[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2018 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          

          Title 12

Banks and Banking


________________________

Parts 220 to 229

                         Revised as of January 1, 2018

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2018
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



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

  Title 12:
          Chapter II--Federal Reserve System (Continued)             3
  Finding Aids:
      Table of CFR Titles and Chapters........................    1011
      Alphabetical List of Agencies Appearing in the CFR......    1031
      List of CFR Sections Affected...........................    1041

[[Page iv]]





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

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

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

[[Page v]]



                               EXPLANATION

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

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

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

LEGAL STATUS

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

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
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    To determine whether a Code volume has been amended since its 
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EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

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

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
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PAST PROVISIONS OF THE CODE

    Provisions of the Code that are no longer in force and effect as of 
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``[RESERVED]'' TERMINOLOGY

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INCORPORATION BY REFERENCE

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This material, like any other properly issued regulation, has the force 
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this volume.

[[Page vii]]

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    Oliver A. Potts,
    Director,
    Office of the Federal Register.
    January 1, 2018.







[[Page ix]]



                               THIS TITLE

    Title 12--Banks and Banking is composed of ten 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, 600-899, 900-1025, 1026-1099, and 
1100-end. The contents of these volumes represent all current 
regulations codified under this title of the CFR as of January 1, 2018.

    For this volume, Ann Worley was Chief Editor. The Code of Federal 
Regulations publication program is under the direction of John Hyrum 
Martinez, assisted by Stephen J. Frattini.

[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                  (This book contains parts 220 to 229)

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

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

[[Page 3]]



             CHAPTER II--FEDERAL RESERVE SYSTEM (CONTINUED)




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

     SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 
                               (CONTINUED)
Part                                                                Page
220             Credit by brokers and dealers (Regulation T)           5
221             Credit by banks and persons other than 
                    brokers or dealers for the purpose of 
                    purchasing or carrying margin stock 
                    (Regulation U)..........................          34
222             Fair credit reporting (Regulation V)........          55
223             Transactions between member banks and their 
                    affiliates (Regulation W)...............         116
224             Borrowers of securities credit (Regulation 
                    X)......................................         143
225             Bank holding companies and change in bank 
                    control (Regulation Y)..................         144
226             Truth in lending (Regulation Z).............         327
228             Community reinvestment (Regulation BB)......         816
229             Availability of funds and collection of 
                    checks (Regulation CC)..................         837

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 
                               (CONTINUED)





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



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

                             Interpretations

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

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

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



Sec. 220.1  Authority, purpose, and scope.

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

[[Page 6]]

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

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



Sec. 220.2  Definitions.

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

[[Page 7]]

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

[[Page 8]]

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

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



Sec. 220.3  General provisions.

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

[[Page 9]]

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

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



Sec. 220.4  Margin account.

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

[[Page 10]]

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

[[Page 11]]

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

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



Sec. 220.5  Special memorandum account.

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

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

[[Page 12]]



Sec. 220.6  Good faith account.

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

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



Sec. 220.7  Broker-dealer credit account.

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

[[Page 13]]

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

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



Sec. 220.8  Cash account.

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

[[Page 14]]

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

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



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

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

[[Page 15]]

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

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



Sec. 220.10  Borrowing and lending securities.

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

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



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

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

[[Page 16]]

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

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

[[Page 17]]



Sec. 220.12  Supplement: margin requirements.

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

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

                             Interpretations



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

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

[11 FR 14155, Dec. 7, 1946]

[[Page 18]]



Sec. 220.102  [Reserved]



Sec. 220.103  Borrowing of securities.

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

[12 FR 5278, Aug. 2, 1947]



Sec. 220.104  [Reserved]



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

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

[[Page 19]]

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

[13 FR 2368, May 1, 1948]



Sec. Sec. 220.106-220.107  [Reserved]



Sec. 220.108  International Bank Securities.

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

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

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

[14 FR 5505, Sept. 7, 1949]



Sec. 220.109  [Reserved]



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

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

[[Page 20]]

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

[18 FR 4592, Aug. 5, 1953]



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

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

[[Page 21]]

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

[18 FR 5505, Sept. 15, 1953]



Sec. 220.112  [Reserved]



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

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

[[Page 22]]

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

[22 FR 5954, July 27, 1957]



Sec. Sec. 220.114-220.116  [Reserved]



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

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


[[Page 23]]


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

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

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

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

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


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

[[Page 24]]

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

[27 FR 3511, Apr. 12, 1962]



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

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

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


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

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

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

[[Page 25]]

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

[27 FR 10885, Nov. 8, 1962]



Sec. 220.119  Applicability of margin requirements to credit extended
to corporation in connection with retirement of stock.

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

[[Page 26]]

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

[27 FR 12346, Dec. 13, 1962]



Sec. 220.120  [Reserved]



Sec. 220.121  Applicability of margin requirements to joint account
between two creditors.

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

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


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

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


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

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


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

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

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

[[Page 27]]

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

[31 FR 7169, May 17, 1966]



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

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

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

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

[[Page 28]]

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

[[Page 29]]

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

[35 FR 3280, Feb. 21, 1970]



Sec. 220.123  Partial delayed issue contracts covering nonconvertible
bonds.

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

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


[[Page 30]]


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

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


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

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


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

[36 FR 2777, Feb. 10, 1971]



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

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

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


[[Page 31]]


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

[37 FR 6568, Mar. 31, 1972]



Sec. Sec. 220.125-220.126  [Reserved]



Sec. 220.127  Independent broker/dealers arranging credit in
connection with the sale of insurance premium funding programs.

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

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

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

[38 FR 11066, May 4, 1973]



Sec. 220.128  Treatment of simultaneous long and short positions in
the same margin account when put or call options or combinations
thereof on such stock are also outstanding in the account.

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

[[Page 32]]

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

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

                                * * * * *

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

                                * * * * *

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

                                * * * * *

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

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

[[Page 33]]

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

[38 FR 12098, May 9, 1973]



Sec. Sec. 220.129-220.130  [Reserved]



Sec. 220.131  Application of the arranging section to broker-dealer
activities under SEC Rule 144A.

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

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

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

[[Page 34]]

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

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



Sec. 220.132  Credit to brokers and dealers.

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

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



PART 221_CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR
THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)--
Table of Contents



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

                             Interpretations

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

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

[[Page 35]]


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



Sec. 221.1  Authority, purpose, and scope.

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



Sec. 221.2  Definitions.

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

[[Page 36]]

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

[[Page 37]]

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



Sec. 221.3  General requirements.

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

[[Page 38]]

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

[[Page 39]]

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



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

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

[[Page 40]]



Sec. 221.5  Special purpose loans to brokers and dealers.

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

[[Page 41]]



Sec. 221.6  Exempted transactions.

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



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

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

                             Interpretations



Sec. 221.101  Determination and effect of purpose of loan.

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

[[Page 42]]

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



Sec. 221.102  Application to committed credit where funds are
disbursed thereafter.

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



Sec. 221.103  Loans to brokers or dealers.

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



Sec. 221.104  Federal credit unions.

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



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

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



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

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

[[Page 43]]

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



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

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



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

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

[[Page 44]]

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



Sec. 221.109  Loan to open-end investment company.

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



Sec. 221.110  Questions arising under this part.

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

[[Page 45]]

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



Sec. 221.111  Contribution to joint venture as extension of credit
when the contribution is disproportionate to the contributor's share
in the venture's profits or losses.

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



Sec. 221.112  Loans by bank in capacity as trustee.

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

[[Page 46]]

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



Sec. 221.113  Loan which is secured indirectly by stock.

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

[[Page 47]]

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



Sec. 221.114  Bank loans to purchase stock of American Telephone and 
Telegraph Company under Employees' Stock Plan.

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

[[Page 48]]

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



Sec. 221.115  Accepting a purpose statement through the mail without
benefit of face-to-face interview.

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

[[Page 49]]

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



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

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

[[Page 50]]



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

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



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

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

[[Page 51]]

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



Sec. 221.119  Applicability of plan-lender provisions to financing 
of stock options and stock purchase rights qualified or restricted
under Internal Revenue Code.
          

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



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

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

[[Page 52]]

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



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

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



Sec. 221.122  Applicability of margin requirements to credit in 
connection with Insurance Premium Funding Programs.

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

[[Page 53]]

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



Sec. 221.123  Combined credit for exercising employee stock options
and paying income taxes incurred as a result of such exercise.

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



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

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

[[Page 54]]

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

[[Page 55]]



Sec. 221.125  Credit to brokers and dealers.

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



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



                      Subpart A_General Provisions

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

Subpart B [Reserved]

                      Subpart C_Affiliate Marketing

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

                      Subpart D_Medical Information

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

              Subpart E_Duties of Furnishers of Information

222.40 Scope.
222.41 Definitions.
222.42 Reasonable policies and procedures concerning the accuracy and 
          integrity of furnished information.
222.43 Direct disputes.

Subpart F [Reserved]

         Subpart H_Duties of Users Regarding Risk-Based Pricing

222.70 Scope.
222.71 Definitions.
222.72 General requirements for risk-based pricing notices.
222.73 Content, form, and timing of risk-based pricing notices.
222.74 Exceptions.
222.75 Rules of construction.

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

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

                   Subpart J_Identity Theft Red Flags

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

Appendix A to Part 222 [Reserved]
Appendix B to Part 222--Model Notices of Furnishing Negative Information
Appendix C to Part 222--Model Forms for Opt-Out Notices
Appendix D to Part 222 [Reserved]
Appendix E to Part 222--Interagency Guidelines Concerning the Accuracy 
          and Integrity of Information Furnished to Consumer Reporting 
          Agencies
Appendix F-G to Part 222 [Reserved]
Appendix H to Part 222--Model Forms for Risk-Based Pricing and Credit 
          Score Disclosure Exception Notices
Appendix I to Part 222 [Reserved]

[[Page 56]]

Appendix J to Part 222-- Interagency Guidelines on Identity Theft 
          Detection, Prevention, and Mitigation

    Authority: 15 U.S.C. 1681b, 1681c, 1681m and 1681s; Secs. 3, 214, 
and 216, Pub. L. 108-159, 117 Stat. 1952.

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



                      Subpart A_General Provisions



Sec. 222.1  Purpose, scope, and effective dates.

    (a) Purpose. The purpose of this part is to implement the Fair 
Credit Reporting Act. This part generally applies to persons that obtain 
and use information about consumers to determine the consumer's 
eligibility for products, services, or employment, share such 
information among affiliates, and furnish information to consumer 
reporting agencies.
    (b) Scope. (1) [Reserved]
    (2) Institutions covered. (i) Except as otherwise provided in this 
part, the regulations in this part apply to banks that are members of 
the Federal Reserve System (other than national banks) and their 
respective operating subsidiaries that are not functionally regulated 
within the meaning of section 5(c)(5) of the Bank Holding Company Act, 
as amended (12 U.S.C. 1844(c)(5)), branches and Agencies of foreign 
banks (other than Federal branches, Federal Agencies, and insured State 
branches of foreign banks), commercial lending companies owned or 
controlled by foreign banks, organizations operating under section 25 or 
25A of the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.), 
and bank holding companies and affiliates of such holding companies, but 
do not apply to affiliates of bank holding companies that are depository 
institutions regulated by another federal banking agency or to consumer 
reporting agencies.
    (ii) For purposes of appendix B to this part, financial institutions 
as defined in section 509 of the Gramm-Leach-Bliley Act (12 U.S.C. 
6809), may use the model notices in appendix B to this part to comply 
with the notice requirement in section 623(a)(7) of the Fair Credit 
Reporting Act (15 U.S.C. 1681s-2(a)(7)).
    (c) Effective dates. The applicable provisions of the Fair and 
Accurate Credit Transactions Act of 2003 (FACT Act), Pub. L. 108-159, 
117 Stat. 1952, shall be effective in accordance with the following 
schedule:
    (1) Provisions effective December 31, 2003. (i) Sections 151(a)(2), 
212(e), 214(c), 311(b), and 711, concerning the relation to state laws; 
and
    (ii) Each of the provisions of the FACT Act that authorizes an 
agency to issue a regulation or to take other action to implement the 
applicable provision of the FACT Act or the applicable provision of the 
Fair Credit Reporting Act, as amended by the FACT Act, but only with 
respect to that agency's authority to propose and adopt the implementing 
regulation or to take such other action.
    (2) Provisions effective March 31, 2004. (i) Section 111, concerning 
the definitions;
    (ii) Section 156, concerning the statute of limitations;
    (iii) Sections 312(d), (e), and (f), concerning the furnisher 
liability exception, liability and enforcement, and rule of 
construction, respectively;
    (iv) Section 313(a), concerning action regarding complaints;
    (v) Section 611, concerning communications for certain employee 
investigations; and
    (vi) Section 811, concerning clerical amendments.
    (3) Provisions effective December 1, 2004. (i) Section 112, 
concerning fraud alerts and active duty alerts;
    (ii) Section 114, concerning procedures for the identification of 
possible instances of identity theft;
    (iii) Section 115, concerning truncation of the social security 
number in a consumer report;
    (iv) Section 151(a)(1), concerning the summary of rights of identity 
theft victims;
    (v) Section 152, concerning blocking of information resulting from 
identity theft;
    (vi) Section 153, concerning the coordination of identity theft 
complaint investigations;
    (vii) Section 154, concerning the prevention of repollution of 
consumer reports;

[[Page 57]]

    (viii) Section 155, concerning notice by debt collectors with 
respect to fraudulent information;
    (ix) Section 211(c), concerning a summary of rights of consumers;
    (x) Section 212(a)-(d), concerning the disclosure of credit scores;
    (xi) Section 213(c), concerning enhanced disclosure of the means 
available to opt out of prescreened lists;
    (xii) Section 217(a), concerning the duty to provide notice to a 
consumer;
    (xiii) Section 311(a), concerning the risk-based pricing notice;
    (xiv) Section 312(a)-(c), concerning procedures to enhance the 
accuracy and integrity of information furnished to consumer reporting 
agencies;
    (xv) Section 314, concerning improved disclosure of the results of 
reinvestigation;
    (xvi) Section 315, concerning reconciling addresses;
    (xvii) Section 316, concerning notice of dispute through reseller; 
and
    (xviii) Section 317, concerning the duty to conduct a reasonable 
reinvestigation.

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



Sec. 222.2  Examples.

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

[70 FR 70678, Nov. 22, 2005]



Sec. 222.3  Definitions.

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

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

[[Page 58]]

Subpart B [Reserved]



                      Subpart C_Affiliate Marketing

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



Sec. 222.20  Coverage and definitions.

    (a) Coverage. Subpart C of this part applies to member banks of the 
Federal Reserve System (other than national banks) and their respective 
operating subsidiaries that are not functionally regulated within the 
meaning of section 5(c)(5) of the Bank Holding Company Act, as amended 
(12 U.S.C. 1844(c)(5)), branches and Agencies of foreign banks (other 
than Federal branches, Federal Agencies, and insured State branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25A of 
the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).
    (b) Definitions. For purposes of this subpart:
    (1) Clear and conspicuous. The term ``clear and conspicuous'' means 
reasonably understandable and designed to call attention to the nature 
and significance of the information presented.
    (2) Concise--(i) In general. The term ``concise'' means a reasonably 
brief expression or statement.
    (ii) Combination with other required disclosures. A notice required 
by this subpart may be concise even if it is combined with other 
disclosures required or authorized by federal or state law.
    (3) Eligibility information. The term ``eligibility information'' 
means any information the communication of which would be a consumer 
report if the exclusions from the definition of ``consumer report'' in 
section 603(d)(2)(A) of the Act did not apply. Eligibility information 
does not include aggregate or blind data that does not contain personal 
identifiers such as account numbers, names, or addresses.
    (4) Pre-existing business relationship--(i) In general. The term 
``pre-existing business relationship'' means a relationship between a 
person, or a person's licensed agent, and a consumer based on--
    (A) A financial contract between the person and the consumer which 
is in force on the date on which the consumer is sent a solicitation 
covered by this subpart;
    (B) The purchase, rental, or lease by the consumer of the person's 
goods or services, or a financial transaction (including holding an 
active account or a policy in force or having another continuing 
relationship) between the consumer and the person, during the 18-month 
period immediately preceding the date on which the consumer is sent a 
solicitation covered by this subpart; or
    (C) An inquiry or application by the consumer regarding a product or 
service offered by that person during the three-month period immediately 
preceding the date on which the consumer is sent a solicitation covered 
by this subpart.
    (ii) Examples of pre-existing business relationships. (A) If a 
consumer has a time deposit account, such as a certificate of deposit, 
at a depository institution that is currently in force, the depository 
institution has a pre-existing business relationship with the consumer 
and can use eligibility information it receives from its affiliates to 
make solicitations to the consumer about its products or services.
    (B) If a consumer obtained a certificate of deposit from a 
depository institution, but did not renew the certificate at maturity, 
the depository institution has a pre-existing business relationship with 
the consumer and can use eligibility information it receives from its 
affiliates to make solicitations to the consumer about its products or 
services for 18 months after the date of maturity of the certificate of 
deposit.
    (C) If a consumer obtains a mortgage, the mortgage lender has a pre-
existing business relationship with the consumer. If the mortgage lender 
sells the consumer's entire loan to an investor, the mortgage lender has 
a pre-existing business relationship with the consumer and can use 
eligibility information it receives from its affiliates to make 
solicitations to the consumer about its products or services for 18 
months after the date it sells the loan, and the investor has a pre-
existing

[[Page 59]]

business relationship with the consumer upon purchasing the loan. If, 
however, the mortgage lender sells a fractional interest in the 
consumer's loan to an investor but also retains an ownership interest in 
the loan, the mortgage lender continues to have a pre-existing business 
relationship with the consumer, but the investor does not have a pre-
existing business relationship with the consumer. If the mortgage lender 
retains ownership of the loan, but sells ownership of the servicing 
rights to the consumer's loan, the mortgage lender continues to have a 
pre-existing business relationship with the consumer. The purchaser of 
the servicing rights also has a pre-existing business relationship with 
the consumer as of the date it purchases ownership of the servicing 
rights, but only if it collects payments from or otherwise deals 
directly with the consumer on a continuing basis.
    (D) If a consumer applies to a depository institution for a product 
or service that it offers, but does not obtain a product or service from 
or enter into a financial contract or transaction with the institution, 
the depository institution has a pre-existing business relationship with 
the consumer and can therefore use eligibility information it receives 
from an affiliate to make solicitations to the consumer about its 
products or services for three months after the date of the application.
    (E) If a consumer makes a telephone inquiry to a depository 
institution about its products or services and provides contact 
information to the institution, but does not obtain a product or service 
from or enter into a financial contract or transaction with the 
institution, the depository institution has a pre-existing business 
relationship with the consumer and can therefore use eligibility 
information it receives from an affiliate to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (F) If a consumer makes an inquiry to a depository institution by e-
mail about its products or services, but does not obtain a product or 
service from or enter into a financial contract or transaction with the 
institution, the depository institution has a pre-existing business 
relationship with the consumer and can therefore use eligibility 
information it receives from an affiliate to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (G) If a consumer has an existing relationship with a depository 
institution that is part of a group of affiliated companies, makes a 
telephone call to the centralized call center for the group of 
affiliated companies to inquire about products or services offered by 
the insurance affiliate, and provides contact information to the call 
center, the call constitutes an inquiry to the insurance affiliate that 
offers those products or services. The insurance affiliate has a pre-
existing business relationship with the consumer and can therefore use 
eligibility information it receives from its affiliated depository 
institution to make solicitations to the consumer about its products or 
services for three months after the date of the inquiry.
    (iii) Examples where no pre-existing business relationship is 
created. (A) If a consumer makes a telephone call to a centralized call 
center for a group of affiliated companies to inquire about the 
consumer's existing account at a depository institution, the call does 
not constitute an inquiry to any affiliate other than the depository 
institution that holds the consumer's account and does not establish a 
pre-existing business relationship between the consumer and any 
affiliate of the account-holding depository institution.
    (B) If a consumer who has a deposit account with a depository 
institution makes a telephone call to an affiliate of the institution to 
ask about the affiliate's retail locations and hours, but does not make 
an inquiry about the affiliate's products or services, the call does not 
constitute an inquiry and does not establish a pre-existing business 
relationship between the consumer and the affiliate. Also, the 
affiliate's capture of the consumer's telephone number does not 
constitute an inquiry and does not establish a pre-existing business 
relationship between the consumer and the affiliate.

[[Page 60]]

    (C) If a consumer makes a telephone call to a depository institution 
in response to an advertisement that offers a free promotional item to 
consumers who call a toll-free number, but the advertisement does not 
indicate that the depository institution's products or services will be 
marketed to consumers who call in response, the call does not create a 
pre-existing business relationship between the consumer and the 
depository institution because the consumer has not made an inquiry 
about a product or service offered by the institution, but has merely 
responded to an offer for a free promotional item.
    (5) Solicitation--(i) In general. The term ``solicitation'' means 
the marketing of a product or service initiated by a person to a 
particular consumer that is--
    (A) Based on eligibility information communicated to that person by 
its affiliate as described in this subpart; and
    (B) Intended to encourage the consumer to purchase or obtain such 
product or service.
    (ii) Exclusion of marketing directed at the general public. A 
solicitation does not include marketing communications that are directed 
at the general public. For example, television, general circulation 
magazine, and billboard advertisements do not constitute solicitations, 
even if those communications are intended to encourage consumers to 
purchase products and services from the person initiating the 
communications.
    (iii) Examples of solicitations. A solicitation would include, for 
example, a telemarketing call, direct mail, e-mail, or other form of 
marketing communication directed to a particular consumer that is based 
on eligibility information received from an affiliate.
    (6) You means a person described in paragraph (a) of this section.



Sec. 222.21  Affiliate marketing opt-out and exceptions.

    (a) Initial notice and opt-out requirement--(1) In general. You may 
not use eligibility information about a consumer that you receive from 
an affiliate to make a solicitation for marketing purposes to the 
consumer, unless--
    (i) It is clearly and conspicuously disclosed to the consumer in 
writing or, if the consumer agrees, electronically, in a concise notice 
that you may use eligibility information about that consumer received 
from an affiliate to make solicitations for marketing purposes to the 
consumer;
    (ii) The consumer is provided a reasonable opportunity and a 
reasonable and simple method to ``opt out,'' or prohibit you from using 
eligibility information to make solicitations for marketing purposes to 
the consumer; and
    (iii) The consumer has not opted out.
    (2) Example. A consumer has a homeowner's insurance policy with an 
insurance company. The insurance company furnishes eligibility 
information about the consumer to its affiliated depository institution. 
Based on that eligibility information, the depository institution wants 
to make a solicitation to the consumer about its home equity loan 
products. The depository institution does not have a pre-existing 
business relationship with the consumer and none of the other exceptions 
apply. The depository institution is prohibited from using eligibility 
information received from its insurance affiliate to make solicitations 
to the consumer about its home equity loan products unless the consumer 
is given a notice and opportunity to opt out and the consumer does not 
opt out.
    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By an affiliate that has or has previously had a pre-existing 
business relationship with the consumer; or
    (ii) As part of a joint notice from two or more members of an 
affiliated group of companies, provided that at least one of the 
affiliates on the joint notice has or has previously had a pre-existing 
business relationship with the consumer.
    (b) Making solicitations--(1) In general. For purposes of this 
subpart, you make a solicitation for marketing purposes if--
    (i) You receive eligibility information from an affiliate;
    (ii) You use that eligibility information to do one or more of the 
following:

[[Page 61]]

    (A) Identify the consumer or type of consumer to receive a 
solicitation;
    (B) Establish criteria used to select the consumer to receive a 
solicitation; or
    (C) Decide which of your products or services to market to the 
consumer or tailor your solicitation to that consumer; and
    (iii) As a result of your use of the eligibility information, the 
consumer is provided a solicitation.
    (2) Receiving eligibility information from an affiliate, including 
through a common database. You may receive eligibility information from 
an affiliate in various ways, including when the affiliate places that 
information into a common database that you may access.
    (3) Receipt or use of eligibility information by your service 
provider. Except as provided in paragraph (b)(5) of this section, you 
receive or use an affiliate's eligibility information if a service 
provider acting on your behalf (whether an affiliate or a nonaffiliated 
third party) receives or uses that information in the manner described 
in paragraphs (b)(1)(i) or (b)(1)(ii) of this section. All relevant 
facts and circumstances will determine whether a person is acting as 
your service provider when it receives or uses an affiliate's 
eligibility information in connection with marketing your products and 
services.
    (4) Use by an affiliate of its own eligibility information. Unless 
you have used eligibility information that you receive from an affiliate 
in the manner described in paragraph (b)(1)(ii) of this section, you do 
not make a solicitation subject to this subpart if your affiliate:
    (i) Uses its own eligibility information that it obtained in 
connection with a pre-existing business relationship it has or had with 
the consumer to market your products or services to the consumer; or
    (ii) Directs its service provider to use the affiliate's own 
eligibility information that it obtained in connection with a pre-
existing business relationship it has or had with the consumer to market 
your products or services to the consumer, and you do not communicate 
directly with the service provider regarding that use.
    (5) Use of eligibility information by a service provider--(i) In 
general. You do not make a solicitation subject to Subpart C of this 
part if a service provider (including an affiliated or third-party 
service provider that maintains or accesses a common database that you 
may access) receives eligibility information from your affiliate that 
your affiliate obtained in connection with a pre-existing business 
relationship it has or had with the consumer and uses that eligibility 
information to market your products or services to the consumer, so long 
as--
    (A) Your affiliate controls access to and use of its eligibility 
information by the service provider (including the right to establish 
the specific terms and conditions under which the service provider may 
use such information to market your products or services);
    (B) Your affiliate establishes specific terms and conditions under 
which the service provider may access and use the affiliate's 
eligibility information to market your products and services (or those 
of affiliates generally) to the consumer, such as the identity of the 
affiliated companies whose products or services may be marketed to the 
consumer by the service provider, the types of products or services of 
affiliated companies that may be marketed, and the number of times the 
consumer may receive marketing materials, and periodically evaluates the 
service provider's compliance with those terms and conditions;
    (C) Your affiliate requires the service provider to implement 
reasonable policies and procedures designed to ensure that the service 
provider uses the affiliate's eligibility information in accordance with 
the terms and conditions established by the affiliate relating to the 
marketing of your products or services;
    (D) Your affiliate is identified on or with the marketing materials 
provided to the consumer; and
    (E) You do not directly use your affiliate's eligibility information 
in the manner described in paragraph (b)(1)(ii) of this section.
    (ii) Writing requirements. (A) The requirements of paragraphs 
(b)(5)(i)(A) and (C) of this section must be set forth in a written 
agreement between your affiliate and the service provider; and

[[Page 62]]

    (B) The specific terms and conditions established by your affiliate 
as provided in paragraph (b)(5)(i)(B) of this section must be set forth 
in writing.
    (6) Examples of making solicitations. (i) A consumer has a deposit 
account with a depository institution, which is affiliated with an 
insurance company. The insurance company receives eligibility 
information about the consumer from the depository institution. The 
insurance company uses that eligibility information to identify the 
consumer to receive a solicitation about insurance products, and, as a 
result, the insurance company provides a solicitation to the consumer 
about its insurance products. Pursuant to paragraph (b)(1) of this 
section, the insurance company has made a solicitation to the consumer.
    (ii) The same facts as in the example in paragraph (b)(6)(i) of this 
section, except that after using the eligibility information to identify 
the consumer to receive a solicitation about insurance products, the 
insurance company asks the depository institution to send the 
solicitation to the consumer and the depository institution does so. 
Pursuant to paragraph (b)(1) of this section, the insurance company has 
made a solicitation to the consumer because it used eligibility 
information about the consumer that it received from an affiliate to 
identify the consumer to receive a solicitation about its products or 
services, and, as a result, a solicitation was provided to the consumer 
about the insurance company's products.
    (iii) The same facts as in the example in paragraph (b)(6)(i) of 
this section, except that eligibility information about consumers that 
have deposit accounts with the depository institution is placed into a 
common database that all members of the affiliated group of companies 
may independently access and use. Without using the depository 
institution's eligibility information, the insurance company develops 
selection criteria and provides those criteria, marketing materials, and 
related instructions to the depository institution. The depository 
institution reviews eligibility information about its own consumers 
using the selection criteria provided by the insurance company to 
determine which consumers should receive the insurance company's 
marketing materials and sends marketing materials about the insurance 
company's products to those consumers. Even though the insurance company 
has received eligibility information through the common database as 
provided in paragraph (b)(2) of this section, it did not use that 
information to identify consumers or establish selection criteria; 
instead, the depository institution used its own eligibility 
information. Therefore, pursuant to paragraph (b)(4)(i) of this section, 
the insurance company has not made a solicitation to the consumer.
    (iv) The same facts as in the example in paragraph (b)(6)(iii) of 
this section, except that the depository institution provides the 
insurance company's criteria to the depository institution's service 
provider and directs the service provider to use the depository 
institution's eligibility information to identify depository institution 
consumers who meet the criteria and to send the insurance company's 
marketing materials to those consumers. The insurance company does not 
communicate directly with the service provider regarding the use of the 
depository institution's information to market its products to the 
depository institution's consumers. Pursuant to paragraph (b)(4)(ii) of 
this section, the insurance company has not made a solicitation to the 
consumer.
    (v) An affiliated group of companies includes a depository 
institution, an insurance company, and a service provider. Each 
affiliate in the group places information about its consumers into a 
common database. The service provider has access to all information in 
the common database. The depository institution controls access to and 
use of its eligibility information by the service provider. This control 
is set forth in a written agreement between the depository institution 
and the service provider. The written agreement also requires the 
service provider to establish reasonable policies and procedures 
designed to ensure that the service provider uses the depository 
institution's eligibility information in accordance with specific terms 
and conditions established by the depository institution

[[Page 63]]

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

[[Page 64]]

    (6) If your compliance with this subpart would prevent you from 
complying with any provision of State insurance laws pertaining to 
unfair discrimination in any State in which you are lawfully doing 
business.
    (d) Examples of exceptions--(1) Example of the pre-existing business 
relationship exception. A consumer has a deposit account with a 
depository institution. The consumer also has a relationship with the 
depository institution's securities affiliate for management of the 
consumer's securities portfolio. The depository institution receives 
eligibility information about the consumer from its securities affiliate 
and uses that information to make a solicitation to the consumer about 
the depository institution's wealth management services. The depository 
institution may make this solicitation even if the consumer has not been 
given a notice and opportunity to opt out because the depository 
institution has a pre-existing business relationship with the consumer.
    (2) Examples of service provider exception. (i) A consumer has an 
insurance policy issued by an insurance company. The insurance company 
furnishes eligibility information about the consumer to its affiliated 
depository institution. Based on that eligibility information, the 
depository institution wants to make a solicitation to the consumer 
about its deposit products. The depository institution does not have a 
pre-existing business relationship with the consumer and none of the 
other exceptions in paragraph (c) of this section apply. The consumer 
has been given an opt-out notice and has elected to opt out of receiving 
such solicitations. The depository institution asks a service provider 
to send the solicitation to the consumer on its behalf. The service 
provider may not send the solicitation on behalf of the depository 
institution because, as a result of the consumer's opt-out election, the 
depository institution is not permitted to make the solicitation.
    (ii) The same facts as in paragraph (d)(2)(i) of this section, 
except the consumer has been given an opt-out notice, but has not 
elected to opt out. The depository institution asks a service provider 
to send the solicitation to the consumer on its behalf. The service 
provider may send the solicitation on behalf of the depository 
institution because, as a result of the consumer's not opting out, the 
depository institution is permitted to make the solicitation.
    (3) Examples of consumer-initiated communications. (i) A consumer 
who has a deposit account with a depository institution initiates a 
communication with the depository institution's credit card affiliate to 
request information about a credit card. The credit card affiliate may 
use eligibility information about the consumer it obtains from the 
depository institution or any other affiliate to make solicitations 
regarding credit card products in response to the consumer-initiated 
communication.
    (ii) A consumer who has a deposit account with a depository 
institution contacts the institution to request information about how to 
save and invest for a child's college education without specifying the 
type of product in which the consumer may be interested. Information 
about a range of different products or services offered by the 
depository institution and one or more affiliates of the institution may 
be responsive to that communication. Such products or services may 
include the following: Mutual funds offered by the institution's mutual 
fund affiliate; section 529 plans offered by the institution, its mutual 
fund affiliate, or another securities affiliate; or trust services 
offered by a different financial institution in the affiliated group. 
Any affiliate offering investment products or services that would be 
responsive to the consumer's request for information about saving and 
investing for a child's college education may use eligibility 
information to make solicitations to the consumer in response to this 
communication.
    (iii) A credit card issuer makes a marketing call to the consumer 
without using eligibility information received from an affiliate. The 
issuer leaves a voice-mail message that invites the consumer to call a 
toll-free number to apply for the issuer's credit card. If the consumer 
calls the toll-free number to inquire about the credit card, the call is 
a consumer-initiated communication about a product or service and the 
credit card issuer may

[[Page 65]]

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



Sec. 222.22  Scope and duration of opt-out.

    (a) Scope of opt-out--(1) In general. Except as otherwise provided 
in this section, the consumer's election to opt out prohibits any 
affiliate covered by the opt-out notice from using eligibility 
information received from another affiliate as described in the notice 
to make solicitations to the consumer.
    (2) Continuing relationship--(i) In general. If the consumer 
establishes a continuing relationship with you or your affiliate, an 
opt-out notice may apply to eligibility information obtained in 
connection with--
    (A) A single continuing relationship or multiple continuing 
relationships that the consumer establishes with you or your affiliates, 
including continuing relationships established subsequent to delivery of 
the opt-out notice, so long

[[Page 66]]

as the notice adequately describes the continuing relationships covered 
by the opt-out; or
    (B) Any other transaction between the consumer and you or your 
affiliates as described in the notice.
    (ii) Examples of continuing relationships. A consumer has a 
continuing relationship with you or your affiliate if the consumer--
    (A) Opens a deposit or investment account with you or your 
affiliate;
    (B) Obtains a loan for which you or your affiliate owns the 
servicing rights;
    (C) Purchases an insurance product from you or your affiliate;
    (D) Holds an investment product through you or your affiliate, such 
as when you act or your affiliate acts as a custodian for securities or 
for assets in an individual retirement arrangement;
    (E) Enters into an agreement or understanding with you or your 
affiliate whereby you or your affiliate undertakes to arrange or broker 
a home mortgage loan for the consumer;
    (F) Enters into a lease of personal property with you or your 
affiliate; or
    (G) Obtains financial, investment, or economic advisory services 
from you or your affiliate for a fee.
    (3) No continuing relationship--(i) In general. If there is no 
continuing relationship between a consumer and you or your affiliate, 
and you or your affiliate obtain eligibility information about a 
consumer in connection with a transaction with the consumer, such as an 
isolated transaction or a credit application that is denied, an opt-out 
notice provided to the consumer only applies to eligibility information 
obtained in connection with that transaction.
    (ii) Examples of isolated transactions. An isolated transaction 
occurs if--
    (A) The consumer uses your or your affiliate's ATM to withdraw cash 
from an account at another financial institution; or
    (B) You or your affiliate sells the consumer a cashier's check or 
money order, airline tickets, travel insurance, or traveler's checks in 
isolated transactions.
    (4) Menu of alternatives. A consumer may be given the opportunity to 
choose from a menu of alternatives when electing to prohibit 
solicitations, such as by electing to prohibit solicitations from 
certain types of affiliates covered by the opt-out notice but not other 
types of affiliates covered by the notice, electing to prohibit 
solicitations based on certain types of eligibility information but not 
other types of eligibility information, or electing to prohibit 
solicitations by certain methods of delivery but not other methods of 
delivery. However, one of the alternatives must allow the consumer to 
prohibit all solicitations from all of the affiliates that are covered 
by the notice.
    (5) Special rule for a notice following termination of all 
continuing relationships--(i) In general. A consumer must be given a new 
opt-out notice if, after all continuing relationships with you or your 
affiliate(s) are terminated, the consumer subsequently establishes 
another continuing relationship with you or your affiliate(s) and the 
consumer's eligibility information is to be used to make a solicitation. 
The new opt-out notice must apply, at a minimum, to eligibility 
information obtained in connection with the new continuing relationship. 
Consistent with paragraph (b) of this section, the consumer's decision 
not to opt out after receiving the new opt-out notice would not override 
a prior opt-out election by the consumer that applies to eligibility 
information obtained in connection with a terminated relationship, 
regardless of whether the new opt-out notice applies to eligibility 
information obtained in connection with the terminated relationship.
    (ii) Example. A consumer has a checking account with a depository 
institution that is part of an affiliated group. The consumer closes the 
checking account. One year after closing the checking account, the 
consumer opens a savings account with the same depository institution. 
The consumer must be given a new notice and opportunity to opt out 
before the depository institution's affiliates may make solicitations to 
the consumer using eligibility information obtained by the depository 
institution in connection with the new savings account relationship, 
regardless of whether the consumer opted out

[[Page 67]]

in connection with the checking account.
    (b) Duration of opt-out. The election of a consumer to opt out must 
be effective for a period of at least five years (the ``opt-out 
period'') beginning when the consumer's opt-out election is received and 
implemented, unless the consumer subsequently revokes the opt-out in 
writing or, if the consumer agrees, electronically. An opt-out period of 
more than five years may be established, including an opt-out period 
that does not expire unless revoked by the consumer.
    (c) Time of opt-out. A consumer may opt out at any time.



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

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

[[Page 68]]

to opt out on behalf of all of the joint consumers and the joint 
consumers must be permitted to exercise their separate rights to opt out 
in a single response.
    (iii) It is impermissible to require all joint consumers to opt out 
before implementing any opt-out direction.
    (3) Alternative contents. If the consumer is afforded a broader 
right to opt out of receiving marketing than is required by this 
subpart, the requirements of this section may be satisfied by providing 
the consumer with a clear, conspicuous, and concise notice that 
accurately discloses the consumer's opt-out rights.
    (4) Model notices. Model notices are provided in appendix C of this 
part.
    (b) Coordinated and consolidated notices. A notice required by this 
subpart may be coordinated and consolidated with any other notice or 
disclosure required to be issued under any other provision of law by the 
entity providing the notice, including but not limited to the notice 
described in section 603(d)(2)(A)(iii) of the Act and the Gramm-Leach-
Bliley Act privacy notice.
    (c) Equivalent notices. A notice or other disclosure that is 
equivalent to the notice required by this subpart, and that is provided 
to a consumer together with disclosures required by any other provision 
of law, satisfies the requirements of this section.



Sec. 222.24  Reasonable opportunity to opt out.

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

[[Page 69]]



Sec. 222.25  Reasonable and simple methods of opting out.

    (a) In general. You must not use eligibility information about a 
consumer that you receive from an affiliate to make a solicitation to 
the consumer about your products or services, unless the consumer is 
provided a reasonable and simple method to opt out, as required by Sec. 
222.21(a)(1)(ii) of this part.
    (b) Examples--(1) Reasonable and simple opt-out methods. Reasonable 
and simple methods for exercising the opt-out right include--
    (i) Designating a check-off box in a prominent position on the opt-
out form;
    (ii) Including a reply form and a self-addressed envelope together 
with the opt-out notice;
    (iii) Providing an electronic means to opt out, such as a form that 
can be electronically mailed or processed at an Internet Web site, if 
the consumer agrees to the electronic delivery of information;
    (iv) Providing a toll-free telephone number that consumers may call 
to opt out; or
    (v) Allowing consumers to exercise all of their opt-out rights 
described in a consolidated opt-out notice that includes the privacy 
opt-out under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., the 
affiliate sharing opt-out under the Act, and the affiliate marketing 
opt-out under the Act, by a single method, such as by calling a single 
toll-free telephone number.
    (2) Opt-out methods that are not reasonable and simple. Reasonable 
and simple methods for exercising an opt-out right do not include--
    (i) Requiring the consumer to write his or her own letter;
    (ii) Requiring the consumer to call or write to obtain a form for 
opting out, rather than including the form with the opt-out notice;
    (iii) Requiring the consumer who receives the opt-out notice in 
electronic form only, such as through posting at an Internet Web site, 
to opt out solely by paper mail or by visiting a different Web site 
without providing a link to that site.
    (c) Specific opt-out means. Each consumer may be required to opt out 
through a specific means, as long as that means is reasonable and simple 
for that consumer.



Sec. 222.26  Delivery of opt-out notices.

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



Sec. 222.27  Renewal of opt-out.

    (a) Renewal notice and opt-out requirement--(1) In general. After 
the opt-out period expires, you may not make solicitations based on 
eligibility information you receive from an affiliate to a

[[Page 70]]

consumer who previously opted out, unless:
    (i) The consumer has been given a renewal notice that complies with 
the requirements of this section and Sec. Sec. 222.24 through 222.26 of 
this part, and a reasonable opportunity and a reasonable and simple 
method to renew the opt-out, and the consumer does not renew the opt-
out; or
    (ii) An exception in Sec. 222.21(c) of this part applies.
    (2) Renewal period. Each opt-out renewal must be effective for a 
period of at least five years as provided in Sec. 222.22(b) of this 
part.
    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By the affiliate that provided the previous opt-out notice, or 
its successor; or
    (ii) As part of a joint renewal notice from two or more members of 
an affiliated group of companies, or their successors, that jointly 
provided the previous opt-out notice.
    (b) Contents of renewal notice. The renewal notice must be clear, 
conspicuous, and concise, and must accurately disclose:
    (1) The name of the affiliate(s) providing the notice. If the notice 
is provided jointly by multiple affiliates and each affiliate shares a 
common name, such as ``ABC,'' then the notice may indicate that it is 
being provided by multiple companies with the ABC name or multiple 
companies in the ABC group or family of companies, for example, by 
stating that the notice is provided by ``all of the ABC companies,'' 
``the ABC banking, credit card, insurance, and securities companies,'' 
or by listing the name of each affiliate providing the notice. But if 
the affiliates providing the joint notice do not all share a common 
name, then the notice must either separately identify each affiliate by 
name or identify each of the common names used by those affiliates, for 
example, by stating that the notice is provided by ``all of the ABC and 
XYZ companies'' or by ``the ABC banking and credit card companies and 
the XYZ insurance companies'';
    (2) A list of the affiliates or types of affiliates whose use of 
eligibility information is covered by the notice, which may include 
companies that become affiliates after the notice is provided to the 
consumer. If each affiliate covered by the notice shares a common name, 
such as ``ABC,'' then the notice may indicate that it applies to 
multiple companies with the ABC name or multiple companies in the ABC 
group or family of companies, for example, by stating that the notice is 
provided by ``all of the ABC companies,'' ``the ABC banking, credit 
card, insurance, and securities companies,'' or by listing the name of 
each affiliate providing the notice. But if the affiliates covered by 
the notice do not all share a common name, then the notice must either 
separately identify each covered affiliate by name or identify each of 
the common names used by those affiliates, for example, by stating that 
the notice applies to ``all of the ABC and XYZ companies'' or to ``the 
ABC banking and credit card companies and the XYZ insurance companies'';
    (3) A general description of the types of eligibility information 
that may be used to make solicitations to the consumer;
    (4) That the consumer previously elected to limit the use of certain 
information to make solicitations to the consumer;
    (5) That the consumer's election has expired or is about to expire;
    (6) That the consumer may elect to renew the consumer's previous 
election;
    (7) If applicable, that the consumer's election to renew will apply 
for the specified period of time stated in the notice and that the 
consumer will be allowed to renew the election once that period expires; 
and
    (8) A reasonable and simple method for the consumer to opt out.
    (c) Timing of the renewal notice--(1) In general. A renewal notice 
may be provided to the consumer either--
    (i) A reasonable period of time before the expiration of the opt-out 
period; or
    (ii) Any time after the expiration of the opt-out period but before 
solicitations that would have been prohibited by the expired opt-out are 
made to the consumer.
    (2) Combination with annual privacy notice. If you provide an annual 
privacy

[[Page 71]]

notice under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., 
providing a renewal notice with the last annual privacy notice provided 
to the consumer before expiration of the opt-out period is a reasonable 
period of time before expiration of the opt-out in all cases.
    (d) No effect on opt-out period. An opt-out period may not be 
shortened by sending a renewal notice to the consumer before expiration 
of the opt-out period, even if the consumer does not renew the opt out.



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

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



                      Subpart D_Medical Information

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



Sec. 222.30  Obtaining or using medical information in connection
with a determination of eligibility for credit.

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

[[Page 72]]

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

[[Page 73]]

medical information in a manner and to an extent that is no less 
favorable than it would use comparable non-medical information.
    (C) A consumer includes on an application for a $10,000 home equity 
loan that he has a $50,000 debt to a medical facility that specializes 
in treating a potentially terminal disease. The creditor contacts the 
medical facility to verify the debt and obtain the repayment history and 
current status of the loan. The creditor learns that the debt is 
current. The applicant meets the income and other requirements of the 
creditor's underwriting guidelines. The creditor grants the application. 
The creditor has used medical information in accordance with the 
exception.
    (iii) Examples of uses of medical information inconsistent with the 
exception. (A) A consumer applies for $25,000 of credit and includes on 
the application information about a $50,000 debt to a hospital. The 
creditor contacts the hospital to verify the amount and payment status 
of the debt, and learns that the debt is current and that the consumer 
has no delinquencies in her repayment history. If the existing debt were 
instead owed to a retail department store, the creditor would approve 
the application and extend credit based on the amount and repayment 
history of the outstanding debt. The creditor, however, denies the 
application because the consumer is indebted to a hospital. The creditor 
has used medical information, here the identity of the medical creditor, 
in a manner and to an extent that is less favorable than it would use 
comparable non-medical information.
    (B) A consumer meets with a loan officer of a creditor to apply for 
a mortgage loan. While filling out the loan application, the consumer 
informs the loan officer orally that she has a potentially terminal 
disease. The consumer meets the creditor's established requirements for 
the requested mortgage loan. The loan officer recommends to the credit 
committee that the consumer be denied credit because the consumer has 
that disease. The credit committee follows the loan officer's 
recommendation and denies the application because the consumer has a 
potentially terminal disease. The creditor has used medical information 
in a manner inconsistent with the exception by taking into account the 
consumer's physical, mental, or behavioral health, condition, or 
history, type of treatment, or prognosis as part of a determination of 
eligibility or continued eligibility for credit.
    (C) A consumer who has an apparent medical condition, such as a 
consumer who uses a wheelchair or an oxygen tank, meets with a loan 
officer to apply for a home equity loan. The consumer meets the 
creditor's established requirements for the requested home equity loan 
and the creditor typically does not require consumers to obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product in connection with such loans. However, based on the consumer's 
apparent medical condition, the loan officer recommends to the credit 
committee that credit be extended to the consumer only if the consumer 
obtains a debt cancellation contract, debt suspension agreement, or 
credit insurance product from a nonaffiliated third party. The credit 
committee agrees with the loan officer's recommendation. The loan 
officer informs the consumer that the consumer must obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product from a nonaffiliated third party to qualify for the loan. The 
consumer obtains one of these products and the creditor approves the 
loan. The creditor has used medical information in a manner inconsistent 
with the exception by taking into account the consumer's physical, 
mental, or behavioral health, condition, or history, type of treatment, 
or prognosis in setting conditions on the consumer's eligibility for 
credit.
    (e) Specific exceptions for obtaining and using medical 
information--(1) In general. A creditor may obtain and use medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit--
    (i) To determine whether the use of a power of attorney or legal 
representative that is triggered by a medical condition or event is 
necessary and appropriate or whether the consumer has the

[[Page 74]]

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

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The creditor receives a loan application from a consumer requesting 
$10,000 of credit under the established loan program for an elective 
surgical procedure. The consumer indicates on the application that the 
purpose of the loan is to finance an elective surgical procedure not 
eligible for funding under the guidelines of the established loan 
program. The creditor may deny the consumer's application because the 
purpose of the loan is not for a particular procedure funded by the 
established loan program.
    (4) Examples of obtaining and using medical information at the 
request of the consumer. (i) If a consumer applies for a loan and 
specifically requests that the creditor consider the consumer's medical 
disability at the relevant time as an explanation for adverse payment 
history information in his credit report, the creditor may consider such 
medical information in evaluating the consumer's willingness and ability 
to repay the requested loan to accommodate the consumer's particular 
circumstances, consistent with safe and sound practices. The creditor 
may also decline to consider such medical information to accommodate the 
consumer, but may evaluate the consumer's application in accordance with 
its otherwise applicable underwriting criteria. The creditor may not 
deny the consumer's application or otherwise treat the consumer less 
favorably because the consumer specifically requested a medical 
accommodation, if the creditor would have extended the credit or treated 
the consumer more favorably under the creditor's otherwise applicable 
underwriting criteria.
    (ii) If a consumer applies for a loan by telephone and explains that 
his income has been and will continue to be interrupted on account of a 
medical condition and that he expects to repay the loan by liquidating 
assets, the creditor may, but is not required to, evaluate the 
application using the sale of assets as the primary source of repayment, 
consistent with safe and sound practices, provided that the creditor 
documents the consumer's request by recording the oral conversation or 
making a notation of the request in the consumer's file.
    (iii) If a consumer applies for a loan and the application form 
provides a space where the consumer may provide any other information or 
special circumstances, whether medical or non-medical, that the consumer 
would like the creditor to consider in evaluating the consumer's 
application, the creditor may use medical information provided by the 
consumer in that space on that application to accommodate the consumer's 
application for credit, consistent with safe and sound practices, or may 
disregard that information.
    (iv) If a consumer specifically requests that the creditor use 
medical information in determining the consumer's eligibility, or 
continued eligibility, for credit and provides the creditor with medical 
information for that purpose, and the creditor determines that it needs 
additional information regarding the consumer's circumstances, the 
creditor may request, obtain, and use additional medical information 
about the consumer as necessary to verify the information provided by 
the consumer or to determine whether to make an accommodation for the 
consumer. The consumer may decline to provide additional information, 
withdraw the request for an accommodation, and have the application 
considered under the creditor's otherwise applicable underwriting 
criteria.
    (v) If a consumer completes and signs a credit application that is 
not for medical purpose credit and the application contains boilerplate 
language that routinely requests medical information from the consumer 
or that indicates that by applying for credit the consumer authorizes or 
consents to the creditor obtaining and using medical information in 
connection with a determination of the consumer's eligibility, or 
continued eligibility, for credit, the consumer has not specifically 
requested that the creditor obtain and use medical information to 
accommodate the consumer's particular circumstances.
    (5) Example of a forbearance practice or program. After an 
appropriate safety and soundness review, a creditor institutes a program 
that allows consumers who are or will be hospitalized to defer payments 
as needed for up to three months, without penalty, if the credit

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account has been open for more than one year and has not previously been 
in default, and the consumer provides confirming documentation at an 
appropriate time. A consumer is hospitalized and does not pay her bill 
for a particular month. This consumer has had a credit account with the 
creditor for more than one year and has not previously been in default. 
The creditor attempts to contact the consumer and speaks with the 
consumer's adult child, who is not the consumer's legal representative. 
The adult child informs the creditor that the consumer is hospitalized 
and is unable to pay the bill at that time. The creditor defers payments 
for up to three months, without penalty, for the hospitalized consumer 
and sends the consumer a letter confirming this practice and the date on 
which the next payment will be due. The creditor has obtained and used 
medical information to determine whether the provisions of a medically-
triggered forbearance practice or program apply to a consumer.



Sec. 222.31  Limits on redisclosure of information.

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



Sec. 222.32  Sharing medical information with affiliates.

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

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    (5) In connection with a determination of the consumer's 
eligibility, or continued eligibility, for credit consistent with Sec. 
222.30 of this part; or
    (6) As otherwise permitted by order of the Board.



              Subpart E_Duties of Furnishers of Information

    Source: 74 FR 31514, July 1, 2009, unless otherwise noted.



Sec. 222.40  Scope.

    Subpart E of this part applies to member banks of the Federal 
Reserve System (other than national banks) and their respective 
operating subsidiaries that are not functionally regulated within the 
meaning of section 5(c)(5) of the Bank Holding Company Act, as amended 
(12 U.S.C. 1844(c)(5)), branches and Agencies of foreign banks (other 
than Federal branches, Federal Agencies, and insured State branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25A of 
the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).



Sec. 222.41  Definitions.

    For purposes of this subpart and appendix E of this part, the 
following definitions apply:
    (a) Accuracy means that information that a furnisher provides to a 
consumer reporting agency about an account or other relationship with 
the consumer correctly:
    (1) Reflects the terms of and liability for the account or other 
relationship;
    (2) Reflects the consumer's performance and other conduct with 
respect to the account or other relationship; and
    (3) Identifies the appropriate consumer.
    (b) Direct dispute means a dispute submitted directly to a furnisher 
(including a furnisher that is a debt collector) by a consumer 
concerning the accuracy of any information contained in a consumer 
report and pertaining to an account or other relationship that the 
furnisher has or had with the consumer.
    (c) Furnisher means an entity that furnishes information relating to 
consumers to one or more consumer reporting agencies for inclusion in a 
consumer report. An entity is not a furnisher when it:
    (1) Provides information to a consumer reporting agency solely to 
obtain a consumer report in accordance with sections 604(a) and (f) of 
the Fair Credit Reporting Act;
    (2) Is acting as a ``consumer reporting agency'' as defined in 
section 603(f) of the Fair Credit Reporting Act;
    (3) Is a consumer to whom the furnished information pertains; or
    (4) Is a neighbor, friend, or associate of the consumer, or another 
individual with whom the consumer is acquainted or who may have 
knowledge about the consumer, and who provides information about the 
consumer's character, general reputation, personal characteristics, or 
mode of living in response to a specific request from a consumer 
reporting agency.
    (d) Identity theft has the same meaning as in 16 CFR 603.2(a).
    (e) Integrity means that information that a furnisher provides to a 
consumer reporting agency about an account or other relationship with 
the consumer:
    (1) Is substantiated by the furnisher's records at the time it is 
furnished;
    (2) Is furnished in a form and manner that is designed to minimize 
the likelihood that the information may be incorrectly reflected in a 
consumer report; and
    (3) Includes the information in the furnisher's possession about the 
account or other relationship that the Board has:
    (i) Determined that the absence of which would likely be materially 
misleading in evaluating a consumer's creditworthiness, credit standing, 
credit capacity, character, general reputation, personal 
characteristics, or mode of living; and
    (ii) Listed in section I.(b)(2)(iii) of appendix E of this part.



Sec. 222.42  Reasonable policies and procedures concerning the
accuracy and integrity of furnished information.

    (a) Policies and procedures. Each furnisher must establish and 
implement reasonable written policies and procedures regarding the 
accuracy and integrity of the information relating to

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consumers that it furnishes to a consumer reporting agency. The policies 
and procedures must be appropriate to the nature, size, complexity, and 
scope of each furnisher's activities.
    (b) Guidelines. Each furnisher must consider the guidelines in 
appendix E of this part in developing its policies and procedures 
required by this section, and incorporate those guidelines that are 
appropriate.
    (c) Reviewing and updating policies and procedures. Each furnisher 
must review its policies and procedures required by this section 
periodically and update them as necessary to ensure their continued 
effectiveness.



Sec. 222.43  Direct disputes.

    (a) General rule. Except as otherwise provided in this section, a 
furnisher must conduct a reasonable investigation of a direct dispute if 
it relates to:
    (1) The consumer's liability for a credit account or other debt with 
the furnisher, such as direct disputes relating to whether there is or 
has been identity theft or fraud against the consumer, whether there is 
individual or joint liability on an account, or whether the consumer is 
an authorized user of a credit account;
    (2) The terms of a credit account or other debt with the furnisher, 
such as direct disputes relating to the type of account, principal 
balance, scheduled payment amount on an account, or the amount of the 
credit limit on an open-end account;
    (3) The consumer's performance or other conduct concerning an 
account or other relationship with the furnisher, such as direct 
disputes relating to the current payment status, high balance, date a 
payment was made, the amount of a payment made, or the date an account 
was opened or closed; or
    (4) Any other information contained in a consumer report regarding 
an account or other relationship with the furnisher that bears on the 
consumer's creditworthiness, credit standing, credit capacity, 
character, general reputation, personal characteristics, or mode of 
living.
    (b) Exceptions. The requirements of paragraph (a) of this section do 
not apply to a furnisher if:
    (1) The direct dispute relates to:
    (i) The consumer's identifying information (other than a direct 
dispute relating to a consumer's liability for a credit account or other 
debt with the furnisher, as provided in paragraph (a)(1) of this 
section) such as name(s), date of birth, Social Security number, 
telephone number(s), or address(es);
    (ii) The identity of past or present employers;
    (iii) Inquiries or requests for a consumer report;
    (iv) Information derived from public records, such as judgments, 
bankruptcies, liens, and other legal matters (unless provided by a 
furnisher with an account or other relationship with the consumer);
    (v) Information related to fraud alerts or active duty alerts; or
    (vi) Information provided to a consumer reporting agency by another 
furnisher; or
    (2) The furnisher has a reasonable belief that the direct dispute is 
submitted by, is prepared on behalf of the consumer by, or is submitted 
on a form supplied to the consumer by, a credit repair organization, as 
defined in 15 U.S.C. 1679a(3), or an entity that would be a credit 
repair organization, but for 15 U.S.C. 1679a(3)(B)(i).
    (c) Direct dispute address. A furnisher is required to investigate a 
direct dispute only if a consumer submits a dispute notice to the 
furnisher at:
    (1) The address of a furnisher provided by a furnisher and set forth 
on a consumer report relating to the consumer;
    (2) An address clearly and conspicuously specified by the furnisher 
for submitting direct disputes that is provided to the consumer in 
writing or electronically (if the consumer has agreed to the electronic 
delivery of information from the furnisher); or
    (3) Any business address of the furnisher if the furnisher has not 
so specified and provided an address for submitting direct disputes 
under paragraphs (c)(1) or (2) of this section.
    (d) Direct dispute notice contents. A dispute notice must include:
    (1) Sufficient information to identify the account or other 
relationship that

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is in dispute, such as an account number and the name, address, and 
telephone number of the consumer, if applicable;
    (2) The specific information that the consumer is disputing and an 
explanation of the basis for the dispute; and
    (3) All supporting documentation or other information reasonably 
required by the furnisher to substantiate the basis of the dispute. This 
documentation may include, for example: a copy of the relevant portion 
of the consumer report that contains the allegedly inaccurate 
information; a police report; a fraud or identity theft affidavit; a 
court order; or account statements.
    (e) Duty of furnisher after receiving a direct dispute notice. After 
receiving a dispute notice from a consumer pursuant to paragraphs (c) 
and (d) of this section, the furnisher must:
    (1) Conduct a reasonable investigation with respect to the disputed 
information;
    (2) Review all relevant information provided by the consumer with 
the dispute notice;
    (3) Complete its investigation of the dispute and report the results 
of the investigation to the consumer before the expiration of the period 
under section 611(a)(1) of the Fair Credit Reporting Act (15 U.S.C. 
1681i(a)(1)) within which a consumer reporting agency would be required 
to complete its action if the consumer had elected to dispute the 
information under that section; and
    (4) If the investigation finds that the information reported was 
inaccurate, promptly notify each consumer reporting agency to which the 
furnisher provided inaccurate information of that determination and 
provide to the consumer reporting agency any correction to that 
information that is necessary to make the information provided by the 
furnisher accurate.
    (f) Frivolous or irrelevant disputes. (1) A furnisher is not 
required to investigate a direct dispute if the furnisher has reasonably 
determined that the dispute is frivolous or irrelevant. A dispute 
qualifies as frivolous or irrelevant if:
    (i) The consumer did not provide sufficient information to 
investigate the disputed information as required by paragraph (d) of 
this section;
    (ii) The direct dispute is substantially the same as a dispute 
previously submitted by or on behalf of the consumer, either directly to 
the furnisher or through a consumer reporting agency, with respect to 
which the furnisher has already satisfied the applicable requirements of 
the Act or this section; provided, however, that a direct dispute is not 
substantially the same as a dispute previously submitted if the dispute 
includes information listed in paragraph (d) of this section that had 
not previously been provided to the furnisher; or
    (iii) The furnisher is not required to investigate the direct 
dispute because one or more of the exceptions listed in paragraph (b) of 
this section applies.
    (2) Notice of determination. Upon making a determination that a 
dispute is frivolous or irrelevant, the furnisher must notify the 
consumer of the determination not later than five business days after 
making the determination, by mail or, if authorized by the consumer for 
that purpose, by any other means available to the furnisher.
    (3) Contents of notice of determination that a dispute is frivolous 
or irrelevant. A notice of determination that a dispute is frivolous or 
irrelevant must include the reasons for such determination and identify 
any information required to investigate the disputed information, which 
notice may consist of a standardized form describing the general nature 
of such information.

Subpart F [Reserved]



         Subpart H_Duties of Users Regarding Risk-Based Pricing

    Source: 75 FR 2752, January 15, 2010, unless otherwise noted.



Sec. 222.70  Scope.

    (a) Coverage--(1) In general. This subpart applies to any person 
that both--
    (i) Uses a consumer report in connection with an application for, or 
a grant, extension, or other provision of, credit to a consumer that is 
primarily for personal, family, or household purposes; and
    (ii) Based in whole or in part on the consumer report, grants, 
extends, or

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otherwise provides credit to the consumer on material terms that are 
materially less favorable than the most favorable material terms 
available to a substantial proportion of consumers from or through that 
person.
    (2) Business credit excluded. This subpart does not apply to an 
application for, or a grant, extension, or other provision of, credit to 
a consumer or to any other applicant primarily for a business purpose.
    (b) Relation to Federal Trade Commission rules. These rules are 
substantively identical to the Federal Trade Commission's (Commission's) 
risk-based pricing rules in 16 CFR 640. Both rules apply to the covered 
person described in paragraph (a) of this section. Compliance with 
either the Board's rules or the Commission's rules satisfies the 
requirements of the statute (15 U.S.C. 1681m(h)).
    (c) Enforcement. The provisions of this subpart will be enforced in 
accordance with the enforcement authority set forth in sections 621(a) 
and (b) of the FCRA.



Sec. 222.71  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Adverse action has the same meaning as in 15 U.S.C. 
1681a(k)(1)(A).
    (b) Annual percentage rate has the same meaning as in 12 CFR 
226.14(b) with respect to an open-end credit plan and as in 12 CFR 
226.22 with respect to closed-end credit.
    (c) Closed-end credit has the same meaning as in 12 CFR 
226.2(a)(10).
    (d) Consumer has the same meaning as in 15 U.S.C. 1681a(c).
    (e) Consummation has the same meaning as in 12 CFR 226.2(a)(13).
    (f) Consumer report has the same meaning as in 15 U.S.C. 1681a(d).
    (g) Consumer reporting agency has the same meaning as in 15 U.S.C. 
1681a(f).
    (h) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (i) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (j) Credit card has the same meaning as in 15 U.S.C. 1681a(r)(2).
    (k) Credit card issuer has the same meaning as in 15 U.S.C. 
1681a(r)(1)(A).
    (l) Credit score has the same meaning as in 15 U.S.C. 
1681g(f)(2)(A).
    (m) Firm offer of credit has the same meaning as in 15 U.S.C. 
1681a(l).
    (n) Material terms means--
    (1) (i) Except as otherwise provided in paragraphs (n)(1)(ii) and 
(n)(3) of this section, in the case of credit extended under an open-end 
credit plan, the annual percentage rate required to be disclosed under 
12 CFR 226.6(a)(1)(ii) or 12 CFR 226.6(b)(2)(i), excluding any temporary 
initial rate that is lower than the rate that will apply after the 
temporary rate expires, any penalty rate that will apply upon the 
occurrence of one or more specific events, such as a late payment or an 
extension of credit that exceeds the credit limit, and any fixed annual 
percentage rate option for a home equity line of credit;
    (ii) In the case of a credit card (other than a credit card that is 
used to access a home equity line of credit or a charge card), the 
annual percentage rate required to be disclosed under 12 CFR 
226.6(b)(2)(i) that applies to purchases (``purchase annual percentage 
rate'') and no other annual percentage rate, or in the case of a credit 
card that has no purchase annual percentage rate, the annual percentage 
rate that varies based on information in a consumer report and that has 
the most significant financial impact on consumers;
    (2) In the case of closed-end credit, the annual percentage rate 
required to be disclosed under 12 CFR 226.17(c) and 226.18(e); and
    (3) In the case of credit for which there is no annual percentage 
rate, the financial term that varies based on information in a consumer 
report and that has the most significant financial impact on consumers, 
such as a deposit required in connection with credit extended by a 
telephone company or utility or an annual membership fee for a charge 
card.
    (o) Materially less favorable means, when applied to material terms, 
that the terms granted, extended, or otherwise provided to a consumer 
differ from the terms granted, extended, or otherwise provided to 
another consumer from or through the same person such that the cost of 
credit to the first consumer would be significantly greater than the 
cost of credit granted, extended, or otherwise provided to the

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other consumer. For purposes of this definition, factors relevant to 
determining the significance of a difference in cost include the type of 
credit product, the term of the credit extension, if any, and the extent 
of the difference between the material terms granted, extended, or 
otherwise provided to the two consumers.
    (p) Open-end credit plan has the same meaning as in 15 U.S.C. 
1602(i), as interpreted by the Board of Governors of the Federal Reserve 
System in Regulation Z (12 CFR part 226) and the Official Staff 
Commentary to Regulation Z (Supplement I to 12 CFR Part 226).
    (q) Person has the same meaning as in 15 U.S.C. 1681a(b).



Sec. 222.72  General requirements for risk-based pricing notices.

    (a) In general. Except as otherwise provided in this subpart, a 
person must provide to a consumer a notice (``risk-based pricing 
notice'') in the form and manner required by this subpart if the person 
both--
    (1) Uses a consumer report in connection with an application for, or 
a grant, extension, or other provision of, credit to that consumer that 
is primarily for personal, family, or household purposes; and
    (2) Based in whole or in part on the consumer report, grants, 
extends, or otherwise provides credit to that consumer on material terms 
that are materially less favorable than the most favorable material 
terms available to a substantial proportion of consumers from or through 
that person.
    (b) Determining which consumers must receive a notice. A person may 
determine whether paragraph (a) of this section applies by directly 
comparing the material terms offered to each consumer and the material 
terms offered to other consumers for a specific type of credit product. 
For purposes of this section, a ``specific type of credit product'' 
means one or more credit products with similar features that are 
designed for similar purposes. Examples of a specific type of credit 
product include student loans, unsecured credit cards, secured credit 
cards, new automobile loans, used automobile loans, fixed-rate mortgage 
loans, and variable-rate mortgage loans. As an alternative to making 
this direct comparison, a person may make the determination by using one 
of the following methods:
    (1) Credit score proxy method--(i) In general. A person that sets 
the material terms of credit granted, extended, or otherwise provided to 
a consumer, based in whole or in part on a credit score, may comply with 
the requirements of paragraph (a) of this section by--
    (A) Determining the credit score (hereafter referred to as the 
``cutoff score'') that represents the point at which approximately 40 
percent of the consumers to whom it grants, extends, or provides credit 
have higher credit scores and approximately 60 percent of the consumers 
to whom it grants, extends, or provides credit have lower credit scores; 
and
    (B) Providing a risk-based pricing notice to each consumer to whom 
it grants, extends, or provides credit whose credit score is lower than 
the cutoff score.
    (ii) Alternative to the 40/60 cutoff score determination. In the 
case of credit that has been granted, extended, or provided on the most 
favorable material terms to more than 40 percent of consumers, a person 
may, at its option, set its cutoff score at a point at which the 
approximate percentage of consumers who historically have been granted, 
extended, or provided credit on material terms other than the most 
favorable terms would receive risk-based pricing notices under this 
section.
    (iii) Determining the cutoff score--(A) Sampling approach. A person 
that currently uses risk-based pricing with respect to the credit 
products it offers must calculate the cutoff score by considering the 
credit scores of all or a representative sample of the consumers to whom 
it has granted, extended, or provided credit for a specific type of 
credit product.
    (B) Secondary source approach in limited circumstances. A person 
that is a new entrant into the credit business, introduces new credit 
products, or starts to use risk-based pricing with respect to the credit 
products it currently offers may initially determine the cutoff score 
based on information

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derived from appropriate market research or relevant third-party sources 
for a specific type of credit product, such as research or data from 
companies that develop credit scores. A person that acquires a credit 
portfolio as a result of a merger or acquisition may determine the 
cutoff score based on information from the party which it acquired, with 
which it merged, or from which it acquired the portfolio.
    (C) Recalculation of cutoff scores. A person using the credit score 
proxy method must recalculate its cutoff score(s) no less than every two 
years in the manner described in paragraph (b)(1)(iii)(A) of this 
section. A person using the credit score proxy method using market 
research, third-party data, or information from a party which it 
acquired, with which it merged, or from which it acquired the portfolio 
as permitted by paragraph (b)(1)(iii)(B) of this section generally must 
calculate a cutoff score(s) based on the scores of its own consumers in 
the manner described in paragraph (b)(1)(iii)(A) of this section within 
one year after it begins using a cutoff score derived from market 
research, third-party data, or information from a party which it 
acquired, with which it merged, or from which it acquired the portfolio. 
If such a person does not grant, extend, or provide credit to new 
consumers during that one-year period such that it lacks sufficient data 
with which to recalculate a cutoff score based on the credit scores of 
its own consumers, the person may continue to use a cutoff score derived 
from market research, third-party data, or information from a party 
which it acquired, with which it merged, or from which it acquired the 
portfolio as provided in paragraph (b)(1)(iii)(B) until it obtains 
sufficient data on which to base the recalculation. However, the person 
must recalculate its cutoff score(s) in the manner described in 
paragraph (b)(1)(iii)(A) of this section within two years, if it has 
granted, extended, or provided credit to some new consumers during that 
two-year period.
    (D) Use of two or more credit scores. A person that generally uses 
two or more credit scores in setting the material terms of credit 
granted, extended, or provided to a consumer must determine the cutoff 
score using the same method the person uses to evaluate multiple scores 
when making credit decisions. These evaluation methods may include, but 
are not limited to, selecting the low, median, high, most recent, or 
average credit score of each consumer to whom it grants, extends, or 
provides credit. If a person that uses two or more credit scores does 
not consistently use the same method for evaluating multiple credit 
scores (e.g., if the person sometimes chooses the median score and other 
times calculates the average score), the person must determine the 
cutoff score using a reasonable means. In such cases, use of any one of 
the methods that the person regularly uses or the average credit score 
of each consumer to whom it grants, extends, or provides credit is 
deemed to be a reasonable means of calculating the cutoff score.
    (iv) Credit score not available. For purposes of this section, a 
person using the credit score proxy method who grants, extends, or 
provides credit to a consumer for whom a credit score is not available 
must assume that the consumer receives credit on material terms that are 
materially less favorable than the most favorable credit terms offered 
to a substantial proportion of consumers from or through that person and 
must provide a risk-based pricing notice to the consumer.
    (v) Examples. (A) A credit card issuer engages in risk-based pricing 
and the annual percentage rates it offers to consumers are based in 
whole or in part on a credit score. The credit card issuer takes a 
representative sample of the credit scores of consumers to whom it 
issued credit cards within the preceding three months. The credit card 
issuer determines that approximately 40 percent of the sampled consumers 
have a credit score at or above 720 (on a scale of 350 to 850) and 
approximately 60 percent of the sampled consumers have a credit score 
below 720. Thus, the card issuer selects 720 as its cutoff score. A 
consumer applies to the credit card issuer for a credit card. The card 
issuer obtains a credit score for the consumer. The consumer's credit 
score is 700. Since the consumer's 700 credit score falls below the 720 
cutoff score, the credit card issuer must provide a

[[Page 83]]

risk-based pricing notice to the consumer.
    (B) A credit card issuer engages in risk-based pricing, and the 
annual percentage rates it offers to consumers are based in whole or in 
part on a credit score. The credit card issuer takes a representative 
sample of the consumers to whom it issued credit cards over the 
preceding six months. The credit card issuer determines that 
approximately 80 percent of the sampled consumers received credit at its 
lowest annual percentage rate, and 20 percent received credit at a 
higher annual percentage rate. Approximately 80 percent of the sampled 
consumers have a credit score at or above 750 (on a scale of 350 to 
850), and 20 percent have a credit score below 750. Thus, the card 
issuer selects 750 as its cutoff score. A consumer applies to the credit 
card issuer for a credit card. The card issuer obtains a credit score 
for the consumer. The consumer's credit score is 740. Since the 
consumer's 740 credit score falls below the 750 cutoff score, the credit 
card issuer must provide a risk-based pricing notice to the consumer.
    (C) An auto lender engages in risk-based pricing, obtains credit 
scores from one of the nationwide consumer reporting agencies, and uses 
the credit score proxy method to determine which consumers must receive 
a risk-based pricing notice. A consumer applies to the auto lender for 
credit to finance the purchase of an automobile. A credit score about 
that consumer is not available from the consumer reporting agency from 
which the lender obtains credit scores. The lender nevertheless grants, 
extends, or provides credit to the consumer. The lender must provide a 
risk-based pricing notice to the consumer.
    (2) Tiered pricing method--(i) In general. A person that sets the 
material terms of credit granted, extended, or provided to a consumer by 
placing the consumer within one of a discrete number of pricing tiers 
for a specific type of credit product, based in whole or in part on a 
consumer report, may comply with the requirements of paragraph (a) of 
this section by providing a risk-based pricing notice to each consumer 
who is not placed within the top pricing tier or tiers, as described 
below.
    (ii) Four or fewer pricing tiers. If a person using the tiered 
pricing method has four or fewer pricing tiers, the person complies with 
the requirements of paragraph (a) of this section by providing a risk-
based pricing notice to each consumer to whom it grants, extends, or 
provides credit who does not qualify for the top tier (that is, the 
lowest-priced tier). For example, a person that uses a tiered pricing 
structure with annual percentage rates of 8, 10, 12, and 14 percent 
would provide the risk-based pricing notice to each consumer to whom it 
grants, extends, or provides credit at annual percentage rates of 10, 
12, and 14 percent.
    (iii) Five or more pricing tiers. If a person using the tiered 
pricing method has five or more pricing tiers, the person complies with 
the requirements of paragraph (a) of this section by providing a risk-
based pricing notice to each consumer to whom it grants, extends, or 
provides credit who does not qualify for the top two tiers (that is, the 
two lowest-priced tiers) and any other tier that, together with the top 
tiers, comprise no less than the top 30 percent but no more than the top 
40 percent of the total number of tiers. Each consumer placed within the 
remaining tiers must receive a risk-based pricing notice. For example, 
if a person has nine pricing tiers, the top three tiers (that is, the 
three lowest-priced tiers) comprise no less than the top 30 percent but 
no more than the top 40 percent of the tiers. Therefore, a person using 
this method would provide a risk-based pricing notice to each consumer 
to whom it grants, extends, or provides credit who is placed within the 
bottom six tiers.
    (c) Application to credit card issuers--(1) In general. A credit 
card issuer subject to the requirements of paragraph (a) of this section 
may use one of the methods set forth in paragraph (b) of this section to 
identify consumers to whom it must provide a risk-based pricing notice. 
Alternatively, a credit card issuer may satisfy its obligations under 
paragraph (a) of this section by providing a risk-based pricing notice 
to a consumer when--
    (i) A consumer applies for a credit card either in connection with 
an application program, such as a direct-

[[Page 84]]

mail offer or a take-one application, or in response to a solicitation 
under 12 CFR 226.5a, and more than a single possible purchase annual 
percentage rate may apply under the program or solicitation; and
    (ii) Based in whole or in part on a consumer report, the credit card 
issuer provides a credit card to the consumer with an annual percentage 
rate referenced in Sec. 222.71(n)(1)(ii) that is greater than the 
lowest annual percentage rate referenced in Sec. 222.71(n)(1)(ii) 
available in connection with the application or solicitation.
    (2) No requirement to compare different offers. A credit card issuer 
is not subject to the requirements of paragraph (a) of this section and 
is not required to provide a risk-based pricing notice to a consumer 
if--
    (i) The consumer applies for a credit card for which the card issuer 
provides a single annual percentage rate referenced in Sec. 
222.71(n)(1)(ii), excluding a temporary initial rate that is lower than 
the rate that will apply after the temporary rate expires and a penalty 
rate that will apply upon the occurrence of one or more specific events, 
such as a late payment or an extension of credit that exceeds the credit 
limit; or
    (ii) The credit card issuer offers the consumer the lowest annual 
percentage rate referenced in Sec. 222.71(n)(1)(ii) available under the 
credit card offer for which the consumer applied, even if a lower annual 
percentage rate referenced in Sec. 222.71(n)(1)(ii) is available under 
a different credit card offer issued by the card issuer.
    (3) Examples. (i) A credit card issuer sends a solicitation to the 
consumer that discloses several possible purchase annual percentage 
rates that may apply, such as 10, 12, or 14 percent, or a range of 
purchase annual percentage rates from 10 to 14 percent. The consumer 
applies for a credit card in response to the solicitation. The card 
issuer provides a credit card to the consumer with a purchase annual 
percentage rate of 12 percent based in whole or in part on a consumer 
report. Unless an exception applies under Sec. 222.74, the card issuer 
may satisfy its obligations under paragraph (a) of this section by 
providing a risk-based pricing notice to the consumer because the 
consumer received credit at a purchase annual percentage rate greater 
than the lowest purchase annual percentage rate available under that 
solicitation.
    (ii) The same facts as in the example in paragraph (c)(3)(i) of this 
section, except that the card issuer provides a credit card to the 
consumer at a purchase annual percentage rate of 10 percent. The card 
issuer is not required to provide a risk-based pricing notice to the 
consumer even if, under a different credit card solicitation, that 
consumer or other consumers might qualify for a purchase annual 
percentage rate of 8 percent.
    (d) Account review--(1) In general. Except as otherwise provided in 
this subpart, a person is subject to the requirements of paragraph (a) 
of this section and must provide a risk-based pricing notice to a 
consumer in the form and manner required by this subpart if the person--
    (i) Uses a consumer report in connection with a review of credit 
that has been extended to the consumer; and
    (ii) Based in whole or in part on the consumer report, increases the 
annual percentage rate (the annual percentage rate referenced in Sec. 
222.71(n)(1)(ii) in the case of a credit card).
    (2) Example. A credit card issuer periodically obtains consumer 
reports for the purpose of reviewing the terms of credit it has extended 
to consumers in connection with credit cards. As a result of this 
review, the credit card issuer increases the purchase annual percentage 
rate applicable to a consumer's credit card based in whole or in part on 
information in a consumer report. The credit card issuer is subject to 
the requirements of paragraph (a) of this section and must provide a 
risk-based pricing notice to the consumer.



Sec. 222.73  Content, form, and timing of risk-based pricing notices.

    (a) Content of the notice--(1) In general. The risk-based pricing 
notice required by Sec. 222.72(a) or (c) must include:
    (i) A statement that a consumer report (or credit report) includes 
information about the consumer's credit history and the type of 
information included in that history;

[[Page 85]]

    (ii) A statement that the terms offered, such as the annual 
percentage rate, have been set based on information from a consumer 
report;
    (iii) A statement that the terms offered may be less favorable than 
the terms offered to consumers with better credit histories;
    (iv) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the credit decision;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from the consumer reporting agency or 
agencies identified in the notice without charge for 60 days after 
receipt of the notice;
    (vii) A statement informing the consumer how to obtain a consumer 
report from the consumer reporting agency or agencies identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency or agencies;
    (viii) A statement directing consumers to the Web sites of the 
Federal Reserve Board and Federal Trade Commission to obtain more 
information about consumer reports; and
    (ix) If a credit score of the consumer to whom a person grants, 
extends, or otherwise provides credit is used in setting the material 
terms of credit:
    (A) A statement that a credit score is a number that takes into 
account information in a consumer report, that the consumer's credit 
score was used to set the terms of credit offered, and that a credit 
score can change over time to reflect changes in the consumer's credit 
history;
    (B) The credit score used by the person in making the credit 
decision;
    (C) The range of possible credit scores under the model used to 
generate the credit score;
    (D) All of the key factors that adversely affected the credit score, 
which shall not exceed four key factors, except that if one of the key 
factors is the number of enquiries made with respect to the consumer 
report, the number of key factors shall not exceed five;
    (E) The date on which the credit score was created; and
    (F) The name of the consumer reporting agency or other person that 
provided the credit score.
    (2) Account review. The risk-based pricing notice required by Sec. 
222.72(d) must include:
    (i) A statement that a consumer report (or credit report) includes 
information about the consumer's credit history and the type of 
information included in that credit history;
    (ii) A statement that the person has conducted a review of the 
account using information from a consumer report;
    (iii) A statement that as a result of the review, the annual 
percentage rate on the account has been increased based on information 
from a consumer report;
    (iv) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the account review;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from the consumer reporting agency or 
agencies identified in the notice without charge for 60 days after 
receipt of the notice;
    (vii) A statement informing the consumer how to obtain a consumer 
report from the consumer reporting agency or agencies identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency or agencies;
    (viii) A statement directing consumers to the Web sites of the 
Federal Reserve Board and Federal Trade Commission to obtain more 
information about consumer reports; and
    (ix) If a credit score of the consumer whose extension of credit is 
under review is used in increasing the annual percentage rate:

[[Page 86]]

    (A) A statement that a credit score is a number that takes into 
account information in a consumer report, that the consumer's credit 
score was used to set the terms of credit offered, and that a credit 
score can change over time to reflect changes in the consumer's credit 
history;
    (B) The credit score used by the person in making the credit 
decision;
    (C) The range of possible credit scores under the model used to 
generate the credit score;
    (D) All of the key factors that adversely affected the credit score, 
which shall not exceed four key factors, except that if one of the key 
factors is the number of enquires made with respect to the consumer 
report, the number of key factors shall not exceed five;
    (E) The date on which the credit score was created; and
    (F) The name of the consumer reporting agency or other person that 
provided the credit score.
    (b) Form of the notice--(1) In general. The risk-based pricing 
notice required by Sec. 222.72(a), (c), or (d) must be:
    (i) Clear and conspicuous; and
    (ii) Provided to the consumer in oral, written, or electronic form.
    (2) Model forms. Model forms of the risk-based pricing notice 
required by Sec. 222.72(a) and (c) are contained in Appendices H-1 and 
H-6 of this part. Appropriate use of Model Form H-1 or H-6 is deemed to 
comply with the requirements of Sec. 222.72(a) and (c). Model forms of 
the risk-based pricing notice required by Sec. 222.72(d) are contained 
in Appendices H-2 and H-7 of this part. Appropriate use of Model Form H-
2 or H-7 is deemed to comply with the requirements of Sec. 222.72(d). 
Use of the model forms is optional.
    (c) Timing--(1) General. Except as provided in paragraph (c)(3) of 
this section, a risk-based pricing notice must be provided to the 
consumer--
    (i) In the case of a grant, extension, or other provision of closed-
end credit, before consummation of the transaction, but not earlier than 
the time the decision to approve an application for, or a grant, 
extension, or other provision of, credit, is communicated to the 
consumer by the person required to provide the notice;
    (ii) In the case of credit granted, extended, or provided under an 
open-end credit plan, before the first transaction is made under the 
plan, but not earlier than the time the decision to approve an 
application for, or a grant, extension, or other provision of, credit is 
communicated to the consumer by the person required to provide the 
notice; or
    (iii) In the case of a review of credit that has been extended to 
the consumer, at the time the decision to increase the annual percentage 
rate (annual percentage rate referenced in Sec. 222.71(n)(1)(ii) in the 
case of a credit card) based on a consumer report is communicated to the 
consumer by the person required to provide the notice, or if no notice 
of the increase in the annual percentage rate is provided to the 
consumer prior to the effective date of the change in the annual 
percentage rate (to the extent permitted by law), no later than five 
days after the effective date of the change in the annual percentage 
rate.
    (2) Application to certain automobile lending transactions. When a 
person to whom a credit obligation is initially payable grants, extends, 
or provides credit to a consumer for the purpose of financing the 
purchase of an automobile from an auto dealer or other party that is not 
affiliated with the person, any requirement to provide a risk-based 
pricing notice pursuant to this subpart is satisfied if the person:
    (i) Provides a notice described in Sec. 222.72(a), Sec. 222.74(e), 
or Sec. 222.74(f) to the consumer within the time periods set forth in 
paragraph (c)(1)(i) of this section, Sec. 222.74(e)(3), or Sec. 
222.74(f)(4), as applicable; or
    (ii) Arranges to have the auto dealer or other party provide a 
notice described in Sec. 222.72(a), Sec. 222.74(e), or Sec. 222.74(f) 
to the consumer on its behalf within the time periods set forth in 
paragraph (c)(1)(i) of this section, Sec. 222.74(e)(3), or Sec. 
222.74(f)(4), as applicable, and maintains reasonable policies and 
procedures to verify that the auto dealer or other party provides such 
notice to the consumer within the applicable time periods. If the person 
arranges to have the auto dealer or other party provide a notice 
described in Sec. 222.74(e), the person's obligation is

[[Page 87]]

satisfied if the consumer receives a notice containing a credit score 
obtained by the dealer or other party, even if a different credit score 
is obtained and used by the person on whose behalf the notice is 
provided.
    (3) Timing requirements for contemporaneous purchase credit. When 
credit under an open-end credit plan is granted, extended, or provided 
to a consumer in person or by telephone for the purpose of financing the 
contemporaneous purchase of goods or services, any risk-based pricing 
notice required to be provided pursuant to this subpart (or the 
disclosures permitted under Sec. 222.74(e) or (f)) may be provided at 
the earlier of:
    (i) The time of the first mailing by the person to the consumer 
after the decision is made to approve the grant, extension, or other 
provision of open-end credit, such as in a mailing containing the 
account agreement or a credit card; or
    (ii) Within 30 days after the decision to approve the grant, 
extension, or other provision of credit.
    (d) Multiple credit scores--(1) In general. When a person obtains or 
creates two or more credit scores and uses one of those credit scores in 
setting the material terms of credit, for example, by using the low, 
middle, high, or most recent score, the notices described in paragraphs 
(a)(1) and (2) of this section must include that credit score and 
information relating to that credit score required by paragraphs 
(a)(1)(ix) and (a)(2)(ix). When a person obtains or creates two or more 
credit scores and uses multiple credit scores in setting the material 
terms of credit by, for example, computing the average of all the credit 
scores obtained or created, the notices described in paragraphs (a)(1) 
and (2) of this section must include one of those credit scores and 
information relating to credit scores required by paragraphs (a)(1)(ix) 
and (a)(2)(ix). The notice may, at the person's option, include more 
than one credit score, along with the additional information specified 
in paragraphs (a)(1)(ix) and (a)(2)(ix) of this section for each credit 
score disclosed.
    (2) Examples. (i) A person that uses consumer reports to set the 
material terms of credit cards granted, extended, or provided to 
consumers regularly requests credit scores from several consumer 
reporting agencies and uses the low score when determining the material 
terms it will offer to the consumer. That person must disclose the low 
score in the notices described in paragraphs (a)(1) and (2) of this 
section.
    (ii) A person that uses consumer reports to set the material terms 
of automobile loans granted, extended, or provided to consumers 
regularly requests credit scores from several consumer reporting 
agencies, each of which it uses in an underwriting program in order to 
determine the material terms it will offer to the consumer. That person 
may choose one of these scores to include in the notices described in 
paragraph (a)(1) and (2) of this section.

[75 FR 2752, Jan. 15, 2010, as amended at 76 FR 41616, July 15, 2011]



Sec. 222.74  Exceptions.

    (a) Application for specific terms--(1) In general. A person is not 
required to provide a risk-based pricing notice to the consumer under 
Sec. 222.72(a) or (c) if the consumer applies for specific material 
terms and is granted those terms, unless those terms were specified by 
the person using a consumer report after the consumer applied for or 
requested credit and after the person obtained the consumer report. For 
purposes of this section, ``specific material terms'' means a single 
material term, or set of material terms, such as an annual percentage 
rate of 10 percent, and not a range of alternatives, such as an annual 
percentage rate that may be 8, 10, or 12 percent, or between 8 and 12 
percent.
    (2) Example. A consumer receives a firm offer of credit from a 
credit card issuer. The terms of the firm offer are based in whole or in 
part on information from a consumer report that the credit card issuer 
obtained under the FCRA's firm offer of credit provisions. The 
solicitation offers the consumer a credit card with a single purchase 
annual percentage rate of 12 percent. The consumer applies for and 
receives a credit card with an annual percentage rate of 12 percent. 
Other customers

[[Page 88]]

with the same credit card have a purchase annual percentage rate of 10 
percent. The exception applies because the consumer applied for specific 
material terms and was granted those terms. Although the credit card 
issuer specified the annual percentage rate in the firm offer of credit 
based in whole or in part on a consumer report, the credit card issuer 
specified that material term before, not after, the consumer applied for 
or requested credit.
    (b) Adverse action notice. A person is not required to provide a 
risk-based pricing notice to the consumer under Sec. 222.72(a), (c), or 
(d) if the person provides an adverse action notice to the consumer 
under section 615(a) of the FCRA.
    (c) Prescreened solicitations--(1) In general. A person is not 
required to provide a risk-based pricing notice to the consumer under 
Sec. 222.72(a) or (c) if the person:
    (i) Obtains a consumer report that is a prescreened list as 
described in section 604(c)(2) of the FCRA; and
    (ii) Uses the consumer report for the purpose of making a firm offer 
of credit to the consumer.
    (2) More favorable material terms. This exception applies to any 
firm offer of credit offered by a person to a consumer, even if the 
person makes other firm offers of credit to other consumers on more 
favorable material terms.
    (3) Example. A credit card issuer obtains two prescreened lists from 
a consumer reporting agency. One list includes consumers with high 
credit scores. The other list includes consumers with low credit scores. 
The issuer mails a firm offer of credit to the high credit score 
consumers with a single purchase annual percentage rate of 10 percent. 
The issuer also mails a firm offer of credit to the low credit score 
consumers with a single purchase annual percentage rate of 14 percent. 
The credit card issuer is not required to provide a risk-based pricing 
notice to the low credit score consumers who receive the 14 percent 
offer because use of a consumer report to make a firm offer of credit 
does not trigger the risk-based pricing notice requirement.
    (d) Loans secured by residential real property--credit score 
disclosure--(1) In general. A person is not required to provide a risk-
based pricing notice to a consumer under Sec. 222.72(a) or (c) if:
    (i) The consumer requests from the person an extension of credit 
that is or will be secured by one to four units of residential real 
property; and
    (ii) The person provides to each consumer described in paragraph 
(d)(1)(i) of this section a notice that contains the following--
    (A) A statement that a consumer report (or credit report) is a 
record of the consumer's credit history and includes information about 
whether the consumer pays his or her obligations on time and how much 
the consumer owes to creditors;
    (B) A statement that a credit score is a number that takes into 
account information in a consumer report and that a credit score can 
change over time to reflect changes in the consumer's credit history;
    (C) A statement that the consumer's credit score can affect whether 
the consumer can obtain credit and what the cost of that credit will be;
    (D) The information required to be disclosed to the consumer 
pursuant to section 609(g) of the FCRA;
    (E) The distribution of credit scores among consumers who are scored 
under the same scoring model that is used to generate the consumer's 
credit score using the same scale as that of the credit score that is 
provided to the consumer, presented in the form of a bar graph 
containing a minimum of six bars that illustrates the percentage of 
consumers with credit scores within the range of scores reflected in 
each bar or by other clear and readily understandable graphical means, 
or a clear and readily understandable statement informing the consumer 
how his or her credit score compares to the scores of other consumers. 
Use of a graph or statement obtained from the person providing the 
credit score that meets the requirements of this paragraph (d)(1)(ii)(E) 
is deemed to comply with this requirement;
    (F) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;

[[Page 89]]

    (G) A statement that federal law gives the consumer the right to 
obtain copies of his or her consumer reports directly from the consumer 
reporting agencies, including a free report from each of the nationwide 
consumer reporting agencies once during any 12-month period;
    (H) Contact information for the centralized source from which 
consumers may obtain their free annual consumer reports; and
    (I) A statement directing consumers to the Web sites of the Federal 
Reserve Board and Federal Trade Commission to obtain more information 
about consumer reports.
    (2) Form of the notice. The notice described in paragraph (d)(1)(ii) 
of this section must be:
    (i) Clear and conspicuous;
    (ii) Provided on or with the notice required by section 609(g) of 
the FCRA;
    (iii) Segregated from other information provided to the consumer, 
except for the notice required by section 609(g) of the FCRA; and
    (iv) Provided to the consumer in writing and in a form that the 
consumer may keep.
    (3) Timing. The notice described in paragraph (d)(1)(ii) of this 
section must be provided to the consumer at the time the disclosure 
required by section 609(g) of the FCRA is provided to the consumer, but 
in any event at or before consummation in the case of closed-end credit 
or before the first transaction is made under an open-end credit plan.
    (4) Multiple credit scores--(i) In general. When a person obtains 
two or more credit scores from consumer reporting agencies and uses one 
of those credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by using the 
low, middle, high, or most recent score, the notice described in 
paragraph (d)(1)(ii) of this section must include that credit score and 
the other information required by that paragraph. When a person obtains 
two or more credit scores from consumer reporting agencies and uses 
multiple credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by computing 
the average of all the credit scores obtained, the notice described in 
paragraph (d)(1)(ii) of this section must include one of those credit 
scores and the other information required by that paragraph. The notice 
may, at the person's option, include more than one credit score, along 
with the additional information specified in paragraph (d)(1)(ii) of 
this section for each credit score disclosed.
    (ii) Examples. (A) A person that uses consumer reports to set the 
material terms of mortgage credit granted, extended, or provided to 
consumers regularly requests credit scores from several consumer 
reporting agencies and uses the low score when determining the material 
terms it will offer to the consumer. That person must disclose the low 
score in the notice described in paragraph (d)(1)(ii) of this section.
    (B) A person that uses consumer reports to set the material terms of 
mortgage credit granted, extended, or provided to consumers regularly 
requests credit scores from several consumer reporting agencies, each of 
which it uses in an underwriting program in order to determine the 
material terms it will offer to the consumer. That person may choose one 
of these scores to include in the notice described in paragraph 
(d)(1)(ii) of this section.
    (5) Model form. A model form of the notice described in paragraph 
(d)(1)(ii) of this section consolidated with the notice required by 
section 609(g) of the FCRA is contained in Appendix H-3 of this part. 
Appropriate use of Model Form H-3 is deemed to comply with the 
requirements of Sec. 222.74(d). Use of the model form is optional.
    (e) Other extensions of credit--credit score disclosure--(1) In 
general. A person is not required to provide a risk-based pricing notice 
to a consumer under Sec. 222.72(a) or (c) if:
    (i) The consumer requests from the person an extension of credit 
other than credit that is or will be secured by one to four units of 
residential real property; and
    (ii) The person provides to each consumer described in paragraph 
(e)(1)(i) of this section a notice that contains the following--
    (A) A statement that a consumer report (or credit report) is a 
record of the

[[Page 90]]

consumer's credit history and includes information about whether the 
consumer pays his or her obligations on time and how much the consumer 
owes to creditors;
    (B) A statement that a credit score is a number that takes into 
account information in a consumer report and that a credit score can 
change over time to reflect changes in the consumer's credit history;
    (C) A statement that the consumer's credit score can affect whether 
the consumer can obtain credit and what the cost of that credit will be;
    (D) The current credit score of the consumer or the most recent 
credit score of the consumer that was previously calculated by the 
consumer reporting agency for a purpose related to the extension of 
credit;
    (E) The range of possible credit scores under the model used to 
generate the credit score;
    (F) The distribution of credit scores among consumers who are scored 
under the same scoring model that is used to generate the consumer's 
credit score using the same scale as that of the credit score that is 
provided to the consumer, presented in the form of a bar graph 
containing a minimum of six bars that illustrates the percentage of 
consumers with credit scores within the range of scores reflected in 
each bar, or by other clear and readily understandable graphical means, 
or a clear and readily understandable statement informing the consumer 
how his or her credit score compares to the scores of other consumers. 
Use of a graph or statement obtained from the person providing the 
credit score that meets the requirements of this paragraph (e)(1)(ii)(F) 
is deemed to comply with this requirement;
    (G) The date on which the credit score was created;
    (H) The name of the consumer reporting agency or other person that 
provided the credit score;
    (I) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;
    (J) A statement that federal law gives the consumer the right to 
obtain copies of his or her consumer reports directly from the consumer 
reporting agencies, including a free report from each of the nationwide 
consumer reporting agencies once during any 12-month period;
    (K) Contact information for the centralized source from which 
consumers may obtain their free annual consumer reports; and
    (L) A statement directing consumers to the web sites of the Federal 
Reserve Board and Federal Trade Commission to obtain more information 
about consumer reports.
    (2) Form of the notice. The notice described in paragraph (e)(1)(ii) 
of this section must be:
    (i) Clear and conspicuous;
    (ii) Segregated from other information provided to the consumer; and
    (iii) Provided to the consumer in writing and in a form that the 
consumer may keep.
    (3) Timing. The notice described in paragraph (e)(1)(ii) of this 
section must be provided to the consumer as soon as reasonably 
practicable after the credit score has been obtained, but in any event 
at or before consummation in the case of closed-end credit or before the 
first transaction is made under an open-end credit plan.
    (4) Multiple credit scores--(i) In general. When a person obtains 
two or more credit scores from consumer reporting agencies and uses one 
of those credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by using the 
low, middle, high, or most recent score, the notice described in 
paragraph (e)(1)(ii) of this section must include that credit score and 
the other information required by that paragraph. When a person obtains 
two or more credit scores from consumer reporting agencies and uses 
multiple credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by computing 
the average of all the credit scores obtained, the notice described in 
paragraph (e)(1)(ii) of this section must include one of those credit 
scores and the other information required by that paragraph. The notice 
may, at the person's option, include more than one credit score,

[[Page 91]]

along with the additional information specified in paragraph (e)(1)(ii) 
of this section for each credit score disclosed.
    (ii) Examples. The manner in which multiple credit scores are to be 
disclosed under this section are substantially identical to the manner 
set forth in the examples contained in paragraph (d)(4)(ii) of this 
section.
    (5) Model form. A model form of the notice described in paragraph 
(e)(1)(ii) of this section is contained in Appendix H-4 of this part. 
Appropriate use of Model Form H-4 is deemed to comply with the 
requirements of Sec. 222.74(e). Use of the model form is optional.
    (f) Credit score not available--(1) In general. A person is not 
required to provide a risk-based pricing notice to a consumer under 
Sec. 222.72(a) or (c) if the person:
    (i) Regularly obtains credit scores from a consumer reporting agency 
and provides credit score disclosures to consumers in accordance with 
paragraphs (d) or (e) of this section, but a credit score is not 
available from the consumer reporting agency from which the person 
regularly obtains credit scores for a consumer to whom the person 
grants, extends, or provides credit;
    (ii) Does not obtain a credit score from another consumer reporting 
agency in connection with granting, extending, or providing credit to 
the consumer; and
    (iii) Provides to the consumer a notice that contains the 
following--
    (A) A statement that a consumer report (or credit report) includes 
information about the consumer's credit history and the type of 
information included in that history;
    (B) A statement that a credit score is a number that takes into 
account information in a consumer report and that a credit score can 
change over time in response to changes in the consumer's credit 
history;
    (C) A statement that credit scores are important because consumers 
with higher credit scores generally obtain more favorable credit terms;
    (D) A statement that not having a credit score can affect whether 
the consumer can obtain credit and what the cost of that credit will be;
    (E) A statement that a credit score about the consumer was not 
available from a consumer reporting agency, which must be identified by 
name, generally due to insufficient information regarding the consumer's 
credit history;
    (F) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the consumer report;
    (G) A statement that federal law gives the consumer the right to 
obtain copies of his or her consumer reports directly from the consumer 
reporting agencies, including a free consumer report from each of the 
nationwide consumer reporting agencies once during any 12-month period;
    (H) The contact information for the centralized source from which 
consumers may obtain their free annual consumer reports; and
    (I) A statement directing consumers to the web sites of the Federal 
Reserve Board and Federal Trade Commission to obtain more information 
about consumer reports.
    (2) Example. A person that uses consumer reports to set the material 
terms of non-mortgage credit granted, extended, or provided to consumers 
regularly requests credit scores from a particular consumer reporting 
agency and provides those credit scores and additional information to 
consumers to satisfy the requirements of paragraph (e) of this section. 
That consumer reporting agency provides to the person a consumer report 
on a particular consumer that contains one trade line, but does not 
provide the person with a credit score on that consumer. If the person 
does not obtain a credit score from another consumer reporting agency 
and, based in whole or in part on information in a consumer report, 
grants, extends, or provides credit to the consumer, the person may 
provide the notice described in paragraph (f)(1)(iii) of this section. 
If, however, the person obtains a credit score from another consumer 
reporting agency, the person may not rely upon the exception in 
paragraph (f) of this section, but may satisfy the requirements of 
paragraph (e) of this section.

[[Page 92]]

    (3) Form of the notice. The notice described in paragraph 
(f)(1)(iii) of this section must be:
    (i) Clear and conspicuous;
    (ii) Segregated from other information provided to the consumer; and
    (iii) Provided to the consumer in writing and in a form that the 
consumer may keep.
    (4) Timing. The notice described in paragraph (f)(1)(iii) of this 
section must be provided to the consumer as soon as reasonably 
practicable after the person has requested the credit score, but in any 
event not later than consummation of a transaction in the case of 
closed-end credit or when the first transaction is made under an open-
end credit plan.
    (5) Model form. A model form of the notice described in paragraph 
(f)(1)(iii) of this section is contained in Appendix H-5 of this part. 
Appropriate use of Model Form H-5 is deemed to comply with the 
requirements of Sec. 222.74(f). Use of the model form is optional.



Sec. 222.75  Rules of construction.

    For purposes of this subpart, the following rules of construction 
apply:
    (a) One notice per credit extension. A consumer is entitled to no 
more than one risk-based pricing notice under Sec. 222.72(a) or (c), or 
one notice under Sec. 222.74(d), (e), or (f), for each grant, 
extension, or other provision of credit. Notwithstanding the foregoing, 
even if a consumer has previously received a risk-based pricing notice 
in connection with a grant, extension, or other provision of credit, 
another risk-based pricing notice is required if the conditions set 
forth in Sec. 222.72(d) have been met.
    (b) Multi-party transactions--(1) Initial creditor. The person to 
whom a credit obligation is initially payable must provide the risk-
based pricing notice described in Sec. 222.72(a) or (c), or satisfy the 
requirements for and provide the notice required under one of the 
exceptions in Sec. 222.74(d), (e), or (f), even if that person 
immediately assigns the credit agreement to a third party and is not the 
source of funding for the credit.
    (2) Purchasers or assignees. A purchaser or assignee of a credit 
contract with a consumer is not subject to the requirements of this 
subpart and is not required to provide the risk-based pricing notice 
described in Sec. 222.72(a) or (c), or satisfy the requirements for and 
provide the notice required under one of the exceptions in Sec. 
222.74(d), (e), or (f).
    (3) Examples. (i) A consumer obtains credit to finance the purchase 
of an automobile. If the auto dealer is the person to whom the loan 
obligation is initially payable, such as where the auto dealer is the 
original creditor under a retail installment sales contract, the auto 
dealer must provide the risk-based pricing notice to the consumer (or 
satisfy the requirements for and provide the notice required under one 
of the exceptions noted above), even if the auto dealer immediately 
assigns the loan to a bank or finance company. The bank or finance 
company, which is an assignee, has no duty to provide a risk-based 
pricing notice to the consumer.
    (ii) A consumer obtains credit to finance the purchase of an 
automobile. If a bank or finance company is the person to whom the loan 
obligation is initially payable, the bank or finance company must 
provide the risk-based pricing notice to the consumer (or satisfy the 
requirements for and provide the notice required under one of the 
exceptions noted above) based on the terms offered by that bank or 
finance company only. The auto dealer has no duty to provide a risk-
based pricing notice to the consumer. However, the bank or finance 
company may comply with this rule if the auto dealer has agreed to 
provide notices to consumers before consummation pursuant to an 
arrangement with the bank or finance company, as permitted under Sec. 
222.73(c).
    (c) Multiple consumers--(1) Risk-based pricing notices. In a 
transaction involving two or more consumers who are granted, extended, 
or otherwise provided credit, a person must provide a notice to each 
consumer to satisfy the requirements of Sec. 222.72(a) or (c). Whether 
the consumers have the same address or not, the person must provide a 
separate notice to each consumer if a notice includes a credit score(s). 
Each separate notice that includes a credit score(s) must contain only 
the credit score(s) of the consumer to whom the notice is provided, and 
not the credit score(s) of the other consumer. If the

[[Page 93]]

consumers have the same address, and the notice does not include a 
credit score(s), a person may satisfy the requirements by providing a 
single notice addressed to both consumers.
    (2) Credit score disclosure notices. In a transaction involving two 
or more consumers who are granted, extended, or otherwise provided 
credit, a person must provide a separate notice to each consumer to 
satisfy the exceptions in Sec. 222.74(d), (e), or (f). Whether the 
consumers have the same address or not, the person must provide a 
separate notice to each consumer. Each separate notice must contain only 
the credit score(s) of the consumer to whom the notice is provided, and 
not the credit score(s) of the other consumer.
    (3) Examples. (i) Two consumers jointly apply for credit with a 
creditor. The creditor obtains credit scores on both consumers. Based in 
part on the credit scores, the creditor grants credit to the consumers 
on material terms that are materially less favorable than the most 
favorable terms available to other consumers from the creditor. The 
creditor provides risk-based pricing notices to satisfy its obligations 
under this subpart. The creditor must provide a separate risk-based 
pricing notice to each consumer whether the consumers have the same 
address or not. Each risk-based pricing notice must contain only the 
credit score(s) of the consumer to whom the notice is provided.
    (ii) Two consumers jointly apply for credit with a creditor. The two 
consumers reside at the same address. The creditor obtains credit scores 
on each of the two consumer applicants. The creditor grants credit to 
the consumers. The creditor provides credit score disclosure notices to 
satisfy its obligations under this subpart. Even though the two 
consumers reside at the same address, the creditor must provide a 
separate credit score disclosure notice to each of the consumers. Each 
notice must contain only the credit score of the consumer to whom the 
notice is provided.

[75 FR 2752, Jan. 15, 2010, as amended at 76 FR 41617, July 15, 2011]



 Subpart I_Duties of Users of Consumer Reports Regarding Identity Theft

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



Sec. Sec. 222.80-222.81  [Reserved]



Sec. 222.82  Duties of users regarding address discrepancies.

    (a) Scope. This section applies to a user of consumer reports (user) 
that receives a notice of address discrepancy from a consumer reporting 
agency described in 15 U.S.C. 1681a(p), and that is a member bank of the 
Federal Reserve System (other than a national bank) and its respective 
operating subsidiaries, a branch or agency of a foreign bank (other than 
a Federal branch, Federal agency, or insured State branch of a foreign 
bank), commercial lending company owned or controlled by a foreign bank, 
and an organization operating under section 25 or 25A of the Federal 
Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).
    (b) Definition. For purposes of this section, a notice of address 
discrepancy means a notice sent to a user by a consumer reporting agency 
described in 15 U.S.C. 1681a(p) pursuant to 15 U.S.C. 1681c(h)(1), that 
informs the user of a substantial difference between the address for the 
consumer that the user provided to request the consumer report and the 
address(es) in the agency's file for the consumer.
    (c) Reasonable belief--(1) Requirement to form a reasonable belief. 
A user must develop and implement reasonable policies and procedures 
designed to enable the user to form a reasonable belief that a consumer 
report relates to the consumer about whom it has requested the report, 
when the user receives a notice of address discrepancy.
    (2) Examples of reasonable policies and procedures. (i) Comparing 
the information in the consumer report provided by the consumer 
reporting agency with information the user:
    (A) Obtains and uses to verify the consumer's identity in accordance 
with the requirements of the Customer Identification Program (CIP) rules 
implementing 31 U.S.C. 5318(l) (31 CFR 103.121);

[[Page 94]]

    (B) Maintains in its own records, such as applications, change of 
address notifications, other customer account records, or retained CIP 
documentation; or
    (C) Obtains from third-party sources; or
    (ii) Verifying the information in the consumer report provided by 
the consumer reporting agency with the consumer.
    (d) Consumer's address--(1) Requirement to furnish consumer's 
address to a consumer reporting agency. A user must develop and 
implement reasonable policies and procedures for furnishing an address 
for the consumer that the user has reasonably confirmed is accurate to 
the consumer reporting agency described in 15 U.S.C. 1681a(p) from whom 
it received the notice of address discrepancy when the user:
    (i) Can form a reasonable belief that the consumer report relates to 
the consumer about whom the user requested the report;
    (ii) Establishes a continuing relationship with the consumer; and
    (iii) Regularly and in the ordinary course of business furnishes 
information to the consumer reporting agency from which the notice of 
address discrepancy relating to the consumer was obtained.
    (2) Examples of confirmation methods. The user may reasonably 
confirm an address is accurate by:
    (i) Verifying the address with the consumer about whom it has 
requested the report;
    (ii) Reviewing its own records to verify the address of the 
consumer;
    (iii) Verifying the address through third-party sources; or
    (iv) Using other reasonable means.
    (3) Timing. The policies and procedures developed in accordance with 
paragraph (d)(1) of this section must provide that the user will furnish 
the consumer's address that the user has reasonably confirmed is 
accurate to the consumer reporting agency described in 15 U.S.C. 
1681a(p) as part of the information it regularly furnishes for the 
reporting period in which it establishes a relationship with the 
consumer.

[Reg. V, 72 FR 63756, Nov. 9, 2007, as amended at 74 FR 22642, May 14, 
2009]



Sec. 222.83  Disposal of consumer information.

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



                   Subpart J_Identity Theft Red Flags

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



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

    (a) Scope. This section applies to financial institutions and 
creditors that are member banks of the Federal Reserve System (other 
than national banks) and their respective operating subsidiaries 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

[[Page 95]]

controlled by foreign banks, and organizations operating under section 
25 or 25A of the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et 
seq.).
    (b) Definitions. For purposes of this section and appendix J, the 
following definitions apply:
    (1) Account means a continuing relationship established by a person 
with a financial institution or creditor to obtain a product or service 
for personal, family, household or business purposes. Account includes:
    (i) An extension of credit, such as the purchase of property or 
services involving a deferred payment; and
    (ii) A deposit account.
    (2) The term board of directors includes:
    (i) In the case of a branch or agency of a foreign bank, the 
managing official in charge of the branch or agency; and
    (ii) In the case of any other creditor that does not have a board of 
directors, a designated employee at the level of senior management.
    (3) Covered account means:
    (i) An account that a financial institution or creditor offers or 
maintains, primarily for personal, family, or household purposes, that 
involves or is designed to permit multiple payments or transactions, 
such as a credit card account, mortgage loan, automobile loan, margin 
account, cell phone account, utility account, checking account, or 
savings account; and
    (ii) Any other account that the financial institution or creditor 
offers or maintains for which there is a reasonably foreseeable risk to 
customers or to the safety and soundness of the financial institution or 
creditor from identity theft, including financial, operational, 
compliance, reputation, or litigation risks.
    (4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (5) Creditor has the same meaning as in 15 U.S.C. 1681m(e)(4).
    (6) Customer means a person that has a covered account with a 
financial institution or creditor.
    (7) Financial institution has the same meaning as in 15 U.S.C. 
1681a(t).
    (8) Identity theft has the same meaning as in 16 CFR 603.2(a).
    (9) Red Flag means a pattern, practice, or specific activity that 
indicates the possible existence of identity theft.
    (10) Service provider means a person that provides a service 
directly to the financial institution or creditor.
    (c) Periodic Identification of Covered Accounts. Each financial 
institution or creditor must periodically determine whether it offers or 
maintains covered accounts. As a part of this determination, a financial 
institution or creditor must conduct a risk assessment to determine 
whether it offers or maintains covered accounts described in paragraph 
(b)(3)(ii) of this section, taking into consideration:
    (1) The methods it provides to open its accounts;
    (2) The methods it provides to access its accounts; and
    (3) Its previous experiences with identity theft.
    (d) Establishment of an Identity Theft Prevention Program--(1) 
Program requirement. Each financial institution or creditor that offers 
or maintains one or more covered accounts must develop and implement a 
written Identity Theft Prevention Program (Program) that is designed to 
detect, prevent, and mitigate identity theft in connection with the 
opening of a covered account or any existing covered account. The 
Program must be appropriate to the size and complexity of the financial 
institution or creditor and the nature and scope of its activities.
    (2) Elements of the Program. The Program must include reasonable 
policies and procedures to:
    (i) Identify relevant Red Flags for the covered accounts that the 
financial institution or creditor offers or maintains, and incorporate 
those Red Flags into its Program;
    (ii) Detect Red Flags that have been incorporated into the Program 
of the financial institution or creditor;
    (iii) Respond appropriately to any Red Flags that are detected 
pursuant to paragraph (d)(2)(ii) of this section to prevent and mitigate 
identity theft; and
    (iv) Ensure the Program (including the Red Flags determined to be 
relevant) is updated periodically, to reflect changes in risks to 
customers and

[[Page 96]]

to the safety and soundness of the financial institution or creditor 
from identity theft.
    (e) Administration of the Program. Each financial institution or 
creditor that is required to implement a Program must provide for the 
continued administration of the Program and must:
    (1) Obtain approval of the initial written Program from either its 
board of directors or an appropriate committee of the board of 
directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a designated employee at the level of senior management in 
the oversight, development, implementation and administration of the 
Program;
    (3) Train staff, as necessary, to effectively implement the Program; 
and
    (4) Exercise appropriate and effective oversight of service provider 
arrangements.
    (f) Guidelines. Each financial institution or creditor that is 
required to implement a Program must consider the guidelines in appendix 
J of this part and include in its Program those guidelines that are 
appropriate.

[Reg. V, 72 FR 63758, Nov. 9, 2007, as amended at 74 FR 22642, May 14, 
2009; 79 FR 30711, May 29, 2014]



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

    (a) Scope. This section applies to a person described in Sec. 
222.90(a) that issues a debit or credit card (card issuer).
    (b) Definitions. For purposes of this section:
    (1) Cardholder means a consumer who has been issued a credit or 
debit card.
    (2) Clear and conspicuous means reasonably understandable and 
designed to call attention to the nature and significance of the 
information presented.
    (c) Address validation requirements. A card issuer must establish 
and implement reasonable policies and procedures to assess the validity 
of a change of address if it receives notification of a change of 
address for a consumer's debit or credit card account and, within a 
short period of time afterwards (during at least the first 30 days after 
it receives such notification), the card issuer receives a request for 
an additional or replacement card for the same account. Under these 
circumstances, the card issuer may not issue an additional or 
replacement card, until, in accordance with its reasonable policies and 
procedures and for the purpose of assessing the validity of the change 
of address, the card issuer:
    (1)(i) Notifies the cardholder of the request:
    (A) At the cardholder's former address; or
    (B) By any other means of communication that the card issuer and the 
cardholder have previously agreed to use; and
    (ii) Provides to the cardholder a reasonable means of promptly 
reporting incorrect address changes; or
    (2) Otherwise assesses the validity of the change of address in 
accordance with the policies and procedures the card issuer has 
established pursuant to Sec. 222.90 of this part.
    (d) Alternative timing of address validation. A card issuer may 
satisfy the requirements of paragraph (c) of this section if it 
validates an address pursuant to the methods in paragraph (c)(1) or 
(c)(2) of this section when it receives an address change notification, 
before it receives a request for an additional or replacement card.
    (e) Form of notice. Any written or electronic notice that the card 
issuer provides under this paragraph must be clear and conspicuous and 
provided separately from its regular correspondence with the cardholder.





                 Sec. Appendix A to Part 222 [Reserved]



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

    a. Although use of the model notices is not required, a financial 
institution that is subject to section 623(a)(7) of the FCRA shall be 
deemed to be in compliance with the notice requirement in section 
623(a)(7) of the FCRA if the institution properly uses the model notices 
in this appendix (as applicable).
    b. A financial institution may use Model Notice B-1 if the 
institution provides the notice prior to furnishing negative information 
to a nationwide consumer reporting agency.

[[Page 97]]

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

                            Model Notice B-1

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

                            Model Notice B-2

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

[69 FR 33285, June 15, 2004]



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

    a. Although use of the model forms is not required, use of the model 
forms in this appendix (as applicable) complies with the requirement in 
section 624 of the Act for clear, conspicuous, and concise notices.
    b. Certain changes may be made to the language or format of the 
model forms without losing the protection from liability afforded by use 
of the model forms. These changes may not be so extensive as to affect 
the substance, clarity, or meaningful sequence of the language in the 
model forms. Persons making such extensive revisions will lose the safe 
harbor that this appendix provides. Acceptable changes include, for 
example:
    1. Rearranging the order of the references to ``your income,'' 
``your account history,'' and ``your credit score.''
    2. Substituting other types of information for ``income,'' ``account 
history,'' or ``credit score'' for accuracy, such as ``payment 
history,'' ``credit history,'' ``payoff status,'' or ``claims history.''
    3. Substituting a clearer and more accurate description of the 
affiliates providing or covered by the notice for phrases such as ``the 
[ABC] group of companies,'' including without limitation a statement 
that the entity providing the notice recently purchased the consumer's 
account.
    4. Substituting other types of affiliates covered by the notice for 
``credit card,'' ``insurance,'' or ``securities'' affiliates.
    5. Omitting items that are not accurate or applicable. For example, 
if a person does not limit the duration of the opt-out period, the 
notice may omit information about the renewal notice.
    6. Adding a statement informing consumers how much time they have to 
opt out before shared eligibility information may be used to make 
solicitations to them.
    7. Adding a statement that the consumer may exercise the right to 
opt out at any time.
    8. Adding the following statement, if accurate: ``If you previously 
opted out, you do not need to do so again.''
    9. Providing a place on the form for the consumer to fill in 
identifying information, such as his or her name and address.
    10. Adding disclosures regarding the treatment of opt-outs by joint 
consumers to comply with Sec. 222.23(a)(2) of this part.

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

C-2 Model Form for Initial Opt-out Notice (Joint Notice)
C-3 Model Form for Renewal Notice (Single-Affiliate Notice)
C-4 Model Form for Renewal Notice (Joint Notice)
C-5 Model Form for Voluntary ``No Marketing'' Notice
C-6 Model Form for Voluntary ``No Marketing'' Notice

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

     [Name of Affiliate] is providing this notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from our affiliates. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from our affiliates.]
     You may limit our affiliates in the [ABC] group 
of companies, such as our [credit card, insurance, and securities] 
affiliates, from marketing their products or services to you based on 
your personal information that we

[[Page 98]]

collect and share with them. This information includes your [income], 
your [account history with us], and your [credit score].
     Your choice to limit marketing offers from our 
affiliates will apply [until you tell us to change your choice]/[for x 
years from when you tell us your choice]/[for at least 5 years from when 
you tell us your choice]. [Include if the opt-out period expires.] Once 
that period expires, you will receive a renewal notice that will allow 
you to continue to limit marketing offers from our affiliates for 
[another x years]/[at least another 5 years].
     [Include, if applicable, in a subsequent notice, 
including an annual notice, for consumers who may have previously opted 
out.] If you have already made a choice to limit marketing offers from 
our affiliates, you do not need to act again until you receive the 
renewal notice.
    To limit marketing offers, contact us [include all that apply]:
     By telephone: 1-877--
     On the Web: www.--.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

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

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

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

[Company name]
[Company address]

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

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

     [Name of Affiliate] is providing this notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from our affiliates. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from our affiliates.]
     You previously chose to limit our affiliates in 
the [ABC] group of companies, such as our [credit card, insurance, and 
securities] affiliates, from marketing their products or services to you 
based on your personal information that we share with them. This 
information includes your [income], your [account history with us], and 
your [credit score].
     Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
     By telephone: 1-877--
     On the Web: www.--.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

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

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

     The [ABC group of companies] is providing this 
notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from the [ABC] companies. Federal law 
also requires us to give you this notice to tell you about your choice 
to limit marketing from the [ABC] companies.]
     You previously chose to limit the [ABC] 
companies, such as the [ABC credit card, insurance, and securities] 
affiliates, from marketing their products or services to you

[[Page 99]]

based on your personal information that they receive from other ABC 
companies. This information includes your [income], your [account 
history], and your [credit score].
     Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
     By telephone: 1-877--
     On the Web: www.--.com
     By mail: Check the box and complete the form 
below, and send the form to:

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

          C-5--Model Form for Voluntary ``No Marketing'' Notice

                      Your Choice To Stop Marketing

     [Name of Affiliate] is providing this notice.
     You may choose to stop all marketing from us and 
our affiliates.
     [Your choice to stop marketing from us and our 
affiliates will apply until you tell us to change your choice.]
    To stop all marketing, contact us [include all that apply]:
     By telephone: 1-877--
     On the Web: www.--.com
     By mail: Check the box and complete the form 
below, and send the form to:
[Company name]
[Company address]
--Do not market to me.

[Reg. V, 72 FR 62962, Nov. 7, 2007, as amended at 74 FR 22642, May 14, 
2009]



                 Sec. Appendix D to Part 222 [Reserved]



  Sec. Appendix E to Part 222-- Interagency Guidelines Concerning the 
 Accuracy and Integrity of Information Furnished to Consumer Reporting 
                                Agencies

    The Board encourages voluntary furnishing of information to consumer 
reporting agencies. Section 222.42 of this part requires each furnisher 
to establish and implement reasonable written policies and procedures 
concerning the accuracy and integrity of the information it furnishes to 
consumer reporting agencies. Under Sec. 222.42(b) of this part, a 
furnisher must consider the guidelines set forth below in developing its 
policies and procedures. In establishing these policies and procedures, 
a furnisher may include any of its existing policies and procedures that 
are relevant and appropriate. Section 222.42(c) requires each furnisher 
to review its policies and procedures periodically and update them as 
necessary to ensure their continued effectiveness.

       I. Nature, Scope, and Objectives of Policies and Procedures

    (a) Nature and Scope. Section 222.42(a) of this part requires that a 
furnisher's policies and procedures be appropriate to the nature, size, 
complexity, and scope of the furnisher's activities. In developing its 
policies and procedures, a furnisher should consider, for example:
    (1) The types of business activities in which the furnisher engages;
    (2) The nature and frequency of the information the furnisher 
provides to consumer reporting agencies; and
    (3) The technology used by the furnisher to furnish information to 
consumer reporting agencies.
    (b) Objectives. A furnisher's policies and procedures should be 
reasonably designed to promote the following objectives:
    (1) To furnish information about accounts or other relationships 
with a consumer that is accurate, such that the furnished information:
    (i) Identifies the appropriate consumer;
    (ii) Reflects the terms of and liability for those accounts or other 
relationships; and
    (iii) Reflects the consumer's performance and other conduct with 
respect to the account or other relationship;
    (2) To furnish information about accounts or other relationships 
with a consumer that has integrity, such that the furnished information:
    (i) Is substantiated by the furnisher's records at the time it is 
furnished;
    (ii) Is furnished in a form and manner that is designed to minimize 
the likelihood that the information may be incorrectly reflected in a 
consumer report; thus, the furnished information should:
    (A) Include appropriate identifying information about the consumer 
to whom it pertains; and
    (B) Be furnished in a standardized and clearly understandable form 
and manner and with a date specifying the time period to which the 
information pertains; and
    (iii) Includes the credit limit, if applicable and in the 
furnisher's possession;
    (3) To conduct reasonable investigations of consumer disputes and 
take appropriate actions based on the outcome of such investigations; 
and
    (4) To update the information it furnishes as necessary to reflect 
the current status of the consumer's account or other relationship, 
including, for example:
    (i) Any transfer of an account (e.g., by sale or assignment for 
collection) to a third party; and
    (ii) Any cure of the consumer's failure to abide by the terms of the 
account or other relationship.

[[Page 100]]

        II. Establishing and Implementing Policies and Procedures

    In establishing and implementing its policies and procedures, a 
furnisher should:
    (a) Identify practices or activities of the furnisher that can 
compromise the accuracy or integrity of information furnished to 
consumer reporting agencies, such as by:
    (1) Reviewing its existing practices and activities, including the 
technological means and other methods it uses to furnish information to 
consumer reporting agencies and the frequency and timing of its 
furnishing of information;
    (2) Reviewing its historical records relating to accuracy or 
integrity or to disputes; reviewing other information relating to the 
accuracy or integrity of information provided by the furnisher to 
consumer reporting agencies; and considering the types of errors, 
omissions, or other problems that may have affected the accuracy or 
integrity of information it has furnished about consumers to consumer 
reporting agencies;
    (3) Considering any feedback received from consumer reporting 
agencies, consumers, or other appropriate parties;
    (4) Obtaining feedback from the furnisher's staff; and
    (5) Considering the potential impact of the furnisher's policies and 
procedures on consumers.
    (b) Evaluate the effectiveness of existing policies and procedures 
of the furnisher regarding the accuracy and integrity of information 
furnished to consumer reporting agencies; consider whether new, 
additional, or different policies and procedures are necessary; and 
consider whether implementation of existing policies and procedures 
should be modified to enhance the accuracy and integrity of information 
about consumers furnished to consumer reporting agencies.
    (c) Evaluate the effectiveness of specific methods (including 
technological means) the furnisher uses to provide information to 
consumer reporting agencies; how those methods may affect the accuracy 
and integrity of the information it provides to consumer reporting 
agencies; and whether new, additional, or different methods (including 
technological means) should be used to provide information to consumer 
reporting agencies to enhance the accuracy and integrity of that 
information.

           III. Specific Components of Policies and Procedures

    In developing its policies and procedures, a furnisher should 
address the following, as appropriate:
    (a) Establishing and implementing a system for furnishing 
information about consumers to consumer reporting agencies that is 
appropriate to the nature, size, complexity, and scope of the 
furnisher's business operations.
    (b) Using standard data reporting formats and standard procedures 
for compiling and furnishing data, where feasible, such as the 
electronic transmission of information about consumers to consumer 
reporting agencies.
    (c) Maintaining records for a reasonable period of time, not less 
than any applicable recordkeeping requirement, in order to substantiate 
the accuracy of any information about consumers it furnishes that is 
subject to a direct dispute.
    (d) Establishing and implementing appropriate internal controls 
regarding the accuracy and integrity of information about consumers 
furnished to consumer reporting agencies, such as by implementing 
standard procedures and verifying random samples of information provided 
to consumer reporting agencies.
    (e) Training staff that participates in activities related to the 
furnishing of information about consumers to consumer reporting agencies 
to implement the policies and procedures.
    (f) Providing for appropriate and effective oversight of relevant 
service providers whose activities may affect the accuracy or integrity 
of information about consumers furnished to consumer reporting agencies 
to ensure compliance with the policies and procedures.
    (g) Furnishing information about consumers to consumer reporting 
agencies following mergers, portfolio acquisitions or sales, or other 
acquisitions or transfers of accounts or other obligations in a manner 
that prevents re-aging of information, duplicative reporting, or other 
problems that may similarly affect the accuracy or integrity of the 
information furnished.
    (h) Deleting, updating, and correcting information in the 
furnisher's records, as appropriate, to avoid furnishing inaccurate 
information.
    (i) Conducting reasonable investigations of disputes.
    (j) Designing technological and other means of communication with 
consumer reporting agencies to prevent duplicative reporting of 
accounts, erroneous association of information with the wrong 
consumer(s), and other occurrences that may compromise the accuracy or 
integrity of information provided to consumer reporting agencies.
    (k) Providing consumer reporting agencies with sufficient 
identifying information in the furnisher's possession about each 
consumer about whom information is furnished to enable the consumer 
reporting agency properly to identify the consumer.
    (l) Conducting a periodic evaluation of its own practices, consumer 
reporting agency practices of which the furnisher is aware, 
investigations of disputed information, corrections of inaccurate 
information, means of

[[Page 101]]

communication, and other factors that may affect the accuracy or 
integrity of information furnished to consumer reporting agencies.
    (m) Complying with applicable requirements under the Fair Credit 
Reporting Act and its implementing regulations.

[Reg. V, 74 FR 31516, July 1, 2009]



               Sec. Appendixes F-G to Part 222 [Reserved]



  Sec. Appendix H to Part 222--Model Forms for Risk-Based Pricing and 
                Credit Score Disclosure Exception Notices

    1. This appendix contains four model forms for risk-based pricing 
notices and three model forms for use in connection with the credit 
score disclosure exceptions. Each of the model forms is designated for 
use in a particular set of circumstances as indicated by the title of 
that model form.
    2. Model form H-1 is for use in complying with the general risk-
based pricing notice requirements in Sec. 222.72 if a credit score is 
not used in setting the material terms of credit. Model form H-2 is for 
risk-based pricing notices given in connection with account review if a 
credit score is not used in increasing the annual percentage rate. Model 
form H-3 is for use in connection with the credit score disclosure 
exception for loans secured by residential real property. Model form H-4 
is for use in connection with the credit score disclosure exception for 
loans that are not secured by residential real property. Model form H-5 
is for use in connection with the credit score disclosure exception when 
no credit score is available for a consumer. Model form H-6 is for use 
in complying with the general risk-based pricing notice requirements in 
Sec. 222.72 if a credit score is used in setting the material terms of 
credit. Model form H-7 is for risk-based pricing notices given in 
connection with account review if a credit score is used in increasing 
the annual percentage rate. All forms contained in this appendix are 
models; their use is optional.
    3. A person may change the forms by rearranging the format or by 
making technical modifications to the language of the forms, in each 
case without modifying the substance of the disclosures. Any such 
rearrangement or modification of the language of the model forms may not 
be so extensive as to materially affect the substance, clarity, 
comprehensibility, or meaningful sequence of the forms. Persons making 
revisions with that effect will lose the benefit of the safe harbor for 
appropriate use of Appendix H model forms. A person is not required to 
conduct consumer testing when rearranging the format of the model forms.
    a. Acceptable changes include, for example
    i. Corrections or updates to telephone numbers, mailing addresses, 
or Web site addresses that may change over time.
    ii. The addition of graphics or icons, such as the person's 
corporate logo.
    iii. Alteration of the shading or color contained in the model 
forms.
    iv. Use of a different form of graphical presentation to depict the 
distribution of credit scores.
    v. Substitution of the words ``credit'' and ``creditor'' or 
``finance'' and ``finance company'' for the terms ``loan'' and 
``lender.''
    vi. Including pre-printed lists of the sources of consumer reports 
or consumer reporting agencies in a ``check-the-box'' format.
    vii. Including the name of the consumer, transaction identification 
numbers, a date, and other information that will assist in identifying 
the transaction to which the form pertains.
    viii. Including the name of an agent, such as an auto dealer or 
other party, when providing the ``Name of the Entity Providing the 
Notice.''
    b. Unacceptable changes include, for example
    i. Providing model forms on register receipts or interspersed with 
other disclosures.
    ii. Eliminating empty lines and extra spaces between sentences 
within the same section.
    4. Optional language in model forms H-6 and H-7 may be used to 
direct the consumer to the entity (which may be a consumer reporting 
agency or the creditor itself, for a proprietary score that meets the 
definition of a credit score) 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 the additional language 
without losing the safe harbor, since the language is optional.
    H-1 Model form for risk-based pricing notice.
    H-2 Model form for account review risk-based pricing notice.
    H-3 Model form for credit score disclosure exception for credit 
secured by one to four units of residential real property.
    H-4 Model form for credit score disclosure exception for loans not 
secured by residential real property.
    H-5 Model form for credit score disclosure exception for loans where 
credit score is not available.
    H-6 Model form for risk-based pricing notice with credit score 
information
    H-7 Model form for account review risk-based pricing notice with 
credit score information

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[75 FR 2759, Jan. 15, 2010, as amended at 76 FR 41617, July 15, 2011]



                 Sec. Appendix I to Part 222 [Reserved]



 Sec. Appendix J to Part 222--Interagency Guidelines on Identity Theft 
                  Detection, Prevention, and Mitigation

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

                             I. The Program

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

                   II. Identifying Relevant Red Flags

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

[[Page 114]]

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

                        III. Detecting Red Flags

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

              IV. Preventing and Mitigating Identity Theft

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

                         V. Updating the Program

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

                VI. Methods for Administering the Program

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

[[Page 115]]

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

                VII. Other Applicable Legal Requirements

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

                       Supplement A to Appendix J

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

   Alerts, Notifications or Warnings from a Consumer Reporting Agency

    1. A fraud or active duty alert is included with a consumer report.
    2. A consumer reporting agency provides a notice of credit freeze in 
response to a request for a consumer report.
    3. A consumer reporting agency provides a notice of address 
discrepancy, as defined in 12 CFR 1022.82(b).
    4. A consumer report indicates a pattern of activity that is 
inconsistent with the history and usual pattern of activity of an 
applicant or customer, such as:
    a. A recent and significant increase in the volume of inquiries;
    b. An unusual number of recently established credit relationships;
    c. A material change in the use of credit, especially with respect 
to recently established credit relationships; or
    d. An account that was closed for cause or identified for abuse of 
account privileges by a financial institution or creditor.

                          Suspicious Documents

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

               Suspicious Personal Identifying Information

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

[[Page 116]]

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

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

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

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

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

[Reg. V, 72 FR 63758, Nov. 9, 2007, as amended at 74 FR 22642, May 14, 
2009; 79 FR 30711, May 29, 2014]



PART 223_TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES 
(REGULATION W)--Table of Contents



                 Subpart A_Introduction and Definitions

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

               Subpart B_General Provisions of Section 23A

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

[[Page 117]]

       Subpart C_Valuation and Timing Principles Under Section 23A

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

             Subpart D_Other Requirements Under Section 23A

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

         Subpart E_Exemptions from the Provisions of Section 23A

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

               Subpart F_General Provisions of Section 23B

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

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

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

                 Subpart H_Miscellaneous Interpretations

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

       Subpart I_Savings Associations_Transactions with Affiliates

223.72 Transactions with affiliates.

    Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e), 
1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5412).

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



                 Subpart A_Introduction and Definitions



Sec. 223.1  Authority, purpose, and scope.

    (a) Authority. The Board of Governors of the Federal Reserve System 
(Board) has issued this part (Regulation W) under the authority of 
sections 23A(f) and 23B(e) of the Federal Reserve Act (FRA) (12 U.S.C. 
371c(f), 371c-1(e)) section 11 of the Home Owners' Loan Act (12 U.S.C. 
1468), and section 312(b)(2)(A) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (12 U.S.C. 5412).
    (b) Purpose. Sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1) establish certain quantitative limits and other 
prudential requirements for loans, purchases of assets, and certain 
other transactions between a member bank and its affiliates. This 
regulation implements sections 23A and 23B by defining terms used in the 
statute, explaining the statute's requirements, and exempting certain 
transactions.
    (c) Scope. Sections 23A and 23B and this regulation apply by their 
terms to ``member banks''--that is, any national bank, State bank, trust 
company, or other institution that is a member of the Federal Reserve 
System. In addition, the Federal Deposit Insurance Act (12 U.S.C. 
1828(j)) applies sections 23A and 23B to insured State nonmember banks 
in the same manner and to the same extent as if they were member banks. 
The Home Owners' Loan Act (12 U.S.C. 1468(a)) also applies sections 23A 
and 23B to insured savings

[[Page 118]]

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

[67 FR 76604, Dec. 12, 2002, as amended at 76 FR 56531, Sept. 13, 2011]



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

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

[[Page 119]]

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



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

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

[[Page 120]]

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

[[Page 121]]

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

[[Page 122]]

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

[[Page 123]]

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



               Subpart B_General Provisions of Section 23A



Sec. 223.11  What is the maximum amount of covered transactions 
that a member bank may enter into with any single affiliate?

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



Sec. 223.12  What is the maximum amount of covered transactions that
a member bank may enter into with all affiliates?

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



Sec. 223.13  What safety and soundness requirement applies to covered
transactions?

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



Sec. 223.14  What are the collateral requirements for a credit
transaction with an affiliate?

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

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

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



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

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



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

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

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

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



       Subpart C_Valuation and Timing Principles Under Section 23A



Sec. 223.21  What valuation and timing principles apply to credit
transactions?

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

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



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

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

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



Sec. 223.23  What valuation and timing principles apply to purchases
of and investments in securities issued by an affiliate?

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

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



Sec. 223.24  What valuation principles apply to extensions of credit
secured by affiliate securities?

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

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



             Subpart D_Other Requirements Under Section 23A



Sec. 223.31  How does section 23A apply to a member bank's acquisition
of an affiliate that becomes an operating subsidiary of the member
bank after the acquisition?
          

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

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



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

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

[[Page 133]]

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



Sec. 223.33  What rules apply to derivative transactions?

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

[[Page 134]]

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



         Subpart E_Exemptions from the Provisions of Section 23A



Sec. 223.41  What covered transactions are exempt from the
quantitative limits and collateral requirements?

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

[[Page 135]]

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



Sec. 223.42  What covered transactions are exempt from the quantitative
limits, collateral requirements, and low-quality asset prohibition?

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

[[Page 136]]

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

[[Page 137]]

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

[[Page 138]]

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

[67 FR 76604, Dec. 12, 2002, as amended at 73 FR 54308, Sept. 19, 2008; 
73 FR 55709, Sept. 26, 2008; 74 FR 6226, 6227, Feb. 6, 2009]



Sec. 223.43  What are the standards under which the Board may grant
additional exemptions from the requirements of section 23A?

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



               Subpart F_General Provisions of Section 23B



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

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



Sec. 223.52  What transactions with affiliates or others must comply
with section 23B's market terms requirement?

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

[[Page 139]]

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



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

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



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

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

[[Page 140]]

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



Sec. 223.55  What are the standards under which the Board may grant
exemptions from the requirements of section 23B?

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



Sec. 223.56  What transactions are exempt from the market-terms
requirement of section 23B?

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

[Reg. W, 74 FR 6228, Feb. 6, 2009]



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



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

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

[[Page 141]]

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



                 Subpart H_Miscellaneous Interpretations



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

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



       Subpart I_Savings Associations_Transactions with Affiliates



Sec. 223.72  Transactions with affiliates.

    (a) Scope. (1) This subpart implements section 11(a) of the Home 
Owners' Loan Act (12 U.S.C. 1468(a)). Section 11(a) applies sections 23A 
and 23B of the FRA (12 U.S.C. 371c and 371c1) to every savings 
association in the same manner and to the same extent as if the 
association were a member bank; prohibits certain types of transactions 
with affiliates; and authorizes the Board to impose additional 
restrictions on a savings association's transactions with affiliates.

[[Page 142]]

    (2) For the purposes of this subpart, ``savings association'' is 
defined at section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813), and also includes any savings bank or any cooperative bank that 
is a savings association under 12 U.S.C. 1467a(l). A non-affiliate 
subsidiary of a savings association is treated as part of the savings 
association. For purposes of this subpart, a ``non-affiliate 
subsidiary'' is a subsidiary of a savings association other than a 
subsidiary described at 12 CFR 223.2(b)(1)(i), and (b)(1)(iii) through 
(v).
    (b) Sections 23A and 23B of the FRA. A savings association must 
comply with sections 23A and 23B of the Federal Reserve Act and this 
part as if it were a member bank, except as described in the following 
chart.

------------------------------------------------------------------------
     Provision of Regulation W                   Application
------------------------------------------------------------------------
(1) 12 CFR 223.2(a)(8)--             Does not apply. Savings association
 ``Affiliate'' includes a financial   subsidiaries do not meet the
 subsidiary.                          statutory definition of financial
                                      subsidiary.
(2) 12 CFR 223.2(a)(12)--            Read to include the following
 Determination that ``affiliate''     statement: ``Affiliate also
 includes other types of companies.   includes any company that the
                                      Board determines, by order or
                                      regulation, to present a risk to
                                      the safety and soundness of the
                                      savings association.''
(3) 12 CFR 223.2(b)(1)(ii)--         Does not apply. Savings association
 ``Affiliate'' includes a             subsidiaries do not meet the
 subsidiary that is a financial       statutory definition of financial
 subsidiary.                          subsidiary.
(4) 12 CFR 223.3(d)--Definition of   ``Capital stock and surplus'' for a
 ``capital stock and surplus.''       savings association has the same
                                      meaning as under the regulatory
                                      capital requirements applicable to
                                      that savings association.
(5) 12 CFR 223.3(h)(1)--Section 23A  Read to incorporate paragraph
 covered transactions include an      (c)(1) of this section, which
 extension of credit to the           prohibits loans or extensions of
 affiliate.                           credit to an affiliate, unless the
                                      affiliate is engaged only in the
                                      activities described at 12 U.S.C.
                                      1467a(c)(2)(F)(i), as defined in
                                      Regulation LL at 12 CFR 238.54.
(6) 12 CFR 223.3(h)(2)--Section 23A  Read to incorporate paragraph
 covered transactions include a       (c)(2) of this section, which
 purchase of or investment in         prohibits purchases and
 securities issued by an affiliate.   investments in securities issued
                                      by an affiliate, other than with
                                      respect to shares of a subsidiary.
(7) 12 CFR 223.3(k)--Definition of   Read to include the following
 ``depository institution.''          statement: ``For the purposes of
                                      this definition, a non-affiliate
                                      subsidiary of a savings
                                      association is treated as part of
                                      the depository institution.''
(8) 12 CFR 223.3(p)--Definition of   Does not apply. Savings association
 ``financial subsidiary.''            subsidiaries do not meet the
                                      statutory definition of financial
                                      subsidiary.
(9) 12 CFR 223.3(w)--Definition of   Read to include the following
 ``member bank.''                     statement: ``Member bank also
                                      includes a savings association.
                                      For purposes of this definition, a
                                      non-affiliate subsidiary of a
                                      savings association is treated as
                                      part of the savings association.''
(10) 12 CFR 223.3(aa)--Definition    Does not apply.
 of ``operating subsidiary.''
(11) 12 CFR 223.31--Application of   Read to refer to ``a non-affiliate
 section 23A to an acquisition of     subsidiary'' instead of
 an affiliate that becomes an         ``operating subsidiary.''
 operating subsidiary.
(12) 12 CFR 223.32--Rules that       Does not apply. Savings association
 apply to financial subsidiaries of   subsidiaries do not meet the
 a bank.                              statutory definition of financial
                                      subsidiary.
(13) 12 CFR 223.42(f)(2)--Exemption  Read to refer to ``Thrift Financial
 for purchasing certain marketable    Report'' instead of ``Call
 securities.                          Report.'' References to ``state
                                      member bank'' are unchanged.
(14) 12 CFR 223.42(g)(2)--Exemption  Read to refer to ``Thrift Financial
 for purchasing municipal             Report'' instead of ``Call
 securities.                          Report.'' References to ``state
                                      member bank'' are unchanged.
(15) 12 CFR 223.61--Application of   Does not apply to savings
 sections 23A and 23B to U.S.         associations or their
 branches and agencies of foreign     subsidiaries.
 banks.
------------------------------------------------------------------------

    (c) Additional prohibitions and restrictions. A savings association 
must comply with the additional prohibitions and restrictions in this 
paragraph (c). Except as described in paragraph (b) of this section, the 
definitions in this part apply to these additional prohibitions and 
restrictions.
    (1) Loans and extensions of credit. (i) A savings association may 
not make a loan or other extension of credit to an affiliate, unless the 
affiliate is solely engaged in the activities described at 12 U.S.C. 
1467a(c)(2)(F)(i), as defined in Sec. 238.54 of Regulation LL (12 CFR 
238.54). A loan or extension of credit to a third party is not 
prohibited merely because proceeds of the transaction are used for the 
benefit of, or are transferred to, an affiliate.
    (ii) If the Board determines that a particular transaction is, in 
substance, a loan or extension of credit to an affiliate that is engaged 
in activities other than those described at 12 U.S.C. 1467a(c)(2)(F)(i), 
as defined in Sec. 238.54 of Regulation LL (12 CFR 238.54), or the 
Board has other supervisory concerns

[[Page 143]]

concerning the transaction, the Board may inform the savings association 
that the transaction is prohibited under this paragraph (c)(1), and 
require the savings association to divest the loan, unwind the 
transaction, or take other appropriate action.
    (2) Purchases or investments in securities. A savings association 
may not purchase or invest in securities issued by any affiliate other 
than with respect to shares of a subsidiary. For the purposes of this 
paragraph (c)(2), subsidiary includes a bank and a savings association.

[76 FR 56531, Sept. 13, 2011]



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



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

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

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

    Editorial Note: For Federal Register citations affecting part 224, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



Sec. 224.1  Authority, purpose, and scope.

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

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



Sec. 224.2  Definitions.

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

[[Page 144]]

more than 50 per centum of the total value of shares of all classes of 
stock.

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



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

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

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



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



                               Regulations

                      Subpart A_General Provisions

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

           Subpart B_Acquisition of Bank Securities or Assets

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

    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 
                                Companies

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

              Subpart D_Control and Divestiture Proceedings

225.31 Control proceedings.

                    Subpart E_Change in Bank Control

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

                 Subpart F_Limitations on Nonbank Banks

225.52 Limitation on overdrafts.

    Subpart G_Appraisal Standards for Federally Related Transactions

225.61 Authority, purpose, and scope.
225.62 Definitions.
225.63 Appraisals required; transactions requiring a State certified or 
          licensed appraiser.

[[Page 145]]

225.64 Minimum appraisal standards.
225.65 Appraiser independence.
225.66 Professional association membership; competency.
225.67 Enforcement.

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

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

                  Subpart I_Financial Holding Companies

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

                             Interpretations

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

[[Page 146]]

225.141 Operations subsidiaries of a bank holding company.
225.142 Statement of policy concerning bank holding companies engaging 
          in futures, forward and options contracts on U.S. Government 
          and agency securities and money market instruments.
225.143 Policy statement on nonvoting equity investments by bank holding 
          companies.
225.145 Limitations established by the Competitive Equality Banking Act 
          of 1987 on the activities and growth of nonbank banks.

                 Subpart J_Merchant Banking Investments

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

                          Conditions to Orders

  Subpart K_Proprietary Trading and Relationships With Hedge Fund and 
                          Private Equity Funds

225.180 Definitions.
225.181 Conformance Period for Banking Entities Engaged in Proprietary 
          Trading or Private Fund Activities.
225.182 Conformance Period for Nonbank Financial Companies Supervised by 
          the Board Engaged in Proprietary Trading or Private Fund 
          Activities.

                     Subpart L_Conditions to Orders

225.200 Conditions to Board's section 20 orders.

    Subpart M_Minimum Requirements for Appraisal Management Companies

225.190 Authority, purpose, and scope.
225.191 Definitions.
225.192 Appraiser panel--annual size calculation.
225.193 Appraisal management company registration.
225.194 Ownership limitations for State-registered appraisal management 
          companies.
225.195 Requirements for Federally regulated appraisal management 
          companies.
225.196 Information to be presented to the Appraisal Subcommittee by 
          participating States.

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Risk-Based Measure
Appendix B to Part 225 [Reserved]
Appendix C to Part 225--Small Bank Holding Company and Savings and Loan 
          Holding Company Policy Statement
Appendixes D-E [Reserved]
Appendix F to Part 225--Interagency Guidelines Establishing Information 
          Security Standards
Appendix G to Part 225 [Reserved]

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

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

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

                               Regulations



                      Subpart A_General Provisions

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



Sec. 225.1  Authority, purpose, and scope.

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

[[Page 147]]

1983 (Pub. L. 98-181, title IX). The BHC Act is codified at 12 U.S.C. 
1841, et seq.
---------------------------------------------------------------------------

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

    (b) Purpose. The principal purposes of this part are to:
    (1) Regulate the acquisition of control of banks by companies and 
individuals;
    (2) Define and regulate the nonbanking activities in which bank 
holding companies and foreign banking organizations with United States 
operations may engage; and
    (3) Set forth the procedures for securing approval for these 
transactions and activities.
    (c) Scope--(1) Subpart A contains general provisions and definitions 
of terms used in this regulation.
    (2) Subpart B governs acquisitions of bank or bank holding company 
securities and assets by bank holding companies or by any company that 
will become a bank holding company as a result of the acquisition.
    (3) Subpart C defines and regulates the nonbanking activities in 
which bank holding companies and foreign banking organizations may 
engage directly or through a subsidiary. The Board's Regulation K 
governs certain nonbanking activities conducted by foreign banking 
organizations and certain foreign activities conducted by bank holding 
companies (12 CFR part 211, International Banking Operations).
    (4) Subpart D specifies situations in which a company is presumed to 
control voting securities or to have the power to exercise a controlling 
influence over the management or policies of a bank or other company; 
sets forth the procedures for making a control determination; and 
provides rules governing the effectiveness of divestitures by bank 
holding companies.
    (5) Subpart E governs changes in bank control resulting from the 
acquisition by individuals or companies (other than bank holding 
companies) of voting securities of a bank holding company or state 
member bank of the Federal Reserve System.
    (6) Subpart F specifies the limitations that govern companies that 
control so-called nonbank banks and the activities of nonbank banks.
    (7) Subpart G prescribes minimum standards that apply to the 
performance of real estate appraisals and identifies transactions that 
require state certified appraisers.
    (8) Subpart H identifies the circumstances when written notice must 
be provided to the Board prior to the appointment of a director or 
senior officer of a bank holding company and establishes procedures for 
obtaining the required Board approval.
    (9) Subpart I establishes the procedure by which a bank holding 
company may elect to become a financial holding company, enumerates the 
consequences if a financial holding company ceases to meet a requirement 
applicable to a financial holding company, lists the activities in which 
a financial holding company may engage, establishes the procedure by 
which a person may request the Board to authorize additional activities 
as financial in nature or incidental thereto, and establishes the 
procedure by which a financial holding company may seek approval to 
engage in an activity that is complementary to a financial activity.
    (10) Subpart J governs the conduct of merchant banking investment 
activities by financial holding companies as permitted under section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)).
    (11) Subpart K governs the period of time that firms subject to 
section 13 of the Bank Holding Company Act (12 U.S.C. 1851) have to 
bring their activities, investments and relationships into compliance 
with the requirements of such section.
    (12)-(13) [Reserved]
    (14) Appendix D contains the Board's Capital Adequacy Guidelines for 
measuring tier 1 leverage for bank holding companies.
    (15) [Reserved]
    (16) Appendix F contains the Interagency Guidelines Establishing 
Information Security Standards.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 16472, Mar. 28, 
2000; 66 FR 414, Jan. 3, 2001; 66 FR 8484, Jan. 31, 2001; 66 FR 8636, 
Feb. 1, 2001; 76 FR 8275, Feb. 14, 2011; 79 FR 62290, Oct. 11, 2013]

[[Page 148]]



Sec. 225.2  Definitions.

    Except as modified in this regulation or unless the context 
otherwise requires, the terms used in this regulation have the same 
meaning as set forth in the relevant statutes.
    (a) Affiliate means any company that controls, is controlled by, or 
is under common control with, another company.
    (b)(1) Bank means:
    (i) An insured bank as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h)); or
    (ii) An institution organized under the laws of the United States 
which both:
    (A) Accepts demand deposits or deposits that the depositor may 
withdraw by check or similar means for payment to third parties or 
others; and
    (B) Is engaged in the business of making commercial loans.
    (2) Bank does not include those institutions qualifying under the 
exceptions listed in section 2(c)(2) of the BHC Act (12 U.S.C. 
1841(c)(2)).
    (c)(1) Bank holding company means any company (including a bank) 
that has direct or indirect control of a bank, other than control that 
results from the ownership or control of:
    (i) Voting securities held in good faith in a fiduciary capacity 
(other than as provided in paragraphs (e)(2)(ii) and (iii) of this 
section) without sole discretionary voting authority, or as otherwise 
exempted under section 2(a)(5)(A) of the BHC Act;
    (ii) Voting securities acquired and held only for a reasonable 
period of time in connection with the underwriting of securities, as 
provided in section 2(a)(5)(B) of the BHC Act;
    (iii) Voting rights to voting securities acquired for the sole 
purpose and in the course of participating in a proxy solicitation, as 
provided in section 2(a)(5)(C) of the BHC Act;
    (iv) Voting securities acquired in satisfaction of debts previously 
contracted in good faith, as provided in section 2(a)(5)(D) of the BHC 
Act, if the securities are divested within two years of acquisition (or 
such later period as the Board may permit by order); or
    (v) Voting securities of certain institutions owned by a thrift 
institution or a trust company, as provided in sections 2(a)(5)(E) and 
(F) of the BHC Act.
    (2) Except for the purposes of Sec. 225.4(b) of this subpart and 
subpart E of this part, or as otherwise provided in this regulation, 
bank holding company includes a foreign banking organization. For the 
purposes of subpart B of this part, bank holding company includes a 
foreign banking organization only if it owns or controls a bank in the 
United States.
    (d)(1) Company includes any bank, corporation, general or limited 
partnership, association or similar organization, business trust, or any 
other trust unless by its terms it must terminate either within 25 
years, or within 21 years and 10 months after the death of individuals 
living on the effective date of the trust.
    (2) Company does not include any organization, the majority of the 
voting securities of which are owned by the United States or any state.
    (3) Testamentary trusts exempt. Unless the Board finds that the 
trust is being operated as a business trust or company, a trust is 
presumed not to be a company if the trust:
    (i) Terminates within 21 years and 10 months after the death of 
grantors or beneficiaries of the trust living on the effective date of 
the trust or within 25 years;
    (ii) Is a testamentary or inter vivos trust established by an 
individual or individuals for the benefit of natural persons (or trusts 
for the benefit of natural persons) who are related by blood, marriage 
or adoption;
    (iii) Contains only assets previously owned by the individual or 
individuals who established the trust;
    (iv) Is not a Massachusetts business trust; and
    (v) Does not issue shares, certificates, or any other evidence of 
ownership.
    (4) Qualified limited partnerships exempt. Company does not include 
a qualified limited partnership, as defined in section 2(o)(10) of the 
BHC Act.
    (e)(1) Control of a bank or other company means (except for the 
purposes of subpart E of this part):
    (i) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting

[[Page 149]]

securities of the bank or other company, directly or indirectly or 
acting through one or more other persons;
    (ii) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of the bank or other company;
    (iii) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of the bank or other company, 
as determined by the Board after notice and opportunity for hearing in 
accordance with Sec. 225.31 of subpart D of this part; or
    (iv) Conditioning in any manner the transfer of 25 percent or more 
of the outstanding shares of any class of voting securities of a bank or 
other company upon the transfer of 25 percent or more of the outstanding 
shares of any class of voting securities of another bank or other 
company.
    (2) A bank or other company is deemed to control voting securities 
or assets owned, controlled, or held, directly or indirectly:
    (i) By any subsidiary of the bank or other company;
    (ii) In a fiduciary capacity (including by pension and profit-
sharing trusts) for the benefit of the shareholders, members, or 
employees (or individuals serving in similar capacities) of the bank or 
other company or any of its subsidiaries; or
    (iii) In a fiduciary capacity for the benefit of the bank or other 
company or any of its subsidiaries.
    (f) Foreign banking organization and qualifying foreign banking 
organization have the same meanings as provided in Sec. 211.21(n) and 
Sec. 211.23 of the Board's Regulation K (12 CFR 211.21(n) and 211.23).
    (g) Insured depository institution includes an insured bank as 
defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(h)) and a savings association.
    (h) Lead insured depository institution means the largest insured 
depository institution controlled by the bank holding company as of the 
quarter ending immediately prior to the proposed filing, based on a 
comparison of the average total risk-weighted assets controlled during 
the previous 12-month period by each insured depository institution 
subsidiary of the holding company.
    (i) Management official means any officer, director (including 
honorary or advisory directors), partner, or trustee of a bank or other 
company, or any employee of the bank or other company with policy-making 
functions.
    (j) Nonbank bank means any institution that:
    (1) Became a bank as a result of enactment of the Competitive 
Equality Amendments of 1987 (Pub. L. 100-86), on the date of enactment 
(August 10, 1987); and
    (2) Was not controlled by a bank holding company on the day before 
the enactment of the Competitive Equality Amendments of 1987 (August 9, 
1987).
    (k) Outstanding shares means any voting securities, but does not 
include securities owned by the United States or by a company wholly 
owned by the United States.
    (l) Person includes an individual, bank, corporation, partnership, 
trust, association, joint venture, pool, syndicate, sole proprietorship, 
unincorporated organization, or any other form of entity.
    (m) Savings association means:
    (1) Any federal savings association or federal savings bank;
    (2) Any building and loan association, savings and loan association, 
homestead association, or cooperative bank if such association or 
cooperative bank is a member of the Savings Association Insurance Fund; 
and
    (3) Any savings bank or cooperative that is deemed by the director 
of the Office of Thrift Supervision to be a savings association under 
section 10(l) of the Home Owners Loan Act.
    (n) Shareholder--(1) Controlling shareholder means a person that 
owns or controls, directly or indirectly, 25 percent or more of any 
class of voting securities of a bank or other company.
    (2) Principal shareholder means a person that owns or controls, 
directly or indirectly, 10 percent or more of any class of voting 
securities of a bank or other company, or any person that the Board 
determines has the power, directly or indirectly, to exercise a 
controlling influence over the management or policies of a bank or other 
company.

[[Page 150]]

    (o) Subsidiary means a bank or other company that is controlled by 
another company, and refers to a direct or indirect subsidiary of a bank 
holding company. An indirect subsidiary is a bank or other company that 
is controlled by a subsidiary of the bank holding company.
    (p) United States means the United States and includes any state of 
the United States, the District of Columbia, any territory of the United 
States, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
    (q)(1) Voting securities means shares of common or preferred stock, 
general or limited partnership shares or interests, or similar interests 
if the shares or interest, by statute, charter, or in any manner, 
entitle the holder:
    (i) To vote for or to select directors, trustees, or partners (or 
persons exercising similar functions of the issuing company); or
    (ii) To vote on or to direct the conduct of the operations or other 
significant policies of the issuing company.
    (2) Nonvoting shares. Preferred shares, limited partnership shares 
or interests, or similar interests are not voting securities if:
    (i) Any voting rights associated with the shares or interest are 
limited solely to the type customarily provided by statute with regard 
to matters that would significantly and adversely affect the rights or 
preference of the security or other interest, such as the issuance of 
additional amounts or classes of senior securities, the modification of 
the terms of the security or interest, the dissolution of the issuing 
company, or the payment of dividends by the issuing company when 
preferred dividends are in arrears;
    (ii) The shares or interest represent an essentially passive 
investment or financing device and do not otherwise provide the holder 
with control over the issuing company; and
    (iii) The shares or interest do not entitle the holder, by statute, 
charter, or in any manner, to select or to vote for the selection of 
directors, trustees, or partners (or persons exercising similar 
functions) of the issuing company.
    (3) Class of voting shares. Shares of stock issued by a single 
issuer are deemed to be the same class of voting shares, regardless of 
differences in dividend rights or liquidation preference, if the shares 
are voted together as a single class on all matters for which the shares 
have voting rights other than matters described in paragraph (o)(2)(i) 
of this section that affect solely the rights or preferences of the 
shares.
    (r) Well-capitalized--(1) Bank holding company. In the case of a 
bank holding company, \2\ well-capitalized means that:
---------------------------------------------------------------------------

    \2\ For purposes of this subpart and subparts B and C of this part, 
a bank holding company with consolidated assets of less than $1 billion 
that is subject to the Small Bank Holding Company Policy Statement in 
appendix C of this part will be deemed to be ``well-capitalized'' if the 
bank holding company meets the requirements for expedited/waived 
processing in appendix C.
---------------------------------------------------------------------------

    (i) On a consolidated basis, the bank holding company maintains a 
total risk-based capital ratio of 10.0 percent or greater, as defined in 
12 CFR 217.10;
    (ii) On a consolidated basis, the bank holding company maintains a 
tier 1 risk-based capital ratio of 6.0 percent or greater, as defined in 
12 CFR 217.10; and
    (iii) The bank holding company is not subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific capital 
level for any capital measure.
    (2) Insured and uninsured depository institution--(i) Insured 
depository institution. In the case of an insured depository 
institution, ``well capitalized'' means that the institution has and 
maintains at least the capital levels required to be well capitalized 
under the capital adequacy regulations or guidelines applicable to the 
institution that have been adopted by the appropriate Federal banking 
agency for the institution under section 38 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o).
    (ii) Uninsured depository institution. In the case of a depository 
institution the deposits of which are not insured by the Federal Deposit 
Insurance Corporation, ``well capitalized'' means that the institution 
has and maintains at least the capital levels required for an insured 
depository institution to be well capitalized.
    (3) Foreign banks--(i) Standards applied. For purposes of 
determining

[[Page 151]]

whether a foreign banking organization qualifies under paragraph (r)(1) 
of this section:
    (A) A foreign banking organization whose home country supervisor, as 
defined in Sec. 211.21 of the Board's Regulation K (12 CFR 211.21), has 
adopted capital standards consistent in all respects with the Capital 
Accord of the Basle Committee on Banking Supervision (Basle Accord) may 
calculate its capital ratios under the home country standard; and
    (B) A foreign banking organization whose home country supervisor has 
not adopted capital standards consistent in all respects with the Basle 
Accord shall obtain a determination from the Board that its capital is 
equivalent to the capital that would be required of a U.S. banking 
organization under paragraph (r)(1) of this section.
    (ii) Branches and agencies. For purposes of determining, under 
paragraph (r)(1) of this section, whether a branch or agency of a 
foreign banking organization is well-capitalized, the branch or agency 
shall be deemed to have the same capital ratios as the foreign banking 
organization.
    (s) Well managed--(1) In general. Except as otherwise provided in 
this part, a company or depository institution is well managed if:
    (i) At its most recent inspection or examination or subsequent 
review by the appropriate Federal banking agency for the company or 
institution (or the appropriate state banking agency in an examination 
described in section 10(d) of the Federal Deposit Insurance Act (12 
U.S.C. 1820(d)), the company or institution received:
    (A) At least a satisfactory composite rating; and
    (B) At least a satisfactory rating for management, if such rating is 
given.
    (ii) In the case of a company or depository institution that has not 
received an inspection or examination rating, the Board has determined, 
after a review of the managerial and other resources of the company or 
depository institution and after consulting with the appropriate Federal 
and state banking agencies, as applicable, for the company or 
institution, that the company or institution is well managed.
    (2) Merged depository institutions--(i) Merger involving well 
managed institutions. A depository institution that results from the 
merger of two or more depository institutions that are well managed 
shall be considered to be well managed unless the Board determines 
otherwise after consulting with the appropriate Federal and state 
banking agencies, as applicable, for each depository institution 
involved in the merger.
    (ii) Merger involving a poorly rated institution. A depository 
institution that results from the merger of a depository institution 
that is well managed with one or more depository institutions that are 
not well managed or have not been examined shall be considered to be 
well managed if the Board determines, after a review of the managerial 
and other resources of the resulting depository institution and after 
consulting with the appropriate Federal and state banking agencies for 
the institutions involved in the merger, as applicable, that the 
resulting institution is well managed.
    (3) Foreign banking organizations. Except as otherwise provided in 
this part, a foreign banking organization is considered well managed if 
the combined operations of the foreign banking organization in the 
United States have received at least a satisfactory composite rating at 
the most recent annual assessment.
    (t) Depository institution. For purposes of this part, the term 
``depository institution'' has the same meaning as in section 3(c) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 3791, Jan. 25, 
2000; 65 FR 15055, Mar. 21, 2000; 66 FR 414, Jan. 3, 2001; 71 FR 9901, 
Feb. 28, 2006; 78 FR 62290, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015; 
80 FR 70673, Nov. 16, 2015]



Sec. 225.3  Administration.

    (a) Delegation of authority. Designated Board members and officers 
and the Federal Reserve Banks are authorized by the Board to exercise 
various functions prescribed in this regulation and in the Board's Rules 
Regarding Delegation of Authority (12 CFR part 265) and the Board's 
Rules of Procedure (12 CFR part 262).

[[Page 152]]

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



Sec. 225.4  Corporate practices.

    (a) Bank holding company policy and operations. (1) A bank holding 
company shall serve as a source of financial and managerial strength to 
its subsidiary banks and shall not conduct its operations in an unsafe 
or unsound manner.
    (2) Whenever the Board believes an activity of a bank holding 
company or control of a nonbank subsidiary (other than a nonbank 
subsidiary of a bank) constitutes a serious risk to the financial 
safety, soundness, or stability of a subsidiary bank of the bank holding 
company and is inconsistent with sound banking principles or the 
purposes of the BHC Act or the Financial Institutions Supervisory Act of 
1966, as amended (12 U.S.C. 1818(b) et seq.), the Board may require the 
bank holding company to terminate the activity or to terminate control 
of the subsidiary, as provided in section 5(e) of the BHC Act.
    (b) Purchase or redemption by bank holding company of its own 
securities--(1) Filing notice. Except as provided in paragraph (b)(6) of 
this section, a bank holding company shall give the Board prior written 
notice before purchasing or redeeming its equity securities if the gross 
consideration for the purchase or redemption, when aggregated with the 
net consideration paid by the company for all such purchases or 
redemptions during the preceding 12 months, is equal to 10 percent or 
more of the company's consolidated net worth. For the purposes of this 
section, ``net consideration'' is the gross consideration paid by the 
company for all of its equity securities purchased or redeemed during 
the period minus the gross consideration received for all of its equity 
securities sold during the period.
    (2) Contents of notice. Any notice under this section shall be filed 
with the appropriate Reserve Bank and shall contain the following 
information:
    (i) The purpose of the transaction, a description of the securities 
to be purchased or redeemed, the total number of each class outstanding, 
the gross consideration to be paid, and the terms and sources of funding 
for the transaction;
    (ii) A description of all equity securities redeemed within the 
preceding 12 months, the net consideration paid, and the terms of any 
debt incurred in connection with those transactions; and
    (iii)(A) If the bank holding company has consolidated assets of $1 
billion or more, consolidated pro forma risk-based capital and leverage 
ratio calculations for the bank holding company as of the most recent 
quarter, and, if the redemption is to be debt funded, a parent-only pro 
forma balance sheet as of the most recent quarter; or
    (B) If the bank holding company has consolidated assets of less than 
$1 billion, a pro forma parent-only balance sheet as of the most recent 
quarter, and, if the redemption is to be debt funded, one-year income 
statement and cash flow projections.
    (3) Acting on notice. Within 15 calendar days of receipt of a notice 
under

[[Page 153]]

this section, the appropriate Reserve Bank shall either approve the 
transaction proposed in the notice or refer the notice to the Board for 
decision. If the notice is referred to the Board for decision, the Board 
shall act on the notice within 30 calendar days after the Reserve Bank 
receives the notice.
    (4) Factors considered in acting on notice. (i) The Board may 
disapprove a proposed purchase or redemption if it finds that the 
proposal would constitute an unsafe or unsound practice, or would 
violate any law, regulation, Board order, directive, or any condition 
imposed by, or written agreement with, the Board.
    (ii) In determining whether a proposal constitutes an unsafe or 
unsound practice, the Board shall consider whether the bank holding 
company's financial condition, after giving effect to the proposed 
purchase or redemption, meets the financial standards applied by the 
Board under section 3 of the BHC Act, including 12 CFR part 217, and the 
Board's Policy Statement for Small Bank Holding Companies (appendix C of 
this part).
    (5) Disapproval and hearing. (i) The Board shall notify the bank 
holding company in writing of the reasons for a decision to disapprove 
any proposed purchase or redemption. Within 10 calendar days of receipt 
of a notice of disapproval by the Board, the bank holding company may 
submit a written request for a hearing.
    (ii) The Board shall order a hearing within 10 calendar days of 
receipt of the request if it finds that material facts are in dispute, 
or if it otherwise appears appropriate. Any hearing conducted under this 
paragraph shall be held in accordance with the Board's Rules of Practice 
for Formal Hearings (12 CFR part 263).
    (iii) At the conclusion of the hearing, the Board shall by order 
approve or disapprove the proposed purchase or redemption on the basis 
of the record of the hearing.
    (6) Exception for well-capitalized bank holding companies. A bank 
holding company is not required to obtain prior Board approval for the 
redemption or purchase of its equity securities under this section 
provided:
    (i) Both before and immediately after the redemption, the bank 
holding company is well-capitalized;
    (ii) The bank holding company is well-managed; and
    (iii) The bank holding company is not the subject of any unresolved 
supervisory issues.
    (7) Exception for certain bank holding companies. This section 
225.4(b) shall not apply to any bank holding company that is subject to 
Sec. 225.8 of Regulation Y (12 CFR 225.8).
    (c) Deposit insurance. Every bank that is a bank holding company or 
a subsidiary of a bank holding company shall obtain Federal Deposit 
Insurance and shall remain an insured bank as defined in section 3(h) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
    (d) Acting as transfer agent or clearing agent. A bank holding 
company or any nonbanking subsidiary that is a ``bank,'' as defined in 
section 3(a)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(6)), and that is a transfer agent of securities, a clearing 
agency, or a participant in a clearing agency (as those terms are 
defined in section 3(a) of the Securities Exchange Act (15 U.S.C. 
78c(a)), shall be subject to Sec. Sec. 208.31-208.33 of the Board's 
Regulation H (12 CFR 208.31-208.33) as if it were a state member bank.
    (e) Reporting requirement for credit secured by certain bank holding 
company stock. Each executive officer or director of a bank holding 
company the shares of which are not publicly traded shall report 
annually to the board of directors of the bank holding company the 
outstanding amount of any credit that was extended to the executive 
officer or director and that is secured by shares of the bank holding 
company. For purposes of this paragraph, the terms ``executive officer'' 
and ``director'' shall have the meaning given in Sec. 215.2 of 
Regulation O (12 CFR 215.2).
    (f) Suspicious activity report. A bank holding company or any 
nonbank subsidiary thereof, or a foreign bank that is subject to the BHC 
Act or any nonbank subsidiary of such foreign bank operating in the 
United States, shall file a suspicious activity report in accordance 
with the provisions of Sec. 208.62 of the Board's Regulation H (12 CFR 
208.62).

[[Page 154]]

    (g) Requirements for financial holding companies engaged in 
securities underwriting, dealing, or market-making activities. (1) Any 
intra-day extension of credit by a bank or thrift, or U.S. branch or 
agency of a foreign bank to an affiliated company engaged in 
underwriting, dealing in, or making a market in securities pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E)) must be on market terms consistent with section 23B of 
the Federal Reserve Act. (12 U.S.C. 371c-1).
    (2) A foreign bank that is or is treated as a financial holding 
company under this part shall ensure that:
    (i) Any extension of credit by any U.S. branch or agency of such 
foreign bank to an affiliated company engaged in underwriting, dealing 
in, or making a market in securities pursuant to section 4(k)(4)(E) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(E)), conforms to 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
371c-1) as if the branch or agency were a member bank;
    (ii) Any purchase by any U.S. branch or agency of such foreign bank, 
as principal or fiduciary, of securities for which a securities 
affiliate described in paragraph (g)(2)(i) of this section is a 
principal underwriter conforms to sections 23A and 23B of the Federal 
Reserve Act (12 U.S.C. 371c and 371c-1) as if the branch or agency were 
a member bank; and
    (iii) Its U.S. branches and agencies not advertise or suggest that 
they are responsible for the obligations of a securities affiliate 
described in paragraph (g)(2)(i) of this section, consistent with 
section 23B(c) of the Federal Reserve Act (12 U.S.C. 371c-1(c)) as if 
the branches or agencies were member banks.
    (h) Protection of customer information and consumer information. A 
bank holding company shall comply with the Interagency Guidelines 
Establishing Information Security Standards, as set forth in appendix F 
of this part, prescribed pursuant to sections 501 and 505 of the Gramm-
Leach-Bliley Act (15 U.S.C. 6801 and 6805). A bank holding company shall 
properly dispose of consumer information in accordance with the rules 
set forth at 16 CFR part 682.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 63 FR 58621, Nov. 2, 
1998; 65 FR 14442, Mar. 17, 2000; 66 FR 8636, Feb. 1, 2001; 69 FR 77618, 
Dec. 28, 2004; 71 FR 9901, Feb. 28, 2006; 76 FR 74644, Dec. 1, 2011; 78 
FR 62290, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015; 80 FR 70673, Nov. 
16, 2015]



Sec. 225.5  Registration, reports, and inspections.

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



Sec. 225.6  Penalties for violations.

    (a) Criminal and civil penalties. (1) Section 8 of the BHC Act 
provides criminal

[[Page 155]]

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



Sec. 225.7  Exceptions to tying restrictions.

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

[[Page 156]]

subject to section 106 by section 4(f)(9) or 4(h) of the BHC Act.



Sec. 225.8  Capital planning.

    (a) Purpose. This section establishes capital planning and prior 
notice and approval requirements for capital distributions by certain 
bank holding companies.
    (b) Scope and reservation of authority--(1) Applicability. Except as 
provided in paragraph (c) of this section, this section applies to:
    (i) Any top-tier bank holding company domiciled in the United States 
with average total consolidated assets of $50 billion or more ($50 
billion asset threshold);
    (ii) Any other bank holding company domiciled in the United States 
that is made subject to this section, in whole or in part, by order of 
the Board;
    (iii) Any U.S. intermediate holding company subject to this section 
pursuant to 12 CFR 252.153; and
    (iv) Any nonbank financial company supervised by the Board that is 
made subject to this section pursuant to a rule or order of the Board.
    (2) Average total consolidated assets. For purposes of this section, 
average total consolidated assets means the average of the total 
consolidated assets as reported by a bank holding company on its 
Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) 
for the four most recent consecutive quarters. If the bank holding 
company has not filed the FR Y-9C for each of the four most recent 
consecutive quarters, average total consolidated assets means the 
average of the company's total consolidated assets, as reported on the 
company's FR Y-9C, for the most recent quarter or consecutive quarters, 
as applicable. Average total consolidated assets are measured on the as-
of date of the most recent FR Y-9C used in the calculation of the 
average.
    (3) Ongoing applicability. A bank holding company (including any 
successor bank holding company) that is subject to any requirement in 
this section shall remain subject to such requirements unless and until 
its total consolidated assets fall below $50 billion for each of four 
consecutive quarters, as reported on the FR Y-9C and effective on the 
as-of date of the fourth consecutive FR Y-9C.
    (4) Reservation of authority. Nothing in this section shall limit 
the authority of the Federal Reserve to issue a capital directive or 
take any other supervisory or enforcement action, including an action to 
address unsafe or unsound practices or conditions or violations of law.
    (5) Rule of construction. Unless the context otherwise requires, any 
reference to bank holding company in this section shall include a U.S. 
intermediate holding company and shall include a nonbank financial 
company supervised by the Board to the extent this section is made 
applicable pursuant to a rule or order of the Board.
    (c) Transitional arrangements--(1) Transition periods for certain 
bank holding companies. (i) A bank holding company that meets the $50 
billion asset threshold (as measured under paragraph (b) of this 
section) on or before September 30 of a calendar year must comply with 
the requirements of this section beginning on January 1 of the next 
calendar year, unless that time is extended by the Board in writing.
    (ii) A bank holding company that meets the $50 billion asset 
threshold after September 30 of a calendar year must comply with the 
requirements of this section beginning on January 1 of the second 
calendar year after the bank holding company meets the $50 billion asset 
threshold, unless that time is extended by the Board in writing.
    (iii) The Board or the appropriate Reserve Bank with the concurrence 
of the Board, may require a bank holding company described in paragraph 
(c)(1)(i) or (ii) of this section to comply with any or all of the 
requirements in paragraphs (e)(1), (e)(3), (f), or (g) of this section 
if the Board or appropriate Reserve Bank with concurrence of the Board, 
determines that the requirement is appropriate on a different date based 
on the company's risk profile, scope of operation, or financial 
condition and provides prior notice to the company of the determination.
    (2) Transition periods for subsidiaries of certain foreign banking 
organizations--(i) U.S. intermediate holding companies. (A) A U.S. 
intermediate holding company

[[Page 157]]

required to be established or designated pursuant to 12 CFR 252.153 on 
or before September 30 of a calendar year must comply with the 
requirements of this section beginning on January 1 of the next calendar 
year, unless that time is extended by the Board in writing.
    (B) A U.S. intermediate holding company required to be established 
or designated pursuant to 12 CFR 252.153 after September 30 of a 
calendar year must comply with the requirements of this section 
beginning on January 1 of the second calendar year after the U.S. 
intermediate holding company is required to be established, unless that 
time is extended by the Board in writing.
    (C) The Board or the appropriate Reserve Bank with the concurrence 
of the Board, may require a U.S. intermediate holding company described 
in paragraph (c)(2)(i)(A) or (B) of this section to comply with any or 
all of the requirements in paragraphs (e)(1), (e)(3), (f), or (g) of 
this section if the Board or appropriate Reserve Bank with concurrence 
of the Board, determines that the requirement is appropriate on a 
different date based on the company's risk profile, scope of operation, 
or financial condition and provides prior notice to the company of the 
determination.
    (ii) Bank holding company subsidiaries of U.S. intermediate holding 
companies required to be established by July 1, 2016. (A) 
Notwithstanding any other requirement in this section, a bank holding 
company that is a subsidiary of a U.S. intermediate holding company (or, 
with the mutual consent of the company and Board, another bank holding 
company domiciled in the United States) shall remain subject to 
paragraph (e) of this section until December 31, 2017, and shall remain 
subject to the requirements of paragraphs (f) and (g) of this section 
until the Board issues an objection or non-objection to the capital plan 
of the relevant U.S. intermediate holding company.
    (B) After the time periods set forth in paragraph (c)(2)(ii)(A) of 
this section, this section will cease to apply to a bank holding company 
that is a subsidiary of a U.S. intermediate holding company, unless 
otherwise determined by the Board in writing.
    (d) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Advanced approaches means the risk-weighted assets calculation 
methodologies at 12 CFR part 217, subpart E, as applicable, and any 
successor regulation.
    (2) Average total nonbank assets means:
    (i) For purposes of the capital plan cycle beginning January 1, 
2017:
    (A) Total combined nonbank assets of nonbank subsidiaries, as 
reported on line 15a of Schedule PC-B of the Parent Company Only 
Financial Statements for Large Holding Companies (FR Y-9LP) as of 
December 31, 2016; plus
    (B) The total amount of equity investments in nonbank subsidiaries 
and associated companies as reported on line 2a of Schedule PC-A of the 
FR Y-9LP as of December 31, 2016 (except that any investments reflected 
in paragraph (d)(2)(i)(A) of this section may be eliminated); plus
    (C) Assets of each Edge and Agreement Corporation, as reported on 
the Consolidated Report of Condition and Income for Edge and Agreement 
Corporations (FR 2886b) as of December 31, 2016, to the extent such 
corporation is designated as ``Nonbanking'' in the box on the front page 
of the FR 2886b; minus
    (D) Assets of each federal savings association, federal savings 
bank, or thrift subsidiary, as reported on the Report of Condition and 
Income (Call Report) as of December 31, 2016.
    (ii) For purposes of any capital plan cycles beginning on or after 
January 1, 2018, the average of the total nonbank assets of a holding 
company subject to the Federal Reserve Board's capital plan rule, 
calculated in accordance with the instructions to the FR Y-9LP, for the 
four most recent consecutive quarters or, if the bank holding company 
has not filed the FR Y-9LP for each of the four most recent consecutive 
quarters, for the most recent quarter or consecutive quarters, as 
applicable.
    (3) BHC stress scenario means a scenario designed by a bank holding 
company that stresses the specific

[[Page 158]]

vulnerabilities of the bank holding company's risk profile and 
operations, including those related to the company's capital adequacy 
and financial condition.
    (4) Capital action means any issuance or redemption of a debt or 
equity capital instrument, any capital distribution, and any similar 
action that the Federal Reserve determines could impact a bank holding 
company's consolidated capital.
    (5) Capital distribution means a redemption or repurchase of any 
debt or equity capital instrument, a payment of common or preferred 
stock dividends, a payment that may be temporarily or permanently 
suspended by the issuer on any instrument that is eligible for inclusion 
in the numerator of any minimum regulatory capital ratio, and any 
similar transaction that the Federal Reserve determines to be in 
substance a distribution of capital.
    (6) Capital plan means a written presentation of a bank holding 
company's capital planning strategies and capital adequacy process that 
includes the mandatory elements set forth in paragraph (e)(2) of this 
section.
    (7) Capital plan cycle means the period beginning on January 1 of a 
calendar year and ending on December 31 of that year.
    (8) Capital policy means a bank holding company's written assessment 
of the principles and guidelines used for capital planning, capital 
issuance, capital usage and distributions, including internal capital 
goals; the quantitative or qualitative guidelines for capital 
distributions; the strategies for addressing potential capital 
shortfalls; and the internal governance procedures around capital policy 
principles and guidelines.
    (9) Large and noncomplex bank holding company means any bank holding 
company subject to this section that, as of December 31 of the calendar 
year prior to the capital plan cycle:
    (i) Has average total consolidated assets of less than $250 billion;
    (ii) Has average total nonbank assets of less than $75 billion; and
    (iii) Is not a bank holding company that is identified as a global 
systemically important BHC pursuant to Sec. 217.402.
    (10) Minimum regulatory capital ratio means any minimum regulatory 
capital ratio that the Federal Reserve may require of a bank holding 
company, by regulation or order, including the bank holding company's 
tier 1 and supplementary leverage ratios as calculated under 12 CFR part 
217, including the deductions required under 12 CFR 248.12, as 
applicable, and the bank holding company's common equity tier 1, tier 1, 
and total risk-based capital ratios as calculated under 12 CFR part 217, 
including the deductions required under 12 CFR 248.12 and the transition 
provisions at 12 CFR 217.1(f)(4) and 217.300; except that the bank 
holding company shall not use the advanced approaches to calculate its 
regulatory capital ratios.
    (11) Nonbank financial company supervised by the Board means a 
company that the Financial Stability Oversight Council has determined 
under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) shall be 
supervised by the Board and for which such determination is still in 
effect.
    (12) Planning horizon means the period of at least nine consecutive 
quarters, beginning with the quarter preceding the quarter in which the 
bank holding company submits its capital plan, over which the relevant 
projections extend.
    (13) Tier 1 capital has the same meaning as under 12 CFR part 217.
    (14) U.S. intermediate holding company means the top-tier U.S. 
company that is required to be established pursuant to 12 CFR 252.153.
    (e) General requirements--(1) Annual capital planning. (i) A bank 
holding company must develop and maintain a capital plan.
    (ii) A bank holding company must submit its complete capital plan to 
the Board and the appropriate Reserve Bank by April 5 of each calendar 
year, or such later date as directed by the Board or by the appropriate 
Reserve Bank with concurrence of the Board.
    (iii) The bank holding company's board of directors or a designated 
committee thereof must at least annually and prior to submission of the 
capital plan under paragraph (e)(1)(ii) of this section:

[[Page 159]]

    (A) Review the robustness of the bank holding company's process for 
assessing capital adequacy,
    (B) Ensure that any deficiencies in the bank holding company's 
process for assessing capital adequacy are appropriately remedied; and
    (C) Approve the bank holding company's capital plan.
    (2) Mandatory elements of capital plan. A capital plan must contain 
at least the following elements:
    (i) An assessment of the expected uses and sources of capital over 
the planning horizon that reflects the bank holding company's size, 
complexity, risk profile, and scope of operations, assuming both 
expected and stressful conditions, including:
    (A) Estimates of projected revenues, losses, reserves, and pro forma 
capital levels, including any minimum regulatory capital ratios (for 
example, leverage, tier 1 risk-based, and total risk-based capital 
ratios) and any additional capital measures deemed relevant by the bank 
holding company, over the planning horizon under expected conditions and 
under a range of scenarios, including any scenarios provided by the 
Federal Reserve and at least one BHC stress scenario;
    (B) A discussion of the results of any stress test required by law 
or regulation, and an explanation of how the capital plan takes these 
results into account; and
    (C) A description of all planned capital actions over the planning 
horizon.
    (ii) A detailed description of the bank holding company's process 
for assessing capital adequacy, including:
    (A) A discussion of how the bank holding company will, under 
expected and stressful conditions, maintain capital commensurate with 
its risks, maintain capital above the minimum regulatory capital ratios, 
and serve as a source of strength to its subsidiary depository 
institutions;
    (B) A discussion of how the bank holding company will, under 
expected and stressful conditions, maintain sufficient capital to 
continue its operations by maintaining ready access to funding, meeting 
its obligations to creditors and other counterparties, and continuing to 
serve as a credit intermediary;
    (iii) The bank holding company's capital policy; and
    (iv) A discussion of any expected changes to the bank holding 
company's business plan that are likely to have a material impact on the 
bank holding company's capital adequacy or liquidity.
    (3) Data collection. Upon the request of the Board or appropriate 
Reserve Bank, the bank holding company shall provide the Federal Reserve 
with information regarding:
    (i) The bank holding company's financial condition, including its 
capital;
    (ii) The bank holding company's structure;
    (iii) Amount and risk characteristics of the bank holding company's 
on- and off-balance sheet exposures, including exposures within the bank 
holding company's trading account, other trading-related exposures (such 
as counterparty-credit risk exposures) or other items sensitive to 
changes in market factors, including, as appropriate, information about 
the sensitivity of positions to changes in market rates and prices;
    (iv) The bank holding company's relevant policies and procedures, 
including risk management policies and procedures;
    (v) The bank holding company's liquidity profile and management;
    (vi) The loss, revenue, and expense estimation models used by the 
bank holding company for stress scenario analysis, including supporting 
documentation regarding each model's development and validation; and
    (vii) Any other relevant qualitative or quantitative information 
requested by the Board or by the appropriate Reserve Bank to facilitate 
review of the bank holding company's capital plan under this section.
    (4) Re-submission of a capital plan. (i) A bank holding company must 
update and re-submit its capital plan to the appropriate Reserve Bank 
within 30 calendar days of the occurrence of one of the following 
events:
    (A) The bank holding company determines there has been or will be a 
material change in the bank holding company's risk profile, financial 
condition, or corporate structure since the bank

[[Page 160]]

holding company last submitted the capital plan to the Board and the 
appropriate Reserve Bank under this section; or
    (B) The Board or the appropriate Reserve Bank with concurrence of 
the Board, directs the bank holding company in writing to revise and 
resubmit its capital plan for any of the following reasons:
    (1) The capital plan is incomplete or the capital plan, or the bank 
holding company's internal capital adequacy process, contains material 
weaknesses;
    (2) There has been, or will likely be, a material change in the bank 
holding company's risk profile (including a material change in its 
business strategy or any risk exposure), financial condition, or 
corporate structure;
    (3) The BHC stress scenario(s) are not appropriate for the bank 
holding company's business model and portfolios, or changes in financial 
markets or the macro-economic outlook that could have a material impact 
on a bank holding company's risk profile and financial condition require 
the use of updated scenarios; or
    (4) The capital plan or the condition of the bank holding company 
raise any of the issues described in paragraph (f)(2)(ii) of this 
section.
    (ii) A bank holding company may resubmit its capital plan to the 
Federal Reserve if the Board or the appropriate Reserve Bank objects to 
the capital plan.
    (iii) The Board or the appropriate Reserve Bank with concurrence of 
the Board, may extend the 30-day period in paragraph (e)(4)(i) of this 
section for up to an additional 60 calendar days, or such longer period 
as the Board or the appropriate Reserve Bank, with concurrence of the 
Board, determines, in its discretion, appropriate.
    (iv) Any updated capital plan must satisfy all the requirements of 
this section; however, a bank holding company may continue to rely on 
information submitted as part of a previously submitted capital plan to 
the extent that the information remains accurate and appropriate.
    (5) Confidential treatment of information submitted. The 
confidentiality of information submitted to the Board under this section 
and related materials shall be determined in accordance with applicable 
exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and 
the Board's Rules Regarding Availability of Information (12 CFR part 
261).
    (f) Review of capital plans by the Federal Reserve; publication of 
summary results--(1) Considerations and inputs. (i) The Board or the 
appropriate Reserve Bank with concurrence of the Board, will consider 
the following factors in reviewing a bank holding company's capital 
plan:
    (A) The comprehensiveness of the capital plan, including the extent 
to which the analysis underlying the capital plan captures and addresses 
potential risks stemming from activities across the firm and the 
company's capital policy;
    (B) The reasonableness of the bank holding company's capital plan, 
the assumptions and analysis underlying the capital plan, and the 
robustness of its capital adequacy process; and
    (C) The bank holding company's ability to maintain capital above 
each minimum regulatory capital ratio on a pro forma basis under 
expected and stressful conditions throughout the planning horizon, 
including but not limited to any scenarios required under paragraphs 
(e)(2)(i)(A) and (e)(2)(ii) of this section.
    (ii) The Board or the appropriate Reserve Bank with concurrence of 
the Board, will also consider the following information in reviewing a 
bank holding company's capital plan:
    (A) Relevant supervisory information about the bank holding company 
and its subsidiaries;
    (B) The bank holding company's regulatory and financial reports, as 
well as supporting data that would allow for an analysis of the bank 
holding company's loss, revenue, and reserve projections;
    (C) As applicable, the Federal Reserve's own pro forma estimates of 
the firm's potential losses, revenues, reserves, and resulting capital 
adequacy under expected and stressful conditions, including but not 
limited to any scenarios required under paragraphs (e)(2)(i)(A) and 
(e)(2)(ii) of this section, as well as the results of any stress tests

[[Page 161]]

conducted by the bank holding company or the Federal Reserve; and
    (D) Other information requested or required by the Board or the 
appropriate Reserve Bank, as well as any other information relevant, or 
related, to the bank holding company's capital adequacy.
    (2) Federal Reserve action on a capital plan--(i) Timing of action. 
The Board or the appropriate Reserve Bank with concurrence of the Board, 
will object, in whole or in part, to the capital plan or provide the 
bank holding company with a notice of non-objection to the capital plan:
    (A) By June 30 of the calendar year in which a capital plan was 
submitted pursuant to paragraph (e)(1)(ii) of this section; and
    (B) For a capital plan resubmitted pursuant to paragraph (e)(4) of 
this section, within 75 calendar days after the date on which a capital 
plan is resubmitted, unless the Board provides notice to the company 
that it is extending the time period.
    (ii) Objection--(A) Large and noncomplex bank holding companies. The 
Board, or the appropriate Reserve Bank with concurrence of the Board, 
may object to a capital plan submitted by a large and noncomplex bank 
holding company if it determines that the bank holding company has not 
demonstrated an ability to maintain capital above each minimum 
regulatory capital ratio on a pro forma basis under expected and 
stressful conditions throughout the planning horizon.
    (B) Bank holding companies that are not large and noncomplex bank 
holding companies. The Board or the appropriate Reserve Bank with 
concurrence of the Board, may object to a capital plan submitted by a 
bank holding company that is not a large and noncomplex bank holding 
company if it determines that:
    (1) The bank holding company has not demonstrated an ability to 
maintain capital above each minimum regulatory capital ratio on a pro 
forma basis under expected and stressful conditions throughout the 
planning horizon;
    (2) The bank holding company has material unresolved supervisory 
issues, including but not limited to issues associated with its capital 
adequacy process;
    (3) The assumptions and analysis underlying the bank holding 
company's capital plan, or the bank holding company's methodologies and 
practices that support its capital planning process, are not reasonable 
or appropriate; or
    (4) The bank holding company's capital planning process or proposed 
capital distributions otherwise constitute an unsafe or unsound 
practice, or would violate any law, regulation, Board order, directive, 
or condition imposed by, or written agreement with, the Board or the 
appropriate Reserve Bank. In determining whether a capital plan or any 
proposed capital distribution would constitute an unsafe or unsound 
practice, the Board or the appropriate Reserve Bank would consider 
whether the bank holding company is and would remain in sound financial 
condition after giving effect to the capital plan and all proposed 
capital distributions.
    (iii) Notification of decision. The Board or the appropriate Reserve 
Bank will notify the bank holding company in writing of the reasons for 
a decision to object to a capital plan.
    (iv) General distribution limitation. If the Board or the 
appropriate Reserve Bank objects to a capital plan and until such time 
as the Board or the appropriate Reserve Bank with concurrence of the 
Board, issues a non-objection to the bank holding company's capital 
plan, the bank holding company may not make any capital distribution, 
other than capital distributions arising from the issuance of a 
regulatory capital instrument eligible for inclusion in the numerator of 
a minimum regulatory capital ratio or capital distributions with respect 
to which the Board or the appropriate Reserve Bank has indicated in 
writing its non-objection.
    (v) Publication of summary results. The Board may disclose publicly 
its decision to object or not object to a bank holding company's capital 
plan under this section, along with a summary of the Board's analyses of 
that company. Any disclosure under this paragraph will occur by June 30 
of the calendar

[[Page 162]]

year in which a capital plan was submitted pursuant to paragraph 
(e)(1)(ii) of this section, unless the Board determines that a later 
disclosure date is appropriate.
    (3) Request for reconsideration or hearing--(i) General. Within 15 
calendar days of receipt of a notice of objection to a capital plan by 
the Board or the appropriate Reserve Bank:
    (A) A bank holding company may submit a written request to the Board 
requesting reconsideration of the objection, including an explanation of 
why reconsideration should be granted. Within 15 calendar days of 
receipt of the bank holding company's request, the Board will notify the 
company of its decision to affirm or withdraw the objection to the bank 
holding company's capital plan or a specific capital distribution; or
    (B) As an alternative to paragraph (f)(3)(i)(A) of this section, a 
bank holding company may request an informal hearing on the objection.
    (ii) Request for an informal hearing. (A) A request for an informal 
hearing shall be in writing and shall be submitted within 15 calendar 
days of a notice of an objection. The Board may, in its sole discretion, 
order an informal hearing if the Board finds that a hearing is 
appropriate or necessary to resolve disputes regarding material issues 
of fact.
    (B) An informal hearing shall be held within 30 calendar days of a 
request, if granted, provided that the Board may extend this period upon 
notice to the requesting party.
    (C) Written notice of the final decision of the Board shall be given 
to the bank holding company within 60 calendar days of the conclusion of 
any informal hearing ordered by the Board, provided that the Board may 
extend this period upon notice to the requesting party.
    (D) While the Board's final decision is pending and until such time 
as the Board or the appropriate Reserve Bank with concurrence of the 
Board issues a non-objection to the bank holding company's capital plan, 
the bank holding company may not make any capital distribution, other 
than those capital distributions with respect to which the Board or the 
appropriate Reserve Bank has indicated in writing its non-objection.
    (4) Application of this section to other bank holding companies. The 
Board may apply this section, in whole or in part, to any other bank 
holding company by order based on the institution's size, level of 
complexity, risk profile, scope of operations, or financial condition.
    (g) Approval requirements for certain capital actions--(1) 
Circumstances requiring approval. Notwithstanding a notice of non-
objection under paragraph (f)(2)(i) of this section, a bank holding 
company may not make a capital distribution (excluding any capital 
distribution arising from the issuance of a regulatory capital 
instrument eligible for inclusion in the numerator of a minimum 
regulatory capital ratio) under the following circumstances, unless it 
receives prior approval from the Board or appropriate Reserve Bank 
pursuant to paragraph (g)(5) of this section:
    (i) After giving effect to the capital distribution, the bank 
holding company would not meet a minimum regulatory capital ratio;
    (ii) The Board or the appropriate Reserve Bank with concurrence of 
the Board, notifies the company in writing that the Federal Reserve has 
determined that the capital distribution would result in a material 
adverse change to the organization's capital or liquidity structure or 
that the company's earnings were materially underperforming projections;
    (iii) Except as provided in paragraph (g)(2) of this section, the 
dollar amount of the capital distribution will exceed the amount 
described in the capital plan for which a non-objection was issued under 
this section, as measured on an aggregate basis beginning in the third 
quarter of the planning horizon through the quarter at issue; or
    (iv) The capital distribution would occur after the occurrence of an 
event requiring resubmission under paragraphs (e)(4)(i)(A) or (B) of 
this section and before the Federal Reserve has acted on the resubmitted 
capital plan.
    (2) Exception for well capitalized bank holding companies. (i) A 
bank holding

[[Page 163]]

company may make a capital distribution for which the dollar amount 
exceeds the amount described in the capital plan for which a non-
objection was issued under paragraph (f)(2)(i) of this section if the 
following conditions are satisfied:
    (A) The bank holding company is, and after the capital distribution 
would remain, well capitalized as defined in Sec. 225.2(r);
    (B) The bank holding company's performance and capital levels are, 
and after the capital distribution would remain, consistent with its 
projections under expected conditions as set forth in its capital plan 
under paragraph (f)(2)(i) of this section;
    (C) Until March 31, 2017, the annual aggregate dollar amount of all 
capital distributions in the period beginning on July 1 of a calendar 
year and ending on June 30 of the following calendar year would not 
exceed the total amounts described in the company's capital plan for 
which the bank holding company received a notice of non-objection by 
more than 1.00 percent multiplied by the bank holding company's tier 1 
capital, as reported to the Federal Reserve on the bank holding 
company's most recent first-quarter FR Y-9C;
    (D) Beginning April 1, 2017, the annual aggregate dollar amount of 
all capital distributions in the period beginning on July 1 of a 
calendar year and ending on June 30 of the following calendar year would 
not exceed the total amounts described in the company's capital plan for 
which the bank holding company received a notice of non-objection by 
more than 0.25 percent multiplied by the bank holding company's tier 1 
capital, as reported to the Federal Reserve on the bank holding 
company's most recent first-quarter FR Y-9C;
    (E) Between July 1 of a calendar year and March 15 of the following 
calendar year, the bank holding company provides the appropriate Reserve 
Bank with notice 15 calendar days prior to a capital distribution that 
includes the elements described in paragraph (g)(4) of this section; and
    (F) The Board or the appropriate Reserve Bank with concurrence of 
the Board, does not object to the transaction proposed in the notice. In 
determining whether to object to the proposed transaction, the Board or 
the appropriate Reserve Bank shall apply the criteria described in 
paragraph (g)(5)(ii) of this section.
    (ii) The exception in this paragraph (g)(2) shall not apply if the 
Board or the appropriate Reserve Bank notifies the bank holding company 
in writing that it is ineligible for this exception.
    (3) Net distribution limitation--(i) General. Notwithstanding a 
notice of non-objection under paragraph (f)(2)(i) of this section, a 
bank holding company must reduce its capital distributions in accordance 
with paragraph (g)(3)(ii) of this section if the bank holding company 
raises a smaller dollar amount of capital of a given category of 
regulatory capital instruments than it had included in its capital plan, 
as measured on an aggregate basis beginning in the third quarter of the 
planning horizon through the end of the current quarter.
    (ii) Reduction of distributions--(A) Common equity tier 1 capital. 
If the bank holding company raises a smaller dollar amount of common 
equity tier 1 capital (as defined in 12 CFR 217.2), the bank holding 
company must reduce its capital distributions relating to common equity 
tier 1 capital such that the dollar amount of the bank holding company's 
capital distributions, net of the dollar amount of its capital raises, 
(``net distributions'') relating to common equity tier 1 capital is no 
greater than the dollar amount of net distributions relating to common 
equity tier 1 capital included in its capital plan, as measured on an 
aggregate basis beginning in the third quarter of the planning horizon 
through the end of the current quarter.
    (B) Additional tier 1 capital. If the bank holding company raises a 
smaller dollar amount of additional tier 1 capital (as defined in 12 CFR 
217.2), the bank holding company must reduce its capital distributions 
relating to additional tier 1 capital (other than scheduled payments on 
additional tier 1 capital instruments) such that the dollar amount of 
the bank holding company's net distributions relating to additional tier 
1 capital is no greater than the

[[Page 164]]

dollar amount of net distributions relating to additional tier 1 capital 
included in its capital plan, as measured on an aggregate basis 
beginning in the third quarter of the planning horizon through the end 
of the current quarter.
    (C) Tier 2 capital. If the bank holding company raises a smaller 
dollar amount of tier 2 capital (as defined in 12 CFR 217.2), the bank 
holding company must reduce its capital distributions relating to tier 2 
capital (other than scheduled payments on tier 2 capital instruments) 
such that the dollar amount of the bank holding company's net 
distributions relating to tier 2 capital is no greater than the dollar 
amount of net distributions relating to tier 2 capital included in its 
capital plan, as measured on an aggregate basis beginning in the third 
quarter of the planning horizon through the end of the current quarter.
    (iii) Exceptions. Paragraphs (g)(3)(i) and (ii) of this section 
shall not apply:
    (A) To the extent that the Board or appropriate Reserve Bank 
indicates in writing its non-objection pursuant to paragraph (g)(5) of 
this section, following a request for non-objection from the bank 
holding company that includes all of the information required to be 
submitted under paragraph (g)(4) of this section;
    (B) To capital distributions arising from the issuance of a 
regulatory capital instrument eligible for inclusion in the numerator of 
a minimum regulatory capital ratio that the bank holding company had not 
included in its capital plan;
    (C) To the extent that the bank holding company raised a smaller 
dollar amount of capital in the category of regulatory capital 
instruments described in paragraph (g)(3)(i) of this section due to 
employee-directed capital issuances related to an employee stock 
ownership plan;
    (D) To the extent that the bank holding company raised a smaller 
dollar amount of capital in the category of regulatory capital 
instruments described in paragraph (g)(3)(i) of this section due to a 
planned merger or acquisition that is no longer expected to be 
consummated or for which the consideration paid is lower than the 
projected price in the capital plan;
    (E) Until March 31, 2017, to the extent that the dollar amount by 
which the bank holding company's net distributions exceed the dollar 
amount of net distributions included in its capital plan in the category 
of regulatory capital instruments described in paragraph (g)(3)(i) of 
this section, as measured on an aggregate basis beginning in the third 
quarter of the planning horizon through the end of the current quarter, 
is less than 1.00 percent of the bank holding company's tier 1 capital, 
as reported to the Federal Reserve on the bank holding company's most 
recent first-quarter FR Y-9C; between July 1 of a calendar year and 
March 15 of the following calendar year, the bank holding company 
provides the appropriate Reserve Bank with notice 15 calendar days prior 
to any capital distribution in that category of regulatory capital 
instruments that includes the elements described in paragraph (g)(4) of 
this section; and the Board or the appropriate Reserve Bank with 
concurrence of the Board, does not object to the transaction proposed in 
the notice. In determining whether to object to the proposed 
transaction, the Board or the appropriate Reserve Bank shall apply the 
criteria described in paragraph (g)(5)(ii) of this section; or
    (F) Beginning April 1, 2017, to the extent that the dollar amount by 
which the bank holding company's net distributions exceed the dollar 
amount of net distributions included in its capital plan in the category 
of regulatory capital instruments described in paragraph (g)(3)(i) of 
this section, as measured on an aggregate basis beginning in the third 
quarter of the planning horizon through the end of the current quarter, 
is less than 0.25 percent of the bank holding company's tier 1 capital, 
as reported to the Federal Reserve on the bank holding company's most 
recent first-quarter FR Y-9C; between July 1 of a calendar year and 
March 15 of the following calendar year, the bank holding company 
provides the appropriate Reserve Bank with notice 15 calendar days prior 
to any capital distribution in that category of regulatory capital 
instruments that includes the elements described in paragraph (g)(4) of 
this section; and the

[[Page 165]]

Board or the appropriate Reserve Bank with concurrence of the Board, 
does not object to the transaction proposed in the notice. In 
determining whether to object to the proposed transaction, the Board or 
the appropriate Reserve Bank shall apply the criteria described in 
paragraph (g)(5)(ii) of this section.
    (iv) The exceptions in paragraph (g)(3)(iii) of this section shall 
not apply if the Board or the appropriate Reserve Bank notifies the bank 
holding company in writing that it is ineligible for this exception.
    (4) Contents of request. (i) A request for a capital distribution 
under this section shall be filed between July 1 of a calendar year and 
March 1 of the following calendar year with the appropriate Reserve Bank 
and the Board and shall contain the following information:
    (A) The bank holding company's current capital plan or an 
attestation that there have been no changes to the capital plan since it 
was last submitted to the Federal Reserve;
    (B) The purpose of the transaction;
    (C) A description of the capital distribution, including for 
redemptions or repurchases of securities, the gross consideration to be 
paid and the terms and sources of funding for the transaction, and for 
dividends, the amount of the dividend(s); and
    (D) Any additional information requested by the Board or the 
appropriate Reserve Bank (which may include, among other things, an 
assessment of the bank holding company's capital adequacy under a 
revised stress scenario provided by the Federal Reserve, a revised 
capital plan, and supporting data).
    (ii) Any request submitted with respect to a capital distribution 
described in paragraph (g)(1)(i) of this section shall also include a 
plan for restoring the bank holding company's capital to an amount above 
a minimum level within 30 calendar days and a rationale for why the 
capital distribution would be appropriate.
    (5) Approval of certain capital distributions. (i) The Board or the 
appropriate Reserve Bank with concurrence of the Board, will act on a 
request under this paragraph (g)(5) within 30 calendar days after the 
receipt of all the information required under paragraph (g)(4) of this 
section.
    (ii) In acting on a request under this paragraph, the Board or 
appropriate Reserve Bank will apply the considerations and principles in 
paragraph (f) of this section. In addition, the Board or the appropriate 
Reserve Bank may disapprove the transaction if the bank holding company 
does not provide all of the information required to be submitted under 
paragraph (g)(4) of this section.
    (6) Disapproval and hearing. (i) The Board or the appropriate 
Reserve Bank will notify the bank holding company in writing of the 
reasons for a decision to disapprove any proposed capital distribution. 
Within 15 calendar days after receipt of a disapproval by the Board, the 
bank holding company may submit a written request for a hearing.
    (A) The Board may, in its sole discretion, order an informal hearing 
if the Board finds that a hearing is appropriate or necessary to resolve 
disputes regarding material issues of fact.
    (B) An informal hearing shall be held within 30 calendar days of a 
request, if granted, provided that the Board may extend this period upon 
notice to the requesting party.
    (C) Written notice of the final decision of the Board shall be given 
to the bank holding company within 60 calendar days of the conclusion of 
any informal hearing ordered by the Board, provided that the Board may 
extend this period upon notice to the requesting party.
    (D) While the Board's final decision is pending and until such time 
as the Board or the appropriate Reserve Bank with concurrence of the 
Board, approves the capital distribution at issue, the bank holding 
company may not make such capital distribution.

[82 FR 9323, Feb. 3, 2017]



           Subpart B_Acquisition of Bank Securities or Assets

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

[[Page 166]]



Sec. 225.11  Transactions requiring Board approval.

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



Sec. 225.12  Transactions not requiring Board approval.

    The following transactions do not require the Board's approval under 
Sec. 225.11 of this subpart:
    (a) Acquisition of securities in fiduciary capacity. The acquisition 
by a bank or other company (other than a trust that is a company) of 
control of voting securities of a bank or bank holding company in good 
faith in a fiduciary capacity, unless:
    (1) The acquiring bank or other company has sole discretionary 
authority to vote the securities and retains this authority for more 
than two years; or
    (2) The acquisition is for the benefit of the acquiring bank or 
other company, or its shareholders, employees, or subsidiaries.
    (b) Acquisition of securities in satisfaction of debts previously 
contracted. The acquisition by a bank or other company of control of 
voting securities of a bank or bank holding company in the regular 
course of securing or collecting a debt previously contracted in good 
faith, if the acquiring bank or other company divests the securities 
within two years of acquisition. The Board or Reserve Bank may grant 
requests for up to three one-year extensions.
    (c) Acquisition of securities by bank holding company with majority 
control. The acquisition by a bank holding company of additional voting 
securities of a bank or bank holding company if more than 50 percent of 
the outstanding voting securities of the bank or bank holding company is 
lawfully controlled by the acquiring bank holding company prior to the 
acquisition.
    (d) Acquisitions involving bank mergers and internal corporate 
reorganizations--(1) Transactions subject to Bank Merger Act. The merger 
or consolidation of a subsidiary bank of a bank holding company with 
another bank, or the purchase of assets by the subsidiary bank, or a 
similar transaction involving subsidiary banks of a bank holding 
company, if the transaction requires the prior approval of a federal 
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)) and 
does not involve the acquisition of shares of a bank. This exception 
does not include:
    (i) The merger of a nonsubsidiary bank and a nonoperating subsidiary

[[Page 167]]

bank formed by a company for the purpose of acquiring the nonsubsidiary 
bank; or
    (ii) Any transaction requiring the Board's prior approval under 
Sec. 225.11(e) of this subpart.
    The Board may require an application under this subpart if it 
determines that the merger or consolidation would have a significant 
adverse impact on the financial condition of the bank holding company, 
or otherwise requires approval under section 3 of the BHC Act.
    (2) Certain acquisitions subject to Bank Merger Act. The acquisition 
by a bank holding company of shares of a bank or company controlling a 
bank or the merger of a company controlling a bank with the bank holding 
company, if the transaction is part of the merger or consolidation of 
the bank with a subsidiary bank (other than a nonoperating subsidiary 
bank) of the acquiring bank holding company, or is part of the purchase 
of substantially all of the assets of the bank by a subsidiary bank 
(other than a nonoperating subsidiary bank) of the acquiring bank 
holding company, and if:
    (i) The bank merger, consolidation, or asset purchase occurs 
simultaneously with the acquisition of the shares of the bank or bank 
holding company or the merger of holding companies, and the bank is not 
operated by the acquiring bank holding company as a separate entity 
other than as the survivor of the merger, consolidation, or asset 
purchase;
    (ii) The transaction requires the prior approval of a federal 
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));
    (iii) The transaction does not involve the acquisition of any 
nonbank company that would require prior approval under section 4 of the 
BHC Act (12 U.S.C. 1843);
    (iv) Both before and after the transaction, the acquiring bank 
holding company meets the requirements of 12 CFR part 217;
    (v) At least 10 days prior to the transaction, the acquiring bank 
holding company has provided to the Reserve Bank written notice of the 
transaction that contains:
    (A) A copy of the filing made to the appropriate federal banking 
agency under the Bank Merger Act; and
    (B) A description of the holding company's involvement in the 
transaction, the purchase price, and the source of funding for the 
purchase price; and
    (vi) Prior to expiration of the period provided in paragraph 
(d)(2)(v) of this section, the Reserve Bank has not informed the bank 
holding company that an application under Sec. 225.11 is required.
    (3) Internal corporate reorganizations. (i) Subject to paragraph 
(d)(3)(ii) of this section, any of the following transactions performed 
in the United States by a bank holding company:
    (A) The merger of holding companies that are subsidiaries of the 
bank holding company;
    (B) The formation of a subsidiary holding company; \1\
---------------------------------------------------------------------------

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

    (C) The transfer of control or ownership of a subsidiary bank or a 
subsidiary holding company between one subsidiary holding company and 
another subsidiary holding company or the bank holding company.
    (ii) A transaction described in paragraph (d)(3)(i) of this section 
qualifies for this exception if:
    (A) The transaction represents solely a corporate reorganization 
involving companies and insured depository institutions that, both 
preceding and following the transaction, are lawfully controlled and 
operated by the bank holding company;
    (B) The transaction does not involve the acquisition of additional 
voting shares of an insured depository institution that, prior to the 
transaction, was less than majority owned by the bank holding company;
    (C) The bank holding company is not organized in mutual form; and
    (D) Both before and after the transaction, the bank holding company 
meets the Board's Capital Adequacy Guidelines (appendices A, B, C, D, 
and E of this part).
    (e) Holding securities in escrow. The holding of any voting 
securities of a

[[Page 168]]

bank or bank holding company in an escrow arrangement for the benefit of 
an applicant pending the Board's action on an application for approval 
of the proposed acquisition, if title to the securities and the voting 
rights remain with the seller and payment for the securities has not 
been made to the seller.
    (f) Acquisition of foreign banking organization. The acquisition of 
a foreign banking organization where the foreign banking organization 
does not directly or indirectly own or control a bank in the United 
States, unless the acquisition is also by a foreign banking organization 
and otherwise subject to Sec. 225.11(f) of this subpart.

[ Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 78 FR 62291, Oct. 11, 
2013; 80 FR 70673, Nov. 16, 2015]



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

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

[[Page 169]]

the relevant statutory factors and other provisions of the BHC Act.



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

    (a) Filing of notice--(1) Information required and public notice. As 
an alternative to the procedure provided in Sec. 225.15, a bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the prior approval requirements of Sec. 225.11 in connection 
with the acquisition of shares, assets or control of a bank, or a merger 
or consolidation between bank holding companies, by providing the 
appropriate Reserve Bank with a written notice containing the following:
    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies and insured depository institutions involved in the 
transaction \3\ and identification of each banking market affected by 
the transaction;
---------------------------------------------------------------------------

    \3\ If, in connection with a transaction under this subpart, any 
person or group of persons proposes to acquire control of the acquiring 
bank holding company for purposes of the Bank Control Act or Sec. 
225.41, the person or group of persons may fulfill the notice 
requirements of the Bank Control Act and Sec. 225.43 by providing, as 
part of the submission by the acquiring bank holding company under this 
subpart, identifying and biographical information required in paragraph 
(6)(A) of the Bank Control Act (12 U.S.C. 1817(j)(6)(A)), as well as any 
financial or other information requested by the Reserve Bank under Sec. 
225.43.
---------------------------------------------------------------------------

    (iii) A description of the effect of the transaction on the 
convenience and needs of the communities to be served and of the actions 
being taken by the bank holding company to improve the CRA performance 
of any insured depository institution subsidiary that does not have at 
least a satisfactory CRA performance rating at the time of the 
transaction;
    (iv) Evidence that notice of the proposal has been published in 
accordance with Sec. 225.16(b)(1);
    (v)(A) If the bank holding company has consolidated assets of $1 
billion or more, an abbreviated consolidated pro forma balance sheet as 
of the most recent quarter showing credit and debit adjustments that 
reflect the proposed transaction, consolidated pro forma risk-based 
capital ratios for the acquiring bank holding company as of the most 
recent quarter, and a description of the purchase price and the terms 
and sources of funding for the transaction;
    (B) If the bank holding company has consolidated assets of less than 
$1 billion, a pro forma parent-only balance sheet as of the most recent 
quarter showing credit and debit adjustments that reflect the proposed 
transaction, and a description of the purchase price, the terms and 
sources of funding for the transaction, and the sources and schedule for 
retiring any debt incurred in the transaction;
    (vi) If the bank holding company has consolidated assets of less 
than $300 million, a list of and biographical information regarding any 
directors or senior executive officers of the resulting bank holding 
company that are not directors or senior executive officers of the 
acquiring bank holding company or of a company or institution to be 
acquired;
    (vii) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (viii) The market indexes for each relevant banking market 
reflecting the pro forma effect of the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraph (a)(1)(v) through (viii) of 
this section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section or notify the bank holding company that the transaction is 
subject to the procedure in Sec. 225.15 within 5 business days after 
the close of the public comment period. The Board and the Reserve Bank 
shall not approve any proposal under this section prior to the third 
business day

[[Page 170]]

following the close of the public comment period, unless an emergency 
exists that requires expedited or immediate action. The Board may extend 
the period for action under this section for up to 5 business days.
    (2) Acceptance of notice in event expedited procedure not available. 
In the event that the Board or the Reserve Bank determines after the 
filing of a notice under this section that a bank holding company may 
not use the procedure in this section and must file an application under 
Sec. 225.15, the application shall be deemed accepted for purposes of 
Sec. 225.15 as of the date that the notice was filed under this 
section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the proposed transaction:
    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (2) Well managed organization--(i) Satisfactory examination ratings. 
At the time of the transaction, the acquiring bank holding company, its 
lead insured depository institution, and insured depository institutions 
that control at least 80 percent of the total risk-weighted assets of 
insured depository institutions controlled by the holding company are 
well managed and have received at least a satisfactory rating for 
compliance at their most recent examination if such rating was given;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution;
    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if :
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Convenience and needs criteria--(i) Effect on the community. The 
record indicates that the proposed transaction would meet the 
convenience and needs of the community standard in the BHC Act; and
    (ii) Established CRA performance record. At the time of the 
transaction, the lead insured depository institution of the acquiring 
bank holding company and insured depository institutions that control at 
least 80 percent of the total risk-weighted assets of insured 
institutions controlled by the holding company have received a 
satisfactory or better composite rating at the most recent examination 
under the Community Reinvestment Act;
    (4) Public comment. No comment that is timely and substantive as 
provided in Sec. 225.16 is received by the Board or the appropriate 
Reserve Bank other than a comment that supports approval of the 
proposal;
    (5) Competitive criteria--(i) Competitive screen. Without regard to 
any divestitures proposed by the acquiring bank holding company, the 
acquisition does not cause:
    (A) Insured depository institutions controlled by the acquiring bank 
holding company to control in excess of 35 percent of market deposits in 
any relevant banking market; or

[[Page 171]]

    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant banking market with a post-acquisition index of 
at least 1800; and
    (ii) Department of Justice. The Department of Justice has not 
indicated to the Board that consummation of the transaction is likely to 
have a significantly adverse effect on competition in any relevant 
banking market;
    (6) Size of acquisition--(i) In general--(A) Limited Growth. Except 
as provided in paragraph (c)(6)(ii) of this section, the sum of the 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk- weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph other qualifying transactions 
means any transaction approved under this section or Sec. 225.23 during 
the 12 months prior to filing the notice under this section; and
    (B) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(6)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;
    (7) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement action, is or was outstanding against the bank 
holding company or any insured depository institution subsidiary of the 
holding company, and no formal administrative enforcement proceeding 
involving any such enforcement action, order, or directive is or was 
pending;
    (8) Interstate acquisitions. Board-approval of the transaction is 
not prohibited under section 3(d) of the BHC Act;
    (9) Other supervisory considerations. Board approval of the 
transaction is not prohibited under the informational sufficiency or 
comprehensive home country supervision standards set forth in section 
3(c)(3) of the BHC Act; and
    (10) Notification. The acquiring bank holding company has not been 
notified by the Board, in its discretion, prior to the expiration of the 
period in paragraph (b)(1) of this section that an application under 
Sec. 225.15 is required in order to permit closer review of any 
financial, managerial, competitive, convenience and needs or other 
matter related to the factors that must be considered under this part.
    (d) Comment by primary banking supervisor--(1) Notice. Upon receipt 
of a notice under this section, the appropriate Reserve Bank shall 
promptly furnish notice of the proposal and a copy of the information 
filed pursuant to paragraph (a) of this section to the primary banking 
supervisor of the insured depository institutions to be acquired.
    (2) Comment period. The primary banking supervisor shall have 30 
calendar days (or such shorter time as agreed to by the primary banking 
supervisor) from the date of the letter giving notice in which to submit 
its views and recommendations to the Board.
    (3) Action subject to supervisor's comment. Action by the Board or 
the Reserve Bank on a proposal under this section is subject to the 
condition that the primary banking supervisor not recommend in writing 
to the Board disapproval of the proposal prior to the expiration of the 
comment period described in paragraph (d)(2) of this section. In such 
event, any approval given under this section shall be revoked and, if 
required by section 3(b) of the BHC Act, the Board shall order a hearing 
on the proposal.
    (4) Emergencies. Notwithstanding paragraphs (d)(2) and (d)(3) of 
this section, the Board may provide the primary banking supervisor with 
10 calendar days' notice of a proposal under this section if the Board 
finds that an emergency exists requiring expeditious action, and may act 
during the notice period or without providing notice to the primary 
banking supervisor if the

[[Page 172]]

Board finds that it must act immediately to prevent probable failure.
    (5) Primary banking supervisor. For purposes of this section and 
Sec. 225.15(b), the primary banking supervisor for an institution is:
    (i) The Office of the Comptroller of the Currency, in the case of a 
national banking association or District bank;
    (ii) The appropriate supervisory authority for the State in which 
the bank is chartered, in the case of a State bank;
    (iii) The Director of the Office of Thrift Supervision, in the case 
of a savings association.
    (e) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution. A U.S. branch or agency of a foreign banking organization 
shall be subject to paragraph (c)(3)(ii) of this section only to the 
extent it is insured by the Federal Deposit Insurance Corporation in 
accordance with section 6 of the International Banking Act of 1978 (12 
U.S.C. 3104).

[Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001; 71 FR 9901, Feb. 28, 2006; 78 FR 62291, Oct. 11, 2013; 80 FR 
20157, Apr. 15, 2015]



Sec. 225.15  Procedures for other bank acquisition proposals.

    (a) Filing application. Except as provided in Sec. 225.14, an 
application for the Board's prior approval under this subpart shall be 
governed by the provisions of this section and shall be filed with the 
appropriate Reserve Bank on the designated form.
    (b) Notice to primary banking supervisor. Upon receipt of an 
application under this subpart, the Reserve Bank shall promptly furnish 
notice and a copy of the application to the primary banking supervisor 
of each bank to be acquired. The primary supervisor shall have 30 
calendar days from the date of the letter giving notice in which to 
submit its views and recommendations to the Board.
    (c) Accepting application for processing. Within 7 calendar days 
after the Reserve Bank receives an application under this section, the 
Reserve Bank shall accept it for processing as of the date the 
application was filed or return the application if it is substantially 
incomplete. Upon accepting an application, the Reserve Bank shall 
immediately send copies to the Board. The Reserve Bank or the Board may 
request additional information necessary to complete the record of an 
application at any time after accepting the application for processing.
    (d) Action on applications--(1) Action under delegated authority. 
The Reserve Bank shall approve an application under this section within 
30 calendar days after the acceptance date for the application, unless 
the Reserve Bank, upon notice to the applicant, refers the application 
to the Board for decision because action under delegated authority is 
not appropriate.
    (2) Board action. The Board shall act on an application under this 
subpart that is referred to it for decision within 60 calendar days 
after the acceptance date for the application, unless the Board notifies 
the applicant that the 60-day period is being extended for a specified 
period and states the reasons for the extension. In no event may the 
extension exceed the 91-day period provided in Sec. 225.16(f). The 
Board may, at any time, request additional information that it believes 
is necessary for its decision.



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

    (a) In general. The provisions of this section apply to all notices 
and applications filed under Sec. 225.14 and Sec. 225.15.
    (b) Public notice--(1) Newspaper publication--(i) Location of 
publication. In the case of each notice or application submitted under 
Sec. 225.14 or Sec. 225.15, the applicant shall publish a notice in a 
newspaper of general circulation, in the form and at the locations 
specified in Sec. 262.3 of the Rules of Procedure (12 CFR 262.3);
    (ii) Contents of notice. A newspaper notice under this paragraph 
shall provide an opportunity for interested persons to comment on the 
proposal for a period of at least 30 calendar days;
    (iii) Timing of publication. Each newspaper notice published in 
connection with a proposal under this paragraph

[[Page 173]]

shall be published no more than 15 calendar days before and no later 
than 7 calendar days following the date that a notice or application is 
filed with the appropriate Reserve Bank.
    (2) Federal Register notice--(i) Publication by Board. Upon receipt 
of a notice or application under Sec. 225.14 or Sec. 225.15, the Board 
shall promptly publish notice of the proposal in the Federal Register 
and shall provide an opportunity for interested persons to comment on 
the proposal for a period of no more than 30 days;
    (ii) Request for advance publication. A bank holding company may 
request that, during the 15-day period prior to filing a notice or 
application under Sec. 225.14 or Sec. 225.15, the Board publish notice 
of a proposal in the Federal Register. A request for advance Federal 
Register publication shall be made in writing to the appropriate Reserve 
Bank and shall contain the identifying information prescribed by the 
Board for Federal Register publication;
    (3) Waiver or shortening of notice. The Board may waive or shorten 
the required notice periods under this section if the Board determines 
that an emergency exists requiring expeditious action on the proposal, 
or if the Board finds that immediate action is necessary to prevent the 
probable failure of an insured depository institution.
    (c) Public comment--(1) Timely comments. Interested persons may 
submit information and comments regarding a proposal filed under this 
subpart. A comment shall be considered timely for purposes of this 
subpart if the comment, together with all supplemental information, is 
submitted in writing in accordance with the Board's Rules of Procedure 
and received by the Board or the appropriate Reserve Bank prior to the 
expiration of the latest public comment period provided in paragraph (b) 
of this section.
    (2) Extension of comment period--(i) In general. The Board may, in 
its discretion, extend the public comment period regarding any proposal 
submitted under this subpart.
    (ii) Requests in connection with obtaining application or notice. In 
the event that an interested person has requested a copy of a notice or 
application submitted under this subpart, the Board may, in its 
discretion and based on the facts and circumstances, grant such person 
an extension of the comment period for up to 15 calendar days.
    (iii) Joint requests by interested person and acquiring company. The 
Board will grant a joint request by an interested person and the 
acquiring bank holding company for an extension of the comment period 
for a reasonable period for a purpose related to the statutory factors 
the Board must consider under this subpart.
    (3) Substantive comment. A comment will be considered substantive 
for purposes of this subpart unless it involves individual complaints, 
or raises frivolous, previously-considered or wholly unsubstantiated 
claims or irrelevant issues.
    (d) Notice to Attorney General. The Board or Reserve Bank shall 
immediately notify the United States Attorney General of approval of any 
notice or application under Sec. 225.14 or Sec. 225.15.
    (e) Hearings. As provided in section 3(b) of the BHC Act, the Board 
shall order a hearing on any application or notice under Sec. 225.15 if 
the Board receives from the primary supervisor of the bank to be 
acquired, within the 30-day period specified in Sec. 225.15(b), a 
written recommendation of disapproval of an application. The Board may 
order a formal or informal hearing or other proceeding on the 
application or notice, as provided in Sec. 262.3(i)(2) of the Board's 
Rules of Procedure. Any request for a hearing (other than from the 
primary supervisor) shall comply with Sec. 262.3(e) of the Rules of 
Procedure (12 CFR 262.3(e)).
    (f) Approval through failure to act--(1) Ninety-one day rule. An 
application or notice under Sec. 225.14 or Sec. 225.15 shall be deemed 
approved if the Board fails to act on the application or notice within 
91 calendar days after the date of submission to the Board of the 
complete record on the application. For this purpose, the Board acts 
when it issues an order stating that the Board has approved or denied 
the application or notice, reflecting the votes of the members of the 
Board, and indicating that a statement of the reasons for the decision 
will follow promptly.
    (2) Complete record. For the purpose of computing the commencement 
of the

[[Page 174]]

91-day period, the record is complete on the latest of:
    (i) The date of receipt by the Board of an application or notice 
that has been accepted by the Reserve Bank;
    (ii) The last day provided in any notice for receipt of comments and 
hearing requests on the application or notice;
    (iii) The date of receipt by the Board of the last relevant material 
regarding the application or notice that is needed for the Board's 
decision, if the material is received from a source outside of the 
Federal Reserve System; or
    (iv) The date of completion of any hearing or other proceeding.
    (g) Exceptions to notice and hearing requirements--(1) Probable bank 
failure. If the Board finds it must act immediately on an application or 
notice in order to prevent the probable failure of a bank or bank 
holding company, the Board may modify or dispense with the notice and 
hearing requirements of this section.
    (2) Emergency. If the Board finds that, although immediate action on 
an application or notice is not necessary, an emergency exists requiring 
expeditious action, the Board shall provide the primary supervisor 10 
days to submit its recommendation. The Board may act on such an 
application or notice without a hearing and may modify or dispense with 
the other notice and hearing requirements of this section.
    (h) Waiting period. A transaction approved under Sec. 225.14 or 
Sec. 225.15 shall not be consummated until 30 days after the date of 
approval of the application, except that a transaction may be 
consummated:
    (1) Immediately upon approval, if the Board has determined under 
paragraph (g) of this section that the application or notice involves a 
probable bank failure;
    (2) On or after the 5th calendar day following the date of approval, 
if the Board has determined under paragraph (g) of this section that an 
emergency exists requiring expeditious action; or
    (3) On or after the 15th calendar day following the date of 
approval, if the Board has not received any adverse comments from the 
United States Attorney General relating to the competitive factors and 
the Attorney General has consented to the shorter waiting period.



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

    (a) Transactions that qualify under this section. An acquisition by 
a company of control of a bank may be consummated 30 days after 
providing notice to the appropriate Reserve Bank in accordance with 
paragraph (b) of this section, provided that all of the following 
conditions are met:
    (1) The shareholder or shareholders who control at least 67 percent 
of the shares of the bank will control, immediately after the 
reorganization, at least 67 percent of the shares of the holding company 
in substantially the same proportion, except for changes in 
shareholders' interests resulting from the exercise of dissenting 
shareholders' rights under state or federal law; \4\
---------------------------------------------------------------------------

    \4\ A shareholder of a bank in reorganization will be considered to 
have the same proportional interest in the holding company if the 
shareholder interest increases, on a pro rata basis, as a result of 
either the redemption of shares from dissenting shareholders by the bank 
or bank holding company, or the acquisition of shares of dissenting 
shareholders by the remaining shareholders.
---------------------------------------------------------------------------

    (2) No shareholder, or group of shareholders acting in concert, 
will, following the reorganization, own or control 10 percent or more of 
any class of voting shares of the bank holding company, unless that 
shareholder or group of shareholders was authorized, after review under 
the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the 
appropriate federal banking agency for the bank, to own or control 10 
percent or more of any class of voting shares of the bank; \5\
---------------------------------------------------------------------------

    \5\ This procedure is not available in cases in which the exercise 
of dissenting shareholders' rights would cause a company that is not a 
bank holding company (other than the company in formation) to be 
required to register as a bank holding company. This procedure also is 
not available for the formation of a bank holding company organized in 
mutual form.
---------------------------------------------------------------------------

    (3) The bank is adequately capitalized (as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o));
    (4) The bank received at least a composite ``satisfactory'' rating 
at its most

[[Page 175]]

recent examination, in the event that the bank was examined;
    (5) At the time of the reorganization, neither the bank nor any of 
its officers, directors, or principal shareholders is involved in any 
unresolved supervisory or enforcement matters with any appropriate 
federal banking agency;
    (6) The company demonstrates that any debt that it incurs at the 
time of the reorganization, and the proposed means of retiring this 
debt, will not place undue burden on the holding company or its 
subsidiary on a pro forma basis; \6\
---------------------------------------------------------------------------

    \6\ For a banking organization with consolidated assets, on a pro 
forma basis, of less than $1 billion (other than a banking organization 
that will control a de novo bank), this requirement is satisfied if the 
proposal complies with the Board's Small Bank Holding Company Policy 
Statement (appendix C of this part).
---------------------------------------------------------------------------

    (7) The holding company will not, as a result of the reorganization, 
acquire control of any additional bank or engage in any activities other 
than those of managing and controlling banks; and
    (8) During this period, neither the appropriate Reserve Bank nor the 
Board objected to the proposal or required the filing of an application 
under Sec. 225.15 of this subpart.
    (b) Contents of notice. A notice filed under this paragraph shall 
include:
    (1) Certification by the notificant's board of directors that the 
requirements of 12 U.S.C. 1842(a)(C) and this section are met by the 
proposal;
    (2) A list identifying all principal shareholders of the bank prior 
to the reorganization and of the holding company following the 
reorganization, and specifying the percentage of shares held by each 
principal shareholder in the bank and proposed to be held in the new 
holding company;
    (3) A description of the resulting management of the proposed bank 
holding company and its subsidiary bank, including:
    (i) Biographical information regarding any senior officers and 
directors of the resulting bank holding company who were not senior 
officers or directors of the bank prior to the reorganization; and
    (ii) A detailed history of the involvement of any officer, director, 
or principal shareholder of the resulting bank holding company in any 
administrative or criminal proceeding; and
    (4) Pro forma financial statements for the holding company, and a 
description of the amount, source, and terms of debt, if any, that the 
bank holding company proposes to incur, and information regarding the 
sources and timing for debt service and retirement.
    (c) Acknowledgment of notice. Within 7 calendar days following 
receipt of a notice under this section, the Reserve Bank shall provide 
the notificant with a written acknowledgment of receipt of the notice. 
This written acknowledgment shall indicate that the transaction 
described in the notice may be consummated on the 30th calendar day 
after the date of receipt of the notice if the Reserve Bank or the Board 
has not objected to the proposal during that time.
    (d) Application required upon objection. The Reserve Bank or the 
Board may object to a proposal during the notice period by providing the 
bank holding company with a written explanation of the reasons for the 
objection. In such case, the bank holding company may file an 
application for prior approval of the proposal pursuant to Sec. 225.15 
of this subpart.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 
2006; 78 FR 62291, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015]



    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 
                                Companies

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



Sec. 225.21  Prohibited nonbanking activities and acquisitions; 
exempt bank holding companies.

    (a) Prohibited nonbanking activities and acquisitions. Except as 
provided in Sec. 225.22 of this subpart, a bank holding company or a 
subsidiary may not engage in, or acquire or control, directly or 
indirectly, voting securities or assets of a company engaged in, any 
activity other than:

[[Page 176]]

    (1) Banking or managing or controlling banks and other subsidiaries 
authorized under the BHC Act; and
    (2) An activity that the Board determines to be so closely related 
to banking, or managing or controlling banks as to be a proper incident 
thereto, including any incidental activities that are necessary to carry 
on such an activity, if the bank holding company has obtained the prior 
approval of the Board for that activity in accordance with the 
requirements of this regulation.
    (b) Exempt bank holding companies. The following bank holding 
companies are exempt from the provisions of this subpart:
    (1) Family-owned companies. Any company that is a ``company covered 
in 1970'' (as defined in section 2(b) of the BHC Act), more than 85 
percent of the voting securities of which was collectively owned on June 
30, 1968, and continuously thereafter, by members of the same family (or 
their spouses) who are lineal descendants of common ancestors.
    (2) Labor, agricultural, and horticultural organizations. Any 
company that was on January 4, 1977, both a bank holding company and a 
labor, agricultural, or horticultural organization exempt from taxation 
under section 501 of the Internal Revenue Code (26 U.S.C. 501(c)).
    (3) Companies granted hardship exemption. Any bank holding company 
that has controlled only one bank since before July 1, 1968, and that 
has been granted an exemption by the Board under section 4(d) of the BHC 
Act, subject to any conditions imposed by the Board.
    (4) Companies granted exemption on other grounds. Any company that 
acquired control of a bank before December 10, 1982, without the Board's 
prior approval under section 3 of the BHC Act, on the basis of a narrow 
interpretation of the term demand deposit or commercial loan, if the 
Board has determined that:
    (i) Coverage of the company as a bank holding company under this 
subpart would be unfair or represent an unreasonable hardship; and
    (ii) Exclusion of the company from coverage under this part is 
consistent with the purposes of the BHC Act and section 106 of the Bank 
Holding Company Act Amendments of 1970 (12 U.S.C. 1971, 1972(1)). The 
provisions of Sec. 225.4 of subpart A of this part do not apply to a 
company exempt under this paragraph.



Sec. 225.22  Exempt nonbanking activities and acquisitions.

    (a) Certain de novo activities. A bank holding company may, either 
directly or indirectly, engage de novo in any nonbanking activity listed 
in Sec. 225.28(b) (other than operation of an insured depository 
institution) without obtaining the Board's prior approval if the bank 
holding company:
    (1) Meets the requirements of paragraphs (c) (1), (2), and (6) of 
Sec. 225.23;
    (2) Conducts the activity in compliance with all Board orders and 
regulations governing the activity; and
    (3) Within 10 business days after commencing the activity, provides 
written notice to the appropriate Reserve Bank describing the activity, 
identifying the company or companies engaged in the activity, and 
certifying that the activity will be conducted in accordance with the 
Board's orders and regulations and that the bank holding company meets 
the requirements of paragraphs (c) (1), (2), and (6) of Sec. 225.23.
    (b) Servicing activities. A bank holding company may, without the 
Board's prior approval under this subpart, furnish services to or 
perform services for, or establish or acquire a company that engages 
solely in servicing activities for:
    (1) The bank holding company or its subsidiaries in connection with 
their activities as authorized by law, including services that are 
necessary to fulfill commitments entered into by the subsidiaries with 
third parties, if the bank holding company or servicing company complies 
with the Board's published interpretations and does not act as principal 
in dealing with third parties; and
    (2) The internal operations of the bank holding company or its 
subsidiaries. Services for the internal operations of the bank holding 
company or its subsidiaries include, but are not limited to:

[[Page 177]]

    (i) Accounting, auditing, and appraising;
    (ii) Advertising and public relations;
    (iii) Data processing and data transmission services, data bases, or 
facilities;
    (iv) Personnel services;
    (v) Courier services;
    (vi) Holding or operating property used wholly or substantially by a 
subsidiary in its operations or for its future use;
    (vii) Liquidating property acquired from a subsidiary;
    (viii) Liquidating property acquired from any sources either prior 
to May 9, 1956, or the date on which the company became a bank holding 
company, whichever is later; and
    (ix) Selling, purchasing, or underwriting insurance, such as blanket 
bond insurance, group insurance for employees, and property and casualty 
insurance.
    (c) Safe deposit business. A bank holding company or nonbank 
subsidiary may, without the Board's prior approval, conduct a safe 
deposit business, or acquire voting securities of a company that 
conducts such a business.
    (d) Nonbanking acquisitions not requiring prior Board approval. The 
Board's prior approval is not required under this subpart for the 
following acquisitions:
    (1) DPC acquisitions. (i) Voting securities or assets, acquired by 
foreclosure or otherwise, in the ordinary course of collecting a debt 
previously contracted (DPC property) in good faith, if the DPC property 
is divested within two years of acquisition.
    (ii) The Board may, upon request, extend this two-year period for up 
to three additional years. The Board may permit additional extensions 
for up to 5 years (for a total of 10 years), for shares, real estate or 
other assets where the holding company demonstrates that each extension 
would not be detrimental to the public interest and either the bank 
holding company has made good faith attempts to dispose of such shares, 
real estate or other assets or disposal of the shares, real estate or 
other assets during the initial period would have been detrimental to 
the company.
    (iii) Transfers of DPC property within the bank holding company 
system do not extend any period for divestiture of the property.
    (2) Securities or assets required to be divested by subsidiary. 
Voting securities or assets required to be divested by a subsidiary at 
the request of an examining federal or state authority (except by the 
Board under the BHC Act or this regulation), if the bank holding company 
divests the securities or assets within two years from the date acquired 
from the subsidiary.
    (3) Fiduciary investments. Voting securities or assets acquired by a 
bank or other company (other than a trust that is a company) in good 
faith in a fiduciary capacity, if the voting securities or assets are:
    (i) Held in the ordinary course of business; and
    (ii) Not acquired for the benefit of the company or its 
shareholders, employees, or subsidiaries.
    (4) Securities eligible for investment by national bank. Voting 
securities of the kinds and amounts explicitly eligible by federal 
statute (other than section 4 of the Bank Service Corporation Act, 12 
U.S.C. 1864) for investment by a national bank, and voting securities 
acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the 
BHC Act and interpretations of the Comptroller of the Currency under 
section 5136 of the Revised Statutes (12 U.S.C. 24(7)).
    (5) Securities or property representing 5 percent or less of a 
company. Voting securities of a company or property that, in the 
aggregate, represent 5 percent or less of the outstanding shares of any 
class of voting securities of a company, or that represent a 5 percent 
interest or less in the property, subject to the provisions of 12 CFR 
225.137.
    (6) Securities of investment company. Voting securities of an 
investment company that is solely engaged in investing in securities and 
that does not own or control more than 5 percent of the outstanding 
shares of any class of voting securities of any company.
    (7) Assets acquired in ordinary course of business. Assets of a 
company acquired in the ordinary course of business, subject to the 
provisions of 12 CFR 225.132, if the assets relate to activities in

[[Page 178]]

which the acquiring company has previously received Board approval under 
this regulation to engage.
    (8) Asset acquisitions by lending company or industrial bank. Assets 
of an office(s) of a company, all or substantially all of which relate 
to making, acquiring, or servicing loans if:
    (i) The acquiring company has previously received Board approval 
under this regulation or is not required to obtain prior Board approval 
under this regulation to engage in lending activities or industrial 
banking activities;
    (ii) The assets acquired during any 12-month period do not represent 
more than 50 percent of the risk-weighted assets (on a consolidated 
basis) of the acquiring lending company or industrial bank, or more than 
$100 million, whichever amount is less;
    (iii) The assets acquired do not represent more than 50 percent of 
the selling company's consolidated assets that are devoted to lending 
activities or industrial banking business;
    (iv) The acquiring company notifies the Reserve Bank of the 
acquisition within 30 days after the acquisition; and
    (v) The acquiring company, after giving effect to the transaction, 
meets the requirements of 12 CFR part 217, and the Board has not 
previously notified the acquiring company that it may not acquire assets 
under the exemption in this paragraph (d).
    (e) Acquisition of securities by subsidiary banks--(1) National 
bank. A national bank or its subsidiary may, without the Board's 
approval under this subpart, acquire or retain securities on the basis 
of section 4(c)(5) of the BHC Act in accordance with the regulations of 
the Comptroller of the Currency.
    (2) State bank. A state-chartered bank or its subsidiary may, 
insofar as federal law is concerned, and without the Board's prior 
approval under this subpart:
    (i) Acquire or retain securities, on the basis of section 4(c)(5) of 
the BHC Act, of the kinds and amounts explicitly eligible by federal 
statute for investment by a national bank; or
    (ii) Acquire or retain all (but, except for directors' qualifying 
shares, not less than all) of the securities of a company that engages 
solely in activities in which the parent bank may engage, at locations 
at which the bank may engage in the activity, and subject to the same 
limitations as if the bank were engaging in the activity directly.
    (f) Activities and securities of new bank holding companies. A 
company that becomes a bank holding company may, for a period of two 
years, engage in nonbanking activities and control voting securities or 
assets of a nonbank subsidiary, if the bank holding company engaged in 
such activities or controlled such voting securities or assets on the 
date it became a bank holding company. The Board may grant requests for 
up to three one-year extensions of the two-year period.
    (g) Grandfathered activities and securities. Unless the Board orders 
divestiture or termination under section 4(a)(2) of the BHC Act, a 
``company covered in 1970,'' as defined in section 2(b) of the BHC Act, 
may:
    (1) Retain voting securities or assets and engage in activities that 
it has lawfully held or engaged in continuously since June 30, 1968; and
    (2) Acquire voting securities of any newly formed company to engage 
in such activities.
    (h) Securities or activities exempt under Regulation K. A bank 
holding company may acquire voting securities or assets and engage in 
activities as authorized in Regulation K (12 CFR part 211).

[ Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 78 FR 62291, Oct. 11, 
2013; 80 FR 70673, Nov. 16, 2015]



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

    (a) Filing of notice--(1) Information required. A bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the notice requirement of this subpart in connection with the 
acquisition of voting securities or assets of a company engaged in 
nonbanking activities that the Board has permitted by order or

[[Page 179]]

regulation (other than an insured depository institution), \2\ or a 
proposal to engage de novo, either directly or indirectly, in a 
nonbanking activity that the Board has permitted by order or by 
regulation, by providing the appropriate Reserve Bank with a written 
notice containing the following:
---------------------------------------------------------------------------

    \2\ A bank holding company may acquire voting securities or assets 
of a savings association or other insured depository institution that is 
not a bank by using the procedures in Sec. 225.14 of subpart B if the 
bank holding company and the proposal qualify under that section as if 
the savings association or other institution were a bank for purposes of 
that section.
---------------------------------------------------------------------------

    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies involved in the transaction, the activities to be 
conducted, and a commitment to conduct the proposed activities in 
conformity with the Board's regulations and orders governing the conduct 
of the proposed activity;
    (iii) If the proposal involves an acquisition of a going concern:
    (A) If the bank holding company has consolidated assets of $1 
billion or more, an abbreviated consolidated pro forma balance sheet for 
the acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction, 
consolidated pro forma risk-based capital ratios for the acquiring bank 
holding company as of the most recent quarter, a description of the 
purchase price and the terms and sources of funding for the transaction, 
and the total revenue and net income of the company to be acquired;
    (B) If the bank holding company has consolidated assets of less than 
$1 billion, a pro forma parent-only balance sheet as of the most recent 
quarter showing credit and debit adjustments that reflect the proposed 
transaction, a description of the purchase price and the terms and 
sources of funding for the transaction and the sources and schedule for 
retiring any debt incurred in the transaction, and the total assets, 
off-balance sheet items, revenue and net income of the company to be 
acquired;
    (C) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis;
    (iv) Identification of the geographic markets in which competition 
would be affected by the proposal, a description of the effect of the 
proposal on competition in the relevant markets, a list of the major 
competitors in that market in the proposed activity if the affected 
market is local in nature, and, if requested, the market indexes for the 
relevant market; and
    (v) A description of the public benefits that can reasonably be 
expected to result from the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraphs (a)(1) (iii) and (iv) of this 
section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section, or notify the bank holding company that the transaction is 
subject to the procedure in Sec. 225.24, within 12 business days 
following the filing of all of the information required in paragraph (a) 
of this section.
    (2) Acceptance of notice if expedited procedure not available. If 
the Board or the Reserve Bank determines, after the filing of a notice 
under this section, that a bank holding company may not use the 
procedure in this section and must file a notice under Sec. 225.24, the 
notice shall be deemed accepted for purposes of Sec. 225.24 as of the 
date that the notice was filed under this section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the transaction:

[[Page 180]]

    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (2) Well managed organization--(i) Satisfactory examination ratings. 
At the time of the transaction, the acquiring bank holding company, its 
lead insured depository institution, and insured depository institutions 
that control at least 80 percent of the total risk-weighted assets of 
insured depository institutions controlled by the holding company are 
well managed and have received at least a satisfactory rating for 
compliance at their most recent examination if such rating was given;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution.
    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if:
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Permissible activity. (i) The Board has determined by regulation 
or order that each activity proposed to be conducted is so closely 
related to banking, or managing or controlling banks, as to be a proper 
incident thereto; and
    (ii) The Board has not indicated that proposals to engage in the 
activity are subject to the notice procedure provided in Sec. 225.24;
    (4) Competitive criteria--(i) Competitive screen. In the case of the 
acquisition of a going concern, the acquisition, without regard to any 
divestitures proposed by the acquiring bank holding company, does not 
cause:
    (A) The acquiring bank holding company to control in excess of 35 
percent of the market share in any relevant market; or
    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant market with a post-acquisition index of at least 
1800; and
    (ii) Other competitive factors. The Board has not indicated that the 
transaction is subject to close scrutiny on competitive grounds;
    (5) Size of acquisition--(i) In general--(A) Limited growth. Except 
as provided in paragraph (c)(5)(ii) of this section, the sum of 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk-weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph, ``other qualifying 
transactions'' means any transaction approved under this section or 
Sec. 225.14 during the 12 months prior to filing the notice under this 
section;
    (B) Consideration paid. The gross consideration to be paid by the 
acquiring bank holding company in the proposal does not exceed 15 
percent of the consolidated Tier 1 capital of the acquiring bank holding 
company; and
    (C) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(5)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;

[[Page 181]]

    (6) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement order is or was outstanding against the bank holding 
company or any insured depository institution subsidiary of the holding 
company, and no formal administrative enforcement proceeding involving 
any such enforcement action, order, or directive is or was pending; and
    (7) Notification. The bank holding company has not been notified by 
the Board, in its discretion, prior to the expiration of the period in 
paragraph (b) of this section that a notice under Sec. 225.24 is 
required in order to permit closer review of any potential adverse 
effect or other matter related to the factors that must be considered 
under this part.
    (d) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution.

[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001; 71 FR 9902, Feb. 28, 2006; 78 FR 62291, Oct. 11, 2013; 80 FR 
20157, Apr. 15, 2015]



Sec. 225.24  Procedures for other nonbanking proposals.

    (a) Notice required for nonbanking activities. Except as provided in 
Sec. Sec. 225.22 and 225.23, a notice for the Board's prior approval 
under Sec. 225.21(a) to engage in or acquire a company engaged in a 
nonbanking activity shall be filed by a bank holding company (including 
a company seeking to become a bank holding company) with the appropriate 
Reserve Bank in accordance with this section and the Board's Rules of 
Procedure (12 CFR 262.3).
    (1) Engaging de novo in listed activities. A bank holding company 
seeking to commence or to engage de novo, either directly or through a 
subsidiary, in a nonbanking activity listed in Sec. 225.28 shall file a 
notice containing a description of the activities to be conducted and 
the identity of the company that will conduct the activity.
    (2) Acquiring company engaged in listed activities. A bank holding 
company seeking to acquire or control voting securities or assets of a 
company engaged in a nonbanking activity listed in Sec. 225.28 shall 
file a notice containing the following:
    (i) A description of the proposal, including a description of each 
proposed activity, and the effect of the proposal on competition among 
entities engaging in each proposed activity in each relevant market with 
relevant market indexes;
    (ii) The identity of any entity involved in the proposal, and, if 
the notificant proposes to conduct the activity through an existing 
subsidiary, a description of the existing activities of the subsidiary;
    (iii) A statement of the public benefits that can reasonably be 
expected to result from the proposal;
    (iv) If the bank holding company has consolidated assets of $150 
million or more:
    (A) Parent company and consolidated pro forma balance sheets for the 
acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction;
    (B) Consolidated pro forma risk-based capital and leverage ratio 
calculations for the acquiring bank holding company as of the most 
recent quarter; and
    (C) A description of the purchase price and the terms and sources of 
funding for the transaction;
    (v) If the bank holding company has consolidated assets of less than 
$150 million:
    (A) A pro forma parent-only balance sheet as of the most recent 
quarter showing credit and debit adjustments that reflect the proposed 
transaction; and
    (B) A description of the purchase price and the terms and sources of 
funding for the transaction and, if the transaction is debt funded, one-
year income statement and cash flow projections for the parent company, 
and the sources and schedule for retiring any debt incurred in the 
transaction;
    (vi) For each insured depository institution whose Tier 1 capital, 
total

[[Page 182]]

capital, total assets or risk-weighted assets change as a result of the 
transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (vii) A description of the management expertise, internal controls 
and risk management systems that will be utilized in the conduct of the 
proposed activities; and
    (viii) A copy of the purchase agreements, and balance sheet and 
income statements for the most recent quarter and year-end for any 
company to be acquired.
    (b) Notice provided to Board. The Reserve Bank shall immediately 
send to the Board a copy of any notice received under paragraphs (a)(2) 
or (a)(3) of this section.
    (c) Notice to public--(1) Listed activities and activities approved 
by order--(i) In a case involving an activity listed in Sec. 225.28 or 
previously approved by the Board by order, the Reserve Bank shall notify 
the Board for publication in the Federal Register immediately upon 
receipt by the Reserve Bank of:
    (A) A notice under this section; or
    (B) A written request that notice of a proposal under this section 
or Sec. 225.23 be published in the Federal Register. Such a request may 
request that Federal Register publication occur up to 15 calendar days 
prior to submission of a notice under this subpart.
    (ii) The Federal Register notice published under this paragraph 
shall invite public comment on the proposal, generally for a period of 
15 days.
    (2) New activities--(i) In general. In the case of a notice under 
this subpart involving an activity that is not listed in Sec. 225.28 
and that has not been previously approved by the Board by order, the 
Board shall send notice of the proposal to the Federal Register for 
publication, unless the Board determines that the notificant has not 
demonstrated that the activity is so closely related to banking or to 
managing or controlling banks as to be a proper incident thereto. The 
Federal Register notice shall invite public comment on the proposal for 
a reasonable period of time, generally for 30 days.
    (ii) Time for publication. The Board shall send the notice required 
under this paragraph to the Federal Register within 10 business days of 
acceptance by the Reserve Bank. The Board may extend the 10-day period 
for an additional 30 calendar days upon notice to the notificant. In the 
event notice of a proposal is not published for comment, the Board shall 
inform the notificant of the reasons for the decision.
    (d) Action on notices--(1) Reserve Bank action--(i) In general. 
Within 30 calendar days after receipt by the Reserve Bank of a notice 
filed pursuant to paragraphs (a)(1) or (a)(2) of this section, the 
Reserve Banks shall:
    (A) Approve the notice; or
    (B) Refer the notice to the Board for decision because action under 
delegated authority is not appropriate.
    (ii) Return of incomplete notice. Within 7 calendar days of receipt, 
the Reserve Bank may return any notice as informationally incomplete 
that does not contain all of the information required by this subpart. 
The return of such a notice shall be deemed action on the notice.
    (iii) Notice of action. The Reserve Bank shall promptly notify the 
bank holding company of any action or referral under this paragraph.
    (iv) Close of public comment period. The Reserve Bank shall not 
approve any notice under this paragraph (d)(1) of this section prior to 
the third business day after the close of the public comment period, 
unless an emergency exists that requires expedited or immediate action.
    (2) Board action; internal schedule. The Board seeks to act on every 
notice referred to it for decision within 60 days of the date that the 
notice is filed with the Reserve Bank. If the Board is unable to act 
within this period, the Board shall notify the notificant and explain 
the reasons and the date by which the Board expects to act.
    (3)(i) Required time limit for System action. The Board or the 
Reserve Bank shall act on any notice under this section within 60 days 
after the submission of a complete notice.
    (ii) Extension of required period for action--(A) In general. The 
Board may extend the 60-day period required for Board action under 
paragraph (d)(3)(i)

[[Page 183]]

of this section for an additional 30 days upon notice to the notificant.
    (B) Unlisted activities. If a notice involves a proposal to engage 
in an activity that is not listed in Sec. 225.28, the Board may extend 
the period required for Board action under paragraph (d)(3)(i) of this 
section for an additional 90 days. This 90-day extension is in addition 
to the 30-day extension period provided in paragraph (d)(3)(ii)(A) of 
this section. The Board shall notify the notificant that the notice 
period has been extended and explain the reasons for the extension.
    (4) Requests for additional information. The Board or the Reserve 
Bank may modify the information requirements under this section or at 
any time request any additional information that either believes is 
needed for a decision on any notice under this section.
    (5) Tolling of period. The Board or the Reserve Bank may at any time 
extend or toll the time period for action on a notice for any period 
with the consent of the notificant.

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



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

    (a) Hearings--(1) Procedure to request hearing. Any request for a 
hearing on a notice under this subpart shall comply with the provisions 
of 12 CFR 262.3(e).
    (2) Determination to hold hearing. The Board may order a formal or 
informal hearing or other proceeding on a notice as provided in 12 CFR 
262.3(i)(2). The Board shall order a hearing only if there are disputed 
issues of material fact that cannot be resolved in some other manner.
    (3) Extension of period for hearing. The Board may extend the time 
for action on any notice for such time as is reasonably necessary to 
conduct a hearing and evaluate the hearing record. Such extension shall 
not exceed 91 calendar days after the date of submission to the Board of 
the complete record on the notice. The procedures for computation of the 
91-day rule as set forth in Sec. 225.16(f) apply to notices under this 
subpart that involve hearings.
    (b) Approval through failure to act. (1) Except as provided in 
paragraph (a) of this section or Sec. 225.24(d)(5), a notice under this 
subpart shall be deemed to be approved at the conclusion of the period 
that begins on the date the complete notice is received by the Reserve 
Bank or the Board and that ends 60 calendar days plus any applicable 
extension and tolling period thereafter.
    (2) Complete notice. For purposes of paragraph (b)(1) of this 
section, a notice shall be deemed complete at such time as it contains 
all information required by this subpart and all other information 
requested by the Board or the Reserve Bank.
    (c) Notice to expand or alter nonbanking activities--(1) De novo 
expansion. A notice under this subpart is required to open a new office 
or to form a subsidiary to engage in, or to relocate an existing office 
engaged in, a nonbanking activity that the Board has previously approved 
for the bank holding company under this regulation, only if:
    (i) The Board's prior approval was limited geographically;
    (ii) The activity is to be conducted in a country outside of the 
United States and the bank holding company has not previously received 
prior Board approval under this regulation to engage in the activity in 
that country; or
    (iii) The Board or appropriate Reserve Bank has notified the company 
that a notice under this subpart is required.
    (2) Activities outside United States. With respect to activities to 
be engaged in outside the United States that require approval under this 
subpart, the procedures of this section apply only to activities to be 
engaged in directly by a bank holding company that is not a qualifying 
foreign banking organization, or by a nonbank subsidiary of a bank 
holding company approved under this subpart. Regulation K (12 CFR part 
211) governs other international operations of bank holding companies.
    (3) Alteration of nonbanking activity. Unless otherwise permitted by 
the Board, a notice under this subpart is required to alter a nonbanking 
activity in any material respect from that considered by the Board in 
acting on the application or notice to engage in the activity.

[[Page 184]]

    (d) Emergency savings association acquisitions. In the case of a 
notice to acquire a savings association, the Board may modify or 
dispense with the public notice and hearing requirements of this subpart 
if the Board finds that an emergency exists that requires the Board to 
act immediately and the primary federal regulator of the institution 
concurs.

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



Sec. 225.26  Factors considered in acting on nonbanking proposals.

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



Sec. 225.27  Procedures for determining scope of nonbanking 
activities.

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

[[Page 185]]

proper incident thereto, and notifies the requester of the 
determination.
    (4) Comments and hearing requests. Any comment and any request for a 
hearing regarding a proposal under this section shall comply with the 
provisions of Sec. 262.3(e) of the Board's Rules of Procedure (12 CFR 
262.3(e)).



Sec. 225.28  List of permissible nonbanking activities.

    (a) Closely related nonbanking activities. The activities listed in 
paragraph (b) of this section are so closely related to banking or 
managing or controlling banks as to be a proper incident thereto, and 
may be engaged in by a bank holding company or its subsidiary in 
accordance with the requirements of this regulation.
    (b) Activities determined by regulation to be permissible--(1) 
Extending credit and servicing loans. Making, acquiring, brokering, or 
servicing loans or other extensions of credit (including factoring, 
issuing letters of credit and accepting drafts) for the company's 
account or for the account of others.
    (2) Activities related to extending credit. Any activity usual in 
connection with making, acquiring, brokering or servicing loans or other 
extensions of credit, as determined by the Board. The Board has 
determined that the following activities are usual in connection with 
making, acquiring, brokering or servicing loans or other extensions of 
credit:
    (i) Real estate and personal property appraising. Performing 
appraisals of real estate and tangible and intangible personal property, 
including securities.
    (ii) Arranging commercial real estate equity financing. Acting as 
intermediary for the financing of commercial or industrial income-
producing real estate by arranging for the transfer of the title, 
control, and risk of such a real estate project to one or more 
investors, if the bank holding company and its affiliates do not have an 
interest in, or participate in managing or developing, a real estate 
project for which it arranges equity financing, and do not promote or 
sponsor the development of the property.
    (iii) Check-guaranty services. Authorizing a subscribing merchant to 
accept personal checks tendered by the merchant's customers in payment 
for goods and services, and purchasing from the merchant validly 
authorized checks that are subsequently dishonored.
    (iv) Collection agency services. Collecting overdue accounts 
receivable, either retail or commercial.
    (v) Credit bureau services. Maintaining information related to the 
credit history of consumers and providing the information to a credit 
grantor who is considering a borrower's application for credit or who 
has extended credit to the borrower.
    (vi) Asset management, servicing, and collection activities. 
Engaging under contract with a third party in asset management, 
servicing, and collection \3\ of assets of a type that an insured 
depository institution may originate and own, if the company does not 
engage in real property management or real estate brokerage services as 
part of these services.
---------------------------------------------------------------------------

    \3\ Asset management services include acting as agent in the 
liquidation or sale of loans and collateral for loans, including real 
estate and other assets acquired through foreclosure or in satisfaction 
of debts previously contracted.
---------------------------------------------------------------------------

    (vii) Acquiring debt in default. Acquiring debt that is in default 
at the time of acquisition, if the company:
    (A) Divests shares or assets securing debt in default that are not 
permissible investments for bank holding companies, within the time 
period required for divestiture of property acquired in satisfaction of 
a debt previously contracted under Sec. 225.12(b); \4\
---------------------------------------------------------------------------

    \4\ For this purpose, the divestiture period for property begins on 
the date that the debt is acquired, regardless of when legal title to 
the property is acquired.
---------------------------------------------------------------------------

    (B) Stands only in the position of a creditor and does not purchase 
equity of obligors of debt in default (other than equity that may be 
collateral for such debt); and
    (C) Does not acquire debt in default secured by shares of a bank or 
bank holding company.
    (viii) Real estate settlement servicing. Providing real estate 
settlement services. \5\
---------------------------------------------------------------------------

    \5\ For purposes of this section, real estate settlement services do 
not include providing title insurance as principal, agent, or broker.

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

[[Page 186]]

    (3) Leasing personal or real property. Leasing personal or real 
property or acting as agent, broker, or adviser in leasing such property 
if:
    (i) The lease is on a nonoperating basis; \6\
---------------------------------------------------------------------------

    \6\ The requirement that the lease be on a nonoperating basis means 
that the bank holding company may not, directly or indirectly, engage in 
operating, servicing, maintaining, or repairing leased property during 
the lease term. For purposes of the leasing of automobiles, the 
requirement that the lease be on a nonoperating basis means that the 
bank holding company may not, directly or indirectly: (1) Provide 
servicing, repair, or maintenance of the leased vehicle during the lease 
term; (2) purchase parts and accessories in bulk or for an individual 
vehicle after the lessee has taken delivery of the vehicle; (3) provide 
the loan of an automobile during servicing of the leased vehicle; (4) 
purchase insurance for the lessee; or (5) provide for the renewal of the 
vehicle's license merely as a service to the lessee where the lessee 
could renew the license without authorization from the lessor. The bank 
holding company may arrange for a third party to provide these services 
or products.
---------------------------------------------------------------------------

    (ii) The initial term of the lease is at least 90 days;
    (iii) In the case of leases involving real property:
    (A) At the inception of the initial lease, the effect of the 
transaction will yield a return that will compensate the lessor for not 
less than the lessor's full investment in the property plus the 
estimated total cost of financing the property over the term of the 
lease from rental payments, estimated tax benefits, and the estimated 
residual value of the property at the expiration of the initial lease; 
and
    (B) The estimated residual value of property for purposes of 
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of 
the acquisition cost of the property to the lessor.
    (4) Operating nonbank depository institutions--(i) Industrial 
banking. Owning, controlling, or operating an industrial bank, Morris 
Plan bank, or industrial loan company, so long as the institution is not 
a bank.
    (ii) Operating savings association. Owning, controlling, or 
operating a savings association, if the savings association engages only 
in deposit-taking activities, lending, and other activities that are 
permissible for bank holding companies under this subpart C.
    (5) Trust company functions. Performing functions or activities that 
may be performed by a trust company (including activities of a 
fiduciary, agency, or custodial nature), in the manner authorized by 
federal or state law, so long as the company is not a bank for purposes 
of section 2(c) of the Bank Holding Company Act.
    (6) Financial and investment advisory activities. Acting as 
investment or financial advisor to any person, including (without, in 
any way, limiting the foregoing):
    (i) Serving as investment adviser (as defined in section 2(a)(20) of 
the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an 
investment company registered under that act, including sponsoring, 
organizing, and managing a closed-end investment company;
    (ii) Furnishing general economic information and advice, general 
economic statistical forecasting services, and industry studies;
    (iii) Providing advice in connection with mergers, acquisitions, 
divestitures, investments, joint ventures, leveraged buyouts, 
recapitalizations, capital structurings, financing transactions and 
similar transactions, and conducting financial feasibility studies;\7\
---------------------------------------------------------------------------

    \7\ Feasibility studies do not include assisting management with the 
planning or marketing for a given project or providing general 
operational or management advice.
---------------------------------------------------------------------------

    (iv) Providing information, statistical forecasting, and advice with 
respect to any transaction in foreign exchange, swaps, and similar 
transactions, commodities, and any forward contract, option, future, 
option on a future, and similar instruments;
    (v) Providing educational courses, and instructional materials to 
consumers on individual financial management matters; and
    (vi) Providing tax-planning and tax-preparation services to any 
person.
    (7) Agency transactional services for customer investments--(i) 
Securities brokerage. Providing securities brokerage services (including 
securities clearing and/or securities execution services on an 
exchange), whether alone or in combination with investment advisory

[[Page 187]]

services, and incidental activities (including related securities credit 
activities and custodial services), if the securities brokerage services 
are restricted to buying and selling securities solely as agent for the 
account of customers and do not include securities underwriting or 
dealing.
    (ii) Riskless principal transactions. Buying and selling in the 
secondary market all types of securities on the order of customers as a 
``riskless principal'' to the extent of engaging in a transaction in 
which the company, after receiving an order to buy (or sell) a security 
from a customer, purchases (or sells) the security for its own account 
to offset a contemporaneous sale to (or purchase from) the customer. 
This does not include:
    (A) Selling bank-ineligible securities \8\ at the order of a 
customer that is the issuer of the securities, or selling bank-
ineligible securities in any transaction where the company has a 
contractual agreement to place the securities as agent of the issuer; or
---------------------------------------------------------------------------

    \8\ A bank-ineligible security is any security that a State member 
bank is not permitted to underwrite or deal in under 12 U.S.C. 24 and 
335.
---------------------------------------------------------------------------

    (B) Acting as a riskless principal in any transaction involving a 
bank-ineligible security for which the company or any of its affiliates 
acts as underwriter (during the period of the underwriting or for 30 
days thereafter) or dealer. \9\
---------------------------------------------------------------------------

    \9\ A company or its affiliates may not enter quotes for specific 
bank-ineligible securities in any dealer quotation system in connection 
with the company's riskless principal transactions; except that the 
company or its affiliates may enter ``bid'' or ``ask'' quotations, or 
publish ``offering wanted'' or ``bid wanted'' notices on trading systems 
other than NASDAQ or an exchange, if the company or its affiliate does 
not enter price quotations on different sides of the market for a 
particular security during any two-day period.
---------------------------------------------------------------------------

    (iii) Private placement services. Acting as agent for the private 
placement of securities in accordance with the requirements of the 
Securities Act of 1933 (1933 Act) and the rules of the Securities and 
Exchange Commission, if the company engaged in the activity does not 
purchase or repurchase for its own account the securities being placed, 
or hold in inventory unsold portions of issues of these securities.
    (iv) Futures commission merchant. Acting as a futures commission 
merchant (FCM) for unaffiliated persons in the execution, clearance, or 
execution and clearance of any futures contract and option on a futures 
contract traded on an exchange in the United States or abroad if:
    (A) The activity is conducted through a separately incorporated 
subsidiary of the bank holding company, which may engage in activities 
other than FCM activities (including, but not limited to, permissible 
advisory and trading activities); and
    (B) The parent bank holding company does not provide a guarantee or 
otherwise become liable to the exchange or clearing association other 
than for those trades conducted by the subsidiary for its own account or 
for the account of any affiliate.
    (v) Other transactional services. Providing to customers as agent 
transactional services with respect to swaps and similar transactions, 
any transaction described in paragraph (b)(8) of this section, any 
transaction that is permissible for a state member bank, and any other 
transaction involving a forward contract, option, futures, option on a 
futures or similar contract (whether traded on an exchange or not) 
relating to a commodity that is traded on an exchange.
    (8) Investment transactions as principal--(i) Underwriting and 
dealing in government obligations and money market instruments. 
Underwriting and dealing in obligations of the United States, general 
obligations of states and their political subdivisions, and other 
obligations that state member banks of the Federal Reserve System may be 
authorized to underwrite and deal in under 12 U.S.C. 24 and 335, 
including banker's acceptances and certificates of deposit, under the 
same limitations as would be applicable if the activity were performed 
by the bank holding company's subsidiary member banks or its subsidiary 
nonmember banks as if they were member banks.
    (ii) Investing and trading activities. Engaging as principal in:
    (A) Foreign exchange;

[[Page 188]]

    (B) Forward contracts, options, futures, options on futures, swaps, 
and similar contracts, whether traded on exchanges or not, based on any 
rate, price, financial asset (including gold, silver, platinum, 
palladium, copper, or any other metal approved by the Board), 
nonfinancial asset, or group of assets, other than a bank-ineligible 
security, \10\ if:
---------------------------------------------------------------------------

    \10\ A bank-ineligible security is any security that a state member 
bank is not permitted to underwrite or deal in under 12 U.S.C. 24 and 
335.
---------------------------------------------------------------------------

    (1) A state member bank is authorized to invest in the asset 
underlying the contract;
    (2) The contract requires cash settlement;
    (3) The contract allows for assignment, termination, or offset prior 
to delivery or expiration, and the company--
    (i) Makes every reasonable effort to avoid taking or making delivery 
of the asset underlying the contract; or
    (ii) Receives and instantaneously transfers title to the underlying 
asset, by operation of contract and without taking or making physical 
delivery of the asset; or
    (4) The contract does not allow for assignment, termination, or 
offset prior to delivery or expiration and is based on an asset for 
which futures contracts or options on futures contracts have been 
approved for trading on a U.S. contract market by the Commodity Futures 
Trading Commission, and the company--
    (i) Makes every reasonable effort to avoid taking or making delivery 
of the asset underlying the contract; or
    (ii) Receives and instantaneously transfers title to the underlying 
asset, by operation of contract and without taking or making physical 
delivery of the asset.
    (C) Forward contracts, options, \11\ futures, options on futures, 
swaps, and similar contracts, whether traded on exchanges or not, based 
on an index of a rate, a price, or the value of any financial asset, 
nonfinancial asset, or group of assets, if the contract requires cash 
settlement.
---------------------------------------------------------------------------

    \11\ This reference does not include acting as a dealer in options 
based on indices of bank-ineligible securities when the options are 
traded on securities exchanges. These options are securities for 
purposes of the federal securities laws and bank-ineligible securities 
for purposes of section 20 of the Glass-Steagall Act, 12 U.S.C. 337. 
Similarly, this reference does not include acting as a dealer in any 
other instrument that is a bank-ineligible security for purposes of 
section 20. A bank holding company may deal in these instruments in 
accordance with the Board's orders on dealing in bank-ineligible 
securities.
---------------------------------------------------------------------------

    (iii) Buying and selling bullion, and related activities. Buying, 
selling and storing bars, rounds, bullion, and coins of gold, silver, 
platinum, palladium, copper, and any other metal approved by the Board, 
for the company's own account and the account of others, and providing 
incidental services such as arranging for storage, safe custody, 
assaying, and shipment.
    (9) Management consulting and counseling activities--(i) Management 
consulting. (A) Providing management consulting advice: \12\
---------------------------------------------------------------------------

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

    (1) On any matter to unaffiliated depository institutions, including 
commercial banks, savings and loan associations, savings banks, credit 
unions, industrial banks, Morris Plan banks, cooperative banks, 
industrial loan companies, trust companies, and branches or agencies of 
foreign banks;
    (2) On any financial, economic, accounting, or audit matter to any 
other company.
    (B) A company conducting management consulting activities under this 
subparagraph and any affiliate of such company may not:
    (1) Own or control, directly or indirectly, more than 5 percent of 
the voting securities of the client institution; and
    (2) Allow a management official, as defined in 12 CFR 212.2(h), of 
the company or any of its affiliates to serve as a management official 
of the client institution, except where such interlocking relationship 
is permitted pursuant to an exemption granted under 12

[[Page 189]]

CFR 212.4(b) or otherwise permitted by the Board.
    (C) A company conducting management consulting activities may 
provide management consulting services to customers not described in 
paragraph (b)(9)(i)(A)(1) of this section or regarding matters not 
described in paragraph (b)(9)(i)(A)(2) of this section, if the total 
annual revenue derived from those management consulting services does 
not exceed 30 percent of the company's total annual revenue derived from 
management consulting activities.
    (ii) Employee benefits consulting services. Providing consulting 
services to employee benefit, compensation and insurance plans, 
including designing plans, assisting in the implementation of plans, 
providing administrative services to plans, and developing employee 
communication programs for plans.
    (iii) Career counseling services. Providing career counseling 
services to:
    (A) A financial organization \13\ and individuals currently employed 
by, or recently displaced from, a financial organization;
---------------------------------------------------------------------------

    \13\ Financial organization refers to insured depository institution 
holding companies and their subsidiaries, other than nonbanking 
affiliates of diversified savings and loan holding companies that engage 
in activities not permissible under section 4(c)(8) of the Bank Holding 
Company Act (12 U.S.C. 1842(c)(8)).
---------------------------------------------------------------------------

    (B) Individuals who are seeking employment at a financial 
organization; and
    (C) Individuals who are currently employed in or who seek positions 
in the finance, accounting, and audit departments of any company.
    (10) Support services--(i) Courier services. Providing courier 
services for:
    (A) Checks, commercial papers, documents, and written instruments 
(excluding currency or bearer-type negotiable instruments) that are 
exchanged among banks and financial institutions; and
    (B) Audit and accounting media of a banking or financial nature and 
other business records and documents used in processing such media. \14\
---------------------------------------------------------------------------

    \14\ See also the Board's interpretation on courier activities (12 
CFR 225.129), which sets forth conditions for bank holding company entry 
into the activity.
---------------------------------------------------------------------------

    (ii) Printing and selling MICR-encoded items. Printing and selling 
checks and related documents, including corporate image checks, cash 
tickets, voucher checks, deposit slips, savings withdrawal packages, and 
other forms that require Magnetic Ink Character Recognition (MICR) 
encoding.
    (11) Insurance agency and underwriting--(i) Credit insurance. Acting 
as principal, agent, or broker for insurance (including home mortgage 
redemption insurance) that is:
    (A) Directly related to an extension of credit by the bank holding 
company or any of its subsidiaries; and
    (B) Limited to ensuring the repayment of the outstanding balance due 
on the extension of credit \15\ in the event of the death, disability, 
or involuntary unemployment of the debtor.
---------------------------------------------------------------------------

    \15\ Extension of credit includes direct loans to borrowers, loans 
purchased from other lenders, and leases of real or personal property so 
long as the leases are nonoperating and full-payout leases that meet the 
requirements of paragraph (b)(3) of this section.
---------------------------------------------------------------------------

    (ii) Finance company subsidiary. Acting as agent or broker for 
insurance directly related to an extension of credit by a finance 
company \16\ that is a subsidiary of a bank holding company, if:
---------------------------------------------------------------------------

    \16\ Finance company includes all non-deposit-taking financial 
institutions that engage in a significant degree of consumer lending 
(excluding lending secured by first mortgages) and all financial 
institutions specifically defined by individual states as finance 
companies and that engage in a significant degree of consumer lending.
---------------------------------------------------------------------------

    (A) The insurance is limited to ensuring repayment of the 
outstanding balance on such extension of credit in the event of loss or 
damage to any property used as collateral for the extension of credit; 
and
    (B) The extension of credit is not more than $10,000, or $25,000 if 
it is to finance the purchase of a residential manufactured home \17\ 
and the credit is secured by the home; and
---------------------------------------------------------------------------

    \17\ These limitations increase at the end of each calendar year, 
beginning with 1982, by the percentage increase in the Consumer Price 
Index for Urban Wage Earners and Clerical Workers published by the 
Bureau of Labor Statistics.
---------------------------------------------------------------------------

    (C) The applicant commits to notify borrowers in writing that:

[[Page 190]]

    (1) They are not required to purchase such insurance from the 
applicant;
    (2) Such insurance does not insure any interest of the borrower in 
the collateral; and
    (3) The applicant will accept more comprehensive property insurance 
in place of such single-interest insurance.
    (iii) Insurance in small towns. Engaging in any insurance agency 
activity in a place where the bank holding company or a subsidiary of 
the bank holding company has a lending office and that:
    (A) Has a population not exceeding 5,000 (as shown in the preceding 
decennial census); or
    (B) Has inadequate insurance agency facilities, as determined by the 
Board, after notice and opportunity for hearing.
    (iv) Insurance-agency activities conducted on May 1, 1982. Engaging 
in any specific insurance-agency activity \18\ if the bank holding 
company, or subsidiary conducting the specific activity, conducted such 
activity on May 1, 1982, or received Board approval to conduct such 
activity on or before May 1, 1982. \19\ A bank holding company or 
subsidiary engaging in a specific insurance agency activity under this 
clause may:
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    \18\ Nothing contained in this provision shall preclude a bank 
holding company subsidiary that is authorized to engage in a specific 
insurance-agency activity under this clause from continuing to engage in 
the particular activity after merger with an affiliate, if the merger is 
for legitimate business purposes and prior notice has been provided to 
the Board.
    \19\ For the purposes of this paragraph, activities engaged in on 
May 1, 1982, include activities carried on subsequently as the result of 
an application to engage in such activities pending before the Board on 
May 1, 1982, and approved subsequently by the Board or as the result of 
the acquisition by such company pursuant to a binding written contract 
entered into on or before May 1, 1982, of another company engaged in 
such activities at the time of the acquisition.
---------------------------------------------------------------------------

    (A) Engage in such specific insurance agency activity only at 
locations:
    (1) In the state in which the bank holding company has its principal 
place of business (as defined in 12 U.S.C. 1842(d));
    (2) In any state or states immediately adjacent to such state; and
    (3) In any state in which the specific insurance-agency activity was 
conducted (or was approved to be conducted) by such bank holding company 
or subsidiary thereof or by any other subsidiary of such bank holding 
company on May 1, 1982; and
    (B) Provide other insurance coverages that may become available 
after May 1, 1982, so long as those coverages insure against the types 
of risks as (or are otherwise functionally equivalent to) coverages sold 
or approved to be sold on May 1, 1982, by the bank holding company or 
subsidiary.
    (v) Supervision of retail insurance agents. Supervising on behalf of 
insurance underwriters the activities of retail insurance agents who 
sell:
    (A) Fidelity insurance and property and casualty insurance on the 
real and personal property used in the operations of the bank holding 
company or its subsidiaries; and
    (B) Group insurance that protects the employees of the bank holding 
company or its subsidiaries.
    (vi) Small bank holding companies. Engaging in any insurance-agency 
activity if the bank holding company has total consolidated assets of 
$50 million or less. A bank holding company performing insurance-agency 
activities under this paragraph may not engage in the sale of life 
insurance or annuities except as provided in paragraphs (b)(11) (i) and 
(iii) of this section, and it may not continue to engage in insurance-
agency activities pursuant to this provision more than 90 days after the 
end of the quarterly reporting period in which total assets of the 
holding company and its subsidiaries exceed $50 million.
    (vii) Insurance-agency activities conducted before 1971. Engaging in 
any insurance-agency activity performed at any location in the United 
States directly or indirectly by a bank holding company that was engaged 
in insurance-agency activities prior to January 1, 1971, as a 
consequence of approval by the Board prior to January 1, 1971.
    (12) Community development activities--(i) Financing and investment 
activities. Making equity and debt investments in corporations or 
projects designed primarily to promote community welfare, such as the 
economic rehabilitation

[[Page 191]]

and development of low-income areas by providing housing, services, or 
jobs for residents.
    (ii) Advisory activities. Providing advisory and related services 
for programs designed primarily to promote community welfare.
    (13) Money orders, savings bonds, and traveler's checks. The 
issuance and sale at retail of money orders and similar consumer-type 
payment instruments; the sale of U.S. savings bonds; and the issuance 
and sale of traveler's checks.
    (14) Data processing. (i) Providing data processing, data storage 
and data transmission services, facilities (including data processing, 
data storage and data transmission hardware, software, documentation, or 
operating personnel), databases, advice, and access to such services, 
facilities, or data-bases by any technological means, if:
    (A) The data to be processed, stored or furnished are financial, 
banking or economic; and
    (B) The hardware provided in connection therewith is offered only in 
conjunction with software designed and marketed for the processing, 
storage and transmission of financial, banking, or economic data, and 
where the general purpose hardware does not constitute more than 30 
percent of the cost of any packaged offering.
    (ii) A company conducting data processing, data storage, and data 
transmission activities may conduct data processing, data storage, and 
data transmission activities not described in paragraph (b)(14)(i) of 
this section if the total annual revenue derived from those activities 
does not exceed 49 percent of the company's total annual revenues 
derived from data processing, data storage and data transmission 
activities.

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



              Subpart D_Control and Divestiture Proceedings



Sec. 225.31  Control proceedings.

    (a) Preliminary determination of control. (1) The Board may issue a 
preliminary determination of control under the procedures set forth in 
this section in any case in which:
    (i) Any of the presumptions of control set forth in paragraph (d) of 
this section is present; or
    (ii) It otherwise appears that a company has the power to exercise a 
controlling influence over the management or policies of a bank or other 
company.
    (2) If the Board makes a preliminary determination of control under 
this section, the Board shall send notice to the controlling company 
containing a statement of the facts upon which the preliminary 
determination is based.
    (b) Response to preliminary determination of control. Within 30 
calendar days of issuance by the Board of a preliminary determination of 
control or such longer period permitted by the Board, the company 
against whom the determination has been made shall:
    (1) Submit for the Board's approval a specific plan for the prompt 
termination of the control relationship;
    (2) File an application under subpart B or C of this regulation to 
retain the control relationship; or
    (3) Contest the preliminary determination by filing a response, 
setting forth the facts and circumstances in support of its position 
that no control exists, and, if desired, requesting a hearing or other 
proceeding.
    (c) Hearing and final determination. (1) The Board shall order a 
formal hearing or other appropriate proceeding upon the request of a 
company that contests a preliminary determination that the company has 
the power to exercise a controlling influence over the management or 
policies of a bank or other company, if the Board finds that material 
facts are in dispute. The Board may also in its discretion order a 
formal hearing or other proceeding with respect to a preliminary 
determination that the company controls voting securities of the bank or 
other company under the presumptions in paragraph (d)(1) of this 
section.
    (2) At a hearing or other proceeding, any applicable presumptions 
established by paragraph (d) of this section shall be considered in 
accordance with the Federal Rules of Evidence and the Board's Rules of 
Practice for Formal Hearings (12 CFR part 263).

[[Page 192]]

    (3) After considering the submissions of the company and other 
evidence, including the record of any hearing or other proceeding, the 
Board shall issue a final order determining whether the company controls 
voting securities, or has the power to exercise a controlling influence 
over the management or policies, of the bank or other company. If a 
control relationship is found, the Board may direct the company to 
terminate the control relationship or to file an application for the 
Board's approval to retain the control relationship under subpart B or C 
of this regulation.
    (d) Rebuttable presumptions of control. The following rebuttable 
presumptions shall be used in any proceeding under this section:
    (1) Control of voting securities--(i) Securities convertible into 
voting securities. A company that owns, controls, or holds securities 
that are immediately convertible, at the option of the holder or owner, 
into voting securities of a bank or other company, controls the voting 
securities.
    (ii) Option or restriction on voting securities. A company that 
enters into an agreement or understanding under which the rights of a 
holder of voting securities of a bank or other company are restricted in 
any manner controls the securities. This presumption does not apply 
where the agreement or understanding:
    (A) Is a mutual agreement among shareholders granting to each other 
a right of first refusal with respect to their shares;
    (B) Is incident to a bona fide loan transaction; or
    (C) Relates to restrictions on transferability and continues only 
for the time necessary to obtain approval from the appropriate Federal 
supervisory authority with respect to acquisition by the company of the 
securities.
    (2) Control over company--(i) Management agreement. A company that 
enters into any agreement or understanding with a bank or other company 
(other than an investment advisory agreement), such as a management 
contract, under which the first company or any of its subsidiaries 
directs or exercises significant influence over the general management 
or overall operations of the bank or other company controls the bank or 
other company.
    (ii) Shares controlled by company and associated individuals. A 
company that, together with its management officials or controlling 
shareholders (including members of the immediate families of either), 
owns, controls, or holds with power to vote 25 percent or more of the 
outstanding shares of any class of voting securities of a bank or other 
company controls the bank or other company, if the first company owns, 
controls, or holds with power to vote more than 5 percent of the 
outstanding shares of any class of voting securities of the bank or 
other company.
    (iii) Common management officials. A company that has one or more 
management officials in common with a bank or other company controls the 
bank or other company, if the first company owns, controls or holds with 
power to vote more than 5 percent of the outstanding shares of any class 
of voting securities of the bank or other company, and no other person 
controls as much as 5 percent of the outstanding shares of any class of 
voting securities of the bank or other company.
    (iv) Shares held as fiduciary. The presumptions in paragraphs (d)(2) 
(ii) and (iii) of this section do not apply if the securities are held 
by the company in a fiduciary capacity without sole discretionary 
authority to exercise the voting rights.
    (e) Presumption of non-control--(1) In any proceeding under this 
section, there is a presumption that any company that directly or 
indirectly owns, controls, or has power to vote less than 5 percent of 
the outstanding shares of any class of voting securities of a bank or 
other company does not have control over that bank or other company.
    (2) In any proceeding under this section, or judicial proceeding 
under the BHC Act, other than a proceeding in which the Board has made a 
preliminary determination that a company has the power to exercise a 
controlling influence over the management or policies of the bank or 
other company, a company may not be held to have had control over the 
bank or other company at any given time, unless that company, at the 
time in question, directly or indirectly owned, controlled,

[[Page 193]]

or had power to vote 5 percent or more of the outstanding shares of any 
class of voting securities of the bank or other company, or had already 
been found to have control on the basis of the existence of a 
controlling influence relationship.

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



                    Subpart E_Change in Bank Control

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



Sec. 225.41  Transactions requiring prior notice.

    (a) Prior notice requirement. Any person acting directly or 
indirectly, or through or in concert with one or more persons, shall 
give the Board 60 days' written notice, as specified in Sec. 225.43 of 
this subpart, before acquiring control of a state member bank or bank 
holding company, unless the acquisition is exempt under Sec. 225.42.
    (b) Definitions. For purposes of this subpart:
    (1) Acquisition includes a purchase, assignment, transfer, or pledge 
of voting securities, or an increase in percentage ownership of a state 
member bank or a bank holding company resulting from a redemption of 
voting securities.
    (2) Acting in concert includes knowing participation in a joint 
activity or parallel action towards a common goal of acquiring control 
of a state member bank or bank holding company whether or not pursuant 
to an express agreement.
    (3) Immediate family includes a person's father, mother, stepfather, 
stepmother, brother, sister, stepbrother, stepsister, son, daughter, 
stepson, stepdaughter, grandparent, grandson, granddaughter, father-in-
law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-
in-law, the spouse of any of the foregoing, and the person's spouse.
    (c) Acquisitions requiring prior notice--(1) Acquisition of control. 
The acquisition of voting securities of a state member bank or bank 
holding company constitutes the acquisition of control under the Bank 
Control Act, requiring prior notice to the Board, if, immediately after 
the transaction, the acquiring person (or persons acting in concert) 
will own, control, or hold with power to vote 25 percent or more of any 
class of voting securities of the institution.
    (2) Rebuttable presumption of control. The Board presumes that an 
acquisition of voting securities of a state member bank or bank holding 
company constitutes the acquisition of control under the Bank Control 
Act, requiring prior notice to the Board, if, immediately after the 
transaction, the acquiring person (or persons acting in concert) will 
own, control, or hold with power to vote 10 percent or more of any class 
of voting securities of the institution, and if:
    (i) The institution has registered securities under section 12 of 
the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
    (ii) No other person will own, control, or hold the power to vote a 
greater percentage of that class of voting securities immediately after 
the transaction. \1\
---------------------------------------------------------------------------

    \1\ If two or more persons, not acting in concert, each propose to 
acquire simultaneously equal percentages of 10 percent or more of a 
class of voting securities of the state member bank or bank holding 
company, each person must file prior notice to the Board.
---------------------------------------------------------------------------

    (d) Rebuttable presumption of concerted action. The following 
persons shall be presumed to be acting in concert for purposes of this 
subpart:
    (1) A company and any controlling shareholder, partner, trustee, or 
management official of the company, if both the company and the person 
own voting securities of the state member bank or bank holding company;
    (2) An individual and the individual's immediate family;
    (3) Companies under common control;
    (4) Persons that are parties to any agreement, contract, 
understanding, relationship, or other arrangement, whether written or 
otherwise, regarding the acquisition, voting, or transfer of control of 
voting securities of a state member bank or bank holding company, other 
than through a revocable proxy as described in Sec. 225.42(a)(5) of 
this subpart;

[[Page 194]]

    (5) Persons that have made, or propose to make, a joint filing under 
sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m 
or 78n), and the rules promulgated thereunder by the Securities and 
Exchange Commission; and
    (6) A person and any trust for which the person serves as trustee.
    (e) Acquisitions of loans in default. The Board presumes an 
acquisition of a loan in default that is secured by voting securities of 
a state member bank or bank holding company to be an acquisition of the 
underlying securities for purposes of this section.
    (f) Other transactions. Transactions other than those set forth in 
paragraph (c) of this section resulting in a person's control of less 
than 25 percent of a class of voting securities of a state member bank 
or bank holding company are not deemed by the Board to constitute 
control for purposes of the Bank Control Act.
    (g) Rebuttal of presumptions. Prior notice to the Board is not 
required for any acquisition of voting securities under the presumption 
of control set forth in this section, if the Board finds that the 
acquisition will not result in control. The Board shall afford any 
person seeking to rebut a presumption in this section an opportunity to 
present views in writing or, if appropriate, orally before its 
designated representatives at an informal conference.



Sec. 225.42  Transactions not requiring prior notice.

    (a) Exempt transactions. The following transactions do not require 
notice to the Board under this subpart:
    (1) Existing control relationships. The acquisition of additional 
voting securities of a state member bank or bank holding company by a 
person who:
    (i) Continuously since March 9, 1979 (or since the institution 
commenced business, if later), held power to vote 25 percent or more of 
any class of voting securities of the institution; or
    (ii) Is presumed, under Sec. 225.41(c)(2) of this subpart, to have 
controlled the institution continuously since March 9, 1979, if the 
aggregate amount of voting securities held does not exceed 25 percent or 
more of any class of voting securities of the institution or, in other 
cases, where the Board determines that the person has controlled the 
bank continuously since March 9, 1979;
    (2) Increase of previously authorized acquisitions. Unless the Board 
or the Reserve Bank otherwise provides in writing, the acquisition of 
additional shares of a class of voting securities of a state member bank 
or bank holding company by any person (or persons acting in concert) who 
has lawfully acquired and maintained control of the institution (for 
purposes of Sec. 225.41(c) of this subpart), after complying with the 
procedures and receiving approval to acquire voting securities of the 
institution under this subpart, or in connection with an application 
approved under section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of 
subpart B of this part) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
    (3) Acquisitions subject to approval under BHC Act or Bank Merger 
Act. Any acquisition of voting securities subject to approval under 
section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of subpart B of 
this part), or section 18(c) of the Federal Deposit Insurance Act (Bank 
Merger Act, 12 U.S.C. 1828(c));
    (4) Transactions exempt under BHC Act. Any transaction described in 
sections 2(a)(5), 3(a)(A), or 3(a)(B) of the BHC Act (12 U.S.C. 
1841(a)(5), 1842(a)(A), and 1842(a)(B)), by a person described in those 
provisions;
    (5) Proxy solicitation. The acquisition of the power to vote 
securities of a state member bank or bank holding company through 
receipt of a revocable proxy in connection with a proxy solicitation for 
the purposes of conducting business at a regular or special meeting of 
the institution, if the proxy terminates within a reasonable period 
after the meeting;
    (6) Stock dividends. The receipt of voting securities of a state 
member bank or bank holding company through a stock dividend or stock 
split if the proportional interest of the recipient in the institution 
remains substantially the same; and
    (7) Acquisition of foreign banking organization. The acquisition of 
voting securities of a qualifying foreign banking organization. (This 
exemption does not extend to the reports and information

[[Page 195]]

required under paragraphs 9, 10, and 12 of the Bank Control Act (12 
U.S.C. 1817(j) (9), (10), and (12)) and Sec. 225.44 of this subpart.)
    (b) Prior notice exemption. (1) The following acquisitions of voting 
securities of a state member bank or bank holding company, which would 
otherwise require prior notice under this subpart, are not subject to 
the prior notice requirements if the acquiring person notifies the 
appropriate Reserve Bank within 90 calendar days after the acquisition 
and provides any relevant information requested by the Reserve Bank:
    (i) Acquisition of voting securities through inheritance;
    (ii) Acquisition of voting securities as a bona fide gift; and
    (iii) Acquisition of voting securities in satisfaction of a debt 
previously contracted (DPC) in good faith.
    (2) The following acquisitions of voting securities of a state 
member bank or bank holding company, which would otherwise require prior 
notice under this subpart, are not subject to the prior notice 
requirements if the acquiring person does not reasonably have advance 
knowledge of the transaction, and provides the written notice required 
under section 225.43 to the appropriate Reserve Bank within 90 calendar 
days after the transaction occurs:
    (i) Acquisition of voting securities resulting from a redemption of 
voting securities by the issuing bank or bank holding company; and
    (ii) Acquisition of voting securities as a result of actions 
(including the sale of securities) by any third party that is not within 
the control of the acquiror.
    (3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits 
the authority of the Board to disapprove a notice pursuant to Sec. 
225.43(h) of this subpart.



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

    (a) Filing notice. (1) A notice required under this subpart shall be 
filed with the appropriate Reserve Bank and shall contain all the 
information required by paragraph 6 of the Bank Control Act (12 U.S.C. 
1817(j)(6)), or prescribed in the designated Board form.
    (2) The Board may waive any of the informational requirements of the 
notice if the Board determines that it is in the public interest.
    (3) A notificant shall notify the appropriate Reserve Bank or the 
Board immediately of any material changes in a notice submitted to the 
Reserve Bank, including changes in financial or other conditions.
    (4) When the acquiring person is an individual, or group of 
individuals acting in concert, the requirement to provide personal 
financial data may be satisfied by a current statement of assets and 
liabilities and an income summary, as required in the designated Board 
form, together with a statement of any material changes since the date 
of the statement or summary. The Reserve Bank or the Board, 
nevertheless, may request additional information, if appropriate.
    (b) Acceptance of notice. The 60-day notice period specified in 
Sec. 225.41 of this subpart begins on the date of receipt of a complete 
notice. The Reserve Bank shall notify the person or persons submitting a 
notice under this subpart in writing of the date the notice is or was 
complete and thereby accepted for processing. The Reserve Bank or the 
Board may request additional relevant information at any time after the 
date of acceptance.
    (c) Publication--(1) Newspaper Announcement. Any person(s) filing a 
notice under this subpart shall publish, in a form prescribed by the 
Board, an announcement soliciting public comment on the proposed 
acquisition. The announcement shall be published in a newspaper of 
general circulation in the community in which the head office of the 
state member bank to be acquired is located or, in the case of a 
proposed acquisition of a bank holding company, in the community in 
which its head office is located and in the community in which the head 
office of each of its subsidiary banks is located. The announcement 
shall be published no earlier than 15 calendar days before the filing of 
the notice with the appropriate Reserve Bank and no later than 10 
calendar days after the filing date; and the publisher's affidavit of a 
publication shall be provided to the appropriate Reserve Bank.

[[Page 196]]

    (2) Contents of newspaper announcement. The newspaper announcement 
shall state:
    (i) The name of each person identified in the notice as a proposed 
acquiror of the bank or bank holding company;
    (ii) The name of the bank or bank holding company to be acquired, 
including the name of each of the bank holding company's subsidiary 
banks; and
    (iii) A statement that interested persons may submit comments on the 
notice to the Board or the appropriate Reserve Bank for a period of 20 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section.
    (3) Federal Register announcement. The Board shall, upon filing of a 
notice under this subpart, publish announcement in the Federal Register 
of receipt of the notice. The Federal Register announcement shall 
contain the information required under paragraphs (c)(2)(i) and 
(c)(2)(ii) of this section and a statement that interested persons may 
submit comments on the proposed acquisition for a period of 15 calendar 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section. The Board may waive publication in the Federal 
Register, if the Board determines that such action is appropriate.
    (4) Delay of publication. The Board may permit delay in the 
publication required under paragraphs (c)(1) and (c)(3) of this section 
if the Board determines, for good cause shown, that it is in the public 
interest to grant such delay. Requests for delay of publication may be 
submitted to the appropriate Reserve Bank.
    (5) Shortening or waiving notice. The Board may shorten or waive the 
public comment or newspaper publication requirements of this paragraph, 
or act on a notice before the expiration of a public comment period, if 
it determines in writing that an emergency exists, or that disclosure of 
the notice, solicitation of public comment, or delay until expiration of 
the public comment period would seriously threaten the safety or 
soundness of the bank or bank holding company to be acquired.
    (6) Consideration of public comments. In acting upon a notice filed 
under this subpart, the Board shall consider all public comments 
received in writing within the period specified in the newspaper or 
Federal Register announcement, whichever is later. At the Board's 
option, comments received after this period may, but need not, be 
considered.
    (7) Standing. No person (other than the acquiring person) who 
submits comments or information on a notice filed under this subpart 
shall thereby become a party to the proceeding or acquire any standing 
or right to participate in the Board's consideration of the notice or to 
appeal or otherwise contest the notice or the Board's action regarding 
the notice.
    (d) Time period for Board action--(1) Consummation of acquisition--
(i) The notificant(s) may consummate the proposed acquisition 60 days 
after submission to the Reserve Bank of a complete notice under 
paragraph (a) of this section, unless within that period the Board 
disapproves the proposed acquisition or extends the 60-day period, as 
provided under paragraph (d)(2) of this section.
    (ii) The notificant(s) may consummate the proposed transaction 
before the expiration of the 60-day period if the Board notifies the 
notificant(s) in writing of the Board's intention not to disapprove the 
acquisition.
    (2) Extensions of time period. (i) The Board may extend the 60-day 
period in paragraph (d)(1) of this section for an additional 30 days by 
notifying the acquiring person(s).
    (ii) The Board may further extend the period during which it may 
disapprove a notice for two additional periods of not more than 45 days 
each, if the Board determines that:
    (A) Any acquiring person has not furnished all the information 
required under paragraph (a) of this section;
    (B) Any material information submitted is substantially inaccurate;
    (C) The Board is unable to complete the investigation of an 
acquiring person because of inadequate cooperation or delay by that 
person; or
    (D) Additional time is needed to investigate and determine that no 
acquiring person has a record of failing to

[[Page 197]]

comply with the requirements of the Bank Secrecy Act, subchapter II of 
Chapter 53 of title 31, United States Code.
    (iii) If the Board extends the time period under this paragraph, it 
shall notify the acquiring person(s) of the reasons therefor and shall 
include a statement of the information, if any, deemed incomplete or 
inaccurate.
    (e) Advice to bank supervisory agencies. (1) Upon accepting a notice 
relating to acquisition of securities of a state member bank, the 
Reserve Bank shall send a copy of the notice to the appropriate state 
bank supervisor, which shall have 30 calendar days from the date the 
notice is sent in which to submit its views and recommendations to the 
Board. The Reserve Bank also shall send a copy of any notice to the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
and the Office of Thrift Supervision.
    (2) If the Board finds that it must act immediately in order to 
prevent the probable failure of the bank or bank holding company 
involved, the Board may dispense with or modify the requirements for 
notice to the state supervisor.
    (f) Investigation and report. (1) After receiving a notice under 
this subpart, the Board or the appropriate Reserve Bank shall conduct an 
investigation of the competence, experience, integrity, and financial 
ability of each person by and for whom an acquisition is to be made. The 
Board shall also make an independent determination of the accuracy and 
completeness of any information required to be contained in a notice 
under paragraph (a) of this section. In investigating any notice 
accepted under this subpart, the Board or Reserve Bank may solicit 
information or views from any person, including any bank or bank holding 
company involved in the notice, and any appropriate state, federal, or 
foreign governmental authority.
    (2) The Board or the appropriate Reserve Bank shall prepare a 
written report of its investigation, which shall contain, at a minimum, 
a summary of the results of the investigation.
    (g) Factors considered in acting on notices. In reviewing a notice 
filed under this subpart, the Board shall consider the information in 
the record, the views and recommendations of the appropriate bank 
supervisor, and any other relevant information obtained during any 
investigation of the notice.
    (h) Disapproval and hearing--(1) Disapproval of notice. The Board 
may disapprove an acquisition if it finds adverse effects with respect 
to any of the factors set forth in paragraph 7 of the Bank Control Act 
(12 U.S.C. 1817(j)(7)) (i.e., competitive, financial, managerial, 
banking, or incompleteness of information).
    (2) Disapproval notification. Within three days after its decision 
to issue a notice of intent to disapprove any proposed acquisition, the 
Board shall notify the acquiring person in writing of the reasons for 
the action.
    (3) Hearing. Within 10 calendar days of receipt of the notice of the 
Board's intent to disapprove, the acquiring person may submit a written 
request for a hearing. Any hearing conducted under this paragraph shall 
be in accordance with the Rules of Practice for Formal Hearings (12 CFR 
part 263). At the conclusion of the hearing, the Board shall, by order, 
approve or disapprove the proposed acquisition on the basis of the 
record of the hearing. If the acquiring person does not request a 
hearing, the notice of intent to disapprove becomes final and 
unappealable.



Sec. 225.44  Reporting of stock loans.

    (a) Requirements. (1) Any foreign bank or affiliate of a foreign 
bank that has credit outstanding to any person or group of persons, in 
the aggregate, which is secured, directly or indirectly, by 25 percent 
or more of any class of voting securities of a state member bank, shall 
file a consolidated report with the appropriate Reserve Bank for the 
state member bank.
    (2) The foreign bank or its affiliate also shall file a copy of the 
report with its appropriate Federal banking agency.
    (3) Any shares of the state member bank held by the foreign bank or 
any affiliate of the foreign bank as principal must be included in the 
calculation of the number of shares in which the foreign bank or its 
affiliate has a security interest for purposes of paragraph (a) of this 
section.

[[Page 198]]

    (b) Definitions. For purposes of paragraph (a) of this section:
    (1) Foreign bank shall have the same meaning as in section 1(b) of 
the International Banking Act of 1978 (12 U.S.C. 3101).
    (2) Credit outstanding includes any loan or extension of credit; the 
issuance of a guarantee, acceptance, or letter of credit, including an 
endorsement or standby letter of credit; and any other type of 
transaction that extends credit or financing to the person or group of 
persons.
    (3) Group of persons includes any number of persons that the foreign 
bank or any affiliate of a foreign bank has reason to believe:
    (i) Are acting together, in concert, or with one another to acquire 
or control shares of the same insured depository institution, including 
an acquisition of shares of the same depository institution at 
approximately the same time under substantially the same terms; or
    (ii) Have made, or propose to make, a joint filing under section 13 
or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and 
the rules promulgated thereunder by the Securities and Exchange 
Commission regarding ownership of the shares of the same insured 
depository institution.
    (c) Exceptions. Compliance with paragraph (a) of this section is not 
required if:
    (1) The person or group of persons referred to in that paragraph has 
disclosed the amount borrowed and the security interest therein to the 
Board or appropriate Reserve Bank in connection with a notice filed 
under Sec. 225.41 of this subpart, or another application filed with 
the Board or Reserve Bank as a substitute for a notice under Sec. 
225.41 of this subpart, including an application filed under section 3 
of the BHC Act (12 U.S.C. 1842) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)), or an application 
for membership in the Federal Reserve System; or
    (2) The transaction involves a person or group of persons that has 
been the owner or owners of record of the stock for a period of one year 
or more; or, if the transaction involves stock issued by a newly 
chartered bank, before the bank is opened for business.
    (d) Report requirements. (1) The consolidated report shall indicate 
the number and percentage of shares securing each applicable extension 
of credit, the identity of the borrower, and the number of shares held 
as principal by the foreign bank and any affiliate thereof.
    (2) A foreign bank, or any affiliate of a foreign bank, shall file 
the consolidated report in writing within 30 days of the date on which 
the foreign bank or affiliate first believes that the security for any 
outstanding credit consists of 25 percent or more of any class of voting 
securities of a state member bank.
    (e) Other reporting requirements. A foreign bank, or any affiliate 
thereof, that is supervised by the System and is required to report 
credit outstanding that is secured by the shares of an insured 
depository institution to another Federal banking agency also shall file 
a copy of the report with the appropriate Reserve Bank.



                 Subpart F_Limitations on Nonbank Banks



Sec. 225.52  Limitation on overdrafts.

    (a) Definitions. For purposes of this section--
    (1) Account means a reserve account, clearing account, or deposit 
account as defined in the Board's Regulation D (12 CFR 204.2(a)(1)(i)), 
that is maintained at a Federal Reserve Bank or nonbank bank.
    (2) Cash item means (i) a check other than a check classified as a 
noncash item; or (ii) any other item payable on demand and collectible 
at par that the Federal Reserve Bank of the district in which the item 
is payable is willing to accept as a cash item.
    (3) Discount window loan means any credit extended by a Federal 
Reserve Bank to a nonbank bank or industrial bank pursuant to the 
provisions of the Board's Regulation A (12 CFR part 201).
    (4) Industrial bank means an institution as defined in section 
2(c)(2)(H) of the BHC Act (12 U.S.C. 1841(c)(2)(H)).
    (5) Noncash item means an item handled by a Reserve Bank as a 
noncash item under the Reserve Bank's ``Collection of Noncash Items 
Operating

[[Page 199]]

Circular'' (e.g., a maturing bankers' acceptance or a maturing security, 
or a demand item, such as a check, with special instructions or an item 
that has not been preprinted or post-encoded).
    (6) Other nonelectronic transactions include all other transactions 
not included as funds transfers, book-entry securities transfers, cash 
items, noncash items, automated clearing house transactions, net 
settlement entries, and discount window loans (e.g., original issue of 
securities or redemption of securities).
    (7) An overdraft in an account occurs whenever the Federal Reserve 
Bank, nonbank bank, or industrial bank holding an account posts a 
transaction to the account of the nonbank bank, industrial bank, or 
affiliate that exceeds the aggregate balance of the accounts of the 
nonbank bank, industrial bank, or affiliate, as determined by the 
posting rules set forth in paragraphs (d) and (e) of this section and 
continues until the aggregate balance of the account is zero or greater.
    (8) Transfer item means an item as defined in subpart B of 
Regulation J (12 CFR 210.25 et seq).
    (b) Restriction on overdrafts--(1) Affiliates. Neither a nonbank 
bank nor an industrial bank shall permit any affiliate to incur any 
overdraft in its account with the nonbank bank or industrial bank.
    (2) Nonbank banks or industrial banks. (i) No nonbank bank or 
industrial bank shall incur any overdraft in its account at a Federal 
Reserve Bank on behalf of an affiliate.
    (ii) An overdraft by a nonbank bank or industrial bank in its 
account at a Federal Reserve Bank shall be deemed to be on behalf of an 
affiliate whenever:
    (A) A nonbank bank or industrial bank holds an account for an 
affiliate from which third-party payments can be made; and
    (B) When the posting of an affiliate's transaction to the nonbank 
bank's or industrial bank's account at a Reserve Bank creates an 
overdraft in its account at a Federal Reserve Bank or increases the 
amount of an existing overdraft in its account at a Federal Reserve 
Bank.
    (c) Permissible overdrafts. The following are permissible overdrafts 
not subject to paragraph (b) of this section:
    (1) Inadvertent error. An overdraft in its account by a nonbank bank 
or its affiliate, or an industrial bank or its affiliate, that results 
from an inadvertent computer error or inadvertent accounting error, that 
was not reasonably forseeable or could not have been prevented through 
the maintenance of procedures reasonably adopted by the nonbank bank or 
affiliate to avoid such overdraft; and
    (2) Fully secured primary dealer affiliate overdrafts. (i) An 
overdraft incurred by an affiliate of a nonbank bank, which affiliate is 
recognized as a primary dealer by the Federal Reserve Bank of New York, 
in the affiliate's account at the nonbank bank, or an overdraft incurred 
by a nonbank bank on behalf of its primary dealer affiliate in the 
nonbank bank's account at a Federal Reserve Bank; provided: the 
overdraft is fully secured by bonds, notes, or other obligations which 
are direct obligations of the United States or on which the principal 
and interest are fully guaranteed by the United States or by securities 
and obligations eligible for settlement on the Federal Reserve book-
entry system.
    (ii) An overdraft by a nonbank bank in its account at a Federal 
Reserve Bank that is on behalf of a primary dealer affiliate is fully 
secured when that portion of its overdraft at the Federal Reserve Bank 
that corresponds to the transaction posted for an affiliate that caused 
or increased the nonbank bank's overdraft is fully secured in accordance 
with paragraph (c)(2)(iii) of this section.
    (iii) An overdraft is fully secured under paragraph (c)(2)(i) when 
the nonbank bank can demonstrate that the overdraft is secured, at all 
times, by a perfected security interest in specific, identified 
obligations described in paragraph (c)(2)(i) with a market value that, 
in the judgment of the Reserve Bank holding the nonbank bank's account, 
is sufficiently in excess of the amount of the overdraft to provide a 
margin of protection in a volatile market or in the event the securities 
need to be liquidated quickly.

[[Page 200]]

    (d) Posting by Federal Reserve Banks. For purposes of determining 
the balance of an account under this section, payments and transfers by 
nonbank banks and industrial banks processed by the Federal Reserve 
Banks shall be considered posted to their accounts at Federal Reserve 
Banks as follows:
    (1) Funds transfers. Transfer items shall be posted:
    (i) To the transferor's account at the time the transfer is actually 
made by the transferor's Federal Reserve Bank; and
    (ii) To the transferee's account at the time the transferee's 
Reserve Bank sends the transfer item or sends or telephones the advice 
of credit for the item to the transferee, whichever occurs first.
    (2) Book-entry securities transfers against payment. A book-entry 
securities transfer against payment shall be posted: (i) to the 
transferor's account at the time the entry is made by the transferor's 
Reserve Bank; and (ii) to the transferee's account at the time the entry 
is made by the transferee's Reserve Bank.
    (3) Discount window loans. Credit for a discount window loan shall 
be posted to the account of a nonbank bank or industrial bank at the 
close of business on the day that it is made or such earlier time as may 
be specifically agreed to by the Federal Reserve Bank and the nonbank 
bank under the terms of the loan. Debit for repayment of a discount 
window loan shall be posted to the account of the nonbank bank or 
industrial bank as of the close of business on the day of maturity of 
the loan or such earlier time as may be agreed to by the Federal Reserve 
Bank and the nonbank bank or required by the Federal Reserve Bank under 
the terms of the loan.
    (4) Other transactions. Total aggregate credits for automated 
clearing house transfers, cash items, noncash items, net settlement 
entries, and other nonelectronic transactions shall be posted to the 
account of a nonbank bank or industrial bank as of the opening of 
business on settlement day. Total aggregate debits for these 
transactions and entries shall be posted to the account of a nonbank 
bank or industrial bank as of the close of business on settlement day.
    (e) Posting by nonbank banks and industrial banks. For purposes of 
determining the balance of an affiliate's account under this section, 
payments and transfers through an affiliate's account at a nonbank bank 
or industrial bank shall be posted as follows:
    (1) Funds transfers. (i) Fedwire transfer items shall be posted:
    (A) To the transferor affiliate's account no later than the time the 
transfer is actually made by the transferor's Federal Reserve Bank; and
    (B) To the transferee affiliate's account no earlier than the time 
the transferee's Reserve Bank sends the transfer item, or sends or 
telephones the advice of credit for the item to the transferee, 
whichever occurs first.
    (ii) For funds transfers not sent or received through Federal 
Reserve Banks, debits shall be posted to the transferor affiliate's 
account not later than the time the nonbank bank or industrial bank 
becomes obligated on the transfer. Credits shall not be posted to the 
transferee affiliate's account before the nonbank bank or industrial 
bank has received actually and finally collected funds for the transfer.
    (2) Book-entry securities transfers against payment. (i) A book-
entry securities transfer against payment shall be posted:
    (A) To the transferor affiliate's account not earlier than the time 
the entry is made by the transferor's Reserve Bank; and
    (B) To the transferee affiliate's account not later than the time 
the entry is made by the transferee's Reserve Bank.
    (ii) For book-entry securities transfers against payment that are 
not sent or received through Federal Reserve Banks, entries shall be 
posted:
    (A) To the buyer-affiliate's account not later than the time the 
nonbank bank or industrial bank becomes obligated on the transfer; and
    (B) To the seller-affiliate's account not before the nonbank bank or 
industrial bank has received actually and finally collected funds for 
the transfer.
    (3) Other transactions--(i) Credits. Except as otherwise provided in 
this paragraph, credits for cash items, noncash

[[Page 201]]

items, ACH transfers, net settlement entries, and all other 
nonelectronic transactions shall be posted to an affiliate's account on 
the day of the transaction (i.e., settlement day for ACH transactions or 
the day of credit for check transactions), but no earlier than the 
Federal Reserve Bank's opening of business on that day. Credit for cash 
items that are required by federal or state statute or regulation to be 
made available to the depositor for withdrawal prior to the posting time 
set forth in the preceding paragraph shall be posted as of the required 
availability time.
    (ii) Debits. Debits for cash items, noncash items, ACH transfers, 
net settlement entries, and all other nonelectronic transactions shall 
be posted to an affiliate's account on the day of the transaction (e.g., 
settlement day for ACH transactions or the day of presentment for check 
transactions), but no later than the Federal Reserve Bank's close of 
business on that day. If a check drawn on an affiliate's account or an 
ACH debit transfer received by an affiliate is returned timely by the 
nonbank bank or industrial bank in accordance with applicable law and 
agreements, no entry need to be posted to the affiliate's account for 
such item.

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



    Subpart G_Appraisal Standards for Federally Related Transactions

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



Sec. 225.61  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (the Board) under title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FlRREA) 
(Pub. L. No. 101-73, 103 Stat. 183 (1989)), 12 U.S.C. 3310, 3331-3351, 
and section 5(b) of the Bank Holding Company Act, 12 U.S.C. 1844(b).
    (b) Purpose and scope. (1) Title XI provides protection for federal 
financial and public policy interests in real estate related 
transactions by requiring real estate appraisals used in connection with 
federally related transactions to be performed in writing, in accordance 
with uniform standards, by appraisers whose competency has been 
demonstrated and whose professional conduct will be subject to effective 
supervision. This subpart implements the requirements of title XI, and 
applies to all federally related transactions entered into by the Board 
or by institutions regulated by the Board (regulated institutions).
    (2) This subpart:
    (i) Identifies which real estate-related financial transactions 
require the services of an appraiser;
    (ii) Prescribes which categories of federally related transactions 
shall be appraised by a State certified appraiser and which by a State 
licensed appraiser; and
    (iii) Prescribes minimum standards for the performance of real 
estate appraisals in connection with federally related transactions 
under the jurisdiction of the Board.



Sec. 225.62  Definitions.

    (a) Appraisal means a written statement independently and 
impartially prepared by a qualified appraiser setting forth an opinion 
as to the market value of an adequately described property as of a 
specific date(s), supported by the presentation and analysis of relevant 
market information.
    (b) Appraisal Foundation means the Appraisal Foundation established 
on November 30, 1987, as a not-for-profit corporation under the laws of 
Illinois.
    (c) Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business entity.
    (e) Complex 1-to-4 family residential property appraisal means one 
in which the property to be appraised, the form of ownership, or market 
conditions are atypical.
    (f) Federally related transaction means any real estate-related 
financial transaction entered into on or after August 9, 1990, that:
    (1) The Board or any regulated institution engages in or contracts 
for; and

[[Page 202]]

    (2) Requires the services of an appraiser.
    (g) Market value means the most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently and 
knowledgeably, and assuming the price is not affected by undue stimulus. 
Implicit in this definition is the consummation of a sale as of a 
specified date and the passing of title from seller to buyer under 
conditions whereby:
    (1) Buyer and seller are typically motivated;
    (2) Both parties are well informed or well advised, and acting in 
what they consider their own best interests;
    (3) A reasonable time is allowed for exposure in the open market;
    (4) Payment is made in terms of cash in U.S. dollars or in terms of 
financial arrangements comparable thereto; and
    (5) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (h) Real estate or real property means an identified parcel or tract 
of land, with improvements, and includes easements, rights of way, 
undivided or future interests, or similar rights in a tract of land, but 
does not include mineral rights, timber rights, growing crops, water 
rights, or similar interests severable from the land when the 
transaction does not involve the associated parcel or tract of land.
    (i) Real estate-related financial transaction means any transaction 
involving:
    (1) The sale, lease, purchase, investment in or exchange of real 
property, including interests in property, or the financing thereof; or
    (2) The refinancing of real property or interests in real property; 
or
    (3) The use of real property or interests in property as security 
for a loan or investment, including mortgage-backed securities.
    (j) State certified appraiser means any individual who has satisfied 
the requirements for certification in a State or territory whose 
criteria for certification as a real estate appraiser currently meet or 
exceed the minimum criteria for certification issued by the Appraiser 
Qualifications Board of the Appraisal Foundation. No individual shall be 
a State certified appraiser unless such individual has achieved a 
passing grade upon a suitable examination administered by a State or 
territory that is consistent with and equivalent to the Uniform State 
Certification Examination issued or endorsed by the Appraiser 
Qualifications Board of the Appraisal Foundation. In addition, the 
Appraisal Subcommittee must not have issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI of FIRREA. The Board may, from time to time, impose additional 
qualification criteria for certified appraisers performing appraisals in 
connection with federally related transactions within its jurisdiction.
    (k) State licensed appraiser means any individual who has satisfied 
the requirements for licensing in a State or territory where the 
licensing procedures comply with title XI of FIRREA and where the 
Appraisal Subcommittee has not issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI. The Board may, from time to time, impose additional 
qualification criteria for licensed appraisers performing appraisals in 
connection with federally related transactions within the Board's 
jurisdiction.
    (l) Tract development means a project of five units or more that is 
constructed or is to be constructed as a single development.
    (m) Transaction value means:
    (1) For loans or other extensions of credit, the amount of the loan 
or extension of credit;
    (2) For sales, leases, purchases, and investments in or exchanges of 
real property, the market value of the real property interest involved; 
and
    (3) For the pooling of loans or interests in real property for 
resale or purchase, the amount of the loan or the market value of the 
real property calculated with respect to each such loan or interest in 
real property.

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

[[Page 203]]



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

    (a) Appraisals required. An appraisal performed by a State certified 
or licensed appraiser is required for all real estate-related financial 
transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than the 
real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived from, 
real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met Board regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable to 
that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity and 
is not required to obtain an appraisal under other law;
    (12) The transaction involves underwriting or dealing in mortgage-
backed securities; or
    (13) The Board determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is consistent 
with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The Board 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
    (d) Transactions requiring a State certified appraiser--(1) All 
transactions of $1,000,000 or more. All federally related transactions 
having a transaction value of $1,000,000 or more shall require an 
appraisal prepared by a State certified appraiser.
    (2) Nonresidential transactions of $250,000 or more. All federally 
related transactions having a transaction value of $250,000 or more, 
other than those involving appraisals of 1-to-4 family residential 
properties, shall require an appraisal prepared by a State certified 
appraiser.

[[Page 204]]

    (3) Complex residential transactions of $250,000 or more. All 
complex 1-to-4 family residential property appraisals rendered in 
connection with federally related transactions shall require a State 
certified appraiser if the transaction value is $250,000 or more. A 
regulated institution may presume that appraisals of 1-to-4 family 
residential properties are not complex, unless the institution has 
readily available information that a given appraisal will be complex. 
The regulated institution shall be responsible for making the final 
determination of whether the appraisal is complex. If during the course 
of the appraisal a licensed appraiser identifies factors that would 
result in the property, form of ownership, or market conditions being 
considered atypical, then either:
    (i) The regulated institution may ask the licensed appraiser to 
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
    (ii) The institution may engage a certified appraiser to complete 
the appraisal.
    (e) Transactions requiring either a State certified or licensed 
appraiser. All appraisals for federally related transactions not 
requiring the services of a State certified appraiser shall be prepared 
by either a State certified appraiser or a State licensed appraiser.

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



Sec. 225.64  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice promulgated 
by the Appraisal Standards Board of the Appraisal Foundation, 1029 
Vermont Ave., NW., Washington, DC 20005, unless principles of safe and 
sound banking require compliance with stricter standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (d) Be based upon the definition of market value as set forth in 
this subpart; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.

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



Sec. 225.65  Appraiser independence.

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

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

[[Page 205]]



Sec. 225.66  Professional association membership; competency.

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



Sec. 225.67  Enforcement.

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



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

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



Sec. 225.71  Definitions.

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



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

    (a) Prior notice by regulated institution. A regulated institution 
shall give the Board 30 days' written notice, as specified in Sec. 
225.73, before adding or replacing any member of its board of directors, 
employing any person as a senior executive officer of the institution, 
or changing the responsibilities of any

[[Page 206]]

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



Sec. 225.73  Procedures for filing, processing, and acting on notices;
standards for disapproval; waiver of notice.

    (a) Filing notice--(1) Content. The notice required in Sec. 225.72 
shall be filed with the appropriate Reserve Bank and shall contain:
    (i) The information required by paragraph 6(A) of the Change in Bank 
Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the 
designated Board form;
    (ii) Additional information consistent with the Federal Financial 
Institutions Examination Council's Joint Statement of Guidelines on 
Conducting Background Checks and Change in Control Investigations, as 
set forth in the designated Board form; and
    (iii) Such other information as may be required by the Board or 
Reserve Bank.
    (2) Modification. The Reserve Bank may modify or accept other 
information in place of the requirements of Sec. 225.73(a)(1) for a 
notice filed under this subpart.
    (3) Acceptance and processing of notice. The 30-day notice period 
specified in Sec. 225.72 shall begin on the date all information 
required to be submitted by the notificant pursuant to Sec. 
225.73(a)(1) is received by the appropriate Reserve Bank. The Reserve 
Bank shall notify the regulated institution or individual submitting the 
notice of the date on which all required information is received and the 
notice is accepted for processing, and of the date on which the 30-day 
notice period will expire. The Board or Reserve Bank may extend the 30-
day notice period for an additional period of not more than 60 days by 
notifying the regulated institution or individual filing the notice that 
the period has been extended and stating the reason for not processing 
the notice within the 30-day notice period.
    (b) Commencement of service--(1) At expiration of period. A proposed 
director or senior executive officer may begin service after the end of 
the 30-day period and any extension as provided under paragraph (a)(3) 
of this section, unless the Board or Reserve Bank disapproves the notice 
before the end of the period.
    (2) Prior to expiration of period. A proposed director or senior 
executive officer may begin service before the end of the 30-day period 
and any extension as provided under paragraph (a)(3) of this section, if 
the Board or the Reserve Bank notifies in writing the regulated 
institution or individual submitting the notice of the Board's or 
Reserve Bank's intention not to disapprove the notice.
    (c) Notice of disapproval. The Board or Reserve Bank shall 
disapprove a notice under Sec. 225.72 if the Board or Reserve Bank 
finds that the competence, experience, character, or integrity of the 
individual with respect to whom the notice is submitted indicates that 
it would not be in the best interests of the depositors of the regulated 
institution or in the best interests of the public to permit the 
individual to be employed by, or associated with, the regulated 
institution. The notice of disapproval shall contain a statement of the 
basis for disapproval and shall be sent to the regulated institution and 
the disapproved individual.
    (d) Appeal of a notice of disapproval. (1) A disapproved individual 
or a regulated institution that has submitted a notice that is 
disapproved under this section may appeal the disapproval to

[[Page 207]]

the Board within 15 days of the effective date of the notice of 
disapproval. An appeal shall be in writing and explain the reasons for 
the appeal and include all facts, documents, and arguments that the 
appealing party wishes to be considered in the appeal, and state whether 
the appealing party is requesting an informal hearing.
    (2) Written notice of the final decision of the Board shall be sent 
to the appealing party within 60 days of the receipt of an appeal, 
unless the appealing party's request for an informal hearing is granted.
    (3) The disapproved individual may not serve as a director or senior 
executive officer of the state member bank or bank holding company while 
the appeal is pending.
    (e) Informal hearing. (1) An individual or regulated institution 
whose notice under this section has been disapproved may request an 
informal hearing on the notice. A request for an informal hearing shall 
be in writing and shall be submitted within 15 days of a notice of 
disapproval. The Board may, in its sole discretion, order an informal 
hearing if the Board finds that oral argument is appropriate or 
necessary to resolve disputes regarding material issues of fact.
    (2) An informal hearing shall be held within 30 days of a request, 
if granted, unless the requesting party agrees to a later date.
    (3) Written notice of the final decision of the Board shall be given 
to the individual and the regulated institution within 60 days of the 
conclusion of any informal hearing ordered by the Board, unless the 
requesting party agrees to a later date.
    (f) Waiver of notice--(1) Waiver requests. The Board or Reserve Bank 
may permit an individual to serve as a senior executive officer or 
director before the notice required under this subpart is provided, if 
the Board or Reserve Bank finds that:
    (i) Delay would threaten the safety or soundness of the regulated 
institution or a bank controlled by a bank holding company;
    (ii) Delay would not be in the public interest; or
    (iii) Other extraordinary circumstances exist that justify waiver of 
prior notice.
    (2) Automatic waiver. An individual may serve as a director upon 
election to the board of directors of a regulated institution before the 
notice required under this subpart is provided if the individual:
    (i) Is not proposed by the management of the regulated institution;
    (ii) Is elected as a new member of the board of directors at a 
meeting of the regulated institution; and
    (iii) Provides to the appropriate Reserve Bank all the information 
required in Sec. 225.73(a) within two (2) business days after the 
individual's election.
    (3) Effect on disapproval authority. A waiver shall not affect the 
authority of the Board or Reserve Bank to disapprove a notice within 30 
days after a waiver is granted under paragraph (f)(1) of this section or 
the election of an individual who has filed a notice and is serving 
pursuant to an automatic waiver under paragraph (f)(2) of this section.



                  Subpart I_Financial Holding Companies

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



Sec. 225.81  What is a financial holding company?

    (a) Definition. A financial holding company is a bank holding 
company that meets the requirements of this section.
    (b) Requirements to be a financial holding company. In order to be a 
financial holding company:
    (1) All depository institutions controlled by the bank holding 
company must be and remain well capitalized;
    (2) All depository institutions controlled by the bank holding 
company must be and remain well managed; and
    (3) The bank holding company must have made an effective election to 
become a financial holding company.
    (c) Requirements for foreign banks that are or are owned by bank 
holding companies--(1) Foreign banks with U.S. branches or agencies that 
also own U.S. banks. A foreign bank that is a bank holding company and 
that operates a branch or agency or owns or controls a commercial 
lending company in the

[[Page 208]]

United States must comply with the requirements of this section, Sec. 
225.82, and Sec. Sec. 225.90 through 225.92 in order to be a financial 
holding company. After it becomes a financial holding company, a foreign 
bank described in this paragraph will be subject to the provisions of 
Sec. Sec. 225.83, 225.84, 225.93, and 225.94.
    (2) Bank holding companies that own foreign banks with U.S. branches 
or agencies. A bank holding company that owns a foreign bank that 
operates a branch or agency or owns or controls a commercial lending 
company in the United States must comply with the requirements of this 
section, Sec. 225.82, and Sec. Sec. 225.90 through 225.92 in order to 
be a financial holding company. After it becomes a financial holding 
company, a bank holding company described in this paragraph will be 
subject to the provisions of Sec. Sec. 225.83, 225.84, 225.93, and 
225.94.



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

    (a) Filing requirement. A bank holding company may elect to become a 
financial holding company by filing a written declaration with the 
appropriate Reserve Bank. A declaration by a bank holding company is 
considered to be filed on the date that all information required by 
paragraph (b) of this section is received by the appropriate Reserve 
Bank.
    (b) Contents of declaration. To be deemed complete, a declaration 
must:
    (1) State that the bank holding company elects to be a financial 
holding company;
    (2) Provide the name and head office address of the bank holding 
company and of each depository institution controlled by the bank 
holding company;
    (3) Certify that each depository institution controlled by the bank 
holding company is well capitalized as of the date the bank holding 
company submits its declaration;
    (4) Provide the capital ratios as of the close of the previous 
quarter for all relevant capital measures, as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o), for each depository 
institution controlled by the company on the date the company submits 
its declaration; and
    (5) Certify that each depository institution controlled by the 
company is well managed as of the date the company submits its 
declaration.
    (c) Effectiveness of election. An election by a bank holding company 
to become a financial holding company shall not be effective if, during 
the period provided in paragraph (e) of this section, the Board finds 
that, as of the date the declaration was filed with the appropriate 
Reserve Bank:
    (1) Any insured depository institution controlled by the bank 
holding company (except an institution excluded under paragraph (d) of 
this section) has not achieved at least a rating of ``satisfactory 
record of meeting community credit needs'' under the Community 
Reinvestment Act at the institution's most recent examination; or
    (2) Any depository institution controlled by the bank holding 
company is not both well capitalized and well managed.
    (d) Consideration of the CRA performance of a recently acquired 
insured depository institution. Except as provided in paragraph (f) of 
this section, an insured depository institution will be excluded for 
purposes of the review of the Community Reinvestment Act rating 
provisions of paragraph (c)(1) of this section if:
    (1) The bank holding company acquired the insured depository 
institution during the 12-month period preceding the filing of an 
election under paragraph (a) of this section;
    (2) The bank holding company has submitted an affirmative plan to 
the appropriate Federal banking agency for the institution to take 
actions necessary for the institution to achieve at least a rating of 
``satisfactory record of meeting community credit needs'' under the 
Community Reinvestment Act at the next examination of the institution; 
and
    (3) The appropriate Federal banking agency for the institution has 
accepted the plan described in paragraph (d)(2) of this section.
    (e) Effective date of election--(1) In general. An election filed by 
a bank holding company under paragraph (a) of this section is effective 
on the 31st

[[Page 209]]

calendar day after the date that a complete declaration was filed with 
the appropriate Reserve Bank, unless the Board notifies the bank holding 
company prior to that time that the election is ineffective.
    (2) Earlier notification that an election is effective. The Board or 
the appropriate Reserve Bank may notify a bank holding company that its 
election to become a financial holding company is effective prior to the 
31st day after the date that a complete declaration was filed with the 
appropriate Reserve Bank. Such a notification must be in writing.
    (f) Requests to become a financial holding company submitted as part 
of an application to become a bank holding company--(1) In general. A 
company that is not a bank holding company and has applied for the 
Board's approval to become a bank holding company under section 3(a)(1) 
of the BHC Act (12 U.S.C. 1842(a)(1)) may as part of that application 
submit a request to become a financial holding company.
    (2) Contents of request. A request to become a financial holding 
company submitted as part of an application to become a bank holding 
company must:
    (i) State that the company seeks to become a financial holding 
company on consummation of its proposal to become a bank holding 
company; and
    (ii) Certify that each depository institution that would be 
controlled by the company on consummation of its proposal to become a 
bank holding company will be both well capitalized and well managed as 
of the date the company consummates the proposal.
    (3) Request becomes a declaration and an effective election on date 
of consummation of bank holding company proposal. A complete request 
submitted by a company under this paragraph (f) becomes a complete 
declaration by a bank holding company for purposes of section 4(l) of 
the BHC Act (12 U.S.C. 1843(l)) and becomes an effective election for 
purposes of Sec. 225.81(b) on the date that the company lawfully 
consummates its proposal under section 3 of the BHC Act (12 U.S.C. 
1842), unless the Board notifies the company at any time prior to 
consummation of the proposal and that:
    (i) Any depository institution that would be controlled by the 
company on consummation of the proposal will not be both well 
capitalized and well managed on the date of consummation; or
    (ii) Any insured depository institution that would be controlled by 
the company on consummation of the proposal has not achieved at least a 
rating of ``satisfactory record of meeting community credit needs'' 
under the Community Reinvestment Act at the institution's most recent 
examination.
    (4) Limited exclusion for recently acquired institutions not 
available. Unless the Board determines otherwise, an insured depository 
institution that is controlled or would be controlled by the company as 
part of its proposal to become a bank holding company may not be 
excluded for purposes of evaluating the Community Reinvestment Act 
criterion described in this paragraph or in paragraph (d) of this 
section.
    (g) Board's authority to exercise supervisory authority over a 
financial holding company. An effective election to become a financial 
holding company does not in any way limit the Board's statutory 
authority under the BHC Act, the Federal Deposit Insurance Act, or any 
other relevant Federal statute to take appropriate action, including 
imposing supervisory limitations, restrictions, or prohibitions on the 
activities and acquisitions of a bank holding company that has elected 
to become a financial holding company, or enforcing compliance with 
applicable law.



Sec. 225.83  What are the consequences of failing to continue to meet
applicable capital and management requirements?

    (a) Notice by the Board. If the Board finds that a financial holding 
company controls any depository institution that is not well capitalized 
or well managed, the Board will notify the company in writing that it is 
not in compliance with the applicable requirement(s) for a financial 
holding company and identify the area(s) of noncompliance. The Board may 
provide this notice at any time before or after receiving notice from 
the financial holding company under paragraph (b) of this section.

[[Page 210]]

    (b) Notification by a financial holding company required--(1) Notice 
to Board. A financial holding company must notify the Board in writing 
within 15 calendar days of becoming aware that any depository 
institution controlled by the company has ceased to be well capitalized 
or well managed. This notification must identify the depository 
institution involved and the area(s) of noncompliance.
    (2) Triggering events for notice to the Board--(i) Well capitalized. 
A company becomes aware that a depository institution it controls is no 
longer well capitalized upon the occurrence of any material event that 
would change the category assigned to the institution for purposes of 
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o). See 
12 CFR 6.3(b)-(c), 208.42(b)-(c), and 325.102(b)-(c).
    (ii) Well managed. A company becomes aware that a depository 
institution it controls is no longer well managed at the time the 
depository institution receives written notice from the appropriate 
Federal or state banking agency that either its composite rating or its 
rating for management is not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice from the 
Board under paragraph (a) of this section, the company must execute an 
agreement acceptable to the Board to comply with all applicable capital 
and management requirements.
    (2) Extension of time for executing agreement. Upon request by a 
company, the Board may extend the 45-day period under paragraph (c)(1) 
of this section if the Board determines that granting additional time is 
appropriate under the circumstances. A request by a company for 
additional time must include an explanation of why an extension is 
necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1) of this section to correct a capital or management deficiency 
must:
    (i) Explain the specific actions that the company will take to 
correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.
    (d) Limitations during period of noncompliance--Until the Board 
determines that a company has corrected the conditions described in a 
notice under paragraph (a) of this section:
    (1) The Board may impose any limitations or conditions on the 
conduct or activities of the company or any of its affiliates as the 
Board finds to be appropriate and consistent with the purposes of the 
BHC Act; and
    (2) The company and its affiliates may not commence any additional 
activity or acquire control or shares of any company under section 4(k) 
of the BHC Act without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Divestiture of depository institutions. If a company does not 
correct the conditions described in a notice under paragraph (a) of this 
section within 180 days of receipt of the notice or such additional time 
as the Board may permit, the Board may order the company to divest 
ownership or control of any depository institution owned or controlled 
by the company. Such divestiture must be done in accordance with the 
terms and conditions established by the Board.
    (2) Alternative method of complying with a divestiture order. A 
company may comply with an order issued under paragraph (e)(1) of this 
section by ceasing to engage (both directly and through any subsidiary 
that is not a depository institution or a subsidiary of a depository 
institution) in any activity that may be conducted only under section 
4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n), or (o)). The 
termination of activities must be completed within the time period 
referred to in paragraph (e)(1) of this section and in accordance with 
the terms and conditions acceptable to the Board.
    (f) Consultation with other agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and state 
regulatory authorities.

[[Page 211]]



Sec. 225.84  What are the consequences of failing to maintain a 
satisfactory or better rating under the Community Reinvestment Act 
at all insured depository institution subsidiaries?
          

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



Sec. 225.85  Is notice to or approval from the Board required prior
to engaging in a financial activity?

    (a) No prior approval required generally--(1) In general. A 
financial holding company and any subsidiary (other than a depository 
institution or subsidiary of a depository institution) of the financial 
holding company may engage in any activity listed in Sec. 225.86, or 
acquire shares or control of a company engaged exclusively in activities 
listed in Sec. 225.86, without providing prior notice to or obtaining 
prior approval from the Board unless required under paragraph (c) of 
this section.
    (2) Acquisitions by a financial holding company of a company engaged 
in other permissible activities. In addition to the activities listed in 
Sec. 225.86, a company acquired or to be acquired by a financial 
holding company under paragraph (a)(1) of this section may engage in 
activities otherwise permissible for a financial holding company under 
this part in accordance with any applicable notice, approval, or other 
requirement.

[[Page 212]]

    (3) Acquisition by a financial holding company of a company engaged 
in limited nonfinancial activities--(i) Mixed acquisitions generally 
permitted. A financial holding company may under this subpart acquire 
more than 5 percent of the outstanding shares of any class of voting 
securities or control of a company that is not engaged exclusively in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding company 
under section 4(c) of the BHC Act (12 U.S.C. 1843(c)) if:
    (A) The company to be acquired is substantially engaged in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding company 
under section 4(c) of the BHC Act (12 U.S.C. 1843(c));
    (B) The financial holding company complies with the notice 
requirements of Sec. 225.87, if applicable; and
    (C) The company conforms, terminates, or divests, within 2 years of 
the date the financial holding company acquires shares or control of the 
company, all activities that are not financial in nature, incidental to 
a financial activity, or otherwise permissible for the financial holding 
company under section 4(c) (12 U.S.C. 1843(c))of the BHC Act.
    (ii) Definition of ``substantially engaged.'' Unless the Board 
determines otherwise, a company will be considered to be ``substantially 
engaged'' in activities permissible for a financial holding company for 
purposes of paragraph (a)(3)(A) of this section if at least 85 percent 
of the company's consolidated total annual gross revenues is derived 
from and at least 85 percent of the company's consolidated total assets 
is attributable to the conduct of activities that are financial in 
nature, incidental to a financial activity, or otherwise permissible for 
a financial holding company under section 4(c) of the BHC Act (12 U.S.C. 
1843(c)).
    (b) Locations in which a financial holding company may conduct 
financial activities. A financial holding company may conduct any 
activity listed in Sec. 225.86 at any location in the United States or 
at any location outside of the United States subject to the laws of the 
jurisdiction in which the activity is conducted.
    (c) Circumstances under which prior notice to the Board is 
required--(1) Acquisition of more than 5 percent of the shares of a 
savings association. A financial holding company must obtain Board 
approval in accordance with section 4(j) of the BHC Act (12 U.S.C. 
1843(j)) and either Sec. 225.14 or Sec. 225.24, as appropriate, prior 
to acquiring control or more than 5 percent of the outstanding shares of 
any class of voting securities of a savings association or of a company 
that owns, operates, or controls a savings association.
    (2) Supervisory actions. The Board may, if appropriate in the 
exercise of its supervisory or other authority, including under Sec. 
225.82(g) or Sec. 225.83(d) or other relevant authority, require a 
financial holding company to provide notice to or obtain approval from 
the Board prior to engaging in any activity or acquiring shares or 
control of any company.



Sec. 225.86  What activities are permissible for any financial holding
company?

    The following activities are financial in nature or incidental to a 
financial activity:
    (a) Activities determined to be closely related to banking. (1) Any 
activity that the Board had determined by regulation prior to November 
12, 1999, to be so closely related to banking as to be a proper incident 
thereto, subject to the terms and conditions contained in this part, 
unless modified by the Board. These activities are listed in Sec. 
225.28.
    (2) Any activity that the Board had determined by an order that was 
in effect on November 12, 1999, to be so closely related to banking as 
to be a proper incident thereto, subject to the terms and conditions 
contained in this part and those in the authorizing orders. These 
activities are:
    (i) Providing administrative and other services to mutual funds 
(Societe Generale, 84 Federal Reserve Bulletin 680 (1998));
    (ii) Owning shares of a securities exchange (J.P. Morgan & Co, Inc., 
and UBS AG, 86 Federal Reserve Bulletin 61 (2000));

[[Page 213]]

    (iii) Acting as a certification authority for digital signatures and 
authenticating the identity of persons conducting financial and 
nonfinancial transactions (Bayerische Hypo- und Vereinsbank AG, et al., 
86 Federal Reserve Bulletin 56 (2000));
    (iv) Providing employment histories to third parties for use in 
making credit decisions and to depository institutions and their 
affiliates for use in the ordinary course of business (Norwest 
Corporation, 81 Federal Reserve Bulletin 732 (1995));
    (v) Check cashing and wire transmission services (Midland Bank, PLC, 
76 Federal Reserve Bulletin 860 (1990) (check cashing); Norwest 
Corporation, 81 Federal Reserve Bulletin 1130 (1995) (money 
transmission));
    (vi) In connection with offering banking services, providing notary 
public services, selling postage stamps and postage-paid envelopes, 
providing vehicle registration services, and selling public 
transportation tickets and tokens (Popular, Inc., 84 Federal Reserve 
Bulletin 481 (1998)); and
    (vii) Real estate title abstracting (The First National Company, 81 
Federal Reserve Bulletin 805 (1995)).
    (b) Activities determined to be usual in connection with the 
transaction of banking abroad. Any activity that the Board had 
determined by regulation in effect on November 11, 1999, to be usual in 
connection with the transaction of banking or other financial operations 
abroad (see Sec. 211.5(d) of this chapter), subject to the terms and 
conditions in part 211 and Board interpretations in effect on that date 
regarding the scope and conduct of the activity. In addition to the 
activities listed in paragraphs (a) and (c) of this section, these 
activities are:
    (1) Providing management consulting services, including to any 
person with respect to nonfinancial matters, so long as the management 
consulting services are advisory and do not allow the financial holding 
company to control the person to which the services are provided;
    (2) Operating a travel agency in connection with financial services 
offered by the financial holding company or others; and
    (3) Organizing, sponsoring, and managing a mutual fund, so long as:
    (i) The fund does not exercise managerial control over the entities 
in which the fund invests; and
    (ii) The financial holding company reduces its ownership in the 
fund, if any, to less than 25 percent of the equity of the fund within 
one year of sponsoring the fund or such additional period as the Board 
permits.
    (c) Activities permitted under section 4(k)(4) of the BHC Act (12 
U.S.C. 1843(k)(4)). Any activity defined to be financial in nature under 
sections 4(k)(4)(A) through (E), (H) and (I) of the BHC Act (12 U.S.C. 
1843(k)(4)(A) through (E), (H) and (I)).
    (d) Activities determined to be financial in nature or incidental to 
financial activities by the Board--(1) Acting as a finder--Acting as a 
finder in bringing together one or more buyers and sellers of any 
product or service for transactions that the parties themselves 
negotiate and consummate.
    (i) What is the scope of finder activities? Acting as a finder 
includes providing any or all of the following services through any 
means--
    (A) Identifying potential parties, making inquiries as to interest, 
introducing and referring potential parties to each other, and arranging 
contacts between and meetings of interested parties;
    (B) Conveying between interested parties expressions of interest, 
bids, offers, orders and confirmations relating to a transaction; and
    (C) Transmitting information concerning products and services to 
potential parties in connection with the activities described in 
paragraphs (d)(1)(i)(A) and (B) of this section.
    (ii) What are some examples of finder services? The following are 
examples of the services that may be provided by a finder when done in 
accordance with paragraphs (d)(1)(iii) and (iv) of this section. These 
examples are not exclusive.
    (A) Hosting an electronic marketplace on the financial holding 
company's Internet web site by providing hypertext or similar links to 
the web sites of third party buyers or sellers.

[[Page 214]]

    (B) Hosting on the financial holding company's servers the Internet 
web site of--
    (1) A buyer (or seller) that provides information concerning the 
buyer (or seller) and the products or services it seeks to buy (or sell) 
and allows sellers (or buyers) to submit expressions of interest, bids, 
offers, orders and confirmations relating to such products or services; 
or
    (2) A government or government agency that provides information 
concerning the services or benefits made available by the government or 
government agency, assists persons in completing applications to receive 
such services or benefits from the government or agency, and allows 
persons to transmit their applications for services or benefits to the 
government or agency.
    (C) Operating an Internet web site that allows multiple buyers and 
sellers to exchange information concerning the products and services 
that they are willing to purchase or sell, locate potential 
counterparties for transactions, aggregate orders for goods or services 
with those made by other parties, and enter into transactions between 
themselves.
    (D) Operating a telephone call center that provides permissible 
finder services.
    (iii) What limitations are applicable to a financial holding company 
acting as a finder? (A) A finder may act only as an intermediary between 
a buyer and a seller.
    (B) A finder may not bind any buyer or seller to the terms of a 
specific transaction or negotiate the terms of a specific transaction on 
behalf of a buyer or seller, except that a finder may--
    (1) Arrange for buyers to receive preferred terms from sellers so 
long as the terms are not negotiated as part of any individual 
transaction, are provided generally to customers or broad categories of 
customers, and are made available by the seller (and not by the 
financial holding company); and
    (2) Establish rules of general applicability governing the use and 
operation of the finder service, including rules that--
    (i) Govern the submission of bids and offers by buyers and sellers 
that use the finder service and the circumstances under which the finder 
service will match bids and offers submitted by buyers and sellers; and
    (ii) Govern the manner in which buyers and sellers may bind 
themselves to the terms of a specific transaction.
    (C) A finder may not--
    (1) Take title to or acquire or hold an ownership interest in any 
product or service offered or sold through the finder service;
    (2) Provide distribution services for physical products or services 
offered or sold through the finder service;
    (3) Own or operate any real or personal property that is used for 
the purpose of manufacturing, storing, transporting, or assembling 
physical products offered or sold by third parties; or
    (4) Own or operate any real or personal property that serves as a 
physical location for the physical purchase, sale or distribution of 
products or services offered or sold by third parties.
    (D) A finder may not engage in any activity that would require the 
company to register or obtain a license as a real estate agent or broker 
under applicable law.
    (iv) What disclosures are required? A finder must distinguish the 
products and services offered by the financial holding company from 
those offered by a third party through the finder service.
    (2) [Reserved]
    (e) Activities permitted under section 4(k)(5) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(5)). (1) The following types of 
activities are financial in nature or incidental to a financial activity 
when conducted pursuant to a determination by the Board under paragraph 
(e)(2) of this section:
    (i) Lending, exchanging, transferring, investing for others, or 
safeguarding financial assets other than money or securities;
    (ii) Providing any device or other instrumentality for transferring 
money or other financial assets; and
    (iii) Arranging, effecting, or facilitating financial transactions 
for the account of third parties.
    (2) Review of specific activities--(i) Is a specific request 
required? A financial

[[Page 215]]

holding company that wishes to engage on the basis of paragraph (e)(1) 
of this section in an activity that is not otherwise permissible for a 
financial holding company must obtain a determination from the Board 
that the activity is permitted under paragraph (e)(1).
    (ii) Consultation with the Secretary of the Treasury. After 
receiving a request under this section, the Board will provide the 
Secretary of the Treasury with a copy of the request and consult with 
the Secretary in accordance with section 4(k)(2)(A) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(2)(A)).
    (iii) Board action on requests. After consultation with the 
Secretary, the Board will promptly make a written determination 
regarding whether the specific activity described in the request is 
included in an activity category listed in paragraph (e)(1) of this 
section and is therefore either financial in nature or incidental to a 
financial activity.
    (3) What factors will the Board consider? In evaluating a request 
made under this section, the Board will take into account the factors 
listed in section 4(k)(3) of the BHC Act (12 U.S.C. 1843(k)(3)) that it 
must consider when determining whether an activity is financial in 
nature or incidental to a financial activity.
    (4) What information must the request contain? Any request by a 
financial holding company under this section must be in writing and 
must:
    (i) Identify and define the activity for which the determination is 
sought, specifically describing what the activity would involve and how 
the activity would be conducted; and
    (ii) Provide information supporting the requested determination, 
including information regarding how the proposed activity falls into one 
of the categories listed in paragraph (e)(1) of this section, and any 
other information required by the Board concerning the proposed 
activity.

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



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

    (a) Post-transaction notice generally required to engage in a 
financial activity. A financial holding company that commences an 
activity or acquires shares of a company engaged in an activity listed 
in Sec. 225.86 must notify the appropriate Reserve Bank in writing 
within 30 calendar days after commencing the activity or consummating 
the acquisition by using the appropriate form.
    (b) Cases in which notice to the Board is not required--(1) 
Acquisitions that do not involve control of a company. A notice under 
paragraph (a) of this section is not required in connection with the 
acquisition of shares of a company if, following the acquisition, the 
financial holding company does not control the company.
    (2) No additional notice required to engage de novo in an activity 
for which a financial holding company already has provided notice. After 
a financial holding company provides the appropriate Reserve Bank with 
notice that the company is engaged in an activity listed in Sec. 
225.86, a financial holding company may, unless otherwise notified by 
the Board, commence the activity de novo through any subsidiary that the 
financial holding company is authorized to control without providing 
additional notice under paragraph (a) of this section.
    (3) Conduct of certain investment activities. Unless required by 
paragraph (b)(4) of this section, a financial holding company is not 
required to provide notice under paragraph (a) of this section of any 
individual acquisition of shares of a company as part of the conduct by 
a financial holding company of securities underwriting, dealing, or 
market making activities as described in section 4(k)(4)(E) of the BHC 
Act (12 U.S.C. 1843(k)(4)(E)), merchant banking activities conducted 
pursuant to section 4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), 
or insurance company investment activities conducted pursuant to section 
4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), if the financial 
holding company previously has notified the Board under paragraph (a) of 
this section that the company has commenced the relevant securities, 
merchant banking, or insurance company investment activities, as 
relevant.

[[Page 216]]

    (4) Notice of large merchant banking or insurance company 
investments. Notwithstanding paragraph (b)(1) or (b)(3) of this section, 
a financial holding company must provide notice under paragraph (a) of 
the section if:
    (i) As part of a merchant banking activity conducted under section 
4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), the financial 
holding company acquires more than 5 percent of the shares, assets, or 
ownership interests of any company at a total cost that exceeds the 
lesser of 5 percent of the financial holding company's Tier 1 capital or 
$200 million;
    (ii) As part of an insurance company investment activity conducted 
under section 4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), the 
financial holding company acquires more than 5 percent of the shares, 
assets, or ownership interests of any company at a total cost that 
exceeds the lesser of 5 percent of the financial holding company's Tier 
1 capital or $200 million; or
    (iii) The Board in the exercise of its supervisory authority 
notifies the financial holding company that a notice is necessary.



Sec. 225.88  How to request the Board to determine that an activity
is financial in nature or incidental to a financial activity?

    (a) Requests regarding activities that may be financial in nature or 
incidental to a financial activity. A financial holding company or other 
interested party may request a determination from the Board that an 
activity not listed in Sec. 225.86 is financial in nature or incidental 
to a financial activity.
    (b) Required information. A request submitted under this section 
must be in writing and must:
    (1) Identify and define the activity for which the determination is 
sought, specifically describing what the activity would involve and how 
the activity would be conducted;
    (2) Explain in detail why the activity should be considered 
financial in nature or incidental to a financial activity; and
    (3) Provide information supporting the requested determination and 
any other information required by the Board concerning the proposed 
activity.
    (c) Board procedures for reviewing requests--(1) Consultation with 
the Secretary of the Treasury. Upon receipt of the request, the Board 
will provide the Secretary of the Treasury a copy of the request and 
consult with the Secretary in accordance with section 4(k)(2)(A) of the 
BHC Act (12 U.S.C. 1843(k)(2)(A)).
    (2) Public notice. The Board may, as appropriate and after 
consultation with the Secretary, publish a description of the proposal 
in the Federal Register with a request for public comment.
    (d) Board action. The Board will endeavor to make a decision on any 
request filed under paragraph (a) of this section within 60 calendar 
days following the completion of both the consultative process described 
in paragraph (c)(1) of this section and the public comment period, if 
any.
    (e) Advisory opinions regarding scope of financial activities--(1) 
Written request. A financial holding company or other interested party 
may request an advisory opinion from the Board about whether a specific 
proposed activity falls within the scope of an activity listed in Sec. 
225.86 as financial in nature or incidental to a financial activity. The 
request must be submitted in writing and must contain:
    (i) A detailed description of the particular activity in which the 
company proposes to engage or the product or service the company 
proposes to provide;
    (ii) An explanation supporting an interpretation regarding the scope 
of the permissible financial activity; and
    (iii) Any additional information requested by the Board regarding 
the activity.
    (2) Board response. The Board will provide an advisory opinion 
within 45 calendar days of receiving a complete written request under 
paragraph (e)(1) of this section.



Sec. 225.89  How to request approval to engage in an activity that
is complementary to a financial activity?

    (a) Prior Board approval is required. A financial holding company 
that seeks to engage in or acquire more than 5 percent of the 
outstanding shares of

[[Page 217]]

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



Sec. 225.90  What are the requirements for a foreign bank to be
treated as a financial holding company?

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

[[Page 218]]

Sec. 225.91(c) that the foreign bank's capital is otherwise comparable 
to the capital that would be required of a U.S. bank owned by a 
financial holding company.
    (c) Standards for ``well managed.'' A foreign bank will be 
considered ``well managed'' if:
    (1) The foreign bank has received at least a satisfactory composite 
rating of its U.S. branch, agency, and commercial lending company 
operations at its most recent assessment;
    (2) The home country supervisor of the foreign bank consents to the 
foreign bank expanding its activities in the United States to include 
activities permissible for a financial holding company; and
    (3) The management of the foreign bank meets standards comparable to 
those required of a U.S. bank owned by a financial holding company.



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

    (a) Filing requirement. A foreign bank that operates a branch or 
agency or owns or controls a commercial lending company in the United 
States, or a company that owns or controls such a foreign bank, may 
elect to be treated as a financial holding company by filing a written 
declaration with the appropriate Reserve Bank.
    (b) Contents of declaration. The declaration must:
    (1) State that the foreign bank or the company elects to be treated 
as a financial holding company;
    (2) Provide the risk-based capital ratios and amount of Tier 1 
capital and total assets of the foreign bank, and of each foreign bank 
that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, as of the close of the 
most recent quarter and as of the close of the most recent audited 
reporting period;
    (3) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, meets the standards of well 
capitalized set out in Sec. 225.90(b)(1)(i) and (ii) or Sec. 
225.90(b)(2) as of the date the foreign bank or company files its 
election;
    (4) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, is well managed as defined in 
Sec. 225.90(c)(1) as of the date the foreign bank or company files its 
election;
    (5) Certify that all U.S. depository institution subsidiaries of the 
foreign bank or company are well capitalized and well managed as of the 
date the foreign bank or company files its election; and
    (6) Provide the capital ratios for all relevant capital measures (as 
defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 
1831(o))) as of the close of the previous quarter for each U.S. 
depository institution subsidiary of the foreign bank or company.
    (c) Pre-clearance process. Before filing an election to be treated 
as a financial holding company, a foreign bank or company may file a 
request for review of its qualifications to be treated as a financial 
holding company. The Board will endeavor to make a determination on such 
requests within 30 days of receipt. A foreign bank that has not been 
found, or that is chartered in a country where no bank from that country 
has been found, by the Board under the Bank Holding Company Act or the 
International Banking Act to be subject to comprehensive supervision or 
regulation on a consolidated basis by its home country supervisor is 
required to use this process.



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

    (a) In general. An election described in Sec. 225.91 is effective 
on the 31st day after the date that an election was received by the 
appropriate Federal Reserve Bank, unless the Board notifies the foreign 
bank or company prior to that time that:
    (1) The election is ineffective; or
    (2) The period is extended with the consent of the foreign bank or 
company making the election.
    (b) Earlier notification that an election is effective. The Board or 
the appropriate Federal Reserve Bank may notify a foreign bank or 
company that its

[[Page 219]]

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



Sec. 225.93  What are the consequences of a foreign bank failing
to continue to meet applicable capital and management requirements?

    (a) Notice by the Board. If a foreign bank or company has made an 
effective election to be treated as a financial holding company under 
this subpart and the Board finds that the foreign bank, any foreign bank 
that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, or any U.S. depository 
institution subsidiary controlled by the foreign bank or company, ceases 
to be well capitalized or well managed, the Board will notify the 
foreign bank and company, if any, in writing that it is not in 
compliance with the applicable requirement(s) for a financial holding 
company and identify the areas of noncompliance.
    (b) Notification by a financial holding company required--(1) Notice 
to Board. Promptly upon becoming aware that the foreign bank, any 
foreign bank

[[Page 220]]

that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, or any U.S. depository 
institution subsidiary of the foreign bank or company, has ceased to be 
well capitalized or well managed, the foreign bank and company, if any, 
must notify the Board and identify the area of noncompliance.
    (2) Triggering events for notice to the Board--(i) Well capitalized. 
A foreign bank becomes aware that it is no longer well capitalized at 
the time that the foreign bank or company is required to file a report 
of condition (or similar supervisory report) with its home country 
supervisor or the appropriate Federal Reserve Bank that indicates that 
the foreign bank no longer meets the well capitalized standards.
    (ii) Well managed. A foreign bank becomes aware that it is no longer 
well managed at the time that the foreign bank receives written notice 
from the appropriate Federal Reserve Bank that the composite rating of 
its U.S. branch, agency, and commercial lending company operations is 
not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice under 
paragraph (a) of this section, the foreign bank or company must execute 
an agreement acceptable to the Board to comply with all applicable 
capital and management requirements.
    (2) Extension of time for executing agreement. Upon request by the 
foreign bank or company, the Board may extend the 45-day period under 
paragraph (c)(1) of this section if the Board determines that granting 
additional time is appropriate under the circumstances. A request by a 
foreign bank or company for additional time must include an explanation 
of why an extension is necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1) of this section to correct a capital or management deficiency 
must:
    (i) Explain the specific actions that the foreign bank or company 
will take to correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.
    (d) Limitations during period of noncompliance--Until the Board 
determines that a foreign bank or company has corrected the conditions 
described in a notice under paragraph (a) of this section:
    (1) The Board may impose any limitations or conditions on the 
conduct or the U.S. activities of the foreign bank or company or any of 
its affiliates as the Board finds to be appropriate and consistent with 
the purposes of the Bank Holding Company Act; and
    (2) The foreign bank or company and its affiliates may not commence 
any additional activity in the United States or acquire control or 
shares of any company under section 4(k) of the Bank Holding Company Act 
(12 U.S.C. 1843(k)) without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Termination of Offices and Divestiture. If a foreign bank or company 
does not correct the conditions described in a notice under paragraph 
(a) of this section within 180 days of receipt of the notice or such 
additional time as the Board may permit, the Board may order the foreign 
bank or company to terminate the foreign bank's U.S. branches and 
agencies and divest any commercial lending companies owned or controlled 
by the foreign bank or company. Such divestiture must be done in 
accordance with the terms and conditions established by the Board.
    (2) Alternative method of complying with a divestiture order. A 
foreign bank or company may comply with an order issued under paragraph 
(e)(1) of this section by ceasing to engage (both directly and through 
any subsidiary that is not a depository institution or a subsidiary of a 
depository institution) in any activity that may be conducted only under 
section 4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n) and 
(o)). The termination of activities must be completed within the time 
period referred to in paragraph (e)(1) of this section and subject to 
terms and conditions acceptable to the Board.

[[Page 221]]

    (f) Consultation with Other Agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and state 
regulatory authorities and the appropriate home country supervisor(s) of 
the foreign bank.



Sec. 225.94  What are the consequences of an insured branch or
depository institution failing to maintain a satisfactory or better
rating under the Community Reinvestment Act?

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

                             Interpretations



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

    (a) The Board's opinion has been requested on the following related 
matters under the Bank Holding Company Act of 1956.
    (b) The question is raised as to whether shares in a nonbanking 
company which were acquired by a banking subsidiary of the bank holding 
company many years ago when their acquisition was lawful and are now 
held as investments, and which do not include more than 5 percent of the 
outstanding voting securities of such nonbanking company and do not have 
a value greater than 5 percent of the value of the bank holding 
company's total assets, are exempted from the divestment requirements of 
the Act by the provisions of section 4(c)(5) of the Act.
    (c) In the Board's opinion, this exemption is as applicable to such 
shares when held by a banking subsidiary of a bank holding company as 
when held directly by the bank holding company itself. While the 
exemption specifically refers only to shares held or acquired by the 
bank holding company, the prohibition of the Act against retention of 
nonbanking interests applies to indirect as well as direct ownership of 
shares of a nonbanking company, and, in the absence of a clear mandate 
to the contrary, any exception to this prohibition should be given equal 
breadth with the prohibition. Any other interpretation would lead to 
unwarranted results.
    (d) Although certain of the other exemptions in section 4(c) of the 
Act specifically refer to shares held or acquired by banking 
subsidiaries, an analysis of those exemptions suggests that such 
specific reference to banking subsidiaries was for the purpose of 
excluding nonbanking subsidiaries from such exemptions, rather than for 
the purpose of providing an inclusionary emphasis on banking 
subsidiaries.
    (e) It should be noted that the Board's view as to this question 
should not be interpreted as meaning that each banking subsidiary could 
own up to 5 percent of the stock of the same nonbanking organization. In 
the Board's opinion the limitations set forth in section 4(c)(5) apply 
to the aggregate amount of stock held in a particular organization by 
the bank holding company itself and by all of its subsidiaries.
    (f) Secondly, question is raised as to whether shares in a 
nonbanking company acquired in satisfaction of debts previously 
contracted (d.p.c.) by a banking subsidiary of the bank holding company 
may be retained if such shares meet the conditions contained in section 
4(c)(5) as to value and amount, notwithstanding the requirement of 
section 4(c)(2) that shares acquired d.p.c. be disposed of within two 
years after the date of their acquisition or the date of the Act, 
whichever is later. In the Board's opinion, the 5 percent exemption 
provided by section 4(c)(5) covers any shares, including shares acquired 
d.p.c., that meet the conditions set forth in that exemption, and, 
consequently, d.p.c. shares held by a banking subsidiary of a bank 
holding

[[Page 222]]

company which meet such conditions are not subject to the two-year 
disposition requirement prescribed by section 4(c)(2), although any such 
shares would, of course, continue to be subject to such requirement for 
disposition as may be prescribed by provisions of any applicable banking 
laws or by the appropriate bank supervisory authorities.
    (g) Finally, question is raised as to whether shares held by banking 
subsidiaries of the bank holding company in companies holding bank 
premises of such subsidiaries are exempted from the divestment 
requirements by section 4(c)(1) of the Act. It is the Board's view that 
section 4(c)(1), exempting shares owned or acquired by a bank holding 
company in any company engaged solely in holding or operating properties 
used wholly or substantially by any subsidiary bank, is to be read and 
interpreted, like section 4(c)(5), as applying to shares owned 
indirectly by a bank holding company through a banking subsidiary as 
well as to shares held directly by the bank holding company. A contrary 
interpretation would impair the right that member banks controlled by 
bank holding companies would otherwise have to invest, subject to the 
limitations of section 24A of the Federal Reserve Act, in stock of 
companies holding their bank premises; and such a result was not, in the 
Board's opinion, intended by the Bank Holding Company Act.
[21 FR 10472, Dec. 29, 1956. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.102  Bank holding company indirectly owning nonbanking
company through subsidiaries.

    (a) The Board of Governors has been requested for an opinion 
regarding the exemptions contained in section 4(c)(5) of the Bank 
Holding Company Act of 1956. It is stated that Y Company is an 
investment company which is not a bank holding company and which is not 
engaged in any business other than investing in securities, which 
securities do not include more than 5 per centum of the outstanding 
voting securities of any company and do not include any asset having a 
value greater than 5 per centum of the value of the total assets of X 
Corporation, a bank holding company. It is stated that direct ownership 
by X Corporation of voting shares of Y Company would be exempt by reason 
of section 4(c)(5) from the prohibition of section 4 of the Act against 
ownership by bank holding companies of nonbanking assets.
    (b) It was asked whether it makes any difference that the shares of 
Y Company are not owned directly by X Corporation but instead are owned 
through Subsidiaries A and B. X Corporation owns all the voting shares 
of Subsidiary A, which owns one-half of the voting shares of Subsidiary 
B. Subsidiaries A and B each own one-third of the voting shares of Y 
Company.
    (c) Section 4(c)(5) is divided into two parts. The first part 
exempts the ownership of securities of nonbanking companies when the 
securities do not include more than 5 percent of the voting securities 
of the nonbanking company and do not have a value greater than 5 percent 
of the value of the total assets of the bank holding company. The second 
part exempts the ownership of securities of an investment company which 
is not a bank holding company and is not engaged in any business other 
than investing in securities, provided the securities held by the 
investment company meet the 5 percent tests mentioned above.
    (d) In Sec. 225.101, the Board expressed the opinion that the first 
exemption in section 4(c)(5):
    * * * is as applicable to such shares when held by a banking 
subsidiary of a bank holding company as when held directly by the bank 
holding company itself. While the exemption specifically refers only to 
shares held or acquired by the bank holding company, the prohibition of 
the Act against retention of nonbanking interests applies to indirect as 
well as direct ownership of shares of a nonbanking company, and, in the 
absence of a clear mandate to the contrary, any exception to this 
prohibition should be given equal breadth with the prohibition. Any 
other interpretation would lead to unwarranted results.
    (e) The Board is of the view that the principles stated in that 
opinion are also applicable to the second exemption in section 4(c)(5), 
and that they apply whether or not the subsidiary owning the shares is a 
banking subsidiary. Accordingly, on the basis of the facts presented, 
the Board is of the opinion that the second exemption in

[[Page 223]]

section 4(c)(5) applies to the indirect ownership by X Corporation of 
shares of Y Company through Subsidiaries A and B.
[22 FR 2533, Apr. 13, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.103  Bank holding company acquiring stock by dividends,
stock splits or exercise of rights.

    (a) The Board of Governors has been asked whether a bank holding 
company may receive bank stock dividends or participate in bank stock 
splits without the Board's prior approval, and whether such a company 
may exercise, without the Board's prior approval, rights to subscribe to 
new stock issued by banks in which the holding company already owns 
stock.
    (b) Neither a stock dividend nor a stock split results in any change 
in a stockholder's proportional interest in the issuing company or any 
increase in the assets of that company. Such a transaction would have no 
effect upon the extent of a holding company's control of the bank 
involved; and none of the five factors required by the Bank Holding 
Company Act to be considered by the Board in approving a stock 
acquisition would seem to have any application. In view of the 
objectives and purposes of the act, the word ``acquire'' would not seem 
reasonably to include transactions of this kind.
    (c) On the other hand, the exercise by a bank holding company of the 
right to subscribe to an issue of additional stock of a bank could 
result in an increase in the holding company's proportional interest in 
the bank. The holding company would voluntarily pay additional funds for 
the extra shares and would ``acquire'' the additional stock even under a 
narrow meaning of that term. Moreover, the exercise of such rights would 
cause the assets of the issuing company to be increased and in a sense, 
therefore, the ``size or extent'' of the bank holding company system 
would be expanded.
    (d) In the circumstances, it is the Board's opinion that receipt of 
bank stock by means of a stock dividend or stock split, assuming no 
change in the class of stock, does not require the Board's prior 
approval under the act, but that purchase of bank stock by a bank 
holding company through the exercise of rights does require the Board's 
prior approval, unless one of the exceptions set forth in section 3(a) 
is applicable.
[22 FR 7461, Sept. 19, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]



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

    (a) Section 4(c)(1) of the Bank Holding Company Act, among other 
things, exempts from the nonbanking divestment requirements of section 
4(a) of the Act shares of a company engaged ``solely in the business of 
furnishing services to or performing services for'' its bank holding 
company or subsidiary banks thereof.
    (b) The Board of Governors has had occasion to express opinions as 
to whether this section of law applies to the following two sets of 
facts:
    (1) In the first case, Corporation X, a nonbanking subsidiary of a 
bank holding company (Holding Company A), was engaged in the business of 
purchasing installment paper suitable for investment by banking 
subsidiaries of Holding Company A. All installment paper purchased by 
Corporation X was sold by it to a bank which is a subsidiary of Holding 
Company A, without recourse, at a price equal to the cost of the 
installment paper to Corporation X, and with compensation to the latter 
based on the earnings from such paper remaining after certain reserves, 
expenses and charges. The subsidiary bank sold participations in such 
installment paper to the other affiliated banks of Holding Company A 
which desired to participate. Purchases by Corporation X consisted 
mainly of paper insured under title I of the National Housing Act and, 
in addition, Corporation X purchased time payment contracts covering 
sales of appliances by dealers under contractual arrangements with 
utilities, as well as paper covering home improvements which was not 
insured. Pursuant to certain service agreements, Corporation X made all 
collections, enforced guaranties, filed claims under title I insurance 
and performed other services for the affiliated banks. Also Corporation 
X rendered to banking subsidiaries of

[[Page 224]]

Holding Company A various accounting, statistical and advisory services 
such as payroll, life insurance and budget loan installment account.
    (2) In the second case, Corporation Y, a nonbanking subsidiary of a 
bank holding company (Holding Company B, which was also a bank), 
solicited business on behalf of Holding Company B from dealers, 
throughout several adjoining or contiguous States, who made time sales 
and desired to convert their time sales paper into cash; but Corporation 
Y made no loans or purchases of sales contracts and did not discount or 
advance money for time sales obligations. Corporation Y investigated 
credit standings of purchasers obligated on time sale contracts to be 
acquired by Holding Company B, Corporation Y received from dealers the 
papers offered by them and inspected such papers to see that they were 
in order, and transmitted to Holding Company B for its determination to 
purchase, including, in some cases, issuance of drafts in favor of 
dealers in order to facilitate their prompt receipt of payment for 
installment paper purchased by Holding Company B. Corporation Y made 
collections of delinquent paper or delinquent installments, which 
sometimes involved repossession and resale of the automobile or other 
property which secured the paper. Also, upon request of purchasers 
obligated on paper held by Holding Company B, Corporation Y transmitted 
installment payments to Holding Company B. Holding Company B reimbursed 
Corporation Y for its actual costs and expenses in performing the 
services mentioned above, including the salaries and wages of all 
Corporation Y officers and employees.
    (c) While the term ``services'' is sometimes used in a broad and 
general sense, the legislative history of the Bank Holding Company Act 
indicates that in section 4(c)(1) the word was meant to be somewhat more 
limited in its application. An early version of the bill specifically 
exempted companies engaged in serving the bank holding company and its 
subsidiary banks in ``auditing, appraising, investment counseling''. The 
statute as finally enacted does not expressly mention any specific type 
of servicing activity for exemption. In recommending the change, the 
Senate Banking and Currency Committee stated that the types of services 
contemplated are ``in the fields of advertising, public relations, 
developing new business, organizations, operations, preparing tax 
returns, personnel, and many others'', which indicates that latitude 
should be given to the range of activities contemplated by this section 
beyond those specifically set forth in the early draft of the bill. 
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3.) It 
nevertheless seems evident that Congress intended such services to be 
types of activities generally comparable to those mentioned above from 
the early bill (``auditing, appraising, investment counseling'') and in 
the excerpt from the Committee Report on the later bill (``advertising, 
public relations, developing new business, organization, operations, 
preparing tax returns, personnel, and many others''). This legislative 
history and the context in which the term ``services'' is used in 
section 4(c)(1) seem to suggest that the term was in general intended to 
refer to servicing operations which a bank could carry on itself, but 
which the bank or its holding company chooses to have done through 
another organization. Moreover, the report of the Senate Banking and 
Currency Committee indicated that the types of servicing permitted under 
section 4(c)(1) are to be distinguished from activities of a 
``financial, fiduciary, or insurance nature'', such as those which might 
be considered for possible exemption under section 4(c)(6) of the Act.
    (d) With respect to the first set of facts, the Board expressed the 
opinion that certain of the activities of Corporation X, such as the 
accounting, statistical and advisory services referred to above, may be 
within the range of servicing activities contemplated by section 
4(c)(1), but that this would not appear to be the case with the main 
activity of Corporation X, which was the purchase of installment paper 
and the resale of such paper at cost, without recourse, to banking 
subsidiaries of Holding Company A. This latter and basic activity of 
Corporation X appeared to involve

[[Page 225]]

essentially a financial relationship between it and the banking 
subsidiaries of Holding Company A and appeared beyond the category of 
servicing exemptions contemplated by section 4(c)(1) of the Act. 
Accordingly, it was the Board's view that Corporation X could not be 
regarded as qualifying under section 4 (c)(1) as a company engaged 
``solely in the business of furnishing services to or performing 
services for'' Holding Company A or subsidiary banks thereof.
    (e) With respect to the second set of facts, the Board expressed the 
opinion that some of the activities engaged in by Corporation Y were 
clearly within the range of servicing activities contemplated by section 
4(c)(1). There was some question as to whether or not some of the other 
activities of Corporation Y mentioned above could meet the test, but on 
balance, it seemed that all such activities probably were activities in 
which Holding Company B, which as already indicated was a bank, could 
itself engage, at the present locations of Corporation Y, without being 
engaged in the operation of bank branches at those locations. In the 
circumstances, while the question was not free from doubt, the Board 
expressed the opinion that the activities of Corporation Y were those of 
a company engaged ``solely in the business of furnishing services to or 
performing services for'' Holding Company B within the meaning of 
section 4(c)(1) of the Act, and that, accordingly, the control by 
Holding Company B of shares in Corporation Y was exempted under that 
section.
[23 FR 2675, May 23, 1958. Redesignated at 36 FR 21666, Nov. 12, 1971]



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

    (a) A registered bank holding company requested an opinion by the 
Board of Governors with respect to whether that company and its banking 
subsidiaries may acquire stock in a small business investment company 
organized pursuant to the Small Business Investment Act of 1958.
    (b) It is understood that the bank holding company and its 
subsidiary banks propose to organize and subscribe for stock in a small 
business investment company which would be chartered pursuant to the 
Small Business Investment Act of 1958 which provides for long-term 
credit and equity financing for small business concerns.
    (c) Section 302(b) of the Small Business Investment Act authorizes 
national banks, as well as other member banks and nonmember insured 
banks to the extent permitted by applicable State law, to invest capital 
in small business investment companies not exceeding one percent of the 
capital and surplus of such banks. Section 4(c)(4) of the Bank Holding 
Company Act exempts from the prohibitions of section 4 of the Act 
``shares which are of the kinds and amounts eligible for investment by 
National banking associations under the provisions of section 5136 of 
the Revised Statutes''. Section 5136 of the Revised Statutes (paragraph 
``Seventh'') in turn provides, in part, as follows:
    Except as hereinafter provided or otherwise permitted by law nothing 
herein contained shall authorize the purchase by the association for its 
own account of any shares of stock of any corporation.
Since the shares of a small business investment company are of a kind 
and amount expressly made eligible for investment by a national bank 
under the Small Business Investment Act of 1958, it follows, therefore, 
that the ownership or control of such shares by a bank holding company 
would be exempt from the prohibitions of section 4 of the Bank Holding 
Company Act by virtue of the provisions of section 4(c)(4) of that Act. 
Accordingly, the ownership or control of such shares by the bank holding 
company would be exempt from the prohibitions of section 4 of the Bank 
Holding Company Act.
    (d) An additional question is presented, however, as to whether 
section 6 of the Bank Holding Company Act prohibits banking subsidiaries 
of the bank holding company from purchasing stock in a small business 
investment company where the latter is a ``subsidiary'' under that Act.
    (e) Section 6(a)(1) of the Act makes it unlawful for a bank to 
invest any of its funds in the capital stock of any other subsidiary of 
the bank holding company. However, section 6(a)(1) was, in effect, 
amended by section 302(b) of the

[[Page 226]]

Small Business Investment Act (15 U.S.C. 682) as amended by the Act of 
June 11, 1960 (Pub. L. 86-502) so as to nullify this prohibition when 
the ``subsidiary'' is a small business investment company.
    (f) Accordingly, section 6 of the Bank Holding Company Act does not 
prohibit banking subsidiaries of the bank holding company from 
purchasing stock in a small business investment company organized 
pursuant to the Small Business Investment Act of 1958, where that 
company is or will be a subsidiary of the bank holding company.

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



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

    (a) The Board of Governors has been requested by a bank holding 
company for an interpretation under section 4(c)(1) of the Bank Holding 
Company Act which, among other things, exempts from the nonbanking 
divestment requirements of section 4(a) of the Act, shares of a company 
engaged ``solely in the business of furnishing services to or performing 
services for'' its bank holding company or subsidiary banks thereof.
    (b) It is understood that a nonbanking subsidiary of the holding 
company engages in writing comprehensive automobile insurance (fire, 
theft, and collision) which is sold only to customers of a subsidiary 
bank of the holding company in connection with the bank's retail 
installment loans; that when payment is made on a loan secured by a lien 
on a motor vehicle, renewal policies are not issued by the insurance 
company; and that the insurance company receives the usual agency 
commissions on all comprehensive automobile insurance written for 
customers of the bank.
    (c) It is also understood that the insurance company writes credit 
life insurance for the benefit of the bank and its installment-loan 
customers; that each insured debtor is covered for an amount equal to 
the unpaid balance of his note to the bank, not to exceed $5,000; that 
as the note is reduced by regular monthly payments, the amount of 
insurance is correspondingly reduced so that at all times the debtor is 
insured for the unpaid balance of his note; that each insurance contract 
provides for payment in full of the entire loan balance upon the death 
or permanent disability of the insured borrower; and that this credit 
life insurance is written only at the request of, and solely for, the 
bank's borrowing customers. It is further understood that the insurance 
company engages in no other activity.
    (d) As indicated in Sec. 225.104 (23 FR 2675), the term 
``services,'' while sometimes used in a broad and general sense, appears 
to be somewhat more limited in its application in section 4(c)(1) of the 
Bank Holding Company Act. Unlike an early version of the Senate bill (S. 
2577, before amendment), the act as finally enacted does not expressly 
mention any type of servicing activity for exemption. The legislative 
history of the Act, however, as indicated in the relevant portion of the 
record of the Senate Banking and Currency Committee on amended S. 2577 
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3) makes it 
evident that Congress had in mind the exemption of services comparable 
to the types of activities mentioned expressly in the early Senate bill 
(``auditing, appraising, investment counseling'') and in the Committee 
Report on the later bill (``advertising, public relations, developing 
new business, organization, operations, preparing tax returns, 
personnel, and many others''). Furthermore, this Committee Report 
expressly stated that the provision of section 4(c)(1) with respect to 
``furnishing services to or performing services for'' was not intended 
to supplant the exemption contained under section 4 (c)(6) of the Act.
    (e) The only activity of the insurance company (writing 
comprehensive automobile insurance and credit life insurance) appears to 
involve an insurance relationship between it and a banking subsidiary of 
the holding company which the legislative history clearly indicates does 
not come within the meaning of the phrase ``furnishing services to or 
performing services for'' a bank holding company or its banking 
subsidiaries.

[[Page 227]]

    (f) Accordingly, it is the Board's view that the insurance company 
could not be regarded as qualifying as a company engaged ``solely in the 
business of furnishing services to or performing services for'' the bank 
holding company or banks with respect to which the latter is a bank 
holding company.

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



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

    (a) Under the provisions of section 4(c)(5) of the Bank Holding 
Company Act, as amended (12 U.S.C. 1843), a bank holding company may 
acquire shares of nonbank companies ``which are of the kinds and amounts 
eligible for investment'' by national banks. Pursuant to section 302(b) 
of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)), as 
amended by title II of the Small Business Act Amendments of 1967 (Pub. 
L. 90-104, 81 Stat. 268, 270), a national bank may invest in stock of 
small business investment companies (SBICs) subject to certain 
restrictions.
    (b) On the basis of the foregoing statutory provisions, it is the 
position of the Board that a bank holding company may acquire direct or 
indirect ownership or control of stock of an SBIC subject to the 
following limits:
    (1) The total direct and indirect investments of a bank holding 
company in stock of SBICs may not exceed:
    (i) With respect to all stock of SBICs owned or controlled directly 
or indirectly by a subsidiary bank, 5 percent of that bank's capital and 
surplus;
    (ii) With respect to all stock of SBICs owned directly by a bank 
holding company that is a bank, 5 percent of that bank's capital and 
surplus; and
    (iii) With respect to all stock of SBICs otherwise owned or 
controlled directly or indirectly by a bank holding company, 5 percent 
of its proportionate interest in the capital and surplus of each 
subsidiary bank (that is, the holding company's percentage of that 
bank's stock times that bank's capital and surplus) less that bank's 
investment in stock of SBICs; and
    (2) A bank holding company may not acquire direct or indirect 
ownership or control of 50 percent or more of the shares of any class of 
equity securities of an SBIC that have actual or potential voting 
rights.
    (c) A bank holding company or a bank subsidiary that acquired direct 
or indirect ownership or control of 50 percent or more of any such class 
of equity securities prior to January 9, 1968, is not required to divest 
to a level below 50 percent. A bank that acquired 50 percent or more 
prior to January 9, 1968, may become a subsidiary in a holding company 
system without any necessity for divesting to a level below 50 percent: 
Provided, That such action does not result in the bank holding company 
acquiring control of a percentage greater than that controlled by such 
bank.

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

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



Sec. 225.112  Indirect control of small business concern through 
convertible debentures held by small business investment company.

    (a) A question has been raised concerning the applicability of 
provisions of the Bank Holding Company Act of 1956 to the acquisition by 
a bank holding company of stock of a small business investment company 
(``SBIC'') organized pursuant to the Small Business Investment Act of 
1958 (``SBI Act'').
    (b) As indicated in the interpretation of the Board (Sec. 225.107) 
published at 23 FR 7813, it is the Board's opinion that, since stock of 
an SBIC is eligible for purchase by national banks and since section 
4(c)(4) of the Holding Company Act exempts stock eligible for investment 
by national banks from the prohibitions of section 4 of that Act, a bank 
holding company may lawfully acquire stock in such an SBIC.
    (c) However, section 304 of the SBI Act provides that debentures of 
a small business concern purchased by a small business investment 
company may be converted at the option of such company into stock of the 
small business concern. The question therefore arises as to whether, in 
the event of such conversion, the parent bank holding company would be 
regarded as having acquired ``direct or indirect ownership or

[[Page 228]]

control'' of stock of the small business concern in violation of section 
4(a) of the Holding Company Act.
    (d) The Small Business Investment Act clearly contemplates that one 
of the primary purposes of that Act was to enable SBICs to provide 
needed equity capital to small business concerns through the purchase of 
debentures convertible into stock. Thus, to the extent that a 
stockholder in an SBIC might acquire indirect control of stock of a 
small business concern, such control appears to be a natural and 
contemplated incident of ownership of stock of the SBIC. The Office of 
the Comptroller of the Currency has informally indicated concurrence 
with this interpretation insofar as it affects investments by national 
banks in stock of an SBIC.
    (e) Since the exception as to stock eligible for investment by 
national banks contained in section 4(c)(4) of the Holding Company Act 
was apparently intended to permit a bank holding company to acquire any 
stock that would be eligible for purchase by a national bank, it is the 
Board's view that section 4(a)(1) of the Act does not prohibit a bank 
holding company from acquiring stock of an SBIC, even though ownership 
of such stock may result in the acquisition of indirect ownership or 
control of stock of a small business concern which would not itself be 
eligible for purchase directly by a national bank or a bank holding 
company.

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



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

    (a) The Board of Governors has been requested for an opinion as to 
whether the performance of certain functions by a bank holding company 
for four banks of which it owns less than 25 percent of the voting 
shares is in violation of section 4(a) of the Bank Holding Company Act.
    (b) It is claimed that the holding company is engaged in 
``managing'' four nonsubsidiary banks, for which services it receives 
``management fees.'' Specifically, the company engages in the following 
activities for the four nonsubsidiary banks: (1) Establishment and 
supervision of loaning policies; (2) direction of the purchase and sale 
of investment securities; (3) selection and training of officer 
personnel; (4) establishment and enforcement of operating policies; and 
(5) general supervision over all policies and practices.
    (c) The question raised is whether these activities are prohibited 
by section 4(a)(2) of the Bank Holding Company Act, which permits a bank 
holding company to engage in only three categories of business: (1) 
Banking; (2) managing or controlling banks; and (3) furnishing services 
to or performing services for any bank of which the holding company owns 
or controls 25 percent or more of the voting shares.
    (d) Clearly, the activities of the company with respect to the four 
nonsubsidiary banks do not constitute ``banking.'' With respect to the 
business of ``managing or controlling'' banks, it is the Board's view 
that such business, within the purview of section 4(a)(2), is 
essentially the exercise of a broad governing influence of the sort 
usually exercised by bank stockholders, as distinguished from direct or 
active participation in the establishment or carrying out of particular 
policies or operations. The latter kinds of activities fall within the 
third category of businesses in which a bank holding company is 
permitted to engage. In the Board's view, the activities enumerated 
above fall in substantial part within that third category.
    (e) Section 4(a)(2), like all other sections of the Holding Company 
Act, must be interpreted in the light of all of its provisions, as well 
as in the light of other sections of the Act. The expression ``managing 
* * * banks,'' if it could be taken by itself, might appear to include 
activities of the sort enumerated. However, such an interpretation of 
those words would virtually nullify the last portion of section 4(a)(2), 
which permits a holding company to furnish services to or perform 
services for ``any bank of which it owns or controls 25 per centum or 
more of the voting shares.''
    (f) Since Congress explicitly authorized the performance of services 
for banks that are at least 25 percent

[[Page 229]]

owned by a holding company, it obviously intended that the holding 
company should not perform services for banks in which it owns less than 
25 percent of the voting shares. However, if the second category--
``managing or controlling banks''--were interpreted to permit the 
holding company to perform services for any bank, including a bank in 
which it held less than 25 percent of the stock (or no stock 
whatsoever), the last clause of section 4(a)(2) would be meaningless.
    (g) It is principally for this reason--that is, to give effective 
meaning to the final clause of section 4(a)(2)--that the Board 
interprets ``managing or controlling banks'' in that provision as 
referring to the exercise of a stockholder's management or control of 
banks, rather than direct and active participation in their operations. 
To repeat, such active participation in operations falls within the 
third category (``furnishing services to or performing services for any 
bank'') and consequently may be engaged in only with respect to banks in 
which the holding company ``owns or controls 25 per centum or more of 
the voting shares.''
    (h) Accordingly, it is the Board's conclusion that, in performing 
the services enumerated, the bank holding company is ``furnishing 
services to or performing services for'' the four banks referred to. 
Under the Act such furnishing or performing of services is permissible 
only if the holding company owns or controls 25 percent of the voting 
shares of each bank receiving such services, and, since the company owns 
less than 25 percent of the voting shares of these banks, it follows 
that these activities are prohibited by section 4(a)(2).
    (i) While this conclusion is required, in the Board's opinion, by 
the language of the statute, it may be noted further that any other 
conclusion would make it possible for bank holding company or any other 
corporation, through arrangements for the ``managing'' of banks in the 
manner here involved, to acquire effective control of banks without 
acquiring bank stocks and thus to evade the underlying objectives of 
section 3 of the Act.

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



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

    (a) Questions have been presented to the Board of Governors 
regarding the applicability of the recently enacted Bank Service 
Corporation Act (Pub. L. 87-856, approved October 23, 1962) in cases 
involving service corporations that are subsidiaries of bank holding 
companies under the Bank Holding Company Act of 1956. In addition to 
being charged with the administration of the latter Act, the Board is 
named in the Bank Service Corporation Act as the Federal supervisory 
agency with respect to the performance of bank services for State member 
banks.
    (b) Holding company-owned corporation serving only subsidiary banks. 
(1) One question is whether the Bank Service Corporation Act is 
applicable in the case of a corporation, wholly owned by a bank holding 
company, which is engaged in performing ``bank services'', as defined in 
section 1(b) of the Act, exclusively for subsidiary banks of the holding 
company.
    (2) Except as noted below with respect to section 5 thereof, the 
Bank Service Corporation Act is not applicable in this case. This is 
true because none of the stock of the corporation performing the 
services is owned by any bank and the corporation, therefore, is not a 
``bank service corporation'' as defined in section 1(c) of the Act. A 
corporation cannot meet that definition unless part of its stock is 
owned by two or more banks. The situation clearly is unaffected by 
section 2(b) of the Act which permits a corporation that fell within the 
definition initially to continue to function as a bank service 
corporation although subsequently only one of the banks remains as a 
stockholder in the corporation.
    (3) However, although it is not a bank service corporation, the 
corporation in question and each of the banks for which it performs bank 
services are subject to section 5 of the Bank Service Corporation Act. 
That section, which requires the furnishing of certain assurances to the 
appropriate Federal supervisory agency in connection with the 
performance of bank services for a

[[Page 230]]

bank, is applicable whether such services are performed by a bank 
service corporation or by others.
    (4) Section 4(a)(1) of the Bank Holding Company Act prohibits the 
acquisition by a bank holding company of ``direct or indirect ownership 
or control'' of shares of a nonbanking company, subject to certain 
exceptions. Section 4(c)(1) of the Act exempts from section 4(a)(1) 
shares of a company engaged ``solely in the business of furnishing 
services to or performing services for'' its bank holding company or 
subsidiary banks thereof. Assuming that the bank services performed by 
the corporation in question are ``services'' of the kinds contemplated 
by section 4(c)(1) of the Bank Holding Company Act (as would be true, 
for example, of the electronic data processing of deposit accounts), the 
holding company's ownership of the corporation's shares in the situation 
described above clearly is permissible under that section of the Act.
    (c) Bank service corporation owned by holding company subsidiaries 
and serving also other banks. (1) The other question concerns the 
applicability of the Bank Service Corporation Act and the Bank Holding 
Company Act in the case of a corporation, all the stock of which is 
owned either by a bank holding company and its subsidiary banks together 
or by the subsidiary banks alone, which is engaged in performing ``bank 
services'', as defined in section 1(b) of the Bank Service Corporation 
Act, for the subsidiary banks and for other banks, as well.
    (2) In contrast to the situation under paragraph (b) of this 
section, the corporation in this case is a ``bank service corporation'' 
within the meaning of section 1(c) of the Bank Service Corporation Act 
because of the ownership by each of the subsidiary banks of a part of 
the corporation's stock. This stock ownership is one of the important 
facts differentiating this case from the first one. Being a bank service 
corporation, the corporation in question is subject to section 3 of the 
Act concerning applications to bank service corporations by competitive 
banks for bank services, and to section 4 forbidding a bank service 
corporation from engaging in any activity other than the performance of 
bank services for banks. Section 5, mentioned previously and relating to 
``assurances'', also is applicable in this case.
    (3) The other important difference between this case and the 
situation in paragraph (b) of this section is that here the bank service 
corporation performs services for nonsubsidiary banks, as well as for 
subsidiary banks. This is permissible because section 2(a) of the Bank 
Service Corporation Act, which authorizes any two or more banks to 
invest limited amounts in a bank service corporation, removes all 
limitations and prohibitions of Federal law exclusively relating to 
banks that otherwise would prevent any such investment. From the 
legislative history of section 2(a), it is clear that section 6 of the 
Bank Holding Company Act is among the limitations and prohibitions so 
removed. But for such removal, section 6(a)(1) of that Act would make it 
unlawful for any of the subsidiary banks of the bank holding company in 
question to own stock in the bank service corporation subsidiary of the 
holding company, as the exemption in section 6(b)(1) would not apply 
because of the servicing by the bank service corporation of 
nonsubsidiary banks.
    (4) Because the bank service corporation referred to in the question 
is serving banks other than the subsidiary banks, the bank holding 
company is not exempt under section 4(c)(1) of the Bank Holding Company 
Act from the prohibition of acquisition of nonbanking interests in 
section 4(a)(1) of that Act. The bank holding company, however, is 
entitled to the benefit of the exemption in section 4(c)(4) of the Act. 
That section exempts from section 4(a) ``shares which are of the kinds 
and amounts eligible for investment by National banking associations 
under the provisions of section 5136 of the Revised Statutes''. Section 
5136 provides, in part, that: ``Except as hereinafter provided or 
otherwise permitted by law, nothing herein contained shall authorize the 
purchase by the association for its own account of any shares of stock 
of any corporation.'' As the provisions of section 2(a) of the Bank 
Service Corporation Act and its legislative history make it clear that 
shares of a bank service corporation are of a

[[Page 231]]

kind eligible for investment by national banks under section 5136, it 
follows that the direct or indirect ownership on control of such shares 
by a bank holding company are permissible within the amount limitation 
discussed in paragraph (d) of this section.
    (d) Limit on investment by bank holding company system in stock of 
bank service corporation. (1) In the situation presented by paragraph 
(c) the bank holding company clearly owns or controls, directly or 
indirectly, all of the stock of the bank service corporation. The 
remaining question, therefore, is whether the total direct and indirect 
investment of the bank holding company in the bank service corporation 
exceeds the amount permissible under the Bank Holding Company Act.
    (2) The effect of sections 4(a)(1) and 4(c)(4) of the Bank Holding 
Company Act is to limit the amount of shares of a bank service 
corporation that a bank holding company may own or control, directly or 
indirectly, to the amount eligible for investment by a national bank, as 
previously indicated. Under section 2(a) of the Bank Service Corporation 
Act, the amount of shares of a bank service corporation eligible for 
investment by a national bank may not exceed ``10 per centum [of the 
bank's] * * * paid-in and unimpaired capital and unimpaired surplus''.
    (3) The Board's view is that this aspect of the matter should be 
determined in accordance with the principles set forth in Sec. 225.111, 
as revised (27 FR 12671), involving the application of sections 4(a)(1) 
and 4(c)(4) of the Bank Holding Company Act in the light of section 
302(b) of the Small Business Investment Act limiting the amount eligible 
for investment by a national bank in the shares of a small business 
investment company to two percent of the bank's ``capital and surplus''.
    (4) Except for the differences in the percentage figures, the 
investment limitation in section 302(b) of the Small Business Investment 
Act is essentially the same as the investment limitation in section 2(a) 
of the Bank Service Corporation Act since, as an accounting matter and 
for the purposes under consideration, ``capital and surplus'' may be 
regarded as equivalent in meaning to ``paid-in and unimpaired capital 
and unimpaired surplus.'' Accordingly, the maximum permissible 
investment by a bank holding company system in the stock of a bank 
service corporation should be determined in accordance with the formula 
prescribed in Sec. 222.111.

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



Sec. 225.118  Computer services for customers of subsidiary banks.

    (a) The question has been presented to the Board of Governors 
whether a wholly-owned nonbanking subsidiary (``service company'') of a 
bank holding company, which is now exempt from the prohibitions of 
section 4 of the Bank Holding Company Act of 1956 (``the Act'') because 
its sole business is the providing of services for the holding company 
and the latter's subsidiary banks, would lose its exempt status if it 
should provide data processing services for customers of the subsidiary 
banks.
    (b) The Board understood from the facts presented that the service 
company owns a computer which it utilizes to furnish data processing 
services for the subsidiary banks of its parent holding company. 
Customers of these banks have requested that the banks provide for them 
computerized billing, accounting, and financial records maintenance 
services. The banks wish to utilize the computer services of the service 
company in providing these and other services of a similar nature. It is 
proposed that, in each instance where a subsidiary bank undertakes to 
provide such services, the bank will enter into a contract directly with 
the customer and then arrange to have the service company perform the 
services for it, the bank. In no case will the service company provide 
services for anyone other than its affiliated banks. Moreover, it will 
not hold itself out as, nor will its parent corporation or affiliated 
banks represent it to be, authorized or willing to provide services for 
others.
    (c) Section 4(c)(1) of the Act permits a holding company to own 
shares in ``any company engaged solely * * * in the business of 
furnishing services to or performing services for such holding company 
and banks with respect to which it is a bank holding company

[[Page 232]]

* * *.'' The Board has ruled heretofore that the term ``services'' as 
used in section 4(c)(1) is to be read as relating to those services 
(excluding ``closely related'' activities of ``a financial, fiduciary, 
or insurance nature'' within the meaning of section 4(c)(6)) which a 
bank itself can provide for its customers (Sec. 225.104). A 
determination as to whether a particular service may legitimately be 
rendered or performed by a bank for its customers must be made in the 
light of applicable Federal or State statutory or regulatory provisions. 
In the case of a State-chartered bank, the laws of the State in which 
the bank operates, together with any interpretations thereunder rendered 
by appropriate bank authorities, would govern the right of the bank to 
provide a particular service. In the case of a national bank, a similar 
determination would require reference to provisions of Federal law 
relating to the establishment and operation of national banks, as well 
as to pertinent rulings or interpretations promulgated thereunder.
    (d) Accordingly, on the assumption that all of the services to be 
performed are of the kinds that the holding company's subsidiary banks 
may render for their customers under applicable Federal or State law, 
the Board concluded that the rendition of such services by the service 
company for its affiliated banks would not adversely affect its exempt 
status under section 4(c)(1) of the Act.
    (e) In arriving at the above conclusion, the Board emphasized that 
its views were premised explicitly upon the facts presented to it, and 
particularly its understanding that banks are permitted, under 
applicable Federal or State law to provide the proposed computer 
services. The Board emphasized also that in respect to the service 
company's operations, there continues in effect the requirement under 
section 4(c)(1) that the service company engage solely in the business 
of furnishing services to or performing services for the bank holding 
company and its subsidiary banks. The Board added that any substantial 
change in the facts that had been presented might require re-examination 
of the service company's status under section 4(c)(1).

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



Sec. 225.121  Acquisition of Edge corporation affiliate by State
member banks of registered bank holding company.

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

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

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

[[Page 233]]



Sec. 225.122  Bank holding company ownership of mortgage companies.

    (a) The Board of Governors recently considered whether a bank 
holding may acquire, either directly or through a subsidiary, the stock 
of a so-called ``mortgage company'' that would be operated on the 
following basis: The company would solicit mortgage loans on behalf of a 
bank in the holding company system, assemble credit information, make 
property inspections and appraisals, and secure title information. The 
company would also participate in the preparation of applications for 
mortgage loans, which it would submit, together with recommendations 
with respect to action thereon, to the bank, which alone would decide 
whether to make any or all of the loans requested. The company would in 
addition solicit investors to purchase mortgage loans from the bank and 
would seek to have such investors contract with the bank for the 
servicing of such loans.
    (b) Under section 4 of the Bank Holding Company Act (12 U.S.C. 
1843), a bank holding company is generally prohibited from acquiring 
``direct or indirect ownership'' of stock of nonbanking corporations. 
The two exceptions principally involved in the question presented are 
with respect to (1) stock that is eligible for investment by a national 
bank (section 4(c)(5) of the Act) and (2) shares of a company 
``furnishing services to or performing services for such bank holding 
company or its banking subsidiaries'' (section 4(c)(1)(C) of the Act).
    (c) The Board has previously indicated its view that a national bank 
is forbidden by the so-called ``stock-purchase prohibition'' of 
paragraph ``Seventh'' of section 5136 of the Revised Statutes (12 U.S.C. 
24) to purchase ``for its own account * * * any shares of stock of any 
corporation'' except (1) to the extent permitted by specific provisions 
of Federal law or (2) as comprised within the concept of ``such 
incidental powers as shall be necessary to carry on the business of 
banking'' referred to in the first sentence of said paragraph 
``Seventh''. There is no specific statutory provision authorizing a 
national bank to purchase stock in a mortgage company, and in the 
Board's view such purchase may not properly be regarded as authorized 
under the ``incidental powers'' clause. (See 1966 Federal Reserve 
Bulletin 1151; 12 CFR 208.119.) Accordingly, a bank holding company may 
not acquire stock in a mortgage company on the basis of the section 
4(c)(5) exemption.
    (d) However, the Board does not believe that such conclusion 
prejudices consideration of the question whether such a company is 
within the section 4(c)(1)(C) ``servicing exemption''. The basic purpose 
of section 4 of the Act is to confine a bank holding company's 
activities to the management and control of banks. In determining 
whether an activity in which a bank could itself engage is within the 
servicing exemption, the question is simply whether such activity may 
appropriately be considered as ``furnishing services to or performing 
services for'' a bank.
    (e) As indicated in the Board's interpretation published in the 1958 
Federal Reserve Bulletin at page 431 (12 CFR 225.104), the legislative 
history of the servicing exemption indicates that it includes the 
following activities: ``auditing, appraising, investment counseling'' 
and ``advertising, public relations, developing new business, 
organization, operations, preparing tax returns, and personnel''. The 
legislative history further indicates that some other activities also 
are within the scope of the exemption. However, the types of servicing 
permitted under such exemption must be distinguished from activities of 
a ``financial fiduciary, or insurance nature'', such as those that might 
be considered for possible exemption under section 4(c)(8) of the Act.
    (f) In considering the interrelation of these exemptions in the 
light of the purpose of the prohibition against bank holding company 
interests in nonbanking organizations, the Board has concluded that the 
appropriate test for determining whether a mortgage company may be 
considered as within the servicing exemption is whether the company will 
perform as principal any banking activities--such as receiving deposits, 
paying checks, extending credit, conducting a trust department, and the 
like. In other words, if the mortgage company is to act merely as

[[Page 234]]

an adjunct to a bank for the purpose of facilitating the banks 
operations, the company may appropriately be considered as within the 
scope of the servicing exemption. \1\
---------------------------------------------------------------------------

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

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

(12 U.S.C. 248)

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



Sec. 225.123  Activities closely related to banking.

    (a) Effective June 15, 1971, the Board of Governors has amended 
Sec. 225.4(a) of Regulation Y to implement its regulatory authority 
under section 4(c)(8) of the Bank Holding Company Act. In some respects 
activities determined by the Board to be closely related to banking are 
described in general terms that will require interpretation from time to 
time. The Board's views on some questions that have arisen are set forth 
below.
    (b) Section 225.4(a) states that a company whose ownership by a bank 
holding company is authorized on the basis of that section may engage 
solely in specified activities. That limitation refers only to 
activities the authority for which depends on section 4(c)(8) of the 
Act. It does not prevent a holding company from establishing one 
subsidiary to engage, for example, in activities specified in Sec. 
225.4(a) and also in activities that fall within the scope of section 
4(c)(1)(C) of the Act--the ``servicing'' exemption.
    (c) The amendments to Sec. 225.4(a) do not apply to restrict the 
activities of a company previously approved by the Board on the basis of 
section 4(c)(8) of the Act. Activities of a company authorized on the 
basis of section 4(c)(8) either before the 1970 Amendments or pursuant 
to the amended Sec. 225.4(a) may be shifted in a corporate 
reorganization to another company within the holding company system 
without complying with the procedures of Sec. 225.4(b), as long as all 
the activities of such company are permissible under one of the 
exemptions in section 4 of the Act.
    (d) Under the procedures in Sec. 225.4(a)(c), a holding company 
that wishes to change the location at which it engages in activities 
authorized pursuant to Sec. 225.4(a) must publish notice in a newspaper 
of general circulation in the community to be served. The Board does not 
regard minor changes in location as within the coverage of that 
requirement. A move from one site to another within a 1-mile radius 
would constitute such a minor change if the new site is in the same 
State.
    (e) Data processing. In providing packaged data processing and 
transmission services for banking, financial and economic data for 
installation on the premises of the customer, as authorized by Sec. 
225.4(a)(8)(ii), a bank holding company should limit its activities to 
providing facilities that perform banking functions, such as check 
collection, or other similar functions for customers that are depository 
or other similar institutions, such as mortgage companies. In addition, 
the Board regards the following as incidental activities necessary to 
carry on the permissible activities in this area:
    (1) Providing excess capacity, not limited to the processing or 
transmission of banking, financial or economic data on data processing 
or transmission equipment or facilities used in connection with 
permissible

[[Page 235]]

data processing and data transmission activities, where:
    (A) Equipment is not purchased solely for the purpose of creating 
excess capacity;
    (B) Hardware is not offered in connection therewith; and
    (C) Facilities for the use of the excess capacity do not include the 
provision of any software, other than systems software (including 
language), network communications support, and the operating personnel 
and documentation necessary for the maintenance and use of these 
facilities.
    (2) Providing by-products of permissible data processing and data 
transmission activities, where not designed, or appreciably enhanced, 
for the purpose of marketability.
    (3) Furnishing any data processing service upon request of a 
customer if such data processing service is not otherwise reasonably 
available in the relevant market area; and


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

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

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



Sec. 225.124  Foreign bank holding companies.

    (a) Effective December 1, 1971, the Board of Governors has added a 
new Sec. 225.4(g) to Regulation Y implementing its authority under 
section 4(c)(9) of the Bank Holding Company Act. The Board's views on 
some questions that have arisen in connection with the meaning of terms 
used in Sec. 225.4(g) are set forth in paragraphs (b) through (g) of 
this section.
    (b) The term ``activities'' refers to nonbanking activities and does 
not include the banking activities that foreign banks conduct in the 
United States through branches or agencies licensed under the banking 
laws of any State of the United States or the District of Columbia.
    (c) A company (including a bank holding company) will not be deemed 
to be engaged in ``activities'' in the United States merely because it 
exports (or imports) products to (or from) the United States, or 
furnishes services or finances goods or services in the United States, 
from locations outside the United States. A company is engaged in 
``activities'' in the United States if it owns, leases, maintains, 
operates, or controls any of the following types of facilities in the 
United States:
    (1) A factory,
    (2) A wholesale distributor or purchasing agency,
    (3) A distribution center,
    (4) A retail sales or service outlet,
    (5) A network of franchised dealers,
    (6) A financing agency, or
    (7) Similar facility for the manufacture, distribution, purchasing, 
furnishing, or financing of goods or services locally in the United 
States.


A company will not be considered to be engaged in ``activities'' in the 
United States if its products are sold to independent importers, or are 
distributed through independent warehouses, that are not controlled or 
franchised by it.
    (d) In the Board's opinion, section 4 (a)(1) of the Bank Holding 
Company Act applies to ownership or control of shares of stock as an 
investment and does not apply to ownership or control of shares of stock 
in the capacity of an underwriter or dealer in securities. Underwriting 
or dealing in shares of stock are nonbanking activities prohibited to 
bank holding companies by section 4(a)(2) of the Act, unless otherwise 
exempted. Under Sec. 225.4(g) of Regulation Y, foreign bank holding 
companies are exempt from the prohibitions of section 4 of the Act with 
respect to their activities outside the United States; thus foreign bank 
holding companies may underwrite or deal in shares of stock (including 
shares of United

[[Page 236]]

States issuers) to be distributed outside the United States, provided 
that shares so acquired are disposed of within a reasonable time.
    (e) A foreign bank holding company does not ``indirectly'' own 
voting shares by reason of the ownership or control of such voting 
shares by any company in which it has a noncontrolling interest. A 
foreign bank holding company may, however, ``indirectly'' control such 
voting shares if its noncontrolling interest in such company is 
accompanied by other arrangements that, in the Board's judgment, result 
in control of such shares by the bank holding company. The Board has 
made one exception to this general approach. A foreign bank holding 
company will be considered to indirectly own or control voting shares of 
a bank if that bank holding company acquires more than 5 percent of any 
class of voting shares of another bank holding company. A bank holding 
company may make such an acquisition only with prior approval of the 
Board.
    (f) A company is ``indirectly'' engaged in activities in the United 
States if any of its subsidiaries (whether or not incorporated under the 
laws of this country) is engaged in such activities. A company is not 
``indirectly'' engaged in activities in the United States by reason of a 
noncontrolling interest in a company engaged in such activities.
    (g) Under the foregoing rules, a foreign bank holding company may 
have a noncontrolling interest in a foreign company that has a U.S. 
subsidiary (but is not engaged in the securities business in the United 
States) if more than half of the foreign company's consolidated assets 
and revenues are located and derived outside the United States. For the 
purpose of such determination, the assets and revenues of the United 
States subsidiary would be counted among the consolidated assets and 
revenues of the foreign company to the extent required or permitted by 
generally accepted accounting principles in the United States. The 
foreign bank holding company would not, however, be permitted to 
``indirectly'' control voting shares of the said U.S. subsidiary, as 
might be the case if there are other arrangements accompanying its 
noncontrolling interest in the foreign parent company that, in the 
Board's judgment, result in control of such shares by the bank holding 
company.

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

[36 FR 21808, Nov. 16, 1971]



Sec. 225.125  Investment adviser activities.

    (a) Effective February 1, 1972, the Board of Governors amended Sec. 
225.4(a) of Regulation Y to add ``serving as investment adviser, as 
defined in section 2(a)(20) of the Investment Company Act of 1940, to an 
investment company registered under that Act'' to the list of activities 
it has determined to be so closely related to banking or managing or 
controlling banks as to be a proper incident thereto. During the course 
of the Board's consideration of this amendment several questions arose 
as to the scope of such activity, particularly in view of certain 
restrictions imposed by sections 16, 20, 21, and 32 of the Banking Act 
of 1933 (12 U.S.C. 24, 377, 378, 78) (sometimes referred to hereinafter 
as the ``Glass-Steagall Act provisions'') and the U.S. Supreme Court's 
decision in Investment Company Institute v. Camp, 401 U.S. 617 (1971). 
The Board's views with respect to some of these questions are set forth 
below.
    (b) It is clear from the legislative history of the Bank Holding 
Company Act Amendments of 1970 (84 Stat. 1760) that the Glass-Steagall 
Act provisions were not intended to be affected thereby. Accordingly, 
the Board regards the Glass-Steagall Act provisions and the Board's 
prior interpretations thereof as applicable to a holding company's 
activities as an investment adviser. Consistently with the spirit and 
purpose of the Glass-Steagall Act, this interpretation applies to all 
bank holding companies registered under the Bank Holding Company Act 
irrespective of whether they have subsidiaries that are member banks.
    (c) Under Sec. 225.4(a)(5), as amended, bank holding companies 
(which term, as used herein, includes both their bank and nonbank 
subsidiaries) may, in accordance with the provisions of Sec. 225.4 (b), 
act as investment advisers to various types of investment companies,

[[Page 237]]

such as ``open-end'' investment companies (commonly referred to as 
``mutual funds'') and ``closed-end'' investment companies. Briefly, a 
mutual fund is an investment company which, typically, is continuously 
engaged in the issuance of its shares and stands ready at any time to 
redeem the securities as to which it is the issuer; a closed-end 
investment company typically does not issue shares after its initial 
organization except at infrequent intervals and does not stand ready to 
redeem its shares.
    (d) The Board intends that a bank holding company may exercise all 
functions that are permitted to be exercised by an ``investment 
adviser'' under the Investment Company Act of 1940, except to the extent 
limited by the Glass-Steagall Act provisions, as described, in part, 
hereinafter.
    (e) The Board recognizes that presently most mutual funds are 
organized, sponsored and managed by investment advisers with which they 
are affiliated and that their securities are distributed to the public 
by such affiliated investment advisers, or subsidiaries or affiliates 
thereof. However, the Board believes that (1) The Glass-Steagall Act 
provisions do not permit a bank holding company to perform all such 
functions, and (2) It is not necessary for a bank holding company to 
perform all such functions in order to engage effectively in the 
described activity.
    (f) In the Board's opinion, the Glass-Steagall Act provisions, as 
interpreted by the U.S. Supreme Court, forbid a bank holding company to 
sponsor, organize, or control a mutual fund. However, the Board does not 
believe that such restrictions apply to closed-end investment companies 
as long as such companies are not primarily or frequently engaged in the 
issuance, sale, and distribution of securities. A bank holding company 
should not act as investment adviser to an investment company that has a 
name similar to the name of the holding company or any of its subsidiary 
banks, unless the prospectus of the investment company contains the 
disclosures required in paragraph (h) of this section. In no case should 
a bank holding company act as investment adviser to an investment 
company that has either the same name as the name of the holding company 
or any of its subsidiary banks, or a name that contains the word 
``bank.''
    (g) In view of the potential conflicts of interests that may exist, 
a bank holding company and its bank and nonbank subsidiaries should not 
purchase in their sole discretion, in a fiduciary capacity (including as 
managing agent), securities of any investment company for which the bank 
holding company acts as investment adviser unless, the purchase is 
specifically authorized by the terms of the instrument creating the 
fiduciary relationship, by court order, or by the law of the 
jurisdiction under which the trust is administered.
    (h) Under section 20 of the Glass-Steagall Act, a member bank is 
prohibited from being affiliated with a company that directly, or 
through a subsidiary, engages principally in the issue, flotation, 
underwriting, public sale, or distribution of securities. A bank holding 
company or its nonbank subsidiary may not engage, directly or 
indirectly, in the underwriting, public sale or distribution of 
securities of any investment company for which the holding company or 
any nonbank subsidiary provides investment advice except in compliance 
with the terms of section 20, and only after obtaining the Board's 
approval under section 4 of the Bank Holding Company Act and subject to 
the limitations and disclosures required by the Board in those cases. 
The Board has determined, however, that the conduct of securities 
brokerage activities by a bank holding company or its nonbank 
subsidiaries, when conducted individually or in combination with 
investment advisory activities, is not deemed to be the underwriting, 
public sale, or distribution of securities prohibited by the Glass-
Steagall Act, and the U.S. Supreme Court has upheld that determination. 
See Securities Industry Ass'n v. Board of Governors, 468 U.S. 207 
(1984); see also Securities Industry Ass'n v. Board of Governors, 821 
F.2d 810 (D.C. Cir. 1987), cert. denied, 484 U.S. 1005 (1988). 
Accordingly, the Board believes that a bank holding company or any of 
its nonbank subsidiaries that has been authorized by the

[[Page 238]]

Board under the Bank Holding Company Act to conduct securities brokerage 
activities (either separately or in combination with investment advisory 
activities) may act as agent, upon the order and for the account of 
customers of the holding company or its nonbank subsidiary, to purchase 
or sell shares of an investment company for which the bank holding 
company or any of its subsidiaries acts as an investment adviser. In 
addition, a bank holding company or any of its nonbank subsidiaries that 
has been authorized by the Board under the Bank Holding Company Act to 
provide investment advice to third parties generally (either separately 
or in combination with securities brokerage services) may provide 
investment advice to customers with respect to the purchase or sale of 
shares of an investment company for which the holding company or any of 
its subsidiaries acts as an investment adviser. In the event that a bank 
holding company or any of its nonbank subsidiaries provides brokerage or 
investment advisory services (either separately or in combination) to 
customers in the situations described above, at the time the service is 
provided the bank holding company should instruct its officers and 
employees to caution customers to read the prospectus of the investment 
company before investing and must advise customers in writing that the 
investment company's shares are not insured by the Federal Deposit 
Insurance Corporation, and are not deposits, obligations of, or endorsed 
or guaranteed in any way by, any bank, unless that happens to be the 
case. The holding company or nonbank subsidiary must also disclose in 
writing to the customer the role of the company or affiliate as adviser 
to the investment company. These disclosures may be made orally so long 
as written disclosure is provided to the customer immediately 
thereafter. To the extent that a bank owned by a bank holding company 
engages in providing advisory or brokerage services to bank customers in 
connection with an investment company advised by the bank holding 
company or a nonbank affiliate, but is not required by the bank's 
primary regulator to make disclosures comparable to the disclosures 
required to be made by bank holding companies providing such services, 
the bank holding company should require its subsidiary bank to make the 
disclosures required in this paragraph to be made by a bank holding 
company that provides such advisory or brokerage services.
    (i) Acting in such capacities as registrar, transfer agent, or 
custodian for an investment company is not a selling activity and is 
permitted under Sec. 225.4(a)(4) of Regulation Y. However, in view of 
potential conflicts of interests, a bank holding company which acts both 
as custodian and investment adviser for an investment company should 
exercise care to maintain at a minimal level demand deposit accounts of 
the investment company which are placed with a bank affiliate and should 
not invest cash funds of the investment company in time deposit accounts 
(including certificates of deposit) of any bank affiliate.

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



Sec. 225.126  Activities not closely related to banking.

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

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

[[Page 239]]



Sec. 225.127  Investment in corporations or projects designed 
primarily to promote community welfare.

    (a) Under Sec. 225.25(b)(6) of Regulation Y, a bank holding company 
may, in accordance with the provisions of Sec. 225.23, engage in 
``making equity and debt investments in corporations or projects 
designed primarily to promote community welfare, such as the economic 
rehabilitation and development of low-income areas.'' The Board included 
that activity among those the Board has determined to be so closely 
related to banking or managing or controlling banks as be a proper 
incident thereto, in order to permit bank holding companies to fulfill 
their civic responsibilities. As indicated hereinafter in this 
interpretation, the Board intends Sec. 225.25(b)(6) to enable bank 
holding companies to take an active role in the quest for solutions to 
the Nation's social problems. Although the interpretation primarily 
focuses on low- and moderate-income housing, it is not intended to limit 
projects under Sec. 225.25(b)(6) to that area. Other investments 
primarily designed to promote community welfare are considered 
permissible, but have not been defined in order to provide bank holding 
companies flexibility in approaching community problems. For example, 
bank holding companies may utilize this flexibility to provide new and 
creative approaches to the promotion of employment opportunities for 
low-income persons. Bank holding companies possess a unique combination 
of financial and managerial resources making them particularly suited 
for a meaningful and substantial role in remedying our social ills. 
Section 225.25(b)(6) is intended to provide an opportunity for them to 
assume such a role.
    (b) Under the authority of Sec. 225.25(b)(6), a bank holding 
company may invest in community development corporations established 
pursuant to Federal or State law. A bank holding company may also 
participate in other civic projects, such as a municipal parking 
facility sponsored by a local civic organization as a means to promote 
greater public use of the community's facilities.
    (c) Within the category of permissible investments under Sec. 
225.25(b)(6) are investments in projects to construct or rehabilitate 
multifamily low- or moderate-income housing with respect to which a 
mortgage is insured under section 221(d)(3), 221(d)(4), or 236 of the 
National Housing Act (12 U.S.C. 1701) and investments in projects to 
construct or rehabilitate low- or moderate-income housing which is 
financed or assisted by direct loan, tax abatement, or insurance under 
provisions of State or local law, similar to the aforementioned Federal 
programs, provided that, with respect to all such projects the owner is, 
by statute, regulation, or regulatory authority, limited as to the rate 
of return on his investment in the project, as to rentals or occupancy 
charges for units in the project, and in such other respects as would be 
a ``limited dividend corporation'' (as defined by the Secretary of 
Housing and Urban Development).
    (d) Investments in other projects that may be considered to be 
designed primarily to promote community welfare include but are not 
limited to: (1) Projects for the construction or rehabilitation of 
housing for the benefit of persons of low- or moderate-income, (2) 
projects for the construction or rehabilitation of ancillary local 
commercial facilities necessary to provide goods or services principally 
to persons residing in low- or moderate-income housing, and (3) projects 
designed explicitly to create improved job opportunities for low- or 
moderate-income groups (for example, minority equity investments, on a 
temporary basis, in small or medium-sized locally-controlled businesses 
in low-income urban or other economically depressed areas). In the case 
of de novo projects, the copy of the notice with respect to such other 
projects which is to be furnished to Reserve Banks in accordance with 
the provisions of Sec. 225.23 should be accompanied by a memorandum 
which demonstrates that such projects meet the objectives of Sec. 
225.25(b)(6).
    (e) Investments in corporations or projects organized to build or 
rehabilitate high-income housing, or commercial, office, or industrial 
facilities that are not designed explicitly to create improved job 
opportunities for low-income persons shall be presumed not to

[[Page 240]]

be designed primarily to promote community welfare, unless there is 
substantial evidence to the contrary, even though to some extent the 
investment may benefit the community.
    (f) Section 6 of the Depository Institutions Disaster Relief Act of 
1992 permits state member banks (12 U.S.C. 338a) and national banks (12 
U.S.C. 24 (Eleventh)) to invest in the stock of community development 
corporations that are designed primarily to promote the public welfare 
of low- and moderate-income communities and persons in the areas of 
housing, services and employment. The Board and the Office of the 
Comptroller of the Currency have adopted rules that permit state member 
banks and national banks to make certain investments without prior 
approval. The Board believes that these rules are consistent with the 
Board's interpretation of, and decisions regarding, the scope of 
community welfare activities permissible for bank holding companies. 
Accordingly, approval received by a bank holding company to conduct 
activities designed to promote the community welfare under section 
4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)) and Sec. 
225.25(b)(6) of the Board's Regulation Y (12 CFR 225.25(b)(6)) includes 
approval to engage, either directly or through a subsidiary, in the 
following activities, up to five percent of the bank holding company's 
total consolidated capital stock and surplus, without additional Board 
or Reserve Bank approval:
    (1) Invest in and provide financing to a corporation or project or 
class of corporations or projects that the Board previously has 
determined is a public welfare project pursuant to paragraph 23 of 
section 9 of the Federal Reserve Act (12 U.S.C. 338a);
    (2) Invest in and provide financing to a corporation or project that 
the Office of the Comptroller of the Currency previously has determined, 
by order or regulation, is a public welfare investment pursuant to 
section 5136 of the Revised Statutes (12 U.S.C. 24 (Eleventh));
    (3) Invest in and provide financing to a community development 
financial institution pursuant to section 103(5) of the Community 
Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 
4702(5));
    (4) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent residential property if a majority of the units will be 
occupied by low- and moderate-income persons or if the property is a 
``qualified low-income building'' as defined in section 42(c)(2) of the 
Internal Revenue Code (26 U.S.C. 42(c)(2));
    (5) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent nonresidential real property or other assets located in a 
low- or moderate-income area provided the property is used primarily for 
low- and moderate-income persons;
    (6) Invest in and provide financing to one or more small businesses 
located in a low- or moderate-income area to stimulate economic 
development;
    (7) Invest in, provide financing to, develop, and otherwise assist 
job training or placement facilities or programs designed primarily for 
low- and moderate-income persons;
    (8) Invest in and provide financing to an entity located in a low- 
or moderate-income area if that entity creates long-term employment 
opportunities, a majority of which (based on full time equivalent 
positions) will be held by low- and moderate-income persons; and
    (9) Provide technical assistance, credit counseling, research, and 
program development assistance to low- and moderate-income persons, 
small businesses, or nonprofit corporations to help achieve community 
development.
    (g) For purposes of paragraph (f) of this section, low- and 
moderate-income persons or areas means individuals and communities whose 
incomes do not exceed 80 percent of the median income of the area 
involved, as determined by the U.S. Department of Housing and Urban 
Development. Small businesses are businesses that are smaller than the 
maximum size eligibility standards established by the Small Business 
Administration (SBA) for the Small Business Investment Company and 
Development Company Programs or the SBA section 7A loan program; and 
specifically include those businesses that are

[[Page 241]]

majority-owned by members of minority groups or by women.
    (h) For purposes of paragraph (f) of this section, five percent of 
the total consolidated capital stock and surplus of a bank holding 
company includes its total investment in projects described in paragraph 
(f) of this section, when aggregated with similar types of investments 
made by depository institutions controlled by the bank holding company. 
The term total consolidated capital stock and surplus of the bank 
holding company means total equity capital and the allowance for loan 
and lease losses. For bank holding companies that file the FR Y-9C 
(Consolidated Financial Statements for Bank Holding Companies), these 
items are readily ascertained from Schedule HC--Consolidated Balance 
Sheet (total equity capital (line 27h) and allowance for loan and lease 
losses (line 4b)). For bank holding companies filing the FR Y-SP (Parent 
Company Only Financial Statements for Small Bank Holding Companies), an 
approximation of these items is ascertained from the Balance Sheet 
(total equity capital (line 16e)) and allowance for loan and lease 
losses (line 3b)) and from the Report of Condition for Insured Banks 
(Schedule RC--Balance Sheet (line 4b)).

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



Sec. 225.129  Activities closely related to banking.

    Courier activities. The Board's amendment of Sec. 225.4(a), which 
adds courier services to the list of closely related activities is 
intended to permit holding companies to transport time critical 
materials of limited intrinsic value of the types utilized by banks and 
bank-related firms in performing their business activities. Such 
transportation activities are of particular importance in the check 
clearing process of the banking system, but are also important to the 
performance of other activities, including the processing of 
financially-related economic data. The authority is not intended to 
permit holding companies to engage generally in the provision of 
transportation services.
    During the course of the Board's proceedings pertaining to courier 
services, objections were made that courier activities were not a proper 
incident to banking because of the possibility that holding companies 
would or had engaged in unfair competitive practices. The Board believes 
that adherence to the following principles will eliminate or reduce to 
an insignificant degree any possibility of unfair competition:
    a. A holding company courier subsidiary established under section 
4(c)(8) should be a separate, independent corporate entity, not merely a 
servicing arm of a bank.
    b. As such, the subsidiary should exist as a separate, profit-
oriented operation and should not be subsidized by the holding company 
system.
    c. Services performed should be explicitly priced, and shall not be 
paid for indirectly, for example, on the basis of deposits maintained at 
or loan arrangements with affiliated banks.


Accordingly, entry of holding companies into courier activities on the 
basis of section 4(c)(8) will be conditioned as follows:
    1. The courier subsidiary shall perform services on an explicit fee 
basis and shall be structured as an individual profit center designed to 
be operated on a profitable basis. The Board may regard operating losses 
sustained over an extended period as being inconsistent with continued 
authority to engage in courier activities.
    2. Courier services performed on behalf of an affiliate's customer 
(such as the carriage of incoming cash letters) shall be paid for by the 
customer. Such payments shall not be made indirectly, for example, on 
the basis of imputed earnings on deposits maintained at or of loan 
arrangements with subsidiaries of the holding company. Concern has also 
been expressed that bank-affiliated courier services will be utilized to 
gain a competitive advantage over firms competing with other holding 
company affiliates. To reduce the possibility that courier affiliates 
might be so employed, the Board will impose the following third 
condition:
    3. The courier subsidiary shall, when requested by any bank or any 
data processing firm providing financially-related data processing 
services which firm competes with a banking or data processing

[[Page 242]]

subsidiary of Applicant, furnish comparable service at comparable rates, 
unless compliance with such request would be beyond the courier 
subsidiary's practical capacity. In this regard, the courier subsidiary 
should make known to the public its minimum rate schedule for services 
and its general pricing policies thereto. The courier subsidiary is also 
expected to maintain for a reasonable period of time (not less than two 
years) each request denied with the reasons for such denial.

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



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

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

[38 FR 35231, Dec. 26, 1973]



Sec. 225.131  Activities closely related to banking.

    (a) Bank management consulting advice. The Board's amendment of 
Sec. 225.4(a), which adds bank management consulting advice to the list 
of closely related activities, described in general terms the nature of 
such activity. This interpretation is intended to explain in greater 
detail certain of the terms in the amendment.
    (b) It is expected that bank management consulting advice would 
include, but not be limited to, advice concerning: Bank operations, 
systems and procedures; computer operations and mechanization; 
implementation of electronic funds transfer systems; site planning and 
evaluation; bank mergers and the establishment of new branches; 
operation and management of a trust department; international banking; 
foreign exchange transactions; purchasing policies and practices; cost 
analysis, capital adequacy and planning; auditing; accounting 
procedures; tax planning; investment advice (as authorized in Sec. 
225.4(a)(5)); credit policies and administration, including credit 
documentation, evaluation, and debt collection; product development, 
including specialized lending provisions; marketing operations, 
including research, market development and advertising programs; 
personnel operations, including recruiting, training, evaluation and 
compensation; and security measures and procedures.
    (c) In permitting bank holding companies to provide management 
consulting advice to nonaffiliated ``banks'', the Board intends such 
advice to be given only to an institution that both accepts deposits 
that the depositor has a legal right to withdraw on demand and engages 
in the business of making commercial loans. It is also intended that 
such management consulting advice may be provided to the ``operations 
subsidiaries'' of a bank, since such subsidiaries perform functions that 
a bank is empowered to perform directly at locations at which the bank 
is authorized to engage in business (Sec. 250.141 of this chapter).
    (d) Although a bank holding company providing management consulting 
advice is prohibited by the regulation from owning or controlling, 
directly or indirectly, any equity securities in a client bank, this 
limitation does not apply to shares of a client bank acquired, directly 
or indirectly, as a result of a default on a debt previously contracted. 
This limitation is also inapplicable to shares of a client bank acquired 
by a bank holding company, directly or indirectly, in a fiduciary 
capacity: Provided, That the bank holding company or its subsidiary does 
not have sole discretionary authority to vote such shares or shares held 
with sole voting rights constitute not more than five percent of the 
outstanding voting shares of a client bank.

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



Sec. 225.132  Acquisition of assets.

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

[[Page 243]]

the acquisition of assets, it is necessary to determine (a) whether the 
acquisition is made in the ordinary course of business \1\ or (b) 
whether it constitutes the acquisition, in whole or in part, of a going 
concern. \2\
---------------------------------------------------------------------------

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

    (c) The following examples illustrate transactions where prior Board 
approval will generally be required:
    (1) The transaction involves the acquisition of all or substantially 
all of the assets of a company, or a subsidiary, division, department or 
office thereof.
    (2) The transaction involves the acquisition of less than 
``substantially all'' of the assets of a company, or a subsidiary, 
division, department or office thereof, the operations of which are 
being terminated or substantially discontinued by the seller, but such 
asset acquisition is significant in relation to the size of the same 
line of nonbank activity of the holding company (e.g., consumer finance 
mortgage banking, data processing). For purposes of this interpretation, 
an acquisition would generally be presumed to be significant if the book 
value of the nonbank assets being acquired exceeds 50 percent of the 
book value of the nonbank assets of the holding company or nonbank 
subsidiary comprising the same line of activity.
    (3) The transaction involves the acquisition of assets for resale 
and the sale of such assets is not a normal business activity of the 
acquiring holding company.
    (4) The transaction involves the acquisition of the assets of a 
company, or a subsidiary, division, department or office thereof, and a 
major purpose of the transaction is to hire some of the seller's 
principal employees who are expert, skilled and experienced in the 
business of the company being acquired.
    (d) In some cases it may be difficult, due to the wide variety of 
circumstances involving possible acquisition of assets, to determine 
whether such acquisitions require prior Board approval. Bank holding 
companies are encouraged to contact their local Reserve Bank for 
guidance where doubt exists as to whether such an acquisition is in the 
ordinary course of business or an acquisition, in whole or in part, of a 
going concern.

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



Sec. 225.133  Computation of amount invested in foreign corporations
under general consent procedures.

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

[40 FR 43199, Sept. 19, 1975]



Sec. 225.134  Escrow arrangements involving bank stock resulting
in a violation of the Bank Holding Company Act.

    (a) In connection with a recent application to become a bank holding 
company, the Board considered a situation in which shares of a bank were 
acquired and then placed in escrow by the applicant prior to the Board's 
approval of the application. The facts indicated that the applicant 
company had incurred debt for the purpose of acquiring bank shares and 
immediately after the purchase the shares were transferred to an 
unaffiliated escrow agent with instructions to retain possession of the 
shares pending Board action on the company's application to become a 
bank holding company. The escrow agreement provided that, if the 
application were approved by the Board, the escrow agent was to return 
the shares to the applicant company; and, if the application were 
denied, the escrow agent was to deliver the shares to the applicant 
company's shareholders upon their assumption of debt originally incurred 
by the applicant in the acquisition of the bank shares. In addition, the 
escrow agreement provided that, while the shares were held in escrow, 
the applicant could not exercise voting or any other ownership rights 
with respect to those shares.

[[Page 244]]

    (b) On the basis of the above facts, the Board concluded that the 
company had violated the prior approval provisions of section 3 of the 
Bank Holding Company Act (``Act'') at the time that it made the initial 
acquisition of bank shares and that, for purposes of the Act, the 
company continued to control those shares in violation of the Act. In 
view of these findings, individuals and bank holding companies should 
not enter into escrow arrangements of the type described herein, or any 
similar arrangement, without securing the prior approval of the Board, 
since such action could constitute a violation of the Act.
    (c) While the above represents the Board's conclusion with respect 
to the particular escrow arrangement involved in the proposal presented, 
the Board does not believe that the use of an escrow arrangement would 
always result in a violation of the Act. For example, it appears that a 
transaction whereby bank shares are placed in escrow pending Board 
action on an application would not involve a violation of the Act so 
long as title to such shares remains with the seller during the pendency 
of the application; there are no other indicia that the applicant 
controls the shares held in escrow; and, in the event of a Board denial 
of the application, the escrow agreement provides that the shares would 
be returned to the seller.

[41 FR 9859, Mar. 8, 1976, as amended at 41 FR 12009, Mar. 23, 1976]



Sec. 225.136  Utilization of foreign subsidiaries to sell long-term 
debt obligations in foreign markets and to transfer the proceeds 
to their United States parent(s) for domestic purposes.

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

[42 FR 752, Jan. 4, 1977]



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

    (a) The Board has received a request for an interpretation of 
section 4(c)(6) of the Bank Holding Company Act (``Act'') \1\ in 
connection with a proposal under which a number of bank holding 
companies would purchase interests in an insurance company to be formed 
for the purpose of underwriting or reinsuring credit life and credit 
accident and health insurance sold in connection with extensions of 
credit by the stockholder bank holding companies and their affiliates.
---------------------------------------------------------------------------

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

    (b) Each participating holding company would own no more than 5 
percent of the outstanding voting shares of the company. However, the 
investment of each holding company would be represented by a separate 
class of voting security, so that each stockholder would own 100 percent 
of its respective class. The participating companies would execute a 
formal ``Agreement Among Stockholders'' under which each would agree to 
use its best efforts at all times to direct or recommend to customers 
and clients the placement of their life, accident and health insurance 
directly or indirectly with the company. Such credit-related insurance 
placed with the company would be identified in the records of the 
company as having been originated by the respective stockholder. A 
separate capital account would be maintained for each stockholder 
consisting of the original capital contribution increased or decreased 
from time to time by the net profit or loss resulting from the insurance 
business attributable to each stockholder. Thus, each stockholder would 
receive a return on its investment based upon the claims experience and 
profitability of the insurance business that it had itself generated. 
Dividends declared by the board of directors of the company would be 
payable

[[Page 245]]

to each stockholder only out of the earned surplus reflected in the 
respective stockholder's capital account.
    (c) It has been requested that the Board issue an interpretation 
that section 4(c)(6) of the Act provides an exemption under which 
participating bank holding companies may acquire such interests in the 
company without prior approval of the Board.
    (d) On the basis of a careful review of the documents submitted, in 
light of the purposes and provisions of the Act, the Board has concluded 
that section 4(c)(6) of the Act is inapplicable to this proposal and 
that a bank holding company must obtain the approval of the Board before 
participating in such a proposal in the manner described. The Board's 
conclusion is based upon the following considerations:
    (1) Section 2(a)(2)(A) of the Act provides that a company is deemed 
to have control over a second company if it owns or controls ``25 per 
centum or more of any class of voting securities'' of the second 
company. In the case presented, the stock interest of each participant 
would be evidenced by a different class of stock and each would 
accordingly, own 100 percent of a class of voting securities of the 
company. Thus, each of the stockholders would be deemed to ``control'' 
the company and prior Board approval would be required for each 
stockholder's acquisition of stock in the company.


The Board believes that this application of section 2(a)(2)(A) of the 
Act is particularly appropriate on the facts presented here. The company 
is, in practical effect, a conglomeration of separate business ventures 
each owned 100 percent by a stockholder the value of whose economic 
interest in the company is determined by reference to the profits and 
losses attributable to its respective class of stock. Furthermore, it is 
the Board's opinion that this application of section 2(a)(2)(A) is not 
inconsistent with section 4(c)(6). Even assuming that section (4)(c)(6) 
is intended to refer to all outstanding voting shares, and not merely 
the outstanding shares of a particular class of securities, section 
4(c)(6) must be viewed as permitting ownership of 5 percent of a 
company's voting stock only when that ownership does not constitute 
``control'' as otherwise defined in the Act. For example, it is entirely 
possible that a company could exercise a controlling influence over the 
management and policies of a second company, and thus ``control'' that 
company under the Act's definitions, even though it held less than 5 
percent of the voting stock of the second company. To view section 
4(c)(6) as an unqualified exemption for holdings of less than 5 percent 
would thus create a serious gap in the coverage of the Act.
    (2) The Board believes that section 4(c)(6) should properly be 
interpreted as creating an exemption from the general prohibitions in 
section 4 on ownership of stock in nonbank companies only for passive 
investments amounting to not more than 5 percent of a company's 
outstanding stock, and that the exemption was not intended to allow a 
group of holding companies, through concerted action, to engage in an 
activity as entrepreneurs. Section 4 of the Act, of course, prohibits 
not only owning stock in nonbank companies, but engaging in activities 
other than banking or those activities permitted by the Board under 
section 4(c)(8) as being closely related to banking. Thus, if a holding 
company may be deemed to be engaging in an activity through the medium 
of a company in which it owns less than 5 percent of the voting stock it 
may nevertheless require Board approval, despite the section 4(c)(6) 
exemption.
    (e) To accept the argument that section 4(c)(6) is an unqualified 
grant of permission to a bank holding company to own 5 percent of the 
shares of any nonbanking company irrespective of the nature or extent of 
the holding company's participation in the affairs of the nonbanking 
company would, in the Board's view, create the potential for serious and 
widespread evasion of the Act's controls over nonbanking activities. 
Such a construction would allow a group of 20 bank holding companies--or 
even a single bank holding company and one or more nonbank companies--to 
engage in entrepreneurial joint ventures in businesses prohibited to 
bank holding companies, a result the Board believes to be contrary to 
the intent of Congress.

[[Page 246]]

    (f) In this proposal, each of the participating stockholders must be 
viewed as engaging in the business of insurance underwriting. Each 
stockholder would agree to channel to the company the insurance business 
it generates, and the value of the interest of each stockholder would be 
determined by reference to the profitability of the business generated 
by that stockholder itself. There is no sharing or pooling among 
stockholders of underwriting risks assumed by the company, and profit or 
loss from investments is allocated on the basis of each bank holding 
company's allocable underwriting profit or loss. The interest of each 
stockholder is thus clearly that of an entrepreneur rather than that of 
an investor.
    (g) Accordingly, on the basis of the factual situation before the 
Board, and for the reasons summarized above, the Board has concluded 
that section 4(c)(6) of the Act cannot be interpreted to exempt the 
ownership of 5 percent of the voting stock of a company under the 
circumstances described, and that a bank holding company wishing to 
become a stockholder in a company under this proposal would be required 
to obtain the Board's approval to do so.

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



Sec. 225.138  Statement of policy concerning divestitures by bank
holding companies.

    (a) From time to time the Board of Governors receives requests from 
companies subject to the Bank Holding Company Act, or other laws 
administered by the Board, to extend time periods specified either by 
statute or by Board order for the divestiture of assets held or 
activities engaged in by such companies. Such divestiture requirements 
may arise in a number of ways. For example, divestiture may be ordered 
by the Board in connection with an acquisition found to have been made 
in violation of law. In other cases the divestiture may be pursuant to a 
statutory requirement imposed at the time and amendment to the Act was 
adopted, or it may be required as a result of a foreclosure upon 
collateral held by the company or a bank subsidiary in connection with a 
debt previously contracted in good faith. Certain divestiture periods 
may be extended in the discretion of the Board, but in other cases the 
Board may be without statutory authority, or may have only limited 
authority, to extend a specified divestiture period.
    (b) In the past, divestitures have taken many different forms, and 
the Board has followed a variety of procedures in enforcing divestiture 
requirements. Because divestitures may occur under widely disparate 
factual circumstances, and because such forced dispositions may have the 
potential for causing a serious adverse economic impact upon the 
divesting company, the Board believes it is important to maintain a 
large measure of flexibility in dealing with divestitures. For these 
reasons, there can be no fixed rule as to the type of divestiture that 
will be appropriate in all situations. For example, where divestiture 
has been ordered to terminate a control relationship created or 
maintained in violation of the Act, it may be necessary to impose 
conditions that will assure that the unlawful relationship has been 
fully terminated and that it will not arise in the future. In other 
circumstances, however, less stringent conditions may be appropriate.
    (1) Avoidance of delays in divestitures. Where a specific time 
period has been fixed for accomplishing divestiture, the affected 
company should endeavor and should be encouraged to complete the 
divestiture as early as possible during the specific period. There will 
generally be substantial advantages to divesting companies in taking 
steps to plan for and accomplish divestitures well before the end of the 
divestiture period. For example, delays may impair the ability of the 
company to realize full value for the divested assets, for as the end of 
the divestiture period approaches the ``forced sale'' aspect of the 
divestiture may lead potential buyers to withhold firm offers and to 
bargain for lower prices. In addition, because some prospective 
purchasers may themselves require regulatory approval to acquire the 
divested property, delay by the divesting company may--by leaving 
insufficient time to obtain

[[Page 247]]

such approvals--have the effect of narrowing the range of prospective 
purchases. Thus, delay in planning for divestiture may increase the 
likelihood that the company will seek an extension of the time for 
divestiture if difficulty is encountered in securing a purchaser, and in 
certain situations, of course, the Board may be without statutory 
authority to grant extensions.
    (2) Submissions and approval of divestiture plans. When a 
divestiture requirement is imposed, the company affected should 
generally be asked to submit a divestiture plan promptly for review and 
approval by the Reserve Bank or the Board. Such a requirement may be 
imposed pursuant to the Board's authority under section 5(b) of the Bank 
Holding Company Act to issue such orders as may be necessary to enable 
the Board to administer and carry out the purposes of the Act and 
prevent evasions thereof. A divestiture plan should be as specific as 
possible, and should indicate the manner in which divestiture will be 
accomplished--for example, by a bulk sale of the assets to a third 
party, by ``spinoff'' or distribution of shares to the shareholders of 
the divesting company, or by termination of prohibited activities. In 
addition, the plan should specify the steps the company expects to take 
in effecting the divestiture and assuring its completeness, and should 
indicate the time schedule for taking such steps. In appropriate 
circumstances, the divestiture plan should make provision for assuring 
that ``controlling influence'' relationships, such as management or 
financial interlocks, will not continue to exist.
    (3) Periodic progress reports. A company subject to a divestiture 
requirement should generally be required to submit regular periodic 
reports detailing the steps it has taken to effect divestiture. Such a 
requirement may be imposed pursuant to the Board's authority under 
section 5(b) of the Bank Holding Company Act, referred to above, as well 
as its authority under section 5(c) of the Act to require reports for 
the purpose of keeping the Board informed as to whether the Act and 
Board regulations and order thereunder are being complied with. Reports 
should set forth in detail such matters as the identities of potential 
buyers who have been approached by the company, the dates of discussions 
with potential buyers and the identities of the individuals involved in 
such discussions, the terms of any offers received, and the reasons for 
rejecting any offers. In addition, the reports should indicate whether 
the company has employed brokers, investment bankers or others to assist 
in the divestiture, or its reasons for not doing so, and should describe 
other efforts by the company to seek out possible purchasers. The 
purpose of requiring such reports is to insure that substantial and good 
faith efforts being made by the company to satisfy its divestiture 
obligations. The frequency of such reports may vary depending upon the 
nature of the divestiture and the period specified for divestiture. 
However, such reports should generally not be required less frequently 
than every three months, and may in appropriate cases be required on a 
monthly or even more frequent basis. Progress reports as well as 
divestiture plans should be afforded confidential treatment.
    (4) Extensions of divestiture periods. Certain divestiture periods--
such as December 31, 1980 deadline for divestitures required by the 1970 
Amendments to the Bank Holding Company Act--are not extendable. In such 
cases it is imperative that divestiture be accomplished in a timely 
manner. In certain other cases, the Board may have discretion to extend 
a statutorily prescribed divestiture period within specified limits. For 
example, under section 4(c)(2) of the Act the Board may extend for three 
one-year periods the two-year period in which a bank subsidiary of a 
holding company is otherwise required to divest shares acquired in 
satisfaction of a debt previously contracted in good faith. In such 
cases, however, when the permissible extensions expire the Board no 
longer has discretion to grant further extensions. In still other cases, 
where a divestiture period is prescribed by the Board, in the exercise 
of its regulatory judgment, the Board may have broader discretion to 
grant extensions. Where extensions of specified divestiture periods are 
permitted by law, extensions should not be granted except under

[[Page 248]]

compelling circumstances. Neither unfavorable market conditions, nor the 
possibility that the company may incur some loss, should alone be viewed 
as constituting such circumstances--particularly if the company has 
failed to take earlier steps to accomplish a divestiture under more 
favorable circumstances. Normally, a request for an extension will not 
be considered unless the company has established that it has made 
substantial and continued good faith efforts to accomplish the 
divestiture within the prescribed period. Furthermore, requests for 
extensions of divestiture periods must be made sufficiently in advance 
of the expiration of the prescribed period both to enable the Board to 
consider the request in an orderly manner and to enable the company to 
effect a timely divestiture in the event the request for extension is 
denied. Companies subject to divestiture requirements should be aware 
that a failure to accomplish a divestiture within the prescribed period 
may in and of itself be viewed as a separate violation of the Act.
    (5) Use of trustees. In appropriate cases a company subject to a 
divestiture requirement may be required to place the assets subject to 
divestiture with an independent trustee under instructions to accomplish 
a sale by a specified date, by public auction if necessary. Such a 
trustee may be given the responsibility for exercising the voting rights 
with respect to shares being divested. The use of such a trustee may be 
particularly appropriate where the divestiture is intended to terminate 
a control relationship established or maintained in violation of law, or 
where the divesting company has demonstrated an inability or 
unwillingness to take timely steps to effect a divestiture.
    (6) Presumptions of control. Bank holding companies contemplating a 
divestiture should be mindful of section 2(g)(3) of the Bank Holding 
Company Act, which creates a presumption of continued control over the 
transferred assets where the transferee is indebted to the transferor, 
or where certain interlocks exist, as well as Sec. 225.2 of Regulation 
Y, which sets forth certain additional control presumptions. Where one 
of these presumptions has arisen with respect to divested assets, the 
divestiture will not be considered as complete until the presumption has 
been overcome. It should be understood that the inquiry into the 
termination of control relationships is not limited by the statutory and 
regulatory presumptions of control, and that the Board may conclude that 
a control relationship still exists even though the presumptions do not 
apply.
    (7) Role of the Reserve Banks. The Reserve Banks have a 
responsibility for supervising and enforcing divestitures. Specifically, 
in coordination with Board staff they should review divestiture plans to 
assure that proposed divestitures will result in the termination of 
control relationships and will not create unsafe or unsound conditions 
in any bank or bank holding company; they should monitor periodic 
progress reports to assure that timely steps are being taken to effect 
divestitures; and they should prompt companies to take such steps when 
it appears that progress is not being made. Where Reserve Banks have 
delegated authority to extend divestiture periods, that authority should 
be exercised consistently with this policy statement.

[42 FR 10969, Feb. 25, 1977]



Sec. 225.139  Presumption of continued control under section 2(g)(3) 
of the Bank Holding Company Act.

    (a) Section 2(g)(3) of the Bank Holding Company Act (the ``Act'') 
establishes a statutory presumption that where certain specified 
relationships exist between a transferor and transferee of shares, the 
transferor (if it is a bank holding company, or a company that would be 
such but for the transfer) continues to own or control indirectly the 
transferred shares. \1\ This presumption arises by operation of law, as 
of the date of the transfer, without the need for any order or 
determination by the Board. Operation of the presumption may be 
terminated only by the issuance of a Board determination,

[[Page 249]]

after opportunity for hearing, ``that the transferor is not in fact 
capable of controlling the transferee.'' \2\
---------------------------------------------------------------------------

    \1\ The presumption arises where the transferee ``is indebted to the 
transferor, or has one or more officers, directors, trustees, or 
beneficiaries in common with or subject to control by the transferor.''
    \2\ The Board has delegated to its General Counsel the authority to 
issue such determinations, 12 CFR 265.2(b)(1).
---------------------------------------------------------------------------

    (b) The purpose of section 2(g)(3) is to provide the Board an 
opportunity to assess the effectiveness of divestitures in certain 
situations in which there may be a risk that the divestiture will not 
result in the complete termination of a control relationship. By 
presuming control to continue as a matter of law, section 2(g)(3) 
operates to allow the effectiveness of the divestiture to be assessed 
before the divesting company is permitted to act on the assumption that 
the divestiture is complete. Thus, for example, if a holding company 
divests its banking interest under circumstances where the presumption 
of continued control arises, the divesting company must continue to 
consider itself bound by the Act until an appropriate order is entered 
by the Board dispelling the presumption. Section 2(g)(3) does not 
establish a substantive rule that invalidates transfers to which it 
applies, and in a great many cases the Board has acted favorably on 
applications to have the presumption dispelled. It merely provides a 
procedural opportunity for Board consideration of the effect of such 
transfers in advance of their being deemed effective. Whether or not the 
statutory presumption arises, the substantive test for assessing the 
effectiveness of a divestiture is the same--that is, the Board must be 
assured that all control relationships between the transferor and the 
transferred property have been terminated and will not be reestablished. 
\3\
---------------------------------------------------------------------------

    \3\ It should be noted, however, that the Board will require 
termination of any interlocking management relationships between the 
divesting company and the transferee or the divested company as a 
precondition of finding that a divestiture is complete. Similarly, the 
retention of an economic interest in the divested company that would 
create an incentive for the divesting company to attempt to influence 
the management of the divested company will preclude a finding that the 
divestiture is complete. (See the Board's Order in the matter of 
``International Bank'', 1977 Federal Reserve Bulletin 1106, 1113.)
---------------------------------------------------------------------------

    (c) In the course of administering section 2(g)(3) the Board has had 
several occasions to consider the scope of that section. In addition, 
questions have been raised by and with the Board's staff as to coverage 
of the section. Accordingly, the Board believes it would be useful to 
set forth the following interpretations of section 2(g)(3):
    (1) The terms transferor and transferee, as used in section 2(g)(3), 
include parents and subsidiaries of each. Thus, for example, where a 
transferee is indebted to a subsidiary of the transferor, or where a 
specified interlocking relationship exists between the transferor or 
transferee and a subsidiary of the other (or between subsidiaries of 
each), the presumption arises. Similarly, if a parent of the transferee 
is indebted to a parent of the transferor, the presumption arises. The 
presumption of continued control also arises where an interlock or debt 
relationship is retained between the divesting company and the company 
being divested, since the divested company will be or may be viewed as a 
subsidiary of the transferee or group of transferees.
    (2) The terms officers, directors, and trustees, as used in section 
2(g)(3), include persons performing functions normally associated with 
such positions (including general partners in a partnership and limited 
partners having a right to participate in the management of the affairs 
of the partnership) as well as persons holding such positions in an 
advisory or honorary capacity. The presumption arises not only where the 
transferee or transferred company has an officer, director or trustee in 
common with the transferor, but where the transferee himself holds such 
a position with the transferor. \4\ It should be noted that where a

[[Page 250]]

transfer takes the form of a pro-rata distribution, or spin-off, of 
shares to a company's shareholders, officers and directors of the 
transferor company are likely to receive a portion of such shares. The 
presumption of continued control would, of course, attach to any shares 
transferred to officers and directors of the divesting company, whether 
by spinoff or outright sale. However, the presumption will be of legal 
significance--and will thus require an application under section 
2(g)(3)--only where the total number of shares subject to the 
presumption exceeds one of the applicable thresholds in the Act. For 
example, where officers and directors of a one-bank holding company 
receive in the aggregate 25 percent or more of the stock of a bank 
subsidiary being divested by the holding company, the holding company 
would be presumed to continue to control the divested bank. In such a 
case it would be necessary for the divesting company to demonstrate that 
it no longer controls either the divested bank or the officer/director 
transferees. However, if officers and directors were to receive in the 
aggregate less than 25 percent of the bank's stock (and no other shares 
were subject to the presumption), section 2(g)(3) would not have the 
legal effect of presuming continued control of the bank. \5\ In the case 
of a divestiture of nonbank shares, an application under section 2(g)(3) 
would be required whenever officers and directors of the divesting 
company received in the aggregate more than 5 percent of the shares of 
the company being divested.
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    \4\ It has been suggested that the words in common with in section 
2(g)(3) evidence an intent to make the presumption applicable only where 
the transferee is a company having an interlock with the transferor. 
Such an interpretation would, in the Board's view, create an unwarranted 
gap in the coverage of section 2(g)(3). Furthermore, because the 
presumption clearly arises where the transferee is an individual who is 
indebted to the transferor such an interpretation would result in an 
illogical internal inconsistency in the statute.
    \5\ Of course, the fact that section 2(g)(3) would not operate to 
presume continued control would not necessarily mean that control had in 
fact been terminated if control could be exercised through other means.
---------------------------------------------------------------------------

    (3) Although section 2(g)(3) refers to transfers of shares it is 
not, in the Board's view, limited to disposition of corporate stock. 
General or limited partnership interests, for example, are included 
within the term shares. Furthermore, the transfer of all or 
substantially all of the assets of a company, or the transfer of such a 
significant volume of assets that the transfer may in effect constitute 
the disposition of a separate activity of the company, is deemed by the 
Board to involve a transfer of shares of that company.
    (4) The term indebtedness giving rise to the presumption of 
continued control under section 2(g)(3) of the Act is not limited to 
debt incurred in connection with the transfer; it includes any debt 
outstanding at the time of transfer from the transferee to the 
transferor or its subsidiaries. However, the Board believes that not 
every kind of indebtedness was within the contemplation of the Congress 
when section 2(g)(3) was adopted. Routine business credit of limited 
amounts and loans for personal or household purposes are generally not 
the kinds of indebtedness that, standing alone, support a presumption 
that the creditor is able to control the debtor. Accordingly, the Board 
does not regard the presumption of section 2(g)(3) as applicable to the 
following categories of credit, provided the extensions of credit are 
not secured by the transferred property and are made in the ordinary 
course of business of the transferor (or its subsidiary) that is 
regularly engaged in the business of extending credit:
    (i) Consumer credit extended for personal or household use to an 
individual transferee; (ii) student loans made for the education of the 
individual transferee or a spouse or child of the transferee; (iii) a 
home mortgage loan made to an individual transferee for the purchase of 
a residence for the individual's personal use and secured by the 
residence; and (iv) loans made to companies (as defined in section 2(b) 
of the Act) in an aggregate amount not exceeding ten per cent of the 
total purchase price (or if not sold, the fair market value) of the 
transferred property. The amounts and terms of the preceding categories 
of credit should not differ substantially from similar credit extended 
in comparable circumstances to others who are not transferees. It should 
be understood that, while the statutory presumption in situations 
involving these categories of credit may not apply, the Board is not 
precluded in any case from examining the facts of a particular transfer 
and finding that

[[Page 251]]

the divestiture of control was ineffective based on the facts of record.
    (d) Section 2(g)(3) provides that a Board determination that a 
transferor is not in fact capable of controlling a transferee shall be 
made after opportunity for hearing. It has been the Board's routine 
practice since 1966 to publish notice in the Federal Register of 
applications filed under section 2(g)(3) and to offer interested parties 
an opportunity for a hearing. Virtually without exception no comments 
have been submitted on such applications by parties other than the 
applicant and, with the exception of one case in which the request was 
later withdrawn, no hearings have been requested in such cases. Because 
the Board believes that the hearing provision in section 2(g)(3) was 
intended as a protection for applicants who are seeking to have the 
presumption overcome by a Board order, a hearing would not be of use 
where an application is to be granted. In light of the experience 
indicating that the publication of Federal Register notice of such 
applications has not served a useful purpose, the Board has decided to 
alter its procedures in such cases. In the future, Federal Register 
notice of section 2(g)(3) applications will be published only in cases 
in which the Board's General Counsel, acting under delegated authority, 
has determined not to grant such an application and has referred the 
matter to the Board for decision. \6\
---------------------------------------------------------------------------

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

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

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



Sec. 225.140  Disposition of property acquired in satisfaction of
debts previously contracted.

    (a) The Board recently considered the permissibility, under section 
4 of the Bank Holding Company Act, of a subsidiary of a bank holding 
company acquiring and holding assets acquired in satisfaction of a debt 
previously contracted in good faith (a ``dpc'' acquisition). In the 
situation presented, a lending subsidiary of a bank holding company made 
a ``dpc'' acquisition of assets and transferred them to a wholly-owned 
subsidiary of the bank holding company for the purpose of effecting an 
orderly divestiture. The question presented was whether such ``dpc'' 
assets could be held indefinitely by a bank holding company subsidiary 
as incidental to its permissible lending activity.
    (b) While the Board believes that ``dpc'' acquisitions may be 
regarded as normal, necessary and incidental to the business of lending, 
the Board does not believe that the holding of assets acquired ``dpc'' 
without any time restrictions is appropriate from the standpoint of 
prudent banking and in light of the prohibitions in section 4 of the Act 
against engaging in nonbank activities. If a nonbanking subsidiary of a 
bank holding company were permitted, either directly or through a 
subsidiary, to hold ``dpc'' assets of substantial amount over an 
extended period of time, the holding of such property could result in an 
unsafe or unsound banking practice or in the holding company engaging in 
an impermissible activity in connection with the assets, rather than 
liquidating them.
    (c) The Board notes that section 4(c)(2) of the Bank Holding Company 
Act provides an exemption from the prohibitions of section 4 of the Act 
for bank holding company subsidiaries to acquire shares ``dpc''. It also 
provides that such ``dpc'' shares may be held for a period of two years, 
subject to the Board's authority to grant three one-year extensions up 
to a maximum of five years. \1\ Viewed in light of the Congressional 
policy evidenced by section

[[Page 252]]

4(c)(2), the Board believes that a lending subsidiary of a bank holding 
company or the holding company itself, should be permitted, as an 
incident to permissible lending activities, to make acquisitions of 
``dpc'' assets. Consistent with the principles underlying the provisions 
of section 4(c)(2) of the Act and as a matter of prudent banking 
practice, such assets may be held for no longer than five years from the 
date of acquisition. Within the divestiture period it is expected that 
the company will make good faith efforts to dispose of ``dpc'' shares or 
assets at the earliest practicable date. While no specific authorization 
is necessary to hold such assets for the five-year period, after two 
years from the date of acquisition of such assets, the holding company 
should report annually on its efforts to accomplish divestiture to its 
Reserve Bank. The Reserve Bank will monitor the efforts of the company 
to effect an orderly divestiture, and may order divestiture before the 
end of the five-year period if supervisory concerns warrant such action.
---------------------------------------------------------------------------

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

    (d) The Board recognizes that there are instances where a company 
may encounter particular difficulty in attempting to effect an orderly 
divestiture of ``dpc'' real estate holdings within the divestiture 
period, notwithstanding its persistent good faith efforts to dispose of 
such property. In the Depository Institutions Deregulation and Monetary 
Control Act of 1980, (Pub. L. 96-221) Congress, recognizing that real 
estate possesses unusual characteristics, amended the National Banking 
Act to permit national banks to hold real estate for five years and for 
an additional five-year period subject to certain conditions. Consistent 
with the policy underlying the recent Congressional enactment, and as a 
matter of supervisory policy, a bank holding company may be permitted to 
hold real estate acquired ``dpc'' beyond the initial five-year period 
provided that the value of the real estate on the books of the company 
has been written down to fair market value, the carrying costs are not 
significant in relation to the overall financial position of the 
company, and the company has made good faith efforts to effect 
divestiture. Companies holding real estate for this extended period are 
expected to make active efforts to dispose of it, and should keep the 
Reserve Bank advised on a regular basis concerning their ongoing 
efforts. Fair market value should be derived from appraisals, comparable 
sales or some other reasonable method. In any case, ``dpc'' real estate 
would not be permitted to be held beyond 10 years from the date of its 
acquisition.
    (e) With respect to the transfer by a subsidiary of other ``dpc'' 
shares or assets to another company in the holding company system, 
including a section 4(c)(1)(D) liquidating subsidiary, or to the holding 
company itself, such transfers would not alter the original divestiture 
period applicable to such shares or assets at the time of their 
acquisition. Moreover, to ensure that assets are not carried at inflated 
values for extended periods of time, the Board expects, in the case of 
all such intracompany transfers, that the shares or assets will be 
transferred at a value no greater than the fair market value at the time 
of transfer and that the transfer will be made in a normal arms-length 
transaction.
    (f) With regard to ``dpc'' assets acquired by a banking subsidiary 
of a holding company, so long as the assets continue to be held by the 
bank itself, the Board will regard them as being solely within the 
regulatory authority of the primary supervisor of the bank.

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

[45 FR 49905, July 28, 1980]



Sec. 225.141  Operations subsidiaries of a bank holding company.

    In orders approving the retention by a bank holding company of a 
4(c)(8) subsidiary, the Board has stated that it would permit, without 
any specific regulatory approval, the formation of a wholly owned 
subsidiary of an approved 4(c)(8) company to engage in activities that 
such a company could itself engage in directly through a division or 
department. (Northwestern Financial Corporation, 65 Federal Reserve 
Bulletin 566 (1979).) Section 4(a)(2) of

[[Page 253]]

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

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

[45 FR 54326, July 15, 1980]



Sec. 225.142  Statement of policy concerning bank holding companies
engaging in futures, forward and options contracts on U.S. Government
and agency securities and money market instruments.
          

    (a) Purpose of financial contract positions. In supervising the 
activities of bank holding companies, the Board has adopted and 
continues to follow the principle that bank holding companies should 
serve as a source of strength for their subsidiary banks. Accordingly, 
the Board believes that any positions that bank holding companies or 
their nonbank subsidiaries take in financial contracts should reduce 
risk exposure, that is, not be speculative.
    (b) Establishment of prudent written policies, appropriate 
limitations and internal controls and audit programs. If the parent 
organization or nonbank subsidiary is taking or intends to take 
positions in financial contracts, that company's board of directors 
should approve prudent written policies and establish appropriate 
limitations to insure that financial contract activities are performed 
in a safe and sound manner with levels of activity reasonably related to 
the organization's business needs and capacity to fulfill obligations. 
In addition, internal controls and internal audit programs to monitor 
such activity should be established. The board of directors, a duly 
authorized committee thereof or the internal auditors should review 
periodically (at least monthly) all financial contract positions to 
insure conformity with such policies and limits. In order to determine 
the company's exposure, all open positions should be reviewed and market 
values determined at least monthly, or more often, depending on volume 
and magnitude of positions.
    (c) Formulating policies and recording financial contracts. In 
formulating its policies and procedures, the parent holding company may 
consider the interest rate exposure of its nonbank subsidiaries, but not 
that of its bank subsidiaries. As a matter of policy, the Board believes 
that any financial contracts executed to reduce the interest rate 
exposure of a bank affiliate of a holding company should be reflected on 
the books and records of the bank affiliate (to the extent required by 
the bank policy statements), rather than on the books and records of the 
parent company. If a bank has an interest rate exposure that management 
believes requires hedging with financial contracts, the bank should be 
the direct beneficiary of any effort to reduce that exposure. The Board 
also believes that final responsibility for financial contract 
transactions for the account of each affiliated bank should reside with 
the management of that bank.
    (d) Accounting. The joint bank policy statements of March 12, 1980 
include accounting guidelines for banks that

[[Page 254]]

engage in financial contract activities. Since the Financial Accounting 
Standards Board is presently considering accounting standards for 
contract activities, no specific accounting requirements for financial 
contracts entered into by parent bank holding companies and nonbank 
subsidiaries are being mandated at this time. The Board expects to 
review further developments in this area.
    (e) Board to monitor bank holding company transactions in financial 
contracts. The Board intends to monitor closely bank holding company 
transactions in financial contracts to ensure that any such activity is 
consistent with maintaining a safe and sound banking system. In any 
cases where bank holding companies are found to be engaging in 
speculative practices, the Board is prepared to institute appropriate 
action under the Financial Institutions Supervisory Act of 1966, as 
amended.
    (f) Federal Reserve Bank notification. Bank holding companies should 
furnish written notification to their District Federal Reserve Bank 
within 10 days after financial contract activities are begun by the 
parent or a nonbank subsidiary. Holding companies in which the parent or 
a nonbank subsidiary currently engage in financial contract activity 
should furnish notice by March 31, 1983.

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

[48 FR 7720, Feb. 24, 1983]



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

    (a) Introduction. (1) In recent months, a number of bank holding 
companies have made substantial equity investments in a bank or bank 
holding company (the ``acquiree'') located in states other than the home 
state of the investing company through acquisition of preferred stock or 
nonvoting common shares of the acquiree. Because of the evident interest 
in these types of investments and because they raise substantial 
questions under the Bank Holding Company Act (the ``Act''), the Board 
believes it is appropriate to provide guidance regarding the consistency 
of such arrangements with the Act.
    (2) This statement sets out the Board's concerns with these 
investments, the considerations the Board will take into account in 
determining whether the investments are consistent with the Act, and the 
general scope of arrangements to be avoided by bank holding companies. 
The Board recognizes that the complexity of legitimate business 
arrangements precludes rigid rules designed to cover all situations and 
that decisions regarding the existence or absence of control in any 
particular case must take into account the effect of the combination of 
provisions and covenants in the agreement as a whole and the particular 
facts and circumstances of each case. Nevertheless, the Board believes 
that the factors outlined in this statement provide a framework for 
guiding bank holding companies in complying with the requirements of the 
Act.
    (b) Statutory and regulatory provisions. (1) Under section 3(a) of 
the Act, a bank holding company may not acquire direct or indirect 
ownership or control of more than 5 per cent of the voting shares of a 
bank without the Board's prior approval. (12 U.S.C. 1842(a)(3)). In 
addition, this section of the Act provides that a bank holding company 
may not, without the Board's prior approval, acquire control of a bank: 
That is, in the words of the statute, ``for any action to be taken that 
causes a bank to become a subsidiary of a bank holding company.'' (12 
U.S.C. 1842(a)(2)). Under the Act, a bank is a subsidiary of a bank 
holding company if:
    (i) The company directly or indirectly owns, controls, or holds with 
power to vote 25 per cent or more of the voting shares of the bank;
    (ii) The company controls in any manner the election of a majority 
of the board of directors of the bank; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company has the power, directly or indirectly, to 
exercise a controlling influence over the management or policies of the 
bank. (12 U.S.C. 1841(d)).
    (2) In intrastate situations, the Board may approve bank holding 
company acquisitions of additional banking subsidiaries. However, where 
the acquiree

[[Page 255]]

is located outside the home state of the investing bank holding company, 
section 3(d) of the Act prevents the Board from approving any 
application that will permit a bank holding company to ``acquire, 
directly or indirectly, any voting shares of, interest in, or all or 
substantially all of the assets of any additional bank.'' (12 U.S.C. 
1842(d)(1)).
    (c) Review of agreements. (1) In apparent expectation of statutory 
changes that might make interstate banking permissible, bank holding 
companies have sought to make substantial equity investments in other 
bank holding companies across state lines, but without obtaining more 
than 5 per cent of the voting shares or control of the acquiree. These 
investments involve a combination of the following arrangements:
    (i) Options on, warrants for, or rights to convert nonvoting shares 
into substantial blocks of voting securities of the acquiree bank 
holding company or its subsidiary bank(s);
    (ii) Merger or asset acquisition agreements with the out-of-state 
bank or bank holding company that are to be consummated in the event 
interstate banking is permitted;
    (iii) Provisions that limit or restrict major policies, operations 
or decisions of the acquiree; and
    (iv) Provisions that make acquisition of the acquiree or its 
subsidiary bank(s) by a third party either impossible or economically 
impracticable.


The various warrants, options, and rights are not exercisable by the 
investing bank holding company unless interstate banking is permitted, 
but may be transferred by the investor either immediately or after the 
passage of a period of time or upon the occurrence of certain events.
    (2) After a careful review of a number of these agreements, the 
Board believes that investments in nonvoting stock, absent other 
arrangements, can be consistent with the Act. Some of the agreements 
reviewed appear consistent with the Act since they are limited to 
investments of relatively moderate size in nonvoting equity that may 
become voting equity only if interstate banking is authorized.
    (3) However, other agreements reviewed by the Board raise 
substantial problems of consistency with the control provisions of the 
Act because the investors, uncertain whether or when interstate banking 
may be authorized, have evidently sought to assure the soundness of 
their investments, prevent takeovers by others, and allow for sale of 
their options, warrants, or rights to a person of the investor's choice 
in the event a third party obtains control of the acquiree or the 
investor otherwise becomes dissatisfied with its investment. Since the 
Act precludes the investors from protecting their investments through 
ownership or use of voting shares or other exercise of control, the 
investors have substituted contractual agreements for rights normally 
achieved through voting shares.
    (4) For example, various covenants in certain of the agreements seek 
to assure the continuing soundness of the investment by substantially 
limiting the discretion of the acquiree's management over major policies 
and decisions, including restrictions on entering into new banking 
activities without the investor's approval and requirements for 
extensive consultations with the investor on financial matters. By their 
terms, these covenants suggest control by the investing company over the 
management and policies of the acquiree.
    (5) Similarly, certain of the agreements deprive the acquiree bank 
holding company, by covenant or because of an option, of the right to 
sell, transfer, or encumber a majority or all of the voting shares of 
its subsidiary bank(s) with the aim of maintaining the integrity of the 
investment and preventing takeovers by others. These long-term 
restrictions on voting shares fall within the presumption in the Board's 
Regulation Y that attributes control of shares to any company that 
enters into any agreement placing long-term restrictions on the rights 
of a holder of voting securities. (12 CFR 225.2(b)(4)).
    (6) Finally, investors wish to reserve the right to sell their 
options, warrants or rights to a person of their choice to prevent being 
locked into what may become an unwanted investment. The Board has taken 
the position that the

[[Page 256]]

ability to control the ultimate disposition of voting shares to a person 
of the investor's choice and to secure the economic benefits therefrom 
indicates control of the shares under the Act. \1\ Moreover, the ability 
to transfer rights to large blocks of voting shares, even if nonvoting 
in the hands of the investing company, may result in such a substantial 
position of leverage over the management of the acquiree as to involve a 
structure that inevitably results in control prohibited by the Act.
---------------------------------------------------------------------------

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

    (d) Provisions that avoid control. (1) In the context of any 
particular agreement, provisions of the type described above may be 
acceptable if combined with other provisions that serve to preclude 
control. The Board believes that such agreements will not be consistent 
with the Act unless provisions are included that will preserve 
management's discretion over the policies and decisions of the acquiree 
and avoid control of voting shares.
    (2) As a first step towards avoiding control, covenants in any 
agreement should leave management free to conduct banking and 
permissible nonbanking activities. Another step to avoid control is the 
right of the acquiree to ``call'' the equity investment and options or 
warrants to assure that covenants that may become inhibiting can be 
avoided by the acquiree. This right makes such investments or agreements 
more like a loan in which the borrower has a right to escape covenants 
and avoid the lender's influence by prepaying the loan.
    (3) A measure to avoid problems of control arising through the 
investor's control over the ultimate disposition of rights to 
substantial amounts of voting shares of the acquiree would be a 
provision granting the acquiree a right of first refusal before 
warrants, options or other rights may be sold and requiring a public and 
dispersed distribution of these rights if the right of first refusal is 
not exercised.
    (4) In this connection, the Board believes that agreements that 
involve rights to less than 25 percent of the voting shares, with a 
requirement for a dispersed public distribution in the event of sale, 
have a much greater prospect of achieving consistency with the Act than 
agreements involving a greater percentage. This guideline is drawn by 
analogy from the provision in the Act that ownership of 25 percent or 
more of the voting securities of a bank constitutes control of the bank.
    (5) The Board expects that one effect of this guideline would be to 
hold down the size of the nonvoting equity investment by the investing 
company relative to the acquiree's total equity, thus avoiding the 
potential for control because the investor holds a very large proportion 
of the acquiree's total equity. Observance of the 25 percent guideline 
will also make provisions in agreements providing for a right of first 
refusal or a public and widely dispersed offering of rights to the 
acquiree's shares more practical and realistic.
    (6) Finally, certain arrangements should clearly be avoided 
regardless of other provisions in the agreement that are designed to 
avoid control. These are:
    (i) Agreements that enable the investing bank holding company (or 
its designee) to direct in any manner the voting of more than 5 per cent 
of the voting shares of the acquiree;
    (ii) Agreements whereby the investing company has the right to 
direct the acquiree's use of the proceeds of an equity investment by the 
investing company to effect certain actions, such as the purchase and 
redemption of the acquiree's voting shares; and
    (iii) The acquisition of more than 5 per cent of the voting shares 
of the acquiree that ``simultaneously'' with their acquisition by the 
investing company become nonvoting shares, remain nonvoting shares while 
held by the investor, and revert to voting shares when transferred to a 
third party.
    (e) Review by the Board. This statement does not constitute the 
exclusive scope of the Board's concerns, nor are the considerations with 
respect to control outlined in this statement an exhaustive catalog of 
permissible or impermissible arrangements. The Board has instructed its 
staff to review agreements of the kind discussed in this statement and 
to bring to the Board's attention those that raise problems of

[[Page 257]]

consistency with the Act. In this regard, companies are requested to 
notify the Board of the terms of such proposed merger or asset 
acquisition agreements or nonvoting equity investments prior to their 
execution or consummation.

[47 FR 30966, July 16, 1982]



Sec. 225.145  Limitations established by the Competitive Equality
Banking Act of 1987 on the activities and growth of nonbank banks.

    (a) Introduction. Effective August 10, 1987, the Competitive 
Equality Banking Act of 1987 (``CEBA'') redefined the term ``bank'' in 
the Bank Holding Company Act (``BHC Act'' or ``Act'') to include any 
bank the deposits of which are insured by the Federal Deposit Insurance 
Corporation as well as any other institution that accepts demand or 
checkable deposit accounts and is engaged in the business of making 
commercial loans. 12 U.S.C. 1841(c). CEBA also contained a grandfather 
provision for certain companies affected by this redefinition. CEBA 
amended section 4 of the BHC Act to permit a company that on March 5, 
1987, controlled a nonbank bank (an institution that became a bank as a 
result of enactment of CEBA) and that was not a bank holding company on 
August 9, 1987, to retain its nonbank bank and not be treated as a bank 
holding company for purposes of the BHC Act if the company and its 
subsidiary nonbank bank observe certain limitations imposed by CEBA. \1\ 
Certain of these limitations are codified in section 4(f)(3) of the BHC 
Act and generally restrict nonbank banks from commencing new activities 
or certain cross-marketing activities with affiliates after March 5, 
1987, or permitting overdrafts for affiliates or incurring overdrafts on 
behalf of affiliates at a Federal Reserve Bank. 12 U.S.C. 1843(f)(3). 
\2\ The Board's views regarding the meaning and scope of these 
limitations are set forth below and in provisions of the Board's 
Regulation Y (12 CFR 225.52).
---------------------------------------------------------------------------

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

    (b) Congressional findings. (1) At the outset, the Board notes that 
the scope and application of the Act's limitations on nonbank banks must 
be guided by the Congressional findings set out in section 4(f)(3) of 
the BHC Act. Congress was aware that these nonbank banks had been 
acquired by companies that engage in a wide range of nonbanking 
activities, such as retailing and general securities activities that are 
forbidden to bank holding companies under section 4 of the BHC Act. In 
section 4(f)(3), Congress found that nonbank banks controlled by 
grandfathered nonbanking companies may, because of their relationships 
with affiliates, be involved in conflicts of interest, concentration of 
resources, or other effects adverse to bank safety and soundness. 
Congress also found that nonbank banks may be able to compete unfairly 
against banks controlled by bank holding companies by combining banking 
services with financial services not permissible for bank holding 
companies. Section 4(f)(3) states that the purpose of the nonbank bank 
limitations is to minimize any such potential adverse effects or 
inequities by restricting the activities of nonbank banks until further 
Congressional action in the area of bank powers could be undertaken. 
Similarly, the Senate Report accompanying CEBA states that the 
restrictions CEBA places on nonbank banks ``will help prevent existing 
nonbank banks from changing their basic character * * * while Congress 
considers proposals for comprehensive legislation; from drastically 
eroding the separation of banking and commerce; and from increasing the 
potential for unfair competition, conflicts of interest, undue 
concentration of resources, and other adverse effects.'' S.

[[Page 258]]

Rep. No. 100-19, 100th Cong., 1st Sess. 12 (1987). See also H. Rep. No. 
100-261, 100th Cong., 1st Sess. 124 (1987) (the ``Conference Report'').
    (2) Thus, Congress explicitly recognized in the statute itself that 
nonbanking companies controlling grandfathered nonbank banks, which 
include the many of the nation's largest commercial and financial 
organizations, were being accorded a significant competitive advantage 
that could not be matched by bank holding companies because of the 
general prohibition against nonbanking activities in section 4 of the 
BHC Act. Congress recognized that this inequality in regulatory approach 
could inflict serious competitive harm on regulated bank holding 
companies as the grandfathered entities sought to exploit potential 
synergies between banking and commercial products and services. See 
Conference Report at 125-126. The basic and stated purpose of the 
restrictions on grandfathered nonbank banks is to minimize these 
potential anticompetitive effects.
    (3) The Board believes that the specific CEBA limitations should be 
implemented in light of these Congressional findings and the legislative 
intent reflected in the plain meaning of the terms used in the statute. 
In those instances when the language of the statute did not provide 
clear guidance, legislative materials and the Congressional intent 
manifested in the overall statutory structure were considered. The Board 
also notes that prior precedent requires that grandfather exceptions in 
the BHC Act, such as the nonbank bank limitations and particularly the 
exceptions thereto, are to be interpreted narrowly in order to ensure 
the proper implementation of Congressional intent. \3\
---------------------------------------------------------------------------

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

    (c) Activity limitation--(1) Scope of activity. (i) The first 
limitation established under section 4(f)(3) provides that a nonbank 
bank shall not ``engage in any activity in which such bank was not 
lawfully engaged as of March 5, 1987.'' The term activity as used in 
this provision of CEBA is not defined. The structure and placement of 
the CEBA activity restriction within section 4 of the BHC Act and its 
legislative history do, however, provide direction as to certain 
transactions that Congress intended to treat as separate activities, 
thereby providing guidance as to the meaning Congress intended to 
ascribe to the term generally. First, it is clear that the term activity 
was not meant to refer to banking as a single activity. To the contrary, 
the term must be viewed as distinguishing between deposit taking and 
lending activities and treating demand deposit-taking as a separate 
activity from general deposit-taking and commercial lending as separate 
from the general lending category.
    (ii) Under the activity limitation, a nonbank bank may engage only 
in activities in which it was ``lawfully engaged'' as of March 5, 1987. 
As of that date, a nonbank bank could not have been engaged in both 
demand deposit-taking and commercial lending activity without placing it 
and its parent holding company in violation of the BHC Act. Thus, under 
the activity limitations, a nonbank bank could not after March 5, 1987, 
commence the demand deposit-taking or commercial lending activity that 
it did not conduct as of March 5, 1987. The debates and Senate and 
Conference Reports on CEBA confirm that Congress intended the activity 
limitation to prevent a grandfathered nonbank bank from converting 
itself into a full-service bank by both offering demand deposits and 
engaging in the business of making commercial loans. \4\ Thus, these 
types of transactions provide a clear guide as to the type of banking 
transactions that would constitute activities under CEBA and the degree 
of specificity intended by Congress in interpreting that term.
---------------------------------------------------------------------------

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

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

[[Page 259]]

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

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

    (iv) Finally, additional guidance as to the meaning of the term 
activity is provided by the statutory context in which the term appears. 
The activity limitation is contained in section 4 of the BHC Act, which 
regulates the investments and activities of bank holding companies and 
their nonbank subsidiaries. The Board believes it reasonable to conclude 
that by placing the CEBA activity limitation in section 4 of the BHC 
Act, Congress meant that Board and judicial decisions regarding the 
meaning of the term activity in that section be looked to for guidance. 
This is particularly appropriate given the fact that grandfathered 
nonbank banks, whether owned by bank holding companies or unregulated 
holding companies, were treated as nonbank companies and not banks 
before enactment of CEBA.
    (v) This interpretation of the term activity draws support from 
comments by Senator Proxmire during the Senate's consideration of the 
provision that the term was not intended to apply ``on a product-by-
product, customer-by-customer basis.'' 133 Cong. Rec. S4054-5 (daily ed. 
March 27, 1987). This is the same manner in which the Board has 
interpreted the term activity in the nonbanking provision of section 4 
as referring to generic categories of activities, not to discrete 
products and services.
    (vi) Accordingly, consistent with the terms and purposes of the 
legislation and the Congressional intent to minimize unfair competition 
and the other adverse effects set out in the CEBA findings, the Board 
concludes that the term activity as used in section 4(f)(3) means any 
line of banking or nonbanking business. This definition does not, 
however, envision a product-by-product approach to the activity 
limitation. The Board believes it would be helpful to describe the 
application of the activity limitation in the context of the following 
major categories of activities: deposit-taking, lending, trust, and 
other activities engaged in by banks.
    (2) Deposit-taking activities. (i) With respect to deposit-taking, 
the Board believes that the activity limitation in section 4(f)(3) 
generally refers to three types of activity: demand deposit-taking; non-
demand deposit-taking with a third party payment capability; and time 
and savings deposit-taking without third party payment powers. As 
previously discussed, it is clear from the terms and intent of CEBA that 
the activity limitation would prevent, and was designed to prevent, 
nonbank banks that prior to the enactment of CEBA had refrained from 
accepting demand deposits in order to avoid coverage as a bank under the 
BHC Act, from starting to take these deposits after enactment of CEBA 
and thus becoming full-service banks. Accordingly, CEBA requires that 
the taking of demand deposits be treated as a separate activity.
    (ii) The Board also considers nondemand deposits withdrawable by 
check or other similar means for payment to third parties or others to 
constitute a separate line of business for purposes of applying the 
activity limitation. In this regard, the Board has

[[Page 260]]

previously recognized that this line of business constitutes a 
permissible but separate activity under section 4 of the BHC Act. 
Furthermore, the offering of accounts with transaction capability 
requires different expertise and systems than non-transaction deposit-
taking and represented a distinct new activity that traditionally 
separated banks from thrift and similar institutions.
    (iii) Support for this view may also be found in the House Banking 
Committee report on proposed legislation prior to CEBA that contained a 
similar prohibition on new activities for nonbank banks. In discussing 
the activity limitation, the report recognized a distinction between 
demand deposits and accounts with transaction capability and those 
without transaction capability:

    With respect to deposits, the Committee recognizes that it is 
legitimate for an institution currently involved in offering demand 
deposits or other third party transaction accounts to make use of new 
technologies that are in the process of replacing the existing check-
based, paper payment system. Again, however, the Committee does not 
believe that technology should be used as a lever for an institution 
that was only incidentally involved in the payment system to transform 
itself into a significant offeror of transaction account capability. \6\
---------------------------------------------------------------------------

    \6\ H. Rep. No. 99-175, 99th Cong., 1st Sess. 13 (1985).

    (iv) Finally, this distinction between demand and nondemand 
checkable accounts and accounts not subject to withdrawal by check was 
specifically recognized by Congress in the redefinition of the term bank 
in CEBA to include an institution that takes demand deposits or 
``deposits that the depositor may withdraw by check or other means for 
payment to third parties or others'' as well as in various exemptions 
from that definition for trust companies, credit card banks, and certain 
industrial banks. \7\
---------------------------------------------------------------------------

    \7\ See 12 U.S.C. 1841(c)(2) (D), (F), (H), and (I).
---------------------------------------------------------------------------

    (v) Thus, an institution that as of March 5, 1987, offered only time 
and savings accounts that were not withdrawable by check for payment to 
third parties could not thereafter begin offering accounts with 
transaction capability, for example, NOW accounts or other types of 
transaction accounts.
    (3) Lending. As noted, the CEBA activity limitation does not treat 
lending as a single activity; it clearly distinguishes between 
commercial and other types of lending. This distinction is also 
reflected in the definition of bank in the BHC Act in effect both prior 
to and after enactment of CEBA as well as in various of the exceptions 
from this definition. In addition, commercial lending is a specialized 
form of lending involving different techniques and analysis from other 
types of lending. Based upon these factors, the Board would view 
commercial lending as a separate and distinct activity for purposes of 
the activity limitation in section 4(f)(3). The Board's decisions under 
section 4 of the BHC Act have not generally differentiated between types 
of commercial lending, and thus the Board would view commercial lending 
as a single activity for purposes of CEBA. Thus, a nonbank bank that 
made commercial loans as of March 5, 1987, could make any type of 
commercial loan thereafter.
    (i) Commercial lending. For purposes of the activity limitation, a 
commercial loan is defined in accordance with the Supreme Court's 
decision in Board of Governors v. Dimension Financial Corporation, 474 
U.S. 361 (1986), as a direct loan to a business customer for the purpose 
of providing funds for that customer's business. In this regard, the 
Board notes that whether a particular transaction is a commercial loan 
must be determined not from the face of the instrument, but from the 
application of the definition of commercial loan in the Dimension 
decision to that transaction. Thus, certain transactions of the type 
mentioned in the Board's ruling at issue in Dimension and in the Senate 
and Conference Reports in the CEBA legislation \8\ would be commercial 
loans if they meet the test for commercial loans established in 
Dimension. Under this test, a commercial loan would not include, for 
example, an

[[Page 261]]

open-market investment in a commercial entity that does not involve a 
borrower-lender relationship or negotiation of credit terms, such as a 
money market transaction.
---------------------------------------------------------------------------

    \8\ S. Rep. No. 100-19 at 31; Conference Report at 123.
---------------------------------------------------------------------------

    (ii) Other lending. Based upon the guidance in the Act as to the 
degree of specificity required in applying the activity limitation with 
respect to lending, the Board believes that, in addition to commercial 
lending, there are three other types of lending activities: consumer 
mortgage lending, consumer credit card lending, and other consumer 
lending. Mortgage lending and credit card lending are recognized, 
discrete lines of banking and business activity, involving techniques 
and processes that are different from and more specialized than those 
required for general consumer lending. For example, these activities 
are, in many cases, conducted by specialized institutions, such as 
mortgage companies and credit card institutions, or through separate 
organizational structures within an institution, particularly in the 
case of mortgage lending. Additionally, the Board's decisions under 
section 4 of the Act have recognized mortgage banking and credit card 
lending as separate activities for bank holding companies. The Board's 
Regulation Y reflects this specialization, noting as examples of 
permissible lending activity: consumer finance, credit card and mortgage 
lending. 12 CFR 225.25(b)(1). Finally, CEBA itself recognizes the 
specialized nature of credit card lending by exempting an institution 
specializing in that activity from the bank definition. For purpose of 
the activity limitation, a consumer mortgage loan will mean any loan to 
an individual that is secured by real estate and that is not a 
commercial loan. A credit card loan would be any loan made to an 
individual by means of a credit card that is not a commercial loan.
    (4) Trust activities. Under section 4 of the Act, the Board has 
historically treated trust activities as a single activity and has not 
differentiated the function on the basis of whether the customer was an 
individual or a business. See 12 CFR 225.25(b)(3). Similarly, the trust 
company exemption from the bank definition in CEBA makes no distinction 
between various types of trust activities. Accordingly, the Board would 
view trust activities as a separate activity without additional 
differentiation for purposes of the activity limitation in section 
4(f)(3).
    (5) Other activities. With respect to activities other than the 
various traditional deposit-taking, lending or trust activities, the 
Board believes it appropriate, for the reasons discussed above, to apply 
the activity limitation in section 4(f)(3) as the term activity 
generally applies in other provisions of section 4 of the BHC Act. Thus, 
a grandfathered nonbank bank could not, for example, commence after 
March 5, 1987, any of the following activities (unless it was engaged in 
such an activity as of that date): discount securities brokerage, full-
service securities brokerage investment advisory services, underwriting 
or dealing in government securities as permissible for member banks, 
foreign exchange transaction services, real or personal property 
leasing, courier services, data processing for third parties, insurance 
agency activities, \9\ real estate development, real estate brokerage, 
real estate syndication, insurance underwriting, management consulting, 
futures commission merchant, or activities of the general type listed in 
Sec. 225.25(b) of Regulation Y.
---------------------------------------------------------------------------

    \9\ In this area, section 4 of the Act does not treat all insurance 
agency activities as a single activity. Thus, for example, the Act 
treats the sale of credit-related life, accident and health insurance as 
a separate activity from general insurance agency activities. See 12 
U.S.C. 1843(c)(8).
---------------------------------------------------------------------------

    (6) Meaning of engaged in. In order to be engaged in an activity, a 
nonbank bank must demonstrate that it had a program in place to provide 
a particular product or service included within the grandfathered 
activity to a customer and that it was in fact offering the product or 
service to customers as of March 5, 1987. Thus, a nonbank bank is not 
engaged in an activity as of March 5, 1987, if the product or service in 
question was in a planning state as of that date and had not been 
offered or delivered to a customer. Consistent with prior Board 
interpretations of the term activity in the grandfather provisions of 
section 4, the Board does not

[[Page 262]]

believe that a company may be engaged in an activity on the basis of a 
single isolated transaction that was not part of a program to offer the 
particular product or to conduct in the activity on an ongoing basis. 
For example, a nonbank bank that held an interest in a single real 
estate project would not thereby be engaged in real estate development 
for purposes of this provision, unless evidence was presented indicating 
the interest was held under a program to commence a real estate 
development business.
    (7) Meaning of as of The Board believes that the grandfather date 
``as of March 5, 1987'' as used throughout section 4(f)(3) should refer 
to activities engaged in on March 5, 1987, or a reasonably short period 
preceding this date not exceeding 13 months. 133 Cong. Rec. S3957 (daily 
ed. March 26, 1987). (Remarks of Senators Dodd and Proxmire). Activities 
that the institution had terminated prior to March 5, 1988, however, 
would not be considered to have been conducted or engaged in as of March 
5. For example, if within 13 months of March 5, 1987, the nonbank bank 
had terminated its commercial lending activity in order to avoid the 
bank definition in the Act, the nonbank bank could not recommence that 
activity after enactment of CEBA.
    (d) Cross-marketing limitation--(1) In general. Section 4(f)(3) also 
limits cross-marketing activities by nonbank banks and their affiliates. 
Under this provision, a nonbank bank may not offer or market a product 
or service of an affiliate unless the product or service may be offered 
by bank holding companies generally under section 4(c)(8) of the BHC 
Act. In addition, a nonbank bank may not permit any of its products or 
services to be offered or marketed by or through a nonbank affiliate 
unless the affiliate engages only in activities permissible for a bank 
holding company under section 4(c)(8). These limitations are subject to 
an exception for products or services that were being so offered or 
marketed as of March 5, 1987, but only in the same manner in which they 
were being offered or marketed as of that date.
    (2) Examples of impermissible cross-marketing. The Conference Report 
illustrates the application of this limitation to the following two 
covered transactions: (i) products and services of an affiliate that 
bank holding companies may not offer under the BHC Act, and (ii) 
products and services of the nonbank bank. In the first case, the 
restrictions would prohibit, for example, a company from marketing life 
insurance or automotive supplies through its affiliate nonbank bank 
because these products are not generally permissible under the BHC Act. 
Conference Report at 126. In the second case, a nonbank bank may not 
permit its products or services to be offered or marketed through a life 
insurance affiliate or automobile parts retailer because these 
affiliates engage in activities prohibited under the BHC Act. Id.
    (3) Permissible cross-marketing. On the other hand, a nonbank bank 
could offer to its customers consumer loans from an affiliated mortgage 
banking or consumer finance company. These affiliates could likewise 
offer their customers the nonbank bank's products or services provided 
the affiliates engaged only in activities permitted for bank holding 
companies under the closely-related-to-banking standard of section 
4(c)(8) of the BHC Act. If the affiliate is engaged in both permissible 
and impermissible activities within the meaning of section 4(c)(8) of 
the BHC Act, however, the affiliate could not offer or market the 
nonbank bank's products or services.
    (4) Product approach to cross-marketing restriction. (i) Unlike the 
activity restrictions, the cross-marketing restrictions of CEBA apply by 
their terms to individual products and services. Thus, an affiliate of a 
nonbank bank that was engaged in activities that are not permissible for 
bank holding companies and that was marketing a particular product or 
service of a nonbank bank on the grandfather date could continue to 
market that product and, as discussed below, could change the terms and 
conditions of the loan. The nonbank affiliate could not, however, begin 
to offer or market another product or service of the nonbank bank.
    (ii) The Board believes that the term product or service must be 
interpreted in light of its accepted ordinary commercial usage. In some 
instances, commercial usage has identified a group of

[[Page 263]]

products so closely related that they constitute a product line (e.g., 
certificates of deposit) and differences in versions of the product 
(e.g., a one-year certificate of deposit) simply represent a difference 
in the terms of the product. \10\ This approach is consistent with the 
treatment in CEBA's legislative history of certificates of deposit as a 
product line rather than each particular type of CD as a separate 
product. \11\
---------------------------------------------------------------------------

    \10\ American Bankers Association, Banking Terminology (1981).
    \11\ During the Senate debates on CEBA, Senator Proxmire in response 
to a statement from Senator Cranston that the joint-marketing 
restrictions do not lock into place the specific terms or conditions of 
the particular grandfathered product or service, stated:
    That is correct. For example, if a nonbank bank was jointly 
marketing on March 5, 1987, a 3 year, $5,000 certificate of deposit, 
this bill would not prohibit offering in the same manner a 1 year, 
$2,000 certificate of deposit with a different interest rate. 133 Cong. 
Rec. S3959 (daily ed. March 26, 1987).
---------------------------------------------------------------------------

    (iii) In the area of consumer lending, the Board believes the 
following provide examples of different consumer loan products: mortgage 
loans to finance the purchase of the borrower's residence, unsecured 
consumer loans, consumer installment loans secured by the personal 
property to be purchased (e.g. automobile, boat or home appliance 
loans), or second mortgage loans. \12\ Under this interpretation, a 
nonbank bank that offered automobile loans through a nonbank affiliate 
on the grandfather date could market boat loans, appliance loans or any 
type of secured consumer installment loan through that affiliate. It 
could not, however, market unsecured consumer loans, home mortgage loans 
or other types of consumer loans.
---------------------------------------------------------------------------

    \12\ In this regard, the Supreme Court in United States v. 
Philadelphia National Bank, noted that ``the principal banking products 
are of course various types of credit, for example: unsecured personal 
and business loans, mortgage loans, loans secured by securities or 
accounts receivable, automobile installment and consumer goods, 
installment loans, tuition financing, bank credit cards, revolving 
credit funds.'' 374 U.S. 321, 326 n.5 (1963).
---------------------------------------------------------------------------

    (iv) In other areas, the Board believes that the determination as to 
what constitutes a product or service should be made on a case-by-case 
basis consistent with the principles that the terms product or service 
must be interpreted in accordance with their ordinary commercial usage 
and must be narrower in scope than the definition of activity. 
Essentially, the concept applied in this analysis is one of permitting 
the continuation of the specific product marketing activity that was 
undertaken as of March 5, 1987. Thus, for example, while insurance 
underwriting may constitute a separate activity under CEBA, a nonbank 
bank could not market a life insurance policy issued by the affiliate if 
on the grandfather date it had only marketed homeowners' policies issued 
by the affiliate.
    (5) Change in terms and conditions permitted. (i) The cross-
marketing restrictions would not limit the ability of the institution to 
change the specific terms and conditions of a particular grandfathered 
product or service. The Conference Report indicates a legislative intent 
not to lock into place the specific terms or conditions of a 
grandfathered product or service. Conference Report at 126. For example, 
a nonbank bank marketing a three-year, $5,000 certificate of deposit 
through an affiliate under the exemption could offer a one-year $2,000 
certificate of deposit with a different interest rate after the 
grandfather date. See footnote 11 above. Modifications that alter the 
type of product, however, are not permitted. Thus, a nonbank bank that 
marketed through affiliates on March 5, 1987, only certificates of 
deposit could not commence marketing MMDA's or NOW accounts after the 
grandfather date.
    (ii) General changes in the character of the product or service as 
the result of market or technological innovation are similarly permitted 
to the extent that they do not transform a grandfathered product into a 
new product. Thus, an unsecured line of credit could not be modified to 
include a lien on the borrower's residence without becoming a new 
product.
    (6) Meaning of offer or market. In the Board's opinion, the terms 
offer or market in the cross-marketing restrictions refer to the 
presentation to a customer of an institution's products or service 
through any type of program, including telemarketing, advertising 
brochures,

[[Page 264]]

direct mailing, personal solicitation, customer referrals, or joint-
marketing agreements or presentations. An institution must have offered 
or actually marketed the product or service on March 5 or shortly before 
that date (as discussed above) to qualify for the grandfather privilege. 
Thus, if the cross-marketing program was in the planning stage on March 
5, 1987, the program would not quality for grandfather treatment under 
CEBA.
    (7) Limitations on cross-marketing to in the same manner. (i) The 
cross-marketing restriction in section 4(f)(3) contains a grandfather 
provision that permits products or services that would otherwise be 
prohibited from being offered or marketed under the provision to 
continue to be offered or marketed by a particular entity if the 
products or services were being so offered or marketed as of March 5, 
1987, but ``only in the same manner in which they were being offered or 
marketed as of that date.'' Thus, to qualify for the grandfather 
provision, the manner of offering or marketing the otherwise prohibited 
product or service must remain the same as on the grandfather date.
    (ii) In interpreting this provision, the Board notes that Congress 
designed the joint-marketing restrictions to prevent the significant 
risk to the public posed by the conduct of such activities by insured 
banks affiliated with companies engaged in general commerce, to ensure 
objectivity in the credit-granting process and to ``minimize the unfair 
competitive advantage that grandfathered commercial companies owning 
nonbank banks might otherwise engage over regulated bank holding 
companies and our competing commercial companies that have no subsidiary 
bank.'' Conference Report at 125-126. The Board believes that 
determinations regarding the manner of cross-marketing of a particular 
product or service may best be accomplished by applying the limitation 
to the particular facts in each case consistent with the stated purpose 
of this provision of CEBA and the general principle that grandfather 
restrictions and exceptions to general prohibitions must be narrowly 
construed in order to prevent the exception from nullifying the rule. 
Essentially, as in the scope of the term ``product or service'', the 
guiding principle of Congressional intent with respect to this term is 
to permit only the continuation of the specific types of cross-marketing 
activity that were undertaken as of March 5, 1987.
    (8) Eligibility for cross-marketing grandfather exemption. The 
Conference Report also clarifies that entitlement to an exemption to 
continue to cross-market products and services otherwise prohibited by 
the statute applies only to the specific company that was engaged in the 
activity as of March 5, 1987. Conference Report at 126. Thus, an 
affiliate that was not engaged in cross-marketing products or services 
as of the grandfather date may not commence these activities under the 
exemption even if such activities were being conducted by another 
affiliate. Id.; see also S. Rep. No. 100-19 at 33-34.
    (e) Eligibility for grandfathered nonbank bank status. In reviewing 
the reports required by CEBA, the Board notes that a number of 
institutions that had not commenced business operations on August 10, 
1987, the date of enactment of CEBA, claimed grandfather privileges 
under section 4(f)(3) of CEBA. To qualify for grandfather privileges 
under section 4(f)(3), the institution must have ``bec[o]me a bank as a 
result of the enactment of [CEBA]'' and must have been controlled by a 
nonbanking company on March 5, 1987. 12 U.S.C. 1843(f)(1)(A). An 
institution that did not have FDIC insurance on August 10, 1987, and 
that did not accept demand deposits or transaction accounts or engage in 
the business of commercial lending on that date, would not have become a 
bank as a result of enactment of CEBA. Thus, institutions that had not 
commenced operations on August 10, 1987, could not qualify for 
grandfather privileges under section 4(f)(3) of CEBA. This view is 
supported by the activity limitations of section 4(f)(3), which, as 
noted, limit the activities of grandfathered nonbank banks to those in 
which they were lawfully engaged as of March 5, 1987. A nonbank bank 
that had not commenced conducting business activities on

[[Page 265]]

March 5, 1987, could not after enactment of CEBA engage in any 
activities under this provision.

[Reg. Y, 53 FR 37746, Sept. 28, 1988, as amended by Reg. Y, 62 FR 9343, 
Feb. 28, 1997]



                 Subpart J_Merchant Banking Investments

    Source: Reg. Y, 66 FR 8484, Jan. 31, 2001, unless otherwise noted.



Sec. 225.170  What type of investments are permitted by this subpart,
and under what conditions may they be made?

    (a) What types of investments are permitted by this subpart? Section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) and 
this subpart authorize a financial holding company, directly or 
indirectly and as principal or on behalf of one or more persons, to 
acquire or control any amount of shares, assets or ownership interests 
of a company or other entity that is engaged in any activity not 
otherwise authorized for the financial holding company under section 4 
of the Bank Holding Company Act. For purposes of this subpart, shares, 
assets or ownership interests acquired or controlled under section 
4(k)(4)(H) and this subpart are referred to as ``merchant banking 
investments.'' A financial holding company may not directly or 
indirectly acquire or control any merchant banking investment except in 
compliance with the requirements of this subpart.
    (b) Must the investment be a bona fide merchant banking investment? 
The acquisition or control of shares, assets or ownership interests 
under this subpart is not permitted unless it is part of a bona fide 
underwriting or merchant or investment banking activity.
    (c) What types of ownership interests may be acquired? Shares, 
assets or ownership interests of a company or other entity include any 
debt or equity security, warrant, option, partnership interest, trust 
certificate or other instrument representing an ownership interest in 
the company or entity, whether voting or nonvoting.
    (d) Where in a financial holding company may merchant banking 
investments be made? A financial holding company and any subsidiary 
(other than a depository institution or subsidiary of a depository 
institution) may acquire or control merchant banking investments. A 
financial holding company and its subsidiaries may not acquire or 
control merchant banking investments on behalf of a depository 
institution or subsidiary of a depository institution.
    (e) May assets other than shares be held directly? A financial 
holding company may not under this subpart acquire or control assets, 
other than debt or equity securities or other ownership interests in a 
company, unless:
    (1) The assets are held by or promptly transferred to a portfolio 
company;
    (2) The portfolio company maintains policies, books and records, 
accounts, and other indicia of corporate, partnership or limited 
liability organization and operation that are separate from the 
financial holding company and limit the legal liability of the financial 
holding company for obligations of the portfolio company; and
    (3) The portfolio company has management that is separate from the 
financial holding company to the extent required by Sec. 225.171.
    (f) What type of affiliate is required for a financial holding 
company to make merchant banking investments? A financial holding 
company may not acquire or control merchant banking investments under 
this subpart unless the financial holding company qualifies under at 
least one of the following paragraphs:
    (1) Securities affiliate. The financial holding company is or has an 
affiliate that is registered under the Securities Exchange Act of 1934 
(15 U.S.C. 78c, 78o, 78o-4) as:
    (i) A broker or dealer; or
    (ii) A municipal securities dealer, including a separately 
identifiable department or division of a bank that is registered as a 
municipal securities dealer.
    (2) Insurance affiliate with an investment adviser affiliate. The 
financial holding company controls:
    (i) An insurance company that is predominantly engaged in 
underwriting life, accident and health, or property and casualty 
insurance (other than credit-related insurance), or providing and 
issuing annuities; and
    (ii) A company that:

[[Page 266]]

    (A) Is registered with the Securities and Exchange Commission as an 
investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 
80b-1 et seq.); and
    (B) Provides investment advice to an insurance company.



Sec. 225.171  What are the limitations on managing or operating 
a portfolio company held as a merchant banking investment?

    (a) May a financial holding company routinely manage or operate a 
portfolio company? Except as permitted in paragraph (e) of this section, 
a financial holding company may not routinely manage or operate any 
portfolio company.
    (b) When does a financial holding company routinely manage or 
operate a company?--(1) Examples of routine management or operation--(i) 
Executive officer interlocks at the portfolio company. A financial 
holding company routinely manages or operates a portfolio company if any 
director, officer or employee of the financial holding company serves as 
or has the responsibilities of an executive officer of the portfolio 
company.
    (ii) Interlocks by executive officers of the financial holding 
company. (A) Prohibition. A financial holding company routinely manages 
or operates a portfolio company if any executive officer of the 
financial holding company serves as or has the responsibilities of an 
officer or employee of the portfolio company.
    (B) Definition. For purposes of paragraph (b)(1)(ii)(A) of this 
section, the term ``financial holding company'' includes the financial 
holding company and only the following subsidiaries of the financial 
holding company:
    (1) A securities broker or dealer registered under the Securities 
Exchange Act of 1934;
    (2) A depository institution;
    (3) An affiliate that engages in merchant banking activities under 
this subpart or insurance company investment activities under section 
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I));
    (4) A small business investment company (as defined in section 
302(b) of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)) 
controlled by the financial holding company or by any depository 
institution controlled by the financial holding company; and
    (5) Any other affiliate that engages in significant equity 
investment activities that are subject to a special capital charge under 
the capital adequacy rules or guidelines of the Board.
    (iii) Covenants regarding ordinary course of business. A financial 
holding company routinely manages or operates a portfolio company if any 
covenant or other contractual arrangement exists between the financial 
holding company and the portfolio company that would restrict the 
portfolio company's ability to make routine business decisions, such as 
entering into transactions in the ordinary course of business or hiring 
officers or employees other than executive officers.
    (2) Presumptions of routine management or operation. A financial 
holding company is presumed to routinely manage or operate a portfolio 
company if:
    (i) Any director, officer, or employee of the financial holding 
company serves as or has the responsibilities of an officer (other than 
an executive officer) or employee of the portfolio company; or
    (ii) Any officer or employee of the portfolio company is supervised 
by any director, officer, or employee of the financial holding company 
(other than in that individual's capacity as a director of the portfolio 
company).
    (c) How may a financial holding company rebut a presumption that it 
is routinely managing or operating a portfolio company? A financial 
holding company may rebut a presumption that it is routinely managing or 
operating a portfolio company under paragraph (b)(2) of this section by 
presenting information to the Board demonstrating to the Board's 
satisfaction that the financial holding company is not routinely 
managing or operating the portfolio company.
    (d) What arrangements do not involve routinely managing or operating 
a portfolio company?--(1) Director representation at portfolio 
companies. A financial holding company may select any or all of the 
directors of a portfolio company

[[Page 267]]

or have one or more of its directors, officers, or employees serve as 
directors of a portfolio company if:
    (i) The portfolio company employs officers and employees responsible 
for routinely managing and operating the company; and
    (ii) The financial holding company does not routinely manage or 
operate the portfolio company, except as permitted in paragraph (e) of 
this section.
    (2) Covenants or other provisions regarding extraordinary events. A 
financial holding company may, by virtue of covenants or other written 
agreements with a portfolio company, restrict the ability of the 
portfolio company, or require the portfolio company to consult with or 
obtain the approval of the financial holding company, to take actions 
outside of the ordinary course of the business of the portfolio company. 
Examples of the types of actions that may be subject to these types of 
covenants or agreements include, but are not limited to, the following:
    (i) The acquisition of significant assets or control of another 
company by the portfolio company or any of its subsidiaries;
    (ii) Removal or selection of an independent accountant or auditor or 
investment banker by the portfolio company;
    (iii) Significant changes to the business plan or accounting methods 
or policies of the portfolio company;
    (iv) Removal or replacement of any or all of the executive officers 
of the portfolio company;
    (v) The redemption, authorization or issuance of any equity or debt 
securities (including options, warrants or convertible shares) of the 
portfolio company or any borrowing by the portfolio company outside of 
the ordinary course of business;
    (vi) The amendment of the articles of incorporation or by-laws (or 
similar governing documents) of the portfolio company; and
    (vii) The sale, merger, consolidation, spin-off, recapitalization, 
liquidation, dissolution or sale of substantially all of the assets of 
the portfolio company or any of its significant subsidiaries.
    (3) Providing advisory and underwriting services to, and having 
consultations with, a portfolio company. A financial holding company 
may:
    (i) Provide financial, investment and management consulting advice 
to a portfolio company in a manner consistent with and subject to any 
restrictions on such activities contained in Sec. Sec. 225.28(b)(6) or 
225.86(b)(1) of this part (12 CFR 225.28(b)(6) and 225.86(b)(1));
    (ii) Provide assistance to a portfolio company in connection with 
the underwriting or private placement of its securities, including 
acting as the underwriter or placement agent for such securities; and
    (iii) Meet with the officers or employees of a portfolio company to 
monitor or provide advice with respect to the portfolio company's 
performance or activities.
    (e) When may a financial holding company routinely manage or operate 
a portfolio company?--(1) Special circumstances required. A financial 
holding company may routinely manage or operate a portfolio company only 
when intervention by the financial holding company is necessary or 
required to obtain a reasonable return on the financial holding 
company's investment in the portfolio company upon resale or other 
disposition of the investment, such as to avoid or address a significant 
operating loss or in connection with a loss of senior management at the 
portfolio company.
    (2) Duration Limited. A financial holding company may routinely 
manage or operate a portfolio company only for the period of time as may 
be necessary to address the cause of the financial holding company's 
involvement, to obtain suitable alternative management arrangements, to 
dispose of the investment, or to otherwise obtain a reasonable return 
upon the resale or disposition of the investment.
    (3) Notice required for extended involvement. A financial holding 
company may not routinely manage or operate a portfolio company for a 
period greater than nine months without prior written notice to the 
Board.
    (4) Documentation required. A financial holding company must 
maintain and make available to the Board upon request a written record 
describing its involvement in routinely managing or operating a 
portfolio company.

[[Page 268]]

    (f) May a depository institution or its subsidiary routinely manage 
or operate a portfolio company?--(1) In general. A depository 
institution and a subsidiary of a depository institution may not 
routinely manage or operate a portfolio company in which an affiliated 
company owns or controls an interest under this subpart.
    (2) Definition applying provisions governing routine management or 
operation. For purposes of this section other than paragraph (e) and for 
purposes of Sec. 225.173(d), a financial holding company includes a 
depository institution controlled by the financial holding company and a 
subsidiary of such a depository institution.
    (3) Exception for certain subsidiaries of depository institutions. 
For purposes of paragraph (e) of this section, a financial holding 
company includes a financial subsidiary held in accordance with section 
5136A of the Revised Statutes (12 U.S.C. 24a) or section 46 of the 
Federal Deposit Insurance Act (12 U.S.C. 1831w), and a subsidiary that 
is a small business investment company and that is held in accordance 
with the Small Business Investment Act (15 U.S.C. 661 et seq.), and such 
a subsidiary may, in accordance with the limitations set forth in this 
section, routinely manage or operate a portfolio company in which an 
affiliated company owns or controls an interest under this subpart.



Sec. 225.172  What are the holding periods permitted for merchant
banking investments?

    (a) Must investments be made for resale? A financial holding company 
may own or control shares, assets and ownership interests pursuant to 
this subpart only for a period of time to enable the sale or disposition 
thereof on a reasonable basis consistent with the financial viability of 
the financial holding company's merchant banking investment activities.
    (b) What period of time is generally permitted for holding merchant 
banking investments?--(1) In general. Except as provided in this section 
or Sec. 225.173, a financial holding company may not, directly or 
indirectly, own, control or hold any share, asset or ownership interest 
pursuant to this subpart for a period that exceeds 10 years.
    (2) Ownership interests acquired from or transferred to companies 
held under this subpart. For purposes of paragraph (b)(1) of this 
section, shares, assets or ownership interests--
    (i) Acquired by a financial holding company from a company in which 
the financial holding company held an interest under this subpart will 
be considered to have been acquired by the financial holding company on 
the date that the share, asset or ownership interest was acquired by the 
company; and
    (ii) Acquired by a company from a financial holding company will be 
considered to have been acquired by the company on the date that the 
share, asset or ownership interest was acquired by the financial holding 
company if--
    (A) The financial holding company held the share, asset, or 
ownership interest under this subpart; and
    (B) The financial holding company holds an interest in the acquiring 
company under this subpart.
    (3) Interests previously held by a financial holding company under 
limited authority. For purposes of paragraph (b)(1) of this section, any 
shares, assets, or ownership interests previously owned or controlled, 
directly or indirectly, by a financial holding company under any other 
provision of the Federal banking laws that imposes a limited holding 
period will if acquired under this subpart be considered to have been 
acquired by the financial holding company under this subpart on the date 
the financial holding company first acquired ownership or control of the 
shares, assets or ownership interests under such other provision of law. 
For purposes of this paragraph (b)(3), a financial holding company 
includes a depository institution controlled by the financial holding 
company and any subsidiary of such a depository institution.
    (4) Approval required to hold interests held in excess of time 
limit. A financial holding company may seek Board approval to own, 
control or hold shares, assets or ownership interests of a company under 
this subpart for a period that exceeds the period specified in paragraph 
(b)(1) of this section. A request for approval must:

[[Page 269]]

    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for the request, including information that 
addresses the factors in paragraph (b)(5) of this section; and
    (iii) Explain the financial holding company's plan for divesting the 
shares, assets or ownership interests.
    (5) Factors governing Board determinations. In reviewing any 
proposal under paragraph (b)(4) of this section, the Board may consider 
all the facts and circumstances related to the investment, including:
    (i) The cost to the financial holding company of disposing of the 
investment within the applicable period;
    (ii) The total exposure of the financial holding company to the 
company and the risks that disposing of the investment may pose to the 
financial holding company;
    (iii) Market conditions;
    (iv) The nature of the portfolio company's business;
    (v) The extent and history of involvement by the financial holding 
company in the management and operations of the company; and
    (vi) The average holding period of the financial holding company's 
merchant banking investments.
    (6) Restrictions applicable to investments held beyond time period. 
A financial holding company that directly or indirectly owns, controls 
or holds any share, asset or ownership interest of a company under this 
subpart for a total period that exceeds the period specified in 
paragraph (b)(1) of this section must--
    (i) For purposes of determining the financial holding company's 
regulatory capital, apply to the financial holding company's adjusted 
carrying value of such shares, assets, or ownership interests a capital 
charge determined by the Board that must be:
    (A) Higher than the maximum marginal tier 1 capital charge 
applicable under part 217 to merchant banking investments held by that 
financial holding company; and
    (B) In no event less than 25 percent of the adjusted carrying value 
of the investment; and
    (ii) Abide by any other restrictions that the Board may impose in 
connection with granting approval under paragraph (b)(4) of this 
section.

[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 78 FR 62291, Oct. 11, 
2013; 80 FR 70673, Nov. 16, 2015]



Sec. 225.173  How are investments in private equity funds treated
under this subpart?

    (a) What is a private equity fund? For purposes of this subpart, a 
``private equity fund'' is any company that:
    (1) Is formed for the purpose of and is engaged exclusively in the 
business of investing in shares, assets, and ownership interests of 
financial and nonfinancial companies for resale or other disposition;
    (2) Is not an operating company;
    (3) No more than 25 percent of the total equity of which is held, 
owned or controlled, directly or indirectly, by the financial holding 
company and its directors, officers, employees and principal 
shareholders;
    (4) Has a maximum term of not more than 15 years; and
    (5) Is not formed or operated for the purpose of making investments 
inconsistent with the authority granted under section 4(k)(4)(H) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) or evading the 
limitations governing merchant banking investments contained in this 
subpart.
    (b) What form may a private equity fund take? A private equity fund 
may be a corporation, partnership, limited liability company or other 
type of company that issues ownership interests in any form.
    (c) What is the holding period permitted for interests in private 
equity funds?--(1) In general. A financial holding company may own, 
control or hold any interest in a private equity fund under this subpart 
and any interest in a portfolio company that is owned or controlled by a 
private equity fund in which the financial holding company owns or 
controls any interest under this subpart for the duration of the fund, 
up to a maximum of 15 years.
    (2) Request to hold interest for longer period. A financial holding 
company may seek Board approval to own, control or hold an interest in 
or held

[[Page 270]]

through a private equity fund for a period longer than the duration of 
the fund in accordance with Sec. 225.172(b) of this subpart.
    (3) Application of rules. The rules described in Sec. 225.172(b)(2) 
and (3) governing holding periods of interests acquired, transferred or 
previously held by a financial holding company apply to interests in, 
held through, or acquired from a private equity fund.
    (d) How do the restrictions on routine management and operation 
apply to private equity funds and investments held through a private 
equity fund?--(1) Portfolio companies held through a private equity 
fund. A financial holding company may not routinely manage or operate a 
portfolio company that is owned or controlled by a private equity fund 
in which the financial holding company owns or controls any interest 
under this subpart, except as permitted under Sec. 225.171(e).
    (2) Private equity funds controlled by a financial holding company. 
A private equity fund that is controlled by a financial holding company 
may not routinely manage or operate a portfolio company, except as 
permitted under Sec. 225.171(e).
    (3) Private equity funds that are not controlled by a financial 
holding company. A private equity fund may routinely manage or operate a 
portfolio company so long as no financial holding company controls the 
private equity fund or as permitted under Sec. 225.171(e).
    (4) When does a financial holding company control a private equity 
fund? A financial holding company controls a private equity fund for 
purposes of this subpart if the financial holding company, including any 
director, officer, employee or principal shareholder of the financial 
holding company:
    (i) Serves as a general partner, managing member, or trustee of the 
private equity fund (or serves in a similar role with respect to the 
private equity fund);
    (ii) Owns or controls 25 percent or more of any class of voting 
shares or similar interests in the private equity fund;
    (iii) In any manner selects, controls or constitutes a majority of 
the directors, trustees or management of the private equity fund; or
    (iv) Owns or controls more than 5 percent of any class of voting 
shares or similar interests in the private equity fund and is the 
investment adviser to the fund.



Sec. 225.174  What aggregate thresholds apply to merchant banking 
investments?

    (a) In general. A financial holding company may not, without Board 
approval, directly or indirectly acquire any additional shares, assets 
or ownership interests under this subpart or make any additional capital 
contribution to any company the shares, assets or ownership interests of 
which are held by the financial holding company under this subpart if 
the aggregate carrying value of all merchant banking investments held by 
the financial holding company under this subpart exceeds:
    (1) 30 percent of the Tier 1 capital of the financial holding 
company; or
    (2) After excluding interests in private equity funds, 20 percent of 
the Tier 1 capital of the financial holding company.
    (b) How do these thresholds apply to a private equity fund? 
Paragraph (a) of this section applies to the interest acquired or 
controlled by the financial holding company under this subpart in a 
private equity fund. Paragraph (a) of this section does not apply to any 
interest in a company held by a private equity fund or to any interest 
held by a person that is not affiliated with the financial holding 
company.
    (c) How long do these thresholds remain in effect? This Sec. 
225.174 shall cease to be effective on the date that a final rule issued 
by the Board that specifically addresses the appropriate regulatory 
capital treatment of merchant banking investments becomes effective.



Sec. 225.175  What risk management, record keeping and reporting
policies are required to make merchant banking investments?

    (a) What internal controls and records are necessary?--(1) General. 
A financial holding company, including a private equity fund controlled 
by a financial holding company, that makes investments under this 
subpart must establish and maintain policies, procedures,

[[Page 271]]

records and systems reasonably designed to conduct, monitor and manage 
such investment activities and the risks associated with such investment 
activities in a safe and sound manner, including policies, procedures, 
records and systems reasonably designed to:
    (i) Monitor and assess the carrying value, market value and 
performance of each investment and the aggregate portfolio;
    (ii) Identify and manage the market, credit, concentration and other 
risks associated with such investments;
    (iii) Identify, monitor and assess the terms, amounts and risks 
arising from transactions and relationships (including contingent fees 
or contingent interests) with each company in which the financial 
holding company holds an interest under this subpart;
    (iv) Ensure the maintenance of corporate separateness between the 
financial holding company and each company in which the financial 
holding company holds an interest under this subpart and protect the 
financial holding company and its depository institution subsidiaries 
from legal liability for the operations conducted and financial 
obligations of each such company; and
    (v) Ensure compliance with this part and any other provisions of law 
governing transactions and relationships with companies in which the 
financial holding company holds an interest under this subpart (e.g., 
fiduciary principles or sections 23A and 23B of the Federal Reserve Act 
(12 U.S.C. 371c, 371c-1), if applicable).
    (2) Availability of records. A financial holding company must make 
the policies, procedures and records required by paragraph (a)(1) of 
this section available to the Board or the appropriate Reserve Bank upon 
request.
    (b) What periodic reports must be filed? A financial holding company 
must provide reports to the appropriate Reserve Bank in such format and 
at such times as the Board may prescribe.
    (c) Is notice required for the acquisition of companies?--(1) 
Fulfillment of statutory notice requirement. Except as required in 
paragraph (c)(2) of this section, no post-acquisition notice under 
section 4(k)(6) of the Bank Holding Company Act (12 U.S.C. 1843(k)(6)) 
is required by a financial holding company in connection with an 
investment made under this subpart if the financial holding company has 
previously filed a notice under Sec. 225.87 indicating that it had 
commenced merchant banking investment activities under this subpart.
    (2) Notice of large individual investments. A financial holding 
company must provide written notice to the Board on the appropriate form 
within 30 days after acquiring more than 5 percent of the voting shares, 
assets or ownership interests of any company under this subpart, 
including an interest in a private equity fund, at a total cost to the 
financial holding company that exceeds the lesser of 5 percent of the 
Tier 1 capital of the financial holding company or $200 million.



Sec. 225.176  How do the statutory cross marketing and sections 
23A and B limitations apply to merchant banking investments?

    (a) Are cross marketing activities prohibited?--(1) In general. A 
depository institution, including a subsidiary of a depository 
institution, controlled by a financial holding company may not:
    (i) Offer or market, directly or through any arrangement, any 
product or service of any company if more than 5 percent of the 
company's voting shares, assets or ownership interests are owned or 
controlled by the financial holding company pursuant to this subpart; or
    (ii) Allow any product or service of the depository institution, 
including any product or service of a subsidiary of the depository 
institution, to be offered or marketed, directly or through any 
arrangement, by or through any company described in paragraph (a)(1)(i) 
of this section.
    (2) How are certain subsidiaries treated? For purposes of paragraph 
(a)(1) of this section, a subsidiary of a depository institution does 
not include a financial subsidiary held in accordance with section 5136A 
of the Revised Statutes (12 U.S.C. 24a) or section 46 of the Federal 
Deposit Insurance Act. (12 U.S.C. 1831w), any company held by a company 
owned in accordance with section 25 or 25A of the Federal Reserve Act 
(12 U.S.C. 601 et seq.; 12 U.S.C. 611 et seq.),

[[Page 272]]

or any company held by a small business investment company owned in 
accordance with the Small Business Investment Act of 1958 (15 U.S.C. 661 
et seq.).
    (3) How do the cross marketing restrictions apply to private equity 
funds? The restriction contained in paragraph (a)(1) of this section 
does not apply to:
    (i) Portfolio companies held by a private equity fund that the 
financial holding company does not control; or
    (ii) The sale, offer or marketing of any interest in a private 
equity fund, whether or not controlled by the financial holding company.
    (b) When are companies held under section 4(k)(4)(H) affiliates 
under sections 23A and B?--(1) Rebuttable presumption of control. The 
following rebuttable presumption of control shall apply for purposes of 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c, 371c-
1): if a financial holding company directly or indirectly owns or 
controls more than 15 percent of the total equity of a company pursuant 
to this subpart, the company shall be presumed to be an affiliate of any 
member bank that is affiliated with the financial holding company.
    (2) Request to rebut presumption. A financial holding company may 
rebut this presumption by providing information acceptable to the Board 
demonstrating that the financial holding company does not control the 
company.
    (3) Presumptions that control does not exist. Absent evidence to the 
contrary, the presumption in paragraph (b)(1) of this section will be 
considered to have been rebutted without Board approval under paragraph 
(b)(2) of this section if any one of the following requirements are met:
    (i) No officer, director or employee of the financial holding 
company serves as a director, trustee, or general partner (or individual 
exercising similar functions) of the company;
    (ii) A person that is not affiliated or associated with the 
financial holding company owns or controls a greater percentage of the 
equity capital of the portfolio company than the amount owned or 
controlled by the financial holding company, and no more than one 
officer or employee of the holding company serves as a director or 
trustee (or individual exercising similar functions) of the company; or
    (iii) A person that is not affiliated or associated with the 
financial holding company owns or controls more than 50 percent of the 
voting shares of the portfolio company, and officers and employees of 
the holding company do not constitute a majority of the directors or 
trustees (or individuals exercising similar functions) of the company.
    (4) Convertible instruments. For purposes of paragraph (b)(1) of 
this section, equity capital includes options, warrants and any other 
instrument convertible into equity capital.
    (5) Application of presumption to private equity funds. A financial 
holding company will not be presumed to own or control the equity 
capital of a company for purposes of paragraph (b)(1) of this section 
solely by virtue of an investment made by the financial holding company 
in a private equity fund that owns or controls the equity capital of the 
company unless the financial holding company controls the private equity 
fund as described in Sec. 225.173(d)(4).
    (6) Application of sections 23A and B to U.S. branches and agencies 
of foreign banks. Sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1) shall apply to all covered transactions between 
each U.S. branch and agency of a foreign bank that acquires or controls, 
or that is affiliated with a company that acquires or controls, merchant 
banking investments and--
    (i) Any portfolio company that the foreign bank or affiliated 
company controls or is presumed to control under paragraph (b)(1) of 
this section; and
    (ii) Any company that the foreign bank or affiliated company 
controls or is presumed to control under paragraph (b)(1) of this 
section if the company is engaged in acquiring or controlling merchant 
banking investments and the proceeds of the covered transaction are used 
for the purpose of funding the company's merchant banking investment 
activities.

[[Page 273]]



Sec. 225.177  Definitions.

    (a) What do references to a financial holding company include? (1) 
Except as otherwise expressly provided, the term ``financial holding 
company'' as used in this subpart means the financial holding company 
and all of its subsidiaries, including a private equity fund or other 
fund controlled by the financial holding company.
    (2) Except as otherwise expressly provided, the term ``financial 
holding company'' does not include a depository institution or 
subsidiary of a depository institution or any portfolio company 
controlled directly or indirectly by the financial holding company.
    (b) What do references to a depository institution include? For 
purposes of this subpart, the term ``depository institution'' includes a 
U.S. branch or agency of a foreign bank.
    (c) What is a portfolio company? A portfolio company is any company 
or entity:
    (1) That is engaged in any activity not authorized for the financial 
holding company under section 4 of the Bank Holding Company Act (12 
U.S.C. 1843); and
    (2) Any shares, assets or ownership interests of which are held, 
owned or controlled directly or indirectly by the financial holding 
company pursuant to this subpart, including through a private equity 
fund that the financial holding company controls.
    (d) Who are the executive officers of a company?  (1) An executive 
officer of a company is any person who participates or has the authority 
to participate (other than in the capacity as a director) in major 
policymaking functions of the company, whether or not the officer has an 
official title, the title designates the officer as an assistant, or the 
officer serves without salary or other compensation.
    (2) The term ``executive officer'' does not include--
    (i) Any person, including a person with an official title, who may 
exercise a certain measure of discretion in the performance of his 
duties, including the discretion to make decisions in the ordinary 
course of the company's business, but who does not participate in the 
determination of major policies of the company and whose decisions are 
limited by policy standards fixed by senior management of the company; 
or
    (ii) Any person who is excluded from participating (other than in 
the capacity of a director) in major policymaking functions of the 
company by resolution of the board of directors or by the bylaws of the 
company and who does not in fact participate in such policymaking 
functions.

                          Conditions to Orders



  Subpart K_Proprietary Trading and Relationships With Hedge Funds and 
                          Private Equity Funds

    Source: 76 FR 8275, Feb. 14, 2011, unless otherwise noted.



Sec. 225.180  Definitions.

    For purposes of this subpart:
    (a) Banking entity means--
    (1) Any insured depository institution;
    (2) Any company that controls an insured depository institution;
    (3) Any company that is treated as a bank holding company for 
purposes of section 8 of the International Banking Act of 1978; and
    (4) Any affiliate or subsidiary of any of the foregoing entities.
    (b) Hedge fund and private equity fund mean an issuer that would be 
an investment company, as defined in the Investment Company Act of 1940 
(15 U.S.C. 80a-1 et seq.), but for section 3(c)(1) or 3(c)(7) of that 
Act, or such similar funds as the appropriate Federal banking agencies, 
the Securities and Exchange Commission, and the Commodity Futures 
Trading Commission may, by rule, as provided in section 13(b)(2) of the 
Bank Holding Company Act (12 U.S.C. 1851(b)(2)), determine.
    (c) Insured depository institution has the same meaning as given 
that term in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813), except that for purposes of this subpart the term shall not 
include an institution that functions solely in a trust or fiduciary 
capacity if--
    (1) All or substantially all of the deposits of such institution are 
in trust

[[Page 274]]

funds and are received in a bona fide fiduciary capacity;
    (2) No deposits of such institution which are insured by the Federal 
Deposit Insurance Corporation are offered or marketed by or through an 
affiliate of such institution;
    (3) Such institution does not accept demand deposits or deposits 
that the depositor may withdraw by check or similar means for payment to 
third parties or others or make commercial loans; and
    (4) Such institution does not--
    (i) Obtain payment or payment related services from any Federal 
Reserve bank, including any service referred to in section 11A of the 
Federal Reserve Act (12 U.S.C. 248a); or
    (ii) Exercise discount or borrowing privileges pursuant to section 
19(b)(7) of the Federal Reserve Act (12 U.S.C. 416(b)(7)).
    (d) Nonbank financial company supervised by the Board means a 
nonbank financial company supervised by the Board of Governors, as 
defined in section 102 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (12 U.S.C. 5311).
    (e) Board means the Board of Governors of the Federal Reserve 
System.
    (f) Illiquid fund means a hedge fund or private equity fund that:
    (1) As of May 1, 2010--
    (i) Was principally invested in illiquid assets; or
    (ii) Was invested in, and contractually committed to principally 
invest in, illiquid assets; and
    (2) Makes all investments pursuant to, and consistent with, an 
investment strategy to principally invest in illiquid assets.
    (g) Illiquid assets means any real property, security, obligation, 
or other asset that--
    (1) Is not a liquid asset;
    (2) Because of statutory or regulatory restrictions applicable to 
the hedge fund, private equity fund or asset, cannot be offered, sold, 
or otherwise transferred by the hedge fund or private equity fund to a 
person that is unaffiliated with the relevant banking entity; or
    (3) Because of contractual restrictions applicable to the hedge 
fund, private equity fund or asset, cannot be offered, sold, or 
otherwise transferred by the hedge fund or private equity fund for a 
period of 3 years or more to a person that is unaffiliated with the 
relevant banking entity.
    (h) Liquid asset means:
    (1) Cash or cash equivalents;
    (2) An asset that is traded on a recognized, established exchange, 
trading facility or other market on which there exist independent, bona 
fide offers to buy and sell so that a price reasonably related to the 
last sales price or current bona fide competitive bid and offer 
quotations can be determined for the particular asset almost 
instantaneously;
    (3) An asset for which there are bona fide, competitive bid and 
offer quotations in a recognized inter-dealer quotation system or 
similar system or for which multiple dealers furnish bona fide, 
competitive bid and offer quotations to other brokers and dealers on 
request;
    (4) An asset the price of which is quoted routinely in a widely 
disseminated publication that is readily available to the general public 
or through an electronic service that provides indicative data from 
real-time financial networks;
    (5) An asset with an initial term of one year or less and the 
payments on which at maturity may be settled, closed-out, or paid in 
cash or one or more other liquid assets described in paragraphs (h)(1), 
(2), (3), or (4); and
    (6) Any other asset that the Board determines, based on all the 
facts and circumstances, is a liquid asset.
    (i) Principally invested and related definitions. A hedge fund or 
private equity fund:
    (1) Is principally invested in illiquid assets if at least 75 
percent of the fund's consolidated total assets are--
    (i) Illiquid assets; or
    (ii) Risk-mitigating hedges entered into in connection with and 
related to individual or aggregated positions in, or holdings of, 
illiquid assets;
    (2) Is contractually committed to principally invest in illiquid 
assets if the fund's organizational documents, other documents that 
constitute a contractual obligation of the fund, or written 
representations contained in the fund's

[[Page 275]]

offering materials distributed to potential investors provide for the 
fund to be principally invested in assets described in paragraph (i)(1) 
at all times other than during temporary periods, such as the period 
prior to the initial receipt of capital contributions from investors or 
the period during which the fund's investments are being liquidated and 
capital and profits are being returned to investors; and
    (3) Has an investment strategy to principally invest in illiquid 
assets if the fund--
    (i) Markets or holds itself out to investors as intending to 
principally invest in assets described in paragraph (i)(1) of this 
section; or
    (ii) Has a documented investment policy of principally investing in 
assets described in paragraph (i)(1) of this section.



Sec. 225.181  Conformance Period for Banking Entities Engaged in
Prohibited Proprietary Trading or Private Fund Activities.

    (a) Conformance Period--(1) In general. Except as provided in 
paragraph (b)(2) or (3) of this section, a banking entity shall bring 
its activities and investments into compliance with the requirements of 
section 13 of the Bank Holding Company Act (12 U.S.C. 1851) and this 
subpart no later than 2 years after the earlier of:
    (i) July 21, 2012; or
    (ii) Twelve months after the date on which final rules adopted under 
section 13(b)(2) of the Bank Holding Company Act (12 U.S.C. 1851(b)(2)) 
are published in the Federal Register.
    (2) New banking entities. A company that was not a banking entity, 
or a subsidiary or affiliate of a banking entity, as of July 21, 2010, 
and becomes a banking entity, or a subsidiary or affiliate of a banking 
entity, after that date shall bring its activities and investments into 
compliance with the requirements of section 13 of the Bank Holding 
Company Act (12 U.S.C. 1851) and this subpart before the later of--
    (i) The conformance date determined in accordance with paragraph 
(a)(1) of this section; or
    (ii) Two years after the date on which the company becomes a banking 
entity or a subsidiary or affiliate of a banking entity.
    (3) Extended conformance period. The Board may extend the two-year 
period under paragraph (a)(1) or (2) of this section by not more than 
three separate one-year periods, if, in the judgment of the Board, each 
such one-year extension is consistent with the purposes of section 13 of 
the Bank Holding Company Act (12 U.S.C. 1851) and this subpart and would 
not be detrimental to the public interest.
    (b) Illiquid funds--(1) Extended transition period. The Board may 
further extend the period provided by paragraph (a) of this section 
during which a banking entity may acquire or retain an equity, 
partnership, or other ownership interest in, or otherwise provide 
additional capital to, a private equity fund or hedge fund if--
    (i) The fund is an illiquid fund; and
    (ii) The acquisition or retention of such interest, or provision of 
additional capital, is necessary to fulfill a contractual obligation of 
the banking entity that was in effect on May 1, 2010.
    (2) Duration limited. The Board may grant a banking entity only one 
extension under paragraph (b)(1) of this section and such extension--
    (i) May not exceed 5 years beyond any conformance period granted 
under paragraph (a)(3) of this section; and
    (ii) Shall terminate automatically on the date during any such 
extension on which the banking entity is no longer under a contractual 
obligation described in paragraph (b)(1)(ii).
    (3) Contractual obligation. For purposes of this paragraph (b)--
    (i) A banking entity has a contractual obligation to take or retain 
an equity, partnership, or other ownership interest in an illiquid fund 
if the banking entity is prohibited from redeeming all of its equity, 
partnership, or other ownership interests in the fund, and from selling 
or otherwise transferring all such ownership interests to a person that 
is not an affiliate of the banking entity--
    (A) Under the terms of the banking entity's equity, partnership, or 
other ownership interest in the fund or the banking entity's other 
contractual arrangements with the fund or unaffiliated investors in the 
fund; or

[[Page 276]]

    (B) If the banking entity is the sponsor of the fund, under the 
terms of a written representation made by the banking entity in the 
fund's offering materials distributed to potential investors;
    (ii) A banking entity has a contractual obligation to provide 
additional capital to an illiquid fund if the banking entity is required 
to provide additional capital to such fund--
    (A) Under the terms of its equity, partnership or other ownership 
interest in the fund or the banking entity's other contractual 
arrangements with the fund or unaffiliated investors in the fund; or
    (B) If the banking entity is the sponsor of the fund, under the 
terms of a written representation made by the banking entity in the 
fund's offering materials distributed to potential investors; and
    (iii) A banking entity shall be considered to have a contractual 
obligation for purposes of paragraph (b)(3)(i) or (ii) of this section 
only if--
    (A) The obligation may not be terminated by the banking entity or 
any of its subsidiaries or affiliates under the terms of its agreement 
with the fund; and
    (B) In the case of an obligation that may be terminated with the 
consent of other persons, the banking entity and its subsidiaries and 
affiliates have used their reasonable best efforts to obtain such 
consent and such consent has been denied.
    (c) Approval required to hold interests in excess of time limit. The 
conformance period in paragraph (a) of this section may be extended in 
accordance with paragraph (a)(3) or (b) of this section only with the 
approval of the Board. A banking entity that seeks the Board's approval 
for an extension of the conformance period under paragraph (a)(3) or for 
an extended transition period under paragraph (b)(1) must--
    (1) Submit a request in writing to the Board at least 180 days prior 
to the expiration of the applicable time period;
    (2) Provide the reasons why the banking entity believes the 
extension should be granted, including information that addresses the 
factors in paragraph (d)(1) of this section; and
    (3) Provide a detailed explanation of the banking entity's plan for 
divesting or conforming the activity or investment(s).
    (d) Factors governing Board determinations--(1) Extension requests 
generally. In reviewing any application by a specific company for an 
extension under paragraph (a)(3) or (b)(1) of this section, the Board 
may consider all the facts and circumstances related to the activity, 
investment, or fund, including, to the extent relevant--
    (i) Whether the activity or investment--
    (A) Involves or results in material conflicts of interest between 
the banking entity and its clients, customers or counterparties;
    (B) Would result, directly or indirectly, in a material exposure by 
the banking entity to high-risk assets or high-risk trading strategies;
    (C) Would pose a threat to the safety and soundness of the banking 
entity; or
    (D) Would pose a threat to the financial stability of the United 
States;
    (ii) Market conditions;
    (iii) The nature of the activity or investment;
    (iv) The date that the banking entity's contractual obligation to 
make or retain an investment in the fund was incurred and when it 
expires;
    (v) The contractual terms governing the banking entity's interest in 
the fund;
    (vi) The degree of control held by the banking entity over 
investment decisions of the fund;
    (vii) The types of assets held by the fund, including whether any 
assets that were illiquid when first acquired by the fund have become 
liquid assets, such as, for example, because any statutory, regulatory, 
or contractual restrictions on the offer, sale, or transfer of such 
assets have expired;
    (viii) The date on which the fund is expected to wind up its 
activities and liquidate, or its investments may be redeemed or sold;
    (ix) The total exposure of the banking entity to the activity or 
investment and the risks that disposing of, or maintaining, the 
investment or activity may pose to the banking entity or the financial 
stability of the United States;

[[Page 277]]

    (x) The cost to the banking entity of divesting or disposing of the 
activity or investment within the applicable period;
    (xi) Whether the divestiture or conformance of the activity or 
investment would involve or result in a material conflict of interest 
between the banking entity and unaffiliated clients, customers or 
counterparties to which it owes a duty;
    (xii) The banking entity's prior efforts to divest or conform the 
activity or investment(s), including, with respect to an illiquid fund, 
the extent to which the banking entity has made efforts to terminate or 
obtain a waiver of its contractual obligation to take or retain an 
equity, partnership, or other ownership interest in, or provide 
additional capital to, the illiquid fund; and
    (xiii) Any other factor that the Board believes appropriate.
    (2) Timing of Board review. The Board will seek to act on any 
request for an extension under paragraph (a)(3) or (b)(1) of this 
section no later than 90 calendar days after the receipt of a complete 
record with respect to such request.
    (3) Consultation. In the case of a banking entity that is primarily 
supervised by another Federal banking agency, the Securities and 
Exchange Commission, or the Commodity Futures Trading Commission, the 
Board will consult with such agency prior to the approval of a request 
by the banking entity for an extension under paragraph (a)(3) or (b)(1) 
of this section.
    (e) Authority to impose restrictions on activities or investments 
during any extension period--(1) In general. The Board may impose such 
conditions on any extension approved under paragraph (a)(3) or (b)(1) of 
this section as the Board determines are necessary or appropriate to 
protect the safety and soundness of the banking entity or the financial 
stability of the United States, address material conflicts of interest 
or other unsound banking practices, or otherwise further the purposes of 
section 13 of the Bank Holding Company Act (12 U.S.C. 1851) and this 
subpart.
    (2) Consultation. In the case of a banking entity that is primarily 
supervised by another Federal banking agency, the Securities and 
Exchange Commission, or the Commodity Futures Trading Commission, the 
Board will consult with such agency prior to imposing conditions on the 
approval of a request by the banking entity for an extension under 
paragraph (a)(3) or (b)(1) of this section.



Sec. 225.182  Conformance Period for Nonbank Financial Companies
Supervised by the Board Engaged in Proprietary Trading or Private
Fund Activities.

    (a) Divestiture requirement. A nonbank financial company supervised 
by the Board shall come into compliance with all applicable requirements 
of section 13 of the Bank Holding Company Act (12 U.S.C. 1851) and this 
subpart, including any capital requirements or quantitative limitations 
adopted thereunder and applicable to the company, not later than 2 years 
after the date the company becomes a nonbank financial company 
supervised by the Board.
    (b) Extensions. The Board may, by rule or order, extend the two-year 
period under paragraph (a) by not more than three separate one-year 
periods, if, in the judgment of the Board, each such one-year extension 
is consistent with the purposes of section 13 of the Bank Holding 
Company Act (12 U.S.C. 1851) and this subpart and would not be 
detrimental to the public interest.
    (c) Approval required to hold interests in excess of time limit. A 
nonbank financial company supervised by the Board that seeks the Board's 
approval for an extension of the conformance period under paragraph (b) 
of this section must--
    (1) Submit a request in writing to the Board at least 180 days prior 
to the expiration of the applicable time period;
    (2) Provide the reasons why the nonbank financial company supervised 
by the Board believes the extension should be granted; and
    (3) Provide a detailed explanation of the company's plan for 
conforming the activity or investment(s) to any applicable requirements 
established under section 13(a)(2) or (f)(4) of the Bank Holding Company 
Act (12 U.S.C. 1851(a)(2) and (f)(4)).
    (d) Factors governing Board determinations--(1) In general. In 
reviewing any application for an extension under paragraph (b) of this 
section, the Board

[[Page 278]]

may consider all the facts and circumstances related to the nonbank 
financial company and the request including, to the extent determined 
relevant by the Board, the factors described in Sec. 225.181(d)(1).
    (2) Timing. The Board will seek to act on any request for an 
extension under paragraph (b) of this section no later than 90 calendar 
days after the receipt of a complete record with respect to such 
request.
    (f) Authority to impose restrictions on activities or investments 
during any extension period. The Board may impose conditions on any 
extension approved under paragraph (b) of this section as the Board 
determines are necessary or appropriate to protect the safety and 
soundness of the nonbank financial company or the financial stability of 
the United States, address material conflicts of interest or other 
unsound practices, or otherwise further the purposes of section 13 of 
the Bank Holding Company Act (12 U.S.C. 1851) and this subpart.



                     Subpart L_Conditions to Orders

    Source: 76 FR 8275, Feb. 14, 2011, unless otherwise noted.



Sec. 225.200  Conditions to Board's section 20 orders.

    (a) Introduction. Under section 20 of the Glass-Steagall Act (12 
U.S.C. 377) and section 4(c)(8) of the Bank Holding Company Act (12 
U.S.C. 1843(c)(8)), a nonbank subsidiary of a bank holding company may 
to a limited extent underwrite and deal in securities for which 
underwriting and dealing by a member bank is prohibited. Pursuant to the 
Securities Act of 1933 and the Securities Exchange Act of 1934, these 
so-called section 20 subsidiaries are required to register with the SEC 
as broker-dealers and are subject to all the financial reporting, anti-
fraud and financial responsibility rules applicable to broker-dealers. 
In addition, transactions between insured depository institutions and 
their section 20 affiliates are restricted by sections 23A and 23B of 
the Federal Reserve Act (12 U.S.C. 371c and 371c-1). The Board expects a 
section 20 subsidiary, like any other subsidiary of a bank holding 
company, to be operated prudently. Doing so would include observing 
corporate formalities (such as the maintenance of separate accounting 
and corporate records), and instituting appropriate risk management, 
including independent trading and exposure limits consistent with parent 
company guidelines.
    (b) Conditions. As a condition of each order approving establishment 
of a section 20 subsidiary, a bank holding company shall comply with the 
following conditions.
    (1) Capital. (i) A bank holding company shall maintain adequate 
capital on a fully consolidated basis. If operating a section 20 
authorized to underwrite and deal in all types of debt and equity 
securities, a bank holding company shall maintain strong capital on a 
fully consolidated basis.
    (ii) In the event that a bank or thrift affiliate of a section 20 
subsidiary shall become less than well capitalized (as defined in 
section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o), and 
the bank holding company shall fail to restore it promptly to the well 
capitalized level, the Board may, in its discretion, reimpose the 
funding, credit extension and credit enhancement firewalls contained in 
its 1989 order allowing underwriting and dealing in bank-ineligible 
securities, \1\ or order the bank holding company to divest the section 
20 subsidiary.
---------------------------------------------------------------------------

    \1\ Firewalls 5-8, 19, 21 and 22 of J.P. Morgan & Co., The Chase 
Manhattan Corp., Bankers Trust New York Corp., Citicorp, and Security 
Pacific Corp., 75 Federal Reserve Bulletin 192, 214-16 (1989).
---------------------------------------------------------------------------

    (iii) A foreign bank that operates a branch or agency in the United 
States shall maintain strong capital on a fully consolidated basis at 
levels above the minimum levels required by the Basle Capital Accord. In 
the event that the Board determines that the foreign bank's capital has 
fallen below these levels and the foreign bank fails to restore its 
capital position promptly, the Board may, in its discretion, reimpose 
the funding, credit extension and credit enhancement firewalls contained 
in its 1990 order allowing foreign banks to underwrite and deal in bank-
ineligible

[[Page 279]]

securities, \2\ or order the foreign bank to divest the section 20 
subsidiary.
---------------------------------------------------------------------------

    \2\ Firewalls 5-8, 19, 21 and 22 of Canadian Imperial Bank of 
Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank PLC, 
76 Federal Reserve Bulletin 158, (1990).
---------------------------------------------------------------------------

    (2) Internal controls. (i) Each bank holding company or foreign bank 
shall cause its subsidiary banks, thrifts, branches or agencies \3\ to 
adopt policies and procedures, including appropriate limits on exposure, 
to govern their participation in transactions underwritten or arranged 
by a section 20 affiliate.
---------------------------------------------------------------------------

    \3\ The terms ``branch'' and ``agency'' refer to a U.S. branch and 
agency of a foreign bank.
---------------------------------------------------------------------------

    (ii) Each bank holding company or foreign bank shall ensure that an 
independent and thorough credit evaluation has been undertaken in 
connection with participation by a bank, thrift, or branch or agency in 
such transactions, and that adequate documentation of that evaluation is 
maintained for review by examiners of the appropriate federal banking 
agency and the Federal Reserve.
    (3) Interlocks restriction. (i) Directors, officers or employees of 
a bank or thrift subsidiary of a bank holding company, or a bank or 
thrift subsidiary or branch or agency of a foreign bank, shall not serve 
as a majority of the board of directors or the chief executive officer 
of an affiliated section 20 subsidiary.
    (ii) Directors, officers or employees of a section 20 subsidiary 
shall not serve as a majority of the board of directors or the chief 
executive officer of an affiliated bank or thrift subsidiary or branch 
or agency, except that the manager of a branch or agency may act as a 
director of the underwriting subsidiary.
    (iii) For purposes of this standard, the manager of a branch or 
agency of a foreign bank generally will be considered to be the chief 
executive officer of the branch or agency.
    (4) Customer disclosure--(i) Disclosure to section 20 customers. A 
section 20 subsidiary shall provide, in writing, to each of its retail 
customers, \4\ at the time an investment account is opened, the same 
minimum disclosures, and obtain the same customer acknowledgment, 
described in the Interagency Statement on Retail Sales of Nondeposit 
Investment Products (Statement) as applicable in such situations. These 
disclosures must be provided regardless of whether the section 20 
subsidiary is itself engaged in activities through arrangements with a 
bank that is covered by the Statement.
---------------------------------------------------------------------------

    \4\ For purposes of this operating standard, a retail customer is 
any customer that is not an ``accredited investor'' as defined in 17 CFR 
230.501(a).
---------------------------------------------------------------------------

    (ii) Disclosures accompanying investment advice. A director, 
officer, or employee of a bank, thrift, branch or agency may not express 
an opinion on the value or the advisability of the purchase or the sale 
of a bank-ineligible security that he or she knows is being underwritten 
or dealt in by a section 20 affiliate unless he or she notifies the 
customer of the affiliate's role.
    (5) Intra-day credit. Any intra-day extension of credit to a section 
20 subsidiary by an affiliated bank, thrift, branch or agency shall be 
on market terms consistent with section 23B of the Federal Reserve Act.
    (6) Restriction on funding purchases of securities during 
underwriting period. No bank, thrift, branch or agency shall knowingly 
extend credit to a customer secured by, or for the purpose of 
purchasing, any bank-ineligible security that a section 20 affiliate is 
underwriting or has underwritten within the past 30 days, unless:
    (i) The extension of credit is made pursuant to, and consistent with 
any conditions imposed in a preexisting line of credit that was not 
established in contemplation of the underwriting; or
    (ii) The extension of credit is made in connection with clearing 
transactions for the section 20 affiliate.
    (7) Reporting requirement. (i) Each bank holding company or foreign 
bank shall submit quarterly to the appropriate Federal Reserve Bank any 
FOCUS report filed with the NASD or other self-regulatory organizations, 
and any information required by the Board to monitor compliance with 
these operating standards and section 20 of the Glass-Steagall Act, on 
forms provided by the Board.
    (ii) In the event that a section 20 subsidiary is required to 
furnish notice

[[Page 280]]

concerning its capitalization to the Securities and Exchange Commission 
pursuant to 17 CFR 240.17a-11, a copy of the notice shall be filed 
concurrently with the appropriate Federal Reserve Bank.
    (8) Foreign banks. A foreign bank shall ensure that any extension of 
credit by its branch or agency to a section 20 affiliate, and any 
purchase by such branch or agency, as principal or fiduciary, of 
securities for which a section 20 affiliate is a principal underwriter, 
conforms to sections 23A and 23B of the Federal Reserve Act, and that 
its branches and agencies not advertise or suggest that they are 
responsible for the obligations of a section 20 affiliate, consistent 
with section 23B(c) of the Federal Reserve Act.

[62 FR 45306, Aug. 27, 1997, as amended by Reg. Y, 63 FR 14804, Mar. 27, 
1998]



    Subpart M_Minimum Requirements for Appraisal Management Companies

    Source: 80 FR 32681, June 9, 2015, unless otherwise noted.



Sec. 225.190  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (the Board) pursuant to title XI of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA) (Pub. L. 101-73, 103 Stat. 183 (1989)), 12 U.S.C. 3310, 3331-
3351, section 1473 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 12 U.S.C. 3353, and section 5(b) of the Bank Holding 
Company Act, 12 U.S.C. 1844(b).
    (b) Purpose and scope. (1) The purpose of this subpart is to 
implement sections 1109, 1117, 1121, and 1124 of FIRREA Title XI, 12 
U.S.C. 3338, 3346, 3350, and 3353. Title XI provides protection for 
Federal financial and public policy interests in real estate related 
transactions by requiring real estate appraisals used in connection with 
Federally related transactions to be performed in writing, in accordance 
with uniform standards, by appraisers whose competency has been 
demonstrated and whose professional conduct will be subject to effective 
supervision. This subpart implements the requirements of title XI as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act 
and applies to all Federally related transactions and to States and to 
appraisal management companies (AMCs) performing appraisal management 
services in connection with consumer credit transactions secured by a 
consumer's principal dwelling or securitizations of those transactions.
    (2) This subpart:
    (i) Identifies which real estate related financial transactions 
require the services of an appraiser.
    (ii) Prescribes which categories of Federally related transactions 
shall be appraised by a State-certified appraiser and which by a State-
licensed appraiser;
    (iii) Prescribes minimum standards for the performance of real 
estate appraisals in connection with Federal related transactions under 
the jurisdiction of the Board;
    (iv) Prescribes minimum requirements to be applied by participating 
States in the registration and supervision of AMCs; and
    (v) Prescribes minimum requirements to be applied by participating 
States to report certain information concerning AMCs registered with the 
States to a national registry of AMCs.
    (c) Rule of construction. Nothing in this subpart should be 
construed to prevent a State from establishing requirements in addition 
to those in this subpart. In addition, nothing in this subpart should be 
construed to alter guidance in, and applicability of, the Interagency 
Appraisal and Evaluation Guidelines \1\ or other relevant agency 
guidance that cautions banks and bank holding companies, that each 
organization is accountable for overseeing the activities of third-party 
service providers and ensuring that any services provided by a third 
party comply with applicable laws, regulations, and supervisory guidance 
applicable directly to the creditor.
---------------------------------------------------------------------------

    \1\ See, Agencies issue final appraisal and evalutation guidelines, 
http://www.federalreserve.gov/newsevents/press/bcreg/20101202a.htm.

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

[[Page 281]]



Sec. 225.191  Definitions.

    For purposes of this subpart:
    (a) Affiliate has the meaning provided in 12 U.S.C. 1841.
    (b) AMC National Registry means the registry of State-registered 
AMCs and Federally regulated AMCs maintained by the Appraisal 
Subcommittee.
    (c) Appraisal Foundation means the Appraisal Foundation established 
on November 30, 1987, as a not-for-profit corporation under the laws of 
Illinois.
    (d)(1) Appraisal management company (AMC) means a person that:
    (i) Provides appraisal management services to creditors or to 
secondary mortgage market participants, including affiliates;
    (ii) Provides such services in connection with valuing a consumer's 
principal dwelling as security for a consumer credit transaction or 
incorporating such transactions into securitizations; and
    (iii) Within a 12-month period, as defined in Sec. 225.192(d), 
oversees an appraiser panel of more than 15 State-certified or State-
licensed appraisers in a State or 25 or more State-certified or State-
licensed appraisers in two or more States, as described in Sec. 
225.192;
    (2) An AMC does not include a department or division of an entity 
that provides appraisal management services only to that entity.
    (e) Appraisal management services means one or more of the 
following:
    (1) Recruiting, selecting, and retaining appraisers;
    (2) Contracting with State-certified or State-licensed appraisers to 
perform appraisal assignments;
    (3) Managing the process of having an appraisal performed, including 
providing administrative services such as receiving appraisal orders and 
appraisal reports, submitting completed appraisal reports to creditors 
and secondary market participants, collecting fees from creditors and 
secondary market participants for services provided, and paying 
appraisers for services performed; and
    (4) Reviewing and verifying the work of appraisers.
    (f) Appraiser panel means a network, list or roster of licensed or 
certified appraisers approved by an AMC to perform appraisals as 
independent contractors for the AMC. Appraisers on an AMC's ``appraiser 
panel'' under this part include both appraisers accepted by the AMC for 
consideration for future appraisal assignments in covered transactions 
or for secondary mortgage market participants in connection with covered 
transactions and appraisers engaged by the AMC to perform one or more 
appraisals in covered transactions or for secondary mortgage market 
participants in connection with covered transactions. An appraiser is an 
independent contractor for purposes of this part if the appraiser is 
treated as an independent contractor by the AMC for purposes of Federal 
income taxation.
    (g) Consumer credit means credit offered or extended to a consumer 
primarily for personal, family, or household purposes.
    (h) Covered transaction means any consumer credit transaction 
secured by the consumer's principal dwelling.
    (i) Creditor means:
    (1) A person who regularly extends consumer credit that is subject 
to a finance charge or is payable by written agreement in more than four 
installments (not including a down payment), and to whom the obligation 
is initially payable, either on the face of the note or contract, or by 
agreement when there is no note or contract.
    (2) A person regularly extends consumer credit if the person 
extended credit (other than credit subject to the requirements of 12 CFR 
1026.32) more than 5 times for transactions secured by a dwelling in the 
preceding calendar year. If a person did not meet these numerical 
standards in the preceding calendar year, the numerical standards shall 
be applied to the current calendar year. A person regularly extends 
consumer credit if, in any 12-month period, the person originates more 
than one credit extension that is subject to the requirements of 12 CFR 
1026.32 or one or more such credit extensions through a mortgage broker.
    (j) Dwelling means:
    (1) A residential structure that contains one to four units, whether 
or not that structure is attached to real property. The term includes an 
individual condominium unit, cooperative unit,

[[Page 282]]

mobile home, and trailer, if it is used as a residence.
    (2) A consumer can have only one ``principal'' dwelling at a time. 
Thus, a vacation or other second home would not be a principal dwelling. 
However, if a consumer buys or builds a new dwelling that will become 
the consumer's principal dwelling within a year or upon the completion 
of construction, the new dwelling is considered the principal dwelling 
for purposes of this section.
    (k) Federally regulated AMC means an AMC that is owned and 
controlled by an insured depository institution, as defined in 12 U.S.C. 
1813 and regulated by the Office of the Comptroller of the Currency, the 
Board of Governors of the Federal Reserve System, or the Federal Deposit 
Insurance Corporation.
    (l) Federally related transaction regulations means regulations 
established by the Office of the Comptroller of the Currency, the Board 
of Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, or the National Credit Union Administration, 
pursuant to sections 1112, 1113, and 1114 of FIRREA Title XI, 12 U.S.C. 
3341-3343.
    (m) Person means a natural person or an organization, including a 
corporation, partnership, proprietorship, association, cooperative, 
estate, trust, or government unit.
    (n) Secondary mortgage market participant means a guarantor or 
insurer of mortgage-backed securities, or an underwriter or issuer of 
mortgage-backed securities. Secondary mortgage market participant only 
includes an individual investor in a mortgage-backed security if that 
investor also serves in the capacity of a guarantor, insurer, 
underwriter, or issuer for the mortgage-backed security.
    (o) States mean the 50 States and the District of Columbia and the 
territories of Guam, Mariana Islands, Puerto Rico, and the U.S. Virgin 
Islands.
    (p) Uniform Standards of Professional Appraisal Practice (USPAP) 
means the appraisal standards promulgated by the Appraisal Standards 
Board of the Appraisal Foundation.



Sec. 225.192  Appraiser panel--annual size calculation.

    For purposes of determining whether, within a 12-month period, an 
AMC oversees an appraiser panel of more than 15 State-certified or 
State-licensed appraisers in a State or 25 or more State-certified or 
State-licensed appraisers in two or more States pursuant to Sec. 
225.191(d)(1)(iii)-
    (a) An appraiser is deemed part of the AMC's appraiser panel as of 
the earliest date on which the AMC:
    (1) Accepts the appraiser for the AMC's consideration for future 
appraisal assignments in covered transactions or for secondary mortgage 
market participants in connection with covered transactions; or
    (2) Engages the appraiser to perform one or more appraisals on 
behalf of a creditor for a covered transaction or secondary mortgage 
market participant in connection with a covered transaction.
    (b) An appraiser who is deemed part of the AMC's appraiser panel 
pursuant to paragraph (a) of this section is deemed to remain on the 
panel until the date on which the AMC:
    (1) Sends written notice to the appraiser removing the appraiser 
from the appraiser panel, with an explanation of its action; or
    (2) Receives written notice from the appraiser asking to be removed 
from the appraiser panel or notice of the death or incapacity of the 
appraiser.
    (c) If an appraiser is removed from an AMC's appraiser panel 
pursuant to paragraph (b) of this section, but the AMC subsequently 
accepts the appraiser for consideration for future assignments or 
engages the appraiser at any time during the twelve months after the 
AMC's removal, the removal will be deemed not to have occurred, and the 
appraiser will be deemed to have been part of the AMC's appraiser panel 
without interruption.
    (d) The period for purposes of counting appraisers on an AMC's 
appraiser panel may be the calendar year or a 12-month period 
established by law or rule of each State with which the AMC is required 
to register.

[[Page 283]]



Sec. 225.193  Appraisal management company registration.

    Each State electing to register AMCs pursuant to paragraph (b)(1) of 
this section must:
    (a) Establish and maintain within the State appraiser certifying and 
licensing agency a licensing program that is subject to the limitations 
set forth in Sec. 225.194 and with the legal authority and mechanisms 
to:
    (1) Review and approve or deny an AMC's application for initial 
registration;
    (2) Review and renew or review and deny an AMC's registration 
periodically;
    (3) Examine the books and records of an AMC operating in the State 
and require the AMC to submit reports, information, and documents;
    (4) Verify that the appraisers on the AMC's appraiser panel hold 
valid State certifications or licenses, as applicable;
    (5) Conduct investigations of AMCs to assess potential violations of 
applicable appraisal-related laws, regulations, or orders;
    (6) Discipline, suspend, terminate, or deny renewal of the 
registration of an AMC that violates applicable appraisal-related laws, 
regulations, or orders; and
    (7) Report an AMC's violation of applicable appraisal-related laws, 
regulations, or orders, as well as disciplinary and enforcement actions 
and other relevant information about an AMC's operations, to the 
Appraisal Subcommittee.
    (b) Impose requirements on AMCs that are not owned and controlled by 
an insured depository institution and not regulated by a Federal 
financial institutions regulatory agency to:
    (1) Register with and be subject to supervision by the State 
appraiser certifying and licensing agency;
    (2) Engage only State-certified or State-licensed appraisers for 
Federally related transactions in conformity with any Federally related 
transaction regulations;
    (3) Establish and comply with processes and controls reasonably 
designed to ensure that the AMC, in engaging an appraiser, selects an 
appraiser who is independent of the transaction and who has the 
requisite education, expertise, and experience necessary to competently 
complete the appraisal assignment for the particular market and property 
type;
    (4) Direct the appraiser to perform the assignment in accordance 
with USPAP; and
    (5) Establish and comply with processes and controls reasonably 
designed to ensure that the AMC conducts its appraisal management 
services in accordance with the requirements of section 129E(a)-(i) of 
the Truth in Lending Act, 15 U.S.C. 1639e(a)-(i), and regulations 
thereunder.



Sec. 225.194  Ownership limitations for State-registered appraisal 
management companies.

    (a) Appraiser certification or licensing of owners. (1) An AMC 
subject to State registration pursuant to Sec. 225.193 shall not be 
registered by a State or included on the AMC National Registry if such 
AMC, in whole or in part, directly or indirectly, is owned by any person 
who has had an appraiser license or certificate refused, denied, 
cancelled, surrendered in lieu of revocation, or revoked in any State 
for a substantive cause, as determined by the appropriate State 
appraiser certifying and licensing agency.
    (2) An AMC subject to State registration pursuant to Sec. 225.193 
is not barred by paragraph (a)(1) of this section from being registered 
by a State or included on the AMC National Registry if the license or 
certificate of the appraiser with an ownership interest was not revoked 
for a substantive cause and has been reinstated by the State or States 
in which the appraiser was licensed or certified.
    (b) Good moral character of owners. An AMC shall not be registered 
by a State if any person that owns more than 10 percent of the AMC--
    (1) Is determined by the State appraiser certifying and licensing 
agency not to have good moral character; or
    (2) Fails to submit to a background investigation carried out by the 
State appraiser certifying and licensing agency.

[[Page 284]]



Sec. 225.195  Requirements for Federally regulated appraisal 
management companies.

    (a) Requirements in providing services. To provide appraisal 
management services for a creditor or secondary mortgage market 
participant relating to a covered transaction, a Federally regulated AMC 
must comply with the requirements in Sec. 225.193(b)(2) through (5).
    (b) Ownership limitations. (1) A Federally regulated AMC shall not 
be included on the AMC National Registry if such AMC, in whole or in 
part, directly or indirectly, is owned by any person who has had an 
appraiser license or certificate refused, denied, cancelled, surrendered 
in lieu of revocation, or revoked in any State for a substantive cause, 
as determined by the ASC.
    (2) A Federally regulated AMC is not barred by this paragraph (b) 
from being included on the AMC National Registry if the license or 
certificate of the appraiser with an ownership interest was not revoked 
for a substantive cause and has been reinstated by the State or States 
in which the appraiser was licensed or certified.
    (c) Reporting information for the AMC National Registry. A Federally 
regulated AMC must report to the State or States in which it operates 
the information required to be submitted by the State to the Appraisal 
Subcommittee pursuant to the Appraisal Subcommittee's policies regarding 
the determination of the AMC National Registry fee, including but not 
necessarily limited to the collection of information related to the 
limitations set forth in this section.



Sec. 225.196  Information to be presented to the Appraisal Subcommittee
by participating States.

    Each State electing to register AMCs for purposes of permitting AMCs 
to provide appraisal management services relating to covered 
transactions in the State must submit to the Appraisal Subcommittee the 
information required to be submitted by Appraisal Subcommittee 
regulations or guidance concerning AMCs that operate in the State.



   Sec. Appendix A to Part 225--Capital Adequacy Guidelines for Bank 
                  Holding Companies: Risk-Based Measure

                               I. Overview

    The Board of Governors of the Federal Reserve System has adopted a 
risk-based capital measure to assist in the assessment of the capital 
adequacy of bank holding companies (banking organizations). \1\ The 
principal objectives of this measure are to: (i) Make regulatory capital 
requirements more sensitive to differences in risk profiles among 
banking organizations; (ii) factor off-balance sheet exposures into the 
assessment of capital adequacy; (iii) minimize disincentives to holding 
liquid, low-risk assets; and (iv) achieve greater consistency in the 
evaluation of the capital adequacy of major banking organizations 
throughout the world. \2\
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    \1\ Supervisory ratios that relate capital to total assets for bank 
holding companies are outlined in appendices B and D of this part.
    \2\ The risk-based capital measure is based upon a framework 
developed jointly by supervisory authorities from the countries 
represented on the Basle Committee on Banking Regulations and 
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the 
Group of Ten Central Bank Governors. The framework is described in a 
paper prepared by the BSC entitled ``International Convergence of 
Capital Measurement,'' July 1988.
---------------------------------------------------------------------------

    The risk-based capital guidelines include both a definition of 
capital and a framework for calculating weighted risk assets by 
assigning assets and off-balance sheet items to broad risk categories. 
An institution's risk-based capital ratio is calculated by dividing its 
qualifying capital (the numerator of the ratio) by its weighted risk 
assets (the denominator). \3\ The definition of qualifying capital is 
outlined below in section II, and the procedures for calculating 
weighted risk assets are discussed in section III. Attachment I 
illustrates a sample calculation of weighted risk assets and the risk-
based capital ratio.
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    \3\ Banking organizations will initially be expected to utilize 
period-end amounts in calculating their risk-based capital ratios. When 
necessary and appropriate, ratios based on average balances may also be 
calculated on a case-by-case basis. Moreover, to the extent banking 
organizations have data on average balances that can be used to 
calculate risk-based ratios, the Federal Reserve will take such data 
into account.
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    In addition, when certain organizations that engage in trading 
activities calculate their risk-based capital ratio under this appendix 
A, they must also refer to appendix E of this part, which incorporates 
capital

[[Page 285]]

charges for certain market risks into the risk-based capital ratio. When 
calculating their risk-based capital ratio under this appendix A, such 
organizations are required to refer to appendix E of this part for 
supplemental rules to determine qualifying and excess capital, calculate 
risk-weighted assets, calculate market risk equivalent assets, and 
calculate risk-based capital ratios adjusted for market risk.
    The risk-based capital guidelines also establish a schedule for 
achieving a minimum supervisory standard for the ratio of qualifying 
capital to weighted risk assets and provide for transitional 
arrangements during a phase-in period to facilitate adoption and 
implementation of the measure at the end of 1992. These interim 
standards and transitional arrangements are set forth in section IV.
    The risk-based guidelines apply on a consolidated basis to any bank 
holding company with consolidated assets of $500 million or more. The 
risk-based guidelines also apply on a consolidated basis to any bank 
holding company with consolidated assets of less than $500 million if 
the holding company (i) is engaged in significant nonbanking activities 
either directly or through a nonbank subsidiary; (ii) conducts 
significant off-balance sheet activities (including securitization and 
asset management or administration) either directly or through a nonbank 
subsidiary; or (iii) has a material amount of debt or equity securities 
outstanding (other than trust preferred securities) that are registered 
with the Securities and Exchange Commission (SEC). The Federal Reserve 
may apply the risk-based guidelines at its discretion to any bank 
holding company, regardless of asset size, if such action is warranted 
for supervisory purposes. \4\
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    \4\ [Reserved]
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    The risk-based guidelines are to be used in the inspection and 
supervisory process as well as in the analysis of applications acted 
upon by the Federal Reserve. Thus, in considering an application filed 
by a bank holding company, the Federal Reserve will take into account 
the organization's risk-based capital ratio, the reasonableness of its 
capital plans, and the degree of progress it has demonstrated toward 
meeting the interim and final risk-based capital standards.
    The risk-based capital ratio focuses principally on broad categories 
of credit risk, although the framework for assigning assets and off-
balance sheet items to risk categories does incorporate elements of 
transfer risk, as well as limited instances of interest rate and market 
risk. The risk-based ratio does not, however, incorporate other factors 
that can affect an organization's financial condition. These factors 
include overall interest rate exposure; liquidity, funding and market 
risks; the quality and level of earnings; investment or loan portfolio 
concentrations; the quality of loans and investments; the effectiveness 
of loan and investment policies; and management's ability to monitor and 
control financial and operating risks.
    In addition to evaluating capital ratios, an overall assessment of 
capital adequacy must take account of these other factors, including, in 
particular, the level and severity of problem and classified assets. For 
this reason, the final supervisory judgment on an organization's capital 
adequacy may differ significantly from conclusions that might be drawn 
solely from the level of the organization's risk-based capital ratio.
    The risk-based capital guidelines establish minimum ratios of 
capital to weighted risk assets. In light of the considerations just 
discussed, banking organizations generally are expected to operate well 
above the minimum risk-based ratios. In particular, banking 
organizations contemplating significant expansion proposals are expected 
to maintain strong capital levels substantially above the minimum ratios 
and should not allow significant diminution of financial strength below 
these strong levels to fund their expansion plans. Institutions with 
high or inordinate levels of risk are also expected to operate above 
minimum capital standards. In all cases, institutions should hold 
capital commensurate with the level and nature of the risks to which 
they are exposed. Banking organizations that do not meet the minimum 
risk-based standard, or that are otherwise considered to be inadequately 
capitalized, are expected to develop and implement plans acceptable to 
the Federal Reserve for achieving adequate levels of capital within a 
reasonable period of time.
    The Board will monitor the implementation and effect of these 
guidelines in relation to domestic and international developments in the 
banking industry. When necessary and appropriate, the Board will 
consider the need to modify the guidelines in light of any significant 
changes in the economy, financial markets, banking practices, or other 
relevant factors.
    The Federal Reserve may determine that the regulatory capital 
treatment for a banking organization's exposure or other relationship to 
an entity not consolidated on the banking organization's balance sheet 
is not commensurate with the actual risk relationship of the banking 
organization to the entity. In making this determination, the Federal 
Reserve may require the banking organization to treat the entity as if 
it were consolidated onto the balance sheet of the banking organization 
for risk-based capital purposes and calculate the appropriate risk-based 
capital ratios accordingly, all as specified by the Federal Reserve.

[[Page 286]]

  II. Definition of Qualifying Capital for the Risk Based Capital Ratio

    (i) A banking organization's qualifying total capital consists of 
two types of capital components: ``core capital elements'' (tier 1 
capital elements) and ``supplementary capital elements'' (tier 2 capital 
elements). These capital elements and the various limits, restrictions, 
and deductions to which they are subject, are discussed below. To 
qualify as an element of tier 1 or tier 2 capital, an instrument must be 
fully paid up and effectively unsecured. Accordingly, if a banking 
organization has purchased, or has directly or indirectly funded the 
purchase of, its own capital instrument, that instrument generally is 
disqualified from inclusion in regulatory capital. A qualifying tier 1 
or tier 2 capital instrument must be subordinated to all senior 
indebtedness of the organization. If issued by a bank, it also must be 
subordinated to claims of depositors. In addition, the instrument must 
not contain or be covered by any covenants, terms, or restrictions that 
are inconsistent with safe and sound banking practices.
    (ii) On a case-by-case basis, the Federal Reserve may determine 
whether, and to what extent, any instrument that does not fit wholly 
within the terms of a capital element set forth below, or that does not 
have the characteristics or the ability to absorb losses commensurate 
with the capital treatment specified below, will qualify as an element 
of tier 1 or tier 2 capital. In making such a determination, the Federal 
Reserve will consider the similarity of the instrument to instruments 
explicitly addressed in the guidelines; the ability of the instrument to 
absorb losses, particularly while the organization operates as a going 
concern; the maturity and redemption features of the instrument; and 
other relevant terms and factors.
    (iii) The redemption of capital instruments before stated maturity 
could have a significant impact on an organization's overall capital 
structure. Consequently, an organization should consult with the Federal 
Reserve before redeeming any equity or other capital instrument included 
in tier 1 or tier 2 capital prior to stated maturity if such redemption 
could have a material effect on the level or composition of the 
organization's capital base. Such consultation generally would not be 
necessary when the instrument is to be redeemed with the proceeds of, or 
replaced by, a like amount of a capital instrument that is of equal or 
higher quality with regard to terms and maturity and the Federal Reserve 
considers the organization's capital position to be fully sufficient.

         A. The Definition and Components of Qualifying Capital

    1. Tier 1 capital. Tier 1 capital generally is defined as the sum of 
core capital elements less any amounts of goodwill, other intangible 
assets, interest-only strips receivables, deferred tax assets, 
nonfinancial equity investments, and other items that are required to be 
deducted in accordance with section II.B. of this appendix. Tier 1 
capital must represent at least 50 percent of qualifying total capital.
    a. Core capital elements (tier 1 capital elements). The elements 
qualifying for inclusion in the tier 1 component of a banking 
organization's qualifying total capital are:
    i. Qualifying common stockholders' equity;
    ii. Qualifying noncumulative perpetual preferred stock, including 
related surplus, and senior perpetual preferred stock issued to the 
United States Department of the Treasury (Treasury) under the Troubled 
Asset Relief Program (TARP), established by the Emergency Economic 
Stabilization Act of 2008 (EESA), Division A of Public Law 110-343 
(which for purposes of this appendix shall be considered qualifying 
noncumulative perpetual preferred stock), including related surplus;
    iii. Minority interest related to qualifying common or noncumulative 
perpetual preferred stock directly issued by a consolidated U.S. 
depository institution or foreign bank subsidiary (Class A minority 
interest); and
    iv. Restricted core capital elements. The aggregate of these items 
is limited within tier 1 capital as set forth in section II.A.1.b. of 
this appendix. These elements are defined to include:
    (1) Qualifying cumulative perpetual preferred stock (including 
related surplus);
    (2) Minority interest related to qualifying cumulative perpetual 
preferred stock directly issued by a consolidated U.S. depository 
institution or foreign bank subsidiary (Class B minority interest);
    (3) Minority interest related to qualifying common stockholders' 
equity or perpetual preferred stock issued by a consolidated subsidiary 
that is neither a U.S. depository institution nor a foreign bank (Class 
C minority interest);
    (4) Qualifying trust preferred securities; and
    (5) Subordinated debentures issued prior to October 4, 2010, to the 
Treasury under the TARP (TARP Subordinated Securities) established by 
the EESA by a bank holding company that has made a valid election to be 
taxed under Subchapter S of Chapter 1 of the U.S. Internal Revenue Code 
(S-Corp BHC) or by a bank holding company organized in mutual form 
(Mutual BHC).
    b. Limits on restricted core capital elements--i. Limits. (1) The 
aggregate amount of restricted core capital elements that may be 
included in the tier 1 capital of a banking organization must not exceed 
25 percent of the sum of all core capital elements, including

[[Page 287]]

restricted core capital elements, net of goodwill less any associated 
deferred tax liability. Stated differently, the aggregate amount of 
restricted core capital elements is limited to one-third of the sum of 
core capital elements, excluding restricted core capital elements, net 
of goodwill less any associated deferred tax liability. Notwithstanding 
the foregoing, the full amount of TARP Subordinated Securities issued by 
an S-Corp BHC or Mutual BHC may be included in its tier 1 capital, 
provided that the banking organization must include the TARP 
Subordinated Securities in restricted core capital elements for the 
purposes of determining the aggregate amount of other restricted core 
capital elements that may be included in tier 1 capital in accordance 
with this section.
    (2) In addition, the aggregate amount of restricted core capital 
elements (other than qualifying mandatory convertible preferred 
securities \5\) that may be included in the tier 1 capital of an 
internationally active banking organization \6\ must not exceed 15 
percent of the sum of all core capital elements, including restricted 
core capital elements, net of goodwill less any associated deferred tax 
liability.
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    \5\ Qualifying mandatory convertible preferred securities generally 
consist of the joint issuance by a bank holding company to investors of 
trust preferred securities and a forward purchase contract, which the 
investors fully collateralize with the securities, that obligates the 
investors to purchase a fixed amount of the bank holding company's 
common stock, generally in three years. A bank holding company wishing 
to issue mandatorily convertible preferred securities and include them 
in tier 1 capital must consult with the Federal Reserve prior to 
issuance to ensure that the securities' terms are consistent with tier 1 
capital treatment.
    \6\ For this purpose, an internationally active banking organization 
is a banking organization that (1) as of its most recent year-end FR Y-
9C reports total consolidated assets equal to $250 billion or more or 
(2) on a consolidated basis, reports total on-balance-sheet foreign 
exposure of $10 billion or more on its filings of the most recent year-
end FFIEC 009 Country Exposure Report.
---------------------------------------------------------------------------

    (3) Amounts of restricted core capital elements in excess of this 
limit generally may be included in tier 2 capital. The excess amounts of 
restricted core capital elements that are in the form of Class C 
minority interest and qualifying trust preferred securities are subject 
to further limitation within tier 2 capital in accordance with section 
II.A.2.d.iv. of this appendix. A banking organization may attribute 
excess amounts of restricted core capital elements first to any 
qualifying cumulative perpetual preferred stock or to Class B minority 
interest, and second to qualifying trust preferred securities or to 
Class C minority interest, which are subject to a tier 2 sublimit.
    ii. Transition.
    (1) The quantitative limits for restricted core capital elements set 
forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix become 
effective on March 31, 2011. Prior to that time, a banking organization 
with restricted core capital elements in amounts that cause it to exceed 
these limits must consult with the Federal Reserve on a plan for 
ensuring that the banking organization is not unduly relying on these 
elements in its capital base and, where appropriate, for reducing such 
reliance to ensure that the organization complies with these limits as 
of March 31, 2011.
    (2) Until March 31, 2011, the aggregate amount of qualifying 
cumulative perpetual preferred stock (including related surplus) and 
qualifying trust preferred securities that a banking organization may 
include in tier 1 capital is limited to 25 percent of the sum of the 
following core capital elements: qualifying common stockholders' equity, 
Qualifying noncumulative and cumulative perpetual preferred stock 
(including related surplus), qualifying minority interest in the equity 
accounts of consolidated subsidiaries, and qualifying trust preferred 
securities. Amounts of qualifying cumulative perpetual preferred stock 
(including related surplus) and qualifying trust preferred securities in 
excess of this limit may be included in tier 2 capital.
    (3) Until March 31, 2011, internationally active banking 
organizations generally are expected to limit the amount of qualifying 
cumulative perpetual preferred stock (including related surplus) and 
qualifying trust preferred securities included in tier 1 capital to 15 
percent of the sum of core capital elements set forth in section 
II.A.1.b.ii.2. of this appendix.
    c. Definitions and requirements for core capital elements--i. 
Qualifying common stockholders' equity.
    (1) Definition. Qualifying common stockholders' equity is limited to 
common stock; related surplus; and retained earnings, including capital 
reserves and adjustments for the cumulative effect of foreign currency 
translation, net of any treasury stock, less net unrealized holding 
losses on available-for-sale equity securities with readily determinable 
fair values. For this purpose, net unrealized holding gains on such 
equity securities and net unrealized holding gains (losses) on 
available-for-sale debt securities are not included in qualifying common 
stockholders' equity.
    (2) Restrictions on terms and features. A capital instrument that 
has a stated maturity date or that has a preference with regard to 
liquidation or the payment of dividends is

[[Page 288]]

not deemed to be a component of qualifying common stockholders' equity, 
regardless of whether or not it is called common equity. Terms or 
features that grant other preferences also may call into question 
whether the capital instrument would be deemed to be qualifying common 
stockholders' equity. Features that require, or provide significant 
incentives for, the issuer to redeem the instrument for cash or cash 
equivalents will render the instrument ineligible as a component of 
qualifying common stockholders' equity.
    (3) Reliance on voting common stockholders' equity. Although section 
II.A.1. of this appendix allows for the inclusion of elements other than 
common stockholders' equity within tier 1 capital, voting common 
stockholders' equity, which is the most desirable capital element from a 
supervisory standpoint, generally should be the dominant element within 
tier 1 capital. Thus, banking organizations should avoid over-reliance 
on preferred stock and nonvoting elements within tier 1 capital. Such 
nonvoting elements can include portions of common stockholders' equity 
where, for example, a banking organization has a class of nonvoting 
common equity, or a class of voting common equity that has substantially 
fewer voting rights per share than another class of voting common 
equity. Where a banking organization relies excessively on nonvoting 
elements within tier 1 capital, the Federal Reserve generally will 
require the banking organization to allocate a portion of the nonvoting 
elements to tier 2 capital.
    ii. Qualifying perpetual preferred stock.
    (1) Qualifying requirements. Perpetual preferred stock qualifying 
for inclusion in tier 1 capital has no maturity date and cannot be 
redeemed at the option of the holder. Perpetual preferred stock will 
qualify for inclusion in tier 1 capital only if it can absorb losses 
while the issuer operates as a going concern.
    (2) Restrictions on terms and features. Perpetual preferred stock 
included in tier 1 capital may not have any provisions restricting the 
banking organization's ability or legal right to defer or waive 
dividends, other than provisions requiring prior or concurrent deferral 
or waiver of payments on more junior instruments, which the Federal 
Reserve generally expects in such instruments consistent with the notion 
that the most junior capital elements should absorb losses first. 
Dividend deferrals or waivers for preferred stock, which the Federal 
Reserve expects will occur either voluntarily or at its direction when 
an organization is in a weakened condition, must not be subject to 
arrangements that would diminish the ability of the deferral to shore up 
the banking organization's resources. Any perpetual preferred stock with 
a feature permitting redemption at the option of the issuer may qualify 
as tier 1 capital only if the redemption is subject to prior approval of 
the Federal Reserve. Features that require, or create significant 
incentives for the issuer to redeem the instrument for cash or cash 
equivalents will render the instrument ineligible for inclusion in tier 
1 capital. For example, perpetual preferred stock that has a credit-
sensitive dividend feature--that is, a dividend rate that is reset 
periodically based, in whole or in part, on the banking organization's 
current credit standing--generally does not qualify for inclusion in 
tier 1 capital. \7\ Similarly, perpetual preferred stock that has a 
dividend rate step-up or a market value conversion feature--that is, a 
feature whereby the holder must or can convert the preferred stock into 
common stock at the market price prevailing at the time of conversion--
generally does not qualify for inclusion in tier 1 capital. \8\
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    \7\ Traditional floating-rate or adjustable-rate perpetual preferred 
stock (that is, perpetual preferred stock in which the dividend rate is 
not affected by the issuer's credit standing or financial condition but 
is adjusted periodically in relation to an independent index based 
solely on general market interest rates), however, generally qualifies 
for inclusion in tier 1 capital provided all other requirements are met.
    \8\ Notwithstanding this provision, senior perpetual preferred stock 
issued to the Treasury under the TARP, established by the EESA, may be 
included in tier 1 capital. In addition, traditional convertible 
perpetual preferred stock, which the holder must or can convert into a 
fixed number of common shares at a preset price, generally qualifies for 
inclusion in tier 1 capital provided all other requirements are met.
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    (3) Noncumulative and cumulative features. Perpetual preferred stock 
that is noncumulative generally may not permit the accumulation or 
payment of unpaid dividends in any form, including in the form of common 
stock. Perpetual preferred stock that provides for the accumulation or 
future payment of unpaid dividends is deemed to be cumulative, 
regardless of whether or not it is called noncumulative.
    iii. Qualifying minority interest. Minority interest in the common 
and preferred stockholders' equity accounts of a consolidated subsidiary 
(minority interest) represents stockholders' equity associated with 
common or preferred equity instruments issued by a banking 
organization's consolidated subsidiary that are held by investors other 
than the banking organization. Minority interest is included in tier 1 
capital because, as a general rule, it represents equity that is freely 
available to absorb losses in the issuing subsidiary. Nonetheless, 
minority interest typically is not available to absorb losses in the 
banking organization as a

[[Page 289]]

whole, a feature that is a particular concern when the minority interest 
is issued by a subsidiary that is neither a U.S. depository institution 
nor a foreign bank. For this reason, this appendix distinguishes among 
three types of qualifying minority interest. Class A minority interest 
is minority interest related to qualifying common and noncumulative 
perpetual preferred equity instruments issued directly (that is, not 
through a subsidiary) by a consolidated U.S. depository institution \9\ 
or foreign bank \10\ subsidiary of a banking organization. Class A 
minority interest is not subject to a formal limitation within tier 1 
capital. Class B minority interest is minority interest related to 
qualifying cumulative perpetual preferred equity instruments issued 
directly by a consolidated U.S. depository institution or foreign bank 
subsidiary of a banking organization. Class B minority interest is a 
restricted core capital element subject to the limitations set forth in 
section II.A.1.b.i. of this appendix, but is not subject to a tier 2 
sub-limit. Class C minority interest is minority interest related to 
qualifying common or perpetual preferred stock issued by a banking 
organization's consolidated subsidiary that is neither a U.S. depository 
institution nor a foreign bank. Class C minority interest is eligible 
for inclusion in tier 1 capital as a restricted core capital element and 
is subject to the limitations set forth in sections II.A.1.b.i. and 
II.A.2.d.iv. of this appendix. Minority interest in small business 
investment companies, investment funds that hold nonfinancial equity 
investments (as defined in section II.B.5.b. of this appendix), and 
subsidiaries engaged in nonfinancial activities are not included in the 
banking organization's tier 1 or total capital if the banking 
organization's interest in the company or fund is held under one of the 
legal authorities listed in section II.B.5.b. of this appendix.
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    \9\ U.S. depository institutions are defined to include branches 
(foreign and domestic) of federally insured banks and depository 
institutions chartered and headquartered in the 50 states of the United 
States, the District of Columbia, Puerto Rico, and U.S. territories and 
possessions. The definition encompasses banks, mutual or stock savings 
banks, savings or building and loan associations, cooperative banks, 
credit unions, and international banking facilities of domestic banks.
    \10\ For this purpose, a foreign bank is defined as an institution 
that engages in the business of banking; is recognized as a bank by the 
bank supervisory or monetary authorities of the country of its 
organization or principal banking operations; receives deposits to a 
substantial extent in the regular course of business; and has the power 
to accept demand deposits.
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    iv. Qualifying trust preferred securities.
    (1) A banking organization that wishes to issue trust preferred 
securities and include them in tier 1 capital must first consult with 
the Federal Reserve. Trust preferred securities are defined as undated 
preferred securities issued by a trust or similar entity sponsored (but 
generally not consolidated) by a banking organization that is the sole 
common equity holder of the trust. Qualifying trust preferred securities 
must allow for dividends to be deferred for at least twenty consecutive 
quarters without an event of default, unless an event of default leading 
to acceleration permitted under section II.A.1.c.iv.(2) has occurred. 
The required notification period for such deferral must be reasonably 
short, no more than 15 business days prior to the payment date. 
Qualifying trust preferred securities are otherwise subject to the same 
restrictions on terms and features as qualifying perpetual preferred 
stock under section II.A.1.c.ii.(2) of this appendix.
    (2) The sole asset of the trust must be a junior subordinated note 
issued by the sponsoring banking organization that has a minimum 
maturity of thirty years, is subordinated with regard to both 
liquidation and priority of periodic payments to all senior and 
subordinated debt of the sponsoring banking organization (other than 
other junior subordinated notes underlying trust preferred securities). 
Otherwise the terms of a junior subordinated note must mirror those of 
the preferred securities issued by the trust. \11\ The note must comply 
with section

[[Page 290]]

II.A.2.d. of this appendix and the Federal Reserve's subordinated debt 
policy statement set forth in 12 CFR 250.166 \12\ except that the note 
may provide for an event of default and the acceleration of principal 
and accrued interest upon (a) nonpayment of interest for 20 or more 
consecutive quarters or (b) termination of the trust without redemption 
of the trust preferred securities, distribution of the notes to 
investors, or assumption of the obligation by a successor to the banking 
organization.
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    \11\ Under generally accepted accounting principles, the trust 
issuing the preferred securities generally is not consolidated on the 
banking organization's balance sheet; rather the underlying subordinated 
note is recorded as a liability on the organization's balance sheet. 
Only the amount of the trust preferred securities issued, which 
generally is equal to the amount of the underlying subordinated note 
less the amount of the sponsoring banking organization's common equity 
investment in the trust (which is recorded as an asset on the banking 
organization's consolidated balance sheet), may be included in tier 1 
capital. Because this calculation method effectively deducts the banking 
organization's common stock investment in the trust in computing the 
numerator of the capital ratio, the common equity investment in the 
trust should be excluded from the calculation of risk-weighted assets in 
accordance with footnote 17 of this appendix. Where a banking 
organization has issued trust preferred securities as part of a pooled 
issuance, the organization generally must not buy back a security issued 
from the pool. Where a banking organization does hold such a security 
(for example, as a result of an acquisition of another banking 
organization), the amount of the trust preferred securities includable 
in regulatory capital must, consistent with section II.(i) of this 
appendix, be reduced by the notional amount of the banking 
organization's investment in the security issued by the pooling entity.
    \12\ Trust preferred securities issued before April 15, 2005, 
generally would be includable in tier 1 capital despite noncompliance 
with sections II.A.1.c.iv. or II.A.2.d. of this appendix or 12 CFR 
250.166 provided the non-complying terms of the instrument (i) have been 
commonly used by banking organizations, (ii) do not provide an 
unreasonably high degree of protection to the holder in circumstances 
other than bankruptcy of the banking organization, and (iii) do not 
effectively allow a holder in due course of the note to stand ahead of 
senior or subordinated debt holders in the event of bankruptcy of the 
banking organization.
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    (3) In the last five years before the maturity of the note, the 
outstanding amount of the associated trust preferred securities is 
excluded from tier 1 capital and included in tier 2 capital, where the 
trust preferred securities are subject to the amortization provisions 
and quantitative restrictions set forth in sections II.A.2.d.iii. and 
iv. of this appendix as if the trust preferred securities were limited-
life preferred stock.
    2. Supplementary capital elements (tier 2 capital elements). The 
tier 2 component of an institution's qualifying capital may consist of 
the following items that are defined as supplementary capital elements:
    (i) Allowance for loan and lease losses (subject to limitations 
discussed below);
    (ii) Perpetual preferred stock and related surplus (subject to 
conditions discussed below);
    (iii) Hybrid capital instruments (as defined below), perpetual debt, 
and mandatory convertible debt securities;
    (iv) Term subordinated debt and intermediate-term preferred stock, 
including related surplus (subject to limitations discussed below);
    (v) Unrealized holding gains on equity securities (subject to 
limitations discussed in section II.A.2.e. of this appendix).
    The maximum amount of tier 2 capital that may be included in an 
institution's qualifying total capital is limited to 100 percent of tier 
1 capital (net of goodwill, other intangible assets, interest-only 
strips receivables and nonfinancial equity investments that are required 
to be deducted in accordance with section II.B. of this appendix A).
    The elements of supplementary capital are discussed in greater 
detail below.
    a. Allowance for loan and lease losses. Allowances for loan and 
lease losses are reserves that have been established through a charge 
against earnings to absorb future losses on loans or lease financing 
receivables. Allowances for loan and lease losses exclude ``allocated 
transfer risk reserves,'' \13\ and reserves created against identified 
losses.
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    \13\ Allocated transfer risk reserves are reserves that have been 
established in accordance with Section 905(a) of the International 
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain 
assets whose value U.S. supervisory authorities have found to be 
significantly impaired by protracted transfer risk problems.
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    During the transition period, the risk-based capital guidelines 
provide for reducing the amount of this allowance that may be included 
in an institution's total capital. Initially, it is unlimited. However, 
by year-end 1990, the amount of the allowance for loan and lease losses 
that will qualify as capital will be limited to 1.5 percent of an 
institution's weighted risk assets. By the end of the transition period, 
the amount of the allowance qualifying for inclusion in Tier 2 capital 
may not exceed 1.25 percent of weighted risk assets. \14\
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    \14\ The amount of the allowance for loan and lease losses that may 
be included in Tier 2 capital is based on a percentage of gross weighted 
risk assets. A banking organization may deduct reserves for loan and 
lease losses in excess of the amount permitted to be included in Tier 2 
capital, as well as allocated transfer risk reserves, from the sum of 
gross weighted risk assets and use the resulting net sum of weighted 
risk assets in computing the denominator of the risk-based capital 
ratio.
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    b. Perpetual preferred stock. Perpetual preferred stock (and related 
surplus) that meets the requirements set forth in section 
II.A.1.c.ii.(1) of this appendix is eligible for inclusion in tier 2 
capital without limit. \15\
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    \15\ Long-term preferred stock with an original maturity of 20 years 
or more (including related surplus) will also qualify in this category 
as an element of tier 2 capital. If the holder of such an instrument has 
the right to require the issuer to redeem, repay, or repurchase the 
instrument prior to the original stated maturity, maturity would be 
defined for risk-based capital purposes as the earliest possible date on 
which the holder can put the instrument back to the issuing banking 
organization. In the last five years before the maturity of the stock, 
it must be treated as limited-life preferred stock, subject to the 
amortization provisions and quantitative restrictions set forth in 
sections II.A.2.d.iii. and iv. of this appendix.

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[[Page 291]]

    c. Hybrid capital instruments, perpetual debt, and mandatory 
convertible debt securities. Hybrid capital instruments include 
instruments that are essentially permanent in nature and that have 
certain characteristics of both equity and debt. Such instruments may be 
included in Tier 2 without limit. The general criteria hybrid capital 
instruments must meet in order to qualify for inclusion in Tier 2 
capital are listed below:
    (1) The instrument must be unsecured; fully paid-up and subordinated 
to general creditors. If issued by a bank, it must also be subordinated 
to claims or depositors.
    (2) The instrument must not be redeemable at the option of the 
holder prior to maturity, except with the prior approval of the Federal 
Reserve. (Consistent with the Board's criteria for perpetual debt and 
mandatory convertible securities, this requirement implies that holders 
of such instruments may not accelerate the payment of principal except 
in the event of bankruptcy, insolvency, or reorganization.)
    (3) The instrument must be available to participate in losses while 
the issuer is operating as a going concern. (Term subordinated debt 
would not meet this requirement.) To satisfy this requirement, the 
instrument must convert to common or perpetual preferred stock in the 
event that the accumulated losses exceed the sum of the retained 
earnings and capital surplus accounts of the issuer.
    (4) The instrument must provide the option for the issuer to defer 
interest payments if: a) the issuer does not report a profit in the 
preceding annual period (defined as combined profits for the most recent 
four quarters), and b) the issuer eliminates cash dividends on common 
and preferred stock.
    Perpetual debt and mandatory convertible debt securities that meet 
the criteria set forth in 12 CFR part 225, appendix B, also qualify as 
unlimited elements of Tier 2 capital for bank holding companies.
    d. Subordinated debt and intermediate-term preferred stock--i. Five-
year minimum maturity. Subordinated debt and intermediate-term preferred 
stock must have an original weighted average maturity of at least five 
years to qualify as tier 2 capital. If the holder has the option to 
require the issuer to redeem, repay, or repurchase the instrument prior 
to the original stated maturity, maturity would be defined, for risk-
based capital purposes, as the earliest possible date on which the 
holder can put the instrument back to the issuing banking organization.
    ii. Other restrictions on subordinated debt. Subordinated debt 
included in tier 2 capital must comply with the Federal Reserve's 
subordinated debt policy statement set forth in 12 CFR 250.166. \16\ 
Accordingly, such subordinated debt must meet the following 
requirements:
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    \16\ The subordinated debt policy statement set forth in 12 CFR 
250.166 notes that certain terms found in subordinated debt may provide 
protection to investors without adversely affecting the overall benefits 
of the instrument to the issuing banking organization and, thus, would 
be acceptable for subordinated debt included in capital. For example, a 
provision that prohibits a bank holding company from merging, 
consolidating, or selling substantially all of its assets unless the new 
entity redeems or assumes the subordinated debt or that designates the 
failure to pay principal and interest on a timely basis as an event of 
default would be acceptable, so long as the occurrence of such events 
does not allow the debt holders to accelerate the payment of principal 
or interest on the debt.
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    (1) The subordinated debt must be unsecured.
    (2) The subordinated debt must clearly state on its face that it is 
not a deposit and is not insured by a Federal agency.
    (3) The subordinated debt must not have credit-sensitive features or 
other provisions that are inconsistent with safe and sound banking 
practice.
    (4) Subordinated debt issued by a subsidiary U.S. depository 
institution or foreign bank of a bank holding company must be 
subordinated in right of payment to the claims of all the institution's 
general creditors and depositors, and generally must not contain 
provisions permitting debt holders to accelerate payment of principal or 
interest upon the occurrence of any event other than receivership of the 
institution. Subordinated debt issued by a bank holding company or its 
subsidiaries that are neither U.S. depository institutions nor foreign 
banks must be subordinated to all senior indebtedness of the issuer; 
that is, the debt must be subordinated at a minimum to all borrowed 
money, similar obligations arising from off-balance sheet guarantees and 
direct credit substitutes, and obligations associated with derivative 
products such as interest rate and foreign exchange contracts, commodity 
contracts, and similar arrangements. Subordinated debt issued by a bank 
holding company or any of its subsidiaries that is not a

[[Page 292]]

U.S. depository institution or foreign bank must not contain provisions 
permitting debt holders to accelerate the payment of principal or 
interest upon the occurrence of any event other than the bankruptcy of 
the bank holding company or the receivership of a major subsidiary 
depository institution. Thus, a provision permitting acceleration in the 
event that any other affiliate of the bank holding company issuer enters 
into bankruptcy or receivership makes the instrument ineligible for 
inclusion in tier 2 capital.
    iii. Discounting in last five years. As a limited-life capital 
instrument approaches maturity, it begins to take on characteristics of 
a short-term obligation. For this reason, the outstanding amount of term 
subordinated debt and limited-life preferred stock eligible for 
inclusion in tier 2 capital is reduced, or discounted, as these 
instruments approach maturity: one-fifth of the outstanding amount is 
excluded each year during the instrument's last five years before 
maturity. When remaining maturity is less than one year, the instrument 
is excluded from tier 2 capital.
    iv. Limits. The aggregate amount of term subordinated debt 
(excluding mandatory convertible debt) and limited-life preferred stock 
as well as, beginning March 31, 2011, qualifying trust preferred 
securities and Class C minority interest in excess of the limits set 
forth in section II.A.1.b.i. of this appendix that may be included in 
tier 2 capital is limited to 50 percent of tier 1 capital (net of 
goodwill and other intangible assets required to be deducted in 
accordance with section II.B.1.b. of this appendix). Amounts of these 
instruments in excess of this limit, although not included in tier 2 
capital, will be taken into account by the Federal Reserve in its 
overall assessment of a banking organization's funding and financial 
condition.
    e. Unrealized gains on equity securities and unrealized gains 
(losses) on other assets. Up to 45 percent of pretax net unrealized 
holding gains (that is, the excess, if any, of the fair value over 
historical cost) on available-for-sale equity securities with readily 
determinable fair values may be included in supplementary capital. 
However, the Federal Reserve may exclude all or a portion of these 
unrealized gains from Tier 2 capital if the Federal Reserve determines 
that the equity securities are not prudently valued. Unrealized gains 
(losses) on other types of assets, such as bank premises and available-
for-sale debt securities, are not included in supplementary capital, but 
the Federal Reserve may take these unrealized gains (losses) into 
account as additional factors when assessing an institution's overall 
capital adequacy.
    f. Revaluation reserves. i. Such reserves reflect the formal balance 
sheet restatement or revaluation for capital purposes of asset carrying 
values to reflect current market values. The Federal Reserve generally 
has not included unrealized asset appreciation in capital ratio 
calculations, although it has long taken such values into account as a 
separate factor in assessing the overall financial strength of a banking 
organization.
    ii. Consistent with long-standing supervisory practice, the excess 
of market values over book values for assets held by bank holding 
companies will generally not be recognized in supplementary capital or 
in the calculation of the risk-based capital ratio. However, all bank 
holding companies are encouraged to disclose their equivalent of 
premises (building) and security revaluation reserves. The Federal 
Reserve will consider any appreciation, as well as any depreciation, in 
specific asset values as additional considerations in assessing overall 
capital strength and financial condition.

            B. Deductions from Capital and Other Adjustments

    Certain assets are deducted from an organization's capital for the 
purpose of calculating the risk-based capital ratio. \17\ These assets 
include:
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    \17\ Any assets deducted from capital in computing the numerator of 
the ratio are not included in weighted risk assets in computing the 
denominator of the ratio.
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    (i)(a) Goodwill--deducted from the sum of core capital elements.
    (b) Certain identifiable intangible assets, that is, intangible 
assets other than goodwill--deducted from the sum of core capital 
elements in accordance with section II.B.1.b. of this appendix.
    (c) Certain credit-enhancing interest-only strips receivables--
deducted from the sum of core capital elements in accordance with 
sections II.B.1.c. through e. of this appendix.
    (ii) Investments in banking and finance subsidiaries that are not 
consolidated for accounting or supervisory purposes, and investments in 
other designated subsidiaries or associated companies at the discretion 
of the Federal Reserve--deducted from total capital components (as 
described in greater detail below).
    (iii) Reciprocal holdings of capital instruments of banking 
organizations--deducted from total capital components.
    (iv) Deferred tax assets--portions are deducted from the sum of core 
capital elements in accordance with section II.B.4. of this appendix A.
    (v) Nonfinancial equity investments--portions are deducted from the 
sum of core capital elements in accordance with section II.B.5 of this 
appendix A.
    1. Goodwill and other intangible assets--a. Goodwill. Goodwill is an 
intangible asset that

[[Page 293]]

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, an organization's 
capital are readily marketable mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships. The total 
amount of these assets that may be included in capital is subject to the 
limitations described below in sections II.B.1.d. and e. of this 
appendix.
    ii. The treatment of identifiable intangible assets set forth in 
this section generally will be used in the calculation of a bank holding 
company's capital ratios for supervisory and applications purposes. 
However, in making an overall assessment of a bank holding company's 
capital adequacy for applications purposes, the Board may, if it deems 
appropriate, take into account the quality and composition of an 
organization's capital, together with the quality and value of its 
tangible and intangible assets.
    c. Credit-enhancing interest-only strips receivables (I/Os) i. 
Credit-enhancing I/Os are on-balance sheet assets that, in form or in 
substance, represent a contractual right to receive some or all of the 
interest due on transferred assets and expose the bank holding company 
to credit risk directly or indirectly associated with transferred assets 
that exceeds a pro rata share of the bank holding company's claim on the 
assets, whether through subordination provisions or other credit 
enhancement techniques. Such I/Os, whether purchased or retained, 
including other similar ``spread'' assets, may be included in, that is, 
not deducted from, a bank holding company's capital subject to the 
limitations described below in sections II.B.1.d. and e. of this 
appendix.
    ii. Both purchased and retained credit-enhancing I/Os, on a non-tax 
adjusted basis, are included in the total amount that is used for 
purposes of determining whether a bank holding company exceeds the tier 
1 limitation described below in this section. In determining whether an 
I/O or other types of spread assets serve as a credit enhancement, the 
Federal Reserve will look to the economic substance of the transaction.
    d. Fair value limitation. The amount of mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card relationships 
that a bank holding company may include in capital shall be the lesser 
of 90 percent of their fair value, as determined in accordance with 
section II.B.1.f. of this appendix, or 100 percent of their book value, 
as adjusted for capital purposes in accordance with the instructions to 
the Consolidated Financial Statements for Bank Holding Companies (FR Y-
9C Report). The amount of credit-enhancing I/Os that a bank holding 
company may include in capital shall be its fair value. If both the 
application of the limits on mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships and the 
adjustment of the balance sheet amount for these assets would result in 
an amount being deducted from capital, the bank holding company would 
deduct only the greater of the two amounts from its core capital 
elements in determining tier 1 capital.
    e. Tier 1 capital limitation. i. The total amount of mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships that may be included in capital, in the aggregate, 
cannot exceed 100 percent of tier 1 capital. Nonmortgage servicing 
assets and purchased credit card relationships are subject, in the 
aggregate, to a separate sublimit of 25 percent of tier 1 capital. In 
addition, the total amount of credit-enhancing I/Os (both purchased and 
retained) that may be included in capital cannot exceed 25 percent of 
tier 1 capital. \18\
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    \18\ Amounts of servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os (both retained and purchased) 
in excess of these limitations, as well as all other identifiable 
intangible assets, including core deposit intangibles and favorable 
leaseholds, are to be deducted from a bank holding company's core 
capital elements in determining tier 1 capital. However, identifiable 
intangible assets (other than mortgage servicing assets and purchased 
credit card relationships) acquired on or before February 19, 1992, 
generally will not be deducted from capital for supervisory purposes, 
although they will continue to be deducted for applications purposes.
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    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.

[[Page 294]]

    iii. Bank holding companies may elect to deduct goodwill, disallowed 
mortgage servicing assets, disallowed nonmortgage servicing assets, and 
disallowed credit-enhancing I/Os (both purchased and retained) on a 
basis that is net of any associated deferred tax liability. Deferred tax 
liabilities netted in this manner cannot also be netted against deferred 
tax assets when determining the amount of deferred tax assets that are 
dependent upon future taxable income.
    f. Valuation. Bank holding companies must review the book value of 
goodwill and other intangible assets at least quarterly and make 
adjustments to these values as necessary. The fair value of mortgage 
servicing assets, nonmortgage servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os also must be determined at 
least quarterly. This determination shall include adjustments for any 
significant changes in original valuation assumptions, including changes 
in prepayment estimates or account attrition rates. Examiners will 
review both the book value and the fair value assigned to these assets, 
together with supporting documentation, during the inspection process. 
In addition, the Federal Reserve may require, on a case-by-case basis, 
an independent valuation of a bank holding company's goodwill, other 
intangible assets, or credit-enhancing I/Os.
    g. Growing organizations. Consistent with long-standing Board 
policy, banking organizations experiencing substantial growth, whether 
internally or by acquisition, are expected to maintain strong capital 
positions substantially above minimum supervisory levels, without 
significant reliance on intangible assets or credit-enhancing I/Os.
    2. Investments in certain subsidiaries-- a. Unconsolidated banking 
or finance subsidiaries. The aggregate amount of investments in banking 
or finance subsidiaries \19\ whose financial statements are not 
consolidated for accounting or regulatory reporting purposes, regardless 
of whether the investment is made by the parent bank holding company or 
its direct or indirect subsidiaries, will be deducted from the 
consolidated parent banking organization's total capital components. 
\20\ Generally, investments for this purpose are defined as equity and 
debt capital investments and any other instruments that are deemed to be 
capital in the particular subsidiary.
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    \19\ For this purpose, a banking and finance subsidiary generally is 
defined as any company engaged in banking or finance in which the parent 
institution holds directly or indirectly more than 50 percent of the 
outstanding voting stock, or which is otherwise controlled or capable of 
being controlled by the parent institution. For purposes of this 
section, the definition of banking and finance subsidiary does not 
include a trust or other special purpose entity used to issue trust 
preferred securities.
    \20\ An exception to this deduction would be made in the case of 
shares acquired in the regular course of securing or collecting a debt 
previously contracted in good faith. The requirements for consolidation 
are spelled out in the instructions to the FR Y-9C Report.
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    Advances (that is, loans, extensions of credit, guarantees, 
commitments, or any other forms of credit exposure) to the subsidiary 
that are not deemed to be capital will generally not be deducted from an 
organization's capital. Rather, such advances generally will be included 
in the parent banking organization's consolidated assets and be assigned 
to the 100 percent risk category, unless such obligations are backed by 
recognized collateral or guarantees, in which case they will be assigned 
to the risk category appropriate to such collateral or guarantees. These 
advances may, however, also be deducted from the consolidated parent 
banking organization's capital if, in the judgment of the Federal 
Reserve, the risks stemming from such advances are comparable to the 
risks associated with capital investments or if the advances involve 
other risk factors that warrant such an adjustment to capital for 
supervisory purposes. These other factors could include, for example, 
the absence of collateral support.
    Inasmuch as the assets of unconsolidated banking and finance 
subsidiaries are not fully reflected in a banking organization's 
consolidated total assets, such assets may be viewed as the equivalent 
of off-balance sheet exposures since the operations of an unconsolidated 
subsidiary could expose the parent organization and its affiliates to 
considerable risk. For this reason, it is generally appropriate to view 
the capital resources invested in these unconsolidated entities as 
primarily supporting the risks inherent in these off-balance sheet 
assets, and not generally available to support risks or absorb losses 
elsewhere in the organization.
    b. Other subsidiaries and investments. The deduction of investments, 
regardless of whether they are made by the parent bank holding company 
or by its direct or indirect subsidiaries, from a consolidated banking 
organization's capital will also be applied in the case of any 
subsidiaries, that, while consolidated for accounting purposes, are not 
consolidated for certain specified supervisory or regulatory purposes, 
such as to facilitate functional regulation. For this purpose, aggregate 
capital investments (that is, the sum of any equity or debt instruments

[[Page 295]]

that are deemed to be capital) in these subsidiaries will be deducted 
from the consolidated parent banking organization's total capital 
components. \21\
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    \21\ Investments in unconsolidated subsidiaries will be deducted 
from both Tier 1 and Tier 2 capital. As a general rule, one-half (50 
percent) of the aggregate amount of capital investments will be deducted 
from the bank holding company's Tier 1 capital and one-half (50 percent) 
from its Tier 2 capital. However, the Federal Reserve may, on a case-by-
case basis, deduct a proportionately greater amount from Tier 1 if the 
risks associated with the subsidiary so warrant. If the amount 
deductible from Tier 2 capital exceeds actual Tier 2 capital, the excess 
would be deducted from Tier 1 capital. Bank holding companies' risk-
based capital ratios, net of these deductions, must exceed the minimum 
standards set forth in section IV.
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    Advances (that is, loans, extensions of credit, guarantees, 
commitments, or any other forms of credit exposure) to such subsidiaries 
that are not deemed to be capital will generally not be deducted from 
capital. Rather, such advances will normally be included in the parent 
banking organization's consolidated assets and assigned to the 100 
percent risk category, unless such obligations are backed by recognized 
collateral or guarantees, in which case they will be assigned to the 
risk category appropriate to such collateral or guarantees. These 
advances may, however, be deducted from the consolidated parent banking 
organization's capital if, in the judgment of the Federal Reserve, the 
risks stemming from such advances are comparable to the risks associated 
with capital investments or if such advances involve other risk factors 
that warrant such an adjustment to capital for supervisory purposes. 
These other factors could include, for example, the absence of 
collateral support. \22\
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    \22\ In assessing the overall capital adequacy of a banking 
organization, the Federal Reserve may also consider the organization's 
fully consolidated capital position.
---------------------------------------------------------------------------

    In general, when investments in a consolidated subsidiary are 
deducted from a consolidated parent banking organization's capital, the 
subsidiary's assets will also be excluded from the consolidated assets 
of the parent banking organization in order to assess the latter's 
capital adequacy. \23\
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    \23\ If the subsidiary's assets are consolidated with the parent 
banking organization for financial reporting purposes, this adjustment 
will involve excluding the subsidiary's assets on a line-by-line basis 
from the consolidated parent organization's assets. The parent banking 
organization's capital ratio will then be calculated on a consolidated 
basis with the exception that the assets of the excluded subsidiary will 
not be consolidated with the remainder of the parent banking 
organization.
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    The Federal Reserve may also deduct from a banking organization's 
capital, on a case-by-case basis, investments in certain other 
subsidiaries in order to determine if the consolidated banking 
organization meets minimum supervisory capital requirements without 
reliance on the resources invested in such subsidiaries.
    The Federal Reserve will not automatically deduct investments in 
other unconsolidated subsidiaries or investments in joint ventures and 
associated companies. \24\ Nonetheless, the resources invested in these 
entities, like investments in unconsolidated banking and finance 
subsidiaries, support assets not consolidated with the rest of the 
banking organization's activities and, therefore, may not be generally 
available to support additional leverage or absorb losses elsewhere in 
the banking organization. Moreover, experience has shown that banking 
organizations stand behind the losses of affiliated institutions, such 
as joint ventures and associated companies, in order to protect the 
reputation of the organization as a whole. In some cases, this has led 
to losses that have exceeded the investments in such organizations.
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    \24\ The definition of such entities is contained in the 
instructions to the Consolidated Financial Statements for Bank Holding 
Companies. Under regulatory reporting procedures, associated companies 
and joint ventures generally are defined as companies in which the 
banking organization owns 20 to 50 percent of the voting stock.
---------------------------------------------------------------------------

    For this reason, the Federal Reserve will monitor the level and 
nature of such investments for individual banking organizations and may, 
on a case-by-case basis, deduct such investments from total capital 
components, apply an appropriate risk-weighted capital charge against 
the organization's proportionate share of the assets of its associated 
companies, require a line-by-line consolidation of the entity (in the 
event that the parent's control over the entity makes it the functional 
equivalent of a subsidiary), or otherwise require the organization to 
operate with a risk-based capital ratio above the minimum.
    In considering the appropriateness of such adjustments or actions, 
the Federal Reserve will generally take into account whether:
    (1) The parent banking organization has significant influence over 
the financial or managerial policies or operations of the subsidiary, 
joint venture, or associated company;
    (2) The banking organization is the largest investor in the 
affiliated company; or

[[Page 296]]

    (3) Other circumstances prevail that appear to closely tie the 
activities of the affiliated company to the parent banking organization.
    3. Reciprocal holdings of banking organizations' capital 
instruments. Reciprocal holdings of banking organizations' capital 
instruments (that is, instruments that qualify as Tier 1 or Tier 2 
capital) will be deducted from an organization's total capital 
components for the purpose of determining the numerator of the risk-
based capital ratio.
    Reciprocal holdings are cross-holdings resulting from formal or 
informal arrangements in which two or more banking organizations swap, 
exchange, or otherwise agree to hold each other's capital instruments. 
Generally, deductions will be limited to intentional cross-holdings. At 
present, the Board does not intend to require banking organizations to 
deduct non-reciprocal holdings of such capital instruments. \25\
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    \25\ Deductions of holdings of capital securities also would not be 
made in the case of interstate ``stake out'' investments that comply 
with the Board's Policy Statement on Nonvoting Equity Investments, 12 
CFR 225.143 (Federal Reserve Regulatory Service 4-172.1; 68 Federal 
Reserve Bulletin 413 (1982)). In addition, holdings of capital 
instruments issued by other banking organizations but taken in 
satisfaction of debts previously contracted would be exempt from any 
deduction from capital. The Board intends to monitor nonreciprocal 
holdings of other banking organizations' capital instruments and to 
provide information on such holdings to the Basle Supervisors' Committee 
as called for under the Basle capital framework.
---------------------------------------------------------------------------

    4. Deferred-tax assets. a. The amount of deferred-tax assets that is 
dependent upon future taxable income, net of the valuation allowance for 
deferred-tax assets, that may be included in, that is, not deducted 
from, a bank holding company's capital may not exceed the lesser of:
    i. The amount of these deferred-tax assets that the bank holding 
company is expected to realize within one year of the calendar quarter-
end date, based on its projections of future taxable income for that 
year, \26\ or
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    \26\ To determine the amount of expected deferred-tax assets 
realizable in the next 12 months, an institution should assume that all 
existing temporary differences fully reverse as of the report date. 
Projected future taxable income should not include net operating loss 
carry-forwards to be used during that year or the amount of existing 
temporary differences a bank holding company expects to reverse within 
the year. Such projections should include the estimated effect of tax-
planning strategies that the organization expects to implement to 
realize net operating losses or tax-credit carry-forwards that would 
otherwise expire during the year. Institutions do not have to prepare a 
new 12-month projection each quarter. Rather, on interim report dates, 
institutions may use the future-taxable income projections for their 
current fiscal year, adjusted for any significant changes that have 
occurred or are expected to occur.
---------------------------------------------------------------------------

    ii. 10 percent of tier 1 capital.
    b. The reported amount of deferred-tax assets, net of any valuation 
allowance for deferred-tax assets, in excess of the lesser of these two 
amounts is to be deducted from a banking organization's core capital 
elements in determining tier 1 capital. For purposes of calculating the 
10 percent limitation, tier 1 capital is defined as the sum of core 
capital elements, net of goodwill and net of all identifiable intangible 
assets other than mortgage servicing assets, nonmortgage servicing 
assets, and purchased credit card relationships, but prior to the 
deduction of any disallowed mortgage servicing assets, any disallowed 
nonmortgage servicing assets, any disallowed purchased credit card 
relationships, any disallowed credit-enhancing I/Os, any disallowed 
deferred-tax assets, and any nonfinancial equity investments. There 
generally is no limit in tier 1 capital on the amount of deferred-tax 
assets that can be realized from taxes paid in prior carry-back years or 
from future reversals of existing taxable temporary differences.
    5. Nonfinancial equity investments--a. General. A bank holding 
company must deduct from its core capital elements the sum of the 
appropriate percentages (as determined below) of the adjusted carrying 
value of all nonfinancial equity investments held by the parent bank 
holding company or by its direct or indirect subsidiaries. For purposes 
of this section II.B.5, investments held by a bank holding company 
include all investments held directly or indirectly by the bank holding 
company or any of its subsidiaries.
    b. Scope of nonfinancial equity investments. A nonfinancial equity 
investment means any equity investment held by the bank holding company: 
under the merchant banking authority of section 4(k)(4)(H) of the BHC 
Act and subpart J of the Board's Regulation Y (12 CFR 225.175 et seq.); 
under section 4(c)(6) or 4(c)(7) of BHC Act in a nonfinancial company or 
in a company that makes investments in nonfinancial companies; in a 
nonfinancial company through a small business investment company (SBIC) 
under section 302(b) of the Small Business Investment Act of 1958; \27\

[[Page 297]]

in a nonfinancial company under the portfolio investment provisions of 
the Board's Regulation K (12 CFR 211.8(c)(3)); or in a nonfinancial 
company under section 24 of the Federal Deposit Insurance Act (other 
than section 24(f)). \28\ A nonfinancial company is an entity that 
engages in any activity that has not been determined to be financial in 
nature or incidental to financial activities under section 4(k) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)).
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    \27\ An equity investment made under section 302(b) of the Small 
Business Investment Act of 1958 in an SBIC that is not consolidated with 
the parent banking organization is treated as a nonfinancial equity 
investment.
    \28\ See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C. 
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a. In a case in which 
the Board of Directors of the FDIC, acting directly in exceptional cases 
and after a review of the proposed activity, has permitted a lesser 
capital deduction for an investment approved by the Board of Directors 
under section 24 of the Federal Deposit Insurance Act, such deduction 
shall also apply to the consolidated bank holding company capital 
calculation so long as the bank's investments under section 24 and SBIC 
investments represent, in the aggregate, less than 15 percent of the 
Tier 1 capital of the bank.
---------------------------------------------------------------------------

    c. Amount of deduction from core capital. i. The bank holding 
company must deduct from its core capital elements the sum of the 
appropriate percentages, as set forth in Table 1, of the adjusted 
carrying value of all nonfinancial equity investments held by the bank 
holding company. The amount of the percentage deduction increases as the 
aggregate amount of nonfinancial equity investments held by the bank 
holding company increases as a percentage of the bank holding company's 
Tier 1 capital.

         Table 1--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
 Aggregate adjusted carrying value of all
   nonfinancial equity investments held     Deduction from Core Capital
    directly or indirectly by the bank      Elements (as a percentage of
 holding company (as a percentage of the    the adjusted carrying value
   Tier 1 capital of the parent banking          of the investment)
            organization) \1\
------------------------------------------------------------------------
Less than 15 percent.....................  8 percent.
15 percent to 24.99 percent..............  12 percent.
25 percent and above.....................  25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
  nonfinancial equity investments as a percentage of Tier 1 capital,
  Tier 1 capital is defined as the sum of core capital elements net of
  goodwill and net of all identifiable intangible assets other than
  mortgage servicing assets, nonmortgage servicing assets and purchased
  credit card relationships, but prior to the deduction for any
  disallowed mortgage servicing assets, any disallowed nonmortgage
  servicing assets, any disallowed purchased credit card relationships,
  any disallowed credit enhancing I/Os (both purchased and retained),
  any disallowed deferred tax assets, and any nonfinancial equity
  investments.

    ii. These deductions are applied on a marginal basis to the portions 
of the adjusted carrying value of nonfinancial equity investments that 
fall within the specified ranges of the parent holding company's Tier 1 
capital. For example, if the adjusted carrying value of all nonfinancial 
equity investments held by a bank holding company equals 20 percent of 
the Tier 1 capital of the bank holding company, then the amount of the 
deduction would be 8 percent of the adjusted carrying value of all 
investments up to 15 percent of the company's Tier 1 capital, and 12 
percent of the adjusted carrying value of all investments in excess of 
15 percent of the company's Tier 1 capital.
    iii. The total adjusted carrying value of any nonfinancial equity 
investment that is subject to deduction under this paragraph is excluded 
from the bank holding company's risk-weighted assets for purposes of 
computing the denominator of the company's risk-based capital ratio. 
\29\
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    \29\ For example, if 8 percent of the adjusted carrying value of a 
nonfinancial equity investment is deducted from Tier 1 capital, the 
entire adjusted carrying value of the investment will be excluded from 
risk-weighted assets in calculating the denominator for the risk-based 
capital ratio.
---------------------------------------------------------------------------

    iv. As noted in section I, this appendix establishes minimum risk-
based capital ratios and banking organizations are at all times expected 
to maintain capital commensurate with the level and nature of the risks 
to which they are exposed. The risk to a banking organization from 
nonfinancial equity investments increases with its concentration in such 
investments and strong capital levels above the minimum requirements are 
particularly important when a banking organization has a high degree of 
concentration in nonfinancial equity investments (e.g., in excess of 50 
percent of Tier 1 capital). The Federal Reserve intends to monitor 
banking organizations and apply heightened supervision to equity 
investment activities as appropriate, including where the banking 
organization has a high degree of concentration in nonfinancial equity 
investments, to ensure that each organization maintains capital levels 
that are appropriate in light of its equity investment activities. The 
Federal Reserve also reserves authority to impose a higher capital 
charge in any case where the circumstances, such as the level of risk of 
the particular investment or portfolio of investments, the risk 
management systems of the banking organization, or other information, 
indicate that a higher minimum capital requirement is appropriate.
    d. SBIC investments. i. No deduction is required for nonfinancial 
equity investments that are held by a bank holding company through one 
or more SBICs that are consolidated with the bank holding company or in 
one or more SBICs that are not consolidated

[[Page 298]]

with the bank holding company to the extent that all such investments, 
in the aggregate, do not exceed 15 percent of the aggregate of the bank 
holding company's pro rata interests in the Tier 1 capital of its 
subsidiary banks. Any nonfinancial equity investment that is held 
through or in an SBIC and not required to be deducted from Tier 1 
capital under this section II.B.5.d. will be assigned a 100 percent 
risk-weight and included in the parent holding company's consolidated 
risk-weighted assets. \30\
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    \30\ If a bank holding company has an investment in an SBIC that is 
consolidated for accounting purposes but that is not wholly owned by the 
bank holding company, the adjusted carrying value of the bank holding 
company's nonfinancial equity investments through the SBIC is equal to 
the holding company's proportionate share of the adjusted carrying value 
of the SBIC's equity investments in nonfinancial companies. The 
remainder of the SBIC's adjusted carrying value (i.e. the minority 
interest holders' proportionate share) is excluded from the risk-
weighted assets of the bank holding company. If a bank holding company 
has an investment in a SBIC that is not consolidated for accounting 
purposes and has current information that identifies the percentage of 
the SBIC's assets that are equity investments in nonfinancial companies, 
the bank holding company may reduce the adjusted carrying value of its 
investment in the SBIC proportionately to reflect the percentage of the 
adjusted carrying value of the SBIC's assets that are not equity 
investments in nonfinancial companies. If a bank holding company reduces 
the adjusted carrying value of its investment in a non-consolidated SBIC 
to reflect financial investments of the SBIC, the amount of the 
adjustment will be risk weighted at 100 percent and included in the 
bank's risk-weighted assets.
---------------------------------------------------------------------------

    ii. To the extent the adjusted carrying value of all nonfinancial 
equity investments that a bank holding company holds through one or more 
SBICs that are consolidated with the bank holding company or in one or 
more SBICs that are not consolidated with the bank holding company 
exceeds, in the aggregate, 15 percent of the aggregate Tier 1 capital of 
the company's subsidiary banks, the appropriate percentage of such 
amounts (as set forth in Table 1) must be deducted from the bank holding 
company's core capital elements. In addition, the aggregate adjusted 
carrying value of all nonfinancial equity investments held through a 
consolidated SBIC and in a non-consolidated SBIC (including any 
investments for which no deduction is required) must be included in 
determining, for purposes of Table 1, the total amount of nonfinancial 
equity investments held by the bank holding company in relation to its 
Tier 1 capital.
    e. Transition provisions. No deduction under this section II.B.5 is 
required to be made with respect to the adjusted carrying value of any 
nonfinancial equity investment (or portion of such an investment) that 
was made by the bank holding company prior to March 13, 2000, or that 
was made after such date pursuant to a binding written commitment \31\ 
entered into by the bank holding company prior to March 13, 2000, 
provided that in either case the bank holding company has continuously 
held the investment since the relevant investment date. \32\ For 
purposes of this section II.B.5.e., a nonfinancial equity investment 
made prior to March 13, 2000, includes any shares or other interests 
received by the bank holding company through a stock split or stock 
dividend on an investment made prior to March 13, 2000, provided the 
bank holding company provides no consideration for the shares or 
interests received and the transaction does not materially increase the 
bank'' holding company's proportional interest in the company. The 
exercise on or after March 13, 2000, of options or warrants acquired 
prior to

[[Page 299]]

March 13, 2000, is not considered to be an investment made prior to 
March 13, 2000, if the bank holding company provides any consideration 
for the shares or interests received upon exercise of the options or 
warrants. Any nonfinancial equity investment (or portion thereof) that 
is not required to be deducted from Tier 1 capital under this section 
II.B.5.e. must be included in determining the total amount of 
nonfinancial equity investments held by the bank holding company in 
relation to its Tier 1 capital for purposes of Table 1. In addition, any 
nonfinancial equity investment (or portion thereof) that is not required 
to be deducted from Tier 1 capital under this section II.B.5.e. will be 
assigned a 100-percent risk weight and included in the bank holding 
company's consolidated risk-weighted assets.
---------------------------------------------------------------------------

    \31\ A ``binding written commitment'' means a legally binding 
written agreement that requires the banking organization to acquire 
shares or other equity of the company, or make a capital contribution to 
the company, under terms and conditions set forth in the agreement. 
Options, warrants, and other agreements that give a banking organization 
the right to acquire equity or make an investment, but do not require 
the banking organization to take such actions, are not considered a 
binding written commitment for purposes of this section II.B.5.
    \32\ For example, if a bank holding company made an equity 
investment in 100 shares of a nonfinancial company prior to March 13, 
2000, that investment would not be subject to a deduction under this 
section II.B.5. However, if the bank holding company made any additional 
equity investment in the company after March 13, 2000, such as by 
purchasing additional shares of the company (including through the 
exercise of options or warrants acquired before or after March 13, 2000) 
or by making a capital contribution to the company, and such investment 
was not made pursuant to a binding written commitment entered into 
before March 13, 2000, the adjusted carrying value of the additional 
investment would be subject to a deduction under this section II.B.5. In 
addition, if the bank holding company sold and repurchased shares of the 
company after March 13, 2000, the adjusted carrying value of the re-
acquired shares would be subject to a deduction under this section 
II.B.5.
---------------------------------------------------------------------------

    f. Adjusted carrying value. i. For purposes of this section II.B.5., 
the ``adjusted carrying value'' of investments is the aggregate value at 
which the investments are carried on the balance sheet of the 
consolidated bank holding company reduced by any unrealized gains on 
those investments that are reflected in such carrying value but excluded 
from the bank holding company's Tier 1 capital and associated deferred 
tax liabilities. For example, for investments held as available-for-sale 
(AFS), the adjusted carrying value of the investments would be the 
aggregate carrying value of the investments (as reflected on the 
consolidated balance sheet of the bank holding company) less any 
unrealized gains on those investments that are included in other 
comprehensive income and not reflected in Tier 1 capital, and associated 
deferred tax liabilities. \33\
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    \33\ Unrealized gains on AFS investments may be included in 
supplementary capital to the extent permitted under section II.A.2.e of 
this appendix A. In addition, the unrealized losses on AFS equity 
investments are deducted from Tier 1 capital in accordance with section 
II.A.1.a of this appendix A.
---------------------------------------------------------------------------

    ii. As discussed above with respect to consolidated SBICs, some 
equity investments may be in companies that are consolidated for 
accounting purposes. For investments in a nonfinancial company that is 
consolidated for accounting purposes under generally accepted accounting 
principles, the parent banking organization's adjusted carrying value of 
the investment is determined under the equity method of accounting (net 
of any intangibles associated with the investment that are deducted from 
the consolidated bank holding company's core capital in accordance with 
section II.B.1 of this appendix). Even though the assets of the 
nonfinancial company are consolidated for accounting purposes, these 
assets (as well as the credit equivalent amounts of the company's off-
balance sheet items) should be excluded from the banking organization's 
risk-weighted assets for regulatory capital purposes.
    g. Equity investments. For purposes of this section II.B.5, an 
equity investment means any equity instrument (including common stock, 
preferred stock, partnership interests, interests in limited liability 
companies, trust certificates and warrants and call options that give 
the holder the right to purchase an equity instrument), any equity 
feature of a debt instrument (such as a warrant or call option), and any 
debt instrument that is convertible into equity where the instrument or 
feature is held under one of the legal authorities listed in section 
II.B.5.b. of this appendix. An investment in any other instrument 
(including subordinated debt) may be treated as an equity investment if, 
in the judgment of the Federal Reserve, the instrument is the functional 
equivalent of equity or exposes the state member bank to essentially the 
same risks as an equity instrument.

   Attachment II--Summary of Definition of Qualifying Capital for Bank
                           Holding Companies*
                   [Using the Year-End 1992 Standard]
------------------------------------------------------------------------
               Components                      Minimum requirements
------------------------------------------------------------------------
CORE CAPITAL (Tier 1)..................  Must equal or exceed 4% of
                                          weighted-risk assets.
    Common stockholders' equity........  No limit.
    Qualifying noncumulative perpetual   No limit; bank holding
     preferred stock.                     companies should avoid undue
                                          reliance on preferred stock in
                                          tier 1.
    Qualifying cumulative perpetual      Limited to 25% of the sum of
     preferred stock.                     common stock, qualifying
                                          perpetual stock, and minority
                                          interests.
    Minority interest in equity          Organizations should avoid
     accounts of consolidated             using minority interests to
     subsidiaries.                        introduce elements not
                                          otherwise qualifying for tier
                                          1 capital.
Less: Goodwill, other intangible
 assets, credit-enhancing interest-only
 strips and nonfinancial equity
 investments required to be deducted
 from capital \1\
SUPPLEMENTARY CAPITAL (Tier 2).........  Total of tier 2 is limited to
                                          100% of tier 1. \2\
    Allowance for loan and lease losses  Limited to 1.25% of weighted-
                                          risk assets. \2\
    Perpetual preferred stock..........  No limit within tier 2.
    Hybrid capital instruments and       No limit within tier 2.
     equity contract notes.

[[Page 300]]

 
    Subordinated debt and intermediate-  Subordinated debt and
     term preferred stock (original       intermediate-term preferred
     weighted average maturity of 5       stock are limited to 50% of
     years or more).                      tier 1 \2\; amortized for
                                          capital purposes as they
                                          approach maturity.
Revaluation reserves (equity and         Not included; organizations
 building).                               encouraged to disclose; may be
                                          evaluated on a case-by-case
                                          basis for international
                                          comparisons; and taken into
                                          account in making an overall
                                          assessment of capital.
DEDUCTIONS (from sum of tier 1 and tier
 2)
    Investments in unconsolidated        As a general rule, one-half of
     subsidiaries.                        the aggregate investments will
                                          be deducted from tier 1
                                          capital and one-half from tier
                                          2 capital. \3\
Reciprocal holdings of banking
 organizations' capital securities
    Other deductions (such as other      On a case-by-case basis or as a
     subsidiaries or joint ventures) as   matter of policy after a
     determined by supervisory            formal rulemaking.
     authority.
      TOTAL CAPITAL (tier 1 + tier 2-    Must equal or exceed 8% of
       deductions).                       weighted-risk assets.
------------------------------------------------------------------------
\1\ Requirements for the deduction of other intangible assets and
  residual interests are set forth in section II.B.1. of this appendix.
\2\ Amounts in excess of limitations are permitted but do not qualify as
  capital.
\3\ A proportionately greater amount may be deducted from tier 1
  capital, if the risks associated with the subsidiary so warrant.
* See discussion in section II of the guidelines for a complete
  description of the requirements for, and the limitations on, the
  components of qualifying capital.

III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet 
                                  Items

                              A. Procedures

    Assets and credit equivalent amounts of off-balance sheet items of 
bank holding companies are assigned to one of several broad risk 
categories, according to the obligor, or, if relevant, the guarantor or 
the nature of the collateral. The aggregate dollar value of the amount 
in each category is then multiplied by the risk weight associated with 
that category. The resulting weighted values from each of the risk 
categories are added together, and this sum is the banking 
organization's total weighted risk assets that comprise the denominator 
of the risk-based capital ratio. Attachment I provides a sample 
calculation.
    Risk weights for all off-balance sheet items are determined by a 
two-step process. First, the ``credit equivalent amount'' of off-balance 
sheet items is determined, in most cases, by multiplying the off-balance 
sheet item by a credit conversion factor. Second, the credit equivalent 
amount is treated like any balance sheet asset and generally is assigned 
to the appropriate risk category according to the obligor, or, if 
relevant, the guarantor or the nature of the collateral.
    In general, if a particular item qualifies for placement in more 
than one risk category, it is assigned to the category that has the 
lowest risk weight. A holding of a U.S. municipal revenue bond that is 
fully guaranteed by a U.S. bank, for example, would be assigned the 20 
percent risk weight appropriate to claims guaranteed by U.S. banks, 
rather than the 50 percent risk weight appropriate to U.S. municipal 
revenue bonds. \34\
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    \34\ An investment in shares of a fund whose portfolio consists 
primarily of various securities or money market instruments that, if 
held separately, would be assigned to different risk categories, 
generally is assigned to the risk category appropriate to the highest 
risk-weighted asset that the fund is permitted to hold in accordance 
with the stated investment objectives set forth in the prospectus. An 
organization may, at its option, assign a fund investment on a pro rata 
basis to different risk categories according to the investment limits in 
the fund's prospectus. In no case will an investment in shares in any 
fund be assigned to a total risk weight of less than 20 percent. If an 
organization chooses to assign a fund investment on a pro rata basis, 
and the sum of the investment limits of assets in the fund's prospectus 
exceeds 100 percent, the organization must assign risk weights in 
descending order. If, in order to maintain a necessary degree of short-
term liquidity, a fund is permitted to hold an insignificant amount of 
its assets in short-term, highly liquid securities of superior credit 
quality that do not qualify for a preferential risk weight, such 
securities generally will be disregarded when determining the risk 
category into which the organization's holding in the overall fund 
should be assigned. The prudent use of hedging instruments by a fund to 
reduce the risk of its assets will not increase the risk weighting of 
the fund investment. For example, the use of hedging instruments by a 
fund to reduce the interest rate risk of its government bond portfolio 
will not increase the risk weight of that fund above the 20 percent 
category. Nonetheless, if a fund engages in any activities that appear 
speculative in nature or has any other characteristics that are 
inconsistent with the preferential risk weighting assigned to the fund's 
assets, holdings in the fund will be assigned to the 100 percent risk 
category.

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[[Page 301]]

    The Federal Reserve will, on a case-by-case basis, determine the 
appropriate risk weight for any asset or credit equivalent amount of an 
off-balance sheet item that does not fit wholly within the terms of one 
of the risk weight categories set forth below or that imposes risks on a 
bank holding company that are incommensurate with the risk weight 
otherwise specified below for the asset or off-balance sheet item. In 
addition, the Federal Reserve will, on a case-by-case basis, determine 
the appropriate credit conversion factor for any off-balance sheet item 
that does not fit wholly within the terms of one of the credit 
conversion factors set forth below or that imposes risks on a banking 
organization that are incommensurate with the credit conversion factors 
otherwise specified below for the off-balance sheet item. In making such 
a determination, the Federal Reserve will consider the similarity of the 
asset or off-balance sheet item to assets or off-balance sheet items 
explicitly treated in the guidelines, as well as other relevant factors.

           B. Collateral, Guarantees, and Other Considerations

    1. Collateral. The only forms of collateral that are formally 
recognized by the risk-based capital framework are: Cash on deposit in a 
subsidiary lending institution; securities issued or guaranteed by the 
central governments of the OECD-based group of countries, \35\ U.S. 
Government agencies, or U.S. Government-sponsored agencies; and 
securities issued by multilateral lending institutions or regional 
development banks. Claims fully secured by such collateral generally are 
assigned to the 20 percent risk-weight category. Collateralized 
transactions meeting all the conditions described in section III.C.1. 
may be assigned a zero percent risk weight.
---------------------------------------------------------------------------

    \35\ The OECD-based group of countries comprises all full members of 
the Organization for Economic Cooperation and Development (OECD) 
regardless of entry date, as well as countries that have concluded 
special lending arrangements with the International Monetary Fund (IMF) 
associated with the IMF's General Arrangements to Borrow, but excludes 
any country that has rescheduled its external sovereign debt within the 
previous five years. As of November 1995, the OECD included the 
following countries: Australia, Austria, Belgium, Canada, Denmark, 
Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, 
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, 
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United 
States; and Saudi Arabia had concluded special lending arrangements with 
the IMF associated with the IMF's General Arrangements to Borrow. A 
rescheduling of external sovereign debt generally would include any 
renegotiation of terms arising from a country's inability or 
unwillingness to meet its external debt service obligations, but 
generally would not include renegotiations of debt in the normal course 
of business, such as a renegotiation to allow the borrower to take 
advantage of a decline in interest rates or other change in market 
conditions.
---------------------------------------------------------------------------

    With regard to collateralized claims that may be assigned to the 20 
percent risk-weight category, the extent to which qualifying securities 
are recognized as collateral is determined by their current market 
value. If such a claim is only partially secured, that is, the market 
value of the pledged securities is less than the face amount of a 
balance-sheet asset or an off-balance-sheet item, the portion that is 
covered by the market value of the qualifying collateral is assigned to 
the 20 percent risk category, and the portion of the claim that is not 
covered by collateral in the form of cash or a qualifying security is 
assigned to the risk category appropriate to the obligor or, if 
relevant, the guarantor. For example, to the extent that a claim on a 
private sector obligor is collateralized by the current market value of 
U.S. Government securities, it would be placed in the 20 percent risk 
category and the balance would be assigned to the 100 percent risk 
category.
    2. Guarantees. Guarantees of the OECD and non-OECD central 
governments, U.S. Government agencies, U.S. Government-sponsored 
agencies, state and local governments of the OECD-based group of 
countries, multilateral lending institutions and regional development 
banks, U.S. depository institutions, and foreign banks are also 
recognized. If a claim is partially guaranteed, that is, coverage of the 
guarantee is less than the face amount of a balance sheet asset or an 
off-balance sheet item, the portion that is not fully covered by the 
guarantee is assigned to the risk category appropriate to the obligor 
or, if relevant, to any collateral. The face amount of a claim covered 
by two types of guarantees that have different risk weights, such as a 
U.S. Government guarantee and a state guarantee, is to be apportioned 
between the two risk categories appropriate to the guarantors.
    The existence of other forms of collateral or guarantees that the 
risk-based capital framework does not formally recognize may be taken 
into consideration in evaluating the risks inherent in an organization's 
loan

[[Page 302]]

portfolio--which, in turn, would affect the overall supervisory 
assessment of the organization's capital adequacy.
    3. Recourse obligations, direct credit substitutes, residual 
interests, and asset- and mortgage-backed securities. Direct credit 
substitutes, assets transferred with recourse, and securities issued in 
connection with asset securitizations and structured financings are 
treated as described below. The term ``asset securitizations'' or 
``securitizations'' in this rule includes structured financings, as well 
as asset securitization transactions.
    a. Definitions--i. Credit derivative means a contract that allows 
one party (the ``protection purchaser'') to transfer the credit risk of 
an asset or off-balance sheet credit exposure to another party (the 
``protection provider''). The value of a credit derivative is dependent, 
at least in part, on the credit performance of the ``reference asset.''
    ii. Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed in connection 
with a transfer of assets (including loan servicing assets) and that 
obligate the bank holding company to protect investors from losses 
arising from credit risk in the assets transferred or the loans 
serviced. Credit-enhancing representations and warranties include 
promises to protect a party from losses resulting from the default or 
nonperformance of another party or from an insufficiency in the value of 
the collateral. Credit-enhancing representations and warranties do not 
include:
    1. Early default clauses and similar warranties that permit the 
return of, or premium refund clauses covering, 1-4 family residential 
first mortgage loans that qualify for a 50 percent risk weight for a 
period not to exceed 120 days from the date of transfer. These 
warranties may cover only those loans that were originated within 1 year 
of the date of transfer;
    2. Premium refund clauses that cover assets guaranteed, in whole or 
in part, by the U.S. Government, a U.S. Government agency or a 
government-sponsored enterprise, provided the premium refund clauses are 
for a period not to exceed 120 days from the date of transfer; or
    3. Warranties that permit the return of assets in instances of 
misrepresentation, fraud or incomplete documentation.
    iii. Direct credit substitute means an arrangement in which a bank 
holding company assumes, in form or in substance, credit risk associated 
with an on- or off-balance sheet credit exposure that was not previously 
owned by the bank holding company (third-party asset) and the risk 
assumed by the bank holding company exceeds the pro rata share of the 
bank holding company's interest in the third-party asset. If the bank 
holding company has no claim on the third-party asset, then the bank 
holding company's assumption of any credit risk with respect to the 
third party asset is a direct credit substitute. Direct credit 
substitutes include, but are not limited to:
    1. Financial standby letters of credit that support financial claims 
on a third party that exceed a bank holding company's pro rata share of 
losses in the financial claim;
    2. Guarantees, surety arrangements, credit derivatives, and similar 
instruments backing financial claims that exceed a bank holding 
company's pro rata share in the financial claim;
    3. Purchased subordinated interests or securities that absorb more 
than their pro rata share of losses from the underlying assets;
    4. Credit derivative contracts under which the bank holding company 
assumes more than its pro rata share of credit risk on a third party 
exposure;
    5. Loans or lines of credit that provide credit enhancement for the 
financial obligations of an account party;
    6. Purchased loan servicing assets if the servicer is responsible 
for credit losses or if the servicer makes or assumes credit-enhancing 
representations and warranties with respect to the loans serviced. 
Mortgage servicer cash advances that meet the conditions of section 
III.B.3.a.viii. of this appendix are not direct credit substitutes;
    7. Clean-up calls on third party assets. Clean-up calls that are 10 
percent or less of the original pool balance that are exercisable at the 
option of the bank holding company are not direct credit substitutes; 
and
    8. Liquidity facilities that provide liquidity support to ABCP 
(other than eligible ABCP liquidity facilities).
    iv. Eligible ABCP liquidity facility means a liquidity facility 
supporting ABCP, in form or in substance, that is subject to an asset 
quality test at the time of draw that precludes funding against assets 
that are 90 days or more past due or in default. In addition, if the 
assets that an eligible ABCP liquidity facility is required to fund 
against are externally rated assets or exposures at the inception of the 
facility, the facility can be used to fund only those assets or 
exposures that are externally rated investment grade at the time of 
funding. Notwithstanding the eligibility requirements set forth in the 
two preceding sentences, a liquidity facility will be considered an 
eligible ABCP liquidity facility if the assets that are funded under the 
liquidity facility and which do not meet the eligibility requirements 
are guaranteed, either conditionally or unconditionally, by the U.S. 
government or its agencies, or by the central government of an OECD 
country.

[[Page 303]]

    v. Externally rated means that an instrument or obligation has 
received a credit rating from a nationally recognized statistical rating 
organization.
    vi. Face amount means the notional principal, or face value, amount 
of an off-balance sheet item; the amortized cost of an asset not held 
for trading purposes; and the fair value of a trading asset.
    vii. Financial asset means cash or other monetary instrument, 
evidence of debt, evidence of an ownership interest in an entity, or a 
contract that conveys a right to receive or exchange cash or another 
financial instrument from another party.
    viii. Financial standby letter of credit means a letter of credit or 
similar arrangement that represents an irrevocable obligation to a 
third-party beneficiary:
    1. To repay money borrowed by, or advanced to, or for the account 
of, a second party (the account party), or
    2. To make payment on behalf of the account party, in the event that 
the account party fails to fulfill its obligation to the beneficiary.
    ix. Liquidity Facility means a legally binding commitment to provide 
liquidity support to ABCP by lending to, or purchasing assets from, any 
structure, program, or conduit in the event that funds are required to 
repay maturing ABCP.
    x. Mortgage servicer cash advance means funds that a residential 
mortgage loan servicer advances to ensure an uninterrupted flow of 
payments, including advances made to cover foreclosure costs or other 
expenses to facilitate the timely collection of the loan. A mortgage 
servicer cash advance is not a recourse obligation or a direct credit 
substitute if:
    1. The servicer is entitled to full reimbursement and this right is 
not subordinated to other claims on the cash flows from the underlying 
asset pool; or
    2. For any one loan, the servicer's obligation to make 
nonreimbursable advances is contractually limited to an insignificant 
amount of the outstanding principal balance of that loan.
    xi. Nationally recognized statistical rating organization (NRSRO) 
means an entity recognized by the Division of Market Regulation of the 
Securities and Exchange Commission (or any successor Division) 
(Commission) as a nationally recognized statistical rating organization 
for various purposes, including the Commission's uniform net capital 
requirements for brokers and dealers.
    xii. Recourse means the retention, by a bank holding company, in 
form or in substance, of any credit risk directly or indirectly 
associated with an asset it has transferred and sold that exceeds a pro 
rata share of the banking organization's claim on the asset. If a 
banking organization has no claim on a transferred asset, then the 
retention of any risk of credit loss is recourse. A recourse obligation 
typically arises when a bank holding company transfers assets and 
retains an explicit obligation to repurchase the assets or absorb losses 
due to a default on the payment of principal or interest or any other 
deficiency in the performance of the underlying obligor or some other 
party. Recourse may also exist implicitly if a bank holding company 
provides credit enhancement beyond any contractual obligation to support 
assets it has sold. The following are examples of recourse arrangements:
    1. Credit-enhancing representations and warranties made on the 
transferred assets;
    2. Loan servicing assets retained pursuant to an agreement under 
which the bank holding company will be responsible for credit losses 
associated with the loans being serviced. Mortgage servicer cash 
advances that meet the conditions of section III.B.3.a.x. of this 
appendix are not recourse arrangements;
    3. Retained subordinated interests that absorb more than their pro 
rata share of losses from the underlying assets;
    4. Assets sold under an agreement to repurchase, if the assets are 
not already included on the balance sheet;
    5. Loan strips sold without contractual recourse where the maturity 
of the transferred loan is shorter than the maturity of the commitment 
under which the loan is drawn;
    6. Credit derivatives issued that absorb more than the bank holding 
company's pro rata share of losses from the transferred assets;
    7. Clean-up calls at inception that are greater than 10 percent of 
the balance of the original pool of transferred loans. Clean-up calls 
that are 10 percent or less of the original pool balance that are 
exercisable at the option of the bank holding company are not recourse 
arrangements; and
    8. Liquidity facilities that provide liquidity support to ABCP 
(other than eligible ABCP liquidity facilities).
    xiii. Residual interest means any on-balance sheet asset that 
represents an interest (including a beneficial interest) created by a 
transfer that qualifies as a sale (in accordance with generally accepted 
accounting principles) of financial assets, whether through a 
securitization or otherwise, and that exposes the bank holding company 
to credit risk directly or indirectly associated with the transferred 
assets that exceeds a pro rata share of the bank holding company's claim 
on the assets, whether through subordination provisions or other credit 
enhancement techniques. Residual interests generally include credit-
enhancing I/Os, spread accounts, cash collateral accounts, retained 
subordinated interests, other forms of over-collateralization, and 
similar assets that function as a credit enhancement. Residual interests 
further include those exposures that, in substance, cause the bank

[[Page 304]]

holding company to retain the credit risk of an asset or exposure that 
had qualified as a residual interest before it was sold. Residual 
interests generally do not include interests purchased from a third 
party, except that purchased credit-enhancing I/Os are residual 
interests for purposes of this appendix.
    xiv. Risk participation means a participation in which the 
originating party remains liable to the beneficiary for the full amount 
of an obligation (e.g., a direct credit substitute) notwithstanding that 
another party has acquired a participation in that obligation.
    xv. Securitization means the pooling and repackaging by a special 
purpose entity of assets or other credit exposures into securities that 
can be sold to investors. Securitization includes transactions that 
create stratified credit risk positions whose performance is dependent 
upon an underlying pool of credit exposures, including loans and 
commitments.
    xvi. Sponsor means a bank holding company that establishes an ABCP 
program; approves the sellers permitted to participate in the program; 
approves the asset pools to be purchased by the program; or administers 
the program by monitoring the assets, arranging for debt placement, 
compiling monthly reports, or ensuring compliance with the program 
documents and with the program's credit and investment policy.
    xvii. Structured finance program means a program where receivable 
interests and asset-backed securities issued by multiple participants 
are purchased by a special purpose entity that repackages those 
exposures into securities that can be sold to investors. Structured 
finance programs allocate credit risks, generally, between the 
participants and credit enhancement provided to the program.
    xviii. Traded position means a position that is externally rated and 
is retained, assumed, or issued in connection with an asset 
securitization, where there is a reasonable expectation that, in the 
near future, the rating will be relied upon by unaffiliated investors to 
purchase the position; or an unaffiliated third party to enter into a 
transaction involving the position, such as a purchase, loan, or 
repurchase agreement.
    b. Credit equivalent amounts and risk weight of recourse obligations 
and direct credit substitutes. i. Credit equivalent amount. Except as 
otherwise provided in sections III.B.3.c. through f. and III.B.5. of 
this appendix, the credit-equivalent amount for a recourse obligation or 
direct credit substitute is the full amount of the credit-enhanced 
assets for which the bank holding company directly or indirectly retains 
or assumes credit risk multiplied by a 100 percent conversion factor.
    ii. Risk-weight factor. To determine the bank holding company's 
risk-weight factor for off-balance sheet recourse obligations and direct 
credit substitutes, the credit equivalent amount is assigned to the risk 
category appropriate to the obligor in the underlying transaction, after 
considering any associated guarantees or collateral. For a direct credit 
substitute that is an on-balance sheet asset (e.g., a purchased 
subordinated security), a bank holding company must calculate risk-
weighted assets using the amount of the direct credit substitute and the 
full amount of the assets it supports, i.e., all the more senior 
positions in the structure. The treatment of direct credit substitutes 
that have been syndicated or in which risk participations have been 
conveyed or acquired is set forth in section III.D.1 of this appendix.
    c. Externally-rated positions: credit-equivalent amounts and risk 
weights of recourse obligations, direct credit substitutes, residual 
interests, and asset- and mortgage-backed securities (including asset-
backed commercial paper)--i. Traded positions. With respect to a 
recourse obligation, direct credit substitute, residual interest (other 
than a credit-enhancing I/Ostrip) or asset- and mortgage-backed security 
(including asset-backed commercial paper) that is a traded position and 
that has received an external rating on a long-term position that is one 
grade below investment grade or better or a short-term rating that is 
investment grade, the bank holding company may multiply the face amount 
of the position by the appropriate risk weight, determined in accordance 
with the tables below. Stripped mortgage-backed securities and other 
similar instruments, such as interest-only or principal-only strips that 
are not credit enhancements, must be assigned to the 100 percent risk 
category. If a traded position has received more than one external 
rating, the lowest single rating will apply.

------------------------------------------------------------------------
                                                            Risk weight
     Long-term rating category            Examples         (In percent)
------------------------------------------------------------------------
Highest or second highest           AAA, AA.............              20
 investment grade.
Third highest investment grade....  A...................              50
Lowest investment grade...........  BBB.................             100
One category below investment       BB..................             200
 grade.


------------------------------------------------------------------------
                                                            Risk weight
         Short-term rating                Examples         (In percent)
------------------------------------------------------------------------
Highest investment grade..........  A-1, P-1............              20

[[Page 305]]

 
Second highest investment grade...  A-2, P-2............              50
Lowest investment grade...........  A-3, P-3............             100
------------------------------------------------------------------------

    ii. Non-traded positions. A recourse obligation, direct credit 
substitute, or residual interest (but not a credit-enhancing I/O strip) 
extended in connection with a securitization that is not a traded 
position may be assigned a risk weight in accordance with section 
III.B.3.c.i. of this appendix if:
    1. It has been externally rated by more than one NRSRO;
    2. It has received an external rating on a long-term position that 
is one grade below investment grade or better or on a short-term 
position that is investment grade by all NRSROs providing a rating;
    3. The ratings are publicly available; and
    4. The ratings are based on the same criteria used to rate traded 
positions.
    If the ratings are different, the lowest rating will determine the 
risk category to which the recourse obligation, direct credit 
substitute, or residual interest will be assigned.
    d. Senior positions not externally rated. For a recourse obligation, 
direct credit substitute, residual interest, or asset-or mortgage-backed 
security that is not externally rated but is senior or preferred in all 
features to a traded position (including collateralization and 
maturity), a bank holding company may apply a risk weight to the face 
amount of the senior position in accordance with section III.B.3.c.i. of 
this appendix, based on the traded position, subject to any current or 
prospective supervisory guidance and the bank holding company satisfying 
the Federal Reserve that this treatment is appropriate. This section 
will apply only if the traded subordinated position provides substantive 
credit support to the unrated position until the unrated position 
matures.
    e. Capital requirement for residual interests--i. Capital 
requirement for credit-enhancing I/O strips. After applying the 
concentration limit to credit-enhancing I/O strips (both purchased and 
retained) in accordance with sections II.B.2.c. through e. of this 
appendix, a bank holding company must maintain risk-based capital for a 
credit-enhancing I/O strip (both purchased and retained), regardless of 
the external rating on that position, equal to the remaining amount of 
the credit-enhancing I/O (net of any existing associated deferred tax 
liability), even if the amount of risk-based capital required to be 
maintained exceeds the full risk-based capital requirement for the 
assets transferred. Transactions that, in substance, result in the 
retention of credit risk associated with a transferred credit-enhancing 
I/O strip will be treated as if the credit-enhancing I/O strip was 
retained by the bank holding company and not transferred.
    ii. Capital requirement for other residual interests. 1. If a 
residual interest does not meet the requirements of sections III.B.3.c. 
or d. of this appendix, a bank holding must maintain risk-based capital 
equal to the remaining amount of the residual interest that is retained 
on the balance sheet (net of any existing associated deferred tax 
liability), even if the amount of risk-based capital required to be 
maintained exceeds the full risk-based capital requirement for the 
assets transferred. Transactions that, in substance, result in the 
retention of credit risk associated with a transferred residual interest 
will be treated as if the residual interest was retained by the bank 
holding company and not transferred.
    2. Where the aggregate capital requirement for residual interests 
and other recourse obligations in connection with the same transfer of 
assets exceed the full risk-based capital requirement for those assets, 
a bank holding company must maintain risk-based capital equal to the 
greater of the risk-based capital requirement for the residual interest 
as calculated under section III.B.3.e.ii.1. of this appendix or the full 
risk-based capital requirement for the assets transferred.
    f. Positions that are not rated by an NRSRO. A position (but not a 
residual interest) maintained in connection with a securitization and 
that is not rated by a NRSRO may be risk-weighted based on the bank 
holding company's determination of the credit rating of the position, as 
specified in the table below, multiplied by the face amount of the 
position. In order to obtain this treatment, the bank holding company's 
system for determining the credit rating of the position must meet one 
of the three alternative standards set out in sections III.B.3.f.i. 
through III.B.3.f.iii. of this appendix.

------------------------------------------------------------------------
                                                            Risk weight
          Rating category                 Examples         (In percent)
------------------------------------------------------------------------
Highest or second highest           AAA, AA.............             100
 investment grade.
Third highest investment grade....  A...................             100
Lowest investment grade...........  BBB.................             100

[[Page 306]]

 
One category below investment       BB..................             200
 grade.
------------------------------------------------------------------------

    i. Internal risk rating used for asset-backed programs. A direct 
credit substitute (other than a purchased credit-enhancing I/O) is 
assumed in connection with an asset-backed commercial paper program 
sponsored by the bank holding company and the bank holding company is 
able to demonstrate to the satisfaction of the Federal Reserve, prior to 
relying upon its use, that the bank holding company's internal credit 
risk rating system is adequate. Adequate internal credit risk rating 
systems usually contain the following criteria:
    1. The internal credit risk system is an integral part of the bank 
holding company's risk management system, which explicitly incorporates 
the full range of risks arising from a bank holding company's 
participation in securitization activities;
    2. Internal credit ratings are linked to measurable outcomes, such 
as the probability that the position will experience any loss, the 
position's expected loss given default, and the degree of variance in 
losses given default on that position;
    3. The bank holding company's internal credit risk system must 
separately consider the risk associated with the underlying loans or 
borrowers, and the risk associated with the structure of a particular 
securitization transaction;
    4. The bank holding company's internal credit risk system must 
identify gradations of risk among ``pass'' assets and other risk 
positions;
    5. The bank holding company must have clear, explicit criteria that 
are used to classify assets into each internal risk grade, including 
subjective factors;
    6. The bank holding company must have independent credit risk 
management or loan review personnel assigning or reviewing the credit 
risk ratings;
    7. The bank holding company must have an internal audit procedure 
that periodically verifies that the internal credit risk ratings are 
assigned in accordance with the established criteria;
    8. The bank holding company must monitor the performance of the 
internal credit risk ratings assigned to nonrated, nontraded direct 
credit substitutes over time to determine the appropriateness of the 
initial credit risk rating assignment and adjust individual credit risk 
ratings, or the overall internal credit risk ratings system, as needed; 
and
    9. The internal credit risk system must make credit risk rating 
assumptions that are consistent with, or more conservative than, the 
credit risk rating assumptions and methodologies of NRSROs.
    ii. Program Ratings. A direct credit substitute or recourse 
obligation (other than a residual interest) is assumed or retained in 
connection with a structured finance program and a NRSRO has reviewed 
the terms of the program and stated a rating for positions associated 
with the program. If the program has options for different combinations 
of assets, standards, internal credit enhancements and other relevant 
factors, and the NRSRO specifies ranges of rating categories to them, 
the bank holding company may apply the rating category that corresponds 
to the bank holding company's position. In order to rely on a program 
rating, the bank holding company must demonstrate to the Federal 
Reserve's satisfaction that the credit risk rating assigned to the 
program meets the same standards generally used by NRSROs for rating 
traded positions. The bank holding company must also demonstrate to the 
Federal Reserve's satisfaction that the criteria underlying the NRSRO's 
assignment of ratings for the program are satisfied for the particular 
position. If a bank holding company participates in a securitization 
sponsored by another party, the Federal Reserve may authorize the bank 
holding company to use this approach based on a programmatic rating 
obtained by the sponsor of the program.
    iii. Computer Program. The bank holding company is using an 
acceptable credit assessment computer program to determine the rating of 
a direct credit substitute or recourse obligation (but not residual 
interest) issued in connection with a structured finance program. A 
NRSRO must have developed the computer program, and the bank holding 
company must demonstrate to the Federal Reserve's satisfaction that 
ratings under the program correspond credibly and reliably with the 
rating of traded positions.
    g. Limitations on risk-based capital requirements--i. Low-level 
exposure. If the maximum contractual exposure to loss retained or 
assumed by a bank holding company in connection with a recourse 
obligation or a direct credit substitute is less than the effective 
risk-based capital requirement for the enhanced assets, the risk-based 
capital requirement is limited to the maximum contractual exposure, less 
any liability account established in accordance with generally accepted 
accounting principles. This limitation does

[[Page 307]]

not apply when a bank holding company provides credit enhancement beyond 
any contractual obligation to support assets it has sold.
    ii. Mortgage-related securities or participation certificates 
retained in a mortgage loan swap. If a bank holding company holds a 
mortgage-related security or a participation certificate as a result of 
a mortgage loan swap with recourse, capital is required to support the 
recourse obligation plus the percentage of the mortgage-related security 
or participation certificate that is not covered by the recourse 
obligation. The total amount of capital required for the on-balance 
sheet asset and the recourse obligation, however, is limited to the 
capital requirement for the underlying loans, calculated as if the 
organization continued to hold these loans as on-balance sheet assets.
    iii. Related on-balance sheet assets. If a recourse obligation or 
direct credit substitute subject to section III.B.3. of this appendix 
also appears as a balance sheet asset, the balance sheet asset is not 
included in an organization's risk-weighted assets to the extent the 
value of the balance sheet asset is already included in the off-balance 
sheet credit equivalent amount for the recourse obligation or direct 
credit substitute, except in the case of loan servicing assets and 
similar arrangements with embedded recourse obligations or direct credit 
substitutes. In that case, both the on-balance sheet assets and the 
related recourse obligations and direct credit substitutes are 
incorporated into the risk-based capital calculation.
    4. Maturity. Maturity is generally not a factor in assigning items 
to risk categories with the exception of claims on non-OECD banks, 
commitments, and interest rate and foreign exchange rate contracts. 
Except for commitments, short-term is defined as one year or less 
remaining maturity and long-term is defined as over one year remaining 
maturity. In the case of commitments, short-term is defined as one year 
or less original maturity and long-term is defined as over one year 
original maturity.
    5. Small Business Loans and Leases on Personal Property Transferred 
with Recourse. a. Notwithstanding other provisions of this appendix A, a 
qualifying banking organization that has transferred small business 
loans and leases on personal property (small business obligations) with 
recourse shall include in weighted-risk assets only the amount of 
retained recourse, provided two conditions are met. First, the 
transaction must be treated as a sale under GAAP and, second, the 
banking organization must establish pursuant to GAAP a non-capital 
reserve sufficient to meet the organization's reasonably estimated 
liability under the recourse arrangement. Only loans and leases to 
businesses that meet the criteria for a small business concern 
established by the Small Business Administration under section 3(a) of 
the Small Business Act are eligible for this capital treatment.
    b. For purposes of this appendix A, a banking organization is 
qualifying if it meets the criteria for well capitalized or, by order of 
the Board, adequately capitalized, as those criteria are set forth in 
the Board's prompt corrective action regulation for state member banks 
(12 CFR 208.40). For purposes of determining whether an organization 
meets these criteria, its capital ratios must be calculated without 
regard to the capital treatment for transfers of small business 
obligations with recourse specified in section III.B.5.a. of this 
appendix A. The total outstanding amount of recourse retained by a 
qualifying banking organization on transfers of small business 
obligations receiving the preferential capital treatment cannot exceed 
15 percent of the organization's total risk-based capital. By order, the 
Board may approve a higher limit.
    c. If a bank holding company ceases to be qualifying or exceeds the 
15 percent capital limitation, the preferential capital treatment will 
continue to apply to any transfers of small business obligations with 
recourse that were consummated during the time that the organization was 
qualifying and did not exceed the capital limit.
    6. Asset-backed commercial paper programs. a. An asset-backed 
commercial paper (ABCP) program means a program that primarily issues 
externally rated commercial paper backed by assets or exposures held in 
a bankruptcy-remote, special purpose entity.
    b. If a bank holding company has multiple overlapping exposures 
(such as a program-wide credit enhancement and multiple pool-specific 
liquidity facilities) to an ABCP program that is not consolidated for 
risk-based capital purposes, the bank holding company is not required to 
hold duplicative risk-based capital under this appendix against the 
overlapping position. Instead, the bank holding company should apply to 
the overlapping position the applicable risk-based capital treatment 
that results in the highest capital charge.

                             C. Risk Weights

    Attachment III contains a listing of the risk categories, a summary 
of the types of assets assigned to each category and the risk weight 
associated with each category, that is, 0 percent, 20 percent, 50 
percent, and 100 percent. A brief explanation of the components of each 
category follows.
    1. Category 1: zero percent. This category includes cash (domestic 
and foreign) owned and held in all offices of subsidiary depository 
institutions or in transit and gold bullion held in either a subsidiary 
depository institution's own vaults or in another's vaults on an 
allocated basis, to the extent it is offset

[[Page 308]]

by gold bullion liabilities. \36\ The category also includes all direct 
claims (including securities, loans, and leases) on, and the portions of 
claims that are directly and unconditionally guaranteed by, the central 
governments \37\ of the OECD countries and U.S. Government agencies, 
\38\ as well as all direct local currency claims on, and the portions of 
local currency claims that are directly and unconditionally guaranteed 
by, the central governments of non-OECD countries, to the extent that 
subsidiary depository institutions have liabilities booked in that 
currency. A claim is not considered to be unconditionally guaranteed by 
a central government if the validity of the guarantee is dependent upon 
some affirmative action by the holder or a third party. Generally, 
securities guaranteed by the U.S. Government or its agencies that are 
actively traded in financial markets, such as GNMA securities, are 
considered to be unconditionally guaranteed.
---------------------------------------------------------------------------

    \36\ All other holdings of bullion are assigned to the 100 percent 
risk category.
    \37\ A central government is defined to include departments and 
ministries, including the central bank, of the central government. The 
U.S. central bank includes the 12 Federal Reserve Banks, and stock held 
in these banks as a condition of membership is assigned to the zero 
percent risk category. The definition of central government does not 
include state, provincial, or local governments; or commercial 
enterprises owned by the central government. In addition, it does not 
include local government entities or commercial enterprises whose 
obligations are guaranteed by the central government, although any 
claims on such entities guaranteed by central governments are placed in 
the same general risk category as other claims guaranteed by central 
governments. OECD central governments are defined as central governments 
of the OECD-based group of countries; non-OECD central governments are 
defined as central governments of countries that do not belong to the 
OECD-based group of countries.
    \38\ A U.S. 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 subsidiary lending institution or by securities issued or 
guaranteed by OECD central governments or U.S. government agencies for 
which a positive margin of collateral is maintained on a daily basis, 
fully taking into account any change in the banking organization's 
exposure to the obligor or counterparty under a claim in relation to the 
market value of the collateral held in support of that claim.
    This category also includes ABCP (i) purchased by a bank holding 
company 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 
holding company 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 by, \39\ U.S. depository institutions \40\ and 
foreign banks \41\; and long-term claims on, and the portions of long-
term claims that are guaranteed by, U.S. depository institutions and 
OECD banks. \42\
---------------------------------------------------------------------------

    \39\ Claims guaranteed by U.S. depository institutions and foreign 
banks include risk participations in both bankers acceptances and 
standby letters of credit, as well as participations in commitments, 
that are conveyed to U.S. depository institutions or foreign banks.
    \40\ See footnote 9 of this appendix for the definition of a U.S. 
depository institution. For this purpose, the definition also includes 
U.S.-chartered depository institutions owned by foreigners. However, 
branches and agencies of foreign banks located in the U.S., as well as 
all bank holding companies, are excluded.
    \41\ See footnote 10 of this appendix for the definition of a 
foreign bank. Foreign banks are distinguished as either OECD banks or 
non-OECD banks. OECD banks include banks and their branches (foreign and 
domestic) organized under the laws of countries (other than the United 
States) that belong to the OECD-based group of countries. Non-OECD banks 
include banks and their branches (foreign and domestic) organized under 
the laws of countries that do not belong to the OECD-based group of 
countries.
    \42\ Long-term claims on, or guaranteed by, non-OECD banks and all 
claims on bank holding companies are assigned to the 100 percent risk 
category, as are holdings of bank-issued securities that qualify as 
capital of the issuing banks.
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    b. This category also includes the portions of claims that are 
conditionally guaranteed

[[Page 309]]

by OECD central governments and U.S. Government agencies, as well as the 
portions of local currency claims that are conditionally guaranteed by 
non-OECD central governments, to the extent that subsidiary depository 
institutions have liabilities booked in that currency. In addition, this 
category also includes claims on, and the portions of claims that are 
guaranteed by, U.S. government-sponsored \43\ agencies and claims on, 
and the portions of claims guaranteed by, the International Bank for 
Reconstruction and Development (World Bank), the International Finance 
Corporation, the Interamerican Development Bank, the Asian Development 
Bank, the African Development Bank, the European Investment Bank, the 
European Bank for Reconstruction and Development, the Nordic Investment 
Bank, and other multilateral lending institutions or regional 
development banks in which the U.S. government is a shareholder or 
contributing member. General obligation claims on, or portions of claims 
guaranteed by the full faith and credit of, states or other political 
subdivisions of the U.S. or other countries of the OECD--based group are 
also assigned to this category. \44\
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    \43\ For this purpose, U.S. government-sponsored agencies are 
defined as agencies originally established or chartered by the Federal 
government to serve public purposes specified by the U.S. Congress but 
whose obligations are not explicitly guaranteed by the full faith and 
credit of the U.S. government. These agencies include the Federal Home 
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage 
Association (FNMA), the Farm Credit System, the Federal Home Loan Bank 
System, and the Student Loan Marketing Association (SLMA). Claims on 
U.S. government-sponsored agencies include capital stock in a Federal 
Home Loan Bank that is held as a condition of membership in that Bank.
    \44\ Claims on, or guaranteed by, states or other political 
subdivisions of countries that do not belong to the OECD-based group of 
countries are placed in the 100 percent risk category.
---------------------------------------------------------------------------

    c. This category also includes the portions of claims (including 
repurchase transactions) collateralized by cash on deposit in the 
subsidiary lending institution or by securities issued or guaranteed by 
OECD central governments or U.S. government agencies that do not qualify 
for the zero percent risk-weight category; collateralized by securities 
issued or guaranteed by U.S. government-sponsored agencies; or 
collateralized by securities issued by multilateral lending institutions 
or regional development banks in which the U.S. government is a 
shareholder or contributing member.
    d. This category also includes claims \45\ on, or guaranteed by, a 
qualifying securities firm \46\ incorporated in the United States or 
other member of the OECD-based group of countries provided that: the 
qualifying securities firm has a long-term issuer credit rating, or a 
rating on at least one issue of long-term debt, in one of the three 
highest investment grade rating categories from a nationally recognized 
statistical rating organization; or the claim is guaranteed by the 
firm's parent company and the parent company has such a rating. If 
ratings are available from more than one rating agency, the lowest 
rating will be used to determine whether the rating requirement has been 
met. This category also includes a collateralized claim on a qualifying 
securities firm in such a country, without regard to satisfaction of the 
rating standard, provided the claim arises under a contract that:
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    \45\ Claims on a qualifying securities firm that are instruments the 
firm, or its parent company, uses to satisfy its applicable capital 
requirement are not eligible for this risk weight.
    \46\ With regard to securities firms incorporated in the United 
States, qualifying securities firms are those securities firms that are 
broker-dealers registered with the Securities and Exchange Commission 
and are in compliance with the SEC's net capital rule, 17 CFR 240.15c3-
1. With regard to securities firms incorporated in other countries in 
the OECD-based group of countries, qualifying securities firms are those 
securities firms that a banking organization is able to demonstrate are 
subject to consolidated supervision and regulation (covering their 
direct and indirect subsidiaries, but not necessarily their parent 
organizations) comparable to that imposed on banks in OECD countries. 
Such regulation must include risk-based capital requirements comparable 
to those applied to banks under the Accord on International Convergence 
of Capital Measurement and Capital Standards (1988, as amended in 1998) 
(Basel Accord).
---------------------------------------------------------------------------

    (1) Is a reverse repurchase/repurchase agreement or securities 
lending/borrowing transaction executed under standard industry 
documentation;
    (2) Is collateralized by debt or equity securities that are liquid 
and readily marketable;
    (3) Is marked-to-market daily;
    (4) Is subject to a daily margin maintenance requirement under the 
standard industry documentation; and
    (5) Can be liquidated, terminated, or accelerated immediately in 
bankruptcy or similar proceeding, and the security or collateral 
agreement will not be stayed or avoided,

[[Page 310]]

under applicable law of the relevant jurisdiction. \47\
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    \47\ For example, a claim is exempt from the automatic stay in 
bankruptcy in the United States if it arises under a securities contract 
or repurchase agreement subject to section 555 or 559 of the Bankruptcy 
Code, respectively (11 U.S.C. 555 or 559), a qualified financial 
contract under section 11(e)(8) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)), or a netting contract between financial institutions 
under sections 401-407 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (12 U.S.C. 4401-4407), or the Board's Regulation 
EE (12 CFR Part 231).
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    3. Category 3: 50 percent. This category includes loans fully 
secured by first liens \48\ on 1- to 4-family residential properties, 
either owner-occupied or rented, or on multifamily residential 
properties,\49\ that meet certain criteria.\50\ Loans included in this 
category must have been made in accordance with prudent underwriting 
standards; \51\ be performing in accordance with their original terms; 
and not be 90 days or more past due or carried in nonaccrual status. 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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    \48\ If a banking organization holds the first and junior lien(s) on 
a residential property and no other party holds an intervening lien, the 
transaction is treated as a single loan secured by a first lien for the 
purposes of determining the loan-to-value ratio and assigning a risk 
weight.
    \49\ Loans that qualify as loans secured by 1- to 4-family 
residential properties or multifamily residential properties are listed 
in the instructions to the FR Y-9C Report. In addition, for risk-based 
capital purposes, loans secured by 1- to 4-family residential properties 
include loans to builders with substantial project equity for the 
construction of 1-to 4-family residences that have been presold under 
firm contracts to purchasers who have obtained firm commitments for 
permanent qualifying mortgage loans and have made substantial earnest 
money deposits. Such loans to builders will be considered prudently 
underwritten only if the bank holding company has obtained sufficient 
documentation that the buyer of the home intends to purchase the home 
(i.e., has a legally binding written sales contract) and has the ability 
to obtain a mortgage loan sufficient to purchase the home (i.e., has a 
firm written commitment for permanent financing of the home upon 
completion).
    \50\ Residential property loans that do not meet all the specified 
criteria or that are made for the purpose of speculative property 
development are placed in the 100 percent risk category.
    \51\ Prudent underwriting standards include a conservative ratio of 
the current loan balance to the value of the property. In the case of a 
loan secured by multifamily residential property, the loan-to-value 
ratio is not conservative if it exceeds 80 percent (75 percent if the 
loan is based on a floating interest rate). Prudent underwriting 
standards also dictate that a loan-to-value ratio used in the case of 
originating a loan to acquire a property would not be deemed 
conservative unless the value is based on the lower of the acquisition 
cost of the property or appraised (or if appropriate, evaluated) value. 
Otherwise, the loan-to-value ratio generally would be based upon the 
value of the property as determined by the most current appraisal, or if 
appropriate, the most current evaluation. All appraisals must be made in 
a manner consistent with the Federal banking agencies' real estate 
appraisal regulations and guidelines and with the banking organization's 
own appraisal guidelines.
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    (1) The structure of the security meets the criteria described in 
section III(B)(3) above;
    (2) if the security is backed by a pool of conventional mortgages, 
on 1- to 4-family residential or multifamily residential properties, 
each underlying mortgage meets the criteria described above in this 
section for eligibility for the 50 percent risk category at the time the 
pool is originated;

[[Page 311]]

    (3) If the security is backed by privately-issued mortgage-backed 
securities, each underlying security qualifies for the 50 percent risk 
category; and
    (4) If the security is backed by a pool of multifamily residential 
mortgages, principal and interest payments on the security are not 30 
days or more past due. Privately-issued mortgage-backed securities that 
do not meet these criteria or that do not qualify for a lower risk 
weight are generally assigned to the 100 percent risk category.
    Also assigned to this category are revenue (non-general obligation) 
bonds or similar obligations, including loans and leases, that are 
obligations of states or other political subdivisions of the U.S. (for 
example, municipal revenue bonds) or other countries of the OECD-based 
group, but for which the government entity is committed to repay the 
debt with revenues from the specific projects financed, rather than from 
general tax funds.
    Credit equivalent amounts of derivative contracts involving standard 
risk obligors (that is, obligors whose loans or debt securities would be 
assigned to the 100 percent risk category) are included in the 50 
percent category, unless they are backed by collateral or guarantees 
that allow them to be placed in a lower risk category.
    4. Category 4: 100 percent. a. All assets not included in the 
categories above are assigned to this category, which comprises standard 
risk assets. The bulk of the assets typically found in a loan portfolio 
would be assigned to the 100 percent category.
    b. This category includes long-term claims on, and the portions of 
long-term claims that are guaranteed by, non-OECD banks, and all claims 
on non-OECD central governments that entail some degree of transfer 
risk. \52\ This category includes all claims on foreign and domestic 
private-sector obligors not included in the categories above (including 
loans to nondepository financial institutions and bank holding 
companies); claims on commercial firms owned by the public sector; 
customer liabilities to the organization on acceptances outstanding 
involving standard risk claims;\53\ investments in fixed assets, 
premises, and other real estate owned; common and preferred stock of 
corporations, including stock acquired for debts previously contracted; 
all stripped mortgage-backed securities and similar instruments; and 
commercial and consumer loans (except those assigned to lower risk 
categories due to recognized guarantees or collateral and loans secured 
by residential property that qualify for a lower risk weight). This 
category also includes claims representing capital of a qualifying 
securities firm.
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    \52\ Such assets include all nonlocal currency claims on, and the 
portions of claims that are guaranteed by, non-OECD central governments 
and those portions of local currency claims on, or guaranteed by, non-
OECD central governments that exceed the local currency liabilities held 
by subsidiary depository institutions.
    \53\ Customer liabilities on acceptances outstanding involving 
nonstandard risk claims, such as claims on U.S. depository institutions, 
are assigned to the risk category appropriate to the identity of the 
obligor or, if relevant, the nature of the collateral or guarantees 
backing the claims. Portions of acceptances conveyed as risk 
participations to U.S. depository institutions or foreign banks are 
assigned to the 20 percent risk category appropriate to short-term 
claims guaranteed by U.S. depository institutions and foreign banks.
---------------------------------------------------------------------------

    c. Also included in this category are industrial-development bonds 
and similar obligations issued under the auspices of states or political 
subdivisions of the OECD-based group of countries for the benefit of a 
private party or enterprise where that party or enterprise, not the 
government entity, is obligated to pay the principal and interest, and 
all obligations of states or political subdivisions of countries that do 
not belong to the OECD-based group.
    d. The following assets also are assigned a risk weight of 100 
percent if they have not been deducted from capital: investments in 
unconsolidated companies, joint ventures, or associated companies; 
instruments that qualify as capital issued by other banking 
organizations; and any intangibles, including those that may have been 
grandfathered into capital.

                       D. Off-Balance Sheet Items

    The face amount of an off-balance sheet item is generally 
incorporated into risk-weighted assets in two steps. The face amount is 
first multiplied by a credit conversion factor, except for direct credit 
substitutes and recourse obligations as discussed in section III.D.1. of 
this appendix. The resultant credit equivalent amount is assigned to the 
appropriate risk category according to the obligor or, if relevant, the 
guarantor, the nature of any collateral, or external credit ratings. 
\54\
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    \54\ The sufficiency of collateral and guarantees for off-balance-
sheet items is determined by the market value of the collateral or the 
amount of the guarantee in relation to the face amount of the item, 
except for derivative contracts, for which this determination is 
generally made in relation to the credit equivalent amount. Collateral 
and guarantees are subject to the same provisions noted under section 
III.B of this appendix A.
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    1. Items with a 100 percent conversion factor. a. Except as 
otherwise provided in section

[[Page 312]]

III.B.3. of this appendix, the full amount of an asset or transaction 
supported, in whole or in part, by a direct credit substitute or a 
recourse obligation. Direct credit substitutes and recourse obligations 
are defined in section III.B.3. of this appendix.
    b. Sale and repurchase agreements and forward agreements. Forward 
agreements are legally binding contractual obligations to purchase 
assets with certain drawdown at a specified future date. Such 
obligations include forward purchases, forward forward deposits placed, 
\55\ and partly-paid shares and securities; they do not include 
commitments to make residential mortgage loans or forward foreign 
exchange contracts.
---------------------------------------------------------------------------

    \55\ Forward forward deposits accepted are treated as interest rate 
contracts.
---------------------------------------------------------------------------

    c. Securities lent by a banking organization are treated in one of 
two ways, depending upon whether the lender is at risk of loss. If a 
banking organization, as agent for a customer, lends the customer's 
securities and does not indemnify the customer against loss, then the 
transaction is excluded from the risk-based capital calculation. If, 
alternatively, a banking organization lends its own securities or, 
acting as agent for a customer, lends the customer's securities and 
indemnifies the customer against loss, the transaction is converted at 
100 percent and assigned to the risk weight category appropriate to the 
obligor, or, if applicable, to any collateral delivered to the lending 
organization, or the independent custodian acting on the lending 
organization's behalf. Where a banking organization is acting as agent 
for a customer in a transaction involving the lending or sale of 
securities that is collateralized by cash delivered to the banking 
organization, the transaction is deemed to be collateralized by cash on 
deposit in a subsidiary depository institution for purposes of 
determining the appropriate risk-weight category, provided that any 
indemnification is limited to no more than the difference between the 
market value of the securities and the cash collateral received and any 
reinvestment risk associated with that cash collateral is borne by the 
customer.
    d. In the case of direct credit substitutes in which a risk 
participation \56\ has been conveyed, the full amount of the assets that 
are supported, in whole or in part, by the credit enhancement are 
converted to a credit equivalent amount at 100 percent. However, the pro 
rata share of the credit equivalent amount that has been conveyed 
through a risk participation is assigned to whichever risk category is 
lower: the risk category appropriate to the obligor, after considering 
any relevant guarantees or collateral, or the risk category appropriate 
to the institution acquiring the participation. \57\ Any remainder is 
assigned to the risk category appropriate to the obligor, guarantor, or 
collateral. For example, the pro rata share of the full amount of the 
assets supported, in whole or in part, by a direct credit substitute 
conveyed as a risk participation to a U.S. domestic depository 
institution or foreign bank is assigned to the 20 percent risk category. 
\58\
---------------------------------------------------------------------------

    \56\ That is, a participation in which the originating banking 
organization remains liable to the beneficiary for the full amount of 
the direct credit substitute if the party that has acquired the 
participation fails to pay when the instrument is drawn.
    \57\ A risk participation in bankers acceptances conveyed to other 
institutions is also assigned to the risk category appropriate to the 
institution acquiring the participation or, if relevant, the guarantor 
or nature of the collateral.
    \58\ Risk participations with a remaining maturity of over one year 
that are conveyed to non-OECD banks are to be assigned to the 100 
percent risk category, unless a lower risk category is appropriate to 
the obligor, guarantor, or collateral.
---------------------------------------------------------------------------

    e. In the case of direct credit substitutes in which a risk 
participation has been acquired, the acquiring banking organization's 
percentage share of the direct credit substitute is multiplied by the 
full amount of the assets that are supported, in whole or in part, by 
the credit enhancement and converted to a credit equivalent amount at 
100 percent. The credit equivalent amount of an acquisition of a risk 
participation in a direct credit substitute is assigned to the risk 
category appropriate to the account party obligor or, if relevant, the 
nature of the collateral or guarantees.
    f. In the case of direct credit substitutes that take the form of a 
syndication where each banking organization is obligated only for its 
pro rata share of the risk and there is no recourse to the originating 
banking organization, each banking organization will only include its 
pro rata share of the assets supported, in whole or in part, by the 
direct credit substitute in its risk-based capital calculation. \59\
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    \59\ For example, if a banking organization has a 10 percent share 
of a $10 syndicated direct credit substitute that provides credit 
support to a $100 loan, then the banking organization's $1 pro rata 
share in the enhancement means that a $10 pro rata share of the loan is 
included in risk weighted assets.
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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 participation in performance 
standby

[[Page 313]]

letters of credit. Peformance standby letters of credit represent 
obligations backing the performance of nonfinancial or commercial 
contracts or undertakings. To the extent permitted by law or regulation, 
performance standby letters of credit include arrangements backing, 
among other things, subcontractors' and suppliers' performance, labor 
and materials contracts, and construction bids.
    b. The unused portion of commitments with an original maturity 
exceeding one year, including underwriting commitments, and commercial 
and consumer credit commitments also are converted at 50 percent. 
Original maturity is defined as the length of time between the date the 
commitment is issued and the earliest date on which: (1) The banking 
organization can, at its option, unconditionally (without cause) cancel 
the commitment;\60\ and (2) the banking organization is scheduled to 
(and as a normal practice actually does) review the facility to 
determine whether or not it should be extended. Such reviews must 
continue to be conducted at least annually for such a facility to 
qualify as a short-term commitment.
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    \60\ In the case of consumer home equity or mortgage lines of credit 
secured by liens on 1-4 family residential properties, the bank is 
deemed able to unconditionally cancel the commitment for the purpose of 
this criterion if, at its option, it can prohibit additional extensions 
of credit, reduce the credit line, and terminate the commitment to the 
full extent permitted by relevant Federal law.
---------------------------------------------------------------------------

    c.i. Commitments are defined as any legally binding arrangements 
that obligate a banking organization to extend credit in the form of 
loans or leases; to purchase loans, securities, or other assets; or to 
participate in loans and leases. They also include overdraft facilities, 
revolving credit, home equity and mortgage lines of credit, eligible 
ABCP liquidity facilities, and similar transactions. Normally, 
commitments involve a written contract or agreement and a commitment 
fee, or some other form of consideration. Commitments are included in 
weighted-risk assets regardless of whether they contain ``material 
adverse change'' clauses or other provisions that are intended to 
relieve the issuer of its funding obligation under certain conditions. 
In the case of commitments structured as syndications, where the banking 
organization is obligated solely for its pro rata share, only the 
organization's proportional share of the syndicated commitment is taken 
into account in calculating the risk-based capital ratio.
    ii. Banking organizations that are subject to the market risk rules 
are required to convert the notional amount of eligible ABCP liquidity 
facilities, in form or in substance, with an original maturity of over 
one year that are carried in the trading account at 50 percent to 
determine the appropriate credit equivalent amount even though those 
facilities are structured or characterized as derivatives or other 
trading book assets. Liquidity facilities that support ABCP, in form or 
in substance, (including those positions to which the market risk rules 
may not be applied as set forth in section 2(a) of appendix E of this 
part) that are not eligible ABCP liquidity facilities are to be 
considered recourse obligations or direct credit substitutes, and 
assessed the appropriate risk-based capital treatment in accordance with 
section III.B.3. of this appendix.
    d. Once a commitment has been converted at 50 percent, any portion 
that has been conveyed to U.S. depository institutions or OECD banks as 
participations in which the originating banking organization retains the 
full obligation to the borrower if the participating bank fails to pay 
when the instrument is drawn, is assigned to the 20 percent risk 
category. This treatment is analogous to that accorded to conveyances of 
risk participations in standby letters of credit. The acquisition of a 
participation in a commitment by a banking organization is converted at 
50 percent and assigned to the risk category appropriate to the account 
party obligor or, if relevant, the nature of the collateral or 
guarantees.
    e. Revolving underwriting facilities (RUFs), note issuance 
facilities (NIFs), and other similar arrangements also are converted at 
50 percent regardless of maturity. These are facilities under which a 
borrower can issue on a revolving basis short-term paper in its own 
name, but for which the underwriting organizations have a legally 
binding commitment either to purchase any notes the borrower is unable 
to sell by the roll-over date or to advance funds to the borrower.
    3. Items with a 20 percent conversion factor. Short-term, self-
liquidating trade-related contingencies which arise from the movement of 
goods are converted at 20 percent. Such contingencies generally include 
commercial letters of credit and other documentary letters of credit 
collateralized by the underlying shipments.
    4. Items with a 10 percent conversion factor. a. Unused portions of 
eligible ABCP liquidity facilities with an original maturity of one year 
or less also are converted at 10 percent.
    b. Banking organizations that are subject to the market risk rules 
are required to convert the notional amount of eligible ABCP liquidity 
facilities, in form or in substance, with an original maturity of one 
year or less that are carried in the trading account at 10 percent to 
determine the appropriate credit equivalent amount even though those 
facilities are structured or characterized as derivatives or other 
trading book assets. Liquidity facilities that support ABCP, in form

[[Page 314]]

or in substance, (including those positions to which the market risk 
rules may not be applied as set forth in section 2(a) of appendix E of 
this part) that are not eligible ABCP liquidity facilities are to be 
considered recourse obligations or direct credit substitutes and 
assessed the appropriate risk-based capital requirement in accordance 
with section III.B.3. of this appendix.
    5. Items with a zero percent conversion factor. These include unused 
portions of commitments (with the exception of eligible ABCP liquidity 
facilities) with an original maturity of one year or less, or which are 
unconditionally cancelable at any time, provided a separate credit 
decision is made before each drawing under the facility. Unused portions 
of lines of credit on retail credit cards and related plans are deemed 
to be short-term commitments if the banking organization has the 
unconditional right to cancel the line of credit at any time, in 
accordance with applicable law.
    E. Derivative Contracts (Interest Rate, Exchange Rate, Commodity- 
(including precious metals) and Equity-Linked Contracts)
    1. Scope. Credit equivalent amounts are computed for each of the 
following off-balance-sheet derivative contracts:
    a. Interest Rate Contracts. These include single currency interest 
rate swaps, basis swaps, forward rate agreements, interest rate options 
purchased (including caps, collars, and floors purchased), and any other 
instrument linked to interest rates that gives rise to similar credit 
risks (including when-issued securities and forward forward deposits 
accepted).
    b. Exchange Rate Contracts. These include cross-currency interest 
rate swaps, forward foreign exchange contracts, currency options 
purchased, and any other instrument linked to exchange rates that gives 
rise to similar credit risks.
    c. Equity Derivative Contracts. These include equity-linked swaps, 
equity-linked options purchased, forward equity-linked contracts, and 
any other instrument linked to equities that gives rise to similar 
credit risks.
    d. Commodity (including precious metal) Derivative Contracts. These 
include commodity-linked swaps, commodity-linked options purchased, 
forward commodity-linked contracts, and any other instrument linked to 
commodities that gives rise to similar credit risks.
    e. Exceptions. Exchange rate contracts with an original maturity of 
fourteen or fewer calendar days and derivative contracts traded on 
exchanges that require daily receipt and payment of cash variation 
margin may be excluded from the risk-based ratio calculation. Gold 
contracts are accorded the same treatment as exchange rate contracts 
except that gold contracts with an original maturity of fourteen or 
fewer calendar days are included in the risk-based ratio calculation. 
Over-the-counter options purchased are included and treated in the same 
way as other derivative contracts.
    2. Calculation of credit equivalent amounts. a. The credit 
equivalent amount of a derivative contract that is not subject to a 
qualifying bilateral netting contract in accordance with section 
III.E.3. of this appendix A is equal to the sum of (i) the current 
exposure (sometimes referred to as the replacement cost) of the 
contract; and (ii) an estimate of the potential future credit exposure 
of the contract.
    b. The current exposure is determined by the mark-to-market value of 
the contract. If the mark-to-market value is positive, then the current 
exposure is equal to that mark-to-market value. If the mark-to-market 
value is zero or negative, then the current exposure is zero. Mark-to-
market values are measured in dollars, regardless of the currency or 
currencies specified in the contract and should reflect changes in 
underlying rates, prices, and indices, as well as counterparty credit 
quality.
    c. The potential future credit exposure of a contract, including a 
contract with a negative mark-to-market value, is estimated by 
multiplying the notional principal amount of the contract by a credit 
conversion factor. Banking organizations should use, subject to examiner 
review, the effective rather than the apparent or stated notional amount 
in this calculation. The credit conversion factors are:

                                               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 315]]

    d. For a contract that is structured such that on specified dates 
any outstanding exposure is settled and the terms are reset so that the 
market value of the contract is zero, the remaining maturity is equal to 
the time until the next reset date. For an interest rate contract with a 
remaining maturity of more than one year that meets these criteria, the 
minimum conversion factor is 0.5 percent.
    e. For a contract with multiple exchanges of principal, the 
conversion factor is multiplied by the number of remaining payments in 
the contract. A derivative contract not included in the definitions of 
interest rate, exchange rate, equity, or commodity contracts as set 
forth in section III.E.1. of this appendix A is subject to the same 
conversion factors as a commodity, excluding precious metals.
    f. No potential future exposure is calculated for a single currency 
interest rate swap in which payments are made based upon two floating 
rate indices (a so called floating/floating or basis swap); the credit 
exposure on such a contract is evaluated solely on the basis of the 
mark-to-market value.
    g. The Board notes that the conversion factors set forth above, 
which are based on observed volatilities of the particular types of 
instruments, are subject to review and modification in light of changing 
volatilities or market conditions.
    3. Netting. a. For purposes of this appendix A, netting refers to 
the offsetting of positive and negative mark-to-market values when 
determining a current exposure to be used in the calculation of a credit 
equivalent amount. Any legally enforceable form of bilateral netting 
(that is, netting with a single counterparty) of derivative contracts is 
recognized for purposes of calculating the credit equivalent amount 
provided that:
    i. The netting is accomplished under a written netting contract that 
creates a single legal obligation, covering all included individual 
contracts, with the effect that the banking organization would have a 
claim to receive, or obligation to pay, only the net amount of the sum 
of the positive and negative mark-to-market values on included 
individual contracts in the event that a counterparty, or a counterparty 
to whom the contract has been validly assigned, fails to perform due to 
any of the following events: default, insolvency, liquidation, or 
similar circumstances.
    ii. The banking organization obtains a written and reasoned legal 
opinion(s) representing that in the event of a legal challenge--
including one resulting from default, insolvency, liquidation, or 
similar circumstances--the relevant court and administrative authorities 
would find the banking organization's exposure to be the net amount 
under:
    1. The law of the jurisdiction in which the counterparty is 
chartered or the equivalent location in the case of noncorporate 
entities, and if a branch of the counterparty is involved, then also 
under the law of the jurisdiction in which the branch is located;
    2. The law that governs the individual contracts covered by the 
netting contract; and
    3. The law that governs the netting contract.
    iii. The banking organization establishes and maintains procedures 
to ensure that the legal characteristics of netting contracts are kept 
under review in the light of possible changes in relevant law.
    iv. The banking organization maintains in its files documentation 
adequate to support the netting of derivative contracts, including a 
copy of the bilateral netting contract and necessary legal opinions.
    b. A contract containing a walkaway clause is not eligible for 
netting for purposes of calculating the credit equivalent amount. \61\
---------------------------------------------------------------------------

    \61\ A walkaway clause is a provision in a netting contract that 
permits a non-defaulting counterparty to make lower payments than it 
would make otherwise under the contract, or no payment at all, to a 
defaulter or to the estate of a defaulter, even if the defaulter or the 
estate of the defaulter is a net creditor under the contract.
---------------------------------------------------------------------------

    c. A banking organization netting individual contracts for the 
purpose of calculating credit equivalent amounts of derivative contracts 
represents that it has met the requirements of this appendix A and all 
the appropriate documents are in the banking organization's files and 
available for inspection by the Federal Reserve. The Federal Reserve may 
determine that a banking organization's files are inadequate or that a 
netting contract, or any of its underlying individual contracts, may not 
be legally enforceable under any one of the bodies of law described in 
section III.E.3.a.ii. of this appendix A. If such a determination is 
made, the netting contract may be disqualified from recognition for 
risk-based capital purposes or underlying individual contracts may be 
treated as though they are not subject to the netting contract.
    d. The credit equivalent amount of contracts that are subject to a 
qualifying bilateral netting contract is calculated by adding (i) the 
current exposure of the netting contract (net current exposure) and (ii) 
the sum of the estimates of potential future credit exposures on all 
individual contracts subject to the netting contract (gross potential 
future exposure) adjusted to reflect the effects of the netting 
contract. \62\
---------------------------------------------------------------------------

    \62\ For purposes of calculating potential future credit exposure to 
a netting counterparty for foreign exchange contracts and other similar 
contracts in which notional principal is equivalent to cash flows, total 
notional principal is defined as the net receipts falling due on each 
value date in each currency.

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

[[Page 316]]

    e. The net current exposure is the sum of all positive and negative 
mark-to-market values of the individual contracts included in the 
netting contract. If the net sum of the mark-to-market values is 
positive, then the net current exposure is equal to that sum. If the net 
sum of the mark-to-market values is zero or negative, then the net 
current exposure is zero. The Federal Reserve may determine that a 
netting contract qualifies for risk-based capital netting treatment even 
though certain individual contracts included under the netting contract 
may not qualify. In such instances, the nonqualifying contracts should 
be treated as individual contracts that are not subject to the netting 
contract.
    f. Gross potential future exposure, or Agross is 
calculated by summing the estimates of potential future exposure 
(determined in accordance with section III.E.2 of this appendix A) for 
each individual contract subject to the qualifying bilateral netting 
contract.
    g. The effects of the bilateral netting contract on the gross 
potential future exposure are recognized through the application of a 
formula that results in an adjusted add-on amount (Anet). The 
formula, which employs the ratio of net current exposure to gross 
current exposure (NGR), is expressed as:

Anet = (0.4 x Agross) + 0.6(NGR x 
          Agross)

    h. The NGR may be calculated in accordance with either the 
counterparty-by-counterparty approach or the aggregate approach.
    i. Under the counterparty-by-counterparty approach, the NGR is the 
ratio of the net current exposure for a netting contract to the gross 
current exposure of the netting contract. The gross current exposure is 
the sum of the current exposures of all individual contracts subject to 
the netting contract calculated in accordance with section III.E.2. of 
this appendix A. Net negative mark-to-market values for individual 
netting contracts with the same counterparty may not be used to offset 
net positive mark-to-market values for other netting contracts with the 
same counterparty.
    ii. Under the aggregate approach, the NGR is the ratio of the sum of 
all of the net current exposures for qualifying bilateral netting 
contracts to the sum of all of the gross current exposures for those 
netting contracts (each gross current exposure is calculated in the same 
manner as in section III.E.3.h.i. of this appendix A). Net negative 
mark-to-market values for individual counterparties may not be used to 
offset net positive current exposures for other counterparties.
    iii. A banking organization must use consistently either the 
counterparty-by-counterparty approach or the aggregate approach to 
calculate the NGR. Regardless of the approach used, the NGR should be 
applied individually to each qualifying bilateral netting contract to 
determine the adjusted add-on for that netting contract.
    i. In the event a netting contract covers contracts that are 
normally excluded from the risk-based ratio calculation--for example, 
exchange rate contracts with an original maturity of fourteen or fewer 
calendar days or instruments traded on exchanges that require daily 
payment and receipt of cash variation margin--an institution may elect 
to either include or exclude all mark-to-market values of such contracts 
when determining net current exposure, provided the method chosen is 
applied consistently.
    4. Risk Weights. Once the credit equivalent amount for a derivative 
contract, or a group of derivative contracts subject to a qualifying 
bilateral netting contract, has been determined, that amount is assigned 
to the risk category appropriate to the counterparty, or, if relevant, 
the guarantor or the nature of any collateral. \63\ However, the maximum 
risk weight applicable to the credit equivalent amount of such contracts 
is 50 percent.
---------------------------------------------------------------------------

    \63\ For derivative contracts, sufficiency of collateral or 
guarantees is generally determined by the market value of the collateral 
or the amount of the guarantee in relation to the credit equivalent 
amount. Collateral and guarantees are subject to the same provisions 
noted under section III.B. of this appendix A.
---------------------------------------------------------------------------

    5. Avoidance of double counting. a. In certain cases, credit 
exposures arising from the derivative contracts covered by section 
III.E. of this appendix A may already be reflected, in part, on the 
balance sheet. To avoid double counting such exposures in the assessment 
of capital adequacy and, perhaps, assigning inappropriate risk weights, 
counterparty credit exposures arising from the derivative instruments 
covered by these guidelines may need to be excluded from balance sheet 
assets in calculating a banking organization's risk-based capital 
ratios.
    b. Examples of the calculation of credit equivalent amounts for 
contracts covered under this section III.E. are contained in Attachment 
V of this appendix A.

              IV. Minimum Supervisory Ratios and Standards

    The interim and final supervisory standards set forth below specify 
minimum supervisory ratios based primarily on broad credit

[[Page 317]]

risk considerations. As noted above, the risk-based ratio does not take 
explicit account of the quality of individual asset portfolios or the 
range of other types of risks to which banking organizations may be 
exposed, such as interest rate, liquidity, market or operational risks. 
For this reason, banking organizations are generally expected to operate 
with capital positions well above the minimum ratios.
    Institutions with high or inordinate levels of risk are expected to 
operate well above minimum capital standards. Banking organizations 
experiencing or anticipating significant growth are also expected to 
maintain capital, including tangible capital positions, well above the 
minimum levels. For example, most such organizations generally have 
operated at capital levels ranging from 100 to 200 basis points above 
the stated minimums. Higher capital ratios could be required if 
warranted by the particular circumstances or risk profiles of individual 
banking organizations. In all cases, organizations should hold capital 
commensurate with the level and nature of all of the risks, including 
the volume and severity of problem loans, to which they are exposed.
    Upon adoption of the risk-based framework, any organization that 
does not meet the interim or final supervisory ratios, or whose capital 
is otherwise considered inadequate, is expected to develop and implement 
a plan acceptable to the Federal Reserve for achieving an adequate level 
of capital consistent with the provisions of these guidelines or with 
the special circumstances affecting the individual organization. In 
addition, such organizations should avoid any actions, including 
increased risk-taking or unwarranted expansion, that would lower or 
further erode their capital positions.

           A. Minimum Risk-Based Ratio After Transition Period

    As reflected in Attachment VI, by year-end 1992, all bank holding 
companies \64\ should meet a minimum ratio of qualifying total capital 
to weighted risk assets of 8 percent, of which at least 4.0 percentage 
points should be in the form of Tier 1 capital. For purposes of section 
IV.A., Tier 1 capital is defined as the sum of core capital elements 
less goodwill and other intangible assets required to be deducted in 
accordance with section II.B.1.b. of this appendix. The maximum amount 
of supplementary capital elements that qualifies as Tier 2 capital is 
limited to 100 percent of Tier 1 capital. In addition, the combined 
maximum amount of subordinated debt and intermediate-term preferred 
stock that qualifies as Tier 2 capital is limited to 50 percent of Tier 
1 capital. The maximum amount of the allowance for loan and lease losses 
that qualifies as Tier 2 capital is limited to 1.25 percent of gross 
weighted risk assets. Allowances for loan and lease losses in excess of 
this limit may, of course, be maintained, but would not be included in 
an organization's total capital. The Federal Reserve will continue to 
require bank holding companies to maintain reserves at levels fully 
sufficient to cover losses inherent in their loan portfolios.
---------------------------------------------------------------------------

    \64\ As noted in section I, bank holding companies with less than 
$500 million in consolidated assets would generally be exempt from the 
calculation and analysis of risk-based ratios on a consolidated holding 
company basis, subject to certain terms and conditions.
---------------------------------------------------------------------------

    Qualifying total capital is calculated by adding Tier 1 capital and 
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then 
deducting from this sum certain investments in banking or finance 
subsidiaries that are not consolidated for accounting or supervisory 
purposes, reciprocal holdings of banking organizations' capital 
securities, or other items at the direction of the Federal Reserve. The 
conditions under which these deductions are to be made and the 
procedures for making the deductions are discussed above in section 
II(B).

                       B. Transition Arrangements

    The transition period for implementing the risk-based capital 
standard ends on December 31, 1992. Initially, the risk-based capital 
guidelines do not establish a minimum level of capital. However, by 
year-end 1990, banking organizations are expected to meet a minimum 
interim target ratio for qualifying total capital to weighted risk 
assets of 7.25 percent, at least one-half of which should be in the form 
of Tier 1 capital. For purposes of meeting the 1990 interim target, the 
amount of loan loss reserves that may be included in capital is limited 
to 1.5 percent of weighted risk assets and up to 10 percent of an 
organization's Tier 1 capital may consist of supplementary capital 
elements. Thus, the 7.25 percent interim target ratio implies a minimum 
ratio of Tier 1 capital to weighted risk assets of 3.6 percent (one-half 
of 7.25) and a minimum ratio of core capital elements to weighted risk 
assets ratio of 3.25 percent (nine-tenths of the Tier 1 capital ratio).
    Through year-end 1990, banking organizations have the option of 
complying with the minimum 7.25 percent year-end 1990 risk-based capital 
standard, in lieu of the minimum 5.5 percent primary and 6 percent total 
capital to total assets ratios set forth in appendix B of this part. In 
addition, as more fully set forth in appendix D to this part, banking 
organizations are expected to maintain a minimum ratio of Tier 1 capital 
to total assets during this transition period.

[[Page 318]]



  Attachment I--Sample Calculation of Risk-Based Capital Ratio for Bank
                            Holding Companies
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Example of a banking organization with $6,000 in total capital and the
 following assets and off-balance sheet items:
Balance Sheet Assets:
    Cash...................................................       $5,000
    U.S. Treasuries........................................       20,000
    Balances at domestic banks.............................        5,000
    Loans secured by first liens on 1-4 family residential         5,000
     properties............................................
    Loans to private corporations..........................       65,000
                                                            ------------
      Total Balance Sheet Assets...........................     $100,000
                                                            ============
Off-Balance Sheet Items:
    Standby letters of credit (``SLCs'') backing general         $10,000
     obligation debt issues of U.S. municipalities
     (``GOs'').............................................
    Long-term legally binding commitments to private              20,000
     corporations..........................................
                                                            ------------
      Total Off/Balance Sheet Items........................      $30,000
This bank holding company's total capital to total assets (leverage)
 ratio would be: ($6,000/$100,000) = 6.00%.
To compute the bank holding company's weighted risk assets:
1. Compute the credit equivalent amount of each off-balance sheet
 (``OBS'') item.
------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                                                                        Credit
                             OBS item                                Face value      Conversion       equivalent
                                                                                       factor           amount
----------------------------------------------------------------------------------------------------------------
SLCS backing municipal GOs........................................      $10,000            1.00   =      $10,000
                                                                                 x
Long-term commitments to private corporations.....................      $20,000            0.50   =      $10,000
                                                                                 x
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               0   =            0
                                                                                 x
                                                                   =============
20% Category:
    Balances at domestic banks....................................        5,000
    Credit equivalent amounts of SLCs backing GOs of U.S.                10,000
     municipalities...............................................
                                                                   --------------
                                                                         15,000             .20   =       $3,000
                                                                                 x
                                                                   =============
50% Category:
    Loans secured by first liens on 1-4 family residential                5,000             .50   =       $2,500
     properties...................................................               x
                                                                   =============
100% Category:
    Loans to private corporations.................................       65,000
    Credit equivalent amounts of long-term commitments to private        10,000
     corporations.................................................
                                                                   -------------
                                                                        $75,000            1.00   =       75,000
                                                                                 x
                                                                                                    ------------
      Total Risk-weighted Assets..................................  ...........  .  ...........  ..       80,500
This bank holding company's ratio of total capital to weighted risk assets (risk-based capital ratio) would be:
 ($6,000/$80,500) = 7.45%
----------------------------------------------------------------------------------------------------------------

   C. Optional Transition Provisions Related to the Implementation of 
                Consolidation Requirements under FAS 167

    This section IV.C. provides optional transition provisions for a 
banking organization 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 banking 
organization'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 banking organization 
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 banking organization did not consolidate the VIE on its 
balance sheet for calendar quarter-end regulatory report dates prior to 
the implementation date,

[[Page 319]]

    (3) The banking organization 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 banking organization 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
    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 banking organization is the sponsor of the ABCP program,
    (2) Prior to the implementation date, the banking organization 
consolidated the VIE onto its balance sheet under GAAP and excluded the 
VIE's assets from the banking organization's risk-weighted assets, and
    (3) The banking organization 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 the two calendar quarter-end regulatory 
report dates during the exclusion period, a banking organization 
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 banking organization 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 banking 
organization 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 banking organization 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 banking organization 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 banking 
organization has provided recourse through credit enhancement beyond any 
contractual obligation to support assets it has sold may not be excluded 
from risk-weighted assets.

[Reg. Y, 54 FR 4209, Jan. 27, 1989]

    Editorial Note: For Federal Register citations affecting appendix A 
to part 225, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.



                 Sec. Appendix B to Part 225 [Reserved]



Sec. Appendix C to Part 225--Small Bank Holding Company and Savings and 
                  Loan Holding Company Policy Statement

   Policy Statement on Assessment of Financial and Managerial Factors

    In acting on applications filed under the Bank Holding Company Act, 
the Board has adopted, and continues to follow, the principle that bank 
holding companies should serve as a source of strength for their 
subsidiary banks. When bank holding companies incur debt and rely upon 
the earnings of their subsidiary banks as the means of repaying such 
debt, a question arises as to the probable effect upon the financial 
condition of the holding company and its subsidiary bank or banks.
    The Board believes that a high level of debt at the parent holding 
company impairs the ability of a bank holding company to provide 
financial assistance to its subsidiary bank(s) and, in some cases, the 
servicing requirements on such debt may be a significant drain on the 
resources of the bank(s). For these reasons, the Board has not favored 
the use of acquisition debt in the formation

[[Page 320]]

of bank holding companies or in the acquisition of additional banks. 
Nevertheless, the Board has recognized that the transfer of ownership of 
small banks often requires the use of acquisition debt. The Board, 
therefore, has permitted the formation and expansion of small bank 
holding companies with debt levels higher than would be permitted for 
larger holding companies. Approval of these applications has been given 
on the condition that small bank holding companies demonstrate the 
ability to service acquisition debt without straining the capital of 
their subsidiary banks and, further, that such companies restore their 
ability to serve as a source of strength for their subsidiary banks 
within a relatively short period of time.
    In the interest of continuing its policy of facilitating the 
transfer of ownership in banks without compromising bank safety and 
soundness, the Board has, as described below, adopted the following 
procedures and standards for the formation and expansion of small bank 
holding companies subject to this policy statement.

                  1. Applicability of Policy Statement

    This policy statement applies only to bank holding companies with 
pro forma consolidated assets of less than $1 billion that (i) are not 
engaged in significant nonbanking activities either directly or through 
a nonbank subsidiary; (ii) do not conduct significant off-balance sheet 
activities (including securitization and asset management or 
administration) either directly or through a nonbank subsidiary; and 
(iii) do not have a material amount of debt or equity securities 
outstanding (other than trust preferred securities) that are registered 
with the Securities and Exchange Commission. The Board may in its 
discretion exclude any bank holding company, regardless of asset size, 
from the policy statement if such action is warranted for supervisory 
purposes. \1\ With the exception of section 4 (Additional Application 
Requirements for Expedited/Waived Processing), the policy statement 
applies to savings and loan holding companies as if they were bank 
holding companies.
---------------------------------------------------------------------------

    \1\ [Reserved]
---------------------------------------------------------------------------

    While this policy statement primarily applies to the formation of 
small bank holding companies, it also applies to existing small bank 
holding companies that wish to acquire an additional bank or company and 
to transactions involving changes in control, stock redemptions, or 
other shareholder transactions. \2\
---------------------------------------------------------------------------

    \2\ The appropriate Reserve Bank should be contacted to determine 
the manner in which a specific situation may qualify for treatment under 
this policy statement.
---------------------------------------------------------------------------

                         2. Ongoing Requirements

    The following guidelines must be followed on an ongoing basis for 
all organizations operating under this policy statement.
    A. Reduction in parent company leverage: Small bank holding 
companies are to reduce their parent company debt consistent with the 
requirement that all debt be retired within 25 years of being incurred. 
The Board also expects that these bank holding companies reach a debt to 
equity ratio of .30:1 or less within 12 years of the incurrence of the 
debt. \3\ The bank holding company must also

[[Page 321]]

comply with debt servicing and other requirements imposed by its 
creditors.
---------------------------------------------------------------------------

    \3\ The term debt, as used in the ratio of debt to equity, means any 
borrowed funds (exclusive of short-term borrowings that arise out of 
current transactions, the proceeds of which are used for current 
transactions), and any securities issued by, or obligations of, the 
holding company that are the functional equivalent of borrowed funds.
    Subordinated debt associated with trust preferred securities 
generally would be treated as debt for purposes of paragraphs 2.C., 
3.A., 4.A.i., and 4.B.i. of this policy statement. A bank holding 
company, however, may exclude from debt an amount of subordinated debt 
associated with trust preferred securities up to 25 percent of the 
holding company's equity (as defined below) less goodwill on the parent 
company's balance sheet in determining compliance with the requirements 
of such paragraphs of the policy statement. In addition, a bank holding 
company subject to this policy statement that has not issued 
subordinated debt associated with a new issuance of trust preferred 
securities after December 31, 2005, may exclude from debt any 
subordinated debt associated with trust preferred securities until 
December 31, 2010. Bank holding companies subject to this policy 
statement also may exclude from debt until December 31, 2010, any 
subordinated debt associated with refinanced issuances of trust 
preferred securities originally issued on or prior to December 31, 2005, 
provided that the refinancing does not increase the bank holding 
company's outstanding amount of subordinated debt. Subordinated debt 
associated with trust preferred securities will not be included as debt 
in determining compliance with any other requirements of this policy 
statement.
    In addition, notwithstanding any other provision of this policy 
statement and for purposes of compliance with paragraphs 2.C., 3.A., 
4.A.i, and 4.B.i. of this policy statement, both a bank holding company 
that is organized in mutual form and a bank holding company that has 
made a valid election to be taxed under Subchapter S of Chapter 1 of the 
U.S. Internal Revenue Code may exclude from debt subordinated debentures 
issued to the United States Department of the Treasury under (i) the 
Troubled Asset Relief Program established by the Emergency Economic 
Stabilization Act of 2008, Division A of Public Law 110-343, 122 Stat. 
3765 (2008), and (ii) the Small Business Lending Fund established by the 
Small Business Jobs Act of 2010, title IV of Public Law 111-240, 124 
Stat. 2504 (2010).
    The term equity, as used in the ratio of debt to equity, means the 
total stockholders' equity of the bank holding company as defined in 
accordance with generally accepted accounting principles. In determining 
the total amount of stockholders' equity, the bank holding company 
should account for its investments in the common stock of subsidiaries 
by the equity method of accounting.
    Ordinarily the Board does not view redeemable preferred stock as a 
substitute for common stock in a small bank holding company. 
Nevertheless, to a limited degree and under certain circumstances, the 
Board will consider redeemable preferred stock as equity in the capital 
accounts of the holding company if the following conditions are met: (1) 
The preferred stock is redeemable only at the option of the issuer; and 
(2) the debt to equity ratio of the holding company would be at or 
remain below .30:1 following the redemption or retirement of any 
preferred stock. Preferred stock that is convertible into common stock 
of the holding company may be treated as equity.
---------------------------------------------------------------------------

    B. Capital adequacy: Each insured depository subsidiary of a small 
bank holding company is expected to be well-capitalized. Any institution 
that is not well-capitalized is expected to become well-capitalized 
within a brief period of time.
    C. Dividend restrictions: A small bank holding company whose debt to 
equity ratio is greater than 1.0:1 is not expected to pay corporate 
dividends until such time as it reduces its debt to equity ratio to 
1.0:1 or less and otherwise meets the criteria set forth in Sec. Sec. 
225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of Regulation Y. \4\
---------------------------------------------------------------------------

    \4\ Dividends may be paid by small bank holding companies with debt 
to equity at or below 1.0:1 and otherwise meeting the requirements of 
Sec. Sec. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) if the 
dividends are reasonable in amount, do not adversely affect the ability 
of the bank holding company to service its debt in an orderly manner, 
and do not adversely affect the ability of the subsidiary banks to be 
well-capitalized. It is expected that dividends will be eliminated if 
the holding company is (1) not reducing its debt consistent with the 
requirement that the debt to equity ratio be reduced to .30:1 within 12 
years of consummation of the proposal or (2) not meeting the 
requirements of its loan agreement(s).
---------------------------------------------------------------------------

    Small bank holding companies formed before the effective date of 
this policy statement may switch to a plan that adheres to the intent of 
this statement provided they comply with the requirements set forth 
above.

                 3. Core Requirements for All Applicants

    In assessing applications or notices by organizations subject to 
this policy statement, the Board will continue to take into account a 
full range of financial and other information about the applicant, and 
its current and proposed subsidiaries, including the recent trend and 
stability of earnings, past and prospective growth, asset quality, the 
ability to meet debt servicing requirements without placing an undue 
strain on the resources of the bank(s), and the record and competency of 
management. In addition, the Board will require applicants to meet the 
following requirements:
    A. Minimum down payment: The amount of acquisition debt should not 
exceed 75 percent of the purchase price of the bank(s) or company to be 
acquired. When the owner(s) of the holding company incurs debt to 
finance the purchase of the bank(s) or company, such debt will be 
considered acquisition debt even though it does not represent an 
obligation of the bank holding company, unless the owner(s) can 
demonstrate that such debt can be serviced without reliance on the 
resources of the bank(s) or bank holding company.
    B. Ability to reduce parent company leverage: The bank holding 
company must clearly be able to reduce its debt to equity ratio and 
comply with its loan agreement(s) as set forth in paragraph 2A above.
    Failure to meet the criteria in this section would normally result 
in denial of an application.

 4. Additional Application Requirements for Expedited/Waived Processing

    A. Expedited notices under Sec. Sec. 225.14 and 225.23 of 
Regulation Y: A small bank holding company proposal will be eligible for 
the expedited processing procedures set forth in Sec. Sec. 225.14 and 
225.23 of Regulation Y if the bank holding company is in compliance with 
the ongoing requirements of this policy statement, the bank holding 
company meets the core requirements for all applicants noted above, and 
the following requirements are met:
    i. The parent bank holding company has a pro forma debt to equity 
ratio of 1.0:1 or less.
    ii. The bank holding company meets all of the criteria for expedited 
action set forth in Sec. Sec. 225.14 or 225.23 of Regulation Y.

[[Page 322]]

    B. Waiver of stock redemption filing: A small bank holding company 
will be eligible for the stock redemption filing exception for well-
capitalized bank holding companies contained in Sec. 225.4(b)(6) if the 
following requirements are met:
    i. The parent bank holding company has a pro forma debt to equity 
ratio of 1.0:1 or less.
    ii. The bank holding company is in compliance with the ongoing 
requirements of this policy statement and meets the requirements of 
Sec. Sec. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of 
Regulation Y.

[Reg. Y, 62 FR 9343, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 
2006; 74 FR 26081, June 1, 2009; 80 FR 20158, Apr. 15, 2015]



               Sec. Appendixes D-E to Part 225 [Reserved]



    Sec. Appendix F to Part 225--Interagency Guidelines Establishing 
                     Information Security Standards

                            Table of Contents

I. Introduction
    A. Scope
    B. Preservation of Existing Authority
    C. Definitions
II. Standards for Safeguarding Customer Information
    A. Information Security Program
    B. Objectives
III. Development and Implementation of Customer Information Security 
Program
    A. Involve the Board of Directors
    B. Assess Risk
    C. Manage and Control Risk
    D. Oversee Service Provider Arrangements
    E. Adjust the Program
    F. Report to the Board
    G. Implement the Standards

                             I. Introduction

    These Interagency Guidelines Establishing Information Security 
Standards (Guidelines) set forth standards pursuant to sections 501 and 
505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805). These 
Guidelines address standards for developing and implementing 
administrative, technical, and physical safeguards to protect the 
security, confidentiality, and integrity of customer information.
    A. Scope. The Guidelines apply to customer information maintained by 
or on behalf of bank holding companies and their nonbank subsidiaries or 
affiliates (except brokers, dealers, persons providing insurance, 
investment companies, and investment advisors), for which the Board has 
supervisory authority.
    B. Preservation of Existing Authority. These Guidelines do not in 
any way limit the authority of the Board to address unsafe or unsound 
practices, violations of law, unsafe or unsound conditions, or other 
practices. The Board may take action under these Guidelines 
independently of, in conjunction with, or in addition to, any other 
enforcement action available to the Board.
    C. Definitions. 1. Except as modified in the Guidelines, or unless 
the context otherwise requires, the terms used in these Guidelines have 
the same meanings as set forth in sections 3 and 39 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813 and 1831p-1).
    2. For purposes of the Guidelines, the following definitions apply:
    a. Board of directors, in the case of a branch or agency of a 
foreign bank, means the managing official in charge of the branch or 
agency.
    b. Customer means any customer of the bank holding company as 
defined in Sec. 1016.3(i) of this chapter.
    c. Customer information means any record containing nonpublic 
personal information, as defined in Sec. 1016.3(p) of this chapter, 
about a customer, whether in paper, electronic, or other form, that is 
maintained by or on behalf of the bank holding company.
    d. Customer information systems means any methods used to access, 
collect, store, use, transmit, protect, or dispose of customer 
information.
    e. Service provider means any person or entity that maintains, 
processes, or otherwise is permitted access to customer information 
through its provision of services directly to the bank holding company.
    f. Subsidiary means any company controlled by a bank holding 
company, except a broker, dealer, person providing insurance, investment 
company, investment advisor, insured depository institution, or 
subsidiary of an insured depository institution.

           II. Standards for Safeguarding Customer Information

    A. Information Security Program. Each bank holding company shall 
implement a comprehensive written information security program that 
includes administrative, technical, and physical safeguards appropriate 
to the size and complexity of the bank holding company and the nature 
and scope of its activities. While all parts of the bank holding company 
are not required to implement a uniform set of policies, all elements of 
the information security program must be coordinated. A bank holding 
company also shall ensure that each of its subsidiaries is subject to a 
comprehensive information security program. The bank holding company may 
fulfill this requirement either by including a subsidiary within the 
scope of the bank holding company's comprehensive information security 
program or by causing the subsidiary to implement a separate 
comprehensive information security program in

[[Page 323]]

accordance with the standards and procedures in sections II and III of 
this appendix that apply to bank holding companies.
    B. Objectives. A bank holding company's information security program 
shall be designed to:
    1. Ensure the security and confidentiality of customer information;
    2. Protect against any anticipated threats or hazards to the 
security or integrity of such information; and
    3. Protect against unauthorized access to or use of such information 
that could result in substantial harm or inconvenience to any customer.

   III. Development and Implementation of Information Security Program

    A. Involve the Board of Directors. The board of directors or an 
appropriate committee of the board of each bank holding company shall:
    1. Approve the bank holding company's written information security 
program; and
    2. Oversee the development, implementation, and maintenance of the 
bank holding company's information security program, including assigning 
specific responsibility for its implementation and reviewing reports 
from management.
    B. Assess Risk. Each bank holding company shall:
    1. Identify reasonably foreseeable internal and external threats 
that could result in unauthorized disclosure, misuse, alteration, or 
destruction of customer information or customer information systems.
    2. Assess the likelihood and potential damage of these threats, 
taking into consideration the sensitivity of customer information.
    3. Assess the sufficiency of policies, procedures, customer 
information systems, and other arrangements in place to control risks.
    C. Manage and Control Risk. Each bank holding company shall:
    1. Design its information security program to control the identified 
risks, commensurate with the sensitivity of the information as well as 
the complexity and scope of the bank holding company's activities. Each 
bank holding company must consider whether the following security 
measures are appropriate for the bank holding company and, if so, adopt 
those measures the bank holding company concludes are appropriate:
    a. Access controls on customer information systems, including 
controls to authenticate and permit access only to authorized 
individuals and controls to prevent employees from providing customer 
information to unauthorized individuals who may seek to obtain this 
information through fraudulent means.
    b. Access restrictions at physical locations containing customer 
information, such as buildings, computer facilities, and records storage 
facilities to permit access only to authorized individuals;
    c. Encryption of electronic customer information, including while in 
transit or in storage on networks or systems to which unauthorized 
individuals may have access;
    d. Procedures designed to ensure that customer information system 
modifications are consistent with the bank holding company's information 
security program;
    e. Dual control procedures, segregation of duties, and employee 
background checks for employees with responsibilities for or access to 
customer information;
    f. Monitoring systems and procedures to detect actual and attempted 
attacks on or intrusions into customer information systems;
    g. Response programs that specify actions to be taken when the bank 
holding company suspects or detects that unauthorized individuals have 
gained access to customer information systems, including appropriate 
reports to regulatory and law enforcement agencies; and
    h. Measures to protect against destruction, loss, or damage of 
customer information due to potential environmental hazards, such as 
fire and water damage or technological failures.
    2. Train staff to implement the bank holding company's information 
security program.
    3. Regularly test the key controls, systems and procedures of the 
information security program. The frequency and nature of such tests 
should be determined by the bank holding company's risk assessment. 
Tests should be conducted or reviewed by independent third parties or 
staff independent of those that develop or maintain the security 
programs.
    D. Oversee Service Provider Arrangements. Each bank holding company 
shall:
    1. Exercise appropriate due diligence in selecting its service 
providers;
    2. Require its service providers by contract to implement 
appropriate measures designed to meet the objectives of these 
Guidelines; and
    3. Where indicated by the bank holding company's risk assessment, 
monitor its service providers to confirm that they have satisfied their 
obligations as required by paragraph D.2. As part of this monitoring, a 
bank holding company should review audits, summaries of test results, or 
other equivalent evaluations of its service providers.
    E. Adjust the Program. Each bank holding company shall monitor, 
evaluate, and adjust, as appropriate, the information security program 
in light of any relevant changes in technology, the sensitivity of its 
customer information, internal or external threats to information, and 
the bank holding company's own changing business arrangements, such as 
mergers and acquisitions, alliances

[[Page 324]]

and joint ventures, outsourcing arrangements, and changes to customer 
information systems.
    F. Report to the Board. Each bank holding company shall report to 
its board or an appropriate committee of the board at least annually. 
This report should describe the overall status of the information 
security program and the bank holding company's compliance with these 
Guidelines. The reports should discuss material matters related to its 
program, addressing issues such as: risk assessment; risk management and 
control decisions; service provider arrangements; results of testing; 
security breaches or violations and management's responses; and 
recommendations for changes in the information security program.
    G. Implement the Standards.
    1. Effective date. Each bank holding company must implement an 
information security program pursuant to these Guidelines by July 1, 
2001.
    2. Two-year grandfathering of agreements with service providers. 
Until July 1, 2003, a contract that a bank holding company has entered 
into with a service provider to perform services for it or functions on 
its behalf satisfies the provisions of section III.D., even if the 
contract does not include a requirement that the servicer maintain the 
security and confidentiality of customer information, as long as the 
bank holding company entered into the contract on or before March 5, 
2001.

Supplement A to Appendix F to Part 225--Interagency Guidance on Response 
 Programs for Unauthorized Access to Customer Information and Customer 
                                 Notice

                              I. Background

    This Guidance \1\ interprets section 501(b) of the Gramm-Leach-
Bliley Act (``GLBA'') and the Interagency Guidelines Establishing 
Information Security Standards (the ``Security Guidelines'') \2\ and 
describes response programs, including customer notification procedures, 
that a financial institution should develop and implement to address 
unauthorized access to or use of customer information that could result 
in substantial harm or inconvenience to a customer. The scope of, and 
definitions of terms used in, this Guidance are identical to those of 
the Security Guidelines. For example, the term ``customer information'' 
is the same term used in the Security Guidelines, and means any record 
containing nonpublic personal information about a customer, whether in 
paper, electronic, or other form, maintained by or on behalf of the 
institution.
---------------------------------------------------------------------------

    \1\ This Guidance is being jointly issued by the Board of Governors 
of the Federal Reserve System (Board), the Federal Deposit Insurance 
Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), 
and the Office of Thrift Supervision (OTS).
    \2\ 12 CFR part 30, app. B (OCC); 12 CFR part 208, app. D-2 and part 
225, app. F (Board); 12 CFR part 364, app. B (FDIC); and 12 CFR part 
570, app. B (OTS). The ``Interagency Guidelines Establishing Information 
Security Standards'' were formerly known as ``The Interagency Guidelines 
Establishing Information Security Standards.''
---------------------------------------------------------------------------

                   A. Interagency Security Guidelines

    Section 501(b) of the GLBA required the Agencies to establish 
appropriate standards for financial institutions subject to their 
jurisdiction that include administrative, technical, and physical 
safeguards, to protect the security and confidentiality of customer 
information. Accordingly, the Agencies issued Security Guidelines 
requiring every financial institution to have an information security 
program designed to:
    1. Ensure the security and confidentiality of customer information;
    2. Protect against any anticipated threats or hazards to the 
security or integrity of such information; and
    3. Protect against unauthorized access to or use of such information 
that could result in substantial harm or inconvenience to any customer.

                     B. Risk Assessment and Controls

    1. The Security Guidelines direct every financial institution to 
assess the following risks, among others, when developing its 
information security program:
    a. Reasonably foreseeable internal and external threats that could 
result in unauthorized disclosure, misuse, alteration, or destruction of 
customer information or customer information systems;
    b. The likelihood and potential damage of threats, taking into 
consideration the sensitivity of customer information; and
    c. The sufficiency of policies, procedures, customer information 
systems, and other arrangements in place to control risks. \3\
---------------------------------------------------------------------------

    \3\ See Security Guidelines, III.B.
---------------------------------------------------------------------------

    2. Following the assessment of these risks, the Security Guidelines 
require a financial institution to design a program to address the 
identified risks. The particular security measures an institution should 
adopt will depend upon the risks presented by the complexity and scope 
of its business. At a minimum, the financial institution is required to 
consider the specific security measures enumerated in the Security 
Guidelines, \4\ and adopt those that are appropriate for the 
institution, including:
---------------------------------------------------------------------------

    \4\ See Security Guidelines, III.C.

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

[[Page 325]]

    a. Access controls on customer information systems, including 
controls to authenticate and permit access only to authorized 
individuals and controls to prevent employees from providing customer 
information to unauthorized individuals who may seek to obtain this 
information through fraudulent means;
    b. Background checks for employees with responsibilities for access 
to customer information; and
    c. Response programs that specify actions to be taken when the 
financial institution suspects or detects that unauthorized individuals 
have gained access to customer information systems, including 
appropriate reports to regulatory and law enforcement agencies. \5\
---------------------------------------------------------------------------

    \5\ See Security Guidelines, III.C.
---------------------------------------------------------------------------

                          C. Service Providers

    The Security Guidelines direct every financial institution to 
require its service providers by contract to implement appropriate 
measures designed to protect against unauthorized access to or use of 
customer information that could result in substantial harm or 
inconvenience to any customer. \6\
---------------------------------------------------------------------------

    \6\ See Security Guidelines, II.B. and III.D. Further, the Agencies 
note that, in addition to contractual obligations to a financial 
institution, a service provider may be required to implement its own 
comprehensive information security program in accordance with the 
Safeguards Rule promulgated by the Federal Trade Commission (``FTC''), 
16 CFR part 314.
---------------------------------------------------------------------------

                          II. Response Program

    Millions of Americans, throughout the country, have been victims of 
identity theft. \7\ Identity thieves misuse personal information they 
obtain from a number of sources, including financial institutions, to 
perpetrate identity theft. Therefore, financial institutions should take 
preventative measures to safeguard customer information against attempts 
to gain unauthorized access to the information. For example, financial 
institutions should place access controls on customer information 
systems and conduct background checks for employees who are authorized 
to access customer information. \8\ However, every financial institution 
should also develop and implement a risk-based response program to 
address incidents of unauthorized access to customer information in 
customer information systems \9\ that occur nonetheless. A response 
program should be a key part of an institution's information security 
program. \10\ The program should be appropriate to the size and 
complexity of the institution and the nature and scope of its 
activities.
---------------------------------------------------------------------------

    \7\ The FTC estimates that nearly 10 million Americans discovered 
they were victims of some form of identity theft in 2002. See The 
Federal Trade Commission, Identity Theft Survey Report, (September 
2003), available at http://www.ftc.gov/os/2003/09/synovatereport.pdf.
    \8\ Institutions should also conduct background checks of employees 
to ensure that the institution does not violate 12 U.S.C. 1829, which 
prohibits an institution from hiring an individual convicted of certain 
criminal offenses or who is subject to a prohibition order under 12 
U.S.C. 1818(e)(6).
    \9\ Under the Guidelines, an institution's customer information 
systems consist of all of the methods used to access, collect, store, 
use, transmit, protect, or dispose of customer information, including 
the systems maintained by its service providers. See Security 
Guidelines, I.C.2.d (I.C.2.c for OTS).
    \10\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, Dec. 2002 available at http://
www.ffiec.gov/ffiecinfobase/html_pages/infosec_book_frame.htm. Federal 
Reserve SR 97-32, Sound Practice Guidance for Information Security for 
Networks, Dec. 4, 1997; OCC Bulletin 2000-14, ``Infrastructure Threats--
Intrusion Risks'' (May 15, 2000), for additional guidance on preventing, 
detecting, and responding to intrusions into financial institution 
computer systems.
---------------------------------------------------------------------------

    In addition, each institution should be able to address incidents of 
unauthorized access to customer information in customer information 
systems maintained by its domestic and foreign service providers. 
Therefore, consistent with the obligations in the Guidelines that relate 
to these arrangements, and with existing guidance on this topic issued 
by the Agencies, \11\ an institution's contract with its service 
provider should require the service provider to take appropriate actions 
to address incidents of unauthorized access to the financial 
institution's customer information, including notification to the 
institution as soon as possible of any such incident, to enable the 
institution to expeditiously implement its response program.
---------------------------------------------------------------------------

    \11\ See Federal Reserve SR Ltr. 00-04, Outsourcing of Information 
and Transaction Processing, Feb. 9, 2000; OCC Bulletin 2001-47, ``Third-
Party Relationships Risk Management Principles,'' Nov. 1, 2001; FDIC FIL 
68-99, Risk Assessment Tools and Practices for Information System 
Security, July 7, 1999; OTS Thrift Bulletin 82a, Third Party 
Arrangements, Sept. 1, 2004.
---------------------------------------------------------------------------

                   A. Components of a Response Program

    1. At a minimum, an institution's response program should contain 
procedures for the following:

[[Page 326]]

    a. Assessing the nature and scope of an incident, and identifying 
what customer information systems and types of customer information have 
been accessed or misused;
    b. Notifying its primary Federal regulator as soon as possible when 
the institution becomes aware of an incident involving unauthorized 
access to or use of sensitive customer information, as defined below;
    c. Consistent with the Agencies' Suspicious Activity Report 
(``SAR'') regulations, \12\ notifying appropriate law enforcement 
authorities, in addition to filing a timely SAR in situations involving 
Federal criminal violations requiring immediate attention, such as when 
a reportable violation is ongoing;
---------------------------------------------------------------------------

    \12\ An institution's obligation to file a SAR is set out in the 
Agencies' SAR regulations and Agency guidance. See 12 CFR 21.11 
(national banks, Federal branches and agencies); 12 CFR 208.62 (State 
member banks); 12 CFR 211.5(k) (Edge and agreement corporations); 12 CFR 
211.24(f) (uninsured State branches and agencies of foreign banks); 12 
CFR 225.4(f) (bank holding companies and their nonbank subsidiaries); 12 
CFR part 353 (State non-member banks); and 12 CFR 563.180 (savings 
associations). National banks must file SARs in connection with computer 
intrusions and other computer crimes. See OCC Bulletin 2000-14, 
``Infrastructure Threats--Intrusion Risks'' (May 15, 2000); Advisory 
Letter 97-9, ``Reporting Computer Related Crimes'' (November 19, 1997) 
(general guidance still applicable though instructions for new SAR form 
published in 65 FR 1229, 1230 (January 7, 2000)). See also Federal 
Reserve SR 01-11, Identity Theft and Pretext Calling, Apr. 26, 2001; SR 
97-28, Guidance Concerning Reporting of Computer Related Crimes by 
Financial Institutions, Nov. 6, 1997; FDIC FIL 48-2000, Suspicious 
Activity Reports, July 14, 2000; FIL 47-97, Preparation of Suspicious 
Activity Reports, May 6, 1997; OTS CEO Memorandum 139, Identity Theft 
and Pretext Calling, May 4, 2001; CEO Memorandum 126, New Suspicious 
Activity Report Form, July 5, 2000; http://www.ots.treas.gov/BSA (for 
the latest SAR form and filing instructions required by OTS as of July 
1, 2003).
---------------------------------------------------------------------------

    d. Taking appropriate steps to contain and control the incident to 
prevent further unauthorized access to or use of customer information, 
for example, by monitoring, freezing, or closing affected accounts, 
while preserving records and other evidence;\13\ and
---------------------------------------------------------------------------

    \13\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, Dec. 2002, pp. 68-74.
---------------------------------------------------------------------------

    e. Notifying customers when warranted.
    2. Where an incident of unauthorized access to customer information 
involves customer information systems maintained by an institution's 
service providers, it is the responsibility of the financial institution 
to notify the institution's customers and regulator. However, an 
institution may authorize or contract with its service provider to 
notify the institution's customers or regulator on its behalf.

                          III. Customer Notice

    Financial institutions have an affirmative duty to protect their 
customers' information against unauthorized access or use. Notifying 
customers of a security incident involving the unauthorized access or 
use of the customer's information in accordance with the standard set 
forth below is a key part of that duty. Timely notification of customers 
is important to manage an institution's reputation risk. Effective 
notice also may reduce an institution's legal risk, assist in 
maintaining good customer relations, and enable the institution's 
customers to take steps to protect themselves against the consequences 
of identity theft. When customer notification is warranted, an 
institution may not forgo notifying its customers of an incident because 
the institution believes that it may be potentially embarrassed or 
inconvenienced by doing so.

                    A. Standard for Providing Notice

    When a financial institution becomes aware of an incident of 
unauthorized access to sensitive customer information, the institution 
should conduct a reasonable investigation to promptly determine the 
likelihood that the information has been or will be misused. If the 
institution determines that misuse of its information about a customer 
has occurred or is reasonably possible, it should notify the affected 
customer as soon as possible. Customer notice may be delayed if an 
appropriate law enforcement agency determines that notification will 
interfere with a criminal investigation and provides the institution 
with a written request for the delay. However, the institution should 
notify its customers as soon as notification will no longer interfere 
with the investigation.

                    1. Sensitive Customer Information

    Under the Guidelines, an institution must protect against 
unauthorized access to or use of customer information that could result 
in substantial harm or inconvenience to any customer. Substantial harm 
or inconvenience is most likely to result from improper access to 
sensitive customer information because this type of information is most 
likely to be misused, as in the commission of identity theft. For 
purposes of this Guidance, sensitive customer information means a 
customer's name, address, or telephone number, in conjunction with the 
customer's social security number, driver's license number, account 
number, credit or debit card number,

[[Page 327]]

or a personal identification number or password that would permit access 
to the customer's account. Sensitive customer information also includes 
any combination of components of customer information that would allow 
someone to log onto or access the customer's account, such as user name 
and password or password and account number.

                          2. Affected Customers

    If a financial institution, based upon its investigation, can 
determine from its logs or other data precisely which customers' 
information has been improperly accessed, it may limit notification to 
those customers with regard to whom the institution determines that 
misuse of their information has occurred or is reasonably possible. 
However, there may be situations where the institution determines that a 
group of files has been accessed improperly, but is unable to identify 
which specific customers' information has been accessed. If the 
circumstances of the unauthorized access lead the institution to 
determine that misuse of the information is reasonably possible, it 
should notify all customers in the group.

                      B. Content of Customer Notice

    1. Customer notice should be given in a clear and conspicuous 
manner. The notice should describe the incident in general terms and the 
type of customer information that was the subject of unauthorized access 
or use. It also should generally describe what the institution has done 
to protect the customers' information from further unauthorized access. 
In addition, it should include a telephone number that customers can 
call for further information and assistance. \14\ The notice also should 
remind customers of the need to remain vigilant over the next twelve to 
twenty-four months, and to promptly report incidents of suspected 
identity theft to the institution. The notice should include the 
following additional items, when appropriate:
---------------------------------------------------------------------------

    \14\ The institution should, therefore, ensure that it has 
reasonable policies and procedures in place, including trained 
personnel, to respond appropriately to customer inquiries and requests 
for assistance.
---------------------------------------------------------------------------

    a. A recommendation that the customer review account statements and 
immediately report any suspicious activity to the institution;
    b. A description of fraud alerts and an explanation of how the 
customer may place a fraud alert in the customer's consumer reports to 
put the customer's creditors on notice that the customer may be a victim 
of fraud;
    c. A recommendation that the customer periodically obtain credit 
reports from each nationwide credit reporting agency and have 
information relating to fraudulent transactions deleted;
    d. An explanation of how the customer may obtain a credit report 
free of charge; and
    e. Information about the availability of the FTC's online guidance 
regarding steps a consumer can take to protect against identity theft. 
The notice should encourage the customer to report any incidents of 
identity theft to the FTC, and should provide the FTC's Web site address 
and toll-free telephone number that customers may use to obtain the 
identity theft guidance and report suspected incidents of identity 
theft. \15\
---------------------------------------------------------------------------

    \15\ Currently, the FTC Web site for the ID Theft brochure and the 
FTC Hotline phone number are http://www.consumer.gov/idtheft and 1-877-
IDTHEFT. The institution may also refer customers to any materials 
developed pursuant to section 151(b) of the FACT Act (educational 
materials developed by the FTC to teach the public how to prevent 
identity theft).
---------------------------------------------------------------------------

    2. The Agencies encourage financial institutions to notify the 
nationwide consumer reporting agencies prior to sending notices to a 
large number of customers that include contact information for the 
reporting agencies.

                     C. Delivery of Customer Notice

    Customer notice should be delivered in any manner designed to ensure 
that a customer can reasonably be expected to receive it. For example, 
the institution may choose to contact all customers affected by 
telephone or by mail, or by electronic mail for those customers for whom 
it has a valid e-mail address and who have agreed to receive 
communications electronically.

[66 FR 8636, Feb. 1, 2001, as amended at 70 FR 15751, 15753, Mar. 29, 
2005; 71 FR 5780, Feb. 3, 2006; 79 FR 37167, July 1, 2014]



                 Sec. Appendix G to Part 225 [Reserved]





PART 226_TRUTH IN LENDING (REGULATION Z)--Table of Contents



                            Subpart A_General

Sec.
226.1 Authority, purpose, coverage, organization, enforcement, and 
          liability.
226.2 Definitions and rules of construction.
226.3 Exempt transactions.
226.4 Finance charge.

                        Subpart B_Open-End Credit

226.5 General disclosure requirements.

[[Page 328]]

226.5a Credit and charge card applications and solicitations.
226.5b Requirements for home equity plans.
226.6 Account-opening disclosures.
226.7 Periodic statement.
226.8 Identifying transactions on periodic statements.
226.9 Subsequent disclosure requirements.
226.10 Payments.
226.11 Treatment of credit balances; account termination.
226.12 Special credit card provisions.
226.13 Billing error resolution.
226.14 Determination of annual percentage rate.
226.15 Right of rescission.
226.16 Advertising.

                       Subpart C_Closed-End Credit

226.17 General disclosure requirements.
226.18 Content of disclosures.
226.19 Certain mortgage and variable-rate transactions.
226.20 Subsequent disclosure requirements.
226.21 Treatment of credit balances.
226.22 Determination of annual percentage rate.
226.23 Right of rescission.
226.24 Advertising.

                         Subpart D_Miscellaneous

226.25 Record retention.
226.26 Use of annual percentage rate in oral disclosures.
226.27 Language of disclosures.
226.28 Effect on State laws.
226.29 State exemptions.
226.30 Limitation on rates.

     Subpart E_Special Rules for Certain Home Mortgage Transactions

226.31 General rules.
226.32 Requirements for certain closed-end home mortgages.
226.33 Requirements for reverse mortgages.
226.34 Prohibited acts or practices in connection with credit subject to 
          Sec. 226.32.
226.35 Prohibited acts or practices in connection with higher-priced 
          mortgage loans.
226.36 Prohibited acts or practices in connection with credit secured by 
          a dwelling.
226.37-226.38 [Reserved]
226.39 Mortgage transfer disclosures.
226.40-226.41 [Reserved]
226.42 Valuation independence.
226.43 Appraisals for higher-priced mortgage loans.
226.44-226.45 [Reserved]

           Subpart F_Special Rules for Private Education Loans

226.46 Special disclosure requirements for private education loans.
226.47 Content of disclosures.
226.48 Limitations on private education loans.

Subpart G_Special Rules Applicable to Credit Card Accounts and Open-End 
                   Credit Offered to College Students

226.51 Ability to pay.
226.52 Limitations on fees.
226.53 Allocation of payments.
226.54 Limitations on the imposition of finance charges.
226.55 Limitations on increasing annual percentage rates, fees, and 
          charges.
226.56 Requirements for over-the-limit transactions.
226.57 Reporting and marketing rules for college student open-end 
          credit.
226.58 Internet posting of credit card agreements.
226.59 Reevaluation of rate increases.

Appendix A to Part 226--Effect on State Laws
Appendix B to Part 226--State Exemptions
Appendix C to Part 226--Issuance of Staff Interpretations
Appendix D to Part 226--Multiple Advance Construction Loans
Appendix E to Part 226--Rules for Card Issuers That Bill on a 
          Transaction-by-Transaction Basis
Appendix F to Part 226--Optional Annual Percentage Rate Computations for 
          Creditors Offering Open-End Plans Subject to the Requirements 
          of Sec. 226.5b
Appendix G to Part 226--Open-End Model Forms and Clauses
Appendix H to Part 226--Closed-End Model Forms and Clauses
Appendix I to Part 226--Federal Enforcement Agencies
Appendix J to Part 226--Annual Percentage Rate Computations For Closed-
          End Credit Transactions
Appendix K to Part 226--Total Annual Loan Cost Rate Computations for 
          Reverse Mortgage Transactions
Appendix L to Part 226--Assumed Loan Periods for Computations of Total 
          Annual Loan Cost Rates
Appendix M1 to Part 226--Repayment Disclosures
Appendix M2 to Part 226--Sample Calculations of Repayment Disclosures
Appendix N to Part 226--Higher-Priced Mortgage Loan Appraisal Safe 
          Harbor Review
Appendix O to Part 226--Illustrative Written Source Documents for 
          Higher-Priced Mortgage Loan Appraisal Rules

[[Page 329]]

Supplement I to Part 226--Official Staff Interpretations

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), 1639(l), and 
1639h; Pub. L. 111-24, section 2, 123 Stat. 1734; Pub. L. 111-203, 124 
Stat. 1376.

    Source: Reg. Z, 46 FR 20892, Apr. 7, 1981, unless otherwise noted.



                            Subpart A_General



Sec. 226.1  Authority, purpose, coverage, organization, enforcement,
and liability.

    (a) Authority. This regulation, known as Regulation Z, is issued by 
the Board of Governors of the Federal Reserve System to implement the 
federal Truth in Lending Act, which is contained in title I of the 
Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.). 
This regulation also implements title XII, section 1204 of the 
Competitive Equality Banking Act of 1987 (Pub. L. 100-86, 101 Stat. 
552). Information-collection requirements contained in this regulation 
have been approved by the Office of Management and Budget under the 
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB No. 
7100-0199.
    (b) Purpose. The purpose of this regulation is to promote the 
informed use of consumer credit by requiring disclosures about its terms 
and cost. The regulation also includes substantive protections. It gives 
consumers the right to cancel certain credit transactions that involve a 
lien on a consumer's principal dwelling, regulates certain credit card 
practices, and provides a means for fair and timely resolution of credit 
billing disputes. The regulation does not generally govern charges for 
consumer credit, except that several provisions in Subpart G set forth 
special rules addressing certain charges applicable to credit card 
accounts under an open-end (not home-secured) consumer credit plan. The 
regulation requires a maximum interest rate to be stated in variable-
rate contracts secured by the consumer's dwelling. It also imposes 
limitations on home-equity plans that are subject to the requirements of 
Sec. 226.5b and mortgages that are subject to the requirements of Sec. 
226.32. The regulation prohibits certain acts or practices in connection 
with credit secured by a dwelling in Sec. 226.36, and credit secured by 
a consumer's principal dwelling in Sec. 226.35. The regulation also 
regulates certain practices of creditors who extend private education 
loans as defined in Sec. 226.46(b)(5).
    (c) Coverage. (1) In general, this regulation applies to each 
individual or business that offers or extends credit when four 
conditions are met:
    (i) The credit is offered or extended to consumers;
    (ii) The offering or extension of credit is done regularly; \1\
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    \1\ [Reserved]
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    (iii) The credit is subject to a finance charge or is payable by a 
written agreement in more than four installments; and
    (iv) The credit is primarily for personal, family, or household 
purposes.
    (2) If a credit card is involved, however, certain provisions apply 
even if the credit is not subject to a finance charge, or is not payable 
by a written agreement in more than four installments, or if the credit 
card is to be used for business purposes.
    (3) In addition, certain requirements of Sec. 226.5b apply to 
persons who are not creditors but who provide applications for home-
equity plans to consumers.
    (4) Furthermore, certain requirements of Sec. 226.57 apply to 
institutions of higher education.
    (d) Organization. The regulation is divided into subparts and 
appendices as follows:
    (1) Subpart A contains general information. It sets forth:
    (i) The authority, purpose, coverage, and organization of the 
regulation;
    (ii) The definitions of basic terms;
    (iii) The transactions that are exempt from coverage; and
    (iv) The method of determining the finance charge.
    (2) Subpart B contains the rules for open-end credit. It requires 
that account-opening disclosures and periodic statements be provided, as 
well as additional disclosures for credit and charge card applications 
and solicitations and for home-equity plans subject to the requirements 
of Sec. 226.5a and Sec. 226.5b, respectively. It also describes 
special

[[Page 330]]

rules that apply to credit card transactions, treatment of payments and 
credit balances, procedures for resolving credit billing errors, annual 
percentage rate calculations, rescission requirements, and advertising.
    (3) Subpart C relates to closed-end credit. It contains rules on 
disclosures, treatment of credit balances, annual percentages rate 
calculations, rescission requirements, and advertising.
    (4) Subpart D contains rules on oral disclosures, disclosures in 
languages other than English, record retention, effect on state laws, 
state exemptions, and rate limitations.
    (5) Subpart E contains special rules for mortgage transactions. 
Section 226.32 requires certain disclosures and provides limitations for 
closed-end loans that have rates or fees above specified amounts. 
Section 226.33 requires special disclosures, including the total annual 
loan cost rate, for reverse mortgage transactions. Section 226.34 
prohibits specific acts and practices in connection with closed-end 
mortgage transactions that are subject to Sec. 226.32. Section 226.35 
prohibits specific acts and practices in connection with closed-end 
higher-priced mortgage loans, as defined in Sec. 226.35(a). Section 
226.36 prohibits specific acts and practices in connection with an 
extension of credit secured by a dwelling.
    (6) Subpart F relates to private education loans. It contains rules 
on disclosures, limitations on changes in terms after approval, the 
right to cancel the loan, and limitations on co-branding in the 
marketing of private education loans.
    (7) Subpart G relates to credit card accounts under an open-end (not 
home-secured) consumer credit plan (except for Sec. 226.57(c), which 
applies to all open-end credit plans). Section 226.51 contains rules on 
evaluation of a consumer's ability to make the required payments under 
the terms of an account. Section 226.52 limits the fees that a consumer 
can be required to pay with respect to an open-end (not home-secured) 
consumer credit plan during the first year after account opening. 
Section 226.53 contains rules on allocation of payments in excess of the 
minimum payment. Section 226.54 sets forth certain limitations on the 
imposition of finance charges as the result of a loss of a grace period. 
Section 226.55 contains limitations on increases in annual percentage 
rates, fees, and charges for credit card accounts. Section 226.56 
prohibits the assessment of fees or charges for over-the-limit 
transactions unless the consumer affirmatively consents to the 
creditor's payment of over-the-limit transactions. Section 226.57 sets 
forth rules for reporting and marketing of college student open-end 
credit. Section 226.58 sets forth requirements for the Internet posting 
of credit card accounts under an open-end (not home-secured) consumer 
credit plan.
    (8) Several appendices contain information such as the procedures 
for determinations about state laws, state exemptions and issuance of 
staff interpretations, special rules for certain kinds of credit plans, 
a list of enforcement agencies, and the rules for computing annual 
percentage rates in closed-end credit transactions and total-annual-
loan-cost rates for reverse mortgage transactions.
    (e) Enforcement and liability. Section 108 of the act contains the 
administrative enforcement provisions. Sections 112, 113, 130, 131, and 
134 contain provisions relating to liability for failure to comply with 
the requirements of the act and the regulation. Section 1204 (c) of 
title XII of the Competitive Equality Banking Act of 1987, Public Law 
100-86, 101 Stat. 552, incorporates by reference administrative 
enforcement and civil liability provisions of sections 108 and 130 of 
the act.

[75 FR 7792, Feb. 22, 2010, as amended at 75 FR 58533, Sept. 24, 2010]



Sec. 226.2  Definitions and rules of construction.

    (a) Definitions. For purposes of this regulation, the following 
definitions apply:
    (1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
    (2) Advertisement means a commercial message in any medium that 
promotes, directly or indirectly, a credit transaction.
    (3) [Reserved] \2\
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    \2\ [Reserved]

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[[Page 331]]

    (4) Billing cycle or cycle means the interval between the days or 
dates of regular periodic statements. These intervals shall be equal and 
no longer than a quarter of a year. An interval will be considered equal 
if the number of days in the cycle does not vary more than four days 
from the regular day or date of the periodic statement.
    (5) Board means the Board of Governors of the Federal Reserve 
System.
    (6) Business day means a day on which the creditor's offices are 
open to the public for carrying on substantially all of its business 
functions. However, for purposes of rescission under Sec. Sec. 226.15 
and 226.23, and for purposes of Sec. Sec. 226.19(a)(1)(ii), 
226.19(a)(2), 226.31, and 226.46(d)(4), the term means all calendar days 
except Sundays and the legal public holidays specified in 5 U.S.C. 
6103(a), such as New Year's Day, the Birthday of Martin Luther King, 
Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day, 
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
    (7) Card issuer means a person that issues a credit card or that 
person's agent with respect to the card.
    (8) Cardholder means a natural person to whom a credit card is 
issued for consumer credit purposes, or a natural person who has agreed 
with the card issuer to pay consumer credit obligations arising from the 
issuance of a credit card to another natural person. For purposes of 
Sec. 226.12(a) and (b), the term includes any person to whom a credit 
card is issued for any purpose, including business, commercial or 
agricultural use, or a person who has agreed with the card issuer to pay 
obligations arising from the issuance of such a credit card to another 
person.
    (9) Cash price means the price at which a creditor, in the ordinary 
course of business, offers to sell for cash property or service that is 
the subject of the transaction. At the creditor's option, the term may 
include the price of accessories, services related to the sale, service 
contracts and taxes and fees for license, title, and registration. The 
term does not include any finance charge.
    (10) Closed-end credit means consumer credit other than ``open-end 
credit'' as defined in this section.
    (11) Consumer means a cardholder or natural person to whom consumer 
credit is offered or extended. However, for purposes of rescission under 
Sec. Sec. 226.15 and 226.23, the term also includes a natural person in 
whose principal dwelling a security interest is or will be retained or 
acquired, if that person's ownership interest in the dwelling is or will 
be subject to the security interest.
    (12) Consumer credit means credit offered or extended to a consumer 
primarily for personal, family, or household purposes.
    (13) Consummation means the time that a consumer becomes 
contractually obligated on a credit transaction.
    (14) Credit means the right to defer payment of debt or to incur 
debt and defer its payment.
    (15)(i) Credit card means any card, plate, or other single credit 
device that may be used from time to time to obtain credit.
    (ii) Credit card account under an open-end (not home-secured) 
consumer credit plan means any open-end credit account that is accessed 
by a credit card, except:
    (A) A home-equity plan subject to the requirements of Sec. 226.5b 
that is accessed by a credit card; or
    (B) An overdraft line of credit that is accessed by a debit card or 
an account number.
    (iii) Charge card means a credit card on an account for which no 
periodic rate is used to compute a finance charge.
    (16) Credit sale means a sale in which the seller is a creditor. The 
term includes a bailment or lease (unless terminable without penalty at 
any time by the consumer) under which the consumer--
    (i) Agrees to pay as compensation for use a sum substantially 
equivalent to, or in excess of, the total value of the property and 
service involved; and
    (ii) Will become (or has the option to become), for no additional 
consideration or for nominal consideration, the owner of the property 
upon compliance with the agreement.
    (17) Creditor means:

[[Page 332]]

    (i) A person who regularly extends consumer credit \3\ that is 
subject to a finance charge or is payable by written agreement in more 
than four installments (not including a down payment), and to whom the 
obligation is initially payable, either on the face of the note or 
contract, or by agreement when there is no note or contract.
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    \3\ [Reserved]
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    (ii) For purposes of Sec. Sec. 226.4(c)(8) (Discounts), 226.9(d) 
(Finance charge imposed at time of transaction), and 226.12(e) (Prompt 
notification of returns and crediting of refunds), a person that honors 
a credit card.
    (iii) For purposes of subpart B, any card issuer that extends either 
open-end credit or credit that is not subject to a finance charge and is 
not payable by written agreement in more than four installments.
    (iv) For purposes of subpart B (except for the credit and charge 
card disclosures contained in Sec. Sec. 226.5a and 226.9(e) and (f), 
the finance charge disclosures contained in Sec. 226.6(a)(1) and 
(b)(3)(i) and Sec. 226.7(a)(4) through (7) and (b)(4) through (6) and 
the right of rescission set forth in Sec. 226.15) and subpart C, any 
card issuer that extends closed-end credit that is subject to a finance 
charge or is payable by written agreement in more than four 
installments.
    (v) A person regularly extends consumer credit only if it extended 
credit (other than credit subject to the requirements of Sec. 226.32) 
more than 25 times (or more than 5 times for transactions secured by a 
dwelling) in the preceding calendar year. If a person did not meet these 
numerical standards in the preceding calendar year, the numerical 
standards shall be applied to the current calendar year. A person 
regularly extends consumer credit if, in any 12-month period, the person 
originates more than one credit extension that is subject to the 
requirements of Sec. 226.32 or one or more such credit extensions 
through a mortgage broker.
    (18) Downpayment means an amount, including the value of property 
used as a trade-in, paid to a seller to reduce the cash price of goods 
or services purchased in a credit sale transaction. A deferred portion 
of a downpayment may be treated as part of the downpayment if it is 
payable not later than the due date of the second otherwise regularly 
scheduled payment and is not subject to a finance charge.
    (19) Dwelling means a residential structure that contains one to 
four units, whether or not that structure is attached to real property. 
The term includes an individual condominium unit, cooperative unit, 
mobile home, and trailer, if it is used as a residence.
    (20) Open-end credit means consumer credit extended by a creditor 
under a plan in which:
    (i) The creditor reasonably contemplates repeated transactions;
    (ii) The creditor may impose a finance charge from time to time on 
an outstanding unpaid balance; and
    (iii) The amount of credit that may be extended to the consumer 
during the term of the plan (up to any limit set by the creditor) is 
generally made available to the extent that any outstanding balance is 
repaid.
    (21) Periodic rate means a rate of finance charge that is or may be 
imposed by a creditor on a balance for a day, week, month, or other 
subdivision of a year.
    (22) Person means a natural person or an organization, including a 
corporation, partnership, proprietorship, association, cooperative, 
estate, trust, or government unit.
    (23) Prepaid finance charge means any finance charge paid separately 
in cash or by check before or at consummation of a transaction, or 
withheld from the proceeds of the credit at any time.
    (24) Residential mortgage transaction means a transaction in which a 
mortgage, deed of trust, purchase money security interest arising under 
an installment sales contract, or equivalent consensual security 
interest is created or retained in the consumer's principal dwelling to 
finance the acquisition or initial construction of that dwelling.
    (25) Security interest means an interest in property that secures 
performance of a consumer credit obligation and that is recognized by 
state or federal law. It does not include incidental interests such as 
interests in proceeds,

[[Page 333]]

accessions, additions, fixtures, insurance proceeds (whether or not the 
creditor is a loss payee or beneficiary), premium rebates, or interests 
in after-acquired property. For purposes of disclosures under Sec. Sec. 
226.6 and 226.18, the term does not include an interest that arises 
solely by operation of law. However, for purposes of the right of 
rescission under Sec. Sec. 226.15 and 226.23, the term does include 
interests that arise solely by operation of law.
    (26) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, and any territory or possession of the 
United States.
    (b) Rules of construction. For purposes of this regulation, the 
following rules of construction apply:
    (1) Where appropriate, the singular form of a word includes the 
plural form and plural includes singular.
    (2) Where the words obligation and transaction are used in the 
regulation, they refer to a consumer credit obligation or transaction, 
depending upon the context. Where the word credit is used in the 
regulation, it means consumer credit unless the context clearly 
indicates otherwise.
    (3) Unless defined in this regulation, the words used have the 
meanings given to them by state law or contract.
    (4) Footnotes have the same legal effect as the text of the 
regulation.
    (5) Where the word amount is used in this regulation to describe 
disclosure requirements, it refers to a numerical amount.

[75 FR 7793, Feb. 22, 2010, as amended at 76 FR 22998, Apr. 25, 2011]



Sec. 226.3  Exempt transactions.

    This regulation does not apply to the following: \4\
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    \4\ [Reserved]
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    (a) Business, commercial, agricultural, or organizational credit. 
(1) An extension of credit primarily for a business, commercial or 
agricultural purpose.
    (2) An extension of credit to other than a natural person, including 
credit to government agencies or instrumentalities.
    (b) Credit over applicable threshold amount--(1) Exemption--(i) 
Requirements. An extension of credit in which the amount of credit 
extended exceeds the applicable threshold amount or in which there is an 
express written commitment to extend credit in excess of the applicable 
threshold amount, unless the extension of credit is:
    (A) Secured by any real property, or by personal property used or 
expected to be used as the principal dwelling of the consumer; or
    (B) A private education loan as defined in Sec. 226.46(b)(5).
    (ii) Annual adjustments. The threshold amount in paragraph (b)(1)(i) 
of this section is adjusted annually to reflect increases in the 
Consumer Price Index for Urban Wage Earners and Clerical Workers, as 
applicable. See the official staff commentary to this paragraph (b) for 
the threshold amount applicable to a specific extension of credit or 
express written commitment to extend credit.
    (2) Transition rule for open-end accounts exempt prior to July 21, 
2011. An open-end account that is exempt on July 20, 2011 based on an 
express written commitment to extend credit in excess of $25,000 remains 
exempt until December 31, 2011 unless:
    (i) The creditor takes a security interest in any real property, or 
in personal property used or expected to be used as the principal 
dwelling of the consumer; or
    (ii) The creditor reduces the express written commitment to extend 
credit to $25,000 or less.
    (c) Public utility credit. An extension of credit that involves 
public utility services provided through pipe, wire, other connected 
facilities, or radio or similar transmission (including extensions of 
such facilities), if the charges for service, delayed payment, or any 
discounts for prompt payment are filed with or regulated by any 
government unit. The financing of durable goods or home improvements by 
a public utility is not exempt.
    (d) Securities or commodities accounts. Transactions in securities 
or commodities accounts in which credit is extended by a broker-dealer 
registered with the Securities and Exchange Commission or the Commodity 
Futures Trading Commission.
    (e) Home fuel budget plans. An installment agreement for the 
purchase of home fuels in which no finance charge is imposed.

[[Page 334]]

    (f) Student loan programs. Loans made, insured, or guaranteed 
pursuant to a program authorized by title IV of the Higher Education Act 
of 1965 (20 U.S.C. 1070 et seq.).
    (g) Employer-sponsored retirement plans. An extension of credit to a 
participant in an employer-sponsored retirement plan qualified under 
Section 401(a) of the Internal Revenue Code, a tax-sheltered annuity 
under Section 403(b) of the Internal Revenue Code, or an eligible 
governmental deferred compensation plan under Section 457(b) of the 
Internal Revenue Code (26 U.S.C. 401(a); 26 U.S.C. 403(b); 26 U.S.C. 
457(b)), provided that the extension of credit is comprised of fully 
vested funds from such participant's account and is made in compliance 
with the Internal Revenue Code (26 U.S.C. 1 et seq.).

[75 FR 7794, Feb. 22, 2010, as amended at 76 FR 18362, Apr. 4, 2011]



Sec. 226.4  Finance charge.

    (a) Definition. The finance charge is the cost of consumer credit as 
a dollar amount. It includes any charge payable directly or indirectly 
by the consumer and imposed directly or indirectly by the creditor as an 
incident to or a condition of the extension of credit. It does not 
include any charge of a type payable in a comparable cash transaction.
    (1) Charges by third parties. The finance charge includes fees and 
amounts charged by someone other than the creditor, unless otherwise 
excluded under this section, if the creditor:
    (i) Requires the use of a third party as a condition of or an 
incident to the extension of credit, even if the consumer can choose the 
third party; or
    (ii) Retains a portion of the third-party charge, to the extent of 
the portion retained.
    (2) Special rule; closing agent charges. Fees charged by a third 
party that conducts the loan closing (such as a settlement agent, 
attorney, or escrow or title company) are finance charges only if the 
creditor--
    (i) Requires the particular services for which the consumer is 
charged;
    (ii) Requires the imposition of the charge; or
    (iii) Retains a portion of the third-party charge, to the extent of 
the portion retained.
    (3) Special rule; mortgage broker fees. Fees charged by a mortgage 
broker (including fees paid by the consumer directly to the broker or to 
the creditor for delivery to the broker) are finance charges even if the 
creditor does not require the consumer to use a mortgage broker and even 
if the creditor does not retain any portion of the charge.
    (b) Examples of finance charges. The finance charge includes the 
following types of charges, except for charges specifically excluded by 
paragraphs (c) through (e) of this section:
    (1) Interest, time price differential, and any amount payable under 
an add-on or discount system of additional charges.
    (2) Service, transaction, activity, and carrying charges, including 
any charge imposed on a checking or other transaction account to the 
extent that the charge exceeds the charge for a similar account without 
a credit feature.
    (3) Points, loan fees, assumption fees, finder's fees, and similar 
charges.
    (4) Appraisal, investigation, and credit report fees.
    (5) Premiums or other charges for any guarantee or insurance 
protecting the creditor against the consumer's default or other credit 
loss.
    (6) Charges imposed on a creditor by another person for purchasing 
or accepting a consumer's obligation, if the consumer is required to pay 
the charges in cash, as an addition to the obligation, or as a deduction 
from the proceeds of the obligation.
    (7) Premiums or other charges for credit life, accident, health, or 
loss-of-income insurance, written in connection with a credit 
transaction.
    (8) Premiums or other charges for insurance against loss of or 
damage to property, or against liability arising out of the ownership or 
use of property, written in connection with a credit transaction.
    (9) Discounts for the purpose of inducing payment by a means other 
than the use of credit.
    (10) Charges or premiums paid for debt cancellation or debt 
suspension coverage written in connection with a

[[Page 335]]

credit transaction, whether or not the coverage is insurance under 
applicable law.
    (c) Charges excluded from the finance charge. The following charges 
are not finance charges:
    (1) Application fees charged to all applicants for credit, whether 
or not credit is actually extended.
    (2) Charges for actual unanticipated late payment, for exceeding a 
credit limit, or for delinquency, default, or a similar occurrence.
    (3) Charges imposed by a financial institution for paying items that 
overdraw an account, unless the payment of such items and the imposition 
of the charge were previously agreed upon in writing.
    (4) Fees charged for participation in a credit plan, whether 
assessed on an annual or other periodic basis.
    (5) Seller's points.
    (6) Interest forfeited as a result of an interest reduction required 
by law on a time deposit used as security for an extension of credit.
    (7) Real-estate related fees. The following fees in a transaction 
secured by real property or in a residential mortgage transaction, if 
the fees are bona fide and reasonable in amount:
    (i) Fees for title examination, abstract of title, title insurance, 
property survey, and similar purposes.
    (ii) Fees for preparing loan-related documents, such as deeds, 
mortgages, and reconveyance or settlement documents.
    (iii) Notary and credit-report fees.
    (iv) Property appraisal fees or fees for inspections to assess the 
value or condition of the property if the service is performed prior to 
closing, including fees related to pest-infestation or flood-hazard 
determinations.
    (v) Amounts required to be paid into escrow or trustee accounts if 
the amounts would not otherwise be included in the finance charge.
    (8) Discounts offered to induce payment for a purchase by cash, 
check, or other means, as provided in section 167(b) of the Act.
    (d) Insurance and debt cancellation and debt suspension coverage--
(1) Voluntary credit insurance premiums. Premiums for credit life, 
accident, health, or loss-of-income insurance may be excluded from the 
finance charge if the following conditions are met:
    (i) The insurance coverage is not required by the creditor, and this 
fact is disclosed in writing.
    (ii) The premium for the initial term of insurance coverage is 
disclosed in writing. If the term of insurance is less than the term of 
the transaction, the term of insurance also shall be disclosed. The 
premium may be disclosed on a unit-cost basis only in open-end credit 
transactions, closed-end credit transactions by mail or telephone under 
Sec. 226.17(g), and certain closed-end credit transactions involving an 
insurance plan that limits the total amount of indebtedness subject to 
coverage.
    (iii) The consumer signs or initials an affirmative written request 
for the insurance after receiving the disclosures specified in this 
paragraph, except as provided in paragraph (d)(4) of this section. Any 
consumer in the transaction may sign or initial the request.
    (2) Property insurance premiums. Premiums for insurance against loss 
of or damage to property, or against liability arising out of the 
ownership or use of property, including single interest insurance if the 
insurer waives all right of subrogation against the consumer,\5\ may be 
excluded from the finance charge if the following conditions are met:
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    \5\ [Reserved]
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    (i) The insurance coverage may be obtained from a person of the 
consumer's choice,\6\ and this fact is disclosed. (A creditor may 
reserve the right to refuse to accept, for reasonable cause, an insurer 
offered by the consumer.)
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    \6\ [Reserved]
---------------------------------------------------------------------------

    (ii) If the coverage is obtained from or through the creditor, the 
premium for the initial term of insurance coverage shall be disclosed. 
If the term of insurance is less than the term of the transaction, the 
term of insurance shall also be disclosed. The premium may be disclosed 
on a unit-cost basis only in open-end credit transactions, closed-end 
credit transactions by mail or telephone under Sec. 226.17(g), and 
certain closed-end credit transactions involving an insurance plan that 
limits

[[Page 336]]

the total amount of indebtedness subject to coverage.
    (3) Voluntary debt cancellation or debt suspension fees. Charges or 
premiums paid for debt cancellation coverage for amounts exceeding the 
value of the collateral securing the obligation or for debt cancellation 
or debt suspension coverage in the event of the loss of life, health, or 
income or in case of accident may be excluded from the finance charge, 
whether or not the coverage is insurance, if the following conditions 
are met:
    (i) The debt cancellation or debt suspension agreement or coverage 
is not required by the creditor, and this fact is disclosed in writing;
    (ii) The fee or premium for the initial term of coverage is 
disclosed in writing. If the term of coverage is less than the term of 
the credit transaction, the term of coverage also shall be disclosed. 
The fee or premium may be disclosed on a unit-cost basis only in open-
end credit transactions, closed-end credit transactions by mail or 
telephone under Sec. 226.17(g), and certain closed-end credit 
transactions involving a debt cancellation agreement that limits the 
total amount of indebtedness subject to coverage;
    (iii) The following are disclosed, as applicable, for debt 
suspension coverage: That the obligation to pay loan principal and 
interest is only suspended, and that interest will continue to accrue 
during the period of suspension.
    (iv) The consumer signs or initials an affirmative written request 
for coverage after receiving the disclosures specified in this 
paragraph, except as provided in paragraph (d)(4) of this section. Any 
consumer in the transaction may sign or initial the request.
    (4) Telephone purchases. If a consumer purchases credit insurance or 
debt cancellation or debt suspension coverage for an open-end (not home-
secured) plan by telephone, the creditor must make the disclosures under 
paragraphs (d)(1)(i) and (ii) or (d)(3)(i) through (iii) of this 
section, as applicable, orally. In such a case, the creditor shall:
    (i) Maintain evidence that the consumer, after being provided the 
disclosures orally, affirmatively elected to purchase the insurance or 
coverage; and
    (ii) Mail the disclosures under paragraphs (d)(1)(i) and (ii) or 
(d)(3)(i) through (iii) of this section, as applicable, within three 
business days after the telephone purchase.
    (e) Certain security interest charges. If itemized and disclosed, 
the following charges may be excluded from the finance charge:
    (1) Taxes and fees prescribed by law that actually are or will be 
paid to public officials for determining the existence of or for 
perfecting, releasing, or satisfying a security interest.
    (2) The premium for insurance in lieu of perfecting a security 
interest to the extent that the premium does not exceed the fees 
described in paragraph (e)(1) of this section that otherwise would be 
payable.
    (3) Taxes on security instruments. Any tax levied on security 
instruments or on documents evidencing indebtedness if the payment of 
such taxes is a requirement for recording the instrument securing the 
evidence of indebtedness.
    (f) Prohibited offsets. Interest, dividends, or other income 
received or to be received by the consumer on deposits or investments 
shall not be deducted in computing the finance charge.

[75 FR 7794, Feb. 22, 2010]



                        Subpart B_Open-End Credit



Sec. 226.5  General disclosure requirements.

    (a) Form of disclosures. (1) General. (i) The creditor shall make 
the disclosures required by this subpart clearly and conspicuously.
    (ii) The creditor shall make the disclosures required by this 
subpart in writing,\7\ in a form that the consumer may keep,\8\ except 
that:
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    \7\ [Reserved]
    \8\ [Reserved]
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    (A) The following disclosures need not be written: Disclosures under 
Sec. 226.6(b)(3) of charges that are imposed as part of an open-end 
(not home-secured) plan that are not required to be disclosed under 
Sec. 226.6(b)(2) and related disclosures of charges under

[[Page 337]]

Sec. 226.9(c)(2)(iii)(B); disclosures under Sec. 226.9(c)(2)(vi); 
disclosures under Sec. 226.9(d) when a finance charge is imposed at the 
time of the transaction; and disclosures under Sec. 226.56(b)(1)(i).
    (B) The following disclosures need not be in a retainable form: 
Disclosures that need not be written under paragraph (a)(1)(ii)(A) of 
this section; disclosures for credit and charge card applications and 
solicitations under Sec. 226.5a; home-equity disclosures under Sec. 
226.5b(d); the alternative summary billing-rights statement under Sec. 
226.9(a)(2); the credit and charge card renewal disclosures required 
under Sec. 226.9(e); and the payment requirements under Sec. 
226.10(b), except as provided in Sec. 226.7(b)(13).
    (iii) The disclosures required by this subpart may be provided to 
the consumer in electronic form, subject to compliance with the consumer 
consent and other applicable provisions of the Electronic Signatures in 
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). 
The disclosures required by Sec. Sec. 226.5a, 226.5b, and 226.16 may be 
provided to the consumer in electronic form without regard to the 
consumer consent or other provisions of the E-Sign Act in the 
circumstances set forth in those sections.
    (2) Terminology. (i) Terminology used in providing the disclosures 
required by this subpart shall be consistent.
    (ii) For home-equity plans subject to Sec. 226.5b, the terms 
finance charge and annual percentage rate, when required to be disclosed 
with a corresponding amount or percentage rate, shall be more 
conspicuous than any other required disclosure.\9\ The terms need not be 
more conspicuous when used for periodic statement disclosures under 
Sec. 226.7(a)(4) and for advertisements under Sec. 226.16.
---------------------------------------------------------------------------

    \9\ [Reserved]
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    (iii) If disclosures are required to be presented in a tabular 
format pursuant to paragraph (a)(3) of this section, the term penalty 
APR shall be used, as applicable. The term penalty APR need not be used 
in reference to the annual percentage rate that applies with the loss of 
a promotional rate, assuming the annual percentage rate that applies is 
not greater than the annual percentage rate that would have applied at 
the end of the promotional period; or if the annual percentage rate that 
applies with the loss of a promotional rate is a variable rate, the 
annual percentage rate is calculated using the same index and margin as 
would have been used to calculate the annual percentage rate that would 
have applied at the end of the promotional period. If credit insurance 
or debt cancellation or debt suspension coverage is required as part of 
the plan, the term required shall be used and the program shall be 
identified by its name. If an annual percentage rate is required to be 
presented in a tabular format pursuant to paragraph (a)(3)(i) or 
(a)(3)(iii) of this section, the term fixed, or a similar term, may not 
be used to describe such rate unless the creditor also specifies a time 
period that the rate will be fixed and the rate will not increase during 
that period, or if no such time period is provided, the rate will not 
increase while the plan is open.
    (3) Specific formats. (i) Certain disclosures for credit and charge 
card applications and solicitations must be provided in a tabular format 
in accordance with the requirements of Sec. 226.5a(a)(2).
    (ii) Certain disclosures for home-equity plans must precede other 
disclosures and must be given in accordance with the requirements of 
Sec. 226.5b(a).
    (iii) Certain account-opening disclosures must be provided in a 
tabular format in accordance with the requirements of Sec. 226.6(b)(1).
    (iv) Certain disclosures provided on periodic statements must be 
grouped together in accordance with the requirements of Sec. 
226.7(b)(6) and (b)(13).
    (v) Certain disclosures provided on periodic statements must be 
given in accordance with the requirements of Sec. 226.7(b)(12).
    (vi) Certain disclosures accompanying checks that access a credit 
card account must be provided in a tabular format in accordance with the 
requirements of Sec. 226.9(b)(3).
    (vii) Certain disclosures provided in a change-in-terms notice must 
be provided in a tabular format in accordance with the requirements of 
Sec. 226.9(c)(2)(iv)(D).

[[Page 338]]

    (viii) Certain disclosures provided when a rate is increased due to 
delinquency, default or as a penalty must be provided in a tabular 
format in accordance with the requirements of Sec. 226.9(g)(3)(ii).
    (b) Time of disclosures--(1) Account-opening disclosures--(i) 
General rule. The creditor shall furnish account-opening disclosures 
required by Sec. 226.6 before the first transaction is made under the 
plan.
    (ii) Charges imposed as part of an open-end (not home-secured) plan. 
Charges that are imposed as part of an open-end (not home-secured) plan 
and are not required to be disclosed under Sec. 226.6(b)(2) may be 
disclosed after account opening but before the consumer agrees to pay or 
becomes obligated to pay for the charge, provided they are disclosed at 
a time and in a manner that a consumer would be likely to notice them. 
This provision does not apply to charges imposed as part of a home-
equity plan subject to the requirements of Sec. 226.5b.
    (iii) Telephone purchases. Disclosures required by Sec. 226.6 may 
be provided as soon as reasonably practicable after the first 
transaction if:
    (A) The first transaction occurs when a consumer contacts a merchant 
by telephone to purchase goods and at the same time the consumer accepts 
an offer to finance the purchase by establishing an open-end plan with 
the merchant or third-party creditor;
    (B) The merchant or third-party creditor permits consumers to return 
any goods financed under the plan and provides consumers with a 
sufficient time to reject the plan and return the goods free of cost 
after the merchant or third-party creditor has provided the written 
disclosures required by Sec. 226.6; and
    (C) The consumer's right to reject the plan and return the goods is 
disclosed to the consumer as a part of the offer to finance the 
purchase.
    (iv) Membership fees--(A) General. In general, a creditor may not 
collect any fee before account-opening disclosures are provided. A 
creditor may collect, or obtain the consumer's agreement to pay, 
membership fees, including application fees excludable from the finance 
charge under Sec. 226.4(c)(1), before providing account-opening 
disclosures if, after receiving the disclosures, the consumer may reject 
the plan and have no obligation to pay these fees (including application 
fees) or any other fee or charge. A membership fee for purposes of this 
paragraph has the same meaning as a fee for the issuance or availability 
of credit described in Sec. 226.5a(b)(2). If the consumer rejects the 
plan, the creditor must promptly refund the membership fee if it has 
been paid, or take other action necessary to ensure the consumer is not 
obligated to pay that fee or any other fee or charge.
    (B) Home-equity plans. Creditors offering home-equity plans subject 
to the requirements of Sec. 226.5b are not subject to the requirements 
of paragraph (b)(1)(iv)(A) of this section.
    (v) Application fees. A creditor may collect an application fee 
excludable from the finance charge under Sec. 226.4(c)(1) before 
providing account-opening disclosures. However, if a consumer rejects 
the plan after receiving account-opening disclosures, the consumer must 
have no obligation to pay such an application fee, or if the fee was 
paid, it must be refunded. See Sec. 226.5(b)(1)(iv)(A).
    (2) Periodic statements--(i) Statement required. The creditor shall 
mail or deliver a periodic statement as required by Sec. 226.7 for each 
billing cycle at the end of which an account has a debit or credit 
balance of more than $1 or on which a finance charge has been imposed. A 
periodic statement need not be sent for an account if the creditor deems 
it uncollectible, if delinquency collection proceedings have been 
instituted, if the creditor has charged off the account in accordance 
with loan-loss provisions and will not charge any additional fees or 
interest on the account, or if furnishing the statement would violate 
federal law.
    (A) Credit card accounts under an open-end (not home-secured) 
consumer credit plan. For credit card accounts under an open-end (not 
home-secured) consumer credit plan, a card issuer must adopt reasonable 
procedures designed to ensure that:
    (1) Periodic statements are mailed or delivered at least 21 days 
prior to the payment due date disclosed on the

[[Page 339]]

statement pursuant to Sec. 226.7(b)(11)(i)(A); and
    (2) The card issuer does not treat as late for any purpose a 
required minimum periodic payment received by the card issuer within 21 
days after mailing or delivery of the periodic statement disclosing the 
due date for that payment.
    (B) Open-end consumer credit plans. For accounts under an open-end 
consumer credit plan, a creditor must adopt reasonable procedures 
designed to ensure that:
    (1) If a grace period applies to the account:
    (i) Periodic statements are mailed or delivered at least 21 days 
prior to the date on which the grace period expires; and
    (ii) The creditor does not impose finance charges as a result of the 
loss of the grace period if a payment that satisfies the terms of the 
grace period is received by the creditor within 21 days after mailing or 
delivery of the periodic statement.
    (2) Regardless of whether a grace period applies to the account:
    (i) Periodic statements are mailed or delivered at least 14 days 
prior to the date on which the required minimum periodic payment must be 
received in order to avoid being treated as late for any purpose; and
    (ii) The creditor does not treat as late for any purpose a required 
minimum periodic payment received by the creditor within 14 days after 
mailing or delivery of the periodic statement.
    (3) For purposes of paragraph (b)(2)(ii)(B) of this section, ``grace 
period'' means a period within which any credit extended may be repaid 
without incurring a finance charge due to a periodic interest rate.\10\
---------------------------------------------------------------------------

    \10\ [Reserved]
---------------------------------------------------------------------------

    (3) Credit and charge card application and solicitation disclosures. 
The card issuer shall furnish the disclosures for credit and charge card 
applications and solicitations in accordance with the timing 
requirements of Sec. 226.5a.
    (4) Home-equity plans. Disclosures for home-equity plans shall be 
made in accordance with the timing requirements of Sec. 226.5b(b).
    (c) Basis of disclosures and use of estimates. Disclosures shall 
reflect the terms of the legal obligation between the parties. If any 
information necessary for accurate disclosure is unknown to the 
creditor, it shall make the disclosure based on the best information 
reasonably available and shall state clearly that the disclosure is an 
estimate.
    (d) Multiple creditors; multiple consumers. If the credit plan 
involves more than one creditor, only one set of disclosures shall be 
given, and the creditors shall agree among themselves which creditor 
must comply with the requirements that this regulation imposes on any or 
all of them. If there is more than one consumer, the disclosures may be 
made to any consumer who is primarily liable on the account. If the 
right of rescission under Sec. 226.15 is applicable, however, the 
disclosures required by Sec. Sec. 226.6 and 226.15(b) shall be made to 
each consumer having the right to rescind.
    (e) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor mails or delivers the 
disclosures, the resulting inaccuracy is not a violation of this 
regulation, although new disclosures may be required under Sec. 
226.9(c).

[75 FR 7796, Feb. 22, 2010, as amended at 76 FR 22998, Apr. 25, 2011]



Sec. 226.5a  Credit and charge card applications and solicitations.

    (a) General rules. The card issuer shall provide the disclosures 
required under this section on or with a solicitation or an application 
to open a credit or charge card account.
    (1) Definition of solicitation. For purposes of this section, the 
term solicitation means an offer by the card issuer to open a credit or 
charge card account that does not require the consumer to complete an 
application. A ``firm offer of credit'' as defined in section 603(l) of 
the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) for a credit or 
charge card is a solicitation for purposes of this section.
    (2) Form of disclosures; tabular format. (i) The disclosures in 
paragraphs (b)(1) through (5) (except for (b)(1)(iv)(B)) and (b)(7) 
through (15) of this section made pursuant to paragraph (c), (d)(2), 
(e)(1)

[[Page 340]]

or (f) of this section generally shall be in the form of a table with 
headings, content, and format substantially similar to any of the 
applicable tables found in G-10 in appendix G to this part.
    (ii) The table described in paragraph (a)(2)(i) of this section 
shall contain only the information required or permitted by this 
section. Other information may be presented on or with an application or 
solicitation, provided such information appears outside the required 
table.
    (iii) Disclosures required by paragraphs (b)(1)(iv)(B), 
(b)(1)(iv)(C) and (b)(6) of this section must be placed directly beneath 
the table.
    (iv) When a tabular format is required, any annual percentage rate 
required to be disclosed pursuant to paragraph (b)(1) of this section, 
any introductory rate required to be disclosed pursuant to paragraph 
(b)(1)(ii) of this section, any rate that will apply after a premium 
initial rate expires required to be disclosed under paragraph 
(b)(1)(iii) of this section, and any fee or percentage amounts or 
maximum limits on fee amounts disclosed pursuant to paragraphs (b)(2), 
(b)(4), (b)(8) through (b)(13) of this section must be disclosed in bold 
text. However, bold text shall not be used for: The amount of any 
periodic fee disclosed pursuant to paragraph (b)(2) of this section that 
is not an annualized amount; and other annual percentage rates or fee 
amounts disclosed in the table.
    (v) For an application or a solicitation that is accessed by the 
consumer in electronic form, the disclosures required under this section 
may be provided to the consumer in electronic form on or with the 
application or solicitation.
    (vi)(A) Except as provided in paragraph (a)(2)(vi)(B) of this 
section, the table described in paragraph (a)(2)(i) of this section must 
be provided in a prominent location on or with an application or a 
solicitation.
    (B) If the table described in paragraph (a)(2)(i) of this section is 
provided electronically, it must be provided in close proximity to the 
application or solicitation.
    (3) Fees based on a percentage. If the amount of any fee required to 
be disclosed under this section is determined on the basis of a 
percentage of another amount, the percentage used and the identification 
of the amount against which the percentage is applied may be disclosed 
instead of the amount of the fee.
    (4) Fees that vary by state. Card issuers that impose fees referred 
to in paragraphs (b)(8) through (12) of this section that vary by state 
may, at the issuer's option, disclose in the table required by paragraph 
(a)(2)(i) of this section: the specific fee applicable to the consumer's 
account; or the range of the fees, if the disclosure includes a 
statement that the amount of the fee varies by state and refers the 
consumer to a disclosure provided with the table where the amount of the 
fee applicable to the consumer's account is disclosed. A card issuer may 
not list fees for multiple states in the table.
    (5) Exceptions. This section does not apply to:
    (i) Home-equity plans accessible by a credit or charge card that are 
subject to the requirements of Sec. 226.5b;
    (ii) Overdraft lines of credit tied to asset accounts accessed by 
check-guarantee cards or by debit cards;
    (iii) Lines of credit accessed by check-guarantee cards or by debit 
cards that can be used only at automated teller machines;
    (iv) Lines of credit accessed solely by account numbers;
    (v) Additions of a credit or charge card to an existing open-end 
plan;
    (vi) General purpose applications unless the application, or 
material accompanying it, indicates that it can be used to open a credit 
or charge card account; or
    (vii) Consumer-initiated requests for applications.
    (b) Required disclosures. The card issuer shall disclose the items 
in this paragraph on or with an application or a solicitation in 
accordance with the requirements of paragraphs (c), (d), (e)(1) or (f) 
of this section. A credit card issuer shall disclose all applicable 
items in this paragraph except for paragraph (b)(7) of this section. A 
charge card issuer shall disclose the applicable items in paragraphs 
(b)(2), (4), (7) through (12), and (15) of this section.

[[Page 341]]

    (1) Annual percentage rate. Each periodic rate that may be used to 
compute the finance charge on an outstanding balance for purchases, a 
cash advance, or a balance transfer, expressed as an annual percentage 
rate (as determined by Sec. 226.14(b)). When more than one rate applies 
for a category of transactions, the range of balances to which each rate 
is applicable shall also be disclosed. The annual percentage rate for 
purchases disclosed pursuant to this paragraph shall be in at least 16-
point type, except for the following: Oral disclosures of the annual 
percentage rate for purchases; or a penalty rate that may apply upon the 
occurrence of one or more specific events.
    (i) Variable rate information. If a rate disclosed under paragraph 
(b)(1) of this section is a variable rate, the card issuer shall also 
disclose the fact that the rate may vary and how the rate is determined. 
In describing how the applicable rate will be determined, the card 
issuer must identify the type of index or formula that is used in 
setting the rate. The value of the index and the amount of the margin 
that are used to calculate the variable rate shall not be disclosed in 
the table. A disclosure of any applicable limitations on rate increases 
shall not be included in the table.
    (ii) Discounted initial rate. If the initial rate is an introductory 
rate, as that term is defined in Sec. 226.16(g)(2)(ii), the card issuer 
must disclose in the table the introductory rate, the time period during 
which the introductory rate will remain in effect, and must use the term 
``introductory'' or ``intro'' in immediate proximity to the introductory 
rate. The card issuer also must disclose the rate that would otherwise 
apply to the account pursuant to paragraph (b)(1) of this section. Where 
the rate is not tied to an index or formula, the card issuer must 
disclose the rate that will apply after the introductory rate expires. 
In a variable-rate account, the card issuer must disclose a rate based 
on the applicable index or formula in accordance with the accuracy 
requirements set forth in paragraphs (c)(2), (d)(3), or (e)(4) of this 
section, as applicable.
    (iii) Premium initial rate. If the initial rate is temporary and is 
higher than the rate that will apply after the temporary rate expires, 
the card issuer must disclose the premium initial rate pursuant to 
paragraph (b)(1) of this section and the time period during which the 
premium initial rate will remain in effect. Consistent with paragraph 
(b)(1) of this section, the premium initial rate for purchases must be 
in at least 16-point type. The issuer must also disclose in the table 
the rate that will apply after the premium initial rate expires, in at 
least 16-point type.
    (iv) Penalty rates--(A) In general. Except as provided in paragraph 
(b)(1)(iv)(B) and (C) of this section, if a rate may increase as a 
penalty for one or more events specified in the account agreement, such 
as a late payment or an extension of credit that exceeds the credit 
limit, the card issuer must disclose pursuant to this paragraph (b)(1) 
the increased rate that may apply, a brief description of the event or 
events that may result in the increased rate, and a brief description of 
how long the increased rate will remain in effect.
    (B) Introductory rates. If the issuer discloses an introductory 
rate, as that term is defined in Sec. 226.16(g)(2)(ii), in the table or 
in any written or electronic promotional materials accompanying 
applications or solicitations subject to paragraph (c) or (e) of this 
section, the issuer must briefly disclose directly beneath the table the 
circumstances, if any, under which the introductory rate may be revoked, 
and the type of rate that will apply after the introductory rate is 
revoked.
    (C) Employee preferential rates. If a card issuer discloses in the 
table a preferential annual percentage rate for which only employees of 
the card issuer, employees of a third party, or other individuals with 
similar affiliations with the card issuer or third party, such as 
executive officers, directors, or principal shareholders are eligible, 
the card issuer must briefly disclose directly beneath the table the 
circumstances under which such preferential rate may be revoked, and the 
rate that will apply after such preferential rate is revoked.
    (v) Rates that depend on consumer's creditworthiness. If a rate 
cannot be determined at the time disclosures are given because the rate 
depends, at least

[[Page 342]]

in part, on a later determination of the consumer's creditworthiness, 
the card issuer must disclose the specific rates or the range of rates 
that could apply and a statement that the rate for which the consumer 
may qualify at account opening will depend on the consumer's 
creditworthiness, and other factors if applicable. If the rate that 
depends, at least in part, on a later determination of the consumer's 
creditworthiness is a penalty rate, as described in paragraph (b)(1)(iv) 
of this section, the card issuer at its option may disclose the highest 
rate that could apply, instead of disclosing the specific rates or the 
range of rates that could apply.
    (vi) APRs that vary by state. Issuers imposing annual percentage 
rates that vary by state may, at the issuer's option, disclose in the 
table: the specific annual percentage rate applicable to the consumer's 
account; or the range of the annual percentage rates, if the disclosure 
includes a statement that the annual percentage rate varies by state and 
refers the consumer to a disclosure provided with the table where the 
annual percentage rate applicable to the consumer's account is 
disclosed. A card issuer may not list annual percentage rates for 
multiple states in the table.
    (2) Fees for issuance or availability. (i) Any annual or other 
periodic fee that may be imposed for the issuance or availability of a 
credit or charge card, including any fee based on account activity or 
inactivity; how frequently it will be imposed; and the annualized amount 
of the fee.
    (ii) Any non-periodic fee that relates to opening an account. A card 
issuer must disclose that the fee is a one-time fee.
    (3) Fixed finance charge; minimum interest charge. Any fixed finance 
charge and a brief description of the charge. Any minimum interest 
charge if it exceeds $1.00 that could be imposed during a billing cycle, 
and a brief description of the charge. The $1.00 threshold amount shall 
be adjusted periodically by the Board to reflect changes in the Consumer 
Price Index. The Board shall calculate each year a price level adjusted 
minimum interest charge using the Consumer Price Index in effect on June 
1 of that year. When the cumulative change in the adjusted minimum value 
derived from applying the annual Consumer Price level to the current 
minimum interest charge threshold has risen by a whole dollar, the 
minimum interest charge will be increased by $1.00. The issuer may, at 
its option, disclose in the table minimum interest charges below this 
threshold.
    (4) Transaction charges. Any transaction charge imposed by the card 
issuer for the use of the card for purchases.
    (5) Grace period. The date by which or the period within which any 
credit extended for purchases may be repaid without incurring a finance 
charge due to a periodic interest rate and any conditions on the 
availability of the grace period. If no grace period is provided, that 
fact must be disclosed. If the length of the grace period varies, the 
card issuer may disclose the range of days, the minimum number of days, 
or the average number of days in the grace period, if the disclosure is 
identified as a range, minimum, or average. In disclosing in the tabular 
format a grace period that applies to all types of purchases, the phrase 
``How to Avoid Paying Interest on Purchases'' shall be used as the 
heading for the row describing the grace period. If a grace period is 
not offered on all types of purchases, in disclosing this fact in the 
tabular format, the phrase ``Paying Interest'' shall be used as the 
heading for the row describing this fact.
    (6) Balance computation method. The name of the balance computation 
method listed in paragraph (g) of this section that is used to determine 
the balance for purchases on which the finance charge is computed, or an 
explanation of the method used if it is not listed. In determining which 
balance computation method to disclose, the card issuer shall assume 
that credit extended for purchases will not be repaid within the grace 
period, if any.
    (7) Statement on charge card payments. A statement that charges 
incurred by use of the charge card are due when the periodic statement 
is received.
    (8) Cash advance fee. Any fee imposed for an extension of credit in 
the form of cash or its equivalent.
    (9) Late payment fee. Any fee imposed for a late payment.

[[Page 343]]

    (10) Over-the-limit fee. Any fee imposed for exceeding a credit 
limit.
    (11) Balance transfer fee. Any fee imposed to transfer an 
outstanding balance.
    (12) Returned-payment fee. Any fee imposed by the card issuer for a 
returned payment.
    (13) Required insurance, debt cancellation or debt suspension 
coverage. (i) A fee for insurance described in Sec. 226.4(b)(7) or debt 
cancellation or suspension coverage described in Sec. 226.4(b)(10), if 
the insurance or debt cancellation or suspension coverage is required as 
part of the plan; and
    (ii) A cross reference to any additional information provided about 
the insurance or coverage accompanying the application or solicitation, 
as applicable.
    (14) Available credit. If a card issuer requires fees for the 
issuance or availability of credit described in paragraph (b)(2) of this 
section, or requires a security deposit for such credit, and the total 
amount of those required fees and/or security deposit that will be 
imposed and charged to the account when the account is opened is 15 
percent or more of the minimum credit limit for the card, a card issuer 
must disclose the available credit remaining after these fees or 
security deposit are debited to the account, assuming that the consumer 
receives the minimum credit limit. In determining whether the 15 percent 
threshold test is met, the issuer must only consider fees for issuance 
or availability of credit, or a security deposit, that are required. If 
fees for issuance or availability are optional, these fees should not be 
considered in determining whether the disclosure must be given. 
Nonetheless, if the 15 percent threshold test is met, the issuer in 
providing the disclosure must disclose the amount of available credit 
calculated by excluding those optional fees, and the available credit 
including those optional fees. This paragraph does not apply with 
respect to fees or security deposits that are not debited to the 
account.
    (15) Web site reference. A reference to the Web site established by 
the Board and a statement that consumers may obtain on the Web site 
information about shopping for and using credit cards.
    (c) Direct mail and electronic applications and solicitations--(1) 
General. The card issuer shall disclose the applicable items in 
paragraph (b) of this section on or with an application or solicitation 
that is mailed to consumers or provided to consumers in electronic form.
    (2) Accuracy. (i) Disclosures in direct mail applications and 
solicitations must be accurate as of the time the disclosures are 
mailed. An accurate variable annual percentage rate is one in effect 
within 60 days before mailing.
    (ii) Disclosures provided in electronic form must be accurate as of 
the time they are sent, in the case of disclosures sent to a consumer's 
e-mail address, or as of the time they are viewed by the public, in the 
case of disclosures made available at a location such as a card issuer's 
Web site. An accurate variable annual percentage rate provided in 
electronic form is one in effect within 30 days before it is sent to a 
consumer's e-mail address, or viewed by the public, as applicable.
    (d) Telephone applications and solicitations--(1) Oral disclosure. 
The card issuer shall disclose orally the information in paragraphs 
(b)(1) through (7) and (b)(14) of this section, to the extent 
applicable, in a telephone application or solicitation initiated by the 
card issuer.
    (2) Alternative disclosure. The oral disclosure under paragraph 
(d)(1) of this section need not be given if the card issuer either:
    (i)(A) Does not impose a fee described in paragraph (b)(2) of this 
section; or
    (B) Imposes such a fee but provides the consumer with a right to 
reject the plan consistent with Sec. 226.5(b)(1)(iv); and
    (ii) The card issuer discloses in writing within 30 days after the 
consumer requests the card (but in no event later than the delivery of 
the card) the following:
    (A) The applicable information in paragraph (b) of this section; and
    (B) As applicable, the fact that the consumer has the right to 
reject the plan and not be obligated to pay fees described in paragraph 
(b)(2) or any

[[Page 344]]

other fees or charges until the consumer has used the account or made a 
payment on the account after receiving a billing statement.
    (3) Accuracy. (i) The oral disclosures under paragraph (d)(1) of 
this section must be accurate as of the time they are given.
    (ii) The alternative disclosures under paragraph (d)(2) of this 
section generally must be accurate as of the time they are mailed or 
delivered. A variable annual percentage rate is one that is accurate if 
it was:
    (A) In effect at the time the disclosures are mailed or delivered; 
or
    (B) In effect as of a specified date (which rate is then updated 
from time to time, but no less frequently than each calendar month).
    (e) Applications and solicitations made available to general public. 
The card issuer shall provide disclosures, to the extent applicable, on 
or with an application or solicitation that is made available to the 
general public, including one contained in a catalog, magazine, or other 
generally available publication. The disclosures shall be provided in 
accordance with paragraph (e)(1) or (e)(2) of this section.
    (1) Disclosure of required credit information. The card issuer may 
disclose in a prominent location on the application or solicitation the 
following:
    (i) The applicable information in paragraph (b) of this section;
    (ii) The date the required information was printed, including a 
statement that the required information was accurate as of that date and 
is subject to change after that date; and
    (iii) A statement that the consumer should contact the card issuer 
for any change in the required information since it was printed, and a 
toll-free telephone number or a mailing address for that purpose.
    (2) No disclosure of credit information. If none of the items in 
paragraph (b) of this section is provided on or with the application or 
solicitation, the card issuer may state in a prominent location on the 
application or solicitation the following:
    (i) There are costs associated with the use of the card; and
    (ii) The consumer may contact the card issuer to request specific 
information about the costs, along with a toll-free telephone number and 
a mailing address for that purpose.
    (3) Prompt response to requests for information. Upon receiving a 
request for any of the information referred to in this paragraph, the 
card issuer shall promptly and fully disclose the information requested.
    (4) Accuracy. The disclosures given pursuant to paragraph (e)(1) of 
this section must be accurate as of the date of printing. A variable 
annual percentage rate is accurate if it was in effect within 30 days 
before printing.
    (f) In-person applications and solicitations. A card issuer shall 
disclose the information in paragraph (b) of this section, to the extent 
applicable, on or with an application or solicitation that is initiated 
by the card issuer and given to the consumer in person. A card issuer 
complies with the requirements of this paragraph if the issuer provides 
disclosures in accordance with paragraph (c)(1) or (e)(1) of this 
section.
    (g) Balance computation methods defined. The following methods may 
be described by name. Methods that differ due to variations such as the 
allocation of payments, whether the finance charge begins to accrue on 
the transaction date or the date of posting the transaction, the 
existence or length of a grace period, and whether the balance is 
adjusted by charges such as late payment fees, annual fees and unpaid 
finance charges do not constitute separate balance computation methods.
    (1)(i) Average daily balance (including new purchases). This balance 
is figured by adding the outstanding balance (including new purchases 
and deducting payments and credits) for each day in the billing cycle, 
and then dividing by the number of days in the billing cycle.
    (ii) Average daily balance (excluding new purchases). This balance 
is figured by adding the outstanding balance (excluding new purchases 
and deducting payments and credits) for each day in the billing cycle, 
and then dividing by the number of days in the billing cycle.
    (2) Adjusted balance. This balance is figured by deducting payments 
and credits made during the billing cycle from the outstanding balance 
at the beginning of the billing cycle.

[[Page 345]]

    (3) Previous balance. This balance is the outstanding balance at the 
beginning of the billing cycle.
    (4) Daily balance. For each day in the billing cycle, this balance 
is figured by taking the beginning balance each day, adding any new 
purchases, and subtracting any payment and credits.

[75 FR 7797, Feb. 22, 2010, as amended at 75 FR 37568, June 26, 2010; 76 
FR 22999, Apr. 25, 2011]



Sec. 226.5b  Requirements for home equity plans.

    The requirements of this section apply to open-end credit plans 
secured by the consumer's dwelling. For purposes of this section, an 
annual percentage rate is the annual percentage rate corresponding to 
the periodic rate as determined under Sec. 226.14(b).
    (a) Form of disclosures--(1) General. The disclosures required by 
paragraph (d) of this section shall be made clearly and conspicuously 
and shall be grouped together and segregated from all unrelated 
information. The disclosures may be provided on the application form or 
on a separate form. The disclosure described in paragraph (d)(4)(iii), 
the itemization of third-party fees described in paragraph (d)(8), and 
the variable-rate information described in paragraph (d)(12) of this 
section may be provided separately from the other required disclosures.
    (2) Precedence of certain disclosures. The disclosures described in 
paragraph (d)(1) through (4)(ii) of this section shall precede the other 
required disclosures.
    (3) For an application that is accessed by the consumer in 
electronic form, the disclosures required under this section may be 
provided to the consumer in electronic form on or with the application.
    (b) Time of disclosures. The disclosures and brochure required by 
paragraphs (d) and (e) of this section shall be provided at the time an 
application is provided to the consumer. \10a\
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    \10a\ The disclosures and the brochure may be delivered or placed in 
the mail not later than three business days following receipt of a 
consumer's application in the case of applications contained in 
magazines or other publications, or when the application is received by 
telephone or through an intermediary agent or broker.
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    (c) Duties of third parties--Persons other than the creditor who 
provide applications to consumers for home equity plans must provide the 
brochure required under paragraph (e) of this section at the time an 
application is provided. If such persons have the disclosures required 
under paragraph (d) of this section for a creditor's home equity plan, 
they also shall provide the disclosures at such time. \10a\
    (d) Content of disclosures. The creditor shall provide the following 
disclosures, as applicable:
    (1) Retention of information. A statement that the consumer should 
make or otherwise retain a copy of the disclosures.
    (2) Conditions for disclosed terms. (i) A statement of the time by 
which the consumer must submit an application to obtain specific terms 
disclosed and an identification of any disclosed term that is subject to 
change prior to opening the plan.
    (ii) A statement that, if a disclosed term changes (other than a 
change due to fluctuations in the index in a variable-rate plan) prior 
to opening the plan and the consumer therefore elects not to open the 
plan, the consumer may receive a refund of all fees paid in connection 
with the application.
    (3) Security interest and risk to home. A statement that the 
creditor will acquire a security interest in the consumer's dwelling and 
that loss of the dwelling may occur in the event of default.
    (4) Possible actions by creditor. (i) A statement that, under 
certain conditions, the creditor may terminate the plan and require 
payment of the outstanding balance in full in a single payment and 
impose fees upon termination; prohibit additional extensions of credit 
or reduce the credit limit; and, as specified in the initial agreement, 
implement certain changes in the plan.
    (ii) A statement that the consumer may receive, upon request, 
information about the conditions under which such actions may occur.

[[Page 346]]

    (iii) In lieu of the disclosure required under paragraph (d)(4)(ii) 
of this section, a statement of such conditions.
    (5) Payment terms. The payment terms of the plan, including:
    (i) The length of the draw period and any repayment period.
    (ii) An explanation of how the minimum periodic payment will be 
determined and the timing of the payments. If paying only the minimum 
periodic payments may not repay any of the principal or may repay less 
than the outstanding balance, a statement of this fact, as well as a 
statement that a balloon payment may result. \10b\
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    \10b\ A balloon payment results if paying the minimum periodic 
payments does not fully amortize the outstanding balance by a specified 
date or time, and the consumer must repay the entire outstanding balance 
at such time.
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    (iii) An example, based on a $10,000 outstanding balance and a 
recent annual percentage rate, \10c\ showing the minimum periodic 
payment, any balloon payment, and the time it would take to repay the 
$10,000 outstanding balance if the consumer made only those payments and 
obtained no additional extensions of credit.
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    \10c\ For fixed-rate plans, a recent annual percentage rate is a 
rate that has been in effect under the plan within the twelve months 
preceding the date the disclosures are provided to the consumer. For 
variable-rate plans, a recent annual percentage rate is the most recent 
rate provided in the historical example described in paragraph 
(d)(12)(xi) of this section or a rate that has been in effect under the 
plan since the date of the most recent rate in the table.


If different payment terms may apply to the draw and any repayment 
period, or if different payment terms may apply within either period, 
the disclosures shall reflect the different payment terms.
    (6) Annual percentage rate. For fixed-rate plans, a recent annual 
percentage rate \10c\ imposed under the plan and a statement that the 
rate does not include costs other than interest.
    (7) Fees imposed by creditor. An itemization of any fees imposed by 
the creditor to open, use, or maintain the plan, stated as a dollar 
amount or percentage, and when such fees are payable.
    (8) Fees imposed by third parties to open a plan. A good faith 
estimate, stated as a single dollar amount or range, of any fees that 
may be imposed by persons other than the creditor to open the plan, as 
well as a statement that the consumer may receive, upon request, a good 
faith itemization of such fees. In lieu of the statement, the 
itemization of such fees may be provided.
    (9) Negative amortization. A statement that negative amortization 
may occur and that negative amortization increases the principal balance 
and reduces the consumer's equity in the dwelling.
    (10) Transaction requirements. Any limitations on the number of 
extensions of credit and the amount of credit that may be obtained 
during any time period, as well as any minimum outstanding balance and 
minimum draw requirements, stated as dollar amounts or percentages.
    (11) Tax implications. A statement that the consumer should consult 
a tax advisor regarding the deductibility of interest and charges under 
the plan.
    (12) Disclosures for variable-rate plans. For a plan in which the 
annual percentage rate is variable, the following disclosures, as 
applicable:
    (i) The fact that the annual percentage rate, payment, or term may 
change due to the variable-rate feature.
    (ii) A statement that the annual percentage rate does not include 
costs other than interest.
    (iii) The index used in making rate adjustments and a source of 
information about the index.
    (iv) An explanation of how the annual percentage rate will be 
determined, including an explanation of how the index is adjusted, such 
as by the addition of a margin.
    (v) A statement that the consumer should ask about the current index 
value, margin, discount or premium, and annual percentage rate.
    (vi) A statement that the initial annual percentage rate is not 
based on the index and margin used to make later rate adjustments, and 
the period of time such initial rate will be in effect.
    (vii) The frequency of changes in the annual percentage rate.

[[Page 347]]

    (viii) Any rules relating to changes in the index value and the 
annual percentage rate and resulting changes in the payment amount, 
including, for example, an explanation of payment limitations and rate 
carryover.
    (ix) A statement of any annual or more frequent periodic limitations 
on changes in the annual percentage rate (or a statement that no annual 
limitation exists), as well as a statement of the maximum annual 
percentage rate that may be imposed under each payment option.
    (x) The minimum periodic payment required when the maximum annual 
percentage rate for each payment option is in effect for a $10,000 
outstanding balance, and a statement of the earliest date or time the 
maximum rate may be imposed.
    (xi) An historical example, based on a $10,000 extension of credit, 
illustrating how annual percentage rates and payments would have been 
affected by index value changes implemented according to the terms of 
the plan. The historical example shall be based on the most recent 15 
years of index values (selected for the same time period each year) and 
shall reflect all significant plan terms, such as negative amortization, 
rate carryover, rate discounts, and rate and payment limitations, that 
would have been affected by the index movement during the period.
    (xii) A statement that rate information will be provided on or with 
each periodic statement.
    (e) Brochure. The home equity brochure published by the Board or a 
suitable substitute shall be provided.
    (f) Limitations on home equity plans. No creditor may, by contract 
or otherwise:
    (1) Change the annual percentage rate unless:
    (i) Such change is based on an index that is not under the 
creditor's control; and
    (ii) Such index is available to the general public.
    (2) Terminate a plan and demand repayment of the entire outstanding 
balance in advance of the original term (except for reverse mortgage 
transactions that are subject to paragraph (f)(4) of this section) 
unless:
    (i) There is fraud or material misrepresentation by the consumer in 
connection with the plan;
    (ii) The consumer fails to meet the repayment terms of the agreement 
for any outstanding balance;
    (iii) Any action or inaction by the consumer adversely affects the 
creditor's security for the plan, or any right of the creditor in such 
security; or
    (iv) Federal law dealing with credit extended by a depository 
institution to its executive officers specifically requires that as a 
condition of the plan the credit shall become due and payable on demand, 
provided that the creditor includes such a provision in the initial 
agreement.
    (3) Change any term, except that a creditor may:
    (i) Provide in the initial agreement that it may prohibit additional 
extensions of credit or reduce the credit limit during any period in 
which the maximum annual percentage rate is reached. A creditor also may 
provide in the initial agreement that specified changes will occur if a 
specified event takes place (for example, that the annual percentage 
rate will increase a specified amount if the consumer leaves the 
creditor's employment).
    (ii) Change the index and margin used under the plan if the original 
index is no longer available, the new index has an historical movement 
substantially similar to that of the original index, and the new index 
and margin would have resulted in an annual percentage rate 
substantially similar to the rate in effect at the time the original 
index became unavailable.
    (iii) Make a specified change if the consumer specifically agrees to 
it in writing at that time.
    (iv) Make a change that will unequivocally benefit the consumer 
throughout the remainder of the plan.
    (v) Make an insignificant change to terms.
    (vi) Prohibit additional extensions of credit or reduce the credit 
limit applicable to an agreement during any period in which:
    (A) The value of the dwelling that secures the plan declines 
significantly below the dwelling's appraised value for purposes of the 
plan;

[[Page 348]]

    (B) The creditor reasonably believes that the consumer will be 
unable to fulfill the repayment obligations under the plan because of a 
material change in the consumer's financial circumstances;
    (C) The consumer is in default of any material obligation under the 
agreement;
    (D) The creditor is precluded by government action from imposing the 
annual percentage rate provided for in the agreement;
    (E) The priority of the creditor's security interest is adversely 
affected by government action to the extent that the value of the 
security interest is less than 120 percent of the credit line; or
    (F) The creditor is notified by its regulatory agency that continued 
advances constitute an unsafe and unsound practice.
    (4) For reverse mortgage transactions that are subject to Sec. 
226.33, terminate a plan and demand repayment of the entire outstanding 
balance in advance of the original term except:
    (i) In the case of default;
    (ii) If the consumer transfers title to the property securing the 
note;
    (iii) If the consumer ceases using the property securing the note as 
the primary dwelling; or
    (iv) Upon the consumer's death.
    (g) Refund of fees. A creditor shall refund all fees paid by the 
consumer to anyone in connection with an application if any term 
required to be disclosed under paragraph (d) of this section changes 
(other than a change due to fluctuations in the index in a variable-rate 
plan) before the plan is opened and, as a result, the consumer elects 
not to open the plan.
    (h) Imposition of nonrefundable fees. Neither a creditor nor any 
other person may impose a nonrefundable fee in connection with an 
application until three business days after the consumer receives the 
disclosures and brochure required under this section. \10d\
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    \10d\ If the disclosures and brochure are mailed to the consumer, 
the consumer is considered to have received them three business days 
after they are mailed.

[Reg. Z, 54 FR 24686, June 9, 1989, as amended at 55 FR 38312, Sept. 18, 
1990; 55 FR 42148, Oct. 17, 1990; 57 FR 34681, Aug. 6, 1992; 60 FR 
15471, Mar. 24, 1995; 66 FR 17338, Mar. 30, 2001; 72 FR 63474, Nov. 9, 
2007]



Sec. 226.6  Account-opening disclosures.

    (a) Rules affecting home-equity plans. The requirements of this 
paragraph (a) apply only to home-equity plans subject to the 
requirements of Sec. 226.5b. A creditor shall disclose the items in 
this section, to the extent applicable:
    (1) Finance charge. The circumstances under which a finance charge 
will be imposed and an explanation of how it will be determined, as 
follows:
    (i) A statement of when finance charges begin to accrue, including 
an explanation of whether or not any time period exists within which any 
credit extended may be repaid without incurring a finance charge. If 
such a time period is provided, a creditor may, at its option and 
without disclosure, impose no finance charge when payment is received 
after the time period's expiration.
    (ii) A disclosure of each periodic rate that may be used to compute 
the finance charge, the range of balances to which it is applicable,\11\ 
and the corresponding annual percentage rate.\12\ If a creditor offers a 
variable-rate plan, the creditor shall also disclose: the circumstances 
under which the rate(s) may increase; any limitations on the increase; 
and the effect(s) of an increase. When different periodic rates apply to 
different types of transactions, the types of transactions to which the 
periodic rates shall apply shall also be disclosed. A creditor is not 
required to adjust the range of balances disclosure to reflect the 
balance below which only a minimum charge applies.
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    \11\ [Reserved]
    \12\ [Reserved]
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    (iii) An explanation of the method used to determine the balance on 
which the finance charge may be computed.

[[Page 349]]

    (iv) An explanation of how the amount of any finance charge will be 
determined,\13\ including a description of how any finance charge other 
than the periodic rate will be determined.
---------------------------------------------------------------------------

    \13\ [Reserved]
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    (2) Other charges. The amount of any charge other than a finance 
charge that may be imposed as part of the plan, or an explanation of how 
the charge will be determined.
    (3) Home-equity plan information. The following disclosures 
described in Sec. 226.5b(d), as applicable:
    (i) A statement of the conditions under which the creditor may take 
certain action, as described in Sec. 226.5b(d)(4)(i), such as 
terminating the plan or changing the terms.
    (ii) The payment information described in Sec. 226.5b(d)(5)(i) and 
(ii) for both the draw period and any repayment period.
    (iii) A statement that negative amortization may occur as described 
in Sec. 226.5b(d)(9).
    (iv) A statement of any transaction requirements as described in 
Sec. 226.5b(d)(10).
    (v) A statement regarding the tax implications as described in Sec. 
226.5b(d)(11).
    (vi) A statement that the annual percentage rate imposed under the 
plan does not include costs other than interest as described in Sec. 
226.5b(d)(6) and (d)(12)(ii).
    (vii) The variable-rate disclosures described in Sec. 
226.5b(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and (d)(12)(xii), as well 
as the disclosure described in Sec. 226.5b(d)(5)(iii), unless the 
disclosures provided with the application were in a form the consumer 
could keep and included a representative payment example for the 
category of payment option chosen by the consumer.
    (4) Security interests. The fact that the creditor has or will 
acquire a security interest in the property purchased under the plan, or 
in other property identified by item or type.
    (5) Statement of billing rights. A statement that outlines the 
consumer's rights and the creditor's responsibilities under Sec. Sec. 
226.12(c) and 226.13 and that is substantially similar to the statement 
found in Model Form G-3 or, at the creditor's option, G-3(A), in 
appendix G to this part.
    (b) Rules affecting open-end (not home-secured) plans. The 
requirements of paragraph (b) of this section apply to plans other than 
home-equity plans subject to the requirements of Sec. 226.5b.
    (1) Form of disclosures; tabular format for open-end (not home-
secured) plans. Creditors must provide the account-opening disclosures 
specified in paragraph (b)(2)(i) through (b)(2)(v) (except for 
(b)(2)(i)(D)(2)) and (b)(2)(vii) through (b)(2)(xiv) of this section in 
the form of a table with the headings, content, and format substantially 
similar to any of the applicable tables in G-17 in appendix G.
    (i) Highlighting. In the table, any annual percentage rate required 
to be disclosed pursuant to paragraph (b)(2)(i) of this section; any 
introductory rate permitted to be disclosed pursuant to paragraph 
(b)(2)(i)(B) or required to be disclosed under paragraph (b)(2)(i)(F) of 
this section, any rate that will apply after a premium initial rate 
expires permitted to be disclosed pursuant to paragraph (b)(2)(i)(C) or 
required to be disclosed pursuant to paragraph (b)(2)(i)(F), and any fee 
or percentage amounts or maximum limits on fee amounts disclosed 
pursuant to paragraphs (b)(2)(ii), (b)(2)(iv), (b)(2)(vii) through 
(b)(2)(xii) of this section must be disclosed in bold text. However, 
bold text shall not be used for: The amount of any periodic fee 
disclosed pursuant to paragraph (b)(2) of this section that is not an 
annualized amount; and other annual percentage rates or fee amounts 
disclosed in the table.
    (ii) Location. Only the information required or permitted by 
paragraphs (b)(2)(i) through (v) (except for (b)(2)(i)(D)(2)) and 
(b)(2)(vii) through (xiv) of this section shall be in the table. 
Disclosures required by paragraphs (b)(2)(i)(D)(2), (b)(2)(i)(D)(3), 
(b)(2)(vi), and (b)(2)(xv) of this section shall be placed directly 
below the table. Disclosures required by paragraphs (b)(3) through (5) 
of this section that are not otherwise required to be in the table and 
other information may be presented with the account agreement or 
account-opening disclosure statement, provided such information appears 
outside the required table.

[[Page 350]]

    (iii) Fees that vary by state. Creditors that impose fees referred 
to in paragraphs (b)(2)(vii) through (b)(2)(xi) of this section that 
vary by state and that provide the disclosures required by paragraph (b) 
of this section in person at the time the open-end (not home-secured) 
plan is established in connection with financing the purchase of goods 
or services may, at the creditor's option, disclose in the account-
opening table the specific fee applicable to the consumer's account, or 
the range of the fees, if the disclosure includes a statement that the 
amount of the fee varies by state and refers the consumer to the account 
agreement or other disclosure provided with the account-opening table 
where the amount of the fee applicable to the consumer's account is 
disclosed. A creditor may not list fees for multiple states in the 
account-opening summary table.
    (iv) Fees based on a percentage. If the amount of any fee required 
to be disclosed under this section is determined on the basis of a 
percentage of another amount, the percentage used and the identification 
of the amount against which the percentage is applied may be disclosed 
instead of the amount of the fee.
    (2) Required disclosures for account-opening table for open-end (not 
home-secured) plans. A creditor shall disclose the items in this 
section, to the extent applicable:
    (i) Annual percentage rate. Each periodic rate that may be used to 
compute the finance charge on an outstanding balance for purchases, a 
cash advance, or a balance transfer, expressed as an annual percentage 
rate (as determined by Sec. 226.14(b)). When more than one rate applies 
for a category of transactions, the range of balances to which each rate 
is applicable shall also be disclosed. The annual percentage rate for 
purchases disclosed pursuant to this paragraph shall be in at least 16-
point type, except for the following: A penalty rate that may apply upon 
the occurrence of one or more specific events.
    (A) Variable-rate information. If a rate disclosed under paragraph 
(b)(2)(i) of this section is a variable rate, the creditor shall also 
disclose the fact that the rate may vary and how the rate is determined. 
In describing how the applicable rate will be determined, the creditor 
must identify the type of index or formula that is used in setting the 
rate. The value of the index and the amount of the margin that are used 
to calculate the variable rate shall not be disclosed in the table. A 
disclosure of any applicable limitations on rate increases or decreases 
shall not be included in the table.
    (B) Discounted initial rates. If the initial rate is an introductory 
rate, as that term is defined in Sec. 226.16(g)(2)(ii), the creditor 
must disclose the rate that would otherwise apply to the account 
pursuant to paragraph (b)(2)(i) of this section. Where the rate is not 
tied to an index or formula, the creditor must disclose the rate that 
will apply after the introductory rate expires. In a variable-rate 
account, the creditor must disclose a rate based on the applicable index 
or formula in accordance with the accuracy requirements of paragraph 
(b)(4)(ii)(G) of this section. Except as provided in paragraph 
(b)(2)(i)(F) of this section, the creditor is not required to, but may 
disclose in the table the introductory rate along with the rate that 
would otherwise apply to the account if the creditor also discloses the 
time period during which the introductory rate will remain in effect, 
and uses the term ``introductory'' or ``intro'' in immediate proximity 
to the introductory rate.
    (C) Premium initial rate. If the initial rate is temporary and is 
higher than the rate that will apply after the temporary rate expires, 
the creditor must disclose the premium initial rate pursuant to 
paragraph (b)(2)(i) of this section. Consistent with paragraph (b)(2)(i) 
of this section, the premium initial rate for purchases must be in at 
least 16-point type. Except as provided in paragraph (b)(2)(i)(F) of 
this section, the creditor is not required to, but may disclose in the 
table the rate that will apply after the premium initial rate expires if 
the creditor also discloses the time period during which the premium 
initial rate will remain in effect. If the creditor also discloses in 
the table the rate that will apply after the premium initial rate for 
purchases expires, that rate also must be in at least 16-point type.

[[Page 351]]

    (D) Penalty rates--(1) In general. Except as provided in paragraph 
(b)(2)(i)(D)(2) and (b)(2)(i)(D)(3) of this section, if a rate may 
increase as a penalty for one or more events specified in the account 
agreement, such as a late payment or an extension of credit that exceeds 
the credit limit, the creditor must disclose pursuant to paragraph 
(b)(2)(i) of this section the increased rate that may apply, a brief 
description of the event or events that may result in the increased 
rate, and a brief description of how long the increased rate will remain 
in effect. If more than one penalty rate may apply, the creditor at its 
option may disclose the highest rate that could apply, instead of 
disclosing the specific rates or the range of rates that could apply.
    (2) Introductory rates. If the creditor discloses in the table an 
introductory rate, as that term is defined in Sec. 226.16(g)(2)(ii), 
creditors must briefly disclose directly beneath the table the 
circumstances under which the introductory rate may be revoked, and the 
rate that will apply after the introductory rate is revoked.
    (3) Employee preferential rates. If a creditor discloses in the 
table a preferential annual percentage rate for which only employees of 
the creditor, employees of a third party, or other individuals with 
similar affiliations with the creditor or third party, such as executive 
officers, directors, or principal shareholders are eligible, the 
creditor must briefly disclose directly beneath the table the 
circumstances under which such preferential rate may be revoked, and the 
rate that will apply after such preferential rate is revoked.
    (E) Point of sale where APRs vary by state or based on 
creditworthiness. Creditors imposing annual percentage rates that vary 
by state or based on the consumer's creditworthiness and providing the 
disclosures required by paragraph (b) of this section in person at the 
time the open-end (not home-secured) plan is established in connection 
with financing the purchase of goods or services may, at the creditor's 
option, disclose pursuant to paragraph (b)(2)(i) of this section in the 
account-opening table:
    (1) The specific annual percentage rate applicable to the consumer's 
account; or
    (2) The range of the annual percentage rates, if the disclosure 
includes a statement that the annual percentage rate varies by state or 
will be determined based on the consumer's creditworthiness and refers 
the consumer to the account agreement or other disclosure provided with 
the account-opening table where the annual percentage rate applicable to 
the consumer's account is disclosed. A creditor may not list annual 
percentage rates for multiple states in the account-opening table.
    (F) Credit card accounts under an open-end (not home-secured) 
consumer credit plan. Notwithstanding paragraphs (b)(2)(i)(B) and 
(b)(2)(i)(C) of this section, for credit card accounts under an open-end 
(not home-secured) plan, issuers must disclose in the table--
    (1) Any introductory rate as that term is defined in Sec. 
226.16(g)(2)(ii) that would apply to the account, consistent with the 
requirements of paragraph (b)(2)(i)(B) of this section, and
    (2) Any rate that would apply upon the expiration of a premium 
initial rate, consistent with the requirements of paragraph (b)(2)(i)(C) 
of this section.
    (ii) Fees for issuance or availability. (A) Any annual or other 
periodic fee that may be imposed for the issuance or availability of an 
open-end plan, including any fee based on account activity or 
inactivity; how frequently it will be imposed; and the annualized amount 
of the fee.
    (B) Any non-periodic fee that relates to opening the plan. A 
creditor must disclose that the fee is a one-time fee.
    (iii) Fixed finance charge; minimum interest charge. Any fixed 
finance charge and a brief description of the charge. Any minimum 
interest charge if it exceeds $1.00 that could be imposed during a 
billing cycle, and a brief description of the charge. The $1.00 
threshold amount shall be adjusted periodically by the Board to reflect 
changes in the Consumer Price Index. The Board shall calculate each year 
a price level adjusted minimum interest charge using the Consumer Price 
Index in effect on the June 1 of that year. When the cumulative change 
in the adjusted minimum value derived from applying the

[[Page 352]]

annual Consumer Price level to the current minimum interest charge 
threshold has risen by a whole dollar, the minimum interest charge will 
be increased by $1.00. The creditor may, at its option, disclose in the 
table minimum interest charges below this threshold.
    (iv) Transaction charges. Any transaction charge imposed by the 
creditor for use of the open-end plan for purchases.
    (v) Grace period. The date by which or the period within which any 
credit extended may be repaid without incurring a finance charge due to 
a periodic interest rate and any conditions on the availability of the 
grace period. If no grace period is provided, that fact must be 
disclosed. If the length of the grace period varies, the creditor may 
disclose the range of days, the minimum number of days, or the average 
number of the days in the grace period, if the disclosure is identified 
as a range, minimum, or average. In disclosing in the tabular format a 
grace period that applies to all features on the account, the phrase 
``How to Avoid Paying Interest'' shall be used as the heading for the 
row describing the grace period. If a grace period is not offered on all 
features of the account, in disclosing this fact in the tabular format, 
the phrase ``Paying Interest'' shall be used as the heading for the row 
describing this fact.
    (vi) Balance computation method. The name of the balance computation 
method listed in Sec. 226.5a(g) that is used to determine the balance 
on which the finance charge is computed for each feature, or an 
explanation of the method used if it is not listed, along with a 
statement that an explanation of the method(s) required by paragraph 
(b)(4)(i)(D) of this section is provided with the account-opening 
disclosures. In determining which balance computation method to 
disclose, the creditor shall assume that credit extended will not be 
repaid within any grace period, if any.
    (vii) Cash advance fee. Any fee imposed for an extension of credit 
in the form of cash or its equivalent.
    (viii) Late payment fee. Any fee imposed for a late payment.
    (ix) Over-the-limit fee. Any fee imposed for exceeding a credit 
limit.
    (x) Balance transfer fee. Any fee imposed to transfer an outstanding 
balance.
    (xi) Returned-payment fee. Any fee imposed by the creditor for a 
returned payment.
    (xii) Required insurance, debt cancellation or debt suspension 
coverage. (A) A fee for insurance described in Sec. 226.4(b)(7) or debt 
cancellation or suspension coverage described in Sec. 226.4(b)(10), if 
the insurance, or debt cancellation or suspension coverage is required 
as part of the plan; and
    (B) A cross reference to any additional information provided about 
the insurance or coverage, as applicable.
    (xiii) Available credit. If a creditor requires fees for the 
issuance or availability of credit described in paragraph (b)(2)(ii) of 
this section, or requires a security deposit for such credit, and the 
total amount of those required fees and/or security deposit that will be 
imposed and charged to the account when the account is opened is 15 
percent or more of the minimum credit limit for the plan, a creditor 
must disclose the available credit remaining after these fees or 
security deposit are debited to the account. The determination whether 
the 15 percent threshold is met must be based on the minimum credit 
limit for the plan. However, the disclosure provided under this 
paragraph must be based on the actual initial credit limit provided on 
the account. In determining whether the 15 percent threshold test is 
met, the creditor must only consider fees for issuance or availability 
of credit, or a security deposit, that are required. If fees for 
issuance or availability are optional, these fees should not be 
considered in determining whether the disclosure must be given. 
Nonetheless, if the 15 percent threshold test is met, the creditor in 
providing the disclosure must disclose the amount of available credit 
calculated by excluding those optional fees, and the available credit 
including those optional fees. The creditor shall also disclose that the 
consumer has the right to reject the plan and not be obligated to pay 
those fees or any other fee or charges until the consumer has used the 
account or made a payment on the account after receiving a periodic 
statement. This paragraph does not

[[Page 353]]

apply with respect to fees or security deposits that are not debited to 
the account.
    (xiv) Web site reference. For issuers of credit cards that are not 
charge cards, a reference to the Web site established by the Board and a 
statement that consumers may obtain on the Web site information about 
shopping for and using credit cards.
    (xv) Billing error rights reference. A statement that information 
about consumers' right to dispute transactions is included in the 
account-opening disclosures.
    (3) Disclosure of charges imposed as part of open-end (not home-
secured) plans. A creditor shall disclose, to the extent applicable:
    (i) For charges imposed as part of an open-end (not home-secured) 
plan, the circumstances under which the charge may be imposed, including 
the amount of the charge or an explanation of how the charge is 
determined. For finance charges, a statement of when the charge begins 
to accrue and an explanation of whether or not any time period exists 
within which any credit that has been extended may be repaid without 
incurring the charge. If such a time period is provided, a creditor may, 
at its option and without disclosure, elect not to impose a finance 
charge when payment is received after the time period expires.
    (ii) Charges imposed as part of the plan are:
    (A) Finance charges identified under Sec. 226.4(a) and Sec. 
226.4(b).
    (B) Charges resulting from the consumer's failure to use the plan as 
agreed, except amounts payable for collection activity after default, 
attorney's fees whether or not automatically imposed, and post-judgment 
interest rates permitted by law.
    (C) Taxes imposed on the credit transaction by a state or other 
governmental body, such as documentary stamp taxes on cash advances.
    (D) Charges for which the payment, or nonpayment, affect the 
consumer's access to the plan, the duration of the plan, the amount of 
credit extended, the period for which credit is extended, or the timing 
or method of billing or payment.
    (E) Charges imposed for terminating a plan.
    (F) Charges for voluntary credit insurance, debt cancellation or 
debt suspension.
    (iii) Charges that are not imposed as part of the plan include:
    (A) Charges imposed on a cardholder by an institution other than the 
card issuer for the use of the other institution's ATM in a shared or 
interchange system.
    (B) A charge for a package of services that includes an open-end 
credit feature, if the fee is required whether or not the open-end 
credit feature is included and the non-credit services are not merely 
incidental to the credit feature.
    (C) Charges under Sec. 226.4(e) disclosed as specified.
    (4) Disclosure of rates for open-end (not home-secured) plans. A 
creditor shall disclose, to the extent applicable:
    (i) For each periodic rate that may be used to calculate interest:
    (A) Rates. The rate, expressed as a periodic rate and a 
corresponding annual percentage rate.
    (B) Range of balances. The range of balances to which the rate is 
applicable; however, a creditor is not required to adjust the range of 
balances disclosure to reflect the balance below which only a minimum 
charge applies.
    (C) Type of transaction. The type of transaction to which the rate 
applies, if different rates apply to different types of transactions.
    (D) Balance computation method. An explanation of the method used to 
determine the balance to which the rate is applied.
    (ii) Variable-rate accounts. For interest rate changes that are tied 
to increases in an index or formula (variable-rate accounts) 
specifically set forth in the account agreement:
    (A) The fact that the annual percentage rate may increase.
    (B) How the rate is determined, including the margin.
    (C) The circumstances under which the rate may increase.
    (D) The frequency with which the rate may increase.
    (E) Any limitation on the amount the rate may change.
    (F) The effect(s) of an increase.

[[Page 354]]

    (G) Except as specified in paragraph (b)(4)(ii)(H) of this section, 
a rate is accurate if it is a rate as of a specified date and this rate 
was in effect within the last 30 days before the disclosures are 
provided.
    (H) Creditors imposing annual percentage rates that vary according 
to an index that is not under the creditor's control that provide the 
disclosures required by paragraph (b) of this section in person at the 
time the open-end (not home-secured) plan is established in connection 
with financing the purchase of goods or services may disclose in the 
table a rate, or range of rates to the extent permitted by Sec. 
226.6(b)(2)(i)(E), that was in effect within the last 90 days before the 
disclosures are provided, along with a reference directing the consumer 
to the account agreement or other disclosure provided with the account-
opening table where an annual percentage rate applicable to the 
consumer's account in effect within the last 30 days before the 
disclosures are provided is disclosed.
    (iii) Rate changes not due to index or formula. For interest rate 
changes that are specifically set forth in the account agreement and not 
tied to increases in an index or formula:
    (A) The initial rate (expressed as a periodic rate and a 
corresponding annual percentage rate) required under paragraph 
(b)(4)(i)(A) of this section.
    (B) How long the initial rate will remain in effect and the specific 
events that cause the initial rate to change.
    (C) The rate (expressed as a periodic rate and a corresponding 
annual percentage rate) that will apply when the initial rate is no 
longer in effect and any limitation on the time period the new rate will 
remain in effect.
    (D) The balances to which the new rate will apply.
    (E) The balances to which the current rate at the time of the change 
will apply.
    (5) Additional disclosures for open-end (not home-secured) plans. A 
creditor shall disclose, to the extent applicable:
    (i) Voluntary credit insurance, debt cancellation or debt 
suspension. The disclosures in Sec. Sec. 226.4(d)(1)(i) and (d)(1)(ii) 
and (d)(3)(i) through (d)(3)(iii) if the creditor offers optional credit 
insurance or debt cancellation or debt suspension coverage that is 
identified in Sec. 226.4(b)(7) or (b)(10).
    (ii) Security interests. The fact that the creditor has or will 
acquire a security interest in the property purchased under the plan, or 
in other property identified by item or type.
    (iii) Statement of billing rights. A statement that outlines the 
consumer's rights and the creditor's responsibilities under Sec. Sec. 
226.12(c) and 226.13 and that is substantially similar to the statement 
found in Model Form G-3(A) in appendix G to this part.

[75 FR 7800, Feb. 22, 2010, as amended at 75 FR 37568, June 26, 2010; 76 
FR 22999, Apr. 25, 2011]



Sec. 226.7  Periodic statement.

    The creditor shall furnish the consumer with a periodic statement 
that discloses the following items, to the extent applicable:
    (a) Rules affecting home-equity plans. The requirements of paragraph 
(a) of this section apply only to home-equity plans subject to the 
requirements of Sec. 226.5b. Alternatively, a creditor subject to this 
paragraph may, at its option, comply with any of the requirements of 
paragraph (b) of this section; however, any creditor that chooses not to 
provide a disclosure under paragraph (a)(7) of this section must comply 
with paragraph (b)(6) of this section.
    (1) Previous balance. The account balance outstanding at the 
beginning of the billing cycle.
    (2) Identification of transactions. An identification of each credit 
transaction in accordance with Sec. 226.8.
    (3) Credits. Any credit to the account during the billing cycle, 
including the amount and the date of crediting. The date need not be 
provided if a delay in accounting does not result in any finance or 
other charge.
    (4) Periodic rates. (i) Except as provided in paragraph (a)(4)(ii) 
of this section, each periodic rate that may be used to compute the 
finance charge, the range of balances to which it is applicable,\14\ and 
the corresponding annual percentage rate.\15\ If no finance charge is 
imposed when the outstanding balance is less than a certain

[[Page 355]]

amount, the creditor is not required to disclose that fact, or the 
balance below which no finance charge will be imposed. If different 
periodic rates apply to different types of transactions, the types of 
transactions to which the periodic rates apply shall also be disclosed. 
For variable-rate plans, the fact that the periodic rate(s) may vary.
---------------------------------------------------------------------------

    \14\ [Reserved]
    \15\ [Reserved]
---------------------------------------------------------------------------

    (ii) Exception. An annual percentage rate that differs from the rate 
that would otherwise apply and is offered only for a promotional period 
need not be disclosed except in periods in which the offered rate is 
actually applied.
    (5) Balance on which finance charge computed. The amount of the 
balance to which a periodic rate was applied and an explanation of how 
that balance was determined. When a balance is determined without first 
deducting all credits and payments made during the billing cycle, the 
fact and the amount of the credits and payments shall be disclosed.
    (6) Amount of finance charge and other charges. Creditors may comply 
with paragraphs (a)(6) of this section, or with paragraph (b)(6) of this 
section, at their option.
    (i) Finance charges. The amount of any finance charge debited or 
added to the account during the billing cycle, using the term finance 
charge. The components of the finance charge shall be individually 
itemized and identified to show the amount(s) due to the application of 
any periodic rates and the amounts(s) of any other type of finance 
charge. If there is more than one periodic rate, the amount of the 
finance charge attributable to each rate need not be separately itemized 
and identified.
    (ii) Other charges. The amounts, itemized and identified by type, of 
any charges other than finance charges debited to the account during the 
billing cycle.
    (7) Annual percentage rate. At a creditor's option, when a finance 
charge is imposed during the billing cycle, the annual percentage 
rate(s) determined under Sec. 226.14(c) using the term annual 
percentage rate.
    (8) Grace period. The date by which or the time period within which 
the new balance or any portion of the new balance must be paid to avoid 
additional finance charges. If such a time period is provided, a 
creditor may, at its option and without disclosure, impose no finance 
charge if payment is received after the time period's expiration.
    (9) Address for notice of billing errors. The address to be used for 
notice of billing errors. Alternatively, the address may be provided on 
the billing rights statement permitted by Sec. 226.9(a)(2).
    (10) Closing date of billing cycle; new balance. The closing date of 
the billing cycle and the account balance outstanding on that date.
    (b) Rules affecting open-end (not home-secured) plans. The 
requirements of paragraph (b) of this section apply only to plans other 
than home-equity plans subject to the requirements of Sec. 226.5b.
    (1) Previous balance. The account balance outstanding at the 
beginning of the billing cycle.
    (2) Identification of transactions. An identification of each credit 
transaction in accordance with Sec. 226.8.
    (3) Credits. Any credit to the account during the billing cycle, 
including the amount and the date of crediting. The date need not be 
provided if a delay in crediting does not result in any finance or other 
charge.
    (4) Periodic rates. (i) Except as provided in paragraph (b)(4)(ii) 
of this section, each periodic rate that may be used to compute the 
interest charge expressed as an annual percentage rate and using the 
term Annual Percentage Rate, along with the range of balances to which 
it is applicable. If no interest charge is imposed when the outstanding 
balance is less than a certain amount, the creditor is not required to 
disclose that fact, or the balance below which no interest charge will 
be imposed. The types of transactions to which the periodic rates apply 
shall also be disclosed. For variable-rate plans, the fact that the 
annual percentage rate may vary.
    (ii) Exception. A promotional rate, as that term is defined in Sec. 
226.16(g)(2)(i), is required to be disclosed only in periods in which 
the offered rate is actually applied.
    (5) Balance on which finance charge computed. The amount of the 
balance to which a periodic rate was applied and an explanation of how 
that balance was

[[Page 356]]

determined, using the term Balance Subject to Interest Rate. When a 
balance is determined without first deducting all credits and payments 
made during the billing cycle, the fact and the amount of the credits 
and payments shall be disclosed. As an alternative to providing an 
explanation of how the balance was determined, a creditor that uses a 
balance computation method identified in Sec. 226.5a(g) may, at the 
creditor's option, identify the name of the balance computation method 
and provide a toll-free telephone number where consumers may obtain from 
the creditor more information about the balance computation method and 
how resulting interest charges were determined. If the method used is 
not identified in Sec. 226.5a(g), the creditor shall provide a brief 
explanation of the method used.
    (6) Charges imposed. (i) The amounts of any charges imposed as part 
of a plan as stated in Sec. 226.6(b)(3), grouped together, in proximity 
to transactions identified under paragraph (b)(2) of this section, 
substantially similar to Sample G-18(A) in appendix G to this part.
    (ii) Interest. Finance charges attributable to periodic interest 
rates, using the term Interest Charge, must be grouped together under 
the heading Interest Charged, itemized and totaled by type of 
transaction, and a total of finance charges attributable to periodic 
interest rates, using the term Total Interest, must be disclosed for the 
statement period and calendar year to date, using a format substantially 
similar to Sample G-18(A) in appendix G to this part.
    (iii) Fees. Charges imposed as part of the plan other than charges 
attributable to periodic interest rates must be grouped together under 
the heading Fees, identified consistent with the feature or type, and 
itemized, and a total of charges, using the term Fees, must be disclosed 
for the statement period and calendar year to date, using a format 
substantially similar to Sample G-18(A) in appendix G to this part.
    (7) Change-in-terms and increased penalty rate summary for open-end 
(not home-secured) plans. Creditors that provide a change-in-terms 
notice required by Sec. 226.9(c), or a rate increase notice required by 
Sec. 226.9(g), on or with the periodic statement, must disclose the 
information in Sec. 226.9(c)(2)(iv)(A) and (c)(2)(iv)(B) (if 
applicable) or Sec. 226.9(g)(3)(i) on the periodic statement in 
accordance with the format requirements in Sec. 226.9(c)(2)(iv)(D), and 
Sec. 226.9(g)(3)(ii). See Forms G-18(F) and G-18(G) in appendix G to 
this part.
    (8) Grace period. The date by which or the time period within which 
the new balance or any portion of the new balance must be paid to avoid 
additional finance charges. If such a time period is provided, a 
creditor may, at its option and without disclosure, impose no finance 
charge if payment is received after the time period's expiration.
    (9) Address for notice of billing errors. The address to be used for 
notice of billing errors. Alternatively, the address may be provided on 
the billing rights statement permitted by Sec. 226.9(a)(2).
    (10) Closing date of billing cycle; new balance. The closing date of 
the billing cycle and the account balance outstanding on that date. The 
new balance must be disclosed in accordance with the format requirements 
of paragraph (b)(13) of this section.
    (11) Due date; late payment costs. (i) Except as provided in 
paragraph (b)(11)(ii) of this section and in accordance with the format 
requirements in paragraph (b)(13) of this section, for a credit card 
account under an open-end (not home-secured) consumer credit plan, a 
card issuer must provide on each periodic statement:
    (A) The due date for a payment. The due date disclosed pursuant to 
this paragraph shall be the same day of the month for each billing 
cycle.
    (B) The amount of any late payment fee and any increased periodic 
rate(s) (expressed as an annual percentage rate(s)) that may be imposed 
on the account as a result of a late payment. If a range of late payment 
fees may be assessed, the card issuer may state the range of fees, or 
the highest fee and an indication that the fee imposed could be lower. 
If the rate may be increased for more than one feature or balance, the 
card issuer may state the range of rates or the highest rate that could 
apply and at the issuer's option an indication that the rate imposed 
could be lower.

[[Page 357]]

    (ii) Exception. The requirements of paragraph (b)(11)(i) of this 
section do not apply to the following:
    (A) Periodic statements provided solely for charge card accounts; 
and
    (B) Periodic statements provided for a charged-off account where 
payment of the entire account balance is due immediately.
    (12) Repayment disclosures--(i) In general. Except as provided in 
paragraphs (b)(12)(ii) and (b)(12)(v) of this section, for a credit card 
account under an open-end (not home-secured) consumer credit plan, a 
card issuer must provide the following disclosures on each periodic 
statement:
    (A) The following statement with a bold heading: ``Minimum Payment 
Warning: If you make only the minimum payment each period, you will pay 
more in interest and it will take you longer to pay off your balance;''
    (B) The minimum payment repayment estimate, as described in appendix 
M1 to this part. If the minimum payment repayment estimate is less than 
2 years, the card issuer must disclose the estimate in months. 
Otherwise, the estimate must be disclosed in years and rounded to the 
nearest whole year;
    (C) The minimum payment total cost estimate, as described in 
appendix M1 to this part. The minimum payment total cost estimate must 
be rounded either to the nearest whole dollar or to the nearest cent, at 
the card issuer's option;
    (D) A statement that the minimum payment repayment estimate and the 
minimum payment total cost estimate are based on the current outstanding 
balance shown on the periodic statement. A statement that the minimum 
payment repayment estimate and the minimum payment total cost estimate 
are based on the assumption that only minimum payments are made and no 
other amounts are added to the balance;
    (E) A toll-free telephone number where the consumer may obtain from 
the card issuer information about credit counseling services consistent 
with paragraph (b)(12)(iv) of this section; and
    (F)(1) Except as provided in paragraph (b)(12)(i)(F)(2) of this 
section, the following disclosures:
    (i) The estimated monthly payment for repayment in 36 months, as 
described in appendix M1 to this part. The estimated monthly payment for 
repayment in 36 months must be rounded either to the nearest whole 
dollar or to the nearest cent, at the card issuer's option;
    (ii) A statement that the card issuer estimates that the consumer 
will repay the outstanding balance shown on the periodic statement in 3 
years if the consumer pays the estimated monthly payment each month for 
3 years;
    (iii) The total cost estimate for repayment in 36 months, as 
described in appendix M1 to this part. The total cost estimate for 
repayment in 36 months must be rounded either to the nearest whole 
dollar or to the nearest cent, at the card issuer's option; and
    (iv) The savings estimate for repayment in 36 months, as described 
in appendix M1 to this part. The savings estimate for repayment in 36 
months must be rounded either to the nearest whole dollar or to the 
nearest cent, at the card issuer's option.
    (2) The requirements of paragraph (b)(12)(i)(F)(1) of this section 
do not apply to a periodic statement in any of the following 
circumstances:
    (i) The minimum payment repayment estimate that is disclosed on the 
periodic statement pursuant to paragraph (b)(12)(i)(B) of this section 
after rounding is three years or less;
    (ii) The estimated monthly payment for repayment in 36 months, as 
described in appendix M1 to this part, after rounding as set forth in 
paragraph (b)(12)(f)(1)(i) of this section that is calculated for a 
particular billing cycle is less than the minimum payment required for 
the plan for that billing cycle; and
    (iii) A billing cycle where an account has both a balance in a 
revolving feature where the required minimum payments for this feature 
will not amortize that balance in a fixed amount of

[[Page 358]]

time specified in the account agreement and a balance in a fixed 
repayment feature where the required minimum payment for this fixed 
repayment feature will amortize that balance in a fixed amount of time 
specified in the account agreement which is less than 36 months.
    (ii) Negative or no amortization. If negative or no amortization 
occurs when calculating the minimum payment repayment estimate as 
described in appendix M1 of this part, a card issuer must provide the 
following disclosures on the periodic statement instead of the 
disclosures set forth in paragraph (b)(12)(i) of this section:
    (A) The following statement: ``Minimum Payment Warning: Even if you 
make no more charges using this card, if you make only the minimum 
payment each month we estimate you will never pay off the balance shown 
on this statement because your payment will be less than the interest 
charged each month'';
    (B) The following statement: ``If you make more than the minimum 
payment each period, you will pay less in interest and pay off your 
balance sooner'';
    (C) The estimated monthly payment for repayment in 36 months, as 
described in appendix M1 to this part. The estimated monthly payment for 
repayment in 36 months must be rounded either to the nearest whole 
dollar or to the nearest cent, at the issuer's option;
    (D) A statement that the card issuer estimates that the consumer 
will repay the outstanding balance shown on the periodic statement in 3 
years if the consumer pays the estimated monthly payment each month for 
3 years; and
    (E) A toll-free telephone number where the consumer may obtain from 
the card issuer information about credit counseling services consistent 
with paragraph (b)(12)(iv) of this section.
    (13) Format requirements. The due date required by paragraph (b)(11) 
of this section shall be disclosed on the front of the first page of the 
periodic statement. The amount of the late payment fee and the annual 
percentage rate(s) required by paragraph (b)(11) of this section shall 
be stated in close proximity to the due date. The ending balance 
required by paragraph (b)(10) of this section and the disclosures 
required by paragraph (b)(12) of this section shall be disclosed closely 
proximate to the minimum payment due. The due date, late payment fee and 
annual percentage rate, ending balance, minimum payment due, and 
disclosures required by paragraph (b)(12) of this section shall be 
grouped together. Sample G-18(D) in appendix G to this part sets forth 
an example of how these terms may be grouped.
    (14) Deferred interest or similar transactions. For accounts with an 
outstanding balance subject to a deferred interest or similar program, 
the date by which that outstanding balance must be paid in full in order 
to avoid the obligation to pay finance charges on such balance must be 
disclosed on the front of any page of each periodic statement issued 
during the deferred interest period beginning with the first periodic 
statement issued during the deferred interest period that reflects the 
deferred interest or similar transaction. The disclosure provided 
pursuant to this paragraph must be substantially similar to Sample G-
18(H) in appendix G to this part.

[75 FR 7804, Feb. 22, 2010, as amended at 75 FR 37568, June 26, 2010; 76 
FR 23000, Apr. 25, 2011]



Sec. 226.8  Identifying transactions on periodic statements.

    The creditor shall identify credit transactions on or with the first 
periodic statement that reflects the transaction by furnishing the 
following information, as applicable.\16\
---------------------------------------------------------------------------

    \16\ [Reserved]
---------------------------------------------------------------------------

    (a) Sale credit. (1) Except as provided in paragraph (a)(2) of this 
section, for each credit transaction involving the sale of property or 
services, the creditor must disclose the amount and date of the 
transaction, and either:
    (i) A brief identification \17\ of the property or services 
purchased, for creditors and sellers that are the same or related; \18\ 
or
---------------------------------------------------------------------------

    \17\ [Reserved]
    \18\ [Reserved]
---------------------------------------------------------------------------

    (ii) The seller's name; and the city and state or foreign country 
where the

[[Page 359]]

transaction took place.\19\ The creditor may omit the address or provide 
any suitable designation that helps the consumer to identify the 
transaction when the transaction took place at a location that is not 
fixed; took place in the consumer's home; or was a mail, Internet, or 
telephone order.
---------------------------------------------------------------------------

    \19\ [Reserved]
---------------------------------------------------------------------------

    (2) Creditors need not comply with paragraph (a)(1) of this section 
if an actual copy of the receipt or other credit document is provided 
with the first periodic statement reflecting the transaction, and the 
amount of the transaction and either the date of the transaction to the 
consumer's account or the date of debiting the transaction are disclosed 
on the copy or on the periodic statement.
    (b) Nonsale credit. For each credit transaction not involving the 
sale of property or services, the creditor must disclose a brief 
identification of the transaction;\20\ the amount of the transaction; 
and at least one of the following dates: The date of the transaction, 
the date the transaction was debited to the consumer's account, or, if 
the consumer signed the credit document, the date appearing on the 
document. If an actual copy of the receipt or other credit document is 
provided and that copy shows the amount and at least one of the 
specified dates, the brief identification may be omitted.
---------------------------------------------------------------------------

    \20\ [Reserved]
---------------------------------------------------------------------------

    (c) Alternative creditor procedures; consumer inquiries for 
clarification or documentation. The following procedures apply to 
creditors that treat an inquiry for clarification or documentation as a 
notice of a billing error, including correcting the account in 
accordance with Sec. 226.13(e):
    (1) Failure to disclose the information required by paragraphs (a) 
and (b) of this section is not a failure to comply with the regulation, 
provided that the creditor also maintains procedures reasonably designed 
to obtain and provide the information. This applies to transactions that 
take place outside a state, as defined in Sec. 226.2(a)(26), whether or 
not the creditor maintains procedures reasonably adapted to obtain the 
required information.
    (2) As an alternative to the brief identification for sale or 
nonsale credit, the creditor may disclose a number or symbol that also 
appears on the receipt or other credit document given to the consumer, 
if the number or symbol reasonably identifies that transaction with that 
creditor.

[75 FR 7806, Feb. 22, 2010]



Sec. 226.9  Subsequent disclosure requirements.

    (a) Furnishing statement of billing rights--(1) Annual statement. 
The creditor shall mail or deliver the billing rights statement required 
by Sec. 226.6(a)(5) and (b)(5)(iii) at least once per calendar year, at 
intervals of not less than 6 months nor more than 18 months, either to 
all consumers or to each consumer entitled to receive a periodic 
statement under Sec. 226.5(b)(2) for any one billing cycle.
    (2) Alternative summary statement. As an alternative to paragraph 
(a)(1) of this section, the creditor may mail or deliver, on or with 
each periodic statement, a statement substantially similar to Model Form 
G-4 or Model Form G-4(A) in appendix G to this part, as applicable. 
Creditors offering home-equity plans subject to the requirements of 
Sec. 226.5b may use either Model Form, at their option.
    (b) Disclosures for supplemental credit access devices and 
additional features. (1) If a creditor, within 30 days after mailing or 
delivering the account-opening disclosures under Sec. 226.6(a)(1) or 
(b)(3)(ii)(A), as applicable, adds a credit feature to the consumer's 
account or mails or delivers to the consumer a credit access device, 
including but not limited to checks that access a credit card account, 
for which the finance charge terms are the same as those previously 
disclosed, no additional disclosures are necessary. Except as provided 
in paragraph (b)(3) of this section, after 30 days, if the creditor adds 
a credit feature or furnishes a credit access device (other than as a 
renewal, resupply, or the original issuance of a credit card) on the 
same finance charge terms, the creditor shall disclose, before the 
consumer uses the feature or device for the first time, that it is for 
use in obtaining credit under the terms previously disclosed.

[[Page 360]]

    (2) Except as provided in paragraph (b)(3) of this section, whenever 
a credit feature is added or a credit access device is mailed or 
delivered to the consumer, and the finance charge terms for the feature 
or device differ from disclosures previously given, the disclosures 
required by Sec. 226.6(a)(1) or (b)(3)(ii)(A), as applicable, that are 
applicable to the added feature or device shall be given before the 
consumer uses the feature or device for the first time.
    (3) Checks that access a credit card account--(i) Disclosures. For 
open-end plans not subject to the requirements of Sec. 226.5b, if 
checks that can be used to access a credit card account are provided 
more than 30 days after account-opening disclosures under Sec. 226.6(b) 
are mailed or delivered, or are provided within 30 days of the account-
opening disclosures and the finance charge terms for the checks differ 
from the finance charge terms previously disclosed, the creditor shall 
disclose on the front of the page containing the checks the following 
terms in the form of a table with the headings, content, and form 
substantially similar to Sample G-19 in appendix G to this part:
    (A) If a promotional rate, as that term is defined in Sec. 
226.16(g)(2)(i) applies to the checks:
    (1) The promotional rate and the time period during which the 
promotional rate will remain in effect;
    (2) The type of rate that will apply (such as whether the purchase 
or cash advance rate applies) after the promotional rate expires, and 
the annual percentage rate that will apply after the promotional rate 
expires. For a variable-rate account, a creditor must disclose an annual 
percentage rate based on the applicable index or formula in accordance 
with the accuracy requirements set forth in paragraph (b)(3)(ii) of this 
section; and
    (3) The date, if any, by which the consumer must use the checks in 
order to qualify for the promotional rate. If the creditor will honor 
checks used after such date but will apply an annual percentage rate 
other than the promotional rate, the creditor must disclose this fact 
and the type of annual percentage rate that will apply if the consumer 
uses the checks after such date.
    (B) If no promotional rate applies to the checks:
    (1) The type of rate that will apply to the checks and the 
applicable annual percentage rate. For a variable-rate account, a 
creditor must disclose an annual percentage rate based on the applicable 
index or formula in accordance with the accuracy requirements set forth 
in paragraph (b)(3)(ii) of this section.
    (2) [Reserved]
    (C) Any transaction fees applicable to the checks disclosed under 
Sec. 226.6(b)(2)(iv); and
    (D) Whether or not a grace period is given within which any credit 
extended by use of the checks may be repaid without incurring a finance 
charge due to a periodic interest rate. When disclosing whether there is 
a grace period, the phrase ``How to Avoid Paying Interest on Check 
Transactions'' shall be used as the row heading when a grace period 
applies to credit extended by the use of the checks. When disclosing the 
fact that no grace period exists for credit extended by use of the 
checks, the phrase ``Paying Interest'' shall be used as the row heading.
    (ii) Accuracy. The disclosures in paragraph (b)(3)(i) of this 
section must be accurate as of the time the disclosures are mailed or 
delivered. A variable annual percentage rate is accurate if it was in 
effect within 60 days of when the disclosures are mailed or delivered.
    (iii) Variable rates. If any annual percentage rate required to be 
disclosed pursuant to paragraph (b)(3)(i) of this section is a variable 
rate, the card issuer shall also disclose the fact that the rate may 
vary and how the rate is determined. In describing how the applicable 
rate will be determined, the card issuer must identify the type of index 
or formula that is used in setting the rate. The value of the index and 
the amount of the margin that are used to calculate the variable rate 
shall not be disclosed in the table. A disclosure of any applicable 
limitations on rate increases shall not be included in the table.
    (c)(1) Rules affecting home-equity plans--(i) Written notice 
required. For home-equity plans subject to the requirements of Sec. 
226.5b, whenever any term required to be disclosed under

[[Page 361]]

Sec. 226.6(a) is changed or the required minimum periodic payment is 
increased, the creditor shall mail or deliver written notice of the 
change to each consumer who may be affected. The notice shall be mailed 
or delivered at least 15 days prior to the effective date of the change. 
The 15-day timing requirement does not apply if the change has been 
agreed to by the consumer; the notice shall be given, however, before 
the effective date of the change.
    (ii) Notice not required. For home-equity plans subject to the 
requirements of Sec. 226.5b, a creditor is not required to provide 
notice under this section when the change involves a reduction of any 
component of a finance or other charge or when the change results from 
an agreement involving a court proceeding.
    (iii) Notice to restrict credit. For home-equity plans subject to 
the requirements of Sec. 226.5b, if the creditor prohibits additional 
extensions of credit or reduces the credit limit pursuant to Sec. 
226.5b(f)(3)(i) or (f)(3)(vi), the creditor shall mail or deliver 
written notice of the action to each consumer who will be affected. The 
notice must be provided not later than three business days after the 
action is taken and shall contain specific reasons for the action. If 
the creditor requires the consumer to request reinstatement of credit 
privileges, the notice also shall state that fact.
    (2) Rules affecting open-end (not home-secured) plans--(i) Changes 
where written advance notice is required--(A) General. For plans other 
than home-equity plans subject to the requirements of Sec. 226.5b, 
except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and (c)(2)(v) 
of this section, when a significant change in account terms as described 
in paragraph (c)(2)(ii) of this section is made, a creditor must provide 
a written notice of the change at least 45 days prior to the effective 
date of the change to each consumer who may be affected. The 45-day 
timing requirement does not apply if the consumer has agreed to a 
particular change as described in paragraph (c)(2)(i)(B) of this 
section; for such changes, notice must be given in accordance with the 
timing requirements of paragraph (c)(2)(i)(B) of this section. Increases 
in the rate applicable to a consumer's account due to delinquency, 
default or as a penalty described in paragraph (g) of this section that 
are not due to a change in the contractual terms of the consumer's 
account must be disclosed pursuant to paragraph (g) of this section 
instead of paragraph (c)(2) of this section.
    (B) Changes agreed to by the consumer. A notice of change in terms 
is required, but it may be mailed or delivered as late as the effective 
date of the change if the consumer agrees to the particular change. This 
paragraph (c)(2)(i)(B) applies only when a consumer substitutes 
collateral or when the creditor can advance additional credit only if a 
change relatively unique to that consumer is made, such as the 
consumer's providing additional security or paying an increased minimum 
payment amount. The following are not considered agreements between the 
consumer and the creditor for purposes of this paragraph (c)(2)(i)(B): 
The consumer's general acceptance of the creditor's contract reservation 
of the right to change terms; the consumer's use of the account (which 
might imply acceptance of its terms under state law); the consumer's 
acceptance of a unilateral term change that is not particular to that 
consumer, but rather is of general applicability to consumers with that 
type of account; and the consumer's request to reopen a closed account 
or to upgrade an existing account to another account offered by the 
creditor with different credit or other features.
    (ii) Significant changes in account terms. For purposes of this 
section, a ``significant change in account terms'' means a change to a 
term required to be disclosed under Sec. 226.6(b)(1) and (b)(2), an 
increase in the required minimum periodic payment, a change to a term 
required to be disclosed under Sec. 226.6(b)(4), or the acquisition of 
a security interest.
    (iii) Charges not covered by Sec. 226.6(b)(1) and (b)(2). Except as 
provided in paragraph (c)(2)(vi) of this section, if a creditor 
increases any component of a charge, or introduces a new charge, 
required to be disclosed under Sec. 226.6(b)(3)

[[Page 362]]

that is not a significant change in account terms as described in 
paragraph (c)(2)(ii) of this section, a creditor must either, at its 
option:
    (A) Comply with the requirements of paragraph (c)(2)(i) of this 
section; or
    (B) Provide notice of the amount of the charge before the consumer 
agrees to or becomes obligated to pay the charge, at a time and in a 
manner that a consumer would be likely to notice the disclosure of the 
charge. The notice may be provided orally or in writing.
    (iv) Disclosure requirements--(A) Significant changes in account 
terms. If a creditor makes a significant change in account terms as 
described in paragraph (c)(2)(ii) of this section, the notice provided 
pursuant to paragraph (c)(2)(i) of this section must provide the 
following information:
    (1) A summary of the changes made to terms required by Sec. 
226.6(b)(1) and (b)(2) or Sec. 226.6(b)(4), a description of any 
increase in the required minimum periodic payment, and a description of 
any security interest being acquired by the creditor
    (2) A statement that changes are being made to the account;
    (3) For accounts other than credit card accounts under an open-end 
(not home-secured) consumer credit plan subject to Sec. 
226.9(c)(2)(iv)(B), a statement indicating the consumer has the right to 
opt out of these changes, if applicable, and a reference to additional 
information describing the opt-out right provided in the notice, if 
applicable;
    (4) The date the changes will become effective;
    (5) If applicable, a statement that the consumer may find additional 
information about the summarized changes, and other changes to the 
account, in the notice;
    (6) If the creditor is changing a rate on the account, other than a 
penalty rate, a statement that if a penalty rate currently applies to 
the consumer's account, the new rate described in the notice will not 
apply to the consumer's account until the consumer's account balances 
are no longer subject to the penalty rate;
    (7) If the change in terms being disclosed is an increase in an 
annual percentage rate, the balances to which the increased rate will be 
applied. If applicable, a statement identifying the balances to which 
the current rate will continue to apply as of the effective date of the 
change in terms; and
    (8) If the change in terms being disclosed is an increase in an 
annual percentage rate for a credit card account under an open-end (not 
home-secured) consumer credit plan, a statement of no more than four 
principal reasons for the rate increase, listed in their order of 
importance.
    (B) Right to reject for credit card accounts under an open-end (not 
home-secured) consumer credit plan. In addition to the disclosures in 
paragraph (c)(2)(iv)(A) of this section, if a card issuer makes a 
significant change in account terms on a credit card account under an 
open-end (not home-secured) consumer credit plan, the creditor must 
generally provide the following information on the notice provided 
pursuant to paragraph (c)(2)(i) of this section. This information is not 
required to be provided in the case of an increase in the required 
minimum periodic payment, an increase in a fee as a result of a 
reevaluation of a determination made under Sec. 226.52(b)(1)(i) or an 
adjustment to the safe harbors in Sec. 226.52(b)(1)(ii) to reflect 
changes in the Consumer Price Index, a change in an annual percentage 
rate applicable to a consumer's account, an increase in a fee previously 
reduced consistent with 50 U.S.C. app. 527 or a similar Federal or State 
statute or regulation if the amount of the increased fee does not exceed 
the amount of that fee prior to the reduction, or when the change 
results from the creditor not receiving the consumer's required minimum 
periodic payment within 60 days after the due date for that payment:
    (C) Changes resulting from failure to make minimum periodic payment 
within 60 days from due date for credit card accounts under an open-end 
(not home-secured) consumer credit plan. For a credit card account under 
an open-end (not home-secured) consumer credit plan:
    (1) If the significant change required to be disclosed pursuant to 
paragraph (c)(2)(i) of this section is an increase in an annual 
percentage rate or a fee or charge required to be disclosed under Sec. 
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)

[[Page 363]]

based on the consumer's failure to make a minimum periodic payment 
within 60 days from the due date for that payment, the notice provided 
pursuant to paragraph (c)(2)(i) of this section must state that the 
increase will cease to apply to transactions that occurred prior to or 
within 14 days of provision of the notice, if the creditor receives six 
consecutive required minimum periodic payments on or before the payment 
due date, beginning with the first payment due following the effective 
date of the increase.
    (2) If the significant change required to be disclosed pursuant to 
paragraph (c)(2)(i) of this section is an increase in a fee or charge 
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or 
(b)(2)(xii) based on the consumer's failure to make a minimum periodic 
payment within 60 days from the due date for that payment, the notice 
provided pursuant to paragraph (c)(2)(i) of this section must also state 
the reason for the increase.
    (D) Format requirements--(1) Tabular format. The summary of changes 
described in paragraph (c)(2)(iv)(A)(1) of this section must be in a 
tabular format (except for a summary of any increase in the required 
minimum periodic payment, a summary of a term required to be disclosed 
under Sec. 226.6(b)(4) that is not required to be disclosed under Sec. 
226.6(b)(1) and (b)(2), or a description of any security interest being 
acquired by the creditor), with headings and format substantially 
similar to any of the account-opening tables found in G-17 in appendix G 
to this part. The table must disclose the changed term and information 
relevant to the change, if that relevant information is required by 
Sec. 226.6(b)(1) and (b)(2). The new terms shall be described in the 
same level of detail as required when disclosing the terms under Sec. 
226.6(b)(2).
    (v) Notice not required. For open-end plans (other than home equity 
plans subject to the requirements of Sec. 226.5b) a creditor is not 
required to provide notice under this section:
    (A) When the change involves charges for documentary evidence; a 
reduction of any component of a finance or other charge; suspension of 
future credit privileges (except as provided in paragraph (c)(2)(vi) of 
this section) or termination of an account or plan; when the change 
results from an agreement involving a court proceeding; when the change 
is an extension of the grace period; or if the change is applicable only 
to checks that access a credit card account and the changed terms are 
disclosed on or with the checks in accordance with paragraph (b)(3) of 
this section;
    (B) When the change is an increase in an annual percentage rate or 
fee upon the expiration of a specified period of time, provided that:
    (1) Prior to commencement of that period, the creditor disclosed in 
writing to the consumer, in a clear and conspicuous manner, the length 
of the period and the annual percentage rate or fee that would apply 
after expiration of the period;
    (2) The disclosure of the length of the period and the annual 
percentage rate or fee that would apply after expiration of the period 
are set forth in close proximity and in equal prominence to the first 
listing of the disclosure of the rate or fee that applies during the 
specified period of time; and
    (3) The annual percentage rate or fee that applies after that period 
does not exceed the rate or fee disclosed pursuant to paragraph 
(c)(2)(v)(B)(1) of this paragraph or, if the rate disclosed pursuant to 
paragraph (c)(2)(v)(B)(1) of this section was a variable rate, the rate 
following any such increase is a variable rate determined by the same 
formula (index and margin) that was used to calculate the variable rate 
disclosed pursuant to paragraph (c)(2)(v)(B)(1);
    (C) When the change is an increase in a variable annual percentage 
rate in accordance with a credit card or other account agreement that 
provides for changes in the rate according to operation of an index that 
is not under the control of the creditor and is available to the general 
public; or
    (D) When the change is an increase in an annual percentage rate, a 
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), (b)(2)(viii), (b)(2)(ix), (b)(2)(ix) or (b)(2)(xii), or the 
required minimum periodic payment due to the completion of a workout or 
temporary hardship arrangement by

[[Page 364]]

the consumer or the consumer's failure to comply with the terms of such 
an arrangement, provided that:
    (vi) Reduction of the credit limit. For open-end plans that are not 
subject to the requirements of Sec. 226.5b, if a creditor decreases the 
credit limit on an account, advance notice of the decrease must be 
provided before an over-the-limit fee or a penalty rate can be imposed 
solely as a result of the consumer exceeding the newly decreased credit 
limit. Notice shall be provided in writing or orally at least 45 days 
prior to imposing the over-the-limit fee or penalty rate and shall state 
that the credit limit on the account has been or will be decreased.
    (d) Finance charge imposed at time of transaction. (1) Any person, 
other than the card issuer, who imposes a finance charge at the time of 
honoring a consumer's credit card, shall disclose the amount of that 
finance charge prior to its imposition.
    (2) The card issuer, other than the person honoring the consumer's 
credit card, shall have no responsibility for the disclosure required by 
paragraph (d)(1) of this section, and shall not consider any such charge 
for the purposes of Sec. Sec. 226.5a, 226.6 and 226.7.
    (e) Disclosures upon renewal of credit or charge card--(1) Notice 
prior to renewal. A card issuer that imposes any annual or other 
periodic fee to renew a credit or charge card account of the type 
subject to Sec. 226.5a, including any fee based on account activity or 
inactivity or any card issuer that has changed or amended any term of a 
cardholder's account required to be disclosed under Sec. 226.6(b)(1) 
and (b)(2) that has not previously been disclosed to the consumer, shall 
mail or deliver written notice of the renewal to the cardholder. If the 
card issuer imposes any annual or other periodic fee for renewal, the 
notice shall be provided at least 30 days or one billing cycle, 
whichever is less, before the mailing or the delivery of the periodic 
statement on which any renewal fee is initially charged to the account. 
If the card issuer has changed or amended any term required to be 
disclosed under Sec. 226.6(b)(1) and (b)(2) and such changed or amended 
term has not previously been disclosed to the consumer, the notice shall 
be provided at least 30 days prior to the scheduled renewal date of the 
consumer's credit or charge card. The notice shall contain the following 
information:
    (i) The disclosures contained in Sec. 226.5a(b)(1) through (b)(7) 
that would apply if the account were renewed; \20a\ and
---------------------------------------------------------------------------

    \20a\ [Reserved]
---------------------------------------------------------------------------

    (ii) How and when the cardholder may terminate credit availability 
under the account to avoid paying the renewal fee, if applicable.
    (2) Notification on periodic statements. The disclosures required by 
this paragraph may be made on or with a periodic statement. If any of 
the disclosures are provided on the back of a periodic statement, the 
card issuer shall include a reference to those disclosures on the front 
of the statement.
    (f) Change in credit card account insurance provider--(1) Notice 
prior to change. If a credit card issuer plans to change the provider of 
insurance for repayment of all or part of the outstanding balance of an 
open-end credit card account of the type subject to Sec. 226.5a, the 
card issuer shall mail or deliver to the cardholder written notice of 
the change not less than 30 days before the change in provider occurs. 
The notice shall also include the following items, to the extent 
applicable:
    (i) Any increase in the rate that will result from the change;
    (ii) Any substantial decrease in coverage that will result from the 
change; and
    (iii) A statement that the cardholder may discontinue the insurance.
    (2) Notice when change in provider occurs. If a change described in 
paragraph (f)(1) of this section occurs, the card issuer shall provide 
the cardholder with a written notice no later than 30 days after the 
change, including the following items, to the extent applicable:
    (i) The name and address of the new insurance provider;
    (ii) A copy of the new policy or group certificate containing the 
basic terms of the insurance, including the rate to be charged; and
    (iii) A statement that the cardholder may discontinue the insurance.

[[Page 365]]

    (3) Substantial decrease in coverage. For purposes of this 
paragraph, a substantial decrease in coverage is a decrease in a 
significant term of coverage that might reasonably be expected to affect 
the cardholder's decision to continue the insurance. Significant terms 
of coverage include, for example, the following:
    (i) Type of coverage provided;
    (ii) Age at which coverage terminates or becomes more restrictive;
    (iii) Maximum insurable loan balance, maximum periodic benefit 
payment, maximum number of payments, or other term affecting the dollar 
amount of coverage or benefits provided;
    (iv) Eligibility requirements and number and identity of persons 
covered;
    (v) Definition of a key term of coverage such as disability;
    (vi) Exclusions from or limitations on coverage; and
    (vii) Waiting periods and whether coverage is retroactive.
    (4) Combined notification. The notices required by paragraph (f)(1) 
and (2) of this section may be combined provided the timing requirement 
of paragraph (f)(1) of this section is met. The notices may be provided 
on or with a periodic statement.
    (g) Increase in rates due to delinquency or default or as a 
penalty--(1) Increases subject to this section. For plans other than 
home-equity plans subject to the requirements of Sec. 226.5b, except as 
provided in paragraph (g)(4) of this section, a creditor must provide a 
written notice to each consumer who may be affected when:
    (i) A rate is increased due to the consumer's delinquency or 
default; or
    (ii) A rate is increased as a penalty for one or more events 
specified in the account agreement, such as making a late payment or 
obtaining an extension of credit that exceeds the credit limit.
    (2) Timing of written notice. Whenever any notice is required to be 
given pursuant to paragraph (g)(1) of this section, the creditor shall 
provide written notice of the increase in rates at least 45 days prior 
to the effective date of the increase. The notice must be provided after 
the occurrence of the events described in paragraphs (g)(1)(i) and 
(g)(1)(ii) of this section that trigger the imposition of the rate 
increase.
    (3)(i) Disclosure requirements for rate increases--(A) General. If a 
creditor is increasing the rate due to delinquency or default or as a 
penalty, the creditor must provide the following information on the 
notice sent pursuant to paragraph (g)(1) of this section:
    (1) A statement that the delinquency or default rate or penalty 
rate, as applicable, has been triggered;
    (2) The date on which the delinquency or default rate or penalty 
rate will apply;
    (3) The circumstances under which the delinquency or default rate or 
penalty rate, as applicable, will cease to apply to the consumer's 
account, or that the delinquency or default rate or penalty rate will 
remain in effect for a potentially indefinite time period;
    (4) A statement indicating to which balances the delinquency or 
default rate or penalty rate will be applied;
    (5) If applicable, a description of any balances to which the 
current rate will continue to apply as of the effective date of the rate 
increase, unless a consumer fails to make a minimum periodic payment 
within 60 days from the due date for that payment; and
    (6) For a credit card account under an open-end (not home-secured) 
consumer credit plan, a statement of no more than four principal reasons 
for the rate increase, listed in their order of importance.
    (B) Rate increases resulting from failure to make minimum periodic 
payment within 60 days from due date. For a credit card account under an 
open-end (not home-secured) consumer credit plan, if the rate increase 
required to be disclosed pursuant to paragraph (g)(1) of this section is 
an increase pursuant to Sec. 226.55(b)(4) based on the consumer's 
failure to make a minimum periodic payment within 60 days from the due 
date for that payment, the notice provided pursuant to paragraph (g)(1) 
of this section must also state that the increase will cease to apply to 
transactions that occurred prior to or within 14 days of provision of 
the notice, if the creditor receives six consecutive required minimum 
periodic payments

[[Page 366]]

on or before the payment due date, beginning with the first payment due 
following the effective date of the increase.
    (ii) Format requirements. (A) If a notice required by paragraph 
(g)(1) of this section is included on or with a periodic statement, the 
information described in paragraph (g)(3)(i) of this section must be in 
the form of a table and provided on the front of any page of the 
periodic statement, above the notice described in paragraph (c)(2)(iv) 
of this section if that notice is provided on the same statement.
    (B) If a notice required by paragraph (g)(1) of this section is not 
included on or with a periodic statement, the information described in 
paragraph (g)(3)(i) of this section must be disclosed on the front of 
the first page of the notice. Only information related to the increase 
in the rate to a penalty rate may be included with the notice, except 
that this notice may be combined with a notice described in paragraph 
(c)(2)(iv) or (g)(4) of this section.
    (4) Exception for decrease in credit limit. A creditor is not 
required to provide a notice pursuant to paragraph (g)(1) of this 
section prior to increasing the rate for obtaining an extension of 
credit that exceeds the credit limit, provided that:
    (i) The creditor provides at least 45 days in advance of imposing 
the penalty rate a notice, in writing, that includes:
    (A) A statement that the credit limit on the account has been or 
will be decreased.
    (B) A statement indicating the date on which the penalty rate will 
apply, if the outstanding balance exceeds the credit limit as of that 
date;
    (C) A statement that the penalty rate will not be imposed on the 
date specified in paragraph (g)(4)(i)(B) of this section, if the 
outstanding balance does not exceed the credit limit as of that date;
    (D) The circumstances under which the penalty rate, if applied, will 
cease to apply to the account, or that the penalty rate, if applied, 
will remain in effect for a potentially indefinite time period;
    (E) A statement indicating to which balances the penalty rate may be 
applied; and
    (F) If applicable, a description of any balances to which the 
current rate will continue to apply as of the effective date of the rate 
increase, unless the consumer fails to make a minimum periodic payment 
within 60 days from the due date for that payment; and
    (ii) The creditor does not increase the rate applicable to the 
consumer's account to the penalty rate if the outstanding balance does 
not exceed the credit limit on the date set forth in the notice and 
described in paragraph (g)(4)(i)(B) of this section.
    (iii)(A) If a notice provided pursuant to paragraph (g)(4)(i) of 
this section is included on or with a periodic statement, the 
information described in paragraph (g)(4)(i) of this section must be in 
the form of a table and provided on the front of any page of the 
periodic statement; or
    (B) If a notice required by paragraph (g)(4)(i) of this section is 
not included on or with a periodic statement, the information described 
in paragraph (g)(4)(i) of this section must be disclosed on the front of 
the first page of the notice. Only information related to the reduction 
in credit limit may be included with the notice, except that this notice 
may be combined with a notice described in paragraph (c)(2)(iv) or 
(g)(1) of this section.
    (h) Consumer rejection of certain significant changes in terms--(1) 
Right to reject. If paragraph (c)(2)(iv)(B) of this section requires 
disclosure of the consumer's right to reject a significant change to an 
account term, the consumer may reject that change by notifying the 
creditor of the rejection before the effective date of the change.
    (2) Effect of rejection. If a creditor is notified of a rejection of 
a significant change to an account term as provided in paragraph (h)(1) 
of this section, the creditor must not:
    (i) Apply the change to the account;
    (ii) Impose a fee or charge or treat the account as in default 
solely as a result of the rejection; or
    (iii) Require repayment of the balance on the account using a method 
that is less beneficial to the consumer

[[Page 367]]

than one of the methods listed in Sec. 226.55(c)(2).
    (3) Exception. Section 226.9(h) does not apply when the creditor has 
not received the consumer's required minimum periodic payment within 60 
days after the due date for that payment.

[75 FR 7807, Feb. 22, 2010, as amended at 75 FR 37568, June 26, 2010; 76 
FR 23000, Apr. 25, 2011]



Sec. 226.10  Payments.

    (a) General rule. A creditor shall credit a payment to the 
consumer's account as of the date of receipt, except when a delay in 
crediting does not result in a finance or other charge or except as 
provided in paragraph (b) of this section.
    (b) Specific requirements for payments--(1) General rule. A creditor 
may specify reasonable requirements for payments that enable most 
consumers to make conforming payments.
    (2) Examples of reasonable requirements for payments. Reasonable 
requirements for making payment may include:
    (i) Requiring that payments be accompanied by the account number or 
payment stub;
    (ii) Setting reasonable cut-off times for payments to be received by 
mail, by electronic means, by telephone, and in person (except as 
provided in paragraph (b)(3) of this section), provided that such cut-
off times shall be no earlier than 5 p.m. on the payment due date at the 
location specified by the creditor for the receipt of such payments;
    (iii) Specifying that only checks or money orders should be sent by 
mail;
    (iv) Specifying that payment is to be made in U.S. dollars; or
    (v) Specifying one particular address for receiving payments, such 
as a post office box.
    (3) In-person payments on credit card accounts--(i) General. 
Notwithstanding Sec. 226.10(b), payments on a credit card account under 
an open-end (not home-secured) consumer credit plan made in person at a 
branch or office of a card issuer that is a financial institution prior 
to the close of business of that branch or office shall be considered 
received on the date on which the consumer makes the payment. A card 
issuer that is a financial institution shall not impose a cut-off time 
earlier than the close of business for any such payments made in person 
at any branch or office of the card issuer at which such payments are 
accepted. Notwithstanding Sec. 226.10(b)(2)(ii), a card issuer may 
impose a cut-off time earlier than 5 p.m. for such payments, if the 
close of business of the branch or office is earlier than 5 p.m.
    (ii) Financial institution. For purposes of paragraph (b)(3) of this 
section, ``financial institution'' shall mean a bank, savings 
association, or credit union.
    (4) Nonconforming payments--(i) In general. Except as provided in 
paragraph (b)(4)(ii) of this section, if a creditor specifies, on or 
with the periodic statement, requirements for the consumer to follow in 
making payments as permitted under this Sec. 226.10, but accepts a 
payment that does not conform to the requirements, the creditor shall 
credit the payment within five days of receipt.
    (ii) Payment methods promoted by creditor. If a creditor promotes a 
method for making payments, such payments shall be considered conforming 
payments in accordance with this paragraph (b) and shall be credited to 
the consumer's account as of the date of receipt, except when a delay in 
crediting does not result in a finance or other charge.
    (c) Adjustment of account. If a creditor fails to credit a payment, 
as required by paragraphs (a) or (b) of this section, in time to avoid 
the imposition of finance or other charges, the creditor shall adjust 
the consumer's account so that the charges imposed are credited to the 
consumer's account during the next billing cycle.
    (d) Crediting of payments when creditor does not receive or accept 
payments on due date--(1) General. Except as provided in paragraph 
(d)(2) of this section, if a creditor does not receive or accept 
payments by mail on the due date for payments, the creditor may 
generally not treat a payment received the next business day as late for 
any purpose. For purposes of this paragraph (d), the ``next business 
day'' means the next day on which the creditor accepts or receives 
payments by mail.

[[Page 368]]

    (2) Payments accepted or received other than by mail. If a creditor 
accepts or receives payments made on the due date by a method other than 
mail, such as electronic or telephone payments, the creditor is not 
required to treat a payment made by that method on the next business day 
as timely, even if it does not accept mailed payments on the due date.
    (e) Limitations on fees related to method of payment. For credit 
card accounts under an open-end (not home-secured) consumer credit plan, 
a creditor may not impose a separate fee to allow consumers to make a 
payment by any method, such as mail, electronic, or telephone payments, 
unless such payment method involves an expedited service by a customer 
service representative of the creditor. For purposes of paragraph (e) of 
this section, the term ``creditor'' includes a third party that 
collects, receives, or processes payments on behalf of a creditor.
    (f) Changes by card issuer. If a card issuer makes a material change 
in the address for receiving payments or procedures for handling 
payments, and such change causes a material delay in the crediting of a 
payment to the consumer's account during the 60-day period following the 
date on which such change took effect, the card issuer may not impose 
any late fee or finance charge for a late payment on the credit card 
account during the 60-day period following the date on which the change 
took effect.

[75 FR 7811, Feb. 22, 2010, as amended at 76 FR 23001, Apr. 25, 2011]



Sec. 226.11  Treatment of credit balances; account termination.

    (a) Credit balances. When a credit balance in excess of $1 is 
created on a credit account (through transmittal of funds to a creditor 
in excess of the total balance due on an account, through rebates of 
unearned finance charges or insurance premiums, or through amounts 
otherwise owed to or held for the benefit of the consumer), the creditor 
shall--
    (1) Credit the amount of the credit balance to the consumer's 
account;
    (2) Refund any part of the remaining credit balance within seven 
business days from receipt of a written request from the consumer;
    (3) Make a good faith effort to refund to the consumer by cash, 
check, or money order, or credit to a deposit account of the consumer, 
any part of the credit balance remaining in the account for more than 
six months. No further action is required if the consumer's current 
location is not known to the creditor and cannot be traced through the 
consumer's last known address or telephone number.
    (b) Account termination. (1) A creditor shall not terminate an 
account prior to its expiration date solely because the consumer does 
not incur a finance charge.
    (2) Nothing in paragraph (b)(1) of this section prohibits a creditor 
from terminating an account that is inactive for three or more 
consecutive months. An account is inactive for purposes of this 
paragraph if no credit has been extended (such as by purchase, cash 
advance or balance transfer) and if the account has no outstanding 
balance.
    (c) Timely settlement of estate debts--(1) General rule--(i) 
Reasonable policies and procedures required. For credit card accounts 
under an open-end (not home-secured) consumer credit plan, card issuers 
must adopt reasonable written policies and procedures designed to ensure 
that an administrator of an estate of a deceased accountholder can 
determine the amount of and pay any balance on the account in a timely 
manner.
    (ii) Application to joint accounts. Paragraph (c) of this section 
does not apply to the account of a deceased consumer if a joint 
accountholder remains on the account.
    (2) Timely statement of balance--(i) Requirement. Upon request by 
the administrator of an estate, a card issuer must provide the 
administrator with the amount of the balance on a deceased consumer's 
account in a timely manner.
    (ii) Safe harbor. For purposes of paragraph (c)(2)(i) of this 
section, providing the amount of the balance on the account within 30 
days of receiving the request is deemed to be timely.
    (3) Limitations after receipt of request from administrator--(i) 
Limitation on fees and increases in annual percentage rates.

[[Page 369]]

After receiving a request from the administrator of an estate for the 
amount of the balance on a deceased consumer's account, a card issuer 
must not impose any fees on the account (such as a late fee, annual fee, 
or over-the-limit fee) or increase any annual percentage rate, except as 
provided by Sec. 226.55(b)(2).
    (ii) Limitation on trailing or residual interest. A card issuer must 
waive or rebate any additional finance charge due to a periodic interest 
rate if payment in full of the balance disclosed pursuant to paragraph 
(c)(2) of this section is received within 30 days after disclosure.

[75 FR 7812, Feb. 22, 2010]



Sec. 226.12  Special credit card provisions.

    (a) Issuance of credit cards. Regardless of the purpose for which a 
credit card is to be used, including business, commercial, or 
agricultural use, no credit card shall be issued to any person except--
    (1) In response to an oral or written request or application for the 
card; or
    (2) As a renewal of, or substitute for, an accepted credit card.\21\
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    \21\ [Reserved]
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    (b) Liability of cardholder for unauthorized use--(1)(i) Definition 
of unauthorized use. For purposes of this section, the term 
``unauthorized use'' means the use of a credit card by a person, other 
than the cardholder, who does not have actual, implied, or apparent 
authority for such use, and from which the cardholder receives no 
benefit.
    (ii) Limitation on amount. The liability of a cardholder for 
unauthorized use \22\ of a credit card shall not exceed the lesser of 
$50 or the amount of money, property, labor, or services obtained by the 
unauthorized use before notification to the card issuer under paragraph 
(b)(3) of this section.
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    \22\ [Reserved]
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    (2) Conditions of liability. A cardholder shall be liable for 
unauthorized use of a credit card only if:
    (i) The credit card is an accepted credit card;
    (ii) The card issuer has provided adequate notice \23\ of the 
cardholder's maximum potential liability and of means by which the card 
issuer may be notified of loss or theft of the card. The notice shall 
state that the cardholder's liability shall not exceed $50 (or any 
lesser amount) and that the cardholder may give oral or written 
notification, and shall describe a means of notification (for example, a 
telephone number, an address, or both); and
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    \23\ [Reserved]
---------------------------------------------------------------------------

    (iii) The card issuer has provided a means to identify the 
cardholder on the account or the authorized user of the card.
    (3) Notification to card issuer. Notification to a card issuer is 
given when steps have been taken as may be reasonably required in the 
ordinary course of business to provide the card issuer with the 
pertinent information about the loss, theft, or possible unauthorized 
use of a credit card, regardless of whether any particular officer, 
employee, or agent of the card issuer does, in fact, receive the 
information. Notification may be given, at the option of the person 
giving it, in person, by telephone, or in writing. Notification in 
writing is considered given at the time of receipt or, whether or not 
received, at the expiration of the time ordinarily required for 
transmission, whichever is earlier.
    (4) Effect of other applicable law or agreement. If state law or an 
agreement between a cardholder and the card issuer imposes lesser 
liability than that provided in this paragraph, the lesser liability 
shall govern.
    (5) Business use of credit cards. If 10 or more credit cards are 
issued by one card issuer for use by the employees of an organization, 
this section does not prohibit the card issuer and the organization from 
agreeing to liability for unauthorized use without regard to this 
section. However, liability for unauthorized use may be imposed on an 
employee of the organization, by either the card issuer or the 
organization, only in accordance with this section.
    (c) Right of cardholder to assert claims or defenses against card 
issuer\24\--(1) General rule. When a person who honors a credit card 
fails to resolve satisfactorily a dispute as to property or services 
purchased with the credit card in a

[[Page 370]]

consumer credit transaction, the cardholder may assert against the card 
issuer all claims (other than tort claims) and defenses arising out of 
the transaction and relating to the failure to resolve the dispute. The 
cardholder may withhold payment up to the amount of credit outstanding 
for the property or services that gave rise to the dispute and any 
finance or other charges imposed on that amount.\25\
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    \24\ [Reserved]
    \25\ [Reserved]
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    (2) Adverse credit reports prohibited. If, in accordance with 
paragraph (c)(1) of this section, the cardholder withholds payment of 
the amount of credit outstanding for the disputed transaction, the card 
issuer shall not report that amount as delinquent until the dispute is 
settled or judgment is rendered.
    (3) Limitations--(i) General. The rights stated in paragraphs (c)(1) 
and (c)(2) of this section apply only if:
    (A) The cardholder has made a good faith attempt to resolve the 
dispute with the person honoring the credit card; and
    (B) The amount of credit extended to obtain the property or services 
that result in the assertion of the claim or defense by the cardholder 
exceeds $50, and the disputed transaction occurred in the same state as 
the cardholder's current designated address or, if not within the same 
state, within 100 miles from that address.\26\
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    \26\ [Reserved]
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    (ii) Exclusion. The limitations stated in paragraph (c)(3)(i)(B) of 
this section shall not apply when the person honoring the credit card:
    (A) Is the same person as the card issuer;
    (B) Is controlled by the card issuer directly or indirectly;
    (C) Is under the direct or indirect control of a third person that 
also directly or indirectly controls the card issuer;
    (D) Controls the card issuer directly or indirectly;
    (E) Is a franchised dealer in the card issuer's products or 
services; or
    (F) Has obtained the order for the disputed transaction through a 
mail solicitation made or participated in by the card issuer.
    (d) Offsets by card issuer prohibited. (1) A card issuer may not 
take any action, either before or after termination of credit card 
privileges, to offset a cardholder's indebtedness arising from a 
consumer credit transaction under the relevant credit card plan against 
funds of the cardholder held on deposit with the card issuer.
    (2) This paragraph does not alter or affect the right of a card 
issuer acting under state or federal law to do any of the following with 
regard to funds of a cardholder held on deposit with the card issuer if 
the same procedure is constitutionally available to creditors generally: 
Obtain or enforce a consensual security interest in the funds; attach or 
otherwise levy upon the funds; or obtain or enforce a court order 
relating to the funds.
    (3) This paragraph does not prohibit a plan, if authorized in 
writing by the cardholder, under which the card issuer may periodically 
deduct all or part of the cardholder's credit card debt from a deposit 
account held with the card issuer (subject to the limitations in Sec. 
226.13(d)(1)).
    (e) Prompt notification of returns and crediting of refunds. (1) 
When a creditor other than the card issuer accepts the return of 
property or forgives a debt for services that is to be reflected as a 
credit to the consumer's credit card account, that creditor shall, 
within 7 business days from accepting the return or forgiving the debt, 
transmit a credit statement to the card issuer through the card issuer's 
normal channels for credit statements.
    (2) The card issuer shall, within 3 business days from receipt of a 
credit statement, credit the consumer's account with the amount of the 
refund.
    (3) If a creditor other than a card issuer routinely gives cash 
refunds to consumers paying in cash, the creditor shall also give credit 
or cash refunds to consumers using credit cards, unless it discloses at 
the time the transaction is consummated that credit or cash refunds for 
returns are not given. This section does not require refunds for returns 
nor does it prohibit refunds in kind.
    (f) Discounts; tie-in arrangements. No card issuer may, by contract 
or otherwise:

[[Page 371]]

    (1) Prohibit any person who honors a credit card from offering a 
discount to a consumer to induce the consumer to pay by cash, check, or 
similar means rather than by use of a credit card or its underlying 
account for the purchase of property or services; or
    (2) Require any person who honors the card issuer's credit card to 
open or maintain any account or obtain any other service not essential 
to the operation of the credit card plan from the card issuer or any 
other person, as a condition of participation in a credit card plan. If 
maintenance of an account for clearing purposes is determined to be 
essential to the operation of the credit card plan, it may be required 
only if no service charges or minimum balance requirements are imposed.
    (g) Relation to Electronic Fund Transfer Act and Regulation E. For 
guidance on whether Regulation Z (12 CFR part 226) or Regulation E (12 
CFR part 205) applies in instances involving both credit and electronic 
fund transfer aspects, refer to Regulation E, 12 CFR 205.12(a) regarding 
issuance and liability for unauthorized use. On matters other than 
issuance and liability, this section applies to the credit aspects of 
combined credit/electronic fund transfer transactions, as applicable.

[75 FR 7812, Feb. 22, 2010]



Sec. 226.13  Billing error resolution.\27\
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    \27\ [Reserved]
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    (a) Definition of billing error. For purposes of this section, the 
term billing error means:
    (1) A reflection on or with a periodic statement of an extension of 
credit that is not made to the consumer or to a person who has actual, 
implied, or apparent authority to use the consumer's credit card or 
open-end credit plan.
    (2) A reflection on or with a periodic statement of an extension of 
credit that is not identified in accordance with the requirements of 
Sec. Sec. 226.7(a)(2) or (b)(2), as applicable, and 226.8.
    (3) A reflection on or with a periodic statement of an extension of 
credit for property or services not accepted by the consumer or the 
consumer's designee, or not delivered to the consumer or the consumer's 
designee as agreed.
    (4) A reflection on a periodic statement of the creditor's failure 
to credit properly a payment or other credit issued to the consumer's 
account.
    (5) A reflection on a periodic statement of a computational or 
similar error of an accounting nature that is made by the creditor.
    (6) A reflection on a periodic statement of an extension of credit 
for which the consumer requests additional clarification, including 
documentary evidence.
    (7) The creditor's failure to mail or deliver a periodic statement 
to the consumer's last known address if that address was received by the 
creditor, in writing, at least 20 days before the end of the billing 
cycle for which the statement was required.
    (b) Billing error notice.\28\ A billing error notice is a written 
notice \29\ from a consumer that:
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    \28\ [Reserved]
    \29\ [Reserved]
---------------------------------------------------------------------------

    (1) Is received by a creditor at the address disclosed under Sec. 
226.7(a)(9) or (b)(9), as applicable, no later than 60 days after the 
creditor transmitted the first periodic statement that reflects the 
alleged billing error;
    (2) Enables the creditor to identify the consumer's name and account 
number; and
    (3) To the extent possible, indicates the consumer's belief and the 
reasons for the belief that a billing error exists, and the type, date, 
and amount of the error.
    (c) Time for resolution; general procedures. (1) The creditor shall 
mail or deliver written acknowledgment to the consumer within 30 days of 
receiving a billing error notice, unless the creditor has complied with 
the appropriate resolution procedures of paragraphs (e) and (f) of this 
section, as applicable, within the 30-day period; and
    (2) The creditor shall comply with the appropriate resolution 
procedures of paragraphs (e) and (f) of this section, as applicable, 
within 2 complete billing cycles (but in no event later than 90 days) 
after receiving a billing error notice.

[[Page 372]]

    (d) Rules pending resolution. Until a billing error is resolved 
under paragraph (e) or (f) of this section, the following rules apply:
    (1) Consumer's right to withhold disputed amount; collection action 
prohibited. The consumer need not pay (and the creditor may not try to 
collect) any portion of any required payment that the consumer believes 
is related to the disputed amount (including related finance or other 
charges).\30\ If the cardholder has enrolled in an automatic payment 
plan offered by the card issuer and has agreed to pay the credit card 
indebtedness by periodic deductions from the cardholder's deposit 
account, the card issuer shall not deduct any part of the disputed 
amount or related finance or other charges if a billing error notice is 
received any time up to 3 business days before the scheduled payment 
date.
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    \30\ [Reserved]
---------------------------------------------------------------------------

    (2) Adverse credit reports prohibited. The creditor or its agent 
shall not (directly or indirectly) make or threaten to make an adverse 
report to any person about the consumer's credit standing, or report 
that an amount or account is delinquent, because the consumer failed to 
pay the disputed amount or related finance or other charges.
    (3) Acceleration of debt and restriction of account prohibited. A 
creditor shall not accelerate any part of the consumer's indebtedness or 
restrict or close a consumer's account solely because the consumer has 
exercised in good faith rights provided by this section. A creditor may 
be subject to the forfeiture penalty under 15 U.S.C. 1666(e) for failure 
to comply with any of the requirements of this section.
    (4) Permitted creditor actions. A creditor is not prohibited from 
taking action to collect any undisputed portion of the item or bill; 
from deducting any disputed amount and related finance or other charges 
from the consumer's credit limit on the account; or from reflecting a 
disputed amount and related finance or other charges on a periodic 
statement, provided that the creditor indicates on or with the periodic 
statement that payment of any disputed amount and related finance or 
other charges is not required pending the creditor's compliance with 
this section.
    (e) Procedures if billing error occurred as asserted. If a creditor 
determines that a billing error occurred as asserted, it shall within 
the time limits in paragraph (c)(2) of this section:
    (1) Correct the billing error and credit the consumer's account with 
any disputed amount and related finance or other charges, as applicable; 
and
    (2) Mail or deliver a correction notice to the consumer.
    (f) Procedures if different billing error or no billing error 
occurred. If, after conducting a reasonable investigation,\31\ a 
creditor determines that no billing error occurred or that a different 
billing error occurred from that asserted, the creditor shall within the 
time limits in paragraph (c)(2) of this section:
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    \31\ [Reserved]
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    (1) Mail or deliver to the consumer an explanation that sets forth 
the reasons for the creditor's belief that the billing error alleged by 
the consumer is incorrect in whole or in part;
    (2) Furnish copies of documentary evidence of the consumer's 
indebtedness, if the consumer so requests; and
    (3) If a different billing error occurred, correct the billing error 
and credit the consumer's account with any disputed amount and related 
finance or other charges, as applicable.
    (g) Creditor's rights and duties after resolution. If a creditor, 
after complying with all of the requirements of this section, determines 
that a consumer owes all or part of the disputed amount and related 
finance or other charges, the creditor:
    (1) Shall promptly notify the consumer in writing of the time when 
payment is due and the portion of the disputed amount and related 
finance or other charges that the consumer still owes;
    (2) Shall allow any time period disclosed under Sec. 226.6(a)(1) or 
(b)(2)(v), as applicable, and Sec. 226.7(a)(8) or (b)(8), as 
applicable, during which the consumer can pay the amount due under 
paragraph (g)(1) of this section without incurring additional finance or 
other charges;
    (3) May report an account or amount as delinquent because the amount 
due

[[Page 373]]

under paragraph (g)(1) of this section remains unpaid after the creditor 
has allowed any time period disclosed under Sec. 226.6(a)(1) or 
(b)(2)(v), as applicable, and Sec. 226.7(a)(8) or (b)(8), as applicable 
or 10 days (whichever is longer) during which the consumer can pay the 
amount; but
    (4) May not report that an amount or account is delinquent because 
the amount due under paragraph (g)(1) of the section remains unpaid, if 
the creditor receives (within the time allowed for payment in paragraph 
(g)(3) of this section) further written notice from the consumer that 
any portion of the billing error is still in dispute, unless the 
creditor also:
    (i) Promptly reports that the amount or account is in dispute;
    (ii) Mails or delivers to the consumer (at the same time the report 
is made) a written notice of the name and address of each person to whom 
the creditor makes a report; and
    (iii) Promptly reports any subsequent resolution of the reported 
delinquency to all persons to whom the creditor has made a report.
    (h) Reassertion of billing error. A creditor that has fully complied 
with the requirements of this section has no further responsibilities 
under this section (other than as provided in paragraph (g)(4) of this 
section) if a consumer reasserts substantially the same billing error.
    (i) Relation to Electronic Fund Transfer Act and Regulation E. If an 
extension of credit is incident to an electronic fund transfer, under an 
agreement between a consumer and a financial institution to extend 
credit when the consumer's account is overdrawn or to maintain a 
specified minimum balance in the consumer's account, the creditor shall 
comply with the requirements of Regulation E, 12 CFR 205.11 governing 
error resolution rather than those of paragraphs (a), (b), (c), (e), 
(f), and (h) of this section.

[75 FR 7814, Feb. 22, 2010]



Sec. 226.14  Determination of annual percentage rate.

    (a) General rule. The annual percentage rate is a measure of the 
cost of credit, expressed as a yearly rate. An annual percentage rate 
shall be considered accurate if it is not more than \1/8\th of 1 
percentage point above or below the annual percentage rate determined in 
accordance with this section.\31a\ An error in disclosure of the annual 
percentage rate or finance charge shall not, in itself, be considered a 
violation of this regulation if:
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    \31a\ [Reserved]
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    (1) The error resulted from a corresponding error in a calculation 
tool used in good faith by the creditor; and
    (2) Upon discovery of the error, the creditor promptly discontinues 
use of that calculation tool for disclosure purposes, and notifies the 
Board in writing of the error in the calculation tool.
    (b) Annual percentage rate--in general. Where one or more periodic 
rates may be used to compute the finance charge, the annual percentage 
rate(s) to be disclosed for purposes of Sec. Sec. 226.5a, 226.5b, 
226.6, 226.7(a)(4) or (b)(4), 226.9, 226.15, 226.16, 226.26, 226.55, and 
226.56 shall be computed by multiplying each periodic rate by the number 
of periods in a year.
    (c) Optional effective annual percentage rate for periodic 
statements for creditors offering open-end plans subject to the 
requirements of Sec. 226.5b. A creditor offering an open-end plan 
subject to the requirements of Sec. 226.5b need not disclose an 
effective annual percentage rate. Such a creditor may, at its option, 
disclose an effective annual percentage rate(s) pursuant to Sec. 
226.7(a)(7) and compute the effective annual percentage rate as follows:
    (1) Solely periodic rates imposed. If the finance charge is 
determined solely by applying one or more periodic rates, at the 
creditor's option, either:
    (i) By multiplying each periodic rate by the number of periods in a 
year; or
    (ii) By dividing the total finance charge for the billing cycle by 
the sum of the balances to which the periodic rates were applied and 
multiplying the quotient (expressed as a percentage) by the number of 
billing cycles in a year.
    (2) Minimum or fixed charge, but not transaction charge, imposed. If 
the finance charge imposed during the billing cycle is or includes a 
minimum, fixed, or other charge not due to the application of a periodic 
rate, other

[[Page 374]]

than a charge with respect to any specific transaction during the 
billing cycle, by dividing the total finance charge for the billing 
cycle by the amount of the balance(s) to which it is applicable \32\ and 
multiplying the quotient (expressed as a percentage) by the number of 
billing cycles in a year.\33\ If there is no balance to which the 
finance charge is applicable, an annual percentage rate cannot be 
determined under this section. Where the finance charge imposed during 
the billing cycle is or includes a loan fee, points, or similar charge 
that relates to opening, renewing, or continuing an account, the amount 
of such charge shall not be included in the calculation of the annual 
percentage rate.
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    \32\ [Reserved]
    \33\ [Reserved]
---------------------------------------------------------------------------

    (3) Transaction charge imposed. If the finance charge imposed during 
the billing cycle is or includes a charge relating to a specific 
transaction during the billing cycle (even if the total finance charge 
also includes any other minimum, fixed, or other charge not due to the 
application of a periodic rate), by dividing the total finance charge 
imposed during the billing cycle by the total of all balances and other 
amounts on which a finance charge was imposed during the billing cycle 
without duplication, and multiplying the quotient (expressed as a 
percentage) by the number of billing cycles in a year,\34\ except that 
the annual percentage rate shall not be less than the largest rate 
determined by multiplying each periodic rate imposed during the billing 
cycle by the number of periods in a year.\35\ Where the finance charge 
imposed during the billing cycle is or includes a loan fee, points, or 
similar charge that relates to the opening, renewing, or continuing an 
account, the amount of such charge shall not be included in the 
calculation of the annual percentage rate. See appendix F to this part 
regarding determination of the denominator of the fraction under this 
paragraph.
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    \34\ [Reserved]
    \35\ [Reserved]
---------------------------------------------------------------------------

    (4) If the finance charge imposed during the billing cycle is or 
includes a minimum, fixed, or other charge not due to the application of 
a periodic rate and the total finance charge imposed during the billing 
cycle does not exceed 50 cents for a monthly or longer billing cycle, or 
the pro rata part of 50 cents for a billing cycle shorter than monthly, 
at the creditor's option, by multiplying each applicable periodic rate 
by the number of periods in a year, notwithstanding the provisions of 
paragraphs (c)(2) and (c)(3) of this section.
    (d) Calculations where daily periodic rate applied. If the 
provisions of paragraph (c)(1)(ii) or (c)(2) of this section apply and 
all or a portion of the finance charge is determined by the application 
of one or more daily periodic rates, the annual percentage rate may be 
determined either:
    (1) By dividing the total finance charge by the average of the daily 
balances and multiplying the quotient by the number of billing cycles in 
a year; or
    (2) By dividing the total finance charge by the sum of the daily 
balances and multiplying the quotient by 365.

[75 FR 7815, Feb. 22, 2010]



Sec. 226.15  Right of rescission.

    (a) Consumer's right to rescind. (1)(i) Except as provided in 
paragraph (a)(1)(ii) of this section, in a credit plan in which a 
security interest is or will be retained or acquired in a consumer's 
principal dwelling, each consumer whose ownership interest is or will be 
subject to the security interest shall have the right to rescind: each 
credit extension made under the plan; the plan when the plan is opened; 
a security interest when added or increased to secure an existing plan; 
and the increase when a credit limit on the plan is increased.
    (ii) As provided in section 125(e) of the Act, the consumer does not 
have the right to rescind each credit extension made under the plan if 
such extension is made in accordance with a previously established 
credit limit for the plan.
    (2) To exercise the right to rescind, the consumer shall notify the 
creditor of the rescission by mail, telegram, or other means of written 
communication. Notice is considered given when mailed, or when filed for 
telegraphic

[[Page 375]]

transmission, or, if sent by other means, when delivered to the 
creditor's designated place of business.
    (3) The consumer may exercise the right to rescind until midnight of 
the third business day following the occurrence described in paragraph 
(a)(1) of this section that gave rise to the right of rescission, 
delivery of the notice required by paragraph (b) of this section, or 
delivery of all material disclosures, \36\ whichever occurs last. If the 
required notice and material disclosures are not delivered, the right to 
rescind shall expire 3 years after the occurrence giving rise to the 
right of rescission, or upon transfer of all of the consumer's interest 
in the property, or upon sale of the property, whichever occurs first. 
In the case of certain administrative proceedings, the rescission period 
shall be extended in accordance with section 125(f) of the Act.
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    \36\ The term material disclosures means the information that must 
be provided to satisfy the requirements in Sec. 226.6 with regard to 
the method of determining the finance charge and the balance upon which 
a finance charge will be imposed, the annual percentage rate, the amount 
or method of determining the amount of any membership or participation 
fee that may be imposed as part of the plan, and the payment information 
described in Sec. 226.5b(d)(5)(i) and (ii) that is required under Sec. 
226.6(e)(2).
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    (4) When more than one consumer has the right to rescind, the 
exercise of the right by one consumer shall be effective as to all 
consumers.
    (b) Notice of right to rescind. In any transaction or occurrence 
subject to rescission, a creditor shall deliver two copies of the notice 
of the right to rescind to each consumer entitled to rescind (one copy 
to each if the notice is delivered in electronic form in accordance with 
the consumer consent and other applicable provisions of the E-Sign Act). 
The notice shall identify the transaction or occurrence and clearly and 
conspicuously disclose the following:
    (1) The retention or acquisition of a security interest in the 
consumer's principal dwelling.
    (2) The consumer's right to rescind, as described in paragraph 
(a)(1) of this section.
    (3) How to exercise the right to rescind, with a form for that 
purpose, designating the address of the creditor's place of business.
    (4) The effects of rescission, as described in paragraph (d) of this 
section.
    (5) The date the rescission period expires.
    (c) Delay of creditor's performance. Unless a consumer waives the 
right to rescind under paragraph (e) of this section, no money shall be 
disbursed other than in escrow, no services shall be performed, and no 
materials delivered until after the rescission period has expired and 
the creditor is reasonably satisfied that the consumer has not 
rescinded. A creditor does not violate this section if a third party 
with no knowledge of the event activating the rescission right does not 
delay in providing materials or services, as long as the debt incurred 
for those materials or services is not secured by the property subject 
to rescission.
    (d) Effects of rescission. (1) When a consumer rescinds a 
transaction, the security interest giving rise to the right of 
rescission becomes void, and the consumer shall not be liable for any 
amount, including any finance charge.
    (2) Within 20 calendar days after receipt of a notice of rescission, 
the creditor shall return any money or property that has been given to 
anyone in connection with the transaction and shall take any action 
necessary to reflect the termination of the security interest.
    (3) If the creditor has delivered any money or property, the 
consumer may retain possession until the creditor has met its obligation 
under paragraph (d)(2) of this section. When the creditor has complied 
with that paragraph, the consumer shall tender the money or property to 
the creditor or, where the latter would be impracticable or inequitable, 
tender its reasonable value. At the consumer's option, tender of 
property may be made at the location of the property or at the 
consumer's residence. Tender of money must be made at the creditor's 
designated place of business. If the creditor does not take possession 
of the money or property within 20 calendar days after the

[[Page 376]]

consumer's tender, the consumer may keep it without further obligation.
    (4) The procedures outlined in paragraphs (d)(2) and (3) of this 
section may be modified by court order.
    (e) Consumer's waiver of right to rescind. (1) The consumer may 
modify or waive the right to rescind if the consumer determines that the 
extension of credit is needed to meet a bona fide personal financial 
emergency. To modify or waive the right, the consumer shall give the 
creditor a dated written statement that describes the emergency, 
specifically modifies or waives the right to rescind, and bears the 
signature of all the consumers entitled to rescind. Printed forms for 
this purpose are prohibited, except as provided in paragraph (e)(2) of 
this section.
    (2) The need of the consumer to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1993, pursuant to 42 U.S.C. 5170, to be a 
major disaster area because of severe storms and flooding in the 
Midwest. \36a\ In this instance, creditors may use printed forms for the 
consumer to waive the right to rescind. This exemption to paragraph 
(e)(1) of this section shall expire one year from the date an area was 
declared a major disaster.
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    \36a\ A list of the affected areas will be maintained by the Board.
---------------------------------------------------------------------------

    (3) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1994 to be a major disaster area, pursuant 
to 42 U.S.C. 5170, because of severe storms and flooding in the South. 
\36b\ In this instance, creditors may use printed forms for the consumer 
to waive the right to rescind. This exemption to paragraph (e)(1) of 
this section shall expire one year from the date an area was declared a 
major disaster.
---------------------------------------------------------------------------

    \36b\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include parts of Alabama, Florida, and 
Georgia.
---------------------------------------------------------------------------

    (4) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during October 1994 to be a major disaster area, pursuant to 42 U.S.C. 
5170, because of severe storms and flooding in Texas. \36c\ In this 
instance, creditors may use printed forms for the consumer to waive the 
right to rescind. This exemption to paragraph (e)(1) of this section 
shall expire one year from the date an area was declared a major 
disaster.
---------------------------------------------------------------------------

    \36c\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include the following counties in Texas: 
Angelina, Austin, Bastrop, Brazos, Brazoria, Burleson, Chambers, 
Fayette, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jackson, 
Jasper, Jefferson, Lee, Liberty, Madison, Matagorda, Montgomery, 
Nacagdoches, Orange, Polk, San Augustine, San Jacinto, Shelby, Trinity, 
Victoria, Washington, Waller, Walker, and Wharton.
---------------------------------------------------------------------------

    (f) Exempt transactions. The right to rescind does not apply to the 
following:
    (1) A residential mortgage transaction.
    (2) A credit plan in which a state agency is a creditor.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 54 FR 24688, June 9, 
1989; 58 FR 40583, July 29, 1993; 59 FR 40204, Aug. 5, 1994; 59 FR 
63715, Dec. 9, 1994; 66 FR 17338, Mar. 30, 2001; 72 FR 63474, Nov. 9, 
2007]



Sec. 226.16  Advertising.

    (a) Actually available terms. If an advertisement for credit states 
specific credit terms, it shall state only those terms that actually are 
or will be arranged or offered by the creditor.
    (b) Advertisement of terms that require additional disclosures. (1) 
Any term required to be disclosed under Sec. 226.6(b)(3) set forth 
affirmatively or negatively in an advertisement for an open-end (not 
home-secured) credit plan triggers additional disclosures under this 
section. Any term required to be disclosed under Sec. 226.6(a)(1) or 
(a)(2) set forth affirmatively or negatively in an advertisement for a 
home-equity plan subject to the requirements of Sec. 226.5b triggers 
additional disclosures under this section. If any of the terms that 
trigger additional disclosures under this

[[Page 377]]

paragraph is set forth in an advertisement, the advertisement shall also 
clearly and conspicuously set forth the following: \36d\
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    \36d\ [Reserved]
---------------------------------------------------------------------------

    (i) Any minimum, fixed, transaction, activity or similar charge that 
is a finance charge under Sec. 226.4 that could be imposed.
    (ii) Any periodic rate that may be applied expressed as an annual 
percentage rate as determined under Sec. 226.14(b). If the plan 
provides for a variable periodic rate, that fact shall be disclosed.
    (iii) Any membership or participation fee that could be imposed.
    (2) If an advertisement for credit to finance the purchase of goods 
or services specified in the advertisement states a periodic payment 
amount, the advertisement shall also state the total of payments and the 
time period to repay the obligation, assuming that the consumer pays 
only the periodic payment amount advertised. The disclosure of the total 
of payments and the time period to repay the obligation must be equally 
prominent to the statement of the periodic payment amount.
    (c) Catalogs or other multiple-page advertisements; electronic 
advertisements. (1) If a catalog or other multiple-page advertisement, 
or an electronic advertisement (such as an advertisement appearing on an 
Internet Web site), gives information in a table or schedule in 
sufficient detail to permit determination of the disclosures required by 
paragraph (b) of this section, it shall be considered a single 
advertisement if:
    (i) The table or schedule is clearly and conspicuously set forth; 
and
    (ii) Any statement of terms set forth in Sec. 226.6 appearing 
anywhere else in the catalog or advertisement clearly refers to the page 
or location where the table or schedule begins.
    (2) A catalog or other multiple-page advertisement or an electronic 
advertisement (such as an advertisement appearing on an Internet Web 
site) complies with this paragraph if the table or schedule of terms 
includes all appropriate disclosures for a representative scale of 
amounts up to the level of the more commonly sold higher-priced property 
or services offered.
    (d) Additional requirements for home-equity plans--(1) Advertisement 
of terms that require additional disclosures. If any of the terms 
required to be disclosed under Sec. 226.6(a)(1) or (a)(2) or the 
payment terms of the plan are set forth, affirmatively or negatively, in 
an advertisement for a home-equity plan subject to the requirements of 
Sec. 226.5b, the advertisement also shall clearly and conspicuously set 
forth the following:
    (i) Any loan fee that is a percentage of the credit limit under the 
plan and an estimate of any other fees imposed for opening the plan, 
stated as a single dollar amount or a reasonable range.
    (ii) Any periodic rate used to compute the finance charge, expressed 
as an annual percentage rate as determined under Sec. 226.14(b).
    (iii) The maximum annual percentage rate that may be imposed in a 
variable-rate plan.
    (2) Discounted and premium rates. If an advertisement states an 
initial annual percentage rate that is not based on the index and margin 
used to make later rate adjustments in a variable-rate plan, the 
advertisement also shall state with equal prominence and in close 
proximity to the initial rate:
    (i) The period of time such initial rate will be in effect; and
    (ii) A reasonably current annual percentage rate that would have 
been in effect using the index and margin.
    (3) Balloon payment. If an advertisement contains a statement of any 
minimum periodic payment and a balloon payment may result if only the 
minimum periodic payments are made, even if such a payment is uncertain 
or unlikely, the advertisement also shall state with equal prominence 
and in close proximity to the minimum periodic payment statement that a 
balloon payment may result, if applicable.\36e\ A balloon payment 
results if paying the minimum periodic payments does not fully amortize 
the outstanding balance by a specified date or time, and the consumer is 
required to repay the entire outstanding balance at such time. If a 
balloon payment will occur when the consumer makes only the minimum 
payments required under the

[[Page 378]]

plan, an advertisement for such a program which contains any statement 
of any minimum periodic payment shall also state with equal prominence 
and in close proximity to the minimum periodic payment statement:
---------------------------------------------------------------------------

    \36e\ [Reserved]
---------------------------------------------------------------------------

    (i) That a balloon payment will result; and
    (ii) The amount and timing of the balloon payment that will result 
if the consumer makes only the minimum payments for the maximum period 
of time that the consumer is permitted to make such payments.
    (4) Tax implications. An advertisement that states that any interest 
expense incurred under the home-equity plan is or may be tax deductible 
may not be misleading in this regard. If an advertisement distributed in 
paper form or through the Internet (rather than by radio or television) 
is for a home-equity plan secured by the consumer's principal dwelling, 
and the advertisement states that the advertised extension of credit may 
exceed the fair market value of the dwelling, the advertisement shall 
clearly and conspicuously state that:
    (i) The interest on the portion of the credit extension that is 
greater than the fair market value of the dwelling is not tax deductible 
for Federal income tax purposes; and
    (ii) The consumer should consult a tax adviser for further 
information regarding the deductibility of interest and charges.
    (5) Misleading terms. An advertisement may not refer to a home-
equity plan as ``free money'' or contain a similarly misleading term.
    (6) Promotional rates and payments. (i) Definitions. The following 
definitions apply for purposes of paragraph (d)(6) of this section:
    (A) Promotional rate. The term ``promotional rate'' means, in a 
variable-rate plan, any annual percentage rate that is not based on the 
index and margin that will be used to make rate adjustments under the 
plan, if that rate is less than a reasonably current annual percentage 
rate that would be in effect under the index and margin that will be 
used to make rate adjustments under the plan.
    (B) Promotional payment. The term ``promotional payment'' means:
    (1) For a variable-rate plan, any minimum payment applicable for a 
promotional period that:
    (i) Is not derived by applying the index and margin to the 
outstanding balance when such index and margin will be used to determine 
other minimum payments under the plan; and
    (ii) Is less than other minimum payments under the plan derived by 
applying a reasonably current index and margin that will be used to 
determine the amount of such payments, given an assumed balance.
    (2) For a plan other than a variable-rate plan, any minimum payment 
applicable for a promotional period if that payment is less than other 
payments required under the plan given an assumed balance.
    (C) Promotional period. A ``promotional period'' means a period of 
time, less than the full term of the loan, that the promotional rate or 
promotional payment may be applicable.
    (ii) Stating the promotional period and post-promotional rate or 
payments. If any annual percentage rate that may be applied to a plan is 
a promotional rate, or if any payment applicable to a plan is a 
promotional payment, the following must be disclosed in any 
advertisement, other than television or radio advertisements, in a clear 
and conspicuous manner with equal prominence and in close proximity to 
each listing of the promotional rate or payment:
    (A) The period of time during which the promotional rate or 
promotional payment will apply;
    (B) In the case of a promotional rate, any annual percentage rate 
that will apply under the plan. If such rate is variable, the annual 
percentage rate must be disclosed in accordance with the accuracy 
standards in Sec. Sec. 226.5b or 226.16(b)(1)(ii) as applicable; and
    (C) In the case of a promotional payment, the amounts and time 
periods of any payments that will apply under the plan. In variable-rate 
transactions, payments that will be determined based on application of 
an index and margin shall be disclosed based on a reasonably current 
index and margin.
    (iii) Envelope excluded. The requirements in paragraph (d)(6)(ii) of 
this section do not apply to an envelope in

[[Page 379]]

which an application or solicitation is mailed, or to a banner 
advertisement or pop-up advertisement linked to an application or 
solicitation provided electronically.
    (e) Alternative disclosures--television or radio advertisements. An 
advertisement made through television or radio stating any of the terms 
requiring additional disclosures under paragraphs (b)(1) or (d)(1) of 
this section may alternatively comply with paragraphs (b)(1) or (d)(1) 
of this section by stating the information required by paragraphs 
(b)(1)(ii) or (d)(1)(ii) of this section, as applicable, and listing a 
toll-free telephone number, or any telephone number that allows a 
consumer to reverse the phone charges when calling for information, 
along with a reference that such number may be used by consumers to 
obtain the additional cost information.
    (f) Misleading terms. An advertisement may not refer to an annual 
percentage rate as ``fixed,'' or use a similar term, unless the 
advertisement also specifies a time period that the rate will be fixed 
and the rate will not increase during that period, or if no such time 
period is provided, the rate will not increase while the plan is open.
    (g) Promotional rates and fees. (1) Scope. The requirements of this 
paragraph apply to any advertisement of an open-end (not home-secured) 
plan, including promotional materials accompanying applications or 
solicitations subject to Sec. 226.5a(c) or accompanying applications or 
solicitations subject to Sec. 226.5a(e).
    (2) Definitions. (i) Promotional rate means any annual percentage 
rate applicable to one or more balances or transactions on an open-end 
(not home-secured) plan for a specified period of time that is lower 
than the annual percentage rate that will be in effect at the end of 
that period on such balances or transactions.
    (ii) Introductory rate means a promotional rate offered in 
connection with the opening of an account.
    (iii) Promotional period means the maximum time period for which a 
promotional rate or promotional fee may be applicable.
    (iv) Promotional fee means a fee required to be disclosed under 
Sec. 226.6(b)(1) and (2) applicable to an open-end (not home-secured) 
plan, or to one or more balances or transactions on an open-end (not 
home-secured) plan, for a specified period of time that is lower than 
the fee that will be in effect at the end of that period for such plan 
or types of balances or transactions.
    (v) Introductory fee means a promotional fee offered in connection 
with the opening of an account.
    (3) Stating the term ``introductory''. If any annual percentage rate 
or fee that may be applied to the account is an introductory rate or 
introductory fee, the term introductory or intro must be in immediate 
proximity to each listing of the introductory rate or introductory fee 
in a written or electronic advertisement.
    (4) Stating the promotional period and post-promotional rate or fee. 
If any annual percentage rate that may be applied to the account is a 
promotional rate under paragraph (g)(2)(i) of this section or any fee 
that may be applied to the account is a promotional fee under paragraph 
(g)(2)(iv) of this section, the information in paragraphs (g)(4)(i) and, 
as applicable, (g)(4)(ii) or (iii) of this section must be stated in a 
clear and conspicuous manner in the advertisement. If the rate or fee is 
stated in a written or electronic advertisement, the information in 
paragraphs (g)(4)(i) and, as applicable, (g)(4)(ii) or (iii) of this 
section must also be stated in a prominent location closely proximate to 
the first listing of the promotional rate or promotional fee.
    (i) When the promotional rate or promotional fee will end;
    (ii) The annual percentage rate that will apply after the end of the 
promotional period. If such rate is variable, the annual percentage rate 
must comply with the accuracy standards in Sec. Sec. 226.5a(c)(2), 
226.5a(d)(3), 226.5a(e)(4), or 226.16(b)(1)(ii), as applicable. If such 
rate cannot be determined at the time disclosures are given because the 
rate depends at least in part on a later determination of the consumer's 
creditworthiness, the advertisement must disclose the specific rates or 
the range of rates that might apply; and
    (iii) The fee that will apply after the end of the promotional 
period.

[[Page 380]]

    (5) Envelope excluded. The requirements in paragraph (g)(4) of this 
section do not apply to an envelope or other enclosure in which an 
application or solicitation is mailed, or to a banner advertisement or 
pop-up advertisement, linked to an application or solicitation provided 
electronically.
    (h) Deferred interest or similar offers. (1) Scope. The requirements 
of this paragraph apply to any advertisement of an open-end credit plan 
not subject to Sec. 226.5b, including promotional materials 
accompanying applications or solicitations subject to Sec. 226.5a(c) or 
accompanying applications or solicitations subject to Sec. 226.5a(e).
    (2) Definitions. ``Deferred interest'' means finance charges, 
accrued on balances or transactions, that a consumer is not obligated to 
pay or that will be waived or refunded to a consumer if those balances 
or transactions are paid in full by a specified date. The maximum period 
from the date the consumer becomes obligated for the balance or 
transaction until the specified date by which the consumer must pay the 
balance or transaction in full in order to avoid finance charges, or 
receive a waiver or refund of finance charges, is the ``deferred 
interest period.'' ``Deferred interest'' does not include any finance 
charges the consumer avoids paying in connection with any recurring 
grace period.
    (3) Stating the deferred interest period. If a deferred interest 
offer is advertised, the deferred interest period must be stated in a 
clear and conspicuous manner in the advertisement. If the phrase ``no 
interest'' or similar term regarding the possible avoidance of interest 
obligations under the deferred interest program is stated, the term ``if 
paid in full'' must also be stated in a clear and conspicuous manner 
preceding the disclosure of the deferred interest period in the 
advertisement. If the deferred interest offer is included in a written 
or electronic advertisement, the deferred interest period and, if 
applicable, the term ``if paid in full'' must also be stated in 
immediate proximity to each statement of ``no interest,'' ``no 
payments,'' ``deferred interest,'' ``same as cash,'' or similar term 
regarding interest or payments during the deferred interest period.
    (4) Stating the terms of the deferred interest or similar offer. If 
any deferred interest offer is advertised, the information in paragraphs 
(h)(4)(i) and (h)(4)(ii) of this section must be stated in the 
advertisement, in language similar to Sample G-24 in appendix G to this 
part. If the deferred interest offer is included in a written or 
electronic advertisement, the information in paragraphs (h)(4)(i) and 
(h)(4)(ii) of this section must also be stated in a prominent location 
closely proximate to the first statement of ``no interest,'' ``no 
payments,'' ``deferred interest,'' ``same as cash,'' or similar term 
regarding interest or payments during the deferred interest period.
    (i) A statement that interest will be charged from the date the 
consumer becomes obligated for the balance or transaction subject to the 
deferred interest offer if the balance or transaction is not paid in 
full within the deferred interest period; and
    (ii) A statement, if applicable, that interest will be charged from 
the date the consumer incurs the balance or transaction subject to the 
deferred interest offer if the account is in default before the end of 
the deferred interest period.
    (5) Envelope excluded. The requirements in paragraph (h)(4) of this 
section do not apply to an envelope or other enclosure in which an 
application or solicitation is mailed, or to a banner advertisement or 
pop-up advertisement linked to an application or solicitation provided 
electronically.

[75 FR 7816, Feb. 22, 201, as amended at 76 FR 23002, Apr. 25, 2011]



                       Subpart C_Closed-End Credit



Sec. 226.17  General disclosure requirements.

    (a) Form of disclosures. (1) The creditor shall make the disclosures 
required by this subpart clearly and conspicuously in writing, in a form 
that the consumer may keep. The disclosures required by this subpart may 
be provided to the consumer in electronic form, subject to compliance 
with the consumer consent and other applicable provisions of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act) 
(15 U.S.C. 7001 et seq.). The

[[Page 381]]

disclosures required by Sec. Sec. 226.17(g), 226.19(b), and 226.24 may 
be provided to the consumer in electronic form without regard to the 
consumer consent or other provisions of the E-Sign Act in the 
circumstances set forth in those sections. The disclosures shall be 
grouped together, shall be segregated from everything else, and shall 
not contain any information not directly related \37\ to the disclosures 
required under Sec. 226.18 or Sec. 226.47.\38\ The itemization of the 
amount financed under Sec. 226.18(c)(1) must be separate from the other 
disclosures under Sec. 226.18, except for private education loan 
disclosures made in compliance with Sec. 226.47.
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    \37\ The disclosures may include an acknowledgment of receipt, the 
date of the transaction, and the consumer's name, address, and account 
number.
    \38\ The following disclosures may be made together with or 
separately from other required disclosures: the creditor's identity 
under Sec. 226.18(a), the variable rate example under Sec. 
226.18(f)(1)(iv), insurance or debt cancellation under Sec. 226.18(n), 
and certain security interest charges under Sec. 226.18(o).
---------------------------------------------------------------------------

    (2) Except for private education loan disclosures made in compliance 
with Sec. 226.47, the terms ``finance charge'' and ``annual percentage 
rate,'' when required to be disclosed under Sec. 226.18 (d) and (e) 
together with a corresponding amount or percentage rate, shall be more 
conspicuous than any other disclosure, except the creditor's identity 
under Sec. 226.18(a). For private education loan disclosures made in 
compliance with Sec. 226.47, the term ``annual percentage rate,'' and 
the corresponding percentage rate must be less conspicuous than the term 
``finance charge'' and corresponding amount under Sec. 226.18(d), the 
interest rate under Sec. Sec. 226.47(b)(1)(i) and (c)(1), and the 
notice of the right to cancel under Sec. 226.47(c)(4).
    (b) Time of disclosures. The creditor shall make disclosures before 
consummation of the transaction. In certain residential mortgage 
transactions, special timing requirements are set forth in Sec. 
226.19(a). In certain variable-rate transactions, special timing 
requirements for variable-rate disclosures are set forth in Sec. Sec. 
226.19(b) and 226.20(c). For private education loan disclosures made in 
compliance with Sec. 226.47, special timing requirements are set forth 
in Sec. 226.46(d). In certain transactions involving mail or telephone 
orders or a series of sales, the timing of disclosures may be delayed in 
accordance with paragraphs (g) and (h) of this section.
    (c) Basis of disclosures and use of estimates. (1) The disclosures 
shall reflect the terms of the legal obligation between the parties.
    (2)(i) If any information necessary for an accurate disclosure is 
unknown to the creditor, the creditor shall make the disclosure based on 
the best information reasonably available at the time the disclosure is 
provided to the consumer, and shall state clearly that the disclosure is 
an estimate.
    (ii) For a transaction in which a portion of the interest is 
determined on a per-diem basis and collected at consummation, any 
disclosure affected by the per-diem interest shall be considered 
accurate if the disclosure is based on the information known to the 
creditor at the time that the disclosure documents are prepared for 
consummation of the transaction.
    (3) The creditor may disregard the effects of the following in 
making calculations and disclosures.
    (i) That payments must be collected in whole cents.
    (ii) That dates of scheduled payments and advances may be changed 
because the scheduled date is not a business day.
    (iii) That months have different numbers of days.
    (iv) The occurrence of leap year.
    (4) In making calculations and disclosures, the creditor may 
disregard any irregularity in the first period that falls within the 
limits described below and any payment schedule irregularity that 
results from the irregular first period:
    (i) For transactions in which the term is less than 1 year, a first 
period not more than 6 days shorter or 13 days longer than a regular 
period;
    (ii) For transactions in which the term is at least 1 year and less 
than 10 years, a first period not more than 11 days shorter or 21 days 
longer than a regular period; and
    (iii) For transactions in which the term is at least 10 years, a 
first period

[[Page 382]]

shorter than or not more than 32 days longer than a regular period.
    (5) If an obligation is payable on demand, the creditor shall make 
the disclosures based on an assumed maturity of 1 year. If an alternate 
maturity date is stated in the legal obligation between the parties, the 
disclosures shall be based on that date.
    (6)(i) A series of advances under an agreement to extend credit up 
to a certain amount may be considered as one transaction.
    (ii) When a multiple-advance loan to finance the construction of a 
dwelling may be permanently financed by the same creditor, the 
construction phase and the permanent phase may be treated as either one 
transaction or more than one transaction.
    (d) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor must 
comply with the requirements that this regulation imposes on any or all 
of them. If there is more than one consumer, the disclosures may be made 
to any consumer who is primarily liable on the obligation. If the 
transaction is rescindable under Sec. 226.23, however, the disclosures 
shall be made to each consumer who has the right to rescind.
    (e) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor delivers the required 
disclosures, the inaccuracy is not a violation of this regulation, 
although new disclosures may be required under paragraph (f) of this 
section, Sec. 226.19, Sec. 226.20, or Sec. 226.48(c)(4).
    (f) Early disclosures. Except for private education loan disclosures 
made in compliance with Sec. 226.47, if disclosures required by this 
subpart are given before the date of consummation of a transaction and a 
subsequent event makes them inaccurate, the creditor shall disclose 
before consummation (subject to the provisions of Sec. 226.19(a)(2) and 
Sec. 226.19(a)(5)(iii)): \39\
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    \39\ [Reserved]
---------------------------------------------------------------------------

    (1) Any changed term unless the term was based on an estimate in 
accordance with Sec. 226.17(c)(2) and was labelled an estimate;
    (2) All changed terms, if the annual percentage rate at the time of 
consummation varies from the annual percentage rate disclosed earlier by 
more than \1/8\ of 1 percentage point in a regular transaction, or more 
than \1/4\ of 1 percentage point in an irregular transaction, as defined 
in Sec. 226.22(a).
    (g) Mail or telephone orders--delay in disclosures. Except for 
private education loan disclosures made in compliance with Sec. 226.47, 
if a creditor receives a purchase order or a request for an extension of 
credit by mail, telephone, or facsimile machine without face-to-face or 
direct telephone solicitation, the creditor may delay the disclosures 
until the due date of the first payment, if the following information 
for representative amounts or ranges of credit is made available in 
written form or in electronic form to the consumer or to the public 
before the actual purchase order or request:
    (1) The cash price or the principal loan amount.
    (2) The total sale price.
    (3) The finance charge.
    (4) The annual percentage rate, and if the rate may increase after 
consummation, the following disclosures:
    (i) The circumstances under which the rate may increase.
    (ii) Any limitations on the increase.
    (iii) The effect of an increase.
    (5) The terms of repayment.
    (h) Series of sales--delay in disclosures. If a credit sale is one 
of a series made under an agreement providing that subsequent sales may 
be added to an outstanding balance, the creditor may delay the required 
disclosures until the due date of the first payment for the current 
sale, if the following two conditions are met:
    (1) The consumer has approved in writing the annual percentage rate 
or rates, the range of balances to which they apply, and the method of 
treating any unearned finance charge on an existing balance.
    (2) The creditor retains no security interest in any property after 
the creditor has received payments equal to the cash price and any 
finance charge attributable to the sale of that property. For purposes 
of this provision, in the

[[Page 383]]

case of items purchased on different dates, the first purchased is 
deemed the first item paid for; in the case of items purchased on the 
same date, the lowest priced is deemed the first item paid for.
    (i) Interim student credit extensions. For transactions involving an 
interim credit extension under a student credit program for which an 
application is received prior to the mandatory compliance date of 
Sec. Sec. 226.46, 47, and 48, the creditor need not make the following 
disclosures: the finance charge under Sec. 226.18(d), the payment 
schedule under Sec. 226.18(g), the total of payments under Sec. 
226.18(h), or the total sale price under Sec. 226.18(j) at the time the 
credit is actually extended. The creditor must make complete disclosures 
at the time the creditor and consumer agree upon the repayment schedule 
for the total obligation. At that time, a new set of disclosures must be 
made of all applicable items under Sec. 226.18.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 52 FR 48670, Dec. 24, 
1987; 61 FR 49246, Sept. 19, 1996; 66 FR 17338, Mar. 30, 2001; 67 FR 
16982, Apr. 9, 2002; 72 FR 63474, Nov. 9, 2007; 73 FR 44600, July 30, 
2008; 74 FR 23301, May 19, 2009; 73 FR 44600, July 30, 2008; 74 FR 
41232, Aug. 14, 2009]



Sec. 226.18  Content of disclosures.

    For each transaction, the creditor shall disclose the following 
information as applicable:
    (a) Creditor. The identity of the creditor making the disclosures.
    (b) Amount financed. The amount financed, using that term, and a 
brief description such as the amount of credit provided to you or on 
your behalf. The amount financed is calculated by:
    (1) Determining the principal loan amount or the cash price 
(subtracting any downpayment);
    (2) Adding any other amounts that are financed by the creditor and 
are not part of the finance charge; and
    (3) Subtracting any prepaid finance charge.
    (c) Itemization of amount financed. (1) A separate written 
itemization of the amount financed, including: \40\
---------------------------------------------------------------------------

    \40\ Good faith estimates of settlement costs provided for 
transactions subject to the Real Estate Settlement Procedures Act (12 
U.S.C. 2601 et seq.) may be substituted for the disclosures required by 
paragraph (c) of this section.
---------------------------------------------------------------------------

    (i) The amount of any proceeds distributed directly to the consumer.
    (ii) The amount credited to the consumer's account with the 
creditor.
    (iii) Any amounts paid to other persons by the creditor on the 
consumer's behalf. The creditor shall identify those persons. \41\
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    \41\ The following payees may be described using generic or other 
general terms and need not be further identified: public officials or 
government agencies, credit reporting agencies, appraisers, and 
insurance companies.
---------------------------------------------------------------------------

    (iv) The prepaid finance charge.
    (2) The creditor need not comply with paragraph (c)(1) of this 
section if the creditor provides a statement that the consumer has the 
right to receive a written itemization of the amount financed, together 
with a space for the consumer to indicate whether it is desired, and the 
consumer does not request it.
    (d) Finance charge. The finance charge, using that term, and a brief 
description such as ``the dollar amount the credit will cost you.''
    (1) Mortgage loans. In a transaction secured by real property or a 
dwelling, the disclosed finance charge and other disclosures affected by 
the disclosed finance charge (including the amount financed and the 
annual percentage rate) shall be treated as accurate if the amount 
disclosed as the finance charge:
    (i) Is understated by no more than $100; or
    (ii) Is greater than the amount required to be disclosed.
    (2) Other credit. In any other transaction, the amount disclosed as 
the finance charge shall be treated as accurate if, in a transaction 
involving an amount financed of $1,000 or less, it is not more than $5 
above or below the amount required to be disclosed; or, in a transaction 
involving an amount financed of more than $1,000, it is not more than 
$10 above or below the amount required to be disclosed.
    (e) Annual percentage rate. The annual percentage rate, using that 
term, and a

[[Page 384]]

brief description such as ``the cost of your credit as a yearly rate.'' 
\42\
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    \42\ For any transaction involving a finance charge of $5 or less on 
an amount financed of $75 or less, or a finance charge of $7.50 or less 
on an amount financed of more than $75, the creditor need not disclose 
the annual percentage rate.
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    (f) Variable rate. (1) If the annual percentage rate may increase 
after consummation in a transaction not secured by the consumer's 
principal dwelling or in a transaction secured by the consumer's 
principal dwelling with a term of one year or less, the following 
disclosures: \43\
---------------------------------------------------------------------------

    \43\ Information provided in accordance with Sec. Sec. 226.18(f)(2) 
and 226.19(b) may be substituted for the disclosures required by 
paragraph (f)(1) of this section.
---------------------------------------------------------------------------

    (i) The circumstances under which the rate may increase.
    (ii) Any limitations on the increase.
    (iii) The effect of an increase.
    (iv) An example of the payment terms that would result from an 
increase.
    (2) If the annual percentage rate may increase after consummation in 
a transaction secured by the consumer's principal dwelling with a term 
greater than one year, the following disclosures:
    (i) The fact that the transaction contains a variable-rate feature.
    (ii) A statement that variable-rate disclosures have been provided 
earlier.
    (g) Payment schedule. Other than for a transaction that is subject 
to paragraph (s) of this section, the number, amounts, and timing of 
payments scheduled to repay the obligation.
    (1) In a demand obligation with no alternate maturity date, the 
creditor may comply with this paragraph by disclosing the due dates or 
payment periods of any scheduled interest payments for the first year.
    (2) In a transaction in which a series of payments varies because a 
finance charge is applied to the unpaid principal balance, the creditor 
may comply with this paragraph by disclosing the following information:
    (i) The dollar amounts of the largest and smallest payments in the 
series.
    (ii) A reference to the variations in the other payments in the 
series.
    (h) Total of payments. The total of payments, using that term, and a 
descriptive explanation such as ``the amount you will have paid when you 
have made all scheduled payments.'' \44\
---------------------------------------------------------------------------

    \44\ In any transaction involving a single payment, the creditor 
need not disclose the total of payments.
---------------------------------------------------------------------------

    (i) Demand feature. If the obligation has a demand feature, that 
fact shall be disclosed. When the disclosures are based on an assumed 
maturity of 1 year as provided in Sec. 226.17(c)(5), that fact shall 
also be disclosed.
    (j) Total sale price. In a credit sale, the total sale price, using 
that term, and a descriptive explanation (including the amount of any 
downpayment) such as ``the total price of your purchase on credit, 
including your downpayment of $----.'' The total sale price is the sum 
of the cash price, the items described in paragraph (b)(2), and the 
finance charge disclosed under paragraph (d) of this section.
    (k) Prepayment. (1) When an obligation includes a finance charge 
computed from time to time by application of a rate to the unpaid 
principal balance, a statement indicating whether or not a penalty may 
be imposed if the obligation is prepaid in full.
    (2) When an obligation includes a finance charge other than the 
finance charge described in paragraph (k)(1) of this section, a 
statement indicating whether or not the consumer is entitled to a rebate 
of any finance charge if the obligation is prepaid in full.
    (l) Late payment. Any dollar or percentage charge that may be 
imposed before maturity due to a late payment, other than a deferral or 
extension charge.
    (m) Security interest. The fact that the creditor has or will 
acquire a security interest in the property purchased as part of the 
transaction, or in other property identified by item or type.
    (n) Insurance and debt cancellation. The items required by Sec. 
226.4(d) in order to exclude certain insurance premiums and debt 
cancellation fees from the finance charge.
    (o) Certain security interest charges. The disclosures required by 
Sec. 226.4(e) in order to exclude from the finance charge certain fees 
prescribed by law or

[[Page 385]]

certain premiums for insurance in lieu of perfecting a security 
interest.
    (p) Contract reference. A statement that the consumer should refer 
to the appropriate contract document for information about nonpayment, 
default, the right to accelerate the maturity of the obligation, and 
prepayment rebates and penalties. At the creditor's option, the 
statement may also include a reference to the contract for further 
information about security interests and, in a residential mortgage 
transaction, about the creditor's policy regarding assumption of the 
obligation.
    (q) Assumption policy. In a residential mortgage transaction, a 
statement whether or not a subsequent purchaser of the dwelling from the 
consumer may be permitted to assume the remaining obligation on its 
original terms.
    (r) Required deposit. If the creditor requires the consumer to 
maintain a deposit as a condition of the specific transaction, a 
statement that the annual percentage rate does not reflect the effect of 
the required deposit. \45\
---------------------------------------------------------------------------

    \45\ A required deposit need not include, for example: (1) An escrow 
account for items such as taxes, insurance or repairs; (2) a deposit 
that earns not less than 5 percent per year; or (3) payments under a 
Morris Plan.
---------------------------------------------------------------------------

    (s) Interest rate and payment summary for mortgage transactions. For 
a closed-end transaction secured by real property or a dwelling, other 
than a transaction secured by a consumer's interest in a timeshare plan 
described in 11 U.S.C. 101(53D), the creditor shall disclose the 
following information about the interest rate and payments:
    (1) Form of disclosures. The information in paragraphs (s)(2)-(4) of 
this section shall be in the form of a table, with no more than five 
columns, with headings and format substantially similar to Model Clause 
H-4(E), H-4(F), H-4(G), or H-4(H) in appendix H to this part. The table 
shall contain only the information required in paragraphs (s)(2)-(4) of 
this section, shall be placed in a prominent location, and shall be in a 
minimum 10-point font.
    (2) Interest rates--(i) Amortizing loans. (A) For a fixed-rate 
mortgage, the interest rate at consummation.
    (B) For an adjustable-rate or step-rate mortgage--
    (1) The interest rate at consummation and the period of time until 
the first interest rate adjustment may occur, labeled as the 
``introductory rate and monthly payment'';
    (2) The maximum interest rate that may apply during the first five 
years after the date on which the first regular periodic payment will be 
due and the earliest date on which that rate may apply, labeled as 
``maximum during first five years''; and
    (3) The maximum interest rate that may apply during the life of the 
loan and the earliest date on which that rate may apply, labeled as 
``maximum ever.''
    (C) If the loan provides for payment increases as described in 
paragraph (s)(3)(i)(B) of this section, the interest rate in effect at 
the time the first such payment increase is scheduled to occur and the 
date on which the increase will occur, labeled as ``first adjustment'' 
if the loan is an adjustable-rate mortgage or, otherwise, labeled as 
``first increase.''
    (ii) Negative amortization loans. For a negative amortization loan--
    (A) The interest rate at consummation and, if it will adjust after 
consummation, the length of time until it will adjust, and the label 
``introductory'' or ``intro'';
    (B) The maximum interest rate that could apply when the consumer 
must begin making fully amortizing payments under the terms of the legal 
obligation;
    (C) If the minimum required payment will increase before the 
consumer must begin making fully amortizing payments, the maximum 
interest rate that could apply at the time of the first payment increase 
and the date the increase is scheduled to occur; and
    (D) If a second increase in the minimum required payment may occur 
before the consumer must begin making fully amortizing payments, the 
maximum interest rate that could apply at the time of the second payment 
increase and the date the increase is scheduled to occur.
    (iii) Introductory rate disclosure for amortizing adjustable-rate 
mortgages. For an amortizing adjustable-rate mortgage, if the interest 
rate at consummation is less than the fully-indexed rate,

[[Page 386]]

placed in a box directly beneath the table required by paragraph (s)(1) 
of this section, in a format substantially similar to Model Clause H-
4(I) in appendix H to this part--
    (A) The interest rate that applies at consummation and the period of 
time for which it applies;
    (B) A statement that, even if market rates do not change, the 
interest rate will increase at the first adjustment and a designation of 
the place in sequence of the month or year, as applicable, of such rate 
adjustment; and
    (C) The fully-indexed rate.
    (3) Payments for amortizing loans--(i) Principal and interest 
payments. If all periodic payments will be applied to accrued interest 
and principal, for each interest rate disclosed under paragraph 
(s)(2)(i) of this section--
    (A) The corresponding periodic principal and interest payment, 
labeled as ``principal and interest;''
    (B) If the periodic payment may increase without regard to an 
interest rate adjustment, the payment that corresponds to the first such 
increase and the earliest date on which the increase could occur;
    (C) If an escrow account will be established, an estimate of the 
amount of taxes and insurance, including any mortgage insurance, payable 
with each periodic payment; and
    (D) The sum of the amounts disclosed under paragraphs (s)(3)(i)(A) 
and (C) of this section or (s)(3)(i)(B) and (C) of this section, as 
applicable, labeled as ``total estimated monthly payment.''
    (ii) Interest-only payments. If the loan is an interest-only loan, 
for each interest rate disclosed under paragraph (s)(2)(i) of this 
section, the corresponding periodic payment and--
    (A) If the payment will be applied to only accrued interest, the 
amount applied to interest, labeled as ``interest payment,'' and a 
statement that none of the payment is being applied to principal;
    (B) If the payment will be applied to accrued interest and 
principal, an itemization of the amount of the first such payment 
applied to accrued interest and to principal, labeled as ``interest 
payment'' and ``principal payment,'' respectively;
    (C) The escrow information described in paragraph (s)(3)(i)(C) of 
this section; and
    (D) The sum of all amounts required to be disclosed under paragraphs 
(s)(3)(ii)(A) and (C) of this section or (s)(3)(ii)(B) and (C) of this 
section, as applicable, labeled as ``total estimated monthly payment.''
    (4) Payments for negative amortization loans. For negative 
amortization loans:
    (i)(A) The minimum periodic payment required until the first payment 
increase or interest rate increase, corresponding to the interest rate 
disclosed under paragraph (s)(2)(ii)(A) of this section;
    (B) The minimum periodic payment that would be due at the first 
payment increase and the second, if any, corresponding to the interest 
rates described in paragraphs (s)(2)(ii)(C) and (D) of this section; and
    (C) A statement that the minimum payment pays only some interest, 
does not repay any principal, and will cause the loan amount to 
increase;
    (ii) The fully amortizing periodic payment amount at the earliest 
time when such a payment must be made, corresponding to the interest 
rate disclosed under paragraph (s)(2)(ii)(B) of this section; and
    (iii) If applicable, in addition to the payments in paragraphs 
(s)(4)(i) and (ii) of this section, for each interest rate disclosed 
under paragraph (s)(2)(ii) of this section, the amount of the fully 
amortizing periodic payment, labeled as the ``full payment option,'' and 
a statement that these payments pay all principal and all accrued 
interest.
    (5) Balloon payments. (i) Except as provided in paragraph (s)(5)(ii) 
of this section, if the transaction will require a balloon payment, 
defined as a payment that is more than two times a regular periodic 
payment, the balloon payment shall be disclosed separately from other 
periodic payments disclosed in the table under this paragraph (s), 
outside the table and in a manner substantially similar to Model Clause 
H-4(J) in appendix H to this part.
    (ii) If the balloon payment is scheduled to occur at the same time 
as another payment required to be disclosed in the table pursuant to 
paragraph (s)(3) or (s)(4) of this section, then the

[[Page 387]]

balloon payment must be disclosed in the table.
    (6) Special disclosures for loans with negative amortization. For a 
negative amortization loan, the following information, in close 
proximity to the table required in paragraph (s)(1) of this section, 
with headings, content, and format substantially similar to Model Clause 
H-4(G) in appendix H to this part:
    (i) The maximum interest rate, the shortest period of time in which 
such interest rate could be reached, the amount of estimated taxes and 
insurance included in each payment disclosed, and a statement that the 
loan offers payment options, two of which are shown.
    (ii) The dollar amount of the increase in the loan's principal 
balance if the consumer makes only the minimum required payments for the 
maximum possible time and the earliest date on which the consumer must 
begin making fully amortizing payments, assuming that the maximum 
interest rate is reached at the earliest possible time.
    (7) Definitions. For purposes of this Sec. 226.18(s):
    (i) The term ``adjustable-rate mortgage'' means a transaction 
secured by real property or a dwelling for which the annual percentage 
rate may increase after consummation.
    (ii) The term ``step-rate mortgage'' means a transaction secured by 
real property or a dwelling for which the interest rate will change 
after consummation, and the rates that will apply and the periods for 
which they will apply are known at consummation.
    (iii) The term ``fixed-rate mortgage'' means a transaction secured 
by real property or a dwelling that is not an adjustable-rate mortgage 
or a step-rate mortgage.
    (iv) The term ``interest-only'' means that, under the terms of the 
legal obligation, one or more of the periodic payments may be applied 
solely to accrued interest and not to loan principal; an ``interest-only 
loan'' is a loan that permits interest-only payments.
    (v) The term ``amortizing loan'' means a loan in which payment of 
the periodic payments does not result in an increase in the principal 
balance under the terms of the legal obligation; the term ``negative 
amortization'' means payment of periodic payments that will result in an 
increase in the principal balance under the terms of the legal 
obligation; the term ``negative amortization loan'' means a loan, other 
than a reverse mortgage subject to Sec. 226.33, that provides for a 
minimum periodic payment that covers only a portion of the accrued 
interest, resulting in negative amortization.
    (vi) The term ``fully-indexed rate'' means the interest rate 
calculated using the index value and margin at the time of consummation.
    (t) ``No-guarantee-to-refinance'' statement--(1) Disclosure. For a 
closed-end transaction secured by real property or a dwelling, other 
than a transaction secured by a consumer's interest in a timeshare plan 
described in 11 U.S.C. 101(53D), the creditor shall disclose a statement 
that there is no guarantee the consumer can refinance the transaction to 
lower the interest rate or periodic payments.
    (2) Format. The statement required by paragraph (t)(1) of this 
section must be in a form substantially similar to Model Clause H-4(K) 
in appendix H to this part.

[46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981, as amended at 52 
FR 48670, Dec. 24, 1987; 61 FR 49246, Sept. 19, 1996; 75 FR 58482, Sept. 
24, 2010; 75 FR 81841, Dec. 29, 2010]



Sec. 226.19  Certain mortgage and variable-rate transactions.

    (a) Mortgage transactions subject to RESPA--(1)(i) Time of 
disclosures. In a mortgage transaction subject to the Real Estate 
Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is secured by 
the consumer's dwelling, other than a home equity line of credit subject 
to Sec. 226.5b or mortgage transaction subject to paragraph (a)(5) of 
this section, the creditor shall make good faith estimates of the 
disclosures required by Sec. 226.18 and shall deliver or place them in 
the mail not later than the third business day after the creditor 
receives the consumer's written application.
    (ii) Imposition of fees. Except as provided in paragraph (a)(1)(iii) 
of this section, neither a creditor nor any other person may impose a 
fee on a consumer

[[Page 388]]

in connection with the consumer's application for a mortgage transaction 
subject to paragraph (a)(1)(i) of this section before the consumer has 
received the disclosures required by paragraph (a)(1)(i) of this 
section. If the disclosures are mailed to the consumer, the consumer is 
considered to have received them three business days after they are 
mailed.
    (iii) Exception to fee restriction. A creditor or other person may 
impose a fee for obtaining the consumer's credit history before the 
consumer has received the disclosures required by paragraph (a)(1)(i) of 
this section, provided the fee is bona fide and reasonable in amount.
    (2) Waiting periods for early disclosures and corrected disclosures. 
(i) The creditor shall deliver or place in the mail the good faith 
estimates required by paragraph (a)(1)(i) of this section not later than 
the seventh business day before consummation of the transaction.
    (ii) If the annual percentage rate disclosed under paragraph 
(a)(1)(i) of this section becomes inaccurate, as defined in Sec. 
226.22, the creditor shall provide corrected disclosures with all 
changed terms. The consumer must receive the corrected disclosures no 
later than three business days before consummation. If the corrected 
disclosures are mailed to the consumer or delivered to the consumer by 
means other than delivery in person, the consumer is deemed to have 
received the corrected disclosures three business days after they are 
mailed or delivered.
    (3) Consumer's waiver of waiting period before consummation. If the 
consumer determines that the extension of credit is needed to meet a 
bona fide personal financial emergency, the consumer may modify or waive 
the seven-business-day waiting period or the three-business-day waiting 
period required by paragraph (a)(2) of this section, after receiving the 
disclosures required by Sec. 226.18. To modify or waive a waiting 
period, the consumer shall give the creditor a dated written statement 
that describes the emergency, specifically modifies or waives the 
waiting period, and bears the signature of all the consumers who are 
primarily liable on the legal obligation. Printed forms for this purpose 
are prohibited.
    (4) Notice. Disclosures made pursuant to paragraph (a)(1) or 
paragraph (a)(2) of this section shall contain the following statement: 
``You are not required to complete this agreement merely because you 
have received these disclosures or signed a loan application.'' The 
disclosure required by this paragraph shall be grouped together with the 
disclosures required by paragraphs (a)(1) or (a)(2) of this section.
    (5) Timeshare plans. In a mortgage transaction subject to the Real 
Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is 
secured by a consumer's interest in a timeshare plan described in 11 
U.S.C. 101(53(D)):
    (i) The requirements of paragraphs (a)(1) through (a)(4) of this 
section do not apply;
    (ii) The creditor shall make good faith estimates of the disclosures 
required by Sec. 226.18 before consummation, or shall deliver or place 
them in the mail not later than three business days after the creditor 
receives the consumer's written application, whichever is earlier; and
    (iii) If the annual percentage rate at the time of consummation 
varies from the annual percentage rate disclosed under paragraph 
(a)(5)(ii) of this section by more than \1/8\ of 1 percentage point in a 
regular transaction or more than \1/4\ of 1 percentage point in an 
irregular transaction, as defined in Sec. 226.22, the creditor shall 
disclose all the changed terms no later than consummation or settlement.
    (b) Certain variable-rate transactions.\45a\ If the annual 
percentage rate may increase after consummation in a transaction secured 
by the consumer's principal dwelling with a term greater than one year, 
the following disclosures must be provided at the time an application 
form is provided or before the consumer pays a non-refundable fee, 
whichever is earlier: \45b\
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    \45a\ Information provided in accordance with variable-rate 
regulations of other federal agencies may be substituted for the 
disclosures required by paragraph (b) of this section.
    \45b\ Disclosures may be delivered or placed in the mail not later 
than three business days following receipt of a consumer's application 
when the application reaches the creditor by telephone, or through an 
intermediary agent or broker.

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[[Page 389]]

    (1) The booklet titled Consumer Handbook on Adjustable Rate 
Mortgages published by the Board and the Federal Home Loan Bank Board, 
or a suitable substitute.
    (2) A loan program disclosure for each variable-rate program in 
which the consumer expresses an interest. The following disclosures, as 
applicable, shall be provided:
    (i) The fact that the interest rate, payment, or term of the loan 
can change.
    (ii) The index or formula used in making adjustments, and a source 
of information about the index or formula.
    (iii) An explanation of how the interest rate and payment will be 
determined, including an explanation of how the index is adjusted, such 
as by the addition of a margin.
    (iv) A statement that the consumer should ask about the current 
margin value and current interest rate.
    (v) The fact that the interest rate will be discounted, and a 
statement that the consumer should ask about the amount of the interest 
rate discount.
    (vi) The frequency of interest rate and payment changes.
    (vii) Any rules relating to changes in the index, interest rate, 
payment amount, and outstanding loan balance including, for example, an 
explanation of interest rate or payment limitations, negative 
amortization, and interest rate carryover.
    (viii) At the option of the creditor, either of the following:
    (A) A historical example, based on a $10,000 loan amount, 
illustrating how payments and the loan balance would have been affected 
by interest rate changes implemented according to the terms of the loan 
program disclosure. The example shall reflect the most recent 15 years 
of index values. The example shall reflect all significant loan program 
terms, such as negative amortization, interest rate carryover, interest 
rate discounts, and interest rate and payment limitations, that would 
have been affected by the index movement during the period.
    (B) The maximum interest rate and payment for a $10,000 loan 
originated at the initial interest rate (index value plus margin, 
adjusted by the amount of any discount or premium) in effect as of an 
identified month and year for the loan program disclosure assuming the 
maximum periodic increases in rates and payments under the program; and 
the initial interest rate and payment for that loan and a statement that 
the periodic payment may increase or decrease substantially depending on 
changes in the rate.
    (ix) An explanation of how the consumer may calculate the payments 
for the loan amount to be borrowed based on either:
    (A) The most recent payment shown in the historical example in 
paragraph (b)(2)(viii)(A) of this section; or
    (B) The initial interest rate used to calculate the maximum interest 
rate and payment in paragraph (b)(2)(viii)(B) of this section.
    (x) The fact that the loan program contains a demand feature.
    (xi) The type of information that will be provided in notices of 
adjustments and the timing of such notices.
    (xii) A statement that disclosure forms are available for the 
creditor's other variable-rate loan programs.
    (c) Electronic disclosures. For an application that is accessed by 
the consumer in electronic form, the disclosures required by paragraph 
(b) of this section may be provided to the consumer in electronic form 
on or with the application.

[Reg. Z, 52 FR 48670, Dec. 24, 1987; 53 FR 467, Jan. 7, 1988, as amended 
at 61 FR 49246, Sept. 19, 1996; 62 FR 63443, Dec. 1, 1997; 72 FR 63474, 
Nov. 9, 2007; 73 FR 44600, July 30, 2008; 73 FR 44600, July 30, 2008; 74 
FR 23301, May 19, 2009]



Sec. 226.20  Subsequent disclosure requirements.

    (a) Refinancings. A refinancing occurs when an existing obligation 
that was subject to this subpart is satisfied and replaced by a new 
obligation undertaken by the same consumer. A refinancing is a new 
transaction requiring new disclosures to the consumer. The new finance 
charge shall include any unearned portion of the old finance

[[Page 390]]

charge that is not credited to the existing obligation. The following 
shall not be treated as a refinancing:
    (1) A renewal of a single payment obligation with no change in the 
original terms.
    (2) A reduction in the annual percentage rate with a corresponding 
change in the payment schedule.
    (3) An agreement involving a court proceeding.
    (4) A change in the payment schedule or a change in collateral 
requirements as a result of the consumer's default or delinquency, 
unless the rate is increased, or the new amount financed exceeds the 
unpaid balance plus earned finance charge and premiums for continuation 
of insurance of the types described in Sec. 226.4(d).
    (5) The renewal of optional insurance purchased by the consumer and 
added to an existing transaction, if disclosures relating to the initial 
purchase were provided as required by this subpart.
    (b) Assumptions. An assumption occurs when a creditor expressly 
agrees in writing with a subsequent consumer to accept that consumer as 
a primary obligor on an existing residential mortgage transaction. 
Before the assumption occurs, the creditor shall make new disclosures to 
the subsequent consumer, based on the remaining obligation. If the 
finance charge originally imposed on the existing obligation was an add-
on or discount finance charge, the creditor need only disclose:
    (1) The unpaid balance of the obligation assumed.
    (2) The total charges imposed by the creditor in connection with the 
assumption.
    (3) The information required to be disclosed under Sec. 226.18(k), 
(l), (m), and (n).
    (4) The annual percentage rate originally imposed on the obligation.
    (5) The payment schedule under Sec. 226.18(g) and the total of 
payments under Sec. 226.18(h) based on the remaining obligation.
    (c) Variable-rate adjustments. \45c\ An adjustment to the interest 
rate with or without a corresponding adjustment to the payment in a 
variable-rate transaction subject to Sec. 226.19(b) is an event 
requiring new disclosures to the consumer. At least once each year 
during which an interest rate adjustment is implemented without an 
accompanying payment change, and at least 25, but no more than 120, 
calendar days before a payment at a new level is due, the following 
disclosures, as applicable, must be delivered or placed in the mail:
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    \45c\ Information provided in accordance with variable-rate 
subsequent disclosure regulations of other federal agencies may be 
substituted for the disclosure required by paragraph (c) of this 
section.
---------------------------------------------------------------------------

    (1) The current and prior interest rates.
    (2) The index values upon which the current and prior interest rates 
are based.
    (3) The extent to which the creditor has foregone any increase in 
the interest rate.
    (4) The contractual effects of the adjustment, including the payment 
due after the adjustment is made, and a statement of the loan balance.
    (5) The payment, if different from that referred to in paragraph 
(c)(4) of this section, that would be required to fully amortize the 
loan at the new interest rate over the remainder of the loan term.

[46 FR 20892, Apr. 7, 1981, as amended at 52 FR 48671, Dec. 24, 1987]



Sec. 226.21  Treatment of credit balances.

    When a credit balance in excess of $1 is created in connection with 
a transaction (through transmittal of funds to a creditor in excess of 
the total balance due on an account, through rebates of unearned finance 
charges or insurance premiums, or through amounts otherwise owed to or 
held for the benefit of a consumer), the creditor shall:
    (a) Credit the amount of the credit balance to the consumer's 
account;
    (b) Refund any part of the remaining credit balance, upon the 
written request of the consumer; and
    (c) Make a good faith effort to refund to the consumer by cash, 
check, or money order, or credit to a deposit account of the consumer, 
any part of the credit balance remaining in the account for more than 6 
months, except that no further action is required if the consumer's 
current location is not

[[Page 391]]

known to the creditor and cannot be traced through the consumer's last 
known address or telephone number.



Sec. 226.22  Determination of annual percentage rate.

    (a) Accuracy of annual percentage rate. (1) The annual percentage 
rate is a measure of the cost of credit, expressed as a yearly rate, 
that relates the amount and timing of value received by the consumer to 
the amount and timing of payments made. The annual percentage rate shall 
be determined in accordance with either the actuarial method or the 
United States Rule method. Explanations, equations and instructions for 
determining the annual percentage rate in accordance with the actuarial 
method are set forth in appendix J to this regulation. \45d\
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    \45d\ An error in disclosure of the annual percentage rate or 
finance charge shall not, in itself, be considered a violation of this 
regulation if: (1) The error resulted from a corresponding error in a 
calculation tool used in good faith by the creditor; and (2) upon 
discovery of the error, the creditor promptly discontinues use of that 
calculation tool for disclosure purposes and notifies the Board in 
writing of the error in the calculation tool.
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    (2) As a general rule, the annual percentage rate shall be 
considered accurate if it is not more than \1/8\ of 1 percentage point 
above or below the annual percentage rate determined in accordance with 
paragraph (a)(1) of this section.
    (3) In an irregular transaction, the annual percentage rate shall be 
considered accurate if it is not more than \1/4\ of 1 percentage point 
above or below the annual percentage rate determined in accordance with 
paragraph (a)(1) of this section. \46\
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    \46\ For purposes of paragraph (a)(3) of this section, an irregular 
transaction is one that includes one or more of the following features: 
multiple advances, irregular payment periods, or irregular payment 
amounts (other than an irregular first period or an irregular first or 
final payment).
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    (4) Mortgage loans. If the annual percentage rate disclosed in a 
transaction secured by real property or a dwelling varies from the 
actual rate determined in accordance with paragraph (a)(1) of this 
section, in addition to the tolerances applicable under paragraphs 
(a)(2) and (3) of this section, the disclosed annual percentage rate 
shall also be considered accurate if:
    (i) The rate results from the disclosed finance charge; and
    (ii)(A) The disclosed finance charge would be considered accurate 
under Sec. 226.18(d)(1); or
    (B) For purposes of rescission, if the disclosed finance charge 
would be considered accurate under Sec. 226.23(g) or (h), whichever 
applies.
    (5) Additional tolerance for mortgage loans. In a transaction 
secured by real property or a dwelling, in addition to the tolerances 
applicable under paragraphs (a)(2) and (3) of this section, if the 
disclosed finance charge is calculated incorrectly but is considered 
accurate under Sec. 226.18(d)(1) or Sec. 226.23(g) or (h), the 
disclosed annual percentage rate shall be considered accurate:
    (i) If the disclosed finance charge is understated, and the 
disclosed annual percentage rate is also understated but it is closer to 
the actual annual percentage rate than the rate that would be considered 
accurate under paragraph (a)(4) of this section;
    (ii) If the disclosed finance charge is overstated, and the 
disclosed annual percentage rate is also overstated but it is closer to 
the actual annual percentage rate than the rate that would be considered 
accurate under paragraph (a)(4) of this section.
    (b) Computation tools. (1) The Regulation Z Annual Percentage Rate 
Tables produced by the Board may be used to determine the annual 
percentage rate, and any rate determined from those tables in accordance 
with the accompanying instructions complies with the requirements of 
this section. Volume I of the tables applies to single advance 
transactions involving up to 480 monthly payments or 104 weekly 
payments. It may be used for regular transactions and for transactions 
with any of the following irregularities: an irregular first period, an 
irregular first payment, and an irregular final payment. Volume II of 
the tables applies to transactions involving multiple advances and any 
type of payment or period irregularity.

[[Page 392]]

    (2) Creditors may use any other computation tool in determining the 
annual percentage rate if the rate so determined equals the rate 
determined in accordance with appendix J, within the degree of accuracy 
set forth in paragraph (a) of this section.
    (c) Single add-on rate transactions. If a single add-on rate is 
applied to all transactions with maturities up to 60 months and if all 
payments are equal in amount and period, a single annual percentage rate 
may be disclosed for all those transactions, so long as it is the 
highest annual percentage rate for any such transaction.
    (d) Certain transactions involving ranges of balances. For purposes 
of disclosing the annual percentage rate referred to in Sec. 
226.17(g)(4) (Mail or telephone orders--delay in disclosures) and (h) 
(Series of sales--delay in disclosures), if the same finance charge is 
imposed on all balances within a specified range of balances, the annual 
percentage rate computed for the median balance may be disclosed for all 
the balances. However, if the annual percentage rate computed for the 
median balance understates the annual percentage rate computed for the 
lowest balance by more than 8 percent of the latter rate, the annual 
percentage rate shall be computed on whatever lower balance will produce 
an annual percentage rate that does not result in an understatement of 
more than 8 percent of the rate determined on the lowest balance.

[46 FR 20892, Apr. 7, 1981, as amended at 47 FR 756, Jan. 7, 1982; 48 FR 
14886, Apr. 6, 1983; 61 FR 49246, Sept. 19, 1996]



Sec. 226.23  Right of rescission.

    (a) Consumer's right to rescind. (1) In a credit transaction in 
which a security interest is or will be retained or acquired in a 
consumer's principal dwelling, each consumer whose ownership interest is 
or will be subject to the security interest shall have the right to 
rescind the transaction, except for transactions described in paragraph 
(f) of this section. \47\
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    \47\ For purposes of this section, the addition to an existing 
obligation of a security interest in a consumer's principal dwelling is 
a transaction. The right of rescission applies only to the addition of 
the security interest and not the existing obligation. The creditor 
shall deliver the notice required by paragraph (b) of this section but 
need not deliver new material disclosures. Delivery of the required 
notice shall begin the rescission period.
---------------------------------------------------------------------------

    (2) To exercise the right to rescind, the consumer shall notify the 
creditor of the rescission by mail, telegram or other means of written 
communication. Notice is considered given when mailed, when filed for 
telegraphic transmission or, if sent by other means, when delivered to 
the creditor's designated place of business.
    (3) The consumer may exercise the right to rescind until midnight of 
the third business day following consummation, delivery of the notice 
required by paragraph (b) of this section, or delivery of all material 
disclosures, \48\ whichever occurs last. If the required notice or 
material disclosures are not delivered, the right to rescind shall 
expire 3 years after consummation, upon transfer of all of the 
consumer's interest in the property, or upon sale of the property, 
whichever occurs first. In the case of certain administrative 
proceedings, the rescission period shall be extended in accordance with 
section 125(f) of the Act.
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    \48\ The term `material disclosures' means the required disclosures 
of the annual percentage rate, the finance charge, the amount financed, 
the total of payments, the payment schedule, and the disclosures and 
limitations referred to in Sec. Sec. 226.32(c) and (d) and 
226.35(b)(2).
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    (4) When more than one consumer in a transaction has the right to 
rescind, the exercise of the right by one consumer shall be effective as 
to all consumers.
    (b)(1) Notice of right to rescind. In a transaction subject to 
rescission, a creditor shall deliver two copies of the notice of the 
right to rescind to each consumer entitled to rescind (one copy to each 
if the notice is delivered in electronic form in accordance with the 
consumer consent and other applicable provisions of the E-Sign Act). The 
notice shall be on a separate document that identifies the transaction 
and shall clearly and conspicuously disclose the following:

[[Page 393]]

    (i) The retention or acquisition of a security interest in the 
consumer's principal dwelling.
    (ii) The consumer's right to rescind the transaction.
    (iii) How to exercise the right to rescind, with a form for that 
purpose, designating the address of the creditor's place of business.
    (iv) The effects of rescission, as described in paragraph (d) of 
this section.
    (v) The date the rescission period expires.
    (2) Proper form of notice. To satisfy the disclosure requirements of 
paragraph (b)(1) of this section, the creditor shall provide the 
appropriate model form in appendix H of this part or a substantially 
similar notice.
    (c) Delay of creditor's performance. Unless a consumer waives the 
right of rescission under paragraph (e) of this section, no money shall 
be disbursed other than in escrow, no services shall be performed and no 
materials delivered until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not rescinded.
    (d) Effects of rescission. (1) When a consumer rescinds a 
transaction, the security interest giving rise to the right of 
rescission becomes void and the consumer shall not be liable for any 
amount, including any finance charge.
    (2) Within 20 calendar days after receipt of a notice of rescission, 
the creditor shall return any money or property that has been given to 
anyone in connection with the transaction and shall take any action 
necessary to reflect the termination of the security interest.
    (3) If the creditor has delivered any money or property, the 
consumer may retain possession until the creditor has met its obligation 
under paragraph (d)(2) of this section. When the creditor has complied 
with that paragraph, the consumer shall tender the money or property to 
the creditor or, where the latter would be impracticable or inequitable, 
tender its reasonable value. At the consumer's option, tender of 
property may be made at the location of the property or at the 
consumer's residence. Tender of money must be made at the creditor's 
designated place of business. If the creditor does not take possession 
of the money or property within 20 calendar days after the consumer's 
tender, the consumer may keep it without further obligation.
    (4) The procedures outlined in paragraphs (d) (2) and (3) of this 
section may be modified by court order.
    (e) Consumer's waiver of right to rescind. (1) The consumer may 
modify or waive the right to rescind if the consumer determines that the 
extension of credit is needed to meet a bona fide personal financial 
emergency. To modify or waive the right, the consumer shall give the 
creditor a dated written statement that describes the emergency, 
specifically modifies or waives the right to rescind, and bears the 
signature of all the consumers entitled to rescind. Printed forms for 
this purpose are prohibited, except as provided in paragraph (e)(2) of 
this section.
    (2) The need of the consumer to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1993, pursuant to 42 U.S.C. 5170, to be a 
major disaster area because of severe storms and flooding in the 
Midwest. \48a\ In this instance, creditors may use printed forms for the 
consumer to waive the right to rescind. This exemption to paragraph 
(e)(1) of this section shall expire one year from the date an area was 
declared a major disaster.
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    \48a\ A list of the affected areas will be maintained by the Board.
---------------------------------------------------------------------------

    (3) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1994 to be a major disaster area, pursuant 
to 42 U.S.C. 5170, because of severe storms and flooding in the South. 
\48b\ In this instance, creditors may use printed forms for the consumer 
to waive the right to rescind. This exemption to paragraph (e)(1) of 
this section shall expire one year from

[[Page 394]]

the date an area was declared a major disaster.
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    \48b\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include parts of Alabama, Florida, and 
Georgia.
---------------------------------------------------------------------------

    (4) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during October 1994 to be a major disaster area, pursuant to 42 U.S.C. 
5170, because of severe storms and flooding in Texas. \48c\ In this 
instance, creditors may use printed forms for the consumer to waive the 
right to rescind. This exemption to paragraph (e)(1) of this section 
shall expire one year from the date an area was declared a major 
disaster.
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    \48c\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include the following counties in Texas: 
Angelina, Austin, Bastrop, Brazos, Brazoria, Burleson, Chambers, 
Fayette, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jackson, 
Jasper, Jefferson, Lee, Liberty, Madison, Matagorda, Montgomery, 
Nacagdoches, Orange, Polk, San Augustine, San Jacinto, Shelby, Trinity, 
Victoria, Washington, Waller, Walker, and Wharton.
---------------------------------------------------------------------------

    (f) Exempt transactions. The right to rescind does not apply to the 
following:
    (1) A residential mortgage transaction.
    (2) A refinancing or consolidation by the same creditor of an 
extension of credit already secured by the consumer's principal 
dwelling. The right of rescission shall apply, however, to the extent 
the new amount financed exceeds the unpaid principal balance, any earned 
unpaid finance charge on the existing debt, and amounts attributed 
solely to the costs of the refinancing or consolidation.
    (3) A transaction in which a state agency is a creditor.
    (4) An advance, other than an initial advance, in a series of 
advances or in a series of single-payment obligations that is treated as 
a single transaction under Sec. 226.17(c)(6), if the notice required by 
paragraph (b) of this section and all material disclosures have been 
given to the consumer.
    (5) A renewal of optional insurance premiums that is not considered 
a refinancing under Sec. 226.20(a)(5).
    (g) Tolerances for accuracy--(1) One-half of 1 percent tolerance. 
Except as provided in paragraphs (g)(2) and (h)(2) of this section, the 
finance charge and other disclosures affected by the finance charge 
(such as the amount financed and the annual percentage rate) shall be 
considered accurate for purposes of this section if the disclosed 
finance charge:
    (i) is understated by no more than \1/2\ of 1 percent of the face 
amount of the note or $100, whichever is greater; or
    (ii) is greater than the amount required to be disclosed.
    (2) One percent tolerance. In a refinancing of a residential 
mortgage transaction with a new creditor (other than a transaction 
covered by Sec. 226.32), if there is no new advance and no 
consolidation of existing loans, the finance charge and other 
disclosures affected by the finance charge (such as the amount financed 
and the annual percentage rate) shall be considered accurate for 
purposes of this section if the disclosed finance charge:
    (i) is understated by no more than 1 percent of the face amount of 
the note or $100, whichever is greater; or
    (ii) is greater than the amount required to be disclosed.
    (h) Special rules for foreclosures--(1) Right to rescind. After the 
initiation of foreclosure on the consumer's principal dwelling that 
secures the credit obligation, the consumer shall have the right to 
rescind the transaction if:
    (i) A mortgage broker fee that should have been included in the 
finance charge was not included; or
    (ii) The creditor did not provide the properly completed appropriate 
model form in appendix H of this part, or a substantially similar notice 
of rescission.
    (2) Tolerance for disclosures. After the initiation of foreclosure 
on the consumer's principal dwelling that secures the credit obligation, 
the finance charge and other disclosures affected by the finance charge 
(such as the amount financed and the annual percentage rate) shall be 
considered accurate for purposes of this section if the disclosed 
finance charge:
    (i) is understated by no more than $35; or

[[Page 395]]

    (ii) is greater than the amount required to be disclosed.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 51 FR 45299, Dec. 18, 
1986; 58 FR 40583, July 29, 1993; 59 FR 40204, Aug. 5, 1994; 59 FR 
63715, Dec. 9, 1994; 60 FR 15471, Mar. 24, 1995; 61 FR 49247, Sept. 19, 
1996; 66 FR 17338, Mar. 30, 2001; 72 FR 63474, Nov. 9, 2007; 73 FR 
44601, July 24, 2008]



Sec. 226.24  Advertising.

    (a) Actually available terms. If an advertisement for credit states 
specific credit terms, it shall state only those terms that actually are 
or will be arranged or offered by the creditor.
    (b) Clear and conspicuous standard. Disclosures required by this 
section shall be made clearly and conspicuously.
    (c) Advertisement of rate of finance charge. If an advertisement 
states a rate of finance charge, it shall state the rate as an ``annual 
percentage rate,'' using that term. If the annual percentage rate may be 
increased after consummation, the advertisement shall state that fact. 
If an advertisement is for credit not secured by a dwelling, the 
advertisement shall not state any other rate, except that a simple 
annual rate or periodic rate that is applied to an unpaid balance may be 
stated in conjunction with, but not more conspicuously than, the annual 
percentage rate. If an advertisement is for credit secured by a 
dwelling, the advertisement shall not state any other rate, except that 
a simple annual rate that is applied to an unpaid balance may be stated 
in conjunction with, but not more conspicuously than, the annual 
percentage rate.
    (d) Advertisement of terms that require additional disclosures--(1) 
Triggering terms. If any of the following terms is set forth in an 
advertisement, the advertisement shall meet the requirements of 
paragraph (d)(2) of this section:
    (i) The amount or percentage of any downpayment.
    (ii) The number of payments or period of repayment.
    (iii) The amount of any payment.
    (iv) The amount of any finance charge.
    (2) Additional terms. An advertisement stating any of the terms in 
paragraph (d)(1) of this section shall state the following terms,\49\ as 
applicable (an example of one or more typical extensions of credit with 
a statement of all the terms applicable to each may be used):
---------------------------------------------------------------------------

    \49\ [Reserved]
---------------------------------------------------------------------------

    (i) The amount or percentage of the downpayment.
    (ii) The terms of repayment, which reflect the repayment obligations 
over the full term of the loan, including any balloon payment.
    (iii) The ``annual percentage rate,'' using that term, and, if the 
rate may be increased after consummation, that fact.
    (e) Catalogs or other multiple-page advertisements; electronic 
advertisements--(1) If a catalog or other multiple-page advertisement, 
or an electronic advertisement (such as an advertisement appearing on an 
Internet Web site), gives information in a table or schedule in 
sufficient detail to permit determination of the disclosures required by 
paragraph (d)(2) of this section, it shall be considered a single 
advertisement if--
    (i) The table or schedule is clearly and conspicuously set forth; 
and
    (ii) Any statement of the credit terms in paragraph (d)(1) of this 
section appearing anywhere else in the catalog or advertisement clearly 
refers to the page or location where the table or schedule begins.
    (2) A catalog or other multiple-page advertisement or an electronic 
advertisement (such as an advertisement appearing on an Internet Web 
site) complies with paragraph (d)(2) of this section if the table or 
schedule of terms includes all appropriate disclosures for a 
representative scale of amounts up to the level of the more commonly 
sold higher-priced property or services offered.
    (f) Disclosure of rates and payments in advertisements for credit 
secured by a dwelling--(1) Scope. The requirements of this paragraph 
apply to any advertisement for credit secured by a dwelling, other than 
television or radio advertisements, including promotional materials 
accompanying applications.
    (2) Disclosure of rates--(i) In general. If an advertisement for 
credit secured by a dwelling states a simple annual rate

[[Page 396]]

of interest and more than one simple annual rate of interest will apply 
over the term of the advertised loan, the advertisement shall disclose 
in a clear and conspicuous manner:
    (A) Each simple annual rate of interest that will apply. In 
variable-rate transactions, a rate determined by adding an index and 
margin shall be disclosed based on a reasonably current index and 
margin;
    (B) The period of time during which each simple annual rate of 
interest will apply; and
    (C) The annual percentage rate for the loan. If such rate is 
variable, the annual percentage rate shall comply with the accuracy 
standards in Sec. Sec. 226.17(c) and 226.22.
    (ii) Clear and conspicuous requirement. For purposes of paragraph 
(f)(2)(i) of this section, clearly and conspicuously disclosed means 
that the required information in paragraphs (f)(2)(i)(A) through (C) 
shall be disclosed with equal prominence and in close proximity to any 
advertised rate that triggered the required disclosures. The required 
information in paragraph (f)(2)(i)(C) may be disclosed with greater 
prominence than the other information.
    (3) Disclosure of payments--(i) In general. In addition to the 
requirements of paragraph (c) of this section, if an advertisement for 
credit secured by a dwelling states the amount of any payment, the 
advertisement shall disclose in a clear and conspicuous manner:
    (A) The amount of each payment that will apply over the term of the 
loan, including any balloon payment. In variable-rate transactions, 
payments that will be determined based on the application of the sum of 
an index and margin shall be disclosed based on a reasonably current 
index and margin;
    (B) The period of time during which each payment will apply; and
    (C) In an advertisement for credit secured by a first lien on a 
dwelling, the fact that the payments do not include amounts for taxes 
and insurance premiums, if applicable, and that the actual payment 
obligation will be greater.
    (ii) Clear and conspicuous requirement. For purposes of paragraph 
(f)(3)(i) of this section, a clear and conspicuous disclosure means that 
the required information in paragraphs (f)(3)(i)(A) and (B) shall be 
disclosed with equal prominence and in close proximity to any advertised 
payment that triggered the required disclosures, and that the required 
information in paragraph (f)(3)(i)(C) shall be disclosed with prominence 
and in close proximity to the advertised payments.
    (4) Envelope excluded. The requirements in paragraphs (f)(2) and 
(f)(3) of this section do not apply to an envelope in which an 
application or solicitation is mailed, or to a banner advertisement or 
pop-up advertisement linked to an application or solicitation provided 
electronically.
    (g) Alternative disclosures--television or radio advertisements. An 
advertisement made through television or radio stating any of the terms 
requiring additional disclosures under paragraph (d)(2) of this section 
may comply with paragraph (d)(2) of this section either by:
    (1) Stating clearly and conspicuously each of the additional 
disclosures required under paragraph (d)(2) of this section; or
    (2) Stating clearly and conspicuously the information required by 
paragraph (d)(2)(iii) of this section and listing a toll-free telephone 
number, or any telephone number that allows a consumer to reverse the 
phone charges when calling for information, along with a reference that 
such number may be used by consumers to obtain additional cost 
information.
    (h) Tax implications. If an advertisement distributed in paper form 
or through the Internet (rather than by radio or television) is for a 
loan secured by the consumer's principal dwelling, and the advertisement 
states that the advertised extension of credit may exceed the fair 
market value of the dwelling, the advertisement shall clearly and 
conspicuously state that:
    (1) The interest on the portion of the credit extension that is 
greater than the fair market value of the dwelling is not tax deductible 
for Federal income tax purposes; and
    (2) The consumer should consult a tax adviser for further 
information regarding the deductibility of interest and charges.

[[Page 397]]

    (i) Prohibited acts or practices in advertisements for credit 
secured by a dwelling. The following acts or practices are prohibited in 
advertisements for credit secured by a dwelling:
    (1) Misleading advertising of ``fixed'' rates and payments. Using 
the word ``fixed'' to refer to rates, payments, or the credit 
transaction in an advertisement for variable-rate transactions or other 
transactions where the payment will increase, unless:
    (i) In the case of an advertisement solely for one or more variable-
rate transactions,
    (A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate 
Mortgage,'' or ``ARM'' appears in the advertisement before the first use 
of the word ``fixed'' and is at least as conspicuous as any use of the 
word ``fixed'' in the advertisement; and
    (B) Each use of the word ``fixed'' to refer to a rate or payment is 
accompanied by an equally prominent and closely proximate statement of 
the time period for which the rate or payment is fixed, and the fact 
that the rate may vary or the payment may increase after that period;
    (ii) In the case of an advertisement solely for non-variable-rate 
transactions where the payment will increase (e.g., a stepped-rate 
mortgage transaction with an initial lower payment), each use of the 
word ``fixed'' to refer to the payment is accompanied by an equally 
prominent and closely proximate statement of the time period for which 
the payment is fixed, and the fact that the payment will increase after 
that period; or
    (iii) In the case of an advertisement for both variable-rate 
transactions and non-variable-rate transactions,
    (A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate 
Mortgage,'' or ``ARM'' appears in the advertisement with equal 
prominence as any use of the term ``fixed,'' ``Fixed-Rate Mortgage,'' or 
similar terms; and
    (B) Each use of the word ``fixed'' to refer to a rate, payment, or 
the credit transaction either refers solely to the transactions for 
which rates are fixed and complies with paragraph (i)(1)(ii) of this 
section, if applicable, or, if it refers to the variable-rate 
transactions, is accompanied by an equally prominent and closely 
proximate statement of the time period for which the rate or payment is 
fixed, and the fact that the rate may vary or the payment may increase 
after that period.
    (2) Misleading comparisons in advertisements. Making any comparison 
in an advertisement between actual or hypothetical credit payments or 
rates and any payment or simple annual rate that will be available under 
the advertised product for a period less than the full term of the loan, 
unless:
    (i) In general. The advertisement includes a clear and conspicuous 
comparison to the information required to be disclosed under sections 
226.24(f)(2) and (3); and
    (ii) Application to variable-rate transactions. If the advertisement 
is for a variable-rate transaction, and the advertised payment or simple 
annual rate is based on the index and margin that will be used to make 
subsequent rate or payment adjustments over the term of the loan, the 
advertisement includes an equally prominent statement in close proximity 
to the payment or rate that the payment or rate is subject to adjustment 
and the time period when the first adjustment will occur.
    (3) Misrepresentations about government endorsement. Making any 
statement in an advertisement that the product offered is a ``government 
loan program'', ``government-supported loan'', or is otherwise endorsed 
or sponsored by any federal, state, or local government entity, unless 
the advertisement is for an FHA loan, VA loan, or similar loan program 
that is, in fact, endorsed or sponsored by a federal, state, or local 
government entity.
    (4) Misleading use of the current lender's name. Using the name of 
the consumer's current lender in an advertisement that is not sent by or 
on behalf of the consumer's current lender, unless the advertisement:
    (i) Discloses with equal prominence the name of the person or 
creditor making the advertisement; and
    (ii) Includes a clear and conspicuous statement that the person 
making the advertisement is not associated with, or acting on behalf of, 
the consumer's current lender.
    (5) Misleading claims of debt elimination. Making any misleading 
claim

[[Page 398]]

in an advertisement that the mortgage product offered will eliminate 
debt or result in a waiver or forgiveness of a consumer's existing loan 
terms with, or obligations to, another creditor.
    (6) Misleading use of the term ``counselor''. Using the term 
``counselor'' in an advertisement to refer to a for-profit mortgage 
broker or mortgage creditor, its employees, or persons working for the 
broker or creditor that are involved in offering, originating or selling 
mortgages.
    (7) Misleading foreign-language advertisements. Providing 
information about some trigger terms or required disclosures, such as an 
initial rate or payment, only in a foreign language in an advertisement, 
but providing information about other trigger terms or required 
disclosures, such as information about the fully-indexed rate or fully 
amortizing payment, only in English in the same advertisement.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 66 FR 17338, Mar. 30, 
2001; 72 FR 63474, Nov. 9, 2007; 73 FR 44601, July 30, 2008]



                         Subpart D_Miscellaneous



Sec. 226.25  Record retention.

    (a) General rule. A creditor shall retain evidence of compliance 
with this regulation (other than advertising requirements under 
Sec. Sec. 226.16 and 226.24) for 2 years after the date disclosures are 
required to be made or action is required to be taken. The 
administrative agencies responsible for enforcing the regulation may 
require creditors under their jurisdictions to retain records for a 
longer period if necessary to carry out their enforcement 
responsibilities under section 108 of the act.
    (b) Inspection of records. A creditor shall permit the agency 
responsible for enforcing this regulation with respect to that creditor 
to inspect its relevant records for compliance.



Sec. 226.26  Use of annual percentage rate in oral disclosures.

    (a) Open-end credit. In an oral response to a consumer's inquiry 
about the cost of open-end credit, only the annual percentage rate or 
rates shall be stated, except that the periodic rate or rates also may 
be stated. If the annual percentage rate cannot be determined in advance 
because there are finance charges other than a periodic rate, the 
corresponding annual percentage rate shall be stated, and other cost 
information may be given.
    (b) Closed-end credit. In an oral response to a consumer's inquiry 
about the cost of closed-end credit, only the annual percentage rate 
shall be stated, except that a simple annual rate or periodic rate also 
may be stated if it is applied to an unpaid balance. If the annual 
percentage rate cannot be determined in advance, the annual percentage 
rate for a sample transaction shall be stated, and other cost 
information for the consumer's specific transaction may be given.



Sec. 226.27  Language of disclosures.

    Disclosures required by this regulation may be made in a language 
other than English, provided that the disclosures are made available in 
English upon the consumer's request. This requirement for providing 
English disclosures on request does not apply to advertisements subject 
to Sec. Sec. 226.16 and 226.24.

[66 FR 17339, Mar. 30, 2001]



Sec. 226.28  Effect on State laws.

    (a) Inconsistent disclosure requirements. (1) Except as provided in 
paragraph (d) of this section, State law requirements that are 
inconsistent with the requirements contained in chapter 1 (General 
Provisions), chapter 2 (Credit Transactions), or chapter 3 (Credit 
Advertising) of the act and the implementing provisions of this 
regulation are preempted to the extent of the inconsistency. A State law 
is inconsistent if it requires a creditor to make disclosures or take 
actions that contradict the requirements of the Federal law. A State law 
is contradictory if it requires the use of the same term to represent a 
different amount or a different meaning than the Federal law, or if it 
requires the use of a term different from that required in the Federal 
law to describe the same item. A creditor, State, or other interested 
party may request the Board to determine whether a State law requirement 
is inconsistent. After the Board determines that a State law is 
inconsistent, a creditor may not

[[Page 399]]

make disclosures using the inconsistent term or form.
    (2)(i) State law requirements are inconsistent with the requirements 
contained in sections 161 (Correction of billing errors) or 162 
(Regulation of credit reports) of the Act and the implementing 
provisions of this regulation and are preempted if they provide rights, 
responsibilities, or procedures for consumers or creditors that are 
different from those required by the Federal law. However, a State law 
that allows a consumer to inquire about an open-end credit account and 
imposes on the creditor an obligation to respond to such inquiry after 
the time allowed in the Federal law for the consumer to submit written 
notice of a billing error shall not be preempted in any situation where 
the time period for making written notice under this regulation has 
expired. If a creditor gives written notice of a consumer's rights under 
such State law, the notice shall state that reliance on the longer time 
period available under State law may result in the loss of important 
rights that could be preserved by acting more promptly under Federal 
law; it shall also explain that the State law provisions apply only 
after expiration of the time period for submitting a proper written 
notice of a billing error under the Federal law. If the State 
disclosures are made on the same side of a page as the required Federal 
disclosures, the State disclosures shall appear under a demarcation line 
below the Federal disclosures, and the Federal disclosures shall be 
identified by a heading indicating that they are made in compliance with 
Federal law.
    (ii) State law requirements are inconsistent with the requirements 
contained in chapter 4 (Credit billing) of the Act (other than section 
161 or 162) and the implementing provisions of this regulation and are 
preempted if the creditor cannot comply with State law without violating 
Federal law.
    (iii) A State may request the Board to determine whether its law is 
inconsistent with chapter 4 of the Act and its implementing provisions.
    (b) Equivalent disclosure requirements. If the Board determines that 
a disclosure required by state law (other than a requirement relating to 
the finance charge, annual percentage rate, or the disclosures required 
under Sec. 226.32) is substantially the same in meaning as a disclosure 
required under the act or this regulation, creditors in that state may 
make the state disclosure in lieu of the federal disclosure. A creditor, 
State, or other interested party may request the Board to determine 
whether a State disclosure is substantially the same in meaning as a 
Federal disclosure.
    (c) Request for determination. The procedures under which a request 
for a determination may be made under this section are set forth in 
appendix A.
    (d) Special rule for credit and charge cards. State law requirements 
relating to the disclosure of credit information in any credit or charge 
card application or solicitation that is subject to the requirements of 
section 127(c) of chapter 2 of the act (Sec. 226.5a of the regulation) 
or in any renewal notice for a credit or charge card that is subject to 
the requirements of section 127(d) of chapter 2 of the act (Sec. 
226.9(e) of the regulation) are preempted. State laws relating to the 
enforcement of section 127 (c) and (d) of the act are not preempted.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 54 FR 13867, Apr. 6, 
1989; 54 FR 32954, Aug. 11, 1989; 60 FR 15471, Mar. 24, 1995]



Sec. 226.29  State exemptions.

    (a) General rule. Any State may apply to the Board to exempt a class 
of transactions within the State from the requirements of chapter 2 
(Credit transactions) or chapter 4 (Credit billing) of the Act and the 
corresponding provisions of this regulation. The Board shall grant an 
exemption if it determines that:
    (1) The State law is substantially similar to the Federal law or, in 
the case of chapter 4, affords the consumer greater protection than the 
Federal law; and
    (2) There is adequate provision for enforcement.
    (b) Civil liability. (1) No exemptions granted under this section 
shall extend to the civil liability provisions of sections 130 and 131 
of the Act.

[[Page 400]]

    (2) If an exemption has been granted, the disclosures required by 
the applicable State law (except any additional requirements not imposed 
by Federal law) shall constitute the disclosures required by this Act.
    (c) Applications. The procedures under which a State may apply for 
an exemption under this section are set forth in appendix B.

[46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981]



Sec. 226.30  Limitation on rates.

    A creditor shall include in any consumer credit contract secured by 
a dwelling and subject to the act and this regulation the maximum 
interest rate that may be imposed during the term of the obligation \50\ 
when:
---------------------------------------------------------------------------

    \50\ [Reserved]
---------------------------------------------------------------------------

    (a) In the case of closed-end credit, the annual percentage rate may 
increase after consummation, or
    (b) In the case of open-end credit, the annual percentage rate may 
increase during the plan.

[75 FR 7818, Feb. 22, 2010]



     Subpart E_Special Rules for Certain Home Mortgage Transactions

    Source: Reg. Z, 60 FR 15471, Mar. 24, 1995, unless otherwise noted.



Sec. 226.31  General rules.

    (a) Relation to other subparts in this part. The requirements and 
limitations of this subpart are in addition to and not in lieu of those 
contained in other subparts of this part.
    (b) Form of disclosures. The creditor shall make the disclosures 
required by this subpart clearly and conspicuously in writing, in a form 
that the consumer may keep. The disclosures required by this subpart may 
be provided to the consumer in electronic form, subject to compliance 
with the consumer consent and other applicable provisions of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act) 
(15 U.S.C. Sec. 7001 et seq.).
    (c) Timing of disclosure--(1) Disclosures for certain closed-end 
home mortgages. The creditor shall furnish the disclosures required by 
Sec. 226.32 at least three business days prior to consummation of a 
mortgage transaction covered by Sec. 226.32.
    (i) Change in terms. After complying with paragraph (c)(1) of this 
section and prior to consummation, if the creditor changes any term that 
makes the disclosures inaccurate, new disclosures shall be provided in 
accordance with the requirements of this subpart.
    (ii) Telephone disclosures. A creditor may provide new disclosures 
by telephone if the consumer initiates the change and if, at 
consummation:
    (A) The creditor provides new written disclosures; and
    (B) The consumer and creditor sign a statement that the new 
disclosures were provided by telephone at least three days prior to 
consummation.
    (iii) Consumer's waiver of waiting period before consummation. The 
consumer may, after receiving the disclosures required by paragraph 
(c)(1) of this section, modify or waive the three-day waiting period 
between delivery of those disclosures and consummation if the consumer 
determines that the extension of credit is needed to meet a bona fide 
personal financial emergency. To modify or waive the right, the consumer 
shall give the creditor a dated written statement that describes the 
emergency, specifically modifies or waives the waiting period, and bears 
the signature of all the consumers entitled to the waiting period. 
Printed forms for this purpose are prohibited, except when creditors are 
permitted to use printed forms pursuant to Sec. 226.23(e)(2).
    (2) Disclosures for reverse mortgages. The creditor shall furnish 
the disclosures required by Sec. 226.33 at least three business days 
prior to:
    (i) Consummation of a closed-end credit transaction; or
    (ii) The first transaction under an open-end credit plan.
    (d) Basis of disclosures and use of estimates--(1) Legal Obligation. 
Disclosures shall reflect the terms of the legal obligation between the 
parties.
    (2) Estimates. If any information necessary for an accurate 
disclosure is unknown to the creditor, the creditor shall make the 
disclosure based on the best information reasonably available

[[Page 401]]

at the time the disclosure is provided, and shall state clearly that the 
disclosure is an estimate.
    (3) Per-diem interest. For a transaction in which a portion of the 
interest is determined on a per-diem basis and collected at 
consummation, any disclosure affected by the per-diem interest shall be 
considered accurate if the disclosure is based on the information known 
to the creditor at the time that the disclosure documents are prepared.
    (e) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor must 
comply with the requirements that this part imposes on any or all of 
them. If there is more than one consumer, the disclosures may be made to 
any consumer who is primarily liable on the obligation. If the 
transaction is rescindable under Sec. 226.15 or Sec. 226.23, however, 
the disclosures shall be made to each consumer who has the right to 
rescind.
    (f) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor delivers the required 
disclosures, the inaccuracy is not a violation of Regulation Z (12 CFR 
part 226), although new disclosures may be required for mortgages 
covered by Sec. 226.32 under paragraph (c) of this section, Sec. 
226.9(c), Sec. 226.19, or Sec. 226.20.
    (g) Accuracy of annual percentage rate. For purposes of Sec. 
226.32, the annual percentage rate shall be considered accurate, and may 
be used in determining whether a transaction is covered by Sec. 226.32, 
if it is accurate according to the requirements and within the 
tolerances under Sec. 226.22. The finance charge tolerances for 
rescission under Sec. 226.23(g) or (h) shall not apply for this 
purpose.

[Reg. Z, 60 FR 15471, Mar. 24, 1995, as amended at 60 FR 29969, June 7, 
1995; 61 FR 49247, Sept. 19, 1996; 66 FR 17339, Mar. 30, 2001; 72 FR 
63475, Nov. 9, 2007]



Sec. 226.32  Requirements for certain closed-end home mortgages.

    (a) Coverage. (1) Except as provided in paragraph (a)(2) of this 
section, the requirements of this section apply to a consumer credit 
transaction that is secured by the consumer's principal dwelling, and in 
which either:
    (i) The annual percentage rate at consummation will exceed by more 
than 8 percentage points for first-lien loans, or by more than 10 
percentage points for subordinate-lien loans, the yield on Treasury 
securities having comparable periods of maturity to the loan maturity as 
of the fifteenth day of the month immediately preceding the month in 
which the application for the extension of credit is received by the 
creditor; or
    (ii) The total points and fees payable by the consumer at or before 
loan closing will exceed the greater of 8 percent of the total loan 
amount, or $400; the $400 figure shall be adjusted annually on January 1 
by the annual percentage change in the Consumer Price Index that was 
reported on the preceding June 1.
    (2) This section does not apply to the following:
    (i) A residential mortgage transaction.
    (ii) A reverse mortgage transaction subject to Sec. 226.33.
    (iii) An open-end credit plan subject to subpart B of this part.
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) For purposes of paragraph (a)(1)(ii) of this section, points and 
fees means:
    (i) All items required to be disclosed under Sec. 226.4(a) and 
226.4(b), except interest or the time-price differential;
    (ii) All compensation paid to mortgage brokers;
    (iii) All items listed in Sec. 226.4(c)(7) (other than amounts held 
for future payment of taxes) unless the charge is reasonable, the 
creditor receives no direct or indirect compensation in connection with 
the charge, and the charge is not paid to an affiliate of the creditor; 
and
    (iv) Premiums or other charges for credit life, accident, health, or 
loss-of-income insurance, or debt-cancellation coverage (whether or not 
the debt-cancellation coverage is insurance under applicable law) that 
provides for cancellation of all or part of the consumer's liability in 
the event of the loss of life, health, or income or in the

[[Page 402]]

case of accident, written in connection with the credit transaction.
    (2) Affiliate means any company that controls, is controlled by, or 
is under common control with another company, as set forth in the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
    (c) Disclosures. In addition to other disclosures required by this 
part, in a mortgage subject to this section, the creditor shall disclose 
the following in conspicuous type size:
    (1) Notices. The following statement: ``You are not required to 
complete this agreement merely because you have received these 
disclosures or have signed a loan application. If you obtain this loan, 
the lender will have a mortgage on your home. You could lose your home, 
and any money you have put into it, if you do not meet your obligations 
under the loan.''
    (2) Annual percentage rate. The annual percentage rate.
    (3) Regular payment; balloon payment. The amount of the regular 
monthly (or other periodic) payment and the amount of any balloon 
payment. The regular payment disclosed under this paragraph shall be 
treated as accurate if it is based on an amount borrowed that is deemed 
accurate and is disclosed under paragraph (c)(5) of this section.
    (4) Variable-rate. For variable-rate transactions, a statement that 
the interest rate and monthly payment may increase, and the amount of 
the single maximum monthly payment, based on the maximum interest rate 
required to be disclosed under Sec. 226.30.
    (5) Amount borrowed. For a mortgage refinancing, the total amount 
the consumer will borrow, as reflected by the face amount of the note; 
and where the amount borrowed includes premiums or other charges for 
optional credit insurance or debt-cancellation coverage, that fact shall 
be stated, grouped together with the disclosure of the amount borrowed. 
The disclosure of the amount borrowed shall be treated as accurate if it 
is not more than $100 above or below the amount required to be 
disclosed.
    (d) Limitations. A mortgage transaction subject to this section 
shall not include the following terms:
    (1)(i) Balloon payment. For a loan with a term of less than five 
years, a payment schedule with regular periodic payments that when 
aggregated do not fully amortize the outstanding principal balance.
    (ii) Exception. The limitations in paragraph (d)(1)(i) of this 
section do not apply to loans with maturities of less than one year, if 
the purpose of the loan is a ``bridge'' loan connected with the 
acquisition or construction of a dwelling intended to become the 
consumer's principal dwelling.
    (2) Negative amortization. A payment schedule with regular periodic 
payments that cause the principal balance to increase.
    (3) Advance payments. A payment schedule that consolidates more than 
two periodic payments and pays them in advance from the proceeds.
    (4) Increased interest rate. An increase in the interest rate after 
default.
    (5) Rebates. A refund calculated by a method less favorable than the 
actuarial method (as defined by section 933(d) of the Housing and 
Community Development Act of 1992, 15 U.S.C. 1615(d)), for rebates of 
interest arising from a loan acceleration due to default.
    (6) Prepayment penalties. Except as allowed under paragraph (d)(7) 
of this section, a penalty for paying all or part of the principal 
before the date on which the principal is due. A prepayment penalty 
includes computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined by 
section 933(d) of the Housing and Community Development Act of 1992, 15 
U.S.C. 1615(d).
    (7) Prepayment penalty exception. A mortgage transaction subject to 
this section may provide for a prepayment penalty (including a refund 
calculated according to the rule of 78s) otherwise permitted by law if, 
under the terms of the loan:
    (i) The penalty will not apply after the two-year period following 
consummation;
    (ii) The penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or an affiliate of the creditor;

[[Page 403]]

    (iii) At consummation, the consumer's total monthly debt payments 
(including amounts owed under the mortgage) do not exceed 50 percent of 
the consumer's monthly gross income, as verified in accordance with 
Sec. 226.34(a)(4)(ii); and
    (iv) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.
    (8) Due-on-demand clause. A demand feature that permits the creditor 
to terminate the loan in advance of the original maturity date and to 
demand repayment of the entire outstanding balance, except in the 
following circumstances:
    (i) There is fraud or material misrepresentation by the consumer in 
connection with the loan;
    (ii) The consumer fails to meet the repayment terms of the agreement 
for any outstanding balance; or
    (iii) There is any action or inaction by the consumer that adversely 
affects the creditor's security for the loan, or any right of the 
creditor in such security.

[Reg. Z, 60 FR 15472, Mar. 24, 1995, as amended at 60 FR 29969, June 7, 
1995; 66 FR 65617, Dec. 20, 2001; 73 FR 44602, July 30, 2008]



Sec. 226.33  Requirements for reverse mortgages.

    (a) Definition. For purposes of this subpart, reverse mortgage 
transaction means a nonrecourse consumer credit obligation in which:
    (1) A mortgage, deed of trust, or equivalent consensual security 
interest securing one or more advances is created in the consumer's 
principal dwelling; and
    (2) Any principal, interest, or shared appreciation or equity is due 
and payable (other than in the case of default) only after:
    (i) The consumer dies;
    (ii) The dwelling is transferred; or
    (iii) The consumer ceases to occupy the dwelling as a principal 
dwelling.
    (b) Content of disclosures. In addition to other disclosures 
required by this part, in a reverse mortgage transaction the creditor 
shall provide the following disclosures in a form substantially similar 
to the model form found in paragraph (d) of appendix K of this part:
    (1) Notice. A statement that the consumer is not obligated to 
complete the reverse mortgage transaction merely because the consumer 
has received the disclosures required by this section or has signed an 
application for a reverse mortgage loan.
    (2) Total annual loan cost rates. A good-faith projection of the 
total cost of the credit, determined in accordance with paragraph (c) of 
this section and expressed as a table of ``total annual loan cost 
rates,'' using that term, in accordance with appendix K of this part.
    (3) Itemization of pertinent information. An itemization of loan 
terms, charges, the age of the youngest borrower and the appraised 
property value.
    (4) Explanation of table. An explanation of the table of total 
annual loan cost rates as provided in the model form found in paragraph 
(d) of appendix K of this part.
    (c) Projected total cost of credit. The projected total cost of 
credit shall reflect the following factors, as applicable:
    (1) Costs to consumer. All costs and charges to the consumer, 
including the costs of any annuity the consumer purchases as part of the 
reverse mortgage transaction.
    (2) Payments to consumer. All advances to and for the benefit of the 
consumer, including annuity payments that the consumer will receive from 
an annuity that the consumer purchases as part of the reverse mortgage 
transaction.
    (3) Additional creditor compensation. Any shared appreciation or 
equity in the dwelling that the creditor is entitled by contract to 
receive.
    (4) Limitations on consumer liability. Any limitation on the 
consumer's liability (such as nonrecourse limits and equity conservation 
agreements).
    (5) Assumed annual appreciation rates. Each of the following assumed 
annual appreciation rates for the dwelling:
    (i) 0 percent.
    (ii) 4 percent.
    (iii) 8 percent.
    (6) Assumed loan period. (i) Each of the following assumed loan 
periods, as provided in appendix L of this part:

[[Page 404]]

    (A) Two years.
    (B) The actuarial life expectancy of the consumer to become 
obligated on the reverse mortgage transaction (as of that consumer's 
most recent birthday). In the case of multiple consumers, the period 
shall be the actuarial life expectancy of the youngest consumer (as of 
that consumer's most recent birthday).
    (C) The actuarial life expectancy specified by paragraph 
(c)(6)(i)(B) of this section, multiplied by a factor of 1.4 and rounded 
to the nearest full year.
    (ii) At the creditor's option, the actuarial life expectancy 
specified by paragraph (c)(6)(i)(B) of this section, multiplied by a 
factor of .5 and rounded to the nearest full year.



Sec. 226.34  Prohibited acts or practices in connection with credit
subject to Sec. 226.32.

    (a) Prohibited acts or practices for loans subject to Sec. 226.32. 
A creditor extending mortgage credit subject to Sec. 226.32 shall not--
    (1) Home improvement contracts. Pay a contractor under a home 
improvement contract from the proceeds of a mortgage covered by Sec. 
226.32, other than:
    (i) By an instrument payable to the consumer or jointly to the 
consumer and the contractor; or
    (ii) At the election of the consumer, through a third-party escrow 
agent in accordance with terms established in a written agreement signed 
by the consumer, the creditor, and the contractor prior to the 
disbursement.
    (2) Notice to assignee. Sell or otherwise assign a mortgage subject 
to Sec. 226.32 without furnishing the following statement to the 
purchaser or assignee: ``Notice: This is a mortgage subject to special 
rules under the federal Truth in Lending Act. Purchasers or assignees of 
this mortgage could be liable for all claims and defenses with respect 
to the mortgage that the borrower could assert against the creditor.''
    (3) Refinancings within one-year period. Within one year of having 
extended credit subject to Sec. 226.32, refinance any loan subject to 
Sec. 226.32 to the same borrower into another loan subject to Sec. 
226.32, unless the refinancing is in the borrower's interest. An 
assignee holding or servicing an extension of mortgage credit subject to 
Sec. 226.32, shall not, for the remainder of the one-year period 
following the date of origination of the credit, refinance any loan 
subject to Sec. 226.32 to the same borrower into another loan subject 
to Sec. 226.32, unless the refinancing is in the borrower's interest. A 
creditor (or assignee) is prohibited from engaging in acts or practices 
to evade this provision, including a pattern or practice of arranging 
for the refinancing of its own loans by affiliated or unaffiliated 
creditors, or modifying a loan agreement (whether or not the existing 
loan is satisfied and replaced by the new loan) and charging a fee.
    (4) Repayment ability. Extend credit subject to Sec. 226.32 to a 
consumer based on the value of the consumer's collateral without regard 
to the consumer's repayment ability as of consummation, including the 
consumer's current and reasonably expected income, employment, assets 
other than the collateral, current obligations, and mortgage-related 
obligations.
    (i) Mortgage-related obligations. For purposes of this paragraph 
(a)(4), mortgage-related obligations are expected property taxes, 
premiums for mortgage-related insurance required by the creditor as set 
forth in Sec. 226.35(b)(3)(i), and similar expenses.
    (ii) Verification of repayment ability. Under this paragraph (a)(4) 
a creditor must verify the consumer's repayment ability as follows:
    (A) A creditor must verify amounts of income or assets that it 
relies on to determine repayment ability, including expected income or 
assets, by the consumer's Internal Revenue Service Form W-2, tax 
returns, payroll receipts, financial institution records, or other 
third-party documents that provide reasonably reliable evidence of the 
consumer's income or assets.
    (B) Notwithstanding paragraph (a)(4)(ii)(A), a creditor has not 
violated paragraph (a)(4)(ii) if the amounts of income and assets that 
the creditor relied upon in determining repayment ability are not 
materially greater than the amounts of the consumer's income or assets 
that the creditor could have verified pursuant to paragraph

[[Page 405]]

(a)(4)(ii)(A) at the time the loan was consummated.
    (C) A creditor must verify the consumer's current obligations.
    (iii) Presumption of compliance. A creditor is presumed to have 
complied with this paragraph (a)(4) with respect to a transaction if the 
creditor:
    (A) Verifies the consumer's repayment ability as provided in 
paragraph (a)(4)(ii);
    (B) Determines the consumer's repayment ability using the largest 
payment of principal and interest scheduled in the first seven years 
following consummation and taking into account current obligations and 
mortgage-related obligations as defined in paragraph (a)(4)(i); and
    (C) Assesses the consumer's repayment ability taking into account at 
least one of the following: The ratio of total debt obligations to 
income, or the income the consumer will have after paying debt 
obligations.
    (iv) Exclusions from presumption of compliance. Notwithstanding the 
previous paragraph, no presumption of compliance is available for a 
transaction for which:
    (A) The regular periodic payments for the first seven years would 
cause the principal balance to increase; or
    (B) The term of the loan is less than seven years and the regular 
periodic payments when aggregated do not fully amortize the outstanding 
principal balance.
    (v) Exemption. This paragraph (a)(4) does not apply to temporary or 
``bridge'' loans with terms of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months.
    (b) Prohibited acts or practices for dwelling-secured loans; open-
end credit. In connection with credit secured by the consumer's dwelling 
that does not meet the definition in Sec. 226.2(a)(20), a creditor 
shall not structure a home-secured loan as an open-end plan to evade the 
requirements of Sec. 226.32.

[Reg. Z, 66 FR 65618, Dec. 20, 2001, as amended at 73 FR 44603, July 30, 
2008]



Sec. 226.35  Prohibited acts or practices in connection with higher-
priced mortgage loans.

    (a) Higher-priced mortgage loans--(1) For purposes of this section, 
except as provided in paragraph (b)(3)(v) of this section, a higher-
priced mortgage loan is a consumer credit transaction secured by the 
consumer's principal dwelling with an annual percentage rate that 
exceeds the average prime offer rate for a comparable transaction as of 
the date the interest rate is set by 1.5 or more percentage points for 
loans secured by a first lien on a dwelling, or by 3.5 or more 
percentage points for loans secured by a subordinate lien on a dwelling.
    (2) ``Average prime offer rate'' means an annual percentage rate 
that is derived from average interest rates, points, and other loan 
pricing terms currently offered to consumers by a representative sample 
of creditors for mortgage transactions that have low-risk pricing 
characteristics. The Board publishes average prime offer rates for a 
broad range of types of transactions in a table updated at least weekly 
as well as the methodology the Board uses to derive these rates.
    (3) Notwithstanding paragraph (a)(1) of this section, the term 
``higher-priced mortgage loan'' does not include a transaction to 
finance the initial construction of a dwelling, a temporary or 
``bridge'' loan with a term of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months, a reverse-mortgage transaction subject to 
Sec. 226.33, or a home equity line of credit subject to Sec. 226.5b.
    (b) Rules for higher-priced mortgage loans. Higher-priced mortgage 
loans are subject to the following restrictions:
    (1) Repayment ability. A creditor shall not extend credit based on 
the value of the consumer's collateral without regard to the consumer's 
repayment ability as of consummation as provided in Sec. 226.34(a)(4).
    (2) Prepayment penalties. A loan may not include a penalty described 
by Sec. 226.32(d)(6) unless:
    (i) The penalty is otherwise permitted by law, including Sec. 
226.32(d)(7) if

[[Page 406]]

the loan is a mortgage transaction described in Sec. 226.32(a); and
    (ii) Under the terms of the loan--
    (A) The penalty will not apply after the two-year period following 
consummation;
    (B) The penalty will not apply if the source of the prepayment funds 
is a refinancing by the creditor or an affiliate of the creditor; and
    (C) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.
    (3) Escrows--(i) Failure to escrow for property taxes and insurance. 
Except as provided in paragraph (b)(3)(ii) of this section, a creditor 
may not extend a loan secured by a first lien on a principal dwelling 
unless an escrow account is established before consummation for payment 
of property taxes and premiums for mortgage-related insurance required 
by the creditor, such as insurance against loss of or damage to 
property, or against liability arising out of the ownership or use of 
the property, or insurance protecting the creditor against the 
consumer's default or other credit loss.
    (ii) Exemptions for loans secured by shares in a cooperative and for 
certain condominium units--(A) Escrow accounts need not be established 
for loans secured by shares in a cooperative; and
    (B) Insurance premiums described in paragraph (b)(3)(i) of this 
section need not be included in escrow accounts for loans secured by 
condominium units, where the condominium association has an obligation 
to the condominium unit owners to maintain a master policy insuring 
condominium units.
    (iii) Cancellation. A creditor or servicer may permit a consumer to 
cancel the escrow account required in paragraph (b)(3)(i) of this 
section only in response to a consumer's dated written request to cancel 
the escrow account that is received no earlier than 365 days after 
consummation.
    (iv) Definition of escrow account. For purposes of this section, 
``escrow account'' shall have the same meaning as in 24 CFR 3500.17(b) 
as amended.
    (v) ``Jumbo'' loans. For purposes of this Sec. 226.35(b)(3), for a 
transaction with a principal obligation at consummation that exceeds the 
limit in effect as of the date the transaction's interest rate is set 
for the maximum principal obligation eligible for purchase by Freddie 
Mac, the coverage threshold set forth in paragraph (a)(1) of this 
section for loans secured by a first lien on a dwelling shall be 2.5 or 
more percentage points greater than the applicable average prime offer 
rate.
    (4) Evasion; open-end credit. In connection with credit secured by a 
consumer's principal dwelling that does not meet the definition of open-
end credit in Sec. 226.2(a)(20), a creditor shall not structure a home-
secured loan as an open-end plan to evade the requirements of this 
section.

[Reg. Z, 73 FR 44603, July 30, 2008, as amended at 76 FR 11324, Mar. 2, 
2011]



Sec. 226.36  Prohibited acts or practices in connection with credit
secured by a dwelling.

    (a) Loan originator and mortgage broker defined--(1) Loan 
originator. For purposes of this section, the term ``loan originator'' 
means with respect to a particular transaction, a person who for 
compensation or other monetary gain, or in expectation of compensation 
or other monetary gain, arranges, negotiates, or otherwise obtains an 
extension of consumer credit for another person. The term ``loan 
originator'' includes an employee of the creditor if the employee meets 
this definition. The term ``loan originator'' includes the creditor only 
if the creditor does not provide the funds for the transaction at 
consummation out of the creditor's own resources, including drawing on a 
bona fide warehouse line of credit, or out of deposits held by the 
creditor.
    (2) Mortgage broker. For purposes of this section, a mortgage broker 
with respect to a particular transaction is any loan originator that is 
not an employee of the creditor.
    (b) [Reserved]
    (c) Servicing practices. (1) In connection with a consumer credit 
transaction secured by a consumer's principal dwelling, no servicer 
shall--
    (i) Fail to credit a payment to the consumer's loan account as of 
the date of receipt, except when a delay in crediting does not result in 
any charge to

[[Page 407]]

the consumer or in the reporting of negative information to a consumer 
reporting agency, or except as provided in paragraph (c)(2) of this 
section;
    (ii) Impose on the consumer any late fee or delinquency charge in 
connection with a payment, when the only delinquency is attributable to 
late fees or delinquency charges assessed on an earlier payment, and the 
payment is otherwise a full payment for the applicable period and is 
paid on its due date or within any applicable grace period; or
    (iii) Fail to provide, within a reasonable time after receiving a 
request from the consumer or any person acting on behalf of the 
consumer, an accurate statement of the total outstanding balance that 
would be required to satisfy the consumer's obligation in full as of a 
specified date.
    (2) If a servicer specifies in writing requirements for the consumer 
to follow in making payments, but accepts a payment that does not 
conform to the requirements, the servicer shall credit the payment as of 
5 days after receipt.
    (3) For purposes of this paragraph (c), the terms ``servicer'' and 
``servicing'' have the same meanings as provided in 24 CFR 3500.2(b), as 
amended.
    (d) Prohibited payments to loan originators--(1) Payments based on 
transaction terms or conditions. (i) In connection with a consumer 
credit transaction secured by a dwelling, no loan originator shall 
receive and no person shall pay to a loan originator, directly or 
indirectly, compensation in an amount that is based on any of the 
transaction's terms or conditions.
    (ii) For purposes of this paragraph (d)(1), the amount of credit 
extended is not deemed to be a transaction term or condition, provided 
compensation received by or paid to a loan originator, directly or 
indirectly, is based on a fixed percentage of the amount of credit 
extended; however, such compensation may be subject to a minimum or 
maximum dollar amount.
    (iii) This paragraph (d)(1) shall not apply to any transaction in 
which paragraph (d)(2) of this section applies.
    (2) Payments by persons other than consumer. If any loan originator 
receives compensation directly from a consumer in a consumer credit 
transaction secured by a dwelling:
    (i) No loan originator shall receive compensation, directly or 
indirectly, from any person other than the consumer in connection with 
the transaction; and
    (ii) No person who knows or has reason to know of the consumer-paid 
compensation to the loan originator (other than the consumer) shall pay 
any compensation to a loan originator, directly or indirectly, in 
connection with the transaction.
    (3) Affiliates. For purposes of this paragraph (d), affiliates shall 
be treated as a single ``person.''
    (e) Prohibition on steering--(1) General. In connection with a 
consumer credit transaction secured by a dwelling, a loan originator 
shall not direct or ``steer'' a consumer to consummate a transaction 
based on the fact that the originator will receive greater compensation 
from the creditor in that transaction than in other transactions the 
originator offered or could have offered to the consumer, unless the 
consummated transaction is in the consumer's interest.
    (2) Permissible transactions. A transaction does not violate 
paragraph (e)(1) of this section if the consumer is presented with loan 
options that meet the conditions in paragraph (e)(3) of this section for 
each type of transaction in which the consumer expressed an interest. 
For purposes of paragraph (e) of this section, the term ``type of 
transaction'' refers to whether:
    (i) A loan has an annual percentage rate that cannot increase after 
consummation;
    (ii) A loan has an annual percentage rate that may increase after 
consummation; or
    (iii) A loan is a reverse mortgage.
    (3) Loan options presented. A transaction satisfies paragraph (e)(2) 
of this section only if the loan originator presents the loan options 
required by that paragraph and all of the following conditions are met:
    (i) The loan originator must obtain loan options from a significant 
number of the creditors with which the originator regularly does 
business and, for each type of transaction in which the consumer 
expressed an interest, must

[[Page 408]]

present the consumer with loan options that include:
    (A) The loan with the lowest interest rate;
    (B) The loan with the lowest interest rate without negative 
amortization, a prepayment penalty, interest-only payments, a balloon 
payment in the first 7 years of the life of the loan, a demand feature, 
shared equity, or shared appreciation; or, in the case of a reverse 
mortgage, a loan without a prepayment penalty, or shared equity or 
shared appreciation; and
    (C) The loan with the lowest total dollar amount for origination 
points or fees and discount points.
    (ii) The loan originator must have a good faith belief that the 
options presented to the consumer pursuant to paragraph (e)(3)(i) of 
this section are loans for which the consumer likely qualifies.
    (iii) For each type of transaction, if the originator presents to 
the consumer more than three loans, the originator must highlight the 
loans that satisfy the criteria specified in paragraph (e)(3)(i) of this 
section.
    (4) Number of loan options presented. The loan originator can 
present fewer than three loans and satisfy paragraphs (e)(2) and 
(e)(3)(i) of this section if the loan(s) presented to the consumer 
satisfy the criteria of the options in paragraph (e)(3)(i) of this 
section and the provisions of paragraph (e)(3) of this section are 
otherwise met.
    (f) This section does not apply to a home-equity line of credit 
subject to Sec. 226.5b. Section 226.36(d) and (e) do not apply to a 
loan that is secured by a consumer's interest in a timeshare plan 
described in 11 U.S.C. 101(53D).

[73 FR 44604, July 30, 2008, as amended at 75 FR 58533, Sept. 24, 2010]



Sec. Sec. 226.37-226.38  [Reserved]



Sec. 226.39  Mortgage transfer disclosures.

    (a) Scope. The disclosure requirements of this section apply to any 
covered person except as otherwise provided in this section. For 
purposes of this section:
    (1) A ``covered person'' means any person, as defined in Sec. 
226.2(a)(22), that becomes the owner of an existing mortgage loan by 
acquiring legal title to the debt obligation, whether through a 
purchase, assignment or other transfer, and who acquires more than one 
mortgage loan in any twelve-month period. For purposes of this section, 
a servicer of a mortgage loan shall not be treated as the owner of the 
obligation if the servicer holds title to the loan, or title is assigned 
to the servicer, solely for the administrative convenience of the 
servicer in servicing the obligation.
    (2) A ``mortgage loan'' means any consumer credit transaction that 
is secured by the principal dwelling of a consumer.
    (b) Disclosure required. Except as provided in paragraph (c) of this 
section, each covered person is subject to the requirements of this 
section and shall mail or deliver the disclosures required by this 
section to the consumer on or before the 30th calendar day following the 
date of transfer.
    (1) Form of disclosures. The disclosures required by this section 
shall be provided clearly and conspicuously in writing, in a form that 
the consumer may keep. The disclosures required by this section 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.).
    (2) The date of transfer. For purposes of this section, the date of 
transfer to the covered person may, at the covered person's option, be 
either the date of acquisition recognized in the books and records of 
the acquiring party, or the date of transfer recognized in the books and 
records of the transferring party.
    (3) Multiple consumers. If more than one consumer is liable on the 
obligation, a covered person may mail or deliver the disclosures to any 
consumer who is primarily liable.
    (4) Multiple transfers. If a mortgage loan is acquired by a covered 
person and subsequently sold, assigned, or otherwise transferred to 
another covered person, a single disclosure may be provided on behalf of 
both covered persons if the disclosure satisfies the timing and content 
requirements applicable to each covered person.
    (5) Multiple covered persons. If an acquisition involves multiple 
covered

[[Page 409]]

persons who jointly acquire the loan, a single disclosure must be 
provided on behalf of all covered persons.
    (c) Exceptions. Notwithstanding paragraph (b) of this section, a 
covered person is not subject to the requirements of this section with 
respect to a particular mortgage loan if:
    (1) The covered person sells, or otherwise transfers or assigns 
legal title to the mortgage loan on or before the 30th calendar day 
following the date that the covered person acquired the mortgage loan 
which shall be the date of transfer recognized for purposes of paragraph 
(b)(2) of this section;
    (2) The mortgage loan is transferred to the covered person in 
connection with a repurchase agreement that obligates the transferor to 
repurchase the loan. However, if the transferor does not repurchase the 
loan, the covered person must provide the disclosures required by this 
section within 30 days after the date that the transaction is recognized 
as an acquisition on its books and records; or
    (3) The covered person acquires only a partial interest in the loan 
and the party authorized to receive the consumer's notice of the right 
to rescind and resolve issues concerning the consumer's payments on the 
loan does not change as a result of the transfer of the partial 
interest.
    (d) Content of required disclosures. The disclosures required by 
this section shall identify the loan that was sold, assigned or 
otherwise transferred, and state the following:
    (1) The name, address, and telephone number of the covered person.
    (i) If a single disclosure is provided on behalf of more than one 
covered person, the information required by this paragraph shall be 
provided for each of them unless paragraph (d)(1)(ii) of this section 
applies.
    (ii) If a single disclosure is provided on behalf of more than one 
covered person and one of them has been authorized in accordance with 
paragraph (d)(3) of this section to receive the consumer's notice of the 
right to rescind and resolve issues concerning the consumer's payments 
on the loan, the information required by paragraph (d)(1) of this 
section may be provided only for that covered person.
    (2) The date of transfer.
    (3) The name, address and telephone number of an agent or party 
authorized to receive notice of the right to rescind and resolve issues 
concerning the consumer's payments on the loan. However, no information 
is required to be provided under this paragraph if the consumer can use 
the information provided under paragraph (d)(1) of this section for 
these purposes.
    (4) Where transfer of ownership of the debt to the covered person is 
or may be recorded in public records, or, alternatively, that the 
transfer of ownership has not been recorded in public records at the 
time the disclosure is provided.
    (e) Optional disclosures. In addition to the information required to 
be disclosed under paragraph (d) of this section, a covered person may, 
at its option, provide any other information regarding the transaction.

[75 FR 58501, Sept. 24, 2010]



Sec. Sec. 226.40-226.41  [Reserved]



Sec. 226.42  Valuation independence.

    (a) Scope. This section applies to any consumer credit transaction 
secured by the consumer's principal dwelling.
    (b) Definitions. For purposes of this section:
    (1) ``Covered person'' means a creditor with respect to a covered 
transaction or a person that provides ``settlement services,'' as 
defined in 12 U.S.C. 2602(3) and implementing regulations, in connection 
with a covered transaction.
    (2) ``Covered transaction'' means an extension of consumer credit 
that is or will be secured by the consumer's principal dwelling, as 
defined in Sec. 226.2(a)(19).
    (3) ``Valuation'' means an estimate of the value of the consumer's 
principal dwelling in written or electronic form, other than one 
produced solely by an automated model or system.
    (4) ``Valuation management functions'' means:
    (i) Recruiting, selecting, or retaining a person to prepare a 
valuation;
    (ii) Contracting with or employing a person to prepare a valuation;
    (iii) Managing or overseeing the process of preparing a valuation, 
including

[[Page 410]]

by providing administrative services such as receiving orders for and 
receiving a valuation, submitting a completed valuation to creditors and 
underwriters, collecting fees from creditors and underwriters for 
services provided in connection with a valuation, and compensating a 
person that prepares valuations; or
    (iv) Reviewing or verifying the work of a person that prepares 
valuations.
    (c) Valuation of consumer's principal dwelling--(1) Coercion. In 
connection with a covered transaction, no covered person shall or shall 
attempt to directly or indirectly cause the value assigned to the 
consumer's principal dwelling to be based on any factor other than the 
independent judgment of a person that prepares valuations, through 
coercion, extortion, inducement, bribery, or intimidation of, 
compensation or instruction to, or collusion with a person that prepares 
valuations or performs valuation management functions.
    (i) Examples of actions that violate paragraph (c)(1) include:
    (A) Seeking to influence a person that prepares a valuation to 
report a minimum or maximum value for the consumer's principal dwelling;
    (B) Withholding or threatening to withhold timely payment to a 
person that prepares a valuation or performs valuation management 
functions because the person does not value the consumer's principal 
dwelling at or above a certain amount;
    (C) Implying to a person that prepares valuations that current or 
future retention of the person depends on the amount at which the person 
estimates the value of the consumer's principal dwelling;
    (D) Excluding a person that prepares a valuation from consideration 
for future engagement because the person reports a value for the 
consumer's principal dwelling that does not meet or exceed a 
predetermined threshold; and
    (E) Conditioning the compensation paid to a person that prepares a 
valuation on consummation of the covered transaction.
    (2) Mischaracterization of value--(i) Misrepresentation. In 
connection with a covered transaction, no person that prepares 
valuations shall materially misrepresent the value of the consumer's 
principal dwelling in a valuation. A misrepresentation is material for 
purposes of this paragraph (c)(2)(i) if it is likely to significantly 
affect the value assigned to the consumer's principal dwelling. A bona 
fide error shall not be a misrepresentation.
    (ii) Falsification or alteration. In connection with a covered 
transaction, no covered person shall falsify and no covered person other 
than a person that prepares valuations shall materially alter a 
valuation. An alteration is material for purposes of this paragraph 
(c)(2)(ii) if it is likely to significantly affect the value assigned to 
the consumer's principal dwelling.
    (iii) Inducement of mischaracterization. In connection with a 
covered transaction, no covered person shall induce a person to violate 
paragraph (c)(2)(i) or (ii) of this section.
    (3) Permitted actions. Examples of actions that do not violate 
paragraph (c)(1) or (c)(2) include:
    (i) Asking a person that prepares a valuation to consider 
additional, appropriate property information, including information 
about comparable properties, to make or support a valuation;
    (ii) Requesting that a person that prepares a valuation provide 
further detail, substantiation, or explanation for the person's 
conclusion about the value of the consumer's principal dwelling;
    (iii) Asking a person that prepares a valuation to correct errors in 
the valuation;
    (iv) Obtaining multiple valuations for the consumer's principal 
dwelling to select the most reliable valuation;
    (v) Withholding compensation due to breach of contract or 
substandard performance of services; and
    (vi) Taking action permitted or required by applicable federal or 
state statute, regulation, or agency guidance.
    (d) Prohibition on conflicts of interest--(1)(i) In general. No 
person preparing a valuation or performing valuation management 
functions for a covered transaction may have a direct or indirect 
interest, financial or otherwise, in the property or transaction for 
which the valuation is or will be performed.

[[Page 411]]

    (ii) Employees and affiliates of creditors; providers of multiple 
settlement services. In any covered transaction, no person violates 
paragraph (d)(1)(i) of this section based solely on the fact that the 
person--
    (A) Is an employee or affiliate of the creditor; or
    (B) Provides a settlement service in addition to preparing 
valuations or performing valuation management functions, or based solely 
on the fact that the person's affiliate performs another settlement 
service.
    (2) Employees and affiliates of creditors with assets of more than 
$250 million for both of the past two calendar years. For any covered 
transaction in which the creditor had assets of more than $250 million 
as of December 31st for both of the past two calendar years, a person 
subject to paragraph (d)(1)(i) of this section who is employed by or 
affiliated with the creditor does not have a conflict of interest in 
violation of paragraph (d)(1)(i) of this section based on the person's 
employment or affiliate relationship with the creditor if:
    (i) The compensation of the person preparing a valuation or 
performing valuation management functions is not based on the value 
arrived at in any valuation;
    (ii) The person preparing a valuation or performing valuation 
management functions reports to a person who is not part of the 
creditor's loan production function, as defined in paragraph (d)(5)(i) 
of this section, and whose compensation is not based on the closing of 
the transaction to which the valuation relates; and
    (iii) No employee, officer or director in the creditor's loan 
production function, as defined in paragraph (d)(5)(i) of this section, 
is directly or indirectly involved in selecting, retaining, recommending 
or influencing the selection of the person to prepare a valuation or 
perform valuation management functions, or to be included in or excluded 
from a list of approved persons who prepare valuations or perform 
valuation management functions.
    (3) Employees and affiliates of creditors with assets of $250 
million or less for either of the past two calendar years. For any 
covered transaction in which the creditor had assets of $250 million or 
less as of December 31st for either of the past two calendar years, a 
person subject to paragraph (d)(1)(i) of this section who is employed by 
or affiliated with the creditor does not have a conflict of interest in 
violation of paragraph (d)(1)(i) of this section based on the person's 
employment or affiliate relationship with the creditor if:
    (i) The compensation of the person preparing a valuation or 
performing valuation management functions is not based on the value 
arrived at in any valuation; and
    (ii) The creditor requires that any employee, officer or director of 
the creditor who orders, performs, or reviews a valuation for a covered 
transaction abstain from participating in any decision to approve, not 
approve, or set the terms of that transaction.
    (4) Providers of multiple settlement services. For any covered 
transaction, a person who prepares a valuation or performs valuation 
management functions in addition to performing another settlement 
service for the transaction, or whose affiliate performs another 
settlement service for the transaction, does not have a conflict of 
interest in violation of paragraph (d)(1)(i) of this section as a result 
of the person or the person's affiliate performing another settlement 
service for the transaction if:
    (i) The creditor had assets of more than $250 million as of December 
31st for both of the past two calendar years and the conditions in 
paragraph (d)(2)(i)-(iii) are met; or
    (ii) The creditor had assets of $250 million or less as of December 
31st for either of the past two calendar years and the conditions in 
paragraph (d)(3)(i)-(ii) are met.
    (5) Definitions. For purposes of this paragraph, the following 
definitions apply:
    (i) Loan production function. The term ``loan production function'' 
means an employee, officer, director, department, division, or other 
unit of a creditor with responsibility for generating covered 
transactions, approving covered transactions, or both.
    (ii) Settlement service. The term ``settlement service'' has the 
same meaning as in the Real Estate Settlement Procedures Act, 12 U.S.C. 
2601 et seq.

[[Page 412]]

    (iii) Affiliate. The term ``affiliate'' has the same meaning as in 
Regulation Y, 12 CFR 225.2(a).
    (e) When extension of credit prohibited. In connection with a 
covered transaction, a creditor that knows, at or before consummation, 
of a violation of paragraph (c) or (d) of this section in connection 
with a valuation shall not extend credit based on the valuation, unless 
the creditor documents that it has acted with reasonable diligence to 
determine that the valuation does not materially misstate or 
misrepresent the value of the consumer's principal dwelling. For 
purposes of this paragraph (e), a valuation materially misstates or 
misrepresents the value of the consumer's principal dwelling if the 
valuation contains a misstatement or misrepresentation that affects the 
credit decision or the terms on which credit is extended.
    (f) Customary and reasonable compensation--(1) Requirement to 
provide customary and reasonable compensation to fee appraisers. In any 
covered transaction, the creditor and its agents shall compensate a fee 
appraiser for performing appraisal services at a rate that is customary 
and reasonable for comparable appraisal services performed in the 
geographic market of the property being appraised. For purposes of 
paragraph (f) of this section, ``agents'' of the creditor do not include 
any fee appraiser as defined in paragraph (f)(4)(i) of this section.
    (2) Presumption of compliance. A creditor and its agents shall be 
presumed to comply with paragraph (f)(1) if--
    (i) The creditor or its agents compensate the fee appraiser in an 
amount that is reasonably related to recent rates paid for comparable 
appraisal services performed in the geographic market of the property 
being appraised. In determining this amount, a creditor or its agents 
shall review the factors below and make any adjustments to recent rates 
paid in the relevant geographic market necessary to ensure that the 
amount of compensation is reasonable:
    (A) The type of property,
    (B) The scope of work,
    (C) The time in which the appraisal services are required to be 
performed,
    (D) Fee appraiser qualifications,
    (E) Fee appraiser experience and professional record, and
    (F) Fee appraiser work quality; and
    (ii) The creditor and its agents do not engage in any 
anticompetitive acts in violation of state or federal law that affect 
the compensation paid to fee appraisers, including--
    (A) Entering into any contracts or engaging in any conspiracies to 
restrain trade through methods such as price fixing or market 
allocation, as prohibited under section 1 of the Sherman Antitrust Act, 
15 U.S.C. 1, or any other relevant antitrust laws; or
    (B) Engaging in any acts of monopolization such as restricting any 
person from entering the relevant geographic market or causing any 
person to leave the relevant geographic market, as prohibited under 
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other 
relevant antitrust laws.
    (3) Alternative presumption of compliance. A creditor and its agents 
shall be presumed to comply with paragraph (f)(1) if the creditor or its 
agents determine the amount of compensation paid to the fee appraiser by 
relying on information about rates that:
    (i) Is based on objective third-party information, including fee 
schedules, studies, and surveys prepared by independent third parties 
such as government agencies, academic institutions, and private research 
firms;
    (ii) Is based on recent rates paid to a representative sample of 
providers of appraisal services in the geographic market of the property 
being appraised or the fee schedules of those providers; and
    (iii) In the case of information based on fee schedules, studies, 
and surveys, such fee schedules, studies, or surveys, or the information 
derived therefrom, excludes compensation paid to fee appraisers for 
appraisals ordered by appraisal management companies, as defined in 
paragraph (f)(4)(iii) of this section.
    (4) Definitions. For purposes of this paragraph (f), the following 
definitions apply:
    (i) Fee appraiser. The term ``fee appraiser'' means--
    (A) A natural person who is a state-licensed or state-certified 
appraiser

[[Page 413]]

and receives a fee for performing an appraisal, but who is not an 
employee of the person engaging the appraiser; or
    (B) An organization that, in the ordinary course of business, 
employs state-licensed or state-certified appraisers to perform 
appraisals, receives a fee for performing appraisals, and is not subject 
to the requirements of section 1124 of the Financial Institutions 
Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3331 et seq.).
    (ii) Appraisal services. The term ``appraisal services'' means the 
services required to perform an appraisal, including defining the scope 
of work, inspecting the property, reviewing necessary and appropriate 
public and private data sources (for example, multiple listing services, 
tax assessment records and public land records), developing and 
rendering an opinion of value, and preparing and submitting the 
appraisal report.
    (iii) Appraisal management company. The term ``appraisal management 
company'' means any person authorized to perform one or more of the 
following actions on behalf of the creditor--
    (A) Recruit, select, and retain fee appraisers;
    (B) Contract with fee appraisers to perform appraisal services;
    (C) Manage the process of having an appraisal performed, including 
providing administrative services such as receiving appraisal orders and 
appraisal reports, submitting completed appraisal reports to creditors 
and underwriters, collecting fees from creditors and underwriters for 
services provided, and compensating fee appraisers for services 
performed; or
    (D) Review and verify the work of fee appraisers.
    (g) Mandatory reporting--(1) Reporting required. Any covered person 
that reasonably believes an appraiser has not complied with the Uniform 
Standards of Professional Appraisal Practice or ethical or professional 
requirements for appraisers under applicable state or federal statutes 
or regulations shall refer the matter to the appropriate state agency if 
the failure to comply is material. For purposes of this paragraph 
(g)(1), a failure to comply is material if it is likely to significantly 
affect the value assigned to the consumer's principal dwelling.
    (2) Timing of reporting. A covered person shall notify the 
appropriate state agency within a reasonable period of time after the 
person determines that there is a reasonable basis to believe that a 
failure to comply required to be reported under paragraph (g)(1) of this 
section has occurred.
    (3) Definition. For purposes of this paragraph (g), ``state agency'' 
means ``state appraiser certifying and licensing agency'' under 12 
U.S.C. 3350(1) and any implementing regulations. The appropriate state 
agency to which a covered person must refer a matter under paragraph 
(g)(1) of this section is the agency for the state in which the 
consumer's principal dwelling is located.

[75 FR 66580, Oct. 28, 2010, 75 FR 80676, Dec. 23, 2010]



Sec. 226.43  Appraisals for higher-priced mortgage loans.

    (a) Definitions. For purposes of this section:
    (1) Certified or licensed appraiser means a person who is certified 
or licensed by the State agency in the State in which the property that 
secures the transaction is located, and who performs the appraisal in 
conformity with the Uniform Standards of Professional Appraisal Practice 
and the requirements applicable to appraisers in title XI of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as 
amended (12 U.S.C. 3331 et seq.), and any implementing regulations, in 
effect at the time the appraiser signs the appraiser's certification.
    (2) Consummation has the same meaning as in 12 CFR 1026.2(a)(13).
    (3) Creditor has the same meaning as in 12 CFR 1026.2(a)(17).
    (4) Credit risk means the financial risk that a consumer will 
default on a loan.
    (5) Higher-priced mortgage loan has the same meaning as in 12 CFR 
1026.35(a)(1).
    (6) Manufactured home has the same meaning as in 24 CFR 3280.2.
    (7) Manufacturer's invoice means a document issued by a manufacturer 
and provided with a manufactured home to a retail dealer that separately

[[Page 414]]

details the wholesale (base) prices at the factory for specific models 
or series of manufactured homes and itemized options (large appliances, 
built-in items and equipment), plus actual itemized charges for freight 
from the factory to the dealer's lot or the homesite (including any 
rental of wheels and axles) and for any sales taxes to be paid by the 
dealer. The invoice may recite such prices and charges on an itemized 
basis or by stating an aggregate price or charge, as appropriate, for 
each category.
    (8) National Registry means the database of information about State 
certified and licensed appraisers maintained by the Appraisal 
Subcommittee of the Federal Financial Institutions Examination Council.
    (9) New manufactured home means a manufactured home that has not 
been previously occupied.
    (10) State agency means a ``State appraiser certifying and licensing 
agency'' recognized in accordance with section 1118(b) of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3347(b)) and any implementing regulations.
    (b) Exemptions. Unless otherwise specified, the requirements in 
paragraphs (c) through (f) of this section do not apply to the following 
types of transactions:
    (1) A loan that satisfies the criteria of a qualified mortgage as 
defined pursuant to 15 U.S.C. 1639c;
    (2) An extension of credit for which the amount of credit extended 
is equal to or less than the applicable threshold amount, which is 
adjusted every year to reflect increases in the Consumer Price Index for 
Urban Wage Earners and Clerical Workers, as applicable, and published in 
the official staff commentary to this paragraph (b)(2);
    (1) A qualified mortgage as defined in 12 CFR 1026.43(e).
    (3) A transaction secured by a mobile home, boat, or trailer.
    (4) A transaction to finance the initial construction of a dwelling.
    (5) A loan with a maturity of 12 months or less, if the purpose of 
the loan is a ``bridge'' loan connected with the acquisition of a 
dwelling intended to become the consumer's principal dwelling.
    (6) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
    (7) An extension of credit that is a refinancing secured by a first 
lien, with refinancing defined as in 12 CFR 1026.20(a) (except that the 
creditor need not be the original creditor or a holder or servicer of 
the original obligation), provided that the refinancing meets the 
following criteria:
    (i) Either--
    (A) The credit risk of the refinancing is retained by the person 
that held the credit risk of the existing obligation and there is no 
commitment, at consummation, to transfer the credit risk to another 
person; or
    (B) The refinancing is insured or guaranteed by the same Federal 
government agency that insured or guaranteed the existing obligation;
    (ii) The regular periodic payments under the refinance loan do not--
    (A) Cause the principal balance to increase;
    (B) Allow the consumer to defer repayment of principal; or
    (C) Result in a balloon payment, as defined in 12 CFR 
1026.18(s)(5)(i); and
    (iii) The proceeds from the refinancing are used only to satisfy the 
existing obligation and to pay amounts attributed solely to the costs of 
the refinancing; and
    (8) A transaction secured by:
    (i) A new manufactured home and land, but the exemption shall only 
apply to the requirement in paragraph (c)(1) of this section that the 
appraiser conduct a physical visit of the interior of the new 
manufactured home; or
    (ii) A manufactured home and not land, for which the creditor 
obtains one of the following and provides a copy to the consumer no 
later than three business days prior to consummation of the 
transaction--
    (A) For a new manufactured home, the manufacturer's invoice for the 
manufactured home securing the transaction, provided that the date of 
manufacture is no earlier than 18 months prior to the creditor's receipt 
of the consumer's application for credit;
    (B) A cost estimate of the value of the manufactured home securing 
the transaction obtained from an independent cost service provider; or

[[Page 415]]

    (C) A valuation, as defined in 12 CFR 1026.42(b)(3), of the 
manufactured home performed by a person who has no direct or indirect 
interest, financial or otherwise, in the property or transaction for 
which the valuation is performed and has training in valuing 
manufactured homes.
    (c) Appraisals required--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall not extend a higher-
priced mortgage loan to a consumer without obtaining, prior to 
consummation, a written appraisal of the property to be mortgaged. The 
appraisal must be performed by a certified or licensed appraiser who 
conducts a physical visit of the interior of the property that will 
secure the transaction.
    (2) Safe harbor. A creditor obtains a written appraisal that meets 
the requirements for an appraisal required under paragraph (c)(1) of 
this section if the creditor:
    (i) Orders that the appraiser perform the appraisal in conformity 
with the Uniform Standards of Professional Appraisal Practice and title 
XI of the Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations in effect at the time the appraiser signs the appraiser's 
certification;
    (ii) Verifies through the National Registry that the appraiser who 
signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
    (iii) Confirms that the elements set forth in appendix N to this 
part are addressed in the written appraisal; and
    (iv) Has no actual knowledge contrary to the facts or certifications 
contained in the written appraisal.
    (d) Additional appraisal for certain higher-priced mortgage loans--
(1) In general. Except as provided in paragraphs (b) and (d)(7) of this 
section, a creditor shall not extend a higher-priced mortgage loan to a 
consumer to finance the acquisition of the consumer's principal dwelling 
without obtaining, prior to consummation, two written appraisals, if:
    (i) The seller acquired the property 90 or fewer days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the property exceeds the seller's 
acquisition price by more than 10 percent; or
    (ii) The seller acquired the property 91 to 180 days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the property exceeds the seller's 
acquisition price by more than 20 percent.
    (2) Different certified or licensed appraisers. The two appraisals 
required under paragraph (d)(1) of this section may not be performed by 
the same certified or licensed appraiser.
    (3) Relationship to general appraisal requirements. If two 
appraisals must be obtained under paragraph (d)(1) of this section, each 
appraisal shall meet the requirements of paragraph (c)(1) of this 
section.
    (4) Required analysis in the additional appraisal. One of the two 
required appraisals must include an analysis of:
    (i) The difference between the price at which the seller acquired 
the property and the price that the consumer is obligated to pay to 
acquire the property, as specified in the consumer's agreement to 
acquire the property from the seller;
    (ii) Changes in market conditions between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property; and
    (iii) Any improvements made to the property between the date the 
seller acquired the property and the date of the consumer's agreement to 
acquire the property.
    (5) No charge for the additional appraisal. If the creditor must 
obtain two appraisals under paragraph (d)(1) of this section, the 
creditor may charge the consumer for only one of the appraisals.
    (6) Creditor's determination of prior sale date and price--(i) 
Reasonable diligence. A creditor must obtain two written appraisals 
under paragraph (d)(1) of this section unless the creditor can 
demonstrate by exercising reasonable diligence that the requirement to 
obtain

[[Page 416]]

two appraisals does not apply. A creditor acts with reasonable diligence 
if the creditor bases its determination on information contained in 
written source documents, such as the documents listed in appendix O to 
this part.
    (ii) Inability to determine prior sale date or price--modified 
requirements for additional appraisal. If, after exercising reasonable 
diligence, a creditor cannot determine whether the conditions in 
paragraphs (d)(1)(i) and (d)(1)(ii) are present and therefore must 
obtain two written appraisals in accordance with paragraphs (d)(1) 
through (5) of this section, one of the two appraisals shall include an 
analysis of the factors in paragraph (d)(4) of this section only to the 
extent that the information necessary for the appraiser to perform the 
analysis can be determined.
    (7) Exemptions from the additional appraisal requirement. The 
additional appraisal required under paragraph (d)(1) of this section 
shall not apply to extensions of credit that finance a consumer's 
acquisition of property:
    (i) From a local, State or Federal government agency;
    (ii) From a person who acquired title to the property through 
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or 
non-judicial procedure as a result of the person's exercise of rights as 
the holder of a defaulted mortgage loan;
    (iii) From a non-profit entity as part of a local, State, or Federal 
government program under which the non-profit entity is permitted to 
acquire title to single-family properties for resale from a seller who 
acquired title to the property through the process of foreclosure, deed-
in-lieu of foreclosure, or other similar judicial or non-judicial 
procedure;
    (iv) From a person who acquired title to the property by inheritance 
or pursuant to a court order of dissolution of marriage, civil union, or 
domestic partnership, or of partition of joint or marital assets to 
which the seller was a party;
    (v) From an employer or relocation agency in connection with the 
relocation of an employee;
    (vi) From a servicemember, as defined in 50 U.S.C. App. 511(1), who 
received a deployment or permanent change of station order after the 
servicemember purchased the property;
    (vii) Located in an area designated by the President as a federal 
disaster area, if and for as long as the Federal financial institutions 
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the 
requirements in title XI of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et seq.), and 
any implementing regulations in that area; or
    (viii) Located in a rural county, as defined in 12 CFR 
1026.35(b)(2)(iv)(A).
    (e) Required disclosure--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall disclose the following 
statement, in writing, to a consumer who applies for a higher-priced 
mortgage loan: ``We may order an appraisal to determine the property's 
value and charge you for this appraisal. We will give you a copy of any 
appraisal, even if your loan does not close. You can pay for an 
additional appraisal for your own use at your own cost.'' Compliance 
with the disclosure requirement in Regulation B, 12 CFR 1002.14(a)(2), 
satisfies the requirements of this paragraph.
    (2) Timing of disclosure. The disclosure required by paragraph 
(e)(1) of this section shall be delivered or placed in the mail no later 
than the third business day after the creditor receives the consumer's 
application for a higher-priced mortgage loan subject to this section. 
In the case of a loan that is not a higher-priced mortgage loan subject 
to this section at the time of application, but becomes a higher-priced 
mortgage loan subject to this section after application, the disclosure 
shall be delivered or placed in the mail not later than the third 
business day after the creditor determines that the loan is a higher-
priced mortgage loan subject to this section.
    (f) Copy of appraisals--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall provide to the consumer 
a copy of any written appraisal performed in connection with a higher-
priced mortgage loan pursuant to paragraphs (c) and (d) of this section.
    (2) Timing. A creditor shall provide to the consumer a copy of each 
written

[[Page 417]]

appraisal pursuant to paragraph (f)(1) of this section:
    (i) No later than three business days prior to consummation of the 
loan; or
    (ii) In the case of a loan that is not consummated, no later than 30 
days after the creditor determines that the loan will not be 
consummated.
    (3) Form of copy. Any copy of a written appraisal required by 
paragraph (f)(1) of this section 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.).
    (4) No charge for copy of appraisal. A creditor shall not charge the 
consumer for a copy of a written appraisal required to be provided to 
the consumer pursuant to paragraph (f)(1) of this section.
    (g) Relation to other rules. The rules in this section were adopted 
jointly by the Board, the Office of the Comptroller of the Currency 
(OCC), the Federal Deposit Insurance Corporation, the National Credit 
Union Administration, the Federal Housing Finance Agency, and the 
Consumer Financial Protection Bureau (Bureau). These rules are 
substantively identical to the OCC's and the Bureau's higher-priced 
mortgage loan appraisal rules published separately in 12 CFR part 34, 
subpart G and 12 CFR part 164, subpart B (for the OCC) and 12 CFR 
1026.35(a) and (c) (for the Bureau). The Board's rules apply to all 
creditors who are State member banks, bank holding companies and their 
subsidiaries (other than a bank), savings and loan holding companies and 
their subsidiaries (other than a savings and loan association), and 
insured branches and agencies of foreign banks. Compliance with the 
Board's rules satisfies the requirements of 15 U.S.C. 1639h.

[78 FR 10437, Feb. 13, 2013, as amended at 78 FR 78582, 78583, Dec. 26, 
2013]



Sec. Sec. 226.44-226.45  [Reserved]



           Subpart F_Special Rules for Private Education Loans

    Source: 74 FR 41232, Aug. 14, 2009, unless otherwise noted.



Sec. 226.46  Special disclosure requirements for private education loans.

    (a) Coverage. The requirements of this subpart apply to private 
education loans as defined in Sec. 226.46(b)(5). A creditor may, at its 
option, comply with the requirements of this subpart for an extension of 
credit subject to Sec. Sec. 226.17 and 226.18 that is extended to a 
consumer for expenses incurred after graduation from a law, medical, 
dental, veterinary, or other graduate school and related to relocation, 
study for a bar or other examination, participation in an internship or 
residency program, or similar purposes.
    (1) Relation to other subparts in this part. Except as otherwise 
specifically provided, the requirements and limitations of this subpart 
are in addition to and not in lieu of those contained in other subparts 
of this part.
    (2) [Reserved]
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) Covered educational institution means:
    (i) An educational institution that meets the definition of an 
institution of higher education, as defined in paragraph (b)(2) of this 
section, without regard to the institution's accreditation status; and
    (ii) Includes an agent, officer, or employee of the institution of 
higher education. An agent means an institution-affiliated organization 
as defined by section 151 of the Higher Education Act of 1965 (20 U.S.C. 
1019) or an officer or employee of an institution-affiliated 
organization.
    (2) Institution of higher education has the same meaning as in 
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 
1001-1002) and the implementing regulations published by the U.S. 
Department of Education.
    (3) Postsecondary educational expenses means any of the expenses 
that are listed as part of the cost of attendance, as defined under 
section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), of a 
student at a covered educational institution. These expenses include 
tuition and fees, books, supplies, miscellaneous personal expenses, room 
and board, and an allowance for any loan fee, origination fee, or 
insurance

[[Page 418]]

premium charged to a student or parent for a loan incurred to cover the 
cost of the student's attendance.
    (4) Preferred lender arrangement has the same meaning as in section 
151 of the Higher Education Act of 1965 (20 U.S.C. 1019).
    (5) Private education loan means an extension of credit that:
    (i) Is not made, insured, or guaranteed under title IV of the Higher 
Education Act of 1965 (20 U.S.C. 1070 et seq.);
    (ii) Is extended to a consumer expressly, in whole or in part, for 
postsecondary educational expenses, regardless of whether the loan is 
provided by the educational institution that the student attends;
    (iii) Does not include open-end credit any loan that is secured by 
real property or a dwelling; and
    (iv) Does not include an extension of credit in which the covered 
educational institution is the creditor if:
    (A) The term of the extension of credit is 90 days or less; or
    (B) an interest rate will not be applied to the credit balance and 
the term of the extension of credit is one year or less, even if the 
credit is payable in more than four installments.
    (c) Form of disclosures--(1) Clear and conspicuous. The disclosures 
required by this subpart shall be made clearly and conspicuously.
    (2) Transaction disclosures. (i) The disclosures required under 
Sec. Sec. 226.47(b) and (c) shall be made in writing, in a form that 
the consumer may keep. The disclosures shall be grouped together, shall 
be segregated from everything else, and shall not contain any 
information not directly related to the disclosures required under 
Sec. Sec. 226.47(b) and (c), which include the disclosures required 
under Sec. 226.18.
    (ii) The disclosures may include an acknowledgement of receipt, the 
date of the transaction, and the consumer's name, address, and account 
number. The following disclosures may be made together with or 
separately from other required disclosures: the creditor's identity 
under Sec. 226.18(a), insurance or debt cancellation under Sec. 
226.18(n), and certain security interest charges under Sec. 226.18(o).
    (iii) The term ``finance charge'' and corresponding amount, when 
required to be disclosed under Sec. 226.18(d), and the interest rate 
required to be disclosed under Sec. Sec. 226.47(b)(1)(i) and (c)(1), 
shall be more conspicuous than any other disclosure, except the 
creditor's identity under Sec. 228.18(a).
    (3) Electronic disclosures. The disclosures required under 
Sec. Sec. 226.47(b) and (c) may be provided to the consumer in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The 
disclosures required by Sec. 226.47(a) may be provided to the consumer 
in electronic form on or with an application or solicitation that is 
accessed by the consumer in electronic form without regard to the 
consumer consent or other provisions of the E-Sign Act. The form 
required to be received under Sec. 226.48(e) may be accepted by the 
creditor in electronic form as provided for in that section.
    (d) Timing of disclosures--(1) Application or solicitation 
disclosures. (i) The disclosures required by Sec. 226.47(a) shall be 
provided on or with any application or solicitation. For purposes of 
this subpart, the term solicitation means an offer of credit that does 
not require the consumer to complete an application. A ``firm offer of 
credit'' as defined in section 603(l) of the Fair Credit Reporting Act 
(15 U.S.C. 1681a(l)) is a solicitation for purposes of this section.
    (ii) The creditor may, at its option, disclose orally the 
information in Sec. 226.47(a) in a telephone application or 
solicitation. Alternatively, if the creditor does not disclose orally 
the information in Sec. 226.47(a), the creditor must provide the 
disclosures or place them in the mail no later than three business days 
after the consumer has applied for the credit, except that, if the 
creditor either denies the consumer's application or provides or places 
in the mail the disclosures in Sec. 226.47(b) no later than three 
business days after the consumer requests the credit, the creditor need 
not also provide the Sec. 226.47(a) disclosures.
    (iii) Notwithstanding paragraph (d)(1)(i), for a loan that the 
consumer

[[Page 419]]

may use for multiple purposes including, but not limited to, 
postsecondary educational expenses, the creditor need not provide the 
disclosures required by Sec. 226.47(a).
    (2) Approval disclosures. The creditor shall provide the disclosures 
required by Sec. 226.47(b) before consummation on or with any notice of 
approval provided to the consumer. If the creditor mails notice of 
approval, the disclosures must be mailed with the notice. If the 
creditor communicates notice of approval by telephone, the creditor must 
mail the disclosures within three business days of providing the notice 
of approval. If the creditor communicates notice of approval 
electronically, the creditor may provide the disclosures in electronic 
form in accordance with Sec. 226.46(d)(3); otherwise the creditor must 
mail the disclosures within three business days of communicating the 
notice of approval. If the creditor communicates approval in person, the 
creditor must provide the disclosures to the consumer at that time.
    (3) Final disclosures. The disclosures required by Sec. 226.47(c) 
shall be provided after the consumer accepts the loan in accordance with 
Sec. 226.48(c)(1).
    (4) Receipt of mailed disclosures. If the disclosures under 
paragraphs (d)(1), (d)(2) or (d)(3), are mailed to the consumer, the 
consumer is considered to have received them three business days after 
they are mailed.
    (e) Basis of disclosures and use of estimates--(1) Legal obligation. 
Disclosures shall reflect the terms of the legal obligation between the 
parties.
    (2) Estimates. If any information necessary for an accurate 
disclosure is unknown to the creditor, the creditor shall make the 
disclosure based on the best information reasonably available at the 
time the disclosure is provided, and shall state clearly that the 
disclosure is an estimate.
    (f) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor will 
comply with the requirements that this part imposes on any or all of 
them. If there is more than one consumer, the disclosures may be made to 
any consumer who is primarily liable on the obligation.
    (g) Effect of subsequent events--(1) Approval disclosures. If a 
disclosure under Sec. 226.47(b) becomes inaccurate because of an event 
that occurs after the creditor delivers the required disclosures, the 
inaccuracy is not a violation of Regulation Z (12 CFR part 226), 
although new disclosures may be required under Sec. 226.48(c).
    (2) Final disclosures. If a disclosure under Sec. 226.47(c) becomes 
inaccurate because of an event that occurs after the creditor delivers 
the required disclosures, the inaccuracy is not a violation of 
Regulation Z (12 CFR part 226).



Sec. 226.47  Content of disclosures.

    (a) Application or solicitation disclosures. A creditor shall 
provide the disclosures required under paragraph (a) of this section on 
or with a solicitation or an application for a private education loan.
    (1) Interest rates. (i) The interest rate or range of interest rates 
applicable to the loan and actually offered by the creditor at the time 
of application or solicitation. If the rate will depend, in part, on a 
later determination of the consumer's creditworthiness or other factors, 
a statement that the rate for which the consumer may qualify will depend 
on the consumer's creditworthiness and other factors, if applicable.
    (ii) Whether the interest rates applicable to the loan are fixed or 
variable.
    (iii) If the interest rate may increase after consummation of the 
transaction, any limitations on the interest rate adjustments, or lack 
thereof; a statement that the consumer's actual rate could be higher or 
lower than the rates disclosed under paragraph (a)(1)(i) of this 
section, if applicable; and, if the limitation is determined by 
applicable law, that fact.
    (iv) Whether the applicable interest rates typically will be higher 
if the loan is not co-signed or guaranteed.
    (2) Fees and default or late payment costs. (i) An itemization of 
the fees or range of fees required to obtain the private education loan.
    (ii) Any fees, changes to the interest rate, and adjustments to 
principal based on the consumer's defaults or late payments.

[[Page 420]]

    (3) Repayment terms. (i) The term of the loan, which is the period 
during which regularly scheduled payments of principal and interest will 
be due.
    (ii) A description of any payment deferral options, or, if the 
consumer does not have the option to defer payments, that fact.
    (iii) For each payment deferral option applicable while the student 
is enrolled at a covered educational institution:
    (A) Whether interest will accrue during the deferral period; and
    (B) If interest accrues, whether payment of interest may be deferred 
and added to the principal balance.
    (iv) A statement that if the consumer files for bankruptcy, the 
consumer may still be required to pay back the loan.
    (4) Cost estimates. An example of the total cost of the loan 
calculated as the total of payments over the term of the loan:
    (i) Using the highest rate of interest disclosed under paragraph 
(a)(1) of this section and including all finance charges applicable to 
loans at that rate;
    (ii) Using an amount financed of $10,000, or $5000 if the creditor 
only offers loans of this type for less than $10,000; and
    (iii) Calculated for each payment option.
    (5) Eligibility. Any age or school enrollment eligibility 
requirements relating to the consumer or co-signer.
    (6) Alternatives to private education loans. (i) A statement that 
the consumer may qualify for Federal student financial assistance 
through a program under title IV of the Higher Education Act of 1965 (20 
U.S.C. 1070 et seq.).
    (ii) The interest rates available under each program under title IV 
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) and whether 
the rates are fixed or variable.
    (iii) A statement that the consumer may obtain additional 
information concerning Federal student financial assistance from the 
institution of higher education that the student attends, or at the Web 
site of the U.S. Department of Education, including an appropriate Web 
site address.
    (iv) A statement that a covered educational institution may have 
school-specific education loan benefits and terms not detailed on the 
disclosure form.
    (7) Rights of the consumer. A statement that if the loan is 
approved, the terms of the loan will be available and will not change 
for 30 days except as a result of adjustments to the interest rate and 
other changes permitted by law.
    (8) Self-certification information. A statement that, before the 
loan may be consummated, the consumer must complete the self-
certification form and that the form may be obtained from the 
institution of higher education that the student attends.
    (b) Approval disclosures. On or with any notice of approval provided 
to the consumer, the creditor shall disclose the information required 
under Sec. 226.18 and the following information:
    (1) Interest rate. (i) The interest rate applicable to the loan.
    (ii) Whether the interest rate is fixed or variable.
    (iii) If the interest rate may increase after consummation of the 
transaction, any limitations on the rate adjustments, or lack thereof.
    (2) Fees and default or late payment costs. (i) An itemization of 
the fees or range of fees required to obtain the private education loan.
    (ii) Any fees, changes to the interest rate, and adjustments to 
principal based on the consumer's defaults or late payments.
    (3) Repayment terms. (i) The principal amount of the loan for which 
the consumer has been approved.
    (ii) The term of the loan, which is the period during which 
regularly scheduled payments of principal and interest will be due.
    (iii) A description of the payment deferral option chosen by the 
consumer, if applicable, and any other payment deferral options that the 
consumer may elect at a later time.
    (iv) Any payments required while the student is enrolled at a 
covered educational institution, based on the deferral option chosen by 
the consumer.
    (v) The amount of any unpaid interest that will accrue while the 
student is enrolled at a covered educational institution, based on the 
deferral option chosen by the consumer.

[[Page 421]]

    (vi) A statement that if the consumer files for bankruptcy, the 
consumer may still be required to pay back the loan.
    (vii) An estimate of the total amount of payments calculated based 
on:
    (A) The interest rate applicable to the loan. Compliance with Sec. 
226.18(h) constitutes compliance with this requirement.
    (B) The maximum possible rate of interest for the loan or, if a 
maximum rate cannot be determined, a rate of 25%.
    (C) If a maximum rate cannot be determined, the estimate of the 
total amount for repayment must include a statement that there is no 
maximum rate and that the total amount for repayment disclosed under 
paragraph (b)(3)(vii)(B) of this section is an estimate and will be 
higher if the applicable interest rate increases.
    (viii) The maximum monthly payment based on the maximum rate of 
interest for the loan or, if a maximum rate cannot be determined, a rate 
of 25%. If a maximum cannot be determined, a statement that there is no 
maximum rate and that the monthly payment amount disclosed is an 
estimate and will be higher if the applicable interest rate increases.
    (4) Alternatives to private education loans. (i) A statement that 
the consumer may qualify for Federal student financial assistance 
through a program under title IV of the Higher Education Act of 1965 (20 
U.S.C. 1070 et seq.).
    (ii) The interest rates available under each program under title IV 
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), and 
whether the rates are fixed or variable.
    (iii) A statement that the consumer may obtain additional 
information concerning Federal student financial assistance from the 
institution of higher education that the student attends, or at the Web 
site of the U.S. Department of Education, including an appropriate Web 
site address.
    (5) Rights of the consumer. (i) A statement that the consumer may 
accept the terms of the loan until the acceptance period under Sec. 
226.48(c)(1) has expired. The statement must include the specific date 
on which the acceptance period expires, based on the date upon which the 
consumer receives the disclosures required under this subsection for the 
loan. The disclosure must also specify the method or methods by which 
the consumer may communicate acceptance.
    (ii) A statement that, except for changes to the interest rate and 
other changes permitted by law, the rates and terms of the loan may not 
be changed by the creditor during the period described in paragraph 
(b)(5)(i) of this section.
    (c) Final disclosures. After the consumer has accepted the loan in 
accordance with Sec. 226.48(c)(1), the creditor shall disclose to the 
consumer the information required by Sec. 226.18 and the following 
information:
    (1) Interest rate. Information required to be disclosed under 
Sec. Sec. 226.47(b)(1).
    (2) Fees and default or late payment costs. Information required to 
be disclosed under Sec. 226.47(b)(2).
    (3) Repayment terms. Information required to be disclosed under 
Sec. 226.47(b)(3).
    (4) Cancellation right. A statement that:
    (i) the consumer has the right to cancel the loan, without penalty, 
at any time before the cancellation period under Sec. 226.48(d) 
expires, and
    (ii) loan proceeds will not be disbursed until after the 
cancellation period under Sec. 226.48(d) expires. The statement must 
include the specific date on which the cancellation period expires and 
state that the consumer may cancel by that date. The statement must also 
specify the method or methods by which the consumer may cancel. If the 
creditor permits cancellation by mail, the statement must specify that 
the consumer's mailed request will be deemed timely if placed in the 
mail not later than the cancellation date specified on the disclosure. 
The disclosures required by this paragraph (c)(4) must be made more 
conspicuous than any other disclosure required under this section, 
except for the finance charge, the interest rate, and the creditor's 
identity, which must be disclosed in accordance with the requirements of 
Sec. 226.46(c)(2)(iii).

[[Page 422]]



Sec. 226.48  Limitations on private education loans.

    (a) Co-branding prohibited. (1) Except as provided in paragraph (b) 
of this section, a creditor, other than the covered educational 
institution itself, shall not use the name, emblem, mascot, or logo of a 
covered educational institution, or other words, pictures, or symbols 
identified with a covered educational institution, in the marketing of 
private education loans in a way that implies that the covered education 
institution endorses the creditor's loans.
    (2) A creditor's marketing of private education loans does not imply 
that the covered education institution endorses the creditor's loans if 
the marketing includes a clear and conspicuous disclosure that is 
equally prominent and closely proximate to the reference to the covered 
educational institution that the covered educational institution does 
not endorse the creditor's loans and that the creditor is not affiliated 
with the covered educational institution.
    (b) Endorsed lender arrangements. If a creditor and a covered 
educational institution have entered into an arrangement where the 
covered educational institution agrees to endorse the creditor's private 
education loans, and such arrangement is not prohibited by other 
applicable law or regulation, paragraph (a)(1) of this section does not 
apply if the private education loan marketing includes a clear and 
conspicuous disclosure that is equally prominent and closely proximate 
to the reference to the covered educational institution that the 
creditor's loans are not offered or made by the covered educational 
institution, but are made by the creditor.
    (c) Consumer's right to accept. (1) The consumer has the right to 
accept the terms of a private education loan at any time within 30 
calendar days following the date on which the consumer receives the 
disclosures required under Sec. 226.47(b).
    (2) Except for changes permitted under paragraphs (c)(3) and (c)(4), 
the rate and terms of the private education loan that are required to be 
disclosed under Sec. Sec. 226.47(b) and (c) may not be changed by the 
creditor prior to the earlier of:
    (i) The date of disbursement of the loan; or
    (ii) The expiration of the 30 calendar day period described in 
paragraph (c)(1) of this section if the consumer has not accepted the 
loan within that time.
    (3) Exceptions not requiring re-disclosure. (i) Notwithstanding 
paragraph (c)(2) of this section, nothing in this section prevents the 
creditor from:
    (A) Withdrawing an offer before consummation of the transaction if 
the extension of credit would be prohibited by law or if the creditor 
has reason to believe that the consumer has committed fraud in 
connection with the loan application;
    (B) Changing the interest rate based on adjustments to the index 
used for a loan;
    (C) Changing the interest rate and terms if the change will 
unequivocally benefit the consumer; or
    (D) Reducing the loan amount based upon a certification or other 
information received from the covered educational institution, or from 
the consumer, indicating that the student's cost of attendance has 
decreased or the consumer's other financial aid has increased. A 
creditor may make corresponding changes to the rate and other terms only 
to the extent that the consumer would have received the terms if the 
consumer had applied for the reduced loan amount.
    (ii) If the creditor changes the rate or terms of the loan under 
this paragraph (c)(3), the creditor need not provide the disclosures 
required under Sec. 228.47(b) for the new loan terms, nor need the 
creditor provide an additional 30-day period to the consumer to accept 
the new terms of the loan under paragraph (c)(1) of this section.
    (4) Exceptions requiring re-disclosure. (i) Notwithstanding 
paragraphs (c)(2) or (c)(3) of this section, nothing in this section 
prevents the creditor, at its option, from changing the rate or terms of 
the loan to accommodate a specific request by the consumer. For example, 
if the consumer requests a different repayment option, the creditor may, 
but need not, offer to provide the requested repayment option and make 
any other changes to the rate and terms.
    (ii) If the creditor changes the rate or terms of the loan under 
this paragraph

[[Page 423]]

(c)(4), the creditor shall provide the disclosures required under Sec. 
228.47(b) and shall provide the consumer the 30-day period to accept the 
loan under paragraph (c)(1) of this section. The creditor shall not make 
further changes to the rates and terms of the loan, except as specified 
in paragraphs (c)(3) and (4) of this section. Except as permitted under 
Sec. 226.48(c)(3), unless the consumer accepts the loan offered by the 
creditor in response to the consumer's request, the creditor may not 
withdraw or change the rates or terms of the loan for which the consumer 
was approved prior to the consumer's request for a change in loan terms.
    (d) Consumer's right to cancel. The consumer may cancel a private 
education loan, without penalty, until midnight of the third business 
day following the date on which the consumer receives the disclosures 
required by Sec. 226.47(c). No funds may be disbursed for a private 
education loan until the three-business day period has expired.
    (e) Self-certification form. For a private education loan intended 
to be used for the postsecondary educational expenses of a student while 
the student is attending an institution of higher education, the 
creditor shall obtain from the consumer or the institution of higher 
education the form developed by the Secretary of Education under section 
155 of the Higher Education Act of 1965, signed by the consumer, in 
written or electronic form, before consummating the private education 
loan.
    (f) Provision of information by preferred lenders. A creditor that 
has a preferred lender arrangement with a covered educational 
institution shall provide to the covered educational institution the 
information required under Sec. Sec. 226.47(a)(1) through (5), for each 
type of private education loan that the lender plans to offer to 
consumers for students attending the covered educational institution for 
the period beginning July 1 of the current year and ending June 30 of 
the following year. The creditor shall provide the information annually 
by the later of the 1st day of April, or within 30 days after entering 
into, or learning the creditor is a party to, a preferred lender 
arrangement.



Subpart G_Special Rules Applicable to Credit Card Accounts and Open-End 
                   Credit Offered to College Students

    Source: 75 FR 7818, Feb. 22, 2010, unless otherwise noted.



Sec. 226.51  Ability to Pay.

    (a) General rule--(1)(i) Consideration of ability to pay. A card 
issuer must not open a credit card account for a consumer under an open-
end (not home-secured) consumer credit plan, or increase any credit 
limit applicable to such account, unless the card issuer considers the 
consumer's independent ability to make the required minimum periodic 
payments under the terms of the account based on the consumer's income 
or assets and current obligations.
    (ii) Reasonable policies and procedures. Card issuers must establish 
and maintain reasonable written policies and procedures to consider a 
consumer's independent income or assets and current obligations. 
Reasonable policies and procedures to consider a consumer's independent 
ability to make the required payments include the consideration of at 
least one of the following: The ratio of debt obligations to income; the 
ratio of debt obligations to assets; or the income the consumer will 
have after paying debt obligations. It would be unreasonable for a card 
issuer to not review any information about a consumer's income, assets, 
or current obligations, or to issue a credit card to a consumer who does 
not have any independent income or assets.
    (2) Minimum periodic payments--(i) Reasonable method. For purposes 
of paragraph (a)(1) of this section, a card issuer must use a reasonable 
method for estimating the minimum periodic payments the consumer would 
be required to pay under the terms of the account.
    (ii) Safe harbor. A card issuer complies with paragraph (a)(2)(i) of 
this section if it estimates required minimum periodic payments using 
the following method:
    (A) The card issuer assumes utilization, from the first day of the 
billing cycle, of the full credit line that the

[[Page 424]]

issuer is considering offering to the consumer; and
    (B) The card issuer uses a minimum payment formula employed by the 
issuer for the product the issuer is considering offering to the 
consumer or, in the case of an existing account, the minimum payment 
formula that currently applies to that account, provided that:
    (1) If the applicable minimum payment formula includes interest 
charges, the card issuer estimates those charges using an interest rate 
that the issuer is considering offering to the consumer for purchases 
or, in the case of an existing account, the interest rate that currently 
applies to purchases; and
    (2) If the applicable minimum payment formula includes mandatory 
fees, the card issuer must assume that such fees have been charged to 
the account.
    (b) Rules affecting young consumers--(1) Applications from young 
consumers. A card issuer may not open a credit card account under an 
open-end (not home-secured) consumer credit plan for a consumer less 
than 21 years old, unless the consumer has submitted a written 
application and the card issuer has:
    (i) Financial information indicating the consumer has an independent 
ability to make the required minimum periodic payments on the proposed 
extension of credit in connection with the account, consistent with 
paragraph (a) of this section; or
    (ii)(A) A signed agreement of a cosigner, guarantor, or joint 
applicant who is at least 21 years old to be either secondarily liable 
for any debt on the account incurred by the consumer before the consumer 
has attained the age of 21 or jointly liable with the consumer for any 
debt on the account, and
    (B) Financial information indicating such cosigner, guarantor, or 
joint applicant has the ability to make the required minimum periodic 
payments on such debts, consistent with paragraph (a) of this section.
    (2) Credit line increases for young consumers. If a credit card 
account has been opened pursuant to paragraph (b)(1)(ii) of this 
section, no increase in the credit limit may be made on such account 
before the consumer attains the age of 21 unless the cosigner, 
guarantor, or joint accountholder who assumed liability at account 
opening agrees in writing to assume liability on the increase.

[75 FR 7818, Feb. 22, 2010, as amended at 76 FR 23002, Apr. 25, 2011]



Sec. 226.52  Limitations on fees.

    (a) Limitations prior to account opening and during first year after 
account opening--(1) General rule. Except as provided in paragraph 
(a)(2) of this section, the total amount of fees a consumer is required 
to pay with respect to a credit card account under an open-end (not 
home-secured) consumer credit plan prior to account opening and during 
the first year after account opening must not exceed 25 percent of the 
credit limit in effect when the account is opened. For purposes of this 
paragraph, an account is considered open no earlier than the date on 
which the account may first be used by the consumer to engage in 
transactions.
    (2) Fees not subject to limitations. Paragraph (a) of this section 
does not apply to:
    (i) Late payment fees, over-the-limit fees, and returned-payment 
fees; or
    (ii) Fees that the consumer is not required to pay with respect to 
the account.
    (3) Rule of construction. Paragraph (a) of this section does not 
authorize the imposition or payment of fees or charges otherwise 
prohibited by law.
    (b) Limitations on penalty fees. A card issuer must not impose a fee 
for violating the terms or other requirements of a credit card account 
under an open-end (not home-secured) consumer credit plan unless the 
dollar amount of the fee is consistent with paragraphs (b)(1) and (b)(2) 
of this section.
    (1) General rule. Except as provided in paragraph (b)(2) of this 
section, a card issuer may impose a fee for violating the terms or other 
requirements of a credit card account under an open-end (not home-
secured) consumer credit plan if the dollar amount of the fee is 
consistent with either paragraph (b)(1)(i) or (b)(1)(ii) of this 
section.
    (i) Fees based on costs. A card issuer may impose a fee for 
violating the terms or other requirements of an account if the card 
issuer has determined

[[Page 425]]

that the dollar amount of the fee represents a reasonable proportion of 
the total costs incurred by the card issuer as a result of that type of 
violation. A card issuer must reevaluate this determination at least 
once every twelve months. If as a result of the reevaluation the card 
issuer determines that a lower fee represents a reasonable proportion of 
the total costs incurred by the card issuer as a result of that type of 
violation, the card issuer must begin imposing the lower fee within 45 
days after completing the reevaluation. If as a result of the 
reevaluation the card issuer determines that a higher fee represents a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of that type of violation, the card issuer may begin imposing 
the higher fee after complying with the notice requirements in Sec. 
226.9.
    (ii) Safe harbors. A card issuer may impose a fee for violating the 
terms or other requirements of an account if the dollar amount of the 
fee does not exceed, as applicable:
    (A) $25.00;
    (B) $35.00 if the card issuer previously imposed a fee pursuant to 
paragraph (b)(1)(ii)(A) of this section for a violation of the same type 
that occurred during the same billing cycle or one of the next six 
billing cycles; or
    (C) Three percent of the delinquent balance on a charge card account 
that requires payment of outstanding balances in full at the end of each 
billing cycle if the card issuer has not received the required payment 
for two or more consecutive billing cycles.
    (D) The amounts in paragraphs (b)(1)(ii)(A) and (b)(1)(ii)(B) of 
this section will be adjusted annually by the Board to reflect changes 
in the Consumer Price Index.
    (2) Prohibited fees--(i) Fees that exceed dollar amount associated 
with violation--(A) Generally. A card issuer must not impose a fee for 
violating the terms or other requirements of a credit card account under 
an open-end (not home-secured) consumer credit plan that exceeds the 
dollar amount associated with the violation.
    (B) No dollar amount associated with violation. A card issuer must 
not impose a fee for violating the terms or other requirements of a 
credit card account under an open-end (not home-secured) consumer credit 
plan when there is no dollar amount associated with the violation. For 
purposes of paragraph (b)(2)(i) of this section, there is no dollar 
amount associated with the following violations:
    (1) Transactions that the card issuer declines to authorize;
    (2) Account inactivity; and
    (3) The closure or termination of an account.
    (ii) Multiple fees based on a single event or transaction. A card 
issuer must not impose more than one fee for violating the terms or 
other requirements of a credit card account under an open-end (not home-
secured) consumer credit plan based on a single event or transaction. A 
card issuer may, at its option, comply with this prohibition by imposing 
no more than one fee for violating the terms or other requirements of an 
account during a billing cycle.

[75 FR 7818, Feb. 22, 2010, as amended at 75 FR 37571, June 26, 2010; 76 
FR 23002, Apr. 25, 2011]



Sec. 226.53  Allocation of payments.

    (a) General rule. Except as provided in paragraph (b) of this 
section, when a consumer makes a payment in excess of the required 
minimum periodic payment for a credit card account under an open-end 
(not home-secured) consumer credit plan, the card issuer must allocate 
the excess amount first to the balance with the highest annual 
percentage rate and any remaining portion to the other balances in 
descending order based on the applicable annual percentage rate.
    (b) Special rules--(1) Accounts with balances subject to deferred 
interest or similar program. When a balance on a credit card account 
under an open-end (not home-secured) consumer credit plan is subject to 
a deferred interest or similar program that provides that a consumer 
will not be obligated to pay interest that accrues on the balance if the 
balance is paid in full prior to the expiration of a specified period of 
time:
    (i) Last two billing cycles. The card issuer must allocate any 
amount paid

[[Page 426]]

by the consumer in excess of the required minimum periodic payment 
consistent with paragraph (a) of this section, except that, during the 
two billing cycles immediately preceding expiration of the specified 
period, the excess amount must be allocated first to the balance subject 
to the deferred interest or similar program and any remaining portion 
allocated to any other balances consistent with paragraph (a) of this 
section; or
    (ii) Consumer request. The card issuer may at its option allocate 
any amount paid by the consumer in excess of the required minimum 
periodic payment among the balances on the account in the manner 
requested by the consumer.
    (2) Accounts with secured balances. When a balance on a credit card 
account under an open-end (not home-secured) consumer credit plan is 
secured, the card issuer may at its option allocate any amount paid by 
the consumer in excess of the required minimum periodic payment to that 
balance if requested by the consumer.

[75 FR 7818, Feb. 22, 2010, as amended at 76 FR 23003, Apr. 25, 2011]



Sec. 226.54  Limitations on the imposition of finance charges.

    (a) Limitations on imposing finance charges as a result of the loss 
of a grace period--(1) General rule. Except as provided in paragraph (b) 
of this section, a card issuer must not impose finance charges as a 
result of the loss of a grace period on a credit card account under an 
open-end (not home-secured) consumer credit plan if those finance 
charges are based on:
    (i) Balances for days in billing cycles that precede the most recent 
billing cycle; or
    (ii) Any portion of a balance subject to a grace period that was 
repaid prior to the expiration of the grace period.
    (2) Definition of grace period. For purposes of paragraph (a)(1) of 
this section, ``grace period'' has the same meaning as in Sec. 
226.5(b)(2)(ii)(B)(3).
    (b) Exceptions. Paragraph (a) of this section does not apply to:
    (1) Adjustments to finance charges as a result of the resolution of 
a dispute under Sec. 226.12 or Sec. 226.13; or
    (2) Adjustments to finance charges as a result of the return of a 
payment.



Sec. 226.55  Limitations on increasing annual percentage rates, fees,
and charges.

    (a) General rule. Except as provided in paragraph (b) of this 
section, a card issuer must not increase an annual percentage rate or a 
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) on a credit card account under an open-end 
(not home-secured) consumer credit plan.
    (b) Exceptions. A card issuer may increase an annual percentage rate 
or a fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) pursuant to an exception set forth in this 
paragraph even if that increase would not be permitted under a different 
exception.
    (1) Temporary rate, fee, or charge exception. A card issuer may 
increase an annual percentage rate or a fee or charge required to be 
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) upon 
the expiration of a specified period of six months or longer, provided 
that:
    (i) Prior to the commencement of that period, the card issuer 
disclosed in writing to the consumer, in a clear and conspicuous manner, 
the length of the period and the annual percentage rate, fee, or charge 
that would apply after expiration of the period; and
    (ii) Upon expiration of the specified period:
    (A) The card issuer must not apply an annual percentage rate, fee, 
or charge to transactions that occurred prior to the period that exceeds 
the annual percentage rate, fee, or charge that applied to those 
transactions prior to the period;
    (B) If the disclosures required by paragraph (b)(1)(i) of this 
section are provided pursuant to Sec. 226.9(c), the card issuer must 
not apply an annual percentage rate, fee, or charge to transactions that 
occurred within 14 days after provision of the notice that exceeds the 
annual percentage rate, fee, or charge that applied to that category of 
transactions prior to provision of the notice; and
    (C) The card issuer must not apply an annual percentage rate, fee, 
or charge to transactions that occurred during the period that exceeds 
the increased annual percentage rate, fee, or charge

[[Page 427]]

disclosed pursuant to paragraph (b)(1)(i) of this section.
    (2) Variable rate exception. A card issuer may increase an annual 
percentage rate when:
    (i) The annual percentage rate varies according to an index that is 
not under the card issuer's control and is available to the general 
public; and
    (ii) The increase in the annual percentage rate is due to an 
increase in the index.
    (3) Advance notice exception. A card issuer may increase an annual 
percentage rate or a fee or charge required to be disclosed under Sec. 
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with the 
applicable notice requirements in Sec. 226.9(b), (c), or (g), provided 
that:
    (i) If a card issuer discloses an increased annual percentage rate, 
fee, or charge pursuant to Sec. 226.9(b), the card issuer must not 
apply that rate, fee, or charge to transactions that occurred prior to 
provision of the notice;
    (ii) If a card issuer discloses an increased annual percentage rate, 
fee, or charge pursuant to Sec. 226.9(c) or (g), the card issuer must 
not apply that rate, fee, or charge to transactions that occurred prior 
to or within 14 days after provision of the notice; and
    (iii) This exception does not permit a card issuer to increase an 
annual percentage rate or a fee or charge required to be disclosed under 
Sec. 226.6(b)(2)(ii), (iii), or (xii) during the first year after the 
account is opened, while the account is closed, or while the card issuer 
does not permit the consumer to use the account for new transactions. 
For purposes of this paragraph, an account is considered open no earlier 
than the date on which the account may first be used by the consumer to 
engage in transactions.
    (4) Delinquency exception. A card issuer may increase an annual 
percentage rate or a fee or charge required to be disclosed under Sec. 
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) due to the card issuer not 
receiving the consumer's required minimum periodic payment within 60 
days after the due date for that payment, provided that:
    (i) The card issuer must disclose in a clear and conspicuous manner 
in the notice of the increase pursuant to Sec. 226.9(c) or (g):
    (A) A statement of the reason for the increase; and
    (B) That the increased annual percentage rate, fee, or charge will 
cease to apply if the card issuer receives six consecutive required 
minimum periodic payments on or before the payment due date beginning 
with the first payment due following the effective date of the increase; 
and
    (ii) If the card issuer receives six consecutive required minimum 
periodic payments on or before the payment due date beginning with the 
first payment due following the effective date of the increase, the card 
issuer must reduce any annual percentage rate, fee, or charge increased 
pursuant to this exception to the annual percentage rate, fee, or charge 
that applied prior to the increase with respect to transactions that 
occurred prior to or within 14 days after provision of the Sec. 
226.9(c) or (g) notice.
    (5) Workout and temporary hardship arrangement exception. A card 
issuer may increase an annual percentage rate or a fee or charge 
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or 
(b)(2)(xii) due to the consumer's completion of a workout or temporary 
hardship arrangement or the consumer's failure to comply with the terms 
of such an arrangement, provided that:
    (i) Prior to commencement of the arrangement (except as provided in 
Sec. 226.9(c)(2)(v)(D)), the card issuer has provided the consumer with 
a clear and conspicuous written disclosure of the terms of the 
arrangement (including any increases due to the completion or failure of 
the arrangement); and
    (ii) Upon the completion or failure of the arrangement, the card 
issuer must not apply to any transactions that occurred prior to 
commencement of the arrangement an annual percentage rate, fee, or 
charge that exceeds the annual percentage rate, fee, or charge that 
applied to those transactions prior to commencement of the arrangement.
    (6) Servicemembers Civil Relief Act exception. If an annual 
percentage rate or a fee or charge required to be disclosed under Sec. 
226.6(b)(2)(ii), (iii), or (xii) has been decreased pursuant to 50 
U.S.C.

[[Page 428]]

app. 527 or a similar Federal or State statute or regulation, a card 
issuer may increase that annual percentage rate, fee, or charge once 50 
U.S.C. app. 527 or the similar statute or regulation no longer applies, 
provided that the card issuer must not apply to any transactions that 
occurred prior to the decrease an annual percentage rate, fee, or charge 
that exceeds the annual percentage rate, fee, or charge that applied to 
those transactions prior to the decrease.
    (c) Treatment of protected balances--(1) Definition of protected 
balance. For purposes of this paragraph, ``protected balance'' means the 
amount owed for a category of transactions to which an increased annual 
percentage rate or an increased fee or charge required to be disclosed 
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) cannot be 
applied after the annual percentage rate, fee, or charge for that 
category of transactions has been increased pursuant to paragraph (b)(3) 
of this section.
    (2) Repayment of protected balance. The card issuer must not require 
repayment of the protected balance using a method that is less 
beneficial to the consumer than one of the following methods:
    (i) The method of repayment for the account before the effective 
date of the increase;
    (ii) An amortization period of not less than five years, beginning 
no earlier than the effective date of the increase; or
    (iii) A required minimum periodic payment that includes a percentage 
of the balance that is equal to no more than twice the percentage 
required before the effective date of the increase.
    (d) Continuing application. This section continues to apply to a 
balance on a credit card account under an open-end (not home-secured) 
consumer credit plan after:
    (1) The account is closed or acquired by another creditor; or
    (2) The balance is transferred from a credit card account under an 
open-end (not home-secured) consumer credit plan issued by a creditor to 
another credit account issued by the same creditor or its affiliate or 
subsidiary (unless the account to which the balance is transferred is 
subject to Sec. 226.5b).
    (e) Promotional waivers or rebates of interest, fees, and other 
charges. If a card issuer promotes the waiver or rebate of finance 
charges due to a periodic interest rate or fees or charges required to 
be disclosed under Sec. 226.6(b)(2)(ii), (iii), or (xii) and applies 
the waiver or rebate to a credit card account under an open-end (not 
home-secured) consumer credit plan, any cessation of the waiver or 
rebate on that account constitutes an increase in an annual percentage 
rate, fee, or charge for purposes of this section.

[75 FR 7818, Feb. 22, 2010, as amended at 76 FR 23003, Apr. 25, 2011]



Sec. 226.56  Requirements for over-the-limit transactions.

    (a) Definition. For purposes of this section, the term ``over-the-
limit transaction'' means any extension of credit by a card issuer to 
complete a transaction that causes a consumer's credit card account 
balance to exceed the credit limit.
    (b) Opt-in requirement--(1) General. A card issuer shall not assess 
a fee or charge on a consumer's credit card account under an open-end 
(not home-secured) consumer credit plan for an over-the-limit 
transaction unless the card issuer:
    (i) Provides the consumer with an oral, written or electronic 
notice, segregated from all other information, describing the consumer's 
right to affirmatively consent, or opt in, to the card issuer's payment 
of an over-the-limit transaction;
    (ii) Provides a reasonable opportunity for the consumer to 
affirmatively consent, or opt in, to the card issuer's payment of over-
the-limit transactions;
    (iii) Obtains the consumer's affirmative consent, or opt-in, to the 
card issuer's payment of such transactions;
    (iv) Provides the consumer with confirmation of the consumer's 
consent in writing, or if the consumer agrees, electronically; and
    (v) Provides the consumer notice in writing of the right to revoke 
that consent following the assessment of an over-the-limit fee or 
charge.

[[Page 429]]

    (2) Completion of over-the-limit transactions without consumer 
consent. Notwithstanding the absence of a consumer's affirmative consent 
under paragraph (b)(1)(iii) of this section, a card issuer may pay any 
over-the-limit transaction on a consumer's account provided that the 
card issuer does not impose any fee or charge on the account for paying 
that over-the-limit transaction.
    (c) Method of election. A card issuer may permit a consumer to 
consent to the card issuer's payment of any over-the-limit transaction 
in writing, orally, or electronically, at the card issuer's option. The 
card issuer must also permit the consumer to revoke his or her consent 
using the same methods available to the consumer for providing consent.
    (d) Timing and placement of notices--(1) Initial notice--(i) 
General. The notice required by paragraph (b)(1)(i) of this section 
shall be provided prior to the assessment of any over-the-limit fee or 
charge on a consumer's account.
    (ii) Oral or electronic consent. If a consumer consents to the card 
issuer's payment of any over-the-limit transaction by oral or electronic 
means, the card issuer must provide the notice required by paragraph 
(b)(1)(i) of this section immediately prior to obtaining that consent.
    (2) Confirmation of opt-in. The notice required by paragraph 
(b)(1)(iv) of this section may be provided no later than the first 
periodic statement sent after the consumer has consented to the card 
issuer's payment of over-the-limit transactions.
    (3) Notice of right of revocation. The notice required by paragraph 
(b)(1)(v) of this section shall be provided on the front of any page of 
each periodic statement that reflects the assessment of an over-the-
limit fee or charge on a consumer's account.
    (e) Content--(1) Initial notice. The notice required by paragraph 
(b)(1)(i) of this section shall include all applicable items in this 
paragraph (e)(1) and may not contain any information not specified in or 
otherwise permitted by this paragraph.
    (i) Fees. The dollar amount of any fees or charges assessed by the 
card issuer on a consumer's account for an over-the-limit transaction;
    (ii) APRs. Any increased periodic rate(s) (expressed as an annual 
percentage rate(s)) that may be imposed on the account as a result of an 
over-the-limit transaction; and
    (iii) Disclosure of opt-in right. An explanation of the consumer's 
right to affirmatively consent to the card issuer's payment of over-the-
limit transactions, including the method(s) by which the consumer may 
consent.
    (2) Subsequent notice. The notice required by paragraph (b)(1)(v) of 
this section shall describe the consumer's right to revoke any consent 
provided under paragraph (b)(1)(iii) of this section, including the 
method(s) by which the consumer may revoke.
    (3) Safe harbor. Use of Model Forms G-25(A) or G-25(B) of appendix G 
to this part, or substantially similar notices, constitutes compliance 
with the notice content requirements of paragraph (e) of this section.
    (f) Joint relationships. If two or more consumers are jointly liable 
on a credit card account under an open-end (not home-secured) consumer 
credit plan, the card issuer shall treat the affirmative consent of any 
of the joint consumers as affirmative consent for that account. 
Similarly, the card issuer shall treat a revocation of consent by any of 
the joint consumers as revocation of consent for that account.
    (g) Continuing right to opt in or revoke opt-in. A consumer may 
affirmatively consent to the card issuer's payment of over-the-limit 
transactions at any time in the manner described in the notice required 
by paragraph (b)(1)(i) of this section. Similarly, the consumer may 
revoke the consent at any time in the manner described in the notice 
required by paragraph (b)(1)(v) of this section.
    (h) Duration of opt-in. A consumer's affirmative consent to the card 
issuer's payment of over-the-limit transactions is effective until 
revoked by the consumer, or until the card issuer decides for any reason 
to cease paying over-the-limit transactions for the consumer.
    (i) Time to comply with revocation request. A card issuer must 
comply with a consumer's revocation request as

[[Page 430]]

soon as reasonably practicable after the card issuer receives it.
    (j) Prohibited practices. Notwithstanding a consumer's affirmative 
consent to a card issuer's payment of over-the-limit transactions, a 
card issuer is prohibited from engaging in the following practices:
    (1) Fees or charges imposed per cycle--(i) General rule. A card 
issuer may not impose more than one over-the-limit fee or charge on a 
consumer's credit card account per billing cycle, and, in any event, 
only if the credit limit was exceeded during the billing cycle. In 
addition, except as provided in paragraph (j)(1)(ii) of this section, a 
card issuer may not impose an over-the-limit fee or charge on the 
consumer's credit card account for more than three billing cycles for 
the same over-the-limit transaction where the consumer has not reduced 
the account balance below the credit limit by the payment due date for 
either of the last two billing cycles.
    (ii) Exception. The prohibition in paragraph (j)(1)(i) of this 
section on imposing an over-the-limit fee or charge in more than three 
billing cycles for the same over-the-limit transaction(s) does not apply 
if another over-the-limit transaction occurs during either of the last 
two billing cycles.
    (2) Failure to promptly replenish. A card issuer may not impose an 
over-the-limit fee or charge solely because of the card issuer's failure 
to promptly replenish the consumer's available credit following the 
crediting of the consumer's payment under Sec. 226.10.
    (3) Conditioning. A card issuer may not condition the amount of a 
consumer's credit limit on the consumer affirmatively consenting to the 
card issuer's payment of over-the-limit transactions if the card issuer 
assesses a fee or charge for such service.
    (4) Over-the-limit fees attributed to fees or interest. A card 
issuer may not impose an over-the-limit fee or charge for a billing 
cycle if a consumer exceeds a credit limit solely because of fees or 
interest charged by the card issuer to the consumer's account during 
that billing cycle. For purposes of this paragraph (j)(4), the relevant 
fees or interest charges are charges imposed as part of the plan under 
Sec. 226.6(b)(3).



Sec. 226.57  Reporting and marketing rules for college student 
open-end credit.

    (a) Definitions:
    (1) College student credit card. The term ``college student credit 
card'' as used in this section means a credit card issued under a credit 
card account under an open-end (not home-secured) consumer credit plan 
to any college student.
    (2) College student. The term ``college student'' as used in this 
section means a consumer who is a full-time or part-time student of an 
institution of higher education.
    (3) Institution of higher education. The term ``institution of 
higher education'' as used in this section has the same meaning as in 
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001 
and 1002).
    (4) Affiliated organization. The term ``affiliated organization'' as 
used in this section means an alumni organization or foundation 
affiliated with or related to an institution of higher education.
    (5) College credit card agreement. The term ``college credit card 
agreement'' as used in this section means any business, marketing or 
promotional agreement between a card issuer and an institution of higher 
education or an affiliated organization in connection with which college 
student credit cards are issued to college students currently enrolled 
at that institution.
    (b) Public disclosure of agreements. An institution of higher 
education shall publicly disclose any contract or other agreement made 
with a card issuer or creditor for the purpose of marketing a credit 
card.
    (c) Prohibited inducements. No card issuer or creditor may offer a 
college student any tangible item to induce such student to apply for or 
open an open-end consumer credit plan offered by such card issuer or 
creditor, if such offer is made:
    (1) On the campus of an institution of higher education;
    (2) Near the campus of an institution of higher education; or
    (3) At an event sponsored by or related to an institution of higher 
education.

[[Page 431]]

    (d) Annual report to the Board--(1) Requirement to report. Any card 
issuer that was a party to one or more college credit card agreements in 
effect at any time during a calendar year must submit to the Board an 
annual report regarding those agreements in the form and manner 
prescribed by the Board.
    (2) Contents of report. The annual report to the Board must include 
the following:
    (i) Identifying information about the card issuer and the agreements 
submitted, including the issuer's name, address, and identifying number 
(such as an RSSD ID number or tax identification number);
    (ii) A copy of any college credit card agreement to which the card 
issuer was a party that was in effect at any time during the period 
covered by the report;
    (iii) A copy of any memorandum of understanding in effect at any 
time during the period covered by the report between the card issuer and 
an institution of higher education or affiliated organization that 
directly or indirectly relates to the college credit card agreement or 
that controls or directs any obligations or distribution of benefits 
between any such entities;
    (iv) The total dollar amount of any payments pursuant to a college 
credit card agreement from the card issuer to an institution of higher 
education or affiliated organization during the period covered by the 
report, and the method or formula used to determine such amounts;
    (v) The total number of credit card accounts opened pursuant to any 
college credit card agreement during the period covered by the report; 
and
    (vi) The total number of credit card accounts opened pursuant to any 
such agreement that were open at the end of the period covered by the 
report.
    (3) Timing of reports. Except for the initial report described in 
this Sec. 226.57(d)(3), a card issuer must submit its annual report for 
each calendar year to the Board by the first business day on or after 
March 31 of the following calendar year. Card issuers must submit the 
first report following the effective date of this section, providing 
information for the 2009 calendar year, to the Board by February 22, 
2010.



Sec. 226.58  Internet posting of credit card agreements.

    (a) Applicability. The requirements of this section apply to any 
card issuer that issues credit cards under a credit card account under 
an open-end (not home-secured) consumer credit plan.
    (b) Definitions--(1) Agreement. For purposes of this section, 
``agreement'' or ``credit card agreement'' means the written document or 
documents evidencing the terms of the legal obligation, or the 
prospective legal obligation, between a card issuer and a consumer for a 
credit card account under an open-end (not home-secured) consumer credit 
plan. ``Agreement'' or ``credit card agreement'' also includes the 
pricing information, as defined in Sec. 226.58(b)(7).
    (2) Amends. For purposes of this section, an issuer ``amends'' an 
agreement if it makes a substantive change (an ``amendment'') to the 
agreement. A change is substantive if it alters the rights or 
obligations of the card issuer or the consumer under the agreement. Any 
change in the pricing information, as defined in Sec. 226.58(b)(7), is 
deemed to be substantive.
    (3) Business day. For purposes of this section, ``business day'' 
means a day on which the creditor's offices are open to the public for 
carrying on substantially all of its business functions.
    (4) Card issuer. For purposes of this section, ``card issuer'' or 
``issuer'' means the entity to which a consumer is legally obligated, or 
would be legally obligated, under the terms of a credit card agreement.
    (5) Offers. For purposes of this section, an issuer ``offers'' or 
``offers to the public'' an agreement if the issuer is soliciting or 
accepting applications for accounts that would be subject to that 
agreement.
    (6) Open account. For purposes of this section, an account is an 
``open account'' or ``open credit card account'' if it is a credit card 
account under an open-end (not home-secured) consumer credit plan and 
either:
    (i) The cardholder can obtain extensions of credit on the account; 
or

[[Page 432]]

    (ii) There is an outstanding balance on the account that has not 
been charged off. An account that has been suspended temporarily (for 
example, due to a report by the cardholder of unauthorized use of the 
card) is considered an ``open account'' or ``open credit card account.''
    (7) Pricing information. For purposes of this section, ``pricing 
information'' means the information listed in Sec. 226.6(b)(2)(i) 
through (b)(2)(xii) and (b)(4). Pricing information does not include 
temporary or promotional rates and terms or rates and terms that apply 
only to protected balances.
    (8) Private label credit card account and private label credit card 
plan. For purposes of this section:
    (i) ``private label credit card account'' means a credit card 
account under an open-end (not home-secured) consumer credit plan with a 
credit card that can be used to make purchases only at a single merchant 
or an affiliated group of merchants; and
    (ii) ``private label credit card plan'' means all of the private 
label credit card accounts issued by a particular issuer with credit 
cards usable at the same single merchant or affiliated group of 
merchants.
    (c) Submission of agreements to Board--(1) Quarterly submissions. A 
card issuer must make quarterly submissions to the Board, in the form 
and manner specified by the Board. Quarterly submissions must be sent to 
the Board no later than the first business day on or after January 31, 
April 30, July 31, and October 31 of each year. Each submission must 
contain:
    (i) Identifying information about the card issuer and the agreements 
submitted, including the issuer's name, address, and identifying number 
(such as an RSSD ID number or tax identification number);
    (ii) The credit card agreements that the card issuer offered to the 
public as of the last business day of the preceding calendar quarter 
that the card issuer has not previously submitted to the Board;
    (iii) Any credit card agreement previously submitted to the Board 
that was amended during the preceding calendar quarter and that the card 
issuer offered to the public as of the last business day of the 
preceding calendar quarter, as described in Sec. 226.58(c)(3); and
    (iv) Notification regarding any credit card agreement previously 
submitted to the Board that the issuer is withdrawing, as described in 
Sec. 226.58(c)(4), (c)(5), (c)(6), and (c)(7).
    (2) [Reserved]
    (3) Amended agreements. If a credit card agreement has been 
submitted to the Board, the agreement has not been amended and the card 
issuer continues to offer the agreement to the public, no additional 
submission regarding that agreement is required. If a credit card 
agreement that previously has been submitted to the Board is amended and 
the card issuer offered the amended agreement to the public as of the 
last business day of the calendar quarter in which the change became 
effective, the card issuer must submit the entire amended agreement to 
the Board, in the form and manner specified by the Board, by the first 
quarterly submission deadline after the last day of the calendar quarter 
in which the change became effective.
    (4) Withdrawal of agreements. If a card issuer no longer offers to 
the public a credit card agreement that previously has been submitted to 
the Board, the card issuer must notify the Board, in the form and manner 
specified by the Board, by the first quarterly submission deadline after 
the last day of the calendar quarter in which the issuer ceased to offer 
the agreement.
    (5) De minimis exception. (i) A card issuer is not required to 
submit any credit card agreements to the Board if the card issuer had 
fewer than 10,000 open credit card accounts as of the last business day 
of the calendar quarter.
    (ii) If an issuer that previously qualified for the de minimis 
exception ceases to qualify, the card issuer must begin making quarterly 
submissions to the Board no later than the first quarterly submission 
deadline after the date as of which the issuer ceased to qualify.
    (iii) If a card issuer that did not previously qualify for the de 
minimis exception qualifies for the de minimis exception, the card 
issuer must continue to make quarterly submissions to the Board until 
the issuer notifies the

[[Page 433]]

Board that the card issuer is withdrawing all agreements it previously 
submitted to the Board.
    (6) Private label credit card exception. (i) A card issuer is not 
required to submit to the Board a credit card agreement if, as of the 
last business day of the calendar quarter, the agreement:
    (A) is offered for accounts under one or more private label credit 
card plans each of which has fewer than 10,000 open accounts; and
    (B) is not offered to the public other than for accounts under such 
a plan.
    (ii) If an agreement that previously qualified for the private label 
credit card exception ceases to qualify, the card issuer must submit the 
agreement to the Board no later than the first quarterly submission 
deadline after the date as of which the agreement ceased to qualify.
    (iii) If an agreement that did not previously qualify for the 
private label credit card exception qualifies for the exception, the 
card issuer must continue to make quarterly submissions to the Board 
with respect to that agreement until the issuer notifies the Board that 
the agreement is being withdrawn.
    (7) Product testing exception. (i) A card issuer is not required to 
submit to the Board a credit card agreement if, as of the last business 
day of the calendar quarter, the agreement:
    (A) is offered as part of a product test offered to only a limited 
group of consumers for a limited period of time;
    (B) is used for fewer than 10,000 open accounts; and
    (C) is not offered to the public other than in connection with such 
a product test.
    (ii) If an agreement that previously qualified for the product 
testing exception ceases to qualify, the card issuer must submit the 
agreement to the Board no later than the first quarterly submission 
deadline after the date as of which the agreement ceased to qualify.
    (iii) If an agreement that did not previously qualify for the 
product testing exception qualifies for the exception, the card issuer 
must continue to make quarterly submissions to the Board with respect to 
that agreement until the issuer notifies the Board that the agreement is 
being withdrawn.
    (8) Form and content of agreements submitted to the Board--(i) Form 
and content generally. (A) Each agreement must contain the provisions of 
the agreement and the pricing information in effect as of the last 
business day of the preceding calendar quarter.
    (B) Agreements must not include any personally identifiable 
information relating to any cardholder, such as name, address, telephone 
number, or account number.
    (C) The following are not deemed to be part of the agreement for 
purposes of Sec. 226.58, and therefore are not required to be included 
in submissions to the Board:
    (1) Disclosures required by State or Federal law, such as affiliate 
marketing notices, privacy policies, billing rights notices, or 
disclosures under the E-Sign Act;
    (2) Solicitation materials;
    (3) Periodic statements;
    (4) Ancillary agreements between the issuer and the consumer, such 
as debt cancellation contracts or debt suspension agreements;
    (5) Offers for credit insurance or other optional products and other 
similar advertisements; and
    (6) Documents that may be sent to the consumer along with the credit 
card or credit card agreement such as a cover letter, a validation 
sticker on the card, or other information about card security.
    (D) Agreements must be presented in a clear and legible font.
    (ii) Pricing information. (A) Pricing information must be set forth 
in a single addendum to the agreement. The addendum must contain all of 
the pricing information, as defined by Sec. 226.58(b)(7). The addendum 
may, but is not required to, contain any other information listed in 
Sec. 226.6(b), provided that information is complete and accurate as of 
the applicable date under Sec. 226.58. The addendum may not contain any 
other information.
    (B) Pricing information that may vary from one cardholder to another 
depending on the cardholder's creditworthiness or state of residence or 
other factors must be disclosed either by setting forth all the possible 
variations (such as purchase APRs of 13 percent, 15 percent, 17 percent, 
and 19

[[Page 434]]

percent) or by providing a range of possible variations (such as 
purchase APRs ranging from 13 percent to 19 percent).
    (C) If a rate included in the pricing information is a variable 
rate, the issuer must identify the index or formula used in setting the 
rate and the margin. Rates that may vary from one cardholder to another 
must be disclosed by providing the index and the possible margins (such 
as the prime rate plus 5 percent, 8 percent, 10 percent, or 12 percent) 
or range of margins (such as the prime rate plus from 5 to 12 percent). 
The value of the rate and the value of the index are not required to be 
disclosed.
    (iii) Optional variable terms addendum. Provisions of the agreement 
other than the pricing information that may vary from one cardholder to 
another depending on the cardholder's creditworthiness or state of 
residence or other factors may be set forth in a single addendum to the 
agreement separate from the pricing information addendum.
    (iv) Integrated agreement. Issuers may not provide provisions of the 
agreement or pricing information in the form of change-in-terms notices 
or riders (other than the pricing information addendum and the optional 
variable terms addendum). Changes in provisions or pricing information 
must be integrated into the text of the agreement, the pricing 
information addendum or the optional variable terms addendum, as 
appropriate.
    (d) Posting of agreements offered to the public. (1) Except as 
provided below, a card issuer must post and maintain on its publicly 
available Web site the credit card agreements that the issuer is 
required to submit to the Board under Sec. 226.58(c). With respect to 
an agreement offered solely for accounts under one or more private label 
credit card plans, an issuer may fulfill this requirement by posting and 
maintaining the agreement in accordance with the requirements of this 
section on the publicly available Web site of at least one of the 
merchants at which credit cards issued under each private label credit 
card plan with 10,000 or more open accounts may be used.
    (2) Except as provided in Sec. 226.58(d), agreements posted 
pursuant to Sec. 226.58(d) must conform to the form and content 
requirements for agreements submitted to the Board specified in Sec. 
226.58(c)(8).
    (3) Agreements posted pursuant to Sec. 226.58(d) may be posted in 
any electronic format that is readily usable by the general public. 
Agreements must be placed in a location that is prominent and readily 
accessible by the public and must be accessible without submission of 
personally identifiable information.
    (4) The card issuer must update the agreements posted on its Web 
site pursuant to Sec. 226.58(d) at least as frequently as the quarterly 
schedule required for submission of agreements to the Board under Sec. 
226.58(c). If the issuer chooses to update the agreements on its Web 
site more frequently, the agreements posted on the issuer's Web site may 
contain the provisions of the agreement and the pricing information in 
effect as of a date other than the last business day of the preceding 
calendar quarter.
    (e) Agreements for all open accounts--(1) Availability of individual 
cardholder's agreement. With respect to any open credit card account, a 
card issuer must either:
    (i) Post and maintain the cardholder's agreement on its Web site; or
    (ii) Promptly provide a copy of the cardholder's agreement to the 
cardholder upon the cardholder's request. If the card issuer makes an 
agreement available upon request, the issuer must provide the cardholder 
with the ability to request a copy of the agreement both by using the 
issuer's Web site (such as by clicking on a clearly identified box to 
make the request) and by calling a readily available telephone line the 
number for which is displayed on the issuer's Web site and clearly 
identified as to purpose. The card issuer must send to the cardholder or 
otherwise make available to the cardholder a copy of the cardholder's 
agreement in electronic or paper form no later than 30 days after the 
issuer receives the cardholder's request.
    (2) Special rule for issuers without interactive Web sites. An 
issuer that does not maintain a Web site from which

[[Page 435]]

cardholders can access specific information about their individual 
accounts, instead of complying with Sec. 226.58(e)(1), may make 
agreements available upon request by providing the cardholder with the 
ability to request a copy of the agreement by calling a readily 
available telephone line, the number for which is displayed on the 
issuer's Web site and clearly identified as to purpose or included on 
each periodic statement sent to the cardholder and clearly identified as 
to purpose. The issuer must send to the cardholder or otherwise make 
available to the cardholder a copy of the cardholder's agreement in 
electronic or paper form no later than 30 days after the issuer receives 
the cardholder's request.
    (3) Form and content of agreements. (i) Except as provided in Sec. 
226.58(e), agreements posted on the card issuer's Web site pursuant to 
Sec. 226.58(e)(1)(i) or made available upon the cardholder's request 
pursuant to Sec. 226.58(e)(1)(ii) or (e)(2) must conform to the form 
and content requirements for agreements submitted to the Board specified 
in Sec. 226.58(c)(8).
    (ii) If the card issuer posts an agreement on its Web site or 
otherwise provides an agreement to a cardholder electronically under 
Sec. 226.58(e), the agreement may be posted or provided in any 
electronic format that is readily usable by the general public and must 
be placed in a location that is prominent and readily accessible to the 
cardholder.
    (iii) Agreements posted or otherwise provided pursuant to Sec. 
226.58(e) may contain personally identifiable information relating to 
the cardholder, such as name, address, telephone number, or account 
number, provided that the issuer takes appropriate measures to make the 
agreement accessible only to the cardholder or other authorized persons.
    (iv) Agreements posted or otherwise provided pursuant to Sec. 
226.58(e) must set forth the specific provisions and pricing information 
applicable to the particular cardholder. Provisions and pricing 
information must be complete and accurate as of a date no more than 60 
days prior to: (1) the date on which the agreement is posted on the card 
issuer's Web site under Sec. 226.58(e)(1)(i); or (2) the date the 
cardholder's request is received under Sec. 226.58(e)(1)(ii) or (e)(2).
    (v) Agreements provided upon cardholder request pursuant to Sec. 
226.58(e)(1)(ii) or (e)(2) may be provided by the issuer in either 
electronic or paper form, regardless of the form of the cardholder's 
request.
    (f) E-Sign Act requirements. Card issuers may provide credit card 
agreements in electronic form under Sec. 226.58(d) and (e) without 
regard to the consumer notice and consent requirements of section 101(c) 
of the Electronic Signatures in Global and National Commerce Act (E-Sign 
Act) (15 U.S.C. 7001 et seq.).

[75 FR 7818, Feb. 22, 2010, as amended at 76 FR 23003, Apr. 25, 2011]



Sec. 226.59  Reevaluation of rate increases.

    (a) General rule--(1) Evaluation of increased rate. If a card issuer 
increases an annual percentage rate that applies to a credit card 
account under an open-end (not home-secured) consumer credit plan, based 
on the credit risk of the consumer, market conditions, or other factors, 
or increased such a rate on or after January 1, 2009, and 45 days' 
advance notice of the rate increase is required pursuant to Sec. 
226.9(c)(2) or (g), the card issuer must:
    (i) Evaluate the factors described in paragraph (d) of this section; 
and
    (ii) Based on its review of such factors, reduce the annual 
percentage rate applicable to the consumer's account, as appropriate.
    (2) Rate reductions--(i) Timing. If a card issuer is required to 
reduce the rate applicable to an account pursuant to paragraph (a)(1) of 
this section, the card issuer must reduce the rate not later than 45 
days after completion of the evaluation described in paragraph (a)(1).
    (ii) Applicability of rate reduction. Any reduction in an annual 
percentage rate required pursuant to paragraph (a)(1) of this section 
shall apply to:
    (A) Any outstanding balances to which the increased rate described 
in paragraph (a)(1) of this section has been applied; and
    (B) New transactions that occur after the effective date of the rate 
reduction

[[Page 436]]

that would otherwise have been subject to the increased rate.
    (b) Policies and procedures. A card issuer must have reasonable 
written policies and procedures in place to conduct the review described 
in paragraph (a) of this section.
    (c) Timing. A card issuer that is subject to paragraph (a) of this 
section must conduct the review described in paragraph (a)(1) of this 
section not less frequently than once every six months after the rate 
increase.
    (d) Factors--(1) In general. Except as provided in paragraph (d)(2) 
of this section, a card issuer must review either:
    (i) The factors on which the increase in an annual percentage rate 
was originally based; or
    (ii) The factors that the card issuer currently considers when 
determining the annual percentage rates applicable to similar new credit 
card accounts under an open-end (not home-secured) consumer credit plan.
    (2) Rate increases imposed between January 1, 2009 and February 21, 
2010. For rate increases imposed between January 1, 2009 and February 
21, 2010, an issuer must consider the factors described in paragraph 
(d)(1)(ii) when conducting the first two reviews required under 
paragraph (a) of this section, unless the rate increase subject to 
paragraph (a) of this section was based solely upon factors specific to 
the consumer, such as a decline in the consumer's credit risk, the 
consumer's delinquency or default, or a violation of the terms of the 
account.
    (e) Rate increases subject to Sec. 226.55(b)(4). If an issuer 
increases a rate applicable to a consumer's account pursuant to Sec. 
226.55(b)(4) based on the card issuer not receiving the consumer's 
required minimum periodic payment within 60 days after the due date, the 
issuer is not required to perform the review described in paragraph (a) 
of this section prior to the sixth payment due date after the effective 
date of the increase. However, if the annual percentage rate applicable 
to the consumer's account is not reduced pursuant to Sec. 
226.55(b)(4)(ii), the card issuer must perform the review described in 
paragraph (a) of this section. The first such review must occur no later 
than six months after the sixth payment due following the effective date 
of the rate increase.
    (f) Termination of obligation to review factors. The obligation to 
review factors described in paragraph (a) and (d) of this section ceases 
to apply:
    (1) If the issuer reduces the annual percentage rate applicable to a 
credit card account under an open-end (not home-secured) consumer credit 
plan to the rate applicable immediately prior to the increase, or, if 
the rate applicable immediately prior to the increase was a variable 
rate, to a variable rate determined by the same formula (index and 
margin) that was used to calculate the rate applicable immediately prior 
to the increase; or
    (2) If the issuer reduces the annual percentage rate to a rate that 
is lower than the rate described in paragraph (f)(1) of this section.
    (g) Acquired accounts--(1) General. Except as provided in paragraph 
(g)(2) of this section, this section applies to credit card accounts 
that have been acquired by the card issuer from another card issuer. A 
card issuer that complies with this section by reviewing the factors 
described in paragraph (d)(1)(i) must review the factors considered by 
the card issuer from which it acquired the accounts in connection with 
the rate increase.
    (2) Review of acquired portfolio. If, not later than six months 
after the acquisition of such accounts, a card issuer reviews all of the 
credit card accounts it acquires in accordance with the factors that it 
currently considers in determining the rates applicable to its similar 
new credit card accounts:
    (i) Except as provided in paragraph (g)(2)(iii), the card issuer is 
required to conduct reviews described in paragraph (a) of this section 
only for rate increases that are imposed as a result of its review under 
this paragraph. See Sec. Sec. 226.9 and 226.55 for additional 
requirements regarding rate increases on acquired accounts.
    (ii) Except as provided in paragraph (g)(2)(iii) of this section, 
the card issuer is not required to conduct reviews in accordance with 
paragraph (a) of this section for any rate increases made prior to the 
card issuer's acquisition of such accounts.

[[Page 437]]

    (iii) If as a result of the card issuer's review, an account is 
subject to, or continues to be subject to, an increased rate as a 
penalty, or due to the consumer's delinquency or default, the 
requirements of paragraph (a) of this section apply.
    (h) Exceptions--(1) Servicemembers Civil Relief Act exception. The 
requirements of this section do not apply to increases in an annual 
percentage rate that was previously decreased pursuant to 50 U.S.C. app. 
527, provided that such a rate increase is made in accordance with Sec. 
226.55(b)(6).
    (2) Charged off accounts. The requirements of this section do not 
apply to accounts that the card issuer has charged off in accordance 
with loan-loss provisions.

[75 FR 37572, June 26, 2010]





            Sec. Appendix A to Part 226--Effect on State Laws

                        Request for Determination

    A request for a determination that a State law is inconsistent or 
that a State law is substantially the same as the Act and regulation 
shall be in writing and addressed to the Secretary, Board of Governors 
of the Federal Reserve System, Washington, DC 20551. The request shall 
be made pursuant to the procedures herein and the Board's Rules of 
Procedure (12 CFR Part 262).

                          Supporting Documents

    A request for a determination shall include the following items:
    (1) The text of the State statute, regulation, or other document 
that is the subject of the request.
    (2) Any other statute, regulation, or judicial or administrative 
opinion that implements, interprets, or applies the relevant provision.
    (3) A comparison of the State law with the corresponding provision 
of the Federal law, including a full discussion of the basis for the 
requesting party's belief that the State provision is either 
inconsistent or substantially the same.
    (4) Any other information that the requesting party believes may 
assist the Board in its determination.

                     Public Notice of Determination

    Notice that the Board intends to make a determination (either on 
request or on its own motion) will be published in the Federal Register, 
with an opportunity for public comment, unless the Board finds that 
notice and opportunity for comment would be impracticable, unnecessary, 
or contrary to the public interest and publishes its reasons for such 
decision.
    Subject to the Board's Rules Regarding Availability of Information 
(12 CFR Part 261), all requests made, including any documents and other 
material submitted in support of the requests, will be made available 
for public inspection and copying.

                       Notice After Determination

    Notice of a final determination will be published in the Federal 
Register, and the Board will furnish a copy of such notice to the party 
who made the request and to the appropriate State official.

                        Reversal of Determination

    The Board reserves the right to reverse a determination for any 
reason bearing on the coverage or effect of State or Federal law.
    Notice of reversal of a determination will be published in the 
Federal Register and a copy furnished to the appropriate State official.

[Reg. Z, 46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981]



              Sec. Appendix B to Part 226--State Exemptions

                               Application

    Any State may apply to the Board for a determination that a class of 
transactions subject to State law is exempt from the requirements of the 
Act and this regulation. An application shall be in writing and 
addressed to the Secretary, Board of Governors of the Federal Reserve 
System, Washington, DC 20551, and shall be signed by the appropriate 
State official. The application shall be made pursuant to the procedures 
herein and the Board's Rules of Procedure (12 CFR Part 262).

                          Supporting Documents

    An application shall be accompanied by:
    (1) The text of the State statute or regulation that is the subject 
of the application, and any other statute, regulation, or judicial or 
administrative opinion that implements, interprets, or applies it.
    (2) A comparison of the State law with the corresponding provisions 
of the Federal law.
    (3) The text of the State statute or regulation that provides for 
civil and criminal liability and administrative enforcement of the State 
law.
    (4) A statement of the provisions for enforcement, including an 
identification of the State office that administers the relevant law, 
information on the funding and the

[[Page 438]]

number and qualifications of personnel engaged in enforcement, and a 
description of the enforcement procedures to be followed, including 
information on examination procedures, practices, and policies. If an 
exemption application extends to federally chartered institutions, the 
applicant must furnish evidence that arrangements have been made with 
the appropriate Federal agencies to ensure adequate enforcement of State 
law in regard to such creditors.
    (5) A statement of reasons to support the applicant's claim that an 
exemption should be granted.

                      Public Notice of Application

    Notice of an application will be published, with an opportunity for 
public comment, in the Federal Register, unless the Board finds that 
notice and opportunity for comment would be impracticable, unnecessary, 
or contrary to the public interest and publishes its reasons for such 
decision.
    Subject to the Board's Rules Regarding Availability of Information 
(12 CFR Part 261), all applications made, including any documents and 
other material submitted in support of the applications, will be made 
available for public inspection and copying. A copy of the application 
also will be made available at the Federal Reserve Bank of each district 
in which the applicant is situated.

                         Favorable Determination

    If the Board determines on the basis of the information before it 
that an exemption should be granted, notice of the exemption will be 
published in the Federal Register, and a copy furnished to the applicant 
and to each Federal official responsible for administrative enforcement.
    The appropriate State official shall inform the Board within 30 days 
of any change in its relevant law or regulations. The official shall 
file with the Board such periodic reports as the Board may require.
    The Board will inform the appropriate State official of any 
subsequent amendments to the Federal law, regulation, interpretations, 
or enforcement policies that might require an amendment to State law, 
regulation, interpretations, or enforcement procedures.

                          Adverse Determination

    If the Board makes an initial determination that an exemption should 
not be granted, the Board will afford the applicant a reasonable 
opportunity to demonstrate further that an exemption is proper. If the 
Board ultimately finds that an exemption should not be granted, notice 
of an adverse determination will be published in the Federal Register 
and a copy furnished to the applicant.

                         Revocation of Exemption

    The Board reserves the right to revoke an exemption if at any time 
it determines that the standards required for an exemption are not met.
    Before taking such action, the Board will notify the appropriate 
State official of its intent, and will afford the official such 
opportunity as it deems appropriate in the circumstances to demonstrate 
that revocation is improper. If the Board ultimately finds that 
revocation is proper, notice of the Board's intention to revoke such 
exemption will be published in the Federal Register with a reasonable 
period of time for interested persons to comment.
    Notice of revocation of an exemption will be published in the 
Federal Register. A copy of such notice will be furnished to the 
appropriate State official and to the Federal officials responsible for 
enforcement. Upon revocation of an exemption, creditors in that State 
shall then be subject to the requirements of the Federal law.



     Sec. Appendix C to Part 226--Issuance of Staff Interpretations

                     Official Staff Interpretations

    Officials in the Board's Division of Consumer and Community Affairs 
are authorized to issue official staff interpretations of this 
regulation. These interpretations provide the protection afforded under 
section 130(f) of the Act. Except in unusual circumstances, such 
interpretations will not be issued separately but will be incorporated 
in an official commentary to the regulation which will be amended 
periodically.

         Requests for Issuance of Official Staff Interpretations

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

                        Scope of Interpretations

    No staff interpretations will be issued approving creditors' forms, 
statements, or calculation tools or methods. This restriction does not 
apply to forms, statements, tools, or methods whose use is required or 
sanctioned by a government agency.

[[Page 439]]



    Sec. Appendix D to Part 226--Multiple Advance Construction Loans

    Section 226.17(c)(6) permits creditors to treat multiple advance 
loans to finance construction of a dwelling that may be permanently 
financed by the same creditor either as a single transaction or as more 
than one transaction. If the actual schedule of advances is not known, 
the following methods may be used to estimate the interest portion of 
the finance charge and the annual percentage rate and to make 
disclosures. If the creditor chooses to disclose the construction phase 
separately, whether interest is payable periodically or at the end of 
construction, part I may be used. If the creditor chooses to disclose 
the construction and the permanent financing as one transaction, part II 
may be used.

            Part I--Construction Period Disclosed Separately

    A. If interest is payable only on the amount actually advanced for 
the time it is outstanding:
    1. Estimated interest--Assume that one-half of the commitment amount 
is outstanding at the contract interest rate for the entire construction 
period.
    2. Estimated annual percentage rate--Assume a single payment loan 
that matures at the end of the construction period. The finance charge 
is the sum of the estimated interest and any prepaid finance charge. The 
amount financed for computation purposes is determined by subtracting 
any prepaid finance charge from one-half of the commitment amount.
    3. Repayment schedule--The number and amounts of any interest 
payments may be omitted in disclosing the payment schedule under Sec. 
226.18(g). The fact that interest payments are required and the timing 
of such payments shall be disclosed.
    4. Amount financed--The amount financed for disclosure purposes is 
the entire commitment amount less any prepaid finance charge.
    B. If interest is payable on the entire commitment amount without 
regard to the dates or amounts of actual disbursement:
    1. Estimated interest--Assume that the entire commitment amount is 
outstanding at the contract interest rate for the entire construction 
period.
    2. Estimated annual percentage rate--Assume a single payment loan 
that matures at the end of the construction period. The finance charge 
is the sum of the estimated interest and any prepaid finance charge. The 
amount financed for computation purposes is determined by subtracting 
any prepaid finance charge from one-half of the commitment amount.
    3. Repayment schedule--Interest payments shall be disclosed in 
making the repayment schedule disclosure under Sec. 226.18(g).

[[Page 440]]

[GRAPHIC] [TIFF OMITTED] TC27SE91.000


[[Page 441]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.001


[[Page 442]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.002



   Sec. Appendix E to Part 226--Rules for Card Issuers That Bill on a 
                    Transaction-by-Transaction Basis

    The following provisions of Subpart B apply if credit cards are 
issued and the card issuer and the seller are the same or related 
persons; no finance charge is imposed; consumers are billed in full for 
each use of the card on a transaction-by-transaction basis, by means of 
an invoice or other statement reflecting each use of the card; and no 
cumulative account is maintained which reflects the transactions by each 
consumer during a period of time, such as a month. The term ``related 
person'' refers to, for example, a franchised or licensed seller of a 
creditor's product or service or a seller who assigns or sells sales 
accounts to a creditor or arranges for credit under a plan that allows 
the consumer to use the credit only in transactions with that seller. A 
seller is not related to the creditor merely because the seller and the 
creditor have an agreement authorizing the seller to honor the 
creditor's credit card.
    1. Section 226.6(a)(5) or Sec. 226.6(b)(5)(iii).
    2. Section 226.6(a)(2) or Sec. 226.6(b)(3)(ii)(B), as applicable. 
The disclosure required by Sec. 226.6(a)(2) or Sec. 226.6(b)(3)(ii)(B) 
shall be limited to those charges that are or may be imposed as a result 
of the deferral of payment by use of the card, such as late payment or 
delinquency charges. A tabular format is not required.
    3. Section 226.6(a)(4) or Sec. 226.6(b)(5)(ii).

[[Page 443]]

    4. Section 226.7(a)(2) or Sec. 226.7(b)(2), as applicable; Sec. 
226.7(a)(9) or Sec. 226.7(b)(9), as applicable. Creditors may comply by 
placing the required disclosures on the invoice or statement sent to the 
consumer for each transaction.
    5. Section 226.9(a). Creditors may comply by mailing or delivering 
the statement required by Sec. 226.6(a)(5) or Sec. 226.6(b)(5)(iii) 
(see appendix G-3 and G-3(A) to this part) to each consumer receiving a 
transaction invoice during a one-month period chosen by the card issuer 
or by sending either the statement prescribed by Sec. 226.6(a)(5) or 
Sec. 226.6(b)(5)(iii), or an alternative billing error rights statement 
substantially similar to that in appendix G-4 and G-4(A) to this part, 
with each invoice sent to a consumer.
    6. Section 226.9(c). A tabular format is not required.
    7. Section 226.10.
    8. Section 226.11(a). This section applies when a card issuer 
receives a payment or other credit that exceeds by more than $1 the 
amount due, as shown on the transaction invoice. The requirement to 
credit amounts to an account may be complied with by other reasonable 
means, such as by a credit memorandum. Since no periodic statement is 
provided, a notice of the credit balance shall be sent to the consumer 
within a reasonable period of time following its occurrence unless a 
refund of the credit balance is mailed or delivered to the consumer 
within seven business days of its receipt by the card issuer.
    9. Section 226.12 including Sec. 226.12(c) and (d), as applicable. 
Section 226.12(e) is inapplicable.
    10. Section 226.13, as applicable. All references to ``periodic 
statement'' shall be read to indicate the invoice or other statement for 
the relevant transaction. All actions with regard to correcting and 
adjusting a consumer's account may be taken by issuing a refund or a new 
invoice, or by other appropriate means consistent with the purposes of 
the section.
    11. Section 226.15, as applicable.

[75 FR 7824, Feb. 22, 2010]



      Sec. Appendix F to Part 226--Optional Annual Percentage Rate 
   Computations for Creditors Offering Open-End Plans Subject to the 
                      Requirements of Sec. 226.5b

    In determining the denominator of the fraction under Sec. 
226.14(c)(3), no amount will be used more than once when adding the sum 
of the balances \1\ subject to periodic rates to the sum of the amounts 
subject to specific transaction charges. (Where a portion of the finance 
charge is determined by application of one or more daily periodic rates, 
the phrase ``sum of the balances'' shall also mean the ``average of 
daily balances.'') In every case, the full amount of transactions 
subject to specific transaction charges shall be included in the 
denominator. Other balances or parts of balances shall be included 
according to the manner of determining the balance subject to a periodic 
rate, as illustrated in the following examples of accounts on monthly 
billing cycles:
---------------------------------------------------------------------------

    \1\ [Reserved]
---------------------------------------------------------------------------

    1. Previous balance--none.
    A specific transaction of $100 occurs on the first day of the 
billing cycle. The average daily balance is $100. A specific transaction 
charge of 3 percent is applicable to the specific transaction. The 
periodic rate is 1\1/2\ percent applicable to the average daily balance. 
The numerator is the amount of the finance charge, which is $4.50. The 
denominator is the amount of the transaction (which is $100), plus the 
amount by which the balance subject to the periodic rate exceeds the 
amount of the specific transactions (such excess in this case is 0), 
totaling $100.
    The annual percentage rate is the quotient (which is 4\1/2\ percent) 
multiplied by 12 (the number of months in a year), i.e., 54 percent.
    2. Previous balance--$100.
    A specific transaction of $100 occurs at the midpoint of the billing 
cycle. The average daily balance is $150. A specific transaction charge 
of 3 percent is applicable to the specific transaction. The periodic 
rate is 1\1/2\ percent applicable to the average daily balance. The 
numerator is the amount of the finance charge which is $5.25. The 
denominator is the amount of the transaction (which is $100), plus the 
amount by which the balance subject to the periodic rate exceeds the 
amount of the specific transaction (such excess in this case is $50), 
totaling $150. As explained in example 1, the annual percentage rate is 
3\1/2\ percent x 12 = 42 percent.
    3. If, in example 2, the periodic rate applies only to the previous 
balance, the numerator is $4.50 and the denominator is $200 (the amount 
of the transaction, $100, plus the balance subject only to the periodic 
rate, the $100 previous balance). As explained in example 1, the annual 
percentage rate is 2\1/4\ percent x 12 = 27 percent.
    4. If, in example 2, the periodic rate applies only to an adjusted 
balance (previous balance less payments and credits) and the consumer 
made a payment of $50 at the midpoint of the billing cycle, the 
numerator is $3.75 and the denominator is $150 (the amount of the 
transaction, $100, plus the balance subject to the periodic rate, the 
$50 adjusted balance). As explained in example 1, the annual percentage 
rate is 2\1/2\ percent x 12 = 30 percent.
    5. Previous balance--$100.
    A specific transaction (check) of $100 occurs at the midpoint of the 
billing cycle. The average daily balance is $150. The specific 
transaction charge is $.25 per check. The

[[Page 444]]

periodic rate is 1\1/2\ percent applied to the average daily balance. 
The numerator is the amount of the finance charge, which is $2.50 and 
includes the $.25 check charge and the $2.25 resulting from the 
application of the periodic rate. The denominator is the full amount of 
the specific transaction (which is $100) plus the amount by which the 
average daily balance exceeds the amount of the specific transaction 
(which in this case is $50), totaling $150. As explained in example 1, 
the annual percentage rate would be 1\2/3\ percent x 12 = 20 percent.
    6. Previous balance--none.
    A specific transaction of $100 occurs at the midpoint of the billing 
cycle. The average daily balance is $50. The specific transaction charge 
is 3 percent of the transaction amount or $3.00. The periodic rate is 
1\1/2\ percent per month applied to the average daily balance. The 
numerator is the amount of the finance charge, which is $3.75, including 
the $3.00 transaction charge and $.75 resulting from application of the 
periodic rate. The denominator is the full amount of the specific 
transaction ($100) plus the amount by which the balance subject to the 
periodic rate exceeds the amount of the transaction ($0). Where the 
specific transaction amount exceeds the balance subject to the periodic 
rate, the resulting number is considered to be zero rather than a 
negative number ($50 - $100 = -$50). The denominator, in this case, is 
$100. As explained in example 1, the annual percentage rate is 3\3/4\ 
percent x 12 = 45 percent.

[75 FR 7824, Feb. 22, 2010]



      Sec. Appendix G to Part 226--Open-End Model Forms and Clauses

G-1 Balance Computation Methods Model Clauses (Home-equity Plans) 
          (Sec. Sec. 226.6 and 226.7)
G-1(A) Balance Computation Methods Model Clauses (Plans other than Home-
          equity Plans) (Sec. Sec. 226.6 and 226.7)
G-2 Liability for Unauthorized Use Model Clause (Home-equity Plans) 
          (Sec. 226.12)
G-2(A) Liability for Unauthorized Use Model Clause (Plans Other Than 
          Home-equity Plans) (Sec. 226.12)
G-3 Long-Form Billing-Error Rights Model Form (Home-equity Plans) 
          (Sec. Sec. 226.6 and 226.9)
G-3(A) Long-Form Billing-Error Rights Model Form (Plans Other Than Home-
          equity Plans) (Sec. Sec. 226.6 and 226.9)
G-4 Alternative Billing-Error Rights Model Form (Home-equity Plans) 
          (Sec. 226.9)
G-4(A) Alternative Billing-Error Rights Model Form (Plans Other Than 
          Home-equity Plans) (Sec. 226.9)
G-5 Rescission Model Form (When Opening an Account) (Sec. 226.15)
G-6 Rescission Model Form (For Each Transaction) (Sec. 226.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec. 
          226.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec. 
          226.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec. 226.15)
G-10(A) Applications and Solicitations Model Form (Credit Cards) (Sec. 
          226.5a(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec. 
          226.5a(b))
G-10(C) Applications and Solicitations Sample (Credit Cards) (Sec. 
          226.5a(b))
G-10(D) Applications and Solicitations Model Form (Charge Cards) (Sec. 
          226.5a(b))
G-10(E) Applications and Solicitations Sample (Charge Cards) (Sec. 
          226.5a(b))
G-11 Applications and Solicitations Made Available to General Public 
          Model Clauses (Sec. 226.5a(e))
G-12 [Reserved]
G-13(A) Change in Insurance Provider Model Form (Combined Notice) (Sec. 
          226.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec. 226.9(f)(2))
G-14A Home-equity Sample
G-14B Home-equity Sample
G-15 Home-equity Model Clauses
G-16(A) Debt Suspension Model Clause (Sec. 226.4(d)(3))
G-16(B) Debt Suspension Sample (Sec. 226.4(d)(3))
G-17(A) Account-opening Model Form (Sec. 226.6(b)(2))
G-17(B) Account-opening Sample (Sec. 226.6(b)(2))
G-17(C) Account-opening Sample (Sec. 226.6(b)(2))
G-17(D) Account-opening Sample (Sec. 226.6(b)(2))
G-18(A) Transactions; Interest Charges; Fees Sample (Sec. 226.7(b))
G-18(B) Late Payment Fee Sample (Sec. 226.7(b))
G-18(C)(1) Minimum Payment Warning (When Amortization Occurs and the 36-
          Month Disclosures Are Required) (Sec. 226.7(b))
G-18(C)(2) Minimum Payment Warning (When Amortization Occurs and the 36-
          Month Disclosures Are Not Required) (Sec. 226.7(b))
G-18(C)(3) Minimum Payment Warning (When Negative or No Amortization 
          Occurs) (Sec. 226.7(b))
G-18(D) Periodic Statement New Balance, Due Date, Late Payment and 
          Minimum Payment Sample (Credit cards) (Sec. 226.7(b))
G-18(E) [Reserved]
G-18(F) Periodic Statement Form
G-18(G) Periodic Statement Form
G-18(H) Deferred Interest Periodic Statement Clause
G-19 Checks Accessing a Credit Card Account Sample (Sec. 226.9(b)(3))

[[Page 445]]

G-20 Change-in-Terms Sample (Increase in Annual Percentage Rate) (Sec. 
          226.9(c)(2))
G-21 Change-in-Terms Sample (Increase in Fees) (Sec. 226.9(c)(2))
G-22 Penalty Rate Increase Sample (Payment 60 or Fewer Days Late) (Sec. 
          226.9(g)(3))
G-23 Penalty Rate Increase Sample (Payment More Than 60 Days Late) 
          (Sec. 226.9(g)(3))
G-24 Deferred Interest Offer Clauses (Sec. 226.16(h))
G-25(A) Consent Form for Over-the-Limit Transactions (Sec. 226.56)
G-25(B) Revocation Notice for Periodic Statement Regarding Over-the-
          Limit Transactions (Sec. 226.56)

   G-1--Balance Computation Methods Model Clauses (Home-Equity Plans)

    (a) Adjusted balance method
    We figure [a portion of] the finance charge on your account by 
applying the periodic rate to the ``adjusted balance'' of your account. 
We get the ``adjusted balance'' by taking the balance you owed at the 
end of the previous billing cycle and subtracting [any unpaid finance 
charges and] any payments and credits received during the present 
billing cycle.
    (b) Previous balance method
    We figure [a portion of] the finance charge on your account by 
applying the periodic rate to the amount you owe at the beginning of 
each billing cycle [minus any unpaid finance charges]. We do not 
subtract any payments or credits received during the billing cycle. [The 
amount of payments and credits to your account this billing cycle was $ 
------.]
    (c) Average daily balance method (excluding current transactions)
    We figure [a portion of] the finance charge on your account by 
applying the periodic rate to the ``average daily balance'' of your 
account (excluding current transactions). To get the ``average daily 
balance'' we take the beginning balance of your account each day and 
subtract any payments or credits [and any unpaid finance charges]. We do 
not add in any new [purchases/advances/loans]. This gives us the daily 
balance. Then, we add all the daily balances for the billing cycle 
together and divide the total by the number of days in the billing 
cycle. This gives us the ``average daily balance.''
    (d) Average daily balance method (including current transactions)
    We figure [a portion of] the finance charge on your account by 
applying the periodic rate to the ``average daily balance'' of your 
account (including current transactions). To get the ``average daily 
balance'' we take the beginning balance of your account each day, add 
any new [purchases/advances/loans], and subtract any payments or 
credits, [and unpaid finance charges]. This gives us the daily balance. 
Then, we add up all the daily balances for the billing cycle and divide 
the total by the number of days in the billing cycle. This gives us the 
``average daily balance.''
    (e) Ending balance method
    We figure [a portion of] the finance charge on your account by 
applying the periodic rate to the amount you owe at the end of each 
billing cycle (including new purchases and deducting payments and 
credits made during the billing cycle).
    (f) Daily balance method (including current transactions)
    We figure [a portion of] the finance charge on your account by 
applying the periodic rate to the ``daily balance'' of your account for 
each day in the billing cycle. To get the ``daily balance'' we take the 
beginning balance of your account each day, add any new [purchases/
advances/fees], and subtract [any unpaid finance charges and] any 
payments or credits. This gives us the daily balance.

  G-1(A)--Balance Computation Methods Model Clauses (Plans Other Than 
                           Home-Equity Plans)

    (a) Adjusted balance method
    We figure the interest charge on your account by applying the 
periodic rate to the ``adjusted balance'' of your account. We get the 
``adjusted balance'' by taking the balance you owed at the end of the 
previous billing cycle and subtracting [any unpaid interest or other 
finance charges and] any payments and credits received during the 
present billing cycle.
    (b) Previous balance method
    We figure the interest charge on your account by applying the 
periodic rate to the amount you owe at the beginning of each billing 
cycle. We do not subtract any payments or credits received during the 
billing cycle.
    (c) Average daily balance method (excluding current transactions)
    We figure the interest charge on your account by applying the 
periodic rate to the ``average daily balance'' of your account. To get 
the ``average daily balance'' we take the beginning balance of your 
account each day and subtract [any unpaid interest or other finance 
charges and] any payments or credits. We do not add in any new 
[purchases/advances/fees]. This gives us the daily balance. Then, we add 
all the daily balances for the billing cycle together and divide the 
total by the number of days in the billing cycle. This gives us the 
``average daily balance.''
    (d) Average daily balance method (including current transactions)
    We figure the interest charge on your account by applying the 
periodic rate to the ``average daily balance'' of your account. To get 
the ``average daily balance'' we take the beginning balance of your 
account each day, add any new [purchases/advances/fees], and

[[Page 446]]

subtract [any unpaid interest or other finance charges and] any payments 
or credits. This gives us the daily balance. Then, we add up all the 
daily balances for the billing cycle and divide the total by the number 
of days in the billing cycle. This gives us the ``average daily 
balance.''
    (e) Ending balance method
    We figure the interest charge on your account by applying the 
periodic rate to the amount you owe at the end of each billing cycle 
(including new [purchases/advances/fees] and deducting payments and 
credits made during the billing cycle).
    (f) Daily balance method (including current transactions)
    We figure the interest charge on your account by applying the 
periodic rate to the ``daily balance'' of your account for each day in 
the billing cycle. To get the ``daily balance'' we take the beginning 
balance of your account each day, add any new [purchases/advances/fees], 
and subtract [any unpaid interest or other finance charges and] any 
payments or credits. This gives us the daily balance.

  G-2--Liability for Unauthorized Use Model Clause (Home-Equity Plans)

    You may be liable for the unauthorized use of your credit card [or 
other term that describes the credit card]. You will not be liable for 
unauthorized use that occurs after you notify [name of card issuer or 
its designee] at [address], orally or in writing, of the loss, theft, or 
possible unauthorized use. [You may also contact us on the Web: 
[Creditor Web or email address]] In any case, your liability will not 
exceed [insert $50 or any lesser amount under agreement with the 
cardholder].

 G-2(A)--Liability for Unauthorized Use Model Clause (Plans Other Than 
                           Home-Equity Plans)

    If you notice the loss or theft of your credit card or a possible 
unauthorized use of your card, you should write to us immediately at: 
[address] [address listed on your bill],
or call us at [telephone number].
    [You may also contact us on the Web: [Creditor Web or email 
address]]
    You will not be liable for any unauthorized use that occurs after 
you notify us. You may, however, be liable for unauthorized use that 
occurs before your notice to us. In any case, your liability will not 
exceed [insert $50 or any lesser amount under agreement with the 
cardholder].

   G-3--Long-Form Billing-Error Rights Model Form (Home-Equity Plans)

                           YOUR BILLING RIGHTS

                     KEEP THIS NOTICE FOR FUTURE USE

    This notice contains important information about your rights and our 
responsibilities under the Fair Credit Billing Act.

        Notify Us in Case of Errors or Questions About Your Bill

    If you think your bill is wrong, or if you need more information 
about a transaction on your bill, write us [on a separate sheet] at 
[address] [the address listed on your bill]. Write to us as soon as 
possible. We must hear from you no later than 60 days after we sent you 
the first bill on which the error or problem appeared. [You may also 
contact us on the Web: [Creditor Web or email address]] You can 
telephone us, but doing so will not preserve your rights.
    In your letter, give us the following information:
     Your name and account number.
     The dollar amount of the suspected error.
     Describe the error and explain, if you can, why 
you believe there is an error. If you need more information, describe 
the item you are not sure about.
    If you have authorized us to pay your credit card bill automatically 
from your savings or checking account, you can stop the payment on any 
amount you think is wrong. To stop the payment your letter must reach us 
three business days before the automatic payment is scheduled to occur.

   Your Rights and Our Responsibilities After We Receive Your Written 
                                 Notice

    We must acknowledge your letter within 30 days, unless we have 
corrected the error by then. Within 90 days, we must either correct the 
error or explain why we believe the bill was correct.
    After we receive your letter, we cannot try to collect any amount 
you question, or report you as delinquent. We can continue to bill you 
for the amount you question, including finance charges, and we can apply 
any unpaid amount against your credit limit. You do not have to pay any 
questioned amount while we are investigating, but you are still 
obligated to pay the parts of your bill that are not in question.
    If we find that we made a mistake on your bill, you will not have to 
pay any finance charges related to any questioned amount. If we didn't 
make a mistake, you may have to pay finance charges, and you will have 
to make up any missed payments on the questioned amount. In either case, 
we will send you a statement of the amount you owe and the date that it 
is due.

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    If you fail to pay the amount that we think you owe, we may report 
you as delinquent. However, if our explanation does not satisfy you and 
you write to us within ten days telling us that you still refuse to pay, 
we must tell anyone we report you to that you have a question about your 
bill. And, we must tell you the name of anyone we reported you to. We 
must tell anyone we report you to that the matter has been settled 
between us when it finally is.
    If we don't follow these rules, we can't collect the first $50 of 
the questioned amount, even if your bill was correct.

                 Special Rule for Credit Card Purchases

    If you have a problem with the quality of property or services that 
you purchased with a credit card, and you have tried in good faith to 
correct the problem with the merchant, you may have the right not to pay 
the remaining amount due on the property or services.
    There are two limitations on this right:
    (a) You must have made the purchase in your home state or, if not 
within your home state within 100 miles of your current mailing address; 
and
    (b) The purchase price must have been more than $50.
    These limitations do not apply if we own or operate the merchant, or 
if we mailed you the advertisement for the property or services.

  G-3(A)--Long-Form Billing-Error Rights Model Form (Plans Other Than 
                           Home-Equity Plans)

         Your Billing Rights: Keep This Document For Future Use

    This notice tells you about your rights and our responsibilities 
under the Fair Credit Billing Act.

           What To Do If You Find A Mistake On Your Statement

    If you think there is an error on your statement, write to us at:
    [Creditor Name]
    [Creditor Address]
[You may also contact us on the Web: [Creditor Web or email address]]
    In your letter, give us the following information:
     Account information: Your name and account 
number.
     Dollar amount: The dollar amount of the suspected 
error.
     Description of problem: If you think there is an 
error on your bill, describe what you believe is wrong and why you 
believe it is a mistake.
    You must contact us:
     Within 60 days after the error appeared on your 
statement.
     At least 3 business days before an automated 
payment is scheduled, if you want to stop payment on the amount you 
think is wrong.
    You must notify us of any potential errors in writing [or 
electronically]. You may call us, but if you do we are not required to 
investigate any potential errors and you may have to pay the amount in 
question.

              What Will Happen After We Receive Your Letter

When we receive your letter, we must do two things:
    1. Within 30 days of receiving your letter, we must tell you that we 
received your letter. We will also tell you if we have already corrected 
the error.
    2. Within 90 days of receiving your letter, we must either correct 
the error or explain to you why we believe the bill is correct.
While we investigate whether or not there has been an error:
     We cannot try to collect the amount in question, 
or report you as delinquent on that amount.
     The charge in question may remain on your 
statement, and we may continue to charge you interest on that amount.
     While you do not have to pay the amount in 
question, you are responsible for the remainder of your balance.
     We can apply any unpaid amount against your 
credit limit.
After we finish our investigation, one of two things will happen:
     If we made a mistake: You will not have to pay 
the amount in question or any interest or other fees related to that 
amount.
     If we do not believe there was a mistake: You 
will have to pay the amount in question, along with applicable interest 
and fees. We will send you a statement of the amount you owe and the 
date payment is due. We may then report you as delinquent if you do not 
pay the amount we think you owe.
    If you receive our explanation but still believe your bill is wrong, 
you must write to us within 10 days telling us that you still refuse to 
pay. If you do so, we cannot report you as delinquent without also 
reporting that you are questioning your bill. We must tell you the name 
of anyone to whom we reported you as delinquent, and we must let those 
organizations know when the matter has been settled between us.
    If we do not follow all of the rules above, you do not have to pay 
the first $50 of the amount you question even if your bill is correct.

   Your Rights If You Are Dissatisfied With Your Credit Card Purchases

    If you are dissatisfied with the goods or services that you have 
purchased with your credit card, and you have tried in good faith to 
correct the problem with the merchant,

[[Page 448]]

you may have the right not to pay the remaining amount due on the 
purchase.
    To use this right, all of the following must be true:
    1. The purchase must have been made in your home state or within 100 
miles of your current mailing address, and the purchase price must have 
been more than $50. (Note: Neither of these are necessary if your 
purchase was based on an advertisement we mailed to you, or if we own 
the company that sold you the goods or services.)
    2. You must have used your credit card for the purchase. Purchases 
made with cash advances from an ATM or with a check that accesses your 
credit card account do not qualify.
    3. You must not yet have fully paid for the purchase.
    If all of the criteria above are met and you are still dissatisfied 
with the purchase, contact us in writing [or electronically] at:
    [Creditor Name]
    [Creditor Address]
    [[Creditor Web or e-mail address]]
    While we investigate, the same rules apply to the disputed amount as 
discussed above. After we finish our investigation, we will tell you our 
decision. At that point, if we think you owe an amount and you do not 
pay, we may report you as delinquent.

  G-4--Alternative Billing-Error Rights Model Form (Home-Equity Plans)

                         BILLING RIGHTS SUMMARY

             In Case of Errors or Questions About Your Bill

    If you think your bill is wrong, or if you need more information 
about a transaction on your bill, write us [on a separate sheet] at 
[address] [the address shown on your bill] as soon as possible. [You may 
also contact us on the Web: [Creditor Web or e-mail address]] We must 
hear from you no later than 60 days after we sent you the first bill on 
which the error or problem appeared. You can telephone us, but doing so 
will not preserve your rights.
    In your letter, give us the following information:
     Your name and account number.
     The dollar amount of the suspected error.
     Describe the error and explain, if you can, why 
you believe there is an error. If you need more information, describe 
the item you are unsure about.
    You do not have to pay any amount in question while we are 
investigating, but you are still obligated to pay the parts of your bill 
that are not in question. While we investigate your question, we cannot 
report you as delinquent or take any action to collect the amount you 
question.

                 Special Rule for Credit Card Purchases

    If you have a problem with the quality of goods or services that you 
purchased with a credit card, and you have tried in good faith to 
correct the problem with the merchant, you may not have to pay the 
remaining amount due on the goods or services. You have this protection 
only when the purchase price was more than $50 and the purchase was made 
in your home state or within 100 miles of your mailing address. (If we 
own or operate the merchant, or if we mailed you the advertisement for 
the property or services, all purchases are covered regardless of amount 
or location of purchase.)

 G-4(A)--Alternative Billing-Error Rights Model Form (Plans Other Than 
                           Home-Equity Plans)

      What To Do If You Think You Find A Mistake On Your Statement

    If you think there is an error on your statement, write to us at:

[Creditor Name]
[Creditor Address]

    [You may also contact us on the Web: [Creditor Web or e-mail 
address]]
    In your letter, give us the following information:
     Account information: Your name and account 
number.
     Dollar amount: The dollar amount of the suspected 
error.
     Description of Problem: If you think there is an 
error on your bill, describe what you believe is wrong and why you 
believe it is a mistake.
    You must contact us within 60 days after the error appeared on your 
statement.
    You must notify us of any potential errors in writing [or 
electronically]. You may call us, but if you do we are not required to 
investigate any potential errors and you may have to pay the amount in 
question.
    While we investigate whether or not there has been an error, the 
following are true:
     We cannot try to collect the amount in question, 
or report you as delinquent on that amount.
     The charge in question may remain on your 
statement, and we may continue to charge you interest on that amount. 
But, if we determine that we made a mistake, you will not have to pay 
the amount in question or any interest or other fees related to that 
amount.
     While you do not have to pay the amount in 
question, you are responsible for the remainder of your balance.
     We can apply any unpaid amount against your 
credit limit.

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   Your Rights If You Are Dissatisfied With Your Credit Card Purchases

    If you are dissatisfied with the goods or services that you have 
purchased with your credit card, and you have tried in good faith to 
correct the problem with the merchant, you may have the right not to pay 
the remaining amount due on the purchase.
    To use this right, all of the following must be true:
    1. The purchase must have been made in your home state or within 100 
miles of your current mailing address, and the purchase price must have 
been more than $50. (Note: Neither of these are necessary if your 
purchase was based on an advertisement we mailed to you, or if we own 
the company that sold you the goods or services.)
    2. You must have used your credit card for the purchase. Purchases 
made with cash advances from an ATM or with a check that accesses your 
credit card account do not qualify.
    3. You must not yet have fully paid for the purchase.
    If all of the criteria above are met and you are still dissatisfied 
with the purchase, contact us in writing [or electronically] at:

[Creditor Name]
[Creditor Address]
[[Creditor Web address]]

    While we investigate, the same rules apply to the disputed amount as 
discussed above. After we finish our investigation, we will tell you our 
decision. At that point, if we think you owe an amount and you do not 
pay we may report you as delinquent.
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   G-11--Applications and Solicitations Made Available to the General 
                          Public Model Clauses

              (a) Disclosure of Required Credit Information

    The information about the costs of the card described in this 
[application]/[solicitation] is accurate as of (month/year). This 
information may have changed after that date. To find out what may have 
changed, [call us at (telephone number)][write to us at (address)].

                 (b) No Disclosure of Credit Information

    There are costs associated with the use of this card. To obtain 
information about these costs, call us at (telephone number) or write to 
us at (address).

                             G-12 [Reserved]

   G-13(A)--Change in Insurance Provider Model Form (Combined Notice)

    The credit card account you have with us is insured. This is to 
notify you that we plan to replace your current coverage with insurance 
coverage from a different insurer.
    If we obtain insurance for your account from a different insurer, 
you may cancel the insurance.
[Your premium rate will increase to $ ---- per ----.]
    [Your coverage will be affected by the following:
    [ ] The elimination of a type of coverage previously provided to 
you. [(explanation)] [See ---- of the attached policy for details.]
    [ ] A lowering of the age at which your coverage will terminate or 
will become more restrictive. [(explanation)] [See ---- of the attached 
policy or certificate for details.]
    [ ] A decrease in your maximum insurable loan balance, maximum 
periodic benefit payment, maximum number of payments, or any other 
decrease in the dollar amount of your coverage or benefits. 
[(explanation)] [See ---- of the attached policy or certificate for 
details.]
    [ ] A restriction on the eligibility for benefits for you or others. 
[(explanation)] [See ---- of the attached policy or certificate for 
details.]
    [ ] A restriction in the definition of ``disability'' or other key 
term of coverage. [(explanation)] [See ---- of the attached policy or 
certificate for details.]
    [ ] The addition of exclusions or limitations that are broader or 
other than those under the current coverage. [(explanation)] [See ---- 
of the attached policy or certificate for details.]
    [ ] An increase in the elimination (waiting) period or a change to 
nonretroactive coverage. [(explanation)] [See ---- of the attached 
policy or certificate for details).]
    [The name and mailing address of the new insurer providing the 
coverage for your account is (name and address).]

            G-13(B)--Change in Insurance Provider Model Form

    We have changed the insurer providing the coverage for your account. 
The new insurer's name and address are (name and address). A copy of the 
new policy or certificate is attached.
    You may cancel the insurance for your account.

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                  G-16(A) Debt Suspension Model Clause

    Please enroll me in the optional [insert name of program], and bill 
my account the fee of [how cost is determined]. I understand that 
enrollment is not required to obtain credit. I also understand that 
depending on the event, the protection may only temporarily suspend my 
duty to make minimum payments, not reduce the balance I owe. I 
understand that my balance will actually grow during the suspension 
period as interest continues to accumulate.

 [To Enroll, Sign Here]/[To Enroll, Initial Here]. X____________________

                     G-16(B) Debt Suspension Sample

    Please enroll me in the optional [name of program], and bill my 
account the fee of $.83 per $100 of my month-end account balance. I 
understand that enrollment is not required to obtain credit. I also 
understand that depending on the event, the protection may only 
temporarily suspend my duty to make minimum payments, not reduce the 
balance I owe. I understand that my balance will actually grow during 
the suspension period as interest continues to accumulate.

 To Enroll, Initial Here. X_____________________________________________

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          G-18(H)--Deferred Interest Periodic Statement Clause

    [You must pay your promotional balance in full by [date] to avoid 
paying accrued interest charges.]

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                  G-24--Deferred Interest Offer Clauses

    (a) For Credit Card Accounts Under an Open-End (Not Home-Secured) 
Consumer Credit Plan
    [Interest will be charged to your account from the purchase date if 
the purchase balance is not paid in full within the/by [deferred 
interest period/date] or if you make a late payment.]
    (b) For Other Open-End Plans
    [Interest will be charged to your account from the purchase date if 
the purchase balance is not paid in full within the/by [deferred 
interest period/date] or if your account is otherwise in default.]
    G-25(A)--Consent Form for Over-the-Credit Limit Transactions

          Your choice regarding over-the-credit limit coverage

    Unless you tell us otherwise, we will decline any transaction that 
causes you to go over your credit limit. If you want us to authorize 
these transactions, you can request over-the-credit limit coverage.
    If you have over-the-credit limit coverage and you go over your 
credit limit, we will charge you a fee of up to $35. We may also 
increase your APRs to the Penalty APR of XX.XX%. You will only pay one 
fee per billing cycle, even if you go over your limit multiple times in 
the same cycle.
    Even if you request over-the-credit limit coverage, in some cases we 
may still decline a transaction that would cause you to go

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over your limit, such as if you are past due or significantly over your 
credit limit.
    If you want over-the-limit coverage and to allow us to authorize 
transactions that go over your credit limit, please:

--Call us at [telephone number];
--Visit [Web site]; or
--Check or initial the box below, and return the form to us at 
[address].
________________________________________________________________________
    -- I want over-the-limit coverage. I understand that if I go over my 
credit limit, my APRs may be increased and I will be charged a fee of up 
to $35. [I have the right to cancel this coverage at any time.]
    [-- I do not want over-the-limit coverage. I understand that 
transactions that exceed my credit limit will not be authorized.]

 Printed Name:__________________________________________________________
 Date:__________________________________________________________________
 [Account Number]:______________________________________________________

  G-25(B)--Revocation Notice for Periodic Statement Regarding Over-the-
                        Credit Limit Transactions

    You currently have over-the-credit limit coverage on your account, 
which means that we pay transactions that cause you go to over your 
credit limit. If you do go over your credit limit, we will charge you a 
fee of up to $35. We may also increase your APRs. To remove over-the-
credit-limit coverage from your account, call us at 1-800-xxxxxxx or 
visit [insert web site]. [You may also write us at: [insert address].]
    [You may also check or initial the box below and return this form to 
us at: [insert address].
    -- I want to cancel over-the-limit coverage for my account.
 Printed Name:__________________________________________________________
 Date:__________________________________________________________________
 [Account Number]:______________________________________________________

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 60191, Dec. 9, 
1981; 54 FR 13868, Apr. 6, 1989; 54 FR 24689, June 9, 1989; 55 FR 38312, 
Sept. 18, 1990; 65 FR 58908, Oct. 3, 2000; 75 FR 7825, Feb. 22, 2010; 75 
FR 37573, June 26, 2010]



    Sec. Appendix H to Part 226-- Closed-End Model Forms and Clauses

H-1 Credit Sale Model Form (Sec. 226.18)
H-2 Loan Model Form (Sec. 226.18)
H-3 Amount Financed Itemization Model Form (Sec. 226.18(c))
H-4(A) Variable-Rate Model Clauses (Sec. 226.18(f)(1))
H-4(B) Variable-Rate Model Clauses (Sec. 226.18(f)(2))
H-4(C) Variable-Rate Model Clauses (Sec. 226.19(b))
H-4(D) Variable-Rate Model Clauses (Sec. 226.20(c))
H-4(E)--Fixed-Rate Mortgage Interest Rate and Payment Summary Model 
          Clause (Sec. 226.18(s))
H-4(F)--Adjustable-Rate Mortgage or Step-Rate Mortgage Interest Rate and 
          Payment Summary Model Clause (Sec. 226.18(s))
H-4(G)--Mortgage with Negative Amortization Interest Rate and Payment 
          Summary Model Clause (Sec. 226.18(s))
H-4(H)--Fixed-Rate Mortgage with Interest-Only Interest Rate and Payment 
          Summary Model Clause (Sec. 226.18(s))
H-4(I)--Adjustable-Rate Mortgage Introductory Rate Disclosure Model 
          Clause (Sec. 226.18(s)(2)(iii))
H-4(J)--Balloon Payment Disclosure Model Clause (Sec. 226.18(s)(5))
H-4(K)--No Guarantee to Refinance Statement Model Clause (Sec. 
          226.18(t))
H-5 Demand Feature Model Clauses (Sec. 226.18(i))
H-6 Assumption Policy Model Clause (Sec. 226.18(q))
H-7 Required Deposit Model Clause (Sec. 226.18(r))
H-8 Rescission Model Form (General) (Sec. 226.23)
H-9 Rescission Model Form (Refinancing (with Original Creditor)) (Sec. 
          226.23)
H-10 Credit Sale Sample
H-11 Installment Loan Sample
H-12 Refinancing Sample
H-13 Mortgage with Demand Feature Sample
H-14 Variable-Rate Mortgage Sample (Sec. 226.19(b))
H-15 Graduated-Payment Mortgage Sample
H-16 Mortgage Sample
H-17(A) Debt Suspension Model Clause
H-17(B) Debt Suspension Sample

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                   H-4(C)--Variable-Rate Model Clauses

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.

            How Your Interest Rate and Payment Are Determined

     Your interest rate will be based on [an index 
plus a margin] [a formula].
     Your payment will be based on the interest rate, 
loan balance, and loan term.
--[The interest rate will be based on (identification of index) plus our 
margin. Ask for our current interest rate and margin.]
--[The interest rate will be based on (identification of formula). Ask 
us for our current interest rate.]
--Information about the index [formula for rate adjustments] is 
published [can be found] ----------------.
--[The initial interest rate is not based on the (index) (formula) used 
to make later adjustments. Ask us for the amount of current interest 
rate discounts.]

                    How Your Interest Rate Can Change

     Your interest rate can change (frequency).
     [Your interest rate cannot increase or decrease 
more than ------ percentage points at each adjustment.]
     Your interest rate cannot increase [or decrease] 
more than ------ percentage points over the term of the loan.

                       How Your Payment Can Change

     Your payment can change (frequency) based on 
changes in the interest rate.
     [Your payment cannot increase more than (amount 
or percentage) at each adjustment.]
     You will be notified in writing -------- days 
before the due date of a payment at a new level. This notice will 
contain information about your interest rates, payment amount, and loan 
balance.
     [You will be notified once each year during which 
interest rate adjustments, but no payment adjustments, have been made to 
your loan. This notice will contain information about your interest 
rates, payment amount, and loan balance.]
     [For example, on a $10,000 [term] loan with an 
initial interest rate of -------- [(the rate shown in the interest rate 
column below for the year 19 --------)] [(in effect (month) (year)], the 
maximum amount that the interest rate can rise under this program is --
------ percentage points, to --------%, and the monthly payment can rise 
from a first-year payment of $-------- to a maximum of $-------- in the 
---------- year. To see what your payments would be, divide your 
mortgage amount by $10,000; then multiply the monthly payment by that 
amount. (For example, the monthly payment for a mortgage amount of 
$60,000 would be: $60,000 / $10,000 = 6; 6 x -------- = $-------- per 
month.)]

                                [Example

    The example below shows how your payments would have changed under 
this ARM program based on actual changes in the index from 1982 to 1996. 
This does not necessarily indicate how your index will change in the 
future.
    The example is based on the following assumptions:

Amount...................................  $10,000
Term.....................................  ----------
Change date..............................  ----------
Payment adjustment.......................  (frequency)
Interest adjustment......................  (frequency)
[Margin] *...............................  --------
Caps -------- [periodic interest rate
 cap]
 -------- [lifetime interest rate cap
 -------- [payment cap]
[Interest rate carryover]
[Negative amortization]
[Interest rate discount] **
Index.......(identification of index or
 formula)
 
* This is a margin we have used recently, your margin may be different.
** This is the amount of a discount we have provided recently; your loan
  may be discounted by a different amount.]


----------------------------------------------------------------------------------------------------------------
                                                                         Margin               Monthly  Remaining
                           Year                               Index   (Percentage  Interest   Payment   Balance
                                                               (%)      points)    Rate (%)     ($)       ($)
----------------------------------------------------------------------------------------------------------------
1982......................................................  ........  ...........  ........  ........  .........
1983......................................................  ........  ...........  ........  ........  .........
1984......................................................  ........  ...........  ........  ........  .........
1985......................................................  ........  ...........  ........  ........  .........
1986......................................................  ........  ...........  ........  ........  .........
1987......................................................  ........  ...........  ........  ........  .........
1988......................................................  ........  ...........  ........  ........  .........
1989......................................................  ........  ...........  ........  ........  .........
1990......................................................  ........  ...........  ........  ........  .........
1991......................................................  ........  ...........  ........  ........  .........
1992......................................................  ........  ...........  ........  ........  .........
1993......................................................  ........  ...........  ........  ........  .........
1994......................................................  ........  ...........  ........  ........  .........
1995......................................................  ........  ...........  ........  ........  .........
1996......................................................  ........  ...........  ........  ........  .........
----------------------------------------------------------------------------------------------------------------
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
  multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount
  of $60,000 taken out in 1982 would be: $60,000 / $10,000 = 6; 6 x -------- = $-------- per month.)


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                 H-4(I)--Introductory Rate Model Clause

[Introductory Rate Notice
You have a discounted introductory rate of -------- % that ends after 
(period).
In the (period in sequence), even if market rates do not change, this 
rate will increase to ---- %.]

                  H-4(J)--Balloon Payment Model Clause

[Final Balloon Payment due (date): $--------]

      H-4(K)--``No-Guarantee-to-Refinance'' Statement Model Clause

    There is no guarantee that you will be able to refinance to lower 
your rate and payments.
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     H-9--Rescission Model Form (Refinancing with Original Creditor)

                        NOTICE OF RIGHT TO CANCEL

                          Your Right To Cancel

    You are entering into a new transaction to increase the amount of 
credit previously provided to you. Your home is the security for this 
new transaction. You have a legal right under federal law to cancel this 
new transaction, without cost, within three business days from whichever 
of the following events occurs last:
    (1) the date of this new transaction, which is ----------------; or
    (2) the date you received your new Truth in Lending disclosures; or
    (3) the date you received this notice of your right to cancel.
    If you cancel this new transaction, it will not affect any amount 
that you presently owe. Your home is the security for that amount. 
Within 20 calendar days after we receive your notice of cancellation of 
this new transaction, we must take the steps necessary to reflect the 
fact that your home does not secure the increase of credit. We must also 
return any money you have given to us or anyone else in connection with 
this new transaction.
    You may keep any money we have given you in this new transaction 
until we have done the things mentioned above, but you must then offer 
to return the money at the address below.
    If we do not take possession of the money within 20 calendar days of 
your offer, you may keep it without further obligation.

                              How To Cancel

    If you decide to cancel this new transaction, you may do so by 
notifying us in writing, at

________________________________________________________________________
(Creditor's name and business address).
    You may use any written statement that is signed and dated by you 
and states your intention to cancel, or you may use this notice by 
dating and signing below. Keep one copy of this notice because it 
contains important information about your rights.
    If you cancel by mail or telegram, you must send the notice no later 
than midnight of

________________________________________________________________________

(Date)__________________________________________________________________

(or midnight of the third business day following the latest of the three 
events listed above).
    If you send or deliver your written notice to cancel some other way, 
it must be delivered to the above address no later than that time.

I WISH TO CANCEL

________________________________________________________________________

Consumer's Signature
________________________________________________________________________

Date

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                   H-14--Variable-Rate Mortgage Sample

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.

            How Your Interest Rate and Payment Are Determined

     Your interest rate will be based on an index rate 
plus a margin.
     Your payment will be based on the interest rate, 
loan balance, and loan term.

--The interest rate will be based on the weekly average yield on United 
States Treasury securities adjusted to a constant maturity of 1 year 
(your index), plus our margin. Ask us for our current interest rate and 
margin.
--Information about the index rate is published weekly in the Wall 
Street Journal.
     Your interest rate will equal the index rate plus 
our margin unless your interest rate ``caps'' limit the amount of change 
in the interest rate.

                    How Your Interest Rate Can Change

     Your interest rate can change yearly.
     Your interest rate cannot increase or decrease 
more than 2 percentage points per year.
     Your interest rate cannot increase or decrease 
more than 5 percentage points over the term of the loan.

[[Page 495]]

                   How Your Monthly Payment Can Change

     Your monthly payment can increase or decrease 
substantially based on annual changes in the interest rate.
     [For example, on a $10,000, 30-year loan with an 
initial interest rate of 12.41 percent in effect in July 1996, the 
maximum amount that the interest rate can rise under this program is 5 
percentage points, to 17.41 percent, and the monthly payment can rise 
from a first-year payment of $106.03 to a maximum of $145.34 in the 
fourth year. To see what your payment is, divide your mortgage amount by 
$10,000; then multiply the monthly payment by that amount. (For example, 
the monthly payment for a mortgage amount of $60,000 would be: $60,000 / 
$10,000 = 6; 6 x 106.03 = $636.18 per month.)
     You will be notified in writing 25 days before 
the annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan balance.]

                                [Example

    The example below shows how your payments would have changed under 
this ARM program based on actual changes in the index from 1982 to 1996. 
This does not necessarily indicate how your index will change in the 
future. The example is based on the following assumptions:

Amount.................................  $10,000
Term...................................  30 years
Payment adjustment.....................  1 year
Interest adjustment....................  1 year
Margin.................................  3 percentage points
Caps-------- 2 percentage points annual interest rate
 -------- 5 percentage points lifetime interest rate
Index-------- Weekly average yield on U.S. Treasury securities adjusted
 to a constant maturity of one year.
 


----------------------------------------------------------------------------------------------------------------
                                                             Margin*
   Year (as of 1st week ending in July)       Index (%)    (percentage    Interest       Monthly      Remaining
                                                             points)      Rate (%)     Payment ($)   Balance ($)
----------------------------------------------------------------------------------------------------------------
1982......................................         14.41             3         17.41        145.90      9,989.37
1983......................................          9.78             3       **15.41        129.81      9,969.66
1984......................................         12.17             3         15.17        127.91      9,945.51
1985......................................          7.66             3       **13.17        112.43      9,903.70
1986......................................          6.36             3      ***12.41        106.73      9,848.94
1987......................................          6.71             3      ***12.41        106.73      9,786.98
1988......................................          7.52             3      ***12.41        106.73      9,716.88
1989......................................          7.97             3      ***12.41        106.73      9,637.56
1990......................................          8.06             3      ***12.41        106.73      9,547.83
1991......................................          6.40             3      ***12.41        106.73      9,446.29
1992......................................          3.96             3      ***12.41        106.73      9,331.56
1993......................................          3.42             3      ***12.41        106.73      9,201.61
1994......................................          5.47             3      ***12.41        106.73      9,054.72
1995......................................          5.53             3      ***12.41        106.73      8,888.52
1996......................................          5.82             3      ***12.41        106.73      8,700.37
----------------------------------------------------------------------------------------------------------------
*This is a margin we have used recently; your margin may be different.
**This interest rate reflects a 2 percentage point annual interest rate cap.
***This interest rate reflects a 5 percentage point lifetime interest rate cap.
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
  multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount
  of $60,000 taken out in 1982 would be: $60,000 / $10,000 = 6; 6 x $106.73 = $640.38.)

     You will be notified in writing 25 days before 
the annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan balance.]

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                  H-17(A) Debt Suspension Model Clause

    Please enroll me in the optional [insert name of program], and bill 
my account the fee of [insert charge for the initial term of coverage]. 
I understand that enrollment is not required to obtain credit. I also 
understand that depending on the event, the protection may only 
temporarily suspend my duty to make minimum payments, not reduce the 
balance I owe. I understand that my balance will actually grow during 
the suspension period as interest continues to accumulate.
    [To Enroll, Sign Here]/[To Enroll, Initial Here]. X ----------------
----

                     H-17(B) Debt Suspension Sample

    Please enroll me in the optional [name of program], and bill my 
account the fee of $200.00. I understand that enrollment is not required 
to obtain credit. I also understand that depending on the event, the 
protection may only temporarily suspend my duty to make minimum 
payments, not reduce the balance I owe. I understand that my balance 
will actually grow during the suspension period as interest continues to 
accumulate.
    To Enroll, Initial Here. X --------------------

[46 FR 20892, Apr. 7, 1981, as amended at 46 FR 29246, June 1, 1981; 52 
FR 48671, Dec. 24, 1987; 53 FR 467, Jan. 7, 1988; Reg. Z, 60 FR 15473, 
Mar. 24, 1995; 61 FR 49247, Sept. 19, 1996; 62 FR 63444, 63445, Dec. 1, 
1997; 62 FR 66179, Dec. 17, 1997; Reg. Z, 63 FR 2723, Jan. 16, 1998; 66 
FR 65618, Dec. 20, 2001; 74 FR 41236, Aug. 14, 2009; 75 FR 7845, Feb. 
22, 2010; 75 FR 58484, Sept. 24, 2010]



        Sec. Appendix I to Part 226--Federal Enforcement Agencies

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

  National banks and federal branches and federal agencies of foreign 
                                  banks

    District office of the Office of the Comptroller of the Currency for 
the district in which the institution is located.

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

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

[[Page 510]]

  Non-member insured banks and insured state branches of foreign banks

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

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

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

                          Federal Credit Unions

    Regional office of the National Credit Union Administration serving 
the area in which the Federal credit union is located.

                              Air Carriers

    Assistant General Counsel for Aviation Enforcement and Proceedings, 
Department of Transportation, 400 Seventh Street, SW., Washington, DC 
20590.

             Creditors Subject to Packers and Stockyards Act

    Nearest Packers and Stockyards Administration area supervisor.

Federal Land Banks, Federal Land Bank Associations, Federal Intermediate 
            Credit Banks and Production Credit Associations.

    Farm Credit Administration, 490 L'Enfant Plaza, SW., Washington, DC 
20578.

    Retail, Department Stores, Consumer Finance Companies, All Other 
Creditors, and All Nonbank Credit Card Issuers (Creditors operating on a 
   local or regional basis should use the address of the FTC Regional 
                     Office in which they operate.)

    Division of Credit Practices, Bureau of Consumer Protection, Federal 
Trade Commission, Washington, DC 20580.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 50 FR 8708, Mar. 5, 
1985; 54 FR 53539, Dec. 29, 1989; 56 FR 51322, Oct. 11, 1991; 57 FR 
20400, May 13, 1992]



  Sec. Appendix J to Part 226--Annual Percentage Rate Computations for 
                     Closed-End Credit Transactions

                            (a) Introduction

    (1) Section 226.22(a) of Regulation Z provides that the annual 
percentage rate for other than open end credit transactions shall be 
determined in accordance with either the actuarial method or the United 
States Rule method. This appendix contains an explanation of the 
actuarial method as well as equations, instructions and examples of how 
this method applies to single advance and multiple advance transactions.
    (2) Under the actuarial method, at the end of each unit-period (or 
fractional unit-period) the unpaid balance of the amount financed is 
increased by the finance charge earned during that period and is 
decreased by the total payment (if any) made at the end of that period. 
The determination of unit-periods and fractional unit-periods shall be 
consistent with the definitions and rules in paragraphs (b) (3), (4) and 
(5) of this section and the general equation in paragraph (b)(8) of this 
section.
    (3) In contrast, under the United States Rule method, at the end of 
each payment period, the unpaid balance of the amount financed is 
increased by the finance charge earned during that payment period and is 
decreased by the payment made at the end of that payment period. If the 
payment is less than the finance charge earned, the adjustment of the 
unpaid balance of the amount financed is postponed until the end of the 
next payment period. If at that time the sum of the two payments is 
still less than the total earned finance charge for the two payment 
periods, the adjustment of the unpaid balance of the amount financed is 
postponed still another payment period, and so forth.

         (b) Instructions and Equations for the Actuarial Method

                            (1) General Rule

    The annual percentage rate shall be the nominal annual percentage 
rate determined by multiplying the unit-period rate by the number of 
unit-periods in a year.

                       (2) Term of the Transaction

    The term of the transaction begins on the date of its consummation, 
except that if the finance charge or any portion of it is earned 
beginning on a later date, the term begins on the later date. The term 
ends on the date the last payment is due, except that if an advance is 
scheduled after that date, the term ends on the later date. For 
computation purposes, the length of the term shall be equal to the time 
interval between any point in time on the beginning date to the same 
point in time on the ending date.

                    (3) Definitions of Time Intervals

    (i) A period is the interval of time between advances or between 
payments and includes the interval of time between the date the finance 
charge begins to be earned and the date of the first advance thereafter 
or the

[[Page 511]]

date of the first payment thereafter, as applicable.
    (ii) A common period is any period that occurs more than once in a 
transaction.
    (iii) A standard interval of time is a day, week, semimonth, month, 
or a multiple of a week or a month up to, but not exceeding, 1 year.
    (iv) All months shall be considered equal. Full months shall be 
measured from any point in time on a given date of a given month to the 
same point in time on the same date of another month. If a series of 
payments (or advances) is scheduled for the last day of each month, 
months shall be measured from the last day of the given month to the 
last day of another month. If payments (or advances) are scheduled for 
the 29th or 30th of each month, the last day of February shall be used 
when applicable.

                             (4) Unit-period

    (i) In all transactions other than a single advance, single payment 
transaction, the unit-period shall be that common period, not to exceed 
1 year, that occurs most frequently in the transaction, except that
    (A) If 2 or more common periods occur with equal frequency, the 
smaller of such common periods shall be the unit-period; or
    (B) If there is no common period in the transaction, the unit-period 
shall be that period which is the average of all periods rounded to the 
nearest whole standard interval of time. If the average is equally near 
2 standard intervals of time, the lower shall be the unit-period.
    (ii) In a single advance, single payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 1 
year.

            (5) Number of Unit-periods Between 2 Given Dates

    (i) The number of days between 2 dates shall be the number of 24-
hour intervals between any point in time on the first date to the same 
point in time on the second date.
    (ii) If the unit-period is a month, the number of full unit-periods 
between 2 dates shall be the number of months measured back from the 
later date. The remaining fraction of a unit-period shall be the number 
of days measured forward from the earlier date to the beginning of the 
first full unit-period, divided by 30. If the unit-period is a month, 
there are 12 unit-periods per year.
    (iii) If the unit-period is a semimonth or a multiple of a month not 
exceeding 11 months, the number of days between 2 dates shall be 30 
times the number of full months measured back from the later date, plus 
the number of remaining days. The number of full unit-periods and the 
remaining fraction of a unit-period shall be determined by dividing such 
number of days by 15 in the case of a semimonthly unit-period or by the 
appropriate multiple of 30 in the case of a multimonthly unit-period. If 
the unit-period is a semimonth, the number of unit-periods per year 
shall be 24. If the number of unit-periods is a multiple of a month, the 
number of unit-periods per year shall be 12 divided by the number of 
months per unit-period.
    (iv) If the unit-period is a day, a week, or a multiple of a week, 
the number of full unit-periods and the remaining fractions of a unit-
period shall be determined by dividing the number of days between the 2 
given dates by the number of days per unit-period. If the unit-period is 
a day, the number of unit-periods per year shall be 365. If the unit-
period is a week or a multiple of a week, the number of unit-periods per 
year shall be 52 divided by the number of weeks per unit-period.
    (v) If the unit-period is a year, the number of full unit-periods 
between 2 dates shall be the number of full years (each equal to 12 
months) measured back from the later date. The remaining fraction of a 
unit-period shall be
    (A) The remaining number of months divided by 12 if the remaining 
interval is equal to a whole number of months, or
    (B) The remaining number of days divided by 365 if the remaining 
interval is not equal to a whole number of months.
    (vi) In a single advance, single payment transaction in which the 
term is less than a year and is equal to a whole number of months, the 
number of unit-periods in the term shall be 1, and the number of unit-
periods per year shall be 12 divided by the number of months in the term 
or 365 divided by the number of days in the term.
    (vii) In a single advance, single payment transaction in which the 
term is less than a year and is not equal to a whole number of months, 
the number of unit-periods in the term shall be 1, and the number of 
unit-periods per year shall be 365 divided by the number of days in the 
term.

           (6) Percentage Rate for a Fraction of a Unit-period

    The percentage rate of finance charge for a fraction (less than 1) 
of a unit-period shall be equal to such fraction multiplied by the 
percentage rate of finance charge per unit-period.

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[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 29246, June 1, 
1981]

[[Page 522]]



 Sec. Appendix K to Part 226--Total Annual Loan Cost Rate Computations 
                    for Reverse Mortgage Transactions

    (a) Introduction. Creditors are required to disclose a series of 
total annual loan cost rates for each reverse mortgage transaction. This 
appendix contains the equations creditors must use in computing the 
total annual loan cost rate for various transactions, as well as 
instructions, explanations, and examples for various transactions. This 
appendix is modeled after appendix J of this part (Annual Percentage 
Rates Computations for Closed-end Credit Transactions); creditors should 
consult appendix J of this part for additional guidance in using the 
formulas for reverse mortgages.
    (b) Instructions and equations for the total annual loan cost rate--
(1) General rule. The total annual loan cost rate shall be the nominal 
total annual loan cost rate determined by multiplying the unit-period 
rate by the number of unit-periods in a year.
    (2) Term of the transaction. For purposes of total annual loan cost 
disclosures, the term of a reverse mortgage transaction is assumed to 
begin on the first of the month in which consummation is expected to 
occur. If a loan cost or any portion of a loan cost is initially 
incurred beginning on a date later than consummation, the term of the 
transaction is assumed to begin on the first of the month in which that 
loan cost is incurred. For purposes of total annual loan cost 
disclosures, the term ends on each of the assumed loan periods specified 
in Sec. 226.33(c)(6).
    (3) Definitions of time intervals.
    (i) A period is the interval of time between advances.
    (ii) A common period is any period that occurs more than once in a 
transaction.
    (iii) A standard interval of time is a day, week, semimonth, month, 
or a multiple of a week or a month up to, but not exceeding, 1 year.
    (iv) All months shall be considered to have an equal number of days.
    (4) Unit-period. (i) In all transactions other than single-advance, 
single-payment transactions, the unit-period shall be that common 
period, not to exceed one year, that occurs most frequently in the 
transaction, except that:
    (A) If two or more common periods occur with equal frequency, the 
smaller of such common periods shall be the unit-period; or
    (B) If there is no common period in the transaction, the unit-period 
shall be that period which is the average of all periods rounded to the 
nearest whole standard interval of time. If the average is equally near 
two standard intervals of time, the lower shall be the unit-period.
    (ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed one 
year.
    (5) Number of unit-periods between two given dates. (i) The number 
of days between two dates shall be the number of 24-hour intervals 
between any point in time on the first date to the same point in time on 
the second date.
    (ii) If the unit-period is a month, the number of full unit-periods 
between two dates shall be the number of months. If the unit-period is a 
month, the number of unit-periods per year shall be 12.
    (iii) If the unit-period is a semimonth or a multiple of a month not 
exceeding 11 months, the number of days between two dates shall be 30 
times the number of full months. The number of full unit-periods shall 
be determined by dividing the number of days by 15 in the case of a 
semimonthly unit-period or by the appropriate multiple of 30 in the case 
of a multimonthly unit-period. If the unit-period is a semimonth, the 
number of unit-periods per year shall be 24. If the number of unit-
periods is a multiple of a month, the number of unit-periods per year 
shall be 12 divided by the number of months per unit-period.
    (iv) If the unit-period is a day, a week, or a multiple of a week, 
the number of full unit-periods shall be determined by dividing the 
number of days between the two given dates by the number of days per 
unit-period. If the unit-period is a day, the number of unit-periods per 
year shall be 365. If the unit-period is a week or a multiple of a week, 
the number of unit-periods per year shall be 52 divided by the number of 
weeks per unit-period.
    (v) If the unit-period is a year, the number of full unit-periods 
between two dates shall be the number of full years (each equal to 12 
months).
    (6) Symbols. The symbols used to express the terms of a transaction 
in the equation set forth in paragraph (b)(8) of this appendix are 
defined as follows:

Aj = The amount of each periodic or lump-sum advance to the 
          consumer under the reverse mortgage transaction.
i = Percentage rate of the total annual loan cost per unit-period, 
          expressed as a decimal equivalent.
j = The number of unit-periods until the jth advance.
n = The number of unit-periods between consummation and repayment of the 
          debt.
Pn = Min (Baln, Valn). This is the 
          maximum amount that the creditor can be repaid at the 
          specified loan term.
Baln = Loan balance at time of repayment, including all costs 
          and fees incurred by the consumer (including any shared 
          appreciation or shared equity amount) compounded to time n at 
          the creditor's contract rate of interest.

[[Page 523]]

Valn = Val0 (1 + [sigma])\y\, where 
          Val0 is the property value at consummation, [sigma] 
          is the assumed annual rate of appreciation for the dwelling, 
          and y is the number of years in the assumed term. 
          Valn must be reduced by the amount of any equity 
          reserved for the consumer by agreement between the parties, or 
          by 7 percent (or the amount or percentage specified in the 
          credit agreement), if the amount required to be repaid is 
          limited to the net proceeds of sale.
[sigma] = The summation operator.
    Symbols used in the examples shown in this appendix are defined as 
follows:
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w = The number of unit-periods per year.
I = wi x 100 = the nominal total annual loan cost rate.
    (7) General equation. The total annual loan cost rate for a reverse 
mortgage transaction must be determined by first solving the following 
formula, which sets forth the relationship between the advances to the 
consumer and the amount owed to the creditor under the terms of the 
reverse mortgage agreement for the loan cost rate per unit-period (the 
loan cost rate per unit-period is then multiplied by the number of unit-
periods per year to obtain the total annual loan cost rate I; that is, I 
= wi):
[GRAPHIC] [TIFF OMITTED] TR24MR95.008

    (8) Solution of general equation by iteration process. (i) The 
general equation in paragraph (b)(7) of this appendix, when applied to a 
simple transaction for a reverse mortgage loan of equal monthly advances 
of $350 each, and with a total amount owed of $14,313.08 at an assumed 
repayment period of two years, takes the special form:
[GRAPHIC] [TIFF OMITTED] TR24MR95.009

Using the iteration procedures found in steps 1 through 4 of (b)(9)(i) 
of appendix J of this part, the total annual loan cost rate, correct to 
two decimals, is 48.53%.
    (ii) In using these iteration procedures, it is expected that 
calculators or computers will be programmed to carry all available 
decimals throughout the calculation and that enough iterations will be 
performed to make virtually certain that the total annual loan cost rate 
obtained, when rounded to two decimals, is correct. Total annual loan 
cost rates in the examples below were obtained by using a 10-digit 
programmable calculator and the iteration procedure described in 
appendix J of this part.
    (9) Assumption for discretionary cash advances. If the consumer 
controls the timing of advances made after consummation (such as in a 
credit line arrangement), the creditor must use the general formula in 
paragraph (b)(7) of this appendix. The total annual loan cost rate shall 
be based on the assumption that 50 percent of the principal loan amount 
is advanced at closing, or in the case of an open-end transaction, at 
the time the consumer becomes obligated under the plan. Creditors shall 
assume the advances are made at the interest rate then in effect and 
that no further advances are made to, or repayments made by, the 
consumer during the term of the transaction or plan.
    (10) Assumption for variable-rate reverse mortgage transactions. If 
the interest rate for a reverse mortgage transaction may increase during 
the loan term and the amount or timing is not known at consummation, 
creditors shall base the disclosures on the initial interest rate in 
effect at the time the disclosures are provided.
    (11) Assumption for closing costs. In calculating the total annual 
loan cost rate, creditors shall assume all closing and other consumer 
costs are financed by the creditor.
    (c) Examples of total annual loan cost rate computations--(1) Lump-
sum advance at consummation.

Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer at 
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
P10 = Min (103,385.84, 137,662.72)

[[Page 524]]

[GRAPHIC] [TIFF OMITTED] TR29SE95.004

i = .1317069438
Total annual loan cost rate (100(.1317069438 x 1)) = 13.17%
    (2) Monthly advance beginning at consummation.

Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer at 
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR24MR95.011

Total annual loan cost rate (100(.009061140 x 12)) = 10.87%
    (3) Lump sum advance at consummation and monthly advances 
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
Estimated time of repayment (based on life expectancy of a consumer at 
age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR24MR95.012

Total annual loan cost rate (100(.007708844 x 12)) = 9.25%
    (d) Reverse mortgage model form and sample form--(1) Model form.

                       Total Annual Loan Cost Rate

                               Loan Terms

Age of youngest borrower:
Appraised property value:
Interest rate:
Monthly advance:
Initial draw:
Line of credit:

                          Initial Loan Charges

Closing costs:
Mortgage insurance premium:
Annuity cost:

                          Monthly Loan Charges

Servicing fee:

                             Other Charges:

Mortgage insurance:
Shared Appreciation:

                            Repayment Limits

[[Page 525]]



----------------------------------------------------------------------------------------------------------------
                                                                          Total annual loan cost rate
                                                             ---------------------------------------------------
                 Assumed annual appreciation                  2-year loan    [ ]-year     [ ]-year     [ ]-year
                                                                  term      loan term]   loan term    loan term
----------------------------------------------------------------------------------------------------------------
0%..........................................................  ...........          [ ]
4%..........................................................  ...........          [ ]
8%..........................................................  ...........          [ ]
----------------------------------------------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you keep 
the loan and how much your house appreciates in value. Generally, the 
longer you keep a reverse mortgage, the lower the total annual loan cost 
rate will be.
    This table shows the estimated cost of your reverse mortgage loan, 
expressed as an annual rate. It illustrates the cost for three [four] 
loan terms: 2 years, [half of life expectancy for someone your age,] 
that life expectancy, and 1.4 times that life expectancy. The table also 
shows the cost of the loan, assuming the value of your home appreciates 
at three different rates: 0%, 4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically include 
principal, interest, closing costs, mortgage insurance premiums, annuity 
costs, and servicing costs (but not costs when you sell the home).
    The rates in this table are estimates. Your actual cost may differ 
if, for example, the amount of your loan advances varies or the interest 
rate on your mortgage changes.

 Signing an Application or Receiving These Disclosures Does Not Require 
                        You To Complete This Loan

    (2) Sample Form.

                       Total Annual Loan Cost Rate

                               Loan Terms

Age of youngest borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly advance: $301.80
Initial draw: $1,000
Line of credit: $4,000

                          Initial Loan Charges

Closing costs: $5,000
Mortgage insurance premium: None
Annuity cost: None

                          Monthly Loan Charges

Servicing fee: None

                              Other Charges

Mortgage insurance: None
Shared Appreciation: None

                            Repayment Limits

Net proceeds estimated at 93% of projected home sale

----------------------------------------------------------------------------------------------------------------
                                                                          Total annual loan cost rate
                                                             ---------------------------------------------------
                 Assumed annual appreciation                  2-year loan    [6-year      12-year      17-year
                                                                  term      loan term]   loan term    loan term
----------------------------------------------------------------------------------------------------------------
0%..........................................................       39.00%     [14.94%]        9.86%        3.87%
4%..........................................................       39.00%     [14.94%]       11.03%       10.14%
8%..........................................................       39.00%     [14.94%]       11.03%       10.20%
----------------------------------------------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you keep 
the loan and how much your house appreciates in value. Generally, the 
longer you keep a reverse mortgage, the lower the total annual loan cost 
rate will be.
    This table shows the estimated cost of your reverse mortgage loan, 
expressed as an annual rate. It illustrates the cost for three [four] 
loan terms: 2 years, [half of life expectancy for someone your age,] 
that life expectancy, and 1.4 times that life expectancy. The table also 
shows the cost of the loan, assuming the value of your home appreciates 
at three different rates: 0%,4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically include 
principal, interest, closing costs, mortgage insurance premiums, annuity 
costs, and servicing costs (but not disposition costs--costs when you 
sell the home).
    The rates in this table are estimates. Your actual cost may differ 
if, for example, the amount of your loan advances varies or the interest 
rate on your mortgage changes.

[[Page 526]]

 Signing an Application or Receiving These Disclosures Does Not Require 
                        You To Complete This Loan

[Reg. Z, 60 FR 15474, Mar. 24, 1995, as amended at 60 FR 50400, Sept. 
29, 1995]



 Sec. Appendix L to Part 226--Assumed Loan Periods for Computations of 
                      Total Annual Loan Cost Rates

    (a) Required tables. In calculating the total annual loan cost rates 
in accordance with appendix K of this part, creditors shall assume three 
loan periods, as determined by the following table.
    (b) Loan periods. (1) Loan Period 1 is a two-year loan period.
    (2) Loan Period 2 is the life expectancy in years of the youngest 
borrower to become obligated on the reverse mortgage loan, as shown in 
the U.S. Decennial Life Tables for 1979-1981 for females, rounded to the 
nearest whole year.
    (3) Loan Period 3 is the life expectancy figure in Loan Period 3, 
multiplied by 1.4 and rounded to the nearest full year (life expectancy 
figures at .5 have been rounded up to 1).
    (4) At the creditor's option, an additional period may be included, 
which is the life expectancy figure in Loan Period 2, multiplied by .5 
and rounded to the nearest full year (life expectancy figures at .5 have 
been rounded up to 1).

----------------------------------------------------------------------------------------------------------------
                                                                                        Loan period
                                                              Loan period   [Optional     2 (life    Loan period
                  Age of youngest borrower                       1 (in     loan period  expectancy)     3 (in
                                                                 years)    (in years)]   (in years)     years)
----------------------------------------------------------------------------------------------------------------
62..........................................................            2         [11]           21           29
63..........................................................            2         [10]           20           28
64..........................................................            2         [10]           19           27
65..........................................................            2          [9]           18           25
66..........................................................            2          [9]           18           25
67..........................................................            2          [9]           17           24
68..........................................................            2          [8]           16           22
69..........................................................            2          [8]           16           22
70..........................................................            2          [8]           15           21
71..........................................................            2          [7]           14           20
72..........................................................            2          [7]           13           18
73..........................................................            2          [7]           13           18
74..........................................................            2          [6]           12           17
75..........................................................            2          [6]           12           17
76..........................................................            2          [6]           11           15
77..........................................................            2          [5]           10           14
78..........................................................            2          [5]           10           14
79..........................................................            2          [5]            9           13
80..........................................................            2          [5]            9           13
81..........................................................            2          [4]            8           11
82..........................................................            2          [4]            8           11
83..........................................................            2          [4]            7           10
84..........................................................            2          [4]            7           10
85..........................................................            2          [3]            6            8
86..........................................................            2          [3]            6            8
87..........................................................            2          [3]            6            8
88..........................................................            2          [3]            5            7
89..........................................................            2          [3]            5            7
90..........................................................            2          [3]            5            7
91..........................................................            2          [2]            4            6
92..........................................................            2          [2]            4            6
93..........................................................            2          [2]            4            6
94..........................................................            2          [2]            4            6
95 and over.................................................            2          [2]            3            4
----------------------------------------------------------------------------------------------------------------


[60 FR 15476, Mar. 24, 1995]



           Sec. Appendix M1 to Part 226--Repayment Disclosures

    (a) Definitions. (1) ``Promotional terms'' means terms of a 
cardholder's account that will expire in a fixed period of time, as set 
forth by the card issuer.
    (2) ``Deferred interest or similar plan'' means a plan where a 
consumer will not be obligated to pay interest that accrues on balances 
or transactions if those balances or transactions are paid in full prior 
to the expiration of a specified period of time.
    (b) Calculating minimum payment repayment estimates. (1) Minimum 
payment formulas. When calculating the minimum payment repayment 
estimate, card issuers must use the minimum payment formula(s) that 
apply to a cardholder's account. If more than one

[[Page 527]]

minimum payment formula applies to an account, the issuer must apply 
each minimum payment formula to the portion of the balance to which the 
formula applies. In this case, the issuer must disclose the longest 
repayment period calculated. For example, assume that an issuer uses one 
minimum payment formula to calculate the minimum payment amount for a 
general revolving feature, and another minimum payment formula to 
calculate the minimum payment amount for special purchases, such as a 
``club plan purchase.'' Also, assume that based on a consumer's balances 
in these features and the annual percentage rates that apply to such 
features, the repayment period calculated pursuant to this Appendix for 
the general revolving feature is 5 years, while the repayment period 
calculated for the special purchase feature is 3 years. This issuer must 
disclose 5 years as the repayment period for the entire balance to the 
consumer. If any promotional terms related to payments apply to a 
cardholder's account, such as a deferred billing plan where minimum 
payments are not required for 12 months, card issuers may assume no 
promotional terms apply to the account. For example, assume that a 
promotional minimum payment of $10 applies to an account for six months, 
and then after the promotional period expires, the minimum payment is 
calculated as 2 percent of the outstanding balance on the account or $20 
whichever is greater. An issuer may assume during the promotional period 
that the $10 promotional minimum payment does not apply, and instead 
calculate the minimum payment disclosures based on the minimum payment 
formula of 2 percent of the outstanding balance or $20, whichever is 
greater. Alternatively, during the promotional period, an issuer in 
calculating the minimum payment repayment estimate may apply the 
promotional minimum payment until it expires and then apply the minimum 
payment formula that applies after the promotional minimum payment 
expires. In the above example, an issuer could calculate the minimum 
payment repayment estimate during the promotional period by applying the 
$10 promotional minimum payment for the first six months and then 
applying the 2 percent or $20 (whichever is greater) minimum payment 
formula after the promotional minimum payment expires. In calculating 
the minimum payment repayment estimate during a promotional period, an 
issuer may not assume that the promotional minimum payment will apply 
until the outstanding balance is paid off by making only minimum 
payments (assuming the repayment estimate is longer than the promotional 
period). In the above example, the issuer may not calculate the minimum 
payment repayment estimate during the promotional period by assuming 
that the $10 promotional minimum payment will apply beyond the six 
months until the outstanding balance is repaid.
    (2) Annual percentage rate. When calculating the minimum payment 
repayment estimate, a card issuer must use the annual percentage rates 
that apply to a cardholder's account, based on the portion of the 
balance to which the rate applies. If any promotional terms related to 
annual percentage rates apply to a cardholder's account, other than 
deferred interest or similar plans, a card issuer in calculating the 
minimum payment repayment estimate during the promotional period must 
apply the promotional annual percentage rate(s) until it expires and 
then must apply the rate that applies after the promotional rate(s) 
expires. If the rate that applies after the promotional rate(s) expires 
is a variable rate, a card issuer must calculate that rate based on the 
applicable index or formula. This variable rate is accurate if it was in 
effect within the last 30 days before the minimum payment repayment 
estimate is provided. For deferred interest plans or similar plans, if 
minimum payments under the deferred interest or similar plan will repay 
the balances or transactions in full prior to the expiration of the 
specified period of time, a card issuer must assume that the consumer 
will not be obligated to pay the accrued interest. This means, in 
calculating the minimum payment repayment estimate, the card issuer must 
apply a zero percent annual percentage rate to the balance subject to 
the deferred interest or similar plan. If, however, minimum payments 
under the deferred interest plan or similar plan may not repay the 
balances or transactions in full prior to the expiration of the 
specified period of time, a card issuer must assume that a consumer will 
not repay the balances or transactions in full prior to the expiration 
of the specified period of time and thus the consumer will be obligated 
to pay the accrued interest. This means, in calculating the minimum 
payment repayment estimate, the card issuer must apply the annual 
percentage rate at which interest is accruing to the balance subject to 
the deferred interest or similar plan.
    (3) Beginning balance. When calculating the minimum payment 
repayment estimate, a card issuer must use as the beginning balance the 
outstanding balance on a consumer's account as of the closing date of 
the last billing cycle. When calculating the minimum payment repayment 
estimate, a card issuer may round the beginning balance as described 
above to the nearest whole dollar.
    (4) Assumptions. When calculating the minimum payment repayment 
estimate, a card issuer for each of the terms below, may either make the 
following assumption about that term, or use the account term that 
applies to a consumer's account.
    (i) Only minimum monthly payments are made each month. In addition, 
minimum

[[Page 528]]

monthly payments are made each month--for example, a debt cancellation 
or suspension agreement, or skip payment feature does not apply to the 
account.
    (ii) No additional extensions of credit are obtained, such as new 
purchases, transactions, fees, charges or other activity. No refunds or 
rebates are given.
    (iii) The annual percentage rate or rates that apply to a 
cardholder's account will not change, through either the operation of a 
variable rate or the change to a rate, except as provided in paragraph 
(b)(2) of this Appendix. For example, if a penalty annual percentage 
rate currently applies to a consumer's account, a card issuer may assume 
that the penalty annual percentage rate will apply to the consumer's 
account indefinitely, even if the consumer may potentially return to a 
non-penalty annual percentage rate in the future under the account 
agreement.
    (iv) There is no grace period.
    (v) The final payment pays the account in full (i.e., there is no 
residual finance charge after the final month in a series of payments).
    (vi) The average daily balance method is used to calculate the 
balance.
    (vii) All months are the same length and leap year is ignored. A 
monthly or daily periodic rate may be assumed. If a daily periodic rate 
is assumed, the issuer may either assume (1) a year is 365 days long, 
and all months are 30.41667 days long, or (2) a year is 360 days long, 
and all months are 30 days long.
    (viii) Payments are credited either on the last day of the month or 
the last day of the billing cycle.
    (ix) Payments are allocated to lower annual percentage rate balances 
before higher annual percentage rate balances.
    (x) The account is not past due and the account balance does not 
exceed the credit limit.
    (xi) When calculating the minimum payment repayment estimate, the 
assumed payments, current balance and interest charges for each month 
may be rounded to the nearest cent, as shown in Appendix M2 to this 
part.
    (5) Tolerance. A minimum payment repayment estimate shall be 
considered accurate if it is not more than 2 months above or below the 
minimum payment repayment estimate determined in accordance with the 
guidance in this Appendix (prior to rounding described in Sec. 
226.7(b)(12)(i)(B) and without use of the assumptions listed in 
paragraph (b)(4) of this Appendix to the extent a card issuer chooses 
instead to use the account terms that apply to a consumer's account). 
For example, assume the minimum payment repayment estimate calculated 
using the guidance in this Appendix is 28 months (2 years, 4 months), 
and the minimum payment repayment estimate calculated by the issuer is 
30 months (2 years, 6 months). The minimum payment repayment estimate 
should be disclosed as 2 years, due to the rounding rule set forth in 
Sec. 226.7(b)(12)(i)(B). Nonetheless, based on the 30-month estimate, 
the issuer disclosed 3 years, based on that rounding rule. The issuer 
would be in compliance with this guidance by disclosing 3 years, instead 
of 2 years, because the issuer's estimate is within the 2 months' 
tolerance, prior to rounding. In addition, even if an issuer's estimate 
is more than 2 months above or below the minimum payment repayment 
estimate calculated using the guidance in this Appendix, so long as the 
issuer discloses the correct number of years to the consumer based on 
the rounding rule set forth in Sec. 226.7(b)(12)(i)(B), the issuer 
would be in compliance with this guidance. For example, assume the 
minimum payment repayment estimate calculated using the guidance in this 
Appendix is 32 months (2 years, 8 months), and the minimum payment 
repayment estimate calculated by the issuer is 38 months (3 years, 2 
months). Under the rounding rule set forth in Sec. 226.7(b)(12)(i)(B), 
both of these estimates would be rounded and disclosed to the consumer 
as 3 years. Thus, if the issuer disclosed 3 years to the consumer, the 
issuer would be in compliance with this guidance even though the minimum 
payment repayment estimate calculated by the issuer is outside the 2 
months' tolerance amount.
    (c) Calculating the minimum payment total cost estimate. When 
calculating the minimum payment total cost estimate, a card issuer must 
total the dollar amount of the interest and principal that the consumer 
would pay if he or she made minimum payments for the length of time 
calculated as the minimum payment repayment estimate under paragraph (b) 
of this Appendix. The minimum payment total cost estimate is deemed to 
be accurate if it is based on a minimum payment repayment estimate that 
is within the tolerance guidance set forth in paragraph (b)(5) of this 
Appendix. For example, assume the minimum payment repayment estimate 
calculated using the guidance in this Appendix is 28 months (2 years, 4 
months), and the minimum payment repayment estimate calculated by the 
issuer is 30 months (2 years, 6 months). The minimum payment total cost 
estimate will be deemed accurate even if it is based on the 30 month 
estimate for length of repayment, because the issuer's minimum payment 
repayment estimate is within the 2 months' tolerance, prior to rounding. 
In addition, assume the minimum payment repayment estimate calculated 
under this Appendix is 32 months (2 years, 8 months), and the minimum 
payment repayment estimate calculated by the issuer is 38 months (3 
years, 2 months). Under the rounding rule set forth in Sec. 
226.7(b)(12)(i)(B), both of these estimates

[[Page 529]]

would be rounded and disclosed to the consumer as 3 years. If the issuer 
based the minimum payment total cost estimate on 38 months (or any other 
minimum payment repayment estimate that would be rounded to 3 years), 
the minimum payment total cost estimate would be deemed to be accurate.
    (d) Calculating the estimated monthly payment for repayment in 36 
months. (1) In general. When calculating the estimated monthly payment 
for repayment in 36 months, a card issuer must calculate the estimated 
monthly payment amount that would be required to pay off the outstanding 
balance shown on the statement within 36 months, assuming the consumer 
paid the same amount each month for 36 months.
    (2) Weighted annual percentage rate. In calculating the estimated 
monthly payment for repayment in 36 months, an issuer may use a weighted 
annual percentage rate that is based on the annual percentage rates that 
apply to a cardholder's account and the portion of the balance to which 
the rate applies, as shown in Appendix M2 to this part. If a card issuer 
uses a weighted annual percentage rate and any promotional terms related 
to annual percentage rates apply to a cardholder's account, other than 
deferred interest plans or similar plans, in calculating the weighted 
annual percentage rate, the issuer must calculate a weighted average of 
the promotional rate and the rate that will apply after the promotional 
rate expires based on the percentage of 36 months each rate will apply, 
as shown in Appendix M2 to this part. For deferred interest plans or 
similar plans, if minimum payments under the deferred interest or 
similar plan will repay the balances or transactions in full prior to 
the expiration of the specified period of time, if a card issuer uses a 
weighted annual percentage rate, the card issuer must assume that the 
consumer will not be obligated to pay the accrued interest. This means, 
in calculating the weighted annual percentage rate, the card issuer must 
apply a zero percent annual percentage rate to the balance subject to 
the deferred interest or similar plan. If, however, minimum payments 
under the deferred interest plan or similar plan may not repay the 
balances or transactions in full prior to the expiration of the 
specified period of time, a card issuer in calculating the weighted 
annual percentage rate must assume that a consumer will not repay the 
balances or transactions in full prior to the expiration of the 
specified period of time and thus the consumer will be obligated to pay 
the accrued interest. This means, in calculating the weighted annual 
percentage rate, the card issuer must apply the annual percentage rate 
at which interest is accruing to the balance subject to the deferred 
interest or similar plan. A card issuer may use a method of calculating 
the estimated monthly payment for repayment in 36 months other than a 
weighted annual percentage rate, so long as the calculation results in 
the same payment amount each month and so long as the total of the 
payments would pay off the outstanding balance shown on the periodic 
statement within 36 months.
    (3) Assumptions. In calculating the estimated monthly payment for 
repayment in 36 months, a card issuer must use the same terms described 
in paragraph (b) of this Appendix, as appropriate.
    (4) Tolerance. An estimated monthly payment for repayment in 36 
months shall be considered accurate if it is not more than 10 percent 
above or below the estimated monthly payment for repayment in 36 months 
determined in accordance with the guidance in this Appendix (after 
rounding described in Sec. 226.7(b)(12)(i)(F)(1)(i)).
    (e) Calculating the total cost estimate for repayment in 36 months. 
When calculating the total cost estimate for repayment in 36 months, a 
card issuer must total the dollar amount of the interest and principal 
that the consumer would pay if he or she made the estimated monthly 
payment calculated under paragraph (d) of this appendix each month for 
36 months. The total cost estimate for repayment in 36 months shall be 
considered accurate if it is based on the estimated monthly payment for 
repayment in 36 months that is calculated in accordance with paragraph 
(d) of this appendix.
    (f) Calculating the savings estimate for repayment in 36 months. 
When calculating the savings estimate for repayment in 36 months, if a 
card issuer chooses under Sec. 226.7(b)(12)(i) to round the disclosures 
to the nearest whole dollar when disclosing them on the periodic 
statement, the card issuer must calculate the savings estimate for 
repayment in 36 months by subtracting the total cost estimate for 
repayment in 36 months calculated under paragraph (e) of this appendix 
(rounded to the nearest whole dollar) from the minimum payment total 
cost estimate calculated under paragraph (c) of this appendix (rounded 
to the nearest whole dollar). If a card issuer chooses under Sec. 
227.7(b)(12)(i), however, to round the disclosures to the nearest cent 
when disclosing them on the periodic statement, the card issuer must 
calculate the savings estimate for repayment in 36 months by subtracting 
the total cost estimate for repayment in 36 months calculated under 
paragraph (e) of this appendix (rounded to the nearest cent) from the 
minimum payment total cost estimate calculated under paragraph (c) of 
this appendix (rounded to the nearest cent). The savings estimate for 
repayment in 36 months shall be considered accurate if it is based on 
the total cost estimate for repayment in 36 months that is calculated in 
accordance with paragraph (e) of this appendix and the minimum payment

[[Page 530]]

total cost estimate calculated under paragraph (c) of this appendix.

[75 FR 7846, Feb. 22, 2010, as amended at 76 FR 23004, Apr. 25, 2011]



     Sec. Appendix M2 to Part 226--Sample Calculations of Repayment 
                               Disclosures

    The following is an example of how to calculate the minimum payment 
repayment estimate, the minimum payment total cost estimate, the 
estimated monthly payment for repayment in 36 months, the total cost 
estimate for repayment in 36 months, and the savings estimate for 
repayment in 36 months using the guidance in Appendix M1 to this part 
where three annual percentage rates apply (where one of the rates is a 
promotional APR), the total outstanding balance is $1000, and the 
minimum payment formula is 2 percent of the outstanding balance or $20, 
whichever is greater. The following calculation is written in SAS code.

data one;
/*

Note: pmt01 = estimated monthly payment to repay balance in 36 months 
          sumpmts36 = sum of payments for repayment in 36 months

month = number of months to repay total balance if making only minimum 
          payments
pmt = minimum monthly payment
fc = monthly finance charge
sumpmts = sum of payments for minimum payments

*/
* inputs;

* annual percentage rates; apr1 = 0.0; apr2 = 0.17; apr3 = 0.21; * 
          insert in ascending order;
* outstanding balances; cbal1 = 500; cbal2 = 250; cbal3 = 250;
* dollar minimum payment; dmin = 20;
* percent minimum payment; pmin = 0.02; * (0.02 + perrate);

* promotional rate information;
* last month for promotional rate; expm = 6; * = 0 if no promotional 
          rate;
* regular rate; rrate = .17; * = 0 if no promotional rate;

array apr(3); array perrate(3);

days = 365/12; * calculate days in month;

* calculate estimated monthly payment to pay off balances in 36 months, 
          and total cost of repaying balance in 36 months;

array xperrate(3);
do I = 1 to 3;
xperrate(I) = (apr(I)/365)*days; * calculate periodic rate;
end;
if expm gt 0 then xperrate1a = (expm/36) * xperrate1 + (1 - (expm/36)) * 
          (rrate/365) * days; else xperrate1a = xperrate1;

tbal = cbal1 + cbal2 + cbal3;
perrate36 = (cbal1 * xperrate1a + cbal2 * xperrate2 + cbal3 * xperrate3) 
          / (cbal1 + cbal2 + cbal3);

* months to repay; dmonths = 36;

* initialize counters for sum of payments for repayment in 36 months; 
          Sumpmts36 = 0;

pvaf = (1 - (1 + perrate36) ** -dmonths) / perrate36; * calculate 
          present value of annuity factor;
pmt01 = round(tbal/pvaf,0.01); * calculate monthly payment for 
          designated number of months;
sumpmts36 = pmt01 * 36;

* calculate time to repay and total cost of making minimum payments each 
          month;
* initialize counter for months, and sum of payments;
month = 0;
sumpmts = 0;

do I = 1 to 3;
perrate(I) = (apr(I) / 365) * days; * calculate periodic rate;

end;
put perrate1 = perrate2 = perrate3 = ;

eins:
month = month + 1; * increment month counter;
pmt = round(pmin*tbal,0.01); * calculate payment as percentage of 
          balance;
if month ge expm and expm ne 0 then perrate1 = (rrate / 365) * days;

if pmt lt dmin then pmt = dmin; * set dollar minimum payment;

array xxxbal(3); array cbal(3);
do I = 1 to 3;
xxxbal(I) = round(cbal(I) * (1 + perrate(I)),0.01);
end;

fc = xxxbal1 + xxxbal2 + xxxbal3 - tbal;

if pmt gt (tbal + fc) then do;
do I = 1 to 3;
if cbal(I) gt 0 then pmt = round(cbal(I) * (1 + perrate(I)),0.01); * set 
          final payment amount;
end;
end;

if pmt le xxxbal1 then do;
cbal1 = xxxbal1 - pmt;
cbal2 = xxxbal2;
cbal3 = xxxbal3;
end;

if pmt gt xxxbal1 and xxxbal2 gt 0 and pmt le (xxxbal1 + xxxbal2) then 
          do;
cbal2 = xxxbal2 - (pmt - xxxbal1);
cbal1 = 0;
cbal3 = xxxbal3;
end;

if pmt gt xxxbal2 and xxxbal3 gt 0 then do;

[[Page 531]]

cbal3 = xxxbal3 - (pmt - xxxbal1 - xxxbal2);
cbal2 = 0;
end;

sumpmts = sumpmts + pmt; * increment sum of payments;
tbal = cbal1 + cbal2 + cbal3; * calculate new total balance;

* print month, balance, payment amount, and finance charge;
put month = tbal = cbal1 = cbal2 = cbal3 = pmt = fc = ;

if tbal gt 0 then go to eins; * go to next month if balance is greater 
          than zero;

* initialize total cost savings;
savtot = 0;
savtot = round(sumpmts,1) - round (sumpmts36,1);

* print number of months to repay debt if minimum payments made, final 
          balance (zero), total cost if minimum payments made, estimated 
          monthly payment for repayment in 36 months, total cost for 
          repayment in 36 months, and total savings if repaid in 36 
          months;

put title = ` ';
put title = `number of months to repay debt if minimum payment made, 
          final balance, total cost if minimum payments made, estimated 
          monthly payment for repayment in 36 months, total cost for 
          repayment in 36 months, and total savings if repaid in 36 
          months';
put month = tbal = sumpmts = pmt01 = sumpmts36 = savto t =;
put title = ` ';
run;

[75 FR 7846, Feb. 22, 2010]



Sec. Appendix N to Part 226--Higher-Priced Mortgage Loan Appraisal Safe 
                              Harbor Review

    To qualify for the safe harbor provided in Sec. 226.43(c)(2), a 
creditor must confirm that the written appraisal:
    1. Identifies the creditor who ordered the appraisal and the 
property and the interest being appraised.
    2. Indicates whether the contract price was analyzed.
    3. Addresses conditions in the property's neighborhood.
    4. Addresses the condition of the property and any improvements to 
the property.
    5. Indicates which valuation approaches were used, and includes a 
reconciliation if more than one valuation approach was used.
    6. Provides an opinion of the property's market value and an 
effective date for the opinion.
    7. Indicates that a physical property visit of the interior of the 
property was performed, as applicable.
    8. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of the 
Uniform Standards of Professional Appraisal Practice.
    9. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of title XI 
of the Financial Institutions Reform, Recovery and Enforcement Act of 
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations.

[78 FR 10439, Feb. 13, 2013, as amended at 78 FR 78583, Dec. 26, 2013]



 Sec. Appendix O to Part 226--Illustrative Written Source Documents for 
               Higher-Priced Mortgage Loan Appraisal Rules

    A creditor acts with reasonable diligence under Sec. 
226.43(d)(6)(i) if the creditor bases its determination on information 
contained in written source documents, such as:
    1. A copy of the recorded deed from the seller.
    2. A copy of a property tax bill.
    3. A copy of any owner's title insurance policy obtained by the 
seller.
    4. A copy of the RESPA settlement statement from the seller's 
acquisition (i.e., the HUD-1 or any successor form).
    5. A property sales history report or title report from a third-
party reporting service.
    6. Sales price data recorded in multiple listing services.
    7. Tax assessment records or transfer tax records obtained from 
local governments.
    8. A written appraisal performed in compliance with Sec. 
226.43(c)(1) for the same transaction.
    9. A copy of a title commitment report detailing the seller's 
ownership of the property, the date it was acquired, or the price at 
which the seller acquired the property.
    10. A property abstract.

[78 FR 10439, Feb. 13, 2013]



      Sec. Supplement I to Part 226--Official Staff Interpretations

                              Introduction

    1. Official status. This commentary is the vehicle by which the 
staff of the Division of Consumer and Community Affairs of the Federal 
Reserve Board issues official staff interpretations of Regulation Z. 
Good faith compliance with this commentary affords protection from 
liability under 130(f) of the Truth in Lending Act. Section 130(f) (15 
U.S.C. 1640) protects creditors from civil liability for any act done or 
omitted in good faith in conformity with any interpretation issued by a 
duly authorized official or employee of the Federal Reserve System.

[[Page 532]]

    2. Procedure for requesting interpretations. Under appendix C of the 
regulation, anyone may request an official staff interpretation. 
Interpretations that are adopted will be incorporated in this commentary 
following publication in the Federal Register. No official staff 
interpretations are expected to be issued other than by means of this 
commentary.
    3. Rules of construction. (a) Lists that appear in the commentary 
may be exhaustive or illustrative; the appropriate construction should 
be clear from the context. In most cases, illustrative lists are 
introduced by phrases such as ``including, but not limited to,'' ``among 
other things,'' ``for example,'' or ``such as.''
    (b) Throughout the commentary, reference to ``this section'' or 
``this paragraph'' means the section or paragraph in the regulation that 
is the subject of the comment.
    4. Comment designations. Each comment in the commentary is 
identified by a number and the regulatory section or paragraph which it 
interprets. The comments are designated with as much specificity as 
possible according to the particular regulatory provision addressed. For 
example, some of the comments to Sec. 226.18(b) are further divided by 
subparagraph, such as comment 18(b)(1)-1 and comment 18(b)(2)-1. In 
other cases, comments have more general application and are designated, 
for example, as comment 18-1 or comment 18(b)-1. This introduction may 
be cited as comments I-1 through I-4. Comments to the appendices may be 
cited, for example, as comment app. A-1.

                           Subpart A--General

 Section 226.1--Authority, Purpose, Coverage, Organization, Enforcement 
                              and Liability

    1(c) Coverage.
    1. Foreign applicability. Regulation Z applies to all persons 
(including branches of foreign banks and sellers located in the United 
States) that extend consumer credit to residents (including resident 
aliens) of any state as defined in Sec. 226.2. If an account is located 
in the United States and credit is extended to a U.S. resident, the 
transaction is subject to the regulation. This will be the case whether 
or not a particular advance or purchase on the account takes place in 
the United States and whether or not the extender of credit is chartered 
or based in the United States or a foreign country. For example, if a 
U.S. resident has a credit card account located in the consumer's state 
issued by a bank (whether U.S. or foreign-based), the account is covered 
by the regulation, including extensions of credit under the account that 
occur outside the United States. In contrast, if a U.S. resident 
residing or visiting abroad, or a foreign national abroad, opens a 
credit card account issued by a foreign branch of a U.S. bank, the 
account is not covered by the regulation.
    1(d) Organization.
    Paragraph 1(d)(1).
    1. [Reserved]
    Paragraph 1(d)(2).
    1. [Reserved]
    Paragraph 1(d)(3).
    1. Effective date. The Board's amendments to Regulation Z published 
on May 19, 2009 apply to covered loans (including refinance loans and 
assumptions considered new transactions under Sec. 226.20) for which 
the creditor receives an application on or after July 30, 2009.
    Paragraph 1(d)(4).
    1. [Reserved]
    Paragraph 1(d)(5).
    1. Effective dates.
    i. The Board's revisions published on July 30, 2008 (the ``final 
rules'') apply to covered loans (including refinance loans and 
assumptions considered new transactions under Sec. 226.20) for which 
the creditor receives an application on or after October 1, 2009, except 
for the final rules on advertising, escrows, and loan servicing. But see 
comment 1(d)(3)-1. The final rules on escrow in Sec. 226.35(b)(3) are 
effective for covered loans (including refinancings and assumptions in 
Sec. 226.20) for which the creditor receives an application on or after 
April 1, 2010; but for such loans secured by manufactured housing on or 
after October 1, 2010. The final rules applicable to servicers in Sec. 
226.36(c) apply to all covered loans serviced on or after October 1, 
2009. The final rules on advertising apply to advertisements occurring 
on or after October 1, 2009. For example, a radio ad occurs on the date 
it is first broadcast; a solicitation occurs on the date it is mailed to 
the consumer. The following examples illustrate the application of the 
effective dates for the final rules.
    A. General. A refinancing or assumption as defined in Sec. 
226.20(a) or (b) is a new transaction and is covered by a provision of 
the final rules if the creditor receives an application for the 
transaction on or after that provision's effective date. For example, if 
a creditor receives an application for a refinance loan covered by Sec. 
226.35(a) on or after October 1, 2009, and the refinance loan is 
consummated on October 15, 2009, the provision restricting prepayment 
penalties in Sec. 226.35(b)(2) applies. However, if the transaction 
were a modification of an existing obligation's terms that does not 
constitute a refinance loan under Sec. 226.20(a), the final rules, 
including for example the restriction on prepayment penalties, would not 
apply.
    B. Escrows. Assume a consumer applies for a refinance loan to be 
secured by a dwelling (that is not a manufactured home) on March 15, 
2010, and the loan is consummated on April 2, 2010. The escrow rule in 
Sec. 226.35(b)(3) does not apply.

[[Page 533]]

    C. Servicing. Assume that a consumer applies for a new loan on 
August 1, 2009. The loan is consummated on September 1, 2009. The 
servicing rules in Sec. 226.36(c) apply to the servicing of that loan 
as of October 1, 2009.
    (ii) The interim final rule on appraisal independence in Sec. 
226.42 published on October 28, 2010 is mandatory on April 1, 2011, for 
open- and closed-end extensions of consumer credit secured by the 
consumer's principal dwelling. Section 226.36(b), which is substantially 
similar to Sec. 226.42(b) and (e), is removed effective April 1, 2011. 
Applications for closed-end extensions of credit secured by the 
consumer's principal dwelling that are received by creditors before 
April 1, 2011, are subject to Sec. 226.36(b) regardless of the date on 
which the transaction is consummated. However, parties subject to Sec. 
226.36(b) may, at their option, choose to comply with Sec. 226.42 
instead of Sec. 226.36(b), for applications received before April 1, 
2011. Thus, an application for a closed-end extension of credit secured 
by the consumer's principal dwelling that is received by a creditor on 
March 20, 2011, and consummated on May 1, 2011, is subject to Sec. 
226.36(b), however, the creditor may choose to comply with Sec. 226.42 
instead. For an application for open- or closed-end credit secured by 
the consumer's principal dwelling that is received on or after April 1, 
2011, the creditor must comply with Sec. 226.42.
    iii. The final rule revising escrow requirements under Sec. 
226.35(b)(3) published on March 2, 2011 applies to certain closed-end 
extensions of consumer credit secured by the consumer's principal 
dwelling. See Sec. 226.35(a). Covered transactions for which an 
application is received by a creditor on or after April 1, 2011 are 
subject to Sec. 226.35(b)(3), as revised.
    Paragraph 1(d)(6).
    1. Mandatory compliance dates. Compliance with the Board's revisions 
to Regulation Z published on August 14, 2009 is mandatory for private 
education loans for which the creditor receives an application on or 
after February 14, 2010. Compliance with the final rules on co-branding 
in Sec. Sec. 226.48(a) and (b) is mandatory for marketing occurring on 
or after February 14, 2010. Compliance with the final rules is optional 
for private education loan transactions for which an application was 
received prior to February 14, 2010, even if consummated after the 
mandatory compliance date.
    2. Optional compliance. A creditor may, at its option, provide the 
approval and final disclosures required under Sec. Sec. 226.47(b) or 
(c) for private education loans where an application was received prior 
to the mandatory compliance date. If the creditor opts to provide the 
disclosures, the creditor must also comply with the applicable timing 
and other rules in Sec. Sec. 226.46 and 226.48 (including providing the 
consumer with the 30-day acceptance period under Sec. 226.48(c), and 
the right to cancel under Sec. 226.48(d)). For example if the creditor 
receives an application on January 25, 2010 and approves the consumer's 
application on or after February 14, 2010, the creditor may, at its 
option, provide the approval disclosures under Sec. 226.47(b), the 
final disclosures under Sec. 226.47(c) and comply with the applicable 
requirements Sec. Sec. 226.46 and 226.48. The creditor must also obtain 
the self-certification form as required in Sec. 226.48(e), if 
applicable. Or, for example, if the creditor receives an application on 
January 25, 2010 and approves the consumer's application before February 
14, 2010, the creditor may, at its option, provide the final disclosure 
under Sec. 226.47(c) and comply with the applicable timing and other 
requirements of Sec. Sec. 226.46 and 226.48, including providing the 
consumer with the right to cancel under Sec. 226.48(d). The creditor 
must also obtain the self-certification form as required in Sec. 
226.48(e), if applicable.
    Paragraph 1(d)(7).
    1. [Reserved]

          Section 226.2--Definitions and Rules of Construction

    2(a)(2) Advertisement.
    1. Coverage. Only commercial messages that promote consumer credit 
transactions requiring disclosures are advertisements. Messages 
inviting, offering, or otherwise announcing generally to prospective 
customers the availability of credit transactions, whether in visual, 
oral, or print media, are covered by Regulation Z (12 CFR part 226).
    i. Examples include:
    A. Messages in a newspaper, magazine, leaflet, promotional flyer, or 
catalog.
    B. Announcements on radio, television, or public address system.
    C. Electronic advertisements, such as on the Internet.
    D. Direct mail literature or other printed material on any exterior 
or interior sign.
    E. Point of sale displays.
    F. Telephone solicitations.
    G. Price tags that contain credit information.
    H. Letters sent to customers or potential customers as part of an 
organized solicitation of business.
    I. Messages on checking account statements offering auto loans at a 
stated annual percentage rate.
    J. Communications promoting a new open-end plan or closed-end 
transaction.
    ii. The term does not include:
    A. Direct personal contacts, such as follow-up letters, cost 
estimates for individual consumers, or oral or written communication 
relating to the negotiation of a specific transaction.
    B. Informational material, for example, interest-rate and loan-term 
memos, distributed only to business entities.

[[Page 534]]

    C. Notices required by federal or state law, if the law mandates 
that specific information be displayed and only the information so 
mandated is included in the notice.
    D. News articles the use of which is controlled by the news medium.
    E. Market-research or educational materials that do not solicit 
business.
    F. Communications about an existing credit account (for example, a 
promotion encouraging additional or different uses of an existing credit 
card account).
    2. Persons covered. All persons must comply with the advertising 
provisions in Sec. Sec. 226.16 and 226.24, not just those that meet the 
definition of creditor in Sec. 226.2(a)(17). Thus, home builders, 
merchants, and others who are not themselves creditors must comply with 
the advertising provisions of the regulation if they advertise consumer 
credit transactions. However, under section 145 of the act, the owner 
and the personnel of the medium in which an advertisement appears, or 
through which it is disseminated, are not subject to civil liability for 
violations.
    2(a)(3) Reserved.
    2(a)(4) Billing cycle or cycle.
    1. Intervals. In open-end credit plans, the billing cycle determines 
the intervals for which periodic disclosure statements are required; 
these intervals are also used as measuring points for other duties of 
the creditor. Typically, billing cycles are monthly, but they may be 
more frequent or less frequent (but not less frequent than quarterly).
    2. Creditors that do not bill. The term cycle is interchangeable 
with billing cycle for definitional purposes, since some creditors' 
cycles do not involve the sending of bills in the traditional sense but 
only statements of account activity. This is commonly the case with 
financial institutions when periodic payments are made through payroll 
deduction or through automatic debit of the consumer's asset account.
    3. Equal cycles. Although cycles must be equal, there is a 
permissible variance to account for weekends, holidays, and differences 
in the number of days in months. If the actual date of each statement 
does not vary by more than four days from a fixed ``day'' (for example, 
the third Thursday of each month) or ``date'' (for example, the 15th of 
each month) that the creditor regularly uses, the intervals between 
statements are considered equal. The requirement that cycles be equal 
applies even if the creditor applies a daily periodic rate to determine 
the finance charge. The requirement that intervals be equal does not 
apply to the first billing cycle on an open-end account (i.e., the time 
period between account opening and the generation of the first periodic 
statement) or to a transitional billing cycle that can occur if the 
creditor occasionally changes its billing cycles so as to establish a 
new statement day or date. (See comments 9(c)(1)-3 and 9(c)(2)-3.)
    4. Payment reminder. The sending of a regular payment reminder 
(rather than a late payment notice) establishes a cycle for which the 
creditor must send periodic statements.
    2(a)(6) Business day.
    1. Business function test. Activities that indicate that the 
creditor is open for substantially all of its business functions include 
the availability of personnel to make loan disbursements, to open new 
accounts, and to handle credit transaction inquiries. Activities that 
indicate that the creditor is not open for substantially all of its 
business functions include a retailer's merely accepting credit cards 
for purchases or a bank's having its customer-service windows open only 
for limited purposes such as deposits and withdrawals, bill paying, and 
related services.
    2. Rule for rescission, disclosures for certain mortgage 
transactions, and private education loans. A more precise rule for what 
is a business day (all calendar days except Sundays and the Federal 
legal holidays specified in 5 U.S.C. 6103(a)) applies when the right of 
rescission, the receipt of disclosures for certain dwelling-secured 
mortgage transactions under Sec. Sec. 226.19(a)(1)(ii), 226.19(a)(2), 
226.31(c), or the receipt of disclosures for private education loans 
under Sec. 226.46(d)(4) is involved. Four Federal legal holidays are 
identified in 5 U.S.C. 6103(a) by a specific date: New Year's Day, 
January 1; Independence Day, July 4; Veterans Day, November 11; and 
Christmas Day, December 25. When one of these holidays (July 4, for 
example) falls on a Saturday, Federal offices and other entities might 
observe the holiday on the preceding Friday (July 3). In cases where the 
more precise rule applies, the observed holiday (in the example, July 3) 
is a business day.
    2(a)(7) Card issuer.
    1. Agent. An agent of a card issuer is considered a card issuer. 
Because agency relationships are traditionally defined by contract and 
by state or other applicable law, the regulation does not define agent. 
Merely providing services relating to the production of credit cards or 
data processing for others, however, does not make one the agent of the 
card issuer. In contrast, a financial institution may become the agent 
of the card issuer if an agreement between the institution and the card 
issuer provides that the cardholder may use a line of credit with the 
financial institution to pay obligations incurred by use of the credit 
card.
    2(a)(8) Cardholder.
    1. General rule. A cardholder is a natural person at whose request a 
card is issued for consumer credit purposes or who is a co-obligor or 
guarantor for such a card issued to another. The second category does 
not include an employee who is a co-obligor or guarantor

[[Page 535]]

on a card issued to the employer for business purposes, nor does it 
include a person who is merely the authorized user of a card issued to 
another.
    2. Limited application of regulation. For the limited purposes of 
the rules on issuance of credit cards and liability for unauthorized 
use, a cardholder includes any person, including an organization, to 
whom a card is issued for any purpose--including a business, 
agricultural, or commercial purpose.
    3. Issuance. See the commentary to Sec. 226.12(a).
    4. Dual-purpose cards and dual-card systems. Some card issuers offer 
dual-purpose cards that are for business as well as consumer purposes. 
If a card is issued to an individual for consumer purposes, the fact 
that an organization has guaranteed to pay the debt does not make it 
business credit. On the other hand, if a card is issued for business 
purposes, the fact that an individual sometimes uses it for consumer 
purchases does not subject the card issuer to the provisions on periodic 
statements, billing-error resolution, and other protections afforded to 
consumer credit. Some card issuers offer dual-card systems--that is, 
they issue two cards to the same individual, one intended for business 
use, the other for consumer or personal use. With such a system, the 
same person may be a cardholder for general purposes when using the card 
issued for consumer use, and a cardholder only for the limited purposes 
of the restrictions on issuance and liability when using the card issued 
for business purposes.
    2(a)(9) Cash price.
    1. Components. This amount is a starting point in computing the 
amount financed and the total sale price under Sec. 226.18 for credit 
sales. Any charges imposed equally in cash and credit transactions may 
be included in the cash price, or they may be treated as other amounts 
financed under Sec. 226.18(b)(2).
    2. Service contracts. Service contracts include contracts for the 
repair or the servicing of goods, such as mechanical breakdown coverage, 
even if such a contract is characterized as insurance under state law.
    3. Rebates. The creditor has complete flexibility in the way it 
treats rebates for purposes of disclosure and calculation. (See the 
commentary to Sec. 226.18(b).)
    2(a)(10) Closed-end credit.
    1. General. The coverage of this term is defined by exclusion. That 
is, it includes any credit arrangement that does not fall within the 
definition of open-end credit. Subpart C contains the disclosure rules 
for closed-end credit when the obligation is subject to a finance charge 
or is payable by written agreement in more than four installments.
    2(a)(11) Consumer.
    1. Scope. Guarantors, endorsers, and sureties are not generally 
consumers for purposes of the regulation, but they may be entitled to 
rescind under certain circumstances and they may have certain rights if 
they are obligated on credit card plans.
    2. Rescission rules. For purposes of rescission under Sec. Sec. 
226.15 and 226.23, a consumer includes any natural person whose 
ownership interest in his or her principal dwelling is subject to the 
risk of loss. Thus, if a security interest is taken in A's ownership 
interest in a house and that house is A's principal dwelling, A is a 
consumer for purposes of rescission, even if A is not liable, either 
primarily or secondarily, on the underlying consumer credit transaction. 
An ownership interest does not include, for example, leaseholds or 
inchoate rights, such as dower.
    3. Land trusts. Credit extended to land trusts, as described in the 
commentary to Sec. 226.3(a), is considered to be extended to a natural 
person for purposes of the definition of consumer.
    2(a)(12) Consumer credit.
    1. Primary purpose. There is no precise test for what constitutes 
credit offered or extended for personal, family, or household purposes, 
nor for what constitutes the primary purpose. (See, however, the 
discussion of business purposes in the commentary to Sec. 226.3(a).)
    2(a)(13) Consummation.
    1. State law governs. When a contractual obligation on the 
consumer's part is created is a matter to be determined under applicable 
law; Regulation Z does not make this determination. A contractual 
commitment agreement, for example, that under applicable law binds the 
consumer to the credit terms would be consummation. Consummation, 
however, does not occur merely because the consumer has made some 
financial investment in the transaction (for example, by paying a 
nonrefundable fee) unless, of course, applicable law holds otherwise.
    2. Credit v. sale. Consummation does not occur when the consumer 
becomes contractually committed to a sale transaction, unless the 
consumer also becomes legally obligated to accept a particular credit 
arrangement. For example, when a consumer pays a nonrefundable deposit 
to purchase an automobile, a purchase contract may be created, but 
consummation for purposes of the regulation does not occur unless the 
consumer also contracts for financing at that time.
    2(a)(14) Credit.
    1. Exclusions. The following situations are not considered credit 
for purposes of the regulation:
    i. Layaway plans, unless the consumer is contractually obligated to 
continue making payments. Whether the consumer is so obligated is a 
matter to be determined under applicable law. The fact that the consumer 
is not entitled to a refund of any amounts paid towards the cash price 
of the merchandise does not bring layaways within the definition of 
credit.

[[Page 536]]

    ii. Tax liens, tax assessments, court judgments, and court approvals 
of reaffirmation of debts in bankruptcy. However, third-party financing 
of such obligations (for example, a bank loan obtained to pay off a tax 
lien) is credit for purposes of the regulation.
    iii. Insurance premium plans that involve payment in installments 
with each installment representing the payment for insurance coverage 
for a certain future period of time, unless the consumer is 
contractually obligated to continue making payments.
    iv. Home improvement transactions that involve progress payments, if 
the consumer pays, as the work progresses, only for work completed and 
has no contractual obligation to continue making payments.
    v. Borrowing against the accrued cash value of an insurance policy 
or a pension account, if there is no independent obligation to repay.
    vi. Letters of credit.
    vii. The execution of option contracts. However, there may be an 
extension of credit when the option is exercised, if there is an 
agreement at that time to defer payment of a debt.
    viii. Investment plans in which the party extending capital to the 
consumer risks the loss of the capital advanced. This includes, for 
example, an arrangement with a home purchaser in which the investor pays 
a portion of the downpayment and of the periodic mortgage payments in 
return for an ownership interest in the property, and shares in any gain 
or loss of property value.
    ix. Mortgage assistance plans administered by a government agency in 
which a portion of the consumer's monthly payment amount is paid by the 
agency. No finance charge is imposed on the subsidy amount, and that 
amount is due in a lump-sum payment on a set date or upon the occurrence 
of certain events. (If payment is not made when due, a new note imposing 
a finance charge may be written, which may then be subject to the 
regulation.)
    2. Payday loans; deferred presentment. Credit includes a transaction 
in which a cash advance is made to a consumer in exchange for the 
consumer's personal check, or in exchange for the consumer's 
authorization to debit the consumer's deposit account, and where the 
parties agree either that the check will not be cashed or deposited, or 
that the consumer's deposit account will not be debited, until a 
designated future date. This type of transaction is often referred to as 
a ``payday loan'' or ``payday advance'' or ``deferred-presentment 
loan.'' A fee charged in connection with such a transaction may be a 
finance charge for purposes of Sec. 226.4, regardless of how the fee is 
characterized under state law. Where the fee charged constitutes a 
finance charge under Sec. 226.4 and the person advancing funds 
regularly extends consumer credit, that person is a creditor and is 
required to provide disclosures consistent with the requirements of 
Regulation Z. (See Sec. 226.2(a)(17).)
    2(a)(15) Credit card.
    1. Usable from time to time. A credit card must be usable from time 
to time. Since this involves the possibility of repeated use of a single 
device, checks and similar instruments that can be used only once to 
obtain a single credit extension are not credit cards.
    2. Examples. i. Examples of credit cards include
    A. A card that guarantees checks or similar instruments, if the 
asset account is also tied to an overdraft line or if the instrument 
directly accesses a line of credit.
    B. A card that accesses both a credit and an asset account (that is, 
a debit-credit card).
    C. An identification card that permits the consumer to defer payment 
on a purchase.
    D. An identification card indicating loan approval that is presented 
to a merchant or to a lender, whether or not the consumer signs a 
separate promissory note for each credit extension.
    E. A card or device that can be activated upon receipt to access 
credit, even if the card has a substantive use other than credit, such 
as a purchase-price discount card. Such a card or device is a credit 
card notwithstanding the fact that the recipient must first contact the 
card issuer to access or activate the credit feature.
    ii. In contrast, credit card does not include, for example
    A. A check-guarantee or debit card with no credit feature or 
agreement, even if the creditor occasionally honors an inadvertent 
overdraft.
    B. Any card, key, plate, or other device that is used in order to 
obtain petroleum products for business purposes from a wholesale 
distribution facility or to gain access to that facility, and that is 
required to be used without regard to payment terms.
    C. An account number that accesses a credit account, unless the 
account number can access an open-end line of credit to purchase goods 
or services. For example, if a creditor provides a consumer with an 
open-end line of credit that can be accessed by an account number in 
order to transfer funds into another account (such as an asset account 
with the same creditor), the account number is not a credit card for 
purposes of Sec. 226.2(a)(15)(i). However, if the account number can 
also access the line of credit to purchase goods or services (such as an 
account number that can be used to purchase goods or services on the 
Internet), the account number is a credit card for purposes of Sec. 
226.2(a)(15)(i), regardless of whether the creditor treats such 
transactions as purchases, cash advances, or some other type of 
transaction. Furthermore, if the line of credit can also be accessed by 
a card (such as a

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debit card), that card is a credit card for purposes of Sec. 
226.2(a)(15)(i).
    3. Charge card. Generally, charge cards are cards used in connection 
with an account on which outstanding balances cannot be carried from one 
billing cycle to another and are payable when a periodic statement is 
received. Under the regulation, a reference to credit cards generally 
includes charge cards. In particular, references to credit card accounts 
under an open-end (not home-secured) consumer credit plan in Subparts B 
and G generally include charge cards. The term charge card is, however, 
distinguished from credit card or credit card account under an open-end 
(not home-secured) consumer credit plan in Sec. Sec. 226.5a, 
226.6(b)(2)(xiv), 226.7(b)(11), 226.7(b)(12), 226.9(e), 226.9(f), 
226.28(d), 226.52(b)(1)(ii)(C), and appendices G-10 through G-13.
    4. Credit card account under an open-end (not home-secured) consumer 
credit plan. An open-end consumer credit account is a credit card 
account under an open-end (not home-secured) consumer credit plan for 
purposes of Sec. 226.2(a)(15)(ii) if
    i. The account is accessed by a credit card, as defined in Sec. 
226.2(a)(15)(i); and
    ii. The account is not excluded under Sec. 226.2(a)(15)(ii)(A) or 
(a)(15)(ii)(B).
    2(a)(16) Credit sale.
    1. Special disclosure. If the seller is a creditor in the 
transaction, the transaction is a credit sale and the special credit 
sale disclosures (that is, the disclosures under Sec. 226.18(j)) must 
be given. This applies even if there is more than one creditor in the 
transaction and the creditor making the disclosures is not the seller. 
(See the commentary to Sec. 226.17(d).)
    2. Sellers who arrange credit. If the seller of the property or 
services involved arranged for financing but is not a creditor as to 
that sale, the transaction is not a credit sale. Thus, if a seller 
assists the consumer in obtaining a direct loan from a financial 
institution and the consumer's note is payable to the financial 
institution, the transaction is a loan and only the financial 
institution is a creditor.
    3. Refinancings. Generally, when a credit sale is refinanced within 
the meaning of Sec. 226.20(a), loan disclosures should be made. 
However, if a new sale of goods or services is also involved, the 
transaction is a credit sale.
    4. Incidental sales. Some lenders sell a product or service--such as 
credit, property, or health insurance--as part of a loan transaction. 
Section 226.4 contains the rules on whether the cost of credit life, 
disability or property insurance is part of the finance charge. If the 
insurance is financed, it may be disclosed as a separate credit-sale 
transaction or disclosed as part of the primary transaction; if the 
latter approach is taken, either loan or credit-sale disclosures may be 
made. (See the commentary to Sec. 226.17(c)(1) for further discussion 
of this point.)
    5. Credit extensions for educational purposes. A credit extension 
for educational purposes in which an educational institution is the 
creditor may be treated as either a credit sale or a loan, regardless of 
whether the funds are given directly to the student, credited to the 
student's account, or disbursed to other persons on the student's 
behalf. The disclosure of the total sale price need not be given if the 
transaction is treated as a loan.
    2(a)(17) Creditor.
    1. General. The definition contains four independent tests. If any 
one of the tests is met, the person is a creditor for purposes of that 
particular test.
    Paragraph 2(a)(17)(i).
    1. Prerequisites. This test is composed of two requirements, both of 
which must be met in order for a particular credit extension to be 
subject to the regulation and for the credit extension to count towards 
satisfaction of the numerical tests mentioned in Sec. 226.2(a)(17)(v).
    i. First, there must be either or both of the following:
    A. A written (rather than oral) agreement to pay in more than four 
installments. A letter that merely confirms an oral agreement does not 
constitute a written agreement for purposes of the definition.
    B. A finance charge imposed for the credit. The obligation to pay 
the finance charge need not be in writing.
    ii. Second, the obligation must be payable to the person in order 
for that person to be considered a creditor. If an obligation is made 
payable to bearer, the creditor is the one who initially accepts the 
obligation.
    2. Assignees. If an obligation is initially payable to one person, 
that person is the creditor even if the obligation by its terms is 
simultaneously assigned to another person. For example:
    i. An auto dealer and a bank have a business relationship in which 
the bank supplies the dealer with credit sale contracts that are 
initially made payable to the dealer and provide for the immediate 
assignment of the obligation to the bank. The dealer and purchaser 
execute the contract only after the bank approves the creditworthiness 
of the purchaser. Because the obligation is initially payable on its 
face to the dealer, the dealer is the only creditor in the transaction.
    3. Numerical tests. The examples below illustrate how the numerical 
tests of Sec. 226.2(a)(17)(v) are applied. The examples assume that 
consumer credit with a finance charge or written agreement for more than 
4 installments was extended in the years in question and that the person 
did not extend such credit in 2006.
    4. Counting transactions. For purposes of closed-end credit, the 
creditor counts each credit transaction. For open-end credit,

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transactions means accounts, so that outstanding accounts are counted 
instead of individual credit extensions. Normally the number of 
transactions is measured by the preceding calendar year; if the 
requisite number is met, then the person is a creditor for all 
transactions in the current year. However, if the person did not meet 
the test in the preceding year, the number of transactions is measured 
by the current calendar year. For example, if the person extends 
consumer credit 26 times in 2007, it is a creditor for purposes of the 
regulation for the last extension of credit in 2007 and for all 
extensions of consumer credit in 2008. On the other hand, if a business 
begins in 2007 and extends consumer credit 20 times, it is not a 
creditor for purposes of the regulation in 2007. If it extends consumer 
credit 75 times in 2008, however, it becomes a creditor for purposes of 
the regulation (and must begin making disclosures) after the 25th 
extension of credit in that year and is a creditor for all extensions of 
consumer credit in 2009.
    5. Relationship between consumer credit in general and credit 
secured by a dwelling. Extensions of credit secured by a dwelling are 
counted towards the 25-extensions test. For example, if in 2007 a person 
extends unsecured consumer credit 23 times and consumer credit secured 
by a dwelling twice, it becomes a creditor for the succeeding extensions 
of credit, whether or not they are secured by a dwelling. On the other 
hand, extensions of consumer credit not secured by a dwelling are not 
counted towards the number of credit extensions secured by a dwelling. 
For example, if in 2007 a person extends credit not secured by a 
dwelling 8 times and credit secured by a dwelling 3 times, it is not a 
creditor.
    6. Effect of satisfying one test. Once one of the numerical tests is 
satisfied, the person is also a creditor for the other type of credit. 
For example, in 2007 a person extends consumer credit secured by a 
dwelling 5 times. That person is a creditor for all succeeding credit 
extensions, whether they involve credit secured by a dwelling or not.
    7. Trusts. In the case of credit extended by trusts, each individual 
trust is considered a separate entity for purposes of applying the 
criteria. For example:
    i. A bank is the trustee for three trusts. Trust A makes 15 
extensions of consumer credit annually; Trust B makes 10 extensions of 
consumer credit annually; and Trust C makes 30 extensions of consumer 
credit annually. Only Trust C is a creditor for purposes of the 
regulation.
    Paragraph 2(a)(17)(ii). [Reserved]
    Paragraph 2(a)(17)(iii).
    1. Card issuers subject to Subpart B. Section 226.2(a)(17)(iii) 
makes certain card issuers creditors for purposes of the open-end credit 
provisions of the regulation. This includes, for example, the issuers of 
so-called travel and entertainment cards that expect repayment at the 
first billing and do not impose a finance charge. Since all disclosures 
are to be made only as applicable, such card issuers would omit finance 
charge disclosures. Other provisions of the regulation regarding such 
areas as scope, definitions, determination of which charges are finance 
charges, Spanish language disclosures, record retention, and use of 
model forms, also apply to such card issuers.
    Paragraph 2(a)(17)(iv).
    1. Card issuers subject to Subparts B and C. Section 
226.2(a)(17)(iv) includes as creditors card issuers extending closed-end 
credit in which there is a finance charge or an agreement to pay in more 
than four installments. These card issuers are subject to the 
appropriate provisions of Subparts B and C, as well as to the general 
provisions.
    2(a)(18) Downpayment.
    1. Allocation. If a consumer makes a lump-sum payment, partially to 
reduce the cash price and partially to pay prepaid finance charges, only 
the portion attributable to reducing the cash price is part of the 
downpayment. (See the commentary to Sec. 226.2(a)(23).)
    2. Pick-up payments. i. Creditors may treat the deferred portion of 
the downpayment, often referred to as pick-up payments, in a number of 
ways. If the pick-up payment is treated as part of the downpayment:
    A. It is subtracted in arriving at the amount financed under Sec. 
226.18(b).
    B. It may, but need not, be reflected in the payment schedule under 
Sec. 226.18(g).
    ii. If the pick-up payment does not meet the definition (for 
example, if it is payable after the second regularly scheduled payment) 
or if the creditor chooses not to treat it as part of the downpayment:
    A. It must be included in the amount financed.
    B. It must be shown in the payment schedule.
    iii. Whichever way the pick-up payment is treated, the total of 
payments under Sec. 226.18(h) must equal the sum of the payments 
disclosed under Sec. 226.18(g).
    3. Effect of existing liens.
    i. No cash payment. In a credit sale, the ``downpayment'' may only 
be used to reduce the cash price. For example, when a trade-in is used 
as the downpayment and the existing lien on an automobile to be traded 
in exceeds the value of the automobile, creditors must disclose a zero 
on the downpayment line rather than a negative number. To illustrate, 
assume a consumer owes $10,000 on an existing automobile loan and that 
the trade-in value of the automobile is only $8,000, leaving a $2,000 
deficit. The creditor should disclose a downpayment of $0, not -$2,000.
    ii. Cash payment. If the consumer makes a cash payment, creditors 
may, at their option, disclose the entire cash payment as the 
downpayment, or apply the cash payment

[[Page 539]]

first to any excess lien amount and disclose any remaining cash as the 
downpayment. In the above example:
    A. If the downpayment disclosed is equal to the cash payment, the 
$2,000 deficit must be reflected as an additional amount financed under 
Sec. 226.18(b)(2).
    B. If the consumer provides $1,500 in cash (which does not 
extinguish the $2,000 deficit), the creditor may disclose a downpayment 
of $1,500 or of $0.
    C. If the consumer provides $3,000 in cash, the creditor may 
disclose a downpayment of $3,000 or of $1,000.
    2(a)(19) Dwelling.
    1. Scope. A dwelling need not be the consumer's principal residence 
to fit the definition, and thus a vacation or second home could be a 
dwelling. However, for purposes of the definition of residential 
mortgage transaction and the right to rescind, a dwelling must be the 
principal residence of the consumer. (See the commentary to Sec. Sec. 
226.2(a)(24), 226.15, and 226.23.)
    2. Use as a residence. Mobile homes, boats, and trailers are 
dwellings if they are in fact used as residences, just as are 
condominium and cooperative units. Recreational vehicles, campers, and 
the like not used as residences are not dwellings.
    3. Relation to exemptions. Any transaction involving a security 
interest in a consumer's principal dwelling (as well as in any real 
property) remains subject to the regulation despite the general 
exemption in Sec. 226.3(b).
    2(a)(20) Open-end credit.
    1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are 
contained in Subpart B), as distinct from closed-end credit. Open-end 
credit is consumer credit that is extended under a plan and meets all 3 
criteria set forth in the definition.
    2. Existence of a plan. The definition requires that there be a 
plan, which connotes a contractual arrangement between the creditor and 
the consumer. Some creditors offer programs containing a number of 
different credit features. The consumer has a single account with the 
institution that can be accessed repeatedly via a number of sub-accounts 
established for the different program features and rate structures. Some 
features of the program might be used repeatedly (for example, an 
overdraft line) while others might be used infrequently (such as the 
part of the credit line available for secured credit). If the program as 
a whole is subject to prescribed terms and otherwise meets the 
definition of open-end credit, such a program would be considered a 
single, multifeatured plan.
    3. Repeated transactions. Under this criterion, the creditor must 
reasonably contemplate repeated transactions. This means that the credit 
plan must be usable from time to time and the creditor must legitimately 
expect that there will be repeat business rather than a one-time credit 
extension. The creditor must expect repeated dealings with consumers 
under the credit plan as a whole and need not believe a consumer will 
reuse a particular feature of the plan. The determination of whether a 
creditor can reasonably contemplate repeated transactions requires an 
objective analysis. Information that much of the creditor's customer 
base with accounts under the plan make repeated transactions over some 
period of time is relevant to the determination, particularly when the 
plan is opened primarily for the financing of infrequently purchased 
products or services. A standard based on reasonable belief by a 
creditor necessarily includes some margin for judgmental error. The fact 
that particular consumers do not return for further credit extensions 
does not prevent a plan from having been properly characterized as open-
end. For example, if much of the customer base of a clothing store makes 
repeat purchases, the fact that some consumers use the plan only once 
would not affect the characterization of the store's plan as open-end 
credit. The criterion regarding repeated transactions is a question of 
fact to be decided in the context of the creditor's type of business and 
the creditor's relationship with its customers. For example, it would be 
more reasonable for a bank or depository institution to contemplate 
repeated transactions with a customer than for a seller of aluminum 
siding to make the same assumption about its customers.
    4. Finance charge on an outstanding balance. The requirement that a 
finance charge may be computed and imposed from time to time on the 
outstanding balance means that there is no specific amount financed for 
the plan for which the finance charge, total of payments, and payment 
schedule can be calculated. A plan may meet the definition of open-end 
credit even though a finance charge is not normally imposed, provided 
the creditor has the right, under the plan, to impose a finance charge 
from time to time on the outstanding balance. For example, in some 
plans, a finance charge is not imposed if the consumer pays all or a 
specified portion of the outstanding balance within a given time period. 
Such a plan could meet the finance charge criterion, if the creditor has 
the right to impose a finance charge, even though the consumer actually 
pays no finance charges during the existence of the plan because the 
consumer takes advantage of the option to pay the balance (either in 
full or in installments) within the time necessary to avoid finance 
charges.
    5. Reusable line. The total amount of credit that may be extended 
during the existence of an open-end plan is unlimited because available 
credit is generally replenished as earlier advances are repaid. A line 
of credit is self-

[[Page 540]]

replenishing even though the plan itself has a fixed expiration date, as 
long as during the plan's existence the consumer may use the line, 
repay, and reuse the credit. The creditor may occasionally or routinely 
verify credit information such as the consumer's continued income and 
employment status or information for security purposes but, to meet the 
definition of open-end credit, such verification of credit information 
may not be done as a condition of granting a consumer's request for a 
particular advance under the plan. In general, a credit line is self-
replenishing if the consumer can take further advances as outstanding 
balances are repaid without being required to separately apply for those 
additional advances. A credit card account where the plan as a whole 
replenishes meets the self-replenishing criterion, notwithstanding the 
fact that a credit card issuer may verify credit information from time 
to time in connection with specific transactions. This criterion of 
unlimited credit distinguishes open-end credit from a series of advances 
made pursuant to a closed-end credit loan commitment. For example:
    i. Under a closed-end commitment, the creditor might agree to lend a 
total of $10,000 in a series of advances as needed by the consumer. When 
a consumer has borrowed the full $10,000, no more is advanced under that 
particular agreement, even if there has been repayment of a portion of 
the debt. (See Sec. 226.2(a)(17)(iv) for disclosure requirements when a 
credit card is used to obtain the advances.)
    ii. This criterion does not mean that the creditor must establish a 
specific credit limit for the line of credit or that the line of credit 
must always be replenished to its original amount. The creditor may 
reduce a credit limit or refuse to extend new credit in a particular 
case due to changes in the creditor's financial condition or the 
consumer's creditworthiness. (The rules in Sec. 226.5b(f), however, 
limit the ability of a creditor to suspend credit advances for home 
equity plans.) While consumers should have a reasonable expectation of 
obtaining credit as long as they remain current and within any preset 
credit limits, further extensions of credit need not be an absolute 
right in order for the plan to meet the self-replenishing criterion.
    6. Verifications of collateral value. Creditors that otherwise meet 
the requirements of Sec. 226.2(a)(20) extend open-end credit 
notwithstanding the fact that the creditor must verify collateral values 
to comply with federal, state, or other applicable law or verifies the 
value of collateral in connection with a particular advance under the 
plan.
    7. Open-end real estate mortgages. Some credit plans call for 
negotiated advances under so-called open-end real estate mortgages. Each 
such plan must be independently measured against the definition of open-
end credit, regardless of the terminology used in the industry to 
describe the plan. The fact that a particular plan is called an open-end 
real estate mortgage, for example, does not, by itself, mean that it is 
open-end credit under the regulation.
    2(a)(21) Periodic rate.
    1. Basis. The periodic rate may be stated as a percentage (for 
example, 1\1/2\% per month) or as a decimal equivalent (for example, 
.015 monthly). It may be based on any portion of a year the creditor 
chooses. Some creditors use \1/360\ of an annual rate as their periodic 
rate. These creditors:
    i. May disclose a \1/360\ rate as a daily periodic rate, without 
further explanation, if it is in fact only applied 360 days per year. 
But if the creditor applies that rate for 365 days, the creditor must 
note that fact and, of course, disclose the true annual percentage rate.
    ii. Would have to apply the rate to the balance to disclose the 
annual percentage rate with the degree of accuracy required in the 
regulation (that is, within \1/8\th of 1 percentage point of the rate 
based on the actual 365 days in the year).
    2. Transaction charges. Periodic rate does not include initial one-
time transaction charges, even if the charge is computed as a percentage 
of the transaction amount.
    2(a)(22) Person.
    1. Joint ventures. A joint venture is an organization and is 
therefore a person.
    2. Attorneys. An attorney and his or her client are considered to be 
the same person for purposes of this regulation when the attorney is 
acting within the scope of the attorney-client relationship with regard 
to a particular transaction.
    3. Trusts. A trust and its trustee are considered to be the same 
person for purposes of this regulation.
    2(a)(23) Prepaid finance charge.
    1. General. Prepaid finance charges must be taken into account under 
Sec. 226.18(b) in computing the disclosed amount financed, and must be 
disclosed if the creditor provides an itemization of the amount financed 
under Sec. 226.18(c).
    2. Examples. i. Common examples of prepaid finance charges include:
    A. Buyer's points.
    B. Service fees.
    C. Loan fees.
    D. Finder's fees.
    E. Loan-guarantee insurance.
    F. Credit-investigation fees.
    ii. However, in order for these or any other finance charges to be 
considered prepaid, they must be either paid separately in cash or check 
or withheld from the proceeds. Prepaid finance charges include any 
portion of the finance charge paid prior to or at closing or settlement.
    3. Exclusions. Add-on and discount finance charges are not prepaid 
finance charges for

[[Page 541]]

purposes of this regulation. Finance charges are not prepaid merely 
because they are precomputed, whether or not a portion of the charge 
will be rebated to the consumer upon prepayment. (See the commentary to 
Sec. 226.18(b).)
    4. Allocation of lump-sum payments. In a credit sale transaction 
involving a lump-sum payment by the consumer and a discount or other 
item that is a finance charge under Sec. 226.4, the discount or other 
item is a prepaid finance charge to the extent the lump-sum payment is 
not applied to the cash price. For example, a seller sells property to a 
consumer for $10,000, requires the consumer to pay $3,000 at the time of 
the purchase, and finances the remainder as a closed-end credit 
transaction. The cash price of the property is $9,000. The seller is the 
creditor in the transaction and therefore the $1,000 difference between 
the credit and cash prices (the discount) is a finance charge. (See the 
commentary to Sec. 226.4(b)(9) and (c)(5).) If the creditor applies the 
entire $3,000 to the cash price and adds the $1,000 finance charge to 
the interest on the $6,000 to arrive at the total finance charge, all of 
the $3,000 lump-sum payment is a downpayment and the discount is not a 
prepaid finance charge. However, if the creditor only applies $2,000 of 
the lump-sum payment to the cash price, then $2,000 of the $3,000 is a 
downpayment and the $1,000 discount is a prepaid finance charge.
    2(a)(24) Residential mortgage transaction.
    1. Relation to other sections. This term is important in five 
provisions in the regulation:
    i. Section 226.4(c)(7)--exclusions from the finance charge.
    ii. Section 226.15(f)--exemption from the right of rescission.
    iii. Section 226.18(q)--whether or not the obligation is assumable.
    iv. Section 226.20(b)--disclosure requirements for assumptions.
    v. Section 226.23(f)--exemption from the right of rescission.
    2. Lien status. The definition is not limited to first lien 
transactions. For example, a consumer might assume a paid-down first 
mortgage (or borrow part of the purchase price) and borrow the balance 
of the purchase price from a creditor who takes a second mortgage. The 
second mortgage transaction is a residential mortgage transaction if the 
dwelling purchased is the consumer's principal residence.
    3. Principal dwelling. A consumer can have only one principal 
dwelling at a time. Thus, a vacation or other second home would not be a 
principal dwelling. However, if a consumer buys or builds a new dwelling 
that will become the consumer's principal dwelling within a year or upon 
the completion of construction, the new dwelling is considered the 
principal dwelling for purposes of applying this definition to a 
particular transaction. (See the commentary to Sec. Sec. 226.15(a) and 
226.23(a).)
    4. Construction financing. If a transaction meets the definition of 
a residential mortgage transaction and the creditor chooses to disclose 
it as several transactions under Sec. 226.17(c)(6), each one is 
considered to be a residential mortgage transaction, even if different 
creditors are involved. For example:
    i. The creditor makes a construction loan to finance the initial 
construction of the consumer's principal dwelling, and the loan will be 
disbursed in five advances. The creditor gives six sets of disclosures 
(five for the construction phase and one for the permanent phase). Each 
one is a residential mortgage transaction.
    ii. One creditor finances the initial construction of the consumer's 
principal dwelling and another creditor makes a loan to satisfy the 
construction loan and provide permanent financing. Both transactions are 
residential mortgage transactions.
    5. Acquisition. i. A residential mortgage transaction finances the 
acquisition of a consumer's principal dwelling. The term does not 
include a transaction involving a consumer's principal dwelling if the 
consumer had previously purchased and acquired some interest to the 
dwelling, even though the consumer had not acquired full legal title.
    ii. Examples of new transactions involving a previously acquired 
dwelling include the financing of a balloon payment due under a land 
sale contract and an extension of credit made to a joint owner of 
property to buy out the other joint owner's interest. In these 
instances, disclosures are not required under Sec. 226.18(q) 
(assumability policies). However, the rescission rules of Sec. Sec. 
226.15 and 226.23 do apply to these new transactions.
    iii. In other cases, the disclosure and rescission rules do not 
apply. For example, where a buyer enters into a written agreement with 
the creditor holding the seller's mortgage, allowing the buyer to assume 
the mortgage, if the buyer had previously purchased the property and 
agreed with the seller to make the mortgage payments, Sec. 226.20(b) 
does not apply (assumptions involving residential mortgages).
    6. Multiple purpose transactions. A transaction meets the definition 
of this section if any part of the loan proceeds will be used to finance 
the acquisition or initial construction of the consumer's principal 
dwelling. For example, a transaction to finance the initial construction 
of the consumer's principal dwelling is a residential mortgage 
transaction even if a portion of the funds will be disbursed directly to 
the consumer or used to satisfy a loan for the purchase of the land on 
which the dwelling will be built.
    7. Construction on previously acquired vacant land. A residential 
mortgage transaction includes a loan to finance the construction of

[[Page 542]]

a consumer's principal dwelling on a vacant lot previously acquired by 
the consumer.
    2(a)(25) Security interest.
    1. Threshold test. The threshold test is whether a particular 
interest in property is recognized as a security interest under 
applicable law. The regulation does not determine whether a particular 
interest is a security interest under applicable law. If the creditor is 
unsure whether a particular interest is a security interest under 
applicable law (for example, if statutes and case law are either silent 
or inconclusive on the issue), the creditor may at its option consider 
such interests as security interests for Truth in Lending purposes. 
However, the regulation and the commentary do exclude specific 
interests, such as after-acquired property and accessories, from the 
scope of the definition regardless of their categorization under 
applicable law, and these named exclusions may not be disclosed as 
security interests under the regulation. (But see the discussion of 
exclusions elsewhere in the commentary to Sec. 226.2(a)(25).)
    2. Exclusions. The general definition of security interest excludes 
three groups of interests: incidental interests, interests in after-
acquired property, and interests that arise solely by operation of law. 
These interests may not be disclosed with the disclosures required under 
Sec. 226.18, but the creditor is not precluded from preserving these 
rights elsewhere in the contract documents, or invoking and enforcing 
such rights, if it is otherwise lawful to do so. If the creditor is 
unsure whether a particular interest is one of the excluded interests, 
the creditor may, at its option, consider such interests as security 
interests for Truth in Lending purposes.
    3. Incidental interests. i. Incidental interests in property that 
are not security interests include, among other things:
    A. Assignment of rents.
    B. Right to condemnation proceeds.
    C. Interests in accessories and replacements.
    D. Interests in escrow accounts, such as for taxes and insurance.
    E. Waiver of homestead or personal property rights.
    ii. The notion of an incidental interest does not encompass an 
explicit security interest in an insurance policy if that policy is the 
primary collateral for the transaction--for example, in an insurance 
premium financing transaction.
    4. Operation of law. Interests that arise solely by operation of law 
are excluded from the general definition. Also excluded are interests 
arising by operation of law that are merely repeated or referred to in 
the contract. However, if the creditor has an interest that arises by 
operation of law, such as a vendor's lien, and takes an independent 
security interest in the same property, such as a UCC security interest, 
the latter interest is a disclosable security interest unless otherwise 
provided.
    5. Rescission rules. Security interests that arise solely by 
operation of law are security interests for purposes of rescission. 
Examples of such interests are mechanics' and materialmen's liens.
    6. Specificity of disclosure. A creditor need not separately 
disclose multiple security interests that it may hold in the same 
collateral. The creditor need only disclose that the transaction is 
secured by the collateral, even when security interests from prior 
transactions remain of record and a new security interest is taken in 
connection with the transaction. In disclosing the fact that the 
transaction is secured by the collateral, the creditor also need not 
disclose how the security interest arose. For example, in a closed-end 
credit transaction, a rescission notice need not specifically state that 
a new security interest is ``acquired'' or an existing security interest 
is ``retained'' in the transaction. The acquisition or retention of a 
security interest in the consumer's principal dwelling instead may be 
disclosed in a rescission notice with a general statement such as the 
following: ``Your home is the security for the new transaction.''
    2(b) Rules of construction.
    1. Footnotes. Footnotes are used extensively in the regulation to 
provide special exceptions and more detailed explanations and examples. 
Material that appears in a footnote has the same legal weight as 
material in the body of the regulation.
    2. Amount. The numerical amount must be a dollar amount unless 
otherwise indicated. For example, in a closed-end transaction (Subpart 
C), the amount financed and the amount of any payment must be expressed 
as a dollar amount. In some cases, an amount should be expressed as a 
percentage. For example, in disclosures provided before the first 
transaction under an open-end plan (Subpart B), creditors are permitted 
to explain how the amount of any finance charge will be determined; 
where a cash-advance fee (which is a finance charge) is a percentage of 
each cash advance, the amount of the finance charge for that fee is 
expressed as a percentage.

                   Section 226.3--Exempt Transactions

    1. Relationship to Sec. 226.12. The provisions in Sec. 226.12(a) 
and (b) governing the issuance of credit cards and the limitations on 
liability for their unauthorized use apply to all credit cards, even if 
the credit cards are issued for use in connection with extensions of 
credit that otherwise are exempt under this section.
    3(a) Business, commercial, agricultural, or organizational credit.

[[Page 543]]

    1. Primary purposes. A creditor must determine in each case if the 
transaction is primarily for an exempt purpose. If some question exists 
as to the primary purpose for a credit extension, the creditor is, of 
course, free to make the disclosures, and the fact that disclosures are 
made under such circumstances is not controlling on the question of 
whether the transaction was exempt. (See comment 3(a)-2, however, with 
respect to credit cards.)
    2. Business purpose purchases.
    i. Business-purpose credit cards--extensions of credit for consumer 
purposes. If a business-purpose credit card is issued to a person, the 
provisions of the regulation do not apply, other than as provided in 
Sec. Sec. 226.12(a) and 226.12(b), even if extensions of credit for 
consumer purposes are occasionally made using that business-purpose 
credit card. For example, the billing error provisions set forth in 
Sec. 226.13 do not apply to consumer-purpose extensions of credit using 
a business-purpose credit card.
    ii. Consumer-purpose credit cards--extensions of credit for business 
purposes. If a consumer-purpose credit card is issued to a person, the 
provisions of the regulation apply, even to occasional extensions of 
credit for business purposes made using that consumer-purpose credit 
card. For example, a consumer may assert a billing error with respect to 
any extension of credit using a consumer-purpose credit card, even if 
the specific extension of credit on such credit card or open-end credit 
plan that is the subject of the dispute was made for business purposes.
    3. Factors. In determining whether credit to finance an 
acquisition--such as securities, antiques, or art--is primarily for 
business or commercial purposes (as opposed to a consumer purpose), the 
following factors should be considered:
    i. General.
    A. The relationship of the borrower's primary occupation to the 
acquisition. The more closely related, the more likely it is to be 
business purpose.
    B. The degree to which the borrower will personally manage the 
acquisition. The more personal involvement there is, the more likely it 
is to be business purpose.
    C. The ratio of income from the acquisition to the total income of 
the borrower. The higher the ratio, the more likely it is to be business 
purpose.
    D. The size of the transaction. The larger the transaction, the more 
likely it is to be business purpose.
    E. The borrower's statement of purpose for the loan.
    ii. Business-purpose examples. Examples of business-purpose credit 
include:
    A. A loan to expand a business, even if it is secured by the 
borrower's residence or personal property.
    B. A loan to improve a principal residence by putting in a business 
office.
    C. A business account used occasionally for consumer purposes.
    iii. Consumer-purpose examples. Examples of consumer-purpose credit 
include:
    A. Credit extensions by a company to its employees or agents if the 
loans are used for personal purposes.
    B. A loan secured by a mechanic's tools to pay a child's tuition.
    C. A personal account used occasionally for business purposes.
    4. Non-owner-occupied rental property. Credit extended to acquire, 
improve, or maintain rental property (regardless of the number of 
housing units) that is not owner-occupied is deemed to be for business 
purposes. This includes, for example, the acquisition of a warehouse 
that will be leased or a single-family house that will be rented to 
another person to live in. If the owner expects to occupy the property 
for more than 14 days during the coming year, the property cannot be 
considered non-owner-occupied and this special rule will not apply. For 
example, a beach house that the owner will occupy for a month in the 
coming summer and rent out the rest of the year is owner occupied and is 
not governed by this special rule. (See comment 3(a)-5, however, for 
rules relating to owner-occupied rental property.)
    5. Owner-occupied rental property. If credit is extended to acquire, 
improve, or maintain rental property that is or will be owner-occupied 
within the coming year, different rules apply:
    i. Credit extended to acquire the rental property is deemed to be 
for business purposes if it contains more than 2 housing units.
    ii. Credit extended to improve or maintain the rental property is 
deemed to be for business purposes if it contains more than 4 housing 
units. Since the amended statute defines dwelling to include 1 to 4 
housing units, this rule preserves the right of rescission for credit 
extended for purposes other than acquisition. Neither of these rules 
means that an extension of credit for property containing fewer than the 
requisite number of units is necessarily consumer credit. In such cases, 
the determination of whether it is business or consumer credit should be 
made by considering the factors listed in comment 3(a)-3.
    6. Business credit later refinanced. Business-purpose credit that is 
exempt from the regulation may later be rewritten for consumer purposes. 
Such a transaction is consumer credit requiring disclosures only if the 
existing obligation is satisfied and replaced by a new obligation made 
for consumer purposes undertaken by the same obligor.
    7. Credit card renewal. A consumer-purpose credit card that is 
subject to the regulation may be converted into a business-purpose

[[Page 544]]

credit card at the time of its renewal, and the resulting business-
purpose credit card would be exempt from the regulation. Conversely, a 
business-purpose credit card that is exempt from the regulation may be 
converted into a consumer-purpose credit card at the time of its 
renewal, and the resulting consumer-purpose credit card would be subject 
to the regulation.
    8. Agricultural purpose. An agricultural purpose includes the 
planting, propagating, nurturing, harvesting, catching, storing, 
exhibiting, marketing, transporting, processing, or manufacturing of 
food, beverages (including alcoholic beverages), flowers, trees, 
livestock, poultry, bees, wildlife, fish, or shellfish by a natural 
person engaged in farming, fishing, or growing crops, flowers, trees, 
livestock, poultry, bees, or wildlife. The exemption also applies to a 
transaction involving real property that includes a dwelling (for 
example, the purchase of a farm with a homestead) if the transaction is 
primarily for agricultural purposes.
    9. Organizational credit. The exemption for transactions in which 
the borrower is not a natural person applies, for example, to loans to 
corporations, partnerships, associations, churches, unions, and 
fraternal organizations. The exemption applies regardless of the purpose 
of the credit extension and regardless of the fact that a natural person 
may guarantee or provide security for the credit.
    10. Land trusts. Credit extended for consumer purposes to a land 
trust is considered to be credit extended to a natural person rather 
than credit extended to an organization. In some jurisdictions, a 
financial institution financing a residential real estate transaction 
for an individual uses a land trust mechanism. Title to the property is 
conveyed to the land trust for which the financial institution itself is 
trustee. The underlying installment note is executed by the financial 
institution in its capacity as trustee and payment is secured by a trust 
deed, reflecting title in the financial institution as trustee. In some 
instances, the consumer executes a personal guaranty of the 
indebtedness. The note provides that it is payable only out of the 
property specifically described in the trust deed and that the trustee 
has no personal liability on the note. Assuming the transactions are for 
personal, family, or household purposes, these transactions are subject 
to the regulation since in substance (if not form) consumer credit is 
being extended.
    3(b) Credit over applicable threshold amount.
    1. Threshold amount. For purposes of Sec. 226.3(b), the threshold 
amount in effect during a particular period is the amount stated in 
comment 3(b)-3 for that period. The threshold amount is adjusted 
effective January 1 of each year by any annual percentage increase in 
the Consumer Price Index for Urban Wage Earners and Clerical Workers 
(CPI-W) that was in effect on the preceding June 1. Comment 3(b)-3 will 
be amended to provide the threshold amount for the upcoming year after 
the annual percentage change in the CPI-W that was in effect on June 1 
becomes available. Any increase in the threshold amount will be rounded 
to the nearest $100 increment. For example, if the annual percentage 
increase in the CPI-W would result in a $950 increase in the threshold 
amount, the threshold amount will be increased by $1,000. However, if 
the annual percentage increase in the CPI-W would result in a $949 
increase in the threshold amount, the threshold amount will be increased 
by $900.
    2. No increase in the CPI-W. If the CPI-W in effect on June 1 does 
not increase from the CPI-W in effect on June 1 of the previous year, 
the threshold amount effective the following January 1 through December 
31 will not change from the previous year. When this occurs, for the 
years that follow, the threshold is calculated based on the annual 
percentage change in the CPI-W applied to the dollar amount that would 
have resulted, after rounding, if decreases and any subsequent increases 
in the CPI-W had been taken into account.
    i. Net increases. If the resulting amount calculated, after 
rounding, is greater than the current threshold, then the threshold 
effective January 1 the following year will increase accordingly.
    ii. Net decreases. If the resulting amount calculated, after 
rounding, is equal to or less than the current threshold, then the 
threshold effective January 1 the following year will not change, but 
future increases will be calculated based on the amount that would have 
resulted.
    3. Threshold. For purposes of Sec. 226.3(b), the threshold amount 
in effect during a particular period is the amount stated below for that 
period.
    i. Prior to July 21, 2011, the threshold amount is $25,000.
    ii. From July 21, 2011 through December 31, 2011, the threshold 
amount is $50,000.
    iii. From January 1, 2012 through December 31, 2012, the threshold 
amount is $51,800.
    iv. From January 1, 2013 through December 31, 2013, the threshold 
amount is $53,000.
    v. From January 1, 2014 through December 31, 2014, the threshold 
amount is $53,500.
    vi. From January 1, 2015 through December 31, 2015, the threshold 
amount is $54,600.
    vii. From January 1, 2016 through December 31, 2016, the threshold 
amount is $54,600.
    viii. From January 1, 2017 through December 31, 2017, the threshold 
amount is $54,600.
    ix. From January 1, 2018 through December 31, 2018, the threshold 
amount is $55,800.
    4. Open-end credit.

[[Page 545]]

    i. Qualifying for exemption. An open-end account is exempt under 
Sec. 226.3(b) (unless secured by any real property, or by personal 
property used or expected to be used as the consumer's principal 
dwelling) if either of the following conditions is met:
    A. The creditor makes an initial extension of credit at or after 
account opening that exceeds the threshold amount in effect at the time 
the initial extension is made. If a creditor makes an initial extension 
of credit after account opening that does not exceed the threshold 
amount in effect at the time the extension is made, the creditor must 
have satisfied all of the applicable requirements of this part from the 
date the account was opened (or earlier, if applicable), including but 
not limited to the requirements of Sec. 226.6 (account-opening 
disclosures), Sec. 226.7 (periodic statements), Sec. 226.52 
(limitations on fees), and Sec. 226.55 (limitations on increasing 
annual percentages rates, fees, and charges). For example:
    (1) Assume that the threshold amount in effect on January 1 is 
$50,000. On February 1, an account is opened but the creditor does not 
make an initial extension of credit at that time. On July 1, the 
creditor makes an initial extension of credit of $60,000. In this 
circumstance, no requirements of this part apply to the account.
    (2) Assume that the threshold amount in effect on January 1 is 
$50,000. On February 1, an account is opened but the creditor does not 
make an initial extension of credit at that time. On July 1, the 
creditor makes an initial extension of credit of $50,000 or less. In 
this circumstance, the account is not exempt and the creditor must have 
satisfied all of the applicable requirements of this part from the date 
the account was opened (or earlier, if applicable).
    B. The creditor makes a firm written commitment at account opening 
to extend a total amount of credit in excess of the threshold amount in 
effect at the time the account is opened with no requirement of 
additional credit information for any advances on the account (except as 
permitted from time to time with respect to open-end accounts pursuant 
to Sec. 226.2(a)(20)).
    ii. Subsequent changes generally. Subsequent changes to an open-end 
account or the threshold amount may result in the account no longer 
qualifying for the exemption in Sec. 226.3(b). In these circumstances, 
the creditor must begin to comply with all of the applicable 
requirements of this part within a reasonable period of time after the 
account ceases to be exempt. Once an account ceases to be exempt, the 
requirements of this part apply to any balances on the account. The 
creditor, however, is not required to comply with the requirements of 
this part with respect to the period of time during which the account 
was exempt. For example, if an open-end credit account ceases to be 
exempt, the creditor must within a reasonable period of time provide the 
disclosures required by Sec. 226.6 reflecting the current terms of the 
account and begin to provide periodic statements consistent with Sec. 
226.7. However, the creditor is not required to disclose fees or charges 
imposed while the account was exempt. Furthermore, if the creditor 
provided disclosures consistent with the requirements of this part while 
the account was exempt, it is not required to provide disclosures 
required by Sec. 226.6 reflecting the current terms of the account. See 
also comment 3(b)-6.
    iii. Subsequent changes when exemption is based on initial extension 
of credit. If a creditor makes an initial extension of credit that 
exceeds the threshold amount in effect at that time, the open-end 
account remains exempt under Sec. 226.3(b) regardless of a subsequent 
increase in the threshold amount, including an increase pursuant to 
Sec. 226.3(b)(1)(ii) as a result of an increase in the CPI-W. 
Furthermore, in these circumstances, the account remains exempt even if 
there are no further extensions of credit, subsequent extensions of 
credit do not exceed the threshold amount, the account balance is 
subsequently reduced below the threshold amount (such as through 
repayment of the extension), or the credit limit for the account is 
subsequently reduced below the threshold amount. However, if the initial 
extension of credit on an account does not exceed the threshold amount 
in effect at the time of the extension, the account is not exempt under 
Sec. 226.3(b) even if a subsequent extension exceeds the threshold 
amount or if the account balance later exceeds the threshold amount (for 
example, due to the subsequent accrual of interest).
    iv. Subsequent changes when exemption is based on firm commitment.
    A. General. If a creditor makes a firm written commitment at account 
opening to extend a total amount of credit that exceeds the threshold 
amount in effect at that time, the open-end account remains exempt under 
Sec. 226.3(b) regardless of a subsequent increase in the threshold 
amount pursuant to Sec. 226.3(b)(1)(ii) as a result of an increase in 
the CPI-W. However, see comment 3(b)-8 with respect to the increase in 
the threshold amount from $25,000 to $50,000. If an open-end account is 
exempt under Sec. 226.3(b) based on a firm commitment to extend credit, 
the account remains exempt even if the amount of credit actually 
extended does not exceed the threshold amount. In contrast, if the firm 
commitment does not exceed the threshold amount at account opening, the 
account is not exempt under Sec. 226.3(b) even if the account balance 
later exceeds the threshold amount. In addition, if a creditor reduces a 
firm commitment, the account ceases to be exempt unless the reduced firm 
commitment exceeds the threshold amount in effect at the time of the 
reduction. For example:

[[Page 546]]

    (1) Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec. 
226.3(b) based on the creditor's firm commitment to extend $55,000 in 
credit. If during year one the creditor reduces its firm commitment to 
$53,000, the account remains exempt under Sec. 226.3(b). However, if 
during year one the creditor reduces its firm commitment to $40,000, the 
account is no longer exempt under Sec. 226.3(b).
    (2) Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec. 
226.3(b) based on the creditor's firm commitment to extend $55,000 in 
credit. If the threshold amount is $56,000 on January 1 of year six as a 
result of increases in the CPI-W, the account remains exempt. However, 
if the creditor reduces its firm commitment to $54,000 on July 1 of year 
six, the account ceases to be exempt under Sec. 226.3(b).
    B. Initial extension of credit. If an open-end account qualifies for 
a Sec. 226.3(b) exemption at account opening based on a firm 
commitment, that account may also subsequently qualify for a Sec. 
226.3(b) exemption based on an initial extension of credit. However, 
that initial extension must be a single advance in excess of the 
threshold amount in effect at the time the extension is made. In 
addition, the account must continue to qualify for an exemption based on 
the firm commitment until the initial extension of credit is made. For 
example:
    (1) Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec. 
226.3(b) based on the creditor's firm commitment to extend $55,000 in 
credit. The account is not used for an extension of credit during year 
one. On January 1 of year two, the threshold amount is increased to 
$51,000 pursuant to Sec. 226.3(b)(1)(ii) as a result of an increase in 
the CPI-W. On July 1 of year two, the consumer uses the account for an 
initial extension of $52,000. As a result of this extension of credit, 
the account remains exempt under Sec. 226.3(b) even if, after July 1 of 
year two, the creditor reduces the firm commitment to $51,000 or less.
    (2) Same facts as in paragraph iv.B(1) above except that the 
consumer uses the account for an initial extension of $30,000 on July 1 
of year two and for an extension of $22,000 on July 15 of year two. In 
these circumstances, the account is not exempt under Sec. 226.3(b) 
based on the $30,000 initial extension of credit because that extension 
did not exceed the applicable threshold amount ($51,000), although the 
account remains exempt based on the firm commitment to extend $55,000 in 
credit.
    (3) Same facts as in paragraph iv.B(1) above except that, on April 1 
of year two, the creditor reduces the firm commitment to $50,000, which 
is below the $51,000 threshold then in effect. Because the account 
ceases to qualify for a Sec. 226.3(b) exemption on April 1 of year two, 
the account does not qualify for a Sec. 226.3(b) exemption based on a 
$52,000 initial extension of credit on July 1 of year two.
    5. Closed-end credit.
    i. Qualifying for exemption. A closed-end loan is exempt under Sec. 
226.3(b) (unless the extension of credit is secured by any real 
property, or by personal property used or expected to be used as the 
consumer's principal dwelling; or is a private education loan as defined 
in Sec. 226.46(b)(5)), if either of the following conditions is met.
    A. The creditor makes an extension of credit at consummation that 
exceeds the threshold amount in effect at the time of consummation. In 
these circumstances, the loan remains exempt under Sec. 226.3(b) even 
if the amount owed is subsequently reduced below the threshold amount 
(such as through repayment of the loan).
    B. The creditor makes a commitment at consummation to extend a total 
amount of credit in excess of the threshold amount in effect at the time 
of consummation. In these circumstances, the loan remains exempt under 
Sec. 226.3(b) even if the total amount of credit extended does not 
exceed the threshold amount.
    ii. Subsequent changes. If a creditor makes a closed-end extension 
of credit or commitment to extend closed-end credit that exceeds the 
threshold amount in effect at the time of consummation, the closed-end 
loan remains exempt under Sec. 226.3(b) regardless of a subsequent 
increase in the threshold amount. However, a closed-end loan is not 
exempt under Sec. 226.3(b) merely because it is used to satisfy and 
replace an existing exempt loan, unless the new extension of credit is 
itself exempt under the applicable threshold amount. For example, assume 
a closed-end loan that qualified for a Sec. 226.3(b) exemption at 
consummation in year one is refinanced in year ten and that the new loan 
amount is less than the threshold amount in effect in year ten. In these 
circumstances, the creditor must comply with all of the applicable 
requirements of this part with respect to the year ten transaction if 
the original loan is satisfied and replaced by the new loan, which is 
not exempt under Sec. 226.3(b). See also comment 3(b)-6.
    6. Addition of a security interest in real property or a dwelling 
after account opening or consummation.
    i. Open-end credit. For open-end accounts, if, after account 
opening, a security interest is taken in real property, or in personal 
property used or expected to be used as the consumer's principal 
dwelling, a previously exempt account ceases to be exempt under Sec. 
226.3(b) and the creditor must begin to comply with all of the 
applicable requirements of this part within a reasonable period of time. 
See comment 3(b)-4.ii. If a security interest

[[Page 547]]

is taken in the consumer's principal dwelling, the creditor must also 
give the consumer the right to rescind the security interest consistent 
with Sec. 226.15.
    ii. Closed-end credit. For closed-end loans, if, after consummation, 
a security interest is taken in any real property, or in personal 
property used or expected to be used as the consumer's principal 
dwelling, an exempt loan remains exempt under Sec. 226.3(b). However, 
the addition of a security interest in the consumer's principal dwelling 
is a transaction for purposes of Sec. 226.23, and the creditor must 
give the consumer the right to rescind the security interest consistent 
with that section. See Sec. 226.23(a)(1) and the accompanying 
commentary. In contrast, if a closed-end loan that is exempt under Sec. 
226.3(b) is satisfied and replaced by a loan that is secured by any real 
property, or by personal property used or expected to be used as the 
consumer's principal dwelling, the new loan is not exempt under Sec. 
226.3(b) and the creditor must comply with all of the applicable 
requirements of this part. See comment 3(b)-5.
    7. Application to extensions secured by mobile homes. Because a 
mobile home can be a dwelling under Sec. 226.2(a)(19), the exemption in 
Sec. 226.3(b) does not apply to a credit extension secured by a mobile 
home that is used or expected to be used as the principal dwelling of 
the consumer. See comment 3(b)-6.
    8. Transition rule for open-end accounts exempt prior to July 21, 
2011. Section 226.3(b)(2) applies only to open-end accounts opened prior 
to July 21, 2011. Section 226.3(b)(2) does not apply if a security 
interest is taken by the creditor in any real property, or in personal 
property used or expected to be used as the consumer's principal 
dwelling. If, on July 20, 2011, an open-end account is exempt under 
Sec. 226.3(b) based on a firm commitment to extend credit in excess of 
$25,000, the account remains exempt under Sec. 226.3(b)(2) until 
December 31, 2011 (unless the firm commitment is reduced to $25,000 or 
less). If the firm commitment is increased on or before December 31, 
2011 to an amount in excess of $50,000, the account remains exempt under 
Sec. 226.3(b)(1) regardless of subsequent increases in the threshold 
amount as a result of increases in the CPI-W. If the firm commitment is 
not increased on or before December 31, 2011 to an amount in excess of 
$50,000, the account ceases to be exempt under Sec. 226.3(b) based on a 
firm commitment to extend credit. For example:
    i. Assume that, on July 20, 2011, the account is exempt under Sec. 
226.3(b) based on the creditor's firm commitment to extend $30,000 in 
credit. On November 1, 2011, the creditor increases the firm commitment 
on the account to $55,000. In these circumstances, the account remains 
exempt under Sec. 226.3(b)(1) regardless of subsequent increases in the 
threshold amount as a result of increases in the CPI-W.
    ii. Same facts as paragraph i. above except, on November 1, 2011, 
the creditor increases the firm commitment on the account to $40,000. In 
these circumstances, the account ceases to be exempt under Sec. 
226.3(b)(2) after December 31, 2011, and the creditor must begin to 
comply with the applicable requirements of this part.
    3(c) Public utility credit.
    1. Examples. Examples of public utility services include:
    i. General.
    A. Gas, water, or electrical services.
    B. Cable television services.
    C. Installation of new sewer lines, water lines, conduits, telephone 
poles, or metering equipment in an area not already serviced by the 
utility.
    ii. Extensions of credit not covered. The exemption does not apply 
to extensions of credit, for example:
    A. To purchase appliances such as gas or electric ranges, grills, or 
telephones.
    B. To finance home improvements such as new heating or air 
conditioning systems.
    3(d) Securities or commodities accounts.
    1. Coverage. This exemption does not apply to a transaction with a 
broker registered solely with the state, or to a separate credit 
extension in which the proceeds are used to purchase securities.
    3(e) Home fuel budget plans.
    1. Definition. Under a typical home fuel budget plan, the fuel 
dealer estimates the total cost of fuel for the season, bills the 
customer for an average monthly payment, and makes an adjustment in the 
final payment for any difference between the estimated and the actual 
cost of the fuel. Fuel is delivered as needed, no finance charge is 
assessed, and the customer may withdraw from the plan at any time. Under 
these circumstances, the arrangement is exempt from the regulation, even 
if a charge to cover the billing costs is imposed.
    3(f) Student loan programs.
    1. Coverage. This exemption applies to loans made, insured, or 
guaranteed under title IV of the Higher Education Act of 1965 (20 U.S.C. 
1070 et seq.). This exemption does not apply to private education loans 
as defined by Sec. 226.46(b)(5).

                      Section 226.4--Finance Charge

    4(a) Definition.
    1. Charges in comparable cash transactions. Charges imposed 
uniformly in cash and credit transactions are not finance charges. In 
determining whether an item is a finance charge, the creditor should 
compare the credit transaction in question with a similar cash 
transaction. A creditor financing the sale of property or services may 
compare charges with those payable in a similar cash

[[Page 548]]

transaction by the seller of the property or service.
    i. For example, the following items are not finance charges:
    A. Taxes, license fees, or registration fees paid by both cash and 
credit customers.
    B. Discounts that are available to cash and credit customers, such 
as quantity discounts.
    C. Discounts available to a particular group of consumers because 
they meet certain criteria, such as being members of an organization or 
having accounts at a particular financial institution. This is the case 
even if an individual must pay cash to obtain the discount, provided 
that credit customers who are members of the group and do not qualify 
for the discount pay no more than the nonmember cash customers.
    D. Charges for a service policy, auto club membership, or policy of 
insurance against latent defects offered to or required of both cash and 
credit customers for the same price.
    ii. In contrast, the following items are finance charges:
    A. Inspection and handling fees for the staged disbursement of 
construction-loan proceeds.
    B. Fees for preparing a Truth in Lending disclosure statement, if 
permitted by law (for example, the Real Estate Settlement Procedures Act 
prohibits such charges in certain transactions secured by real 
property).
    C. Charges for a required maintenance or service contract imposed 
only in a credit transaction.
    iii. If the charge in a credit transaction exceeds the charge 
imposed in a comparable cash transaction, only the difference is a 
finance charge. For example:
    A. If an escrow agent is used in both cash and credit sales of real 
estate and the agent's charge is $100 in a cash transaction and $150 in 
a credit transaction, only $50 is a finance charge.
    2. Costs of doing business. Charges absorbed by the creditor as a 
cost of doing business are not finance charges, even though the creditor 
may take such costs into consideration in determining the interest rate 
to be charged or the cash price of the property or service sold. 
However, if the creditor separately imposes a charge on the consumer to 
cover certain costs, the charge is a finance charge if it otherwise 
meets the definition. For example:
    i. A discount imposed on a credit obligation when it is assigned by 
a seller-creditor to another party is not a finance charge as long as 
the discount is not separately imposed on the consumer. (See Sec. 
226.4(b)(6).)
    ii. A tax imposed by a state or other governmental body on a 
creditor is not a finance charge if the creditor absorbs the tax as a 
cost of doing business and does not separately impose the tax on the 
consumer. (For additional discussion of the treatment of taxes, see 
other commentary to Sec. 226.4(a).)
    3. Forfeitures of interest. If the creditor reduces the interest 
rate it pays or stops paying interest on the consumer's deposit account 
or any portion of it for the term of a credit transaction (including, 
for example, an overdraft on a checking account or a loan secured by a 
certificate of deposit), the interest lost is a finance charge. (See the 
commentary to Sec. 226.4(c)(6).) For example:
    A. A consumer borrows $5,000 for 90 days and secures it with a 
$10,000 certificate of deposit paying 15% interest. The creditor charges 
the consumer an interest rate of 6% on the loan and stops paying 
interest on $5,000 of the $10,000 certificate for the term of the loan. 
The interest lost is a finance charge and must be reflected in the 
annual percentage rate on the loan.
    B. However, the consumer must be entitled to the interest that is 
not paid in order for the lost interest to be a finance charge. For 
example:
    iii. A consumer wishes to buy from a financial institution a $10,000 
certificate of deposit paying 15% interest but has only $4,000. The 
financial institution offers to lend the consumer $6,000 at an interest 
rate of 6% but will pay the 15% interest only on the amount of the 
consumer's deposit, $4,000. The creditor's failure to pay interest on 
the $6,000 does not result in an additional finance charge on the 
extension of credit, provided the consumer is entitled by the deposit 
agreement with the financial institution to interest only on the amount 
of the consumer's deposit.
    iv. A consumer enters into a combined time deposit/credit agreement 
with a financial institution that establishes a time deposit account and 
an open-end line of credit. The line of credit may be used to borrow 
against the funds in the time deposit. The agreement provides for an 
interest rate on any credit extension of, for example, 1%. In addition, 
the agreement states that the creditor will pay 0% interest on the 
amount of the time deposit that corresponds to the amount of the credit 
extension(s). The interest that is not paid on the time deposit by the 
financial institution is not a finance charge (and therefore does not 
affect the annual percentage rate computation).
    4. Treatment of transaction fees on credit card plans. Any 
transaction charge imposed on a cardholder by a card issuer is a finance 
charge, regardless of whether the issuer imposes the same, greater, or 
lesser charge on withdrawals of funds from an asset account such as a 
checking or savings account. For example:
    i. Any charge imposed on a credit cardholder by a card issuer for 
the use of an automated teller machine (ATM) to obtain a cash advance 
(whether in a proprietary, shared, interchange, or other system) is a 
finance

[[Page 549]]

charge regardless of whether the card issuer imposes a charge on its 
debit cardholders for using the ATM to withdraw cash from a consumer 
asset account, such as a checking or savings account.
    ii. Any charge imposed on a credit cardholder for making a purchase 
or obtaining a cash advance outside the United States, with a foreign 
merchant, or in a foreign currency is a finance charge, regardless of 
whether a charge is imposed on debit cardholders for such transactions. 
The following principles apply in determining what is a foreign 
transaction fee and the amount of the fee:
    A. Included are (1) fees imposed when transactions are made in a 
foreign currency and converted to U.S. dollars; (2) fees imposed when 
transactions are made in U.S. dollars outside the U.S.; and (3) fees 
imposed when transactions are made (whether in a foreign currency or in 
U.S. dollars) with a foreign merchant, such as via a merchant's Web 
site. For example, a consumer may use a credit card to make a purchase 
in Bermuda, in U.S. dollars, and the card issuer may impose a fee 
because the transaction took place outside the United States.
    B. Included are fees imposed by the card issuer and fees imposed by 
a third party that performs the conversion, such as a credit card 
network or the card issuer's corporate parent. (For example, in a 
transaction processed through a credit card network, the network may 
impose a 1 percent charge and the card-issuing bank may impose an 
additional 2 percent charge, for a total of a 3 percentage point foreign 
transaction fee being imposed on the consumer.)
    C. Fees imposed by a third party are included only if they are 
directly passed on to the consumer. For example, if a credit card 
network imposes a 1 percent fee on the card issuer, but the card issuer 
absorbs the fee as a cost of doing business (and only passes it on to 
consumers in the general sense that the interest and fees are imposed on 
all its customers to recover its costs), then the fee is not a foreign 
transaction fee and need not be disclosed. In another example, if the 
credit card network imposes a 1 percent fee for a foreign transaction on 
the card issuer, and the card issuer imposes this same fee on the 
consumer who engaged in the foreign transaction, then the fee is a 
foreign transaction fee and a finance charge.
    D. A card issuer is not required to disclose a fee imposed by a 
merchant. For example, if the merchant itself performs the currency 
conversion and adds a fee, this fee need not be disclosed by the card 
issuer. Under Sec. 226.9(d), a card issuer is not obligated to disclose 
finance charges imposed by a party honoring a credit card, such as a 
merchant, although the merchant is required to disclose such a finance 
charge if the merchant is subject to the Truth in Lending Act and 
Regulation Z.
    E. The foreign transaction fee is determined by first calculating 
the dollar amount of the transaction by using a currency conversion rate 
outside the card issuer's and third party's control. Any amount in 
excess of that dollar amount is a foreign transaction fee. Conversion 
rates outside the card issuer's and third party's control include, for 
example, a rate selected from the range of rates available in the 
wholesale currency exchange markets, an average of the highest and 
lowest rates available in such markets, or a government-mandated or 
government-managed exchange rate (or a rate selected from a range of 
such rates).
    F. The rate used for a particular transaction need not be the same 
rate that the card issuer (or third party) itself obtains in its 
currency conversion operations. In addition, the rate used for a 
particular transaction need not be the rate in effect on the date of the 
transaction (purchase or cash advance).
    5. Taxes.
    i. Generally, a tax imposed by a state or other governmental body 
solely on a creditor is a finance charge if the creditor separately 
imposes the charge on the consumer.
    ii. In contrast, a tax is not a finance charge (even if it is 
collected by the creditor) if applicable law imposes the tax:
    A. Solely on the consumer;
    B. On the creditor and the consumer jointly;
    C. On the credit transaction, without indicating which party is 
liable for the tax; or
    D. On the creditor, if applicable law directs or authorizes the 
creditor to pass the tax on to the consumer. (For purposes of this 
section, if applicable law is silent as to passing on the tax, the law 
is deemed not to authorize passing it on.)
    iii. For example, a stamp tax, property tax, intangible tax, or any 
other state or local tax imposed on the consumer, or on the credit 
transaction, is not a finance charge even if the tax is collected by the 
creditor.
    iv. In addition, a tax is not a finance charge if it is excluded 
from the finance charge by another provision of the regulation or 
commentary (for example, if the tax is imposed uniformly in cash and 
credit transactions).
    4(a)(1) Charges by third parties.
    1. Choosing the provider of a required service. An example of a 
third-party charge included in the finance charge is the cost of 
required mortgage insurance, even if the consumer is allowed to choose 
the insurer.
    2. Annuities associated with reverse mortgages. Some creditors offer 
annuities in connection with a reverse-mortgage transaction. The amount 
of the premium is a finance charge if the creditor requires the purchase 
of the annuity incident to the credit. Examples include the following:

[[Page 550]]

    i. The credit documents reflect the purchase of an annuity from a 
specific provider or providers.
    ii. The creditor assesses an additional charge on consumers who do 
not purchase an annuity from a specific provider.
    iii. The annuity is intended to replace in whole or in part the 
creditor's payments to the consumer either immediately or at some future 
date.
    4(a)(2) Special rule; closing agent charges.
    1. General. This rule applies to charges by a third party serving as 
the closing agent for the particular loan. An example of a closing agent 
charge included in the finance charge is a courier fee where the 
creditor requires the use of a courier.
    2. Required closing agent. If the creditor requires the use of a 
closing agent, fees charged by the closing agent are included in the 
finance charge only if the creditor requires the particular service, 
requires the imposition of the charge, or retains a portion of the 
charge. Fees charged by a third-party closing agent may be otherwise 
excluded from the finance charge under Sec. 226.4. For example, a fee 
that would be paid in a comparable cash transaction may be excluded 
under Sec. 226.4(a). A charge for conducting or attending a closing is 
a finance charge and may be excluded only if the charge is included in 
and is incidental to a lump-sum fee excluded under Sec. 226.4(c)(7).
    4(a)(3) Special rule; mortgage broker fees.
    1. General. A fee charged by a mortgage broker is excluded from the 
finance charge if it is the type of fee that is also excluded when 
charged by the creditor. For example, to exclude an application fee from 
the finance charge under Sec. 226.4(c)(1), a mortgage broker must 
charge the fee to all applicants for credit, whether or not credit is 
extended.
    2. Coverage. This rule applies to charges paid by consumers to a 
mortgage broker in connection with a consumer credit transaction secured 
by real property or a dwelling.
    3. Compensation by lender. The rule requires all mortgage broker 
fees to be included in the finance charge. Creditors sometimes 
compensate mortgage brokers under a separate arrangement with those 
parties. Creditors may draw on amounts paid by the consumer, such as 
points or closing costs, to fund their payment to the broker. 
Compensation paid by a creditor to a mortgage broker under an agreement 
is not included as a separate component of a consumer's total finance 
charge (although this compensation may be reflected in the finance 
charge if it comes from amounts paid by the consumer to the creditor 
that are finance charges, such as points and interest).
    4(b) Examples of finance charges.
    1. Relationship to other provisions. Charges or fees shown as 
examples of finance charges in Sec. 226.4(b) may be excludable under 
Sec. 226.4(c), (d), or (e). For example:
    i. Premiums for credit life insurance, shown as an example of a 
finance charge under Sec. 226.4(b)(7), may be excluded if the 
requirements of Sec. 226.4(d)(1) are met.
    ii. Appraisal fees mentioned in Sec. 226.4(b)(4) are excluded for 
real property or residential mortgage transactions under Sec. 
226.4(c)(7).
    Paragraph 4(b)(2).
    1. Checking account charges. A checking or transaction account 
charge imposed in connection with a credit feature is a finance charge 
under Sec. 226.4(b)(2) to the extent the charge exceeds the charge for 
a similar account without a credit feature. If a charge for an account 
with a credit feature does not exceed the charge for an account without 
a credit feature, the charge is not a finance charge under Sec. 
226.4(b)(2). To illustrate:
    i. A $5 service charge is imposed on an account with an overdraft 
line of credit (where the institution has agreed in writing to pay an 
overdraft), while a $3 service charge is imposed on an account without a 
credit feature; the $2 difference is a finance charge. (If the 
difference is not related to account activity, however, it may be 
excludable as a participation fee. See the commentary to Sec. 
226.4(c)(4).)
    ii. A $5 service charge is imposed for each item that results in an 
overdraft on an account with an overdraft line of credit, while a $25 
service charge is imposed for paying or returning each item on a similar 
account without a credit feature; the $5 charge is not a finance charge.
    Paragraph 4(b)(3).
    1. Assumption fees. The assumption fees mentioned in Sec. 
226.4(b)(3) are finance charges only when the assumption occurs and the 
fee is imposed on the new buyer. The assumption fee is a finance charge 
in the new buyer's transaction.
    Paragraph 4(b)(5).
    1. Credit loss insurance. Common examples of the insurance against 
credit loss mentioned in Sec. 226.4(b)(5) are mortgage guaranty 
insurance, holder in due course insurance, and repossession insurance. 
Such premiums must be included in the finance charge only for the period 
that the creditor requires the insurance to be maintained.
    2. Residual value insurance. Where a creditor requires a consumer to 
maintain residual value insurance or where the creditor is a beneficiary 
of a residual value insurance policy written in connection with an 
extension of credit (as is the case in some forms of automobile balloon-
payment financing, for example), the premiums for the insurance must be 
included in the finance charge for the period that the insurance is to 
be maintained. If a creditor pays for residual-value insurance and 
absorbs the payment as a cost of doing business, such costs are not 
considered finance charges. (See comment 4(a)-2.)

[[Page 551]]

    Paragraphs 4(b)(7) and (b)(8).
    1. Pre-existing insurance policy. The insurance discussed in Sec. 
226.4(b)(7) and (b)(8) does not include an insurance policy (such as a 
life or an automobile collision insurance policy) that is already owned 
by the consumer, even if the policy is assigned to or otherwise made 
payable to the creditor to satisfy an insurance requirement. Such a 
policy is not ``written in connection with'' the transaction, as long as 
the insurance was not purchased for use in that credit extension, since 
it was previously owned by the consumer.
    2. Insurance written in connection with a transaction. Credit 
insurance sold before or after an open-end (not home-secured) plan is 
opened is considered ``written in connection with a credit 
transaction.'' Insurance sold after consummation in closed-end credit 
transactions or after the opening of a home-equity plan subject to the 
requirements of Sec. 226.5b is not considered ``written in connection 
with'' the credit transaction if the insurance is written because of the 
consumer's default (for example, by failing to obtain or maintain 
required property insurance) or because the consumer requests insurance 
after consummation or the opening of a home-equity plan subject to the 
requirements of Sec. 226.5b (although credit-sale disclosures may be 
required for the insurance sold after consummation if it is financed).
    3. Substitution of life insurance. The premium for a life insurance 
policy purchased and assigned to satisfy a credit life insurance 
requirement must be included in the finance charge, but only to the 
extent of the cost of the credit life insurance if purchased from the 
creditor or the actual cost of the policy (if that is less than the cost 
of the insurance available from the creditor). If the creditor does not 
offer the required insurance, the premium to be included in the finance 
charge is the cost of a policy of insurance of the type, amount, and 
term required by the creditor.
    4. Other insurance. Fees for required insurance not of the types 
described in Sec. 226.4(b)(7) and (b)(8) are finance charges and are 
not excludable. For example:
    i. The premium for a hospitalization insurance policy, if it is 
required to be purchased only in a credit transaction, is a finance 
charge.
    Paragraph 4(b)(9).
    1. Discounts for payment by other than credit. The discounts to 
induce payment by other than credit mentioned in Sec. 226.4(b)(9) 
include, for example, the following situation:
    i. The seller of land offers individual tracts for $10,000 each. If 
the purchaser pays cash, the price is $9,000, but if the purchaser 
finances the tract with the seller the price is $10,000. The $1,000 
difference is a finance charge for those who buy the tracts on credit.
    2. Exception for cash discounts.
    i. Creditors may exclude from the finance charge discounts offered 
to consumers for using cash or another means of payment instead of using 
a credit card or an open-end plan. The discount may be in whatever 
amount the seller desires, either as a percentage of the regular price 
(as defined in section 103(z) of the act, as amended) or a dollar 
amount. Pursuant to section 167(b) of the act, this provision applies 
only to transactions involving an open-end credit plan or a credit card 
(whether open-end or closed-end credit is extended on the card). The 
merchant must offer the discount to prospective buyers whether or not 
they are cardholders or members of the open-end credit plan. The 
merchant may, however, make other distinctions. For example:
    A. The merchant may limit the discount to payment by cash and not 
offer it for payment by check or by use of a debit card.
    B. The merchant may establish a discount plan that allows a 15% 
discount for payment by cash, a 10% discount for payment by check, and a 
5% discount for payment by a particular credit card. None of these 
discounts is a finance charge.
    ii. Pursuant to section 171(c) of the act, discounts excluded from 
the finance charge under this paragraph are also excluded from treatment 
as a finance charge or other charge for credit under any state usury or 
disclosure laws.
    3. Determination of the regular price.
    i. The regular price is critical in determining whether the 
difference between the price charged to cash customers and credit 
customers is a discount or a surcharge, as these terms are defined in 
amended section 103 of the act. The regular price is defined in section 
103 of the act as--
    * * * the tag or posted price charged for the property or service if 
a single price is tagged or posted, or the price charged for the 
property or service when payment is made by use of an open-end credit 
account or a credit card if either (1) no price is tagged or posted, or 
(2) two prices are tagged or posted. * * *
    ii. For example, in the sale of motor vehicle fuel, the tagged or 
posted price is the price displayed at the pump. As a result, the higher 
price (the open-end credit or credit card price) must be displayed at 
the pump, either alone or along with the cash price. Service station 
operators may designate separate pumps or separate islands as being for 
either cash or credit purchases and display only the appropriate prices 
at the various pumps. If a pump is capable of displaying on its meter 
either a cash or a credit price depending upon the consumer's means of 
payment, both the cash price and the credit price must be displayed at 
the pump. A service station operator may display the cash price of fuel 
by itself on a curb sign, as long

[[Page 552]]

as the sign clearly indicates that the price is limited to cash 
purchases.
    4(b)(10) Debt cancellation and debt suspension fees.
    1. Definition. Debt cancellation coverage provides for payment or 
satisfaction of all or part of a debt when a specified event occurs. The 
term ``debt cancellation coverage'' includes guaranteed automobile 
protection, or ``GAP,'' agreements, which pay or satisfy the remaining 
debt after property insurance benefits are exhausted. Debt suspension 
coverage provides for suspension of the obligation to make one or more 
payments on the date(s) otherwise required by the credit agreement, when 
a specified event occurs. The term ``debt suspension'' does not include 
loan payment deferral arrangements in which the triggering event is the 
bank's unilateral decision to allow a deferral of payment and the 
borrower's unilateral election to do so, such as by skipping or reducing 
one or more payments (``skip payments'').
    2. Coverage written in connection with a transaction. Coverage sold 
after consummation in closed-end credit transactions or after the 
opening of a home-equity plan subject to the requirements of Sec. 
226.5b is not ``written in connection with'' the credit transaction if 
the coverage is written because the consumer requests coverage after 
consummation or the opening of a home-equity plan subject to the 
requirements of Sec. 226.5b (although credit-sale disclosures may be 
required for the coverage sold after consummation if it is financed). 
Coverage sold before or after an open-end (not home-secured) plan is 
opened is considered ``written in connection with a credit 
transaction.''
    4(c) Charges excluded from the finance charge.
    Paragraph 4(c)(1).
    1. Application fees. An application fee that is excluded from the 
finance charge is a charge to recover the costs associated with 
processing applications for credit. The fee may cover the costs of 
services such as credit reports, credit investigations, and appraisals. 
The creditor is free to impose the fee in only certain of its loan 
programs, such as mortgage loans. However, if the fee is to be excluded 
from the finance charge under Sec. 226.4(c)(1), it must be charged to 
all applicants, not just to applicants who are approved or who actually 
receive credit.
    Paragraph 4(c)(2).
    1. Late payment charges.
    i. Late payment charges can be excluded from the finance charge 
under Sec. 226.4(c)(2) whether or not the person imposing the charge 
continues to extend credit on the account or continues to provide 
property or services to the consumer. In determining whether a charge is 
for actual unanticipated late payment on a 30-day account, for example, 
factors to be considered include:
    A. The terms of the account. For example, is the consumer required 
by the account terms to pay the account balance in full each month? If 
not, the charge may be a finance charge.
    B. The practices of the creditor in handling the accounts. For 
example, regardless of the terms of the account, does the creditor allow 
consumers to pay the accounts over a period of time without demanding 
payment in full or taking other action to collect? If no effort is made 
to collect the full amount due, the charge may be a finance charge.
    ii. Section 226.4(c)(2) applies to late payment charges imposed for 
failure to make payments as agreed, as well as failure to pay an account 
in full when due.
    2. Other excluded charges. Charges for ``delinquency, default, or a 
similar occurrence'' include, for example, charges for reinstatement of 
credit privileges or for submitting as payment a check that is later 
returned unpaid.
    Paragraph 4(c)(3).
    1. Assessing interest on an overdraft balance. A charge on an 
overdraft balance computed by applying a rate of interest to the amount 
of the overdraft is not a finance charge, even though the consumer 
agrees to the charge in the account agreement, unless the financial 
institution agrees in writing that it will pay such items.
    Paragraph 4(c)(4).
    1. Participation fees--periodic basis. The participation fees 
described in Sec. 226.4(c)(4) do not necessarily have to be formal 
membership fees, nor are they limited to credit card plans. The 
provision applies to any credit plan in which payment of a fee is a 
condition of access to the plan itself, but it does not apply to fees 
imposed separately on individual closed-end transactions. The fee may be 
charged on a monthly, annual, or other periodic basis; a one-time, non-
recurring fee imposed at the time an account is opened is not a fee that 
is charged on a periodic basis, and may not be treated as a 
participation fee.
    2. Participation fees--exclusions. Minimum monthly charges, charges 
for non-use of a credit card, and other charges based on either account 
activity or the amount of credit available under the plan are not 
excluded from the finance charge by Sec. 226.4(c)(4). Thus, for 
example, a fee that is charged and then refunded to the consumer based 
on the extent to which the consumer uses the credit available would be a 
finance charge. (See the commentary to Sec. 226.4(b)(2). Also, see 
comment 14(c)-2 for treatment of certain types of fees excluded in 
determining the annual percentage rate for the periodic statement.)
    Paragraph 4(c)(5).
    1. Seller's points. The seller's points mentioned in Sec. 
226.4(c)(5) include any charges imposed by the creditor upon the 
noncreditor seller of property for providing credit to the

[[Page 553]]

buyer or for providing credit on certain terms. These charges are 
excluded from the finance charge even if they are passed on to the 
buyer, for example, in the form of a higher sales price. Seller's points 
are frequently involved in real estate transactions guaranteed or 
insured by governmental agencies. A commitment fee paid by a noncreditor 
seller (such as a real estate developer) to the creditor should be 
treated as seller's points. Buyer's points (that is, points charged to 
the buyer by the creditor), however, are finance charges.
    2. Other seller-paid amounts. Mortgage insurance premiums and other 
finance charges are sometimes paid at or before consummation or 
settlement on the borrower's behalf by a noncreditor seller. The 
creditor should treat the payment made by the seller as seller's points 
and exclude it from the finance charge if, based on the seller's 
payment, the consumer is not legally bound to the creditor for the 
charge. A creditor who gives disclosures before the payment has been 
made should base them on the best information reasonably available.
    Paragraph 4(c)(6).
    1. Lost interest. Certain federal and state laws mandate a 
percentage differential between the interest rate paid on a deposit and 
the rate charged on a loan secured by that deposit. In some situations, 
because of usury limits the creditor must reduce the interest rate paid 
on the deposit and, as a result, the consumer loses some of the interest 
that would otherwise have been earned. Under Sec. 226.4(c)(6), such 
``lost interest'' need not be included in the finance charge. This rule 
applies only to an interest reduction imposed because a rate 
differential is required by law and a usury limit precludes compliance 
by any other means. If the creditor imposes a differential that exceeds 
that required, only the lost interest attributable to the excess amount 
is a finance charge. (See the commentary to Sec. 226.4(a).)
    Paragraph 4(c)(7).
    1. Real estate or residential mortgage transaction charges. The list 
of charges in Sec. 226.4(c)(7) applies both to residential mortgage 
transactions (which may include, for example, the purchase of a mobile 
home) and to other transactions secured by real estate. The fees are 
excluded from the finance charge even if the services for which the fees 
are imposed are performed by the creditor's employees rather than by a 
third party. In addition, the cost of verifying or confirming 
information connected to the item is also excluded. For example, credit-
report fees cover not only the cost of the report but also the cost of 
verifying information in the report. In all cases, charges excluded 
under Sec. 226.4(c)(7) must be bona fide and reasonable.
    2. Lump-sum charges. If a lump sum charged for several services 
includes a charge that is not excludable, a portion of the total should 
be allocated to that service and included in the finance charge. 
However, a lump sum charged for conducting or attending a closing (for 
example, by a lawyer or a title company) is excluded from the finance 
charge if the charge is primarily for services related to items listed 
in Sec. 226.4(c)(7) (for example, reviewing or completing documents), 
even if other incidental services such as explaining various documents 
or disbursing funds for the parties are performed. The entire charge is 
excluded even if a fee for the incidental services would be a finance 
charge if it were imposed separately.
    3. Charges assessed during the loan term. Real estate or residential 
mortgage transaction charges excluded under Sec. 226.4(c)(7) are those 
charges imposed solely in connection with the initial decision to grant 
credit. This would include, for example, a fee to search for tax liens 
on the property or to determine if flood insurance is required. The 
exclusion does not apply to fees for services to be performed 
periodically during the loan term, regardless of when the fee is 
collected. For example, a fee for one or more determinations during the 
loan term of the current tax-lien status or flood-insurance requirements 
is a finance charge, regardless of whether the fee is imposed at 
closing, or when the service is performed. If a creditor is uncertain 
about what portion of a fee to be paid at consummation or loan closing 
is related to the initial decision to grant credit, the entire fee may 
be treated as a finance charge.
    4(d) Insurance and debt cancellation and debt suspension coverage.
    1. General. Section 226.4(d) permits insurance premiums and charges 
and debt cancellation and debt suspension charges to be excluded from 
the finance charge. The required disclosures must be made in writing, 
except as provided in Sec. 226.4(d)(4). The rules on location of 
insurance and debt cancellation and debt suspension disclosures for 
closed-end transactions are in Sec. 226.17(a). For purposes of Sec. 
226.4(d), all references to insurance also include debt cancellation and 
debt suspension coverage unless the context indicates otherwise.
    2. Timing of disclosures. If disclosures are given early, for 
example under Sec. 226.17(f) or Sec. 226.19(a), the creditor need not 
redisclose if the actual premium is different at the time of 
consummation. If insurance disclosures are not given at the time of 
early disclosure and insurance is in fact written in connection with the 
transaction, the disclosures under Sec. 226.4(d) must be made in order 
to exclude the premiums from the finance charge.
    3. Premium rate increases. The creditor should disclose the premium 
amount based on the rates currently in effect and need not designate it 
as an estimate even if the premium rates may increase. An increase in 
insurance rates after consummation of a closed-end credit transaction or 
during the

[[Page 554]]

life of an open-end credit plan does not require redisclosure in order 
to exclude the additional premium from treatment as a finance charge.
    4. Unit-cost disclosures.
    i. Open-end credit. The premium or fee for insurance or debt 
cancellation or debt suspension for the initial term of coverage may be 
disclosed on a unit-cost basis in open-end credit transactions. The cost 
per unit should be based on the initial term of coverage, unless one of 
the options under comment 4(d)-12 is available.
    ii. Closed-end credit. One of the transactions for which unit-cost 
disclosures (such as 50 cents per year for each $100 of the amount 
financed) may be used in place of the total insurance premium involves a 
particular kind of insurance plan. For example, a consumer with a 
current indebtedness of $8,000 is covered by a plan of credit life 
insurance coverage with a maximum of $10,000. The consumer requests an 
additional $4,000 loan to be covered by the same insurance plan. Since 
the $4,000 loan exceeds, in part, the maximum amount of indebtedness 
that can be covered by the plan, the creditor may properly give the 
insurance-cost disclosures on the $4,000 loan on a unit-cost basis.
    5. Required credit life insurance; debt cancellation or suspension 
coverage. Credit life, accident, health, or loss-of-income insurance, 
and debt cancellation and suspension coverage described in Sec. 
226.4(b)(10), must be voluntary in order for the premium or charges to 
be excluded from the finance charge. Whether the insurance or coverage 
is in fact required or optional is a factual question. If the insurance 
or coverage is required, the premiums must be included in the finance 
charge, whether the insurance or coverage is purchased from the creditor 
or from a third party. If the consumer is required to elect one of 
several options--such as to purchase credit life insurance, or to assign 
an existing life insurance policy, or to pledge security such as a 
certificate of deposit--and the consumer purchases the credit life 
insurance policy, the premium must be included in the finance charge. 
(If the consumer assigns a preexisting policy or pledges security 
instead, no premium is included in the finance charge. The security 
interest would be disclosed under Sec. 226.6(a)(4), Sec. 
226.6(b)(5)(ii), or Sec. 226.18(m). See the commentary to Sec. 
226.4(b)(7) and (b)(8).)
    6. Other types of voluntary insurance. Insurance is not credit life, 
accident, health, or loss-of-income insurance if the creditor or the 
credit account of the consumer is not the beneficiary of the insurance 
coverage. If the premium for such insurance is not imposed by the 
creditor as an incident to or a condition of credit, it is not covered 
by Sec. 226.4.
    7. Signatures. If the creditor offers a number of insurance options 
under Sec. 226.4(d), the creditor may provide a means for the consumer 
to sign or initial for each option, or it may provide for a single 
authorizing signature or initial with the options selected designated by 
some other means, such as a check mark. The insurance authorization may 
be signed or initialed by any consumer, as defined in Sec. 
226.2(a)(11), or by an authorized user on a credit card account.
    8. Property insurance. To exclude property insurance premiums or 
charges from the finance charge, the creditor must allow the consumer to 
choose the insurer and disclose that fact. This disclosure must be made 
whether or not the property insurance is available from or through the 
creditor. The requirement that an option be given does not require that 
the insurance be readily available from other sources. The premium or 
charge must be disclosed only if the consumer elects to purchase the 
insurance from the creditor; in such a case, the creditor must also 
disclose the term of the property insurance coverage if it is less than 
the term of the obligation.
    9. Single-interest insurance. Blanket and specific single-interest 
coverage are treated the same for purposes of the regulation. A charge 
for either type of single-interest insurance may be excluded from the 
finance charge if:
    i. The insurer waives any right of subrogation.
    ii. The other requirements of Sec. 226.4(d)(2) are met. This 
includes, of course, giving the consumer the option of obtaining the 
insurance from a person of the consumer's choice. The creditor need not 
ascertain whether the consumer is able to purchase the insurance from 
someone else.
    10. Single-interest insurance defined. The term single-interest 
insurance as used in the regulation refers only to the types of coverage 
traditionally included in the term vendor's single-interest insurance 
(or VSI), that is, protection of tangible property against normal 
property damage, concealment, confiscation, conversion, embezzlement, 
and skip. Some comprehensive insurance policies may include a variety of 
additional coverages, such as repossession insurance and holder-in-due-
course insurance. These types of coverage do not constitute single-
interest insurance for purposes of the regulation, and premiums for them 
do not qualify for exclusion from the finance charge under Sec. 
226.4(d). If a policy that is primarily VSI also provides coverages that 
are not VSI or other property insurance, a portion of the premiums must 
be allocated to the nonexcludable coverages and included in the finance 
charge. However, such allocation is not required if the total premium in 
fact attributable to all of the non-VSI coverages included in the policy 
is $1.00 or less (or $5.00 or less in the case of a multiyear policy).
    11. Initial term.

[[Page 555]]

    i. The initial term of insurance or debt cancellation or debt 
suspension coverage determines the period for which a premium amount 
must be disclosed, unless one of the options discussed under comment 
4(d)-12 is available. For purposes of Sec. 226.4(d), the initial term 
is the period for which the insurer or creditor is obligated to provide 
coverage, even though the consumer may be allowed to cancel the coverage 
or coverage may end due to nonpayment before that term expires.
    ii. For example:
    A. The initial term of a property insurance policy on an automobile 
that is written for one year is one year even though premiums are paid 
monthly and the term of the credit transaction is four years.
    B. The initial term of an insurance policy is the full term of the 
credit transaction if the consumer pays or finances a single premium in 
advance.
    12. Initial term; alternative.
    i. General. A creditor has the option of providing cost disclosures 
on the basis of one year of insurance or debt cancellation or debt 
suspension coverage instead of a longer initial term (provided the 
premium or fee is clearly labeled as being for one year) if:
    A. The initial term is indefinite or not clear, or
    B. The consumer has agreed to pay a premium or fee that is assessed 
periodically but the consumer is under no obligation to continue the 
coverage, whether or not the consumer has made an initial payment.
    ii. Open-end plans. For open-end plans, a creditor also has the 
option of providing unit-cost disclosure on the basis of a period that 
is less than one year if the consumer has agreed to pay a premium or fee 
that is assessed periodically, for example monthly, but the consumer is 
under no obligation to continue the coverage.
    iii. Examples. To illustrate:
    A. A credit life insurance policy providing coverage for a 30-year 
mortgage loan has an initial term of 30 years, even though premiums are 
paid monthly and the consumer is not required to continue the coverage. 
Disclosures may be based on the initial term, but the creditor also has 
the option of making disclosures on the basis of coverage for an assumed 
initial term of one year.
    13. Loss-of-income insurance. The loss-of-income insurance mentioned 
in Sec. 226.4(d) includes involuntary unemployment insurance, which 
provides that some or all of the consumer's payments will be made if the 
consumer becomes unemployed involuntarily.
    4(d)(3) Voluntary debt cancellation or debt suspension fees.
    1. General. Fees charged for the specialized form of debt 
cancellation agreement known as guaranteed automobile protection 
(``GAP'') agreements must be disclosed according to Sec. 226.4(d)(3) 
rather than according to Sec. 226.4(d)(2) for property insurance.
    2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by 
providing a disclosure that refers to debt cancellation or debt 
suspension coverage whether or not the coverage is considered insurance. 
Creditors may use the model credit insurance disclosures only if the 
debt cancellation or debt suspension coverage constitutes insurance 
under state law. (See Model Clauses and Samples at G-16 and H-17 in 
appendix G and appendix H to part 226 for guidance on how to provide the 
disclosure required by Sec. 226.4(d)(3)(iii) for debt suspension 
products.)
    3. Multiple events. If debt cancellation or debt suspension coverage 
for two or more events is provided at a single charge, the entire charge 
may be excluded from the finance charge if at least one of the events is 
accident or loss of life, health, or income and the conditions specified 
in Sec. 226.4(d)(3) or, as applicable, Sec. 226.4(d)(4), are 
satisfied.
    4. Disclosures in programs combining debt cancellation and debt 
suspension features. If the consumer's debt can be cancelled under 
certain circumstances, the disclosure may be modified to reflect that 
fact. The disclosure could, for example, state (in addition to the 
language required by Sec. 226.4(d)(3)(iii)) that ``In some 
circumstances, my debt may be cancelled.'' However, the disclosure would 
not be permitted to list the specific events that would result in debt 
cancellation.
    4(d)(4) Telephone purchases.
    1. Affirmative request. A creditor would not satisfy the requirement 
to obtain a consumer's affirmative request if the ``request'' was a 
response to a script that uses leading questions or negative consent. A 
question asking whether the consumer wishes to enroll in the credit 
insurance or debt cancellation or suspension plan and seeking a yes-or-
no response (such as ``Do you want to enroll in this optional debt 
cancellation plan?'') would not be considered leading.
    4(e) Certain security interest charges.
    1. Examples.
    i. Excludable charges. Sums must be actually paid to public 
officials to be excluded from the finance charge under Sec. 226.4(e)(1) 
and (e)(3). Examples are charges or other fees required for filing or 
recording security agreements, mortgages, continuation statements, 
termination statements, and similar documents, as well as intangible 
property or other taxes even when the charges or fees are imposed by the 
state solely on the creditor and charged to the consumer (if the tax 
must be paid to record a security agreement). (See comment 4(a)-5 
regarding the treatment of taxes, generally.)
    ii. Charges not excludable. If the obligation is between the 
creditor and a third party (an assignee, for example), charges or other 
fees for filing or recording security agreements, mortgages, 
continuation statements, termination statements, and similar documents

[[Page 556]]

relating to that obligation are not excludable from the finance charge 
under this section.
    2. Itemization. The various charges described in Sec. 226.4(e)(1) 
and (e)(3) may be totaled and disclosed as an aggregate sum, or they may 
be itemized by the specific fees and taxes imposed. If an aggregate sum 
is disclosed, a general term such as security interest fees or filing 
fees may be used.
    3. Notary fees. In order for a notary fee to be excluded under Sec. 
226.4(e)(1), all of the following conditions must be met:
    i. The document to be notarized is one used to perfect, release, or 
continue a security interest.
    ii. The document is required by law to be notarized.
    iii. A notary is considered a public official under applicable law.
    iv. The amount of the fee is set or authorized by law.
    4. Nonfiling insurance. The exclusion in Sec. 226.4(e)(2) is 
available only if nonfiling insurance is purchased. If the creditor 
collects and simply retains a fee as a sort of ``self-insurance'' 
against nonfiling, it may not be excluded from the finance charge. If 
the nonfiling insurance premium exceeds the amount of the fees 
excludable from the finance charge under Sec. 226.4(e)(1), only the 
excess is a finance charge. For example:
    i. The fee for perfecting a security interest is $5.00 and the fee 
for releasing the security interest is $3.00. The creditor charges 
$10.00 for nonfiling insurance. Only $8.00 of the $10.00 is excludable 
from the finance charge.
    4(f) Prohibited offsets.
    1. Earnings on deposits or investments. The rule that the creditor 
shall not deduct any earnings by the consumer on deposits or investments 
applies whether or not the creditor has a security interest in the 
property.

                       Subpart B--Open-End Credit

             Section 226.5--General Disclosure Requirements

    5(a) Form of disclosures.
    5(a)(1) General.
    1. Clear and conspicuous standard. The ``clear and conspicuous'' 
standard generally requires that disclosures be in a reasonably 
understandable form. Disclosures for credit card applications and 
solicitations under Sec. 226.5a, highlighted account-opening 
disclosures under Sec. 226.6(b)(1), highlighted disclosure on checks 
that access a credit card under Sec. 226.9(b)(3), highlighted change-
in-terms disclosures under Sec. 226.9(c)(2)(iv)(D), and highlighted 
disclosures when a rate is increased due to delinquency, default or for 
a penalty under Sec. 226.9(g)(3)(ii) must also be readily noticeable to 
the consumer.
    2. Clear and conspicuous--reasonably understandable form. Except 
where otherwise provided, the reasonably understandable form standard 
does not require that disclosures be segregated from other material or 
located in any particular place on the disclosure statement, or that 
numerical amounts or percentages be in any particular type size. For 
disclosures that are given orally, the standard requires that they be 
given at a speed and volume sufficient for a consumer to hear and 
comprehend them. (See comment 5(b)(1)(ii)-1.) Except where otherwise 
provided, the standard does not prohibit:
    i. Pluralizing required terminology (``finance charge'' and ``annual 
percentage rate'').
    ii. Adding to the required disclosures such items as contractual 
provisions, explanations of contract terms, state disclosures, and 
translations.
    iii. Sending promotional material with the required disclosures.
    iv. Using commonly accepted or readily understandable abbreviations 
(such as ``mo.'' for ``month'' or ``Tx.'' for ``Texas'') in making any 
required disclosures.
    v. Using codes or symbols such as ``APR'' (for annual percentage 
rate), ``FC'' (for finance charge), or ``Cr'' (for credit balance), so 
long as a legend or description of the code or symbol is provided on the 
disclosure statement.
    3. Clear and conspicuous--readily noticeable standard. To meet the 
readily noticeable standard, disclosures for credit card applications 
and solicitations under Sec. 226.5a, highlighted account-opening 
disclosures under Sec. 226.6(b)(1), highlighted disclosures on checks 
that access a credit card account under Sec. 226.9(b)(3), highlighted 
change-in-terms disclosures under Sec. 226.9(c)(2)(iv)(D), and 
highlighted disclosures when a rate is increased due to delinquency, 
default or penalty pricing under Sec. 226.9(g)(3)(ii) must be given in 
a minimum of 10-point font. (See special rule for font size requirements 
for the annual percentage rate for purchases under Sec. Sec. 
226.5a(b)(1) and 226.6(b)(2)(i).)
    4. Integrated document. The creditor may make both the account-
opening disclosures (Sec. 226.6) and the periodic-statement disclosures 
(Sec. 226.7) on more than one page, and use both the front and the 
reverse sides, except where otherwise indicated, so long as the pages 
constitute an integrated document. An integrated document would not 
include disclosure pages provided to the consumer at different times or 
disclosures interspersed on the same page with promotional material. An 
integrated document would include, for example:
    i. Multiple pages provided in the same envelope that cover related 
material and are folded together, numbered consecutively, or clearly 
labeled to show that they relate to one another; or
    ii. A brochure that contains disclosures and explanatory material 
about a range of services the creditor offers, such as credit,

[[Page 557]]

checking account, and electronic fund transfer features.
    5. Disclosures covered. Disclosures that must meet the ``clear and 
conspicuous'' standard include all required communications under this 
subpart. Therefore, disclosures made by a person other than the card 
issuer, such as disclosures of finance charges imposed at the time of 
honoring a consumer's credit card under Sec. 226.9(d), and notices, 
such as the correction notice required to be sent to the consumer under 
Sec. 226.13(e), must also be clear and conspicuous.
    Paragraph 5(a)(1)(ii)(A).
    1. Electronic disclosures. Disclosures that need not be provided in 
writing under Sec. 226.5(a)(1)(ii)(A) may be provided in writing, 
orally, or in electronic form. If the consumer requests the service in 
electronic form, such as on the creditor's Web site, the specified 
disclosures may be provided in electronic form without regard to the 
consumer consent or other provisions of the Electronic Signatures in 
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    Paragraph 5(a)(1)(iii).
    1. Disclosures not subject to E-Sign Act. See the commentary to 
Sec. 226.5(a)(1)(ii)(A) regarding disclosures (in addition to those 
specified under Sec. 226.5(a)(1)(iii)) that may be provided in 
electronic form without regard to the consumer consent or other 
provisions of the E-Sign Act.
    5(a)(2) Terminology.
    1. When disclosures must be more conspicuous. For home-equity plans 
subject to Sec. 226.5b, the terms finance charge and annual percentage 
rate, when required to be used with a number, must be disclosed more 
conspicuously than other required disclosures, except in the cases 
provided in Sec. 226.5(a)(2)(ii). At the creditor's option, finance 
charge and annual percentage rate may also be disclosed more 
conspicuously than the other required disclosures even when the 
regulation does not so require. The following examples illustrate these 
rules:
    i. In disclosing the annual percentage rate as required by Sec. 
226.6(a)(1)(ii), the term annual percentage rate is subject to the more 
conspicuous rule.
    ii. In disclosing the amount of the finance charge, required by 
Sec. 226.7(a)(6)(i), the term finance charge is subject to the more 
conspicuous rule.
    iii. Although neither finance charge nor annual percentage rate need 
be emphasized when used as part of general informational material or in 
textual descriptions of other terms, emphasis is permissible in such 
cases. For example, when the terms appear as part of the explanations 
required under Sec. 226.6(a)(1)(iii) and (a)(1)(iv), they may be 
equally conspicuous as the disclosures required under Sec. Sec. 
226.6(a)(1)(ii) and 226.7(a)(7).
    2. Making disclosures more conspicuous. In disclosing the terms 
finance charge and annual percentage rate more conspicuously for home-
equity plans subject to Sec. 226.5b, only the words finance charge and 
annual percentage rate should be accentuated. For example, if the term 
total finance charge is used, only finance charge should be emphasized. 
The disclosures may be made more conspicuous by, for example:
    i. Capitalizing the words when other disclosures are printed in 
lower case.
    ii. Putting them in bold print or a contrasting color.
    iii. Underlining them.
    iv. Setting them off with asterisks.
    v. Printing them in larger type.
    3. Disclosure of figures--exception to more conspicuous rule. For 
home-equity plans subject to Sec. 226.5b, the terms annual percentage 
rate and finance charge need not be more conspicuous than figures 
(including, for example, numbers, percentages, and dollar signs).
    4. Consistent terminology. Language used in disclosures required in 
this subpart must be close enough in meaning to enable the consumer to 
relate the different disclosures; however, the language need not be 
identical.
    5(b) Time of disclosures.
    5(b)(1) Account-opening disclosures.
    5(b)(1)(i) General rule.
    1. Disclosure before the first transaction. When disclosures must be 
furnished ``before the first transaction,'' account-opening disclosures 
must be delivered before the consumer becomes obligated on the plan. 
Examples include:
    i. Purchases. The consumer makes the first purchase, such as when a 
consumer opens a credit plan and makes purchases contemporaneously at a 
retail store, except when the consumer places a telephone call to make 
the purchase and opens the plan contemporaneously. (See commentary to 
Sec. 226.5(b)(1)(iii) below.)
    ii. Advances. The consumer receives the first advance. If the 
consumer receives a cash advance check at the same time the account-
opening disclosures are provided, disclosures are still timely if the 
consumer can, after receiving the disclosures, return the cash advance 
check to the creditor without obligation (for example, without paying 
finance charges).
    2. Reactivation of suspended account. If an account is temporarily 
suspended (for example, because the consumer has exceeded a credit 
limit, or because a credit card is reported lost or stolen) and then is 
reactivated, no new account-opening disclosures are required.
    3. Reopening closed account. If an account has been closed (for 
example, due to inactivity, cancellation, or expiration) and then is 
reopened, new account-opening disclosures

[[Page 558]]

are required. No new account-opening disclosures are required, however, 
when the account is closed merely to assign it a new number (for 
example, when a credit card is reported lost or stolen) and the ``new'' 
account then continues on the same terms.
    4. Converting closed-end to open-end credit. If a closed-end credit 
transaction is converted to an open-end credit account under a written 
agreement with the consumer, account-opening disclosures under Sec. 
226.6 must be given before the consumer becomes obligated on the open-
end credit plan. (See the commentary to Sec. 226.17 on converting open-
end credit to closed-end credit.)
    5. Balance transfers. A creditor that solicits the transfer by a 
consumer of outstanding balances from an existing account to a new open-
end plan must furnish the disclosures required by Sec. 226.6 so that 
the consumer has an opportunity, after receiving the disclosures, to 
contact the creditor before the balance is transferred and decline the 
transfer. For example, assume a consumer responds to a card issuer's 
solicitation for a credit card account subject to Sec. 226.5a that 
offers a range of balance transfer annual percentage rates, based on the 
consumer's creditworthiness. If the creditor opens an account for the 
consumer, the creditor would comply with the timing rules of this 
section by providing the consumer with the annual percentage rate (along 
with the fees and other required disclosures) that would apply to the 
balance transfer in time for the consumer to contact the creditor and 
withdraw the request. A creditor that permits consumers to withdraw the 
request by telephone has met this timing standard if the creditor does 
not effect the balance transfer until 10 days after the creditor has 
sent account-opening disclosures to the consumer, assuming the consumer 
has not contacted the creditor to withdraw the request. Card issuers 
that are subject to the requirements of Sec. 226.5a may establish 
procedures that comply with both Sec. Sec. 226.5a and 226.6 in a single 
disclosure statement.
    6. Substitution or replacement of credit card accounts.
    i. Generally. When a card issuer substitutes or replaces an existing 
credit card account with another credit card account, the card issuer 
must either provide notice of the terms of the new account consistent 
with Sec. 226.6(b) or provide notice of the changes in the terms of the 
existing account consistent with Sec. 226.9(c)(2). Whether a 
substitution or replacement results in the opening of a new account or a 
change in the terms of an existing account for purposes of the 
disclosure requirements in Sec. Sec. 226.6(b) and 226.9(c)(2) is 
determined in light of all the relevant facts and circumstances. For 
additional requirements and limitations related to the substitution or 
replacement of credit card accounts, see Sec. Sec. 226.12(a) and 
226.55(d) and comments 12(a)(1)-1 through -8, 12(a)(2)-1 through -9, 
55(b)(3)-3, and 55(d)-1 through -3.
    ii. Relevant facts and circumstances. Listed below are facts and 
circumstances that are relevant to whether a substitution or replacement 
results in the opening of a new account or a change in the terms of an 
existing account for purposes of the disclosure requirements in 
Sec. Sec. 226.6(b) and 226.9(c)(2). When most of the facts and 
circumstances listed below are present, the substitution or replacement 
likely constitutes the opening of a new account for which Sec. 226.6(b) 
disclosures are appropriate. When few of the facts and circumstances 
listed below are present, the substitution or replacement likely 
constitutes a change in the terms of an existing account for which Sec. 
226.9(c)(2) disclosures are appropriate.
    A. Whether the card issuer provides the consumer with a new credit 
card;
    B. Whether the card issuer provides the consumer with a new account 
number;
    C. Whether the account provides new features or benefits after the 
substitution or replacement (such as rewards on purchases);
    D. Whether the account can be used to conduct transactions at a 
greater or lesser number of merchants after the substitution or 
replacement (such as when a retail card is replaced with a cobranded 
general purpose credit card that can be used at a wider number of 
merchants);
    E. Whether the card issuer implemented the substitution or 
replacement on an individualized basis (such as in response to a 
consumer's request); and
    F. Whether the account becomes a different type of open-end plan 
after the substitution or replacement (such as when a charge card is 
replaced by a credit card).
    iii. Replacement as a result of theft or unauthorized use. 
Notwithstanding paragraphs i. and ii. above, a card issuer that replaces 
a credit card or provides a new account number because the consumer has 
reported the card stolen or because the account appears to have been 
used for unauthorized transactions is not required to provide a notice 
under Sec. Sec. 226.6(b) or 226.9(c)(2) unless the card issuer has 
changed a term of the account that is subject to Sec. Sec. 226.6(b) or 
226.9(c)(2).
    5(b)(1)(ii) Charges imposed as part of an open-end (not home-
secured) plan.
    1. Disclosing charges before the fee is imposed. Creditors may 
disclose charges imposed as part of an open-end (not home-secured) plan 
orally or in writing at any time before a consumer agrees to pay the fee 
or becomes obligated for the charge, unless the charge is specified 
under Sec. 226.6(b)(2). (Charges imposed as part of an open-end (not 
home-secured plan) that are not specified under Sec. 226.6(b)(2) may 
alternatively be disclosed in electronic form; see the commentary to 
Sec. 226.5(a)(1)(ii)(A).) Creditors must provide such disclosures at a 
time and in a manner

[[Page 559]]

that a consumer would be likely to notice them. For example, if a 
consumer telephones a card issuer to discuss a particular service, a 
creditor would meet the standard if the creditor clearly and 
conspicuously discloses the fee associated with the service that is the 
topic of the telephone call orally to the consumer. Similarly, a 
creditor providing marketing materials in writing to a consumer about a 
particular service would meet the standard if the creditor provided a 
clear and conspicuous written disclosure of the fee for that service in 
those same materials. A creditor that provides written materials to a 
consumer about a particular service but provides a fee disclosure for 
another service not promoted in such materials would not meet the 
standard. For example, if a creditor provided marketing materials 
promoting payment by Internet, but included the fee for a replacement 
card on such materials with no explanation, the creditor would not be 
disclosing the fee at a time and in a manner that the consumer would be 
likely to notice the fee.
    5(b)(1)(iii) Telephone purchases.
    1. Return policies. In order for creditors to provide disclosures in 
accordance with the timing requirements of this paragraph, consumers 
must be permitted to return merchandise purchased at the time the plan 
was established without paying mailing or return-shipment costs. 
Creditors may impose costs to return subsequent purchases of merchandise 
under the plan, or to return merchandise purchased by other means such 
as a credit card issued by another creditor. A reasonable return policy 
would be of sufficient duration that the consumer is likely to have 
received the disclosures and had sufficient time to make a decision 
about the financing plan before his or her right to return the goods 
expires. Return policies need not provide a right to return goods if the 
consumer consumes or damages the goods, or for installed appliances or 
fixtures, provided there is a reasonable repair or replacement policy to 
cover defective goods or installations. If the consumer chooses to 
reject the financing plan, creditors comply with the requirements of 
this paragraph by permitting the consumer to pay for the goods with 
another reasonable form of payment acceptable to the merchant and keep 
the goods although the creditor cannot require the consumer to do so.
    5(b)(1)(iv) Membership fees.
    1. Membership fees. See Sec. 226.5a(b)(2) and related commentary 
for guidance on fees for issuance or availability of a credit or charge 
card.
    2. Rejecting the plan. If a consumer has paid or promised to pay a 
membership fee including an application fee excludable from the finance 
charge under Sec. 226.4(c)(1) before receiving account-opening 
disclosures, the consumer may, after receiving the disclosures, reject 
the plan and not be obligated for the membership fee, application fee, 
or any other fee or charge. A consumer who has received the disclosures 
and uses the account, or makes a payment on the account after receiving 
a billing statement, is deemed not to have rejected the plan.
    3. Using the account. A consumer uses an account by obtaining an 
extension of credit after receiving the account-opening disclosures, 
such as by making a purchase or obtaining an advance. A consumer does 
not ``use'' the account by activating the account. A consumer also does 
not ``use'' the account when the creditor assesses fees on the account 
(such as start-up fees or fees associated with credit insurance or debt 
cancellation or suspension programs agreed to as a part of the 
application and before the consumer receives account-opening 
disclosures). For example, the consumer does not ``use'' the account 
when a creditor sends a billing statement with start-up fees, there is 
no other activity on the account, the consumer does not pay the fees, 
and the creditor subsequently assesses a late fee or interest on the 
unpaid fee balances. A consumer also does not ``use'' the account by 
paying an application fee excludable from the finance charge under Sec. 
226.4(c)(1) prior to receiving the account-opening disclosures.
    4. Home-equity plans. Creditors offering home-equity plans subject 
to the requirements of Sec. 226.5b are subject to the requirements of 
Sec. 226.5b(h) regarding the collection of fees.
    5(b)(2) Periodic statements.
    Paragraph 5(b)(2)(i).
    1. Periodic statements not required. Periodic statements need not be 
sent in the following cases:
    i. If the creditor adjusts an account balance so that at the end of 
the cycle the balance is less than $1--so long as no finance charge has 
been imposed on the account for that cycle.
    ii. If a statement was returned as undeliverable. If a new address 
is provided, however, within a reasonable time before the creditor must 
send a statement, the creditor must resume sending statements. Receiving 
the address at least 20 days before the end of a cycle would be a 
reasonable amount of time to prepare the statement for that cycle. For 
example, if an address is received 22 days before the end of the June 
cycle, the creditor must send the periodic statement for the June cycle. 
(See Sec. 226.13(a)(7).)
    2. Termination of draw privileges. When a consumer's ability to draw 
on an open-end account is terminated without being converted to closed-
end credit under a written agreement, the creditor must continue to 
provide periodic statements to those consumers entitled to receive them 
under

[[Page 560]]

Sec. 226.5(b)(2)(i), for example, when the draw period of an open-end 
credit plan ends and consumers are paying off outstanding balances 
according to the account agreement or under the terms of a workout 
agreement that is not converted to a closed-end transaction. In 
addition, creditors must continue to follow all of the other open-end 
credit requirements and procedures in subpart B.
    3. Uncollectible accounts. An account is deemed uncollectible for 
purposes of Sec. 226.5(b)(2)(i) when a creditor has ceased collection 
efforts, either directly or through a third party.
    4. Instituting collection proceedings. Creditors institute a 
delinquency collection proceeding by filing a court action or initiating 
an adjudicatory process with a third party. Assigning a debt to a debt 
collector or other third party would not constitute instituting a 
collection proceeding.
    Paragraph 5(b)(2)(ii).
    1. Mailing or delivery of periodic statements. A creditor is not 
required to determine the specific date on which a periodic statement is 
mailed or delivered to an individual consumer for purposes of Sec. 
226.5(b)(2)(ii). A creditor complies with Sec. 226.5(b)(2)(ii) if it 
has adopted reasonable procedures designed to ensure that periodic 
statements are mailed or delivered to consumers no later than a certain 
number of days after the closing date of the billing cycle and adds that 
number of days to the 21-day or 14-day period required by Sec. 
226.5(b)(2)(ii) when determining, as applicable, the payment due date 
for purposes of Sec. 226.5(b)(2)(ii)(A), the date on which any grace 
period expires for purposes of Sec. 226.5(b)(2)(ii)(B)(1), or the date 
after which the payment will be treated as late for purposes of Sec. 
226.5(b)(2)(ii)(B)(2). For example
    A. If a creditor has adopted reasonable procedures designed to 
ensure that periodic statements for a credit card account under an open-
end (not home-secured) consumer credit plan or an account under an open-
end consumer credit plan that provides a grace period are mailed or 
delivered to consumers no later than three days after the closing date 
of the billing cycle, the payment due date for purposes of Sec. 
226.5(b)(2)(ii)(A) and the date on which any grace period expires for 
purposes of Sec. 226.5(b)(2)(ii)(B)(1) must be no less than 24 days 
after the closing date of the billing cycle. Similarly, in these 
circumstances, the limitations in Sec. 226.5(b)(2)(ii)(A) and 
(b)(2)(ii)(B)(1) on treating a payment as late and imposing finance 
charges apply for 24 days after the closing date of the billing cycle.
    B. If a creditor has adopted reasonable procedures designed to 
ensure that periodic statements for an account under an open-end 
consumer credit plan that does not provide a grace period are mailed or 
delivered to consumers no later than five days after the closing date of 
the billing cycle, the date on which a payment must be received in order 
to avoid being treated as late for purposes of Sec. 
226.5(b)(2)(ii)(B)(2) must be no less than 19 days after the closing 
date of the billing cycle. Similarly, in these circumstances, the 
limitation in Sec. 226.5(b)(2)(ii)(B)(2) on treating a payment as late 
for any purpose applies for 19 days after the closing date of the 
billing cycle.
    2. Treating a payment as late for any purpose. Treating a payment as 
late for any purpose includes increasing the annual percentage rate as a 
penalty, reporting the consumer as delinquent to a credit reporting 
agency, assessing a late fee or any other fee, initiating collection 
activities, or terminating benefits (such as rewards on purchases) based 
on the consumer's failure to make a payment within a specified amount of 
time or by a specified date. The prohibitions in Sec. 
226.5(b)(2)(ii)(A)(2) and (b)(2)(B)(2)(ii) on treating a payment as late 
for any purpose apply only during the 21-day or 14-day period (as 
applicable) following mailing or delivery of the periodic statement 
stating the due date for that payment and only if the required minimum 
periodic payment is received within that period. For example
    i. Assume that, for a credit card account under an open-end (not 
home-secured) consumer credit plan, a periodic statement mailed on April 
4 states that a required minimum periodic payment of $50 is due on April 
25. If the card issuer does not receive any payment on or before April 
25, Sec. 226.5(b)(2)(ii)(A)(2) does not prohibit the card issuer from 
treating the required minimum periodic payment as late.
    ii. Same facts as in paragraph i. above. On April 20, the card 
issuer receives a payment of $30 and no additional payment is received 
on or before April 25. Section 226.5(b)(2)(ii)(A)(2) does not prohibit 
the card issuer from treating the required minimum periodic payment as 
late.
    iii. Same facts as in paragraph i. above. On May 4, the card issuer 
has not received the $50 required minimum periodic payment that was due 
on April 25. The periodic statement mailed on May 4 states that a 
required minimum periodic payment of $150 is due on May 25. Section 
226.5(b)(2)(ii)(A)(2) does not permit the card issuer to treat the $150 
required minimum periodic payment as late until April 26. However, the 
card issuer may continue to treat the $50 required minimum periodic 
payment as late during this period.
    iv. Assume that, for an account under an open-end consumer credit 
plan that does not provide a grace period, a periodic statement mailed 
on September 10 states that a required minimum periodic payment of $100 
is due on September 24. If the creditor does not receive any payment on 
or before September 24, Sec. 226.5(b)(2)(ii)(B)(2)(ii) does not 
prohibit the creditor from treating the required minimum periodic 
payment as late.

[[Page 561]]

    3. Grace periods. i. Definition of grace period. For purposes of 
Sec. 226.5(b)(2)(ii)(B), ``grace period'' means a period within which 
any credit extended may be repaid without incurring a finance charge due 
to a periodic interest rate. A deferred interest or similar promotional 
program under which the consumer is not obligated to pay interest that 
accrues on a balance if that balance is paid in full prior to the 
expiration of a specified period of time is not a grace period for 
purposes of Sec. 226.5(b)(2)(ii)(B). Similarly, a period following the 
payment due date during which a late payment fee will not be imposed is 
not a grace period for purposes of Sec. 226.5(b)(2)(ii)(B). See 
comments 7(b)(11)-1, 7(b)(11)-2, and 54(a)(1)-2.
    ii. Applicability of Sec. 226.5(b)(2)(ii)(B)(1). Section 
226.5(b)(2)(ii)(B)(1) applies if an account is eligible for a grace 
period when the periodic statement is mailed or delivered. Section 
226.5(b)(2)(ii)(B)(1) does not require the creditor to provide a grace 
period or prohibit the creditor from placing limitations and conditions 
on a grace period to the extent consistent with Sec. 226.5(b)(2)(ii)(B) 
and Sec. 226.54. See comment 54(a)(1)-1. Furthermore, the prohibition 
in Sec. 226.5(b)(2)(ii)(B)(1)(ii) applies only during the 21-day period 
following mailing or delivery of the periodic statement and applies only 
when the creditor receives a payment within that 21-day period that 
satisfies the terms of the grace period.
    iii. Example. Assume that the billing cycles for an account begin on 
the first day of the month and end on the last day of the month and that 
the payment due date for the account is the twenty-fifth of the month. 
Assume also that, under the terms of the account, the balance at the end 
of a billing cycle must be paid in full by the following payment due 
date in order for the account to remain eligible for the grace period. 
At the end of the April billing cycle, the balance on the account is 
$500. The grace period applies to the $500 balance because the balance 
for the March billing cycle was paid in full on April 25. Accordingly, 
Sec. 226.5(b)(2)(ii)(B)(1)(i) requires the creditor to have reasonable 
procedures designed to ensure that the periodic statement reflecting the 
$500 balance is mailed or delivered on or before May 4. Furthermore, 
Sec. 226.5(b)(2)(ii)(B)(1)(ii) requires the creditor to have reasonable 
procedures designed to ensure that the creditor does not impose finance 
charges as a result of the loss of the grace period if a $500 payment is 
received on or before May 25. However, if the creditor receives a 
payment of $300 on April 25, Sec. 226.5(b)(2)(ii)(B)(1)(ii) would not 
prohibit the creditor from imposing finance charges as a result of the 
loss of the grace period (to the extent permitted by Sec. 226.54).
    4. Application of Sec. 226.5(b)(2)(ii) to charge card and charged-
off accounts. i. Charge card accounts. For purposes of Sec. 
226.5(b)(2)(ii)(A)(1), the payment due date for a credit card account 
under an open-end (not home-secured) consumer credit plan is the date 
the card issuer is required to disclose on the periodic statement 
pursuant to Sec. 226.7(b)(11)(i)(A). Because Sec. 226.7(b)(11)(ii) 
provides that Sec. 226.7(b)(11)(i) does not apply to periodic 
statements provided solely for charge card accounts, Sec. 
226.5(b)(2)(ii)(A)(1) also does not apply to the mailing or delivery of 
periodic statements provided solely for such accounts. However, in these 
circumstances, Sec. 226.5(b)(2)(ii)(A)(2) requires the card issuer to 
have reasonable procedures designed to ensure that a payment is not 
treated as late for any purpose during the 21-day period following 
mailing or delivery of the statement. A card issuer that complies with 
Sec. 226.5(b)(2)(ii)(A) as discussed above with respect to a charge 
card account has also complied with Sec. 226.5(b)(2)(ii)(B)(2). Section 
226.5(b)(2)(ii)(B)(1) does not apply to charge card accounts because, 
for purposes of Sec. 226.5(b)(2)(ii)(B), a grace period is a period 
within which any credit extended may be repaid without incurring a 
finance charge due to a periodic interest rate and, consistent with 
Sec. 226.2(a)(15)(iii), charge card accounts do not impose a finance 
charge based on a periodic rate.
    ii. Charged-off accounts. For purposes of Sec. 
226.5(b)(2)(ii)(A)(1), the payment due date for a credit card account 
under an open-end (not home-secured) consumer credit plan is the date 
the card issuer is required to disclose on the periodic statement 
pursuant to Sec. 226.7(b)(11)(i)(A). Because Sec. 226.7(b)(11)(ii) 
provides that Sec. 226.7(b)(11)(i) does not apply to periodic 
statements provided for charged-off accounts where full payment of the 
entire account balance is due immediately, Sec. 226.5(b)(2)(ii)(A)(1) 
also does not apply to the mailing or delivery of periodic statements 
provided solely for such accounts. Furthermore, although Sec. 
226.5(b)(2)(ii)(A)(2) requires the card issuer to have reasonable 
procedures designed to ensure that a payment is not treated as late for 
any purpose during the 21-day period following mailing or delivery of 
the statement, Sec. 226.5(b)(2)(ii)(A)(2) does not prohibit a card 
issuer from continuing to treat prior payments as late during that 
period. See comment 5(b)(2)(ii)-2. Similarly, although Sec. 
226.5(b)(2)(ii)(B)(2) applies to open-end consumer credit accounts in 
these circumstances, Sec. 226.5(b)(2)(ii)(B)(2)(ii) does not prohibit a 
creditor from continuing treating prior payments as late during the 14-
day period following mailing or delivery of a periodic statement. 
Section 226.5(b)(2)(ii)(B)(1) does not apply to charged-off accounts 
where full payment of the entire account balance is due immediately 
because such accounts do not provide a grace period.
    5. Consumer request to pick up periodic statements. When a consumer 
initiates a request,

[[Page 562]]

the creditor may permit, but may not require, the consumer to pick up 
periodic statements. If the consumer wishes to pick up a statement, the 
statement must be made available in accordance with Sec. 
226.5(b)(2)(ii).
    6. Deferred interest and similar promotional programs. See comment 
7(b)-1.iv.
    5(c) Basis of disclosures and use of estimates.
    1. Legal obligation. The disclosures should reflect the credit terms 
to which the parties are legally bound at the time of giving the 
disclosures.
    i. The legal obligation is determined by applicable state or other 
law.
    ii. The fact that a term or contract may later be deemed 
unenforceable by a court on the basis of equity or other grounds does 
not, by itself, mean that disclosures based on that term or contract did 
not reflect the legal obligation.
    iii. The legal obligation normally is presumed to be contained in 
the contract that evidences the agreement. But this may be rebutted if 
another agreement between the parties legally modifies that contract.
    2. Estimates--obtaining information. Disclosures may be estimated 
when the exact information is unknown at the time disclosures are made. 
Information is unknown if it is not reasonably available to the creditor 
at the time disclosures are made. The reasonably available standard 
requires that the creditor, acting in good faith, exercise due diligence 
in obtaining information. In using estimates, the creditor is not 
required to disclose the basis for the estimated figures, but may 
include such explanations as additional information. The creditor 
normally may rely on the representations of other parties in obtaining 
information. For example, the creditor might look to insurance companies 
for the cost of insurance.
    3. Estimates--redisclosure. If the creditor makes estimated 
disclosures, redisclosure is not required for that consumer, even though 
more accurate information becomes available before the first 
transaction. For example, in an open-end plan to be secured by real 
estate, the creditor may estimate the appraisal fees to be charged; such 
an estimate might reasonably be based on the prevailing market rates for 
similar appraisals. If the exact appraisal fee is determinable after the 
estimate is furnished but before the consumer receives the first advance 
under the plan, no new disclosure is necessary.
    5(d) Multiple creditors; multiple consumers.
    1. Multiple creditors. Under Sec. 226.5(d):
    i. Creditors must choose which of them will make the disclosures.
    ii. A single, complete set of disclosures must be provided, rather 
than partial disclosures from several creditors.
    iii. All disclosures for the open-end credit plan must be given, 
even if the disclosing creditor would not otherwise have been obligated 
to make a particular disclosure.
    2. Multiple consumers. Disclosures may be made to either obligor on 
a joint account. Disclosure responsibilities are not satisfied by giving 
disclosures to only a surety or guarantor for a principal obligor or to 
an authorized user. In rescindable transactions, however, separate 
disclosures must be given to each consumer who has the right to rescind 
under Sec. 226.15.
    3. Card issuer and person extending credit not the same person. 
Section 127(c)(4)(D) of the Truth in Lending Act (15 U.S.C. 
1637(c)(4)(D)) contains rules pertaining to charge card issuers with 
plans that allow access to an open-end credit plan that is maintained by 
a person other than the charge card issuer. These rules are not 
implemented in Regulation Z (although they were formerly implemented in 
Sec. 226.5a(f)). However, the statutory provisions remain in effect and 
may be used by charge card issuers with plans meeting the specified 
criteria.
    5(e) Effect of subsequent events.
    1. Events causing inaccuracies. Inaccuracies in disclosures are not 
violations if attributable to events occurring after disclosures are 
made. For example, when the consumer fails to fulfill a prior commitment 
to keep the collateral insured and the creditor then provides the 
coverage and charges the consumer for it, such a change does not make 
the original disclosures inaccurate. The creditor may, however, be 
required to provide a new disclosure(s) under Sec. 226.9(c).
    2. Use of inserts. When changes in a creditor's plan affect required 
disclosures, the creditor may use inserts with outdated disclosure 
forms. Any insert:
    i. Should clearly refer to the disclosure provision it replaces.
    ii. Need not be physically attached or affixed to the basic 
disclosure statement.
    iii. May be used only until the supply of outdated forms is 
exhausted.

  Section 226.5a--Credit and Charge Card Applications and Solicitations

    1. General. Section 226.5a generally requires that credit 
disclosures be contained in application forms and solicitations 
initiated by a card issuer to open a credit or charge card account. (See 
Sec. 226.5a(a)(5) and (e)(2) for exceptions; see Sec. 226.5a(a)(1) and 
accompanying commentary for the definition of solicitation; see also 
Sec. 226.2(a)(15) and accompanying commentary for the definition of 
charge card.)
    2. Substitution of account-opening summary table for the disclosures 
required by Sec. 226.5a. In complying with Sec. 226.5a(c), (e)(1) or 
(f), a card issuer may provide the account-opening summary table 
described in Sec. 226.6(b)(1) in lieu of the disclosures required by 
Sec. 226.5a, if the issuer provides the disclosures required by Sec. 
226.6 on or with the application or solicitation.

[[Page 563]]

    3. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to Sec. 226.5a disclosures.
    5a(a) General rules.
    5a(a)(1) Definition of solicitation.
    1. Invitations to apply. A card issuer may contact a consumer who 
has not been preapproved for a card account about opening an account 
(whether by direct mail, telephone, or other means) and invite the 
consumer to complete an application. Such a contact does not meet the 
definition of solicitation, nor is it covered by this section, unless 
the contact itself includes an application form in a direct mailing, 
electronic communication or ``take-one''; an oral application in a 
telephone contact initiated by the card issuer; or an application in an 
in-person contact initiated by the card issuer.
    5a(a)(2) Form of disclosures; tabular format.
    1. Location of table. i. General. Except for disclosures given 
electronically, disclosures in Sec. 226.5a(b) that are required to be 
provided in a table must be prominently located on or with the 
application or solicitation. Disclosures are deemed to be prominently 
located, for example, if the disclosures are on the same page as an 
application or solicitation reply form. If the disclosures appear 
elsewhere, they are deemed to be prominently located if the application 
or solicitation reply form contains a clear and conspicuous reference to 
the location of the disclosures and indicates that they contain rate, 
fee, and other cost information, as applicable.
    ii. Electronic disclosures. If the table is provided electronically, 
the table must be provided in close proximity to the application or 
solicitation. Card issuers have flexibility in satisfying this 
requirement. Methods card issuers could use to satisfy the requirement 
include, but are not limited to, the following examples:
    A. The disclosures could automatically appear on the screen when the 
application or reply form appears;
    B. The disclosures could be located on the same Web page as the 
application or reply form (whether or not they appear on the initial 
screen), if the application or reply form contains a clear and 
conspicuous reference to the location of the disclosures and indicates 
that the disclosures contain rate, fee, and other cost information, as 
applicable;
    C. Card issuers could provide a link to the electronic disclosures 
on or with the application (or reply form) as long as consumers cannot 
bypass the disclosures before submitting the application or reply form. 
The link would take the consumer to the disclosures, but the consumer 
need not be required to scroll completely through the disclosures; or
    D. The disclosures could be located on the same Web page as the 
application or reply form without necessarily appearing on the initial 
screen, immediately preceding the button that the consumer will click to 
submit the application or reply.
    Whatever method is used, a card issuer need not confirm that the 
consumer has read the disclosures.
    2. Multiple accounts. If a tabular format is required to be used, 
card issuers offering several types of accounts may disclose the various 
terms for the accounts in a single table or may provide a separate table 
for each account.
    3. Information permitted in the table. See the commentary to Sec. 
226.5a(b), (d), and (e)(1) for guidance on additional information 
permitted in the table.
    4. Deletion of inapplicable disclosures. Generally, disclosures need 
only be given as applicable. Card issuers may, therefore, omit 
inapplicable headings and their corresponding boxes in the table. For 
example, if no foreign transaction fee is imposed on the account, the 
heading Foreign transaction and disclosure may be deleted from the table 
or the disclosure form may contain the heading Foreign transaction and a 
disclosure showing none. There is an exception for the grace period 
disclosure; even if no grace period exists, that fact must be stated.
    5. Highlighting of annual percentage rates and fee amounts. i. In 
general. See Samples G-10(B) and G-10(C) for guidance on providing the 
disclosures described in Sec. 226.5a(a)(2)(iv) in bold text. Other 
annual percentage rates or fee amounts disclosed in the table may not be 
in bold text. Samples G-10(B) and G-10(C) also provide guidance to 
issuers on how to disclose the rates and fees described in Sec. 
226.5a(a)(2)(iv) in a clear and conspicuous manner, by including these 
rates and fees generally as the first text in the applicable rows of the 
table so that the highlighted rates and fees generally are aligned 
vertically in the table.
    ii. Maximum limits on fees. Section 226.5a(a)(2)(iv) provides that 
any maximum limits on fee amounts must be disclosed in bold text. For 
example, assume that, consistent with Sec. 226.52(b)(1)(ii), a card 
issuer's late payment fee will not exceed $35. The maximum limit of $35 
for the late payment fee must be highlighted in bold. Similarly, assume 
an issuer will charge a cash advance fee of $5 or 3 percent of the cash 
advance transaction amount, whichever is greater, but the fee will not 
exceed $100. The maximum limit of $100 for the cash advance fee must be 
highlighted in bold.
    iii. Periodic fees. Section 226.5a(a)(2)(iv) provides that any 
periodic fee disclosed pursuant to Sec. 226.5a(b)(2) that is not an 
annualized amount must not be disclosed in bold. For example, if an 
issuer imposes a $10 monthly maintenance fee for a card account, the 
issuer must disclose in the table that there is a $10 monthly 
maintenance fee, and that the fee is $120 on an annual basis. In this 
example, the $10 fee disclosure would not be

[[Page 564]]

disclosed in bold, but the $120 annualized amount must be disclosed in 
bold. In addition, if an issuer must disclose any annual fee in the 
table, the amount of the annual fee must be disclosed in bold.
    6. Form of disclosures. Whether disclosures must be in electronic 
form depends upon the following:
    i. If a consumer accesses a credit card application or solicitation 
electronically (other than as described under ii. below), such as on-
line at a home computer, the card issuer must provide the disclosures in 
electronic form (such as with the application or solicitation on its Web 
site) in order to meet the requirement to provide disclosures in a 
timely manner on or with the application or solicitation. If the issuer 
instead mailed paper disclosures to the consumer, this requirement would 
not be met.
    ii. In contrast, if a consumer is physically present in the card 
issuer's office, and accesses a credit card application or solicitation 
electronically, such as via a terminal or kiosk (or if the consumer uses 
a terminal or kiosk located on the premises of an affiliate or third 
party that has arranged with the card issuer to provide applications or 
solicitations to consumers), the issuer may provide disclosures in 
either electronic or paper form, provided the issuer complies with the 
timing and delivery (``on or with'') requirements of the regulation.
    7. Terminology. Section 226.5a(a)(2)(i) generally requires that the 
headings, content and format of the tabular disclosures be substantially 
similar, but need not be identical, to the applicable tables in appendix 
G-10 to part 226; but see Sec. 226.5(a)(2) for terminology requirements 
applicable to Sec. 226.5a disclosures.
    5a(a)(4) Fees that vary by state.
    1. Manner of disclosing range. If the card issuer discloses a range 
of fees instead of disclosing the amount of the specific fee applicable 
to the consumer's account, the range may be stated as the lowest 
authorized fee (zero, if there are one or more states where no fee 
applies) to the highest authorized fee.
    5a(a)(5) Exceptions.
    1. Noncoverage of consumer-initiated requests. Applications provided 
to a consumer upon request are not covered by Sec. 226.5a, even if the 
request is made in response to the card issuer's invitation to apply for 
a card account. To illustrate, if a card issuer invites consumers to 
call a toll-free number or to return a response card to obtain an 
application, the application sent in response to the consumer's request 
need not contain the disclosures required under Sec. 226.5a. Similarly, 
if the card issuer invites consumers to call and make an oral 
application on the telephone, Sec. 226.5a does not apply to the 
application made by the consumer. If, however, the card issuer calls a 
consumer or initiates a telephone discussion with a consumer about 
opening a card account and contemporaneously takes an oral application, 
such applications are subject to Sec. 226.5a, specifically Sec. 
226.5a(d). Likewise, if the card issuer initiates an in-person 
discussion with a consumer about opening a card account and 
contemporaneously takes an application, such applications are subject to 
Sec. 226.5a, specifically Sec. 226.5a(f).
    5a(b) Required disclosures.
    1. Tabular format. Provisions in Sec. 226.5a(b) and its commentary 
provide that certain information must appear or is permitted to appear 
in a table. The tabular format is required for Sec. 226.5a(b) 
disclosures given pursuant to Sec. 226.5a(c), (d)(2), (e)(1) and (f). 
The tabular format does not apply to oral disclosures given pursuant to 
Sec. 226.5a(d)(1). (See Sec. 226.5a(a)(2).)
    2. Accuracy. Rules concerning accuracy of the disclosures required 
by Sec. 226.5a(b), including variable rate disclosures, are stated in 
Sec. 226.5a(c)(2), (d)(3), and (e)(4), as applicable.
    5a(b)(1) Annual percentage rate.
    1. Variable-rate accounts--definition. For purposes of Sec. 
226.5a(b)(1), a variable-rate account exists when rate changes are part 
of the plan and are tied to an index or formula. (See the commentary to 
Sec. 226.6(b)(4)(ii) for examples of variable-rate plans.)
    2. Variable-rate accounts--fact that rate varies and how the rate 
will be determined. In describing how the applicable rate will be 
determined, the card issuer must identify in the table the type of index 
or formula used, such as the prime rate. In describing the index, the 
issuer may not include in the table details about the index. For 
example, if the issuer uses a prime rate, the issuer must disclose the 
rate as a ``prime rate'' and may not disclose in the table other details 
about the prime rate, such as the fact that it is the highest prime rate 
published in the Wall Street Journal two business days before the 
closing date of the statement for each billing period. The issuer may 
not disclose in the table the current value of the index (such as that 
the prime rate is currently 7.5 percent) or the amount of the margin or 
spread added to the index or formula in setting the applicable rate. A 
card issuer may not disclose any applicable limitations on rate 
increases or decreases in the table, such as describing that the rate 
will not go below a certain rate or higher than a certain rate. (See 
Samples G-10(B) and G-10(C) for guidance on how to disclose the fact 
that the applicable rate varies and how it is determined.)
    3. Discounted initial rates. i. Immediate proximity. If the term 
``introductory'' is in the same phrase as the introductory rate, as that 
term is defined in Sec. 226.16(g)(2)(ii), it will be deemed to be in 
immediate proximity of the listing. For example, an issuer that uses the 
phrase ``introductory balance transfer APR X percent'' has used the word 
``introductory'' within the same phrase as the rate. (See

[[Page 565]]

Sample G-10(C) for guidance on how to disclose clearly and conspicuously 
the expiration date of the introductory rate and the rate that will 
apply after the introductory rate expires, if an introductory rate is 
disclosed in the table.)
    ii. Subsequent changes in terms. The fact that an issuer may reserve 
the right to change a rate subsequent to account opening, pursuant to 
the notice requirements of Sec. 226.9(c) and the limitations in Sec. 
226.55, does not, by itself, make that rate an introductory rate. For 
example, assume an issuer discloses an annual percentage rate for 
purchases of 12.99% but does not specify a time period during which that 
rate will be in effect. Even if that issuer subsequently increases the 
annual percentage rate for purchases to 15.99%, pursuant to a change-in-
terms notice provided under Sec. 226.9(c), the 12.99% is not an 
introductory rate.
    iii. More than one introductory rate. If more than one introductory 
rate may apply to a particular balance in succeeding periods, the term 
``introductory'' need only be used to describe the first introductory 
rate. For example, if an issuer offers a rate of 8.99% on purchases for 
six months, 10.99% on purchases for the following six months, and 14.99% 
on purchases after the first year, the term ``introductory'' need only 
be used to describe the 8.99% rate.
    4. Premium initial rates--subsequent changes in terms. The fact that 
an issuer may reserve the right to change a rate subsequent to account 
opening, pursuant to the notice requirements of Sec. 226.9(c) and the 
limitations in Sec. 226.55 (as applicable), does not, by itself, make 
that rate a premium initial rate. For example, assume an issuer 
discloses an annual percentage rate for purchases of 18.99% but does not 
specify a time period during which that rate will be in effect. Even if 
that issuer subsequently reduces the annual percentage rate for 
purchases to 15.99%, the 18.99% is not a premium initial rate. If the 
rate decrease is the result of a change from a non-variable rate to a 
variable rate or from a variable rate to a non-variable rate, see 
comments 9(c)(2)(v)-3 and 9(c)(2)(v)-4 for guidance on the notice 
requirements under Sec. 226.9(c).
    5. Increased penalty rates. i. In general. For rates that are not 
introductory rates or employee preferential rates, if a rate may 
increase as a penalty for one or more events specified in the account 
agreement, such as a late payment or an extension of credit that exceeds 
the credit limit, the card issuer must disclose the increased rate that 
would apply, a brief description of the event or events that may result 
in the increased rate, and a brief description of how long the increased 
rate will remain in effect. The description of the specific event or 
events that may result in an increased rate should be brief. For 
example, if an issuer may increase a rate to the penalty rate because 
the consumer does not make the minimum payment by 5 p.m., Eastern Time, 
on its payment due date, the issuer should describe this circumstance in 
the table as ``make a late payment.'' Similarly, if an issuer may 
increase a rate that applies to a particular balance because the account 
is more than 60 days late, the issuer should describe this circumstance 
in the table as ``make a late payment.'' An issuer may not distinguish 
between the events that may result in an increased rate for existing 
balances and the events that may result in an increased rate for new 
transactions. (See Samples G-10(B) and G-10(C) (in the row labeled 
``Penalty APR and When it Applies'') for additional guidance on the 
level of detail in which the specific event or events should be 
described.) The description of how long the increased rate will remain 
in effect also should be brief. If a card issuer reserves the right to 
apply the increased rate to any balances indefinitely, to the extent 
permitted by Sec. Sec. 226.55(b)(4) and 226.59, the issuer should 
disclose that the penalty rate may apply indefinitely. The card issuer 
may not disclose in the table any limitations imposed by Sec. Sec. 
226.55(b)(4) and 226.59 on the duration of increased rates. For example, 
if the issuer generally provides that the increased rate will apply 
until the consumer makes twelve timely consecutive required minimum 
periodic payments, except to the extent that Sec. Sec. 226.55(b)(4) and 
226.59 apply, the issuer should disclose that the penalty rate will 
apply until the consumer makes twelve consecutive timely minimum 
payments. (See Samples G-10(B) and G-10(C) (in the row labeled ``Penalty 
APR and When it Applies'') for additional guidance on the level of 
detail which the issuer should use to describe how long the increased 
rate will remain in effect.) A card issuer will be deemed to meet the 
standard to clearly and conspicuously disclose the information required 
by Sec. 226.5a(b)(1)(iv)(A) if the issuer uses the format shown in 
Samples G-10(B) and G-10(C) (in the row labeled ``Penalty APR and When 
it Applies'') to disclose this information.
    ii. Introductory rates--general. An issuer is required to disclose 
directly beneath the table the circumstances under which an introductory 
rate, as that term is defined in Sec. 226.16(g)(2)(ii), may be revoked, 
and the rate that will apply after the revocation. This information 
about revocation of an introductory rate and the rate that will apply 
after revocation must be provided even if the rate that will apply after 
the introductory rate is revoked is the rate that would have applied at 
the end of the promotional period. In a variable-rate account, the rate 
that would have applied at the end of the promotional period is a rate 
based on the applicable index or formula in accordance with the accuracy 
requirements set forth in Sec. 226.5a(c)(2) or (e)(4). In describing 
the rate that will apply

[[Page 566]]

after revocation of the introductory rate, if the rate that will apply 
after revocation of the introductory rate is already disclosed in the 
table, the issuer is not required to repeat the rate, but may refer to 
that rate in a clear and conspicuous manner. For example, if the rate 
that will apply after revocation of an introductory rate is the standard 
rate that applies to that type of transaction (such as a purchase or 
balance transfer transaction), and the standard rates are labeled in the 
table as ``standard APRs,'' the issuer may refer to the ``standard APR'' 
when describing the rate that will apply after revocation of an 
introductory rate. (See Sample G-10(C) in the disclosure labeled ``Loss 
of Introductory APR'' directly beneath the table.) The description of 
the circumstances in which an introductory rate could be revoked should 
be brief. For example, if an issuer may increase an introductory rate 
because the account is more than 60 days late, the issuer should 
describe this circumstance directly beneath the table as ``make a late 
payment.'' In addition, if the circumstances in which an introductory 
rate could be revoked are already listed elsewhere in the table, the 
issuer is not required to repeat the circumstances again, but may refer 
to those circumstances in a clear and conspicuous manner. For example, 
if the circumstances in which an introductory rate could be revoked are 
the same as the event or events that may trigger a ``penalty rate'' as 
described in Sec. 226.5a(b)(1)(iv)(A), the issuer may refer to the 
actions listed in the Penalty APR row, in describing the circumstances 
in which the introductory rate could be revoked. (See Sample G-10(C) in 
the disclosure labeled ``Loss of Introductory APR'' directly beneath the 
table for additional guidance on the level of detail in which to 
describe the circumstances in which an introductory rate could be 
revoked.) A card issuer will be deemed to meet the standard to clearly 
and conspicuously disclose the information required by Sec. 
226.5a(b)(1)(iv)(B) if the issuer uses the format shown in Sample G-
10(C) to disclose this information.
    iii. Introductory rates--limitations on revocation. Issuers that are 
disclosing an introductory rate are prohibited by Sec. 226.55 from 
increasing or revoking the introductory rate before it expires unless 
the consumer fails to make a required minimum periodic payment within 60 
days after the due date for the payment. In making the required 
disclosure pursuant to Sec. 226.5a(b)(1)(iv)(B), issuers should 
describe this circumstance directly beneath the table as ``make a late 
payment.''
    iv. Employee preferential rates. An issuer is required to disclose 
directly beneath the table the circumstances under which an employee 
preferential rate may be revoked, and the rate that will apply after the 
revocation. In describing the rate that will apply after revocation of 
the employee preferential rate, if the rate that will apply after 
revocation of the employee preferential rate is already disclosed in the 
table, the issuer is not required to repeat the rate, but may refer to 
that rate in a clear and conspicuous manner. For example, if the rate 
that will apply after revocation of an employee preferential rate is the 
standard rate that applies to that type of transaction (such as a 
purchase or balance transfer transaction), and the standard rates are 
labeled in the table as ``standard APRs,'' the issuer may refer to the 
``standard APR'' when describing the rate that will apply after 
revocation of an employee preferential rate. The description of the 
circumstances in which an employee preferential rate could be revoked 
should be brief. For example, if an issuer may increase an employee 
preferential rate based upon termination of the employee's employment 
relationship with the issuer or a third party, issuers may describe this 
circumstance as ``if your employment with [issuer or third party] 
ends.''
    6. Rates that depend on consumer's creditworthiness. i. In general. 
The card issuer, at its option, may disclose the possible rates that may 
apply as either specific rates, or a range of rates. For example, if 
there are three possible rates that may apply (9.99, 12.99 or 17.99 
percent), an issuer may disclose specific rates (9.99, 12.99 or 17.99 
percent) or a range of rates (9.99 to 17.99 percent). The card issuer 
may not disclose only the lowest, highest or median rate that could 
apply. (See Samples G-10(B) and G-10(C) for guidance on how to disclose 
a range of rates.)
    ii. Penalty rates. If the rate is a penalty rate, as described in 
Sec. 226.5a(b)(1)(iv), the card issuer at its option may disclose the 
highest rate that could apply, instead of disclosing the specific rates 
or the range of rates that could apply. For example, if the penalty rate 
could be up to 28.99 percent, but the issuer may impose a penalty rate 
that is less than that rate depending on factors at the time the penalty 
rate is imposed, the issuer may disclose the penalty rate as ``up to'' 
28.99 percent. The issuer also must include a statement that the penalty 
rate for which the consumer may qualify will depend on the consumer's 
creditworthiness, and other factors if applicable.
    iii. Other factors. Section 226.5a(b)(1)(v) applies even if other 
factors are used in combination with a consumer's creditworthiness to 
determine the rate for which a consumer may qualify at account opening. 
For example, Sec. 226.5a(b)(1)(v) would apply if the issuer considers 
the type of purchase the consumer is making at the time the consumer 
opens the account, in combination with the consumer's creditworthiness, 
to determine the rate for which the consumer may qualify at account 
opening. If other factors are considered, the issuer should amend the 
statement about creditworthiness, to indicate that the rate for which 
the consumer may qualify at

[[Page 567]]

account opening will depend on the consumer's creditworthiness and other 
factors. Nonetheless, Sec. 226.5a(b)(1)(v) does not apply if a 
consumer's creditworthiness is not one of the factors that will 
determine the rate for which the consumer may qualify at account opening 
(for example, if the rate is based solely on the type of purchase that 
the consumer is making at the time the consumer opens the account, or is 
based solely on whether the consumer has other banking relationships 
with the card issuer).
    7. Rate based on another rate on the account. In some cases, one 
rate may be based on another rate on the account. For example, assume 
that a penalty rate as described in Sec. 226.5a(b)(1)(iv)(A) is 
determined by adding 5 percentage points to the current purchase rate, 
which is 10 percent. In this example, the card issuer in disclosing the 
penalty rate must disclose 15 percent as the current penalty rate. If 
the purchase rate is a variable rate, then the penalty rate also is a 
variable rate. In that case, the card issuer also must disclose the fact 
that the penalty rate may vary and how the rate is determined, such as 
``This APR may vary with the market based on the Prime Rate.'' In 
describing the penalty rate, the issuer shall not disclose in the table 
the amount of the margin or spread added to the current purchase rate to 
determine the penalty rate, such as describing that the penalty rate is 
determined by adding 5 percentage points to the purchase rate. (See 
Sec. 226.5a(b)(1)(i) and comment 5a(b)(1)-2 for further guidance on 
describing a variable rate.)
    8. Rates. The only rates that shall be disclosed in the table are 
annual percentage rates determined under Sec. 226.14(b). Periodic rates 
shall not be disclosed in the table.
    9. Deferred interest or similar transactions. An issuer offering a 
deferred interest or similar plan, such as a promotional program that 
provides that a consumer will not be obligated to pay interest that 
accrues on a balance if that balance is paid in full prior to the 
expiration of a specified period of time, may not disclose a 0% rate as 
the rate applicable to deferred interest or similar transactions if 
there are any circumstances under which the consumer will be obligated 
for interest on such transactions for the deferred interest or similar 
period.
    5a(b)(2) Fees for issuance or availability.
    1. Membership fees. Membership fees for opening an account must be 
disclosed under this paragraph. A membership fee to join an organization 
that provides a credit or charge card as a privilege of membership must 
be disclosed only if the card is issued automatically upon membership. 
Such a fee shall not be disclosed in the table if membership results 
merely in eligibility to apply for an account.
    2. Enhancements. Fees for optional services in addition to basic 
membership privileges in a credit or charge card account (for example, 
travel insurance or card-registration services) shall not be disclosed 
in the table if the basic account may be opened without paying such 
fees. Issuing a card to each primary cardholder (not authorized users) 
is considered a basic membership privilege and fees for additional 
cards, beyond the first card on the account, must be disclosed as a fee 
for issuance or availability. Thus, a fee to obtain an additional card 
on the account beyond the first card (so that each cardholder would have 
his or her own card) must be disclosed in the table as a fee for 
issuance or availability under Sec. 226.5a(b)(2). This fee must be 
disclosed even if the fee is optional; that is, if the fee is charged 
only if the cardholder requests one or more additional cards. (See the 
available credit disclosure in Sec. 226.5a(b)(14).)
    3. One-time fees. Disclosure of non-periodic fees is limited to fees 
related to opening the account, such as one-time membership or 
participation fees, or an application fee that is excludable from the 
finance charge under Sec. 226.4(c)(1). The following are examples of 
fees that shall not be disclosed in the table
    i. Fees for reissuing a lost or stolen card.
    ii. Statement reproduction fees.
    4. Waived or reduced fees. If fees required to be disclosed are 
waived or reduced for a limited time, the introductory fees or the fact 
of fee waivers may be disclosed in the table in addition to the required 
fees if the card issuer also discloses how long the reduced fees or 
waivers will remain in effect in accordance with the requirements of 
Sec. Sec. 226.9(c)(2)(v)(B) and 226.55(b)(1).
    5. Periodic fees and one-time fees. A card issuer disclosing a 
periodic fee must disclose the amount of the fee, how frequently it will 
be imposed, and the annualized amount of the fee. A card issuer 
disclosing a non-periodic fee must disclose that the fee is a one-time 
fee. (See Sample G-10(C) for guidance on how to meet these 
requirements.)
    5a(b)(3) Fixed finance charge; minimum interest charge.
    1. Example of brief statement. See Samples G-10(B) and G-10(C) for 
guidance on how to provide a brief description of a minimum interest 
charge.
    2. Adjustment of $1.00 threshold amount. Consistent with Sec. 
226.5a(b)(3), the Board will publish adjustments to the $1.00 threshold 
amount, as appropriate.
    5a(b)(4) Transaction charges.
    1. Charges imposed by person other than card issuer. Charges imposed 
by a third party, such as a seller of goods, shall not be disclosed in 
the table under this section; the third party would be responsible for 
disclosing the charge under Sec. 226.9(d)(1).
    2. Foreign transaction fees. A transaction charge imposed by the 
card issuer for the use of the card for purchases includes any fee 
imposed by the issuer for purchases in a foreign

[[Page 568]]

currency or that take place outside the United States or with a foreign 
merchant. (See comment 4(a)-4 for guidance on when a foreign transaction 
fee is considered charged by the card issuer.) If an issuer charges the 
same foreign transaction fee for purchases and cash advances in a 
foreign currency, or that take place outside the United States or with a 
foreign merchant, the issuer may disclose this foreign transaction fee 
as shown in Samples G-10(B) and G-10(C). Otherwise, the issuer must 
revise the foreign transaction fee language shown in Samples G-10(B) and 
G-10(C) to disclose clearly and conspicuously the amount of the foreign 
transaction fee that applies to purchases and the amount of the foreign 
transaction fee that applies to cash advances.
    5a(b)(5) Grace period.
    1. How grace period disclosure is made. The card issuer must state 
any conditions on the applicability of the grace period. An issuer, 
however, may not disclose under Sec. 226.5a(b)(5) the limitations on 
the imposition of finance charges as a result of a loss of a grace 
period in Sec. 226.54, or the impact of payment allocation on whether 
interest is charged on purchases as a result of a loss of a grace 
period. Some issuers may offer a grace period on all purchases under 
which interest will not be charged on purchases if the consumer pays the 
outstanding balance shown on a periodic statement in full by the due 
date shown on that statement for one or more billing cycles. In these 
circumstances, Sec. 226.5a(b)(5) requires that the issuer disclose the 
grace period and the conditions for its applicability using the 
following language, or substantially similar language, as applicable: 
``Your due date is [at least] ---- days after the close of each billing 
cycle. We will not charge you any interest on purchases if you pay your 
entire balance by the due date each month.'' However, other issuers may 
offer a grace period on all purchases under which interest may be 
charged on purchases even if the consumer pays the outstanding balance 
shown on a periodic statement in full by the due date shown on that 
statement each billing cycle. In these circumstances, Sec. 226.5a(b)(5) 
requires the issuer to amend the above disclosure language to describe 
accurately the conditions on the applicability of the grace period.
    2. No grace period. The issuer may use the following language to 
describe that no grace period on any purchases is offered, as 
applicable: ``We will begin charging interest on purchases on the 
transaction date.''
    3. Grace period on some purchases. If the issuer provides a grace 
period on some types of purchases but no grace period on others, the 
issuer may combine and revise the language in comments 5a(b)(5)-1 and -2 
as appropriate to describe to which types of purchases a grace period 
applies and to which types of purchases no grace period is offered.
    5a(b)(6) Balance computation method.
    1. Form of disclosure. In cases where the card issuer uses a balance 
computation method that is identified by name in Sec. 226.5a(g), the 
card issuer must disclose below the table only the name of the method. 
In cases where the card issuer uses a balance computation method that is 
not identified by name in Sec. 226.5a(g), the disclosure below the 
table must clearly explain the method in as much detail as set forth in 
the descriptions of balance methods in Sec. 226.5a(g). The explanation 
need not be as detailed as that required for the disclosures under Sec. 
226.6(b)(4)(i)(D).
    2. Determining the method. In determining which balance computation 
method to disclose for purchases, the card issuer must assume that a 
purchase balance will exist at the end of any grace period. Thus, for 
example, if the average daily balance method will include new purchases 
only if purchase balances are not paid within the grace period, the card 
issuer would disclose the name of the average daily balance method that 
includes new purchases. The card issuer must not assume the existence of 
a purchase balance, however, in making other disclosures under Sec. 
226.5a(b).
    5a(b)(7) Statement on charge card payments.
    1. Applicability and content. The disclosure that charges are 
payable upon receipt of the periodic statement is applicable only to 
charge card accounts. In making this disclosure, the card issuer may 
make such modifications as are necessary to more accurately reflect the 
circumstances of repayment under the account. For example, the 
disclosure might read, ``Charges are due and payable upon receipt of the 
periodic statement and must be paid no later than 15 days after receipt 
of such statement.''
    5a(b)(8) Cash advance fee.
    1. Content. See Samples G-10(B) and G-10(C) for guidance on how to 
disclose clearly and conspicuously the cash advance fee.
    2. Foreign cash advances. Cash advance fees required to be disclosed 
under Sec. 226.5a(b)(8) include any charge imposed by the card issuer 
for cash advances in a foreign currency or that take place outside the 
United States or with a foreign merchant. (See comment 4(a)-4 for 
guidance on when a foreign transaction fee is considered charged by the 
card issuer.) If an issuer charges the same foreign transaction fee for 
purchases and cash advances in a foreign currency or that take place 
outside the United States or with a foreign merchant, the issuer may 
disclose this foreign transaction fee as shown in Samples G-10(B) and 
(C). Otherwise, the issuer must revise the foreign transaction fee 
language shown in Samples G-10(B) and (C) to disclose clearly and 
conspicuously the amount of the foreign transaction fee that applies to 
purchases and the amount of the

[[Page 569]]

foreign transaction fee that applies to cash advances.
    3. ATM fees. An issuer is not required to disclose pursuant to Sec. 
226.5a(b)(8) any charges imposed on a cardholder by an institution other 
than the card issuer for the use of the other institution's ATM in a 
shared or interchange system.
    5a(b)(9) Late payment fee.
    1. Applicability. The disclosure of the fee for a late payment 
includes only those fees that will be imposed for actual, unanticipated 
late payments. (See the commentary to Sec. 226.4(c)(2) for additional 
guidance on late payment fees. See Samples G-10(B) and G-10(C) for 
guidance on how to disclose clearly and conspicuously the late payment 
fee.)
    5a(b)(10) Over-the-limit fee.
    1. Applicability. The disclosure of fees for exceeding a credit 
limit does not include fees for other types of default or for services 
related to exceeding the limit. For example, no disclosure is required 
of fees for reinstating credit privileges or fees for the dishonor of 
checks on an account that, if paid, would cause the credit limit to be 
exceeded. (See Samples G-10(B) and G-10(C) for guidance on how to 
disclose clearly and conspicuously the over-the-limit fee.)
    5a(b)(13) Required insurance, debt cancellation, or debt suspension 
coverage.
    1. Content. See Sample G-10(B) for guidance on how to comply with 
the requirements in Sec. 226.5a(b)(13).
    5a(b)(14) Available credit.
    1. Calculating available credit. If the 15 percent threshold test is 
met, the issuer must disclose the available credit excluding optional 
fees, and the available credit including optional fees. In calculating 
the available credit to disclose in the table, the issuer must consider 
all fees for the issuance or availability of credit described in Sec. 
226.5a(b)(2), and any security deposit, that will be imposed and charged 
to the account when the account is opened, such as one-time issuance and 
set-up fees. For example, in calculating the available credit, issuers 
must consider the first year's annual fee and the first month's 
maintenance fee (as applicable) if they are charged to the account on 
the first billing statement. In calculating the amount of the available 
credit including optional fees, if optional fees could be charged 
multiple times, the issuer shall assume that the optional fee is only 
imposed once. For example, if an issuer charges a fee for each 
additional card issued on the account, the issuer in calculating the 
amount of the available credit including optional fees may assume that 
the cardholder requests only one additional card. In disclosing the 
available credit, the issuer shall round down the available credit 
amount to the nearest whole dollar.
    2. Content. See Sample G-10(C) for guidance on how to provide the 
disclosure required by Sec. 226.5a(b)(14) clearly and conspicuously.
    5a(b)(15) Web site reference.
    1. Content. See Samples G-10(B) and G-10(C) for guidance on 
disclosing a reference to the Web site established by the Board and a 
statement that consumers may obtain on the Web site information about 
shopping for and using credit card accounts.
    5a(c) Direct mail and electronic applications and solicitations.
    1. Mailed publications. Applications or solicitations contained in 
generally available publications mailed to consumers (such as 
subscription magazines) are subject to the requirements applicable to 
take-ones in Sec. 226.5a(e), rather than the direct mail requirements 
of Sec. 226.5a(c). However, if a primary purpose of a card issuer's 
mailing is to offer credit or charge card accounts--for example, where a 
card issuer ``prescreens'' a list of potential cardholders using credit 
criteria, and then mails to the targeted group its catalog containing an 
application or a solicitation for a card account--the direct mail rules 
apply. In addition, a card issuer may use a single application form as a 
take-one (in racks in public locations, for example) and for direct 
mailings, if the card issuer complies with the requirements of Sec. 
226.5a(c) even when the form is used as a take-one--that is, by 
presenting the required Sec. 226.5a disclosures in a tabular format. 
When used in a direct mailing, the credit term disclosures must be 
accurate as of the mailing date whether or not the Sec. 
226.5a(e)(1)(ii) and (e)(1)(iii) disclosures are included; when used in 
a take-one, the disclosures must be accurate for as long as the take-one 
forms remain available to the public if the Sec. 226.5a(e)(1)(ii) and 
(e)(1)(iii) disclosures are omitted. (If those disclosures are included 
in the take-one, the credit term disclosures need only be accurate as of 
the printing date.)
    5a(d) Telephone applications and solicitations.
    1. Coverage. i. This paragraph applies if:
    A. A telephone conversation between a card issuer and consumer may 
result in the issuance of a card as a consequence of an issuer-initiated 
offer to open an account for which the issuer does not require any 
application (that is, a prescreened telephone solicitation).
    B. The card issuer initiates the contact and at the same time takes 
application information over the telephone.
    ii. This paragraph does not apply to:
    A. Telephone applications initiated by the consumer.
    B. Situations where no card will be issued--because, for example, 
the consumer indicates that he or she does not want the card, or the 
card issuer decides either during the telephone conversation or later 
not to issue the card.

[[Page 570]]

    2. Right to reject the plan. The right to reject the plan referenced 
in this paragraph is the same as the right to reject the plan described 
in Sec. 226.5(b)(1)(iv). If an issuer substitutes the account-opening 
summary table described in Sec. 226.6(b)(1) in lieu of the disclosures 
specified in Sec. 226.5a(d)(2)(ii), the disclosure specified in Sec. 
226.5a(d)(2)(ii)(B) must appear in the table, if the issuer is required 
to do so pursuant to Sec. 226.6(b)(2)(xiii). Otherwise, the disclosure 
specified in Sec. 226.5a(d)(2)(ii)(B) may appear either in or outside 
the table containing the required credit disclosures.
    3. Substituting account-opening table for alternative written 
disclosures. An issuer may substitute the account-opening summary table 
described in Sec. 226.6(b)(1) in lieu of the disclosures specified in 
Sec. 226.5a(d)(2)(ii).
    5a(e) Applications and solicitations made available to general 
public.
    1. Coverage. Applications and solicitations made available to the 
general public include what are commonly referred to as take-one 
applications typically found at counters in banks and retail 
establishments, as well as applications contained in catalogs, magazines 
and other generally available publications. In the case of credit 
unions, this paragraph applies to applications and solicitations to open 
card accounts made available to those in the general field of 
membership.
    2. In-person applications and solicitations. In-person applications 
and solicitations initiated by a card issuer are subject to Sec. 
226.5a(f), not Sec. 226.5a(e). (See Sec. 226.5a(f) and accompanying 
commentary for rules relating to in-person applications and 
solicitations.)
    3. Toll-free telephone number. If a card issuer, in complying with 
any of the disclosure options of Sec. 226.5a(e), provides a telephone 
number for consumers to call to obtain credit information, the number 
must be toll-free for nonlocal calls made from an area code other than 
the one used in the card issuer's dialing area. Alternatively, a card 
issuer may provide any telephone number that allows a consumer to call 
for information and reverse the telephone charges.
    5a(e)(1) Disclosure of required credit information.
    1. Date of printing. Disclosure of the month and year fulfills the 
requirement to disclose the date an application was printed.
    2. Form of disclosures. The disclosures specified in Sec. 
226.5a(e)(1)(ii) and (e)(1)(iii) may appear either in or outside the 
table containing the required credit disclosures.
    5a(e)(2) No disclosure of credit information.
    1. When disclosure option available. A card issuer may use this 
option only if the issuer does not include on or with the application or 
solicitation any statement that refers to the credit disclosures 
required by Sec. 226.5a(b). Statements such as no annual fee, low 
interest rate, favorable rates, and low costs are deemed to refer to the 
required credit disclosures and, therefore, may not be included on or 
with the solicitation or application, if the card issuer chooses to use 
this option.
    5a(e)(3) Prompt response to requests for information.
    1. Prompt disclosure. Information is promptly disclosed if it is 
given within 30 days of a consumer's request for information but in no 
event later than delivery of the credit or charge card.
    2. Information disclosed. When a consumer requests credit 
information, card issuers need not provide all the required credit 
disclosures in all instances. For example, if disclosures have been 
provided in accordance with Sec. 226.5a(e)(1) and a consumer calls or 
writes a card issuer to obtain information about changes in the 
disclosures, the issuer need only provide the items of information that 
have changed from those previously disclosed on or with the application 
or solicitation. If a consumer requests information about particular 
items, the card issuer need only provide the requested information. If, 
however, the card issuer has made disclosures in accordance with the 
option in Sec. 226.5a(e)(2) and a consumer calls or writes the card 
issuer requesting information about costs, all the required disclosure 
information must be given.
    3. Manner of response. A card issuer's response to a consumer's 
request for credit information may be provided orally or in writing, 
regardless of the manner in which the consumer's request is received by 
the issuer. Furthermore, the card issuer must provide the information 
listed in Sec. 226.5a(e)(1). Information provided in writing need not 
be in a tabular format.
    5a(f) In-person applications and solicitations.
    1. Coverage. i. This paragraph applies if:
    A. An in-person conversation between a card issuer and a consumer 
may result in the issuance of a card as a consequence of an issuer-
initiated offer to open an account for which the issuer does not require 
any application (that is, a preapproved in-person solicitation).
    B. The card issuer initiates the contact and at the same time takes 
application information in person. For example, the following are 
covered:
    1. A consumer applies in person for a car loan at a financial 
institution and the loan officer invites the consumer to apply for a 
credit or charge card account; the consumer accepts the invitation and 
submits an application.
    2. An employee of a retail establishment, in the course of 
processing a sales transaction using a bank credit card, asks a customer 
if he or she would like to apply for the retailer's credit or charge 
card; the customer responds affirmatively and submits an application.
    ii. This paragraph does not apply to:

[[Page 571]]

    A. In-person applications initiated by the consumer.
    B. Situations where no card will be issued--because, for example, 
the consumer indicates that he or she does not want the card, or the 
card issuer decides during the in-person conversation not to issue the 
card.

           Section 226.5b--Requirements for Home-equity Plans

    1. Coverage. This section applies to all open-end credit plans 
secured by the consumer's dwelling, as defined in Sec. 226.2(a)(19), 
and is not limited to plans secured by the consumer's principal 
dwelling. (See the commentary to Sec. 226.3(a), which discusses whether 
transactions are consumer or business-purpose credit, for guidance on 
whether a home equity plan is subject to Regulation Z.)
    2. Changes to home equity plans entered into on or after November 7, 
1989. Section 226.9(c) applies if, by written agreement under Sec. 
226.5b(f)(3)(iii), a creditor changes the terms of a home equity plan--
entered into on or after November 7, 1989--at or before its scheduled 
expiration, for example, by renewing a plan on different terms. A new 
plan results, however, if the plan is renewed (with or without changes 
to the terms) after the scheduled expiration. The new plan is subject to 
all open-end credit rules, including Sec. Sec. 226.5b, 226.6, and 
226.15.
    3. Transition rules and renewals of preexistinq plans. The 
requirements of this section do not apply to home equity plans entered 
into before November 7, 1989. The requirements of this section also do 
not apply if the original consumer, on or after November 7, 1989, renews 
a plan entered into prior to that date (with or without changes to the 
terms). If, on or after November 7, 1989, a security interest in the 
consumer's dwelling is added to a line of credit entered into before 
that date, the substantive restrictions of this section apply for the 
remainder of the plan, but no new disclosures are required under this 
section.
    4. Disclosure of repayment phase--applicability of requirements. 
Some plans provide in the initial agreement for a period during which no 
further draws may be taken and repayment of the amount borrowed is made. 
All of the applicable disclosures in this section must be given for the 
repayment phase. Thus, for example, a creditor must provide payment 
information about the repayment phase as well as about the draw period, 
as required by Sec. 226.5b(d)(5). If the rate that will apply during 
the repayment phase is fixed at a known amount, the creditor must 
provide an annual percentage rate under Sec. 226.5b(d)(6) for that 
phase. If, however, a creditor uses an index to determine the rate that 
will apply at the time of conversion to the repayment phase--even if the 
rate will thereafter be fixed--the creditor must provide the information 
in Sec. 226.5b(d)(12), as applicable.
    5. Payment terms--applicability of closed-end provisions and 
substantive rules. All payment terms that are provided for in the 
initial agreement are subject to the requirements of subpart B and not 
subpart C of the regulation. Payment terms that are subsequently added 
to the agreement may be subject to subpart B or to subpart C, depending 
on the circumstances. The following examples apply these general rules 
to different situations:
     If the initial agreement provides for a repayment 
phase or for other payment terms such as options permitting conversion 
of part or all of the balance to a fixed rate during the draw period, 
these terms must be disclosed pursuant to Sec. Sec. 226.5b and 226.6, 
and not under subpart C. Furthermore, the creditor must continue to 
provide periodic statements under Sec. 226.7 and comply with other 
provisions of subpart B (such as the substantive requirements of Sec. 
226.5b(f)) throughout the plan, including the repayment phase.
     If the consumer and the creditor enter into an 
agreement during the draw period to repay all or part of the principal 
balance on different terms (for example, with a fixed rate of interest) 
and the amount of available credit will be replenished as the principal 
balance is repaid, the creditor must continue to comply with subpart B. 
For example, the creditor must continue to provide periodic statements 
and comply with the substantive requirements of Sec. 226.5b(f) 
throughout the plan.
     If the consumer and creditor enter into an 
agreement during the draw period to repay all or part of the principal 
balance and the amount of available credit will not be replenished as 
the principal balance is repaid, the creditor must give closed-end 
credit disclosures pursuant to subpart C for that new agreement. In such 
cases, subpart B, including the substantive rules, does not apply to the 
closed-end credit transaction, although it will continue to apply to any 
remaining open-end credit available under the plan.
    6. Spreader clause. When a creditor holds a mortgage or deed of 
trust on the consumer's dwelling and that mortgage or deed of trust 
contains a spreader clause (also known as a dragnet or cross-
collateralization clause), subsequent occurrences such as the opening of 
an open-end plan are subject to the rules applicable to home equity 
plans to the same degree as if a security interest were taken directly 
to secure the plan, unless the creditor effectively waives its security 
interest under the spreader clause with respect to the subsequent open-
end credit extensions.
    7. Appraisals and other valuations. For consumer credit transactions 
subject to Sec. 226.5b and secured by the consumer's principal 
dwelling, creditors and other persons must comply with the requirements 
for appraisals and other valuations under Sec. 226.42.

[[Page 572]]

                        5b(a) Form of Disclosure

                            5b(a)(1) General

    1. Written disclosures. The disclosures required under this section 
must be clear and conspicuous and in writing, but need not be in a form 
the consumer can keep. (See the commentary to Sec. 226.6(a)(3) for 
special rules when disclosures required under Sec. 226.5b(d) are given 
in a retainable form.)
    2. Disclosure of annual percentage rate--more conspicuous 
requirement. As provided in Sec. 226.5(a)(2), when the term annual 
percentage rate is required to be disclosed with a number, it must be 
more conspicuous than other required disclosures.
    3. Segregation of disclosures. While most of the disclosures must be 
grouped together and segregated from all unrelated information, the 
creditor is permitted to include information that explains or expands on 
the required disclosures, including, for example:
     Any prepayment penalty
     How a substitute index may be chosen
     Actions the creditor may take short of 
terminating and accelerating an outstanding balance
     Renewal terms
     Rebate of fees

An example of information that does not explain or expand on the 
required disclosures and thus cannot be included is the creditor's 
underwriting criteria, although the creditor could provide such 
information separately from the required disclosures.
    4. Method of providing disclosures. A creditor may provide a single 
disclosure form for all of its home equity plans, as long as the 
disclosure describes all aspects of the plans. For example, if the 
creditor offers several payment options, all such options must be 
disclosed. (See, however, the commentary to Sec. 226.5b(d)(5)(iii) and 
(d)(12) (x) and (xi) for disclosure requirements relating to these 
provisions.) If any aspects of a plan are linked together, the creditor 
must disclose clearly the relationship of the terms to each other. For 
example, if the consumer can only obtain a particular payment option in 
conjunction with a certain variable-rate feature, this fact must be 
disclosed. A creditor has the option of providing separate disclosure 
forms for multiple options or variations in features. For example, a 
creditor that offers different payment options for the draw period may 
prepare separate disclosure forms for the two payment options. A 
creditor using this alternative, however, must include a statement on 
each disclosure form that the consumer should ask about the creditor's 
other home equity programs. (This disclosure is required only for those 
programs available generally to the public. Thus, if the only other 
programs available are employee preferred-rate plans, for example, the 
creditor would not have to provide this statement.) A creditor that 
receives a request for information about other available programs must 
provide the additional disclosures as soon as reasonably possible.
    5. Form of electronic disclosures provided on or with electronic 
applications. Creditors must provide the disclosures required by this 
section (including the brochure) on or with a blank application that is 
made available to the consumer in electronic form, such as on a 
creditor's Internet Web site. Creditors have flexibility in satisfying 
this requirement. Methods creditors could use to satisfy the requirement 
include, but are not limited to, the following examples:
    i. The disclosures could automatically appear on the screen when the 
application appears;
    ii. The disclosures could be located on the same web page as the 
application (whether or not they appear on the initial screen), if the 
application contains a clear and conspicuous reference to the location 
of the disclosures and indicates that the disclosures contain rate, fee, 
and other cost information, as applicable;
    iii. Creditors could provide a link to the electronic disclosures on 
or with the application as long as consumers cannot bypass the 
disclosures before submitting the application. The link would take the 
consumer to the disclosures, but the consumer need not be required to 
scroll completely through the disclosures; or
    iv. The disclosures could be located on the same web page as the 
application without necessarily appearing on the initial screen, 
immediately preceding the button that the consumer will click to submit 
the application.
    Whatever method is used, a creditor need not confirm that the 
consumer has read the disclosures.

               5b(a)(2) Precedence of Certain Disclosures

    1. Precedence rule. The list of conditions provided at the 
creditor's option under Sec. 226.5b(d)(4)(iii) need not precede the 
other disclosures.

                           Paragraph 5b(a)(3)

    1. Form of disclosures. Whether disclosures must be in electronic 
form depends upon the following:
    i. If a consumer accesses a home equity credit line application 
electronically (other than as described under ii. below), such as online 
at a home computer, the creditor must provide the disclosures in 
electronic form (such as with the application form on its Web site) in 
order to meet the requirement to provide disclosures in a timely manner 
on or with the application. If the creditor instead mailed paper 
disclosures to the consumer, this requirement would not be met.

[[Page 573]]

    ii. In contrast, if a consumer is physically present in the 
creditor's office, and accesses a home equity credit line application 
electronically, such as via a terminal or kiosk (or if the consumer uses 
a terminal or kiosk located on the premises of an affiliate or third 
party that has arranged with the creditor to provide applications to 
consumers), the creditor may provide disclosures in either electronic or 
paper form, provided the creditor complies with the timing, delivery, 
and retainability requirements of the regulation.

                        5b(b) Time of Disclosures

    1. Mail and telephone applications. If the creditor sends 
applications through the mail, the disclosures and a brochure must 
accompany the application. If an application is taken over the 
telephone, the disclosures and brochure may be delivered or mailed 
within three business days of taking the application. If an application 
is mailed to the consumer following a telephone request, however, the 
creditor also must send the disclosures and a brochure along with the 
application.
    2. General purpose applications. The disclosures and a brochure need 
not be provided when a general purpose application is given to a 
consumer unless (1) the application or materials accompanying it 
indicate that it can be used to apply for a home equity plan or (2) the 
application is provided in response to a consumer's specific inquiry 
about a home equity plan. On the other hand, if a general purpose 
application is provided in response to a consumer's specific inquiry 
only about credit other than a home equity plan, the disclosures and 
brochure need not be provided even if the application indicates it can 
be used for a home equity plan, unless it is accompanied by promotional 
information about home equity plans.
    3. Publicly-available applications. Some creditors make applications 
for home equity plans, such as take-ones, available without the need for 
a consumer to request them. These applications must be accompanied by 
the disclosures and a brochure, such as by attaching the disclosures and 
brochure to the application form.
    4. Response cards. A creditor may solicit consumers for its home 
equity plan by mailing a response card which the consumer returns to the 
creditor to indicate interest in the plan. If the only action taken by 
the creditor upon receipt of the response card is to send the consumer 
an application form or to telephone the consumer to discuss the plan, 
the creditor need not send the disclosures and brochure with the 
response card.
    5. Denial or withdrawal of application. In situations where footnote 
10a permits the creditor a three-day delay in providing disclosures and 
the brochure, if the creditor determines within that period that an 
application will not be approved, the creditor need not provide the 
consumer with the disclosures or brochure. Similarly, if the consumer 
withdraws the application within this three-day period, the creditor 
need not provide the disclosures or brochure.
    6. Intermediary agent or broker. In determining whether or not an 
application involves an intermediary agent or broker as discussed in 
footnote 10a, creditors should consult the provisions in comment 19(b)-
3.

                      5b(c) Duties of Third Parties

    1. Disclosure requirements. Although third parties who give 
applications to consumers for home equity plans must provide the 
brochure required under Sec. 226.5b(e) in all cases, such persons need 
provide the disclosures required under Sec. 226.5b(d) only in certain 
instances. A third party has no duty to obtain disclosures about a 
creditor's home equity plan or to create a set of disclosures based on 
what it knows about a creditor's plan. If, however, a creditor provides 
the third party with disclosures along with its application form, the 
third party must give the disclosures to the consumer with the 
application form. The duties under this section are those of the third 
party; the creditor is not responsible for ensuring that a third party 
complies with those obligations. If an intermediary agent or broker 
takes an application over the telephone or receives an application 
contained in a magazine or other publication, footnote 10a permits that 
person to mail the disclosures and brochure within three business days 
of receipt of the application. (See the commentary to Sec. 226.5b(h) 
about imposition of nonrefundable fees.)

                      5b(d) Content of Disclosures

    1. Disclosures given as applicable. The disclosures required under 
this section need be made only as applicable. Thus, for example, if 
negative amortization cannot occur in a home equity plan, a reference to 
it need not be made.
    2. Duty to respond to requests for information. If the consumer, 
prior to the opening of a plan, requests information as suggested in the 
disclosures (such as the current index value or margin), the creditor 
must provide this information as soon as reasonably possible after the 
request.

                    5b(d)(1) Retention of Information

    1. When disclosure not required. The creditor need not disclose that 
the consumer should make or otherwise retain a copy of the disclosures 
if they are retainable--for example, if the disclosures are not part of 
an application that must be returned to the creditor to apply for the 
plan.

[[Page 574]]

                 5b(d)(2) Conditions for Disclosed Terms

                          Paragraph 5b(d)(2)(i)

    1. Guaranteed terms. The requirement that the creditor disclose the 
time by which an application must be submitted to obtain the disclosed 
terms does not require the creditor to guarantee any terms. If a 
creditor chooses not to guarantee any terms, it must disclose that all 
of the terms are subject to change prior to opening the plan. The 
creditor also is permitted to guarantee some terms and not others, but 
must indicate which terms are subject to change.
    2. Date for obtaining disclosed terms. The creditor may disclose 
either a specific date or a time period for obtaining the disclosed 
terms. If the creditor discloses a time period, the consumer must be 
able to determine from the disclosure the specific date by which an 
application must be submitted to obtain any guaranteed terms. For 
example, the disclosure might read, ``To obtain the following terms, you 
must submit your application within 60 days after the date appearing on 
this disclosure,'' provided the disclosure form also shows the date.

                         Paragraph 5b(d)(2)(ii)

    1. Relation to other provisions. Creditors should consult the rules 
in Sec. 226.5b(g) regarding refund of fees.

                  5b(d)(4) Possible Actions by Creditor

                          Paragraph 5b(d)(4)(i)

    1. Fees imposed upon termination. This disclosure applies only to 
fees (such as penalty or prepayment fees) that the creditor imposes if 
it terminates the plan prior to normal expiration. The disclosure does 
not apply to fees that are imposed either when the plan expires in 
accordance with the agreement or if the consumer terminates the plan 
prior to its scheduled maturity. In addition, the disclosure does not 
apply to fees associated with collection of the debt, such as attorneys 
fees and court costs, or to increases in the annual percentage rate 
linked to the consumer's failure to make payments. The actual amount of 
the fee need not be disclosed.
    2. Changes specified in the initial agreement. If changes may occur 
pursuant to Sec. 226.5b(f)(3)(i), a creditor must state that certain 
changes will be implemented as specified in the initial agreement.

                         Paragraph 5b(d)(4)(iii)

    1. Disclosure of conditions. In making this disclosure, the creditor 
may provide a highlighted copy of the document that contains such 
information, such as the contract or security agreement. The relevant 
items must be distinguished from the other information contained in the 
document. For example, the creditor may provide a cover sheet that 
specifically points out which contract provisions contain the 
information, or may mark the relevant items on the document itself. As 
an alternative to disclosing the conditions in this manner, the creditor 
may simply describe the conditions using the language in Sec. Sec. 
226.5b(f)(2)(i)-(iii), 226.5b(f)(3)(i) (regarding freezing the line when 
the maximum annual percentage rate is reached), and 226.5b(f)(3)(vi) or 
language that is substantially similar. The condition contained in Sec. 
226.5b(f)(2)(iv) need not be stated. In describing specified changes 
that may be implemented during the plan, the creditor may provide a 
disclosure such as ``Our agreement permits us to make certain changes to 
the terms of the line at specified times or upon the occurrence of 
specified events.''
    2. Form of disclosure. The list of conditions under Sec. 
226.5b(d)(4)(iii) may appear with the segregated disclosures or apart 
from them. If the creditor elects to provide the list of conditions with 
the segregated disclosures, the list need not comply with the precedence 
rule in Sec. 226.5b(a)(2).

                         5b(d)(5) Payment Terms

                          Paragraph 5b(d)(5)(i)

    1. Length of the plan. The combined length of the draw period and 
any repayment period need not be stated. If the length of the repayment 
phase cannot be determined because, for example, it depends on the 
balance outstanding at the beginning of the repayment period, the 
creditor must state that the length is determined by the size of the 
balance. If the length of the plan is indefinite (for example, because 
there is no time limit on the period during which the consumer can take 
advances), the creditor must state that fact.
    2. Renewal provisions. If, under the credit agreement, a creditor 
retains the right to review a line at the end of the specified draw 
period and determine whether to renew or extend the draw period of the 
plan, the possibility of renewal or extension--regardless of its 
likelihood--should be ignored for purposes of the disclosures. For 
example, if an agreement provides that the draw period is five years and 
that the creditor may renew the draw period for an additional five 
years, the possibility of renewal should be ignored and the draw period 
should be considered five years. (See the commentary accompanying Sec. 
226.9(c)(1) dealing with change in terms requirements.)

                         Paragraph 5b(d)(5)(ii)

    1. Determination of the minimum periodic payment. This disclosure 
must reflect how the minimum periodic payment is determined, but need 
only describe the principal and interest components of the payment.

[[Page 575]]

Other charges that may be part of the payment (as well as the balance 
computation method) may, but need not, be described under this 
provision.
    2. Fixed rate and term payment options during draw period. If the 
home equity plan permits the consumer to repay all or part of the 
balance during the draw period at a fixed rate (rather than a variable 
rate) and over a specified time period, this feature must be disclosed. 
To illustrate, a variable-rate plan may permit a consumer to elect 
during a ten-year draw period to repay all or a portion of the balance 
over a three-year period at a fixed rate. The creditor must disclose the 
rules relating to this feature including the period during which the 
option can be selected, the length of time over which repayment can 
occur, any fees imposed for such a feature, and the specific rate or a 
description of the index and margin that will apply upon exercise of 
this choice. For example, the index and margin disclosure might state: 
``If you choose to convert any portion of your balance to a fixed rate, 
the rate will be the highest prime rate published in the `Wall Street 
Journal' that is in effect at the date of conversion plus a margin.'' If 
the fixed rate is to be determined according to an index, it must be one 
that is outside the creditor's control and is publicly available in 
accordance with Sec. 226.5b(f)(1). The effect of exercising the option 
should not be reflected elsewhere in the disclosures, such as in the 
historical example required in Sec. 226.5b(d)(12)(xi).
    3. Balloon payments. In programs where the occurrence of a balloon 
payment is possible, the creditor must disclose the possibility of a 
balloon payment even if such a payment is uncertain or unlikely. In such 
cases, the disclosure might read, ``Your minimum payments may not be 
sufficient to fully repay the principal that is outstanding on your 
line. If they are not, you will be required to pay the entire 
outstanding balance in a single payment.'' In programs where a balloon 
payment will occur, such as programs with interest-only payments during 
the draw period and no repayment period, the disclosures must state that 
fact. For example, the disclosure might read, ``Your minimum payments 
will not repay the principal that is outstanding on your line. You will 
be required to pay the entire outstanding balance in a single payment.'' 
In making this disclosure, the creditor is not required to use the term 
``balloon payment.'' The creditor also is not required to disclose the 
amount of the balloon payment. (See, however, the requirement under 
Sec. 226.5b(d)(5)(iii).) The balloon payment disclosure does not apply 
in cases where repayment of the entire outstanding balance would occur 
only as a result of termination and acceleration. The creditor also need 
not make a disclosure about balloon payments if the final payment could 
not be more than twice the amount of other minimum payments under the 
plan.

                         Paragraph 5b(d)(5)(iii)

    1. Minimum periodic payment example. In disclosing the payment 
example, the creditor may assume that the credit limit as well as the 
outstanding balance is $10,000 if such an assumption is relevant to 
calculating payments. (If the creditor only offers lines of credit for 
less than $10,000, the creditor may assume an outstanding balance of 
$5,000 instead of $10,000 in making this disclosure.) The example should 
reflect the payment comprised only of principal and interest. Creditors 
may provide an additional example reflecting other charges that may be 
included in the payment, such as credit insurance premiums. Creditors 
may assume that all months have an equal number of days, that payments 
are collected in whole cents, and that payments will fall on a business 
day even though they may be due on a non-business day. For variable-rate 
plans, the example must be based on the last rate in the historical 
example required in Sec. 226.5b(d)(12)(xi), or a more recent rate. In 
cases where the last rate shown in the historical example is different 
from the index value and margin (for example, due to a rate cap), 
creditors should calculate the rate by using the index value and margin. 
A discounted rate may not be considered a more recent rate in 
calculating this payment example for either variable- or fixed-rate 
plans.
    2. Representative examples. In plans with multiple payment options 
within the draw period or within any repayment period, the creditor may 
provide representative examples as an alternative to providing examples 
for each payment option. The creditor may elect to provide 
representative payment examples based on three categories of payment 
options. The first category consists of plans that permit minimum 
payment of only accrued finance charges (interest only plans). The 
second category includes plans in which a fixed percentage or a fixed 
fraction of the outstanding balance or credit limit (for example, 2% of 
the balance or \1/180\th of the balance) is used to determine the 
minimum payment. The third category includes all other types of minimum 
payment options, such as a specified dollar amount plus any accrued 
finance charges. Creditors may classify their minimum payment 
arrangements within one of these three categories even if other features 
exist, such as varying lengths of a draw or repayment period, required 
payment of past due amounts, late charges, and minimum dollar amounts. 
The creditor may use a single example within each category to represent 
the payment options in that category. For example, if a creditor permits 
minimum payments of 1%, 2%, 3% or 4% of the outstanding balance, it may 
pick one of

[[Page 576]]

these four options and provide the example required under Sec. 
226.5b(d)(5)(iii) for that option alone.
    The example used to represent a category must be an option commonly 
chosen by consumers, or a typical or representative example. (See the 
commentary to Sec. 226.5b(d)(12) (x) and (xi) for a discussion of the 
use of representative examples for making those disclosures. Creditors 
using a representative example within each category must use the same 
example for purposes of the disclosures under Sec. 226.5b (d)(5)(iii) 
and (d)(12) (x) and (xi).) Creditors may use representative examples 
under Sec. 226.5b(d)(5) only with respect to the payment example 
required under paragraph (d)(5)(iii). Creditors must provide a full 
narrative description of all payment options under Sec. 226.5b(d)(5) 
(i) and (ii).
    3. Examples for draw and repayment periods. Separate examples must 
be given for the draw and repayment periods unless the payments are 
determined the same way during both periods. In setting forth payment 
examples for any repayment period under this section (and the historical 
example under Sec. 226.5b(d)(12)(xi)), creditors should assume a 
$10,000 advance is taken at the beginning of the draw period and is 
reduced according to the terms of the plan. Creditors should not assume 
an additional advance is taken at any time, including at the beginning 
of any repayment period.
    4. Reverse mortgages. Reverse mortgages, also known as reverse 
annuity or home equity conversion mortgages, in addition to permitting 
the consumer to obtain advances, may involve the disbursement of monthly 
advances to the consumer for a fixed period or until the occurrence of 
an event such as the consumer's death. Repayment of the reverse mortgage 
(generally a single payment of principal and accrued interest) may be 
required to be made at the end of the disbursements or, for example, 
upon the death of the consumer. In disclosing these plans, creditors 
must apply the following rules, as applicable:
     If the reverse mortgage has a specified period 
for advances and disbursements but repayment is due only upon occurrence 
of a future event such as the death of the consumer, the creditor must 
assume that disbursements will be made until they are scheduled to end. 
The creditor must assume repayment will occur when disbursements end (or 
within a period following the final disbursement which is not longer 
than the regular interval between disbursements). This assumption should 
be used even though repayment may occur before or after the 
disbursements are scheduled to end. In such cases, the creditor may 
include a statement such as ``The disclosures assume that you will repay 
the line at the time the draw period and our payments to you end. As 
provided in your agreement, your repayment may be rquired at a different 
time.'' The single payment should be considered the ``minimum periodic 
payment'' and consequently would not be treated as a balloon payment. 
The example of the minimum payment under Sec. 226.5b(d)(5)(iii) should 
assume a single $10,000 draw.
     If the reverse mortgage has neither a specified 
period for advances or disbursements nor a specified repayment date and 
these terms will be determined solely by reference to future events, 
including the consumer's death, the creditor may assume that the draws 
and disbursements will end upon the consumer's death (estimated by using 
actuarial tables, for example) and that repayment will be required at 
the same time (or within a period following the date of the final 
disbursement which is not longer than the regular interval for 
disbursements). Alternatively, the creditor may base the disclosures 
upon another future event it estimates will be most likely to occur 
first. (If terms will be determined by reference to future events which 
do not include the consumer's death, the creditor must base the 
disclosures upon the occurrence of the event estimated to be most likely 
to occur first.)
     In making the disclosures, the creditor must 
assume that all draws and disbursements and accrued interest will be 
paid by the consumer. For example, if the note has a non-recourse 
provision providing that the consumer is not obligated for an amount 
greater than the value of the house, the creditor must nonetheless 
assume that the full amount to be drawn or disbursed will be repaid. In 
this case, however, the creditor may include a statement such as ``The 
disclosures assume full repayment of the amount advanced plus accrued 
interest, although the amount you may be required to pay is limited by 
your agreement.''
     Some reverse mortgages provide that some or all 
of the appreciation in the value of the property will be shared between 
the consumer and the creditor. The creditor must disclose the 
appreciation feature, including describing how the creditor's share will 
be determined, any limitations, and when the feature may be exercised.

                     5b(d)(6) Annual Percentage Rate

    1. Preferred-rate plans. If a creditor offers a preferential fixed-
rate plan in which the rate will increase a specified amount upon the 
occurrence of a specified event, the creditor must disclose the specific 
amount the rate will increase.

                    5b(d)(7) Fees Imposed by Creditor

    1. Applicability. The fees referred to in Sec. 226.5b(d)(7) include 
items such as application fees, points, annual fees, transaction fees, 
fees to obtain checks to access the plan,

[[Page 577]]

and fees imposed for converting to a repayment phase that is provided 
for in the original agreement. This disclosure includes any fees that 
are imposed by the creditor to use or maintain the plan, whether the 
fees are kept by the creditor or a third party. For example, if a 
creditor requires an annual credit report on the consumer and requires 
the consumer to pay this fee to the creditor or directly to the third 
party, the fee must be specifically stated. Third party fees to open the 
plan that are initially paid by the consumer to the creditor may be 
included in this disclosure or in the disclosure under Sec. 
226.5b(d)(8).
    2. Manner of describing fees. Charges may be stated as an estimated 
dollar amount for each fee, or as a percentage of a typical or 
representative amount of credit. The creditor may provide a stepped fee 
schedule in which a fee will increase a specified amount at a specified 
date. (See the discussion contained in the commentary to Sec. 
226.5b(f)(3)(i).)
    3. Fees not required to be disclosed. Fees that are not imposed to 
open, use, or maintain a plan, such as fees for researching an account, 
photocopying, paying late, stopping payment, having a check returned, 
exceeding the credit limit, or closing out an account do not have to be 
disclosed under this section. Credit report and appraisal fees imposed 
to investigate whether a condition permitting a freeze continues to 
exist--as discussed in the commentary to Sec. 226.5b(f)(3)(vi)--are not 
required to be disclosed under this section or Sec. 226.5b(d)(8).
    4. Rebates of closing costs. If closing costs are imposed they must 
be disclosed, regardless of whether such costs may be rebated later (for 
example, rebated to the extent of any interest paid during the first 
year of the plan).
    5. Terms used in disclosure. Creditors need not use the terms 
finance charge or other charge in describing the fees imposed by the 
creditor under this section or those imposed by third parties under 
Sec. 226.5b(d)(8).

          5b(d)(8) Fees Imposed by Third Parties to Open a Plan

    1. Applicability. Section 226.5b(d)(8) applies only to fees imposed 
by third parties to open the plan. Thus, for example, this section does 
not require disclosure of a fee imposed by a government agency at the 
end of a plan to release a security interest. Fees to be disclosed 
include appraisal, credit report, government agency, and attorneys fees. 
In cases where property insurance is required by the creditor, the 
creditor either may disclose the amount of the premium or may state that 
property insurance is required. For example, the disclosure might state, 
``You must carry insurance on the property that secures this plan.''
    2. Itemization of third-party fees. In all cases creditors must 
state the total of third-party fees as a single dollar amount or a range 
except that the total need not include costs for property insurance if 
the creditor discloses that such insurance is required. A creditor has 
two options with regard to providing the more detailed information about 
third party fees. Creditors may provide a statement that the consumer 
may request more specific cost information about third party fees from 
the creditor. As an alternative to including this statement, creditors 
may provide an itemization of such fees (by type and amount) with the 
early disclosures. Any itemization provided upon the consumer's request 
need not include a disclosure about property insurance.
    3. Manner of describing fees. A good faith estimate of the amount of 
fees must be provided. Creditors may provide, based on a typical or 
representative amount of credit, a range for such fees or state the 
dollar amount of such fees. Fees may be expressed on a unit cost basis, 
for example, $5 per $1,000 of credit.
    4. Rebates of third party fees. Even if fees imposed by third 
parties may be rebated, they must be disclosed. (See the commentary to 
Sec. 226.5b(d)(7).)

                     5b(d)(9) Negative Amortization

    1. Disclosure required. In transactions where the minimum payment 
will not or may not be sufficient to cover the interest that accrues on 
the outstanding balance, the creditor must disclose that negative 
amortization will or may occur. This disclosure is required whether or 
not the unpaid interest is added to the outstanding balance upon which 
interest is computed. A disclosure is not required merely because a loan 
calls for non-amortizing or partially amortizing payments.

                   5b(d)(10) Transaction Requirements

    1. Applicability. A limitation on automated teller machine usage 
need not be disclosed under this paragraph unless that is the only means 
by which the consumer can obtain funds.

              5b(d)(12) Disclosures for Variable-Rate Plans

    1. Variable-rate provisions. Sample forms in appendix G-14 provide 
illustrative guidance on the variable-rate rules.

                         Paragraph 5b(d)(12)(iv)

    1. Determination of annual percentage rate. If the creditor adjusts 
its index through the addition of a margin, the disclosure might read, 
``Your annual percentage rate is based on the index plus a margin.'' The 
creditor is not required to disclose a specific value for the margin.

[[Page 578]]

                        Paragraph 5b(d)(12)(viii)

    1. Preferred-rate provisions. This paragraph requires disclosure of 
preferred-rate provisions, where the rate will increase upon the 
occurrence of some event, such as the borrower-employee leaving the 
creditor's employ or the consumer closing an existing deposit account 
with the creditor.
    2. Provisions on conversion to fixed rates. The commentary to Sec. 
226.5b(d)(5)(ii) discusses the disclosure requirements for options 
permitting the consumer to convert from a variable rate to a fixed rate.

                         Paragraph 5b(d)(12)(ix)

    1. Periodic limitations on increases in rates. The creditor must 
disclose any annual limitations on increases in the annual percentage 
rate. If the creditor bases its rate limitation on 12 monthly billing 
cycles, such a limitation should be treated as an annual cap. Rate 
limitations imposed on less than an annual basis must be stated in terms 
of a specific amount of time. For example, if the creditor imposes rate 
limitations on only a semiannual basis, this must be expressed as a rate 
limitation for a six-month time period. If the creditor does not impose 
periodic limitations (annual or shorter) on rate increases, the fact 
that there are no annual rate limitations must be stated.
    2. Maximum limitations on increases in rates. The maximum annual 
percentage rate that may be imposed under each payment option over the 
term of the plan (including the draw period and any repayment period 
provided for in the initial agreement) must be provided. The creditor 
may disclose this rate as a specific number (for example, 18%) or as a 
specific amount above the initial rate. For example, this disclosure 
might read, ``The maximum annual percentage rate that can apply to your 
line will be 5 percentage points above your initial rate.'' If the 
creditor states the maximum rate as a specific amount above the initial 
rate, the creditor must include a statement that the consumer should 
inquire about the rate limitations that are currently available. If an 
initial discount is not taken into account in applying maximum rate 
limitations, that fact must be disclosed. If separate overall 
limitations apply to rate increases resulting from events such as the 
exercise of a fixed-rate conversion option or leaving the creditor's 
employ, those limitations also must be stated. Limitations do not 
include legal limits in the nature of usury or rate ceilings under state 
or federal statutes or regulations.
    3. Form of disclosures. The creditor need not disclose each periodic 
or maximum rate limitation that is currently available. Instead, the 
creditor may disclose the range of the lowest and highest periodic and 
maximum rate limitations that may be applicable to the creditor's home 
equity plans. Creditors using this alternative must include a statement 
that the consumer should inquire about the rate limitations that are 
currently available.

                         Paragraph 5b(d)(12)(x)

    1. Maximum rate payment example. In calculating the payment 
creditors should assume the maximum rate is in effect. Any discounted or 
premium initial rates or periodic rate limitations should be ignored for 
purposes of this disclosure. If a range is used to disclose the maximum 
cap under Sec. 226.5b(d)(12)(ix), the highest rate in the range must be 
used for the disclosure under this paragraph. As an alternative to 
making disclosures based on each payment option, the creditor may choose 
a representative example within the three categories of payment options 
upon which to base this disclosure. (See the commentary to Sec. 
226.5b(d)(5).) However, separate examples must be provided for the draw 
period and for any repayment period unless the payment is determined the 
same way in both periods. Creditors should calculate the example for the 
repayment period based on an assumed $10,000 balance. (See the 
commentary to Sec. 226.5b(d)(5) for a discussion of the circumstances 
in which a creditor may use a lower outstanding balance.)
    2. Time the maximum rate could be reached. In stating the date or 
time when the maximum rate could be reached, creditors should assume the 
rate increases as rapidly as possible under the plan. In calculating the 
date or time, creditors should factor in any discounted or premium 
initial rates and periodic rate limitations. This disclosure must be 
provided for the draw phase and any repayment phase. Creditors should 
assume the index and margin shown in the last year of the historical 
example (or a more recent rate) is in effect at the beginning of each 
phase.

                         Paragraph 5b(d)(12)(xi)

    1. Index movement. Index values and annual percentage rates must be 
shown for the entire 15 years of the historical example and must be 
based on the most recent 15 years. The example must be updated annually 
to reflect the most recent 15 years of index values as soon as 
reasonably possible after the new index value becomes available. If the 
values for an index have not been available for 15 years, a creditor 
need only go back as far as the values have been available and may start 
the historical example at the year for which values are first available.
    2. Selection of index values. The historical example must reflect 
the method of choosing index values for the plan. For example, if an 
average of index values is used in the plan, averages must be used in 
the example, but if an index value as of a particular date is used,

[[Page 579]]

a single index value must be shown. The creditor is required to assume 
one date (or one period, if an average is used) within a year on which 
to base the history of index values. The creditor may choose to use 
index values as of any date or period as long as the index value as of 
this date or period is used for each year in the example. Only one index 
value per year need be shown, even if the plan provides for adjustments 
to the annual percentage rate or payment more than once in a year. In 
such cases, the creditor can assume that the index rate remained 
constant for the full year for the purpose of calculating the annual 
percentage rate and payment.
    3. Selection of margin. A value for the margin must be assumed in 
order to prepare the example. A creditor may select a representative 
margin that it has used with the index during the six months preceding 
preparation of the disclosures and state that the margin is one that it 
has used recently. The margin selected may be used until the creditor 
annually updates the disclosure form to reflect the most recent 15 years 
of index values.
    4. Amount of discount or premium. In reflecting any discounted or 
premium initial rate, the creditor may select a discount or premium that 
it has used during the six months preceding preparation of the 
disclosures, and should disclose that the discount or premium is one 
that the creditor has used recently. The discount or premium should be 
reflected in the example for as long as it is in effect. The creditor 
may assume that a discount or premium that would have been in effect for 
any part of a year was in effect for the full year for purposes of 
reflecting it in the historical example.
    5. Rate limitations. Limitations on both periodic and maximum rates 
must be reflected in the historical example. If ranges of rate 
limitations are provided under Sec. 226.5b(d)(12)(ix), the highest 
rates provided in those ranges must be used in the example. Rate 
limitations that may apply more often than annually should be treated as 
if they were annual limitations. For example, if a creditor imposes a 1% 
cap every six months, this should be reflected in the example as if it 
were a 2% annual cap.
    6. Assumed advances. The creditor should assume that the $10,000 
balance is an advance taken at the beginning of the first billing cycle 
and is reduced according to the terms of the plan, and that the consumer 
takes no subsequent draws. As discussed in the commentary to Sec. 
226.5b(d)(5), creditors should not assume an additional advance is taken 
at the beginning of any repayment period. If applicable, the creditor 
may assume the $10,000 is both the advance and the credit limit. (See 
the commentary to Sec. 226.5b(d)(5) for a discussion of the 
circumstances in which a creditor may use a lower outstanding balance.)
    7. Representative payment options. The creditor need not provide an 
historical example for all of its various payment options, but may 
select a representative payment option within each of the three 
categories of payments upon which to base its disclosure. (See the 
commentary to Sec. 226.5b(d)(5).)
    8. Payment information. The payment figures in the historical 
example must reflect all significant program terms. For example, 
features such as rate and payment caps, a discounted initial rate, 
negative amortization, and rate carryover must be taken into account in 
calculating the payment figures if these would have applied to the plan. 
The historical example should include payments for as much of the length 
of the plan as would occur during a 15-year period. For example:
     If the draw period is 10 years and the repayment 
period is 15 years, the example should illustrate the entire 10-year 
draw period and the first 5 years of the repayment period.
     If the length of the draw period is 15 years and 
there is a 15-year repayment phase, the historical example must reflect 
the payments for the 15-year draw period and would not show any of the 
repayment period. No additional historical example would be required to 
reflect payments for the repayment period.
     If the length of the plan is less than 15 years, 
payments in the historical example need only be shown for the number of 
years in the term. In such cases, however, the creditor must show the 
index values, margin and annual percentage rates and continue to reflect 
all significant plan terms such as rate limitations for the entire 15 
years.

A creditor need show only a single payment per year in the example, even 
though payments may vary during a year. The calculations should be based 
on the actual payment computation formula, although the creditor may 
assume that all months have an equal number of days. The creditor may 
assume that payments are made on the last day of the billing cycle, the 
billing date or the payment due date, but must be consistent in the 
manner in which the period used to illustrate payment information is 
selected. Information about balloon payments and remaining balance may, 
but need not, be reflected in the example.
    9. Disclosures for repayment period. The historical example must 
reflect all features of the repayment period, including the appropriate 
index values, margin, rate limitations, length of the repayment period, 
and payments. For example, if different indices are used during the draw 
and repayment periods, the index values for that portion of the 15 years 
that reflect the repayment period must be the values for the appropriate 
index.
    10. Reverse mortgages. The historical example for reverse mortgages 
should reflect 15

[[Page 580]]

years of index values and annual percentage rates, but the payment 
column should be blank until the year that the single payment will be 
made, assuming that payment is estimated to occur within 15 years. (See 
the commentary to Sec. 226.5b(d)(5) for a discussion of reverse 
mortgages.)

                             5b(e) Brochure

    1. Substitutes. A brochure is a suitable substitute for the Board's 
home equity brochure if it is, at a minimum, comparable to the Board's 
brochure in substance and comprehensiveness. Creditors are permitted to 
provide more detailed information than is contained in the Board's 
brochure.
    2. Effect of third party delivery of brochure. If a creditor 
determines that a third party has provided a consumer with the required 
brochure pursuant to Sec. 226.5b(c), the creditor need not give the 
consumer a second brochure.

                 5b(f) Limitations on Home Equity Plans

    1. Coverage. Section 226.5b(f) limits both actions that may be taken 
and language that may be included in contracts, and applies to any 
assignee or holder as well as to the original creditor. The limitations 
apply to the draw period and any repayment period, and to any renewal or 
modification of the original agreement.

                           Paragraph 5b(f)(1)

    1. External index. A creditor may change the annual percentage rate 
for a plan only if the change is based on an index outside the 
creditor's control. Thus, a creditor may not make rate changes based on 
its own prime rate or cost of funds and may not reserve a contractual 
right to change rates at its discretion. A creditor is permitted, 
however, to use a published prime rate, such as that in the Wall Street 
Journal, even if the bank's own prime rate is one of several rates used 
to establish the published rate.
    2. Publicly available. The index must be available to the public. A 
publicly available index need not be published in a newspaper, but it 
must be one the consumer can independently obtain (by telephone, for 
example) and use to verify rates imposed under the plan.
    3. Provisions not prohibited. This paragraph does not prohibit rate 
changes that are specifically set forth in the agreement. For example, 
stepped-rate plans, in which specified rates are imposed for specified 
periods, are permissible. In addition, preferred-rate provisions, in 
which the rate increases by a specified amount upon the occurrence of a 
specified event, also are permissible.

                           Paragraph 5b(f)(2)

    1. Limitations on termination and acceleration. In general, 
creditors are prohibited from terminating and accelerating payment of 
the outstanding balance before the scheduled expiration of a plan. 
However, creditors may take these actions in the four circumstances 
specified in Sec. 226.5b(f)(2). Creditors are not permitted to specify 
in their contracts any other events that allow termination and 
acceleration beyond those permitted by the regulation. Thus, for 
example, an agreement may not provide that the balance is payable on 
demand nor may it provide that the account will be terminated and the 
balance accelerated if the rate cap is reached.
    2. Other actions permitted. If an event permitting termination and 
acceleration occurs, a creditor may instead take actions short of 
terminating and accelerating. For example, a creditor could temporarily 
or permanently suspend further advances, reduce the credit limit, change 
the payment terms, or require the consumer to pay a fee. A creditor also 
may provide in its agreement that a higher rate or higher fees will 
apply in circumstances under which it would otherwise be permitted to 
terminate the plan and accelerate the balance. A creditor that does not 
immediately terminate an account and accelerate payment or take another 
permitted action may take such action at a later time, provided one of 
the conditions permitting termination and acceleration exists at that 
time.

                          Paragraph 5b(f)(2)(i)

    1. Fraud or material misrepresentation. A creditor may terminate a 
plan and accelerate the balance if there has been fraud or material 
misrepresentation by the consumer in connection with the plan. This 
exception includes fraud or misrepresentation at any time, either during 
the application process or during the draw period and any repayment 
period. What constitutes fraud or misrepresentation is determined by 
applicable state law and may include acts of omission as well as overt 
acts, as long as any necessary intent on the part of the consumer 
exists.

                         Paragraph 5b(f)(2)(ii)

    1. Failure to meet repayment terms. A creditor may terminate a plan 
and accelerate the balance when the consumer fails to meet the repayment 
terms provided for in the agreement. However, a creditor may terminate 
and accelerate under this provision only if the consumer actually fails 
to make payments. For example, a creditor may not terminate and 
accelerate if the consumer, in error, sends a payment to the wrong 
location, such as a branch rather than the main office of the creditor. 
If a consumer files for or is placed in bankruptcy, the creditor may

[[Page 581]]

terminate and accelerate under this provision if the consumer fails to 
meet the repayment terms of the agreement. This section does not 
override any state or other law that requires a right-to-cure notice, or 
otherwise places a duty on the creditor before it can terminate a plan 
and accelerate the balance.

                         Paragraph 5b(f)(2)(iii)

    1. Impairment of security. A creditor may terminate a plan and 
accelerate the balance if the consumer's action or inaction adversely 
affects the creditor's security for the plan, or any right of the 
creditor in that security. Action or inaction by third parties does not, 
in itself, permit the creditor to terminate and accelerate.
    2. Examples. A creditor may terminate and accelerate, for example, 
if:
     The consumer transfers title to the property or 
sells the property without the permission of the creditor
     The consumer fails to maintain required insurance 
on the dwelling
     The consumer fails to pay taxes on the property
     The consumer permits the filing of a lien senior 
to that held by the creditor
     The sole consumer obligated on the plan dies
     The property is taken through eminent domain
     A prior lienholder forecloses

By contrast, the filing of a judgment against the consumer would permit 
termination and acceleration only if the amount of the judgment and 
collateral subject to the judgment is such that the creditor's security 
is adversely affected. If the consumer commits waste or otherwise 
destructively uses or fails to maintain the property such that the 
action adversely affects the security, the plan may be terminated and 
the balance accelerated. Illegal use of the property by the consumer 
would permit termination and acceleration if it subjects the property to 
seizure. If one of two consumers obligated on a plan dies the creditor 
may terminate the plan and accelerate the balance if the security is 
adversely affected. If the consumer moves out of the dwelling that 
secures the plan and that action adversely affects the security, the 
creditor may terminate a plan and accelerate the balance.

                           Paragraph 5b(f)(3)

    1. Scope of provision. In general, a creditor may not change the 
terms of a plan after it is opened. For example, a creditor may not 
increase any fee or impose a new fee once the plan has been opened, even 
if the fee is charged by a third party, such as a credit reporting 
agency, for a service. The change of terms prohibition applies to all 
features of a plan, not only those required to be disclosed under this 
section. For example, this provision applies to charges imposed for late 
payment, although this fee is not required to be disclosed under Sec. 
226.5b(d)(7).
    2. Charges not covered. There are three charges not covered by this 
provision. A creditor may pass on increases in taxes since such charges 
are imposed by a governmental body and are beyond the control of the 
creditor. In addition, a creditor may pass on increases in premiums for 
property insurance that are excluded from the finance charge under Sec. 
226.4(d)(2), since such insurance provides a benefit to the consumer 
independent of the use of the line and is often maintained 
notwithstanding the line. A creditor also may pass on increases in 
premiums for credit insurance that are excluded from the finance charge 
under Sec. 226.4(d)(1), since the insurance is voluntary and provides a 
benefit to the consumer.

                          Paragraph 5b(f)(3)(i)

    1. Changes provided for in agreement. A creditor may provide in the 
initial agreement that further advances will be prohibited or the credit 
line reduced during any period in which the maximum annual percentage 
rate is reached. A creditor also may provide for other specific changes 
to take place upon the occurrence of specific events. Both the 
triggering event and the resulting modification must be stated with 
specificity. For example, in home equity plans for employees, the 
agreement could provide that a specified higher rate or margin will 
apply if the borrower's employment with the creditor ends. A contract 
could contain a stepped-rate or stepped-fee schedule providing for 
specified changes in the rate or the fees on certain dates or after a 
specified period of time. A creditor also may provide in the initial 
agreement that it will be entitled to a share of the appreciation in the 
value of the property as long as the specific appreciation share and the 
specific circumstances which require the payment of it are set forth. A 
contract may permit a consumer to switch among minimum payment options 
during the plan.
    2. Prohibited provisions. A creditor may not include a general 
provision in its agreement permitting changes to any or all of the terms 
of the plan. For example, creditors may not include ``boilerplate'' 
language in the agreement stating that they reserve the right to change 
the fees imposed under the plan. In addition, a creditor may not include 
any ``triggering events'' or responses that the regulation expressly 
addresses in a manner different from that provided in the regulation. 
For example, an agreement may not provide that the margin in a variable-
rate plan will increase if there is a material change in the consumer's 
financial circumstances, because the regulation specifies

[[Page 582]]

that temporarily freezing the line or lowering the credit limit is the 
permissible response to a material change in the consumer's financial 
circumstances. Similarly a contract cannot contain a provision allowing 
the creditor to freeze a line due to an insignificant decline in 
property value since the regulation allows that response only for a 
significant decline.

                         Paragraph 5b(f)(3)(ii)

    1. Substitution of index. A creditor may change the index and margin 
used under the plan if the original index becomes unavailable, as long 
as historical fluctuations in the original and replacement indices were 
substantially similar, and as long as the replacement index and margin 
will produce a rate similar to the rate that was in effect at the time 
the original index became unavailable. If the replacement index is newly 
established and therefore does not have any rate history, it may be used 
if it produces a rate substantially similar to the rate in effect when 
the original index became unavailable.

                         Paragraph 5b(f)(3)(iii)

    1. Changes by written agreement. A creditor may change the terms of 
a plan if the consumer expressly agrees in writing to the change at the 
time it is made. For example, a consumer and a creditor could agree in 
writing to change the repayment terms from interest-only payments to 
payments that reduce the principal balance. The provisions of any such 
agreement are governed by the limitations in Sec. 226.5b(f). For 
example, a mutual agreement could not provide for future annual 
percentage rate changes based on the movement of an index controlled by 
the creditor or for termination and acceleration under circumstances 
other than those specified in the regulation. By contrast, a consumer 
could agree to a new credit limit for the plan, although the agreement 
could not permit the creditor to later change the credit limit except by 
a subsequent written agreement or in the circumstances described in 
Sec. 226.5b(f)(3)(vi).
    2. Written agreement. The change must be agreed to in writing by the 
consumer. Creditors are not permitted to assume consent because the 
consumer uses an account, even if use of an account would otherwise 
constitute acceptance of a proposed change under state law.

                         Paragraph 5b(f)(3)(iv)

    1. Beneficial changes. After a plan is opened, a creditor may make 
changes that unequivocally benefit the consumer. Under this provision, a 
creditor may offer more options to consumers, as long as existing 
options remain. For example, a creditor may offer the consumer the 
option of making lower monthly payments or could increase the credit 
limit. Similarly, a creditor wishing to extend the length of the plan on 
the same terms may do so. Creditors are permitted to temporarily reduce 
the rate or fees charged during the plan (though a change in terms 
notice may be required under Sec. 226.9(c) when the rate or fees are 
returned to their original level). Creditors also may offer an 
additional means of access to the line, even if fees are associated with 
using the device, provided the consumer retains the ability to use prior 
access devices on the original terms.

                          Paragraph 5b(f)(3)(v)

    1. Insignificant changes. A creditor is permitted to make 
insignificant changes after a plan is opened. This rule accommodates 
operational and similar problems, such as changing the address of the 
creditor for purposes of sending payments. It does not permit a creditor 
to change a term such as a fee charged for late payments.
    2. Examples of insignificant changes. Creditors may make minor 
changes to features such as the billing cycle date, the payment due date 
(as long as the consumer does not have a diminished grace period if one 
is provided), and the day of the month on which index values are 
measured to determine changes to the rate for variable-rate plans. A 
creditor also may change its rounding practice in accordance with the 
tolerance rules set forth in Sec. 226.14 (for example, stating an exact 
APR of 14.3333 percent as 14.3 percent, even if it had previously been 
stated as 14.33 percent). A creditor may change the balance computation 
method it uses only if the change produces an insignificant difference 
in the finance charge paid by the consumer. For example, a creditor may 
switch from using the average daily balance method (including new 
transactions) to the daily balance method (including new transactions).

                         Paragraph 5b(f)(3)(vi)

    1. Suspension of credit privileges or reduction of credit limit. A 
creditor may prohibit additional extensions of credit or reduce the 
credit limit in the circumstances specified in this section of the 
regulation. In addition, as discussed under Sec. 226.5b(f)(3)(i), a 
creditor may contractually reserve the right to take such actions when 
the maximum annual percentage rate is reached. A creditor may not take 
these actions under other circumstances, unless the creditor would be 
permitted to terminate the line and accelerate the balance as described 
in Sec. 226.5b(f)(2). The creditor's right to reduce the credit limit 
does not permit reducing the limit below the amount of the outstanding 
balance if this would require the consumer to make a higher payment.

[[Page 583]]

    2. Temporary nature of suspension or reduction. Creditors are 
permitted to prohibit additional extensions of credit or reduce the 
credit limit only while one of the designated circumstances exists. When 
the circumstance justifying the creditor's action ceases to exist, 
credit privileges must be reinstated, assuming that no other 
circumstance permitting such action exists at that time.
    3. Imposition of fees. If not prohibited by state law, a creditor 
may collect only bona fide and reasonable appraisal and credit report 
fees if such fees are actually incurred in investigating whether the 
condition permitting the freeze continues to exist. A creditor may not, 
in any circumstances, impose a fee to reinstate a credit line once the 
condition has been determined not to exist.
    4. Reinstatement of credit privileges. Creditors are responsible for 
ensuring that credit privileges are restored as soon as reasonably 
possible after the condition that permitted the creditor's action ceases 
to exist. One way a creditor can meet this responsibility is to monitor 
the line on an ongoing basis to determine when the condition ceases to 
exist. The creditor must investigate the condition frequently enough to 
assure itself that the condition permitting the freeze continues to 
exist. The frequency with which the creditor must investigate to 
determine whether a condition continues to exist depends upon the 
specific condition permitting the freeze. As an alternative to such 
monitoring, the creditor may shift the duty to the consumer to request 
reinstatement of credit privileges by providing a notice in accordance 
with Sec. 226.9(c)(1)(iii). A creditor may require a reinstatement 
request to be in writing if it notifies the consumer of this requirement 
on the notice provided under Sec. 226.9(c)(1)(iii). Once the consumer 
requests reinstatement, the creditor must promptly investigate to 
determine whether the condition allowing the freeze continues to exist. 
Under this alternative, the creditor has a duty to investigate only upon 
the consumer's request.
    5. Suspension of credit privileges following request by consumer. A 
creditor may honor a specific request by a consumer to suspend credit 
privileges. If the consumer later requests that the creditor reinstate 
credit privileges, the creditor must do so provided no other 
circumstance justifying a suspension exists at that time. If two or more 
consumers are obligated under a plan and each has the ability to take 
advances, the agreement may permit any of the consumers to direct the 
creditor not to make further advances. A creditor may require that all 
persons obligated under a plan request reinstatement.
    6. Significant decline defined. What constitutes a significant 
decline for purposes of Sec. 226.5b(f)(3)(vi)(A) will vary according to 
individual circumstances. In any event, if the value of the dwelling 
declines such that the initial difference between the credit limit and 
the available equity (based on the property's appraised value for 
purposes of the plan) is reduced by fifty percent, this constitutes a 
significant decline in the value of the dwelling for purposes of Sec. 
226.5b(f)(3)(vi)(A). For example, assume that a house with a first 
mortgage of $50,000 is appraised at $100,000 and the credit limit is 
$30,000. The difference between the credit limit and the available 
equity is $20,000, half of which is $10,000. The creditor could prohibit 
further advances or reduce the credit limit if the value of the property 
declines from $100,000 to $90,000. This provision does not require a 
creditor to obtain an appraisal before suspending credit privileges 
although a significant decline must occur before suspension can occur.
    7. Material change in financial circumstances. Two conditions must 
be met for Sec. 226.5b(f)(3)(vi)(B) to apply. First, there must be a 
``material change'' in the consumer's financial circumstances, such as a 
significant decrease in the consumer's income. Second, as a result of 
this change, the creditor must have a reasonable belief that the 
consumer will be unable to fulfill the payment obligations of the plan. 
A creditor may, but does not have to, rely on specific evidence (such as 
the failure to pay other debts) in concluding that the second part of 
the test has been met. A creditor may prohibit further advances or 
reduce the credit limit under this section if a consumer files for or is 
placed in bankruptcy.
    8. Default of a material obligation. Creditors may specify events 
that would qualify as a default of a material obligation under Sec. 
226.5b(f)(3)(vi)(C). For example, a creditor may provide that default of 
a material obligation will exist if the consumer moves out of the 
dwelling or permits an intervening lien to be filed that would take 
priority over future advances made by the creditor.
    9. Government limits on the annual percentage rate. Under Sec. 
226.5b(f)(3)(vi)(D), a creditor may prohibit further advances or reduce 
the credit limit if, for example, a state usury law is enacted which 
prohibits a creditor from imposing the agreed-upon annual percentage 
rate.

                          5b(g) Refund of Fees

    1. Refund of fees required. If any disclosed term, including any 
term provided upon request pursuant to Sec. 226.5b(d), changes between 
the time the early disclosures are provided to the consumer and the time 
the plan is opened, and the consumer as a result decides to not enter 
into the plan, a creditor must refund all fees paid by the consumer in 
connection with the application. All fees, including credit report fees 
and appraisal fees, must be refunded whether such fees are paid to the 
creditor or directly to third parties. A

[[Page 584]]

consumer is entitled to a refund of fees under these circumstances 
whether or not terms are guaranteed by the creditor under Sec. 
226.5b(d)(2)(i).
    2. Variable-rate plans. The right to a refund of fees does not apply 
to changes in the annual percentage rate resulting from fluctuations in 
the index value in a variable-rate plan. Also, if the maximum annual 
percentage rate is expressed as an amount over the initial rate, the 
right to refund of fees would not apply to changes in the cap resulting 
from fluctuations in the index value.
    3. Changes in terms. If a term, such as the maximum rate, is stated 
as a range in the early disclosures, and the term ultimately applicable 
to the plan falls within that range, a change does not occur for 
purposes of this section. If, however, no range is used and the term is 
changed (for example, a rate cap of 6 rather than 5 percentage points 
over the initial rate), the change would permit the consumer to obtain a 
refund of fees. If a fee imposed by the creditor is stated in the early 
disclosures as an estimate and the fee changes, the consumer could elect 
to not enter into the agreement and would be entitled to a refund of 
fees. On the other hand, if fees imposed by third parties are disclosed 
as estimates and those fees change, the consumer is not entitled to a 
refund of fees paid in connection with the application. Creditors must, 
however, use the best information reasonably available in providing 
disclosures about such fees.
    4. Timing of refunds and relation to other provisions. The refund of 
fees must be made as soon as reasonably possible after the creditor is 
notified that the consumer is not entering into the plan because of the 
changed term, or that the consumer wants a refund of fees. The fact that 
an application fee may be refunded to some applicants under this 
provision does not render such fees finance charges under Sec. 
226.4(c)(1) of the regulation.

                 5b(h) Imposition of Nonrefundable Fees

    1. Collection of fees after consumer receives disclosures. A fee may 
be collected after the consumer receives the disclosures and brochure 
and before the expiration of three days, although the fee must be 
refunded if, within three days of receiving the required information, 
the consumer decides to not enter into the agreement. In such a case, 
the consumer must be notified that the fee is refundable for three days. 
The notice must be clear and conspicuous and in writing, and may be 
included with the disclosures required under Sec. 226.5b(d) or as an 
attachment to them. If disclosures and brochure are mailed to the 
consumer, footnote 10d of the regulation provides that a nonrefundable 
fee may not be imposed until six business days after the mailing.
    2. Collection of fees before consumer receives disclosures. An 
application fee may be collected before the consumer receives the 
disclosures and brochure (for example, when an application contained in 
a magazine is mailed in with an application fee) provided that it 
remains refundable until three business days after the consumer receives 
the Sec. 226.5b disclosures. No other fees except a refundable 
membership fee may be collected until after the consumer receives the 
disclosures required under Sec. 226.5b.
    3. Relation to other provisions. A fee collected before disclosures 
are provided may become nonrefundable except that, under Sec. 
226.5b(g), it must be refunded if the consumer elects to not enter into 
the plan because of a change in terms. (Of course, all fees must be 
refunded if the consumer later rescinds under Sec. 226.15.)

               Section 226.6--Account-Opening Disclosures

    6(a) Rules affecting home-equity plans.
    6(a)(1) Finance charge.
    Paragraph 6(a)(1)(i).
    1. When finance charges accrue. Creditors are not required to 
disclose a specific date when finance charges will begin to accrue. 
Creditors may provide a general explanation such as that the consumer 
has 30 days from the closing date to pay the new balance before finance 
charges will accrue on the account.
    2. Grace periods. In disclosing whether or not a grace period 
exists, the creditor need not use ``free period,'' ``free-ride period,'' 
``grace period'' or any other particular descriptive phrase or term. For 
example, a statement that ``the finance charge begins on the date the 
transaction is posted to your account'' adequately discloses that no 
grace period exists. In the same fashion, a statement that ``finance 
charges will be imposed on any new purchases only if they are not paid 
in full within 25 days after the close of the billing cycle'' indicates 
that a grace period exists in the interim.
    Paragraph 6(a)(1)(ii).
    1. Range of balances. The range of balances disclosure is 
inapplicable:
    i. If only one periodic rate may be applied to the entire account 
balance.
    ii. If only one periodic rate may be applied to the entire balance 
for a feature (for example, cash advances), even though the balance for 
another feature (purchases) may be subject to two rates (a 1.5% monthly 
periodic rate on purchase balances of $0-$500, and a 1% monthly periodic 
rate for balances above $500). In this example, the creditor must give a 
range of balances disclosure for the purchase feature.
    2. Variable-rate disclosures--coverage.
    i. Examples. This section covers open-end credit plans under which 
rate changes are specifically set forth in the account agreement and are 
tied to an index or formula. A creditor would use variable-rate 
disclosures

[[Page 585]]

for plans involving rate changes such as the following:
    A. Rate changes that are tied to the rate the creditor pays on its 
six-month certificates of deposit.
    B. Rate changes that are tied to Treasury bill rates.
    C. Rate changes that are tied to changes in the creditor's 
commercial lending rate.
    ii. An open-end credit plan in which the employee receives a lower 
rate contingent upon employment (that is, with the rate to be increased 
upon termination of employment) is not a variable-rate plan.
    3. Variable-rate plan--rate(s) in effect. In disclosing the rate(s) 
in effect at the time of the account-opening disclosures (as is required 
by Sec. 226.6(a)(1)(ii)), the creditor may use an insert showing the 
current rate; may give the rate as of a specified date and then update 
the disclosure from time to time, for example, each calendar month; or 
may disclose an estimated rate under Sec. 226.5(c).
    4. Variable-rate plan--additional disclosures required. In addition 
to disclosing the rates in effect at the time of the account-opening 
disclosures, the disclosures under Sec. 226.6(a)(1)(ii) also must be 
made.
    5. Variable-rate plan--index. The index to be used must be clearly 
identified; the creditor need not give, however, an explanation of how 
the index is determined or provide instructions for obtaining it.
    6. Variable-rate plan--circumstances for increase.
    i. Circumstances under which the rate(s) may increase include, for 
example:
    A. An increase in the Treasury bill rate.
    B. An increase in the Federal Reserve discount rate.
    ii. The creditor must disclose when the increase will take effect; 
for example:
    A. ``An increase will take effect on the day that the Treasury bill 
rate increases,'' or
    B. ``An increase in the Federal Reserve discount rate will take 
effect on the first day of the creditor's billing cycle.''
    7. Variable-rate plan--limitations on increase. In disclosing any 
limitations on rate increases, limitations such as the maximum increase 
per year or the maximum increase over the duration of the plan must be 
disclosed. When there are no limitations, the creditor may, but need 
not, disclose that fact. (A maximum interest rate must be included in 
dwelling-secured open-end credit plans under which the interest rate may 
be changed. See Sec. 226.30 and the commentary to that section.) Legal 
limits such as usury or rate ceilings under state or federal statutes or 
regulations need not be disclosed. Examples of limitations that must be 
disclosed include:
    i. ``The rate on the plan will not exceed 25% annual percentage 
rate.''
    ii. ``Not more than \1/2\% increase in the annual percentage rate 
per year will occur.''
    8. Variable-rate plan--effects of increase. Examples of effects of 
rate increases that must be disclosed include:
    i. Any requirement for additional collateral if the annual 
percentage rate increases beyond a specified rate.
    ii. Any increase in the scheduled minimum periodic payment amount.
    9. Variable-rate plan--change-in-terms notice not required. No 
notice of a change in terms is required for a rate increase under a 
variable-rate plan as defined in comment 6(a)(1)(ii)-2.
    10. Discounted variable-rate plans. In some variable-rate plans, 
creditors may set an initial interest rate that is not determined by the 
index or formula used to make later interest rate adjustments. 
Typically, this initial rate is lower than the rate would be if it were 
calculated using the index or formula.
    i. For example, a creditor may calculate interest rates according to 
a formula using the six-month Treasury bill rate plus a 2 percent 
margin. If the current Treasury bill rate is 10 percent, the creditor 
may forgo the 2 percent spread and charge only 10 percent for a limited 
time, instead of setting an initial rate of 12 percent, or the creditor 
may disregard the index or formula and set the initial rate at 9 
percent.
    ii. When creditors use an initial rate that is not calculated using 
the index or formula for later rate adjustments, the account-opening 
disclosure statement should reflect:
    A. The initial rate (expressed as a periodic rate and a 
corresponding annual percentage rate), together with a statement of how 
long the initial rate will remain in effect;
    B. The current rate that would have been applied using the index or 
formula (also expressed as a periodic rate and a corresponding annual 
percentage rate); and
    C. The other variable-rate information required in Sec. 
226.6(a)(1)(ii).
    iii. In disclosing the current periodic and annual percentage rates 
that would be applied using the index or formula, the creditor may use 
any of the disclosure options described in comment 6(a)(1)(ii)-3.
    11. Increased penalty rates. If the initial rate may increase upon 
the occurrence of one or more specific events, such as a late payment or 
an extension of credit that exceeds the credit limit, the creditor must 
disclose the initial rate and the increased penalty rate that may apply. 
If the penalty rate is based on an index and an increased margin, the 
issuer must disclose the index and the margin. The creditor must also 
disclose the specific event or events that may result in the increased 
rate, such as ``22% APR, if 60 days late.'' If the penalty rate cannot 
be determined at the time disclosures are given, the creditor must 
provide an explanation of the specific event or events that may result 
in the increased rate. At the creditor's option, the creditor may 
disclose the period for

[[Page 586]]

which the increased rate will remain in effect, such as ``until you make 
three timely payments.'' The creditor need not disclose an increased 
rate that is imposed when credit privileges are permanently terminated.
    Paragraph 6(a)(1)(iii).
    1. Explanation of balance computation method. A shorthand phrase 
such as ``previous balance method'' does not suffice in explaining the 
balance computation method. (See Model Clauses G-1 and G-1(A) to part 
226.)
    2. Allocation of payments. Creditors may, but need not, explain how 
payments and other credits are allocated to outstanding balances. For 
example, the creditor need not disclose that payments are applied to 
late charges, overdue balances, and finance charges before being applied 
to the principal balance; or in a multifeatured plan, that payments are 
applied first to finance charges, then to purchases, and then to cash 
advances. (See comment 7-1 for definition of multifeatured plan.)
    Paragraph 6(a)(1)(iv).
    1. Finance charges. In addition to disclosing the periodic rate(s) 
under Sec. 226.6(a)(1)(ii), creditors must disclose any other type of 
finance charge that may be imposed, such as minimum, fixed, transaction, 
and activity charges; required insurance; or appraisal or credit report 
fees (unless excluded from the finance charge under Sec. 226.4(c)(7)). 
Creditors are not required to disclose the fact that no finance charge 
is imposed when the outstanding balance is less than a certain amount or 
the balance below which no finance charge will be imposed.
    6(a)(2) Other charges.
    1. General; examples of other charges. Under Sec. 226.6(a)(2), 
significant charges related to the plan (that are not finance charges) 
must also be disclosed. For example:
    i. Late-payment and over-the-credit-limit charges.
    ii. Fees for providing documentary evidence of transactions 
requested under Sec. 226.13 (billing error resolution).
    iii. Charges imposed in connection with residential mortgage 
transactions or real estate transactions such as title, appraisal, and 
credit-report fees (see Sec. 226.4(c)(7)).
    iv. A tax imposed on the credit transaction by a state or other 
governmental body, such as a documentary stamp tax on cash advances. 
(See the commentary to Sec. 226.4(a)).
    v. A membership or participation fee for a package of services that 
includes an open-end credit feature, unless the fee is required whether 
or not the open-end credit feature is included. For example, a 
membership fee to join a credit union is not an ``other charge,'' even 
if membership is required to apply for credit. For example, if the 
primary benefit of membership in an organization is the opportunity to 
apply for a credit card, and the other benefits offered (such as a 
newsletter or a member information hotline) are merely incidental to the 
credit feature, the membership fee would be disclosed as an ``other 
charge.''
    vi. Charges imposed for the termination of an open-end credit plan.
    2. Exclusions. The following are examples of charges that are not 
``other charges''
    i. Fees charged for documentary evidence of transactions for income 
tax purposes.
    ii. Amounts payable by a consumer for collection activity after 
default; attorney's fees, whether or not automatically imposed; 
foreclosure costs; post-judgment interest rates imposed by law; and 
reinstatement or reissuance fees.
    iii. Premiums for voluntary credit life or disability insurance, or 
for property insurance, that are not part of the finance charge.
    iv. Application fees under Sec. 226.4(c)(1).
    v. A monthly service charge for a checking account with overdraft 
protection that is applied to all checking accounts, whether or not a 
credit feature is attached.
    vi. Charges for submitting as payment a check that is later returned 
unpaid (See commentary to Sec. 226.4(c)(2)).
    vii. Charges imposed on a cardholder by an institution other than 
the card issuer for the use of the other institution's ATM in a shared 
or interchange system. (See also comment 7(a)(2)-2.)
    viii. Taxes and filing or notary fees excluded from the finance 
charge under Sec. 226.4(e).
    ix. A fee to expedite delivery of a credit card, either at account 
opening or during the life of the account, provided delivery of the card 
is also available by standard mail service (or other means at least as 
fast) without paying a fee for delivery.
    x. A fee charged for arranging a single payment on the credit 
account, upon the consumer's request (regardless of how frequently the 
consumer requests the service), if the credit plan provides that the 
consumer may make payments on the account by another reasonable means, 
such as by standard mail service, without paying a fee to the creditor.
    6(a)(3) Home-equity plan information.
    1. Additional disclosures required. For home-equity plans, creditors 
must provide several of the disclosures set forth in Sec. 226.5b(d) 
along with the disclosures required under Sec. 226.6. Creditors also 
must disclose a list of the conditions that permit the creditor to 
terminate the plan, freeze or reduce the credit limit, and implement 
specified modifications to the original terms. (See comment 
5b(d)(4)(iii)-1.)
    2. Form of disclosures. The home-equity disclosures provided under 
this section must be in a form the consumer can keep, and are governed 
by Sec. 226.5(a)(1). The segregation standard set forth in Sec. 
226.5b(a) does not apply to home-equity disclosures provided under Sec. 
226.6.

[[Page 587]]

    3. Disclosure of payment and variable-rate examples.
    i. The payment-example disclosure in Sec. 226.5b(d)(5)(iii) and the 
variable-rate information in Sec. 226.5b(d)(12)(viii), (d)(12)(x), 
(d)(12)(xi), and (d)(12)(xii) need not be provided with the disclosures 
under Sec. 226.6 if the disclosures under Sec. 226.5b(d) were provided 
in a form the consumer could keep; and the disclosures of the payment 
example under Sec. 226.5b(d)(5)(iii), the maximum-payment example under 
Sec. 226.5b(d)(12)(x) and the historical table under Sec. 
226.5b(d)(12)(xi) included a representative payment example for the 
category of payment options the consumer has chosen.
    ii. For example, if a creditor offers three payment options (one for 
each of the categories described in the commentary to Sec. 
226.5b(d)(5)), describes all three options in its early disclosures, and 
provides all of the disclosures in a retainable form, that creditor need 
not provide the Sec. 226.5b(d)(5)(iii) or (d)(12) disclosures again 
when the account is opened. If the creditor showed only one of the three 
options in the early disclosures (which would be the case with a 
separate disclosure form rather than a combined form, as discussed under 
Sec. 226.5b(a)), the disclosures under Sec. 226.5b(d)(5)(iii), 
(d)(12)(viii), (d)(12)(x), (d)(12)(xi) and (d)(12)(xii) must be given to 
any consumer who chooses one of the other two options. If the Sec. 
226.5b(d)(5)(iii) and (d)(12) disclosures are provided with the second 
set of disclosures, they need not be transaction-specific, but may be 
based on a representative example of the category of payment option 
chosen.
    4. Disclosures for the repayment period. The creditor must provide 
disclosures about both the draw and repayment phases when giving the 
disclosures under Sec. 226.6. Specifically, the creditor must make the 
disclosures in Sec. 226.6(a)(3), state the corresponding annual 
percentage rate, and provide the variable-rate information required in 
Sec. 226.6(a)(1)(ii) for the repayment phase. To the extent the 
corresponding annual percentage rate, the information in Sec. 
226.6(a)(1)(ii), and any other required disclosures are the same for the 
draw and repayment phase, the creditor need not repeat such information, 
as long as it is clear that the information applies to both phases.
    6(a)(4) Security interests.
    1. General. Creditors are not required to use specific terms to 
describe a security interest, or to explain the type of security or the 
creditor's rights with respect to the collateral.
    2. Identification of property. Creditors sufficiently identify 
collateral by type by stating, for example, motor vehicle or household 
appliances. (Creditors should be aware, however, that the federal credit 
practices rules, as well as some state laws, prohibit certain security 
interests in household goods.) The creditor may, at its option, provide 
a more specific identification (for example, a model and serial number.)
    3. Spreader clause. If collateral for preexisting credit with the 
creditor will secure the plan being opened, the creditor must disclose 
that fact. (Such security interests may be known as ``spreader'' or 
``dragnet'' clauses, or as ``cross-collateralization'' clauses.) The 
creditor need not specifically identify the collateral; a reminder such 
as ``collateral securing other loans with us may also secure this loan'' 
is sufficient. At the creditor's option, a more specific description of 
the property involved may be given.
    4. Additional collateral. If collateral is required when advances 
reach a certain amount, the creditor should disclose the information 
available at the time of the account-opening disclosures. For example, 
if the creditor knows that a security interest will be taken in 
household goods if the consumer's balance exceeds $1,000, the creditor 
should disclose accordingly. If the creditor knows that security will be 
required if the consumer's balance exceeds $1,000, but the creditor does 
not know what security will be required, the creditor must disclose on 
the initial disclosure statement that security will be required if the 
balance exceeds $1,000, and the creditor must provide a change-in-terms 
notice under Sec. 226.9(c) at the time the security is taken. (See 
comment 6(a)(4)-2.)
    5. Collateral from third party. Security interests taken in 
connection with the plan must be disclosed, whether the collateral is 
owned by the consumer or a third party.
    6(a)(5) Statement of billing rights.
    1. See the commentary to Model Forms G-3, G-3(A), G-4, and G-4(A).
    6(b) Rules affecting open-end (not home-secured) plans.
    6(b)(1) Form of disclosures; tabular format for open-end (not home-
secured) plans.
    1. Relation to tabular summary for applications and solicitations. 
See commentary to Sec. 226.5a(a), (b), and (c) regarding format and 
content requirements, except for the following:
    i. Creditors must use the accuracy standard for annual percentage 
rates in Sec. 226.6(b)(4)(ii)(G).
    ii. Generally, creditors must disclose the specific rate for each 
feature that applies to the account. If the rates on an open-end (not 
home-secured) plan vary by state and the creditor is providing the 
account-opening table in person at the time the plan is established in 
connection with financing the purchase of goods or services the creditor 
may, at its option, disclose in the account-opening table (A) the rate 
applicable to the consumer's account, or (B) the range of rates, if the 
disclosure includes a statement that the rate varies by state and refers 
the consumer to the account agreement or other disclosure provided with 
the account-opening table

[[Page 588]]

where the rate applicable to the consumer's account is disclosed.
    iii. Creditors must explain whether or not a grace period exists for 
all features on the account. The row heading ``Paying Interest'' must be 
used if any one feature on the account does not have a grace period.
    iv. Creditors must name the balance computation method used for each 
feature of the account and state that an explanation of the balance 
computation method(s) is provided in the account-opening disclosures.
    v. Creditors must state that consumers' billing rights are provided 
in the account-opening disclosures.
    vi. If fees on an open-end (not home-secured) plan vary by state and 
the creditor is providing the account-opening table in person at the 
time the plan is established in connection with financing the purchase 
of goods or services the creditor may, at its option, disclose in the 
account-opening table (A) the specific fee applicable to the consumer's 
account, or (B) the range of fees, if the disclosure includes a 
statement that the amount of the fee varies by state and refers the 
consumer to the account agreement or other disclosure provided with the 
account-opening table where the fee applicable to the consumer's account 
is disclosed.
    vii. Creditors that must disclose the amount of available credit 
must state the initial credit limit provided on the account.
    viii. Creditors must disclose directly beneath the table the 
circumstances under which an introductory rate may be revoked and the 
rate that will apply after the introductory rate is revoked. Issuers of 
credit card accounts under an open-end (not home-secured) consumer 
credit plan are subject to limitations on the circumstances under which 
an introductory rate may be revoked. (See comment 5a(b)(1)-5 for 
guidance on how a card issuer may disclose the circumstances under which 
an introductory rate may be revoked.)
    ix. The applicable forms providing safe harbors for account-opening 
tables are under appendix G-17 to part 226.
    2. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to Sec. 226.6 disclosures.
    3. Terminology. Section 226.6(b)(1) generally requires that the 
headings, content, and format of the tabular disclosures be 
substantially similar, but need not be identical, to the tables in 
appendix G to part 226; but see Sec. 226.5(a)(2) for terminology 
requirements applicable to Sec. 226.6(b).
    6(b)(2) Required disclosures for account-opening table for open-end 
(not home-secured) plans.
    6(b)(2)(iii) Fixed finance charge; minimum interest charge.
    1. Example of brief statement. See Samples G-17(B), G-17(C), and G-
17(D) for guidance on how to provide a brief description of a minimum 
interest charge.
    6(b)(2)(v) Grace period.
    1. Grace period. Creditors must state any conditions on the 
applicability of the grace period. A creditor, however, may not disclose 
under Sec. 226.6(b)(2)(v) the limitations on the imposition of finance 
charges as a result of a loss of a grace period in Sec. 226.54, or the 
impact of payment allocation on whether interest is charged on 
transactions as a result of a loss of a grace period. Some creditors may 
offer a grace period on all types of transactions under which interest 
will not be charged on transactions if the consumer pays the outstanding 
balance shown on a periodic statement in full by the due date shown on 
that statement for one or more billing cycles. In these circumstances, 
Sec. 226.6(b)(2)(v) requires that the creditor disclose the grace 
period and the conditions for its applicability using the following 
language, or substantially similar language, as applicable: ``Your due 
date is [at least] ---- days after the close of each billing cycle. We 
will not charge you any interest on your account if you pay your entire 
balance by the due date each month.'' However, other creditors may offer 
a grace period on all types of transactions under which interest may be 
charged on transactions even if the consumer pays the outstanding 
balance shown on a periodic statement in full by the due date shown on 
that statement each billing cycle. In these circumstances, Sec. 
226.6(b)(2)(v) requires the creditor to amend the above disclosure 
language to describe accurately the conditions on the applicability of 
the grace period.
    2. No grace period. Creditors may use the following language to 
describe that no grace period is offered, as applicable: ``We will begin 
charging interest on [applicable transactions] on the transaction 
date.''
    3. Grace period on some features. Some creditors do not offer a 
grace period on cash advances and balance transfers, but offer a grace 
period for all purchases under which interest will not be charged on 
purchases if the consumer pays the outstanding balance shown on a 
periodic statement in full by the due date shown on that statement for 
one or more billing cycles. In these circumstances, Sec. 226.6(b)(2)(v) 
requires that the creditor disclose the grace period for purchases and 
the conditions for its applicability, and the lack of a grace period for 
cash advances and balance transfers using the following language, or 
substantially similar language, as applicable: ``Your due date is [at 
least] ---- days after the close of each billing cycle. We will not 
charge you any interest on purchases if you pay your entire balance by 
the due date each month. We will begin charging interest on cash 
advances and balance transfers on the transaction date.'' However, other 
creditors may offer a grace period on all purchases under which interest 
may be charged on purchases even if the consumer pays the

[[Page 589]]

outstanding balance shown on a periodic statement in full by the due 
date shown on that statement each billing cycle. In these circumstances, 
Sec. 226.6(a)(2)(v) requires the creditor to amend the above disclosure 
language to describe accurately the conditions on the applicability of 
the grace period. Also, some creditors may not offer a grace period on 
cash advances and balance transfers, and will begin charging interest on 
these transactions from a date other than the transaction date, such as 
the posting date. In these circumstances, Sec. 226.6(a)(2)(v) requires 
the creditor to amend the above disclosure language to be accurate.
    6(b)(2)(vi) Balance computation method.
    1. Use of same balance computation method for all features. In cases 
where the balance for each feature is computed using the same balance 
computation method, a single identification of the name of the balance 
computation method is sufficient. In this case, a creditor may use an 
appropriate name listed in Sec. 226.5a(g) (e.g., ``average daily 
balance (including new purchases)'') to satisfy the requirement to 
disclose the name of the method for all features on the account, even 
though the name only refers to purchases. For example, if a creditor 
uses the average daily balance method including new transactions for all 
features, a creditor may use the name ``average daily balance (including 
new purchases)'' listed in Sec. 226.5a(g)(i) to satisfy the requirement 
to disclose the name of the balance computation method for all features. 
As an alternative, in this situation, a creditor may revise the balance 
computation names listed in Sec. 226.5a(g) to refer more broadly to all 
new credit transactions, such as using the language ``new transactions'' 
or ``current transactions'' (e.g., ``average daily balance (including 
new transactions)''), rather than simply referring to new purchases when 
the same method is used to calculate the balances for all features of 
the account. See Samples G-17(B) and G-17(C) for guidance on how to 
disclose the balance computation method where the same method is used 
for all features on the account.
    2. Use of balance computation names in Sec. 226.5a(g) for balances 
other than purchases. The names of the balance computation methods 
listed in Sec. 226.5a(g) describe balance computation methods for 
purchases. When a creditor is disclosing the name of the balance 
computation methods separately for each feature, in using the names 
listed in Sec. 226.5a(g) to satisfy the requirements of Sec. 
226.6(b)(2)(vi) for features other than purchases, a creditor must 
revise the names listed in Sec. 226.5a(g) to refer to the other 
features. For example, when disclosing the name of the balance 
computation method applicable to cash advances, a creditor must revise 
the name listed in Sec. 226.5a(g)(i) to disclose it as ``average daily 
balance (including new cash advances)'' when the balance for cash 
advances is figured by adding the outstanding balance (including new 
cash advances and deducting payments and credits) for each day in the 
billing cycle, and then dividing by the number of days in the billing 
cycle. Similarly, a creditor must revise the name listed in Sec. 
226.5a(g)(ii) to disclose it as ``average daily balance (excluding new 
cash advances)'' when the balance for cash advances is figured by adding 
the outstanding balance (excluding new cash advances and deducting 
payments and credits) for each day in the billing cycle, and then 
dividing by the number of days in the billing cycle. See comment 
6(b)(2)(vi)-1 for guidance on the use of one balance computation name 
when the same balance computation method is used for all features on the 
account.
    6(b)(2)(xiii) Available credit.
    1. Right to reject the plan. Creditors may use the following 
language to describe consumers' right to reject a plan after receiving 
account-opening disclosures: ``You may still reject this plan, provided 
that you have not yet used the account or paid a fee after receiving a 
billing statement. If you do reject the plan, you are not responsible 
for any fees or charges.''
    6(b)(3) Disclosure of charges imposed as part of open-end (not home-
secured) plans.
    1. When finance charges accrue. Creditors are not required to 
disclose a specific date when a cost that is a finance charge under 
Sec. 226.4 will begin to accrue.
    2. Grace periods. In disclosing in the account agreement or 
disclosure statement whether or not a grace period exists, the creditor 
need not use any particular descriptive phrase or term. However, the 
descriptive phrase or term must be sufficiently similar to the 
disclosures provided pursuant to Sec. Sec. 226.5a(b)(5) and 
226.6(b)(2)(v) to satisfy a creditor's duty to provide consistent 
terminology under Sec. 226.5(a)(2).
    3. No finance charge imposed below certain balance. Creditors are 
not required to disclose the fact that no finance charge is imposed when 
the outstanding balance is less than a certain amount or the balance 
below which no finance charge will be imposed.
    Paragraph 6(b)(3)(ii).
    1. Failure to use the plan as agreed. Late payment fees, over-the-
limit fees, and fees for payments returned unpaid are examples of 
charges resulting from consumers' failure to use the plan as agreed.
    2. Examples of fees that affect the plan. Examples of charges the 
payment, or nonpayment, of which affects the consumer's account are:
    i. Access to the plan. Fees for using the card at the creditor's ATM 
to obtain a cash advance, fees to obtain additional cards including 
replacements for lost or stolen cards, fees to expedite delivery of 
cards or other credit devices, application and membership

[[Page 590]]

fees, and annual or other participation fees identified in Sec. 
226.4(c)(4).
    ii. Amount of credit extended. Fees for increasing the credit limit 
on the account, whether at the consumer's request or unilaterally by the 
creditor.
    iii. Timing or method of billing or payment. Fees to pay by 
telephone or via the Internet.
    3. Threshold test. If the creditor is unsure whether a particular 
charge is a cost imposed as part of the plan, the creditor may at its 
option consider such charges as a cost imposed as part of the plan for 
purposes of the Truth in Lending Act.
    Paragraph 6(b)(3)(iii)(B).
    1. Fees for package of services. A fee to join a credit union is an 
example of a fee for a package of services that is not imposed as part 
of the plan, even if the consumer must join the credit union to apply 
for credit. In contrast, a membership fee is an example of a fee for a 
package of services that is considered to be imposed as part of a plan 
where the primary benefit of membership in the organization is the 
opportunity to apply for a credit card, and the other benefits offered 
(such as a newsletter or a member information hotline) are merely 
incidental to the credit feature.
    6(b)(4) Disclosure of rates for open-end (not home-secured) plans.
    Paragraph 6(b)(4)(i)(B).
    1. Range of balances. Creditors are not required to disclose the 
range of balances:
    i. If only one periodic interest rate may be applied to the entire 
account balance.
    ii. If only one periodic interest rate may be applied to the entire 
balance for a feature (for example, cash advances), even though the 
balance for another feature (purchases) may be subject to two rates (a 
1.5% monthly periodic interest rate on purchase balances of $0-$500, and 
a 1% periodic interest rate for balances above $500). In this example, 
the creditor must give a range of balances disclosure for the purchase 
feature.
    Paragraph 6(b)(4)(i)(D).
    1. Explanation of balance computation method. Creditors do not 
provide a sufficient explanation of a balance computation method by 
using a shorthand phrase such as ``previous balance method'' or the name 
of a balance computation method listed in Sec. 226.5a(g). (See Model 
Clauses G-1(A) in appendix G to part 226. See Sec. 226.6(b)(2)(vi) 
regarding balance computation descriptions in the account-opening 
summary.)
    2. Allocation of payments. Creditors may, but need not, explain how 
payments and other credits are allocated to outstanding balances.
    6(b)(4)(ii) Variable-rate accounts.
    1. Variable-rate disclosures--coverage.
    i. Examples. Examples of open-end plans that permit the rate to 
change and are considered variable-rate plans include:
    A. Rate changes that are tied to the rate the creditor pays on its 
six-month certificates of deposit.
    B. Rate changes that are tied to Treasury bill rates.
    C. Rate changes that are tied to changes in the creditor's 
commercial lending rate.
    ii. Examples of open-end plans that permit the rate to change and 
are not considered variable-rate include:
    A. Rate changes that are invoked under a creditor's contract 
reservation to increase the rate without reference to such an index or 
formula (for example, a plan that simply provides that the creditor 
reserves the right to raise its rates).
    B. Rate changes that are triggered by a specific event such as an 
open-end credit plan in which the employee receives a lower rate 
contingent upon employment, and the rate increases upon termination of 
employment.
    2. Variable-rate plan--circumstances for increase.
    i. The following are examples that comply with the requirement to 
disclose circumstances under which the rate(s) may increase:
    A. ``The Treasury bill rate increases.''
    B. ``The Federal Reserve discount rate increases.''
    ii. Disclosing the frequency with which the rate may increase 
includes disclosing when the increase will take effect; for example:
    A. ``An increase will take effect on the day that the Treasury bill 
rate increases.''
    B. ``An increase in the Federal Reserve discount rate will take 
effect on the first day of the creditor's billing cycle.''
    3. Variable-rate plan--limitations on increase. In disclosing any 
limitations on rate increases, limitations such as the maximum increase 
per year or the maximum increase over the duration of the plan must be 
disclosed. When there are no limitations, the creditor may, but need 
not, disclose that fact. Legal limits such as usury or rate ceilings 
under state or federal statutes or regulations need not be disclosed. 
Examples of limitations that must be disclosed include:
    i. ``The rate on the plan will not exceed 25% annual percentage 
rate.''
    ii. ``Not more than \1/2\ of 1% increase in the annual percentage 
rate per year will occur.''
    4. Variable-rate plan--effects of increase. Examples of effects of 
rate increases that must be disclosed include:
    i. Any requirement for additional collateral if the annual 
percentage rate increases beyond a specified rate.
    ii. Any increase in the scheduled minimum periodic payment amount.
    5. Discounted variable-rate plans. In some variable-rate plans, 
creditors may set an initial interest rate that is not determined by

[[Page 591]]

the index or formula used to make later interest rate adjustments. 
Typically, this initial rate is lower than the rate would be if it were 
calculated using the index or formula.
    i. For example, a creditor may calculate interest rates according to 
a formula using the six-month Treasury bill rate plus a 2 percent 
margin. If the current Treasury bill rate is 10 percent, the creditor 
may forgo the 2 percent spread and charge only 10 percent for a limited 
time, instead of setting an initial rate of 12 percent, or the creditor 
may disregard the index or formula and set the initial rate at 9 
percent.
    ii. When creditors disclose in the account-opening disclosures an 
initial rate that is not calculated using the index or formula for later 
rate adjustments, the disclosure should reflect:
    A. The initial rate (expressed as a periodic rate and a 
corresponding annual percentage rate), together with a statement of how 
long the initial rate will remain in effect;
    B. The current rate that would have been applied using the index or 
formula (also expressed as a periodic rate and a corresponding annual 
percentage rate); and
    C. The other variable-rate information required by Sec. 
226.6(b)(4)(ii).
    6(b)(4)(iii) Rate changes not due to index or formula.
    1. Events that cause the initial rate to change.
    i. Changes based on expiration of time period. If the initial rate 
will change at the expiration of a time period, creditors that disclose 
the initial rate in the account-opening disclosure must identify the 
expiration date and the fact that the initial rate will end at that 
time.
    ii. Changes based on specified contract terms. If the account 
agreement provides that the creditor may change the initial rate upon 
the occurrence of a specified event or events, the creditor must 
identify the events or events. Examples include the consumer not making 
the required minimum payment when due, or the termination of an employee 
preferred rate when the employment relationship is terminated.
    2. Rate that will apply after initial rate changes.
    i. Increased margins. If the initial rate is based on an index and 
the rate may increase due to a change in the margin applied to the 
index, the creditor must disclose the increased margin. If more than one 
margin could apply, the creditor may disclose the highest margin.
    ii. Risk-based pricing. In some plans, the amount of the rate change 
depends on how the creditor weighs the occurrence of events specified in 
the account agreement that authorize the creditor to change rates, as 
well as other factors. Creditors must state the increased rate that may 
apply. At the creditor's option, the creditor may state the possible 
rates as a range, or by stating only the highest rate that could be 
assessed. The creditor must disclose the period for which the increased 
rate will remain in effect, such as ``until you make three timely 
payments,'' or if there is no limitation, the fact that the increased 
rate may remain indefinitely.
    3. Effect of rate change on balances. Creditors must disclose 
information to consumers about the balance to which the new rate will 
apply and the balance to which the current rate at the time of the 
change will apply. Card issuers subject to Sec. 226.55 may be subject 
to certain restrictions on the application of increased rates to certain 
balances.
    6(b)(5) Additional disclosures for open-end (not home-secured) 
plans.
    6(b)(5)(i) Voluntary credit insurance, debt cancellation or debt 
suspension.
    1. Timing. Under Sec. 226.4(d), disclosures required to exclude the 
cost of voluntary credit insurance or debt cancellation or debt 
suspension coverage from the finance charge must be provided before the 
consumer agrees to the purchase of the insurance or coverage. Creditors 
comply with Sec. 226.6(b)(5)(i) if they provide those disclosures in 
accordance with Sec. 226.4(d). For example, if the disclosures required 
by Sec. 226.4(d) are provided at application, creditors need not repeat 
those disclosures at account opening.
    6(b)(5)(ii) Security interests.
    1. General. Creditors are not required to use specific terms to 
describe a security interest, or to explain the type of security or the 
creditor's rights with respect to the collateral.
    2. Identification of property. Creditors sufficiently identify 
collateral by type by stating, for example, motor vehicle or household 
appliances. (Creditors should be aware, however, that the federal credit 
practices rules, as well as some state laws, prohibit certain security 
interests in household goods.) The creditor may, at its option, provide 
a more specific identification (for example, a model and serial number.)
    3. Spreader clause. If collateral for preexisting credit with the 
creditor will secure the plan being opened, the creditor must disclose 
that fact. (Such security interests may be known as ``spreader'' or 
``dragnet'' clauses, or as ``cross-collateralization'' clauses.) The 
creditor need not specifically identify the collateral; a reminder such 
as ``collateral securing other loans with us may also secure this loan'' 
is sufficient. At the creditor's option, a more specific description of 
the property involved may be given.
    4. Additional collateral. If collateral is required when advances 
reach a certain amount, the creditor should disclose the information 
available at the time of the account-opening disclosures. For example, 
if the creditor knows that a security interest will be taken in 
household goods if the consumer's balance exceeds $1,000, the creditor 
should disclose accordingly. If the creditor

[[Page 592]]

knows that security will be required if the consumer's balance exceeds 
$1,000, but the creditor does not know what security will be required, 
the creditor must disclose on the initial disclosure statement that 
security will be required if the balance exceeds $1,000, and the 
creditor must provide a change-in-terms notice under Sec. 226.9(c) at 
the time the security is taken. (See comment 6(b)(5)(ii)-2.)
    5. Collateral from third party. Security interests taken in 
connection with the plan must be disclosed, whether the collateral is 
owned by the consumer or a third party.
    6(b)(5)(iii) Statement of billing rights.
    1. See the commentary to Model Forms G-3(A) and G-4(A).

                    Section 226.7--Periodic Statement

    1. Multifeatured plans. Some plans involve a number of different 
features, such as purchases, cash advances, or overdraft checking. 
Groups of transactions subject to different finance charge terms because 
of the dates on which the transactions took place are treated like 
different features for purposes of disclosures on the periodic 
statements. The commentary includes additional guidance for 
multifeatured plans.
    7(a) Rules affecting home-equity plans.
    7(a)(1) Previous balance.
    1. Credit balances. If the previous balance is a credit balance, it 
must be disclosed in such a way so as to inform the consumer that it is 
a credit balance, rather than a debit balance.
    2. Multifeatured plans. In a multifeatured plan, the previous 
balance may be disclosed either as an aggregate balance for the account 
or as separate balances for each feature (for example, a previous 
balance for purchases and a previous balance for cash advances). If 
separate balances are disclosed, a total previous balance is optional.
    3. Accrued finance charges allocated from payments. Some open-end 
credit plans provide that the amount of the finance charge that has 
accrued since the consumer's last payment is directly deducted from each 
new payment, rather than being separately added to each statement and 
reflected as an increase in the obligation. In such a plan, the previous 
balance need not reflect finance charges accrued since the last payment.
    7(a)(2) Identification of transactions.
    1. Multifeatured plans. In identifying transactions under Sec. 
226.7(a)(2) for multifeatured plans, creditors may, for example, choose 
to arrange transactions by feature (such as disclosing sale transactions 
separately from cash advance transactions) or in some other clear 
manner, such as by arranging the transactions in general chronological 
order.
    2. Automated teller machine (ATM) charges imposed by other 
institutions in shared or interchange systems. A charge imposed on the 
cardholder by an institution other than the card issuer for the use of 
the other institution's ATM in a shared or interchange system and 
included by the terminal-operating institution in the amount of the 
transaction need not be separately disclosed on the periodic statement.
    7(a)(3) Credits.
    1. Identification--sufficiency. The creditor need not describe each 
credit by type (returned merchandise, rebate of finance charge, etc.)--
``credit'' would suffice--except if the creditor is using the periodic 
statement to satisfy the billing-error correction notice requirement. 
(See the commentary to Sec. 226.13(e) and (f).)
    2. Format. A creditor may list credits relating to credit extensions 
(payments, rebates, etc.) together with other types of credits (such as 
deposits to a checking account), as long as the entries are identified 
so as to inform the consumer which type of credit each entry represents.
    3. Date. If only one date is disclosed (that is, the crediting date 
as required by the regulation), no further identification of that date 
is necessary. More than one date may be disclosed for a single entry, as 
long as it is clear which date represents the date on which credit was 
given.
    4. Totals. A total of amounts credited during the billing cycle is 
not required.
    7(a)(4) Periodic rates.
    1. Disclosure of periodic rates--whether or not actually applied. 
Except as provided in Sec. 226.7(a)(4)(ii), any periodic rate that may 
be used to compute finance charges (and its corresponding annual 
percentage rate) must be disclosed whether or not it is applied during 
the billing cycle. For example:
    i. If the consumer's account has both a purchase feature and a cash 
advance feature, the creditor must disclose the rate for each, even if 
the consumer only makes purchases on the account during the billing 
cycle.
    ii. If the rate varies (such as when it is tied to a particular 
index), the creditor must disclose each rate in effect during the cycle 
for which the statement was issued.
    2. Disclosure of periodic rates required only if imposition 
possible. With regard to the periodic rate disclosure (and its 
corresponding annual percentage rate), only rates that could have been 
imposed during the billing cycle reflected on the periodic statement 
need to be disclosed. For example:
    i. If the creditor is changing rates effective during the next 
billing cycle (because of a variable-rate plan), the rates required to 
be disclosed under Sec. 226.7(a)(4) are only those in effect during the 
billing cycle reflected on the periodic statement. For example, if the 
monthly rate applied during May was 1.5%, but the creditor will increase 
the rate to 1.8% effective June 1, 1.5% (and its corresponding annual 
percentage rate) is the only required disclosure under Sec. 226.7(a)(4) 
for the periodic statement reflecting the May account activity.

[[Page 593]]

    ii. If rates applicable to a particular type of transaction changed 
after a certain date and the old rate is only being applied to 
transactions that took place prior to that date, the creditor need not 
continue to disclose the old rate for those consumers that have no 
outstanding balances to which that rate could be applied.
    3. Multiple rates--same transaction. If two or more periodic rates 
are applied to the same balance for the same type of transaction (for 
example, if the finance charge consists of a monthly periodic rate of 
1.5% applied to the outstanding balance and a required credit life 
insurance component calculated at 0.1% per month on the same outstanding 
balance), the creditor may do either of the following:
    i. Disclose each periodic rate, the range of balances to which it is 
applicable, and the corresponding annual percentage rate for each. (For 
example, 1.5% monthly, 18% annual percentage rate; 0.1% monthly, 1.2% 
annual percentage rate.)
    ii. Disclose one composite periodic rate (that is, 1.6% per month) 
along with the applicable range of balances and the corresponding annual 
percentage rate.
    4. Corresponding annual percentage rate. In disclosing the annual 
percentage rate that corresponds to each periodic rate, the creditor may 
use ``corresponding annual percentage rate,'' ``nominal annual 
percentage rate,'' ``corresponding nominal annual percentage rate,'' or 
similar phrases.
    5. Rate same as actual annual percentage rate. When the 
corresponding rate is the same as the annual percentage rate disclosed 
under Sec. 226.7(a)(7), the creditor need disclose only one annual 
percentage rate, but must use the phrase ``annual percentage rate.''
    6. Range of balances. See comment 6(a)(1)(ii)-1. A creditor is not 
required to adjust the range of balances disclosure to reflect the 
balance below which only a minimum charge applies.
    7(a)(5) Balance on which finance charge computed.
    1. Limitation to periodic rates. Section 226.7(a)(5) only requires 
disclosure of the balance(s) to which a periodic rate was applied and 
does not apply to balances on which other kinds of finance charges (such 
as transaction charges) were imposed. For example, if a consumer obtains 
a $1,500 cash advance subject to both a 1% transaction fee and a 1% 
monthly periodic rate, the creditor need only disclose the balance 
subject to the monthly rate (which might include portions of earlier 
cash advances not paid off in previous cycles).
    2. Split rates applied to balance ranges. If split rates were 
applied to a balance because different portions of the balance fall 
within two or more balance ranges, the creditor need not separately 
disclose the portions of the balance subject to such different rates 
since the range of balances to which the rates apply has been separately 
disclosed. For example, a creditor could disclose a balance of $700 for 
purchases even though a monthly periodic rate of 1.5% applied to the 
first $500, and a monthly periodic rate of 1% to the remainder. This 
option to disclose a combined balance does not apply when the finance 
charge is computed by applying the split rates to each day's balance (in 
contrast, for example, to applying the rates to the average daily 
balance). In that case, the balances must be disclosed using any of the 
options that are available if two or more daily rates are imposed. (See 
comment 7(a)(5)-5.)
    3. Monthly rate on average daily balance. Creditors may apply a 
monthly periodic rate to an average daily balance.
    4. Multifeatured plans. In a multifeatured plan, the creditor must 
disclose a separate balance (or balances, as applicable) to which a 
periodic rate was applied for each feature or group of features subject 
to different periodic rates or different balance computation methods. 
Separate balances are not required, however, merely because a grace 
period is available for some features but not others. A total balance 
for the entire plan is optional. This does not affect how many balances 
the creditor must disclose--or may disclose--within each feature. (See, 
for example, comment 7(a)(5)-5.)
    5. Daily rate on daily balances. i. If the finance charge is 
computed on the balance each day by application of one or more daily 
periodic rates, the balance on which the finance charge was computed may 
be disclosed in any of the following ways for each feature:
    ii. If a single daily periodic rate is imposed, the balance to which 
it is applicable may be stated as:
    A. A balance for each day in the billing cycle.
    B. A balance for each day in the billing cycle on which the balance 
in the account changes.
    C. The sum of the daily balances during the billing cycle.
    D. The average daily balance during the billing cycle, in which case 
the creditor shall explain that the average daily balance is or can be 
multiplied by the number of days in the billing cycle and the periodic 
rate applied to the product to determine the amount of the finance 
charge.
    iii. If two or more daily periodic rates may be imposed, the 
balances to which the rates are applicable may be stated as:
    A. A balance for each day in the billing cycle.
    B. A balance for each day in the billing cycle on which the balance 
in the account changes.
    C. Two or more average daily balances, each applicable to the daily 
periodic rates imposed for the time that those rates were in effect, as 
long as the creditor explains that the finance charge is or may be 
determined

[[Page 594]]

by (1) multiplying each of the average balances by the number of days in 
the billing cycle (or if the daily rate varied during the cycle, by 
multiplying by the number of days the applicable rate was in effect), 
(2) multiplying each of the results by the applicable daily periodic 
rate, and (3) adding these products together.
    6. Explanation of balance computation method. See the commentary to 
6(a)(1)(iii).
    7. Information to compute balance. In connection with disclosing the 
finance charge balance, the creditor need not give the consumer all of 
the information necessary to compute the balance if that information is 
not otherwise required to be disclosed. For example, if current 
purchases are included from the date they are posted to the account, the 
posting date need not be disclosed.
    8. Non-deduction of credits. The creditor need not specifically 
identify the total dollar amount of credits not deducted in computing 
the finance charge balance. Disclosure of the amount of credits not 
deducted is accomplished by listing the credits (Sec. 226.7(a)(3)) and 
indicating which credits will not be deducted in determining the balance 
(for example, ``credits after the 15th of the month are not deducted in 
computing the finance charge.'').
    9. Use of one balance computation method explanation when multiple 
balances disclosed. Sometimes the creditor will disclose more than one 
balance to which a periodic rate was applied, even though each balance 
was computed using the same balance computation method. For example, if 
a plan involves purchases and cash advances that are subject to 
different rates, more than one balance must be disclosed, even though 
the same computation method is used for determining the balance for each 
feature. In these cases, one explanation of the balance computation 
method is sufficient. Sometimes the creditor separately discloses the 
portions of the balance that are subject to different rates because 
different portions of the balance fall within two or more balance 
ranges, even when a combined balance disclosure would be permitted under 
comment 7(a)(5)-2. In these cases, one explanation of the balance 
computation method is also sufficient (assuming, of course, that all 
portions of the balance were computed using the same method).
    7(a)(6) Amount of finance charge and other charges.
    Paragraph 7(a)(6)(i).
    1. Total. A total finance charge amount for the plan is not 
required.
    2. Itemization--types of finance charges. Each type of finance 
charge (such as periodic rates, transaction charges, and minimum 
charges) imposed during the cycle must be separately itemized; for 
example, disclosure of only a combined finance charge attributable to 
both a minimum charge and transaction charges would not be permissible. 
Finance charges of the same type may be disclosed, however, individually 
or as a total. For example, five transaction charges of $1 may be listed 
separately or as $5.
    3. Itemization--different periodic rates. Whether different periodic 
rates are applicable to different types of transactions or to different 
balance ranges, the creditor may give the finance charge attributable to 
each rate or may give a total finance charge amount. For example, if a 
creditor charges 1.5% per month on the first $500 of a balance and 1% 
per month on amounts over $500, the creditor may itemize the two 
components ($7.50 and $1.00) of the $8.50 charge, or may disclose $8.50.
    4. Multifeatured plans. In a multifeatured plan, in disclosing the 
amount of the finance charge attributable to the application of periodic 
rates no total periodic rate disclosure for the entire plan need be 
given.
    5. Finance charges not added to account. A finance charge that is 
not included in the new balance because it is payable to a third party 
(such as required life insurance) must still be shown on the periodic 
statement as a finance charge.
    6. Finance charges other than periodic rates. See comment 
6(a)(1)(iv)-1 for examples.
    7. Accrued finance charges allocated from payments. Some plans 
provide that the amount of the finance charge that has accrued since the 
consumer's last payment is directly deducted from each new payment, 
rather than being separately added to each statement and therefore 
reflected as an increase in the obligation. In such a plan, no 
disclosure is required of finance charges that have accrued since the 
last payment.
    8. Start-up fees. Points, loan fees, and similar finance charges 
relating to the opening of the account that are paid prior to the 
issuance of the first periodic statement need not be disclosed on the 
periodic statement. If, however, these charges are financed as part of 
the plan, including charges that are paid out of the first advance, the 
charges must be disclosed as part of the finance charge on the first 
periodic statement. However, they need not be factored into the annual 
percentage rate. (See Sec. 226.14(c)(3).)
    Paragraph 7(a)(6)(ii).
    1. Identification. In identifying any other charges actually imposed 
during the billing cycle, the type is adequately described as late 
charge or membership fee, for example. Similarly, closing costs or 
settlement costs, for example, may be used to describe charges imposed 
in connection with real estate transactions that are excluded from the 
finance charge under Sec. 226.4(c)(7), if the same term (such as 
closing costs) was used in the initial disclosures and if the creditor 
chose to itemize and individually disclose the costs included in that 
term. Even though the taxes

[[Page 595]]

and filing or notary fees excluded from the finance charge under Sec. 
226.4(e) are not required to be disclosed as other charges under Sec. 
226.6(a)(2), these charges may be included in the amount shown as 
closing costs or settlement costs on the periodic statement, if the 
charges were itemized and disclosed as part of the closing costs or 
settlement costs on the initial disclosure statement. (See comment 
6(a)(2)-1 for examples of other charges.)
    2. Date. The date of imposing or debiting other charges need not be 
disclosed.
    3. Total. Disclosure of the total amount of other charges is 
optional.
    4. Itemization--types of other charges. Each type of other charge 
(such as late-payment charges, over-the-credit-limit charges, and 
membership fees) imposed during the cycle must be separately itemized; 
for example, disclosure of only a total of other charges attributable to 
both an over-the-credit-limit charge and a late-payment charge would not 
be permissible. Other charges of the same type may be disclosed, 
however, individually or as a total. For example, three fees of $3 for 
providing copies related to the resolution of a billing error could be 
listed separately or as $9.
    7(a)(7) Annual percentage rate.
    1. Plans subject to the requirements of Sec. 226.5b. For home-
equity plans subject to the requirements of Sec. 226.5b, creditors are 
not required to disclose an effective annual percentage rate. Creditors 
that state an annualized rate in addition to the corresponding annual 
percentage rate required by Sec. 226.7(a)(4) must calculate that rate 
in accordance with Sec. 226.14(c).
    2. Labels. Creditors that choose to disclose an annual percentage 
rate calculated under Sec. 226.14(c) and label the figure as ``annual 
percentage rate'' must label the periodic rate expressed as an 
annualized rate as the ``corresponding APR,'' ``nominal APR,'' or a 
similar phrase as provided in comment 7(a)(4)-4. Creditors also comply 
with the label requirement if the rate calculated under Sec. 226.14(c) 
is described as the ``effective APR'' or something similar. For those 
creditors, the periodic rate expressed as an annualized rate could be 
labeled ``annual percentage rate,'' consistent with the requirement 
under Sec. 226.7(b)(4). If the two rates represent different values, 
creditors must label the rates differently to meet the clear and 
conspicuous standard under Sec. 226.5(a)(1).
    7(a)(8) Grace period.
    1. Terminology. Although the creditor is required to indicate any 
time period the consumer may have to pay the balance outstanding without 
incurring additional finance charges, no specific wording is required, 
so long as the language used is consistent with that used on the 
account-opening disclosure statement. For example, ``To avoid additional 
finance charges, pay the new balance before --------'' would suffice.
    7(a)(9) Address for notice of billing errors.
    1. Terminology. The periodic statement should indicate the general 
purpose for the address for billing-error inquiries, although a detailed 
explanation or particular wording is not required.
    2. Telephone number. A telephone number, e-mail address, or Web site 
location may be included, but the mailing address for billing-error 
inquiries, which is the required disclosure, must be clear and 
conspicuous. The address is deemed to be clear and conspicuous if a 
precautionary instruction is included that telephoning or notifying the 
creditor by e-mail or Web site will not preserve the consumer's billing 
rights, unless the creditor has agreed to treat billing error notices 
provided by electronic means as written notices, in which case the 
precautionary instruction is required only for telephoning.
    7(a)(10) Closing date of billing cycle; new balance.
    1. Credit balances. See comment 7(a)(1)-1.
    2. Multifeatured plans. In a multifeatured plan, the new balance may 
be disclosed for each feature or for the plan as a whole. If separate 
new balances are disclosed, a total new balance is optional.
    3. Accrued finance charges allocated from payments. Some plans 
provide that the amount of the finance charge that has accrued since the 
consumer's last payment is directly deducted from each new payment, 
rather than being separately added to each statement and therefore 
reflected as an increase in the obligation. In such a plan, the new 
balance need not reflect finance charges accrued since the last payment.
    7(b) Rules affecting open-end (not home-secured) plans.
    1. Deferred interest or similar transactions. Creditors offer a 
variety of payment plans for purchases that permit consumers to avoid 
interest charges if the purchase balance is paid in full by a certain 
date. ``Deferred interest'' has the same meaning as in Sec. 
226.16(h)(2) and associated commentary. The following provides guidance 
for a deferred interest or similar plan where, for example, no interest 
charge is imposed on a $500 purchase made in January if the $500 balance 
is paid by July 31.
    i. Annual percentage rates. Under Sec. 226.7(b)(4), creditors must 
disclose each annual percentage rate that may be used to compute the 
interest charge. Under some plans with a deferred interest or similar 
feature, if the deferred interest balance is not paid by a certain date, 
July 31 in this example, interest charges applicable to the billing 
cycles between the date of purchase in January and July 31 may be 
imposed. Annual percentage rates that may apply to the deferred interest 
balance ($500 in this example) if the balance is not paid in full by 
July 31 must appear on periodic statements for the billing cycles 
between the date of purchase and July

[[Page 596]]

31. However, if the consumer does not pay the deferred interest balance 
by July 31, the creditor is not required to identify, on the periodic 
statement disclosing the interest charge for the deferred interest 
balance, annual percentage rates that have been disclosed in previous 
billing cycles between the date of purchase and July 31.
    ii. Balances subject to periodic rates. Under Sec. 226.7(b)(5), 
creditors must disclose the balances subject to interest during a 
billing cycle. The deferred interest balance ($500 in this example) is 
not subject to interest for billing cycles between the date of purchase 
and July 31 in this example. Periodic statements sent for those billing 
cycles should not include the deferred interest balance in the balance 
disclosed under Sec. 226.7(b)(5). This amount must be separately 
disclosed on periodic statements and identified by a term other than the 
term used to identify the balance disclosed under Sec. 226.7(b)(5) 
(such as ``deferred interest balance''). During any billing cycle in 
which an interest charge on the deferred interest balance is debited to 
the account, the balance disclosed under Sec. 226.7(b)(5) should 
include the deferred interest balance for that billing cycle.
    iii. Amount of interest charge. Under Sec. 226.7(b)(6)(ii), 
creditors must disclose interest charges imposed during a billing cycle. 
For some deferred interest purchases, the creditor may impose interest 
from the date of purchase if the deferred interest balance ($500 in this 
example) is not paid in full by July 31 in this example, but otherwise 
will not impose interest for billing cycles between the date of purchase 
and July 31. Periodic statements for billing cycles preceding July 31 in 
this example should not include in the interest charge disclosed under 
Sec. 226.7(b)(6)(ii) the amounts a consumer may owe if the deferred 
interest balance is not paid in full by July 31. In this example, the 
February periodic statement should not identify as interest charges 
interest attributable to the $500 January purchase. This amount must be 
separately disclosed on periodic statements and identified by a term 
other than ``interest charge'' (such as ``contingent interest charge'' 
or ``deferred interest charge''). The interest charge on a deferred 
interest balance should be reflected on the periodic statement under 
Sec. 226.7(b)(6)(ii) for the billing cycle in which the interest charge 
is debited to the account.
    iv. Due date to avoid obligation for finance charges under a 
deferred interest or similar program. Section 226.7(b)(14) requires 
disclosure on periodic statements of the date by which any outstanding 
balance subject to a deferred interest or similar program must be paid 
in full in order to avoid the obligation for finance charges on such 
balance. This disclosure must appear on the front of any page of each 
periodic statement issued during the deferred interest period beginning 
with the first periodic statement issued during the deferred interest 
period that reflects the deferred interest or similar transaction.
    7(b)(1) Previous balance.
    1. Credit balances. If the previous balance is a credit balance, it 
must be disclosed in such a way so as to inform the consumer that it is 
a credit balance, rather than a debit balance.
    2. Multifeatured plans. In a multifeatured plan, the previous 
balance may be disclosed either as an aggregate balance for the account 
or as separate balances for each feature (for example, a previous 
balance for purchases and a previous balance for cash advances). If 
separate balances are disclosed, a total previous balance is optional.
    3. Accrued finance charges allocated from payments. Some open-end 
credit plans provide that the amount of the finance charge that has 
accrued since the consumer's last payment is directly deducted from each 
new payment, rather than being separately added to each statement and 
reflected as an increase in the obligation. In such a plan, the previous 
balance need not reflect finance charges accrued since the last payment.
    7(b)(2) Identification of transactions.
    1. Multifeatured plans. Creditors may, but are not required to, 
arrange transactions by feature (such as disclosing purchase 
transactions separately from cash advance transactions). Pursuant to 
Sec. 226.7(b)(6), however, creditors must group all fees and all 
interest separately from transactions and may not disclose any fees or 
interest charges with transactions.
    2. Automated teller machine (ATM) charges imposed by other 
institutions in shared or interchange systems. A charge imposed on the 
cardholder by an institution other than the card issuer for the use of 
the other institution's ATM in a shared or interchange system and 
included by the terminal-operating institution in the amount of the 
transaction need not be separately disclosed on the periodic statement.
    7(b)(3) Credits.
    1. Identification--sufficiency. The creditor need not describe each 
credit by type (returned merchandise, rebate of finance charge, etc.)--
``credit'' would suffice--except if the creditor is using the periodic 
statement to satisfy the billing-error correction notice requirement. 
(See the commentary to Sec. 226.13(e) and (f).) Credits may be 
distinguished from transactions in any way that is clear and 
conspicuous, for example, by use of debit and credit columns or by use 
of plus signs and/or minus signs.
    2. Date. If only one date is disclosed (that is, the crediting date 
as required by the regulation), no further identification of that date 
is necessary. More than one date may be disclosed for a single entry, as 
long as it is clear which date represents the date on which credit was 
given.

[[Page 597]]

    3. Totals. A total of amounts credited during the billing cycle is 
not required.
    7(b)(4) Periodic rates.
    1. Disclosure of periodic interest rates--whether or not actually 
applied. Except as provided in Sec. 226.7(b)(4)(ii), any periodic 
interest rate that may be used to compute finance charges, expressed as 
and labeled ``Annual Percentage Rate,'' must be disclosed whether or not 
it is applied during the billing cycle. For example
    i. If the consumer's account has both a purchase feature and a cash 
advance feature, the creditor must disclose the annual percentage rate 
for each, even if the consumer only makes purchases on the account 
during the billing cycle.
    ii. If the annual percentage rate varies (such as when it is tied to 
a particular index), the creditor must disclose each annual percentage 
rate in effect during the cycle for which the statement was issued.
    2. Disclosure of periodic interest rates required only if imposition 
possible. With regard to the periodic interest rate disclosure (and its 
corresponding annual percentage rate), only rates that could have been 
imposed during the billing cycle reflected on the periodic statement 
need to be disclosed. For example
    i. If the creditor is changing annual percentage rates effective 
during the next billing cycle (either because it is changing terms or 
because of a variable-rate plan), the annual percentage rates required 
to be disclosed under Sec. 226.7(b)(4) are only those in effect during 
the billing cycle reflected on the periodic statement. For example, if 
the annual percentage rate applied during May was 18%, but the creditor 
will increase the rate to 21% effective June 1, 18% is the only required 
disclosure under Sec. 226.7(b)(4) for the periodic statement reflecting 
the May account activity.
    ii. If the consumer has an overdraft line that might later be 
expanded upon the consumer's request to include secured advances, the 
rates for the secured advance feature need not be given until such time 
as the consumer has requested and received access to the additional 
feature.
    iii. If annual percentage rates applicable to a particular type of 
transaction changed after a certain date and the old rate is only being 
applied to transactions that took place prior to that date, the creditor 
need not continue to disclose the old rate for those consumers that have 
no outstanding balances to which that rate could be applied.
    3. Multiple rates--same transaction. If two or more periodic rates 
are applied to the same balance for the same type of transaction (for 
example, if the interest charge consists of a monthly periodic interest 
rate of 1.5% applied to the outstanding balance and a required credit 
life insurance component calculated at 0.1% per month on the same 
outstanding balance), creditors must disclose the periodic interest 
rate, expressed as an 18% annual percentage rate and the range of 
balances to which it is applicable. Costs attributable to the credit 
life insurance component must be disclosed as a fee under Sec. 
226.7(b)(6)(iii).
    4. Fees. Creditors that identify fees in accordance with Sec. 
226.7(b)(6)(iii) need not identify the periodic rate at which a fee 
would accrue if the fee remains unpaid. For example, assume a fee is 
imposed for a late payment in the previous cycle and that the fee, 
unpaid, would be included in the purchases balance and accrue interest 
at the rate for purchases. The creditor need not separately disclose 
that the purchase rate applies to the portion of the purchases balance 
attributable to the unpaid fee.
    5. Ranges of balances. See comment 6(b)(4)(i)(B)-1. A creditor is 
not required to adjust the range of balances disclosure to reflect the 
balance below which only a minimum charge applies.
    6. Deferred interest transactions. See comment 7(b)-1.i.
    7(b)(5) Balance on which finance charge computed.
    1. Split rates applied to balance ranges. If split rates were 
applied to a balance because different portions of the balance fall 
within two or more balance ranges, the creditor need not separately 
disclose the portions of the balance subject to such different rates 
since the range of balances to which the rates apply has been separately 
disclosed. For example, a creditor could disclose a balance of $700 for 
purchases even though a monthly periodic rate of 1.5% applied to the 
first $500, and a monthly periodic rate of 1% to the remainder. This 
option to disclose a combined balance does not apply when the interest 
charge is computed by applying the split rates to each day's balance (in 
contrast, for example, to applying the rates to the average daily 
balance). In that case, the balances must be disclosed using any of the 
options that are available if two or more daily rates are imposed. (See 
comment 7(b)(5)-4.)
    2. Monthly rate on average daily balance. Creditors may apply a 
monthly periodic rate to an average daily balance.
    3. Multifeatured plans. In a multifeatured plan, the creditor must 
disclose a separate balance (or balances, as applicable) to which a 
periodic rate was applied for each feature. Separate balances are not 
required, however, merely because a grace period is available for some 
features but not others. A total balance for the entire plan is 
optional. This does not affect how many balances the creditor must 
disclose--or may disclose--within each feature. (See, for example, 
comments 7(b)(5)-4 and 7(b)(4)-5.)
    4. Daily rate on daily balance. i. If a finance charge is computed 
on the balance each day by application of one or more daily periodic

[[Page 598]]

interest rates, the balance on which the interest charge was computed 
may be disclosed in any of the following ways for each feature
    ii. If a single daily periodic interest rate is imposed, the balance 
to which it is applicable may be stated as
    A. A balance for each day in the billing cycle.
    B. A balance for each day in the billing cycle on which the balance 
in the account changes.
    C. The sum of the daily balances during the billing cycle.
    D. The average daily balance during the billing cycle, in which case 
the creditor may, at its option, explain that the average daily balance 
is or can be multiplied by the number of days in the billing cycle and 
the periodic rate applied to the product to determine the amount of 
interest.
    iii. If two or more daily periodic interest rates may be imposed, 
the balances to which the rates are applicable may be stated as
    A. A balance for each day in the billing cycle.
    B. A balance for each day in the billing cycle on which the balance 
in the account changes.
    C. Two or more average daily balances, each applicable to the daily 
periodic interest rates imposed for the time that those rates were in 
effect. The creditor may, at its option, explain that interest is or may 
be determined by (1) multiplying each of the average balances by the 
number of days in the billing cycle (or if the daily rate varied during 
the cycle, by multiplying by the number of days the applicable rate was 
in effect), (2) multiplying each of the results by the applicable daily 
periodic rate, and (3) adding these products together.
    5. Information to compute balance. In connection with disclosing the 
interest charge balance, the creditor need not give the consumer all of 
the information necessary to compute the balance if that information is 
not otherwise required to be disclosed. For example, if current 
purchases are included from the date they are posted to the account, the 
posting date need not be disclosed.
    6. Non-deduction of credits. The creditor need not specifically 
identify the total dollar amount of credits not deducted in computing 
the finance charge balance. Disclosure of the amount of credits not 
deducted is accomplished by listing the credits (Sec. 226.7(b)(3)) and 
indicating which credits will not be deducted in determining the balance 
(for example, ``credits after the 15th of the month are not deducted in 
computing the interest charge.'').
    7. Use of one balance computation method explanation when multiple 
balances disclosed. Sometimes the creditor will disclose more than one 
balance to which a periodic rate was applied, even though each balance 
was computed using the same balance computation method. For example, if 
a plan involves purchases and cash advances that are subject to 
different rates, more than one balance must be disclosed, even though 
the same computation method is used for determining the balance for each 
feature. In these cases, one explanation or a single identification of 
the name of the balance computation method is sufficient. Sometimes the 
creditor separately discloses the portions of the balance that are 
subject to different rates because different portions of the balance 
fall within two or more balance ranges, even when a combined balance 
disclosure would be permitted under comment 7(b)(5)-1. In these cases, 
one explanation or a single identification of the name of the balance 
computation method is also sufficient (assuming, of course, that all 
portions of the balance were computed using the same method). In these 
cases, a creditor may use an appropriate name listed in Sec. 226.5a(g) 
(e.g., ``average daily balance (including new purchases)'') as the 
single identification of the name of the balance computation method 
applicable to all features, even though the name only refers to 
purchases. For example, if a creditor uses the average daily balance 
method including new transactions for all features, a creditor may use 
the name ``average daily balance (including new purchases)'' listed in 
Sec. 226.5a(g)(i) to satisfy the requirement to disclose the name of 
the balance computation method for all features. As an alternative, in 
this situation, a creditor may revise the balance computation names 
listed in Sec. 226.5a(g) to refer more broadly to all new credit 
transactions, such as using the language ``new transactions'' or 
``current transactions'' (e.g., ``average daily balance (including new 
transactions)''), rather than simply referring to new purchases, when 
the same method is used to calculate the balances for all features of 
the account.
    8. Use of balance computation names in Sec. 226.5a(g) for balances 
other than purchases. The names of the balance computation methods 
listed in Sec. 226.5a(g) describe balance computation methods for 
purchases. When a creditor is disclosing the name of the balance 
computation methods separately for each feature, in using the names 
listed in Sec. 226.5a(g) to satisfy the requirements of Sec. 
226.7(b)(5) for features other than purchases, a creditor must revise 
the names listed in Sec. 226.5a(g) to refer to the other features. For 
example, when disclosing the name of the balance computation method 
applicable to cash advances, a creditor must revise the name listed in 
Sec. 226.5a(g)(i) to disclose it as ``average daily balance (including 
new cash advances)'' when the balance for cash advances is figured by 
adding the outstanding balance (including new cash advances and 
deducting payments and credits) for each day in the

[[Page 599]]

billing cycle, and then dividing by the number of days in the billing 
cycle. Similarly, a creditor must revise the name listed in Sec. 
226.5a(g)(ii) to disclose it as ``average daily balance (excluding new 
cash advances)'' when the balance for cash advances is figured by adding 
the outstanding balance (excluding new cash advances and deducting 
payments and credits) for each day in the billing cycle, and then 
dividing by the number of days in the billing cycle. See comment 
7(b)(5)-7 for guidance on the use of one balance computation method 
explanation or name when multiple balances are disclosed.
    7(b)(6) Charges imposed.
    1. Examples of charges. See commentary to Sec. 226.6(b)(3).
    2. Fees. Costs attributable to periodic rates other than interest 
charges shall be disclosed as a fee. For example, if a consumer obtains 
credit life insurance that is calculated at 0.1% per month on an 
outstanding balance and a monthly interest rate of 1.5% applies to the 
same balance, the creditor must disclose the dollar cost attributable to 
interest as an ``interest charge'' and the credit insurance cost as a 
``fee.''
    3. Total fees and interest charged for calendar year to date.
    i. Monthly statements. Some creditors send monthly statements but 
the statement periods do not coincide with the calendar month. For 
creditors sending monthly statements, the following comply with the 
requirement to provide calendar year-to-date totals.
    A. A creditor may disclose calendar-year-to-date totals at the end 
of the calendar year by separately aggregating finance charges 
attributable to periodic interest rates and fees for 12 monthly cycles, 
starting with the period that begins during January and finishing with 
the period that begins during December. For example, if statement 
periods begin on the 10th day of each month, the statement covering 
December 10, 2011 through January 9, 2012, may disclose the separate 
year-to-date totals for interest charged and fees imposed from January 
10, 2011, through January 9, 2012. Alternatively, the creditor could 
provide a statement for the cycle ending January 9, 2012, showing the 
separate year-to-date totals for interest charged and fees imposed 
January 1, 2011, through December 31, 2011.
    B. A creditor may disclose calendar-year-to-date totals at the end 
of the calendar year by separately aggregating finance charges 
attributable to periodic interest rates and fees for 12 monthly cycles, 
starting with the period that begins during December and finishing with 
the period that begins during November. For example, if statement 
periods begin on the 10th day of each month, the statement covering 
November 10, 2011 through December 9, 2011, may disclose the separate 
year-to-date totals for interest charged and fees imposed from December 
10, 2010, through December 9, 2011.
    ii. Quarterly statements. Creditors issuing quarterly statements may 
apply the guidance set forth for monthly statements to comply with the 
requirement to provide calendar year-to-date totals on quarterly 
statements.
    4. Minimum charge in lieu of interest. A minimum charge imposed if a 
charge would otherwise have been determined by applying a periodic rate 
to a balance except for the fact that such charge is smaller than the 
minimum must be disclosed as a fee. For example, assume a creditor 
imposes a minimum charge of $1.50 in lieu of interest if the calculated 
interest for a billing period is less than that minimum charge. If the 
interest calculated on a consumer's account for a particular billing 
period is 50 cents, the minimum charge of $1.50 would apply. In this 
case, the entire $1.50 would be disclosed as a fee; the periodic 
statement would reflect the $1.50 as a fee, and $0 in interest.
    5. Adjustments to year-to-date totals. In some cases, a creditor may 
provide a statement for the current period reflecting that fees or 
interest charges imposed during a previous period were waived or 
reversed and credited to the account. Creditors may, but are not 
required to, reflect the adjustment in the year-to-date totals, nor, if 
an adjustment is made, to provide an explanation about the reason for 
the adjustment. Such adjustments should not affect the total fees or 
interest charges imposed for the current statement period.
    6. Acquired accounts. An institution that acquires an account or 
plan must include, as applicable, fees and charges imposed on the 
account or plan prior to the acquisition in the aggregate disclosures 
provided under Sec. 226.7(b)(6) for the acquired account or plan. 
Alternatively, the institution may provide separate totals reflecting 
activity prior and subsequent to the account or plan acquisition. For 
example, a creditor that acquires an account or plan on August 12 of a 
given calendar year may provide one total for the period from January 1 
to August 11 and a separate total for the period beginning on August 12.
    7. Account upgrades. A creditor that upgrades, or otherwise changes, 
a consumer's plan to a different open-end credit plan must include, as 
applicable, fees and charges imposed for that portion of the calendar 
year prior to the upgrade or change in the consumer's plan in the 
aggregate disclosures provided pursuant to Sec. 226.7(b)(6) for the new 
plan. For example, assume a consumer has incurred $125 in fees for the 
calendar year to date for a retail credit card account, which is then 
replaced by a cobranded credit card account also issued by the creditor. 
In this case, the creditor must reflect the $125 in fees incurred prior 
to the replacement of the retail credit card account in the calendar

[[Page 600]]

year-to-date totals provided for the cobranded credit card account. 
Alternatively, the institution may provide two separate totals 
reflecting activity prior and subsequent to the plan upgrade or change.
    7(b)(7) Change-in-terms and increased penalty rate summary for open-
end (not home-secured) plans.
    1. Location of summary tables. If a change-in-terms notice required 
by Sec. 226.9(c)(2) is provided on or with a periodic statement, a 
tabular summary of key changes must appear on the front of the 
statement. Similarly, if a notice of a rate increase due to delinquency 
or default or as a penalty required by Sec. 226.9(g)(1) is provided on 
or with a periodic statement, information required to be provided about 
the increase, presented in a table, must appear on the front of the 
statement.
    7(b)(8) Grace period.
    1. Terminology. In describing the grace period, the language used 
must be consistent with that used on the account-opening disclosure 
statement. (See Sec. 226.5(a)(2)(i).)
    2. Deferred interest transactions. See comment 7(b)-1.iv.
    3. Limitation on the imposition of finance charges in Sec. 226.54. 
Section 226.7(b)(8) does not require a card issuer to disclose the 
limitations on the imposition of finance charges as a result of a loss 
of a grace period in Sec. 226.54, or the impact of payment allocation 
on whether interest is charged on transactions as a result of a loss of 
a grace period.
    7(b)(9) Address for notice of billing errors.
    1. Terminology. The periodic statement should indicate the general 
purpose for the address for billing-error inquiries, although a detailed 
explanation or particular wording is not required.
    2. Telephone number. A telephone number, e-mail address, or Web site 
location may be included, but the mailing address for billing-error 
inquiries, which is the required disclosure, must be clear and 
conspicuous. The address is deemed to be clear and conspicuous if a 
precautionary instruction is included that telephoning or notifying the 
creditor by e-mail or Web site will not preserve the consumer's billing 
rights, unless the creditor has agreed to treat billing error notices 
provided by electronic means as written notices, in which case the 
precautionary instruction is required only for telephoning.
    7(b)(10) Closing date of billing cycle; new balance.
    1. Credit balances. See comment 7(b)(1)-1.
    2. Multifeatured plans. In a multifeatured plan, the new balance may 
be disclosed for each feature or for the plan as a whole. If separate 
new balances are disclosed, a total new balance is optional.
    3. Accrued finance charges allocated from payments. Some plans 
provide that the amount of the finance charge that has accrued since the 
consumer's last payment is directly deducted from each new payment, 
rather than being separately added to each statement and therefore 
reflected as an increase in the obligation. In such a plan, the new 
balance need not reflect finance charges accrued since the last payment.
    7(b)(11) Due date; late payment costs.
    1. Informal periods affecting late payments. Although the terms of 
the account agreement may provide that a card issuer may assess a late 
payment fee if a payment is not received by a certain date, the card 
issuer may have an informal policy or practice that delays the 
assessment of the late payment fee for payments received a brief period 
of time after the date upon which a card issuer has the contractual 
right to impose the fee. A card issuer must disclose the due date 
according to the legal obligation between the parties, and need not 
consider the end of an informal ``courtesy period'' as the due date 
under Sec. 226.7(b)(11).
    2. Assessment of late payment fees. Some state or other laws require 
that a certain number of days must elapse following a due date before a 
late payment fee may be imposed. In addition, a card issuer may be 
restricted by the terms of the account agreement from imposing a late 
payment fee until a payment is late for a certain number of days 
following a due date. For example, assume a payment is due on March 10 
and the account agreement or state law provides that a late payment fee 
cannot be assessed before March 21. A card issuer must disclose the due 
date under the terms of the legal obligation (March 10 in this example), 
and not a date different than the due date, such as when the card issuer 
is restricted by the account agreement or state or other law from 
imposing a late payment fee unless a payment is late for a certain 
number of days following the due date (March 21 in this example). 
Consumers' rights under state law to avoid the imposition of late 
payment fees during a specified period following a due date are 
unaffected by the disclosure requirement. In this example, the card 
issuer would disclose March 10 as the due date for purposes of Sec. 
226.7(b)(11), but could not, under state law, assess a late payment fee 
before March 21.
    3. Fee or rate triggered by multiple events. If a late payment fee 
or penalty rate is triggered after multiple events, such as two late 
payments in six months, the card issuer may, but is not required to, 
disclose the late payment and penalty rate disclosure each month. The 
disclosures must be included on any periodic statement for which a late 
payment could trigger the late payment fee or penalty rate, such as 
after the consumer made one late payment in this example. For example, 
if a cardholder has already made one late payment, the disclosure must 
be on each statement for the following five billing cycles.

[[Page 601]]

    4. Range of late fees or penalty rates. A card issuer that imposes a 
range of late payment fees or rates on a credit card account under an 
open-end (not home-secured) consumer credit plan may state the highest 
fee or rate along with an indication lower fees or rates could be 
imposed. For example, a phrase indicating the late payment fee could be 
``up to $29'' complies with this requirement.
    5. Penalty rate in effect. If the highest penalty rate has 
previously been triggered on an account, the card issuer may, but is not 
required to, delete the amount of the penalty rate and the warning that 
the rate may be imposed for an untimely payment, as not applicable. 
Alternatively, the card issuer may, but is not required to, modify the 
language to indicate that the penalty rate has been increased due to 
previous late payments (if applicable).
    6. Same day each month. The requirement that the due date be the 
same day each month means that the due date must generally be the same 
numerical date. For example, a consumer's due date could be the 25th of 
every month. In contrast, a due date that is the same relative date but 
not numerical date each month, such as the third Tuesday of the month, 
generally would not comply with this requirement. However, a consumer's 
due date may be the last day of each month, even though that date will 
not be the same numerical date. For example, if a consumer's due date is 
the last day of each month, it will fall on February 28th (or February 
29th in a leap year) and on August 31st.
    7. Change in due date. A creditor may adjust a consumer's due date 
from time to time provided that the new due date will be the same 
numerical date each month on an ongoing basis. For example, a creditor 
may choose to honor a consumer's request to change from a due date that 
is the 20th of each month to the 5th of each month, or may choose to 
change a consumer's due date from time to time for operational reasons. 
See comment 2(a)(4)-3 for guidance on transitional billing cycles.
    8. Billing cycles longer than one month. The requirement that the 
due date be the same day each month does not prohibit billing cycles 
that are two or three months, provided that the due date for each 
billing cycle is on the same numerical date of the month. For example, a 
creditor that establishes two-month billing cycles could send a consumer 
periodic statements disclosing due dates of January 25, March 25, and 
May 25.
    9. Payment due date when the creditor does not accept or receive 
payments by mail. If the due date in a given month falls on a day on 
which the creditor does not receive or accept payments by mail and the 
creditor is required to treat a payment received the next business day 
as timely pursuant to Sec. 226.10(d), the creditor must disclose the 
due date according to the legal obligation between the parties, not the 
date as of which the creditor is permitted to treat the payment as late. 
For example, assume that the consumer's due date is the 4th of every 
month and the creditor does not accept or receive payments by mail on 
Thursday, July 4. Pursuant to Sec. 226.10(d), the creditor may not 
treat a mailed payment received on the following business day, Friday, 
July 5, as late for any purpose. The creditor must nonetheless disclose 
July 4 as the due date on the periodic statement and may not disclose a 
July 5 due date.
    7(b)(12) Repayment disclosures.
    1. Rounding. In disclosing on the periodic statement the minimum 
payment total cost estimate, the estimated monthly payment for repayment 
in 36 months, the total cost estimate for repayment in 36 months, and 
the savings estimate for repayment in 36 months under Sec. 
226.7(b)(12)(i) or (b)(12)(ii) as applicable, a card issuer, at its 
option, must either round these disclosures to the nearest whole dollar 
or to the nearest cent. Nonetheless, an issuer's rounding for all of 
these disclosures must be consistent. An issuer may round all of these 
disclosures to the nearest whole dollar when disclosing them on the 
periodic statement, or may round all of these disclosures to the nearest 
cent. An issuer may not, however, round some of the disclosures to the 
nearest whole dollar, while rounding other disclosures to the nearest 
cent.
    Paragraph 7(b)(12)(i)(F).
    1. Minimum payment repayment estimate disclosed on the periodic 
statement is three years or less. Section 226.7(b)(12)(i)(F)(2)(i) 
provides that a credit card issuer is not required to provide the 
disclosures related to repayment in 36 months if the minimum payment 
repayment estimate disclosed under Sec. 226.7(b)(12)(i)(B) after 
rounding is 3 years or less. For example, if the minimum payment 
repayment estimate is 2 years 6 months to 3 years 5 months, issuers 
would be required under Sec. 226.7(b)(12)(i)(B) to disclose that it 
would take 3 years to pay off the balance in full if making only the 
minimum payment. In these cases, an issuer would not be required to 
disclose the 36-month disclosures on the periodic statement because the 
minimum payment repayment estimate disclosed to the consumer on the 
periodic statement (after rounding) is 3 years or less.
    7(b)(12)(iv) Provision of information about credit counseling 
services.
    1. Approved organizations. Section 226.7(b)(12)(iv)(A) requires card 
issuers to provide information regarding at least three organizations 
that have been approved by the United States Trustee or a bankruptcy 
administrator pursuant to 11 U.S.C. 111(a)(1) to provide credit 
counseling services in, at the card issuer's option, either the state in 
which the billing address for the account is

[[Page 602]]

located or the state specified by the consumer. A card issuer does not 
satisfy the requirements in Sec. 226.7(b)(12)(iv)(A) by providing 
information regarding providers that have been approved pursuant to 11 
U.S.C. 111(a)(2) to offer personal financial management courses.
    2. Information regarding approved organizations. i. Provision of 
information obtained from United States Trustee or bankruptcy 
administrator. A card issuer complies with the requirements of Sec. 
226.7(b)(12)(iv)(A) if, through the toll-free number disclosed pursuant 
to Sec. 226.7(b)(12)(i) or (b)(12)(ii), it provides the consumer with 
information obtained from the United States Trustee or a bankruptcy 
administrator, such as information obtained from the Web site operated 
by the United States Trustee. Section 226.7(b)(12)(iv)(A) does not 
require a card issuer to provide information that is not available from 
the United States Trustee or a bankruptcy administrator. If, for 
example, the Web site address for an organization approved by the United 
States Trustee is not available from the Web site operated by the United 
States Trustee, a card issuer is not required to provide a Web site 
address for that organization. However, Sec. 226.7(b)(12)(iv)(B) 
requires the card issuer to, at least annually, update the information 
it provides for consistency with the information provided by the United 
States Trustee or a bankruptcy administrator.
    ii. Provision of information consistent with request of approved 
organization. If requested by an approved organization, a card issuer 
may at its option provide, in addition to the name of the organization 
obtained from the United States Trustee or a bankruptcy administrator, 
another name used by that organization through the toll-free number 
disclosed pursuant to Sec. 226.7(b)(12)(i) or (b)(12)(ii). In addition, 
if requested by an approved organization, a card issuer may at its 
option provide through the toll-free number disclosed pursuant to Sec. 
226.7(b)(12)(i) or (b)(12)(ii) a street address, telephone number, or 
Web site address for the organization that is different than the street 
address, telephone number, or Web site address obtained from the United 
States Trustee or a bankruptcy administrator. However, if requested by 
an approved organization, a card issuer must not provide information 
regarding that organization through the toll-free number disclosed 
pursuant to Sec. 226.7(b)(12)(i) or (b)(12)(ii).
    iii. Information regarding approved organizations that provide 
credit counseling services in a language other than English. A card 
issuer may at its option provide through the toll-free number disclosed 
pursuant to Sec. 226.7(b)(12)(i) or (b)(12)(ii) information regarding 
approved organizations that provide credit counseling services in 
languages other than English. In the alternative, a card issuer may at 
its option state that such information is available from the Web site 
operated by the United States Trustee. Disclosing this Web site address 
does not by itself constitute a statement that organizations have been 
approved by the United States Trustee for purposes of comment 
7(b)(12)(iv)-2.iv.
    iv. Statements regarding approval by the United States Trustee or a 
bankruptcy administrator. Section 226.7(b)(12)(iv) does not require a 
card issuer to disclose through the toll-free number disclosed pursuant 
to Sec. 226.7(b)(12)(i) or (b)(12)(ii) that organizations have been 
approved by the United States Trustee or a bankruptcy administrator. 
However, if a card issuer chooses to make such a disclosure, Sec. 
226.7(b)(12)(iv) requires that the card issuer also disclose that
    A. The United States Trustee or a bankruptcy administrator has 
determined that the organizations meet the minimum requirements for 
nonprofit pre-bankruptcy budget and credit counseling;
    B. The organizations may provide other credit counseling services 
that have not been reviewed by the United States Trustee or a bankruptcy 
administrator; and
    C. The United States Trustee or the bankruptcy administrator does 
not endorse or recommend any particular organization.
    3. Automated response systems or devices. At their option, card 
issuers may use toll-free telephone numbers that connect consumers to 
automated systems, such as an interactive voice response system, through 
which consumers may obtain the information required by Sec. 
226.7(b)(12)(iv) by inputting information using a touch-tone telephone 
or similar device.
    4. Toll-free telephone number. A card issuer may provide a toll-free 
telephone number that is designed to handle customer service calls 
generally, so long as the option to receive the information required by 
Sec. 226.7(b)(12)(iv) is prominently disclosed to the consumer. For 
automated systems, the option to receive the information required by 
Sec. 226.7(b)(12)(iv) is prominently disclosed to the consumer if it is 
listed as one of the options in the first menu of options given to the 
consumer, such as ``Press or say `3' if you would like information about 
credit counseling services.'' If the automated system permits callers to 
select the language in which the call is conducted and in which 
information is provided, the menu to select the language may precede the 
menu with the option to receive information about accessing credit 
counseling services.
    5. Third parties. At their option, card issuers may use a third 
party to establish and maintain a toll-free telephone number for use by 
the issuer to provide the information required by Sec. 
226.7(b)(12)(iv).
    6. Web site address. When making the repayment disclosures on the 
periodic statement

[[Page 603]]

pursuant to Sec. 226.7(b)(12), a card issuer at its option may also 
include a reference to a Web site address (in addition to the toll-free 
telephone number) where its customers may obtain the information 
required by Sec. 226.7(b)(12)(iv), so long as the information provided 
on the Web site complies with Sec. 226.7(b)(12)(iv). The Web site 
address disclosed must take consumers directly to the Web page where 
information about accessing credit counseling may be obtained. In the 
alternative, the card issuer may disclose the Web site address for the 
Web page operated by the United States Trustee where consumers may 
obtain information about approved credit counseling organizations. 
Disclosing this Web site address does not by itself constitute a 
statement that organizations have been approved by the United States 
Trustee for purposes of comment 7(b)(12)(iv)-2.iv.
    7. Advertising or marketing information. If a consumer requests 
information about credit counseling services, the card issuer may not 
provide advertisements or marketing materials to the consumer (except 
for providing the name of the issuer) prior to providing the information 
required by Sec. 226.7(b)(12)(iv). Educational materials that do not 
solicit business are not considered advertisements or marketing 
materials for this purpose. Examples
    i. Toll-free telephone number. As described in comment 7(b)(12)(iv)-
4, an issuer may provide a toll-free telephone number that is designed 
to handle customer service calls generally, so long as the option to 
receive the information required by Sec. 226.7(b)(12)(iv) through that 
toll-free telephone number is prominently disclosed to the consumer. 
Once the consumer selects the option to receive the information required 
by Sec. 226.7(b)(12)(iv), the issuer may not provide advertisements or 
marketing materials to the consumer (except for providing the name of 
the issuer) prior to providing the required information.
    ii. Web page. If the issuer discloses a link to a Web site address 
as part of the disclosures pursuant to comment 7(b)(12)(iv)-6, the 
issuer may not provide advertisements or marketing materials (except for 
providing the name of the issuer) on the Web page accessed by the 
address prior to providing the information required by Sec. 
226.7(b)(12)(iv).
    7(b)(12)(v) Exemptions.
    1. Billing cycle where paying the minimum payment due for that 
billing cycle will pay the outstanding balance on the account for that 
billing cycle. Under Sec. 226.7(b)(12)(v)(C), a card issuer is exempt 
from the repayment disclosure requirements set forth in Sec. 
226.7(b)(12) for a particular billing cycle where paying the minimum 
payment due for that billing cycle will pay the outstanding balance on 
the account for that billing cycle. For example, if the entire 
outstanding balance on an account for a particular billing cycle is $20 
and the minimum payment is $20, an issuer would not need to comply with 
the repayment disclosure requirements for that particular billing cycle. 
In addition, this exemption would apply to a charged-off account where 
payment of the entire account balance is due immediately.
    7(b)(13) Format requirements.
    1. Combined deposit account and credit account statements. Some 
financial institutions provide information about deposit account and 
open-end credit account activity on one periodic statement. For purposes 
of providing disclosures on the front of the first page of the periodic 
statement pursuant to Sec. 226.7(b)(13), the first page of such a 
combined statement shall be the page on which credit transactions first 
appear.

     Section 226.8--Identifying Transactions on Periodic Statements

    8(a) Sale credit.
    1. Sale credit. The term ``sale credit'' refers to a purchase in 
which the consumer uses a credit card or otherwise directly accesses an 
open-end line of credit (see comment 8(b)-1 if access is by means of a 
check) to obtain goods or services from a merchant, whether or not the 
merchant is the card issuer or creditor. ``Sale credit'' includes:
    i. The purchase of funds-transfer services (such as a wire transfer) 
from an intermediary.
    ii. The purchase of services from the card issuer or creditor. For 
the purchase of services that are costs imposed as part of the plan 
under Sec. 226.6(b)(3), card issuers and creditors comply with the 
requirements for identifying transactions under this section by 
disclosing the fees in accordance with the requirements of Sec. 
226.7(b)(6). For the purchases of services that are not costs imposed as 
part of the plan, card issuers and creditors may, at their option, 
identify transactions under this section or in accordance with the 
requirements of Sec. 226.7(b)(6).
    2. Amount--transactions not billed in full. If sale transactions are 
not billed in full on any single statement, but are billed periodically 
in precomputed installments, the first periodic statement reflecting the 
transaction must show either the full amount of the transaction together 
with the date the transaction actually took place; or the amount of the 
first installment that was debited to the account together with the date 
of the transaction or the date on which the first installment was 
debited to the account. In any event, subsequent periodic statements 
should reflect each installment due, together with either any other 
identifying information required by Sec. 226.8(a) (such as the seller's 
name and address in a three-party situation) or other appropriate 
identifying information relating the transaction to the first billing. 
The debiting date for the particular installment, or the date the 
transaction took place,

[[Page 604]]

may be used as the date of the transaction on these subsequent 
statements.
    3. Date--when a transaction takes place.
    i. If the consumer conducts the transaction in person, the date of 
the transaction is the calendar date on which the consumer made the 
purchase or order, or secured the advance.
    ii. For transactions billed to the account on an ongoing basis 
(other than installments to pay a precomputed amount), the date of the 
transaction is the date on which the amount is debited to the account. 
This might include, for example, monthly insurance premiums.
    iii. For mail, Internet, or telephone orders, a creditor may 
disclose as the transaction date either the invoice date, the debiting 
date, or the date the order was placed by telephone or via the Internet.
    iv. In a foreign transaction, the debiting date may be considered 
the transaction date.
    4. Date--sufficiency of description.
    i. If the creditor discloses only the date of the transaction, the 
creditor need not identify it as the ``transaction date.'' If the 
creditor discloses more than one date (for example, the transaction date 
and the posting date), the creditor must identify each.
    ii. The month and day sufficiently identify the transaction date, 
unless the posting of the transaction is delayed so long that the year 
is needed for a clear disclosure to the consumer.
    5. Same or related persons. i. For purposes of identifying 
transactions, the term same or related persons refers to, for example:
    A. Franchised or licensed sellers of a creditor's product or 
service.
    B. Sellers who assign or sell open-end sales accounts to a creditor 
or arrange for such credit under a plan that allows the consumer to use 
the credit only in transactions with that seller.
    ii. A seller is not related to the creditor merely because the 
seller and the creditor have an agreement authorizing the seller to 
honor the creditor's credit card.
    6. Brief identification--sufficiency of description. The ``brief 
identification'' provision in Sec. 226.8(a)(1)(i) requires a 
designation that will enable the consumer to reconcile the periodic 
statement with the consumer's own records. In determining the 
sufficiency of the description, the following rules apply:
    i. While item-by-item descriptions are not necessary, reasonable 
precision is required. For example, ``merchandise,'' ``miscellaneous,'' 
``second-hand goods,'' or ``promotional items'' would not suffice.
    ii. A reference to a department in a sales establishment that 
accurately conveys the identification of the types of property or 
services available in the department is sufficient--for example, 
``jewelry,'' or ``sporting goods.''
    iii. A number or symbol that is related to an identification list 
printed elsewhere on the statement that reasonably identifies the 
transaction with the creditor is sufficient.
    7. Seller's name--sufficiency of description. The requirement 
contemplates that the seller's name will appear on the periodic 
statement in essentially the same form as it appears on transaction 
documents provided to the consumer at the time of the sale. The seller's 
name may also be disclosed as, for example:
    i. A more complete spelling of the name that was alphabetically 
abbreviated on the receipt or other credit document.
    ii. An alphabetical abbreviation of the name on the periodic 
statement even if the name appears in a more complete spelling on the 
receipt or other credit document. Terms that merely indicate the form of 
a business entity, such as ``Inc.,'' ``Co.,'' or ``Ltd.,'' may always be 
omitted.
    8. Location of transaction.
    i. If the seller has multiple stores or branches within a city, the 
creditor need not identify the specific branch at which the sale 
occurred.
    ii. When no meaningful address is available because the consumer did 
not make the purchase at any fixed location of the seller, the creditor 
may omit the address, or may provide some other identifying designation, 
such as ``aboard plane,'' ``ABC Airways Flight,'' ``customer's home,'' 
``telephone order,'' ``Internet order'' or ``mail order.''
    8(b) Nonsale credit.
    1. Nonsale credit. The term ``nonsale credit'' refers to any form of 
loan credit including, for example:
    i. A cash advance.
    ii. An advance on a credit plan that is accessed by overdrafts on a 
checking account.
    iii. The use of a ``supplemental credit device'' in the form of a 
check or draft or the use of the overdraft credit plan accessed by a 
debit card, even if such use is in connection with a purchase of goods 
or services.
    iv. Miscellaneous debits to remedy mispostings, returned checks, and 
similar entries.
    2. Amount--overdraft credit plans. If credit is extended under an 
overdraft credit plan tied to a checking account or by means of a debit 
card tied to an overdraft credit plan:
    i. The amount to be disclosed is that of the credit extension, not 
the face amount of the check or the total amount of the debit/credit 
transaction.
    ii. The creditor may disclose the amount of the credit extensions on 
a cumulative daily basis, rather than the amount attributable to each 
check or each use of the debit card that accesses the credit plan.
    3. Date of transaction. See comment 8(a)-4.
    4. Nonsale transaction--sufficiency of identification. The creditor 
sufficiently identifies a

[[Page 605]]

nonsale transaction by describing the type of advance it represents, 
such as cash advance, loan, overdraft loan, or any readily 
understandable trade name for the credit program.

            Section 226.9--Subsequent Disclosure Requirements

    9(a) Furnishing statement of billing rights.
    9(a)(1) Annual statement.
    1. General. The creditor may provide the annual billing rights 
statement:
    i. By sending it in one billing period per year to each consumer 
that gets a periodic statement for that period; or
    ii. By sending a copy to all of its accountholders sometime during 
the calendar year but not necessarily all in one billing period (for 
example, sending the annual notice in connection with renewal cards or 
when imposing annual membership fees).
    2. Substantially similar. See the commentary to Model Forms G-3 and 
G-3(A) in appendix G to part 226.
    9(a)(2) Alternative summary statement.
    1. Changing from long-form to short form statement and vice versa. 
If the creditor has been sending the long-form annual statement, and 
subsequently decides to use the alternative summary statement, the first 
summary statement must be sent no later than 12 months after the last 
long-form statement was sent. Conversely, if the creditor wants to 
switch to the long-form, the first long-form statement must be sent no 
later than 12 months after the last summary statement.
    2. Substantially similar. See the commentary to Model Forms G-4 and 
G-4(A) in appendix G to part 226.
    9(b) Disclosures for supplemental credit access devices and 
additional features.
    1. Credit access device--examples. Credit access device includes, 
for example, a blank check, payee-designated check, blank draft or 
order, or authorization form for issuance of a check; it does not 
include a check issued payable to a consumer representing loan proceeds 
or the disbursement of a cash advance.
    2. Credit account feature--examples. A new credit account feature 
would include, for example:
    i. The addition of overdraft checking to an existing account 
(although the regular checks that could trigger the overdraft feature 
are not themselves ``devices'').
    ii. The option to use an existing credit card to secure cash 
advances, when previously the card could only be used for purchases.
    Paragraph 9(b)(2).
    1. Different finance charge terms. Except as provided in Sec. 
226.9(b)(3) for checks that access a credit card account, if the finance 
charge terms are different from those previously disclosed, the creditor 
may satisfy the requirement to give the finance charge terms either by 
giving a complete set of new account-opening disclosures reflecting the 
terms of the added device or feature or by giving only the finance 
charge disclosures for the added device or feature.
    9(b)(3) Checks that access a credit card account.
    9(b)(3)(i) Disclosures.
    1. Front of the page containing the checks. The following would 
comply with the requirement that the tabular disclosures provided 
pursuant to Sec. 226.9(b)(3) appear on the front of the page containing 
the checks
    i. Providing the tabular disclosure on the front of the first page 
on which checks appear, for an offer where checks are provided on 
multiple pages;
    ii. Providing the tabular disclosure on the front of a mini-book or 
accordion booklet containing the checks; or
    iii. Providing the tabular disclosure on the front of the 
solicitation letter, when the checks are printed on the front of the 
same page as the solicitation letter even if the checks can be separated 
by the consumer from the solicitation letter using perforations.
    2. Combined disclosures for checks and other transactions subject to 
the same terms. A card issuer may include in the tabular disclosure 
provided pursuant to Sec. 226.9(b)(3) disclosures regarding the terms 
offered on non-check transactions, provided that such transactions are 
subject to the same terms that are required to be disclosed pursuant to 
Sec. 226.9(b)(3)(i) for the checks that access a credit card account. 
However, a card issuer may not include in the table information 
regarding additional terms that are not required disclosures for checks 
that access a credit card account pursuant to Sec. 226.9(b)(3).
    Paragraph 9(b)(3)(i)(D).
    1. Grace period. A creditor may not disclose under Sec. 
226.9(b)(3)(i)(D) the limitations on the imposition of finance charges 
as a result of a loss of a grace period in Sec. 226.54, or the impact 
of payment allocation on whether interest is charged on transactions as 
a result of a loss of a grace period. Some creditors may offer a grace 
period on credit extended by the use of an access check under which 
interest will not be charged on the check transactions if the consumer 
pays the outstanding balance shown on a periodic statement in full by 
the due date shown on that statement for one or more billing cycles. In 
these circumstances, Sec. 226.9(b)(3)(i)(D) requires that the creditor 
disclose the grace period using the following language, or substantially 
similar language, as applicable: ``Your due date is [at least] ---- days 
after the close of each billing cycle. We will not charge you any 
interest on check transactions if you pay your entire balance by the due 
date each month.'' However, other creditors may offer a grace period on 
check transactions under which interest may be charged on check 
transactions even if the consumer pays the outstanding balance shown on 
a periodic statement in full by the due date shown on

[[Page 606]]

that statement each billing cycle. In these circumstances, Sec. 
226.9(b)(3)(i)(D) requires the creditor to amend the above disclosure 
language to describe accurately the conditions on the applicability of 
the grace period. Creditors may use the following language to describe 
that no grace period on check transactions is offered, as applicable: 
``We will begin charging interest on these checks on the transaction 
date.''
    9(c) Change in terms.
    9(c) Change in terms.
    9(c)(1) Rules affecting home-equity plans.
    1. Changes initially disclosed. No notice of a change in terms need 
be given if the specific change is set forth initially, such as: rate 
increases under a properly disclosed variable-rate plan, a rate increase 
that occurs when an employee has been under a preferential rate 
agreement and terminates employment, or an increase that occurs when the 
consumer has been under an agreement to maintain a certain balance in a 
savings account in order to keep a particular rate and the account 
balance falls below the specified minimum. The rules in Sec. 226.5b(f) 
relating to home-equity plans limit the ability of a creditor to change 
the terms of such plans.
    2. State law issues. Examples of issues not addressed by Sec. 
226.9(c) because they are controlled by state or other applicable law 
include:
    i. The types of changes a creditor may make. (But see Sec. 
226.5b(f))
    ii. How changed terms affect existing balances, such as when a 
periodic rate is changed and the consumer does not pay off the entire 
existing balance before the new rate takes effect.
    3. Change in billing cycle. Whenever the creditor changes the 
consumer's billing cycle, it must give a change-in-terms notice if the 
change either affects any of the terms required to be disclosed under 
Sec. 226.6(a) or increases the minimum payment, unless an exception 
under Sec. 226.9(c)(1)(ii) applies; for example, the creditor must give 
advance notice if the creditor initially disclosed a 25-day grace period 
on purchases and the consumer will have fewer days during the billing 
cycle change.
    9(c)(1)(i) Written notice required.
    1. Affected consumers. Change-in-terms notices need only go to those 
consumers who may be affected by the change. For example, a change in 
the periodic rate for check overdraft credit need not be disclosed to 
consumers who do not have that feature on their accounts.
    2. Timing--effective date of change. The rule that the notice of the 
change in terms be provided at least 15 days before the change takes 
effect permits mid-cycle changes when there is clearly no retroactive 
effect, such as the imposition of a transaction fee. Any change in the 
balance computation method, in contrast, would need to be disclosed at 
least 15 days prior to the billing cycle in which the change is to be 
implemented.
    3. Timing--advance notice not required. Advance notice of 15 days is 
not necessary--that is, a notice of change in terms is required, but it 
may be mailed or delivered as late as the effective date of the change--
in two circumstances:
    i. If there is an increased periodic rate or any other finance 
charge attributable to the consumer's delinquency or default.
    ii. If the consumer agrees to the particular change. This provision 
is intended for use in the unusual instance when a consumer substitutes 
collateral or when the creditor can advance additional credit only if a 
change relatively unique to that consumer is made, such as the 
consumer's providing additional security or paying an increased minimum 
payment amount. Therefore, the following are not ``agreements'' between 
the consumer and the creditor for purposes of Sec. 226.9(c)(1)(i): The 
consumer's general acceptance of the creditor's contract reservation of 
the right to change terms; the consumer's use of the account (which 
might imply acceptance of its terms under state law); and the consumer's 
acceptance of a unilateral term change that is not particular to that 
consumer, but rather is of general applicability to consumers with that 
type of account.
    4. Form of change-in-terms notice. A complete new set of the initial 
disclosures containing the changed term complies with Sec. 
226.9(c)(1)(i) if the change is highlighted in some way on the 
disclosure statement, or if the disclosure statement is accompanied by a 
letter or some other insert that indicates or draws attention to the 
term change.
    5. Security interest change--form of notice. A copy of the security 
agreement that describes the collateral securing the consumer's account 
may be used as the notice, when the term change is the addition of a 
security interest or the addition or substitution of collateral.
    6. Changes to home-equity plans entered into on or after November 7, 
1989. Section 226.9(c)(1) applies when, by written agreement under Sec. 
226.5b(f)(3)(iii), a creditor changes the terms of a home-equity plan--
entered into on or after November 7, 1989--at or before its scheduled 
expiration, for example, by renewing a plan on terms different from 
those of the original plan. In disclosing the change:
    i. If the index is changed, the maximum annual percentage rate is 
increased (to the limited extent permitted by Sec. 226.30), or a 
variable-rate feature is added to a fixed-rate plan, the creditor must 
include the disclosures required by Sec. 226.5b(d)(12)(x) and 
(d)(12)(xi), unless these disclosures are unchanged from those given 
earlier.
    ii. If the minimum payment requirement is changed, the creditor must 
include the disclosures required by Sec. 226.5b(d)(5)(iii) (and, in

[[Page 607]]

variable-rate plans, the disclosures required by Sec. 226.5b(d)(12)(x) 
and (d)(12)(xi)) unless the disclosures given earlier contained 
representative examples covering the new minimum payment requirement. 
(See the commentary to Sec. 226.5b(d)(5)(iii), (d)(12)(x) and 
(d)(12)(xi) for a discussion of representative examples.)
    iii. When the terms are changed pursuant to a written agreement as 
described in Sec. 226.5b(f)(3)(iii), the advance-notice requirement 
does not apply.
    9(c)(1)(ii) Notice not required.
    1. Changes not requiring notice. The following are examples of 
changes that do not require a change-in-terms notice:
    i. A change in the consumer's credit limit.
    ii. A change in the name of the credit card or credit card plan.
    iii. The substitution of one insurer for another.
    iv. A termination or suspension of credit privileges. (But see Sec. 
226.5b(f).)
    v. Changes arising merely by operation of law; for example, if the 
creditor's security interest in a consumer's car automatically extends 
to the proceeds when the consumer sells the car.
    2. Skip features. If a credit program allows consumers to skip or 
reduce one or more payments during the year, or involves temporary 
reductions in finance charges, no notice of the change in terms is 
required either prior to the reduction or upon resumption of the higher 
rates or payments if these features are explained on the initial 
disclosure statement (including an explanation of the terms upon 
resumption). For example, a merchant may allow consumers to skip the 
December payment to encourage holiday shopping, or a teachers' credit 
union may not require payments during summer vacation. Otherwise, the 
creditor must give notice prior to resuming the original schedule or 
rate, even though no notice is required prior to the reduction. The 
change-in-terms notice may be combined with the notice offering the 
reduction. For example, the periodic statement reflecting the reduction 
or skip feature may also be used to notify the consumer of the 
resumption of the original schedule or rate, either by stating 
explicitly when the higher payment or charges resume, or by indicating 
the duration of the skip option. Language such as ``You may skip your 
October payment,'' or ``We will waive your finance charges for 
January,'' may serve as the change-in-terms notice.
    9(c)(1)(iii) Notice to restrict credit.
    1. Written request for reinstatement. If a creditor requires the 
request for reinstatement of credit privileges to be in writing, the 
notice under Sec. 226.9(c)(1)(iii) must state that fact.
    2. Notice not required. A creditor need not provide a notice under 
this paragraph if, pursuant to the commentary to Sec. 226.5b(f)(2), a 
creditor freezes a line or reduces a credit line rather than terminating 
a plan and accelerating the balance.
    9(c)(2) Rules affecting open-end (not home-secured) plans.
    1. Changes initially disclosed. Except as provided in Sec. 
226.9(g)(1), no notice of a change in terms need be given if the 
specific change is set forth initially consistent with any applicable 
requirements, such as rate or fee increases upon expiration of a 
specific period of time that were disclosed in accordance with Sec. 
226.9(c)(2)(v)(B) or rate increases under a properly disclosed variable-
rate plan in accordance with Sec. 226.9(c)(2)(v)(C). In contrast, 
notice must be given if the contract allows the creditor to increase a 
rate or fee at its discretion.
    2. State law issues. Some issues are not addressed by Sec. 
226.9(c)(2) because they are controlled by state or other applicable 
laws. These issues include the types of changes a creditor may make, to 
the extent otherwise permitted by this regulation.
    3. Change in billing cycle. Whenever the creditor changes the 
consumer's billing cycle, it must give a change-in-terms notice if the 
change affects any of the terms described in Sec. 226.9(c)(2)(i), 
unless an exception under Sec. 226.9(c)(2)(v) applies; for example, the 
creditor must give advance notice if the creditor initially disclosed a 
28-day grace period on purchases and the consumer will have fewer days 
during the billing cycle change. See also Sec. 226.7(b)(11)(i)(A) 
regarding the general requirement that the payment due date for a credit 
card account under an open-end (not home-secured) consumer credit plan 
must be the same day each month.
    4. Relationship to Sec. 226.9(b). If a creditor adds a feature to 
the account on the type of terms otherwise required to be disclosed 
under Sec. 226.6, the creditor must satisfy: The requirement to provide 
the finance charge disclosures for the added feature under Sec. 
226.9(b); and any applicable requirement to provide a change-in-terms 
notice under Sec. 226.9(c), including any advance notice that must be 
provided. For example, if a creditor adds a balance transfer feature to 
an account more than 30 days after account-opening disclosures are 
provided, it must give the finance charge disclosures for the balance 
transfer feature under Sec. 226.9(b) as well as comply with the change-
in-terms notice requirements under Sec. 226.9(c), including providing 
notice of the change at least 45 days prior to the effective date of the 
change. Similarly, if a creditor makes a balance transfer offer on 
finance charge terms that are higher than those previously disclosed for 
balance transfers, it would also generally be required to provide a 
change-in-terms notice at least 45 days in advance of the effective date 
of the change. A creditor may provide a single notice under Sec. 
226.9(c) to satisfy the notice requirements of both paragraphs (b) and 
(c) of Sec. 226.9. For checks that access a

[[Page 608]]

credit card account subject to the disclosure requirements in Sec. 
226.9(b)(3), a creditor is not subject to the notice requirements under 
Sec. 226.9(c) even if the applicable rate or fee is higher than those 
previously disclosed for such checks. Thus, for example, the creditor 
need not wait 45 days before applying the new rate or fee for 
transactions made using such checks, but the creditor must make the 
required disclosures on or with the checks in accordance with Sec. 
226.9(b)(3).
    9(c)(2)(i) Changes where written advance notice is required.
    1. Affected consumers. Change-in-terms notices need only go to those 
consumers who may be affected by the change. For example, a change in 
the periodic rate for check overdraft credit need not be disclosed to 
consumers who do not have that feature on their accounts. If a single 
credit account involves multiple consumers that may be affected by the 
change, the creditor should refer to Sec. 226.5(d) to determine the 
number of notices that must be given.
    2. Timing--effective date of change. The rule that the notice of the 
change in terms be provided at least 45 days before the change takes 
effect permits mid-cycle changes when there is clearly no retroactive 
effect, such as the imposition of a transaction fee. Any change in the 
balance computation method, in contrast, would need to be disclosed at 
least 45 days prior to the billing cycle in which the change is to be 
implemented.
    3. Changes agreed to by the consumer. See also comment 5(b)(1)(i)-6.
    4. Form of change-in-terms notice. Except if Sec. 226.9(c)(2)(iv) 
applies, a complete new set of the initial disclosures containing the 
changed term complies with Sec. 226.9(c)(2)(i) if the change is 
highlighted on the disclosure statement, or if the disclosure statement 
is accompanied by a letter or some other insert that indicates or draws 
attention to the term being changed.
    5. Security interest change--form of notice. A creditor must provide 
a description of any security interest it is acquiring under Sec. 
226.9(c)(2)(iv). A copy of the security agreement that describes the 
collateral securing the consumer's account may also be used as the 
notice, when the term change is the addition of a security interest or 
the addition or substitution of collateral.
    6. Examples. See comment 55(a)-1 and 55(b)-3 for examples of how a 
card issuer that is subject to Sec. 226.55 may comply with the timing 
requirements for notices required by Sec. 226.9(c)(2)(i).
    9(c)(2)(iii) Charges not covered by Sec. 226.6(b)(1) and (b)(2).
    1. Applicability. Generally, if a creditor increases any component 
of a charge, or introduces a new charge, that is imposed as part of the 
plan under Sec. 226.6(b)(3) but is not required to be disclosed as part 
of the account-opening summary table under Sec. 226.6(b)(1) and (b)(2), 
the creditor must either, at its option (i) provide at least 45 days' 
written advance notice before the change becomes effective to comply 
with the requirements of Sec. 226.9(c)(2)(i), or (ii) provide notice 
orally or in writing, or electronically if the consumer requests the 
service electronically, of the amount of the charge to an affected 
consumer before the consumer agrees to or becomes obligated to pay the 
charge, at a time and in a manner that a consumer would be likely to 
notice the disclosure. (See the commentary under Sec. 226.5(a)(1)(iii) 
regarding disclosure of such changes in electronic form.) For example, a 
fee for expedited delivery of a credit card is a charge imposed as part 
of the plan under Sec. 226.6(b)(3) but is not required to be disclosed 
in the account-opening summary table under Sec. 226.6(b)(1) and (b)(2). 
If a creditor changes the amount of that expedited delivery fee, the 
creditor may provide written advance notice of the change to affected 
consumers at least 45 days before the change becomes effective. 
Alternatively, the creditor may provide oral or written notice, or 
electronic notice if the consumer requests the service electronically, 
of the amount of the charge to an affected consumer before the consumer 
agrees to or becomes obligated to pay the charge, at a time and in a 
manner that the consumer would be likely to notice the disclosure. (See 
comment 5(b)(1)(ii)-1 for examples of disclosures given at a time and in 
a manner that the consumer would be likely to notice them.)
    9(c)(2)(iv) Disclosure requirements.
    1. Changing margin for calculating a variable rate. If a creditor is 
changing a margin used to calculate a variable rate, the creditor must 
disclose the amount of the new rate (as calculated using the new margin) 
in the table described in Sec. 226.9(c)(2)(iv), and include a reminder 
that the rate is a variable rate. For example, if a creditor is changing 
the margin for a variable rate that uses the prime rate as an index, the 
creditor must disclose in the table the new rate (as calculated using 
the new margin) and indicate that the rate varies with the market based 
on the prime rate.
    2. Changing index for calculating a variable rate. If a creditor is 
changing the index used to calculate a variable rate, the creditor must 
disclose the amount of the new rate (as calculated using the new index) 
and indicate that the rate varies and how the rate is determined, as 
explained in Sec. 226.6(b)(2)(i)(A). For example, if a creditor is 
changing from using a prime rate to using the LIBOR in calculating a 
variable rate, the creditor would disclose in the table the new rate 
(using the new index) and indicate that the rate varies with the market 
based on the LIBOR.
    3. Changing from a variable rate to a non-variable rate. If a 
creditor is changing a rate applicable to a consumer's account from a

[[Page 609]]

variable rate to a non-variable rate, the creditor generally must 
provide a notice as otherwise required under Sec. 226.9(c) even if the 
variable rate at the time of the change is higher than the non-variable 
rate. However, a creditor is not required to provide a notice under 
Sec. 226.9(c) if the creditor provides the disclosures required by 
Sec. 226.9(c)(2)(v)(B) or (c)(2)(v)(D) in connection with changing a 
variable rate to a lower non-variable rate. Similarly, a creditor is not 
required to provide a notice under Sec. 226.9(c) when changing a 
variable rate to a lower non-variable rate in order to comply with 50 
U.S.C. app. 527 or a similar Federal or State statute or regulation. 
Finally, a creditor is not required to provide a notice under Sec. 
226.9(c) when changing a variable rate to a lower non-variable rate in 
order to comply with Sec. 226.55(b)(4).
    4. Changing from a non-variable rate to a variable rate. If a 
creditor is changing a rate applicable to a consumer's account from a 
non-variable rate to a variable rate, the creditor generally must 
provide a notice as otherwise required under Sec. 226.9(c) even if the 
non-variable rate is higher than the variable rate at the time of the 
change. However, a creditor is not required to provide a notice under 
Sec. 226.9(c) if the creditor provides the disclosures required by 
Sec. 226.9(c)(2)(v)(B) or (c)(2)(v)(D) in connection with changing a 
non-variable rate to a lower variable rate. Similarly, a creditor is not 
required to provide a notice under Sec. 226.9(c) when changing a non-
variable rate to a lower variable rate in order to comply with 50 U.S.C. 
app. 527 or a similar Federal or State statute or regulation. Finally, a 
creditor is not required to provide a notice under Sec. 226.9(c) when 
changing a non-variable rate to a lower variable rate in order to comply 
with Sec. 226.55(b)(4). See comment 55(b)(2)-4 regarding the 
limitations in Sec. 226.55(b)(2) on changing the rate that applies to a 
protected balance from a non-variable rate to a variable rate.
    5. Changes in the penalty rate, the triggers for the penalty rate, 
or how long the penalty rate applies. If a creditor is changing the 
amount of the penalty rate, the creditor must also redisclose the 
triggers for the penalty rate and the information about how long the 
penalty rate applies even if those terms are not changing. Likewise, if 
a creditor is changing the triggers for the penalty rate, the creditor 
must redisclose the amount of the penalty rate and information about how 
long the penalty rate applies. If a creditor is changing how long the 
penalty rate applies, the creditor must redisclose the amount of the 
penalty rate and the triggers for the penalty rate, even if they are not 
changing.
    6. Changes in fees. If a creditor is changing part of how a fee that 
is disclosed in a tabular format under Sec. 226.6(b)(1) and (b)(2) is 
determined, the creditor must redisclose all relevant information 
related to that fee regardless of whether this other information is 
changing. For example, if a creditor currently charges a cash advance 
fee of ``Either $5 or 3% of the transaction amount, whichever is 
greater. (Max: $100),'' and the creditor is only changing the minimum 
dollar amount from $5 to $10, the issuer must redisclose the other 
information related to how the fee is determined. For example, the 
creditor in this example would disclose the following: ``Either $10 or 
3% of the transaction amount, whichever is greater. (Max: $100).''
    7. Combining a notice described in Sec. 226.9(c)(2)(iv) with a 
notice described in Sec. 226.9(g)(3). If a creditor is required to 
provide a notice described in Sec. 226.9(c)(2)(iv) and a notice 
described in Sec. 226.9(g)(3) to a consumer, the creditor may combine 
the two notices. This would occur if penalty pricing has been triggered, 
and other terms are changing on the consumer's account at the same time.
    8. Content. Sample G-20 contains an example of how to comply with 
the requirements in Sec. 226.9(c)(2)(iv) when a variable rate is being 
changed to a non-variable rate on a credit card account. The sample 
explains when the new rate will apply to new transactions and to which 
balances the current rate will continue to apply. Sample G-21 contains 
an example of how to comply with the requirements in Sec. 
226.9(c)(2)(iv) when the late payment fee on a credit card account is 
being increased, and the returned payment fee is also being increased. 
The sample discloses the consumer's right to reject the changes in 
accordance with Sec. 226.9(h).
    9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to disclosures required under 
Sec. 226.9(c)(2)(iv)(A)(1).
    10. Terminology. See Sec. 226.5(a)(2) for terminology requirements 
applicable to disclosures required under Sec. 226.9(c)(2)(iv)(A)(1).
    11. Reasons for increase. i. In general. Section 
226.9(c)(2)(iv)(A)(8) requires card issuers to disclose the principal 
reason(s) for increasing an annual percentage rate applicable to a 
credit card account under an open-end (not home-secured) consumer credit 
plan. The regulation does not mandate a minimum number of reasons that 
must be disclosed. However, the specific reasons disclosed under Sec. 
226.9(c)(2)(iv)(A)(8) are required to relate to and accurately describe 
the principal factors actually considered by the card issuer in 
increasing the rate. A card issuer may describe the reasons for the 
increase in general terms. For example, the notice of a rate increase 
triggered by a decrease of 100 points in a consumer's credit score may 
state that the increase is due to ``a decline in your creditworthiness'' 
or ``a decline in your credit score.'' Similarly, a notice of a rate 
increase triggered by a 10% increase in the card issuer's cost of funds 
may be disclosed as ``a change in market conditions.'' In some 
circumstances, it may be appropriate for a

[[Page 610]]

card issuer to combine the disclosure of several reasons in one 
statement. However, Sec. 226.9(c)(2)(iv)(A)(8) requires that the notice 
specifically disclose any violation of the terms of the account on which 
the rate is being increased, such as a late payment or a returned 
payment, if such violation of the account terms is one of the four 
principal reasons for the rate increase.
    ii. Example. Assume that a consumer made a late payment on the 
credit card account on which the rate increase is being imposed, made a 
late payment on a credit card account with another card issuer, and the 
consumer's credit score decreased, in part due to such late payments. 
The card issuer may disclose the reasons for the rate increase as a 
decline in the consumer's credit score and the consumer's late payment 
on the account subject to the increase. Because the late payment on the 
credit card account with the other issuer also likely contributed to the 
decline in the consumer's credit score, it is not required to be 
separately disclosed. However, the late payment on the credit card 
account on which the rate increase is being imposed must be specifically 
disclosed even if that late payment also contributed to the decline in 
the consumer's credit score.
    9(c)(2)(v) Notice not required.
    1. Changes not requiring notice. The following are examples of 
changes that do not require a change-in-terms notice
    i. A change in the consumer's credit limit except as otherwise 
required by Sec. 226.9(c)(2)(vi).
    ii. A change in the name of the credit card or credit card plan.
    iii. The substitution of one insurer for another.
    iv. A termination or suspension of credit privileges.
    v. Changes arising merely by operation of law; for example, if the 
creditor's security interest in a consumer's car automatically extends 
to the proceeds when the consumer sells the car.
    2. Skip features. i. Skipped or reduced payments. If a credit 
program allows consumers to skip or reduce one or more payments during 
the year, no notice of the change in terms is required either prior to 
the reduction in payments or upon resumption of the higher payments if 
these features are explained on the account-opening disclosure statement 
(including an explanation of the terms upon resumption). For example, a 
merchant may allow consumers to skip the December payment to encourage 
holiday shopping, or a teacher's credit union may not require payments 
during summer vacation. Otherwise, the creditor must give notice prior 
to resuming the original payment schedule, even though no notice is 
required prior to the reduction. The change-in-terms notice may be 
combined with the notice offering the reduction. For example, the 
periodic statement reflecting the skip feature may also be used to 
notify the consumer of the resumption of the original payment schedule, 
either by stating explicitly when the higher resumes or by indicating 
the duration of the skip option. Language such as ``You may skip your 
October payment'' may serve as the change-in-terms notice.
    ii. Temporary reductions in interest rates or fees. If a credit 
program involves temporary reductions in an interest rate or fee, no 
notice of the change in terms is required either prior to the reduction 
or upon resumption of the original rate or fee if these features are 
disclosed in advance in accordance with the requirements of Sec. 
226.9(c)(2)(v)(B). Otherwise, the creditor must give notice prior to 
resuming the original rate or fee, even though no notice is required 
prior to the reduction. The notice provided prior to resuming the 
original rate or fee must comply with the timing requirements of Sec. 
226.9(c)(2)(i) and the content and format requirements of Sec. 
226.9(c)(2)(iv)(A), (B) (if applicable), (C) (if applicable), and (D). 
See comment 55(b)-3 for guidance regarding the application of Sec. 
226.55 in these circumstances.
    3. Changing from a variable rate to a non-variable rate. See comment 
9(c)(2)(iv)-3.
    4. Changing from a non-variable rate to a variable rate. See comment 
9(c)(2)(iv)-4.
    5. Temporary rate or fee reductions offered by telephone. The timing 
requirements of Sec. 226.9(c)(2)(v)(B) are deemed to have been met, and 
written disclosures required by Sec. 226.9(c)(2)(v)(B) may be provided 
as soon as reasonably practicable after the first transaction subject to 
a rate that will be in effect for a specified period of time (a 
temporary rate) or the imposition of a fee that will be in effect for a 
specified period of time (a temporary fee) if
    i. The consumer accepts the offer of the temporary rate or temporary 
fee by telephone;
    ii. The creditor permits the consumer to reject the temporary rate 
or temporary fee offer and have the rate or rates or fee that previously 
applied to the consumer's balances reinstated for 45 days after the 
creditor mails or delivers the written disclosures required by Sec. 
226.9(c)(2)(v)(B), except that the creditor need not permit the consumer 
to reject a temporary rate or temporary fee offer if the rate or rates 
or fee that will apply following expiration of the temporary rate do not 
exceed the rate or rates or fee that applied immediately prior to 
commencement of the temporary rate or temporary fee; and
    iii. The disclosures required by Sec. 226.9(c)(2)(v)(B) and the 
consumer's right to reject the temporary rate or temporary fee offer and 
have the rate or rates or fee that previously applied to the consumer's 
account reinstated, if applicable, are disclosed to the consumer as part 
of the temporary rate or temporary fee offer.

[[Page 611]]

    6. First listing. The disclosures required by Sec. 
226.9(c)(2)(v)(B)(1) are only required to be provided in close proximity 
and in equal prominence to the first listing of the temporary rate or 
fee in the disclosure provided to the consumer. For purposes of Sec. 
226.9(c)(2)(v)(B), the first statement of the temporary rate or fee is 
the most prominent listing on the front side of the first page of the 
disclosure. If the temporary rate or fee does not appear on the front 
side of the first page of the disclosure, then the first listing of the 
temporary rate or fee is the most prominent listing of the temporary 
rate on the subsequent pages of the disclosure. For advertising 
requirements for promotional rates, see Sec. 226.16(g).
    7. Close proximity--point of sale. Creditors providing the 
disclosures required by Sec. 226.9(c)(2)(v)(B) of this section in 
person in connection with financing the purchase of goods or services 
may, at the creditor's option, disclose the annual percentage rate or 
fee that would apply after expiration of the period on a separate page 
or document from the temporary rate or fee and the length of the period, 
provided that the disclosure of the annual percentage rate or fee that 
would apply after the expiration of the period is equally prominent to, 
and is provided at the same time as, the disclosure of the temporary 
rate or fee and length of the period.
    8. Disclosure of annual percentage rates. If a rate disclosed 
pursuant to Sec. 226.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable rate, 
the creditor must disclose the fact that the rate may vary and how the 
rate is determined. For example, a creditor could state ``After October 
1, 2009, your APR will be 14.99%. This APR will vary with the market 
based on the Prime Rate.''
    9. Deferred interest or similar programs. If the applicable 
conditions are met, the exception in Sec. 226.9(c)(2)(v)(B) applies to 
deferred interest or similar promotional programs under which the 
consumer is not obligated to pay interest that accrues on a balance if 
that balance is paid in full prior to the expiration of a specified 
period of time. For purposes of this comment and Sec. 
226.9(c)(2)(v)(B), ``deferred interest'' has the same meaning as in 
Sec. 226.16(h)(2) and associated commentary. For such programs, a 
creditor must disclose pursuant to Sec. 226.9(c)(2)(v)(B)(1) the length 
of the deferred interest period and the rate that will apply to the 
balance subject to the deferred interest program if that balance is not 
paid in full prior to expiration of the deferred interest period. 
Examples of language that a creditor may use to make the required 
disclosures under Sec. 226.9(c)(2)(v)(B)(1) include
    i. ``No interest if paid in full in 6 months. If the balance is not 
paid in full in 6 months, interest will be imposed from the date of 
purchase at a rate of 15.99%.''
    ii. ``No interest if paid in full by December 31, 2010. If the 
balance is not paid in full by that date, interest will be imposed from 
the transaction date at a rate of 15%.''
    10. Relationship between Sec. Sec. 226.9(c)(2)(v)(B) and 226.6(b). 
A disclosure of the information described in Sec. 226.9(c)(2)(v)(B)(1) 
provided in the account-opening table in accordance with Sec. 226.6(b) 
complies with the requirements of Sec. 226.9(c)(2)(v)(B)(2), if the 
listing of the introductory rate in such tabular disclosure also is the 
first listing as described in comment 9(c)(2)(v)-6.
    11. Disclosure of the terms of a workout or temporary hardship 
arrangement. In order for the exception in Sec. 226.9(c)(2)(v)(D) to 
apply, the disclosure provided to the consumer pursuant to Sec. 
226.9(c)(2)(v)(D)(2) must set forth
    i. The annual percentage rate that will apply to balances subject to 
the workout or temporary hardship arrangement;
    ii. The annual percentage rate that will apply to such balances if 
the consumer completes or fails to comply with the terms of, the workout 
or temporary hardship arrangement;
    iii. Any reduced fee or charge of a type required to be disclosed 
under Sec. 226.6(b)(2)(ii), (b)(2)(iii), (b)(2)(viii), (b)(2)(ix), 
(b)(2)(xi), or (b)(2)(xii) that will apply to balances subject to the 
workout or temporary hardship arrangement, as well as the fee or charge 
that will apply if the consumer completes or fails to comply with the 
terms of the workout or temporary hardship arrangement;
    iv. Any reduced minimum periodic payment that will apply to balances 
subject to the workout or temporary hardship arrangement, as well as the 
minimum periodic payment that will apply if the consumer completes or 
fails to comply with the terms of the workout or temporary hardship 
arrangement; and
    v. If applicable, that the consumer must make timely minimum 
payments in order to remain eligible for the workout or temporary 
hardship arrangement.
    12. Index not under creditor's control. See comment 55(b)(2)-2 for 
guidance on when an index is deemed to be under a creditor's control.
    13. Temporary rates--relationship to Sec. 226.59. i. General. 
Section 226.59 requires a card issuer to review rate increases imposed 
due to the revocation of a temporary rate. In some circumstances, Sec. 
226.59 may require an issuer to reinstate a reduced temporary rate based 
on that review. If, based on a review required by Sec. 226.59, a 
creditor reinstates a temporary rate that had been revoked, the card 
issuer is not required to provide an additional notice to the consumer 
when the reinstated temporary rate expires, if the card issuer provided 
the disclosures required by Sec. 226.9(c)(2)(v)(B) prior to the 
original commencement of the temporary rate. See Sec. 226.55 and the 
associated commentary for guidance on the permissibility and 
applicability of rate increases.

[[Page 612]]

    ii. Example. A consumer opens a new credit card account under an 
open-end (not home-secured) consumer credit plan on January 1, 2011. The 
annual percentage rate applicable to purchases is 18%. The card issuer 
offers the consumer a 15% rate on purchases made between January 1, 2012 
and January 1, 2014. Prior to January 1, 2012, the card issuer 
discloses, in accordance with Sec. 226.9(c)(2)(v)(B), that the rate on 
purchases made during that period will increase to the standard 18% rate 
on January 1, 2014. In March 2012, the consumer makes a payment that is 
ten days late. The card issuer, upon providing 45 days' advance notice 
of the change under Sec. 226.9(g), increases the rate on new purchases 
to 18% effective as of June 1, 2012. On December 1, 2012, the issuer 
performs a review of the consumer's account in accordance with Sec. 
226.59. Based on that review, the card issuer is required to reduce the 
rate to the original 15% temporary rate as of January 15, 2013. On 
January 1, 2014, the card issuer may increase the rate on purchases to 
18%, as previously disclosed prior to January 1, 2012, without providing 
an additional notice to the consumer.
    9(d) Finance charge imposed at time of transaction.
    1. Disclosure prior to imposition. A person imposing a finance 
charge at the time of honoring a consumer's credit card must disclose 
the amount of the charge, or an explanation of how the charge will be 
determined, prior to its imposition. This must be disclosed before the 
consumer becomes obligated for property or services that may be paid for 
by use of a credit card. For example, disclosure must be given before 
the consumer has dinner at a restaurant, stays overnight at a hotel, or 
makes a deposit guaranteeing the purchase of property or services.
    9(e) Disclosures upon renewal of credit or charge card.
    1. Coverage. This paragraph applies to credit and charge card 
accounts of the type subject to Sec. 226.5a. (See Sec. 226.5a(a)(5) 
and the accompanying commentary for discussion of the types of accounts 
subject to Sec. 226.5a.) The disclosure requirements are triggered when 
a card issuer imposes any annual or other periodic fee on such an 
account or if the card issuer has changed or amended any term of a 
cardholder's account required to be disclosed under Sec. 226.6(b)(1) 
and (b)(2) that has not previously been disclosed to the consumer, 
whether or not the card issuer originally was required to provide the 
application and solicitation disclosures described in Sec. 226.5a.
    2. Form. The disclosures under this paragraph must be clear and 
conspicuous, but need not appear in a tabular format or in a prominent 
location. The disclosures need not be in a form the cardholder can 
retain.
    3. Terms at renewal. Renewal notices must reflect the terms actually 
in effect at the time of renewal. For example, a card issuer that offers 
a preferential annual percentage rate to employees during their 
employment must send a renewal notice to employees disclosing the lower 
rate actually charged to employees (although the card issuer also may 
show the rate charged to the general public).
    4. Variable rate. If the card issuer cannot determine the rate that 
will be in effect if the cardholder chooses to renew a variable-rate 
account, the card issuer may disclose the rate in effect at the time of 
mailing or delivery of the renewal notice. Alternatively, the card 
issuer may use the rate as of a specified date within the last 30 days 
before the disclosure is provided.
    5. Renewals more frequent than annual. If a renewal fee is billed 
more often than annually, the renewal notice should be provided each 
time the fee is billed. In this instance, the fee need not be disclosed 
as an annualized amount. Alternatively, the card issuer may provide the 
notice no less than once every 12 months if the notice explains the 
amount and frequency of the fee that will be billed during the time 
period covered by the disclosure, and also discloses the fee as an 
annualized amount. The notice under this alternative also must state the 
consequences of a cardholder's decision to terminate the account after 
the renewal-notice period has expired. For example, if a $2 fee is 
billed monthly but the notice is given annually, the notice must inform 
the cardholder that the monthly charge is $2, the annualized fee is $24, 
and $2 will be billed to the account each month for the coming year 
unless the cardholder notifies the card issuer. If the cardholder is 
obligated to pay an amount equal to the remaining unpaid monthly charges 
if the cardholder terminates the account during the coming year but 
after the first month, the notice must disclose the fact.
    6. Terminating credit availability. Card issuers have some 
flexibility in determining the procedures for how and when an account 
may be terminated. However, the card issuer must clearly disclose the 
time by which the cardholder must act to terminate the account to avoid 
paying a renewal fee, if applicable. State and other applicable law 
govern whether the card issuer may impose requirements such as 
specifying that the cardholder's response be in writing or that the 
outstanding balance be repaid in full upon termination.
    7. Timing of termination by cardholder. When a card issuer provides 
notice under Sec. 226.9(e)(1), a cardholder must be given at least 30 
days or one billing cycle, whichever is less, from the date the notice 
is mailed or delivered to make a decision whether to terminate an 
account.

[[Page 613]]

    8. Timing of notices. A renewal notice is deemed to be provided when 
mailed or delivered. Similarly, notice of termination is deemed to be 
given when mailed or delivered.
    9. Prompt reversal of renewal fee upon termination. In a situation 
where a cardholder has provided timely notice of termination and a 
renewal fee has been billed to a cardholder's account, the card issuer 
must reverse or otherwise withdraw the fee promptly. Once a cardholder 
has terminated an account, no additional action by the cardholder may be 
required.
    10. Disclosure of changes in terms required to be disclosed pursuant 
to Sec. 226.6(b)(1) and (b)(2). Clear and conspicuous disclosure of a 
changed term on a periodic statement provided to a consumer prior to 
renewal of the consumer's account constitutes prior disclosure of that 
term for purposes of Sec. 226.9(e)(1). Card issuers should refer to 
Sec. 226.9(c)(2) for additional timing, content, and formatting 
requirements that apply to certain changes in terms under that 
paragraph.
    9(e)(2) Notification on periodic statements.
    1. Combined disclosures. If a single disclosure is used to comply 
with both Sec. Sec. 226.9(e) and 226.7, the periodic statement must 
comply with the rules in Sec. Sec. 226.5a and 226.7. For example, a 
description substantially similar to the heading describing the grace 
period required by Sec. 226.5a(b)(5) must be used and the name of the 
balance-calculation method must be identified (if listed in Sec. 
226.5a(g)) to comply with the requirements of Sec. 226.5a. A card 
issuer may include some of the renewal disclosures on a periodic 
statement and others on a separate document so long as there is some 
reference indicating that the disclosures relate to one another. All 
renewal disclosures must be provided to a cardholder at the same time.
    2. Preprinted notices on periodic statements. A card issuer may 
preprint the required information on its periodic statements. A card 
issuer that does so, however, must make clear on the periodic statement 
when the preprinted renewal disclosures are applicable. For example, the 
card issuer could include a special notice (not preprinted) at the 
appropriate time that the renewal fee will be billed in the following 
billing cycle, or could show the renewal date as a regular (preprinted) 
entry on all periodic statements.
    9(f) Change in credit card account insurance provider.
    1. Coverage. This paragraph applies to credit card accounts of the 
type subject to Sec. 226.5a if credit insurance (typically life, 
disability, and unemployment insurance) is offered on the outstanding 
balance of such an account. (Credit card accounts subject to Sec. 
226.9(f) are the same as those subject to Sec. 226.9(e); see comment 
9(e)-1.) Charge card accounts are not covered by this paragraph. In 
addition, the disclosure requirements of this paragraph apply only where 
the card issuer initiates the change in insurance provider. For example, 
if the card issuer's current insurance provider is merged into or 
acquired by another company, these disclosures would not be required. 
Disclosures also need not be given in cases where card issuers pay for 
credit insurance themselves and do not separately charge the cardholder.
    2. No increase in rate or decrease in coverage. The requirement to 
provide the disclosure arises when the card issuer changes the provider 
of insurance, even if there will be no increase in the premium rate 
charged to the consumer and no decrease in coverage under the insurance 
policy.
    3. Form of notice. If a substantial decrease in coverage will result 
from the change in provider, the card issuer either must explain the 
decrease or refer to an accompanying copy of the policy or group 
certificate for details of the new terms of coverage. (See the 
commentary to appendix G-13 to part 226.)
    4. Discontinuation of insurance. In addition to stating that the 
cardholder may cancel the insurance, the card issuer may explain the 
effect the cancellation would have on the consumer's credit card plan.
    5. Mailing by third party. Although the card issuer is responsible 
for the disclosures, the insurance provider or another third party may 
furnish the disclosures on the card issuer's behalf.
    9(f)(3) Substantial decrease in coverage.
    1. Determination. Whether a substantial decrease in coverage will 
result from the change in provider is determined by the two-part test in 
Sec. 226.9(f)(3): First, whether the decrease is in a significant term 
of coverage; and second, whether the decrease might reasonably be 
expected to affect a cardholder's decision to continue the insurance. If 
both conditions are met, the decrease must be disclosed in the notice.
    9(g) Increase in rates due to delinquency or default or as a 
penalty.
    1. Relationship between Sec. 226.9(c) and (g) and Sec. 226.55--
examples. Card issuers subject to Sec. 226.55 are prohibited from 
increasing the annual percentage rate for a category of transactions on 
any consumer credit card account unless specifically permitted by one of 
the exceptions in Sec. 226.55(b). See comments 55(a)-1 and 55(b)-3 and 
the commentary to Sec. 226.55(b)(4) for examples that illustrate the 
relationship between the notice requirements of Sec. 226.9(c) and (g) 
and Sec. 226.55.
    2. Affected consumers. If a single credit account involves multiple 
consumers that may be affected by the change, the creditor should refer 
to Sec. 226.5(d) to determine the number of notices that must be given.
    3. Combining a notice described in Sec. 226.9(g)(3) with a notice 
described in Sec. 226.9(c)(2)(iv). If a

[[Page 614]]

creditor is required to provide notices pursuant to both Sec. 
226.9(c)(2)(iv) and (g)(3) to a consumer, the creditor may combine the 
two notices. This would occur when penalty pricing has been triggered, 
and other terms are changing on the consumer's account at the same time.
    4. Content. Sample G-22 contains an example of how to comply with 
the requirements in Sec. 226.9(g)(3)(i) when the rate on a consumer's 
credit card account is being increased to a penalty rate as described in 
Sec. 226.9(g)(1)(ii), based on a late payment that is not more than 60 
days late. Sample G-23 contains an example of how to comply with the 
requirements in Sec. 226.9(g)(3)(i) when the rate increase is triggered 
by a delinquency of more than 60 days.
    5. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to disclosures required under 
Sec. 226.9(g).
    6. Terminology. See Sec. 226.5(a)(2) for terminology requirements 
applicable to disclosures required under Sec. 226.9(g).
    7. Reasons for increase. See comment 9(c)(2)(iv)-11 for guidance on 
disclosure of the reasons for a rate increase for a credit card account 
under an open-end (not home-secured) consumer credit plan.
    9(g)(4) Exception for decrease in credit limit.
    1. The following illustrates the requirements of Sec. 226.9(g)(4). 
Assume that a creditor decreased the credit limit applicable to a 
consumer's account and sent a notice pursuant to Sec. 226.9(g)(4) on 
January 1, stating among other things that the penalty rate would apply 
if the consumer's balance exceeded the new credit limit as of February 
16. If the consumer's balance exceeded the credit limit on February 16, 
the creditor could impose the penalty rate on that date. However, a 
creditor could not apply the penalty rate if the consumer's balance did 
not exceed the new credit limit on February 16, even if the consumer's 
balance had exceeded the new credit limit on several dates between 
January 1 and February 15. If the consumer's balance did not exceed the 
new credit limit on February 16 but the consumer conducted a transaction 
on February 17 that caused the balance to exceed the new credit limit, 
the general rule in Sec. 226.9(g)(1)(ii) would apply and the creditor 
would be required to give an additional 45 days' notice prior to 
imposition of the penalty rate (but under these circumstances the 
consumer would have no ability to cure the over-the-limit balance in 
order to avoid penalty pricing).
    9(h) Consumer rejection of certain significant changes in terms.
    1. Circumstances in which Sec. 226.9(h) does not apply. Section 
226.9(h) applies when Sec. 226.9(c)(2)(iv)(B) requires disclosure of 
the consumer's right to reject a significant change to an account term. 
Thus, for example, Sec. 226.9(h) does not apply to changes to the terms 
of home equity plans subject to the requirements of Sec. 226.5b that 
are accessible by a credit or charge card because Sec. 226.9(c)(2) does 
not apply to such plans. Similarly, Sec. 226.9(h) does not apply in the 
following circumstances because Sec. 226.9(c)(2)(iv)(B) does not 
require disclosure of the right to reject in those circumstances: (i) An 
increase in the required minimum periodic payment; (ii) a change in an 
annual percentage rate applicable to a consumer's account (such as 
changing the margin or index for calculating a variable rate, changing 
from a variable rate to a non-variable rate, or changing from a non-
variable rate to a variable rate); (iii) a change in the balance 
computation method necessary to comply with Sec. 226.54; and (iv) when 
the change results from the creditor not receiving the consumer's 
required minimum periodic payment within 60 days after the due date for 
that payment.
    9(h)(1) Right to reject.
    1. Reasonable requirements for submission of rejections. A creditor 
may establish reasonable requirements for the submission of rejections 
pursuant to Sec. 226.9(h)(1). For example:
    i. It would be reasonable for a creditor to require that rejections 
be made by the primary account holder and that the consumer identify the 
account number.
    ii. It would be reasonable for a creditor to require that rejections 
be made only using the toll-free telephone number disclosed pursuant to 
Sec. 226.9(c). It would also be reasonable for a creditor to designate 
additional channels for the submission of rejections (such as an address 
for rejections submitted by mail) so long as the creditor does not 
require that rejections be submitted through such additional channels.
    iii. It would be reasonable for a creditor to require that 
rejections be received before the effective date disclosed pursuant to 
Sec. 226.9(c) and to treat the account as not subject to Sec. 226.9(h) 
if a rejection is received on or after that date. It would not, however, 
be reasonable to require that rejections be submitted earlier than the 
day before the effective date. If a creditor is unable to process all 
rejections received before the effective date, the creditor may delay 
implementation of the change in terms until all rejections have been 
processed. In the alternative, the creditor could implement the change 
on the effective date and then, on any account for which a timely 
rejection was received, reverse the change and remove or credit any 
interest charges or fees imposed as a result of the change. For example, 
if the effective date for a change in terms is June 15 and the creditor 
cannot process all rejections received by telephone on June 14 until 
June 16, the creditor may delay imposition of the change until June 17. 
Alternatively, the

[[Page 615]]

creditor could implement the change for all affected accounts on June 15 
and then, once all rejections have been processed, return any account 
for which a timely rejection was received to the prior terms and ensure 
that the account is not assessed any additional interest or fees as a 
result of the change or that the account is credited for such interest 
or fees.
    2. Use of account following provision of notice. A consumer does not 
waive or forfeit the right to reject a significant change in terms by 
using the account for transactions prior to the effective date of the 
change. Similarly, a consumer does not revoke a rejection by using the 
account for transactions after the rejection is received.
    9(h)(2)(ii) Prohibition on penalties.
    1. Termination or suspension of credit availability. Section 
226.9(h)(2)(ii) does not prohibit a creditor from terminating or 
suspending credit availability as a result of the consumer's rejection 
of a significant change in terms.
    2. Solely as a result of rejection. A creditor is prohibited from 
imposing a fee or charge or treating an account as in default solely as 
a result of the consumer's rejection of a significant change in terms. 
For example, if credit availability is terminated or suspended as a 
result of the consumer's rejection of a significant change in terms, a 
creditor is prohibited from imposing a periodic fee that was not charged 
before the consumer rejected the change (such as a closed account fee). 
See also comment 55(d)-1. However, regardless of whether credit 
availability is terminated or suspended as a result of the consumer's 
rejection, a creditor is not prohibited from continuing to charge a 
periodic fee that was charged before the rejection. Similarly, a 
creditor that charged a fee for late payment before a change was 
rejected is not prohibited from charging that fee after rejection of the 
change.
    9(h)(2)(iii) Repayment of outstanding balance.
    1. Relevant date for repayment methods. Once a consumer has rejected 
a significant change in terms, Sec. 226.9(h)(2)(iii) prohibits the 
creditor from requiring repayment of the balance on the account using a 
method that is less beneficial to the consumer than one of the methods 
listed in Sec. 226.55(c)(2). When applying the methods listed in Sec. 
226.55(c)(2) pursuant to Sec. 226.9(h)(2)(iii), a creditor may utilize 
the date on which the creditor was notified of the rejection or a later 
date (such as the date on which the change would have gone into effect 
but for the rejection). For example, assume that on April 16 a creditor 
provides a notice pursuant to Sec. 226.9(c) informing the consumer that 
the monthly maintenance fee for the account will increase effective June 
1. The notice also states that the consumer may reject the increase by 
calling a specified toll-free telephone number before June 1 but that, 
if the consumer does so, credit availability for the account will be 
terminated. On May 5, the consumer calls the toll-free number and 
exercises the right to reject. If the creditor chooses to establish a 
five-year amortization period for the balance on the account consistent 
with Sec. 226.55(c)(2)(ii), that period may begin no earlier than the 
date on which the creditor was notified of the rejection (May 5). 
However, the creditor may also begin the amortization period on the date 
on which the change would have gone into effect but for the rejection 
(June 1).
    2. Balance on the account.
    i. In general. When applying the methods listed in Sec. 
226.55(c)(2) pursuant to Sec. 226.9(h)(2)(iii), the provisions in Sec. 
226.55(c)(2) and the guidance in the commentary to Sec. 226.55(c)(2) 
regarding protected balances also apply to a balance on the account 
subject to Sec. 226.9(h)(2)(iii). If a creditor terminates or suspends 
credit availability based on a consumer's rejection of a significant 
change in terms, the balance on the account that is subject to Sec. 
226.9(h)(2)(iii) is the balance at the end of the day on which credit 
availability is terminated or suspended. However, if a creditor does not 
terminate or suspend credit availability based on the consumer's 
rejection, the balance on the account subject to Sec. 226.9(h)(2)(iii) 
is the balance at the end of the day on which the creditor was notified 
of the rejection or, at the creditor's option, a later date.
    ii. Example. Assume that on June 16 a creditor provides a notice 
pursuant to Sec. 226.9(c) informing the consumer that the annual fee 
for the account will increase effective August 1. The notice also states 
that the consumer may reject the increase by calling a specified toll-
free telephone number before August 1 but that, if the consumer does so, 
credit availability for the account will be terminated. On July 20, the 
account has a purchase balance of $1,000 and the consumer calls the 
toll-free number and exercises the right to reject. On July 22, a $200 
purchase is charged to the account. If the creditor terminates credit 
availability on July 25 as a result of the rejection, the balance 
subject to the repayment limitations in Sec. 226.9(h)(2)(iii) is the 
$1,200 purchase balance at the end of the day on July 25. However, if 
the creditor does not terminate credit availability as a result of the 
rejection, the balance subject to the repayment limitations in Sec. 
226.9(h)(2)(iii) is the $1,000 purchase balance at the end of the day on 
the date the creditor was notified of the rejection (July 20), although 
the creditor may, at its option, treat the $200 purchase as part of the 
balance subject to Sec. 226.9(h)(2)(iii).
    9(h)(3) Exception.
    1. Examples. Section 226.9(h)(3) provides that Sec. 226.9(h) does 
not apply when the creditor has not received the consumer's required 
minimum periodic payment within 60 days

[[Page 616]]

after the due date for that payment. The following examples illustrate 
the application of this exception:
    i. Account becomes more than 60 days delinquent before notice 
provided. Assume that a credit card account is opened on January 1 of 
year one and that the payment due date for the account is the fifteenth 
day of the month. On June 20 of year two, the creditor has not received 
the required minimum periodic payments due on April 15, May 15, and June 
15. On June 20, the creditor provides a notice pursuant to Sec. 
226.9(c) informing the consumer that a monthly maintenance fee of $10 
will be charged beginning on August 4. However, Sec. 226.9(c)(2)(iv)(B) 
does not require the creditor to notify the consumer of the right to 
reject because the creditor has not received the April 15 minimum 
payment within 60 days after the due date. Furthermore, the exception in 
Sec. 226.9(h)(3) applies and the consumer may not reject the fee.
    ii. Account becomes more than 60 days delinquent after rejection. 
Assume that a credit card account is opened on January 1 of year one and 
that the payment due date for the account is the fifteenth day of the 
month. On April 20 of year two, the creditor has not received the 
required minimum periodic payment due on April 15. On April 20, the 
creditor provides a notice pursuant to Sec. 226.9(c) informing the 
consumer that an annual fee of $100 will be charged beginning on June 4. 
The notice further states that the consumer may reject the fee by 
calling a specified toll-free telephone number before June 4 but that, 
if the consumer does so, credit availability for the account will be 
terminated. On May 5, the consumer calls the toll-free telephone number 
and rejects the fee. Section 226.9(h)(2)(i) prohibits the creditor from 
charging the $100 fee to the account. If, however, the creditor does not 
receive the minimum payments due on April 15 and May 15 by June 15, 
Sec. 226.9(h)(3) permits the creditor to charge the $100 fee. The 
creditor must provide a second notice of the fee pursuant to Sec. 
226.9(c), but Sec. 226.9(c)(2)(iv)(B) does not require the creditor to 
disclose the right to reject and Sec. 226.9(h)(3) does not allow the 
consumer to reject the fee. Similarly, the restrictions in Sec. 
226.9(h)(2)(ii) and (iii) no longer apply.

                        Section 226.10--Payments

    10(a) General rule.
    1. Crediting date. Section 226.10(a) does not require the creditor 
to post the payment to the consumer's account on a particular date; the 
creditor is only required to credit the payment as of the date of 
receipt.
    2. Date of receipt. The ``date of receipt'' is the date that the 
payment instrument or other means of completing the payment reaches the 
creditor. For example:
    i. Payment by check is received when the creditor gets it, not when 
the funds are collected.
    ii. In a payroll deduction plan in which funds are deposited to an 
asset account held by the creditor, and from which payments are made 
periodically to an open-end credit account, payment is received on the 
date when it is debited to the asset account (rather than on the date of 
the deposit), provided the payroll deduction method is voluntary and the 
consumer retains use of the funds until the contractual payment date.
    iii. If the consumer elects to have payment made by a third party 
payor such as a financial institution, through a preauthorized payment 
or telephone bill-payment arrangement, payment is received when the 
creditor gets the third party payor's check or other transfer medium, 
such as an electronic fund transfer, as long as the payment meets the 
creditor's requirements as specified under Sec. 226.10(b).
    iv. Payment made via the creditor's Web site is received on the date 
on which the consumer authorizes the creditor to effect the payment, 
even if the consumer gives the instruction authorizing that payment in 
advance of the date on which the creditor is authorized to effect the 
payment. If the consumer authorizes the creditor to effect the payment 
immediately, but the consumer's instruction is received after 5 p.m. or 
any later cut-off time specified by the creditor, the date on which the 
consumer authorizes the creditor to effect the payment is deemed to be 
the next business day.
    10(b) Specific requirements for payments.
    1. Payment by electronic fund transfer. A creditor may be prohibited 
from specifying payment by preauthorized electronic fund transfer. (See 
section 913 of the Electronic Fund Transfer Act.)
    2. Payment methods promoted by creditor. If a creditor promotes a 
specific payment method, any payments made via that method (prior to any 
cut-off time specified by the creditor, to the extent permitted by Sec. 
226.10(b)(2)) are generally conforming payments for purposes of Sec. 
226.10(b). For example
    i. If a creditor promotes electronic payment via its Web site (such 
as by disclosing on the Web site itself that payments may be made via 
the Web site), any payments made via the creditor's Web site prior to 
the creditor's specified cut-off time, if any, would generally be 
conforming payments for purposes of Sec. 226.10(b).
    ii. If a creditor promotes payment by telephone (for example, by 
including the option to pay by telephone in a menu of options provided 
to consumers at a toll-free number disclosed on its periodic statement), 
payments made by telephone would generally be conforming payments for 
purposes of Sec. 226.10(b).

[[Page 617]]

    iii. If a creditor promotes in-person payments, for example by 
stating in an advertisement that payments may be made in person at its 
branch locations, such in-person payments made at a branch or office of 
the creditor generally would be conforming payments for purposes of 
Sec. 226.10(b).
    iv. If a creditor promotes that payments may be made through an 
unaffiliated third party, such as by disclosing the Web site address of 
that third party on the periodic statement, payments made via that third 
party's Web site generally would be conforming payments for purposes of 
Sec. 226.10(b). In contrast, if a customer service representative of 
the creditor confirms to a consumer that payments may be made via an 
unaffiliated third party, but the creditor does not otherwise promote 
that method of payment, Sec. 226.10(b) permits the creditor to treat 
payments made via such third party as nonconforming payments in 
accordance with Sec. 226.10(b)(4).
    3. Acceptance of nonconforming payments. If the creditor accepts a 
nonconforming payment (for example, payment mailed to a branch office, 
when the creditor had specified that payment be sent to a different 
location), finance charges may accrue for the period between receipt and 
crediting of payments.
    4. Implied guidelines for payments. In the absence of specified 
requirements for making payments (see Sec. 226.10(b)):
    i. Payments may be made at any location where the creditor conducts 
business.
    ii. Payments may be made any time during the creditor's normal 
business hours.
    iii. Payment may be by cash, money order, draft, or other similar 
instrument in properly negotiable form, or by electronic fund transfer 
if the creditor and consumer have so agreed.
    5. Payments made at point of sale. If a card issuer that is a 
financial institution issues a credit card under an open-end (not home-
secured) consumer credit plan that can be used only for transactions 
with a particular merchant or merchants or a credit card that is 
cobranded with the name of a particular merchant or merchants, and a 
consumer is able to make a payment on that credit card account at a 
retail location maintained by such a merchant, that retail location is 
not considered to be a branch or office of the card issuer for purposes 
of Sec. 226.10(b)(3).
    6. In-person payments on credit card accounts. For purposes of Sec. 
226.10(b)(3), payments made in person at a branch or office of a 
financial institution include payments made with the direct assistance 
of, or to, a branch or office employee, for example a teller at a bank 
branch. A payment made at the bank branch without the direct assistance 
of a branch or office employee, for example a payment placed in a branch 
or office mail slot, is not a payment made in person for purposes of 
Sec. 226.10(b)(3).
    7. In-person payments at affiliate of card issuer. If an affiliate 
of a card issuer that is a financial institution shares a name with the 
card issuer, such as ``ABC,'' and accepts in-person payments on the card 
issuer's credit card accounts, those payments are subject to the 
requirements of Sec. 226.10(b)(3).
    10(d) Crediting of payments when creditor does not receive or accept 
payments on due date.
    1. Example. A day on which the creditor does not receive or accept 
payments by mail may occur, for example, if the U.S. Postal Service does 
not deliver mail on that date.
    2. Treating a payment as late for any purpose. See comment 
5(b)(2)(ii)-2 for guidance on treating a payment as late for any 
purpose. When an account is not eligible for a grace period, imposing a 
finance charge due to a periodic interest rate does not constitute 
treating a payment as late.
    10(e) Limitations on fees related to method of payment.
    1. Separate fee to allow consumers to make a payment. For purposes 
of Sec. 226.10(e), the term ``separate fee'' means a fee imposed on a 
consumer for making a payment to the consumer's account. A fee or other 
charge imposed if payment is made after the due date, such as a late fee 
or finance charge, is not a separate fee to allow consumers to make a 
payment for purposes of Sec. 226.10(e).
    2. Expedited. For purposes of Sec. 226.10(e), the term 
``expedited'' means crediting a payment the same day or, if the payment 
is received after any cut-off time established by the creditor, the next 
business day.
    3. Service by a customer service representative. Service by a 
customer service representative of a creditor means any payment made to 
the consumer's account with the assistance of a live representative or 
agent of the creditor, including those made in person, on the telephone, 
or by electronic means. A customer service representative does not 
include automated means of making payment that do not involve a live 
representative or agent of the creditor, such as a voice response unit 
or interactive voice response system. Service by a customer service 
representative includes any payment transaction which involves the 
assistance of a live representative or agent of the creditor, even if an 
automated system is required for a portion of the transaction.
    4. Creditor. For purposes of Sec. 226.10(e), the term ``creditor'' 
includes a third party that collects, receives, or processes payments on 
behalf of a creditor. For example
    i. Assume that a creditor uses a service provider to receive, 
collect, or process on the creditor's behalf payments made through the 
creditor's Web site or made through an automated telephone payment 
service. In these circumstances, the service provider would be

[[Page 618]]

considered a creditor for purposes of paragraph (e).
    ii. Assume that a consumer pays a fee to a money transfer or payment 
service in order to transmit a payment to the creditor on the consumer's 
behalf. In these circumstances, the money transfer or payment service 
would not be considered a creditor for purposes of paragraph (e).
    iii. Assume that a consumer has a checking account at a depository 
institution. The consumer makes a payment to the creditor from the 
checking account using a bill payment service provided by the depository 
institution. In these circumstances, the depository institution would 
not be considered a creditor for purposes of paragraph (e).
    10(f) Changes by card issuer.
    1. Address for receiving payment. For purposes of Sec. 226.10(f), 
``address for receiving payment'' means a mailing address for receiving 
payment, such as a post office box, or the address of a branch or office 
at which payments on credit card accounts are accepted.
    2. Materiality. For purposes of Sec. 226.10(f), a ``material 
change'' means any change in the address for receiving payment or 
procedures for handling cardholder payments which causes a material 
delay in the crediting of a payment. ``Material delay'' means any delay 
in crediting payment to a consumer's account which would result in a 
late payment and the imposition of a late fee or finance charge. A delay 
in crediting a payment which does not result in a late fee or finance 
charge would be immaterial.
    3. Safe harbor. i. General. A card issuer may elect not to impose a 
late fee or finance charge on a consumer's account for the 60-day period 
following a change in address for receiving payment or procedures for 
handling cardholder payments which could reasonably be expected to cause 
a material delay in crediting of a payment to the consumer's account. 
For purposes of Sec. 226.10(f), a late fee or finance charge is not 
imposed if the fee or charge is waived or removed, or an amount equal to 
the fee or charge is credited to the account.
    ii. Retail location. For a material change in the address of a 
retail location or procedures for handling cardholder payments at a 
retail location, a card issuer may impose a late fee or finance charge 
on a consumer's account for a late payment during the 60-day period 
following the date on which the change took effect. However, if a card 
issuer is notified by a consumer no later than 60 days after the card 
issuer transmitted the first periodic statement that reflects the late 
fee or finance charge for a late payment that the late payment was 
caused by such change, the card issuer must waive or remove any late fee 
or finance charge, or credit an amount equal to any late fee or finance 
charge, imposed on the account during the 60-day period following the 
date on which the change took effect.
    4. Examples.
    i. A card issuer changes the mailing address for receiving payments 
by mail from a five-digit postal zip code to a nine-digit postal zip 
code. A consumer mails a payment using the five-digit postal zip code. 
The change in mailing address is immaterial and it does not cause a 
delay. Therefore, a card issuer may impose a late fee or finance charge 
for a late payment on the account.
    ii. A card issuer changes the mailing address for receiving payments 
by mail from one post office box number to another post office box 
number. For a 60-day period following the change, the card issuer 
continues to use both post office box numbers for the collection of 
payments received by mail. The change in mailing address would not cause 
a material delay in crediting a payment because payments would be 
received and credited at both addresses. Therefore, a card issuer may 
impose a late fee or finance charge for a late payment on the account 
during the 60-day period following the date on which the change took 
effect.
    iii. Same facts as paragraph ii. above, except the prior post office 
box number is no longer valid and mail sent to that address during the 
60-day period following the change would be returned to sender. The 
change in mailing address is material and the change could cause a 
material delay in the crediting of a payment because a payment sent to 
the old address could be delayed past the due date. If, as a result, a 
consumer makes a late payment on the account during the 60-day period 
following the date on which the change took effect, a card issuer may 
not impose any late fee or finance charge for the late payment.
    iv. A card issuer permanently closes a local branch office at which 
payments are accepted on credit card accounts. The permanent closing of 
the local branch office is a material change in address for receiving 
payment. Relying on the safe harbor, the card issuer elects not to 
impose a late fee or finance charge for the 60-day period following the 
local branch closing for late payments on consumer accounts which the 
issuer reasonably determines are associated with the local branch and 
which could reasonably be expected to have been caused by the branch 
closing.
    v. A consumer has elected to make payments automatically to a credit 
card account, such as through a payroll deduction plan or a third party 
payor's preauthorized payment arrangement. A card issuer changes the 
procedures for handling such payments and as a result, a payment is 
delayed and not credited to the consumer's account before the due date. 
In these circumstances, a card

[[Page 619]]

issuer may not impose any late fee or finance charge during the 60-day 
period following the date on which the change took effect for a late 
payment on the account.
    vi. A card issuer no longer accepts payments in person at a retail 
location as a conforming method of payment, which is a material change 
in the procedures for handling cardholder payment. In the 60-day period 
following the date on which the change took effect, a consumer attempts 
to make a payment in person at a retail location of a card issuer. As a 
result, the consumer makes a late payment and the issuer charges a late 
fee on the consumer's account. The consumer notifies the card issuer of 
the late fee for the late payment which was caused by the material 
change. In order to comply with Sec. 226.10(f), the card issuer must 
waive or remove the late fee or finance charge, or credit the consumer's 
account in an amount equal to the late fee or finance charge.
    5. Finance charge due to periodic interest rate. When an account is 
not eligible for a grace period, imposing a finance charge due to a 
periodic interest rate does not constitute imposition of a finance 
charge for a late payment for purposes of Sec. 226.10(f).

    Section 226.11--Treatment of Credit Balances; Account Termination

    11(a) Credit balances.
    1. Timing of refund. The creditor may also fulfill its obligations 
under Sec. 226.11 by:
    i. Refunding any credit balance to the consumer immediately.
    ii. Refunding any credit balance prior to receiving a written 
request (under Sec. 226.11(a)(2)) from the consumer.
    iii. Refunding any credit balance upon the consumer's oral or 
electronic request.
    iv. Making a good faith effort to refund any credit balance before 6 
months have passed. If that attempt is unsuccessful, the creditor need 
not try again to refund the credit balance at the end of the 6-month 
period.
    2. Amount of refund. The phrases any part of the remaining credit 
balance in Sec. 226.11(a)(2) and any part of the credit balance 
remaining in the account in Sec. 226.11(a)(3) mean the amount of the 
credit balance at the time the creditor is required to make the refund. 
The creditor may take into consideration intervening purchases or other 
debits to the consumer's account (including those that have not yet been 
reflected on a periodic statement) that decrease or eliminate the credit 
balance.
    Paragraph 11(a)(2).
    1. Written requests--standing orders. The creditor is not required 
to honor standing orders requesting refunds of any credit balance that 
may be created on the consumer's account.
    Paragraph 11(a)(3).
    1. Good faith effort to refund. The creditor must take positive 
steps to return any credit balance that has remained in the account for 
over 6 months. This includes, if necessary, attempts to trace the 
consumer through the consumer's last known address or telephone number, 
or both.
    2. Good faith effort unsuccessful. Section 226.11 imposes no further 
duties on the creditor if a good faith effort to return the balance is 
unsuccessful. The ultimate disposition of the credit balance (or any 
credit balance of $1 or less) is to be determined under other applicable 
law.
    11(b) Account termination.
    Paragraph 11(b)(1).
    1. Expiration date. The credit agreement determines whether or not 
an open-end plan has a stated expiration (maturity) date. Creditors that 
offer accounts with no stated expiration date are prohibited from 
terminating those accounts solely because a consumer does not incur a 
finance charge, even if credit cards or other access devices associated 
with the account expire after a stated period. Creditors may still 
terminate such accounts for inactivity consistent with Sec. 
226.11(b)(2).
    11(c) Timely settlement of estate debts
    1. Administrator of an estate. For purposes of Sec. 226.11(c), the 
term ``administrator'' means an administrator, executor, or any personal 
representative of an estate who is authorized to act on behalf of the 
estate.
    2. Examples. The following are examples of reasonable procedures 
that satisfy this rule:
    i. A card issuer may decline future transactions and terminate the 
account upon receiving reasonable notice of the consumer's death.
    ii. A card issuer may credit the account for fees and charges 
imposed after the date of receiving reasonable notice of the consumer's 
death.
    iii. A card issuer may waive the estate's liability for all charges 
made to the account after receiving reasonable notice of the consumer's 
death.
    iv. A card issuer may authorize an agent to handle matters in 
accordance with the requirements of this rule.
    v. A card issuer may require administrators of an estate to provide 
documentation indicating authority to act on behalf of the estate.
    vi. A card issuer may establish or designate a department, business 
unit, or communication channel for administrators, such as a specific 
mailing address or toll-free number, to handle matters in accordance 
with the requirements of this rule.
    vii. A card issuer may direct administrators, who call a general 
customer service toll-free number or who send correspondence by mail to 
an address for general correspondence, to an appropriate customer 
service representative, department, business unit, or communication 
channel to handle matters in

[[Page 620]]

accordance with the requirements of this rule.
    2. Request by an administrator of an estate. A card issuer may 
receive a request for the amount of the balance on a deceased consumer's 
account in writing or by telephone call from the administrator of an 
estate. If a request is made in writing, such as by mail, the request is 
received on the date the card issuer receives the correspondence.
    3. Timely statement of balance. A card issuer must disclose the 
balance on a deceased consumer's account, upon request by the 
administrator of the decedent's estate. A card issuer may provide the 
amount, if any, by a written statement or by telephone. This does not 
preclude a card issuer from providing the balance amount to appropriate 
persons, other than the administrator, such as the spouse or a relative 
of the decedent, who indicate that they may pay any balance. This 
provision does not relieve card issuers of the requirements to provide a 
periodic statement, under Sec. 226.5(b)(2). A periodic statement, under 
Sec. 226.5(b)(2), may satisfy the requirements of Sec. 226.11(c)(2), 
if provided within 30 days of receiving a request by an administrator of 
the estate.
    4. Imposition of fees and interest charges. Section 226.11(c)(3) 
does not prohibit a card issuer from imposing fees and finance charges 
due to a periodic interest rate based on balances for days that precede 
the date on which the card issuer receives a request pursuant to Sec. 
226.11(c)(2). For example, if the last day of the billing cycle is June 
30 and the card issuer receives a request pursuant to Sec. 226.11(c)(2) 
on June 25, the card issuer may charge interest that accrued prior to 
June 25.
    5. Example. A card issuer receives a request from an administrator 
for the amount of the balance on a deceased consumer's account on March 
1. The card issuer discloses to the administrator on March 25 that the 
balance is $1,000. If the card issuer receives payment in full of the 
$1,000 on April 24, the card issuer must waive or rebate any additional 
interest that accrued on the $1,000 balance between March 25 and April 
24. If the card issuer receives a payment of $1,000 on April 25, the 
card issuer is not required to waive or rebate interest charges on the 
$1,000 balance in respect of the period between March 25 and April 25. 
If the card issuer receives a partial payment of $500 on April 24, the 
card issuer is not required to waive or rebate interest charges on the 
$1,000 balance in respect of the period between March 25 and April 25.
    6. Application to joint accounts. A card issuer may impose fees and 
charges on an account of a deceased consumer if a joint accountholder 
remains on the account. If only an authorized user remains on the 
account of a deceased consumer, however, then a card issuer may not 
impose fees and charges.

             Section 226.12--Special Credit Card Provisions

    1. Scope. Sections 226.12(a) and (b) deal with the issuance and 
liability rules for credit cards, whether the card is intended for 
consumer, business, or any other purposes. Sections 226.12(a) and (b) 
are exceptions to the general rule that the regulation applies only to 
consumer credit. (See Sec. Sec. 226.1 and 226.3.)
    2. Definition of ``accepted credit card''. For purposes of this 
section, ``accepted credit card'' means any credit card that a 
cardholder has requested or applied for and received, or has signed, 
used, or authorized another person to use to obtain credit. Any credit 
card issued as a renewal or substitute in accordance with Sec. 
226.12(a) becomes an accepted credit card when received by the 
cardholder.
    12(a) Issuance of credit cards.
    Paragraph 12(a)(1).
    1. Explicit request. A request or application for a card must be 
explicit. For example, a request for an overdraft plan tied to a 
checking account does not constitute an application for a credit card 
with overdraft checking features.
    2. Addition of credit features. If the consumer has a non-credit 
card, the addition of credit features to the card (for example, the 
granting of overdraft privileges on a checking account when the consumer 
already has a check guarantee card) constitutes issuance of a credit 
card.
    3. Variance of card from request. The request or application need 
not correspond exactly to the card that is issued. For example:
    i. The name of the card requested may be different when issued.
    ii. The card may have features in addition to those reflected in the 
request or application.
    4. Permissible form of request. The request or application may be 
oral (in response to a telephone solicitation by a card issuer, for 
example) or written.
    5. Time of issuance. A credit card may be issued in response to a 
request made before any cards are ready for issuance (for example, if a 
new program is established), even if there is some delay in issuance.
    6. Persons to whom cards may be issued. A card issuer may issue a 
credit card to the person who requests it, and to anyone else for whom 
that person requests a card and who will be an authorized user on the 
requester's account. In other words, cards may be sent to consumer A on 
A's request, and also (on A's request) to consumers B and C, who will be 
authorized users on A's account. In these circumstances, the following 
rules apply:
    i. The additional cards may be imprinted in either A's name or in 
the names of B and C.
    ii. No liability for unauthorized use (by persons other than B and 
C), not even the

[[Page 621]]

$50, may be imposed on B or C since they are merely users and not 
cardholders as that term is defined in Sec. 226.2 and used in Sec. 
226.12(b); of course, liability of up to $50 for unauthorized use of B's 
and C's cards may be imposed on A.
    iii. Whether B and C may be held liable for their own use, or on the 
account generally, is a matter of state or other applicable law.
    7. Issuance of non-credit cards.
    i. General. Under Sec. 226.12(a)(1), a credit card cannot be issued 
except in response to a request or an application. (See comment 
2(a)(15)-2 for examples of cards or devices that are and are not credit 
cards.) A non-credit card may be sent on an unsolicited basis by an 
issuer that does not propose to connect the card to any credit plan; a 
credit feature may be added to a previously issued non-credit card only 
upon the consumer's specific request.
    ii. Examples. A purchase-price discount card may be sent on an 
unsolicited basis by an issuer that does not propose to connect the card 
to any credit plan. An issuer demonstrates that it proposes to connect 
the card to a credit plan by, for example, including promotional 
materials about credit features or account agreements and disclosures 
required by Sec. 226.6. The issuer will violate the rule against 
unsolicited issuance if, for example, at the time the card is sent a 
credit plan can be accessed by the card or the recipient of the 
unsolicited card has been preapproved for credit that the recipient can 
access by contacting the issuer and activating the card.
    8. Unsolicited issuance of PINs. A card issuer may issue personal 
identification numbers (PINs) to existing credit cardholders without a 
specific request from the cardholders, provided the PINs cannot be used 
alone to obtain credit. For example, the PINs may be necessary if 
consumers wish to use their existing credit cards at automated teller 
machines or at merchant locations with point of sale terminals that 
require PINs.
    Paragraph 12(a)(2).
    1. Renewal. Renewal generally contemplates the regular replacement 
of existing cards because of, for example, security reasons or new 
technology or systems. It also includes the re-issuance of cards that 
have been suspended temporarily, but does not include the opening of a 
new account after a previous account was closed.
    2. Substitution--examples. Substitution encompasses the replacement 
of one card with another because the underlying account relationship has 
changed in some way--such as when the card issuer has:
    i. Changed its name.
    ii. Changed the name of the card.
    iii. Changed the credit or other features available on the account. 
For example, the original card could be used to make purchases and 
obtain cash advances at teller windows. The substitute card might be 
usable, in addition, for obtaining cash advances through automated 
teller machines. (If the substitute card constitutes an access device, 
as defined in Regulation E, then the Regulation E issuance rules would 
have to be followed.) The substitution of one card with another on an 
unsolicited basis is not permissible, however, where in conjunction with 
the substitution an additional credit card account is opened and the 
consumer is able to make new purchases or advances under both the 
original and the new account with the new card. For example, if a retail 
card issuer replaces its credit card with a combined retailer/bank card, 
each of the creditors maintains a separate account, and both accounts 
can be accessed for new transactions by use of the new credit card, the 
card cannot be provided to a consumer without solicitation.
    iv. Substituted a card user's name on the substitute card for the 
cardholder's name appearing on the original card.
    v. Changed the merchant base, provided that the new card is honored 
by at least one of the persons that honored the original card. However, 
unless the change in the merchant base is the addition of an affiliate 
of the existing merchant base, the substitution of a new card for 
another on an unsolicited basis is not permissible where the account is 
inactive. A credit card cannot be issued in these circumstances without 
a request or application. For purposes of Sec. 226.12(a), an account is 
inactive if no credit has been extended and if the account has no 
outstanding balance for the prior 24 months. (See Sec. 226.11(b)(2).)
    3. Substitution--successor card issuer. Substitution also occurs 
when a successor card issuer replaces the original card issuer (for 
example, when a new card issuer purchases the accounts of the original 
issuer and issues its own card to replace the original one). A 
permissible substitution exists even if the original issuer retains the 
existing receivables and the new card issuer acquires the right only to 
future receivables, provided use of the original card is cut off when 
use of the new card becomes possible.
    4. Substitution--non-credit-card plan. A credit card that replaces a 
retailer's open-end credit plan not involving a credit card is not 
considered a substitute for the retailer's plan--even if the consumer 
used the retailer's plan. A credit card cannot be issued in these 
circumstances without a request or application.
    5. One-for-one rule. An accepted card may be replaced by no more 
than one renewal or substitute card. For example, the card issuer may 
not replace a credit card permitting purchases and cash advances with 
two cards, one for the purchases and another for the cash advances.
    6. One-for-one rule--exceptions. The regulation does not prohibit 
the card issuer from:

[[Page 622]]

    i. Replacing a debit/credit card with a credit card and another card 
with only debit functions (or debit functions plus an associated 
overdraft capability), since the latter card could be issued on an 
unsolicited basis under Regulation E.
    ii. Replacing an accepted card with more than one renewal or 
substitute card, provided that:
    A. No replacement card accesses any account not accessed by the 
accepted card;
    B. For terms and conditions required to be disclosed under Sec. 
226.6, all replacement cards are issued subject to the same terms and 
conditions, except that a creditor may vary terms for which no change in 
terms notice is required under Sec. 226.9(c); and
    C. Under the account's terms the consumer's total liability for 
unauthorized use with respect to the account does not increase.
    7. Methods of terminating replaced card. The card issuer need not 
physically retrieve the original card, provided the old card is voided 
in some way, for example:
    i. The issuer includes with the new card a notification that the 
existing card is no longer valid and should be destroyed immediately.
    ii. The original card contained an expiration date.
    iii. The card issuer, in order to preclude use of the card, 
reprograms computers or issues instructions to authorization centers.
    8. Incomplete replacement. If a consumer has duplicate credit cards 
on the same account (Card A--one type of bank credit card, for example), 
the card issuer may not replace the duplicate cards with one Card A and 
one Card B (Card B--another type of bank credit card) unless the 
consumer requests Card B.
    9. Multiple entities. Where multiple entities share responsibilities 
with respect to a credit card issued by one of them, the entity that 
issued the card may replace it on an unsolicited basis, if that entity 
terminates the original card by voiding it in some way, as described in 
comment 12(a)(2)-7. The other entity or entities may not issue a card on 
an unsolicited basis in these circumstances.
    12(b) Liability of cardholder for unauthorized use.
    1. Meaning of cardholder. For purposes of this provision, cardholder 
includes any person (including organizations) to whom a credit card is 
issued for any purpose, including business. When a corporation is the 
cardholder, required disclosures should be provided to the corporation 
(as opposed to an employee user).
    2. Imposing liability. A card issuer is not required to impose 
liability on a cardholder for the unauthorized use of a credit card; if 
the card issuer does not seek to impose liability, the issuer need not 
conduct any investigation of the cardholder's claim.
    3. Reasonable investigation. If a card issuer seeks to impose 
liability when a claim of unauthorized use is made by a cardholder, the 
card issuer must conduct a reasonable investigation of the claim. In 
conducting its investigation, the card issuer may reasonably request the 
cardholder's cooperation. The card issuer may not automatically deny a 
claim based solely on the cardholder's failure or refusal to comply with 
a particular request, including providing an affidavit or filing a 
police report; however, if the card issuer otherwise has no knowledge of 
facts confirming the unauthorized use, the lack of information resulting 
from the cardholder's failure or refusal to comply with a particular 
request may lead the card issuer reasonably to terminate the 
investigation. The procedures involved in investigating claims may 
differ, but actions such as the following represent steps that a card 
issuer may take, as appropriate, in conducting a reasonable 
investigation:
    i. Reviewing the types or amounts of purchases made in relation to 
the cardholder's previous purchasing pattern.
    ii. Reviewing where the purchases were delivered in relation to the 
cardholder's residence or place of business.
    iii. Reviewing where the purchases were made in relation to where 
the cardholder resides or has normally shopped.
    iv. Comparing any signature on credit slips for the purchases to the 
signature of the cardholder or an authorized user in the card issuer's 
records, including other credit slips.
    v. Requesting documentation to assist in the verification of the 
claim.
    vi. Requiring a written, signed statement from the cardholder or 
authorized user. For example, the creditor may include a signature line 
on a billing rights form that the cardholder may send in to provide 
notice of the claim. However, a creditor may not require the cardholder 
to provide an affidavit or signed statement under penalty of perjury as 
part of a reasonable investigation.
    vii. Requesting a copy of a police report, if one was filed.
    viii. Requesting information regarding the cardholder's knowledge of 
the person who allegedly used the card or of that person's authority to 
do so.
    4. Checks that access a credit card account. The liability 
provisions for unauthorized use under Sec. 226.12(b)(1) only apply to 
transactions involving the use of a credit card, and not if an 
unauthorized transaction is made using a check accessing the credit card 
account. However, the billing error provisions in Sec. 226.13 apply to 
both of these types of transactions.
    12(b)(1)(ii) Limitation on amount.
    1. Meaning of authority. Section 226.12(b)(1)(i) defines 
unauthorized use in terms of whether the user has actual, implied, or 
apparent authority. Whether such

[[Page 623]]

authority exists must be determined under state or other applicable law.
    2. Liability limits--dollar amounts. As a general rule, the 
cardholder's liability for a series of unauthorized uses cannot exceed 
either $50 or the value obtained through the unauthorized use before the 
card issuer is notified, whichever is less.
    3. Implied or apparent authority. If a cardholder furnishes a credit 
card and grants authority to make credit transactions to a person (such 
as a family member or coworker) who exceeds the authority given, the 
cardholder is liable for the transaction(s) unless the cardholder has 
notified the creditor that use of the credit card by that person is no 
longer authorized.
    4. Credit card obtained through robbery or fraud. An unauthorized 
use includes, but is not limited to, a transaction initiated by a person 
who has obtained the credit card from the consumer, or otherwise 
initiated the transaction, through fraud or robbery.
    12(b)(2) Conditions of liability.
    1. Issuer's option not to comply. A card issuer that chooses not to 
impose any liability on cardholders for unauthorized use need not comply 
with the disclosure and identification requirements discussed in Sec. 
226.12(b)(2).
    Paragraph 12(b)(2)(ii).
    1. Disclosure of liability and means of notifying issuer. The 
disclosures referred to in Sec. 226.12(b)(2)(ii) may be given, for 
example, with the initial disclosures under Sec. 226.6, on the credit 
card itself, or on periodic statements. They may be given at any time 
preceding the unauthorized use of the card.
    2. Meaning of ``adequate notice.'' For purposes of this provision, 
``adequate notice'' means a printed notice to a cardholder that sets 
forth clearly the pertinent facts so that the cardholder may reasonably 
be expected to have noticed it and understood its meaning. The notice 
may be given by any means reasonably assuring receipt by the cardholder.
    Paragraph 12(b)(2)(iii).
    1. Means of identifying cardholder or user. To fulfill the condition 
set forth in Sec. 226.12(b)(2)(iii), the issuer must provide some 
method whereby the cardholder or the authorized user can be identified. 
This could include, for example, a signature, photograph, or fingerprint 
on the card or other biometric means, or electronic or mechanical 
confirmation.
    2. Identification by magnetic strip. Unless a magnetic strip (or 
similar device not readable without physical aids) must be used in 
conjunction with a secret code or the like, it would not constitute 
sufficient means of identification. Sufficient identification also does 
not exist if a ``pool'' or group card, issued to a corporation and 
signed by a corporate agent who will not be a user of the card, is 
intended to be used by another employee for whom no means of 
identification is provided.
    3. Transactions not involving card. The cardholder may not be held 
liable under Sec. 226.12(b) when the card itself (or some other 
sufficient means of identification of the cardholder) is not presented. 
Since the issuer has not provided a means to identify the user under 
these circumstances, the issuer has not fulfilled one of the conditions 
for imposing liability. For example, when merchandise is ordered by 
telephone or the Internet by a person without authority to do so, using 
a credit card account number by itself or with other information that 
appears on the card (for example, the card expiration date and a 3- or 
4-digit cardholder identification number), no liability may be imposed 
on the cardholder.
    12(b)(3) Notification to card issuer.
    1. How notice must be provided. Notice given in a normal business 
manner--for example, by mail, telephone, or personal visit--is effective 
even though it is not given to, or does not reach, some particular 
person within the issuer's organization. Notice also may be effective 
even though it is not given at the address or phone number disclosed by 
the card issuer under Sec. 226.12(b)(2)(ii).
    2. Who must provide notice. Notice of loss, theft, or possible 
unauthorized use need not be initiated by the cardholder. Notice is 
sufficient so long as it gives the ``pertinent information'' which would 
include the name or card number of the cardholder and an indication that 
unauthorized use has or may have occurred.
    3. Relationship to Sec. 226.13. The liability protections afforded 
to cardholders in Sec. 226.12 do not depend upon the cardholder's 
following the error resolution procedures in Sec. 226.13. For example, 
the written notification and time limit requirements of Sec. 226.13 do 
not affect the Sec. 226.12 protections. (See also comment 12(b)-4.)
    12(b)(5) Business use of credit cards.
    1. Agreement for higher liability for business use cards. The card 
issuer may not rely on Sec. 226.12(b)(5) if the business is clearly not 
in a position to provide 10 or more cards to employees (for example, if 
the business has only 3 employees). On the other hand, the issuer need 
not monitor the personnel practices of the business to make sure that it 
has at least 10 employees at all times.
    2. Unauthorized use by employee. The protection afforded to an 
employee against liability for unauthorized use in excess of the limits 
set in Sec. 226.12(b) applies only to unauthorized use by someone other 
than the employee. If the employee uses the card in an unauthorized 
manner, the regulation sets no restriction on the employee's potential 
liability for such use.
    12(c) Right of cardholder to assert claims or defenses against card 
issuer.

[[Page 624]]

    1. Relationship to Sec. 226.13. The Sec. 226.12(c) credit card 
``holder in due course'' provision deals with the consumer's right to 
assert against the card issuer a claim or defense concerning property or 
services purchased with a credit card, if the merchant has been 
unwilling to resolve the dispute. Even though certain merchandise 
disputes, such as non-delivery of goods, may also constitute ``billing 
errors'' under Sec. 226.13, that section operates independently of 
Sec. 226.12(c). The cardholder whose asserted billing error involves 
undelivered goods may institute the error resolution procedures of Sec. 
226.13; but whether or not the cardholder has done so, the cardholder 
may assert claims or defenses under Sec. 226.12(c). Conversely, the 
consumer may pay a disputed balance and thus have no further right to 
assert claims and defenses, but still may assert a billing error if 
notice of that billing error is given in the proper time and manner. An 
assertion that a particular transaction resulted from unauthorized use 
of the card could also be both a ``defense'' and a billing error.
    2. Claims and defenses assertible. Section 226.12(c) merely 
preserves the consumer's right to assert against the card issuer any 
claims or defenses that can be asserted against the merchant. It does 
not determine what claims or defenses are valid as to the merchant; this 
determination must be made under state or other applicable law.
    3. Transactions excluded. Section 226.12(c) does not apply to the 
use of a check guarantee card or a debit card in connection with an 
overdraft credit plan, or to a check guarantee card used in connection 
with cash-advance checks.
    4. Method of calculating the amount of credit outstanding. The 
amount of the claim or defense that the cardholder may assert shall not 
exceed the amount of credit outstanding for the disputed transaction at 
the time the cardholder first notifies the card issuer or the person 
honoring the credit card of the existence of the claim or defense. 
However, when a consumer has asserted a claim or defense against a 
creditor pursuant to Sec. 226.12(c), the creditor must apply any 
payment or other credit in a manner that avoids or minimizes any 
reduction in the amount subject to that claim or defense. Accordingly, 
to determine the amount of credit outstanding for purposes of this 
section, payments and other credits must be applied first to amounts 
other than the disputed transaction.
    i. For examples of how to comply with Sec. Sec. 226.12 and 226.53 
for credit card accounts under an open-end (not home-secured) consumer 
credit plan, see comment 53-3.
    ii. For other types of credit card accounts, creditors may, at their 
option, apply payments consistent with Sec. 226.53 and comment 53-3. In 
the alternative, payments and other credits may be applied to: Late 
charges in the order of entry to the account; then to finance charges in 
the order of entry to the account; and then to any debits other than the 
transaction subject to the claim or defense in the order of entry to the 
account. In these circumstances, if more than one item is included in a 
single extension of credit, credits are to be distributed pro rata 
according to prices and applicable taxes.
    12(c)(1) General rule.
    1. Situations excluded and included. The consumer may assert claims 
or defenses only when the goods or services are ``purchased with the 
credit card.'' This could include mail, the Internet or telephone 
orders, if the purchase is charged to the credit card account. But it 
would exclude:
    i. Use of a credit card to obtain a cash advance, even if the 
consumer then uses the money to purchase goods or services. Such a 
transaction would not involve ``property or services purchased with the 
credit card.''
    ii. The purchase of goods or services by use of a check accessing an 
overdraft account and a credit card used solely for identification of 
the consumer. (On the other hand, if the credit card is used to make 
partial payment for the purchase and not merely for identification, the 
right to assert claims or defenses would apply to credit extended via 
the credit card, although not to the credit extended on the overdraft 
line.)
    iii. Purchases made by use of a check guarantee card in conjunction 
with a cash advance check (or by cash advance checks alone). (See 
comment 12(c)-3.) A cash advance check is a check that, when written, 
does not draw on an asset account; instead, it is charged entirely to an 
open-end credit account.
    iv. Purchases effected by use of either a check guarantee card or a 
debit card when used to draw on overdraft credit plans. (See comment 
12(c)-3.) The debit card exemption applies whether the card accesses an 
asset account via point of sale terminals, automated teller machines, or 
in any other way, and whether the card qualifies as an ``access device'' 
under Regulation E or is only a paper based debit card. If a card serves 
both as an ordinary credit card and also as check guarantee or debit 
card, a transaction will be subject to this rule on asserting claims and 
defenses when used as an ordinary credit card, but not when used as a 
check guarantee or debit card.
    12(c)(2) Adverse credit reports prohibited.
    1. Scope of prohibition. Although an amount in dispute may not be 
reported as delinquent until the matter is resolved:
    i. That amount may be reported as disputed.
    ii. Nothing in this provision prohibits the card issuer from 
undertaking its normal collection activities for the delinquent and 
undisputed portion of the account.

[[Page 625]]

    2. Settlement of dispute. A card issuer may not consider a dispute 
settled and report an amount disputed as delinquent or begin collection 
of the disputed amount until it has completed a reasonable investigation 
of the cardholder's claim. A reasonable investigation requires an 
independent assessment of the cardholder's claim based on information 
obtained from both the cardholder and the merchant, if possible. In 
conducting an investigation, the card issuer may request the 
cardholder's reasonable cooperation. The card issuer may not 
automatically consider a dispute settled if the cardholder fails or 
refuses to comply with a particular request. However, if the card issuer 
otherwise has no means of obtaining information necessary to resolve the 
dispute, the lack of information resulting from the cardholder's failure 
or refusal to comply with a particular request may lead the card issuer 
reasonably to terminate the investigation.
    12(c)(3) Limitations.
    Paragraph 12(c)(3)(i)(A).
    1. Resolution with merchant. The consumer must have tried to resolve 
the dispute with the merchant. This does not require any special 
procedures or correspondence between them, and is a matter for factual 
determination in each case. The consumer is not required to seek 
satisfaction from the manufacturer of the goods involved. When the 
merchant is in bankruptcy proceedings, the consumer is not required to 
file a claim in those proceedings, and may instead file a claim for the 
property or service purchased with the credit card with the card issuer 
directly.
    Paragraph 12(c)(3)(i)(B).
    1. Geographic limitation. The question of where a transaction occurs 
(as in the case of mail, Internet, or telephone orders, for example) is 
to be determined under state or other applicable law.
    Paragraph 12(c)(3)(ii).
    1. Merchant honoring card. The exceptions (stated in Sec. 
226.12(c)(3)(ii)) to the amount and geographic limitations in Sec. 
226.12(c)(3)(i)(B) do not apply if the merchant merely honors, or 
indicates through signs or advertising that it honors, a particular 
credit card.
    12(d) Offsets by card issuer prohibited.
    Paragraph 12(d)(1).
    1. Holds on accounts. ``Freezing'' or placing a hold on funds in the 
cardholder's deposit account is the functional equivalent of an offset 
and would contravene the prohibition in Sec. 226.12(d)(1), unless done 
in the context of one of the exceptions specified in Sec. 226.12(d)(2). 
For example, if the terms of a security agreement permitted the card 
issuer to place a hold on the funds, the hold would not violate the 
offset prohibition. Similarly, if an order of a bankruptcy court 
required the card issuer to turn over deposit account funds to the 
trustee in bankruptcy, the issuer would not violate the regulation by 
placing a hold on the funds in order to comply with the court order.
    2. Funds intended as deposits. If the consumer tenders funds as a 
deposit (to a checking account, for example), the card issuer may not 
apply the funds to repay indebtedness on the consumer's credit card 
account.
    3. Types of indebtedness; overdraft accounts. The offset prohibition 
applies to any indebtedness arising from transactions under a credit 
card plan, including accrued finance charges and other charges on the 
account. The prohibition also applies to balances arising from 
transactions not using the credit card itself but taking place under 
plans that involve credit cards. For example, if the consumer writes a 
check that accesses an overdraft line of credit, the resulting 
indebtedness is subject to the offset prohibition since it is incurred 
through a credit card plan, even though the consumer did not use an 
associated check guarantee or debit card.
    4. When prohibition applies in case of termination of account. The 
offset prohibition applies even after the card issuer terminates the 
cardholder's credit card privileges, if the indebtedness was incurred 
prior to termination. If the indebtedness was incurred after 
termination, the prohibition does not apply.
    Paragraph 12(d)(2).
    1. Security interest--limitations. In order to qualify for the 
exception stated in Sec. 226.12(d)(2), a security interest must be 
affirmatively agreed to by the consumer and must be disclosed in the 
issuer's account-opening disclosures under Sec. 226.6. The security 
interest must not be the functional equivalent of a right of offset; as 
a result, routinely including in agreements contract language indicating 
that consumers are giving a security interest in any deposit accounts 
maintained with the issuer does not result in a security interest that 
falls within the exception in Sec. 226.12(d)(2). For a security 
interest to qualify for the exception under Sec. 226.12(d)(2) the 
following conditions must be met:
    i. The consumer must be aware that granting a security interest is a 
condition for the credit card account (or for more favorable account 
terms) and must specifically intend to grant a security interest in a 
deposit account. Indicia of the consumer's awareness and intent include 
at least one of the following (or a substantially similar procedure that 
evidences the consumer's awareness and intent):
    A. Separate signature or initials on the agreement indicating that a 
security interest is being given.
    B. Placement of the security agreement on a separate page, or 
otherwise separating the security interest provisions from other 
contract and disclosure provisions.

[[Page 626]]

    C. Reference to a specific amount of deposited funds or to a 
specific deposit account number.
    ii. The security interest must be obtainable and enforceable by 
creditors generally. If other creditors could not obtain a security 
interest in the consumer's deposit accounts to the same extent as the 
card issuer, the security interest is prohibited by Sec. 226.12(d)(2).
    2. Security interest--after-acquired property. As used in Sec. 
226.12(d)(2), the term ``security interest'' does not exclude (as it 
does for other Regulation Z purposes) interests in after-acquired 
property. Thus, a consensual security interest in deposit-account funds, 
including funds deposited after the granting of the security interest 
would constitute a permissible exception to the prohibition on offsets.
    3. Court order. If the card issuer obtains a judgment against the 
cardholder, and if state and other applicable law and the terms of the 
judgment do not so prohibit, the card issuer may offset the indebtedness 
against the cardholder's deposit account.
    Paragraph 12(d)(3).
    1. Automatic payment plans--scope of exception. With regard to 
automatic debit plans under Sec. 226.12(d)(3), the following rules 
apply:
    i. The cardholder's authorization must be in writing and signed or 
initialed by the cardholder.
    ii. The authorizing language need not appear directly above or next 
to the cardholder's signature or initials, provided it appears on the 
same document and that it clearly spells out the terms of the automatic 
debit plan.
    iii. If the cardholder has the option to accept or reject the 
automatic debit feature (such option may be required under section 913 
of the Electronic Fund Transfer Act), the fact that the option exists 
should be clearly indicated.
    2. Automatic payment plans--additional exceptions. The following 
practices are not prohibited by Sec. 226.12(d)(1):
    i. Automatically deducting charges for participation in a program of 
banking services (one aspect of which may be a credit card plan).
    ii. Debiting the cardholder's deposit account on the cardholder's 
specific request rather than on an automatic periodic basis (for 
example, a cardholder might check a box on the credit card bill stub, 
requesting the issuer to debit the cardholder's account to pay that 
bill).
    12(e) Prompt notification of returns and crediting of refunds.
    Paragraph 12(e)(1).
    1. Normal channels. The term normal channels refers to any network 
or interchange system used for the processing of the original charge 
slips (or equivalent information concerning the transaction).
    Paragraph 12(e)(2).
    1. Crediting account. The card issuer need not actually post the 
refund to the consumer's account within three business days after 
receiving the credit statement, provided that it credits the account as 
of a date within that time period.

                Section 226.13--Billing Error Resolution

    1. Creditor's failure to comply with billing error provisions. 
Failure to comply with the error resolution procedures may result in the 
forfeiture of disputed amounts as prescribed in section 161(e) of the 
act. (Any failure to comply may also be a violation subject to the 
liability provisions of section 130 of the act.)
    2. Charges for error resolution. If a billing error occurred, 
whether as alleged or in a different amount or manner, the creditor may 
not impose a charge related to any aspect of the error resolution 
process (including charges for documentation or investigation) and must 
credit the consumer's account if such a charge was assessed pending 
resolution. Since the act grants the consumer error resolution rights, 
the creditor should avoid any chilling effect on the good faith 
assertion of errors that might result if charges are assessed when no 
billing error has occurred.
    13(a) Definition of billing error.
    Paragraph 13(a)(1).
    1. Actual, implied, or apparent authority. Whether use of a credit 
card or open-end credit plan is authorized is determined by state or 
other applicable law. (See comment 12(b)(1)(ii)-1.)
    Paragraph 13(a)(3).
    1. Coverage. i. Section 226.13(a)(3) covers disputes about goods or 
services that are ``not accepted'' or ``not delivered * * * as agreed''; 
for example:
    A. The appearance on a periodic statement of a purchase, when the 
consumer refused to take delivery of goods because they did not comply 
with the contract.
    B. Delivery of property or services different from that agreed upon.
    C. Delivery of the wrong quantity.
    D. Late delivery.
    E. Delivery to the wrong location.
    ii. Section 226.13(a)(3) does not apply to a dispute relating to the 
quality of property or services that the consumer accepts. Whether 
acceptance occurred is determined by state or other applicable law.
    2. Application to purchases made using a third-party payment 
intermediary. Section 226.13(a)(3) generally applies to disputes about 
goods and services that are purchased using a third-party payment 
intermediary, such as a person-to-person Internet payment service, 
funded through use of a consumer's open-end credit plan when the goods 
or services are not accepted by the consumer or not delivered to the 
consumer as agreed. However, the extension of credit must be made at

[[Page 627]]

the time the consumer purchases the good or service and match the amount 
of the transaction to purchase the good or service (including ancillary 
taxes and fees). Under these circumstances, the property or service for 
which the extension of credit is made is not the payment service, but 
rather the good or service that the consumer has purchased using the 
payment service. Thus, for example, Sec. 226.13(a)(3) would not apply 
to purchases using a third party payment intermediary that is funded 
through use of an open-end credit plan if:
    i. The extension of credit is made to fund the third-party payment 
intermediary ``account,'' but the consumer does not contemporaneously 
use those funds to purchase a good or service at that time.
    ii. The extension of credit is made to fund only a portion of the 
purchase amount, and the consumer uses other sources to fund the 
remaining amount.
    3. Notice to merchant not required. A consumer is not required to 
first notify the merchant or other payee from whom he or she has 
purchased goods or services and attempt to resolve a dispute regarding 
the good or service before providing a billing-error notice to the 
creditor under Sec. 226.13(a)(3) asserting that the goods or services 
were not accepted or delivered as agreed.
    Paragraph 13(a)(5).
    1. Computational errors. In periodic statements that are combined 
with other information, the error resolution procedures are triggered 
only if the consumer asserts a computational billing error in the 
credit-related portion of the periodic statement. For example, if a bank 
combines a periodic statement reflecting the consumer's credit card 
transactions with the consumer's monthly checking statement, a 
computational error in the checking account portion of the combined 
statement is not a billing error.
    Paragraph 13(a)(6).
    1. Documentation requests. A request for documentation such as 
receipts or sales slips, unaccompanied by an allegation of an error 
under Sec. 226.13(a) or a request for additional clarification under 
Sec. 226.13(a)(6), does not trigger the error resolution procedures. 
For example, a request for documentation merely for purposes such as tax 
preparation or recordkeeping does not trigger the error resolution 
procedures.
    13(b) Billing error notice.
    1. Withdrawal of billing error notice by consumer. The creditor need 
not comply with the requirements of Sec. 226.13(c) through (g) of this 
section if the consumer concludes that no billing error occurred and 
voluntarily withdraws the billing error notice. The consumer's 
withdrawal of a billing error notice may be oral, electronic or written.
    2. Form of written notice. The creditor may require that the written 
notice not be made on the payment medium or other material accompanying 
the periodic statement if the creditor so stipulates in the billing 
rights statement required by Sec. Sec. 226.6(a)(5) or (b)(5)(iii), and 
226.9(a). In addition, if the creditor stipulates in the billing rights 
statement that it accepts billing error notices submitted 
electronically, and states the means by which a consumer may 
electronically submit a billing error notice, a notice sent in such 
manner will be deemed to satisfy the written notice requirement for 
purposes of Sec. 226.13(b).
    Paragraph 13(b)(1).
    1. Failure to send periodic statement--timing. If the creditor has 
failed to send a periodic statement, the 60-day period runs from the 
time the statement should have been sent. Once the statement is 
provided, the consumer has another 60 days to assert any billing errors 
reflected on it.
    2. Failure to reflect credit--timing. If the periodic statement 
fails to reflect a credit to the account, the 60-day period runs from 
transmittal of the statement on which the credit should have appeared.
    3. Transmittal. If a consumer has arranged for periodic statements 
to be held at the financial institution until called for, the statement 
is ``transmitted'' when it is first made available to the consumer.
    Paragraph 13(b)(2).
    1. Identity of the consumer. The billing error notice need not 
specify both the name and the account number if the information supplied 
enables the creditor to identify the consumer's name and account.
    13(c) Time for resolution; general procedures.
    1. Temporary or provisional corrections. A creditor may temporarily 
correct the consumer's account in response to a billing error notice, 
but is not excused from complying with the remaining error resolution 
procedures within the time limits for resolution.
    2. Correction without investigation. A creditor may correct a 
billing error in the manner and amount asserted by the consumer without 
the investigation or the determination normally required. The creditor 
must comply, however, with all other applicable provisions. If a 
creditor follows this procedure, no presumption is created that a 
billing error occurred.
    3. Relationship with Sec. 226.12. The consumer's rights under the 
billing error provisions in Sec. 226.13 are independent of the 
provisions set forth in Sec. 226.12(b) and (c). (See comments 12(b)-4, 
12(b)(3)-3, and 12(c)-1.)
    Paragraph 13(c)(2).
    1. Time for resolution. The phrase two complete billing cycles means 
two actual billing cycles occurring after receipt of the billing error 
notice, not a measure of time equal to two billing cycles. For example, 
if a creditor on a monthly billing cycle receives a billing error notice 
mid-cycle, it has the remainder

[[Page 628]]

of that cycle plus the next two full billing cycles to resolve the 
error.
    2. Finality of error resolution procedure. A creditor must comply 
with the error resolution procedures and complete its investigation to 
determine whether an error occurred within two complete billing cycles 
as set forth in Sec. 226.13(c)(2). Thus, for example, Sec. 
226.13(c)(2) prohibits a creditor from reversing amounts previously 
credited for an alleged billing error even if the creditor obtains 
evidence after the error resolution time period has passed indicating 
that the billing error did not occur as asserted by the consumer. 
Similarly, if a creditor fails to mail or deliver a written explanation 
setting forth the reason why the billing error did not occur as 
asserted, or otherwise fails to comply with the error resolution 
procedures set forth in Sec. 226.13(f), the creditor generally must 
credit the disputed amount and related finance or other charges, as 
applicable, to the consumer's account. However, if a consumer receives 
more than one credit to correct the same billing error, Sec. 226.13 
does not prevent a creditor from reversing amounts it has previously 
credited to correct that error, provided that the total amount of the 
remaining credits is equal to or more than the amount of the error and 
that the consumer does not incur any fees or other charges as a result 
of the timing of the creditor's reversal. For example, assume that a 
consumer asserts a billing error with respect to a $100 transaction and 
that the creditor posts a $100 credit to the consumer's account to 
correct that error during the time period set forth in Sec. 
226.13(c)(2). However, following that time period, a merchant or other 
person honoring the credit card issues a $100 credit to the consumer to 
correct the same error. In these circumstances, Sec. 226.13(c)(2) does 
not prohibit the creditor from reversing its $100 credit once the $100 
credit from the merchant or other person has posted to the consumer's 
account.
    13(d) Rules pending resolution.
    1. Disputed amount. Disputed amount is the dollar amount alleged by 
the consumer to be in error. When the allegation concerns the 
description or identification of the transaction (such as the date or 
the seller's name) rather than a dollar amount, the disputed amount is 
the amount of the transaction or charge that corresponds to the disputed 
transaction identification. If the consumer alleges a failure to send a 
periodic statement under Sec. 226.13(a)(7), the disputed amount is the 
entire balance owing.
    13(d)(1) Consumer's right to withhold disputed amount; collection 
action prohibited.
    1. Prohibited collection actions. During the error resolution 
period, the creditor is prohibited from trying to collect the disputed 
amount from the consumer. Prohibited collection actions include, for 
example, instituting court action, taking a lien, or instituting 
attachment proceedings.
    2. Right to withhold payment. If the creditor reflects any disputed 
amount or related finance or other charges on the periodic statement, 
and is therefore required to make the disclosure under Sec. 
226.13(d)(4), the creditor may comply with that disclosure requirement 
by indicating that payment of any disputed amount is not required 
pending resolution. Making a disclosure that only refers to the disputed 
amount would, of course, in no way affect the consumer's right under 
Sec. 226.13(d)(1) to withhold related finance and other charges. The 
disclosure under Sec. 226.13(d)(4) need not appear in any specific 
place on the periodic statement, need not state the specific amount that 
the consumer may withhold, and may be preprinted on the periodic 
statement.
    3. Imposition of additional charges on undisputed amounts. The 
consumer's withholding of a disputed amount from the total bill cannot 
subject undisputed balances (including new purchases or cash advances 
made during the present or subsequent cycles) to the imposition of 
finance or other charges. For example, if on an account with a grace 
period (that is, an account in which paying the new balance in full 
allows the consumer to avoid the imposition of additional finance 
charges), a consumer disputes a $2 item out of a total bill of $300 and 
pays $298 within the grace period, the consumer would not lose the grace 
period as to any undisputed amounts, even if the creditor determines 
later that no billing error occurred. Furthermore, finance or other 
charges may not be imposed on any new purchases or advances that, absent 
the unpaid disputed balance, would not have finance or other charges 
imposed on them. Finance or other charges that would have been incurred 
even if the consumer had paid the disputed amount would not be affected.
    4. Automatic payment plans--coverage. The coverage of this provision 
is limited to the card issuer's automatic payment plans, whether or not 
the consumer's asset account is held by the card issuer or by another 
financial institution. It does not apply to automatic or bill-payment 
plans offered by financial institutions other than the credit card 
issuer.
    5. Automatic payment plans--time of notice. While the card issuer 
does not have to restore or prevent the debiting of a disputed amount if 
the billing error notice arrives after the three-business-day cut-off, 
the card issuer must, however, prevent the automatic debit of any part 
of the disputed amount that is still outstanding and unresolved at the 
time of the next scheduled debit date.
    13(d)(2) Adverse credit reports prohibited.
    1. Report of dispute. Although the creditor must not issue an 
adverse credit report because the consumer fails to pay the disputed

[[Page 629]]

amount or any related charges, the creditor may report that the amount 
or the account is in dispute. Also, the creditor may report the account 
as delinquent if undisputed amounts remain unpaid.
    2. Person. During the error resolution period, the creditor is 
prohibited from making an adverse credit report about the disputed 
amount to any person--including employers, insurance companies, other 
creditors, and credit bureaus.
    3. Creditor's agent. Whether an agency relationship exists between a 
creditor and an issuer of an adverse credit report is determined by 
State or other applicable law.
    13(e) Procedures if billing error occurred as asserted.
    1. Correction of error. The phrase as applicable means that the 
necessary corrections vary with the type of billing error that occurred. 
For example, a misidentified transaction (or a transaction that is 
identified by one of the alternative methods in Sec. 226.8) is cured by 
properly identifying the transaction and crediting related finance and 
any other charges imposed. The creditor is not required to cancel the 
amount of the underlying obligation incurred by the consumer.
    2. Form of correction notice. The written correction notice may take 
a variety of forms. It may be sent separately, or it may be included on 
or with a periodic statement that is mailed within the time for 
resolution. If the periodic statement is used, the amount of the billing 
error must be specifically identified. If a separate billing error 
correction notice is provided, the accompanying or subsequent periodic 
statement reflecting the corrected amount may simply identify it as 
credit.
    3. Discovery of information after investigation period. See comment 
13(c)(2)-2.
    13(f) Procedures if different billing error or no billing error 
occurred.
    1. Different billing error. Examples of a different billing error 
include:
    i. Differences in the amount of an error (for example, the customer 
asserts a $55.00 error but the error was only $53.00).
    ii. Differences in other particulars asserted by the consumer (such 
as when a consumer asserts that a particular transaction never occurred, 
but the creditor determines that only the seller's name was disclosed 
incorrectly).
    2. Form of creditor's explanation. The written explanation (which 
also may notify the consumer of corrections to the account) may take a 
variety of forms. It may be sent separately, or it may be included on or 
with a periodic statement that is mailed within the time for resolution. 
If the creditor uses the periodic statement for the explanation and 
correction(s), the corrections must be specifically identified. If a 
separate explanation, including the correction notice, is provided, the 
enclosed or subsequent periodic statement reflecting the corrected 
amount may simply identify it as a credit. The explanation may be 
combined with the creditor's notice to the consumer of amounts still 
owing, which is required under Sec. 226.13(g)(1), provided it is sent 
within the time limit for resolution. (See commentary to Sec. 
226.13(e).)
    3. Reasonable investigation. A creditor must conduct a reasonable 
investigation before it determines that no billing error occurred or 
that a different billing error occurred from that asserted. In 
conducting its investigation of an allegation of a billing error, the 
creditor may reasonably request the consumer's cooperation. The creditor 
may not automatically deny a claim based solely on the consumer's 
failure or refusal to comply with a particular request, including 
providing an affidavit or filing a police report. However, if the 
creditor otherwise has no knowledge of facts confirming the billing 
error, the lack of information resulting from the consumer's failure or 
refusal to comply with a particular request may lead the creditor 
reasonably to terminate the investigation. The procedures involved in 
investigating alleged billing errors may differ depending on the billing 
error type.
    i. Unauthorized transaction. In conducting an investigation of a 
notice of billing error alleging an unauthorized transaction under Sec. 
226.13(a)(1), actions such as the following represent steps that a 
creditor may take, as appropriate, in conducting a reasonable 
investigation:
    A. Reviewing the types or amounts of purchases made in relation to 
the consumer's previous purchasing pattern.
    B. Reviewing where the purchases were delivered in relation to the 
consumer's residence or place of business.
    C. Reviewing where the purchases were made in relation to where the 
consumer resides or has normally shopped.
    D. Comparing any signature on credit slips for the purchases to the 
signature of the consumer (or an authorized user in the case of a credit 
card account) in the creditor's records, including other credit slips.
    E. Requesting documentation to assist in the verification of the 
claim.
    F. Requiring a written, signed statement from the consumer (or 
authorized user, in the case of a credit card account). For example, the 
creditor may include a signature line on a billing rights form that the 
consumer may send in to provide notice of the claim. However, a creditor 
may not require the consumer to provide an affidavit or signed statement 
under penalty of perjury as a part of a reasonable investigation.
    G. Requesting a copy of a police report, if one was filed.
    H. Requesting information regarding the consumer's knowledge of the 
person who allegedly obtained an extension of credit on

[[Page 630]]

the account or of that person's authority to do so.
    ii. Nondelivery of property or services. In conducting an 
investigation of a billing error notice alleging the nondelivery of 
property or services under Sec. 226.13(a)(3), the creditor shall not 
deny the assertion unless it conducts a reasonable investigation and 
determines that the property or services were actually delivered, 
mailed, or sent as agreed.
    iii. Incorrect information. In conducting an investigation of a 
billing error notice alleging that information appearing on a periodic 
statement is incorrect because a person honoring the consumer's credit 
card or otherwise accepting an access device for an open-end plan has 
made an incorrect report to the creditor, the creditor shall not deny 
the assertion unless it conducts a reasonable investigation and 
determines that the information was correct.
    13(g) Creditor's rights and duties after resolution.
    Paragraph 13(g)(1).
    1. Amounts owed by consumer. Amounts the consumer still owes may 
include both minimum periodic payments and related finance and other 
charges that accrued during the resolution period. As explained in the 
commentary to Sec. 226.13(d)(1), even if the creditor later determines 
that no billing error occurred, the creditor may not include finance or 
other charges that are imposed on undisputed balances solely as a result 
of a consumer's withholding payment of a disputed amount.
    2. Time of notice. The creditor need not send the notice of amount 
owed within the time period for resolution, although it is under a duty 
to send the notice promptly after resolution of the alleged error. If 
the creditor combines the notice of the amount owed with the explanation 
required under Sec. 226.13(f)(1), the combined notice must be provided 
within the time limit for resolution.
    Paragraph 13(g)(2).
    1. Grace period if no error occurred. If the creditor determines, 
after a reasonable investigation, that a billing error did not occur as 
asserted, and the consumer was entitled to a grace period at the time 
the consumer provided the billing error notice, the consumer must be 
given a period of time equal to the grace period disclosed under Sec. 
226.6(a)(1) or (b)(2) and Sec. 226.7(a)(8) or (b)(8) to pay any 
disputed amounts due without incurring additional finance or other 
charges. However, the creditor need not allow a grace period disclosed 
under the above-mentioned sections to pay the amount due under Sec. 
226.13(g)(1) if no error occurred and the consumer was not entitled to a 
grace period at the time the consumer asserted the error. For example, 
assume that a creditor provides a consumer a grace period of 20 days to 
pay a new balance to avoid finance charges, and that the consumer did 
not carry an outstanding balance from the prior month. If the consumer 
subsequently asserts a billing error for the current statement period 
within the 20-day grace period, and the creditor determines that no 
billing error in fact occurred, the consumer must be given at least 20 
days (i.e., the full disclosed grace period) to pay the amount due 
without incurring additional finance charges. Conversely, if the 
consumer was not entitled to a grace period at the time the consumer 
asserted the billing error, for example, if the consumer did not pay the 
previous monthly balance of undisputed charges in full, the creditor may 
assess finance charges on the disputed balance for the entire period the 
item was in dispute.
    Paragraph 13(g)(3).
    1. Time for payment. The consumer has a minimum of 10 days to pay 
(measured from the time the consumer could reasonably be expected to 
have received notice of the amount owed) before the creditor may issue 
an adverse credit report; if an initially disclosed grace period allows 
the consumer a longer time in which to pay, the consumer has the benefit 
of that longer period.
    Paragraph 13(g)(4).
    1. Credit reporting. Under Sec. 226.13(g)(4)(i) and (iii) the 
creditor's additional credit reporting responsibilities must be 
accomplished promptly. The creditor need not establish costly procedures 
to fulfill this requirement. For example, a creditor that reports to a 
credit bureau on scheduled updates need not transmit corrective 
information by an unscheduled computer or magnetic tape; it may provide 
the credit bureau with the correct information by letter or other 
commercially reasonable means when using the scheduled update would not 
be ``prompt.'' The creditor is not responsible for ensuring that the 
credit bureau corrects its information immediately.
    2. Adverse report to credit bureau. If a creditor made an adverse 
report to a credit bureau that disseminated the information to other 
creditors, the creditor fulfills its Sec. 226.13(g)(4)(ii) obligations 
by providing the consumer with the name and address of the credit 
bureau.
    13(i) Relation to Electronic Fund Transfer Act and Regulation E.
    1. Coverage. Credit extended directly from a non-overdraft credit 
line is governed solely by Regulation Z, even though a combined credit 
card/access device is used to obtain the extension.
    2. Incidental credit under agreement. Credit extended incident to an 
electronic fund transfer under an agreement between the consumer and the 
financial institution is governed by Sec. 226.13(i), which provides 
that certain error resolution procedures in both this regulation and 
Regulation E apply. Incidental credit that is not extended under an

[[Page 631]]

agreement between the consumer and the financial institution is governed 
solely by the error resolution procedures in Regulation E. For example, 
credit inadvertently extended incident to an electronic fund-transfer, 
such as under an overdraft service not subject to Regulation Z, is 
governed solely by the Regulation E error resolution procedures, if the 
bank and the consumer do not have an agreement to extend credit when the 
consumer's account is overdrawn.
    3. Application to debit/credit transactions-examples. If a consumer 
withdraws money at an automated teller machine and activates an 
overdraft credit feature on the checking account:
    i. An error asserted with respect to the transaction is subject, for 
error resolution purposes, to the applicable Regulation E provisions 
(such as timing and notice) for the entire transaction.
    ii. The creditor need not provisionally credit the consumer's 
account, under Sec. 205.11(c)(2)(i) of Regulation E, for any portion of 
the unpaid extension of credit.
    iii. The creditor must credit the consumer's account under Sec. 
205.11(c) with any finance or other charges incurred as a result of the 
alleged error.
    iv. The provisions of Sec. Sec. 226.13(d) and (g) apply only to the 
credit portion of the transaction.

         Section 226.14--Determination of Annual Percentage Rate

    14(a) General rule.
    1. Tolerance. The tolerance of \1/8\th of 1 percentage point above 
or below the annual percentage rate applies to any required disclosure 
of the annual percentage rate. The disclosure of the annual percentage 
rate is required in Sec. Sec. 226.5a, 226.5b, 226.6, 226.7, 226.9, 
226.15, 226.16, 226.26, 226.55, and 226.56.
    2. Rounding. The regulation does not require that the annual 
percentage rate be calculated to any particular number of decimal 
places; rounding is permissible within the \1/8\th of 1 percent 
tolerance. For example, an exact annual percentage rate of 14.33333% may 
be stated as 14.33% or as 14.3%, or even as 14\1/4\%; but it could not 
be stated as 14.2% or 14%, since each varies by more than the permitted 
tolerance.
    3. Periodic rates. No explicit tolerance exists for any periodic 
rate as such; a disclosed periodic rate may vary from precise accuracy 
(for example, due to rounding) only to the extent that its annualized 
equivalent is within the tolerance permitted by Sec. 226.14(a). 
Further, a periodic rate need not be calculated to any particular number 
of decimal places.
    4. Finance charges. The regulation does not prohibit creditors from 
assessing finance charges on balances that include prior, unpaid finance 
charges; state or other applicable law may do so, however.
    5. Good faith reliance on faulty calculation tools. The regulation 
relieves a creditor of liability for an error in the annual percentage 
rate or finance charge that resulted from a corresponding error in a 
calculation tool used in good faith by the creditor. Whether or not the 
creditor's use of the tool was in good faith must be determined on a 
case-by-case basis, but the creditor must in any case have taken 
reasonable steps to verify the accuracy of the tool, including any 
instructions, before using it. Generally, the safe harbor from liability 
is available only for errors directly attributable to the calculation 
tool itself, including software programs; it is not intended to absolve 
a creditor of liability for its own errors, or for errors arising from 
improper use of the tool, from incorrect data entry, or from 
misapplication of the law.
    6. Effect of leap year. Any variance in the annual percentage rate 
that occurs solely by reason of the addition of February 29 in a leap 
year, may be disregarded, and such a rate may be disclosed without 
regard to such variance.
    14(b) Annual percentage rate--in general.
    1. Corresponding annual percentage rate computation. For purposes of 
Sec. Sec. 226.5a, 226.5b, 226.6, 226.7(a)(4) or (b)(4), 226.9, 226.15, 
226.16, 226.26, 226.55, and 226.56, the annual percentage rate is 
determined by multiplying the periodic rate by the number of periods in 
the year. This computation reflects the fact that, in such disclosures, 
the rate (known as the corresponding annual percentage rate) is 
prospective and does not involve any particular finance charge or 
periodic balance.
    14(c) Optional effective annual percentage rate for periodic 
statements for creditors offering open-end plans subject to the 
requirements of Sec. 226.5b.
    1. General rule. The periodic statement may reflect (under Sec. 
226.7(a)(7)) the annualized equivalent of the rate actually applied 
during a particular cycle; this rate may differ from the corresponding 
annual percentage rate because of the inclusion of, for example, fixed, 
minimum, or transaction charges. Sections 226.14(c)(1) through (c)(4) 
state the computation rules for the effective rate.
    2. Charges related to opening, renewing, or continuing an account. 
Sections 226.14(c)(2) and (c)(3) exclude from the calculation of the 
effective annual percentage rate finance charges that are imposed during 
the billing cycle such as a loan fee, points, or similar charge that 
relates to opening, renewing, or continuing an account. The charges 
involved here do not relate to a specific transaction or to specific 
activity on the account, but relate solely to the opening, renewing, or 
continuing of the account. For example, an annual fee to renew an open-
end credit account that is a percentage of the credit limit on the 
account, or that is charged only to consumers that have not used their 
credit card for a certain dollar amount in transactions

[[Page 632]]

during the preceding year, would not be included in the calculation of 
the annual percentage rate, even though the fee may not be excluded from 
the finance charge under Sec. 226.4(c)(4). (See comment 4(c)(4)-2.) 
This rule applies even if the loan fee, points, or similar charges are 
billed on a subsequent periodic statement or withheld from the proceeds 
of the first advance on the account.
    3. Classification of charges. If the finance charge includes a 
charge not due to the application of a periodic rate, the creditor must 
use the annual percentage rate computation method that corresponds to 
the type of charge imposed. If the charge is tied to a specific 
transaction (for example, 3 percent of the amount of each transaction), 
then the method in Sec. 226.14(c)(3) must be used. If a fixed or 
minimum charge is applied, that is, one not tied to any specific 
transaction, then the formula in Sec. 226.14(c)(2) is appropriate.
    4. Small finance charges. Section 226.14(c)(4) gives the creditor an 
alternative to Sec. 226.14(c)(2) and (c)(3) if small finance charges 
(50 cents or less) are involved; that is, if the finance charge includes 
minimum or fixed fees not due to the application of a periodic rate and 
the total finance charge for the cycle does not exceed 50 cents. For 
example, while a monthly activity fee of 50 cents on a balance of $20 
would produce an annual percentage rate of 30 percent under the rule in 
Sec. 226.14(c)(2), the creditor may disclose an annual percentage rate 
of 18 percent if the periodic rate generally applicable to all balances 
is 1\1/2\ percent per month.
    5. Prior-cycle adjustments. i. The annual percentage rate reflects 
the finance charges imposed during the billing cycle. However, finance 
charges imposed during the billing cycle may relate to activity in a 
prior cycle. Examples of circumstances when this may occur are:
    A. A cash advance occurs on the last day of a billing cycle on an 
account that uses the transaction date to figure finance charges, and it 
is impracticable to post the transaction until the following cycle.
    B. An adjustment to the finance charge is made following the 
resolution of a billing error dispute.
    C. A consumer fails to pay the purchase balance under a deferred 
payment feature by the payment due date, and finance charges are imposed 
from the date of purchase.
    ii. Finance charges relating to activity in prior cycles should be 
reflected on the periodic statement as follows:
    A. If a finance charge imposed in the current billing cycle is 
attributable to periodic rates applicable to prior billing cycles (such 
as when a deferred payment balance was not paid in full by the payment 
due date and finance charges from the date of purchase are now being 
debited to the account, or when a cash advance occurs on the last day of 
a billing cycle on an account that uses the transaction date to figure 
finance charges and it is impracticable to post the transaction until 
the following cycle), and the creditor uses the quotient method to 
calculate the annual percentage rate, the numerator would include the 
amount of any transaction charges plus any other finance charges posted 
during the billing cycle. At the creditor's option, balances relating to 
the finance charge adjustment may be included in the denominator if 
permitted by the legal obligation, if it was impracticable to post the 
transaction in the previous cycle because of timing, or if the 
adjustment is covered by comment 14(c)-5.ii.B.
    B. If a finance charge that is posted to the account relates to 
activity for which a finance charge was debited or credited to the 
account in a previous billing cycle (for example, if the finance charge 
relates to an adjustment such as the resolution of a billing error 
dispute, or an unintentional posting error, or a payment by check that 
was later returned unpaid for insufficient funds or other reasons), the 
creditor shall at its option:
    1. Calculate the annual percentage rate in accordance with ii.A. of 
this paragraph, or
    2. Disclose the finance charge adjustment on the periodic statement 
and calculate the annual percentage rate for the current billing cycle 
without including the finance charge adjustment in the numerator and 
balances associated with the finance charge adjustment in the 
denominator.
    14(c)(1) Solely periodic rates imposed.
    1. Periodic rates. Section 226.14(c)(1) applies if the only finance 
charge imposed is due to the application of a periodic rate to a 
balance. The creditor may compute the annual percentage rate either:
    i. By multiplying each periodic rate by the number of periods in the 
year; or
    ii. By the ``quotient'' method. This method refers to a composite 
annual percentage rate when different periodic rates apply to different 
balances. For example, a particular plan may involve a periodic rate of 
\1/2\ percent on balances up to $500, and 1 percent on balances over 
$500. If, in a given cycle, the consumer has a balance of $800, the 
finance charge would consist of $7.50 (500 x .015) plus $3.00 (300 x 
.01), for a total finance charge of $10.50. The annual percentage rate 
for this period may be disclosed either as 18% on $500 and 12 percent on 
$300, or as 15.75 percent on a balance of $800 (the quotient of $10.50 
divided by $800, multiplied by 12).
    14(c)(2) Minimum or fixed charge, but not transaction charge, 
imposed.
    1. Certain charges not based on periodic rates. Section 226.14(c)(2) 
specifies use of the quotient method to determine the annual percentage 
rate if the finance charge imposed includes a certain charge not due to 
the application of a periodic rate (other than

[[Page 633]]

a charge relating to a specific transaction). For example, if the 
creditor imposes a minimum $1 finance charge on all balances below $50, 
and the consumer's balance was $40 in a particular cycle, the creditor 
would disclose an annual percentage rate of 30 percent (1/40 x 12).
    2. No balance. If there is no balance to which the finance charge is 
applicable, an annual percentage rate cannot be determined under Sec. 
226.14(c)(2). This could occur not only when minimum charges are imposed 
on an account with no balance, but also when a periodic rate is applied 
to advances from the date of the transaction. For example, if on May 19 
the consumer pays the new balance in full from a statement dated May 1, 
and has no further transactions reflected on the June 1 statement, that 
statement would reflect a finance charge with no account balance.
    14(c)(3) Transaction charge imposed.
    1. Transaction charges. i. Section 226.14(c)(3) transaction charges 
include, for example:
    A. A loan fee of $10 imposed on a particular advance.
    B. A charge of 3 percent of the amount of each transaction.
    ii. The reference to avoiding duplication in the computation 
requires that the amounts of transactions on which transaction charges 
were imposed not be included both in the amount of total balances and in 
the ``other amounts on which a finance charge was imposed'' figure. In a 
multifeatured plan, creditors may consider each bona fide feature 
separately in the calculation of the denominator. A creditor has 
considerable flexibility in defining features for open-end plans, as 
long as the creditor has a reasonable basis for the distinctions. For 
further explanation and examples of how to determine the components of 
this formula, see appendix F to part 226.
    2. Daily rate with specific transaction charge. Section 226.14(c)(3) 
sets forth an acceptable method for calculating the annual percentage 
rate if the finance charge results from a charge relating to a specific 
transaction and the application of a daily periodic rate. This section 
includes the requirement that the creditor follow the rules in appendix 
F to part 226 in calculating the annual percentage rate, especially the 
provision in the introductory section of appendix F which addresses the 
daily rate/transaction charge situation by providing that the ``average 
of daily balances'' shall be used instead of the ``sum of the 
balances.''
    14(d) Calculations where daily periodic rate applied.
    1. Quotient method. Section 226.14(d) addresses use of a daily 
periodic rate(s) to determine some or all of the finance charge and use 
of the quotient method to determine the annual percentage rate. Since 
the quotient formula in Sec. 226.14(c)(1)(ii) and (c)(2) cannot be used 
when a daily rate is being applied to a series of daily balances, Sec. 
226.14(d) provides two alternative ways to calculate the annual 
percentage rate--either of which satisfies the provisions of Sec. 
226.7(a)(7).
    2. Daily rate with specific transaction charge. If the finance 
charge results from a charge relating to a specific transaction and the 
application of a daily periodic rate, see comment 14(c)(3)-2 for 
guidance on an appropriate calculation method.

                   Section 226.15--Right of Rescission

    1. Transactions not covered. Credit extensions that are not subject 
to the regulation are not covered by Sec. 226.15 even if the customer's 
principal dwelling is the collateral securing the credit. For this 
purpose, credit extensions also would include the occurrences listed in 
Comment 15(a)(1)-1. For example, the right of rescission does not apply 
to the opening of a business-purpose credit line, even though the loan 
is secured by the customer's principal dwelling.
    15(a) Consumer's right to rescind.
    Paragraph 15(a)(1).
    1. Occurrences subject to right. Under an open-end credit plan 
secured by the consumer's principal dwelling, the right of rescission 
generally arises with each of the following occurrences:

     Opening the account.
     Each credit extension.
     Increasing the credit limit.
     Adding to an existing account a security interest 
in the consumer's principal dwelling.
     Increasing the dollar amount of the security 
interest taken in the dwelling to secure the plan. For example, a 
consumer may open an account with a $10,000 credit limit, $5,000 of 
which is initially secured by the consumer's principal dwelling. The 
consumer has the right to rescind at that time and (except as noted in 
Sec. 226.15(a)(1)(ii)) with each extension on the account. Later, if 
the creditor decides that it wants the credit line fully secured, and 
increases the amount of its interest in the consumer's dwelling, the 
consumer has the right to rescind the increase.

    2. Exceptions. Although the consumer generally has the right to 
rescind with each transaction on the account, section 125(e) of the Act 
provides an exception: the creditor need not provide the right to 
rescind at the time of each credit extension made under an open-end 
credit plan secured by the consumer's principal dwelling to the extent 
that the credit extended is in accordance with a previously established 
credit limit for the plan. This limited rescission option is available 
whether or not the plan existed prior to the effective date of the Act.
    3. Security interest arising from transaction. In order for the 
right of rescission to apply,

[[Page 634]]

the security interest must be retained as part of the credit 
transaction. For example:

     A security interest that is acquired by a 
contractor who is also extending the credit in the transaction.
     A mechanic's or materialman's lien that is 
retained by a subcontractor or supplier of a contractor-creditor, even 
when the latter has waived its own security interest in the consumer's 
home.

    The security interest is not part of the credit transaction, and 
therefore the transaction is not subject to the right of rescission 
when, for example:

     A mechanic's or materialman's lien is obtained by 
a contractor who is not a party to the credit transaction but merely is 
paid with the proceeds of the consumer's cash advance.
     All security interests that may arise in 
connection with the credit transaction are validly waived.
     The creditor obtains a lien and completion bond 
that in effect satisfies all liens against the consumer's principal 
dwelling as a result of the credit transaction.

    Although liens arising by operation of law are not considered 
security interests for purposes of disclosure under Sec. 226.2, that 
section specifically includes them in the definition for purposes of the 
right of rescission. Thus, even though an interest in the consumer's 
principal dwelling is not a required disclosure under Sec. 226.6(c), it 
may still give rise to the right of rescission.
    4. Consumer. To be a consumer within the meaning of Sec. 226.2, 
that person must at least have an ownership interest in the dwelling 
that is encumbered by the creditor's security interest, although that 
person need not be a signatory to the credit agreement. For example, if 
only one spouse enters into a secured plan, the other spouse is a 
consumer if the ownership interest of that spouse is subject to the 
security interest.
    5. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or other 
second home would not be a principal dwelling. A transaction secured by 
a second home (such as a vacation home) that is not currently being used 
as the consumer's principal dwelling is not rescindable, even if the 
consumer intends to reside there in the future. When a consumer buys or 
builds a new dwelling that will become the consumer's principal dwelling 
within one year or upon completion of construction, the new dwelling is 
considered the principal dwelling if it secures the open-end credit 
line. In that case, the transaction secured by the new dwelling is a 
residential mortgage transaction and is not rescindable. For example, if 
a consumer whose principal dwelling is currently A builds B, to be 
occupied by the consumer upon completion of construction, an advance on 
an open-end line to finance B and secured by B is a residential mortgage 
transaction. Dwelling, as defined in Sec. 226.2, includes structures 
that are classified as personalty under state law. For example, a 
transaction secured by a mobile home, trailer, or houseboat used as the 
consumer's principal dwelling may be rescindable.
    6. Special rule for principal dwelling. Notwithstanding the general 
rule that consumers may have only one principal dwelling, when the 
consumer is acquiring or constructing a new principal dwelling, a credit 
plan or extension that is subject to Regulation Z and is secured by the 
equity in the consumer's current principal dwelling is subject to the 
right of rescission regardless of the purpose of that loan (for example, 
an advance to be used as a bridge loan). For example, if a consumer 
whose principal dwelling is currently A builds B, to be occupied by the 
consumer upon completion of construction, a loan to finance B and 
secured by A is subject to the right of rescission. Moreover, a loan 
secured by both A and B is, likewise, rescindable.
    Paragraph 15(a)(2).
    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec. 226.15(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--the 
time period for the creditor's performance under Sec. 226.15(d)(2) does 
not begin to run until the notification has been received. The creditor 
may designate an agent to receive the notification so long as the 
agent's name and address appear on the notice provided to the consumer 
under Sec. 226.15(b). Where the creditor fails to provide the consumer 
with a designated address for sending the notification of rescission, 
delivery of the notification to the person or address to which the 
consumer has been directed to send payments constitutes delivery to the 
creditor or assignee. State law determines whether delivery of the 
notification to a third party other than the person to whom payments are 
made is delivery to the creditor or assignee, in the case where the 
creditor fails to designate an address for sending the notification of 
rescission.
    Paragraph 15 (a)(3).
    1. Rescission period. the period within which the consumer may 
exercise the right to rescind runs for 3 business days from the last of 
3 events:

     The occurrence that gives rise to the right of 
rescission.
     Delivery of all material disclosures that are 
relevant to the plan.
     Delivery to the consumer of the required 
rescission notice.

    For example, an account is opened on Friday, June 1, and the 
disclosures and notice of

[[Page 635]]

the right to rescind were given on Thursday, May 31; the rescission 
period will expire at midnight of the third business day after June 1--
that is, Tuesday June 5. In another example, if the disclosures are 
given and the account is opened on Friday, June 1, and the rescission 
notice is given on Monday, June 4, the rescission period expires at 
midnight of the third business day after June 4--that is Thursday, June 
7. The consumer must place the rescission notice in the mail, file it 
for telegraphic transmission, or deliver it to the creditor's place of 
business within that period in order to exercise the right.
    2. Material disclosures. Footnote 36 sets forth the material 
disclosures that must be provided before the rescission period can begin 
to run. The creditor must provide sufficient information to satisfy the 
requirements of Sec. 226.6 for these disclosures. A creditor may 
satisfy this requirement by giving an initial disclosure statement that 
complies with the regulation. Failure to give the other required initial 
disclosures (such as the billing rights statement) or the information 
required under section 226.5b. does not prevent the running of the 
rescission period, although that failure may result in civil liability 
or administrative sanctions. The payment terms set forth in footnote 36 
apply to any repayment phase set forth in the agreement. Thus, the 
payment terms described in Sec. 226.6(e)(2) for any repayment phase as 
well as for the draw period are ``material disclosures.''
    3. Material disclosures--variable rate program. For a variable rate 
program, the material disclosures also include the disclosures listed in 
footnote 12 to Sec. 226.6(a)(2): the circumstances under which the rate 
may increase; the limitations on the increase; and the effect of an 
increase. The disclosures listed in footnote 12 to section 226.6(a)(2) 
for any repayment phase also are material disclosures for variable-rate 
programs.
    4. Unexpired right of rescission. When the creditor has failed to 
take the action necessary to start the three-day rescission period 
running the right to rescind automatically lapses on the occurrence of 
the earliest of the following three events:

     The expiration of three years after the 
occurrence giving rise to the right of rescission.
     Transfer of all the consumer's interest in the 
property.
     Sale of the consumer's interest in the property, 
including a transaction in which the consumer sells the dwelling and 
takes back a purchase money note and mortgage or retains legal title 
through a device such as an installment sale contract.

    Transfer of all the consumer's interest includes such transfers as 
bequests and gifts. A sale or transfer of the property need not be 
voluntary to terminate the right to rescind. For example, a foreclosure 
sale would terminate an unexpired right to rescind. As provided in 
section 125 of the act, the three-year limit may be extended by an 
administrative proceeding to enforce the provisions of Sec. 226.15. A 
partial transfer of the consumer's interest, such as a transfer 
bestowing co-ownership on a spouse, does not terminate the right of 
rescission.
    Paragraph 15(a)(4).
    1. Joint owners. When more than one consumer has the right to 
rescind a transaction, any one of them may exercise that right and 
cancel the transaction on behalf of all. For example, if both a husband 
and wife have the right to rescind a transaction, either spouse acting 
alone may exercise the right and both are bound by the rescission.
    15(b) Notice of right to rescind.
    1. Who receives notice. Each consumer entitled to rescind must be 
given:
     Two copies of the rescission notice.
     The material disclosures.
    In a transaction involving joint owners, both of whom are entitled 
to rescind, both must receive the notice of the right to rescind and 
disclosures. For example, if both spouses are entitled to rescind a 
transaction, each must receive two copies of the rescission notice (one 
copy to each if the notice is provided in electronic form in accordance 
with the consumer consent and other applicable provisions of the E-Sign 
Act) and one copy of the disclosures.
    2. Format. The rescission notice may be physically separated from 
the material disclosures or combined with the material disclosures, so 
long as the information required to be included on the notice is set 
forth in a clear and conspicuous manner. See the model notices in 
appendix G.
    3. Content. The notice must include all of the information outlined 
in Sec. 226.15(b)(1) through (5). The requirement in Sec. 226.15(b) 
that the transaction or occurrence be identified may be met by providing 
the date of the transaction or occurrence. The notice may include 
additional information related to the required information, such as:
     A description of the property subject to the 
security interest.
     A statement that joint owners may have the right 
to rescind and that a rescission by one is effective for all.
     The name and address of an agent of the creditor 
to receive notice of rescission.

    4. Time of providing notice. The notice required by Sec. 226.15(b) 
need not be given before the occurrence giving rise to the right of 
rescission. The creditor may deliver the notice after the occurrence, 
but the rescission period will not begin to run until the notice is 
given. For example, if the creditor provides the notice on May 15, but 
disclosures were given and the credit limit was raised on May 10, the 3-
business-day rescission period will run from May 15.

[[Page 636]]

    15(c) Delay of creditor's performance.
    1. General rule. Until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not rescinded, 
the creditor must not, either directly or through a third party:
     Disburse advances to the consumer.
     Begin performing services for the consumer.
     Deliver materials to the consumer.
    A creditor may, however, continue to allow transactions under an 
existing open-end credit plan during a rescission period that results 
solely from the addition of a security interest in the consumer's 
principal dwelling. (See comment 15(c)-3 for other actions that may be 
taken during the delay period.)

    2. Escrow. The creditor may disburse advances during the rescission 
period in a valid escrow arrangement. The creditor may not, however, 
appoint the consumer as ``trustee'' or ``escrow agent'' and distribute 
funds to the consumer in that capacity during the delay period.
    3. Actions during the delay period. Section 226.15(c) does not 
prevent the creditor from taking other steps during the delay, short of 
beginning actual performance. Unless otherwise prohibited, such as by 
state law, the creditor may, for example:
     Prepare the cash advance check.
     Perfect the security interest.
     Accrue finance charges during the delay period.

    4. Performance by third party. The creditor is relieved from 
liability for failure to delay performance if a third party with no 
knowledge that the rescission right has been activated provides 
materials or services, as long as any debt incurred for materials or 
services obtained by the consumer during the rescission period is not 
secured by the security interest in the consumer's dwelling. For 
example, if a consumer uses a bank credit card to purchase materials 
from a merchant in an amount below the floor limit, the merchant might 
not contact the card issuer for authorization and therefore would not 
know that materials should not be provided.
    5. Delay beyond rescission period. The creditor must wait until it 
is reasonably satisfied that the consumer has not rescinded. For 
example, the creditor may satisfy itself by doing one of the following:

     Waiting a reasonable time after expiration of the 
rescission period to allow for delivery of a mailed notice.
     Obtaining a written statement from the consumer 
that the right has not been exercised.

    When more than one consumer has the right to rescind, the creditor 
cannot reasonably rely on the assurance of only one consumer, because 
other consumers may exercise the right.
    15(d) Effects of rescission.
    Paragraph 15(d)(1).
    1. Termination of security interest. Any security interest giving 
rise to the right of rescission becomes void when the consumer exercises 
the right of rescission. The security interest is automatically negated, 
regardless of its status and whether or not it was recorded or 
perfected. Under Sec. 226.15(d)(2), however, the creditor must take any 
action necessary to reflect the fact that the security interest no 
longer exists.
    2. Extent of termination. The creditor's security interest is void 
to the extent that it is related to the occurrence giving rise to the 
right of rescission. For example, upon rescission:

     If the consumer's right to rescind is activated 
by the opening of a plan, any security interest in the principal 
dwelling is void.
     If the right arises due to an increase in the 
credit limit, the security interest is void as to the amount of credit 
extensions over the prior limit, but the security interest in amounts up 
to the original credit limit is unaffected.
     If the right arises with each individual credit 
extension, then the interest is void as to that extension, and other 
extensions are unaffected.

    Paragraph 15(d)(2).
    1. Refunds to consumer. The consumer cannot be required to pay any 
amount in the form of money or property either to the creditor or to a 
third party as part of the occurrence subject to the right of 
rescission. Any amounts of this nature already paid by the consumer must 
be refunded. ``Any amount'' includes finance charges already accrued, as 
well as other charges such as broker fees, application and commitment 
fees, or fees for a title search or appraisal, whether paid to the 
creditor, paid by the consumer directly to a third party, or passed on 
from the creditor to the third party. It is irrelevant that these 
amounts may not represent profit to the creditor. For example:
     If the occurrence is the opening of the plan, the 
creditor must return any membership or application fee paid.
     If the occurrence is the increase in a credit 
limit or the addition of a security interest, the creditor must return 
any fee imposed for a new credit report or filing fees.
     If the occurrence is a credit extension, the 
creditors must return fees such as application, title, and appraisal or 
survey fees, as well as any finance charges related to the credit 
extension.

    2. Amounts not refundable to consumer. Creditors need not return any 
money given by the consumer to a third party outside of the occurrence, 
such as costs incurred for a building permit or for a zoning variance. 
Similarly, the term any amount does not apply to money or property given 
by the creditor to the consumer; those amounts

[[Page 637]]

must be tendered by the consumer to the creditor under Sec. 
226.15(d)(3).
    3. Reflection of security interest termination. The creditor must 
take whatever steps are necessary to indicate that the security interest 
is terminated. Those steps include the cancellation of documents 
creating the security interest, and the filing of release or termination 
statements in the public record. In a transaction involving 
subcontractors or suppliers that also hold security interests related to 
the occurrence rescinded by the consumer, the creditor must insure that 
the termination of their security interests is also reflected. The 20-
day period for the creditor's action refers to the time within which the 
creditor must begin the process. It does not require all necessary steps 
to have been completed within that time, but the creditor is responsible 
for seeing the process through to completion.
    Paragraph 15(d)(3).
    1. Property exchange. Once the creditor has fulfilled its obligation 
under Sec. 226.15(d)(2), the consumer must tender to the creditor any 
property or money the creditor has already delivered to the consumer. At 
the consumer's option, property may be tendered at the location of the 
property. For example, if fixtures or furniture have been delivered to 
the consumer's home, the consumer may tender them to the creditor by 
making them available for pick-up at the home, rather than physically 
returning them to the creditor's premises. Money already given to the 
consumer must be tendered at the creditor's place of business. For 
purpose of property exchange, the following additional rules apply:

     A cash advance is considered money for purposes 
of this section even if the creditor knows what the consumer intends to 
purchase with the money.
     In a 3-party open-end credit plan (that is, if 
the creditor and seller are not the same or related persons), extensions 
by the creditor that are used by the consumer for purchases from third-
party sellers are considered to be the same as cash advances for 
purposes of tendering value to the creditor, even though the transaction 
is a purchase for other purposes under the regulation. For example, if a 
consumer exercises the unexpired right to rescind after using a 3-party 
credit card for one year, the consumer would tender the amount of the 
purchase price for the items charged to the account, rather than 
tendering the items themselves to the creditor.

    2. Reasonable value. If returning the property would be extremely 
burdensome to the consumer, the consumer may offer the creditor its 
reasonable value rather than returning the property itself. For example, 
if building materials have already been incorporated into the consumer's 
dwelling, the consumer may pay their reasonable value.
    Paragraph 15(d)(4).
    1. Modifications. The procedures outlined in Sec. 226.15(d)(2) and 
(3) may be modified by a court. For example, when a consumer is in 
bankruptcy proceedings and prohibited from returning anything to the 
creditor, or when the equities dictate, a modification might be made. 
The sequence of procedures under Sec. 226.15(d)(2) and (3), or a 
court's modification of those procedures under Sec. 226.15(d)(4), does 
not affect a consumer's substantive right to rescind and to have the 
loan amount adjusted accordingly. Where the consumer's right to rescind 
is contested by the creditor, a court would normally determine whether 
the consumer has a right to rescind and determine the amounts owed 
before establishing the procedures for the parties to tender any money 
or property.
    15(e) Consumer's waiver of right to rescind.
    1. Need for waiver. To waive the right to rescind, the consumer must 
have a bona fide personal financial emergency that must be met before 
the end of the rescission period. The existence of the consumer's waiver 
will not, of itself, automatically insulate the creditor from liability 
for failing to provide the right of rescission.
    2. Procedure. To waive or modify the right to rescind, the consumer 
must give a written statement that specifically waives or modifies the 
right, and also includes a brief description of the emergency. Each 
consumer entitled to rescind must sign the waiver statement. In a 
transaction involving multiple consumers, such as a husband and wife 
using their home as collateral, the waiver must bear the signatures of 
both spouses.
    15(f) Exempt transactions.
    1. Residential mortgage transaction. Although residential mortgage 
transactions would seldom be made on bona fide open-end credit plans 
(under which repeated transactions must be reasonably contemplated), an 
advance on an open-end plan could be for a downpayment for the purchase 
of a dwelling that would then secure the remainder of the line. In such 
a case, only the particular advance for the downpayment would be exempt 
from the rescission right.
    2. State creditors. Cities and other political subdivisions of 
states acting as creditors are not exempt from Sec. 226.15.
    3. Spreader clause. When the creditor holds a mortgage or deed of 
trust on the consumer's principal dwelling and that mortgage or deed of 
trust contains a ``spreader clause'' (also known as a ``dragnet'' or 
cross-collateralization clause), subsequent occurrences such as the 
opening of a plan or individual credit extensions are subject to the 
right of rescission to the same degree as if the security interest were 
taken directly to secure the open-end plan, unless the creditor 
effectively waives its security interest under the spreader clause with 
respect to the subsequent open-end credit extensions.

[[Page 638]]

                               References

    Statute: Sections 113, 125, 130, and the Housing and Community 
Development Technical Amendments Act of 1984, Sec. 205 (Pub. L. 98-479).
    Other sections: Section 226.2 and appendix G.
    Previous regulation: Section 226.9.
    1981 Changes: Section 226.15 reflects the statutory amendments of 
1980, providing for a limited right of rescission when individual credit 
extensions are made in accordance with a previously established credit 
limit for an open-end credit plan. The 1980 amendments provided that 
this limited rescission right be available for a three-year trial 
period. However, Pub. L. 98-479 now permanently exempts such individual 
credit extensions from the right of rescission.
    The right to rescind applies not only to real property used as the 
consumer's principal dwelling, but to personal property as well. The 
regulation provides no specific text or format for the rescission 
notice.
    When a consumer exercises the right to rescind, the creditor now has 
20 days to return a consumer's money or property and take the necessary 
action to terminate the security interest. The creditor has 20 days to 
take possession of the money or property after the consumer's tender 
before the consumer may keep it without further obligation.
    Under the revised regulation, the waiver provision has been relaxed. 
The lien status of the mortgage is irrelevant for purposes of the 
residential mortgage transaction exemption. The exemption for 
agricultural loans from the right to rescind has been deleted.

                       Section 226.16--Advertising

    1. Clear and conspicuous standard--general. Section 226.16 is 
subject to the general ``clear and conspicuous'' standard for subpart B 
(see Sec. 226.5(a)(1)) but prescribes no specific rules for the format 
of the necessary disclosures, other than the format requirements related 
to the disclosure of a promotional rate or payment under Sec. 
226.16(d)(6), a promotional rate or promotional fee under Sec. 
226.16(g), or a deferred interest or similar offer under Sec. 
226.16(h). Other than the disclosure of certain terms described in 
Sec. Sec. 226.16(d)(6), (g), or (h), the credit terms need not be 
printed in a certain type size nor need they appear in any particular 
place in the advertisement.
    2. Clear and conspicuous standard--promotional rates or payments; 
deferred interest or similar offers. i. For purposes of Sec. 
226.16(d)(6), a clear and conspicuous disclosure means that the required 
information in Sec. 226.16(d)(6)(ii)(A)-(C) is disclosed with equal 
prominence and in close proximity to the promotional rate or payment to 
which it applies. If the information in Sec. 226.16(d)(6)(ii)(A)-(C) is 
the same type size and is located immediately next to or directly above 
or below the promotional rate or payment to which it applies, without 
any intervening text or graphical displays, the disclosures would be 
deemed to be equally prominent and in close proximity. Notwithstanding 
the above, for electronic advertisements that disclose promotional rates 
or payments, compliance with the requirements of Sec. 226.16(c) is 
deemed to satisfy the clear and conspicuous standard.
    ii. For purposes of Sec. 226.16(g)(4) as it applies to written or 
electronic advertisements only, a clear and conspicuous disclosure means 
the required information in Sec. 226.16(g)(4)(i) and, as applicable, 
(g)(4)(ii) and (g)(4)(iii) must be equally prominent to the promotional 
rate or promotional fee to which it applies. If the information in Sec. 
226.16(g)(4)(i) and, as applicable, (g)(4)(ii) and (g)(4)(iii) is the 
same type size as the promotional rate or promotional fee to which it 
applies, the disclosures would be deemed to be equally prominent. For 
purposes of Sec. 226.16(h)(3) as it applies to written or electronic 
advertisements only, a clear and conspicuous disclosure means the 
required information in Sec. 226.16(h)(3) must be equally prominent to 
each statement of ``no interest,'' ``no payments,'' ``deferred 
interest,'' ``same as cash,'' or similar term regarding interest or 
payments during the deferred interest period. If the information 
required to be disclosed under Sec. 226.16(h)(3) is the same type size 
as the statement of ``no interest,'' ``no payments,'' ``deferred 
interest,'' ``same as cash,'' or similar term regarding interest or 
payments during the deferred interest period, the disclosure would be 
deemed to be equally prominent.
    3. Clear and conspicuous standard--Internet advertisements for home-
equity plans. For purposes of this section, a clear and conspicuous 
disclosure for visual text advertisements on the Internet for home-
equity plans subject to the requirements of Sec. 226.5b means that the 
required disclosures are not obscured by techniques such as graphical 
displays, shading, coloration, or other devices and comply with all 
other requirements for clear and conspicuous disclosures under Sec. 
226.16(d). (See also comment 16(c)(1)-2.)
    4. Clear and conspicuous standard--televised advertisements for 
home-equity plans. For purposes of this section, including alternative 
disclosures as provided for by Sec. 226.16(e), a clear and conspicuous 
disclosure in the context of visual text advertisements on television 
for home-equity plans subject to the requirements of Sec. 226.5b means 
that the required disclosures are not obscured by techniques such as 
graphical displays, shading, coloration, or other devices, are displayed 
in a manner that allows for a consumer to read the information required 
to be disclosed, and comply with all other requirements for clear and 
conspicuous disclosures under Sec. 226.16(d). For example, very fine 
print in a television

[[Page 639]]

advertisement would not meet the clear and conspicuous standard if 
consumers cannot see and read the information required to be disclosed.
    5. Clear and conspicuous standard--oral advertisements for home-
equity plans. For purposes of this section, including alternative 
disclosures as provided for by Sec. 226.16(e), a clear and conspicuous 
disclosure in the context of an oral advertisement for home-equity plans 
subject to the requirements of Sec. 226.5b, whether by radio, 
television, the Internet, or other medium, means that the required 
disclosures are given at a speed and volume sufficient for a consumer to 
hear and comprehend them. For example, information stated very rapidly 
at a low volume in a radio or television advertisement would not meet 
the clear and conspicuous standard if consumers cannot hear and 
comprehend the information required to be disclosed.
    6. Expressing the annual percentage rate in abbreviated form. 
Whenever the annual percentage rate is used in an advertisement for 
open-end credit, it may be expressed using a readily understandable 
abbreviation such as APR.
    7. Effective date. For guidance on the applicability of the Board's 
revisions to Sec. 226.16 published on July 30, 2008, see comment 
1(d)(5)-1.
    16(a) Actually available terms.
    1. General rule. To the extent that an advertisement mentions 
specific credit terms, it may state only those terms that the creditor 
is actually prepared to offer. For example, a creditor may not advertise 
a very low annual percentage rate that will not in fact be available at 
any time. Section 226.16(a) is not intended to inhibit the promotion of 
new credit programs, but to bar the advertising of terms that are not 
and will not be available. For example, a creditor may advertise terms 
that will be offered for only a limited period, or terms that will 
become available at a future date.
    2. Specific credit terms. Specific credit terms is not limited to 
the disclosures required by the regulation but would include any 
specific components of a credit plan, such as the minimum periodic 
payment amount or seller's points in a plan secured by real estate.
    16(b) Advertisement of terms that require additional disclosures.
    Paragraph (b)(1).
    1. Triggering terms. Negative as well as affirmative references 
trigger the requirement for additional information. For example, if a 
creditor states no interest or no annual membership fee in an 
advertisement, additional information must be provided. Other examples 
of terms that trigger additional disclosures are:
    i. Small monthly service charge on the remaining balance, which 
describes how the amount of a finance charge will be determined.
    ii. 12 percent Annual Percentage Rate or A $15 annual membership fee 
buys you $2,000 in credit, which describe required disclosures under 
Sec. 226.6.
    2. Implicit terms. Section 226.16(b) applies even if the triggering 
term is not stated explicitly, but may be readily determined from the 
advertisement.
    3. Membership fees. A membership fee is not a triggering term nor 
need it be disclosed under Sec. 226.16(b)(1)(iii) if it is required for 
participation in the plan whether or not an open-end credit feature is 
attached. (See comment 6(a)(2)-1 and Sec. 226.6(b)(3)(iii)(B).)
    4. Deferred billing and deferred payment programs. Statements such 
as ``Charge it--you won't be billed until May'' or ``You may skip your 
January payment'' are not in themselves triggering terms, since the 
timing for initial billing or for monthly payments are not terms 
required to be disclosed under Sec. 226.6. However, a statement such as 
``No interest charges until May'' or any other statement regarding when 
interest or finance charges begin to accrue is a triggering term, 
whether appearing alone or in conjunction with a description of a 
deferred billing or deferred payment program such as the examples above.
    5. Variable-rate plans. In disclosing the annual percentage rate in 
an advertisement for a variable-rate plan, as required by Sec. 
226.16(b)(1)(ii), the creditor may use an insert showing the current 
rate; or may give the rate as of a specified recent date. The additional 
requirement in Sec. 226.16(b)(1)(ii) to disclose the variable-rate 
feature may be satisfied by disclosing that the annual percentage rate 
may vary or a similar statement, but the advertisement need not include 
the information required by Sec. 226.6(a)(1)(ii) or (b)(4)(ii).
    6. Membership fees for open-end (not home-secured) plans. For 
purposes of Sec. 226.16(b)(1)(iii), membership fees that may be imposed 
on open-end (not home-secured) plans shall have the same meaning as in 
Sec. 226.5a(b)(2).
    Paragraph (b)(2).
    1. Assumptions. In stating the total of payments and the time period 
to repay the obligation, assuming that the consumer pays only the 
periodic payment amounts advertised, as required under Sec. 
226.16(b)(2), the following additional assumptions may be made:
    i. Payments are made timely so as not to be considered late by the 
creditor;
    ii. Payments are made each period, and no debt cancellation or 
suspension agreement, or skip payment feature applies to the account;
    iii. No interest rate changes will affect the account;
    iv. No other balances are currently carried or will be carried on 
the account;
    v. No taxes or ancillary charges are or will be added to the 
obligation;

[[Page 640]]

    vi. Goods or services are delivered on a single date; and
    vii. The consumer is not currently and will not become delinquent on 
the account.
    2. Positive periodic payment amounts. Only positive periodic payment 
amounts trigger the additional disclosures under Sec. 226.16(b)(2). 
Therefore, if the periodic payment amount advertised is not a positive 
amount (e.g., ``No payments''), the advertisement need not state the 
total of payments and the time period to repay the obligation.
    16(c) Catalogs or other multiple-page advertisements; electronic 
advertisements.
    1. Definition. The multiple-page advertisements to which Sec. 
226.16(c) refers are advertisements consisting of a series of 
sequentially numbered pages--for example, a supplement to a newspaper. A 
mailing consisting of several separate flyers or pieces of promotional 
material in a single envelope does not constitute a single multiple-page 
advertisement for purposes of Sec. 226.16(c).
    Paragraph 16(c)(1).
    1. General. Section 226.16(c)(1) permits creditors to put credit 
information together in one place in a catalog or other multiple-page 
advertisement or an electronic advertisement (such as an advertisement 
appearing on an Internet Web site). The rule applies only if the 
advertisement contains one or more of the triggering terms from Sec. 
226.16(b).
    2. Electronic advertisement. If an electronic advertisement (such as 
an advertisement appearing on an Internet Web site) contains the table 
or schedule permitted under Sec. 226.16(c)(1), any statement of terms 
set forth in Sec. 226.6 appearing anywhere else in the advertisement 
must clearly direct the consumer to the location where the table or 
schedule begins. For example, a term triggering additional disclosures 
may be accompanied by a link that directly takes the consumer to the 
additional information.
    Paragraph 16(c)(2).
    1. Table or schedule if credit terms depend on outstanding balance. 
If the credit terms of a plan vary depending on the amount of the 
balance outstanding, rather than the amount of any property purchased, a 
table or schedule complies with Sec. 226.16(c)(2) if it includes the 
required disclosures for representative balances. For example, a 
creditor would disclose that a periodic rate of 1.5% is applied to 
balances of $500 or less, and a 1% rate is applied to balances greater 
than $500.
    16(d) Additional requirements for home-equity plans.
    1. Trigger terms. Negative as well as affirmative references trigger 
the requirement for additional information. For example, if a creditor 
states no annual fee, no points, or we waive closing costs in an 
advertisement, additional information must be provided. (See comment 
16(d)-4 regarding the use of a phrase such as no closing costs.) 
Inclusion of a statement such as low fees, however, would not trigger 
the need to state additional information. References to payment terms 
include references to the draw period or any repayment period, to the 
length of the plan, to how the minimum payments are determined and to 
the timing of such payments.
    2. Fees to open the plan. Section 226.16(d)(1)(i) requires a 
disclosure of any fees imposed by the creditor or a third party to open 
the plan. In providing the fee information required under this 
paragraph, the corresponding rules for disclosure of this information 
apply. For example, fees to open the plan may be stated as a range. 
Similarly, if property insurance is required to open the plan, a 
creditor either may estimate the cost of the insurance or provide a 
statement that such insurance is required. (See the commentary to Sec. 
226.5b(d)(7) and (d)(8).)
    3. Statements of tax deductibility. An advertisement that refers to 
deductibility for tax purposes is not misleading if it includes a 
statement such as ``consult a tax advisor regarding the deductibility of 
interest.'' An advertisement distributed in paper form or through the 
Internet (rather than by radio or television) that states that the 
advertised extension of credit may exceed the fair market value of the 
consumer's dwelling is not misleading if it clearly and conspicuously 
states the required information in Sec. Sec. 226.16(d)(4)(i) and 
(d)(4)(ii).
    4. Misleading terms prohibited. Under Sec. 226.16(d)(5), 
advertisements may not refer to home-equity plans as free money or use 
other misleading terms. For example, an advertisement could not state 
``no closing costs'' or ``we waive closing costs'' if consumers may be 
required to pay any closing costs, such as recordation fees. In the case 
of property insurance, however, a creditor may state, for example, ``no 
closing costs'' even if property insurance may be required, as long as 
the creditor also provides a statement that such insurance may be 
required. (See the commentary to this section regarding fees to open a 
plan.)
    5. Promotional rates and payments in advertisements for home-equity 
plans. Section 226.16(d)(6) requires additional disclosures for 
promotional rates or payments.
    i. Variable-rate plans. In advertisements for variable-rate plans, 
if the advertised annual percentage rate is based on (or the advertised 
payment is derived from) the index and margin that will be used to make 
rate (or payment) adjustments over the term of the loan, then there is 
no promotional rate or promotional payment. If, however, the advertised 
annual percentage rate is not based on (or the advertised payment is not 
derived from) the index and margin that will be used to make rate (or 
payment) adjustments, and a reasonably current application of the index 
and margin would result in a higher annual

[[Page 641]]

percentage rate (or, given an assumed balance, a higher payment) then 
there is a promotional rate or promotional payment.
    ii. Equal prominence, close proximity. Information required to be 
disclosed in Sec. 226.16(d)(6)(ii) that is immediately next to or 
directly above or below the promotional rate or payment (but not in a 
footnote) is deemed to be closely proximate to the listing. Information 
required to be disclosed in Sec. 226.16(d)(6)(ii) that is in the same 
type size as the promotional rate or payment is deemed to be equally 
prominent.
    iii. Amounts and time periods of payments. Section 
226.16(d)(6)(ii)(C) requires disclosure of the amount and time periods 
of any payments that will apply under the plan. This section may require 
disclosure of several payment amounts, including any balloon payment. 
For example, if an advertisement for a home-equity plan offers a 
$100,000 five-year line of credit and assumes that the entire line is 
drawn resulting in a minimum payment of $800 per month for the first six 
months, increasing to $1,000 per month after month six, followed by a 
$50,000 balloon payment after five years, the advertisement must 
disclose the amount and time period of each of the two monthly payment 
streams, as well as the amount and timing of the balloon payment, with 
equal prominence and in close proximity to the promotional payment. 
However, if the final payment could not be more than twice the amount of 
other minimum payments, the final payment need not be disclosed.
    iv. Plans other than variable-rate plans. For a plan other than a 
variable-rate plan, if an advertised payment is calculated in the same 
way as other payments based on an assumed balance, the fact that the 
minimum payment could increase solely if the consumer made an additional 
draw does not make the payment a promotional payment. For example, if a 
payment of $500 results from an assumed $10,000 draw, and the payment 
would increase to $1,000 if the consumer made an additional $10,000 
draw, the payment is not a promotional payment.
    v. Conversion option. Some home-equity plans permit the consumer to 
repay all or part of the balance during the draw period at a fixed rate 
(rather than a variable rate) and over a specified time period. The 
fixed-rate conversion option does not, by itself, make the rate or 
payment that would apply if the consumer exercised the fixed-rate 
conversion option a promotional rate or payment.
    vi. Preferred-rate provisions. Some home-equity plans contain a 
preferred-rate provision, where the rate will increase upon the 
occurrence of some event, such as the consumer-employee leaving the 
creditor's employ, the consumer closing an existing deposit account with 
the creditor, or the consumer revoking an election to make automated 
payments. A preferred-rate provision does not, by itself, make the rate 
or payment under the preferred-rate provision a promotional rate or 
payment.
    6. Reasonably current index and margin. For the purposes of this 
section, an index and margin is considered reasonably current if:
    i. For direct mail advertisements, it was in effect within 60 days 
before mailing;
    ii. For advertisements in electronic form it was in effect within 30 
days before the advertisement is sent to a consumer's e-mail address, or 
in the case of an advertisement made on an Internet Web site, when 
viewed by the public; or
    iii. For printed advertisements made available to the general 
public, including ones contained in a catalog, magazine, or other 
generally available publication, it was in effect within 30 days before 
printing.
    7. Relation to other sections. Advertisements for home-equity plans 
must comply with all provisions in Sec. 226.16, not solely the rules in 
Sec. 226.16(d). If an advertisement contains information (such as the 
payment terms) that triggers the duty under Sec. 226.16(d) to state the 
annual percentage rate, the additional disclosures in Sec. 226.16(b) 
must be provided in the advertisement. While Sec. 226.16(d) does not 
require a statement of fees to use or maintain the plan (such as 
membership fees and transaction charges), such fees must be disclosed 
under Sec. 226.16(b)(1)(i) and (b)(1)(iii).
    8. Inapplicability of closed-end rules. Advertisements for home-
equity plans are governed solely by the requirements in Sec. 226.16, 
except Sec. 226.16(g), and not by the closed-end advertising rules in 
Sec. 226.24. Thus, if a creditor states payment information about the 
repayment phase, this will trigger the duty to provide additional 
information under Sec. 226.16, but not under Sec. 226.24.
    9. Balloon payment. See comment 5b(d)(5)(ii)-3 for information not 
required to be stated in advertisements, and on situations in which the 
balloon payment requirement does not apply.
    16(e) Alternative disclosures--television or radio advertisements.
    1. Multi-purpose telephone number. When an advertised telephone 
number provides a recording, disclosures must be provided early in the 
sequence to ensure that the consumer receives the required disclosures. 
For example, in providing several options--such as providing directions 
to the advertiser's place of business--the option allowing the consumer 
to request disclosures should be provided early in the telephone message 
to ensure that the option to request disclosures is not obscured by 
other information.
    2. Statement accompanying toll free number. Language must accompany 
a telephone number indicating that disclosures are available by calling 
the telephone number, such as ``call 1-800-000-0000 for details about 
credit costs and terms.''
    16(g) Promotional rates.

[[Page 642]]

    1. Rate in effect at the end of the promotional period. If the 
annual percentage rate that will be in effect at the end of the 
promotional period (i.e., the post-promotional rate) is a variable rate, 
the post-promotional rate for purposes of Sec. 226.16(g)(2)(i) is the 
rate that would have applied at the time the promotional rate was 
advertised if the promotional rate was not offered, consistent with the 
accuracy requirements in Sec. 226.5a(c)(2) and (e)(4), as applicable.
    2. Immediate proximity. For written or electronic advertisements, 
including the term ``introductory'' or ``intro'' in the same phrase as 
the listing of the introductory rate or introductory fee is deemed to be 
in immediate proximity of the listing.
    3. Prominent location closely proximate. For written or electronic 
advertisements, information required to be disclosed in Sec. 
226.16(g)(4)(i) and, as applicable, (g)(4)(ii) and (g)(4)(iii) that is 
in the same paragraph as the first listing of the promotional rate or 
promotional fee is deemed to be in a prominent location closely 
proximate to the listing. Information disclosed in a footnote will not 
be considered in a prominent location closely proximate to the listing.
    4. First listing. For purposes of Sec. 226.16(g)(4) as it applies 
to written or electronic advertisements, the first listing of the 
promotional rate or promotional fee is the most prominent listing of the 
rate or fee on the front side of the first page of the principal 
promotional document. The principal promotional document is the document 
designed to be seen first by the consumer in a mailing, such as a cover 
letter or solicitation letter. If the promotional rate or promotional 
fee does not appear on the front side of the first page of the principal 
promotional document, then the first listing of the promotional rate or 
promotional fee is the most prominent listing of the rate or fee on the 
subsequent pages of the principal promotional document. If the 
promotional rate or promotional fee is not listed on the principal 
promotional document or there is no principal promotional document, the 
first listing is the most prominent listing of the rate or fee on the 
front side of the first page of each document listing the promotional 
rate or promotional fee. If the promotional rate or promotional fee does 
not appear on the front side of the first page of a document, then the 
first listing of the promotional rate or promotional fee is the most 
prominent listing of the rate or fee on the subsequent pages of the 
document. If the listing of the promotional rate or promotional fee with 
the largest type size on the front side of the first page (or subsequent 
pages if the promotional rate or promotional fee is not listed on the 
front side of the first page) of the principal promotional document (or 
each document listing the promotional rate or promotional fee if the 
promotional rate or promotional fee is not listed on the principal 
promotional document or there is no principal promotional document) is 
used as the most prominent listing, it will be deemed to be the first 
listing. Consistent with comment 16(c)-1, a catalog or multiple-page 
advertisement is considered one document for purposes of Sec. 
226.16(g)(4).
    5. Post-promotional rate depends on consumer's creditworthiness. For 
purposes of disclosing the rate that may apply after the end of the 
promotional rate period, at the advertiser's option, the advertisement 
may disclose the rates that may apply as either specific rates, or a 
range of rates. For example, if there are three rates that may apply 
(9.99%, 12.99% or 17.99%), an issuer may disclose these three rates as 
specific rates (9.99%, 12.99% or 17.99%) or as a range of rates (9.99%-
17.99%).
    16(h) Deferred interest or similar offers.
    1. Deferred interest or similar offers clarified. Deferred interest 
or similar offers do not include offers that allow a consumer to skip 
payments during a specified period of time, and under which the consumer 
is not obligated under any circumstances for any interest or other 
finance charges that could be attributable to that period. Deferred 
interest or similar offers also do not include 0% annual percentage rate 
offers where a consumer is not obligated under any circumstances for 
interest attributable to the time period the 0% annual percentage rate 
was in effect, though such offers may be considered promotional rates 
under Sec. 226.16(g)(2)(i). Deferred interest or similar offers also do 
not include skip payment programs that have no required minimum payment 
for one or more billing cycles but where interest continues to accrue 
and is imposed during that period.
    2. Deferred interest period clarified. Although the terms of an 
advertised deferred interest or similar offer may provide that a 
creditor may charge the accrued interest if the balance is not paid in 
full by a certain date, creditors sometimes have an informal policy or 
practice that delays charging the accrued interest for payment received 
a brief period of time after the date upon which a creditor has the 
contractual right to charge the accrued interest. The advertisement need 
not include the end of an informal ``courtesy period'' in disclosing the 
deferred interest period under Sec. 226.16(h)(3).
    3. Immediate proximity. For written or electronic advertisements, 
including the deferred interest period in the same phrase as the 
statement of ``no interest,'' ``no payments,'' ``deferred interest,'' or 
``same as cash'' or similar term regarding interest or payments during 
the deferred interest period is deemed to be in immediate proximity of 
the statement.

[[Page 643]]

    4. Prominent location closely proximate. For written or electronic 
advertisements, information required to be disclosed in Sec. 
226.16(h)(4)(i) and (ii) that is in the same paragraph as the first 
statement of ``no interest,'' ``no payments,'' ``deferred interest,'' or 
``same as cash'' or similar term regarding interest or payments during 
the deferred interest period is deemed to be in a prominent location 
closely proximate to the statement. Information disclosed in a footnote 
is not considered in a prominent location closely proximate to the 
statement.
    5. First listing. For purposes of Sec. 226.16(h)(4) as it applies 
to written or electronic advertisements, the first statement of ``no 
interest,'' ``no payments,'' ``deferred interest,'' ``same as cash,'' or 
similar term regarding interest or payments during the deferred interest 
period is the most prominent listing of one of these statements on the 
front side of the first page of the principal promotional document. The 
principal promotional document is the document designed to be seen first 
by the consumer in a mailing, such as a cover letter or solicitation 
letter. If one of the statements does not appear on the front side of 
the first page of the principal promotional document, then the first 
listing of one of these statements is the most prominent listing of a 
statement on the subsequent pages of the principal promotional document. 
If one of the statements is not listed on the principal promotional 
document or there is no principal promotional document, the first 
listing of one of these statements is the most prominent listing of the 
statement on the front side of the first page of each document 
containing one of these statements. If one of the statements does not 
appear on the front side of the first page of a document, then the first 
listing of one of these statements is the most prominent listing of a 
statement on the subsequent pages of the document. If the listing of one 
of these statements with the largest type size on the front side of the 
first page (or subsequent pages if one of these statements is not listed 
on the front side of the first page) of the principal promotional 
document (or each document listing one of these statements if a 
statement is not listed on the principal promotional document or there 
is no principal promotional document) is used as the most prominent 
listing, it will be deemed to be the first listing. Consistent with 
comment 16(c)-1, a catalog or multiple-page advertisement is considered 
one document for purposes of Sec. 226.16(h)(4).
    6. Additional information. Consistent with comment 5(a)-2, the 
information required under Sec. 226.16(h)(4) need not be segregated 
from other information regarding the deferred interest or similar offer. 
Advertisements may also be required to provide additional information 
pursuant to Sec. 226.16(b) though such information need not be 
integrated with the information required under Sec. 226.16(h)(4).
    7. Examples. Examples of disclosures that could be used to comply 
with the requirements of Sec. 226.16(h)(3) include: ``no interest if 
paid in full within 6 months'' and ``no interest if paid in full by 
December 31, 2010.''

                      Subpart C--Closed-End Credit

             Section 226.17--General Disclosure Requirements

    17(a) Form of disclosures.
    Paragraph 17(a)(1).
    1. Clear and conspicuous. This standard requires that disclosures be 
in a reasonably understandable form. For example, while the regulation 
requires no mathematical progression or format, the disclosures must be 
presented in a way that does not obscure the relationship of the terms 
to each other. In addition, although no minimum type size is mandated 
(except for the interest rate and payment summary for mortgage 
transactions required by Sec. 228.18(s)), the disclosures must be 
legible, whether typewritten, handwritten, or printed by computer.
    2. Segregation of disclosures. The disclosures may be grouped 
together and segregated from other information in a variety of ways. For 
example, the disclosures may appear on a separate sheet of paper or may 
be set off from other information on the contract or other documents:
     By outlining them in a box
     By bold print dividing lines
     By a different color background
     By a different type style

(The general segregation requirement described in this subparagraph does 
not apply to the disclosures required under Sec. Sec. 226.19(b) and 
226.20(c) although the disclosures must be clear and conspicuous.)

    3. Location. The regulation imposes no specific location 
requirements on the segregated disclosures. For example:

     They may appear on a disclosure statement 
separate from all other material.
     They may be placed on the same document with the 
credit contract or other information, so long as they are segregated 
from that information.
     They may be shown on the front or back of a 
document.
     They need not begin at the top of a page.
     They may be continued from one page to another.

    4. Content of segregated disclosures. Footnotes 37 and 38 contain 
exceptions to the requirement that the disclosures under Sec. 226.18 be 
segregated from material that is not directly related to those 
disclosures. Footnote 37 lists the items that may be added to the 
segregated disclosures, even though not directly related to those 
disclosures. Footnote 38 lists the items required under Sec. 226.18 
that

[[Page 644]]

may be deleted from the segregated disclosures and appear elsewhere. Any 
one or more of these additions or deletions may be combined and appear 
either together with or separate from the segregated disclosures. The 
itemization of the amount financed under Sec. 226.18(c), however, must 
be separate from the other segregated disclosures under Sec. 226.18, 
except for private education loan disclosures made in compliance with 
Sec. 226.47. If a creditor chooses to include the security interest 
charges required to be itemized under Sec. 226.4(e) and Sec. 226.18(o) 
in the amount financed itemization, it need not list these charges 
elsewhere.
    5. Directly related. The segregated disclosures may, at the 
creditor's option, include any information that is directly related to 
those disclosures. The following is directly related information:
    i. A description of a grace period after which a late payment charge 
will be imposed. For example, the disclosure given under Sec. 226.18(l) 
may state that a late charge will apply to ``any payment received more 
than 15 days after the due date.''
    ii. A statement that the transaction is not secured. For example, 
the creditor may add a category labelled ``unsecured'' or ``not 
secured'' to the security interest disclosures given under Sec. 
226.18(m).
    iii. The basis for any estimates used in making disclosures. For 
example, if the maturity date of a loan depends solely on the occurrence 
of a future event, the creditor may indicate that the disclosures assume 
that event will occur at a certain time.
    iv. The conditions under which a demand feature may be exercised. 
For example, in a loan subject to demand after five years, the 
disclosures may state that the loan will become payable on demand in 
five years.
    v. An explanation of the use of pronouns or other references to the 
parties to the transaction. For example, the disclosures may state, 
```You' refers to the customer and `we' refers to the creditor.''
    vi. Instructions to the creditor or its employees on the use of a 
multiple-purpose form. For example, the disclosures may state, ``Check 
box if applicable.''
    vii. A statement that the borrower may pay a minimum finance charge 
upon prepayment in a simple-interest transaction. For example, when 
state law prohibits penalties, but would allow a minimum finance charge 
in the event of prepayment, the creditor may make the Sec. 226.18(k)(1) 
disclosure by stating, ``You may be charged a minimum finance charge.''
    viii. A brief reference to negative amortization in variable-rate 
transactions. For example, in the variable-rate disclosure, the creditor 
may include a short statement such as ``Unpaid interest will be added to 
principal.'' (See the commentary to Sec. 226.18(f)(1)(iii).)
    ix. A brief caption identifying the disclosures. For example, the 
disclosures may bear a general title such as ``Federal Truth in Lending 
Disclosures'' or a descriptive title such as ``Real Estate Loan 
Disclosures.''
    x. A statement that a due-on-sale clause or other conditions on 
assumption are contained in the loan document. For example, the 
disclosure given under Sec. 226.18(q) may state, ``Someone buying your 
home may, subject to conditions in the due-on-sale clause contained in 
the loan document, assume the remainder of the mortgage on the original 
terms.''
    xi. If a state or Federal law prohibits prepayment penalties and 
excludes the charging of interest after prepayment from coverage as a 
penalty, a statement that the borrower may have to pay interest for some 
period after prepayment in full. The disclosure given under Sec. 
226.18(k) may state, for example, ``If you prepay your loan on other 
than the regular installment date, you may be assessed interest charges 
until the end of the month.''
    xii. More than one hypothetical example under Sec. 226.18(f)(1)(iv) 
in transactions with more than one variable-rate feature. For example, 
in a variable-rate transaction with an option permitting consumers to 
convert to a fixed-rate transaction, the disclosures may include an 
example illustrating the effects on the payment terms of an increase 
resulting from conversion in addition to the example illustrating an 
increase resulting from changes in the index.
    xiii. The disclosures set forth under Sec. 226.18(f)(1) for 
variable-rate transactions subject to Sec. 226.18(f)(2).
    xiv. A statement whether or not a subsequent purchaser of the 
property securing an obligation may be permitted to assume the remaining 
obligation on its original terms.
    xv. A late-payment fee disclosure under Sec. 226.18(l) on a single 
payment loan.
    xvi. The notice set forth in Sec. 226.19(a)(4), in a closed-end 
transaction not subject to Sec. 226.19(a)(1)(i). In a mortgage 
transaction subject to Sec. 226.19(a)(1)(i), the creditor must disclose 
the notice contained in Sec. 226.19(a)(4) grouped together with the 
disclosures made under Sec. 226.18. See comment 19(a)(4)-1.

    6. Multiple-purpose forms. The creditor may design a disclosure 
statement that can be used for more than one type of transaction, so 
long as the required disclosures for individual transactions are clear 
and conspicuous. (See the Commentary to appendices G and H for a 
discussion of the treatment of disclosures that do not apply to specific 
transactions.) Any disclosure listed in Sec. 226.18 (except the 
itemization of the amount financed under Sec. 226.18(c) for 
transactions other than private education loans) may be included on a 
standard disclosure statement

[[Page 645]]

even though not all of the creditor's transactions include those 
features. For example, the statement may include:
     The variable rate disclosure under Sec. 
226.18(f).
     The demand feature disclosure under Sec. 
226.18(i).
     A reference to the possibility of a security 
interest arising from a spreader clause, under Sec. 226.18(m).
     The assumption policy disclosure under Sec. 
226.18(q).
     The required deposit disclosure under Sec. 
226.18(r).
    7. Balloon payment financing with leasing characteristics. In 
certain credit sale or loan transactions, a consumer may reduce the 
dollar amount of the payments to be made during the course of the 
transaction by agreeing to make, at the end of the loan term, a large 
final payment based on the expected residual value of the property. The 
consumer may have a number of options with respect to the final payment, 
including, among other things, retaining the property and making the 
final payment, refinancing the final payment, or transferring the 
property to the creditor in lieu of the final payment. Such transactions 
may have some of the characteristics of lease transactions subject to 
Regulation M, but are considered credit transactions where the consumer 
assumes the indicia of ownership, including the risks, burdens and 
benefits of ownership upon consummation. These transactions are governed 
by the disclosure requirements of this regulation instead of Regulation 
M. Creditors should not include in the segregated Truth in Lending 
disclosures additional information. Thus, disclosures should show the 
large final payment in the payment schedule and should not, for example, 
reflect the other options available to the consumer at maturity.

                           Paragraph 17(a)(2)

    1. When disclosures must be more conspicuous. The following rules 
apply to the requirement that the terms ``annual percentage rate'' 
(except for private education loan disclosures made in compliance with 
Sec. 226.47) and ``finance charge'' be shown more conspicuously:
     The terms must be more conspicuous only in 
relation to the other required disclosures under Sec. 226.18. For 
example, when the disclosures are included on the contract document, 
those two terms need not be more conspicuous as compared to the heading 
on the contract document or information required by state law.
     The terms need not be more conspicuous except as 
part of the finance charge and annual percentage rate disclosures under 
Sec. 226.18 (d) and (e), although they may, at the creditor's option, 
be highlighted wherever used in the required disclosures. For example, 
the terms may, but need not, be highlighted when used in disclosing a 
prepayment penalty under Sec. 226.18(k) or a required deposit under 
Sec. 226.18(r).
     The creditor's identity under Sec. 226.18(a) 
may, but need not, be more prominently displayed than the finance charge 
and annual percentage rate.
     The terms need not be more conspicuous than 
figures (including, for example, numbers, percentages, and dollar 
signs).
    2. Making disclosures more conspicuous. The terms ``finance charge'' 
and (except for private education loan disclosures made in compliance 
with Sec. 226.47) ``annual percentage rate'' may be made more 
conspicuous in any way that highlights them in relation to the other 
required disclosures. For example, they may be:
     Capitalized when other disclosures are printed in 
capital and lower case.
     Printed in larger type, bold print or different 
type face.
     Printed in a contrasting color.
     Underlined.
     Set off with asterisks.

                        17(b) Time of Disclosures

    1. Consummation. As a general rule, disclosures must be made before 
``consummation'' of the transaction. The disclosures need not be given 
by any particular time before consummation, except in certain mortgage 
transactions and variable-rate transactions secured by the consumer's 
principal dwelling with a term greater than one year under Sec. 226.19, 
and in private education loan transactions disclosed in compliance with 
Sec. Sec. 226.46 and 226.47. (See the commentary to Sec. 226.2(a)(13) 
regarding the definition of consummation.)
    2. Converting open-end to closed-end credit. Except for home equity 
plans subject to Sec. 226.5b in which the agreement provides for a 
repayment phase, if an open-end credit account is converted to a closed-
end transaction under a written agreement with the consumer, the 
creditor must provide a set of closed-end credit disclosures before 
consummation of the closed-end transaction. (See the commentary to Sec. 
226.19(b) for the timing rules for additional disclosures required upon 
the conversion to a variable-rate transaction secured by a consumer's 
principal dwelling with a term greater than one year.) If consummation 
of the closed-end transaction occurs at the same time as the consumer 
enters into the open-end agreement, the closed-end credit disclosures 
may be given at the time of conversion. If disclosures are delayed until 
conversion and the closed-end transaction has a variable-rate feature, 
disclosures should be based on the rate in effect at the time of 
conversion. (See the commentary to Sec. 226.5 regarding conversion of 
closed-end to open-end credit.)

[[Page 646]]

    3. Disclosures provided on credit contracts. Creditors must give the 
required disclosures to the consumer in writing, in a form that the 
consumer may keep, before consummation of the transaction. See Sec. 
226.17(a)(1) and (b). Sometimes the disclosures are placed on the same 
document with the credit contract. Creditors are not required to give 
the consumer two separate copies of the document before consummation, 
one for the consumer to keep and a second copy for the consumer to 
execute. The disclosure requirement is satisfied if the creditor gives a 
copy of the document containing the unexecuted credit contract and 
disclosures to the consumer to read and sign; and the consumer receives 
a copy to keep at the time the consumer becomes obligated. It is not 
sufficient for the creditor merely to show the consumer the document 
containing the disclosures before the consumer signs and becomes 
obligated. The consumer must be free to take possession of and review 
the document in its entirety before signing.
    i. Example. To illustrate:
    A. A creditor gives a consumer a multiple-copy form containing a 
credit agreement and TILA disclosures. The consumer reviews and signs 
the form and returns it to the creditor, who separates the copies and 
gives one copy to the consumer to keep. The creditor has satisfied the 
disclosure requirement.
    17(c) Basis of disclosures and use of estimates.
    Paragraph 17(c)(1).
    1. Legal obligation. The disclosures shall reflect the credit terms 
to which the parties are legally bound as of the outset of the 
transaction. In the case of disclosures required under Sec. 226.20(c), 
the disclosures shall reflect the credit terms to which the parties are 
legally bound when the disclosures are provided. The legal obligation is 
determined by applicable state law or other law. (Certain transactions 
are specifically addressed in this commentary. See, for example, the 
discussion of buydown transactions elsewhere in the commentary to Sec. 
226.17(c).)

     The fact that a term or contract may later be 
deemed unenforceable by a court on the basis of equity or other grounds 
does not, by itself, mean that disclosures based on that term or 
contract did not reflect the legal obligation.

    2. Modification of obligation. The legal obligation normally is 
presumed to be contained in the note or contract that evidences the 
agreement. But this presumption is rebutted if another agreement between 
the parties legally modifies that note or contract. If the parties 
informally agree to a modification of the legal obligation, the 
modification should not be reflected in the disclosures unless it rises 
to the level of a change in the terms of the legal obligation. For 
example:

     If the creditor offers a preferential rate, such 
as an employee preferred rate, the disclosures should reflect the terms 
of the legal obligation. (See the commentary to Sec. 226.19(b) for an 
example of a preferred-rate transaction that is a variable-rate 
transaction.)
     If the contract provides for a certain monthly 
payment schedule but payments are made on a voluntary payroll deduction 
plan or an informal principal-reduction agreement, the disclosures 
should reflect the schedule in the contract.
     If the contract provides for regular monthly 
payments but the creditor informally permits the consumer to defer 
payments from time to time, for instance, to take account of holiday 
seasons or seasonal employment, the disclosures should reflect the 
regular monthly payments.

    3. Third-party buydowns. In certain transactions, a seller or other 
third party may pay an amount, either to the creditor or to the 
consumer, in order to reduce the consumer's payments or buy down the 
interest rate for all or a portion of the credit term. For example, a 
consumer and a bank agree to a mortgage with an interest rate of 15% and 
level payments over 25 years. By a separate agreement, the seller of the 
property agrees to subsidize the consumer's payments for the first 2 
years of the mortgage, giving the consumer an effective rate of 12% for 
that period.

     If the lower rate is reflected in the credit 
contract between the consumer and the bank, the disclosures must take 
the buydown into account. For example, the annual percentage rate must 
be a composite rate that takes account of both the lower initial rate 
and the higher subsequent rate, and the payment schedule disclosures 
must reflect the 2 payment levels. However, the amount paid by the 
seller would not be specifically reflected in the disclosures given by 
the bank, since that amount constitutes seller's points and thus is not 
part of the finance charge.
     If the lower rate is not reflected in the credit 
contract between the consumer and the bank and the consumer is legally 
bound to the 15% rate from the outset, the disclosures given by the bank 
must not reflect the seller buydown in any way. For example, the annual 
percentage rate and payment schedule would not take into account the 
reduction in the interest rate and payment level for the first 2 years 
resulting from the buydown.

    4. Consumer buydowns. In certain transactions, the consumer may pay 
an amount to the creditor to reduce the payments or obtain a lower 
interest rate on the transaction. Consumer buydowns must be reflected in 
the disclosures given for that transaction. To illustrate, in a mortgage 
transaction, the creditor and consumer agree to a note specifying a 14 
percent interest rate. However, in a separate document, the consumer 
agrees to

[[Page 647]]

pay an amount to the creditor at consummation in return for a reduction 
in the interest rate to 12 percent for a portion of the mortgage term. 
The amount paid by the consumer may be deposited in an escrow account or 
may be retained by the creditor. Depending upon the buydown plan, the 
consumer's prepayment of the obligation may or may not result in a 
portion of the amount being credited or refunded to the consumer. In the 
disclosures given for the mortgage, the creditor must reflect the terms 
of the buydown agreement. For example:

     The amount paid by the consumer is a prepaid 
finance charge (even if deposited in an escrow account).
     A composite annual percentage rate must be 
calculated, taking into account both interest rates, as well as the 
effect of the prepaid finance charge.
     The payment schedule must reflect the multiple 
payment levels resulting from the buydown.

    The rules regarding consumer buydowns do not apply to transactions 
known as ``lender buydowns,'' In lender buydowns. a creditor pays an 
amount (either into an account or to the party to whom the obligation is 
sold) to reduce the consumer's payments or interest rate for all or a 
portion of the credit term. Typically, these transactions are structured 
as a buydown of the interest rate during an initial period of the 
transaction with a higher than usual rate for the remainder of the term. 
The disclosures for lender buydowns should be based on the terms of the 
legal obligation between the consumer and the creditor. (See comment 
17(c)(1)-3 for the analogous rules concerning third-party buydowns.)
    5. Split buydowns. In certain transactions, a third party (such as a 
seller) and a consumer both pay an amount to the creditor to reduce the 
interest rate. The creditor must include the portion paid by the 
consumer in the finance charge and disclose the corresponding multiple 
payment levels and composite annual percentage rate. The portion paid by 
the third party and the corresponding reduction in interest rate, 
however, should not be reflected in the disclosures unless the lower 
rate is reflected in the credit contract. (See the discussion on third-
party and consumer buydown transactions elsewhere in the commentary to 
Sec. 226.17(c).)
    6. Wrap-around financing. Wrap-around transactions, usually loans, 
involve the creditor's wrapping the outstanding balance on an existing 
loan and advancing additional funds to the consumer. The pre-existing 
loan, which is wrapped, may be to the same consumer or to a different 
consumer. In either case, the consumer makes a single payment to the new 
creditor, who makes the payments on the pre-existing loan to the 
original creditor. Wrap-around loans or sales are considered new single-
advance transactions, with an amount financed equalling the sum of the 
new funds advanced by the wrap creditor and the remaining principal owed 
to the original creditor on the pre-existing loan. In disclosing the 
itemization of the amount financed, the creditor may use a label such as 
``the amount that will be paid to creditor X'' to describe the remaining 
principal balance on the pre-existing loan. This approach to Truth in 
Lending calculations has no effect on calculations required by other 
statutes, such as state usury laws.
    7. Wrap-around financing with balloon payments. For wrap-around 
transactions involving a large final payment of the new funds before the 
maturity of the pre-existing loan, the amount financed is the sum of the 
new funds and the remaining principal on the pre-existing loan. The 
disclosures should be based on the shorter term of the wrap loan, with a 
large final payment of both the new funds and the total remaining 
principal on the pre-existing loan (although only the wrap loan will 
actually be paid off at that time).
    8. Basis of disclosures in variable-rate transactions. The 
disclosures for a variable-rate transaction must be given for the full 
term of the transaction and must be based on the terms in effect at the 
time of consummation. Creditors should base the disclosures only on the 
initial rate and should not assume that this rate will increase. For 
example, in a loan with an initial rate of 10 percent and a 5 percentage 
points rate cap, creditors should base the disclosures on the initial 
rate and should not assume that this rate will increase 5 percentage 
points. However, in a variable-rate transaction with a seller buydown 
that is reflected in the credit contract, a consumer buydown, or a 
discounted or premium rate, disclosures should not be based solely on 
the initial terms. In those transactions, the disclosed annual 
percentage rate should be a composite rate based on the rate in effect 
during the initial period and the rate that is the basis of the 
variable-rate feature for the remainder of the term. (See the commentary 
to Sec. 226.17(c) for a discussion of buydown, discounted, and premium 
transactions and the commentary to Sec. 226.19(a)(2) for a discussion 
of the redisclosure in certain mortgage transactions with a variable-
rate feature.)
    9. Use of estimates in variable-rate transactions. The variable-rate 
feature does not, by itself, make the disclosures estimates.
    10. Discounted and premium variable-rate transactions. In some 
variable-rate transactions, creditors may set an initial interest rate 
that is not determined by the index or formula used to make later 
interest rate adjustments. Typically, this initial rate charged to 
consumers is lower than the rate would be if it were calculated using 
the index

[[Page 648]]

or formula. However, in some cases the initial rate may be higher. In a 
discounted transaction, for example, a creditor may calculate interest 
rates according to a formula using the six-month Treasury bill rate plus 
a 2 percent margin. If the Treasury bill rate at consummation is 10 
percent, the creditor may forgo the 2 percent spread and charge only 10 
percent for a limited time, instead of setting an initial rate of 12 
percent.
    i. When creditors use an initial interest rate that is not 
calculated using the index or formula for later rate adjustments, the 
disclosures should reflect a composite annual percentage rate based on 
the initial rate for as long as it is charged and, for the remainder of 
the term, the rate that would have been applied using the index or 
formula at the time of consummation. The rate at consummation need not 
be used if a contract provides for a delay in the implementation of 
changes in an index value. For example, if the contract specifies that 
rate changes are based on the index value in effect 45 days before the 
change date, creditors may use any index value in effect during the 45 
day period before consummation in calculating a composite annual 
percentage rate.
    ii. The effect of the multiple rates must also be reflected in the 
calculation and disclosure of the finance charge, total of payments, and 
payment schedule.
    iii. If a loan contains a rate or payment cap that would prevent the 
initial rate or payment, at the time of the first adjustment, from 
changing to the rate determined by the index or formula at consummation, 
the effect of that rate or payment cap should be reflected in the 
disclosures.
    iv. Because these transactions involve irregular payment amounts, an 
annual percentage rate tolerance of \1/4\ of 1 percent applies, in 
accordance with Sec. 226.22(a)(3).
    v. Examples of discounted variable-rate transactions include:
    A. A 30-year loan for $100,000 with no prepaid finance charges and 
rates determined by the Treasury bill rate plus 2 percent. Rate and 
payment adjustments are made annually. Although the Treasury bill rate 
at the time of consummation is 10 percent, the creditor sets the 
interest rate for one year at 9 percent, instead of 12 percent according 
to the formula. The disclosures should reflect a composite annual 
percentage rate of 11.63 percent based on 9 percent for one year and 12 
percent for 29 years. Reflecting those two rate levels, the payment 
schedule should show 12 payments of $804.62 and 348 payments of 
$1,025.31. The finance charge should be $266,463.32 and the total of 
payments $366,463.32.
    B. Same loan as above, except with a 2 percent rate cap on periodic 
adjustments. The disclosures should reflect a composite annual 
percentage rate of 11.53 percent based on 9 percent for the first year, 
11 percent for the second year, and 12 percent for the remaining 28 
years. Reflecting those three rate levels, the payment schedule should 
show 12 payments of $804.62, 12 payments of $950.09, and 336 payments of 
$1,024.34. The finance charge should be $265,234.76 and the total of 
payments $365,234.76.
    C. Same loan as above, except with a 7\1/2\ percent cap on payment 
adjustments. The disclosures should reflect a composite annual 
percentage rate of 11.64 percent, based on 9 percent for one year and 12 
percent for 29 years. Because of the payment cap, five levels of 
payments should be reflected. The payment schedule should show 12 
payments of $804.62, 12 payments of $864.97, 12 payments of $929.84, 12 
payments of $999.58, and 312 payments of $1,070.04. The finance charge 
should be $277,040.60, and the total of payments $377,040.60.
    vi. A loan in which the initial interest rate is set according to 
the index or formula used for later adjustments but is not set at the 
value of the index or formula at consummation is not a discounted 
variable-rate loan. For example, if a creditor commits to an initial 
rate based on the formula on a date prior to consummation, but the index 
has moved during the period between that time and consummation, a 
creditor should base its disclosures on the initial rate.
    11. Examples of variable-rate transactions. Variable-rate 
transactions include:
     Renewable balloon-payment instruments where the 
creditor is both unconditionally obligated to renew the balloon-payment 
loan at the consumer's option (or is obligated to renew subject to 
conditions within the consumer's control) and has the option of 
increasing the interest rate at the time of renewal. Disclosures must be 
based on the payment amortization (unless the specified term of the 
obligation with renewals is shorter) and on the rate in effect at the 
time of consummation of the transaction. (Examples of conditions within 
a consumer's control include requirements that a consumer be current in 
payments or continue to reside in the mortgaged property. In contrast, 
setting a limit on the rate at which the creditor would be obligated to 
renew or reserving the right to change the credit standards at the time 
of renewal are examples of conditions outside a consumer's control.) If, 
however, a creditor is not obligated to renew as described above, 
disclosures must be based on the term of the balloon-payment loan. 
Disclosures also must be based on the term of the balloon-payment loan 
in balloon-payment instruments in which the legal obligation provides 
that the loan will be renewed by a ``refinancing'' of the obligation, as 
that term is defined by Sec. 226.20(a). If it cannot be determined from 
the legal obligation that the loan will be renewed by a ``refinancing,'' 
disclosures must be based either on the term of the balloon-

[[Page 649]]

payment loan or on the payment amortization, depending on whether the 
creditor is unconditionally obligated to renew the loan as described 
above. (This discussion does not apply to construction loans subject to 
Sec. 226.17(c)(6).)
     ``Shared-equity'' or ``shared-appreciation'' 
mortgages that have a fixed rate of interest and an appreciation share 
based on the consumer's equity in the mortgaged property. The 
appreciation share is payable in a lump sum at a specified time. 
Disclosures must be based on the fixed interest rate. (As discussed in 
the commentary to Sec. 226.2, other types of shared-equity arrangements 
are not considered ``credit'' and are not subject to Regulation Z.)
     Preferred-rate loans where the terms of the legal 
obligation provide that the initial underlying rate is fixed but will 
increase upon the occurrence of some event, such as an employee leaving 
the employ of the creditor, and the note reflects the preferred rate. 
The disclosures are to be based on the preferred rate.
     Graduated-payment mortgages and step-rate 
transactions without a variable-rate feature are not considered 
variable-rate transactions.
     ``Price level adjusted mortgages'' or other 
indexed mortgages that have a fixed rate of interest but provide for 
periodic adjustments to payments and the loan balance to reflect changes 
in an index measuring prices or inflation. Disclosures are to be based 
on the fixed interest rate.
    12. Graduated payment adjustable rate mortgages. These mortgages 
involve both a variable interest rate and scheduled variations in 
payment amounts during the loan term. For example, under these plans, a 
series of graduated payments may be scheduled before rate adjustments 
affect payment amounts, or the initial scheduled payment may remain 
constant for a set period before rate adjustments affect the payment 
amount. In any case, the initial payment amount may be insufficient to 
cover the scheduled interest, causing negative amortization from the 
outset of the transaction. In these transactions, the disclosures should 
treat these features as follows:

     The finance charge includes the amount of 
negative amortization based on the assumption that the rate in effect at 
consummation remains unchanged.
     The amount financed does not include the amount 
of negative amortization.
     As in any variable-rate transaction, the annual 
percentage rate is based on the terms in effect at consummation.
     The schedule of payments discloses the amount of 
any scheduled initial payments followed by an adjusted level of payments 
based on the initial interest rate. Since some mortgage plans contain 
limits on the amount of the payment adjustment, the payment schedule may 
require several different levels of payments, even with the assumption 
that the original interest rate does not increase.

    13. Growth-equity mortgages. Also referred to as payment-escalated 
mortgages, these mortgage plans involve scheduled payment increases to 
prematurely amortize the loan. The initial payment amount is determined 
as for a long-term loan with a fixed interest rate. Payment increases 
are scheduled periodically, based on changes in an index. The larger 
payments result in accelerated amortization of the loan. In disclosing 
these mortgage plans, creditors may either:
     Estimate the amount of payment increases, based 
on the best information reasonably available; or
     Disclose by analogy to the variable-rate 
disclosures in 226.18(f)(1).

(This discussion does not apply to growth-equity mortgages in which the 
amount of payment increases can be accurately determined at the time of 
disclosure. For these mortgages, as for graduated-payment mortgages, 
disclosures should reflect the scheduled increases in payments.)
    14. Reverse mortgages. Reverse mortgages, also known as reverse 
annuity or home equity conversion mortgages, typically involve the 
disbursement of monthly advances to the consumer for a fixed period or 
until the occurrence of an event such as the consumer's death. Repayment 
of the loan (generally a single payment of principal and accrued 
interest) may be required to be made at the end of the disbursements or, 
for example, upon the death of the consumer. In disclosing these 
transactions, creditors must apply the following rules, as applicable:
     If the reverse mortgage has a specified period 
for disbursements but repayment is due only upon the occurrence of a 
future event such as the death of the consumer, the creditor must assume 
that disbursements will be made until they are scheduled to end. The 
creditor must assume repayment will occur when disbursements end (or 
within a period following the final disbursement which is not longer 
than the regular interval between disbursements). This assumption should 
be used even though repayment may occur before or after the 
disbursements are scheduled to end. In such cases, the creditor may 
include a statement such as ``The disclosures assume that you will repay 
the loan at the time our payments to you end. As provided in your 
agreement, your repayment may be required at a different time.''
     If the reverse mortgage has neither a specified 
period for disbursements nor a specified repayment date and these terms 
will be determined solely by reference to future events including the 
consumer's death, the creditor may assume that the disbursements will 
end upon the consumer's death

[[Page 650]]

(estimated by using actuarial tables, for example) and that repayment 
will be required at the same time (or within a period following the date 
of the final disbursement which is not longer than the regular interval 
for disbursements). Alternatively, the creditor may base the disclosures 
upon another future event it estimates will be most likely to occur 
first. (If terms will be determined by reference to future events which 
do not include the consumer's death, the creditor must base the 
disclosures upon the occurance of the event estimated to be most likely 
to occur first.)
     In making the disclosures, the creditor must 
assume that all disbursements and accrued interest will be paid by the 
consumer. For example, if the note has a nonrecourse provision providing 
that the consumer is not obligated for an amount greater than the value 
of the house, the creditor must nonetheless assume that the full amount 
to be disbursed will be repaid. In this case, however, the creditor may 
include a statement such as ``The disclosures assume full repayment of 
the amount advanced plus accrued interest, although the amount you may 
be required to pay is limited by your agreement.''
     Some reverse mortgages provide that some or all 
of the appreciation in the value of the property will be shared between 
the consumer and the creditor. Such loans are considered variable-rate 
mortgages, as described in comment 17(c)(1)-11, and the appreciation 
feature must be disclosed in accordance with Sec. 226.18(f)(1). If the 
reverse mortgage has a variable interest rate, is written for a term 
greater than one year, and is secured by the consumer's principal 
dwelling, the shared appreciation feature must be described under Sec. 
226.19(b)(2)(vii).
    15. Morris Plan transactions. When a deposit account is created for 
the sole purpose of accumulating payments and then is applied to satisfy 
entirely the consumer's obligation in the transaction, each deposit made 
into the account is considered the same as a payment on a loan for 
purposes of making disclosures.
    16. Number of transactions. Creditors have flexibility in handling 
credit extensions that may be viewed as multiple transactions. For 
example:

     When a creditor finances the credit sale of a 
radio and a television on the same day, the creditor may disclose the 
sales as either 1 or 2 credit sale transactions.
     When a creditor finances a loan along with a 
credit sale of health insurance, the creditor may disclose in one of 
several ways: a single credit sale transaction, a single loan 
transaction, or a loan and a credit sale transaction.
     The separate financing of a downpayment in a 
credit sale transaction may, but need not, be disclosed as 2 
transactions (a credit sale and a separate transaction for the financing 
of the downpayment).

    17. Special rules for tax refund anticipation loans. Tax refund 
loans, also known as refund anticipation loans (RALs), are transactions 
in which a creditor will lend up to the amount of a consumer's expected 
tax refund. RAL agreements typically require repayment upon demand, but 
also may provide that repayment is required when the refund is made. The 
agreements also typically provide that if the amount of the refund is 
less than the payment due, the consumer must pay the difference. 
Repayment often is made by a preauthorized offset to a consumer's 
account held with the creditor when the refund has been deposited by 
electronic transfer. Creditors may charge fees for RALs in addition to 
fees for filing the consumer's tax return electronically. In RAL 
transactions subject to the regulation the following special rules 
apply:
     If, under the terms of the legal obligation, 
repayment of the loan is required when the refund is received by the 
consumer (such as by deposit into the consumer's account), the 
disclosures should be based on the creditor's estimate of the time the 
refund will be delivered even if the loan also contains a demand clause. 
The practice of a creditor to demand repayment upon delivery of refunds 
does not determine whether the legal obligation requires that repayment 
be made at that time; this determination must be made according to 
applicable state or other law. (See comment 17(c)(5)-1 for the rules 
regarding disclosures if the loan is payable solely on demand or is 
payable either on demand or on an alternate maturity date.)
     If the consumer is required to repay more than 
the amount borrowed, the difference is a finance charge unless excluded 
under Sec. 226.4. In addition, to the extent that any fees charged in 
connection with the loan (such as for filing the tax return 
electronically) exceed those fees for a comparable cash transaction 
(that is, filing the tax return electronically without a loan), the 
difference must be included in the finance charge.
    18. Pawn Transactions. When, in connection with an extension of 
credit, a consumer pledges or sells an item to a pawnbroker creditor in 
return for a sum of money and retains the right to redeem the item for a 
greater sum (the redemption price) within a specified period of time, 
disclosures are required. In addition to other disclosure requirements 
that may be applicable under Sec. 226.18, for purposes of pawn 
transactions:
    i. The amount financed is the initial sum paid to the consumer. The 
pawnbroker creditor need not provide a separate itemization of the 
amount financed if that entire amount is paid directly to the consumer 
and the disclosed description of the amount financed is

[[Page 651]]

``the amount of cash given directly to you'' or a similar phrase.
    ii. The finance charge is the difference between the initial sum 
paid to the consumer and the redemption price plus any other finance 
charges paid in connection with the transaction. (See Sec. 226.4.)
    iii. The term of the transaction, for calculating the annual 
percentage rate, is the period of time agreed to by the pawnbroker 
creditor and the consumer. The term of the transaction does not include 
a grace period (including any statutory grace period) after the agreed 
redemption date.
    Paragraph 17(c)(2)(i).
    1. Basis for estimates. Disclosures may be estimated when the exact 
information is unknown at the time disclosures are made. Information is 
unknown if it is not reasonably available to the creditor at the time 
the disclosures are made. The ``reasonably available'' standard requires 
that the creditor, acting in good faith, exercise due diligence in 
obtaining information. For example, the creditor must at a minimum 
utilize generally accepted calculation tools, but need not invest in the 
most sophisticated computer program to make a particular type of 
calculation. The creditor normally may rely on the representations of 
other parties in obtaining information. For example, the creditor might 
look to the consumer for the time of consummation, to insurance 
companies for the cost of insurance, or to realtors for taxes and escrow 
fees. The creditor may utilize estimates in making disclosures even 
though the creditor knows that more precise information will be 
available by the point of consummation. However, new disclosures may be 
required under Sec. 226.17(f) or Sec. 226.19.
    2. Labelling estimates. Estimates must be designated as such in the 
segregated disclosures. Even though other disclosures are based on the 
same assumption on which a specific estimated disclosure was based, the 
creditor has some flexibility in labelling the estimates. Generally, 
only the particular disclosure for which the exact information is 
unknown is labelled as an estimate. However, when several disclosures 
are affected because of the unknown information, the creditor has the 
option of labelling either every affected disclosure or only the 
disclosure primarily affected. For example, when the finance charge is 
unknown because the date of consummation is unknown, the creditor must 
label the finance charge as an estimate and may also label as estimates 
the total of payments and the payment schedule. When many disclosures 
are estimates, the creditor may use a general statement, such as ``all 
numerical disclosures except the late payment disclosure are 
estimates,'' as a method to label those disclosures as estimates.
    3. Simple-interest transactions. If consumers do not make timely 
payments in a simple-interest transaction, some of the amounts 
calculated for Truth in Lending disclosures will differ from amounts 
that consumers will actually pay over the term of the transaction. 
Creditors may label disclosures as estimates in these transactions. For 
example, because the finance charge and total of payments may be larger 
than disclosed if consumers make late payments, creditors may label the 
finance charge and total of payments as estimates. On the other hand, 
creditors may choose not to label disclosures as estimates and may base 
all disclosures on the assumption that payments will be made on time, 
disregarding any possible inaccuracies resulting from consumers' payment 
patterns.
    Paragraph 17(c)(2)(ii).
    1. Per-diem interest. This paragraph applies to any numerical amount 
(such as the finance charge, annual percentage rate, or payment amount) 
that is affected by the amount of the per-diem interest charge that will 
be collected at consummation. If the amount of per-diem interest used in 
preparing the disclosures for consummation is based on the information 
known to the creditor at the time the disclosure document is prepared, 
the disclosures are considered accurate under this rule, and affected 
disclosures are also considered accurate, even if the disclosures are 
not labeled as estimates. For example, if the amount of per-diem 
interest used to prepare disclosures is less than the amount of per-diem 
interest charged at consummation, and as a result the finance charge is 
understated by $200, the disclosed finance charge is considered accurate 
even though the understatement is not within the $100 tolerance of Sec. 
226.18(d)(1), and the finance charge was not labeled as an estimate. In 
this example, if in addition to the understatement related to the per-
diem interest, a $90 fee is incorrectly omitted from the finance charge, 
causing it to be understated by a total of $290, the finance charge is 
considered accurate because the $90 fee is within the tolerance in Sec. 
226.18(d)(1).
    Paragraph 17(c)(3)
    1. Minor variations. Section 226.17(c)(3) allows creditors to 
disregard certain factors in calculating and making disclosures. For 
example:

     Creditors may ignore the effects of collecting 
payments in whole cents. Because payments cannot be collected in 
fractional cents, it is often difficult to amortize exactly an 
obligation with equal payments; the amount of the last payment may 
require adjustment to account for the rounding of the other payments to 
whole cents.
     Creditors may base their disclosures on 
calculation tools that assume that all months have an equal number of 
days, even if their practice is to take account of the variations in 
months for purposes of collecting interest. For example, a creditor may 
use a calculation tool based on a 360-day

[[Page 652]]

year, when it in fact collects interest by applying a factor of \1/365\ 
of the annual rate to 365 days. This rule does not, however, authorize 
creditors to ignore, for disclosure purposes, the effects of applying 
\1/360\ of an annual rate to 365 days.
    2. Use of special rules. A creditor may utilize the special rules in 
Sec. 226.17(c)(3) for purposes of calculating and making all 
disclosures for a transaction or may, at its option, use the special 
rules for some disclosures and not others.
    Paragraph 17(c)(4).
    1. Payment schedule irregularities. When one or more payments in a 
transaction differ from the others because of a long or short first 
period, the variations may be ignored in disclosing the payment 
schedule, finance charge, annual percentage rate, and other terms. For 
example:

     A 36-month auto loan might be consummated on June 
8 with payments due on July 1 and the first of each succeeding month. 
The creditor may base its calculations on a payment schedule that 
assumes 36 equal intervals and 36 equal installment payments, even 
though a precise computation would produce slightly different amounts 
because of the shorter first period.
     By contrast, in the same example, if the first 
payment were not scheduled until August 1, the irregular first period 
would exceed the limits in Sec. 226.17(c)(4); the creditor could not 
use the special rule and could not ignore the extra days in the first 
period in calculating its disclosures.

    2. Measuring odd periods. In determining whether a transaction may 
take advantage of the rule in Sec. 226.17(c)(4), the creditor must 
measure the variation against a regular period. For purposes of that 
rule:

     The first period is the period from the date on 
which the finance charge begins to be earned to the date of the first 
payment.
     The term is the period from the date on which the 
finance charge begins to be earned to the date of the final payment.
     The regular period is the most common interval 
between payments in the transaction.

    In transactions involving regular periods that are monthly, 
semimonthly or multiples of a month, the length of the irregular and 
regular periods may be calculated on the basis of either the actual 
number of days or an assumed 30-day month. In other transactions, the 
length of the periods is based on the actual number of days.
    3. Use of special rules. A creditor may utilize the special rules in 
Sec. 226.17(c)(4) for purposes of calculating and making some 
disclosures but may elect not to do so for all of the disclosures. For 
example, the variations may be ignored in calculating and disclosing the 
annual percentage rate but taken into account in calculating and 
disclosing the finance charge and payment schedule.
    4. Relation to prepaid finance charges. Prepaid finance charges, 
including ``odd-days'' or ``per-diem'' interest, paid prior to or at 
closing may not be treated as the first payment on a loan. Thus, 
creditors may not disregard an irregularity in disclosing such finance 
charges.
    Paragraph 17(c)(5).
    1. Demand disclosures. Disclosures for demand obligations are based 
on an assumed 1-year term, unless an alternate maturity date is stated 
in the legal obligation. Whether an alternate maturity date is stated in 
the legal obligation is determined by applicable law. An alternate 
maturity date is not inferred from an informal principal reduction 
agreement or a similar understanding between the parties. However, when 
the note itself specifies a principal reduction schedule (for example, 
``payable on demand or $2,000 plus interest quarterly''), an alternate 
maturity is stated and the disclosures must reflect that date.
    2. Future event as maturity date. An obligation whose maturity date 
is determined solely by a future event, as for example, a loan payable 
only on the sale of property, is not a demand obligation. Because no 
demand feature is contained in the obligation, demand disclosures under 
Sec. 226.18(i) are inapplicable. The disclosures should be based on the 
creditor's estimate of the time at which the specified event will occur, 
and may indicate the basis for the creditor's estimate, as noted in the 
commentary to Sec. 226.17(a).
    3. Demand after stated period. Most demand transactions contain a 
demand feature that may be exercised at any point during the term, but 
certain transactions convert to demand status only after a fixed period. 
For example, in States prohibiting due-on-sale clauses, the Federal 
National Mortgage Association (FNMA) requires mortgages that it 
purchases to include a call option rider that may be exercised after 7 
years. These mortgages are generally written as long-term obligations, 
but contain a demand feature that may be exercised only within a 30-day 
period at 7 years. The disclosures for these transactions should be 
based upon the legally agreed-upon maturity date. Thus, if a mortgage 
containing the 7-year FNMA call option is written as a 20-year 
obligation, the disclosures should be based on the 20-year term, with 
the demand feature disclosed under Sec. 226.18(i).
    4. Balloon mortgages. Balloon payment mortgages, with payments based 
on a long-term amortization schedule and a large final payment due after 
a shorter term, are not demand obligations unless a demand feature is 
specifically contained in the contract. For example, a mortgage with a 
term of 5 years and a payment schedule based on 20 years would not be 
treated as a mortgage with a

[[Page 653]]

demand feature, in the absence of any contractual demand provisions. In 
this type of mortgage, disclosures should be based on the 5-year term.
    Paragraph 17(c)(6).
    1. Series of advances. Section 226.17(c)(6)(i) deals with a series 
of advances under an agreement to extend credit up to a certain amount. 
A creditor may treat all of the advances as a single transaction or 
disclose each advance as a separate transaction. If these advances are 
treated as 1 transaction and the timing and amounts of advances are 
unknown, creditors must make disclosures based on estimates, as provided 
in Sec. 226.17(c)(2). If the advances are disclosed separately, 
disclosures must be provided before each advance occurs, with the 
disclosures for the first advance provided by consummation.
    2. Construction loans. Section 226.17(c)(6)(ii) provides a flexible 
rule for disclosure of construction loans that may be permanently 
financed. These transactions have 2 distinct phases, similar to 2 
separate transactions. The construction loan may be for initial 
construction or subsequent construction, such as rehabilitation or 
remodelling. The construction period usually involves several 
disbursements of funds at times and in amounts that are unknown at the 
beginning of that period, with the consumer paying only accrued interest 
until construction is completed. Unless the obligation is paid at that 
time, the loan then converts to permanent financing in which the loan 
amount is amortized just as in a standard mortgage transaction. Section 
226.17(c)(6)(ii) permits the creditor to give either one combined 
disclosure for both the construction financing and the permanent 
financing, or a separate set of disclosures for the 2 phases. This rule 
is available whether the consumer is initially obligated to accept 
construction financing only or is obligated to accept both construction 
and permanent financing from the outset. If the consumer is obligated on 
both phases and the creditor chooses to give 2 sets of disclosures, both 
sets must be given to the consumer initially, because both transactions 
would be consummated at that time. (appendix D provides a method of 
calculating the annual percentage rate and other disclosures for 
construction loans, which may be used, at the creditor's option, in 
disclosing construction financing.)
    3. Multiple-advance construction loans. Section 226.17(c)(6)(i) and 
(ii) are not mutually exclusive. For example, in a transaction that 
finances the construction of a dwelling that may be permanently financed 
by the same creditor, the construction phase may consist of a series of 
advances under an agreement to extend credit up to a certain amount. In 
these cases, the creditor may disclose the construction phase as either 
1 or more than 1 transaction and also disclose the permanent financing 
as a separate transaction.
    4. Residential mortgage transaction. See the commentary to Sec. 
226.2(a)(24) for a discussion of the effect of Sec. 226.17(c)(6) on the 
definition of a residential mortgage transaction.
    5. Allocation of points. When a creditor utilizes the special rule 
in Sec. 226.17(c)(6) to disclose credit extensions as multiple 
transactions, buyers points or similar amounts imposed on the consumer 
must be allocated for purposes of calculating disclosures. While such 
amounts should not be taken into account more than once in making 
calculations, they may be allocated between the transactions in any 
manner the creditor chooses. For example, if a construction-permanent 
loan is subject to 5 points imposed on the consumer and the creditor 
chooses to disclose the 2 phases separately, the 5 points may be 
allocated entirely to the construction loan, entirely to the permanent 
loan, or divided in any manner between the two. However, the entire 5 
points may not be applied twice, that is, to both the construction and 
the permanent phases.
    17(d) Multiple creditors; multiple consumers.
    1. Multiple creditors. If a credit transaction involves more than 
one creditor:

 The creditors must choose which of them will make the 
disclosures.
 A single, complete set of disclosures must be 
provided, rather than partial disclosures from several creditors.
 All disclosures for the transaction must be given, 
even if the disclosing creditor would not otherwise have been obligated 
to make a particular disclosure. For example, if one of the creditors is 
the seller, the total sale price disclosure under Sec. 226.18(j) must 
be made, even though the disclosing creditor is not the seller.

    2. Multiple consumers. When two consumers are joint obligors with 
primary liability on an obligation, the disclosures may be given to 
either one of them. If one consumer is merely a surety or guarantor, the 
disclosures must be given to the principal debtor. In rescindable 
transactions, however, separate disclosures must be given to each 
consumer who has the right to rescind under Sec. 226.23, although the 
disclosures required under Sec. 226.19(b) need only be provided to the 
consumer who expresses an interest in a variable-rate loan program.
    17(e) Effect of subsequent events.
    1. Events causing inaccuracies. Inaccuracies in disclosures are not 
violations if attributable to events occurring after the disclosures are 
made. For example, when the consumer fails to fulfill a prior commitment 
to keep the collateral insured and the creditor then provides the 
coverage and charges the consumer for it, such a change does not make 
the original disclosures inaccurate. The creditor may, however, be 
required to

[[Page 654]]

make new disclosures under Sec. 226.17(f) or Sec. 226.19 if the events 
occurred between disclosure and consummation or under Sec. 226.20 if 
the events occurred after consummation.
    17(f) Early disclosures.
    1. Change in rate or other terms. Redisclosure is required for 
changes that occur between the time disclosures are made and 
consummation if the annual percentage rate in the consummated 
transaction exceeds the limits prescribed in this section, even if the 
initial disclosures would be considered accurate under the tolerances in 
Sec. 226.18(d) or 226.22(a). To illustrate:
    i. General. A. If disclosures are made in a regular transaction on 
July 1, the transaction is consummated on July 15, and the actual annual 
percentage rate varies by more than \1/8\ of 1 percentage point from the 
disclosed annual percentage rate, the creditor must either redisclose 
the changed terms or furnish a complete set of new disclosures before 
consummation. Redisclosure is required even if the disclosures made on 
July 1 are based on estimates and marked as such.
    B. In a regular transaction, if early disclosures are marked as 
estimates and the disclosed annual percentage rate is within \1/8\ of 1 
percentage point of the rate at consummation, the creditor need not 
redisclose the changed terms (including the annual percentage rate).
    ii. Nonmortgage loan. If disclosures are made on July 1, the 
transaction is consummated on July 15, and the finance charge increased 
by $35 but the disclosed annual percentage rate is within the permitted 
tolerance, the creditor must at least redisclose the changed terms that 
were not marked as estimates. (See Sec. 226.18(d)(2) of this part.)
    iii. Mortgage loan. At the time TILA disclosures are prepared in 
July, the loan closing is scheduled for July 31 and the creditor does 
not plan to collect per-diem interest at consummation. Consummation 
actually occurs on August 5, and per-diem interest for the remainder of 
August is collected as a prepaid finance charge. Assuming there were no 
other changes requiring redisclosure, the creditor may rely on the 
disclosures prepared in July that were accurate when they were prepared. 
However, if the creditor prepares new disclosures in August that will be 
provided at consummation, the new disclosures must take into account the 
amount of the per-diem interest known to the creditor at that time.

    2. Variable rate. The addition of a variable rate feature to the 
credit terms, after early disclosures are given, requires new 
disclosures.
    3. Content of new disclosures. If redisclosure is required, the 
creditor has the option of either providing a complete set of new 
disclosures, or providing disclosures of only the terms that vary from 
those originally disclosed. (See the commentary to Sec. 226.19(a)(2).)
    4. Special rules. In mortgage transactions subject to Sec. 226.19, 
the creditor must redisclose if, between the delivery of the required 
early disclosures and consummation, the annual percentage rate changes 
by more than a stated tolerance. When subsequent events occur after 
consummation, new disclosures are required only if there is a 
refinancing or an assumption within the meaning of Sec. 226.20.
    Paragraph 17(f)(2).
    1. Irregular transactions. For purposes of this paragraph, a 
transaction is deemed to be ``irregular'' according to the definition in 
footnote 46 of Sec. 226.22(a)(3).
    17(g) Mail or telephone orders--delay in disclosures.
    1. Conditions for use. When the creditor receives a mail or 
telephone request for credit, the creditor may delay making the 
disclosures until the first payment is due if the following conditions 
are met:

     The credit request is initiated without face-to-
face or direct telephone solicitation. (Creditors may, however, use the 
special rule when credit requests are solicited by mail.)
     The creditor has supplied the specified credit 
information about its credit terms either to the individual consumer or 
to the public generally. That information may be distributed through 
advertisements, catalogs, brochures, special mailers, or similar means.

    2. Insurance. The location requirements for the insurance 
disclosures under Sec. 226.18(n) permit them to appear apart from the 
other disclosures. Therefore, a creditor may mail an insurance 
authorization to the consumer and then prepare the other disclosures to 
reflect whether or not the authorization is completed by the consumer. 
Creditors may also disclose the insurance cost on a unit-cost basis, if 
the transaction meets the requirements of Sec. 226.17(g).
    17(h) Series of sales--delay in disclosures.
    1. Applicability. The creditor may delay the disclosures for 
individual credit sales in a series of such sales until the first 
payment is due on the current sale, assuming the 2 conditions in this 
paragraph are met. If those conditions are not met, the general timing 
rules in Sec. 266.17(b) apply.
    2. Basis of disclosures. Creditors structuring disclosures for a 
series of sales under Sec. 226.17(h) may compute the total sale price 
as either:

 The cash price for the sale plus that portion of the 
finance charge and other charges applicable to that sale; or
 The cash price for the sale, other charges applicable 
to the sale, and the total finance charge and outstanding principal.

    17(i) Interim student credit extensions.
    1. Definition. Student credit plans involve extensions of credit for 
education purposes

[[Page 655]]

where the repayment amount and schedule are not known at the time credit 
is advanced. These plans include loans made under any student credit 
plan, whether government or private, where the repayment period does not 
begin immediately. (Certain student credit plans that meet this 
definition are exempt from Regulation Z. See Sec. 226.3(f).)
    2. Relation to other sections. For disclosures made before the 
mandatory compliance date of the disclosures required under Sec. Sec. 
226.46, 47, and 48, paragraph 17(i) permitted creditors to omit from the 
disclosures the terms set forth in that paragraph at the time the credit 
was actually extended. However, creditors were required to make complete 
disclosures at the time the creditor and consumer agreed upon the 
repayment schedule for the total obligation. At that time, a new set of 
disclosures of all applicable items under Sec. 226.18 was required. 
Most student credit plans are subject to the requirements in Sec. Sec. 
226.46, 47, and 48. Consequently, for applications for student credit 
plans received on or after the mandatory compliance date of Sec. Sec. 
226.46, 47, and 48, the creditor may not omit from the disclosures the 
terms set forth in paragraph 17(i). Instead, the creditor must comply 
with Sec. Sec. 226.46, 47, and 48, if applicable, or with Sec. Sec. 
226.17 and 226.18.
    3. Basis of disclosures. The disclosures given at the time of 
execution of the interim note should reflect two annual percentage 
rates, one for the interim period and one for the repayment period. The 
use of Sec. 226.17(i) in making disclosures does not, by itself, make 
those disclosures estimates. Any portion of the finance charge, such as 
statutory interest, that is attributable to the interim period and is 
paid by the student (either as a prepaid finance charge, periodically 
during the interim period, in one payment at the end of the interim 
period, or capitalized at the beginning of the repayment period) must be 
reflected in the interim annual percentage rate. Interest subsidies, 
such as payments made by either a state or the Federal government on an 
interim loan, must be excluded in computing the annual percentage rate 
on the interim obligation, when the consumer has no contingent liability 
for payment of those amounts. Any finance charges that are paid 
separately by the student at the outset or withheld from the proceeds of 
the loan are prepaid finance charges. An example of this type of charge 
is the loan guarantee fee. The sum of the prepaid finance charges is 
deducted from the loan proceeds to determine the amount financed and 
included in the calculation of the finance charge.
    4. Consolidation. Consolidation of the interim student credit 
extensions through a renewal note with a set repayment schedule is 
treated as a new transaction with disclosures made as they would be for 
a refinancing. Any unearned portion of the finance charge must be 
reflected in the new finance charge and annual percentage rate, and is 
not added to the new amount financed. In itemizing the amount financed 
under Sec. 226.18(c), the creditor may combine the principal balances 
remaining on the interim extensions at the time of consolidation and 
categorize them as the amount paid on the consumer's account.
    5. Approved student credit forms. See the commentary to appendix H 
regarding disclosure forms approved for use in certain student credit 
programs for which applications were received prior to the mandatory 
compliance date of Sec. Sec. 226.46, 47, and 48.

                               References

    Statute: Sections 121, 122, 124, and 128, and the Higher Education 
Act of 1965 (20 U.S.C. 1071) as amended by Pub. L. 97-35, August 13, 
1981.
    Other sections: Section 226.2 and appendix H.
    Previous regulation: Sections 226.6 and 226.8.
    1981 changes: With few exceptions, the disclosures must now appear 
apart from all other information, and may not be interspersed with that 
information. The disclosures must be based on the legal obligation 
between the parties, rather than any side agreement.
    The assumed maturity period for demand loans has been increased from 
6 months to 1 year. Any alternate maturity date must be stated in the 
legal obligation rather than inferred from the documents, in order to 
form a basis for disclosures.
    In multiple-advance transactions, a series of advances up to a 
certain amount and construction loans that may be permanently financed 
may be disclosed, at the creditor's option, as either a single 
transaction or several transactions. Appendix D is applicable only to 
multiple advances for the construction of a dwelling, whereas its 
predecessor, Interpretation Sec. 226.813, could be used for all 
multiple-advance transactions.
    If disclosures are made before the date of consummation, the 
creditor need not provide updated disclosures at consummation unless the 
annual percentage rate has changed beyond certain limits or a variable 
rate feature has been added.

                 Section 226.18--Content of Disclosures

    1. As applicable. The disclosures required by this section need be 
made only as applicable. Any disclosure not relevant to a particular 
transaction may be eliminated entirely. For example:

     In a loan transaction, the creditor may delete 
disclosure of the total sale price.
     In a credit sale requiring disclosure of the 
total sale price under Sec. 226.18(j), the creditor may delete any 
reference to a downpayment where no downpayment is involved.


[[Page 656]]


    Where the amounts of several numerical disclosures are the same, the 
``as applicable'' language also permits creditors to combine the terms, 
so long as it is done in a clear and conspicuous manner. For example:

     In a transaction in which the amount financed 
equals the total of payments, the creditor may disclose ``amount 
financed/total of payments,'' together with descriptive language, 
followed by a single amount.
     However, if the terms are separated on the 
disclosure statement and separate space is provided for each amount, 
both disclosures must be completed, even though the same amount is 
entered in each space.

    2. Format. See the commentary to Sec. 226.17 and appendix H for a 
discussion of the format to be used in making these disclosures, as well 
as acceptable modifications.
    18(a) Creditor.
    1. Identification of creditor. The creditor making the disclosures 
must be identified. This disclosure may, at the creditor's option, 
appear apart from the other disclosures. Use of the creditor's name is 
sufficient, but the creditor may also include an address and/or 
telephone number. In transactions with multiple creditors, any one of 
them may make the disclosures; the one doing so must be identified.
    18(b) Amount financed.
    1. Disclosure required. The net amount of credit extended must be 
disclosed using the term amount financed and a descriptive explanation 
similar to the phrase in the regulation.
    2. Rebates and loan premiums. In a loan transaction, the creditor 
may offer a premium in the form of cash or merchandise to prospective 
borrowers. Similarly, in a credit sale transaction, a seller's or 
manufacturer's rebate may be offered to prospective purchasers of the 
creditor's goods or services. At the creditor's option, these amounts 
may be either reflected in the Truth in Lending disclosures or 
disregarded in the disclosures. If the creditor chooses to reflect them 
in the Sec. 226.18 disclosures, rather than disregard them, they may be 
taken into account in any manner as part of those disclosures.
    Paragraph 18(b)(1).
    1. Downpayments. A downpayment is defined in Sec. 226.2(a)(18) to 
include, at the creditor's option, certain deferred downpayments or 
pick-up payments. A deferred downpayment that meets the criteria set 
forth in the definition may be treated as part of the downpayment, at 
the creditor's option.

     Deferred downpayments that are not treated as 
part of the downpayment (either because they do not meet the definition 
or because the creditor simply chooses not to treat them as 
downpayments) are included in the amount financed.
     Deferred downpayments that are treated as part of 
the downpayment are not part of the amount financed under Sec. 
226.18(b)(1).

    Paragraph 18(b)(2).
    1. Adding other amounts. Fees or other charges that are not part of 
the finance charge and that are financed rather than paid separately at 
consummation of the transaction are included in the amount financed. 
Typical examples are real estate settlement charges and premiums for 
voluntary credit life and disability insurance excluded from the finance 
charge under Sec. 226.4. This paragraph does not include any amounts 
already accounted for under Sec. 226.18(b)(1), such as taxes, tag and 
title fees, or the costs of accessories or service policies that the 
creditor includes in the cash price.
    Paragraph 18(b)(3).
    1. Prepaid finance charges. Prepaid finance charges that are paid 
separately in cash or by check should be deducted under Sec. 
226.18(b)(3) in calculating the amount financed. To illustrate:
     A consumer applies for a loan of $2,500 with a 
$40 loan fee. The face amount of the note is $2,500 and the consumer 
pays the loan fee separately by cash or check at closing. The principal 
loan amount for purposes of Sec. 226.18(b)(1) is $2,500 and $40 should 
be deducted under Sec. 226.18(b(3), thereby yielding an amount financed 
of $2,460.
    In some instances, as when loan fees are financed by the creditor, 
finance charges are incorporated in the face amount of the note. 
Creditors have the option, when the charges are not add-on or discount 
charges, of determining a principal loan amount under Sec. 226.18(b)(1) 
that either includes or does not include the amount of the finance 
charges. (Thus the principal loan amount may, but need not, be 
determined to equal the face amount of the note.) When the finance 
charges are included in the principal loan amount, they should be 
deducted as prepaid finance charges under Sec. 226.18(b)(3). When the 
finance charges are not included in the principal loan amount, they 
should not be deducted under Sec. 226.18(b)(3). The following examples 
illustrate the application of Sec. 226.18(b) to this type of 
transaction. Each example assumes a loan request of $2,500 with a loan 
fee of $40; the creditor assesses the loan fee by increasing the face 
amount of the note to $2,540.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,540, it has included the loan 
fee in the principal loan amount and should deduct $40 as a prepaid 
finance charge under Sec. 226.18(b)(3), thereby obtaining an amount 
financed of $2,500.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,500, it has not included the 
loan fee in the principal loan amount and should not deduct any amount 
under Sec. 226.18(b)(3), thereby obtaining an amount financed of 
$2,500.

[[Page 657]]

The same rules apply when the creditor does not increase the face amount 
of the note by the amount of the charge but collects the charge by 
withholding it from the amount advanced to the consumer. To illustrate, 
the following examples assume a loan request of $2,500 with a loan fee 
of $40; the creditor prepares a note for $2,500 and advances $2,460 to 
the consumer.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,500, it has included the loan 
fee in the principal loan amount and should deduct $40 as a prepaid 
finance charge under Sec. 226.18(b)(3), thereby obtaining an amount 
financed of $2,460.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,460, it has not included the 
loan fee in the principal loan amount and should not deduct any amount 
under Sec. 226.18(b)(3), thereby obtaining an amount financed of 
$2,460.
Thus in the examples where the creditor derives the net amount of credit 
by determining a principal loan amount that does not include the amount 
of the finance charge, no subtraction is appropriate. Creditors should 
note, however, that although the charges are not subtracted as prepaid 
finance charges in those examples, they are nonetheless finance charges 
and must be treated as such.
    2. Add-on or discount charges. All finance charges must be deducted 
from the amount of credit in calculating the amount financed. If the 
principal loan amount reflects finance charges that meet the definition 
of a prepaid finance charge in Sec. 226.2, those charges are included 
in the Sec. 226.18(b)(1) amount and deducted under Sec. 226.18(b)(3). 
However, if the principal loan amount includes finance charges that do 
not meet the definition of a prepaid finance charge, the Sec. 
226.18(b)(1) amount must exclude those finance charges. The following 
examples illustrate the application of Sec. 226.18(b) to these types of 
transactions. Each example assumes a loan request of $1000 for 1 year, 
subject to a 6 percent precomputed interest rate, with a $10 loan fee 
paid separately at consummation.

     The creditor assesses add-on interest of $60 
which is added to the $1000 in loan proceeds for an obligation with a 
face amount of $1060. The principal for purposes of Sec. 226.18(b)(1) 
is $1000, no amounts are added under Sec. 226.18(b)(2), and the $10 
loan fee is a prepaid finance charge to be deducted under Sec. 
226.18(b)(3). The amount financed is $990.
     The creditor assesses discount interest of $60 
and distributes $940 to the consumer, who is liable for an obligation 
with a face amount of $1000. The principal under Sec. 226.18(b)(1) is 
$940, which results in an amount financed of $930, after deduction of 
the $10 prepaid finance charge under Sec. 226.18(b)(3).
     The creditor assesses $60 in discount interest by 
increasing the face amount of the obligation to $1060, with the consumer 
receiving $1000. The principal under Sec. 226.18(b)(1) is thus $1000 
and the amount financed $990, after deducting the $10 prepaid finance 
charge under Sec. 226.18(b)(3).

    18(c) Itemization of amount financed.
    1. Disclosure required. The creditor has 2 alternatives in complying 
with Sec. 226.18(c):

     The creditor may inform the consumer, on the 
segregated disclosures, that a written itemization of the amount 
financed will be provided on request, furnishing the itemization only if 
the customer in fact requests it.
     The creditor may provide an itemization as a 
matter of course, without notifying the consumer of the right to receive 
it or waiting for a request.

    Whether given as a matter of course or only on request, the 
itemization must be provided at the same time as the other disclosures 
required by Sec. 226.18, although separate from those disclosures.
    2. Additional information. Section 226.18(c) establishes only a 
minimum standard for the material to be included in the itemization of 
the amount financed. Creditors have considerable flexibility in revising 
or supplementing the information listed in Sec. 226.18(c) and shown in 
model form H-3, although no changes are required. The creditor may, for 
example, do one or more of the following:
    i. Include amounts that reflect payments not part of the amount 
financed. For example, escrow items and certain insurance premiums may 
be included, as discussed in the commentary to Sec. 226.18(g).
    ii. Organize the categories in any order. For example, the creditor 
may rearrange the terms in a mathematical progression that depicts the 
arithmetic relationship of the terms.
    iii. Add categories. For example, in a credit sale, the creditor may 
include the cash price and the downpayment. If the credit sale involves 
a trade-in of the consumer's car and an existing lien on that car 
exceeds the value of the trade-in amount, the creditor may disclose the 
consumer's trade-in value, the creditor's payoff of the existing lien, 
and the resulting additional amount financed.
    iv. Further itemize each category. For example, the amount paid 
directly to the consumer may be subdivided into the amount given by 
check and the amount credited to the consumer's savings account.
    v. Label categories with different language from that shown in Sec. 
226.18(c). For example, an amount paid on the consumer's account may be 
revised to specifically identify the account as ``your auto loan with 
us.''
    vi. Delete, leave blank, mark ``N/A'' or otherwise not inapplicable 
categories in the itemization. For example, in a credit sale with no 
prepaid finance charges or amounts paid to others, the amount financed 
may

[[Page 658]]

consist of only the cash price less downpayment. In this case, the 
itemization may be composed of only a single category and all other 
categories may be eliminated.

    3. Amounts appropriate to more than one category. When an amount may 
appropriately be placed in any of several categories and the creditor 
does not wish to revise the categories shown in Sec. 226.18(c), the 
creditor has considerable flexibility in determining where to show the 
amount. For example:

     In a credit sale, the portion of the purchase 
price being financed by the creditor may be viewed as either an amount 
paid to the consumer or an amount paid on the consumer's account.

    4. RESPA transactions. The Real Estate Settlement Procedures Act 
(RESPA) requires creditors to provide a good faith estimate of closing 
costs and a settlement statement listing the amounts paid by the 
consumer. Transactions subject to RESPA are exempt from the requirements 
of Sec. 226.18(c) if the creditor complies with RESPA's requirements 
for a good faith estimate and settlement statement. The itemization of 
the amount financed need not be given, even though the content and 
timing of the good faith estimate and settlement statement under RESPA 
differ from the requirements of Sec. Sec. 226.18(c) and 226.19(a)(2). 
If a creditor chooses to substitute RESPA's settlement statement for the 
itemization when redisclosure is required under Sec. 226.19(a)(2), the 
statement must be delivered to the consumer at or prior to consummation. 
The disclosures required by Sec. Sec. 226.18(c) and 226.19(a)(2) may 
appear on the same page or on the same document as the good faith 
estimate or the settlement statement, so long as the requirements of 
Sec. 226.17(a) are met.
    Paragraph 18(c)(1)(i).
    1. Amounts paid to consumer. This encompasses funds given to the 
consumer in the form of cash or a check, including joint proceeds 
checks, as well as funds placed in an asset account. It may include 
money in an interest-bearing account even if that amount is considered a 
required deposit under Sec. 226.18(r). For example, in a transaction 
with total loan proceeds of $500, the consumer receives a check for $300 
and $200 is required by the creditor to be put into an interest-bearing 
account. Whether or not the $200 is a required deposit, it is part of 
the amount financed. At the creditor's option, it may be broken out and 
labeled in the itemization of the amount financed.
    Paragraph 18(c)(1)(ii).
    1. Amounts credited to consumer's account. The term consumer's 
account refers to an account in the nature of a debt with that creditor. 
It may include, for example, an unpaid balance on a prior loan, a credit 
sale balance or other amounts owing to that creditor. It does not 
include asset accounts of the consumer such as savings or checking 
accounts.
    Paragraph 18(c)(1)(iii).
    1. Amounts paid to others. This includes, for example, tag and title 
fees; amounts paid to insurance companies for insurance premiums; 
security interest fees, and amounts paid to credit bureaus, appraisers 
or public officials. When several types of insurance premiums are 
financed, they may, at the creditor's option, be combined and listed in 
one sum, labeled ``insurance'' or similar term. This includes, but is 
not limited to, different types of insurance premiums paid to one 
company and different types of insurance premiums paid to different 
companies. Except for insurance companies and other categories noted in 
footnote 41, third parties must be identified by name.
    2. Charges added to amounts paid to others. A sum is sometimes added 
to the amount of a fee charged to a consumer for a service provided by a 
third party (such as for an extended warranty or a service contract) 
that is payable in the same amount in comparable cash and credit 
transactions. In the credit transaction, the amount is retained by the 
creditor. Given the flexibility permitted in meeting the requirements of 
the amount financed itemization (see the commentary to Sec. 226.18(c)), 
the creditor in such cases may reflect that the creditor has retained a 
portion of the amount paid to others. For example, the creditor could 
add to the category ``amount paid to others'' language such as ``(we may 
be retaining a portion of this amount).''
    Paragraph 18(c)(1)(iv).
    1. Prepaid finance charge. Prepaid finance charges that are deducted 
under Sec. 226.18(b)(3) must be disclosed under this section. The 
prepaid finance charges must be shown as a total amount but may, at the 
creditor's option, also be further itemized and described. All amounts 
must be reflected in this total, even if portions of the prepaid finance 
charge are also reflected elsewhere. For example, if at consummation the 
creditor collects interim interest of $30 and a credit report fee of 
$10, a total prepaid finance charge of $40 must be shown. At the 
creditor's option, the credit report fee paid to a third party may also 
be shown elsewhere as an amount included in Sec. 226.18(c)(1)(iii). The 
creditor may also further describe the 2 components of the prepaid 
finance charge, although no itemization of this element is required by 
Sec. 226.18(c)(1)(iv).
    2. Prepaid mortgage insurance premiums. RESPA requires creditors to 
give consumers a settlement statement disclosing the costs associated 
with mortgage loan transactions. Included on the settlement statement 
are mortgage insurance premiums collected at settlement, which are 
prepaid finance charges. In calculating the total amount of prepaid 
finance charges, creditors should use

[[Page 659]]

the amount for mortgage insurance listed on the line for mortgage 
insurance on the settlement statement (line 1002 on HUD-1 or HUD 1-A), 
without adjustment, even if the actual amount collected at settlement 
may vary because of RESPA's escrow accounting rules. Figures for 
mortgage insurance disclosed in conformance with RESPA shall be deemed 
to be accurate for purposes of Regulation Z.
    18(d) Finance charge.
    1. Disclosure required. The creditor must disclose the finance 
charge as a dollar amount, using the term finance charge, and must 
include a brief description similar to that in Sec. 226.18(d). The 
creditor may, but need not, further modify the descriptor for variable 
rate transactions with a phrase such as which is subject to change. The 
finance charge must be shown on the disclosures only as a total amount; 
the elements of the finance charge must not be itemized in the 
segregated disclosures, although the regulation does not prohibit their 
itemization elsewhere.
    2. [Reserved]
    18(d)(2) Other credit.
    1. Tolerance. When a finance charge error results in a misstatement 
of the amount financed, or some other dollar amount for which the 
regulation provides no specific tolerance, the misstated disclosure does 
not violate the act or the regulation if the finance charge error is 
within the permissible tolerance under this paragraph.
    18(e) Annual percentage rate.
    1. Disclosure required. The creditor must disclose the cost of the 
credit as an annual rate, using the term annual percentage rate, plus a 
brief descriptive phrase comparable to that used in Sec. 226.18(e). For 
variable rate transactions, the descriptor may be further modified with 
a phrase such as which is subject to change. Under Sec. 226.17(a), the 
terms annual percentage rate and finance charge must be more conspicuous 
than the other required disclosures.
    2. Exception. Footnote 42 provides an exception for certain 
transactions in which no annual percentage rate disclosure is required.
    18(f) Variable rate.
    1. Coverage. The requirements of Sec. 226.18(f) apply to all 
transactions in which the terms of the legal obligation allow the 
creditor to increase the rate originally disclosed to the consumer. It 
includes not only increases in the interest rate but also increases in 
other components, such as the rate of required credit life insurance. 
The provisions, however, do not apply to increases resulting from 
delinquency (including late payment), default, assumption, acceleration 
or transfer of the collateral. Section 226.18(f)(1) applies to variable-
rate transactions that are not secured by the consumer's principal 
dwelling and to those that are secured by the principal dwelling but 
have a term of one year or less. Section 226.18(f)(2) applies to 
variable-rate transactions that are secured by the consumer's principal 
dwelling and have a term greater than one year. Moreover, transactions 
subject to Sec. 226.18(f)(2) are subject to the special early 
disclosure requirements of Sec. 226.19(b). (However, ``shared-equity'' 
or ``shared-appreciation'' mortgages are subject to the disclosure 
requirements of Sec. 226.18(f)(1) and not to the requirements of 
Sec. Sec. 226.18(f)(2) and 226.19(b) regardless of the general coverage 
of those sections.) Creditors are permitted under footnote 43 to 
substitute in any variable-rate transaction the disclosures required 
under Sec. 226.19(b) for those disclosures ordinarily required under 
226.18(f)(1). Creditors who provide variable-rate disclosures under 
Sec. 226.19(b) must comply with all of the requirements of that 
section, including the timing of disclosures, and must also provide the 
disclosures required under Sec. 226.18(f)(2). Creditors utilizing 
footnote 43 may, but need not, also provide disclosures pursuant to 
Sec. 226.20(c). (Substitution of disclosures under Sec. 226.18(f)(1) 
in transactions subject to Sec. 226.19(b) is not permitted under the 
footnote.)
    Paragraph 18(f)(1).
    1. Terms used in disclosure. In describing the variable rate 
feature, the creditor need not use any prescribed terminology. For 
example, limitations and hypothetical examples may be described in terms 
of interest rates rather than annual percentage rates. The model forms 
in appendix H provide examples of ways in which the variable rate 
disclosures may be made.
    2. Conversion feature. In variable-rate transactions with an option 
permitting consumers to convert to a fixed-rate transaction, the 
conversion option is a variable-rate feature that must be disclosed. In 
making disclosures under Sec. 226.18(f)(1), creditors should disclose 
the fact that the rate may increase upon conversion; identify the index 
or formula used to set the fixed rate; and state any limitations on and 
effects of an increase resulting from conversion that differ from other 
variable-rate features. Because Sec. 226.18(f)(1)(iv) requires only one 
hypothetical example (such as an example of the effect on payments 
resulting from changes in the index), a second hypothetical example need 
not be given.
    Paragraph 18(f)(1)(i).
    1. Circumstances. The circumstances under which the rate may 
increase include identification of any index to which the rate is tied, 
as well as any conditions or events on which the increase is contingent.

     When no specific index is used, any identifiable 
factors used to determine whether to increase the rate must be 
disclosed.
     When the increase in the rate is purely 
discretionary, the fact that any increase is within the creditor's 
discretion must be disclosed.

[[Page 660]]

     When the index is internally defined (for 
example, by that creditor's prime rate), the creditor may comply with 
this requirement by either a brief description of that index or a 
statement that any increase is in the discretion of the creditor. An 
externally defined index, however, must be identified.

    Paragraph 18(f)(1)(ii).
    1. Limitations. This includes any maximum imposed on the amount of 
an increase in the rate at any time, as well as any maximum on the total 
increase over the life of the transaction. Except for private education 
loans disclosures, when there are no limitations, the creditor may, but 
need not, disclose that fact, and limitations do not include legal 
limits in the nature of usury or rate ceilings under State or Federal 
statutes or regulations. (See Sec. 226.30 for the rule requiring that a 
maximum interest rate be included in certain variable-rate 
transactions.) For disclosures with respect to private education loan 
disclosures, see comment 47(b)(1)-2.
    Paragraph 18(f)(1)(iii).
    1. Effects. Disclosure of the effect of an increase refers to an 
increase in the number or amount of payments or an increase in the final 
payment. In addition, the creditor may make a brief reference to 
negative amortization that may result from a rate increase. (See the 
commentary to Sec. 226.17(a)(1) regarding directly related 
information.) If the effect cannot be determined, the creditor must 
provide a statement of the possible effects. For example, if the 
exercise of the variable-rate feature may result in either more or 
larger payments, both possibilities must be noted.
    Paragraph 18(f)(1)(iv).
    1. Hypothetical example. The example may, at the creditor's option 
appear apart from the other disclosures. The creditor may provide either 
a standard example that illustrates the terms and conditions of that 
type of credit offered by that creditor or an example that directly 
reflects the terms and conditions of the particular transaction. In 
transactions with more than one variable-rate feature, only one 
hypothetical example need be provided. (See the commentary to section 
226.17(a)(1) regarding disclosure of more than one hypothetical example 
as directly related information.)
    2. Hypothetical example not required. The creditor need not provide 
a hypothetical example in the following transactions with a variable-
rate feature:
     Demand obligations with no alternate maturity 
date.
     Private education loans as defined in Sec. 
226.46(b)(5).
     Multiple-advance construction loans disclosed 
pursuant to appendix D, Part I.
    Paragraph 18(f)(2).
    1. Disclosure required. In variable-rate transactions that have a 
term greater than one year and are secured by the consumer's principal 
dwelling, the creditor must give special early disclosures under Sec. 
226.19(b) in addition to the later disclosures required under Sec. 
226.18(f)(2). The disclosures under Sec. 226.18(f)(2) must state that 
the transaction has a variable-rate feature and that variable-rate 
disclosures have been provided earlier. (See the commentary to Sec. 
226.17(a)(1) regarding the disclosure of certain directly related 
information in addition to the variable-rate disclosures required under 
Sec. 226.18(f)(2).)

    18(g) Payment schedule.
    1. Amounts included in repayment schedule. The repayment schedule 
should reflect all components of the finance charge, not merely the 
portion attributable to interest. A prepaid finance charge, however, 
should not be shown in the repayment schedule as a separate payment. The 
payments may include amounts beyond the amount financed and finance 
charge. For example, the disclosed payments may, at the creditor's 
option, reflect certain insurance premiums where the premiums are not 
part of either the amount financed or the finance charge, as well as 
real estate escrow amounts such as taxes added to the payment in mortage 
transactions.
    2. Deferred downpayments. As discussed in the commentary to Sec. 
226.2(a)(18), deferred downpayments or pick-up payments that meet the 
conditions set forth in the definition of downpayment may be treated as 
part of the downpayment. Even if treated as a downpayment, that amount 
may nevertheless be disclosed as part of the payment schedule, at the 
creditor's option.
    3. Total number of payments. In disclosing the number of payments 
for transactions with more than one payment level, creditors may but 
need not disclose as a single figure the total number of payments for 
all levels. For example, in a transaction calling for 108 payments of 
$350, 240 payments of $335, and 12 payments of $330, the creditor need 
not state that there will be a total of 360 payments.
    4. Timing of payments. i. General rule. Section 226.18(g) requires 
creditors to disclose the timing of payments. To meet this requirement, 
creditors may list all of the payment due dates. They also have the 
option of specifying the ``period of payments'' scheduled to repay the 
obligation. As a general rule, creditors that choose this option must 
disclose the payment intervals or frequency, such as ``monthly''or ``bi-
weekly,'' and the calendar date that the beginning payment is due. For 
example, a creditor may disclose that payments are due ``monthly 
beginning on July 1, 1998.'' This information, when combined with the 
number of payments, is necessary to define the repayment period and 
enable a consumer to determine all of the payment due dates.
    ii. Exception. In a limited number of circumstances, the beginning-
payment date is unknown and difficult to determine at the

[[Page 661]]

time disclosures are made. For example, a consumer may become obligated 
on a credit contract that contemplates the delayed disbursement of funds 
based on a contingent event, such as the completion of home repairs. 
Disclosures may also accompany loan checks that are sent by mail, in 
which case the initial disbursement and repayment dates are solely 
within the consumer's control. In such cases, if the beginning-payment 
date is unknown the creditor may use an estimated date and label the 
disclosure as an estimate pursuant to Sec. 226.17(c). Alternatively, 
the disclosure may refer to the occurrence of a particular event, for 
example, by disclosing that the beginning payment is due ``30 days after 
the first loan disbursement.'' This information also may be included 
with an estimated date to explain the basis for the creditor's estimate. 
See Comment 17(a)(1)-5(iii).
    5. Mortgage insurance. The payment schedule should reflect the 
consumer's mortgage insurance payments until the date on which the 
creditor must automatically terminate coverage under applicable law, 
even though the consumer may have a right to request that the insurance 
be cancelled earlier. The payment schedule must reflect the legal 
obligation, as determined by applicable state or other law. For example, 
assume that under applicable law, mortgage insurance must terminate 
after the 130th scheduled monthly payment, and the creditor collects at 
closing and places in escrow two months of premiums. If, under the legal 
obligation, the creditor will include mortgage insurance premiums in 130 
payments and refund the escrowed payments when the insurance is 
terminated, the payment schedule should reflect 130 premium payments. 
If, under the legal obligation, the creditor will apply the amount 
escrowed to the two final insurance payments, the payment schedule 
should reflect 128 monthly premium payments. (For assumptions in 
calculating a payment schedule that includes mortgage insurance that 
must be automatically terminated, see comments 17(c)(1)-8 and 17(c)(1)-
10.)
    6. Mortgage transactions. Section 226.18(g) applies only to closed-
end transactions other than transactions that are subject to Sec. 
226.18(s). Section 226.18(s) applies to closed-end transactions secured 
by real property or a dwelling. Thus, if a closed-end consumer credit 
transaction is secured by real property or a dwelling, the creditor 
discloses an interest rate and payment summary table in accordance with 
Sec. 226.18(s) and does not observe the requirements of Sec. 
226.18(g). On the other hand, if a closed-end consumer credit 
transaction is not secured by real property or a dwelling, the creditor 
discloses a payment schedule in accordance with Sec. 226.18(g) and does 
not observe the requirements of Sec. 226.18(s).
    Paragraph 18(g)(1).
    1. Demand obligations. In demand obligations with no alternate 
maturity date, the creditor has the option of disclosing only the due 
dates or periods of scheduled interest payments in the first year (for 
example, ``interest payable quarterly'' or ``interest due the first of 
each month''). The amounts of the interest payments need not be shown.
    Paragraph 18(g)(2).
    1. Abbreviated disclosure. The creditor may disclose an abbreviated 
payment schedule when the amount of each regularly scheduled payment 
(other than the first or last payment) includes an equal amount to be 
applied on principal and a finance charge computed by application of a 
rate to the decreasing unpaid balance. This option is also available 
when mortgage-guarantee insurance premiums, paid either monthly or 
annually, cause variations in the amount of the scheduled payments, 
reflecting the continual decrease or increase in the premium due. In 
addition, in transactions where payments vary because interest and 
principal are paid at different intervals, the two series of payments 
may be disclosed separately and the abbreviated payment schedule may be 
used for the interest payments. For example, in transactions with fixed 
quarterly principal payments and monthly interest payments based on the 
outstanding principal balance, the amount of the interest payments will 
change quarterly as principal declines. In such cases the creditor may 
treat the interest and principal payments as two separate series of 
payments, separately disclosing the number, amount, and due dates of 
principal payments, and, using the abbreviated payment schedule, the 
number, amount, and due dates of interest payments. This option may be 
used when interest and principal are scheduled to be paid on the same 
date of the month as well as on different dates of the month. The 
creditor using this alternative must disclose the dollar amount of the 
highest and lowest payments and make reference to the variation in 
payments.
    2. Combined payment schedule disclosures. Creditors may combine the 
option in this paragraph with the general payment schedule requirements 
in transactions where only a portion of the payment schedule meets the 
conditions of Sec. 226.18(g)(2). For example, in a graduated payment 
mortgage where payments rise sharply for 5 years and then decline over 
the next 25 years because of decreasing mortgage insurance premiums, the 
first 5 years would be disclosed under the general rule in Sec. 
226.18(g) and the next 25 years according to the abbreviated schedule in 
Sec. 226.18(g)(2).
    3. Effect on other disclosures. Section 226.18(g)(2) applies only to 
the payment schedule disclosure. The actual amounts of payments must be 
taken into account in calculating and disclosing the finance charge and 
the annual percentage rate.

[[Page 662]]

    Paragraph 18(h) Total of payments.
    1. Disclosure required. The total of payments must be disclosed 
using that term, along with a descriptive phrase similar to the one in 
the regulation. The descriptive explanation may be revised to reflect a 
variable rate feature with a brief phrase such as ``based on the current 
annual percentage rate which may change.''
    2. Calculation of total of payments. The total of payments is the 
sum of the payments disclosed under Sec. 226.18(g). For example, if the 
creditor disclosed a deferred portion of the downpayment as part of the 
payment schedule, that payment must be reflected in the total disclosed 
under this paragraph. To calculate the total of payments amount for 
transactions subject to Sec. 226.18(s), creditors should use the rules 
in Sec. 226.18(g) and associated commentary and, for adjustable-rate 
transactions, comments 17(c)(1)-8 and -10.
    3. Exception. Footnote 44 permits creditors to omit disclosure of 
the total of payments in single-payment transactions. This exception 
does not apply to a transaction calling for a single payment of 
principal combined with periodic payments of interest.
    4. Demand obligations. In demand obligations with no alternate 
maturity date, the creditor may omit disclosure of payment amounts under 
Sec. 226.18(g)(1). In those transactions, the creditor need not 
disclose the total of payments.
    Paragraph 18(i) Demand feature.
    1. Disclosure requirements. The disclosure requirements of this 
provision apply not only to transactions payable on demand from the 
outset, but also to transactions that are not payable on demand at the 
time of consummation but convert to a demand status after a stated 
period. In demand obligations in which the disclosures are based on an 
assumed maturity of 1 year under Sec. 226.17(c)(5), that fact must also 
be stated. Appendix H contains model clauses that may be used in making 
this disclosure.
    2. Covered demand features. The type of demand feature triggering 
the disclosures required by Sec. 226.18(i) includes only those demand 
features contemplated by the parties as part of the legal obligation. 
For example, this provision does not apply to transactions that covert 
to a demand status as a result of the consumer's default. A due-on-sale 
clause is not considered a demand feature. A creditor may, but need not, 
treat its contractual right to demand payment of a loan made to its 
executive officers as a demand feature to the extent that the 
contractual right is required by Regulation O (12 CFR 215.5) or other 
federal law.
    3. Relationship to payment schedule disclosures. As provided in 
Sec. 226.18(g)(1), in demand obligations with no alternate maturity 
date, the creditor need only disclose the due dates or payment periods 
of any scheduled interest payments for the first year. If the demand 
obligation states an alternate maturity, however, the disclosed payment 
schedule must reflect that stated term; the special rule in Sec. 
226.18(g)(1) is not available.
    Paragraph 18(j) Total sale price.
    1. Disclosure required. In a credit sale transaction, the total sale 
price must be disclosed using that term, along with a descriptive 
explanation similar to the one in the regulation. For variable rate 
transactions, the descriptive phrase may, at the creditor's option, be 
modified to reflect the variable rate feature. For example, the 
descriptor may read: ``The total cost of your purchase on credit, which 
is subject to change, including your downpayment of * * *.'' The 
reference to a downpayment may be eliminated in transactions calling for 
no downpayment.
    2. Calculation of total sale price. The figure to be disclosed is 
the sum of the cash price, other charges added under Sec. 226.18(b)(2), 
and the finance charge disclosed under Sec. 226.18(d).
    3. Effect of existing liens. When a credit sale transaction involves 
property that is being used as a trade-in (an automobile, for example) 
and that has a lien exceeding the value of the trade-in, the total sale 
price is affected by the amount of any cash provided. (See comment 
2(a)(18)-3.) To illustrate, assume a consumer finances the purchase of 
an automobile with a cash price of $20,000. Another vehicle used as a 
trade-in has a value of $8,000 but has an existing lien of $10,000, 
leaving a $2,000 deficit that the consumer must finance.
    i. If the consumer pays $1,500 in cash, the creditor may apply the 
cash first to the lien, leaving a $500 deficit, and reflect a 
downpayment of $0. The total sale price would include the $20,000 cash 
price, an additional $500 financed under Sec. 226.18(b)(2), and the 
amount of the finance charge. Alternatively, the creditor may reflect a 
downpayment of $1,500 and finance the $2,000 deficit. In that case, the 
total sale price would include the sum of the $20,000 cash price, the 
$2,000 lien payoff amount as an additional amount financed, and the 
amount of the finance charge.
    ii. If the consumer pays $3,000 in cash, the creditor may apply the 
cash first to extinguish the lien and reflect the remainder as a 
downpayment of $1,000. The total sale price would reflect the $20,000 
cash price and the amount of the finance charge. (The cash payment 
extinguishes the trade-in deficit and no charges are added under Sec. 
226.18(b)(2).) Alternatively, the creditor may elect to reflect a 
downpayment of $3,000 and finance the $2,000 deficit. In that case, the 
total sale price would include the sum of the $20,000 cash price, the 
$2,000 lien payoff amount as an additional amount financed, and the 
amount of the finance charge.
    Paragraph 18(k) Prepayment.
    1. Disclosure required. The creditor must give a definitive 
statement of whether or not

[[Page 663]]

a penalty will be imposed or a rebate will be given.

     The fact that no penalty will be imposed may not 
simply be inferred from the absence of a penalty disclosure; the 
creditor must indicate that prepayment will not result in a penalty.
     If a penalty or refund is possible for one type 
of prepayment, even though not for all, a positive disclosure is 
required. This applies to any type of prepayment, whether voluntary or 
involuntary as in the case of prepayments resulting from acceleration.
     Any difference in rebate or penalty policy, 
depending on whether prepayment is voluntary or not, must not be 
disclosed with the segregated disclosures.

    2. Rebate-penalty disclosure. A single transaction may involve both 
a precomputed finance charge and a finance charge computed by 
application of a rate to the unpaid balance (for example, mortgages with 
mortgage-guarantee insurance). In these cases, disclosures about both 
prepayment rebates and penalties are required. Sample form H-15 in 
appendix H illustrates a mortgage transaction in which both rebate and 
penalty disclosures are necessary.
    3. Prepaid finance charge. The existence of a prepaid finance charge 
in a transaction does not, by itself, require a disclosure under Sec. 
226.18(k). A prepaid finance charge is not considered a penalty under 
Sec. 226.18(k)(1), nor does it require a disclosure under Sec. 
226.18(k)(2). At its option, however, a creditor may consider a prepaid 
finance charge to be under Sec. 226.18(k)(2). If a disclosure is made 
under Sec. 226.18(k)(2) with respect to a prepaid finance charge or 
other finance charge, the creditor may further identify that finance 
charge. For example, the disclosure may state that the borrower ``will 
not be entitled to a refund of the prepaid finance charge'' or some 
other term that describes the finance charge.
    Paragraph 18(k)(1).

                           Paragraph 18(k)(1)

    1. Penalty. This applies only to those transactions in which the 
interest calculation takes account of all scheduled reductions in 
principal, as well as transactions in which interest calculations are 
made daily. The term penalty as used here encompasses only those charges 
that are assessed strictly because of the prepayment in full of a 
simple-interest obligation, as an addition to all other amounts. Items 
which are penalties include, for example:
     Interest charges for any period after prepayment 
in full is made. (See the commentary to Sec. 226.17(a)(1) regarding 
disclosure of interest charges assessed for periods after prepayment in 
full as directly related information.)
     A minimum finance charge in a simple-interest 
transaction. (See the commentary to Sec. 226.17(a)(1) regarding the 
disclosure of a minimum finance charge as directly related information.) 
Items which are not penalties include, for example, loan guarantee fees.
    Paragraph 18(k)(2).
    1. Rebate of finance charge. This applies to any finance charges 
that do not take account of each reduction in the principal balance of 
an obligation. This category includes, for example:

 Precomputed finance charges such as add-on charges.
 Charges that take account of some but not all 
reductions in principal, such as mortgage guarantee insurance assessed 
on the basis of an annual declining balance, when the principal is 
reduced on a monthly basis.

No description of the method of computing earned or unearned finance 
charges is required or permitted as part of the segregated disclosures 
under this section.
    Paragraph 18(l) Late payment.
    1. Definition. This paragraph requires a disclosure only if charges 
are added to individual delinquent installments by a creditor who 
otherwise considers the transaction ongoing on its original terms. Late 
payment charges do not include:

     The right of acceleration.
     Fees imposed for actual collection costs, such as 
repossession charges or attorney's fees.
     Deferral and extension charges.
     The continued accrual of simple interest at the 
contract rate after the payment due date. However, an increase in the 
interest rate is a late payment charge to the extent of the increase.

    2. Content of disclosure. Many state laws authorize the calculation 
of late charges on the basis of either a percentage or a specified 
dollar amount, and permit imposition of the lesser or greater of the 2 
charges. The disclosure made under Sec. 226.18(l) may reflect this 
alternative. For example, stating that the charge in the event of a late 
payment is 5% of the late amount, not to exceed $5.00, is sufficient. 
Many creditors also permit a grace period during which no late charge 
will be assessed; this fact may be disclosed as directly related 
information. (See the commentary to Sec. 226.17(a).)
    Paragraph 18(m) Security interest.
    1. Purchase money transactions. When the collateral is the item 
purchased as part of, or with the proceeds of, the credit transaction, 
section 226.18(m) requires only a general identification such as ``the 
property purchased in this transaction.'' However, the creditor may 
identify the property by item or type instead of identifying it more 
generally with a phrase such as ``the property purchased in this 
transaction.'' For example,

[[Page 664]]

a creditor may identify collateral as ``a motor vehicle,'' or as ``the 
property purchased in this transaction.'' Any transaction in which the 
credit is being used to purchase the collateral is considered a purchase 
money transaction and the abbreviated identification may be used, 
whether the obligation is treated as a loan or a credit sale.
    2. Nonpurchase money transactions. In nonpurchase money 
transactions, the property subject to the security interest must be 
identified by item or type. This disclosure is satisfied by a general 
disclosure of the category of property subject to the security interest, 
such as ``motor vehicles,'' ``securities,'' ``certain household items,'' 
or ``household goods.'' (Creditors should be aware, however, that the 
Federal credit practices rules, as well as some state laws, prohibit 
certain security interests in household goods.) At the creditor's 
option, however, a more precise identification of the property or goods 
may be provided.
    3. Mixed collateral. In some transactions in which the credit is 
used to purchase the collateral, the creditor may also take other 
property of the consumer as security. In those cases, a combined 
disclosure must be provided, consisting of an identification of the 
purchase money collateral consistent with comment 18(m)-1 and a specific 
identification of the other collateral consistent with comment 18(m)-2.
    4. After-acquired property. An after-acquired property clause is not 
a security interest to be disclosed under Sec. 226.18(m).
    5. Spreader clause. The fact that collateral for pre-existing credit 
with the institution is being used to secure the present obligation 
constitutes a security interest and must be disclosed. (Such security 
interests may be known as ``spreader'' or ``dragnet'' clauses, or as 
``cross-collateralization'' clauses.) A specific identification of that 
collateral is unnecessary but a reminder of the interest arising from 
the prior indebtedness is required. The disclosure may be made by using 
language such as ``collateral securing other loans with us may also 
secure this loan.'' At the creditor's option, a more specific 
description of the property involved may be given.
    6. Terms used in disclosure. No specified terminology is required in 
disclosing a security interest. Although the disclosure may, at the 
creditor's option, use the term security interest, the creditor may 
designate its interest by using, for example, pledge, lien, or mortgage.
    7. Collateral from third party. In certain transactions, the 
consumer's obligation may be secured by collateral belonging to a third 
party. For example, a loan to a student may be secured by an interest in 
the property of the student's parents. In such cases, the security 
interest is taken in connection with the transaction and must be 
disclosed, even though the property encumbered is owned by someone other 
than the consumer.
    18(n) Insurance and debt cancellation.
    1. Location. This disclosure may, at the creditor's option, appear 
apart from the other disclosures. It may appear with any other 
information, including the amount financed itemization, any information 
prescribed by state law, or other supplementary material. When this 
information is disclosed with the other segregated disclosures, however, 
no additional explanatory material may be included.
    2. Debt cancellation. Creditors may use the model credit insurance 
disclosures only if the debt cancellation coverage constitutes insurance 
under state law. Otherwise, they may provide a parallel disclosure that 
refers to debt cancellation coverage.
    Paragraph 18(o) Certain security interest charges.
    1. Format. No special format is required for these disclosures; 
under Sec. 226.4(e), taxes and fees paid to government officials with 
respect to a security interest may be aggregated, or may be broken down 
by individual charge. For example, the disclosure could be labelled 
``filing fees and taxes'' and all funds disbursed for such purposes may 
be aggregated in a single disclosure. This disclosure may appear, at the 
creditor's option, apart from the other required disclosures. The 
inclusion of this information on a statement required under the Real 
Estate Settlement Procedures Act is sufficient disclosure for purposes 
of Truth in Lending.
    Paragraph 18(p) Contract reference.
    1. Content. Creditors may substitute, for the phrase ``appropriate 
contract document,'' a reference to specific transaction documents in 
which the additional information is found, such as ``promissory note'' 
or ``retail installment sale contract.'' A creditor may, at its option, 
delete inapplicable items in the contract reference, as for example when 
the contract documents contain no information regarding the right of 
acceleration.
    Paragraph 18(q) Assumption policy.
    1. Policy statement. In many mortgages, the creditor cannot 
determine, at the time disclosure must be made, whether a loan may be 
assumable at a future date on its original terms. For example, the 
assumption clause commonly used in mortgages sold to the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation conditions an assumption on a variety of factors such as the 
creditworthiness of the subsequent borrower, the potential for 
impairment of the lender's security, and execution of an assumption 
agreement by the subsequent borrower. In cases where uncertainty exists 
as to the future assumability of a mortgage, the disclosure under Sec. 
226.18(q) should reflect that fact. In making disclosures in such cases, 
the creditor may use

[[Page 665]]

phrases such as ``subject to conditions,'' ``under certain 
circumstances,'' or ``depending on future conditions.'' The creditor may 
provide a brief reference to more specific criteria such as a due-on-
sale clause, although a complete explanation of all conditions is not 
appropriate. For example, the disclosure may state, ``Someone buying 
your home may be allowed to assume the mortgage on its original terms, 
subject to certain conditions, such as payment of an assumption fee.'' 
See comment 17(a)(1)-5 for an example for a reference to a due-on-sale 
clause.
    2. Original terms. The phrase original terms for purposes of Sec. 
226.18(q) does not preclude the imposition of an assumption fee, but a 
modification of the basic credit agreement, such as a change in the 
contract interest rate, represents different terms.
    Paragraph 18(r) Required deposit.
    1. Disclosure required. The creditor must inform the consumer of the 
existence of a required deposit. (appendix H provides a model clause 
that may be used in making that disclosure.) Footnote 45 describes 3 
types of deposits that need not be considered required deposits. Use of 
the phrase ``need not'' permits creditors to include the disclosure even 
in cases where there is doubt as to whether the deposit constitutes a 
required deposit.
    2. Pledged account mortgages. In these transactions, a consumer 
pledges as collateral funds that the consumer deposits in an account 
held by the creditor. The creditor withdraws sums from that account to 
supplement the consumer's periodic payments. Creditors may treat these 
pledged accounts as required deposits or they may treat them as consumer 
buydowns in accordance with the commentary to Sec. 226.17(c)(1).
    3. Escrow accounts. The escrow exception in footnote 45 applies, for 
example, to accounts for such items as maintenance fees, repairs, or 
improvements, whether in a realty or a nonrealty transaction. (See the 
commentary to Sec. 226.17(c)(1) regarding the use of escrow accounts in 
consumer buydown transactions.)
    4. Interest-bearing accounts. When a deposit earns at least 5 
percent interest per year, no disclosure is required under Sec. 
226.18(r). This exception applies whether the deposit is held by the 
creditor or by a third party.
    5. Morris Plan transactions. A deposit under a Morris Plan, in which 
a deposit account is created for the sole purpose of accumulating 
payments and this is applied to satisfy entirely the consumer's 
obligation in the transaction, is not a required deposit.
    6. Examples of amounts excluded. The following are among the types 
of deposits that need not be treated as required deposits:

     Requirement that a borrower be a customer or a 
member even if that involves a fee or a minimum balance.
     Required property insurance escrow on a mobile 
home transaction.
     Refund of interest when the obligation is paid in 
full.
     Deposits that are immediately available to the 
consumer.
     Funds deposited with the creditor to be disbursed 
(for example, for construction) before the loan proceeds are advanced.
     Escrow of condominium fees.
     Escrow of loan proceeds to be released when the 
repairs are completed.

                               References

    Statute: Section 128, the Garn-St Germain Depository Institutions 
Act of 1982 (Pub. L. 97-320) and the Real Estate Settlement Procedures 
Act (12 U.S.C. 2602).
    Other sections: Sections 226.2, 226.17, and appendix H.
    Other regulations: 12 CFR 545.6-2(a) and 12 CFR Part 29.
    Previous regulation: Sections 226.4 and 226.8.
    1981 changes: Five of the required disclosures must be explained to 
the consumer in a manner similar to the descriptive phrases shown in the 
regulation. A written itemization of the amount financed need not be 
provided unless the consumer requests it. The finance charge must be 
provided in all transactions, including real estate transactions, but 
must be shown only as a total amount. The disclosed finance charge is 
considered accurate if it is within a specified range.
    The variable rate hypothetical is required in all variable rate 
transactions and may be either general or transaction-specific. The 
penalty and rebate disclosures in the event of prepayment have been 
modified and combined. The requirement of an explanation of how the 
rebates or penalties are computed has been eliminated. The late payment 
disclosure has also been narrowed to include only charges imposed before 
maturity for late payments.
    The information required in the security interest disclosure has 
been decreased by the deletion of the type of security interest and a 
reduction in the property description requirement. The disclosure of the 
required deposit is limited to a statement that the annual percentage 
rate does not reflect the required deposit; the presence of a required 
deposit has no effect on the annual percentage rate.
    Two disclosure requirements have been added: A reference to the 
contract documents for additional information and, in a residential 
mortgage transaction, a statement of the creditor's assumption policy.
    18(s) Interest rate and payment summary for mortgage transactions.
    1. In general. Section 226.18(s) prescribes format and content for 
disclosure of interest rates and monthly (or other periodic) payments 
for mortgage loans. The information in Sec. 226.18(s)(2)-(4) is 
required to be in the form of a table, except as otherwise provided,

[[Page 666]]

with headings and format substantially similar to Model Clause H-4(E), 
H-4(F), H-4(G), or H-4(H) in Appendix H to this part. A disclosure that 
does not include the shading shown in a model clause but otherwise 
follows the model clause's headings and format is substantially similar 
to that model clause. Where Sec. 226.18(s)(2)-(4) or the applicable 
model clause requires that a column or row of the table be labeled using 
the word ``monthly'' but the periodic payments are not due monthly, the 
creditor should use the appropriate term, such as ``bi-weekly'' or 
``quarterly.'' In all cases, the table should have no more than five 
vertical columns corresponding to applicable interest rates at various 
times during the loan's term; corresponding payments would be shown in 
horizontal rows. Certain loan types and terms are defined for purposes 
of Sec. 226.18(s) in Sec. 226.18(s)(7).
    2. Amortizing loans. Loans described as amortizing in Sec. Sec. 
226.18(s)(2)(i) and 226.18(s)(3) include interest-only loans if they do 
not also permit negative amortization. (For rules relating to loans with 
balloon payments, see Sec. 226.18(s)(5)). If an amortizing loan is an 
adjustable-rate mortgage with an introductory rate (less than the fully-
indexed rate), creditors must provide a special explanation of 
introductory rates. See Sec. 226.18(s)(2)(iii).
    3. Negative amortization. For negative amortization loans, creditors 
must follow the rules in Sec. Sec. 226.18(s)(2)(ii) and 226.18(s)(4) in 
disclosing interest rates and monthly payments. Loans with negative 
amortization also require special explanatory disclosures about rates 
and payments. See Sec. 226.18(s)(6). Loans with negative amortization 
include ``payment option'' loans, in which the consumer is permitted to 
make minimum payments that will cover only some of the interest accruing 
each month. See also comment 17(c)(1)-12, regarding graduated-payment 
adjustable-rate mortgages.
    18(s)(2) Interest rates.
    18(s)(2)(i) Amortizing loans.
    Paragraph 18(s)(2)(i)(A).
    1. Fixed rate loans--payment increases. Although the interest rate 
will not change after consummation for a fixed-rate loan, some fixed-
rate loans may have periodic payments that increase after consummation. 
For example, the terms of the legal obligation may permit the consumer 
to make interest-only payments for a specified period such as the first 
five years after consummation. In such cases, the creditor must include 
the increased payment under Sec. 226.18(s)(3)(ii)(B) in the payment 
row, and must show the interest rate in the column for that payment, 
even though the rate has not changed since consummation. See also 
comment 17(c)(1)-13, regarding growth equity mortgages.
    Paragraph 18(s)(2)(i)(B).
    1. Adjustable-rate mortgages and step-rate mortgages. Creditors must 
disclose more than one interest rate for adjustable-rate mortgages and 
step-rate mortgages, in accordance with Sec. 226.18(s)(2)(i)(B). 
Creditors must assume that an adjustable-rate mortgage's interest rate 
will increase after consummation as rapidly as possible, taking into 
account the terms of the legal obligation.
    2. Maximum interest rate during first five years--adjustable-rate 
mortgages and step-rate mortgages. The creditor must disclose the 
maximum rate that could apply during the first five years after 
consummation. If there are no interest rate caps other than the maximum 
rate required under Sec. 226.30, then the creditor should disclose only 
the rate at consummation and the maximum rate. Such a table would have 
only two columns.
    i. For an adjustable-rate mortgage, the creditor must take into 
account any interest rate caps when disclosing the maximum interest rate 
during the first five years. The creditor must also disclose the 
earliest date on which that adjustment may occur.
    ii. If the transaction is a step-rate mortgage, the creditor should 
disclose the rate that will apply after consummation. For example, the 
legal obligation may provide that the rate is 6 percent for the first 
two years following consummation, and then increases to 7 percent for at 
least the next three years. The creditor should disclose the maximum 
rate during the first five years as 7 percent and the date on which the 
rate is scheduled to increase to 7 percent.
    3. Maximum interest rate at any time. The creditor must disclose the 
maximum rate that could apply at any time during the term of the loan 
and the earliest date on which the maximum rate could apply.
    i. For an adjustable-rate mortgage, the creditor must take into 
account any interest rate caps in disclosing the maximum interest rate. 
For example, if the legal obligation provides that at each annual 
adjustment the rate may increase by no more than 2 percentage points, 
the creditor must take this limit into account in determining the 
earliest date on which the maximum possible rate may be reached.
    ii. For a step-rate mortgage, the creditor should disclose the 
highest rate that could apply under the terms of the legal obligation 
and the date on which that rate will first apply.
    Paragraph 18(s)(2)(i)(C).
    1. Payment increases. For some loans, the payment may increase 
following consummation for reasons unrelated to an interest rate 
adjustment. For example, an adjustable-rate mortgage may have an 
introductory fixed-rate for the first five years following consummation 
and permit the borrower to make interest-only payments for the first 
three years. The disclosure requirement of Sec. 226.18(s)(2)(i)(C) 
applies to all amortizing

[[Page 667]]

loans, including interest-only loans, if the consumer's payment can 
increase in the manner described in Sec. 226.18(s)(3)(i)(B), even if it 
is not the type of loan covered by Sec. 226.18(s)(3)(i). Thus, Sec. 
226.18(s)(2)(i)(C) requires that the creditor disclose the interest rate 
that corresponds to the first payment that includes principal as well as 
interest, even though the interest rate will not adjust at that time. In 
such cases, if the loan is an interest-only loan, the creditor also must 
disclose the corresponding periodic payment pursuant to Sec. 
226.18(s)(3)(ii). The table would show, from left to right: The interest 
rate and payment at consummation with the payment itemized to show that 
the payment is being applied to interest only; the interest rate and 
payment when the interest-only option ends; the maximum interest rate 
and payment during the first five years; and the maximum possible 
interest rate and payment. The disclosure requirements of Sec. 
226.18(s)(2)(i)(C) do not apply to minor payment variations resulting 
solely from the fact that months have different numbers of days.
    18(s)(2)(ii) Negative amortization loans.
    1. Rate at consummation. In all cases the interest rate in effect at 
consummation must be disclosed, even if it will apply only for a short 
period such as one month.
    2. Rates for adjustable-rate mortgages. The creditor must assume 
that interest rates rise as quickly as possible after consummation, in 
accordance with any interest rate caps under the legal obligation. For 
adjustable-rate mortgages with no rate caps except a life-time maximum, 
creditors must assume that the interest rate reaches the maximum at the 
first adjustment. For example, assume that the legal obligation provides 
for an interest rate at consummation of 1.5 percent. One month after 
consummation, the interest rate adjusts and will adjust monthly 
thereafter, according to changes in the index. The consumer may make 
payments that cover only part of the interest accrued each month, until 
the date the principal balance reaches 115 percent of its original 
balance, or until the end of the fifth year after consummation, 
whichever comes first. The maximum possible rate is 10.5 percent. No 
other limits on interest rates apply. The minimum required payment 
adjusts each year, and may increase by no more than 7.5 percent over the 
previous year's payment. The creditor should disclose the following 
rates and the dates when they are scheduled to occur: A rate of 1.5 
percent for the first month following consummation and the minimum 
payment; a rate of 10.5 percent, and the corresponding minimum payment 
taking into account the 7.5 percent limit on payment increases, at the 
beginning of the second year; and a rate of 10.5 percent and the 
corresponding minimum payment taking into account the 7.5 percent 
payment increase limit, at the beginning of the third year. The creditor 
also must disclose the rate of 10.5 percent, the fully amortizing 
payment, and the date on which the consumer must first make such a 
payment under the terms of the legal obligation.
    18(s)(2)(iii) Introductory rate disclosure for amortizing 
adjustable-rate mortgage.
    1. Introductory rate. In some adjustable-rate mortgages, creditors 
may set an initial interest rate that is lower than the fully-indexed 
rate at consummation. For amortizing loans with an introductory rate, 
creditors must disclose the information required in Sec. 
226.18(s)(2)(iii) directly below the table.
    Paragraph 18(s)(2)(iii)(B).
    1. Place in sequence. ``Designation of the place in sequence'' 
refers to identifying the month or year, as applicable, of the change in 
the rate resulting from the expiration of an introductory rate by its 
place in the sequence of months or years, as applicable, of the 
transaction's term. For example, if a transaction has a discounted rate 
for the first three years, Sec. 226.18(s)(2)(iii)(B) requires a 
statement such as, ``In the fourth year, even if market rates do not 
change, this rate will increase to ----%.''
    Paragraph 18(s)(2)(iii)(C).
    1. Fully-indexed rate. The fully-indexed rate is defined in Sec. 
226.18(s)(7) as the index plus the margin at consummation. For purposes 
of Sec. 226.18(s)(2)(iii)(C), ``at consummation'' refers to disclosures 
delivered at consummation, or three business days before consummation 
pursuant to Sec. 226.19(a)(2)(ii); for early disclosures delivered 
within three business days after receipt of a consumer's application 
pursuant to Sec. 226.19(a)(1), the fully-indexed rate disclosed under 
Sec. 226.18(s)(2)(iii)(C) may be based on the index in effect at the 
time the disclosures are provided. The index in effect at consummation 
(or at the time of early disclosures) need not be used if a contract 
provides for a delay in the implementation of changes in an index value. 
For example, if the contract specifies that rate changes are based on 
the index value in effect 45 days before the change date, creditors may 
use any index value in effect during the 45 days before consummation (or 
any earlier date of disclosure) in calculating the fully-indexed rate to 
be disclosed.
    18(s)(3) Payments for amortizing loans.
    1. Payments corresponding to interest rates. Creditors must disclose 
the periodic payment that corresponds to each interest rate disclosed 
under Sec. 226.18(s)(2)(i)(A)-(C). The corresponding periodic payment 
is the regular payment for each such interest rate, without regard to 
any final payment that differs from others because of the rounding of 
periodic payments to account for payment amounts including fractions of 
cents. Balloon payments, however, must be disclosed as provided in Sec. 
226.18(s)(5).

[[Page 668]]

    2. Principal and interest payment amounts; examples.
    i. For fixed-rate interest-only transactions, Sec. 
226.18(s)(3)(ii)(B) requires scheduled increases in the regular periodic 
payment amounts to be disclosed along with the date of the increase. For 
example, in a fixed-rate interest-only loan, a scheduled increase in the 
payment amount from an interest-only payment to a fully amortizing 
payment must be disclosed. Similarly, in a fixed-rate balloon loan, the 
balloon payment must be disclosed in accordance with Sec. 226.18(s)(5).
    ii. For adjustable-rate mortgage transactions, Sec. 
226.18(s)(3)(i)(A) requires that for each interest rate required to be 
disclosed under Sec. 226.18(s)(2)(i) (the interest rate at 
consummation, the maximum rate during the first five years, and the 
maximum possible rate) a corresponding payment amount must be disclosed.
    iii. The format of the payment disclosure varies depending on 
whether all regular periodic payment amounts will include principal and 
interest, and whether there will be an escrow account for taxes and 
insurance.
    Paragraph 18(s)(3)(i)(C).
    1. Taxes and insurance. An estimated payment amount for taxes and 
insurance must be disclosed if the creditor will establish an escrow 
account for such amounts. If the escrow account will include amounts for 
items other than taxes and insurance, such as homeowners association 
dues, the creditor may but is not required to include such items in the 
estimate. When such estimated escrow payments must be disclosed in 
multiple columns of the table, such as for adjustable- and step-rate 
transactions, each column should use the same estimate for taxes and 
insurance except that the estimate should reflect changes in periodic 
mortgage insurance premiums that are known to the creditor at the time 
the disclosure is made. The estimated amounts of mortgage insurance 
premiums should be based on the declining principal balance that will 
occur as a result of changes to the interest rate that are assumed for 
purposes of disclosing those rates under Sec. 226.18(s)(2) and 
accompanying commentary. The payment amount must include estimated 
amounts for property taxes and premiums for mortgage-related insurance 
required by the creditor, such as insurance against loss of or damage to 
property, or against liability arising out of the ownership or use of 
the property, or insurance protecting the creditor against the 
consumer's default or other credit loss. Premiums for credit insurance, 
debt suspension and debt cancellation agreements, however, should not be 
included. Except for periodic mortgage insurance premiums included in 
the escrow payment under Sec. 226.18(s)(3)(i)(C), amounts included in 
the escrow payment disclosure such as property taxes and homeowner's 
insurance generally are not finance charges under Sec. 226.4 and, 
therefore, do not affect other disclosures, including the finance charge 
and annual percentage rate.
    2. Mortgage insurance. Payment amounts under Sec. 226.18(s)(3)(i) 
should reflect the consumer's mortgage insurance payments until the date 
on which the creditor must automatically terminate coverage under 
applicable law, even though the consumer may have a right to request 
that the insurance be cancelled earlier. The payment amount must reflect 
the terms of the legal obligation, as determined by applicable state or 
other law. For example, assume that under applicable law, mortgage 
insurance must terminate after the 130th scheduled monthly payment, and 
the creditor collects at closing and places in escrow two months of 
premiums. If, under the legal obligation, the creditor will include 
mortgage insurance premiums in 130 payments and refund the escrowed 
payments when the insurance is terminated, payment amounts disclosed 
through the 130th payment should reflect premium payments. If, under the 
legal obligation, the creditor will apply the amount escrowed to the two 
final insurance payments, payments disclosed through the 128th payment 
should reflect premium payments. The escrow amount reflected on the 
disclosure should include mortgage insurance premiums even if they are 
not escrowed and even if there is no escrow account established for the 
transaction.
    Paragraph 18(s)(3)(i)(D).
    1. Total monthly payment. For amortizing loans, each column should 
add up to a total estimated payment. The total estimated payment amount 
should be labeled. If periodic payments are not due monthly, the 
creditor should use the appropriate term such as ``quarterly'' or 
``annually.''
    18(s)(3)(ii) Interest-only payments.
    1. Interest-only loans that are also negative amortization loans. 
The rules in Sec. 226.18(s)(3)(ii) for disclosing payments on interest-
only loans apply only if the loan is not also a negative amortization 
loan. If the loan is a negative amortization loan, even if it also has 
an interest-only feature, payments are disclosed under the rules in 
Sec. 226.18(s)(4).
    Paragraph 18(s)(3)(ii)(C).
    1. Escrows. See the commentary under Sec. 226.18(s)(3)(i)(C) for 
guidance on escrows for purposes of Sec. 226.18(s)(3)(ii)(C).
    18(s)(4) Payments for negative amortization loans.
    1. Table. Section 226.18(s)(1) provides that tables shall include 
only the information required in Sec. 226.18(s)(2)-(4). Thus, a table 
for a negative amortization loan must contain no more than two 
horizontal rows of payments and no more than five vertical columns of 
interest rates.
    2. Payment amounts. The payment amounts disclosed under Sec. 
226.18(s)(4) are the minimum or fully amortizing periodic payments,

[[Page 669]]

as applicable, corresponding to the interest rates disclosed under Sec. 
226.18(s)(2)(ii). The corresponding periodic payment is the regular 
payment for each such interest rate, without regard to any final payment 
that differs from the rest because of the rounding of periodic payments 
to account for payment amounts including fractions of cents.
    Paragraph 18(s)(4)(i).
    1. Minimum required payments. In one row of the table, the creditor 
must disclose the minimum required payment in each column of the table, 
corresponding to each interest rate or adjustment required in Sec. 
226.18(s)(2)(ii). The payments in this row must be calculated based on 
an assumption that the consumer makes the minimum required payment for 
as long as possible under the terms of the legal obligation. This row 
should be identified as the minimum payment option, and the statement 
required by Sec. 226.18(s)(4)(i)(C) should be included in the heading 
for the row.
    Paragraph 18(s)(4)(iii).
    1. Fully amortizing payments. In one row of the table, the creditor 
must disclose the fully amortizing payment in each column of the table, 
corresponding to each interest rate required in Sec. 226.18(s)(2)(ii). 
The creditor must assume, for purposes of calculating the amounts in 
this row that the consumer makes only fully amortizing payments starting 
with the first scheduled payment.
    18(s)(5) Balloon payments.
    1. General. A balloon payment is one that is more than two times the 
regular periodic payment. In a reverse mortgage transaction, the single 
payment is not considered a balloon payment. A balloon payment must be 
disclosed outside and below the table, unless the balloon payment 
coincides with an interest rate adjustment or a scheduled payment 
increase. In those cases, the balloon payment must be disclosed in the 
table.
    18(s)(6) Special disclosures for loans with negative amortization.
    1. Escrows. See the commentary under Sec. 226.18(s)(3)(i)(C) for 
guidance on escrows for purposes of Sec. 226.18(s)(6). Under that 
guidance, because mortgage insurance payments decline over a loan's 
term, the payment amounts shown in the table should reflect the mortgage 
insurance payment that will be applicable at the time each disclosed 
periodic payment will be in effect. Accordingly, the disclosed mortgage 
insurance payment will be zero if it corresponds to a periodic payment 
that will occur after the creditor will be legally required to terminate 
mortgage insurance. On the other hand, because only one escrow amount is 
disclosed under Sec. 226.18(s)(6) for negative amortization loans and 
escrows are not itemized in the payment amounts, the single escrow 
amount disclosed should reflect the mortgage insurance amount that will 
be collected at the outset of the loan's term, even though that amount 
will decline in the future and ultimately will be discontinued pursuant 
to the terms of the mortgage insurance policy.
    18(s)(7) Definitions.
    1. Negative amortization loans. Under Sec. 226.18(s)(7)(v), a 
negative amortization loan is one that requires only a minimum periodic 
payment that covers only a portion of the accrued interest, resulting in 
negative amortization. For such a loan, Sec. 226.18(s)(4)(iii) requires 
creditors to disclose the fully amortizing periodic payment for each 
interest rate disclosed under Sec. 226.18(s)(2)(ii), in addition to the 
minimum periodic payment, regardless of whether the legal obligation 
explicitly recites that the consumer may make the fully amortizing 
payment. Some loan types that result in negative amortization do not 
meet the definition of negative amortization loan for purposes of Sec. 
226.18(s). These include, for example, loans requiring level, amortizing 
payments but having a payment schedule containing gaps during which 
interest accrues and is added to the principal balance before regular, 
amortizing payments begin (or resume). For example, ``seasonal income'' 
loans may provide for amortizing payments during nine months of the year 
and no payments for the other three months; the required minimum 
payments (when made) are amortizing payments, thus such loans are not 
negative amortization loans under Sec. 226.18(s)(7)(v). An adjustable-
rate loan that has fixed periodic payments that do not adjust when the 
interest rate adjusts also would not be disclosed as a negative 
amortization loan under Sec. 226.18(s). For example, assume the initial 
rate is 4%, for which the fully amortizing payment is $1500. Under the 
terms of the legal obligation, the consumer will make $1500 monthly 
payments even if the interest rate increases, and the additional 
interest is capitalized. The possibility (but not certainty) of negative 
amortization occurring after consummation does not make this transaction 
a negative amortization loan for purposes of Sec. 226.18(s). Loans that 
do not meet the definition of negative amortization loan, even if they 
may have negative amortization, are amortizing loans and are disclosed 
under Sec. Sec. 226.18(s)(2)(i) and 226.18(s)(3).

     Section 226.19--Certain Mortgage and Variable-Rate Transactions

    19(a)(1)(i) Time of disclosure
    1. Coverage. This section requires early disclosure of credit terms 
in mortgage transactions that are secured by a consumer's dwelling 
(other than home equity lines of credit subject to Sec. 226.5b or 
mortgage transactions secured by an interest in a timeshare plan) that 
are also subject to the Real Estate Settlement Procedures Act (RESPA) 
and its implementing Regulation X, administered by the Department of 
Housing and Urban Development (HUD). To be covered by Sec. 226.19, a

[[Page 670]]

transaction must be a Federally related mortgage loan under RESPA. 
``Federally related mortgage loan'' is defined under RESPA (12 U.S.C. 
2602) and Regulation X (24 CFR 3500.2), and is subject to any 
interpretations by HUD.
    2. Timing and use of estimates. The disclosures required by Sec. 
226.19(a)(1)(i) must be delivered or mailed not later than three 
business days after the creditor receives the consumer's written 
application. The general definition of ``business day'' in Sec. 
226.2(a)(6)--a day on which the creditor's offices are open to the 
public for substantially all of its business functions--is used for 
purposes of Sec. 226.19(a)(1)(i). See comment 2(a)(6)-1. This general 
definition is consistent with the definition of ``business day'' in 
HUD's Regulation X--a day on which the creditor's offices are open to 
the public for carrying on substantially all of its business functions. 
See 24 CFR 3500.2. Accordingly, the three-business-day period in Sec. 
226.19(a)(1)(i) for making early disclosures coincides with the time 
period within which creditors subject to RESPA must provide good faith 
estimates of settlement costs. If the creditor does not know the precise 
credit terms, the creditor must base the disclosures on the best 
information reasonably available and indicate that the disclosures are 
estimates under Sec. 226.17(c)(2). If many of the disclosures are 
estimates, the creditor may include a statement to that effect (such as 
``all numerical disclosures except the late-payment disclosure are 
estimates'') instead of separately labelling each estimate. In the 
alternative, the creditor may label as an estimate only the items 
primarily affected by unknown information. (See the commentary to Sec. 
226.17(c)(2).) The creditor may provide explanatory material concerning 
the estimates and the contingencies that may affect the actual terms, in 
accordance with the commentary to Sec. 226.17(a)(1).
    3. Written application. Creditors may rely on RESPA and Regulation X 
(including any interpretations issued by HUD) in deciding whether a 
``written application'' has been received. In general, Regulation X 
defines ``application'' to mean the submission of a borrower's financial 
information in anticipation of a credit decision relating to a Federally 
related mortgage loan. See 24 CFR 3500.2(b). An application is received 
when it reaches the creditor in any of the ways applications are 
normally transmitted--by mail, hand delivery, or through an intermediary 
agent or broker. (See comment 19(b)-3 for guidance in determining 
whether or not the transaction involves an intermediary agent or 
broker.) If an application reaches the creditor through an intermediary 
agent or broker, the application is received when it reaches the 
creditor, rather than when it reaches the agent or broker.
    4. Denied or withdrawn applications. The creditor may determine 
within the three-business-day period that the application will not or 
cannot be approved on the terms requested, as, for example, when a 
consumer applies for a type or amount of credit that the creditor does 
not offer, or the consumer's application cannot be approved for some 
other reason. In that case, or if the consumer withdraws the application 
within the three-business-day period, the creditor need not make the 
disclosures under this section. If the creditor fails to provide early 
disclosures and the transaction is later consummated on the original 
terms, the creditor will be in violation of this provision. If, however, 
the consumer amends the application because of the creditor's 
unwillingness to approve it on its original terms, no violation occurs 
for not providing disclosures based on the original terms. But the 
amended application is a new application subject to Sec. 
226.19(a)(1)(i).
    5. Itemization of amount financed. In many mortgage transactions, 
the itemization of the amount financed required by Sec. 226.18(c) will 
contain items, such as origination fees or points, that also must be 
disclosed as part of the good faith estimates of settlement costs 
required under RESPA. Creditors furnishing the RESPA good faith 
estimates need not give consumers any itemization of the amount 
financed.
    19(a)(1)(ii) Imposition of fees.
    1. Timing of fees. The consumer must receive the disclosures 
required by this section before paying or incurring any fee imposed by a 
creditor or other person in connection with the consumer's application 
for a mortgage transaction that is subject to Sec. 226.19(a)(1)(i), 
except as provided in Sec. 226.19(a)(1)(iii). If the creditor delivers 
the disclosures to the consumer in person, a fee may be imposed anytime 
after delivery. If the creditor places the disclosures in the mail, the 
creditor may impose a fee after the consumer receives the disclosures 
or, in all cases, after midnight on the third business day following 
mailing of the disclosures. For purposes of Sec. 226.19(a)(1)(ii), the 
term ``business day'' means all calendar days except Sundays and legal 
public holidays referred to in Sec. 226.2(a)(6). See Comment 2(a)(6)-2. 
For example, assuming that there are no intervening legal public 
holidays, a creditor that receives the consumer's written application on 
Monday and mails the early mortgage loan disclosure on Tuesday may 
impose a fee on the consumer after midnight on Friday.
    2. Fees restricted. A creditor or other person may not impose any 
fee, such as for an appraisal, underwriting, or broker services, until 
the consumer has received the disclosures required by Sec. 
226.19(a)(1)(i). The only exception to the fee restriction allows the 
creditor or other person to impose a bona fide and reasonable fee for 
obtaining a consumer's credit history, such as for a credit report(s).

[[Page 671]]

    3. Collection of fees. A creditor complies with Sec. 
226.19(a)(1)(ii) if--
    i. The creditor receives a consumer's written application directly 
from the consumer and does not collect any fee, other than a fee for 
obtaining a consumer's credit history, until the consumer receives the 
early mortgage loan disclosure.
    ii. A third party submits a consumer's written application to a 
creditor and both the creditor and third party do not collect any fee, 
other than a fee for obtaining a consumer's credit history, until the 
consumer receives the early mortgage loan disclosure from the creditor.
    iii. A third party submits a consumer's written application to a 
second creditor following a prior creditor's denial of an application 
made by the same consumer (or following the consumer's withdrawal), and, 
if a fee already has been assessed, the new creditor or third party does 
not collect or impose any additional fee until the consumer receives an 
early mortgage loan disclosure from the new creditor.
    19(a)(1)(iii) Exception to fee restriction.
    1. Requirements. A creditor or other person may impose a fee before 
the consumer receives the required disclosures if it is for obtaining 
the consumer's credit history, such as by purchasing a credit report(s) 
on the consumer. The fee also must be bona fide and reasonable in 
amount. For example, a creditor may collect a fee for obtaining a credit 
report(s) if it is in the creditor's ordinary course of business to 
obtain a credit report(s). If the criteria in Sec. 226.19(a)(1)(iii) 
are met, the creditor may describe or refer to this fee, for example, as 
an ``application fee.''

                  19(a)(2) Waiting period(s) required.

    1. Business day definition. For purposes of Sec. 226.19(a)(2), 
``business day'' means all calendar days except Sundays and the legal 
public holidays referred to in Sec. 226.2(a)(6). See comment 2(a)(6)-2.
    2. Consummation after both waiting periods expire. Consummation may 
not occur until both the seven-business-day waiting period and the 
three-business-day waiting period have expired. For example, assume a 
creditor delivers the early disclosures to the consumer in person or 
places them in the mail on Monday, June 1, and the creditor then 
delivers corrected disclosures in person to the consumer on Wednesday, 
June 3. Although Saturday, June 6 is the third business day after the 
consumer received the corrected disclosures, consummation may not occur 
before Tuesday, June 9, the seventh business day following delivery or 
mailing of the early disclosures.

             19(a)(2)(i) Seven-business-day waiting period.

    1. Timing. The disclosures required by Sec. 226.19(a)(1)(i) must be 
delivered or placed in the mail no later than the seventh business day 
before consummation. The seven-business-day waiting period begins when 
the creditor delivers the early disclosures or places them in the mail, 
not when the consumer receives or is deemed to have received the early 
disclosures. For example, if a creditor delivers the early disclosures 
to the consumer in person or places them in the mail on Monday, June 1, 
consummation may occur on or after Tuesday, June 9, the seventh business 
day following delivery or mailing of the early disclosures.

             19(a)(2)(ii) Three-business-day waiting period.

    1. Conditions for redisclosure. If, at the time of consummation, the 
annual percentage rate disclosed is accurate under Sec. 226.22, the 
creditor does not have to make corrected disclosures under Sec. 
226.19(a)(2). If, on the other hand, the annual percentage rate 
disclosed is not accurate under Sec. 226.22, the creditor must make 
corrected disclosures of all changed terms (including the annual 
percentage rate) so that the consumer receives them not later than the 
third business day before consummation. For example, assume consummation 
is scheduled for Thursday, June 11 and the early disclosures for a 
regular mortgage transaction disclose an annual percentage rate of 
7.00%:
    i. On Thursday, June 11, the annual percentage rate will be 7.10%. 
The creditor is not required to make corrected disclosures under Sec. 
226.19(a)(2).
    ii. On Thursday, June 11, the annual percentage rate will be 7.15%. 
The creditor must make corrected disclosures so that the consumer 
receives them on or before Monday, June 8.
    2. Content of new disclosures. If redisclosure is required, the 
creditor may provide a complete set of new disclosures, or may 
redisclose only the changed terms. If the creditor chooses to provide a 
complete set of new disclosures, the creditor may but need not highlight 
the new terms, provided that the disclosures comply with the format 
requirements of Sec. 226.17(a). If the creditor chooses to disclose 
only the new terms, all the new terms must be disclosed. For example, a 
different annual percentage rate will almost always produce a different 
finance charge, and often a new schedule of payments; all of these 
changes would have to be disclosed. If, in addition, unrelated terms 
such as the amount financed or prepayment penalty vary from those 
originally disclosed, the accurate terms must be disclosed. However, no 
new disclosures are required if the only inaccuracies involve estimates 
other than the

[[Page 672]]

annual percentage rate, and no variable rate feature has been added. For 
a discussion of the requirement to redisclose when a variable-rate 
feature is added, see comment 17(f)-2. For a discussion of redisclosure 
requirements in general, see the commentary on Sec. 226.17(f).
    3. Timing. When redisclosures are necessary because the annual 
percentage rate has become inaccurate, they must be received by the 
consumer no later than the third business day before consummation. (For 
redisclosures triggered by other events, the creditor must provide 
corrected disclosures before consummation. See Sec. 226.17(f).) If the 
creditor delivers the corrected disclosures to the consumer in person, 
consummation may occur any time on the third business day following 
delivery. If the creditor provides the corrected disclosures by mail, 
the consumer is considered to have received them three business days 
after they are placed in the mail, for purposes of determining when the 
three-business-day waiting period required under Sec. 226.19(a)(2)(ii) 
begins. Creditors that use electronic mail or a courier other than the 
postal service may also follow this approach.
    4. Basis for annual percentage rate comparison. To determine whether 
a creditor must make corrected disclosures under Sec. 226.22, a 
creditor compares (a) what the annual percentage rate will be at 
consummation to (b) the annual percentage rate stated in the most recent 
disclosures the creditor made to the consumer. For example, assume 
consummation for a regular mortgage transaction is scheduled for 
Thursday, June 11, the early disclosures provided in May stated an 
annual percentage rate of 7.00%, and corrected disclosures received by 
the consumer on Friday, June 5 stated an annual percentage rate of 
7.15%:
    i. On Thursday, June 11, the annual percentage rate will be 7.25%, 
which exceeds the most recently disclosed annual percentage rate by less 
than the applicable tolerance. The creditor is not required to make 
additional corrected disclosures or wait an additional three business 
days under Sec. 226.19(a)(2).
    ii. On Thursday, June 11, the annual percentage rate will be 7.30%, 
which exceeds the most recently disclosed annual percentage rate by more 
than the applicable tolerance. The creditor must make corrected 
disclosures such that the consumer receives them on or before Monday, 
June 8.
    19(a)(3) Consumer's waiver of waiting period before consummation.
    1. Modification or waiver. A consumer may modify or waive the right 
to a waiting period required by Sec. 226.19(a)(2) only after the 
creditor makes the disclosures required by Sec. 226.18. The consumer 
must have a bona fide personal financial emergency that necessitates 
consummating the credit transaction before the end of the waiting 
period. Whether these conditions are met is determined by the facts 
surrounding individual situations. The imminent sale of the consumer's 
home at foreclosure, where the foreclosure sale will proceed unless loan 
proceeds are made available to the consumer during the waiting period, 
is one example of a bona fide personal financial emergency. Each 
consumer who is primarily liable on the legal obligation must sign the 
written statement for the waiver to be effective.
    2. Examples of waivers within the seven-business-day waiting period. 
Assume the early disclosures are delivered to the consumer in person on 
Monday, June 1, and at that time the consumer executes a waiver of the 
seven-business-day waiting period (which would end on Tuesday, June 9) 
so that the loan can be consummated on Friday, June 5:
    i. If the annual percentage rate on the early disclosures is 
inaccurate under Sec. 226.22, the creditor must provide a corrected 
disclosure to the consumer before consummation, which triggers the 
three-business-day waiting period in Sec. 226.19(a)(2)(ii). After the 
consumer receives the corrected disclosure, the consumer must execute a 
waiver of the three-business-day waiting period in order to consummate 
the transaction on Friday, June 5.
    ii. If a change occurs that does not render the annual percentage 
rate on the early disclosures inaccurate under Sec. 226.22, the 
creditor must disclose the changed terms before consummation, consistent 
with Sec. 226.17(f). Disclosure of the changed terms does not trigger 
an additional waiting period, and the transaction may be consummated on 
June 5 without the consumer giving the creditor an additional 
modification or waiver.
    3. Examples of waivers made after the seven-business-day waiting 
period. Assume the early disclosures are delivered to the consumer in 
person on Monday, June 1 and consummation is scheduled for Friday, June 
19. On Wednesday, June 17, a change to the annual percentage rate 
occurs:
    i. If the annual percentage rate on the early disclosures is 
inaccurate under Sec. 226.22, the creditor must provide a corrected 
disclosure to the consumer before consummation, which triggers the 
three-business-day waiting period in Sec. 226.19(a)(2). After the 
consumer receives the corrected disclosure, the consumer must execute a 
waiver of the three-business-day waiting period in order to consummate 
the transaction on Friday, June 19.
    ii. If a change occurs that does not render the annual percentage 
rate on the early disclosures inaccurate under Sec. 226.22, the 
creditor must disclose the changed terms before consummation, consistent 
with Sec. 226.17(f). Disclosure of the changed terms does not trigger 
an additional waiting period, and the transaction may be consummated on 
Friday, June 19 without the consumer giving the

[[Page 673]]

creditor an additional modification or waiver.
    19(a)(4) Notice.
    1. Inclusion in other disclosures. The notice required by Sec. 
226.19(a)(4) must be grouped together with the disclosures required by 
Sec. 226.19(a)(1)(i) or Sec. 226.19(a)(2). See comment 17(a)(1)-2 for 
a discussion of the rules for segregating disclosures. In other cases, 
the notice set forth in Sec. 226.19(a)(4) may be disclosed together 
with or separately from the disclosures required under Sec. 226.18. See 
comment 17(a)(1)-5(xvi).
    19(a)(5)(ii) Time of disclosures for timeshare plans.
    1. Timing. A mortgage transaction secured by a consumer's interest 
in a ``timeshare plan,'' as defined in 11 U.S.C. 101(53D), that is also 
a Federally related mortgage loan under RESPA is subject to the 
requirements of Sec. 226.19(a)(5) instead of the requirements of Sec. 
226.19(a)(1) through Sec. 226.19(a)(4). See comment 19(a)(1)(i)-1. 
Early disclosures for transactions subject to Sec. 226.19(a)(5) must be 
given (a) before consummation or (b) within three business days after 
the creditor receives the consumer's written application, whichever is 
earlier. The general definition of ``business day'' in Sec. 
226.2(a)(6)--a day on which the creditor's offices are open to the 
public for substantially all of its business functions--applies for 
purposes of Sec. 226.19(a)(5)(ii). See comment 2(a)(6)-1. These timing 
requirements are different from the timing requirements under Sec. 
226.19(a)(1)(i). Timeshare transactions covered by Sec. 226.19(a)(5) 
may be consummated any time after the disclosures required by Sec. 
226.19(a)(5)(ii) are provided.
    2. Use of estimates. If the creditor does not know the precise 
credit terms, the creditor must base the disclosures on the best 
information reasonably available and indicate that the disclosures are 
estimates under Sec. 226.17(c)(2). If many of the disclosures are 
estimates, the creditor may include a statement to that effect (such as 
``all numerical disclosures except the late-payment disclosure are 
estimates'') instead of separately labelling each estimate. In the 
alternative, the creditor may label as an estimate only the items 
primarily affected by unknown information. (See the commentary to Sec. 
226.17(c)(2).) The creditor may provide explanatory material concerning 
the estimates and the contingencies that may affect the actual terms, in 
accordance with the commentary to Sec. 226.17(a)(1).
    3. Written application. For timeshare transactions, creditors may 
rely on comment 19(a)(1)(i)-3 in determining whether a ``written 
application'' has been received.
    4. Denied or withdrawn applications. For timeshare transactions, 
creditors may rely on comment 19(a)(1)(i)-4 in determining that 
disclosures are not required by Sec. 226.19(a)(5)(ii) because the 
consumer's application will not or cannot be approved on the terms 
requested or the consumer has withdrawn the application.
    5. Itemization of amount financed. For timeshare transactions, 
creditors may rely on comment 19(a)(1)(i)-5 in determining whether 
providing the good faith estimates of settlement costs required by RESPA 
satisfies the requirement of Sec. 226.18(c) to provide an itemization 
of the amount financed.
    19(a)(5)(iii) Redisclosure for timeshare plans.
    1. Consummation or settlement. For extensions of credit secured by a 
consumer's timeshare plan, when corrected disclosures are required, they 
must be given no later than ``consummation or settlement.'' 
``Consummation'' is defined in Sec. 226.2(a). ``Settlement'' is defined 
in Regulation X (24 CFR 3500.2(b)) and is subject to any interpretations 
issued by HUD. In some cases, a creditor may delay redisclosure until 
settlement, which may be at a time later than consummation. If a 
creditor chooses to redisclose at settlement, disclosures may be based 
on the terms in effect at settlement, rather than at consummation. For 
example, in a variable-rate transaction, a creditor may choose to base 
disclosures on the terms in effect at settlement, despite the general 
rule in comment 17(c)(1)-8 that variable-rate disclosures should be 
based on the terms in effect at consummation.
    2. Content of new disclosures. Creditors may rely on comment 
19(a)(2)(ii)-2 in determining the content of corrected disclosures 
required under Sec. 226.19(a)(5)(iii).
    19(b) Certain variable-rate transactions.
    1. Coverage. Section 226.19(b) applies to all closed-end variable-
rate transactions that are secured by the consumer's principal dwelling 
and have a term greater than one year. The requirements of this section 
apply not only to transactions financing the initial acquisition of the 
consumer's principal dwelling, but also to any other closed-end 
variable-rate transaction secured by the principal dwelling. Closed-end 
variable-rate transactions that are not secured by the principal 
dwelling, or are secured by the principal dwelling but have a term of 
one year or less, are subject to the disclosure requirements of Sec. 
226.18(f)(1) rather than those of Sec. 226.19(b). (Furthermore, 
``shared-equity'' or ``shared-appreciation'' mortgages are subject to 
the disclosure requirements of Sec. 226.18(f)(1) rather than those of 
Sec. 226.19(b) regardless of the general coverage of those sections.) 
For purposes of this section, the term of a variable-rate demand loan is 
determined in accordance with the commentary to Sec. 226.17(c)(5). In 
determining whether a construction loan that may be permanently financed 
by the same creditor is covered under this section, the creditor may 
treat the construction and the permanent phases as separate transactions 
with distinct terms to maturity or as a single combined transaction.

[[Page 674]]

For purposes of the disclosures required under Sec. 226.18, the 
creditor may nevertheless treat the two phases either as separate 
transactions or as a single combined transaction in accordance with 
Sec. 226.17(c)(6). Finally, in any assumption of a variable-rate 
transaction secured by the consumer's principal dwelling with a term 
greater than one year, disclosures need not be provided under Sec. Sec. 
226.18(f)(2)(ii) or 226.19(b).
    2. Timing. A creditor must give the disclosures required under this 
section at the time an application form is provided or before the 
consumer pays a nonrefundable fee, whichever is earlier.
    i. Intermediary agent or broker. In cases where a creditor receives 
a written application through an intermediary agent or broker, however, 
footnote 45b provides a substitute timing rule requiring the creditor to 
deliver the disclosures or place them in the mail not later than three 
business days after the creditor receives the consumer's written 
application. (See comment 19(b)-3 for guidance in determining whether or 
not the transaction involves an intermediary agent or broker.) This 
three-day rule also applies where the creditor takes an application over 
the telephone.
    ii. Telephone request. In cases where the consumer merely requests 
an application over the telephone, the creditor must include the early 
disclosures required under this section with the application that is 
sent to the consumer.
    iii. Mail solicitations. In cases where the creditor solicits 
applications through the mail, the creditor must also send the 
disclosures required under this section if an application form is 
included with the solicitation.
    iv. Conversion. In cases where an open-end credit account will 
convert to a closed-end transaction subject to this section under a 
written agreement with the consumer, disclosures under this section may 
be given at the time of conversion. (See the commentary to Sec. 
226.20(a) for information on the timing requirements for Sec. 
226.19(b)(2) disclosures when a variable-rate feature is later added to 
a transaction.)
    v. Form of electronic disclosures provided on or with electronic 
applications. Creditors must provide the disclosures required by this 
section (including the brochure) on or with a blank application that is 
made available to the consumer in electronic form, such as on a 
creditor's Internet Web site. Creditors have flexibility in satisfying 
this requirement. Methods creditors could use to satisfy the requirement 
include, but are not limited to, the following examples:
    A. The disclosures could automatically appear on the screen when the 
application appears;
    B. The disclosures could be located on the same web page as the 
application (whether or not they appear on the initial screen), if the 
application contains a clear and conspicuous reference to the location 
of the disclosures and indicates that the disclosures contain rate, fee, 
and other cost information, as applicable;
    C. Creditors could provide a link to the electronic disclosures on 
or with the application as long as consumers cannot bypass the 
disclosures before submitting the application. The link would take the 
consumer to the disclosures, but the consumer need not be required to 
scroll completely through the disclosures; or
    D. The disclosures could be located on the same web page as the 
application without necessarily appearing on the initial screen, 
immediately preceding the button that the consumer will click to submit 
the application.
    Whatever method is used, a creditor need not confirm that the 
consumer has read the disclosures.
    3. Intermediary agent or broker. In certain transactions involving 
an ``intermediary agent or broker,'' a creditor may delay providing 
disclosures. A creditor may not delay providing disclosures in 
transactions involving either a legal agent (as determined by applicable 
law) or any other third party that is not an ``intermediary agent or 
broker.'' In determining whether or not a transaction involves an 
``intermediary agent or broker'' the following factors should be 
considered:
     The number of applications submitted by the 
broker to the creditor as compared to the total number of applications 
received by the creditor. The greater the percentage of total loan 
applications submitted by the broker in any given period of time, the 
less likely it is that the broker would be considered an ``intermediary 
agent or broker'' of the creditor during the next period.
     The number of applications submitted by the 
broker to the creditor as compared to the total number of applications 
received by the broker. (This factor is applicable only if the creditor 
has such information.) The greater the percentage of total loan 
applications received by the broker that is submitted to a creditor in 
any given period of time, the less likely it is that the broker would be 
considered an ``intermediary agent or broker'' of the creditor during 
the next period.
     The amount of work (such as document preparation) 
the creditor expects to be done by the broker on an application based on 
the creditor's prior dealings with the broker and on the creditor's 
requirements for accepting applications, taking into consideration the 
customary practice of brokers in a particular area. The more work that 
the creditor expects the broker to do on an application, in excess of 
what is usually expected of a broker in that area, the less likely it is 
that the broker would be considered an ``intermediary agent or broker'' 
of the creditor.


[[Page 675]]


    An example of an ``intermediary agent or broker'' is a broker who, 
customarily within a brief period of time after receiving an 
application, inquires about the credit terms of several creditors with 
whom the broker does business and submits the application to one of 
them. The broker is responsible for only a small percentage of the 
applications received by that creditor. During the time the broker has 
the application, it might request a credit report and an appraisal (or 
even prepare an entire loan package if customary in that particular 
area).
    4. Other variable-rate regulations. Transactions in which the 
creditor is required to comply with and has complied with the disclosure 
requirements of the variable-rate regulations of other Federal agencies 
are exempt from the requirements of Sec. 226.19(b), by virtue of 
footnote 45a, and are exempt from the requirements of Sec. 226.20(c), 
by virtue of footnote 45c. Those variable-rate regulations include the 
regulations issued by the Federal Home Loan Bank Board and those issued 
by the Department of Housing and Urban Development. The exception in 
footnotes 45a and 45c is also available to creditors that are required 
by state law to comply with the federal variable-rate regulations noted 
above and to creditors that are authorized by title VIII of the 
Depository Institutions Act of 1982 (12 U.S.C. 3801 et seq.) to make 
loans in accordance with those regulations. Creditors using this 
exception should comply with the timing requirements of those 
regulations rather than the timing requirements of Regulation Z in 
making the variable-rate disclosures.
    5. Examples of variable-rate transactions.
    (i) The following transactions, if they have a term greater than one 
year and are secured by the consumer's principal dwelling, constitute 
variable-rate transactions subject to the disclosure requirements of 
Sec. 226.19(b).
    (A) Renewable balloon-payment instruments where the creditor is both 
unconditionally obligated to renew the balloon-payment loan at the 
consumer's option (or is obligated to renew subject to conditions within 
the consumer's control) and has the option of increasing the interest 
rate at the time of renewal. (See comment 17(c)(1)-11 for a discussion 
of conditions within a consumer's control in connection with renewable 
balloon-payment loans.)
    (B) Preferred-rate loans where the terms of the legal obligation 
provide that the initial underlying rate is fixed but will increase upon 
the occurrence of some event, such as an employee leaving the employ of 
the creditor, and the note reflects the preferred rate. The disclosures 
under Sec. Sec. 226.19(b)(1) and 226.19(b)(2)(v), (viii), (ix), and 
(xii) are not applicable to such loans.
    (C) ``Price-level-adjusted mortgages'' or other indexed mortgages 
that have a fixed rate of interest but provide for periodic adjustments 
to payments and the loan balance to reflect changes in an index 
measuring prices or inflation. The disclosures under Sec. 226.19(b)(1) 
are not applicable to such loans, nor are the following provisions to 
the extent they relate to the determination of the interest rate by the 
addition of a margin, changes in the interest rate, or interest rate 
discounts: Section 226.19(b)(2) (i), (iii), (iv), (v), (vi), (vii), 
(viii), and (ix). (See comments 20(c)-2 and 30-1 regarding the 
inapplicability of variable-rate adjustment notices and interest rate 
limitations to price-level-adjusted or similar mortgages.)
    (ii) Graduated-payment mortgages and step-rate transactions without 
a variable-rate feature are not considered variable-rate transactions.
    Paragraph 19(b)(1).
    1. Substitute. Creditors who wish to use publications other than the 
Consumer Handbook on Adjustable Rate Mortgages must make a good faith 
determination that their brochures are suitable substitutes to the 
Consumer Handbook. A substitute is suitable if it is, at a minimum, 
comparable to the Consumer Handbook in substance and comprehensiveness. 
Creditors are permitted to provide more detailed information than is 
contained in the Consumer Handbook.
    2. Applicability. The Consumer Handbook need not be given for 
variable-rate transactions subject to this section in which the 
underlying interest rate is fixed. (See comment 19(b)-5 for an example 
of a variable-rate transaction where the underlying interest rate is 
fixed.)
    Paragraph 19(b)(2).
    1. Disclosure for each variable-rate program. A creditor must 
provide disclosures to the consumer that fully describe each of the 
creditor's variable-rate loan programs in which the consumer expresses 
an interest. If a program is made available only to certain customers of 
an institution, a creditor need not provide disclosures for that program 
to other consumers who express a general interest in a creditor's ARM 
programs. Disclosures must be given at the time an application form is 
provided or before the consumer pays a nonrefundable fee, whichever is 
earlier. If program disclosures cannot be provided because a consumer 
expresses an interest in individually negotiating loan terms that are 
not generally offered, disclosures reflecting those terms may be 
provided as soon as reasonably possible after the terms have been 
decided upon, but not later than the time a non-refundable fee is paid. 
If a consumer who has received program disclosures subsequently 
expresses an interest in other available variable-rate programs subject 
to 226.19(b)(2), or the creditor and consumer decide on a program for 
which the consumer has not received disclosures, the creditor must 
provide appropriate disclosures as soon as reasonably possible. The 
creditor, of

[[Page 676]]

course, is permitted to give the consumer information about additional 
programs subject to Sec. 226.19(b) initially.
    2. Variable-rate loan program defined. i. Generally, if the 
identification, the presence or absence, or the exact value of a loan 
feature must be disclosed under this section, variable-rate loans that 
differ as to such features constitute separate loan programs. For 
example, separate loan programs would exist based on differences in any 
of the following loan features:
    A. The index or other formula used to calculate interest rate 
adjustments.
    B. The rules relating to changes in the index value, interest rate, 
payments, and loan balance.
    C. The presence or absence of, and the amount of, rate or payment 
caps.
    D. The presence of a demand feature.
    E. The possibility of negative amortization.
    F. The possibility of interest rate carryover.
    G. The frequency of interest rate and payment adjustments.
    H. The presence of a discount feature.
    I. In addition, if a loan feature must be taken into account in 
preparing the disclosures required by Sec. 226.19(b)(2)(viii), 
variable-rate loans that differ as to that feature constitute separate 
programs under Sec. 226.19(b)(2).
    ii. If, however, a representative value may be given for a loan 
feature or the feature need not be disclosed under Sec. 226.19(b)(2), 
variable-rate loans that differ as to such features do not constitute 
separate loan programs. For example, separate programs would not exist 
based on differences in the following loan features:
    A. The amount of a discount.
    B. The amount of a margin.
    3. Form of program disclosures. A creditor may provide separate 
program disclosure forms for each ARM program it offers or a single 
disclosure form that describes multiple programs. A disclosure form may 
consist of more than one page. For example, a creditor may attach a 
separate page containing the historical payment example for a particular 
program. A disclosure form describing more than one program need not 
repeat information applicable to each program that is described. For 
example, a form describing multiple programs may disclose the 
information applicable to all of the programs in one place with the 
various program features (such as options permitting conversion to a 
fixed rate) disclosed separately. The form, however, must state if any 
program feature that is described is available only in conjunction with 
certain other program features. Both the separate and multiple program 
disclosures may illustrate more than one loan maturity or payment 
amortization--for example, by including multiple payment and loan 
balance columns in the historical payment example. Disclosures may be 
inserted or printed in the Consumer Handbook (or a suitable substitute) 
as long as they are identified as the creditor's loan program 
disclosures.
    4. As applicable. The disclosures required by this section need only 
be made as applicable. Any disclosure not relevant to a particular 
transaction may be eliminated. For example, if the transaction does not 
contain a demand feature, the disclosure required under Sec. 
226.19(b)(2)(x) need not be given. As used in this section, payment 
refers only to a payment based on the interest rate, loan balance and 
loan term, and does not refer to payment of other elements such as 
mortgage insurance premiums.
    5. Revisions. A creditor must revise the disclosures required under 
this section once a year as soon as reasonably possible after the new 
index value becomes available. Revisions to the disclosures also are 
required when the loan program changes.
    Paragraph 19(b)(2)(i).
    1. Change in interest rate, payment, or term. A creditor must 
disclose the fact that the terms of the legal obligation permit the 
creditor, after consummation of the transaction, to increase (or 
decrease) the interest rate, payment, or term of the loan initially 
disclosed to the consumer. For example, the disclosures for a variable-
rate program in which the interest rate and payment (but not loan term) 
can change might read, ``Your interest rate and payment can change 
yearly.'' In transactions where the term of the loan may change due to 
rate fluctuations, the creditor must state that fact.
    Paragraph 19(b)(2)(ii).
    1. Identification of index or formula. If a creditor ties interest 
rate changes to a particular index, this fact must be disclosed, along 
with a source of information about the index. For example, if a creditor 
uses the weekly average yield on U.S. Treasury Securities adjusted to a 
constant maturity as its index, the disclosure might read, ``Your index 
is the weekly average yield on U.S. Treasury Securities adjusted to a 
constant maturity of one year published weekly in the Wall Street 
Journal.'' If no particular index is used, the creditor must briefly 
describe the formula used to calculate interest rate changes.
    2. Changes at creditor's discretion. If interest rate changes are at 
the creditor's discretion, this fact must be disclosed. If an index is 
internally defined, such as by a creditor's prime rate, the creditor 
should either briefly describe that index or state that interest rate 
changes are at the creditor's discretion.
    Paragraph 19(b)(2)(iii).
    1. Determination of interest rate and payment. This provision 
requires an explanation of how the creditor will determine the 
consumer's interest rate and payment. In cases where a creditor bases 
its interest rate on a

[[Page 677]]

specific index and adjusts the index through the addition of a margin, 
for example, the disclosure might read, ``Your interest rate is based on 
the index plus a margin, and your payment will be based on the interest 
rate, loan balance, and remaining loan term.'' In transactions where 
paying the periodic payments will not fully amortize the outstanding 
balance at the end of the loan term and where the final payment will 
equal the periodic payment plus the remaining unpaid balance, the 
creditor must disclose this fact. For example, the disclosure might 
read, ``Your periodic payments will not fully amortize your loan and you 
will be required to make a single payment of the periodic payment plus 
the remaining unpaid balance at the end of the loan term.'' The 
creditor, however, need not reflect any irregular final payment in the 
historical example or in the disclosure of the initial and maximum rates 
and payments. If applicable, the creditor should also disclose that the 
rate and payment will be rounded.
    Paragraph 19(b)(2)(iv).
    1. Current margin value and interest rate. Because the disclosures 
can be prepared in advance, the interest rate and margin may be several 
months old when the disclosures are delivered. A statement, therefore, 
is required alerting consumers to the fact that they should inquire 
about the current margin value applied to the index and the current 
interest rate. For example, the disclosure might state, ``Ask us for our 
current interest rate and margin.''
    Paragraph 19(b)(2)(v).
    1. Discounted and premium interest rate. In some variable-rate 
transactions, creditors may set an initial interest rate that is not 
determined by the index or formula used to make later interest rate 
adjustments. Typically, this initial rate charged to consumers is lower 
than the rate would be if it were calculated using the index or formula. 
However, in some cases the initial rate may be higher. If the initial 
interest rate will be a discount or a premium rate, creditors must alert 
the consumer to this fact. For example, if a creditor discounted a 
consumer's initial rate, the disclosure might state, ``Your initial 
interest rate is not based on the index used to make later 
adjustments.'' (See the commentary to Sec. 226.17(c)(1) for a further 
discussion of discounted and premium variable-rate transactions.) In 
addition, the disclosure must suggest that consumers inquire about the 
amount that the program is currently discounted. For example, the 
disclosure might state, ``Ask us for the amount our adjustable rate 
mortgages are currently discounted.'' In a transaction with a consumer 
buydown or with a third-party buydown that will be incorporated in the 
legal obligation, the creditor should disclose the program as a 
discounted variable-rate transaction, but need not disclose additional 
information regarding the buydown in its program disclosures. (See the 
commentary to Sec. 226.19(b)(2)(viii) for a discussion of how to 
reflect the discount or premium in the historical example or the maximum 
rate and payment disclosure).
    Paragraph 19(b)(2)(vi).
    1. Frequency. The frequency of interest rate and payment adjustments 
must be disclosed. If interest rate changes will be imposed more 
frequently or at different intervals than payment changes, a creditor 
must disclose the frequency and timing of both types of changes. For 
example, in a variable-rate transaction where interest rate changes are 
made monthly, but payment changes occur on an annual basis, this fact 
must be disclosed. In certain ARM transactions, the interval between 
loan closing and the initial adjustment is not known and may be 
different from the regular interval for adjustments. In such cases, the 
creditor may disclose the initial adjustment period as a range of the 
minimum and maximum amount of time from consummation or closing. For 
example, the creditor might state: ``The first adjustment to your 
interest rate and payment will occur no sooner than 6 months and no 
later than 18 months after closing. Subsequent adjustments may occur 
once each year after the first adjustment.'' (See comments 
19(b)(2)(viii)(A)-7 and 19(b)(2)(viii)(B)-4 for guidance on other 
disclosures when this alternative disclosure rule is used.)
    Paragraph 19(b)(2)(vii).
    1. Rate and payment caps. The creditor must disclose limits on 
changes (increases or decreases) in the interest rate or payment. If an 
initial discount is not taken into account in applying overall or 
periodic rate limitations, that fact must be disclosed. If separate 
overall or periodic limitations apply to interest rate increases 
resulting from other events, such as the exercise of a fixed-rate 
conversion option or leaving the creditor's employ, those limitations 
must also be stated. Limitations do not include legal limits in the 
nature of usury or rate ceilings under state or Federal statutes or 
regulations. (See Sec. 226.30 for the rule requiring that a maximum 
interest rate be included in certain variable-rate transactions.) The 
creditor need not disclose each periodic or overall rate limitation that 
is currently available. As an alternative, the creditor may disclose the 
range of the lowest and highest periodic and overall rate limitations 
that may be applicable to the creditor's ARM transactions. For example, 
the creditor might state: ``The limitation on increases to your interest 
rate at each adjustment will be set at an amount in the following range: 
Between 1 and 2 percentage points at each adjustment. The limitation on 
increases to your interest rate over the term of the loan will be set at 
an amount in the following range: Between 4 and 7 percentage points 
above the initial interest

[[Page 678]]

rate.'' A creditor using this alternative rule must include a statement 
in its program disclosures suggesting that the consumer ask about the 
overall rate limitations currently offered for the creditor's ARM 
programs. (See comments 19(b)(2)(viii)(A)-6 and 19(b)(2)(viii)(B)-3 for 
an explanation of the additional requirements for a creditor using this 
alternative rule for disclosure of periodic and overall rate 
limitations.)
    2. Negative amortization and interest rate carryover. A creditor 
must disclose, where applicable, the possibility of negative 
amortization. For example, the disclosure might state, ``If any of your 
payments is not sufficient to cover the interest due, the difference 
will be added to your loan amount.'' Loans that provide for more than 
one way to trigger negative amortization are separate variable-rate 
programs requiring separate disclosures. (See the commentary to Sec. 
226.19(b)(2) for a discussion on the definition of a variable-rate loan 
program and the format for disclosure.) If a consumer is given the 
option to cap monthly payments that may result in negative amortization, 
the creditor must fully disclose the rules relating to the option, 
including the effects of exercising the option (such as negative 
amortization will occur and the principal loan balance will increase); 
however, the disclosure in Sec. 226.19(b)(2)(viii) need not be 
provided.
    3. Conversion option. If a loan program permits consumers to convert 
their variable-rate loans to fixed-rate loans, the creditor must 
disclose that the interest rate may increase if the consumer converts 
the loan to a fixed-rate loan. The creditor must also disclose the rules 
relating to the conversion feature, such as the period during which the 
loan may be converted, that fees may be charged at conversion, and how 
the fixed rate will be determined. The creditor should identify any 
index or other measure or formula used to determine the fixed rate and 
state any margin to be added. In disclosing the period during which the 
loan may be converted and the margin, the creditor may use information 
applicable to the conversion feature during the six months preceding 
preparation of the disclosures and state that the information is 
representative of conversion features recently offered by the creditor. 
The information may be used until the program disclosures are otherwise 
revised. Although the rules relating to the conversion option must be 
disclosed, the effect of exercising the option should not be reflected 
elsewhere in the disclosures, such as in the historical example or in 
the calculation of the initial and maximum interest rate and payments.
    4. Preferred-rate loans. Section 226.19(b) applies to preferred-rate 
loans, where the rate will increase upon the occurrence of some event, 
such as an employee leaving the creditor's employ, whether or not the 
underlying rate is fixed or variable. In these transactions, the 
creditor must disclose the event that would allow the creditor to 
increase the rate such as that the rate may increase if the employee 
leaves the creditor's employ. The creditor must also disclose the rules 
relating to termination of the preferred rate, such as that fees may be 
charged when the rate is changed and how the new rate will be 
determined.
    Paragraph 19(b)(2)(viii).
    1. Historical example and initial and maximum interest rates and 
payments. A creditor may disclose both the historical example and the 
initial and maximum interest rates and payments.

                      Paragraph 19(b)(2)(viii)(A).

    1. Index movement. This section requires a creditor to provide an 
historical example, based on a $10,000 loan amount originating in 1977, 
showing how interest rate changes implemented according to the terms of 
the loan program would have affected payments and the loan balance at 
the end of each year during a 15-year period. (In all cases, the 
creditor need only calculate the payments and loan balance for the term 
of the loan. For example, in a five-year loan, a creditor would show the 
payments and loan balance for the five-year term, from 1977 to 1981, 
with a zero loan balance reflected for 1981. For the remaining ten 
years, 1982-1991, the creditor need only show the remaining index 
values, margin and interest rate and must continue to reflect all 
significant loan program terms such as rate limitations affecting them.) 
Pursuant to this section, the creditor must provide a history of index 
values for the preceding 15 years. Initially, the disclosures would give 
the index values from 1977 to the present. Each year thereafter, the 
revised program disclosures should include an additional year's index 
value until 15 years of values are shown. If the values for an index 
have not been available for 15 years, a creditor need only go back as 
far as the values are available in giving a history and payment example. 
In all cases, only one index value per year need be shown. Thus, in 
transactions where interest rate adjustments are implemented more 
frequently than once per year, a creditor may assume that the interest 
rate and payment resulting from the index value chosen will stay in 
effect for the entire year for purposes of calculating the loan balance 
as of the end of the year and for reflecting other loan program terms. 
In cases where interest rate changes are at the creditor's discretion 
(see the commentary to Sec. 226.19(b)(2)(ii)), the creditor must 
provide a history of the rates imposed for the preceding 15 years, 
beginning with the rates in 1977. In giving this history, the creditor 
need only go back as far as the creditor's rates can reasonably be 
determined.
    2. Selection of index values. The historical example must reflect 
the method by which

[[Page 679]]

index values are determined under the program. If a creditor uses an 
average of index values or any other index formula, the history given 
should reflect those values. The creditor should select one date or, 
when an average of single values is used as an index, one period and 
should base the example on index values measured as of that same date or 
period for each year shown in the history. A date or period at any time 
during the year may be selected, but the same date or period must be 
used for each year in the historical example. For example, a creditor 
could use values for the first business day in July or for the first 
week ending in July for each of the 15 years shown in the example.
    3. Selection of margin. For purposes of the disclosure required 
under Sec. 226.19(b)(2)(viii)(A), a creditor may select a 
representative margin that has been used during the six months preceding 
preparation of the disclosures, and should disclose that the margin is 
one that the creditor has used recently. The margin selected may be used 
until a creditor revises the disclosure form.
    4. Amount of discount or premium. For purposes of the disclosure 
required under Sec. 226.19(b)(2)(viii)(A), a creditor may select a 
discount or premium (amount and term) that has been used during the six 
months preceding preparation of the disclosures, and should disclose 
that the discount or premium is one that the creditor has used recently. 
The discount or premium should be reflected in the historical example 
for as long as the discount or premium is in effect. A creditor may 
assume that a discount that would have been in effect for any part of a 
year was in effect for the full year for purposes of reflecting it in 
the historical example. For example, a 3-month discount may be treated 
as being in effect for the entire first year of the example; a 15-month 
discount may be treated as being in effect for the first two years of 
the example. In illustrating the effect of the discount or premium, 
creditors should adjust the value of the interest rate in the historical 
example, and should not adjust the margin or index values. For example, 
if during the six months preceding preparation of the disclosures the 
fully indexed rate would have been 10% but the first year's rate under 
the program was 8%, the creditor would discount the first interest rate 
in the historical example by 2 percentage points.
    5. Term of the loan. In calculating the payments and loan balances 
in the historical example, a creditor need not base the disclosures on 
each term to maturity or payment amortization that it offers. Instead, 
disclosures for ARMs may be based upon terms to maturity or payment 
amortizations of 5, 15 and 30 years, as follows: ARMs with terms or 
amortizations from over 1 year to 10 years may be based on a 5-year term 
or amortization; ARMs with terms or amortizations from over 10 years to 
20 years may be based on a 15-year term or amortization; and ARMs with 
terms or amortizations over 20 years may be based on a 30-year term or 
amortization. Thus, disclosures for ARMs offered with any term from over 
1 year to 40 years may be based solely on terms of 5, 15 and 30 years. 
Of course, a creditor may always base the disclosures on the actual 
terms or amortizations offered. If the creditor bases the disclosures on 
5-, 15- or 30-year terms or payment amortization as provided above, the 
term or payment amortization used in making the disclosure must be 
stated.
    6. Rate caps. A creditor using the alternative rule described in 
comment 19(b)(2)(vii)-1 for disclosure of rate limitations must base the 
historical example upon the highest periodic and overall rate 
limitations disclosed under section 226.19(b)(2)(vii). In addition, the 
creditor must state the limitations used in the historical example. (See 
comment 19(b)(2)(viii)(B)-3 for an explanation of the use of the highest 
rate limitation in other disclosures.)
    7. Frequency of adjustments. In certain transactions, creditors may 
use the alternative rule described in comment 19(b)(2)(vi)-1 for 
disclosure of the frequency of rate and payment adjustments. In such 
cases, the creditor may assume for purposes of the historical example 
that the first adjustment occurred at the end of the first full year in 
which the adjustment could occur. For example, in an ARM in which the 
first adjustment may occur between 6 and 18 months after closing and 
annually thereafter, the creditor may assume that the first adjustment 
occurred at the end of the first year in the historical example. (See 
comment 19(b)(2)(viii)(B)-4 for an explanation of how to compute the 
maximum interest rate and payment when the initial adjustment period is 
not known.)
    Paragraph 19(b)(2)(viii)(B).
    1. Initial and maximum interest rates and payments. The disclosure 
form must state the initial and maximum interest rates and payments for 
a $10,000 loan originated at an initial interest rate (index value plus 
margin adjusted by the amount of any discount or premium) in effect as 
of an identified month and year for the loan program disclosure. (See 
comment 19(b)(2)-5 on revisions to the loan program disclosure.) In 
calculating the maximum payment under this paragraph, a creditor should 
assume that the interest rate increases as rapidly as possible under the 
loan program, and the maximum payment disclosed should reflect the 
amortization of the loan during this period. Thus, in a loan with 2 
percentage point annual (and 5 percentage point overall) interest rate 
limitations or ``caps,'' the maximum interest rate would be 5 percentage 
points higher than the initial interest rate disclosed. Moreover, the 
loan would not reach the maximum interest rate until the fourth year 
because of the 2

[[Page 680]]

percentage point annual rate limitations, and the maximum payment 
disclosed would reflect the amortization of the loan during this period. 
If the loan program includes a discounted or premium initial interest 
rate, the initial interest rate should be adjusted by the amount of the 
discount or premium.
    2. Term of the loan. In calculating the initial and maximum 
payments, the creditor need not base the disclosures on each term to 
maturity or payment amortization offered under the program. Instead, the 
creditor may follow the rules set out in comment 19(b)(2)(viii)(A)-5.
    If a historical example is provided under Sec. 
226.19(b)(2)(viii)(A), the terms to maturity or payment amortization 
used in the historical example must be used in calculating the initial 
and maximum payment. In addition, creditors must state the term or 
payment amortization used in making the disclosures under this section.
    3. Rate caps. A creditor using the alternative rule for disclosure 
of interest rate limitations described in comment 19(b)(2)(vii)-1 must 
calculate the maximum interest rate and payment based upon the highest 
periodic and overall rate limitations disclosed under Sec. 
226.19(b)(2)(vii). In addition, the creditor must state the rate 
limitations used in calculating the maximum interest rate and payment. 
(See comment 19(b)(2)(viii)(A)-6 for an explanation of the use of the 
highest rate limitation in other disclosures.)
    4. Frequency of adjustments. In certain transactions, a creditor may 
use the alternative rule for disclosure of the frequency of rate and 
payment adjustments described in comment 19(b)(2)(vi)-1. In such cases, 
the creditor must base the calculations of the initial and maximum rates 
and payments upon the earliest possible first adjustment disclosed under 
Sec. 226.19(b)(2)(vi). (See comment 19(b)(2)(viii)(A)-7 for an 
explanation of how to disclose the historical example when the initial 
adjustment period is not known.)
    5. Periodic payment statement. The statement that the periodic 
payment may increase or decrease substantially may be satisfied by the 
disclosure in paragraph 19(b)(2)(vi) if it states for example, ``your 
monthly payment can increase or decrease substantially based on annual 
changes in the interest rate.''
    Paragraph 19(b)(2)(ix).
    1. Calculation of payments. A creditor is required to include a 
statement on the disclosure form that explains how a consumer may 
calculate his or her actual monthly payments for a loan amount other 
than $10,000. The example should be based upon the most recent payment 
shown in the historical example or upon the initial interest rate 
reflected in the maximum rate and payment disclosure. In transactions in 
which the latest payment shown in the historical example is not for the 
latest year of index values shown (such as in a five-year loan), a 
creditor may provide additional examples based on the initial and 
maximum payments disclosed under Sec. 226.19(b)(2)(viii)(B). The 
creditor, however, is not required to calculate the consumer's payments. 
(See the model clauses in appendix H-4(C).)
    Paragraph 19(b)(2)(x).
    1. Demand feature. If a variable-rate loan subject to Sec. 
226.19(b) requirements contains a demand feature as discussed in the 
commentary to Sec. 226.18(i), this fact must be disclosed. (Pursuant to 
Sec. 226.18(i), creditors would also disclose the demand feature in the 
standard disclosures given later.)
    Paragraph 19(b)(2)(xi).
    1. Adjustment notices. A creditor must disclose to the consumer the 
type of information that will be contained in subsequent notices of 
adjustments and when such notices will be provided. (See the commentary 
to Sec. 226.20(c) regarding notices of adjustments.) For example, the 
disclosure might state, ``You will be notified at least 25, but no more 
than 120, days before the due date of a payment at a new level. This 
notice will contain information about the index and interest rates, 
payment amount, and loan balance.'' In transactions where there may be 
interest rate adjustments without accompanying payment adjustments in a 
year, the disclosure might read, ``You will be notified once each year 
during which interest rate adjustments, but no payment adjustments, have 
been made to your loan. This notice will contain information about the 
index and interest rates, payment amount, and loan balance.''
    Paragraph 19(b)(2)(xii).
    1. Multiple loan programs. A creditor that offers multiple variable-
rate loan programs is required to have disclosures for each variable-
rate loan program subject to Sec. 226.19(b)(2). Unless disclosures for 
all of its variable-rate programs are provided initially, the creditor 
must inform the consumer that other closed-end variable-rate programs 
exist, and that disclosure forms are available for these additional loan 
programs. For example, the disclosure form might state, ``Information on 
other adjustable rate mortgage programs is available upon request.''
    19(c) Electronic disclosures.
    1. Form of disclosures. Whether disclosures must be in electronic 
form depends upon the following:
    i. If a consumer accesses an ARM loan application electronically 
(other than as described under ii. below), such as online at a home 
computer, the creditor must provide the disclosures in electronic form 
(such as with the application form on its Web site) in order to meet the 
requirement to provide disclosures in a timely manner on or with the 
application. If the creditor instead

[[Page 681]]

mailed paper disclosures to the consumer, this requirement would not be 
met.
    ii. In contrast, if a consumer is physically present in the 
creditor's office, and accesses an ARM loan application electronically, 
such as via a terminal or kiosk (or if the consumer uses a terminal or 
kiosk located on the premises of an affiliate or third party that has 
arranged with the creditor to provide applications to consumers), the 
creditor may provide disclosures in either electronic or paper form, 
provided the creditor complies with the timing, delivery, and 
retainability requirements of the regulation.

                               References

    Statute: Section 128(b)(2) and the Real Estate Settlement Procedures 
Act (12 U.S.C. 2602).
    Other sections: Sections 226.2, 226.17, and 226.22.
    Other regulations: Regulation X (24 CFR 3500.2(a), 3500.5(b), and 
3500.6(a)).
    Previous regulation: None.
    1981 changes: This section implements section 128(b)(2), a new 
provision that requires early disclosure of credit terms in certain 
mortgage transactions.

            Section 226.20 Subsequent Disclosure Requirements

    Paragraph 20(a) Refinancings.
    1. Definition. A refinancing is a new transaction requiring a 
complete new set of disclosures. Whether a refinancing has occurred is 
determined by reference to whether the original obligation has been 
satisfied or extinguished and replaced by a new obligation, based on the 
parties' contract and applicable law. The refinancing may involve the 
consolidation of several existing obligations, disbursement of new money 
to the consumer or on the consumer's behalf, or the rescheduling of 
payments under an existing obligation. In any form, the new obligation 
must completely replace the prior one.

     Changes in the terms of an existing obligation, 
such as the deferral of individual installments, will not constitute a 
refinancing unless accomplished by the cancellation of that obligation 
and the substitution of a new obligation.
     A substitution of agreements that meets the 
refinancing definition will require new disclosures, even if the 
substitution does not substantially alter the prior credit terms.

    2. Exceptions. A transaction is subject to Sec. 226.20(a) only if 
it meets the general definition of a refinancing. Section 226.20(a) (1) 
through (5) lists 5 events that are not treated as refinancings, even if 
they are accomplished by cancellation of the old obligation and 
substitution of a new one.
    3. Variable-rate.
    i. If a variable-rate feature was properly disclosed under the 
regulation, a rate change in accord with those disclosures is not a 
refinancing. For example, no new disclosures are required when the 
variable-rate feature is invoked on a renewable balloon-payment mortgage 
that was previously disclosed as a variable-rate transaction.
    ii. Even if it is not accomplished by the cancellation of the old 
obligation and substitution of a new one, a new transaction subject to 
new disclosures results if the creditor either:
    A. Increases the rate based on a variable-rate feature that was not 
previously disclosed; or
    B. Adds a variable-rate feature to the obligation. A creditor does 
not add a variable-rate feature by changing the index of a variable-rate 
transaction to a comparable index, whether the change replaces the 
existing index or substitutes an index for one that no longer exists.
    iii. If either of the events in paragraph 20(a)3.ii.A. or ii.B. 
occurs in a transaction secured by a principal dwelling with a term 
longer than one year, the disclosures required under Sec. 226.19(b) 
also must be given at that time.
    4. Unearned finance charge. In a transaction involving precomputed 
finance charges, the creditor must include in the finance charge on the 
refinanced obligation any unearned portion of the original finance 
charge that is not rebated to the consumer or credited against the 
underlying obligation. For example, in a transaction with an add-on 
finance charge, a creditor advances new money to a consumer in a fashion 
that extinguishes the original obligation and replaces it with a new 
one. The creditor neither refunds the unearned finance charge on the 
original obligation to the consumer nor credits it to the remaining 
balance on the old obligation. Under these circumstances, the unearned 
finance charge must be included in the finance charge on the new 
obligation and reflected in the annual percentage rate disclosed on 
refinancing. Accrued but unpaid finance charges are included in the 
amount financed in the new obligation.
    5. Coverage. Section 226.20(a) applies only to refinancings 
undertaken by the original creditor or a holder or servicer of the 
original obligation. A ``refinancing'' by any other person is a new 
transaction under the regulation, not a refinancing under this section.
    Paragraph 20(a)(1).
    1. Renewal. This exception applies both to obligations with a single 
payment of principal and interest and to obligations with periodic 
payments of interest and a final payment of principal. In determining 
whether a new obligation replacing an old one is a renewal of the 
original terms or a refinancing, the creditor may consider it a renewal 
even if:

     Accrued unpaid interest is added to the principal 
balance.

[[Page 682]]

     Changes are made in the terms of renewal 
resulting from the factors listed in Sec. 226.17(c)(3).
     The principal at renewal is reduced by a 
curtailment of the obligation.

    Paragraph 20(a)(2).
    1. Annual percentage rate reduction. A reduction in the annual 
percentage rate with a corresponding change in the payment schedule is 
not a refinancing. If the annual percentage rate is subsequently 
increased (even though it remains below its original level) and the 
increase is effected in such a way that the old obligation is satisfied 
and replaced, new disclosures must then be made.
    2. Corresponding change. A corresponding change in the payment 
schedule to implement a lower annual percentage rate would be a 
shortening of the maturity, or a reduction in the payment amount or the 
number of payments of an obligation. The exception in Sec. 226.20(a)(2) 
does not apply if the maturity is lengthened, or if the payment amount 
or number of payments is increased beyond that remaining on the existing 
transaction.
    Paragraph 20(a)(3).
    1. Court agreements. This exception includes, for example, 
agreements such as reaffirmations of debts discharged in bankruptcy, 
settlement agreements, and post-judgment agreements. (See the commentary 
to Sec. 226.2(a)(14) for a discussion of court-approved agreements that 
are not considered ``credit.'')
    Paragraph 20(a)(4).
    1. Workout agreements. A workout agreement is not a refinancing 
unless the annual percentage rate is increased or additional credit is 
advanced beyond amounts already accrued plus insurance premiums.
    Paragraph 20(a)(5).
    1. Insurance renewal. The renewal of optional insurance added to an 
existing credit transaction is not a refinancing, assuming that 
appropriate Truth in Lending disclosures were provided for the initial 
purchase of the insurance.
    Paragraph 20(b) Assumptions.
    1. General definition. An assumption as defined in Sec. 226.20(b) 
is a new transaction and new disclosures must be made to the subsequent 
consumer. An assumption under the regulation requires the following 
three elements:

 A residential mortgage transaction.
 An express acceptance of the subsequent consumer by 
the creditor.
 A written agreement.

    The assumption of a nonexempt consumer credit obligation requires no 
disclosures unless all three elements are present. For example, an 
automobile dealer need not provide Truth in Lending disclosures to a 
customer who assumes an existing obligation secured by an automobile. 
However, a residential mortgage transaction with the elements described 
in Sec. 226.20(b) is an assumption that calls for new disclosures; the 
disclosures must be given whether or not the assumption is accompanied 
by changes in the terms of the obligation. (See comment 2(a)(24)-5 for a 
discussion of assumptions that are not considered residential mortgage 
transactions.)
    2. Existing residential mortgage transaction. A transaction may be a 
residential mortgage transaction as to one consumer and not to the other 
consumer. In that case, the creditor must look to the assuming consumer 
in determining whether a residential mortgage transaction exists. To 
illustrate:

     The original consumer obtained a mortgage to 
purchase a home for vacation purposes. The loan was not a residential 
mortgage transaction as to that consumer. The mortgage is assumed by a 
consumer who will use the home as a principal dwelling. As to that 
consumer, the loan is a residential mortgage transaction. For purposes 
of Sec. 226.20(b), the assumed loan is an ``existing residential 
mortgage transaction'' requiring disclosures, if the other criteria for 
an assumption are met.

    3. Express agreement. Expressly agrees means that the creditor's 
agreement must relate specifically to the new debtor and must 
unequivocally accept that debtor as a primary obligor. The following 
events are not construed to be express agreements between the creditor 
and the subsequent consumer:

     Approval of creditworthiness.
     Notification of a change in records.
     Mailing of a coupon book to the subsequent 
consumer.
     Acceptance of payments from the new consumer.

    4. Retention of original consumer. The retention of the original 
consumer as an obligor in some capacity does not prevent the change from 
being an assumption, provided the new consumer becomes a primary 
obligor. But the mere addition of a guarantor to an obligation for which 
the original consumer remains primarily liable does not give rise to an 
assumption. However, if neither party is designated as the primary 
obligor but the creditor accepts payment from the subsequent consumer, 
an assumption exists for purposes of Sec. 226.20(b).
    5. Status of parties. Section 226.20(b) applies only if the previous 
debtor was a consumer and the obligation is assumed by another consumer. 
It does not apply, for example, when an individual takes over the 
obligation of a corporation.
    6. Disclosures. For transactions that are assumptions within this 
provision, the creditor must make disclosures based on the ``remaining 
obligation.'' For example:
     The amount financed is the remaining principal 
balance plus any arrearages or

[[Page 683]]

other accrued charges from the original transaction.
     If the finance charge is computed from time to 
time by application of a percentage rate to an unpaid balance, in 
determining the amount of the finance charge and the annual percentage 
rate to be disclosed, the creditor should disregard any prepaid finance 
charges paid by the original obligor, but must include in the finance 
charge any prepaid finance charge imposed in connection with the 
assumption.
     If the creditor requires the assuming consumer to 
pay any charges as a condition of the assumption, those sums are prepaid 
finance charges as to that consumer, unless exempt from the finance 
charge under Sec. 226.4. If a transaction involves add-on or discount 
finance charges, the creditor may make abbreviated disclosures, as 
outlined in Sec. 226.20(b) (1) through (5). Creditors providing 
disclosures pursuant to this section for assumptions of variable-rate 
transactions secured by the consumer's principal dwelling with a term 
longer than one year need not provide new disclosures under Sec. 
226.18(f)(2)(ii) or Sec. 226.19(b). In such transactions, a creditor 
may disclose the variable-rate feature solely in accordance with Sec. 
226.18(f)(1).
    7. Abbreviated disclosures. The abbreviated disclosures permitted 
for assumptions of transactions involving add-on or discount finance 
charges must be made clearly and conspicuously in writing in a form that 
the consumer may keep. However, the creditor need not comply with the 
segregation requirement of Sec. 226.17(a)(1). The terms annual 
percentage rate and total of payments, when disclosed according to Sec. 
226.20(b) (4) and (5), are not subject to the description requirements 
of Sec. 226.18 (e) and (h). The term annual percentage rate disclosed 
under Sec. 226.20(b)(4) need not be more conspicuous than other 
disclosures.
    Paragraph 20(c) Variable-rate adjustments.
    1. Timing of adjustment notices. This section requires a creditor 
(or a subsequent holder) to provide certain disclosures in cases where 
an adjustment to the interest rate is made in a variable-rate 
transaction subject to Sec. 226.19(b). There are two timing rules, 
depending on whether payment changes accompany interest rate changes. A 
creditor is required to provide at least one notice each year during 
which interest rate adjustments have occurred without accompanying 
payment adjustments. For payment adjustments, a creditor must deliver or 
place in the mail notices to borrowers at least 25, but not more than 
120, calendar days before a payment at a new level is due. The timing 
rules also apply to the notice required to be given in connection with 
the adjustment to the rate and payment that follows conversion of a 
transaction subject to Sec. 226.19(b) to a fixed-rate transaction. (In 
cases where an open-end account is converted to a closed-end transaction 
subject to Sec. 226.19(b), the requirements of this section do not 
apply until adjustments are made following conversion.)
    2. Exceptions. Section 226.20(c) does not apply to ``shared-
equity,'' ``shared-appreciation,'' or ``price level adjusted'' or 
similar mortgages.
    3. Basis of disclosures. The disclosures required under this section 
shall reflect the terms of the parties' legal obligation, as required 
under Sec. 226.17(c)(1).
    Paragraph 20(c)(1).
    1. Current and prior interest rates. The requirements under this 
paragraph are satisfied by disclosing the interest rate used to compute 
the new adjusted payment amount (``current rate'') and the adjusted 
interest rate that was disclosed in the last adjustment notice, as well 
as all other interest rates applied to the transaction in the period 
since the last notice (``prior rates''). (If there has been no prior 
adjustment notice, the prior rates are the interest rate applicable to 
the transaction at consummation, as well as all other interest rates 
applied to the transaction in the period since consummation.) If no 
payment adjustment has been made in a year, the current rate is the new 
adjusted interest rate for the transaction, and the prior rates are the 
adjusted interest rate applicable to the loan at the time of the last 
adjustment notice, and all other rates applied to the transaction in the 
period between the current and last adjustment notices. In disclosing 
all other rates applied to the transaction during the period between 
notices, a creditor may disclose a range of the highest and lowest rates 
applied during that period.
    Paragraph 20(c)(2).
    1. Current and prior index values. This section requires disclosure 
of the index or formula values used to compute the current and prior 
interest rates disclosed in Sec. 226.20(c)(1). The creditor need not 
disclose the margin used in computing the rates. If the prior interest 
rate was not based on an index or formula value, the creditor also need 
not disclose the value of the index that would otherwise have been used 
to compute the prior interest rate.
    Paragraph 20(c)(3).
    1. Unapplied index increases. The requirement that the consumer 
receive information about the extent to which the creditor has foregone 
any increase in the interest rate is applicable only to those 
transactions permitting interest rate carryover. The amount of increase 
that is foregone at an adjustment is the amount that, subject to rate 
caps, can be applied to future adjustments independently to increase, or 
offset decreases in, the rate that is determined according to the index 
or formula.
    Paragraph 20(c)(4).

[[Page 684]]

    1. Contractual effects of the adjustment. The contractual effects of 
an interest rate adjustment must be disclosed including the payment due 
after the adjustment is made whether or not the payment has been 
adjusted. A contractual effect of a rate adjustment would include, for 
example, disclosure of any change in the term or maturity of the loan if 
the change resulted from the rate adjustment. In transactions where 
paying the periodic payments will not fully amortize the outstanding 
balance at the end of the loan term and where the final payment will 
equal the periodic payment plus the remaining unpaid balance, the amount 
of the adjusted payment must be disclosed if such payment has changed as 
a result of the rate adjustment. A statement of the loan balance also is 
required. The balance required to be disclosed is the balance on which 
the new adjusted payment is based. If no payment adjustment is disclosed 
in the notice, the balance disclosed should be the loan balance on which 
the payment disclosed under Sec. 226.20(c)(5) is based, if applicable, 
or the balance at the time the disclosure is prepared.
    Paragraph 20(c)(5).
    1. Fully-amortizing payment. This paragraph requires a disclosure 
only when negative amortization occurs as a result of the adjustment. A 
disclosure is not required simply because a loan calls for non-
amortizing or partially amortizing payments. For example, in a 
transaction with a five-year term and payments based on a longer 
amortization schedule, and where the final payment will equal the 
periodic payment plus the remaining unpaid balance, the creditor would 
not have to disclose the payment necessary to fully amortize the loan in 
the remainder of the five-year term. A disclosure is required, however, 
if the payment disclosed under Sec. 226.20(c)(4) is not sufficient to 
prevent negative amortization in the loan. The adjustment notice must 
state the payment required to prevent negative amortization. (This 
paragraph does not apply if the payment disclosed in Sec. 226.20(c)(4) 
is sufficient to prevent negative amortization in the loan but the final 
payment will be a different amount due to rounding.)

                               References

    Statute: None.
    Other sections: Section 226.2.
    Previous regulation: Section 226.8(j) through (l), and 
Interpretation Sections 226.807, 226.811, 226.814, and 226.817.
    1981 changes: While the previous regulation treated virtually any 
change in terms as a refinancing requiring new disclosures, this 
regulation limits refinancings to transactions in which the entire 
original obligation is extinguished and replaced by a new one. 
Redisclosure is no longer required for deferrals or extensions.
    The assumption provision retains the substance of Sec. 226.8(k) and 
Interpretation Sec. 226.807 of the previous regulation, but limits its 
scope to residential mortgage transactions.

              Section 226.21--Treatment of Credit Balances

    Paragraph 21(a).
    1. Credit balance. A credit balance arises whenever the creditor 
receives or holds funds in an account in excess of the total balance due 
from the consumer on that account. A balance might result, for example, 
from the debtor's paying off a loan by transmitting funds in excess of 
the total balance owed on the account, or from the early payoff of a 
loan entitling the consumer to a rebate of insurance premiums and 
finance charges. However, Sec. 226.21 does not determine whether the 
creditor in fact owes or holds sums for the consumer. For example, if a 
creditor has no obligation to rebate any portion of precomputed finance 
charges on prepayment, the consumer's early payoff would not create a 
credit balance with respect to those charges. Similarly, nothing in this 
provision interferes with any rights the creditor may have under the 
contract or under state law with respect to set-off, cross 
collateralization, or similar provisions.
    2. Total balance due. The phrase total balance due refers to the 
total outstanding balance. Thus, this provision does not apply where the 
consumer has simply paid an amount in excess of the payment due for a 
given period.
    3. Timing of refund. The creditor may also fulfill its obligation 
under this section by:

     Refunding any credit balance to the consumer 
immediately.
     Refunding any credit balance prior to a written 
request from the consumer.
     Making a good faith effort to refund any credit 
balance before 6 months have passed. If that attempt is unsuccessful, 
the creditor need not try again to refund the credit balance at the end 
of the 6-month period.

    Paragraph 21(b).
    1. Written requests--standing orders. The creditor is not required 
to honor standing orders requesting refunds of any credit balance that 
may be created on the consumer's account.
    Paragraph 21(c).
    1. Good faith effort to refund. The creditor must take positive 
steps to return any credit balance that has remained in the account for 
over 6 months. This includes, if necessary, attempts to trace the 
consumer through the consumer's last known address or telephone number, 
or both.
    2. Good faith effort unsuccessful. Section 226.21 imposes no further 
duties on the creditor if a good faith effort to return the balance is 
unsuccessful. The ultimate disposition of the credit balance (or any 
credit balance of $1 or less) is to be determined under other applicable 
law.

[[Page 685]]

                               References

    Statute: Section 165.
    Other sections: None.
    Previous regulation: None.
    1981 changes: This section implements section 165 of the Act, which 
was expanded by the 1980 statutory amendments to apply to closed-end as 
well as open-end credit.

       Section 226.22--Determination of the Annual Percentage Rate

    22(a) Accuracy of the annual percentage rate.
    Paragraph 22(a)(1).
    1. Calculation method. The regulation recognizes both the actuarial 
method and the United States Rule Method (U.S. Rule) as measures of an 
exact annual percentage rate. Both methods yield the same annual 
percentage rate when payment intervals are equal. They differ in their 
treatment of unpaid accrued interest.
    2. Actuarial method. When no payment is made, or when the payment is 
insufficient to pay the accumulated finance charge, the actuarial method 
requires that the unpaid finance charge be added to the amount financed 
and thereby capitalized. Interest is computed on interest since in 
succeeding periods the interest rate is applied to the unpaid balance 
including the unpaid finance charge. Appendix J provides instructions 
and examples for calculating the annual percentage rate using the 
actuarial method.
    3. U.S. Rule. The U.S. Rule produces no compounding of interest in 
that any unpaid accrued interest is accumulated separately and is not 
added to principal. In addition, under the U.S. Rule, no interest 
calculation is made until a payment is received.
    4. Basis for calculations. When a transaction involves ``step 
rates'' or ``split rates''--that is, different rates applied at 
different times or to different portions of the principal balance--a 
single composite annual percentage rate must be calculated and disclosed 
for the entire transaction. Assume, for example, a step-rate transaction 
in which a $10,000 loan is repayable in 5 years at 10 percent interest 
for the first 2 years, 12 percent for years 3 and 4, and 14 percent for 
year 5. The monthly payments are $210.71 during the first 2 years of the 
term, $220.25 for years 3 and 4, and $222.59 for year 5. The composite 
annual percentage rate, using a calculator with a ``discounted cash flow 
analysis'' or ``internal rate of return'' function, is 10.75 percent.
    5. Good faith reliance on faulty calculation tools. Footnote 45d 
absolves a creditor of liability for an error in the annual percentage 
rate or finance charge that resulted from a corresponding error in a 
calculation tool used in good faith by the creditor. Whether or not the 
creditor's use of the tool was in good faith must be determined on a 
case-by-case basis, but the creditor must in any case have taken 
reasonable steps to verify the accuracy of the tool, including any 
instructions, before using it. Generally, the footnote is available only 
for errors directly attributable to the calculation tool itself, 
including software programs; it is not intended to absolve a creditor of 
liability for its own errors, or for errors arising from improper use of 
the tool, from incorrect data entry, or from misapplication of the law.
    Paragraph 22(a)(2).
    1. Regular transactions. The annual percentage rate for a regular 
transaction is considered accurate if it varies in either direction by 
not more than \1/8\ of 1 percentage point from the actual annual 
percentage rate. For example, when the exact annual percentage rate is 
determined to be 10\1/8\%, a disclosed annual percentage rate from 10% 
to 10\1/4\%, or the decimal equivalent, is deemed to comply with the 
regulation.
    Paragraph 22(a)(3).
    1. Irregular transactions. The annual percentage rate for an 
irregular transaction is considered accurate if it varies in either 
direction by not more than \1/4\ of 1 percentage point from the actual 
annual percentage rate. This tolerance is intended for more complex 
transactions that do not call for a single advance and a regular series 
of equal payments at equal intervals. The \1/4\ of 1 percentage point 
tolerance may be used, for example, in a construction loan where 
advances are made as construction progresses, or in a transaction where 
payments vary to reflect the consumer's seasonal income. It may also be 
used in transactions with graduated payment schedules where the contract 
commits the consumer to several series of payments in different amounts. 
It does not apply, however, to loans with variable rate features where 
the initial disclosures are based on a regular amortization schedule 
over the life of the loan, even though payments may later change because 
of the variable rate feature.
    22(a)(4) Mortgage loans.
    1. Example. If a creditor improperly omits a $75 fee from the 
finance charge on a regular transaction, the understated finance charge 
is considered accurate under Sec. 226.18(d)(1), and the annual 
percentage rate corresponding to that understated finance charge also is 
considered accurate even if it falls outside the tolerance of \1/8\ of 1 
percentage point provided under Sec. 226.22(a)(2). Because a $75 error 
was made, an annual percentage rate corresponding to a $100 
understatement of the finance charge would not be considered accurate.
    22(a)(5) Additional tolerance for mortgage loans.
    1. Example. This paragraph contains an additional tolerance for a 
disclosed annual percentage rate that is incorrect but is closer to the 
actual annual percentage rate than the rate that would be considered 
accurate under the tolerance in Sec. 226.22(a)(4). To illustrate:

[[Page 686]]

in an irregular transaction subject to a \1/4\ of 1 percentage point 
tolerance, if the actual annual percentage rate is 9.00 percent and a 
$75 omission from the finance charge corresponds to a rate of 8.50 
percent that is considered accurate under Sec. 226.22(a)(4), a 
disclosed APR of 8.65 percent is within the tolerance in Sec. 
226.22(a)(5). In this example of an understated finance charge, a 
disclosed annual percentage rate below 8.50 or above 9.25 percent will 
not be considered accurate.
    22(b) Computation tools.
    Paragraph 22(b)(1).
    1. Board tables. Volumes I and II of the Board's Annual Percentage 
Rate Tables provide a means of calculating annual percentage rates for 
regular and irregular transactions, respectively. An annual percentage 
rate computed in accordance with the instructions in the tables is 
deemed to comply with the regulation, even where use of the tables 
produces a rate that falls outside the general standard of accuracy. To 
illustrate:

     Volume I may be used for single advance 
transactions with completely regular payment schedules or with payment 
schedules that are regular except for an odd first payment, odd first 
period or odd final payment. When used for a transaction with a large 
final balloon payment, Volume I may produce a rate that is considerably 
higher than the exact rate produced using a computer program based 
directly on appendix J. However, the Volume I rate--produced using 
certain adjustments in that volume--is considered to be in compliance.

    Paragraph 22(b)(2).
    1. Other calculation tools. Creditors need not use the Board tables 
in calculating the annual percentage rates. Any computation tools may be 
used, so long as they produce annual percentage rates within \1/8\ or 
\1/4\ of 1 percentage point, as applicable, of the precise actuarial or 
U.S. Rule annual percentage rate.
    22(c) Single add-on rate transactions.
    1. General rule. Creditors applying a single add-on rate to all 
transactions up to 60 months in length may disclose the same annual 
percentage rate for all those transactions, although the actual annual 
percentage rate varies according to the length of the transaction. 
Creditors utilizing this provision must show the highest of those rates. 
For example:

     An add-on rate of 10 percent converted to an 
annual percentage rate produce the following actual annual percentage 
rates at various maturities: at 3 months, 14.94 percent; at 21 months, 
18.18 percent; and at 60 months, 17.27 percent. The creditor must 
disclose an annual percentage rate of 18.18 percent (the highest annual 
percentage rate) for any transaction up to 5 years, even though that 
rate is precise only for a transaction of 21 months.

    22(d) Certain transactions involving ranges of balances.
    1. General rule. Creditors applying a fixed dollar finance charge to 
all balances within a specified range of balances may understate the 
annual percentage rate by up to 8 percent of that rate, by disclosing 
for all those balances the annual percentage rate computed on the median 
balance within that range. For example:

     If a finance charge of $9 applies to all balances 
between $91 and $100, an annual percentage rate of 10 percent (the rate 
on the median balance) may be disclosed as the annual percentage rate 
for all balances, even though a $9 finance charge applied to the lowest 
balance ($91) would actually produce an annual percentage rate of 10.7 
percent.

                               References

    Statute: Section 107.
    Other sections: Section 226.17(c)(4) and appendix J.
    Previous regulation: Section 226.5(b) through (e).
    1981 changes: The section now provides a larger tolerance (\1/4\ of 
1 percentage point) for irregular transactions.

                   Section 226.23--Right of Rescission

    1. Transactions not covered. Credit extensions that are not subject 
to the regulation are not covered by Sec. 226.23 even if a customer's 
principal dwelling is the collateral securing the credit. For example, 
the right of rescission does not apply to a business purpose loan, even 
though the loan is secured by the customer's principal dwelling.
    23(a) Consumer's right to rescind.
    Paragraph 23(a)(1).
    1. Security interest arising from transaction. In order for the 
right of rescission to apply, the security interest must be retained as 
part of the credit transaction. For example:

     A security interest that is acquired by a 
contractor who is also extending the credit in the transaction.
     A mechanic's or materialman's lien that is 
retained by a subcontractor or supplier of the contractor-creditor, even 
when the latter has waived its own security interest in the consumer's 
home.

    The security interest is not part of the credit transaction and 
therefore the transaction is not subject to the right of rescission 
when, for example:

     A mechanic's or materialman's lien is obtained by 
a contractor who is not a party to the credit transaction but is merely 
paid with the proceeds of the consumer's unsecured bank loan.
     All security interests that may arise in 
connection with the credit transaction are validly waived.

[[Page 687]]

     The creditor obtains a lien and completion bond 
that in effect satisfies all liens against the consumer's principal 
dwelling as a result of the credit transaction.

    Although liens arising by operation of law are not considered 
security interests for purposes of disclosure under Sec. 226.2, that 
section specifically includes them in the definition for purposes of the 
right of rescission. Thus, even though an interest in the consumer's 
principal dwelling is not a required disclosure under Sec. 226.18(m), 
it may still give rise to the right of rescission.
    2. Consumer. To be a consumer within the meaning of Sec. 226.2, 
that person must at least have an ownership interest in the dwelling 
that is encumbered by the creditor's security interest, although that 
person need not be a signatory to the credit agreement. For example, if 
only one spouse signs a credit contract, the other spouse is a consumer 
if the ownership interest of that spouse is subject to the security 
interest.
    3. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or other 
second home would not be a principal dwelling. A transaction secured by 
a second home (such as a vacation home) that is not currently being used 
as the consumer's principal dwelling is not rescindable, even if the 
consumer intends to reside there in the future. When a consumer buys or 
builds a new dwelling that will become the consumer's principal dwelling 
within one year or upon completion of construction, the new dwelling is 
considered the principal dwelling if it secures the acquisition or 
construction loan. In that case, the transaction secured by the new 
dwelling is a residential mortgage transaction and is not rescindable. 
For example, if a consumer whose principal dwelling is currently A 
builds B, to be occupied by the consumer upon completion of 
construction, a construction loan to finance B and secured by B is a 
residential mortgage transaction. Dwelling, as defined in Sec. 226.2, 
includes structures that are classified as personalty under state law. 
For example, a transaction secured by a mobile home, trailer, or 
houseboat used as the consumer's principal dwelling may be rescindable.
    4. Special rule for principal dwelling. Notwithstanding the general 
rule that consumers may have only one principal dwelling, when the 
consumer is acquiring or constructing a new principal dwelling, any loan 
subject to Regulation Z and secured by the equity in the consumer's 
current principal dwelling (for example, a bridge loan) is subject to 
the right of rescission regardless of the purpose of that loan. For 
example, if a consumer whose principal dwelling is currently A builds B, 
to be occupied by the consumer upon completion of construction, a 
construction loan to finance B and secured by A is subject to the right 
of rescission. A loan secured by both A and B is, likewise, rescindable.
    5. Addition of a security interest. Under footnote 47, the addition 
of a security interest in a consumer's principal dwelling to an existing 
obligation is rescindable even if the existing obligation is not 
satisfied and replaced by a new obligation, and even if the existing 
obligation was previously exempt under Sec. 226.3(b). The right of 
rescission applies only to the added security interest, however, and not 
to the original obligation. In those situations, only the Sec. 
226.23(b) notice need be delivered, not new material disclosures; the 
rescission period will begin to run from the delivery of the notice.
    Paragraph 23(a)(2).
    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec. 226.23(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--the 
time period for the creditor's performance under Sec. 226.23(d)(2) does 
not begin to run until the notification has been received. The creditor 
may designate an agent to receive the notification so long as the 
agent's name and address appear on the notice provided to the consumer 
under Sec. 226.23(b). Where the creditor fails to provide the consumer 
with a designated address for sending the notification of rescission, 
delivering notification to the person or address to which the consumer 
has been directed to send, payments constitutes delivery to the creditor 
or assignee. State law determines whether delivery of the notification 
to a third party other than the person to whom payments are made is 
delivery to the creditor or assignee, in the case where the creditor 
fails to designate an address for sending the notification of 
rescission.
    Paragraph 23(a)(3).
    1. Rescission period. The period within which the consumer may 
exercise the right to rescind runs for 3 business days from the last of 
3 events:

     Consummation of the transaction.
     Delivery of all material disclosures.
     Delivery to the consumer of the required 
rescission notice.

    For example, if a transaction is consummated on Friday, June 1, and 
the disclosures and notice of the right to rescind were given on 
Thursday, May 31, the rescission period will expire at midnight of the 
third business day after June 1--that is, Tuesday, June 5. In another 
example, if the disclosures are given and the transaction consummated on 
Friday, June 1, and the rescission notice is given on Monday, June 4, 
the rescission period expires at midnight of the third business day 
after June 4--that is, Thursday, June 7.

[[Page 688]]

The consumer must place the rescission notice in the mail, file it for 
telegraphic transmission, or deliver it to the creditor's place of 
business within that period in order to exercise the right.
    2. Material disclosures. Footnote 48 sets forth the material 
disclosures that must be provided before the rescission period can begin 
to run. Failure to provide information regarding the annual pecentage 
rate also includes failure to inform the consumer of the existence of a 
variable rate feature. Failure to give the other required disclosures 
does not prevent the running of the rescission period, although that 
failure may result in civil liability or administrative sanctions.
    3. Unexpired right of rescission. When the creditor has failed to 
take the action necessary to start the three-business day rescission 
period running, the right to rescind automatically lapses on the 
occurrence of the earliest of the following three events:

 The expiration of three years after consummation of 
the transaction.
 Transfer of all the consumer's interest in the 
property.
 Sale of the consumer's interest in the property, 
including a transaction in which the consumer sells the dwelling and 
takes back a purchase money note and mortgage or retains legal title 
through a device such as an installment sale contract.

    Transfer of all the consumers' interest includes such transfers as 
bequests and gifts. A sale or transfer of the property need not be 
voluntary to terminate the right to rescind. For example, a foreclosure 
sale would terminate an unexpired right to rescind. As provided in 
section 125 of the Act, the three-year limit may be extended by an 
administrative proceeding to enforce the provisions of this section. A 
partial transfer of the consumer's interest, such as a transfer 
bestowing co-ownership on a spouse, does not terminate the right of 
rescission.
    Paragraph 23(a)(4).
    1. Joint owners. When more than one consumer has the right to 
rescind a transaction, any of them may exercise that right and cancel 
the transaction on behalf of all. For example, if both husband and wife 
have the right to rescind a transaction, either spouse acting alone may 
exercise the right and both are bound by the rescission.
    23(b) Notice of right to rescind.
    1. Who receives notice. Each consumer entitled to rescind must be 
given:
     Two copies of the rescission notice.
     The material disclosures.
    In a transaction involving joint owners, both of whom are entitled 
to rescind, both must receive the notice of the right to rescind and 
disclosures. For example, if both spouses are entitled to rescind a 
transaction, each must receive two copies of the rescission notice (one 
copy to each if the notice is provided in electronic form in accordance 
with the consumer consent and other applicable provisions of the E-Sign 
Act) and one copy of the disclosures.
    2. Format. The notice must be on a separate piece of paper, but may 
appear with other information such as the itemization of the amount 
financed. The material must be clear and conspicuous, but no minimum 
type size or other technical requirements are imposed. The notices in 
appendix H provide models that creditors may use in giving the notice.
    3. Content. The notice must include all of the information outlined 
in Section 226.23(b)(1)(i) through (v). The requirement in Sec. 
226.23(b) that the transaction be identified may be met by providing the 
date of the transaction. The creditor may provide a separate form that 
the consumer may use to exercise the right of rescission, or that form 
may be combined with the other rescission disclosures, as illustrated in 
appendix H. The notice may include additional information related to the 
required information, such as:

     A description of the property subject to the 
security interest.
     A statement that joint owners may have the right 
to rescind and that a rescission by one is effective for all.
     The name and address of an agent of the creditor 
to receive notice of rescission.

    4. Time of providing notice. The notice required by Sec. 226.23(b) 
need not be given before consummation of the transaction. The creditor 
may deliver the notice after the transaction is consummated, but the 
rescission period will not begin to run until the notice is given. For 
example, if the creditor provides the notice on May 15, but disclosures 
were given and the transaction was consummated on May 10, the 3-business 
day rescission period will run from May 15.
    23(c) Delay of creditor's performance.
    1. General rule. Until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not rescinded, 
the creditor must not, either directly or through a third party:

     Disburse loan proceeds to the consumer.
     Begin performing services for the consumer.
     Deliver materials to the consumer.

    2. Escrow. The creditor may disburse loan proceeds during the 
rescission period in a valid escrow arrangement. The creditor may not, 
however, appoint the consumer as ``trustee'' or ``escrow agent'' and 
distribute funds to the consumer in that capacity during the delay 
period.
    3. Actions during the delay period. Section 226.23(c) does not 
prevent the creditor from taking other steps during the delay, short of 
beginning actual performance. Unless otherwise prohibited, such as by 
state law, the creditor may, for example:
     Prepare the loan check.

[[Page 689]]

     Perfect the security interest.
     Prepare to discount or assign the contract to a 
third party.
     Accrue finance charges during the delay period.

    4. Delay beyond rescission period. The creditor must wait until it 
is reasonably satisfied that the consumer has not rescinded. For 
example, the creditor may satisfy itself by doing one of the following:

     Waiting a reasonable time after expiration of the 
rescission period to allow for delivery of a mailed notice.
     Obtaining a written statement from the consumer 
that the right has not been exercised.

    When more than one consumer has the right to rescind, the creditor 
cannot reasonably rely on the assurance of only one consumer, because 
other consumers may exercise the right.
    23(d) Effects of rescission.
    Paragraph 23(d)(1).
    1. Termination of security interest. Any security interest giving 
rise to the right of rescission becomes void when the consumer exercises 
the right of rescission. The security interest is automatically negated 
regardless of its status and whether or not it was recorded or 
perfected. Under Sec. 226.23(d)(2), however, the creditor must take any 
action necessary to reflect the fact that the security interest no 
longer exists.
    Paragraph 23(d)(2).
    1. Refunds to consumer. The consumer cannot be required to pay any 
amount in the form of money or property either to the creditor or to a 
third party as part of the credit transaction. Any amounts of this 
nature already paid by the consumer must be refunded. ``Any amount'' 
includes finance charges already accrued, as well as other charges, such 
as broker fees, application and commitment fees, or fees for a title 
search or appraisal, whether paid to the creditor, paid directly to a 
third party, or passed on from the creditor to the third party. It is 
irrelevant that these amounts may not represent profit to the creditor.
    2. Amounts not refundable to consumer. Creditors need not return any 
money given by the consumer to a third party outside of the credit 
transaction, such as costs incurred for a building permit or for a 
zoning variance. Similarly, the term any amount does not apply to any 
money or property given by the creditor to the consumer; those amounts 
must be tendered by the consumer to the creditor under Sec. 
226.23(d)(3).
    3. Reflection of security interest termination. The creditor must 
take whatever steps are necessary to indicate that the security interest 
is terminated. Those steps include the cancellation of documents 
creating the security interest, and the filing of release or termination 
statements in the public record. In a transaction involving 
subcontractors or suppliers that also hold security interests related to 
the credit transaction, the creditor must insure that the termination of 
their security interests is also reflected. The 20-day period for the 
creditor's action refers to the time within which the creditor must 
begin the process. It does not require all necessary steps to have been 
completed within that time, but the creditor is responsible for seeing 
the process through to completion.
    Paragraph 23(d)(3).
    1. Property exchange. Once the creditor has fulfilled its 
obligations under Sec. 226.23(d)(2), the consumer must tender to the 
creditor any property or money the creditor has already delivered to the 
consumer. At the consumer's option, property may be tendered at the 
location of the property. For example, if lumber or fixtures have been 
delivered to the consumer's home, the consumer may tender them to the 
creditor by making them available for pick-up at the home, rather than 
physically returning them to the creditor's premises. Money already 
given to the consumer must be tendered at the creditor's place of 
business.
    2. Reasonable value. If returning the property would be extremely 
burdensome to the consumer, the consumer may offer the creditor its 
reasonable value rather than returning the property itself. For example, 
if building materials have already been incorporated into the consumer's 
dwelling, the consumer may pay their reasonable value.
    Paragraph 23(d)(4).
    1. Modifications. The procedures outlined in Sec. 226.23(d)(2) and 
(3) may be modified by a court. For example, when a consumer is in 
bankruptcy proceedings and prohibited from returning anything to the 
creditor, or when the equities dictate, a modification might be made. 
The sequence of procedures under Sec. 226.23(d)(2) and (3), or a 
court's modification of those procedures under Sec. 226.23(d)(4), does 
not affect a consumer's substantive right to rescind and to have the 
loan amount adjusted accordingly. Where the consumer's right to rescind 
is contested by the creditor, a court would normally determine whether 
the consumer has a right to rescind and determine the amounts owed 
before establishing the procedures for the parties to tender any money 
or property.
    23(e) Consumer's waiver of right to rescind.
    1. Need for waiver. To waive the right to rescind, the consumer must 
have a bona fide personal financial emergency that must be met before 
the end of the rescission period. The existence of the consumer's waiver 
will not, of itself, automatically insulate the creditor from liability 
for failing to provide the right of rescission.
    2. Procedure. To waive or modify the right to rescind, the consumer 
must give a written

[[Page 690]]

statement that specifically waives or modifies the right, and also 
includes a brief description of the emergency. Each consumer entitled to 
rescind must sign the waiver statement. In a transaction involving 
multiple consumers, such as a husband and wife using their home as 
collateral, the waiver must bear the signatures of both spouses.
    23(f) Exempt transactions.
    1. Residential mortgage transaction. Any transaction to construct or 
acquire a principal dwelling, whether considered real or personal 
property, is exempt. (See the commentary to Sec. 226.23(a).) For 
example, a credit transaction to acquire a mobile home or houseboat to 
be used as the consumer's principal dwelling would not be rescindable.
    2. Lien status. The lien status of the mortgage is irrelevant for 
purposes of the exemption in Sec. 226.23(f)(1); the fact that a loan 
has junior lien status does not by itself preclude application of this 
exemption. For example, a home buyer may assume the existing first 
mortgage and create a second mortgage to finance the balance of the 
purchase price. Such a transaction would not be rescindable.
    3. Combined-purpose transaction. A loan to acquire a principal 
dwelling and make improvements to that dwelling is exempt if treated as 
one transaction. If, on the other hand, the loan for the acquisition of 
the principal dwelling and the subsequent advances for improvements are 
treated as more than one transaction, then only the transaction that 
finances the acquisition of that dwelling is exempt.
    4. New advances. The exemption in Sec. 226.23(f)(2) applies only to 
refinancings (including consolidations) by the original creditor. The 
original creditor is the creditor to whom the written agreement was 
initially made payable. In a merger, consolidation or acquisition, the 
successor institution is considered the original creditor for purposes 
of the exemption in Sec. 226.23(f)(2). If the refinancing involves a 
new advance of money, the amount of the new advance is rescindable. In 
determining whether there is a new advance, a creditor may rely on the 
amount financed, refinancing costs, and other figures stated in the 
latest Truth in Lending disclosures provided to the consumer and is not 
required to use, for example, more precise information that may only 
become available when the loan is closed. For purposes of the right of 
rescission, a new advance does not include amounts attributed solely to 
the costs of the refinancing. These amounts would include Sec. 
226.4(c)(7) charges (such as attorneys fees and title examination and 
insurance fees, if bona fide and reasonable in amount), as well as 
insurance premiums and other charges that are not finance charges. 
(Finance charges on the new transaction--points, for example--would not 
be considered in determining whether there is a new advance of money in 
a refinancing since finance charges are not part of the amount 
financed.) To illustrate, if the sum of the outstanding principal 
balance plus the earned unpaid finance charge is $50,000 and the new 
amount financed is $51,000, then the refinancing would be exempt if the 
extra $1,000 is attributed solely to costs financed in connection with 
the refinancing that are not finance charges. Of course, if new advances 
of money are made (for example, to pay for home improvements) and the 
consumer exercises the right of rescission, the consumer must be placed 
in the same position as he or she was in prior to entering into the new 
credit transaction. Thus, all amounts of money (which would include all 
the costs of the refinancing) already paid by the consumer to the 
creditor or to a third party as part of the refinancing would have to be 
refunded to the consumer. (See the commentary to Sec. 226.23(d)(2) for 
a discussion of refunds to consumers.) A model rescission notice 
applicable to transactions involving new advances appears in appendix H. 
The general rescission notice (model form H-8) is the appropriate form 
for use by creditors not considered original creditors in refinancing 
transactions.
    5. State creditors. Cities and other political subdivisions of 
states acting as creditors are not exempted from this section.
    6. Multiple advances. Just as new disclosures need not be made for 
subsequent advances when treated as one transaction, no new rescission 
rights arise so long as the appropriate notice and disclosures are given 
at the outset of the transaction. For example, the creditor extends 
credit for home improvements secured by the consumer's principal 
dwelling, with advances made as repairs progress. As permitted by Sec. 
226.17(c)(6), the creditor makes a single set of disclosures at the 
beginning of the construction period, rather than separate disclosures 
for each advance. The right of rescission does not arise with each 
advance. However, if the advances are treated as separate transactions, 
the right of rescission applies to each advance.
    7. Spreader clauses. When the creditor holds a mortgage or deed of 
trust on the consumer's principal dwelling and that mortgage or deed of 
trust contains a ``spreader clause,'' subsequent loans made are separate 
transactions and are subject to the right of rescission. Those loans are 
rescindable unless the creditor effectively waives its security interest 
under the spreader clause with respect to the subsequent transactions.
    8. Converting open-end to closed-end credit. Under certain state 
laws, consummation of a closed-end credit transaction may occur at the 
time a consumer enters into the intitial open-end credit agreement. As 
provided in the commentary to Sec. 226.17(b), closed-end credit 
disclosures may be delayed under these circumstances until the 
conversion of

[[Page 691]]

the open-end account to a closed-end transaction. In accounts secured by 
the consumer's principal dwelling, no new right of rescission arises at 
the time of conversion. Rescission rights under Sec. 226.15 are 
unaffected.
    23(g) Tolerances for accuracy.
    23(g)(2) One percent tolerance.
    1. New advance. The phrase ``new advance'' has the same meaning as 
in comment 23(f)-4.
    23(h) Special Rules for Foreclosures.
    1. Rescission. Section 226.23(h) applies only to transactions that 
are subject to rescission under Sec. 226.23(a)(1).
    Paragraph 23(h)(1)(i).
    1. Mortgage broker fees. A consumer may rescind a loan in 
foreclosure if a mortgage broker fee that should have been included in 
the finance charge was omitted, without regard to the dollar amount 
involved. If the amount of the mortgage broker fee is included but 
misstated the rule in Sec. 226.23(h)(2) applies.
    23(h)(2) Tolerance for disclosures.
    1. General. This section is based on the accuracy of the total 
finance charge rather than its component charges.

                               References

    Statute: Sections 113, 125, and 130.
    Other sections: Section 226.2 and appendix H.
    Previous regulation: Section 226.9.
    1981 changes: The right to rescind applies not only to real property 
used as the consumer's principal dwelling, but to personal property as 
well. The regulation provides no specific text or format for the notice 
of the right to rescind.

                       Section 226.24--Advertising

    1. Effective date. For guidance on the applicability of the Board's 
changes to Sec. 226.24 published on July 30, 2008, see comment 1(d)(5)-
1.
    24(a) Actually available terms.
    1. General rule. To the extent that an advertisement mentions 
specific credit terms, it may state only those terms that the creditor 
is actually prepared to offer. For example, a creditor may not advertise 
a very low annual percentage rate that will not in fact be available at 
any time. This provision is not intended to inhibit the promotion of new 
credit programs, but to bar the advertising of terms that are not and 
will not be available. For example, a creditor may advertise terms that 
will be offered for only a limited period, or terms that will become 
available at a future date.
    24(b) Clear and conspicuous standard.
    1. Clear and conspicuous standard--general. This section is subject 
to the general ``clear and conspicuous'' standard for this subpart, see 
Sec. 226.17(a)(1), but prescribes no specific rules for the format of 
the necessary disclosures, other than the format requirements related to 
the advertisement of rates and payments as described in comment 24(b)-2 
below. The credit terms need not be printed in a certain type size nor 
need they appear in any particular place in the advertisement. For 
example, a merchandise tag that is an advertisement under the regulation 
complies with this section if the necessary credit terms are on both 
sides of the tag, so long as each side is accessible.
    2. Clear and conspicuous standard--rates and payments in 
advertisements for credit secured by a dwelling. For purposes of Sec. 
226.24(f), a clear and conspicuous disclosure means that the required 
information in Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i)(A) and (B) 
is disclosed with equal prominence and in close proximity to the 
advertised rates or payments triggering the required disclosures, and 
that the required information in Sec. 226.24(f)(3)(i)(C) is disclosed 
prominently and in close proximity to the advertised rates or payments 
triggering the required disclosures. If the required information in 
Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i)(A) and (B) is the same 
type size as the advertised rates or payments triggering the required 
disclosures, the disclosures are deemed to be equally prominent. The 
information in Sec. 226.24(f)(3)(i)(C) must be disclosed prominently, 
but need not be disclosed with equal prominence or be the same type size 
as the payments triggering the required disclosures. If the required 
information in Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i) is located 
immediately next to or directly above or below the advertised rates or 
payments triggering the required disclosures, without any intervening 
text or graphical displays, the disclosures are deemed to be in close 
proximity. Notwithstanding the above, for electronic advertisements that 
disclose rates or payments, compliance with the requirements of Sec. 
226.24(e) is deemed to satisfy the clear and conspicuous standard.
    3. Clear and conspicuous standard--Internet advertisements for 
credit secured by a dwelling. For purposes of this section, a clear and 
conspicuous disclosure for visual text advertisements on the Internet 
for credit secured by a dwelling means that the required disclosures are 
not obscured by techniques such as graphical displays, shading, 
coloration, or other devices and comply with all other requirements for 
clear and conspicuous disclosures under Sec. 226.24. See also comment 
24(e)-4.
    4. Clear and conspicuous standard--televised advertisements for 
credit secured by a dwelling. For purposes of this section, including 
alternative disclosures as provided for by Sec. 226.24(g), a clear and 
conspicuous disclosure in the context of visual text advertisements on 
television for credit secured by a dwelling means that the required 
disclosures are not obscured by techniques such as graphical displays, 
shading, coloration, or other devices,

[[Page 692]]

are displayed in a manner that allows a consumer to read the information 
required to be disclosed, and comply with all other requirements for 
clear and conspicuous disclosures under Sec. 226.24. For example, very 
fine print in a television advertisement would not meet the clear and 
conspicuous standard if consumers cannot see and read the information 
required to be disclosed.
    5. Clear and conspicuous standard--oral advertisements for credit 
secured by a dwelling. For purposes of this section, including 
alternative disclosures as provided for by Sec. 226.24(g), a clear and 
conspicuous disclosure in the context of an oral advertisement for 
credit secured by a dwelling, whether by radio, television, or other 
medium, means that the required disclosures are given at a speed and 
volume sufficient for a consumer to hear and comprehend them. For 
example, information stated very rapidly at a low volume in a radio or 
television advertisement would not meet the clear and conspicuous 
standard if consumers cannot hear and comprehend the information 
required to be disclosed.
    24(c) Advertisment of rate of finance charge.
    1. Annual percentage rate. Advertised rates must be stated in terms 
of an annual percentage rate, as defined in Sec. 226.22. Even though 
state or local law permits the use of add-on, discount, time-price 
differential, or other methods of stating rates, advertisements must 
state them as annual percentage rates. Unlike the transactional 
disclosure of an annual percentage rate under Sec. 226.18(e), the 
advertised annual percentage rate need not include a descriptive 
explanation of the term and may be expressed using the abbreviation APR. 
The advertisement must state that the rate is subject to increase after 
consummation if that is the case, but the advertisement need not 
describe the rate increase, its limits, or how it would affect the 
payment schedule. As under Sec. 226.18(f), relating to disclosure of a 
variable rate, the rate increase disclosure requirement in this 
provision does not apply to any rate increase due to delinquency 
(including late payment), default, acceleration, assumption, or transfer 
of collateral.
    2. Simple or periodic rates. The advertisement may not 
simultaneously state any other rate, except that a simple annual rate or 
periodic rate applicable to an unpaid balance may appear along with (but 
not more conspicuously than) the annual percentage rate. An 
advertisement for credit secured by a dwelling may not state a periodic 
rate, other than a simple annual rate, that is applied to an unpaid 
balance. For example, in an advertisement for credit secured by a 
dwelling, a simple annual interest rate may be shown in the same type 
size as the annual percentage rate for the advertised credit, subject to 
the requirements of section 226.24(f). A simple annual rate or periodic 
rate that is applied to an unpaid balance is the rate at which interest 
is accruing; those terms do not include a rate lower than the rate at 
which interest is accruing, such as an effective rate, payment rate, or 
qualifying rate.
    3. Buydowns. When a third party (such as a seller) or a creditor 
wishes to promote the availability of reduced interest rates (consumer 
or seller buydowns), the advertised annual percentage rate must be 
determined in accordance with the commentary to Sec. 226.17(c) 
regarding the basis of transactional disclosures for buydowns. The 
seller or creditor may advertise the reduced simple interest rate, 
provided the advertisement shows the limited term to which the reduced 
rate applies and states the simple interest rate applicable to the 
balance of the term. The advertisement may also show the effect of the 
buydown agreement on the payment schedule for the buydown period, but 
this will trigger the additional disclosures under Sec. 226.24(d)(2).
    4. Discounted variable-rate transactions. The advertised annual 
percentage rate for discounted variable-rate transactions must be 
determined in accordance with comment 17(c)(1)-10 regarding the basis of 
transactional disclosures for such financing.
    i. A creditor or seller may promote the availability of the initial 
rate reduction in such transactions by advertising the reduced simple 
annual rate, provided the advertisement shows with equal prominence and 
in close proximity the limited term to which the reduced rate applies 
and the annual percentage rate that will apply after the term of the 
initial rate reduction expires. See Sec. 226.24(f).
    ii. Limits or caps on periodic rate or payment adjustments need not 
be stated. To illustrate using the second example in comment 17(c)(1)-
10, the fact that the rate is presumed to be 11 percent in the second 
year and 12 percent for the remaining 28 years need not be included in 
the advertisement.
    iii. The advertisement may also show the effect of the discount on 
the payment schedule for the discount period, but this will trigger the 
additional disclosures under Sec. 226.24(d).
    24(d) Advertisement of terms that require additional disclosures.
    1. General rule. Under Sec. 226.24(d)(1), whenever certain 
triggering terms appear in credit advertisements, the additional credit 
terms enumerated in Sec. 226.24(d)(2) must also appear. These 
provisions apply even if the triggering term is not stated explicitly 
but may be readily determined from the advertisement. For example, an 
advertisement may state ``80 percent financing available,'' which is in 
fact indicating that a 20 percent downpayment is required.
    24(d) Advertisement of terms that require additional disclosures.

[[Page 693]]

    1. General rule. Under Sec. 226.24(c)(1), whenever certain 
triggering terms appear in credit advertisements, the additional credit 
terms enumerated in Sec. 226.24(c)(2) must also appear. These 
provisions apply even if the triggering term is not stated explicitly, 
but may be readily determined from the advertisement. For example, an 
advertisement may state ``80% financing available,'' which is in fact 
indicating that a 20% downpayment is required.
    Paragraph 24(d)(1).
    1. Downpayment. The dollar amount of a downpayment or a statement of 
the downpayment as a percentage of the price requires further 
information. By virtue of the definition of downpayment in Sec. 226.2, 
this triggering term is limited to credit sale transactions. It includes 
such statements as:
     Only 5% down.
     As low as $100 down.
     Total move-in costs of $800.

    This provision applies only if a downpayment is actually required; 
statements such as no downpayment or no trade-in required do not trigger 
the additional disclosures under this paragraph.
    2. Payment period. The number of payments required or the total 
period of repayment includes such statements as:

     48-month payment terms.
     30-year mortgage.
     Repayment in as many as 36 monthly installments.

    But it does not include such statements as ``pay weekly,'' ``monthly 
payment terms arranged,'' or ``take years to repay,'' since these 
statements do not indicate a time period over which a loan may be 
financed.
    3. Payment amount. The dollar amount of any payment includes 
statements such as:
     ``Payable in installments of $103''.
     ``$25 weekly''.
     ``$500,000 loan for just $1,650 per month''.
     ``$1,200 balance payable in 10 equal 
installments''.

In the last example, the amount of each payment is readily determinable, 
even though not explicitly stated. But statements such as ``monthly 
payments to suit your needs'' or ``regular monthly payments'' are not 
deemed to be statements of the amount of any payment.
    4. Finance charge. The dollar amount of the finance charge or any 
portion of it includes statements such as:

     ``$500 total cost of credit.''
     ``$2 monthly carrying charge.''
     ``$50,000 mortgages, 2 points to the borrower.''

    In the last example, the $1,000 prepaid finance charge can be 
readily determined from the information given. Statements of the annual 
percentage rate or statements that there is no particular charge for 
credit (such as ``no closing costs'') are not triggering terms under 
this paragraph.
    Paragraph 24(d)(2).
    1. Disclosure of downpayment. The total downpayment as a dollar 
amount or percentage must be shown, but the word ``downpayment'' need 
not be used in making this disclosure. For example, ``10% cash required 
from buyer'' or ``credit terms require minimum $100 trade-in'' would 
suffice.
    2. Disclosure of repayment terms. The phrase ``terms of repayment'' 
generally has the same meaning as the ``payment schedule'' required to 
be disclosed under Sec. 226.18(g). Section 226.24(d)(2)(ii) provides 
flexibility to creditors in making this disclosure for advertising 
purposes. Repayment terms may be expressed in a variety of ways in 
addition to an exact repayment schedule; this is particularly true for 
advertisements that do not contemplate a single specific transaction. 
Repayment terms, however, must reflect the consumer's repayment 
obligations over the full term of the loan, including any balloon 
payment, see comment 24(d)(2)-3, not just the repayment terms that will 
apply for a limited period of time. For example:
    i. A creditor may use a unit-cost approach in making the required 
disclosure, such as ``48 monthly payments of $27.83 per $1,000 
borrowed.''
    ii. In an advertisement for credit secured by a dwelling, when any 
series of payments varies because of the inclusion of mortgage insurance 
premiums, a creditor may state the number and timing of payments, the 
fact that payments do not include amounts for mortgage insurance 
premiums, and that the actual payment obligation will be higher.
    iii. In an advertisement for credit secured by a dwelling, when one 
series of monthly payments will apply for a limited period of time 
followed by a series of higher monthly payments for the remaining term 
of the loan, the advertisement must state the number and time period of 
each series of payments, and the amounts of each of those payments. For 
this purpose, the creditor must assume that the consumer makes the lower 
series of payments for the maximum allowable period of time.
    3. Balloon payment; disclosure of repayment terms. In some 
transactions, a balloon payment will occur when the consumer only makes 
the minimum payments specified in an advertisement. A balloon payment 
results if paying the minimum payments does not fully amortize the 
outstanding balance by a specified date or time, usually the end of the 
term of the loan, and the consumer must repay the entire outstanding 
balance at such time. If a balloon payment will occur when the consumer 
only makes the minimum payments specified in an advertisement, the 
advertisement must state with equal prominence and in close proximity to 
the minimum payment statement the amount and

[[Page 694]]

timing of the balloon payment that will result if the consumer makes 
only the minimum payments for the maximum period of time that the 
consumer is permitted to make such payments.
    4. Annual percentage rate. The advertised annual percentage rate may 
be expressed using the abbreviation ``APR.'' The advertisement must also 
state, if applicable, that the annual percentage rate is subject to 
increase after consummation.
    5. Use of examples. A creditor may use illustrative credit 
transactions to make the necessary disclosures under Sec. 226.24(d)(2). 
That is, where a range of possible combinations of credit terms is 
offered, the advertisement may use examples of typical transactions, so 
long as each example contains all of the applicable terms required by 
Sec. 226.24(d). The examples must be labeled as such and must reflect 
representative credit terms made available by the creditor to present 
and prospective customers.
    24(e) Catalogs or Other Multiple-page Advertisements; Electronic 
Advertisements
    1. Definition. The multiple-page advertisements to which this 
section refers are advertisements consisting of a series of sequentially 
numbered pages--for example, a supplement to a newspaper. A mailing 
consisting of several separate flyers or pieces of promotional material 
in a single envelope does not constitute a single multiple-page 
advertisement for purposes of Sec. 226.24(e).
    2. General. Section 226.24(e) permits creditors to put credit 
information together in one place in a catalog or other multiple-page 
advertisement or in an electronic advertisement (such as an 
advertisement appearing on an Internet Web site). The rule applies only 
if the advertisement contains one or more of the triggering terms from 
Sec. 226.24(d)(1). A list of different annual percentage rates 
applicable to different balances, for example, does not trigger further 
disclosures under Sec. 226.24(d)(2) and so is not covered by Sec. 
226.24(e).
    3. Representative examples. The table or schedule must state all the 
necessary information for a representative sampling of amounts of 
credit. This must reflect amounts of credit the creditor actually 
offers, up to and including the higher-priced items. This does not mean 
that the chart must make the disclosures for the single most expensive 
item the seller offers, but only that the chart cannot be limited to 
information about less expensive sales when the seller commonly offers a 
distinct level of more expensive goods or services. The range of 
transactions shown in the table or schedule in a particular catalog or 
multiple-page advertisement need not exceed the range of transactions 
actually offered in that advertisement.
    4. Electronic advertisement. If an electronic advertisement (such as 
an advertisement appearing on an Internet Web site) contains the table 
or schedule permitted under Sec. 226.24(e)(1), any statement of terms 
set forth in Sec. 226.24(d)(1) appearing anywhere else in the 
advertisement must clearly direct the consumer to the location where the 
table or schedule begins. For example, a term triggering additional 
disclosures may be accompanied by a link that directly takes the 
consumer to the additional information.
    24(f) Disclosure of rates and payments in advertisements for credit 
secured by a dwelling.
    1. Applicability. The requirements of Sec. 226.24(f)(2) apply to 
advertisements for loans where more than one simple annual rate of 
interest will apply. The requirements of Sec. 226.24(f)(3)(i)(A) 
require a clear and conspicuous disclosure of each payment that will 
apply over the term of the loan. In determining whether a payment will 
apply when the consumer may choose to make a series of lower monthly 
payments that will apply for a limited period of time, the creditor must 
assume that the consumer makes the series of lower payments for the 
maximum allowable period of time. See comment 24(d)(2)-2.iii. However, 
for purposes of Sec. 226.24(f), the creditor may, but need not, assume 
that specific events which trigger changes to the simple annual rate of 
interest or to the applicable payments will occur. For example:
    i. Fixed-rate conversion loans. If a loan program permits consumers 
to convert their variable-rate loans to fixed rate loans, the creditor 
need not assume that the fixed-rate conversion option, by itself, means 
that more than one simple annual rate of interest will apply to the loan 
under Sec. 226.24(f)(2) and need not disclose as a separate payment 
under Sec. 226.24(f)(3)(i)(A) the payment that would apply if the 
consumer exercised the fixed-rate conversion option.
    ii. Preferred-rate loans. Some loans contain a preferred-rate 
provision, where the rate will increase upon the occurrence of some 
event, such as the consumer-employee leaving the creditor's employ or 
the consumer closing an existing deposit account with the creditor or 
the consumer revoking an election to make automated payments. A creditor 
need not assume that the preferred-rate provision, by itself, means that 
more than one simple annual rate of interest will apply to the loan 
under Sec. 226.24(f)(2) and the payments that would apply upon 
occurrence of the event that triggers the rate increase need not be 
disclosed as a separate payments under Sec. 226.24(f)(3)(i)(A).
    iii. Rate reductions. Some loans contain a provision where the rate 
will decrease upon the occurrence of some event, such as if the consumer 
makes a series of payments on time. A creditor need not assume that the 
rate reduction provision, by itself, means that more than one simple 
annual rate of interest will apply to the loan under

[[Page 695]]

Sec. 226.24(f)(2) and need not disclose the payments that would apply 
upon occurrence of the event that triggers the rate reduction as a 
separate payments under Sec. 226.24(f)(3)(i)(A).
    2. Equal prominence, close proximity. Information required to be 
disclosed under Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i) that is 
immediately next to or directly above or below the simple annual rate or 
payment amount (but not in a footnote) is deemed to be closely proximate 
to the listing. Information required to be disclosed under Sec. Sec. 
226.24(f)(2)(i) and 226.24(f)(3)(i)(A) and (B) that is in the same type 
size as the simple annual rate or payment amount is deemed to be equally 
prominent.
    3. Clear and conspicuous standard. For more information about the 
applicable clear and conspicuous standard, see comment 24(b)-2.
    4. Comparisons in advertisements. When making any comparison in an 
advertisement between actual or hypothetical credit payments or rates 
and the payments or rates available under the advertised product, the 
advertisement must state all applicable payments or rates for the 
advertised product and the time periods for which those payments or 
rates will apply, as required by this section.
    5. Application to variable-rate transactions--disclosure of rates. 
In advertisements for variable-rate transactions, if a simple annual 
rate that applies at consummation is not based on the index and margin 
that will be used to make subsequent rate adjustments over the term of 
the loan, the requirements of Sec. 226.24(f)(2)(i) apply.
    6. Reasonably current index and margin. For the purposes of this 
section, an index and margin is considered reasonably current if:
    i. For direct mail advertisements, it was in effect within 60 days 
before mailing;
    ii. For advertisements in electronic form it was in effect within 30 
days before the advertisement is sent to a consumer's e-mail address, or 
in the case of an advertisement made on an Internet Web site, when 
viewed by the public; or
    iii. For printed advertisements made available to the general 
public, including ones contained in a catalog, magazine, or other 
generally available publication, it was in effect within 30 days before 
printing.
    24(f)(3) Disclosure of payments.
    1. Amounts and time periods of payments. Section 226.24(f)(3)(i) 
requires disclosure of the amounts and time periods of all payments that 
will apply over the term of the loan. This section may require 
disclosure of several payment amounts, including any balloon payment. 
For example, if an advertisement for credit secured by a dwelling offers 
$300,000 of credit with a 30-year loan term for a payment of $600 per 
month for the first six months, increasing to $1,500 per month after 
month six, followed by a balloon payment of $30,000 at the end of the 
loan term, the advertisement must disclose the amount and time periods 
of each of the two monthly payment streams, as well as the amount and 
timing of the balloon payment, with equal prominence and in close 
proximity to each other. However, if the final scheduled payment of a 
fully amortizing loan is not greater than two times the amount of any 
other regularly scheduled payment, the final payment need not be 
disclosed.
    2. Application to variable-rate transactions--disclosure of 
payments. In advertisements for variable-rate transactions, if the 
payment that applies at consummation is not based on the index and 
margin that will be used to make subsequent payment adjustments over the 
term of the loan, the requirements of Sec. 226.24(f)(3)(i) apply.
    24(g) Alternative disclosures--television or radio advertisements.
    1. Multi-purpose telephone number. When an advertised telephone 
number provides a recording, disclosures should be provided early in the 
sequence to ensure that the consumer receives the required disclosures. 
For example, in providing several options--such as providing directions 
to the advertiser's place of business--the option allowing the consumer 
to request disclosures should be provided early in the telephone message 
to ensure that the option to request disclosures is not obscured by 
other information.
    2. Statement accompanying telephone number. Language must accompany 
a telephone number indicating that disclosures are available by calling 
the telephone number, such as ``call 1-800-000-0000 for details about 
credit costs and terms.''
    24(i) Prohibited acts or practices in advertisements for credit 
secured by a dwelling.
    1. Comparisons in advertisements. The requirements of Sec. 
226.24(i)(2) apply to all advertisements for credit secured by a 
dwelling, including radio and television advertisements. A comparison 
includes a claim about the amount a consumer may save under the 
advertised product. For example, a statement such as ``save $300 per 
month on a $300,000 loan'' constitutes an implied comparison between the 
advertised product's payment and a consumer's current payment.
    2. Misrepresentations about government endorsement. A statement that 
the federal Community Reinvestment Act entitles the consumer to 
refinance his or her mortgage at the low rate offered in the 
advertisement is prohibited because it conveys a misleading impression 
that the advertised product is endorsed or sponsored by the federal 
government.
    3. Misleading claims of debt elimination. The prohibition against 
misleading claims of debt elimination or waiver or forgiveness does not 
apply to legitimate statements that the advertised product may reduce 
debt payments, consolidate debts, or shorten the term of the debt. 
Examples of misleading

[[Page 696]]

claims of debt elimination or waiver or forgiveness of loan terms with, 
or obligations to, another creditor of debt include: ``Wipe-Out Personal 
Debts!'', ``New DEBT-FREE Payment'', ``Set yourself free; get out of 
debt today'', ``Refinance today and wipe your debt clean!'', ``Get 
yourself out of debt * * * Forever!'', and ``Pre-payment Penalty 
Waiver.''

                               References

    Statute: Sections 141, 142, and 144.
    Other sections: Sections 226.2, 226.4, and 226.22.
    Previous regulation: Section 226.10 (a), (b), and (d).
    1981 changes: This section retains the advertising rules in a form 
very similar to the previous regulation, but with certain changes to 
reflect the 1980 statutory amendments. For example, if triggering terms 
appear in any advertisement, the additional disclosures required no 
longer include the cash price. The special rule for FHA section 235 
financing has been eliminated, as well as the rule for advertising 
credit payable in more than four installments with no identified finance 
charge. Interpretation Sec. 226.1002, requiring disclosure of 
representative amounts of credit in catalogs and multiple-page 
advertisements, has been incorporated in simplified form in Sec. 
226.24(d).
    Unlike the previous regulation, if the advertised annual percentage 
rate is subject to increase, that fact must now be disclosed.

                        Subpart D--Miscellaneous

                    Section 226.25--Record Retention

    25(a) General rule.
    1. Evidence of required actions. The creditor must retain evidence 
that it performed the required actions as well as made the required 
disclosures. This includes, for example, evidence that the creditor 
properly handled adverse credit reports in connection with amounts 
subject to a billing dispute under Sec. 226.13, and properly handled 
the refunding of credit balances under Sec. Sec. 226.11 and 226.21.
    2. Methods of retaining evidence. Adequate evidence of compliance 
does not necessarily mean actual paper copies of disclosure statements 
or other business records. The evidence may be retained on microfilm, 
microfiche, or by any other method that reproduces records accurately 
(including computer programs). The creditor need retain only enough 
information to reconstruct the required disclosures or other records. 
Thus, for example, the creditor need not retain each open-end periodic 
statement, so long as the specific information on each statement can be 
retrieved.
    3. Certain variable-rate transactions. In variable-rate transactions 
that are subject to the disclosure requirements of Sec. 226.19(b), 
written procedures for compliance with those requirements as well as a 
sample disclosure form for each loan program represent adequate evidence 
of compliance. (See comment 25(a)-2 pertaining to permissible methods of 
retaining the required disclosures.)
    4. Home equity plans. In home equity plans that are subject to the 
requirements of Sec. 226.5b, written procedures for compliance with 
those requirements as well as a sample disclosure form and contract for 
each home equity program represent adequate evidence of compliance. (See 
comment 25(a)-2 pertaining to permissible methods of retaining the 
required disclosures.)
    5. Prohibited payments to loan originators. For each transaction 
subject to the loan originator compensation provisions in Sec. 
226.36(d)(1), a creditor should maintain records of the compensation it 
provided to the loan originator for the transaction as well as the 
compensation agreement in effect on the date the interest rate was set 
for the transaction. See Sec. 226.35(a) and comment 35(a)(2)(iii)-3 for 
additional guidance on when a transaction's rate is set. For example, 
where a loan originator is a mortgage broker, a disclosure of 
compensation or other broker agreement required by applicable state law 
that complies with Sec. 226.25 would be presumed to be a record of the 
amount actually paid to the loan originator in connection with the 
transaction.

                               References

    Statute: Sections 105 and 108.
    Other sections: Appendix I.
    Previous regulation: Section 226.6(i).
    1981 changes: Section 226.25 substitutes a uniform 2-year record-
retention rule for the previous requirement that certain creditors 
retain records through at least one compliance examination. It also 
states more explicitly that the record-retention requirements apply to 
evidence of required actions.

    Section 226.26--Use of Annual Percentage Rate in Oral Disclosures

    1. Application of rules. The restrictions of Sec. 226.26 apply only 
if the creditor chooses to respond orally to the consumer's request for 
credit cost information. Nothing in the regulation requires the creditor 
to supply rate information orally. If the creditor volunteers 
information (including rate information) through oral solicitations 
directed generally to prospective customers, as through a telephone 
solicitation, those communications may be advertisements subject to the 
rules in Sec. Sec. 226.16 and 226.24.
    26(a) Open-end credit.
    1. Information that may be given. The creditor may state periodic 
rates in addition to the required annual percentage rate, but it need 
not do so. If the annual percentage rate is unknown because transaction 
charges, loan fees, or similar finance charges may be

[[Page 697]]

imposed, the creditor must give the corresponding annual percentage rate 
(that is, the periodic rate multiplied by the number of periods in a 
year, as described in Sec. Sec. 226.6(a)(1)(ii) and (b)(4)(i)(A) and 
226.7(a)(4) and (b)(4)). In such cases, the creditor may, but need not, 
also give the consumer information about other finance charges and other 
charges.
    26(b) Closed-end credit.
    1. Information that may be given. The creditor may state other 
annual or periodic rates that are applied to an unpaid balance, along 
with the required annual percentage rate. This rule permits disclosure 
of a simple interest rate, for example, but not an add-on, discount, or 
similar rate. If the creditor cannot give a precise annual percentage 
rate in its oral response because of variables in the transaction, it 
must give the annual percentage rate for a comparable sample 
transaction; in this case, other cost information may, but need not, be 
given. For example, the creditor may be unable to state a precise annual 
percentage rate for a mortgage loan without knowing the exact amount to 
be financed, the amount of loan fees or mortgage insurance premiums, or 
similar factors. In this situation, the creditor should state an annual 
percentage rate for a sample transaction; it may also provide 
information about the consumer's specific case, such as the contract 
interest rate, points, other finance charges, and other charges.

                               References

    Statute: Section 146.
    Other sections: Sections 226.6(a)(2) and 226.7(d).
    Previous regulation: Interpretation Sec. 226.101.
    1981 changes: This section implements amended section 146 of the 
Act, which added a provision dealing with oral disclosures, and 
incorporates Interpretation Sec. 226.101.

                 Section 226.27--Language of Disclosures

    1. Subsequent disclosures. If a creditor provides account-opening 
disclosures in a language other than English, subsequent disclosures 
need not be in that other language. For example, if the creditor gave 
Spanish-language account-opening disclosures, periodic statements and 
change-in-terms notices may be made in English.
    2. [Reserved]

                               References

    Statute: None.
    Other sections: None.
    Previous regulation: Section 226.6(a).
    1981 changes: No substantive change.

                  Section 226.28--Effect on State Laws

    28(a) Inconsistent disclosure requirements
    1. General. There are 3 sets of preemption criteria: 1 applies to 
the general disclosure and advertising rules of the regulation, and 2 
apply to the credit billing provisions. Section 226.28 also provides for 
Board determinations of preemption.
    2. Rules for chapters 1, 2, and 3. The standard for judging whether 
State laws that cover the types of requirements in chapters 1 (General 
provisions), 2 (Credit transactions), and 3 (Credit advertising) of the 
Act are inconsistent and therefore preempted, is contradiction of the 
Federal law. Examples of laws that would be preempted include:

     A State law that requires use of the term finance 
charge, but defines the term to include fees that the Federal law 
excludes, or to exclude fees the Federal law includes.
     A State law that requires a label such as nominal 
annual interest rate to be used for what the Federal law calls the 
annual percentage rate.

    3. Laws not contradictory to chapters 1, 2, and 3. Generally, State 
law requirements that call for the disclosure of items of information 
not covered by the Federal law, or that require more detailed 
disclosures, do not contradict the Federal requirements. Examples of 
laws that are not preempted include:

     A State law that requires disclosure of the 
minimum periodic payment for open-end credit, even though not required 
by Sec. 226.7.
     A State law that requires contracts to contain 
warnings such as: ``Read this contract before you sign. Do not sign if 
any spaces are left blank. You are entitled to a copy of this 
contract.''

    Similarly, a State law that requires itemization of the amount 
financed does not automatically contradict the permissive itemization 
under Sec. 226.18(c). However, a State law requirement that the 
itemization appear with the disclosure of the amount financed in the 
segregated closed-end credit disclosures is inconsistent, and this 
location requirement would be preempted.
    4. Creditor's options. Before the Board makes a determination about 
a specific State law, the creditor has certain options. Since the 
prohibition against giving the State disclosures does not apply until 
the Board makes its determination, the creditor may choose to give State 
disclosures until the Board formally determines that the State law is 
inconsistent. (The Board will provide sufficient time for creditors to 
revise forms and procedures as necessary to conform to its 
determinations.)

     Under this first approach, as in all cases, the 
Federal disclosures must be clear and conspicuous, and the closed-end 
disclosures must be properly segregated in accordance with Sec. 
226.17(a)(1).
     This ability to give State disclosures relieves 
any uncertainty that the creditor might have prior to Board 
determinations of inconsistency.


[[Page 698]]


    As a second option, the creditor may apply the preemption standards 
to a State law, conclude that it is inconsistent, and choose not to give 
the state-required disclosures. However, nothing in Sec. 226.28(a) 
provides the creditor with immunity for violations of State law if the 
creditor chooses not to make State disclosures and the Board later 
determines that the State law is not preempted.
    5. Rules for correction of billing errors and regulation of credit 
reports. The preemption criteria for the fair credit billing provisions 
set forth in Sec. 226.28 have 2 parts. With respect to the rules on 
correction of billing errors and regulation of credit reports (which are 
in Sec. 226.13), Sec. 226.28(a)(2)(i) provides that a State law is 
inconsistent and preempted if its requirements are different from the 
Federal law. An exception is made, however, for State laws that allow 
the consumer to inquire about an account and require the creditor to 
respond to such inquiries beyond the time limits in the Federal law. 
Such a State law is not preempted with respect to the extra time period. 
For example, Sec. 226.13 requires the consumer to submit a written 
notice of billing error within 60 days after transmittal of the periodic 
statement showing the alleged error. If a State law allows the consumer 
90 days to submit a notice, the State law remains in effect to provide 
the extra 30 days. Any State law disclosures concerning this extended 
state time limit must reflect the qualifications and conform to the 
format specified in Sec. 226.28(a)(2)(i). Examples of laws that would 
be preempted include:

     A State law that has a narrower or broader 
definition of billing error.
     A State law that requires the creditor to take 
different steps to resolve errors.
     A State law that provides different timing rules 
for error resolution (subject to the exception discussed above).

    6. Rules for other fair credit billing provisions. The second part 
of the criteria for fair credit billing relates to the other rules 
implementing chapter 4 of the act (addressed in Sec. Sec. 226.4(c)(8), 
226.5(b)(2)(ii), 226.6(a)(5) and (b)(5)(iii), 226.7(a)(9) and (b)(9), 
226.9(a), 226.10, 226.11, 226.12(c) through (f), 226.13, and 226.21). 
Section 226.28(a)(2)(ii) provides that the test of inconsistency is 
whether the creditor can comply with state law without violating Federal 
law. For example:
    i. A state law that allows the card issuer to offset the consumer's 
credit-card indebtedness against funds held by the card issuer would be 
preempted, since Sec. 226.12(d) prohibits such action.
    ii. A state law that requires periodic statements to be sent more 
than 14 days before the end of a free-ride period would not be 
preempted.
    iii. A state law that permits consumers to assert claims and 
defenses against the card issuer without regard to the $50 and 100-mile 
limitations of Sec. 226.12(c)(3)(ii) would not be preempted.
    iv. In paragraphs ii. and iii. of this comment, compliance with 
state law would involve no violation of the Federal law.
    7. Who may receive a chapter 4 determination. Only states (through 
their authorized officials) may request and receive determinations on 
inconsistency with respect to the fair credit billing provisions.
    8. Preemption determination--Arizona. Effective October 1, 1983, the 
Board has determined that the following provisions in the State law of 
Arizona are preempted by the Federal law:

 Section 44-287 B.5--Disclosure of final cash price 
balance. This provision is preempted in those transactions in which the 
amount of the final cash price balance is the same as the Federal amount 
financed, since in such transactions the State law requires the use of a 
term different from the Federal term to represent the same amount.
 Section 44-287 B.6--Disclosure of finance charge. 
This provision is preempted in those transactions in which the amount of 
the finance charge is different from the amount of the Federal finance 
charge, since in such transactions the State law requires the use of the 
same term as the Federal law to represent a different amount.
 Section 44-287 B.7--Disclosure of the time balance. 
The time balance disclosure provision is preempted in those transactions 
in which the amount is the same as the amount of the Federal total of 
payments, since in such transactions the State law requires the use of a 
term different from the Federal term to represent the same amount.

    9. Preemption determination--Florida. Effective October 1, 1983, the 
Board has determined that the following provisions in the State law of 
Florida are preempted by the Federal law:

 Sections 520.07(2)(f) and 520.34(2)(f)--Disclosure of 
amount financed. This disclosure is preempted in those transactions in 
which the amount is different from the Federal amount financed, since in 
such transactions the State law requires the use of the same term as the 
Federal law to represent a different amount.
 Sections 520.07(2)(g), 520.34(2)(g), and 
520.35(2)(d)--Disclosure of finance charge and a description of its 
components. The finance charge disclosure is preempted in those 
transactions in which the amount of the finance charge is different from 
the Federal amount, since in such transactions the State law requires 
the use of the same

[[Page 699]]

term as the Federal law to represent a different amount. The requirement 
to describe or itemize the components of the finance charge, which is 
also included in these provisions, is not preempted.
 Sections 520.07(2)(h) and 520.34(2)(h)--Disclosure of 
total of payments. The total of payments disclosure is preempted in 
those transactions in which the amount differs from the amount of the 
Federal total of payments, since in such transactions the State law 
requires the use of the same term as the Federal law to represent a 
different amount than the Federal law.
 Sections 520.07(2)(i) and 520.34(2)(i)--Disclosure of 
deferred payment price. This disclosure is preempted in those 
transactions in which the amount is the same as the Federal total sale 
price, since in such transactions the State law requires the use of a 
different term than the Federal law to represent the same amount as the 
Federal law.

    10. Preemption determination--Missouri. Effective October 1, 1983, 
the Board has determined that the following provisions in the State law 
of Missouri are preempted by the Federal law:

 Sections 365.070-6(9) and 408.260-5(6)--Disclosure of 
principal balance. This disclosure is preempted in those transactions in 
which the amount of the principal balance is the same as the Federal 
amount financed, since in such transactions the State law requires the 
use of a term different from the Federal term to represent the same 
amount.
 Sections 365.070-6(10) and 408.260-5(7)--Disclosure 
of time price differential and time charge, respectively. These 
disclosures are preempted in those transactions in which the amount is 
the same as the Federal finance charge, since in such transactions the 
State law requires the use of a term different from the Federal law to 
represent the same amount.
 Sections 365.070-2 and 408.260-2--Use of the terms 
time price differential and time charge in certain notices to the buyer. 
In those transactions in which the State disclosure of the time price 
differential or time charge is preempted, the use of the terms in this 
notice also is preempted. The notice itself is not preempted.
 Sections 365.070-6(11) and 408.260-5(8)--Disclosure 
of time balance. The time balance disclosure is preempted in those 
transactions in which the amount is the same as the amount of the 
Federal total of payments, since in such transactions the State law 
requires the use of a different term than the Federal law to represent 
the same amount.
 Sections 365.070-6(12) and 408.260-5(9)--Disclosure 
of time sale price. This disclosure is preempted in those transactions 
in which the amount is the same as the Federal total sale price, since 
in such transactions the State law requires the use of a different term 
from the Federal law to represent the same amount.

    11. Preemption determination--Mississippi. Effective October 1, 
1984, the Board has determined that the following provision in the State 
law of Mississippi is preempted by the Federal law:
     Section 63-19-31(2)(g)--Disclosure of finance 
charge. This disclosure is preempted in those cases in which the term 
finance charge would be used under State law to describe a different 
amount than the finance charge disclosed under Federal law.
    12. Preemption determination--South Carolina. Effective October 1, 
1984, the Board has determined that the following provision in the State 
law of South Carolina is preempted by the Federal law.
     Section 37-10-102(c)--Disclosure of due-on-sale 
clause. This provision is preempted, but only to the extent that the 
creditor is required to include the disclosure with the segregated 
Federal disclosures. If the creditor may comply with the State law by 
placing the due-on-sale notice apart from the Federal disclosures, the 
state law is not preempted.
    13. Preemption determination--Arizona. Effective October 1, 1986, 
the Board has determined that the following provision in the State law 
of Arizona is preempted by the Federal law:
     Section 6-621A.2--Use of the term the total sum 
of $-------- in certain notices provided to borrowers. This term 
describes the same item that is disclosed under Federal law as the total 
of payments. Since the State law requires the use of a different term 
than Federal law to describe the same item, the State-required term is 
preempted. The notice itself is not preempted.

    Note: The State disclosure notice that incorporated the above 
preempted term was amended on May 4, 1987, to provide that disclosures 
must now be made pursuant to the Federal disclosure provisions.)

    14. Preemption determination--Indiana. Effective October 1, 1988, 
the Board has determined that the following provision in the State law 
of Indiana is preempted by the Federal law:
     Section 23-2-5-8--Inclusion of the loan broker's 
fees and charges in the calculation of, among other items, the finance 
charge and annual percentage rate disclosed to potential borrowers. This 
disclosure is inconsistent with sections 106(a) and Sec. 226.4(a) of 
the Federal statute and regulation, respectively, and is preempted in 
those instances where the use of the same term would disclose a 
different amount than that required to be disclosed under Federal law.

[[Page 700]]

    15. Preemption determination--Wisconsin. Effective October 1, 1991, 
the Board has determined that the following provisions in the state law 
of Wisconsin are preempted by the federal law:
     Section 422.308(1)--the disclosure of the annual 
percentage rate in cases where the amount of the annual percentage rate 
disclosed to consumers under the state law differs from the amount that 
would be disclosed under federal law, since in those cases the state law 
requires the use of the same term as the federal law to represent a 
different amount than the federal law.
     Section 766.565(5)--the provision permitting a 
creditor to include in an open-end home equity agreement authorization 
to declare the account balance due and payable upon receiving notice of 
termination from a non-obligor spouse, since such provision is 
inconsistent with the purpose of the federal law.
    28(b) Equivalent disclosure requirements.
    1. General. A state disclosure may be substituted for a Federal 
disclosure only after the Board has made a finding of substantial 
similarity. Thus, the creditor may not unilaterally choose to make a 
state disclosure in place of a Federal disclosure, even if it believes 
that the state disclosure is substantially similar. Since the rule 
stated in Sec. 226.28(b) does not extend to any requirement relating to 
the finance charge or annual percentage rate, no state provision on 
computation, description, or disclosure of these terms may be 
substituted for the Federal provision.

             28(d) Special Rule for Credit and Charge Cards

    1. General. The standard that applies to preemption of state laws as 
they affect transactions of the type subject to Sec. Sec. 226.5a and 
226.9(e) differs from the preemption standards generally applicable 
under the Truth in Lending Act. The Fair Credit and Charge Card 
Disclosure Act fully preempts state laws relating to the disclosure of 
credit information in consumer credit or charge card applications or 
solicitations. (For purposes of this section, a single credit or charge 
card application or solicitation that may be used to open either an 
account for consumer purposes or an account for business purposes is 
deemed to be a ``consumer credit or charge card application or 
solicitation.'') For example, a state law requiring disclosure of credit 
terms in direct mail solicitations for consumer credit card accounts is 
preempted. A state law requiring disclosures in telephone applications 
for consumer credit card accounts also is preempted, even if it applies 
to applications initiated by the consumer rather than the issuer, 
because the state law relates to the disclosure of credit information in 
applications or solicitations within the general field of preemption, 
that is, consumer credit and charge cards.
    2. Limitations on field of preemption. Preemption under the Fair 
Credit and Charge Card Disclosure Act does not extend to state laws 
applying to types of credit other than open-end consumer credit and 
charge card accounts. Thus, for example, a state law is not preempted as 
it applies to disclosures in credit and charge card applications and 
solicitations solely for business-purpose accounts. On the other hand, 
state credit disclosure laws will not apply to a single application or 
solicitation to open either an account for consumer purposes or an 
account for business purposes. Such ``dual purpose'' applications and 
solicitations are treated as ``consumer credit or charge card 
applications or solicitations'' under this section and state credit 
disclosure laws applicable to them are preempted. Preemption under this 
statute does not extend to state laws applicable to home equity plans; 
preemption determinations in this area are based on the Home Equity Loan 
Consumer Protection Act, as implemented in Sec. 226.5b of the 
regulation.
    3. Laws not preempted. State laws relating to disclosures concerning 
credit and charge cards other than in applications, solicitations, or 
renewal notices are not preempted under Sec. 226.28(d). In addition, 
state laws regulating the terms of credit and charge card accounts are 
not preempted, nor are laws preempted that regulate the form or content 
of information unrelated to the information required to be disclosed 
under Sec. Sec. 226.5a and 226.9(e). Finally, state laws concerning the 
enforcement of the requirements of Sec. Sec. 226.5a and 226.9(e) and 
state laws prohibiting unfair or deceptive acts or practices concerning 
credit and charge card applications, solicitations and renewals are not 
preempted. Examples of laws that are not preempted include:
     A state law that requires card issuers to offer a 
grace period or that prohibits certain fees in credit and charge card 
transactions.
     A state retail installment sales law or a state 
plain language law, except to the extent that it regulates the 
disclosure of credit information in applications, solicitations and 
renewals of accounts of the type subject to Sec. Sec. 226.5a and 
226.9(e).
     A state law requiring notice of a consumer's 
rights under antidiscrimination or similar laws or a state law requiring 
notice about credit information available from state authorities.

                               References

    Statute: Sections 111 and 171 (a) and (c).
    Other sections: Appendix A.
    Previous regulation: Section 226.6 (b) and (c), and Interpretation 
Sec. 226.604.
    1981 changes: Section 226.28 implements amended section 111 of the 
Act. The test for preemption of state laws relating to disclosure and 
advertising is now whether the state law ``contradicts'' the Federal, 
rather

[[Page 701]]

than whether state requirements are ``different.''
    The revised regulation contains no counterpart to Sec. 226.6(c) of 
the previous regulation concerning placement of inconsistent 
disclosures. It also reflects the statutory amendment providing that 
once the Board determines that a state-required disclosure is 
inconsistent with Federal law, the creditor may not make the state 
disclosure.

                    Section 226.29--State Exemptions

    29(a) General rule.
    1. Classes eligible. The state determines the classes of 
transactions for which it will request an exemption, and makes its 
application for those classes. Classes might be, for example, all open-
end credit transactions, all open-end and closed-end transactions, or 
all transactions in which the creditor is a bank.
    2. Substantial similarity. The ``substantially similar'' standard 
requires that state statutory or regulatory provisions and state 
interpretations of those provisions be generally the same as the Federal 
Act and Regulation Z. This includes the requirement that state 
provisions for reimbursement to consumers for overcharges be at least 
equivalent to those required in section 108 of the act. A State will be 
eligible for an exemption even if its law covers classes of transactions 
not covered by the Federal law. For example, if a state's law covers 
agricultural credit, this will not prevent the Board from granting an 
exemption for consumer credit, even though agricultural credit is not 
covered by the Federal law.
    3. Adequate enforcement. The standard requiring adequate provision 
for enforcement generally means that appropriate state officials must be 
authorized to enforce the state law through procedures and sanctions 
comparable to those available to Federal enforcement agencies. 
Furthermore, state law must make adequate provision for enforcement of 
the reimbursement rules.
    4. Exemptions granted. Effective October 1, 1982, the Board has 
granted the following exemptions from portions of the revised Truth in 
Lending Act:

     Maine. Credit or lease transactions subject to 
the Maine Consumer Credit Code and its implementing regulations are 
exempt from chapters 2, 4 and 5 of the Federal Act. (The exemption does 
not apply to transactions in which a federally chartered institution is 
a creditor or lessor.)
     Connecticut. Credit transactions subject to the 
Connecticut Truth in Lending Act are exempt from chapters 2 and 4 of the 
Federal Act. (The exemption does not apply to transactions in which a 
federally chartered institution is a creditor.)
     Massachusetts. Credit transactions subject to the 
Massachusetts Truth in Lending Act are exempt from chapters 2 and 4 of 
the Federal Act. (The exemption does not apply to transactions in which 
a federally chartered institution is a creditor.)
     Oklahoma. Credit or lease transactions subject to 
the Oklahoma Consumer Credit Code are exempt from chapters 2 and 5 of 
the Federal Act. (The exemption does not apply to sections 132 through 
135 of the Federal Act, nor does it apply to transactions in which a 
federally chartered institution is a creditor or lessor.)
     Wyoming. Credit transactions subject to the 
Wyoming Consumer Credit Code are exempt from chapter 2 of the Federal 
Act. (The exemption does not apply to transactions in which a federally 
chartered institution is a creditor.)

    29(b) Civil liability.
    1. Not eligible for exemption. The provision that an exemption may 
not extend to sections 130 and 131 of the Act assures that consumers 
retain access to both Federal and State courts in seeking damages or 
civil penalties for violations, while creditors retain the defenses 
specified in those sections.

                               References

    Statute: Sections 108, 123, and 171(b).
    Other sections: Appendix B.
    Previous regulation: Section 226.12.
    1981 changes: The procedures that states must follow to seek 
exemptions are now located in an appendix. Exemptions under the previous 
regulation will be automatically revoked on April 1, 1982, when 
compliance with the new regulation is mandatory.

                   Section 226.30--Limitation on Rates

    1. Scope of coverage. The requirement of this section applies to 
consumer credit obligations secured by a dwelling (as dwelling is 
defined in Sec. 226.2(a)(19)) in which the annual percentage rate may 
increase after consummation (or during the term of the plan, in the case 
of open-end credit) as a result of an increase in the interest rate 
component of the finance charge--whether those increases are tied to an 
index or formula or are within a creditor's discretion. The section 
applies to credit sales as well as loans. Examples of credit obligations 
subject to this section include:

     Dwelling-secured credit obligations that require 
variable-rate disclosures under the regulation because the interest rate 
may increase during the term of the obligation.
     Dwelling-secured open-end credit plans entered 
into before November 7, 1989 (the effective date of the home equity 
rules) that are not considered variable-rate obligations for purposes of 
disclosure under the regulation but where the creditor reserves the 
contractual right to increase the interest rate--periodic rate and 
corresponding annual percentage rate--during the term of the plan.


[[Page 702]]


In contrast, credit obligations in which there is no contractual right 
to increase the interest rate during the term of the obligation are not 
subject to this section. Examples include:

     ``Shared-equity'' or ``shared-appreciation'' 
mortgage loans that have a fixed rate of interest and a shared-
appreciation feature based on the consumer's equity in the mortgaged 
property. (The appreciation share is payable in a lump sum at a 
specified time.)
     Dwelling-secured fixed-rate closed-end balloon-
payment mortgage loans and dwelling-secured fixed-rate open-end plans 
with a stated term that the creditor may renew at maturity. (Contrast 
with the renewable balloon-payment mortgage instrument described in 
comment 17(c)(1)-11.)
     Dwelling-secured fixed rate closed-end multiple 
advance transactions in which each advance is disclosed as a separate 
transaction.
     ``Price level adjusted mortgages'' or other 
indexed mortgages that have a fixed rate of interest but provide for 
periodic adjustments to payments and the loan balance to reflect changes 
in an index measuring prices or inflation.

The requirement of this section does not apply to credit obligations 
entered into prior to December 9, 1987. Consequently, new advances under 
open-end credit plans existing prior to December 9, 1987, are not 
subject to this section.
    2. Refinanced obligations. On or after December 9, 1987, when a 
credit obligation is refinanced, as defined in Sec. 226.20(a), the new 
obligation is subject to this section if it is dwelling-secured and 
allows for increases in the interest rate.
    3. Assumptions. On or after December 9, 1987, when a credit 
obligation is assumed, as defined in Sec. 226.20(b), the obligation 
becomes subject to this section if it is dwelling-secured and allows for 
increases in the interest rate.
    4. Modifications of obligations. The modification of an obligation, 
regardless of when the obligation was entered into, is generally not 
covered by this section. For example, increasing the credit limit on a 
dwelling-secured, open-end plan with a variable interest rate entered 
into before the effective date of the rule does not make the obligation 
subject to this section. If, however, a security interest in a dwelling 
is added on or after December 9, 1987, to a credit obligation that 
allows for interest rate increases, the obligation becomes subject to 
this section. Similarly, if a variable interest rate feature is added to 
a dwelling-secured credit obligation, the obligation becomes subject to 
this section.
    5. Land trusts. In some states, a land trust is used in residential 
real estate transactions. (See discussion in comment 3(a)-8).) If a 
consumer-purpose loan that allows for interest rate increases is secured 
by an assignment of a beneficial interest in a land trust that holds 
title to a consumer's dwelling, that loan is subject to this section.
    6. Relationship to other sections. Unless otherwise provided for in 
the commentary to this section, other provisions of the regulation such 
as definitions, exemptions, rules and interpretations also apply to this 
section where appropriate. To illustrate:
     An adjustable interest rate business-purpose loan 
is not subject to this section even if the loan is secured by a dwelling 
because such credit extensions are not subject to the regulation. (See 
generally Sec. 226.3(a).)
     Creditors subject to this section are only those 
that fall within the definition of a creditor in Sec. 226.2(a)(17).
    7. Consumer credit contract. Creditors are required to specify a 
lifetime maximum interest rate in their credit contracts--the instrument 
that creates personal liability and generally contains the terms and 
conditions of the agreement (for example, a promissory note or home-
equity line of credit agreement). In some states, the signing of a 
commitment letter may create a binding obligation, for example, 
constituting consummation as defined in Sec. 226.2(a)(13). The maximum 
interest rate must be included in the credit contract, but a creditor 
may include the rate ceiling in the commitment instrument as well.
    8. Manner of stating the maximum interest rate. The maximum interest 
rate must be stated in the credit contract either as a specific amount 
or in any other manner that would allow the consumer to easily 
ascertain, at the time of entering into the obligation, what the rate 
ceiling will be over the term of the obligation.
    i. For example, the following statements would be sufficiently 
specific
    A. The maximum interest rate will not exceed X%.
    B. The interest rate will never be higher than X percentage points 
above the initial rate of Y%.
    C. The interest rate will not exceed X%, or X percentage points 
above [a rate to be determined at some future point in time], whichever 
is less.
    D. The maximum interest rate will not exceed X%, or the state usury 
ceiling, whichever is less.
    ii. The following statements would not comply with this section
    A. The interest rate will never be higher than X percentage points 
over the prevailing market rate.
    B. The interest rate will never be higher than X percentage points 
above [a rate to be determined at some future point in time].
    C. The interest rate will not exceed the state usury ceiling which 
is currently X%.

[[Page 703]]

    iii. A creditor may state the maximum rate in terms of a maximum 
annual percentage rate that may be imposed. Under an open-end credit 
plan, this normally would be the corresponding annual percentage rate. 
(See generally Sec. 226.6(a)(1)(ii) and (b)(4)(i)(A).)
    9. Multiple interest rate ceilings. Creditors are not prohibited 
from setting multiple interest rate ceilings. For example, on loans with 
multiple variable-rate features, creditors may establish a maximum 
interest rate for each feature. To illustrate, in a variable-rate loan 
that has an option to convert to a fixed rate, a creditor may set one 
maximum interest rate for the initially imposed index-based variable-
rate feature and another for the conversion option. Of course, a 
creditor may establish one maximum interest rate applicable to all 
features.
    10. Interest rate charged after default. State law may allow an 
interest rate after default higher than the contract rate in effect at 
the time of default; however, the interest rate after default is subject 
to a maximum interest rate set forth in a credit obligation that is 
otherwise subject to this section. This rule applies only in situations 
in which a post-default agreement is still considered part of the 
original obligation.
    11. Increasing the maximum interest rate--general rule. Generally, a 
creditor may not increase the maximum interest rate originally set on a 
credit obligation subject to this section unless the consumer and the 
creditor enter into a new obligation. Therefore, under an open-end plan, 
a creditor may not increase the rate ceiling imposed merely because 
there is an increase in the credit limit. If an open-end plan is closed 
and another opened, a new rate ceiling may be imposed. Furthermore, 
where an open-end plan has a fixed maturity and a creditor renews the 
plan at maturity, or enters into a closed-end credit transaction, a new 
maximum interest rate may be set at that time. If the open-end plan 
provides for a repayment phase, the maximum interest rate cannot be 
increased when the repayment phase begins unless the agreement provided 
for such an increase. For a closed-end credit transaction, a new maximum 
interest rate may be set only if the transaction is satisfied and 
replaced by a new obligation. (The exceptions in Sec. 226.20(a)(1)-(5) 
which limit what transactions are considered refinancings for purposes 
of disclosure do not apply with respect to increasing a rate ceiling 
that has been imposed; if a transaction is satisfied and replaced, the 
rate ceiling may be increased.)
    12. Increasing the maximum interest rate--assumption of an 
obligation. If an obligation subject to this section is assumed by a new 
obligor and the original obligor is released from liability, the maximum 
interest rate set on the obligation may be increased as part of the 
assumption agreement. (This rule applies whether or not the transaction 
constitutes an assumption as defined in Sec. 226.20(b).)

                               References

    Statute: Competitive Equality Banking Act of 1987, Pub. L. No. 100-
86, 101 Stat. 552
    Other sections: Sections 226.6, 226.18, and 226.19
    Previous regulation: None
    1987 changes: This section implements section 1204 of the 
Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 
552 which provides that, effective December 9, 1987, adjustable-rate 
mortgages must include a limitation on the interest rate that may apply 
during the term of the mortgage loan. An adjustable-rate mortgage loan 
is defined in section 1204 as ``any loan secured by a lien on a one-to-
four family dwelling unit, including a condominium unit, cooperative 
housing unit, or mobile home, where the loan is made pursuant to an 
agreement under which the creditor may, from time to time, adjust the 
rate of interest.'' The rule in this section incorporates section 1204 
into Regulation Z and limits the scope of section 1204 to dwelling-
secured consumer credit subject to the Truth in Lending Act, in which a 
creditor has the contractual right to increase the interest rate during 
the term of the credit obligation.

     Subpart E--Special Rules for Certain Home Mortgage Transactions

                      Section 226.31--General Rules

    31(c) Timing of disclosure.
    1. Furnishing disclosures. Disclosures are considered furnished when 
received by the consumer.
    Paragraph 31(c)(1) Disclosures for certain closed-end home 
mortgages.
    1. Pre-consummation waiting period. A creditor must furnish Sec. 
226.32 disclosures at least three business days prior to consummation. 
Under Sec. 226.32, ``business day'' has the same meaning as the 
rescission rule in comment 2(a)(6)-2--all calendar days except Sundays 
and the federal legal holidays listed in 5 U.S.C. 6103(a). However, 
while the disclosure rule under Sec. Sec. 226.15 and 226.23 extends to 
midnight of the third business day, the rule under Sec. 226.32 does 
not. For example, under Sec. 226.32, if disclosures were provided on a 
Friday, consummation could occur any time on Tuesday, the third business 
day following receipt of the disclosures. If the timing of the 
rescission rule were to be used, consummation could not occur until 
after midnight on Tuesday.
    Paragraph 31(c)(1)(i) Change in terms.
    1. Redisclosure required. Creditors must provide new disclosures 
when a change in terms makes disclosures previously provided under Sec. 
226.32(c) inaccurate, including disclosures based on and labeled as an 
estimate. A

[[Page 704]]

change in terms may result from a formal written agreement or otherwise.
    2. Sale of optional products at consummation. If the consumer 
finances the purchase of optional products such as credit insurance and 
as a result the monthly payment differs from what was previously 
disclosed under Sec. 226.32, redisclosure is required and a new three-
day waiting period applies. (See comment 32(c)(3)-1 on when optional 
items may be included in the regular payment disclosure.)
    Paragraph 31(c)(1)(ii) Telephone disclosures.
    1. Telephone disclosures. Disclosures by telephone must be furnished 
at least three business days prior to consummation, calculated in accord 
with the timing rules under Sec. 226.31(c)(1).
    Paragraph 31(c)(1)(iii) Consumer's waiver of waiting period before 
consummation.
    1. Modification or waiver. A consumer may modify or waive the right 
to the three-day waiting period only after receiving the disclosures 
required by Sec. 226.32 and only if the circumstances meet the criteria 
for establishing a bona fide personal financial emergency under Sec. 
226.23(e). Whether these criteria are met is determined by the facts 
surrounding individual situations. The imminent sale of the consumer's 
home at foreclosure during the three-day period is one example of a bona 
fide personal financial emergency. Each consumer entitled to the three-
day waiting period must sign the handwritten statement for the waiver to 
be effective.
    31(c)(2) Disclosures for reverse mortgages.
    1. Business days. For purposes of providing reverse mortgage 
disclosures, ``business day'' has the same meaning as in comment 
31(c)(1)-1--all calendar days except Sundays and the Federal legal 
holidays listed in 5 U.S.C. 6103(a). This means if disclosures are 
provided on a Friday, consummation could occur any time on Tuesday, the 
third business day following receipt of the disclosures.
    2. Open-end plans. Disclosures for open-end reverse mortgages must 
be provided at least three business days before the first transaction 
under the plan (see Sec. 226.5(b)(1)).
    31(d) Basis of disclosures and use of estimates.
    1. Redisclosure. Section 226.31(d) allows the use of estimates when 
information necessary for an accurate disclosure is unknown to the 
creditor, provided that the disclosure is clearly identified as an 
estimate. For purposes of Subpart E, the rule in Sec. 226.31(c)(1)(i) 
requiring new disclosures when the creditor changes terms also applies 
to disclosures labeled as estimates.
    31(d)(3) Per-diem interest.
    1. Per-diem interest. This paragraph applies to the disclosure of 
any numerical amount (such as the finance charge, annual percentage 
rate, or payment amount) that is affected by the amount of the per-diem 
interest charge that will be collected at consummation. If the amount of 
per-diem interest used in preparing the disclosures for consummation is 
based on the information known to the creditor at the time the 
disclosure document is prepared, the disclosures are considered accurate 
under this rule, and affected disclosures are also considered accurate, 
even if the disclosures were not labeled as estimates. (See comment 
17(c)(2)(ii)-1 generally.)

   Section 226.32--Requirements for Certain Closed-End Home Mortgages

    32(a) Coverage.
    Paragraph 32(a)(1)(i).
    1. Application date. An application is deemed received when it 
reaches the creditor in any of the ways applications are normally 
transmitted. (See Sec. 226.19(a).) For example, if a borrower applies 
for a 10-year loan on September 30 and the creditor counteroffers with a 
7-year loan on October 10, the application is deemed received in 
September and the creditor must measure the annual percentage rate 
against the appropriate Treasury security yield as of August 15. An 
application transmitted through an intermediary agent or broker is 
received when it reaches the creditor, rather than when it reaches the 
agent or broker. (See comment 19(b)-3 to determine whether a transaction 
involves an intermediary agent or broker.)
    2. When fifteenth not a business day. If the 15th day of the month 
immediately preceding the application date is not a business day, the 
creditor must use the yield as of the business day immediately preceding 
the 15th.
    3. Calculating annual percentage rates for variable-rate loans and 
discount loans. Creditors must use the rules set out in the commentary 
to Sec. 226.17(c)(1) in calculating the annual percentage rate for 
variable-rate loans (assume the rate in effect at the time of disclosure 
remains unchanged) and for discount, premium, and stepped-rate 
transactions (which must reflect composite annual percentage rates).
    4. Treasury securities. To determine the yield on comparable 
Treasury securities for the annual percentage rate test, creditors may 
use the yield on actively traded issues adjusted to constant maturities 
published in the Board's ``Selected Interest Rates'' (statistical 
release H-15). Creditors must use the yield corresponding to the 
constant maturity that is closest to the loan's maturity. If the loan's 
maturity is exactly halfway between security maturities, the annual 
percentage rate on the loan should be compared with the yield for 
Treasury securities having the lower yield. In determining the loan's 
maturity, creditors may rely on the rules in Sec. 226.17(c)(4) 
regarding irregular first payment periods. For example:
    i. If the H-15 contains a yield for Treasury securities with 
constant maturities of 7 years and 10 years and no maturity in between, 
the annual percentage rate for an 8-

[[Page 705]]

year mortgage loan is compared with the yield of securities having a 7-
year maturity, and the annual percentage rate for a 9-year mortgage loan 
is compared with the yield of securities having a 10-year maturity.
    ii. If a mortgage loan has a term of 15 years, and the H-15 contains 
a yield of 5.21 percent for constant maturities of 10 years, and also 
contains a yield of 6.33 percent for constant maturities of 20 years, 
then the creditor compares the annual percentage rate for a 15-year 
mortgage loan with the yield for constant maturities of 10 years.
    iii. If a mortgage loan has a term of 30 years, and the H-15 does 
not contain a yield for 30-year constant maturities, but contains a 
yield for 20-year constant maturities, and an average yield for 
securities with remaining terms to maturity of 25 years and over, then 
the annual percentage rate on the loan is compared with the yield for 
20-year constant maturities.
    Paragraph 32(a)(1)(ii).
    1. Total loan amount. For purposes of the ``points and fees'' test, 
the total loan amount is calculated by taking the amount financed, as 
determined according to Sec. 226.18(b), and deducting any cost listed 
in Sec. 226.32(b)(1)(iii) and Sec. 226.32(b)(1)(iv) that is both 
included as points and fees under Sec. 226.32(b)(1) and financed by the 
creditor. Some examples follow, each using a $10,000 amount borrowed, a 
$300 appraisal fee, and $400 in points. A $500 premium for optional 
credit life insurance is used in one example.
    i. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and pays $400 in points at closing, the amount financed under 
Sec. 226.18(b) is $9,900 ($10,000 plus the $300 appraisal fee that is 
paid to and financed by the creditor, less $400 in prepaid finance 
charges). The $300 appraisal fee paid to the creditor is added to other 
points and fees under Sec. 226.32(b)(1)(iii). It is deducted from the 
amount financed ($9,900) to derive a total loan amount of $9,600.
    ii. If the consumer pays the $300 fee for the creditor-conducted 
appraisal in cash at closing, the $300 is included in the points and 
fees calculation because it is paid to the creditor. However, because 
the $300 is not financed by the creditor, the fee is not part of the 
amount financed under Sec. 226.18(b). In this case, the amount financed 
is the same as the total loan amount: $9,600 ($10,000, less $400 in 
prepaid finance charges).
    iii. If the consumer finances a $300 fee for an appraisal conducted 
by someone other than the creditor or an affiliate, the $300 fee is not 
included with other points and fees under Sec. 226.32(b)(1)(iii). The 
amount financed under Sec. 226.18(b) is $9,900 ($10,000 plus the $300 
fee for an independently-conducted appraisal that is financed by the 
creditor, less the $400 paid in cash and deducted as prepaid finance 
charges).
    iv. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and a $500 single premium for optional credit life insurance, 
and pays $400 in points at closing, the amount financed under Sec. 
226.18(b) is $10,400 ($10,000, plus the $300 appraisal fee that is paid 
to and financed by the creditor, plus the $500 insurance premium that is 
financed by the creditor, less $400 in prepaid finance charges). The 
$300 appraisal fee paid to the creditor is added to other points and 
fees under Sec. 226.32(b)(1)(iii), and the $500 insurance premium is 
added under 226.32(b)(1)(iv). The $300 and $500 costs are deducted from 
the amount financed ($10,400) to derive a total loan amount of $9,600.
    2. Annual adjustment of $400 amount. A mortgage loan is covered by 
Sec. 226.32 if the total points and fees payable by the consumer at or 
before loan consummation exceed the greater of $400 or 8 percent of the 
total loan amount. The $400 figure is adjusted annually on January 1 by 
the annual percentage change in the CPI that was in effect on the 
preceding June 1. The Board will publish adjustments after the June 
figures become available each year. The adjustment for the upcoming year 
will be included in any proposed commentary published in the fall, and 
incorporated into the commentary the following spring. The adjusted 
figures are:
    i. For 1996, $412, reflecting a 3.00 percent increase in the CPI-U 
from June 1994 to June 1995, rounded to the nearest whole dollar.
    ii. For 1997, $424, reflecting a 2.9 percent increase in the CPI-U 
from June 1995 to June 1996, rounded to the nearest whole dollar.
    iii. For 1998, $435, reflecting a 2.5 percent increase in the CPI-U 
from June 1996 to June 1997, rounded to the nearest whole dollar.
    iv. For 1999, $441, reflecting a 1.4 percent increase in the CPI-U 
from June 1997 to June 1998, rounded to the nearest whole dollar.
    v. For 2000, $451, reflecting a 2.3 percent increase in the CPI-U 
from June 1998 to June 1999, rounded to the nearest whole dollar.
    vi. For 2001, $465, reflecting a 3.1 percent increase in the CPI-U 
from June 1999 to June 2000, rounded to the nearest whole dollar.
    vii. For 2002, $480, reflecting a 3.27 percent increase in the CPI-U 
from June 2000 to June 2001, rounded to the nearest whole dollar.
    viii. For 2003, $488, reflecting a 1.64 percent increase in the CPI-
U from June 2001 to June 2002, rounded to the nearest whole dollar.
    ix. For 2004, $499, reflecting a 2.22 percent increase in the CPI-U 
from June 2002 to June 2003, rounded to the nearest whole dollar.
    x. For 2005, $510, reflecting a 2. 29 percent increase in the CPI-U 
from June 2003 to June 2004, rounded to the nearest whole dollar.
    xi. For 2006, $528, reflecting a 3.51 percent increase in the CPI-U 
from June 2004 to June 2005, rounded to the nearest whole dollar.

[[Page 706]]

    xii. For 2007, $547, reflecting a 3.55 percent increase in the CPI-U 
from June 2005 to June 2006, rounded to the nearest whole dollar.
    xiii. For 2008, $561, reflecting a 2.56 percent increase in the CPI-
U from June 2006 to June 2007, rounded to the nearest whole dollar.
    xiv. For 2009, $583, reflecting a 3.94 percent increase in the CPI-U 
from June 2007 to June 2008, rounded to the nearest whole dollar.
    xv. For 2010, $579, reflecting a 0.74 percent decrease in the CPI-U 
from June 2008 to June 2009, rounded to the nearest whole dollar.
    xvi. For 2011, $592, reflecting a 2.2 percent increase in the CPI-U 
from June 2009 to June 2010, rounded to the nearest whole dollar.
    xvii. For 2012, $611, reflecting a 3.2 percent increase in the CPI-U 
from June 2010 to June 2011, rounded to the nearest whole dollar.
    Paragraph 32(a)(2).
    1. Exemption limited. Section 226.32(a)(2) lists certain 
transactions exempt from the provisions of Sec. 226.32. Nevertheless, 
those transactions may be subject to the provisions of Sec. 226.35, 
including any provisions of Sec. 226.32 to which Sec. 226.35 refers. 
See 12 CFR 226.35(a).

                            32(b) Definitions

    Paragraph 32(b)(1)(i).
    1. General. Section 226.32(b)(1)(i) includes in the total ``points 
and fees'' items defined as finance charges under Sec. Sec. 226.4(a) 
and 226.(4)(b). Items excluded from the finance charge under other 
provisions of Sec. 226.4 are not included in the total ``points and 
fees'' under paragraph 32(b)(1)(i), but may be included in ``points and 
fees'' under paragraphs 32(b)(1)(ii) and 32(b)(1)(iii). Interest, 
including per-diem interest, is excluded from ``points and fees'' under 
Sec. 226.32(b)(1).
    Paragraph 32(b)(1)(ii).
    1. Mortgage broker fees. In determining ``points and fees'' for 
purposes of this section, compensation paid by a consumer to a mortgage 
broker (directly or through the creditor for delivery to the broker) is 
included in the calculation whether or not the amount is disclosed as a 
finance charge. Mortgage broker fees that are not paid by the consumer 
are not included. Mortgage broker fees already included in the 
calculation as finance charges under Sec. 226.32(b)(1)(i) need not be 
counted again under Sec. 226.32(b)(1)(ii).
    2. Example. Section 226.32(b)(1)(iii) defines ``points and fees'' to 
include all items listed in Sec. 226.4(c)(7), other than amounts held 
for the future payment of taxes. An item listed in Sec. 226.4(c)(7) may 
be excluded from the ``points and fees'' calculation, however, if the 
charge is reasonable, the creditor receives no direct or indirect 
compensation from the charge, and the charge is not paid to an affiliate 
of the creditor. For example, a reasonable fee paid by the consumer to 
an independent, third-party appraiser may be excluded from the ``points 
and fees'' calculation (assuming no compensation is paid to the 
creditor). A fee paid by the consumer for an appraisal performed by the 
creditor must be included in the calculation, even though the fee may be 
excluded from the finance charge if it is bona fide and reasonable in 
amount.
    Paragraph 32(b)(1)(iv).
    1. Premium amount. In determining ``points and fees'' for purposes 
of this section, premiums paid at or before closing for credit insurance 
are included whether they are paid in cash or financed, and whether the 
amount represents the entire premium for the coverage or an initial 
payment.
    32(c) Disclosures.
    1. Format. The disclosures must be clear and conspicuous but need 
not be in any particular type size or typeface, nor presented in any 
particular manner. The disclosures need not be a part of the note or 
mortgage document.
    Paragraph 32(c)(3) Regular payment; balloon payment.
    1. General. The regular payment is the amount due from the borrower 
at regular intervals, such as monthly, bimonthly, quarterly, or 
annually. There must be at least two payments, and the payments must be 
in an amount and at such intervals that they fully amortize the amount 
owed. In disclosing the regular payment, creditors may rely on the rules 
set forth in Sec. 226.18(g); however, the amounts for voluntary items, 
such as credit life insurance, may be included in the regular payment 
disclosure only if the consumer has previously agreed to the amounts.
    i. If the loan has more than one payment level, the regular payment 
for each level must be disclosed. For example:
    A. In a 30-year graduated payment mortgage where there will be 
payments of $300 for the first 120 months, $400 for the next 120 months, 
and $500 for the last 120 months, each payment amount must be disclosed, 
along with the length of time that the payment will be in effect.
    B. If interest and principal are paid at different times, the 
regular amount for each must be disclosed.
    C. In discounted or premium variable-rate transactions where the 
creditor sets the initial interest rate and later rate adjustments are 
determined by an index or formula, the creditor must disclose both the 
initial payment based on the discount or premium and the payment that 
will be in effect thereafter. Additional explanatory material which does 
not detract from the required disclosures may accompany the disclosed 
amounts. For example, if a monthly payment is $250 for the first six 
months and then increases based on an index and margin, the creditor 
could use language such as the following: ``Your regular monthly payment 
will be $250 for six months. After six months your regular

[[Page 707]]

monthly payment will be based on an index and margin, which currently 
would make your payment $350. Your actual payment at that time may be 
higher or lower.''
    Paragraph 32(c)(4) Variable-rate.
    1. Calculating ``worst-case'' payment example. Creditors may rely on 
instructions in Sec. 226.19(b)(2)(viii)(B) for calculating the maximum 
possible increases in rates in the shortest possible timeframe, based on 
the face amount of the note (not the hypothetical loan amount of $10,000 
required by Sec. 226.19(b)(2)(viii)(B)). The creditor must provide a 
maximum payment for each payment level, where a payment schedule 
provides for more than one payment level and more than one maximum 
payment amount is possible.
    Paragraph 32(c)(5) Amount borrowed.
    1. Optional insurance; debt-cancellation coverage. This disclosure 
is required when the amount borrowed in a refinancing includes premiums 
or other charges for credit life, accident, health, or loss-of-income 
insurance, or debt-cancellation coverage (whether or not the debt-
cancellation coverage is insurance under applicable law) that provides 
for cancellation of all or part of the consumer's liability in the event 
of the loss of life, health, or income or in the case of accident. See 
comment 4(d)(3)-2 and comment app. G and H-2 regarding terminology for 
debt-cancellation coverage.
    32(d) Limitations.

                            32(d) Limitations

    1. Additional prohibitions applicable under other sections. Section 
226.34 sets forth certain prohibitions in connection with mortgage 
credit subject to Sec. 226.32, in addition to the limitations in Sec. 
226.32(d). Further, Sec. 226.35(b) prohibits certain practices in 
connection with transactions that meet the coverage test in Sec. 
226.35(a). Because the coverage test in Sec. 226.35(a) is generally 
broader than the coverage test in Sec. 226.32(a), most Sec. 226.32 
mortgage loans are also subject to the prohibitions set forth in Sec. 
226.35(b) (such as escrows), in addition to the limitations in Sec. 
226.32(d).
    2. Effective date. For guidance on the application of the Board's 
revisions published on July 30, 2008 to Sec. 226.32, see comment 
1(d)(5)-1.
    Paragraph 32(d)(1)(i) Balloon payment.
    1. Regular periodic payments. The repayment schedule for a Sec. 
226.32 mortgage loan with a term of less than five years must fully 
amortize the outstanding principal balance through ``regular periodic 
payments.'' A payment is a ``regular periodic payment'' if it is not 
more than twice the amount of other payments.
    Paragraph 32(d)(2) Negative amortization.
    1. Negative amortization. The prohibition against negative 
amortization in a mortgage covered by Sec. 226.32 does not preclude 
reasonable increases in the principal balance that result from events 
permitted by the legal obligation unrelated to the payment schedule. For 
example, when a consumer fails to obtain property insurance and the 
creditor purchases insurance, the creditor may add a reasonable premium 
to the consumer's principal balance, to the extent permitted by the 
legal obligation.
    Paragraph 32(d)(4) Increased interest rate.
    1. Variable-rate transactions. The limitation on interest rate 
increases does not apply to rate increases resulting from changes in 
accordance with the legal obligation in a variable-rate transaction, 
even if the increase occurs after default by the consumer.
    Paragraph 32(d)(5) Rebates.
    1. Calculation of refunds. The limitation applies only to refunds of 
precomputed (such as add-on) interest and not to any other charges that 
are considered finance charges under Sec. 226.4 (for example, points 
and fees paid at closing). The calculation of the refund of interest 
includes odd-days interest, whether paid at or after consummation.
    Paragraph 32(d)(6) Prepayment penalties.
    1. State law. For purposes of computing a refund of unearned 
interest, if using the actuarial method defined by applicable state law 
results in a refund that is greater than the refund calculated by using 
the method described in section 933(d) of the Housing and Community 
Development Act of 1992, creditors should use the state law definition 
in determining if a refund is a prepayment penalty.
    32(d)(7) Prepayment penalty exception.
    Paragraph 32(d)(7)(iii).
    1. Calculating debt-to-income ratio. ``Debt'' does not include 
amounts paid by the borrower in cash at closing or amounts from the loan 
proceeds that directly repay an existing debt. Creditors may consider 
combined debt-to-income ratios for transactions involving joint 
applicants. For more information about obligations and inflows that may 
constitute ``debt'' or ``income'' for purposes of Sec. 
226.32(d)(7)(iii), see comment 34(a)(4)-6 and comment 34(a)(4)(iii)(C)-
1.
    2. Verification. Creditors shall verify income in the manner 
described in Sec. 226.34(a)(4)(ii) and the related comments. Creditors 
may verify debt with a credit report. However, a credit report may not 
reflect certain obligations undertaken just before or at consummation of 
the transaction and secured by the same dwelling that secures the 
transaction. Section 226.34(a)(4) may require creditors to consider such 
obligations; see comment 34(a)(4)-3 and comment 34(a)(4)(ii)(C)-1.
    3. Interaction with Regulation B. Section 226.32(d)(7)(iii) does not 
require or permit the creditor to make inquiries or verifications that 
would be prohibited by Regulation B, 12 CFR part 202.
    Paragraph 32(d)(7)(iv).

[[Page 708]]

    1. Payment change. Section 226.32(d)(7) sets forth the conditions 
under which a mortgage transaction subject to this section may have a 
prepayment penalty. Section 226.32(d)(7)(iv) lists as a condition that 
the amount of the periodic payment of principal or interest or both may 
not change during the four-year period following consummation. The 
following examples show whether prepayment penalties are permitted or 
prohibited under Sec. 226.32(d)(7)(iv) in particular circumstances.
    i. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due is 
January 1, 2014. A prepayment penalty is permitted with this mortgage 
transaction provided that the other Sec. 226.32(d)(7) conditions are 
met, that is: provided that the prepayment penalty is permitted by other 
applicable law, the penalty expires on or before Dec. 31, 2011, the 
penalty will not apply if the source of the prepayment funds is a 
refinancing by the creditor or its affiliate, and at consummation the 
consumer's total monthly debts do not exceed 50 percent of the 
consumer's monthly gross income, as verified.
    ii. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due is 
December 31, 2013. A prepayment penalty is prohibited with this mortgage 
transaction because the payment may change within the four-year period 
following consummation.
    iii. Initial payments for a graduated-payment transaction 
consummated on January 1, 2010 are $1,000 per month. Under the loan 
agreement, the first possible date that a payment in a different amount 
may be due is January 1, 2014. A prepayment penalty is permitted with 
this mortgage transaction provided that the other Sec. 226.32(d)(7) 
conditions are met, that is: provided that the prepayment penalty is 
permitted by other applicable law, the penalty expires on or before 
December 31, 2011, the penalty will not apply if the source of the 
prepayment funds is a refinancing by the creditor or its affiliate, and 
at consummation the consumer's total monthly debts do not exceed 50 
percent of the consumer's monthly gross income, as verified.
    iv. Initial payments for a step-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due is 
December 31, 2013. A prepayment penalty is prohibited with this mortgage 
transaction because the payment may change within the four-year period 
following consummation.
    2. Payment changes excluded. Payment changes due to the following 
circumstances are not considered payment changes for purposes of this 
section:
    i. A change in the amount of a periodic payment that is allocated to 
principal or interest that does not change the total amount of the 
periodic payment.
    ii. The borrower's actual unanticipated late payment, delinquency, 
or default; and
    iii. The borrower's voluntary payment of additional amounts (for 
example when a consumer chooses to make a payment of interest and 
principal on a loan that only requires the consumer to pay interest).
    32(d)(8) Due-on-demand clause.
    Paragraph 32(d)(8)(ii).
    1. Failure to meet repayment terms. A creditor may terminate a loan 
and accelerate the balance when the consumer fails to meet the repayment 
terms provided for in the agreement; a creditor may do so, however, only 
if the consumer actually fails to make payments. For example, a creditor 
may not terminate and accelerate if the consumer, in error, sends a 
payment to the wrong location, such as a branch rather than the main 
office of the creditor. If a consumer files for or is placed in 
bankruptcy, the creditor may terminate and accelerate under this 
provision if the consumer fails to meet the repayment terms of the 
agreement. Section 226.32(d)(8)(ii) does not override any state or other 
law that requires a creditor to notify a borrower of a right to cure, or 
otherwise places a duty on the creditor before it can terminate a loan 
and accelerate the balance.
    Paragraph 32(d)(8)(iii).
    1. Impairment of security. A creditor may terminate a loan and 
accelerate the balance if the consumer's action or inaction adversely 
affects the creditor's security for the loan, or any right of the 
creditor in that security. Action or inaction by third parties does not, 
in itself, permit the creditor to terminate and accelerate.
    2. Examples. i. A creditor may terminate and accelerate, for 
example, if:
    A. The consumer transfers title to the property or sells the 
property without the permission of the creditor.
    B. The consumer fails to maintain required insurance on the 
dwelling.
    C. The consumer fails to pay taxes on the property.
    D. The consumer permits the filing of a lien senior to that held by 
the creditor.
    E. The sole consumer obligated on the credit dies.
    F. The property is taken through eminent domain.
    G. A prior lienholder forecloses.
    ii. By contrast, the filing of a judgment against the consumer would 
permit termination and acceleration only if the amount of the judgment 
and collateral subject to the judgment is such that the creditor's 
security is adversely affected. If the consumer commits waste or 
otherwise destructively uses

[[Page 709]]

or fails to maintain the property such that the action adversely affects 
the security, the loan may be terminated and the balance accelerated. 
Illegal use of the property by the consumer would permit termination and 
acceleration if it subjects the property to seizure. If one of two 
consumers obligated on a loan dies, the creditor may terminate the loan 
and accelerate the balance if the security is adversely affected. If the 
consumer moves out of the dwelling that secures the loan and that action 
adversely affects the security, the creditor may terminate a loan and 
accelerate the balance.
    Paragraph 32(e)(1) Repayment ability.
    1. Determining repayment ability. The information provided to the 
creditor in connection with Sec. 226.32(d)(7) may be used to show that 
the creditor considered the consumer's income and obligations before 
extending the credit. Any expected income can be considered by the 
creditor, except equity income that the consumer would obtain through 
the foreclosure of a mortgage covered by Sec. 226.32. For example, a 
creditor may use information about income other than regular salary or 
wages such as gifts, expected retirement payments, or income from 
housecleaning or childcare. The creditor also may use unverified income, 
as long as the creditor has a reasonable basis for believing that the 
income exists and will support the loan.
    Paragraph 32(e)(2) Home-Improvement Contracts.
    Paragraph 32(e)(2)(i).
    1. Joint payees. If a creditor pays a contractor with an instrument 
jointly payable to the contractor and the consumer, the instrument must 
name as payee each consumer who is primarily obligated on the note.
    Paragraph 32(e)(3) Notice to Assignee.
    1. Subsequent sellers or assignors. Any person, whether or not the 
original creditor, that sells or assigns a mortgage subject to this 
section must furnish the notice of potential liability to the purchaser 
or assignee.
    2. Format. While the notice of potential liability need not be in 
any particular format, the notice must be prominent. Placing it on the 
face of the note, such as with a stamp, is one means of satisfying the 
prominence requirement.

           Section 226.33--Requirements for Reverse Mortgages

    33(a) Definition.
    1. Nonrecourse transaction. A nonrecourse reverse mortgage 
transaction limits the homeowner's liability to the proceeds of the sale 
of the home (or any lesser amount specified in the credit obligation). 
If a transaction structured as a closed-end reverse mortgage transaction 
allows recourse against the consumer, and the annual percentage rate or 
the points and fees exceed those specified under Sec. 226.32(a)(1), the 
transaction is subject to all the requirements of Sec. 226.32, 
including the limitations concerning balloon payments and negative 
amortization.
    Paragraph 33(a)(2).
    1. Default. Default is not defined by the statute or regulation, but 
rather by the legal obligation between the parties and state or other 
law.
    2. Definite term or maturity date. To meet the definition of a 
reverse mortgage transaction, a creditor cannot require any principal, 
interest, or shared appreciation or equity to be due and payable (other 
than in the case of default) until after the consumer's death, transfer 
of the dwelling, or the consumer ceases to occupy the dwelling as a 
principal dwelling. Some state laws require legal obligations secured by 
a mortgage to specify a definite maturity date or term of repayment in 
the instrument. An obligation may state a definite maturity date or term 
of repayment and still meet the definition of a reverse-mortgage 
transaction if the maturity date or term of repayment used would not 
operate to cause maturity prior to the occurrence of any of the maturity 
events recognized in the regulation. For example, some reverse mortgage 
programs specify that the final maturity date is the borrower's 150th 
birthday; other programs include a shorter term but provide that the 
term is automatically extended for consecutive periods if none of the 
other maturity events has yet occurred. These programs would be 
permissible.
    33(c) Projected total cost of credit.
    Paragraph 33(c)(1) Costs to consumer.
    1. Costs and charges to consumer--relation to finance charge. All 
costs and charges to the consumer that are incurred in a reverse 
mortgage transaction are included in the projected total cost of credit, 
and thus in the total annual loan cost rates, whether or not the cost or 
charge is a finance charge under Sec. 226.4.
    2. Annuity costs. As part of the credit transaction, some creditors 
require or permit a consumer to purchase an annuity that immediately--or 
at some future time--supplements or replaces the creditor's payments. 
The amount paid by the consumer for the annuity is a cost to the 
consumer under this section, regardless of whether the annuity is 
purchased through the creditor or a third party, or whether the purchase 
is mandatory or voluntary. For example, this includes the costs of an 
annuity that a creditor offers, arranges, assists the consumer in 
purchasing, or that the creditor is aware the consumer is purchasing as 
a part of the transaction.
    3. Disposition costs excluded. Disposition costs incurred in 
connection with the sale or transfer of the property subject to the 
reverse mortgage are not included in the costs to the consumer under 
this paragraph. (However, see the definition of Valn in 
appendix K

[[Page 710]]

to the regulation to determine the effect certain disposition costs may 
have on the total annual loan cost rates.)
    Paragraph 33(c)(2) Payments to consumer.
    1. Payments upon a specified event. The projected total cost of 
credit should not reflect contingent payments in which a credit to the 
outstanding loan balance or a payment to the consumer's estate is made 
upon the occurrence of an event (for example, a ``death benefit'' 
payable if the consumer's death occurs within a certain period of time). 
Thus, the table of total annual loan cost rates required under Sec. 
226.33(b)(2) would not reflect such payments. At its option, however, a 
creditor may put an asterisk, footnote, or similar type of notation in 
the table next to the applicable total annual loan cost rate, and state 
in the body of the note, apart from the table, the assumption upon which 
the total annual loan cost is made and any different rate that would 
apply if the contingent benefit were paid.
    Paragraph 33(c)(3) Additional creditor compensation.
    1. Shared appreciation or equity. Any shared appreciation or equity 
that the creditor is entitled to receive pursuant to the legal 
obligation must be included in the total cost of a reverse mortgage 
loan. For example, if a creditor agrees to a reduced interest rate on 
the transaction in exchange for a portion of the appreciation or equity 
that may be realized when the dwelling is sold, that portion is included 
in the projected total cost of credit.
    Paragraph 33(c)(4) Limitations on consumer liability.
    1. In general. Creditors must include any limitation on the 
consumer's liability (such as a nonrecourse limit or an equity 
conservation agreement) in the projected total cost of credit. These 
limits and agreements protect a portion of the equity in the dwelling 
for the consumer or the consumer's estate. For example, the following 
are limitations on the consumer's liability that must be included in the 
projected total cost of credit:
    i. A limit on the consumer's liability to a certain percentage of 
the projected value of the home.
    ii. A limit on the consumer's liability to the net proceeds from the 
sale of the property subject to the reverse mortgage.
    2. Uniform assumption for ``net proceeds'' recourse limitations. If 
the legal obligation between the parties does not specify a percentage 
for the ``net proceeds'' liability of the consumer, for purposes of the 
disclosures required by Sec. 226.33, a creditor must assume that the 
costs associated with selling the property will equal 7 percent of the 
projected sale price (see the definition of the Valn symbol 
under appendix K(b)(6)).

 Section 226.34--Prohibited Acts or Practices in Connection with Credit 
                         Subject to Sec. 226.32

    34(a) Prohibited acts or practices for loans subject to Sec. 
226.32.
    Paragraph 34(a)(1) Home-improvement contracts.
    Paragraph 34(a)(1)(i).
    1. Joint payees. If a creditor pays a contractor with an instrument 
jointly payable to the contractor and the consumer, the instrument must 
name as payee each consumer who is primarily obligated on the note.
    Paragraph 34(a)(2) Notice to Assignee.
    1. Subsequent sellers or assignors. Any person, whether or not the 
original creditor, that sells or assigns a mortgage subject to Sec. 
226.32 must furnish the notice of potential liability to the purchaser 
or assignee.
    2. Format. While the notice of potential liability need not be in 
any particular format, the notice must be prominent. Placing it on the 
face of the note, such as with a stamp, is one means of satisfying the 
prominence requirement.
    3. Assignee liability. Pursuant to section 131(d) of the act, the 
act's general holder-in-due course protections do not apply to 
purchasers and assignees of loans covered by Sec. 226.32. For such 
loans, a purchaser's or other assignee's liability for all claims and 
defenses that the consumer could assert against the creditor is not 
limited to violations of the act.
    Paragraph 34(a)(3) Refinancings within one-year period.
    1. In the borrower's interest. The determination of whether or not a 
refinancing covered by Sec. 226.34(a)(3) is in the borrower's interest 
is based on the totality of the circumstances, at the time the credit is 
extended. A written statement by the borrower that ``this loan is in my 
interest'' alone does not meet this standard.
    i. A refinancing would be in the borrower's interest if needed to 
meet the borrower's ``bona fide personal financial emergency'' (see 
generally Sec. 226.23(e) and Sec. 226.31(c)(1)(iii)).
    ii. In connection with a refinancing that provides additional funds 
to the borrower, in determining whether a loan is in the borrower's 
interest consideration should be given to whether the loan fees and 
charges are commensurate with the amount of new funds advanced, and 
whether the real estate-related charges are bona fide and reasonable in 
amount (see generally Sec. 226.4(c)(7)).
    2. Application of the one-year refinancing prohibition to creditors 
and assignees. The prohibition in Sec. 226.34(a)(3) applies where an 
extension of credit subject to Sec. 226.32 is refinanced into another 
loan subject to Sec. 226.32. The prohibition is illustrated by the 
following examples. Assume that Creditor A makes a loan subject to Sec. 
226.32 on January

[[Page 711]]

15, 2003, secured by a first lien; this loan is assigned to Creditor B 
on February 15, 2003:
    i. Creditor A is prohibited from refinancing the January 2003 loan 
(or any other loan subject to Sec. 226.32 to the same borrower) into a 
loan subject to Sec. 226.32, until January 15, 2004. Creditor B is 
restricted until January 15, 2004, or such date prior to January 15, 
2004 that Creditor B ceases to hold or service the loan. During the 
prohibition period, Creditors A and B may make a subordinate lien loan 
that does not refinance a loan subject to Sec. 226.32. Assume that on 
April 1, 2003, Creditor A makes but does not assign a second-lien loan 
subject to Sec. 226.32. In that case, Creditor A would be prohibited 
from refinancing either the first-lien or second-lien loans (or any 
other loans to that borrower subject to Sec. 226.32) into another loan 
subject to Sec. 226.32 until April 1, 2004.
    ii. The loan made by Creditor A on January 15, 2003 (and assigned to 
Creditor B) may be refinanced by Creditor C at any time. If Creditor C 
refinances this loan on March 1, 2003 into a new loan subject to Sec. 
226.32, Creditor A is prohibited from refinancing the loan made by 
Creditor C (or any other loan subject to Sec. 226.32 to the same 
borrower) into another loan subject to Sec. 226.32 until January 15, 
2004. Creditor C is similarly prohibited from refinancing any loan 
subject to Sec. 226.32 to that borrower into another until March 1, 
2004. (The limitations of Sec. 226.34(a)(3) no longer apply to Creditor 
B after Creditor C refinanced the January 2003 loan and Creditor B 
ceased to hold or service the loan.)
    34(a)(4) Repayment ability.
    1. Application of repayment ability rule. The Sec. 226.34(a)(4) 
prohibition against making loans without regard to consumers' repayment 
ability applies to mortgage loans described in Sec. 226.32(a). In 
addition, the Sec. 226.34(a)(4) prohibition applies to higher-priced 
mortgage loans described in Sec. 226.35(a). See 12 CFR 226.35(b)(1). 
For guidance on the application of the Board's revisions to Sec. 
226.34(a)(4) published on July 30, 2008, see comment 1(d)(5)-1.
    2. General prohibition. Section 226.34(a)(4) prohibits a creditor 
from extending credit subject to Sec. 226.32 to a consumer based on the 
value of the consumer's collateral without regard to the consumer's 
repayment ability as of consummation, including the consumer's current 
and reasonably expected income, employment, assets other than the 
collateral, current obligations, and property tax and insurance 
obligations. A creditor may base its determination of repayment ability 
on current or reasonably expected income from employment or other 
sources, on assets other than the collateral, or both.
    3. Other dwelling-secured obligations. For purposes of Sec. 
226.34(a)(4), current obligations include another credit obligation of 
which the creditor has knowledge undertaken prior to or at consummation 
of the transaction and secured by the same dwelling that secures the 
transaction subject to Sec. 226.32 or Sec. 226.35. For example, where 
a transaction subject to Sec. 226.35 is a first-lien transaction for 
the purchase of a home, a creditor must consider a ``piggyback'' second-
lien transaction of which it has knowledge that is used to finance part 
of the down payment on the house.
    4. Discounted introductory rates and non-amortizing or negatively-
amortizing payments. A credit agreement may determine a consumer's 
initial payments using a temporarily discounted interest rate or permit 
the consumer to make initial payments that are non-amortizing or 
negatively amortizing. (Negative amortization is permissible for loans 
covered by Sec. 226.35(a), but not Sec. 226.32). In such cases the 
creditor may determine repayment ability using the assumptions provided 
in Sec. 226.34(a)(4)(iv).
    5. Repayment ability as of consummation. Section 226.34(a)(4) 
prohibits a creditor from disregarding repayment ability based on the 
facts and circumstances known to the creditor as of consummation. In 
general, a creditor does not violate this provision if a consumer 
defaults because of a significant reduction in income (for example, a 
job loss) or a significant obligation (for example, an obligation 
arising from a major medical expense) that occurs after consummation. 
However, if a creditor has knowledge as of consummation of reductions in 
income, for example, if a consumer's written application states that the 
consumer plans to retire within twelve months without obtaining new 
employment, or states that the consumer will transition from full-time 
to part-time employment, the creditor must consider that information.
    6. Income, assets, and employment. Any current or reasonably 
expected assets or income may be considered by the creditor, except the 
collateral itself. For example, a creditor may use information about 
current or expected salary, wages, bonus pay, tips, and commissions. 
Employment may be full-time, part-time, seasonal, irregular, military, 
or self-employment. Other sources of income could include interest or 
dividends; retirement benefits; public assistance; and alimony, child 
support, or separate maintenance payments. A creditor may also take into 
account assets such as savings accounts or investments that the consumer 
can or will be able to use.
    7. Interaction with Regulation B. Section 226.34(a)(4) does not 
require or permit the creditor to make inquiries or verifications that 
would be prohibited by Regulation B, 12 CFR part 202.
    34(a)(4)(i) Mortgage-related obligations.

[[Page 712]]

    1. Mortgage-related obligations. A creditor must include in its 
repayment ability analysis the expected property taxes and premiums for 
mortgage-related insurance required by the creditor as set forth in 
Sec. 226.35(b)(3)(i), as well as similar mortgage-related expenses. 
Similar mortgage-related expenses include homeowners' association dues 
and condominium or cooperative fees.
    34(a)(4)(ii) Verification of repayment ability.
    1. Income and assets relied on. A creditor must verify the income 
and assets the creditor relies on to evaluate the consumer's repayment 
ability. For example, if a consumer earns a salary and also states that 
he or she is paid an annual bonus, but the creditor only relies on the 
applicant's salary to evaluate repayment ability, the creditor need only 
verify the salary.
    2. Income and assets--co-applicant. If two persons jointly apply for 
credit and both list income or assets on the application, the creditor 
must verify repayment ability with respect to both applicants unless the 
creditor relies only on the income or assets of one of the applicants in 
determining repayment ability.
    3. Expected income. If a creditor relies on expected income, the 
expectation must be reasonable and it must be verified with third-party 
documents that provide reasonably reliable evidence of the consumer's 
expected income. For example, if the creditor relies on an expectation 
that a consumer will receive an annual bonus, the creditor may verify 
the basis for that expectation with documents that show the consumer's 
past annual bonuses and the expected bonus must bear a reasonable 
relationship to past bonuses. Similarly, if the creditor relies on a 
consumer's expected salary following the consumer's receipt of an 
educational degree, the creditor may verify that expectation with a 
written statement from an employer indicating that the consumer will be 
employed upon graduation at a specified salary.
    Paragraph 34(a)(4)(ii)(A).
    1. Internal Revenue Service (IRS) Form W-2. A creditor may verify a 
consumer's income using a consumer's IRS Form W-2 (or any subsequent 
revisions or similar IRS Forms used for reporting wages and tax 
withholding). The creditor may also use an electronic retrieval service 
for obtaining the consumer's W-2 information.
    2. Tax returns. A creditor may verify a consumer's income or assets 
using the consumer's tax return. A creditor may also use IRS Form 4506 
``Request for Copy of Tax Return,'' Form 4506-T ``Request for Transcript 
of Tax Return,'' or Form 8821 ``Tax Information Authorization'' (or any 
subsequent revisions or similar IRS Forms appropriate for obtaining tax 
return information directly from the IRS) to verify the consumer's 
income or assets. The creditor may also use an electronic retrieval 
service for obtaining tax return information.
    3. Other third-party documents that provide reasonably reliable 
evidence of consumer's income or assets. Creditors may verify income and 
assets using documents produced by third parties. Creditors may not rely 
on information provided orally by third parties, but may rely on 
correspondence from the third party, such as by letter or e-mail. The 
creditor may rely on any third-party document that provides reasonably 
reliable evidence of the consumer's income or assets. For example, 
creditors may verify the consumer's income using receipts from a check-
cashing or remittance service, or by obtaining a written statement from 
the consumer's employer that states the consumer's income.
    4. Information specific to the consumer. Creditors must verify a 
consumer's income or assets using information that is specific to the 
individual consumer. Creditors may use third-party databases that 
contain individual-specific data about a consumer's income or assets, 
such as a third-party database service used by the consumer's employer 
for the purpose of centralizing income verification requests, so long as 
the information is reasonably current and accurate. Information about 
average incomes for the consumer's occupation in the consumer's 
geographic location or information about average incomes paid by the 
consumer's employer, however, would not be specific to the individual 
consumer.
    5. Duplicative collection of documentation. A creditor that has made 
a loan to a consumer and is refinancing or extending new credit to the 
same consumer need not collect from the consumer a document the creditor 
previously obtained if the creditor has no information that would 
reasonably lead the creditor to believe that document has changed since 
it was initially collected. For example, if the creditor has obtained 
the consumer's 2006 tax return to make a home purchase loan in May 2007, 
the creditor may rely on the 2006 tax return if the creditor makes a 
home equity loan to the same consumer in August 2007. Similarly, if the 
creditor has obtained the consumer's bank statement for May 2007 in 
making the first loan, the creditor may rely on that bank statement for 
that month in making the subsequent loan in August 2007.
    Paragraph 34(a)(4)(ii)(B).
    1. No violation if income or assets relied on not materially greater 
than verifiable amounts. A creditor that does not verify income or 
assets used to determine repayment ability with reasonably reliable 
third-party documents does not violate Sec. 226.34(a)(4)(ii) if the 
creditor demonstrates that the income or assets it relied upon were not 
materially greater than the amounts that the creditor would have been 
able to verify pursuant to

[[Page 713]]

Sec. 226.34(a)(4)(ii). For example, if a creditor determines a 
consumer's repayment ability by relying on the consumer's annual income 
of $40,000 but fails to obtain documentation of that amount before 
extending the credit, the creditor will not have violated this section 
if the creditor later obtains evidence that would satisfy Sec. 
226.34(a)(4)(ii)(A), such as tax return information, showing that the 
creditor could have documented, at the time the loan was consummated, 
that the consumer had an annual income not materially less than $40,000.
    2. Materially greater than. Amounts of income or assets relied on 
are not materially greater than amounts that could have been verified at 
consummation if relying on the verifiable amounts would not have altered 
a reasonable creditor's decision to extend credit or the terms of the 
credit.
    Paragraph 34(a)(4)(ii)(C).
    1. In general. A credit report may be used to verify current 
obligations. A credit report, however, might not reflect an obligation 
that a consumer has listed on an application. The creditor is 
responsible for considering such an obligation, but the creditor is not 
required to independently verify the obligation. Similarly, a creditor 
is responsible for considering certain obligations undertaken just 
before or at consummation of the transaction and secured by the same 
dwelling that secures the transaction (for example, a ``piggy back'' 
loan), of which the creditor knows, even if not reflected on a credit 
report. See comment 34(a)(4)-3.
    34(a)(4)(iii) Presumption of compliance.
    1. In general. A creditor is presumed to have complied with Sec. 
226.34(a)(4) if the creditor follows the three underwriting procedures 
specified in paragraph 34(a)(4)(iii) for verifying repayment ability, 
determining the payment obligation, and measuring the relationship of 
obligations to income. The procedures for verifying repayment ability 
are required under paragraph 34(a)(4)(ii); the other procedures are not 
required but, if followed along with the required procedures, create a 
presumption that the creditor has complied with Sec. 226.34(a)(4). The 
consumer may rebut the presumption with evidence that the creditor 
nonetheless disregarded repayment ability despite following these 
procedures. For example, evidence of a very high debt-to-income ratio 
and a very limited residual income could be sufficient to rebut the 
presumption, depending on all of the facts and circumstances. If a 
creditor fails to follow one of the non-required procedures set forth in 
paragraph 34(a)(4)(iii), then the creditor's compliance is determined 
based on all of the facts and circumstances without there being a 
presumption of either compliance or violation.
    Paragraph 34(a)(4)(iii)(B).
    1. Determination of payment schedule. To retain a presumption of 
compliance under Sec. 226.34(a)(4)(iii), a creditor must determine the 
consumer's ability to pay the principal and interest obligation based on 
the maximum scheduled payment in the first seven years following 
consummation. In general, a creditor should determine a payment schedule 
for purposes of Sec. 226.34(a)(4)(iii)(B) based on the guidance in the 
staff commentary to Sec. 226.17(c)(1). Examples of how to determine the 
maximum scheduled payment in the first seven years are provided as 
follows (all payment amounts are rounded):
    i. Balloon-payment loan; fixed interest rate. A loan in an amount of 
$100,000 with a fixed interest rate of 8.0 percent (no points) has a 7-
year term but is amortized over 30 years. The monthly payment scheduled 
for 7 years is $733 with a balloon payment of remaining principal due at 
the end of 7 years. The creditor will retain the presumption of 
compliance if it assesses repayment ability based on the payment of 
$733.
    ii. Fixed-rate loan with interest-only payment for five years. A 
loan in an amount of $100,000 with a fixed interest rate of 8.0 percent 
(no points) has a 30-year term. The monthly payment of $667 scheduled 
for the first 5 years would cover only the interest due. After the fifth 
year, the scheduled payment would increase to $772, an amount that fully 
amortizes the principal balance over the remaining 25 years. The 
creditor will retain the presumption of compliance if it assesses 
repayment ability based on the payment of $772.
    iii. Fixed-rate loan with interest-only payment for seven years. A 
loan in an amount of $100,000 with a fixed interest rate of 8.0 percent 
(no points) has a 30-year term. The monthly payment of $667 scheduled 
for the first 7 years would cover only the interest due. After the 
seventh year, the scheduled payment would increase to $793, an amount 
that fully amortizes the principal balance over the remaining 23 years. 
The creditor will retain the presumption of compliance if it assesses 
repayment ability based on the interest-only payment of $667.
    iv. Variable-rate loan with discount for five years. A loan in an 
amount of $100,000 has a 30-year term. The loan agreement provides for a 
fixed interest rate of 7.0 percent for an initial period of 5 years. 
Accordingly, the payment scheduled for the first 5 years is $665. The 
agreement provides that, after 5 years, the interest rate will adjust 
each year based on a specified index and margin. As of consummation, the 
sum of the index value and margin (the fully-indexed rate) is 8.0 
percent. Accordingly, the payment scheduled for the remaining 25 years 
is $727. The creditor will retain the presumption of compliance if it 
assesses repayment ability based on the payment of $727.
    v. Variable-rate loan with discount for seven years. A loan in an 
amount of $100,000 has a 30-year term. The loan agreement provides for a 
fixed interest rate of 7.125 percent for

[[Page 714]]

an initial period of 7 years. Accordingly, the payment scheduled for the 
first 7 years is $674. After 7 years, the agreement provides that the 
interest rate will adjust each year based on a specified index and 
margin. As of consummation, the sum of the index value and margin (the 
fully-indexed rate) is 8.0 percent. Accordingly, the payment scheduled 
for the remaining years is $725. The creditor will retain the 
presumption of compliance if it assesses repayment ability based on the 
payment of $674.
    vi. Step-rate loan. A loan in an amount of $100,000 has a 30-year 
term. The agreement provides that the interest rate will be 5 percent 
for two years, 6 percent for three years, and 7 percent thereafter. 
Accordingly, the payment amounts are $537 for two years, $597 for three 
years, and $654 thereafter. To retain the presumption of compliance, the 
creditor must assess repayment ability based on the payment of $654.
    Paragraph 34(a)(4)(iii)(C).
    1. ``Income'' and ``debt''. To determine whether to classify 
particular inflows or obligations as ``income'' or ``debt,'' creditors 
may look to widely accepted governmental and non-governmental 
underwriting standards, including, for example, those set forth in the 
Federal Housing Administration's handbook on Mortgage Credit Analysis 
for Mortgage Insurance on One- to Four-Unit Mortgage Loans.
    34(a)(4)(iv) Exclusions from the presumption of compliance.
    1. In general. The exclusions from the presumption of compliance 
should be interpreted consistent with staff comments 32(d)(1)(i)-1 and 
32(d)(2)-1.
    2. Renewable balloon loan. If a creditor is unconditionally 
obligated to renew a balloon-payment loan at the consumer's option (or 
is obligated to renew subject to conditions within the consumer's 
control), the full term resulting from such renewal is the relevant term 
for purposes of the exclusion of certain balloon-payment loans. See 
comment 17(c)(1)-11 for a discussion of conditions within a consumer's 
control in connection with renewable balloon-payment loans.
    Paragraph 34(b) Prohibited acts or practices for dwelling-secured 
loans; open-end credit.
    1. Amount of credit extended. Where a loan is documented as open-end 
credit but the features and terms or other circumstances demonstrate 
that it does not meet the definition of open-end credit, the loan is 
subject to the rules for closed-end credit, including Sec. 226.32 if 
the rate or fee trigger is met. In applying the triggers under Sec. 
226.32, the ``amount financed,'' including the ``principal loan amount'' 
must be determined. In making the determination, the amount of credit 
that would have been extended if the loan had been documented as a 
closed-end loan is a factual determination to be made in each case. 
Factors to be considered include the amount of money the consumer 
originally requested, the amount of the first advance or the highest 
outstanding balance, or the amount of the credit line. The full amount 
of the credit line is considered only to the extent that it is 
reasonable to expect that the consumer might use the full amount of 
credit.

 Section 226.35--Prohibited Acts or Practices in Connection With Higher-
                          priced Mortgage Loans

    35(a) Higher-priced mortgage loans.
    Paragraph 35(a)(2).
    1. Average prime offer rate. Average prime offer rates are annual 
percentage rates derived from average interest rates, points, and other 
loan pricing terms currently offered to consumers by a representative 
sample of creditors for mortgage transactions that have low-risk pricing 
characteristics. Other pricing terms include commonly used indices, 
margins, and initial fixed-rate periods for variable-rate transactions. 
Relevant pricing characteristics include a consumer's credit history and 
transaction characteristics such as the loan-to-value ratio, owner-
occupant status, and purpose of the transaction. To obtain average prime 
offer rates, the Board uses a survey of creditors that both meets the 
criteria of Sec. 226.35(a)(2) and provides pricing terms for at least 
two types of variable-rate transactions and at least two types of non-
variable-rate transactions. An example of such a survey is the Freddie 
Mac Primary Mortgage Market Survey [supreg].
    2. Comparable transaction. A higher-priced mortgage loan is a 
consumer credit transaction secured by the consumer's principal dwelling 
with an annual percentage rate that exceeds the average prime offer rate 
for a comparable transaction as of the date the interest rate is set by 
the specified margin. The table of average prime offer rates published 
by the Board indicates how to identify the comparable transaction.
    3. Rate set. A transaction's annual percentage rate is compared to 
the average prime offer rate as of the date the transaction's interest 
rate is set (or ``locked'') before consummation. Sometimes a creditor 
sets the interest rate initially and then re-sets it at a different 
level before consummation. The creditor should use the last date the 
interest rate is set before consummation.
    4. Board table. The Board publishes on the Internet, in table form, 
average prime offer rates for a wide variety of transaction types. The 
Board calculates an annual percentage rate, consistent with Regulation Z 
(see Sec. 226.22 and appendix J), for each transaction type for which 
pricing terms are available from a survey. The Board estimates annual 
percentage rates for other types of transactions for which direct survey 
data are not available based on the loan pricing terms available in the 
survey and other information. The Board publishes on the Internet

[[Page 715]]

the methodology it uses to arrive at these estimates.
    35(b) Rules for higher-priced mortgage loans.
    1. Effective date. For guidance on the applicability of the rules in 
Sec. 226.35(b), see comment 1(d)(5)-1.
    Paragraph 35(b)(2)(ii)(C).
    1. Payment change. Section 226.35(b)(2) provides that a loan subject 
to this section may not have a penalty described by Sec. 226.32(d)(6) 
unless certain conditions are met. Section 226.35(b)(2)(ii)(C) lists as 
a condition that the amount of the periodic payment of principal or 
interest or both may not change during the four-year period following 
consummation. For examples showing whether a prepayment penalty is 
permitted or prohibited in connection with particular payment changes, 
see comment 32(d)(7)(iv)-1. Those examples, however, include a condition 
that Sec. 226.35(b)(2) does not include: the condition that, at 
consummation, the consumer's total monthly debt payments may not exceed 
50 percent of the consumer's monthly gross income. For guidance about 
circumstances in which payment changes are not considered payment 
changes for purposes of this section, see comment 32(d)(7)(iv)-2.
    2. Negative amortization. Section 226.32(d)(2) provides that a loan 
described in Sec. 226.32(a) may not have a payment schedule with 
regular periodic payments that cause the principal balance to increase. 
Therefore, the commentary to Sec. 226.32(d)(7)(iv) does not include 
examples of payment changes in connection with negative amortization. 
The following examples show whether, under Sec. 226.35(b)(2), 
prepayment penalties are permitted or prohibited in connection with 
particular payment changes, when a loan agreement permits negative 
amortization:
    i. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month and the loan agreement permits 
negative amortization to occur. Under the loan agreement, the first date 
that a scheduled payment in a different amount may be due is January 1, 
2014 and the creditor does not have the right to change scheduled 
payments prior to that date even if negative amortization occurs. A 
prepayment penalty is permitted with this mortgage transaction provided 
that the other Sec. 226.35(b)(2) conditions are met, that is: provided 
that the prepayment penalty is permitted by other applicable law, the 
penalty expires on or before December 31, 2011, and the penalty will not 
apply if the source of the prepayment funds is a refinancing by the 
creditor or its affiliate.
    ii. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month and the loan agreement permits 
negative amortization to occur. Under the loan agreement, the first date 
that a scheduled payment in a different amount may be due is January 1, 
2014, but the creditor has the right to change scheduled payments prior 
to that date if negative amortization occurs. A prepayment penalty is 
prohibited with this mortgage transaction because the payment may change 
within the four-year period following consummation.
    35(b)(3) Escrows.
    Paragraph 35(b)(3)(i).
    1. Section 226.35(b)(3) applies to principal dwellings, including 
structures that are classified as personal property under state law. For 
example, an escrow account must be established on a higher-priced 
mortgage loan secured by a first-lien on a mobile home, boat or a 
trailer used as the consumer's principal dwelling. See the commentary 
under Sec. Sec. 226.2(a)(19), 226.2(a)(24), 226.15 and 226.23. Section 
226.35(b)(3) also applies to higher-priced mortgage loans secured by a 
first lien on a condominium or a cooperative unit if it is in fact used 
as principal residence.
    2. Administration of escrow accounts. Section 226.35(b)(3) requires 
creditors to establish before the consummation of a loan secured by a 
first lien on a principal dwelling an escrow account for payment of 
property taxes and premiums for mortgage-related insurance required by 
creditor. Section 6 of RESPA, 12 U.S.C. 2605, and Regulation X address 
how escrow accounts must be administered.
    3. Optional insurance items. Section 226.35(b)(3) does not require 
that escrow accounts be established for premiums for mortgage-related 
insurance that the creditor does not require in connection with the 
credit transaction, such as an earthquake insurance or debt-protection 
insurance.
    Paragraph 35(b)(3)(ii)(B).
    1. Limited exception. A creditor is required to escrow for payment 
of property taxes for all first lien loans secured by condominium units 
regardless of whether the creditors escrows insurance premiums for 
condominium unit.
    35(b)(3)(v) ``Jumbo'' loans.
    1. Special threshold for ``jumbo'' loans. For purposes of the escrow 
requirement in Sec. 226.35(b)(3) only, the coverage threshold stated in 
Sec. 226.35(a)(1) for first-lien loans (1.5 or more percentage points 
greater than the average prime offer rate) does not apply to a loan with 
a principal obligation that exceeds the limit in effect as of the date 
the loan's rate is set for the maximum principal obligation eligible for 
purchase by Freddie Mac (``jumbo'' loans). The Federal Housing Finance 
Agency (FHFA) establishes and adjusts the maximum principal obligation 
pursuant to 12 U.S.C. 1454(a)(2) and other provisions of federal law. 
Adjustments to the maximum principal obligation made by FHFA apply in 
determining whether a mortgage loan is a ``jumbo'' loan to which the 
separate coverage threshold in Sec. 226.35(b)(3)(v) applies.

[[Page 716]]

    2. Escrow requirements only. Under Sec. 226.35(b)(3)(v), for 
``jumbo'' loans, the annual percentage rate threshold is 2.5 or more 
percentage points greater than the average prime offer rate. This 
threshold applies solely in determining whether a ``jumbo'' loan is 
subject to the escrow requirement of Sec. 226.35(b)(3). The 
determination of whether ``jumbo'' first-lien loans are subject to the 
other protections in Sec. 226.35, such as the ability to repay 
requirements under Sec. 226.35(b)(1) and the restrictions on prepayment 
penalties under Sec. 226.35(b)(2), is based on the 1.5 percentage point 
threshold stated in Sec. 226.35(a)(1).

 Section 226.36--Prohibited Acts or Practices in Connection with Credit 
                          Secured by a Dwelling

    1. Scope of coverage. Sections 226.36(b) and (c) apply to closed-end 
consumer credit transactions secured by a consumer's principal dwelling. 
Sections 226.36(d) and (e) apply to closed-end consumer credit 
transactions secured by a dwelling. Sections 226.36(d) and (e) apply to 
closed-end loans secured by first or subordinate liens, and reverse 
mortgages that are not home-equity lines of credit under Sec. 226.5b. 
See Sec. 226.36(f) for additional restrictions on the scope of this 
section, and Sec. Sec. 226.1(c) and 226.3(a) and corresponding 
commentary for further discussion of extensions of credit subject to 
Regulation Z.
    2. Mandatory compliance date for Sec. Sec. 226.36(d) and (e). The 
final rules on loan originator compensation in Sec. 226.36 apply to 
transactions for which the creditor receives an application on or after 
the effective date. For example, assume a mortgage broker takes an 
application on March 10, 2011, which the creditor receives on March 25, 
2011. This transaction is not covered. If, however, the creditor does 
not receive the application until April 8, 2011, the transaction is 
covered.
    3. Effective date. For guidance on the applicability of the rules in 
Sec. 226.36, see comment 1(d)(5)-1.
    36(a) Loan originator and mortgage broker defined.
    1. Meaning of loan originator. i. General. Section 226.36(a) 
provides that a loan originator is any person who for compensation or 
other monetary gain arranges, negotiates, or otherwise obtains an 
extension of consumer credit for another person. Thus, the term ``loan 
originator'' includes employees of a creditor as well as employees of a 
mortgage broker that satisfy this definition. In addition, the 
definition of loan originator expressly includes any creditor that 
satisfies the definition of loan originator but makes use of ``table 
funding'' by a third party. See comment 36(a)-1.ii below discussing 
table funding. Although consumers may sometimes arrange, negotiate, or 
otherwise obtain extensions of consumer credit on their own behalf, in 
such cases they do not do so for another person or for compensation or 
other monetary gain, and therefore are not loan originators under this 
section. (Under Sec. 226.2(a)(22), the term ``person'' means a natural 
person or an organization.)
    ii. Table funding. Table funding occurs when the creditor does not 
provide the funds for the transaction at consummation out of the 
creditor's own resources, including drawing on a bona fide warehouse 
line of credit, or out of deposits held by the creditor. Accordingly, a 
table-funded transaction is consummated with the debt obligation 
initially payable by its terms to one person, but another person 
provides the funds for the transaction at consummation and receives an 
immediate assignment of the note, loan contract, or other evidence of 
the debt obligation. Although Sec. 226.2(a)(17)(i)(B) provides that a 
person to whom a debt obligation is initially payable on its face 
generally is a creditor, Sec. 226.36(a)(1) provides that, solely for 
the purposes of Sec. 226.36, such a person is also considered a loan 
originator. The creditor is not considered a loan originator unless 
table funding occurs. For example, if a person closes a loan in its own 
name but does not fund the loan from its own resources or deposits held 
by it because it assigns the loan at consummation, it is considered a 
creditor for purposes of Regulation Z and also a loan originator for 
purposes of Sec. 226.36. However, if a person closes a loan in its own 
name and draws on a bona fide warehouse line of credit to make the loan 
at consummation, it is considered a creditor, not a loan originator, for 
purposes of Regulation Z, including Sec. 226.36.
    iii. Servicing. The definition of ``loan originator'' does not apply 
to a loan servicer when the servicer modifies an existing loan on behalf 
of the current owner of the loan. The rule only applies to extensions of 
consumer credit and does not apply if a modification of an existing 
obligation's terms does not constitute a refinancing under Sec. 
226.20(a).
    2. Meaning of mortgage broker. For purposes of Sec. 226.36, with 
respect to a particular transaction, the term ``mortgage broker'' refers 
to a loan originator who is not an employee of the creditor. 
Accordingly, the term ``mortgage broker'' includes companies that engage 
in the activities described in Sec. 226.36(a) and also includes 
employees of such companies that engage in these activities. Section 
226.36(d) prohibits certain payments to a loan originator. These 
prohibitions apply to payments made to all loan originators, including 
payments made to mortgage brokers, and payments made by a company acting 
as a mortgage broker to its employees who are loan originators.
    3. Meaning of creditor. For purposes of Sec. 226.36(d) and (e), a 
creditor means a creditor that is not deemed to be a loan originator on 
the transaction under this section. Thus, a

[[Page 717]]

person that closes a loan in its own name (but another person provides 
the funds for the transaction at consummation and receives an immediate 
assignment of the note, loan contract, or other evidence of the debt 
obligation) is deemed a loan originator, not a creditor, for purposes of 
Sec. 226.36. However, that person is still a creditor for all other 
purposes of Regulation Z.
    4. Managers and administrative staff. For purposes of Sec. 226.36, 
managers, administrative staff, and similar individuals who are employed 
by a creditor or loan originator but do not arrange, negotiate, or 
otherwise obtain an extension of credit for a consumer, and whose 
compensation is not based on whether any particular loan is originated, 
are not loan originators.
    36(c) Servicing practices.
    Paragraph 36(c)(1)(i).
    1. Crediting of payments. Under Sec. 226.36(c)(1)(i), a mortgage 
servicer must credit a payment to a consumer's loan account as of the 
date of receipt. This does not require that a mortgage servicer post the 
payment to the consumer's loan account on a particular date; the 
servicer is only required to credit the payment as of the date of 
receipt. Accordingly, a servicer that receives a payment on or before 
its due date (or within any grace period), and does not enter the 
payment on its books or in its system until after the payment's due date 
(or expiration of any grace period), does not violate this rule as long 
as the entry does not result in the imposition of a late charge, 
additional interest, or similar penalty to the consumer, or in the 
reporting of negative information to a consumer reporting agency.
    2. Payments to be credited. Payments should be credited based on the 
legal obligation between the creditor and consumer. The legal obligation 
is determined by applicable state or other law.
    3. Date of receipt. The ``date of receipt'' is the date that the 
payment instrument or other means of payment reaches the mortgage 
servicer. For example, payment by check is received when the mortgage 
servicer receives it, not when the funds are collected. If the consumer 
elects to have payment made by a third-party payor such as a financial 
institution, through a preauthorized payment or telephone bill-payment 
arrangement, payment is received when the mortgage servicer receives the 
third-party payor's check or other transfer medium, such as an 
electronic fund transfer.
    Paragraph 36(c)(1)(ii).
    1. Pyramiding of late fees. The prohibition on pyramiding of late 
fees in this subsection should be construed consistently with the 
``credit practices rule'' of Regulation AA, 12 CFR 227.15.
    Paragraph 36(c)(1)(iii).
    1. Reasonable time. The payoff statement must be provided to the 
consumer, or person acting on behalf of the consumer, within a 
reasonable time after the request. For example, it would be reasonable 
under most circumstances to provide the statement within five business 
days of receipt of a consumer's request. This time frame might be 
longer, for example, when the servicer is experiencing an unusually high 
volume of refinancing requests.
    2. Person acting on behalf of the consumer. For purposes of Sec. 
226.36(c)(1)(iii), a person acting on behalf of the consumer may include 
the consumer's representative, such as an attorney representing the 
individual, a non-profit consumer counseling or similar organization, or 
a creditor with which the consumer is refinancing and which requires the 
payoff statement to complete the refinancing. A servicer may take 
reasonable measures to verify the identity of any person acting on 
behalf of the consumer and to obtain the consumer's authorization to 
release information to any such person before the ``reasonable time'' 
period begins to run.
    3. Payment requirements. The servicer may specify reasonable 
requirements for making payoff requests, such as requiring requests to 
be in writing and directed to a mailing address, e-mail address or fax 
number specified by the servicer or orally to a telephone number 
specified by the servicer, or any other reasonable requirement or 
method. If the consumer does not follow these requirements, a longer 
time frame for responding to the request would be reasonable.
    4. Accuracy of payoff statements. Payoff statements must be accurate 
when issued.
    Paragraph 36(c)(2).
    1. Payment requirements. The servicer may specify reasonable 
requirements for making payments in writing, such as requiring that 
payments be accompanied by the account number or payment coupon; setting 
a cut-off hour for payment to be received, or setting different hours 
for payment by mail and payments made in person; specifying that only 
checks or money orders should be sent by mail; specifying that payment 
is to be made in U.S. dollars; or specifying one particular address for 
receiving payments, such as a post office box. The servicer may be 
prohibited, however, from requiring payment solely by preauthorized 
electronic fund transfer. (See section 913 of the Electronic Fund 
Transfer Act, 15 U.S.C. 1693k.)
    2. Payment requirements--limitations. Requirements for making 
payments must be reasonable; it should not be difficult for most 
consumers to make conforming payments. For example, it would be 
reasonable to require a cut-off time of 5 p.m. for receipt of a mailed 
check at the location specified by the servicer for receipt of such 
check.
    3. Implied guidelines for payments. In the absence of specified 
requirements for making payments, payments may be made at any location 
where the servicer conducts business;

[[Page 718]]

any time during the servicer's normal business hours; and by cash, money 
order, draft, or other similar instrument in properly negotiable form, 
or by electronic fund transfer if the servicer and consumer have so 
agreed.
    36(d) Prohibited payments to loan originators.
    1. Persons covered. Section 226.36(d) prohibits any person 
(including the creditor) from paying compensation to a loan originator 
in connection with a covered credit transaction, if the amount of the 
payment is based on any of the transaction's terms or conditions. For 
example, a person that purchases a loan from the creditor may not 
compensate the loan originator in a manner that violates Sec. 
226.36(d).
    2. Mortgage brokers. The payments made by a company acting as a 
mortgage broker to its employees who are loan originators are subject to 
the section's prohibitions. For example, a mortgage broker may not pay 
its employee more for a transaction with a 7 percent interest rate than 
for a transaction with a 6 percent interest rate.
    36(d)(1) Payments based on transaction terms and conditions.
    1. Compensation. i. General. For purposes of Sec. 226.36(d) and 
(e), the term ``compensation'' includes salaries, commissions, and any 
financial or similar incentive provided to a loan originator that is 
based on any of the terms or conditions of the loan originator's 
transactions. See comment 36(d)(1)-3 for examples of types of 
compensation that are not covered by Sec. 226.36(d) and (e). For 
example, the term ``compensation'' includes
    A. An annual or other periodic bonus; or
    B. Awards of merchandise, services, trips, or similar prizes.
    ii. Name of fee. Compensation includes amounts the loan originator 
retains and is not dependent on the label or name of any fee imposed in 
connection with the transaction. For example, if a loan originator 
imposes a ``processing fee'' in connection with the transaction and 
retains such fee, it is deemed compensation for purposes of Sec. 
226.36(d) and (e), whether the originator expends the time to process 
the consumer's application or uses the fee for other expenses, such as 
overhead.
    iii. Amounts for third-party charges. Compensation includes amounts 
the loan originator retains, but does not include amounts the originator 
receives as payment for bona fide and reasonable third-party charges, 
such as title insurance or appraisals. In some cases, amounts received 
for payment for third-party charges may exceed the actual charge 
because, for example, the originator cannot determine with accuracy what 
the actual charge will be before consummation. In such a case, the 
difference retained by the originator is not deemed compensation if the 
third-party charge imposed on the consumer was bona fide and reasonable, 
and also complies with state and other applicable law. On the other 
hand, if the originator marks up a third-party charge (a practice known 
as ``upcharging''), and the originator retains the difference between 
the actual charge and the marked-up charge, the amount retained is 
compensation for purposes of Sec. 226.36(d) and (e). For example
    A. Assume a loan originator charges the consumer a $400 application 
fee that includes $50 for a credit report and $350 for an appraisal. 
Assume that $50 is the amount the creditor pays for the credit report. 
At the time the loan originator imposes the application fee on the 
consumer, the loan originator is uncertain of the cost of the appraisal 
because the originator may choose from appraisers that charge between 
$300 to $350 for appraisals. Later, the cost for the appraisal is 
determined to be $300 for this consumer's transaction. In this case, the 
$50 difference between the $400 application fee imposed on the consumer 
and the actual $350 cost for the credit report and appraisal is not 
deemed compensation for purposes of Sec. 226.36(d) and (e), even though 
the $50 is retained by the loan originator.
    B. Using the same example in comment 36(d)(1)-1.iii.A above, the $50 
difference would be compensation for purposes of Sec. 226.36(d) and (e) 
if the appraisers from whom the originator chooses charge fees between 
$250 and $300.
    2. Examples of compensation that is based on transaction terms or 
conditions. Section 226.36(d)(1) prohibits loan originator compensation 
that is based on the terms or conditions of the loan originator's 
transactions. For example, the rule prohibits compensation to a loan 
originator for a transaction based on that transaction's interest rate, 
annual percentage rate, loan-to-value ratio, or the existence of a 
prepayment penalty. The rule also prohibits compensation based on a 
factor that is a proxy for a transaction's terms or conditions. For 
example, a consumer's credit score or similar representation of credit 
risk, such as the consumer's debt-to-income ratio, is not one of the 
transaction's terms or conditions. However, if a loan originator's 
compensation varies in whole or in part with a factor that serves as a 
proxy for loan terms or conditions, then the originator's compensation 
is based on a transaction's terms or conditions. To illustrate, assume 
that consumer A and consumer B receive loans from the same loan 
originator and the same creditor. Consumer A has a credit score of 650, 
and consumer B has a credit score of 800. Consumer A's loan has a 7 
percent interest rate, and consumer B's loan has a 6\1/2\ percent 
interest rate because of the consumers' different credit scores. If the 
creditor pays the loan originator $1,500 in compensation for consumer 
A's loan and $1,000 in compensation for consumer B's loan because the 
creditor varies compensation payments in whole or in part

[[Page 719]]

with a consumer's credit score, the originator's compensation would be 
based on the transactions' terms or conditions.
    3. Examples of compensation not based on transaction terms or 
conditions. The following are only illustrative examples of compensation 
methods that are permissible (unless otherwise prohibited by applicable 
law), and not an exhaustive list. Compensation is not based on the 
transaction's terms or conditions if it is based on, for example
    i. The loan originator's overall loan volume (i.e., total dollar 
amount of credit extended or total number of loans originated), 
delivered to the creditor.
    ii. The long-term performance of the originator's loans.
    iii. An hourly rate of pay to compensate the originator for the 
actual number of hours worked.
    iv. Whether the consumer is an existing customer of the creditor or 
a new customer.
    v. A payment that is fixed in advance for every loan the originator 
arranges for the creditor (e.g., $600 for every loan arranged for the 
creditor, or $1,000 for the first 1,000 loans arranged and $500 for each 
additional loan arranged).
    vi. The percentage of applications submitted by the loan originator 
to the creditor that result in consummated transactions.
    vii. The quality of the loan originator's loan files (e.g., accuracy 
and completeness of the loan documentation) submitted to the creditor.
    viii. A legitimate business expense, such as fixed overhead costs.
    ix. Compensation that is based on the amount of credit extended, as 
permitted by Sec. 226.36(d)(1)(ii). See comment 36(d)(1)-9 discussing 
compensation based on the amount of credit extended.
    4. Creditor's flexibility in setting loan terms. Section 
226.36(d)(1) does not limit a creditor's ability to offer a higher 
interest rate in a transaction as a means for the consumer to finance 
the payment of the loan originator's compensation or other costs that 
the consumer would otherwise be required to pay directly (either in cash 
or out of the loan proceeds). Thus, a creditor may charge a higher 
interest rate to a consumer who will pay fewer of the costs of the 
transaction directly, or it may offer the consumer a lower rate if the 
consumer pays more of the costs directly. For example, if the consumer 
pays half of the transaction costs directly, a creditor may charge an 
interest rate of 6 percent but, if the consumer pays none of the 
transaction costs directly, the creditor may charge an interest rate of 
6.5 percent. Section 226.36(d)(1) also does not limit a creditor from 
offering or providing different loan terms to the consumer based on the 
creditor's assessment of the credit and other transactional risks 
involved. A creditor could also offer different consumers varying 
interest rates that include a constant interest rate premium to recoup 
the loan originator's compensation through increased interest paid by 
the consumer (such as by adding a constant 0.25 percent to the interest 
rate on each loan).
    5. Effect of modification of loan terms. Under Sec. 226.36(d)(1), a 
loan originator's compensation may not vary based on any of a credit 
transaction's terms or conditions. Thus, a creditor and originator may 
not agree to set the originator's compensation at a certain level and 
then subsequently lower it in selective cases (such as where the 
consumer is able to obtain a lower rate from another creditor). When the 
creditor offers to extend a loan with specified terms and conditions 
(such as the rate and points), the amount of the originator's 
compensation for that transaction is not subject to change (increase or 
decrease) based on whether different loan terms are negotiated. For 
example, if the creditor agrees to lower the rate that was initially 
offered, the new offer may not be accompanied by a reduction in the loan 
originator's compensation.
    6. Periodic changes in loan originator compensation and 
transactions' terms and conditions. This section does not limit a 
creditor or other person from periodically revising the compensation it 
agrees to pay a loan originator. However, the revised compensation 
arrangement must result in payments to the loan originator that do not 
vary based on the terms or conditions of a credit transaction. A 
creditor or other person might periodically review factors such as loan 
performance, transaction volume, as well as current market conditions 
for originator compensation, and prospectively revise the compensation 
it agrees to pay to a loan originator. For example, assume that during 
the first 6 months of the year, a creditor pays $3,000 to a particular 
loan originator for each loan delivered, regardless of the loan terms or 
conditions. After considering the volume of business produced by that 
originator, the creditor could decide that as of July 1, it will pay 
$3,250 for each loan delivered by that particular originator, regardless 
of the loan terms or conditions. No violation occurs even if the loans 
made by the creditor after July 1 generally carry a higher interest rate 
than loans made before that date, to reflect the higher compensation.
    7. Compensation received directly from the consumer. The prohibition 
in Sec. 226.36(d)(1) does not apply to transactions in which any loan 
originator receives compensation directly from the consumer, in which 
case no other person may provide any compensation to a loan originator, 
directly or indirectly, in connection with that particular transaction 
pursuant to Sec. 226.36(d)(2). Payments to a loan originator made out 
of loan proceeds are considered compensation received directly from the 
consumer, while payments

[[Page 720]]

derived from an increased interest rate are not considered compensation 
received directly from the consumer. However, points paid on the loan by 
the consumer to the creditor are not considered payments received 
directly from the consumer whether they are paid in cash or out of the 
loan proceeds. That is, if the consumer pays origination points to the 
creditor and the creditor compensates the loan originator, the loan 
originator may not also receive compensation directly from the consumer. 
Compensation includes amounts retained by the loan originator, but does 
not include amounts the loan originator receives as payment for bona 
fide and reasonable third-party charges, such as title insurance or 
appraisals. See comment 36(d)(1)-1.
    8. Record retention. See comment 25(a)-5 for guidance on complying 
with the record retention requirements of Sec. 226.25(a) as they apply 
to Sec. 226.36(d)(1).
    9. Amount of credit extended. A loan originator's compensation may 
be based on the amount of credit extended, subject to certain 
conditions. Section 226.36(d)(1) does not prohibit an arrangement under 
which a loan originator is paid compensation based on a percentage of 
the amount of credit extended, provided the percentage is fixed and does 
not vary with the amount of credit extended. However, compensation that 
is based on a fixed percentage of the amount of credit extended may be 
subject to a minimum and/or maximum dollar amount, as long as the 
minimum and maximum dollar amounts do not vary with each credit 
transaction. For example
    i. A creditor may offer a loan originator 1 percent of the amount of 
credit extended for all loans the originator arranges for the creditor, 
but not less than $1,000 or greater than $5,000 for each loan.
    ii. A creditor may not offer a loan originator 1 percent of the 
amount of credit extended for loans of $300,000 or more, 2 percent of 
the amount of credit extended for loans between $200,000 and $300,000, 
and 3 percent of the amount of credit extended for loans of $200,000 or 
less.
    36(d)(2) Payments by persons other than consumer.
    1. Compensation in connection with a particular transaction. Under 
Sec. 226.36(d)(2), if any loan originator receives compensation 
directly from a consumer in a transaction, no other person may provide 
any compensation to a loan originator, directly or indirectly, in 
connection with that particular credit transaction. See comment 
36(d)(1)-7 discussing compensation received directly from the consumer. 
The restrictions imposed under Sec. 226.36(d)(2) relate only to 
payments, such as commissions, that are specific to, and paid solely in 
connection with, the transaction in which the consumer has paid 
compensation directly to a loan originator. Thus, payments by a mortgage 
broker company to an employee in the form of a salary or hourly wage, 
which is not tied to a specific transaction, do not violate Sec. 
226.36(d)(2) even if the consumer directly pays a loan originator a fee 
in connection with a specific credit transaction. However, if any loan 
originator receives compensation directly from the consumer in 
connection with a specific credit transaction, neither the mortgage 
broker company nor an employee of the mortgage broker company can 
receive compensation from the creditor in connection with that 
particular credit transaction.
    2. Compensation received directly from a consumer. Under Regulation 
X, which implements the Real Estate Settlement Procedures Act (RESPA), a 
yield spread premium paid by a creditor to the loan originator may be 
characterized on the RESPA disclosures as a ``credit'' that will be 
applied to reduce the consumer's settlement charges, including 
origination fees. A yield spread premium disclosed in this manner is not 
considered to be received by the loan originator directly from the 
consumer for purposes of Sec. 226.36(d)(2).
    36(d)(3) Affiliates.
    1. For purposes of Sec. 226.36(d), affiliates are treated as a 
single ``person.'' The term ``affiliate'' is defined in Sec. 
226.32(b)(2). For example, assume a parent company has two mortgage 
lending subsidiaries. Under Sec. 226.36(d)(1), subsidiary ``A'' could 
not pay a loan originator greater compensation for a loan with an 
interest rate of 8 percent than it would pay for a loan with an interest 
rate of 7 percent. If the loan originator may deliver loans to both 
subsidiaries, they must compensate the loan originator in the same 
manner. Accordingly, if the loan originator delivers the loan to 
subsidiary ``B'' and the interest rate is 8 percent, the originator must 
receive the same compensation that would have been paid by subsidiary A 
for a loan with a rate of either 7 or 8 percent.
    36(e) Prohibition on steering.
    1. Compensation. See comment 36(d)(1)-1 for guidance on compensation 
that is subject to Sec. 226.36(e).
    Paragraph 36(e)(1).
    1. Steering. For purposes of Sec. 226.36(e), directing or 
``steering'' a consumer to consummate a particular credit transaction 
means advising, counseling, or otherwise influencing a consumer to 
accept that transaction. For such actions to constitute steering, the 
consumer must actually consummate the transaction in question. Thus, 
Sec. 226.36(e)(1) does not address the actions of a loan originator if 
the consumer does not actually obtain a loan through that loan 
originator.
    2. Prohibited conduct. Under Sec. 226.36(e)(1), a loan originator 
may not direct or steer a consumer to consummate a transaction based on 
the fact that the loan originator

[[Page 721]]

would increase the amount of compensation that the loan originator would 
receive for that transaction compared to other transactions, unless the 
consummated transaction is in the consumer's interest.
    i. In determining whether a consummated transaction is in the 
consumer's interest, that transaction must be compared to other possible 
loan offers available through the originator, if any, and for which the 
consumer was likely to qualify, at the time that transaction was offered 
to the consumer. Possible loan offers are available through the loan 
originator if they could be obtained from a creditor with which the loan 
originator regularly does business. Section 226.36(e)(1) does not 
require a loan originator to establish a business relationship with any 
creditor with which the loan originator does not already do business. To 
be considered a possible loan offer available through the loan 
originator, an offer need not be extended by the creditor; it need only 
be an offer that the creditor likely would extend upon receiving an 
application from the applicant, based on the creditor's current credit 
standards and its current rate sheets or other similar means of 
communicating its current credit terms to the loan originator. An 
originator need not inform the consumer about a potential transaction if 
the originator makes a good faith determination that the consumer is not 
likely to qualify for it.
    ii. Section 226.36(e)(1) does not require a loan originator to 
direct a consumer to the transaction that will result in a creditor 
paying the least amount of compensation to the originator. However, if 
the loan originator reviews possible loan offers available from a 
significant number of the creditors with which the originator regularly 
does business, and the originator directs the consumer to the 
transaction that will result in the least amount of creditor-paid 
compensation for the loan originator, the requirements of Sec. 
226.36(e)(1) are deemed to be satisfied. In the case where a loan 
originator directs the consumer to the transaction that will result in a 
greater amount of creditor-paid compensation for the loan originator, 
Sec. 226.36(e)(1) is not violated if the terms and conditions on that 
transaction compared to the other possible loan offers available through 
the originator, and for which the consumer likely qualifies, are the 
same. A loan originator who is an employee of the creditor on a 
transaction may not obtain compensation that is based on the 
transaction's terms or conditions pursuant to Sec. 226.36(d)(1), and 
compliance with that provision by such a loan originator also satisfies 
the requirements of Sec. 226.36(e)(1) for that transaction with the 
creditor. However, if a creditor's employee acts as a broker by 
forwarding a consumer's application to a creditor other than the loan 
originator's employer, such as when the employer does not offer any loan 
products for which the consumer would qualify, the loan originator is 
not an employee of the creditor in that transaction and is subject to 
Sec. 226.36(e)(1) if the originator is compensated for arranging the 
loan with the other creditor.
    iii. See the commentary under Sec. 226.36(e)(3) for additional 
guidance on what constitutes a ``significant number of creditors with 
which a loan originator regularly does business'' and guidance on the 
determination about transactions for which ``the consumer likely 
qualifies.''
    3. Examples. Assume a loan originator determines that a consumer 
likely qualifies for a loan from Creditor A that has a fixed interest 
rate of 7 percent, but the loan originator directs the consumer to a 
loan from Creditor B having a rate of 7.5 percent. If the loan 
originator receives more in compensation from Creditor B than the amount 
that would have been paid by Creditor A, the prohibition in Sec. 
226.36(e) is violated unless the higher-rate loan is in the consumer's 
interest. For example, a higher-rate loan might be in the consumer's 
interest if the lower-rate loan has a prepayment penalty, or if the 
lower-rate loan requires the consumer to pay more in up-front charges 
that the consumer is unable or unwilling to pay or finance as part of 
the loan amount.
    36(e)(2) Permissible transactions.
    1. Safe harbors. A loan originator that satisfies Sec. 226.36(e)(2) 
is deemed to comply with Sec. 226.36(e)(1). A loan originator that does 
not satisfy Sec. 226.36(e)(2) is not subject to any presumption 
regarding the originator's compliance or noncompliance with Sec. 
226.36(e)(1).
    2. Minimum number of loan options. To obtain the safe harbor, Sec. 
226.36(e)(2) requires that the loan originator present loan options that 
meet the criteria in Sec. 226.36(e)(3)(i) for each type of transaction 
in which the consumer expressed an interest. As required by Sec. 
226.36(e)(3)(ii), the loan originator must have a good faith belief that 
the options presented are loans for which the consumer likely qualifies. 
If the loan originator is not able to form such a good faith belief for 
loan options that meet the criteria in Sec. 226.36(e)(3)(i) for a given 
type of transaction, the loan originator may satisfy Sec. 226.36(e)(2) 
by presenting all loans for which the consumer likely qualifies and that 
meet the other requirements in Sec. 226.36(e)(3) for that given type of 
transaction. A loan originator may present to the consumer any number of 
loan options, but presenting a consumer more than four loan options for 
each type of transaction in which the consumer expressed an interest and 
for which the consumer likely qualifies would not likely help the 
consumer make a meaningful choice.
    36(e)(3) Loan options presented.
    1. Significant number of creditors. A significant number of the 
creditors with which a

[[Page 722]]

loan originator regularly does business is three or more of those 
creditors. If the loan originator regularly does business with fewer 
than three creditors, the originator is deemed to comply by obtaining 
loan options from all the creditors with which it regularly does 
business. Under Sec. 226.36(e)(3)(i), the loan originator must obtain 
loan options from a significant number of creditors with which the loan 
originator regularly does business, but the loan originator need not 
present loan options from all such creditors to the consumer. For 
example, if three loans available from one of the creditors with which 
the loan originator regularly does business satisfy the criteria in 
Sec. 226.36(e)(3)(i), presenting those and no options from any other 
creditor satisfies that section.
    2. Creditors with which loan originator regularly does business. To 
qualify for the safe harbor in Sec. 226.36(e)(2), the loan originator 
must obtain and review loan options from a significant number of the 
creditors with which the loan originator regularly does business. For 
this purpose, a loan originator regularly does business with a creditor 
if
    i. There is a written agreement between the originator and the 
creditor governing the originator's submission of mortgage loan 
applications to the creditor;
    ii. The creditor has extended credit secured by a dwelling to one or 
more consumers during the current or previous calendar month based on an 
application submitted by the loan originator; or
    iii. The creditor has extended credit secured by a dwelling twenty-
five or more times during the previous twelve calendar months based on 
applications submitted by the loan originator. For this purpose, the 
previous twelve calendar months begin with the calendar month that 
precedes the month in which the loan originator accepted the consumer's 
application.
    3. Lowest interest rate. To qualify under the safe harbor in Sec. 
226.36(e)(2), for each type of transaction in which the consumer has 
expressed an interest, the loan originator must present the consumer 
with loan options that meet the criteria in Sec. 226.36(e)(3)(i). The 
criteria are: The loan with the lowest interest rate; the loan with the 
lowest total dollar amount for discount points and origination points or 
fees; and a loan with the lowest interest rate without negative 
amortization, a prepayment penalty, a balloon payment in the first seven 
years of the loan term, shared equity, or shared appreciation, or, in 
the case of a reverse mortgage, a loan without a prepayment penalty, 
shared equity, or shared appreciation. To identify the loan with the 
lowest interest rate, for any loan that has an initial rate that is 
fixed for at least five years, the loan originator shall use the initial 
rate that would be in effect at consummation. For a loan with an initial 
rate that is not fixed for at least five years
    i. If the interest rate varies based on changes to an index, the 
originator shall use the fully-indexed rate that would be in effect at 
consummation without regard to any initial discount or premium.
    ii. For a step-rate loan, the originator shall use the highest rate 
that would apply during the first five years.
    4. Transactions for which the consumer likely qualifies. To qualify 
under the safe harbor in Sec. 226.36(e)(2), the loan originator must 
have a good faith belief that the loan options presented to the consumer 
pursuant to Sec. 226.36(e)(3) are transactions for which the consumer 
likely qualifies. The loan originator's belief that the consumer likely 
qualifies should be based on information reasonably available to the 
loan originator at the time the loan options are presented. In making 
this determination, the loan originator may rely on information provided 
by the consumer, even if it subsequently is determined to be inaccurate. 
For purposes of Sec. 226.36(e)(3), a loan originator is not expected to 
know all aspects of each creditor's underwriting criteria. But pricing 
or other information that is routinely communicated by creditors to loan 
originators is considered to be reasonably available to the loan 
originator, for example, rate sheets showing creditors' current pricing 
and the required minimum credit score or other eligibility criteria.

             Section 226.39--Mortgage transfer disclosures.

    39(a) Scope.
    Paragraph 39(a)(1).
    1. Covered persons. The disclosure requirements of this section 
apply to any ``covered person'' that becomes the legal owner of an 
existing mortgage loan, whether through a purchase, or other transfer or 
assignment, regardless of whether the person also meets the definition 
of a ``creditor'' in Regulation Z. The fact that a person purchases or 
acquires mortgage loans and provides the disclosures under this section 
does not by itself make that person a ``creditor'' as defined in the 
regulation.
    2. Acquisition of legal title. To become a ``covered person'' 
subject to this section, a person must become the owner of an existing 
mortgage loan by acquiring legal title to the debt obligation.
    i. Partial interest. A person may become a covered person by 
acquiring a partial interest in the mortgage loan. If the original 
creditor transfers a partial interest in the loan to one or more 
persons, all such transferees are covered persons under this section.
    ii. Joint acquisitions. All persons that jointly acquire legal title 
to the loan are covered persons under this section, and under Sec. 
226.39(b)(5), a single disclosure must be provided on behalf of all such 
covered persons.

[[Page 723]]

Multiple persons are deemed to jointly acquire legal title to the loan 
if each acquires a partial interest in the loan pursuant to the same 
agreement or by otherwise acting in concert. See comments 39(b)(5)-1 and 
39(d)(1)(ii)-1 regarding the disclosure requirements for multiple 
persons that jointly acquire a loan.
    iii. Affiliates. An acquiring party that is a separate legal entity 
from the transferor must provide the disclosures required by this 
section even if the parties are affiliated entities.
    3. Exclusions.
    i. Beneficial interest. Section 226.39 does not apply to a party 
that acquires only a beneficial interest or a security interest in the 
loan, or to a party that assumes the credit risk without acquiring legal 
title to the loan. For example, an investor that acquires mortgage-
backed securities, pass-through certificates, or participation interests 
and does not acquire legal title in the underlying mortgage loans is not 
covered by this section.
    ii. Loan servicers. Pursuant to TILA Section 131(f)(2), the servicer 
of a mortgage loan is not the owner of the obligation for purposes of 
this section if the servicer holds title to the loan as a result of the 
assignment of the obligation to the servicer solely for the 
administrative convenience of the servicer in servicing the obligation.
    4. Mergers, corporate acquisitions, or reorganizations. Disclosures 
are required under this section when, as a result of a merger, corporate 
acquisition, or reorganization, the ownership of a mortgage loan is 
transferred to a different legal entity.
    Paragraph 39(a)(2).
    1. Mortgage transactions covered. Section 226.39 applies to closed-
end or open-end consumer credit transactions secured by the principal 
dwelling of a consumer.
    39(b) Disclosure required.
    1. Generally. A covered person must mail or deliver the disclosures 
required by this section on or before the 30th calendar day following 
the date of transfer, unless an exception in Sec. 226.39(c) applies. 
For example, if a covered person acquires a mortgage loan on March 15, 
the disclosure must be mailed or delivered on or before April 14.
    39(b)(1) Form of disclosure.
    1. Combining disclosures. The disclosures under this section can be 
combined with other materials or disclosures, including the transfer of 
servicing notices required by the Real Estate Settlement Procedure Act 
(12 U.S.C. 2601 et seq.) so long as the combined disclosure satisfies 
the timing and other requirements of this section.
    39(b)(4) Multiple transfers.
    1. Single disclosure for multiple transfers. A mortgage loan might 
be acquired by a covered person and subsequently transferred to another 
entity that is also a covered person required to provide the disclosures 
under this section. In such cases, a single disclosure may be provided 
on behalf of both covered persons instead of providing two separate 
disclosures if the disclosure satisfies the timing and content 
requirements applicable to each covered person. For example, if a 
covered person acquires a loan on March 15 with the intent to assign the 
loan to another entity on April 30, the covered person could mail the 
disclosure on or before April 14 to provide the required information for 
both entities and indicate when the subsequent transfer is expected to 
occur.
    2. Estimating the date. When a covered person provides the 
disclosure required by this section that also describes a subsequent 
transfer, the date of the subsequent transfer may be estimated when the 
exact date is unknown at the time the disclosure is made. Information is 
unknown if it is not reasonably available to the covered person at the 
time the disclosure is made. The ``reasonably available'' standard 
requires that the covered person, acting in good faith, exercise due 
diligence in obtaining information. The covered person normally may rely 
on the representations of other parties in obtaining information. The 
covered person might make the disclosure using an estimated date even 
though the covered person knows that more precise information will be 
available in the future. For example, a covered person may provide a 
disclosure on March 31 stating that it acquired the loan on March 15 and 
that a transfer to another entity is expected to occur ``on or around'' 
April 30, even if more precise information will be available by April 
14.
    3. Duty to comply. Even though one covered person provides the 
disclosures for another covered person, each has a duty to ensure that 
disclosures related to its acquisition are accurate and provided in a 
timely manner unless an exception in Sec. 226.39(c) applies.
    39(b)(5) Multiple covered person.
    1. Single disclosure required. If multiple covered persons jointly 
acquire the loan, a single disclosure must be provided on behalf of all 
covered persons instead of providing separate disclosures. See comment 
39(a)(1)-2(ii) regarding a joint acquisition of legal title, and comment 
39(d)(1)(ii)-1 regarding the disclosure requirements for multiple 
persons that jointly acquire a loan. If multiple covered persons jointly 
acquire the loan and complete the acquisition on separate dates, a 
single disclosure must be provided on behalf of all persons on or before 
the 30th day following the earliest acquisition date. For examples, if 
covered persons A and B enter into an agreement with the original 
creditor to jointly acquire the loan, and complete the acquisition on 
March 15 and March 25, respectively, a single disclosure must be 
provided on behalf of both persons on or before April 14. If the two 
acquisition dates are

[[Page 724]]

more than 30 days apart, a single disclosure must be provided on behalf 
of both persons on or before the 30th day following the earlier 
acquisition date, even though one person has not completed its 
acquisition. See comment 39(b)(4)-2 regarding use of an estimated date 
of transfer.
    2. Single disclosure not required. If multiple covered persons each 
acquire a partial interest in the loan pursuant to separate and 
unrelated agreements and not jointly, each covered person has a duty to 
ensure that disclosures related to its acquisition are accurate and 
provided in a timely manner unless an exception in Sec. 226.39(c) 
applies. The parties may, but are not required to, provide a single 
disclosure that satisfies the timing and content requirements applicable 
to each covered person.
    3. Timing requirements. A single disclosure provided on behalf of 
multiple covered persons must satisfy the timing and content 
requirements applicable to each covered person unless an exception in 
Sec. 226.39(c) applies.
    4. Duty to comply. Even though one covered person provides the 
disclosures for another covered person, each has a duty to ensure that 
disclosures related to its acquisition are accurate and provided in a 
timely manner unless an exception in Sec. 226.39(c) applies. See 
comments 39(c)(1)-2, 39(c)(3)-1 and 39(c)(3)-2 regarding transfers of a 
partial interest in the mortgage loan.
    39(c) Exceptions.
    Paragraph 39(c)(1).
    1. Transfer of all interest. A covered person is not required to 
provide the disclosures required by this section if it sells, assigns or 
otherwise transfers all of its interest in the mortgage loan on or 
before the 30th calendar day following the date that it acquired the 
loan. For example, if covered person A acquires the loan on March 15 and 
subsequently transfers all of its interest in the loan to covered person 
B on April 1, person A is not required to provide the disclosures 
required by this section. Person B, however, must provide the 
disclosures required by this section unless an exception in Sec. 
226.39(c) applies.
    2. Transfer of partial interests. A covered person that subsequently 
transfers a partial interest in the loan is required to provide the 
disclosures required by this section if the covered person retains a 
partial interest in the loan on the 30th calendar day after it acquired 
the loan, unless an exception in Sec. 226.39(c) applies. For example, 
if covered person A acquires the loan on March 15 and subsequently 
transfers fifty percent of its interest in the loan to covered person B 
on April 1, person A is required to provide the disclosures under this 
section if it retains a partial interest in the loan on April 14. Person 
B in this example must also provide the disclosures required under this 
section unless an exception in Sec. 226.39(c) applies. Either person A 
or person B could provide the disclosure on behalf of both of them if 
the disclosure satisfies the timing and content requirements applicable 
to each of them. In this example, a single disclosure for both covered 
persons would have to be provided on or before April 14 to satisfy the 
timing requirements for person A's acquisition of the loan on March 15. 
See comment 39(b)(4)-1 regarding a single disclosure for multiple 
transfers.
    Paragraph 39(c)(2).
    1. Repurchase agreements. The original creditor or owner of the 
mortgage loan might sell, assign or otherwise transfer legal title to 
the loan to secure temporary business financing under an agreement that 
obligates the original creditor or owner to repurchase the loan. The 
covered person that acquires the loan in connection with such a 
repurchase agreement is not required to provide disclosures under this 
section. However, if the transferor does not repurchase the mortgage 
loan, the acquiring party must provide the disclosures required by this 
section within 30 days after the date that the transaction is recognized 
as an acquisition on its books and records.
    2. Intermediary parties. The exception in Sec. 226.39(c)(2) applies 
regardless of whether the repurchase arrangement involves an 
intermediary party. For example, legal title to the loan may transfer 
from the original creditor to party A through party B as an 
intermediary. If the original creditor is obligated to repurchase the 
loan, neither party A nor party B is required to provide the disclosures 
under this section. However, if the original creditor does not 
repurchase the loan, party A must provide the disclosures required by 
this section within 30 days after the date that the transaction is 
recognized as an acquisition on its books and records unless another 
exception in Sec. 226.39(c) applies.
    Paragraph 39(c)(3).
    1. Acquisition of partial interests. This exception applies if the 
covered person acquires only a partial interest in the loan, and there 
is no change in the agent or person authorized to receive notice of the 
right to rescind and resolve issues concerning the consumer's payments. 
If, as a result of the transfer of a partial interest in the loan, a 
different agent or party is authorized to receive notice of the right to 
rescind and resolve issues concerning the consumer's payments, the 
disclosures under this section must be provided.
    2. Examples.
    i. A covered person is not required to provide the disclosures under 
this section if it acquires a partial interest in the loan from the 
original creditor who remains authorized to receive the notice of the 
right to rescind and resolve issues concerning the consumer's payments 
after the transfer.
    ii. The original creditor transfers fifty percent of its interest in 
the loan to covered

[[Page 725]]

person A. Person A does not provide the disclosures under this section 
because the exception in Sec. 226.39(c)(3) applies. The creditor then 
transfers the remaining fifty percent of its interest in the loan to 
covered person B and does not retain any interest in the loan. Person B 
must provide the disclosures under this section.
    iii. The original creditor transfers fifty percent of its interest 
in the loan to covered person A and also authorizes party X as its agent 
to receive notice of the right to rescind and resolve issues concerning 
the consumer's payments on the loan. Since there is a change in an agent 
or party authorized to receive notice of the right to rescind and 
resolve issues concerning the consumer's payments, person A is required 
to provide the disclosures under this section. Person A then transfers 
all of its interest in the loan to covered person B. Person B is not 
required to provide the disclosures under this section if the original 
creditor retains a partial interest in the loan and party X retains the 
same authority.
    iv. The original creditor transfers all of its interest in the loan 
to covered person A. Person A provides the disclosures under this 
section and notifies the consumer that party X is authorized to receive 
notice of the right to rescind and resolve issues concerning the 
consumer's payments on the loan. Person A then transfers fifty percent 
of its interest in the loan to covered person B. Person B is not 
required to provide the disclosures under this section if person A 
retains a partial interest in the loan and party X retains the same 
authority.
    39(d) Content of required disclosures.
    1. Identifying the loan. The disclosures required by this section 
must identify the loan that was acquired or transferred. The covered 
person has flexibility in determining what information to provide for 
this purpose and may use any information that would reasonably inform a 
consumer which loan was acquired or transferred. For example, the 
covered person may identify the loan by stating
    i. The address of the mortgaged property along with the account 
number or loan number previously disclosed to the consumer, which may 
appear in a truncated format;
    ii. The account number alone, or other identifying number, if that 
number has been previously provided to the consumer, such as on a 
statement that the consumer receives monthly; or
    iii. The date on which the credit was extended and the original 
amount of the loan or credit line.
    Paragraph 39(d)(1).
    1. Identification of covered person. Section 226.39(d)(1) requires a 
covered person to provide its name, address, and telephone number. The 
party identified must be the covered person who owns the mortgage loan, 
regardless of whether another party services the loan or is the covered 
person's agent. In addition to providing its name, address and telephone 
number, the covered person may, at its option, provide an address for 
receiving electronic mail or an internet Web site address, but is not 
required to do so.

                               39(d)(1)(i)

    1. Multiple transfers, single disclosure. If a mortgage loan is 
acquired by a covered person and subsequently transferred to another 
covered person, a single disclosure may be provided on behalf of both 
covered persons instead of providing two separate disclosures as long as 
the disclosure satisfies the timing and content requirements applicable 
to each covered person. See comment 39(b)(4)-1 regarding multiple 
transfers. A single disclosure for multiple transfers must state the 
name, address, and telephone number of each covered person unless Sec. 
226.39(d)(1)(ii) applies.

                              39(d)(1)(ii)

    1. Multiple covered persons, single disclosure. If multiple covered 
persons jointly acquire the loan, a single disclosure must be provided 
on behalf of all covered persons instead of providing separate 
disclosures. The single disclosure must provide the name, address, and 
telephone number of each covered person unless Sec. 226.39(d)(1)(ii) 
applies and one of the covered persons has been authorized in accordance 
with Sec. 226.39(d)(3) of this section to receive the consumer's notice 
of the right to rescind and resolve issues concerning the consumer's 
payments on the loan. In such cases, the information required by Sec. 
226.39(d)(1) may be provided only for that covered person.
    2. Multiple covered persons, multiple disclosures. If multiple 
covered persons each acquire a partial interest in the loan in separate 
transactions and not jointly, each covered person must comply with the 
disclosure requirements of this section unless an exception in Sec. 
226.39(c) applies. See comment 39(a)(1)-2(ii) regarding a joint 
acquisition of legal title, and comment 39(b)(5)-2 regarding the 
disclosure requirements for multiple covered persons.
    Paragraph 39(d)(3).
    1. Identifying agents. Under Sec. 226.39(d)(3), the covered person 
must provide the name, address and telephone number for the agent or 
other party having authority to receive the notice of the right to 
rescind and resolve issues concerning the consumer's payments on the 
loan. If multiple persons are identified under this paragraph, the 
disclosure shall provide the name, address and telephone number for each 
and indicate the extent to which the authority of each person differs. 
Section 226.39(d)(3) does not require that a covered person designate an 
agent or

[[Page 726]]

other party, but if the consumer cannot contact the covered person for 
these purposes, the disclosure must provide the name, address and 
telephone number for an agent or other party that can address these 
matters. If an agent or other party is authorized to receive the notice 
of the right to rescind and resolve issues concerning the consumer's 
payments on the loan, the disclosure can state that the consumer may 
contact that agent regarding any questions concerning the consumer's 
account without specifically mentioning rescission or payment issues. 
However, if multiple agents are listed on the disclosure, the disclosure 
shall state the extent to which the authority of each agent differs by 
indicating if only one of the agents is authorized to receive notice of 
the right to rescind, or only one of the agents is authorized to resolve 
issues concerning payments.
    2. Other contact information. The covered person may also provide an 
agent's electronic mail address or internet Web site address, but is not 
required to do so.
    Paragraph 39(d)(4).
    1. Where recorded. Section 226.39(d)(4) requires the covered person 
to disclose where transfer of ownership of the debt to the covered 
person is recorded if it has been recorded in public records. 
Alternatively, the disclosure can state that the transfer of ownership 
of the debt has not been recorded in public records at the time the 
disclosure is provided, if that is the case, or the disclosure can state 
where the transfer may later be recorded. An exact address is not 
required and it would be sufficient, for example, to state that the 
transfer of ownership is recorded in the office of public land records 
or the recorder of deeds office for the county or local jurisdiction 
where the property is located.
    39(e) Optional disclosures.
    1. Generally. Section 226.39(e) provides that covered persons may, 
at their option, include additional information about the mortgage 
transaction that they consider relevant or helpful to consumers. For 
example, the covered person may choose to inform consumers that the 
location where they should send mortgage payments has not changed. See 
comment 39(b)(1)-1 regarding combined disclosures.

                 Section 226.42--Valuation Independence

    42(a) Scope.
    1. Open- and closed-end credit. Section 226.42 applies to both open-
end and closed-end transactions secured by the consumer's principal 
dwelling.
    2. Consumer's principal dwelling. Section 226.42 applies only if the 
dwelling that will secure a consumer credit transaction is the principal 
dwelling of the consumer who obtains credit.
    42(b) Definitions.
    Paragraph 42(b)(1).
    1. Examples of covered persons. ``Covered persons'' include 
creditors, mortgage brokers, appraisers, appraisal management companies, 
real estate agents, and other persons that provide ``settlement 
services'' as defined under the Real Estate Settlement Procedures Act 
and implementing regulations. See 12 U.S.C. 2602(3).
    2. Examples of persons not covered. The following persons are not 
``covered persons'' (unless, of course, they are creditors with respect 
to a covered transaction or perform ``settlement services'' in 
connection with a covered transaction)
    i. The consumer who obtains credit through a covered transaction.
    ii. A person secondarily liable for a covered transaction, such as a 
guarantor.
    iii. A person that resides in or will reside in the consumer's 
principal dwelling but will not be liable on the covered transaction, 
such as a non-obligor spouse.
    Paragraph 42(b)(2).
    1. Principal dwelling. The term ``principal dwelling'' has the same 
meaning under Sec. 226.42(b) as under Sec. Sec. 226.2(a)(24), 
226.15(a), and 226.23(a). See comments 2(a)(24)-3, 15(a)-5, and 23(a)-3.
    Paragraph 42(b)(3).
    1. Valuation. A ``valuation'' is an estimate of value prepared by a 
natural person, such as an appraisal report prepared by an appraiser or 
an estimate of market value prepared by a real estate agent. The term 
includes photographic or other information included with a written 
estimate of value. A ``valuation'' includes an estimate provided or 
viewed electronically, such as an estimate transmitted via electronic 
mail or viewed using a computer.
    2. Automated model or system. A ``valuation'' does not include an 
estimate of value produced exclusively using an automated model or 
system. However, a ``valuation'' includes an estimate of value developed 
by a natural person based in part on an estimate of value produced using 
an automated model or system.
    3. Estimate. An estimate of the value of the consumer's principal 
dwelling includes an estimate of a range of values for the consumer's 
principal dwelling.
    42(c) Valuation for consumer's principal dwelling.
    42(c)(1) Coercion.
    1. State law. The terms ``coercion,'' ``extortion,'' ``inducement,'' 
``bribery,'' ``intimidation,'' ``compensation,'' ``instruction,'' and 
``collusion'' have the meanings given to them by applicable state law or 
contract. See Sec. 226.2(b)(3).
    2. Purpose. A covered person does not violate Sec. 226.42(c)(1) if 
the person does not engage in an act or practice set forth in Sec. 
226.42(c)(1) for the purpose of causing the value assigned to the 
consumer's principal dwelling to be based on a factor other than

[[Page 727]]

the independent judgment of a person that prepares valuations. For 
example, requesting that a person that prepares a valuation take certain 
actions, such as consider additional, appropriate property information, 
does not violate Sec. 226.42(c), because such request does not supplant 
the independent judgment of the person that prepares a valuation. See 
Sec. 226.42(c)(3)(i). A covered person also may provide incentives, 
such as additional compensation, to a person that prepares valuations or 
performs valuation management functions under Sec. 226.42(c)(1), as 
long as the covered person does not cause or attempt to cause the value 
assigned to the consumer's principal dwelling to be based on a factor 
other than the independent judgment of the person that prepares 
valuations.
    3. Person that prepares valuations. For purposes of Sec. 226.42, 
the term ``valuation'' includes an estimate of value regardless of 
whether it is an appraisal prepared by a state-certified or -licensed 
appraiser. See comment 42(b)(3)-1. A person that prepares valuations may 
or may not be a state-licensed or state-certified appraiser. Thus a 
person violates Sec. 226.42(c)(1) by engaging in prohibited acts or 
practices directed towards any person that prepares or may prepare a 
valuation of the consumer's principal dwelling for a covered 
transaction. For example, a person violates Sec. 226.42(c)(1) by 
seeking to coerce a real estate agent to assign a value to the 
consumer's principal dwelling based on a factor other than the 
independent judgment of the real estate agent, in connection with a 
covered transaction.
    4. Indirect acts or practices. Section 226.42(c)(1) prohibits both 
direct and indirect attempts to cause the value assigned to the 
consumer's principal dwelling to be based on a factor other than the 
independent judgment of the person that prepares the valuation, through 
coercion and certain other acts and practices. For example, a creditor 
violates Sec. 226.42(c)(1) if the creditor attempts to cause the value 
an appraiser engaged by an appraisal management company assigns to the 
consumer's principal dwelling to be based on a factor other than the 
appraiser's independent judgment, by threatening to withhold future 
business from a title company affiliated with the appraisal management 
company unless the appraiser assigns a value to the dwelling that meets 
or exceeds a minimum threshold.
    Paragraph 42(c)(1)(i).
    1. Applicability of examples. Section 226.42(c)(1)(i) provides 
examples of coercion of a person that prepares valuations. However, 
Sec. 226.42(c)(1)(i) also applies to coercion of a person that performs 
valuation management functions or its affiliate. See Sec. 226.42(c)(1); 
comment 42(c)(1)-4.
    2. Specific value or predetermined threshold. As used in the 
examples of actions prohibited under Sec. 226.42(c)(1), a ``specific 
value'' and a ``predetermined threshold'' include a predetermined 
minimum, maximum, or range of values. Further, although the examples 
assume a covered person's prohibited actions are designed to cause the 
value assigned to the consumer's principal dwelling to equal or exceed a 
certain amount, the rule applies equally to cases where a covered 
person's prohibited actions are designed to cause the value assigned to 
the dwelling to be below a certain amount.
    42(c)(2) Mischaracterization of value.
    42(c)(2)(i) Misrepresentation.
    1. Opinion of value. Section 226.42(c)(2)(i) prohibits a person that 
performs valuations from misrepresenting the value of the consumer's 
principal dwelling in a valuation. Such person misrepresents the value 
of the consumer's principal dwelling by assigning a value to such 
dwelling that does not reflect the person's opinion of the value of such 
dwelling. For example, an appraiser misrepresents the value of the 
consumer's principal dwelling if the appraiser estimates that the value 
of such dwelling is $250,000 applying the standards required by the 
Uniform Standards of Professional Appraisal Standards but assigns a 
value of $300,000 to such dwelling in a Uniform Residential Appraisal 
Report.
    42(c)(2)(iii) Inducement of mischaracterization.
    1. Inducement. A covered person may not induce a person to 
materially misrepresent the value of the consumer's principal dwelling 
in a valuation or to falsify or alter a valuation. For example, a loan 
originator may not coerce a loan underwriter to alter an appraisal 
report to increase the value assigned to the consumer's principal 
dwelling.
    42(d) Prohibition on conflicts of interest.
    42(d)(1)(i) In general.
    1. Prohibited interest in the property. A person preparing a 
valuation or performing valuation management functions for a covered 
transaction has a prohibited interest in the property under paragraph 
(d)(1)(i) if the person has any ownership or reasonably foreseeable 
ownership interest in the property. For example, a person who seeks a 
mortgage to purchase a home has a reasonably foreseeable ownership 
interest in the property securing the mortgage, and therefore is not 
permitted to prepare the valuation or perform valuation management 
functions for that mortgage transaction under paragraph (d)(1)(i).
    2. Prohibited interest in the transaction. A person preparing a 
valuation or performing valuation management functions has a prohibited 
interest in the transaction under paragraph (d)(1)(i) if that person or 
an affiliate of that person also serves as a loan officer of the 
creditor, mortgage broker, real estate broker, or other settlement 
service provider for the transaction and the conditions under paragraph 
(d)(4) are not satisfied. A

[[Page 728]]

person also has a prohibited interest in the transaction if the person 
is compensated or otherwise receives financial or other benefits based 
on whether the transaction is consummated. Under these circumstances, 
the person is not permitted to prepare the valuation or perform 
valuation management functions for that transaction under paragraph 
(d)(1)(i).
    42(d)(1)(ii) Employees and affiliates of creditors; providers of 
multiple settlement services.
    1. Employees and affiliates of creditors. In general, a creditor may 
use employees or affiliates to prepare a valuation or perform valuation 
management functions without violating paragraph (d)(1)(i). However, 
whether an employee or affiliate has a direct or indirect interest in 
the property or transaction that creates a prohibited conflict of 
interest under paragraph (d)(1)(i) depends on the facts and 
circumstances of a particular case, including the structure of the 
employment or affiliate relationship.
    2. Providers of multiple settlement services. In general, a person 
who prepares a valuation or perform valuation management functions for a 
covered transaction may perform another settlement service for the same 
transaction, or the person's affiliate may perform another settlement 
service, without violating paragraph (d)(1)(i). However, whether the 
person has a direct or indirect interest in the property or transaction 
that creates a prohibited conflict of interest under paragraph (d)(1)(i) 
depends on the facts and circumstances of a particular case.
    42(d)(2) Employees and affiliates of creditors with assets of more 
than $250 million for both of the past two calendar years.
    1. Safe harbor. A person who a prepares valuation or performs 
valuation management functions for a covered transaction and is an 
employee or affiliate of the creditor will not be deemed to have an 
interest prohibited under paragraph (d)(1)(i) on the basis of the 
employment or affiliate relationship with the creditor if the conditions 
in paragraph (d)(2) are satisfied. Even if the conditions in paragraph 
(d)(2) are satisfied, however, the person may have a prohibited conflict 
of interest on other grounds, such as if the person performs a valuation 
for a purchase-money mortgage transaction in which the person is the 
buyer or seller of the subject property. Thus, in general, in any 
covered transaction in which the creditor had assets of more than $250 
million for both of the past two years, the creditor may use its own 
employee or affiliate to prepare a valuation or perform valuation 
management functions for a particular transaction, as long as the 
conditions described in paragraph (d)(2) are satisfied. If the 
conditions in paragraph (d)(2) are not satisfied, whether a person 
preparing a valuation or performing valuation management functions has 
violated paragraph (d)(1)(i) depends on all of the facts and 
circumstances.
    Paragraph 42(d)(2)(ii).
    1. Prohibition on reporting to a person who is part of the 
creditor's loan production function. To qualify for the safe harbor 
under paragraph (d)(2), the person preparing a valuation or performing 
valuation management functions may not report to a person who is part of 
the creditor's loan production function (as defined in paragraph 
(d)(5)(i) and comment 42(d)(5)(i)-1). For example, if a person preparing 
a valuation is directly supervised or managed by a loan officer or other 
person in the creditor's loan production function, or by a person who is 
directly supervised or managed by a loan officer, the condition under 
paragraph (d)(2)(ii) is not met.
    2. Prohibition on reporting to a person whose compensation is based 
on the transaction closing. To qualify for the safe harbor under 
paragraph (d)(2), the person preparing a valuation or performing 
valuation management functions may not report to a person whose 
compensation is based on the closing of the transaction to which the 
valuation relates. For example, assume an appraisal management company 
performs valuation management functions for a transaction in which the 
creditor is an affiliate of the appraisal management company. If the 
employee of the appraisal management company who is in charge of 
valuation management functions for that transaction is supervised by a 
person who earns a commission or bonus based on the percentage of closed 
transactions for which the appraisal management company provides 
valuation management functions, the condition under paragraph (d)(2)(ii) 
is not met.
    Paragraph 42(d)(2)(iii).
    1. Direct or indirect involvement in selection of person who 
prepares a valuation. In any covered transaction, the safe harbor under 
paragraph (d)(2) is available if, among other things, no employee, 
officer or director in the creditor's loan production function (as 
defined in paragraph (d)(4)(ii) and comment 42(d)(4)(ii)-1) is directly 
or indirectly involved in selecting, retaining, recommending or 
influencing the selection of the person to prepare a valuation or 
perform valuation management functions, or to be included in or excluded 
from a list or panel of approved persons who prepare valuations or 
perform valuation management functions. For example, if the person who 
selects the person to prepare the valuation for a covered transaction is 
supervised by an employee of the creditor who also supervises loan 
officers, the condition in paragraph (d)(2)(iii) is not met.
    42(d)(3) Employees and affiliates of creditors with assets of $250 
million or less for either of the past two calendar years.

[[Page 729]]

    1. Safe harbor. A person who prepares a valuation or performs 
valuation management functions for a covered transaction and is an 
employee or affiliate of the creditor will not be deemed to have 
interest prohibited under paragraph (d)(1)(i) on the basis of the 
employment or affiliate relationship with the creditor if the conditions 
in paragraph (d)(3) are satisfied. Even if the conditions in paragraph 
(d)(3) are satisfied, however, the person may have a prohibited conflict 
of interest on other grounds, such as if the person performs a valuation 
for a purchase-money mortgage transaction in which the person is the 
buyer or seller of the subject property. Thus, in general, in any 
covered transaction in which the creditor had assets of $250 million or 
less for either of the past two calendar years, the creditor may use its 
own employee or affiliate to prepare a valuation or perform valuation 
management functions for a particular transaction, as long as the 
conditions described in paragraph (d)(3) are satisfied. If the 
conditions in paragraph (d)(3) are not satisfied, whether a person 
preparing valuations or performing valuation management functions has 
violated paragraph (d)(1)(i) depends on all of the facts and 
circumstances.
    42(d)(4) Providers of multiple settlement services.
    Paragraph 42(d)(4)(i).
    1. Safe harbor in transactions in which the creditor had assets of 
more than $250 million for both of the past two calendar years. A person 
preparing a valuation or performing valuation management functions in 
addition to performing another settlement service for the same 
transaction, or whose affiliate performs another settlement service for 
the transaction, will not be deemed to have interest prohibited under 
paragraph (d)(1)(i) as a result of the person or the person's affiliate 
performing another settlement service if the conditions in paragraph 
(d)(4)(i) are satisfied. Even if the conditions in paragraph (d)(4)(i) 
are satisfied, however, the person may have a prohibited conflict of 
interest on other grounds, such as if the person performs a valuation 
for a purchase-money mortgage transaction in which the person is the 
buyer or seller of the subject property. Thus, in general, in any 
covered transaction with a creditor that had assets of more than $250 
million for the past two years, a person preparing a valuation or 
performing valuation management functions, or its affiliate, may provide 
another settlement service for the same transaction, as long as the 
conditions described in paragraph (d)(4)(i) are satisfied. If the 
conditions in paragraph (d)(4)(i) are not satisfied, whether a person 
preparing valuations or performing valuation management functions has 
violated paragraph (d)(1)(i) depends on all of the facts and 
circumstances.
    2. Reporting. The safe harbor under paragraph (d)(4)(i) is available 
if the condition specified in paragraph (d)(2)(ii), among others, is 
met. Paragraph (d)(2)(ii) prohibits a person preparing a valuation or 
performing valuation management functions from reporting to a person 
whose compensation is based on the closing of the transaction to which 
the valuation relates. For example, assume an appraisal management 
company performs both valuation management functions and title services, 
including providing title insurance, for the same covered transaction. 
If the appraisal management company employee in charge of valuation 
management functions for the transaction is supervised by the title 
insurance agent in the transaction, whose compensation depends in whole 
or in part on whether title insurance is sold at the loan closing, the 
condition in paragraph (d)(2)(ii) is not met.
    Paragraph 42(d)(4)(ii).
    1. Safe harbor in transactions in which the creditor had assets of 
$250 million or less for either of the past two calendar years. A person 
preparing a valuation or performing valuation management functions in 
addition to performing another settlement service for the same 
transaction, or whose affiliate performs another settlement service for 
the transaction, will not be deemed to have an interest prohibited under 
paragraph (d)(1)(i) as a result of the person or the person's affiliate 
performing another settlement service if the conditions in paragraph 
(d)(4)(ii) are satisfied. Even if the conditions in paragraph (d)(4)(ii) 
are satisfied, however, the person may have a prohibited conflict of 
interest on other grounds, such as if the person performs a valuation 
for a purchase-money mortgage transaction in which the person is the 
buyer or seller of the subject property. Thus, in general, in any 
covered transaction in which the creditor had assets of $250 million or 
less for either of the past two years, a person preparing a valuation or 
performing valuation management functions, or its affiliate, may provide 
other settlement services for the same transaction, as long as the 
conditions described in paragraph (d)(4)(ii) are satisfied. If the 
conditions in paragraph (d)(4)(ii) are not satisfied, whether a person 
preparing valuations or performing valuation management functions has 
violated paragraph (d)(1)(i) depends on all of the facts and 
circumstances.
    42(d)(5) Definitions.
    Paragraph 42(d)(5)(i).
    1. Loan production function. One condition of the safe harbors under 
paragraphs (d)(2) and (d)(4)(i), involving transactions in which the 
creditor had assets of more than $250 million for both of the past two 
calendar years, is that the person who prepares a valuation or performs 
valuation management functions must report to a person who is not part 
of the creditor's ``loan production

[[Page 730]]

function.'' A creditor's ``loan production function'' includes retail 
sales staff, loan officers, and any other employee of the creditor with 
responsibility for taking a loan application, offering or negotiating 
loan terms or whose compensation is based on loan processing volume. A 
person is not considered part of a creditor's loan production function 
solely because part of the person's compensation includes a general 
bonus not tied to specific transactions or a specific percentage of 
transactions closing, or a profit sharing plan that benefits all 
employees. A person solely responsible for credit administration or risk 
management is also not considered part of a creditor's loan production 
function. Credit administration and risk management includes, for 
example, loan underwriting, loan closing functions (e.g., loan 
documentation), disbursing funds, collecting mortgage payments and 
otherwise servicing the loan (e.g., escrow management and payment of 
taxes), monitoring loan performance, and foreclosure processing.
    42(e) When extension of credit prohibited.
    1. Reasonable diligence. A creditor will be deemed to have acted 
with reasonable diligence under Sec. 226.42(e) if the creditor extends 
credit based on a valuation other than the valuation subject to the 
restriction in Sec. 226.42(e). A creditor need not obtain a second 
valuation to document that the creditor has acted with reasonable 
diligence to determine that the valuation does not materially misstate 
or misrepresent the value of the consumer's principal dwelling, however. 
For example, assume an appraiser notifies a creditor before consummation 
that a loan originator attempted to cause the value assigned to the 
consumer's principal dwelling to be based on a factor other than the 
appraiser's independent judgment, through coercion. If the creditor 
reasonably determines and documents that the appraisal does not 
materially misstate or misrepresent the value of the consumer's 
principal dwelling, for purposes of Sec. 226.42(e), the creditor may 
extend credit based on the appraisal.
    42(f) Customary and reasonable compensation.
    42(f)(1) Requirement to provide customary and reasonable 
compensation to fee appraisers.
    1. Agents of the creditor. Whether a person is an agent of the 
creditor is determined by applicable law; however, a ``fee appraiser'' 
as defined in paragraph (f)(4)(i) is not an agent of the creditor for 
purposes of paragraph (f), and therefore is not required to pay other 
fee appraisers customary and reasonable compensation under paragraph 
(f).
    2. Geographic market. For purposes of paragraph (f), the 
``geographic market of the property being appraised'' means the 
geographic market relevant to compensation levels for appraisal 
services. Depending on the facts and circumstances, the relevant 
geographic market may be a state, metropolitan statistical area (MSA), 
metropolitan division, area outside of an MSA, county, or other 
geographic area. For example, assume that fee appraisers who normally 
work only in County A generally accept $400 to appraise an attached 
single-family property in County A. Assume also that very few or no fee 
appraisers who work only in contiguous County B will accept a rate 
comparable to $400 to appraise an attached single-family property in 
County A. The relevant geographic market for an attached single-family 
property in County A may reasonably be defined as County A. On the other 
hand, assume that fee appraisers who normally work only in County A 
generally accept $400 to appraise an attached single-family property in 
County A. Assume also that many fee appraisers who normally work only in 
contiguous County B will accept a rate comparable to $400 to appraise an 
attached single-family property in County A. The relevant geographic 
market for an attached single-family property in County A may reasonably 
be defined to include both County A and County B.
    3. Failure to perform contractual obligations. Paragraph (f)(1) does 
not prohibit a creditor or its agent from withholding compensation from 
a fee appraiser for failing to meet contractual obligations, such as 
failing to provide the appraisal report or violating state or federal 
appraisal laws in performing the appraisal.
    4. Agreement that fee is ``customary and reasonable.'' A document 
signed by a fee appraiser indicating that the appraiser agrees that the 
fee paid to the appraiser is ``customary and reasonable'' does not by 
itself create a presumption of compliance with Sec. 226.42(f) or 
otherwise satisfy the requirement to pay a fee appraiser at a customary 
and reasonable rate.
    5. Volume-based discounts. Section 226.42(f)(1) does not prohibit a 
fee appraiser and a creditor (or its agent) from agreeing to 
compensation based on transaction volume, so long as the compensation is 
customary and reasonable. For example, assume that a fee appraiser 
typically receives $300 for appraisals from creditors with whom it does 
business; the fee appraiser, however, agrees to reduce the fee to $280 
for a particular creditor, in exchange for a minimum number of 
assignments from the creditor.
    42(f)(2) Presumption of compliance.
    1. In general. A creditor and its agent are presumed to comply with 
paragraph (f)(1) if the creditor or its agent meets the conditions 
specified in paragraph (f)(2) in determining the compensation paid to a 
fee appraiser. These conditions are not requirements for compliance but, 
if met, create a presumption that the creditor or its agent has complied 
with Sec. 226.42(f)(1). A person may rebut this presumption with 
evidence that the amount of compensation paid to a fee appraiser was not 
customary and reasonable for reasons unrelated to the conditions in

[[Page 731]]

paragraph (f)(2)(i) or (f)(2)(ii). If a creditor or its agent does not 
meet one of the non-required conditions set forth in paragraph (f)(2), 
the creditor's and its agent's compliance with paragraph (f)(1) is 
determined based on all of the facts and circumstances without a 
presumption of either compliance or violation.
    42(f)(2)(i) Presumption of compliance.
    1. Two-step process for determining customary and reasonable rates. 
Paragraph (f)(2)(i) sets forth a two-step process for a creditor or its 
agent to determine the amount of compensation that is customary and 
reasonable in a given transaction. First, the creditor or its agent must 
identify recent rates paid for comparable appraisal services in the 
relevant geographic market. Second, once recent rates have been 
identified, the creditor or its agent must review the factors listed in 
paragraph (f)(2)(i)(A)-(F) and make any appropriate adjustments to the 
rates to ensure that the amount of compensation is reasonable.
    2. Identifying recent rates. Whether rates may reasonably be 
considered ``recent'' depends on the facts and circumstances. Generally, 
``recent'' rates would include rates charged within one year of the 
creditor's or its agent's reliance on this information to qualify for 
the presumption of compliance under paragraph (f)(2). For purposes of 
the presumption of compliance under paragraph (f)(2), a creditor or its 
agent may gather information about recent rates by using a reasonable 
method that provides information about rates for appraisal services in 
the geographic market of the relevant property; a creditor or its agent 
may, but is not required to, use or perform a fee survey.
    3. Accounting for factors. Once recent rates in the relevant 
geographic market have been identified, the creditor or its agent must 
review the factors listed in paragraph (f)(2)(i)(A)-(F) to determine the 
appropriate rate for the current transaction. For example, if the recent 
rates identified by the creditor or its agent were solely for appraisal 
assignments in which the scope of work required consideration of two 
comparable properties, but the current transaction required an appraisal 
that considered three comparable properties, the creditor or its agent 
might reasonably adjust the rate by an amount that accounts for the 
increased scope of work, in addition to making any other appropriate 
adjustments based on the remaining factors.
    Paragraph 42(f)(2)(i)(A).
    1. Type of property. The type of property may include, for example, 
detached or attached single-family property, condominium or cooperative 
unit, or manufactured home.
    Paragraph 42(f)(2)(i)(B).
    1. Scope of work. The scope of work may include, for example, the 
type of inspection (such as exterior only or both interior and exterior) 
or number of comparables required for the appraisal.
    Paragraph 42(f)(2)(i)(D).
    1. Fee appraiser qualifications. The fee appraiser qualifications 
may include, for example, a state license or certification in accordance 
with the minimum criteria issued by the Appraisal Qualifications Board 
of the Appraisal Foundation, or completion of continuing education 
courses on effective appraisal methods and related topics.
    2. Membership in professional appraisal organization. Paragraph 
42(f)(2)(i)(D) does not override state or federal laws prohibiting the 
exclusion of an appraiser from consideration for an assignment solely by 
virtue of membership or lack of membership in any particular appraisal 
organization. See, e.g., 12 CFR 225.66(a).
    Paragraph 42(f)(2)(i)(E).
    1. Fee appraiser experience and professional record. The fee 
appraiser's level of experience may include, for example, the fee 
appraiser's years of service as a state-licensed or state-certified 
appraiser, or years of service appraising properties in a particular 
geographical area or of a particular type. The fee appraiser's 
professional record may include, for example, whether the fee appraiser 
has a past record of suspensions, disqualifications, debarments, or 
judgments for waste, fraud, abuse or breach of legal or professional 
standards.
    Paragraph 42(f)(2)(i)(F).
    1. Fee appraiser work quality. The fee appraiser's work quality may 
include, for example, the past quality of appraisals performed by the 
appraiser based on the written performance and review criteria of the 
creditor or agent of the creditor.
    Paragraph 42(f)(2)(ii).
    1. Restraining trade. Under Sec. 226.42(f)(2)(ii)(A), creditor or 
its agent would not qualify for the presumption of compliance under 
paragraph (f)(2) if it engaged in any acts to restrain trade such as 
entering into a price fixing or market allocation agreement that affect 
the compensation of fee appraisers. For example, if appraisal management 
company A and appraisal management company B agreed to compensate fee 
appraisers at no more than a specific rate or range of rates, neither 
appraisal management company would qualify for the presumption of 
compliance. Likewise, if appraisal management company A and appraisal 
management company B agreed that appraisal management company A would 
limit its business to a certain portion of the relevant geographic 
market and appraisal management company B would limit its business to a 
different portion of the relevant geographic market, and as a result 
each appraisal management company unilaterally set the fees paid to fee 
appraisers in their respective portions of the market, neither appraisal 
management company would

[[Page 732]]

qualify for the presumption of compliance under paragraph (f)(2).
    2. Acts of monopolization. Under Sec. 226.42(f)(2)(ii)(B), a 
creditor or its agent would not qualify for the presumption of 
compliance under paragraph (f)(2) if it engaged in any act of 
monopolization such as restricting entry into the relevant geographic 
market or causing any person to leave the relevant geographic market, 
resulting in anticompetitive effects that affect the compensation paid 
to fee appraisers. For example, if only one appraisal management company 
exists or is predominant in a particular market area, that appraisal 
management company might not qualify for the presumption of compliance 
if it entered into exclusivity agreements with all creditors in the 
market or all fee appraisers in the market, such that other appraisal 
management companies had to leave or could not enter the market. Whether 
this behavior would be considered an anticompetitive act that affects 
the compensation paid to fee appraisers depends on all of the facts and 
circumstances, including applicable law.
    42(f)(3) Alternative presumption of compliance.
    1. In general. A creditor and its agent are presumed to comply with 
paragraph (f)(1) if the creditor or its agent determine the compensation 
paid to a fee appraiser based on information about customary and 
reasonable rates that satisfies the conditions in paragraph (f)(3) for 
that information. Reliance on information satisfying the conditions in 
paragraph (f)(3) is not a requirement for compliance with paragraph 
(f)(1), but creates a presumption that the creditor or its agent has 
complied. A person may rebut this presumption with evidence that the 
rate of compensation paid to a fee appraiser by the creditor or its 
agent is not customary and reasonable based on facts or information 
other than third-party information satisfying the conditions of this 
paragraph (f)(3). If a creditor or its agent does not rely on 
information that meets the conditions in paragraph (f)(3), the 
creditor's and its agent's compliance with paragraph (f)(1) is 
determined based on all of the facts and circumstances without a 
presumption of either compliance or violation.
    2. Geographic market. The meaning of ``geographic market'' for 
purposes of paragraph (f) is explained in comment (f)(1)-1.
    3. Recent rates. Whether rates may reasonably be considered 
``recent'' depends on the facts and circumstances. Generally, ``recent'' 
rates would include rates charged within one year of the creditor's or 
its agent's reliance on this information to qualify for the presumption 
of compliance under paragraph (f)(3).
    42(f)(4) Definitions.
    42(f)(4)(i) Fee appraiser.
    1. Organization. The term ``organization'' in paragraph 
42(d)(4)(i)(B) includes a corporation, partnership, proprietorship, 
association, cooperative, or other business entity and does not include 
a natural person.
    42(g) Mandatory reporting.
    42(g)(1) Reporting required.
    1. Reasonable basis. A person reasonably believes that an appraiser 
has materially failed to comply with the Uniform Standards of 
Professional Appraisal Practice (USPAP) established by the Appraisal 
Standards Board of the Appraisal Foundation (as defined in 12 U.S.C. 
3350(9)) or ethical or professional requirements for appraisers under 
applicable state or federal statutes or regulations if the person 
possesses knowledge or information that would lead a reasonable person 
in the same circumstances to conclude that the appraiser has materially 
failed to comply with USPAP or such statutory or regulatory 
requirements.
    2. Material failure to comply. For purposes of Sec. 226.42(g)(1), a 
material failure to comply is one that is likely to affect the value 
assigned to the consumer's principal dwelling. The following are 
examples of a material failure to comply with USPAP or ethical or 
professional requirements
    i. Mischaracterizing the value of the consumer's principal dwelling 
in violation of Sec. 226.42(c)(2)(i).
    ii. Performing an assignment in a grossly negligent manner, in 
violation of a rule under USPAP.
    iii. Accepting an appraisal assignment on the condition that the 
appraiser will report a value equal to or greater than the purchase 
price for the consumer's principal dwelling, in violation of a rule 
under USPAP.
    3. Other matters. Section 226.42(g)(1) does not require reporting of 
a matter that is not material under Sec. 226.42(g)(1), for example
    i. An appraiser's disclosure of confidential information in 
violation of applicable state law.
    ii. An appraiser's failure to maintain errors and omissions 
insurance in violation of applicable state law.
    4. Examples of covered persons. ``Covered persons'' include 
creditors, mortgage brokers, appraisers, appraisal management companies, 
real estate agents, and other persons that provide ``settlement 
services'' as defined under the Real Estate Settlement Procedures Act 
and implementing regulations. See 12 U.S.C. 2602(3); Sec. 226.42(b)(1).
    5. Examples of persons not covered. The following persons are not 
``covered persons'' (unless, of course, they are creditors with respect 
to a covered transaction or perform ``settlement services'' in 
connection with a covered transaction)
    i. The consumer who obtains credit through a covered transaction.
    ii. A person secondarily liable for a covered transaction, such as a 
guarantor.

[[Page 733]]

    iii. A person that resides in or will reside in the consumer's 
principal dwelling but will not be liable on the covered transaction, 
such as a non-obligor spouse.
    6. Appraiser. For purposes of Sec. 226.42(g)(1), an ``appraiser'' 
is a natural person who provides opinions of the value of dwellings and 
is required to be licensed or certified under the laws of the state in 
which the consumer's principal dwelling is located or otherwise is 
subject to the jurisdiction of the appraiser certifying and licensing 
agency for that state. See 12 U.S.C. 3350(1).

        Section 226.43--Appraisals for Higher-Risk Mortgage Loans

    43(a) Definitions.
    43(a)(1) Certified or licensed appraiser.
    1. USPAP. The Uniform Standards of Professional Appraisal Practice 
(USPAP) are established by the Appraisal Standards Board of the 
Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under Sec. 
226.43(a)(1), the relevant USPAP standards are those found in the 
edition of USPAP in effect at the time the appraiser signs the 
appraiser's certification.
    2. Appraiser's certification. The appraiser's certification refers 
to the certification that must be signed by the appraiser for each 
appraisal assignment. This requirement is specified in USPAP Standards 
Rule 2-3.
    3. FIRREA title XI and implementing regulations. The relevant 
regulations are those prescribed under section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), as 
amended (12 U.S.C. 3339), that relate to an appraiser's development and 
reporting of the appraisal in effect at the time the appraiser signs the 
appraiser's certification. Paragraph (3) of FIRREA section 1110 (12 
U.S.C. 3339(3)), which relates to the review of appraisals, is not 
relevant for determining whether an appraiser is a certified or licensed 
appraiser under Sec. 226.43(a)(1).
    43(a)(3) Higher-priced mortgage loan.
    1. Principal dwelling. The term ``principal dwelling'' has the same 
meaning under Sec. 226.43(a)(3) as under 12 CFR 1026.2(a)(24). See the 
Official Staff Interpretations to the Bureau's Regulation Z (Supplement 
I to Part 1026), comment 2(a)(24)-3.
    2. Average prime offer rate. For guidance on average prime offer 
rates, see the Official Staff Interpretations to the Bureau's Regulation 
Z, comments 35(a)(2)-1 and -3.
    3. Comparable transaction. For guidance on determining the average 
prime offer rate for comparable transactions, see the Official Staff 
Interpretations to the Bureau's Regulation Z, comments 35(a)(1)-1 and 
35(a)(2)-2.
    4. Rate set. For guidance on the date the annual percentage rate is 
set, see the Official Staff Interpretations to the Bureau's Regulation 
Z, comment 35(a)(1)-2.
    5. Threshold for ``jumbo'' loans. For guidance on determining 
whether a transaction's principal balance exceeds the limit in effect as 
of the date the transaction's rate is set for the maximum principal 
obligation eligible for purchase by Freddie Mac, see the Official Staff 
Interpretations to the Bureau's Regulation Z, comment 35(a)(1)-3.
    43(b) Exemptions.
    1. Compliance with title XI of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA). Section 226.43(b) 
provides exemptions solely from the requirements of Sec. 226.43(c) 
through (f). Institutions subject to the requirements of FIRREA and its 
implementing regulations that make a loan qualifying for an exemption 
under Sec. 226.43(b) must still comply with appraisal and evaluation 
requirements under FIRREA and its implementing regulations.
    Paragraph 43(b)(1)
    1. Qualified mortgage criteria. Under Sec. 226.43(b)(1), a loan is 
exempt from the appraisal requirements of Sec. 226.43 if either:
    i. The loan is--(1) subject to the ability-to-repay requirements of 
the Bureau of Consumer Financial Protection (Bureau) in 12 CFR 1026.43 
as a ``covered transaction'' (defined in 12 CFR 1026.43(b)(1)) and (2) a 
qualified mortgage pursuant to the Bureau's rules or, for loans insured, 
guaranteed, or administered by the U.S. Department of Housing and Urban 
Development (HUD), U.S. Department of Veterans Affairs (VA), U.S. 
Department of Agriculture (USDA), or Rural Housing Service (RHS), a 
qualified mortgage pursuant to applicable rules prescribed by those 
agencies (but only once such rules are in effect; otherwise, the 
Bureau's definition of a qualified mortgage applies to those loans); or
    ii. The loan is--(1) not subject to the Bureau's ability-to-repay 
requirements in 12 CFR 1026.43 as a ``covered transaction'' (defined in 
12 CFR 1026.43(b)(1)), but (2) meets the criteria for a qualified 
mortgage in the Bureau's rules or, for loans insured, guaranteed, or 
administered by HUD, VA, USDA, or RHS, meets the criteria for a 
qualified mortgage in the applicable rules prescribed by those agencies 
(but only once such rules are in effect; otherwise, the Bureau's 
criteria for a qualified mortgage applies to those loans). To explain 
further, loans enumerated in 12 CFR 1026.43(a) are not ``covered 
transactions'' under the Bureau's ability-to-repay requirements in 12 
CFR 1026.43, and thus cannot be qualified mortgages (entitled to a 
rebuttable presumption or safe harbor of compliance with the ability-to-
repay requirements of 12 CFR 1026.43, see, e.g., 12 CFR 1026.43(e)(1)). 
These include an extension of credit made pursuant to a program 
administered by a Housing Finance Agency, as defined under 24 CFR 266.5, 
or pursuant to a program authorized by sections 101 and 109 of the 
Emergency Economic Stabilization Act of 2008. See 12 CFR 
1026.43(a)(3)(iv) and (vi).

[[Page 734]]

They also include extensions of credit made by a creditor identified in 
12 CFR 1026.43(a)(3)(v). However, these loans are eligible for the 
exemption in Sec. 226.43(b)(1) if they meet the Bureau's qualified 
mortgage criteria in Sec. 1026.43(e)(2), (4), (5), or (6) or Sec. 
1026.43(f) (including limits on when loans must be consummated) or, for 
loans that are insured, guaranteed, or administered by HUD, VA, USDA, or 
RHS, in applicable rules prescribed by those agencies (but only once 
such rules are in effect; otherwise, the Bureau's criteria for a 
qualified mortgage applies to those loans). For example, assume that HUD 
has prescribed rules to define loans insured under its programs that are 
qualified mortgages and those rules are in effect. Assume further that a 
creditor designated as a Community Development Financial Institution, as 
defined under 12 CFR 1805.104(h), originates a loan insured by the 
Federal Housing Administration, which is a part of HUD. The loan is not 
a ``covered transaction'' and thus is not a qualified mortgage. See 12 
CFR 1026.43(a)(3)(v)(A) and (b)(1). Nonetheless, the transaction is 
eligible for an exemption from the appraisal requirements of Sec. 
226.43 if it meets the qualified mortgage criteria in HUD's rules. 
Nothing in Sec. 226.43(b)(1) alters the definition of a qualified 
mortgage under regulations of the Bureau, HUD, VA, USDA, or RHS.
    Paragraph 43(b)(2)
    1. Threshold amount. For purposes of Sec. 226.43(b)(2), the 
threshold amount in effect during a particular period is the amount 
stated in comment 43(b)(2)-3 for that period. The threshold amount is 
adjusted effective January 1 of each year by any annual percentage 
increase in the Consumer Price Index for Urban Wage Earners and Clerical 
Workers (CPI-W) that was in effect on the preceding June 1. Comment 
43(b)(2)-3 will be amended to provide the threshold amount for the 
upcoming year after the annual percentage change in the CPI-W that was 
in effect on June 1 becomes available. Any increase in the threshold 
amount will be rounded to the nearest $100 increment. For example, if 
the annual percentage increase in the CPI-W would result in a $950 
increase in the threshold amount, the threshold amount will be increased 
by $1,000. However, if the annual percentage increase in the CPI-W would 
result in a $949 increase in the threshold amount, the threshold amount 
will be increased by $900.
    2. No increase in the CPI-W. If the CPI-W in effect on June 1 does 
not increase from the CPI-W in effect on June 1 of the previous year, 
the threshold amount effective the following January 1 through December 
31 will not change from the previous year. When this occurs, for the 
years that follow, the threshold is calculated based on the annual 
percentage change in the CPI-W applied to the dollar amount that would 
have resulted, after rounding, if decreases and any subsequent increases 
in the CPI-W had been taken into account.
    i. Net increases. If the resulting amount calculated, after 
rounding, is greater than the current threshold, then the threshold 
effective January 1 the following year will increase accordingly.
    ii. Net decreases. If the resulting amount calculated, after 
rounding, is equal to or less than the current threshold, then the 
threshold effective January 1 the following year will not change, but 
future increases will be calculated based on the amount that would have 
resulted.
    3. Threshold. For purposes of Sec. 226.43(b)(2), the threshold 
amount in effect during a particular period is the amount stated below 
for that period.
    i. From January 18, 2014, through December 31, 2014, the threshold 
amount is $25,000.
    ii. From January 1, 2015, through December 31, 2015, the threshold 
amount is $25,500.
    iii. From January 1, 2016, through December 31, 2016, the threshold 
amount is $25,500.
    iv. From January 1, 2017, through December 31, 2017, the threshold 
amount is $25,500.
    v. From January 1, 2018, through December 31, 2018, the threshold 
amount is $26,000.
    4. Qualifying for exemption--in general. A transaction is exempt 
under Sec. 226.43(b)(2) if the creditor makes an extension of credit at 
consummation that is equal to or below the threshold amount in effect at 
the time of consummation.
    5. Qualifying for exemption--subsequent changes. A transaction does 
not meet the condition for an exemption under Sec. 226.43(b)(2) merely 
because it is used to satisfy and replace an existing exempt loan, 
unless the amount of the new extension of credit is equal to or less 
than the applicable threshold amount. For example, assume a closed-end 
loan that qualified for a Sec. 226.43(b)(2) exemption at consummation 
in year one is refinanced in year ten and that the new loan amount is 
greater than the threshold amount in effect in year ten. In these 
circumstances, the creditor must comply with all of the applicable 
requirements of Sec. 226.43 with respect to the year ten transaction if 
the original loan is satisfied and replaced by the new loan, unless 
another exemption from the requirements of Sec. 226.43 applies. See 
Sec. 226.43(b) and (d)(7).
    Paragraph 43(b)(3)
    1. Secured by a mobile home. For purposes of the exemption in Sec. 
226.43(b)(3), a mobile home does not include a manufactured home, as 
defined in Sec. 226.43(a)(3).
    Paragraph 43(b)(4)
    1. Construction-to-permanent loans. Section 226.43 does not apply to 
a transaction to finance the initial construction of a dwelling. This 
exclusion applies to a construction-only loan as well as to the 
construction phase of a construction-to-permanent loan. Section

[[Page 735]]

226.43 does apply, however, to permanent financing that replaces a 
construction loan, whether the permanent financing is extended by the 
same or a different creditor, unless the permanent financing is 
otherwise exempt from the requirements of Sec. 226.43. See Sec. 
226.43(b). When a construction loan may be permanently financed by the 
same creditor, the general disclosure requirements for closed-end credit 
pursuant to Regulation Z (12 CFR 1026.17) provide that the creditor may 
give either one combined disclosure for both the construction financing 
and the permanent financing, or a separate set of disclosures for each 
of the two phases as though they were two separate transactions. See 12 
CFR 1026.17(c)(6)(ii) and the Official Staff Interpretations to the 
Bureau's Regulation Z, comment 17(c)(6)-2. Which disclosure option a 
creditor elects under Sec. 1026.17(c)(6)(ii) does not affect the 
determination of whether the permanent phase of the transaction is 
subject to Sec. 226.43. When the creditor discloses the two phases as 
separate transactions, the annual percentage rate for the permanent 
phase must be compared to the average prime offer rate for a transaction 
that is comparable to the permanent financing to determine coverage 
under Sec. 226.43. When the creditor discloses the two phases as a 
single transaction, a single annual percentage rate, reflecting the 
appropriate charges from both phases, must be calculated for the 
transaction in accordance with Sec. 226.43(a)(3) and appendix D to 12 
CFR part 1026. The annual percentage rate must be compared to the 
average prime offer rate for a transaction that is comparable to the 
permanent financing to determine coverage under Sec. 226.43. If the 
transaction is determined to be a higher-priced mortgage loan not 
otherwise exempt under Sec. 226.43(b), only the permanent phase is 
subject to the requirements of Sec. 226.43.
    2. Financing initial construction. The exemption for construction 
loans in Sec. 226.43(b)(4) applies to temporary financing of the 
construction of a dwelling that will be replaced by permanent financing 
once construction is complete. The exemption does not apply, for 
example, to loans to finance the purchase of manufactured homes that 
have not been or are in the process of being built when the financing 
obtained by the consumer at that time is permanent. See Sec. 
226.43(b)(8).
    Paragraph 43(b)(7)(i)(A)
    1. Same credit risk holder. The requirement that the holder of the 
credit risk on the existing obligation and the refinancing be the same 
applies to situations in which an entity bears the financial 
responsibility for the default of a loan by either holding the loan in 
its portfolio or guaranteeing payments of principal and any interest to 
investors in a mortgage-backed security in which the loan is pooled. See 
Sec. 226.43(a)(4) (defining ``credit risk''). For example, a credit 
risk holder could be a bank that bears the credit risk on the existing 
obligation by holding the loan in the bank's portfolio. Another example 
of a credit risk holder would be a government-sponsored enterprise that 
bears the risk of default on a loan by guaranteeing the payment of 
principal and any interest on a loan to investors in a mortgage-backed 
security. The holder of credit risk under Sec. 226.43(b)(7)(i)(A) does 
not mean individual investors in a mortgage-backed security or providers 
of private mortgage insurance.
    2. Same credit risk holder--illustrations.
    Illustrations of the credit risk holder of the existing obligation 
continuing to be the credit risk holder of the refinancing include, but 
are not limited to, the following:
    i. The existing obligation is held in the portfolio of a bank, thus 
the bank holds the credit risk. The bank arranges to refinance the loan 
and also will hold the refinancing in its portfolio. If the refinancing 
otherwise meets the requirements for an exemption under Sec. 
226.43(b)(7), the transaction will qualify for the exemption because the 
credit risk holder is the same for the existing obligation and the 
refinance transaction. In this case, the exemption would apply 
regardless of whether the bank arranged to refinance the loan directly 
or indirectly, such as through the servicer or subservicer on the 
existing obligation.
    ii. The existing obligation is held in the portfolio of a 
government-sponsored enterprise (GSE), thus the GSE holds the credit 
risk. The existing obligation is then refinanced by the servicer of the 
loan and immediately transferred to the GSE. The GSE pools the 
refinancing in a mortgage-backed security guaranteed by the GSE, thus 
the GSE holds the credit risk on the refinance loan. If the refinance 
transaction otherwise meets the requirements for an exemption under 
Sec. 226.43(b)(7), the transaction will qualify for the exemption 
because the credit risk holder is the same for the existing obligation 
and the refinance transaction. In this case, the exemption would apply 
regardless of whether the existing obligation was refinanced by the 
servicer or subservicer on the existing obligation (acting as a 
``creditor'' under Sec. 1026.2(a)(17)) or by a different creditor.
    3. Forward commitments. A creditor may make a mortgage loan that 
will be sold or otherwise transferred pursuant to an agreement that has 
been entered into at or before the time the transaction is consummated. 
Such an agreement is sometimes known as a ``forward commitment.'' A 
refinance loan does not satisfy the requirement of Sec. 
226.43(b)(7)(i)(A) if the loan will be acquired pursuant to a forward 
commitment, such that the credit risk on the refinance loan will 
transfer to a person who did not hold the credit risk on the existing 
obligation.
    Paragraph 43(b)(7)
    Paragraph 43(b)(7)(ii)

[[Page 736]]

    1. Regular periodic payments. Under Sec. 226.43(b)(7)(ii), the 
regular periodic payments on the refinance loan must not: result in an 
increase of the principal balance (negative amortization); allow the 
consumer to defer repayment of principal (see 12 CFR 1026.43 and the 
Official Staff Interpretations to the Bureau's Regulation Z, comment 
43(e)(2)(i)-2); or result in a balloon payment. Thus, the terms of the 
legal obligation must require the consumer to make payments of principal 
and interest on a monthly or other periodic basis that will repay the 
loan amount over the loan term. Except for payments resulting from any 
interest rate changes after consummation in an adjustable-rate or step-
rate mortgage, the periodic payments must be substantially equal. For an 
explanation of the term ``substantially equal,'' see 12 CFR 1026.43 and 
the Official Staff Interpretations to the Bureau's Regulation Z, comment 
43(c)(5)(i)-4. In addition, a single-payment transaction is not a 
refinancing meeting the requirements of Sec. 226.43(b)(7) because it 
does not require ``regular periodic payments.''
    Paragraph 43(b)(7)(iii)
    1. Permissible use of proceeds. The exemption for a refinancing 
under Sec. 226.43(b)(7) is available only if the proceeds from the 
refinancing are used exclusively for the existing obligation and amounts 
attributed solely to the costs of the refinancing. The existing 
obligation includes the unpaid principal balance of the existing first 
lien loan, any earned unpaid finance charges, and any other lawful 
charges related to the existing loan. For guidance on the meaning of 
refinancing costs, see 12 CFR 1026.23, the Official Staff 
Interpretations to the Bureau's Regulations Z, comment 23(f)-4. If the 
proceeds of a refinancing are used for other purposes, such as to pay 
off other liens or to provide additional cash to the consumer for 
discretionary spending, the transaction does not qualify for the 
exemption for a refinancing under Sec. 226.43(b)(7) from the appraisal 
requirements in Sec. 226.43.
    For applications received on or after July 18, 2015

                           Paragraph 43(b)(8)

                          Paragraph 43(b)(8)(i)

    1. Secured by new manufactured home and land--physical visit of the 
interior. A transaction secured by a new manufactured home and land is 
subject to the requirements of Sec. 226.43(c) through (f) except for 
the requirement in Sec. 226.43(c)(1) that the appraiser conduct a 
physical inspection of the interior of the property. Thus, for example, 
a creditor of a loan secured by a new manufactured home and land could 
comply with Sec. 226.43(c)(1) by obtaining an appraisal conducted by a 
state-certified or -licensed appraiser based on plans and specifications 
for the new manufactured home and an inspection of the land on which the 
property will be sited, as well as any other information necessary for 
the appraiser to complete the appraisal assignment in conformity with 
the Uniform Standards of Professional Appraisal Practice and the 
requirements of FIRREA and any implementing regulations.

                         Paragraph 43(b)(8)(ii)

    1. Secured by a manufactured home and not land. Section 
226.43(b)(8)(ii) applies to a higher-priced mortgage loan secured by a 
manufactured home and not land, regardless of whether the home is titled 
as realty by operation of State law.

                        Paragraph 43(b)(8)(ii)(B)

    1. Independent. A cost service provider from which the creditor 
obtains a manufactured home unit cost estimate under Sec. 
226.43(b)(8)(ii)(B) is ``independent'' if that person is not affiliated 
with the creditor in the transaction, such as by common corporate 
ownership, and receives no direct or indirect financial benefits based 
on whether the transaction is consummated.
    2. Adjustments. The requirement that the cost estimate be from an 
independent cost service provider does not prohibit a creditor from 
providing a cost estimate that reflects adjustments to account for 
factors such as special features, condition or location. However, the 
requirement that the estimate be obtained from an independent cost 
service provider means that any adjustments to the estimate must be 
based on adjustment factors available as part of the independent cost 
service used, with associated values that are determined by the 
independent cost service.

                        Paragraph 43(b)(8)(ii)(C)

    1. Interest in the property. A person has a direct or indirect in 
the property if, for example, the person has any ownership or reasonably 
foreseeable ownership interest in the manufactured home. To illustrate, 
a person who seeks a loan to purchase the manufactured home to be valued 
has a reasonably foreseeable ownership interest in the property.
    2. Interest in the transaction. A person has a direct or indirect 
interest in the transaction if, for example, the person or an affiliate 
of that person also serves as a loan officer of the creditor or 
otherwise arranges the credit transaction, or is the retail dealer of 
the manufactured home. A person also has a prohibited interest in the 
transaction if the person is compensated or otherwise receives financial 
or other benefits based on whether the transaction is consummated.
    3. Training in valuing manufactured homes. Training in valuing 
manufactured homes includes, for example, successfully completing

[[Page 737]]

a course in valuing manufactured homes offered by a State or national 
appraiser association or receiving job training from an employer in the 
business of valuing manufactured homes.
    4. Manufactured home valuation--example. A valuation in compliance 
with Sec. 226.43(b)(8)(ii)(C) would include, for example, an appraisal 
of the manufactured home in accordance with the appraisal requirements 
for a manufactured home classified as personal property under the Title 
I Manufactured Home Loan Insurance Program of the U.S. Department of 
Housing and Urban Development, pursuant to section 2(b)(10) of the 
National Housing Act, 12 U.S.C. 1703(b)(10).
    43(c) Appraisals required.
    43(c)(1) In general.
    1. Written appraisal--electronic transmission. To satisfy the 
requirement that the appraisal be ``written,'' a creditor may obtain the 
appraisal in paper form or via electronic transmission.
    43(c)(2) Safe harbor.
    1. Safe harbor. A creditor that satisfies the safe harbor conditions 
in Sec. 226.43(c)(2)(i) through (iv) complies with the appraisal 
requirements of Sec. 226.43(c)(1). A creditor that does not satisfy the 
safe harbor conditions in Sec. 226.43(c)(2)(i) through (iv) does not 
necessarily violate the appraisal requirements of Sec. 226.43(c)(1).
    2. Appraiser's certification. For purposes of Sec. 226.43(c)(2), 
the appraiser's certification refers to the certification specified in 
item 9 of appendix N. See also comment 43(a)(1)-2.
    Paragraph 43(c)(2)(iii).
    1. Confirming elements in the appraisal. To confirm that the 
elements in appendix N to this part are included in the written 
appraisal, a creditor need not look beyond the face of the written 
appraisal and the appraiser's certification.
    43(d) Additional appraisal for certain higher-priced mortgage loans.
    1. Acquisition. For purposes of Sec. 226.43(d), the terms 
``acquisition'' and ``acquire'' refer to the acquisition of legal title 
to the property pursuant to applicable State law, including by purchase.
    43(d)(1) In general.
    1. Appraisal from a previous transaction. An appraisal that was 
previously obtained in connection with the seller's acquisition or the 
financing of the seller's acquisition of the property does not satisfy 
the requirements to obtain two written appraisals under Sec. 
226.43(d)(1).
    2. 90-day, 180-day calculation. The time periods described in Sec. 
226.43(d)(1)(i) and (ii) are calculated by counting the day after the 
date on which the seller acquired the property, up to and including the 
date of the consumer's agreement to acquire the property that secures 
the transaction. For example, assume that the creditor determines that 
date of the consumer's acquisition agreement is October 15, 2012, and 
that the seller acquired the property on April 17, 2012. The first day 
to be counted in the 180-day calculation would be April 18, 2012, and 
the last day would be October 15, 2012. In this case, the number of days 
from April 17 would be 181, so an additional appraisal is not required.
    3. Date seller acquired the property. For purposes of Sec. 
226.43(d)(1)(i) and (ii), the date on which the seller acquired the 
property is the date on which the seller became the legal owner of the 
property pursuant to applicable State law.
    4. Date of the consumer's agreement to acquire the property. For the 
date of the consumer's agreement to acquire the property under Sec. 
226.43(d)(1)(i) and (ii), the creditor should use the date on which the 
consumer and the seller signed the agreement provided to the creditor by 
the consumer. The date on which the consumer and the seller signed the 
agreement might not be the date on which the consumer became 
contractually obligated under State law to acquire the property. For 
purposes of Sec. 226.43(d)(1)(i) and (ii), a creditor is not obligated 
to determine whether and to what extent the agreement is legally binding 
on both parties. If the dates on which the consumer and the seller 
signed the agreement differ, the creditor should use the later of the 
two dates.
    5. Price at which the seller acquired the property. The price at 
which the seller acquired the property refers to the amount paid by the 
seller to acquire the property. The price at which the seller acquired 
the property does not include the cost of financing the property.
    6. Price the consumer is obligated to pay to acquire the property. 
The price the consumer is obligated to pay to acquire the property is 
the price indicated on the consumer's agreement with the seller to 
acquire the property. The price the consumer is obligated to pay to 
acquire the property from the seller does not include the cost of 
financing the property. For purposes of Sec. 226.43(d)(1)(i) and (ii), 
a creditor is not obligated to determine whether and to what extent the 
agreement is legally binding on both parties. See also comment 43(d)(1)-
4.
    43(d)(2) Different certified or licensed appraisers.
    1. Independent appraisers. The requirements that a creditor obtain 
two separate appraisals under Sec. 226.43(d)(1), and that each 
appraisal be conducted by a different licensed or certified appraiser 
under Sec. 226.43(d)(2), indicate that the two appraisals must be 
conducted independently of each other. If the two certified or licensed 
appraisers are affiliated, such as by being employed by the same 
appraisal firm, then whether they have conducted the appraisal 
independently of each other must be determined based on the facts and 
circumstances of the particular case known to the creditor.

[[Page 738]]

    43(d)(3) Relationship to general appraisal requirements.
    1. Safe harbor. When a creditor is required to obtain an additional 
appraisal under Sec. 226(d)(1), the creditor must comply with the 
requirements of both Sec. 226.43(c)(1) and Sec. 226.43(d)(2) through 
(5) for that appraisal. The creditor complies with the requirements of 
Sec. 226.43(c)(1) for the additional appraisal if the creditor meets 
the safe harbor conditions in Sec. 226.43(c)(2) for that appraisal.
    43(d)(4) Required analysis in the additional appraisal.
    1. Determining acquisition dates and prices used in the analysis of 
the additional appraisal. For guidance on identifying the date on which 
the seller acquired the property, see comment 43(d)(1)-3. For guidance 
on identifying the date of the consumer's agreement to acquire the 
property, see comment 43(d)(1)-4. For guidance on identifying the price 
at which the seller acquired the property, see comment 43(d)(1)-5. For 
guidance on identifying the price the consumer is obligated to pay to 
acquire the property, see comment 43(d)(1)-6.
    43(d)(5) No charge for additional appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging the 
consumer for the performance of one of the two appraisals required under 
Sec. 226.43(d)(1), including by imposing a fee specifically for that 
appraisal or by marking up the interest rate or any other fees payable 
by the consumer in connection with the higher-priced mortgage loan.
    43(d)(6) Creditor's determination of prior sale date and price.
    43(d)(6)(i) In general.
    1. Estimated sales price. If a written source document describes the 
seller's acquisition price in a manner that indicates that the price 
described is an estimated or assumed amount and not the actual price, 
the creditor should look at an alternative document to satisfy the 
reasonable diligence standard in determining the price at which the 
seller acquired the property.
    2. Reasonable diligence--oral statements insufficient. Reliance on 
oral statements of interested parties, such as the consumer, seller, or 
mortgage broker, does not constitute reasonable diligence under Sec. 
226.43(d)(6)(i).
    3. Lack of information and conflicting information--two appraisals 
required. If a creditor is unable to demonstrate that the requirement to 
obtain two appraisals under Sec. 226.43(d)(1) does not apply, the 
creditor must obtain two written appraisals before extending a higher-
priced mortgage loan subject to the requirements of Sec. 226.43. See 
also comment 43(d)(6)(ii)-1. For example:
    i. Assume a creditor orders and reviews the results of a title 
search, which shows that a prior sale occurred between 91 and 180 days 
ago, but not the price paid in that sale. Thus, based on the title 
search, the creditor would not be able to determine whether the price 
the consumer is obligated to pay under the consumer's acquisition 
agreement is more than 20 percent higher than the seller's acquisition 
price, pursuant to Sec. 226.43(d)(1)(ii). Before extending a higher-
priced mortgage loan subject to the appraisal requirements of Sec. 
226.43, the creditor must either: perform additional diligence to 
ascertain the seller's acquisition price and, based on this information, 
determine whether two written appraisals are required; or obtain two 
written appraisals in compliance with Sec. 226.43(d). See also comment 
43(d)(6)(ii)-1.
    ii. Assume a creditor reviews the results of a title search 
indicating that the last recorded purchase was more than 180 days before 
the consumer's agreement to acquire the property. Assume also that the 
creditor subsequently receives a written appraisal indicating that the 
seller acquired the property between 91 and 180 days before the 
consumer's agreement to acquire the property. In this case, unless one 
of these sources is clearly wrong on its face, the creditor would not be 
able to determine whether the seller acquired the property within 180 
days of the date of the consumer's agreement to acquire the property 
from the seller, pursuant to Sec. 226.43(d)(1)(ii). Before extending a 
higher-priced mortgage loan subject to the appraisal requirements of 
Sec. 226.43, the creditor must either: (1) Perform additional diligence 
to ascertain the seller's acquisition date and, based on this 
information, determine whether two written appraisals are required; or 
(2) obtain two written appraisals in compliance with Sec. 226.43(d). 
See also comment 43(d)(6)(ii)-1.
    43(d)(6)(ii) Inability to determine prior sales date or price--
modified requirements for additional appraisal.
    1. Required analysis. In general, the additional appraisal required 
under Sec. 226.43(d)(1) should include an analysis of the factors 
listed in Sec. 226.43(d)(4)(i) through (iii). However, if, following 
reasonable diligence, a creditor cannot determine whether the conditions 
in Sec. 226.43(d)(1)(i) or (ii) are present due to a lack of 
information or conflicting information, the required additional 
appraisal must include the analyses required under Sec. 226.43(d)(4)(i) 
through (iii) only to the extent that the information necessary to 
perform the analyses is known. For example, assume that a creditor is 
able, following reasonable diligence, to determine that the date on 
which the seller acquired the property occurred between 91 and 180 days 
prior to the date of the consumer's agreement to acquire the property. 
However, the creditor is unable, following reasonable diligence, to 
determine the price at which the seller acquired the property. In this 
case, the creditor is required to obtain an additional written appraisal 
that includes an analysis under Sec. 226.43(d)(4)(ii) and (iii) of the 
changes in market conditions and any improvements

[[Page 739]]

made to the property between the date the seller acquired the property 
and the date of the consumer's agreement to acquire the property. 
However, the creditor is not required to obtain an additional written 
appraisal that includes analysis under Sec. 226.43(d)(4)(i) of the 
difference between the price at which the seller acquired the property 
and the price that the consumer is obligated to pay to acquire the 
property.
    43(d)(7) Exemptions from the additional appraisal requirement.
    Paragraph 43(d)(7)(iii).
    1. Non-profit entity. For purposes of Sec. 226.43(d)(7)(iii), a 
``non-profit entity'' is a person with a tax exemption ruling or 
determination letter from the Internal Revenue Service under section 
501(c)(3) of the Internal Revenue Code of 1986 (12 U.S.C. 501(c)(3)).
    Paragraph 43(d)(7)(viii).
    1. Bureau table of rural counties. The Bureau publishes on its Web 
site a table of rural counties under Sec. 226.43(d)(7)(viii) for each 
calendar year by the end of the calendar year. See Official Staff 
Interpretations to the Bureau's Regulation Z, comment 35(b)(2)(iv)-1. A 
property securing an HPML subject to Sec. 226.43 is in a rural county 
under Sec. 226.43(d)(7)(viii) if the county in which the property is 
located is on the table of rural counties most recently published by the 
Bureau. For example, for a transaction occurring in 2015, assume that 
the Bureau most recently published a table of rural counties at the end 
of 2014. The property securing the transaction would be located in a 
rural county for purposes of Sec. 226.43(d)(7)(viii) if the county is 
on the table of rural counties published by the Bureau at the end of 
2014.
    43(e) Required disclosure.
    43(e)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a loan 
subject to this section, the creditor is required to give the disclosure 
to only one of the consumers.
    2. Appraisal independence requirements not affected. Nothing in the 
text of the consumer notice required by Sec. 226.43(e)(1) should be 
construed to affect, modify, limit, or supersede the operation of any 
legal, regulatory, or other requirements or standards relating to 
independence in the conduct of appraisers or restrictions on the use of 
borrower-ordered appraisals by creditors.
    43(f) Copy of appraisals.
    43(f)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a loan 
subject to this section, the creditor is required to give the copy of 
each required appraisal to only one of the consumers.
    43(f)(2) Timing.
    1. ``Provide.'' For purposes of the requirement to provide a copy of 
the appraisal within a specified time under Sec. 226.43(f)(2), 
``provide'' means ``deliver.'' Delivery occurs three business days after 
mailing or delivering the copies to the last-known address of the 
applicant, or when evidence indicates actual receipt by the applicant 
(which, in the case of electronic receipt, must be based upon consent 
that complies with the E-Sign Act), whichever is earlier.
    2. No waiver. Regulation B, 12 CFR 1002.14(a)(1), allowing the 
consumer to waive the requirement that the appraisal copy be provided 
three business days before consummation, does not apply to higher-priced 
mortgage loans subject to Sec. 226.43. A consumer of a higher-priced 
mortgage loan subject to Sec. 226.43 may not waive the timing 
requirement to receive a copy of the appraisal under Sec. 226.43(f)(2).
    43(f)(4) No charge for copy of appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging the 
consumer for any copy of an appraisal required to be provided under 
Sec. 226.43(f)(1), including by imposing a fee specifically for a 
required copy of an appraisal or by marking up the interest rate or any 
other fees payable by the consumer in connection with the higher-priced 
mortgage loan.

          Subpart F--Special Rules for Private Education Loans

 Section 226.46--Special Disclosure Requirements for Private Education 
                                  Loans

                             46(a) Coverage

    1. Coverage. This subpart applies to all private education loans as 
defined in Sec. 226.46(b)(5). Coverage under this subpart is optional 
for certain extensions of credit that do not meet the definition of 
``private education loan'' because the credit is not extended, in whole 
or in part, for ``postsecondary educational expenses'' defined in Sec. 
226.46(b)(3). If a transaction is not covered and a creditor opts to 
comply with any section of this subpart, the creditor must comply with 
all applicable sections of this subpart. If a transaction is not covered 
and a creditor opts not to comply with this subpart, the creditor must 
comply with all applicable requirements under Sec. Sec. 226.17 and 
226.18. Compliance with this subpart is optional for an extension of 
credit for expenses incurred after graduation from a law, medical, 
dental, veterinary, or other graduate school and related to relocation, 
study for a bar or other examination, participation in an internship or 
residency program, or similar purposes. However, if any part of such 
loan is used for postsecondary educational expenses as defined in Sec. 
226.46(b)(3), then compliance with Subpart F is mandatory not optional.

                            46(b) Definitions

                46(b)(1) Covered Educational Institution

    1. General. A covered educational institution includes any 
educational institution

[[Page 740]]

that meets the definition of an institution of higher education in Sec. 
226.46(b)(2). An institution is also a covered educational institution 
if it otherwise meets the definition of an institution of higher 
education, except for its lack of accreditation. Such an institution may 
include, for example, a university or community college. It may also 
include an institution, whether accredited or unaccredited, offering 
instruction to prepare students for gainful employment in a recognized 
profession, such as flying, culinary arts, or dental assistance. A 
covered educational institution does not include elementary or secondary 
schools.
    2. Agent. For purposes of Sec. 226.46(b)(1), the term agent means 
an institution-affiliated organization as defined by section 151 of the 
Higher Education Act of 1965 (20 U.S.C 1019) or an officer or employee 
of an institution-affiliated organization. Under section 151 of the 
Higher Education Act, an institution-affiliated organization means any 
organization that is directly or indirectly related to a covered 
institution and is engaged in the practice of recommending, promoting, 
or endorsing education loans for students attending the covered 
institution or the families of such students. An institution-affiliated 
organization may include an alumni organization, athletic organization, 
foundation, or social, academic, or professional organization, of a 
covered institution, but does not include any creditor with respect to 
any private education loan made by that creditor.
    46(b)(2) Institution of higher education.
    1. General. An institution of higher education includes any 
institution that meets the definitions contained in sections 101 and 102 
of the Higher Education Act of 1965 (20 U.S.C. 1001-1002) and 
implementing Department of Education regulations (34 CFR 600). Such an 
institution may include, for example, a university or community college. 
It may also include an institution offering instruction to prepare 
students for gainful employment in a recognized profession, such as 
flying, culinary arts, or dental assistance. An institution of higher 
education does not include elementary or secondary schools.
    46(b)(3) Postsecondary educational expenses.
    1. General. The examples listed in Sec. 226.46(b)(3) are 
illustrative only. The full list of postsecondary educational expenses 
is contained in section 472 of the Higher Education Act of 1965 (20 
U.S.C. 1087ll).
    46(b)(4) Preferred lender arrangement.
    1. General. The term ``preferred lender arrangement'' is defined in 
section 151 of the Higher Education Act of 1965 (20 U.S.C 1019). The 
term refers to an arrangement or agreement between a creditor and a 
covered educational institution (or an institution-affiliated 
organization as defined by section 151 of the Higher Education Act of 
1965 (20 U.S.C 1019)) under which a creditor provides private education 
loans to consumers for students attending the covered educational 
institution and the covered educational institution recommends, 
promotes, or endorses the private education loan products of the 
creditor. It does not include arrangements or agreements with respect to 
Federal Direct Stafford/Ford loans, or Federal PLUS loans made under the 
Federal PLUS auction pilot program.
    46(b)(5) Private education loan.
    1. Extended expressly for postsecondary educational expenses. A 
private education loan is one that is extended expressly for 
postsecondary educational expenses. The term includes loans extended for 
postsecondary educational expenses incurred while a student is enrolled 
in a covered educational institution as well as loans extended to 
consolidate a consumer's pre-existing private education loans.
    2. Multiple-purpose loans. i. Definition. A private education loan 
may include an extension of credit not excluded under Sec. 226.46(b)(5) 
that the consumer may use for multiple purposes including, but not 
limited to, postsecondary educational expenses. If the consumer 
expressly indicates that the proceeds of the loan will be used to pay 
for postsecondary educational expenses by indicating the loan's purpose 
on an application, the loan is a private education loan.
    ii. Coverage. A creditor generally will not know before an 
application is received whether the consumer intends to use the loan for 
postsecondary educational expenses. For this reason, the creditor need 
not provide the disclosures required by Sec. 226.47(a) on or with the 
application or solicitation for a loan that may be used for multiple 
purposes. See Sec. 226.47(d)(1)(i). However, if the consumer expressly 
indicates that the proceeds of the loan will be used to pay for 
postsecondary educational expenses, the creditor must comply with 
Sec. Sec. 226.47(b) and (c) and Sec. 226.48. For purposes of the 
required disclosures, the creditor must calculate the disclosures based 
on the entire amount of the loan, even if only a part of the proceeds is 
intended for postsecondary educational expenses. The creditor may rely 
solely on a check-box, or a purpose line, on a loan application to 
determine whether or not the applicant intends to use loan proceeds for 
postsecondary educational expenses.
    iii. Examples. The creditor must comply only if the extension of 
credit also meets the other parts of the definition of private education 
loan. For example, if the creditor uses a single application form for 
both open-end and closed-end credit, and the consumer applies for open-
end credit to be used for postsecondary educational expenses, the 
extension of credit is not covered. Similarly, if the consumer indicates 
the extension of credit will be used for educational expenses that are 
not postsecondary educational expenses, such as elementary or secondary 
educational

[[Page 741]]

expenses, the extension of credit is not covered. These examples are 
only illustrative, not exhaustive.
    3. Short-term loans. Some covered educational institutions offer 
loans to students with terms of 90 days or less to assist the student in 
paying for educational expenses, usually while the student waits for 
other funds to be disbursed. Under Sec. 226.46(b)(5)(iv)(A) such loans 
are not considered private education loans, even if interest is charged 
on the credit balance. (Because these loans charge interest, they are 
not covered by the exception under Sec. 226.46(b)(5)(iv)(B).) However, 
these loans are extensions of credit subject to the requirements of 
Sec. Sec. 226.17 and 18. The legal agreement may provide that repayment 
is required when the consumer or the educational institution receives 
certain funds. If, under the terms of the legal obligation, repayment of 
the loan is required when the certain funds are received by the consumer 
or the educational institution (such as by deposit into the consumer's 
or educational institution's account), the disclosures should be based 
on the creditor's estimate of the time the funds will be delivered.
    4. Billing plans. Some covered educational institutions offer 
billing plans that permit a consumer to make payments in installments. 
Such plans are not considered private education loans, if an interest 
rate will not be applied to the credit balance and the term of the 
extension of credit is one year or less, even if the plan is payable in 
more than four installments. However, such plans may be extensions of 
credit subject to the requirements of Sec. Sec. 226.17 and 18.

                        46(c) Form of Disclosures

    1. Form of disclosures--relation to other sections. Creditors must 
make the disclosures required under this subpart in accordance with 
Sec. 226.46(c). Section 226.46(c)(2) requires that the disclosures be 
grouped together and segregated from everything else. In complying with 
this requirement, creditors may follow the rules in Sec. 226.17, except 
where specifically provided otherwise. For example, although Sec. 
226.17(b) requires creditors to provide only one set of disclosures 
before consummation of the transaction, Sec. Sec. 226.47(b) and (c) 
require that the creditor provide the disclosures under Sec. 226.18 
both upon approval and after the consumer accepts the loan.

                           Paragraph 46(c)(3)

    1. Application and solicitation disclosures--electronic disclosures. 
If the disclosures required under Sec. 226.47(a) are provided 
electronically, they must be provided on or with the application or 
solicitation reply form. Electronic disclosures are deemed to be on or 
with an application or solicitation if they meet one of the following 
conditions:
    i. They automatically appear on the screen when the application or 
solicitation reply form appears;
    ii. They are located on the same Web ``page'' as the application or 
solicitation reply form without necessarily appearing on the initial 
screen, if the application or reply form contains a clear and 
conspicuous reference to the location of the disclosures and indicates 
that the disclosures contain rate, fee, and other cost information, as 
applicable; or
    iii. They are posted on a Web site and the application or 
solicitation reply form is linked to the disclosures in a manner that 
prevents the consumer from by passing the disclosures before submitting 
the application or reply form.

                       46(d) Timing of Disclosures

    1. Receipt of disclosures. Under Sec. 226.46(d)(4), if the creditor 
places the disclosures in the mail, the consumer is considered to have 
received them three business days after they are mailed. For purposes of 
Sec. 226.46(d)(4), ``business day'' means all calendar days except 
Sundays and the legal public holidays referred to in Sec. 226.2(a)(6). 
See comment 2(a)(6)-2. For example, if the creditor places the 
disclosures in the mail on Thursday, June 4, the disclosures are 
considered received on Monday, June 8.

                           Paragraph 46(d)(1)

    1. Invitations to apply. A creditor may contact a consumer who has 
not been pre-selected for a private education loan about taking out a 
loan (whether by direct mail, telephone, or other means) and invite the 
consumer to complete an application. Such a contact does not meet the 
definition of solicitation, nor is it covered by this subpart, unless 
the contact itself includes the following:
    i. An application form in a direct mailing, electronic communication 
or a single application form as a ``take-one'' (in racks in public 
locations, for example);
    ii. An oral application in a telephone contact; or
    iii. An application in an in-person contact.

                           Paragraph 46(d)(2)

    1. Timing. The creditor must provide the disclosures required by 
Sec. 226.47(b) at the time the creditor provides to the consumer any 
notice that the loan has been approved. However, nothing in this section 
prevents the creditor from communicating to the consumer that additional 
information is required from the consumer before approval may be 
granted. In such a case, a creditor is not required to provide the 
disclosures at that time. If the creditor communicates notice of 
approval to the consumer by mail, the disclosures must be mailed at the 
same time as the notice of approval. If the creditor

[[Page 742]]

communicates notice of approval by telephone, the creditor must place 
the disclosures in the mail within three business days of the telephone 
call. If the creditor communicates notice of approval in electronic 
form, the creditor may provide the disclosures in electronic form. If 
the creditor has complied with the consumer consent and other applicable 
provisions of the Electronic Signatures in Global and National Commerce 
Act (E-Sign Act) (15 U.S.C. 7001 et seq.) the creditor may provide the 
disclosures solely in electronic form; otherwise, the creditor must 
place the disclosures in the mail within three business days of the 
communication.

                    46(g) Effect of subsequent events

    1. Approval disclosures. Inaccuracies in the disclosures required 
under Sec. 226.47(b) are not violations if attributable to events 
occurring after disclosures are made, although creditors are restricted 
under Sec. 226.48(c)(2) from making certain changes to the loan's rate 
or terms after the creditor provides an approval disclosure to a 
consumer. Since creditors are required provide the final disclosures 
under Sec. 226.47(c), they need not make new approval disclosures in 
response to an event that occurs after the creditor delivers the 
required approval disclosures, except as specified under Sec. 
226.48(c)(4). For example, at the time the approval disclosures are 
provided, the creditor may not know the precise disbursement date of the 
loan funds and must provide estimated disclosures based on the best 
information reasonably available and labelled as an estimate. If, after 
the approval disclosures are provided, the creditor learns from the 
educational institution the precise disbursement date, new approval 
disclosures would not be required, unless specifically required under 
Sec. 226.48(c)(4) if other changes are made. Similarly, the creditor 
may not know the precise amounts of each loan to be consolidated in a 
consolidation loan transaction and information about the precise amounts 
would not require new approval disclosures, unless specifically required 
under Sec. 226.48(c)(4) if other changes are made.
    2. Final disclosures. Inaccuracies in the disclosures required under 
Sec. 226.47(c) are not violations if attributable to events occurring 
after disclosures are made. For example, if the consumer initially 
chooses to defer payment of principal and interest while enrolled in a 
covered educational institution, but later chooses to make payments 
while enrolled, such a change does not make the original disclosures 
inaccurate.

                 Section 226.47--Content of Disclosures

    1. As applicable. The disclosures required by this subpart need be 
made only as applicable, unless specifically required otherwise. The 
creditor need not provide any disclosure that is not applicable to a 
particular transaction. For example, in a transaction consolidating 
private education loans, or in transactions under Sec. 226.46(a) for 
which compliance with this subpart is optional, the creditor need not 
disclose the information under Sec. Sec. 226.47(a)(6), and (b)(4), and 
any other information otherwise required to be disclosed under this 
subpart that is not applicable to the transaction. Similarly, creditors 
making loans to consumers where the student is not attending an 
institution of higher education, as defined in Sec. 226.46(b)(2), need 
not provide the disclosures regarding the self-certification form in 
Sec. 226.47(a)(8).

              47(a) Application or Solicitation Disclosures

                          Paragraph 47(a)(1)(i)

    1. Rates actually offered. The disclosure may state only those rates 
that the creditor is actually prepared to offer. For example, a creditor 
may not disclose a very low interest rate that will not in fact be 
offered at any time. For a loan with variable interest rates, the ranges 
of rates will be considered actually offered if:
    i. For disclosures in applications or solicitations sent by direct 
mail, the rates were in effect within 60 days before mailing;
    ii. For disclosures in applications or solicitations in electronic 
form, the rates were in effect within 30 days before the disclosures are 
sent to a consumer, or for disclosures made on an Internet Web site, 
within 30 days before being viewed by the public;
    iii. For disclosures in printed applications or solicitations made 
available to the general public, the rates were in effect within 30 days 
before printing; or
    iv. For disclosures provided orally in telephone applications or 
solicitations, the rates are currently available at the time the 
disclosures are provided.
    2. Creditworthiness and other factors. If the rate will depend, at 
least in part, on a later determination of the consumer's 
creditworthiness or other factors, the disclosure must include a 
statement that the rate for which the consumer may qualify at approval 
will depend on the consumer's creditworthiness and other factors. The 
creditor may, but is not required to, specify any additional factors 
that it will use to determine the interest rate. For example, if the 
creditor will determine the interest rate based on information in the 
consumer's or co-signer's credit report and the type of school the 
consumer attends, the creditor may state, ``Your interest rate will be 
based on your credit history and other factors (co-signer credit and 
school type).''
    3. Rates applicable to the loan. For a variable-rate private 
education loan, the disclosure of the interest rate or range of rates 
must reflect the rate or rates calculated based on the index and margin 
that will be used to make interest rate adjustments for

[[Page 743]]

the loan. The creditor may provide a description of the index and margin 
or range of margins used to make interest rate adjustments, including a 
reference to a source, such as a newspaper, where the consumer may look 
up the index.

                         Paragraph 47(a)(1)(iii)

    1. Coverage. The interest rate is considered variable if the terms 
of the legal obligation allow the creditor to increase the interest rate 
originally disclosed to the consumer and the requirements of section 
226.47(a)(1)(iii) apply to all such transactions. The provisions do not 
apply to increases resulting from delinquency (including late payment), 
default, assumption, or acceleration.
    2. Limitations. The creditor must disclose how often the rate may 
change and any limit on the amount that the rate may increase at any one 
time. The creditor must also disclose any maximum rate over the life of 
the transaction. If the legal obligation between the parties does 
specify a maximum rate, the creditor must disclose any legal limits in 
the nature of usury or rate ceilings under state or Federal statutes or 
regulations. However, if the applicable maximum rate is in the form of a 
legal limit, such as a state's usury cap (rather than a maximum rate 
specified in the legal obligation between the parties), the creditor 
must disclose that the maximum rate is determined by applicable law. The 
creditor must also disclose that the consumer's actual rate may be 
higher or lower than the initial rates disclosed under Sec. 
226.47(a)(1)(i), if applicable.

                         Paragraph 47(a)(1)(iv)

    1. Co-signer or guarantor--changes in applicable interest rate. The 
creditor must state whether the interest rate typically will be higher 
if the loan is not co-signed or guaranteed by a third party. The 
creditor is required to provide a statement of the effect on the 
interest rate and is not required to provide a numerical estimate of the 
effect on the interest rate. For example, a creditor may state: ``Rates 
are typically higher without a co-signer.''

             47(a)(2) Fees and Default or Late Payment Costs

    1. Fees or range of fees. The creditor must itemize fees required to 
obtain the private education loan. The creditor must give a single 
dollar amount for each fee, unless the fee is based on a percentage, in 
which case a percentage must be stated. If the exact amount of the fee 
is not known at the time of disclosure, the creditor may disclose the 
dollar amount or percentage for each fee as an estimated range.
    2. Fees required to obtain the private education loan. The creditor 
must itemize the fees that the consumer must pay to obtain the private 
education loan. Fees disclosed include all finance charges under Sec. 
226.4, such as loan origination fees, credit report fees, and fees 
charged upon entering repayment, as well as fees not considered finance 
charges but required to obtain credit, such as application fees that are 
charged whether or not credit is extended. Fees disclosed include those 
paid by the consumer directly to the creditor and fees paid to third 
parties by the creditor on the consumer's behalf. Creditors are not 
required to disclose fees that apply if the consumer exercises an option 
under the loan agreement after consummation, such as fees for deferment, 
forbearance, or loan modification.

                        47(a)(3) Repayment Terms

    1. Loan term. The term of the loan is the maximum period of time 
during which regularly scheduled payments of principal and interest will 
be due on the loan.
    2. Payment deferral options--general. The creditor must describe the 
options that the consumer has under the loan agreement to defer payment 
on the loan. When there is no deferment option provided for the loan, 
the creditor must disclose that fact. Payment deferral options required 
to be disclosed include options for immediate deferral of payments, such 
as when the student is currently enrolled at a covered educational 
institution. The description may include of the length of the maximum 
initial in-school deferment period, the types of payments that may be 
deferred, and a description of any payments that are required during the 
deferment period. The creditor may, but need not, disclose any 
conditions applicable to the deferment option, such as that deferment is 
permitted only while the student is continuously enrolled in school. If 
payment deferral is not an option while the student is enrolled in 
school, the creditor may disclose that the consumer must begin repayment 
upon disbursement of the loan and that the consumer may not defer 
repayment while enrolled in school. If the creditor offers payment 
deferral options that may apply during the repayment period, such as an 
option to defer payments if the student returns to school to pursue an 
additional degree, the creditor must include a statement referring the 
consumer to the contract document or promissory note for more 
information.
    3. Payment deferral options--in school deferment. For each payment 
deferral option applicable while the student is enrolled at a covered 
educational institution the creditor must disclose whether interest will 
accrue while the student is enrolled at a covered educational 
institution and, if interest does accrue, whether payment of interest 
may be deferred and added to the principal balance.
    4. Combination with cost estimate disclosure. The disclosures of the 
loan term under Sec. 226.47(a)(3)(i) and of the payment deferral

[[Page 744]]

options applicable while the student is enrolled at a covered 
educational institution under Sec. Sec. 226.47(a)(3)(ii) and (iii) may 
be combined with the disclosure of cost estimates required in Sec. 
226.47(a)(4). For example, the creditor may describe each payment 
deferral option in the same chart or table that provides the cost 
estimates for each payment deferral option. See Appendix H-21.
    5. Bankruptcy limitations. The creditor may comply with Sec. 
226.47(a)(3)(iv) by disclosing the following statement: ``If you file 
for bankruptcy you may still be required to pay back this loan.''

                         47(a)(4) Cost Estimates

    1. Total cost of the loan. For purposes of Sec. 226.47(a)(4), the 
creditor must calculate the example of the total cost of the loan in 
accordance with the rules in Sec. 226.18(h) for calculating the loan's 
total of payments.
    2. Basis for estimates. i. The creditor must calculate the total 
cost estimate by determining all finance charges that would be 
applicable to loans with the highest rate of interest required to be 
disclosed under Sec. 226.47(a)(1)(i). For example, if a creditor 
charges a range of origination fees from 0% to 3%, but the 3% 
origination fee would apply to loans with the highest initial rate, the 
lender must assume the 3% origination fee is charged. The creditor must 
base the total cost estimate on a total loan amount that includes all 
prepaid finance charges and results in a $10,000 amount financed. For 
example, if the prepaid finance charges are $600, the creditor must base 
the estimate on a $10,600 total loan amount and an amount financed of 
$10,000. The example must reflect an amount provided of $10,000. If the 
creditor only offers a particular private education loan for less than 
$10,000, the creditor may assume a loan amount that results in a $5,000 
amount financed for that loan.
    ii. If a prepaid finance charge is determined as a percentage of the 
amount financed, for purposes of the example, the creditor should assume 
that the fee is determined as a percentage of the total loan amount, 
even if this is not the creditor's usual practice. For example, suppose 
the consumer requires a disbursement of $10,000 and the creditor charges 
a 3% origination fee. In order to calculate the total cost example, the 
creditor must determine the loan amount that will result in a $10,000 
amount financed after the 3% fee is assessed. In this example, the 
resulting loan amount would be $10,309.28. Assessing the 3% origination 
fee on the loan amount of $10,309.28 results in an origination fee of 
$309.28, which is withheld from the loan funds disbursed to the 
consumer. The principal loan amount of $10,309.28 minus the prepaid 
finance charge of $309.28 results in an amount financed of $10,000.
    3. Calculated for each option to defer interest payments. The 
example must include an estimate of the total cost of the loan for each 
in-school deferral option disclosed in Sec. 226.47(a)(3)(iii). For 
example, if the creditor provides the consumer with the option to begin 
making principal and interest payments immediately, to defer principal 
payments but begin making interest-only payments immediately, or to 
defer all principal and interest payments while in school, the creditor 
is required to disclose three estimates of the total cost of the loan, 
one for each deferral option. If the creditor adds accrued interest to 
the loan balance (i.e., interest is capitalized), the estimate of the 
total loan cost should be based on the capitalization method that the 
creditor actually uses for the loan. For instance, for each deferred 
payment option where the creditor would capitalize interest on a 
quarterly basis, the total loan cost must be calculated assuming 
interest capitalizes on a quarterly basis.
    4. Deferment period assumptions. Creditors may use either of the 
following two methods for estimating the duration of in-school deferment 
periods:
    i. For loan programs intended for educational expenses of 
undergraduate students, the creditor may assume that the consumer defers 
payments for a four-year matriculation period, plus the loan's maximum 
applicable grace period, if any. For all other loans, the creditor may 
assume that the consumer defers for a two-year matriculation period, 
plus the maximum applicable grace period, if any, or the maximum time 
the consumer may defer payments under the loan program, whichever is 
shorter.
    ii. Alternatively, if the creditor knows that the student will be 
enrolled in a program with a standard duration, the creditor may assume 
that the consumer defers payments for the full duration of the program 
(plus any grace period). For example, if a creditor makes loans intended 
for students enrolled in a four-year medical school degree program, the 
creditor may assume that the consumer defers payments for four years 
plus the loan's maximum applicable grace period, if any. However, the 
creditor may not modify the disclosure to correspond to a particular 
student's situation. For example, even if the creditor knows that a 
student will be a second-year medical school student, the creditor must 
assume a four-year deferral period.

                              47(a)(6)(ii)

    1. Terms of Federal student loans. The creditor must disclose the 
interest rates available under each program under title IV of the Higher 
Education Act of 1965 and whether the rates are fixed or variable, as 
prescribed in the Higher Education Act of 1965 (20 U.S.C. 1077a). Where 
the fixed interest rate for a loan varies by statute depending

[[Page 745]]

on the date of disbursement or receipt of application, the creditor must 
disclose only the interest rate as of the time the disclosure is 
provided.

                              47(a)(6)(iii)

    1. Web site address. The creditor must include with this disclosure 
an appropriate U.S. Department of Education Web site address such as 
``Federalstudentaid.ed.gov.''

                       47(b) Approval Disclosures

                         47(b)(1) Interest Rate

    1. Variable rate disclosures. The interest rate is considered 
variable if the terms of the legal obligation allow the creditor to 
increase the interest rate originally disclosed to the consumer. The 
provisions do not apply to increases resulting from delinquency 
(including late payment), default, assumption, or acceleration. In 
addition to disclosing the information required under Sec. Sec. 
226.47(b)(ii) and (iii), the creditor must disclose the information 
required under Sec. Sec. 226.18(f)(1)(i) and (iii)--the circumstances 
under which the rate may increase and the effect of an increase, 
respectively. The creditor is required to disclose the maximum monthly 
payment based on the maximum possible rate in Sec. 226.47(b)(3)(viii), 
and the creditor need not disclose a separate example of the payment 
terms that would result from an increase under Sec. 226.18(f)(1)(iv).
    2. Limitations on rate adjustments. The creditor must disclose how 
often the rate may change and any limit on the amount that the rate may 
increase at any one time. The creditor must also disclose any maximum 
rate over the life of the transaction. If the legal obligation between 
the parties does provide a maximum rate, the creditor must disclose any 
legal limits in the nature of usury or rate ceilings under state or 
Federal statutes or regulations. However, if the applicable maximum rate 
is in the form of a legal limit, such as a State's usury cap (rather 
than a maximum rate specified in the legal obligation between the 
parties), the creditor must disclose that the maximum rate is determined 
by applicable law. Compliance with Sec. 226.18(f)(1)(ii) (requiring 
disclosure of any limitations on the increase of the interest rate) does 
not necessarily constitute compliance with this section. Specifically, 
this section requires that if there are no limitations on interest rate 
increases, the creditor must disclose that fact. By contrast, comment 
18(f)(1)(ii)-1 states that if there are no limitations the creditor need 
not disclose that fact. In addition, under this section, limitations on 
rate increases include, rather than exclude, legal limits in the nature 
of usury or rate ceilings under state or Federal statutes or 
regulations.
    3. Rates applicable to the loan. For a variable-rate loan, the 
disclosure of the interest rate must reflect the index and margin that 
will be used to make interest rate adjustments for the loan. The 
creditor may provide a description of the index and margin or range of 
margins used to make interest rate adjustments, including a reference to 
a source, such as a newspaper, where the consumer may look up the index.

                           Paragraph 47(b)(2)

    1. Fees and default or late payment costs. Creditors may follow the 
commentary for Sec. 226.47(a)(2) in complying with Sec. 226.47(b)(2). 
Creditors must disclose the late payment fees required to be disclosed 
under Sec. 226.18(l) as part of the disclosure required under Sec. 
226.47(b)(2)(ii). If the creditor includes the itemization of the amount 
financed under Sec. 226.18(c)(1), any fees disclosed as part of the 
itemization need not be separately disclosed elsewhere.

                        47(b)(3) Repayment Terms

    1. Principal amount. The principal amount must equal what the face 
amount of the note would be as of the time of approval, and it must be 
labeled ``Total Loan Amount.'' See Appendix H-18. This amount may be 
different from the ``principal loan amount'' used to calculate the 
amount financed under comment 18(b)(3)-1, because the creditor has the 
option under that comment of using a ``principal loan amount'' that is 
different from the face amount of the note. If the creditor elects to 
provide an itemization of the amount financed under Sec. 226.18(c)(1) 
the creditor need not disclose the amount financed elsewhere.
    2. Loan term. The term of the loan is the maximum period of time 
during which regularly scheduled payments of principal and interest are 
due on the loan.
    3. Payment deferral options applicable to the consumer. Creditors 
may follow the commentary for Sec. 226.47(a)(3)(ii) in complying with 
Sec. 226.47(b)(3)(iii).
    4. Payments required during enrollment. Required payments that must 
be disclosed include payments of interest and principal, interest only, 
or other payments that the consumer must make during the time that the 
student is enrolled. Compliance with Sec. 226.18(g) constitutes 
compliance with Sec. 226.47(b)(3)(iv).
    5. Bankruptcy limitations. The creditor may comply with Sec. 
226.47(b)(3)(vi) by disclosing the following statement: ``If you file 
for bankruptcy you may still be required to pay back this loan.''
    6. An estimate of the total amount for repayment. The creditor must 
disclose an estimate of the total amount for repayment at two interest 
rates:
    i. The interest rate in effect on the date of approval. Compliance 
with the total of payments disclosure requirement of Sec. 226.18(h)

[[Page 746]]

constitutes compliance with this requirement.
    ii. The maximum possible rate of interest applicable to the loan or, 
if the maximum rate cannot be determined, a rate of 25%. If the legal 
obligation between the parties specifies a maximum rate of interest, the 
creditor must calculate the total amount for repayment based on that 
rate. If the legal obligation does not specify a maximum rate but a 
usury or rate ceiling under State or Federal statutes or regulations 
applies, the creditor must use that rate. If a there is no maximum rate 
in the legal obligation or under a usury or rate ceiling, the creditor 
must base the disclosure on a rate of 25% and must disclose that there 
is no maximum rate and that the total amount for repayment disclosed 
under Sec. 226.47(b)(3)(vii)(B) is an estimate and will be higher if 
the applicable interest rate increases.
    iii. If terms of the legal obligation provide a limitation on the 
amount that the interest rate may increase at any one time, the creditor 
may reflect the effect of the interest rate limitation in calculating 
the total cost example. For example, if the legal obligation provides 
that the interest rate may not increase by more than three percentage 
points each year, the creditor may assume that the rate increases by 
three percentage points each year until it reaches that maximum possible 
rate, or if a maximum rate cannot be determined, an interest rate of 
25%.
    7. The maximum monthly payment. The creditor must disclose the 
maximum payment that the consumer could be required to make under the 
loan agreement, calculated using the maximum rate of interest applicable 
to the loan, or if the maximum rate cannot be determined, a rate of 25%. 
The creditor must determine and disclose the maximum rate of interest in 
accordance with comments 47(b)(3)-6.ii and 47(b)(3)-6.iii. In addition, 
if a maximum rate cannot be determined, the creditor must state that 
there is no maximum rate and that the monthly payment amounts disclosed 
under Sec. 226.47(b)(3)(viii) are estimates and will be higher if the 
applicable interest rate increases.

            47(b)(4) Alternatives to Private Education Loans

    1. General. Creditors may use the guidance provided in the 
commentary for Sec. 226.47(a)(6) in complying with Sec. 226.47(b)(4).

                     47(b)(5) Rights of the Consumer

    1. Notice of acceptance period. The disclosure that the consumer may 
accept the terms of the loan until the acceptance period under Sec. 
226.48(c)(1) has expired must include the specific date on which the 
acceptance period expires and state that the consumer may accept the 
terms of the loan until that date. Under Sec. 226.48(c)(1), the date on 
which the acceptance period expires is based on when the consumer 
receives the disclosures. If the creditor mails the disclosures, the 
consumer is considered to have received them three business days after 
the creditor places the disclosures in the mail See Sec. 226.46(d)(4). 
If the creditor provides an acceptance period longer than the minimum 30 
calendar days, the disclosure must reflect the later date. The 
disclosure must also specify the method or methods by which the consumer 
may communicate acceptance.

                         47(c) Final Disclosures

    1. Notice of right to cancel. The disclosure of the right to cancel 
must include the specific date on which the three-day cancellation 
period expires and state that the consumer has a right to cancel by that 
date. See comments 48(d)-1 and 2. For example, if the disclosures were 
mailed to the consumer on Friday, June 1, and the consumer is deemed to 
receive them on Tuesday, June 5, the creditor could state: ``You have a 
right to cancel this transaction, without penalty, by midnight on June 
8, 2009. No funds will be disbursed to you or to your school until after 
this time. You may cancel by calling us at 800-XXX-XXXX.'' If the 
creditor permits cancellation by mail, the statement must specify that 
the consumer's mailed request will be deemed timely if placed in the 
mail not later than the cancellation date specified on the disclosure. 
The disclosure must also specify the method or methods by which the 
consumer may cancel.
    2. More conspicuous. The statement of the right to cancel must be 
more conspicuous than any other disclosure required under this section 
except for the finance charge, the interest rate, and the creditor's 
identity. See Sec. 226.46(c)(2)(iii). The statement will be deemed to 
be made more conspicuous if it is segregated from other disclosures, 
placed near or at the top of the disclosure document, and highlighted in 
relation to other required disclosures. For example, the statement may 
be outlined with a prominent, noticeable box; printed in contrasting 
color; printed in larger type, bold print, or different type face; 
underlined; or set off with asterisks.

         Section 226.48--Limitations on Private Education Loans

    1. Co-branding--definition of marketing. The prohibition on co-
branding in Sec. Sec. 226.48(a) and (b) applies to the marketing of 
private education loans. The term marketing includes any advertisement 
under Sec. 226.2(a)(2). In addition, the term marketing includes any 
document provided by the creditor to the consumer related to a specific 
transaction, such as an application or solicitation, a promissory note 
or a contract provided to the consumer. For example, prominently 
displaying the name of the educational institution at

[[Page 747]]

the top of the application form or promissory note without mentioning 
the name of the creditor, such as by naming the loan product the 
``University of ABC Loan,'' would be prohibited.
    2. Implied endorsement. A suggestion that a private education loan 
is offered or made by the covered educational institution instead of by 
the creditor is included in the prohibition on implying that the covered 
educational institution endorses the private education loan under Sec. 
226.48(a)(1). For example, naming the loan the ``University of ABC 
Loan,'' suggests that the loan is offered by the educational 
institution. However, the use of a creditor's full name, even if that 
name includes the name of a covered educational institution, does not 
imply endorsement. For example, a credit union whose name includes the 
name of a covered educational institution is not prohibited from using 
its own name. In addition, the authorized use of a state seal by a state 
or an institution of higher education in the marketing of state 
education loan products does not imply endorsement.
    3. Disclosure. i. A creditor is considered to have complied with 
Sec. 226.48(a)(2) if the creditor's marketing contains a clear and 
conspicuous statement, equally prominent and closely proximate to the 
reference to the covered educational institution, using the name of the 
creditor and the name of the covered educational institution that the 
covered educational institution does not endorse the creditor's loans 
and that the creditor is not affiliated with the covered educational 
institution. For example, ``[Name of creditor]'s loans are not endorsed 
by [name of school] and [name of creditor] is not affiliated with [name 
of school].'' The statement is considered to be equally prominent and 
closely proximate if it is the same type size and is located immediately 
next to or directly above or below the reference to the educational 
institution, without any intervening text or graphical displays.
    ii. A creditor is considered to have complied with Sec. 226.48(b) 
if the creditor's marketing contains a clear and conspicuous statement, 
equally prominent and closely proximate to the reference to the covered 
educational institution, using the name of the creditor's loan or loan 
program, the name of the covered educational institution, and the name 
of the creditor, that the creditor's loans are not offered or made by 
the covered educational institution, but are made by the creditor. For 
example, ``[Name of loan or loan program] is not being offered or made 
by [name of school], but by [name of creditor].'' The statement is 
considered to be equally prominent and closely proximate if it is the 
same type size and is located immediately next to or directly above or 
below the reference to the educational institution, without any 
intervening text or graphical displays.

                             Paragraph 48(c)

    1. 30 day acceptance period. The creditor must provide the consumer 
with at least 30 calendar days from the date the consumer receives the 
disclosures required under Sec. 226.47(b) to accept the terms of the 
loan. The creditor may provide the consumer with a longer period of 
time. If the creditor places the disclosures in the mail, the consumer 
is considered to have received them three business days after they are 
mailed under Sec. 226.46(d)(4). For purposes of determining when a 
consumer receives mailed disclosures, ``business day'' means all 
calendar days except Sundays and the legal public holidays referred to 
in Sec. 226.2(a)(6). See comment 46(d)-1. The consumer may accept the 
loan at any time before the end of the 30 day period.
    2. Method of acceptance. The creditor must specify a method or 
methods by which the consumer can accept the loan at any time within the 
30-day acceptance period. The creditor may require the consumer to 
communicate acceptance orally or in writing. Acceptance may also be 
communicated electronically, but electronic communication must not be 
the only means provided for the consumer to communicate acceptance 
unless the creditor has provided the approval disclosure electronically 
in compliance with the consumer consent and other applicable provisions 
of the Electronic Signatures in Global and National Commerce Act (E-Sign 
Act) (15 U.S.C. Sec. 7001 et seq.). If acceptance by mail is allowed, 
the consumer's communication of acceptance is considered timely if 
placed in the mail within the 30-day period.
    3. Prohibition on changes to rates and terms. The prohibition on 
changes to the rates and terms of the loan applies to changes that 
affect those terms that are required to be disclosed under Sec. Sec. 
226.47(b) and (c). The creditor is permitted to make changes that do not 
affect any of the terms disclosed to the consumer under those sections.
    4. Permissible changes to rates and terms--re-disclosure not 
required. Creditors are not required to consummate a loan where the 
extension of credit would be prohibited by law or where the creditor has 
reason to believe that the consumer has committed fraud. A creditor may 
make changes to the rate based on adjustments to the index used for the 
loan and changes that will unequivocally benefit the consumer. For 
example, a creditor is permitted to reduce the interest rate or lower 
the amount of a fee. A creditor may also reduce the loan amount based on 
a certification or other information received from a covered educational 
institution or from the consumer indicating that the student's cost of 
attendance has decreased or the amount of other financial aid has 
increased. A creditor

[[Page 748]]

may also withdraw the loan approval based on a certification or other 
information received from a covered educational institution or from the 
consumer indicating that the student is not enrolled in the institution. 
For these changes permitted by Sec. 226.48(c)(3), the creditor is not 
required to provide a new set of approval disclosures required under 
Sec. 226.47(b) or provide the consumer with a new 30-day acceptance 
period under Sec. 226.48(c)(1). The creditor must provide the final 
disclosures under Sec. 226.47(c).
    5. Permissible changes to rates and terms--school certification. If 
the creditor reduces the loan amount based on information that the 
student's cost of attendance has decreased or the amount of other 
financial aid has increased, the creditor may make certain corresponding 
changes to the rate and terms. The creditor may change the rate or terms 
to those that the consumer would have received if the consumer had 
applied for the reduced loan amount. For example, assume a consumer 
applies for, and is approved for, a $10,000 loan at a 7% interest rate. 
However, after the consumer receives the approval disclosures, the 
consumer's school certifies that the consumer's financial need is only 
$8,000. The creditor may reduce the loan amount for which the consumer 
is approved to $8,000. The creditor may also, for example, increase the 
interest rate on the loan to 7.125%, but only if the consumer would have 
received a rate of 7.125% if the consumer had originally applied for an 
$8,000 loan.
    5. Permissible changes to rates and terms--re-disclosure required. A 
creditor may make changes to the interest rate or terms to accommodate a 
request from a consumer. For example, assume a consumer applies for a 
$10,000 loan and is approved for the $10,000 amount at an interest rate 
of 6%. After the creditor has provided the approval disclosures, the 
consumer's financial need increases, and the consumer requests to a loan 
amount of $15,000. In this situation, the creditor is permitted to offer 
a $15,000 loan, and to make any other changes such as raising the 
interest rate to 7%, in response to the consumer's request. The creditor 
must provide a new set of disclosures under Sec. 226.47(b) and provide 
the consumer with 30 days to accept the offer under Sec. 226.48(c) for 
the $15,000 loan offered in response to the consumer's request. However, 
because the consumer may choose not to accept the offer for the $15,000 
loan at the higher interest rate, the creditor may not withdraw or 
change the rate or terms of the offer for the $10,000 loan, except as 
permitted under Sec. 226.48(c)(3), unless the consumer accepts the 
$15,000 loan.

                             Paragraph 48(d)

    1. Right to cancel. If the creditor mails the disclosures, the 
disclosures are considered received by the consumer three business days 
after the disclosures were mailed. For purposes of determining when the 
consumer receives the disclosures, the term ``business day'' is defined 
as all calendar days except Sunday and the legal public holidays 
referred to in Sec. 226.2(a)(6). See Sec. 226.46(d)(4). The consumer 
has three business days from the date on which the disclosures are 
deemed received to cancel the loan. For example, if the creditor places 
the disclosures in the mail on Thursday, June 4, the disclosures are 
considered received on Monday, June 8. The consumer may cancel any time 
before midnight Thursday, June 11. The creditor may provide the consumer 
with more time to cancel the loan than the minimum three business days 
required under this section. If the creditor provides the consumer with 
a longer period of time in which to cancel the loan, the creditor may 
disburse the funds three business days after the consumer has received 
the disclosures required under this section, but the creditor must honor 
the consumer's later timely cancellation request.
    2. Method of cancellation. The creditor must specify a method or 
methods by which the consumer may cancel. For example, the creditor may 
require the consumer to communicate cancellation orally or in writing. 
Cancellation may also be communicated electronically, but electronic 
communication must not be the only means by which the consumer may 
cancel unless the creditor provided the final disclosure electronically 
in 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.). If the creditor allows cancellation by 
mail, the creditor must specify an address or the name and address of an 
agent of the creditor to receive notice of cancellation. The creditor 
must wait to disburse funds until it is reasonably satisfied that the 
consumer has not canceled. For example, the creditor may satisfy itself 
by waiting a reasonable time after expiration of the cancellation period 
to allow for delivery of a mailed notice. The creditor may also satisfy 
itself by obtaining a written statement from the consumer, which must be 
provided to and signed by the consumer only at the end of the three-day 
period, that the right has not been exercised.
    3. Cancellation without penalty. The creditor may not charge the 
consumer a fee for exercising the right to cancel under Sec. 226.48(d). 
The prohibition extends only to fees charged specifically for canceling 
the loan. The creditor is not required to refund fees, such as an 
application fee, that are charged to all consumers whether or not the 
consumer cancels the loan.

                             Paragraph 48(e)

    1. General. Section 226.48(e) requires that the creditor obtain the 
self-certification

[[Page 749]]

form, signed by the consumer, before consummating the private education 
loan. The rule applies only to private education loans that will be used 
for the postsecondary educational expenses of a student while that 
student is attending an institution of higher education as defined in 
Sec. 226.46(b)(2). It does not apply to all covered educational 
institutions. The requirement applies even if the student is not 
currently attending an institution of higher education, but will use the 
loan proceeds for postsecondary educational expenses while attending 
such institution. For example, a creditor is required to obtain the form 
before consummating a private education loan provided to a high school 
senior for expenses to be incurred during the consumer's first year of 
college. This provision does not require that the creditor obtain the 
self-certification form in instances where the loan is not intended for 
a student attending an institution of higher education, such as when the 
consumer is consolidating loans after graduation. Section 155(a)(2) of 
the Higher Education Act of 1965 provides that the form shall be made 
available to the consumer by the relevant institution of higher 
education. However, Sec. 226.48(e) provides flexibility to institutions 
of higher education and creditors as to how the completed self-
certification form is provided to the lender. The creditor may receive 
the form directly from the consumer, or the creditor may receive the 
form from the consumer through the institution of higher education. In 
addition, the creditor may provide the form, and the information the 
consumer will require to complete the form, directly to the consumer.
    2. Electronic signature. Under Section 155(a)(2) of the Higher 
Education Act of 1965, the institution of higher education may provide 
the self-certification form to the consumer in written or electronic 
form. Under Section 155(a)(5) of the Higher Education Act of 1965, the 
form may be signed electronically by the consumer. A creditor may accept 
the self-certification form from the consumer in electronic form. A 
consumer's electronic signature is considered valid if it meets the 
requirements issued by the Department of Education under Section 
155(a)(5) of the Higher Education Act of 1965.

                             Paragraph 48(f)

    1. General. Section 226.48(f) does not specify the format in which 
creditors must provide the required information to the covered 
educational institution. Creditors may choose to provide only the 
required information or may provide copies of the form or forms the 
lender uses to comply with Sec. 226.47(a). A creditor is only required 
to provide the required information if the creditor is aware that it is 
a party to a preferred lender arrangement. For example, if a creditor is 
placed on a covered educational institution's preferred lender list 
without the creditor's knowledge, the creditor is not required to comply 
with Sec. 226.48(f).

Subpart G--Special Rules Applicable to Credit Card Accounts and Open-End 
                   Credit Offered to College Students

                      Sec. 226.51--Ability To Pay

    51(a) General rule.
    51(a)(1) Consideration of ability to pay.
    1. Consideration of additional factors. Section 226.51(a) requires a 
card issuer to consider a consumer's independent ability to make the 
required minimum periodic payments under the terms of an account based 
on the consumer's independent income or assets and current obligations. 
The card issuer may also consider consumer reports, credit scores, and 
other factors, consistent with Regulation B (12 CFR part 202).
    2. Ability to pay as of application or consideration of increase. A 
card issuer complies with Sec. 226.51(a) if it bases its determination 
regarding a consumer's independent ability to make the required minimum 
periodic payments on the facts and circumstances known to the card 
issuer at the time the consumer applies to open the credit card account 
or when the card issuer considers increasing the credit line on an 
existing account.
    3. Credit line increase. When a card issuer considers increasing the 
credit line on an existing account, Sec. 226.51(a) applies whether the 
consideration is based upon a request of the consumer or is initiated by 
the card issuer.
    4. Income and assets. i. Sources of information. For purposes of 
Sec. 226.51(a), a card issuer may consider the consumer's income and 
assets based on
    A. Information provided by the consumer in connection with the 
credit card account under an open-end (not home-secured) consumer credit 
plan;
    B. Information provided by the consumer in connection with any other 
financial relationship the card issuer or its affiliates have with the 
consumer (subject to any applicable information-sharing rules);
    C. Information obtained through third parties (subject to any 
applicable information-sharing rules); and
    D. Information obtained through any empirically derived, 
demonstrably and statistically sound model that reasonably estimates a 
consumer's income and assets.
    ii. Income and assets of persons liable for debts incurred on 
account. For purposes of Sec. 226.51(a), a card issuer may consider any 
current or reasonably expected income and assets of the consumer or 
consumers who are applying for a new account and will be liable for 
debts incurred on that account. Similarly, when a card issuer is 
considering whether to increase the credit limit on an

[[Page 750]]

existing account, the card issuer may consider any current or reasonably 
expected income and assets of the consumer or consumers who are 
accountholders and are liable for debts incurred on that account. A card 
issuer may also consider any current or reasonably expected income and 
assets of a cosigner or guarantor who is or will be liable for debts 
incurred on the account. However, a card issuer may not use the income 
and assets of an authorized user or other person who is not liable for 
debts incurred on the account to satisfy the requirements of Sec. 
226.51, unless a Federal or State statute or regulation grants a 
consumer who is liable for debts incurred on the account an ownership 
interest in such income and assets. Information about current or 
reasonably expected income and assets includes, for example, information 
about current or expected salary, wages, bonus pay, tips, and 
commissions. Employment may be full-time, part-time, seasonal, 
irregular, military, or self-employment. Other sources of income could 
include interest or dividends, retirement benefits, public assistance, 
alimony, child support, or separate maintenance payments. A card issuer 
may also take into account assets such as savings accounts or 
investments.
    iii. Household income and assets. Consideration of information 
regarding a consumer's household income does not by itself satisfy the 
requirement in Sec. 226.51(a) to consider the consumer's independent 
ability to pay. For example, if a card issuer requests on its 
application forms that applicants provide their ``household income,'' 
the card issuer may not rely solely on the information provided by 
applicants to satisfy the requirements of Sec. 226.51(a). Instead, the 
card issuer would need to obtain additional information about an 
applicant's independent income (such as by contacting the applicant). 
However, if a card issuer requests on its application forms that 
applicants provide their income without reference to household income 
(such as by requesting ``income'' or ``salary''), the card issuer may 
rely on the information provided by applicants to satisfy the 
requirements of Sec. 226.51(a).
    5. Current obligations. A card issuer may consider the consumer's 
current obligations based on information provided by the consumer or in 
a consumer report. In evaluating a consumer's current obligations, a 
card issuer need not assume that credit lines for other obligations are 
fully utilized.
    6. Joint applicants and joint accountholders. With respect to the 
opening of a joint account for two or more consumers or a credit line 
increase on such an account, the card issuer may consider the collective 
ability of all persons who are or will be liable for debts incurred on 
the account to make the required payments.
    51(a)(2) Minimum periodic payments.
    1. Applicable minimum payment formula. For purposes of estimating 
required minimum periodic payments under the safe harbor set forth in 
Sec. 226.51(a)(2)(ii), if the account has or may have a promotional 
program, such as a deferred payment or similar program, where there is 
no applicable minimum payment formula during the promotional period, the 
issuer must estimate the required minimum periodic payment based on the 
minimum payment formula that will apply when the promotion ends.
    2. Interest rate for purchases. For purposes of estimating required 
minimum periodic payments under the safe harbor set forth in Sec. 
226.51(a)(2)(ii), if the interest rate for purchases is or may be a 
promotional rate, the issuer must use the post-promotional rate to 
estimate interest charges.
    3. Mandatory fees. For purposes of estimating required minimum 
periodic payments under the safe harbor set forth in Sec. 
226.51(a)(2)(ii), mandatory fees that must be assumed to be charged 
include those fees the card issuer knows the consumer will be required 
to pay under the terms of the account if the account is opened, such as 
an annual fee. If a mandatory fee is a promotional fee (as defined in 
Sec. 226.16(g)), the issuer must use the post-promotional fee amount 
for purposes of Sec. 226.51(a)(2)(ii).
    51(b) Rules affecting young consumers.
    1. Age as of date of application or consideration of credit line 
increase. Sections 226.51(b)(1) and (b)(2) apply only to a consumer who 
has not attained the age of 21 as of the date of submission of the 
application under Sec. 226.51(b)(1) or the date the credit line 
increase is requested by the consumer (or if no request has been made, 
the date the credit line increase is considered by the card issuer) 
under Sec. 226.51(b)(2).
    2. Liability of cosigner, guarantor, or joint accountholder. 
Sections 226.51(b)(1)(ii) and (b)(2) require the signature or written 
consent of a cosigner, guarantor, or joint accountholder agreeing either 
to be secondarily liable for any debt on the account incurred by the 
consumer before the consumer has attained the age of 21 or to be jointly 
liable with the consumer for any debt on the account. Sections 
226.51(b)(1)(ii) and (b)(2) do not prohibit a card issuer from also 
requiring the cosigner, guarantor, or joint accountholder to assume 
liability for debts incurred after the consumer has attained the age of 
21, consistent with any agreement made between the parties.
    3. Authorized users exempt. If a consumer who has not attained the 
age of 21 is being added to another person's account as an authorized 
user and has no liability for debts incurred on the account, Sec. 
226.51(b)(1) and (b)(2) do not apply.
    4. Electronic application. Consistent with Sec. 226.5(a)(1)(iii), 
an application may be provided to the consumer in electronic form

[[Page 751]]

without regard to the consumer consent or other provisions of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act) 
(15 U.S.C. 7001 et seq.) in the circumstances set forth in Sec. 226.5a. 
The electronic submission of an application from a consumer or a consent 
to a credit line increase from a cosigner, guarantor, or joint 
accountholder to a card issuer would constitute a written application or 
consent for purposes of Sec. 226.51(b) and would not be considered a 
consumer disclosure for purposes of the E-Sign Act.
    51(b)(1) Applications from young consumers.
    1. Relation to Regulation B. In considering an application or credit 
line increase on the credit card account of a consumer who is less than 
21 years old, creditors must comply with the applicable rules in 
Regulation B (12 CFR part 202).
    2. Financial information. Information regarding income and assets 
that satisfies the requirements of Sec. 226.51(a) also satisfies the 
requirements of Sec. 226.51(b)(1). See comment 51(a)(1)-4.
    51(b)(2) Credit line increases for young consumers.
    1. Relation to Regulation B. In considering an application or credit 
line increase on the credit card account of a consumer who is less than 
21 years old, creditors must comply with the applicable rules in 
Regulation B (12 CFR part 202).

                    Sec. 226.52--Limitations on Fees

    52(a) Limitations prior to account opening and during first year 
after account opening.
    52(a)(1) General rule.
    1. Application. The 25 percent limit in Sec. 226.52(a)(1) applies 
to fees that the card issuer charges to the account as well as to fees 
that the card issuer requires the consumer to pay with respect to the 
account through other means (such as through a payment from the 
consumer's asset account to the card issuer or from another credit 
account provided by the card issuer). For example
    i. Assume that, under the terms of a credit card account, a consumer 
is required to pay $120 in fees for the issuance or availability of 
credit at account opening. The consumer is also required to pay a cash 
advance fee that is equal to five percent of the cash advance and a late 
payment fee of $15 if the required minimum periodic payment is not 
received by the payment due date (which is the twenty-fifth of the 
month). At account opening on January 1 of year one, the credit limit 
for the account is $500. Section 226.52(a)(1) permits the card issuer to 
charge to the account the $120 in fees for the issuance or availability 
of credit at account opening. On February 1 of year one, the consumer 
uses the account for a $100 cash advance. Section 226.52(a)(1) permits 
the card issuer to charge a $5 cash-advance fee to the account. On March 
26 of year one, the card issuer has not received the consumer's required 
minimum periodic payment. Section 226.52(a)(2) permits the card issuer 
to charge a $15 late payment fee to the account. On July 15 of year one, 
the consumer uses the account for a $50 cash advance. Section 
226.52(a)(1) does not permit the card issuer to charge a $2.50 cash 
advance fee to the account. Furthermore, Sec. 225.52(a)(1) prohibits 
the card issuer from collecting the $2.50 cash advance fee from the 
consumer by other means.
    ii. Assume that, under the terms of a credit card account, a 
consumer is required to pay $125 in fees for the issuance or 
availability of credit during the first year after account opening. At 
account opening on January 1 of year one, the credit limit for the 
account is $500. Section 226.52(a)(1) permits the card issuer to charge 
the $125 in fees to the account. However, Sec. 226.52(a)(1) prohibits 
the card issuer from requiring the consumer to make payments to the card 
issuer for additional non-exempt fees with respect to the account prior 
to account opening or during the first year after account opening. 
Section 226.52(a)(1) also prohibits the card issuer from requiring the 
consumer to open a separate credit account with the card issuer to fund 
the payment of additional non-exempt fees prior to the opening of the 
credit card account or during the first year after the credit card 
account is opened.
    iii. Assume that, on January 1 of year one, a consumer is required 
to pay a $100 fee in order to apply for a credit card account. On 
January 5, the card issuer approves the consumer's application, assigns 
the account a credit limit of $1,000, and provides the consumer with 
account-opening disclosures consistent with Sec. 226.6. The date on 
which the account may first be used by the consumer to engage in 
transactions is January 5. The consumer is required to pay $150 in fees 
for the issuance or availability of credit, which Sec. 226.52(a)(1) 
permits the card issuer to charge to the account on January 5. However, 
because the $100 application fee is subject to the 25 percent limit in 
Sec. 226.52(a)(1), the card issuer is prohibited from requiring the 
consumer to pay any additional non-exempt fees with respect to the 
account until January 5 of year two.
    2. Fees that exceed 25 percent limit. A card issuer that charges a 
fee to a credit card account that exceeds the 25 percent limit complies 
with Sec. 226.52(a)(1) if the card issuer waives or removes the fee and 
any associated interest charges or credits the account for an amount 
equal to the fee and any associated interest charges within a reasonable 
amount of time but no later than the end of the billing cycle following 
the billing cycle during which the fee was charged. For example, 
assuming the facts in the example in comment 52(a)(1)-1.i. above, the 
card issuer complies with Sec. 226.52(a)(1) if the card issuer charged

[[Page 752]]

the $2.50 cash advance fee to the account on July 15 of year one but 
waived or removed the fee or credited the account for $2.50 (plus any 
interest charges on that $2.50) at the end of the billing cycle.
    3. Changes in credit limit during first year. i. Increases in credit 
limit. If a card issuer increases the credit limit during the first year 
after the account is opened, Sec. 226.52(a)(1) does not permit the card 
issuer to require the consumer to pay additional fees that would 
otherwise be prohibited (such as a fee for increasing the credit limit). 
For example, assume that, at account opening on January 1, the credit 
limit for a credit card account is $400 and the consumer is required to 
pay $100 in fees for the issuance or availability of credit. On July 1, 
the card issuer increases the credit limit for the account to $600. 
Section 226.52(a)(1) does not permit the card issuer to require the 
consumer to pay additional fees based on the increased credit limit.
    ii. Decreases in credit limit. If a card issuer decreases the credit 
limit during the first year after the account is opened, Sec. 
226.52(a)(1) requires the card issuer to waive or remove any fees 
charged to the account that exceed 25 percent of the reduced credit 
limit or to credit the account for an amount equal to any fees the 
consumer was required to pay with respect to the account that exceed 25 
percent of the reduced credit limit within a reasonable amount of time 
but no later than the end of the billing cycle following the billing 
cycle during which the credit limit was reduced. For example
    A. Assume that, at account opening on January 1, the credit limit 
for a credit card account is $1,000 and the consumer is required to pay 
$250 in fees for the issuance or availability of credit. The billing 
cycles for the account begin on the first day of the month and end on 
the last day of the month. On July 30, the card issuer decreases the 
credit limit for the account to $500. Section 226.52(a)(1) requires the 
card issuer to waive or remove $175 in fees from the account or to 
credit the account for an amount equal to $175 within a reasonable 
amount of time but no later than August 31.
    B. Assume that, on June 25 of year one, a consumer is required to 
pay a $75 fee in order to apply for a credit card account. At account 
opening on July 1 of year one, the credit limit for the account is $500 
and the consumer is required to pay $50 in fees for the issuance or 
availability of credit. The billing cycles for the account begin on the 
first day of the month and end on the last day of the month. On February 
15 of year two, the card issuer decreases the credit limit for the 
account to $250. Section 226.52(a)(1) requires the card issuer to waive 
or remove fees from the account or to credit the account for an amount 
equal to $62.50 within a reasonable amount of time but no later than 
March 31 of year two.
    4. Date on which account may first be used by consumer to engage in 
transactions.
    i. Methods of compliance. For purposes of Sec. 226.52(a)(1), an 
account is considered open no earlier than the date on which the account 
may first be used by the consumer to engage in transactions. A card 
issuer may consider an account open for purposes of Sec. 226.52(a)(1) 
on any of the following dates
    A. The date the account is first used by the consumer for a 
transaction (such as when an account is established in connection with 
financing the purchase of goods or services).
    B. The date the consumer complies with any reasonable activation 
procedures imposed by the card issuer for preventing fraud or 
unauthorized use of a new account (such as requiring the consumer to 
provide information that verifies his or her identity), provided that 
the account may be used for transactions on that date.
    C. The date that is seven days after the card issuer mails or 
delivers to the consumer account-opening disclosures that comply with 
Sec. 226.6, provided that the consumer may use the account for 
transactions after complying with any reasonable activation procedures 
imposed by the card issuer for preventing fraud or unauthorized use of 
the new account (such as requiring the consumer to provide information 
that verifies his or her identity). If a card issuer has reasonable 
procedures designed to ensure that account-opening disclosures that 
comply with Sec. 226.6 are mailed or delivered to consumers no later 
than a certain number of days after the card issuer establishes the 
account, the card issuer may add that number of days to the seven-day 
period for purposes of determining the date on which the account was 
opened.
    ii. Examples.
    A. Assume that, on July 1 of year one, a credit card account under 
an open-end (not home-secured) consumer credit plan is established in 
connection with financing the purchase of goods or services and a $500 
transaction is charged to the account by the consumer. The card issuer 
may consider the account open on July 1 of year one for purposes of 
Sec. 226.52(a)(1). Accordingly, Sec. 226.52(a)(1) ceases to apply to 
the account on July 1 of year two.
    B. Assume that, on July 1 of year one, a card issuer approves a 
consumer's application for a credit card account under an open-end (not 
home-secured) consumer credit plan and establishes the account on its 
internal systems. On July 5, the card issuer mails or delivers to the 
consumer account-opening disclosures that comply with Sec. 226.6. If 
the consumer may use the account for transactions on the date the 
consumer complies with any reasonable procedures imposed by the card 
issuer for preventing fraud or unauthorized use, the card issuer may 
consider

[[Page 753]]

the account open on July 12 of year one for purposes of Sec. 
226.52(a)(1). Accordingly, Sec. 226.52(a)(1) ceases to apply to the 
account on July 12 of year two.
    C. Same facts as in paragraph B above except that the card issuer 
has adopted reasonable procedures designed to ensure that account-
opening disclosures that comply with Sec. 226.6 are mailed or delivered 
to consumers no later than three days after an account is established on 
its systems. If the consumer may use the account for transactions on the 
date the consumer complies with any reasonable procedures imposed by the 
card issuer for preventing fraud or unauthorized use, the card issuer 
may consider the account open on July 11 of year one for purposes of 
Sec. 226.52(a)(1). Accordingly, Sec. 226.52(a)(1) ceases to apply to 
the account on July 11 of year two. However, if the consumer uses the 
account for a transaction or complies with the card issuer's reasonable 
procedures for preventing fraud or unauthorized use on July 8 of year 
one, the card issuer may, at its option, consider the account open on 
that date for purposes of Sec. 226.52(a)(1) and Sec. 226.52(a)(1) 
therefore ceases to apply to the account on July 8 of year two.
    52(a)(2) Fees not subject to limitations.
    1. Covered fees. Except as provided in Sec. 226.52(a)(2), Sec. 
226.52(a) applies to any fees or other charges that a card issuer will 
or may require the consumer to pay with respect to a credit card account 
prior to account opening and during the first year after account 
opening, other than charges attributable to periodic interest rates. For 
example, Sec. 226.52(a) applies to
    i. Fees that the consumer is required to pay for the issuance or 
availability of credit described in Sec. 226.5a(b)(2), including any 
fee based on account activity or inactivity and any fee that a consumer 
is required to pay in order to receive a particular credit limit;
    ii. Fees for insurance described in Sec. 226.4(b)(7) or debt 
cancellation or debt suspension coverage described in Sec. 226.4(b)(10) 
written in connection with a credit transaction, if the insurance or 
debt cancellation or debt suspension coverage is required by the terms 
of the account;
    iii. Fees that the consumer is required to pay in order to engage in 
transactions using the account (such as cash advance fees, balance 
transfer fees, foreign transaction fees, and fees for using the account 
for purchases);
    iv. Fees that the consumer is required to pay for violating the 
terms of the account (except to the extent specifically excluded by 
Sec. 226.52(a)(2)(i));
    v. Fixed finance charges; and
    vi. Minimum charges imposed if a charge would otherwise have been 
determined by applying a periodic interest rate to a balance except for 
the fact that such charge is smaller than the minimum.
    2. Fees the consumer is not required to pay. Section 
226.52(a)(2)(ii) provides that Sec. 226.52(a) does not apply to fees 
that the consumer is not required to pay with respect to the account. 
For example, Sec. 226.52(a) generally does not apply to fees for making 
an expedited payment (to the extent permitted by Sec. 226.10(e)), fees 
for optional services (such as travel insurance), fees for reissuing a 
lost or stolen card, or statement reproduction fees.
    3. Security deposits. A security deposit that is charged to a credit 
card account is a fee for purposes of Sec. 226.52(a). In contrast, 
however, a security deposit is not subject to the 25 percent limit in 
Sec. 226.52(a)(1) if it is not charged to the account. For example, 
Sec. 226.52(a)(1) does not prohibit a card issuer from requiring a 
consumer to provide funds at account opening pledged as security for the 
account that exceed 25 percent of the credit limit at account opening so 
long as those funds are not obtained from the account.
    52(a)(3) Rule of construction.
    1. Fees or charges otherwise prohibited by law. Section 226.52(a) 
does not authorize the imposition or payment of fees or charges 
otherwise prohibited by law. For example, see 16 CFR 310.4(a)(4).
    52(b) Limitations on penalty fees.
    1. Fees for violating the account terms or other requirements. For 
purposes of Sec. 226.52(b), a fee includes any charge imposed by a card 
issuer based on an act or omission that violates the terms of the 
account or any other requirements imposed by the card issuer with 
respect to the account, other than charges attributable to periodic 
interest rates. Accordingly, for purposes of Sec. 226.52(b), a fee does 
not include charges attributable to an increase in an annual percentage 
rate based on an act or omission that violates the terms or other 
requirements of an account.
    i. The following are examples of fees that are subject to the 
limitations in Sec. 226.52(b) or are prohibited by Sec. 226.52(b)
    A. Late payment fees and any other fees imposed by a card issuer if 
an account becomes delinquent or if a payment is not received by a 
particular date.
    B. Returned payment fees and any other fees imposed by a card issuer 
if a payment received via check, automated clearing house, or other 
payment method is returned.
    C. Any fee or charge for an over-the-limit transaction as defined in 
Sec. 226.56(a), to the extent the imposition of such a fee or charge is 
permitted by Sec. 226.56.
    D. Any fee imposed by a card issuer if payment on a check that 
accesses a credit card account is declined.
    E. Any fee or charge for a transaction that the card issuer declines 
to authorize. See Sec. 226.52(b)(2)(i)(B).

[[Page 754]]

    F. Any fee imposed by a card issuer based on account inactivity 
(including the consumer's failure to use the account for a particular 
number or dollar amount of transactions or a particular type of 
transaction). See Sec. 226.52(b)(2)(i)(B).
    G. Any fee imposed by a card issuer based on the closure or 
termination of an account. See Sec. 226.52(b)(2)(i)(B).
    ii. The following are examples of fees to which Sec. 226.52(b) does 
not apply
    A. Balance transfer fees.
    B. Cash advance fees.
    C. Foreign transaction fees.
    D. Annual fees and other fees for the issuance or availability of 
credit described in Sec. 226.5a(b)(2), except to the extent that such 
fees are based on account inactivity. See Sec. 226.52(b)(2)(i)(B).
    E. Fees for insurance described in Sec. 226.4(b)(7) or debt 
cancellation or debt suspension coverage described in Sec. 226.4(b)(10) 
written in connection with a credit transaction, provided that such fees 
are not imposed as a result of a violation of the account terms or other 
requirements of an account.
    F. Fees for making an expedited payment (to the extent permitted by 
Sec. 226.10(e)).
    G. Fees for optional services (such as travel insurance).
    H. Fees for reissuing a lost or stolen card.
    2. Rounding to nearest whole dollar. A card issuer may round any fee 
that complies with Sec. 226.52(b) to the nearest whole dollar. For 
example, if Sec. 226.52(b) permits a card issuer to impose a late 
payment fee of $21.50, the card issuer may round that amount up to the 
nearest whole dollar and impose a late payment fee of $22. However, if 
the late payment fee permitted by Sec. 226.52(b) were $21.49, the card 
issuer would not be permitted to round that amount up to $22, although 
the card issuer could round that amount down and impose a late payment 
fee of $21.
    52(b)(1) General rule.
    1. Relationship between Sec. 226.52(b)(1)(i), (b)(1)(ii), and 
(b)(2).
    i. Relationship between Sec. 226.52(b)(1)(i) and (b)(1)(ii). A card 
issuer may impose a fee for violating the terms or other requirements of 
an account pursuant to either Sec. 226.52(b)(1)(i) or (b)(1)(ii).
    A. A card issuer that complies with the safe harbors in Sec. 
226.52(b)(1)(ii) is not required to determine that its fees represent a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of a type of violation under Sec. 226.52(b)(1)(i).
    B. A card issuer may impose a fee for one type of violation pursuant 
to Sec. 226.52(b)(1)(i) and may impose a fee for a different type of 
violation pursuant to Sec. 226.52(b)(1)(ii). For example, a card issuer 
may impose a late payment fee of $30 based on a cost determination 
pursuant to Sec. 226.52(b)(1)(i) but impose returned payment and over-
the-limit fees of $25 or $35 pursuant to the safe harbors in Sec. 
226.52(b)(1)(ii).
    C. A card issuer that previously based the amount of a penalty fee 
for a particular type of violation on a cost determination pursuant to 
Sec. 226.52(b)(1)(i) may begin to impose a penalty fee for that type of 
violation that is consistent with Sec. 226.52(b)(1)(ii) at any time 
(subject to the notice requirements in Sec. 226.9), provided that the 
first fee imposed pursuant to Sec. 226.52(b)(1)(ii) is consistent with 
Sec. 226.52(b)(1)(ii)(A). For example, assume that a late payment 
occurs on January 15 and that, based on a cost determination pursuant to 
Sec. 226.52(b)(1)(i), the card issuer imposes a $30 late payment fee. 
Another late payment occurs on July 15. The card issuer may impose 
another $30 late payment fee pursuant to Sec. 226.52(b)(1)(i) or may 
impose a $25 late payment fee pursuant to Sec. 226.52(b)(1)(ii)(A). 
However, the card issuer may not impose a $35 late payment fee pursuant 
to Sec. 226.52(b)(1)(ii)(B). If the card issuer imposes a $25 fee 
pursuant to Sec. 226.52(b)(1)(ii)(A) for the July 15 late payment and 
another late payment occurs on September 15, the card issuer may impose 
a $35 fee for the September 15 late payment pursuant to Sec. 
226.52(b)(1)(ii)(B).
    ii. Relationship between Sec. 226.52(b)(1) and (b)(2). Section 
226.52(b)(1) does not permit a card issuer to impose a fee that is 
inconsistent with the prohibitions in Sec. 226.52(b)(2). For example, 
if Sec. 226.52(b)(2)(i) prohibits the card issuer from imposing a late 
payment fee that exceeds $15, Sec. 226.52(b)(1)(ii) does not permit the 
card issuer to impose a higher late payment fee.
    52(b)(1)(i) Fees based on costs.
    1. Costs incurred as a result of violations. Section 226.52(b)(1)(i) 
does not require a card issuer to base a fee on the costs incurred as a 
result of a specific violation of the terms or other requirements of an 
account. Instead, for purposes of Sec. 226.52(b)(1)(i), a card issuer 
must have determined that a fee for violating the terms or other 
requirements of an account represents a reasonable proportion of the 
costs incurred by the card issuer as a result of that type of violation. 
A card issuer may make a single determination for all of its credit card 
portfolios or may make separate determinations for each portfolio. The 
factors relevant to this determination include
    i. The number of violations of a particular type experienced by the 
card issuer during a prior period of reasonable length (for example, a 
period of twelve months).
    ii. The costs incurred by the card issuer during that period as a 
result of those violations.
    iii. At the card issuer's option, the number of fees imposed by the 
card issuer as a result of those violations during that period that the 
card issuer reasonably estimates it will

[[Page 755]]

be unable to collect. See comment 52(b)(1)(i)-5.
    iv. At the card issuer's option, reasonable estimates for an 
upcoming period of changes in the number of violations of that type, the 
resulting costs, and the number of fees that the card issuer will be 
unable to collect. See illustrative examples in comments 52(b)(1)(i)-6 
through -9.
    2. Amounts excluded from cost analysis. The following amounts are 
not costs incurred by a card issuer as a result of violations of the 
terms or other requirements of an account for purposes of Sec. 
226.52(b)(1)(i)
    i. Losses and associated costs (including the cost of holding 
reserves against potential losses and the cost of funding delinquent 
accounts).
    ii. Costs associated with evaluating whether consumers who have not 
violated the terms or other requirements of an account are likely to do 
so in the future (such as the costs associated with underwriting new 
accounts). However, once a violation of the terms or other requirements 
of an account has occurred, the costs associated with preventing 
additional violations for a reasonable period of time are costs incurred 
by a card issuer as a result of violations of the terms or other 
requirements of an account for purposes of Sec. 226.52(b)(1)(i).
    3. Third party charges. As a general matter, amounts charged to the 
card issuer by a third party as a result of a violation of the terms or 
other requirements of an account are costs incurred by the card issuer 
for purposes of Sec. 226.52(b)(1)(i). For example, if a card issuer is 
charged a specific amount by a third party for each returned payment, 
that amount is a cost incurred by the card issuer as a result of 
returned payments. However, if the amount is charged to the card issuer 
by an affiliate or subsidiary of the card issuer, the card issuer must 
have determined that the charge represents a reasonable proportion of 
the costs incurred by the affiliate or subsidiary as a result of the 
type of violation. For example, if an affiliate of a card issuer 
provides collection services to the card issuer on delinquent accounts, 
the card issuer must have determined that the amounts charged to the 
card issuer by the affiliate for such services represent a reasonable 
proportion of the costs incurred by the affiliate as a result of late 
payments.
    4. Amounts charged by other card issuers. The fact that a card 
issuer's fees for violating the terms or other requirements of an 
account are comparable to fees assessed by other card issuers does not 
satisfy the requirements of Sec. 226.52(b)(1)(i).
    5. Uncollected fees. For purposes of Sec. 226.52(b)(1)(i), a card 
issuer may consider fees that it is unable to collect when determining 
the appropriate fee amount. Fees that the card issuer is unable to 
collect include fees imposed on accounts that have been charged off by 
the card issuer, fees that have been discharged in bankruptcy, and fees 
that the card issuer is required to waive in order to comply with a 
legal requirement (such as a requirement imposed by 12 CFR part 226 or 
50 U.S.C. app. 527). However, fees that the card issuer chooses not to 
impose or chooses not to collect (such as fees the card issuer chooses 
to waive at the request of the consumer or under a workout or temporary 
hardship arrangement) are not relevant for purposes of this 
determination. See illustrative examples in comments 52(b)(2)(i)-6 
through -9.
    6. Late payment fees. i. Costs incurred as a result of late 
payments. For purposes of Sec. 226.52(b)(1)(i), the costs incurred by a 
card issuer as a result of late payments include the costs associated 
with the collection of late payments, such as the costs associated with 
notifying consumers of delinquencies and resolving delinquencies 
(including the establishment of workout and temporary hardship 
arrangements).
    ii. Examples.
    A. Late payment fee based on past delinquencies and costs. Assume 
that, during year one, a card issuer experienced 1 million delinquencies 
and incurred $26 million in costs as a result of those delinquencies. 
For purposes of Sec. 226.52(b)(1)(i), a $26 late payment fee would 
represent a reasonable proportion of the total costs incurred by the 
card issuer as a result of late payments during year two.
    B. Adjustment based on fees card issuer is unable to collect. Same 
facts as above except that the card issuer imposed a late payment fee 
for each of the 1 million delinquencies experienced during year one but 
was unable to collect 25% of those fees (in other words, the card issuer 
was unable to collect 250,000 fees, leaving a total of 750,000 late 
payments for which the card issuer did collect or could have collected a 
fee). For purposes of Sec. 226.52(b)(2)(i), a late payment fee of $35 
would represent a reasonable proportion of the total costs incurred by 
the card issuer as a result of late payments during year two.
    C. Adjustment based on reasonable estimate of future changes. Same 
facts as paragraphs A. and B. above except the card issuer reasonably 
estimates that--based on past delinquency rates and other factors 
relevant to potential delinquency rates for year two--it will experience 
a 2% decrease in delinquencies during year two (in other words, 20,000 
fewer delinquencies for a total of 980,000). The card issuer also 
reasonably estimates that it will be unable to collect the same 
percentage of fees (25%) during year two as during year one (in other 
words, the card issuer will be unable to collect 245,000 fees, leaving a 
total of 735,000 late payments for which the card issuer will be able to 
collect a fee). The card issuer also reasonably estimates that--based on 
past changes in costs incurred as a result of delinquencies

[[Page 756]]

and other factors relevant to potential costs for year two--it will 
experience a 5% increase in costs during year two (in other words, $1.3 
million in additional costs for a total of $27.3 million). For purposes 
of Sec. 226.52(b)(1)(i), a $37 late payment fee would represent a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of late payments during year two.
    7. Returned payment fees. i. Costs incurred as a result of returned 
payments. For purposes of Sec. 226.52(b)(1)(i), the costs incurred by a 
card issuer as a result of returned payments include
    A. Costs associated with processing returned payments and 
reconciling the card issuer's systems and accounts to reflect returned 
payments;
    B. Costs associated with investigating potential fraud with respect 
to returned payments; and
    C. Costs associated with notifying the consumer of the returned 
payment and arranging for a new payment.
    ii. Examples.
    A. Returned payment fee based on past returns and costs. Assume 
that, during year one, a card issuer experienced 150,000 returned 
payments and incurred $3.1 million in costs as a result of those 
returned payments. For purposes of Sec. 226.52(b)(1)(i), a $21 returned 
payment fee would represent a reasonable proportion of the total costs 
incurred by the card issuer as a result of returned payments during year 
two.
    B. Adjustment based on fees card issuer is unable to collect. Same 
facts as above except that the card issuer imposed a returned payment 
fee for each of the 150,000 returned payments experienced during year 
one but was unable to collect 15% of those fees (in other words, the 
card issuer was unable to collect 22,500 fees, leaving a total of 
127,500 returned payments for which the card issuer did collect or could 
have collected a fee). For purposes of Sec. 226.52(b)(2)(i), a returned 
payment fee of $24 would represent a reasonable proportion of the total 
costs incurred by the card issuer as a result of returned payments 
during year two.
    C. Adjustment based on reasonable estimate of future changes. Same 
facts as paragraphs A. and B. above except the card issuer reasonably 
estimates that--based on past returned payment rates and other factors 
relevant to potential returned payment rates for year two--it will 
experience a 2% increase in returned payments during year two (in other 
words, 3,000 additional returned payments for a total of 153,000). The 
card issuer also reasonably estimates that it will be unable to collect 
25% of returned payment fees during year two (in other words, the card 
issuer will be unable to collect 38,250 fees, leaving a total of 114,750 
returned payments for which the card issuer will be able to collect a 
fee). The card issuer also reasonably estimates that--based on past 
changes in costs incurred as a result of returned payments and other 
factors relevant to potential costs for year two--it will experience a 
1% decrease in costs during year two (in other words, a $31,000 
reduction in costs for a total of $3.069 million). For purposes of Sec. 
226.52(b)(1)(i), a $27 returned payment fee would represent a reasonable 
proportion of the total costs incurred by the card issuer as a result of 
returned payments during year two.
    8. Over-the-limit fees. i. Costs incurred as a result of over-the-
limit transactions. For purposes of Sec. 226.52(b)(1)(i), the costs 
incurred by a card issuer as a result of over-the-limit transactions 
include
    A. Costs associated with determining whether to authorize over-the-
limit transactions; and
    B. Costs associated with notifying the consumer that the credit 
limit has been exceeded and arranging for payments to reduce the balance 
below the credit limit.
    ii. Costs not incurred as a result of over-the-limit transactions. 
For purposes of Sec. 226.52(b)(1)(i), costs associated with obtaining 
the affirmative consent of consumers to the card issuer's payment of 
transactions that exceed the credit limit consistent with Sec. 226.56 
are not costs incurred by a card issuer as a result of over-the-limit 
transactions.
    iii. Examples.
    A. Over-the-limit fee based on past fees and costs. Assume that, 
during year one, a card issuer authorized 600,000 over-the-limit 
transactions and incurred $4.5 million in costs as a result of those 
over-the-limit transactions. However, because of the affirmative consent 
requirements in Sec. 226.56, the card issuer was only permitted to 
impose 200,000 over-the-limit fees during year one. For purposes of 
Sec. 226.52(b)(1)(i), a $23 over-the-limit fee would represent a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of over-the-limit transactions during year two.
    B. Adjustment based on fees card issuer is unable to collect. Same 
facts as above except that the card issuer was unable to collect 30% of 
the 200,000 over-the-limit fees imposed during year one (in other words, 
the card issuer was unable to collect 60,000 fees, leaving a total of 
140,000 over-the-limit transactions for which the card issuer did 
collect or could have collected a fee). For purposes of Sec. 
226.52(b)(2)(i), an over-the-limit fee of $32 would represent a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of over-the-limit transactions during year two.
    C. Adjustment based on reasonable estimate of future changes. Same 
facts as paragraphs A. and B. above except the card issuer reasonably 
estimates that--based on past over-the-limit transaction rates, the 
percentages of over-the-limit transactions that

[[Page 757]]

resulted in an over-the-limit fee in the past (consistent with Sec. 
226.56), and factors relevant to potential changes in those rates and 
percentages for year two--it will authorize approximately the same 
number of over-the-limit transactions during year two (600,000) and 
impose approximately the same number of over-the-limit fees (200,000). 
The card issuer also reasonably estimates that it will be unable to 
collect the same percentage of fees (30%) during year two as during year 
one (in other words, the card issuer was unable to collect 60,000 fees, 
leaving a total of 140,000 over-the-limit transactions for which the 
card issuer will be able to collect a fee). The card issuer also 
reasonably estimates that--based on past changes in costs incurred as a 
result of over-the-limit transactions and other factors relevant to 
potential costs for year two--it will experience a 6% decrease in costs 
during year two (in other words, a $270,000 reduction in costs for a 
total of $4.23 million). For purposes of Sec. 226.52(b)(1)(i), a $30 
over-the-limit fee would represent a reasonable proportion of the total 
costs incurred by the card issuer as a result of over-the-limit 
transactions during year two.
    9. Declined access check fees. i. Costs incurred as a result of 
declined access checks. For purposes of Sec. 226.52(b)(1)(i), the costs 
incurred by a card issuer as a result of declining payment on a check 
that accesses a credit card account include
    A. Costs associated with determining whether to decline payment on 
access checks;
    B. Costs associated with processing declined access checks and 
reconciling the card issuer's systems and accounts to reflect declined 
access checks;
    C. Costs associated with investigating potential fraud with respect 
to declined access checks; and
    D. Costs associated with notifying the consumer and the merchant or 
other party that accepted the access check that payment on the check has 
been declined.
    ii. Example. Assume that, during year one, a card issuer declined 
100,000 access checks and incurred $2 million in costs as a result of 
those declined checks. The card issuer imposed a fee for each declined 
access check but was unable to collect 10% of those fees (in other 
words, the card issuer was unable to collect 10,000 fees, leaving a 
total of 90,000 declined access checks for which the card issuer did 
collect or could have collected a fee). For purposes of Sec. 
226.52(b)(1)(i), a $22 declined access check fee would represent a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of declined access checks during year two.
    52(b)(1)(ii) Safe harbors.
    1. Multiple violations of same type.
    i. Same billing cycle or next six billing cycles. A card issuer 
cannot impose a fee for a violation pursuant to Sec. 
226.52(b)(1)(ii)(B) unless a fee has previously been imposed for the 
same type of violation pursuant to Sec. 226.52(b)(1)(ii)(A). Once a fee 
has been imposed for a violation pursuant to Sec. 226.52(b)(1)(ii)(A), 
the card issuer may impose a fee pursuant to Sec. 226.52(b)(1)(ii)(B) 
for any subsequent violation of the same type until that type of 
violation has not occurred for a period of six consecutive complete 
billing cycles. A fee has been imposed for purposes of Sec. 
226.52(b)(1)(ii) even if the card issuer waives or rebates all or part 
of the fee.
    A. Late payments. For purposes of Sec. 226.52(b)(1)(ii), a late 
payment occurs during the billing cycle in which the payment may first 
be treated as late consistent with the requirements of 12 CFR Part 226 
and the terms or other requirements of the account.
    B. Returned payments. For purposes of Sec. 226.52(b)(1)(ii), a 
returned payment occurs during the billing cycle in which the payment is 
returned to the card issuer.
    C. Transactions that exceed the credit limit. For purposes of Sec. 
226.52(b)(1)(ii), a transaction that exceeds the credit limit for an 
account occurs during the billing cycle in which the transaction occurs 
or is authorized by the card issuer.
    D. Declined access checks. For purposes of Sec. 226.52(b)(1)(ii), a 
check that accesses a credit card account is declined during the billing 
cycle in which the card issuer declines payment on the check.
    ii. Relationship to Sec. Sec. 226.52(b)(2)(ii) and 226.56(j)(1). If 
multiple violations are based on the same event or transaction such that 
Sec. 226.52(b)(2)(ii) prohibits the card issuer from imposing more than 
one fee, the event or transaction constitutes a single violation for 
purposes of Sec. 226.52(b)(1)(ii). Furthermore, consistent with Sec. 
226.56(j)(1)(i), no more than one violation for exceeding an account's 
credit limit can occur during a single billing cycle for purposes of 
Sec. 226.52(b)(1)(ii). However, Sec. 226.52(b)(2)(ii) does not 
prohibit a card issuer from imposing fees for exceeding the credit limit 
in consecutive billing cycles based on the same over-the-limit 
transaction to the extent permitted by Sec. 226.56(j)(1). In these 
circumstances, the second and third over-the-limit fees permitted by 
Sec. 226.56(j)(1) may be imposed pursuant to Sec. 226.52(b)(1)(ii)(B). 
See comment 52(b)(2)(ii)-1.
    iii. Examples. The following examples illustrate the application of 
Sec. 226.52(b)(1)(ii)(A) and (b)(1)(ii)(B) with respect to credit card 
accounts under an open-end (not home-secured) consumer credit plan that 
are not charge card accounts. For purposes of these examples, assume 
that the billing cycles for the account begin on the first day of the 
month and end on the last day of the month and that the payment due date 
for the account is the twenty-fifth day of the month.
    A. Violations of same type (late payments). A required minimum 
periodic payment of $50 is

[[Page 758]]

due on March 25. On March 26, a late payment has occurred because no 
payment has been received. Accordingly, consistent with Sec. 
226.52(b)(1)(ii)(A), the card issuer imposes a $25 late payment fee on 
March 26. In order for the card issuer to impose a $35 late payment fee 
pursuant to Sec. 226.52(b)(1)(ii)(B), a second late payment must occur 
during the April, May, June, July, August, or September billing cycles.
    (1) The card issuer does not receive any payment during the March 
billing cycle. A required minimum periodic payment of $100 is due on 
April 25. On April 20, the card issuer receives a $50 payment. No 
further payment is received during the April billing cycle. Accordingly, 
consistent with Sec. 226.52(b)(1)(ii)(B), the card issuer may impose a 
$35 late payment fee on April 26. Furthermore, the card issuer may 
impose a $35 late payment fee for any late payment that occurs during 
the May, June, July, August, September, or October billing cycles.
    (2) Same facts as in paragraph A. above. On March 30, the card 
issuer receives a $50 payment and the required minimum periodic payments 
for the April, May, June, July, August, and September billing cycles are 
received on or before the payment due date. A required minimum periodic 
payment of $60 is due on October 25. On October 26, a late payment has 
occurred because the required minimum periodic payment due on October 25 
has not been received. However, because this late payment did not occur 
during the six billing cycles following the March billing cycle, Sec. 
226.52(b)(1)(ii) only permits the card issuer to impose a late payment 
fee of $25.
    B. Violations of different types (late payment and over the credit 
limit). The credit limit for an account is $1,000. Consistent with Sec. 
226.56, the consumer has affirmatively consented to the payment of 
transactions that exceed the credit limit. A required minimum periodic 
payment of $30 is due on August 25. On August 26, a late payment has 
occurred because no payment has been received. Accordingly, consistent 
with Sec. 226.52(b)(1)(ii)(A), the card issuer imposes a $25 late 
payment fee on August 26. On August 30, the card issuer receives a $30 
payment. On September 10, a transaction causes the account balance to 
increase to $1,150, which exceeds the account's $1,000 credit limit. On 
September 11, a second transaction increases the account balance to 
$1,350. On September 23, the card issuer receives the $50 required 
minimum periodic payment due on September 25, which reduces the account 
balance to $1,300. On September 30, the card issuer imposes a $25 over-
the-limit fee, consistent with Sec. 226.52(b)(1)(ii)(A). On October 26, 
a late payment has occurred because the $60 required minimum periodic 
payment due on October 25 has not been received. Accordingly, consistent 
with Sec. 226.52(b)(1)(ii)(B), the card issuer imposes a $35 late 
payment fee on October 26.
    C. Violations of different types (late payment and returned 
payment). A required minimum periodic payment of $50 is due on July 25. 
On July 26, a late payment has occurred because no payment has been 
received. Accordingly, consistent with Sec. 226.52(b)(1)(ii)(A), the 
card issuer imposes a $25 late payment fee on July 26. On July 30, the 
card issuer receives a $50 payment. A required minimum periodic payment 
of $50 is due on August 25. On August 24, a $50 payment is received. On 
August 27, the $50 payment is returned to the card issuer for 
insufficient funds. In these circumstances, Sec. 226.52(b)(2)(ii) 
permits the card issuer to impose either a late payment fee or a 
returned payment fee but not both because the late payment and the 
returned payment result from the same event or transaction. Accordingly, 
for purposes of Sec. 226.52(b)(1)(ii), the event or transaction 
constitutes a single violation. However, if the card issuer imposes a 
late payment fee, Sec. 226.52(b)(1)(ii)(B) permits the issuer to impose 
a fee of $35 because the late payment occurred during the six billing 
cycles following the July billing cycle. In contrast, if the card issuer 
imposes a returned payment fee, the amount of the fee may be no more 
than $25 pursuant to Sec. 226.52(b)(1)(ii)(A).
    2. Adjustments based on Consumer Price Index. For purposes of Sec. 
226.52(b)(1)(ii)(A) and (b)(1)(ii)(B), the Board shall calculate each 
year price level adjusted amounts using the Consumer Price Index in 
effect on June 1 of that year. When the cumulative change in the 
adjusted minimum value derived from applying the annual Consumer Price 
level to the current amounts in Sec. 226.52(b)(1)(ii)(A) and 
(b)(1)(ii)(B) has risen by a whole dollar, those amounts will be 
increased by $1.00. Similarly, when the cumulative change in the 
adjusted minimum value derived from applying the annual Consumer Price 
level to the current amounts in Sec. 226.52(b)(1)(ii)(A) and 
(b)(1)(ii)(B) has decreased by a whole dollar, those amounts will be 
decreased by $1.00. The Board will publish adjustments to the amounts in 
Sec. 226.52(b)(1)(ii)(A) and (b)(1)(ii)(B).
    3. Delinquent balance for charge card accounts. Section 
226.52(b)(1)(ii)(C) provides that, when a charge card issuer that 
requires payment of outstanding balances in full at the end of each 
billing cycle has not received the required payment for two or more 
consecutive billing cycles, the card issuer may impose a late payment 
fee that does not exceed three percent of the delinquent balance. For 
purposes of Sec. 226.52(b)(1)(ii)(C), the delinquent balance is any 
previously billed amount that remains unpaid at the time the late 
payment fee is imposed pursuant to Sec. 226.52(b)(1)(ii)(C). Consistent 
with Sec. 226.52(b)(2)(ii), a charge card issuer that imposes a fee 
pursuant to Sec. 226.52(b)(1)(ii)(C)

[[Page 759]]

with respect to a late payment may not impose a fee pursuant to Sec. 
226.52(b)(1)(ii)(B) with respect to the same late payment. The following 
examples illustrate the application of Sec. 226.52(b)(1)(ii)(C)
    i. Assume that a charge card issuer requires payment of outstanding 
balances in full at the end of each billing cycle and that the billing 
cycles for the account begin on the first day of the month and end on 
the last day of the month. At the end of the June billing cycle, the 
account has a balance of $1,000. On July 5, the card issuer provides a 
periodic statement disclosing the $1,000 balance consistent with Sec. 
226.7. During the July billing cycle, the account is used for $300 in 
transactions, increasing the balance to $1,300. At the end of the July 
billing cycle, no payment has been received and the card issuer imposes 
a $25 late payment fee consistent with Sec. 226.52(b)(1)(ii)(A). On 
August 5, the card issuer provides a periodic statement disclosing the 
$1,325 balance consistent with Sec. 226.7. During the August billing 
cycle, the account is used for $200 in transactions, increasing the 
balance to $1,525. At the end of the August billing cycle, no payment 
has been received. Consistent with Sec. 226.52(b)(1)(ii)(C), the card 
issuer may impose a late payment fee of $40, which is 3% of the $1,325 
balance that was due at the end of the August billing cycle. Section 
226.52(b)(1)(ii)(C) does not permit the card issuer to include the $200 
in transactions that occurred during the August billing cycle.
    ii. Same facts as above except that, on August 25, a $100 payment is 
received. Consistent with Sec. 226.52(b)(1)(ii)(C), the card issuer may 
impose a late payment fee of $37, which is 3% of the unpaid portion of 
the $1,325 balance that was due at the end of the August billing cycle 
($1,225).
    iii. Same facts as in paragraph A. above except that, on August 25, 
a $200 payment is received. Consistent with Sec. 226.52(b)(1)(ii)(C), 
the card issuer may impose a late payment fee of $34, which is 3% of the 
unpaid portion of the $1,325 balance that was due at the end of the 
August billing cycle ($1,125). In the alternative, the card issuer may 
impose a late payment fee of $35 consistent with Sec. 
226.52(b)(1)(ii)(B). However, Sec. 226.52(b)(2)(ii) prohibits the card 
issuer from imposing both fees.
    52(b)(2) Prohibited fees.
    1. Relationship to Sec. 226.52(b)(1). A card issuer does not comply 
with Sec. 226.52(b) if it imposes a fee that is inconsistent with the 
prohibitions in Sec. 226.52(b)(2). Thus, the prohibitions in Sec. 
226.52(b)(2) apply even if a fee is consistent with Sec. 
226.52(b)(1)(i) or (b)(1)(ii). For example, even if a card issuer has 
determined for purposes of Sec. 226.52(b)(1)(i) that a $27 fee 
represents a reasonable proportion of the total costs incurred by the 
card issuer as a result of a particular type of violation, Sec. 
226.52(b)(2)(i) prohibits the card issuer from imposing that fee if the 
dollar amount associated with the violation is less than $27. Similarly, 
even if Sec. 226.52(b)(1)(ii) permits a card issuer to impose a $25 
fee, Sec. 226.52(b)(2)(i) prohibits the card issuer from imposing that 
fee if the dollar amount associated with the violation is less than $25.
    52(b)(2)(i) Fees that exceed dollar amount associated with 
violation.
    1. Late payment fees. For purposes of Sec. 226.52(b)(2)(i), the 
dollar amount associated with a late payment is the amount of the 
required minimum periodic payment due immediately prior to assessment of 
the late payment fee. Thus, Sec. 226.52(b)(2)(i)(A) prohibits a card 
issuer from imposing a late payment fee that exceeds the amount of that 
required minimum periodic payment. For example
    i. Assume that a $15 required minimum periodic payment is due on 
September 25. The card issuer does not receive any payment on or before 
September 25. On September 26, the card issuer imposes a late payment 
fee. For purposes of Sec. 226.52(b)(2)(i), the dollar amount associated 
with the late payment is the amount of the required minimum periodic 
payment due on September 25 ($15). Thus, under Sec. 226.52(b)(2)(i)(A), 
the amount of that fee cannot exceed $15 (even if a higher fee would be 
permitted under Sec. 226.52(b)(1)).
    ii. Same facts as above except that, on September 25, the card 
issuer receives a $10 payment. No further payments are received. On 
September 26, the card issuer imposes a late payment fee. For purposes 
of Sec. 226.52(b)(2)(i), the dollar amount associated with the late 
payment is the full amount of the required minimum periodic payment due 
on September 25 ($15), rather than the unpaid portion of that payment 
($5). Thus, under Sec. 226.52(b)(2)(i)(A), the amount of the late 
payment fee cannot exceed $15 (even if a higher fee would be permitted 
under Sec. 226.52(b)(1)).
    iii. Assume that a $15 required minimum periodic payment is due on 
October 28 and the billing cycle for the account closes on October 31. 
The card issuer does not receive any payment on or before November 3. On 
November 3, the card issuer determines that the required minimum 
periodic payment due on November 28 is $50. On November 5, the card 
issuer imposes a late payment fee. For purposes of Sec. 
226.52(b)(2)(i), the dollar amount associated with the late payment is 
the amount of the required minimum periodic payment due on October 28 
($15), rather than the amount of the required minimum periodic payment 
due on November 28 ($50). Thus, under Sec. 226.52(b)(2)(i)(A), the 
amount of that fee cannot exceed $15 (even if a higher fee would be 
permitted under Sec. 226.52(b)(1)).
    2. Returned payment fees. For purposes of Sec. 226.52(b)(2)(i), the 
dollar amount associated

[[Page 760]]

with a returned payment is the amount of the required minimum periodic 
payment due immediately prior to the date on which the payment is 
returned to the card issuer. Thus, Sec. 226.52(b)(2)(i)(A) prohibits a 
card issuer from imposing a returned payment fee that exceeds the amount 
of that required minimum periodic payment. However, if a payment has 
been returned and is submitted again for payment by the card issuer, 
there is no additional dollar amount associated with a subsequent return 
of that payment and Sec. 226.52(b)(2)(i)(B) prohibits the card issuer 
from imposing an additional returned payment fee. For example
    i. Assume that the billing cycles for an account begin on the first 
day of the month and end on the last day of the month and that the 
payment due date is the twenty-fifth day of the month. A minimum payment 
of $15 is due on March 25. The card issuer receives a check for $100 on 
March 23, which is returned to the card issuer for insufficient funds on 
March 26. For purposes of Sec. 226.52(b)(2)(i), the dollar amount 
associated with the returned payment is the amount of the required 
minimum periodic payment due on March 25 ($15). Thus, Sec. 
226.52(b)(2)(i)(A) prohibits the card issuer from imposing a returned 
payment fee that exceeds $15 (even if a higher fee would be permitted 
under Sec. 226.52(b)(1)). Furthermore, Sec. 226.52(b)(2)(ii) prohibits 
the card issuer from assessing both a late payment fee and a returned 
payment fee in these circumstances. See comment 52(b)(2)(ii)-1.
    ii. Same facts as above except that the card issuer receives the 
$100 check on March 31 and the check is returned for insufficient funds 
on April 2. The minimum payment due on April 25 is $30. For purposes of 
Sec. 226.52(b)(2)(i), the dollar amount associated with the returned 
payment is the amount of the required minimum periodic payment due on 
March 25 ($15), rather than the amount of the required minimum periodic 
payment due on April 25 ($30). Thus, Sec. 226.52(b)(2)(i)(A) prohibits 
the card issuer from imposing a returned payment fee that exceeds $15 
(even if a higher fee would be permitted under Sec. 226.52(b)(1)). 
Furthermore, Sec. 226.52(b)(2)(ii) prohibits the card issuer from 
assessing both a late payment fee and a returned payment fee in these 
circumstances. See comment 52(b)(2)(ii)-1.
    iii. Same facts as paragraph i. above except that, on March 28, the 
card issuer presents the $100 check for payment a second time. On April 
1, the check is again returned for insufficient funds. Section 
226.52(b)(2)(i)(B) prohibits the card issuer from imposing a returned 
payment fee based on the return of the payment on April 1.
    iv. Assume that the billing cycles for an account begin on the first 
day of the month and end on the last day of the month and that the 
payment due date is the twenty-fifth day of the month. A minimum payment 
of $15 is due on August 25. The card issuer receives a check for $15 on 
August 23, which is not returned. The card issuer receives a check for 
$50 on September 5, which is returned to the card issuer for 
insufficient funds on September 7. Section 226.52(b)(2)(i)(B) does not 
prohibit the card issuer from imposing a returned payment fee in these 
circumstances. Instead, for purposes of Sec. 226.52(b)(2)(i), the 
dollar amount associated with the returned payment is the amount of the 
required minimum periodic payment due on August 25 ($15). Thus, Sec. 
226.52(b)(2)(i)(A) prohibits the card issuer from imposing a returned 
payment fee that exceeds $15 (even if a higher fee would be permitted 
under Sec. 226.52(b)(1)).
    3. Over-the-limit fees. For purposes of Sec. 226.52(b)(2)(i), the 
dollar amount associated with extensions of credit in excess of the 
credit limit for an account is the total amount of credit extended by 
the card issuer in excess of the credit limit during the billing cycle 
in which the over-the-limit fee is imposed. Thus, Sec. 
226.52(b)(2)(i)(A) prohibits a card issuer from imposing an over-the-
limit fee that exceeds that amount. Nothing in Sec. 226.52(b) permits a 
card issuer to impose an over-the-limit fee if imposition of the fee is 
inconsistent with Sec. 226.56. The following examples illustrate the 
application of Sec. 226.52(b)(2)(i)(A) to over-the-limit fees
    i. Assume that the billing cycles for a credit card account with a 
credit limit of $5,000 begin on the first day of the month and end on 
the last day of the month. Assume also that, consistent with Sec. 
226.56, the consumer has affirmatively consented to the payment of 
transactions that exceed the credit limit. On March 1, the account has a 
$4,950 balance. On March 6, a $60 transaction is charged to the account, 
increasing the balance to $5,010. On March 25, a $5 transaction is 
charged to the account, increasing the balance to $5,015. On the last 
day of the billing cycle (March 31), the card issuer imposes an over-
the-limit fee. For purposes of Sec. 226.52(b)(2)(i), the dollar amount 
associated with the extensions of credit in excess of the credit limit 
is the total amount of credit extended by the card issuer in excess of 
the credit limit during the March billing cycle ($15). Thus, Sec. 
226.52(b)(2)(i)(A) prohibits the card issuer from imposing an over-the-
limit fee that exceeds $15 (even if a higher fee would be permitted 
under Sec. 226.52(b)(1)).
    ii. Same facts as above except that, on March 26, the card issuer 
receives a payment of $20, reducing the balance below the credit limit 
to $4,995. Nevertheless, for purposes of Sec. 226.52(b)(2)(i), the 
dollar amount associated with the extensions of credit in excess of the 
credit limit is the total amount of credit extended by the card issuer 
in excess of the credit limit during the March billing cycle ($15). 
Thus, consistent with

[[Page 761]]

Sec. 226.52(b)(2)(i)(A), the card issuer may impose an over-the-limit 
fee of $15.
    4. Declined access check fees. For purposes of Sec. 
226.52(b)(2)(i), the dollar amount associated with declining payment on 
a check that accesses a credit card account is the amount of the check. 
Thus, when a check that accesses a credit card account is declined, 
Sec. 226.52(b)(2)(i)(A) prohibits a card issuer from imposing a fee 
that exceeds the amount of that check. For example, assume that a check 
that accesses a credit card account is used as payment for a $50 
transaction, but payment on the check is declined by the card issuer 
because the transaction would have exceeded the credit limit for the 
account. For purposes of Sec. 226.52(b)(2)(i), the dollar amount 
associated with the declined check is the amount of the check ($50). 
Thus, Sec. 226.52(b)(2)(i)(A) prohibits the card issuer from imposing a 
fee that exceeds $50. However, the amount of this fee must also comply 
with Sec. 226.52(b)(1)(i) or (b)(1)(ii).
    5. Inactivity fees. Section 226.52(b)(2)(i)(B)(2) prohibits a card 
issuer from imposing a fee with respect to a credit card account under 
an open-end (not home-secured) consumer credit plan based on inactivity 
on that account (including the consumer's failure to use the account for 
a particular number or dollar amount of transactions or a particular 
type of transaction). For example, Sec. 226.52(b)(2)(i)(B)(2) prohibits 
a card issuer from imposing a $50 fee when a credit card account under 
an open-end (not home-secured) consumer credit plan is not used for at 
least $2,000 in purchases over the course of a year. Similarly, Sec. 
226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50 annual 
fee on all accounts of a particular type but waiving the fee on any 
account that is used for at least $2,000 in purchases over the course of 
a year if the card issuer promotes the waiver or rebate of the annual 
fee for purposes of Sec. 226.55(e). However, if the card issuer does 
not promote the waiver or rebate of the annual fee for purposes of Sec. 
226.55(e), Sec. 226.52(b)(2)(i)(B)(2) does not prohibit a card issuer 
from considering account activity along with other factors when deciding 
whether to waive or rebate annual fees on individual accounts (such as 
in response to a consumer's request).
    6. Closed account fees. Section 226.52(b)(2)(i)(B)(3) prohibits a 
card issuer from imposing a fee based on the closure or termination of 
an account. For example, 226.52(b)(2)(i)(B)(3) prohibits a card issuer 
from
    i. Imposing a one-time fee to consumers who close their accounts.
    ii. Imposing a periodic fee (such as an annual fee, a monthly 
maintenance fee, or a closed account fee) after an account is closed or 
terminated if that fee was not imposed prior to closure or termination. 
This prohibition applies even if the fee was disclosed prior to closure 
or termination. See also comment 55(d)-1.
    iii. Increasing a periodic fee (such as an annual fee or a monthly 
maintenance fee) after an account is closed or terminated. However, a 
card issuer is not prohibited from continuing to impose a periodic fee 
that was imposed before the account was closed or terminated.
    52(b)(2)(ii) Multiple fees based on single event or transaction.
    1. Single event or transaction. Section 226.52(b)(2)(ii) prohibits a 
card issuer from imposing more than one fee for violating the terms or 
other requirements of an account based on a single event or transaction. 
If Sec. 226.56(j)(1) permits a card issuer to impose fees for exceeding 
the credit limit in consecutive billing cycles based on the same over-
the-limit transaction, those fees are not based on a single event or 
transaction for purposes of Sec. 226.52(b)(2)(ii). The following 
examples illustrate the application of Sec. 226.52(b)(2)(ii). Assume 
for purposes of these examples that the billing cycles for a credit card 
account begin on the first day of the month and end on the last day of 
the month and that the payment due date for the account is the twenty-
fifth day of the month.
    i. Assume that the required minimum periodic payment due on March 25 
is $20. On March 26, the card issuer has not received any payment and 
imposes a late payment fee. Consistent with Sec. Sec. 
226.52(b)(1)(ii)(A) and (b)(2)(i), the card issuer may impose a $20 late 
payment fee on March 26. However, Sec. 226.52(b)(2)(ii) prohibits the 
card issuer from imposing an additional late payment fee if the $20 
minimum payment has not been received by a subsequent date (such as 
March 31).
    A. On April 3, the card issuer provides a periodic statement 
disclosing that a $70 required minimum periodic payment is due on April 
25. This minimum payment includes the $20 minimum payment due on March 
25 and the $20 late payment fee imposed on March 26. On April 20, the 
card issuer receives a $20 payment. No additional payments are received 
during the April billing cycle. Section 226.52(b)(2)(ii) does not 
prohibit the card issuer from imposing a late payment fee based on the 
consumer's failure to make the $70 required minimum periodic payment on 
or before April 25. Accordingly, consistent with Sec. 
226.52(b)(1)(ii)(B) and (b)(2)(i), the card issuer may impose a $35 late 
payment fee on April 26.
    B. On April 3, the card issuer provides a periodic statement 
disclosing that a $20 required minimum periodic payment is due on April 
25. This minimum payment does not include the $20 minimum payment due on 
March 25 or the $20 late payment fee imposed on March 26. On April 20, 
the card issuer receives a $20 payment. No additional payments are 
received during the April billing

[[Page 762]]

cycle. Because the card issuer has received the required minimum 
periodic payment due on April 25 and because Sec. 226.52(b)(2)(ii) 
prohibits the card issuer from imposing a second late payment fee based 
on the consumer's failure to make the $20 minimum payment due on March 
25, the card issuer cannot impose a late payment fee in these 
circumstances.
    ii. Assume that the required minimum periodic payment due on March 
25 is $30.
    A. On March 25, the card issuer receives a check for $50, but the 
check is returned for insufficient funds on March 27. Consistent with 
Sec. Sec. 226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may 
impose a late payment fee of $25 or a returned payment fee of $25. 
However, Sec. 226.52(b)(2)(ii) prohibits the card issuer from imposing 
both fees because those fees would be based on a single event or 
transaction.
    B. Same facts as paragraph ii.A. above except that that card issuer 
receives the $50 check on March 27 and the check is returned for 
insufficient funds on March 29. Consistent with Sec. Sec. 
226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a late 
payment fee of $25 or a returned payment fee of $25. However, Sec. 
226.52(b)(2)(ii) prohibits the card issuer from imposing both fees 
because those fees would be based on a single event or transaction. If 
no payment is received on or before the next payment due date (April 
25), Sec. 226.52(b)(2)(ii) does not prohibit the card issuer from 
imposing a late payment fee.
    iii. Assume that the required minimum periodic payment due on July 
25 is $30. On July 10, the card issuer receives a $50 payment, which is 
not returned. On July 20, the card issuer receives a $100 payment, which 
is returned for insufficient funds on July 24. Consistent with Sec. 
226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a 
returned payment fee of $25. Nothing in Sec. 226.52(b)(2)(ii) prohibits 
the imposition of this fee.
    iv. Assume that the credit limit for an account is $1,000 and that, 
consistent with Sec. 226.56, the consumer has affirmatively consented 
to the payment of transactions that exceed the credit limit. On March 
31, the balance on the account is $970 and the card issuer has not 
received the $35 required minimum periodic payment due on March 25. On 
that same date (March 31), a $70 transaction is charged to the account, 
which increases the balance to $1,040. Consistent with Sec. 
226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a late 
payment fee of $25 and an over-the-limit fee of $25. Section 
226.52(b)(2)(ii) does not prohibit the imposition of both fees because 
those fees are based on different events or transactions. No additional 
transactions are charged to the account during the March, April, or May 
billing cycles. If the account balance remains more than $35 above the 
credit limit on April 26, the card issuer may impose an over-the-limit 
fee of $35 pursuant to Sec. 226.52(b)(1)(ii)(B), to the extent 
consistent with Sec. 226.56(j)(1). Furthermore, if the account balance 
remains more than $35 above the credit limit on May 26, the card issuer 
may again impose an over-the-limit fee of $35 pursuant to Sec. 
226.52(b)(1)(ii)(B), to the extent consistent with Sec. 226.56(j)(1). 
Thereafter, Sec. 226.56(j)(1) does not permit the card issuer to impose 
additional over-the-limit fees unless another over-the-limit transaction 
occurs. However, if an over-the-limit transaction occurs during the six 
billing cycles following the May billing cycle, the card issuer may 
impose an over-the-limit fee of $35 pursuant to Sec. 
226.52(b)(1)(ii)(B).
    v. Assume that the credit limit for an account is $5,000 and that, 
consistent with Sec. 226.56, the consumer has affirmatively consented 
to the payment of transactions that exceed the credit limit. On July 23, 
the balance on the account is $4,950. On July 24, the card issuer 
receives the $100 required minimum periodic payment due on July 25, 
reducing the balance to $4,850. On July 26, a $75 transaction is charged 
to the account, which increases the balance to $4,925. On July 27, the 
$100 payment is returned for insufficient funds, increasing the balance 
to $5,025. Consistent with Sec. Sec. 226.52(b)(1)(ii)(A) and 
(b)(2)(i)(A), the card issuer may impose a returned payment fee of $25 
or an over-the-limit fee of $25. However, Sec. 226.52(b)(2)(ii) 
prohibits the card issuer from imposing both fees because those fees 
would be based on a single event or transaction.
    vi. Assume that the required minimum periodic payment due on March 
25 is $50. On March 20, the card issuer receives a check for $50, but 
the check is returned for insufficient funds on March 22. Consistent 
with Sec. Sec. 226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer 
may impose a returned payment fee of $25. On March 25, the card issuer 
receives a second check for $50, but the check is returned for 
insufficient funds on March 27. Consistent with Sec. Sec. 
226.52(b)(1)(ii)(A), (b)(1)(ii)(B), and (b)(2)(i)(A), the card issuer 
may impose a late payment fee of $25 or a returned payment fee of $35. 
However, Sec. 226.52(b)(2)(ii) prohibits the card issuer from imposing 
both fees because those fees would be based on a single event or 
transaction.
    vii. Assume that the required minimum periodic payment due on 
February 25 is $100. On February 25, the card issuer receives a check 
for $100. On March 3, the card issuer provides a periodic statement 
disclosing that a $120 required minimum periodic payment is due on March 
25. On March 4, the $100 check is returned to the card issuer for 
insufficient funds. Consistent with Sec. Sec. 226.52(b)(1)(ii)(A) and 
(b)(2)(i)(A), the card issuer may impose a late payment fee of $25 or a 
returned payment fee of $25 with respect to the $100 payment. However, 
Sec. 226.52(b)(2)(ii) prohibits the

[[Page 763]]

card issuer from imposing both fees because those fees would be based on 
a single event or transaction. On March 20, the card issuer receives a 
$120 check, which is not returned. No additional payments are received 
during the March billing cycle. Because the card issuer has received the 
required minimum periodic payment due on March 25 and because Sec. 
226.52(b)(2)(ii) prohibits the card issuer from imposing a second fee 
based on the $100 payment that was returned for insufficient funds, the 
card issuer cannot impose a late payment fee in these circumstances.

                 Section 226.53--Allocation of Payments

    1. Required minimum periodic payment. Section 226.53 addresses the 
allocation of amounts paid by the consumer in excess of the minimum 
periodic payment required by the card issuer. Section 226.53 does not 
limit or otherwise address the card issuer's ability to determine, 
consistent with applicable law and regulatory guidance, the amount of 
the required minimum periodic payment or how that payment is allocated. 
A card issuer may, but is not required to, allocate the required minimum 
periodic payment consistent with the requirements in Sec. 226.53 to the 
extent consistent with other applicable law or regulatory guidance.
    2. Applicable rates and balances. Section 226.53 permits a card 
issuer to allocate an amount paid by the consumer in excess of the 
required minimum periodic payment based on the annual percentage rates 
and balances on the day the preceding billing cycle ends, on the day the 
payment is credited to the account, or on any day in between those two 
dates. The day used by the card issuer to determine the applicable 
annual percentage rates and balances for purposes of Sec. 226.53 
generally must be consistent from billing cycle to billing cycle, 
although the card issuer may adjust this day from time to time. For 
example:
    i. Assume that the billing cycles for a credit card account start on 
the first day of the month and end on the last day of the month. On the 
date the March billing cycle ends (March 31), the account has a purchase 
balance of $500 at a promotional annual percentage rate of 5% and 
another purchase balance of $200 at a non-promotional annual percentage 
rate of 15%. On April 5, a $100 purchase to which the 15% rate applies 
is charged to the account. On April 15, the promotional rate expires and 
Sec. 226.55(b)(1) permits the card issuer to increase the rate that 
applies to the $500 balance from 5% to 18%. On April 25, the card issuer 
credits to the account $400 paid by the consumer in excess of the 
required minimum periodic payment. If the card issuer's practice is to 
allocate payments based on the rates and balances on the last day of the 
prior billing cycle, the card issuer would allocate the $400 payment to 
pay in full the $200 balance to which the 15% rate applied on March 31 
and then allocate the remaining $200 to the $500 balance to which the 5% 
rate applied on March 31. In the alternative, if the card issuer's 
practice is to allocate payments based on the rates and balances on the 
day a payment is credited to the account, the card issuer would allocate 
the $400 payment to the $500 balance to which the 18% rate applied on 
April 25.
    ii. Same facts as above except that, on April 25, the card issuer 
credits to the account $750 paid by the consumer in excess of the 
required minimum periodic payment. If the card issuer's practice is to 
allocate payments based on the rates and balances on the last day of the 
prior billing cycle, the card issuer would allocate the $750 payment to 
pay in full the $200 balance to which the 15% rate applied on March 31 
and the $500 balance to which the 5% rate applied on March 31 and then 
allocate the remaining $50 to the $100 purchase made on April 5. In the 
alternative, if the card issuer's practice is to allocate payments based 
on the rates and balances on the day a payment is credited to the 
account, the card issuer would allocate the $750 payment to pay in full 
the $500 balance to which the 18% rate applied on April 25 and then 
allocate the remaining $250 to the $300 balance to which the 15% rate 
applied on April 25.
    3. Claims or defenses under Sec. 226.12(c) and billing error 
disputes under Sec. 226.13. When a consumer has asserted a claim or 
defense against the card issuer pursuant to Sec. 226.12(c) or alleged a 
billing error under Sec. 226.13, the card issuer must apply the 
consumer's payment in a manner that avoids or minimizes any reduction in 
the amount subject to that claim, defense, or dispute. For example:
    i. Assume that a credit card account has a $500 cash advance balance 
at an annual percentage rate of 25% and a $1,000 purchase balance at an 
annual percentage rate of 17%. Assume also that $200 of the cash advance 
balance is subject to a claim or defense under Sec. 226.12(c) or a 
billing error dispute under Sec. 226.13. If the consumer pays $900 in 
excess of the required minimum periodic payment, the card issuer must 
allocate $300 of the excess payment to pay in full the portion of the 
cash advance balance that is not subject to the claim, defense, or 
dispute and then allocate the remaining $600 to the $1,000 purchase 
balance.
    ii. Same facts as above except that the consumer pays $1,400 in 
excess of the required minimum periodic payment. The card issuer must 
allocate $1,300 of the excess payment to pay in full the $300 cash 
advance balance that is not subject to the claim, defense, or dispute 
and the $1,000 purchase balance. If there are no new transactions or 
other amounts to which the remaining $100 can be allocated, the card 
issuer may apply

[[Page 764]]

that amount to the $200 cash advance balance that is subject to the 
claim, defense, or dispute. However, if the card issuer subsequently 
determines that a billing error occurred as asserted by the consumer, 
the card issuer must credit the account for the disputed amount and any 
related finance or other charges and send a correction notice consistent 
with Sec. 226.13(e).
    4. Balances with the same rate. When the same annual percentage rate 
applies to more than one balance on an account and a different annual 
percentage rate applies to at least one other balance on that account, 
Sec. 226.53 generally does not require that any particular method be 
used when allocating among the balances with the same annual percentage 
rate. Under these circumstances, a card issuer may treat the balances 
with the same rate as a single balance or separate balances. See example 
in comment 53-5.iv. However, when a balance on a credit card account is 
subject to a deferred interest or similar program that provides that a 
consumer will not be obligated to pay interest that accrues on the 
balance if the balance is paid in full prior to the expiration of a 
specified period of time, that balance must be treated as a balance with 
an annual percentage rate of zero for purposes of Sec. 226.53 during 
that period of time. For example, if an account has a $1,000 purchase 
balance and a $2,000 balance that is subject to a deferred interest 
program that expires on July 1 and a 15% annual percentage rate applies 
to both, the balances must be treated as balances with different rates 
for purposes of Sec. 226.53 until July 1. In addition, unless the card 
issuer allocates amounts paid by the consumer in excess of the required 
minimum periodic payment in the manner requested by the consumer 
pursuant to Sec. 226.53(b)(1)(ii), Sec. 226.53(b)(1)(i) requires the 
card issuer to apply any excess payments first to the $1,000 purchase 
balance except during the last two billing cycles of the deferred 
interest period (when it must be applied first to any remaining portion 
of the $2,000 balance). See example in comment 53-5.v.
    5. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed (unless otherwise stated).
    i. Assume that a credit card account has a cash advance balance of 
$500 at an annual percentage rate of 20% and a purchase balance of 
$1,500 at an annual percentage rate of 15% and that the consumer pays 
$800 in excess of the required minimum periodic payment. Under Sec. 
226.53(a), the card issuer must allocate $500 to pay off the cash 
advance balance and then allocate the remaining $300 to the purchase 
balance.
    ii. Assume that a credit card account has a cash advance balance of 
$500 at an annual percentage rate of 20% and a purchase balance of 
$1,500 at an annual percentage rate of 15% and that the consumer pays 
$400 in excess of the required minimum periodic payment. Under Sec. 
226.53(a), the card issuer must allocate the entire $400 to the cash 
advance balance.
    iii. Assume that a credit card account has a cash advance balance of 
$100 at an annual percentage rate of 20%, a purchase balance of $300 at 
an annual percentage rate of 18%, and a $600 protected balance on which 
the 12% annual percentage rate cannot be increased pursuant to Sec. 
226.55. If the consumer pays $500 in excess of the required minimum 
periodic payment, Sec. 226.53(a) requires the card issuer to allocate 
$100 to pay off the cash advance balance, $300 to pay off the purchase 
balance, and $100 to the protected balance.
    iv. Assume that a credit card account has a cash advance balance of 
$500 at an annual percentage rate of 20%, a purchase balance of $1,000 
at an annual percentage rate of 15%, and a transferred balance of $2,000 
that was previously at a discounted annual percentage rate of 5% but is 
now at an annual percentage rate of 15%. Assume also that the consumer 
pays $800 in excess of the required minimum periodic payment. Under 
Sec. 226.53(a), the card issuer must allocate $500 to pay off the cash 
advance balance and allocate the remaining $300 among the purchase 
balance and the transferred balance in the manner the card issuer deems 
appropriate.
    v. Assume that on January 1 a consumer uses a credit card account to 
make a $1,200 purchase subject to a deferred interest program under 
which interest accrues at an annual percentage rate of 15% but the 
consumer will not be obligated to pay that interest if the balance is 
paid in full on or before June 30. The billing cycles for this account 
begin on the first day of the month and end on the last day of the 
month. Each month from January through June, the consumer uses the 
account to make $200 in purchases that are not subject to the deferred 
interest program but are subject to the 15% rate
    A. Each month from February through June, the consumer pays $400 in 
excess of the required minimum periodic payment on the payment due date, 
which is the twenty-fifth of the month. Any interest that accrues on the 
purchases not subject to the deferred interest program is paid by the 
required minimum periodic payment. The card issuer does not accept 
requests from consumers regarding the allocation of excess payments 
pursuant to Sec. 226.53(b)(1)(ii). Thus, Sec. 226.53(b)(1)(i) requires 
the card issuer to allocate the $400 excess payments received on 
February 25, March 25, and April 25 consistent with Sec. 226.53(a). In 
other words, the card issuer must allocate those payments as follows: 
$200 to pay off the balance not subject to the deferred interest program 
(which is subject to the 15% rate) and the remaining

[[Page 765]]

$200 to the deferred interest balance (which is treated as a balance 
with a rate of zero). However, Sec. 226.53(b)(1)(i) requires the card 
issuer to allocate the entire $400 excess payment received on May 25 to 
the deferred interest balance. Similarly, Sec. 226.53(b)(1)(i) requires 
the card issuer to allocate the $400 excess payment received on June 25 
as follows: $200 to the deferred interest balance (which pays that 
balance in full) and the remaining $200 to the balance not subject to 
the deferred interest program.
    B. Same facts as above, except that the card issuer does accept 
requests from consumers regarding the allocation of excess payments 
pursuant to Sec. 226.53(b)(1)(ii). In addition, on April 25, the card 
issuer receives an excess payment of $800, which the consumer requests 
be allocated to pay off the $800 balance subject to the deferred 
interest program. Section 226.53(b)(1)(ii) permits the card issuer to 
allocate the $800 excess payment in the manner requested by the 
consumer.
    53(b) Special rules.
    1. Deferred interest and similar programs. Section 226.53(b)(1) 
applies to deferred interest or similar programs under which the 
consumer is not obligated to pay interest that accrues on a balance if 
that balance is paid in full prior to the expiration of a specified 
period of time. For purposes of Sec. 226.53(b)(1), ``deferred 
interest'' has the same meaning as in Sec. 226.16(h)(2) and associated 
commentary. Section 226.53(b)(1) applies regardless of whether the 
consumer is required to make payments with respect to that balance 
during the specified period. However, a grace period during which any 
credit extended may be repaid without incurring a finance charge due to 
a periodic interest rate is not a deferred interest or similar program 
for purposes of Sec. 226.53(b)(1). Similarly, a temporary annual 
percentage rate of zero percent that applies for a specified period of 
time consistent with Sec. 226.55(b)(1) is not a deferred interest or 
similar program for purposes of Sec. 226.53(b)(1) unless the consumer 
may be obligated to pay interest that accrues during the period if a 
balance is not paid in full prior to expiration of the period.
    2. Expiration of deferred interest or similar program during billing 
cycle. For purposes of Sec. 226.53(b)(1)(i), a billing cycle does not 
constitute one of the two billing cycles immediately preceding 
expiration of a deferred interest or similar program if the expiration 
date for the program precedes the payment due date in that billing 
cycle. For example, assume that a credit card account has a balance 
subject to a deferred interest program that expires on June 15. Assume 
also that the billing cycles for the account begin on the first day of 
the month and end on the last day of the month and that the required 
minimum periodic payment is due on the twenty-fifth day of the month. 
The card issuer does not accept requests from consumers regarding the 
allocation of excess payments pursuant to Sec. 226.53(b)(1)(ii). 
Because the expiration date for the deferred interest program (June 15) 
precedes the due date in the June billing cycle (June 25), Sec. 
226.53(b)(1)(i) requires the card issuer to allocate first to the 
deferred interest balance any amount paid by the consumer in excess of 
the required minimum periodic payment during the April and May billing 
cycles (as well as any amount paid by the consumer before June 15). 
However, if the deferred interest program expired on June 25 or on June 
30 (or on any day in between), Sec. 226.53(b)(1)(i) would apply only to 
the May and June billing cycles.
    3. Consumer requests. i. Generally. Section 226.53(b) does not 
require a card issuer to allocate amounts paid by the consumer in excess 
of the required minimum periodic payment in the manner requested by the 
consumer, provided that the card issuer instead allocates such amounts 
consistent with Sec. 226.53(a) or (b)(1)(i), as applicable. For 
example, a card issuer may decline consumer requests regarding payment 
allocation as a general matter or may decline such requests when a 
consumer does not comply with requirements set by the card issuer (such 
as submitting the request in writing or submitting the request prior to 
or contemporaneously with submission of the payment), provided that 
amounts paid by the consumer in excess of the required minimum periodic 
payment are allocated consistent with Sec. 226.53(a) or (b)(1)(i), as 
applicable. Similarly, a card issuer that accepts requests pursuant to 
Sec. 226.53(b)(1)(ii) or (b)(2) must allocate amounts paid by a 
consumer in excess of the required minimum periodic payment consistent 
with Sec. 226.53(a) or (b)(1)(i), as applicable, if the consumer does 
not submit a request. Furthermore, a card issuer that accepts requests 
pursuant to Sec. 226.53(b)(1)(ii) or (b)(2) must allocate consistent 
with Sec. 226.53(a) or (b)(1)(i), as applicable, if the consumer 
submits a request with which the card issuer cannot comply (such as a 
request that contains a mathematical error), unless the consumer submits 
an additional request with which the card issuer can comply.
    ii. Examples of consumer requests that satisfy Sec. 
226.53(b)(1)(ii) or (b)(2). A consumer has made a request for purposes 
of Sec. 226.53(b)(1)(ii) or (b)(2) if
    A. The consumer contacts the card issuer orally, electronically, or 
in writing and specifically requests that a payment or payments be 
allocated in a particular manner during the period of time that the 
deferred interest or similar program applies to a balance on the account 
or the period of time that a balance on the account is secured.
    B. The consumer completes and submits to the card issuer a form or 
payment coupon provided by the card issuer for the purpose of

[[Page 766]]

requesting that a payment or payments be allocated in a particular 
manner during the period of time that the deferred interest or similar 
program applies to a balance on the account or the period of time that a 
balance on the account is secured.
    C. The consumer contacts the card issuer orally, electronically, or 
in writing and specifically requests that a payment that the card issuer 
has previously allocated consistent with Sec. 226.53(a) or (b)(1)(i), 
as applicable, instead be allocated in a different manner.
    iii. Examples of consumer requests that do not satisfy Sec. 
226.53(b)(1)(ii) or (b)(2). A consumer has not made a request for 
purposes of Sec. 226.53(b)(1)(ii) or (b)(2) if
    A. The terms and conditions of the account agreement contain 
preprinted language stating that by applying to open an account, by 
using that account for transactions subject to a deferred interest or 
similar program, or by using the account to purchase property in which 
the card issuer holds a security interest the consumer requests that 
payments be allocated in a particular manner.
    B. The card issuer's on-line application contains a preselected 
check box indicating that the consumer requests that payments be 
allocated in a particular manner and the consumer does not deselect the 
box.
    C. The payment coupon provided by the card issuer contains 
preprinted language or a preselected check box stating that by 
submitting a payment the consumer requests that the payment be allocated 
in a particular manner.
    D. The card issuer requires a consumer to accept a particular 
payment allocation method as a condition of using a deferred interest or 
similar program, purchasing property in which the card issuer holds a 
security interest, making a payment, or receiving account services or 
features.

    Section 226.54--Limitations on the Imposition of Finance Charges

    54(a) Limitations on imposing finance charges as a result of the 
loss of a grace period.
    54(a)(1) General rule.
    1. Eligibility for grace period. Section 226.54 prohibits the 
imposition of finance charges as a result of the loss of a grace period 
in certain specified circumstances. Section 226.54 does not require the 
card issuer to provide a grace period. Furthermore, Sec. 226.54 does 
not prohibit the card issuer from placing limitations and conditions on 
a grace period (such as limiting application of the grace period to 
certain types of transactions or conditioning eligibility for the grace 
period on certain transactions being paid in full by a particular date), 
provided that such limitations and conditions are consistent with Sec. 
226.5(b)(2)(ii)(B) and Sec. 226.54. Finally, Sec. 226.54 does not 
limit the imposition of finance charges with respect to a transaction 
when the consumer is not eligible for a grace period on that transaction 
at the end of the billing cycle in which the transaction occurred. For 
example:
    i. Assume that the billing cycles for a credit card account begin on 
the first day of the month and end on the last day of the month and that 
the payment due date is the twenty-fifth day of the month. Assume also 
that, for purchases made during the current billing cycle (for purposes 
of this example, the June billing cycle), the grace period applies from 
the date of the purchase until the payment due date in the following 
billing cycle (July 25), subject to two conditions. First, the purchase 
balance at the end of the preceding billing cycle (the May billing 
cycle) must have been paid in full by the payment due date in the 
current billing cycle (June 25). Second, the purchase balance at the end 
of the current billing cycle (the June billing cycle) must be paid in 
full by the following payment due date (July 25). Finally, assume that 
the consumer was eligible for a grace period at the start of the June 
billing cycle (in other words, assume that the purchase balance for the 
April billing cycle was paid in full by May 25).
    A. If the consumer pays the purchase balance for the May billing 
cycle in full by June 25, then at the end of the June billing cycle the 
consumer is eligible for a grace period with respect to purchases made 
during that billing cycle. Therefore, Sec. 226.54 limits the imposition 
of finance charges with respect to purchases made during the June 
billing cycle if the consumer does not pay the purchase balance for the 
June billing cycle in full by July 25. Specifically, Sec. 
226.54(a)(1)(i) prohibits the card issuer from imposing finance charges 
based on the purchase balance at the end of the June billing cycle for 
days that precede the July billing cycle. Furthermore, Sec. 
226.54(a)(1)(ii) prohibits the card issuer from imposing finance charges 
based on any portion of the balance at the end of the June billing cycle 
that was paid on or before July 25.
    B. If the consumer does not pay the purchase balance for the May 
billing cycle in full by June 25, then the consumer is not eligible for 
a grace period with respect to purchases made during the June billing 
cycle at the end of that cycle. Therefore, Sec. 226.54 does not limit 
the imposition of finance charges with respect to purchases made during 
the June billing cycle regardless of whether the consumer pays the 
purchase balance for the June billing cycle in full by July 25.
    ii. Same facts as above except that the card issuer places only one 
condition on the provision of a grace period for purchases made during 
the current billing cycle (the June billing cycle): that the purchase 
balance at the end of the current billing cycle (the June billing cycle) 
be paid in full by the following payment due date (July 25). In

[[Page 767]]

these circumstances, Sec. 226.54 applies to the same extent as 
discussed in paragraphs i.A. and i.B. above regardless of whether the 
purchase balance for the April billing cycle was paid in full by May 25.
    2. Definition of grace period. For purposes of Sec. Sec. 
226.5(b)(2)(ii)(B) and 226.54, a grace period is a period within which 
any credit extended may be repaid without incurring a finance charge due 
to a periodic interest rate. The following are not grace periods for 
purposes of Sec. 226.54:
    i. Deferred interest and similar programs. A deferred interest or 
similar promotional program under which a consumer will not be obligated 
to pay interest that accrues on a balance if that balance is paid in 
full prior to the expiration of a specified period of time is not a 
grace period for purposes of Sec. 226.54. Thus, Sec. 226.54 does not 
prohibit the card issuer from charging accrued interest to an account 
upon expiration of a deferred interest or similar program if the balance 
was not paid in full prior to expiration (to the extent consistent with 
Sec. 226.55 and other applicable law and regulatory guidance).
    ii. Waivers or rebates of interest. As a general matter, a card 
issuer has not provided a grace period with respect to transactions for 
purposes of Sec. 226.54 if, on an individualized basis (such as in 
response to a consumer's request), the card issuer waives or rebates 
finance charges that have accrued on transactions. In addition, when a 
balance at the end of the preceding billing cycle is paid in full on or 
before the payment due date in the current billing cycle, a card issuer 
that waives or rebates trailing or residual interest accrued on that 
balance or any other transactions during the current billing cycle has 
not provided a grace period with respect to that balance or any other 
transactions for purposes of Sec. 226.54. However, if the terms of the 
account provide that all interest accrued on transactions will be waived 
or rebated if the balance for those transactions at the end of the 
billing cycle during which the transactions occurred is paid in full by 
the following payment due date, the card issuer is providing a grace 
period with respect to those transactions for purposes of Sec. 226.54. 
For example:
    A. Assume that the billing cycles for a credit card account begin on 
the first day of the month and end on the last day of the month and that 
the payment due date is the twenty-fifth day of the month. On March 31, 
the balance on the account is $1,000 and the consumer is not eligible 
for a grace period with respect to that balance because the balance at 
the end of the prior billing cycle was not paid in full on March 25. On 
April 15, the consumer uses the account for a $500 purchase. On April 
25, the card issuer receives a payment of $1,000. On May 3, the card 
issuer mails or delivers a periodic statement reflecting trailing or 
residual interest that accrued on the $1,000 balance from April 1 
through April 24 as well as interest that accrued on the $500 purchase 
from April 15 through April 30. On May 10, the consumer requests that 
the trailing or residual interest charges be waived and the card issuer 
complies. By waiving these interest charges, the card issuer has not 
provided a grace period with respect to the $1,000 balance or the $500 
purchase.
    B. Same facts as in paragraph ii.A. above except that the terms of 
the account state that trailing or residual interest will be waived in 
these circumstances or it is the card issuer's practice to waive 
trailing or residual interest in these circumstances. By waiving these 
interest charges, the card issuer has not provided a grace period with 
respect to the $1,000 balance or the $500 purchase.
    C. Assume that the billing cycles for a credit card account begin on 
the first day of the month and end on the last day of the month and that 
the payment due date is the twenty-fifth day of the month. Assume also 
that, for purchases made during the current billing cycle (for purposes 
of this example, the June billing cycle), the terms of the account 
provide that interest accrued on those purchases from the date of the 
purchase until the payment due date in the following billing cycle (July 
25) will be waived or rebated, subject to two conditions. First, the 
purchase balance at the end of the preceding billing cycle (the May 
billing cycle) must have been paid in full by the payment due date in 
the current billing cycle (June 25). Second, the purchase balance at the 
end of the current billing cycle (the June billing cycle) must be paid 
in full by the following payment due date (July 25). Under these 
circumstances, the card issuer is providing a grace period on purchases 
for purposes of Sec. 226.54. Therefore, assuming that the consumer was 
eligible for this grace period at the start of the June billing cycle 
(in other words, assuming that the purchase balance for the April 
billing cycle was paid in full by May 25) and assuming that the consumer 
pays the purchase balance for the May billing cycle in full by June 25, 
Sec. 226.54 applies to the imposition of finance charges with respect 
to purchases made during the June billing cycle. Specifically, Sec. 
226.54(a)(1)(i) prohibits the card issuer from imposing finance charges 
based on the purchase balance at the end of the June billing cycle for 
days that precede the July billing cycle. Furthermore, Sec. 
226.54(a)(1)(ii) prohibits the card issuer from imposing finance charges 
based on any portion of the balance at the end of the June billing cycle 
that was paid on or before July 25.
    3. Relationship to payment allocation requirements in Sec. 226.53. 
Card issuers must comply with the payment allocation requirements in

[[Page 768]]

Sec. 226.53 even if doing so will result in the loss of a grace period.
    4. Prohibition on two-cycle balance computation method. When a 
consumer ceases to be eligible for a grace period, Sec. 226.54(a)(1)(i) 
prohibits the card issuer from computing the finance charge using the 
two-cycle average daily balance computation method. This method 
calculates the finance charge using a balance that is the sum of the 
average daily balances for two billing cycles. The first balance is for 
the current billing cycle, and is calculated by adding the total balance 
(including or excluding new purchases and deducting payments and 
credits) for each day in the billing cycle, and then dividing by the 
number of days in the billing cycle. The second balance is for the 
preceding billing cycle.
    5. Prohibition on imposing finance charges on amounts paid within 
grace period. When a balance on a credit card account is eligible for a 
grace period and the card issuer receives payment for some but not all 
of that balance prior to the expiration of the grace period, Sec. 
226.54(a)(1)(ii) prohibits the card issuer from imposing finance charges 
on the portion of the balance paid. Card issuers are not required to use 
a particular method to comply with Sec. 226.54(a)(1)(ii). However, when 
Sec. 226.54(a)(1)(ii) applies, a card issuer is in compliance if, for 
example, it applies the consumer's payment to the balance subject to the 
grace period at the end of the preceding billing cycle (in a manner 
consistent with the payment allocation requirements in Sec. 226.53) and 
then calculates interest charges based on the amount of the balance that 
remains unpaid.
    6. Examples. Assume that the annual percentage rate for purchases on 
a credit card account is 15%. The billing cycle starts on the first day 
of the month and ends on the last day of the month. The payment due date 
for the account is the twenty-fifth day of the month. For purchases made 
during the current billing cycle, the card issuer provides a grace 
period from the date of the purchase until the payment due date in the 
following billing cycle, provided that the purchase balance at the end 
of the current billing cycle is paid in full by the following payment 
due date. For purposes of this example, assume that none of the required 
minimum periodic payment is allocated to the balances discussed. During 
the March billing cycle, the following transactions are charged to the 
account: A $100 purchase on March 10, a $200 purchase on March 15, and a 
$300 purchase on March 20. On March 25, the purchase balance for the 
February billing cycle is paid in full. Thus, for purposes of Sec. 
226.54, the consumer is eligible for a grace period on the March 
purchases. At the end of the March billing cycle (March 31), the 
consumer's total purchase balance is $600 and the consumer will not be 
charged interest on that balance if it is paid in full by the following 
due date (April 25).
    i. On April 10, a $150 purchase is charged to the account. On April 
25, the card issuer receives $500 in excess of the required minimum 
periodic payment. Section 226.54(a)(1)(i) prohibits the card issuer from 
reaching back and charging interest on any of the March transactions 
from the date of the transaction through the end of the March billing 
cycle (March 31). In these circumstances, the card issuer may comply 
with Sec. 226.54(a)(1)(ii) by applying the $500 excess payment to the 
$600 purchase balance and then charging interest only on the portion of 
the $600 purchase balance that remains unpaid ($100) from the start of 
the April billing cycle (April 1) through the end of the April billing 
cycle (April 30). In addition, the card issuer may charge interest on 
the $150 purchase from the date of the transaction (April 10) through 
the end of the April billing cycle (April 31).
    ii. Same facts as in paragraph 6. above except that, on March 18, a 
$250 cash advance is charged to the account at an annual percentage rate 
of 25%. The card issuer's grace period does not apply to cash advances, 
but the card issuer does provide a grace period on the March purchases 
because the purchase balance for the February billing cycle is paid in 
full on March 25. On April 25, the card issuer receives $600 in excess 
of the required minimum periodic payment. As required by Sec. 226.53, 
the card issuer allocates the $600 excess payment first to the balance 
with the highest annual percentage rate (the $250 cash advance balance). 
Although Sec. 226.54(a)(1)(i) prohibits the card issuer from charging 
interest on the March purchases based on days in the March billing 
cycle, the card issuer may charge interest on the $250 cash advance from 
the date of the transaction (March 18) through April 24. In these 
circumstances, the card issuer may comply with Sec. 226.54(a)(1)(ii) by 
applying the remainder of the excess payment ($350) to the $600 purchase 
balance and then charging interest only on the portion of the $600 
purchase balance that remains unpaid ($250) from the start of the April 
billing cycle (April 1) through the end of the April billing cycle 
(April 30).
    iii. Same facts as in paragraph 6. above except that the consumer 
does not pay the balance for the February billing cycle in full on March 
25 and therefore is not eligible for a grace period on the March 
purchases. Under these circumstances, Sec. 226.54 does not apply and 
the card issuer may charge interest from the date of each transaction 
through April 24 and interest on the remaining $100 from April 25 
through the end of the April billing cycle (April 25).

Section 226.55--Limitations on Increasing Annual Percentage Rates, Fees, 
                               and Charges

    55(a) General rule.

[[Page 769]]

    1. Increase in rate, fee, or charge. Section 226.55(a) prohibits 
card issuers from increasing an annual percentage rate or any fee or 
charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) on a credit card account unless specifically 
permitted by one of the exceptions in Sec. 226.55(b). Except as 
specifically provided in Sec. 226.55(b), this prohibition applies even 
if the circumstances under which an increase will occur are disclosed in 
advance. The following examples illustrate the general application of 
Sec. 226.55(a) and (b). Additional examples illustrating specific 
aspects of the exceptions in Sec. 226.55(b) are provided in the 
commentary to those exceptions.
    i. Account-opening disclosure of non-variable rate for six months, 
then variable rate. Assume that, at account opening on January 1 of year 
one, a card issuer discloses that the annual percentage rate for 
purchases is a non-variable rate of 15% and will apply for six months. 
The card issuer also discloses that, after six months, the annual 
percentage rate for purchases will be a variable rate that is currently 
18% and will be adjusted quarterly by adding a margin of 8 percentage 
points to a publicly-available index not under the card issuer's 
control. Furthermore, the card issuer discloses that the annual 
percentage rate for cash advances is the same variable rate that will 
apply to purchases after six months. Finally, the card issuer discloses 
that, to the extent consistent with Sec. 226.55 and other applicable 
law, a non-variable penalty rate of 30% may apply if the consumer makes 
a late payment. The payment due date for the account is the twenty-fifth 
day of the month and the required minimum periodic payments are applied 
to accrued interest and fees but do not reduce the purchase and cash 
advance balances.
    A. Change-in-terms rate increase for new transactions after first 
year. On January 15 of year one, the consumer uses the account to make a 
$2,000 purchase and a $500 cash advance. No other transactions are made 
on the account. At the start of each quarter, the card issuer may adjust 
the variable rate that applies to the $500 cash advance consistent with 
changes in the index (pursuant to Sec. 226.55(b)(2)). All required 
minimum periodic payments are received on or before the payment due date 
until May of year one, when the payment due on May 25 is received by the 
creditor on May 28. At this time, the card issuer is prohibited by Sec. 
226.55 from increasing the rates that apply to the $2,000 purchase, the 
$500 cash advance, or future purchases and cash advances. Six months 
after account opening (July 1), the card issuer may begin to accrue 
interest on the $2,000 purchase at the previously-disclosed variable 
rate determined using an 8-point margin (pursuant to Sec. 
226.55(b)(1)). Because no other increases in rate were disclosed at 
account opening, the card issuer may not subsequently increase the 
variable rate that applies to the $2,000 purchase and the $500 cash 
advance (except due to increases in the index pursuant to Sec. 
226.55(b)(2)). On November 16, the card issuer provides a notice 
pursuant to Sec. 226.9(c) informing the consumer of a new variable rate 
that will apply on January 1 of year two (calculated using the same 
index and an increased margin of 12 percentage points). On December 15, 
the consumer makes a $100 purchase. On January 1 of year two, the card 
issuer may increase the margin used to determine the variable rate that 
applies to new purchases to 12 percentage points (pursuant to Sec. 
226.55(b)(3)). However, Sec. 226.55(b)(3)(ii) does not permit the card 
issuer to apply the variable rate determined using the 12-point margin 
to the $2,000 purchase balance. Furthermore, although the $100 purchase 
occurred more than 14 days after provision of the Sec. 226.9(c) notice, 
Sec. 226.55(b)(3)(iii) does not permit the card issuer to apply the 
variable rate determined using the 12-point margin to that purchase 
because it occurred during the first year after account opening. On 
January 15 of year two, the consumer makes a $300 purchase. The card 
issuer may apply the variable rate determined using the 12-point margin 
to the $300 purchase.
    B. Account becomes more than 60 days delinquent during first year. 
Same facts as above except that the required minimum periodic payment 
due on May 25 of year one is not received by the card issuer until July 
30 of year one. Because the card issuer received the required minimum 
periodic payment more than 60 days after the payment due date, Sec. 
226.55(b)(4) permits the card issuer to increase the annual percentage 
rate applicable to the $2,000 purchase, the $500 cash advance, and 
future purchases and cash advances. However, Sec. 226.55(b)(4)(i) 
requires the card issuer to first comply with the notice requirements in 
Sec. 226.9(g). Thus, if the card issuer provided a Sec. 226.9(g) 
notice on July 25 stating that all rates on the account would be 
increased to the 30% penalty rate, the card issuer could apply that rate 
beginning on September 8 to all balances and to future transactions.
    ii. Account-opening disclosure of non-variable rate for six months, 
then increased non-variable rate for six months, then variable rate; 
change-in-terms rate increase for new transactions after first year. 
Assume that, at account opening on January 1 of year one, a card issuer 
discloses that the annual percentage rate for purchases will increase as 
follows: A non-variable rate of 5% for six months; a non-variable rate 
of 10% for an additional six months; and thereafter a variable rate that 
is currently 15% and will be adjusted monthly by adding a margin of 5 
percentage points to a publicly-available index not under the card 
issuer's control. The payment due date for the account is the fifteenth 
day of the

[[Page 770]]

month and the required minimum periodic payments are applied to accrued 
interest and fees but do not reduce the purchase balance. On January 15 
of year one, the consumer uses the account to make a $1,500 purchase. 
Six months after account opening (July 1), the card issuer may begin to 
accrue interest on the $1,500 purchase at the previously-disclosed 10% 
non-variable rate (pursuant to Sec. 226.55(b)(1)). On September 15, the 
consumer uses the account for a $700 purchase. On November 16, the card 
issuer provides a notice pursuant to Sec. 226.9(c) informing the 
consumer of a new variable rate that will apply on January 1 of year two 
(calculated using the same index and an increased margin of 8 percentage 
points). One year after account opening (January 1 of year two), the 
card issuer may begin accruing interest on the $2,200 purchase balance 
at the previously-disclosed variable rate determined using a 5-point 
margin (pursuant to Sec. 226.55(b)(1)). Section 226.55 does not permit 
the card issuer to apply the variable rate determined using the 8-point 
margin to the $2,200 purchase balance. Furthermore, Sec. 226.55 does 
not permit the card issuer to subsequently increase the variable rate 
determined using the 5-point margin that applies to the $2,200 purchase 
balance (except due to increases in the index pursuant to Sec. 
226.55(b)(2)). The card issuer may, however, apply the variable rate 
determined using the 8-point margin to purchases made on or after 
January 1 of year two (pursuant to Sec. 226.55(b)(3)).
    iii. Change-in-terms rate increase for new transactions after first 
year; penalty rate increase after first year. Assume that, at account 
opening on January 1 of year one, a card issuer discloses that the 
annual percentage rate for purchases is a variable rate determined by 
adding a margin of 6 percentage points to a publicly-available index 
outside of the card issuer's control. The card issuer also discloses 
that, to the extent consistent with Sec. 226.55 and other applicable 
law, a non-variable penalty rate of 28% may apply if the consumer makes 
a late payment. The due date for the account is the fifteenth of the 
month. On May 30 of year two, the account has a purchase balance of 
$1,000. On May 31, the card issuer provides a notice pursuant to Sec. 
226.9(c) informing the consumer of a new variable rate that will apply 
on July 16 for all purchases made on or after June 15 (calculated by 
using the same index and an increased margin of 8 percentage points). On 
June 14, the consumer makes a $500 purchase. On June 15, the consumer 
makes a $200 purchase. On July 1, the card issuer has not received the 
payment due on June 15 and provides the consumer with a notice pursuant 
to Sec. 226.9(g) stating that the 28% penalty rate will apply as of 
August 15 to all transactions made on or after July 16 and that, if the 
consumer becomes more than 60 days late, the penalty rate will apply to 
all balances on the account. On July 17, the consumer makes a $300 
purchase.
    A. Account does not become more than 60 days delinquent. The payment 
due on June 15 of year two is received on July 2. On July 16, Sec. 
226.55(b)(3)(ii) permits the card issuer to apply the variable rate 
determined using the 8-point margin disclosed in the Sec. 226.9(c) 
notice to the $200 purchase made on June 15 but does not permit the card 
issuer to apply this rate to the $1,500 purchase balance. On August 15, 
Sec. 226.55(b)(3)(ii) permits the card issuer to apply the 28% penalty 
rate disclosed at account opening and in the Sec. 226.9(g) notice to 
the $300 purchase made on July 17 but does not permit the card issuer to 
apply this rate to the $1,500 purchase balance (which remains at the 
variable rate determined using the 6-point margin) or the $200 purchase 
(which remains at the variable rate determined using the 8-point 
margin).
    B. Account becomes more than 60 days delinquent after provision of 
Sec. 226.9(g) notice. Same facts as above except the payment due on 
June 15 of year two has not been received by August 15. Section 
226.55(b)(4) permits the card issuer to apply the 28% penalty rate to 
the $1,500 purchase balance and the $200 purchase because it has not 
received the June 15 payment within 60 days after the due date. However, 
in order to do so, Sec. 226.55(b)(4)(i) requires the card issuer to 
first provide an additional notice pursuant to Sec. 226.9(g). This 
notice must be sent no earlier than August 15, which is the first day 
the account became more than 60 days' delinquent. If the notice is sent 
on August 15, the card issuer may begin accruing interest on the $1,500 
purchase balance and the $200 purchase at the 28% penalty rate beginning 
on September 29.
    2. Relationship to grace period. Nothing in Sec. 226.55 prohibits a 
card issuer from assessing interest due to the loss of a grace period to 
the extent consistent with Sec. 226.5(b)(2)(ii)(B) and Sec. 226.54. In 
addition, a card issuer has not reduced an annual percentage rate on a 
credit card account for purposes of Sec. 226.55 if the card issuer does 
not charge interest on a balance or a portion thereof based on a payment 
received prior to the expiration of a grace period. For example, if the 
annual percentage rate for purchases on an account is 15% but the card 
issuer does not charge any interest on a $500 purchase balance because 
that balance was paid in full prior to the expiration of the grace 
period, the card issuer has not reduced the 15% purchase rate to 0% for 
purposes of Sec. 226.55.
    55(b) Exceptions.
    1. Exceptions not mutually exclusive. A card issuer generally may 
increase an annual percentage rate or a fee or charge required to be 
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) 
pursuant to an exception set forth in Sec. 226.55(b) even if that 
increase would not be permitted under a different exception. For

[[Page 771]]

example, although a card issuer cannot increase an annual percentage 
rate pursuant to Sec. 226.55(b)(1) unless that rate is provided for a 
specified period of at least six months, the card issuer may increase an 
annual percentage rate during a specified period due to an increase in 
an index consistent with Sec. 226.55(b)(2). Similarly, although Sec. 
226.55(b)(3) does not permit a card issuer to increase an annual 
percentage rate during the first year after account opening, the card 
issuer may increase the rate during the first year after account opening 
pursuant to Sec. 226.55(b)(4) if the required minimum periodic payment 
is not received within 60 days after the due date. However, if Sec. 
226.55(b)(4)(ii) requires a card issuer to decrease the rate, fee, or 
charge that applies to a balance while the account is subject to a 
workout or temporary hardship arrangement or subject to 50 U.S.C. app. 
527 or a similar Federal or State statute or regulation, the card issuer 
may not impose a higher rate, fee, or charge on that balance pursuant to 
Sec. 226.55(b)(5) or (b)(6) upon completion or failure of the 
arrangement or once 50 U.S.C. app. 527 or the similar Federal or State 
statute or regulation no longer applies. For example, assume that, on 
January 1, the annual percentage rate that applies to a $1,000 balance 
is increased from 12% to 30% pursuant to Sec. 226.55(b)(4). On February 
1, the rate on that balance is decreased from 30% to 15% consistent with 
Sec. 226.55(b)(5) as a part of a workout or temporary hardship 
arrangement. On July 1, Sec. 226.55(b)(4)(ii) requires the card issuer 
to reduce the rate that applies to any remaining portion of the $1,000 
balance from 15% to 12%. If the consumer subsequently completes or fails 
to comply with the terms of the workout or temporary hardship 
arrangement, the card issuer may not increase the 12% rate that applies 
to any remaining portion of the $1,000 balance pursuant to Sec. 
226.55(b)(5).
    55(b) Exceptions.
    1. Exceptions not mutually exclusive. A card issuer generally may 
increase an annual percentage rate or a fee or charge required to be 
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) 
pursuant to an exception set forth in Sec. 226.55(b) even if that 
increase would not be permitted under a different exception. For 
example, although a card issuer cannot increase an annual percentage 
rate pursuant to Sec. 226.55(b)(1) unless that rate is provided for a 
specified period of at least six months, the card issuer may increase an 
annual percentage rate during a specified period due to an increase in 
an index consistent with Sec. 226.55(b)(2). Similarly, although Sec. 
226.55(b)(3) does not permit a card issuer to increase an annual 
percentage rate during the first year after account opening, the card 
issuer may increase the rate during the first year after account opening 
pursuant to Sec. 226.55(b)(4) if the required minimum periodic payment 
is not received within 60 days after the due date. However, if Sec. 
226.55(b)(4)(ii) requires a card issuer to decrease the rate, fee, or 
charge that applies to a balance while the account is subject to a 
workout or temporary hardship arrangement or subject to 50 U.S.C. app. 
527 or a similar Federal or State statute or regulation, the card issuer 
may not impose a higher rate, fee, or charge on that balance pursuant to 
Sec. 226.55(b)(5) or (b)(6) upon completion or failure of the 
arrangement or once 50 U.S.C. app. 527 or the similar Federal or State 
statute or regulation no longer applies. For example, assume that, on 
January 1, the annual percentage rate that applies to a $1,000 balance 
is increased from 12% to 30% pursuant to Sec. 226.55(b)(4). On February 
1, the rate on that balance is decreased from 30% to 15% consistent with 
Sec. 226.55(b)(5) as a part of a workout or temporary hardship 
arrangement. On July 1, Sec. 226.55(b)(4)(ii) requires the card issuer 
to reduce the rate that applies to any remaining portion of the $1,000 
balance from 15% to 12%. If the consumer subsequently completes or fails 
to comply with the terms of the workout or temporary hardship 
arrangement, the card issuer may not increase the 12% rate that applies 
to any remaining portion of the $1,000 balance pursuant to Sec. 
226.55(b)(5).
    2. Relationship between exceptions in Sec. 226.55(b) and notice 
requirements in Sec. 226.9. Nothing in Sec. 226.55 alters the 
requirements in Sec. 226.9(c) and (g) that creditors provide written 
notice at least 45 days prior to the effective date of certain increases 
in annual percentage rates, fees, and charges.
    i. 14-day rule in Sec. 226.55(b)(3)(ii). Although Sec. 
226.55(b)(3)(ii) permits a card issuer that discloses an increased rate 
pursuant to Sec. 226.9(c) or (g) to apply that rate to transactions 
that occur more than 14 days after provision of the notice, the card 
issuer cannot begin to accrue interest at the increased rate until that 
increase goes into effect, consistent with Sec. 226.9(c) or (g). For 
example, if on May 1 a card issuer provides a notice pursuant to Sec. 
226.9(c) stating that a rate will increase from 15% to 18% on June 15, 
Sec. 226.55(b)(3)(ii) permits the card issuer to apply the 18% rate to 
transactions that occur on or after May 16. However, neither Sec. 
226.55 nor Sec. 226.9(c) permits the card issuer to begin accruing 
interest at the 18% rate on those transactions until June 15. See 
additional examples in comment 55(b)(3)-4.
    ii. Mid-cycle increases; application of balance computation methods. 
Once an increased rate has gone into effect, the card issuer cannot 
calculate interest charges based on that increased rate for days prior 
to the effective date. Assume that, in the example in paragraph i. 
above, the billing cycles for the account begin on the first day of the 
month and end on the last day of the month. If, for example, the card 
issuer uses the average

[[Page 772]]

daily balance computation method, it cannot apply the 18% rate to the 
average daily balance for the entire June billing cycle because that 
rate did not become effective until June 15. However, the card issuer 
could apply the 15% rate to the average daily balance from June 1 
through June 14 and the 18% rate to the average daily balance from June 
15 through June 30. Similarly, if the card issuer that uses the daily 
balance computation method, it could apply the 15% rate to the daily 
balance for each day from June 1 through June 14 and the 18% rate to the 
daily balance for each day from June 15 through June 30.
    iii. Mid-cycle increases; delayed implementation of increase. If 
Sec. 226.55(b) and Sec. 226.9(b), (c), or (g) permit a card issuer to 
apply an increased annual percentage rate, fee, or charge on a date that 
is not the first day of a billing cycle, the card issuer may delay 
application of the increased rate, fee, or charge until the first day of 
the following billing cycle without relinquishing the ability to apply 
that rate, fee, or charge. Thus, in the example in paragraphs i. and ii. 
above, the card issuer could delay application of the 18% rate until the 
start of the next billing cycle (April 1) without relinquishing its 
ability to apply that rate under Sec. 226.55(b)(3). Similarly, assume 
that, at account opening on January 1, a card issuer discloses that a 
non-variable annual percentage rate of 10% will apply to purchases for 
six months and a non-variable rate of 15% will apply thereafter. The 
first day of each billing cycle for the account is the fifteenth of the 
month. If the six-month period expires on July 1, the card issuer may 
delay application of the 15% rate until the start of the next billing 
cycle (July 15) without relinquishing its ability to apply that rate 
under Sec. 226.55(b)(1).
    3. Application of a lower rate, fee, or charge. Nothing in Sec. 
226.55 prohibits a card issuer from lowering an annual percentage rate 
or a fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii). However, a card issuer that does so cannot 
subsequently increase the rate, fee, or charge unless permitted by one 
of the exceptions in Sec. 226.55(b). The following examples illustrate 
the application of the rule
    i. Application of lower rate during first year. Assume that a card 
issuer discloses at account opening on January 1 of year one that a non-
variable annual percentage rate of 15% will apply to purchases. The card 
issuer also discloses that, to the extent consistent with Sec. 226.55 
and other applicable law, a non-variable penalty rate of 30% may apply 
if the consumer's required minimum periodic payment is received after 
the payment due date, which is the tenth of the month. The required 
minimum periodic payments are applied to accrued interest and fees but 
do not reduce the purchase balance.
    A. Temporary rate returns to standard rate at expiration. On 
September 30 of year one, the account has a purchase balance of $1,400 
at the 15% rate. On October 1, the card issuer provides a notice 
pursuant to Sec. 226.9(c) informing the consumer that the rate for new 
purchases will decrease to a non-variable rate of 5% for six months 
(from October 1 through March 31 of year two) and that, beginning on 
April 1 of year two, the rate for purchases will increase to the 15% 
non-variable rate disclosed at account opening. The card issuer does not 
apply the 5% rate to the $1,400 purchase balance. On October 14 of year 
one, the consumer makes a $300 purchase at the 5% rate. On January 15 of 
year two, the consumer makes a $150 purchase at the 5% rate. On April 1 
of year two, the card issuer may begin accruing interest on the $300 
purchase and the $150 purchase at 15% as disclosed in the Sec. 226.9(c) 
notice (pursuant to Sec. 226.55(b)(1)).
    B. Penalty rate increase. Same facts as above except that the 
required minimum periodic payment due on November 10 of year one is not 
received until November 15. Section 226.55 does not permit the card 
issuer to increase any annual percentage rate on the account at this 
time. The card issuer may apply the 30% penalty rate to new transactions 
beginning on April 1 of year two pursuant to Sec. 226.55(b)(3) by 
providing a Sec. 226.9(g) notice informing the consumer of this 
increase no later than February 14 of year two. The card issuer may not, 
however, apply the 30% penalty rate to the $1,400 purchase balance as of 
September 30 of year one, the $300 purchase on October 15 of year one, 
or the $150 purchase on January 15 of year two.
    ii. Application of lower rate at end of first year. Assume that, at 
account opening on January 1 of year one, a card issuer discloses that a 
non-variable annual percentage rate of 15% will apply to purchases for 
one year and discloses that, after the first year, the card issuer will 
apply a variable rate that is currently 20% and is determined by adding 
a margin of 10 percentage points to a publicly-available index not under 
the card issuer's control. On December 31 of year one, the account has a 
purchase balance of $3,000.
    A. Notice of extension of existing temporary rate provided 
consistent with Sec. 226.55(b)(1)(i). On December 15 of year one, the 
card issuer provides a notice pursuant to Sec. 226.9(c) informing the 
consumer that the existing 15% rate will continue to apply until July 1 
of year two. The notice further states that, on July 1 of year two, the 
variable rate disclosed at account opening will apply. On July 1 of year 
two, Sec. 226.55(b)(1) permits the card issuer to apply that variable 
rate to any remaining portion of the $3,000 balance and to new 
transactions.
    B. Notice of new temporary rate provided consistent with Sec. 
226.55(b)(1)(i). On December 15 of year one, the card issuer provides a 
notice

[[Page 773]]

pursuant to Sec. 226.9(c) informing the consumer of a new variable rate 
that will apply on January 1 of year two that is lower than the variable 
rate disclosed at account opening. The new variable rate is calculated 
using the same index and a reduced margin of 8 percentage points. The 
notice further states that, on July 1 of year two, the margin will 
increase to the margin disclosed at account opening (10 percentage 
points). On July 1 of year two, Sec. 226.55(b)(1) permits the card 
issuer to increase the margin used to determine the variable rate that 
applies to new purchases to 10 percentage points and to apply that rate 
to any remaining portion of the $3,000 purchase balance.
    C. No notice provided. Same facts as in paragraph ii.B. above except 
that the card issuer does not send a notice on December 15 of year one. 
Instead, on January 1 of year two, the card issuer lowers the margin 
used to determine the variable rate to 8 percentage points and applies 
that rate to the $3,000 purchase balance and to new purchases. Section 
226.9 does not require advance notice in these circumstances. However, 
unless the account becomes more than 60 days' delinquent, Sec. 226.55 
does not permit the card issuer to subsequently increase the rate that 
applies to the $3,000 purchase balance except due to increases in the 
index (pursuant to Sec. 226.55(b)(2)).
    iii. Application of lower rate after first year. Assume that a card 
issuer discloses at account opening on January 1 of year one that a non-
variable annual percentage rate of 10% will apply to purchases for one 
year, after which that rate will increase to a non-variable rate of 15%. 
The card issuer also discloses that, to the extent consistent with Sec. 
226.55 and other applicable law, a non-variable penalty rate of 30% may 
apply if the consumer's required minimum periodic payment is received 
after the payment due date, which is the tenth of the month. The 
required minimum periodic payments are applied to accrued interest and 
fees but do not reduce the purchase balance.
    A. Effect of 14-day period. On June 30 of year two, the account has 
a purchase balance of $1,000 at the 15% rate. On July 1, the card issuer 
provides a notice pursuant to Sec. 226.9(c) informing the consumer that 
the rate for new purchases will decrease to a non-variable rate of 5% 
for six months (from July 1 through December 31 of year two) and that, 
beginning on January 1 of year three, the rate for purchases will 
increase to a non-variable rate of 17%. On July 15 of year two, the 
consumer makes a $200 purchase. On July 16, the consumer makes a $100 
purchase. On January 1 of year three, the card issuer may begin accruing 
interest on the $100 purchase at 17% (pursuant to Sec. 226.55(b)(1)). 
However, Sec. 226.55(b)(1)(ii)(B) does not permit the card issuer to 
apply the 17% rate to the $200 purchase because that transaction 
occurred within 14 days after provision of the Sec. 226.9(c) notice. 
Instead, the card issuer may apply the 15% rate that applied to 
purchases prior to provision of the Sec. 226.9(c) notice. In addition, 
if the card issuer applied the 5% rate to the $1,000 purchase balance, 
Sec. 226.55(b)(ii)(A) would not permit the card issuer to increase the 
rate that applies to that balance on January 1 of year three to a rate 
that is higher than 15% that previously applied to the balance.
    B. Penalty rate increase. Same facts as above except that the 
required minimum periodic payment due on August 25 is received on August 
30. At this time, Sec. 226.55 does not permit the card issuer to 
increase the annual percentage rates that apply to the $1,000 purchase 
balance, the $200 purchase, or the $100 purchase. Instead, those rates 
can only be increased as discussed in paragraph iii.A. above. However, 
if the card issuer provides a notice pursuant to Sec. 226.9(c) or (g) 
on September 1, Sec. 226.55(b)(3) permits the card issuer to apply an 
increased rate (such as the 17% purchase rate or the 30% penalty rate) 
to transactions that occur on or after September 16 beginning on October 
16.
    C. Application of lower temporary rate during specified period. Same 
facts as in paragraph iii. above. On June 30 of year two, the account 
has a purchase balance of $1,000 at the 15% non-variable rate. On July 
1, the card issuer provides a notice pursuant to Sec. 226.9(c) 
informing the consumer that the rate for the $1,000 balance and new 
purchases will decrease to a non-variable rate of 12% for six months 
(from July 1 through December 31 of year two) and that, beginning on 
January 1 of year three, the rate for purchases will increase to a 
variable rate that is currently 20% and is determined by adding a margin 
of 10 percentage points to a publicly-available index not under the card 
issuer's control. On August 15 of year two, the consumer makes a $500 
purchase. On October 1, the card issuer provides another notice pursuant 
to Sec. 226.9(c) informing the consumer that the rate for the $1,000 
balance, the $500 purchase, and new purchases will decrease to a non-
variable rate of 5% for six months (from October 1 of year two through 
March 31 of year three) and that, beginning on April 1 of year three, 
the rate for purchases will increase to a variable rate that is 
currently 23% and is determined by adding a margin of 13 percentage 
points to the previously-disclosed index. On November 15 of year two, 
the consumer makes a $300 purchase. On April 1 of year three, Sec. 
226.55 permits the card issuer to begin accruing interest using the 
following rates for any remaining portion of the following balances: The 
15% non-variable rate for the $1,000 balance; the variable rate 
determined using the 10-point margin for the $500 purchase; and the 
variable rate determined

[[Page 774]]

using the 13-point margin for the $300 purchase.
    4. Date on which transaction occurred. When a transaction occurred 
for purposes of Sec. 226.55 is generally determined by the date of the 
transaction. However, if a transaction that occurred within 14 days 
after provision of a Sec. 226.9(c) or (g) notice is not charged to the 
account prior to the effective date of the change or increase, the card 
issuer may treat the transaction as occurring more than 14 days after 
provision of the notice for purposes of Sec. 226.55. See example in 
comment 55(b)(3)-4.iii.B. In addition, when a merchant places a ``hold'' 
on the available credit on an account for an estimated transaction 
amount because the actual transaction amount will not be known until a 
later date, the date of the transaction for purposes of Sec. 226.55 is 
the date on which the card issuer receives the actual transaction amount 
from the merchant. See example in comment 55(b)(3)-4.iii.A.
    5. Category of transactions. For purposes of Sec. 226.55, a 
``category of transactions'' is a type or group of transactions to which 
an annual percentage rate applies that is different than the annual 
percentage rate that applies to other transactions. Similarly, a type or 
group of transactions is a ``category of transactions'' for purposes of 
Sec. 226.55 if a fee or charge required to be disclosed under Sec. 
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) applies to those 
transactions that is different than the fee or charge that applies to 
other transactions. For example, purchase transactions, cash advance 
transactions, and balance transfer transactions are separate categories 
of transactions for purposes of Sec. 226.55 if a card issuer applies 
different annual percentage rates to each. Furthermore, if, for example, 
the card issuer applies different annual percentage rates to different 
types of purchase transactions (such as one rate for purchases of 
gasoline or purchases over $100 and a different rate for all other 
purchases), each type constitutes a separate category of transactions 
for purposes of Sec. 226.55.
    55(b)(1) Temporary rate, fee, or charge exception.
    1. Relationship to Sec. 226.9(c)(2)(v)(B). A card issuer that has 
complied with the disclosure requirements in Sec. 226.9(c)(2)(v)(B) has 
also complied with the disclosure requirements in Sec. 226.55(b)(1)(i).
    2. Period of six months or longer. A temporary annual percentage 
rate, fee, or charge must apply for a specified period of six months or 
longer before a card issuer can increase that rate, fee, or charge 
pursuant to Sec. 226.55(b)(1). The specified period must expire no less 
than six months after the date on which the card issuer provides the 
consumer with the disclosures required by Sec. 226.55(b)(1)(i) or, if 
later, the date on which the account can be used for transactions to 
which the temporary rate, fee, or charge applies. Section 226.55(b)(1) 
does not prohibit a card issuer from limiting the application of a 
temporary annual percentage rate, fee, or charge to a particular 
category of transactions (such as to balance transfers or to purchases 
over $100). However, in circumstances where the card issuer limits 
application of the temporary rate, fee, or charge to a single 
transaction, the specified period must expire no less than six months 
after the date on which that transaction occurred. The following 
examples illustrate the application of Sec. 226.55(b)(1)
    i. Assume that on January 1 a card issuer offers a consumer a 5% 
annual percentage rate on purchases made during the months of January 
through June. A 15% rate will apply thereafter. On February 15, a $500 
purchase is charged to the account. On June 15, a $200 purchase is 
charged to the account. On July 1, the card issuer may begin accruing 
interest at the 15% rate on the $500 purchase and the $200 purchase 
(pursuant to Sec. 226.55(b)(1)).
    ii. Same facts as above except that on January 1 the card issuer 
offered the 5% rate on purchases beginning in the month of February. 
Section 226.55(b)(1) would not permit the card issuer to begin accruing 
interest at the 15% rate on the $500 purchase and the $200 purchase 
until August 1.
    iii. Assume that on October 31 of year one the annual percentage 
rate for purchases is 17%. On November 1, the card issuer offers the 
consumer a 0% rate for six months on purchases made during the months of 
November and December. The 17% rate will apply thereafter. On November 
15, a $500 purchase is charged to the account. On December 15, a $300 
purchase is charged to the account. On January 15 of year two, a $150 
purchase is charged to the account. Section 226.55(b)(1) would not 
permit the card issuer to begin accruing interest at the 17% rate on the 
$500 purchase and the $300 purchase until May 1 of year two. However, 
the card issuer may accrue interest at the 17% rate on the $150 purchase 
beginning on January 15 of year two.
    iv. Assume that on June 1 of year one a card issuer offers a 
consumer a 0% annual percentage rate for six months on the purchase of 
an appliance. An 18% rate will apply thereafter. On September 1, a 
$5,000 transaction is charged to the account for the purchase of an 
appliance. Section 226.55(b)(1) would not permit the card issuer to 
begin accruing interest at the 18% rate on the $5,000 transaction until 
March 1 of year two.
    v. Assume that on May 31 of year one the annual percentage rate for 
purchases is 15%. On June 1, the card issuer offers the consumer a 5% 
rate for six months on a balance transfer of at least $1,000. The 15% 
rate will apply thereafter. On June 15, a $3,000 balance is transferred 
to the account. On July 15, a $200 purchase is charged to the account. 
Section 226.55(b)(1) would not permit the card

[[Page 775]]

issuer to begin accruing interest at the 15% rate on the $3,000 
transferred balance until December 15. However, the card issuer may 
accrue interest at the 15% rate on the $200 purchase beginning on July 
15.
    vi. Same facts as in paragraph v. above except that the card issuer 
offers the 5% rate for six months on all balance transfers of at least 
$1,000 during the month of June and a $2,000 balance is transferred to 
the account on June 30 (in addition to the $3,000 balance transfer on 
June 15). Because the 5% rate is not limited to a particular 
transaction, Sec. 226.55(b)(1) permits the card issuer to begin 
accruing interest on the $3,000 and $2,000 transferred balances on 
December 1.
    vii. Assume that a card issuer discloses at account opening on 
January 1 of year one that the annual fee for the account is $0 until 
January 1 of year two, when the fee will increase to $50. On January 1 
of year two, the card issuer may impose the $50 annual fee. However, the 
issuer must also comply with the notice requirements in Sec. 226.9(e).
    viii. Assume that a card issuer discloses at account opening on 
January 1 of year one that the monthly maintenance fee for the account 
is $0 until July 1 of year one, when the fee will increase to $10. 
Beginning on July 1 of year one, the card issuer may impose the $10 
monthly maintenance fee (to the extent consistent with Sec. 226.52(a)).
    3. Deferred interest and similar promotional programs. i. 
Application of Sec. 226.55. The general prohibition in Sec. 226.55(a) 
applies to the imposition of accrued interest upon the expiration of a 
deferred interest or similar promotional program under which the 
consumer is not obligated to pay interest that accrues on a balance if 
that balance is paid in full prior to the expiration of a specified 
period of time. However, the exception in Sec. 226.55(b)(1) also 
applies to these programs, provided that the specified period is six 
months or longer and that, prior to the commencement of the period, the 
card issuer discloses the length of the period and the rate at which 
interest will accrue on the balance subject to the deferred interest or 
similar program if that balance is not paid in full prior to expiration 
of the period. See comment 9(c)(2)(v)-9. For purposes of Sec. 226.55, 
``deferred interest'' has the same meaning as in Sec. 226.16(h)(2) and 
associated commentary.
    ii. Examples.
    A. Deferred interest offer at account opening. Assume that, at 
account opening on January 1 of year one, the card issuer discloses the 
following with respect to a deferred interest program: ``No interest on 
purchases made in January of year one if paid in full by December 31 of 
year one. If the balance is not paid in full by that date, interest will 
be imposed from the transaction date at a rate of 20%.'' On January 15 
of year one, the consumer makes a purchase of $2,000. No other 
transactions are made on the account. The terms of the deferred interest 
program require the consumer to make minimum periodic payments with 
respect to the deferred interest balance, and the payment due on April 1 
is not received until April 10. Section 226.55 does not permit the card 
issuer to charge to the account interest that has accrued on the $2,000 
purchase at this time. Furthermore, if the consumer pays the $2,000 
purchase in full on or before December 31 of year one, Sec. 226.55 does 
not permit the card issuer to charge to the account any interest that 
has accrued on that purchase. If, however, the $2,000 purchase has not 
been paid in full by January 1 of year two, Sec. 226.55(b)(1) permits 
the card issuer to charge to the account the interest accrued on that 
purchase at the 20% rate during year one (to the extent consistent with 
other applicable law).
    B. Deferred interest offer after account opening. Assume that a card 
issuer discloses at account opening on January 1 of year one that the 
rate that applies to purchases is a variable annual percentage rate that 
is currently 18% and will be adjusted quarterly by adding a margin of 8 
percentage points to a publicly-available index not under the card 
issuer's control. The card issuer also discloses that, to the extent 
consistent with Sec. 226.55 and other applicable law, a non-variable 
penalty rate of 30% may apply if the consumer's required minimum 
periodic payment is received after the payment due date, which is the 
first of the month. On June 30 of year two, the consumer uses the 
account for a $1,000 purchase in response to an offer of a deferred 
interest program. Under the terms of this program, interest on the 
purchase will accrue at the variable rate for purchases but the consumer 
will not be obligated to pay that interest if the purchase is paid in 
full by December 31 of year three. The terms of the deferred interest 
program require the consumer to make minimum periodic payments with 
respect to the deferred interest balance, and the payment due on 
September 1 of year two is not received until September 6. Section 
226.55 does not permit the card issuer to charge to the account interest 
that has accrued on the $1,000 purchase at this time. Furthermore, if 
the consumer pays the $1,000 purchase in full on or before December 31 
of year three, Sec. 226.55 does not permit the card issuer to charge to 
the account any interest that has accrued on that purchase. On December 
31 of year three, the $1,000 purchase has been paid in full. Under these 
circumstances, the card issuer may not charge any interest accrued on 
the $1,000 purchase.
    C. Application of Sec. 226.55(b)(4) to deferred interest programs. 
Same facts as in paragraph ii.B. above except that, on November 2 of 
year two, the card issuer has not received the required minimum periodic 
payments due on September 1, October 1, or November

[[Page 776]]

1 of year two and sends a Sec. 226.9(c) or (g) notice stating that 
interest accrued on the $1,000 purchase since June 30 of year two will 
be charged to the account on December 17 of year two and thereafter 
interest will be charged on the $1,000 purchase consistent with the 
variable rate for purchases. On December 17 of year two, Sec. 
226.55(b)(4) permits the card issuer to charge to the account interest 
accrued on the $1,000 purchase since June 30 of year two and Sec. 
226.55(b)(3) permits the card issuer to begin charging interest on the 
$1,000 purchase consistent with the variable rate for purchases. 
However, if the card issuer receives the required minimum periodic 
payments due on January 1, February 1, March 1, April 1, May 1, and June 
1 of year three, Sec. 226.55(b)(4)(ii) requires the card issuer to 
cease charging the account for interest on the $1,000 purchase no later 
than the first day of the next billing cycle. See comment 55(b)(4)-
3.iii. However, Sec. 226.55(b)(4)(ii) does not require the card issuer 
to waive or credit the account for interest accrued on the $1,000 
purchase since June 30 of year two. If the $1,000 purchase is paid in 
full on December 31 of year three, the card issuer is not permitted to 
charge to the account interest accrued on the $1,000 purchase after June 
1 of year three.
    4. Contingent or discretionary increases. Section 226.55(b)(1) 
permits a card issuer to increase a temporary annual percentage rate, 
fee, or charge upon the expiration of a specified period of time. 
However, Sec. 226.55(b)(1) does not permit a card issuer to apply an 
increased rate, fee, or charge that is contingent on a particular event 
or occurrence or that may be applied at the card issuer's discretion. 
The following examples illustrate rate increases that are not permitted 
by Sec. 226.55
    i. Assume that a card issuer discloses at account opening on January 
1 of year one that a non-variable annual percentage rate of 15% applies 
to purchases but that all rates on an account may be increased to a non-
variable penalty rate of 30% if a consumer's required minimum periodic 
payment is received after the payment due date, which is the fifteenth 
of the month. On March 1, the account has a $2,000 purchase balance. The 
payment due on March 15 is not received until March 20. Section 226.55 
does not permit the card issuer to apply the 30% penalty rate to the 
$2,000 purchase balance. However, pursuant to Sec. 226.55(b)(3), the 
card issuer could provide a Sec. 226.9(c) or (g) notice on or before 
November 16 informing the consumer that, on January 1 of year two, the 
30% rate (or a different rate) will apply to new transactions.
    ii. Assume that a card issuer discloses at account opening on 
January 1 of year one that a non-variable annual percentage rate of 5% 
applies to transferred balances but that this rate will increase to a 
non-variable rate of 18% if the consumer does not use the account for at 
least $200 in purchases each billing cycle. On July 1, the consumer 
transfers a balance of $4,000 to the account. During the October billing 
cycle, the consumer uses the account for $150 in purchases. Section 
226.55 does not permit the card issuer to apply the 18% rate to the 
$4,000 transferred balance or the $150 in purchases. However, pursuant 
to Sec. 226.55(b)(3), the card issuer could provide a Sec. 226.9(c) or 
(g) notice on or before November 16 informing the consumer that, on 
January 1 of year two, the 18% rate (or a different rate) will apply to 
new transactions.
    iii. Assume that a card issuer discloses at account opening on 
January 1 of year one that the annual fee for the account is $10 but may 
be increased to $50 if a consumer's required minimum periodic payment is 
received after the payment due date, which is the fifteenth of the 
month. The payment due on July 15 is not received until July 23. Section 
226.55 does not permit the card issuer to impose the $50 annual fee at 
this time. Furthermore, Sec. 226.55(b)(3) does not permit the card 
issuer to increase the $10 annual fee during the first year after 
account opening. However, Sec. 226.55(b)(3) does permit the card issuer 
to impose the $50 fee (or a different fee) on January 1 of year two if, 
on or before November 16 of year one, the issuer informs the consumer of 
the increased fee consistent with Sec. 226.9(c) and the consumer does 
not reject that increase pursuant to Sec. 226.9(h).
    iv. Assume that a card issuer discloses at account opening on 
January 1 of year one that the annual fee for a credit card account 
under an open-end (not home-secured) consumer credit plan is $0 but may 
be increased to $100 if the consumer's balance in a deposit account 
provided by the card issuer or its affiliate or subsidiary falls below 
$5,000. On June 1 of year one, the balance on the deposit account is 
$4,500. Section 226.55 does not permit the card issuer to impose the 
$100 annual fee at this time. Furthermore, Sec. 226.55(b)(3) does not 
permit the card issuer to increase the $0 annual fee during the first 
year after account opening. However, Sec. 226.55(b)(3) does permit the 
card issuer to impose the $100 fee (or a different fee) on January 1 of 
year two if, on or before November 16 of year one, the issuer informs 
the consumer of the increased fee consistent with Sec. 226.9(c) and the 
consumer does not reject that increase pursuant to Sec. 226.9(h).
    5. Application of increased fees and charges. Section 
226.55(b)(1)(ii) limits the ability of a card issuer to apply an 
increased fee or charge to certain transactions. However, to the extent 
consistent with Sec. 226.55(b)(3), (c), and (d), a card issuer 
generally is not prohibited from increasing a fee or charge that applies 
to the account as a whole. See comments 55(c)(1)-3 and 55(d)-1.
    55(b)(2) Variable rate exception.

[[Page 777]]

    1. Increases due to increase in index. Section 226.55(b)(2) provides 
that an annual percentage rate that varies according to an index that is 
not under the card issuer's control and is available to the general 
public may be increased due to an increase in the index. This section 
does not permit a card issuer to increase the rate by changing the 
method used to determine a rate that varies with an index (such as by 
increasing the margin), even if that change will not result in an 
immediate increase. However, from time to time, a card issuer may change 
the day on which index values are measured to determine changes to the 
rate.
    2. Index not under card issuer's control. A card issuer may increase 
a variable annual percentage rate pursuant to Sec. 226.55(b)(2) only if 
the increase is based on an index or indices outside the card issuer's 
control. For purposes of Sec. 226.55(b)(2), an index is under the card 
issuer's control if:
    i. The index is the card issuer's own prime rate or cost of funds. A 
card issuer is permitted, however, to use a published prime rate, such 
as that in the Wall Street Journal, even if the card issuer's own prime 
rate is one of several rates used to establish the published rate.
    ii. The variable rate is subject to a fixed minimum rate or similar 
requirement that does not permit the variable rate to decrease 
consistent with reductions in the index. A card issuer is permitted, 
however, to establish a fixed maximum rate that does not permit the 
variable rate to increase consistent with increases in an index. For 
example, assume that, under the terms of an account, a variable rate 
will be adjusted monthly by adding a margin of 5 percentage points to a 
publicly-available index. When the account is opened, the index is 10% 
and therefore the variable rate is 15%. If the terms of the account 
provide that the variable rate will not decrease below 15% even if the 
index decreases below 10%, the card issuer cannot increase that rate 
pursuant to Sec. 226.55(b)(2). However, Sec. 226.55(b)(2) does not 
prohibit the card issuer from providing in the terms of the account that 
the variable rate will not increase above a certain amount (such as 
20%).
    iii. The variable rate can be calculated based on any index value 
during a period of time (such as the 90 days preceding the last day of a 
billing cycle). A card issuer is permitted, however, to provide in the 
terms of the account that the variable rate will be calculated based on 
the average index value during a specified period. In the alternative, 
the card issuer is permitted to provide in the terms of the account that 
the variable rate will be calculated based on the index value on a 
specific day (such as the last day of a billing cycle). For example, 
assume that the terms of an account provide that a variable rate will be 
adjusted at the beginning of each quarter by adding a margin of 7 
percentage points to a publicly-available index. At account opening at 
the beginning of the first quarter, the variable rate is 17% (based on 
an index value of 10%). During the first quarter, the index varies 
between 9.8% and 10.5% with an average value of 10.1%. On the last day 
of the first quarter, the index value is 10.2%. At the beginning of the 
second quarter, Sec. 226.55(b)(2) does not permit the card issuer to 
increase the variable rate to 17.5% based on the first quarter's maximum 
index value of 10.5%. However, if the terms of the account provide that 
the variable rate will be calculated based on the average index value 
during the prior quarter, Sec. 226.55(b)(2) permits the card issuer to 
increase the variable rate to 17.1% (based on the average index value of 
10.1% during the first quarter). In the alternative, if the terms of the 
account provide that the variable rate will be calculated based on the 
index value on the last day of the prior quarter, Sec. 226.55(b)(2) 
permits the card issuer to increase the variable rate to 17.2% (based on 
the index value of 10.2% on the last day of the first quarter).
    3. Publicly available. The index or indices must be available to the 
public. A publicly-available index need not be published in a newspaper, 
but it must be one the consumer can independently obtain (by telephone, 
for example) and use to verify the annual percentage rate applied to the 
account.
    4. Changing a non-variable rate to a variable rate. Section 226.55 
generally prohibits a card issuer from changing a non-variable annual 
percentage rate to a variable annual percentage rate because such a 
change can result in an increase. However, a card issuer may change a 
non-variable rate to a variable rate to the extent permitted by one of 
the exceptions in Sec. 226.55(b). For example, Sec. 226.55(b)(1) 
permits a card issuer to change a non-variable rate to a variable rate 
upon expiration of a specified period of time. Similarly, following the 
first year after the account is opened, Sec. 226.55(b)(3) permits a 
card issuer to change a non-variable rate to a variable rate with 
respect to new transactions (after complying with the notice 
requirements in Sec. 226.9(b), (c) or (g)).
    5. Changing a variable rate to a non-variable rate. Nothing in Sec. 
226.55 prohibits a card issuer from changing a variable annual 
percentage rate to an equal or lower non-variable rate. Whether the non-
variable rate is equal to or lower than the variable rate is determined 
at the time the card issuer provides the notice required by Sec. 
226.9(c). For example, assume that on March 1 a variable annual 
percentage rate that is currently 15% applies to a balance of $2,000 and 
the card issuer sends a notice pursuant to Sec. 226.9(c) informing the 
consumer that the variable rate will be converted to a non-variable rate 
of 14% effective April 15. On April 15, the card issuer may apply the 
14% non-variable rate

[[Page 778]]

to the $2,000 balance and to new transactions even if the variable rate 
on March 2 or a later date was less than 14%.
    6. Substitution of index. A card issuer may change the index and 
margin used to determine the annual percentage rate under Sec. 
226.55(b)(2) if the original index becomes unavailable, as long as 
historical fluctuations in the original and replacement indices were 
substantially similar, and as long as the replacement index and margin 
will produce a rate similar to the rate that was in effect at the time 
the original index became unavailable. If the replacement index is newly 
established and therefore does not have any rate history, it may be used 
if it produces a rate substantially similar to the rate in effect when 
the original index became unavailable.
    55(b)(3) Advance notice exception.
    1. Relationship to Sec. 226.9(h). A card issuer may not increase a 
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) pursuant to Sec. 226.55(b)(3) if the 
consumer has rejected the increased fee or charge pursuant to Sec. 
226.9(h).
    2. Notice provided pursuant to Sec. 226.9(b) and (c). If an 
increased annual percentage rate, fee, or charge is disclosed pursuant 
to both Sec. 226.9(b) and (c), that rate, fee, or charge may only be 
applied to transactions that occur more than 14 days after provision of 
the Sec. 226.9(c) notice as provided in Sec. 226.55(b)(3)(ii).
    3. Account opening.
    i. Multiple accounts with same card issuer. When a consumer has a 
credit card account with a card issuer and the consumer opens a new 
credit card account with the same card issuer (or its affiliate or 
subsidiary), the opening of the new account constitutes the opening of a 
credit card account for purposes of Sec. 226.55(b)(3)(iii) if, more 
than 30 days after the new account is opened, the consumer has the 
option to obtain additional extensions of credit on each account. For 
example, assume that, on January 1 of year one, a consumer opens a 
credit card account with a card issuer. On July 1 of year one, the 
consumer opens a second credit card account with that card issuer. On 
July 15, a $1,000 balance is transferred from the first account to the 
second account. The opening of the second account constitutes the 
opening of a credit card account for purposes of Sec. 226.55(b)(3)(iii) 
so long as, on August 1, the consumer has the option to engage in 
transactions using either account. Under these circumstances, the card 
issuer could not increase an annual percentage rate or a fee or charge 
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or 
(b)(2)(xii) on the second account pursuant to Sec. 226.55(b)(3) until 
July 1 of year two (which is one year after the second account was 
opened).
    ii. Substitution, replacement or consolidation.
    A. Generally. A credit card account has not been opened for purposes 
of Sec. 226.55(b)(3)(iii) when a credit card account issued by a card 
issuer is substituted, replaced, or consolidated with another credit 
card account issued by the same card issuer (or its affiliate or 
subsidiary). Circumstances in which a credit card account has not been 
opened for purposes of Sec. 226.55(b)(3)(iii) include when:
    (1) A retail credit card account is replaced with a cobranded 
general purpose credit card account that can be used at a wider number 
of merchants;
    (2) A credit card account is replaced with another credit card 
account offering different features;
    (3) A credit card account is consolidated or combined with one or 
more other credit card accounts into a single credit card account; or
    (4) A credit card account acquired through merger or acquisition is 
replaced with a credit card account issued by the acquiring card issuer.
    B. Limitation. A card issuer that replaces or consolidates a credit 
card account with another credit card account issued by the card issuer 
(or its affiliate or subsidiary) may not increase an annual percentage 
rate or a fee or charge required to be disclosed under Sec. 
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) in a manner otherwise 
prohibited by Sec. 226.55. For example, assume that, on January 1 of 
year one, a consumer opens a credit card account with an annual 
percentage rate of 15% for purchases. On July 1 of year one, the account 
is replaced with a credit card account that offers different features 
(such as rewards on purchases). Under these circumstances, Sec. 
226.55(b)(3)(iii) prohibits the card issuer from increasing the annual 
percentage rate for new purchases to a rate that is higher than 15% 
pursuant to Sec. 226.55(b)(3) until January 1 of year two (which is one 
year after the first account was opened).
    4. Examples.
    i. Change-in-terms rate increase; temporary rate increase; 14-day 
period. Assume that an account is opened on January 1 of year one. On 
March 14 of year two, the account has a purchase balance of $2,000 at a 
non-variable annual percentage rate of 15%. On March 15, the card issuer 
provides a notice pursuant to Sec. 226.9(c) informing the consumer that 
the rate for new purchases will increase to a non-variable rate of 18% 
on May 1. The notice further states that the 18% rate will apply for six 
months (until November 1) and that thereafter the card issuer will apply 
a variable rate that is currently 22% and is determined by adding a 
margin of 12 percentage points to a publicly-available index that is not 
under the card issuer's control. The fourteenth day after provision of 
the notice is March 29 and, on that date, the consumer makes a $200 
purchase. On March 30, the consumer makes a $1,000 purchase. On May 1, 
the card issuer may begin accruing interest

[[Page 779]]

at 18% on the $1,000 purchase made on March 30 (pursuant to Sec. 
226.55(b)(3)). Section 226.55(b)(3)(ii) does not permit the card issuer 
to apply the 18% rate to the $2,200 purchase balance as of March 29 
because that balance reflects transactions that occurred prior to or 
within 14 days after the provision of the Sec. 226.9(c) notice. After 
six months (November 2), the card issuer may begin accruing interest on 
any remaining portion of the $1,000 purchase at the previously-disclosed 
variable rate determined using the 12-point margin (pursuant to Sec. 
226.55(b)(1) and (b)(3)).
    ii. Checks that access an account. Assume that a card issuer 
discloses at account opening on January 1 of year one that the annual 
percentage rate that applies to cash advances is a variable rate that is 
currently 24% and will be adjusted quarterly by adding a margin of 14 
percentage points to a publicly available index not under the card 
issuer's control. On July 1 of year two, the card issuer provides checks 
that access the account and, pursuant to Sec. 226.9(b)(3)(i)(A), 
discloses that a promotional rate of 15% will apply to credit extended 
by use of the checks until January 1 of year three, after which the cash 
advance rate determined using the 14-point margin will apply. On July 9 
of year two, the consumer uses one of the checks to pay for a $500 
transaction. Beginning on January 1 of year three, the card issuer may 
apply the cash advance rate determined using the 14-point margin to any 
remaining portion of the $500 transaction (pursuant to Sec. 
226.55(b)(1) and (b)(3)).
    iii. Hold on available credit; 14-day period. Assume that an account 
is opened on January 1 of year one. On September 14 of year two, the 
account has a purchase balance of $2,000 at a non-variable annual 
percentage rate of 17%. On September 15, the card issuer provides a 
notice pursuant to Sec. 226.9(c) informing the consumer that the rate 
for new purchases will increase to a non-variable rate of 20% on October 
30. The fourteenth day after provision of the notice is September 29. On 
September 28, the consumer uses the credit card to check into a hotel 
and the hotel obtains authorization for a $1,000 hold on the account to 
ensure there is adequate available credit to cover the anticipated cost 
of the stay.
    A. The consumer checks out of the hotel on October 2. The actual 
cost of the stay is $1,100 because of additional incidental costs. On 
October 2, the hotel charges the $1,100 transaction to the account. For 
purposes of Sec. 226.55(b)(3), the transaction occurred on October 2. 
Therefore, on October 30, Sec. 226.55(b)(3) permits the card issuer to 
apply the 20% rate to new purchases and to the $1,100 transaction. 
However, Sec. 226.55(b)(3)(ii) does not permit the card issuer to apply 
the 20% rate to any remaining portion of the $2,000 purchase balance.
    B. Same facts as above except that the consumer checks out of the 
hotel on September 29. The actual cost of the stay is $250, but the 
hotel does not charge this amount to the account until November 1. For 
purposes of Sec. 226.55(b)(3), the card issuer may treat the 
transaction as occurring more than 14 days after provision of the Sec. 
226.9(c) notice (i.e., after September 29). Accordingly, the card issuer 
may apply the 20% rate to the $250 transaction.
    5. Application of increased fees and charges. See comment 55(c)(1)-
3.
    6. Delayed implementation of increase. Section 226.55(b)(3)(iii) 
does not prohibit a card issuer from notifying a consumer of an increase 
in an annual percentage rate, fee, or charge consistent with Sec. 
226.9(b), (c), or (g). However, Sec. 226.55(b)(3)(iii) does prohibit 
application of an increased rate, fee, or charge during the first year 
after the account is opened, while the account is closed, or while the 
card issuer does not permit the consumer to use the account for new 
transactions. If Sec. 226.9(b), (c), or (g) permits a card issuer to 
apply an increased rate, fee, or charge on a particular date and the 
account is closed on that date or the card issuer does not permit the 
consumer to use the account for new transactions on that date, the card 
issuer may delay application of the increased rate, fee, or charge until 
the first day of the following billing cycle without relinquishing the 
ability to apply that rate, fee, or charge (assuming the increase is 
otherwise consistent with Sec. 226.55). See examples in comment 55(b)-
2.iii. However, if the account is closed or the card issuer does not 
permit the consumer to use the account for new transactions on the first 
day of the following billing cycle, then the card issuer must provide a 
new notice of the increased rate, fee, or charge consistent with Sec. 
226.9(b), (c), or (g).
    7. Date on which account may first be used by consumer to engage in 
transactions. For purposes of Sec. 226.55(b)(3)(iii), an account is 
considered open no earlier than the date on which the account may first 
be used by the consumer to engage in transactions. An account is 
considered open for purposes of Sec. 226.55(b)(3)(iii) on any date that 
the card issuer may consider the account open for purposes of Sec. 
226.52(a)(1). See comment 52(a)(1)-4.
    55(b)(4) Delinquency exception.
    1. Receipt of required minimum periodic payment within 60 days of 
due date. Section 226.55(b)(4) applies when a card issuer has not 
received the consumer's required minimum periodic payment within 60 days 
after the due date for that payment. In order to satisfy this condition, 
a card issuer that requires monthly minimum payments generally must not 
have received two consecutive required minimum periodic payments. 
Whether a required minimum periodic payment has been received for 
purposes of

[[Page 780]]

Sec. 226.55(b)(4) depends on whether the amount received is equal to or 
more than the first outstanding required minimum periodic payment. For 
example, assume that the required minimum periodic payments for a credit 
card account are due on the fifteenth day of the month. On May 13, the 
card issuer has not received the $50 required minimum periodic payment 
due on March 15 or the $150 required minimum periodic payment due on 
April 15. The sixtieth day after the March 15 payment due date is May 
14. If the card issuer receives a $50 payment on May 14, Sec. 
226.55(b)(4) does not apply because the payment is equal to the required 
minimum periodic payment due on March 15 and therefore the account is 
not more than 60 days delinquent. However, if the card issuer instead 
received a $40 payment on May 14, Sec. 226.55(b)(4) would apply 
beginning on May 15 because the payment is less than the required 
minimum periodic payment due on March 15. Furthermore, if the card 
issuer received the $50 payment on May 15, Sec. 226.55(b)(4) would 
apply because the card issuer did not receive the required minimum 
periodic payment due on March 15 within 60 days after the due date for 
that payment.
    2. Relationship to Sec. 226.9(g)(3)(i)(B). A card issuer that has 
complied with the disclosure requirements in Sec. 226.9(g)(3)(i)(B) has 
also complied with the disclosure requirements in Sec. 226.55(b)(4)(i).
    3. Reduction in rate pursuant to Sec. 226.55(b)(4)(ii). Section 
226.55(b)(4)(ii) provides that, if the card issuer receives six 
consecutive required minimum periodic payments on or before the payment 
due date beginning with the first payment due following the effective 
date of the increase, the card issuer must reduce any annual percentage 
rate, fee, or charge increased pursuant to Sec. 226.55(b)(4) to the 
annual percentage rate, fee, or charge that applied prior to the 
increase with respect to transactions that occurred prior to or within 
14 days after provision of the Sec. 226.9(c) or (g) notice.
    i. Six consecutive payments immediately following effective date of 
increase. Section 226.55(b)(4)(ii) does not apply if the card issuer 
does not receive six consecutive required minimum periodic payments on 
or before the payment due date beginning with the payment due 
immediately following the effective date of the increase, even if, at 
some later point in time, the card issuer receives six consecutive 
required minimum periodic payments on or before the payment due date.
    ii. Rate, fee, or charge that does not exceed rate, fee, or charge 
that applied before increase. Although Sec. 226.55(b)(4)(ii) requires 
the card issuer to reduce an annual percentage rate, fee, or charge 
increased pursuant to Sec. 226.55(b)(4) to the annual percentage rate, 
fee, or charge that applied prior to the increase, this provision does 
not prohibit the card issuer from applying an increased annual 
percentage rate, fee, or charge consistent with any of the other 
exceptions in Sec. 226.55(b). For example, if a temporary rate applied 
prior to the Sec. 226.55(b)(4) increase and the temporary rate expired 
before a reduction in rate pursuant to Sec. 226.55(b)(4)(ii), the card 
issuer may apply an increased rate to the extent consistent with Sec. 
226.55(b)(1). Similarly, if a variable rate applied prior to the Sec. 
226.55(b)(4) increase, the card issuer may apply any increase in that 
variable rate to the extent consistent with Sec. 226.55(b)(2).
    iii. Delayed implementation of reduction. If Sec. 226.55(b)(4)(ii) 
requires a card issuer to reduce an annual percentage rate, fee, or 
charge on a date that is not the first day of a billing cycle, the card 
issuer may delay application of the reduced rate, fee, or charge until 
the first day of the following billing cycle.
    iv. Examples. The following examples illustrate the application of 
Sec. 226.55(b)(4)(ii):
    A. Assume that the billing cycles for an account begin on the first 
day of the month and end on the last day of the month and that the 
required minimum periodic payments are due on the fifteenth day of the 
month. Assume also that the account has a $5,000 purchase balance to 
which a non-variable annual percentage rate of 15% applies. On May 16 of 
year one, the card issuer has not received the required minimum periodic 
payments due on the fifteenth day of March, April, or May and sends a 
Sec. 226.9(c) or (g) notice stating that the annual percentage rate 
applicable to the $5,000 balance and to new transactions will increase 
to 28% effective July 1. On July 1, Sec. 226.55(b)(4) permits the card 
issuer to apply the 28% rate to the $5,000 balance and to new 
transactions. The card issuer receives the required minimum periodic 
payments due on the fifteenth day of July, August, September, October, 
November, and December. On January 1 of year two, Sec. 226.55(b)(4)(ii) 
requires the card issuer to reduce the rate that applies to any 
remaining portion of the $5,000 balance to 15%. The card issuer is not 
required to reduce the rate that applies to any transactions that 
occurred on or after May 31 (which is the fifteenth day after provision 
of the Sec. 226.9(c) or (g) notice).
    B. Same facts as paragraph iv.A. above except that the 15% rate that 
applied to the $5,000 balance prior to the Sec. 226.55(b)(4) increase 
was scheduled to increase to 20% on August 1 of year one (pursuant to 
Sec. 226.55(b)(1)). On January 1 of year two, Sec. 226.55(b)(4)(ii) 
requires the card issuer to reduce the rate that applies to any 
remaining portion of the $5,000 balance to 20%.
    C. Same facts as paragraph iv.A. above except that the 15% rate that 
applied to the $5,000 balance prior to the Sec. 226.55(b)(4) increase 
was scheduled to increase to 20% on March 1 of year two (pursuant to

[[Page 781]]

Sec. 226.55(b)(1)). On January 1 of year two, Sec. 226.55(b)(4)(ii) 
requires the card issuer to reduce the rate that applies to any 
remaining portion of the $5,000 balance to 15%.
    D. Same facts as paragraph iv.A. above except that the 15% rate that 
applied to the $5,000 balance prior to the Sec. 226.55(b)(4) increase 
was a variable rate that was determined by adding a margin of 10 
percentage points to a publicly-available index not under the card 
issuer's control (consistent with Sec. 226.55(b)(2)). On January 1 of 
year two, Sec. 226.55(b)(4)(ii) requires the card issuer to reduce the 
rate that applies to any remaining portion of the $5,000 balance to the 
variable rate determined using the 10-point margin.
    E. For an example of the application of Sec. 226.55(b)(4)(ii) to 
deferred interest or similar programs, see comment 55(b)(1)-3.ii.C.
    55(b)(5) Workout and temporary hardship arrangement exception.
    1. Scope of exception. Nothing in Sec. 226.55(b)(5) permits a card 
issuer to alter the requirements of Sec. 226.55 pursuant to a workout 
or temporary hardship arrangement. For example, a card issuer cannot 
increase an annual percentage rate or a fee or charge required to be 
disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) 
pursuant to a workout or temporary hardship arrangement unless otherwise 
permitted by Sec. 226.55. In addition, a card issuer cannot require the 
consumer to make payments with respect to a protected balance that 
exceed the payments permitted under Sec. 226.55(c).
    2. Relationship to Sec. 226.9(c)(2)(v)(D). A card issuer that has 
complied with the disclosure requirements in Sec. 226.9(c)(2)(v)(D) has 
also complied with the disclosure requirements in Sec. 226.55(b)(5)(i). 
See comment 9(c)(2)(v)-10. Thus, although the disclosures required by 
Sec. 226.55(b)(5)(i) must generally be provided in writing prior to 
commencement of the arrangement, a card issuer may comply with Sec. 
226.55(b)(5)(i) by complying with Sec. 226.9(c)(2)(v)(D), which states 
that the disclosure of the terms of the arrangement may be made orally 
by telephone, provided that the card issuer mails or delivers a written 
disclosure of the terms of the arrangement to the consumer as soon as 
reasonably practicable after the oral disclosure is provided.
    3. Rate, fee, or charge that does not exceed rate, fee, or charge 
that applied before workout or temporary hardship arrangement. Upon the 
completion or failure of a workout or temporary hardship arrangement, 
Sec. 226.55(b)(5)(ii) prohibits the card issuer from applying to any 
transactions that occurred prior to commencement of the arrangement an 
annual percentage rate, fee, or charge that exceeds the annual 
percentage rate, fee, or charge that applied to those transactions prior 
to commencement of the arrangement. However, this provision does not 
prohibit the card issuer from applying an increased annual percentage 
rate, fee, or charge upon completion or failure of the arrangement, to 
the extent consistent with any of the other exceptions in Sec. 
226.55(b). For example, if a temporary rate applied prior to the 
arrangement and that rate expired during the arrangement, the card 
issuer may apply an increased rate upon completion or failure of the 
arrangement to the extent consistent with Sec. 226.55(b)(1). Similarly, 
if a variable rate applied prior to the arrangement, the card issuer may 
apply any increase in that variable rate upon completion or failure of 
the arrangement to the extent consistent with Sec. 226.55(b)(2).
    4. Examples.
    i. Assume that an account is subject to a $50 annual fee and that, 
consistent with Sec. 226.55(b)(4), the margin used to determine a 
variable annual percentage rate that applies to a $5,000 balance is 
increased from 5 percentage points to 15 percentage points. Assume also 
that the card issuer and the consumer subsequently agree to a workout 
arrangement that reduces the annual fee to $0 and reduces the margin 
back to 5 points on the condition that the consumer pay a specified 
amount by the payment due date each month. If the consumer does not pay 
the agreed-upon amount by the payment due date, Sec. 226.55(b)(5) 
permits the card issuer to increase the annual fee to $50 and increase 
the margin for the variable rate that applies to the $5,000 balance up 
to 15 percentage points.
    ii. Assume that a consumer fails to make four consecutive monthly 
minimum payments totaling $480 on a consumer credit card account with a 
balance of $6,000 and that, consistent with Sec. 226.55(b)(4), the 
annual percentage rate that applies to that balance is increased from a 
non-variable rate of 15% to a non-variable penalty rate of 30%. Assume 
also that the card issuer and the consumer subsequently agree to a 
temporary hardship arrangement that reduces all rates on the account to 
0% on the condition that the consumer pay an amount by the payment due 
date each month that is sufficient to cure the $480 delinquency within 
six months. If the consumer pays the agreed-upon amount by the payment 
due date during the six-month period and cures the delinquency, Sec. 
226.55(b)(5) permits the card issuer to increase the rate that applies 
to any remaining portion of the $6,000 balance to 15% or any other rate 
up to the 30% penalty rate.
    55(b)(6) Servicemembers Civil Relief Act exception.
    1. Rate that does not exceed rate that applied before decrease. Once 
50 U.S.C. app. 527 no longer applies, Sec. 226.55(b)(6) prohibits a 
card issuer from applying an annual percentage rate to any transactions 
that occurred prior to a decrease in rate pursuant to 50 U.S.C. app. 527 
that exceeds the rate that applied to those transactions prior to the 
decrease. However, this provision does not prohibit the

[[Page 782]]

card issuer from applying an increased annual percentage rate once 50 
U.S.C. app. 527 no longer applies, to the extent consistent with any of 
the other exceptions in Sec. 226.55(b). For example, if a temporary 
rate applied prior to the decrease and that rate expired during the 
period that 50 U.S.C. app. 527 applied to the account, the card issuer 
may apply an increased rate once 50 U.S.C. app. 527 no longer applies to 
the extent consistent with Sec. 226.55(b)(1). Similarly, if a variable 
rate applied prior to the decrease, the card issuer may apply any 
increase in that variable rate once 50 U.S.C. app. 527 no longer applies 
to the extent consistent with Sec. 226.55(b)(2).
    2. Example. Assume that on December 31 of year one the annual 
percentage rate that applies to a $5,000 balance on a credit card 
account is a variable rate that is determined by adding a margin of 10 
percentage points to a publicly-available index that is not under the 
card issuer's control. On January 1 of year two, the card issuer reduces 
the rate that applies to the $5,000 balance to a non-variable rate of 6% 
pursuant to 50 U.S.C. app. 527. On January 1 of year three, 50 U.S.C. 
app. 527 ceases to apply and the card issuer provides a notice pursuant 
to Sec. 226.9(c) informing the consumer that on February 15 of year 
three the variable rate determined using the 10-point margin will apply 
to any remaining portion of the $5,000 balance. On February 15 of year 
three, Sec. 226.55(b)(6) permits the card issuer to begin accruing 
interest on any remaining portion of the $5,000 balance at the variable 
rate determined using the 10-point margin.
    55(c) Treatment of protected balances.
    55(c)(1) Definition of protected balance.
    1. Example of protected balance. Assume that, on March 15 of year 
two, an account has a purchase balance of $1,000 at a non-variable 
annual percentage rate of 12% and that, on March 16, the card issuer 
sends a notice pursuant to Sec. 226.9(c) informing the consumer that 
the annual percentage rate for new purchases will increase to a non-
variable rate of 15% on May 1. The fourteenth day after provision of the 
notice is March 29. On March 29, the consumer makes a $100 purchase. On 
March 30, the consumer makes a $150 purchase. On May 1, Sec. 
226.55(b)(3)(ii) permits the card issuer to begin accruing interest at 
15% on the $150 purchase made on March 30 but does not permit the card 
issuer to apply that 15% rate to the $1,100 purchase balance as of March 
29. Accordingly, the protected balance for purposes of Sec. 226.55(c) 
is the $1,100 purchase balance as of March 29. The $150 purchase made on 
March 30 is not part of the protected balance.
    2. First year after account opening. Section 226.55(c) applies to 
amounts owed for a category of transactions to which an increased annual 
percentage rate or an increased fee or charge cannot be applied after 
the rate, fee, or charge for that category of transactions has been 
increased pursuant to Sec. 226.55(b)(3). Because Sec. 
226.55(b)(3)(iii) does not permit a card issuer to increase an annual 
percentage rate or a fee or charge required to be disclosed under Sec. 
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first year after 
account opening, Sec. 226.55(c) does not apply to balances during the 
first year after account opening.
    3. Increased fees and charges. Except as provided in Sec. 
226.55(b)(3)(iii), Sec. 226.55(b)(3) permits a card issuer to increase 
a fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) after complying with the applicable notice 
requirements in Sec. 226.9(b) or (c), provided that the increased fee 
or charge is not applied to a protected balance. To the extent 
consistent with Sec. 226.55(b)(3)(iii), a card issuer is not prohibited 
from increasing a fee or charge that applies to the account as a whole 
or to balances other than the protected balance. For example, after the 
first year following account opening, a card issuer generally may add or 
increase an annual or a monthly maintenance fee for an account after 
complying with the notice requirements in Sec. 226.9(c), including 
notifying the consumer of the right to reject the new or increased fee 
under Sec. 226.9(h). However, except as otherwise provided in Sec. 
226.55(b), an increased fee or charge cannot be applied to an account 
while the account is closed or while the card issuer does not permit the 
consumer to use the account for new transactions. See Sec. 
226.55(b)(3)(iii); see also Sec. Sec. 226.52(b)(2)(i)(B)(3) and 
226.55(d)(1). Furthermore, if the consumer rejects an increase in a fee 
or charge pursuant to Sec. 226.9(h), the card issuer is prohibited from 
applying the increased fee or charge to the account and from imposing 
any other fee or charge solely as a result of the rejection. See Sec. 
226.9(h)(2)(i) and (ii); comment 9(h)(2)(ii)-2.
    4. Changing balance computation method. Nothing in Sec. 226.55 
prohibits a card issuer from changing the balance computation method 
that applies to new transactions as well as protected balances.
    55(c)(2) Repayment of protected balance.
    1. No less beneficial to the consumer. A card issuer may provide a 
method of repaying the protected balance that is different from the 
methods listed in Sec. 226.55(c)(2) so long as the method used is no 
less beneficial to the consumer than one of the listed methods. A method 
is no less beneficial to the consumer if the method results in a 
required minimum periodic payment that is equal to or less than a 
minimum payment calculated using the method for the account before the 
effective date of the increase. Similarly, a method is no less 
beneficial to the consumer if the method amortizes the balance in five 
years or longer or if the method results in a required minimum periodic 
payment that is equal to or less than a minimum payment

[[Page 783]]

calculated consistent with Sec. 226.55(c)(2)(iii). For example:
    i. If at account opening the cardholder agreement stated that the 
required minimum periodic payment would be either the total of fees and 
interest charges plus 1% of the total amount owed or $20 (whichever is 
greater), the card issuer may require the consumer to make a minimum 
payment of $20 even if doing so would pay off the balance in less than 
five years or constitute more than 2% of the balance plus fees and 
interest charges.
    ii. A card issuer could increase the percentage of the balance 
included in the required minimum periodic payment from 2% to 5% so long 
as doing so would not result in amortization of the balance in less than 
five years.
    iii. A card issuer could require the consumer to make a required 
minimum periodic payment that amortizes the balance in four years so 
long as doing so would not more than double the percentage of the 
balance included in the minimum payment prior to the date on which the 
increased annual percentage rate, fee, or charge became effective.
    55(c)(2)(ii) Five-year amortization period.
    1. Amortization period starting from effective date of increase. 
Section 226.55(c)(2)(ii) provides for an amortization period for the 
protected balance of no less than five years, starting from the date on 
which the increased annual percentage rate or fee or charge required to 
be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) 
became effective. A card issuer is not required to recalculate the 
required minimum periodic payment for the protected balance if, during 
the amortization period, that balance is reduced as a result of the 
allocation of payments by the consumer in excess of that minimum payment 
consistent with Sec. 226.53 or any other practice permitted by these 
rules and other applicable law.
    2. Amortization when applicable rate is variable. If the annual 
percentage rate that applies to the protected balance varies with an 
index, the card issuer may adjust the interest charges included in the 
required minimum periodic payment for that balance accordingly in order 
to ensure that the balance is amortized in five years. For example, 
assume that a variable rate that is currently 15% applies to a protected 
balance and that, in order to amortize that balance in five years, the 
required minimum periodic payment must include a specific amount of 
principal plus all accrued interest charges. If the 15% variable rate 
increases due to an increase in the index, the creditor may increase the 
required minimum periodic payment to include the additional interest 
charges.
    55(c)(2)(iii) Doubling repayment rate.
    1. Portion of required minimum periodic payment on other balances. 
Section 226.55(c)(2)(iii) addresses the portion of the required minimum 
periodic payment based on the protected balance. Section 
226.55(c)(2)(iii) does not limit or otherwise address the card issuer's 
ability to determine the portion of the required minimum periodic 
payment based on other balances on the account or the card issuer's 
ability to apply that portion of the minimum payment to the balances on 
the account.
    2. Example. Assume that the method used by a card issuer to 
calculate the required minimum periodic payment for a credit card 
account requires the consumer to pay either the total of fees and 
accrued interest charges plus 2% of the total amount owed or $50, 
whichever is greater. Assume also that the account has a purchase 
balance of $2,000 at an annual percentage rate of 15% and a cash advance 
balance of $500 at an annual percentage rate of 20% and that the card 
issuer increases the rate for purchases to 18% but does not increase the 
rate for cash advances. Under Sec. 226.55(c)(2)(iii), the card issuer 
may require the consumer to pay fees and interest plus 4% of the $2,000 
purchase balance. Section 226.55(c)(2)(iii) does not limit the card 
issuer's ability to increase the portion of the required minimum 
periodic payment that is based on the cash advance balance.
    55(d) Continuing application.
    1. Closed accounts. If a credit card account under an open-end (not 
home-secured) consumer credit plan with a balance is closed, Sec. 
226.55 continues to apply to that balance. For example, if a card issuer 
or a consumer closes a credit card account with a balance, Sec. 
226.55(d)(1) prohibits the card issuer from increasing the annual 
percentage rate that applies to that balance or imposing a periodic fee 
based solely on that balance that was not charged before the account was 
closed (such as a closed account fee) unless permitted by one of the 
exceptions in Sec. 226.55(b).
    2. Acquired accounts. If, through merger or acquisition (for 
example), a card issuer acquires a credit card account under an open-end 
(not home-secured) consumer credit plan with a balance, Sec. 226.55 
continues to apply to that balance. For example, if a credit card 
account has a $1,000 purchase balance with an annual percentage rate of 
15% and the card issuer that acquires that account applies an 18% rate 
to purchases, Sec. 226.55(d)(1) prohibits the card issuer from applying 
the 18% rate to the $1,000 balance unless permitted by one of the 
exceptions in Sec. 226.55(b).
    3. Balance transfers.
    i. Between accounts issued by the same creditor. If a balance is 
transferred from a credit card account under an open-end (not home-
secured) consumer credit plan issued by a creditor to another credit 
account issued by the same creditor or its affiliate or subsidiary, 
Sec. 226.55 continues to apply to that

[[Page 784]]

balance. For example, if a credit card account has a $2,000 purchase 
balance with an annual percentage rate of 15% and that balance is 
transferred to another credit card account issued by the same creditor 
that applies an 18% rate to purchases, Sec. 226.55(d)(2) prohibits the 
creditor from applying the 18% rate to the $2,000 balance unless 
permitted by one of the exceptions in Sec. 226.55(b). However, the 
creditor would not generally be prohibited from charging a new periodic 
fee (such as an annual fee) on the second account so long as the fee is 
not based solely on the $2,000 balance and the creditor has notified the 
consumer of the fee either by providing written notice 45 days before 
imposing the fee pursuant to Sec. 226.9(c) or by providing account-
opening disclosures pursuant to Sec. 226.6(b). See also Sec. 
226.55(b)(3)(iii); comment 55(b)(3)-3; comment 5(b)(1)(i)-6. Additional 
circumstances in which a balance is considered transferred for purposes 
of Sec. 226.55(d)(2) include when:
    A. A retail credit card account with a balance is replaced or 
substituted with a cobranded general purpose credit card account that 
can be used with a broader merchant base;
    B. A credit card account with a balance is replaced or substituted 
with another credit card account offering different features;
    C. A credit card account with a balance is consolidated or combined 
with one or more other credit card accounts into a single credit card 
account; and
    D. A credit card account is replaced or substituted with a line of 
credit that can be accessed solely by an account number.
    ii. Between accounts issued by different creditors. If a balance is 
transferred to a credit card account under an open-end (not home-
secured) consumer credit plan issued by a creditor from a credit card 
account issued by a different creditor or an institution that is not an 
affiliate or subsidiary of the creditor that issued the account to which 
the balance is transferred, Sec. 226.55(d)(2) does not prohibit the 
creditor to which the balance is transferred from applying its account 
terms to that balance, provided that those terms comply with this part. 
For example, if a credit card account issued by creditor A has a $1,000 
purchase balance at an annual percentage rate of 15% and the consumer 
transfers that balance to a credit card account with a purchase rate of 
17% issued by creditor B, creditor B may apply the 17% rate to the 
$1,000 balance. However, creditor B may not subsequently increase the 
rate on that balance unless permitted by one of the exceptions in Sec. 
226.55(b).
    55(e) Promotional waivers or rebates of interest, fees, and other 
charges.
    1. Generally. Nothing in Sec. 226.55 prohibits a card issuer from 
waiving or rebating finance charges due to a periodic interest rate or a 
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii). However, if a card issuer promotes and 
applies the waiver or rebate to an account, the card issuer cannot 
temporarily or permanently cease or terminate any portion of the waiver 
or rebate on that account unless permitted by one of the exceptions in 
Sec. 226.55(b). For example
    i. A card issuer applies an annual percentage rate of 15% to balance 
transfers but promotes a program under which all of the interest accrued 
on transferred balances will be waived or rebated for one year. If, 
prior to the commencement of the one-year period, the card issuer 
discloses the length of the period and the annual percentage rate that 
will apply to transferred balances after expiration of that period 
consistent with Sec. 226.55(b)(1)(i), Sec. 226.55(b)(1) permits the 
card issuer to begin imposing interest charges on transferred balances 
after one year. Furthermore, if, during the one-year period, a required 
minimum periodic payment is not received within 60 days of the payment 
due date, Sec. 226.55(b)(4) permits the card issuer to begin imposing 
interest charges on transferred balances (after providing a notice 
consistent with Sec. 226.9(g) and Sec. 226.55(b)(4)(i)). However, if a 
required minimum periodic payment is not more than 60 days delinquent or 
if the consumer otherwise violates the terms or other requirements of 
the account, Sec. 226.55 does not permit the card issuer to begin 
imposing interest charges on transferred balances until the expiration 
of the one-year period.
    ii. A card issuer imposes a monthly maintenance fee of $10 but 
promotes a program under which the fee will be waived or rebated for the 
six months following account opening. If, prior to account opening, the 
card issuer discloses the length of the period and the monthly 
maintenance fee that will be imposed after expiration of that period 
consistent with Sec. 226.55(b)(1)(i), Sec. 226.55(b)(1) permits the 
card issuer to begin imposing the monthly maintenance fee six months 
after account opening. Furthermore, if, during the six-month period, a 
required minimum periodic payment is not received within 60 days of the 
payment due date, Sec. 226.55(b)(4) permits the card issuer to begin 
imposing the monthly maintenance fee (after providing a notice 
consistent with Sec. 226.9(c) and Sec. 226.55(b)(4)(i)). However, if a 
required minimum periodic payment is not more than 60 days delinquent or 
if the consumer otherwise violates the terms or other requirements of 
the account, Sec. 226.55 does not permit the card issuer to begin 
imposing the monthly maintenance fee until the expiration of the six-
month period.
    2. Promotion of waiver or rebate. For purposes of Sec. 226.55(e), a 
card issuer generally promotes a waiver or rebate if the card issuer 
discloses the waiver or rebate in an advertisement (as defined in Sec. 
226.2(a)(2)). See

[[Page 785]]

comment 2(a)(2)-1. In addition, a card issuer generally promotes a 
waiver or rebate for purposes of Sec. 226.55(e) if the card issuer 
discloses the waiver or rebate in communications regarding existing 
accounts (such as communications regarding a promotion that encourages 
additional or different uses of an existing account). However, a card 
issuer does not promote a waiver or rebate for purposes of Sec. 
226.55(e) if the advertisement or communication relates to an inquiry or 
dispute about a specific charge or to interest, fees, or charges that 
have already been waived or rebated.
    i. Examples of promotional communications. The following are 
examples of circumstances in which a card issuer is promoting a waiver 
or rebate for purposes of Sec. 226.55(e)
    A. A card issuer discloses the waiver or rebate in a newspaper, 
magazine, leaflet, promotional flyer, catalog, sign, or point-of-sale 
display, unless the disclosure relates to interest, fees, or charges 
that have already been waived.
    B. A card issuer discloses the waiver or rebate on radio or 
television or through electronic advertisements (such as on the 
Internet), unless the disclosure relates to interest, fees, or charges 
that have already been waived or rebated.
    C. A card issuer discloses a waiver or rebate to individual 
consumers, such as by telephone, letter, or electronic communication, 
through direct mail literature, or on or with account statements, unless 
the disclosure relates to an inquiry or dispute about a specific charge 
or to interest, fees, or charges that have already been waived or 
rebated.
    ii. Examples of non-promotional communications. The following are 
examples of circumstances in which a card issuer is not promoting a 
waiver or rebate for purposes of Sec. 226.55(e)
    A. After a card issuer has waived or rebated interest, fees, or 
other charges subject to Sec. 226.55 with respect to an account, the 
issuer discloses the waiver or rebate to the accountholder on the 
periodic statement or by telephone, letter, or electronic communication. 
However, if the card issuer also discloses prospective waivers or 
rebates in the same communication, the issuer is promoting a waiver or 
rebate for purposes of Sec. 226.55(e).
    B. A card issuer communicates with a consumer about a waiver or 
rebate of interest, fees, or other charges subject to Sec. 226.55 in 
relation to an inquiry or dispute about a specific charge, including a 
dispute under Sec. Sec. 226.12 or 226.13.
    C. A card issuer waives or rebates interest, fees, or other charges 
subject to Sec. 226.55 in order to comply with a legal requirement 
(such as the limitations in Sec. 226.52(a)).
    D. A card issuer discloses a grace period, as defined in Sec. 
226.5(b)(2)(ii)(3).
    E. A card issuer provides a period after the payment due date during 
which interest, fees, or other charges subject to Sec. 226.55 are 
waived or rebated even if a payment has not been received.
    F. A card issuer provides benefits (such as rewards points or cash 
back on purchases or finance charges) that can be applied to the account 
as credits, provided that the benefits are not promoted as reducing 
interest, fees, or other charges subject to Sec. 226.55.
    3. Relationship of Sec. 226.55(e) to grace period. Section 
226.55(e) does not apply to the waiver of finance charges due to a 
periodic rate consistent with a grace period, as defined in Sec. 
226.5(b)(2)(ii)(3).

      Section 226.56--Requirements for Over-the-Limit Transactions

    56(b) Opt-in requirement.
    1. Policy and practice of declining over-the-limit transactions. 
Section 226.56(b)(1)(i)-(v), including the requirements to provide 
notice and obtain consumer consent, do not apply to any card issuer that 
has a policy and practice of declining to pay any over-the-limit 
transactions for the consumer's credit card account when the card issuer 
has a reasonable belief that completing a transaction will cause the 
consumer to exceed the consumer's credit limit for that account. For 
example, if a card issuer only authorizes those transactions which, at 
the time of authorization, would not cause the consumer to exceed a 
credit limit, it is not subject to the requirement to provide consumers 
notice and an opportunity to affirmatively consent to the card issuer's 
payment of over-the-limit transactions. However, if an over-the-limit 
transaction is paid without the consumer providing affirmative consent, 
the card issuer may not charge a fee for paying the transaction.
    2. Over-the-limit transactions not required to be authorized or 
paid. Section 226.56 does not require a card issuer to authorize or pay 
an over-the-limit transaction even if the consumer has affirmatively 
consented to the card issuer's over-the-limit service.
    3. Examples of reasonable opportunity to provide affirmative 
consent. A card issuer provides a reasonable opportunity for the 
consumer to provide affirmative consent to the card issuer's payment of 
over-the-limit transactions when, among other things, it provides 
reasonable methods by which the consumer may affirmatively consent. A 
card issuer provides such reasonable methods if--
    i. On the application. The card issuer provides the notice on the 
application form that the consumer can fill out to request the service 
as part of the application;
    ii. By mail. The card issuer provides a form with the account-
opening disclosures or the periodic statement for the consumer to fill 
out and mail to affirmatively request the service;

[[Page 786]]

    iii. By telephone. The card issuer provides a readily available 
telephone line that consumers may call to provide affirmative consent.
    iv. By electronic means. The card issuer provides an electronic 
means for the consumer to affirmatively consent. For example, a card 
issuer could provide a form that can be accessed and processed at its 
Web site, where the consumer can check a box to opt in and confirm that 
choice by clicking on a button that affirms the consumer's consent.
    4. Separate consent required. A consumer's affirmative consent, or 
opt-in, to a card issuer's payment of over-the-limit transactions must 
be obtained separately from other consents or acknowledgments obtained 
by the card issuer. For example, a consumer's signature on a credit 
application to request a credit card would not by itself sufficiently 
evidence the consumer's consent to the card issuer's payment of over-
the-limit transactions. However, a card issuer may obtain a consumer's 
affirmative consent by providing a blank signature line or a check box 
on the application that the consumer can sign or select to request the 
over-the-limit service, provided that the signature line or check box is 
used solely for purposes of evidencing the choice and not for any other 
purpose, such as to also obtain consumer consents for other account 
services or features or to receive disclosures electronically.
    5. Written confirmation. A card issuer may comply with the 
requirement in Sec. 226.56(b)(1)(iv) to provide written confirmation of 
the consumer's decision to affirmatively consent, or opt in, to the card 
issuer's payment of over-the-limit transactions by providing the 
consumer a copy of the consumer's completed opt-in form or by sending a 
letter or notice to the consumer acknowledging that the consumer has 
elected to opt into the card issuer's service. A card issuer may also 
satisfy the written confirmation requirement by providing the 
confirmation on the first periodic statement sent after the consumer has 
opted in. For example, a card issuer could provide a written notice 
consistent with Sec. 226.56(e)(2) on the periodic statement. A card 
issuer may not, however, assess any over-the-limit fees or charges on 
the consumer's credit card account unless and until the card issuer has 
sent the written confirmation. Thus, if a card issuer elects to provide 
written confirmation on the first periodic statement after the consumer 
has opted in, it would not be permitted to assess any over-the-limit 
fees or charges until the next statement cycle.
    56(b)(2) Completion of over-the-limit transactions without consumer 
consent.
    1. Examples of over-the-limit transactions paid without consumer 
consent. Section 226.56(b)(2) provides that a card issuer may pay an 
over-the-limit transaction even if the consumer has not provided 
affirmative consent, so long as the card issuer does not impose a fee or 
charge for paying the transaction. The prohibition on imposing fees for 
paying an over-the-limit transaction applies even in circumstances where 
the card issuer is unable to avoid paying a transaction that exceeds the 
consumer's credit limit.
    i. Transactions not submitted for authorization. A consumer has not 
affirmatively consented to a card issuer's payment of over-the-limit 
transactions. The consumer purchases a $3 cup of coffee using his credit 
card. Because of the small dollar amount of the transaction, the 
merchant does not submit the transaction to the card issuer for 
authorization. The transaction causes the consumer to exceed the credit 
limit. Under these circumstances, the card issuer is prohibited from 
imposing a fee or charge on the consumer's credit card account for 
paying the over-the-limit transaction because the consumer has not opted 
in to the card issuer's over-the-limit service.
    ii. Settlement amount exceeds authorization amount. A consumer has 
not affirmatively consented to a card issuer's payment of over-the-limit 
transactions. The consumer uses his credit card at a pay-at-the-pump 
fuel dispenser to purchase $50 of fuel. Before permitting the consumer 
to use the fuel pump, the merchant verifies the validity of the card by 
requesting an authorization hold of $1. The subsequent $50 transaction 
amount causes the consumer to exceed his credit limit. Under these 
circumstances, the card issuer is prohibited from imposing a fee or 
charge on the consumer's credit card account for paying the over-the-
limit transaction because the consumer has not opted in to the card 
issuer's over-the-limit service.
    iii. Intervening charges. A consumer has not affirmatively consented 
to a card issuer's payment of over-the-limit transactions. The consumer 
makes a $50 purchase using his credit card. However, before the $50 
transaction is charged to the consumer's account, a separate recurring 
charge is posted to the account. The $50 purchase then causes the 
consumer to exceed his credit limit. Under these circumstances, the card 
issuer is prohibited from imposing a fee or charge on the consumer's 
credit card account for paying the over-the-limit transaction because 
the consumer has not opted in to the card issuer's over-the-limit 
service.
    2. Permissible fees or charges when a consumer has not consented. 
Section 226.56(b)(2) does not preclude a card issuer from assessing fees 
or charges other than over-the-limit fees when an over-the-limit 
transaction is completed. For example, if a consumer has not opted in, 
the card issuer may assess a balance transfer fee in connection with a 
balance transfer, provided such a fee is assessed whether or not the 
transfer exceeds the credit limit. Section 226.56(b)(2) does not limit

[[Page 787]]

the card issuer's ability to debit the consumer's account for the amount 
of the over-the-limit transaction if the card issuer is permitted to do 
so under applicable law. The card issuer may also assess interest 
charges in connection with the over-the-limit transaction.
    56(c) Method of election.
    1. Card issuer-determined methods. A card issuer may determine the 
means available to consumers to affirmatively consent, or opt in, to the 
card issuer's payment of over-the-limit transactions. For example, a 
card issuer may decide to obtain consents in writing, electronically, or 
orally, or through some combination of these methods. Section 226.56(c) 
further requires, however, that such methods must be made equally 
available for consumers to revoke a prior consent. Thus, for example, if 
a card issuer allows a consumer to consent in writing or electronically, 
it must also allow the consumer to revoke that consent in writing or 
electronically.
    2. Electronic requests. A consumer consent or revocation request 
submitted electronically is not considered a consumer disclosure for 
purposes of the E-Sign Act.
    56(d) Timing and placement of notices.
    1. Contemporaneous notice for oral or electronic consent. Under 
Sec. 226.56(d)(1)(ii), if a card issuer seeks to obtain consent from 
the consumer orally or by electronic means, the card issuer must provide 
a notice containing the disclosures in Sec. 226.56(e)(1) prior to and 
as part of the process of obtaining the consumer's consent.
    56(e) Content.
    1. Amount of over-the-limit fee. See Model Forms G-25(A) and G-25(B) 
for guidance on how to disclose the amount of the over-the-limit fee.
    2. Notice content. In describing the consumer's right to 
affirmatively consent to a card issuer's payment of over-the-limit 
transactions, the card issuer may explain that any transactions that 
exceed the consumer's credit limit will be declined if the consumer does 
not consent to the service. In addition, the card issuer should explain 
that even if a consumer consents, the payment of over-the-limit 
transactions is at the discretion of the card issuer. For example, the 
card issuer may indicate that it may decline a transaction for any 
reason, such as if the consumer is past due or significantly over the 
limit. The card issuer may also disclose the consumer's right to revoke 
consent.
    56(f) Joint relationships.
    1. Authorized users. Section 226.56(f) does not permit a card issuer 
to treat a request to opt in to or to revoke a prior request for the 
card issuer's payment of over-the-limit transactions from an authorized 
user that is not jointly liable on a credit card account as a consent or 
revocation request for that account.
    56(g) Continuing right to opt in or revoke opt-in.
    1. Fees or charges for over-the-limit transactions incurred prior to 
revocation. Section 226.56(g) 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 card issuer to waive or reverse any over-the-limit 
fees or charges assessed to the consumer's account for transactions that 
occurred prior to the card issuer's implementation of the consumer's 
revocation request. Nor does this requirement prevent the card issuer 
from assessing over-the-limit fees in subsequent cycles if the 
consumer's account balance continues to exceed the credit limit after 
the payment due date as a result of an over-the-limit transaction that 
occurred prior to the consumer's revocation of consent.
    56(h) Duration of opt-in.
    1. Card issuer ability to stop paying over-the-limit transactions 
after consumer consent. A card issuer may cease paying over-the-limit 
transactions for consumers that have previously opted in at any time and 
for any reason. For example, a card issuer may stop paying over-the-
limit transactions for a consumer to respond to changes in the credit 
risk presented by the consumer.
    56(j) Prohibited practices.
    1. Periodic fees or charges. A card issuer may charge an over-the-
limit fee or charge only if the consumer has exceeded the credit limit 
during the billing cycle. Thus, a card issuer may not impose any 
recurring or periodic fees for paying over-the-limit transactions (for 
example, a monthly ``over-the-limit protection'' service fee), even if 
the consumer has affirmatively consented to or opted in to the service, 
unless the consumer has in fact exceeded the credit limit during that 
cycle.
    2. Examples of limits on fees or charges imposed per billing cycle. 
Section 226.56(j)(1) generally prohibits a card issuer from assessing a 
fee or charge due to the same over-the-limit transaction for more than 
three billing cycles. The following examples illustrate the prohibition.
    i. Assume that a consumer has opted into a card issuer's payment of 
over-the-limit transactions. The consumer exceeds the credit limit 
during the December billing cycle and does not make sufficient payment 
to bring the account balance back under the limit for four consecutive 
cycles. The consumer does not engage in any additional transactions 
during this period. In this case, Sec. 226.56(j)(1) would permit the 
card issuer to charge a maximum of three over-the-limit fees for the 
December over-the-limit transaction.
    ii. Assume the same facts as above except that the consumer makes 
sufficient payment to reduce his account balance by the payment due date 
during the February billing cycle. The card issuer may charge over-the-

[[Page 788]]

limit fees for the December and January billing cycles. However, because 
the consumer's account balance was below the credit limit by the payment 
due date for the February billing cycle, the card issuer may not charge 
an over-the-limit fee for the February billing cycle.
    iii. Assume the same facts as in paragraph i., except that the 
consumer engages in another over-the-limit transaction during the 
February billing cycle. Because the consumer has obtained an additional 
extension of credit which causes the consumer to exceed his credit 
limit, the card issuer may charge over-the-limit fees for the December 
transaction on the January, February and March billing statements, and 
additional over-the-limit fees for the February transaction on the April 
and May billing statements. The card issuer may not charge an over-the-
limit fee for each of the December and the February transactions on the 
March billing statement because it is prohibited from imposing more than 
one over-the-limit fee during a billing cycle.
    3. Replenishment of credit line. Section 226.56(j)(2) does not 
prevent a card issuer from delaying replenishment of a consumer's 
available credit where appropriate, for example, where the card issuer 
may suspect fraud on the credit card account. However, a card issuer may 
not assess an over-the-limit fee or charge if the over-the-limit 
transaction is caused by the card issuer's decision not to promptly 
replenish the available credit after the consumer's payment is credited 
to the consumer's account.
    4. Examples of conditioning. Section 226.56(j)(3) prohibits a card 
issuer from conditioning or otherwise tying the amount of a consumer's 
credit limit on the consumer affirmatively consenting to the card 
issuer's payment of over-the-limit transactions where the card issuer 
assesses an over-the-limit fee for the transaction. The following 
examples illustrate the prohibition.
    i. Amount of credit limit. Assume that a card issuer offers a credit 
card with a credit limit of $1,000. The consumer is informed that if the 
consumer opts in to the payment of the card issuer's payment of over-
the-limit transactions, the initial credit limit would be increased to 
$1,300. If the card issuer would have offered the credit card with the 
$1,300 credit limit but for the fact that the consumer did not consent 
to the card issuer's payment of over-the-limit transactions, the card 
issuer would not be in compliance with Sec. 226.56(j)(3). Section 
226.56(j)(3) prohibits the card issuer from tying the consumer's opt-in 
to the card issuer's payment of over-the-limit transactions as a 
condition of obtaining the credit card with the $1,300 credit limit.
    ii. Access to credit. Assume the same facts as above, except that 
the card issuer declines the consumer's application altogether because 
the consumer has not affirmatively consented or opted in to the card 
issuer's payment of over-the-limit transactions. The card issuer is not 
in compliance with Sec. 226.56(j)(3) because the card issuer has 
required the consumer's consent as a condition of obtaining credit.
    5. Over-the-limit fees caused by accrued fees or interest. Section 
226.56(j)(4) prohibits a card issuer from imposing any over-the-limit 
fees or charges on a consumer's account if the consumer has exceeded the 
credit limit solely because charges imposed as part of the plan as 
described in Sec. 226.6(b)(3) were charged to the consumer's account 
during the billing cycle. For example, a card issuer may not assess an 
over-the-limit fee or charge even if the credit limit was exceeded due 
to fees for services requested by the consumer if such fees would 
constitute charges imposed as part of the plan (such as fees for 
voluntary debt cancellation or suspension coverage). Section 
226.56(j)(4) does not, however, restrict card issuers from assessing 
over-the-limit fees or charges due to accrued finance charges or fees 
from prior cycles that have subsequently been added to the account 
balance. The following examples illustrate the prohibition.
    i. Assume that a consumer has opted in to a card issuer's payment of 
over-the-limit transactions. The consumer's account has a credit limit 
of $500. The billing cycles for the account begin on the first day of 
the month and end on the last day of the month. The account is not 
eligible for a grace period as defined in Sec. 226.5(b)(2)(ii)(B)(3). 
On December 31, the only balance on the account is a purchase balance of 
$475. On that same date, $50 in fees charged as part of the plan under 
Sec. 226.6(b)(3)(i) and interest charges are imposed on the account, 
increasing the total balance at the end of the December billing cycle to 
$525. Although the total balance exceeds the $500 credit limit, Sec. 
226.56(j)(4) prohibits the card issuer from imposing an over-the-limit 
fee or charge for the December billing cycle in these circumstances 
because the consumer's credit limit was exceeded solely because of the 
imposition of fees and interest charges during that cycle.
    ii. Same facts as above except that, on December 31, the only 
balance on the account is a purchase balance of $400. On that same date, 
$50 in fees imposed as part of the plan under Sec. 226.6(b)(3)(i), 
including interest charges, are imposed on the account, increasing the 
total balance at the end of the December billing cycle to $450. The 
consumer makes a $25 payment by the January payment due date and the 
remaining $25 in fees imposed as part of the plan in December is added 
to the outstanding balance. On January 25, an $80 purchase is charged to 
the account. At the close of the cycle on January 31, an additional $20 
in fees imposed as part

[[Page 789]]

of the plan are imposed on the account, increasing the total balance to 
$525. Because Sec. 226.56(j)(4) does not require the issuer to consider 
fees imposed as part of the plan for the prior cycle in determining 
whether an over-the-limit fee may be properly assessed for the current 
cycle, the issuer need not take into account the remaining $25 in fees 
and interest charges from the December cycle in determining whether fees 
imposed as part of the plan caused the consumer to exceed the credit 
limit during the January cycle. Thus, under these circumstances, Sec. 
226.56(j)(4) does not prohibit the card issuer from imposing an over-
the-limit fee or charge for the January billing cycle because the $20 in 
fees imposed as part of the plan for the January billing cycle did not 
cause the consumer to exceed the credit limit during that cycle.
    6. Additional restrictions on over-the-limit fees. See Sec. 
226.52(b).

 Section 226.57--Reporting and Marketing Rules for College Student Open-
                               End Credit

    57(a) Definitions.
    57(a)(1) College student credit card.
    1. Definition. The definition of college student credit card 
excludes home-equity lines of credit accessed by credit cards and 
overdraft lines of credit accessed by debit cards. A college student 
credit card includes a college affinity card within the meaning of TILA 
Section 127(r)(1)(A). In addition, a card may fall within the scope of 
the definition regardless of the fact that it is not intentionally 
targeted at or marketed to college students. For example, an agreement 
between a college and a card issuer may provide for marketing of credit 
cards to alumni, faculty, staff, and other non-student consumers who 
have a relationship with the college, but also contain provisions that 
contemplate the issuance of cards to students. A credit card issued to a 
student at the college in connection with such an agreement qualifies as 
a college student credit card.
    57(a)(5) College credit card agreement.
    1. Definition. Section 226.57(a)(5) defines ``college credit card 
agreement'' to include any business, marketing or promotional agreement 
between a card issuer and a college or university (or an affiliated 
organization, such as an alumni club or a foundation) if the agreement 
provides for the issuance of credit cards to full-time or part-time 
students. Business, marketing or promotional agreements may include a 
broad range of arrangements between a card issuer and an institution of 
higher education or affiliated organization, including arrangements that 
do not meet the criteria to be considered college affinity card 
agreements as discussed in TILA Section 127(r)(1)(A). For example, TILA 
Section 127(r)(1)(A) specifies that under a college affinity card 
agreement, the card issuer has agreed to make a donation to the 
institution or affiliated organization, the card issuer has agreed to 
offer discounted terms to the consumer, or the credit card will display 
pictures, symbols, or words identified with the institution or 
affiliated organization; even if these conditions are not met, an 
agreement may qualify as a college credit card agreement, if the 
agreement is a business, marketing or promotional agreement that 
contemplates the issuance of college student credit cards to college 
students currently enrolled (either full-time or part-time) at the 
institution. An agreement may qualify as a college credit card agreement 
even if marketing of cards under the agreement is targeted at alumni, 
faculty, staff, and other non-student consumers, as long as cards may 
also be issued to students in connection with the agreement.
    57(b) Public disclosure of agreements.
    1. Public disclosure. Section 226.57(b) requires an institution of 
higher education to publicly disclose any contract or other agreement 
made with a card issuer or creditor for the purpose of marketing a 
credit card. Examples of publicly disclosing such contracts or 
agreements include, but are not limited to, posting such contracts or 
agreements on the institution's Web site or making such contracts or 
agreements available upon request, provided the procedures for 
requesting the documents are reasonable and free of cost to the 
requestor, and the requested contracts or agreements are provided within 
a reasonable time frame.
    2. Redaction prohibited. An institution of higher education must 
publicly disclose any contract or other agreement made with a card 
issuer for the purpose of marketing a credit card in its entirety and 
may not redact any portion of such contract or agreement. Any clause 
existing in such contracts or agreements, providing for the 
confidentiality of any portion of the contract or agreement, would be 
invalid to the extent it restricts the ability of the institution of 
higher education to publicly disclose the contract or agreement in its 
entirety.
    57(c) Prohibited inducements.
    1. Tangible item clarified. A tangible item includes any physical 
item, such as a gift card, a t-shirt, or a magazine subscription, that a 
card issuer or creditor offers to induce a college student to apply for 
or open an open-end consumer credit plan offered by such card issuer or 
creditor. Tangible items do not include non-physical inducements such as 
discounts, rewards points, or promotional credit terms.
    2. Inducement clarified. If a tangible item is offered to a person 
whether or not that person applies for or opens an open-end consumer 
credit plan, the tangible item has not been offered to induce the person 
to apply for or open the plan. For example, refreshments offered to a 
college student on campus that are not conditioned on whether the 
student

[[Page 790]]

has applied for or agreed to open an open-end consumer credit plan would 
not violate Sec. 226.57(c).
    3. Near campus clarified. A location that is within 1,000 feet of 
the border of the campus of an institution of higher education, as 
defined by the institution of higher education, is considered near the 
campus of an institution of higher education.
    4. Mailings included. The prohibition in Sec. 226.57(c) on offering 
a tangible item to a college student to induce such student to apply for 
or open an open-end consumer credit plan offered by such card issuer or 
creditor applies to any solicitation or application mailed to a college 
student at an address on or near the campus of an institution of higher 
education.
    5. Related event clarified. An event is related to an institution of 
higher education if the marketing of such event uses the name, emblem, 
mascot, or logo of an institution of higher education, or other words, 
pictures, symbols identified with an institution of higher education in 
a way that implies that the institution of higher education endorses or 
otherwise sponsors the event.
    6. Reasonable procedures for determining if applicant is a student. 
Section 226.57(c) applies solely to offering a tangible item to a 
college student. Therefore, a card issuer or creditor may offer any 
person who is not a college student a tangible item to induce such 
person to apply for or open an open-end consumer credit plan offered by 
such card issuer or creditor, on campus, near campus, or at an event 
sponsored by or related to an institution of higher education. The card 
issuer or creditor must have reasonable procedures for determining 
whether an applicant is a college student before giving the applicant 
the tangible item. For example, a card issuer or creditor may ask 
whether the applicant is a college student as part of the application 
process. The card issuer or creditor may rely on the representations 
made by the applicant.
    57(d) Annual report to the Board.
    57(d)(2) Contents of report.
    1. Memorandum of understanding. Section 226.57(d)(2) requires that 
the report to the Board include, among other items, a copy of any 
memorandum of understanding between the card issuer and the institution 
(or affiliated organization) that ``directly or indirectly relates to 
the college credit card agreement or that controls or directs any 
obligations or distribution of benefits between any such entities.'' 
Such a memorandum of understanding includes any document that amends the 
college credit card agreement, or that constitutes a further agreement 
between the parties as to the interpretation or administration of the 
agreement. For example, a memorandum of understanding required to be 
included in the report would include a document that provides details on 
the dollar amounts of payments from the card issuer to the university, 
to supplement the original agreement which only provided for payments in 
general terms (e.g., as a percentage). A memorandum of understanding for 
these purposes would not include email (or other) messages that merely 
discuss matters such as the addresses to which payments should be sent 
or the names of contact persons for carrying out the agreement.

       Section 226.58--Internet Posting of Credit Card Agreements

    58(b) Definitions.
    58(b)(1) Agreement.
    1. Inclusion of pricing information. For purposes of this section, a 
credit card agreement is deemed to include certain information, such as 
annual percentage rates and fees, even if the issuer does not otherwise 
include this information in the basic credit contract. This information 
is listed under the defined term ``pricing information'' in Sec. 
226.58(b)(7). For example, the basic credit contract may not specify 
rates, fees and other information that constitutes pricing information 
as defined in Sec. 226.58(b)(7); instead, such information may be 
provided to the cardholder in a separate document sent along with the 
card. However, this information nevertheless constitutes part of the 
agreement for purposes of Sec. 226.58.
    2. Provisions contained in separate documents included. A credit 
card agreement is defined as the written document or documents 
evidencing the terms of the legal obligation, or the prospective legal 
obligation, between a card issuer and a consumer for a credit card 
account under an open-end (not home-secured) consumer credit plan. An 
agreement therefore may consist of several documents that, taken 
together, define the legal obligation between the issuer and consumer. 
For example, provisions that mandate arbitration or allow an issuer to 
unilaterally alter the terms of the card issuer's or consumer's 
obligation are part of the agreement even if they are provided to the 
consumer in a document separate from the basic credit contract.
    58(b)(2) Amends.
    1. Substantive changes. A change to an agreement is substantive, and 
therefore is deemed an amendment of the agreement, if it alters the 
rights or obligations of the parties. Section 226.58(b)(2) provides that 
any change in the pricing information, as defined in Sec. 226.58(b)(7), 
is deemed to be substantive. Examples of other changes that generally 
would be considered substantive include: (i) Addition or deletion of a 
provision giving the issuer or consumer a right under the agreement, 
such as a clause that allows an issuer to unilaterally change the terms 
of an agreement; (ii) addition or deletion of a provision giving the 
issuer or consumer an obligation

[[Page 791]]

under the agreement, such as a clause requiring the consumer to pay an 
additional fee; (iii) changes that may affect the cost of credit to the 
consumer, such as changes in a provision describing how the minimum 
payment will be calculated; (iv) changes that may affect how the terms 
of the agreement are construed or applied, such as changes in a choice-
of-law provision; and (v) changes that may affect the parties to whom 
the agreement may apply, such as provisions regarding authorized users 
or assignment of the agreement.
    2. Non-substantive changes. Changes that generally would not be 
considered substantive include, for example: (i) Correction of 
typographical errors that do not affect the meaning of any terms of the 
agreement; (ii) changes to the card issuer's corporate name, logo, or 
tagline; (iii) changes to the format of the agreement, such as 
conversion to a booklet from a full-sheet format, changes in font, or 
changes in margins; (iv) changes to the name of the credit card to which 
the program applies; (v) reordering sections of the agreement without 
affecting the meaning of any terms of the agreement; (vi) adding, 
removing, or modifying a table of contents or index; and (vii) changes 
to titles, headings, section numbers, or captions.
    58(b)(4) Card issuer.
    1. Card issuer clarified. Section 226.58(b)(4) provides that, for 
purposes of Sec. 226.58, card issuer or issuer means the entity to 
which a consumer is legally obligated, or would be legally obligated, 
under the terms of a credit card agreement. For example, Bank X and Bank 
Y work together to issue credit cards. A consumer that obtains a credit 
card issued pursuant to this arrangement between Bank X and Bank Y is 
subject to an agreement that states ``This is an agreement between you, 
the consumer, and Bank X that governs the terms of your Bank Y Credit 
Card.'' The card issuer in this example is Bank X, because the agreement 
creates a legally enforceable obligation between the consumer and Bank 
X. Bank X is the issuer even if the consumer applied for the card 
through a link on Bank Y's Web site and the cards prominently feature 
the Bank Y logo on the front of the card.
    2. Use of third-party service providers. An institution that is the 
card issuer as defined in Sec. 226.58(b)(4) has a legal obligation to 
comply with the requirements of Sec. 226.58. However, a card issuer 
generally may use a third-party service provider to satisfy its 
obligations under Sec. 226.58, provided that the issuer acts in 
accordance with regulatory guidance regarding use of third-party service 
providers and other applicable regulatory guidance. In some cases, an 
issuer may wish to arrange for the institution with which it partners to 
issue credit cards to fulfill the requirements of Sec. 226.58 on the 
issuer's behalf. For example, Retailer and Bank work together to issue 
credit cards. Under the Sec. 226.58(b)(4) definition, Bank is the 
issuer of these credit cards for purposes of Sec. 226.58. However, 
Retailer services the credit card accounts, including mailing account 
opening materials and periodic statements to cardholders. While Bank is 
responsible for ensuring compliance with Sec. 226.58, Bank may arrange 
for Retailer (or another appropriate third-party service provider) to 
submit credit card agreements to the Board under Sec. 226.58 on Bank's 
behalf. Bank must comply with regulatory guidance regarding use of 
third-party service providers and other applicable regulatory guidance.
    3. Partner institution Web sites. As explained in comments 58(d)-2 
and 58(e)-3, if an issuer provides cardholders with access to specific 
information about their individual accounts, such as balance information 
or copies of statements, through a third-party Web site, the issuer is 
deemed to maintain that Web site for purposes of Sec. 226.58. Such a 
Web site is deemed to be maintained by the issuer for purposes of Sec. 
226.58 even where, for example, an unaffiliated entity designs the Web 
site and owns and maintains the information technology infrastructure 
that supports the Web site, cardholders with credit cards from multiple 
issuers can access individual account information through the same Web 
site, and the Web site is not labeled, branded, or otherwise held out to 
the public as belonging to the issuer. A partner institution's Web site 
is an example of a third-party Web site that may be deemed to be 
maintained by the issuer for purposes of Sec. 226.58. For example, 
Retailer and Bank work together to issue credit cards. Under the Sec. 
226.58(b)(4) definition, Bank is the issuer of these credit cards for 
purposes of Sec. 226.58. Bank does not have a Web site. However, 
cardholders can access information about their individual accounts, such 
as balance information and copies of statements, through a Web site 
maintained by Retailer. Retailer designs the Web site and owns and 
maintains the information technology infrastructure that supports the 
Web site. The Web site is branded and held out to the public as 
belonging to Retailer. Because cardholders can access information about 
their individual accounts through this Web site, the Web site is deemed 
to be maintained by Bank for purposes of Sec. 226.58. Bank therefore 
may comply with Sec. 226.58(d) by ensuring that agreements offered to 
the public are posted on Retailer's Web site in accordance with Sec. 
226.58(d). Bank may comply with Sec. 226.58(e) by ensuring that 
cardholders can request copies of their individual agreements through 
Retailer's Web site in accordance with Sec. 226.58(e)(1). Bank need not 
create and maintain a Web site branded and held out to the public as 
belonging to Bank in order to comply with Sec. Sec. 226.58(d) and (e) 
as long as Bank ensures that Retailer's Web site complies with these 
sections.

[[Page 792]]

    In addition, Sec. 226.58(d)(1) provides that, with respect to an 
agreement offered solely for accounts under one or more private label 
credit card plans, an issuer may comply with Sec. 226.58(d) by posting 
the agreement on the publicly available Web site of at least one of the 
merchants at which credit cards issued under each private label credit 
card plan with 10,000 or more open accounts may be used. This rule is 
not conditioned on cardholders' ability to access account-specific 
information through the merchant's Web site.
    58(b)(5) Offers.
    1. Cards offered to limited groups. A card issuer is deemed to offer 
a credit card agreement to the public even if the issuer solicits, or 
accepts applications from, only a limited group of persons. For example, 
a card issuer may market affinity cards to students and alumni of a 
particular educational institution, or may solicit only high-net-worth 
individuals for a particular card; in these cases, the agreement would 
be considered to be offered to the public. Similarly, agreements for 
credit cards issued by a credit union are considered to be offered to 
the public even though such cards are available only to credit union 
members.
    2. Individualized agreements. A card issuer is deemed to offer a 
credit card agreement to the public even if the terms of the agreement 
are changed immediately upon opening of an account to terms not offered 
to the public.
    58(b)(6) Open account.
    1. Open account clarified. The definition of open account includes a 
credit card account under an open-end (not home-secured) consumer credit 
plan if either: (i) The cardholder can obtain extensions of credit on 
the account; or (ii) there is an outstanding balance on the account that 
has not been charged off. Under this definition, an account that meets 
either of these criteria is considered to be open even if the account is 
inactive. Similarly, if an account has been closed for new activity (for 
example, due to default by the cardholder), but the cardholder is still 
making payments to pay off the outstanding balance, the account is 
considered open.
    58(b)(8) Private label credit card account and private label credit 
card plan.
    1. Private label credit card account. The term private label credit 
card account means a credit card account under an open-end (not home-
secured) consumer credit plan with a credit card that can be used to 
make purchases only at a single merchant or an affiliated group of 
merchants. This term applies to any such credit card account, regardless 
of whether it is issued by the merchant or its affiliate or by an 
unaffiliated third party.
    2. Co-branded credit cards. The term private label credit card 
account does not include accounts with so-called co-branded credit 
cards. Credit cards that display the name, mark, or logo of a merchant 
or affiliated group of merchants as well as the mark, logo, or brand of 
payment network are generally referred to as co-branded cards. While 
these credit cards may display the brand of the merchant or affiliated 
group of merchants as the dominant brand on the card, such credit cards 
are usable at any merchant that participates in the payment network. 
Because these credit cards can be used at multiple unaffiliated 
merchants, accounts with such credit cards are not considered private 
label credit card accounts under Sec. 226.58(b)(8).
    3. 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. For 
example, the term would include 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 each other, by contract or otherwise, to 
accept a credit card 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, 
several local clothing retailers jointly agree to issue credit cards 
called the ``Main Street Fashion Card'' that can be used to make 
purchases only at those retailers. For purposes of this section, these 
retailers would be considered an affiliated group of merchants.
    4. Private label credit card plan. Which credit card accounts issued 
by a particular issuer constitute a private label credit card plan is 
determined by where the credit cards can be used. All of the private 
label credit card accounts issued by a particular card issuer with 
credit cards usable at the same merchant or affiliated group of 
merchants constitute a single private label credit card plan, regardless 
of whether the rates, fees, or other terms applicable to the individual 
credit card accounts differ. For example, a card issuer has 3,000 open 
private label credit card accounts with credit cards usable only at 
Merchant A and 5,000 open private label credit card accounts with credit 
cards usable only at Merchant B and its affiliates. The card issuer has 
two separate private label credit card plans, as defined by Sec. 
226.58(b)(8)--one plan consisting of 3,000 open accounts with credit 
cards usable only at Merchant A and another plan consisting of 5,000 
open accounts with credit cards usable only at Merchant B and its 
affiliates.
    The example above remains the same regardless of whether (or the 
extent to which) the terms applicable to the individual open accounts 
differ. For example, assume that, with respect to the card issuer's 
3,000 open accounts with credit cards usable only at Merchant A in the 
example above, 1,000 of the open accounts have a purchase APR of 12

[[Page 793]]

percent, 1,000 of the open accounts have a purchase APR of 15 percent, 
and 1,000 of the open accounts have a purchase APR of 18 percent. All of 
the 5,000 open accounts with credit cards usable only at Merchant B and 
Merchant B's affiliates have the same 15 percent purchase APR. The card 
issuer still has only two separate private label credit card plans, as 
defined by Sec. 226.58(b)(8). The open accounts with credit cards 
usable only at Merchant A do not constitute three separate private label 
credit card plans under Sec. 226.58(b)(8), even though the accounts are 
subject to different terms.
    58(c) Submission of agreements to Board.
    58(c)(1) Quarterly submissions.
    1. Quarterly submission requirement. Section 226.58(c)(1) requires 
card issuers to send quarterly submissions to the Board no later than 
the first business day on or after January 31, April 30, July 31, and 
October 31 of each year. For example, a card issuer has already 
submitted three credit card agreements to the Board. On October 15, the 
card issuer stops offering agreement A. On November 20, the card issuer 
amends agreement B. On December 1, the issuer starts offering a new 
agreement D. The card issuer must submit to the Board no later than the 
first business day on or after January 31: (i) Notification that the 
card issuer is withdrawing agreement A, because it is no longer offered 
to the public; (ii) the amended version of agreement B; and (iii) 
agreement D.
    2. No quarterly submission required. Under Sec. 226.58(c)(1), a 
card issuer is not required to make any submission to the Board at a 
particular quarterly submission deadline if, during the previous 
calendar quarter, the card issuer did not take any of the following 
actions: (i) Offering a new credit card agreement that was not submitted 
to the Board previously; (ii) amending an agreement previously submitted 
to the Board; and (iii) ceasing to offer an agreement previously 
submitted to the Board. For example, a card issuer offers five 
agreements to the public as of September 30 and submits these to the 
Board by October 31, as required by Sec. 226.58(c)(1). Between 
September 30 and December 31, the card issuer continues to offer all 
five of these agreements to the public without amending them and does 
not begin offering any new agreements. The card issuer is not required 
to make any submission to the Board by the following January 31.
    3. Quarterly submission of complete set of updated agreements. 
Section 226.58(c)(1) permits a card issuer to submit to the Board on a 
quarterly basis a complete, updated set of the credit card agreements 
the card issuer offers to the public. For example, a card issuer offers 
agreements A, B, and C to the public as of March 31. The card issuer 
submits each of these agreements to the Board by April 30 as required by 
Sec. 226.58(c)(1). On May 15, the card issuer amends agreement A, but 
does not make any changes to agreements B or C. As of June 30, the card 
issuer continues to offer amended agreement A and agreements B and C to 
the public. At the next quarterly submission deadline, July 31, the card 
issuer must submit the entire amended agreement A and is not required to 
make any submission with respect to agreements B and C. The card issuer 
may either: (i) Submit the entire amended agreement A and make no 
submission with respect to agreements B and C; or (ii) submit the entire 
amended agreement A and also resubmit agreements B and C. A card issuer 
may choose to resubmit to the Board all of the agreements it offered to 
the public as of a particular quarterly submission deadline even if the 
card issuer has not introduced any new agreements or amended any 
agreements since its last submission and continues to offer all 
previously submitted agreements.
    58(c)(3) Amended agreements.
    1. No requirement to resubmit agreements not amended. Under Sec. 
226.58(c)(3), if a credit card agreement has been submitted to the 
Board, the agreement has not been amended, and the card issuer continues 
to offer the agreement to the public, no additional submission regarding 
that agreement is required. For example, a credit card issuer begins 
offering an agreement in October and submits the agreement to the Board 
the following January 31, as required by Sec. 226.58(c)(1). As of March 
31, the card issuer has not amended the agreement and is still offering 
the agreement to the public. The card issuer is not required to submit 
anything to the Board regarding that agreement by April 30.
    2. Submission of amended agreements. If a card issuer amends a 
credit card agreement previously submitted to the Board, Sec. 
226.58(c)(3) requires the card issuer to submit the entire amended 
agreement to the Board. The issuer must submit the amended agreement to 
the Board by the first quarterly submission deadline after the last day 
of the calendar quarter in which the change became effective. However, 
the issuer is required to submit the amended agreement to the Board only 
if the issuer offered the amended agreement to the public as of the last 
business day of the calendar quarter in which the change became 
effective. For example, a card issuer submits an agreement to the Board 
on October 31. On November 15, the issuer changes the balance 
computation method used under the agreement. Because an element of the 
pricing information has changed, the agreement has been amended for 
purposes of Sec. 226.58(c)(3). On December 31, the last business day of 
the calendar quarter in which the change in the balance computation 
method became effective, the issuer still offers the agreement to the 
public as amended on November 15. The issuer must submit

[[Page 794]]

the entire amended agreement to the Board no later than January 31.
    3. Agreements amended but no longer offered to the public. A card 
issuer should submit an amended agreement to the Board under Sec. 
226.58(c)(3) only if the issuer offered the amended agreement to the 
public as of the last business day of the calendar quarter in which the 
amendment became effective. Agreements that are not offered to the 
public as of the last day of the calendar quarter should not be 
submitted to the Board. For example, on December 31 a card issuer offers 
two agreements, Agreement A and Agreement B. The issuer submits these 
agreements to the Board by January 31 as required by Sec. 226.58. On 
February 15, the issuer amends both Agreement A and Agreement B. On 
February 28, the issuer stops offering Agreement A to the public. On 
March 15, the issuer amends Agreement B a second time. As a result, on 
March 31, the last business day of the calendar quarter, the issuer 
offers to the public one agreement--Agreement B as amended on March 15. 
By the April 30 quarterly submission deadline, the issuer must: (1) 
Notify the Board that it is withdrawing Agreement A because Agreement A 
is no longer offered to the public; and (2) submit to the Board 
Agreement B as amended on March 15. The issuer should not submit to the 
Board either Agreement A as amended on February 15 or the earlier 
version of Agreement B (as amended on February 15), as neither was 
offered to the public on March 31, the last business day of the calendar 
quarter.
    4. Change-in-terms notices not permissible. Section 226.58(c)(3) 
requires that if an agreement previously submitted to the Board is 
amended, the card issuer must submit the entire revised agreement to the 
Board. A card issuer may not fulfill this requirement by submitting a 
change-in-terms or similar notice covering only the terms that have 
changed. In addition, amendments must be integrated into the text of the 
agreement (or the addenda described in Sec. 226.58(c)(8)), not provided 
as separate riders. For example, a card issuer changes the purchase APR 
associated with an agreement the issuer has previously submitted to the 
Board. The purchase APR for that agreement was included in the addendum 
of pricing information, as required by Sec. 226.58(c)(8). The card 
issuer may not submit a change-in-terms or similar notice reflecting the 
change in APR, either alone or accompanied by the original text of the 
agreement and original pricing information addendum. Instead, the card 
issuer must revise the pricing information addendum to reflect the 
change in APR and submit to the Board the entire text of the agreement 
and the entire revised addendum, even though no changes have been made 
to the provisions of the agreement and only one item on the pricing 
information addendum has changed.
    58(c)(4) Withdrawal of agreements.
    1. Notice of withdrawal of agreement. Section 226.58(c)(4) requires 
a card issuer to notify the Board if any agreement previously submitted 
to the Board by that issuer is no longer offered to the public by the 
first quarterly submission deadline after the last day of the calendar 
quarter in which the card issuer ceased to offer the agreement. For 
example, on January 5 a card issuer stops offering to the public an 
agreement it previously submitted to the Board. The card issuer must 
notify the Board that the agreement is being withdrawn by April 30, the 
first quarterly submission deadline after March 31, the last day of the 
calendar quarter in which the card issuer stopped offering the 
agreement.
    58(c)(5) De minimis exception.
    1. Relationship to other exceptions. The de minimis exception is 
distinct from the private label credit card exception under Sec. 
226.58(c)(6) and the product testing exception under Sec. 226.58(c)(7). 
The de minimis exception provides that a card issuer with fewer than 
10,000 open credit card accounts is not required to submit any 
agreements to the Board, regardless of whether those agreements qualify 
for the private label credit card exception or the product testing 
exception. In contrast, the private label credit card exception and the 
product testing exception provide that a card issuer is not required to 
submit to the Board agreements offered solely in connection with certain 
types of credit card plans with fewer than 10,000 open accounts, 
regardless of the card issuer's total number of open accounts.
    2. De minimis exception. Under Sec. 226.58(c)(5), a card issuer is 
not required to submit any credit card agreements to the Board under 
Sec. 226.58(c)(1) if the card issuer has fewer than 10,000 open credit 
card accounts as of the last business day of the calendar quarter. For 
example, a card issuer offers five credit card agreements to the public 
as of September 30. However, the card issuer has only 2,000 open credit 
card accounts as of September 30. The card issuer is not required to 
submit any agreements to the Board by October 31 because the issuer 
qualifies for the de minimis exception.
    3. Date for determining whether card issuer qualifies clarified. 
Whether a card issuer qualifies for the de minimis exception is 
determined as of the last business day of each calendar quarter. For 
example, as of December 31, a card issuer offers three agreements to the 
public and has 9,500 open credit card accounts. As of January 30, the 
card issuer still offers three agreements, but has 10,100 open accounts. 
As of March 31, the card issuer still offers three agreements, but has 
only 9,700 open accounts. Even though the card issuer had 10,100 open 
accounts at one time during the calendar quarter, the card issuer 
qualifies for the de minimis exception because the number of open 
accounts was

[[Page 795]]

less than 10,000 as of March 31. The card issuer therefore is not 
required to submit any agreements to the Board under Sec. 226.58(c)(1) 
by April 30.
    4. Date for determining whether card issuer ceases to qualify 
clarified. Whether a card issuer has ceased to qualify for the de 
minimis exception under Sec. 226.58(c)(5) is determined as of the last 
business day of the calendar quarter, For example, as of June 30, a card 
issuer offers three agreements to the public and has 9,500 open credit 
card accounts. The card issuer is not required to submit any agreements 
to the Board under Sec. 226.58(c)(1) because the card issuer qualifies 
for the de minimis exception. As of July 15, the card issuer still 
offers the same three agreements, but now has 10,000 open accounts. The 
card issuer is not required to take any action at this time, because 
whether a card issuer qualifies for the de minimis exception under Sec. 
226.58(c)(5) is determined as of the last business day of the calendar 
quarter. As of September 30, the card issuer still offers the same three 
agreements and still has 10,000 open accounts. Because the card issuer 
had 10,000 open accounts as of September 30, the card issuer ceased to 
qualify for the de minimis exception and must submit the three 
agreements it offers to the Board by October 31, the next quarterly 
submission deadline.
    5. Option to withdraw agreements clarified. Section 226.58(c)(5) 
provides that if a card issuer that did not previously qualify for the 
de minimis exception qualifies for the de minimis exception, the card 
issuer must continue to make quarterly submissions to the Board as 
required by Sec. 226.58(c)(1) until the card issuer notifies the Board 
that the issuer is withdrawing all agreements it previously submitted to 
the Board. For example, a card issuer has 10,001 open accounts and 
offers three agreements to the public as of December 31. The card issuer 
has submitted each of the three agreements to the Board as required 
under Sec. 226.58(c)(1). As of March 31, the card issuer has only 9,999 
open accounts. The card issuer has two options. First, the card issuer 
may notify the Board that the card issuer is withdrawing each of the 
three agreements it previously submitted. Once the card issuer has 
notified the Board, the card issuer is no longer required to make 
quarterly submissions to the Board under Sec. 226.58(c)(1). 
Alternatively, the card issuer may choose not to notify the Board that 
it is withdrawing its agreements. In this case, the card issuer must 
continue making quarterly submissions to the Board as required by Sec. 
226.58(c)(1). The card issuer might choose not to withdraw its 
agreements if, for example, the card issuer believes that it likely will 
cease to qualify for the de minimis exception again in the near future.
    58(c)(6) Private label credit card exception.
    1. Private label credit card exception. Under Sec. 226.58(c)(6)(i), 
a card issuer is not required to submit to the Board a credit card 
agreement if, as of the last business day of the calendar quarter, the 
agreement: (A) Is offered for accounts under one or more private label 
credit card plans each of which has fewer than 10,000 open accounts; and 
(B) is not offered to the public other than for accounts under such a 
plan. For example, a card issuer offers to the public a credit card 
agreement offered solely for private label credit card accounts with 
credit cards that can be used only at Merchant A. The card issuer has 
8,000 open accounts with such credit cards usable only at Merchant A. 
The card issuer is not required to submit this agreement to the Board 
under Sec. 226.58(c)(1) because the agreement is offered for a private 
label credit card plan with fewer than 10,000 open accounts, and the 
credit card agreement is not offered to the public other than for 
accounts under that private label credit card plan.
    In contrast, assume the same card issuer also offers to the public a 
different credit card agreement that is offered solely for private label 
credit card accounts with credit cards usable only at Merchant B. The 
card issuer has 12,000 open accounts with such credit cards usable only 
at Merchant B. The private label credit card exception does not apply. 
Although this agreement is offered for a private label credit card plan 
(i.e., the 12,000 private label credit card accounts with credit cards 
usable only at Merchant B), and the agreement is not offered to the 
public other than for accounts under that private label credit card 
plan, the private label credit card plan has more than 10,000 open 
accounts. (The card issuer still is not required to submit to the Board 
the agreement offered in connection with credit cards usable only at 
Merchant A, as each agreement is evaluated separately under the private 
label credit card exception.)
    2. Card issuers with small private label and other credit card 
plans. Whether the private label credit card exception applies is 
determined on an agreement-by-agreement basis. Therefore, some 
agreements offered by a card issuer may qualify for the private label 
credit card exception even though the card issuer also offers other 
agreements that do not qualify, such as agreements offered for accounts 
with cards usable at multiple unaffiliated merchants or agreements 
offered for accounts under private label plans with 10,000 or more open 
accounts.
    3. De minimis exception distinguished. The private label credit card 
exception under Sec. 226.58(c)(6) is distinct from the de minimis 
exception under Sec. 226.58(c)(5). The private label credit card 
exception exempts card issuers from submitting certain agreements to the 
Board regardless of the card issuer's overall size as measured by total 
number of

[[Page 796]]

open accounts. In contrast, the de minimis exception exempts a 
particular card issuer from submitting any credit card agreements to the 
Board if the card issuer has fewer than 10,000 total open accounts. For 
example, a card issuer offers to the public two credit card agreements. 
Agreement A is offered solely for private label credit card accounts 
with credit cards usable only at Merchant A. The card issuer has 5,000 
open credit card accounts with such credit cards usable only at Merchant 
A. Agreement B is offered solely for credit card accounts with cards 
usable at multiple unaffiliated merchants that participate in a major 
payment network. The card issuer has 40,000 open credit card accounts 
with such payment network cards. The card issuer is not required to 
submit agreement A to the Board under Sec. 226.58(c)(1) because 
agreement A qualifies for the private label credit card exception under 
Sec. 226.58(c)(6). Agreement A is offered for accounts under a private 
label credit card plan with fewer than 10,000 open accounts (i.e., the 
5,000 accounts with credit cards usable only at Merchant A) and is not 
otherwise offered to the public. The card issuer is required to submit 
agreement B to the Board under Sec. 226.58(c)(1). The card issuer does 
not qualify for the de minimis exception under Sec. 226.58(c)(5) 
because it has more than 10,000 open accounts, and agreement B does not 
qualify for the private label credit card exception under Sec. 
226.58(c)(6) because it is not offered solely for accounts under a 
private label credit card plan with fewer than 10,000 open accounts.
    4. Agreement otherwise offered to the public. An agreement qualifies 
for the private label exception only if it is offered for accounts under 
one or more private label credit card plans with fewer than 10,000 open 
accounts and is not offered to the public other than for accounts under 
such a plan. For example, a card issuer offers a single agreement to the 
public. The agreement is offered for private label credit card accounts 
with credit cards usable only at Merchant A. The card issuer has 9,000 
such open accounts with credit cards usable only at Merchant A. The 
agreement also is offered for credit card accounts with credit cards 
usable at multiple unaffiliated merchants that participate in a major 
payment network. The agreement does not qualify for the private label 
credit card exception. The agreement is offered for accounts under a 
private label credit card plan with fewer than 10,000 open accounts. 
However, the agreement also is offered to the public for accounts that 
are not part of a private label credit card plan and therefore does not 
qualify for the private label credit card exception.
    Similarly, an agreement does not qualify for the private label 
credit card exception if it is offered in connection with one private 
label credit card plan with fewer than 10,000 open accounts and one 
private label credit card plan with 10,000 or more open accounts. For 
example, a card issuer offers a single credit card agreement to the 
public. The agreement is offered for two types of accounts. The first 
type of account is a private label credit card account with a credit 
card usable only at Merchant A. The second type of account is a private 
label credit card account with a credit card usable only at Merchant B. 
The card issuer has 10,000 such open accounts with credit cards usable 
only at Merchant A and 5,000 such open accounts with credit cards usable 
only at Merchant B. The agreement does not qualify for the private label 
credit card exception. While the agreement is offered for accounts under 
a private label credit card plan with fewer than 10,000 open accounts 
(i.e., the 5,000 open accounts with credit cards usable only at Merchant 
B), the agreement is also offered for accounts not under such a plan 
(i.e., the 10,000 open accounts with credit cards usable only at 
Merchant A).
    5. Agreement used for multiple small private label plans. The 
private label exception applies even if the same agreement is used for 
more than one private label credit card plan with fewer than 10,000 open 
accounts. For example, a card issuer has 15,000 total open private label 
credit card accounts. Of these, 7,000 accounts have credit cards usable 
only at Merchant A, 5,000 accounts have credit cards usable only at 
Merchant B, and 3,000 accounts have credit cards usable only at Merchant 
C. The card issuer offers to the public a single credit card agreement 
that is offered for all three types of accounts and is not offered for 
any other type of account. The card issuer is not required to submit the 
agreement to the Board under Sec. 226.58(c)(1). The agreement is used 
for three different private label credit card plans (i.e., the accounts 
with credit cards usable at Merchant A, the accounts with credit cards 
usable at Merchant B, and the accounts with credit cards usable at 
Merchant C), each of which has fewer than 10,000 open accounts, and the 
card issuer does not offer the agreement for any other type of account. 
The agreement therefore qualifies for the private label credit card 
exception under Sec. 226.58(c)(6).
    6. Multiple agreements used for one private label credit card plan. 
The private label credit card exception applies even if a card issuer 
offers more than one agreement in connection with a particular private 
label credit card plan. For example, a card issuer has 5,000 open 
private label credit card accounts with credit cards usable only at 
Merchant A. The card issuer offers to the public three different 
agreements each of which may be used in connection with private label 
credit card accounts with credit cards usable only at Merchant A. The 
agreements are not offered for any other type of credit card account. 
The card issuer is not required to submit any of the three agreements to 
the Board under

[[Page 797]]

Sec. 226.58(c)(1) because each of the agreements is used for a private 
label credit card plan which has fewer than 10,000 open accounts and 
none of the three is offered to the public other than for accounts under 
such a plan.
    58(c)(8) Form and content of agreements submitted to the Board.
    1. ``As of'' date clarified. Agreements submitted to the Board must 
contain the provisions of the agreement and pricing information in 
effect as of the last business day of the preceding calendar quarter. 
For example, on June 1, a card issuer decides to decrease the purchase 
APR associated with one of the agreements it offers to the public. The 
change in the APR will become effective on August 1. If the card issuer 
submits the agreement to the Board on July 31 (for example, because the 
agreement has been otherwise amended), the agreement submitted should 
not include the new lower APR because that APR was not in effect on June 
30, the last business day of the preceding calendar quarter.
    2. Pricing agreement addendum. Pricing information must be set forth 
in the separate addendum described in Sec. 226.58(c)(8)(ii)(A) even if 
it is also stated elsewhere in the agreement.
    3. Pricing agreement variations do not constitute separate 
agreements. Pricing information that may vary from one cardholder to 
another depending on the cardholder's creditworthiness or state of 
residence or other factors must be disclosed by setting forth all the 
possible variations or by providing a range of possible variations. Two 
agreements that differ only with respect to variations in the pricing 
information do not constitute separate agreements for purposes of this 
section. For example, a card issuer offers two types of credit card 
accounts that differ only with respect to the purchase APR. The purchase 
APR for one type of account is 15 percent, while the purchase APR for 
the other type of account is 18 percent. The provisions of the agreement 
and pricing information for the two types of accounts are otherwise 
identical. The card issuer should not submit to the Board one agreement 
with a pricing information addendum listing a 15 percent purchase APR 
and another agreement with a pricing information addendum listing an 18 
percent purchase APR. Instead, the card issuer should submit to the 
Board one agreement with a pricing information addendum listing possible 
purchase APRs of 15 or 18 percent.
    4. Optional variable terms addendum. Examples of provisions that 
might be included in the variable terms addendum include a clause that 
is required by law to be included in credit card agreements in a 
particular state but not in other states (unless, for example, a clause 
is included in the agreement used for all cardholders under a heading 
such as ``For State X Residents''), the name of the credit card plan to 
which the agreement applies (if this information is included in the 
agreement), or the name of a charitable organization to which donations 
will be made in connection with a particular card (if this information 
is included in the agreement).
    5. Integrated agreement requirement. Card issuers may not provide 
provisions of the agreement or pricing information in the form of 
change-in-terms notices or riders. The only two addenda that may be 
submitted as part of an agreement are the pricing information addendum 
and optional variable terms addendum described in Sec. 226.58(c)(8). 
Changes in provisions or pricing information must be integrated into the 
body of the agreement, pricing information addendum, or optional 
variable terms addendum described in Sec. 226.58(c)(8). For example, it 
would be impermissible for a card issuer to submit to the Board an 
agreement in the form of a terms and conditions document dated January 
1, 2005, four subsequent change in terms notices, and 2 addenda showing 
variations in pricing information. Instead, the card issuer must submit 
a document that integrates the changes made by each of the change in 
terms notices into the body of the original terms and conditions 
document and a single addendum displaying variations in pricing 
information.
    58(d) Posting of agreements offered to the public.
    1. Requirement applies only to agreements submitted to the Board. 
Card issuers are only required to post and maintain on their publicly 
available Web site the credit card agreements that the card issuer must 
submit to the Board under Sec. 226.58(c). If, for example, a card 
issuer is not required to submit any agreements to the Board because the 
card issuer qualifies for the de minimis exception under Sec. 
226.58(c)(5), the card issuer is not required to post and maintain any 
agreements on its Web site under Sec. 226.58(d). Similarly, if a card 
issuer is not required to submit a specific agreement to the Board, such 
as an agreement that qualifies for the private label exception under 
Sec. 226.58(c)(6), the card issuer is not required to post and maintain 
that agreement under Sec. 226.58(d) (either on the card issuer's 
publicly available Web site or on the publicly available Web sites of 
merchants at which private label credit cards can be used). (The card 
issuer in both of these cases is still required to provide each 
individual cardholder with access to his or her specific credit card 
agreement under Sec. 226.58(e) by posting and maintaining the agreement 
on the card issuer's Web site or by providing a copy of the agreement 
upon the cardholder's request.)
    2. Card issuers that do not otherwise maintain Web sites. Unlike 
Sec. 226.58(e), Sec. 226.58(d) does not include a special rule for 
card issuers that do not otherwise maintain a Web site. If a card issuer 
is required to submit one or

[[Page 798]]

more agreements to the Board under Sec. 226.58(c), that card issuer 
must post those agreements on a publicly available Web site it maintains 
(or, with respect to an agreement for a private label credit card, on 
the publicly available Web site of at least one of the merchants at 
which the card may be used, as provided in Sec. 226.58(d)(1)).
    If an issuer provides cardholders with access to specific 
information about their individual accounts, such as balance information 
or copies of statements, through a third-party Web site, the issuer is 
considered to maintain that Web site for purposes of Sec. 226.58. Such 
a third-party Web site is deemed to be maintained by the issuer for 
purposes of Sec. 226.58(d) even where, for example, an unaffiliated 
entity designs the Web site and owns and maintains the information 
technology infrastructure that supports the Web site, cardholders with 
credit cards from multiple issuers can access individual account 
information through the same Web site, and the Web site is not labeled, 
branded, or otherwise held out to the public as belonging to the issuer. 
Therefore, issuers that provide cardholders with access to account-
specific information through a third-party Web site can comply with 
Sec. 226.58(d) by ensuring that the agreements the issuer submits to 
the Board are posted on the third-party Web site in accordance with 
Sec. 226.58(d). (In contrast, the Sec. 226.58(d)(1) rule regarding 
agreements for private label credit cards is not conditioned on 
cardholders' ability to access account-specific information through the 
merchant's Web site.)
    3. Private label credit card plans. Section 226.58(d) provides that, 
with respect to an agreement offered solely for accounts under one or 
more private label credit card plans, a card issuer may comply by 
posting and maintaining the agreement on the Web site of at least one of 
the merchants at which the cards issued under each private label credit 
card plan with 10,000 or more open accounts may be used. For example, a 
card issuer has 100,000 open private label credit card accounts. Of 
these, 75,000 open accounts have credit cards usable only at Merchant A 
and 25,000 open accounts have credit cards usable only at Merchant B and 
Merchant B's affiliates, Merchants C and D. The card issuer offers to 
the public a single credit card agreement that is offered for both of 
these types of accounts and is not offered for any other type of 
account.
    The card issuer is required to submit the agreement to the Board 
under Sec. 226.58(c)(1). (The card issuer has more than 10,000 open 
accounts, so the Sec. 226.58(c)(5) de minimis exception does not apply. 
The agreement is offered solely for two different private label credit 
card plans (i.e., one plan consisting of the accounts with credit cards 
usable at Merchant A and one plan consisting of the accounts with credit 
cards usable at Merchant B and its affiliates, Merchants C and D), but 
both of these plans have more than 10,000 open accounts, so the Sec. 
226.58(c)(6) private label credit card exception does not apply. 
Finally, the agreement is not offered solely in connection with a 
product test by the card issuer, so the Sec. 226.58(c)(7) product test 
exception does not apply.)
    Because the card issuer is required to submit the agreement to the 
Board under Sec. 226.58(c)(1), the card issuer is required to post and 
maintain the agreement on the card issuer's publicly available Web site 
under Sec. 226.58(d). However, because the agreement is offered solely 
for accounts under one or more private label credit card plans, the card 
issuer may comply with Sec. 226.58(d) in either of two ways. First, the 
card issuer may comply by posting and maintaining the agreement on the 
card issuer's own publicly available Web site. Alternatively, the card 
issuer may comply by posting and maintaining the agreement on the 
publicly available Web site of Merchant A and the publicly available Web 
site of at least one of Merchants B, C and D. It would not be sufficient 
for the card issuer to post the agreement on Merchant A's Web site alone 
because Sec. 226.58(d) requires the card issuer to post the agreement 
on the publicly available Web site of ``at least one of the merchants at 
which cards issued under each private label credit card plan may be 
used'' (emphasis added).
    In contrast, assume that a card issuer has 100,000 open private 
label credit card accounts. Of these, 5,000 open accounts have credit 
cards usable only at Merchant A and 95,000 open accounts have credit 
cards usable only at Merchant B and Merchant B's affiliates, Merchants C 
and D. The card issuer offers to the public a single credit card 
agreement that is offered for both of these types of accounts and is not 
offered for any other type of account.
    The card issuer is required to submit the agreement to the Board 
under Sec. 226.58(c)(1). (The card issuer has more than 10,000 open 
accounts, so the Sec. 226.58(c)(5) de minimis exception does not apply. 
The agreement is offered solely for two different private label credit 
card plans (i.e., one plan consisting of the accounts with credit cards 
usable at Merchant A and one plan consisting of the accounts with credit 
cards usable at Merchant B and its affiliates, Merchants C and D), but 
one of these plans has more than 10,000 open accounts, so the Sec. 
226.58(c)(6) private label credit card exception does not apply. 
Finally, the agreement is not offered solely in connection with a 
product test by the card issuer, so the Sec. 226.58(c)(7) product test 
exception does not apply.)
    Because the card issuer is required to submit the agreement to the 
Board under Sec. 226.58(c)(1), the card issuer is required to post and 
maintain the agreement on the card issuer's publicly available Web site 
under

[[Page 799]]

Sec. 226.58(d). However, because the agreement is offered solely for 
accounts under one or more private label credit card plans, the card 
issuer may comply with Sec. 226.58(d) in either of two ways. First, the 
card issuer may comply by posting and maintaining the agreement on the 
card issuer's own publicly available Web site. Alternatively, the card 
issuer may comply by posting and maintaining the agreement on the 
publicly available Web site of at least one of Merchants B, C and D. The 
card issuer is not required to post and maintain the agreement on the 
publicly available Web site of Merchant A because the card issuer's 
private label credit card plan consisting of accounts with cards usable 
only at Merchant A has fewer than 10,000 open accounts.
    58(e) Agreements for all open accounts.
    1. Requirement applies to all open accounts. The requirement to 
provide access to credit card agreements under Sec. 226.58(e) applies 
to all open credit card accounts, regardless of whether such agreements 
are required to be submitted to the Board pursuant to Sec. 226.58(c) 
(or posted on the card issuer's Web site pursuant to Sec. 226.58(d)). 
For example, a card issuer that is not required to submit agreements to 
the Board because it qualifies for the de minimis exception under Sec. 
226.58(c)(5)) would still be required to provide cardholders with access 
to their specific agreements under Sec. 226.58(e). Similarly, an 
agreement that is no longer offered to the public would not be required 
to be submitted to the Board under Sec. 226.58(c), but would still need 
to be provided to the cardholder to whom it applies under Sec. 
226.58(e).
    2. Readily available telephone line. Section 226.58(e) provides that 
card issuers that provide copies of cardholder agreements upon request 
must provide the cardholder with the ability to request a copy of their 
agreement by calling a readily available telephone line. 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.
    3. Issuers without interactive Web sites. Section 226.58(e)(2) 
provides that a card issuer that does not maintain a Web site from which 
cardholders can access specific information about their individual 
accounts is not required to provide a cardholder with the ability to 
request a copy of the agreement by using the card issuer's Web site. A 
card issuer without a Web site of any kind could comply by disclosing 
the telephone number on each periodic statement; a card issuer with a 
non-interactive Web site could comply in the same way, or alternatively 
could comply by displaying the telephone number on the card issuer's Web 
site. An issuer is considered to maintain an interactive Web site for 
purposes of the Sec. 226.58(e)(2) special rule if the issuer provide 
cardholders with access to specific information about their individual 
accounts, such as balance information or copies of statements, through a 
third-party interactive Web site. Such a Web site is deemed to be 
maintained by the issuer for purposes of Sec. 226.58(e)(2) even where, 
for example, an unaffiliated entity designs the Web site and owns and 
maintains the information technology infrastructure that supports the 
Web site, cardholders with credit cards from multiple issuers can access 
individual account information through the same Web site, and the Web 
site is not labeled, branded, or otherwise held out to the public as 
belonging to the issuer. An issuer that provides cardholders with access 
to specific information about their individual accounts through such a 
Web site is not permitted to comply with the special rule in Sec. 
226.58(e)(2). Instead, such an issuer must comply with Sec. 
226.58(e)(1).
    4. Deadline for providing requested agreements clarified. Sections 
226.58(e)(1)(ii) and (e)(2) require that credit card agreements provided 
upon request must be sent to the cardholder or otherwise made available 
to the cardholder in electronic or paper form no later than 30 days 
after the cardholder's request is received. For example, if a card 
issuer chooses to respond to a cardholder's request by mailing a paper 
copy of the cardholder's agreement, the card issuer must mail the 
agreement no later than 30 days after receipt of the cardholder's 
request. Alternatively, if a card issuer chooses to respond to a 
cardholder's request by posting the cardholder's agreement on the card 
issuer's Web site, the card issuer must post the agreement on its Web 
site no later than 30 days after receipt of the cardholder's request. 
Section 226.58(e)(3)(v) provides that a card issuer may provide 
cardholder agreements in either electronic or paper form regardless of 
the form of the cardholder's request.

             Section 226.59-Reevaluation of Rate Increases.

    59(a) General rule.
    59(a)(1) Evaluation of increased rate.
    1. Types of rate increases covered. Section 226.59(a) applies both 
to increases in annual percentage rates imposed on a consumer's account 
based on that consumer's credit risk or other circumstances specific to 
that consumer and to increases in annual percentage rates imposed based 
on factors that are not specific to the consumer, such as changes in 
market conditions or the issuer's cost of funds.
    2. Rate increases actually imposed. Under Sec. 226.59(a), a card 
issuer must review changes

[[Page 800]]

in factors only if the increased rate is actually imposed on the 
consumer's account. For example, if a card issuer increases the penalty 
rate for a credit card account under an open-end (not home-secured) 
consumer credit plan and the consumer's account has no balances that are 
currently subject to the penalty rate, the card issuer is required to 
provide a notice pursuant to Sec. 226.9(c) of the change in terms, but 
the requirements of Sec. 226.59 do not apply. However, if the 
consumer's account later becomes subject to the penalty rate, the card 
issuer is required to provide a notice pursuant to Sec. 226.9(g) and 
the requirements of Sec. 226.59 begin to apply upon imposition of the 
penalty rate. Similarly, if a card issuer raises the cash advance rate 
applicable to a consumer's account but the consumer engages in no cash 
advance transactions to which that increased rate is applied, the card 
issuer is required to provide a notice pursuant to Sec. 226.9(c) of the 
change in terms, but the requirements of Sec. 226.59 do not apply. If 
the consumer subsequently engages in a cash advance transaction, the 
requirements of Sec. 226.59 begin to apply at that time.
    3. Change in type of rate. i. Generally. A change from a variable 
rate to a non-variable rate or from a non-variable rate to a variable 
rate is not a rate increase for purposes of Sec. 226.59, if the rate in 
effect immediately prior to the change in type of rate is equal to or 
greater than the rate in effect immediately after the change. For 
example, a change from a variable rate of 15.99% to a non-variable rate 
of 15.99% is not a rate increase for purposes of Sec. 226.59 at the 
time of the change. See Sec. 226.55 for limitations on the 
permissibility of changing from a non-variable rate to a variable rate.
    ii. Change from non-variable rate to variable rate. A change from a 
non-variable to a variable rate constitutes a rate increase for purposes 
of Sec. 226.59 if the variable rate exceeds the non-variable rate that 
would have applied if the change in type of rate had not occurred. For 
example, assume a new credit card account under an open-end (not home-
secured) consumer credit plan is opened on January 1 of year 1 and that 
a non-variable annual percentage rate of 12% applies to all transactions 
on the account. On January 1 of year 2, upon 45 days' advance notice 
pursuant to Sec. 226.9(c)(2), the rate on all new transactions is 
changed to a variable rate that is currently 12% and is determined by 
adding a margin of 10 percentage points to a publicly-available index 
not under the card issuer's control. The change from the 12% non-
variable rate to the 12% variable rate on January 1 of year 2 is not a 
rate increase for purposes of Sec. 226.59(a). On April 1 of year 2, the 
value of the variable rate increases to 12.5%. The increase in the rate 
from 12% to 12.5% is a rate increase for purposes of Sec. 226.59, and 
the card issuer must begin periodically conducting reviews of the 
account pursuant to Sec. 226.59. The increase that must be evaluated 
for purposes of Sec. 226.59 is the increase from a non-variable rate of 
12% to a variable rate of 12.5%.
    iii. Change from variable rate to non-variable rate. A change from a 
variable to a non-variable rate constitutes a rate increase for purposes 
of Sec. 226.59 if the non-variable rate exceeds the variable rate that 
would have applied if the change in type of rate had not occurred. For 
example, assume a new credit card account under an open-end (not home-
secured) consumer credit plan is opened on January 1 of year 1 and that 
a variable annual percentage rate that is currently 15% and is 
determined by adding a margin of 10 percentage points to a publicly-
available index not under the card issuer's control applies to all 
transactions on the account. On January 1 of year 2, upon 45 days' 
advance notice pursuant to Sec. 226.9(c)(2), the rate on all existing 
balances and new transactions is changed to a non-variable rate that is 
currently 15%. The change from the 15% variable rate to the 15% non-
variable rate on January 1 of year 2 is not a rate increase for purposes 
of Sec. 226.59(a). On April 1 of year 2, the value of the variable rate 
that would have applied to the account decreases to 12.5%. Accordingly, 
on April 1 of year 2, the non-variable rate of 15% exceeds the 12.5% 
variable rate that would have applied but for the change in type of 
rate. At this time, the change to the non-variable rate of 15% 
constitutes a rate increase for purposes of Sec. 226.59, and the card 
issuer must begin periodically conducting reviews of the account 
pursuant to Sec. 226.59. The increase that must be evaluated for 
purposes of Sec. 226.59 is the increase from a variable rate of 12.5% 
to a non-variable rate of 15%.
    4. Rate increases prior to effective date of rule. For increases in 
annual percentage rates made on or after January 1, 2009, and prior to 
August 22, 2010, Sec. 226.59(a) requires the card issuer to review the 
factors described in Sec. 226.59(d) and reduce the rate, as 
appropriate, if the rate increase is of a type for which 45 days' 
advance notice would currently be required under Sec. 226.9(c)(2) or 
(g). For example, 45 days' notice is not required under Sec. 
226.9(c)(2) if the rate increase results from the increase in the index 
by which a properly-disclosed variable rate is determined in accordance 
with Sec. 226.9(c)(2)(v)(C) or if the increase occurs upon expiration 
of a specified period of time and disclosures complying with Sec. 
226.9(c)(2)(v)(B) have been provided. The requirements of Sec. 226.59 
do not apply to such rate increases.
    5. Amount of rate decrease. i. General. Even in circumstances where 
a rate reduction is required, Sec. 226.59 does not require that a card 
issuer decrease the rate that applies to a credit card account to the 
rate that was in effect prior to the rate increase subject to Sec. 
226.59(a). The amount of the rate decrease

[[Page 801]]

that is required must be determined based upon the card issuer's 
reasonable policies and procedures under Sec. 226.59(b) for 
consideration of factors described in Sec. 226.59(a) and (d). For 
example, assume a consumer's rate on new purchases is increased from a 
variable rate of 15.99% to a variable rate of 23.99% based on the 
consumer's making a required minimum periodic payment five days late. 
The consumer makes all of the payments required on the account on time 
for the six months following the rate increase. Assume that the card 
issuer evaluates the account by reviewing the factors on which the 
increase in an annual percentage rate was originally based, in 
accordance with Sec. 226.59(d)(1)(i). The card issuer is not required 
to decrease the consumer's rate to the 15.99% that applied prior to the 
rate increase. However, the card issuer's policies and procedures for 
performing the review required by Sec. 226.59(a) must be reasonable, as 
required by Sec. 226.59(b), and must take into account any reduction in 
the consumer's credit risk based upon the consumer's timely payments.
    ii. Change in type of rate. If the rate increase subject to Sec. 
226.59 involves a change from a variable rate to a non-variable rate or 
from a non-variable rate to a variable rate, Sec. 226.59 does not 
require that the issuer reinstate the same type of rate that applied 
prior to the change. However, the amount of any rate decrease that is 
required must be determined based upon the card issuer's reasonable 
policies and procedures under Sec. 226.59(b) for consideration of 
factors described in Sec. 226.59(a) and (d).
    59(a)(2) Rate reductions.
    59(a)(2)(ii) Applicability of rate reduction.
    1. Applicability of reduced rate to new transactions. Section 
226.59(a)(2)(ii) requires, in part, that any reduction in rate required 
pursuant to Sec. 226.59(a)(1) must apply to new transactions that occur 
after the effective date of the rate reduction, if those transactions 
would otherwise have been subject to the increased rate described in 
Sec. 226.59(a)(1). A credit card account may have multiple types of 
balances, for example, purchases, cash advances, and balance transfers, 
to which different rates apply. For example, assume a new credit card 
account opened on January 1 of year one has a rate applicable to 
purchases of 15% and a rate applicable to cash advances and balance 
transfers of 20%. Effective March 1 of year two, consistent with the 
limitations in Sec. 226.55 and upon giving notice required by Sec. 
226.9(c)(2), the card issuer raises the rate applicable to new purchases 
to 18% based on market conditions. The only transaction in which the 
consumer engages in year two is a $1,000 purchase made on July 1. The 
rate for cash advances and balance transfers remains at 20%. Based on a 
subsequent review required by Sec. 226.59(a)(1), the card issuer 
determines that the rate on purchases must be reduced to 16%. Section 
226.59(a)(2)(ii) requires that the 16% rate be applied to the $1,000 
purchase made on July 1 and to all new purchases. The rate for new cash 
advances and balance transfers may remain at 20%, because there was no 
rate increase applicable to those types of transactions and, therefore, 
the requirements of Sec. 226.59(a) do not apply.
    59(c) Timing.
    1. In general. The issuer may review all of its accounts subject to 
Sec. 226.59(a) at the same time once every six months, may review each 
account once each six months on a rolling basis based on the date on 
which the rate was increased for that account, or may otherwise review 
each account not less frequently than once every six months.
    2. Example. A card issuer increases the rates applicable to one half 
of its credit card accounts on June 1, 2011. The card issuer increases 
the rates applicable to the other half of its credit card accounts on 
September 1, 2011. The card issuer may review the rate increases for all 
of its credit card accounts on or before December 1, 2011, and at least 
every six months thereafter. In the alternative, the card issuer may 
first review the rate increases for the accounts that were repriced on 
June 1, 2011 on or before December 1, 2011, and may first review the 
rate increases for the accounts that were repriced on September 1, 2011 
on or before March 1, 2012.
    3. Rate increases prior to effective date of rule. For increases in 
annual percentage rates applicable to a credit card account under an 
open-end (not home-secured) consumer credit plan on or after January 1, 
2009 and prior to August 22, 2010, Sec. 226.59(c) requires that the 
first review for such rate increases be conducted prior to February 22, 
2011.
    59(d) Factors.
    1. Change in factors. A creditor that complies with Sec. 226.59(a) 
by reviewing the factors it currently considers in determining the 
annual percentage rates applicable to similar new credit card accounts 
may change those factors from time to time. When a creditor changes the 
factors it considers in determining the annual percentage rates 
applicable to similar new credit card accounts from time to time, it may 
comply with Sec. 226.59(a) by reviewing the set of factors it 
considered immediately prior to the change in factors for a brief 
transition period, or may consider the new factors. For example, a 
creditor changes the factors it uses to determine the rates applicable 
to similar new credit card accounts on January 1, 2012. The creditor 
reviews the rates applicable to its existing accounts that have been 
subject to a rate increase pursuant to Sec. 226.59(a) on January 25, 
2012. The creditor complies with Sec. 226.59(a) by reviewing, at its 
option, either the factors that it considered on December 31, 2011 when 
determining the rates applicable to similar

[[Page 802]]

new credit card accounts or the factors that it considers as of January 
25, 2012. For purposes of compliance with Sec. 226.59(d), a transition 
period of 60 days from the change of factors constitutes a brief 
transition period.
    2. Comparison of existing account to factors used for similar new 
accounts. Under Sec. 226.59(a), if a creditor evaluates an existing 
account using the same factors that it considers in determining the 
rates applicable to similar new accounts, the review of factors need not 
result in existing accounts being subject to exactly the same rates and 
rate structure as a creditor imposes on similar new accounts. For 
example, a creditor may offer variable rates on similar new accounts 
that are computed by adding a margin that depends on various factors to 
the value of the LIBOR index. The account that the creditor is required 
to review pursuant to Sec. 226.59(a) may have variable rates that were 
determined by adding a different margin, depending on different factors, 
to a published prime rate. In performing the review required by Sec. 
226.59(a), the creditor may review the factors it uses to determine the 
rates applicable to similar new accounts. If a rate reduction is 
required, however, the creditor need not base the variable rate for the 
existing account on the LIBOR index but may continue to use the 
published prime rate. Section 226.59(a) requires, however, that the rate 
on the existing account after the reduction, as determined by adding the 
published prime rate and margin, be comparable to the rate, as 
determined by adding the margin and LIBOR, charged on a new account for 
which the factors are comparable.
    3. Similar new credit card accounts. A card issuer complying with 
Sec. 226.59(d)(1)(ii) is required to consider the factors that the card 
issuer currently considers when determining the annual percentage rates 
applicable to similar new credit card accounts under an open-end (not 
home-secured) consumer credit plan. For example, a card issuer may 
review different factors in determining the annual percentage rate that 
applies to credit card plans for which the consumer pays an annual fee 
and receives rewards points than it reviews in determining the rates for 
credit card plans with no annual fee and no rewards points. Similarly, a 
card issuer may review different factors in determining the annual 
percentage rate that applies to private label credit cards than it 
reviews in determining the rates applicable to credit cards that can be 
used at a wider variety of merchants. In addition, a card issuer may 
review different factors in determining the annual percentage rate that 
applies to private label credit cards usable only at Merchant A than it 
may review for private label credit cards usable only at Merchant B. 
However, Sec. 226.59(d)(1)(ii) requires a card issuer to review the 
factors it considers when determining the rates for new credit card 
accounts with similar features that are offered for similar purposes.
    4. No similar new credit card accounts. In some circumstances, a 
card issuer that complies with Sec. 226.59(a) by reviewing the factors 
that it currently considers in determining the annual percentage rates 
applicable to similar new accounts may not be able to identify a class 
of new accounts that are similar to the existing accounts on which a 
rate increase has been imposed. For example, consumers may have existing 
credit card accounts under an open-end (not home-secured) consumer 
credit plan but the card issuer may no longer offer a product to new 
consumers with similar characteristics, such as the availability of 
rewards, size of credit line, or other features. Similarly, some 
consumers' accounts may have been closed and therefore cannot be used 
for new transactions, while all new accounts can be used for new 
transactions. In those circumstances, Sec. 226.59 requires that the 
card issuer nonetheless perform a review of the rate increase on the 
existing customers' accounts. A card issuer does not comply with Sec. 
226.59 by maintaining an increased rate without performing such an 
evaluation. In such circumstances, Sec. 226.59(d)(1)(ii) requires that 
the card issuer compare the existing accounts to the most closely 
comparable new accounts that it offers.
    5. Consideration of consumer's conduct on existing account. A card 
issuer that complies with Sec. 226.59(a) by reviewing the factors that 
it currently considers in determining the annual percentage rates 
applicable to similar new accounts may consider the consumer's payment 
or other account behavior on the existing account only to the same 
extent and in the same manner that the issuer considers such information 
when one of its current cardholders applies for a new account with the 
card issuer. For example, a card issuer might obtain consumer reports 
for all of its applicants. The consumer reports contain certain 
information regarding the applicant's past performance on existing 
credit card accounts. However, the card issuer may have additional 
information about an existing cardholder's payment history or account 
usage that does not appear in the consumer report and that, accordingly, 
it would not generally have for all new applicants. For example, a 
consumer may have made a payment that is five days late on his or her 
account with the card issuer, but this information does not appear on 
the consumer report. The card issuer may consider this additional 
information in performing its review under Sec. 226.59(a), but only to 
the extent and in the manner that it considers such information if a 
current cardholder applies for a new account with the issuer.
    6. Multiple rate increases between January 1, 2009 and February 21, 
2010. i. General. Section 226.59(d)(2) applies if an issuer increased 
the

[[Page 803]]

rate applicable to a credit card account under an open-end (not home-
secured) consumer credit plan between January 1, 2009 and February 21, 
2010, and the increase was not based solely upon factors specific to the 
consumer. In some cases, a credit card account may have been subject to 
multiple rate increases during the period from January 1, 2009 to 
February 21, 2010. Some such rate increases may have been based solely 
upon factors specific to the consumer, while others may have been based 
on factors not specific to the consumer, such as the issuer's cost of 
funds or market conditions. In such circumstances, when conducting the 
first two reviews required under Sec. 226.59, the card issuer may 
separately review: (i) Rate increases imposed based on factors not 
specific to the consumer, using the factors described in Sec. 
226.59(d)(1)(ii) (as required by Sec. 226.59(d)(2)); and (ii) rate 
increases imposed based on consumer-specific factors, using the factors 
described in Sec. 226.59(d)(1)(i). If the review of factors described 
in Sec. 226.59(d)(1)(i) indicates that it is appropriate to continue to 
apply a penalty or other increased rate to the account as a result of 
the consumer's payment history or other factors specific to the 
consumer, Sec. 226.59 permits the card issuer to continue to impose the 
penalty or other increased rate, even if the review of the factors 
described in Sec. 226.59(d)(1)(ii) would otherwise require a rate 
decrease.
    ii. Example. Assume a credit card account was subject to a rate of 
15% on all transactions as of January 1, 2009. On May 1, 2009, the 
issuer increased the rate on existing balances and new transactions to 
18%, based upon market conditions or other factors not specific to the 
consumer or the consumer's account. Subsequently, on September 1, 2009, 
based on a payment that was received five days after the due date, the 
issuer increased the applicable rate on existing balances and new 
transactions from 18% to a penalty rate of 25%. When conducting the 
first review required under Sec. 226.59, the card issuer reviews the 
rate increase from 15% to 18% using the factors described in Sec. 
226.59(d)(1)(ii) (as required by Sec. 226.59(d)(2)), and separately but 
concurrently reviews the rate increase from 18% to 25% using the factors 
described in paragraph Sec. 226.59(d)(1)(i). The review of the rate 
increase from 15% to 18% based upon the factors described in Sec. 
226.59(d)(1)(ii) indicates that a similarly situated new consumer would 
receive a rate of 17%. The review of the rate increase from 18% to 25% 
based upon the factors described in Sec. 226.59(d)(1)(i) indicates that 
it is appropriate to continue to apply the 25% penalty rate based upon 
the consumer's late payment. Section 226.59 permits the rate on the 
account to remain at 25%.
    59(f) Termination of obligation to review factors.
    1. Revocation of temporary rates. i. In general. If an annual 
percentage rate is increased due to revocation of a temporary rate, 
Sec. 226.59(a) requires that the card issuer periodically review the 
increased rate. In contrast, if the rate increase results from the 
expiration of a temporary rate previously disclosed in accordance with 
Sec. 226.9(c)(2)(v)(B), the review requirements in Sec. 226.59(a) do 
not apply. If a temporary rate is revoked such that the requirements of 
Sec. 226.59(a) apply, Sec. 226.59(f) permits an issuer to terminate 
the review of the rate increase if and when the applicable rate is the 
same as the rate that would have applied if the increase had not 
occurred.
    ii. Examples. Assume that on January 1, 2011, a consumer opens a new 
credit card account under an open-end (not home-secured) consumer credit 
plan. The annual percentage rate applicable to purchases is 15%. The 
card issuer offers the consumer a 10% rate on purchases made between 
February 1, 2012 and August 1, 2013 and discloses pursuant to Sec. 
226.9(c)(2)(v)(B) that on August 1, 2013 the rate on purchases will 
revert to the original 15% rate. The consumer makes a payment that is 
five days late in July 2012.
    A. Upon providing 45 days' advance notice and to the extent 
permitted under Sec. 226.55, the card issuer increases the rate 
applicable to new purchases to 15%, effective on September 1, 2012. The 
card issuer must review that rate increase under Sec. 226.59(a) at 
least once each six months during the period from September 1, 2012 to 
August 1, 2013, unless and until the card issuer reduces the rate to 
10%. The card issuer performs reviews of the rate increase on January 1, 
2013 and July 1, 2013. Based on those reviews, the rate applicable to 
purchases remains at 15%. Beginning on August 1, 2013, the card issuer 
is not required to continue periodically reviewing the rate increase, 
because if the temporary rate had expired in accordance with its 
previously disclosed terms, the 15% rate would have applied to purchase 
balances as of August 1, 2013 even if the rate increase had not occurred 
on September 1, 2012.
    B. Same facts as above except that the review conducted on July 1, 
2013 indicates that a reduction to the original temporary rate of 10% is 
appropriate. Section 226.59(a)(2)(i) requires that the rate be reduced 
no later than 45 days after completion of the review, or no later than 
August 15, 2013. Because the temporary rate would have expired prior to 
the date on which the rate decrease is required to take effect, the card 
issuer may, at its option, reduce the rate to 10% for any portion of the 
period from July 1, 2013, to August 1, 2013, or may continue to impose 
the 15% rate for that entire period. The card issuer is not required to 
conduct further reviews of the 15% rate on purchases.
    C. Same facts as above except that on September 1, 2012 the card 
issuer increases the

[[Page 804]]

rate applicable to new purchases to the penalty rate on the consumer's 
account, which is 25%. The card issuer conducts reviews of the increased 
rate in accordance with Sec. 226.59 on January 1, 2013 and July 1, 
2013. Based on those reviews, the rate applicable to purchases remains 
at 25%. The card issuer's obligation to review the rate increase 
continues to apply after August 1, 2013, because the 25% penalty rate 
exceeds the 15% rate that would have applied if the temporary rate 
expired in accordance with its previously disclosed terms. The card 
issuer's obligation to review the rate terminates if and when the annual 
percentage rate applicable to purchases is reduced to the 15% rate.
    2. Example--relationship to Sec. 226.59(a). Assume that on January 
1, 2011, a consumer opens a new credit card account under an open-end 
(not home-secured) consumer credit plan. The annual percentage rate 
applicable to purchases is 15%. Upon providing 45 days' advance notice 
and to the extent permitted under Sec. 226.55, the card issuer 
increases the rate applicable to new purchases to 18%, effective on 
September 1, 2012. The card issuer conducts reviews of the increased 
rate in accordance with Sec. 226.59 on January 1, 2013 and July 1, 
2013, based on the factors described in Sec. 226.59(d)(1)(ii). Based on 
the January 1, 2013 review, the rate applicable to purchases remains at 
18%. In the review conducted on July 1, 2013, the card issuer determines 
that, based on the relevant factors, the rate it would offer on a 
comparable new account would be 14%. Consistent with Sec. 226.59(f), 
Sec. 226.59(a) requires that the card issuer reduce the rate on the 
existing account to the 15% rate that was in effect prior to the 
September 1, 2012 rate increase.
    59(g) Acquired accounts.
    59(g)(1) General.
    1. Relationship to Sec. 226.59(d)(2) for rate increases imposed 
between January 1, 2009 and February 21, 2010. Section 226.59(d)(2) 
applies to acquired accounts. Accordingly, if a card issuer acquires 
accounts on which a rate increase was imposed between January 1, 2009 
and February 21, 2010 that was not based solely upon consumer-specific 
factors, that acquiring card issuer must consider the factors that it 
currently considers when determining the annual percentage rates 
applicable to similar new credit card accounts, if it conducts either or 
both of the first two reviews of such accounts that are required after 
August 22, 2010 under Sec. 226.59(a).
    59(g)(2) Review of acquired portfolio.
    1. Example--general. A card issuer acquires a portfolio of accounts 
that currently are subject to annual percentage rates of 12%, 15%, and 
18%. Not later than six months after the acquisition of such accounts, 
the card issuer reviews all of these accounts in accordance with the 
factors that it currently uses in determining the rates applicable to 
similar new credit card accounts. As a result of that review, the card 
issuer decreases the rate on the accounts that are currently subject to 
a 12% annual percentage rate to 10%, leaves the rate applicable to the 
accounts currently subject to a 15% annual percentage rate at 15%, and 
increases the rate applicable to the accounts currently subject to a 
rate of 18% to 20%. Section 226.59(g)(2) requires the card issuer to 
review, no less frequently than once every six months, the accounts for 
which the rate has been increased to 20%. The card issuer is not 
required to review the accounts subject to 10% and 15% rates pursuant to 
Sec. 226.59(a), unless and until the card issuer makes a subsequent 
rate increase applicable to those accounts.
    2. Example--penalty rates. A card issuer acquires a portfolio of 
accounts that currently are subject to standard annual percentage rates 
of 12% and 15%. In addition, several acquired accounts are subject to a 
penalty rate of 24%. Not later than six months after the acquisition of 
such accounts, the card issuer reviews all of these accounts in 
accordance with the factors that it currently uses in determining the 
rates applicable to similar new credit card accounts. As a result of 
that review, the card issuer leaves the standard rates applicable to the 
accounts at 12% and 15%, respectively. The card issuer decreases the 
rate applicable to the accounts currently at 24% to its penalty rate of 
23%. Section 226.59(g)(2) requires the card issuer to review, no less 
frequently than once every six months, the accounts that are subject to 
a penalty rate of 23%. The card issuer is not required to review the 
accounts subject to 12% and 15% rates pursuant to Sec. 226.59(a), 
unless and until the card issuer makes a subsequent rate increase 
applicable to those accounts.

                    Appendix A--Effect on State Laws

    1. Who may make requests. Appendix A sets forth the procedures for 
preemption determinations. As discussed in Sec. 226.28, which contains 
the standards for preemption, a request for a determination of whether a 
state law is inconsistent with the requirements of chapters 1, 2, or 3 
may be made by creditors, states, or any interested party. However, only 
states may request and receive determinations in connection with the 
fair credit billing provisions of chapter 4.

                               References

    Statute: Sections 111 and 171(a).
    Other sections: Section 226.28.
    Previous regulation: Sections 226.6(b) and 226.70 (Supplement V, 
Section II).
    1981 changes: The procedures in appendix A were largely adapted from 
Supplement V, Section II of the previous regulation (Sec. 226.70), with 
changes made to streamline the procedures.

[[Page 805]]

                      Appendix B--State Exemptions

    1. General. Appendix B sets forth the procedures for exemption 
applications. The exemption standards are found in Sec. 226.29 and are 
discussed in the commentary to that section.

                               References

    Statute: Sections 123 and 171(b).
    Other sections: Section 226.29.
    Previous regulation: Sections 226.12, 226.50 (Supplement II), 226.60 
(Supplement IV), and 226.70 (Supplement V, Section I).
    1981 changes: The procedures in appendix B represent a combination 
and streamlining of the procedures set forth in the supplements to the 
previous regulation.

              Appendix C--Issuance of Staff Interpretations

    1. General. This commentary is the vehicle for providing official 
staff interpretations. Individual interpretations generally will not be 
issued separately from the commentary.

                               References

    Statute: Sections 105 and 130(f).
    Other sections: None.
    Previous regulation: Section 226.1(d).
    1981 changes: Appendix C reflects the Board's intention that this 
commentary serve as the vehicle for interpreting the regulation, rather 
than individual interpretive letters.

             Appendix D--Multiple-Advance Construction Loans

    1. General rule. Appendix D provides a special procedure that 
creditors may use, at their option, to estimate and disclose the terms 
of multiple-advance construction loans when the amounts or timing of 
advances is unknown at consummation of the transaction. This appendix 
reflects the approach taken in Sec. 226.17(c)(6)(ii), which permits 
creditors to provide separate or combined disclosures for the 
construction period and for the permanent financing, if any; i.e., the 
construction phase and the permanent phase may be treated as one 
transaction or more than one transaction. Appendix D may also be used in 
multiple-advance transactions other than construction loans, when the 
amounts or timing of advances is unknown at consummation.
    2. Variable-rate multiple-advance loans. The hypothetical disclosure 
required in variable-rate transactions by Sec. 226.18(f)(1)(iv) is not 
required for multiple-advance loans disclosed pursuant to appendix D, 
part I.
    3. Calculation of the total of payments. When disclosures are made 
pursuant to appendix D, the total of payments may reflect either the sum 
of the payments or the sum of the amount financed and the finance 
charge.
    4. Annual percentage rate. Appendix D does not require the use of 
Volume I of the Board's Annual Percentage Rate Tables for calculation of 
the annual percentage rate. Creditors utilizing appendix D in making 
calculations and disclosures may use other computation tools to 
determine the estimated annual percentage rate, based on the finance 
charge and payment schedule obtained by use of the appendix.
    5. Interest reserves. In a multiple-advance construction loan, a 
creditor may establish an ``interest reserve'' to ensure that interest 
is paid as it accrues by designating a portion of the loan to be used 
for paying the interest that accrues on the loan. An interest reserve is 
not treated as a prepaid finance charge, whether the interest reserve is 
the same as or different from the estimated interest figure calculated 
under appendix D.
     If a creditor permits a consumer to make interest 
payments as they become due, the interest reserve should be disregarded 
in the disclosures and calculations under appendix D.
     If a creditor requires the establishment of an 
interest reserve and automatically deducts interest payments from the 
reserve amount rather than allow the consumer to make interest payments 
as they become due, the fact that interest will accrue on those interest 
payments as well as the other loan proceeds must be reflected in the 
calculations and disclosures. To reflect the effects of such 
compounding, a creditor should first calculate interest on the 
commitment amount (exclusive of the interest reserve) and then add the 
figure obtained by assuming that one-half of that interest is 
outstanding at the contract interest rate for the entire construction 
period. For example, using the example shown under paragraph A, part I 
of appendix D, the estimated interest would be $1,117.68 ($1093.75 plus 
an additional $23.93 calculated by assuming half of $1093.75 is 
outstanding at the contract interest rate for the entire construction 
period), and the estimated annual percentage rate would be 21.18%.
    6. Relation to Sec. 226.18(s). A creditor must disclose an interest 
rate and payment summary table for transactions secured by real property 
or a dwelling, pursuant to Sec. 226.18(s), instead of the general 
payment schedule required by Sec. 226.18(g). Accordingly, home 
construction loans that are secured by real property or a dwelling are 
subject to Sec. 226.18(s) and not Sec. 226.18(g). Under Sec. 
226.176(c)(6)(ii), when a multiple-advance construction loan may be 
permanently financed by the same creditor, the construction phase and 
the permanent phase may be treated as either one transaction or more 
than one transaction.
    i. If a creditor uses Appendix D and elects pursuant to Sec. 
226.17(c)(6)(ii) to disclose the

[[Page 806]]

construction and permanent phases as separate transactions, the 
construction phase must be disclosed according to the rules in Sec. 
226.18(s). Under Sec. 226.18(s), the creditor must disclose the 
applicable interest rates and corresponding periodic payments during the 
construction phase in an interest rate and payment summary table. The 
provision in Appendix D, Part I.A.3, which allows the creditor to omit 
the number and amounts of any interest payments ``in disclosing the 
payment schedule under Sec. 226.18(g)'' does not apply because the 
transaction is governed by Sec. 226.18(s) rather than Sec. 226.18(g). 
Also, because the construction phase is being disclosed as a separate 
transaction and its terms do not repay all principal, the creditor must 
disclose a balloon payment, pursuant to Sec. 226.18(s)(5).
    ii. On the other hand, if the creditor elects to disclose the 
construction and permanent phases as a single transaction, the 
construction phase must be disclosed pursuant to Appendix D, Part II.C, 
which provides that the creditor shall disclose the repayment schedule 
without reflecting the number or amounts of payments of interest only 
that are made during the construction phase. Appendix D also provides, 
however, that creditors must disclose (outside of the table) the fact 
that interest payments must be made and the timing of such payments. The 
rate and payment summary table disclosed under Sec. 226.18(s) must 
reflect only the permanent phase of the transaction. Therefore, in 
determining the rates and payments that must be disclosed in the columns 
of the table, creditors should apply the requirements of Sec. 226.18(s) 
to the permanent phase only. For example, under Sec. 226.18(s)(2)(i)(A) 
or Sec. 226.18(s)(2)(i)(B)(1), as applicable, the creditor should 
disclose the interest rate corresponding to the first installment due 
under the permanent phase and not any rate applicable during the 
construction phase.

                               References

    Statute: None.
    Other sections: Sections 226.17 and 226.22.
    Previous regulation: Interpretation Sec. 226.813.
    1981 Changes: The use of appendix D is limited to multiple-advance 
loans for construction purposes or analogous types of transactions.

    Appendix E--Rules for Card Issuers That Bill on a Transaction-by-
                            Transaction Basis

    Statute: None.
    Previous regulation: Interpretation Sec. 226.709.
    Other sections: Sections 226.6 through 226.13, and 226.15.
    1981 changes: The rules in this appendix have been streamlined and 
clarified to indicate how certain card issuers that bill on a 
transaction basis may comply with the requirements of Subpart B.

 Appendix F--Optional Annual Percentage Rate Computations for Creditors 
   Offering Open-End Plans Subject to the Requirements of Sec. 226.5b

    1. Daily rate with specific transaction charge. If the finance 
charge results from a charge relating to a specific transaction and the 
application of a daily periodic rate, see comment 14(c)(3)-2 for 
guidance on an appropriate calculation method.

   Appendices G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. Although use of the model forms and clauses 
is not required, creditors using them properly will be deemed to be in 
compliance with the regulation with regard to those disclosures. 
Creditors may make certain changes in the format or content of the forms 
and clauses and may delete any disclosures that are inapplicable to a 
transaction or a plan without losing the act's protection from 
liability, except formatting changes may not be made to model forms and 
samples in H-18, H-19, H-20, H-21, H-22, H-23, G-2(A), G-3(A), G-4(A), 
G-10(A)-(E), G-17(A)-(D), G-18(A) (except as permitted pursuant to Sec. 
226.7(b)(2)), G-18(B)-(C), G-19, G-20, and G-21, or to the model clauses 
in H-4(E), H-4(F), H-4(G), and H-4(H). Creditors may modify the heading 
of the second column shown in Model Clause H-4(H) to read ``first 
adjustment'' or ``first increase,'' as applicable, pursuant to Sec. 
226.18(s)(2)(i)(C). The rearrangement of the model forms and clauses may 
not be so extensive as to affect the substance, clarity, or meaningful 
sequence of the forms and clauses. Creditors making revisions with that 
effect will lose their protection from civil liability. Except as 
otherwise specifically required, acceptable changes include, for example
    i. Using the first person, instead of the second person, in 
referring to the borrower.
    ii. Using ``borrower'' and ``creditor'' instead of pronouns.
    iii. Rearranging the sequences of the disclosures.
    iv. Not using bold type for headings.
    v. Incorporating certain state ``plain English'' requirements.
    vi. Deleting inapplicable disclosures by whiting out, blocking out, 
filling in ``N/A'' (not applicable) or ``0,'' crossing out, leaving 
blanks, checking a box for applicable items, or circling applicable 
items. (This should permit use of multipurpose standard forms.)
    vii. Using a vertical, rather than a horizontal, format for the 
boxes in the closed-end disclosures.
    2. Debt-cancellation coverage. This regulation does not authorize 
creditors to characterize debt-cancellation fees as insurance

[[Page 807]]

premiums for purposes of this regulation. Creditors may provide a 
disclosure that refers to debt cancellation or debt suspension coverage 
whether or not the coverage is considered insurance. Creditors may use 
the model credit insurance disclosures only if the debt cancellation 
coverage constitutes insurance under state law.

   Appendixes G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. Although use of the model forms and clauses 
is not required, creditors using them properly will be deemed to be in 
compliance with the regulation with regard to those disclosures. 
Creditors may make certain changes in the format or content of the forms 
and clauses and may delete any disclosures that are inapplicable to a 
transaction or a plan without losing the act's protection from 
liability, except formatting changes may not be made to model forms and 
samples in H-18, H-19, H-20, H-21, H-22, H-23, G-2(A), G-3(A), G-4(A), 
G-10(A)-(E), G-17(A)-(D), G-18(A) (except as permitted pursuant to Sec. 
226.7(b)(2)), G-18(B)-(C), G-19, G-20, and G-21. The rearrangement of 
the model forms and clauses may not be so extensive as to affect the 
substance, clarity, or meaningful sequence of the forms and clauses. 
Creditors making revisions with that effect will lose their protection 
from civil liability. Except as otherwise specifically required, 
acceptable changes include, for example:
    i. Using the first person, instead of the second person, in 
referring to the borrower.
    ii. Using ``borrower'' and ``creditor'' instead of pronouns.
    iii. Rearranging the sequences of the disclosures.
    iv. Not using bold type for headings.
    v. Incorporating certain state ``plain English'' requirements.
    vi. Deleting inapplicable disclosures by whiting out, blocking out, 
filling in ``N/A'' (not applicable) or ``0,'' crossing out, leaving 
blanks, checking a box for applicable items, or circling applicable 
items. (This should permit use of multipurpose standard forms.)
    vii. Using a vertical, rather than a horizontal, format for the 
boxes in the closed-end disclosures.
    2. Debt cancellation coverage. This regulation does not authorize 
creditors to characterize debt cancellation fees as insurance premiums 
for purposes of this regulation. Creditors may provide a disclosure that 
refers to debt cancellation coverage whether or not the coverage is 
considered insurance. Creditors may use the model credit insurance 
disclosures only if the debt cancellation coverage constitutes insurance 
under state law.

              Appendix G--Open-End Model Forms and Clauses

    1. Models G-1 and G-1(A). The model disclosures in G-1 and G-1(A) 
(different balance computation methods) may be used in both the account-
opening disclosures under Sec. 226.6 and the periodic disclosures under 
Sec. 226.7. As is clear from the models given, ``shorthand'' 
descriptions of the balance computation methods are not sufficient, 
except where Sec. 226.7(b)(5) applies. For creditors using model G-1, 
the phrase ``a portion of'' the finance charge should be included if the 
total finance charge includes other amounts, such as transaction 
charges, that are not due to the application of a periodic rate. If 
unpaid interest or finance charges are subtracted in calculating the 
balance, that fact must be stated so that the disclosure of the 
computation method is accurate. Only model G-1(b) contains a final 
sentence appearing in brackets, which reflects the total dollar amount 
of payments and credits received during the billing cycle. The other 
models do not contain this language because they reflect plans in which 
payments and credits received during the billing cycle are subtracted. 
If this is not the case, however, the language relating to payments and 
credits should be changed, and the creditor should add either the 
disclosure of the dollar amount as in model G-1(b) or an indication of 
which credits (disclosed elsewhere on the periodic statement) will not 
be deducted in determining the balance. (Such an indication may also 
substitute for the bracketed sentence in model G-1(b).) (See the 
commentary to Sec. 226.7(a)(5) and (b)(5).) For open-end plans subject 
to the requirements of Sec. 226.5b, creditors may, at their option, use 
the clauses in G-1 or G-1(A).
    2. Models G-2 and G-2(A). These models contain the notice of 
liability for unauthorized use of a credit card. For home-equity plans 
subject to the requirements of Sec. 226.5b, at the creditor's option, a 
creditor either may use G-2 or G-2(A). For open-end plans not subject to 
the requirements of Sec. 226.5b, creditors properly use G-2(A).
    3. Models G-3, G-3(A), G-4 and G-4(A).
    i. These set out models for the long-form billing-error rights 
statement (for use with the account-opening disclosures and as an annual 
disclosure or, at the creditor's option, with each periodic statement) 
and the alternative billing-error rights statement (for use with each 
periodic statement), respectively. For home-equity plans subject to the 
requirements of Sec. 226.5b, at the creditor's option, a creditor 
either may use G-3 or G-3(A), and for creditors that use the short form, 
G-4 or G-4(A). For open-end (not home-secured) plans that not subject to 
the requirements of Sec. 226.5b, creditors properly use G-3(A) and G-
4(A). Creditors must provide the billing-error rights statements in a 
form substantially similar to the models in order

[[Page 808]]

to comply with the regulation. The model billing-rights statements may 
be modified in any of the ways set forth in the first paragraph to the 
commentary on appendices G and H. The models may, furthermore, be 
modified by deleting inapplicable information, such as:
    A. The paragraph concerning stopping a debit in relation to a 
disputed amount, if the creditor does not have the ability to debit 
automatically the consumer's savings or checking account for payment.
    B. The rights stated in the special rule for credit card purchases 
and any limitations on those rights.
    ii. The model billing rights statements also contain optional 
language that creditors may use. For example, the creditor may:
    A. Include a statement to the effect that notice of a billing error 
must be submitted on something other than the payment ticket or other 
material accompanying the periodic disclosures.
    B. Insert its address or refer to the address that appears elsewhere 
on the bill.
    C. Include instructions for consumers, at the consumer's option, to 
communicate with the creditor electronically or in writing.
    iii. Additional information may be included on the statements as 
long as it does not detract from the required disclosures. For instance, 
information concerning the reporting of errors in connection with a 
checking account may be included on a combined statement as long as the 
disclosures required by the regulation remain clear and conspicuous.
    4. Models G-5 through G-9. These models set out notices of the right 
to rescind that would be used at different times in an open-end plan. 
The last paragraph of each of the rescission model forms contains a 
blank for the date by which the consumer's notice of cancellation must 
be sent or delivered. A parenthetical is included to address the 
situation in which the consumer's right to rescind the transaction 
exists beyond 3 business days following the date of the transaction, for 
example, when the notice or material disclosures are delivered late or 
when the date of the transaction in paragraph 1 of the notice is an 
estimate. The language of the parenthetical is not optional. See the 
commentary to section 226.2(a)(25) regarding the specificity of the 
security interest disclosure for model form G-7.
    5. Model G-10(A), samples G-10(B) and G-10(C), model G-10(D), sample 
G-10(E), model G-17(A), and samples G-17(B), 17(C) and 17(D). i. Model 
G-10(A) and Samples G-10(B) and G-10(C) illustrate, in the tabular 
format, the disclosures required under Sec. 226.5a for applications and 
solicitations for credit cards other than charge cards. Model G-10(D) 
and Sample G-10(E) illustrate the tabular format disclosure for charge 
card applications and solicitations and reflect the disclosures in the 
table. Model G-17(A) and Samples G-17(B), G-17(C) and G-17(D) 
illustrate, in the tabular format, the disclosures required under Sec. 
226.6(b)(2) for account-opening disclosures.
    ii. Except as otherwise permitted, disclosures must be substantially 
similar in sequence and format to Models G-10(A), G-10(D) and G-17(A). 
While proper use of the model forms will be deemed in compliance with 
the regulation, card issuers and other creditors offering open-end (not 
home-secured) plans are permitted to disclose the annual percentage 
rates for purchases, cash advances, or balance transfers in the same row 
in the table for any transaction types for which the issuer or creditor 
charges the same annual percentage rate. Similarly, card issuer and 
other creditors offering open-end (not home-secured) plans are permitted 
to disclose fees of the same amount in the same row if the fees are in 
the same category. Fees in different categories may not be disclosed in 
the same row. For example, a transaction fee and a penalty fee that are 
of the same amount may not be disclosed in the same row. Card issuers 
and other creditors offering open-end (not home-secured) plans are also 
permitted to use headings other than those in the forms if they are 
clear and concise and are substantially similar to the headings 
contained in model forms, with the following exceptions. The heading 
``penalty APR'' must be used when describing rates that may increase due 
to default or delinquency or as a penalty, and in relation to required 
insurance, or debt cancellation or suspension coverage, the term 
``required'' and the name of the product must be used. (See also 
Sec. Sec. 226.5a(b)(5) and 226.6(b)(2)(v) for guidance on headings that 
must be used to describe the grace period, or lack of grace period, in 
the disclosures required under Sec. 226.5a for applications and 
solicitations for credit cards other than charge cards, and the 
disclosures required under Sec. 226.6(b)(2) for account-opening 
disclosures, respectively.)
    iii. Models G-10(A) and G-17(A) contain two alternative headings 
(``Minimum Interest Charge'' and ``Minimum Charge'') for disclosing a 
minimum interest or fixed finance charge under Sec. Sec. 226.5a(b)(3) 
and 226.6(b)(2)(iii). If a creditor imposes a minimum charge in lieu of 
interest in those months where a consumer would otherwise incur an 
interest charge but that interest charge is less than the minimum 
charge, the creditor should disclose this charge under the heading 
``Minimum Interest Charge'' or a substantially similar heading. Other 
minimum or fixed finance charges should be disclosed under the heading 
``Minimum Charge'' or a substantially similar heading.
    iv. Models G-10(A), G-10(D) and G-17(A) contain two alternative 
headings (``Annual Fees'' and ``Set-up and Maintenance Fees'')

[[Page 809]]

for disclosing fees for issuance or availability of credit under Sec. 
226.5a(b)(2) or Sec. 226.6(b)(2)(ii). If the only fee for issuance or 
availability of credit disclosed under Sec. 226.5a(b)(2) or Sec. 
226.6(b)(2)(ii) is an annual fee, a creditor should use the heading 
``Annual Fee'' or a substantially similar heading to disclose this fee. 
If a creditor imposes fees for issuance or availability of credit 
disclosed under Sec. 226.5a(b)(2) or Sec. 226.6(b)(2)(ii) other than, 
or in addition to, an annual fee, the creditor should use the heading 
``Set-up and Maintenance Fees'' or a substantially similar heading to 
disclose fees for issuance or availability of credit, including the 
annual fee.
    v. Although creditors are not required to use a certain paper size 
in disclosing the Sec. Sec. 226.5a or 226.6(b)(1) and (2) disclosures, 
samples G-10(B), G-10(C), G-17(B), G-17(C) and G-17(D) are designed to 
be printed on an 8\1/2\ x 14 inch sheet of paper. A creditor may use a 
smaller sheet of paper, such as 8\1/2\ x 11 inch sheet of paper. If the 
table is not provided on a single side of a sheet of paper, the creditor 
must include a reference or references, such as ``SEE BACK OF PAGE for 
more important information about your account.'' at the bottom of each 
page indicating that the table continues onto an additional page or 
pages. A creditor that splits the table onto two or more pages must 
disclose the table on consecutive pages and may not include any 
intervening information between portions of the table. In addition, the 
following formatting techniques were used in presenting the information 
in the sample tables to ensure that the information is readable:
    A. A readable font style and font size (10-point Arial font style, 
except for the purchase annual percentage rate which is shown in 16-
point type).
    B. Sufficient spacing between lines of the text.
    C. Adequate spacing between paragraphs when several pieces of 
information were included in the same row of the table, as appropriate. 
For example, in the samples in the row of the tables with the heading 
``APR for Balance Transfers,'' the forms disclose two components: the 
applicable balance transfer rate and a cross reference to the balance 
transfer fee. The samples show these two components on separate lines 
with adequate space between each component. On the other hand, in the 
samples, in the disclosure of the late payment fee, the forms disclose 
two components: the late payment fee, and the cross reference to the 
penalty rate. Because the disclosure of both these components is short, 
these components are disclosed on the same line in the tables.
    D. Standard spacing between words and characters. In other words, 
the text was not compressed to appear smaller than 10-point type.
    E. Sufficient white space around the text of the information in each 
row, by providing sufficient margins above, below and to the sides of 
the text.
    F. Sufficient contrast between the text and the background. 
Generally, black text was used on white paper.
    vi. While the Board is not requiring issuers to use the above 
formatting techniques in presenting information in the table (except for 
the 10-point and 16-point font requirement), the Board encourages 
issuers to consider these techniques when deciding how to disclose 
information in the table, to ensure that the information is presented in 
a readable format.
    vii. Creditors are allowed to use color, shading and similar graphic 
techniques with respect to the table, so long as the table remains 
substantially similar to the model and sample forms in appendix G.
    6. Model G-11. Model G-11 contains clauses that illustrate the 
general disclosures required under Sec. 226.5a(e) in applications and 
solicitations made available to the general public.
    7. Models G-13(A) and G-13(B). These model forms illustrate the 
disclosures required under Sec. 226.9(f) when the card issuer changes 
the entity providing insurance on a credit card account. Model G-13(A) 
contains the items set forth in Sec. 226.9(f)(3) as examples of 
significant terms of coverage that may be affected by the change in 
insurance provider. The card issuer may either list all of these 
potential changes in coverage and place a check mark by the applicable 
changes, or list only the actual changes in coverage. Under either 
approach, the card issuer must either explain the changes or refer to an 
accompanying copy of the policy or group certificate for details of the 
new terms of coverage. Model G-13(A) also illustrates the permissible 
combination of the two notices required by Sec. 226.9(f)--the notice 
required for a planned change in provider and the notice required once a 
change has occurred. This form may be modified for use in providing only 
the disclosures required before the change if the card issuer chooses to 
send two separate notices. Thus, for example, the references to the 
attached policy or certificate would not be required in a separate 
notice prior to a change in the insurance provider since the policy or 
certificate need not be provided at that time. Model G-13(B) illustrates 
the disclosures required under Sec. 226.9(f)(2) when the insurance 
provider is changed.
    8. Samples G-18(A)-(D). For home-equity plans subject to the 
requirements of Sec. 226.5b, if a creditor chooses to comply with the 
requirements in Sec. 226.7(b), the creditor may use Samples G-18(A) 
through G-18(D) to comply with these requirements, as applicable.
    9. Samples G-18(D). Sample G-18(D) illustrates how credit card 
issuers may comply

[[Page 810]]

with proximity requirements for payment information on periodic 
statements. Creditors that offer card accounts with a charge card 
feature and a revolving feature may change the disclosure to make clear 
to which feature the disclosures apply.
    10. Forms G-18(F)-(G). Forms G-18(F) and G-18(G) are intended as a 
compliance aid to illustrate front sides of a periodic statement, and 
how a periodic statement for open-end (not home-secured) plans might be 
designed to comply with the requirements of Sec. 226.7. The samples 
contain information that is not required by Regulation Z. The samples 
also present information in additional formats that are not required by 
Regulation Z.
    i. Creditors are not required to use a certain paper size in 
disclosing the Sec. 226.7 disclosures. However, Forms G-18(F) and G-
18(G) are designed to be printed on an 8 x 14 inch sheet of paper.
    ii. The due date for a payment, if a late payment fee or penalty 
rate may be imposed, must appear on the front of the first page of the 
statement. See Sample G-18(D) that illustrates how a creditor may comply 
with proximity requirements for other disclosures. The payment 
information disclosures appear in the upper right-hand corner on Samples 
G-18(F) and G-18(G), but may be located elsewhere, as long as they 
appear on the front of the first page of the periodic statement. The 
summary of account activity presented on Samples G-18(F) and G-18(G) is 
not itself a required disclosure, although the previous balance and the 
new balance, presented in the summary, must be disclosed in a clear and 
conspicuous manner on periodic statements.
    iii. Additional information not required by Regulation Z may be 
presented on the statement. The information need not be located in any 
particular place or be segregated from disclosures required by 
Regulation Z, although the effect of proximity requirements for required 
disclosures, such as the due date, may cause the additional information 
to be segregated from those disclosures required to be disclosed in 
close proximity to one another. Any additional information must be 
presented consistent with the creditor's obligation to provide required 
disclosures in a clear and conspicuous manner.
    iv. Model Forms G-18(F) and G-18(G) demonstrate two examples of ways 
in which transactions could be presented on the periodic statement. 
Model Form G-18(G) presents transactions grouped by type and Model Form 
G-18(F) presents transactions in a list in chronological order. Neither 
of these approaches to presenting transactions is required; a creditor 
may present transactions differently, such as in a list grouped by 
authorized user or other means.
    11. Model Form G-19. See Sec. 226.9(b)(3) regarding the headings 
required to be disclosed when describing in the tabular disclosure a 
grace period (or lack of a grace period) offered on check transactions 
that access a credit card account.
    12. Sample G-24. Sample G-24 includes two model clauses for use in 
complying with Sec. 226.16(h)(4). Model clause (a) is for use in 
connection with credit card accounts under an open-end (not home-
secured) consumer credit plan. Model clause (b) is for use in connection 
with other open-end credit plans.

             Appendix H--Closed-End Model Forms and Clauses

    1. Models H-1 and H-2. Creditors may make several types of changes 
to closed-end model forms H-1 (credit sale) and H-2 (loan) and still be 
deemed to be in compliance with the regulation, provided that the 
required disclosures are made clearly and conspicuously. Permissible 
changes include the addition of the information permitted by footnote 37 
to Sec. 226.17 and ``directly related'' information as set forth in the 
commentary to Sec. 226.17(a).
    The creditor may also delete or, on multi-purpose forms, indicate 
inapplicable disclosures, such as:
     The itemization of the amount financed option. 
(See Samples H-12 through H-15.)
     The credit life and disability insurance 
disclosures. (See Samples H-11 and H-12.)
     The property insurance disclosures. (See Samples 
H-10 through H-12, and H-14.)
     The ``filing fees'' and ``non-filing insurance'' 
disclosures. (See Samples H-11 and H-12.)
     The prepayment penalty or rebate disclosures. 
(See Samples H-12 and H-14.)
     The total sale price. (See Samples H-11 through 
H-15.)
    Other permissible changes include:
     Adding the creditor's address or telephone 
number. (See the commentary to Sec. 226.18(a).)
     Combining required terms where several numerical 
disclosures are the same, for instance, if the ``total of payments'' 
equals the ``total sale price.'' (See the commentary to Sec. 226.18.)
     Rearranging the sequence or location of the 
disclosures--for instance, by placing the descriptive phrases outside 
the boxes containing the corresponding disclosures, or by grouping the 
descriptors together as a glossary of terms in a separate section of the 
segregated disclosures; by placing the payment schedule at the top of 
the form; or by changing the order of the disclosures in the boxes, 
including the annual percentage rate and finance charge boxes.
     Using brackets, instead of checkboxes, to 
indicate inapplicable disclosures.
     Using a line for the consumer to initial, rather 
than a checkbox, to indicate an election to receive an itemization of 
the amount financed.
     Deleting captions for disclosures.

[[Page 811]]

     Using a symbol, such as an asterisk, for 
estimated disclosures, instead of an ``e.''
     Adding a signature line to the insurance 
disclosures to reflect joint policies.
     Separately itemizing the filing fees.
     Revising the late charge disclosure in accordance 
with the commentary to Sec. 226.18(l).
    2. Model H-3. Creditors have considerable flexibility in filling out 
Model H-3 (itemization of the amount financed). Appropriate revisions, 
such as those set out in the commentary to Sec. 226.18(c), may be made 
to this form without loss of protection from civil liability for proper 
use of the model forms.
    3. Models H-4 through H-7. The model clauses are not included in the 
model forms although they are mandatory for certain transactions. 
Creditors using the model clauses when applicable to a transaction are 
deemed to be in compliance with the regulation with regard to that 
disclosure.
    4. Model H-4(A). This model contains the variable rate model clauses 
applicable to transactions subject to Sec. 226.18(f)(1) and is intended 
to give creditors considerable flexibility in structuring variable rate 
disclosures to fit individual plans. The information about 
circumstances, limitations, and effects of an increase may be given in 
terms of the contract interest rate or the annual percentage rate. 
Clauses are shown for hypothetical examples based on the specific amount 
of the transaction and based on a representative amount. Creditors may 
preprint the variable rate disclosures based on a representative amount 
for similar types of transactions, instead of constructing an 
individualized example for each transaction. In both representative 
examples and transaction-specific examples, creditors may refer either 
to the incremental change in rate, payment amount, or number of 
payments, or to the resulting rate, payment amount, or number of 
payments. For example, creditors may state that the rate will increase 
by 2%, with a corresponding $150 increase in the payment, or creditors 
may state that the rate will increase to 16%, with a corresponding 
payment of $850.
    5. Model H-4(B). This model clause illustrates the variable-rate 
disclosure required under Sec. 226.18(f)(2), which would alert 
consumers to the fact that the transaction contains a variable-rate 
feature and that disclosures were provided earlier.
    6. Model H-4(C). This model clause illustrates the early disclosures 
required generally under Sec. 226.19(b). It includes information on how 
the consumer's interest rate is determined and how it can change over 
the term of the loan, and explains changes that may occur in the 
borrower's monthly payment. It contains an example of how to disclose 
historical changes in the index or formula values used to compute 
interest rates for the preceding 15 years. The model clause also 
illustrates the disclosure of the initial and maximum interest rates and 
payments based on an initial interest rate (index value plus margin, 
adjusted by the amount of any discount or premium) in effect as of an 
identified month and year for the loan program disclosure and 
illustrates how to provide consumers with a method for calculating the 
monthly payment for the loan amount to be borrowed.
    7. Models H-4(D) through H-4(J). These model clauses illustrate 
certain notices, statements, and other disclosures required as follows
    i. Model H-4(D) illustrates the adjustment notice required under 
Sec. 226.20(c), and provides examples of payment change notices and 
annual notices of interest rate changes.
    ii. Model H-4(E) illustrates the interest rate and payment summary 
table required under Sec. 226.18(s) for a fixed-rate mortgage 
transaction.
    iii. Model H-4(F) illustrates the interest rate and payment summary 
table required under Sec. 226.18(s) for an adjustable-rate or a step-
rate mortgage transaction.
    iv. Model H-4(G) illustrates the interest rate and payment summary 
table required under Sec. 226.18(s) for a mortgage transaction with 
negative amortization.
    v. Model H-4(H) illustrates the interest rate and payment summary 
table required under Sec. 226.18(s) for a fixed-rate, interest-only 
mortgage transaction.
    vi. Model H-4(I) illustrates the introductory rate disclosure 
required by Sec. 226.18(s)(2)(iii) for an adjustable-rate mortgage 
transaction with an introductory rate.
    vii. Model H-4(J) illustrates the balloon payment disclosure 
required by Sec. 226.18(s)(5) for a mortgage transaction with a balloon 
payment term.
    viii. Model H-4(K) illustrates the no-guarantee-to-refinance 
statement required by Sec. 226.18(t) for a mortgage transaction.
    8. Model H-5. This contains the demand feature clause.
    9. Model H-6. This contains the assumption clause.
    10. Model H-7. This contains the required deposit clause.
    11. Models H-8 and H-9. These models contain the rescission notices 
for a typical closed-end transaction and a refinancing, respectively. 
The last paragraph of each model form contains a blank for the date by 
which the consumer's notice of cancellation must be sent or delivered. A 
parenthetical is included to address the situation in which the 
consumer's right to rescind the transaction exists beyond 3 business 
days following the date of the transaction, for example, where the 
notice or material disclosures are delivered late or where the date of 
the transaction in paragraph 1 of the notice is an estimate. The 
language of the parenthetical is not optional. See the commentary to 
section

[[Page 812]]

226.2(a)(25) regarding the specificity of the security interest 
disclosure for model form H-9. The prior version of model form H-9 is 
substantially similar to the current version and creditors may continue 
to use it, as appropriate. Creditors are encouraged, however, to use the 
current version when reordering or reprinting forms.
    12. Sample forms. The sample forms (H-10 through H-15) serve a 
different purpose than the model forms. The samples illustrate various 
ways of adapting the model forms to the individual transactions 
described in the commentary to appendix H. The deletions and 
rearrangments shown relate only to the specific transactions described. 
As a result, the samples do not provide the general protection from 
civil liability provided by the model forms and clauses.
    13. Sample H-10. This sample illustrates an automobile credit sale. 
The cash price is $7,500 with a downpayment of $1,500. There is an 8% 
add-on interest rate and a term of 3 years, with 36 equal monthly 
payments. The credit life insurance premium and the filing fees are 
financed by the creditor. There is a $25 credit report fee paid by the 
consumer before consummation, which is a prepaid finance charge.
    14. Sample H-11. This sample illustrates an installment loan. The 
amount of the loan is $5,000. There is a 12% simple interest rate and a 
term of 2 years. The date of the transaction is expected to be April 15, 
1981, with the first payment due on June 1, 1981. The first payment 
amount is labelled as an estimate since the transaction date is 
uncertain. The odd days' interest ($26.67) is collected with the first 
payment. The remaining 23 monthly payments are equal.
    15. Sample H-12. This sample illustrates a refinancing and 
consolidation loan. The amount of the loan is $5,000. There is a 15% 
simple interest rate and a term of 3 years. The date of the transaction 
is April 1, 1981, with the first payment due on May 1, 1981. The first 
35 monthly payments are equal, with an odd final payment. The credit 
disability insurance premium is financed. In calculating the annual 
percentage rate, the U.S. Rule has been used. Since an itemization of 
the amount financed is included with the disclosures, the statement 
regarding the consumer's option to receive an itemization is deleted.
    16. Samples H-13 through H-15. These samples illustrate various 
mortgage transactions. They assume that the mortgages are subject to the 
Real Estate Settlement Procedures Act (RESPA). As a result, no option 
regarding the itemization of the amount financed has been included in 
the samples, because providing the good faith estimates of settlement 
costs required by RESPA satisfies Truth in Lending's amount financed 
itemization requirement. (See footnote 39 to Sec. 226.18(c).)
    17. Sample H-13. This sample illustrates a mortgage with a demand 
feature. The loan amount is $44,900, payable in 360 monthly installments 
at a simple interest rate of 14.75%. The 15 days of interim interest 
($294.34) is collected as a prepaid finance charge at the time of 
consummation of the loan (April 15, 1981). In calculating the disclosure 
amounts, the minor irregularities provision in Sec. 226.17(c)(4) has 
been used. The property insurance premiums are not included in the 
payment schedule. This disclosure statement could be used for notes with 
the 7-year call option required by the Federal National Mortgage 
Association (FNMA) in states where due-on-sale clauses are prohibited.
    18. Sample H-14. This sample disclosure form illustrates the 
disclosures under Sec. 226.19(b) for a variable-rate transaction 
secured by the consumer's principal dwelling with a term greater than 
one year. The sample form shows a creditor how to adapt the model 
clauses in appendix H-4(C) to the creditor's own particular variable-
rate program. The sample disclosure form describes the features of a 
specific variable-rate mortgage program and alerts the consumer to the 
fact that information on the creditor's other closed-end variable-rate 
programs is available upon request. It includes information on how the 
interest rate is determined and how it can change over time. Section 
226.19(b)(2)(viii) permits creditors the option to provide either a 
historical example or an initial and maximum interest rates and payments 
disclosure; both are illustrated in the sample disclosure. The 
historical example explains how the monthly payment can change based on 
a $10,000 loan amount, payable in 360 monthly installments, based on 
historical changes in the values for the weekly average yield on U.S. 
Treasury Securities adjusted to a constant maturity of one year. Index 
values are measured for 15 years, as of the first week ending in July. 
This reflects the requirement that the index history be based on values 
for the same date or period each year in the example. The sample 
disclosure also illustrates the alternative disclosure under Sec. 
226.19(b)(2)(viii)(B) that the initial and the maximum interest rates 
and payments be shown for a $10,000 loan originated at an initial 
interest rate of 12.41 percent (which was in effect July 1996) and to 
have 2 percentage point annual (and 5 percentage point overall) interest 
rate limitations or caps. Thus, the maximum amount that the interest 
rate could rise under this program is 5 percentage points higher than 
the 12.41 percent initial rate to 17.41 percent, and the monthly payment 
could rise from $106.03 to a maximum of $145.34. The loan would not 
reach the maximum interest rate until its fourth year because of the 2 
percentage point annual rate limitations, and the maximum payment 
disclosed reflects the

[[Page 813]]

amortization of the loan during that period. The sample form also 
illustrates how to provide consumers with a method for calculating their 
actual monthly payment for a loan amount other than $10,000.
    19. Sample H-15. This sample illustrates a graduated payment 
mortgage with a 5-year graduation period and a 7\1/2\ percent yearly 
increase in payments. The loan amount is $44,900, payable in 360 monthly 
installments at a simple interest rate of 14.75%. Two points ($898), as 
well as an initial mortgage guarantee insurance premium of $225.00, are 
included in the prepaid finance charge. The mortgage guarantee insurance 
premiums are calculated on the basis of \1/4\ of 1% of the outstanding 
principal balance under an annual reduction plan. The abbreviated 
disclosure permitted under Sec. 226.18(g)(2) is used for the payment 
schedule for years 6 through 30. The prepayment disclosure refers to 
both penalties and rebates because information about penalties is 
required for the simple interest portion of the obligation and 
information about rebates is required for the mortgage insurance portion 
of the obligation.
    20. Sample H-16. This sample illustrates the disclosures required 
under Sec. 226.32(c). The sample illustrates the amount borrowed and 
the disclosures about optional insurance that are required for mortgage 
refinancings under Sec. 226.32(c)(5). Creditors may, at their option, 
include these disclosures for all loans subject to Sec. 226.32. The 
sample also includes disclosures required under Sec. 226.32(c)(3) when 
the legal obligation includes a balloon payment.
    21. HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved 
for use for loans made prior to the mandatory compliance date of the 
disclosures required under Subpart F. The form was approved for all 
Health Education Assistance Loans (HEAL) with a variable interest rate 
that were considered interim student credit extensions as defined in 
Regulation Z.
    22. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved 
for use for loans made prior to the mandatory compliance date of the 
disclosures required under Subpart F. The form was approved for all HEAL 
loans with a fixed interest rate that were considered interim student 
credit extensions as defined in Regulation Z.
    23. HRSA-502-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-1 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved 
for use for loans made prior to the mandatory compliance date of the 
disclosures required under Subpart F. The form was approved for all HEAL 
loans with a variable interest rate in which the borrower has reached 
repayment status and is making payments of both interest and principal.
    24. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved 
for use for loans made prior to the mandatory compliance date of the 
disclosures required under Subpart F. The form was approved for all HEAL 
loans with a fixed interest rate in which the borrower has reached 
repayment status and is making payments of both interest and principal.
    25. Models H-18, H-19, H-20.
    i. These model forms illustrate disclosures required under Sec. 
226.47 on or with an application or solicitation, at approval, and after 
acceptance of a private education loan. Although use of the model forms 
is not required, creditors using them properly will be deemed to be in 
compliance with the regulation with regard to private education loan 
disclosures. Creditors may make certain types of changes to private 
education loan model forms H-18 (application and solicitation), H-19 
(approval), and H-20 (final) and still be deemed to be in compliance 
with the regulation, provided that the required disclosures are made 
clearly and conspicuously. The model forms aggregate disclosures into 
groups under specific headings. Changes may not include rearranging the 
sequence of disclosures, for instance, by rearranging which disclosures 
are provided under each heading or by rearranging the sequence of the 
headings and grouping of disclosures. Changes to the model forms may not 
be so extensive as to affect the substance or clarity of the forms. 
Creditors making revisions with that effect will lose their protection 
from civil liability.
    The creditor may delete inapplicable disclosures, such as:
     The Federal student financial assistance 
alternatives disclosures
     The self-certification disclosure
    Other permissible changes include, for example:
     Adding the creditor's address, telephone number, 
or Web site
     Adding loan identification information, such as a 
loan identification number
     Adding the date on which the form was printed or 
produced
     Placing the notice of the right to cancel in the 
top left or top right of the disclosure to accommodate a window envelope
     Combining required terms where several numerical 
disclosures are the same. For instance, if the itemization of the amount 
financed is provided, the amount financed need not be separately 
disclosed

[[Page 814]]

     Combining the disclosure of loan term and payment 
deferral options required in Sec. 226.47(a)(3) with the disclosure of 
cost estimates required in Sec. 226.47(a)(4) in the same chart or table 
(See comment 47(a)(3)-4.)
     Using the first person, instead of the second 
person, in referring to the borrower
     Using ``borrower'' and ``creditor'' instead of 
pronouns
     Incorporating certain state ``plain English'' 
requirements
     Deleting inapplicable disclosures by whiting out, 
blocking out, filling in ``N/A'' (not applicable) or ``0,'' crossing 
out, leaving blanks, checking a box for applicable items, or circling 
applicable items
    ii. Although creditors are not required to use a certain paper size 
in disclosing the Sec. Sec. 226.47(a), (b) and (c) disclosures, samples 
H-21, H-22, and H-23 are designed to be printed on two 8\1/2\ x 11 inch 
sheets of paper. A creditor may use a larger sheet of paper, such as 
8\1/2\ x 14 inch sheets of paper, or may use multiple pages. If the 
disclosures are provided on two sides of a single sheet of paper, the 
creditor must include a reference or references, such as ``SEE BACK OF 
PAGE'' at the bottom of each page indicating that the disclosures 
continue onto the back of the page. If the disclosures are on two or 
more pages, a creditor may not include any intervening information 
between portions of the disclosure. In addition, the following 
formatting techniques were used in presenting the information in the 
sample tables to ensure that the information is readable:
    A. A readable font style and font size (10-point Helvetica font 
style for body text).
    B. Sufficient spacing between lines of the text.
    C. Standard spacing between words and characters. In other words, 
the body text was not compressed to appear smaller than the 10-point 
type size.
    D. Sufficient white space around the text of the information in each 
row, by providing sufficient margins above, below and to the sides of 
the text.
    E. Sufficient contrast between the text and the background. 
Generally, black text was used on white paper.
    iii. While the Board is not requiring issuers to use the above 
formatting techniques in presenting information in the disclosure, the 
Board encourages issuers to consider these techniques when deciding how 
to disclose information in the disclosure to ensure that the information 
is presented in a readable format.
    iv. Creditors are allowed to use color, shading and similar graphic 
techniques in the disclosures, so long as the disclosures remain 
substantially similar to the model and sample forms in appendix H.
    26. Sample H-21. This sample illustrates a disclosure required under 
Sec. 226.47(a). The sample assumes a range of interest rates between 
7.375% and 17.375%. The sample assumes a variable interest rate that 
will never exceed 25% over the life of the loan. The term of the sample 
loan is 20 years for an amount up to $20,000 and 30 years for an amount 
more than $20,000. The repayment options and sample costs have been 
combined into a single table, as permitted in the commentary to Sec. 
226.47(a)(3). It demonstrates the loan amount, interest rate, and total 
paid when a consumer makes loan payments while in school, pays only 
interest while in school, and defers all payments while in school.
    27. Sample H-22. This sample illustrates a disclosure required under 
Sec. 226.47(b). The sample assumes the consumer financed $10,000 at an 
8.23% annual percentage rate. The sample assumes a variable interest 
rate that will never exceed 25% over the life of the loan. The payment 
schedule and terms assumes a 20-year loan term and that the consumer 
elected to defer payments while enrolled in school. This includes a 
sample disclosure of a total loan amount of $10,600 and prepaid finance 
charges totaling $600, for a total amount financed of $10,000.
    28. Sample H-22. This sample illustrates a disclosure required under 
Sec. 226.47(c). The sample assumes the consumer financed $10,000 at an 
8.23% annual percentage rate. The sample assumes a variable annual 
percentage rate in an instance where there is no maximum interest rate. 
The sample demonstrates disclosure of an assumed maximum rate, and the 
statement that the consumer's actual maximum rate and payment amount 
could be higher. The payment schedule and terms assumes a 20-year loan 
term, the assumed maximum interest rate, and that the consumer elected 
to defer payments while enrolled in school. This includes a sample 
disclosure of a total loan amount of $10,600 and prepaid finance charges 
totaling $600, for a total amount financed of $10,000.

                Appendix I--Federal Enforcement Agencies

    Statute: Section 108.
    Other sections: None.
    Previous regulation: Section 226.1(b).
    1981 changes: None.

 Appendix J--Annual Percentage Rate Computations for Closed-End Credit 
                              Transactions

    1. Use of appendix J. Appendix J sets forth the actuarial equations 
and instructions for calculating the annual percentage rate in closed-
end credit transactions. While the formulas contained in this appendix 
may be directly applied to calculate the annual percentage rate for an 
individual transaction, they may also be utilized to program calculators 
and computers to perform the calculations.

[[Page 815]]

    2. Relation to Board tables. The Board's Annual Percentage Rate 
Tables also provide creditors with a calculation tool that applies the 
technical information in appendix J. An annual percentage rate computed 
in accordance with the instructions in the tables is deemed to comply 
with the regulation. Volume I of the tables may be used for credit 
transactions involving equal payment amounts and periods, as well as for 
transactions involving any of the following irregularities: odd first 
period, odd first payment and odd last payment. Volume II of the tables 
may be used for transactions that involve any type of irregularities. 
These tables may be obtained from any Federal Reserve Bank or from the 
Board in Washington, DC 20551, upon request.

                               References

    Statute: Section 107.
    Other sections: Section 226.22.
    Previous regulation: Section 226.40 (Supplement I).
    1981 changes: Paragraph (b)(2) has been revised to clarify that the 
term of the transaction never begins earlier than consummation of the 
transaction. Paragraph (b)(5)(vi) has been revised to permit creditors 
in single-advance, single-payment transactions in which the term is less 
than a year and is equal to a whole number of months, to use either the 
12-month method or the 365-day method to compute the number of unit-
periods per year.

    Appendix K--Total Annual Loan Cost Rate Computations for Reverse 
                          Mortgage Transactions

    1. General. The calculation of total annual loan cost rates under 
appendix K is based on the principles set forth and the estimation or 
``iteration'' procedure used to compute annual percentage rates under 
appendix J. Rather than restate this iteration process in full, the 
regulation cross-references the procedures found in appendix J. In other 
aspects the appendix reflects the special nature of reverse mortgage 
transactions. Special definitions and instructions are included where 
appropriate.
    (b) Instructions and equations for the total annual loan cost rate.
    (b)(5) Number of unit-periods between two given dates.
    1. Assumption as to when transaction begins. The computation of the 
total annual loan cost rate is based on the assumption that the reverse 
mortgage transaction begins on the first day of the month in which 
consummation is estimated to occur. Therefore, fractional unit-periods 
(used under appendix J for calculating annual percentage rates) are not 
used.
    (b)(9) Assumption for discretionary cash advances.
    1. Amount of credit. Creditors should compute the total annual loan 
cost rates for transactions involving discretionary cash advances by 
assuming that 50 percent of the initial amount of the credit available 
under the transaction is advanced at closing or, in an open-end 
transaction, when the consumer becomes obligated under the plan. (For 
the purposes of this assumption, the initial amount of the credit is the 
principal loan amount less any costs to the consumer under section 
226.33(c)(1).)
    (b)(10) Assumption for variable-rate reverse mortgage transactions.
    1. Initial discount or premium rate. Where a variable-rate reverse 
mortgage transaction includes an initial discount or premium rate, the 
creditor should apply the same rules for calculating the total annual 
loan cost rate as are applied when calculating the annual percentage 
rate for a loan with an initial discount or premium rate (see the 
commentary to Sec. 226.17(c)).
    (d) Reverse mortgage model form and sample form.
    (d)(2) Sample form.
    1. General. The ``clear and conspicuous'' standard for reverse 
mortgage disclosures does not require disclosures to be printed in any 
particular type size. Disclosures may be made on more than one page, and 
use both the front and the reverse sides, as long as the pages 
constitute an integrated document and the table disclosing the total 
annual loan cost rates is on a single page.

 Appendix L--Assumed Loan Periods for Computations of Total Annual Loan 
                               Cost Rates

    1. General. The life expectancy figures used in appendix L are those 
found in the U.S. Decennial Life Tables for women, as rounded to the 
nearest whole year and as published by the U. S. Department of Health 
and Human Services. The figures contained in appendix L must be used by 
creditors for all consumers (men and women). Appendix L will be revised 
periodically by the Board to incorporate revisions to the figures made 
in the Decennial Tables.

  Appendix O--Illustrative Written Source Documents for Higher-Priced 
                      Mortgage Loan Appraisal Rules

    1. Title commitment report. The ``title commitment report'' is a 
document from a title insurance company describing the property interest 
and status of its title, parties with interests in the title and the 
nature of their claims, issues with the title that must be resolved 
prior to closing of the transaction between the parties to the transfer, 
amount and disposition of the premiums, and endorsements on the title 
policy. This document is issued by the title insurance company prior to 
the company's issuance of an

[[Page 816]]

actual title insurance policy to the property's transferee and/or 
creditor financing the transaction. In different jurisdictions, this 
instrument may be referred to by different terms, such as a title 
commitment, title binder, title opinion, or title report.

[46 FR 50288, Oct. 9, 1981]

    Editorial Note: For Federal Register citations affecting supplement 
I of part 226, see the List of CFR Sections Affected, which appears in 
the Finding Aids section of the printed volume and at www.fdsys.gov.



PART 228_COMMUNITY REINVESTMENT (REGULATION BB)--Table of Contents



Sec.
228.1-228.2 [Reserved]

                            Subpart A_General

228.11 Authority, purposes, and scope.
228.12 Definitions.

              Subpart B_Standards for Assessing Performance

228.21 Performance tests, standards, and ratings, in general.
228.22 Lending test.
228.23 Investment test.
228.24 Service test.
228.25 Community development test for wholesale or limited purpose 
          banks.
228.26 Small bank performance standards.
228.27 Strategic plan.
228.28 Assigned ratings.
228.29 Effect of CRA performance on applications.

        Subpart C_Records, Reporting, and Disclosure Requirements

228.41 Assessment area delineation.
228.42 Data collection, reporting, and disclosure.
228.43 Content and availability of public file.
228.44 Public notice by banks.
228.45 Publication of planned examination schedule.

Appendix A to Part 228--Ratings
Appendix B to Part 228--CRA Notice

    Authority: 12 U.S.C. 321, 325, 1828(c), 1842, 1843, 1844, and 2901 
et seq.

    Source: 43 FR 47148, Oct. 12, 1978, unless otherwise noted.



Sec. Sec. 228.1-228.2  [Reserved]



                            Subpart A_General

    Source: Reg. BB, 60 FR 22190, May 4, 1995, unless otherwise noted.



Sec. 228.11  Authority, purposes, and scope.

    (a) Authority. The Board of Governors of the Federal Reserve System 
(the Board) issues this part to implement the Community Reinvestment Act 
(12 U.S.C. 2901 et seq.) (CRA). The regulations comprising this part are 
issued under the authority of the CRA and under the provisions of the 
United States Code authorizing the Board:
    (1) To conduct examinations of State-chartered banks that are 
members of the Federal Reserve System (12 U.S.C. 325);
    (2) To conduct examinations of bank holding companies and their 
subsidiaries (12 U.S.C. 1844) and savings and loan holding companies and 
their subsidiaries (12 U.S.C. 1467a); and
    (3) To consider applications for:
    (i) Domestic branches by State member banks (12 U.S.C. 321);
    (ii) Mergers in which the resulting bank would be a State member 
bank (12 U.S.C. 1828(c));
    (iii) Formations of, acquisitions of banks by, and mergers of, bank 
holding companies (12 U.S.C. 1842);
    (iv) The acquisition of savings associations by bank holding 
companies (12 U.S.C. 1843); and
    (v) Formations of, acquisitions of savings associations by, 
conversions of, and mergers of, savings and loan holding companies (12 
U.S.C. 1467a).
    (b) Purposes. In enacting the CRA, the Congress required each 
appropriate Federal financial supervisory agency to assess an 
institution's record of helping to meet the credit needs of the local 
communities in which the institution is chartered, consistent with the 
safe and sound operation of the institution, and to take this record 
into account in the agency's evaluation of an application for a deposit 
facility by the institution. This part is intended to carry out the 
purposes of the CRA by:
    (1) Establishing the framework and criteria by which the Board 
assesses a bank's record of helping to meet the

[[Page 817]]

credit needs of its entire community, including low- and moderate-income 
neighborhoods, consistent with the safe and sound operation of the bank; 
and
    (2) Providing that the Board takes that record into account in 
considering certain applications.
    (c) Scope--(1) General. This part applies to all banks except as 
provided in paragraph (c)(3) of this section.
    (2) Foreign bank acquisitions. This part also applies to an 
uninsured State branch (other than a limited branch) of a foreign bank 
that results from an acquisition described in section 5(a)(8) of the 
International Banking Act of 1978 (12 U.S.C. 3103(a)(8)). The terms 
``State branch'' and ``foreign bank'' have the same meanings as in 
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101 et 
seq.); the term ``uninsured State branch'' means a State branch the 
deposits of which are not insured by the Federal Deposit Insurance 
Corporation; the term ``limited branch'' means a State branch that 
accepts only deposits that are permissible for a corporation organized 
under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.).
    (3) Certain special purpose banks. This part does not apply to 
special purpose banks that do not perform commercial or retail banking 
services by granting credit to the public in the ordinary course of 
business, other than as incident to their specialized operations. These 
banks include banker's banks, as defined in 12 U.S.C. 24 (Seventh), and 
banks that engage only in one or more of the following activities: 
providing cash management controlled disbursement services or serving as 
correspondent banks, trust companies, or clearing agents.

[43 FR 47148, Oct. 12, 1978, as amended at 76 FR 56532, Sept. 13, 2011]



Sec. 228.12  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Affiliate means any company that controls, is controlled by, or 
is under common control with another company. The term ``control'' has 
the meaning given to that term in 12 U.S.C. 1841(a)(2), and a company is 
under common control with another company if both companies are directly 
or indirectly controlled by the same company.
    (b) Area median income means:
    (1) The median family income for the MSA, if a person or geography 
is located in an MSA, or for the metropolitan division, if a person or 
geography is located in an MSA that has been subdivided into 
metropolitan divisions; or
    (2) The statewide nonmetropolitan median family income, if a person 
or geography is located outside an MSA.
    (c) Assessment area means a geographic area delineated in accordance 
with Sec. 228.41.
    (d) Automated teller machine (ATM) means an automated, unstaffed 
banking facility owned or operated by, or operated exclusively for, the 
bank at which deposits are received, cash dispersed, or money lent.
    (e) Bank means a State member bank as that term is defined in 
section 3(d)(2) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(d)(2)), except as provided in Sec. 228.11(c)(3), and includes an 
uninsured State branch (other than a limited branch) of a foreign bank 
described in Sec. 228.11(c)(2).
    (f) Branch means a staffed banking facility approved as a branch, 
whether shared or unshared, including, for example, a mini-branch in a 
grocery store or a branch operated in conjunction with any other local 
business or nonprofit organization.
    (g) Community development means:
    (1) Affordable housing (including multifamily rental housing) for 
low- or moderate-income individuals;
    (2) Community services targeted to low- or moderate-income 
individuals;
    (3) Activities that promote economic development by financing 
businesses or farms that meet the size eligibility standards of the 
Small Business Administration's Development Company or Small Business 
Investment Company programs (13 CFR 121.301) or have gross annual 
revenues of $1 million or less; or
    (4) Activities that revitalize or stabilize--
    (i) Low-or moderate-income geographies;
    (ii) Designated disaster areas; or

[[Page 818]]

    (iii) Distressed or underserved nonmetropolitan middle-income 
geographies designated by the Board, Federal Deposit Insurance 
Corporation, and Office of the Comptroller of the Currency, based on--
    (A) Rates of poverty, unemployment, and population loss; or
    (B) Population size, density, and dispersion. Activities revitalize 
and stabilize geographies designated based on population size, density, 
and dispersion if they help to meet essential community needs, including 
needs of low- and moderate-income individuals.
    (h) Community development loan means a loan that:
    (1) Has as its primary purpose community development; and
    (2) Except in the case of a wholesale or limited purpose bank:
    (i) Has not been reported or collected by the bank or an affiliate 
for consideration in the bank's assessment as a home mortgage, small 
business, small farm, or consumer loan, unless the loan is for a 
multifamily dwelling (as defined in Sec. 1003.2(n) of this title); and
    (ii) Benefits the bank's assessment area(s) or a broader statewide 
or regional area that includes the bank's assessment area(s).
    (i) Community development service means a service that:
    (1) Has as its primary purpose community development;
    (2) Is related to the provision of financial services; and
    (3) Has not been considered in the evaluation of the bank's retail 
banking services under Sec. 228.24(d).
    (j) Consumer loan means a loan to one or more individuals for 
household, family, or other personal expenditures. A consumer loan does 
not include a home mortgage, small business, or small farm loan. 
Consumer loans include the following categories of loans:
    (1) Motor vehicle loan, which is a consumer loan extended for the 
purchase of and secured by a motor vehicle;
    (2) Credit card loan, which is a line of credit for household, 
family, or other personal expenditures that is accessed by a borrower's 
use of a ``credit card,'' as this term is defined in Sec. 1026.2 of 
this chapter;
    (3) Other secured consumer loan, which is a secured consumer loan 
that is not included in one of the other categories of consumer loans; 
and
    (4) Other unsecured consumer loan, which is an unsecured consumer 
loan that is not included in one of the other categories of consumer 
loans.
    (k) Geography means a census tract delineated by the United States 
Bureau of the Census in the most recent decennial census.
    (l) Home mortgage loan means a closed-end mortgage loan or an open-
end line of credit as these terms are defined under Sec. 1003.2 of this 
title and that is not an excluded transaction under Sec. 1003.3(c)(1) 
through (10) and (13) of this title.
    (m) Income level includes:
    (1) Low-income, which means an individual income that is less than 
50 percent of the area median income, or a median family income that is 
less than 50 percent, in the case of a geography.
    (2) Moderate-income, which means an individual income that is at 
least 50 percent and less than 80 percent of the area median income, or 
a median family income that is at least 50 and less than 80 percent, in 
the case of a geography.
    (3) Middle-income, which means an individual income that is at least 
80 percent and less than 120 percent of the area median income, or a 
median family income that is at least 80 and less than 120 percent, in 
the case of a geography.
    (4) Upper-income, which means an individual income that is 120 
percent or more of the area median income, or a median family income 
that is 120 percent or more, in the case of a geography.
    (n) Limited purpose bank means a bank that offers only a narrow 
product line (such as credit card or motor vehicle loans) to a regional 
or broader market and for which a designation as a limited purpose bank 
is in effect, in accordance with Sec. 228.25(b).
    (o) Loan location. A loan is located as follows:
    (1) A consumer loan is located in the geography where the borrower 
resides;
    (2) A home mortgage loan is located in the geography where the 
property to which the loan relates is located; and
    (3) A small business or small farm loan is located in the geography 
where

[[Page 819]]

the main business facility or farm is located or where the loan proceeds 
otherwise will be applied, as indicated by the borrower.
    (p) Loan production office means a staffed facility, other than a 
branch, that is open to the public and that provides lending-related 
services, such as loan information and applications.
    (q) Metropolitan division means a metropolitan division as defined 
by the Director of the Office of Management and Budget.
    (r) MSA means a metropolitan statistical area as defined by the 
Director of the Office of Management and Budget.
    (s) Nonmetropolitan area means any area that is not located in an 
MSA.
    (t) Qualified investment means a lawful investment, deposit, 
membership share, or grant that has as its primary purpose community 
development.
    (u) Small bank--(1) Definition. Small bank means a bank that, as of 
December 31 of either of the prior two calendar years, had assets of 
less than $1.252 billion. Intermediate small bank means a small bank 
with assets of at least $313 million as of December 31 of both of the 
prior two calendar years and less than $1.252 billion as of December 31 
of either of the prior two calendar years.
    (2) Adjustment. The dollar figures in paragraph (u)(1) of this 
section shall be adjusted annually and published by the Board, based on 
the year-to-year change in the average of the Consumer Price Index for 
Urban Wage Earners and Clerical Workers, not seasonally adjusted, for 
each twelve-month period ending in November, with rounding to the 
nearest million.
    (v) Small business loan means a loan included in ``loans to small 
businesses'' as defined in the instructions for preparation of the 
Consolidated Report of Condition and Income.
    (w) Small farm loan means a loan included in ``loans to small 
farms'' as defined in the instructions for preparation of the 
Consolidated Report of Condition and Income.
    (x) Wholesale bank means a bank that is not in the business of 
extending home mortgage, small business, small farm, or consumer loans 
to retail customers, and for which a designation as a wholesale bank is 
in effect, in accordance with Sec. 228.25(b).

[Reg. BB, 60 FR 22190, May 4, 1995]

    Editorial Note: For Federal Register citations affecting Sec. 
228.12, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.



              Subpart B_Standards for Assessing Performance

    Source: Reg. BB, 60 FR 22191, May 4, 1995, unless otherwise noted.



Sec. 228.21  Performance tests, standards, and ratings, in general.

    (a) Performance tests and standards. The Board assesses the CRA 
performance of a bank in an examination as follows:
    (1) Lending, investment, and service tests. The Board applies the 
lending, investment, and service tests, as provided in Sec. Sec. 228.22 
through 228.24, in evaluating the performance of a bank, except as 
provided in paragraphs (a)(2), (a)(3), and (a)(4) of this section.
    (2) Community development test for wholesale or limited purpose 
banks. The Board applies the community development test for a wholesale 
or limited purpose bank, as provided in Sec. 228.25, except as provided 
in paragraph (a)(4) of this section.
    (3) Small bank performance standards. The Board applies the small 
bank performance standards as provided in Sec. 228.26 in evaluating the 
performance of a small bank or a bank that was a small bank during the 
prior calendar year, unless the bank elects to be assessed as provided 
in paragraphs (a)(1), (a)(2), or (a)(4) of this section. The bank may 
elect to be assessed as provided in paragraph (a)(1) of this section 
only if it collects and reports the data required for other banks under 
Sec. 228.42.
    (4) Strategic plan. The Board evaluates the performance of a bank 
under a strategic plan if the bank submits, and the Board approves, a 
strategic plan as provided in Sec. 228.27.
    (b) Performance context. The Board applies the tests and standards 
in paragraph (a) of this section and also considers whether to approve a 
proposed strategic plan in the context of:

[[Page 820]]

    (1) Demographic data on median income levels, distribution of 
household income, nature of housing stock, housing costs, and other 
relevant data pertaining to a bank's assessment area(s);
    (2) Any information about lending, investment, and service 
opportunities in the bank's assessment area(s) maintained by the bank or 
obtained from community organizations, state, local, and tribal 
governments, economic development agencies, or other sources;
    (3) The bank's product offerings and business strategy as determined 
from data provided by the bank;
    (4) Institutional capacity and constraints, including the size and 
financial condition of the bank, the economic climate (national, 
regional, and local), safety and soundness limitations, and any other 
factors that significantly affect the bank's ability to provide lending, 
investments, or services in its assessment area(s);
    (5) The bank's past performance and the performance of similarly 
situated lenders;
    (6) The bank's public file, as described in Sec. 228.43, and any 
written comments about the bank's CRA performance submitted to the bank 
or the Board; and
    (7) Any other information deemed relevant by the Board.
    (c) Assigned ratings. The Board assigns to a bank one of the 
following four ratings pursuant to Sec. 228.28 and appendix A of this 
part: ``outstanding''; ``satisfactory''; ``needs to improve''; or 
``substantial noncompliance'' as provided in 12 U.S.C. 2906(b)(2). The 
rating assigned by the Board reflects the bank's record of helping to 
meet the credit needs of its entire community, including low- and 
moderate-income neighborhoods, consistent with the safe and sound 
operation of the bank.
    (d) Safe and sound operations. This part and the CRA do not require 
a bank to make loans or investments or to provide services that are 
inconsistent with safe and sound operations. To the contrary, the Board 
anticipates banks can meet the standards of this part with safe and 
sound loans, investments, and services on which the banks expect to make 
a profit. Banks are permitted and encouraged to develop and apply 
flexible underwriting standards for loans that benefit low- or moderate-
income geographies or individuals, only if consistent with safe and 
sound operations.
    (e) Low-cost education loans provided to low-income borrowers. In 
assessing and taking into account the record of a bank under this part, 
the Board considers, as a factor, low-cost education loans originated by 
the bank to borrowers, particularly in its assessment area(s), who have 
an individual income that is less than 50 percent of the area median 
income. For purposes of this paragraph, ``low-cost education loans'' 
means any education loan, as defined in section 140(a)(7) of the Truth 
in Lending Act (15 U.S.C. 1650(a)(7)) (including a loan under a state or 
local education loan program), originated by the bank for a student at 
an ``institution of higher education,'' as that term is generally 
defined in sections 101 and 102 of the Higher Education Act of 1965 (20 
U.S.C. 1001 and 1002) and the implementing regulations published by the 
U.S. Department of Education, with interest rates and fees no greater 
than those of comparable education loans offered directly by the U.S. 
Department of Education. Such rates and fees are specified in section 
455 of the Higher Education Act of 1965 (20 U.S.C. 1087e).
    (f) Activities in cooperation with minority- or women-owned 
financial institutions and low-income credit unions. In assessing and 
taking into account the record of a nonminority-owned and nonwomen-owned 
bank under this part, the Board considers as a factor capital 
investment, loan participation, and other ventures undertaken by the 
bank in cooperation with minority- and women-owned financial 
institutions and low-income credit unions. Such activities must help 
meet the credit needs of local communities in which the minority- and 
women-owned financial institutions and low-income credit unions are 
chartered. To be considered, such activities need not also benefit the 
bank's assessment area(s) or the broader statewide or regional area that 
includes the bank's assessment area(s).

[Reg. BB, 60 FR 22191, May 4, 1995, as amended at 75 FR 61044, Oct. 4, 
2010]

[[Page 821]]



Sec. 228.22  Lending test.

    (a) Scope of test. (1) The lending test evaluates a bank's record of 
helping to meet the credit needs of its assessment area(s) through its 
lending activities by considering a bank's home mortgage, small 
business, small farm, and community development lending. If consumer 
lending constitutes a substantial majority of a bank's business, the 
Board will evaluate the bank's consumer lending in one or more of the 
following categories: motor vehicle, credit card, other secured, and 
other unsecured loans. In addition, at a bank's option, the Board will 
evaluate one or more categories of consumer lending, if the bank has 
collected and maintained, as required in Sec. 228.42(c)(1), the data 
for each category that the bank elects to have the Board evaluate.
    (2) The Board considers originations and purchases of loans. The 
Board will also consider any other loan data the bank may choose to 
provide, including data on loans outstanding, commitments and letters of 
credit.
    (3) A bank may ask the Board to consider loans originated or 
purchased by consortia in which the bank participates or by third 
parties in which the bank has invested only if the loans meet the 
definition of community development loans and only in accordance with 
paragraph (d) of this section. The Board will not consider these loans 
under any criterion of the lending test except the community development 
lending criterion.
    (b) Performance criteria. The Board evaluates a bank's lending 
performance pursuant to the following criteria:
    (1) Lending activity. The number and amount of the bank's home 
mortgage, small business, small farm, and consumer loans, if applicable, 
in the bank's assessment area(s);
    (2) Geographic distribution. The geographic distribution of the 
bank's home mortgage, small business, small farm, and consumer loans, if 
applicable, based on the loan location, including:
    (i) The proportion of the bank's lending in the bank's assessment 
area(s);
    (ii) The dispersion of lending in the bank's assessment area(s); and
    (iii) The number and amount of loans in low-, moderate-, middle-, 
and upper-income geographies in the bank's assessment area(s);
    (3) Borrower characteristics. The distribution, particularly in the 
bank's assessment area(s), of the bank's home mortgage, small business, 
small farm, and consumer loans, if applicable, based on borrower 
characteristics, including the number and amount of:
    (i) Home mortgage loans to low-, moderate-, middle-, and upper-
income individuals;
    (ii) Small business and small farm loans to businesses and farms 
with gross annual revenues of $1 million or less;
    (iii) Small business and small farm loans by loan amount at 
origination; and
    (iv) Consumer loans, if applicable, to low-, moderate-, middle-, and 
upper-income individuals;
    (4) Community development lending. The bank's community development 
lending, including the number and amount of community development loans, 
and their complexity and innovativeness; and
    (5) Innovative or flexible lending practices. The bank's use of 
innovative or flexible lending practices in a safe and sound manner to 
address the credit needs of low- or moderate-income individuals or 
geographies.
    (c) Affiliate lending. (1) At a bank's option, the Board will 
consider loans by an affiliate of the bank, if the bank provides data on 
the affiliate's loans pursuant to Sec. 228.42.
    (2) The Board considers affiliate lending subject to the following 
constraints:
    (i) No affiliate may claim a loan origination or loan purchase if 
another institution claims the same loan origination or purchase; and
    (ii) If a bank elects to have the Board consider loans within a 
particular lending category made by one or more of the bank's affiliates 
in a particular assessment area, the bank shall elect to have the Board 
consider, in accordance with paragraph (c)(1) of this section, all the 
loans within that lending category in that particular assessment area 
made by all of the bank's affiliates.

[[Page 822]]

    (3) The Board does not consider affiliate lending in assessing a 
bank's performance under paragraph (b)(2)(i) of this section.
    (d) Lending by a consortium or a third party. Community development 
loans originated or purchased by a consortium in which the bank 
participates or by a third party in which the bank has invested:
    (1) Will be considered, at the bank's option, if the bank reports 
the data pertaining to these loans under Sec. 228.42(b)(2); and
    (2) May be allocated among participants or investors, as they 
choose, for purposes of the lending test, except that no participant or 
investor:
    (i) May claim a loan origination or loan purchase if another 
participant or investor claims the same loan origination or purchase; or
    (ii) May claim loans accounting for more than its percentage share 
(based on the level of its participation or investment) of the total 
loans originated by the consortium or third party.
    (e) Lending performance rating. The Board rates a bank's lending 
performance as provided in appendix A of this part.

[Reg. BB, 60 FR 22191, May 4, 1995, as amended at 82 FR 55743, Nov. 24, 
2017]



Sec. 228.23  Investment test.

    (a) Scope of test. The investment test evaluates a bank's record of 
helping to meet the credit needs of its assessment area(s) through 
qualified investments that benefit its assessment area(s) or a broader 
statewide or regional area that includes the bank's assessment area(s).
    (b) Exclusion. Activities considered under the lending or service 
tests may not be considered under the investment test.
    (c) Affiliate investment. At a bank's option, the Board will 
consider, in its assessment of a bank's investment performance, a 
qualified investment made by an affiliate of the bank, if the qualified 
investment is not claimed by any other institution.
    (d) Disposition of branch premises. Donating, selling on favorable 
terms, or making available on a rent-free basis a branch of the bank 
that is located in a predominantly minority neighborhood to a minority 
depository institution or women's depository institution (as these terms 
are defined in 12 U.S.C. 2907(b)) will be considered as a qualified 
investment.
    (e) Performance criteria. The Board evaluates the investment 
performance of a bank pursuant to the following criteria:
    (1) The dollar amount of qualified investments;
    (2) The innovativeness or complexity of qualified investments;
    (3) The responsiveness of qualified investments to credit and 
community development needs; and
    (4) The degree to which the qualified investments are not routinely 
provided by private investors.
    (f) Investment performance rating. The Board rates a bank's 
investment performance as provided in appendix A of this part.



Sec. 228.24  Service test.

    (a) Scope of test. The service test evaluates a bank's record of 
helping to meet the credit needs of its assessment area(s) by analyzing 
both the availability and effectiveness of a bank's systems for 
delivering retail banking services and the extent and innovativeness of 
its community development services.
    (b) Area(s) benefitted. Community development services must benefit 
a bank's assessment area(s) or a broader statewide or regional area that 
includes the bank's assessment area(s).
    (c) Affiliate service. At a bank's option, the Board will consider, 
in its assessment of a bank's service performance, a community 
development service provided by an affiliate of the bank, if the 
community development service is not claimed by any other institution.
    (d) Performance criteria--retail banking services. The Board 
evaluates the availability and effectiveness of a bank's systems for 
delivering retail banking services, pursuant to the following criteria:
    (1) The current distribution of the bank's branches among low-,

moderate-, middle-, and upper-income geographies;
    (2) In the context of its current distribution of the bank's 
branches, the bank's record of opening and closing

[[Page 823]]

branches, particularly branches located in low- or moderate-income 
geographies or primarily serving low- or moderate-income individuals;
    (3) The availability and effectiveness of alternative systems for 
delivering retail banking services (e.g., ATMs, ATMs not owned or 
operated by or exclusively for the bank, banking by telephone or 
computer, loan production offices, and bank-at-work or bank-by-mail 
programs) in low- and moderate-income geographies and to low- and 
moderate-income individuals; and
    (4) The range of services provided in low-, moderate-, middle-, and 
upper-income geographies and the degree to which the services are 
tailored to meet the needs of those geographies.
    (e) Performance criteria--community development services. The Board 
evaluates community development services pursuant to the following 
criteria:
    (1) The extent to which the bank provides community development 
services; and
    (2) The innovativeness and responsiveness of community development 
services.
    (f) Service performance rating. The Board rates a bank's service 
performance as provided in appendix A of this part.



Sec. 228.25  Community development test for wholesale or limited 
purpose banks.

    (a) Scope of test. The Board assesses a wholesale or limited purpose 
bank's record of helping to meet the credit needs of its assessment 
area(s) under the community development test through its community 
development lending, qualified investments, or community development 
services.
    (b) Designation as a wholesale or limited purpose bank. In order to 
receive a designation as a wholesale or limited purpose bank, a bank 
shall file a request, in writing, with the Board, at least three months 
prior to the proposed effective date of the designation. If the Board 
approves the designation, it remains in effect until the bank requests 
revocation of the designation or until one year after the Board notifies 
the bank that the Board has revoked the designation on its own 
initiative.
    (c) Performance criteria. The Board evaluates the community 
development performance of a wholesale or limited purpose bank pursuant 
to the following criteria:
    (1) The number and amount of community development loans (including 
originations and purchases of loans and other community development loan 
data provided by the bank, such as data on loans outstanding, 
commitments, and letters of credit), qualified investments, or community 
development services;
    (2) The use of innovative or complex qualified investments, 
community development loans, or community development services and the 
extent to which the investments are not routinely provided by private 
investors; and
    (3) The bank's responsiveness to credit and community development 
needs.
    (d) Indirect activities. At a bank's option, the Board will consider 
in its community development performance assessment:
    (1) Qualified investments or community development services provided 
by an affiliate of the bank, if the investments or services are not 
claimed by any other institution; and
    (2) Community development lending by affiliates, consortia and third 
parties, subject to the requirements and limitations in Sec. 228.22(c) 
and (d).
    (e) Benefit to assessment area(s)--(1) Benefit inside assessment 
area(s). The Board considers all qualified investments, community 
development loans, and community development services that benefit areas 
within the bank's assessment area(s) or a broader statewide or regional 
area that includes the bank's assessment area(s).
    (2) Benefit outside assessment area(s). The Board considers the 
qualified investments, community development loans, and community 
development services that benefit areas outside the bank's assessment 
area(s), if the bank has adequately addressed the needs of its 
assessment area(s).
    (f) Community development performance rating. The Board rates a 
bank's community development performance as provided in appendix A of 
this part.

[[Page 824]]



Sec. 228.26  Small bank performance standards.

    (a) Performance criteria--(1) Small banks that are not intermediate 
small banks. The Board evaluates the record of a small bank that is not, 
or that was not during the prior calendar year, an intermediate small 
bank, of helping to meet the credit needs of its assessment area(s) 
pursuant to the criteria set forth in paragraph (b) of this section.
    (2) Intermediate small banks. The Board evaluates the record of a 
small bank that is, or that was during the prior calendar year, an 
intermediate small bank, of helping to meet the credit needs of its 
assessment area(s) pursuant to the criteria set forth in paragraphs (b) 
and (c) of this section.
    (b) Lending test. A small bank's lending performance is evaluated 
pursuant to the following criteria:
    (1) The bank's loan-to-deposit ratio, adjusted for seasonal 
variation, and, as appropriate, other lending-related activities, such 
as loan originations for sale to the secondary markets, community 
development loans, or qualified investments;
    (2) The percentage of loans and, as appropriate, other lending-
related activities located in the bank's assessment area(s);
    (3) The bank's record of lending to and, as appropriate, engaging in 
other lending-related activities for borrowers of different income 
levels and businesses and farms of different sizes;
    (4) The geographic distribution of the bank's loans; and
    (5) The bank's record of taking action, if warranted, in response to 
written complaints about its performance in helping to meet credit needs 
in its assessment area(s).
    (c) Community development test. An intermediate small bank's 
community development performance also is evaluated pursuant to the 
following criteria:
    (1) The number and amount of community development loans;
    (2) The number and amount of qualified investments;
    (3) The extent to which the bank provides community development 
services; and
    (4) The bank's responsiveness through such activities to community 
development lending, investment, and services needs.
    (d) Small bank performance rating. The Board rates the performance 
of a bank evaluated under this section as provided in appendix A of this 
part.

[70 FR 44268, Aug. 2, 2005, as amended at 71 FR 78337, Dec. 29, 2006; 72 
FR 72573, Dec. 21, 2007]



Sec. 228.27  Strategic plan.

    (a) Alternative election. The Board will assess a bank's record of 
helping to meet the credit needs of its assessment area(s) under a 
strategic plan if:
    (1) The bank has submitted the plan to the Board as provided for in 
this section;
    (2) The Board has approved the plan;
    (3) The plan is in effect; and
    (4) The bank has been operating under an approved plan for at least 
one year.
    (b) Data reporting. The Board's approval of a plan does not affect 
the bank's obligation, if any, to report data as required by Sec. 
228.42.
    (c) Plans in general--(1) Term. A plan may have a term of no more 
than five years, and any multi-year plan must include annual interim 
measurable goals under which the Board will evaluate the bank's 
performance.
    (2) Multiple assessment areas. A bank with more than one assessment 
area may prepare a single plan for all of its assessment areas or one or 
more plans for one or more of its assessment areas.
    (3) Treatment of affiliates. Affiliated institutions may prepare a 
joint plan if the plan provides measurable goals for each institution. 
Activities may be allocated among institutions at the institutions' 
option, provided that the same activities are not considered for more 
than one institution.
    (d) Public participation in plan development. Before submitting a 
plan to the Board for approval, a bank shall:
    (1) Informally seek suggestions from members of the public in its 
assessment area(s) covered by the plan while developing the plan;
    (2) Once the bank has developed a plan, formally solicit public 
comment on the plan for at least 30 days by publishing notice in at 
least one newspaper of general circulation in each assessment area 
covered by the plan; and

[[Page 825]]

    (3) During the period of formal public comment, make copies of the 
plan available for review by the public at no cost at all offices of the 
bank in any assessment area covered by the plan and provide copies of 
the plan upon request for a reasonable fee to cover copying and mailing, 
if applicable.
    (e) Submission of plan. The bank shall submit its plan to the Board 
at least three months prior to the proposed effective date of the plan. 
The bank shall also submit with its plan a description of its informal 
efforts to seek suggestions from members of the public, any written 
public comment received, and, if the plan was revised in light of the 
comment received, the initial plan as released for public comment.
    (f) Plan content--(1) Measurable goals. (i) A bank shall specify in 
its plan measurable goals for helping to meet the credit needs of each 
assessment area covered by the plan, particularly the needs of low- and 
moderate-income geographies and low- and moderate-income individuals, 
through lending, investment, and services, as appropriate.
    (ii) A bank shall address in its plan all three performance 
categories and, unless the bank has been designated as a wholesale or 
limited purpose bank, shall emphasize lending and lending-related 
activities. Nevertheless, a different emphasis, including a focus on one 
or more performance categories, may be appropriate if responsive to the 
characteristics and credit needs of its assessment area(s), considering 
public comment and the bank's capacity and constraints, product 
offerings, and business strategy.
    (2) Confidential information. A bank may submit additional 
information to the Board on a confidential basis, but the goals stated 
in the plan must be sufficiently specific to enable the public and the 
Board to judge the merits of the plan.
    (3) Satisfactory and outstanding goals. A bank shall specify in its 
plan measurable goals that constitute ``satisfactory'' performance. A 
plan may specify measurable goals that constitute ``outstanding'' 
performance. If a bank submits, and the Board approves, both 
``satisfactory'' and ``outstanding'' performance goals, the Board will 
consider the bank eligible for an ``outstanding'' performance rating.
    (4) Election if satisfactory goals not substantially met. A bank may 
elect in its plan that, if the bank fails to meet substantially its plan 
goals for a satisfactory rating, the Board will evaluate the bank's 
performance under the lending, investment, and service tests, the 
community development test, or the small bank performance standards, as 
appropriate.
    (g) Plan approval--(1) Timing. The Board will act upon a plan within 
60 calendar days after the Board receives the complete plan and other 
material required under paragraph (e) of this section. If the Board 
fails to act within this time period, the plan shall be deemed approved 
unless the Board extends the review period for good cause.
    (2) Public participation. In evaluating the plan's goals, the Board 
considers the public's involvement in formulating the plan, written 
public comment on the plan, and any response by the bank to public 
comment on the plan.
    (3) Criteria for evaluating plan. The Board evaluates a plan's 
measurable goals using the following criteria, as appropriate:
    (i) The extent and breadth of lending or lending-related activities, 
including, as appropriate, the distribution of loans among different 
geographies, businesses and farms of different sizes, and individuals of 
different income levels, the extent of community development lending, 
and the use of innovative or flexible lending practices to address 
credit needs;
    (ii) The amount and innovativeness, complexity, and responsiveness 
of the bank's qualified investments; and
    (iii) The availability and effectiveness of the bank's systems for 
delivering retail banking services and the extent and innovativeness of 
the bank's community development services.
    (h) Plan amendment. During the term of a plan, a bank may request 
the Board to approve an amendment to the plan on grounds that there has 
been a material change in circumstances. The bank shall develop an 
amendment to a previously approved plan in accordance

[[Page 826]]

with the public participation requirements of paragraph (d) of this 
section.
    (i) Plan assessment. The Board approves the goals and assesses 
performance under a plan as provided for in appendix A of this part.

[Reg. BB, 60 FR 22193, May 4, 1995, as amended at 60 FR 66050, Dec. 20, 
1995; 69 FR 41187, July 8, 2004]



Sec. 228.28  Assigned ratings.

    (a) Ratings in general. Subject to paragraphs (b) and (c) of this 
section, the Board assigns to a bank a rating of ``outstanding,'' 
``satisfactory,'' ``needs to improve,'' or ``substantial noncompliance'' 
based on the bank's performance under the lending, investment and 
service tests, the community development test, the small bank 
performance standards, or an approved strategic plan, as applicable.
    (b) Lending, investment, and service tests. The Board assigns a 
rating for a bank assessed under the lending, investment, and service 
tests in accordance with the following principles:
    (1) A bank that receives an ``outstanding'' rating on the lending 
test receives an assigned rating of at least ``satisfactory'';
    (2) A bank that receives an ``outstanding'' rating on both the 
service test and the investment test and a rating of at least ``high 
satisfactory'' on the lending test receives an assigned rating of 
``outstanding''; and
    (3) No bank may receive an assigned rating of ``satisfactory'' or 
higher unless it receives a rating of at least ``low satisfactory'' on 
the lending test.
    (c) Effect of evidence of discriminatory or other illegal credit 
practices. (1) The Board's evaluation of a bank's CRA performance is 
adversely affected by evidence of discriminatory or other illegal credit 
practices in any geography by the bank or in any assessment area by any 
affiliate whose loans have been considered as part of the bank's lending 
performance. In connection with any type of lending activity described 
in Sec. 228.22(a), evidence of discriminatory or other credit practices 
that violate an applicable law, rule, or regulation includes, but is not 
limited to:
    (i) Discrimination against applicants on a prohibited basis in 
violation, for example, of the Equal Credit Opportunity Act or the Fair 
Housing Act;
    (ii) Violations of the Home Ownership and Equity Protection Act;
    (iii) Violations of section 5 of the Federal Trade Commission Act;
    (iv) Violations of section 8 of the Real Estate Settlement 
Procedures Act; and
    (v) Violations of the Truth in Lending Act provisions regarding a 
consumer's right of rescission.
    (2) In determining the effect of evidence of practices described in 
paragraph (c)(1) of this section on the bank's assigned rating, the 
Board considers the nature, extent, and strength of the evidence of the 
practices; the policies and procedures that the bank (or affiliate, as 
applicable) has in place to prevent the practices; any corrective action 
that the bank (or affiliate, as applicable) has taken or has committed 
to take, including voluntary corrective action resulting from self-
assessment; and any other relevant information.

[43 FR 47148, Oct. 12, 1978, as amended at 70 FR 44268, Aug. 2, 2005]



Sec. 228.29  Effect of CRA performance on applications.

    (a) CRA performance. Among other factors, the Board takes into 
account the record of performance under the CRA of:
    (1) Each applicant bank for the:
    (i) Establishment of a domestic branch by a State member bank; and
    (ii) Merger, consolidation, acquisition of assets, or assumption of 
liabilities requiring approval under the Bank Merger Act (12 U.S.C. 
1828(c)) if the acquiring, assuming, or resulting bank is to be a State 
member bank; and
    (2) Each insured depository institution (as defined in 12 U.S.C. 
1813) controlled by an applicant and subsidiary bank or savings 
association proposed to be controlled by an applicant:
    (i) To become a bank holding company in a transaction that requires 
approval under section 3 of the Bank Holding Company Act (12 U.S.C. 
1842);
    (ii) To acquire ownership or control of shares or all or 
substantially all of the assets of a bank, to cause a bank to become a 
subsidiary of a bank holding company, or to merge or consolidate a

[[Page 827]]

bank holding company with any other bank holding company in a 
transaction that requires approval under section 3 of the Bank Holding 
Company Act (12 U.S.C. 1842);
    (iii) To own, control or operate a savings association in a 
transaction that requires approval under section 4 of the Bank Holding 
Company Act (12 U.S.C. 1843);
    (iv) To become a savings and loan holding company in a transaction 
that requires approval under section 10 of the Home Owners' Loan Act (12 
U.S.C. 1467a); and
    (v) To acquire ownership or control of shares or all or 
substantially all of the assets of a savings association, to cause a 
savings association to become a subsidiary of a savings and loan holding 
company, or to merge or consolidate a savings and loan holding company 
with any other savings and loan holding company in a transaction that 
requires approval under section 10 of the Home Owners' Loan Act (12 
U.S.C. 1467a).
    (b) Interested parties. In considering CRA performance in an 
application described in paragraph (a) of this section, the Board takes 
into account any views expressed by interested parties that are 
submitted in accordance with the Board's Rules of Procedure set forth in 
part 262 of this chapter.
    (c) Denial or conditional approval of application. A bank or savings 
association's record of performance may be the basis for denying or 
conditioning approval of an application listed in paragraph (a) of this 
section.
    (d) Definitions. For purposes of paragraphs (a)(2)(i), (ii), and 
(iii) of this section, ``bank,'' ``bank holding company,'' 
``subsidiary,'' and ``savings association'' have the meanings given to 
those terms in section 2 of the Bank Holding Company Act (12 U.S.C. 
1841). For purposes of paragraphs (a)(2)(iv) and (v) of this section, 
``savings and loan holding company'' and ``subsidiary'' has the meaning 
given to that term in section 10 of the Home Owners' Loan Act (12 U.S.C. 
1467a).

[ Reg. BB, 60 FR 22191, May 4, 1995, as amended at 76 FR 56532, Sept. 
13, 2011]



        Subpart C_Records, Reporting, and Disclosure Requirements

    Source: Reg. BB, 60 FR 22195, May 4, 1995, unless otherwise noted.



Sec. 228.41  Assessment area delineation.

    (a) In general. A bank shall delineate one or more assessment areas 
within which the Board evaluates the bank's record of helping to meet 
the credit needs of its community. The Board does not evaluate the 
bank's delineation of its assessment area(s) as a separate performance 
criterion, but the Board reviews the delineation for compliance with the 
requirements of this section.
    (b) Geographic area(s) for wholesale or limited purpose banks. The 
assessment area(s) for a wholesale or limited purpose bank must consist 
generally of one or more MSAs or metropolitan divisions (using the MSA 
or metropolitan division boundaries that were in effect as of January 1 
of the calendar year in which the delineation is made) or one or more 
contiguous political subdivisions, such as counties, cities, or towns, 
in which the bank has its main office, branches, and deposit-taking 
ATMs.
    (c) Geographic area(s) for other banks. The assessment area(s) for a 
bank other than a wholesale or limited purpose bank must:
    (1) Consist generally of one or more MSAs or metropolitan divisions 
(using the MSA or metropolitan division boundaries that were in effect 
as of January 1 of the calendar year in which the delineation is made) 
or one or more contiguous political subdivisions, such as counties, 
cities, or towns; and
    (2) Include the geographies in which the bank has its main office, 
its branches, and its deposit-taking ATMs, as well as the surrounding 
geographies in which the bank has originated or purchased a substantial 
portion of its loans (including home mortgage loans, small business and 
small farm loans, and any other loans the bank chooses, such as those 
consumer loans on which the bank elects to have its performance 
assessed).
    (d) Adjustments to geographic area(s). A bank may adjust the 
boundaries of

[[Page 828]]

its assessment area(s) to include only the portion of a political 
subdivision that it reasonably can be expected to serve. An adjustment 
is particularly appropriate in the case of an assessment area that 
otherwise would be extremely large, of unusual configuration, or divided 
by significant geographic barriers.
    (e) Limitations on the delineation of an assessment area. Each 
bank's assessment area(s):
    (1) Must consist only of whole geographies;
    (2) May not reflect illegal discrimination;
    (3) May not arbitrarily exclude low- or moderate-income geographies, 
taking into account the bank's size and financial condition; and
    (4) May not extend substantially beyond an MSA boundary or beyond a 
state boundary unless the assessment area is located in a multistate 
MSA. If a bank serves a geographic area that extends substantially 
beyond a state boundary, the bank shall delineate separate assessment 
areas for the areas in each state. If a bank serves a geographic area 
that extends substantially beyond an MSA boundary, the bank shall 
delineate separate assessment areas for the areas inside and outside the 
MSA.
    (f) Banks serving military personnel. Notwithstanding the 
requirements of this section, a bank whose business predominantly 
consists of serving the needs of military personnel or their dependents 
who are not located within a defined geographic area may delineate its 
entire deposit customer base as its assessment area.
    (g) Use of assessment area(s). The Board uses the assessment area(s) 
delineated by a bank in its evaluation of the bank's CRA performance 
unless the Board determines that the assessment area(s) do not comply 
with the requirements of this section.

[Reg. BB, 60 FR 22195, May 4, 1995, as amended at 69 FR 41187, July 8, 
2004]



Sec. 228.42  Data collection, reporting, and disclosure.

    (a) Loan information required to be collected and maintained. A 
bank, except a small bank, shall collect, and maintain in machine 
readable form (as prescribed by the Board) until the completion of its 
next CRA examination, the following data for each small business or 
small farm loan originated or purchased by the bank:
    (1) A unique number or alpha-numeric symbol that can be used to 
identify the relevant loan file;
    (2) The loan amount at origination;
    (3) The loan location; and
    (4) An indicator whether the loan was to a business or farm with 
gross annual revenues of $1 million or less.
    (b) Loan information required to be reported. A bank, except a small 
bank or a bank that was a small bank during the prior calendar year, 
shall report annually by March 1 to the Board in machine readable form 
(as prescribed by the Board) the following data for the prior calendar 
year:
    (1) Small business and small farm loan data. For each geography in 
which the bank originated or purchased a small business or small farm 
loan, the aggregate number and amount of loans:
    (i) With an amount at origination of $100,000 or less;
    (ii) With amount at origination of more than $100,000 but less than 
or equal to $250,000;
    (iii) With an amount at origination of more than $250,000; and
    (iv) To businesses and farms with gross annual revenues of $1 
million or less (using the revenues that the bank considered in making 
its credit decision);
    (2) Community development loan data. The aggregate number and 
aggregate amount of community development loans originated or purchased; 
and
    (3) Home mortgage loans. If the bank is subject to reporting under 
part 1003 of this chapter, the location of each home mortgage loan 
application, origination, or purchase outside the MSAs in which the bank 
has a home or branch office (or outside any MSA) in accordance with the 
requirements of part 1003 of this chapter.
    (c) Optional data collection and maintenance--(1) Consumer loans. A 
bank may collect and maintain in machine readable form (as prescribed by 
the Board) data for consumer loans originated or purchased by the bank 
for consideration under the lending test. A bank may maintain data for 
one or more of

[[Page 829]]

the following categories of consumer loans: motor vehicle, credit card, 
other secured, and other unsecured. If the bank maintains data for loans 
in a certain category, it shall maintain data for all loans originated 
or purchased within that category. The bank shall maintain data 
separately for each category, including for each loan:
    (i) A unique number or alpha-numeric symbol that can be used to 
identify the relevant loan file;
    (ii) The loan amount at origination or purchase;
    (iii) The loan location; and
    (iv) The gross annual income of the borrower that the bank 
considered in making its credit decision.
    (2) Other loan data. At its option, a bank may provide other 
information concerning its lending performance, including additional 
loan distribution data.
    (d) Data on affiliate lending. A bank that elects to have the Board 
consider loans by an affiliate, for purposes of the lending or community 
development test or an approved strategic plan, shall collect, maintain, 
and report for those loans the data that the bank would have collected, 
maintained, and reported pursuant to paragraphs (a), (b), and (c) of 
this section had the loans been originated or purchased by the bank. For 
home mortgage loans, the bank shall also be prepared to identify the 
home mortgage loans reported under part 1003 of this chapter by the 
affiliate.
    (e) Data on lending by a consortium or a third party. A bank that 
elects to have the Board consider community development loans by a 
consortium or third party, for purposes of the lending or community 
development tests or an approved strategic plan, shall report for those 
loans the data that the bank would have reported under paragraph (b)(2) 
of this section had the loans been originated or purchased by the bank.
    (f) Small banks electing evaluation under the lending, investment, 
and service tests. A bank that qualifies for evaluation under the small 
bank performance standards but elects evaluation under the lending, 
investment, and service tests shall collect, maintain, and report the 
data required for other banks pursuant to paragraphs (a) and (b) of this 
section.
    (g) Assessment area data. A bank, except a small bank or a bank that 
was a small bank during the prior calendar year, shall collect and 
report to the Board by March 1 of each year a list for each assessment 
area showing the geographies within the area.
    (h) CRA Disclosure Statement. The Board prepares annually for each 
bank that reports data pursuant to this section a CRA Disclosure 
Statement that contains, on a state-by-state basis:
    (1) For each county (and for each assessment area smaller than a 
county) with a population of 500,000 persons or fewer in which the bank 
reported a small business or small farm loan:
    (i) The number and amount of small business and small farm loans 
reported as originated or purchased located in low-, moderate-, middle-, 
and upper-income geographies;
    (ii) A list grouping each geography according to whether the 
geography is low-, moderate-, middle-, or upper-income;
    (iii) A list showing each geography in which the bank reported a 
small business or small farm loan; and
    (iv) The number and amount of small business and small farm loans to 
businesses and farms with gross annual revenues of $1 million or less;
    (2) For each county (and for each assessment area smaller than a 
county) with a population in excess of 500,000 persons in which the bank 
reported a small business or small farm loan:
    (i) The number and amount of small business and small farm loans 
reported as originated or purchased located in geographies with median 
income relative to the area median income of less than 10 percent, 10 or 
more but less than 20 percent, 20 or more but less than 30 percent, 30 
or more but less than 40 percent, 40 or more but less than 50 percent, 
50 or more but less than 60 percent, 60 or more but less than 70 
percent, 70 or more but less than 80 percent, 80 or more but less than 
90 percent, 90 or more but less than 100 percent, 100 or more but less 
than 110 percent, 110 or more but less than 120 percent, and 120 percent 
or more;

[[Page 830]]

    (ii) A list grouping each geography in the county or assessment area 
according to whether the median income in the geography relative to the 
area median income is less than 10 percent, 10 or more but less than 20 
percent, 20 or more but less than 30 percent, 30 or more but less than 
40 percent, 40 or more but less than 50 percent, 50 or more but less 
than 60 percent, 60 or more but less than 70 percent, 70 or more but 
less than 80 percent, 80 or more but less than 90 percent, 90 or more 
but less than 100 percent, 100 or more but less than 110 percent, 110 or 
more but less than 120 percent, and 120 percent or more;
    (iii) A list showing each geography in which the bank reported a 
small business or small farm loan; and
    (iv) The number and amount of small business and small farm loans to 
businesses and farms with gross annual revenues of $1 million or less;
    (3) The number and amount of small business and small farm loans 
located inside each assessment area reported by the bank and the number 
and amount of small business and small farm loans located outside the 
assessment area(s) reported by the bank; and
    (4) The number and amount of community development loans reported as 
originated or purchased.
    (i) Aggregate disclosure statements. The Board, in conjunction with 
the Office of the Comptroller of the Currency and the Federal Deposit 
Insurance Corporation, prepares annually, for each MSA or metropolitan 
division (including an MSA or metropolitan division that crosses a state 
boundary) and the nonmetropolitan portion of each state, an aggregate 
disclosure statement of small business and small farm lending by all 
institutions subject to reporting under this part or parts 25, 195, or 
345 of this title. These disclosure statements indicate, for each 
geography, the number and amount of all small business and small farm 
loans originated or purchased by reporting institutions, except that the 
Board may adjust the form of the disclosure if necessary, because of 
special circumstances, to protect the privacy of a borrower or the 
competitive position of an institution.
    (j) Central data depositories. The Board makes the aggregate 
disclosure statements, described in paragraph (i) of this section, and 
the individual bank CRA Disclosure Statements, described in paragraph 
(h) of this section, available to the public at central data 
depositories. The Board publishes a list of the depositories at which 
the statements are available.

[Reg. BB, 60 FR 22195, May 4, 1995, as amended at 69 FR 41187, July 8, 
2004; 80 FR 81164, Dec. 29, 2015; 82 FR 55743, Nov. 24, 2017]



Sec. 228.43  Content and availability of public file.

    (a) Information available to the public. A bank shall maintain a 
public file that includes the following information:
    (1) All written comments received from the public for the current 
year and each of the prior two calendar years that specifically relate 
to the bank's performance in helping to meet community credit needs, and 
any response to the comments by the bank, if neither the comments nor 
the responses contain statements that reflect adversely on the good name 
or reputation of any persons other than the bank or publication of which 
would violate specific provisions of law;
    (2) A copy of the public section of the bank's most recent CRA 
Performance Evaluation prepared by the Board. The bank shall place this 
copy in the public file within 30 business days after its receipt from 
the Board;
    (3) A list of the bank's branches, their street addresses, and 
geographies;
    (4) A list of branches opened or closed by the bank during the 
current year and each of the prior two calendar years, their street 
addresses, and geographies;
    (5) A list of services (including hours of operation, available loan 
and deposit products, and transaction fees) generally offered at the 
bank's branches and descriptions of material differences in the 
availability or cost of services at particular branches, if any. At its 
option, a bank may include information regarding the availability of 
alternative systems for delivering retail banking services (e.g., ATMs, 
ATMs not owned or operated by or exclusively for the bank, banking by 
telephone or computer, loan production offices, and

[[Page 831]]

bank-at-work or bank-by-mail programs);
    (6) A map of each assessment area showing the boundaries of the area 
and identifying the geographies contained within the area, either on the 
map or in a separate list; and
    (7) Any other information the bank chooses.
    (b) Additional information available to the public--(1) Banks other 
than small banks. A bank, except a small bank or a bank that was a small 
bank during the prior calendar year, shall include in its public file 
the following information pertaining to the bank and its affiliates, if 
applicable, for each of the prior two calendar years:
    (i) If the bank has elected to have one or more categories of its 
consumer loans considered under the lending test, for each of these 
categories, the number and amount of loans:
    (A) To low-, moderate-, middle-, and upper-income individuals;
    (B) Located in low-, moderate-, middle-, and upper-income census 
tracts; and
    (C) Located inside the bank's assessment area(s) and outside the 
bank's assessment area(s); and
    (ii) The bank's CRA Disclosure Statement. The bank shall place the 
statement in the public file within three business days of its receipt 
from the Board.
    (2) Banks required to report Home Mortgage Disclosure Act (HMDA) 
data. A bank required to report home mortgage loan data pursuant part 
1003 of this title shall include in its public file a written notice 
that the institution's HMDA Disclosure Statement may be obtained on the 
Consumer Financial Protection Bureau's (Bureau's) Web site at 
www.consumerfinance.gov/hmda. In addition, a bank that elected to have 
the Board consider the mortgage lending of an affiliate shall include in 
its public file the name of the affiliate and a written notice that the 
affiliate's HMDA Disclosure Statement may be obtained at the Bureau's 
Web site. The bank shall place the written notice(s) in the public file 
within three business days after receiving notification from the Federal 
Financial Institutions Examination Council of the availability of the 
disclosure statement(s).
    (3) Small banks. A small bank or a bank that was a small bank during 
the prior calendar year shall include in its public file:
    (i) The bank's loan-to-deposit ratio for each quarter of the prior 
calendar year and, at its option, additional data on its loan-to-deposit 
ratio; and
    (ii) The information required for other banks by paragraph (b)(1) of 
this section, if the bank has elected to be evaluated under the lending, 
investment, and service tests.
    (4) Banks with strategic plans. A bank that has been approved to be 
assessed under a strategic plan shall include in its public file a copy 
of that plan. A bank need not include information submitted to the Board 
on a confidential basis in conjunction with the plan.
    (5) Banks with less than satisfactory ratings. A bank that received 
a less than satisfactory rating during its most recent examination shall 
include in its public file a description of its current efforts to 
improve its performance in helping to meet the credit needs of its 
entire community. The bank shall update the description quarterly.
    (c) Location of public information. A bank shall make available to 
the public for inspection upon request and at no cost the information 
required in this section as follows:
    (1) At the main office and, if an interstate bank, at one branch 
office in each state, all information in the public file; and
    (2) At each branch:
    (i) A copy of the public section of the bank's most recent CRA 
Performance Evaluation and a list of services provided by the branch; 
and
    (ii) Within five calendar days of the request, all the information 
in the public file relating to the assessment area in which the branch 
is located.
    (d) Copies. Upon request, a bank shall provide copies, either on 
paper or in another form acceptable to the person making the request, of 
the information in its public file. The bank may charge a reasonable fee 
not to exceed the cost of copying and mailing (if applicable).
    (e) Updating. Except as otherwise provided in this section, a bank 
shall ensure that the information required by

[[Page 832]]

this section is current as of April 1 of each year.

[Reg. BB, 60 FR 22195, May 4, 1995, as amended at 80 FR 81164, Dec. 29, 
2015; 82 FR 55743, Nov. 24, 2017]



Sec. 228.44  Public notice by banks.

    A bank shall provide in the public lobby of its main office and each 
of its branches the appropriate public notice set forth in appendix B of 
this part. Only a branch of a bank having more than one assessment area 
shall include the bracketed material in the notice for branch offices. 
Only a bank that is an affiliate of a holding company shall include the 
next to the last sentence of the notices. A bank shall include the last 
sentence of the notices only if it is an affiliate of a holding company 
that is not prevented by statute from acquiring additional banks.



Sec. 228.45  Publication of planned examination schedule.

    The Board publishes at least 30 days in advance of the beginning of 
each calendar quarter a list of banks scheduled for CRA examinations in 
that quarter.





                  Sec. Appendix A to Part 228--Ratings

    (a) Ratings in general. (1) In assigning a rating, the Board 
evaluates a bank's performance under the applicable performance criteria 
in this part, in accordance with Sec. Sec. 228.21 and 228.28. This 
includes consideration of low-cost education loans provided to low-
income borrowers and activities in cooperation with minority- or women-
owned financial institutions and low-income credit unions, as well as 
adjustments on the basis of evidence of discriminatory or other illegal 
credit practices.
    (2) A bank's performance need not fit each aspect of a particular 
rating profile in order to receive that rating, and exceptionally strong 
performance with respect to some aspects may compensate for weak 
performance in others. The bank's overall performance, however, must be 
consistent with safe and sound banking practices and generally with the 
appropriate rating profile as follows.
    (b) Banks evaluated under the lending, investment, and service 
tests--(1) Lending performance rating. The Board assigns each bank's 
lending performance one of the five following ratings.
    (i) Outstanding. The Board rates a bank's lending performance 
``outstanding'' if, in general, it demonstrates:
    (A) Excellent responsiveness to credit needs in its assessment 
area(s), taking into account the number and amount of home mortgage, 
small business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A substantial majority of its loans are made in its assessment 
area(s);
    (C) An excellent geographic distribution of loans in its assessment 
area(s);
    (D) An excellent distribution, particularly in its assessment 
area(s), of loans among individuals of different income levels and 
businesses (including farms) of different sizes, given the product lines 
offered by the bank;
    (E) An excellent record of serving the credit needs of highly 
economically disadvantaged areas in its assessment area(s), low-income 
individuals, or businesses (including farms) with gross annual revenues 
of $1 million or less, consistent with safe and sound operations;
    (F) Extensive use of innovative or flexible lending practices in a 
safe and sound manner to address the credit needs of low- or moderate-
income individuals or geographies; and
    (G) It is a leader in making community development loans.
    (ii) High satisfactory. The Board rates a bank's lending performance 
``high satisfactory'' if, in general, it demonstrates:
    (A) Good responsiveness to credit needs in its assessment area(s), 
taking into account the number and amount of home mortgage, small 
business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A high percentage of its loans are made in its assessment 
area(s);
    (C) A good geographic distribution of loans in its assessment 
area(s);
    (D) A good distribution, particularly in its assessment area(s), of 
loans among individuals of different income levels and businesses 
(including farms) of different sizes, given the product lines offered by 
the bank;
    (E) A good record of serving the credit needs of highly economically 
disadvantaged areas in its assessment area(s), low-income individuals, 
or businesses (including farms) with gross annual revenues of $1 million 
or less, consistent with safe and sound operations;
    (F) Use of innovative or flexible lending practices in a safe and 
sound manner to address the credit needs of low- or moderate-income 
individuals or geographies; and
    (G) It has made a relatively high level of community development 
loans.
    (iii) Low satisfactory. The Board rates a bank's lending performance 
``low satisfactory'' if, in general, it demonstrates:
    (A) Adequate responsiveness to credit needs in its assessment 
area(s), taking into account the number and amount of home

[[Page 833]]

mortgage, small business, small farm, and consumer loans, if applicable, 
in its assessment area(s);
    (B) An adequate percentage of its loans are made in its assessment 
area(s);
    (C) An adequate geographic distribution of loans in its assessment 
area(s);
    (D) An adequate distribution, particularly in its assessment 
area(s), of loans among individuals of different income levels and 
businesses (including farms) of different sizes, given the product lines 
offered by the bank;
    (E) An adequate record of serving the credit needs of highly 
economically disadvantaged areas in its assessment area(s), low-income 
individuals, or businesses (including farms) with gross annual revenues 
of $1 million or less, consistent with safe and sound operations;
    (F) Limited use of innovative or flexible lending practices in a 
safe and sound manner to address the credit needs of low- or moderate-
income individuals or geographies; and
    (G) It has made an adequate level of community development loans.
    (iv) Needs to improve. The Board rates a bank's lending performance 
``needs to improve'' if, in general, it demonstrates:
    (A) Poor responsiveness to credit needs in its assessment area(s), 
taking into account the number and amount of home mortgage, small 
business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A small percentage of its loans are made in its assessment 
area(s);
    (C) A poor geographic distribution of loans, particularly to low- or 
moderate-income geographies, in its assessment area(s);
    (D) A poor distribution, particularly in its assessment area(s), of 
loans among individuals of different income levels and businesses 
(including farms) of different sizes, given the product lines offered by 
the bank;
    (E) A poor record of serving the credit needs of highly economically 
disadvantaged areas in its assessment area(s), low-income individuals, 
or businesses (including farms) with gross annual revenues of $1 million 
or less, consistent with safe and sound operations;
    (F) Little use of innovative or flexible lending practices in a safe 
and sound manner to address the credit needs of low- or moderate-income 
individuals or geographies; and
    (G) It has made a low level of community development loans.
    (v) Substantial noncompliance. The Board rates a bank's lending 
performance as being in ``substantial noncompliance'' if, in general, it 
demonstrates:
    (A) A very poor responsiveness to credit needs in its assessment 
area(s), taking into account the number and amount of home mortgage, 
small business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A very small percentage of its loans are made in its assessment 
area(s);
    (C) A very poor geographic distribution of loans, particularly to 
low- or moderate-income geographies, in its assessment area(s);
    (D) A very poor distribution, particularly in its assessment 
area(s), of loans among individuals of different income levels and 
businesses (including farms) of different sizes, given the product lines 
offered by the bank;
    (E) A very poor record of serving the credit needs of highly 
economically disadvantaged areas in its assessment area(s), low-income 
individuals, or businesses (including farms) with gross annual revenues 
of $1 million or less, consistent with safe and sound operations;
    (F) No use of innovative or flexible lending practices in a safe and 
sound manner to address the credit needs of low- or moderate-income 
individuals or geographies; and
    (G) It has made few, if any, community development loans.
    (2) Investment performance rating. The Board assigns each bank's 
investment performance one of the five following ratings.
    (i) Outstanding. The Board rates a bank's investment performance 
``outstanding'' if, in general, it demonstrates:
    (A) An excellent level of qualified investments, particularly those 
that are not routinely provided by private investors, often in a 
leadership position;
    (B) Extensive use of innovative or complex qualified investments; 
and
    (C) Excellent responsiveness to credit and community development 
needs.
    (ii) High satisfactory. The Board rates a bank's investment 
performance ``high satisfactory'' if, in general, it demonstrates:
    (A) A significant level of qualified investments, particularly those 
that are not routinely provided by private investors, occasionally in a 
leadership position;
    (B) Significant use of innovative or complex qualified investments; 
and
    (C) Good responsiveness to credit and community development needs.
    (iii) Low satisfactory. The Board rates a bank's investment 
performance ``low satisfactory'' if, in general, it demonstrates:
    (A) An adequate level of qualified investments, particularly those 
that are not routinely provided by private investors, although rarely in 
a leadership position;
    (B) Occasional use of innovative or complex qualified investments; 
and
    (C) Adequate responsiveness to credit and community development 
needs.
    (iv) Needs to improve. The Board rates a bank's investment 
performance ``needs to improve'' if, in general, it demonstrates:
    (A) A poor level of qualified investments, particularly those that 
are not routinely provided by private investors;
    (B) Rare use of innovative or complex qualified investments; and

[[Page 834]]

    (C) Poor responsiveness to credit and community development needs.
    (v) Substantial noncompliance. The Board rates a bank's investment 
performance as being in ``substantial noncompliance'' if, in general, it 
demonstrates:
    (A) Few, if any, qualified investments, particularly those that are 
not routinely provided by private investors;
    (B) No use of innovative or complex qualified investments; and
    (C) Very poor responsiveness to credit and community development 
needs.
    (3) Service performance rating. The Board assigns each bank's 
service performance one of the five following ratings.
    (i) Outstanding. The Board rates a bank's service performance 
``outstanding'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are readily accessible to 
geographies and individuals of different income levels in its assessment 
area(s);
    (B) To the extent changes have been made, its record of opening and 
closing branches has improved the accessibility of its delivery systems, 
particularly in low- or moderate-income geographies or to low- or 
moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) are 
tailored to the convenience and needs of its assessment area(s), 
particularly low- or moderate-income geographies or low- or moderate-
income individuals; and
    (D) It is a leader in providing community development services.
    (ii) High satisfactory. The Board rates a bank's service performance 
``high satisfactory'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are accessible to geographies and 
individuals of different income levels in its assessment area(s);
    (B) To the extent changes have been made, its record of opening and 
closing branches has not adversely affected the accessibility of its 
delivery systems, particularly in low- and moderate-income geographies 
and to low- and moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) do 
not vary in a way that inconveniences its assessment area(s), 
particularly low- and moderate-income geographies and low- and moderate-
income individuals; and
    (D) It provides a relatively high level of community development 
services.
    (iii) Low satisfactory. The Board rates a bank's service performance 
``low satisfactory'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are reasonably accessible to 
geographies and individuals of different income levels in its assessment 
area(s);
    (B) To the extent changes have been made, its record of opening and 
closing branches has generally not adversely affected the accessibility 
of its delivery systems, particularly in low- and moderate-income 
geographies and to low- and moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) do 
not vary in a way that inconveniences its assessment area(s), 
particularly low- and moderate-income geographies and low- and moderate-
income individuals; and
    (D) It provides an adequate level of community development services.
    (iv) Needs to improve. The Board rates a bank's service performance 
``needs to improve'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are unreasonably inaccessible to 
portions of its assessment area(s), particularly to low- or moderate-
income geographies or to low- or moderate-income individuals;
    (B) To the extent changes have been made, its record of opening and 
closing branches has adversely affected the accessibility its delivery 
systems, particularly in low- or moderate-income geographies or to low- 
or moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) vary 
in a way that inconveniences its assessment area(s), particularly low- 
or moderate-income geographies or low- or moderate-income individuals; 
and
    (D) It provides a limited level of community development services.
    (v) Substantial noncompliance. The Board rates a bank's service 
performance as being in ``substantial noncompliance'' if, in general, 
the bank demonstrates:
    (A) Its service delivery systems are unreasonably inaccessible to 
significant portions of its assessment area(s), particularly to low- or 
moderate-income geographies or to low- or moderate-income individuals;
    (B) To the extent changes have been made, its record of opening and 
closing branches has significantly adversely affected the accessibility 
of its delivery systems, particularly in low- or moderate-income 
geographies or to low- or moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) vary 
in a way that significantly inconveniences its assessment area(s), 
particularly low- or moderate-income geographies or low- or moderate-
income individuals; and
    (D) It provides few, if any, community development services.
    (c) Wholesale or limited purpose banks. The Board assigns each 
wholesale or limited purpose bank's community development performance 
one of the four following ratings.
    (1) Outstanding. The Board rates a wholesale or limited purpose 
bank's community development performance ``outstanding'' if, in general, 
it demonstrates:

[[Page 835]]

    (i) A high level of community development loans, community 
development services, or qualified investments, particularly investments 
that are not routinely provided by private investors;
    (ii) Extensive use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Excellent responsiveness to credit and community development 
needs in its assessment area(s).
    (2) Satisfactory. The Board rates a wholesale or limited purpose 
bank's community development performance ``satisfactory'' if, in 
general, it demonstrates:
    (i) An adequate level of community development loans, community 
development services, or qualified investments, particularly investments 
that are not routinely provided by private investors;
    (ii) Occasional use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Adequate responsiveness to credit and community development 
needs in its assessment area(s).
    (3) Needs to improve. The Board rates a wholesale or limited purpose 
bank's community development performance as ``needs to improve'' if, in 
general, it demonstrates:
    (i) A poor level of community development loans, community 
development services, or qualified investments, particularly investments 
that are not routinely provided by private investors;
    (ii) Rare use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Poor responsiveness to credit and community development needs 
in its assessment area(s).
    (4) Substantial noncompliance. The Board rates a wholesale or 
limited purpose bank's community development performance in 
``substantial noncompliance'' if, in general, it demonstrates:
    (i) Few, if any, community development loans, community development 
services, or qualified investments, particularly investments that are 
not routinely provided by private investors;
    (ii) No use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Very poor responsiveness to credit and community development 
needs in its assessment area(s).
    (d) Banks evaluated under the small bank performance standards--(1) 
Lending test ratings. (i) Eligibility for a satisfactory lending test 
rating. The Board rates a small bank's lending performance 
``satisfactory'' if, in general, the bank demonstrates:
    (A) A reasonable loan-to-deposit ratio (considering seasonal 
variations) given the bank's size, financial condition, the credit needs 
of its assessment area(s), and taking into account, as appropriate, 
other lending-related activities such as loan originations for sale to 
the secondary markets and community development loans and qualified 
investments;
    (B) A majority of its loans and, as appropriate, other lending-
related activities, are in its assessment area;
    (C) A distribution of loans to and, as appropriate, other lending-
related activities for individuals of different income levels (including 
low- and moderate-income individuals) and businesses and farms of 
different sizes that is reasonable given the demographics of the bank's 
assessment area(s);
    (D) A record of taking appropriate action, when warranted, in 
response to written complaints, if any, about the bank's performance in 
helping to meet the credit needs of its assessment area(s); and
    (E) A reasonable geographic distribution of loans given the bank's 
assessment area(s).
    (ii) Eligibility for an ``outstanding'' lending test rating. A small 
bank that meets each of the standards for a ``satisfactory'' rating 
under this paragraph and exceeds some or all of those standards may 
warrant consideration for a lending test rating of ``outstanding.''
    (iii) Needs to improve or substantial noncompliance ratings. A small 
bank may also receive a lending test rating of ``needs to improve'' or 
``substantial noncompliance'' depending on the degree to which its 
performance has failed to meet the standard for a ``satisfactory'' 
rating.
    (2) Community development test ratings for intermediate small 
banks--(i) Eligibility for a satisfactory community development test 
rating. The Board rates an intermediate small bank's community 
development performance ``satisfactory'' if the bank demonstrates 
adequate responsiveness to the community development needs of its 
assessment area(s) through community development loans, qualified 
investments, and community development services. The adequacy of the 
bank's response will depend on its capacity for such community 
development activities, its assessment area's need for such community 
development activities, and the availability of such opportunities for 
community development in the bank's assessment area(s).
    (ii) Eligibility for an outstanding community development test 
rating. The Board rates an intermediate small bank's community 
development performance ``outstanding'' if the bank demonstrates 
excellent responsiveness to community development needs in its 
assessment area(s) through community development loans, qualified 
investments, and community development services, as appropriate, 
considering the bank's capacity and

[[Page 836]]

the need and availability of such opportunities for community 
development in the bank's assessment area(s).
    (iii) Needs to improve or substantial noncompliance ratings. An 
intermediate small bank may also receive a community development test 
rating of ``needs to improve'' or ``substantial noncompliance'' 
depending on the degree to which its performance has failed to meet the 
standards for a ``satisfactory'' rating.
    (3) Overall rating--(i) Eligibility for a satisfactory overall 
rating. No intermediate small bank may receive an assigned overall 
rating of ``satisfactory'' unless it receives a rating of at least 
``satisfactory'' on both the lending test and the community development 
test.
    (ii) Eligibility for an outstanding overall rating. (A) An 
intermediate small bank that receives an ``outstanding'' rating on one 
test and at least ``satisfactory'' on the other test may receive an 
assigned overall rating of ``outstanding.''
    (B) A small bank that is not an intermediate small bank that meets 
each of the standards for a ``satisfactory'' rating under the lending 
test and exceeds some or all of those standards may warrant 
consideration for an overall rating of ``outstanding.'' In assessing 
whether a bank's performance is ``outstanding,'' the Board considers the 
extent to which the bank exceeds each of the performance standards for a 
``satisfactory'' rating and its performance in making qualified 
investments and its performance in providing branches and other services 
and delivery systems that enhance credit availability in its assessment 
area(s).
    (iii) Needs to improve or substantial noncompliance overall ratings. 
A small bank may also receive a rating of ``needs to improve'' or 
``substantial noncompliance'' depending on the degree to which its 
performance has failed to meet the standards for a ``satisfactory'' 
rating.
    (e) Strategic plan assessment and rating--(1) Satisfactory goals. 
The Board approves as ``satisfactory'' measurable goals that adequately 
help to meet the credit needs of the bank's assessment area(s).
    (2) Outstanding goals. If the plan identifies a separate group of 
measurable goals that substantially exceed the levels approved as 
``satisfactory,'' the Board will approve those goals as ``outstanding.''
    (3) Rating. The Board assesses the performance of a bank operating 
under an approved plan to determine if the bank has met its plan goals:
    (i) If the bank substantially achieves its plan goals for a 
satisfactory rating, the Board will rate the bank's performance under 
the plan as ``satisfactory.''
    (ii) If the bank exceeds its plan goals for a satisfactory rating 
and substantially achieves its plan goals for an outstanding rating, the 
Board will rate the bank's performance under the plan as 
``outstanding.''
    (iii) If the bank fails to meet substantially its plan goals for a 
satisfactory rating, the Board will rate the bank as either ``needs to 
improve'' or ``substantial noncompliance,'' depending on the extent to 
which it falls short of its plan goals, unless the bank elected in its 
plan to be rated otherwise, as provided in Sec. 228.27(f)(4).

[Reg. BB, 60 FR 22198, May 4, 1995, as amended at 70 FR 44268, Aug. 2, 
2005; 75 FR 61044, Oct. 4, 2010]



                 Sec. Appendix B to Part 228--CRA Notice

    (a) Notice for main offices and, if an interstate bank, one branch 
office in each state.

                    Community Reinvestment Act Notice

    Under the Federal Community Reinvestment Act (CRA), the Federal 
Reserve Board (Board) evaluates our record of helping to meet the credit 
needs of this community consistent with safe and sound operations. The 
Board also takes this record into account when deciding on certain 
applications submitted by us.
    Your involvement is encouraged.
    You are entitled to certain information about our operations and our 
performance under the CRA, including, for example, information about our 
branches, such as their location and services provided at them; the 
public section of our most recent CRA Performance Evaluation, prepared 
by the Federal Reserve Bank of -------- (Reserve Bank); and comments 
received from the public relating to our performance in helping to meet 
community credit needs, as well as our responses to those comments. You 
may review this information today.
    At least 30 days before the beginning of each quarter, the Federal 
Reserve System publishes a list of the banks that are scheduled for CRA 
examination by the Reserve Bank in that quarter. This list is available 
from (title of responsible official), Federal Reserve Bank of -------- 
(address). You may send written comments about our performance in 
helping to meet community credit needs to (name and address of official 
at bank) and (title of responsible official), Federal Reserve Bank of --
------ (address). Your letter, together with any response by us, will be 
considered by the Federal Reserve System in evaluating our CRA 
performance and may be made public.
    You may ask to look at any comments received by the Reserve Bank. 
You may also request from the Reserve Bank an announcement of our 
applications covered by the CRA filed with the Reserve Bank. We are an 
affiliate of (name of holding company), a bank holding company. You may 
request from (title of responsible official), Federal Reserve

[[Page 837]]

Bank of -------- (address) an announcement of applications covered by 
the CRA filed by bank holding companies.
    (b) Notice for branch offices.

                    Community Reinvestment Act Notice

    Under the Federal Community Reinvestment Act (CRA), the Federal 
Reserve Board (Board) evaluates our record of helping to meet the credit 
needs of this community consistent with safe and sound operations. The 
Board also takes this record into account when deciding on certain 
applications submitted by us.
    Your involvement is encouraged.
    You are entitled to certain information about our operations and our 
performance under the CRA. You may review today the public section of 
our most recent CRA evaluation, prepared by the Federal Reserve Bank of 
-------- (address), and a list of services provided at this branch. You 
may also have access to the following additional information, which we 
will make available to you at this branch within five calendar days 
after you make a request to us: (1) a map showing the assessment area 
containing this branch, which is the area in which the Board evaluates 
our CRA performance in this community; (2) information about our 
branches in this assessment area; (3) a list of services we provide at 
those locations; (4) data on our lending performance in this assessment 
area; and (5) copies of all written comments received by us that 
specifically relate to our CRA performance in this assessment area, and 
any responses we have made to those comments. If we are operating under 
an approved strategic plan, you may also have access to a copy of the 
plan.
    [If you would like to review information about our CRA performance 
in other communities served by us, the public file for our entire bank 
is available at (name of office located in state), located at 
(address).]
    At least 30 days before the beginning of each quarter, the Federal 
Reserve System publishes a list of the banks that are scheduled for CRA 
examination by the Reserve Bank in that quarter. This list is available 
from (title of responsible official), Federal Reserve Bank of -------- 
(address). You may send written comments about our performance in 
helping to meet community credit needs to (name and address of official 
at bank) and (title of responsible official), Federal Reserve Bank of --
------ (address). Your letter, together with any response by us, will be 
considered by the Federal Reserve System in evaluating our CRA 
performance and may be made public.
    You may ask to look at any comments received by the Reserve Bank. 
You may also request from the Reserve Bank an announcement of our 
applications covered by the CRA filed with the Reserve Bank. We are an 
affiliate of (name of holding company), a bank holding company. You may 
request from (title of responsible official), Federal Reserve Bank of --
------ (address) an announcement of applications covered by the CRA 
filed by bank holding companies.

[Reg. BB, 60 FR 22200, May 4, 1995]



PART 229_AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS 
(REGULATION CC)--Table of Contents



                            Subpart A_General

Sec.
229.1 Authority and purpose; organization.
229.2 Definitions.
229.3 Administrative enforcement.

  Subpart B_Availability of Funds and Disclosure of Funds Availability 
                                Policies

229.10 Next-day availability.
229.11 [Reserved]
229.12 Availability schedule.
229.13 Exceptions.
229.14 Payment of interest.
229.15 General disclosure requirements.
229.16 Specific availability policy disclosure.
229.17 Initial disclosures.
229.18 Additional disclosure requirements.
229.19 Miscellaneous.
229.20 Relation to state law.
229.21 Civil liability.

                     Subpart C_Collection of Checks

229.30 Paying bank's responsibility for return of checks.
229.31 Returning bank's responsibility for return of checks.
229.32 Depositary bank's responsibility for returned checks.
229.33 Notice of nonpayment.
229.34 Warranties.
229.35 Indorsements.
229.36 Presentment and issuance of checks.
229.37 Variation by agreement.
229.38 Liability.
229.39 Insolvency of bank.
229.40 Effect of merger transaction.
229.41 Relation to State law.
229.42 Exclusions.
229.43 Checks payable in Guam, American Samoa, and the Northern Mariana 
          Islands.

                       Subpart D_Substitute Checks

229.51 General provisions governing substitute checks.
229.52 Substitute check warranties.
229.53 Substitute check indemnity.
229.54 Expedited recredit for consumers.
229.55 Expedited recredit for banks.
229.56 Liability.

[[Page 838]]

229.57 Consumer awareness.
229.58 Mode of delivery of information.
229.59 Relation to other law.
229.60 Variation by agreement.

Appendix A to Part 229--Routing Number Guide to Next-Day Availability 
          Checks and Local Checks
Appendix B to Part 229 [Reserved]
Appendix C to Part 229--Model Availability Policy Disclosures, Clauses, 
          and Notices; Model Substitute Check Policy Disclosure and 
          Notices
Appendix D to Part 229--Indorsement, Reconverting Bank Identification, 
          and Truncating Bank Identification Standards
Appendix E to Part 229--Commentary
Appendix F to Part 229--Official Board Interpretations; Preemption 
          Determinations

    Authority: 12 U.S.C. 4001-4010, 12 U.S.C. 5001-5018.

    Source: 53 FR 19433, May 27, 1988, unless otherwise noted.



                            Subpart A_General



Sec. 229.1  Authority and purpose; organization.

    (a) Authority and purpose. This part is issued by the Board of 
Governors of the Federal Reserve System (Board) to implement the 
Expedited Funds Availability Act (12 U.S.C. 4001-4010) (the EFA Act) and 
the Check Clearing for the 21st Century Act (12 U.S.C. 5001-5018) (the 
Check 21 Act).
    (b) Organization. This part is divided into subparts and appendices 
as follows--
    (1) Subpart A contains general information. It sets forth--
    (i) The authority, purpose, and organization;
    (ii) Definition of terms; and
    (iii) Authority for administrative enforcement of this part's 
provisions.
    (2) Subpart B of this part contains rules regarding the duty of 
banks to make funds deposited into accounts available for withdrawal, 
including availability schedules. Subpart B of this part also contains 
rules regarding exceptions to the schedules, disclosure of funds 
availability policies, payment of interest, liability of banks for 
failure to comply with subpart B of this part, and other matters.
    (3) Subpart C of this part contains rules to expedite the collection 
and return of checks by banks. These rules cover the direct return of 
checks, the manner in which the paying bank and returning banks must 
return checks to the depositary bank, notification of nonpayment by the 
paying bank, indorsement and presentment of checks, same-day settlement 
for certain checks, the liability of banks for failure to comply with 
subpart C of this part, and other matters.
    (4) Subpart D of this part contains rules relating to substitute 
checks. These rules address the creation and legal status of substitute 
checks; the substitute check warranties and indemnity; expedited 
recredit procedures for resolving improper charges and warranty claims 
associated with substitute checks provided to consumers; and the 
disclosure and notices that banks must provide.

[53 FR 19433, May 27, 1988, as amended at 57 FR 36598, Aug. 14, 1992; 57 
FR 46972, Oct. 14, 1992; Reg. CC, 60 FR 51670, Oct. 3, 1995; 69 FR 
47309, Aug. 4, 2004]

    Effective Date Note: At 82 FR 27578, June 15, 2017, Sec. 229.1 was 
amended by revising paragraph (b)(3) and adding paragraphs (b)(5) 
through (10), effective July 1, 2018. For the convenience of the user, 
the added and revised text is set forth as follows:



Sec. 229.1  Authority and purpose; organization.

                                * * * * *

    (b) * * *
    (3) Subpart C of this part contains rules to expedite the collection 
and return of checks and electronic checks by banks. These rules cover 
the direct return of checks and electronic checks, the manner in which 
the paying bank and returning banks must return checks and electronic 
checks to the depositary bank, notification of nonpayment by the paying 
bank, indorsement and presentment of checks and electronic checks, same-
day settlement for certain checks, the liability of banks for failure to 
comply with subpart C of this part, and other matters.

                                * * * * *

    (5) Appendix A of this part contains a routing number guide to next 
day-availability checks. The guide lists the routing numbers of checks 
drawn on Federal Reserve Banks and Federal Home Loan Banks, and U.S. 
Treasury checks and Postal money orders that are subject to next-day 
availability.
    (6) Appendix B of this part is reserved.
    (7) Appendix C of this part contains model funds-availability policy 
disclosures, clauses,

[[Page 839]]

and notices and a model disclosure and notices related to substitute-
check policies.
    (8) Appendix D of this part is reserved.
    (9) Appendix E of this part contains Board interpretations, which 
are labeled``Commentary,'' of the provisions of this part. The 
Commentary provides background material to explain the Board's intent in 
adopting a particular part of the regulation and provides examples to 
aid in understanding how a particular requirement is to work. The 
Commentary is an official Board interpretation under section 611(e) of 
the EFA Act (12 U.S.C. 4010(e)).
    (10) Appendix F of this part contains the Board's determinations of 
the EFA Act and Regulation CC's preemption of state laws that were in 
effect on September 1, 1989.



Sec. 229.2  Definitions.

    As used in this part, and unless the context requires otherwise, the 
following terms have the meanings set forth in this section, and the 
terms not defined in this section have the meanings set forth in the 
Uniform Commercial Code:
    (a) Account. (1) Except as provided in paragraphs (a)(2) and (a)(3) 
of this section, account means a deposit as defined in 12 CFR 
204.2(a)(1)(i) that is a transaction account as described in 12 CFR 
204.2(e). As defined in these sections, account generally includes 
accounts at a bank from which the account holder is permitted to make 
transfers or withdrawals by negotiable or transferable instrument, 
payment order of withdrawal, telephone transfer, electronic payment, or 
other similar means for the purpose of making payments or transfers to 
third persons or others. Account also includes accounts at a bank from 
which the account holder may make third party payments at an ATM, remote 
service unit, or other electronic device, including by debit card, but 
the term does not include savings deposits or accounts described in 12 
CFR 204.2(d)(2) even though such accounts permit third party transfers. 
An account may be in the form of--
    (i) A demand deposit account,
    (ii) A negotiable order of withdrawal account,
    (iii) A share draft account,
    (iv) An automatic transfer account, or
    (v) Any other transaction account described in 12 CFR 204.2(e).
    (2) For purposes of subpart B of this part and, in connection 
therewith, this subpart A, account does not include an account where the 
account holder is a bank, where the account holder is an office of an 
institution described in paragraphs (e)(1) through (e)(6) of this 
section or an office of a ``foreign bank'' as defined in section 1(b) of 
the International Banking Act (12 U.S.C. 3101) that is located outside 
the United States, or where the direct or indirect account holder is the 
Treasury of the United States.
    (3) For purposes of subpart D of this part and, in connection 
therewith, this subpart A, account means any deposit, as defined in 12 
CFR 204.2(a)(1)(i), at a bank, including a demand deposit or other 
transaction account and a savings deposit or other time deposit, as 
those terms are defined in 12 CFR 204.2.
    (b) Automated clearinghouse or ACH means a facility that processes 
debit and credit transfers under rules established by a Federal Reserve 
Bank operating circular on automated clearinghouse items or under rules 
of an automated clearinghouse association.
    (c) Automated teller machine or ATM means an electronic device at 
which a natural person may make deposits to an account by cash or check 
and perform other account transactions.
    (d) Available for withdrawal with respect to funds deposited means 
available for all uses generally permitted to the customer for actually 
and finally collected funds under the bank's account agreement or 
policies, such as for payment of checks drawn on the account, 
certification of checks drawn on the account, electronic payments, 
withdrawals by cash, and transfers between accounts.
    (e) Bank means--
    (1) An insured bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 18I3) or a bank that is eligible to apply to 
become an insured bank under section 5 of that Act (12 U.S.C. 1815);
    (2) A mutual savings bank as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813);
    (3) A savings bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813);

[[Page 840]]

    (4) An insured credit union as defined in section 101 of the Federal 
Credit Union Act (12 U.S.C. 1752) or a credit union that is eligible to 
make application to become an insured credit union under section 201 of 
that Act (12 U.S.C. 1781);
    (5) A member as defined in section 2 of the Federal Home Loan Bank 
Act (12 U.S.C. 1422);
    (6) A savings association as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813) that is an insured depository 
institution as defined in section 3 of that Act (12 U.S.C. 1813(c)(2)) 
or that is eligible to apply to become an insured depository institution 
under section 5 of that Act (12 U.S.C. 1815); or
    (7) An agency or a branch of a foreign bank as defined in section 
l(b) of the International Banking Act (12 U.S.C. 3101).


For purposes of subparts C and D of this part and, in connection 
therewith, this subpart A, the term bank also includes any person 
engaged in the business of banking, as well as a Federal Reserve Bank, a 
Federal Home Loan Bank, and a state or unit of general local government 
to the extent that the state or unit of general local government acts as 
a paying bank. Unless otherwise specified, the term bank includes all of 
a bank's offices in the United States, but not offices located outside 
the United States.

    Note: For purposes of subpart D of this part and, in connection 
therewith, this subpart A, bank also includes the Treasury of the United 
States or the United States Postal Service to the extent that the 
Treasury or the Postal Service acts as a paying bank.

    (f) Banking day means that part of any business day on which an 
office of a bank is open to the public for carrying on substantially all 
of its banking functions.
    (g) Business day means a calendar day other than a Saturday or a 
Sunday, January 1, the third Monday in January, the third Monday in 
February, the last Monday in May, July 4, the first Monday in September, 
the second Monday in October, November 11, the fourth Thursday in 
November, or December 25. If January 1, July 4, November 11, or December 
25 fall on a Sunday, the next Monday is not a business day.
    (h) Cash means United States coins and currency.
    (i) Cashier's check means a check that is--
    (1) Drawn on a bank;
    (2) Signed by an officer or employee of the bank on behalf of the 
bank as drawer;
    (3) A direct obligation of the bank; and
    (4) Provided to a customer of the bank or acquired from the bank for 
remittance purposes.
    (j) Certified check means a check with respect to which the drawee 
bank certifies by signature on the check of an officer or other 
authorized employee of the bank that--
    (1) (i) The signature of the drawer on the check is genuine; and
    (ii) The bank has set aside funds that--
    (A) Are equal to the amount of the check, and
    (B) Will be used to pay the check; or
    (2) The bank will pay the check upon presentment.
    (k) Check means--
    (1) A negotiable demand draft drawn on or payable through or at an 
office of a bank;
    (2) A negotiable demand draft drawn on a Federal Reserve Bank or a 
Federal Home Loan Bank;
    (3) A negotiable demand draft drawn on the Treasury of the United 
States;
    (4) A demand draft drawn on a state government or unit of general 
local government that is not payable through or at a bank;
    (5) A United States Postal Service money order; or
    (6) A traveler's check drawn on or payable through or at a bank.
    (7) The term check includes an original check and a substitute 
check.

    Note: The term check does not include a noncash item or an item 
payable in a medium other than United States money. A draft may be a 
check even though it is described on its face by another term, such as 
money order. For purposes of subparts C and D, and in connection 
therewith, subpart A, of this part, the term check also includes a 
demand draft of the type described above that is nonnegotiable.

    (l) [Reserved]
    (m) Check processing region means the geographical area served by an 
office of

[[Page 841]]

a Federal Reserve Bank for purposes of its check processing activities.
    (n) Consumer account means any account used primarily for personal, 
family, or household purposes.
    (o) Depositary bank means the first bank to which a check is 
transferred even though it is also the paying bank or the payee. A check 
deposited in an account is deemed to be transferred to the bank holding 
the account into which the check is deposited, even though the check is 
physically received and indorsed first by another bank.
    (p) Electronic payment means a wire transfer or an ACH credit 
transfer.
    (q) Forward collection means the process by which a bank sends a 
check on a cash basis to a collecting bank for settlement or to the 
paying bank for payment.
    (r) Local check means a check payable by or at a local paying bank, 
or a check payable by a nonbank payor and payable through a local paying 
bank.
    (s) Local paying bank means a paying bank that is located in the 
same check-processing region as the physical location of the branch, 
contractual branch, or proprietary ATM of the depositary bank in which 
that check was deposited.
    (t) Merger transaction means--
    (1) A merger or consolidation of two or more banks; or
    (2) The transfer of substantially all of the assets of one or more 
banks or branches to another bank in consideration of the assumption by 
the acquiring bank of substantially all of the liabilities of the 
transferring banks, including the deposit liabilities.
    (u) Noncash item means an item that would otherwise be a check, 
except that--
    (1) A passbook, certificate, or other document is attached;
    (2) It is accompanied by special instructions, such as a request for 
special advice of payment or dishonor;
    (3) It consists of more than a single thickness of paper, except a 
check that qualifies for handling by automated check processing 
equipment; or
    (4) It has not been preprinted or post-encoded in magnetic ink with 
the routing number of the paying bank.
    (v) Nonlocal check means a check payable by, through, or at a 
nonlocal paying bank.
    (w) Nonlocal paying bank means a paying bank that is not a local 
paying bank with respect to the depositary bank.
    (x) Nonproprietary ATM means an ATM that is not a proprietary ATM.
    (y) [Reserved]
    (z) Paying bank means--
    (1) The bank by which a check is payable, unless the check is 
payable at another bank and is sent to the other bank for payment or 
collection;
    (2) The bank at which a check is payable and to which it is sent for 
payment or collection;
    (3) The Federal Reserve Bank or Federal Home Loan Bank by which a 
check is payable;
    (4) The bank through which a check is payable and to which it is 
sent for payment or collection, if the check is not payable by a bank; 
or
    (5) The state or unit of general local government on which a check 
is drawn and to which it is sent for payment or collection.


For purposes of subparts C and D, and in connection therewith, subpart 
A, paying bank includes the bank through which a check is payable and to 
which the check is sent for payment or collection, regardless of whether 
the check is payable by another bank, and the bank whose routing number 
appears on a check in fractional or magnetic form and to which the check 
is sent for payment or collection.

    Note: For purposes of subpart D of this part and, in connection 
therewith, this subpart A, paying bank also includes the Treasury of the 
United States or the United States Postal Service for a check that is 
payable by that entity and that is sent to that entity for payment or 
collection.

    (aa) Proprietary ATM means an ATM that is--
    (1) Owned or operated by, or operated exclusively for, the 
depositary bank;
    (2) Located on the premises (including the outside wall) of the 
depositary bank; or
    (3) Located within 50 feet of the premises of the depositary bank, 
and not identified as being owned or operated by another entity.

[[Page 842]]

    If more than one bank meets the owned or operated criterion of 
paragraph (aa)(1) of this section, the ATM is considered proprietary to 
the bank that operates it.
    (bb) Qualified returned check means a returned check that is 
prepared for automated return to the depositary bank by placing the 
check in a carrier envelope or placing a strip on the check and encoding 
the strip or envelope in magnetic ink. A qualified returned check need 
not contain other elements of a check drawn on the depositary bank, such 
as the name of the depositary bank.
    (cc) Returning bank means a bank (other than the paying or 
depositary bank) handling a returned check or notice in lieu of return. 
A returning bank is also a collecting bank for purposes of UCC 4-202(b).
    (dd) Routing number means--
    (1) The number printed on the face of a check in fractional form on 
in nine-digit form; or
    (2) The number in a bank's indorsement in fractional or nine-digit 
form.
    (ee) Similarly situated bank means a bank of similar size, located 
in the same community, and with similar check handling activities as the 
paying bank or returning bank.
    (ff) State means a state, the District of Columbia, Puerto Rico, or 
the U.S. Virgin Islands. For purposes of subpart D of this part and, in 
connection therewith, this subpart A, state also means Guam, American 
Samoa, the Trust Territory of the Pacific Islands, the Northern Mariana 
Islands, and any other territory of the United States.
    (gg) Teller's check means a check provided to a customer of a bank 
or acquired from a bank for remittance purposes, that is drawn by the 
bank, and drawn on another bank or payable through or at a bank.
    (hh) Traveler's check means an instrument for the payment of money 
that--
    (1) Is drawn on or payable through or at a bank;
    (2) Is designated on its face by the term traveler's check or by any 
substantially similar term or is commonly known and marketed as a 
traveler's check by a corporation or bank that is an issuer of 
traveler's checks;
    (3) Provides for a specimen signature of the purchaser to be 
completed at the time of purchase; and
    (4) Provides for a countersignature of the purchaser to be completed 
at the time of negotiation.
    (ii) Uniform Commercial Code, Code, or U.C.C. means the Uniform 
Commercial Code as adopted in a state.
    (jj) United States means the states, including the District of 
Columbia, the U.S. Virgin Islands, and Puerto Rico.
    (kk) Unit of general local government means any city, county, 
parish, town, township, village, or other general purpose political 
subdivision of a state. The term does not include special purpose units 
of government, such as school districts or water districts.
    (ll) Wire transfer means an unconditional order to a bank to pay a 
fixed or determinable amount of money to a beneficiary upon receipt or 
on a day stated in the order, that is transmitted by electronic or other 
means through Fedwire, the Clearing House Interbank Payments System, 
other similar network, between banks, or on the books of a bank. Wire 
transfer does not include an electronic fund transfer as defined in 
section 903(6) of the Electronic Fund Transfer Act (15 U.S.C. 1693a(6)).
    (mm) Fedwire has the same meaning as that set forth in Sec. 
210.26(e) of this chapter.
    (nn) Good faith means honesty in fact and observance of reasonable 
commercial standards of fair dealing.
    (oo) Interest compensation means an amount of money calculated at 
the average of the Federal Funds rates published by the Federal Reserve 
Bank of New York for each of the days for which interest compensation is 
payable, divided by 360. The Federal Funds rate for any day on which a 
published rate is not available is the same as the published rate for 
the last preceding day for which there is a published rate.
    (pp) Contractual branch, with respect to a bank, means a branch of 
another bank that accepts a deposit on behalf of the first bank.
    (qq) Claimant bank means a bank that submits a claim for a recredit 
for a substitute check to an indemnifying bank under Sec. 229.55.

[[Page 843]]

    (rr) Collecting bank means any bank handling a check for forward 
collection, except the paying bank.
    (ss) Consumer means a natural person who--
    (1) With respect to a check handled for forward collection, draws 
the check on a consumer account; or
    (2) With respect to a check handled for return, deposits the check 
into or cashes the check against a consumer account.
    (tt) Customer means a person having an account with a bank.
    (uu) Indemnifying bank means a bank that provides an indemnity under 
Sec. 229.53 with respect to a substitute check.
    (vv) Magnetic ink character recognition line and MICR line mean the 
numbers, which may include the routing number, account number, check 
number, check amount, and other information, that are printed near the 
bottom of a check in magnetic ink in accordance with American National 
Standard Specifications for Placement and Location of MICR Printing, 
X9.13 (hereinafter ANS X9.13) for an original check and American 
National Standard Specifications for an Image Replacement Document--IRD, 
X9.100-140 (hereinafter ANS X9.100-140) for a substitute check (unless 
the Board by rule or order determines that different standards apply).
    (ww) Original check means the first paper check issued with respect 
to a particular payment transaction.
    (xx) Paper or electronic representation of a substitute check means 
any copy of or information related to a substitute check that a bank 
handles for forward collection or return, charges to a customer's 
account, or provides to a person as a record of a check payment made by 
the person.
    (yy) Person means a natural person, corporation, unincorporated 
company, partnership, government unit or instrumentality, trust, or any 
other entity or organization.
    (zz) Reconverting bank means--
    (1) The bank that creates a substitute check; or
    (2) With respect to a substitute check that was created by a person 
that is not a bank, the first bank that transfers, presents, or returns 
that substitute check or, in lieu thereof, the first paper or electronic 
representation of that substitute check.
    (aaa) Substitute check means a paper reproduction of an original 
check that--
    (1) Contains an image of the front and back of the original check;
    (2) Bears a MICR line that, except as provided under ANS X9.100-140 
(unless the Board by rule or order determines that a different standard 
applies), contains all the information appearing on the MICR line of the 
original check at the time that the original check was issued and any 
additional information that was encoded on the original check's MICR 
line before an image of the original check was captured;
    (3) Conforms in paper stock, dimension, and otherwise with ANS 
X9.100-140 (unless the Board by rule or order determines that a 
different standard applies); and
    (4) Is suitable for automated processing in the same manner as the 
original check.
    (bbb) Sufficient copy and copy. (1) A sufficient copy is a copy of 
an original check that accurately represents all of the information on 
the front and back of the original check as of the time the original 
check was truncated or is otherwise sufficient to determine whether or 
not a claim is valid.
    (2) A copy of an original check means any paper reproduction of an 
original check, including a paper printout of an electronic image of the 
original check, a photocopy of the original check, or a substitute 
check.
    (ccc) Transfer and consideration. The terms transfer and 
consideration have the meanings set forth in the Uniform Commercial Code 
and in addition, for purposes of subpart D--
    (1) The term transfer with respect to a substitute check or a paper 
or electronic representation of a substitute check means delivery of the 
substitute check or other representation of the substitute check by a 
bank to a person other than a bank; and
    (2) A bank that transfers a substitute check or a paper or 
electronic representation of a substitute check directly to a person 
other than a bank has received consideration for the substitute check or 
other paper or electronic representation of the substitute

[[Page 844]]

check if it has charged, or has the right to charge, the person's 
account or otherwise has received value for the original check, a 
substitute check, or a representation of the original check or 
substitute check.
    (ddd) Truncate means to remove an original check from the forward 
collection or return process and send to a recipient, in lieu of such 
original check, a substitute check or, by agreement, information 
relating to the original check (including data taken from the MICR line 
of the original check or an electronic image of the original check), 
whether with or without the subsequent delivery of the original check.
    (eee) Truncating bank means--
    (1) The bank that truncates the original check; or
    (2) If a person other than a bank truncates the original check, the 
first bank that transfers, presents, or returns, in lieu of such 
original check, a substitute check or, by agreement with the recipient, 
information relating to the original check (including data taken from 
the MICR line of the original check or an electronic image of the 
original check), whether with or without the subsequent delivery of the 
original check.
    (fff) Remotely created check means a check that is not created by 
the paying bank and that does not bear a signature applied, or purported 
to be applied, by the person on whose account the check is drawn. For 
purposes of this definition, ``account'' means an account as defined in 
paragraph (a) of this section as well as a credit or other arrangement 
that allows a person to draw checks that are payable by, through, or at 
a bank.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 53 
FR 44324, Nov. 2, 1988; Reg. CC, 54 FR 13850, Apr. 6, 1989; 57 FR 46972, 
Oct. 14, 1992; 58 FR 2, Jan. 4, 1993; 60 FR 51670, Oct. 3, 1995; 62 FR 
13809, Mar. 24, 1997; 69 FR 47309, 47310, Aug. 4, 2004; 70 FR 71225, 
Nov. 28, 2005]

    Effective Date Note: At 82 FR 27578, June 15, 2017, Sec. 229.2 was 
amended by revising paragraphs (dd), (uu), (vv), and (bbb), and by 
adding paragraphs (ggg) and (hhh), effective July 1, 2018. For the 
convenience of the user, the added and revised text is set forth as 
follows:



Sec. 229.2  Definitions.

                                * * * * *

    (dd) Routing number means--
    (1) The number printed on the face of a check in fractional form on 
in nine-digit form;
    (2) The number in a bank's indorsement in fractional or nine-digit 
form; or
    (3) For purposes of subpart C and subpart D, the bank-identification 
number contained in an electronic check or electronic returned check.

                                * * * * *

    (uu) Indemnifying bank. Indemnifying bank means--
    (1) For the purposes of Sec. 229.34, a bank that provides an 
indemnity under Sec. 229.34 with respect to remote deposit capture or 
an electronically-created item, or
    (2) For the purposes of Sec. 229.53, a bank that provides an 
indemnity under Sec. 229.53 with respect to a substitute check.
    (vv) Magnetic ink character recognition line and MICR line mean the 
numbers, which may include the routing number, account number, check 
number, check amount, and other information, that are (unless the Board 
by rule or order determines that different standards apply)--
    (1) Printed near the bottom of a check in magnetic ink in accordance 
with American National Standard Specifications for Placement and 
Location of MICR Printing, X9.13 (hereinafter ANS X9.13) for an original 
check and American National Standard Specifications for an Image 
Replacement Document-- IRD, X9.100-140 (hereinafter ANS X9.100-140) for 
a substitute check, or
    (2) For purposes of subpart C and subpart D, contained in a record 
specified for MICR line data in an electronic check or electronic 
returned check in accordance with American National Standard 
Specifications for Electronic Exchange of Check Image Data--Domestic, 
X9.100-187 (hereinafter ANS X9.100--187).

                                * * * * *

    (bbb) Copy and sufficient copy. (1) A copy of an original check 
means--
    (i) Any paper reproduction of an original check, including a paper 
printout of an electronic image of the check, a photocopy of the 
original check, or a substitute check; or
    (ii) Any electronic reproduction of a check that a recipient has 
agreed to receive from the sender instead of a paper reproduction.
    (2) A sufficient copy is a copy of an original check that accurately 
represents all of the information on the front and back of the original 
check as of the time the original

[[Page 845]]

check was truncated or is otherwise sufficient to determine whether or 
not a claim is valid.

                                * * * * *

    (ggg) Electronic check and electronic returned check mean an 
electronic image of, and electronic information derived from, a paper 
check or paper returned check, respectively,that--
    (1) Is sent to a receiving bank pursuant to an agreement between the 
sender and the receiving bank; and
    (2) Conforms with ANS X9.100-187, unless the Board by rule or order 
determines that a different standard applies or the parties otherwise 
agree.
    (hhh) Electronically-created item means an electronic image that has 
all the attributes of an electronic check or electronic returned check 
but was created electronically and not derived from a paper check.



Sec. 229.3  Administrative enforcement.

    (a) Enforcement agencies. Compliance with this part is enforced 
under--
    (1) Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818 
et seq.) in the case of--
    (i) National banks, and Federal branches and Federal agencies of 
foreign banks, by the Office of the Comptroller of the Currency;
    (ii) Member banks of the Federal Reserve System (other than national 
banks), and offices, branches, and agencies of foreign banks located in 
the United States (other than Federal branches, Federal agencies, and 
insured State branches of foreign banks), by the Board; and
    (iii) Banks insured by the Federal Deposit Insurance Corporation 
(other than members of the Federal Reserve System) and insured State 
branches of foreign banks, by the Board of Directors of the Federal 
Deposit Insurance Corporation;
    (2) Section 8 of the Federal Deposit Insurance Act, by the Director 
of the Office of Thrift Supervision in the case of savings associations 
the deposits of which are insured by the Federal Deposit Insurance 
Corporation; and
    (3) The Federal Credit Union Act (12 U.S.C. 1751 et seq.) by the 
National Credit Union Administration Board with respect to any federal 
credit union or credit union insured by the National Credit Union Share 
Insurance Fund.


The terms used in paragraph (a)(1) of this section that are not defined 
in this part or otherwise defined in section 3(s) of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them 
in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 
3101).
    (b) Additional powers. (1) For the purposes of the exercise by any 
agency referred to in paragraph (a) of this section of its powers under 
any statute referred to in that paragraph, a violation of any 
requirement imposed under the EFA Act is deemed to be a violation of a 
requirement imposed under that statute.
    (2) In addition to its powers under any provision of law 
specifically referred to in paragraph (a) of this section, each of the 
agencies referred to in that paragraph may exercise, for purposes of 
enforcing compliance with any requirement imposed under this part, any 
other authority conferred on it by law.
    (c) Enforcement by the Board. (1) Except to the extent that 
enforcement of the requirements imposed under this part is specifically 
committed to some other government agency, the Board shall enforce such 
requirements.
    (2) If the Board determines that--
    (i) Any bank that is not a bank described in paragraph (a) of this 
section; or
    (ii) Any other person subject to the authority of the Board under 
the EFA Act and this part,


has failed to comply with any requirement imposed by this part, the 
Board may issue an order prohibiting any bank, any Federal Reserve Bank, 
or any other person subject to the authority of the Board from engaging 
in any activity or transaction that directly or indirectly involves such 
noncomplying bank or person (including any activity or transaction 
involving the receipt, payment, collection, and clearing of checks, and 
any related function of the payment system with respect to checks).

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 55 FR 21855, May 30, 
1990; 57 FR 36600, Aug. 14, 1992; 69 FR 47310, Aug. 4, 2004]

[[Page 846]]



  Subpart B_Availability of Funds and Disclosure of Funds Availability 
                                Policies



Sec. 229.10  Next-day availability.

    (a) Cash deposits. (1) A bank shall make funds deposited in an 
account by cash available for withdrawal not later than the business day 
after the banking day on which the cash is deposited, if the deposit is 
made in person to an employee of the depositary bank.
    (2) A bank shall make funds deposited in an account by cash 
available for withdrawal not later than the second business day after 
the banking day on which the cash is deposited, if the deposit is not 
made in person to an employee of the depositary bank.
    (b) Electronic payments--(1) In general. A bank shall make funds 
received for deposit in an account by an electronic payment available 
for withdrawal not later than the business day after the banking day on 
which the bank received the electronic payment.
    (2) When an electronic payment is received. An electronic payment is 
received when the bank receiving the payment has received both--
    (i) Payment in actually and finally collected funds; and
    (ii) Information on the account and amount to be credited.
    A bank receives an electronic payment only to the extent that the 
bank has received payment in actually and finally collected funds.
    (c) Certain check deposits--(1) General rule. A depositary bank 
shall make funds deposited in an account by check available for 
withdrawal not later than the business day after the banking day on 
which the funds are deposited, in the case of--
    (i) A check drawn on the Treasury of the United States and deposited 
in an account held by a payee of the check;
    (ii) A U.S. Postal Service money order deposited--
    (A) In an account held by a payee of the money order; and
    (B) In person to an employee of the depositary bank.
    (iii) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank and deposited--
    (A) In an account held by a payee of the check; and
    (B) In person to an employee of the depositary bank;
    (iv) A check drawn by a state or a unit of general local government 
and deposited--
    (A) In an account held by a payee of the check;
    (B) In a depositary bank located in the state that issued the check, 
or the same state as the unit of general local government that issued 
the check;
    (C) In person to an employee of the depositary bank; and
    (D) With a special deposit slip or deposit envelope, if such slip or 
envelope is required by the depositary bank under paragraph (c)(3) of 
this section.
    (v) A cashier's, certified, or teller's check deposited--
    (A) In an account held by a payee of the check;
    (B) In person to an employee of the depositary bank; and
    (C) With a special deposit slip or deposit envelope, if such slip or 
envelope is required by the depositary bank under paragraph (c)(3) of 
this section.
    (vi) A check deposited in a branch of the depositary bank and drawn 
on the same or another branch of the same bank if both branches are 
located in the same state or the same check processing region; and,
    (vii) The lesser of--
    (A) $100, or
    (B) The aggregate amount deposited on any one banking day to all 
accounts of the customer by check or checks not subject to next-day 
availability under paragraphs (c)(1) (i) through (vi) of this section.
    (2) Checks not deposited in person. A depositary bank shall make 
funds deposited in an account by check or checks available for 
withdrawal not later than the second business day after the banking day 
on which funds are deposited, in the case of a check deposit described 
in and that meets the requirements of paragraphs (c)(1) (ii), (iii), 
(iv), and (v), of this section, except that it is not deposited in 
person to an employee of the depositary bank.
    (3) Special deposit slip. (i) As a condition to making the funds 
available for withdrawal in accordance with this section, a depositary 
bank may require that a state or local government check or a cashier's, 
certified, or teller's

[[Page 847]]

check be deposited with a special deposit slip or deposit envelope that 
identifies the type of check.
    (ii) If a depositary bank requires the use of a special deposit slip 
or deposit envelope, the bank must either provide the special deposit 
slip or deposit envelope to its customers or inform its customers how 
the slip or envelope may be prepared or obtained and make the slip or 
envelope reasonably available.



Sec. 229.11  [Reserved]



Sec. 229.12  Availability schedule.

    (a) Effective date. The availability schedule contained in this 
section is effective September 1, 1990.
    (b) Local checks and certain other checks. Except as provided in 
paragraphs (d), (e), and (f) of this section, a depository bank shall 
make funds deposited in an account by a check available for withdrawal 
not later than the second business day following the banking day on 
which funds are deposited, in the case of--
    (1) A local check;
    (2) A check drawn on the Treasury of the United States that is not 
governed by the availability requirements of Sec. 229.10(c);
    (3) A U.S. Postal Service money order that is not governed by the 
availability requirements of Sec. 229.10(c); and
    (4) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank; a check drawn by a state or unit of general local government; or a 
cashier's, certified, or teller's check; if any check referred to in 
this paragraph (b)(4) is a local check that is not governed by the 
availability requirements of Sec. 229.10(c).
    (c) Nonlocal checks--(1) In general. Except as provided in 
paragraphs (d), (e), and (f) of this section, a depositary bank shall 
make funds deposited in an account by a check available for withdrawal 
not later than the fifth business day following the banking day on which 
funds are deposited, in the case of--
    (i) A nonlocal check; and
    (ii) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank; a check drawn by a state or unit of general local government; a 
cashier's, certified, or teller's check; or a check deposited in a 
branch of the depositary bank and drawn on the same or another branch of 
the same bank, if any check referred to in this paragraph (c)(1)(ii) is 
a nonlocal check that is not governed by the availability requirements 
of Sec. 229.10(c).
    (2) Nonlocal checks specified in appendix B-2 to this part must be 
made available for withdrawal not later than the times prescribed in 
that appendix.
    (d) Time period adjustment for withdrawal by cash or similar means. 
A depositary bank may extend by one business day the time that funds 
deposited in an account by one or more checks subject to paragraphs (b), 
(c), or (f) of this section are available for withdrawal by cash or 
similar means. Similar means include electronic payment, issuance of a 
cashier's or teller's check, or certification of a check, or other 
irrevocable commitment to pay, but do not include the granting of credit 
to a bank, a Federal Reserve Bank, or a Federal Home Loan Bank that 
presents a check to the depositary bank for payment. A depositary bank 
shall, however, make $400 of these funds available for withdrawal by 
cash or similar means not later than 5:00 p.m. on the business day on 
which the funds are available under paragraphs (b), (c), or (f) of this 
section. This $400 is in addition to the $100 available under Sec. 
229.10(c)(1)(vii).
    (e) Extension of schedule for certain deposits in Alaska, Hawaii, 
Puerto Rico, and the U.S. Virgin Islands. The depositary bank may extend 
the time periods set forth in this section by one business day in the 
case of any deposit, other than a deposit described in Sec. 229.10, 
that is--
    (1) Deposited in an account at a branch of a depositary bank if the 
branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin 
Islands; and
    (2) Deposited by a check drawn on or payable at or through a paying 
bank not located in the same state as the depositary bank.
    (f) Deposits at nonproprietary ATMs. A depositary bank shall make 
funds deposited in an account at a nonproprietary ATM by cash or check 
available for withdrawal not later than the fifth

[[Page 848]]

business day following the banking day on which the funds are deposited.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 55 FR 50818, Dec. 11, 
1990; 56 FR 7801, Feb. 26, 1991; 56 FR 66343, Dec. 23, 1991; 57 FR 
36601, Aug. 14, 1992; 60 FR 51670, Oct. 3, 1995]



Sec. 229.13  Exceptions.

    (a) New accounts. For purposes of this paragraph, checks subject to 
Sec. 229.10(c)(1)(v) include traveler's checks.
    (1) A deposit in a new account--
    (i) Is subject to the requirements of Sec. 229.10 (a) and (b) to 
make funds from deposits by cash and electronic payments available for 
withdrawal on the business day following the banking day of deposit or 
receipt;
    (ii) Is subject to the requirements of Sec. 229.10(c)(1) (i) 
through (v) and Sec. 229.10(c)(2) only with respect to the first $5,000 
of funds deposited on any one banking day; but the amount of the deposit 
in excess of $5,000 shall be available for withdrawal not later than the 
ninth business day following the banking day on which funds are 
deposited; and
    (iii) Is not subject to the availability requirements of Sec. Sec. 
229.10(c)(1)(vi) and (vii) and 229.12.
    (2) An account is considered a new account during the first 30 
calendar days after the account is established. An account is not 
considered a new account if each customer on the account has had, within 
30 calendar days before the account is established, another account at 
the depositary bank for at least 30 calendar days.
    (b) Large deposits. Sections 229.10(c) and 229.12 do not apply to 
the aggregate amount of deposits by one or more checks to the extent 
that the aggregate amount is in excess of $5,000 on any one banking. 
day. For customers that have multiple accounts at a depositary bank, the 
bank may apply this exception to the aggregate deposits to all accounts 
held by the customer, even if the customer is not the sole holder of the 
accounts and not all of the holders of the accounts are the same.
    (c) Redeposited checks. Sections 229.10(c) and 229.12 do not apply 
to a check that has been returned unpaid and redeposited by the customer 
or the depositary bank. This exception does not apply--
    (1) To a check that has been returned due to a missing indorsement 
and redeposited after the missing indorsement has been obtained, if the 
reason for return indication on the check states that it was returned 
due to a missing indorsement; or
    (2) To a check that has been returned because it was post dated, if 
the reason for return indicated on the check states that it was returned 
because it was post dated, and if the check is no longer postdated when 
redeposited.
    (d) Repeated overdrafts. If any account or combination of accounts 
of a depositary bank's customer has been repeatedly overdrawn, then for 
a period of six months after the last such overdraft, Sec. Sec. 
229.10(c) and 229.12 do not apply to any of the accounts. A depositary 
bank may consider a customer's account to be repeatedly overdrawn if--
    (1) On six or more banking days within the preceding six months, the 
account balance is negative, or the account balance would have become 
negative if checks or other charges to the account had been paid; or
    (2) On two or more banking days within the preceding six months, the 
account balance is negative, or the account balance would have become 
negative, in the amount of $5,000 or more, if checks or other charges to 
the account had been paid.
    (e) Reasonable cause to doubt collectibility--(1) In general. 
Sections 229.10(c) and 229.12 do not apply to a check deposited in an 
account at a depositary bank if the depositary bank has reasonable cause 
to believe that the check is uncollectible from the paying bank. 
Reasonable cause to believe a check is uncollectible requires the 
existence of facts that would cause a well-grounded belief in the mind 
of a reasonable person. Such belief shall not be based on the fact that 
the check is of a particular class or is deposited by a particular class 
of persons. The reason for the bank's belief that the check is 
uncollectible shall be included in the notice required under paragraph 
(g) of this section.
    (2) Overdraft and returned check fees. A depositary bank that 
extends the time when funds will be available for

[[Page 849]]

withdrawal as described in paragraph (e)(1) of this section, and does 
not furnish the depositor with written notice at the time of deposit 
shall not assess any fees for any subsequent overdrafts (including use 
of a line of credit) or return of checks of other debits to the account, 
if--
    (i) The overdraft or return of the check would not have occurred 
except for the fact that the deposited funds were delayed under 
paragraph (e)(1) of this section; and
    (ii) The deposited check was paid by the paying bank.


Notwithstanding the foregoing, the depositary bank may assess an 
overdraft or returned check fee if it includes a notice concerning 
overdraft and returned check fees with the notice of exception required 
in paragraph (g) of this section and, when required, refunds any such 
fees upon the request of the customer. The notice must state that the 
customer may be entitled to a refund of overdraft or returned check fees 
that are assessed if the check subject to the exception is paid and how 
to obtain a refund.
    (f) Emergency conditions. Sections 229.10(c) and 229.12 do not apply 
to funds deposited by check in a depositary bank in the case of--
    (1) An interruption of communications or computer or other equipment 
facilities;
    (2) A suspension of payments by another bank;
    (3) A war; or
    (4) An emergency condition beyond the control of the depositary 
bank,


if the depositary bank exercises such diligence as the circumstances 
require.
    (g) Notice of exception--(1) In general. Subject to paragraphs 
(g)(2) and (g)(3) of this section, when a depositary bank extends the 
time when funds will be available for withdrawal based on the 
application of an exception contained in paragraphs (b) through (e) of 
this section, it must provide the depositor with a written notice.
    (i) The notice shall include the following information--
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account;
    (B) The date of the deposit;
    (C) The amount of the deposit that is being delayed;
    (D) The reason the exception was invoked; and
    (E) The time period within which the funds will be available for 
withdrawal.
    (ii) Timing of notice. The notice shall be provided to the depositor 
at the time of the deposit, unless the deposit is not made in person to 
an employee of the depositary bank, or, if the facts upon which a 
determination to invoke one of the exceptions in paragraphs (b) through 
(e) of this section to delay a deposit only become known to the 
depositary bank after the time of the deposit. If the notice is not 
given at the time of the deposit, the depositary bank shall mail or 
deliver the notice to the customer as soon as practicable, but no later 
than the first business day following the day the facts become known to 
the depositary bank, or the deposit is made, whichever is later.
    (2) One-time exception notice. In lieu of providing notice pursuant 
to paragraph (g)(1) of this section, a depositary bank that extends the 
time when the funds deposited in a nonconsumer account will be available 
for withdrawal based on an exception contained in paragraph (b) or (c) 
of this section may provide a single notice to the customer that 
includes the following information--
    (i) The reason(s) the exception may be invoked; and
    (ii) The time period within which deposits subject to the exception 
generally will be available for withdrawal.


This one-time notice shall be provided only if each type of exception 
cited in the notice will be invoked for most check deposits in the 
account to which the exception could apply. This notice shall be 
provided at or prior to the time notice must be provided under paragraph 
(g)(1)(ii) of this section.
    (3) Notice of repeated overdrafts exception. In lieu of providing 
notice pursuant to paragraph (g)(1) of this section, a depositary bank 
that extends the time when funds deposited in an account will be 
available for withdrawal based on the exception contained in paragraph 
(d) of this section may provide a notice to the customer for each time 
period during which the exception will be in effect. The notice shall 
include the following information--

[[Page 850]]

    (i) The account number of the customer;
    (ii) The fact that the availability of funds deposited in the 
customer's account will be delayed because the repeated overdrafts 
exception will be invoked;
    (iii) The time period within which deposits subject to the exception 
generally will be available for withdrawal; and
    (iv) The time period during which the exception will apply.


This notice shall be provided at or prior to the time notice must be 
provided under paragraph (g)(1)(ii) of this section and only if the 
exception cited in the notice will be invoked for most check deposits in 
the account.
    (4) Emergency conditions exception notice. When a depositary bank 
extends the time when funds will be available for withdrawal based on 
the application of the emergency conditions exception contained in 
paragraph (f) of this section, it must provide the depositor with notice 
in a reasonable form and within a reasonable time given the 
circumstances. The notice shall include the reason the exception was 
invoked and the time period within which funds shall be made available 
for withdrawal, unless the depositary bank, in good faith, does not know 
at the time the notice is given the duration of the emergency and, 
consequently, when the funds must be made available. The depositary bank 
is not required to provide a notice if the funds subject to the 
exception become available before the notice must be sent.
    (5) Record retention. A depositary bank shall retain a record, in 
accordance with Sec. 229.21(g), of each notice provided pursuant to its 
application of the reasonable cause exception under paragraph (e) of 
this section, together with a brief statement of the facts giving rise 
to the bank's reason to doubt the collectibility of the check.
    (h) Availability of deposits subject to exceptions. (1) If an 
exception contained in paragraphs (b) through (f) of this section 
applies, the depositary bank may extend the time periods established 
under Sec. Sec. 229.10(c) and 229.12 by a reasonable period of time.
    (2) If a depositary bank invokes an exception contained in 
paragraphs (b) through (e) of this section with respect to a check 
described in Sec. 229.10(c)(1) (i) through (v) or Sec. 229.10(c)(2), 
it shall make the funds available for withdrawal not later than a 
reasonable period after the day the funds would have been required to be 
made available had the check been subject to 229.12.
    (3) If a depositary bank invokes an exception under paragraph (f) of 
this section based on an emergency condition, the depositary bank shall 
make the funds available for withdrawal not later than a reasonable 
period after the emergency has ceased or the period established in 
Sec. Sec. 229.10(c) and 229.12, whichever is later.
    (4) For the purposes of this section, a ``reasonable period'' is an 
extension of up to one business day for checks described in Sec. 
229.10(c)(1)(vi), five business days for checks described in Sec. 
229.12(b) (1) through (4), and six business days for checks described in 
Sec. 229.12(c) (1) and (2) or Sec. 229.12(f). A longer extension may 
be reasonable, but the bank has the burden of so establishing.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989; Reg. CC, 55 FR 21855, May 30, 1990; 57 FR 3279, Jan. 29, 1992; 57 
FR 36598, Aug. 14, 1992; 60 FR 51671, Oct. 3, 1995; Reg. CC, 62 FR 
13809, Mar. 24, 1997; 69 FR 47310, Aug. 4, 2004]



Sec. 229.14  Payment of interest.

    (a) In general. A depositary bank shall begin to accrue interest or 
dividends on funds deposited in an interest-bearing account not later 
than the business day on which the depositary bank receives credit for 
the funds. For the purposes of this section, the depositary bank may--
    (1) Rely on the availability schedule of its Federal Reserve Bank, 
Federal Home Loan Bank, or correspondent bank to determine the time 
credit is actually received; and
    (2) Accrue interest or dividends on funds deposited in interest-
bearing accounts by checks that the depositary bank sends to paying 
banks or subsequent collecting banks for payment or collection based on 
the availability of funds the depositary bank receives from the paying 
or collecting banks.

[[Page 851]]

    (b) Special rule for credit unions. Paragraph (a) of this section 
does not apply to any account at a bank described in Sec. 229.2(e)(4), 
if the bank--
    (1) Begins the accrual of interest or dividends at a later date than 
the date described in paragraph (a) of this section with respect to all 
funds, including cash, deposited in the account; and
    (2) Provides notice of its interest or dividend payment policy in 
the manner required under Sec. 229.16(d).
    (c) Exception for checks returned unpaid. This subpart does not 
require a bank to pay interest or dividends on funds deposited by a 
check that is returned unpaid.



Sec. 229.15  General disclosure requirements.

    (a) Form of disclosures. A bank shall make the disclosures required 
by this subpart clearly and conspicuously in writing. Disclosures, other 
than those posted at locations where employees accept consumer deposits 
and ATMs and the notice on preprinted deposit slips, must be in a form 
that the customer may keep. The disclosures shall be grouped together 
and shall not contain any information not related to the disclosures 
required by this subpart. If contained in a document that sets forth 
other account terms, the disclosures shall be highlighted within the 
document by, for example, use of a separate heading.
    (b) Uniform reference to day of availability. In its disclosure, a 
bank shall describe funds as being available for withdrawal on ``the --
-------- business day after'' the day of deposit. In this calculation, 
the first business day is the business day following the banking day the 
deposit was received, and the last business day is the day on which the 
funds are made available.
    (c) Multiple accounts and multiple account holders. A bank need not 
give multiple disclosures to a customer that holds multiple accounts if 
the accounts are subject to the same availability policies. Similarly, a 
bank need not give separate disclosures to each customer on a jointly 
held account.
    (d) Dormant or inactive accounts. A bank need not give availability 
disclosures to a customer that holds a dormant or inactive account.



Sec. 229.16  Specific availability policy disclosure.

    (a) General. To meet the requirements of a specific availability 
policy disclosure under Sec. Sec. 229.17 and 229.18(d), a bank shall 
provide a disclosure describing the bank's policy as to when funds 
deposited in an account are available for withdrawal. The disclosure 
must reflect the policy followed by the bank in most cases. A bank may 
impose longer delays on a case-by-case basis or by invoking one of the 
exceptions in Sec. 229.l3, provided this is reflected in the 
disclosure.
    (b) Content of specific availability policy disclosure. The specific 
availability policy disclosure shall contain the following, as 
applicable--
    (1) A summary of the bank's availability policy;
    (2) A description of any categories of deposits or checks used by 
the bank when it delays availability (such as local or nonlocal checks); 
how to determine the category to which a particular deposit or check 
belongs; and when each category will be available for withdrawal 
(including a description of the bank's business days and when a deposit 
is considered received);\1\
---------------------------------------------------------------------------

    \1\ A bank that distinguishes in its disclosure between local and 
nonlocal checks based on the routing number on the check must disclose 
that certain checks, such as some credit union share drafts that are 
payable by one bank but payable through another bank, will be treated as 
local or nonlocal checks based upon the location of the bank by which 
they are payable and not on the basis of the location of the bank whose 
routing number appears on the check. A bank that makes funds from 
nonlocal checks available for withdrawal within the time periods 
required for local checks under Sec. Sec. 229.12 and 229.13 is not 
required to provide this disclosure on payable-through checks to its 
customers. The statement concerning payable-through checks must describe 
how the customer can determine whether these checks will be treated as 
local or nonlocal, or state that special rules apply to such checks and 
that the customer may ask about the availability of these checks.
---------------------------------------------------------------------------

    (3) A description of any of the exceptions in Sec. 229.13 that may 
be invoked by the bank, including the time following a deposit that 
funds generally will be

[[Page 852]]

available for withdrawal and a statement that the bank will notify the 
customer if the bank invokes one of the exceptions;
    (4) A description, as specified in paragraph (c)(1) of this section, 
of any case-by-case policy of delaying availability that may result in 
deposited funds being available for withdrawal later than the time 
periods stated in the bank's availability policy; and
    (5) A description of how the customer can differentiate between a 
proprietary and a nonproprietary ATM, if the bank makes funds from 
deposits at nonproprietary ATMs available for withdrawal later than 
funds from deposits at proprietary ATMs.
    (c) Longer delays on a case-by-case basis--(1) Notice in specific 
policy disclosure. A bank that has a policy of making deposited funds 
available for withdrawal sooner than required by this subpart may extend 
the time when funds are available up to the time periods allowed under 
this subpart on a case-by-case basis, provided the bank includes the 
following in its specific policy disclosure--
    (i) A statement that the time when deposited funds are available for 
withdrawal may be extended in some cases, and the latest time following 
a deposit that funds will be available for withdrawal;
    (ii) A statement that the bank will notify the customer if funds 
deposited in the customer's account will not be available for withdrawal 
until later than the time periods stated in the bank's availability 
policy; and
    (iii) A statement that customers should ask if they need to be sure 
about when a particular deposit will be available for withdrawal.
    (2) Notice at time of case-by-case delay--(i) In general. When a 
depositary bank extends the time when funds will be available for 
withdrawal on a case-by-case basis, it must provide the depositor with a 
written notice. The notice shall include the following information--
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account.
    (B) The date of the deposit;
    (C) The amount of the deposit that is being delayed; and
    (D) The day the funds will be available for withdrawal.
    (ii) Timing of notice. The notice shall be provided to the depositor 
at the time of the deposit, unless the deposit is not made in person to 
an employee of the depositary bank or the decision to extend the time 
when the deposited funds will be available is made after the time of the 
deposit. If notice is not given at the time of the deposit, the 
depositary bank shall mail or deliver the notice to the customer not 
later than the first business day following the banking day the deposit 
is made.
    (3) Overdraft and returned check fees. A depositary bank that 
extends the time when funds will be available for withdrawal on a case-
by-case basis and does not furnish the depositor with written notice at 
the time of deposit shall not assess any fees for any subsequent 
overdrafts (including use of a line of credit) or return of checks or 
other debits to the account, if--
    (i) The overdraft or return of the check or other debit would not 
have occurred except for the fact that the deposited funds were delayed 
under paragraph (c)(1) of this section; and
    (ii) The deposited check was paid by the paying bank.
    Notwithstanding the foregoing, the depositary bank may assess an 
overdraft or returned check fee if it includes a notice concerning 
overdraft and returned check fees with the notice required in paragraph 
(c)(2) of this section and, when required, refunds any such fees upon 
the request of the customer. The notice must state that the customer may 
be entitled to a refund of overdraft or returned check fees that are 
assessed if the check subject to the delay is paid and how to obtain a 
refund.
    (d) Credit union notice of interest payment policy. If a bank 
described in Sec. 229.2(e)(4) begins to accrue interest or dividends on 
all deposits made in an interest-bearing account, including cash 
deposits, at a later time than the day specified in Sec. 229.14(a), the 
bank's specific policy disclosures shall contain an

[[Page 853]]

explanation of when interest or dividends on deposited funds begin to 
accrue.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 53 
FR 44324, Nov. 2, 1988; Reg. CC, 54 FR 13850, Apr. 6, 1989; 60 FR 51671, 
Oct. 3, 1995; Reg. CC, 62 FR 13810, Mar. 24, 1997; 69 FR 47311, Aug. 4, 
2004]



Sec. 229.17  Initial disclosures.

    Before opening a new account, a bank shall provide a potential 
customer with the applicable specific availability policy disclosure 
described in Sec. 229.16.

[Reg. CC, 60 FR 51671, Oct. 3, 1995]



Sec. 229.18  Additional disclosure requirements.

    (a) Deposit slips. A bank shall include on all preprinted deposit 
slips furnished to its customers a notice that deposits may not be 
available for immediate withdrawal.
    (b) Locations where employees accept consumer deposits. A bank shall 
post in a conspicuous place in each location where its employees receive 
deposits to consumer accounts a notice that sets forth the time periods 
applicable to the availability of funds deposited in a consumer account.
    (c) Automated teller machines. (1) A depositary bank shall post or 
provide a notice at each ATM location that funds deposited in the ATM 
may not be available for immediate withdrawal.
    (2) A depositary bank that operates an off-premises ATM from which 
deposits are removed not more than two times each week, as described in 
Sec. 229.19(a)(4), shall disclose at or on the ATM the days on which 
deposits made at the ATM will be considered received.
    (d) Upon request. A bank shall provide to any person, upon oral or 
written request, a notice containing the applicable specific 
availability policy disclosure described in Sec. 229.l6.
    (e) Changes in policy. A bank shall send a notice to holders of 
consumer accounts at least 30 days before implementing a change to the 
bank's availability policy regarding such accounts, except that a change 
that expedites the availability of funds may be disclosed not later than 
30 days after implementation.



Sec. 229.19  Miscellaneous.

    (a) When funds are considered deposited. For the purposes of this 
subpart--
    (1) Funds deposited at a staffed facility, ATM, or contractual 
branch are considered deposited when they are received at the staffed 
facility, ATM, or contractual branch;
    (2) Funds mailed to the depositary bank are considered deposited on 
the day they are received by the depositary bank;
    (3) Funds deposited to a night depository, lock box, or similar 
facility are considered deposited on the day on which the deposit is 
removed from such facility and is available for processing by the 
depositary bank;
    (4) Funds deposited at an ATM that is not on, or within 50 feet of, 
the premises of the depositary bank are considered deposited on the day 
the funds are removed from the ATM, if funds normally are removed from 
the ATM not more than two times each week; and
    (5) Funds may be considered deposited on the next banking day, in 
the case of funds that are deposited--
    (i) On a day that is not a banking day for the depositary bank; or
    (ii) After a cut-off hour set by the depositary bank for the receipt 
of deposits of 2:00 p.m. or later, or, for the receipt of deposits at 
ATMs, contractual branches, or off-premise facilities, of 12:00 noon or 
later. Different cut-off hours later than these times may be established 
for the receipt of different types of deposits, or receipt of deposits 
at different locations.
    (b) Availability at start of business day. Except as otherwise 
provided in Sec. 229.12(d), if any provision of this subpart requires 
that funds be made available for withdrawal on any business day, the 
funds shall be available for withdrawal by the later of:
    (1) 9:00 a.m. (local time of the depositary bank); or
    (2) The time the depositary bank's teller facilities (including 
ATMs) are available for customer account withdrawals.
    (c) Effect on policies of depositary bank. This part does not--
    (1) Prohibit a depositary bank from making funds available to a 
customer for withdrawal in a shorter period of

[[Page 854]]

time than the time required by this subpart;
    (2) Affect a depositary bank's right--
    (i) To accept or reject a check for deposit;
    (ii) To revoke any settlement made by the depositary bank with 
respect to a check accepted by the bank for deposit, to charge back the 
customer's account for the amount of a check based on the return of the 
check or receipt of a notice of nonpayment of the check, or to claim a 
refund of such credit; and
    (iii) To charge back funds made available to its customer for an 
electronic payment for which the bank has not received payment in 
actually and finally collected funds;
    (3) Require a depositary bank to open or otherwise to make its 
facilities available for customer transactions on a given business day; 
or
    (4) Supersede any policy of a depositary bank that limits the amount 
of cash a customer may withdraw from its account on any one day, if that 
policy--
    (i) Is not dependent on the time the funds have been deposited in 
the account, as long as the funds have been on deposit for the time 
period specified in Sec. Sec. 229.10, 229.12, or 229.13; and
    (ii) In the case of withdrawals made in person to an employee of the 
depositary bank--
    (A) Is applied without discrimination to all customers of the bank; 
and
    (B) Is related to security, operating, or bonding requirements of 
the depositary bank.
    (d) Use of calculated availability. A depositary bank may provide 
availability to its nonconsumer accounts based on a sample of checks 
that represents the average composition of the customer's deposits, if 
the terms for availability based on the sample are equivalent to or more 
prompt than the availability requirements of this subpart.
    (e) Holds on other funds. (1) A depositary bank that receives a 
check for deposit in an account may not place a hold on any funds of the 
customer at the bank, where--
    (i) The amount of funds that are held exceeds the amount of the 
check; or
    (ii) The funds are not made available for withdrawal within the 
times specified in Sec. Sec. 229.10, 229.12, and 229.13.
    (2) A depositary bank that cashes a check for a customer over the 
counter, other than a check drawn on the depositary bank, may not place 
a hold on funds in an account of the customer at the bank, if--
    (i) The amount of funds that are held exceeds the amount of the 
check; or
    (ii) The funds are not made available for withdrawal within the 
times specified in Sec. Sec. 229.10, 229.12, and 229.13.
    (f) Employee training and compliance. Each bank shall establish 
procedures to ensure that the bank complies with the requirements of 
this subpart, and shall provide each employee who performs duties 
subject to the requirements of this subpart with a statement of the 
procedures applicable to that employee.
    (g) Effect of merger transaction--(1) In general. For purposes of 
this subpart, except for the purposes of the new accounts exception of 
Sec. 229.13(a), and when funds are considered deposited under Sec. 
229.19(a), two or more banks that have engaged in a merger transaction 
may be considered to be separate banks for a period of one year 
following the consummation of the merger transaction.
    (2) Merger transactions on or after July 1, 1998, and before March 
1, 2000. If banks have consummated a merger transaction on or after July 
1, 1998, and before March 1, 2000, the merged banks may be considered 
separate banks until March 1, 2001.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended by 54 FR 13850, Apr. 6, 
1989; 60 FR 51671, Oct. 3, 1995; 62 FR 13810, Mar. 24, 1997; 64 FR 
14577, Mar. 26, 1999]



Sec. 229.20  Relation to state law.

    (a) In general. Any provision of a law or regulation of any state in 
effect on or before September 1, 1989, that requires funds deposited in 
an account at a bank chartered by the state to be made available for 
withdrawal in a shorter time than the time provided in subpart B, and, 
in connection therewith, subpart A, shall--

[[Page 855]]

    (1) Supersede the provisions of the EFA Act and subpart B, and, in 
connection therewith, subpart A, to the extent the provisions relate to 
the time by which funds deposited or received for deposit in an account 
are available for withdrawal; and
    (2) Apply to all federally insured banks located within the state.


No amendment to a state law or regulation governing the availability of 
funds that becomes effective after September 1, 1989, shall supersede 
the EFA Act and subpart B, and, in connection therewith, subpart A, but 
unamended provisions of state law shall remain in effect.
    (b) Preemption of inconsistent law. Except as provided in paragraph 
(a), the EFA Act and subpart B, and, in connection therewith, subpart A, 
supersede any provision of inconsistent state law.
    (c) Standards for preemption. A provision of a state law in effect 
on or before September 2, 1989, is not inconsistent with the EFA Act, or 
subpart B, or in connection therewith, subpart A, if it requires that 
funds shall be available in a shorter period of time than the time 
provided in this subpart. Inconsistency with the EFA Act and subpart B, 
and in connection therewith, subpart A, may exist when state law--
    (1) Permits a depositary bank to make funds deposited in an account 
by cash, electronic payment, or check available for withdrawal in a 
longer period of time than the maximum period of time permitted under 
subpart B, and, in connection therewith, subpart A; or
    (2) Provides for disclosures or notices concerning funds 
availability relating to accounts.
    (d) Preemption determinations. The Board may determine, upon the 
request of any state, bank, or other interested party, whether the EFA 
Act and subpart B, and, in connection therewith, subpart A, preempt 
provisions of state laws relating to the availability of funds.
    (e) Procedures for preemption determinations. A request for a 
preemption determination shall include the following--
    (1) A copy of the full text of the state law in question, including 
any implementing regulations or judicial interpretations of that law; 
and
    (2) A comparison of the provisions of state law with the 
corresponding provisions in the EFA Act and subparts A and B of this 
part, together with a discussion of the reasons why specific provisions 
of state law are either consistent or inconsistent with corresponding 
sections of the EFA Act and subparts A and B of this part.
    A request for a preemption determination shall be addressed to the 
Secretary, Board of Governors of the Federal Reserve System.

[53 FR 19433, May 27, 1988, as amended at 69 FR 47311, Aug. 4, 2004]



Sec. 229.21  Civil liability.

    (a) Civil liability. A bank that fails to comply with any 
requirement imposed under subpart B, and in connection therewith, 
subpart A, of this part or any provision of state law that supersedes 
any provision of subpart B, and in connection therewith, subpart A, with 
respect to any person is liable to that person in an amount equal to the 
sum of--
    (1) Any actual damage sustained by that person as a result of the 
failure;
    (2) Such additional amount as the court may allow, except that--
    (i) In the case of an individual action, liability under this 
paragraph shall not be less than $100 nor greater than $1,000; and
    (ii) In the case of a class action--
    (A) No minimum recovery shall be applicable to each member of the 
class; and
    (B) The total recovery under this paragraph in any class action or 
series of class actions arising out of the same failure to comply by the 
same depositary bank shall not be more than the lesser of $500,000 or 1 
percent of the net worth of the bank involved; and
    (3) In the case of a successful action to enforce the foregoing 
liability, the costs of the action, together with a reasonable 
attorney's fee as determined by the court.
    (b) Class action awards. In determining the amount of any award in 
any class action, the court shall consider, among other relevant 
factors--
    (1) The amount of any damages awarded;

[[Page 856]]

    (2) The frequency and persistence of failures of compliance;
    (3) The resources of the bank;
    (4) The number of persons adversely affected; and
    (5) The extent to which the failure of compliance was intentional.
    (c) Bona fide errors--(1) General rule. A bank is not liable in any 
action brought under this section for a violation of this subpart if the 
bank demonstrates by a preponderance of the evidence that the violation 
was not intentional and resulted from a bona fide error, notwithstanding 
the maintenance of procedures reasonably adapted to avoid any such 
error.
    (2) Examples. Examples of a bona fide error include clerical, 
calculation, computer malfunction and programming, and printing errors, 
except that an error of legal judgment with respect to the bank's 
obligation under this subpart is not a bona fide error.
    (d) Jurisdiction. Any action under this section may be brought in 
any United States district court or in any other court of competent 
jurisdiction, and shall be brought within one year after the date of the 
occurrence of the violation involved.
    (e) Reliance on Board rulings. No provision of this subpart imposing 
any liability shall apply to any act done or omitted in good faith in 
conformity with any rule, regulation, or interpretation thereof by the 
Board, regardless of whether such rule, regulation, or interpretation is 
amended, rescinded, or determined by judicial or other authority to be 
invalid for any reason after the act or omission has occurred.
    (f) Exclusions. This section does not apply to claims that arise 
under subpart C of this part or to actions for wrongful dishonor.
    (g) Record retention. (1) A bank shall retain evidence of compliance 
with the requirements imposed by this subpart for not less than two 
years. Records may be stored by use of microfiche, microfilm, magnetic 
tape, or other methods capable of accurately retaining and reproducing 
information.
    (2) If a bank has actual notice that it is being investigated, or is 
subject to an enforcement proceeding by an agency charged with 
monitoring that bank's compliance with the EFA Act and this subpart, or 
has been served with notice of an action filed under this section, it 
shall retain the records pertaining to the action or proceeding pending 
final disposition of the matter, unless an earlier time is allowed by 
order of the agency or court.

[53 FR 19433, May 27, 1988, as amended at 69 FR 47311, Aug. 4, 2004]



                     Subpart C_Collection of Checks



Sec. 229.30  Paying bank's responsibility for return of checks.

    (a) Return of checks. If a paying bank determines not to pay a 
check, it shall return the check in an expeditious manner as provided in 
either paragraph (a)(1) or (a)(2) of this section.
    (1) Two-day/four-day test. A paying bank returns a check in an 
expeditious manner if it sends the returned check in a manner such that 
the check would normally be received by the depositary bank not later 
than 4:00 p.m. (local time of the depositary bank) of--
    (i) The second business day following the banking day on which the 
check was presented to the paying bank, if the paying bank is located in 
the same check processing region as the depositary bank; or
    (ii) The fourth business day following the banking day on which the 
check was presented to the paying bank, if the paying bank is not 
located in the same check processing region as the depositary bank.


If the last business day on which the paying bank may deliver a returned 
check to the depositary bank is not a banking day for the depositary 
bank, the paying bank meets the two-day/four-day test if the returned 
check is received by the depositary bank on or before the depositary 
bank's next banking day.
    (2) Forward collection test. A paying bank also returns a check in 
an expeditious manner if it sends the returned check in a manner that a 
similarly situated bank would normally handle a check--
    (i) Of similar amount as the returned check;
    (ii) Drawn on the depositary bank; and

[[Page 857]]

    (iii) Deposited for forward collection in the similarly situated 
bank by noon on the banking day following the banking day on which the 
check was presented to the paying bank.


Subject to the requirement for expeditious return, a paying bank may 
send a returned check to the depositary bank, or to any other bank 
agreeing to handle the returned check expeditiously under Sec. 
229.31(a). A paying bank may convert a check to a qualified returned 
check. A qualified returned check shall be encoded in magnetic ink with 
the routing number of the depositary bank, the amount of the returned 
check, and a ``2'' in the case of an original check (or a ``5'' in the 
case of a substitute check) in position 44 of the qualified return MICR 
line as a return identifier. A qualified returned original check shall 
be encoded in accordance with ANS X9.13, and a qualified returned 
substitute check shall be encoded in accordance with ANS X9.100-140. 
This paragraph does not affect a paying bank's responsibility to return 
a check within the deadlines required by the U.C.C., Regulation J (12 
CFR part 210), or Sec. 229.30(c).
    (b) Unidentifiable depositary bank. A paying bank that is unable to 
identify the depositary bank with respect to a check may send the 
returned check to any bank that handled the check for forward collection 
even if that bank does not agree to handle the check expeditiously under 
Sec. 229.31(a). A paying bank sending a returned check under this 
paragraph to a bank that handled the check for forward collection must 
advise the bank to which the check is sent that the paying bank is 
unable to identify the depositary bank. The expeditious return 
requirements in Sec. 229.30(a) do not apply to the paying bank's return 
of a check under this paragraph.
    (c) Extension of deadline. The deadline for return or notice of 
nonpayment under the U.C.C. or Regulation J (12 CFR part 210), or Sec. 
229.36(f)(2) is extended to the time of dispatch of such return or 
notice of nonpayment where a paying bank uses a means of delivery that 
would ordinarily result in receipt by the bank to which it is sent--
    (1) On or before the receiving bank's next banking day following the 
otherwise applicable deadline by the earlier of the close of that 
banking day or a cutoff hour of 2 p.m. or later set by the receiving 
bank under U.C.C. 4-108, for all deadlines other than those described in 
paragraph (c)(2) of this section; this deadline is extended further if a 
paying bank uses a highly expeditious means of transportation, even if 
this means of transportation would ordinarily result in delivery after 
the receiving bank's next cutoff hour or banking day referred to above; 
or
    (2) Prior to the cut-off hour for the next processing cycle (if sent 
to a returning bank), or on the next banking day (if sent to the 
depositary bank), for a deadline falling on a Saturday that is a banking 
day (as defined in the applicable U.C.C.) for the paying bank.
    (d) Identification of returned check. A paying bank returning a 
check shall clearly indicate on the front of the check that it is a 
returned check and the reason for return. If the check is a substitute 
check, the paying bank shall place this information within the image of 
the original check that appears on the front of the substitute check.
    (e) Depositary bank without accounts. The expeditious return 
requirements of paragraph (a) of this section do not apply to checks 
deposited in a depositary bank that does not maintain accounts.
    (f) Notice in lieu of return. If a check is unavailable for return, 
the paying bank may send in its place a copy of the front and back of 
the returned check, or, if no such copy is available, a written notice 
of nonpayment containing the information specified in Sec. 229.33(b). 
The copy or notice shall clearly state that it constitutes a notice in 
lieu of return. A notice in lieu of return is considered a returned 
check subject to the expeditious return requirements of this section and 
to the other requirements of this subpart.
    (g) Reliance on routing number. A paying bank may return a returned 
check based on any routing number designating the depositary bank 
appearing

[[Page 858]]

on the returned check in the depositary bank's indorsement.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 
Reg. CC, 55 FR 21855, May 30, 1990; 57 FR 46972, Oct. 14, 1993; Reg. CC, 
62 FR 13810, Mar. 24, 1997; 69 FR 47311, Aug. 4, 2004]

    Effective Date Note: At 82 FR 27579, June 15, 2017, Sec. 229.30 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.30  Electronic checks and electronic information.

    (a) Checks under this subpart. Electronic checks and electronic 
returned checks are subject to this subpart as if they were checks or 
returned checks, except where ``paper check'' or ``paper returned 
check'' is specified. For the purposes of this subpart, the term 
``check'' or ``returned check'' as used in Subpart A includes 
``electronic check'' or ``electronic returned check,'' except where 
``paper check'' or ``paper returned check'' is specified.
    (b) Writings. If a bank is required to provide information in 
writing under this subpart, the bank may satisfy that requirement by 
providing the information electronically if the receiving bank agrees to 
receive that information electronically.



Sec. 229.31  Returning bank's responsibility for return of checks.

    (a) Return of checks. A returning bank shall return a returned check 
in an expeditious manner as provided in either paragraph (a)(1) or 
(a)(2) of this section.
    (1) Two-day/four-day test. A returning bank returns a check in an 
expeditious manner if it sends the returned check in a manner such that 
the check would normally be received by the depositary bank not later 
than 4:00 p.m. (local time) of--
    (i) The second business day following the banking day on which the 
check was presented to the paying bank if the paying bank is located in 
the same check processing region as the depositary bank; or
    (ii) The fourth business day following the banking day on which the 
check was presented to the paying bank if the paying bank is not located 
in the same check processing region as the depositary bank.


If the last business day on which the returning bank may deliver a 
returned check to the depositary bank is not a banking day for the 
depositary bank, the returning bank meets this requirement if the 
returned check is received by the depositary bank on or before the 
depositary bank's next banking day.
    (2) Forward collection test. A returning bank also returns a check 
in an expeditious manner if it sends the returned check in a manner that 
a similarly situated bank would normally handle a check--
    (i) Of similar amount as the returned check;
    (ii) Drawn on the depositary bank; and
    (iii) Received for forward collection by the similarly situated bank 
at the time the returning bank received the returned check, except that 
a returning bank may set a cut-off hour for the receipt of returned 
checks that is earlier than the similarly situated bank's cut-off hour 
for checks received for forward collection, if the cut-off hour is not 
earlier than 2:00 p.m.


Subject to the requirement for expeditious return, the returning bank 
may send the returned check to the depositary bank, or to any bank 
agreeing to handle the returned check expeditiously under Sec. 
229.31(a). The returning bank may convert the returned check to a 
qualified returned check. A qualified returned check shall be encoded in 
magnetic ink with the routing number of the depositary bank, the amount 
of the returned check, and a ``2'' in the case of an original check (or 
a ``5'' in the case of a substitute check) in position 44 of the 
qualified return MICR line as a return identifier. A qualified returned 
original check shall be encoded in accordance with ANS X9.13, and a 
qualified returned substitute check shall be encoded in accordance with 
ANS X9.100-140. The time for expeditious return under the forward 
collection test, and the deadline for return under the U.C.C. and 
Regulation J (12 CFR part 210), are extended by one business day if the 
returning bank converts a returned check to a qualified returned check. 
This extension does not apply to the two-day/four-day test specified in 
paragraph (a)(1) of this section or when a returning bank is returning a 
check directly to the depositary bank.

[[Page 859]]

    (b) Unidentifiable depositary bank. A returning bank that is unable 
to identify the depositary bank with respect to a returned check may 
send the returned check to--
    (1) Any collecting bank that handled the check for forward 
collection if the returning bank was not a collecting bank with respect 
to the returned check; or
    (2) A prior collecting bank, if the returning bank was a collecting 
bank with respect to the returned check;


even if that collecting bank does not agree to handle the returned check 
expeditiously under Sec. 229.31(a). A returning bank sending a returned 
check under this paragraph must advise the bank to which the check is 
sent that the returning bank is unable to identify the depositary bank. 
The expeditious return requirements in paragraph (a) of this section do 
not apply to return of a check under this paragraph. A returning bank 
that receives a returned check from a paying bank under Sec. 229.30(b), 
or from a returning bank under this paragraph, but that is able to 
identify the depositary bank, must thereafter return the check 
expeditiously to the depositary bank.
    (c) Settlement. A returning bank shall settle with a bank sending a 
returned check to it for return by the same means that it settles or 
would settle with the sending bank for a check received for forward 
collection drawn on the depositary bank. This settlement is final when 
made.
    (d) Charges. A returning bank may impose a charge on a bank sending 
a returned check for handling the returned check.
    (e) Depositary bank without accounts. The expeditious return 
requirements of paragraph (a) of this section do not apply to checks 
deposited with a depositary bank that does not maintain accounts.
    (f) Notice in lieu of return. If a check is unavailable for return, 
the returning bank may send in its place a copy of the front and back of 
the returned check, or, if no copy is available, a written notice of 
nonpayment containing the information specified in Sec. 229.33(b). The 
copy or notice shall clearly state that it constitutes a notice in lieu 
of return. A notice in lieu of return is considered a returned check 
subject to the expeditious return requirements of this section and to 
the other requirements of this subpart.
    (g) Reliance on routing number. A returning bank may return a 
returned check based on any routing number designating the depositary 
bank appearing on the returned check in the depositary bank's 
indorsement or in magnetic ink on a qualified returned check.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 
Reg. CC, 54 FR 13850, Apr. 6, 1989; 69 FR 47311, Aug. 4, 2004]

    Effective Date Note: At 82 FR 27579, June 15, 2017, Sec. 229.31 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.31  Paying bank's responsibility for return of checks and 
          notices of nonpayment.

    (a) Return of checks. (1) Subject to the requirement of expeditious 
return under paragraph (b) of this section, a paying bank may send a 
returned check to the depositary bank, to any other bank agreeing to 
handle the returned check, or as provided in paragraph (a)(2) of this 
section.
    (2) A paying bank that is unable to identify the depositary bank 
with respect to a check may send the returned check to any bank that 
handled the check for forward collection and must advise the bank to 
which the check is sent that the paying bank is unable to identify the 
depositary bank.
    (3) A paying bank may convert a check to a qualified returned check. 
A qualified returned check shall be encoded in magnetic ink with the 
routing number of the depositary bank, the amount of the returned check, 
and a ``2'' in the case of an original check (or a ``5'' in the case of 
a substitute check) in position 44 of the qualified return MICR line as 
a return identifier. A qualified returned original check shall be 
encoded in accordance with ANS X9.13, and a qualified returned 
substitute check shall be encoded in accordance with ANS X9.100-140.
    (4) Except as provided in paragraph (g) of this section, this 
section does not affect a paying bank's responsibility to return a check 
within the deadlines required by the UCC or Regulation J (12 CFR part 
210).
    (b) Expeditious return of checks. (1) Except as provided in 
paragraph (d) of this section, if a paying bank determines not to pay a 
check, it shall return the check in an expeditious manner such that the 
check would normally be received by the depositary bank not

[[Page 860]]

later than 2 p.m. (local time of the depositary bank) on the second 
business day following the banking day on which the check was presented 
to the paying bank.
    (2) If the second business day following the banking day on which 
the check was presented to the paying bank is not a banking day for the 
depositary bank, the paying bank satisfies the expeditious return 
requirement if it sends the returned check in a manner such that the 
depositary bank would normally receive the returned check not later than 
2 p.m. (local time of the depositary bank) on the depositary bank's next 
banking day.
    (c) Notice of nonpayment. (1) If a paying bank determines not to pay 
a check in the amount of $5,000 or more, it shall provide notice of 
nonpayment such that the notice would normally be received by the 
depositary bank not later than 2 p.m. (local time of the depositary 
bank) on the second business day following the banking day on which the 
check was presented to the paying bank. If the day the paying bank is 
required to provide notice is not a banking day for the depositary bank, 
receipt of notice not later than 2 p.m. (local time of the depositary 
bank) on the depositary bank's next banking day constitutes timely 
notice. Notice may be provided by any reasonable means, including the 
returned check, a writing (including a copy of the check), or telephone.
    (2)(i) To the extent available to the paying bank, notice must 
include the information contained in the check's MICR line when the 
check is received by the paying bank, as well as--
    (A) Name of the payee(s);
    (B) Amount;
    (C) Date of the indorsement of the depositary bank;
    (D) The bank name, routing number, and trace or sequence number 
associated with the indorsement of the depositary bank; and
    (E) Reason for nonpayment.
    (ii) If the paying bank is not sure of the accuracy of an item of 
information, it shall include the information required by this paragraph 
to the extent possible, and identify any item of information for which 
the bank is not sure of the accuracy.
    (iii) The notice may include other information from the check that 
may be useful in identifying the check being returned and the customer.
    (d) Exceptions to the expeditious return of checks and notice of 
nonpayment requirements. The expeditious return and notice of nonpayment 
requirements of paragraphs (b) and (c) of this section do not apply if--
    (1) The check is deposited in a depositary bank that is not subject 
to subpart B of this part; or
    (2) A paying bank is unable to identify the depositary bank with 
respect to the check.
    (e) Identification of returned check. A paying bank returning a 
check shall clearly indicate on the front of the check that it is a 
returned check and the reason for return. If the paying bank is 
returning a substitute check or an electronic returned check, the paying 
bank shall include this information such that the information would be 
retained on any subsequent substitute check.
    (f) Notice in Lieu of Return. If a check is unavailable for return, 
the paying bank may send in its place a copy of the front and back of 
the returned check, or, if no such copy is available, a written notice 
of nonpayment containing the information specified in paragraph (c)(2) 
of this section. The copy or written notice shall clearly state that it 
constitutes a notice in lieu of return. A notice in lieu of return is 
considered a returned check subject to the requirements of this subpart.
    (g) Extension of deadline. The deadline for return or notice of 
dishonor or nonpayment under the UCC or Regulation J (12 CFR part 210), 
or Sec. 229.36(d)(3) and (4) is extended to the time of dispatch of 
such return or notice if the depositary bank (or the receiving bank, if 
the depositary bank is unidentifiable) receives the returned check or 
notice--
    (1) On or before the depositary bank's (or receiving bank's) next 
banking day following the otherwise applicable deadline by the earlier 
of the close of that banking day or a cutoff hour of 2 p.m. (local time 
of the depositary bank or receiving bank) or later set by the depositary 
bank (or receiving bank) under UCC 4-108, for all deadlines other than 
those described in paragraph (g)(2) of this section; or
    (2) Prior to the cut-off hour for the next processing cycle (if sent 
to a returning bank), or on the next banking day (if sent to the 
depositary bank), for a deadline falling on a Saturday that is a banking 
day (as defined in the UCC) for the paying bank.
    (h) Payable-through and payable-at checks. A check payable at or 
through a paying bank is considered to be drawn on that bank for 
purposes of the expeditious return and notice of nonpayment requirements 
of this subpart.
    (i) Reliance on routing number. A paying bank may return a returned 
check based on any routing number designating the depositary bank 
appearing on the returned check in the depositary bank's indorsement.



Sec. 229.32  Depositary bank's responsibility for returned checks.

    (a) Acceptance of returned checks. A depositary bank shall accept 
returned checks and written notices of nonpayment
    (1) At a location at which presentment of checks for forward 
collection

[[Page 861]]

is requested by the depositary bank; and
    (2) (i) At a branch, head office, or other location consistent with 
the name and address of the bank in its indorsement on the check;
    (ii) If no address appears in the indorsement, at a branch or head 
office associated with the routing number of the bank in its indorsement 
on the check;
    (iii) If the address in the indorsement is not in the same check 
processing region as the address associated with the routing number of 
the bank in its indorsement on the check, at a location consistent with 
the address in the indorsement and at a branch or head office associated 
with the routing number in the bank's indorsement; or
    (iv) If no routing number or address appears in its indorsement on 
the check, at any branch or head office of the bank.


A depositary bank may require that returned checks be separated from 
forward collection checks.
    (b) Payment. A depositary bank shall pay the returning or paying 
bank returning the check to it for the amount of the check prior to the 
close of business on the banking day on which it received the check 
(``payment date'') by--
    (1) Debit to an account of the depositary bank on the books of the 
returning or paying bank;
    (2) Cash;
    (3) Wire transfer; or
    (4) Any other form of payment acceptable to the returning or paying 
bank;


provided that the proceeds of the payment are available to the returning 
or paying bank in cash or by credit to an account of the returning or 
paying bank on or as of the payment date. If the payment date is not a 
banking day for the returning or paying bank or the depositary bank is 
unable to make the payment on the payment date, payment shall be made by 
the next day that is a banking day for the returning or paying bank. 
These payments are final when made.
    (c) Misrouted returned checks and written notices of nonpayment. If 
a bank receives a returned check or written notice of nonpayment on the 
basis that it is the depositary bank, and the bank determines that it is 
not the depositary bank with respect to the check or notice, it shall 
either promptly send the returned check or notice to the depositary bank 
directly or by means of a returning bank agreeing to handle the returned 
check expeditiously under Sec. 229.31(a), or send the check or notice 
back to the bank from which it was received.
    (d) Charges. A depositary bank may not impose a charge for accepting 
and paying checks being returned to it.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989]

    Effective Date Note: At 82 FR 27580, June 15, 2017, Sec. 229.32 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.32  Returning bank's responsibility for return of checks.

    (a) Return of checks. (1) Subject to the requirement of expeditious 
return under paragraph (b) of this section, a returning bank may send a 
returned check to the depositary bank, to any other bank agreeing to 
handle the returned check, or as provided in paragraph (a)(2) of this 
section.
    (2) A returning bank that is unable to identify the depositary bank 
with respect to a check may send the returned check to any collecting 
bank that handled the returned check for forward collection if the 
returning bank was not a collecting bank with respect to the returned 
check, or to a prior collecting bank, if the returning bank was a 
collecting bank with respect to the returned check. A returning bank 
sending a returned check under this paragraph to a bank must advise the 
bank to which the returned check is sent that the returning bank is 
unable to identify the depositary bank.
    (3) A returning bank may convert a check to a qualified returned 
check. A qualified returned check shall be encoded in magnetic ink with 
the routing number of the depositary bank, the amount of the returned 
check, and a ``2'' in the case of an original check (or a ``5'' in the 
case of a substitute check) in position 44 of the qualified return MICR 
line as a return identifier. A qualified returned original check shall 
be encoded in accordance with ANS X9.13, and a qualified returned 
substitute check shall be encoded in accordance with ANS X9.100-140.
    (b) Expeditious return of checks. (1) Except as provided in 
paragraph (c) of this section, a returning bank shall return a returned 
check in an expeditious manner such that the check would normally be 
received by the depositary bank not later than 2 p.m. (local

[[Page 862]]

time of the depositary bank) on the second business day following the 
banking day on which the check was presented to the paying bank.
    (2) If the second business day following the banking day on which 
the check was presented to the paying bank is not a banking day for the 
depositary bank, the returning bank satisfies the expeditious return 
requirement if it sends the returned check in a manner such that the 
depositary bank would normally receive the returned check not later than 
2 p.m. (local time of the depositary bank) on the depositary bank's next 
banking day.
    (c) Exceptions to the expeditious return of checks. The expeditious 
return requirement of paragraph (b) of this section does not apply if--
    (1) The check is deposited in a depositary bank that is not subject 
to subpart B of this part;
    (2) A paying bank is unable to identify the depositary bank with 
respect to the check; or
    (3) The bank handles a misrouted returned check pursuant to Sec. 
229.33(f).
    (d) Notice in Lieu of Return. If a check is unavailable for return, 
the returning bank may send in its place a copy of the front and back of 
the returned check, or, if no such copy is available, a written notice 
of nonpayment containing the information specified in Sec. 229.31(c). 
The copy or written notice shall clearly state that it constitutes a 
notice in lieu of return. A notice in lieu of return is considered a 
returned check subject to the requirements of this section and the other 
requirements of this subpart.
    (e) Settlement. A returning bank shall settle with a bank sending a 
returned check to it for return by the same means that it settles or 
would settle with the sending bank for a check received for forward 
collection drawn on the depositary bank. This settlement is final when 
made.
    (f) Charges. A returning bank may impose a charge on a bank sending 
a returned check for handling the returned check.
    (g) Reliance on routing number. A returning bank may return a 
returned check based on any routing number designating the depositary 
bank appearing on the returned check in the depositary bank's 
indorsement or in magnetic ink on a qualified returned check.



Sec. 229.33  Notice of nonpayment.

    (a) Requirement. If a paying bank determines not to pay a check in 
the amount of $2,500 or more, it shall provide notice of nonpayment such 
that the notice is received by the depositary bank by 4:00 p.m. (local 
time) on the second business day following the banking day on which the 
check was presented to the paying bank. If the day the paying bank is 
required to provide notice is not a banking day for the depositary bank, 
receipt of notice on the depositary bank's next banking day constitutes 
timely notice. Notice may be provided by any reasonable means, including 
the returned check, a writing (including a copy of the check), 
telephone, Fedwire, telex, or other form of telegraph.
    (b) Content of notice. Notice must include the--
    (1) Name and routing number of the paying bank;
    (2) Name of the payee(s);
    (3) Amount;
    (4) Date of the indorsement of the depositary bank;
    (5) Account number of the customer(s) of the depositary bank;
    (6) Branch name or number of the depositary bank from its 
indorsement;
    (7) Trace number associated with the indorsement of the depositary 
bank; and
    (8) Reason for nonpayment.


The notice may include other information from the check that may be 
useful in identifying the check being returned and the customer, and, in 
the case of a written notice, must include the name and routing number 
of the depositary bank from its indorsement. If the paying bank is not 
sure of an item of information, it shall include the information 
required by this paragraph to the extent possible, and identify any item 
of information for which the bank is not sure of the accuracy.
    (c) Acceptance of notice. The depositary bank shall accept notices 
during its banking day--
    (1) Either at the telephone or telegraph number of its return check 
unit indicated in the indorsement, or, if no such number appears in the 
indorsement or if the number is illegible, at the general purpose 
telephone or telegraph number of its head office or the branch indicated 
in the indorsement; and
    (2) At any other number held out by the bank for receipt of notice 
of nonpayment, and, in the case of written notice, as specified in Sec. 
229.32(a).
    (d) Notification to customer. If the depositary bank receives a 
returned check or notice of nonpayment, it shall

[[Page 863]]

send or give notice to its customer of the facts by midnight of the 
banking day following the banking day on which it received the returned 
check or notice, or within a longer reasonable time.
    (e) Depositary bank without accounts. The requirements of this 
section do not apply to checks deposited in a depositary bank that does 
not maintain accounts.

[53 FR 19433, May 27, 1988, as amended at 69 FR 47311, Aug. 4, 2004]

    Effective Date Note: At 82 FR 27580, June 15, 2017, Sec. 229.33 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.33  Depositary bank's responsibility for returned checks and 
          notices of nonpayment.

    (a) Right to assert claim. (1) A paying bank or returning bank may 
be liable to a depositary bank under Sec. 229.38 for failing to return 
a check in an expeditious manner only if the depositary bank has 
arrangements in place such that the paying bank or returning bank could 
return a returned check to the depositary bank electronically, directly 
or indirectly, by commercially reasonable means.
    (2) For purposes of paragraph (a)(1) of this section, the depositary 
bank that has asserted a claim has the burden of proof for demonstrating 
that the depositary bank's arrangements meet the standard of paragraph 
(a)(1).
    (b) Acceptance of electronic returned checks and electronic notices 
of nonpayment. A depositary bank's agreement with the transferor bank 
governs the terms under which the depositary bank will accept electronic 
returned checks and electronic written notices of nonpayment.
    (c) Acceptance of paper returned checks and paper notices of 
nonpayment. (1) A depositary bank shall accept paper returned checks and 
paper notices of nonpayment during its banking day--
    (i) At a location, if any, at which presentment of paper checks for 
forward collection is requested by the depositary bank; and
    (ii)(A) At a branch, head office, or other location consistent with 
the name and address of the bank in its indorsement on the check;
    (B) If no address appears in the indorsement, at a branch or head 
office associated with the routing number of the bank in its indorsement 
on the check; or
    (C) If no routing number or address appears in its indorsement on 
the check, at any branch or head office of the bank.
    (2) A depositary bank may require that paper returned checks be 
separated from paper forward collection checks.
    (d) Acceptance of oral notices of nonpayment. A depositary bank 
shall accept oral notices of nonpayment during its banking day--
    (1) At the telephone number indicated in the indorsement; and
    (2) At any other number held out by the bank for receipt of notice 
of nonpayment.
    (e) Payment. (1) A depositary bank shall pay the returning bank or 
paying bank returning the check to it for the amount of the check prior 
to the close of business on the depositary bank's banking day on which 
it received the check (``payment date'') by--
    (i) Debit to an account of the depositary bank on the books of the 
returning bank or paying bank;
    (ii) Cash;
    (iii) Wire transfer; or
    (iv) Any other form of payment acceptable to the returning bank or 
paying bank.
    (2) The proceeds of the payment must be available to the returning 
bank or paying bank in cash or by credit to an account of the returning 
bank or paying bank on or as of the payment date. If the payment date is 
not a banking day for the returning bank or paying bank or the 
depositary bank is unable to make the payment on the payment date, 
payment shall be made by the next day that is a banking day for the 
returning bank or paying bank. These payments are final when made.
    (f) Misrouted returned checks and written notices of nonpayment. If 
a bank receives a returned check or written notice of nonpayment on the 
basis that it is the depositary bank, and the bank determines that it is 
not the depositary bank with respect to the check or notice, it shall 
either promptly send the returned check or notice to the depositary bank 
directly or by means of a returning bank agreeing to handle the returned 
check or notice, or send the check or notice back to the bank from which 
it was received.
    (g) Charges. A depositary bank may not impose a charge for accepting 
and paying checks being returned to it.
    (h) Notification to customer. If the depositary bank receives a 
returned check, notice of nonpayment, or notice of recovery under Sec. 
229.35(b), it shall send or give notice to its customer of the facts by 
midnight of the banking day following the banking day on which it 
received the returned check, notice of nonpayment, or notice of 
recovery, or within a longer reasonable time.
    (i) Depositary bank without accounts. The requirements of this 
section with respect to notices of nonpayment do not apply to checks 
deposited in a depositary bank that does not maintain accounts.

[[Page 864]]



Sec. 229.34  Warranties.

    (a) Warranties. Each paying bank or returning bank that transfers a 
returned check and receives a settlement or other consideration for it 
warrants to the transferee returning bank, to any subsequent returning 
bank, to the depositary bank, and to the owner of the check, that--
    (1) The paying bank, or in the case of a check payable by a bank and 
payable through another bank, the bank by which the check is payable, 
returned the check within its deadline under the U.C.C., Regulation J 
(12 CFR part 210), or Sec. 229.30(c) of this part;
    (2) It is authorized to return the check;
    (3) The check has not been materially altered; and
    (4) In the case of a notice in lieu of return, the original check 
has not and will not be returned.


These warranties are not made with respect to checks drawn on the 
Treasury of the United States, U.S. Postal Service money orders, or 
checks drawn on a state or a unit of general local government that are 
not payable through or at a bank.
    (b) Warranty of notice of nonpayment. Each paying bank that gives a 
notice of nonpayment warrants to the transferee bank, to any subsequent 
transferee bank, to the depositary bank, and to the owner of the check 
that--
    (1) The paying bank, or in the case of a check payable by a bank and 
payable through another bank, the bank by which the check is payable, 
returned or will return the check within its deadline under the U.C.C., 
Regulation J (12 CFR part 210), or Sec. 229.30(c) of this part;
    (2) It is authorized to send the notice; and
    (3) The check has not been materially altered.


These warranties are not made with respect to checks drawn on a state or 
a unit of general local government that are not payable through or at a 
bank.
    (c) Warranty of settlement amount, encoding, and offset. (1) Each 
bank that presents one or more checks to a paying bank and in return 
receives a settlement or other consideration warrants to the paying bank 
that the total amount of the checks presented is equal to the total 
amount of the settlement demanded by the presenting bank from the paying 
bank.
    (2) Each bank that transfers one or more checks or returned checks 
to a collecting, returning, or depositary bank and in return receives a 
settlement or other consideration warrants to the transferee bank that 
the accompanying information, if any, accurately indicates the total 
amount of the checks or returned checks transferred.
    (3) Each bank that presents or transfers a check or returned check 
warrants to any bank that subsequently handles it that, at the time of 
presentment or transfer, the information encoded after issue in magnetic 
ink on the check or returned check is correct. For purposes of this 
paragraph, the information encoded after issue on the check or returned 
check includes any information placed in the MICR line of a substitute 
check that represents that check or returned check.
    (4) If a bank settles with another bank for checks presented, or for 
returned checks for which it is the depositary bank, in amount exceeding 
the total amount of the checks, the settling bank may set off the excess 
settlement amount against subsequent settlements for checks presented, 
or for returned checks for which it is the depositary bank, that it 
receives from the other bank.
    (d) Transfer and presentment warranties with respect to a remotely 
created check. (1) A bank that transfers or presents a remotely created 
check and receives a settlement or other consideration warrants to the 
transferee bank, any subsequent collecting bank, and the paying bank 
that the person on whose account the remotely created check is drawn 
authorized the issuance of the check in the amount stated on the check 
and to the payee stated on the check. For purposes of this paragraph 
(d)(1), ``account'' includes an account as defined in Sec. 229.2(a) as 
well as a credit or other arrangement that allows a person to draw 
checks that are payable by, through, or at a bank.
    (2) If a paying bank asserts a claim for breach of warranty under 
paragraph (d)(1) of this section, the warranting bank may defend by 
proving that the

[[Page 865]]

customer of the paying bank is precluded under U.C.C. 4-406, as 
applicable, from asserting against the paying bank the unauthorized 
issuance of the check.
    (e) Damages. Damages for breach of these warranties shall not exceed 
the consideration received by the bank that presents or transfers a 
check or returned check, plus interest compensation and expenses related 
to the check or returned check, if any.
    (f) Tender of defense. If a bank is sued for breach of a warranty 
under this section, it may give a prior bank in the collection or return 
chain written notice of the litigation, and the bank notified may then 
give similar notice to any other prior bank. If the notice states that 
the bank notified may come in and defend and that failure to do so will 
bind the bank notified in an action later brought by the bank giving the 
notice as to any determination of fact common to the two litigations, 
the bank notified is so bound unless after seasonable receipt of the 
notice the bank notified does come in and defend.
    (g) Notice of claim. Unless a claimant gives notice of a claim for 
breach of warranty under this section to the bank that made the warranty 
within 30 days after the claimant has reason to know of the breach and 
the identity of the warranting bank, the warranting bank is discharged 
to the extent of any loss caused by the delay in giving notice of the 
claim.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989; 57 FR 46972, Oct. 14, 1992; 62 FR 13810, Mar. 24, 1997; 69 FR 
47311, Aug. 4, 2004; 70 FR 71225, Nov. 28, 2005]

    Effective Date Note: At 82 FR 27581, June 15, 2017, Sec. 229.34 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.34  Warranties and indemnities.

    (a) Warranties with respect to electronic checks and electronic 
returned checks. (1) Each bank that transfers or presents an electronic 
check or electronic returned check and receives a settlement or other 
consideration for it warrants that--
    (i) The electronic image accurately represents all of the 
information on the front and back of the original check as of the time 
that the original check was truncated and the electronic information 
includes an accurate record of all MICR line information required for a 
substitute check under Sec. 229.2(aaa) and the amount of the check, and
    (ii) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for an electronic check or electronic returned 
check, the original check, a substitute check, or a paper or electronic 
representation of a substitute check such that the person will be asked 
to make payment based on a check it has already paid.
    (2) Each bank that makes the warranties under paragraph (a)(1) of 
this section makes the warranties to--
    (i) In the case of transfers for collection or presentment, the 
transferee bank, any subsequent collecting bank, the paying bank, and 
the drawer; and
    (ii) In the case of transfers for return, the transferee returning 
bank, any subsequent returning bank, the depositary bank, and the owner.
    (b) Transfer and presentment warranties with respect to a remotely 
created check. (1) A bank that transfers or presents a remotely created 
check and receives a settlement or other consideration warrants to the 
transferee bank, any subsequent collecting bank, and the paying bank 
that the person on whose account the remotely created check is drawn 
authorized the issuance of the check in the amount stated on the check 
and to the payee stated on the check. For purposes of this paragraph 
(b)(1), ``account'' includes an account as defined in Sec. 229.2(a) as 
well as a credit or other arrangement that allows a person to draw 
checks that are payable by, through, or at a bank.
    (2) If a paying bank asserts a claim for breach of warranty under 
paragraph (b)(1) of this section, the warranting bank may defend by 
proving that the customer of the paying bank is precluded under UCC 4-
406, as applicable, from asserting against the paying bank the 
unauthorized issuance of the check.
    (c) Settlement amount, encoding, and offset warranties. (1) Each 
bank that presents one or more checks to a paying bank and in return 
receives a settlement or other consideration warrants to the paying bank 
that the total amount of the checks presented is equal to the total 
amount of the settlement demanded by the presenting bank from the paying 
bank.
    (2) Each bank that transfers one or more checks or returned checks 
to a collecting bank, returning bank, or depositary bank and in return 
receives a settlement or other consideration warrants to the transferee 
bank that the accompanying information, if any, accurately indicates the 
total amount of the checks or returned checks transferred.
    (3) Each bank that presents or transfers a check or returned check 
warrants to any bank that subsequently handles it that, at the time of 
presentment or transfer, the information encoded after issue regarding 
the check or returned check is accurate. For

[[Page 866]]

purposes of this paragraph, the information encoded after issue 
regarding the check or returned check means any information that could 
be encoded in the MICR line of a paper check.
    (4) If a bank settles with another bank for checks presented, or for 
returned checks for which it is the depositary bank, in an amount 
exceeding the total amount of the checks, the settling bank may set off 
the excess settlement amount against subsequent settlements for checks 
presented, or for returned checks for which it is the depositary bank, 
that it receives from the other bank.
    (d) Returned check warranties. (1) Each paying bank or returning 
bank that transfers a returned check and receives a settlement or other 
consideration for it warrants to the transferee returning bank, to any 
subsequent returning bank, to the depositary bank, and to the owner of 
the check, that--
    (i) The paying bank, or in the case of a check payable by a bank and 
payable through another bank, the bank by which the check is payable, 
returned the check within its deadline under the UCC or Sec. 229.31(g) 
of this part;
    (ii) It is authorized to return the check;
    (iii) The check has not been materially altered; and
    (iv) In the case of a notice in lieu of return, the check has not 
and will not be returned.
    (2) These warranties are not made with respect to checks drawn on 
the Treasury of the United States, U.S. Postal Service money orders, or 
checks drawn on a state or a unit of general local government that are 
not payable through or at a bank.
    (e) Notice of nonpayment warranties. (1) Each paying bank that gives 
a notice of nonpayment warrants to the transferee bank, to any 
subsequent transferee bank, to the depositary bank, and to the owner of 
the check that--
    (i) The paying bank, or in the case of a check payable by a bank and 
payable through another bank, the bank by which the check is payable, 
returned or will return the check within its deadline under the UCC or 
Sec. 229.31(g) of this part;
    (ii) It is authorized to send the notice; and
    (iii) The check has not been materially altered.
    (2) These warranties are not made with respect to checks drawn on 
the Treasury of the United States, U.S. Postal Service money orders, or 
check drawn on a state or a unit of general local government that are 
not payable through or at a bank.
    (f) Remote deposit capture indemnity. (1) The indemnity described in 
paragraph (f)(2) of this section is provided by a depositary bank that--
    (i) Is a truncating bank under Sec. 229.2(eee)(2) because it 
accepts deposit of an electronic image or other electronic information 
related to an original check;
    (ii) Does not receive the original check;
    (iii) Receives settlement or other consideration for an electronic 
check or substitute check related to the original check; and
    (iv) Does not receive a return of the check unpaid.
    (2) A bank described in paragraph (f)(1) of this section shall 
indemnify, as set forth in Sec. 229.34(i), a depositary bank that 
accepts the original check for deposit for losses incurred by that 
depositary bank if the loss is due to the check having already been 
paid.
    (3) A depositary bank may not make an indemnity claim under 
paragraph (f)(2) of this section if the original check it accepted for 
deposit bore a restrictive indorsement inconsistent with the means of 
deposit.
    (g) Indemnities with respect to electronically-created items. Each 
bank that transfers or presents an electronically-created item and 
receives a settlement or other consideration for it shall indemnify, as 
set forth in Sec. 229.34(i), each transferee bank, any subsequent 
collecting bank, the paying bank, and any subsequent returning bank 
against losses that result from the fact that--
    (1) The electronic image or electronic information is not derived 
from a paper check;
    (2) The person on whose account the electronically-created item is 
drawn did not authorize the issuance of the item in the amount stated on 
the item or to the payee stated on the item (for purposes of this 
paragraph (g)(2), ``account'' includes an account as defined in section 
229.2(a) as well as a credit or other arrangement that allows a person 
to draw checks that are payable by, through, or at a bank); or
    (3) A person receives a transfer, presentment, or return of, or 
otherwise is charged for an electronically-created item such that the 
person is asked to make payment based on an item or check it has already 
paid.
    (h) Damages. Damages for breach of the warranties in this section 
shall not exceed the consideration received by the bank that presents or 
transfers a check or returned check, plus interest compensation and 
expenses related to the check or returned check, if any.
    (i) Indemnity amounts. (1) The amount of the indemnity in paragraphs 
(f)(2) and (g) of this section shall not exceed the sum of--
    (i) The amount of the loss of the indemnified bank, up to the amount 
of the settlement or other consideration received by the indemnifying 
bank; and
    (ii) Interest and expenses of the indemnified bank (including costs 
and reasonable attorney's fees and other expenses of representation).
    (2)(i) If a loss described in paragraph (f)(2) or (g) of this 
section results in whole or in part from the indemnified bank's 
negligence or failure to act in good faith, then the indemnity amount 
described in paragraph (i)(1) of this section shall be reduced in 
proportion

[[Page 867]]

to the amount of negligence or bad faith attributable to the indemnified 
bank.
    (ii) Nothing in this paragraph (i)(2) affects the rights of a person 
under the UCC or other applicable provision of state or federal law.
    (j) Tender of defense. If a bank is sued for breach of a warranty or 
for indemnity under this section, it may give a prior bank in the 
collection or return chain written notice of the litigation, and the 
bank notified may then give similar notice to any other prior bank. If 
the notice states that the bank notified may come in and defend and that 
failure to do so will bind the bank notified in an action later brought 
by the bank giving the notice as to any determination of fact common to 
the two litigations, the bank notified is so bound unless after 
seasonable receipt of the notice the bank notified does come in and 
defend.
    (k) Notice of claim. Unless a claimant gives notice of a claim for 
breach of warranty or for indemnity under this section to the bank that 
made the warranty or indemnification within 30 days after the claimant 
has reason to know of the breach or facts and circumstances giving rise 
to the indemnity and the identity of the warranting or indemnifying 
bank, the warranting or indemnifying bank is discharged to the extent of 
any loss caused by the delay in giving notice of the claim.



Sec. 229.35  Indorsements.

    (a) Indorsement standards. A bank (other than a paying bank) that 
handles a check during forward collection or a returned check shall 
indorse the check in a manner that permits a person to interpret the 
indorsement, in accordance with the indorsement standard set forth in 
appendix D of this part.
    (b) Liability of bank handling check. A bank that handles a check 
for forward collection or return is liable to any bank that subsequently 
handles the check to the extent that the subsequent bank does not 
receive payment for the check because of suspension of payments by 
another bank or otherwise. This paragraph applies whether or not a bank 
has placed its indorsement on the check. This liability is not affected 
by the failure of any bank to exercise ordinary care, but any bank 
failing to do so remains liable. A bank seeking recovery against a prior 
bank shall send notice to that prior bank reasonably promptly after it 
learns the facts entitling it to recover. A bank may recover from the 
bank with which it settled for the check by revoking the settlement, 
charging back any credit given to an account, or obtaining a refund. A 
bank may have the rights of a holder with respect to each check it 
handles.
    (c) Indorsement by a bank. After a check has been indorsed by a 
bank, only a bank may acquire the rights of a holder--
    (1) Until the check has been returned to the person initiating 
collection; or
    (2) Until the check has been specially indorsed by a bank to a 
person who is not a bank.
    (d) Indorsement for depositary bank. A depositary bank may arrange 
with another bank to apply the other bank's indorsement as the 
depositary bank indorsement, provided that any indorsement of the 
depositary bank on the check avoids the area reserved for the depositary 
bank indorsement as specified in appendix D. The other bank indorsing as 
depositary bank is considered the depositary bank for purposes of 
subpart C of this part.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 55 FR 21855, May 30, 
1990; 69 FR 47311, Aug. 4, 2004]

    Effective Date Note: At 82 FR 27582, June 15, 2017, Sec. 229.35 was 
amended by revising paragraphs (a) and (d), effective July 1, 2018. For 
the convenience of the user, the revised text is set forth as follows:



Sec. 229.35  Indorsements.

    (a) Indorsement standards. A bank (other than a paying bank) that 
handles a check during forward collection or a returned check shall 
indorse the check in a manner that permits a person to interpret the 
indorsement, in accordance with American National Standard (ANS) 
Specifications for Physical Check Endorsements, X9.100-111 (ANS X9.100-
111), for a paper check other than a substitute check; ANS 
Specifications for an Image Replacement Document, X9.100-140 (ANS 
X9.100-140), for a substitute check; and ANS Specifications for 
Electronic Exchange of Check and Image Data--Domestic, X9.100-187 (ANS 
X9.100-187), for an electronic check; unless the Board by rule or order 
determines that different standards apply or the parties otherwise 
agree.

                                * * * * *

    (d) Indorsement for depositary bank. A depositary bank may arrange 
with another bank to apply the other bank's indorsement as the 
depositary bank indorsement, provided that any indorsement of the 
depositary bank on the check avoids the area reserved for the

[[Page 868]]

depositary bank indorsement as specified in the indorsement standard 
applicable to the check under paragraph (a) of this section. The other 
bank indorsing as depositary bank is considered the depositary bank for 
purposes of subpart C of this part.



Sec. 229.36  Presentment and issuance of checks.

    (a) Payable through and payable at checks. A check payable at or 
through a paying bank is considered to be drawn on that bank for 
purposes of the expeditious return and notice of nonpayment requirements 
of this subpart.
    (b) Receipt at bank office or processing center. A check is 
considered received by the paying bank when it is received:
    (1) At a location to which delivery is requested by the paying bank;
    (2) At an address of the bank associated with the routing number on 
the check, whether in magnetic ink or in fractional form;
    (3) At any branch or head office, if the bank is identified on the 
check by name without address; or
    (4) At a branch, head office, or other location consistent with the 
name and address of the bank on the check if the bank is identified on 
the check by name and address.
    (c) [Reserved]
    (d) Liability of bank during forward collection. Settlements between 
banks for the forward collection of a check are final when made; 
however, a collecting bank handling a check for forward collection may 
be liable to a prior collecting bank, including the depositary bank, and 
the depositary bank's customer.
    (e) Issuance of payable-through checks. (1) A bank that arranges for 
checks payable by it to be payable through another bank shall require 
that the following information be printed conspicuously on the face of 
each check:
    (i) The name, location, and first four digits of the nine-digit 
routing number of the bank by which the check is payable; and
    (ii) The words ``payable through'' followed by the name of the 
payable-through bank.
    (2) A bank is responsible for damages under Sec. 229.38 to the 
extent that a check payable by it and not payable through another bank 
is labelled as provided in this section.
    (f) Same-day settlement. (1) A check is considered presented, and a 
paying bank must settle for or return the check pursuant to paragraph 
(f)(2) of this section, if a presenting bank delivers the check in 
accordance with reasonable delivery requirements established by the 
paying bank and demands payment under this paragraph (f)--
    (i) At a location designated by the paying bank for receipt of 
checks under this paragraph (f) that is in the check processing region 
consistent with the routing number encoded in magnetic ink on the check 
and at which the paying bank would be considered to have received the 
check under paragraph (b) of this section or, if no location is 
designated, at any location described in paragraph (b) of this section; 
and
    (ii) By 8 a.m. on a business day (local time of the location 
described in paragraph (f)(1)(i) of this section).

    A paying bank may require that checks presented for settlement 
pursuant to this paragraph (f)(1) be separated from other forward-
collection checks or returned checks.
    (2) If presentment of a check meets the requirements of paragraph 
(f)(1) of this section, the paying bank is accountable to the presenting 
bank for the amount of the check unless, by the close of Fedwire on the 
business day it receives the check, it either:
    (i) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (ii) Returns the check.
    (3) Notwithstanding paragraph (f)(2) of this section, if a paying 
bank closes on a business day and receives presentment of a check on 
that day in accordance with paragraph (f)(1) of this section, the paying 
bank is accountable to the presenting bank for the amount of the check 
unless, by the close of Fedwire on its next banking day, it either:
    (i) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (ii) Returns the check.


If the closing is voluntary, unless the paying bank settles for or 
returns the

[[Page 869]]

check in accordance with paragraph (f)(2) of this section, it shall pay 
interest compensation to the presenting bank for each day after the 
business day on which the check was presented until the paying bank 
settles for the check, including the day of settlement.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended by 54 FR 32047, Aug. 4, 
1989; 55 FR 21855, May 30, 1990; 57 FR 46972, Oct. 14, 1992; 60 FR 
51671, Oct. 3, 1995; 62 FR 13810, Mar. 24, 1997; 64 FR 59613, Nov. 3, 
1999]

    Effective Date Note: At 82 FR 27583, June 15, 2017, Sec. 229.36 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.36  Presentment and issuance of checks.

    (a) Receipt of electronic checks. The terms under which a paying 
bank will accept presentment of an electronic check is governed by the 
paying bank's agreement with the presenting bank.
    (b) Receipt of paper checks. (1) A paper check is considered 
received by the paying bank when it is received--
    (i) At a location to which delivery is requested by the paying bank;
    (ii) At an address of the bank associated with the routing number on 
the check, whether contained in the MICR line or in fractional form;
    (iii) At a branch, head office, or other location consistent with 
the name and address of the bank on the check if the bank is identified 
on the check by name and address; or
    (iv) At any branch or head office, if the bank is identified on the 
check by name without address.
    (2) A bank may require that checks presented to it as a paying bank 
be separated from returned checks.
    (c) Liability of bank during forward collection. Settlements between 
banks for the forward collection of a check are final when made; 
however, a collecting bank handling a check for forward collection may 
be liable to a prior collecting bank, including the depositary bank, and 
the depositary bank's customer.
    (d) Same-day settlement. (1) A paper check is considered presented, 
and a paying bank must settle for or return the check pursuant to 
paragraph (d)(2) of this section, if a presenting bank delivers the 
check in accordance with reasonable delivery requirements established by 
the paying bank and demands payment under this paragraph (d)--
    (i) At a location designated by the paying bank for receipt of paper 
checks under this paragraph (d) at which the paying bank would be 
considered to have received the paper check under paragraph (b) of this 
section or, if no location is designated, at any location described in 
paragraph (b) of this section; and
    (ii) By 8 a.m. on a business day (local time of the location 
described in paragraph (d)(1)(i) of this section).
    (2) A paying bank may require that paper checks presented for 
settlement pursuant to paragraph (d)(1) of this section be separated 
from other forward-collection checks or returned checks.
    (3) If presentment of a paper check meets the requirements of 
paragraph (d)(1) of this section, the paying bank is accountable to the 
presenting bank for the amount of the check unless, by the close of 
Fedwire on the business day it receives the check, it either--
    (i) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (ii) Returns the check.
    (4) Notwithstanding paragraph (d)(3) of this section, if a paying 
bank closes on a business day and receives presentment of a paper check 
on that day in accordance with paragraph (d)(1) of this section--
    (i) The paying bank is accountable to the presenting bank for the 
amount of the check unless, by the close of Fedwire on its next banking 
day, it either--
    (A) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (B) Returns the check.
    (ii) If the closing is voluntary, unless the paying bank settles for 
or returns the check in accordance with paragraph (d)(3) of this 
section, it shall pay interest compensation to the presenting bank for 
each day after the business day on which the check was presented until 
the paying bank settles for the check, including the day of settlement.



Sec. 229.37  Variation by agreement.

    The effect of the provisions of subpart C may be varied by 
agreement, except that no agreement can disclaim the responsibility of a 
bank for its own lack of good faith or failure to exercise ordinary 
care, or can limit the measure of damages for such lack or failure; but 
the parties may determine by agreement the standards by which such 
responsibility is to be measured if such standards are not manifestly 
unreasonable.



Sec. 229.38  Liability.

    (a) Standard of care; liability; measure of damages. A bank shall 
exercise ordinary care and act in good faith in complying with the 
requirements of this subpart. A bank that fails to exercise

[[Page 870]]

ordinary care or act in good faith under this subpart may be liable to 
the depositary bank, the depositary bank's customer, the owner of a 
check, or another party to the check. The measure of damages for failure 
to exercise ordinary care is the amount of the loss incurred, up to the 
amount of the check, reduced by the amount of the loss that party would 
have incurred even if the bank had exercised ordinary care. A bank that 
fails to act in good faith under this subpart may be liable for other 
damages, if any, suffered by the party as a proximate consequence. 
Subject to a bank's duty to exercise ordinary care or act in good faith 
in choosing the means of return or notice of nonpayment, the bank is not 
liable for the insolvency, neglect, misconduct, mistake, or default of 
another bank or person, or for loss or destruction of a check or notice 
of nonpayment in transit or in the possession of others. This section 
does not affect a paying bank's liability to its customer under the 
U.C.C. or other law.
    (b) Paying bank's failure to make timely return. If a paying bank 
fails both to comply with Sec. 229.30(a) and to comply with the 
deadline for return under the U.C.C., Regulation J (12 CFR part 210), or 
Sec. 229.30(c) in connection with a single nonpayment of a check, the 
paying bank shall be liable under either Sec. 229.30(a) or such other 
provision, but not both.
    (c) Comparative negligence. If a person, including a bank, fails to 
exercise ordinary care or act in good faith under this subpart in 
indorsing a check (Sec. 229.35), accepting a returned check or notice 
of nonpayment (Sec. Sec. 229.32(a) and 229.33(c)), or otherwise, the 
damages incurred by that person under Sec. 229.38(a) shall be 
diminished in proportion to the amount of negligence or bad faith 
attributable to that person.
    (d) Responsibility for certain aspects of checks--(1) A paying bank, 
or in the case of a check payable through the paying bank and payable by 
another bank, the bank by which the check is payable, is responsible for 
damages under paragraph (a) of this section to the extent that the 
condition of the check when issued by it or its customer adversely 
affects the ability of a bank to indorse the check legibly in accordance 
with Sec. 229.35. A depositary bank is responsible for damages under 
paragraph (a) of this section to the extent that the condition of the 
back of a check arising after the issuance of the check and prior to 
acceptance of the check by it adversely affects the ability of a bank to 
indorse the check legibly in accordance with Sec. 229.35. A 
reconverting bank is responsible for damages under paragraph (a) of this 
section to the extent that the condition of the back of a substitute 
check transferred, presented, or returned by it--
    (i) Adversely affects the ability of a subsequent bank to indorse 
the check legibly in accordance with Sec. 229.35; or
    (ii) Causes an indorsement that previously was applied in accordance 
with Sec. 229.35 to become illegible.

    Note: Responsibility under this paragraph (d) shall be treated as 
negligence of the paying bank, depositary bank, or reconverting bank for 
purposes of paragraph (c) of this section.

    (2) Responsibility for payable through checks. In the case of a 
check that is payable by a bank and payable through a paying bank 
located in a different check processing region than the bank by which 
the check is payable, the bank by which the check is payable is 
responsible for damages under paragraph (a) of this section, to the 
extent that the check is not returned to the depositary bank through the 
payable through bank as quickly as the check would have been required to 
be returned under Sec. 229.30(a) had the bank by which the check is 
payable--
    (i) Received the check as paying bank on the day the payable through 
bank received the check; and
    (ii) Returned the check as paying bank in accordance with Sec. 
229.30(a)(1).


Responsibility under this paragraph shall be treated as negligence of 
the bank by which the check is payable for purposes of paragraph (c) of 
this section.
    (e) Timeliness of action. If a bank is delayed in acting beyond the 
time limits set forth in this subpart because of interruption of 
communication or computer facilities, suspension of payments by a bank, 
war, emergency conditions, failure of equipment, or other circumstances 
beyond its control, its

[[Page 871]]

time for acting is extended for the time necessary to complete the 
action, if it exercises such diligence as the circumstances require.
    (f) Exclusion. Section 229.21 of this part and section 611 (a), (b), 
and (c) of the EFA Act (12 U.S.C. 4010 (a), (b), and (c)) do not apply 
to this subpart.
    (g) Jurisdiction. Any action under this subpart may be brought in 
any United States district court, or in any other court of competent 
jurisdiction, and shall be brought within one year after the date of the 
occurrence of the violation involved.
    (h) Reliance on Board rulings. No provision of this subpart imposing 
any liability shall apply to any act done or omitted in good faith in 
conformity with any rule, regulation, or interpretation thereof by the 
Board, regardless of whether the rule, regulation, or interpretation is 
amended, rescinded, or determined by judicial or other authority to be 
invalid for any reason after the act or omission has occurred.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989; 54 FR 32047, Aug. 4, 1989; 69 FR 47311, Aug. 4, 2004]

    Effective Date Note: At 82 FR 27583, June 15, 2017, Sec. 229.38 was 
amended by revising paragraphs (b), (c) and (d), effective July 1, 2018. 
For the convenience of the user, the revised text is set forth as 
follows:



Sec. 229.38  Liability.

                                * * * * *

    (b) Paying bank's failure to make timely return. If a paying bank 
fails both to comply with its expeditious return requirements under 
Sec. 229.31(b) and with the deadline for return under the UCC, 
Regulation J (12 CFR part 210), or the extension of deadline under Sec. 
229.31(g) in connection with a single nonpayment of a check, the paying 
bank shall be liable under either Sec. 229.31(b) or such other 
provision, but not both.
    (c) Comparative negligence. If a person, including a bank, fails to 
exercise ordinary care or act in good faith under this subpart in 
indorsing a check (Sec. 229.35), accepting a returned check or notice 
of nonpayment (Sec. 229.33(b), (c), and (d)), or otherwise, the damages 
incurred by that person under Sec. 229.38(a) shall be diminished in 
proportion to the amount of negligence or bad faith attributable to that 
person.
    (d) Responsibility for certain aspects of checks. (1) A paying bank, 
or in the case of a check payable through the paying bank and payable by 
another bank, the bank by which the check is payable, is responsible for 
damages under paragraph (a) of this section to the extent that the 
condition of the check when issued by it or its customer adversely 
affects the ability of a bank to indorse the check legibly in accordance 
with Sec. 229.35. A depositary bank is responsible for damages under 
paragraph (a) of this section to the extent that the condition of the 
back of a check arising after the issuance of the check and prior to 
acceptance of the check by it adversely affects the ability of a bank to 
indorse the check legibly in accordance with Sec. 229.35. A 
reconverting bank is responsible for damages under paragraph (a) of this 
section to the extent that the condition of the back of a substitute 
check transferred, presented, or returned by it--
    (i) Adversely affects the ability of a subsequent bank to indorse 
the check legibly in accordance with Sec. 229.35; or
    (ii) Causes an indorsement that previously was applied in accordance 
with Sec. 229.35 to become illegible.
    (2) Responsibility under this paragraph (d) shall be treated as 
negligence of the paying bank, depositary bank, or reconverting bank for 
purposes of paragraph (c) of this section.

                                * * * * *



Sec. 229.39  lnsolvency of bank.

    (a) Duty of receiver. A check or returned check in, or coming into, 
the possession of a paying, collecting, depositary, or returning bank 
that suspends payment, and which is not paid, shall be returned by the 
receiver, trustee, or agent in charge of the closed bank to the bank or 
customer that transferred the check to the closed bank.
    (b) Preference against paying or depositary bank. If a paying bank 
finally pays a check, or if a depositary bank becomes obligated to pay a 
returned check, and suspends payment without making a settlement for the 
check or returned check with the prior bank that is or becomes final, 
the prior bank has a preferred claim against the paying bank or the 
depositary bank.
    (c) Preference against collecting, paying, or returning bank. If a 
collecting, paying, or returning bank receives settlement from a 
subsequent bank for a check or returned check, which settlement is or 
becomes final, and suspends payments without making a settlement for the 
check with the prior bank, which is or becomes final, the prior bank has 
a preferred claim

[[Page 872]]

against the collecting or returning bank.
    (d) Preference against presenting bank. If a paying bank settles 
with a presenting bank for one or more checks, and if the presenting 
bank breaches a warranty specified in Sec. 229.34(c) (1) or (3) with 
respect to those checks and suspends payments before satisfying the 
paying bank's warranty claim, the paying bank has a preferred claim 
against the presenting bank for the amount of the warranty claim.
    (e) Finality of settlement. If a paying or depositary bank gives, or 
a collecting, paying, or returning bank gives or receives, a settlement 
for a check or returned check and thereafter suspends payment, the 
suspension does not prevent or interfere with the settlement becoming 
final if such finality occurs automatically upon the lapse of a certain 
time or the happening of certain events.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended at 57 FR 46973, Oct. 14, 
1992; Reg. CC, 62 FR 13810, Mar. 24, 1997]

    Effective Date Note: At 82 FR 27583, June 15, 2017, Sec. 229.39 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.39  Insolvency of bank.

    (a) Duty of receiver to return unpaid checks. A check or returned 
check in, or coming into, the possession of a paying bank, collecting 
bank, depositary bank, or returning bank that suspends payment, and 
which is not paid, shall be returned by the receiver, trustee, or agent 
in charge of the closed bank to the bank or customer that transferred 
the check to the closed bank.
    (b) Claims against banks for checks not returned by receiver. If a 
check or returned check is not returned by the receiver, trustee, or 
agent in charge of the closed bank under paragraph (a) of this section, 
a bank shall have claims with respect to the check or returned check as 
follows:
    (1) If the paying bank has finally paid the check, or if a 
depositary bank is obligated to pay the returned check, and suspends 
payment without making a settlement for the check or returned check with 
the prior bank that is or becomes final, the prior bank has a claim 
against the paying bank or the depositary bank.
    (2) If a collecting bank, paying bank, or returning bank receives 
settlement from a subsequent bank for a check or returned check, which 
settlement is or becomes final, and suspends payments without making a 
settlement for the check with the prior bank, which is or becomes final, 
the prior bank has a claim against the collecting bank or returning 
bank.
    (c) Preferred claim against presenting bank for breach of warranty. 
If a paying bank settles with a presenting bank for one or more checks, 
and if the presenting bank breaches a warranty specified in Sec. 
229.34(c)(1) or (3) with respect to those checks and suspends payments 
before satisfying the paying bank's warranty claim, the paying bank has 
a preferred claim against the presenting bank for the amount of the 
warranty claim.
    (d) Finality of settlement. If a paying bank or depositary bank 
gives, or a collecting bank, paying bank, or returning bank gives or 
receives, a settlement for a check or returned check and thereafter 
suspends payment, the suspension does not prevent or interfere with the 
settlement becoming final if such finality occurs automatically upon the 
lapse of a certain time or the happening of certain events.



Sec. 229.40  Effect of merger transaction.

    (a) In general. For purposes of this subpart, two or more banks that 
have engaged in a merger transaction may be considered to be separate 
banks for a period of one year following the consummation of the merger 
transaction.
    (b) Merger transactions on or after July 1, 1998, and before March 
1, 2000. If banks have consummated a merger transaction on or after July 
1, 1998, and before March 1, 2000, the merged banks may be considered 
separate banks until March 1, 2001.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended at 64 FR 14577, Mar. 26, 
1999]

    Effective Date Note: At 82 FR 27584, June 15, 2017, Sec. 229.40 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.40  Effect of merger transaction.

    For purposes of this subpart, two or more banks that have engaged in 
a merger transaction may be considered to be separate banks for a period 
of one year following the consummation of the merger transaction.



Sec. 229.41  Relation to State law.

    The provisions of this subpart supersede any inconsistent provisions 
of the U.C.C. as adopted in any state, or of any other state law, but 
only to the extent of the inconsistency.



Sec. 229.42  Exclusions.

    The expeditious-return (Sec. Sec. 229.30(a) and 229.31(a)), notice-
of-nonpayment

[[Page 873]]

(Sec. 229.33), and same-day settlement (Sec. 229.36(f)) requirements 
of this subpart do not apply to a check drawn upon the United States 
Treasury, to a U.S. Postal Service money order, or to a check drawn on a 
state or a unit of general local government that is not payable through 
or at a bank.

[Reg. CC, 62 FR 13810, Mar. 24, 1997]

    Effective Date Note: At 82 FR 27584, June 15, 2017, Sec. 229.42 was 
revised, effective July 1, 2018. For the convenience of the user, the 
revised text is set forth as follows:



Sec. 229.42  Exclusions.

    The expeditious return (Sec. Sec. 229.31(b) and 229.32(b)), notice 
of nonpayment (Sec. 229.31(c)), and same-day settlement (Sec. 
229.36(d)) requirements of this subpart do not apply to a check drawn 
upon the United States Treasury, to a U.S. Postal Service money order, 
or to a check drawn on a state or a unit of general local government 
that is not payable through or at a bank.



Sec. 229.43  Checks payable in Guam, American Samoa, and the Northern
Mariana Islands.

    (a) Definitions. The definitions in Sec. 229.2 apply to this 
section, unless otherwise noted. In addition, for the purposes of this 
section--
    (1) Pacific island bank means an office of an institution that would 
be a bank as defined in Sec. 229.2(e) but for the fact that the office 
is located in Guam, American Samoa, or the Northern Mariana Islands;
    (2) Pacific island check means a demand draft drawn on or payable 
through or at a Pacific island bank, which is not a check as defined in 
Sec. 229.2(k).
    (b) Rules applicable to Pacific island checks. To the extent a bank 
handles a Pacific island check as if it were a check defined in Sec. 
229.2(k), the bank is subject to the following sections of this part 
(and the word ``check'' in each such section is construed to include a 
Pacific island check)--
    (1) Sec. 229.31, except that the returning bank is not subject to 
the requirement to return a Pacific island check in an expeditious 
manner;
    (2) Sec. 229.32;
    (3) Sec. 229.34(c)(2), (c)(3), (d), (e), and (f);
    (4) Sec. 229.35; for purposes of Sec. 229.35(c), the Pacific 
island bank is deemed to be a bank;
    (5) Sec. 229.36(d);
    (6) Sec. 229.37;
    (7) Sec. 229.38(a) and (c) through (h);
    (8) Sec. 229.39(a), (b), (c) and (e); and
    (9) Sec. Sec. 229.40 through 229.42.

[Reg. CC, 62 FR 13810, Mar. 24, 1997, as amended at 70 FR 71225, Nov. 
28, 2005]

    Effective Date Note: At 82 FR 27584, June 15, 2017, Sec. 229.43 was 
amended by revising paragraphs (a)(2) and (b), effective July 1, 2018. 
For the convenience of the user, the revised text is set forth as 
follows:



Sec. 229.43  Checks payable in Guam, American Samoa, and the Northern 
          Mariana Islands.

    (a) * * *
    (2) Pacific island check means--
    (i) A demand draft drawn on or payable through or at a Pacific 
island bank, which is not a check as defined in Sec. 229.2(k); and
    (ii) An electronic image of, and electronic information derived 
from, a demand draft or returned demand draft drawn on or payable 
through or at a Pacific island bank that--
    (A) Is sent to a receiving bank pursuant to an agreement between the 
sender and the receiving bank; and
    (B) Conforms with ANS X9.100-187, unless the Board by rule or order 
determines that a different standard applies or the parties otherwise 
agree.
    (b) Rules applicable to Pacific island checks. To the extent a bank 
handles a Pacific island check as if it were a check defined in Sec. 
229.2(k) or an electronic check defined in Sec. 229.2(ggg), the bank is 
subject to the following sections of this part (and the word ``check'' 
in each such section is construed to include a Pacific island check)--
    (1) Section 229.30(a) (Checks under this subpart), and (b) 
(Writings);
    (2) Section 229.32 (Returning bank's responsibilities for return of 
checks) except that the returning bank is not subject to the requirement 
to return a Pacific Island check in an expeditious manner;
    (3) Section 229.33(b) (Acceptance of electronic returned checks and 
electronic notices of nonpayment), (c) (Acceptance of paper returned 
checks and paper notices of nonpayment), Sec. 229.33(d) (Acceptances of 
oral notices of nonpayment), Sec. 229.33(e) (Payment), Sec. 229.33(f) 
(Misrouted returned checks and written notices of nonpayment), Sec. 
229.33(g) (Charges);
    (4) Section 229.34(a) (Warranties with respect to electronic checks 
and electronic returned checks), Sec. 229.34(b) (Transfer and 
presentment warranties with respect to a remotely-created check), Sec. 
229.34(c)(2) (Cash letter total warranty), Sec. 229.34(c)(3) (Encoding 
warranty), Sec. 229.34(f) (Remote deposit capture warranty), Sec. 
229.34(g) (Indemnities with respect to electronically-created items),

[[Page 874]]

Sec. 229.34(h) (Damages), Sec. 229.34(i) (Indemnity amounts), and 
Sec. 229.34(j) (Tender of defense);
    (5) Section 229.35 (Indorsements); for purposes of Sec. 229.35(c) 
(Indorsement by a bank), the Pacific island bank is deemed to be a bank;
    (6) Section 229.36(c) (Liability of bank during forward collection);
    (7) Section 229.37 (Variation by agreement);
    (8) Section 229.38 (Liability), except for Sec. 229.38(b) (Paying 
bank's failure to make timely return);
    (9) Section 229.39 (Insolvency of bank), except for Sec. 229.39(c) 
(Preferred claim against presenting bank for breach of warranty); and
    (10) Section 229.40 (Effect of merger transaction), Sec. 229.41 
(Relation to state law) and Sec. 229.42 (Exclusions).



                       Subpart D_Substitute Checks

    Authority: 12 U.S.C. 5001-5018.

    Source: 69 FR 47311, Aug. 4, 2004, unless otherwise noted.



Sec. 229.51  General provisions governing substitute checks.

    (a) Legal equivalence. A substitute check for which a bank has 
provided the warranties described in Sec. 229.52 is the legal 
equivalent of an original check for all persons and all purposes, 
including any provision of federal or state law, if the substitute 
check--
    (1) Accurately represents all of the information on the front and 
back of the original check as of the time the original check was 
truncated; and
    (2) Bears the legend, ``This is a legal copy of your check. You can 
use it the same way you would use the original check.''
    (b) Reconverting bank duties. A bank shall ensure that a substitute 
check for which it is the reconverting bank--
    (1) Bears all indorsements applied by parties that previously 
handled the check in any form (including the original check, a 
substitute check, or another paper or electronic representation of such 
original check or substitute check) for forward collection or return;
    (2) Identifies the reconverting bank in a manner that preserves any 
previous reconverting bank identifications, in accordance with ANS 
X9.100-140 and appendix D of this part; and
    (3) Identifies the bank that truncated the original check, in 
accordance with ANS X9.100-140 and appendix D of this part.
    (c) Applicable law. A substitute check that is the legal equivalent 
of an original check under paragraph (a) of this section shall be 
subject to any provision, including any provision relating to the 
protection of customers, of this part, the U.C.C., and any other 
applicable federal or state law as if such substitute check were the 
original check, to the extent such provision of law is not inconsistent 
with the Check 21 Act or this subpart.

    Effective Date Note: At 82 FR 27584, June 15, 2017, Sec. 229.51 was 
amended by revising paragraphs (b)(2) and (3), effective July 1, 2018. 
For the convenience of the user, the revised text is set forth as 
follows:



Sec. 229.51  General provisions governing substitute checks.

                                * * * * *

    (b) * * *
    (2) Identifies the reconverting bank in a manner that preserves any 
previous reconverting-bank identifications, in accordance with ANS 
X9.100-140; and
    (3) Identifies the bank that truncated the original check, in 
accordance with ANS X9.100-140.

                                * * * * *



Sec. 229.52  Substitute check warranties.

    (a) Content and provision of substitute check warranties. A bank 
that transfers, presents, or returns a substitute check (or a paper or 
electronic representation of a substitute check) for which it receives 
consideration warrants to the parties listed in paragraph (b) of this 
section that--
    (1) The substitute check meets the requirements for legal 
equivalence described in Sec. 229.51(a)(1)-(2); and
    (2) No depositary bank, drawee, drawer, or indorser will receive 
presentment or return of, or otherwise be charged for, the substitute 
check, the original check, or a paper or electronic representation of 
the substitute check or original check such that that person will be 
asked to make a payment based on a check that it already has paid.
    (b) Warranty recipients. A bank makes the warranties described in 
paragraph (a) of this section to the person to which the bank transfers, 
presents, or

[[Page 875]]

returns the substitute check or a paper or electronic representation of 
such substitute check and to any subsequent recipient, which could 
include a collecting or returning bank, the depositary bank, the drawer, 
the drawee, the payee, the depositor, and any indorser. These parties 
receive the warranties regardless of whether they received the 
substitute check or a paper or electronic representation of a substitute 
check.

    Effective Date Note: At 82 FR 27584, June 15, 2017, Sec. 229.52 was 
amended by revising paragraph (a), effective July 1, 2018. For the 
convenience of the user, the revised text is set forth as follows:



Sec. 229.52  Substitute check warranties.

    (a) Content and provision of substitute-check warranties. (1) A bank 
that transfers, presents, or returns a substitute check (or a paper or 
electronic representation of a substitute check) for which it receives 
consideration warrants to the parties listed in paragraph (b) of this 
section that--
    (i) The substitute check meets the requirements for legal 
equivalence described in Sec. 229.51(a)(1) and (2); and
    (ii) No depositary bank, drawee, drawer, or indorser will receive 
presentment or return of, or otherwise be charged for, the substitute 
check, the original check, or a paper or electronic representation of 
the substitute check or original check such that that person will be 
asked to make a payment based on a check that it already has paid.
    (2) A bank that rejects a check submitted for deposit and returns to 
its customer a substitute check (or a paper or electronic representation 
of a substitute check) makes the warranties in paragraph (a)(1) of this 
section regardless of whether the bank received consideration.

                                * * * * *



Sec. 229.53  Substitute check indemnity.

    (a) Scope of indemnity. A bank that transfers, presents, or returns 
a substitute check or a paper or electronic representation of a 
substitute check for which it receives consideration shall indemnify the 
recipient and any subsequent recipient (including a collecting or 
returning bank, the depositary bank, the drawer, the drawee, the payee, 
the depositor, and any indorser) for any loss incurred by any recipient 
of a substitute check if that loss occurred due to the receipt of a 
substitute check instead of the original check.
    (b) Indemnity amount--(1) In general. Unless otherwise indicated by 
paragraph (b)(2) or (b)(3) of this section, the amount of the indemnity 
under paragraph (a) of this section is as follows:
    (i) If the loss resulted from a breach of a substitute check 
warranty provided under Sec. 229.52, the amount of the indemnity shall 
be the amount of any loss (including interest, costs, reasonable 
attorney's fees, and other expenses of representation) proximately 
caused by the warranty breach.
    (ii) If the loss did not result from a breach of a substitute check 
warranty provided under Sec. 229.52, the amount of the indemnity shall 
be the sum of--
    (A) The amount of the loss, up to the amount of the substitute 
check; and
    (B) Interest and expenses (including costs and reasonable attorney's 
fees and other expenses of representation) related to the substitute 
check.
    (2) Comparative negligence. (i) If a loss described in paragraph (a) 
of this section results in whole or in part from the indemnified 
person's negligence or failure to act in good faith, then the indemnity 
amount described in paragraph (b)(1) of this section shall be reduced in 
proportion to the amount of negligence or bad faith attributable to the 
indemnified person.
    (ii) Nothing in this paragraph (b)(2) reduces the rights of a 
consumer or any other person under the U.C.C. or other applicable 
provision of state or federal law.
    (3) Effect of producing the original check or a sufficient copy--
    (i) If an indemnifying bank produces the original check or a 
sufficient copy, the indemnifying bank shall--
    (A) Be liable under this section only for losses that are incurred 
up to the time that the bank provides that original check or sufficient 
copy to the indemnified person; and
    (B) Have a right to the return of any funds it has paid under this 
section in excess of those losses.
    (ii) The production by the indemnifying bank of the original check 
or a sufficient copy under paragraph (b)(3)(i) of this section shall not 
absolve the indemnifying bank from any liability under any warranty that 
the

[[Page 876]]

bank has provided under Sec. 229.52 or other applicable law.
    (c) Subrogation of rights--(1) In general. An indemnifying bank 
shall be subrogated to the rights of the person that it indemnifies to 
the extent of the indemnity it has provided and may attempt to recover 
from another person based on a warranty or other claim.
    (2) Duty of indemnified person for subrogated claims. Each 
indemnified person shall have a duty to comply with all reasonable 
requests for assistance from an indemnifying bank in connection with any 
claim the indemnifying bank brings against a warrantor or other person 
related to a check that forms the basis for the indemnification.

    Effective Date Note: At 82 FR 27585, June 15, 2017, Sec. 229.53 was 
amended by revising paragraph (a), effective July 1, 2018. For the 
convenience of the user, the revised text is set forth as follows:



Sec. 229.53  Substitute check indemnity.

    (a) Scope of indemnity. (1) A bank that transfers, presents, or 
returns a substitute check or a paper or electronic representation of a 
substitute check for which it receives consideration shall indemnify the 
recipient and any subsequent recipient (including a collecting or 
returning bank, the depositary bank, the drawer, the drawee, the payee, 
the depositor, and any indorser) for any loss incurred by any recipient 
of a substitute check if that loss occurred due to the receipt of a 
substitute check instead of the original check.
    (2) A bank that rejects a check submitted for deposit and returns to 
its customer a substitute check (or a paper or electronic representation 
of a substitute check) shall indemnify the recipient as described in 
paragraph (a)(1) of this section regardless of whether the bank received 
consideration.

                                * * * * *



Sec. 229.54  Expedited recredit for consumers.

    (a) Circumstances giving rise to a claim. A consumer may make a 
claim under this section for a recredit with respect to a substitute 
check if the consumer asserts in good faith that--
    (1) The bank holding the consumer's account charged that account for 
a substitute check that was provided to the consumer (although the 
consumer need not be in possession of that substitute check at the time 
he or she submits a claim);
    (2) The substitute check was not properly charged to the consumer 
account or the consumer has a warranty claim with respect to the 
substitute check;
    (3) The consumer suffered a resulting loss; and
    (4) Production of the original check or a sufficient copy is 
necessary to determine whether or not the substitute check in fact was 
improperly charged or whether the consumer's warranty claim is valid.
    (b) Procedures for making claims. A consumer shall make his or her 
claim for a recredit under this section with the bank that holds the 
consumer's account in accordance with the timing, content, and form 
requirements of this section.
    (1) Timing of claim. (i) The consumer shall submit his or her claim 
such that the bank receives the claim by the end of the 40th calendar 
day after the later of the calendar day on which the bank mailed or 
delivered, by a means agreed to by the consumer--
    (A) The periodic account statement that contains information 
concerning the transaction giving rise to the claim; or
    (B) The substitute check giving rise to the claim.
    (ii) If the consumer cannot submit his or her claim by the time 
specified in paragraph (b)(1)(i) of this section because of extenuating 
circumstances, the bank shall extend the 40-calendar-day period by an 
additional reasonable amount of time.
    (iii) If a consumer makes a claim orally and the bank requires the 
claim to be in writing, the consumer's claim is timely if the oral claim 
was received within the time described in paragraphs (b)(1)(i)-(ii) of 
this section and the written claim was received within the time 
described in paragraph (b)(3)(ii) of this section.
    (2) Content of claim. (i) The consumer's claim shall include the 
following information:
    (A) A description of the consumer's claim, including the reason why 
the consumer believes his or her account was improperly charged for the 
substitute check or the nature of his or

[[Page 877]]

her warranty claim with respect to such check;
    (B) A statement that the consumer suffered a loss and an estimate of 
the amount of that loss;
    (C) The reason why production of the original check or a sufficient 
copy is necessary to determine whether or not the charge to the 
consumer's account was proper or the consumer's warranty claim is valid; 
and
    (D) Sufficient information to allow the bank to identify the 
substitute check and investigate the claim.
    (ii) If a consumer attempts to make a claim but fails to provide all 
the information in paragraph (b)(2)(i) of this section that is required 
to constitute a claim, the bank shall inform the consumer that the claim 
is not complete and identify the information that is missing.
    (3) Form and submission of claim; computation of time for bank 
action. The bank holding the account that is the subject of the 
consumer's claim may, in its discretion, require the consumer to submit 
the information required by this section in writing. A bank that 
requires a written submission--
    (i) May permit the consumer to submit the written claim 
electronically;
    (ii) Shall inform a consumer who submits a claim orally of the 
written claim requirement at the time of the oral claim and may require 
such consumer to submit the written claim such that the bank receives 
the written claim by the 10th business day after the banking day on 
which the bank received the oral claim; and
    (iii) Shall compute the time periods for acting on the consumer's 
claim described in paragraph (c) of this section from the date on which 
the bank received the written claim.
    (c) Action on claims. A bank that receives a claim that meets the 
requirements of paragraph (b) of this section shall act as follows:
    (1) Valid consumer claim. If the bank determines that the consumer's 
claim is valid, the bank shall--
    (i) Recredit the consumer's account for the amount of the consumer's 
loss, up to the amount of the substitute check, plus interest if the 
account is an interest-bearing account, no later than the end of the 
business day after the banking day on which the bank makes that 
determination; and
    (ii) Send to the consumer the notice required by paragraph (e)(1) of 
this section.
    (2) Invalid consumer claim. If a bank determines that the consumer's 
claim is not valid, the bank shall send to the consumer the notice 
described in paragraph (e)(2) of this section.
    (3) Recredit pending investigation. If the bank has not taken an 
action described in paragraph (c)(1) or (c)(2) of this section before 
the end of the 10th business day after the banking day on which the bank 
received the claim, the bank shall--
    (i) By the end of that business day--
    (A) Recredit the consumer's account for the amount of the consumer's 
loss, up to the lesser of the amount of the substitute check or $2,500, 
plus interest on that amount if the account is an interest-bearing 
account; and
    (B) Send to the consumer the notice required by paragraph (e)(1) of 
this section; and
    (ii) Recredit the consumer's account for the remaining amount of the 
consumer's loss, if any, up to the amount of the substitute check, plus 
interest if the account is an interest-bearing account, no later than 
the end of the 45th calendar day after the banking day on which the bank 
received the claim and send to the consumer the notice required by 
paragraph (e)(1) of this section, unless the bank prior to that time has 
determined that the consumer's claim is or is not valid in accordance 
with paragraph (c)(1) or (c)(2) of this section.
    (4) Reversal of recredit. A bank may reverse a recredit that it has 
made to a consumer account under paragraph (c)(1) or (c)(3) of this 
section, plus interest that the bank has paid, if any, on that amount, 
if the bank--
    (i) Determines that the consumer's claim was not valid; and
    (ii) Notifies the consumer in accordance with paragraph (e)(3) of 
this section.
    (d) Availability of recredit--(1) Next-day availability. Except as 
provided in paragraph (d)(2) of this section, a bank shall make any 
amount that it recredits to a consumer account under this section 
available for withdrawal

[[Page 878]]

no later than the start of the business day after the banking day on 
which the bank provides the recredit.
    (2) Safeguard exceptions. A bank may delay availability to a 
consumer of a recredit provided under paragraph (c)(3)(i) of this 
section until the start of the earlier of the business day after the 
banking day on which the bank determines the consumer's claim is valid 
or the 45th calendar day after the banking day on which the bank 
received the oral or written claim, as required by paragraph (b) of this 
section, if--
    (i) The consumer submits the claim during the 30-calendar-day period 
beginning on the banking day on which the consumer account was 
established;
    (ii) Without regard to the charge that gave rise to the recredit 
claim--
    (A) On six or more business days during the six-month period ending 
on the calendar day on which the consumer submitted the claim, the 
balance in the consumer account was negative or would have become 
negative if checks or other charges to the account had been paid; or
    (B) On two or more business days during such six-month period, the 
balance in the consumer account was negative or would have become 
negative in the amount of $5,000 or more if checks or other charges to 
the account had been paid; or
    (iii) The bank has reasonable cause to believe that the claim is 
fraudulent, based on facts that would cause a well-grounded belief in 
the mind of a reasonable person that the claim is fraudulent. The fact 
that the check in question or the consumer is of a particular class may 
not be the basis for invoking this exception.
    (3) Overdraft fees. A bank that delays availability as permitted in 
paragraph (d)(2) of this section may not impose an overdraft fee with 
respect to drafts drawn by the consumer on such recredited funds until 
the fifth calendar day after the calendar day on which the bank sent the 
notice required by paragraph (e)(1) of this section.
    (e) Notices relating to consumer expedited recredit claims--(1) 
Notice of recredit. A bank that recredits a consumer account under 
paragraph (c) of this section shall send notice to the consumer of the 
recredit no later than the business day after the banking day on which 
the bank recredits the consumer account. This notice shall describe--
    (i) The amount of the recredit; and
    (ii) The date on which the recredited funds will be available for 
withdrawal.
    (2) Notice that the consumer's claim is not valid. If a bank 
determines that a substitute check for which a consumer made a claim 
under this section was in fact properly charged to the consumer account 
or that the consumer's warranty claim for that substitute check was not 
valid, the bank shall send notice to the consumer no later than the 
business day after the banking day on which the bank makes that 
determination. This notice shall--
    (i) Include the original check or a sufficient copy, except as 
provided in Sec. 229.58;
    (ii) Demonstrate to the consumer that the substitute check was 
properly charged or the consumer's warranty claim is not valid; and
    (iii) Include the information or documents (in addition to the 
original check or sufficient copy), if any, on which the bank relied in 
making its determination or a statement that the consumer may request 
copies of such information or documents.
    (3) Notice of a reversal of recredit. A bank that reverses an amount 
it previously recredited to a consumer account shall send notice to the 
consumer no later than the business day after the banking day on which 
the bank made the reversal. This notice shall include the information 
listed in paragraph (e)(2) of this section and also describe--
    (i) The amount of the reversal, including both the amount of the 
recredit (including the interest component, if any) and the amount of 
interest paid on the recredited amount, if any, being reversed; and
    (ii) The date on which the bank made the reversal.
    (f) Other claims not affected. Providing a recredit in accordance 
with this section shall not absolve the bank from liability for a claim 
made under any other provision of law, such as a claim for wrongful 
dishonor of a check under the U.C.C., or from liability for additional 
damages, such as damages under

[[Page 879]]

Sec. 229.53 or Sec. 229.56 of this subpart or U.C.C. 4-402.



Sec. 229.55  Expedited recredit for banks.

    (a) Circumstances giving rise to a claim. A bank that has an 
indemnity claim under Sec. 229.53 with respect to a substitute check 
may make an expedited recredit claim against an indemnifying bank if--
    (1) The claimant bank or a bank that the claimant bank has 
indemnified--
    (i) Has received a claim for expedited recredit from a consumer 
under Sec. 229.54; or
    (ii) Would have been subject to such a claim if the consumer account 
had been charged for the substitute check;
    (2) The claimant bank is obligated to provide an expedited recredit 
with respect to such substitute check under Sec. 229.54 or otherwise 
has suffered a resulting loss; and
    (3) The production of the original check or a sufficient copy is 
necessary to determine the validity of the charge to the consumer 
account or the validity of any warranty claim connected with such 
substitute check.
    (b) Procedures for making claims. A claimant bank shall send its 
claim to the indemnifying bank, subject to the timing, content, and form 
requirements of this section.
    (1) Timing of claim. The claimant bank shall submit its claim such 
that the indemnifying bank receives the claim by the end of the 120th 
calendar day after the date of the transaction that gave rise to the 
claim.
    (2) Content of claim. The claimant bank's claim shall include the 
following information--
    (i) A description of the consumer's claim or the warranty claim 
related to the substitute check, including why the bank believes that 
the substitute check may not be properly charged to the consumer 
account;
    (ii) A statement that the claimant bank is obligated to recredit a 
consumer account under Sec. 229.54 or otherwise has suffered a loss and 
an estimate of the amount of that recredit or loss, including interest 
if applicable;
    (iii) The reason why production of the original check or a 
sufficient copy is necessary to determine the validity of the charge to 
the consumer account or the warranty claim; and
    (iv) Sufficient information to allow the indemnifying bank to 
identify the substitute check and investigate the claim.
    (3) Requirements relating to copies of substitute checks. If the 
information submitted by a claimant bank under paragraph (b)(2) of this 
section includes a copy of any substitute check, the claimant bank shall 
take reasonable steps to ensure that the copy cannot be mistaken for the 
legal equivalent of the check under Sec. 229.51(a) or sent or handled 
by any bank, including the indemnifying bank, for forward collection or 
return.
    (4) Form and submission of claim; computation of time. The 
indemnifying bank may, in its discretion, require the claimant bank to 
submit the information required by this section in writing, including a 
copy of the paper or electronic claim submitted by the consumer, if any. 
An indemnifying bank that requires a written submission--
    (i) May permit the claimant bank to submit the written claim 
electronically;
    (ii) Shall inform a claimant bank that submits a claim orally of the 
written claim requirement at the time of the oral claim; and
    (iii) Shall compute the 10-day time period for acting on the claim 
described in paragraph (c) of this section from the date on which the 
bank received the written claim.
    (c) Action on claims. No later than the 10th business day after the 
banking day on which the indemnifying bank receives a claim that meets 
the requirements of paragraph (b) of this section, the indemnifying bank 
shall--
    (1) Recredit the claimant bank for the amount of the claim, up to 
the amount of the substitute check, plus interest if applicable;
    (2) Provide to the claimant bank the original check or a sufficient 
copy; or
    (3) Provide information to the claimant bank regarding why the 
indemnifying bank is not obligated to comply with paragraph (c)(1) or 
(c)(2) of this section.
    (d) Recredit does not abrogate other liabilities. Providing a 
recredit to a claimant bank under this section does

[[Page 880]]

not absolve the indemnifying bank from liability for claims brought 
under any other law or from additional damages under Sec. 229.53 or 
Sec. 229.56.
    (e) Indemnifying bank's right to a refund. (1) If a claimant bank 
reverses a recredit it previously made to a consumer account under Sec. 
229.54 or otherwise receives reimbursement for a substitute check that 
formed the basis of its claim under this section, the claimant bank 
shall provide a refund promptly to any indemnifying bank that previously 
advanced funds to the claimant bank. The amount of the refund to the 
indemnifying bank shall be the amount of the reversal or reimbursement 
obtained by the claimant bank, up to the amount previously advanced by 
the indemnifying bank.
    (2) If the indemnifying bank provides the claimant bank with the 
original check or a sufficient copy under paragraph (c)(2) of this 
section, Sec. 229.53(b)(3) governs the indemnifying bank's entitlement 
to repayment of any amount provided to the claimant bank that exceeds 
the amount of losses the claimant bank incurred up to that time.



Sec. 229.56  Liability.

    (a) Measure of damages--(1) In general. Except as provided in 
paragraph (a)(2) or (a)(3) of this section or Sec. 229.53, any person 
that breaches a warranty described in Sec. 229.52 or fails to comply 
with any requirement of this subpart with respect to any other person 
shall be liable to that person for an amount equal to the sum of--
    (i) The amount of the loss suffered by the person as a result of the 
breach or failure, up to the amount of the substitute check; and
    (ii) Interest and expenses (including costs and reasonable 
attorney's fees and other expenses of representation) related to the 
substitute check.
    (2) Offset of recredits. The amount of damages a person receives 
under paragraph (a)(1) of this section shall be reduced by any amount 
that the person receives and retains as a recredit under Sec. 229.54 or 
Sec. 229.55.
    (3) Comparative negligence. (i) If a person incurs damages that 
resulted in whole or in part from that person's negligence or failure to 
act in good faith, then the amount of any damages due to that person 
under paragraph (a)(1) of this section shall be reduced in proportion to 
the amount of negligence or bad faith attributable to that person.
    (ii) Nothing in this paragraph (a)(3) reduces the rights of a 
consumer or any other person under the U.C.C. or other applicable 
provision of federal or state law.
    (b) Timeliness of action. Delay by a bank beyond any time limits 
prescribed or permitted by this subpart is excused if the delay is 
caused by interruption of communication or computer facilities, 
suspension of payments by another bank, war, emergency conditions, 
failure of equipment, or other circumstances beyond the control of the 
bank and if the bank uses such diligence as the circumstances require.
    (c) Jurisdiction. A person may bring an action to enforce a claim 
under this subpart in any United States district court or in any other 
court of competent jurisdiction. Such claim shall be brought within one 
year of the date on which the person's cause of action accrues. For 
purposes of this paragraph, a cause of action accrues as of the date on 
which the injured person first learns, or by which such person 
reasonably should have learned, of the facts and circumstances giving 
rise to the cause of action, including the identity of the warranting or 
indemnifying bank against which the action is brought.
    (d) Notice of claims. Except as otherwise provided in this paragraph 
(d), unless a person gives notice of a claim under this section to the 
warranting or indemnifying bank within 30 calendar days after the person 
has reason to know of both the claim and the identity of the warranting 
or indemnifying bank, the warranting or indemnifying bank is discharged 
from liability in an action to enforce a claim under this subpart to the 
extent of any loss caused by the delay in giving notice of the claim. A 
timely recredit claim by a consumer under Sec. 229.54 constitutes 
timely notice under this paragraph.

[[Page 881]]



Sec. 229.57  Consumer awareness.

    (a) General disclosure requirement and content. Each bank shall 
provide, in accordance with paragraph (b) of this section, a brief 
disclosure to each of its consumer customers that describes--
    (1) That a substitute check is the legal equivalent of an original 
check; and
    (2) The consumer recredit rights that apply when a consumer in good 
faith believes that a substitute check was not properly charged to his 
or her account.
    (b) Distribution--(1) Disclosure to consumers who receive paid 
checks with periodic account statements. A bank shall provide the 
disclosure described in paragraph (a) of this section to a consumer 
customer who receives paid original checks or paid substitute checks 
with his or her periodic account statement--
    (i) No later than the first regularly scheduled communication with 
the consumer after October 28, 2004, for each consumer who is a customer 
of the bank on that date; and
    (ii) At the time the customer relationship is initiated, for each 
customer relationship established after October 28, 2004.
    (2) Disclosure to consumers who receive substitute checks on an 
occasional basis--(i) The bank shall provide the disclosure described in 
paragraph (a) of this section to a consumer customer of the bank who 
requests an original check or a copy of a check and receives a 
substitute check. If feasible, the bank shall provide this disclosure at 
the time of the consumer's request; otherwise, the bank shall provide 
this disclosure no later than the time at which the bank provides a 
substitute check in response to the consumer's request.
    (ii) The bank shall provide the disclosure described in paragraph 
(a) of this section to a consumer customer of the bank who receives a 
returned substitute check, at the time the bank provides such substitute 
check.
    (3) Multiple account holders. A bank need not give separate 
disclosures to each customer on a jointly held account.



Sec. 229.58  Mode of delivery of information.

    A bank may deliver any notice or other information that it is 
required to provide under this subpart by United States mail or by any 
other means through which the recipient has agreed to receive account 
information. If a bank is required to provide an original check or a 
sufficient copy, the bank instead may provide an electronic image of the 
original check or sufficient copy if the recipient has agreed to receive 
that information electronically.



Sec. 229.59  Relation to other law.

    The Check 21 Act and this subpart supersede any provision of federal 
or state law, including the Uniform Commercial Code, that is 
inconsistent with the Check 21 Act or this subpart, but only to the 
extent of the inconsistency.



Sec. 229.60  Variation by agreement.

    Any provision of Sec. 229.55 may be varied by agreement of the 
banks involved. No other provision of this subpart may be varied by 
agreement by any person or persons.





     Sec. Appendix A to Part 229--Routing Number Guide to Next-Day 
                  Availability Checks and Local Checks

    A. Each bank is assigned a routing number by an agent of the 
American Bankers Association. The routing number takes two forms: a 
fractional form and a nine-digit form. A paying bank generally is 
identified on the face of a check by its routing number in both the 
fractional form (which generally appears in the upper right-hand corner 
of the check) and the nine-digit form (which is printed in magnetic ink 
along the bottom of the check). Where a check is payable by one bank but 
payable through another bank, the routing number appearing on the check 
is that of the payable-through bank, not the payor bank.
    B. The first four digits of the nine-digit routing number (and the 
denominator of the fractional routing number) form the ``Federal Reserve 
routing symbol,'' and the first two digits of the routing number 
identify the Federal Reserve District in which the bank is located. 
Thus, 01 will be the first two digits of the routing number of a bank in 
the First Federal Reserve District (Boston), and 12 will be the first 
two digits of the routing number of a bank in the Twelfth District

[[Page 882]]

(San Francisco). Adding 2 to the first digit denotes a thrift 
institution. Thus, 21 identifies a thrift in the First District, and 32 
denotes a thrift in the Twelfth District.

                     Fourth Federal Reserve District

                   [Federal Reserve Bank of Cleveland]

                               Head Office

\1\ 0110
0111
0112
0113
0114
0115
0116
0117
0118
0119
0210
0211
0212
0213
0214
0215
0216
0219
0220
0223
0260
0280
0310
0311
0312
0313
0319
0360
0410
0412
0420
0421
0422
0423
0430
0432
0433
0434
0440
0441
0442
0510
0514
0515
0519
0520
0521
0522
0530
0531
0532
0539
0540
0550
0560
0570
0610
0611
0612
0613
0620
0621
0622
0630
0631
0632
0640
0641
0642
0650
0651
0652
0653
0654
0655
0660
0670
0710
0711
0712
0719
0720
0724
0730
0739
0740
0749
0750
0759
0810
0812
0813
0815
0819
0820
0829
0830
0839
0840
0841
0842
0843
0863
0865
0910
0911
0912
0913
0914
0915
0918
0919
0920
0921
0929
0960
1010
1011
1012
1019
1020
1021
1022
1023
1030
1031
1039
1040
1041
1049
1070
1110
1111
1113
1119
1120
1122
1123
1130
1131
1140
1149
1163
1210
1211
1212
1213
1220
1221
1222
1223
1224
1230
1231
1232
1233
1240
1241
1242
1243
1250
1251
1252
2111
2112
2113
2114
2115
2116
2117
2118
2119
2210
2211
2212
2213
2214
2215
2216
2219
2220
2223
2260
2280
2310
2311
2312
2313
2319
2360
2410
2412
2420
2421
2422
2423
2430
2432
2433
2434
2440
2441
2442
2510
2514
2515
2519
2520
2521
2522
2530
2531
2532
2539
2540
2550
2560
2570
2610
2611
2612
2613
2620
2621
2622
2630
2631
2632
2640
2641
2642
2650
2651
2652
2653
2654
2655
2660
2670
2710
2711
2712
2719
2720

[[Page 883]]


2724
2730
2739
2740
2749
2750
2759
2810
2812
2813
2815
2819
2820
2829
2830
2839
2840
2841
2842
2843
2863
2865
2910
2911
2912
2913
2914
2915
2918
2919
2920
2921
2929
2960
3010
3011
3012
3019
3020
3021
3022
3023
3030
3031
3039
3040
3041
3049
3070
3110
3111
3113
3119
3120
3122
3123
3130
3131
3140
3149
3163
3210
3211
3212
3213
3220
3221
3222
3223
3224
3230
3231
3232
3233
3240
3241
3242
3243
3250
3251
3252
    \1\ The first two digits identify the bank's Federal Reserve 
District. For example, 01 identifies the First Federal Reserve District 
(Boston), and 12 identifies the Twelfth District (San Francisco). Adding 
2 to the first digit denotes a thrift institution. For example, 21 
identifies a thrift in the First District, and 32 denotes a thrift in 
the Twelfth District.

                          Federal Reserve Banks

0110 0001 5
0111 0048 1
0210 0120 8
0212 0400 5
0213 0500 1
0220 0026 6
0310 0004 0
0410 0001 4
0420 0043 7
0430 0030 0
0440 0050 3
0510 0003 3
0519 0002 3
0520 0027 8
0530 0020 6
0539 0008 9
0610 0014 6
0620 0019 0
0630 0019 9
0640 0010 1
0650 0021 0
0660 0010 9
0710 0030 1
0711 0711 0
0720 0029 0
0730 0033 8
0740 0020 1
0750 0012 9
0810 0004 5
0820 0013 8
0830 0059 3
0840 0003 9
0910 0008 0
0920 0026 7
1010 0004 8
1020 0019 9
1030 0024 0
1040 0012 6
1110 0003 8
1120 0001 1
1130 0004 9
1140 0072 1
1210 0037 4
1220 0016 6
1230 0001 3
1240 0031 3
1250 0001 1

                         Federal Home Loan Banks

0110 0053 6
0212 0639 1
0260 0973 9
0410 0291 5
0420 0091 6
0430 0143 5
0430 1862 2
0610 0876 6
0710 0450 1
0730 0091 4
0740 0101 9
0810 0091 9
0910 0091 2
1010 0091 2
1011 0194 7
1110 1083 7
1119 1083 0
1210 0070 1
1240 0287 4
1250 0050 3

[53 FR 19433, May 27, 1988]

    Editorial Note: For Federal Register citations affecting appendix A 
to part 229, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.



                 Sec. Appendix B to Part 229 [Reserved]



  Sec. Appendix C to Part 229--Model Availability Policy Disclosures, 
   Clauses, and Notices; Model Substitute Check Policy Disclosure and 
                                 Notices

    This appendix contains model availability policy and substitute 
check policy disclosures, clauses, and notices to facilitate compliance 
with the disclosure and notice requirements of Regulation CC (12 CFR 
part 229). Although use of these models is not required, banks using 
them properly (with the exception of models C-22 through C-25) to make 
disclosures required by Regulation CC are deemed to be in compliance.

                  Model Availability Policy Disclosures

C-1 Next-day availability
C-2 Next-day availability and Sec. 229.13 exceptions
C-3 Next-day availability, case-by-case holds to statutory limits, and 
          Sec. 229.13 exceptions
C-4 Holds to statutory limits on all deposits (includes chart)
C-5 Holds to statutory limits on all deposits
C-5A Substitute check policy disclosure

                              Model Clauses

C-6 Holds on other funds (check cashing)
C-7 Holds on other funds (other account)
C-8 Appendix B availability (nonlocal checks)

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C-9 Automated teller machine deposits (extended hold)
C-10 Cash withdrawal limitation
C-11 Credit union interest payment policy
C-11A Availability of Funds Deposited at Other Locations

                              Model Notices

C-12 Exception hold notice
C-13 Reasonable cause hold notice
C-14 One-time notice for large deposit and redeposited check exception 
          holds
C-15 One-time notice for repeated overdraft exception holds
C-16 Case-by-case hold notice
C-17 Notice at locations where employees accept consumer deposits
C-18 Notice at locations where employees accept consumer deposits (case-
          by-case holds)
C-19 Notice at automated teller machines
C-20 Notice at automated teller machines (delayed receipt)
C-21 Deposit slip notice
C-22 Expedited Recredit Claim, Valid Claim Refund Notice
C-23 Expedited Recredit Claim, Provisional Refund Notice
C-24 Expedited Recredit Claim, Denial Notice
C-25 Expedited Recredit Claim, Reversal Notice

                  Model Availability Policy Disclosures

                       C-1--Next-Day Availability

                     Your Ability To Withdraw Funds

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive your 
deposit. Electronic direct deposits will be available on the day we 
receive the deposit. Once the funds are available, you can withdraw them 
in cash and we will use them to pay checks that you have written.
    For determining the availability of your deposits, every day is a 
business day, except Saturdays, Sundays, and federal holidays. If you 
make a deposit before (time of day) on a business day that we are open, 
we will consider that day to be the day of your deposit. However, if you 
make a deposit after (time of day) or on a day we are not open, we will 
consider that the deposit was made on the next business day we are open.

         C-2--Next-day availability and Sec. 229.13 exceptions

                     Your Ability To Withdraw Funds

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive your 
deposit. Electronic direct deposits will be available on the day we 
receive the deposit. Once they are available, you can withdraw the funds 
in cash and we will use the funds to pay checks that you have written.
    For determining the availability of your deposits, every day is a 
business day, except Saturdays, Sundays, and federal holidays. If you 
make a deposit before (time of day) on a business day that we are open, 
we will consider that day to be the day of your deposit. However, if you 
make a deposit after (time of day) or on a day we are not open, we will 
consider that the deposit was made on the next business day we are open.

                         Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period under 
the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.
     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules for New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

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C-3--Next-Day Availability, Case-by-Case Holds to Statutory Limits, and 
                         Sec. 229.13 Exceptions

                     Your Ability To Withdraw Funds

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive your 
deposit. Electronic direct deposits will be available on the day we 
receive the deposit. Once they are available, you can withdraw the funds 
in cash and we will use the funds to pay checks that you have written.
    For determining the availability of your deposits, every day is a 
business day, except Saturdays, Sundays, and federal holidays. If you 
make a deposit before (time of day) on a business day that we are open, 
we will consider that day to be the day of your deposit. However, if you 
make a deposit after (time of day) or on a day we are not open, we will 
consider that the deposit was made on the next business day we are open.

                         Longer Delays May Apply

    In some cases, we will not make all of the funds that you deposit by 
check available to you on the first business day after the day of your 
deposit. Depending on the type of check that you deposit, funds may not 
be available until the fifth business day after the day of your deposit. 
The first $100 of your deposits, however, may be available on the first 
business day.
    If we are not going to make all of the funds from your deposit 
available on the first business day, we will notify you at the time you 
make your deposit. We will also tell you when the funds will be 
available. If your deposit is not made directly to one of our employees, 
or if we decide to take this action after you have left the premises, we 
will mail you the notice by the day after we receive your deposit.
    If you will need the funds from a deposit right away, you should ask 
us when the funds will be available.
    In addition, funds you deposit by check may be delayed for a longer 
period under the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.
     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules for New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

     C-4--Holds to Statutory Limits On All Deposits (Includes Chart)

                     Your Ability To Withdraw Funds

    Our policy is to delay the availability of funds from your cash and 
check deposits. During the delay, you may not withdraw the funds in cash 
and we will not use the funds to pay checks that you have written.

                Determining the Availability of a Deposit

    The length of the delay is counted in business days from the day of 
your deposit. Every day is a business day except Saturdays, Sundays, and 
federal holidays. If you make a deposit before (time of day) on a 
business day that we are open, we will consider that day to be the day 
of your deposit. However, if you make a deposit after (time of day) or 
on a day we are not open, we will consider that the deposit was made on 
the next business day we are open.
    The length of the delay varies depending on the type of deposit and 
is explained below.

                          Same-Day Availability

    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit.

                          Next-Day Availability

    Funds from the following deposits are available on the first 
business day after the day of your deposit:
     U.S. Treasury checks that are payable to you.
     Wire transfers.

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     Checks drawn on (bank name) [unless (any 
limitations related to branches in different states or check processing 
regions)].
    If you make the deposit in person to one of our employees, funds 
from the following deposits are also available on the first business day 
after the day of your deposit:
     Cash.
     State and local government checks that are 
payable to you [if you use a special deposit slip available from (where 
deposit slip may be obtained)].
     Cashier's, certified, and teller's checks that 
are payable to you [if you use a special deposit slip available from 
(where deposit slip may be obtained)].
     Federal Reserve Bank checks, Federal Home Loan 
Bank checks, and postal money orders, if these items are payable to you.
    If you do not make your deposit in person to one of our employees 
(for example, if you mail the deposit), funds from these deposits will 
be available on the second business day after the day we receive your 
deposit.

                          Other Check Deposits

    To find out when funds from other check deposits will be available, 
look at the first four digits of the routing number on the check:
[GRAPHIC] [TIFF OMITTED] TR24MR97.000

    Some checks are marked ``payable through'' and have a four-or nine-
digit number nearby. For these checks, use this four-digit number (or 
the first four digits of the nine-digit number), not the routing number 
on the bottom of the check, to determine if these checks are local or 
nonlocal. Once you have determined the first four digits of the routing 
number (1234 in the examples above), the following chart will show you 
when funds from the check will be available:

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----------------------------------------------------------------------------------------------------------------
   First four digits from routing                                  When funds are available if a deposit is made
               number                  When funds are available                     on a Monday
----------------------------------------------------------------------------------------------------------------
[local numbers]....................  $100 on the first business   Tuesday.
                                      day after the day of your
                                      deposit.
                                     Remaining funds on the       Wednesday.
                                      second business day after
                                      the day of your deposit.
All other numbers..................  $100 on the first business   Tuesday.
                                      day after the day of your
                                      deposit.
                                     Remaining funds on the       Monday of the following week.
                                      fifth business day after
                                      the day of your deposit.
----------------------------------------------------------------------------------------------------------------

    If you deposit both categories of checks, $100 from the checks will 
be available on the first business day after the day of your deposit, 
not $100 from each category of check.

                         Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period under 
the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.
     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules for New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

             C-5--Holds to Statutory Limits on All Deposits

                     Your Ability To Withdraw Funds

    Our policy is to delay the availability of funds from your cash and 
check deposits. During the delay, you may not withdraw the funds in cash 
and we will not use the funds to pay checks that you have written.

                Determining the Availability Of A Deposit

    The length of the delay is counted in business days from the day of 
your deposit. Every day is a business day except Saturdays, Sundays, and 
federal holidays. If you make a deposit before (time of day) on a 
business day that we are open, we will consider that day to be the day 
of your deposit. However, if you make a deposit after (time of day) or 
on a day we are not open, we will consider that the deposit was made on 
the next business day we are open.
    The length of the delay varies depending on the type of deposit and 
is explained below.

                          Same-Day Availability

    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit.

                          Next-Day Availability

    Funds from the following deposits are available on the first 
business day after the day of your deposit:
     U.S. Treasury checks that are payable to you.
     Wire transfers.
     Checks drawn on (bank name) [unless (any 
limitations related to branches in different states or check processing 
regions)].
    If you make the deposit in person to one of our employees, funds 
from the following deposits are also available on the first business day 
after the day of your deposit:
     Cash.
     State and local government checks that are 
payable to you [if you use a special deposit slip available from (where 
deposit slip may be obtained)].
     Cashier's, certified, and teller's checks that 
are payable to you [if you use a special deposit slip available from 
(where deposit slip may be obtained)].

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     Federal Reserve Bank checks, Federal Home Loan 
Bank checks, and postal money orders, if these items are payable to you.
    If you do not make your deposit in person to one of our employees 
(for example, if you mail the deposit), funds from these deposits will 
be available on the second business day after the day we receive your 
deposit.

                          Other Check Deposits

    The delay for other check deposits depends on whether the check is a 
local or a nonlocal check. To see whether a check is a local or a 
nonlocal check, look at the routing number on the check:
[GRAPHIC] [TIFF OMITTED] TR17SE97.000

    If the first four digits of the routing number (1234 in the examples 
above) are (list of local numbers), then the check is a local check. 
Otherwise, the check is a nonlocal check. Some checks are marked 
``payable through'' and have a four- or nine-digit number nearby. For 
these checks, use the four-digit number (or the first four digits of the 
nine-digit number), not the routing number on the bottom of the check, 
to determine if these checks are local or nonlocal. Our policy is to 
make funds from local and nonlocal checks available as follows.
    1. Local checks. The first $100 from a deposit of local checks will 
be available on the

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first business day after the day of your deposit. The remaining funds 
will be available on the second business day after the day of your 
deposit.
    For example, if you deposit a local check of $700 on a Monday, $100 
of the deposit is available on Tuesday. The remaining $600 is available 
on Wednesday.
    2. Nonlocal checks. The first $100 from a deposit of nonlocal checks 
will be available on the first business day after the day of your 
deposit. The remaining funds will be available on the fifth business day 
after the day of your deposit.
    For example, if you deposit a $700 nonlocal check on a Monday, $100 
of the deposit is available on Tuesday. The remaining $600 is available 
on Monday of the following week.
    3. Local and nonlocal checks. If you deposit both categories of 
checks, $100 from the checks will be available on the first business day 
after the day of your deposit, not $100 from each category of check.

                         Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period under 
the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.
     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules For New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

                C-5A--Substitute Check Policy Disclosure

  Substitute Checks and Your Rights--[Important Information About Your 
                            Checking Account]

                    Substitute Checks and Your Rights

                       What Is a Substitute Check?

    To make check processing faster, federal law permits banks to 
replace original checks with ``substitute checks.'' These checks are 
similar in size to original checks with a slightly reduced image of the 
front and back of the original check. The front of a substitute check 
states: ``This is a legal copy of your check. You can use it the same 
way you would use the original check.'' You may use a substitute check 
as proof of payment just like the original check.
    Some or all of the checks that you receive back from us may be 
substitute checks. This notice describes rights you have when you 
receive substitute checks from us. The rights in this notice do not 
apply to original checks or to electronic debits to your account. 
However, you have rights under other law with respect to those 
transactions.

             What Are My Rights Regarding Substitute Checks?

    In certain cases, federal law provides a special procedure that 
allows you to request a refund for losses you suffer if a substitute 
check is posted to your account (for example, if you think that we 
withdrew the wrong amount from your account or that we withdrew money 
from your account more than once for the same check). The losses you may 
attempt to recover under this procedure may include the amount that was 
withdrawn from your account and fees that were charged as a result of 
the withdrawal (for example, bounced check fees).
    The amount of your refund under this procedure is limited to the 
amount of your loss or the amount of the substitute check, whichever is 
less. You also are entitled to interest on the amount of your refund if 
your account is an interest-bearing account. If your loss exceeds the 
amount of the substitute check, you may be able to recover additional 
amounts under other law.
    If you use this procedure, you may receive up to (amount, not lower 
than $2,500) of your refund (plus interest if your account earns 
interest) within (number of days, not more than 10) business days after 
we received your claim and the remainder of your refund (plus interest 
if your account earns interest) not

[[Page 890]]

later than (number of days, not more than 45) calendar days after we 
received your claim.
    We may reverse the refund (including any interest on the refund) if 
we later are able to demonstrate that the substitute check was correctly 
posted to your account.

                   How Do I Make a Claim for a Refund?

    If you believe that you have suffered a loss relating to a 
substitute check that you received and that was posted to your account, 
please contact us at (contact information, for example phone number, 
mailing address, e-mail address). You must contact us within (number of 
days, not less than 40) calendar days of the date that we mailed (or 
otherwise delivered by a means to which you agreed) the substitute check 
in question or the account statement showing that the substitute check 
was posted to your account, whichever is later. We will extend this time 
period if you were not able to make a timely claim because of 
extraordinary circumstances.
    Your claim must include--
     A description of why you have suffered a loss 
(for example, you think the amount withdrawn was incorrect);
     An estimate of the amount of your loss;
     An explanation of why the substitute check you 
received is insufficient to confirm that you suffered a loss; and
     A copy of the substitute check [and/or] the 
following information to help us identify the substitute check: 
(identifying information, for example the check number, the name of the 
person to whom you wrote the check, the amount of the check).

                              Model Clauses

                C-6--Holds on Other Funds (Check Cashing)

    If we cash a check for you that is drawn on another bank, we may 
withhold the availability of a corresponding amount of funds that are 
already in your account. Those funds will be available at the time funds 
from the check we cashed would have been available if you had deposited 
it.

                C-7--Holds on Other Funds (Other Account)

    If we accept for deposit a check that is drawn on another bank, we 
may make funds from the deposit available for withdrawal immediately but 
delay your availability to withdraw a corresponding amount of funds that 
you have on deposit in another account with us. The funds in the other 
account would then not be available for withdrawal until the time 
periods that are described elsewhere in this disclosure for the type of 
check that you deposited.

             C-8--Appendix B Availability (Nonlocal Checks)

    3. Certain other checks. We can process nonlocal checks drawn on 
financial institutions in certain areas faster than usual. Therefore, 
funds from deposits of checks drawn on institutions in those areas will 
be available to you more quickly. Call us if you would like a list of 
the routing numbers for these institutions.

         C-9--Automated Teller Machine Deposits (Extended Hold)

                  Deposits at Automated Teller Machines

    Funds from any deposits (cash or checks) made at automated teller 
machines (ATMs) we do not own or operate will not be available until the 
fifth business day after the day of your deposit. This rule does not 
apply at ATMs that we own or operate.
    (A list of our ATMs is enclosed. or A list of ATMs where you can 
make deposits but that are not owned or operated by us is enclosed. or 
All ATMs that we own or operate are identified as our machines.)

                    C-10--Cash Withdrawal Limitation

                       Cash Withdrawal Limitation

    We place certain limitations on withdrawals in cash. In general, 
$100 of a deposit is available for withdrawal in cash on the first 
business day after the day of deposit. In addition, a total of $400 of 
other funds becoming available on a given day is available for 
withdrawal in cash at or after (time no later than 5:00 p.m.) on that 
day. Any remaining funds will be available for withdrawal in cash on the 
following business day.

               C-11--Credit Union Interest Payment Policy

                         Interest Payment Policy

    If we receive a deposit to your account on or before the tenth of 
the month, you begin earning interest on the deposit (whether it was a 
deposit of cash or checks) as of the first day of that month. If we 
receive the deposit after the tenth of the month, you begin earning 
interest on the deposit as of the first of the following month. For 
example, a deposit made on June 7 earns interest from June l, while a 
deposit made on June 17 earns interest from July 1.

        C-11A--Availability of Funds Deposited at Other Locations

                       Deposits at Other Locations

    This availability policy only applies to funds deposited at 
(location). Please inquire for information about the availability of 
funds deposited at other locations.

                              Model Notices

                       C-12--Exception Hold Notice

                             Notice of Hold

Account number: (number)

[[Page 891]]

Date of deposit: (date)

    We are delaying the availability of (amount being held) from this 
deposit. These funds will be available on the (number) business day 
after the day of your deposit.
    We are taking this action because:

--A check you deposited was previously returned unpaid.
--You have overdrawn your account repeatedly in the last six months.
--The checks you deposited on this day exceed $5,000.
--An emergency, such as failure of computer or communications equipment, 
has occurred.
--We believe a check you deposited will not be paid for the following 
reasons [*]:

________________________________________________________________________

________________________________________________________________________

________________________________________________________________________

[*If you did not receive this notice at the time you made the deposit 
and the check you deposited is paid, we will refund to you any fees for 
overdrafts or returned checks that result solely from the additional 
delay that we are imposing. To obtain a refund of such fees, 
(description of procedure for obtaining refund).]

                   C-13--Reasonable Cause Hold Notice

                             Notice of Hold

Account number: (number)
Date of deposit: (date)

    We are delaying the availability of the funds you deposited by the 
following check: (description of check, such as amount and drawer.)
    These funds will be available on the (number) business day after the 
day of your deposit. The reason for the delay is explained below:

--We received notice that the check is being returned unpaid.
--We have confidential information that indicates that the check may not 
be paid.
--The check is drawn on an account with repeated overdrafts.
--We are unable to verify the endorsement of a joint payee.
--Some information on the check is not consistent with other information 
on the check.
--There are erasures or other apparent alterations on the check.
--The routing number of the paying bank is not a current routing number.
--The check is postdated or has a stale date.
--Information from the paying bank indicates that the check may not be 
paid.
--We have been notified that the check has been lost or damaged in 
collection.
--Other:

________________________________________________________________________

    [If you did not receive this notice at the time you made the deposit 
and the check you deposited is paid, we will refund to you any fees for 
overdrafts or returned checks that result solely from the additional 
delay that we are imposing. To obtain a refund of such fees, 
(description of procedure for obtaining refund).]

C-14--One-Time Notice for Large Deposit and Redeposited Check Exception 
                                  Holds

                             Notice of Hold

    If you deposit into your account:
     Checks totaling more than $5,000 on any one day, 
the first $5,000 deposited on any one banking day will be available to 
you according to our general policy. The amount in excess of $5,000 will 
generally be available on the (number) business day after the day of 
deposit for checks drawn on (bank name), the (number) business day after 
the day of deposit for local checks and (number) business day after the 
day of deposit for nonlocal checks. If checks (not drawn on us) that 
otherwise would receive next-day availability exceed $5,000, the excess 
will be treated as either local or nonlocal checks depending on the 
location of the paying bank. If your check deposit, exceeding $5,000 on 
any one day, is a mix of local checks, nonlocal checks, checks drawn on 
(bank name), or checks that generally receive next-day availability, the 
excess will be calculated by first adding together the (type of check), 
then the (type of check), then the (type of check), then the (type of 
check).
     A check that has been returned unpaid, the funds 
will generally be available on the (number) business day after the day 
of deposit for checks drawn on (bank name), the (number) business day 
after the day of deposit for local checks and the (number) business day 
after the day of deposit for nonlocal checks. Checks (not drawn on us) 
that otherwise would receive next-day availability will be treated as 
either local or nonlocal checks depending on the location of the paying 
bank.

       C-15--One-Time Notice for Repeated Overdraft Exception Hold

                             Notice of Hold

Account Number: (number) Date of Notice: (date)

    We are delaying the availability of checks deposited into your 
account due to repeated overdrafts of your account. For the next six 
months, deposits will generally be available on the (number) business 
day after the day of your deposit for checks drawn on (bank name), the 
(number) business day after the day of your deposit for local checks, 
and the (number) business day after the day of deposit for nonlocal 
checks. Checks (not drawn on us) that otherwise would have received

[[Page 892]]

next-day availability will be treated as either local or nonlocal checks 
depending on the location of the paying bank.

                     C-16--Case-by-Case Hold Notice

                             Notice of Hold

Account number: (number)
Date of deposit: (date)

    We are delaying the availability of (amount being held) from this 
deposit. These funds will be available on the (number) business day 
after the day of your deposit [(subject to our cash withdrawal 
limitation policy)].
    [If you did not receive this notice at the time you made the deposit 
and the check you deposited is paid, we will refund to you any fees for 
overdrafts or returned checks that result solely from the additional 
delay that we are imposing. To obtain a refund of such fees, 
(description of procedure for obtaining refund).]

   C-17--Notice at locations where employees accept consumer deposits

                        FUNDS AVAILABILITY POLICY

------------------------------------------------------------------------
                                             When funds can be withdrawn
          Description of deposit                  by cash or check
------------------------------------------------------------------------
Direct deposits...........................  The day we receive the
                                             deposit
Cash, wire transfers, cashier's,            The first business day after
 certified, teller's, or government          the day of deposit.
 checks, checks on (bank name) [unless
 (any limitation reIated to branches in
 different check processing regions)], and
 the first $100 of a day's deposits of
 other checks.
Local checks..............................  The second business day
                                             after the day of deposit.
Nonlocal checks...........................  The fifth business day after
                                             the day of deposit.
------------------------------------------------------------------------

   C-18--Notice at locations where employees accept consumer deposits 
                          (case-by-case holds)

                        FUNDS AVAILABILITY POLICY

    Our general policy is to allow you to withdraw funds deposited in 
your account on the (number) business day after the day we receive your 
deposit. Funds from electronic direct deposits will be available on the 
day we receive the deposit. In some cases, we may delay your ability to 
withdraw funds beyond the (number) business day. Then, the funds will 
generally be available by the fifth business day after the day of 
deposit.

                C-19--Notice at Automated Teller Machines

                        AVAILABILITY OF DEPOSITS

    Funds from deposits may not be available for immediate withdrawal. 
Please refer to your institution's rules governing funds availability 
for details.

       C-20--Notice at Automated Teller Machines (Delayed Receipt)

                                 NOTICE

    Deposits at this ATM between (day) and (day) will not be considered 
received until (day). The availability of funds from the deposit may be 
delayed as a result.

                        C-21--Deposit Slip Notice

    Deposits may not be available for immediate withdrawal.

        C-22--Expedited Recredit Claim, Valid Claim Refund Notice

                    Notice of Valid Claim and Refund

    We have determined that your substitute check claim is valid. We are 
refunding (amount) [of which [(amount) represents fees] [and] [(amount) 
represents accrued interest]] to your account. You may withdraw these 
funds as of (date). [This refund is the amount in excess of the $2,500 
[plus interest] that we credited to your account on (date).]

        C-23--Expedited Recredit Claim, Provisional Refund Notice

                      Notice of Provisional Refund

    In response to your substitute check claim, we are refunding 
(amount) [of which [(amount) represents fees] [and] [(amount) represents 
accrued interest]] to your account, while we complete our investigation 
of your claim. You may withdraw these funds as of (date). [Unless we 
determine that your claim is not valid, we will credit the remaining 
amount of your refund to your account no later than the 45th calendar 
day after we received your claim.]
    If, based on our investigation, we determine that your claim is not 
valid, we will reverse the refund by withdrawing the amount of the 
refund [plus interest that we have paid you on that amount] from your 
account. We will notify you within one day of any such reversal.

              C-24--Expedited Recredit Claim, Denial Notice

                             Denial of Claim

    Based on our review, we are denying your substitute check claim. As 
the enclosed (type of document, for example original check or 
sufficient) shows, (describe reason for denial, for example the check 
was properly posted, the signature is authentic, there was no warranty 
breach).
    [We have also enclosed a copy of the other information we used to 
make our decision.] [Upon your request, we will send you a copy

[[Page 893]]

of the other information that we used to make our decision.]

             C-25--Expedited Recredit Claim, Reversal Notice

                           Reversal of Refund

    In response to your substitute check claim, we provided a refund of 
(amount) by crediting your account on (date(s)). We now have determined 
that your substitute check claim was not valid. As the enclosed (type of 
document, for example original check or sufficient copy) shows, 
(describe reason for reversal, for example the check was properly 
posted, the signature is authentic, there was no warranty breach). As a 
result, we have reversed the refund to your account [plus interest that 
we have paid you on that amount] by withdrawing (amount) from your 
account on (date).
    [We have also enclosed a copy of the other information we used to 
make our decision.] [Upon your request, we will send you a copy of the 
information we used to make our decision.]

[53 FR 19433, May 27, 1988, as amended at 53 FR 31293, Aug. 18, 1988; 
Reg. CC, 55 FR 21855, May 30, 1990; 55 FR 50818, Dec. 11, 1990; 56 FR 
7802, Feb. 26, 1991; 57 FR 3280, Jan. 29, 1992; 60 FR 51671, Oct. 3, 
1995; 62 FR 13811, Mar. 24, 1997; 62 FR 48752, Sept. 17, 1997; 69 FR 
47315, 47316, Aug. 4, 2004]



      Sec. Appendix D to Part 229--Indorsement, Reconverting Bank 
      Identification, and Truncating Bank Identification Standards

    (1) The depositary bank shall indorse an original check or 
substitute check according to the following specifications:
    (i) The indorsement shall contain--
    (A) The bank's nine-digit routing number, set off by an arrow at 
each end of the number and pointing toward the number, and, if the 
depositary bank is a reconverting bank with respect to the check, an 
asterisk outside the arrow at each end of the routing number to identify 
the bank as a reconverting bank;
    (B) The indorsement date; and
    (C) The bank's name or location, if the depositary bank applies the 
indorsement physically.
    (ii) The indorsement also may contain--
    (A) A branch identification;
    (B) A trace or sequence number;
    (C) A telephone number for receipt of notification of large-dollar 
returned checks; and
    (D) Other information, provided that the inclusion of such 
information does not interfere with the readability of the indorsement.
    (iii) The indorsement, if applied to an existing paper check, shall 
be placed on the back of the check so that the routing number is wholly 
contained in the area 3.0 inches from the leading edge of the check to 
1.5 inches from the trailing edge of the check. \31\
---------------------------------------------------------------------------

    \31\ The leading edge is definded as the right side of the check 
looking at it from the front. The trailing edge is defined as the left 
side of the check looking at it from the front. See American National 
Standards Specifications for the Placement and Location of MICR 
Printing, X9.13.
---------------------------------------------------------------------------

    (iv) When printing its depositary bank indorsement (or a depositary 
bank indorsement that previously was applied electronically) onto a 
substitute check at the time that the substitute check is created, a 
reconverting bank shall place the indorsement on the back of the check 
between 1.88 and 2.74 inches from the leading edge of the check. The 
reconverting bank may omit the depositary bank's name and location from 
the indorsement.
    (2) Each subsequent collecting bank or returning bank indorser shall 
protect the identifiability and legibility of the depositary bank 
indorsement by indorsing an original check or substitute check according 
to the following specifications:
    (i) The indorsement shall contain only--
    (A) The bank's nine-digit routing number (without arrows) and, if 
the collecting bank or returning bank is a reconverting bank with 
respect to the check, an asterisk at each end of the number to identify 
the bank as a reconverting bank;
    (B) The indorsement date, and
    (C) An optional trace or sequence number.
    (ii) The indorsement, if applied to an existing paper check, shall 
be placed on the back of the check from 0.0 inches to 3.0 inches from 
the leading edge of the check.
    (iii) When printing its collecting bank or returning bank 
indorsement (or a collecting bank or returning bank indorsement that 
previously was applied electronically) onto a substitute check at the 
time that the substitute check is created, a reconverting bank shall 
place the indorsement on the back of the check between 0.25 and 2.50 
inches from the trailing edge of the check.
    (3) A reconverting bank shall comply with the following 
specifications when creating a substitute check:
    (i) If it is a depositary bank, collecting bank, or returning bank 
with respect to the substitute check, the reconverting bank shall place 
its own indorsement onto the back of the check as specified in this 
appendix.
    (ii) A reconverting bank that also is the paying bank with respect 
to the substitute check shall so identify itself by placing on the back 
of the check, between 0.25 and 2.50 inches from the trailing edge of the 
check, its nine-digit routing number (without arrows) and an asterisk at 
each end of the number.

[[Page 894]]

    (iii) The reconverting bank shall place on the front of the check, 
outside the image of the original check, its nine-digit routing number 
(without arrows) and an asterisk at each end of the number, in 
accordance with ANS X9.100-140.
    (iv) The reconverting bank shall place on the front of the check, 
outside the image of the original check, the truncating bank's nine-
digit routing number (without arrows) and a bracket at each end of the 
number, in accordance with ANS X9.100-140.
    (4) Any indorsement, reconverting bank identification, or truncating 
bank identification placed on an original check or substitute check 
shall be printed in black ink.

[69 FR 47316, Aug. 4, 2004]

    Effective Date Note: At 82 FR 27585, June 15, 2017, appendix D to 
part 229 was removed and reserved, effective July 1, 2018.



                 Sec. Appendix E to Part 229--Commentary

                             I. Introduction

                              A. Background

    1. The Board interpretations, which are labeled ``Commentary'' and 
follow each section of Regulation CC (12 CFR Part 229), provide 
background material to explain the Board's intent in adopting a 
particular part of the regulation; the Commentary also provides examples 
to aid in understanding how a particular requirement is to work. Under 
section 611(e) of the Expedited Funds Availability Act (12 U.S.C. 
4010(e)), no provision of section 611 imposing any liability shall apply 
to any act done or omitted in good faith conformity with any rule, 
regulation, or interpretation thereof by the Board of Governors of the 
Federal Reserve System, notwithstanding the fact that after such act or 
omission has occurred, such rule, regulation, or interpretation is 
amended, rescinded, or determined by judicial or other authority to be 
invalid for any reason. The Commentary is an ``interpretation'' of a 
regulation by the Board within the meaning of section 611.

                      II. Section 229.2 Definitions

                              A. Background

    1. Section 229.2 defines the terms used in the regulation. For the 
most part, terms are defined as they are in section 602 of the Expedited 
Funds Availability Act (12 U.S.C. 4001). The Board has made a number of 
changes for the sake of clarity, to conform the terminology to that 
which is familiar to the banking industry, to define terms that are not 
defined in the EFA Act, and to carry out the purposes of the EFA Act. 
The Board also has incorporated by reference the definitions of the 
Uniform Commercial Code where appropriate. Some of Regulation CC's 
definitions are self-explanatory and therefore are not discussed in this 
Commentary.

                           B. 229.2(a) Account

    1. The EFA Act defines account to mean ``a demand deposit account or 
similar transaction account at a depository institution.'' The 
regulation defines account, for purposes other than subpart D, in terms 
of the definition of ``transaction account'' in the Board's Regulation D 
(12 CFR part 204). This definition of account, however, excludes certain 
deposits, such as nondocumentary obligations (see 12 CFR 
204.2(a)(1)(vii)), that are covered under the definition of 
``transaction account'' in Regulation D. The definition applies to 
accounts with general third party payment powers but does not cover time 
deposits or savings deposits, including money market deposit accounts, 
even though they may have limited third party payment powers. The Board 
believes that it is appropriate to exclude these accounts because of the 
reference to demand deposits in the EFA Act, which suggests that the EFA 
Act is intended to apply only to accounts that permit unlimited third 
party transfers.
    2. The term account also differs from the definition of transaction 
account in Regulation D because the term account refers to accounts held 
at banks. Under Subparts A and C, the term bank includes not only any 
depository institution, as defined in the EFA Act, but also any person 
engaged in the business of banking, such as a Federal Reserve Bank, a 
Federal Home Loan Bank, or a private banker that is not subject to 
Regulation D. Thus, accounts at these institutions benefit from the 
expeditious return requirements of Subpart C.
    3. Interbank deposits, including accounts of offices of domestic 
banks or foreign banks located outside the United States, and direct and 
indirect accounts of the United States Treasury (including Treasury 
General Accounts and Treasury Tax and Loan deposits) are exempt from 
subpart B and, in connection therewith, subpart A. However, interbank 
deposits are included as accounts for purposes of subparts C and D and, 
in connection therewith, subpart A.
    4. The Check 21 Act defines account to mean any deposit account at a 
bank. Therefore, for purposes of subpart D and, in connection therewith, 
subpart A, account means any deposit, as that term is defined by Sec. 
204.2(a)(1)(i) of Regulation D, at a bank. Many deposits that are not 
accounts for purposes of the other subparts of Regulation CC, such as 
savings deposits, are accounts for purposes of subpart D.

                C. 229.2(b) Automated Clearinghouse (ACH)

    1. The Board has defined automated clearinghouse as a facility that 
processes debit and credit transfers under rules established

[[Page 895]]

by a Federal Reserve Bank operating circular governing automated 
clearinghouse items or the rules of an ACH association. ACH credit 
transfers are included in the definition of electronic payment.
    2. The reference to ``debit and credit transfers'' does not refer to 
the corresponding debit and credit entries that are part of the same 
transaction, but to different kinds of ACH payments. In an ACH credit 
transfer, the originator orders that its account be debited and another 
account credited. In an ACH debit transfer, the originator, with prior 
authorization, orders another account to be debited and the originator's 
account to be credited.
    3. A facility that handles only wire transfers (defined elsewhere) 
is not an ACH.

               D. 229.2(c) Automated Teller Machine (ATM)

    1. ATM is not defined in the EFA Act. The regulation defines an ATM 
as an electronic device at which a natural person may make deposits to 
an account by cash or check and perform other account transactions. 
Point-of-sale terminals, machines that only dispense cash, night 
depositories, and lobby deposit boxes are not ATMs within the meaning of 
the definition, either because they do not accept deposits of cash or 
checks (e.g., point-of-sale terminals and cash dispensers) or because 
they only accept deposits (e.g., night depositories and lobby boxes) and 
cannot perform other transactions. A lobby deposit box or similar 
receptacle in which written payment orders or deposits may be placed is 
not an ATM.
    2. A facility may be an ATM within this definition even if it is a 
branch under state or federal law, although an ATM is not a branch as 
that term is used in this regulation.

                  E. 229.2(d) Available for Withdrawal

    1. Under this definition, when funds become available for 
withdrawal, the funds may be put to all uses for which the customer may 
use actually and finally collected funds in the customer's account under 
the customer's account agreement with the bank. Examples of such uses 
include payment of checks drawn on the account, certification of checks, 
electronic payments, and cash withdrawals. Funds are available for these 
uses notwithstanding provisions of other law that may restrict the use 
of uncollected funds (e.g., 18 U.S.C. 1004; 12 U.S.C. 331).
    2. If a bank makes funds available to a customer for a specific 
purpose (such as paying checks that would otherwise overdraw the 
customer's account and be returned for insufficient funds) before the 
funds must be made available under the bank's policy or this regulation, 
it may nevertheless apply a hold consistent with this regulation to 
those funds for other purposes (such as cash withdrawals). For purposes 
of this regulation, funds are considered available for withdrawal even 
though they are being held by the bank to satisfy an obligation of the 
customer other than the customer's potential liability for the return of 
the check. For example, a bank does not violate its obligations under 
this subpart by holding funds to satisfy a garnishment, tax levy, or 
court order restricting disbursements from the account; or to satisfy 
the customer's liability arising from the certification of a check, sale 
of a cashier's or teller's check, guaranty or acceptance of a check, or 
similar transaction to be debited from the customer's account.

                            F. 229.2(e) Bank

    1. The EFA Act uses the term depository institution, which it 
defines by reference to section 19(b)(1)(A)(i) through (vi) of the 
Federal Reserve Act (12 U.S.C. 461(b)(1)(A)(i) through (vi)). This 
regulation uses the term bank, a term that conforms to the usage the 
Board has previously adopted in Regulation J. Bank is also used in 
Articles 4 and 4A of the Uniform Commercial Code.
    2. Bank is defined to include depository institutions, such as 
commercial banks, savings banks, savings and loan associations, and 
credit unions as defined in the EFA Act, and U.S. branches and agencies 
of foreign banks. For purposes of Subpart B, the term does not include 
corporations organized under section 25A of the Federal Reserve Act, 12 
U.S.C. 611-631 (Edge corporations) or corporations having an agreement 
or undertaking with the Board under section 25 of the Federal Reserve 
Act, 12 U.S.C. 601-604a (agreement corporations). For purposes of 
Subparts C and D, and in connection therewith, Subpart A, any Federal 
Reserve Bank, Federal Home Loan Bank, or any other person engaged in the 
business of banking is regarded as a bank. The phrase ``any other person 
engaged in the business of banking'' is derived from U.C.C. 1-201(4), 
and is intended to cover entities that handle checks for collection and 
payment, such as Edge and agreement corporations, commercial lending 
companies under 12 U.S.C. 3101, certain industrial banks, and private 
bankers, so that virtually all checks will be covered by the same rules 
for forward collection and return, even though they may not be covered 
by the requirements of Subpart B. For the purposes of Subparts C and D, 
and in connection therewith, Subpart A, the term also may include a 
state or a unit of general local government to the extent that it pays 
warrants or other drafts drawn directly on the state or local government 
itself, and the warrants or other drafts are sent to the state or local 
government for payment or collection.

[[Page 896]]

    3. Unless otherwise specified, the term bank includes all of a 
bank's offices in the United States. The regulation does not cover 
foreign offices of U.S. banks.
    4. For purposes of subpart D and, in connection therewith, subpart 
A, the term bank also includes the Treasury of the United States and the 
United States Postal Service to the extent that they act as paying banks 
because the Check 21 Act includes these two entities in the definition 
of the term bank to the extent that they act as payors.

              G. 229.2(f) Banking Day and (g) Business Day

    1. The EFA Act defines business day as any day excluding Saturdays, 
Sundays, and legal holidays. Legal holiday, however, is not defined, and 
the variety of local holidays, together with the practice of some banks 
to close midweek, makes the EFA Act's definition difficult to apply. The 
Board believes that two kinds of business days are relevant. First, when 
determining the day when funds are deposited or when a bank must perform 
certain actions (such as returning a check), the focus should be on a 
day that the bank is actually open for business. Second, when counting 
days for purposes of determining when funds must be available under the 
regulation or when notice of nonpayment must be received by the 
depositary bank, there would be confusion and uncertainty in trying to 
follow the schedule of a particular bank, and there is less need to 
identify a day when a particular bank is open. Most banks that act as 
intermediaries (large correspondents and Federal Reserve Banks) follow 
the same holiday schedule. Accordingly, the regulation has two 
definitions: Business day generally follows the standard Federal Reserve 
Bank holiday schedule (which is followed by most large banks), and 
banking day is defined to mean that part of a business day on which a 
bank is open for substantially all of its banking activities.
    2. The definition of banking day corresponds to the definition of 
banking day in U.C.C. 4-104(a)(3), except that a banking day is defined 
in terms of a business day. Thus, if a bank is open on Saturday, 
Saturday might be a banking day for purposes of the U.C.C., but it would 
not be a banking day for purposes of Regulation CC because Saturday is 
never a business day under the regulation.
    3. The definition of banking day is phrased in terms of when ``an 
office of a bank is open'' to indicate that a bank may observe a banking 
day on a per-branch basis. A deposit made at an ATM or off-premise 
facility (such as a remote depository or a lock box) is considered made 
at the branch holding the account into which the deposit is made for the 
purpose of determining the day of deposit. All other deposits are 
considered made at the branch at which the deposit is received. For 
example, under Sec. 229.19(a)(1), funds deposited at an ATM are 
considered deposited at the time they are received at the ATM. On a 
calendar day that is a banking day for the branch or other location of 
the depositary bank at which the account is maintained, a deposit 
received at an ATM before the ATM's cut-off hour is considered deposited 
on that banking day, and a deposit received at an ATM after the ATM's 
cut-off hour is considered deposited on the next banking day of the 
branch or other location where the account is maintained. On a calendar 
day that is not a banking day for the account-holding location, all ATM 
deposits are considered deposited on that location's next banking day. 
This rule for determining the day of deposit also would apply to a 
deposit to an off-premise facility, such as a night depository or lock 
box, which is considered deposited when removed from the facility and 
available for processing under Sec. 229.19(a)(3). If an unstaffed 
facility, such as a night depository or lock box, is on branch premises, 
the day of deposit is determined by the banking day at the branch at 
which the deposit is received, whether or not it is the branch at which 
the account is maintained.

                            H. 229.2(h) Cash

    1. Cash means U.S. coins and currency. The phrase in the EFA Act 
``including Federal Reserve notes'' has been deleted as unnecessary. 
(See 31 U.S.C. 5103.)

                       I. 229.2(i) Cashier's Check

    1. The regulation adds to the second item in the EFA Act's 
definition of cashier's check the phrase, ``on behalf of the bank as 
drawer,'' to clarify that the term cashier's check is intended to cover 
only checks that a bank draws on itself. The definition of cashier's 
check includes checks provided to a customer of the bank in connection 
with customer deposit account activity, such as account disbursements 
and interest payments. The definition also includes checks acquired from 
a bank by noncustomers for remittance purposes, such as certain loan 
disbursement checks. Cashier's checks provided to customers or others 
are often labeled as ``cashier's check,'' ``officer's check,'' or 
``official check.'' The definition excludes checks that a bank draws on 
itself for other purposes, such as to pay employees and vendors, and 
checks issued by the bank in connection with a payment service, such as 
a payroll or a bill-paying service. Cashier's checks generally are sold 
by banks to substitute the bank's credit for the customer's credit and 
thereby enhance the collectibility of the checks. A check issued in 
connection with a payment service generally is provided as a convenience 
to the customer rather than as a guarantee of the check's 
collectibility. In addition, such checks are often more difficult to 
distinguish from other types of

[[Page 897]]

checks than are cashier's checks as defined by this regulation.

                       J. 229.2(j) Certified Check

    1. The EFA Act defines a certified check as one to which a bank has 
certified that the drawer's signature is genuine and that the bank has 
set aside funds to pay the check. Under the Uniform Commercial Code, 
certification of a check means the bank's signed agreement that it will 
honor the check as presented (U.C.C. 3-409). The regulation defines 
certified check to include both the EFA Act's and U.C.C.'s definitions.

                            K. 229.2(k) Check

    1. Check is defined in section 602(7) of the EFA Act as a negotiable 
demand draft drawn on or payable through an office of a depository 
institution located in the United States, excluding noncash items. The 
regulation includes six categories of instruments within the definition 
of check.
    2. The first category is negotiable demand drafts drawn on, or 
payable through or at, an office of a bank. As the definition of bank 
includes only offices located in the United States, this category is 
limited to checks drawn on, or payable through or at, a banking office 
located in the United States.
    3. The EFA Act treats drafts payable through a bank as checks, even 
though under the U.C.C. the payable-through bank is a collecting bank to 
make presentment and generally is not authorized to make payment (U.C.C. 
4-106(a)). The EFA Act does not expressly address items that are payable 
at a bank. This regulation treats both payable-through and payable-at 
demand drafts as checks. The Board believes that treating demand drafts 
payable at a bank as checks will not have a substantial effect on the 
operations of payable-at banks--by far the largest proportion of 
payable-at items are not negotiable demand drafts, but time items, such 
as commercial paper, bonds, notes, bankers' acceptances, and securities. 
These time items are not covered by the requirements of the EFA Act or 
this regulation. (The treatment of payable-through drafts is discussed 
in greater detail in connection with the definitions of local check and 
paying bank.)
    4. The second category is checks drawn on Federal Reserve Banks and 
Federal Home Loan Banks. Principal and interest payments on federal debt 
instruments often are paid with checks drawn on a Federal Reserve Bank 
as fiscal agent of the United States, and these fiscal agency checks are 
indistinguishable from other checks drawn on Federal Reserve Banks. (See 
31 CFR Part 355.) Federal Reserve Bank checks also are used by some 
banks as substitutes for cashier's or teller's checks. Similarly, 
savings and loan associations often use checks drawn on Federal Home 
Loan Banks as teller's checks. The definition of check includes checks 
drawn on Federal Home Loan Banks and Federal Reserve Banks because in 
many cases they are the functional equivalent of Treasury checks or 
teller's checks.
    5. The third and fourth categories of instrument included in the 
definition of check refer to government checks. The EFA Act refers to 
checks drawn on the U.S. Treasury, even though these instruments are not 
drawn on or payable through an office of a depository institution, and 
checks drawn by state and local governments. The EFA Act also gives the 
Board authority to define functionally equivalent instruments as 
depository checks. \1\ Thus, the EFA Act is intended to apply to 
instruments other than those that meet the strict definition of check in 
section 602(7) of the EFA Act. Checks and warrants drawn by states and 
local governments often are used for the purposes of making unemployment 
compensation payments and other payments that are important to the 
recipients. Consequently, the Board has expressly defined check to 
include drafts drawn on the U.S. Treasury and drafts or warrants drawn 
by a state or a unit of general local government on itself.
---------------------------------------------------------------------------

    \1\ Section 602(11) of the EFA Act (12 U.S.C. 4001(11)) defines 
``depository check'' as ``any cashier's check, certified check, teller's 
check, and any other functionally equivalent instrument as determined by 
the Board.''
---------------------------------------------------------------------------

    6. The fifth category of instrument included in the definition of 
check is U.S. Postal Service money orders. These instruments are defined 
as checks because they often are used as a substitute for checks by 
consumers, even though money orders are not negotiable under Postal 
Service regulations. The Board has not provided specific rules for other 
types of money orders; these instruments generally are drawn on or 
payable through or payable at banks and are treated as checks on that 
basis.
    7. The sixth and final category of instrument included in the 
definition of check is traveler's checks drawn on or payable through or 
at a bank. Traveler's check is defined in paragraph (hh) of this 
section.
    8. Finally, for the purposes of Subparts C and D, and in connection 
therewith, Subpart A, the definition of check includes nonnegotiable 
demand drafts because these instruments are often handled as cash items 
in the forward collection process.
    9. A substitute check as defined in Sec. 229.2(aaa) is a check for 
purposes of Regulation CC and the U.C.C., even if that substitute check 
does not meet the requirements for legal equivalence set forth in Sec. 
229.51(a).
    10. The definition of check does not include an instrument payable 
in a foreign currency

[[Page 898]]

(i.e., other than in United States money as defined in 31 U.S.C. 5101) 
or a credit card draft (i.e., a sales draft used by a merchant or a 
draft generated by a bank as a result of a cash advance), or an ACH 
debit transfer. The definition of check includes a check that a bank may 
supply to a customer as a means of accessing a credit line without the 
use of a credit card.

                         L. 229.2(l) [Reserved]

                   M. 229.2(m) Check Processing Region

    1. The EFA Act defines this term as ``the geographic area served by 
a Federal Reserve bank check processing center or such larger area as 
the Board may prescribe by regulations.'' The Board has defined check 
processing region as the territory served by one of the Federal Reserve 
head offices, branches, or regional check processing centers. Appendix A 
includes a list of routing numbers arranged by Federal Reserve Bank 
office. The definition of check processing region is key to determining 
whether a check is considered local or nonlocal.

                      N. 229.2(n) Consumer Account

    1. Consumer account is defined as an account used primarily for 
personal, family, or household purposes. An account that does not meet 
the definition of consumer account is a nonconsumer account. A clearing 
account maintained at a bank directly by a brokerage firm is not a 
consumer account, even if the account is used to pay checks drawn by 
consumers using the funds in that account. The bank's relationship is 
with the brokerage firm, and the account is used by the brokerage firm 
to facilitate the clearing of its customers' checks. Because for 
purposes of Regulation CC the term account includes only deposit 
accounts, a consumer's revolving credit relationship or other line of 
credit with a bank is not a consumer account, even if the consumer draws 
on such credit lines by using a check. Both consumer and nonconsumer 
accounts are subject to the requirements of this regulation, including 
the requirement that funds be made available according to specific 
schedules and that the bank make specified disclosures of its 
availability policies. Section 229.18(b) (notices at branch locations) 
and Sec. 229.18(e) (notice of changes in policy) apply only to consumer 
accounts. Section 229.13(g)(2) (one-time exception notice) and Sec. 
229.19(d) (use of calculated availability) apply only to nonconsumer 
accounts.

                       O. 229.2(o) Depositary Bank

    1. The regulation uses the term depositary bank rather than the term 
receiving depository institution. Receiving depository institution is a 
term unique to the EFA Act, while depositary bank is the term used in 
Article 4 of the U.C.C. and Regulation J.
    2. A depositary bank includes the bank in which the check is first 
deposited. If a foreign office of a U.S. or foreign bank sends checks to 
its U.S. correspondent bank for forward collection, the U.S. 
correspondent is the depositary bank because foreign offices of banks 
are not included in the definition of bank.
    3. If a customer deposits a check in its account at a bank, the 
customer's bank is the depositary bank with respect to the check. For 
example, if a person deposits a check into an account at a 
nonproprietary ATM, the bank holding the account into which the check is 
deposited is the depositary bank even though another bank may service 
the nonproprietary ATM and send the check for collection. (Under Sec. 
229.35 the depositary bank may agree with the bank servicing the 
nonproprietary ATM to have the servicing bank place its own indorsement 
on the check as the depositary bank. For the purposes of Subpart C, the 
bank applying its indorsement as the depositary bank indorsement on the 
check is the depositary bank.)
    4. For purposes of Subpart B, a bank may act as both the depositary 
bank and the paying bank with respect to a check, if the check is 
payable by the bank in which it was deposited, or if the check is 
payable by a nonbank payor and payable through or at the bank in which 
it was deposited. A bank also is considered a depositary bank with 
respect to checks it receives as payee. For example, a bank is a 
depositary bank with respect to checks it receives for loan repayment, 
even though these checks are not deposited in an account at the bank. 
Because these checks would not be ``deposited to accounts,'' they would 
not be subject to the availability or disclosure requirements of Subpart 
B.

                     P. 229.2(p) Electronic Payment

    1. Electronic payment is defined to mean a wire transfer as defined 
in Sec. 229.2(11) or an ACH credit transfer. The EFA Act requires that 
funds deposited by wire transfer be made available for withdrawal on the 
business day following deposit but expressly leaves the definition of 
the term wire transfer to the Board. Because ACH credit transfers 
frequently involve important consumer payments, such as wages, the 
regulation requires that funds deposited by ACH credit transfers be 
available for withdrawal on the business day following deposit.
    2. ACH debit transfers, even though they may be transmitted 
electronically, are not defined as electronic payments because the 
receiver of an ACH debit transfer has the right to return the transfer, 
which would reverse the credit given to the originator. Thus, ACH debit 
transfers are more like

[[Page 899]]

checks than wire transfers. Further, bank customers that receive funds 
by originating ACH debit transfers are primarily large corporations, 
which generally would be able to negotiate with their banks for prompt 
availability.
    3. A point-of-sale transaction would not be considered an electronic 
payment unless the transaction was effected by means of an ACH credit 
transfer or wire transfer.

                     Q. 229.2(q) Forward Collection

    1. Forward collection is defined to mean the process by which a bank 
sends a check to the paying bank for collection, including sending the 
check to an intermediary collecting bank for settlement, as 
distinguished from the process by which the check is returned unpaid. 
Noncash collections are not included in the term forward collection.

                         R. 229.2(r) Local Check

    1. Local check is defined as a check payable by or at a local paying 
bank, or, in the case of nonbank payors, payable through a local paying 
bank. A check payable by a local bank but payable through a nonlocal 
bank is a local check. Conversely, a check payable through a local bank 
but payable by a nonlocal bank is a nonlocal check. Where two banks are 
named on a check and neither is designated as a payable-through bank, 
the check is considered payable by either bank and may be considered 
local or nonlocal depending on the bank to which it is sent for payment. 
Generally, the depositary bank may rely on the routing number to 
determine whether a check is local or nonlocal. Appendix A includes a 
list of routing numbers arranged by Federal Reserve Bank Office to 
assist persons in determining whether or not such a check is local. If, 
however, a check is payable by one bank but payable through another 
bank, the routing number appearing on the check will be that of the 
payable-through bank, not the paying bank. Many credit union share 
drafts and certain other checks payable by banks are payable through 
other banks. In such cases, the routing number cannot be relied on to 
determine whether the check is local or nonlocal. For payable-through 
checks that meet the labeling requirements of Sec. 229.36(e), the 
depositary bank may rely on the four-digit routing symbol of the paying 
bank that is printed on the face of the check as required by that 
section, e.g., in the title plate, but not on the first four digits of 
the payable-through bank's routing number printed in magnetic ink in the 
MICR line or in fractional form, to determine whether the check is local 
or nonlocal.

                      S. 229.2(s) Local Paying Bank

    1. ``Local paying bank'' is defined as a paying bank located in the 
same check-processing region as the branch, contractual branch, or 
proprietary ATM of the depositary bank. For example, a check deposited 
at a contractual branch would be deemed local or nonlocal based on the 
location of the contractual branch with respect to the location of the 
paying bank.
    Examples.
    a. If a check that is payable by a bank that is located in the same 
check processing region as the depositary bank is payable through a bank 
located in another check processing region, the check is considered 
local or nonlocal depending on the location of the bank by which it is 
payable even if the check is sent to the nonlocal bank for collection.
    b. The location of the depositary bank is determined by the physical 
location of the branch or proprietary ATM at which a check is deposited, 
regardless of whether the deposit is made in person, by mail, or 
otherwise. For example, if a branch of the depositary bank located in 
one check-processing region sends a check that was deposited at that 
branch to the depositary bank's central facility in another check-
processing region, and the central facility is in the same check-
processing region as the paying bank, the check is still considered 
nonlocal. (See the commentary to the definition of ``paying bank.'')
    c. If a person deposits a check to an account by mailing or 
otherwise sending the check to a facility or office that is not a bank, 
the check is considered local or nonlocal depending on the location of 
the bank whose indorsement appears on the check as the depositary bank.

                     T. 229.2(t) Merger Transaction

    1. Merger transaction is a term used in Subparts B and C in 
connection with transition rules for merged banks. It encompasses 
mergers, consolidations, and purchase/assumption transactions of the 
type that usually must be approved under the Bank Merger Act (12 U.S.C. 
1828(c)) or similar statutes; it does not encompass acquisitions of a 
bank under the Bank Holding Company Act (12 U.S.C. 1842) where an 
acquired bank maintains its separate corporate existence.
    2. Regulation CC adopts a one-year transition period for banks that 
are party to a merger transaction during which the merged banks will 
continue to be treated as separate entities. (See Sec. Sec. 229.19(g) 
and 229.40.)

                        U. 229.2(u) Noncash Item

    1. The EFA Act defines the term check to exclude noncash items, and 
defines noncash items to include checks to which another document is 
attached, checks accompanied by special instructions, or any similar 
item classified as a noncash item in the Board's regulation. To qualify 
as a noncash item, an item must be handled as such and may not

[[Page 900]]

be handled as a cash item by the depositary bank.
    2. The regulation's definition of noncash item also includes checks 
that consist of more than a single thickness of paper (except checks 
that qualify for handling by automated check processing equipment, e.g. 
those placed in carrier envelopes) and checks that have not been 
preprinted or post-encoded in magnetic ink with the paying bank's 
routing number, as well as checks with documents attached or accompanied 
by special instructions. (In the context of this definition, paying bank 
refers to the paying bank as defined for purposes of Subpart C.)
    3. A check that has been preprinted or post-encoded with a routing 
number that has been retired (e.g., because of a merger) for at least 
three years is a noncash item unless the current number is added for 
processing purposes by placing the check in an encoded carrier envelope 
or adding a strip to the check.
    4. Checks that are accompanied by special instructions are also 
noncash items. For example, a person concerned about whether a check 
will be paid may request the depositary bank to send a check for 
collection as a noncash item with an instruction to the paying bank to 
notify the depositary bank promptly when the check is paid or 
dishonored.
    5. For purposes of forward collection, a copy of a check is neither 
a check nor a noncash item, but may be treated as either. For purposes 
of return, a copy is generally a notice in lieu of return. (See 
Sec. Sec. 229.30(f) and 229.31(f).)

                         V. 229.2(v) [Reserved]

                         W. 229.2(w) [Reserved]

                         X. 229.2(x) [Reserved]

                         Y. 229.2(y) [Reserved]

                         Z. 229.2(z) Paying Bank

    1. The regulation uses this term in lieu of the EFA Act's 
``originating depository institution.'' For purposes of all subparts of 
Regulation CC, the term paying bank includes the bank by which a check 
is payable, the payable-at bank to which a check is sent, or, if the 
check is payable by a nonbank payor, the bank through which the check is 
payable and to which it is sent for payment or collection. For purposes 
of subparts C and D, the term paying bank also includes the payable-
through bank and the bank whose routing number appears on the check, 
regardless of whether the check is payable by a different bank, provided 
that the check is sent for payment or collection to the payable through 
bank or the bank whose routing number appears on the check.
    2. Under Sec. Sec. 229.30 and 229.36(a), a bank designated as a 
payable-through bank or payable-at bank and to which the check is sent 
for payment or collection is responsible for the expedited return of 
checks and notice of nonpayment requirements of Subpart C. The payable-
through or payable-at bank may contract with the payor with respect to 
its liability in discharging these responsibilities. The Board believes 
that the EFA Act makes a clear connection between availability and the 
time it takes for checks to be cleared and returned. Allowing the 
payable-through bank additional time to forward checks to the payor and 
await return or pay instructions from the payor would delay the return 
of these checks, increasing the risks to depositary banks. Subpart C 
places on payable-through and payable-at banks the requirements of 
expeditious return based on the time the payable-through or payable-at 
bank received the check for forward collection.
    3. If a check is sent for forward collection based on the routing 
number, the bank associated with the routing number is a paying bank for 
the purposes of Subparts C and D requirements, including notice of 
nonpayment, even if the check is not drawn by a customer of that bank or 
the check is fraudulent.
    4. The phrase ``and to which [the check] is sent for payment or 
collection'' includes sending not only the physical check, but 
information regarding the check under a truncation arrangement.
    5. Federal Reserve Banks and Federal Home Loan Banks are also paying 
banks under all subparts of the regulation with respect to checks 
payable by them, even though such banks are not defined as banks for 
purposes of Subpart B.
    6. In accordance with the Check 21 Act, for purposes of subpart D 
and, in connection therewith, subpart A, paying bank includes the 
Treasury of the United States or the United States Postal Service with 
respect to a check payable by that entity and sent to that entity for 
payment or collection, even though the Treasury and Postal Service are 
not defined as banks for purposes of subparts B and C. Because the 
Federal Reserve Banks act as fiscal agents for the Treasury and the U.S. 
Postal Service and in that capacity are designated as presentment 
locations for Treasury checks and U.S. Postal Service money orders, a 
Treasury check or U.S. Postal Service money order presented to a Federal 
Reserve Bank is considered to be presented to the Treasury or U.S. 
Postal Service, respectively.

                      AA. 229.2(aa) Proprietary ATM

    1. All deposits at nonproprietary ATMs are treated as deposits of 
nonlocal checks, and deposits at proprietary ATMs generally are treated 
as deposits at banking offices. The Conference Report on the EFA Act 
indicates

[[Page 901]]

that the special availability rules for deposits received through 
nonproprietary ATMs are provided because ``nonproprietary ATMs today do 
not distinguish among check deposits or between check and cash 
deposits'' (H.R. Rep. No. 261, 100th Cong., 1st Sess. at 179 (1987)). 
Thus, a deposit of any combination of cash and checks at a 
nonproprietary ATM may be treated as if it were a deposit of nonlocal 
checks, because the depositary bank does not know the makeup of the 
deposit and consequently is unable to place different holds on cash, 
local check, and nonlocal check deposits made at the ATM.
    2. A colloquy between Senators Proxmire and Dodd during the floor 
debate on the Competitive Equality Banking Act (133 Cong. Rec. S11289 
(Aug. 4, 1987)) indicates that whether a bank operates the ATM is the 
primary criterion in determining whether the ATM is proprietary to that 
bank. Because a bank should be capable of ascertaining the composition 
of deposits made to an ATM operated by that bank, an exception to the 
availability schedules is not warranted for these deposits. If more than 
one bank meets the ``owns or operates'' criterion, the ATM is considered 
proprietary to the bank that operates it. For the purpose of this 
definition, the bank that operates an ATM is the bank that puts checks 
deposited into the ATM into the forward collection stream. An ATM owned 
by one or more banks, but operated by a nonbank servicer, is considered 
proprietary to the bank or banks that own it.
    3. The EFA Act also includes location as a factor in determining 
whether an ATM that is either owned or operated by a bank is proprietary 
to that bank. The definition of proprietary ATM includes an ATM located 
on the premises of the bank, either inside the branch or on its outside 
wall, regardless of whether the ATM is owned or operated by that bank. 
Because the EFA Act also defines a proprietary ATM as one that is ``in 
close proximity'' to the bank, the regulation defines an ATM located 
within 50 feet of a bank to be proprietary to that bank unless it is 
identified as being owned or operated by another entity. The Board 
believes that the statutory proximity test was designed to apply to 
situations where it would appear to the depositor that the ATM is run by 
his or her bank, because of the proximity of the ATM to the bank. The 
Board believes that an ATM located within 50 feet of a banking office 
would be presumed proprietary to that bank unless it is clearly 
identified as being owned or operated by another entity.

                 BB. 229.2(bb) Qualified Returned Check

    1. Subpart C requires the paying bank and returning bank(s) to 
return checks in an expeditious manner. The banks may meet this 
responsibility by returning a check to the depositary bank by the same 
general means used for forward collection of a check from the depositary 
bank to the paying bank. One way to speed the return process is to 
prepare the returned check for automated processing. Qualified returned 
checks are identified by placing a ``2'' in the case of an original 
check (or a ``5'' in the case of a substitute check) in position 44 of 
the qualified return MICR line as a return identifier in accordance with 
American National Standard Specifications for Placement and Location of 
MICR Printing, X9.13 (hereinafter ``ANS X9.13'') for original checks or 
American National Standard Specifications for an Image Replacement 
Document--IRD, X9.100-140 (hereinafter ``ANS X9.100-140'') for 
substitute checks.
    2. Generally, under the standard of care imposed by Sec. 229.38, a 
paying or returning bank would be liable for any damages incurred due to 
misencoding of the routing number, the amount of the check, or return 
identifier on a qualified returned check unless the error was due to 
problems with the depositary bank's indorsement. (See also discussion of 
Sec. 229.38(c).) A qualified returned check that contains an encoding 
error would still be a qualified returned check for purposes of the 
regulation.
    3. A qualified returned check need not contain the elements of a 
check drawn on the depositary bank, such as the name of the depositary 
bank. Because indorsements and other information on carrier envelopes or 
strips will not appear on a returned check itself, banks will wish to 
retain carrier envelopes and/or microfilm or other records of carrier 
envelopes or strips with their check records.

                      CC. 229.2(cc) Returning Bank

    1. Returning bank is defined to mean any bank (excluding the paying 
bank and the depositary bank) handling a returned check. A returning 
bank may or may not be a bank that handled the returned check in the 
forward collection process. A returning bank includes a bank that agrees 
to handle a returned check for expeditious return to the depositary bank 
under Sec. 229.31(a). A returning bank is also a collecting bank for 
the purpose of a collecting bank's duty to exercise ordinary care under 
U.C.C. 4-202(b) and is analogous to a collecting bank for purposes of 
final settlement. (See Commentary to Sec. 229.35(b).)

                      DD. 229.2(dd) Routing Number

    1. Each bank is assigned a routing number by an agent of the 
American Bankers Association. The routing number takes two forms--a 
fractional form and a nine-digit form. A paying bank is identified by 
both the fractional form routing number (which normally appears in the 
upper right hand corner of the check) and the nine-digit form. The

[[Page 902]]

nine-digit routing number of the paying bank generally is printed in 
magnetic ink near the bottom of the check (the MICR strip; see ANSI 
X9.13-1983). Subpart C requires depositary banks and subsequent 
collecting banks to place their routing numbers in nine-digit form in 
their indorsements.

                        EE. 229.2(ee) [Reserved]

                        FF. 229.2(ff) [Reserved]

                      GG. 229.2(gg) Teller's Check

    1. Teller's check is defined in the EFA Act to mean a check issued 
by a depository institution and drawn on another depository institution. 
The definition in the regulation includes not only checks drawn by a 
bank on another bank, but also checks payable through or at a bank. This 
would include checks drawn on a nonbank, as long as the check is payable 
through or at a bank. The definition does not include checks that are 
drawn by a nonbank on a nonbank even if payable through or at a bank. 
The definition includes checks provided to a customer of the bank in 
connection with customer deposit account activity, such as account 
disbursements and interest payments. The definition also includes checks 
acquired from a bank by a noncustomer for remittance purposes, such as 
certain loan disbursement checks. The definition excludes checks used by 
the bank to pay employees or vendors and checks issued by the bank in 
connection with a payment service, such as a payroll or a bill-paying 
service. Teller's checks generally are sold by banks to substitute the 
bank's credit for the customer's credit and thereby enhance the 
collectibility of the checks. A check issued in connection with a 
payment service generally is provided as a convenience to the customer 
rather than as a guarantee of the check's collectibility. In addition, 
such checks are often more difficult to distinguish from other types of 
checks than are teller's checks as defined by this regulation.

                     HH. 229.2(hh) Traveler's Check

    1. The EFA Act and regulation require that traveler's checks be 
treated as cashier's, teller's, or certified checks when a new depositor 
opens an account. (See Sec. 229.13(a); 12 U.S.C. 4003(a)(1)(C).) The 
EFA Act does not define traveler's check.
    2. One element of the definition states that a traveler's check is 
``drawn on or payable through or at a bank.'' Sometimes traveler's 
checks that are not issued by banks do not have any words on them 
identifying a bank as drawee or paying agent, but instead bear unique 
routing numbers with an 8000 prefix that identifies a bank as paying 
agent.
    3. Because a traveler's check is payable by, at, or through a bank, 
it is also a check for purposes of this regulation. When not subject to 
the next-day availability requirement for new accounts, a traveler's 
check should be treated as a local or nonlocal check depending on the 
location of the paying bank. The depositary bank may rely on the 
designation of the paying bank by the routing number to determine 
whether local or nonlocal treatment is required.

                  II. 229.2(ii) Uniform Commercial Code

    1. Uniform Commercial Code is defined as the version of the Code 
adopted by the individual states. For purposes of uniform citation, all 
citations to the U.C.C. in this part refer to the Official Text as 
approved by the American Law Institute and the National Conference of 
Commissioners on Uniform State Laws.

                        JJ. 229.2(jj) [Reserved]

             KK. 229.2(kk) Unit of General Local Government

    1. Unit of general local government is defined to include a city, 
county, parish, town, township, village, or other general purpose 
political subdivision of a state. The term does not include special 
purpose units, such as school districts, water districts, or Indian 
nations.

                       LL. 229.2(ll) Wire Transfer

    1. The EFA Act delegates to the Board the authority to define the 
term wire transfer. The regulation defines wire transfer as an 
unconditional order to a bank to pay a fixed or determinable amount of 
money to a beneficiary, upon receipt or on a day stated in the order, 
that is transmitted by electronic or other means over certain networks 
or on the books of banks and that is used primarily to transfer funds 
between commercial accounts. ``Unconditional'' means that no condition, 
such as presentation of documents, must be met before the bank receiving 
the order is to make payment. A wire transfer may be transmitted by 
electronic or other means. ``Electronic means'' include computer-to-
computer links, on-line terminals, telegrams (including TWX, TELEX, or 
similar methods of communication), telephone calls, or other similar 
methods. Fedwire (the Federal Reserve's wire transfer network), CHIPS 
(Clearing House Interbank Payments System, operated by the New York 
Clearing House), and book transfers among banks or within one bank are 
covered by this definition. Credits for credit and debit card 
transactions are not wire transfers. The term wire transfer excludes 
electronic fund transfers as that term is defined by the Electronic Fund 
Transfer Act.

[[Page 903]]

                        MM. 229.2(mm) [Reserved]

                        NN. 229.2(nn) Good Faith

    1. This definition of good faith derives from U.C.C. 3-103(a)(4).

                   OO. 229.2(oo) Interest Compensation

    1. This calculation of interest compensation derives from U.C.C. 4A-
506(b). (See Sec. Sec. 229.34(e) and 229.36(f).)

                    PP. 229.2(pp) Contractual Branch

    1. When one bank arranges for another bank to accept deposits on its 
behalf, the second bank is a contractual branch of the first bank. For 
further discussion of contractual branch deposits and related 
disclosures, see Sec. Sec. 229.2(s) and 229.19(a) of the regulation and 
the commentary to Sec. Sec. 229.2(s), 229.10(c), 229.14(a), 229.16(a), 
229.18(b), and 229.19(a).

                        QQ. 229.2(qq) [Reserved]

                        RR. 229.2(rr) [Reserved]

                        SS. 229.2(ss) [Reserved]

                        TT. 229.2(tt) [Reserved]

                        UU. 229.2(uu) [Reserved]

                         VV. 229.2(vv) MICR Line

    1. Information in the MICR line of a check must be printed in 
accordance with ANS X9.13 for original checks and ANS X9.100-140 for 
substitute checks. These standards could vary the requirements for 
printing the MICR line, such as by indicating circumstances under which 
the use of magnetic ink is not required.

                      WW. 229.2(ww) Original Check

    1. The definition of original check distinguishes the first paper 
check signed or otherwise authorized by the drawer to effect a 
particular payment transaction from a substitute check or other paper or 
electronic representation that is derived from an original check or 
substitute check. There is only one original check for any particular 
payment transaction. However, multiple substitute checks could be 
created to represent that original check at various points in the check 
collection and return process.

 XX. 229.2(xx) Paper or Electronic Representation of a Substitute Check

    1. Receipt of a paper or electronic representation of a substitute 
check does not trigger indemnity or expedited recredit rights, although 
the recipient nonetheless could have a warranty claim or a claim under 
other check law with respect to that document or the underlying payment 
transaction. A paper or electronic representation of a substitute check 
would include a representation of a substitute check that was drawn on 
an account, as well as a representation of a substitute traveler's 
check, credit card check, or other item that meets the substitute check 
definition. The following examples illustrate the scope of the 
definition.

                                Examples.

    a. A bank receives electronic presentment of a substitute check that 
has been converted to electronic form and charges the customer's account 
for that electronic item. The periodic account statement that the bank 
provides to the customer includes information about the electronically-
presented substitute check in a line-item list describing all the checks 
the bank charged to the customer's account during the previous month. 
The electronic file that the bank received for presentment and charged 
to the customer's account would be an electronic representation of a 
substitute check, and the line-item appearing on the customer's account 
statement would be a paper representation of a substitute check.
    b. A paying bank receives and settles for a substitute check and 
then realizes that its settlement was for the wrong amount. The paying 
bank sends an adjustment request to the presenting bank to correct the 
error. The adjustment request is not a paper or electronic 
representation of a substitute check under the definition because it is 
not being handled for collection or return as a check. Rather, it is a 
separate request that is related to a check. As a result, no substitute 
check warranty, indemnity, or expedited recredit rights attach to the 
adjustment.

                        YY. 229.2(yy) [Reserved]

                     ZZ. 229.2(zz) Reconverting Bank

    1. A substitute check is ``created'' when and where a paper 
reproduction of an original check that meets the requirements of Sec. 
229.2(aaa) is physically printed. A bank is a reconverting bank if it 
creates a substitute check directly or if another person by agreement 
creates a substitute check on the bank's behalf. A bank also is a 
reconverting bank if it is the first bank that receives a substitute 
check created by a nonbank and transfers, presents, or returns that 
substitute check or, in lieu thereof, the first paper or electronic 
representation of such substitute check.

                                Examples.

    a. Bank A, by agreement, sends an electronic check file for 
collection to Bank B. Bank B chooses to use that file to print a 
substitute check that meets the requirements of Sec. 229.2(aaa). Bank B 
is the reconverting bank as of the time it prints the substitute check.

[[Page 904]]

    b. Company A, which is not a bank, by agreement receives check 
information electronically from Bank A. Bank A becomes the reconverting 
bank when Company A prints a substitute check on behalf of Bank A in 
accordance with that agreement.
    c. A depositary bank's customer, which is a nonbank business, 
receives a check for payment, truncates that original check, and creates 
a substitute check to deposit with its bank. The depositary bank 
receives that substitute check from its customer and is the first bank 
to handle the substitute check. The depositary bank becomes the 
reconverting bank as of the time that it transfers or presents the 
substitute check (or in lieu thereof the first paper or electronic 
representation of the substitute check) for forward collection.
    d. A bank is the payable-through bank for checks that are drawn on a 
nonbank payor, which is the bank's customer. When the customer decides 
not to pay a check that is payable through the bank, the customer 
creates a substitute check for purposes of return. The payable-through 
bank becomes the reconverting bank when it returns the substitute check 
(or in lieu thereof the first paper or electronic representation of the 
substitute check) to a returning bank or the depositary bank.
    e. A paying bank returns a substitute check to the depositary bank, 
which in turn gives that substitute check back to its nonbank customer. 
That customer then redeposits the substitute check for collection at a 
different bank. Because the substitute check was already transferred by 
a bank, the second depositary bank does not become a reconverting bank 
when it transfers or presents that substitute check for collection.
    2. In some cases there will be one or more banks between the 
truncating bank and the reconverting bank.

                                Example.

    A depositary bank truncates the original check and sends an 
electronic representation of the original check for collection to an 
intermediary bank. The intermediary bank sends the electronic 
representation of the original check to the presenting bank, which 
creates a substitute check to present to the paying bank. The presenting 
bank is the reconverting bank.
    3. A check could move from electronic form to substitute check form 
several times during the collection and return process. It therefore is 
possible that there could be multiple substitute checks, and thus 
multiple reconverting banks, with respect to the same underlying 
payment.

                    AAA. 229.2(aaa) Substitute Check

    1. ``A paper reproduction of an original check'' could include a 
reproduction created directly from the original check or a reproduction 
of the original check that is created from some other source that 
contains an image of the original check, such as an electronic 
representation of an original check or substitute check, or a previous 
substitute check.
    2. Because a substitute check must be a piece of paper, an 
electronic file or electronic check image that has not yet been printed 
in accordance with the substitute check definition is not a substitute 
check.
    3. Because a substitute check must be a representation of a check, a 
paper reproduction of something that is not a check cannot be a 
substitute check. For example, a savings bond or a check drawn on a non-
U.S. branch of a foreign bank cannot be reconverted to a substitute 
check.
    4. As described in Sec. 229.51(b) and the commentary thereto, a 
reconverting bank is required to ensure that a substitute check contains 
all indorsements applied by previous parties that handled the check in 
any form. Therefore, the image of the original check that appears on the 
back of a substitute check would include indorsements that were 
physically applied to the original check before an image of the original 
check was captured. An indorsement that was applied physically to the 
original check after an image of the original check was captured would 
be conveyed as an electronic indorsement (see paragraph 3 of the 
commentary to Sec. 229.35(a)). The back of the substitute check would 
contain a physical representation of any indorsements that were applied 
electronically to the check after an image of the check was captured but 
before creation of the substitute check.

                                Example.

    Bank A, which is the depositary bank, captures an image of an 
original check, indorses it electronically and, by agreement, transmits 
to Bank B an electronic image of the check accompanied by the electronic 
indorsement. Bank B then creates a substitute check to send to Bank C. 
The back of the substitute check created by Bank B must contain a 
representation of the indorsement previously applied electronically by 
Bank A and Bank B's own indorsement. (For more information on 
indorsement requirements, see Sec. 229.35, appendix D, and the 
commentary thereto.)
    5. Some substitute checks will not be created directly from the 
original check, but rather will be created from a previous substitute 
check. The back of a subsequent substitute check will contain an image 
of the full length of the back of the previous substitute check. ANS 
X9.100-140 requires preservation of the full length of the back of the 
previous substitute check in order to preserve previous indorsements and 
reconverting bank identifications. By contrast,

[[Page 905]]

the front of a subsequent substitute check will not contain an image of 
the entire previous substitute check. Rather, the image field of the 
subsequent substitute check will contain the image of the front of the 
original check that appeared on the previous substitute check at the 
time the previous substitute check was converted to electronic form. The 
portions of the front of the subsequent substitute check other than the 
image field will contain information applied by the subsequent 
reconverting bank, such as its reconverting bank identification, the 
MICR line, the legal equivalence legend, and optional security 
information.

                                Examples.

    a. The back of a subsequent substitute check would contain the 
following indorsements, all of which would be preserved through the 
image of the back of the previous substitute check: (1) The indorsements 
that were applied physically to the original check before an image of 
the original check was captured; (2) a physical representation of 
indorsements that were applied electronically to the original check 
after an image of the original check was captured but before creation of 
the first substitute check; and (3) indorsements that were applied 
physically to the previous substitute check. In addition, the 
reconverting bank for the subsequent substitute check must overlay onto 
the back of that substitute check a physical representation of any 
indorsements that were applied electronically after the previous 
substitute check was converted to electronic form but before creation of 
the subsequent substitute check.
    b. Because information could have been physically added to the image 
of the front of the original check that appeared on the previous 
substitute check, the original check image that appears on the front of 
a subsequent substitute check could contain information in addition to 
that which appeared on the original check at the time it was truncated.
    6. The MICR line applied to a substitute check must contain 
information in all fields of the MICR line that were encoded on the 
original check at any time before an image of the original check was 
captured. This includes all the MICR-line information that was 
preprinted on the original check, plus any additional information that 
was added to the MICR line before the image of the original check was 
captured (for example, the amount of the check). The information in each 
field of the substitute check's MICR line must be the same information 
as in the corresponding field of the MICR line of the original check, 
except as provided by ANS X9.100-140 (unless the Board by rule or order 
determines that a different standard applies). Industry standards may 
not, however, vary the requirement that a substitute check at the time 
of its creation must bear a full-field MICR line.
    7. ANS X9.100-140, provides that a substitute check must have a 
``4'' in position 44 and that a qualified returned substitute check must 
have a ``4'' in position 44 of the forward-collection MICR line as well 
as a ``5'' in position 44 of the qualified return MICR line. The ``4'' 
and ``5'' indicate that the document is a substitute check so that the 
size of the check image remains constant throughout the collection and 
return process, regardless of the number of substitute checks created 
that represent the same original check (see also Sec. Sec. 229.30(a)(2) 
and 229.31(a)(2) and the commentary thereto regarding requirements for 
qualified returned substitute checks). An original check generally has a 
blank position 44 for forward collection. Because a reconverting bank 
must encode position 44 of a substitute check's forward collection MICR 
line with a ``4,'' the reconverting bank must vary any character that 
appeared in position 44 of the forward-collection MICR line of the 
original check. A bank that misencodes or fails to encode position 44 at 
the time it attempts to create a substitute check has failed to create a 
substitute check. A bank that receives a properly-encoded substitute 
check may further encode that item but does so subject to the encoding 
warranties in Regulation CC and the U.C.C.
    8. A substitute check's MICR line could contain information in 
addition to the information required at the time the substitute check is 
created. For example, if the amount field of the original check was not 
encoded and the substitute check therefore did not, when created, have 
an encoded amount field, the MICR line of the substitute check later 
could be amount-encoded.
    9. A bank may receive a substitute check that contains a MICR-line 
variation but nonetheless meets the MICR-line replication requirements 
of Sec. 229.2(aaa)(2) because that variation is permitted by ANS 
X9.100-140. If such a substitute check contains a MICR-line error, a 
bank that receives it may, but is not required to, repair that error. 
Such a repair must be made in accordance with ANS X9.100-140 for 
repairing a MICR line, which generally allows a bank to correct an error 
by applying a strip that may or may not contain information in all 
fields encoded on the check's MICR line. A bank's repair of a MICR-line 
error on a substitute check is subject to the encoding warranties in 
Regulation CC and the U.C.C.
    10. A substitute check must conform to all the generally applicable 
industry standards for substitute checks set forth in ANS X9.100-140, 
which incorporates other industry standards by reference. Thus, multiple 
substitute check images contained on the same

[[Page 906]]

page of an account statement are not substitute checks.

                BBB. 229.2(bbb) Sufficient Copy and Copy

    1. A copy must be a paper reproduction of a check. An electronic 
image therefore is not a copy or a sufficient copy. However, if a 
customer has agreed to receive such information electronically, a bank 
that is required to provide an original check or sufficient copy may 
satisfy that requirement by providing an electronic image in accordance 
with Sec. 229.58 and the commentary thereto.
    2. A bank under Sec. 229.53(b)(3) may limit its liability for an 
indemnity claim and under Sec. Sec. 229.54(e)(2) and 229.55(c)(2) may 
respond to an expedited recredit claim by providing the claimant with a 
copy of a check that accurately represents all of the information on the 
front and back of the original check as of the time the original check 
was truncated or that otherwise is sufficient to determine the validity 
of the claim against the bank.

                                Examples.

    a. A copy of an original check that accurately represents all the 
information on the front and back of the original check as of the time 
of truncation would constitute a sufficient copy if that copy resolved 
the claim. For example, if resolution of the claim required accurate 
payment and indorsement information, an accurate copy of the front and 
back of a legible original check (including but not limited to a 
substitute check) would be a sufficient copy.
    b. A copy of the original check that does not accurately represent 
all the information on both the front and back of the original check 
also could be a sufficient copy if such copy contained all the 
information necessary to determine the validity of the relevant claim. 
For instance, if a consumer received a substitute check that contained a 
blurry image of a legible original check, the consumer might seek an 
expedited recredit because his or her account was charged for $1,000, 
but he or she believed that the check was written for only $100. If the 
amount that appeared on the front of the original check was legible, an 
accurate copy of only the front of the original check that showed the 
amount of the check would be sufficient to determine whether or not the 
consumer's claim regarding the amount of the check was valid.

               CCC. 229.2(ccc) Transfer and Consideration

    1. Under Sec. Sec. 229.52 and 229.53, a bank is responsible for the 
warranties and indemnity when it transfers, presents, or returns a 
substitute check (or a paper or electronic representation thereof) for 
consideration. Drawers and other nonbank persons that receive checks 
from a bank are not transferees that receive consideration as those 
terms are defined in the U.C.C. However, the Check 21 Act clearly 
contemplates that such nonbank persons that receive substitute checks 
(or representations thereof) from a bank will receive the warranties and 
indemnity from all previous banks that handled the check. To ensure that 
these parties are covered by the substitute check warranties and 
indemnity in the manner contemplated by the Check 21 Act, Sec. 
229.2(ccc) incorporates the U.C.C. definitions of the term transfer and 
consideration by reference and expands those definitions to cover a 
broader range of situations. Delivering a check to a nonbank that is 
acting on behalf of a bank (such as a third-party check processor or 
presentment point) is a transfer of the check to that bank.

                                Examples.

    a. A paying bank pays a substitute check and then provides that paid 
substitute check (or a representation thereof) to a drawer with a 
periodic statement. Under the expanded definitions, the paying bank 
thereby transfers the substitute check (or representation thereof) to 
the drawer for consideration and makes the substitute check warranties 
described in Sec. 229.52. A drawer that suffers a loss due to receipt 
of a substitute check may have warranty, indemnity, and, if the drawer 
is a consumer, expedited recredit rights under the Check 21 Act and 
subpart D. A drawer that suffers a loss due to receipt of a paper or 
electronic representation of a substitute check would receive the 
substitute check warranties but would not have indemnity or expedited 
recredit rights.
    b. The expanded definitions also operate such that a paying bank 
that pays an original check (or a representation thereof) and then 
creates a substitute check to provide to the drawer with a periodic 
statement transfers the substitute check for consideration and thereby 
provides the warranties and indemnity.
    c. The expanded definitions ensure that a bank that receives a 
returned check in any form and then provides a substitute check to the 
depositor gives the substitute check warranties and indemnity to the 
depositor.
    d. The expanded definitions apply to substitute checks representing 
original checks that are not drawn on deposit accounts, such as checks 
used to access a credit card or a home equity line of credit.

                        DDD. 229.2(ddd) Truncate

    1. Truncate means to remove the original check from the forward 
collection or return process and to send in lieu of the original check 
either a substitute check or, by agreement, information relating to the 
original check. Truncation does not include removal of a substitute 
check from the check collection or return process.

[[Page 907]]

                     EEE. 229.2(eee) Truncating Bank

    1. A bank is a truncating bank if it truncates an original check or 
if it is the first bank to transfer, present, or return another form of 
an original check that was truncated by a person that is not a bank.

                                Example.

    a. A bank's customer that is a nonbank business receives a check for 
payment and deposits either a substitute check or an electronic 
representation of the original check with its depositary bank instead of 
the original check. That depositary bank is the truncating bank when it 
transfers, presents, or returns the substitute check or electronic 
representation in lieu of the original check. That bank also would be 
the reconverting bank if it were the first bank to transfer, present, or 
return a substitute check that it received from (or created from the 
information given by) its nonbank customer (see Sec. 229.2(yy) and the 
commentary thereto).
    2. A truncating bank does not make the subpart D warranties and 
indemnity unless it also is the reconverting bank. Therefore, a bank 
that truncates the original check and sends an electronic file to a 
collecting bank does not provide subpart D protections to the recipient 
of that electronic item. However, a recipient of an electronic item may 
protect itself against losses associated with that item by agreement 
with the truncating bank.

                 FFF. 229.2(fff) Remotely Created Check

    1. A check authorized by a consumer over the telephone that is not 
created by the paying bank and bears a legend on the signature line, 
such as ``Authorized by Drawer,'' is an example of a remotely created 
check. A check that bears the signature applied, or purported to be 
applied, by the person on whose account the check is drawn is not a 
remotely created check. A typical forged check, such as a stolen 
personal check fraudulently signed by a person other than the drawer, is 
not covered by the definition of a remotely created check.
    2. The term signature as used in this definition has the meaning set 
forth at U.C.C. 3-401. The term ``applied by'' refers to the physical 
act of placing the signature on the check.
    3. The definition of a ``remotely created check'' differs from the 
definition of a ``remotely created consumer item'' under the U.C.C. A 
``remotely created check'' may be drawn on an account held by a 
consumer, corporation, unincorporated company, partnership, government 
unit or instrumentality, trust, or any other entity or organization. A 
``remotely created consumer item'' under the U.C.C., however, must be 
drawn on a consumer account.
    4. Under Regulation CC (12 CFR part 229), the term ``check'' 
includes a negotiable demand draft drawn on or payable through or at an 
office of a bank. In the case of a ``payable through'' or ``payable at'' 
check, the signature of the person on whose account the check is drawn 
would include the signature of the payor institution or the signatures 
of the customers who are authorized to draw checks on that account, 
depending on the arrangements between the ``payable through'' or 
``payable at'' bank, the payor institution, and the customers.
    5. The definition of a remotely created check includes a remotely 
created check that has been reconverted to a substitute check.

        III. Section 229.3 Administrative Enforcement [Reserved]

                IV. Section 229.10 Next-Day Availability

                    A. Business Days and Banking Days

    1. This section, as well as other provisions of this subpart 
governing the availability of funds, provides that funds must be made 
available for withdrawal not later than a specified number of business 
days following the banking day on which the funds are deposited. Thus, a 
deposit is considered made only on a banking day, i.e., a day that the 
bank is open to the public for carrying on substantially all of its 
banking functions. For example, if a deposit is made at an ATM on a 
Saturday, Sunday, or other day on which the bank is closed to the 
public, the deposit is considered received on that bank's next banking 
day.
    2. Nevertheless, business days are used to determine the number of 
days following the banking day of deposit that funds must be available 
for withdrawal. For example, if a deposit of a local check were made on 
a Monday, the availability schedule requires that funds be available for 
withdrawal on the second business day after deposit. Therefore, funds 
must be made available on Wednesday regardless of whether the bank was 
closed on Tuesday for other than a standard legal holiday as specified 
in the definition of business day.

                       B. 229.10(a) Cash Deposits

    1. This paragraph implements the EFA Act's requirement for next-day 
availability for cash deposits to accounts at a depositary bank 
``staffed by individuals employed by such institution.'' \2\ Under this 
paragraph, cash deposited in an account at a staffed

[[Page 908]]

teller station on a Monday must become available for withdrawal by the 
start of business on Tuesday. It must become available for withdrawal by 
the start of business on Wednesday if it is deposited by mail, at a 
proprietary ATM, or by other means other than at a staffed teller 
station.
---------------------------------------------------------------------------

    \2\ Nothing in the EFA Act or this regulation affects terms of 
account arrangements, such as negotiable order of withdrawal accounts, 
which may require prior notice of withdrawal. (See 12 CFR 204.2(e)(2).)
---------------------------------------------------------------------------

                    C. 229.10(b) Electronic Payments

    1. The EFA Act provides next-day availability for funds received for 
deposit by wire transfer. The regulation uses the term electronic 
payment, rather than wire transfer, to include both wire transfers and 
ACH credit transfers under the next-day availability requirement. (See 
discussion of definitions of automated clearinghouse, electronic 
payment, and wire transfer in Sec. 229.2.)
    2. The EFA Act requires that funds received by wire transfer be 
available for withdrawal not later than the business day following the 
day a wire transfer is received. This paragraph clarifies what 
constitutes receipt of an electronic payment. For the purposes of this 
paragraph, a bank receives an electronic payment when the bank receives 
both payment in finally collected funds and the payment instructions 
indicating the customer accounts to be credited and the amount to be 
credited to each account. For example, in the case of Fedwire, the bank 
receives finally collected funds at the time the payment is made. (See 
12 CFR 210.31.) Finally collected funds generally are received for an 
ACH credit transfer when they are posted to the receiving bank's account 
on the settlement day. In certain cases, the bank receiving ACH credit 
payments will not receive the specific payment instructions indicating 
which accounts to credit until after settlement day. In these cases, the 
payments are not considered received until the information on the 
account and amount to be credited is received.
    3. This paragraph also establishes the extent to which an electronic 
payment is considered made. Thus, if a participant on a private network 
fails to settle and the receiving bank receives finally settled funds 
representing only a partial amount of the payment, it must make only the 
amount that it actually received available for withdrawal.
    4. The availability requirements of this regulation do not preempt 
or invalidate other rules, regulations, or agreements which require 
funds to be made available on a more prompt basis. For example, the 
next-day availability requirement for ACH credits in this section does 
not preempt ACH association rules and Treasury regulations (31 CFR part 
210), which provide that the proceeds of these credit payments be 
available to the recipient for withdrawal on the day the bank receives 
the funds.

                   D. 229.10(c) Certain Check Deposits

    1. The EFA Act generally requires that funds be made available on 
the business day following the banking day of deposit for Treasury 
checks, state and local government checks, cashier's checks, certified 
checks, teller's checks, and ``on us'' checks, under specified 
conditions. (Treasury checks are checks drawn on the Treasury of the 
United States and have a routing number beginning with the digits 
``0000.'') This section also requires next-day availability for 
additional types of checks not addressed in the EFA Act. Checks drawn on 
a Federal Reserve Bank or a Federal Home Loan Bank and U.S. Postal 
Service money orders also must be made available on the first business 
day following the day of deposit under specified conditions. For the 
purposes of this section, all checks drawn on a Federal Reserve Bank or 
a Federal Home Loan Bank that contain in the MICR line a routing number 
that is listed in appendix A are subject to the next-day availability 
requirement if they are deposited in an account held by a payee of the 
check and in person to an employee of the depositary bank, regardless of 
the purposes for which the checks were issued. For all new accounts, 
even if the new account exception is not invoked, traveler's checks must 
be included in the $5,000 aggregation of checks deposited on any one 
banking day that are subject to the next-day availability requirement. 
(See Sec. 229.13(a).)
    2. Deposit in Account of Payee. One statutory condition to receipt 
of next-day availability of Treasury checks, state and local government 
checks, cashier's checks, certified checks, and teller's checks is that 
the check must be ``endorsed only by the person to whom it was issued.'' 
The EFA Act could be interpreted to include a check that has been 
indorsed in blank and deposited into an account of a third party that is 
not named as payee. The Board believes that such a check presents 
greater risks than a check deposited by the payee and that Congress did 
not intend to require next-day availability for such checks. The 
regulation, therefore, provides that funds must be available on the 
business day following deposit only if the check is deposited in an 
account held by a payee of the check. For the purposes of this section, 
payee does not include transferees other than named payees. The 
regulation also applies this condition to Postal Service money orders 
and checks drawn on Federal Reserve Banks and Federal Home Loan Banks.
    3. Deposits Made to an Employee of the Depositary Bank.
    a. In most cases, next-day availability of the proceeds of checks 
subject to this section is conditioned on the deposit of these checks in 
person to an employee of the depositary

[[Page 909]]

bank. If the deposit is not made to an employee of the depositary bank 
on the premises of such bank, the proceeds of the deposit must be made 
available for withdrawal by the start of business on the second business 
day after deposit, under paragraph (c)(2) of this section. For example, 
second-day availability rather than next-day availability would be 
allowed for deposits of checks subject to this section made at a 
proprietary ATM, night depository, through the mail or a lock box, or at 
a teller station staffed by a person who is not an employee of the 
depositary bank. Second-day availability also may be allowed for 
deposits picked up by an employee of the depositary bank at the 
customer's premises; such deposits would be considered made upon receipt 
at the branch or other location of the depositary bank. Employees of a 
contractual branch would not be considered employees of the depositary 
bank for the purposes of this regulation, and deposits at contractual 
branches would be treated the same as deposits to a proprietary ATM for 
the purposes of this regulation. (See also, Commentary to Sec. 
229.19(a).)
    b. In the case of Treasury checks, the EFA Act and regulation do not 
condition the receipt of next-day availability to deposits at staffed 
teller stations. Therefore, Treasury checks deposited at a proprietary 
ATM must be accorded next-day availability, if the check is deposited to 
an account of a payee of the check.
    4. ``On Us'' Checks. The EFA Act and regulation require next-day 
availability for ``on us'' checks, i.e., checks deposited in a branch of 
the depositary bank and drawn on the same or another branch of the same 
bank, if both branches are located in the same state or check processing 
region. Thus, checks deposited in one branch of a bank and drawn on 
another branch of the same bank must receive next-day availability even 
if the branch on which the checks are drawn is located in another check 
processing region but in the same state as the branch in which the check 
is deposited. For the purposes of this requirement, deposits at 
facilities that are not located on the premises of a brick-and-mortar 
branch of the bank, such as off-premise ATMs and remote depositories, 
are not considered deposits made at branches of the depositary bank.
    5. First $100.
    a. The EFA Act and regulation also require that up to $100 of the 
aggregate deposit by check or checks not subject to next-day 
availability on any one banking day be made available on the next 
business day. For example, if $70 were deposited in an account by 
check(s) on a Monday, the entire $70 must be available for withdrawal at 
the start of business on Tuesday. If $200 were deposited by check(s) on 
a Monday, this section requires that $100 of the funds be available for 
withdrawal at the start of business on Tuesday. The portion of the 
customer's deposit to which the $100 must be applied is at the 
discretion of the depositary bank, as long as it is not applied to any 
checks subject to next-day availability. The $100 next-day availability 
rule does not apply to deposits at nonproprietary ATMs.
    b. The $100 that must be made available under this rule is in 
addition to the amount that must be made available for withdrawal on the 
business day after deposit under other provisions of this section. For 
example, if a customer deposits a $1,000 Treasury check, and a $1,000 
local check in its account on Monday, $1,100 must be made available for 
withdrawal on Tuesday--the proceeds of the $1,000 Treasury check, as 
well as the first $100 of the local check.
    c. A depositary bank may aggregate all local and nonlocal check 
deposits made by the customer on a given banking day for the purposes of 
the $100 next-day availability rule. Thus, if a customer has two 
accounts at the depositary bank, and on a particular banking day makes 
deposits to each account, $100 of the total deposited to the two 
accounts must be made available on the business day after deposit. Banks 
may aggregate deposits to individual and joint accounts for the purposes 
of this provision.
    d. If the customer deposits a $500 local check, and gets $100 cash 
back at the time of deposit, the bank need not make an additional $100 
available for withdrawal on the following day. Similarly, if the 
customer depositing the local check has a negative book balance, or 
negative available balance in its account at the time of deposit, the 
$100 that must be available on the next business day may be made 
available by applying the $100 to the negative balance, rather than 
making the $100 available for withdrawal by cash or check on the 
following day.
    6. Special Deposit Slips.
    a. Under the EFA Act, a depositary bank may require the use of a 
special deposit slip as a condition to providing next-day availability 
for certain types of checks. This condition was included in the EFA Act 
because many banks determine the availability of their customers' check 
deposits in an automated manner by reading the MICR-encoded routing 
number on the deposited checks. Using these procedures, a bank can 
determine whether a check is a local or nonlocal check, a check drawn on 
the Treasury, a Federal Reserve Bank, a Federal Home Loan Bank, or a 
branch of the depositary bank, or a U.S. Postal Service money order. 
Appendix A includes the routing numbers of certain categories of checks 
that are subject to next-day availability. The bank cannot require a 
special deposit slip for these checks.
    b. A bank cannot distinguish whether the check is a state or local 
government check, cashier's check, certified check, or teller's check by 
reading the MICR-encoded routing

[[Page 910]]

number, because these checks bear the same routing number as other 
checks drawn on the same bank that are not accorded next-day 
availability. Therefore, a bank may require a special deposit slip for 
these checks.
    c. The regulation specifies that if a bank decides to require the 
use of a special deposit slip (or a special deposit envelope in the case 
of a deposit at an ATM or other unstaffed facility) as a condition to 
granting next-day availability under paragraphs (c)(1)(iv) or (c)(1)(v) 
of this section or second-day availability under paragraph (c)(2) of 
this section, and if the deposit slip that must be used is different 
from the bank's regular deposit slips, the bank must either provide the 
special slips to its customers or inform its customers how such slips 
may be obtained and make the slips reasonably available to the 
customers.
    d. A bank may meet this requirement by providing customers with an 
order form for the special deposit slips and allowing sufficient time 
for the customer to order and receive the slips before this condition is 
imposed. If a bank provides deposit slips in its branches for use by its 
customers, it also must provide the special deposit slips in the 
branches. If special deposit envelopes are required for deposits at an 
ATM, the bank must provide such envelopes at the ATM.
    e. Generally, a teller is not required to advise depositors of the 
availability of special deposit slips merely because checks requiring 
special deposit slips for next-day availability are deposited without 
such slips. If a bank provides the special deposit slips only upon the 
request of a depositor, however, the teller must advise the depositor of 
the availability of the special deposit slips, or the bank must post a 
notice advising customers that the slips are available upon request. 
Such notice need not be posted at each teller window, but the notice 
must be posted in a place where consumers seeking to make deposits are 
likely to see it before making their deposits. For example, the notice 
might be posted at the point where the line forms for teller service in 
the lobby. The notice is not required at any drive-through teller 
windows nor is it required at night depository locations, or at 
locations where consumer deposits are not accepted. If a bank prepares a 
deposit for a depositor, it must use a special deposit slip where 
appropriate. A bank may require the customer to segregate the checks 
subject to next-day availability for which special deposit slips could 
be required, and to indicate on a regular deposit slip that such checks 
are being deposited, if the bank so instructs its customers in its 
initial disclosure.

                      V. Section 229.11 [Reserved]

                VI. Section 229.12 Availability Schedule

                       A. 229.12(a) Effective Date

    1. The availability schedule set forth in this section supersedes 
the temporary schedule that was effective September 1, 1988, through 
August 31, 1990.

           B. 229.12(b) Local Checks and Certain Other Checks

    1. Local checks must be made available for withdrawal not later than 
the second business day following the banking day on which the checks 
were deposited.
    2. In addition, the proceeds of Treasury checks and U.S. Postal 
Service money orders not subject to next-day (or second-day) 
availability under Sec. 229.10(c), checks drawn on Federal Reserve 
Banks and Federal Home Loan Banks, checks drawn by a state or unit of 
general local government, cashier's checks, certified checks, and 
teller's checks not subject to next-day (or second-day) availability 
under Sec. 229.10(c) and payable in the same check processing region as 
the depositary bank, must be made available for withdrawal by the second 
business day following deposit.
    3. Exceptions are made for withdrawals by cash or similar means and 
for deposits in banks located outside the 48 contiguous states. Thus, 
the proceeds of a local check deposited on a Monday generally must be 
made available for withdrawal on Wednesday.

                      C. 229.12(c) Nonlocal Checks

    1. Nonlocal checks must be made available for withdrawal not later 
than the fifth business day following deposit, i.e., proceeds of a 
nonlocal check deposited on a Monday must be made available for 
withdrawal on the following Monday. In addition, a check described in 
Sec. 229.10(c) that does not meet the conditions for next-day 
availability (or second-day availability) is treated as a nonlocal 
check, if the check is drawn on or payable through or at a nonlocal 
paying bank. Adjustments are made to the schedule for withdrawals by 
cash or similar means and deposits in banks located outside the 48 
contiguous states.
    2. Reduction in Schedules.
    a. Section 603(d)(1) of the EFA Act (12 U.S.C. 4002(d)(1)) requires 
the Board to reduce the statutory schedules for any category of checks 
where most of those checks would be returned in a shorter period of time 
than provided in the schedules. The conferees indicated that ``if the 
new system makes it possible for two-thirds of the items of a category 
of checks to meet this test in a shorter period of time, then the 
Federal

[[Page 911]]

Reserve must shorten the schedules accordingly.'' H.R. Rep. No. 261, 
100th Cong., 1st Sess. at 179 (1987).
    b. Reduced schedules are provided for certain nonlocal checks where 
significant improvements can be made to the EFA Act's schedules due to 
transportation arrangements or proximity between the check processing 
regions of the depositary bank and the paying bank, allowing for faster 
collection and return. Appendix B sets forth the specific reduction of 
schedules applicable to banks located in certain check processing 
regions.
    c. A reduction in schedules may apply even in those cases where the 
determination that the check is nonlocal cannot be made based on the 
routing number on the check. For example, a nonlocal credit union 
payable-through share draft may be subject to a reduction in schedules 
if the routing number of the payable-through bank that appears on the 
draft is included in appendix B, even though the determination that the 
payable-through share draft is nonlocal is based on the location of the 
credit union and not the routing number on the draft.

 D. 229.12(d) Time Period Adjustment for Withdrawal by Cash or Similar 
                                  Means

    1. The EFA Act provides an adjustment to the availability rules for 
cash withdrawals. Funds from local and nonlocal checks need not be 
available for cash withdrawal until 5:00 p.m. on the day specified in 
the schedule. At 5:00 p.m., $400 of the deposit must be made available 
for cash withdrawal. This $400 is in addition to the first $100 of a 
day's deposit, which must be made available for withdrawal at the start 
of business on the first business day following the banking day of 
deposit. If the proceeds of local and nonlocal checks become available 
for withdrawal on the same business day, the $400 withdrawal limitation 
applies to the aggregate amount of the funds that became available for 
withdrawal on that day. The remainder of the funds must be available for 
cash withdrawal at the start of business on the business day following 
the business day specified in the schedule.
    2. The EFA Act recognizes that the $400 that must be provided on the 
day specified in the schedule may exceed a bank's daily ATM cash 
withdrawal limit, and explicitly provides that the EFA Act does not 
supersede the bank's policy in this regard. The Board believes that the 
rationale for accommodating a bank's ATM withdrawal limit also applies 
to other cash withdrawal limits established by that bank. Section 
229.19(c)(4) of the regulation addresses the relation between a bank's 
cash withdrawal limit (for over-the-counter cash withdrawals as well as 
ATM cash withdrawals) and the requirements of this subpart.
    3. The Board believes that the Congress included this special cash 
withdrawal rule to provide a depositary bank with additional time to 
learn of the nonpayment of a check before it must make funds available 
to its customer. If a customer deposits a local check on a Monday, and 
that check is returned by the paying bank, the depositary bank may not 
receive the returned check until Thursday, the day after funds for a 
local check ordinarily must be made available for withdrawal. The intent 
of the special cash withdrawal rule is to minimize this risk to the 
depositary bank. For this rule to minimize the depositary bank's risk, 
it must apply not only to cash withdrawals, but also to withdrawals by 
other means that result in an irrevocable debit to the customer's 
account or commitment to pay by the bank on the customer's behalf during 
the day. Thus, the cash withdrawal rule also includes withdrawals by 
electronic payment, issuance of a cashier's or teller's check, 
certification of a check, or other irrevocable commitment to pay, such 
as authorization of an on-line point-of-sale debit. The rule also would 
apply to checks presented over the counter for payment on the day of 
presentment by the depositor or another person. Such checks could not be 
dishonored for insufficient funds if an amount sufficient to cover the 
check had became available for cash withdrawal under this rule; however, 
payment of such checks would be subject to the bank's cut-off hour 
established under U.C.C. 4-108. The cash withdrawal rule does not apply 
to checks and other provisional debits presented to the bank for payment 
that the bank has the right to return.

   E. 229.12(e) Extension of Schedule for Certain Deposits in Alaska, 
            Hawaii, Puerto Rico, and the U.S. Virgin Islands

    1. The EFA Act and regulation provide an extension of the 
availability schedules for check deposits at a branch of a bank if the 
branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin 
Islands. The schedules for local checks, nonlocal checks (including 
nonlocal checks subject to the reduced schedules of appendix B), and 
deposits at nonproprietary ATMs are extended by one business day for 
checks deposited to accounts in banks located in these jurisdictions 
that are drawn on or payable at or through a paying bank not located in 
the same jurisdiction as the depositary bank. For example, a check 
deposited in a bank in Hawaii and drawn on a San Francisco paying bank 
must be made available for withdrawal not later than the third business 
day following deposit. This extension does not apply to deposits that 
must be made available for withdrawal on the next business day.
    2. The Congress did not provide this extension of the schedules to 
checks drawn on a

[[Page 912]]

paying bank located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin 
Islands and deposited in an account at a depositary bank in the 48 
contiguous states. Therefore, a check deposited in a San Francisco bank 
drawn on a Hawaii paying bank must be made available for withdrawal not 
later than the second rather than the third business day following 
deposit.

              F. 229.12(f) Deposits at Nonproprietary ATMs

    1. The EFA Act and regulation provide a special rule for deposits 
made at nonproprietary ATMs. This paragraph does not apply to deposits 
made at proprietary ATMs. All deposits at a nonproprietary ATM must be 
made available for withdrawal by the fifth business day following the 
banking day of deposit. For example, a deposit made at a nonproprietary 
ATM on a Monday, including any deposit by cash or checks that would 
otherwise be subject to next-day (or second-day) availability, must be 
made available for withdrawal not later than Monday of the following 
week. The provisions of Sec. 229.10(c)(1)(vii) requiring a depositary 
bank to make up to $100 of an aggregate daily deposit available for 
withdrawal on the first business day after the banking day of deposit do 
not apply to deposits at a nonproprietary ATM.

                     VII. Section 229.13 Exceptions

                             A. Introduction

    1. While certain safeguard exceptions (such as those for new 
accounts and checks the bank has reasonable cause to believe are 
uncollectible) are established in the EFA Act, the Congress gave the 
Board the discretion to determine whether certain other exceptions 
should be included in its regulations. Specifically, the EFA Act gives 
the Board the authority to establish exceptions to the schedules for 
large or redeposited checks and for accounts that have been repeatedly 
overdrawn. These exceptions apply to local and nonlocal checks as well 
as to checks that must otherwise be accorded next-day (or second-day) 
availability under Sec. 229.10(c).
    2. Many checks will not be returned to the depositary bank by the 
time funds must be made available for withdrawal under the next-day (or 
second-day), local, and nonlocal schedules. In order to reduce risk to 
depositary banks, the Board has exercised its statutory authority to 
adopt these exceptions to the schedules in the regulation to allow the 
depositary bank to extend the time within which it is required to make 
funds available.
    3. The EFA Act also gives the Board the authority to suspend the 
schedules for any classification of checks, if the schedules result in 
an unacceptable level of fraud losses. The Board will adopt regulations 
or issue orders to implement this statutory authority if and when 
circumstances requiring its implementation arise.

                        B. 229.13(a) New Accounts

    1. Definition of New Account.
    a. The EFA Act provides an exception to the availability schedule 
for new accounts. An account is defined as a new account during the 
first 30 calendar days after the account is opened. An account is opened 
when the first deposit is made to the account. An account is not 
considered a new account, however, if each customer on the account has a 
transaction account relationship with the depositary bank, including a 
dormant account, that is at least 30 calendar days old or if each 
customer has had an established transaction account with the depositary 
bank within the 30 calendar days prior to opening the second account.
    b. The following are examples of what constitutes, and does not 
constitute, a new account:
    i. If the customer has an established account with a bank and opens 
a second account with the bank, the second account is not subject to the 
new account exception.
    ii. If a customer's account were closed and another account opened 
as a successor to the original account (due, for example, to the theft 
of checks or a debit card used to access the original account), the 
successor account is not subject to the new account exception, assuming 
the previous account relationship is at least 30 days old. Similarly, if 
a customer closes an established account and opens a separate account 
within 30 days, the new account is not subject to the new account 
exception.
    iii. If a customer has a savings deposit or other deposit that is 
not an account (as that term is defined in Sec. 229.2(a)) at the bank, 
and opens an account, the account is subject to the new account 
exception.
    iv. If a person that is authorized to sign on a corporate account 
(but has no other relationship with the bank) opens a personal account, 
the personal account is subject to the new account exception.
    v. If a customer has an established joint account at a bank, and 
subsequently opens an individual account with that bank, the individual 
account is not subject to the new account exception.
    vi. If two customers that each have an established individual 
account with the bank open a joint account, the joint account is not 
subject to the new account exception. If one of the customers on the 
account has no current or recent established account relationship with 
the bank, however, the joint account is subject to the new account 
exception, even if the other individual on the account has an 
established account relationship with the bank.
    2. Rules Applicable to New Accounts.

[[Page 913]]

    a. During the new account exception period, the schedules for local 
and nonlocal checks do not apply, and, unlike the other exceptions 
provided in this section, the regulation provides no maximum time frames 
within which the proceeds of these deposits must be made available for 
withdrawal. Maximum times within which funds must be available for 
withdrawal during the new account period are provided, however, for 
certain other deposits. Deposits received by cash and electronic 
payments must be made available for withdrawal in accordance with Sec. 
229.10.
    b. Special rules also apply to deposits of Treasury checks, U.S. 
Postal Service money orders, checks drawn on Federal Reserve Banks and 
Federal Home Loan Banks, state and local government checks, cashier's 
checks, certified checks, teller's checks, and, for the purposes of the 
new account exception only, traveler's checks. The first $5,000 of funds 
deposited to a new account on any one banking day by these check 
deposits must be made available for withdrawal in accordance with Sec. 
229.10(c). Thus, the first $5,000 of the proceeds of these check 
deposits must be made available on the first business day following 
deposit, if the deposit is made in person to an employee of the 
depositary bank and the other conditions of next-day availability are 
met. Funds must be made available on the second business day after 
deposit for deposits that are not made over the counter, in accordance 
with Sec. 229.10(c)(2). (Proceeds of Treasury check deposits must be 
made available on the first business day after deposit, even if the 
check is not deposited in person to an employee of the depositary bank.) 
Funds in excess of the first $5,000 deposited by these types of checks 
on a banking day must be available for withdrawal not later than the 
ninth business day following the banking day of deposit. The 
requirements of Sec. 229.10(c)(1)(vi) and (vii) that ``on us'' checks 
and the first $100 of a day's deposit be made available for withdrawal 
on the next business day do not apply during the new account period.
    3. Representation by Customer. The depositary bank may rely on the 
representation of the customer that the customer has no established 
account relationship with the bank, and has not had any such account 
relationship within the past 30 days, to determine whether an account is 
subject to the new account exception.

                       C. 229.13(b) Large Deposits

    1. Under the large deposit exception, a depositary bank may extend 
the hold placed on check deposits to the extent that the amount of the 
aggregate deposit on any banking day exceeds $5,000. This exception 
applies to local and nonlocal checks, as well as to checks that 
otherwise would be made available on the next (or second) business day 
after the day of deposit under Sec. 229.10(c). Although the first 
$5,000 of a day's deposit is subject to the availability otherwise 
provided for checks, the amount in excess of $5,000 may be held for an 
additional period of time as provided in Sec. 229.13(h). When the large 
deposit exception is applied to deposits composed of a mix of checks 
that would otherwise be subject to differing availability schedules, the 
depositary bank has the discretion to choose the portion of the deposit 
to which it applies the exception. Deposits by cash or electronic 
payment are not subject to this exception for large deposits.
    2. The following example illustrates the operation of the large 
deposit exception. If a customer deposits $2,000 in cash and a $9,000 
local check on a Monday, $2,100 (the proceeds of the cash deposit and 
$100 from the local check deposit) must be made available for withdrawal 
on Tuesday. An additional $4,900 of the proceeds of the local check must 
be available for withdrawal on Wednesday in accordance with the local 
schedule, and the remaining $4,000 may be held for an additional period 
of time under the large deposit exception.
    3. Where a customer has multiple accounts with a depositary bank, 
the bank may apply the large deposit exception to the aggregate deposits 
to all of the customer's accounts, even if the customer is not the sole 
holder of the accounts and not all of the holders of the customer's 
accounts are the same. Thus, a depositary bank may aggregate the 
deposits made to two individual accounts in the same name, to an 
individual and a joint account with one common name, or to two joint 
accounts with at least one common name for the purpose of applying the 
large deposit exception. Aggregation of deposits to multiple accounts is 
permitted because the Board believes that the risk to the depositary 
bank associated with large deposits is similar regardless of how the 
deposits are allocated among the customer's accounts.

                     D. 229.13(c) Redeposited Checks

    1. The EFA Act gives the Board the authority to promulgate an 
exception to the schedule for checks that have been returned unpaid and 
redeposited. Section 229.13(c) provides such an exception for checks 
that have been returned unpaid and redeposited by the customer or the 
depositary bank. This exception applies to local and nonlocal checks, as 
well as to checks that would otherwise be made available on the next (or 
second) business day after the day of deposit under Sec. 229.10(c).
    2. This exception addresses the increased risk to the depositary 
bank that checks that have been returned once will be uncollectible when 
they are presented to the paying bank a second time. The Board, however, 
does not believe that this increased risk is present for

[[Page 914]]

checks that have been returned due to a missing indorsement. Thus, the 
exception does not apply to checks returned unpaid due to missing 
indorsements and redeposited after the missing indorsement has been 
obtained, if the reason for return indicated on the check (see Sec. 
229.30(d)) states that it was returned due to a missing indorsement. For 
the same reason, this exception does not apply to a check returned 
because it was postdated (future dated), if the reason for return 
indicated on the check states that it was returned because it was 
postdated, and if it is no longer postdated when redeposited.
    3. To determine when funds must be made available for withdrawal, 
the banking day on which the check is redeposited is considered to be 
the day of deposit. A depositary bank that made $100 of a check 
available for withdrawal under Sec. 229.10(c)(1)(vii) can charge back 
the full amount of the check, including the $100, if the check is 
returned unpaid, and the $100 need not be made available again if the 
check is redeposited.

                    E. 229.13(d) Repeated Overdrafts

    1. The EFA Act gives the Board the authority to establish an 
exception for ``deposit accounts which have been overdrawn repeatedly.'' 
This paragraph provides two tests to determine what constitutes repeated 
overdrafts. Under the first test, a customer's accounts are considered 
repeatedly overdrawn if, on six banking days within the preceding six 
months, the available balance in any account held by the customer is 
negative, or the balance would have become negative if checks or other 
charges to the account had been paid, rather than returned. This test 
can be met based on separate occurrences (e.g., checks that are returned 
for insufficient funds on six different days), or based on one 
occurrence (e.g., a negative balance that remains on the customer's 
account for six banking days). If the bank dishonors a check that 
otherwise would have created a negative balance, however, the incident 
is considered an overdraft only on that day.
    2. The second test addresses substantial overdrafts. Such overdrafts 
increase the risk to the depositary bank of dealing with the repeated 
overdrafter. Under this test, a customer incurs repeated overdrafts if, 
on two banking days within the preceding six months, the available 
balance in any account held by the customer is negative in an amount of 
$5,000 or more, or would have become negative in an amount of $5,000 or 
more if checks or other charges to the account had been paid.
    3. The exception relates not only to overdrafts caused by checks 
drawn on the account, but also overdrafts caused by other debit charges 
(e.g. ACH debits, point-of-sale transactions, returned checks, account 
fees, etc.). If the potential debit is in excess of available funds, the 
exception applies regardless of whether the items were paid or returned 
unpaid. An overdraft resulting from an error on the part of the 
depositary bank, or from the imposition of overdraft charges for which 
the customer is entitled to a refund under Sec. Sec. 229.13(e) or 
229.16(c), cannot be considered in determining whether the customer is a 
repeated overdrafter. The exception excludes accounts with overdraft 
lines of credit, unless the credit line has been exceeded or would have 
been exceeded if the checks or other charges to the account had been 
paid.
    4. This exception applies to local and nonlocal checks, as well as 
to checks that otherwise would be made available on the next (or second) 
business day after the day of deposit under Sec. 229.10(c). When a bank 
places or extends a hold under this exception, it need not make the 
first $100 of a deposit available for withdrawal on the next business 
day, as otherwise would be required by Sec. 229.10(c)(1)(vii).

          F. 229.13(e) Reasonable Cause To Doubt Collectibility

    1. In the case of certain check deposits, if the bank has reasonable 
cause to believe the check is uncollectible, it may extend the time 
funds must be made available for withdrawal. This exception applies to 
local and nonlocal checks, as well as to checks that would otherwise be 
made available on the next (or second) business day after the day of 
deposit under Sec. 229.10(c). When a bank places or extends a hold 
under this exception, it need not make the first $100 of a deposit 
available for withdrawal on the next business day, as otherwise would be 
required by Sec. 229.10(c)(1)(vii). If the reasonable cause exception 
is invoked, the bank must include in the notice to its customer, 
required by Sec. 229.13(g), the reason that the bank believes that the 
check is uncollectible.
    2. The following are several examples of circumstances under which 
the reasonable cause exception may be invoked:
    a. If a bank received a notice from the paying bank that a check was 
not paid and is being returned to the depositary bank, the depositary 
bank could place a hold on the check or extend a hold previously placed 
on that check, and notify the customer that the bank had received notice 
that the check is being returned. The exception could be invoked even if 
the notice were incomplete, if the bank had reasonable cause to believe 
that the notice applied to that particular check.
    b. The depositary bank may have received information from the paying 
bank, prior to the presentment of the check, that gives the bank 
reasonable cause to believe that the check is uncollectible. For 
example, the paying bank may have indicated that payment has been 
stopped on the check, or that the drawer's account does not currently 
have

[[Page 915]]

sufficient funds to honor the check. Such information may provide 
sufficient basis to invoke this exception. In these cases, the 
depositary bank could invoke the exception and disclose as the reason 
the exception is being invoked the fact that information from the paying 
bank indicates that the check may not be paid.
    c. The fact that a check is deposited more than six months after the 
date on the check (i.e. a stale check) is a reasonable indication that 
the check may be uncollectible, because under U.C.C. 4-404 a bank has no 
duty to its customer to pay a check that is more than six months old. 
Similarly, if a check being deposited is postdated (future dated), the 
bank may have a reasonable cause to believe the check is uncollectible, 
because the check may not be properly payable under U.C.C. 4-401. The 
bank, in its notice, should specify that the check is stale-dated or 
postdated.
    d. There are reasons that may cause a bank to believe that a check 
is uncollectible that are based on confidential information. For 
example, a bank could conclude that a check being deposited is 
uncollectible based on its reasonable belief that the depositor is 
engaging in kiting activity. Reasonable belief as to the insolvency or 
pending insolvency of the drawer of the check or the drawee bank and 
that the checks will not be paid also may justify invoking this 
exception. In these cases, the bank may indicate, as the reason it is 
invoking the exception, that the bank has confidential information that 
indicates that the check might not be paid.
    3. The Board has included a reasonable cause exception notice as a 
model notice in appendix C (C-13). The model notice includes several 
reasons for which this exception may be invoked. The Board does not 
intend to provide a comprehensive list of reasons for which this 
exception may be invoked; another reason that does not appear on the 
model notice may be used as the basis for extending a hold, if the 
reason satisfies the conditions for invoking this exception. A 
depositary bank may invoke the reasonable cause exception based on a 
combination of factors that give rise to a reasonable cause to doubt the 
collectibility of a check. In these cases, the bank should disclose the 
primary reasons for which the exception was invoked in accordance with 
paragraph (g) of this section.
    4. The regulation provides that the determination that a check is 
uncollectible shall not be based on a class of checks or persons. For 
example, a depositary bank cannot invoke this exception simply because 
the check is drawn on a paying bank in a rural area and the depositary 
bank knows it will not have the opportunity to learn of nonpayment of 
that check before funds must be made available under the availability 
schedules. Similarly, a depositary bank cannot invoke the reasonable 
cause exception based on the race or national origin of the depositor.
    5. If a depositary bank invokes this exception with respect to a 
particular check and does not provide a written notice to the depositor 
at the time of deposit, the depositary bank may not assess any overdraft 
fee (such as an ``NSF'' charge) or charge interest for use of overdraft 
credit, if the check is paid by the paying bank and these charges would 
not have occurred had the exception not been invoked. A bank may assess 
an overdraft fee under these circumstances, however, if it provides 
notice to the customer, in the notice of exception required by paragraph 
(g) of this section, that the fee may be subject to refund, and refunds 
the charges upon the request of the customer. The notice must state that 
the customer may be entitled to a refund of any overdraft fees that are 
assessed if the check being held is paid, and indicate where such 
requests for a refund of overdraft fees should be directed.

                    G. 229.13(f) Emergency Conditions

    1. Certain emergency conditions may arise that delay the collection 
or return of checks, or delay the processing and updating of customer 
accounts. In the circumstances specified in this paragraph, the 
depositary bank may extend the holds that are placed on deposits of 
checks that are affected by such delays, if the bank exercises such 
diligence as the circumstances require. For example, if a bank learns 
that a check has been delayed in the process of collection due to severe 
weather conditions or other causes beyond its control, an emergency 
condition covered by this section may exist and the bank may place a 
hold on the check to reflect the delay. This exception applies to local 
and nonlocal checks, as well as checks that would otherwise be made 
available on the next (or second) business day after the day of deposit 
under Sec. 229.10(c). When a bank places or extends a hold under this 
exception, it need not make the first $100 of a deposit available for 
withdrawal on the next business day, as otherwise would be required by 
Sec. 229.10(c)(1)(vii). In cases where the emergency conditions 
exception does not apply, as in the case of deposits of cash or 
electronic payments under Sec. 229.10 (a) and (b), the depositary bank 
may not be liable for a delay in making funds available for withdrawal 
if the delay is due to a bona fide error such as an unavoidable computer 
malfunction.

                    H. 229.13(g) Notice of Exception

    1. In general.
    a. If a depositary bank invokes any of the safeguard exceptions to 
the schedules listed above, other than the new account or emergency 
conditions exception, and extends the hold on a deposit beyond the time 
periods

[[Page 916]]

permitted in Sec. Sec. 229.10(c) and 229.12, it must provide a notice 
to its customer. Except in the cases described in paragraphs (g)(2) and 
(g)(3) of this section, notices must be given each time an exception 
hold is invoked and must state the customer's account number, the date 
of deposit, the reason the exception was invoked, and the time period 
within which funds will be available for withdrawal. For a customer that 
is not a consumer, a depositary bank satisfies the written-notice 
requirement by sending an electronic notice that displays the text and 
is in a form that the customer may keep, if the customer agrees to such 
means of notice. Information is in a form that the customer may keep if, 
for example, it can be downloaded or printed. For a customer who is a 
consumer, a depositary bank satisfies the written-notice requirement by 
sending an electronic notice in compliance with the requirements of the 
Electronic Signatures in Global and National Commerce Act (12 U.S.C. 
7001 et seq.), which include obtaining the consumer's affirmative 
consent to such means of notice.
    b. With respect to paragraph (g)(1), the requirement that the notice 
state the time period within which the funds shall be made available may 
be satisfied if the notice identifies the date the deposit is received 
and information sufficient to indicate when funds will be available and 
the amounts that will be available at those times. For example, for a 
deposit involving more than one check, the bank need not provide a 
notice that discloses when funds from each individual check in the 
deposit will be available for withdrawal; instead, the bank may provide 
a total dollar amount for each of the time periods when funds will be 
available, or provide the customer with an explanation of how to 
determine the amount of the deposit that will be held and when the funds 
will be available for deposit. Appendix C (C-12) contains a model 
notice.
    c. For deposits made in person to an employee of the depositary 
bank, the notice generally must be given to the person making the 
deposit, i.e., the ``depositor'', at the time of deposit. The depositor 
need not be the customer holding the account. For other deposits, such 
as deposits received at an ATM, lobby deposit box, night depository, or 
through the mail, notice must be mailed to the customer not later than 
the close of the business day following the banking day on which the 
deposit was made.
    d. Notice to the customer also may be provided at a later time, if 
the facts upon which the determination to invoke the exception do not 
become known to the depositary bank until after notice would otherwise 
have to be given. In these cases, the bank must mail the notice to the 
customer as soon as practicable, but not later than the business day 
following the day the facts become known. A bank is deemed to have 
knowledge when the facts are brought to the attention of the person or 
persons in the bank responsible for making the determination, or when 
the facts would have been brought to their attention if the bank had 
exercised due diligence.
    e. In those cases described in paragraphs (g)(2) and (g)(3), the 
depositary bank need not provide a notice every time an exception hold 
is applied to a deposit. When paragraph (g)(2) or (g)(3) requires 
disclosure of the time period within which deposits subject to the 
exception generally will be available for withdrawal, the requirement 
may be satisfied if the one-time notice states when ``on us,'' local, 
and nonlocal checks will be available for withdrawal if an exception is 
invoked.
    2. One-time exception notice.
    a. Under paragraph (g)(2), if a nonconsumer account (see Commentary 
to Sec. 229.2(n)) is subject to the large deposit or redeposited check 
exception, the depositary bank may give its customer a single notice at 
or prior to the time notice must be provided under paragraph (g)(1). 
Notices provided under paragraph (g)(2) must contain the reason the 
exception may be invoked and the time period within which deposits 
subject to the exception will be available for withdrawal (see Model 
Notice C-14). A depositary bank may provide a one-time notice to a 
nonconsumer customer under paragraph (g)(2) only if each exception cited 
in the notice (the large deposit and/or the redeposited check exception) 
will be invoked for most check deposits to the customer's account to 
which the exception could apply. A one-time notice may state that the 
depositary bank will apply exception holds to certain subsets of 
deposits to which the large deposit or redeposited check exception may 
apply, and the notice should identify such subsets. For example, the 
depositary bank may apply the redeposited check exception only to checks 
that were redeposited automatically by the depositary bank in accordance 
with an agreement with the customer, rather than to all redeposited 
checks. In lieu of sending the one-time notice, a depositary bank may 
send individual hold notices for each deposit subject to the large 
deposit or redeposited check exception in accordance with Sec. 
229.13(g)(1) (see Model Notice C-12).
    b. In the case of a deposit of multiple checks, the depositary bank 
has the discretion to place an exception hold on any combination of 
checks in excess of $5,000. The notice should enable a customer to 
determine the availability of the deposit in the case of a deposit of 
multiple checks. For example, if a customer deposits a $5,000 local 
check and a $5,000 nonlocal check, under the large deposit exception, 
the depositary bank may make funds available in the amount of (1) $100 
on the first business day after deposit, $4,900 on the second business 
day after deposit (local check), and $5,000 on the eleventh

[[Page 917]]

business day after deposit (nonlocal check with 6-day exception hold), 
or (2) $100 on the first business day after deposit, $4,900 on the fifth 
business day after deposit (nonlocal check), and $5,000 on the seventh 
business day after deposit (local check with 5-day exception hold). The 
notice should reflect the bank's priorities in placing exception holds 
on next-day (or second-day), local, and nonlocal checks.
    3. Notice of repeated overdraft exception. Under paragraph (g)(3), 
if an account is subject to the repeated overdraft exception, the 
depositary bank may provide one notice to its customer for each time 
period during which the exception will apply. Notices sent pursuant to 
paragraph (g)(3) must state the customer's account number, the fact the 
exception was invoked under the repeated overdraft exception, the time 
period within which deposits subject to the exception will be made 
available for withdrawal, and the time period during which the exception 
will apply (see Model Notice C-15). A depositary bank may provide a one-
time notice to a customer under paragraph (g)(3) only if the repeated 
overdraft exception will be invoked for most check deposits to the 
customer's account.
    4. Emergency conditions exception notice.
    a. If an account is subject to the emergency conditions exception 
under Sec. 229.13(f), the depositary bank must provide notice in a 
reasonable form within a reasonable time, depending on the 
circumstances. For example, a depositary bank may learn of a weather 
emergency or a power outage that affects the paying bank's operations. 
Under these circumstances, it likely would be reasonable for the 
depositary bank to provide an emergency conditions exception notice in 
the same manner and within the same time as required for other exception 
notices. On the other hand, if a depositary bank experiences a weather 
or power outage emergency that affects its own operations, it may be 
reasonable for the depositary bank to provide a general notice to all 
depositors via postings at branches and ATMs, or through newspaper, 
television, or radio notices.
    b. If the depositary bank extends the hold placed on a deposit due 
to an emergency condition, the bank need not provide a notice if the 
funds would be available for withdrawal before the notice must be sent. 
For example, if on the last day of a hold period the depositary bank 
experiences a computer failure and customer accounts cannot be updated 
in a timely fashion to reflect the funds as available balances, notices 
are not required if the funds are made available before the notices must 
be sent.
    5. Record retention. A depositary bank must retain a record of each 
notice of a reasonable cause exception for a period of two years, or 
such longer time as provided in the record retention requirements of 
Sec. 229.21. This record must contain a brief description of the facts 
on which the depositary bank based its judgment that there was 
reasonable cause to doubt the collectibility of a check. In many cases, 
such as where the exception was invoked on the basis of a notice of 
nonpayment received, the record requirement may be met by retaining a 
copy of the notice sent to the customer. In other cases, such as where 
the exception was invoked on the basis of confidential information, a 
further description to the facts, such as insolvency of drawer, should 
be included in the record.

       I. 229.13(h) Availability of Deposits Subject to Exceptions

    1. If a depositary bank invokes any exception other than the new 
account exception, the bank may extend the time within which funds must 
be made available under the schedule by a reasonable period of time. 
This provision establishes that an extension of up to one business day 
for ``on us'' checks, five business days for local checks, and six 
business days for nonlocal checks and checks deposited in a 
nonproprietary ATM is reasonable. Under certain circumstances, however, 
a longer extension of the schedules may be reasonable. In these cases, 
the burden is placed on the depositary bank to establish that a longer 
period is reasonable.
    2. For example, assume a bank extended the hold on a local check 
deposit by five business days based on its reasonable cause to believe 
that the check is uncollectible. If, on the day before the extended hold 
is scheduled to expire, the bank receives a notification from the paying 
bank that the check is being returned unpaid, the bank may determine 
that a longer hold is warranted, if it decides not to charge back the 
customer's account based on the notification. If the bank decides to 
extend the hold, the bank must send a second notice, in accordance with 
paragraph (g) of this section, indicating the new date that the funds 
will be available for withdrawal.
    3. With respect to Treasury checks, U.S. Postal Service money 
orders, checks drawn on Federal Reserve Banks or Federal Home Loan 
Banks, state and local government checks, cashier's checks, certified 
checks, and teller's checks subject to the next-day (or second-day) 
availability requirement, the depositary bank may extend the time funds 
must be made available for withdrawal under the large deposit, 
redeposited check, repeated overdraft, or reasonable cause exception by 
a reasonable period beyond the delay that would have been permitted 
under the regulation had the checks not been subject to the next-day (or 
second-day) availability requirement. The additional hold is added to 
the local or nonlocal schedule that would apply based on the location of 
the paying bank.

[[Page 918]]

    4. One business day for ``on us'' checks, five business days for 
local checks, and six business days for nonlocal checks or checks 
deposited in a nonproprietary ATM, in addition to the time period 
provided in the schedule, should provide adequate time for the 
depositary bank to learn of the nonpayment of virtually all checks that 
are returned. For example, if a customer deposits a $7,000 cashier's 
check drawn on a nonlocal bank, and the depositary bank applies the 
large deposit exception to that check, $5,000 must be available for 
withdrawal on the first business day after the day of deposit and the 
remaining $2,000 must be available for withdrawal on the eleventh 
business day following the day of deposit (six business days added to 
the five-day schedule for nonlocal checks), unless the depositary bank 
establishes that a longer hold is reasonable.
    5. In the case of the application of the emergency conditions 
exception, the depositary bank may extend the hold placed on a check by 
not more than a reasonable period following the end of the emergency or 
the time funds must be available for withdrawal under Sec. Sec. 
229.10(c) or 229.12, whichever is later.
    6. This provision does not apply to holds imposed under the new 
account exception. Under that exception, the maximum time period within 
which funds must be made available for withdrawal is specified for 
deposits that generally must be accorded next-day availability under 
Sec. 229.10. This subpart does not specify the maximum time period 
within which the proceeds of local and nonlocal checks must be made 
available for withdrawal during the new account period.

                VIII. Section 229.14 Payment of Interest

                         A. 229.14(a) In General

    1. This section requires that a depositary bank begin accruing 
interest on interest-bearing accounts not later than the day on which 
the depositary bank receives credit for the funds deposited. \3\ A 
depositary bank generally receives credit on checks within one or two 
days following deposit. A bank receives credit on a cash deposit, an 
electronic payment, and the deposit of a check that is drawn on the 
depositary bank itself on the day the cash, electronic payment, or check 
is received. In the case of a deposit at a nonproprietary ATM, credit 
generally is received on the day the bank that operates the ATM credits 
the depositary bank for the amount of the deposit. In the case of a 
deposit at a contractual branch, credit is received on the day the 
depositary bank receives credit for the amount of the deposit, which may 
be different from the day the contractual branch receives credit for the 
deposit.
---------------------------------------------------------------------------

    \3\ This section implements section 606 of the EFA Act (12 U.S.C. 
4005). The EFA Act keys the requirement to pay interest to the time the 
depositary bank receives provisional credit for a check. Provisional 
credit is a term used in the U.C.C. that is derived from the Code's 
concept of provisional settlement. (See U.C.C. 4-214 and 4-215.) 
Provisional credit is credit that is subject to charge-back if the check 
is returned unpaid; once the check is finally paid, the right to charge 
back expires and the provisional credit becomes final. Under Subpart C, 
a paying bank no longer has an automatic right to charge back credits 
given in settlement of a check, and the concept of provisional 
settlement is no longer useful and has been eliminated by the 
regulation. Accordingly, this section uses the term credit rather than 
provisional credit, and this section applies regardless of whether a 
credit would be provisional or final under the U.C.C. Credit does not 
include a bookkeeping entry (sometimes referred to as deferred credit) 
that does not represent funds actually available for the bank's use.
---------------------------------------------------------------------------

    2. Because account includes only transaction accounts, other 
interest-bearing accounts of the depositary bank, such as money market 
deposit accounts, savings deposits, and time deposits, are not subject 
to this requirement; however, a bank may accrue interest on such 
deposits in the same way that it accrues interest under this paragraph 
for simplicity of operation. The Board intends the term interest to 
refer to payments to or for the account of any customer as compensation 
for the use of funds, but to exclude the absorption of expenses incident 
to providing a normal banking function or a bank's forbearance from 
charging a fee in connection with such a service. (See 12 CFR 217.2(d).) 
Thus, earnings credits often applied to corporate accounts are not 
interest payments for the purposes of this section.
    3. It may be difficult for a depositary bank to track which day the 
depositary bank receives credit for specific checks in order to accrue 
interest properly on the account to which the check is deposited. This 
difficulty may be pronounced if the bank uses different means of 
collecting checks based on the time of day the check is received, the 
dollar amount of the check, and/or the paying bank to which it must be 
sent. Thus, for the purpose of the interest accrual requirement, a bank 
may rely on an availability schedule from its Federal Reserve Bank, 
Federal Home Loan Bank, or correspondent to determine when the 
depositary bank receives credit. If availability is delayed beyond that 
specified in the availability schedule, a bank may charge back interest 
erroneously accrued or paid on the basis of that schedule.
    4. This paragraph also permits a depositary bank to accrue interest 
on checks deposited

[[Page 919]]

to all of its interest-bearing accounts based on when the bank receives 
credit on all checks sent for payment or collection. For example, if a 
bank receives credit on 20 percent of the funds deposited in the bank by 
check as of the business day of deposit (e.g., ``on us'' checks), 70 
percent as of the business day following deposit, and 10 percent on the 
second business day following deposit, the bank can apply these 
percentages to determine the day interest must begin to accrue on check 
deposits to all interest-bearing accounts, regardless of when the bank 
received credit on the funds deposited in any particular account. Thus, 
a bank may begin accruing interest on a uniform basis for all interest-
bearing accounts, without the need to track the type of check deposited 
to each account.
    5. This section is not intended to limit a policy of a depositary 
bank that provides that interest accrues only on balances that exceed a 
specified amount, or on the minimum balance maintained in the account 
during a given period, provided that the balance is determined based on 
the date that the depositary bank receives credit for the funds. This 
section also is not intended to limit any policy providing that interest 
accrues sooner than required by this paragraph.

               B. 229.14(b) Special Rule for Credit Unions

    1. This provision implements a requirement in section 606(b) of the 
EFA Act, and provides an exemption from the payment-of-interest 
requirements for credit unions that do not begin to accrue interest or 
dividends on their customer accounts until a later date than the day the 
credit union receives credit for those deposits, including cash 
deposits. These credit unions are exempt from the payment-of-interest 
requirements, as long as they provide notice of their interest accrual 
policies in accordance with Sec. 229.16(d). For example, if a credit 
union has a policy of computing interest on all deposits received by the 
10th of the month from the first of that month, and on all deposits 
received after the 10th of the month from the first of the next month, 
that policy is not superseded by this regulation, if the credit union 
provides proper disclosure of this policy to its customers.
    2. The EFA Act limits this exemption to credit unions; other types 
of banks must comply with the payment-of-interest requirements. In 
addition, credit unions that compute interest from the day of deposit or 
day of credit should not change their existing practices in order to 
avoid compliance with the requirement that interest accrue from the day 
the credit union receives credit.

            C. 229.14(c) Exception for Checks Returned Unpaid

    1. This provision is based on section 606(c) of the EFA Act (12 
U.S.C. 4005(c)) and provides that interest need not be paid on funds 
deposited in an interest-bearing account by check that has been returned 
unpaid, regardless of the reason for return.

           IX. Section 229.15 General Disclosure Requirements

                    A. 229.15(a) Form of Disclosures

    1. This paragraph sets forth the general requirements for the 
disclosures required under Subpart B. All of the disclosures must be 
given in a clear and conspicuous manner, must be in writing, and, in 
most cases, must be in a form the customer may keep. A disclosure is in 
a form that the customer may keep if, for example, it can be downloaded 
or printed. For a customer that is not a consumer, a depositary bank 
satisfies the written-disclosure requirement by sending an electronic 
disclosure that displays the text and is in a form that the customer may 
keep, if the customer agrees to such means of disclosure. For a customer 
who is a consumer, a depositary bank satisfies the written-notice 
requirement by sending an electronic notice in compliance with the 
requirements of the Electronic Signatures in Global and National 
Commerce Act (12 U.S.C. 7001 et seq.), which include obtaining the 
consumer's affirmative consent to such means of notice. Disclosures 
posted at locations where employees accept consumer deposits, at ATMs, 
and on preprinted deposit slips need not be in a form that the customer 
may keep. Appendix C of the regulation contains model forms, clauses, 
and notices to assist banks in preparing disclosures.
    2. Disclosures concerning availability must be grouped together and 
may not contain any information that is not related to the disclosures 
required by this subpart. Therefore, banks may not intersperse the 
required disclosures with other account disclosures, and may not include 
other account information that is not related to their availability 
policy within the text of the required disclosures. Banks may, however, 
include information that is related to their availability policies. For 
example, a bank may inform its customers that, even when the bank has 
already made funds available for withdrawal, the customer is responsible 
for any problem with the deposit, such as the return of a deposited 
check.
    3. The regulation does not require that the disclosures be 
segregated from other account terms and conditions. For example, banks 
may include the disclosure of their specific availability policy in a 
booklet or pamphlet that sets out all of the terms and conditions

[[Page 920]]

of the bank's accounts. The required disclosures must, however, be 
grouped together and highlighted or identified in some manner, for 
example, by use of a separate heading for the disclosures, such as 
``When Deposits are Available for Withdrawal.''
    4. A bank may, by agreement or at the consumer's request, provide 
any disclosure or notice required by subpart B in a language other than 
English, provided that the bank makes a complete disclosure available in 
English at the customer's request.

          B. 229.15(b) Uniform Reference to Day of Availability

    1. This paragraph requires banks to disclose in a uniform manner 
when deposited funds will be available for withdrawal. Banks must 
disclose when deposited funds are available for withdrawal by stating 
the business day on which the customer may begin to withdraw funds. The 
business day funds will be available must be disclosed as ``the --------
-------- business day after'' the day of deposit, or substantially 
similar language. The business day of availability is determined by 
counting the number of business days starting with the business day 
following the banking day on which the deposit is received, as 
determined under Sec. 229.19(a), and ending with the business day on 
which the customer may begin to withdraw funds. For example, a bank that 
imposes delays of four intervening business days for nonlocal checks 
must describe those checks as being available on ``the fifth business 
day after'' the day of the deposit.

       C. 229.15(c) Multiple Accounts and Multiple Account Holders

    1. This paragraph clarifies that banks need not provide multiple 
disclosures under the regulation. A single disclosure to a customer that 
holds multiple accounts, or a single disclosure to one of the account 
holders of a jointly held account, satisfies the disclosure requirements 
of the regulation.

                D. 229.15(d) Dormant or Inactive Accounts

    1. This paragraph makes clear that banks need not provide disclosure 
of their specific availability policies to customers that hold accounts 
that are either dormant or inactive. The determination that certain 
accounts are dormant or inactive must be made by the bank. If a bank 
considers an account dormant or inactive for purposes other than this 
regulation and no longer provides statements and other mailings to an 
account for this reason, such an account is considered dormant or 
inactive for purposes of this regulation.

        X. Section 229.16 Specific Availability Policy Disclosure

                          A. 229.16(a) General

    1. This section describes the information that must be disclosed by 
banks to comply with Sec. Sec. 229.17 and 229.18(d), which require that 
banks furnish notices of their specific policy regarding availability of 
deposited funds. The disclosure provided by a bank must reflect the 
availability policy followed by the bank in most cases, even though a 
bank may in some cases make funds available sooner or impose a longer 
delay.
    2. The disclosure must reflect the policy and practice of the bank 
regarding availability as to most accounts and most deposits into those 
accounts. In disclosing the availability policy that it follows in most 
cases, a bank may provide a single disclosure that reflects one policy 
to all its transaction account customers, even though some of its 
customers may receive faster availability than that reflected in the 
policy disclosure. Thus, a bank need not disclose to some customers that 
they receive faster availability than indicated in the disclosure. If, 
however, a bank has a policy of imposing delays in availability on any 
customers longer than those specified in its disclosure, those customers 
must receive disclosures that reflect the longer applicable availability 
periods. A bank may establish different availability policies for 
different groups of customers, such as customers in a particular 
geographic area or customers of a particular branch. For purposes of 
providing a specific availability policy, the bank may allocate 
customers among groups through good faith use of a reasonable method. A 
bank may also establish different availability policies for deposits at 
different locations, such as deposits at a contractual branch.
    3. A bank may disclose that funds are available for withdrawal on a 
given day notwithstanding the fact that the bank uses the funds to pay 
checks received before that day. For example, a bank may disclose that 
its policy is to make funds available from deposits of local checks on 
the second business day following the day of deposit, even though it may 
use the deposited funds to pay checks prior to the second business day; 
the funds used to pay checks in this example are not available for 
withdrawal until the second business day after deposit because the funds 
are not available for all uses until the second business day. (See the 
definition of available for withdrawal in Sec. 229.2(d).)

           B. 229.16(b) Content of Specific Policy Disclosure

    1. This paragraph sets forth the items that must be included, as 
applicable, in a bank's specific availability policy disclosure. The

[[Page 921]]

information that must be disclosed by a particular bank will vary 
considerably depending upon the bank's availability policy. For example, 
a bank that makes deposited funds available for withdrawal on the 
business day following the day of deposit need simply disclose that 
deposited funds will be available for withdrawal on the first business 
day after the day of deposit, the bank's business days, and when 
deposits are considered received.
    2. On the other hand, a bank that has a policy of routinely delaying 
on a blanket basis the time when deposited funds are available for 
withdrawal would have a more detailed disclosure. Such blanket hold 
policies might be for the maximum time allowed under the federal law or 
might be for shorter periods. These banks must disclose the types of 
deposits that will be subject to delays, how the customer can determine 
the type of deposit being made, and the day that funds from each type of 
deposit will be available for withdrawal.
    3. Some banks may have a combination of next-day availability and 
blanket delays. For example, a bank may provide next-day availability 
for all deposits except for one or two categories, such as deposits at 
nonproprietary ATMs and nonlocal personal checks over a specified dollar 
amount. The bank would describe the categories that are subject to 
delays in availability and tell the customer when each category would be 
available for withdrawal, and state that other deposits will be 
available for withdrawal on the first business day after the day of 
deposit. Similarly, a bank that provides availability on the second 
business day for most of its deposits would need to identify the 
categories of deposits which, under the regulation, are subject to next-
day availability and state that all other deposits will be available on 
the second business day.
    4. Because many banks' availability policies may be complex, a bank 
must give a brief summary of its policy at the beginning of the 
disclosure. In addition, the bank must describe any circumstances when 
actual availability may be longer than the schedules disclosed. Such 
circumstances would arise, for example, when the bank invokes one of the 
exceptions set forth in Sec. 229.13 of the regulation, or when the bank 
delays or extends the time when deposited funds are available for 
withdrawal up to the time periods allowed by the regulation on a case-
by-case basis. Also, a bank that must make certain checks available 
faster under appendix B (reduction of schedules for certain nonlocal 
checks) must state that some check deposits will be available for 
withdrawal sooner because of special rules and that a list of the 
pertinent routing numbers is available upon request.
    5. Generally, a bank that distinguishes in its disclosure between 
local and nonlocal checks based on the routing number on the check must 
disclose to its customers that certain checks, such as some credit union 
payable-through drafts, will be treated as local or nonlocal based on 
the location of the bank by which they are payable (e.g., the credit 
union), and not on the basis of the location of the bank whose routing 
number appears on the check. A bank is not required to provide this 
disclosure, however, if it makes the proceeds of both local and nonlocal 
checks available for withdrawal within the time periods required for 
local checks in Sec. Sec. 229.12 and 229.13.
    6. The business day cut-off time used by the bank must be disclosed 
and if some locations have different cut-off times the bank must note 
this in the disclosure and state the earliest time that might apply. A 
bank need not list all of the different cut-off times that might apply. 
If a bank does not have a cut-off time prior to its closing time, the 
bank need not disclose a cut-off time.
    7. A bank taking advantage of the extended time period for making 
deposits at nonproprietary ATMs available for withdrawal under Sec. 
229.12(f) must explain this in the initial disclosure. In addition, the 
bank must provide a list (on or with the initial disclosure) of either 
the bank's proprietary ATMs or those ATMs that are nonproprietary at 
which customers may make deposits. As an alternative to providing such a 
list, the bank may label all of its proprietary ATMs with the bank's 
name and state in the initial disclosure that this has been done. 
Similarly, a bank taking advantage of the cash withdrawal limitations of 
Sec. 229.12(d), or the provision in Sec. 229.19(e) allowing holds to 
be placed on other deposits when a deposit is made or a check is cashed, 
must explain this in the initial disclosure.
    8. A bank that provides availability based on when the bank 
generally receives credit for deposited checks need not disclose the 
time when a check drawn on a specific bank will be available for 
withdrawal. Instead, the bank may disclose the categories of deposits 
that must be available on the first business day after the day of 
deposit (deposits subject to Sec. 229.10) and state the other 
categories of deposits and the time periods that will be applicable to 
those deposits. For example, a bank might disclose the four-digit 
Federal Reserve routing symbol for local checks and indicate that such 
checks as well as certain nonlocal checks will be available for 
withdrawal on the first or second business day following the day of 
deposit, depending on the location of the particular bank on which the 
check is drawn, and disclose that funds from all other checks will be 
available on the second or third business day. The bank must also 
disclose that the customer may request a copy of the bank's detailed 
schedule that would enable the customer to determine the availability of 
any check and must provide such schedule upon request. A change in

[[Page 922]]

the bank's detailed schedule would not trigger the change in policy 
disclosure requirement of Sec. 229.18(e).

           C. 229.16(c) Longer Delays on a Case-by-Case Basis

    1. Notice in specific policy disclosure.
    a. Banks that make deposited funds available for withdrawal sooner 
than required by the regulation--for example, providing their customers 
with immediate or next-day availability for deposited funds--and delay 
the time when funds are available for withdrawal only from time to time 
determined on a case-by-case basis, must provide notice of this in their 
specific availability policy disclosure. This paragraph outlines the 
requirements for that notice.
    b. In addition to stating what their specific availability policy is 
in most cases, banks that may delay or extend the time when deposits are 
available on a case-by-case basis must: state that from time to time 
funds may be available for withdrawal later than the time periods in 
their specific policy disclosure, disclose the latest time that a 
customer may have to wait for deposited funds to be available for 
withdrawal when a case-by-case hold is placed, state that customers will 
be notified when availability of a deposit is delayed on a case-by-case 
basis, and advise customers to ask if they need to be sure of the 
availability of a particular deposit.
    c. A bank that imposes delays on a case-by-case basis is still 
subject to the availability requirements of this regulation. If the bank 
imposes a delay on a particular deposit that is not longer than the 
availability required by Sec. 229.12 for local and nonlocal checks, the 
reason for the delay need not be based on the exceptions provided in 
Sec. 229.13. If the delay exceeds the time periods permitted under 
Sec. 229.12, however, then it must be based on an exception provided in 
Sec. 229.13, and the bank must comply with the Sec. 229.13 notice 
requirements. A bank that imposes delays on a case-by-case basis may 
avail itself of the one-time notice provisions in Sec. 229.13(g)(2) and 
(3) for deposits to which those provisions apply.
    2. Notice at time of case-by-case delay.
    a. In addition to including the disclosures required by paragraph 
(c)(1) of this section in their specific availability policy disclosure, 
banks that delay or extend the time period when funds are available for 
withdrawal on a case-by-case basis must give customers a notice when 
availability of funds from a particular deposit will be delayed or 
extended beyond the time when deposited funds are generally available 
for withdrawal. The notice must state that a delay is being imposed and 
indicate when the funds will be available. In addition, the notice must 
include the account number, the date of the deposit, and the amount of 
the deposit being delayed.
    b. If notice of the delay was not given at the time the deposit was 
made and the bank assesses overdraft or returned check fees on accounts 
when a case-by-case hold has been placed, the case-by-case hold notice 
provided to the customer must include a notice concerning overdraft or 
returned check fees. The notice must state that the customer may be 
entitled to a refund of any overdraft or returned check fees that result 
from the deposited funds not being available if the check that was 
deposited was in fact paid by the payor bank, and explain how to request 
a refund of any fees. (See Sec. 229.16(c)(3).)
    c. The requirement that the case-by-case hold notice state the day 
that funds will be made available for withdrawal may be met by stating 
the date or the number of business days after deposit that the funds 
will be made available. This requirement is satisfied if the notice 
provides information sufficient to indicate when funds will be available 
and the amounts that will be available at those times. For example, for 
a deposit involving more than one check, the bank need not provide a 
notice that discloses when funds from each individual item in the 
deposit will be available for withdrawal. Instead, the bank may provide 
a total dollar amount for each of the time periods when funds will be 
available, or provide the customer with an explanation of how to 
determine the amount of the deposit that will be held and when the held 
funds will be available for withdrawal.
    d. For deposits made in person to an employee of the depositary 
bank, the notice generally must be given at the time of the deposit. The 
notice at the time of the deposit must be given to the person making the 
deposit, that is, the ``depositor.'' The depositor need not be the 
customer holding the account. For other deposits, such as deposits 
received at an ATM, lobby deposit box, night depository, through the 
mail, or by armored car, notice must be mailed to the customer not later 
than the close of the business day following the banking day on which 
the deposit was made. Notice to the customer also may be provided not 
later than the close of the business day following the banking day on 
which the deposit was made if the decision to delay availability is made 
after the time of the deposit.
    3. Overdraft and returned check fees. If a depositary bank delays or 
extends the time when funds from a deposited check are available for 
withdrawal on a case-by-case basis and does not provide a written notice 
to its depositor at the time of deposit, the depositary bank may not 
assess any overdraft or returned check fees (such as an insufficient 
funds charge) or charge interest for use of an overdraft line of credit, 
if the deposited check is paid by the paying bank and these fees would 
not have occurred had the additional case-by-case delay not been 
imposed. A bank may assess an overdraft or returned

[[Page 923]]

check fee under these circumstances, however, if it provides notice to 
the customer in the notice required by paragraph (c)(2) of this section 
that the fee may be subject to refund, and refunds the fee upon the 
request of the customer when required to do so. The notice must state 
that the customer may be entitled to a refund of any overdraft or 
returned check fees that are assessed if the deposited check is paid, 
and indicate where such requests for a refund of overdraft fees should 
be directed. Paragraph (c)(3) applies when a bank provides a case-by-
case notice in accordance with paragraph (c)(2) and does not apply if 
the bank has provided an exception hold notice in accordance with Sec. 
229.13.

       D. 229.16(d) Credit Union Notice of Interest Payment Policy

    1. This paragraph sets forth the special disclosure requirement for 
credit unions that delay accrual of interest or dividends for all cash 
and check deposits beyond the date of receiving provisional credit for 
checks being deposited. (The interest payment requirement is set forth 
in Sec. 229.14(a).) Such credit unions are required to describe their 
policy with respect to accrual of interest or dividends on deposits in 
their specific availability policy disclosure.

                 XI. Section 229.17 Initial Disclosures

    A. This paragraph requires banks to provide a notice of their 
availability policy to all potential customers prior to opening an 
account. The requirement of a notice prior to opening an account 
requires banks to provide disclosures prior to accepting a deposit to 
open an account. Disclosures must be given at the time the bank accepts 
an initial deposit regardless of whether the bank has opened the account 
yet for the customer. If a bank, however, receives a written request by 
mail from a person asking that an account be opened and the request 
includes an initial deposit, the bank may open the account with the 
deposit, provided the bank mails the required disclosures to the 
customer not later than the business day following the banking day on 
which the bank receives the deposit. Similarly, if a bank receives a 
telephone request from a customer asking that an account be opened with 
a transfer from a separate account of the customer's at the bank, the 
disclosure may be mailed not later than the business day following the 
banking day of the request.

         XII. Section 229.18 Additional Disclosure Requirements

                       A. 229.18(a) Deposit Slips

    1. This paragraph requires banks to include a notice on all 
preprinted deposit slips. The deposit slip notice need only state, 
somewhere on the front of the deposit slip, that deposits may not be 
available for immediate withdrawal. The notice is required only on 
preprinted deposit slips--those printed with the customer's account 
number and name and furnished by the bank in response to a customer's 
order to the bank. A bank need not include the notice on deposit slips 
that are not preprinted and supplied to the customer--such as counter 
deposit slips--or on those special deposit slips provided to the 
customer under Sec. 229.10(c). A bank is not responsible for ensuring 
that the notice appear on deposit slips that the customer does not 
obtain from or through the bank. This paragraph applies to preprinted 
deposit slips furnished to customers on or after September 1, 1988.

     B. 229.18(b) Locations Where Employees Accept Consumer Deposits

    1. This paragraph describes the statutory requirement that a bank 
post in each location where its employees accept consumer deposits a 
notice of its availability policy pertaining to consumer accounts. The 
notice that is required must specifically state the availability periods 
for the various deposits that may be made to consumer accounts. The 
notice need not be posted at each teller window, but the notice must be 
posted in a place where consumers seeking to make deposits are likely to 
see it before making their deposits. For example, the notice might be 
posted at the point where the line forms for teller service in the 
lobby. The notice is not required at any drive-through teller windows 
nor is it required at night depository locations, or at locations where 
consumer deposits are not accepted. A bank that acts as a contractual 
branch at a particular location must include the availability policy 
that applies to its own customers but need not include the policy that 
applies to the customers of the bank for which it is acting as a 
contractual branch.

                 C. 229.18(c) Automated Teller Machines

    1. This paragraph sets forth the required notices for ATMs. 
Paragraph (c)(1) provides that the depositary bank is responsible for 
posting a notice on all ATMs at which deposits can be made to accounts 
at the depositary bank. The depositary bank may arrange for a third 
party, such as the owner or operator of the ATM, to post the notice and 
indemnify the depositary bank from liability if the depositary bank is 
liable under Sec. 229.21 for the owner or operator failing to provide 
the required notice.
    2. The notice may be posted on a sign, shown on the screen, or 
included on deposit envelopes provided at the ATM. This disclosure must 
be given before the customer has made the deposit. Therefore, a notice 
provided on the customer's deposit receipt or

[[Page 924]]

appearing on the ATM's screen after the customer has made the deposit 
would not satisfy this requirement.
    3. Paragraph (c)(2) requires a depositary bank that operates an off-
premise ATM from which deposits are removed not more than two times a 
week to make a disclosure of this fact on the off-premise ATM. The 
notice must disclose to the customer the days on which deposits made at 
the ATM will be considered received.

                        D. 229.18(d) Upon Request

    1. This paragraph requires banks to provide written notice of their 
specific availability policy to any person upon that person's oral or 
written request. The notice must be sent within a reasonable period of 
time following receipt of the request.

                     E. 229.18(e) Changes in Policy

    1. This paragraph requires banks to send notices to their customers 
when the banks change their availability policies with regard to 
consumer accounts. A notice may be given in any form as long as it is 
clear and conspicuous. If the bank gives notice of a change by sending 
the customer a complete new availability disclosure, the bank must 
direct the customer to the changed terms in the disclosure by use of a 
letter or insert, or by highlighting the changed terms in the 
disclosure.
    2. Generally, a bank must send a notice at least 30 calendar days 
before implementing any change in its availability policy. If the change 
results in faster availability of deposits--for example, if the bank 
changes its availability for nonlocal checks from the fifth business day 
after deposit to the fourth business day after deposit--the bank need 
not send advance notice. The bank must, however, send notice of the 
change no later than 30 calendar days after the change is implemented. A 
bank is not required to give a notice when there is a change in appendix 
B (reduction of schedules for certain nonlocal checks).
    3. A bank that has provided its customers with a list of ATMs under 
Sec. 229.16(b)(5) shall provide its customers with an updated list of 
ATMs once a year if there are changes in the list of ATMs previously 
disclosed to the customers.

                   XIII. Section 229.19 Miscellaneous

            A. 229.19(a) When Funds Are Considered Deposited

    1. The time funds must be made available for withdrawal under this 
subpart is determined by the day the deposit is made. This paragraph 
provides rules to determine the day funds are considered deposited in 
various circumstances.
    2. Staffed facilities and ATMs. Funds received at a staffed teller 
station or ATM are considered deposited when received by the teller or 
placed in the ATM. Funds received at a contractual branch are considered 
deposited when received by a teller at the contractual branch or 
deposited into a proprietary ATM of the contractual branch. (See also, 
Commentary to Sec. 229.10(c) on deposits made to an employee of the 
depositary bank.) Funds deposited to a deposit box in a bank lobby that 
is accessible to customers only during regular business hours generally 
are considered deposited when placed in the lobby box; a bank may, 
however, treat deposits to lobby boxes the same as deposits to night 
depositories (as provided in Sec. 229.19(a)(3)), provided a notice 
appears on the lobby box informing the customer when such funds will be 
considered deposited.
    3. Mail. Funds mailed to the depositary bank are considered 
deposited on the banking day they are received by the depositary bank. 
The funds are received by the depositary bank at the time the mail is 
delivered to the bank, even if it is initially delivered to a mail room, 
rather than the check processing area.
    4. Other facilities.
    a. In addition to deposits at staffed facilities, at ATMs, and by 
mail, funds may be deposited at a facility such as a night depository or 
a lock box. A night depository is a receptacle for receipt of deposits, 
typically used by corporate depositors when the branch is closed. Funds 
deposited at a night depository are considered deposited on the banking 
day the deposit is removed, and the contents of the deposit are 
accessible to the depositary bank for processing. For example, some 
businesses deposit their funds in a locked bag at the night depository 
late in the evening, and return to the bank the following day to open 
the bag. Other depositors may have an agreement with their bank that the 
deposit bag must be opened under the dual control of the bank and the 
depositor. In these cases, the funds are considered deposited when the 
customer returns to the bank and opens the deposit bag.
    b. A lock box is a post office box used by a corporation for the 
collection of bill payments or other check receipts. The depositary bank 
generally assumes the responsibility for collecting the mail from the 
lock box, processing the checks, and crediting the corporation for the 
amount of the deposit. Funds deposited through a lock box arrangement 
are considered deposited on the day the deposit is removed from the lock 
box and are accessible to the depositary bank for processing.
    5. Certain off-premise ATMs. A special provision is made for certain 
off-premise ATMs that are not serviced daily. Funds deposited at such an 
ATM are considered deposited on the day they are removed from the ATM, 
if

[[Page 925]]

the ATM is not serviced more than two times each week. This provision is 
intended to address the practices of some banks of servicing certain 
remote ATMs infrequently. If a depositary bank applies this provision 
with respect to an ATM, a notice must be posted at the ATM informing 
depositors that funds deposited at the ATM may not be considered 
deposited until a future day, in accordance with Sec. 229.18.
    6. Banking day of deposit.
    a. This paragraph also provides that a deposit received on a day 
that the depositary bank is closed, or after the bank's cut-off hour, 
may be considered made on the next banking day. Generally, for purposes 
of the availability schedules of this subpart, a bank may establish a 
cut-off hour of 2 p.m. or later for receipt of deposits at its head 
office or branch offices. For receipt of deposits at ATMs, contractual 
branches, or other off-premise facilities, such as night depositories or 
lock boxes, the depositary bank may establish a cut-off hour of 12:00 
noon or later (either local time of the branch or other location of the 
depositary bank at which the account is maintained or local time of the 
ATM, contractual branch, or other off-premise facility). The depositary 
bank must use the same timing method for establishing the cut-off hour 
for all ATMs, contractual branches, and other off-premise facilities 
used by its customers. The choice of cut-off hour must be reflected in 
the bank's internal procedures, and the bank must inform its customers 
of the cut-off hour upon request. This earlier cut-off for ATM, 
contractual branch, or other off-premise deposits is intended to provide 
greater flexibility in the servicing of these facilities.
    b. Different cut-off hours may be established for different types of 
deposits. For example, a bank may establish a 2 p.m. cut-off for the 
receipt of check deposits, but a later cut-off for the receipt of wire 
transfers. Different cut-off hours also may be established for deposits 
received at different locations. For example, a different cut-off may be 
established for ATM deposits than for over-the-counter deposits, or for 
different teller stations at the same branch. With the exception of the 
12 noon cut-off for deposits at ATMs and off-premise facilities, no cut-
off hour for receipt of deposits for purposes of this subpart can be 
established earlier than 2 p.m.
    c. A bank is not required to remain open until 2 p.m. If a bank 
closes before 2 p.m., deposits received after the closing may be 
considered deposited on the next banking day. Further, as Sec. 229.2(f) 
defines the term banking day as the portion of a business day on which a 
bank is open to the public for substantially all of its banking 
functions, a day, or a portion of a day, is not necessarily a banking 
day merely because the bank is open for only limited functions, such as 
keeping drive-in or walk-up teller windows open, when the rest of the 
bank is closed to the public. For example, a banking office that usually 
provides a full range of banking services may close at 12 noon but leave 
a drive-in teller window open for the limited purpose of receiving 
deposits and making cash withdrawals. Under those circumstances, the 
bank is considered closed and may consider deposits received after 12 
noon as having been received on the next banking day. The fact that a 
bank may reopen for substantially all of its banking functions after 2 
p.m., or that it continues its back office operations throughout the 
day, would not affect this result. A bank may not, however, close 
individual teller stations and reopen them for next-day's business 
before 2 p.m. during a banking day.

           B. 229.19(b) Availability at Start of Business Day

    1. If funds must be made available for withdrawal on a business day, 
the funds must be available for withdrawal by the later of 9 a.m. or the 
time the depositary bank's teller facilities, including ATMs, are 
available for customer account withdrawals, except under the special 
rule for cash withdrawals set forth in Sec. 229.12(d). Thus, if a bank 
has no ATMs and its branch facilities are available for customer 
transactions beginning at 10 a.m., funds must be available for customer 
withdrawal beginning at 10 a.m. If the bank has ATMs that are available 
24 hours a day, rather than establishing 12:01 a.m. as the start of the 
business day, this paragraph sets 9 a.m. as the start of the day with 
respect to ATM withdrawals. The Board believes that this rule provides 
banks with sufficient time to update their accounting systems to reflect 
the available funds in customer accounts for that day.
    2. The start of business is determined by the local time of the 
branch or other location of the depositary bank at which the account is 
maintained. For example, if funds in a customer's account at a west 
coast bank are first made available for withdrawal at the start of 
business on a given day, and the customer attempts to withdraw the funds 
at an east coast ATM, the depositary bank is not required to make the 
funds available until 9 a.m. west coast time (12 noon east coast time).

           C. 229.19(c) Effect on Policies of Depositary Bank

    1. This subpart establishes the maximum hold that may be placed on 
customer deposits. A depositary bank may provide availability to its 
customers in a shorter time than prescribed in this subpart. A 
depositary bank also may adopt different funds availability policies for 
different segments of its customer base, as long as each policy meets

[[Page 926]]

the schedules in the regulation. For example, a bank may differentiate 
between its corporate and consumer customers, or may adopt different 
policies for its consumer customers based on whether a customer has an 
overdraft line of credit associated with the account.
    2. This regulation does not affect a depositary bank's right to 
accept or reject a check for deposit, to charge back the customer's 
account based on a returned check or notice of nonpayment, or to claim a 
refund for any credit provided to the customer. For example, even if a 
check is returned or a notice of nonpayment is received after the time 
by which funds must be made available for withdrawal in accordance with 
this regulation, the depositary bank may charge back the customer's 
account for the full amount of the check. (See Sec. 229.33(d) and 
Commentary.)
    3. Nothing in the regulation requires a depositary bank to have 
facilities open for customers to make withdrawals at specified times or 
on specified days. For example, even though the special cash withdrawal 
rule set forth in Sec. 229.12(d) states that a bank must make up to 
$400 available for cash withdrawals no later than 5 p.m. on specific 
business days, if a bank does not participate in an ATM system and does 
not have any teller windows open at or after 5 p.m., the bank need not 
join an ATM system or keep offices open. In this case, the bank complies 
with this rule if the funds that are required to be available for cash 
withdrawal at 5 p.m. on a particular day are available for withdrawal at 
the start of business on the following day. Similarly, if a depositary 
bank is closed for customer transactions, including ATMs, on a day funds 
must be made available for withdrawal, the regulation does not require 
the bank to open.
    4. The special cash withdrawal rule in the EFA Act recognizes that 
the $400 that must be made available for cash withdrawal by 5 p.m. on 
the day specified in the schedule may exceed a bank's daily ATM cash 
withdrawal limit and explicitly provides that the EFA Act does not 
supersede a bank's policy in this regard. As a result, if a bank has a 
policy of limiting cash withdrawals from automated teller machines to 
$250 per day, the regulation would not require that the bank dispense 
$400 of the proceeds of the customer's deposit that must be made 
available for cash withdrawal on that day.
    5. Even though the EFA Act clearly provides that the bank's ATM 
withdrawal limit is not superseded by the federal availability rules on 
the day funds must first be made available, the EFA Act does not 
specifically permit banks to limit cash withdrawals at ATMs on 
subsequent days when the entire amount of the deposit must be made 
available for withdrawal. The Board believes that the rationale behind 
the EFA Act's provision that a bank's ATM withdrawal limit is not 
superseded by the requirement that funds be made available for cash 
withdrawal applies on subsequent days. Nothing in the regulation 
prohibits a depositary bank from establishing ATM cash withdrawal limits 
that vary among customers of the bank, as long as the limit is not 
dependent on the length of time funds have been in the customer's 
account (provided that the permissible hold has expired).
    6. Some small banks, particularly credit unions, due to lack of 
secure facilities, keep no cash on their premises and hence offer no 
cash withdrawal capability to their customers. Other banks limit the 
amount of cash on their premises due to bonding requirements or cost 
factors, and consequently reserve the right to limit the amount of cash 
each customer can withdraw over-the-counter on a given day. For example, 
some banks require advance notice for large cash withdrawals in order to 
limit the amount of cash needed to be maintained on hand at any time.
    7. Nothing in the regulation is intended to prohibit a bank from 
limiting the amount of cash that may be withdrawn at a staffed teller 
station if the bank has a policy limiting the amount of cash that may be 
withdrawn, and if that policy is applied equally to all customers of the 
bank, is based on security, operating, or bonding requirements, and is 
not dependent on the length of time the funds have been in the 
customer's account (as long as the permissible hold has expired). The 
regulation, however, does not authorize such policies if they are 
otherwise prohibited by statutory, regulatory, or common law.

               D. 229.19(d) Use of Calculated Availability

    1. A depositary bank may provide availability to its nonconsumer 
accounts on a calculated availability basis. Under calculated 
availability, a specified percentage of funds from check deposits may be 
made available to the customer on the next business day, with the 
remaining percentage deferred until subsequent days. The determination 
of the percentage of deposited funds that will be made available each 
day is based on the customer's typical deposit mix as determined by a 
sample of the customer's deposits. Use of calculated availability is 
permitted only if, on average, the availability terms that result from 
the sample are equivalent to or more prompt than the requirements of 
this subpart.

                    E. 229.19(e) Holds on Other Funds

    1. Section 607(d) of the EFA Act (12 U.S.C. 4006(d)) provides that 
once funds are available for withdrawal under the EFA Act, such funds 
shall not be frozen solely due to the subsequent deposit of additional 
checks that are not yet available for withdrawal. This

[[Page 927]]

provision of the EFA Act is designed to prevent evasion of the EFA Act's 
availability requirements.
    2. This paragraph clarifies that if a customer deposits a check in 
an account (as defined in Sec. 229.2(a)), the bank may not place a hold 
on any of the customer's funds so that the funds that are held exceed 
the amount of the check deposited or the total amount of funds held are 
not made available for withdrawal within the times required in this 
subpart. For example, if a bank places a hold on funds in a customer's 
non transaction account, rather than a transaction account, for deposits 
made to the customer's transaction account, the bank may place such a 
hold only to the extent that the funds held do not exceed the amount of 
the deposit and the length of the hold does not exceed the time periods 
permitted by this regulation.
    3. These restrictions also apply to holds placed on funds in a 
customer's account (as defined in Sec. 229.2(a)) if a customer cashes a 
check at a bank (other than a check drawn on that bank) over the 
counter. The regulation does not prohibit holds that may be placed on 
other funds of the customer for checks cashed over the counter, to the 
extent that the transaction does not involve a deposit to an account. A 
bank may not, however, place a hold on any account when an ``on us'' 
check is cashed over the counter. ``On us'' checks are considered 
finally paid when cashed (see U.C.C. 4-215(a)(1)). When a customer 
cashes a check over the counter and the bank places a hold on an account 
of the customer, the bank must give whatever notice would have been 
required under Sec. Sec. 229.13 or 229.16 had the check been deposited 
in the account.

              F. 229.19(f) Employee Training and Compliance

    1. The EFA Act requires banks to take such actions as may be 
necessary to inform fully each employee that performs duties subject to 
the EFA Act of the requirements of the EFA Act, and to establish and 
maintain procedures reasonably designed to assure and monitor employee 
compliance with such requirements.
    2. This paragraph requires a bank to establish procedures to ensure 
compliance with these requirements and provide these procedures to the 
employees responsible for carrying them out.

                G. 229.19(g) Effect of Merger Transaction

    1. After banks merge, there is often a period of adjustment before 
their operations are consolidated. This paragraph accommodates this 
adjustment period by allowing merged banks to be treated as separate 
banks for purposes of this subpart for a period of up to one year after 
consummation of the merger transaction, except that a customer of any 
bank that is a party to the transaction that has an established account 
with that bank may not be treated as a new account holder for any other 
party to the transaction for purposes of the new account exception of 
Sec. 229.13(a), and a deposit in any branch of the merged bank is 
considered deposited in the bank for purposes of the availability 
schedules in accordance with Sec. 229.19(a).
    2. This rule affects the status of the combined entity in several 
areas. For example, this rule would affect when an ATM is a proprietary 
ATM (Sec. 229.2(aa) and Sec. 229.12(b)) and when a check is considered 
drawn on a branch of the depositary bank (Sec. 229.10(c)(1)(vi)).
    3. Merger transaction is defined in Sec. 229.2(t).

                XIV. Section 229.20 Relation to State Law

                         A. 229.20(a) In General

    1. Several states have enacted laws that govern when banks in those 
states must make funds available to their customers. The EFA Act 
provides that any state law in effect on September 1, 1989, that 
provides that funds be made available in a shorter period of time than 
provided in this regulation, will supersede the time periods in the EFA 
Act and the regulation. The Conference Report on the EFA Act clarifies 
this provision by stating that any state law enacted on or before 
September 1, 1989, may supersede federal law to the extent that the law 
relates to the time funds must be made available for withdrawal. H.R. 
Rep. No. 261, 100th Cong. 1st Sess. at 182 (1987).
    2. Thus, if a state had wished to adopt a law governing funds 
availability, it had to have made that law effective on or before 
September 1, 1989. Laws adopted after that date do not supersede federal 
law, even if they provide for shorter availability periods than are 
provided under federal law. If a state that had a law governing funds 
availability in effect before September 1, 1989, amended its law after 
that date, the amendment would not supersede federal law, but an 
amendment deleting a state requirement would be effective.
    3. If a state provides for a shorter hold for a certain category of 
checks than is provided for under federal law, that state requirement 
will supersede the federal provision. For example, most state laws base 
some hold periods on whether the check being deposited is drawn on an 
in-state or out-of-state bank. If a state contains more than one check 
processing region, the state's hold period for in-state checks may be 
shorter than the federal maximum hold period for nonlocal checks. Thus, 
the state schedule would supersede the federal schedule to the extent 
that it applies to in-state, nonlocal checks.

[[Page 928]]

    4. The EFA Act also provides that any state law that provides for 
availability in a shorter period of time than required by federal law is 
applicable to all federally insured institutions in that state, 
including federally chartered institutions. If a state law provides 
shorter availability only for deposits in accounts in certain categories 
of banks, such as commercial banks, the superseding state law continues 
to apply only to those categories of banks, rather than to all federally 
insured banks in the state.

               B. 229.20(b) Preemption of Inconsistent Law

    1. This paragraph reflects the statutory provision that other 
provisions of state law that are inconsistent with federal law are 
preempted. Preemption does not require a determination by the Board to 
be effective.

                  C. 229.20(c) Standards for Preemption

    1. This section describes the standards the Board uses in making 
determinations on whether federal law will preempt state laws governing 
funds availability. A provision of state law is considered inconsistent 
with federal law if it permits a depositary bank to make funds available 
to a customer in a longer period of time than the maximum period 
permitted by the EFA Act and this regulation. For example, a state law 
that permits a hold of four business days or longer for local checks 
permits a hold that is longer than that permitted under the EFA Act and 
this regulation, and therefore is inconsistent and preempted. State 
availability schedules that provide for availability in a shorter period 
of time than required under Regulation CC supersede the federal 
schedule.
    2. Under a state law, some categories of deposits could be available 
for withdrawal sooner or later than the time required by this subpart, 
depending on the composition of the deposit. For example, the EFA Act 
and this regulation (Sec. 229.10(c)(1)(vii)) require next-day 
availability for the first $100 of the aggregate deposit of local or 
nonlocal checks on any day, and a state law could require next-day 
availability for any check of $100 or less that is deposited. Under the 
EFA Act and this regulation, if either one $150 check or three $50 
checks are deposited on a given day, $100 must be made available for 
withdrawal on the next business day, and $50 must be made available in 
accordance with the local or nonlocal schedule. Under the state law, 
however, the two deposits would be subject to different availability 
rules. In the first case, none of the proceeds of the deposit would be 
subject to next-day availability; in the second case, the entire 
proceeds of the deposit would be subject to next-day availability. In 
this example, because the state law would, in some situations, permit a 
hold longer than the maximum permitted by the EFA Act, this provision of 
state law is inconsistent and preempted in its entirety.
    3. In addition to the differences between state and federal 
availability schedules, a number of state laws contain exceptions to the 
state availability schedules that are different from those provided 
under the EFA Act and this regulation. The state exceptions continue to 
apply only in those cases where the state schedule is shorter than or 
equal to the federal schedule, and then only up to the limit permitted 
by the Regulation CC schedule. Where a deposit is subject to a state 
exception under a state schedule that is not preempted by Regulation CC 
and is also subject to a federal exception, the hold on the deposit 
cannot exceed the hold permissible under the federal exception in 
accordance with Regulation CC. In such cases, only one exception notice 
is required, in accordance with Sec. 229.13(g). This notice need only 
include the applicable federal exception as the reason the exception was 
invoked. For those categories of checks for which the state schedule is 
preempted by the federal schedule, only the federal exceptions may be 
used.
    4. State laws that provide maximum availability periods for 
categories of deposits that are not covered by the EFA Act would not be 
preempted. Thus, state funds availability laws that apply to funds in 
time and savings deposits are not affected by the EFA Act or this 
regulation. In addition, the availability schedules of several states 
apply to ``items'' deposited to an account. The term items may encompass 
deposits, such as nonnegotiable instruments, that are not subject to the 
Regulation CC availability schedules. Deposits that are not covered by 
Regulation CC continue to be subject to the state availability 
schedules. State laws that provide maximum availability periods for 
categories of institutions that are not covered by the EFA Act also 
would not be preempted. For example, a state law that governs money 
market mutual funds would not be affected by the EFA Act or this 
regulation.
    5. Generally, state rules governing the disclosure or notice of 
availability policies applicable to accounts also are preempted, if they 
are different from the federal rules. Nevertheless, a state law 
requiring disclosure of funds availability policies that apply to 
deposits other than ``accounts,'' such as savings or time deposits, are 
not inconsistent with the EFA Act and this subpart. Banks in these 
states would have to follow the state disclosure rules for these 
deposits.

                 D. 229.20(d) Preemption Determinations

    1. The Board may issue preemption determinations upon the request of 
an interested party in a state. The determinations will relate only to 
the provisions of Subparts A and B; generally the Board will not issue 
individual preemption determinations regarding

[[Page 929]]

the relation of state U.C.C. provisions to the requirements of Subpart 
C.

          E. 229.20(e) Procedures for Preemption Determinations

    1. This provision sets forth the information that must be included 
in a request by an interested party for a preemption determination by 
the Board.

                   XV. Section 229.21 Civil Liability

                      A. 229.21(a) Civil Liability

    1. This paragraph sets forth the statutory penalties for failure to 
comply with the requirements of this subpart. These penalties apply to 
provisions of state law that supersede provisions of this regulation, 
such as requirements that funds deposited in accounts at banks be made 
available more promptly than required by this regulation, but they do 
not apply to other provisions of state law. (See Commentary to Sec. 
229.20.)

                    B. 229.21(b) Class Action Awards

    1. This paragraph sets forth the provision in the EFA Act concerning 
the factors that should be considered by the court in establishing the 
amount of a class action award.

                      C. 229.21(c) Bona Fide Errors

    1. A bank is shielded from liability under this section for a 
violation of a requirement of this subpart if it can demonstrate, by a 
preponderance of the evidence, that the violation resulted from a bona 
fide error and that it maintains procedures designed to avoid such 
errors. For example, a bank may make a bona fide error if it fails to 
give next-day availability on a check drawn on the Treasury because the 
bank's computer system malfunctions in a way that prevents the bank from 
updating its customer's account; or if it fails to identify whether a 
payable-through check is a local or nonlocal check despite procedures 
designed to make this determination accurately.

                        D. 229.21(d) Jurisdiction

    1. The EFA Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions for 
violations of this subpart.

                 E. 229.21(e) Reliance on Board Rulings

    1. This provision shields banks from civil liability if they act in 
good faith in reliance on any rule, regulation, model form, notice, or 
clause (if the disclosure actually corresponds to the bank's 
availability policy), or interpretation of the Board, even if it were 
subsequently determined to be invalid. Banks may rely on this 
Commentary, which is issued as an official Board interpretation, as well 
as on the regulation itself.

                         F. 229.21(f) Exclusions

    1. This provision clarifies that liability under this section does 
not apply to violations of the requirements of Subpart C of this 
regulation, or to actions for wrongful dishonor of a check by a paying 
bank's customer.

                      G. 229.21(g) Record Retention

    1. Banks must keep records to show compliance with the requirements 
of this subpart for at least two years. This record retention period is 
extended in the case of civil actions and enforcement proceedings. 
Generally, a bank is not required to retain records showing that it 
actually has given disclosures or notices required by this subpart to 
each customer, but it must retain evidence demonstrating that its 
procedures reasonably ensure the customers' receipt of the required 
disclosures and notices. A bank must, however, retain a copy of each 
notice provided pursuant to its use of the reasonable cause exception 
under Sec. 229.13(g) as well as a brief description of the facts giving 
rise to the availability of that exception.

  XVI. Section 229.30 Paying Bank's Responsibility for Return of Checks

                      A. 229.30(a) Return of Checks

    1. This section requires a paying bank (which, for purposes of 
Subpart C, may include a payable-through and payable-at bank; see Sec. 
229.2(z)) that determines not to pay a check to return the check 
expeditiously. Generally, a check is returned expeditiously if the 
return process is as fast as the forward collection process. This 
paragraph provides two standards for expeditious return, the ``two-day/
four-day'' test, and the ``forward collection'' test.
    2. Under the ``two-day/four-day'' test, if a check is returned such 
that it would normally be received by the depositary bank two business 
days after presentment where both the paying and depositary banks are 
located in the same check processing region or four business days after 
presentment where the paying and depositary banks are not located in the 
same check processing region, the check is considered returned 
expeditiously. In certain limited cases, however, these times are 
shorter than the time it would normally take a forward collection check 
deposited in the paying bank and payable by the depositary bank to be 
collected. Therefore, the Board has included a ``forward collection'' 
test, whereby a check is nonetheless considered to be returned 
expeditiously if the paying bank uses transportation methods and banks 
for return comparable to those used for forward collection checks, even 
if the check is not received by the depositary banks within the two-day 
or four-day period.

[[Page 930]]

    3. Two-day/four-day test.
    a. Under the first test, a paying bank must return the check so that 
the check would normally be received by the depositary bank within 
specified times, depending on whether or not the paying and depositary 
banks are located in the same check processing region.
    b. Where both banks are located in the same check processing region, 
a check is returned expeditiously if it is returned to the depositary 
bank by 4:00 p.m. (local time of the depositary bank) of the second 
business day after the banking day on which the check was presented to 
the paying bank. For example, a check presented on Monday to a paying 
bank must be returned to a depositary bank located in the same check 
processing region by 4 p.m. on Wednesday. For a paying bank that is 
located in a different check processing region than the depositary bank, 
the deadline to complete return is 4 p.m. (local time of the depositary 
bank) of the fourth business day after the banking day on which the 
check was presented to the paying bank. For example, a check presented 
to such a paying bank on Monday must be returned to the depositary bank 
by 4:00 p.m. on Friday.
    c. This two-day/four-day test does not necessarily require actual 
receipt of the check by the depositary bank within these times. Rather, 
the paying bank must send the check so that the check would normally be 
received by the depositary bank within the specified time. Thus, the 
paying bank is not responsible for unforeseeable delays in the return of 
the check, such as transportation delays.
    d. Often, returned checks will be delivered to the depositary bank 
together with forward collection checks. Where the last day on which a 
check could be delivered to a depositary bank under this two-day/four-
day test is not a banking day for the depositary bank, a returning bank 
might not schedule delivery of forward collection checks to the 
depositary bank on that day. Further, the depositary bank may not 
process checks on that day. Consequently, if the last day of the time 
limit is not a banking day for the depositary bank, the check may be 
delivered to the depositary bank before the close of the depositary 
bank's next banking day and the return will still be considered 
expeditious. Ordinarily, this extension of time will allow the returned 
checks to be delivered with the next shipment of forward collection 
checks destined for the depositary bank.
    e. The times specified in this two-day/four-day test are based on 
estimated forward collection times, but take into account the particular 
difficulties that may be encountered in handling returned checks. It is 
anticipated that the normal process for forward collection of a check 
coupled with these return requirements will frequently result in the 
return of checks before the proceeds of nonlocal checks, other than 
those covered by Sec. 229.10(c), must be made available for withdrawal.
    f. Under this two-day/four-day test, no particular means of 
returning checks is required, thus providing flexibility to paying banks 
in selecting means of return. The Board anticipates that paying banks 
will often use returning banks (see Sec. 229.31) as their agents to 
return checks to depositary banks. A paying bank may rely on the 
availability schedule of the returning bank it uses in determining 
whether the returned check would ``normally'' be returned within the 
required time under this two-day/four-day test, unless the paying bank 
has reason to believe that these schedules do not reflect the actual 
time for return of a check.
    4. Forward collection test.
    a. Under the second, ``forward collection,'' test, a paying bank 
returns a check expeditiously if it returns a check by means as swift as 
the means similarly situated banks would use for the forward collection 
of a check drawn on the depositary bank.
    b. Generally, the paying bank would satisfy the ``forward 
collection'' test if it uses a transportation method and collection path 
for return comparable to that used for forward collection, provided that 
the returning bank selected to process the return agrees to handle the 
returned check under the standards for expeditious return for returning 
banks under Sec. 229.31(a). This test allows many paying banks a simple 
means of expeditious return of checks and takes into account the longer 
time for return that will be required by banks that do not have ready 
access to direct courier transportation.
    c. The paying bank's normal method of sending a check for forward 
collection would not be expeditious, however, if it is materially slower 
than that of other banks of similar size and with similar check handling 
activity in its community.
    d. Under the ``forward collection'' test, a paying bank must handle, 
route, and transport a returned check in a manner designed to be at 
least as fast as a similarly situated bank would collect a forward 
collection check (1) of similar amount, (2) drawn on the depositary 
bank, and (3) received for deposit by a branch of the paying bank or a 
similarly situated bank by noon on the banking day following the banking 
day of presentment of the returned check.
    e. This test refers to similarly situated banks to indicate a 
general community standard. In the case of a paying bank (other than a 
Federal Reserve Bank), a similarly situated bank is a bank of similar 
asset size, in the same community, and with similar check handling 
activity as the paying bank. (See Sec. 229.2(ee).) A paying bank has 
similar check handling activity to other banks that handle similar 
volumes of checks for collection.

[[Page 931]]

    f. Under the forward collection test, banks that use means of 
handling returned checks that are less efficient than the means used by 
similarly situated banks must improve their procedures. On the other 
hand, a bank with highly efficient means of collecting checks drawn on a 
particular bank, such as a direct presentment of checks to a bank in a 
remote community, is not required to use that means for returned checks, 
i.e. direct return, if similarly situated banks do not present checks 
directly to that depositary bank.
    5. Examples.
    a. If a check is presented to a paying bank on Monday and the 
depositary bank and the paying bank are participants in the same 
clearinghouse, the paying bank should arrange to have the returned check 
received by the depositary bank by Wednesday. This would be the same day 
the paying bank would deliver a forward collection check to the 
depositary bank if the paying bank received the deposit by noon on 
Tuesday.
    b. i. If a check is presented to a paying bank on Monday and the 
paying bank would normally collect checks drawn on the depositary bank 
by sending them to a correspondent or a Federal Reserve Bank by courier, 
the paying bank could send the returned check to its correspondent or 
Federal Reserve Bank, provided that the correspondent has agreed to 
handle returned checks expeditiously under Sec. 229.31(a). (All Federal 
Reserve Banks agree to handle returned checks expeditiously.)
    ii. The paying bank must deliver the returned check to the 
correspondent or Federal Reserve Bank by the correspondent's or Federal 
Reserve Bank's appropriate cut-off hour. The appropriate cut-off hour is 
the cut-off hour for returned checks that corresponds to the cut-off 
hour for forward collection checks drawn on the depositary bank that 
would normally be used by the paying bank or a similarly situated bank. 
A returned check cut-off hour corresponds to a forward collection cut-
off hour if it provides for the same or faster availability for checks 
destined for the same depositary banks.
    iii. In this example, delivery to the correspondent or a Federal 
Reserve Bank by the appropriate cut-off hour satisfies the paying bank's 
duty, even if use of the correspondent or Federal Reserve Bank is not 
the most expeditious means of returning the check. Thus, a paying bank 
may send a local returned check to a correspondent instead of a Federal 
Reserve Bank, even if the correspondent then sends the returned check to 
a Federal Reserve Bank the following day as a qualified returned check. 
Where the paying bank delivers forward collection checks by courier to 
the correspondent or the Federal Reserve Bank, mailing returned checks 
to the correspondent or Federal Reserve Bank would not satisfy the 
forward collection test.
    iv. If a paying bank ordinarily mails its forward collection checks 
to its correspondent or Federal Reserve Bank in order to avoid the costs 
of a courier delivery, but similarly situated banks use a courier to 
deliver forward collection checks to their correspondent or Federal 
Reserve Bank, the paying bank must send its returned checks by courier 
to meet the forward collection test.
    c. If a paying bank normally sends its forward collection checks 
directly to the depositary bank, which is located in another community, 
but similarly situated banks send forward collection checks drawn on the 
depositary bank to a correspondent or a Federal Reserve Bank, the paying 
bank would not have to send returned checks directly to the depositary 
bank, but could send them to a correspondent or a Federal Reserve Bank.
    d. The dollar amount of the returned check has a bearing on how it 
must be returned. If the paying bank and similarly situated banks 
present large-dollar checks drawn on the depositary bank directly to the 
depositary bank, but use a Federal Reserve Bank or a correspondent to 
collect small-dollar checks, generally the paying bank would be required 
to send its large-dollar returns directly to the depositary bank (or 
through a returning bank, if the checks are returned as quickly), but 
could use a Federal Reserve Bank or a correspondent for its small-dollar 
returns.
    6. Choice of returning bank. In meeting the requirements of the 
forward collection test, the paying bank is responsible for its own 
actions, but not for those of the depositary bank or returning banks. 
(This is analogous to the responsibility of collecting banks under 
U.C.C. 4-202(c).) For example, if the paying bank starts the return of 
the check in a timely manner but return is delayed by a returning bank 
(including delay to create a qualified returned check), generally the 
paying bank has met its requirements. (See Sec. 229.38.) If, however, 
the paying bank selects a returning bank that the paying bank should 
know is not capable of meeting its return requirements, the paying bank 
will not have met its obligation of exercising ordinary care in 
selecting intermediaries to return the check. The paying bank is free to 
use a method of return, other than its method of forward collection, as 
long as the alternate method results in delivery of the returned check 
to the depositary bank as quickly as the forward collection of a check 
drawn on the depositary bank or, where the returning bank takes a day to 
create a qualified returned check under Sec. 229.31(a), one day later 
than the forward collection time. If a paying bank returns a check on 
its banking day of receipt without settling for the check, as permitted 
under U.C.C. 4-302(a), and receives settlement for the returned check 
from a returning bank, it must promptly pay

[[Page 932]]

the amount of the check to the collecting bank from which it received 
the check.
    7. Qualified returned checks. Although paying banks may wish to 
prepare qualified returned checks because they will be handled at a 
lower cost by returning banks, the one business day extension provided 
to returning banks is not available to paying banks because of the 
longer time that a paying bank has to dispatch the check. Normally, 
paying banks will be able to convert a check to a qualified returned 
check at any time after the determination is made to return the check 
until late in the day following presentment, while a returning bank may 
receive returned checks late on one day and be expected to dispatch them 
early the next morning. A check that is converted to a qualified 
returned check must be encoded in accordance with ANS X9.13 for original 
checks or ANS X9.100-140 for substitute checks.
    8. Routing of returned checks.
    a. In effect, under either test, the paying bank acts as an agent or 
subagent of the depositary bank in selecting a means of return. Under 
Sec. 229.30(a), a paying bank is authorized to route the returned check 
in a variety of ways:
    i. It may send the returned check directly to the depositary bank by 
courier or other means of delivery, bypassing returning banks; or
    ii. It may send the returned check to any returning bank agreeing to 
handle the returned check for expeditious return to the depositary bank 
under Sec. 229.31(a), regardless of whether or not the returning bank 
handled the check for forward collection.
    b. If the paying bank elects to return the check directly to the 
depositary bank, it is not necessarily required to return the check to 
the branch of first deposit. The check may be returned to the depositary 
bank at any location permitted under Sec. 229.32(a).
    9. Midnight deadline.
    a. Except for the extension permitted by Sec. 229.30(c), discussed 
below, this section does not relieve a paying bank from the requirement 
for timely return (i.e., midnight deadline) under U.C.C. 4-301 and 4-
302, which continue to apply. Under U.C.C. 4-302, a paying bank is 
``accountable'' for the amount of a demand item, other than a 
documentary draft, if it does not pay or return the item or send notice 
of dishonor by its midnight deadline. Under U.C.C. 3-418(c) and 4-
215(a), late return constitutes payment and would be final in favor of a 
holder in due course or a person who has in good faith changed his 
position in reliance on the payment. Thus, retaining this requirement 
gives the paying bank an additional incentive to make a prompt return.
    b. The expeditious return requirement applies to a paying bank that 
determines not to pay a check. This requirement applies to a payable-
through or a payable-at bank that is defined as a paying bank (see Sec. 
229.2(z)) and that returns a check. This requirement begins when the 
payable-through or payable-at bank receives the check during forward 
collection, not when the payor returns the check to the payable-through 
or payable-at bank. Nevertheless, a check sent for payment or collection 
to a payable-through or payable-at bank is not considered to be drawn on 
that bank for purposes of the midnight deadline provision of U.C.C. 4-
301. (See discussion of Sec. 229.36(a).)
    c. The liability section of this subpart (Sec. 229.38) provides 
that a paying bank is not subject to both ``accountability'' for missing 
the midnight deadline under the U.C.C. and liability for missing the 
timeliness requirements of this regulation. Also, a paying bank is not 
responsible for failure to make expeditious return to a party that has 
breached a presentment warranty under U.C.C. 4-208, notwithstanding that 
the paying bank has returned the check. (See Commentary to Sec. 
229.33(a).)
    10. U.C.C. provisions affected. This paragraph directly affects the 
following provisions of the U.C.C., and may affect other sections or 
provisions:
    a. Section 4-301(d), in that instead of returning a check through a 
clearinghouse or to the presenting bank, a paying bank may send a 
returned check to the depositary bank or to a returning bank.
    b. Section 4-301(a), in that time limits specified in that section 
may be affected by the additional requirement to make an expeditious 
return and in that settlement for returned checks is made under Sec. 
229.31(c), not by revocation of settlement.

               B. 229.30(b) Unidentifiable Depositary Bank

    1. In some cases, a paying bank will be unable to identify the 
depositary bank through the use of ordinary care and good faith. The 
Board expects that these cases will be unusual as skilled return clerks 
will readily identify the depositary bank from the depositary bank 
indorsement required under Sec. 229.35 and appendix D. In cases where 
the paying bank is unable to identify the depositary bank, the paying 
bank may, in accordance with Sec. 229.30(a), send the returned check to 
a returning bank that agrees to handle the returned check for 
expeditious return to the depositary bank under Sec. 229.31(a). The 
returning bank may be better able to identify the depositary bank.
    2. In the alternative, the paying bank may send the check back up 
the path used for forward collection of the check. The presenting bank 
and prior collecting banks normally will be able to trace the collection 
path of the check through the use of their internal records in 
conjunction with the indorsements on the returned check. In these 
limited cases, the paying bank may send

[[Page 933]]

such a returned check to any bank that handled the check for forward 
collection, even if that bank does not agree to handle the returned 
check for expeditious return to the depositary bank under Sec. 
229.31(a). A paying bank returning a check under this paragraph to a 
bank that has not agreed to handle the check expeditiously must advise 
that bank that it is unable to identify the depositary bank. This advice 
must be conspicuous, such as a stamp on each check for which the 
depositary bank is unknown if such checks are commingled with other 
returned checks, or, if such checks are sent in a separate cash letter, 
by one notice on the cash letter. This information will warn the bank 
that this check will require special research and handling in accordance 
with Sec. 229.31(b). The returned check may not be prepared for 
automated return. The return of a check to a bank that handled the check 
for forward collection is consistent with Sec. 229.35(b), which 
requires a bank handling a check to take up the check it is has not been 
paid.
    3. The sending of a check to a bank that handled the check for 
forward collection under this paragraph is not subject to the 
requirements for expeditious return by the paying bank. Often, the 
paying bank will not have courier or other expeditious means of 
transportation to the collecting or presenting bank. Although the lack 
of a requirement of expeditious return will create risks for the 
depositary bank, in many cases the inability to identify the depositary 
bank will be due to the depositary bank's, or a collecting bank's, 
failure to use the indorsement required by Sec. 229.35(a) and appendix 
D. If the depositary bank failed to use the proper indorsement, it 
should bear the risks of less than expeditious return. Similarly, where 
the inability to identify the depositary bank is due to indorsements or 
other information placed on the back of the check by the depositary 
bank's customer or other prior indorser, the depositary bank should bear 
the risk that it cannot charge a returned check back to that customer. 
Where the inability to identify the depositary bank is due to subsequent 
indorsements of collecting banks, these collecting banks may be liable 
for a loss incurred by the depositary bank due to less than expeditious 
return of a check; those banks therefore have an incentive to return 
checks sent to them under this paragraph quickly.
    4. This paragraph does not relieve a paying bank from the liability 
for the lack of expeditious return in cases where the paying bank is 
itself responsible for the inability to identify the depositary bank, 
such as when the paying bank's customer has used a check with printing 
or other material on the back in the area reserved for the depositary 
bank's indorsement, making the indorsement unreadable. (See Sec. 
229.38(d).)
    5. A paying bank's return under this paragraph is also subject to 
its midnight deadline under U.C.C. 4-301, Regulation J (if the check is 
returned through a Federal Reserve Bank), and the exception provided in 
Sec. 229.30(c). A paying bank also may send a check to a prior 
collecting bank to make a claim against that bank under Sec. 229.35(b) 
where the depositary bank is insolvent or in other cases as provided in 
Sec. 229.35(b). Finally, a paying bank may make a claim against a prior 
collecting bank based on a breach of warranty under U.C.C. 4-208.

                   C. 229.30(c) Extension of Deadline

    1. This paragraph permits extension of the deadlines for returning a 
check for which the paying bank previously has settled (generally 
midnight of the banking day following the banking day on which the check 
is received by the paying bank) and for returning a check without 
settling for it (generally midnight of the banking day on which the 
check is received by the paying bank, or such other time provided by 
Sec. 210.9 of Regulation J (12 CFR part 210) or Sec. 229.36(f)(2) of 
this part), but not of the duty of expeditious return, in two 
circumstances:
    a. A paying bank may have a courier that leaves after midnight (or 
after any other applicable deadline) to deliver its forward-collection 
checks. This paragraph removes the constraint of the midnight deadline 
for returned checks if the returned check reaches the receiving bank on 
or before the receiving bank's next banking day following the otherwise 
applicable deadline by the earlier of the close of that banking day or a 
cutoff hour of 2 p.m. or later set by the receiving bank under U.C.C. 4-
108. The extension also applies if the check reaches the bank to which 
it is sent later than the time described in the previous sentence if 
highly expeditious means of transportation are used. For example, a West 
Coast paying bank may use this further extension to ship a returned 
check by air courier directly to an East Coast returning bank even if 
the check arrives after the returning bank's cutoff hour. This paragraph 
applies to the extension of all midnight deadlines except Saturday 
midnight deadlines (see paragraph XVI.C.1.b of this appendix).
    b. A paying bank may observe a banking day, as defined in the 
applicable U.C.C., on a Saturday, which is not a business day and 
therefore not a banking day under Regulation CC. In such a case, the 
U.C.C. deadline for returning checks received and settled for on Friday, 
or for returning checks received on Saturday without settling for them, 
might require the bank to return the checks by midnight Saturday. 
However, the bank may not have couriers leaving on Saturday to carry 
returned checks, and even if it did, the returning or depositary bank to 
which

[[Page 934]]

the returned checks were sent might not be open until Sunday night or 
Monday morning to receive and process the checks. This paragraph extends 
the midnight deadline if the returned checks reach the returning bank by 
a cut-off hour (usually on Sunday night or Monday morning) that permits 
processing during its next processing cycle or reach the depositary bank 
by the cut-off hour on its next banking day following the Saturday 
midnight deadline. This paragraph applies exclusively to the extension 
of Saturday midnight deadlines.
    2. The time limits that are extended in each case are the paying 
bank's midnight deadline for returning a check for which it has already 
settled and the paying bank's deadline for returning a check without 
settling for it in U.C.C. 4-301 and 4-302, Sec. Sec. 210.9 and 210.12 
of Regulation J (12 CFR 210.9 and 210.12), and Sec. 229.36(f)(2) of 
this part. As these extensions are designed to speed (Sec. 
229.30(c)(1)), or at least not slow (Sec. 229.30(c)(2)), the overall 
return of checks, no modification or extension of the expeditious return 
requirements in Sec. 229.30(a) is required.
    3. The paying bank satisfies its midnight or other return deadline 
by dispatching returned checks to another bank by courier, including a 
courier under contract with the paying bank, prior to expiration of the 
deadline.
    4. This paragraph directly affects U.C.C. 4-301 and 4-302 and 
Sec. Sec. 210.9 and 210.12 of Regulation J (12 CFR 210.9 and 210.12) to 
the extent that this paragraph applies by its terms, and may affect 
other provisions.

              D. 229.30(d) Identification of Returned Check

    1. The reason for the return must be clearly indicated. A check is 
identified as a returned check if the front of that check indicates the 
reason for return, even though it does not specifically state that the 
check is a returned check. A reason such as ``Refer to Maker'' is 
permissible in appropriate cases. If the returned check is a substitute 
check, the reason for return must be placed within the image of the 
original check that appears on the front of the substitute check so that 
the information is retained on any subsequent substitute check. If the 
paying bank places the returned check in a carrier envelope, the carrier 
envelope should indicate that it is a returned check but need not repeat 
the reason for return stated on the check if it in fact appears on the 
check.

              E. 229.30(e) Depositary Bank Without Accounts

    1. Subpart B of this regulation applies only to ``checks'' deposited 
in transaction-type ``accounts.'' Thus, a depositary bank with only time 
or savings accounts need not comply with the availability requirements 
of Subpart B. Collecting banks will not have couriers delivering checks 
to these banks as paying banks, because no checks are drawn on them. 
Consequently, the costs of using a courier or other expedited means to 
deliver returned checks directly to such a depositary bank may not be 
justified. Thus, the expedited return requirement of Sec. 229.30(a) and 
the notice of nonpayment requirement of Sec. 229.33 do not apply to 
checks being returned to banks that do not hold accounts. The paying 
bank's midnight deadline in U.C.C. 4-301 and 4-302 and Sec. 210.12 of 
Regulation J (12 CFR 210.12) would continue to apply to these checks. 
Returning banks also would be required to act on such checks within 
their midnight deadline. Further, in order to avoid complicating the 
process of returning checks generally, banks without accounts are 
required to use the standard indorsement, and their checks are returned 
by returning banks and paid for by the depositary bank under the same 
rules as checks deposited in other banks, with the exception of the 
expeditious return and notice of nonpayment requirements of Sec. Sec. 
229.30(a), 229.31(a), and 229.33.
    2. The expeditious return requirements also apply to a check 
deposited in a bank that is not a depository institution. Federal 
Reserve Banks, Federal Home Loan Banks, private bankers, and possibly 
certain industrial banks are not depository institutions within the 
meaning of the EFA Act, and therefore are not subject to the expedited 
availability and disclosure requirements of Subpart B. These banks do, 
however, maintain accounts as defined in Sec. 229.2(a), and a paying 
bank returning a check to one of these banks would be required to return 
the check to the depositary bank, in accordance with the requirements of 
this section.

                  F. 229.30(f) Notice in Lieu of Return

    1. A check that is lost or otherwise unavailable for return may be 
returned by sending a legible copy of both sides of the check or, if 
such a copy is not available to the paying bank, a written notice of 
nonpayment containing the information specified in Sec. 229.33(b). The 
copy or written notice must clearly indicate it is a notice in lieu of 
return and must be handled in the same manner as other returned checks. 
Notice by telephone, telegraph, or other electronic transmission, other 
than a legible facsimile or similar image transmission of both sides of 
the check, does not satisfy the requirements for a notice in lieu of 
return. The requirement for a writing and the indication that the notice 
is a substitute for the returned check is necessary so that the 
returning and depositary banks are informed that the notice carries 
value. Notice in lieu of return is permitted only when a bank does not 
have and cannot obtain possession of the check or must retain possession 
of the check

[[Page 935]]

for protest. A check is not unavailable for return if it is merely 
difficult to retrieve from a filing system or from storage by a keeper 
of checks in a truncation system. A notice in lieu of return may be used 
by a bank handling a returned check that has been lost or destroyed, 
including when the original returned check has been charged back as lost 
or destroyed as provided in Sec. 229.35(b). A bank using a notice in 
lieu of return gives a warranty under Sec. 229.34(a)(4) that the 
original check has not been and will not be returned.
    2. The requirement of this paragraph supersedes the requirement of 
U.C.C. 4-301(a) as to the form and information required of a notice of 
dishonor or nonpayment. Reference in the regulation and this commentary 
to a returned check includes a notice in lieu of return unless the 
context indicates otherwise.
    3. The notice in lieu of return is subject to the provisions of 
Sec. 229.30 and is treated like a returned check for settlement 
purposes. If the original check is over $2,500, the notice of nonpayment 
under Sec. 229.33 is still required, but may be satisfied by the notice 
in lieu of return if the notice in lieu meets the time and information 
requirements of Sec. 229.33.
    4. If not all of the information required by Sec. 229.33(b) is 
available, the paying bank may make a claim against any prior bank 
handling the check as provided in Sec. 229.35(b).

                 G. 229.30(g) Reliance on Routing Number

    1. Although Sec. 229.35 and appendix D require that the depositary 
bank indorsement contain its nine-digit routing number, it is possible 
that a returned check will bear the routing number of the depositary 
bank in fractional, nine-digit, or other form. This paragraph permits a 
paying bank to rely on the routing number of the depositary bank as it 
appears on the check (in the depositary bank's indorsement) when it is 
received by the paying bank.
    2. If there are inconsistent routing numbers, the paying bank may 
rely on any routing number designating the depositary bank. The paying 
bank is not required to resolve the inconsistency prior to processing 
the check. The paying bank remains subject to the requirement to act in 
good faith and use ordinary care under Sec. 229.38(a).

   XVII. Section 229.31 Returning Bank's Responsibility for Return of 
                                 Checks

                      A. 229.31(a) Return of Checks

    1. The standards for return of checks established by this section 
are similar to those for paying banks in Sec. 229.30(a). This section 
requires a returning bank to return a returned check expeditiously if it 
agrees to handle the returned check for expeditious return under this 
paragraph. In effect, the returning bank is an agent or subagent of the 
paying bank and a subagent of the depositary bank for the purposes of 
returning the check.
    2. A returning bank agrees to handle a returned check for 
expeditious return to the depositary bank if it:
    a. Publishes or distributes availability schedules for the return of 
returned checks and accepts the returned check for return;
    b. Handles a returned check for return that it did not handle for 
forward collection; or
    c. Otherwise agrees to handle a returned check for expeditious 
return.
    3. Two-day/four-day test. As in the case of a paying bank, a 
returning bank's return of a returned check is expeditious if it meets 
either of two tests. Under the ``two-day/four-day'' test, the check must 
be returned so that it would normally be received by the depositary bank 
by 4:00 p.m. either two or four business days after the check was 
presented to the paying bank, depending on whether or not the paying 
bank is located in the same check processing region as the depositary 
bank. This is the same test as the two-day/four-day test applicable to 
paying banks. (See Commentary to Sec. 229.30(a).) While a returning 
bank will not have first hand knowledge of the day on which a check was 
presented to the paying bank, returning banks may, by agreement, 
allocate with paying banks liability for late return based on the delays 
caused by each. In effect, the two-day/four day test protects all paying 
and returning banks that return checks from claims that they failed to 
return a check expeditiously, where the check is returned within the 
specified time following presentment to the paying bank, or a later time 
as would result from unforeseen delays.
    4. Forward collection test.
    a. The ``forward collection'' test is similar to the forward 
collection test for paying banks. Under this test, a returning bank must 
handle a returned check in the same manner that a similarly situated 
collecting bank would handle a check of similar size drawn on the 
depositary bank for forward collection. A similarly situated bank is a 
bank (other than a Federal Reserve Bank) that is of similar asset size 
and check handling activity in the same community. A bank has similar 
check handling activity if it handles a similar volume of checks for 
forward collection as the forward collection volume of the returning 
bank.
    b. Under the forward collection test, a returning bank must accept 
returned checks, including both qualified and other returned checks 
(``raw returns''), at approximately the same times and process them 
according to the same general schedules as checks handled for forward 
collection. Thus, a returning bank generally must process even raw 
returns on an overnight basis, unless its time limit is extended by one 
day to convert a raw return to a qualified returned check.
    5. Cut-off hours. A returning bank may establish earlier cut-off 
hours for receipt of returned checks than for receipt of forward

[[Page 936]]

collection checks, but the cut-off hour for returned checks may not be 
earlier than 2:00 p.m. The returning bank also may set different sorting 
requirements for returned checks than those applicable to other checks. 
Thus, a returning bank may allow itself more processing time for returns 
than for forward collection checks. All returned checks received by a 
cut-off hour for returned checks must be processed and dispatched by the 
returning bank by the time that it would dispatch forward collection 
checks received at a corresponding forward collection cut-off hour that 
provides for the same or faster availability for checks destined for the 
same depositary banks.
    6. Examples.
    a. If a returning bank receives a returned check by its cut-off hour 
for returned checks on Monday and the depositary bank and the returning 
bank are participants in the same clearinghouse, the returning bank 
should arrange to have the returned check received by the depositary 
bank by Tuesday. This would be the same day that it would deliver a 
forward collection check drawn on the depositary bank and received by 
the returning bank at a corresponding forward collection cut-off hour on 
Monday.
    b. i. If a returning bank receives a returned check, and the 
returning bank normally would collect a forward collection check drawn 
on the depositary bank by sending the forward collection check to a 
correspondent or a Federal Reserve Bank by courier, the returning bank 
could send the returned check in the same manner if the correspondent 
has agreed to handle returned checks expeditiously under Sec. 
229.31(a). The returning bank would have to deliver the check by the 
correspondent's or Federal Reserve Bank's cut-off hour for returned 
checks that corresponds to its cut-off hour for forward collection 
checks drawn on the depositary bank. A returning bank may take a day to 
convert a check to a qualified returned check. Where the forward 
collection checks are delivered by courier, mailing the returned checks 
would not meet the duty established by this section for returning banks.
    ii. A returning bank must return a check to the depositary bank by 
courier or other means as fast as a courier, if similarly situated 
returning banks use couriers to deliver their forward collection checks 
to the depositary bank.
    iii. For some depositary banks, no community practice exists as to 
delivery of checks. For example, a credit union whose customers use 
payable-through drafts normally does not have checks presented to it 
because the drafts are normally sent to the payable-through bank for 
collection. In these circumstances, the community standard is 
established by taking into account the dollar volume of the checks being 
sent to the depositary bank and the location of the depositary bank, and 
determining whether similarly situated banks normally would deliver 
forward collection checks to the depositary bank, taking into account 
the particular risks associated with returned checks. Where the 
community standard does not require courier delivery, other means of 
delivery, including mail, are acceptable.
    7. Qualified returned checks.
    a. The expeditious return requirement for a returning bank in this 
regulation is more stringent in many cases than the duty of a collecting 
bank to exercise ordinary care under U.C.C. 4-202 in returning a check. 
A returning bank is under a duty to act as expeditiously in returning a 
check as it would in the forward collection of a check. Notwithstanding 
its duty of expeditious return, its midnight deadline under U.C.C. 4-202 
and Sec. 210.12(a) of Regulation J (12 CFR 210.12(a)), under the 
forward collection test, a returning bank may take an extra day to 
qualify a returned check. A qualified returned check will be handled by 
subsequent returning banks more efficiently than a raw return. This 
paragraph gives a returning bank an extra business day beyond the time 
that would otherwise be required to return the returned check to convert 
a returned check to a qualified returned check. The qualified returned 
check must include the routing number of the depositary bank, the amount 
of the check, and a return identifier encoded on the check in magnetic 
ink. A check that is converted to a qualified returned check must be 
encoded in accordance with ANS X9.13 for original checks or ANS X9.100-
140 for substitute checks.
    b. If the returning bank is sending the returned check directly to 
the depositary bank, this extra day is not available because preparing a 
qualified returned check will not expedite handling by other banks. If 
the returning bank makes an encoding error in creating a qualified 
returned check, it may be liable under Sec. 229.38 for losses caused by 
any negligence or under Sec. 229.34(c)(3) for breach of an encoding 
warranty. The returning bank would not lose the one-day extension 
available to it for creating a qualified returned check because of an 
encoding error.
    8. Routing of returned check.
    a. Under Sec. 229.31(a), the returning bank is authorized to route 
the returned check in a variety of ways:
    i. It may send the returned check directly to the depositary bank by 
courier or other expeditious means of delivery; or
    ii. It may send the returned check to any returning bank agreeing to 
handle the returned check for expeditious return to the depositary bank 
under this section regardless of whether or not the returning bank 
handled the check for forward collection.
    b. If the returning bank elects to send the returned check directly 
to the depositary

[[Page 937]]

bank, it is not required to send the check to the branch of the 
depositary bank that first handled the check. The returned check may be 
sent to the depositary bank at any location permitted under Sec. 
229.32(a).
    9. Responsibilities of returning bank. In meeting the requirements 
of this section, the returning bank is responsible for its own actions, 
but not those of the paying bank, other returning banks, or the 
depositary bank. (See U.C.C. 4-202(c) regarding the responsibility of 
collecting banks.) For example, if the paying bank has delayed the start 
of the return process, but the returning bank acts in a timely manner, 
the returning bank may satisfy the requirements of this section even if 
the delayed return results in a loss to the depositary bank. (See Sec. 
229.38.) A returning bank must handle a notice in lieu of return as 
expeditiously as a returned check.
    10. U.C.C. sections affected. This paragraph directly affects the 
following provisions of the U.C.C., and may affect other sections or 
provisions:
    a. Section 4-202(b), in that time limits required by that section 
may be affected by the additional requirement to make an expeditious 
return.
    b. Section 4-214(a), in that settlement for returned checks is made 
under Sec. 229.31(c) and not by charge-back of provisional credit, and 
in that the time limits may be affected by the additional requirement to 
make an expeditious return.

               B. 229.31(b) Unidentifiable Depositary Bank

    1. This section is similar to Sec. 229.30(b), but applies to 
returning banks instead of paying banks. In some cases a returning bank 
will be unable to identify the depositary bank with respect to a check. 
Returning banks agreeing to handle checks for return to depositary banks 
under Sec. 229.31(a) are expected to be expert in identifying 
depositary bank indorsements. In the limited cases where the returning 
bank cannot identify the depositary bank, the returning bank may send 
the returned check to a returning bank that agrees to handle the 
returned check for expeditious return under Sec. 229.31(a), or it may 
send the returned check to a bank that handled the check for forward 
collection, even if that bank does not agree to handle the returned 
check expeditiously under Sec. 229.31(a).
    2. If the returning bank itself handled the check for forward 
collection, it may send the returned check to a collecting bank that was 
prior to it in the forward collection process, which will be better able 
to identify the depositary bank. If there are no prior collecting banks, 
the returning bank must research the collection of the check and 
identify the depositary bank. As in the case of paying banks under Sec. 
229.30(b), a returning bank's sending of a check to a bank that handled 
the check for forward collection under Sec. 229.31(b) is not subject to 
the expeditious return requirements of Sec. 229.31(a).
    3. The returning bank's return of a check under this paragraph is 
subject to the midnight deadline under U.C.C. 4-202(b). (See definition 
of returning bank in Sec. 229.2(cc).)
    4. Where a returning bank receives a check that it does not agree to 
handle expeditiously under Sec. 229.31(a), such as a check sent to it 
under Sec. 229.30(b), but the returning bank is able to identify the 
depositary bank, the returning bank must thereafter return the check 
expeditiously to the depositary bank. The returning bank returns a check 
expeditiously under this paragraph if it returns the check by the same 
means it would use to return a check drawn on it to the depositary bank 
or by other reasonably prompt means.
    5. As in the case of a paying bank returning a check under Sec. 
229.30(b), a returning bank returning a check under this paragraph to a 
bank that has not agreed to handle the check expeditiously must advise 
that bank that it is unable to identify the depositary bank. This advice 
must be conspicuous, such as a stamp on each check for which the 
depositary bank is unknown if such checks are commingled with other 
returned checks, or, if such checks are sent in a separate cash letter, 
by one notice on the cash letter. The returned check may not be prepared 
for automated return.

                         C. 229.31(c) Settlement

    1. Under the U.C.C., a collecting bank receives settlement for a 
check when it is presented to the paying bank. The paying bank may 
recover the settlement when the paying bank returns the check to the 
presenting bank. Under this regulation, however, the paying bank may 
return the check directly to the depositary bank or through returning 
banks that did not handle the check for forward collection. On these 
more efficient return paths, the paying bank does not recover the 
settlement made to the presenting bank. Thus, this paragraph requires 
the returning bank to settle for a returned check (either with the 
paying bank or another returning bank) in the same way that it would 
settle for a similar check for forward collection. To achieve 
uniformity, this paragraph applies even if the returning bank handled 
the check for forward collection.
    2. Any returning bank, including one that handled the check for 
forward collection, may provide availability for returned checks 
pursuant to an availability schedule as it does for forward collection 
checks. These settlements by returning banks, as well as settlements 
between banks made during the forward collection of a check, are 
considered final when made subject to any deferment of availability. 
(See Sec. 229.36(d) and Commentary to Sec. 229.35(b).)

[[Page 938]]

    3. A returning bank may vary the settlement method it uses by 
agreement with paying banks or other returning banks. Special rules 
apply in the case of insolvency of banks. (See Sec. 229.39.) If payment 
cannot be obtained from a depositary or returning bank because of its 
insolvency or otherwise, recovery can be had by returning, paying, and 
collecting banks from prior banks on this basis of the liability of 
prior banks under Sec. 229.35(b).
    4. This paragraph affects U.C.C. 4-214(a) in that a paying or 
collecting bank does not ordinarily have a right to charge back against 
the bank from which it received the returned check, although it is 
entitled to settlement if it returns the returned check to that bank, 
and may affect other sections or provisions. Under Sec. 229.36(d), a 
bank collecting a check remains liable to prior collecting banks and the 
depositary bank's customer under the U.C.C.

                          D. 229.31(d) Charges

    1. This paragraph permits any returning bank, even one that handled 
the check for forward collection, to impose a fee on the paying bank or 
other returning bank for its service in handling a returned check. Where 
a claim is made under Sec. 229.35(b), the bank on which the claim is 
made is not authorized by this paragraph to impose a charge for taking 
up a check. This paragraph preempts state laws to the extent that these 
laws prevent returning banks from charging fees for handling returned 
checks.

              E. 229.31(e) Depositary Bank Without Accounts

    1. This paragraph is similar to Sec. 229.30(e) and relieves a 
returning bank of its obligation to make expeditious return to a 
depositary bank that does not maintain any accounts. (See the Commentary 
to Sec. 229.30(e).)

                  F. 229.31(f) Notice in Lieu of Return

    1. This paragraph is similar to Sec. 229.30(f) and authorizes a 
returning bank to originate a notice in lieu of return if the returned 
check is unavailable for return. Notice in lieu of return is permitted 
only when a bank does not have and cannot obtain possession of the check 
or must retain possession of the check for protest. A check is not 
unavailable for return if it is merely difficult to retrieve from a 
filing system or from storage by a keeper of checks in a truncation 
system. (See the Commentary to Sec. 229.30(f).)

                 G. 229.31(g) Reliance on Routing Number

    1. This paragraph is similar to Sec. 229.30(g) and permits a 
returning bank to rely on routing numbers appearing on a returned check 
such as routing numbers in the depositary bank's indorsement or on 
qualified returned checks. (See the Commentary to Sec. 229.30(g).)

  XVIII. Section 229.32 Depositary Bank's Responsibility for Returned 
                                 Checks

               A. 229.32(a) Acceptance of Returned Checks

    1. This regulation seeks to encourage direct returns by paying and 
returning banks and may result in a number of banks sending checks to 
depositary banks with no preexisting arrangements as to where the 
returned checks should be delivered. This paragraph states where the 
depositary bank is required to accept returned checks and written 
notices of nonpayment under Sec. 229.33. (These locations differ from 
locations at which a depositary bank must accept electronic notices.) It 
is derived from U.C.C. 3-111, which specifies that presentment for 
payment may be made at the place specified in the instrument or, if 
there is none, at the place of business of the party to pay. In the case 
of returned checks, the depositary bank does not print the check and can 
only specify the place of ``payment'' of the returned check in its 
indorsement.
    2. The paragraph specifies four locations at which the depositary 
bank must accept returned checks:
    a. The depositary bank must accept returned checks at any location 
at which it requests presentment of forward collection checks such as a 
processing center. A depositary bank does not request presentment of 
forward collection checks at a branch of the bank merely by paying 
checks presented over the counter.
    b. i. If the depositary bank indorsement states the name and address 
of the depositary bank, it must accept returned checks at the branch, 
head office, or other location, such as a processing center, indicated 
by the address. If the address is too general to identify a particular 
location, then the depositary bank must accept returned checks at any 
branch or head office consistent with the address. If, for example, the 
address is ``New York, New York,'' each branch in New York City must 
accept returned checks.
    ii. If no address appears in the depositary bank's indorsement, the 
depositary bank must accept returned checks at any branch or head office 
associated with the depositary bank's routing number. The offices 
associated with the routing number of a bank are found in American 
Bankers Association Key to Routing Numbers, published by an agent of the 
American Bankers Association, which lists a city and state address for 
each routing number.
    iii. The depositary bank must accept returned checks at the address 
in its indorsement and at an address associated with its routing number 
in the indorsement if the written address in the indorsement and

[[Page 939]]

the address associated with the routing number in the indorsement are 
not in the same check processing region. Under Sec. Sec. 229.30(g) and 
229.31(g), a paying or returning bank may rely on the depositary bank's 
routing number in its indorsement in handling returned checks and is not 
required to send returned checks to an address in the depositary bank's 
indorsement that is not in the same check processing region as the 
address associated with the routing number in the indorsement.
    iv. If no routing number or address appears in its indorsement, the 
depositary bank must accept a returned check at any branch or head 
office of the bank. The indorsement requirement of Sec. 229.35 and 
appendix D requires that the indorsement contain a routing number, a 
name, and a location. Consequently, this provision, as well as paragraph 
(a)(2)(ii) of this section, only applies where the depositary bank has 
failed to comply with the indorsement requirement.
    3. For ease of processing, a depositary bank may require that 
returning or paying banks returning checks to it separate returned 
checks from forward collection checks being presented.
    4. Under Sec. 229.33(d), a depositary bank receiving a returned 
check or notice of nonpayment must send notice to its customer by its 
midnight deadline or within a longer reasonable time.

                          B. 229.32(b) Payment

    1. As discussed in the commentary to Sec. 229.31(c), under this 
regulation a paying or returning bank does not obtain credit for a 
returned check by charge-back but by, in effect, presenting the returned 
check to the depositary bank. This paragraph imposes an obligation to 
``pay'' a returned check that is similar to the obligation to pay a 
forward collection check by a paying bank, except that the depositary 
bank may not return a returned check for which it is the depositary 
bank. Also, certain means of payment, such as remittance drafts, may be 
used only with the agreement of the returning bank.
    2. The depositary bank must pay for a returned check by the close of 
the banking day on which it received the returned check. The day on 
which a returned check is received is determined pursuant to U.C.C. 4-
108, which permits the bank to establish a cut-off hour, generally not 
earlier than 2:00 p.m., and treat checks received after that hour as 
being received on the next banking day. If the depositary bank is unable 
to make payment to a returning or paying bank on the banking day that it 
receives the returned check, because the returning or paying bank is 
closed for a holiday or because the time when the depositary bank 
received the check is after the close of Fedwire, e.g., west coast banks 
with late cut-off hours, payment may be made on the next banking day of 
the bank receiving payment.
    3. Payment must be made so that the funds are available for use by 
the bank returning the check to the depositary bank on the day the check 
is received by the depositary bank. For example, a depositary bank meets 
this requirement if it sends a wire transfer of funds to the returning 
or paying bank on the day it receives the returned check, even if the 
returning or paying bank has closed for the day. A wire transfer should 
indicate the purpose of the payment.
    4. The depositary bank may use a net settlement arrangement to 
settle for a returned check. Banks with net settlement agreements could 
net the appropriate credits and debits for returned checks with the 
accounting entries for forward collection checks if they so desired. If, 
for purposes of establishing additional controls or for other reasons, 
the banks involved desired a separate settlement for returned checks, a 
separate net settlement agreement could be established.
    5. The bank sending the returned check to the depositary bank may 
agree to accept payment at a later date if, for example, it does not 
believe that the amount of the returned check or checks warrants the 
costs of same-day payment. Thus, a returning or paying bank may agree to 
accept payment through an ACH credit or debit transfer that settles the 
day after the returned check is received instead of a wire transfer that 
settles on the same day.
    6. This paragraph and this subpart do not affect the depositary 
bank's right to recover a provisional settlement with its nonbank 
customer for a check that is returned. (See also Sec. Sec. 
229.19(c)(2)(ii), 229.33(d) and 229.35(b).)

                 C. 229.32(c) Misrouted Returned Checks

    1. This paragraph permits a bank receiving a check on the basis that 
it is the depositary bank to send the misrouted returned check to the 
correct depositary bank, if it can identify the correct depositary bank, 
either directly or through a returning bank agreeing to handle the check 
expeditiously under Sec. 229.30(a). In these cases, the bank receiving 
the check is acting as a returning bank. Alternatively, the bank 
receiving the misrouted returned check must send the check back to the 
bank from which it was received. In either case the bank to which the 
returned check was misrouted could receive settlement for the check. The 
depositary bank would be required to pay for the returned check under 
Sec. 229.32(b), and any other bank to which the check is sent under 
this paragraph would be required to settle for the check as a returning 
bank under Sec. 229.31(c). If the check was originally received 
``free,'' that is, without a charge for the check, the bank incorrectly 
receiving the check would have to return the check, without a charge,

[[Page 940]]

to the bank from which it came. The bank to which the returned check was 
misrouted is required to act promptly but is not required to meet the 
expeditious return requirements of Sec. 229.31(a); however, it must act 
within its midnight deadline. This paragraph does not affect a bank's 
duties under Sec. 229.35(b).

                          D. 229.32(d) Charges

    1. This paragraph prohibits a depositary bank from charging the 
equivalent of a presentment fee for returned checks. A returning bank, 
however, may charge a fee for handling returned checks. If the returning 
bank receives a mixed cash letter of returned checks, which includes 
some checks for which the returning bank also is the depositary bank, 
the fee may be applied to all the returned checks in the cash letter. In 
the case of a sorted cash letter containing only returned checks for 
which the returning bank is the depositary bank, however, no fee may be 
charged.

                XIX. Section 229.33 Notice of Nonpayment

                        A. 229.33(a) Requirement

    1. Notice of nonpayment as required by this section and written 
notice in lieu of return as provided in Sec. Sec. 229.30(f) and 
229.31(f) serve different functions. The two kinds of notice, however, 
must meet the content requirements of this section. The paying bank must 
send a notice of nonpayment if it decides not to pay a check of $2,500 
or more. A paying bank may rely on an amount encoded on the check in 
magnetic ink to determine whether the check is in the amount of $2,500 
or more. The notice of nonpayment carries no value, and the check itself 
(or the notice in lieu of return) must be returned. The paying bank must 
ensure that the notice of nonpayment is received by the depositary bank 
by 4:00 p.m. local time on the second business day following 
presentment. A bank identified by routing number as the paying bank is 
considered the paying bank under this regulation and would be required 
to create a notice of nonpayment even though that bank determined that 
the check was not drawn by a customer of that bank. (See Commentary to 
the definition of paying bank in Sec. 229.2(z).)
    2. The paying bank should not send a notice of nonpayment until it 
has finally determined not to pay the check. Under Sec. 229.34(b), by 
sending the notice the paying bank warrants that it has returned or will 
return the check. If a paying bank sends a notice and subsequently 
decides to pay the check, the paying bank may mitigate its liability on 
this warranty by notifying the depositary bank that the check has been 
paid.
    3. Because the return of the check itself may serve as the required 
notice of nonpayment, in many cases no notice other than the return of 
the check will be necessary. For example, in many cases the return of a 
check through a clearinghouse to another participant of the 
clearinghouse will be made in time to meet the time requirements of this 
section. If the check normally will not be received by the depositary 
bank within the time limits for notice, the return of the check will not 
satisfy the notice requirement. In determining whether the returned 
check will satisfy the notice requirement, the paying bank may rely on 
the availability schedules of returning banks as the time that the 
returned check is expected to be delivered to the depositary bank, 
unless the paying bank has reason to know the availability schedules are 
inaccurate.
    4. Unless the returned check is used to satisfy the notice 
requirement, the requirement for notice is independent of and does not 
affect the requirements for timely and expeditious return of the check 
under Sec. 229.30 and the U.C.C. (See Sec. 229.30(a).) If a paying 
bank fails both to comply with this section and to comply with the 
requirements for timely and expeditious return under Sec. 229.30 and 
the U.C.C. and Regulation J (12 CFR part 210), the paying bank shall be 
liable under either this section or such other requirements, but not 
both. (See Sec. 229.38(b).) A paying bank is not responsible for 
failure to give notice of nonpayment to a party that has breached a 
presentment warranty under U.C.C. 4-208, notwithstanding that the paying 
bank may have returned the check. (See U.C.C. 4-208 and 4-302.)

                     B. 229.33(b) Content of Notices

    1. This paragraph provides that the notice must at a minimum contain 
eight elements which are specifically enumerated. In the case of written 
notices, the name and routing number of the depositary bank also are 
required.
    2. If the paying bank cannot identify the depositary bank from the 
check itself, it may wish to send the notice to the earliest collecting 
bank it can identify and indicate that the notice is not being sent to 
the depositary bank. The collecting bank may be able to identify the 
depositary bank and forward the notice, but is under no duty to do so. 
In addition, the collecting bank may actually be the depositary bank.
    3. A bank must identify an item of information if the bank is 
uncertain as to that item's accuracy. A bank may make this 
identification by setting the item off with question marks, asterisks, 
or other symbols designated for this purpose by generally applicable 
industry standards.

                    C. 229.33(c) Acceptance of Notice

    1. In the case of a written notice, the depositary bank is required 
to accept notices at the locations specified in Sec. 229.32(a). In the 
case of telephone notices, the bank may not

[[Page 941]]

refuse to accept notices at the telephone numbers identified in this 
section, but may transfer calls or use a recording device. Banks may 
vary by agreement the location and manner in which notices are received.

                  D. 229.33(d) Notification to Customer

    1. This paragraph requires a depositary bank to notify its customer 
of nonpayment upon receipt of a returned check or notice of nonpayment, 
regardless of the amount of the check or notice. This requirement is 
similar to the requirement under the U.C.C. as interpreted in Appliance 
Buyers Credit Corp. v. Prospect National Bank, 708 F.2d 290 (7th Cir. 
1983), that a depositary bank may be liable for damages incurred by its 
customer for its failure to give its customer timely advice that it has 
received a notice of nonpayment. Notice also must be given if a 
depositary bank receives a notice of recovery under Sec. 229.35(b). A 
bank that chooses to provide the notice required by Sec. 229.33(d) in 
writing may send the notice by e-mail or facsimile if the bank sends the 
notice to the e-mail address or facsimile number specified by the 
customer for that purpose. The notice to the customer required under 
this paragraph also may satisfy the notice requirement of Sec. 
229.13(g) if the depositary bank invokes the reasonable-cause exception 
of Sec. 229.13(e) due to the receipt of a notice of nonpayment, 
provided the notice meets all the requirements of Sec. 229.13(g).

                      XX. Section 229.34 Warranties

                 A. 229.34(a) Warranty of Returned Check

    1. This paragraph includes warranties that a returned check, 
including a notice in lieu of return, was returned by the paying bank, 
or in the case of a check payable by a bank and payable through another 
bank, the bank by which the check is payable, within the deadline under 
the U.C.C. (subject to any claims or defenses under the U.C.C., such as 
breach of a presentment warranty), Regulation J (12 CFR part 210), or 
Sec. 229.30(c); that the paying or returning bank is authorized to 
return the check; that the returned check has not been materially 
altered; and that, in the case of a notice in lieu of return, the 
original check has not been and will not be returned for payment. (See 
the Commentary to Sec. 229.30(f).) The warranty does not include a 
warranty that the bank complied with the expeditious return requirements 
of Sec. Sec. 229.30(a) and 229.31(a). These warranties do not apply to 
checks drawn on the United States Treasury, to U.S. Postal Service money 
orders, or to checks drawn on a state or a unit of general local 
government that are not payable through or at a bank. (See Sec. 
229.42.)

              B. 229.34(b) Warranty of Notice of Nonpayment

    1. This paragraph provides for warranties for notices of nonpayment. 
This warranty does not include a warranty that the notice is accurate 
and timely under Sec. 229.33. The requirements of Sec. 229.33 that are 
not covered by the warranty are subject to the liability provisions of 
Sec. 229.38. These warranties are designed to give the depositary bank 
more confidence in relying on notices of nonpayment. This paragraph 
imposes liability on a paying bank that gives notice of nonpayment and 
then subsequently returns the check. (See Commentary on Sec. 
229.33(a).)

    C. 229.34(c) Warranty of Settlement Amount, Encoding, and Offset

    1. Paragraph (c)(1) provides that a bank that presents and receives 
settlement for checks warrants to the paying bank that the settlement it 
demands (e.g., as noted on the cash letter) equals the total amount of 
the checks it presents. This paragraph gives the paying bank a warranty 
claim against the presenting bank for the amount of any excess 
settlement made on the basis of the amount demanded, plus expenses. If 
the amount demanded is understated, a paying bank discharges its 
settlement obligation under U.C.C. 4-301 by paying the amount demanded, 
but remains liable for the amount by which the demand is understated; 
the presenting bank is nevertheless liable for expenses in resolving the 
adjustment.
    2. When checks or returned checks are transferred to a collecting, 
returning, or depositary bank, the transferor bank is not required to 
demand settlement, as is required upon presentment to the paying bank. 
However, often the checks or returned checks will be accompanied by 
information (such as a cash letter listing) that will indicate the total 
of the checks or returned checks. Paragraph (c)(2) provides that if the 
transferor bank includes information indicating the total amount of 
checks or returned checks transferred, it warrants that the information 
is correct (i.e., equals the actual total of the items).
    3. Paragraph (c)(3) provides that a bank that presents or transfers 
a check or returned check warrants the accuracy of the magnetic ink 
encoding that was placed on the item after issue, and that exists at the 
time of presentment or transfer, to any bank that subsequently handles 
the check or returned check. Under U.C.C. 4-209(a), only the encoder (or 
the encoder and the depositary bank, if the encoder is a customer of the 
depositary bank) warrants the encoding accuracy, thus any claims on the 
warranty must be directed to the encoder. Paragraph (c)(3) expands on 
the U.C.C. by providing that all banks that transfer or present a check 
or returned check make the encoding warranty.

[[Page 942]]

In addition, under the U.C.C., the encoder makes the warranty to 
subsequent collecting banks and the paying bank, while paragraph (c)(3) 
provides that the warranty is made to banks in the return chain as well. 
Paragraph (c)(3) applies to all MICR-line encoding on a substitute 
check.
    4. A paying bank that settles for an overstated cash letter because 
of a misencoded check may make a warranty claim against the presenting 
bank under paragraph (c)(1) (which would require the paying bank to show 
that the check was part of the overstated cash letter) or an encoding 
warranty claim under paragraph (c)(3) against the presenting bank or any 
preceding bank that handled the misencoded check.
    5. Paragraph (c)(4) provides that a paying bank or a depositary bank 
may set off excess settlement paid to another bank against settlement 
owed to that bank for checks presented or returned checks received (for 
which it is the depositary bank) subsequent to the excess settlement.

            D. 229.34(d) Transfer and Presentment Warranties

    1. A bank that transfers or presents a remotely created check and 
receives a settlement or other consideration warrants that the person on 
whose account the check is drawn authorized the issuance of the check in 
the amount stated on the check and to the payee stated on the check. The 
warranties are given only by banks and only to subsequent banks in the 
collection chain. The warranties ultimately shift liability for the loss 
created by an unauthorized remotely created check to the depositary 
bank. The depositary bank cannot assert the transfer and presentment 
warranties against a depositor. However, a depositary bank may, by 
agreement, allocate liability for such an item to the depositor and also 
may have a claim under other laws against that person.
    2. The transfer and presentment warranties for remotely created 
checks supplement the Federal Trade Commission's Telemarketing Sales 
Rule, which requires telemarketers that submit checks for payment to 
obtain the customer's ``express verifiable authorization'' (the 
authorization may be either in writing or tape recorded and must be made 
available upon request to the customer's bank). 16 CFR 310.3(a)(3). The 
transfer and presentment warranties shift liability to the depositary 
bank only when the remotely created check is unauthorized, and would not 
apply when the customer initially authorizes a check but then 
experiences ``buyer's remorse'' and subsequently tries to revoke the 
authorization by asserting a claim against the paying bank under U.C.C. 
4-401. If the depositary bank suspects ``buyer's remorse,'' it may 
obtain from its customer the express verifiable authorization of the 
check by the paying bank's customer, required under the Federal Trade 
Commission's Telemarketing Sales Rule, and use that authorization as a 
defense to the warranty claim.
    3. The scope of the transfer and presentment warranties for remotely 
created checks differs from that of the corresponding U.C.C. warranty 
provisions in two respects. The U.C.C. warranties differ from the Sec. 
229.34(d) warranties in that they are given by any person, including a 
nonbank depositor, that transfers a remotely created check and not just 
to a bank, as is the case under Sec. 229.34(d). In addition, the U.C.C. 
warranties state that the person on whose account the item is drawn 
authorized the issuance of the item in the amount for which the item is 
drawn. The Sec. 229.34(d) warranties specifically cover the amount as 
well as the payee stated on the check. Neither the U.C.C. warranties, 
nor the Sec. 229.34(d) warranties apply to the date stated on the 
remotely created check.
    4. A bank making the Sec. 229.34(d) warranties may defend a claim 
asserting violation of the warranties by proving that the customer of 
the paying bank is precluded by U.C.C. 4-406 from making a claim against 
the paying bank. This may be the case, for example, if the customer 
failed to discover the unauthorized remotely created check in a timely 
manner.
    5. The transfer and presentment warranties for a remotely created 
check apply to a remotely created check that has been reconverted to a 
substitute check.

                          E. 229.34(d) Damages

    1. This paragraph adopts for the warranties in Sec. 229.34 (a), 
(b), and (c) the damages provided in U.C.C. 4-207(c) and 4A-506(b). (See 
definition of interest compensation in Sec. 229.2(oo).)

                     F. 229.34(e) Tender of Defense

    1. This paragraph adopts for this regulation the vouching-in 
provisions of U.C.C. 3-119.

                      G. 229.34(f) Notice of Claim

    1. This paragraph adopts the notice provisions of U.C.C. sections 4-
207(d) and 4-208(e). The time limit set forth in this paragraph applies 
to notices of claims for warranty breaches only. As provided in Sec. 
229.38(g), all actions under this section must be brought within one 
year after the date of the occurrence of the violation involved.

                    XXI. Section 229.35 Indorsements

                   A. 229.35(a) Indorsement Standards

    1. This section and appendix D require banks to use a standard form 
of indorsement when indorsing checks during the forward collection and 
return process. The standard provides for indorsements by all collecting 
and returning banks, plus a unique standard

[[Page 943]]

for depositary bank indorsements. It is designed to facilitate the 
identification of the depositary bank and the prompt return of checks. 
The regulation places a duty on banks to ensure that their indorsements 
can be interpreted by any person. The indorsement standard specifies the 
information each indorsement must contain and its location and ink 
color.
    2. Banks generally apply indorsements to a paper check in one of two 
ways: (1) banks print or ``spray'' indorsements onto a check when the 
check is processed through the banks'' automated check sorters 
(regardless of whether the checks are original checks or substitute 
checks), and (2) reconverting banks print or ``overlay'' previously 
applied electronic indorsements and their own indorsements and 
identifications onto a substitute check at the time that the substitute 
check is created. If a subsequent substitute check is created in the 
course of collection or return, that substitute check will contain, in 
its image of the back of the previous substitute check, reproductions of 
indorsements that were sprayed or overlaid onto the previous item. For 
purposes of the indorsement standard set forth in appendix D, a 
reproduction of a previously applied sprayed or overlaid indorsement 
contained within an image of a check does not constitute ``an 
indorsement that previously was applied electronically.'' To accommodate 
these two indorsement scenarios, the appendix includes two indorsement 
location specifications: one standard applies to banks spraying 
indorsements onto existing paper original checks and substitute checks, 
and another applies to reconverting banks overlaying indorsements that 
previously were applied electronically and their own indorsements onto 
substitute checks at the time the substitute checks are created.
    3. A bank might use check processing equipment that captures an 
image of a check prior to spraying an indorsement onto that item. If the 
bank truncates that item, it should ensure that it also applies an 
indorsement to the item electronically. A reconverting bank satisfies 
its obligation to preserve all previously applied indorsements by 
overlaying a bank's indorsement that previously was applied 
electronically onto a substitute check that the reconverting bank 
creates.
    4. The location of an indorsement applied to an original paper check 
in accordance with appendix D may shift if that check is truncated and 
later reconverted to a substitute check. If an indorsement applied to 
the original check in accordance with appendix D is overwritten by a 
subsequent indorsement applied to the substitute check in accordance 
with appendix D, then one or both of those indorsements could be 
rendered illegible. As explained in Sec. 229.38(d) and the commentary 
thereto, a reconverting bank is liable for losses associated with 
indorsements that are rendered illegible as a result of check 
substitution.
    5. To ensure that indorsements can be easily read and would remain 
legible after an image of a check is captured, the standard requires all 
indorsements applied to original checks and substitute checks to be 
printed in black ink as of January 1, 2006.
    6. The standard requires the depositary bank's indorsement to 
include (1) its nine-digit routing number set off by an arrow at each 
end of the routing number and, if the depositary bank is a reconverting 
bank with respect to the check, an asterisk outside the arrow at each 
end of the routing number to identify the bank as a reconverting bank; 
(2) the indorsement date; and (3) if the indorsement is applied 
physically, name or location information. The standard also permits but 
does not require the indorsement to include other identifying 
information. The standard requires a collecting bank's or returning 
bank's indorsement to include only (1) the bank's nine digit routing 
number (without arrows) and, if the collecting bank or returning bank is 
a reconverting bank with respect to the check, an asterisk at each end 
of the number to identify the bank as a reconverting bank, (2) the 
indorsement date, and (3) an optional trace or sequence number.
    7. Depositary banks should not include information that can be 
confused with required information. For example, a nine-digit zip code 
could be confused with the nine-digit routing number.
    8. A depositary bank may want to include an address in its 
indorsement in order to limit the number of locations at which it must 
receive returned checks. In instances where this address is not 
consistent with the routing number in the indorsement, the depositary 
bank is required to receive returned checks at a branch or head office 
consistent with the routing number. Banks should note, however, that 
Sec. 229.32 requires a depositary bank to receive returned checks at 
the location(s) at which it receives forward-collection checks.
    9. In addition to indorsing a substitute check in accordance with 
appendix D, a reconverting bank must identify itself and the truncating 
bank by applying its routing number and the routing number of the 
truncating bank to the front of the check in accordance with appendix D 
and ANS X9.100-140. Further, if the reconverting bank is the paying 
bank, it also must identify itself by applying its routing number to the 
back of the check in accordance with appendix D. In these instances, the 
reconverting bank and truncating bank routing numbers are for 
identification purposes only and are not indorsements or acceptances.
    10. Under the U.C.C., a specific guarantee of prior indorsement is 
not necessary. (See

[[Page 944]]

U.C.C. 4-207(a) and 4-208(a).) Use of guarantee language in 
indorsements, such as ``P.E.G.'' (``prior endorsements guaranteed''), 
may result in reducing the type size used in bank indorsements, thereby 
making them more difficult to read. Use of this language may make it 
more difficult for other banks to identify the depositary bank. 
Subsequent collecting bank indorsements may not include this language.
    11. If the bank maintaining the account into which a check is 
deposited agrees with another bank (a correspondent, ATM operator, or 
lock box operator) to have the other bank accept returns and notices of 
nonpayment for the bank of account, the indorsement placed on the check 
as the depositary bank indorsement may be the indorsement of the bank 
that acts as correspondent, ATM operator, or lock box operator as 
provided in paragraph (d) of this section.
    12. The backs of many checks bear pre-printed information or blacked 
out areas for various reasons. For example, some checks are printed with 
a carbon band across the back that allows the transfer of information 
from the check to a ledger with one writing. Also, contracts or loan 
agreements are printed on certain checks. Other checks that are mailed 
to recipients may contain areas on the back that are blacked out so that 
they may not be read through the mailer. On the deposit side, the payee 
of the check may place its indorsement or information identifying the 
drawer of the check in the area specified for the depositary bank 
indorsement, thus making the depositary bank indorsement unreadable.
    13. The indorsement standard does not prohibit the use of a carbon 
band or other printed or written matter on the backs of checks and does 
not require banks to avoid placing their indorsements in these areas. 
Nevertheless, checks will be handled more efficiently if depositary 
banks design indorsement stamps so that the nine-digit routing number 
avoids the carbon band area. Indorsing parties other than banks, e.g., 
corporations, will benefit from the faster return of checks if they 
protect the identifiability and legibility of the depositary bank 
indorsement by staying clear of the area reserved for the depositary 
bank indorsement.
    14. Section 229.38(d) allocates responsibility for loss resulting 
from a delay in return of a check due to indorsements that are 
unreadable because of material on the back of the check. The depositary 
bank is responsible for a loss resulting from a delay in return caused 
by the condition of the check arising after its issuance until its 
acceptance by the depositary bank that made the depositary bank's 
indorsement illegible. The paying bank is responsible for loss resulting 
from a delay in return caused by indorsements that are not readable 
because of other material on the back of the check at the time that it 
was issued. Depositary and paying banks may shift these risks to their 
customers by agreement.
    15. The standard does not require the paying bank to indorse the 
check; however, if a paying bank does indorse a check that is returned, 
it should follow the indorsement standard for collecting banks and 
returning banks. The standard requires collecting and returning banks to 
indorse the check for tracing purposes. With respect to the 
identification of a paying bank that is also a reconverting bank, see 
the commentary to Sec. 229.51(b)(2).

              B. 229.35(b) Liability of Bank Handling Check

    1. When a check is sent for forward collection, the collection 
process results in a chain of indorsements extending from the depositary 
bank through any subsequent collecting banks to the paying bank. This 
section extends the indorsement chain through the paying bank to the 
returning banks, and would permit each bank to recover from any prior 
indorser if the claimant bank does not receive payment for the check 
from a subsequent bank in the collection or return chain. For example, 
if a returning bank returned a check to an insolvent depositary bank, 
and did not receive the full amount of the check from the failed bank, 
the returning bank could obtain the unrecovered amount of the check from 
any bank prior to it in the collection and return chain including the 
paying bank. Because each bank in the collection and return chain could 
recover from a prior bank, any loss would fall on the first collecting 
bank that received the check from the depositary bank. To avoid circuity 
of actions, the returning bank could recover directly from the first 
collecting bank. Under the U.C.C., the first collecting bank might 
ultimately recover from the depositary bank's customer or from the other 
parties on the check.
    2. Where a check is returned through the same banks used for the 
forward collection of the check, priority during the forward collection 
process controls over priority in the return process for the purpose of 
determining prior and subsequent banks under this regulation.
    3. Where a returning bank is insolvent and fails to pay the paying 
bank or a prior returning bank for a returned check, Sec. 229.39(a) 
requires the receiver of the failed bank to return the check to the bank 
that transferred the check to the failed bank. That bank then either 
could continue the return to the depositary bank or recover based on 
this paragraph. Where the paying bank is insolvent, and fails to pay the 
collecting bank, the collecting bank also could recover from a prior 
collecting bank under this paragraph, and the bank from which it 
recovered could in turn recover from its prior collecting bank

[[Page 945]]

until the loss settled on the depositary bank (which could recover from 
its customer).
    4. A bank is not required to make a claim against an insolvent bank 
before exercising its right to recovery under this paragraph. Recovery 
may be made by charge-back or by other means. This right of recovery 
also is permitted even where nonpayment of the check is the result of 
the claiming bank's negligence such as failure to make expeditious 
return, but the claiming bank remains liable for its negligence under 
Sec. 229.38.
    5. This liability is imposed on a bank handling a check for 
collection or return regardless of whether the bank's indorsement 
appears on the check. Notice must be sent under this paragraph to a 
prior bank from which recovery is sought reasonably promptly after a 
bank learns that it did not receive payment from another bank, and 
learns the identity of the prior bank. Written notice reasonably 
identifying the check and the basis for recovery is sufficient if the 
check is not available. Receipt of notice by the bank against which the 
claim is made is not a precondition to recovery by charge-back or other 
means; however, a bank may be liable for negligence for failure to 
provide timely notice. A paying or returning bank also may recover from 
a prior collecting bank as provided in Sec. Sec. 229.30(b) and 
229.31(b). This provision is not a substitute for a paying or returning 
bank making expeditious return under Sec. Sec. 229.30(a) or 229.31(b). 
This paragraph does not affect a paying bank's accountability for a 
check under U.C.C. 4-215(a) and 4-302. Nor does this paragraph affect a 
collecting bank's accountability under U.C.C. 4-213 and 4-215(d). A 
collecting bank becomes accountable upon receipt of final settlement as 
provided in the foregoing U.C.C. sections. The term final settlement in 
Sec. Sec. 229.31 (c), 229.32 (b), and 229.36(d) is intended to be 
consistent with the use of the term final settlement in the U.C.C. 
(e.g., U.C.C. 4-213, 4-214, and 4-215). (See also Sec. 229.2(cc) and 
Commentary.)
    6. This paragraph also provides that a bank may have the rights of a 
holder based on the handling of the check for collection or return. A 
bank may become a holder or a holder in due course regardless of whether 
prior banks have complied with the indorsement standard in Sec. 
229.35(a) and appendix D.
    7. This paragraph affects the following provisions of the U.C.C., 
and may affect other provisions:
    a. Section 4-214(a), in that the right to recovery is not based on 
provisional settlement, and recovery may be had from any prior bank. 
Section 4-214(a) would continue to permit a depositary bank to recover a 
provisional settlement from its customer. (See Sec. 229.33(d).)
    b. Section 3-415 and related provisions (such as section 3-503), in 
that such provisions would not apply as between banks, or as between the 
depositary bank and its customer.

                    C. 229.35(c) Indorsement by Bank

    1. This section protects the rights of a customer depositing a check 
in a bank without requiring the words ``pay any bank,'' as required by 
the U.C.C. (See U.C.C. 4-201(b).) Use of this language in a depositary 
bank's indorsement will make it more difficult for other banks to 
identify the depositary bank. The indorsement standard in appendix D 
prohibits such material in subsequent collecting bank indorsements. The 
existence of a bank indorsement provides notice of the restrictive 
indorsement without any additional words.

              D. 229.35(d) Indorsement for Depositary Bank

    1. This section permits a depositary bank to arrange with another 
bank to indorse checks. This practice may occur when a correspondent 
indorses for a respondent, or when the bank servicing an ATM or lock box 
indorses for the bank maintaining the account in which the check is 
deposited--i.e., the depositary bank. If the indorsing bank applies the 
depositary bank's indorsement, checks will be returned to the depositary 
bank. If the indorsing bank does not apply the depositary bank's 
indorsement, by agreement with the depositary bank it may apply its own 
indorsement as the depositary bank indorsement. In that case, the 
depositary bank's own indorsement on the check (if any) should avoid the 
location reserved for the depositary bank. The actual depositary bank 
remains responsible for the availability and other requirements of 
Subpart B, but the bank indorsing as depositary bank is considered the 
depositary bank for purposes of Subpart C. The check will be returned, 
and notice of nonpayment will be given, to the bank indorsing as 
depositary bank.
    2. Because the depositary bank for Subpart B purposes will desire 
prompt notice of nonpayment, its arrangement with the indorsing bank 
should provide for prompt notice of nonpayment. The bank indorsing as 
depositary bank may require the depositary bank to agree to take up the 
check if the check is not paid even if the depositary bank's indorsement 
does not appear on the check and it did not handle the check. The 
arrangement between the banks may constitute an agreement varying the 
effect of provisions of Subpart C under Sec. 229.37.

         XXII. Section 229.36 Presentment and Issuance of Checks

           A. 229.36(a) Payable Through and Payable at Checks

    1. For purposes of Subpart C, the regulation defines a payable-
through or payable-at

[[Page 946]]

bank (which could be designated the collectible-through or collectible-
at bank) as a paying bank. The requirements of Sec. 229.30(a) and the 
notice of nonpayment requirements of Sec. 229.33 are imposed on a 
payable-through or payable-at bank and are based on the time of receipt 
of the forward collection check by the payable-through or payable-at 
bank. This provision is intended to speed the return of checks that are 
payable through or at a bank to the depositary bank.

        B. 229.36(b) Receipt at Bank Office or Processing Center

    1. This paragraph seeks to facilitate efficient presentment of 
checks to promote early return or notice of nonpayment to the depositary 
bank and clarifies the law as to the effect of presentment by routing 
number. This paragraph differs from Sec. 229.32(a) because presentment 
of checks differs from delivery of returned checks.
    2. The paragraph specifies four locations at which the paying bank 
must accept presentment of checks. Where the check is payable through a 
bank and the check is sent to that bank, the payable-through bank is the 
paying bank for purposes of this subpart, regardless of whether the 
paying bank must present the check to another bank or to a nonbank payor 
for payment.
    a. Delivery of checks may be made, and presentment is considered to 
occur, at a location (including a processing center) requested by the 
paying bank. This is the way most checks are presented by banks today. 
This provision adopts the common law rule of a number of legal decisions 
that the processing center acts as the agent of the paying bank to 
accept presentment and to begin the time for processing of the check. 
(See also U.C.C. 4-204(c).) If a bank designates different locations for 
the presentment of forward collection checks bearing different routing 
numbers, for purposes of this paragraph it requests presentment of 
checks bearing a particular routing number only at the location 
designated for receipt of forward collection checks bearing that routing 
number.
    b. i. Delivery may be made at an office of the bank associated with 
the routing number on the check. The office associated with the routing 
number of a bank is found in American Bankers Association Key to Routing 
Numbers, published by an agent of the American Bankers Association, 
which lists a city and state address for each routing number. Checks 
generally are handled by collecting banks on the basis of the nine-digit 
routing number encoded in magnetic ink (or on the basis of the 
fractional form routing number if the magnetic ink characters are 
obliterated) on the check, rather than the printed name or address. The 
definition of a paying bank in Sec. 229.2(z) includes a bank designated 
by routing number, whether or not there is a name on the check, and 
whether or not any name is consistent with the routing number. Where a 
check is payable by one bank, but payable through another, the routing 
number is that of the payable-through bank, not that of the payor bank. 
As the payor bank has selected the payable-through bank as the point 
through which presentment is to be made, it is proper to treat the 
payable-through bank as the paying bank for purposes of this section.
    ii. There is no requirement in the regulation that the name and 
address on the check agree with the address associated with the routing 
number on the check. A bank generally may control the use of its routing 
number, just as it does the use of its name. The address associated with 
the routing number may be a processing center.
    iii. In some cases, a paying bank may have several offices in the 
city associated with the routing number. In such case, it would not be 
reasonable or efficient to require the presenting bank to sort the 
checks by more specific branch addresses that might be printed on the 
checks, and to deliver the checks to each branch. A collecting bank 
normally would deliver all checks to one location. In cases where checks 
are delivered to a branch other than the branch on which they may be 
drawn, computer and courier communication among branches should permit 
the paying bank to determine quickly whether to pay the check.
    c. If the check specifies the name of the paying bank but no 
address, the bank must accept delivery at any office. Where delivery is 
made by a person other than a bank, or where the routing number is not 
readable, delivery will be made based on the name and address of the 
paying bank on the check. If there is no address, delivery may be made 
at any office of the paying bank. This provision is consistent with 
U.C.C. 3-111, which states that presentment for payment may be made at 
the place specified in the instrument, or, if there is none, at the 
place of business of the party to pay. Thus, there is a trade-off for a 
paying bank between specifying a particular address on a check to limit 
locations of delivery, and simply stating the name of the bank to 
encourage wider currency for the check.
    d. If the check specifies the name and address of a branch or head 
office, or other location (such as a processing center), the check may 
be delivered by delivery to that office or other location. If the 
address is too general to identify a particular office, delivery may be 
made at any office consistent with the address. For example, if the 
address is ``San Francisco, California,'' each office in San Francisco 
must accept presentment. The designation of an address on the check 
generally is in the control of the paying bank.

[[Page 947]]

    3. This paragraph may affect U.C.C. 3-111 to the extent that the 
U.C.C. requires presentment to occur at a place specified in the 
instrument.

                              C. [Reserved]

        D. 229.36(d) Liability of Bank During Forward Collection

    1. This paragraph makes settlement between banks during forward 
collection final when made, subject to any deferment of credit, just as 
settlements between banks during the return of checks are final. In 
addition, this paragraph clarifies that this change does not affect the 
liability scheme under U.C.C. 4-201 during forward collection of a 
check. That U.C.C. section provides that, unless a contrary intent 
clearly appears, a bank is an agent or subagent of the owner of a check, 
but that Article 4 of the U.C.C. applies even though a bank may have 
purchased an item and is the owner of it. This paragraph preserves the 
liability of a collecting bank to prior collecting banks and the 
depositary bank's customer for negligence during the forward collection 
of a check under the U.C.C., even though this paragraph provides that 
settlement between banks during forward collection is final rather than 
provisional. Settlement by a paying bank is not considered to be final 
payment for the purposes of U.C.C. 4-215(a)(2) or (3), because a paying 
bank has the right to recover settlement from a returning or depositary 
bank to which it returns a check under this subpart. Other provisions of 
the U.C.C. not superseded by this subpart, such as section 4-202, also 
continue to apply to the forward collection of a check and may apply to 
the return of a check. (See definition of returning bank in Sec. 
229.2(cc).)

             E. 229.36(e) Issuance of Payable Through Checks

    1. If a bank arranges for checks payable by it to be payable through 
another bank, it must require its customers to use checks that contain 
conspicuously on their face the name, location, and first four digits of 
the nine-digit routing number of the bank by which the check is payable 
and the legend ``payable through'' followed by the name of the payable-
through bank. The first four digits of the nine-digit routing number and 
the location of the bank by which the check is payable must be 
associated with the same check processing region. (This section does not 
affect Sec. 229.36(b).) The required information is deemed conspicuous 
if it is printed in a type size not smaller than six-point type and if 
it is contained in the title plate, which is located in the lower left 
quadrant of the check. The required information may be conspicuous if it 
is located elsewhere on the check.
    2. If a payable-through check does not meet the requirements of this 
paragraph, the bank by which the check is payable may be liable to the 
depositary bank or others as provided in Sec. 229.38. For example, a 
bank by which a payable-through check is payable could be liable to a 
depositary bank that suffers a loss, such as lost interest or liability 
under Subpart B, that would not have occurred had the check met the 
requirements of this paragraph. Similarly, a bank may be liable under 
Sec. 229.38 if a check payable by it that is not payable through 
another bank is labeled as provided in this section. For example, a bank 
that holds checking accounts and processes checks at a central location 
but has widely-dispersed branches may be liable under this section if it 
labels all of its checks as ``payable through'' a single branch and 
includes the name, address, and four-digit routing symbol of another 
branch. These checks would not be payable through another bank and 
should not be labeled as payable-through checks. (All of a bank's 
offices within the United States are considered part of the same bank; 
see Sec. 229.2(e).) In this example, the bank by which the checks are 
payable could be liable to a depositary bank that suffers a loss, such 
as lost interest or liability under Subpart B, due to the mislabeled 
check. The bank by which the check is payable may be liable for 
additional damages if it fails to act in good faith.

                    F. 229.36(f) Same-Day Settlement

    1. This paragraph provides that, under certain conditions, a paying 
bank must settle with a presenting bank for a check on the same day the 
check is presented in order to avail itself of the ability to return the 
check on its next banking day under U.C.C. 4-301 and 4-302. This 
paragraph does not apply to checks presented for immediate payment over 
the counter. Settling for a check under this paragraph does not 
constitute final payment of the check under the U.C.C. This paragraph 
does not supersede or limit the rules governing collection and return of 
checks through Federal Reserve Banks that are contained in Subpart A of 
Regulation J (12 CFR part 210).
    2. Presentment requirements.
    a. Location and time.
    i. For presented checks to qualify for mandatory same-day 
settlement, information accompanying the checks must indicate that 
presentment is being made under this paragraph--e.g. ``these checks are 
being presented for same-day settlement''--and must include a demand for 
payment of the total amount of the checks together with appropriate 
payment instructions in order to enable the paying bank to discharge its 
settlement responsibilities under this paragraph. In addition, the check 
or checks must be presented at a location designated by the paying bank 
for receipt of checks for same-day

[[Page 948]]

settlement by 8:00 a.m. local time of that location. The designated 
presentment location must be a location at which the paying bank would 
be considered to have received a check under Sec. 229.36(b). The paying 
bank may not designate a location solely for presentment of checks 
subject to settlement under this paragraph; by designating a location 
for the purposes of Sec. 229.36(f), the paying bank agrees to accept 
checks at that location for the purposes of Sec. 229.36(b).
    ii. The designated presentment location also must be within the 
check processing region consistent with the nine-digit routing number 
encoded in magnetic ink on the check. A paying bank that uses more than 
one routing number associated with a single check processing region may 
designate, for purposes of this paragraph, one or more locations in that 
check processing region at which checks will be accepted, but the paying 
bank must accept any checks with a routing number associated with that 
check processing region at each designated location. A paying bank may 
designate a presentment location for traveler's checks with an 8000-
series routing number anywhere in the country because these traveler's 
checks are not associated with any check processing region. The paying 
bank, however, must accept at that presentment location any other checks 
for which it is paying bank that have a routing number consistent with 
the check processing region of that location.
    iii. If the paying bank does not designate a presentment location, 
it must accept presentment for same-day settlement at any location 
identified in Sec. 229.36(b), i.e., at an address of the bank 
associated with the routing number on the check, at any branch or head 
office if the bank is identified on the check by name without address, 
or at a branch, head office, or other location consistent with the name 
and address of the bank on the check if the bank is identified on the 
check by name and address. A paying bank and a presenting bank may agree 
that checks will be accepted for same-day settlement at an alternative 
location (e.g., at an intercept processor located in a different check 
processing region) or that the cut-off time for same-day settlement be 
earlier or later than 8:00 a.m. local time.
    iv. In the case of a check payable through a bank but payable by 
another bank, this paragraph does not authorize direct presentment to 
the bank by which the check is payable. The requirements of same-day 
settlement under this paragraph would apply to a payable-through or 
payable-at bank to which the check is sent for payment or collection.
    b. Reasonable delivery requirements. A check is considered presented 
when it is delivered to and payment is demanded at a location specified 
in paragraph (f)(1). Ordinarily, a presenting bank will find it 
necessary to contact the paying bank to determine the appropriate 
presentment location and any delivery instructions. Further, because 
presentment might not take place during the paying bank's banking day, a 
paying bank may establish reasonable delivery requirements to safeguard 
the checks presented, such as use of a night depository. If a presenting 
bank fails to follow reasonable delivery requirements established by the 
paying bank, it runs the risk that it will not have presented the 
checks. However, if no reasonable delivery requirements are established 
or if the paying bank does not make provisions for accepting delivery of 
checks during its non-business hours, leaving the checks at the 
presentment location constitutes effective presentment.
    c. Sorting of checks. A paying bank may require that checks 
presented to it for same-day settlement be sorted separately from other 
forward collection checks it receives as a collecting bank or returned 
checks it receives as a returning or depositary bank. For example, if a 
bank provides correspondent check collection services and receives 
unsorted checks from a respondent bank that include checks for which it 
is the paying bank and that would otherwise meet the requirements for 
same-day settlement under this section, the collecting bank need not 
make settlement in accordance with paragraph (f)(2). If the collecting 
bank receives sorted checks from its respondent bank, consisting only of 
checks for which the collecting bank is the paying bank and that meet 
the requirements for same-day settlement under this paragraph, the 
collecting bank may not charge a fee for handling those checks and must 
make settlement in accordance with this paragraph.
    3. Settlement
    a. If a bank presents a check in accordance with the time and 
location requirements for presentment under paragraph (f)(1), the paying 
bank either must settle for the check on the business day it receives 
the check without charging a presentment fee or return the check prior 
to the time for settlement. (This return deadline is subject to 
extension under Sec. 229.30(c).) The settlement must be in the form of 
a credit to an account designated by the presenting bank at a Federal 
Reserve Bank (e.g., a Fedwire transfer). The presenting bank may agree 
with the paying bank to accept settlement in another form (e.g., credit 
to an account of the presenting bank at the paying bank or debit to an 
account of the paying bank at the presenting bank). The settlement must 
occur by the close of Fedwire on the business day the check is received 
by the paying bank. Under the provisions of Sec. 229.34(c), a 
settlement owed to a presenting bank may be set off by adjustments for 
previous settlements with the presenting bank. (See also Sec. 
229.39(d).)
    b. Checks that are presented after the 8 a.m. (local time) 
presentment deadline for

[[Page 949]]

same-day settlement and before the paying bank's cut-off hour are 
treated as if they were presented under other applicable law and settled 
for or returned accordingly. However, for purposes of settlement only, 
the presenting bank may require the paying bank to treat such checks as 
presented for same-day settlement on the next business day in lieu of 
accepting settlement by cash or other means on the business day the 
checks are presented to the paying bank. Checks presented after the 
paying bank's cut-off hour or on non-business days, but otherwise in 
accordance with this paragraph, are considered presented for same-day 
settlement on the next business day.
    4. Closed Paying Bank
    a. There may be certain business days that are not banking days for 
the paying bank. Some paying banks may continue to settle for checks 
presented on these days (e.g., by opening their back office operations 
or by using an intercept processor). In other cases, a paying bank may 
be unable to settle for checks presented on a day it is closed.
    If the paying bank closes on a business day and checks are presented 
to the paying bank in accordance with paragraph (f)(1), the paying bank 
is accountable for the checks unless it settles for or returns the 
checks by the close of Fedwire on its next banking day. In addition, 
checks presented on a business day on which the paying bank is closed 
are considered received on the paying bank's next banking day for 
purposes of the U.C.C. midnight deadline (U.C.C. 4-301 and 4-302) and 
this regulation's expeditious return and notice of nonpayment 
provisions.
    b. If the paying bank is closed on a business day voluntarily, the 
paying bank must pay interest compensation, as defined in Sec. 
229.2(oo), to the presenting bank for the value of the float associated 
with the check from the day of the voluntary closing until the day of 
settlement. Interest compensation is not required in the case of an 
involuntary closing on a business day, such as a closing required by 
state law. In addition, if the paying bank is closed on a business day 
due to emergency conditions, settlement delays and interest compensation 
may be excused under Sec. 229.38(e) or U.C.C. 4-109(b).
    5. Good faith. Under Sec. 229.38(a), both presenting banks and 
paying banks are held to a standard of good faith, defined in Sec. 
229.2(nn) to mean honesty in fact and the observance of reasonable 
commercial standards of fair dealing. For example, designating a 
presentment location or changing presentment locations for the primary 
purpose of discouraging banks from presenting checks for same-day 
settlement might not be considered good faith on the part of the paying 
bank. Similarly, presenting a large volume of checks without prior 
notice could be viewed as not meeting reasonable commercial standards of 
fair dealing and therefore may not constitute presentment in good faith. 
In addition, if banks, in the general course of business, regularly 
agree to certain practices related to same-day settlement, it might not 
be considered consistent with reasonable commercial standards of fair 
dealing, and therefore might not be considered good faith, for a bank to 
refuse to agree to those practices if agreeing would not cause it harm.
    6. U.C.C. sections affected. This paragraph directly affects the 
following provisions of the U.C.C. and may affect other sections or 
provisions:
    a. Section 4-204(b)(1), in that a presenting bank may not send a 
check for same-day settlement directly to the paying bank, if the paying 
bank designates a different location in accordance with paragraph 
(f)(1).
    b. Section 4-213(a), in that the medium of settlement for checks 
presented under this paragraph is limited to a credit to an account at a 
Federal Reserve Bank and that, for checks presented after the deadline 
for same-day settlement and before the paying bank's cut-off hour, the 
presenting bank may require settlement on the next business day in 
accordance with this paragraph rather than accept settlement on the 
business day of presentment by cash.
    c. Section 4-301(a), in that, to preserve the ability to exercise 
deferred posting, the time limit specified in that section for 
settlement or return by a paying bank on the banking day a check is 
received is superseded by the requirement to settle for checks presented 
under this paragraph by the close of Fedwire.
    d. Section 4-302(a), in that, to avoid accountability, the time 
limit specified in that section for settlement or return by a paying 
bank on the banking day a check is received is superseded by the 
requirement to settle for checks presented under this paragraph by the 
close of Fedwire.

              XXIII. Section 229.37 Variations by Agreement

    A. This section is similar to U.C.C. 4-103, and permits consistent 
treatment of agreements varying Article 4 or Subpart C, given the 
substantial interrelationship of the two documents. To achieve 
consistency, the official comment to U.C.C. 4-103(a) (which in turn 
follows U.C.C. 1-201(3)) should be followed in construing this section. 
For example, as stated in Official Comment 2 to section 4-103, owners of 
items and other interested parties are not affected by agreements under 
this section unless they are parties to the agreement or are bound by 
adoption, ratification, estoppel, or the like. In particular, agreements 
varying this subpart that delay the return of a check beyond the times 
required by this subpart may result in liability under Sec. 229.38 to 
entities not party to the agreement.

[[Page 950]]

    B. The Board has not followed U.C.C. 4-103(b), which permits Federal 
Reserve regulations and operating letters, clearinghouse rules, and the 
like to apply to parties that have not specifically assented. 
Nevertheless, this section does not affect the status of such agreements 
under the U.C.C.
    C. The following are examples of situations where variation by 
agreement is permissible, subject to the limitations of this section:
    1. A depositary bank may authorize another bank to apply the other 
bank's indorsement to a check as the depositary bank. (See Sec. 
229.35(d).)
    2. A depositary bank may authorize returning banks to commingle 
qualified returned checks with forward collection checks. (See Sec. 
229.32(a).)
    3. A depositary bank may limit its liability to its customer in 
connection with the late return of a deposited check where the lateness 
is caused by markings on the check by the depositary bank's customer or 
prior indorser in the area of the depositary bank indorsement. (See 
Sec. 229.38(d).)
    4. A paying bank may require its customer to assume the paying 
bank's liability for delayed or missent checks where the delay or 
missending is caused by markings placed on the check by the paying 
bank's customer that obscured a properly placed indorsement of the 
depositary bank. (See Sec. 229.38(d).)
    5. A collecting or paying bank may agree to accept forward 
collection checks without the indorsement of a prior collecting bank. 
(See Sec. 229.35(a).)
    6. A bank may agree to accept returned checks without the 
indorsement of a prior bank. (See Sec. 229.35(a).)
    7. A presenting bank may agree with a paying bank to present checks 
for same-day settlement at a location that is not in the check 
processing region consistent with the routing number on the checks. (See 
Sec. 229.36(f)(1)(i).)
    8. A presenting bank may agree with a paying bank to present checks 
for same-day settlement by a deadline earlier or later than 8:00 a.m. 
(See Sec. 229.36(f)(1)(ii).)
    9. A presenting bank and a paying bank may agree that presentment 
takes place when the paying bank receives an electronic transmission of 
information describing the check rather than upon delivery of the 
physical check. (See Sec. 229.36(b).)
    10. A depositary bank may agree with a paying or returning bank to 
accept an image or other notice in lieu of a returned check even when 
the check is available for return under this part. Except to the extent 
that other parties interested in the check assent to or are bound by the 
variation of the notice-in-lieu provisions of this part, banks entering 
into such an agreement may be responsible under this part or other 
applicable law to other interested parties for any losses caused by the 
handling of a returned check under the agreement. (See Sec. Sec. 
229.30(f), 229.31(f), 229.38(a).)
    D. The Board expects to review the types of variation by agreement 
that develop under this section and will consider whether it is 
necessary to limit certain variations.

                     XXIV. Section 229.38 Liability

      A. 229.38(a) Standard of care; liability; measure of damages

    1. The standard of care established by this section applies to any 
bank covered by the requirements of Subpart C of the regulation. Thus, 
the standard of care applies to a paying bank under Sec. Sec. 229.30 
and 229.33, to a returning bank under Sec. 229.31, to a depositary bank 
under Sec. Sec. 229.32 and 229.33, to a bank erroneously receiving a 
returned check or written notice of nonpayment as depositary bank under 
Sec. 229.32(d), and to a bank indorsing a check under Sec. 229.35. The 
standard of care is similar to the standard imposed by U.C.C. 1-203 and 
4-103(a) and includes a duty to act in good faith, as defined in Sec. 
229.2(nn) of this regulation.
    2. A bank not meeting this standard of care is liable to the 
depositary bank, the depositary bank's customer, the owner of the check, 
or another party to the check. The depositary bank's customer is usually 
a depositor of a check in the depositary bank (but see Sec. 229.35(d)). 
The measure of damages provided in this section (loss incurred up to 
amount of check, less amount of loss party would have incurred even if 
bank had exercised ordinary care) is based on U.C.C. 4-103(e) (amount of 
the item reduced by an amount that could not have been realized by the 
exercise of ordinary care), as limited by 4-202(c) (bank is liable only 
for its own negligence and not for actions of subsequent banks in chain 
of collection). This subpart does not absolve a collecting bank of 
liability to prior collecting banks under U.C.C. 4-201.
    3. Under this measure of damages, a depositary bank or other person 
must show that the damage incurred results from the negligence proved. 
For example, the depositary bank may not simply claim that its customer 
will not accept a charge-back of a returned check, but must prove that 
it could not charge back when it received the returned check and could 
have charged back if no negligence had occurred, and must first attempt 
to collect from its customer. (See Marcoux v. Van Wyk, 572 F.2d 651 (8th 
Cir. 1978); Appliance Buyers Credit Corp. v. Prospect Nat'l Bank, 708 
F.2d 290 (7th Cir. 1983).) Generally, a paying or returning bank's 
liability would not be reduced because the depositary bank did not place 
a hold on its customer's deposit before it learned of nonpayment of the 
check.
    4. This paragraph also states that it does not affect a paying 
bank's liability to its

[[Page 951]]

customer. Under U.C.C. 4-402, for example, a paying bank is liable to 
its customer for wrongful dishonor, which is different from failure to 
exercise ordinary care and has a different measure of damages.

        B. 229.38(b) Paying Bank's Failure To Make Timely Rreturn

    1. Section 229.30(a) imposes requirements on the paying bank for 
expeditious return of a check and leaves in place the U.C.C. deadlines 
(as they may be modified by Sec. 229.30(c)), which may allow return at 
a different time. This paragraph clarifies that the paying bank could be 
liable for failure to meet either standard, but not for failure to meet 
both. The regulation intends to preserve the paying bank's 
accountability for missing its midnight or other deadline under the 
U.C.C., (e.g., sections 4-215 and 4-302), provisions that are not 
incorporated in this regulation, but may be useful in establishing the 
time of final payment by the paying bank.

                   C. 229.38(c) Comparative negligence

    1. This paragraph establishes a ``pure'' comparative negligence 
standard for liability under Subpart C of this regulation. This 
comparative negligence rule may have particular application where a 
paying or returning bank delays in returning a check because of 
difficulty in identifying the depositary bank. Some examples will 
illustrate liability in such cases. In each example, it is assumed that 
the returned check is received by the depositary bank after it has made 
funds available to its customer, that it may no longer recover the funds 
from its customer, and that the inability to recover the funds from the 
customer is due to a delay in returning the check contrary to the 
standards established by Sec. Sec. 229.30(a) or 229.31(a).
    2. Examples.
    a. If a depositary bank fails to use the indorsement required by 
this regulation, and this failure is caused by a failure to exercise 
ordinary care, and if a paying or returning bank is delayed in returning 
the check because additional time is required to identify the depositary 
bank or find its routing number, the paying or returning bank's 
liability to the depositary bank would be reduced or eliminated.
    b. If the depositary bank uses the standard indorsement, but that 
indorsement is obscured by a subsequent collecting bank's indorsement, 
and a paying or returning bank is delayed in returning the check because 
additional time was required to identify the depositary bank or find its 
routing number, the paying or returning bank may not be liable to the 
depositary bank because the delay was not due to its negligence. 
Nonetheless, the collecting bank may be liable to the depositary bank to 
the extent that its negligence in indorsing the check caused the paying 
or returning bank's delay.
    c. If a depositary bank accepts a check that has printing, a carbon 
band, or other material on the back of the check that existed at the 
time the check was issued, and the depositary bank's indorsement is 
obscured by the printing, carbon band, or other material, and a paying 
or returning bank is delayed in returning the check because additional 
time was required to identify the depositary bank, the returning bank 
may not be liable to the depositary bank because the delay was not due 
to its negligence. Nonetheless, the paying bank may be liable to the 
depositary bank to the extent that the printing, carbon band, or other 
material caused the delay.

        D. 229.38(d) Responsibility for Certain Aspects of Checks

    1. Responsibility for back of check. The indorsement standard in 
Sec. 229.35 is most effective if the back of the check remains clear of 
other matter that may obscure bank indorsements. Because bank 
indorsements are usually applied by automated equipment, it is not 
possible to avoid pre-existing matter on the back of the check. For 
example, bank indorsements are not required to avoid a carbon band or 
printed, stamped, or written terms or notations on the back of the 
check. Accordingly, this provision places responsibility on the paying 
bank, depositary bank, or reconverting bank, as appropriate, for keeping 
the back of the check clear for bank indorsements during forward 
collection and return.
    2. ANS X9.100-140 provides that an image of an original check must 
be reduced in size when placed on the first substitute check associated 
with that original check. (The image thereafter would be constant in 
size on any subsequent substitute check that might be created.) Because 
of this size reduction, the location of an indorsement, particularly a 
depositary bank indorsement, applied to an original paper check likely 
will change when the first reconverting bank creates a substitute check 
that contains that indorsement within the image of the original paper 
check. If the indorsement was applied to the original paper check in 
accordance with appendix D's location requirements for indorsements 
applied to existing paper checks, and if the size reduction of the image 
causes the placement of the indorsement to no longer be consistent with 
the appendix's requirements, then the reconverting bank bears the 
liability for any loss that results from the shift in the placement of 
the indorsement. Such a loss could result either because the original 
indorsement applied in accordance with appendix D is rendered illegible 
by a subsequent indorsement that

[[Page 952]]

later is applied to the substitute check in accordance with appendix D, 
or because the subsequent bank cannot apply its indorsement to the 
substitute check legibly in accordance with appendix D as a result of 
the shift in the previous indorsement.

                                Example.

    In accordance with appendix D's specifications, a depositary bank 
sprays its indorsement onto a business-sized original check between 3.0 
inches from the leading edge of the check and 1.5 inches from the 
trailing edge of the check. The check's conversion to electronic form 
and subsequent reconversion to paper form causes the location of the 
depositary bank indorsement, now contained within the image of the 
original check, to change such that it is less than 3.0 inches from the 
leading edge of the substitute check. In accordance with appendix D's 
specifications, a subsequent collecting bank sprays its indorsement onto 
the substitute check between the leading edge of the check and 3.0 
inches from the leading edge of the check and the indorsement happens to 
be on top of the shifted depositary bank indorsement. If the check is 
returned unpaid and the return is not expeditious because of the 
illegibility of the depositary bank indorsement, and the depositary bank 
incurs a loss that it would not have incurred had the return been 
expeditious, the reconverting bank bears the liability for that loss.
    3. Responsibility for payable-through checks.
    a. This paragraph provides that the bank by which a payable-through 
check is payable is liable for damages under paragraph (a) of this 
section to the extent that the check is not returned through the 
payable-through bank as quickly as would have been necessary to meet the 
requirements of Sec. 229.30(a)(1) (the 2-day/4-day test) had the bank 
by which it is payable received the check as paying bank on the day the 
payable-through bank received it. The location of the bank by which a 
check is payable for purposes of the 2-day/4-day test may be determined 
from the location or the first four digits of the routing number of the 
bank by which the check is payable. This information should be stated on 
the check. (See Sec. 229.36(e) and accompanying Commentary.) 
Responsibility under paragraph (d)(2) does not include responsibility 
for the time required for the forward collection of a check to the 
payable-through bank.
    b. Generally, liability under paragraph (d)(2) will be limited in 
amount. Under Sec. 229.33(a), a paying bank that returns a check in the 
amount of $2,500 or more must provide notice of nonpayment to the 
depositary bank by 4:00 p.m. on the second business day following the 
banking day on which the check is presented to the paying bank. Even if 
a payable-through check in the amount of $2,500 or more is not returned 
through the payable-through bank as quickly as would have been required 
had the check been received by the bank by which it is payable, the 
depositary bank should not suffer damages unless it has not received 
timely notice of nonpayment. Thus, ordinarily the bank by which a 
payable-through check is payable would be liable under paragraph (a) 
only for checks in amounts up to $2,500, and the paying bank would be 
responsible for notice of nonpayment for checks in the amount of $2,500 
or more.
    4. Responsibility under paragraphs (d)(1) and (d)(2) is treated as 
negligence for comparative negligence purposes, and the contribution to 
damages under paragraphs (d)(1) and (d)(2) is treated in the same way as 
the degree of negligence under paragraph (c) of this section.

                    E. 229.38(e) Timeliness of Action

    1. This paragraph excuses certain delays. It adopts the standard of 
U.C.C. 4-109(b).

                         F. 229.38(f) Exclusion

    1. This paragraph provides that the civil liability and class action 
provisions, particularly the punitive damage provisions of sections 
611(a) and (b), and the bona fide error provision of 611(c) of the EFA 
Act (12 U.S.C. 4010(a), (b), and (c)) do not apply to regulatory 
provisions adopted to improve the efficiency of the payments mechanism. 
Allowing punitive damages for delays in the return of checks where no 
actual damages are incurred would only encourage litigation and provide 
little or no benefit to the check collection system. In view of the 
provisions of paragraph (a), which incorporate traditional bank 
collection standards based on negligence, the provision on bona fide 
error is not included in Subpart C.

                        G. 229.38(g) Jurisdiction

    1. The EFA Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions for 
violations of this subpart.

                 H. 229.38(h) Reliance on Board Rulings

    1. This provision shields banks from civil liability if they act in 
good faith in reliance on any rule, regulation, or interpretation of the 
Board, even if it were subsequently determined to be invalid. Banks may 
rely on the Commentary to this regulation, which is issued as an 
official Board interpretation, as well as on the regulation itself.

                 XXV. Section 229.39 Insolvency of Bank

                             A. Introduction

    1. These provisions cover situations where a bank becomes insolvent 
during collection

[[Page 953]]

or return and are derived from U.C.C. 4-216. They are intended to apply 
to all banks.

                      B. 229.39(a) Duty of Receiver

    1. This paragraph requires a receiver of a closed bank to return a 
check to the prior bank if it does not pay for the check. This permits 
the prior bank, as holder, to pursue its claims against the closed bank 
or prior indorsers on the check.

        C. 229.39(b) Preference Against Paying or Depositary Bank

    1. This paragraph gives a bank a preferred claim against a closed 
paying bank that finally pays a check without settling for it or a 
closed depositary bank that becomes obligated to pay a returned check 
without settling for it. If the bank with a preferred claim under this 
paragraph recovers from a prior bank or other party to the check, the 
prior bank or other party to the check is subrogated to the preferred 
claim.

 D. 229.39(c) Preference Against Paying, Collecting, or Depositary Bank

    1. This paragraph gives a bank a preferred claim against a closed 
collecting, paying, or returning bank that receives settlement but does 
not settle for a check. (See Commentary to Sec. 229.35(b) for 
discussion of prior and subsequent banks.) As in the case of Sec. 
229.39(b), if the bank with a preferred claim under this paragraph 
recovers from a prior bank or other party to the check, the prior bank 
or other party to the check is subrogated to the preferred claim.

             E. 229.39(d) Preference Against Presenting Bank

    1. This paragraph gives a paying bank a preferred claim against a 
closed presenting bank in the event that the presenting bank breaches an 
amount or encoding warranty as provided in Sec. 229.34(c)(1) or (3) and 
does not reimburse the paying bank for adjustments for a settlement made 
by the paying bank in excess of the value of the checks presented. This 
preference is intended to have the effect of a perfected security 
interest and is intended to put the paying bank in the position of a 
secured creditor for purposes of the receivership provisions of the 
Federal Deposit Insurance Act and similar provisions of state law.

                   F. 229.39(e) Finality of Settlement

    1. This paragraph provides that insolvency does not interfere with 
the finality of a settlement, such as a settlement by a paying bank that 
becomes final by expiration of the midnight deadline.

            XXVI. Section 229.40 Effect on Merger Transaction

    A. When banks merge, there is normally a period of adjustment 
required before their operations are consolidated. To allow for this 
adjustment period, the regulation provides that the merged banks may be 
treated as separate banks for a period of up to one year after the 
consummation of the transaction. The term merger transaction is defined 
in Sec. 229.2(t). This rule affects the status of the combined entity 
in a number of areas in this subpart. For example:
    1. The paying bank's responsibility for expeditious return (Sec. 
229.30).
    2. The returning bank's responsibility for expeditious return (Sec. 
229.31).
    3. Whether a returning bank is entitled to an extra day to qualify a 
return that will be delivered directly to a depositary bank that has 
merged with the returning bank (Sec. 229.31(a)).
    4. Where the depositary bank must accept returned checks (Sec. 
229.32(a)).
    5. Where the depositary bank must accept notice of nonpayment (Sec. 
229.33(c)).
    6. Where a paying bank must accept presentment of checks (Sec. 
229.36(b)).

               XXVII. Section 229.41 Relation to State Law

    A. This section specifies that state law relating to the collection 
of checks is preempted only to the extent that it is inconsistent with 
this regulation. Thus, this regulation is not a complete replacement for 
state laws relating to the collection or return of checks.

                    XXVIII. Section 229.42 Exclusions

    A. Checks drawn on the United States Treasury, U.S. Postal Service 
money orders, and checks drawn on states and units of general local 
government that are presented directly to the state or unit of general 
local government and that are not payable through or at a bank are 
excluded from the coverage of the expeditious-return, notice-of-
nonpayment, and same-day settlement requirements of subpart C of this 
part. Other provisions of this subpart continue to apply to the checks. 
This exclusion does not apply to checks drawn by the U.S. government on 
banks.

  XXIX. Section 229.43 Checks Payable in Guam, American Samoa, and the 
                        Northern Mariana Islands

                        A. 229.43(a) Definitions

    1. Bank offices in Guam, American Samoa, and the Northern Mariana 
Islands (which Regulation CC defines as Pacific island banks) do not 
meet the definition of bank in Sec. 229.2(e) because they are not 
located in the United States. Some checks drawn on Pacific island banks 
(defined as Pacific island

[[Page 954]]

checks) bear U.S. routing numbers and are collected and returned by 
banks in the same manner as checks payable in the U.S.

         B. 229.43(b) Rules Applicable to Pacific Island Checks

    1. When a bank handles a Pacific island check as if it were a check 
as defined in Sec. 229.2(k), the bank is subject to certain provisions 
of Regulation CC, as provided in this section. Because the Pacific 
island bank is not a bank as defined in Sec. 229.2(e), it is not a 
paying bank as defined in Sec. 229.2(z) (unless otherwise noted in this 
section). Pacific island banks are not subject to the provisions of 
Regulation CC.
    2. A bank may agree to handle a Pacific island check as a returned 
check under Sec. 229.31 and may convert the returned Pacific island 
check to a qualified returned check. The returning bank is not, however, 
subject to the expeditious-return requirements of Sec. 229.31. The 
returning bank may receive the Pacific island check directly from a 
Pacific island bank or from another returning bank. As a Pacific island 
bank is not a paying bank under Regulation CC, Sec. 229.31(c) does not 
apply to a returning bank settling with the Pacific island bank.
    3. A depositary bank that handles a Pacific island check is not 
subject to the provisions of subpart B of Regulation CC, including the 
availability, notice, and interest accrual requirements, with respect to 
that check. If, however, a bank accepts a Pacific island check for 
deposit (or otherwise accepts the check as transferee) and collects the 
Pacific island check in the same manner as other checks, the bank is 
subject to the provisions of Sec. 229.32, including the provisions 
regarding time and manner of settlement for returned checks in Sec. 
229.32(b), in the event the Pacific island check is returned by a 
returning bank. If the depositary bank receives the returned Pacific 
island check directly from the Pacific island bank, however, the 
provisions of Sec. 229.32(b) do not apply, because the Pacific island 
bank is not a paying bank under Regulation CC. The depositary bank is 
not subject to the notice of nonpayment provisions in Sec. 229.33 for 
Pacific island checks.
    4. Banks that handle Pacific island checks in the same manner as 
other checks are subject to the indorsement provisions of Sec. 229.35. 
Section 229.35(c) eliminates the need for the restrictive indorsement 
``pay any bank.'' For purposes of Sec. 229.35(c), the Pacific island 
bank is deemed to be a bank.
    5. Pacific island checks will often be intermingled with other 
checks in a single cash letter. Therefore, a bank that handles Pacific 
island checks in the same manner as other checks is subject to the 
transfer warranty provision in Sec. 229.34(c)(2) regarding accurate 
cash letter totals and the encoding warranty in Sec. 229.34(c)(3). A 
bank that acts as a returning bank for a Pacific island check is not 
subject to the warranties in Sec. 229.34(a). Similarly, because the 
Pacific island bank is not a ``bank'' or a ``paying bank'' under 
Regulation CC, Sec. 229.34(b), (c)(1), and (c)(4) do not apply. For the 
same reason, the provisions of Sec. 229.36 governing paying bank 
responsibilities such as place of receipt and same-day settlement do not 
apply to checks presented to a Pacific island bank, and the liability 
provisions applicable to paying banks in Sec. 229.38 do not apply to 
Pacific island banks. Section 229.36(d), regarding finality of 
settlement between banks during forward collection, applies to banks 
that handle Pacific island checks in the same manner as other checks, as 
do the liability provisions of Sec. 229.38, to the extent the banks are 
subject to the requirements of Regulation CC as provided in this 
section, and Sec. Sec. 229.37 and 229.39 through 229.42.

    XXX. Sec. 229.51 General provisions governing substitute checks

                  A. Sec. 229.51(a) Legal Equivalence

    1. Section 229.51(a) states that a substitute check for which a bank 
has provided the substitute check warranties is the legal equivalent of 
the original check for all purposes and all persons if it meets the 
accuracy and legend requirements. Where the law (or a contract) requires 
production of the original check, production of a legally equivalent 
substitute check would satisfy that requirement. A person that receives 
a substitute check cannot be assessed costs associated with the creation 
of the substitute check, absent agreement to the contrary.

                                Examples.

    a. A presenting bank presents a substitute check that meets the 
legal equivalence requirements to a paying bank. The paying bank cannot 
refuse presentment of the substitute check on the basis that it is a 
substitute check, because the substitute check is the legal equivalent 
of the original check.
    b. A depositor's account agreement with a bank provides that the 
depositor is entitled to receive original cancelled checks back with his 
or her periodic account statement. The bank may honor that agreement by 
providing original checks, substitute checks, or a combination thereof. 
However, a bank may not honor such an agreement by providing something 
other than an original check or a substitute check.
    c. A mortgage company argues that a consumer missed a monthly 
mortgage payment that the consumer believes she made. A legally 
equivalent substitute check concerning that mortgage payment could be 
used in the same manner as the original check to prove the payment.
    2. A person other than a bank that creates a substitute check could 
transfer, present, or return that check only by agreement unless

[[Page 955]]

and until a bank provided the substitute check warranties.
    3. To be the legal equivalent of the original check, a substitute 
check must accurately represent all the information on the front and 
back of the check as of the time the original check was truncated. An 
accurate representation of information that was illegible on the 
original check would satisfy this requirement. The payment instructions 
placed on the check by, or as authorized by, the drawer, such as the 
amount of the check, the payee, and the drawer's signature, must be 
accurately represented, because that information is an essential element 
of a negotiable instrument. Other information that must be accurately 
represented includes (1) the information identifying the drawer and the 
paying bank that is preprinted on the check, including the MICR line; 
and (2) other information placed on the check prior to the time an image 
of the check is captured, such as any required identification written on 
the front of the check and any indorsements applied to the back of the 
check. A substitute check need not capture other characteristics of the 
check, such as watermarks, microprinting, or other physical security 
features that cannot survive the imaging process or decorative images, 
in order to meet the accuracy requirement. Conversely, some security 
features that are latent on the original check might become visible as a 
result of the check imaging process. For example, the original check 
might have a faint representation of the word ``void'' that will appear 
more clearly on a photocopied or electronic image of the check. Provided 
the inclusion of the clearer version of the word on the image used to 
create a substitute check did not obscure the required information 
listed above, a substitute check that contained such information could 
be the legal equivalent of an original check under Sec. 229.51(a). 
However, if a person suffered a loss due to receipt of such a substitute 
check instead of the original check, that person could have an indemnity 
claim under Sec. 229.53 and, in the case of a consumer, an expedited 
recredit claim under Sec. 229.54.
    4. To be the legal equivalent of the original check, a substitute 
check must bear the legal equivalence legend described in Sec. 
229.51(a)(2). A bank may not vary the language of the legal equivalence 
legend and must place the legend on the substitute check as specified by 
generally applicable industry standards for substitute checks contained 
in ANS X9.100-140.
    5. In some cases, the original check used to create a substitute 
check could be forged or otherwise fraudulent. A substitute check 
created from a fraudulent original check would have the same status 
under Regulation CC and the U.C.C. as the original fraudulent check. For 
example, a substitute check of a fraudulent original check would not be 
properly payable under U.C.C. 4-401 and would be subject to the transfer 
and presentment warranties in U.C.C. 4-207 and 4-208.

                  B. 229.51(b) Reconverting Bank Duties

    1. As discussed in more detail in appendix D and the commentary to 
Sec. 229.35, a reconverting bank must indorse (or, if it is a paying 
bank with respect to the check, identify itself on) the back of a 
substitute check in a manner that preserves all indorsements applied, 
whether physically or electronically, by persons that previously handled 
the check in any form for forward collection or return. Indorsements 
applied physically to the original check before an image of the check 
was captured would be preserved through the image of the back of the 
original check that a substitute check must contain. Indorsements 
applied physically to the original check after an image of the original 
check was captured would be conveyed as electronic indorsements (see 
paragraph 3 of the commentary to Sec. 229.35(a)). If indorsements were 
applied electronically after an image of the original check was captured 
or were applied electronically after a previous substitute check was 
converted to electronic form, the reconverting bank must apply those 
indorsements physically to the substitute check. A reconverting bank is 
not responsible for obtaining indorsements that persons that previously 
handled the check should have applied but did not apply.
    2. A reconverting bank also must identify itself as such on the 
front and back of the substitute check and must preserve on the back of 
the substitute check the identifications of any previous reconverting 
banks in accordance with appendix D. The presence on the back of a 
substitute check of indorsements that were applied by previous 
reconverting banks and identified with asterisks in accordance with 
appendix D would satisfy the requirement that the reconverting bank 
preserve the identification of previous reconverting banks. As discussed 
in more detail in the commentary to Sec. 229.35, the reconverting bank 
and truncating bank routing numbers on the front of a substitute check 
and, if the reconverting bank is the paying bank, the reconverting 
bank's routing number on the back of a substitute check are for 
identification only and are not indorsements or acceptances.
    3. The reconverting bank must place the routing number of the 
truncating bank surrounded by brackets on the front of the substitute 
check in accordance with appendix D and ANS X9.100-140.

                                Example.

    A bank's customer, which is a nonbank business, receives checks for 
payment and by

[[Page 956]]

agreement deposits substitute checks instead of the original checks with 
its depositary bank. The depositary bank is the reconverting bank with 
respect to the substitute checks and the truncating bank with respect to 
the original checks. In accordance with appendix D and with ANS X9.100-
140, the bank must therefore be identified on the front of the 
substitute checks as a reconverting bank and as the truncating bank, and 
on the back of the substitute checks as the depositary bank and a 
reconverting bank.

                       C. 229.51(c) Applicable Law

    1. A substitute check that meets the requirements for legal 
equivalence set forth in this section is subject to any provision of 
federal or state law that applies to original checks, except to the 
extent such provision is inconsistent with the Check 21 Act or subpart 
D. A legally equivalent substitute check is subject to all laws that are 
not preempted by the Check 21 Act in the same manner and to the same 
extent as is an original check. Thus, any person could satisfy a law 
that requires production of an original check by producing a substitute 
check that is derived from the relevant original check and that meets 
the legal equivalence requirements of Sec. 229.51(a).
    2. A law is not inconsistent with the Check 21 Act or subpart D 
merely because it allows for the recovery of a greater amount of 
damages.

                                Example.

    A drawer that suffers a loss with respect to a substitute check that 
was improperly charged to its account and for which the drawer has an 
indemnity claim but not a warranty claim would be limited under the 
Check 21 Act to recovery of the amount of the substitute check plus 
interest and expenses. However, if the drawer also suffered damages that 
were proximately caused because the bank wrongfully dishonored 
subsequently presented checks as a result of the improper substitute 
check charge, the drawer could recover those losses under U.C.C. 4-402.

             XXXI. Sec. 229.52 Substitute Check Warranties

               A. 229.52(a) Warranty Content and Provision

    1. The responsibility for providing the substitute check warranties 
begins with the reconverting bank. In the case of a substitute check 
created by a bank, the reconverting bank starts the flow of warranties 
when it transfers, presents, or returns a substitute check for which it 
receives consideration. A bank that receives a substitute check created 
by a nonbank starts the flow of warranties when it transfers, presents, 
or returns for consideration either the substitute check it received or 
an electronic or paper representation of that substitute check. To 
ensure that warranty protections flow all the way through to the 
ultimate recipient of a substitute check or paper or electronic 
representation thereof, any subsequent bank that transfers, presents, or 
returns for consideration either the substitute check or a paper or 
electronic representation of the substitute check is responsible to 
subsequent transferees for the warranties. Any warranty recipient could 
bring a claim for a breach of a substitute check warranty if it received 
either the actual substitute check or a paper or electronic 
representation of a substitute check.
    2. The substitute check warranties and indemnity are not given under 
Sec. Sec. 229.52 and 229.53 by a bank that truncates the original check 
and by agreement transfers the original check electronically to a 
subsequent bank for consideration. However, parties may, by agreement, 
allocate liabilities associated with the exchange of electronic check 
information.

                                Example.

    A bank that receives check information electronically and uses it to 
create substitute checks is the reconverting bank and, when it 
transfers, presents, or returns that substitute check, becomes the first 
warrantor. However, that bank may protect itself by including in its 
agreement with the sending bank provisions that specify the sending 
bank's warranties and responsibilities to the receiving bank, 
particularly with respect to the accuracy of the check image and check 
data transmitted under the agreement.
    3. A bank need not affirmatively make the warranties because they 
attach automatically when a bank transfers, presents, or returns the 
substitute check (or a representation thereof) for which it receives 
consideration. Because a substitute check transferred, presented, or 
returned for consideration is warranted to be the legal equivalent of 
the original check and thereby subject to existing laws as if it were 
the original check, all U.C.C. and other Regulation CC warranties that 
apply to the original check also apply to the substitute check.
    4. The legal equivalence warranty by definition must be linked to a 
particular substitute check. When an original check is truncated, the 
check may move from electronic form to substitute check form and then 
back again, such that there would be multiple substitute checks 
associated with one original check. When a check changes form multiple 
times in the collection or return process, the first reconverting bank 
and subsequent banks that transfer, present, or return the first 
substitute check (or a paper or electronic representation of the first 
substitute check) warrant the legal equivalence

[[Page 957]]

of only the first substitute check. If a bank receives an electronic 
representation of a substitute check and uses that representation to 
create a second substitute check, the second reconverting bank and 
subsequent transferees of the second substitute check (or a 
representation thereof) warrant the legal equivalence of both the first 
and second substitute checks. A reconverting bank would not be liable 
for a warranty breach under Sec. 229.52 if the legal equivalence defect 
is the fault of a subsequent bank that handled the substitute check, 
either as a substitute check or in other paper or electronic form.
    5. The warranty in Sec. 229.52(a)(2), which addresses multiple 
payment requests for the same check, is not linked to a particular 
substitute check but rather is given by each bank handling the 
substitute check, an electronic representation of a substitute check, or 
a subsequent substitute check created from an electronic representation 
of a substitute check. All banks that transfer, present, or return a 
substitute check (or a paper or electronic representation thereof) 
therefore provide the warranty regardless of whether the ultimate demand 
for double payment is based on the original check, the substitute check, 
or some other electronic or paper representation of the substitute or 
original check, and regardless of the order in which the duplicative 
payment requests occur. This warranty is given by the banks that 
transfer, present, or return a substitute check even if the demand for 
duplicative payment results from a fraudulent substitute check about 
which the warranting bank had no knowledge.

                                Example.

    A nonbank depositor truncates a check and in lieu thereof sends an 
electronic version of that check to both Bank A and Bank B. Bank A and 
Bank B each uses the check information that it received electronically 
to create a substitute check, which it presents to Bank C for payment. 
Bank A and Bank B each is a reconverting bank that made the substitute 
check warranties when it presented a substitute check to and received 
payment from Bank C. Bank C could pursue a warranty claim for the loss 
it suffered as a result of the duplicative payment against either Bank A 
or Bank B.

                    B. 229.52(b) Warranty Recipients

    1. A reconverting bank makes the warranties to the person to which 
it transfers, presents, or returns the substitute check for 
consideration and to any subsequent recipient that receives either the 
substitute check or a paper or electronic representation derived from 
the substitute check. These subsequent recipients could include a 
subsequent collecting or returning bank, the depositary bank, the 
drawer, the drawee, the payee, the depositor, and any indorser. The 
paying bank would be included as a warranty recipient, for example 
because it would be the drawee of a check or a transferee of a check 
that is payable through it.
    2. The warranties flow with the substitute check to persons that 
receive a substitute check or a paper or electronic representation of a 
substitute check. The warranties do not flow to a person that receives 
only the original check or a representation of an original check that 
was not derived from a substitute check. However, a person that 
initially handled only the original check could become a warranty 
recipient if that person later receives a returned substitute check or a 
paper or electronic representation of a substitute check that was 
derived from that original check.

             XXXII. Sec. 229.53 Substitute Check Indemnity

                     A. 229.53(a) Scope of Indemnity

    1. Each bank that for consideration transfers, presents, or returns 
a substitute check or a paper or electronic representation of a 
substitute check is responsible for providing the substitute check 
indemnity. The indemnity covers losses due to any subsequent recipient's 
receipt of the substitute check instead of the original check. The 
indemnity therefore covers the loss caused by receipt of the substitute 
check as well as the loss that a bank incurs because it pays an 
indemnity to another person. A bank that pays an indemnity would in turn 
have an indemnity claim regardless of whether it received the substitute 
check or a paper or electronic representation of the substitute check 
The indemnity would not apply to a person that handled only the original 
check or a paper or electronic version of the original check that was 
not derived from a substitute check.

                                Examples.

    a. A paying bank makes payment based on a substitute check that was 
derived from a fraudulent original cashier's check. The amount and other 
characteristics of the original cashier's check are such that, had the 
original check been presented instead, the paying bank would have 
inspected the original check for security features. The paying bank's 
fraud detection procedures were designed to detect the fraud in question 
and allow the bank to return the fraudulent check in a timely manner. 
However, the security features that the bank would have inspected were 
security features that did not survive the imaging process (see the 
commentary to Sec. 229.51(a)). Under these circumstances, the paying 
bank could assert an indemnity claim against the bank that presented the 
substitute check.

[[Page 958]]

    b. By contrast with the previous examples, the indemnity would not 
apply if the characteristics of the presented substitute check were such 
that the bank's security policies and procedures would not have detected 
the fraud even if the original had been presented. For example, if the 
check was under the threshold amount at which the bank subjects an item 
to its fraud detection procedures, the bank would not have inspected the 
item for security features regardless of the form of the item and 
accordingly would have suffered a loss even if it had received the 
original check.
    c. A paying bank makes an erroneous payment based on an electronic 
representation of a substitute check because the electronic cash letter 
accompanying the electronic item included the wrong amount to be 
charged. The paying bank would not have an indemnity claim associated 
with that payment because its loss did not result from receipt of an 
actual substitute check instead of the original check. However, the 
paying bank could protect itself from such losses through its agreement 
with the bank that sent the check to it electronically and may have 
rights under other law.
    d. A drawer has agreed with its bank that the drawer will not 
receive paid checks with periodic account statements. The drawer 
requested a copy of a paid check in order to prove payment and received 
a photocopy of a substitute check. The photocopy that the bank provided 
in response to this request was illegible, such that the drawer could 
not prove payment. Any loss that the drawer suffered as a result of 
receiving the blurry check image would not trigger an indemnity claim 
because the loss was not caused by the receipt of a substitute check. 
The drawer may, however, still have a warranty claim if he received a 
copy of a substitute check, and may also have rights under the U.C.C.

                      B. 229.53(b) Indemnity Amount

    1. If a recipient of a substitute check is making an indemnity claim 
because a bank has breached one of the substitute check warranties, the 
recipient can recover any losses proximately caused by that warranty 
breach.

                                Examples.

    a. A drawer discovers that its account has been charged for two 
different substitute checks that were provided to the drawer and that 
were associated with the same original check. As a result of this 
duplicative charge, the paying bank dishonored several subsequently-
presented checks that it otherwise would have paid and charged the 
drawer returned check fees. The payees of the returned checks also 
charged the drawer returned check fees. The drawer would have a warranty 
claim against any of the warranting banks, including its bank, for 
breach of the warranty described in Sec. 229.52(a)(2). The drawer also 
could assert an indemnity claim. Because there is only one original 
check for any payment transaction, if the collecting and presenting bank 
had collected the original check instead of using a substitute check the 
bank would have been asked to make only one payment. The drawer could 
assert its warranty and indemnity claims against the paying bank, 
because that is the bank with which the drawer has a customer 
relationship and the drawer has received an indemnity from that bank. 
The drawer could recover from the indemnifying bank the amount of the 
erroneous charge, as well as the amount of the returned check fees 
charged by both the paying bank and the payees of the returned checks. 
If the drawer's account were an interest-bearing account, the drawer 
also could recover any interest lost on the erroneously debited amount 
and the erroneous returned check fees. The drawer also could recover its 
expenditures for representation in connection with the claim. Finally, 
the drawer could recover any other losses that were proximately caused 
by the warranty breach.
    b. In the example above, the paying bank that received the duplicate 
substitute checks also would have a warranty claim against the previous 
transferor(s) of those substitute checks and could seek an indemnity 
from that bank (or either of those banks). The indemnifying bank would 
be responsible for compensating the paying bank for all the losses 
proximately caused by the warranty breach, including representation 
expenses and other costs incurred by the paying bank in settling the 
drawer's claim.
    2. If the recipient of the substitute check does not have a 
substitute check warranty claim with respect to the substitute check, 
the amount of the loss the recipient may recover under Sec. 229.53 is 
limited to the amount of the substitute check, plus interest and 
expenses. However, the indemnified person might be entitled to 
additional damages under some other provision of law.

                                Examples.

    a. A drawer received a substitute check that met all the legal 
equivalence requirements and for which the drawer was only charged once, 
but the drawer believed that the underlying original check was a 
forgery. If the drawer suffered a loss because it could not prove the 
forgery based on the substitute check, for example because proving the 
forgery required analysis of pen pressure that could be determined only 
from the original check, the drawer would have an indemnity claim. 
However, the drawer would not have a substitute check warranty claim 
because the substitute check was the legal equivalent of the original 
check and no person was asked

[[Page 959]]

to pay the substitute check more than once. In that case, the amount of 
the drawer's indemnity under Sec. 229.53 would be limited to the amount 
of the substitute check, plus interest and expenses. However, the drawer 
could attempt to recover additional losses, if any, under other law.
    b. As described more fully in the commentary to Sec. 229.53(a) 
regarding the scope of the indemnity, a paying bank could have an 
indemnity claim if it paid a legally equivalent substitute check that 
was created from a fraudulent cashier's check that the paying bank's 
fraud detection procedures would have caught and that the bank would 
have returned by its midnight deadline had it received the original 
check. However, if the substitute check was not subject to a warranty 
claim (because it met the legal equivalence requirements and there was 
only one payment request) the paying bank's indemnity would be limited 
to the amount of the substitute check plus interest and expenses.
    3. The amount of an indemnity would be reduced in proportion to the 
amount of any amount loss attributable to the indemnified person's 
negligence or bad faith. This comparative negligence standard is 
intended to allocate liability in the same manner as the comparative 
negligence provision of Sec. 229.38(c).
    4. An indemnifying bank may limit the losses for which it is 
responsible under Sec. 229.53 by producing the original check or a 
sufficient copy. However, production of the original check or a 
sufficient copy does not absolve the indemnifying bank from liability 
claims relating to a warranty the bank has provided under Sec. 229.52 
or any other law, including but not limited to subpart C of this part or 
the U.C.C.

                   C. 229.53(c) Subrogation of Rights

    1. A bank that pays an indemnity claim is subrogated to the rights 
of the person it indemnified, to the extent of the indemnity it 
provided, so that it may attempt to recover that amount from another 
person based on an indemnity, warranty, or other claim. The person that 
the bank indemnified must comply with reasonable requests from the 
indemnifying bank for assistance with respect to the subrogated claim.

                                Example.

    A paying bank indemnifies a drawer for a substitute check that the 
drawer alleged was a forgery that would have been detected had the 
original check instead been presented. The bank that provided the 
indemnity could pursue its own indemnity claim against the bank that 
presented the substitute check, could attempt to recover from the 
forger, or could pursue any claim that it might have under other law. 
The bank also could request from the drawer any information that the 
drawer might possess regarding the possible identity of the forger.

          XXXIII. Sec. 229.54 Expedited Recredit for Consumers

            A. 229.54(a) Circumstances Giving Rise to a Claim

    1. A consumer may make a claim for expedited recredit under this 
section only for a substitute check that he or she has received and for 
which the bank charged his or her deposit account. As a result, checks 
used to access loans, such as credit card checks or home equity line of 
credit checks, that are reconverted to substitute checks would not give 
rise to an expedited recredit claim, unless such a check was returned 
unpaid and the bank charged the consumer's deposit account for the 
amount of the returned check. In addition, a consumer who received only 
a statement that contained images of multiple substitute checks per page 
would not be entitled to make an expedited recredit claim, although he 
or she could seek redress under other provisions of law, such as Sec. 
229.52 or U.C.C. 4-401. However, a consumer who originally received only 
a statement containing images of multiple substitute checks per page but 
later received a substitute check, such as in response to a request for 
a copy of a check shown in the statement, could bring a claim if the 
other expedited recredit criteria were met. Although a consumer must at 
some point have received a substitute check to make an expedited 
recredit claim, the consumer need not be in possession of the substitute 
check at the time he or she submits the claim.
    2. A consumer must in good faith assert that the bank improperly 
charged the consumer's account for the substitute check or that the 
consumer has a warranty claim for the substitute check (or both). The 
warranty in question could be a substitute check warranty described in 
Sec. 229.52 or any other warranty that a bank provides with respect to 
a check under other law. A consumer could, for example, have a warranty 
claim under Sec. 229.34(b), which contains returned check warranties 
that are made to the owner of the check.
    3. A consumer's recovery under the expedited recredit section is 
limited to the amount of his or her loss, up to the amount of the 
substitute check subject to the claim, plus interest if the consumer's 
account is an interest-bearing account. The consumer's loss could 
include fees that resulted from the allegedly incorrect charge, such as 
bounced check fees that were imposed because the improper charge caused 
the bank to dishonor subsequently presented checks that it otherwise 
would have honored. A consumer who suffers a total loss greater than the 
amount of the substitute check plus interest could attempt to recover 
the remainder of that

[[Page 960]]

loss by bringing warranty, indemnity, or other claim under this subpart 
or other applicable law.

                                Examples.

    a. A consumer who received a substitute check believed that he or 
she wrote the check for $150, but the bank charged his or her account 
for $1,500. The amount on the substitute check the consumer received is 
illegible. If the substitute check contained a blurry image of what was 
a legible original check, the consumer could have a claim for a breach 
of the legal equivalence warranty in addition to an improper charge 
claim. Because the amount of the check cannot be determined from the 
substitute check provided to the consumer, the consumer, if acting in 
good faith, could assert that the production of the original check or a 
better copy of the original check is necessary to determine the validity 
of the claim. The consumer in this case could attempt to recover his or 
her losses by using the expedited recredit procedure. The consumer's 
losses recoverable under Sec. 229.54 could include the $1,350 he or she 
believed was incorrectly charged plus any improperly charged fees 
associated with that charge, up to $150 (plus foregone interest on the 
amount of the consumer's loss if the account was an interest-bearing 
account). The consumer could recover any additional losses, if any, 
under other law, such as U.C.C. 4-401 and 4-402.
    b. A consumer received a substitute check for which his or her 
account was charged and believed that the original check from which the 
substitute was derived was a forgery. The forgery was good enough that 
analysis of the original check was necessary to verify whether the 
signature is that of the consumer. Under those circumstances, the 
consumer, if acting in good faith, could assert that the charge was 
improper, that he or she therefore had incurred a loss in the amount of 
the check (plus foregone interest if the account was an interest-bearing 
account), and that he or she needed the original check to determine the 
validity of the forgery claim. By contrast, if the signature on the 
substitute check obviously was forged (for example, if the forger signed 
a name other than that of the account holder) and there was no other 
defect with the substitute check, the consumer would not need the 
original check or a sufficient copy to determine the fact of the forgery 
and thus would not be able to make an expedited recredit claim under 
this section. However, the consumer would have a claim under U.C.C. 4-
401 if the item was not properly payable.

                B. 229.54(b) Procedures for Making Claims

    1. The consumer must submit his or her expedited recredit claim to 
the bank within 40 calendar days of the later of the day on which the 
bank mailed or delivered, by a means agreed to by the consumer, (1) the 
periodic account statement containing information concerning the 
transaction giving rise to the claim, or (2) the substitute check giving 
rise to the claim. The mailing or delivery of a substitute check could 
be in connection with a regular account statement, in response to a 
consumer's specific request for a copy of a check, or in connection with 
the return of a substitute check to the payee.
    2. Section 229.54(b) contemplates more than one possible means of 
delivering an account statement or a substitute check to the consumer. 
The time period for making a claim thus could be triggered by the 
mailed, in-person, or electronic delivery of an account statement or by 
the mailed or in-person delivery of a substitute check. In-person 
delivery would include, for example, making an account statement or 
substitute check available at the bank for the consumer's retrieval 
under an arrangement agreed to by the consumer. In the case of a mailed 
statement or substitute check, the 40-day period should be calculated 
from the postmark on the envelope. In the case of in-person delivery, 
the 40-day period should be calculated from the earlier of the calendar 
day on which delivery occurred or the bank first made the statement or 
substitute check available for the consumer's retrieval.
    3. A bank must extend the consumer's time for submitting a claim for 
a reasonable period if the consumer is prevented from submitting his or 
her claim within 40 days because of extenuating circumstances. 
Extenuating circumstances could include, for example, the extended 
travel or illness of the consumer.
    4. For purposes of determining the timeliness of a consumer's 
actions, a consumer's claim is considered received on the banking day on 
which the consumer's bank receives a complete claim in person or by 
telephone or on the banking day on which the consumer's bank receives a 
letter or e-mail containing a complete claim. (But see paragraphs 9-11 
of this section for a discussion of time periods related to oral claims 
that the bank requires to be put in writing.)
    5. A consumer who makes an untimely claim would not be entitled to 
recover his or her losses using the expedited recredit procedure. 
However, he or she still could have rights under other law, such as a 
warranty or indemnity claim under subpart D, a claim for an improper 
charge to his or her account under U.C.C. 4-401, or a claim for wrongful 
dishonor under U.C.C. 4-402.
    6. A consumer's claim must include the reason why the consumer 
believes that his or her account was charged improperly or why he or she 
has a warranty claim. A charge could be improper, for example, if the 
bank charged the consumer's account for an amount different than the 
consumer believes

[[Page 961]]

he or she authorized or charged the consumer more than once for the same 
check, or if the check in question was a forgery or otherwise 
fraudulent.
    7. A consumer also must provide a reason why production of the 
original check or a sufficient copy is necessary to determine the 
validity of the claim identified by the consumer. For example, if the 
consumer believed that the bank charged his or her account for the wrong 
amount, the original check might be necessary to prove this claim if the 
amount of the substitute check were illegible. Similarly, if the 
consumer believed that his or her signature had been forged, the 
original check might be necessary to confirm the forgery if, for 
example, pen pressure or similar analysis were necessary to determine 
the genuineness of the signature.
    8. The information that the consumer is required to provide under 
Sec. 229.54(b)(2)(iv) to facilitate the bank's investigation of the 
claim could include, for example, a copy of the allegedly defective 
substitute check or information related to that check, such as the 
number, amount, and payee.
    9. A bank may accept an expedited recredit claim in any form but 
could in its discretion require the consumer to submit the claim in 
writing. A bank that requires a recredit claim to be in writing must 
inform the consumer of that requirement and provide a location to which 
such a written claim should be sent. If the consumer attempts to make a 
claim orally, the bank must inform the consumer at that time of the 
written notice requirement. A bank that receives a timely oral claim and 
then requires the consumer to submit the claim in writing may require 
the consumer to submit the written claim within 10 business days of the 
bank's receipt of the timely oral claim. If the consumer's oral claim 
was timely and the consumer's written claim was received within the 10-
day period for submitting the claim in writing, the consumer would 
satisfy the requirement of Sec. 229.54(b)(1) to submit his or her claim 
within 40 days, even if the bank received the written claim after that 
40-day period.
    10. A bank may permit but may not require a consumer to submit a 
written claim electronically.
    11. If a bank requires a consumer to submit a claim in writing, the 
bank may compute time periods for the bank's action on the claim from 
the date that the bank received the written claim. Thus, if a consumer 
called the bank to make an expedited recredit claim and the bank 
required the consumer to submit the claim in writing, the time at which 
the bank must take action on the claim would be determined based on the 
date on which the bank received the written claim, not the date on which 
the consumer made the oral claim.
    12. Regardless of whether the consumer's communication with the bank 
is oral or written, a consumer complaint that does not contain all the 
elements described in Sec. 229.54(b) is not a claim for purposes of 
Sec. 229.54. If the consumer attempts to submit a claim but does not 
provide all the required information, then the bank has a duty to inform 
the consumer that the complaint does not constitute a claim under Sec. 
229.54 and identify what information is missing.

                      C. 229.54(c) Action on Claims

    1. If the bank has not determined whether or not the consumer's 
claim is valid by the end of the 10th business day after the banking day 
on which the consumer submitted the claim, the bank must by that time 
recredit the consumer's account for the amount of the consumer's loss, 
up to the lesser of the amount of the substitute check or $2,500, plus 
interest if the account is an interest-bearing account. A bank must 
provide the recredit pending investigation for each substitute check for 
which the consumer submitted a claim, even if the consumer submitted 
multiple substitute check claims in the same communication.
    2. A bank that provides a recredit to the consumer, either 
provisionally or after determining that the consumer's claim is valid, 
may reverse the amount of the recredit if the bank later determines that 
the claim in fact was not valid. A bank that reverses a recredit also 
may reverse the amount of any interest that it has paid on the 
previously recredited amount. A bank's time for reversing a recredit may 
be limited by a statute of limitations.

                  D. 229.54(d) Availability of Recredit

    1. The availability of a recredit provided by a bank under Sec. 
229.54(c) is governed solely by Sec. 229.54(d) and therefore is not 
subject to the availability provisions of subpart B. A bank generally 
must make a recredit available for withdrawal no later than the start of 
the business day after the banking day on which the bank provided the 
recredit. However, a bank may delay the availability of up to the first 
$2,500 that it provisionally recredits to a consumer account under Sec. 
229.54(c)(3)(i) if (1) the account is a new account, (2) without regard 
to the substitute check giving rise to the recredit claim, the account 
has been repeatedly overdrawn during the six month period ending on the 
date the bank received the claim, or (3) the bank has reasonable cause 
to believe that the claim is fraudulent. These first two exceptions are 
meant to operate in the same manner as the corresponding new account and 
repeated overdraft exceptions in subpart B, as described in Sec. 
229.13(a) and (d) and the commentary thereto regarding application of 
the exceptions. When a recredit amount for which a bank delays 
availability contains an interest component, that component also is 
subject to

[[Page 962]]

the delay because it is part of the amount recredited under Sec. 
229.54(c)(3)(i). However, interest continues to accrue during the hold 
period.
    2. Section 229.54(d)(2) describes the maximum period of time that a 
bank may delay availability of a recredit provided under Sec. 
229.54(c). The bank may delay availability under one of the three listed 
exceptions until the business day after the banking day on which the 
bank determines that the consumer's claim is valid or the 45th calendar 
day after the banking day on which the bank received the consumer's 
claim, whichever is earlier. The only portion of the recredit that is 
subject to delay under Sec. 229.54(d)(2) is the amount that the bank 
recredits under Sec. 229.54(c)(3)(i) (including the interest component, 
if any) pending its investigation of a claim.

   E. 229.54(e) Notices Relating to Consumer Expedited Recredit Claims

    1. A bank must notify a consumer of its action regarding a recredit 
claim no later than the business day after the banking day that the bank 
makes a recredit, determines a claim is not valid, or reverses a 
recredit, as appropriate. As provided in Sec. 229.58, a bank may 
provide any notice required by this section by U.S. mail or by any other 
means through which the consumer has agreed to receive account 
information.
    2. A bank that denies the consumer's recredit claim must demonstrate 
to the consumer that the substitute check was properly charged or that 
the warranty claim was not valid, such as by explaining the reason that 
the substitute check charge was proper or the consumer's warranty claim 
was not valid. For example, if a consumer has claimed that the bank 
charged its account for an improper amount, the bank denying that claim 
must explain why it determined that the charged amount was proper.
    3. A bank denying a recredit claim also must provide the original 
check or a sufficient copy, unless the bank is providing the claim 
denial notice electronically and the consumer has agreed to receive that 
type of information electronically. In that case, Sec. 229.58 allows 
the bank instead to provide an image of the original check or an image 
of the sufficient copy that the bank would have sent to the consumer had 
the bank provided the notice by mail.
    4. A bank that relies on information or documents in addition to the 
original check or sufficient copy when denying a consumer expedited 
recredit claim also must either provide such information or documents to 
the consumer or inform the consumer that he or she may request copies of 
such information or documents. This requirement does not apply to a bank 
that relies only on the original check or a sufficient copy to make its 
determination.
    5. Models C-22 through C-25 in appendix C contain model language for 
each of three notices described in Sec. 229.54(e). A bank may, but is 
not required to, use the language listed in the appendix. The Check 21 
Act does not provide banks that use these models with a safe harbor. 
However, the Board has published these models to aid banks' efforts to 
comply with Sec. 229.54(e).

        F. 229.54(f) Recredit Does Not Abrogate Other Liabilities

    1. The amount that a consumer may recover under Sec. 229.54 is 
limited to the lesser of the amount of his or her loss or the amount of 
the substitute check, plus interest on that amount if his or her account 
earns interest. However, a consumer's total loss associated with the 
substitute check could exceed that amount, and the consumer could be 
entitled to additional damages under other law. For example, if a 
consumer's loss exceeded the amount of the substitute check plus 
interest and he or she had both a warranty and an indemnity claim with 
respect to the substitute check, he or she would be entitled to 
additional damages under Sec. 229.53 of this subpart. Similarly, if a 
consumer was charged bounced check fees as a result of an improperly 
charged substitute check and could not recover all of those fees because 
of the Sec. 229.54's limitation on recovery, he or she could attempt to 
recover additional amounts under U.C.C. 4-402.

       XXXIV. Sec. 229.55 Expedited Recredit Procedures for Banks

            A. 229.55(a) Circumstances Giving Rise to a Claim

    1. This section allows a bank to make an expedited recredit claim 
under two sets of circumstances: first, because it is obligated to 
provide a recredit, either to the consumer or to another bank that is 
obligated to provide a recredit in connection with the consumer's claim; 
and second, because the bank detected a problem with the substitute 
check that, if uncaught, could have given rise to a consumer claim.
    2. The loss giving rise to an interbank recredit claim could be the 
recredit that the claimant bank provided directly to its consumer 
customer under Sec. 229.54 or a loss incurred because the claimant bank 
was required to indemnify another bank that provided an expedited 
recredit to either a consumer or a bank.

                                Examples.

    a. A paying bank charged a consumer's account based on a substitute 
check that contained a blurry image of a legible original check, and the 
consumer whose account was charged made an expedited recredit claim

[[Page 963]]

against the paying bank because the consumer suffered a loss and needed 
the original check or a sufficient copy to determine the validity of his 
or her claim. The paying bank would have a warranty claim against the 
presenting bank that transferred the defective substitute check to it 
and against any previous transferring bank(s) that handled that 
substitute check or another paper or electronic representation of the 
check. The paying bank therefore would meet each of the requirements 
necessary to bring an interbank expedited recredit claim.
    b. Continuing with the example in paragraph a, if the presenting 
bank determined that the paying bank's claim was valid and provided a 
recredit, the presenting bank would have suffered a loss in the amount 
of the recredit it provided and could, in turn, make an expedited 
recredit claim against the bank that transferred the defective 
substitute check to it.

                B. 229.55(b) Procedures for Making Claims

    1. An interbank recredit claim under this section must be brought 
within 120 calendar days of the transaction giving rise to the claim. 
For purposes of computing this period, the transaction giving rise to 
the claim is the claimant bank's settlement for the substitute check in 
question.
    2. When estimating the amount of its loss, Sec. 229.55(b)(2)(ii) 
states that the claimant bank should include ``interest if applicable.'' 
The quoted phrase refers to any interest that the claimant bank or a 
bank that the claimant bank indemnified paid to a consumer who has an 
interest-bearing account in connection with an expedited recredit under 
Sec. 229.54.
    3. The information that the claimant bank is required to provide 
under Sec. 229.55(b)(2)(iv) to facilitate investigation of the claim 
could include, for example, a copy of any written claim that a consumer 
submitted under Sec. 229.54 or any written record the bank may have of 
a claim the consumer submitted orally. The information also could 
include a copy of the defective substitute check or information relating 
to that check, such as the number, amount, and payee of the check. 
However, a claimant bank that provides a copy of the substitute check 
must take reasonable steps to ensure that the copy is not mistaken for a 
legal equivalent of the original check or handled for forward collection 
or return.
    4. The indemnifying bank's right to require a claimant bank to 
submit a claim in writing and the computation of time from the date of 
the written submission parallel the corresponding provision in the 
consumer recredit section (Sec. 229.54(b)(3)). However, the 
indemnifying bank also may require the claimant bank to submit a copy of 
the written or electronic claim submitted by the consumer under that 
section, if any.

                      C. 229.55(c) Action on Claims

    1. An indemnifying bank that responds to an interbank expedited 
recredit claim by providing the original check or a sufficient copy of 
the original check need not demonstrate why that claim or the underlying 
consumer expedited recredit claim is or is not valid.

                      XXXV. Sec. 229.56 Liability

                     A. 229.56(a) Measure of Damages

    1. In general, a person's recovery under this section is limited to 
the amount of the loss up to the amount of the substitute check that is 
the subject of the claim, plus interest and expenses (including costs 
and reasonable attorney's fees and other expenses of representation) 
related to that substitute check. However, a person that is entitled to 
an indemnity under Sec. 229.53 because of a breach of a substitute 
check warranty also may recover under Sec. 229.53 any losses 
proximately caused by the warranty breach, including interest, costs, 
wrongfully-charged fees imposed as a result of the warranty breach, 
reasonable attorney's fees, and other expenses of representation.
    2. A reconverting bank also may be liable under Sec. 229.38 for 
damages associated with the illegibility of indorsements applied to 
substitute checks if that illegibility results because the reduction of 
the original check image and its placement on the substitute check 
shifted a previously-applied indorsement that, when applied, complied 
with appendix D. For more detailed discussion of this topic, see Sec. 
229.38 and the accompanying commentary.

                    B. 229.56(b) Timeliness of Action

    1. A bank's delay beyond the time limits prescribed or permitted by 
any provision of subpart D is excused if the delay is caused by certain 
circumstances beyond the bank's control. This parallels the standard of 
U.C.C. 4-109(b).

                        C. 229.56(c) Jurisdiction

    1. The Check 21 Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions for 
violations of subpart D.

                      D. 229.56(d) Notice of Claims

    1. This paragraph is designed to adopt the notice of claim 
provisions of U.C.C. 4-207(d) and 4-208(e), with an added provision that 
a timely Sec. 229.54 expedited recredit claim satisfies the generally-
applicable notice requirement. The time limit described in this 
paragraph applies only to notices of warranty and indemnity claims. As 
provided in Sec. 229.56(c), all actions under Sec. 229.56 must be 
brought within one year of the date that the cause of action accrues.

[[Page 964]]

                        XXXVI. Consumer Awareness

         A. 229.57(a) General Disclosure Requirement and Content

    1. A bank must provide the disclosure required by Sec. 229.57 under 
two circumstances. First, each bank must provide the disclosure to each 
of its consumer customers who receives paid checks with his or her 
account statement. This requirement does not apply if the bank provides 
with the account statement something other than paid original checks, 
paid substitute checks, or a combination thereof. For example, this 
requirement would not apply if a bank provided with the account 
statement only a document that contained multiple check images per page. 
Second, a bank also must provide the disclosure when it (a) provides a 
substitute check to a consumer in response to that consumer's request 
for a check or check copy or (b) returns a substitute check to a 
consumer depositor. A bank must provide the disclosure each time it 
provides a substitute check to a consumer on an occasional basis, 
regardless of whether the bank previously provided the disclosure to 
that consumer.
    2. A bank may, but is not required to, use the model disclosure in 
appendix C-5A to satisfy the disclosure content requirements of this 
section. A bank that uses the model language is deemed to comply with 
the disclosure content requirement(s) for which it uses the model 
language, provided the information in the disclosure accurately 
describes the bank's policies and practices. A bank also may include in 
its disclosure additional information relating to substitute checks that 
is not required by this section.
    3. A bank may, by agreement or at the consumer's request, provide 
the disclosure required by this section in a language other than 
English, provided that the bank makes a complete English notice 
available at the consumer's request.

                        B. 229.57(b) Distribution

    1. A consumer may request a check or a copy of a check on an 
occasional basis, such as to prove that he or she made a particular 
payment. A bank that responds to the consumer's request by providing a 
substitute check must provide the required disclosure at the time of the 
consumer's request if feasible. Otherwise, the bank must provide the 
disclosure no later than the time at which the bank provides a 
substitute check in response to the consumer's request. It would not be 
feasible for a bank to provide notice to the consumer at the time of the 
request if, for example, the bank did not know at the time of the 
request whether it would provide a substitute check in response to that 
request, regardless of the form of the consumer's request. It also would 
not be feasible for a bank to provide notice at the time of the request 
if the consumer's request was mailed to the bank or made by telephone, 
even if the bank knew when it received the request that it would provide 
a substitute check in response. A bank's provision to the consumer of 
something other a substitute check, such as a photocopy of a check or a 
statement containing images of multiple substitute checks per page, does 
not trigger the notice requirement.
    2. A consumer who does not routinely receive paid checks might 
receive a returned substitute check. For example, a consumer deposits an 
original check that is payable to him or her into his or her deposit 
account. The paying bank returns the check unpaid and the depositary 
bank returns the check to the depositor in the form of a substitute 
check. A depositary bank that provides a returned substitute check to a 
consumer depositor must provide the substitute check disclosure at that 
time.

                     XXXVII. Variation by Agreement

    Section 229.60 provides that banks involved in an interbank 
expedited recredit claim under Sec. 229.55 may vary the terms of that 
section by agreement, but otherwise no person may vary the terms of 
subpart D by agreement. A bank's decision to provide more generous 
protections for consumers than this subpart requires, such as by 
providing consumers additional time to submit expedited claims under 
Sec. 229.54 under non-exigent circumstances, would not be a variation 
prohibited by Sec. 229.60.

XXXVIII. Appendix C--Model Availability Policy Disclosures, Clauses, and 
    Notices; and Model Substitute Check Policy Disclosure and Notices

                             A. Introduction

    1. Appendix C contains model disclosure, clauses, and notices that 
may be used by banks to meet their disclosure and notice 
responsibilities under the regulation. Banks using the models (except 
models C-22 through C-25) properly will be deemed in compliance with the 
regulation's disclosure requirements.
    2. Information that must be inserted by a bank using the models is 
italicized within parentheses in the text of the models. Optional 
information is enclosed in brackets.
    3. Banks may make certain changes to the format or content of the 
models, including deleting material that is inapplicable, without losing 
the EFA Act's protection from liability for banks that use the models 
properly. For example, if a bank does not have a cut-off hour prior to 
it's closing time, or if a bank does not take advantage of the Sec. 
229.13 exceptions, it may delete the references to those provisions. 
Changes to the models may not be so extensive as to affect the 
substance, clarity, or meaningful sequence of

[[Page 965]]

the models. Acceptable changes include, for example:
    a. Using ``customer'' and ``bank'' instead of pronouns.
    b. Changing the typeface or size.
    c. Incorporating certain state law ``plain English'' requirements.
    4. Shorter time periods for availability may always be substituted 
for time periods used in the models.
    5. Banks may also add related information. For example, a bank may 
indicate that although funds have been made available to a customer and 
the customer has withdrawn them, the customer is still responsible for 
problems with the deposit, such as checks that were deposited being 
returned unpaid. Or a bank could include a telephone number to be used 
if a customer has an inquiry regarding a deposit.
    6. Banks are cautioned against using the models without reviewing 
their own policies and practices, as well as state and federal laws 
regarding the time periods for availability of specific types of checks. 
A bank using the models will be in compliance with the EFA Act and the 
regulation only if the bank's disclosures correspond to its availability 
policy.
    7. Banks that have used earlier versions of the models (such as 
those models that gave Social Security benefits and payroll payments as 
examples of preauthorized credits available the day after deposit, or 
that did not address the cash withdrawal limitation) are protected from 
civil liability under Sec. 229.21(e). Banks are encouraged, however, to 
use current versions of the models when reordering or reprinting 
supplies.

 B. Model Availability Policy and Substitute Check Policy Disclosures, 
                         Models C-1 through C-5A

    1. Models C-1 through C-5 generally.
    a. Models C-1 through C-5A are models for the availability policy 
disclosures described in Sec. 229.16 and substitute check policy 
disclosure described in Sec. 229.57. The models accommodate a variety 
of availability policies, ranging from next-day availability to holds to 
statutory limits on all deposits. Model C-3 reflects the additional 
disclosures discussed in Sec. Sec. 229.16 (b) and (c) for banks that 
have a policy of extending availability times on a case-by-case basis.
    b. As already noted, there are several places in the models where 
information must be inserted. This information includes the bank's cut-
off times, limitations relating to next-day availability, and the first 
four digits of routing numbers for local banks. In disclosing when funds 
will be available for withdrawal, the bank must insert the ordinal 
number (such as first, second, etc.) of the business day after deposit 
that the funds will become available.
    c. Models C-1 through C-5A generally do not reflect any optional 
provisions of the regulation, or those that apply only to certain banks. 
Instead, disclosures for these provisions are included in Models C-6 
through C-11A. A bank using one of the model availability policy 
disclosures should also consider whether it must incorporate one or more 
of Models C-6 through C-11A.
    d. While Sec. 229.10(b) requires next-day availability for 
electronic payments, Treasury regulations (31 CFR part 210) and ACH 
association rules require that preauthorized credits (''direct 
deposits'') be made available on the day the bank receives the funds. 
Models C-1 through C-5 reflect these rules. Wire transfers, however, are 
not governed by Treasury or ACH rules, but banks generally make funds 
from wire transfers available on the day received or on the business day 
following receipt. Banks should ensure that their disclosures reflect 
the availability given in most cases for wire transfers.
    2. Model C-1 Next-day availability. A bank may use this model when 
its policy is to make funds from all deposits available on the first 
business day after a deposit is made. This model may also be used by 
banks that provide immediate availability by substituting the word 
``immediately'' in place of ``on the first business day after the day we 
receive your deposit.''
    3. Model C-2 Next-day availability and Sec. 229.13 exceptions. A 
bank may use this model when its policy is to make funds from all 
deposits available to its customers on the first business day after the 
deposit is made, and to reserve the right to invoke the new account and 
other exceptions in Sec. 229.13. In disclosing that a longer delay may 
apply, a bank may disclose when funds will generally be available based 
on when the funds would be available if the deposit were of a nonlocal 
check.
    4. Model C-3 Next-day availability, case-by-case holds to statutory 
limits, and Sec. 229.13 exceptions. A bank may use this model when its 
policy, in most cases, is to make funds from all types of deposits 
available the day after the deposit is made, but to delay availability 
on some deposits on a case-by-case basis up to the maximum time periods 
allowed under the regulation. A bank using this model also reserves the 
right to invoke the exceptions listed in Sec. 229.13. In disclosing 
that a longer delay may apply, a bank may disclose when funds will 
generally be available based on when the funds would be available if the 
deposit were of a nonlocal check.
    5. Model C-4 Holds to statutory limits on all deposits. A bank may 
use this model when its policy is to impose delays to the full extent 
allowed under Sec. 229.12 and to reserve the right to invoke the Sec. 
229.13 exceptions. In disclosing that a longer delay may apply, a bank 
may disclose when funds will generally be available based on when the 
funds would

[[Page 966]]

be available if the deposit were of a nonlocal check. Model C-4 uses a 
chart to show the bank's availability policy for local and nonlocal 
checks and Model C-5 uses a narrative description.
    6. Model C-5 Holds to statutory limits on all deposits. A bank may 
use this model when its policy is to impose delays to the full extent 
allowed under Sec. 229.12 and to reserve the right to invoke the Sec. 
229.13 exceptions. In disclosing that a longer delay may apply, a bank 
may disclose when funds will generally be available based on when the 
funds would be available if the deposit were of a nonlocal check.
    7. Model C-5A A bank may use this form when it is providing the 
disclosure to its consumers required by Sec. 229.57 explaining that a 
substitute check is the legal equivalent of an original check and the 
circumstances under which the consumer may make a claim for expedited 
recredit.

               C. Model Clauses, Models C-6 Through C-11A

    1. Models C-6 through C-11A generally. Certain clauses like those in 
the models must be incorporated into a bank's availability policy 
disclosure under certain circumstances. The commentary to each clause 
indicates when a clause similar to the model clause is required.
    2. Model C-6 Holds on other funds (check cashing). A bank that 
reserves the right to place a hold on funds already on deposit when it 
cashes a check for a customer, as addressed in Sec. 229.19(e), must 
incorporate this type of clause in its availability policy disclosure.
    3. Model C-7 Holds on other funds (other account). A bank that 
reserves the right to place a hold on funds in an account of the 
customer other than the account into which the deposit is made, as 
addressed in Sec. 229.19(e), must incorporate this type of clause in 
its availability policy disclosure.
    4. Model C-8 Appendix B availability (nonlocal checks). A bank in a 
check processing region where the availability schedules for certain 
nonlocal checks have been reduced, as described in appendix B of 
Regulation CC, must incorporate this type of clause in its availability 
policy disclosure. Banks using Model C-5 may insert this clause at the 
conclusion of the discussion titled ``Nonlocal checks.''
    5. Model C-9 Automated teller machine deposits (extended holds). A 
bank that reserves the right to delay availability of deposits at 
nonproprietary ATMs until the fifth business day following the date of 
deposit, as permitted by Sec. 229.12(f), must incorporate this type of 
clause in its availability policy disclosure. A bank must choose among 
the alternative language based on how it chooses to differentiate 
between proprietary and nonproprietary ATMs, as required under Sec. 
229.16(b)(5).
    6. Model C-10 Cash withdrawal limitation. A bank that imposes cash 
withdrawal limitations under Sec. 229.12 must incorporate this type of 
clause in its availability policy disclosure. Banks reserving the right 
to impose the cash withdrawal limitation and using Model C-3 should 
disclose that funds may not be available until the sixth (rather than 
fifth) business day in the first paragraph under the heading ``Longer 
Delays May Apply.''
    7. Model C-11 Credit union interest payment policy. A credit union 
subject to the notice requirement of Sec. 229.14(b)(2) must incorporate 
this type of clause in its availability policy disclosure. This model 
clause is only an example of a hypothetical policy. Credit unions may 
follow any policy for accrual provided the method of accruing interest 
is the same for cash and check deposits.
    8. Model C-11A Availability of funds deposited at other locations. A 
clause similar to Model C-11A should be used if a bank bases the 
availability of funds on the location where the funds are deposited (for 
example, at a contractual or other branch located in a different check 
processing region). Similarly, a clause similar to Model C-11A should be 
used if a bank distinguishes between local and non-local checks (for 
example, a bank using model availability policy disclosure C-4 or C-5), 
and accepts deposits in more than one check processing region.

               D. Model Notices, Models C-12 through C-25

    1. Models C-12 through C-25 generally. Models C-12 through C-25 
provide models of the various notices required by the regulation. A bank 
that cashes a check and places a hold on funds in an account of the 
customer (see Sec. 229.19(e)) should modify the model hold notice 
accordingly. For example, the bank could replace the word ``deposit'' 
with the word ``transaction'' and could add the phrase ``or cashed'' 
after the word ``deposited.''
    2. Model C-12 Exception hold notice. This model satisfies the 
written notice required under Sec. 229.13(g) when a bank places a hold 
based on a Sec. 229.13 exception. If a hold is being placed on more 
than one check in a deposit, each check need not be described, but if 
different reasons apply, each reason must be indicated. A bank may use 
the actual date when funds will be available for withdrawal rather than 
the number of the business day following the day of deposit. A bank must 
incorporate in the notice the material set out in brackets if it imposes 
overdraft or returned check fees after invoking the reasonable cause 
exception under Sec. 229.13(e).
    3. Model C-13 Reasonable cause hold notice. This notice satisfies 
the written notice required under Sec. 229.13(g) when a bank invokes 
the reasonable cause exception under Sec. 229.13(e). The notice 
provides the bank with a list of specific reasons that may be given for 
invoking the exception. If a hold is being

[[Page 967]]

placed on more than one check in a deposit, each check must be described 
separately, and if different reasons apply, each reason must be 
indicated. A bank may disclose its reason for doubting collectibility by 
checking the appropriate reason on the model. If the ``Other'' category 
is checked, the reason must be given. A bank may use the actual date 
when funds will be available for withdrawal rather than the number of 
the business day following the day of deposit. A bank must incorporate 
in the notice the material set out in brackets if it imposes overdraft 
or returned check fees after invoking the reasonable cause exception 
under Sec. 229.13(e).
    4. Model C-14 One-time notice for large deposit and redeposited 
check exception holds. This model satisfies the notice requirements of 
Sec. 229.13(g)(2) concerning nonconsumer accounts.
    5. Model C-15 One-time notice for repeated overdraft exception hold. 
This model satisfies the notice requirements of Sec. 229.13(g)(3).
    6. Model C-16 Case-by-case hold notice. This model satisfies the 
notice required under Sec. 229.16(c)(2) when a bank with a case-by-case 
hold policy imposes a hold on a deposit. This notice does not require a 
statement of the specific reason for the hold, as is the case when a 
Sec. 229.13 exception hold is placed. A bank may specify the actual 
date when funds will be available for withdrawal rather than the number 
of the business day following the day of deposit when funds will be 
available. A bank must incorporate in the notice the material set out in 
brackets if it imposes overdraft fees after invoking a case-by-case 
hold.
    7. Model C-17 Notice at locations where employees accept consumer 
deposits and Model C-18 Notice at locations where employees accept 
consumer deposits (case-by-case holds). These models satisfy the notice 
requirement of Sec. 229.18(b). Model C-17 reflects an availability 
policy of holds to statutory limits on all deposits, and Model C-18 
reflects a case-by-case availability policy.
    8. Model C-19 Notice at automated teller machines. This model 
satisfies the ATM notice requirement of Sec. 229.18(c)(1).
    9. Model C-20 Notice at automated teller machines (delayed receipt). 
This model satisfies the ATM notice requirement of Sec. 229.18(c)(2) 
when receipt of deposits at off-premises ATMs is delayed under Sec. 
229.19(a)(4). It is based on collection of deposits once a week. If 
collections occur more or less frequently, the description of when 
deposits are received must be adjusted accordingly.
    10. Model C-21 Deposit slip notice. This model satisfies the notice 
requirements of Sec. 229.18(a) for deposit slips.
    11. Models C-22 through C-25 generally. Models C-22 through C-25 
provide models for the various notices required when a consumer who 
receives substitute checks makes an expedited recredit claim under Sec. 
229.54 for a loss related to a substitute check. The Check 21 Act does 
not provide banks that use these models with a safe harbor. However, the 
Board has published these models to aid banks' efforts to comply with 
Sec. 229.54(e).
    12. Model C-22 Valid Claim Refund Notice. A bank may use this model 
when crediting the entire amount or the remaining amount of a consumer's 
expedited recredit claim after determining that the consumer's claim is 
valid. This notice could be used when the bank provides the consumer a 
full recredit based on a valid claim determination within ten days of 
the receipt of the consumer's claim or when the bank recredits the 
remaining amount of a consumer's expedited recredit claim by the 45th 
calendar day after receiving the consumer's claim, as required under 
Sec. 229.54(e)(1).
    13. Model C-23 Provisional Refund Notice. A bank may use this model 
when providing a full or partial expedited recredit to a consumer 
pending further investigation of the consumer's claim, as required under 
Sec. 229.54(e)(1).
    14. Model C-24 Denial Notice. A bank may use this model when denying 
a claim for an expedited recredit under Sec. 229.54(e)(2).
    15. Model C-25 Reversal Notice. A bank may use this model when 
reversing an expedited recredit that was credited to a consumer's 
account under Sec. 229.54(e)(3).

[Reg. CC, 60 FR 51672, Oct. 3, 1995, as amended by Reg. CC, 62 FR 13816, 
Mar. 24, 1997; 64 FR 59613, Nov. 3, 1999; 68 FR 52078, Sept. 2, 2003; 68 
FR 53672, Sept. 12, 2003; 69 FR 47317, Aug. 4, 2004; 70 FR 71225, Nov. 
28, 2005]

    Effective Date Note: At 82 FR 27585, June 15, 2017, effective July 
1, 2018, appendix E to part 229 was amended as follows:
    A. Under ``II. Section 229.2 Definitions'':
    i. By revising paragraph 2 under ``Z. 229.2(z) Paying Bank'';
    ii. By revising DD. 229(dd);
    iii. By revising VV. 229.2(vv);
    iv. By revising BBB. 229.2(bbb);
    v. By adding GGG. 229.2(ggg); and
    vi. By adding HHH. 229.2(hhh).
    B. By revising XVI through XXVI and XXIX;
    C. In ``XXX. Sec. 229.51 General provisions governing substitute 
checks,'' by revising paragraph B;
    D. By revising XXXI;
    E. In ``XXXII. Sec. 229.53 Substitute Check Indemnity,'' by 
revising paragraphs A, B.1., B.1. Examples, and B.3.
    F. In ``XXXIII. Section 229.54 Expedited Recredit for Consumers,'' 
by revising paragraph A.2.
    For the convenience of the user, the added and revised text is set 
forth as follows:

[[Page 968]]



                 Sec. Appendix E to Part 229--Commentary

                                * * * * *

                      II. Section 229.2 Definitions

                                * * * * *

                         Z. 229.2(z) Paying Bank

                                * * * * *

    2. Under Sec. 229.31, a bank designated as a payable-through bank 
or payable-at bank and to which the check is sent for payment or 
collection is responsible for the expedited return of checks and notice 
of nonpayment requirements of Subpart C. The payable-through or payable-
at bank may contract with the payor with respect to its liability in 
discharging these responsibilities. The Board believes that the EFA Act 
makes a clear connection between availability and the time it takes for 
checks to be cleared and returned. Allowing the payable-through bank 
additional time to forward checks to the payor and await return or pay 
instructions from the payor may delay the return of these checks, 
increasing the risks to depositary banks. Subpart C of this part 
requires payable-through and payable-at banks to return a check 
expeditiously based on the time the payable-through or payable-at bank 
received the check for forward collection.

                                * * * * *

                      DD. 229.2(dd) Routing Number

    1. Each bank is assigned a routing number by an agent of the 
American Bankers Association. The routing number takes two forms--a 
fractional form and a nine-digit form. A paying bank is identified by 
both the fractional form routing number (which normally appears in the 
upper right hand corner of the check) and the nine-digit form. The nine-
digit form of the routing number of the paying bank generally is printed 
in magnetic ink near the bottom of the check (the MICR line; see ANS 
X9.13). In the case of an electronic check, the routing number of the 
paying bank is contained in the electronic image of the check (in nine-
digit form and fractional form) and in the electronic information 
related to the check (in nine-digit form). When a check is payable by 
one bank but payable through another bank, the routing number appearing 
on the check is that of the payable-through bank, not the payor bank. 
Industry standards require depositary banks, subsequent collecting 
banks, and returning banks to place their routing numbers in nine-digit 
form in their indorsements. (See Sec. 229.35 and commentary thereto).

                                * * * * *

                         VV. 229.2(vv) MICR Line

    1. Information in the MICR line of a check must be printed in 
accordance with ANS X9.13 for original checks and in accordance with ANS 
X9.100-140 for substitute checks, and must be contained in electronic 
checks in accordance with ANS X9.100-187. These standards could vary the 
requirements for printing the MICR line, such as by indicating 
circumstances under which the use of magnetic ink is not required. Banks 
that exchange checks electronically may agree to other standards for 
including MICR line information in the checks that they exchange 
electronically.

                                * * * * *

                BBB. 229.2(bbb) Sufficient Copy and Copy

    1. A ``copy'' or a ``sufficient copy'' as defined in 229.2(bbb) must 
be a paper reproduction of a check, unless the parties sending and 
receiving the copy otherwise agree. Therefore, an electronic image of a 
check is not a ``copy'' or a ``sufficient copy'' absent an agreement to 
that effect. If a customer has agreed to receive such information 
electronically, however, a bank that is required to provide a copy or 
sufficient copy may satisfy that requirement by providing an electronic 
image. (See Sec. 229.58).
    2. A sufficient copy, which is used to resolve claims related to the 
receipt of a substitute check, must be a copy of the original check.
    3. A bank under Sec. 229.53(b)(3) may limit its liability for an 
indemnity claim and under Sec. Sec. 229.54(e)(2) and 229.55(c)(2) may 
respond to an expedited recredit claim by providing the claimant with a 
copy of a check that accurately represents all of the information on the 
front and back of the original check as of the time the original check 
was truncated or that otherwise is sufficient to determine the validity 
of the claim against the bank.

                                Examples

    a. A copy of an original check that accurately represents all the 
information on the front and back of the original check as of the time 
of truncation would constitute a sufficient copy if that copy resolved 
the claim. For example, if resolution of the claim required accurate 
payment and indorsement information, an accurate copy of the front and 
back of a legible original check (including but not limited to a 
substitute check) would be a sufficient copy.
    b. A copy of the original check that does not accurately represent 
all the information

[[Page 969]]

on both the front and back of the original check also could be a 
sufficient copy if such copy contained all the information necessary to 
determine the validity of the relevant claim. For instance, if a 
consumer received a substitute check that contained a blurry image of a 
legible original check, the consumer might seek an expedited recredit 
because his or her account was charged for $1,000, but he or she 
believed that the check was written for only $100. If the amount that 
appeared on the front of the original check was legible, an accurate 
copy of only the front of the original check that showed the amount of 
the check would be sufficient to determine whether or not the consumer's 
claim regarding the amount of the check was valid.

                                * * * * *

     GGG. 229.2(ggg) Electronic Check and Electronic Returned Check

    1. Banks often enter into agreements under which a check may be 
transferred, returned, or presented electronically instead of 
transferring, returning, or presenting the paper check. For example, an 
agreement may provide that either an electronic image of the check or 
electronic information related to the check may be sent instead of the 
paper check. In order to satisfy Regulation CC's definition of 
``electronic check'' (or ``electronic returned check''), however, both 
the electronic image of the check and electronic information derived 
from the check must be sent. A sending bank and receiving bank may also 
agree, for example, that instead of sending the electronic check or 
electronic returned check directly to the receiving bank, the electronic 
check or electronic returned check may be sent to an intermediary that 
stores the electronic check or electronic returned check on the 
receiving bank's behalf and makes the electronic check or electronic 
returned check available for the receiving bank to retrieve.
    2. A sending bank must have an agreement with the receiving bank in 
order to send an electronic check instead of a paper check. The 
agreement to receive an electronic check or electronic returned check 
may be either bilateral or through a Federal Reserve Bank operating 
circular, clearinghouse rule, or other interbank agreement. (See UCC 4-
110).
    3. ANS X9.100-187 is the most prevalent industry standard for 
electronic checks and electronic returned checks that will enable banks 
to create substitute checks. Multiple standards, however, exist that 
would enable a bank to create a substitute check from an electronic 
check. Therefore, the banks exchanging electronic checks may agree that 
a different standard applies to electronic checks exchanged between the 
two banks. Additionally, banks that exchange checks electronically may 
agree to transfer, present, or return only electronic images of checks 
or only electronic information related to checks. In these situations, 
the sending bank and receiving bank will have agreed to a different 
standard as ANS X9.100-187 requires both an electronic image and 
electronic information.
    4. Electronic checks and electronic returned checks as defined in 
Regulation CC are subject to subpart C, except as otherwise provided in 
that subpart. (See Sec. 229.30 and commentary thereto).

               HHH. 229.2(hhh) Electronically-Created Item

    1. Electronically-created items are also sometimes referred to in 
the industry as ``electronic payment orders'' or ``EPOs.''
    2. Because an electronically-created item as defined in Regulation 
CC never existed in paper form, it does not meet the definition of 
``electronic check'' in 229.2(ggg) and therefore an electronically-
created item cannot be used to create a substitute check that is the 
legal equivalent of the original paper check.
    3. An electronically-created item can resemble an electronic image 
of a paper check or an electronic image of a remotely created check. 
(See 229.2(fff) (definition of remotely created check)).

                                Examples

    a. A corporate customer of a bank, rather than printing and mailing 
a paper check to a payee, electronically creates an image that looks 
like an image of the corporate customer's paper checks and emails the 
image to the payee.
    b. A consumer uses a smart-phone application through which the 
consumer provides the payee name, amount, and the consumer's signature. 
The application electronically sends this information, appearing 
formatted as a check, to the payee.
    c. A consumer calls his utility company to make an emergency bill 
payment, and provides his bank account information. The utility company 
uses this information to create an electronically-created item and 
deposits the electronically-created item with its bank to obtain payment 
from the consumer.

                                * * * * *

    XVI. Section 229.30 Electronic Checks and Electronic Information

                 A. 229.30(a) Checks Under This Subpart

    1. A bank may agree to receive an electronic check or electronic 
returned check from another bank instead of a paper check or returned 
check. (See Sec. 229.2(bbb) and commentary thereto). Section 229.30(a) 
does not give a bank the right to send an electronic

[[Page 970]]

check or electronic returned check absent an agreement to do so with the 
receiving bank.
    2. Electronic checks and electronic returned checks are subject to 
subpart C of this part as if they were checks or returned checks, unless 
otherwise provided in subpart C. For example, Sec. 229.31(c), which 
requires a paying bank to provide a notice of nonpayment if the paying 
bank determines not to pay a check in the amount of $5,000 or more, also 
applies when a paying bank determines not to pay an electronic check in 
the amount of $5,000 or more. A depositary bank's obligation to pay for 
a returned check (Sec. 229.33(e)) also applies with respect to an 
electronic returned check.
    Additionally, Sec. Sec. 229.33(b) and 229.36(a) specify that the 
parties' agreements govern the receipt of electronic returned checks and 
electronic written notices of nonpayment, and electronic checks, 
respectively. Section 229.34(a) sets forth warranties that are given 
only with respect to electronic checks and electronic returned checks 
and section 229.34(f) sets forth an indemnity given only with respect to 
remote deposit capture. Warranties that apply to paper checks or paper 
returned checks also apply to electronic checks and electronic returned 
checks, including Sec. 229.34(b) (transfer and presentment warranties 
with respect to remotely created checks), Sec. 229.34(c) (settlement 
amount, encoding, and offset warranties), Sec. 229.34(d) (returned 
check warranties), and Sec. 229.34(e) (notice of nonpayment 
warranties). The parties may, by agreement, vary the effect of the 
provisions in subpart C of this part as they apply to electronic checks 
and electronic returned checks, except that as set forth in Sec. 
229.37, no agreement can disclaim the responsibility of a bank for its 
own lack of good faith or failure to exercise ordinary care. (See Sec. 
229.37 and commentary thereto).
    3. Certain provisions of subpart C relate solely to paper checks or 
paper returned checks, as specified, such as Sec. 229.33(c) (acceptance 
of paper returned checks) and Sec. 229.36(d) (same-day settlement).

                          B. 229.30(b) Writings

    1. Provisions in subpart C of this part require that a paying bank 
or returning bank send information in writing. For example, Sec. 
229.31(f) requires that a notice in lieu be either a copy of the check 
or a written notice of nonpayment. A bank may send information required 
to be in writing in electronic form if the bank sending the information 
has an agreement with the bank receiving the information to do so.

 XVII. Section 229.31 Paying Bank's Responsibility for Return of Checks 
                        and Notices of Nonpayment

                      A. 229.31(a) Return of Checks

    1. Routing of returned checks.
    a. This subsection is subject to the requirements of expeditious 
return provided in Sec. 229.31(b).
    b. The paying bank acts, in effect, as an agent or subagent of the 
depositary bank in selecting a means of return. Under Sec. 229.31(a), a 
paying bank is authorized to route the returned check in a variety of 
ways:
    i. It may send the returned check directly to the depositary bank by 
sending an electronic returned check directly to the depositary bank if 
the paying bank has an agreement with the depositary bank to do so, or 
by using a courier or other means of delivery, bypassing returning 
banks; or
    ii. It may send the returned check or electronic returned check to 
any returning bank agreeing to handle the returned check or electronic 
returned check, regardless of whether or not the returning bank handled 
the check for forward collection.
    c. If the paying bank elects to return the check directly to the 
depositary bank, it is not necessarily required to return the check to 
the branch of first deposit. A paper check may be returned to the 
depositary bank at any physical location permitted under Sec. 
229.33(c).
    2. a. In some cases, a paying bank will be unable to identify the 
depositary bank through the use of ordinary care and good faith. These 
cases are now rare as depositary banks generally apply their 
indorsements electronically. A paying bank, for example, would be unable 
to identify the depositary bank if the depositary bank's indorsement is 
neither in an addenda record nor within the image of the check that was 
presented electronically. A paying bank, however, would not be 
``unable'' to identify the depositary bank merely because the depositary 
bank's indorsement is available within the image rather than attached as 
an addenda record.
    b. In cases where the paying bank is unable to identify the 
depositary bank, the paying bank may send the returned check to a 
returning bank that agrees to handle the returned check. The returning 
bank may be better able to identify the depositary bank.
    c. In the alternative, the paying bank may send the check back up 
the path used for forward collection of the check. The presenting bank 
and prior collecting banks normally will be able to trace the collection 
path of the check through the use of their internal records in 
conjunction with the indorsements on the returned check. In these 
limited cases, the presenting bank or a prior collecting bank is 
required to accept the returned check and send it to another prior 
collecting bank in the path used for forward collection or to the 
depositary bank. If the paying bank has an agreement to send electronic 
returned checks to a bank that handled the check for forward collection, 
the paying bank may send the electronic returned check to that bank.

[[Page 971]]

    d. A paying bank returning a check to a prior collecting bank 
because it is unable to identify the depositary bank must advise that 
bank that it is unable to identify the depositary bank. This advice must 
be conspicuous, such as a stamp on each check for which the depositary 
bank is unknown if such checks are commingled with other returned 
checks, or, if such checks are sent in a separate cash letter, by one 
notice on the cash letter. In the case of an electronic returned check, 
the advice requirement may be satisfied as agreed to by the parties. The 
advice will warn the bank that this check will require special research 
and handling in accordance with Sec. 229.32(a)(2). The returned check 
may not be prepared as a qualified return.
    e. A paying bank also may send a check to a prior collecting bank to 
make a claim against that bank under Sec. 229.35(b) where the 
depositary bank is insolvent or in other cases as provided in Sec. 
229.35(b). Finally, a paying bank may make a claim against a prior 
collecting bank based on a breach of warranty under UCC 4-208.
    3. Midnight deadline. Except for the extension permitted by Sec. 
229.31(g), discussed below, this section does not relieve a paying bank 
from the requirement for timely return (i.e., midnight deadline) under 
UCC 4-301 and 4-302, which continue to apply. Under UCC 4-302, a paying 
bank is ``accountable'' for the amount of a demand item, other than a 
documentary draft, if it does not pay or return the item or send notice 
of dishonor by its midnight deadline. Under UCC 3-418(c) and 4-215(a), 
late return constitutes payment and would be final in favor of a holder 
in due course or a person who has in good faith changed his position in 
reliance on the payment. Thus, the UCC midnight deadline gives the 
paying bank an incentive to make a prompt return.
    4. UCC provisions affected. This paragraph directly affects the 
following provisions of the UCC, and may affect other sections or 
provisions:
    a. Section 4-301(d), in that instead of returning a check through a 
clearinghouse or to the presenting bank, a paying bank may send a 
returned check to the depositary bank or to a returning bank.
    b. Section 4-301(a), in that settlement for returned checks is made 
under Sec. 229.32(e), not by revocation of settlement.

                B. 229.31(b) Expeditious Return of Checks

    1. This section requires a paying bank (which, for purposes of 
subpart C, may include a payable-through and payable-at bank (see Sec. 
229.2(z)) that determines not to pay a check to return the check 
expeditiously. Section 229.31(d) sets forth exceptions to this general 
rule. If a paying bank is not subject to the requirement for expeditious 
return under Sec. 229.31(b), the paying bank, nonetheless, must return 
the check within its deadlines under the UCC, Regulation J (12 CFR part 
210) or Sec. Sec. 229.36(d)(3) and (f)(4), as extended by Sec. 
229.31(g), for returning the item or sending notice.

                             2. Two-Day Test

    a. A returned check, including the original check, substitute check, 
or electronic returned check, is returned expeditiously if a paying bank 
sends the returned check in a manner such that the returned check would 
normally be received by the depositary bank not later than 2 p.m. (local 
time of the depositary bank) on the second business day following the 
banking day on which the check was presented to the paying bank.
    b. A paying bank may satisfy its expeditious return requirement by 
returning either an electronic returned check or a paper check. For 
example, a paying bank could meet the expeditious return test by sending 
an electronic returned check directly to the depositary bank, if the 
paying bank has an agreement with the depositary bank to do so, such 
that it normally would reach the depositary bank by the specified 
deadline, or sending an electronic returned check to a returning bank, 
if the paying bank has an agreement with the returning bank to do so, 
within the returning bank's timeframe for delivering electronic returned 
checks to the depositary bank within the return deadline. A paying bank 
that sends a returned check in paper form would typically need a highly 
expeditious means of delivery to meet the expeditious return test.
    c. This test does not require actual receipt of the returned check 
by the depositary bank within the specified deadline. In determining 
whether an electronic returned check would normally reach a depositary 
bank within the specified deadline, a paying bank may rely on a 
returning bank's return deadlines and availability schedules for 
electronic returned checks and returned checks destined for the 
depositary bank. A paying bank may not rely on the availability 
schedules if the paying bank has reason to believe that these schedules 
do not reflect the actual time for return of an electronic returned 
check to the depositary bank to which the paying bank is returning the 
check. The paying bank is not responsible for unforeseeable delays in 
the return of the check, such as communication failures or 
transportation delays.
    d. Where the second business day following presentment of the check 
to the paying bank is not a banking day for the depositary bank, the 
depositary bank might not process checks on that day. Consequently, if 
the last day of the time limit is not a banking day for the depositary 
bank, the check may be delivered to the depositary bank not later than 2 
p.m. (local time of the depositary bank) on the depositary bank's next 
banking

[[Page 972]]

day and the return will still be considered expeditious.
    e. Paying banks and returning banks are subject to the expeditious 
return rule, however, under section 229.33(a) a paying or returning bank 
may be liable to a depositary bank for failing to return a check in an 
expeditious manner only if the depositary bank has arrangements in place 
such that the paying or returning bank could return a returned check to 
the depositary bank electronically by commercially reasonable means. The 
depositary bank has the burden of proof for demonstrating that its 
arrangements are commercially reasonable.

                               3. Examples

    a. The paying bank and depositary bank have a bilateral agreement 
under which the depositary bank agrees to receive electronic returned 
checks directly from the paying bank. If a check is presented to a 
paying bank on Monday, the paying bank should send the returned check 
such that an electronic returned check normally would be received by the 
depositary bank by 2 p.m. (local time of the depositary bank) on 
Wednesday. This result is the same if, instead of a bilateral agreement, 
the paying bank and depositary bank are members of the same 
clearinghouse and agree to exchange electronic returned checks under 
clearinghouse rules.
    b. The depositary bank has an agreement to receive electronic 
returned checks from Returning Bank A but not from the paying bank. The 
paying bank, however, has an agreement with Returning Bank A to send 
electronic returned checks to Returning Bank A. If a check is presented 
to the paying bank on Monday, the paying bank should send the returned 
check such that the depositary bank normally would receive the returned 
check by 2 p.m. (local time of the depositary bank) on Wednesday. A 
paying bank may satisfy this requirement by sending either an electronic 
returned check or a paper returned check to Returning Bank A in a manner 
that permits Returning Bank A to send an electronic returned check to 
the depositary bank by 2 p.m. on Wednesday. The paying bank may also 
send a paper returned check to the depositary bank if a paper returned 
check would normally be received by the depositary bank by 2 p.m. on 
Wednesday.
    c. The paying bank has an agreement to send electronic returned 
checks to Returning Bank A. The depositary bank has an agreement to 
receive electronic returned checks from Returning Bank B. The paying 
bank does not have an agreement to send electronic returned checks to 
Returning Bank B. Returning Bank A, however, has an agreement to send 
electronic returned checks to Returning Bank B. If a check is presented 
to the paying bank on Monday, the paying bank should send the returned 
check such that the depositary bank normally would receive the returned 
check by 2 p.m. (local time of the depositary bank) on Wednesday.

                    C. 229.31(c) Notice of Nonpayment

                             1. Requirement

    a. The paying bank must send a notice of nonpayment if it decides 
not to pay a check in the amount of $5,000 or more. Except in the case 
where the returned check or a notice in lieu of return serves as the 
notice of nonpayment, the notice of nonpayment carries no value, and the 
check or substitute check must be returned in addition to the notice of 
nonpayment. The paying bank must send the notice of nonpayment such that 
it would normally be received by the depositary bank not later than 2 
p.m. (local time of the depositary bank) on the second business day 
following presentment. In determining whether the notice requirement is 
satisfied, the paying bank may rely on the availability schedules of a 
third party that provides the notice on behalf of the paying bank as the 
time that the notice is expected to be delivered to the depositary bank, 
unless the paying bank has reason to know the availability schedules are 
inaccurate.
    b. A bank identified by routing number as the paying bank is 
considered the paying bank under this subpart and would be required to 
provide a notice of nonpayment even though that bank determined that the 
check was not drawn by a customer of that bank. (See commentary to the 
definition of paying bank in Sec. 229.2(z)). A bank designated as a 
payable-through or payable-at bank and to which the check is sent for 
payment or collection is responsible for the notice of nonpayment 
requirement. The payable-through or payable-at bank may contract with 
the payor with respect to its liability in discharging these 
responsibilities.
    c. The paying bank should not send a notice of nonpayment until it 
has finally determined not to pay the check. Under Sec. 229.34(e), by 
sending the notice the paying bank warrants that it has returned or will 
return the check. If a paying bank sends a notice and subsequently 
decides to pay the check, the paying bank may mitigate its liability on 
this warranty by notifying the depositary bank that the check has been 
paid.
    d. The return of the check itself may serve as the required notice 
of nonpayment. In some cases, the returned check may be received by the 
depositary bank within the time requirements of Sec. 229.31(c)(1) and 
no notice other than the return of the check will be necessary. If the 
check is not received by the depositary bank within the time limits for 
notice, the return of the check may not satisfy the notice requirement. 
In determining whether the returned check will satisfy the notice 
requirement, the paying bank

[[Page 973]]

may rely on the availability schedules of returning banks as the time 
that the returned check is expected to be delivered to the depositary 
bank, unless the paying bank has reason to know the availability 
schedules are inaccurate.
    e. The requirement for notice does not affect the requirements for 
return of the check under the UCC (or Sec. 229.31(b)). A paying bank is 
not responsible for failure to give notice of nonpayment to a party that 
has breached a presentment warranty under UCC 4-208, notwithstanding 
that the paying bank may have returned the check. (See UCC 4-208 and 4-
302).

                          2. Content of Notices

    a. This paragraph provides that, to the extent the information is 
available to the paying bank, the notice must at a minimum contain the 
information contained in the check's MICR line when the check was 
received by the paying bank. The MICR line information includes the 
paying bank's routing number, the account number of the paying bank's 
customer, the check number, and auxiliary on-us fields for corporate 
checks, and may include the amount of the check.
    b. Although it has no duty to do so, a paying bank that cannot 
identify the depositary bank from the check itself may wish to send the 
notice to the earliest collecting bank it can identify and indicate that 
the notice is not being sent to the depositary bank. The collecting bank 
may be able to identify the depositary bank and forward the notice, but 
is under no duty to do so. In addition, the collecting bank may actually 
be the depositary bank.
    c. A bank must identify an item of information if the bank is 
uncertain as to that item's accuracy. A bank may make this 
identification in accordance with general industry practices, or by 
other reasonable means. For example, where the paying bank receives a 
handwritten check with a payee name that the paying bank cannot decipher 
using a good faith effort, the paying bank could include a ``?'' symbol 
in the payee's name field of the notice to indicate its uncertainty as 
to that particular element.

 D. 229.31(d) Exceptions to the Expeditious Return of Checks and Notice 
                              of Nonpayment

        1. Depositary Banks Not Subject to Subpart B of This Part

    a. Subpart B of this part applies only to ``checks'' deposited in 
transaction ``accounts.'' A depositary bank with only time or savings 
accounts or credit card accounts need not comply with the availability 
requirements of subpart B of Regulation CC. Thus, the expeditious return 
requirement of Sec. 229.31(b) and the notice of nonpayment requirement 
of Sec. 229.31(c) do not apply to checks being returned to banks that 
do not hold accounts. The paying bank's midnight deadline in UCC 4-301 
and 4-302 and Sec. 210.12 of Regulation J (12 CFR 210.12), and the 
extension in Sec. 229.31(g), would continue to apply to these checks.
    b. The expeditious return requirement and the notice of nonpayment 
requirement apply only to ``checks'' deposited in a bank that is a 
``depository institution'' under the EFA Act. Federal Reserve Banks, 
Federal Home Loan Banks, private bankers, and possibly certain 
industrial banks are not ``depository institutions'' within the meaning 
of the EFA Act and therefore are not subject to the expedited-
availability requirements of subpart B of this regulation. Thus, the 
expeditious return and notice of nonpayment requirements of this section 
would not apply to a paying bank returning a check that was deposited in 
one of these banks.

                   2. Unidentifiable Depositary Banks

    a. A paying bank that sends a check to a bank that handled the check 
for forward collection because the paying bank is unable to identify the 
depositary bank is not subject to the requirement for expeditious return 
by the paying bank or to the requirement for notice of nonpayment. 
Although the lack of requirement for notice of nonpayment under this 
paragraph will create risks for the depositary bank, the inability to 
identify the depositary bank will generally be due to the depositary 
bank's, or a collecting bank's, failure to indorse as required by Sec. 
229.35(a). If the depositary bank failed to use the proper indorsement, 
it should bear the risks of less- than-expeditious return or not 
receiving notice of nonpayment in a timely manner. Similarly, where the 
inability to identify the depositary bank is due to indorsements or 
other information placed on the back of the check by the depositary 
bank's customer or other prior indorser, the depositary bank should bear 
the risk that it cannot charge a returned check back to that customer.
    b. This paragraph does not relieve a paying bank from the liability 
for the lack of expeditious return or not providing notice of nonpayment 
in cases where the paying bank is itself responsible for the inability 
to identify the depositary bank, such as when the paying bank's customer 
has used a check with printing or other material on the back in the area 
reserved for the depositary bank's indorsement, and the depositary bank 
placed its indorsement on the original check making the indorsement 
unreadable. (See Sec. 229.38(c)).
    c. A paying bank's return of a check to an unidentifiable depositary 
bank is subject to its midnight deadline under UCC 4-301, Regulation J 
(if the check is returned through a Federal Reserve Bank), and the 
extension provided in Sec. 229.31(g).

[[Page 974]]

              E. 229.31(e) Identification of Returned Check

    1. The reason for the return must be clearly indicated. A check is 
identified as a returned check if the front of that check indicates the 
reason for return, even though it does not specifically state that the 
check is a returned check. A reason such as ``Refer to Maker'' may be 
appropriate in certain cases, such as when a drawer with a positive pay 
arrangement instructs the bank to return the check. By contrast, a 
reason such as ``Refer to Maker'' would be inappropriate in cases where 
a check is being returned due to the paying bank having already paid the 
item, where a check has been altered, or where a check is unauthorized. 
In such cases, the payee and not the drawer would generally have more 
information as to why the check is being returned.
    2. If the returned check is a substitute check or electronic 
returned check, the reason for return information must be included such 
that it is retained on any subsequent substitute check. For substitute 
checks, this requirement could be met by placing the information (1) in 
the location on the front of the substitute check that is specified by 
ANS X9.100-140 or (2) within the image of the original check that 
appears on the front of the substitute check so that the information is 
retained on any subsequent substitute check. For electronic returned 
checks, this requirement could be met by including the reason for return 
in accordance with ANS X9.100-187. If the paying bank places the 
returned check in a carrier envelope, the carrier envelope should 
indicate that it is a returned check but need not repeat the reason for 
return stated on the check if it in fact appears on the check.

                  F. 229.31(f) Notice in Lieu of Return

    1. A notice in lieu of return may be used by a bank handling a 
returned check that has been lost or destroyed, including when the 
original returned check has been charged back as lost or destroyed as 
provided in Sec. 229.35(b). Notice in lieu of return is permitted only 
when a bank does not have and cannot obtain possession of the check (or 
must retain possession of the check for protest) and does not have 
sufficient information to create a substitute check. For example, a bank 
that does not have the original check may have an image of both sides of 
the check, but the image may be insufficient or may not be in the proper 
format such that the bank cannot create a substitute check or provide 
required substitute check warranties. In that case, the check would be 
unavailable for return. A bank using a notice in lieu of return gives a 
warranty under Sec. 229.34(d)(1)(iv) that the check, in any form, has 
not been and will not be returned.
    2. A notice in lieu of return must be in writing (either in paper 
form, or if agreed to by the parties electronic form), but not provided 
by telephone or other oral transmission. The requirement for a writing 
and the indication that the notice is a substitute for the returned 
check is necessary so that any returning bank and the depositary bank 
are informed that the notice carries value. A check that is lost or 
otherwise unavailable for return may be returned by sending a legible 
copy of both sides of the check or, if such a copy is not available to 
the paying bank, a written notice of nonpayment containing the 
information specified in Sec. 229.31(c)(2). The copy or written notice 
must clearly indicate it is a notice in lieu of return. Notice by a 
legible facsimile of both sides of the check may satisfy the 
requirements for a notice in lieu of return.
    The paying bank may send an electronic image of both sides of the 
check as a notice in lieu of return only if it has an agreement to do so 
with the receiving bank. (See Sec. 229.30(b)).
    3. The requirement of this paragraph supersedes the requirement of 
UCC 4-301(a) as to the form and information required of a notice of 
dishonor or nonpayment.
    4. The notice in lieu of return is subject to the provisions of this 
subpart relating to returned checks and is treated like a returned check 
for purposes of this subpart. Reference in the regulation and this 
commentary to a returned check includes a notice in lieu of return 
unless the context indicates otherwise.
    5. If not all of the information required by Sec. 229.31(c)(2) is 
available, the paying bank may make a claim against any prior bank 
handling the check as provided in Sec. 229.35(b).

                   G. 229.31(g) Extension of Deadline

    1. This paragraph permits extension of the deadlines in the UCC, 
Regulation J (12 CFR part 210), and Sec. 229.36(d)(3) and (4) for 
returning a check for which the paying bank previously has settled 
(generally midnight of the banking day following the banking day on 
which the check is received by the paying bank) and for returning a 
check without settling for it (generally midnight of the banking day on 
which the check is received by the paying bank, or such other time 
provided by Sec. 210.9 of Regulation J (12 CFR part 210), or Sec. 
229.36(d)(3) or (4)), in two circumstances:
    a. A paying bank may, by agreement, send an electronic returned 
check instead of a paper returned check or may have a courier that 
leaves after midnight (or after any other applicable deadline) to 
deliver its forward-collection checks. This paragraph removes the 
constraint of the midnight deadline for returned checks if the returned 
check reaches the depositary bank (or receiving bank, if the depositary 
bank is unidentifiable) on or before the depositary bank's (or receiving 
bank's) next banking

[[Page 975]]

day following the otherwise applicable deadline by the earlier of the 
close of that banking day or a cutoff hour of 2 p.m. (local time of the 
depositary bank or receiving bank) or later set by the depositary bank 
(or receiving bank) under UCC 4-108. This paragraph applies to the 
extension of all midnight deadlines except Saturday midnight deadlines 
(see the following paragraph).
    b. A paying bank may observe a banking day, as defined in the 
applicable UCC, on a Saturday, which is not a business day and therefore 
not a banking day under Regulation CC. In such a case, the UCC deadline 
for returning checks received and settled for on Friday, or for 
returning checks received on Saturday without settling for them, might 
require the bank to return the checks by midnight Saturday. However, the 
bank may not have its back-office operations staff available on Saturday 
to prepare and send the electronic returned checks, and the returning 
bank or depositary bank that would be receiving this electronic 
information may not have staff available to process it until Sunday 
night or Monday morning. This paragraph extends the midnight deadline if 
the returned checks reach the returning bank by a cut-off hour (usually 
on Sunday night or Monday morning) that permits processing during its 
next processing cycle or reach the depositary bank (or receiving bank) 
by the cut-off hour on its next banking day following the Saturday 
midnight deadline. This paragraph applies exclusively to the extension 
of Saturday midnight deadlines.
    2. The time limits that are extended in each case are the paying 
bank's midnight deadline for returning a check for which it has already 
settled and the paying bank's deadline for returning a check without 
settling for it in UCC 4-301 and 4-302, Sec. Sec. 210.9 and 210.12 of 
Regulation J (12 CFR 210.9 and 210.12), and Sec. 229.36(d)(3) and (4).
    3. If the paying bank has an agreement to do so with the receiving 
bank (such as through bilateral agreements, clearinghouse rules, or 
operating circular), the paying bank may satisfy its midnight or other 
return deadline by sending an electronic returned check prior to the 
expiration of the deadline. The time when the electronic returned check 
is considered to be received by the depositary bank is determined by the 
agreement. The paying bank satisfies its midnight or other return 
deadline by dispatching paper returned checks to another bank by 
courier, including a courier under contract with the paying bank, prior 
to expiration of the deadline.
    4. This paragraph directly affects UCC 4-301 and 4-302 and 
Sec. Sec. 210.9 and 210.12 of Regulation J (12 CFR 210.9 and 210.12) to 
the extent that this paragraph applies by its terms, and may affect 
other provisions.

           H. 229.31(h) Payable Through and Payable at Checks

    1. For purposes of subpart C of this part, the regulation defines a 
payable-through or payable-at bank (which could be designated the 
collectible-through or collectible-at bank) as a paying bank. The 
requirements of subpart C are imposed on a payable-through or payable-at 
bank and are based on the time of receipt of the forward collection 
check by the payable-through or payable-at bank. This provision is 
intended to speed the return of checks and receipt of notices of 
nonpayment for checks that are payable through or at a bank to the 
depositary bank.
    2. A check sent for payment or collection to a payable-through or 
payable-at bank is not considered to be drawn on that bank for purposes 
of the midnight deadline provision of UCC 4-301.

                 I. 229.31(i) Reliance on Routing Number

    1. Although Sec. 229.35 requires that the depositary bank 
indorsement contain its nine-digit routing number, it is possible that a 
returned check will bear the routing number of the depositary bank in 
fractional, nine-digit, or other form. This paragraph permits a paying 
bank to rely on the routing number of the depositary bank as it appears 
on the check (in the depositary bank's indorsement) or in the electronic 
check sent pursuant to an agreement when the check, or electronic check, 
is received by the paying bank.
    2. If there are inconsistent routing numbers, the paying bank may 
rely on any routing number designating the depositary bank. The paying 
bank is not required to resolve the inconsistency prior to processing 
the check. The paying bank remains subject to the requirement to act in 
good faith and use ordinary care under Sec. 229.38(a).

   XVIII. Section 229.32 Returning Bank's Responsibility for Returned 
                                 Checks

                      A. 229.32(a) Return of Checks

                      1. Routing of Returned Check

    a. Under Sec. 229.32(a), the returning bank is authorized to route 
the returned check in a variety of ways:
    i. It may send the returned check directly to the depositary bank by 
sending an electronic returned check directly to the depositary bank if 
the returning bank has an agreement with the depositary bank to do so, 
or by using a courier or other means of delivery; or
    ii. It may send the returned check or electronic returned check to 
any returning bank agreeing to handle the returned check regardless of 
whether or not the returning bank handled the check for forward 
collection.

[[Page 976]]

    b. If the returning bank elects to send the returned check directly 
to the depositary bank, it is not required to send the check to the 
branch of the depositary bank that first handled the check. A paper 
returned check may be sent to the depositary bank at any physical 
location permitted under Sec. 229.33(b).

                    2. Unidentifiable Depositary Bank

    a. Returning banks agreeing to handle checks for return to 
depositary banks under Sec. 229.32(a) are expected to be expert in 
identifying depositary bank indorsements. In the limited cases where the 
returning bank cannot identify the depositary bank, if the returning 
bank did not handle the check for forward collection, it may send the 
returned check to any collecting bank that handled the check for forward 
collection.
    b. If, on the other hand, the returning bank itself handled the 
check for forward collection, it may send the returned check to a 
collecting bank that was prior to it in the forward-collection process, 
which will be better able to identify the depositary bank. If there are 
no prior collecting banks, the returning bank must research the 
collection of the check and identify the depositary bank.
    c. The returning bank's return of a check under this paragraph is 
subject to the requirement to use ordinary care under UCC 4-202(b). (See 
definition of returning bank in Sec. 229.2(cc)).
    d. As in the case of a paying bank returning a check under Sec. 
229.31(a)(2), a returning bank returning a check under Sec. 
229.32(a)(2) must advise the bank to which it sends the returned check 
that it is unable to identify the depositary bank. This advice must be 
conspicuous, such as a stamp on the check or a notice on the cash 
letter. The returned check may not be prepared as a qualified return. In 
the case of an electronic returned check, the advice requirement may be 
satisfied as agreed to by the parties.
    3. A returning bank agrees to handle a returned check if it--
    a. Publishes or distributes availability schedules for the return of 
returned checks and accepts the returned check for return;
    b. Handles a returned check for return that it did not handle for 
forward collection;
    c. Agrees with the paying bank or returning bank to handle 
electronic returned checks sent by that bank; or
    d. Otherwise agrees to handle a returned check.
    4. Cut-off hours. A returning bank may establish earlier cut-off 
hours for receipt of returned checks than for receipt of forward 
collection checks, but, unless the sending bank and returning bank agree 
otherwise, the cut-off hour for returned checks may not be earlier than 
2 p.m. (local time of the returning bank). The returning bank also may 
set different sorting requirements for returned checks than those 
applicable to other checks. Thus, a returning bank may allow itself more 
processing time for returns than for forward collection checks.
    5. Qualified returned checks. A qualified returned check will be 
handled by subsequent returning banks more efficiently than a raw 
return. The qualified returned check must include the routing number of 
the depositary bank, the amount of the check, and a return identifier 
encoded on the check in magnetic ink. A check that is converted to a 
qualified returned check must be encoded in accordance with ANS X9.13 
for original checks or ANS X9.100-140 for substitute checks. If the 
returning bank makes an encoding error in creating a qualified returned 
check, it may be liable under Sec. 229.38 for losses caused by any 
negligence or under Sec. 229.34(c)(3) for breach of an encoding 
warranty.
    6. Responsibilities of returning bank. In meeting the requirements 
of this section, the returning bank is responsible for its own actions, 
but not those of the paying bank, other returning banks, or the 
depositary bank. (See UCC 4-202(c) regarding the responsibility of 
collecting banks).
    7. UCC sections affected. Section 229.32 directly affects UCC 
Section 4-214(a) and may affect other sections or provisions. (See UCC 
4-202(b)). Section 4-214(a) is affected in that settlement for returned 
checks is made under Sec. 229.32(e) and not by charge-back of 
provisional credit.

                B. 229.32(b) Expeditious Return of Checks

    1. The standards for return of checks established by this section 
are similar to those for paying banks in Sec. 229.31(b). This section 
requires a returning bank to return a returned check expeditiously, 
subject to the exceptions set forth in Sec. 229.32(c). In effect, the 
returning bank is an agent or subagent of the paying bank and a subagent 
of the depositary bank for the purposes of returning the check.
    2. A returning bank that agrees to handle a returned check (see 
commentary to Sec. 229.32(a)) is subject to the expeditious return 
requirement with respect to the returned check except as provided in 
Sec. 229.32(c)).
    3. Two-day test. As in the case of a paying bank, a returning bank's 
return of a returned check is expeditious if it is sent in a manner such 
that the depositary bank would normally receive the returned check by 2 
p.m. (local time of the depositary bank) of the second business day 
after the banking day on which the check was presented to the paying 
bank. Although a returning bank will not have firsthand knowledge of the 
day on which a check was presented to the paying bank, returning banks 
may, by agreement, allocate with paying banks liability for late return 
based on the delays caused by each. Paying banks and returning banks are 
subject to the expeditious return rule, however,

[[Page 977]]

under section 229.33(a) a paying or returning bank may be liable to a 
depositary bank for failing to return a check in an expeditious manner 
only if the depositary bank has arrangements in place such that the 
paying bank or returning bank could return a returned check to the 
depositary bank electronically by commercially reasonable means. The 
depositary bank has the burden of proof for demonstrating that its 
arrangements are commercially reasonable.
    4. Example. Returning Bank A does not have an agreement to send 
electronic returned checks to the depositary bank but has an agreement 
to send electronic returned checks to Returning Bank B, which, in turn, 
has an agreement to send electronic returned checks to the depositary 
bank. If a check is presented to the paying bank on Monday, each 
returning bank would need to send the returned check in a manner such 
that the depositary bank normally would receive the returned check by 2 
p.m. (local time of the depositary bank) on Wednesday.

       C. 229.32(c) Exceptions to the Expeditious Return of Checks

    1. This paragraph sets forth the circumstances under which a 
returning bank is not required to return the check to the depositary 
bank in accordance with Sec. 229.32(b).
    2. Depositary bank not subject to subpart B. This paragraph is 
similar to Sec. 229.31(d)(1) and relieves a returning bank of its 
obligation to make expeditious return to a depositary bank that does not 
hold ``accounts'' under subpart B of this regulation or is not a 
``depository institution'' within the meaning of the EFA Act. (See 
commentary to Sec. 229.31(d)).
    3. Unidentifiable depositary bank. A returning bank is not subject 
to the expeditious return requirements of Sec. 229.32(b) in handling a 
returned check for which the paying bank cannot identify the depositary 
bank.
    4. Misrouted returned check. A returning bank is not subject to the 
expeditious return requirements of Sec. 229.32(b) in handling a 
misrouted returned check pursuant to Sec. 229.33(f). A bank acting as a 
returning bank because it received a returned check on the basis that it 
was the depositary bank and sends the misrouted returned check to the 
correct depositary bank, directly or through subsequent returning banks, 
is similarly not subject to the expeditious return requirements of Sec. 
229.32(b). (See commentary to Sec. 229.33(f)).

                  D. 229.32(d) Notice in Lieu of Return

    1. This paragraph is similar to Sec. 229.31(f) and authorizes a 
returning bank to originate a notice in lieu of return if the returned 
check is unavailable for return. Notice in lieu of return is permitted 
only when a bank does not have and cannot obtain possession of the check 
(or when the bank must retain possession of the check for protest) and 
does not have sufficient information to create a substitute check. (See 
commentary to Sec. 229.31(f)).

                         E. 229.32(e) Settlement

    1. Under the UCC, a paying bank settles with a presenting bank after 
the check is presented to the paying bank. The paying bank may recover 
the settlement when the paying bank returns the check to the presenting 
bank. Under this regulation, however, the paying bank may return the 
check directly to the depositary bank or through returning banks that 
did not handle the check for forward collection. On these more efficient 
return paths, the paying bank does not recover the settlement made to 
the presenting bank. Thus, this paragraph requires the returning bank to 
settle for a returned check (either with the paying bank or another 
returning bank) in the same way that it would settle for a similar check 
for forward collection. To achieve uniformity, this paragraph applies 
even if the returning bank handled the check for forward collection.
    2. Any returning bank, including one that handled the check for 
forward collection, may provide availability for returned checks 
pursuant to an availability schedule as it does for forward collection 
checks. These settlements by returning banks, as well as settlements 
between banks made during the forward collection of a check, are 
considered final when made subject to any deferment of availability. 
(See Sec. 229.36(c) and commentary to Sec. 229.35(b)).
    3. A returning bank may vary the settlement method it uses by 
agreement with paying banks or other returning banks. Special rules 
apply in the case of insolvency of banks. (See Sec. 229.39). If payment 
cannot be obtained from a depositary bank or returning bank because of 
its insolvency or otherwise, recovery can be had by returning banks, 
paying banks, and collecting banks from prior banks on this basis of the 
liability of prior banks under Sec. 229.35(b).
    4. This paragraph affects UCC 4-214(a) in that a paying bank or 
collecting bank does not ordinarily have a right to charge back against 
the bank from which it received the returned check, although it is 
entitled to settlement if it returns the returned check to that bank, 
and may affect other sections or provisions. Under Sec. 229.36(c), a 
bank collecting a check remains liable to prior collecting banks and the 
depositary bank's customer under the UCC.

                          F. 229.32(f) Charges

    1. This paragraph permits any returning bank, even one that handled 
the check for forward collection, to impose a fee on the

[[Page 978]]

paying bank or other returning bank for its service in handling a 
returned check. Where a claim is made under Sec. 229.35(b), the bank on 
which the claim is made is not authorized by this paragraph to impose a 
charge for taking up a check. This paragraph preempts state laws to the 
extent that these laws prevent returning banks from charging fees for 
handling returned checks.

                 G. 229.32(g) Reliance on Routing Number

    1. This paragraph is similar to Sec. 229.31(i) and permits a 
returning bank to rely on routing numbers appearing on a returned check 
such as routing numbers in the depositary bank's indorsement, or in the 
electronic returned check received by the returning bank pursuant to an 
agreement, or on qualified returned checks. (See commentary to Sec. 
229.31(i)).

XIX. Section 229.33 Depositary Bank's Responsibility for Returned Checks 
                        and Notices of Nonpayment

                   A. 229.33(a) Right To Assert Claim

    1. This paragraph sets forth the circumstances under which a paying 
bank or returning bank may be liable to a depositary bank for failing to 
return a check in an expeditious manner in accordance with Sec. Sec. 
229.31(b) and 229.32(b) respectively.
    2. This paragraph does not require a depositary bank to establish 
arrangements to accept returned checks electronically, either directly 
from the paying bank or indirectly from a returning bank. Most 
depositary banks, however, have arrangements in place to accept returned 
checks electronically. (See commentary to Sec. Sec. 229.31(b) and 
229.32(b) for examples of direct and indirect arrangements).
    3. The depositary bank has the burden of proof for demonstrating 
that its arrangements for accepting returned checks electronically are 
commercially reasonable. The standard allows for case-by-case 
flexibility and can change over time to reflect market practices. The 
standard is intended to prevent a depositary bank from establishing 
electronic return arrangements that are very limited in scope or that 
provide unreasonable barriers to return such that, in practice, the 
depositary bank would accept only a small proportion of its returns 
electronically.

  B. 229.33(b) Acceptance of Electronic Returned Checks and Electronic 
                          Notices of Nonpayment

    1. A depositary bank may agree directly with a returning bank or a 
paying bank (or through clearinghouse rules) to accept electronic 
returned checks. Likewise, a depositary bank may agree directly with a 
paying bank (or through clearinghouse rules) to accept electronic 
written notices of nonpayment. (See Sec. Sec. 229.2(ggg), 229.30(b), 
and 229.31(c) and commentary thereto). The depositary bank's acceptance 
of electronic returned checks and electronic written notices of 
nonpayment is governed by the depositary bank's agreement with the banks 
sending the electronic returned check or electronic written notice of 
nonpayment to the depositary bank (or through the applicable 
clearinghouse rules). The agreement normally would specify the 
electronic address or receipt point at which the depositary bank accepts 
returned checks and written notices of nonpayment electronically, as 
well as what constitutes receipt of the returned checks and written 
notices of nonpayment. The agreement also may specify whether electronic 
returned checks must be separated from electronic checks sent for 
forward collection.

 C. 229.33(c) Acceptance of Paper Returned Checks and Paper Notices of 
                               Nonpayment

    1. This paragraph states where the depositary bank is required to 
accept paper returned checks and paper notices of nonpayment during its 
banking day. (These locations differ from locations at which a 
depositary bank must accept oral notices or electronic notices. (See 
Sec. 229.33(b) and (d) and commentary thereto). This paragraph is 
derived from UCC 3-111, which specifies that presentment for payment may 
be made at the place specified in the instrument or, if there is none, 
at the place of business of the party to pay. In the case of returned 
checks, the depositary bank does not print the check and can only 
specify the place of ``payment'' of the returned check in its 
indorsement.
    2. The paragraph specifies four locations at which the depositary 
bank must accept paper returned checks and paper notices of nonpayment:
    a. The depositary bank must accept paper returned checks and paper 
notices of nonpayment at any location at which it requests presentment 
of forward collection paper checks, such as a processing center. A 
depositary bank does not request presentment of forward collection 
checks at a branch of the bank merely by paying checks presented over 
the counter.
    b. i. If the depositary bank indorsement states the name and address 
of the depositary bank, it must accept paper returned checks and paper 
notices of nonpayment at the branch, head office, or other location, 
such as a processing center, indicated by the address. If the address is 
too general to identify a particular location, then the depositary bank 
must accept paper returned checks and paper notices of nonpayment at any 
branch or head office consistent with the address. If, for example, the 
address is ``New York, New York,'' each branch in New York City must 
accept paper returned checks and paper notices of nonpayment. 
Accordingly, a

[[Page 979]]

depositary bank may limit the locations at which it must accept paper 
returned checks and paper notices of nonpayment by specifying a branch 
or head office in its indorsement.
    ii. If no address appears in the depositary bank's indorsement, the 
depositary bank must accept paper returned checks and paper notices of 
nonpayment at any branch or head office associated with the depositary 
bank's routing number. The offices associated with the routing number of 
a bank are found in American Bankers Association Key to Routing Numbers, 
published by an agent of the American Bankers Association, which lists a 
city and state address for each routing number.
    iii. If no routing number or address appears in its indorsement, the 
depositary bank must accept a paper returned check at any branch or head 
office of the bank. Section 229.35 and applicable industry standards 
require that the indorsement contain a routing number, a name, and a 
location. Consequently paragraphs (c)(1)(ii)(B) and (C) of this section 
apply only where the depositary bank has failed to comply with the 
indorsement requirement.
    3. For ease of processing, a depositary bank may require that 
returning banks or paying banks returning checks to it separate returned 
checks from forward collection checks being presented.

           D. 229.33(d) Acceptance Oral Notices of Nonpayment

    In the case of telephone notices, the depositary bank may not refuse 
to accept notices at the telephone numbers identified in this section, 
but may transfer calls or use a recording device.

                          E. 229.33(e) Payment

    1. As discussed in the commentary to Sec. 229.32(e), under this 
regulation a paying bank or returning bank does not obtain credit for a 
returned check by charge-back but by, in effect, ``presenting'' the 
returned check to the depositary bank. This paragraph imposes an 
obligation to ``pay'' a returned check that is similar to the obligation 
to pay a forward collection check by a paying bank, except that the 
depositary bank may not return a returned check for which it is the 
depositary bank. Also, certain means of payment, such as remittance 
drafts, may be used only by agreement.
    2. The depositary bank must pay for a returned check by the close of 
the banking day on which it received the returned check. The day on 
which a returned check is received is determined pursuant to UCC 4-108, 
which permits the bank to establish a cut-off hour, generally not 
earlier than 2 p.m. (local time of the depositary bank), and treat 
checks received after that hour as being received on the next banking 
day. If the depositary bank is unable to make payment to a returning 
bank or paying bank on the banking day that it receives the returned 
check, because the returning bank or paying bank is closed for a holiday 
or because the time when the depositary bank received the check is after 
the close of Fedwire, e.g., west coast banks with late cut-off hours, 
payment may be made on the next banking day of the bank receiving 
payment.
    3. Payment must be made so that the funds are available for use by 
the bank returning the check to the depositary bank on the day the check 
is received by the depositary bank. For example, a depositary bank meets 
this requirement if it sends a wire transfer to the returning bank or 
paying bank on the day it receives the returned check, even if the 
returning bank or paying bank has closed for the day. A wire transfer 
should indicate the purpose of the payment.
    4. The depositary bank may use a net settlement arrangement to 
settle for a returned check. Banks with net settlement agreements could 
net the appropriate credits and debits for returned checks with the 
accounting entries for forward collection checks if they so desired. If, 
for purposes of establishing additional controls or for other reasons, 
the banks involved desired a separate settlement for returned checks, a 
separate net settlement agreement could be established.
    5. The bank sending the returned check to the depositary bank may 
agree to accept payment at a later date if, for example, it does not 
believe that the amount of the returned check or checks warrants the 
costs of same-day payment. Thus, a returning bank or paying bank may 
agree to accept payment through an ACH credit or debit transfer that 
settles the day after the returned check is received instead of a wire 
transfer that settles on the same day.
    6. This paragraph and this subpart do not affect the depositary 
bank's right to recover a provisional settlement with its nonbank 
customer for a check that is returned. (See also Sec. Sec. 
229.19(c)(2)(ii), 229.33(h), and 229.35(b)).

F. 229.33(f) Misrouted Returned Checks and Written Notices of Nonpayment

    1. This paragraph permits a bank receiving a check or written notice 
of nonpayment (either in paper form or electronic form) on the basis 
that it is the depositary bank to send the misrouted returned check or 
written notice of nonpayment to the correct depositary bank, if it can 
identify the correct depositary bank, either directly or through a 
returning bank agreeing to handle the check or written notice of 
nonpayment. When sending a returned check under this paragraph, the bank 
receiving the misrouted check is acting as a returning bank. 
Alternatively, the bank receiving the misrouted returned check or 
written notice of nonpayment must

[[Page 980]]

send the check or notice back to the bank from which it was received.
    2. In sending a misrouted returned check, the bank to which the 
returned check was misrouted (the incorrect depositary bank) could 
receive settlement from the bank to which it sends the misrouted check 
under Sec. 229.33(f) (the correct depositary bank, a returning bank 
that agrees to handle it, or the bank from which the misrouted check was 
received). The correct depositary bank would be required to pay for the 
returned check under Sec. 229.33(e), and any other bank to which the 
check is sent under this paragraph would be required to settle for the 
check as a returning bank under Sec. 229.32(e). The bank to which the 
returned check was misrouted is required to act promptly, i.e., within 
its midnight deadline. This paragraph does not affect a bank's duties 
under Sec. 229.35(b).

                          G. 229.33(g) Charges

    1. This paragraph prohibits a depositary bank from charging the 
equivalent of a presentment fee for returned checks. A returning bank, 
however, may charge a fee for handling returned checks. If the returning 
bank receives a mixed cash letter of returned checks, which includes 
some checks for which the returning bank also is the depositary bank, 
the fee may be applied to all the returned checks in the cash letter. In 
the case of a sorted cash letter containing only returned checks for 
which the returning bank is the depositary bank, however, no fee may be 
charged.

                  H. 229.33(h) Notification to Customer

    1. This paragraph requires a depositary bank to notify its customer 
of nonpayment upon receipt of a returned check or notice of nonpayment. 
Notice also must be given if a depositary bank receives a notice of 
recovery under Sec. 229.35(b). A bank that chooses to provide the 
notice required by Sec. 229.33(h) in writing may send the notice by 
email or facsimile if the bank sends the notice to the email address or 
facsimile number specified by the customer for that purpose. The notice 
to the customer required under this paragraph also may satisfy the 
notice requirement of Sec. 229.13(g) if the depositary bank invokes the 
reasonable-cause exception of Sec. 229.13(e) due to the receipt of a 
notice of nonpayment, provided the notice meets all the requirements of 
Sec. 229.13(g).

              XX. Section 229.34 Warranties and Indemnities

                             A. Introduction

    1. Unless otherwise specified, warranties that apply to checks or 
returned checks also apply to electronic checks and electronic returned 
checks, including under paragraphs (b) (transfer and presentment 
warranties with respect to remotely created checks), (c) (settlement 
amount, encoding, and offset warranties), (d) (returned check 
warranties), and (e) (notice of nonpayment warranties). (See Sec. 
229.30(a) and commentary thereto). Paragraph (f), however, sets forth 
remote deposit capture indemnities provided to banks that accept an 
original check for deposit for losses incurred by that depositary bank 
if the loss is due to the check having already been paid. Paragraph (a) 
sets forth warranties that are given only with respect to electronic 
checks and electronic returned checks. Paragraph (g) sets forth 
indemnities with respect to electronically created items.

B. 229.34(a) Warranties With Respect to Electronic Checks and Electronic 
                             Returned Checks

    1. Paragraph (a) of Sec. 229.34 sets forth the warranties that a 
bank makes when transferring or presenting an electronic check or 
electronic returned check and receiving settlement or other 
consideration for it. Electronic checks and electronic returned checks 
sent pursuant to an agreement with the receiving bank are treated as 
checks subject to subpart C. Therefore, the warranties in Sec. 
229.34(a) are in addition to any warranties a bank makes under 
paragraphs (b), (c), (d), and (e) with respect to an electronic check or 
electronic returned check. For example, a bank that transfers and 
receives consideration for an electronic check that is derived from a 
remotely created check warrants that the remotely created check, from 
which the electronic check is derived, is authorized by the person on 
whose account the check is drawn.
    2. The warranties in Sec. 229.34(a)(1) relate to a subsequent 
bank's ability to create a substitute check. This paragraph provides a 
bank that creates a substitute check from an electronic check or 
electronic returned check with a warranty claim against any prior bank 
that transferred the electronic check or electronic returned check. The 
warranties in this paragraph correspond to the warranties made by a bank 
that transfers, presents, or returns a substitute check (a paper or 
electronic representation of a substitute check) for which it receives 
consideration. (See Sec. 229.52 and commentary thereto). A bank that 
transfers an electronic check or electronic returned check that is an 
electronic representation of a substitute check also makes the 
warranties and indemnities in Sec. Sec. 229.52 and 229.53.
    3. By agreement, a sending and receiving bank may vary the 
warranties the sending bank makes to the receiving bank for electronic 
images of or electronic information related to checks, for example, to 
provide that the bank transferring the check does

[[Page 981]]

not warrant that the electronic image or information is sufficient for 
creating a substitute check. (See Sec. 229.37(a)). The variation by 
agreement, however, would not affect the rights of banks and persons 
that are not bound by the agreement.

   C. 229.34(b) Transfer and Presentment Warranties With Respect to a 
                         Remotely Created Check

    1. A bank that transfers or presents a remotely created check and 
receives a settlement or other consideration warrants that the person on 
whose account the check is drawn authorized the issuance of the check in 
the amount stated on the check and to the payee stated on the check. The 
warranties are given only by banks and only to subsequent banks in the 
collection chain. The warranties ultimately shift liability for the loss 
created by an unauthorized remotely created check to the depositary 
bank. The depositary bank cannot assert the transfer and presentment 
warranties against a depositor. However, a depositary bank may, by 
agreement, allocate liability for such an item to the depositor and also 
may have a claim under other laws against that person. The Federal Trade 
Commission's Telemarketing Sales Rule (16 CFR part 310) contains further 
regulatory provisions regarding remotely created checks.
    2. The scope of the transfer and presentment warranties for remotely 
created checks differs from that of the corresponding UCC warranty 
provisions in two respects. The UCC warranties are given by any person, 
including a nonbank depositor, that transfers a remotely created check 
and not just to a bank, as is the case under Sec. 229.34(b). In 
addition, the UCC warranties state that the person on whose account the 
item is drawn authorized the issuance of the item in the amount for 
which the item is drawn. The Sec. 229.34(b) warranties specifically 
cover the amount as well as the payee stated on the check. Neither the 
UCC warranties, nor the Sec. 229.34(b) warranties, apply to the date 
stated on the remotely created check.
    3. A bank making the Sec. 229.34(b) warranties may defend a claim 
asserting violation of the warranties by proving that the customer of 
the paying bank is precluded by UCC 4-406 from making a claim against 
the paying bank. This may be the case, for example, if the customer 
failed to discover the unauthorized remotely created check in a timely 
manner.
    4. The transfer and presentment warranties for a remotely created 
check apply to a remotely created check that has been converted to an 
electronic check or reconverted to a substitute check.

     D. 229.34(c) Settlement Amount, Encoding, and Offset Warranties

    1. Paragraph (c)(1) provides that a bank that presents and receives 
settlement for checks warrants to the paying bank that the settlement it 
demands (e.g., as noted on the cash letter or in the electronic cash 
letter file) equals the total amount of the checks it presents. This 
paragraph gives the paying bank a warranty claim against the presenting 
bank for the amount of any excess settlement made on the basis of the 
amount demanded, plus expenses. If the amount demanded is understated, a 
paying bank discharges its settlement obligation under UCC 4-301 by 
paying the amount demanded, but remains liable for the amount by which 
the demand is understated; the presenting bank is nevertheless liable 
for expenses in resolving the adjustment.
    2. When checks or returned checks are transferred to a collecting 
bank, returning bank, or depositary bank, the transferor bank is not 
required to demand settlement, as is required upon presentment to the 
paying bank. However, often the checks or returned checks will be 
accompanied by information (such as a cash letter listing or cash letter 
control record) that will indicate the total of the checks or returned 
checks. Paragraph (c)(2) provides that if the transferor bank includes 
information indicating the total amount of checks or returned checks 
transferred, it warrants that the information is correct (i.e., equals 
the actual total of the items).
    3. Paragraph (c)(3) provides that a bank that presents or transfers 
a check or returned check warrants the accuracy of information encoded 
regarding the check after issue, and that exists at the time of 
presentment or transfer, to any bank that subsequently handles the check 
or returned check. Paragraph (c)(3) applies to all MICR-line encoding on 
a paper check, substitute check, or contained in an electronic check or 
electronic returned check. Under UCC 4-209(a), only the encoder (or the 
encoder and the depositary bank, if the encoder is a customer of the 
depositary bank) warrants the encoding accuracy, thus any claims on the 
warranty must be directed to the encoder. Paragraph (c)(3) expands on 
the UCC by providing that all banks that transfer or present a check or 
returned check make the encoding warranty. In addition, under the UCC, 
the encoder makes the warranty to subsequent collecting banks and the 
paying bank, while paragraph (c)(3) provides that the warranty is made 
to banks in the return chain as well.
    4. A paying bank that settles for an overstated cash letter because 
of a misencoded check may make a warranty claim against the presenting 
bank under paragraph (c)(1) (which would require the paying bank to

[[Page 982]]

show that the check was part of the overstated cash letter) or an 
encoding warranty claim under paragraph (c)(3) against the presenting 
bank or any preceding bank that handled the misencoded check.
    5. Paragraph (c)(4) provides that a paying bank or a depositary bank 
may set off excess settlement paid to another bank against settlement 
owed to that bank for checks presented or returned checks received (for 
which it is the depositary bank) subsequent to the excess settlement.

                 E. 229.34(d) Returned Check Warranties

    1. This paragraph includes warranties that a returned check, 
including a notice in lieu of return or an electronic returned check, 
was returned by the paying bank, or in the case of a check payable by a 
bank and payable through another bank, the bank by which the check is 
payable, within the deadline under the UCC (subject to any claims or 
defenses under the UCC, such as breach of a presentment warranty) or 
Sec. 229.31(g); that the paying bank or returning bank is authorized to 
return the check; that the returned check has not been materially 
altered; and that, in the case of a notice in lieu of return, the check 
has not been and will not be returned for payment. (See commentary to 
Sec. 229.31(f)). The warranty does not include a warranty that the bank 
complied with the expeditious return requirements of Sec. Sec. 
229.31(b) and 229.32(b). These warranties do not apply to checks drawn 
on the United States Treasury, to U.S. Postal Service money orders, or 
to checks drawn on a state or a unit of general local government that 
are not payable through or at a bank. (See Sec. 229.42).

              F. 229.34(e) Notice of Nonpayment Warranties

    1. This paragraph sets forth warranties for notices of nonpayment. 
This warranty does not include a warranty that the notice is accurate 
and timely under Sec. 229.31(c). The requirements of Sec. 229.31(c) 
that are not covered by the warranty are subject to the liability 
provisions of Sec. 229.38. These warranties are designed to protect 
depositary banks that rely on notices of nonpayment. This paragraph 
imposes liability on a paying bank that gives notice of nonpayment and 
then subsequently does not return the check. (See commentary to Sec. 
229.31(c)).

              G. 229.34(f) Remote Deposit Capture Indemnity

    1. This indemnity provides for a depositary bank's potential 
liability when it permits a customer to deposit checks by remote deposit 
capture (i.e., to truncate checks and deposit an electronic image of the 
original check instead of the original check). Because the depositary 
bank's customer retains the original check, that customer might, 
intentionally or mistakenly, deposit the original check in another 
depositary bank. The depositary bank that accepts the original check, in 
turn, may make funds available to the customer before it learns that the 
check is being returned unpaid and, in some cases, may be unable to 
recover the funds from its customer. Section 229.34(f) provides the 
depositary bank that accepts the original check for deposit with a claim 
against the depositary bank that did not receive the original check 
because it permitted its customer to truncate it, received settlement or 
other consideration for the check, and did not receive a return of the 
check unpaid. This claim exists only if the check is returned to the 
depositary bank that accepted the original check due to the fact that 
the check had already been paid.

                               2. Examples

    a. Depositary Bank A offers its customers a remote deposit capture 
service that permits customers to take pictures of the front and back of 
their checks and send the image to the bank for deposit. Depositary Bank 
A accepts an image of the check from its customer and sends an 
electronic check for collection to Paying Bank. Paying Bank, in turn, 
pays the check. Depositary Bank A receives settlement for the check. The 
same customer who sent Depositary Bank A the electronic image of the 
check then deposits the original check in Depositary Bank B. There is no 
restrictive indorsement on the check. Depositary Bank B sends the 
original check (or a substitute check or electronic check) for 
collection and makes funds from the deposited check available to its 
customer. The customer withdraws the funds. Paying Bank returns the 
check to Depositary Bank B indicating that the check already had been 
paid. Depositary Bank B may be unable to charge back funds from its 
customer's account. Depositary Bank B may make an indemnity claim 
against Depositary Bank A for the amount of the funds Depositary Bank B 
is unable to recover from its customer.
    b. The facts are the same as above with respect to Depositary Bank A 
and B; however, the original check deposited in Depositary Bank B bears 
a restrictive indorsement ``for mobile deposit at Depositary Bank A 
only'' and the customer's account number at Depositary Bank A. 
Depositary Bank B may not make an indemnity claim against Depositary 
Bank A because Depositary Bank B accepted the original check bearing a 
restrictive indorsement inconsistent with the means of deposit.
    c. The facts are the same as above with respect to Depositary Bank 
A; however, Depositary Bank B also offers a remote deposit capture 
service to its customer. The customer uses Depositary Bank B's remote 
deposit capture service to send an electronic image of the front and 
back of the check,

[[Page 983]]

after sending the same image to Depositary Bank A. The customer deposits 
the original check into Depositary Bank C without a restrictive 
indorsement. Paying Bank pays the check based on the image presented by 
Depositary Bank A, and Depositary Bank A receives settlement for the 
check without the check being returned unpaid to it. Paying Bank returns 
the checks presented by Depositary Bank B and Depositary Bank C. Neither 
Depositary Bank B nor Depositary Bank C can recover the funds from the 
deposited check from the customer. Depositary Bank B does not have an 
indemnity claim against Depositary Bank A because Depositary Bank B did 
not receive the original check for deposit. Depositary Bank C, however, 
would be able to bring an indemnity claim against Depositary Bank A.
    3. A depositary bank may, by agreement, allocate liability for loss 
incurred from subsequent deposit of the original check to its customer 
that sent the electronic check related to the original check to the 
depositary bank.

  H. 229.34(g) Indemnities With Respect to Electronically-Created Items

    1. As a practical matter a bank receiving an electronic image 
generally cannot distinguish an image that is derived from a paper check 
from an electronically-created item. Nonetheless, the bank receiving the 
electronically-created item often handles the electronically-created 
image as if it were derived from a paper check.
    2. Paragraph (g) of Sec. 229.34 sets forth the indemnities that a 
bank provides when transferring or presenting an electronically-created 
item and receiving settlement or other consideration for it. The 
indemnities set forth in Sec. 229.34(g) are provided only by banks and 
only to subsequent banks in the collection chain. The indemnities 
ultimately shift liability for losses to the depositary bank due to the 
fact the electronically created item is not derived from a paper check, 
was unauthorized, or was transferred or presented for payment more than 
once. (See Sec. 229.34(i) and commentary thereto). The depositary bank 
cannot assert the indemnities set forth in Sec. 229.34(g) against a 
depositor. However, a depositary bank may, by agreement, allocate 
liability for such an item to the depositor and also may have a claim 
under other laws against that person.
    2. The paying bank's losses in paragraph (g)(1) of this section 
include losses arising from Regulation E non-compliance caused by the 
receipt of an electronically-created item.
    3. Under paragraphs (g)(2) and (3), indemnified banks have a claim 
for damages pursuant to Sec. 229.34(i) regardless of whether the 
damages would have occurred if the item transferred had been derived 
from a paper check.

                               3. Examples

    a. A paying bank pays an electronically-created item, which the 
paying bank's customer subsequently claims is unauthorized. The paying 
bank may incur liability on the item due to the fact the item is 
electronically created and not derived from a paper check. For example, 
the paying bank may have no means of disputing the customer's claim 
without examining the physical check, which does not exist. The 
indemnity in Sec. 229.34(g) enables the paying bank to recover from the 
presenting bank or any prior transferor bank for the amount of its loss, 
as permitted under Sec. 229.34(i), due to receiving the electronically-
created item.
    b. A bank receives an electronic image of and electronic information 
related to an electronically-created item and, in turn, produces a paper 
item that is indistinguishable from a substitute check. The paper item 
is not a substitute check because the item is not derived from an 
original, paper check. That bank may incur a loss because it cannot 
produce the legal equivalent of a check (See Sec. 229.53 and commentary 
thereto). The indemnity in Sec. 229.34(g) enables a bank that received 
the electronically-created item to recover from the bank sending the 
check for the amount of the loss permitted under Sec. 229.34(i).
    c. A paying bank is not required by Sec. 229.31(b) to return an 
electronically-created item expeditiously. The depositary bank incurs a 
loss because it receives the return of the electronically-created item 
unexpeditiously and is unable to recover funds previously made available 
to its customer. The depositary bank is not an indemnified party under 
Sec. 229.34(g) and therefore cannot recover its loss pursuant to that 
indemnity.

                          I. 229.34(h) Damages

    1. This paragraph adopts for the warranties in Sec. 229.34(a), (b), 
(c), (d), and (e) the damages provided in UCC 4-207(c) and 4A-506(b). 
(See definition of interest compensation in Sec. 229.2(oo)).

                     J. 229.34(i) Indemnity Amounts

    1. This paragraph adopts for the amount of the indemnities provided 
for in Sec. 229.34(f)(2) and (g) an amount comparable to the damages 
provided in Sec. 229.53(b)(1)(ii) of subpart D of this regulation.
    2. The amount of an indemnity would be reduced in proportion to the 
amount of any loss attributable to the indemnified person's negligence 
or bad faith. This comparative-negligence standard is intended to 
allocate liability in the same manner as the comparative negligence 
provision of Sec. 229.38(c).
    3. An indemnified bank may be able to make an indemnity claim 
against more than one indemnifying depositary bank. However,

[[Page 984]]

an indemnified bank may not recover in the aggregate across all 
indemnifying banks more than the amount described in this paragraph. 
Therefore, an indemnified bank that recovers the amount of its the loss 
from one indemnifying depositary bank under this paragraph no longer has 
a loss that it can collect from a different indemnifying depositary 
bank.

                     K. 229.34(j) Tender of Defense

    1. This paragraph adopts for this regulation the vouching-in 
provisions of UCC 3-119.

                      L. 229.34(k) Notice of Claim

    1. This paragraph adopts the notice provisions of UCC sections 4-
207(d) and 4-208(e) and applies them to this section's indemnities and 
warranties. The time limit set forth in this paragraph applies to 
notices of claims for warranty breaches and for indemnities. As provided 
in Sec. 229.38(g), all actions under this section must be brought 
within one year after the date of the occurrence of the violation 
involved.

                    XXI. Section 229.35 Indorsements

                   A. 229.35(a) Indorsement Standards

    1. This section requires banks to use a standard form of indorsement 
when indorsing checks during the forward collection and return process. 
It is designed to facilitate the identification of the depositary bank 
and the prompt return of checks. The indorsement standard a bank must 
use depends on the type of check being indorsed. Paper checks must be 
indorsed in accordance with ANS X9.100-111. Substitute checks must be 
indorsed in accordance with ANS X9.100-140. Electronic checks must be 
indorsed in accordance ANS X9.100-187. The Board, however, may by rule 
or order determine that different standards apply.
    2. The parties sending and receiving a check may agree that 
different indorsement standards will apply to such checks. For example, 
although ANS X9.100-187 is an industry standard for banks' exchange of 
electronic checks, the parties may agree to send and receive electronic 
checks that conform to a different standard.
    3. Banks generally apply indorsements to a paper check in one of two 
ways: (1) In accordance with ANS X9.100-111, banks print or ``spray'' 
indorsements onto a paper check when the check is processed through the 
banks' automated check sorters (regardless of whether the checks are 
original checks or substitute checks), and (2) in accordance with ANS 
X9.100-140, reconverting banks print or ``overlay'' previously applied 
electronic indorsements and their own indorsements and identifications 
onto a substitute check at the time that the substitute check is 
created. If a subsequent substitute check is created in the course of 
collection or return, that substitute check will contain, in its image 
of the back of the previous substitute check, reproductions of 
indorsements that were sprayed or overlaid onto the previous item.
    4. A bank might use check-processing equipment that captures an 
image of a check prior to spraying an indorsement onto that item. If the 
bank truncates that item, it should ensure that it also applies an 
indorsement to the item electronically. A reconverting bank satisfies 
its obligation to preserve all previously applied indorsements by 
overlaying a bank's indorsement that previously was applied 
electronically onto a substitute check that the reconverting bank 
creates. (See commentary to Sec. 229.51(b)).
    5. A depositary bank may want to include an address in its 
indorsement in order to limit the number of locations at which it must 
receive paper returned checks and paper notices of nonpayment. Banks 
should note, however, that Sec. 229.33(c) requires a depositary bank to 
receive paper returned checks at the location(s) at which it receives 
paper forward-collection checks, as well as the other locations 
enumerated in Sec. 229.33(c). (See Sec. 229.33(c) and commentary 
thereto).
    6. Under the UCC, a specific guarantee of prior indorsement is not 
necessary. (See UCC 4-207(a) and 4-208(a)). Use of guarantee language in 
indorsements of paper checks, such as ``P.E.G.'' (``prior endorsements 
guaranteed''), may result in reducing the type size used in bank 
indorsements, thereby making them more difficult to read. Use of this 
language may make it more difficult for other banks to identify the 
depositary bank.
    7. If the bank maintaining the account into which a check is 
deposited agrees with another bank (a correspondent, ATM operator, or 
lock box operator) to have the other bank accept returns and notices of 
nonpayment for the bank of account, the indorsement placed on the check 
as the depositary bank indorsement may be the indorsement of the bank 
that acts as correspondent, ATM operator, or lock box operator as 
provided in paragraph (d) of Sec. 229.35.
    8. In general, paper checks will be handled more efficiently if 
depositary banks place their indorsement so that the nine-digit routing 
number is not obscured by pre-existing matter on the back of the check. 
Indorsing parties other than banks, e.g., corporations, will benefit 
from the faster return of checks if they protect the identifiability and 
legibility of the depositary bank indorsement by staying clear of the 
area on the back of the paper check reserved for the depositary bank 
indorsement.
    9. A paying bank is not required to indorse the check; however, if a 
paying bank does indorse a check that is returned, it should follow the 
indorsement standards for collecting banks and returning banks. 
Collecting banks

[[Page 985]]

and returning banks are required to indorse the check for tracing 
purposes. With respect to the identification of a paying bank that is 
also a reconverting bank, see commentary to Sec. 229.51(b)(2).

              B. 229.35(b) Liability of Bank Handling Check

    1. When a check is sent for forward collection, the collection 
process results in a chain of indorsements extending from the depositary 
bank through any subsequent collecting banks to the paying bank. This 
paragraph extends the indorsement chain through the paying bank to the 
returning banks, and would permit each bank to recover from any prior 
indorser if the claimant bank does not receive payment for the check 
from a subsequent bank in the collection or return chain. For example, 
if a returning bank returned a check to an insolvent depositary bank, 
and did not receive the full amount of the check from the failed bank, 
the returning bank could obtain the unrecovered amount of the check from 
any bank prior to it in the collection and return chain including the 
paying bank. Because each bank in the collection and return chain could 
recover from a prior bank, any loss would fall on the first intermediary 
collecting bank that received the check from the depositary bank. To 
avoid circuity of actions, the returning bank could recover directly 
from the first collecting bank. Under the UCC, the first collecting bank 
might ultimately recover from the depositary bank's customer or from the 
other parties on the check.
    2. Where a check is returned through the same banks used for the 
forward collection of the check, priority during the forward collection 
process controls over priority in the return process for the purpose of 
determining prior and subsequent banks under this regulation.
    3. Where a returning bank is insolvent and fails to pay the paying 
bank or a prior returning bank for a returned check, Sec. 229.39(a) 
requires the receiver of the failed bank to return the check to the bank 
that transferred the check to the failed bank. That bank then either 
could continue the return to the depositary bank or recover based on 
this paragraph. Where the paying bank is insolvent, and fails to pay the 
collecting bank, the collecting bank also could recover from a prior 
collecting bank under this paragraph, and the bank from which it 
recovered could in turn recover from its prior collecting bank until the 
loss settled on the depositary bank (which could recover from its 
customer).
    4. A bank is not required to make a claim against an insolvent bank 
before exercising its right to recovery under this paragraph. Recovery 
may be made by charge-back or by other means. This right of recovery 
also is permitted even where nonpayment of the check is the result of 
the claiming bank's negligence such as failure to make expeditious 
return, but the claiming bank remains liable for its negligence under 
Sec. 229.38.
    5. This liability to a bank that subsequently handles the check and 
does not receive payment for the check is imposed on a bank handling a 
check for collection or return regardless of whether the bank's 
indorsement appears on the check. Notice must be sent under this 
paragraph to a prior bank from which recovery is sought reasonably 
promptly after a bank learns that it did not receive payment from 
another bank, and learns the identity of the prior bank. Written notice 
reasonably identifying the check and the basis for recovery is 
sufficient if the check is not available. Receipt of notice by the bank 
against which the claim is made is not a precondition to recovery by 
charge-back or other means; however, a bank may be liable for negligence 
for failure to provide timely notice. A paying bank or returning bank 
also may recover from a prior collecting bank as provided in Sec. Sec. 
229.31(a) and 229.32(b) (in those cases where the paying bank is unable 
to identify the depositary bank). This paragraph does not affect a 
paying bank's accountability for a check under UCC 4-215(a) and 4-302. 
Nor does this paragraph affect a collecting bank's accountability under 
UCC 4-214 and 4-215(d). A collecting bank becomes accountable upon 
receipt of final settlement as provided in the foregoing UCC sections. 
Final settlement in Sec. Sec. 229.32(e), 229.33(e), and 229.36(c) is 
intended to be consistent with final settlement in the UCC (e.g., UCC 4-
213, 4-214, and 4-215). (See also Sec. 229.2(cc) (definition of 
returning bank) and commentary thereto).
    6. This paragraph also provides that a bank may have the rights of a 
holder based on the handling of a check for collection or return. A bank 
may become a holder or a holder in due course regardless of whether 
prior banks have complied with the indorsement standard in Sec. 
229.35(a).
    7. This paragraph affects the following provisions of the UCC, and 
may affect other provisions depending on circumstance:
    a. Section 4-214(a), in that the right to recovery is not based on 
provisional settlement, and recovery may be had from any prior bank. 
Section 4-214(a) would continue to permit a depositary bank to recover a 
provisional settlement from its customer. (See Sec. 229.33(h)).
    b. Section 3-415 and related provisions (such as section 3-503), in 
that such provisions would not apply as between banks, or as between the 
depositary bank and its customer.

                    C. 229.35(c) Indorsement by Bank

    1. This section protects the rights of a customer depositing a check 
in a bank without requiring the words ``pay any bank,'' as required by 
the UCC (See UCC 4-201(b)). Use of this language in a depositary bank's

[[Page 986]]

indorsement will make it more difficult for other banks to identify the 
depositary bank. The applicable industry standard prohibits such 
material in subsequent collecting bank indorsements. The existence of a 
bank indorsement provides notice of the restrictive indorsement without 
any additional words.

              D. 229.35(d) Indorsement for Depositary Bank

    1. This section permits a depositary bank to arrange with another 
bank to indorse checks. This practice may occur when a correspondent 
indorses for a respondent, or when the bank servicing an ATM or lock box 
indorses for the bank maintaining the account in which the check is 
deposited--i.e., the depositary bank. If the indorsing bank applies the 
depositary bank's indorsement, checks will be returned to the depositary 
bank. An indorsing bank may by agreement with the depositary bank apply 
its own indorsement as the depositary bank indorsement. In that case, 
the actual depositary bank's own indorsement on the check (if any) 
should avoid the location reserved for the depositary bank. The actual 
depositary bank remains responsible for the availability and other 
requirements of subpart B, but the bank indorsing as depositary bank is 
considered the depositary bank for purposes of subpart C (e.g., for 
purposes of determining the right to assert a claim under Sec. 
229.33(a) for failure to return a check expeditiously and accepting 
paper checks under Sec. 229.33(c)). The check will be returned, and 
notice of nonpayment will be given, to the bank indorsing as depositary 
bank.
    2. Because the depositary bank for subpart B purposes will desire 
prompt notice of nonpayment, its arrangement with the indorsing bank 
should provide for prompt notice of nonpayment. The bank indorsing as 
depositary bank may require the depositary bank to agree to take up the 
check if the check is not paid even if the depositary bank's indorsement 
does not appear on the check and it did not handle the check. The 
arrangement between the banks may constitute an agreement varying the 
effect of provisions of subpart C under Sec. 229.37.

         XXII. Section 229.36 Presentment and Issuance of Checks

                A. 229.36(a) Receipt of Electronic Checks

    1. A paying bank may agree to accept presentment of electronic 
checks. (See Sec. 229.2(ggg) and commentary thereto). The paying bank's 
acceptance of such electronic checks is governed by the paying bank's 
agreement with the bank sending the electronic check to the paying bank. 
The terms of these agreements are determined by the parties and may 
include, for example, the electronic address or electronic receipt point 
at which the paying bank agrees to accept electronic checks, as well as 
when presentment occurs. The agreement also may specify whether 
electronic checks sent for forward collection must be separated from 
electronic returned checks.

                  B. 229.36(b) Receipt of Paper Checks

    1. The paragraph specifies four locations at which the paying bank 
must accept presentment of paper checks. Where the check is payable 
through a bank and the check is sent to that bank, the payable-through 
bank is the paying bank for purposes of this subpart, regardless of 
whether the paying bank must present the check to another bank or to a 
nonbank payor for payment.
    a. Delivery of paper checks may be made, and presentment is 
considered to occur, at a location (including a processing center) 
requested by the paying bank. This provision adopts the common law rule 
that the processing center acts as the agent of the paying bank to 
accept presentment and to begin the time for processing of the check. 
(See also UCC 4-204(c)). If a bank designates different locations for 
the presentment of forward collection paper checks bearing different 
routing numbers, for purposes of this paragraph it requests presentment 
of paper checks bearing a particular routing number only at the location 
designated for receipt of forward collection paper checks bearing that 
routing number.
    b. If the check specifies the name and address of a branch or head 
office, or other location (such as a processing center), the paper check 
may be delivered to that office or other location. If the address is too 
general to identify a particular office, delivery may be made at any 
office consistent with the address. For example, if the address is ``San 
Francisco, California,'' each office in San Francisco must accept 
presentment of paper checks. The designation of an address on the check 
generally is in the control of the paying bank.
    c. i. Delivery of a paper check may be made at an office of the bank 
associated with the routing number on the check. In the case of a 
substitute check, delivery may be made at an office of the bank 
associated with the routing number in the electronic check from which it 
was derived. The office associated with the routing number of a bank is 
found in American Bankers Association Key to Routing Numbers, published 
by an agent of the American Bankers Association, which lists a city and 
state address for each routing number. Paper checks generally are 
handled by collecting banks on the basis of the nine-digit routing 
number contained in the MICR line (or on the basis of the fractional 
form routing number if the MICR line is obliterated) on the check, 
rather than the printed name or address. The definition of a paying bank 
in Sec. 229.2(z) includes a bank designated

[[Page 987]]

by routing number, whether or not there is a name on the check, and 
whether or not any name is consistent with the routing number. Where a 
check is payable by one bank, but payable through another, the routing 
number is that of the payable-through bank, not that of the payor bank. 
In these cases, the payor bank has selected the payable-through bank as 
the point through which presentment of paper checks is to be made.
    ii. There is no requirement in the regulation that the name and 
address on the check agree with the address associated with the routing 
number on the check. A bank generally may control the use of its routing 
number, just as it does the use of its name. The address associated with 
the routing number may be a processing center.
    iii. In some cases, a paying bank may have several offices in the 
city associated with the routing number. In such case, it would not be 
reasonable or efficient to require the presenting bank to sort paper 
checks by more specific branch addresses that might be printed on the 
checks, and to deliver paper checks to each branch. A collecting bank 
normally would deliver all paper checks to one location. In cases where 
paper checks are delivered to a branch other than the branch on which 
they may be drawn, computer and courier communication among branches 
should permit the paying bank to determine quickly whether to pay the 
check.
    d. If the paper check specifies the name of the paying bank but no 
address, the bank must accept delivery at any office. Where delivery is 
made by a person other than a bank, or where the routing number is not 
readable, delivery will be made based on the name and address of the 
paying bank on the check. If there is no address, delivery may be made 
at any office of the paying bank. This provision is consistent with UCC 
3-111, which states that presentment for payment may be made at the 
place specified in the instrument, or, if there is none, at the place of 
business of the party to pay.
    2. This paragraph may affect UCC 3-111 to the extent that the UCC 
requires presentment to occur at a place specified in the instrument.

        C. 229.36(c) Liability of Bank During Forward Collection

    1. This paragraph makes settlement between banks during forward 
collection final when made, subject to any deferment of credit, just as 
settlements between banks during the return of checks are final. In 
addition, this paragraph clarifies that this change does not affect the 
liability scheme under UCC 4-201 during forward collection of a check. 
That UCC section provides that, unless a contrary intent clearly 
appears, a bank is an agent or subagent of the owner of a check, but 
that Article 4 of the UCC applies even though a bank may have purchased 
an item and is the owner of it. This paragraph preserves the liability 
of a collecting bank to prior collecting banks and the depositary bank's 
customer for negligence during the forward collection of a check under 
the UCC, even though this paragraph provides that settlement between 
banks during forward collection is final rather than provisional. 
Settlement by a paying bank is not considered to be final payment for 
the purposes of UCC 4-215(a)(2) or (3), because a paying bank has the 
right to recover settlement from a returning bank or depositary bank to 
which it returns a check under this subpart. Other provisions of the UCC 
not superseded by this subpart, such as section 4-202, also continue to 
apply to the forward collection of a check and may apply to the return 
of a check. (See definition of returning bank in Sec. 229.2(cc)).

                    D. 229.36(d) Same-Day Settlement

    1. This paragraph governs settlement for presentment of paper 
checks. Settlement for presentment of electronic checks is governed by 
the agreement of the parties. (See Sec. 229.36(a) and commentary 
thereto). This paragraph provides that, under certain conditions, a 
paying bank must settle with a presenting bank for a paper check on the 
same day the paper check is presented in order to avail itself of the 
ability to return the paper check on its next banking day under UCC 4-
301 and 4-302. This paragraph does not apply to paper checks presented 
for immediate payment over the counter. Settling for a paper check under 
this paragraph does not constitute final payment of the paper check 
under the UCC. This paragraph does not supersede or limit the rules 
governing collection and return of paper checks through Federal Reserve 
Banks that are contained in subpart A of Regulation J (12 CFR part 210).

                       2. Presentment Requirements

                          a. Location and Time

    i. For presented paper checks to qualify for mandatory same-day 
settlement, information accompanying the paper checks must indicate that 
presentment is being made under this paragraph--e.g., ``these checks are 
being presented for same-day settlement''--and must include a demand for 
payment of the total amount of the checks together with appropriate 
payment instructions in order to enable the paying bank to discharge its 
settlement responsibilities under this paragraph. In addition, the paper 
check or checks must be presented at a location designated by the paying 
bank for receipt of paper checks for same-day settlement by 8 a.m. local 
time of that location. The designated presentment location must be a 
location at which the paying bank would be considered

[[Page 988]]

to have received a paper check under Sec. 229.36(b). The paying bank 
may not designate a location solely for presentment of paper checks 
subject to settlement under this paragraph; by designating a location 
for the purposes of Sec. 229.36(d), the paying bank agrees to accept 
paper checks at that location for the purposes of Sec. 229.36(b).
    ii. If the paying bank does not designate a presentment location, it 
must accept presentment of paper check for same-day settlement at any 
location identified in Sec. 229.36(b), i.e., at an address of the bank 
associated with the routing number on the check, at any branch or head 
office if the bank is identified on the check by name without address, 
or at a branch, head office, or other location consistent with the name 
and address of the bank on the check if the bank is identified on the 
check by name and address. A paying bank and a presenting bank may agree 
that paper checks will be accepted for same-day settlement at an 
alternative location or that the cut-off time for same-day settlement be 
earlier or later than 8 a.m. local time of the presentment location.
    iii. In the case of a paper check payable through a bank but payable 
by another bank, this paragraph does not authorize direct presentment to 
the bank by which the paper check is payable. The requirements of same-
day settlement under this paragraph would apply to a payable-through or 
payable-at bank to which the paper check is sent for payment or 
collection.
    b. Reasonable delivery requirements. A paper check is considered 
presented when it is delivered to and payment is demanded at a location 
specified in paragraph (d)(1). Ordinarily, a presenting bank will find 
it necessary to contact the paying bank to determine the appropriate 
presentment location and any delivery instructions. Further, because 
presentment might not take place during the paying bank's banking day, a 
paying bank may establish reasonable delivery requirements to safeguard 
the paper checks presented, such as use of a night depository. If a 
presenting bank fails to follow reasonable delivery requirements 
established by the paying bank, it runs the risk that it will not have 
presented the paper checks. However, if no reasonable delivery 
requirements are established or if the paying bank does not make 
provisions for accepting delivery of checks during its non-business 
hours, leaving the paper checks at the presentment location constitutes 
effective presentment.
    c. Sorting of checks. A paying bank may require that paper checks 
presented to it for same-day settlement be sorted separately from other 
forward collection paper checks it receives as a collecting bank or 
paper returned checks it receives as a returning bank or depositary 
bank. For example, if a bank provides correspondent check collection 
services and receives unsorted paper checks from a respondent bank that 
include paper checks for which it is the paying bank and that would 
otherwise meet the requirements for same-day settlement under this 
section, the collecting bank need not make settlement in accordance with 
paragraph (d)(3). If the collecting bank receives sorted paper checks 
from its respondent bank, consisting only of paper checks for which the 
collecting bank is the paying bank and that meet the requirements for 
same-day settlement under this paragraph, the collecting bank may not 
charge a fee for handling those paper checks and must make settlement in 
accordance with this paragraph.

                              3. Settlement

    a. If a bank presents a paper check in accordance with the time and 
location requirements for presentment under paragraph (d)(1), the paying 
bank either must settle for the paper check on the business day it 
receives the paper check without charging a presentment fee or return 
the paper check prior to the time for settlement. (This return deadline 
is subject to extension under Sec. 229.31(g).) The settlement must be 
in the form of a credit to an account designated by the presenting bank 
at a Federal Reserve Bank (e.g., a Fedwire transfer), unless the 
presenting bank agrees with the paying bank to accept settlement in 
another form (e.g., credit to an account of the presenting bank at the 
paying bank or debit to an account of the paying bank at the presenting 
bank). The settlement must occur by the close of Fedwire on the business 
day the paper check is received by the paying bank. Under the provisions 
of Sec. 229.34(c), a settlement owed to a presenting bank may be set 
off by adjustments for previous settlements with the presenting bank. 
(See also Sec. 229.39(d)).
    b. Paper checks that are presented after the 8 a.m. (local time of 
the location at which the paper checks are presented) presentment 
deadline for same-day settlement and before the paying bank's cut-off 
hour are treated as if they were presented under other applicable law 
and settled for or returned accordingly. However, for purposes of 
settlement only, the presenting bank may require the paying bank to 
treat such paper checks as presented for same-day settlement on the next 
business day in lieu of accepting settlement by cash or other means on 
the business day the paper checks are presented to the paying bank. 
Paper checks presented after the paying bank's cut-off hour or on non-
business days, but otherwise in accordance with this paragraph, are 
considered presented for same-day settlement on the next business day.

                          4. Closed Paying Bank

    a. There may be certain business days that are not banking days for 
the paying bank.

[[Page 989]]

Some paying banks may continue to settle for paper checks presented on 
these days (e.g., by opening their back office operations). In other 
cases, a paying bank may be unable to settle for paper checks presented 
on a day it is closed. If the paying bank closes on a business day and 
paper checks are presented to the paying bank in accordance with 
paragraph (d)(1), the paying bank is accountable for the paper checks 
unless it settles for or returns the paper checks by the close of 
Fedwire on its next banking day. In addition, paper checks presented on 
a business day on which the paying bank is closed are considered 
received on the paying bank's next banking day for purposes of the UCC 
midnight deadline (UCC 4-301 and 4-302) and this regulation's 
expeditious return and notice of nonpayment provisions.
    b. If the paying bank is closed on a business day voluntarily, the 
paying bank must pay interest compensation, as defined in Sec. 
229.2(oo), to the presenting bank for the value of the float associated 
with the paper check from the day of the voluntary closing until the day 
of settlement. Interest compensation is not required in the case of an 
involuntary closing on a business day, such as a closing required by 
state law. In addition, if the paying bank is closed on a business day 
due to emergency conditions, settlement delays and interest compensation 
may be excused under Sec. 229.38(e) or UCC 4-109(b).
    5. Good faith. Under Sec. 229.38(a), both the presenting bank and 
paying bank are held to a standard of good faith, defined in Sec. 
229.2(nn) to mean honesty in fact and the observance of reasonable 
commercial standards of fair dealing. For example, designating a 
presentment location or changing presentment locations for the primary 
purpose of discouraging banks from presenting paper checks for same-day 
settlement might not be considered good faith on the part of the paying 
bank. Similarly, presenting a large volume of paper checks without prior 
notice could be viewed as not meeting reasonable commercial standards of 
fair dealing and therefore may not constitute presentment in good faith. 
In addition, if banks, in the general course of business, regularly 
agree to certain practices related to same-day settlement, it might not 
be considered consistent with reasonable commercial standards of fair 
dealing, and therefore might not be considered good faith, for a bank to 
refuse to agree to those practices if agreeing would not cause it harm.
    6. UCC sections affected. This paragraph directly affects the 
following provisions of the UCC and may affect other sections or 
provisions:
    a. Section 4-204(b)(1), in that a presenting bank may not send a 
paper check for same-day settlement directly to the paying bank, if the 
paying bank designates a different location in accordance with paragraph 
(d)(1).
    b. Section 4-213(a), in that the medium of settlement for paper 
checks presented under this paragraph is limited to a credit to an 
account at a Federal Reserve Bank and that, for paper checks presented 
after the deadline for same-day settlement and before the paying bank's 
cut-off hour, the presenting bank may require settlement on the next 
business day in accordance with this paragraph rather than accept 
settlement on the business day of presentment by cash.
    c. Section 4-301(a), in that, to preserve the ability to exercise 
deferred posting, the time limit specified in that section for 
settlement or return by a paying bank on the banking day a paper check 
is received is superseded by the requirement to settle for paper checks 
presented under this paragraph by the close of Fedwire.
    d. Section 4-302(a), in that, to avoid accountability, the time 
limit specified in that section for settlement or return by a paying 
bank on the banking day a paper check is received is superseded by the 
requirement to settle for paper checks presented under this paragraph by 
the close of Fedwire.

              XXIII. Section 229.37 Variations by Agreement

    A. This section is similar to UCC 4-103, and permits consistent 
treatment of agreements varying Article 4 or Subpart C, given the 
substantial interrelationship of the two documents. To achieve 
consistency, the official comment to UCC 4-103(a) (which in turn follows 
UCC 1-201(3)) should be followed in construing this section. For 
example, as stated in Official Comment 2 to UCC 4-103, owners of items 
and other interested parties are not affected by agreements under this 
section unless they are parties to the agreement or are bound by 
adoption, ratification, estoppel, or the like. In particular, agreements 
varying this subpart that delay the return of a check beyond the times 
required by this subpart may result in liability under Sec. 229.38 to 
entities not party to the agreement.
    B. The Board has not followed UCC 4-103(b), which permits Federal 
Reserve regulations and operating letters, clearinghouse rules, and the 
like to apply to parties that have not specifically assented. 
Nevertheless, this section does not affect the status of such agreements 
under the UCC.
    C. The following are examples of situations where variation by 
agreement is permissible, subject to the limitations of this section:
    1. A depositary bank may authorize another bank to apply the other 
bank's indorsement to a check as the depositary bank. (See Sec. 
229.35(d)).
    2. A depositary bank may authorize returning banks to commingle 
paper qualified returned checks with paper forward collection checks. 
(See Sec. 229.33(c)).
    3. A depositary bank may limit its liability to its customer in 
connection with the late

[[Page 990]]

return of a deposited check where the lateness is caused by markings on 
the check by the depositary bank's customer or prior indorser in the 
area of the depositary bank indorsement. (See Sec. 229.38(d)).
    4. A paying bank may require its customer to assume the paying 
bank's liability for delayed or missent checks where the delay or 
missending is caused by markings placed on the check by the paying 
bank's customer that obscured a properly placed indorsement of the 
depositary bank. (See Sec. 229.38(d)).
    5. A collecting bank or paying bank may agree to accept forward 
collection checks without the indorsement of a prior intermediary 
collecting bank. (See Sec. 229.35(a)).
    6. A bank may agree to accept returned checks without the 
indorsement of a prior bank. (See Sec. 229.35(a)).
    7. A presenting bank may agree with a paying bank to present paper 
checks for same-day settlement by a deadline earlier or later than 8 
a.m. (See Sec. 229.36(d)(1)(ii)).
    8. A presenting bank and a paying bank may agree that presentment 
takes place when the paying bank receives an electronic transmission of 
information describing the check rather than upon delivery of the 
physical check. (See Sec. 229.36(b)).
    9. A depositary bank may agree with a paying bank or returning bank 
to accept an image or other notice in lieu of a returned check even when 
the check is available for return under this part. Except to the extent 
that other parties interested in the check assent to or are bound by the 
variation of the notice-in-lieu provisions of this part, a depositary 
bank entering into such an agreement may be responsible under this part 
or other applicable law to other interested parties for any losses 
caused by the acceptance of an image or notice in lieu of a returned 
check. (See Sec. Sec. 229.31(f) and 229.38(a)).
    D. The Board expects to review the types of variation by agreement 
that develop under this section and will consider whether it is 
necessary to limit certain variations.

                     XXIV. Section 229.38 Liability

      A. 229.38(a) Standard of Care; Liability; Measure of Damages

    1. The standard of care established by this section applies to any 
bank covered by the requirements of subpart C of the regulation. Thus, 
the standard of care applies to a paying bank under Sec. Sec. 229.31, 
to a returning bank under Sec. 229.32, to a depositary bank under 
Sec. Sec. 229.33, to a bank erroneously receiving a returned check or 
written notice of nonpayment as depositary bank under Sec. 229.33(f), 
and to a bank indorsing a check under Sec. 229.35. The standard of care 
is similar to the standard imposed by UCC 1-203 and 4-103(a) and 
includes a duty to act in good faith, as defined in Sec. 229.2(nn) of 
this regulation.
    2. A bank not meeting this standard of care is liable to the 
depositary bank, the depositary bank's customer, the owner of the check, 
or another party to the check. The depositary bank's customer is usually 
a depositor of a check in the depositary bank (but see Sec. 229.35(d)). 
The measure of damages provided in this section (loss incurred up to 
amount of check, less amount of loss party would have incurred even if 
bank had exercised ordinary care) is based on UCC 4-103(e) (amount of 
the item reduced by an amount that could not have been realized by the 
exercise of ordinary care), as limited by 4-202(c) (bank is liable only 
for its own negligence and not for actions of subsequent banks in chain 
of collection). This subpart does not absolve a collecting bank of 
liability to prior collecting banks under UCC 4-201.
    3. Under this measure of damages, a depositary bank or other person 
must show that the damage incurred results from the negligence proved. 
For example, the depositary bank may not simply claim that its customer 
will not accept a charge-back of a returned check, but must prove that 
it could not charge back when it received the returned check and could 
have charged back if no negligence had occurred, and must first attempt 
to collect from its customer. (See Marcoux v. Van Wyk, 572 F.2d 651 (8th 
Cir. 1978); Appliance Buyers Credit Corp. v. Prospect Nat'l Bank, 708 
F.2d 290 (7th Cir. 1983)). Generally, a paying or returning bank's 
liability would not be reduced because the depositary bank did not place 
a hold on its customer's deposit before it learned of nonpayment of the 
check.
    4. This paragraph also states that it does not affect a paying 
bank's liability to its customer. Under UCC 4-402, for example, a paying 
bank is liable to its customer for wrongful dishonor, which is different 
from failure to exercise ordinary care and has a different measure of 
damages.

        B. 229.38(b) Paying Bank's Failure To Make Timely Return

    1. Section 229.31(b) imposes requirements on the paying bank for 
expeditious return of a check and leaves in place the UCC deadlines (as 
they may be modified by Sec. 229.31(g)), which may allow return at a 
different time. This paragraph clarifies that the paying bank could be 
liable for failure to meet either standard, but not for failure to meet 
both. The regulation intends to preserve the paying bank's 
accountability for missing its midnight or other deadline under the UCC 
(e.g., sections 4-215 and 4-302), provisions that are not incorporated 
in this regulation, but may be useful in establishing the time of final 
payment by the paying bank.

[[Page 991]]

                   C. 229.38(c) Comparative Negligence

    1. This paragraph establishes a ``pure'' comparative negligence 
standard for liability under subpart C of this regulation. This 
comparative negligence rule may have particular application where a 
paying bank or returning bank delays in returning a check because of 
difficulty in identifying the depositary bank, where the depositary bank 
has failed to exercise ordinary care in applying its indorsement.

        D. 229.38(d) Responsibility for Certain Aspects of Checks

    1. ANS X9.100-140 provides that an image of an original check must 
be reduced in size when placed on the first substitute check associated 
with that original check. (The image thereafter would be constant in 
size on any subsequent substitute check that might be created.) Because 
of this size reduction, the location of an indorsement, particularly a 
depositary bank indorsement, applied to an original paper check likely 
will change when the first reconverting bank creates a substitute check 
that contains that indorsement within the image of the original paper 
check. If the indorsement was applied to the original paper check in 
accordance with ANS X9.100-111's location requirements for indorsements 
applied to existing paper checks, and if the size reduction of the image 
causes the placement of the indorsement to no longer be consistent with 
ANS X9.100-111's requirements, then the reconverting bank bears the 
liability for any loss that results from the shift in the placement of 
the indorsement. Such a loss could result either because the original 
indorsement applied in accordance with ANS X9.100-111 is rendered 
illegible by a subsequent indorsement that a reconverting bank later 
applies to the substitute check in accordance with ANS X9.100-140, or 
because a subsequent bank receiving a substitute check cannot apply its 
indorsement to the substitute check legibly in accordance with ANS 
X9.100-111 as a result of the shift in the previous indorsement.
    2. Responsibility under paragraph (d)(1) is treated as negligence 
for comparative negligence purposes, and the contribution to damages 
under paragraph (d)(1) is treated in the same way as the degree of 
negligence under paragraph (c) of this section.

                                * * * * *

                 XXV. Section 229.39 Insolvency of Bank

                             A. Introduction

    1. These provisions cover situations where a bank becomes insolvent 
during collection or return of a check. Paragraphs (a), (b), and (d) of 
Sec. 229.39 are derived from UCC 4-216. They are intended to apply to 
all banks. Like UCC 4-216, paragraphs (a), (b), and (d) of Sec. 229.39 
are intended to establish the point in the collection process at which 
collection or return of a check should be either stopped or continued 
when a particular bank suspends payments. Section 229.39(a) sets forth 
the circumstances under which the receiver must stop collection or 
return and, instead, send the check back to the bank or customer that 
transferred the check. Section 229.39(b) sets forth the circumstances 
under which the collection or return of the check should continue. 
Paragraphs (a) and (b) of Sec. 229.39 are not intended to confer upon 
banks preferential positions in the event of bank failures over general 
depositors or any other creditor of the failed bank. (See UCC 4-216, 
cmt. 1).

          B. 229.39(a) Duty of Receiver To Return Unpaid Checks

    1. This paragraph requires a receiver of a closed bank to return a 
check to the prior bank if the paying bank or the receiver did not pay 
for the check. This permits the prior bank, as holder, to pursue its 
claims against the closed bank or prior indorsers on the check.

    C. 229.39(b) Claims Against Banks for Checks Not Returned by the 
                                Receiver

    1. This section sets forth the claims available to banks in 
situations in which a receiver does not return a check under Sec. 
229.39(a). In those situations, the prior bank would not be a holder of 
the check and would be unable to pursue claims as a holder.
    2. Paragraph (b)(1) of Sec. 229.39 gives a bank a claim against a 
closed paying bank that finally pays a check without settling for it or 
a closed depositary bank that becomes obligated to pay a returned check 
without settling for it. If the bank with a claim under this paragraph 
recovers from a prior bank or other party to the check, the prior bank 
or other party to the check is subrogated to the claim.
    3. Paragraph (b)(2) of Sec. 229.39 gives a bank a claim against a 
closed collecting bank, paying bank, or returning bank that receives 
settlement for but does not make settlement for a check. (See commentary 
to Sec. 229.35(b) for discussion of prior and subsequent banks). As in 
the case of Sec. 229.39(b)(1), if the bank with a claim under this 
paragraph recovers from a prior bank or other party to the check, the 
prior bank or other party to the check is subrogated to the claim.

   D. 229.39(c) Preferred Claim Against Presenting Bank for Breach of 
                                Warranty

    1. This paragraph gives a paying bank a preferred claim against a 
closed presenting bank in the event that the presenting bank breaches an 
amount or encoding warranty as provided in Sec. 229.34(c)(1) or (3) and 
does not

[[Page 992]]

reimburse the paying bank for adjustments for a settlement made by the 
paying bank in excess of the value of the checks presented. This 
preferred claim is intended to have the effect of a perfected security 
interest and is intended to put the paying bank in the position of a 
secured creditor for purposes of the receivership provisions of the 
Federal Deposit Insurance Act and similar provisions of state law.

                   E. 229.39(d) Finality of Settlement

    1. This paragraph provides that insolvency does not interfere with 
the finality of a settlement, such as a settlement by a paying bank that 
becomes final by expiration of the midnight deadline.

            XXVI. Section 229.40 Effect on Merger Transaction

    A. When banks merge, there is normally a period of adjustment before 
their operations are consolidated. To allow for this adjustment period, 
the regulation provides that the merged banks may be treated as separate 
banks for a period of up to one year after the consummation of the 
transaction. The term merger transaction is defined in Sec. 229.2(t). 
This rule affects the status of the combined entity in a number of areas 
in this subpart, such as the following:
    1. The paying bank's responsibility for notice of nonpayment (Sec. 
229.31(c)).
    2. Where the depositary bank must accept returned checks (Sec. 
229.33(b) and (c)).
    3. Where the depositary bank must accept notice of nonpayment (Sec. 
229.33(b) and (c)).
    4. Where a paying bank must accept presentment of paper checks 
(Sec. 229.36(b)).

                                * * * * *

  XXIX. Section 229.43 Checks Payable in Guam, American Samoa, and the 
                        Northern Mariana Islands

                        A. 229.43(a) Definitions

    1. For purposes of subparts B and C of this part, bank offices in 
Guam, American Samoa, and the Northern Mariana Islands (which Regulation 
CC defines as Pacific island banks) do not meet the definition of bank 
in Sec. 229.2(e) because they are not located in the United States. 
Some checks drawn on Pacific island banks (defined as Pacific island 
checks) bear U.S. routing numbers and are collected and returned by 
banks in the same manner as checks payable in the U.S.

         B. 229.43(b) Rules Applicable to Pacific Island Checks

    1. When a bank handles a Pacific island check as if it were a check 
as defined in Sec. 229.2(k), or an electronic image and electronic 
information derived from a demand draft as defined in Sec. 
229.43(a)(2), the bank is subject to certain provisions of subpart C of 
this part, as provided in this section. Because a Pacific island bank is 
not a bank as defined in Sec. 229.2(e) for purposes of subpart C, it is 
not a paying bank as defined in Sec. 229.2(z) for purposes of subpart C 
(unless otherwise noted in this section). Pacific island banks are not 
subject to the provisions of subparts B and C, but may be subject to the 
provisions of subpart D of this part to the extent they create 
substitute checks. (See Sec. 229.2(ff) defining ``State'').
    2. A bank may agree to handle a Pacific island check as a returned 
check under Sec. 229.32 and may convert the returned Pacific island 
check to a qualified returned check. The returning bank may receive the 
Pacific island check directly from a Pacific island bank or from another 
returning bank. As a Pacific island bank is not a paying bank for 
purposes of subpart C of this part, Sec. 229.32(e) does not apply to a 
returning bank settling with the Pacific island bank.
    3. A depositary bank that handles a Pacific island check is not 
subject to the provisions of subpart B of Regulation CC, including the 
availability, notice, and interest accrual requirements, with respect to 
that check. If, however, a bank accepts a Pacific island check for 
deposit (or otherwise accepts the check as transferee) and collects the 
Pacific island check in the same manner as other checks, the bank 
generally is subject to the provisions of Sec. 229.33, except for Sec. 
229.33(c) with respect to its application to paper notices of 
nonpayment, Sec. 229.33(d) (acceptance of oral notices of nonpayment), 
and Sec. 229.33(h) (notification to customer of returned check). If the 
depositary bank receives the returned Pacific island check directly from 
the Pacific island bank, the provisions of Sec. 229.33(e) (regarding 
time and manner of settlement for returned checks) do not apply, because 
the Pacific island bank is not a paying bank for purposes of subpart C 
of this part. In the event the Pacific island check is returned by a 
returning bank, however, the provisions of Sec. 229.33(e) apply. The 
depositary bank is not subject to the provisions in Sec. 229.33(c) with 
respect to paper notices of nonpayment for Pacific island checks, but is 
subject to Sec. 229.33(c) with respect to paper returned checks that 
are Pacific island checks.
    4. Banks that handle Pacific island checks in the same manner as 
other checks are subject to the indorsement provisions of Sec. 229.35. 
Section 229.35(c) eliminates the need for the restrictive indorsement 
``pay any bank.'' For purposes of Sec. 229.35(c), the Pacific island 
bank is deemed to be a bank.
    5. Pacific island checks will often be intermingled with other 
checks in a single cash letter. Therefore, a bank that handles Pacific 
island checks in the same manner as

[[Page 993]]

other checks is subject to the transfer warranty provision in Sec. 
229.34(c)(2) regarding accurate cash letter totals and the encoding 
warranty in Sec. 229.34(c)(3). A bank that acts as a returning bank for 
a Pacific island check is not subject to the returned check warranties 
in Sec. 229.34(d). Similarly, because the Pacific island bank is not a 
``bank'' or a ``paying bank'' for purposes of subpart C of this part, 
the notice of nonpayment warranties in Sec. 229.34(e), and the 
presentment warranties in Sec. 229.34(c)(1) and (c)(4) do not apply. 
For the same reason, the provisions of Sec. 229.36 governing paying 
bank responsibilities such as place of receipt and same-day settlement 
do not apply to checks presented to a Pacific island bank, and the 
liability provisions applicable to paying banks in Sec. 229.38 do not 
apply to Pacific island banks. Section 229.36(c), regarding finality of 
settlement between banks during forward collection, applies to banks 
that handle Pacific island checks in the same manner as other checks, as 
do the liability provisions of Sec. 229.38, to the extent the banks are 
subject to the requirements of Regulation CC as provided in this 
section, and Sec. Sec. 229.37 and 229.39 through 229.42.

   XXX. Section 229.51 General Provisions Governing Substitute Checks

                                * * * * *

                  B. 229.51(b) Reconverting Bank Duties

    1. In accordance with ANS X9.100-140, a reconverting bank must 
indorse (or, if it is a paying bank with respect to the check or a bank 
that rejected a check submitted for deposit, identify itself on) the 
back of a substitute check in a manner that preserves all indorsements 
applied, whether physically or electronically, by persons that 
previously handled the check in any form for forward collection or 
return. Indorsements applied physically to the original check before an 
image of the check was captured would be preserved through the image of 
the back of the original check that a substitute check must contain. If 
a bank sprays an indorsement onto a paper check after it captures an 
image of the check, it should ensure that it applies an indorsement to 
the item electronically, if it transfers the check as an electronic 
check or electronic returned check. (See paragraph 4 of commentary to 
section 229.35(a)). A reconverting bank satisfies its obligation to 
preserve all previously applied indorsements by physically applying 
(overlaying) electronic indorsements onto a substitute check that the 
reconverting bank creates. A reconverting bank is not responsible for 
obtaining indorsements that persons that previously handled the check in 
any form should have applied but did not apply.
    2. A reconverting bank must identify itself and the truncating bank 
by applying its routing number and the routing number of the truncating 
bank to the front of a substitute check in accordance with ANS X9.100-
140.
    3. If the reconverting bank is the paying bank or a bank that 
rejected a check submitted for deposit, it also must identify itself by 
applying its routing number to the back of the check. A reconverting 
bank also must preserve on the back of the substitute check, in 
accordance with ANS X9.100-140, the identifications of any previous 
reconverting banks. The reconverting-bank and truncating-bank routing 
numbers on the front of a substitute check and, if the reconverting bank 
is the paying bank or a bank that rejected a check submitted for 
deposit, the reconverting bank's routing number on the back of a 
substitute check are for identification only and are not indorsements or 
acceptances.
    Example. A bank's customer, which is a nonbank business, receives 
checks for payment and by agreement deposits substitute checks instead 
of the original checks with its depositary bank. The depositary bank is 
the reconverting bank with respect to the substitute checks and the 
truncating bank with respect to the original checks. In accordance with 
ANS X9.100-140, the bank must therefore be identified on the front of 
the substitute checks as a reconverting bank and as the truncating bank, 
and on the back of the substitute checks as the depositary bank and a 
reconverting bank.
    4. The location of an indorsement applied to a paper check in 
accordance with ANS X9.100-111 may shift if that check is truncated and 
later reconverted to a substitute check. If an indorsement applied to an 
original check in accordance with ANS X9.100-111 is overwritten by a 
subsequent indorsement applied to a substitute check in accordance with 
industry standards, then one or both of those indorsements could be 
rendered illegible. As explained in Sec. 229.38(c) and the commentary 
thereto, a reconverting bank is liable for losses associated with 
indorsements that are rendered illegible as a result of check 
substitution.

                                * * * * *

            XXXI. Section 229.52 Substitute Check Warranties

               A. 229.52(a) Warranty Content and Provision

    1. The responsibility for providing the substitute-check warranties 
begins with the reconverting bank. In the case of a substitute check 
created by a bank, the reconverting bank starts the flow of warranties 
when it transfers, presents, or returns a substitute check for which it 
receives consideration or

[[Page 994]]

when it rejects a check submitted for deposit and returns to its 
customer a substitute check. A bank that receives a substitute check 
created by a nonbank starts the flow of warranties when it transfers, 
presents, or returns for consideration either the substitute check it 
received or an electronic or paper representation of that substitute 
check.
    2. To ensure that warranty protections flow all the way through to 
the ultimate recipient of a substitute check or paper or electronic 
representation thereof, any subsequent bank that transfers, presents, or 
returns for consideration either the substitute check or a paper or 
electronic representation of the substitute check is responsible to 
subsequent transferees for the warranties. Any warranty recipient could 
bring a claim for a breach of a substitute-check warranty if it received 
either the actual substitute check or a paper or electronic 
representation of a substitute check.
    3. The substitute-check warranties and indemnity are not given under 
sections 229.52 and 229.53 by a bank that truncates the original check 
and by agreement transfers an electronic check to a subsequent bank for 
consideration. However, the warranties in Sec. 229.34(a) would apply to 
the transfer of an electronic check, and those warranties may be varied 
by agreement between the parties. A bank that is a truncating bank under 
Sec. 229.2(eee)(2) because it accepts a deposit of a check 
electronically might be subject to a claim by another depositary bank 
that accepts the original check for deposit. (See Sec. 229.34(f) and 
commentary thereto).
    Example. A bank that receives an electronic check and uses it to 
create substitute checks is the reconverting bank and, when it 
transfers, presents, or returns that substitute check, becomes the first 
warrantor with respect to the substitute check warranties. That bank, 
however, may have similar warranty claims with respect to the electronic 
check under Sec. 229.34(a) against the bank that transferred the 
electronic check.
    4. A bank need not affirmatively make the warranties because they 
attach automatically when a bank transfers, presents, or returns the 
substitute check (or a representation thereof) for which it receives 
consideration. Because a substitute check transferred, presented, or 
returned for consideration is warranted to be the legal equivalent of 
the original check and thereby subject to existing laws as if it were 
the original check, all UCC and other Regulation CC warranties that 
apply to the original check also apply to the substitute check.
    5. The legal-equivalence warranty by definition must be linked to a 
particular substitute check. When an original check is truncated, the 
check may move from electronic form to substitute-check form and then 
back again, such that there would be multiple substitute checks 
associated with one original check. When a check changes form multiple 
times in the collection or return process, the first reconverting bank 
and subsequent banks that transfer, present, or return the first 
substitute check (or a paper or electronic representation of the first 
substitute check) warrant the legal equivalence of only the first 
substitute check. If a bank receives an electronic representation of a 
substitute check and uses that representation to create a second 
substitute check, the second reconverting bank and subsequent 
transferees of the second substitute check (or a representation thereof) 
warrant the legal equivalence of both the first and second substitute 
checks. A reconverting bank would not be liable for a warranty breach 
under section 229.52 if the legal-equivalence defect is the fault of a 
subsequent bank that handled the substitute check, either as a 
substitute check or in other paper or electronic form.
    6. The warranty in Sec. 229.52(a)(1)(ii), which addresses multiple 
payment requests for the same check, is not linked to a particular 
substitute check but rather is given by each bank handling the 
substitute check, an electronic representation of a substitute check, or 
a subsequent substitute check created from an electronic representation 
of a substitute check. All banks that transfer, present, or return a 
substitute check (or a paper or electronic representation thereof) 
therefore provide the warranty regardless of whether the ultimate demand 
for double payment is based on the original check, the substitute check, 
or some other electronic or paper representation of the substitute or 
original check, and regardless of the order in which the duplicative 
payment requests occur. This warranty is given by the banks that 
transfer, present, or return a substitute check even if the demand for 
duplicative payment results from a fraudulent substitute check about 
which the warranting bank had no knowledge. (See also Sec. 
229.34(a)(1)(ii)).
    Example. A nonbank depositor truncates a check and in lieu of the 
check sends an electronic check to both Bank A and Bank B. Bank A and 
Bank B each use the check information that it received electronically to 
create a substitute check, which it presents to Bank C for payment. Bank 
A and Bank B are both reconverting banks and each made the substitute-
check warranties when it presented a substitute check to and received 
payment from Bank C. Bank C could pursue a warranty claim for the loss 
it suffered as a result of the duplicative payment against either Bank A 
or Bank B.
    7. A bank that rejects a check submitted for deposit and, instead of 
the original check, provides its customer with a substitute check makes 
the warranties in Sec. 229.52(a)(1). As noted in the commentary to

[[Page 995]]

Sec. 229.2(ccc), the Check 21 Act contemplates that nonbank persons 
that receive substitute checks (or representations thereof) from a bank 
will receive warranties and indemnities with respect to the checks. A 
reconverting bank that provides a substitute check to its depositor 
after it has rejected the check submitted for deposit may not have 
received consideration for the substitute check. In order to prevent 
banks from being able to transfer a check the bank truncated and then 
reconverted without providing substitute check warranties, the 
regulation provides that a bank that rejects a check submitted for 
deposit but provides its customer with a substitute check (or a paper or 
electronic representation of a substitute check) makes the warranties 
set forth in Sec. 229.52(a)(1) regardless of whether the bank received 
consideration.
    Example. A bank's customer submits a check for deposit at an ATM 
that captures an image of the check and sends the image electronically 
to the bank. After reviewing the item, the bank rejects the item 
submitted for deposit. Instead of providing the original check to its 
customer, the bank provides a substitute check to its customer. This 
bank is the reconverting bank with respect to the substitute check and 
makes the warranties described in Sec. 229.52(a)(1) regardless of 
whether the bank previously extended credit to its customer. (See 
commentary to Sec. 229.2(ccc)).

                    B. 229.52(b) Warranty Recipients

    1. A reconverting bank makes the warranties to the person to which 
it transfers, presents, or returns the substitute check for 
consideration and to any subsequent recipient that receives either the 
substitute check or a paper or electronic representation derived from 
the substitute check. These subsequent recipients could include a 
subsequent collecting or returning bank, the depositary bank, the 
drawer, the drawee, the payee, the depositor, and any indorser. The 
paying bank would be included as a warranty recipient, for example 
because it would be the drawee of a check or a transferee of a check 
that is payable through it.
    2. The warranties flow with the substitute check to persons that 
receive a substitute check or a paper or electronic representation of a 
substitute check. The warranties do not flow to a person that receives 
only the original check or a representation of an original check that 
was not derived from a substitute check. However, a person that 
initially handled only the original check could become a warranty 
recipient if that person later receives a returned substitute check or a 
paper or electronic representation of a substitute check that was 
derived from that original check. (See Sec. 229.34(f) regarding claims 
by a depositary bank that accepts deposit of an original check).
    3. A reconverting bank also makes the warranties to a person to whom 
the bank transfers a substitute check that the bank has rejected for 
deposit regardless of whether the bank received consideration.

            XXXII. Section 229.53 Substitute Check Indemnity

                     A. 229.53(a) Scope of Indemnity

    1. Each bank that for consideration transfers, presents, or returns 
a substitute check or a paper or electronic representation of a 
substitute check is responsible for providing the substitute-check 
indemnity.
    2. The indemnity covers losses due to any subsequent recipient's 
receipt of the substitute check instead of the original check. The 
indemnity therefore covers the loss caused by receipt of the substitute 
check as well as the loss that a bank incurs because it pays an 
indemnity to another person. A bank that pays an indemnity would in turn 
have an indemnity claim regardless of whether it received the substitute 
check or a paper or electronic representation of the substitute check. 
The indemnity would not apply to a person that handled only the original 
check or a paper or electronic image of the original check that was not 
derived from a substitute check.
    3. A reconverting bank also provides the substitute check indemnity 
to a person to whom the bank transfers a substitute check (or a paper or 
electronic representation of a substitute check) derived from a check 
that the bank has rejected for deposit regardless of whether the bank 
providing the indemnity has received consideration.

                                * * * * *

                      B. 229.53(b) Indemnity Amount

    1. If a recipient of a substitute check is making an indemnity claim 
because a bank has breached one of the substitute-check warranties, the 
recipient can recover any losses proximately caused by that warranty 
breach.

                                Examples

    a. A drawer discovers that its account has been charged for two 
different substitute checks that were provided to the drawer and that 
were associated with the same original check. As a result of this 
duplicative charge, the paying bank dishonored several subsequently 
presented checks that it otherwise would have paid and charged the 
drawer returned-check fees. The payees of the returned checks also 
charged the drawer returned-check fees. The drawer would have a warranty 
claim against any of the warranting banks, including its bank, for 
breach

[[Page 996]]

of the warranty described in Sec. 229.52(a)(1)(ii). The drawer also 
could assert an indemnity claim. Because there is only one original 
check for any payment transaction, if the collecting bank and presenting 
bank had collected the original check instead of using a substitute 
check the bank would have been asked to make only one payment. The 
drawer could assert its warranty and indemnity claims against the paying 
bank, because that is the bank with which the drawer has a customer 
relationship and the drawer has received an indemnity from that bank. 
The drawer could recover from the indemnifying bank the amount of the 
erroneous charge, as well as the amount of the returned-check fees 
charged by both the paying bank and the payees of the returned checks. 
If the drawer's account were an interest-bearing account, the drawer 
also could recover any interest lost on the erroneously debited amount 
and the erroneous returned-check fees. The drawer also could recover its 
expenditures for representation in connection with the claim. Finally, 
the drawer could recover any other losses that were proximately caused 
by the warranty breach.
    b. In the example above, the paying bank that received the duplicate 
substitute checks also would have a warranty claim against the previous 
transferor(s) of those substitute checks and could seek an indemnity 
from that bank (or either of those banks). The indemnifying bank would 
be responsible for compensating the paying bank for all the losses 
proximately caused by the warranty breach, including representation 
expenses and other costs incurred by the paying bank in settling the 
drawer's claim.

                                * * * * *

    3. The amount of an indemnity would be reduced in proportion to the 
amount of any loss attributable to the indemnified person's negligence 
or bad faith. This comparative-negligence standard is intended to 
allocate liability in the same manner as the comparative-negligence 
provision of section 229.38(c).

                                * * * * *

             XXXIII. 229.54 Expedited Recredit for Consumers

    A. * * *
    2. A consumer must in good faith assert that the bank improperly 
charged the consumer's account for the substitute check or that the 
consumer has a warranty claim for the substitute check (or both). The 
warranty in question could be a substitute-check warranty described in 
section 229.52 or any other warranty that a bank provides with respect 
to a check under other law. A consumer could, for example, have a 
warranty claim under section 229.34(a) or (d), which contain returned-
check warranties that are made to the owner of the check.

                                * * * * *



Sec. Appendix F to Part 229--Official Board Interpretations; Preemption 
                             Determinations

                Uniform Commercial Code, Section 4-213(5)

    Section 4-213(5) of the Uniform Commercial Code (``U.C.C.'') 
provides that money deposited in a bank is available for withdrawal as 
of right at the opening of business of the banking day after deposit. 
Although the language ``deposited in a bank'' is unclear, arguably it is 
broader than the language ``made in person to an employee of the 
depositary bank'', which conditions the next-day availability of cash 
under Regulation CC (Sec. 229.10(a)(1)). Under Regulation CC, deposits 
of cash that are not made in person to an employee of the depositary 
bank must be made available by the second business day after the banking 
day of deposit (Sec. 229.10(a)(2)). Therefore, this provision of the 
U.C.C. may call for the availability of certain cash deposits in a 
shorter time than provided in Regulation CC.
    This provision of the U.C.C., however, is subject to Section 4-
103(1), which provides, in part, that ``the effect of the provisions of 
this Article may be varied by agreement * * *.'' (The Regulation CC 
funds availability requirements may not be varied by agreement.) U.C.C. 
Section 4-213(5) supersedes the Regulation CC provision in Sec. 
229.10(a)(2), but a depositary bank may not agree with its customer 
under section 4-103(1) of the Code to extend availability beyond the 
time periods provided in Sec. 229.10(a) of Regulation CC.

                               California

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC preempt the provisions of 
California law concerning availability of funds. This preemption 
determination specifies those provisions of the California funds 
availability law that supersede the Act and Regulation CC. (See also the 
Board's preemption determination regarding the Uniform Commercial Code, 
section 4-213(5), pertaining to availability of cash deposits.)
    California has four separate sets of regulations establishing 
maximum availability schedules. The regulations applicable to commercial 
banks and branches of foreign banks located in California (Cal. Admin.

[[Page 997]]

Code tit. 10, Sec. Sec. 10.190401-10.190402) were promulgated by the 
Superintendent of Banks. The regulations applicable to savings banks and 
savings and loan associations (Cal. Admin. Code tit. 10, Sec. Sec. 
106.200-106.202) were adopted by the Savings and Loan Commissioner. The 
regulations applicable to credit unions (Cal. Admin. Code tit. 10, 
section 901) and to industrial loan companies (Cal. Admin. Code tit. 10, 
section 1101) were adopted by the Commissioner of Corporations.
    All the regulations were adopted pursuant to California Financial 
Code section 866.5 and California Commercial Code section 4213(4)(a), 
under which the appropriate state regulatory agency for each depository 
institution must issue administrative regulations to define a reasonable 
time for permitting customers to draw on items received for deposit in 
the customer's account. California Financial Code section 867 also 
establishes availability periods for funds deposited by cashier's check, 
certified check, teller's check, or depository check under certain 
circumstances. Finally, California Financial Code section 866.2 
establishes disclosure requirements.
    The Board's determination with respect to these California laws and 
regulations governing the funds availability requirements applicable to 
depository institutions in California are as follows.

             Commercial Banks and Branches of Foreign Banks

                                Coverage

    The California State Banking Department regulations, which apply to 
California state commercial banks, California national banks, and 
California branch offices of foreign banks, provide that a depositary 
bank shall make funds deposited into a deposit account available for 
withdrawal as provided in Regulation CC with certain exceptions. The 
funds availability schedules in Regulation CC apply only to accounts as 
defined in Regulation CC, which generally consist of transaction 
accounts. The California funds availability law and regulations apply to 
accounts as defined by Regulation CC as well as savings accounts (other 
than time accounts), as defined in the Board's Regulation D (12 CFR 
204.2(d)). (Note, however, that under Sec. 229.19(e) of Regulation CC, 
Holds on other funds, the federal availability schedules may apply to 
savings, time, and other accounts not defined as accounts under 
Regulation CC in certain circumstances.)

                         Availability Schedules

    Temporary schedule. Regulation CC provides that, until September 1, 
1990, nonlocal checks must be made available for withdrawal by the 
seventh business day after the banking day of deposit, except for 
certain nonlocal checks listed in appendix B-1, which must be made 
available within a shorter time (by the fifth business day following 
deposit for those California checks listed). Under the temporary 
schedule in the California regulations, a depositary bank with a four-
digit routing symbol of 1210 (``1210 bank'') or of 1220 (``1220 bank'') 
that receives for deposit a check drawn on a nonlocal, in-state 
commercial bank or foreign bank branch \1\ must make the funds available 
for withdrawal by the fourth business day after the day of deposit. The 
California regulations provide that 1210 and 1220 banks must make 
deposited checks drawn on nonlocal in-state thrifts (defined as savings 
and loan associations, savings banks, and credit unions) available by 
the fifth business day after deposit. In addition, California law 
provides that all other depositary banks must make deposited checks 
drawn on a nonlocal in-state commercial bank or foreign bank branch 
available by the fifth business day after deposit and checks drawn on 
nonlocal in-state thrifts available by the sixth business day after 
deposit. To the extent that these schedules provide for shorter holds 
than Regulation CC and its appendix B-1, the state schedules supersede 
the federal schedules. \2\ For example, the California four-day schedule 
that applies to checks drawn on in-state nonlocal commercial banks or 
foreign bank branches and deposited in a 1210 or 1220 bank would be 
shorter than and would supersede the federal schedules.
---------------------------------------------------------------------------

    \1\ The California regulation uses the term paying bank when 
describing the institution on which these checks are drawn, but does not 
define paying bank or bank. Regulation CC's definitions of paying bank 
and bank include savings institutions and credit unions as well as 
commercial banks and branches of foreign banks. However, because the 
California regulation makes separate provisions for checks drawn on 
savings institutions and credit unions, the Board concludes that the 
term paying bank, as used in the California regulation, includes only 
commercial banks and foreign bank branches.
    \2\ Appendix B-1 of Regulation CC provides that the federal 
schedules will be the same as the California schedules (5 days) in the 
following cases: A depositary bank bearing a 1210 routing number 
receiving for deposit checks bearing a 3220 or a 3223 routing number, 
and a depositary bank bearing a 1220 routing number receiving for 
deposit checks bearing a 3210 routing number. In the cases where federal 
and state law are the same, the state law is not preempted by, nor does 
it supersede, the federal law.
---------------------------------------------------------------------------

    The California regulations do not specify whether the state 
schedules apply to deposits of checks at nonproprietary ATMs. Under the 
temporary schedules in Regulation CC, deposits at nonproprietary ATMs 
must be

[[Page 998]]

made available for withdrawal by the seventh business day following 
deposit. To the extent that the California schedules provide for shorter 
availability for deposits at nonproprietary ATMs, they would supersede 
the temporary schedule in Regulation CC for deposits at nonproprietary 
ATMs specified in Sec. 229.11(d).
    Permanent schedule. Regulation CC provides that, as of September 1, 
1990, nonlocal checks must be made available for withdrawal by the fifth 
business day after the banking day of deposit. Under the permanent 
schedule in the California regulations, a depositary bank with a four-
digit routing symbol of 1210 or of 1220 that receives for deposit a 
check drawn on a nonlocal, in-state commercial bank or foreign bank 
branch must make the funds available for withdrawal by the fourth 
business day after the day of deposit. These state schedules provide for 
shorter hold periods than and thus supersede the federal schedules.
    Second-day availability. Section 867 of the California Financial 
Code requires depository institutions to make funds deposited by 
cashier's check, teller's check, certified check, or depository check 
available for withdrawal on the second business day following deposit, 
if certain conditions are met. The Regulation CC next-day availability 
requirement for cashier's checks and teller's checks applies only to 
those checks issued to a customer of the bank or acquired from the bank 
for remittance purposes. To the extent that the state second-day 
availability requirement applies to cashier's and teller's checks issued 
to a non-customer of the bank for other than remittance purposes, the 
state two-day requirement supersedes the federal local and nonlocal 
schedules.
    Availability at start of day. The California regulations do not 
specify when during the day funds must be made available for withdrawal. 
Section 229.19(b) of Regulation CC provides that funds must be made 
available at the start of the business day. In those cases where federal 
and state law provide for holds for the same number of days, to the 
extent that the California regulations allow funds to be made available 
later in the day than does Regulation CC, the federal law would preempt 
state law.
    Exceptions to the availability schedules. Under the state preemption 
standards of Regulation CC (see Sec. 229.20(c) and accompanying 
Commentary), for deposits subject to the state availability schedules, a 
state exception may be used to extend the state availability schedule up 
to the federal availability schedule. Once the deposit is held up to the 
federal availability schedule limit under a state exception, the 
depositary bank may further extend the hold under any federal exception 
that can be applied to the deposit. If no state exceptions exist, then 
no exceptions holds may be placed on deposits covered by state 
schedules. Thus, to the extent that California law provides for 
exceptions to the California schedules that supersede Regulation CC, 
those exceptions may be applied in order to extend the state 
availability schedules up to the federal availability schedules or such 
later time as is permitted by a federal exception.

                               Disclosures

    California law (Cal. Fin. Code Sec. 866.2) requires depository 
institutions to provide written disclosures of their general 
availability policies to potential customers prior to opening any 
deposit account. The law also requires that preprinted deposit slips and 
ATM deposit envelopes contain a conspicuous summary of the general 
policy. Finally, the law requires depository institutions to provide 
specific notice of the time the customer may withdraw funds deposited by 
check or similar instrument into a deposit account if the funds are not 
available for immediate withdrawal.
    Section 229.20(c)(2) of Regulation CC provides that inconsistency 
may exist when a state law provides for disclosures or notices 
concerning funds availability relating to accounts. California Financial 
Code Sec. 866.2 requires disclosures that differ from those required by 
Regulation CC and, therefore, is preempted to the extent that it applies 
to accounts as defined in Regulation CC. The state law continues to 
apply to savings accounts and other accounts not governed by Regulation 
CC disclosure requirements.

                          Savings Institutions

                                Coverage

    The California Department of Savings and Loan regulations, which 
apply to California savings and loan associations and California savings 
banks, provide that a depositary bank shall make funds deposited into a 
transaction or non-transaction account available for withdrawal as 
provided in Regulation CC. The funds availability schedules in 
Regulation CC apply only to accounts as defined in Regulation CC, which 
generally consist of transaction accounts. The California funds 
availability law and regulations apply to accounts as defined by 
Regulation CC as well as savings accounts as defined in the Board's 
Regulation D (12 CFR 204.2(d)). (Note, however, that under Sec. 
229.19(e) of Regulation CC, Holds on other funds, the federal 
availability schedules may apply to savings, time, and other accounts 
not defined as accounts under Regulation CC in certain circumstances.)

                         Availability Schedules

    Second-day availability. Section 867 of the California Financial 
Code requires depository institutions to make funds deposited by

[[Page 999]]

cashier's check, teller's check, certified check, or depository check 
available for withdrawal on the second business day following deposit, 
if certain conditions are met. The Regulation CC next-day availability 
requirement for cashier's checks and teller's checks applies only to 
those checks issued to a customer of the bank or acquired from the bank 
for remittance purposes. To the extent that the state second-day 
availability requirement applies to cashier's and teller's checks issued 
to a non-customer of the bank for other than remittance purposes, the 
state two-day requirement supersedes the federal local and nonlocal 
schedules.
    Temporary and permanent schedules. Other than the provisions of 
Section 867 discussed above, California law incorporates the Regulation 
CC availability requirements with respect to deposits to accounts 
covered by Regulation CC. Because the state requirements are consistent 
with the federal requirements, the California regulation is not 
preempted by, nor does it supersede, the federal law.

                               Disclosures

    California law (Cal. Fin. Code Sec. 866.2) requires depository 
institutions to provide written disclosures of their general 
availability policies to potential customers prior to opening any 
deposit account. The law also requires that preprinted deposit slips and 
ATM deposit envelopes contain a conspicuous summary of the general 
policy. Finally, the law requires depository institutions to provide 
specific notice of the time the customer may withdraw funds deposited by 
check or similar instrument into a deposit account if the funds are not 
available for immediate withdrawal. Section 229.20(c)(2) of Regulation 
CC provides that inconsistency may exist when a state law provides for 
disclosures or notices concerning funds availability relating to 
accounts. To the extent that California Financial Code Sec. 866.2 
requires disclosures that differ from those required by Regulation CC 
and apply to accounts as defined in Regulation CC (generally, 
transaction accounts), the California law is preempted by Regulation CC.
    The Department of Savings and Loan regulations provide that for 
those non-transaction accounts covered by state law but not by federal 
law, disclosures in accordance with Regulation CC will be deemed to 
comply with the state law disclosure requirements. To the extent that 
the Department of Savings and Loan regulations permit reliance on 
Regulation CC disclosures for transaction accounts and to the extent the 
state regulations survive the preemption of California Financial Code 
Sec. 866.2, they are not preempted by, nor do they supersede, the 
federal law. The state law continues to apply to savings accounts and 
other non-transaction accounts not governed by Regulation CC disclosure 
requirements.

               Credit Unions and Industrial Loan Companies

    Each credit union and federally-insured industrial loan company that 
maintains an office in California for the acceptance of deposits must 
make funds deposited by check available for withdrawal in accordance 
with the following table:

------------------------------------------------------------------------
                                                Availability
                                   -------------------------------------
                                                        Industrial Loan
                                       Credit Union         Company
------------------------------------------------------------------------
$100 or less checks; U.S. Treasury  1st day..........  1st day
 checks; state/local gov't checks.
On us checks; cashier's/certifies/  2nd day..........  2nd day
 teller's/depository checks.
In-state checks...................  6th day..........  6th day
out-of-state checks...............  10th day.........  12th day
------------------------------------------------------------------------
Note: These time periods are stated in terms of availability for
  withdrawal not later than the Xth business day following the banking
  day of deposit to facilitate comparison with Regulation CC. State
  regulations are stated in terms of availability at the start of the
  business day subsequent to the number of days specified in the
  regulation.

                                Coverage

    The California law and regulations govern the availability of funds 
to ``demand deposits, negotiable order of withdrawal draft accounts, 
savings deposits subject to automatic transfers, share draft accounts, 
and all savings deposits and share accounts, other than time deposits.'' 
(California Financial Code section 886(b)) The federal preemption of 
state funds availability laws only applies to accounts subject to 
Regulation CC, which generally includes transaction accounts. Thus, the 
California funds availability regulations continue to apply to deposits 
in savings and other accounts (such as accounts in which the account-
holder is another bank) that are no accounts under Regulation CC. (Note, 
however, that under Sec. 229.19(e) of Regulation CC, Holds on other 
funds, the federal availability schedules may apply to savings, time, 
and other accounts not defined as accounts under Regulation CC in 
certain circumstances.)
    The California law applies to any Item (California Financial Code 
section 866.5 and California Commercial Code section 4213(4)(a)). The 
California Commercial Code defines item to mean any instrument for the 
payment of money even though it is not negotiable * * * (Cal. Com. Code 
section 4104(g)). This term is broader in scope than the definition of 
check in the Act and Regulation CC. The Commissioner's regulations, 
however, define the term item to include checks, negotiable orders of 
withdrawal, share drafts, warrants, and money orders. As limited by

[[Page 1000]]

the state regulations, the state law applies only to instruments that 
are also checks as defined in Sec. 229.2(k) of Regulation CC.

                         Availability Schedules

    Temporary schedule. The California regulations provide that in-state 
nonlocal checks must be made available for withdrawal not later than the 
sixth business day following deposit. This time period is shorter than 
the seventh business day availability required for nonlocal checks under 
Sec. 229.11(c) of Regulation CC, although it is not shorter than the 
schedules for nonlocal checks set forth in Sec. 229.11(c)(2) and 
appendix B-1 of Regulation CC. Thus, the state scheduled for in-state 
nonlocal checks supersede the federal schedule to the extent that they 
apply to an item payable by a California institution that is defined as 
a nonlocal check under Regulation CC, and is not subject to reduced 
schedules under Sec. 229.11(c)(2) and appendix B-1.
    Under the California regulations, credit unions and industrial loan 
companies must provide next-day availability to first-indorsed items 
issued by any federally-insured institution. This regulatory 
requirement, however, has been superseded by section 867 of the 
California Financial Code, which requires depository institutions to 
make funds deposited by cashier's check, teller's check, certified 
checks, or depository check available for withdrawal on the second 
business day following deposit, if certain conditions are met. This 
requirement became effective January 1, 1988.
    The Regulation CC next-day availability requirement for cashier's 
checks and teller's checks applies only to those checks issued for 
remittance purposes. To the extent that the state second business day 
availability requirement applies to cashier's and teller's checks issued 
for other than remittance purposes, the state two-day requirement 
supersedes the federal local and nonlocal schedules.
    The California regulations do not specify whether they apply to 
deposits of checks at nonproprietary ATMs. Under the temporary schedule 
in Regulation CC, deposits at nonproprietary ATMs must be made available 
for withdrawal at the start of the seventh business day after deposit. 
To the extent that the California schedules provide for shorter 
availability for deposits at nonproprietary ATMs, they would supersede 
the temporary schedule in Regulation CC for deposits at nonproprietary 
ATMs specified in Sec. 229.11(d).
    Permanent schedule. Under the California regulations, credit unions 
and industrial loan companies must provide next-day availability to 
first-indorsed items issued by any federally-insured institution. This 
regulatory requirement, however, has been superseded by section 867 of 
the California Financial Code, which requires depository institutions to 
make funds deposited by cashier's check, teller's check, certified 
check, or depository check available for withdrawal on the second 
business day following deposit, if certain conditions are met. This 
requirement became effective January 1, 1988.
    The Regulation CC next-day availability requirement for cashier's 
and teller's checks applies only to those checks issued for remittance 
purposes. To the extent that the state second business day availability 
requirement applies to cashier's and teller's checks issued for other 
than remittance purposes, the state two-day requirement supersedes the 
federal local and nonlocal schedules.
    Next-day availability. Credit unions and industrial loan companies 
in California are required to give next-day availability to items drawn 
by the State of California or any of its departments, agencies, or 
political subdivisions. California law supersedes the fedeal law in that 
the state law does not condition next-day availability on receipt at a 
staffed teller station or use of a special deposit slip.
    California credit unions and industrial loan companies must provide 
second business day availability to checks drawn on the depositary bank. 
Regulation CC requires next-day availability for checks deposited in a 
branch of the depositary bank and drawn on the same or another branch of 
the same bank if both branches are located in the same state or the same 
check processing region. Thus, generally, the Regulation CC rule for 
availability of on us checks preempts the California regulations. To the 
extent, however, that an on us check is (1) drawn on an out-of-state 
branch of the depositary bank that is not in the same check processing 
region as the branch in which it was deposited, or (2) deposited at an 
off-premises ATM or another facility of the depositary bank that is not 
considered a branch under federal law, the state regulation supersedes 
the Regulation CC availability requirements.
    Exceptions to the availability schedules. California law provides 
exceptions to the state availability schedules for large deposits, new 
accounts, repeated overdrafters, doubtful collectibility, foreign items, 
and emergency conditions. In all cases where the federal availability 
schedule preempts the state schedule, only the federal exceptions will 
apply. For deposits that are covered by the state availability schedule 
(e.g., in-state nonlocal checks under the temporary schedule; cashier's 
or teller's checks that are not deposited with a special deposit slip or 
at a staff teller station), the state exceptions may be used to extend 
the state availability schedule up to the federal availability schedule. 
Once the deposit is held up to the federal availability limit under a 
state exception, the depositary bank may further extend the hold under 
any federal exception that can be applied to the deposit. Any time a 
depositary bank invokes an exception to extend a hold

[[Page 1001]]

beyond the time periods otherwise permitted by law, it must give notice 
of the extended hold to its customer in accordance with Sec. 229.13(g) 
of Regulation CC.
    Business day/banking day. The definitions of business day and 
banking day in the California regulations are preempted by the 
Regulation CC definition of those terms. Thus, for determining the 
permissible hold under the California schedules that supersede the 
Regulation CC schedule, deposits are considered made on the specified 
number of business days following the banking day of deposit.

                               Disclosures

    California law (Cal. Fin. Code section 866.2) requires depository 
institutions to provide written disclosures of their general 
availability policies to potential customers prior to opening any 
deposit account. The law also requires that preprinted deposit slips and 
ATM deposit envelopes contain a conspicuous summary of the general 
policy. Finally, the law requires a depository institution to provide 
specific notice of the time the customer may withdraw funds deposited by 
check or similar instrument into a deposit account if the funds are not 
available for immediate withdrawal.
    Section 229.20(c)(2) of Regulation CC provides that inconsistency 
may exist when a state law provides for disclosures or notices 
concerning funds availability relating to accounts. California Financial 
Code section 866.2 requires disclosures that differ from those required 
by Regulation CC, and therefore is preempted to the extent that it 
applies to accounts as defined in Regulation CC. The state law continues 
to apply to savings accounts and other accounts not governed by 
Regulation CC disclosure requirements.

                               Connecticut

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt provisions of 
Connecticut law relating to the availability of funds. This preemption 
determination specifies those provisions of the Connecticut funds 
availability law that supersede the Act and Regulation CC. (See also the 
Board's preemption determination regarding the Uniform Commercial Code, 
section 4-213(5), pertaining to availability of cash deposits.)
    In 1987, Connecticut amended its statute governing funds 
availability (Conn. Gen. Stat. section 36-9v), which requires 
Connecticut depository institutions to make funds deposited in a 
checking, time, interest, or savings account available for withdrawal 
with specified periods.
    Generally, the Connecticut statute, as amended, provides that items 
deposited in a checking, time, interest, or savings account at a 
depository institution must be available for withdrawal in accordance 
with the following table:

 
                                                     Availability
 
On us checks...............................  2nd day
In-state checks............................  4th day
Out-of-state checks........................  6th day
 

    Exceptions to the schedules are provided for items received for 
deposit for the purpose of opening an account and for items that the 
depositary bank has reason to believe will not clear. The Connecticut 
statute also requires availability policy disclosures to depositors in 
the form of written notices and notices posted conspicuously at each 
branch.

                                Coverage

    The Connecticut statute governs the availability of funds deposited 
in savings and time accounts, as well as accounts as defined in Sec. 
229.2(a) of Regulation CC. The federal preemption of state funds 
availability requirements only applies to accounts subject to Regulation 
CC, which generally consist of trasaction accounts. Regulation CC does 
not affect the Connecticut statute to the extent that the state law 
applies to deposits in savings and other accounts (including transaction 
accounts where the account holder is a bank, foreign bank or the U.S. 
Treasury) that are not accounts under Regulation CC. (Note, however, 
that under Sec. 229.19(e) of Regulation CC, Holds on other funds, the 
federal availability schedules may apply to savings, time, and other 
accounts not defined as accounts under Regulation CC, in certain 
circumstances.)
    The Connecticut statute applies to items deposited in accounts. This 
term encompasses instruments that are not defined as checks in 
Regulation CC (Sec. 229.2(k)), such as nonnegotiable instruments, and 
are therefore not subject to Regulation CC's provisions governing funds 
availability. Those items that are subject to Connecticut law but are 
not subject to Regulation CC will continue to be covered by the state 
availability schedules and exceptions.

                         Availability Schedules

    Temporary schedule. Connecticut law provides that certain checks 
that are nonlocal under Regulation CC must be available in a shorter 
time (sixth business day after deposit for checks payable by depository 
institutions not located in Connecticut) than under the federal 
regulation (seventh business day after deposit under the temporary 
schedule for nonlocal checks). Accordingly,

[[Page 1002]]

the Connecticut law supersedes Regulation CC with respect to nonlocal 
checks (other than checks covered by appendix B-1) deposited in accounts 
until the federal permanent availability schedules take effect on 
September 1, 1990.
    The Connecticut statute does not specify whether it applies to 
deposits of checks at nonproprietary ATMs. Under the temporary schedule 
in Regulation CC, deposits at nonproprietary ATMs must be made available 
for withdrawal at the start of the seventh business day after deposit. 
To the extent that the Connecticut schedules provide for shorter 
availability for deposits at nonproprietary ATMs, they would supersede 
the temporary schedule in Regulation CC for deposits at nonproprietary 
ATMs specified in Sec. 229.11(d).
    Exceptions to the availability schedule. The Connecticut law 
provides exceptions for items received for deposit for the purpose of 
opening new accounts and for items that the depositary bank has reason 
to believe will not clear. In all cases where the federal availability 
schedule preempts the state schedule, only the federal exceptions will 
apply. For deposits that are covered by the state availability schedule 
(e.g., nonlocal out-of-state checks under the temporary schedule), the 
state exceptions may be used to extend the state availability schedule 
(of six business days) to meet the federal availability schedule (of 
seven business days). Once the deposit is held up to the federal 
availability schedule limit under a state exception, the depositary bank 
may further extend the hold under any federal exception that can be 
applied to the deposit. Any time a depositary bank invokes an exception 
to extend a hold beyond the time periods otherwise permitted by law, it 
must give notice of the extended hold to its customer, in accordance 
with Sec. 229.13(g) of Regulation CC.

                               Disclosures

    The Connecticut statute (Conn. Gen. Stat. Section 36-9v(b)) requires 
written notice to depositors of an institution's check hold policy and 
requires a notice of the policy to be posted in each branch.
    Regulation CC preempts state disclosure requirements concerning 
funds availability that relate to accounts that are inconsistent with 
the federal requirements. The state requriements are different from, and 
therefore inconsistent with, the federal disclosure rules. (Sec. 
229.20(c)(2)). Thus, the Connecticut statute is preempted by Regulation 
CC to the extent that these disclosure provisions apply to accounts as 
defined by Regulation CC. The Connecticut disclosure rules would 
continue to apply to accounts, such as savings and time accounts, not 
governed by the Regulation CC disclosure requirements.

                                Illinois

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act and subpart B, and, in connection therewith, 
subpart A, of Regulation CC, preempt provisions of Illinois law relating 
to the availability of funds. Section 4-213(5) of the Uniform Commercial 
Code as adopted in Illinois (Illinois Revised Statutes Chapter 26, 
paragraph 4-213(5), enacted July 26, 1988) provides that:

    Time periods after which deposits must be available for withdrawal 
shall be determined by the provisions of the federal Expedited Funds 
Availability Act (Title VI of the Competitive Equality Banking Act of 
1987) and the regulations promulgated by the Federal Reserve Board for 
the implementation of that Act.

    Section 4-213(5) of the Illinois law does not supersede Regulation 
CC; and, because this provision of Illinois law does not permit funds to 
be made available for withdrawal in a longer period of time than 
required under the Act and Regulation, it is not preempted by Regulation 
CC.

                                  Maine

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt the provisions of Maine 
law concerning the availability of funds. This preemption determination 
addresses the relation of the Act and Regulation CC to the Maine funds 
availability law. (See also the Board's preemption determination 
regarding the Uniform Commercial Code, section 4-213(5), pertaining to 
availability of cash deposits.)
    In 1985, Maine adopted a statute governing funds availability (Title 
9-B MRSA section 241(5)), which requires Maine financial institutions to 
make funds deposited in a transaction account, savings account, or time 
account available for withdrawal within a reasonable period. The Maine 
statute gives the Superintendent of Banking for the State of Maine the 
authority to promulgate rules setting forth time limitations and 
disclosure requirements governing funds availability.
    The Superintendent of Banking issued regulations implementing the 
Maine funds availability statute, effective July 1, 1987 (Regulation 
18(IV)), and adopted amendments to this regulation, effective September 
1, 1988. Under the revised regulation, funds deposited to any deposit 
account in a Maine financial institution must be made available for 
withdrawal in accordance with the Act and Regulation CC (Regulation 18-

[[Page 1003]]

IV(A)(1)). The state regulation provides that an institution's funds 
availability policies for accounts subject to Regulation CC be disclosed 
in a manner consistent with the Regulation CC requirements. Funds 
availability policies for accounts not subject to Regulation CC must be 
disclosed in accordance with the state regulation (Regulation 18-
IV(A)(2)).

                                Coverage

    The Maine law and regulation govern the availability of funds to any 
deposit account, as defined in the Board's Regulation D (12 CFR 
204.2(a)). This coverage is broader than the accounts covered in 
Regulation CC. The Maine law continues to apply to all deposit accounts, 
including those that are not accounts under Regulation CC. (Note, 
however, that under Sec. 229.19(e) of Regulation CC, Holds on other 
funds, the federal availability schedules may apply to savings, time, 
and other accounts not defined as accounts under Regulation CC, in 
certain circumstances.)

                 Availability Schedules and Disclosures

    The Maine regulation incorporates the Regulation CC availability and 
disclosure requirements with respect to deposits to accounts covered by 
Regulation CC. Because the state requirements are consistent with the 
federal requirements, the Maine regulation is not preempted by, nor does 
it supersede, the federal law.

                              Massachusetts

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt provisions of 
Massachusetts law relating to the availability of funds. This preemption 
determination addresses the relationship of the Act and Regulation CC to 
the Massachusetts funds availability law. (See also the Board's 
preemption determination regarding the Uniform Commercial Code, section 
4-213(5), pertaining to availability of cash deposits.)
    In 1988, Massachusetts amended its statute governing funds 
availability (Mass. Gen. L. ch. 167D, section 35), to require 
Massachusetts banking institutions to make funds available for 
withdrawal and disclose their availability policies in accordance with 
the Act and Regulation CC. The Massachusetts law, however, provides that 
``local originating depository institution'' is to be defined as any 
originating depository institution located in the Commonwealth.

                                Coverage

    The Massachusetts statute governs the availability of funds 
deposited in ``any demand deposit, negotiable order of withdrawal 
account, savings deposit, share account or other asset account.'' 
Regulation CC applies only to accounts as defined in Sec. 229.2(a). 
Regulation CC does not affect the Massachusetts statute to the extent 
that the state law applies to deposits in savings and other accounts 
(including transaction accounts where the account holder is a bank, 
foreign bank, or the U.S. Treasury) that are not accounts under 
Regulation CC. (Note, however, that under Sec. 229.19(e) of Regulation 
CC, Holds on other funds, the federal availability schedules may apply 
to savings, time, and other accounts not defined as accounts under 
Regulation CC, in certain circumstances.)

                         Availability Schedules

    The Massachusetts definition of local originating depository 
institution (local paying bank in Regulation CC terminology) requires 
that in-state checks that are nonlocal checks under Regulation CC be 
made available in accordance with the Regulation CC local schedule. The 
Massachusetts law supersedes Regulation CC under the temporary and 
permanent schedule with respect to nonlocal checks payable by banks 
located in Massachusetts and deposited into accounts. Regulation CC 
preempts the Massachusetts law, however, to the extent the state law 
does not define banks located outside of Massachusetts, but in the same 
check processing region as the paying bank, as local originating 
depository institutions.

                               Disclosures

    The Massachusetts regulation incorporates the Regulation CC 
disclosure requirements with respect to both accounts covered by 
Regulation CC and savings and other accounts not governed by the federal 
regulation. Because the state requirements are consistent with the 
federal requirements, the Massachusetts regulation is not preempted by, 
nor does it supersede, the federal law. The Massachusetts disclosure 
rules would continue to apply to accounts not governed by the Regulation 
CC disclosure requirements.

                               New Jersey

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC preempt the provisions of New 
Jersey law concerning disclosure of a bank's funds availability policy. 
(See also the Board's preemption determination regarding the Uniform 
Commercial Code, section 4-213(5), pertaining to availability of cash 
deposits.)

[[Page 1004]]

    New Jersey does not have a law or regulation establishing the 
maximum time periods within which funds deposited by check or electronic 
payment must be made available for withdrawal. New Jersey does, however, 
have regulations concerning the disclosure of a banking institution's 
availability policy (N.J.A.C. 3:1-15.1 et seq.).

                               Disclosures

    New Jersey law requires every banking institution (defined as any 
state or federally chartered commercial bank, savings bank, or savings 
and loan association) to provide written disclosure to all holders of 
and applicants for deposit accounts which describes the institution's 
funds availability policy. Institutions must also disclose to their 
customers any significant changes to their availability policy.
    Regulation CC preempts state disclosure requirements concerning 
funds availability that relates to accounts that are inconsistent with 
the federal requirements. The state requirements are different from, and 
therefore inconsistent with, the federal disclosure rules. (Sec. 
229.20(c)(2)). Thus, the New Jersey statute (N.J.A.C. sections 3:1-15.1 
et seq.) is preempted by Regulation CC to the extent that these 
disclosure provisions apply to accounts as defined by Regulation CC. The 
New Jersey disclosure rules would continue to apply to other deposit 
accounts, as defined by New Jersey law, including money market accounts 
and savings accounts established by a natural person for personal or 
family purposes, which are not governed by the Regulation CC disclosure 
requirements.

                                New York

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt the provisions of New 
York law concerning the availability of funds. This preemption 
determination addresses the relation of the Act and Regulation CC to the 
New York funds availability law. (See also the Board's preemption 
determination regarding the Uniform Commercial Code, section 4-213(5), 
pertaining to availability of cash deposits.)
    In 1983, the New York State Banking Department, pursuant to section 
14-d of the New York Banking law, issued regulations requiring that 
funds deposited in an account be made available for withdrawal within 
specified time periods, and provided certain exceptions to those 
availability schedules. Part 34 of the New York State Banking 
Department's General Regulations established time frames within which 
commercial banks, trust companies, and branches of foreign banks 
(banks); and savings banks, savings and loan associations, and credit 
unions (savings institutions) must make funds deposited in customer 
accounts available for withdrawal.
    The Banking Department amended part 34, effective September 1, 1988, 
generally to exclude accounts covered by Regulation CC from the scope of 
the state regulation. Part 34.4 (a)(2) and (b)(2) of the revised New 
York rules, however, continue to apply to checks deposited to accounts, 
as defined in Regulation CC. These provisions require that the proceeds 
of nonlocal checks payable by a New York institution be made available 
for withdrawal not later than the start of the fourth business day 
following deposit, if deposited in a bank, or the fifth business day 
following deposit, if deposited in a savings institution. The revised 
regulation also provides that, with respect to savings accounts and time 
deposits, New York institutions could elect to comply with either the 
state or federal availability and disclosure requirements.
    This preemption determination supersedes the determination issued by 
the Board on August 18, 1988 (53 FR 32357 (August 24, 1988)).

                                Coverage

    The New York law and regulation govern the availability of funds in 
savings accounts and time deposits, as well as accounts as defined in 
Sec. 229.2(a) of Regulation CC. The New York law continues to apply to 
deposits to savings accounts and time deposits that are not accounts 
under Regulation CC. (Note, however, that under Sec. 229.19(e) of 
Regulation CC, Hold on other funds, the federal availability schedules 
may apply to savings, time, and other accounts not defined as accounts 
under Regulation CC, in certain circumstances.)
    The New York law and regulation apply to items deposited to 
accounts. Part 34.3(e) defines item as a check, negotiable order of 
withdrawal or money order deposited into an account. The Board 
interprets the definition of item in New York law to be consistent with 
the definition of check in Regulation CC (Sec. 229.2(k)).

                         Availability Schedules

    The provisions of New York law governing the availability of in-
state nonlocal items provide for shorter hold than is provided under 
Regulation CC, and supersede that federal availability requirements. 
With the exception of these provisions, the New York regulation does not 
apply to deposits to accounts covered by Regulation CC.
    Temporary schedule. The time periods for the availability of in-
state nonlocal checks, contained in part 34.4 (a)(2) and (b)(2), are 
shorter that the seventh business day availability required for nonlocal 
checks under

[[Page 1005]]

Sec. 229.11(c) of Regulation CC, although they are not necessarily 
shorter than the schedules for nonlocal checks set forth in Sec. 
229.11(c)(2) and appendix B-1 of Regulation CC. Thus, these state 
schedules supersede the federal schedule to the extent that they apply 
to an item payable by a New York bank or savings institution that is 
defined as a nonlocal checks under Regulation CC and the applicable 
state schedule is less than the applicable schedule specified in Sec. 
229.11(c) and appendix B-1.
    Permanent schedule. The New York schedule for banks supersedes the 
Regulation CC requirement in the permanent schedule, effective September 
1, 1990, that nonlocal checks be made available for withdrawal by the 
start of the fifth business day following deposit, to the extent that 
the in-state checks are defined as nonlocal under Regulation CC, and the 
Regulation CC schedule for nonlocal checks is not shortened under Sec. 
229.12(c)(2) and appendix B-2 of Regulation CC. In addition, the New 
York schedule for savings institutions supersedes the Regulation CC time 
period adjustment for withdrawal by cash or similar means in the 
permanent schedule, to the extent that the in-state checks are defined 
as nonlocal under Regulation CC, and the Regulation CC schedule for 
nonlocal checks is not shortened under Sec. 229.12(c)(2) and appendix 
B-2.
    Exceptions to the availability schedules. New York law provides 
exceptions to the state availability schedules for large deposits, new 
accounts, repeated overdrafters, doubtful collectibility, foreign items, 
and emergency conditions (part 34.4). The state exceptions apply only 
with respect to deposits of in-state nonlocal checks that are subject to 
the state availability schedule. For these deposits, the depositary bank 
may invoke a state exception and place a hold on the deposit up to the 
federal availability schedule limit for that type of deposit. Once the 
federal availability schedule limit is reached, the depositary bank may 
further extend the hold under any of the federal exceptions that apply 
to that deposit. Any time a depositary bank invokes an exception to 
extend a hold beyond the time periods otherwise permitted by law, it 
must give notice of the extended hold to its customer in accordance with 
Sec. 229.12(g) of Regulation CC.

                               Disclosures

    The revised New York regulation does not contain funds availability 
disclosure requirements applicable to accounts subject to Regulation CC.

                              Rhode Island

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, supersede provisions of Rhode 
Island law relating to the availability of funds. This preemption 
determination specifies those provisions in the Rhode Island funds 
availability law that supersede the Act and Regulation CC. (See also the 
Board's preemption determination regarding the Uniform Commercial Code, 
section 4-213(5), pertaining to availability of cash deposits.)
    In 1986, Rhode Island adopted a statute governing funds availability 
(R.I. Gen. Laws tit. 6A, sections 4-601 through 4-608), which requires 
Rhode Island depository institutions to make checks deposited in a 
personal transaction account available for withdrawal within certain 
specific periods. Commercial banks and thrift institutions (mutual 
savings banks, savings banks, savings and loan institutions and credit 
unions) must make funds available for withdrawal in accordance with the 
following table:

------------------------------------------------------------------------
                                                            Thrift
                                    Commercial banks     institutions
------------------------------------------------------------------------
Treasury checks, Rhode Island       2nd.............  2nd
 Government checks, first-indorsed.
In-state cashier's checks less      2nd.............  2nd
 than $2,500.
On-us checks......................  2nd.............  3rd
In-state clearinghouse checks.....  3rd.............  4th
In-state nonclearinghouse checks..  5th.............  6th
1st or 2nd Federal Reserve          7th.............  7th
 District checks (out-of-state).
Other checks......................  9th.............  10th
------------------------------------------------------------------------
Note: These time periods are stated in terms of availability for
  withdrawal not later than the Xth business day following the banking
  day of deposit to facilitate comparison with Regulation CC. State
  regulations are stated in terms of availability at the start of the
  business day subsequent to the number of days specified in the
  regulation.

The Rhode Island statute also provides restrictions and exceptions to 
the schedules and requires institutions to make certain disclosures to 
their customers.

                                Coverage

    The Rhode Island statute governing the availability of funds 
deposited in personal transaction accounts, a term not defined in the 
statute. The federal law would continue to apply to accounts, as defined 
in Sec. 229.2(a), that are not personal transaction accounts.
    The Rhode Island statute applies to items, defined as checks, 
negotiable orders of withdrawal, or money orders. The Board interprets 
the definition of item to be consistent with the definition of check in 
Regulation CC (Sec. 299.2(k)).

                         Availability Schedules

    Temporary schedule. Rhode Island law requires availability for 
certain checks in the same time as does Regulation CC. Thus, in

[[Page 1006]]

these instances, the federal law does not preempt the state law. Rhode 
Island law requires commercial banks (but not thrift institutions) to 
make checks payable by a depositary institution that uses the same in-
state clearing facility as the depositary bank available for withdrawal 
on the third business day following the day of the deposit. This is the 
same time period contained in Regulation CC for local checks payable by 
a bank that is a member of the same local clearinghouse as the 
depositary bank. (The Board views the definition of the same in-state 
clearing facility as having the same meaning as the term the same check 
clearinghouse association in the federal law's provision that allows 
banks to limit the customer's ability to withdraw cash on the third 
business day if the local check being deposited is payable by a bank 
that is not a member of the same local clearinghouse as the depositary 
bank.) Since the Rhode Island law and the federal law both require the 
funds to be made available no later than the third business day, the 
state law is not preempted by the federal law.
    The Rhode Island law also requires commercial banks and savings 
institutions to make checks payable by a depository institution located 
in the First or Second Federal Reserve District (outside of Rhode 
Island) available on the seventh business day following deposit. To the 
extent that this provision applies to checks payable by institutions 
located outside the Boston check processing region, it provides for 
availability in the same time as required for nonlocal checks under the 
temporary federal schedule, and thus is not preempted by the federal 
law.
    The Rhode Island statute does not specify whether it applies to 
deposits of checks at nonproprietary ATMs. Under the temporary schedule 
in Regulation CC, deposits at nonproprietary ATMs must be made available 
for withdrawal at the opening of the seventh business day after deposit. 
To the extent that the Rhode Island schedules provide for shorter 
availability for deposits at nonproprietary ATMs, they would supersede 
the temporary schedule.
    Exceptions to the availability schedules. The Rhode Island law 
contains exceptions for reason to doubt collectibility or ability of the 
depositor to reimburse the depositary bank, for new accounts, for large 
checks, and for foreign checks. In all cases where the federal 
availability schedule preempts the state schedule, only the federal 
exceptions will apply. For deposits that are covered by the state 
availability schedule, the state exceptions may be used to extend the 
state availability schedule to meet the federal availability schedule. 
Once the deposit is held up to the federal availability schedule limit 
under a state exception, the depositary bank may further extend the hold 
under any federal exception that can be applied to the deposit. Thus, if 
the state and federal availability schedules are the same for a 
particular deposit, both a state and a federal exception must be 
applicable to that deposit in order to extend the hold beyond the 
schedule. Any time a depositary bank invokes an exception to extend a 
hold beyond the time periods otherwise permitted by law, it must give 
notice of the extended hold to its customer, in accordance with Sec. 
229.13(g) of Regulation CC.
    Business day/banking day. The Rhode Island statute defines business 
day as excluding Saturday, Sunday and legal holidays. This definition is 
preempted by the Regulation CC definitions of business day and banking 
day. Thus, for determining the permissible hold under the Rhode Island 
schedules that supersede the Regulation CC schedule, deposits are 
considered made on the specified number of business days following the 
banking day of deposit.

                               Disclosures

    The Rhode Island statute requires written notice to depositors of an 
institution's check hold policy and requires a notice on deposit slips. 
Regulation CC preempts state disclosure requirements concerning funds 
availability that relate to accounts that are inconsistent with the 
federal requirements. The state reuirements are different from, and 
therefore inconsistent with, the federal rules. (Sec. 229.20(c)(2)) 
Thus, Regulation CC preempts the Rhode Island disclosure requirements 
concerning funds availability.

                                Wisconsin

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the Act) and subpart B (and in connection 
therewith, subpart A) of Regulation CC preempt the provisions of 
Wisconsin law concerning availability of funds. This preemption 
determination specifies those provisions of the Wisconsin funds 
availability law that are not preempted by the Act and Regulation CC. 
(See also the Board's preemption determination regarding the Uniform 
Commercial Code, section 4-213(5), pertaining to availability of cash 
deposits.)
    Wisconsin Statutes sections 404.213(4m), 215.136, and 186.117 
require Wisconsin banks, savings and loan associations, and credit 
unions, respectively, to make funds deposited in accounts available for 
withdrawal within specified time frames. Generally, checks drawn on the 
U.S. Treasury, the State of Wisconsin, or on a local government located 
in Wisconsin must be made available for withdrawal by the second day 
following deposit. (The law governing commercial

[[Page 1007]]

banks determines availability based on banking day; the laws governing 
savings and loan associations and credit unions determine availability 
based on business days.) In-state and out-of-state checks must be made 
available for withdrawal within five days and eight days following 
deposit, respectively. Exceptions are provided for new accounts and 
reason to doubt collectibility. In addition, Wisconsin Statutes section 
404.103 permits commercial banks to vary these availability requirements 
by agreement.

                                Coverage

    Wisconsin law defines account, with respect to the rules governing 
commercial banks, as any account with a bank and includes a checking, 
time, interest or savings account (Wisconsin Statutes section 
404.104(1)(a)). The statutes relating to the funds availability 
requirements applicable to savings and loan associations and credit 
unions do not define the term account. The Federal preemption of state 
funds availability requirements applies only to accounts subject to 
Regulation CC, which generally consist of transaction accounts. 
Regulation CC does not affect the Wisconsin law to the extent that the 
state law applies to deposits in savings, time, and other accounts 
(including transaction accounts where the account holder is a bank, 
foreign bank, or the U.S. Treasury) that are not accounts under 
Regulation CC. (Note, however, that under Sec. 229.19(e) of Regulation 
CC, Holds on Other Funds, the federal availability schedules may apply 
to savings, time, and other accounts not defined as accounts under 
Regulation CC in certain circumstances.)
    The Wisconsin statute applies to items deposited in accounts. This 
term encompasses instruments that are not defined as checks in 
Regulation CC (Sec. 229.2(k)), such as nonnegotiable instruments, and 
are therefore not subject to Regulation CC's provisions governing funds 
availability. Those items that are subject to Wisconsin law but are not 
subject to Regulation CC will continue to be covered by the state 
availability schedules and exceptions.

                         Availability Schedules

    Temporary schedule. The Wisconsin statute requires that in-state 
nonlocal checks be made available for withdrawal not later than the 
fifth day following deposit (Wisconsin Statutes sections 
404.213(4m)(b)(2); 215.136(2)(b); 186.117(2)(b)). This time period is 
shorter than the seventh business day availability required for nonlocal 
checks under Sec. 229.11(c) of Regulation CC, although it is not 
shorter than the schedules for nonlocal checks set forth in Sec. 
229.11(c)(2) and appendix B-1 of Regulation CC. Thus, the state schedule 
for in-state nonlocal checks supersedes the Federal schedule to the 
extent that it applies to an item payable by a Wisconsin bank that is 
defined as a nonlocal check under Regulation CC and is not subject to 
reduced schedules under Sec. 229.11(c)(2) and appendix B-1.
    Permanent Schedule. Under the Federal permanent availability 
schedule, nonlocal checks must be made available for withdrawal not 
later than the fifth business day following deposit. The fifth day 
availability requirement for in-state items in the Wisconsin statute 
supersedes the Regulation CC time period adjustment for withdrawal by 
cash or similar means in the permanent schedule, to the extent that the 
in-state checks are defined as nonlocal under Regulation CC.
    Next-day availability. Under the Wisconsin statute, the proceeds of 
state and local government checks must be made available for withdrawal 
by the second day following deposit, if the check is endorsed only by 
the person to whom it was issued (Wisconsin Statutes sections 
404.213(4m)(b)(1); 215.136(2)(b); and 186.117(2)(a)). Regulation CC 
requires next-day availability for these checks if they are (1) 
deposited in an account of a payee of the check, (2) deposited in a 
depositary bank located in the same state as the state or local 
government that issued the check, (3) deposited in person to an employee 
of the depositary bank, and (4) deposited with a special deposit slip, 
if the depositary bank informed its customers that use of such a slip is 
a condition to next-day availability. Under the Federal law, if a state 
or local government check is not deposited in person to an employee of 
the depositary bank, but meets the other conditions set forth in Sec. 
229.10(c)(1)(iv), the funds must be made available for withdrawal not 
later than the second business day following deposit. The Wisconsin 
statute supersedes Regulation CC to the extent that the state law does 
not permit the use of a special deposit slip as a condition to receipt 
of second-day availability.
    Exceptions to the schedules. Wisconsin law provides exceptions to 
the state availability schedules for new accounts (those opened less 
than 90 days) and reason to doubt collectibility (Wisconsin Statutes 
sections 404.213(4m)(b); 215.136(2); and 186.117(2)). The state 
availability law also permits commercial banks to vary the funds 
availability requirements by agreement (Wisconsin Statute section 
404.103(1)). In all cases where the Federal schedule preempts the state 
schedule, only the Federal exceptions apply. For deposits that are 
covered by the state availability schedule (e.g., in-state nonlocal 
checks), a state exception must apply in order to extend the state 
availability schedule up to the Federal availability schedule. Once the 
deposit is held up to the Federal availability limit under a state 
exception, the depositary bank may further extend the

[[Page 1008]]

hold only if a Federal exception can be applied to the deposit. Any time 
a depositary bank invokes an exception to extend a hold beyond the time 
periods otherwise permitted by law, it must give notice of the extended 
hold to its customer in accordance with Sec. 229.13(g) of Regulation 
CC.
    Business day/banking day. The definitions of business day and 
banking day in the Wisconsin statutes are preempted by the Regulation CC 
definition of those terms. For determining the permissible hold under 
the Wisconsin schedules that supersede the Regulation CC schedule, 
deposits are considered available for withdrawal on the specified number 
of business days following the banking day of deposit.
    Wisconsin law considers funds to be deposited, for the purpose of 
determining when they must be made available for withdrawal, when an 
item is ``received at the proof and transit facility of the 
depository.'' For the purposes of this preemption determination, funds 
are considered deposited under Wisconsin law in accordance with the 
rules set forth in Sec. 229.19(a) of Regulation CC.

                               Disclosures

    The Wisconsin statute does not require disclosure of a bank's funds 
availability policy. The state law does require, however, that a bank 
give notice to its customer if it extends the time within which funds 
will be available for withdrawal due to the bank's doubt as to the 
collectibility of the item (Wisconsin Statutes sections 404.213(4m)(b); 
215.136(2); and 186.117(2)).
    Regulation CC preempts state disclosure requirements concerning 
funds availability that relate to accounts that are inconsistent with 
the Federal requirements. The state requirement is different from, and 
therefore inconsistent with, the Federal disclosure rules (Sec. 
229.20(c)(2)). Thus, the Wisconsin statute is preempted by Regulation CC 
to the extent that the state notice requirement applies to accounts as 
defined by Regulation CC. The Wisconsin requirement would continue to 
apply to accounts, such as savings and time accounts, not governed by 
the Regulation CC disclosure requirements.

[53 FR 32356, Aug. 24, 1988, as amended at 53 FR 44328, Nov. 2, 1988; 53 
FR 47524, Nov. 22, 1988; 53 FR 51748, Dec. 23, 1988; Reg. CC, 54 FR 
13838, Apr. 6, 1989; 55 FR 11358, Mar. 28, 1990; 60 FR 51703, Oct. 3, 
1995]

[[Page 1009]]



                              FINDING AIDS




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

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  List of CFR Sections Affected

[[Page 1011]]



                    Table of CFR Titles and Chapters




                     (Revised as of January 1, 2018)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
       III  Administrative Conference of the United States (Parts 
                300--399)
        IV  Miscellaneous Agencies (Parts 400--599)
        VI  National Capital Planning Commission (Parts 600--699)

                    Title 2--Grants and Agreements

            Subtitle A--Office of Management and Budget Guidance 
                for Grants and Agreements
         I  Office of Management and Budget Governmentwide 
                Guidance for Grants and Agreements (Parts 2--199)
        II  Office of Management and Budget Guidance (Parts 200--
                299)
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements
       III  Department of Health and Human Services (Parts 300--
                399)
        IV  Department of Agriculture (Parts 400--499)
        VI  Department of State (Parts 600--699)
       VII  Agency for International Development (Parts 700--799)
      VIII  Department of Veterans Affairs (Parts 800--899)
        IX  Department of Energy (Parts 900--999)
         X  Department of the Treasury (Parts 1000--1099)
        XI  Department of Defense (Parts 1100--1199)
       XII  Department of Transportation (Parts 1200--1299)
      XIII  Department of Commerce (Parts 1300--1399)
       XIV  Department of the Interior (Parts 1400--1499)
        XV  Environmental Protection Agency (Parts 1500--1599)
     XVIII  National Aeronautics and Space Administration (Parts 
                1800--1899)
        XX  United States Nuclear Regulatory Commission (Parts 
                2000--2099)
      XXII  Corporation for National and Community Service (Parts 
                2200--2299)
     XXIII  Social Security Administration (Parts 2300--2399)
      XXIV  Housing and Urban Development (Parts 2400--2499)
       XXV  National Science Foundation (Parts 2500--2599)
      XXVI  National Archives and Records Administration (Parts 
                2600--2699)

[[Page 1012]]

     XXVII  Small Business Administration (Parts 2700--2799)
    XXVIII  Department of Justice (Parts 2800--2899)
      XXIX  Department of Labor (Parts 2900--2999)
       XXX  Department of Homeland Security (Parts 3000--3099)
      XXXI  Institute of Museum and Library Services (Parts 3100--
                3199)
     XXXII  National Endowment for the Arts (Parts 3200--3299)
    XXXIII  National Endowment for the Humanities (Parts 3300--
                3399)
     XXXIV  Department of Education (Parts 3400--3499)
      XXXV  Export-Import Bank of the United States (Parts 3500--
                3599)
     XXXVI  Office of National Drug Control Policy, Executive 
                Office of the President (Parts 3600--3699)
    XXXVII  Peace Corps (Parts 3700--3799)
     LVIII  Election Assistance Commission (Parts 5800--5899)
       LIX  Gulf Coast Ecosystem Restoration Council (Parts 5900--
                5999)

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  Government Accountability Office (Parts 1--199)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
        IV  Office of Personnel Management and Office of the 
                Director of National Intelligence (Parts 1400--
                1499)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Parts 2100--2199)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Parts 3200--
                3299)
     XXIII  Department of Energy (Parts 3300--3399)
      XXIV  Federal Energy Regulatory Commission (Parts 3400--
                3499)
       XXV  Department of the Interior (Parts 3500--3599)
      XXVI  Department of Defense (Parts 3600--3699)

[[Page 1013]]

    XXVIII  Department of Justice (Parts 3800--3899)
      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Parts 4300--
                4399)
     XXXIV  Securities and Exchange Commission (Parts 4400--4499)
      XXXV  Office of Personnel Management (Parts 4500--4599)
     XXXVI  Department of Homeland Security (Parts 4600--4699)
    XXXVII  Federal Election Commission (Parts 4700--4799)
        XL  Interstate Commerce Commission (Parts 5000--5099)
       XLI  Commodity Futures Trading Commission (Parts 5100--
                5199)
      XLII  Department of Labor (Parts 5200--5299)
     XLIII  National Science Foundation (Parts 5300--5399)
       XLV  Department of Health and Human Services (Parts 5500--
                5599)
      XLVI  Postal Rate Commission (Parts 5600--5699)
     XLVII  Federal Trade Commission (Parts 5700--5799)
    XLVIII  Nuclear Regulatory Commission (Parts 5800--5899)
      XLIX  Federal Labor Relations Authority (Parts 5900--5999)
         L  Department of Transportation (Parts 6000--6099)
       LII  Export-Import Bank of the United States (Parts 6200--
                6299)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Parts 6400--6499)
        LV  National Endowment for the Arts (Parts 6500--6599)
       LVI  National Endowment for the Humanities (Parts 6600--
                6699)
      LVII  General Services Administration (Parts 6700--6799)
     LVIII  Board of Governors of the Federal Reserve System 
                (Parts 6800--6899)
       LIX  National Aeronautics and Space Administration (Parts 
                6900--6999)
        LX  United States Postal Service (Parts 7000--7099)
       LXI  National Labor Relations Board (Parts 7100--7199)
      LXII  Equal Employment Opportunity Commission (Parts 7200--
                7299)
     LXIII  Inter-American Foundation (Parts 7300--7399)
      LXIV  Merit Systems Protection Board (Parts 7400--7499)
       LXV  Department of Housing and Urban Development (Parts 
                7500--7599)
      LXVI  National Archives and Records Administration (Parts 
                7600--7699)
     LXVII  Institute of Museum and Library Services (Parts 7700--
                7799)
    LXVIII  Commission on Civil Rights (Parts 7800--7899)
      LXIX  Tennessee Valley Authority (Parts 7900--7999)
       LXX  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 8000--8099)
      LXXI  Consumer Product Safety Commission (Parts 8100--8199)
    LXXIII  Department of Agriculture (Parts 8300--8399)

[[Page 1014]]

     LXXIV  Federal Mine Safety and Health Review Commission 
                (Parts 8400--8499)
     LXXVI  Federal Retirement Thrift Investment Board (Parts 
                8600--8699)
    LXXVII  Office of Management and Budget (Parts 8700--8799)
      LXXX  Federal Housing Finance Agency (Parts 9000--9099)
   LXXXIII  Special Inspector General for Afghanistan 
                Reconstruction (Parts 9300--9399)
    LXXXIV  Bureau of Consumer Financial Protection (Parts 9400--
                9499)
    LXXXVI  National Credit Union Administration (Parts 9600--
                9699)
     XCVII  Department of Homeland Security Human Resources 
                Management System (Department of Homeland 
                Security--Office of Personnel Management) (Parts 
                9700--9799)
    XCVIII  Council of the Inspectors General on Integrity and 
                Efficiency (Parts 9800--9899)
      XCIX  Military Compensation and Retirement Modernization 
                Commission (Parts 9900--9999)
         C  National Council on Disability (Parts 10000--10049)

                      Title 6--Domestic Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 1--199)
         X  Privacy and Civil Liberties Oversight Board (Parts 
                1000--1099)

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)

[[Page 1015]]

         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
        XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)
       XXV  Office of Advocacy and Outreach, Department of 
                Agriculture (Parts 2500--2599)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy Policy and New Uses, Department of 
                Agriculture (Parts 2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  National Institute of Food and Agriculture (Parts 
                3400--3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

[[Page 1016]]

                    Title 8--Aliens and Nationality

         I  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)
         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XIII  Nuclear Waste Technical Review Board (Parts 1300--
                1399)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Parts 1800--1899)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)
        II  Election Assistance Commission (Parts 9400--9499)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
         X  Bureau of Consumer Financial Protection (Parts 1000--
                1099)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XII  Federal Housing Finance Agency (Parts 1200--1299)

[[Page 1017]]

      XIII  Financial Stability Oversight Council (Parts 1300--
                1399)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Department of the Treasury (Parts 1500--1599)
       XVI  Office of Financial Research (Parts 1600--1699)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board (Parts 
                500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--1199)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)

[[Page 1018]]

        XI  National Technical Information Service, Department of 
                Commerce (Parts 1100--1199)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399) [Reserved]

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  U.S. Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  U.S. Immigration and Customs Enforcement, Department 
                of Homeland Security (Parts 400--599) [Reserved]

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)

[[Page 1019]]

       III  Social Security Administration (Parts 400--499)
        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board (Parts 900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
      XIII  Millennium Challenge Corporation (Parts 1300--1399)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)

[[Page 1020]]

        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XV  Emergency Mortgage Insurance and Loan Programs, 
                Department of Housing and Urban Development (Parts 
                2700--2799) [Reserved]
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)

[[Page 1021]]

      XXIV  Board of Directors of the HOPE for Homeowners Program 
                (Parts 4000--4099) [Reserved]
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--899)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
        VI  Office of the Assistant Secretary, Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Parts 1200--1299)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--End)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

[[Page 1022]]

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)
        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Bureau of Safety and Environmental Enforcement, 
                Department of the Interior (Parts 200--299)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
         V  Bureau of Ocean Energy Management, Department of the 
                Interior (Parts 500--599)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)
       XII  Office of Natural Resources Revenue, Department of the 
                Interior (Parts 1200--1299)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)

[[Page 1023]]

        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)
      VIII  Office of Investment Security, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)
         X  Financial Crimes Enforcement Network, Department of 
                the Treasury (Parts 1000--1099)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
      XVII  Office of the Director of National Intelligence (Parts 
                1700--1799)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army, Department 
                of Defense (Parts 200--399)
        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)

[[Page 1024]]

        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)
        IV  Office of Career, Technical and Adult Education, 
                Department of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599) 
                [Reserved]
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
       VII  Office of Educational Research and Improvement, 
                Department of Education (Parts 700--799) 
                [Reserved]
            Subtitle C--Regulations Relating to Education
        XI  (Parts 1100--1199) [Reserved]
       XII  National Council on Disability (Parts 1200--1299)

                          Title 35 [Reserved]

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
        VI  [Reserved]
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Parts 1500--
                1599)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
        II  U.S. Copyright Office, Library of Congress (Parts 
                200--299)
       III  Copyright Royalty Board, Library of Congress (Parts 
                300--399)
        IV  National Institute of Standards and Technology, 
                Department of Commerce (Parts 400--599)

[[Page 1025]]

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--199)
        II  Armed Forces Retirement Home (Parts 200--299)

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Regulatory Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)
      VIII  Gulf Coast Ecosystem Restoration Council (Parts 1800--
                1899)

          Title 41--Public Contracts and Property Management

            Subtitle A--Federal Procurement Regulations System 
                [Note]
            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
   62--100  [Reserved]
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
  103--104  [Reserved]
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)
  129--200  [Reserved]
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]

[[Page 1026]]

            Subtitle E--Federal Information Resources Management 
                Regulations System [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)
       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-1--303-99)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
   ii--III  [Reserved]
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--699)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1099)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 400--999)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10099)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare
        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)

[[Page 1027]]

       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
        IX  Denali Commission (Parts 900--999)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Administration for Children and Families, Department 
                of Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission of Fine Arts (Parts 2100--2199)
     XXIII  Arctic Research Commission (Part 2301)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)

[[Page 1028]]

        IV  National Telecommunications and Information 
                Administration, Department of Commerce, and 
                National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 400--499)
         V  The First Responder Network Authority (Parts 500--599)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)
         2  Defense Acquisition Regulations System, Department of 
                Defense (Parts 200--299)
         3  Health and Human Services (Parts 300--399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  Agency for International Development (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399) 
                [Reserved]

[[Page 1029]]

        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        57  African Development Foundation (Parts 5700--5799)
        61  Civilian Board of Contract Appeals, General Services 
                Administration (Parts 6100--6199)
        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Pipeline and Hazardous Materials Safety 
                Administration, Department of Transportation 
                (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board (Parts 1000--1399)
        XI  Research and Innovative Technology Administration, 
                Department of Transportation (Parts 1400--1499) 
                [Reserved]
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1699)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
         V  Marine Mammal Commission (Parts 500--599)

[[Page 1030]]

        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

[[Page 1031]]





           Alphabetical List of Agencies Appearing in the CFR




                     (Revised as of January 1, 2018)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Administrative Conference of the United States    1, III
Advisory Council on Historic Preservation         36, VIII
Advocacy and Outreach, Office of                  7, XXV
Afghanistan Reconstruction, Special Inspector     5, LXXXIII
     General for
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development              2, VII; 22, II
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            2, IV; 5, LXXIII
  Advocacy and Outreach, Office of                7, XXV
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Economic Research Service                       7, XXXVII
  Energy Policy and New Uses, Office of           2, IX; 7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  National Institute of Food and Agriculture      7, XXXIV
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII

[[Page 1032]]

Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase from People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Career, Technical and Adult Education, Office of  34, IV
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chemical Safety and Hazardous Investigation       40, VI
     Board
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X, XIII
Civil Rights, Commission on                       5, LXVIII; 45, VII
Civil Rights, Office for                          34, I
Council of the Inspectors General on Integrity    5, XCVIII
     and Efficiency
Court Services and Offender Supervision Agency    5, LXX
     for the District of Columbia
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce Department                               2, XIII; 44, IV; 50, VI
  Census Bureau                                   15, I
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II; 37, IV
  National Marine Fisheries Service               50, II, IV
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Technical Information Service          15, XI
  National Telecommunications and Information     15, XXIII; 47, III, IV
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Secretary of Commerce, Office of                15, Subtitle A
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Financial Protection Bureau              5, LXXXIV; 12, X
Consumer Product Safety Commission                5, LXXI; 16, II
Copyright Royalty Board                           37, III
Corporation for National and Community Service    2, XXII; 45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    5, LXX; 28, VIII
     for the District of Columbia
Customs and Border Protection                     19, I
Defense Contract Audit Agency                     32, I
Defense Department                                2, XI; 5, XXVI; 32, 
                                                  Subtitle A; 40, VII
  Advanced Research Projects Agency               32, I

[[Page 1033]]

  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III; 
                                                  48, 51
  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 2, XI; 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
Denali Commission                                 45, IX
District of Columbia, Court Services and          5, LXX; 28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          2, XXXIV; 5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Career, Technical and Adult Education, Office   34, IV
       of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Career, Technical, and Adult Education, Office  34, IV
       of
Educational Research and Improvement, Office of   34, VII
Election Assistance Commission                    2, LVIII; 11, II
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             2, IX; 5, XXIII; 10, II, 
                                                  III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   2, XV; 5, LIV; 40, I, IV, 
                                                  VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                2, Subtitle A; 5, III, 
                                                  LXXVII; 14, VI; 48, 99
  National Drug Control Policy, Office of         2, XXXVI; 21, III
  National Security Council                       32, XXI; 47, 2

[[Page 1034]]

  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           2, XXXV; 5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       5, XXXVII; 11, I
Federal Emergency Management Agency               44, I
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Agency                    5, LXXX; 12, XII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority                 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Financial Crimes Enforcement Network              31, X
Financial Research Office                         12, XVI
Financial Stability Oversight Council             12, XIII
Fine Arts, Commission of                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Services Administration                   5, LVII; 41, 105

[[Page 1035]]

  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5
  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Accountability Office                  4, I
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Gulf Coast Ecosystem Restoration Council          2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          2, III; 5, XLV; 45, 
                                                  Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X, XIII
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  2, XXX; 5, XXXVI; 6, I; 8, 
                                                  I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection                   19, I
  Federal Emergency Management Agency             44, I
  Human Resources Management and Labor Relations  5, XCVII
       Systems
  Immigration and Customs Enforcement Bureau      19, IV
  Transportation Security Administration          49, XII
HOPE for Homeowners Program, Board of Directors   24, XXIV
     of
Housing and Urban Development, Department of      2, XXIV; 5, LXV; 24, 
                                                  Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Immigration and Customs Enforcement Bureau        19, IV
Immigration Review, Executive Office for          8, V
Independent Counsel, Office of                    28, VII
Independent Counsel, Offices of                   28, VI
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
   Secretary
[[Page 1036]]

Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII, XV
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior Department                               2, XIV
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Natural Resource Revenue, Office of             30, XII
  Ocean Energy Management, Bureau of              30, V
  Reclamation, Bureau of                          43, I
  Safety and Enforcement Bureau, Bureau of        30, II
  Secretary of the Interior, Office of            2, XIV; 43, Subtitle A
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
Investment Security, Office of                    31, VIII
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                2, XXVIII; 5, XXVIII; 28, 
                                                  I, XI; 40, IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Independent Counsel, Offices of                 28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  2, XXIX; 5, XLII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
     of
[[Page 1037]]

  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I, VII
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Royalty Board                         37, III
  U.S. Copyright Office                           37, II
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II, LXIV
Micronesian Status Negotiations, Office for       32, XXVII
Military Compensation and Retirement              5, XCIX
     Modernization Commission
Millennium Challenge Corporation                  22, XIII
Mine Safety and Health Administration             30, I
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
Museum and Library Services, Institute of         2, XXXI
National Aeronautics and Space Administration     2, XVIII; 5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   2, XXII; 45, XII, XXV
National Archives and Records Administration      2, XXVI; 5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Capital Planning Commission              1, IV, VI
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National Council on Disability                    5, C; 34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           2, XXXVI; 21, III
National Endowment for the Arts                   2, XXXII
National Endowment for the Humanities             2, XXXIII
National Foundation on the Arts and the           45, XI
     Humanities
National Geospatial-Intelligence Agency           32, I
National Highway Traffic Safety Administration    23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute of Food and Agriculture        7, XXXIV
National Institute of Standards and Technology    15, II; 37, IV
National Intelligence, Office of Director of      5, IV; 32, XVII
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       2, XXV; 5, XLIII; 45, VI

[[Page 1038]]

  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III, IV, V
     Administration
National Transportation Safety Board              49, VIII
Natural Resources Conservation Service            7, VI
Natural Resource Revenue, Office of               30, XII
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
     Commission
Nuclear Regulatory Commission                     2, XX; 5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Ocean Energy Management, Bureau of                30, V
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 5, IV; 45, 
                                                  VIII
  Human Resources Management and Labor Relations  5, XCVII
       Systems, Department of Homeland Security
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Pipeline and Hazardous Materials Safety           49, I
     Administration
Postal Regulatory Commission                      5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Privacy and Civil Liberties Oversight Board       6, X
Procurement and Property Management, Office of    7, XXXII
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Relocation Allowances                             41, 302
Research and Innovative Technology                49, XI
     Administration
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Safety and Environmental Enforcement, Bureau of   30, II
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV

[[Page 1039]]

Securities and Exchange Commission                5, XXXIV; 17, II
Selective Service System                          32, XVI
Small Business Administration                     2, XXVII; 13, I
Smithsonian Institution                           36, V
Social Security Administration                    2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  2, VI; 22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     2, XII; 5, L
  Commercial Space Transportation                 14, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 47, IV; 49, V
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               2, X;5, XXI; 12, XV; 17, 
                                                  IV; 31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection                   19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Claims Collection Standards             31, IX
  Federal Law Enforcement Training Center         31, VII
  Financial Crimes Enforcement Network            31, X
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  Investment Security, Office of                  31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
U.S. Copyright Office                             37, II
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs Department                       2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Wage and Hour Division                            29, V
Water Resources Council                           18, VI

[[Page 1040]]

Workers' Compensation Programs, Office of         20, I, VII
World Agricultural Outlook Board                  7, XXXVIII

[[Page 1041]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations (CFR) that 
were made by documents published in the Federal Register since January 
1, 2013 are enumerated in the following list. Entries indicate the 
nature of the changes effected. Page numbers refer to Federal Register 
pages. The user should consult the entries for chapters, parts and 
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the 
annual edition of the monthly List of CFR Sections Affected (LSA). The 
LSA is available at www.fdsys.gov. For changes to this volume of the CFR 
prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 1964-
1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. The 
``List of CFR Sections Affected 1986-2000'' is available at 
www.fdsys.gov.

                                  2013

12 CFR
                                                                   78 FR
                                                                    Page
Chapter II
225.1 (c)(12), (13) and (15) removed; eff. 1-1-15..................62290
225.2 (r)(1)(i) and (ii) revised...................................62290
225.4 (b)(4)(ii) revised...........................................62290
225.8 Revised; interim.............................................59783
225.12 (d)(3)(i)(B) footnote 1 redesignated as footnote 2; 
        (d)(2)(iv) and new footnote 1 added........................62291
225.14 Footnote 2 redesignated as footnote 3.......................62291
225.17 Footnotes 3, 4 and 5 redesignated as footnotes 4, 5 and 6 
                                                                   62291
225.22 (d)(8)(v) revised; footnote 1 added.........................62291
225.23 Footnote 1 redesignated as footnote 2.......................62291
225.28 Footnotes 2 through 18 redesignated as footnotes 3 through 
        19.........................................................62291
225.172 (b)(6)(i)(A) revised; footnote 1 added.....................62291
225 Appendix A removed; eff. 1-1-19................................62291
    Appendices B and G removed.....................................62291
    Appendices D and E removed; eff. 1-1-15........................62291
    Appendix E amended; eff. 4-1-14..................76527, 76528, 76529
226 Authority citation revised; eff. 1-18-14.......................10437
    Regulation at 78 FR 10437 confirmed............................69793
    Supplement I amended...........................................70196
226.43 Added; eff. 1-18-14.........................................10437
    Regulation at 78 FR 10437 confirmed............................69793
    (a)(2) through (6), (b) introductory text, (1), (2) and (5) 
revised; (a)(7) through (10), (b)(7) and (8) added; eff. 1-18-14 
                                                                   78582
    (b)(8) revised; eff. 7-18-15...................................78583
226 Appendices N and O added; eff. 1-18-14.........................10439
    Supplement I amended; eff. 1-18-14......................10439, 78583
    Regulation at 78 FR 10437 confirmed............................69793
    Appendix N amended; eff. 1-18-14...............................78583
    Supplement I amended; eff. 7-18-15.............................78583
228.12 (u)(1) revised..............................................79285

                                  2014

12 CFR
                                                                   79 FR
                                                                    Page
Chapter II
222.90 (b)(5) revised..............................................30711
222 Appendix J amended.............................................30711
225 Authority citation revised.....................................64040
225.8 Revised......................................................13502
    Revised; eff. in part 4-1-15...................................64040
225 Appendix F amended.............................................37167
    Appendix A regulation at 78 FR 62291 withdrawn.................64045

[[Page 1042]]

226.9 (c)(2)(v)(D) correctly amended; CFR correction...............43232
226 Supplement I amended....................................56484, 78298
228.12 (u)(1) revised..............................................77854

                                  2015

12 CFR
                                                                   80 FR
                                                                    Page
Chapter II
225 Authority citation revised..............................32681, 75424
225.2 (r) footnote 2 revised.......................................20157
    (r)(1) footnotes 3 and 4 correctly removed.....................70673
225.4 (b)(2)(iii) revised..........................................20157
    Footnote 1 correctly removed...................................70673
225.8 (c)(3), (d)(8), (11), (e)(2)(ii)(A), (f)(1)(i)(C), 
        (2)(ii)(C) an d(g)(1)(i) revised; (d)(12), (13) and 
        (e)(2)(i)(B) removed; (d)(14) redesignated as (d)(12)......75424
225.12 Footnote 1 correctly removed; Footnote 2 correctly 
        redesignated as Footnote 1.................................70673
225.14 (a)(1)(v) revised...........................................20157
225.17 (a)(6) footnote 6 revised...................................20157
225.22 Footnote 1 correctly removed................................70673
225.23 (a)(1)(iii) revised.........................................20157
225.172 Footnote 1 correctly removed...............................70673
225.190--225.196 (Subpart M) Added.................................32681
225 Appendix C amended.............................................20158
226 Supplement I amended....................................73945, 73948
228.12 (h)(2)(i), (j)(2) and (l) amended; (u)(1) revised...........81164
228.42 (b)(3), (d) and (i) amended.................................81164
228.43 (b)(2) amended..............................................81164

                                  2016

12 CFR
                                                                   81 FR
                                                                    Page
Chapter II
225 Policy statement...............................................75315
226 Supplement I amended....................................86254, 86263
227 Removed.........................................................8134
228 Policy statement...............................................48506

                                  2017

12 CFR
                                                                   82 FR
                                                                    Page
Chapter II
225 Policy statement...............................................49089
225.8 Revised.......................................................9323
226 Supplement I amended....................................51975, 51979
228 Authority citation revised.....................................61145
228.12 (u)(1) revised...............................................5356
    (g)(3), (4)(iii)(B), (h)(2)(i) and (l) amended; (g)(5) and 
(j)(3) removed; (j)(4) and (5) redesignated as new (j)(3) and (4) 
                                                                   55743
    (u)(1) revised.................................................61145
228.22 (a)(1) amended..............................................55743
228.42 (c)(1) introductory text amended............................55743
228.43 (b)(2) revised..............................................55743
229.1 (b)(3) revised; (5) through (10) added; eff. 7-1-18..........27578
229.2 (dd), (uu), (vv) and (bbb) revised; (ggg) and (hhh) added; 
        eff. 7-1-18................................................27578
229.30 Revised; eff. 7-1-18........................................27579
229.31 Revised; eff. 7-1-18........................................27579
229.32 Revised; eff. 7-1-18........................................27580
229.33 Revised; eff. 7-1-18........................................27580
229.34 Revised; eff. 7-1-18........................................27581
229.35 (a) and (d) revised; eff. 7-1-18............................27582
229.36 Revised; eff. 7-1-18........................................27583
229.38 (b), (c) and (d) revised; eff. 7-1-18.......................27583
229.39 Revised; eff. 7-1-18........................................27583
229.40 Revised; eff. 7-1-18........................................27584
229.42 Revised; eff. 7-1-18........................................27584
229.43 (a)(2) and (b) revised; eff. 7-1-18.........................27584
229.51 (b)(2) and (3) revised; eff. 7-1-18.........................27584
229.52 (a) revised; eff. 7-1-18....................................27584
229.53 (a) revised; eff. 7-1-18....................................27585
229 Appendix D removed; appendix E amended; eff. 7-1-18............27585


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