[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2008 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

          12


          Parts 200 to 219

                         Revised as of January 1, 2008


          Banks and Banking
          



________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2008
          With Ancillaries
                    Published by:
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

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                            Table of Contents



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

  Title 12:
          Chapter II--Federal Reserve System                         3
  Finding Aids:
      Table of CFR Titles and Chapters........................     507
      Alphabetical List of Agencies Appearing in the CFR......     525
      List of CFR Sections Affected...........................     535

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

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

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

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                               EXPLANATION

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

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

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

LEGAL STATUS

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noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
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HOW TO USE THE CODE OF FEDERAL REGULATIONS

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EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

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

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
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OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
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    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
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you have any problem locating or obtaining a copy of material listed in 
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the revision dates of the 50 CFR titles.

[[Page vii]]


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    Raymond A. Mosley,
    Director,
    Office of the Federal Register.
    January 1, 2008.







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                               THIS TITLE

    Title 12--Banks and Banking is composed of seven volumes. The parts 
in these volumes are arranged in the following order: parts 1-199, 200-
219, 220-299, 300-499, 500-599, part 600-899, and 900-end. The first 
volume containing parts 1-199 is comprised of chapter I--Comptroller of 
the Currency, Department of the Treasury. The second and third volumes 
containing parts 200-299 are comprised of chapter II--Federal Reserve 
System. The fourth volume containing parts 300-499 is comprised of 
chapter III--Federal Deposit Insurance Corporation and chapter IV--
Export-Import Bank of the United States. The fifth volume containing 
parts 500-599 is comprised of chapter V--Office of Thrift Supervision, 
Department of the Treasury. The sixth volume containing parts 600-899 is 
comprised of chapter VI--Farm Credit Administration, chapter VII--
National Credit Union Administration, chapter VIII--Federal Financing 
Bank. The seventh volume containing part 900-end is comprised of chapter 
IX--Federal Housing Finance Board, chapter XI--Federal Financial 
Institutions Examination Council, chapter XIV--Farm Credit System 
Insurance Corporation, chapter XV--Department of the Treasury, chapter 
XVII--Office of Federal Housing Enterprise Oversight, Department of 
Housing and Urban Development and chapter XVIII--Community Development 
Financial Institutions Fund, Department of the Treasury. The contents of 
these volumes represent all of the current regulations codified under 
this title of the CFR as of January 1, 2008.

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


[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                  (This book contains parts 200 to 219)

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

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

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                   CHAPTER II--FEDERAL RESERVE SYSTEM




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

     SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Part                                                                Page
201             Extensions of credit by Federal Reserve 
                    banks (Regulation A)....................           5
202             Equal Credit Opportunity Act (Regulation B).          14
203             Home mortgage disclosure (Regulation C).....          70
204             Reserve requirements of depository 
                    institutions (Regulation D).............          94
205             Electronic fund transfers (Regulation E)....         127
206             Limitations on interbank liabilities 
                    (Regulation F)..........................         169
207             Disclosure and reporting of CRA-related 
                    agreements (Regulation G)...............         173
208             Membership of State banking institutions in 
                    the Federal Reserve System (Regulation 
                    H)......................................         186
209             Issue and cancellation of Federal Reserve 
                    Bank capital stock (Regulation I).......         336
210             Collection of checks and other items by 
                    Federal Reserve banks and funds 
                    transfers through Fedwire (Regulation J)         340
211             International banking operations (Regulation 
                    K)......................................         377
212             Management official interlocks..............         426
213             Consumer leasing (Regulation M).............         430
214             Relations with foreign banks and bankers 
                    (Regulation N)..........................         455
215             Loans to executive officers, directors, and 
                    principal shareholders of member banks 
                    (Regulation O)..........................         457
216             Privacy of consumer financial information 
                    (Regulation P)..........................         467
217             Prohibition against the payment of interest 
                    on demand deposits (Regulation Q).......         485
218             Exceptions for banks from the definition of 
                    broker in the Securities Exchange Act of 
                    1934 (Regulation R).....................         487
219             Reimbursement for providing financial 
                    records; recordkeeping requirements for 
                    certain financial records (Regulation S)         501


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Supplementary Publications: The Federal Reserve Act, as amended through 
  December 31, 1976, with an Appendix containing provisions of certain 
  other statutes affecting the Federal Reserve System. Rules of 
  Organization and Procedure--Board of Governors of the Federal Reserve 
  System. Regulations of the Board of Governors of the Federal Reserve 
  System. The Federal Reserve System--Purposes and Functions. Annual 
  Report. Federal Reserve Bulletin. Monthly. Federal Reserve Chart Book 
  Quarterly; Historical Chart Book issued in September.

[[Page 5]]



      SUBCHAPTER A_BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM





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




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

                             Interpretations

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

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

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



Sec. 201.1  Authority, purpose and scope.

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

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



Sec. 201.2  Definitions.

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

[[Page 6]]

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

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



Sec. 201.3  Extensions of credit generally.

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

[[Page 7]]

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

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



Sec. 201.4  Availability and terms of credit.

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

[[Page 8]]

auction conducted under this paragraph and at the rate specified in 
Sec. 201.51(e) if, in the judgment of the Reserve Bank, the depository 
institution is in generally sound financial condition and is expected to 
remain in that condition during the term of the advance. An auction 
under this paragraph shall be conducted subject to such conditions, 
including conditions regarding the participants, size and duration of 
the facility, minimum bid amount, maximum bid amount, term of advance, 
minimum bid rate, use of proceeds, and schedule of auction dates, as the 
Board may establish from time to time in connection with the term 
auction facility. The Board may appoint one or more Reserve Banks or 
others to conduct the auction.
    (2) Authorization for the term auction facility established by Sec. 
201.4(e)(1) shall expire on such date as set by the Board.

[Reg. A, 67 FR 67786, Nov. 7, 2002, as amended at 72 FR 71203, Dec. 17, 
2007]



Sec. 201.5  Limitations on availability and assessments.

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

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



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

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

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

[[Page 9]]



------------------------------------------------------------------------
         Federal Reserve Bank            Rate           Effective
------------------------------------------------------------------------
Boston................................    4.75  December 12, 2007.
New York..............................    4.75  December 11, 2007.
Philadelphia..........................    4.75  December 11, 2007.
Cleveland.............................    4.75  December 11, 2007.
Richmond..............................    4.75  December 11, 2007.
Atlanta...............................    4.75  December 11, 2007.
Chicago...............................    4.75  December 11, 2007.
St. Louis.............................    4.75  December 12, 2007.
Minneapolis...........................    4.75  December 12, 2007.
Kansas City...........................    4.75  December 13, 2007.
Dallas................................    4.75  December 12, 2007.
San Francisco.........................    4.75  December 11, 2007.
------------------------------------------------------------------------

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

------------------------------------------------------------------------
         Federal Reserve Bank            Rate           Effective
------------------------------------------------------------------------
Boston................................    5.25  December 12, 2007.
New York..............................    5.25  December 11, 2007.
Philadelphia..........................    5.25  December 11, 2007.
Cleveland.............................    5.25  December 11, 2007.
Richmond..............................    5.25  December 11, 2007.
Atlanta...............................    5.25  December 11, 2007.
Chicago...............................    5.25  December 11, 2007.
St. Louis.............................    5.25  December 12, 2007.
Minneapolis...........................    5.25  December 12, 2007
Kansas City...........................    5.25  December 13, 2007.
Dallas................................    5.25  December 12, 2007.
San Francisco.........................    5.25  December 11, 2007.
------------------------------------------------------------------------

    (c) Seasonal credit. The rate for seasonal credit extended to 
depository institutions under Sec. 201.4(c) is a flexible rate that 
takes into account rates on market sources of funds.
    (d) Primary credit rate in a financial emergency. (1) The primary 
credit rate at a Federal Reserve Bank is the target federal funds rate 
of the Federal Open Market Committee if:
    (i) In a financial emergency the Reserve Bank has established the 
primary credit rate at that rate; and
    (ii) The Chairman of the Board of Governors (or, in the Chairman's 
absence, his authorized designee) certifies that a quorum of the Board 
is not available to act on the Reserve Bank's rate establishment.
    (2) For purposes of this paragraph (d), a financial emergency is a 
significant disruption to the U.S. money markets resulting from an act 
of war, military or terrorist attack, natural disaster, or other 
catastrophic event.
    (e) Term auction facility. The interest rate on advances to 
depository institutions made pursuant to an auction under Sec. 201.4(e) 
is the rate at which all bids at that auction may be fulfilled, up to 
the maximum auction amount and subject to any minimum bid rate and other 
conditions as set by the Board.

[Reg. A, 67 FR 67787, Nov. 7, 2002, as amended at 68 FR 41054, July 10, 
2003; 72 FR 48549, Aug. 24, 2007; 72 FR 54814, Sept. 27, 2007; 72 FR 
56890, Oct. 5, 2007; 72 FR 63097, Nov. 8, 2007; 72 FR 71203, Dec. 17, 
2007; 72 FR 71756, Dec. 19, 2007]

                             Interpretations



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

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

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

    (c) It continues to be the opinion of the Board that borrowing for 
the purpose of purchasing goods is borrowing for a commercial purpose, 
whether the borrower intends to use the goods himself or to resell them. 
Hence, loans made to enable consumers to purchase automobiles or other 
goods should be included under commercial, agricultural, and industrial 
paper within the meaning of the Federal Reserve Act, and as such are 
eligible for discounting with the Reserve Banks and as security for 
advances from the Reserve Banks under section 13, paragraph 8, of the 
Federal Reserve Act as long as they conform to requirements with respect 
to maturity and other matters. This applies equally to loans made 
directly

[[Page 10]]

by banks to consumers and to paper accepted by banks from dealers or 
finance companies. It also applies to notes of finance companies 
themselves as long as the proceeds of such notes are used to finance the 
purchase of consumer goods or for other purposes which are eligible 
within the meaning of the Federal Reserve Act.
    (d) If there is any question as to whether the proceeds of a note of 
a finance company have been or are to be used for a commercial, 
agricultural, or industrial purpose, a financial statement of the 
finance company reflecting an excess of notes receivable which appear 
eligible for rediscount (without regard to maturity) over total current 
liabilities (i.e., notes due within 1 year) may be taken as an 
indication of eligibility. Where information is lacking as to whether 
direct consumer loans by a finance company are for eligible purposes, it 
may be assumed that 50 percent of such loans are ``notes receivable 
which appear eligible for rediscount''. In addition, that language 
should be regarded as including notes given for the purchase of mobile 
homes that are acquired by a finance company from a dealer-seller of 
such homes.
    (e) The principles stated above apply not only to notes of a finance 
company engaged in making consumer loans but also to notes of a finance 
company engaged in making loans for other eligible purposes, including 
business and agricultural loans. Under section 13a of the Federal 
Reserve Act, paper representing loans to finance the production, 
marketing, and carrying of agricultural products or the breeding, 
raising, fattening, or marketing of livestock is eligible for discount 
if the paper has a maturity of not exceeding 9 months. Consequently, a 
note of a finance company the proceeds of which are used by it to make 
loans for such purposes is eligible for discount or as security for a 
Federal Reserve advance, and such a note, unlike the note of a finance 
company making consumer loans, may have a maturity of up to 9 months.

[37 FR 4701, Mar. 4, 1972]



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

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

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

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

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

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

[31 FR 5443, Apr. 16, 1966]



Sec. 201.108  Obligations eligible as collateral for advances.

    (a) Section 3(a) of Pub. L. 90-505, approved September 21, 1968, 
amended the eighth paragraph of section 13 of the Federal Reserve Act 
(12 U.S.C. 347) to authorize advances thereunder to member banks 
``secured by such obligations as are eligible for purchase under section 
14(b) of this Act.'' The relevant part of such paragraph had previously

[[Page 11]]

referred only to ``notes * * * eligible * * * for purchase'', which the 
Board had construed as not including obligations generally regarded as 
securities. (See 1962 Federal Reserve Bulletin 690, Sec. 201.103(d).)
    (b) Under section 14(b) direct obligations of, and obligations fully 
guaranteed as to principal and interest by, the United States are 
eligible for purchase by Reserve Banks. Such obligations include 
certificates issued by the trustees of Penn Central Transportation Co. 
that are fully guaranteed by the Secretary of Transportation. Under 
section 14(b) direct obligations of, and obligations fully guaranteed as 
to principal and interest by, any agency of the United States are also 
eligible for purchase by Reserve Banks. Following are the principal 
agency obligations eligible as collateral for advances:
    (1) Federal Intermediate Credit Bank debentures;
    (2) Federal Home Loan Bank notes and bonds;
    (3) Federal Land Bank bonds;
    (4) Bank for Cooperative debentures;
    (5) Federal National Mortgage Association notes, debentures and 
guaranteed certificates of participation;
    (6) Obligations of or fully guaranteed by the Government National 
Mortgage Association;
    (7) Merchant Marine bonds;
    (8) Export-Import Bank notes and guaranteed participation 
certificates;
    (9) Farmers Home Administration insured notes;
    (10) Notes fully guaranteed as to principal and interest by the 
Small Business Administration;
    (11) Federal Housing Administration debentures;
    (12) District of Columbia Armory Board bonds;
    (13) Tennessee Valley Authority bonds and notes;
    (14) Bonds and notes of local urban renewal or public housing 
agencies fully supported as to principal and interest by the full faith 
and credit of the United States pursuant to section 302 of the Housing 
Act of 1961 (42 U.S.C. 1421a(c), 1452(c)).
    (15) Commodity Credit Corporation certificates of interest in a 
price-support loan pool.
    (16) Federal Home Loan Mortgage Corporation notes, debentures, and 
guaranteed certificates of participation.
    (17) U.S. Postal Service obligations.
    (18) Participation certificates evidencing undivided interests in 
purchase contracts entered into by the General Services Administration.
    (19) Obligations entered into by the Secretary of Health, Education, 
and Welfare under the Public Health Service Act, as amended by the 
Medical Facilities Construction and Modernization Amendments of 1970.
    (20) Obligations guaranteed by the Overseas Private Investment 
Corp., pursuant to the provisions of the Foreign Assistance Act of 1961, 
as amended.
    (c) Nothing less than a full guarantee of principal and interest by 
a Federal agency will make an obligation eligible. For example, mortgage 
loans insured by the Federal Housing Administration are not eligible 
since the insurance contract is not equivalent to an unconditional 
guarantee and does not fully cover interest payable on the loan. 
Obligations of international institutions, such as the Inter-American 
Development Bank and the International Bank for Reconstruction and 
Development, are also not eligible, since such institutions are not 
agencies of the United States.
    (d) Also eligible for purchase under section 14(b) are ``bills, 
notes, revenue bonds, and warrants with a maturity from date of purchase 
of not exceeding 6 months, issued in anticipation of the collection of 
taxes or in anticipation of the receipt of assured revenues by any 
State, county, district, political subdivision, or municipality in the 
continental United States, including irrigation, drainage and 
reclamation districts.''\3\ In determining the eligibility of such 
obligations as collateral for advances, but the Reserve Bank will 
satisfy itself that sufficient tax or other

[[Page 12]]

assured revenues earmarked for payment of such obligations will be 
available for that purpose at maturity, or within 6 months from the date 
of the advance if no maturity is stated. Payments due from Federal, 
State or other governmental units may, in the Reserve Bank's discretion, 
be regarded as ``other assured revenues''; but neither the proceeds of a 
prospective issue of securities nor future tolls, rents or similar 
collections for the voluntary use of government property for non-
governmental purposes will normally be so regarded. Obligations with 
original maturities exceeding 1 year would not ordinarily be self-
liquidating as contemplated by the statute, unless at the time of issue 
provision is made for a redemption or sinking fund that will be 
sufficient to pay such obligations at maturity.
---------------------------------------------------------------------------

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

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



Sec. 201.109  Eligibility for discount of mortgage company notes.

    (a) The question has arisen whether notes issued by mortgage banking 
companies to finance their acquisition and temporary holding of real 
estate mortgages are eligible for discount by Reserve Banks.
    (b) Under section 13 of the Federal Reserve Act the Board has 
authority to define what are ``agricultural, industrial, or commercial 
purposes'', which is the statutory criterion for determining the 
eligibility of notes and drafts for discount. However, such definition 
may not include paper ``covering merely investments or issued or drawn 
for the purpose of carrying or trading in stocks, bonds, or other 
investment securities''.
    (c) The legislative history of section 13 suggests that Congress 
intended to make eligible for discount ``any paper drawn for a 
legitimate business purpose of any kind'' \4\ and that the Board, in 
determining what paper is eligible, should place a ``broad and adaptable 
construction'' \5\ upon the terms in section 13. It may also be noted 
that Congress apparently considered paper issued to carry investment 
securities as paper issued for a ``commercial purpose'', since it 
specifically prohibited the Board from making such paper eligible for 
discount. If ``commercial'' is broad enough to encompass investment 
banking, it would also seem to include mortgage banking.
---------------------------------------------------------------------------

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

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

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

    (e) Section 201.3(a) provides that a negotiable note maturing in 90 
days or less is not eligible for discount if the proceeds are used ``for 
permanent or fixed investments of any kind, such as land, buildings or 
machinery, or for any other fixed capital purpose''. However, the 
proceeds of a mortgage company's commercial paper are not used

[[Page 13]]

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

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



Sec. 201.110  Goods held by persons employed by owner.

    (a) The Board has been asked to review an Interpretation it issued 
in 1933 concerning the eligibility for rediscount by a Federal Reserve 
Bank of bankers' acceptances issued against field warehouse receipts 
where the custodian of the goods is a present or former employee of the 
borrower. [] 1445 Published Interpretations, 1933 BULLETIN 188] The 
Board determined at that time that the acceptances were not eligible 
because such receipts do not comply with the requirement of section 13 
of the Federal Reserve Act that a banker's acceptance be ``secured at 
the time of acceptance by a warehouse receipt or other such document 
conveying or securing title covering readily marketable staples,'' nor 
with the requirement of section XI of the Board's Regulation A that it 
be ``secured at the time of acceptance by a warehouse, terminal, or 
other similar receipt, conveying security title to such staples, issued 
by a party independent of the customer.''

The requirement that the receipt be ``issued by a party independent of 
the customer'' was deleted from Regulation A in 1973, and thus the 
primary issue for the Board's consideration is whether a field warehouse 
receipt is a document ``securing title'' to readily marketable staples.
    (b) While bankers' acceptances secured by field warehouse receipts 
are rarely offered for rediscount or as collateral for an advance, the 
issue of ``eligibility'' is still significant. If an ineligible 
acceptance is discounted and then sold by a member bank, the proceeds 
are deemed to be ``deposits'' under Sec. 204.1(f) of Regulation D and 
are subject to reserve requirements.
    (c) In reviewing this matter, the Board has taken into consideration 
the changes that have occurred in commercial law and practice since 
1933. Modern commercial law, embodied in the Uniform Commercial Code, 
refers to ``perfecting security interests'' rather than ``securing 
title'' to goods. The Board believes that if, under State law, the 
issuance of a field warehouse receipt provides the lender with a 
perfected security interest in the goods, the receipt should be regarded 
as a document ``securing title'' to goods for the purposes of section 13 
of the Federal Reserve Act. It should be noted, however, that the mere 
existence of a perfected security interest alone is not sufficient; the 
Act requires that the acceptance be secured by a warehouse receipt or 
its equivalent.
    (d) Under the U.C.C., evidence of an agreement between the secured 
party and the debtor must exist before a security interest can attach. 
[U.C.C. section 9-202.] This agreement may be evidence by: (1) A written 
security agreement signed by the debtor, or (2) the collateral being 
placed in the possession of the secured party or his agent [U.C.C. 
section 9-203]. Generally, a security interest is perfected by the 
filing of a financing statement, [U.C.C. section 9-302.] However, if the 
collateral is in the possession of a bailee, then perfection can be 
achieved by:
    (1) Having warehouse receipts issued in the name of the secured 
party; (2) notifying the bailee of the secured party's interest; or (3) 
having a financing statement filed. [U.C.C. section 9-304(3).]
    (e) If the field warehousing operation is properly conducted, a 
security interest in the goods is perfected when a

[[Page 14]]

warehouse receipt is issued in the name of the secured party (the 
lending bank). Therefore, warehouse receipts issued pursuant to a bona 
fide field warehousing operation satisfy the legal requirements of 
section 13 of the Federal Reserve Act. Moreover, in a properly conducted 
field warehousing operation, the warehouse manager will be trained, 
bonded, supervised and audited by the field warehousing company. This 
procedure tends to insure that he will not be impermissibly controlled 
by his former (or sometimes present) employer, the borrower, even though 
he may look to the borrower for reemployment at some future time. A 
prudent lender will, of course, carefully review the field warehousing 
operation to ensure that stated procedures are satisfactory and that 
they are actually being followed. The lender may also wish to review the 
field warehousing company's fidelity bonds and legal liability insurance 
policies to ensure that they provide satisfactory protection to the 
lender.
    (f) If the warehousing operation is not conducted properly, however, 
and the manager remains under the control of the borrower, the security 
interest may be lost. Consequently, the lender may wish to require a 
written security agreement and the filing of a financing statement to 
insure that the lender will have a perfected security interest even if 
it is later determined that the field warehousing operation was not 
properly conducted. It should be noted however, that the Federal Reserve 
Act clearly requires that the bankers' acceptance be secured by a 
warehouse receipt in order to satisfy the requirements of eligibility, 
and a written security agreement and a filed financing statement, while 
desirable, cannot serve as a substitute for a warehouse receipt.
    (g) This Interpretation is based on facts that have been presented 
in regard to field warehousing operations conducted by established, 
professional field warehouse companies, and it does not necessarily 
apply to all field warehousing operations. Thus ] 1430 and ] 1440 of the 
Published Interpretations [1918 BULLETIN 31 and 1918 BULLETIN 862] 
maintain their validity with regard to corporations formed for the 
purpose of conducting limited field warehousing operations. Furthermore, 
the prohibition contained in ] 1435 Published Interpretations [1918 
BULLETIN 634] that ``the borrower shall not have access to the premises 
and shall exercise no control over the goods stored'' retains its 
validity, except that access for inspection purposes is still permitted 
under ] 1450 [1926 BULLETIN 666]. The purpose for the acceptance 
transaction must be proper and cannot be for speculation [] 1400, 1919 
BULLETIN 858] or for the purpose of furnishing working capital [] 1405, 
1922 BULLETIN 52].
    (h) This interpretation suspersedes only the previous ] 1445 of the 
Published Interpretations [1933 BULLETIN 188], and is not intended to 
affect any other Board Interpretation regarding field warehousing.

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

[43 FR 21434, May 18, 1978]



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




Sec.

                 Regulation B (Equal Credit Opportunity)

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

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


[[Page 15]]


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

    Source: Reg. B, 68 FR 13161, Mar. 18, 2003, unless otherwise noted.



Sec. 202.1  Authority, scope and purpose.

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



Sec. 202.2  Definitions.

    For the purposes of this regulation, unless the context indicates 
otherwise, the following definitions apply.
    (a) Account means an extension of credit. When employed in relation 
to an account, the word use refers only to open-end credit.
    (b) Act means the Equal Credit Opportunity Act (title VII of the 
Consumer Credit Protection Act).
    (c) Adverse action. (1) The term means:
    (i) A refusal to grant credit in substantially the amount or on 
substantially the terms requested in an application unless the creditor 
makes a counteroffer (to grant credit in a different amount or on other 
terms) and the applicant uses or expressly accepts the credit offered;
    (ii) A termination of an account or an unfavorable change in the 
terms of an account that does not affect all or substantially all of a 
class of the creditor's accounts; or
    (iii) A refusal to increase the amount of credit available to an 
applicant who has made an application for an increase.
    (2) The term does not include:
    (i) A change in the terms of an account expressly agreed to by an 
applicant.
    (ii) Any action or forbearance relating to an account taken in 
connection with inactivity, default, or delinquency as to that account;
    (iii) A refusal or failure to authorize an account transaction at 
point of sale or loan, except when the refusal is a termination or an 
unfavorable change in the terms of an account that does not affect all 
or substantially all of a class of the creditor's accounts, or when the 
refusal is a denial of an application for an increase in the amount of 
credit available under the account;
    (iv) A refusal to extend credit because applicable law prohibits the 
creditor from extending the credit requested; or
    (v) A refusal to extend credit because the creditor does not offer 
the type of credit or credit plan requested.
    (3) An action that falls within the definition of both paragraphs 
(c)(1) and (c)(2) of this section is governed by paragraph (c)(2) of 
this section.
    (d) Age refers only to the age of natural persons and means the 
number of fully elapsed years from the date of an applicant's birth.

[[Page 16]]

    (e) Applicant means any person who requests or who has received an 
extension of credit from a creditor, and includes any person who is or 
may become contractually liable regarding an extension of credit. For 
purposes of Sec. 202.7(d), the term includes guarantors, sureties, 
endorsers, and similar parties.
    (f) Application means an oral or written request for an extension of 
credit that is made in accordance with procedures used by a creditor for 
the type of credit requested. The term application does not include the 
use of an account or line of credit to obtain an amount of credit that 
is within a previously established credit limit. A completed application 
means an application in connection with which a creditor has received 
all the information that the creditor regularly obtains and considers in 
evaluating applications for the amount and type of credit requested 
(including, but not limited to, credit reports, any additional 
information requested from the applicant, and any approvals or reports 
by governmental agencies or other persons that are necessary to 
guarantee, insure, or provide security for the credit or collateral). 
The creditor shall exercise reasonable diligence in obtaining such 
information.
    (g) Business credit refers to extensions of credit primarily for 
business or commercial (including agricultural) purposes, but excluding 
extensions of credit of the types described in Sec. 202.3(a)-(d).
    (h) Consumer credit means credit extended to a natural person 
primarily for personal, family, or household purposes.
    (i) Contractually liable means expressly obligated to repay all 
debts arising on an account by reason of an agreement to that effect.
    (j) Credit means the right granted by a creditor to an applicant to 
defer payment of a debt, incur debt and defer its payment, or purchase 
property or services and defer payment therefor.
    (k) Credit card means any card, plate, coupon book, or other single 
credit device that may be used from time to time to obtain money, 
property, or services on credit.
    (l) Creditor means a person who, in the ordinary course of business, 
regularly participates in a credit decision, including setting the terms 
of the credit. The term creditor includes a creditor's assignee, 
transferee, or subrogee who so participates. For purposes of Sec. 
202.4(a) and (b), the term creditor also includes a person who, in the 
ordinary course of business, regularly refers applicants or prospective 
applicants to creditors, or selects or offers to select creditors to 
whom requests for credit may be made. A person is not a creditor 
regarding any violation of the Act or this regulation committed by 
another creditor unless the person knew or had reasonable notice of the 
act, policy, or practice that constituted the violation before becoming 
involved in the credit transaction. The term does not include a person 
whose only participation in a credit transaction involves honoring a 
credit card.
    (m) Credit transaction means every aspect of an applicant's dealings 
with a creditor regarding an application for credit or an existing 
extension of credit (including, but not limited to, information 
requirements; investigation procedures; standards of creditworthiness; 
terms of credit; furnishing of credit information; revocation, 
alteration, or termination of credit; and collection procedures).
    (n) Discriminate against an applicant means to treat an applicant 
less favorably than other applicants.
    (o) Elderly means age 62 or older.
    (p) Empirically derived and other credit scoring systems--(1) A 
credit scoring system is a system that evaluates an applicant's 
creditworthiness mechanically, based on key attributes of the applicant 
and aspects of the transaction, and that determines, alone or in 
conjunction with an evaluation of additional information about the 
applicant, whether an applicant is deemed creditworthy. To qualify as an 
empirically derived, demonstrably and statistically sound, credit 
scoring system, the system must be:
    (i) Based on data that are derived from an empirical comparison of 
sample groups or the population of creditworthy and noncreditworthy 
applicants who applied for credit within a reasonable preceding period 
of time;

[[Page 17]]

    (ii) Developed for the purpose of evaluating the creditworthiness of 
applicants with respect to the legitimate business interests of the 
creditor utilizing the system (including, but not limited to, minimizing 
bad debt losses and operating expenses in accordance with the creditor's 
business judgment);
    (iii) Developed and validated using accepted statistical principles 
and methodology; and
    (iv) Periodically revalidated by the use of appropriate statistical 
principles and methodology and adjusted as necessary to maintain 
predictive ability.
    (2) A creditor may use an empirically derived, demonstrably and 
statistically sound, credit scoring system obtained from another person 
or may obtain credit experience from which to develop such a system. Any 
such system must satisfy the criteria set forth in paragraph (p)(1)(i) 
through (iv) of this section; if the creditor is unable during the 
development process to validate the system based on its own credit 
experience in accordance with paragraph (p)(1) of this section, the 
system must be validated when sufficient credit experience becomes 
available. A system that fails this validity test is no longer an 
empirically derived, demonstrably and statistically sound, credit 
scoring system for that creditor.
    (q) Extend credit and extension of credit mean the granting of 
credit in any form (including, but not limited to, credit granted in 
addition to any existing credit or credit limit; credit granted pursuant 
to an open-end credit plan; the refinancing or other renewal of credit, 
including the issuance of a new credit card in place of an expiring 
credit card or in substitution for an existing credit card; the 
consolidation of two or more obligations; or the continuance of existing 
credit without any special effort to collect at or after maturity).
    (r) Good faith means honesty in fact in the conduct or transaction.
    (s) Inadvertent error means a mechanical, electronic, or clerical 
error that a creditor demonstrates was not intentional and occurred 
notwithstanding the maintenance of procedures reasonably adapted to 
avoid such errors.
    (t) Judgmental system of evaluating applicants means any system for 
evaluating the creditworthiness of an applicant other than an 
empirically derived, demonstrably and statistically sound, credit 
scoring system.
    (u) Marital status means the state of being unmarried, married, or 
separated, as defined by applicable state law. The term ``unmarried'' 
includes persons who are single, divorced, or widowed.
    (v) Negative factor or value, in relation to the age of elderly 
applicants, means utilizing a factor, value, or weight that is less 
favorable regarding elderly applicants than the creditor's experience 
warrants or is less favorable than the factor, value, or weight assigned 
to the class of applicants that are not classified as elderly and are 
most favored by a creditor on the basis of age.
    (w) Open-end credit means credit extended under a plan in which a 
creditor may permit an applicant to make purchases or obtain loans from 
time to time directly from the creditor or indirectly by use of a credit 
card, check, or other device.
    (x) Person means a natural person, corporation, government or 
governmental subdivision or agency, trust, estate, partnership, 
cooperative, or association.
    (y) Pertinent element of creditworthiness, in relation to a 
judgmental system of evaluating applicants, means any information about 
applicants that a creditor obtains and considers and that has a 
demonstrable relationship to a determination of creditworthiness.
    (z) Prohibited basis means race, color, religion, national origin, 
sex, marital status, or age (provided that the applicant has the 
capacity to enter into a binding contract); the fact that all or part of 
the applicant's income derives from any public assistance program; or 
the fact that the applicant has in good faith exercised any right under 
the Consumer Credit Protection Act or any state law upon which an 
exemption has been granted by the Board.
    (aa) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, or any territory or possession of the 
United States.

[[Page 18]]



Sec. 202.3  Limited exceptions for certain classes of transactions.

    (a) Public utilities credit--(1) Definition. Public utilities credit 
refers to extensions of credit that involve public utility services 
provided through pipe, wire, or other connected facilities, or radio or 
similar transmission (including extensions of such facilities), if the 
charges for service, delayed payment, and any discount for prompt 
payment are filed with or regulated by a government unit.
    (2) Exceptions. The following provisions of this regulation do not 
apply to public utilities credit:
    (i) Section 202.5(d)(1) concerning information about marital status; 
and
    (ii) Section 202.12(b) relating to record retention.
    (b) Securities credit--(1) Definition. Securities credit refers to 
extensions of credit subject to regulation under section 7 of the 
Securities Exchange Act of 1934 or extensions of credit by a broker or 
dealer subject to regulation as a broker or dealer under the Securities 
Exchange Act of 1934.
    (2) Exceptions. The following provisions of this regulation do not 
apply to securities credit:
    (i) Section 202.5(b) concerning information about the sex of an 
applicant;
    (ii) Section 202.5(c) concerning information about a spouse or 
former spouse;
    (iii) Section 202.5(d)(1) concerning information about marital 
status;
    (iv) Section 202.7(b) relating to designation of name to the extent 
necessary to comply with rules regarding an account in which a broker or 
dealer has an interest, or rules regarding the aggregation of accounts 
of spouses to determine controlling interests, beneficial interests, 
beneficial ownership, or purchase limitations and restrictions;
    (v) Section 202.7(c) relating to action concerning open-end 
accounts, to the extent the action taken is on the basis of a change of 
name or marital status;
    (vi) Section 202.7(d) relating to the signature of a spouse or other 
person;
    (vii) Section 202.10 relating to furnishing of credit information; 
and
    (viii) Section 202.12(b) relating to record retention.
    (c) Incidental credit--(1) Definition. Incidental credit refers to 
extensions of consumer credit other than the types described in 
paragraphs (a) and (b) of this section:
    (i) That are not made pursuant to the terms of a credit card 
account;
    (ii) That are not subject to a finance charge (as defined in 
Regulation Z, 12 CFR 226.4); and
    (iii) That are not payable by agreement in more than four 
installments.
    (2) Exceptions. The following provisions of this regulation do not 
apply to incidental credit:
    (i) Section 202.5(b) concerning information about the sex of an 
applicant, but only to the extent necessary for medical records or 
similar purposes;
    (ii) Section 202.5(c) concerning information about a spouse or 
former spouse;
    (iii) Section 202.5(d)(1) concerning information about marital 
status;
    (iv) Section 202.5(d)(2) concerning information about income derived 
from alimony, child support, or separate maintenance payments;
    (v) Section 202.7(d) relating to the signature of a spouse or other 
person;
    (vi) Section 202.9 relating to notifications;
    (vii) Section 202.10 relating to furnishing of credit information; 
and
    (viii) Section 202.12(b) relating to record retention.
    (d) Government credit--(1) Definition. Government credit refers to 
extensions of credit made to governments or governmental subdivisions, 
agencies, or instrumentalities.
    (2) Applicability of regulation. Except for Sec. 202.4(a), the 
general rule against discrimination on a prohibited basis, the 
requirements of this regulation do not apply to government credit.



Sec. 202.4  General rules.

    (a) Discrimination. A creditor shall not discriminate against an 
applicant on a prohibited basis regarding any aspect of a credit 
transaction.
    (b) Discouragement. A creditor shall not make any oral or written 
statement, in advertising or otherwise, to applicants or prospective 
applicants that would discourage on a prohibited basis a reasonable 
person from making or pursuing an application.

[[Page 19]]

    (c) Written applications. A creditor shall take written applications 
for the dwelling-related types of credit covered by Sec. 202.13(a).
    (d) Form of disclosures--(1) General rule. A creditor that provides 
in writing any disclosures or information required by this regulation 
must provide the disclosures in a clear and conspicuous manner and, 
except for the disclosures required by Sec. Sec. 202.5 and 202.13, in a 
form the applicant may retain.
    (2) Disclosures in electronic form. The disclosures required by this 
part that are required to be given in writing may be provided to the 
applicant in electronic form, subject to compliance with the consumer 
consent and other applicable provisions of the Electronic Signatures in 
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). 
Where the disclosures under Sec. Sec. 202.5(b)(1), 202.5(b)(2), 
202.5(d)(1), 202.5(d)(2), 202.13, and 202.14(a)(2)(i) accompany an 
application accessed by the applicant in electronic form, these 
disclosures may be provided to the applicant in electronic form on or 
with the application form, without regard to the consumer consent or 
other provisions of the E-Sign Act.
    (e) Foreign-language disclosures. Disclosures may be made in 
languages other than English, provided they are available in English 
upon request.

[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 72 FR 63451, Nov. 9, 
2007]



Sec. 202.5  Rules concerning requests for information.

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

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

    (2) Required collection of information. Notwithstanding paragraphs 
(b) through (d) of this section, a creditor shall request information 
for monitoring purposes as required by Sec. 202.13 for credit secured 
by the applicant's dwelling. In addition, a creditor may obtain 
information required by a regulation, order, or agreement issued by, or 
entered into with, a court or an enforcement agency (including the 
Attorney General of the United States or a similar state official) to 
monitor or enforce compliance with the Act, this regulation, or other 
federal or state statutes or regulations.
    (3) Special-purpose credit. A creditor may obtain information that 
is otherwise restricted to determine eligibility for a special purpose 
credit program, as provided in Sec. 202.8(b), (c), and (d).
    (b) Limitation on information about race, color, religion, national 
origin, or sex. A creditor shall not inquire about the race, color, 
religion, national origin, or sex of an applicant or any other person in 
connection with a credit transaction, except as provided in paragraphs 
(b)(1) and (b)(2) of this section.
    (1) Self-test. A creditor may inquire about the race, color, 
religion, national origin, or sex of an applicant or any other person in 
connection with a credit transaction for the purpose of conducting a 
self-test that meets the requirements of Sec. 202.15. A creditor that 
makes such an inquiry shall disclose orally or in writing, at the time 
the information is requested, that:
    (i) The applicant will not be required to provide the information;
    (ii) The creditor is requesting the information to monitor its 
compliance with the federal Equal Credit Opportunity Act;
    (iii) Federal law prohibits the creditor from discriminating on the 
basis of this information, or on the basis of an applicant's decision 
not to furnish the information; and
    (iv) If applicable, certain information will be collected based on 
visual observation or surname if not provided by the applicant or other 
person.
    (2) Sex. An applicant may be requested to designate a title on an 
application form (such as Ms., Miss, Mr., or Mrs.) if the form discloses 
that the designation of a title is optional. An application form shall 
otherwise use only terms that are neutral as to sex.
    (c) Information about a spouse or former spouse--(1) General rule. 
Except

[[Page 20]]

as permitted in this paragraph, a creditor may not request any 
information concerning the spouse or former spouse of an applicant.
    (2) Permissible inquiries. A creditor may request any information 
concerning an applicant's spouse (or former spouse under paragraph 
(c)(2)(v) of this section) that may be requested about the applicant if:
    (i) The spouse will be permitted to use the account;
    (ii) The spouse will be contractually liable on the account;
    (iii) The applicant is relying on the spouse's income as a basis for 
repayment of the credit requested;
    (iv) The applicant resides in a community property state or is 
relying on property located in such a state as a basis for repayment of 
the credit requested; or
    (v) The applicant is relying on alimony, child support, or separate 
maintenance payments from a spouse or former spouse as a basis for 
repayment of the credit requested.
    (3) Other accounts of the applicant. A creditor may request that an 
applicant list any account on which the applicant is contractually 
liable and to provide the name and address of the person in whose name 
the account is held. A creditor may also ask an applicant to list the 
names in which the applicant has previously received credit.
    (d) Other limitations on information requests--(1) Marital status. 
If an applicant applies for individual unsecured credit, a creditor 
shall not inquire about the applicant's marital status unless the 
applicant resides in a community property state or is relying on 
property located in such a state as a basis for repayment of the credit 
requested. If an application is for other than individual unsecured 
credit, a creditor may inquire about the applicant's marital status, but 
shall use only the terms married, unmarried, and separated. A creditor 
may explain that the category unmarried includes single, divorced, and 
widowed persons.
    (2) Disclosure about income from alimony, child support, or separate 
maintenance. A creditor shall not inquire whether income stated in an 
application is derived from alimony, child support, or separate 
maintenance payments unless the creditor discloses to the applicant that 
such income need not be revealed if the applicant does not want the 
creditor to consider it in determining the applicant's creditworthiness.
    (3) Childbearing, childrearing. A creditor shall not inquire about 
birth control practices, intentions concerning the bearing or rearing of 
children, or capability to bear children. A creditor may inquire about 
the number and ages of an applicant's dependents or about dependent-
related financial obligations or expenditures, provided such information 
is requested without regard to sex, marital status, or any other 
prohibited basis.
    (e) Permanent residency and immigration status. A creditor may 
inquire about the permanent residency and immigration status of an 
applicant or any other person in connection with a credit transaction.



Sec. 202.6  Rules concerning evaluation of applications.

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

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

    (b) Specific rules concerning use of information--(1) Except as 
provided in the Act and this regulation, a creditor shall not take a 
prohibited basis into account in any system of evaluating the 
creditworthiness of applicants.
    (2) Age, receipt of public assistance. (i) Except as permitted in 
this paragraph, a creditor shall not take into account an applicant's 
age (provided that the applicant has the capacity to enter into a 
binding contract) or whether an applicant's income derives from any 
public assistance program.
    (ii) In an empirically derived, demonstrably and statistically 
sound, credit scoring system, a creditor may use an

[[Page 21]]

applicant's age as a predictive variable, provided that the age of an 
elderly applicant is not assigned a negative factor or value.
    (iii) In a judgmental system of evaluating creditworthiness, a 
creditor may consider an applicant's age or whether an applicant's 
income derives from any public assistance program only for the purpose 
of determining a pertinent element of creditworthiness.
    (iv) In any system of evaluating creditworthiness, a creditor may 
consider the age of an elderly applicant when such age is used to favor 
the elderly applicant in extending credit.
    (3) Childbearing, childrearing. In evaluating creditworthiness, a 
creditor shall not make assumptions or use aggregate statistics relating 
to the likelihood that any category of persons will bear or rear 
children or will, for that reason, receive diminished or interrupted 
income in the future.
    (4) Telephone listing. A creditor shall not take into account 
whether there is a telephone listing in the name of an applicant for 
consumer credit but may take into account whether there is a telephone 
in the applicant's residence.
    (5) Income. A creditor shall not discount or exclude from 
consideration the income of an applicant or the spouse of an applicant 
because of a prohibited basis or because the income is derived from 
part-time employment or is an annuity, pension, or other retirement 
benefit; a creditor may consider the amount and probable continuance of 
any income in evaluating an applicant's creditworthiness. When an 
applicant relies on alimony, child support, or separate maintenance 
payments in applying for credit, the creditor shall consider such 
payments as income to the extent that they are likely to be consistently 
made.
    (6) Credit history. To the extent that a creditor considers credit 
history in evaluating the creditworthiness of similarly qualified 
applicants for a similar type and amount of credit, in evaluating an 
applicant's creditworthiness a creditor shall consider:
    (i) The credit history, when available, of accounts designated as 
accounts that the applicant and the applicant's spouse are permitted to 
use or for which both are contractually liable;
    (ii) On the applicant's request, any information the applicant may 
present that tends to indicate the credit history being considered by 
the creditor does not accurately reflect the applicant's 
creditworthiness; and
    (iii) On the applicant's request, the credit history, when 
available, of any account reported in the name of the applicant's spouse 
or former spouse that the applicant can demonstrate accurately reflects 
the applicant's creditworthiness.
    (7) Immigration status. A creditor may consider the applicant's 
immigration status or status as a permanent resident of the United 
States, and any additional information that may be necessary to 
ascertain the creditor's rights and remedies regarding repayment.
    (8) Marital status. Except as otherwise permitted or required by 
law, a creditor shall evaluate married and unmarried applicants by the 
same standards; and in evaluating joint applicants, a creditor shall not 
treat applicants differently based on the existence, absence, or 
likelihood of a marital relationship between the parties.
    (9) Race, color, religion, national origin, sex. Except as otherwise 
permitted or required by law, a creditor shall not consider race, color, 
religion, national origin, or sex (or an applicant's or other person's 
decision not to provide the information) in any aspect of a credit 
transaction.
    (c) State property laws. A creditor's consideration or application 
of state property laws directly or indirectly affecting creditworthiness 
does not constitute unlawful discrimination for the purposes of the Act 
or this regulation.



Sec. 202.7  Rules concerning extensions of credit.

    (a) Individual accounts. A creditor shall not refuse to grant an 
individual account to a creditworthy applicant on the basis of sex, 
marital status, or any other prohibited basis.
    (b) Designation of name. A creditor shall not refuse to allow an 
applicant to open or maintain an account in a birth-given first name and 
a surname that is the applicant's birth-given surname, the spouse's 
surname, or a combined surname.

[[Page 22]]

    (c) Action concerning existing open-end accounts--(1) Limitations. 
In the absence of evidence of the applicant's inability or unwillingness 
to repay, a creditor shall not take any of the following actions 
regarding an applicant who is contractually liable on an existing open-
end account on the basis of the applicant's reaching a certain age or 
retiring or on the basis of a change in the applicant's name or marital 
status:
    (i) Require a reapplication, except as provided in paragraph (c)(2) 
of this section;
    (ii) Change the terms of the account; or
    (iii) Terminate the account.
    (2) Requiring reapplication. A creditor may require a reapplication 
for an open-end account on the basis of a change in the marital status 
of an applicant who is contractually liable if the credit granted was 
based in whole or in part on income of the applicant's spouse and if 
information available to the creditor indicates that the applicant's 
income may not support the amount of credit currently available.
    (d) Signature of spouse or other person--(1) Rule for qualified 
applicant. Except as provided in this paragraph, a creditor shall not 
require the signature of an applicant's spouse or other person, other 
than a joint applicant, on any credit instrument if the applicant 
qualifies under the creditor's standards of creditworthiness for the 
amount and terms of the credit requested. A creditor shall not deem the 
submission of a joint financial statement or other evidence of jointly 
held assets as an application for joint credit.
    (2) Unsecured credit. If an applicant requests unsecured credit and 
relies in part upon property that the applicant owns jointly with 
another person to satisfy the creditor's standards of creditworthiness, 
the creditor may require the signature of the other person only on the 
instrument(s) necessary, or reasonably believed by the creditor to be 
necessary, under the law of the state in which the property is located, 
to enable the creditor to reach the property being relied upon in the 
event of the death or default of the applicant.
    (3) Unsecured credit--community property states. If a married 
applicant requests unsecured credit and resides in a community property 
state, or if the applicant is relying on property located in such a 
state, a creditor may require the signature of the spouse on any 
instrument necessary, or reasonably believed by the creditor to be 
necessary, under applicable state law to make the community property 
available to satisfy the debt in the event of default if:
    (i) Applicable state law denies the applicant power to manage or 
control sufficient community property to qualify for the credit 
requested under the creditor's standards of creditworthiness; and
    (ii) The applicant does not have sufficient separate property to 
qualify for the credit requested without regard to community property.
    (4) Secured credit. If an applicant requests secured credit, a 
creditor may require the signature of the applicant's spouse or other 
person on any instrument necessary, or reasonably believed by the 
creditor to be necessary, under applicable state law to make the 
property being offered as security available to satisfy the debt in the 
event of default, for example, an instrument to create a valid lien, 
pass clear title, waive inchoate rights, or assign earnings.
    (5) Additional parties. If, under a creditor's standards of 
creditworthiness, the personal liability of an additional party is 
necessary to support the credit requested, a creditor may request a 
cosigner, guarantor, endorser, or similar party. The applicant's spouse 
may serve as an additional party, but the creditor shall not require 
that the spouse be the additional party.
    (6) Rights of additional parties. A creditor shall not impose 
requirements upon an additional party that the creditor is prohibited 
from imposing upon an applicant under this section.
    (e) Insurance. A creditor shall not refuse to extend credit and 
shall not terminate an account because credit life, health, accident, 
disability, or other credit-related insurance is not available on the 
basis of the applicant's age.

[[Page 23]]



Sec. 202.8  Special purpose credit programs.

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



Sec. 202.9  Notifications.

    (a) Notification of action taken, ECOA notice, and statement of 
specific reasons--(1) When notification is required. A creditor shall 
notify an applicant of action taken within:
    (i) 30 days after receiving a completed application concerning the 
creditor's approval of, counteroffer to, or adverse action on the 
application;
    (ii) 30 days after taking adverse action on an incomplete 
application, unless notice is provided in accordance with paragraph (c) 
of this section;
    (iii) 30 days after taking adverse action on an existing account; or
    (iv) 90 days after notifying the applicant of a counteroffer if the 
applicant does not expressly accept or use the credit offered.
    (2) Content of notification when adverse action is taken. A 
notification given to an applicant when adverse action is

[[Page 24]]

taken shall be in writing and shall contain a statement of the action 
taken; the name and address of the creditor; a statement of the 
provisions of Sec. 701(a) of the Act; the name and address of the 
federal agency that administers compliance with respect to the creditor; 
and either:
    (i) A statement of specific reasons for the action taken; or
    (ii) A disclosure of the applicant's right to a statement of 
specific reasons within 30 days, if the statement is requested within 60 
days of the creditor's notification. The disclosure shall include the 
name, address, and telephone number of the person or office from which 
the statement of reasons can be obtained. If the creditor chooses to 
provide the reasons orally, the creditor shall also disclose the 
applicant's right to have them confirmed in writing within 30 days of 
receiving the applicant's written request for confirmation.
    (3) Notification to business credit applicants. For business credit, 
a creditor shall comply with the notification requirements of this 
section in the following manner:
    (i) With regard to a business that had gross revenues of $1 million 
or less in its preceding fiscal year (other than an extension of trade 
credit, credit incident to a factoring agreement, or other similar types 
of business credit), a creditor shall comply with paragraphs (a)(1) and 
(2) of this section, except that:
    (A) The statement of the action taken may be given orally or in 
writing, when adverse action is taken;
    (B) Disclosure of an applicant's right to a statement of reasons may 
be given at the time of application, instead of when adverse action is 
taken, provided the disclosure contains the information required by 
paragraph (a)(2)(ii) of this section and the ECOA notice specified in 
paragraph (b)(1) of this section;
    (C) For an application made entirely by telephone, a creditor 
satisfies the requirements of paragraph (a)(3)(i) of this section by an 
oral statement of the action taken and of the applicant's right to a 
statement of reasons for adverse action.
    (ii) With regard to a business that had gross revenues in excess of 
$1 million in its preceding fiscal year or an extension of trade credit, 
credit incident to a factoring agreement, or other similar types of 
business credit, a creditor shall:
    (A) Notify the applicant, within a reasonable time, orally or in 
writing, of the action taken; and
    (B) Provide a written statement of the reasons for adverse action 
and the ECOA notice specified in paragraph (b)(1) of this section if the 
applicant makes a written request for the reasons within 60 days of the 
creditor's notification.
    (b) Form of ECOA notice and statement of specific reasons--(1) ECOA 
notice. To satisfy the disclosure requirements of paragraph (a)(2) of 
this section regarding section 701(a) of the Act, the creditor shall 
provide a notice that is substantially similar to the following: The 
federal Equal Credit Opportunity Act prohibits creditors from 
discriminating against credit applicants on the basis of race, color, 
religion, national origin, sex, marital status, age (provided the 
applicant has the capacity to enter into a binding contract); because 
all or part of the applicant's income derives from any public assistance 
program; or because the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. The federal agency that 
administers compliance with this law concerning this creditor is [name 
and address as specified by the appropriate agency listed in appendix A 
of this regulation].
    (2) Statement of specific reasons. The statement of reasons for 
adverse action required by paragraph (a)(2)(i) of this section must be 
specific and indicate the principal reason(s) for the adverse action. 
Statements that the adverse action was based on the creditor's internal 
standards or policies or that the applicant, joint applicant, or similar 
party failed to achieve a qualifying score on the creditor's credit 
scoring system are insufficient.
    (c) Incomplete applications--(1) Notice alternatives. Within 30 days 
after receiving an application that is incomplete regarding matters that 
an applicant can complete, the creditor shall notify the applicant 
either:
    (i) Of action taken, in accordance with paragraph (a) of this 
section; or

[[Page 25]]

    (ii) Of the incompleteness, in accordance with paragraph (c)(2) of 
this section.
    (2) Notice of incompleteness. If additional information is needed 
from an applicant, the creditor shall send a written notice to the 
applicant specifying the information needed, designating a reasonable 
period of time for the applicant to provide the information, and 
informing the applicant that failure to provide the information 
requested will result in no further consideration being given to the 
application. The creditor shall have no further obligation under this 
section if the applicant fails to respond within the designated time 
period. If the applicant supplies the requested information within the 
designated time period, the creditor shall take action on the 
application and notify the applicant in accordance with paragraph (a) of 
this section.
    (3) Oral request for information. At its option, a creditor may 
inform the applicant orally of the need for additional information. If 
the application remains incomplete the creditor shall send a notice in 
accordance with paragraph (c)(1) of this section.
    (d) Oral notifications by small-volume creditors. In the case of a 
creditor that did not receive more than 150 applications during the 
preceding calendar year, the requirements of this section (including 
statements of specific reasons) are satisfied by oral notifications.
    (e) Withdrawal of approved application. When an applicant submits an 
application and the parties contemplate that the applicant will inquire 
about its status, if the creditor approves the application and the 
applicant has not inquired within 30 days after applying, the creditor 
may treat the application as withdrawn and need not comply with 
paragraph (a)(1) of this section.
    (f) Multiple applicants. When an application involves more than one 
applicant, notification need only be given to one of them but must be 
given to the primary applicant where one is readily apparent.
    (g) Applications submitted through a third party. When an 
application is made on behalf of an applicant to more than one creditor 
and the applicant expressly accepts or uses credit offered by one of the 
creditors, notification of action taken by any of the other creditors is 
not required. If no credit is offered or if the applicant does not 
expressly accept or use the credit offered, each creditor taking adverse 
action must comply with this section, directly or through a third party. 
A notice given by a third party shall disclose the identity of each 
creditor on whose behalf the notice is given.

[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 72 FR 63451, Nov. 9, 
2007]



Sec. 202.10  Furnishing of credit information.

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



Sec. 202.11  Relation to state law.

    (a) Inconsistent state laws. Except as otherwise provided in this 
section, this regulation alters, affects, or preempts only those state 
laws that are inconsistent with the Act and this regulation and then 
only to the extent of the inconsistency. A state law is not inconsistent 
if it is more protective of an applicant.

[[Page 26]]

    (b) Preempted provisions of state law. (1) A state law is deemed to 
be inconsistent with the requirements of the Act and this regulation and 
less protective of an applicant within the meaning of section 705(f) of 
the Act to the extent that the law:
    (i) Requires or permits a practice or act prohibited by the Act or 
this regulation;
    (ii) Prohibits the individual extension of consumer credit to both 
parties to a marriage if each spouse individually and voluntarily 
applies for such credit;
    (iii) Prohibits inquiries or collection of data required to comply 
with the Act or this regulation;
    (iv) Prohibits asking about or considering age in an empirically 
derived, demonstrably and statistically sound, credit scoring system to 
determine a pertinent element of creditworthiness, or to favor an 
elderly applicant; or
    (v) Prohibits inquiries necessary to establish or administer a 
special purpose credit program as defined by Sec. 202.8.
    (2) A creditor, state, or other interested party may request that 
the Board determine whether a state law is inconsistent with the 
requirements of the Act and this regulation.
    (c) Laws on finance charges, loan ceilings. If married applicants 
voluntarily apply for and obtain individual accounts with the same 
creditor, the accounts shall not be aggregated or otherwise combined for 
purposes of determining permissible finance charges or loan ceilings 
under any federal or state law. Permissible loan ceiling laws shall be 
construed to permit each spouse to become individually liable up to the 
amount of the loan ceilings, less the amount for which the applicant is 
jointly liable.
    (d) State and federal laws not affected. This section does not alter 
or annul any provision of state property laws, laws relating to the 
disposition of decedents' estates, or federal or state banking 
regulations directed only toward insuring the solvency of financial 
institutions.
    (e) Exemption for state-regulated transactions--(1) Applications. A 
state may apply to the Board for an exemption from the requirements of 
the Act and this regulation for any class of credit transactions within 
the state. The Board will grant such an exemption if the Board 
determines that:
    (i) The class of credit transactions is subject to state law 
requirements substantially similar to those of the Act and this 
regulation or that applicants are afforded greater protection under 
state law; and
    (ii) There is adequate provision for state enforcement.
    (2) Liability and enforcement. (i) No exemption will extend to the 
civil liability provisions of section 706 of the Act or the 
administrative enforcement provisions of section 704 of the Act.
    (ii) After an exemption has been granted, the requirements of the 
applicable state law (except for additional requirements not imposed by 
federal law) will constitute the requirements of the Act and this 
regulation.



Sec. 202.12  Record retention.

    (a) Retention of prohibited information. A creditor may retain in 
its files information that is prohibited by the Act or this regulation 
for use in evaluating applications, without violating the Act or this 
regulation, if the information was obtained:
    (1) From any source prior to March 23, 1977;
    (2) From consumer reporting agencies, an applicant, or others 
without the specific request of the creditor; or
    (3) As required to monitor compliance with the Act and this 
regulation or other federal or state statutes or regulations.
    (b) Preservation of records--(1) Applications. For 25 months (12 
months for business credit, except as provided in paragraph (b)(5) of 
this section) after the date that a creditor notifies an applicant of 
action taken on an application or of incompleteness, the creditor shall 
retain in original form or a copy thereof:
    (i) Any application that it receives, any information required to be 
obtained concerning characteristics of the applicant to monitor 
compliance with the Act and this regulation or other similar law, and 
any other written or recorded information used in

[[Page 27]]

evaluating the application and not returned to the applicant at the 
applicant's request;
    (ii) A copy of the following documents if furnished to the applicant 
in written form (or, if furnished orally, any notation or memorandum 
made by the creditor):
    (A) The notification of action taken; and
    (B) The statement of specific reasons for adverse action; and
    (iii) Any written statement submitted by the applicant alleging a 
violation of the Act or this regulation.
    (2) Existing accounts. For 25 months (12 months for business credit, 
except as provided in paragraph (b)(5) of this section) after the date 
that a creditor notifies an applicant of adverse action regarding an 
existing account, the creditor shall retain as to that account, in 
original form or a copy thereof:
    (i) Any written or recorded information concerning the adverse 
action; and
    (ii) Any written statement submitted by the applicant alleging a 
violation of the Act or this regulation.
    (3) Other applications. For 25 months (12 months for business 
credit, except as provided in paragraph (b)(5) of this section) after 
the date that a creditor receives an application for which the creditor 
is not required to comply with the notification requirements of Sec. 
202.9, the creditor shall retain all written or recorded information in 
its possession concerning the applicant, including any notation of 
action taken.
    (4) Enforcement proceedings and investigations. A creditor shall 
retain the information beyond 25 months (12 months for business credit, 
except as provided in paragraph (b)(5) of this section) if the creditor 
has actual notice that it is under investigation or is subject to an 
enforcement proceeding for an alleged violation of the Act or this 
regulation, by the Attorney General of the United States or by an 
enforcement agency charged with monitoring that creditor's compliance 
with the Act and this regulation, or if it has been served with notice 
of an action filed pursuant to section 706 of the Act and Sec. 202.17 
of this regulation. The creditor shall retain the information until 
final disposition of the matter, unless an earlier time is allowed by 
order of the agency or court.
    (5) Special rule for certain business credit applications. With 
regard to a business that had gross revenues in excess of $1 million in 
its preceding fiscal year, or an extension of trade credit, credit 
incident to a factoring agreement, or other similar types of business 
credit, the creditor shall retain records for at least 60 days after 
notifying the applicant of the action taken. If within that time period 
the applicant requests in writing the reasons for adverse action or that 
records be retained, the creditor shall retain records for 12 months.
    (6) Self-tests. For 25 months after a self-test (as defined in Sec. 
202.15) has been completed, the creditor shall retain all written or 
recorded information about the self-test. A creditor shall retain 
information beyond 25 months if it has actual notice that it is under 
investigation or is subject to an enforcement proceeding for an alleged 
violation, or if it has been served with notice of a civil action. In 
such cases, the creditor shall retain the information until final 
disposition of the matter, unless an earlier time is allowed by the 
appropriate agency or court order.
    (7) Prescreened solicitations. For 25 months after the date on which 
an offer of credit is made to potential customers (12 months for 
business credit, except as provided in paragraph (b)(5) of this 
section), the creditor shall retain in original form or a copy thereof:
    (i) The text of any prescreened solicitation;
    (ii) The list of criteria the creditor used to select potential 
recipients of the solicitation; and
    (iii) Any correspondence related to complaints (formal or informal) 
about the solicitation.



Sec. 202.13  Information for monitoring purposes.

    (a) Information to be requested. (1) A creditor that receives an 
application for credit primarily for the purchase or refinancing of a 
dwelling occupied or to be occupied by the applicant as a principal 
residence, where the extension of credit will be secured by the 
dwelling, shall request as part of the application

[[Page 28]]

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



Sec. 202.14  Rules on providing appraisal reports.

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

[[Page 29]]

not limited to, an individual condominium or cooperative unit, and a 
mobile or other manufactured home. The term appraisal report means the 
document(s) relied upon by a creditor in evaluating the value of the 
dwelling.



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

    (a) General rules--(1) Voluntary self-testing and correction. The 
report or results of a self-test that a creditor voluntarily conducts 
(or authorizes) are privileged as provided in this section. Data 
collection required by law or by any governmental authority is not a 
voluntary self-test.
    (2) Corrective action required. The privilege in this section 
applies only if the creditor has taken or is taking appropriate 
corrective action.
    (3) Other privileges. The privilege created by this section does not 
preclude the assertion of any other privilege that may also apply.
    (b) Self-test defined--(1) Definition. A self-test is any program, 
practice, or study that:
    (i) Is designed and used specifically to determine the extent or 
effectiveness of a creditor's compliance with the Act or this 
regulation; and
    (ii) Creates data or factual information that is not available and 
cannot be derived from loan or application files or other records 
related to credit transactions.
    (2) Types of information privileged. The privilege under this 
section applies to the report or results of the self-test, data or 
factual information created by the self-test, and any analysis, 
opinions, and conclusions pertaining to the self-test report or results. 
The privilege covers workpapers or draft documents as well as final 
documents.
    (3) Types of information not privileged. The privilege under this 
section does not apply to:
    (i) Information about whether a creditor conducted a self-test, the 
methodology used or the scope of the self-test, the time period covered 
by the self-test, or the dates it was conducted; or
    (ii) Loan and application files or other business records related to 
credit transactions, and information derived from such files and 
records, even if the information has been aggregated, summarized, or 
reorganized to facilitate analysis.
    (c) Appropriate corrective action--(1) General requirement. For the 
privilege in this section to apply, appropriate corrective action is 
required when the self-test shows that it is more likely than not that a 
violation occurred, even though no violation has been formally 
adjudicated.
    (2) Determining the scope of appropriate corrective action. A 
creditor must take corrective action that is reasonably likely to remedy 
the cause and effect of a likely violation by:
    (i) Identifying the policies or practices that are the likely cause 
of the violation; and
    (ii) Assessing the extent and scope of any violation.
    (3) Types of relief. Appropriate corrective action may include both 
prospective and remedial relief, except that to establish a privilege 
under this section:
    (i) A creditor is not required to provide remedial relief to a 
tester used in a self-test;
    (ii) A creditor is only required to provide remedial relief to an 
applicant identified by the self-test as one whose rights were more 
likely than not violated; and
    (iii) A creditor is not required to provide remedial relief to a 
particular applicant if the statute of limitations applicable to the 
violation expired before the creditor obtained the results of the self-
test or the applicant is otherwise ineligible for such relief.
    (4) No admission of violation. Taking corrective action is not an 
admission that a violation occurred.
    (d) Scope of privilege--(1) General rule. The report or results of a 
privileged self-test may not be obtained or used:
    (i) By a government agency in any examination or investigation 
relating to compliance with the Act or this regulation; or
    (ii) By a government agency or an applicant (including a prospective 
applicant who alleges a violation of Sec. 202.4(b)) in any proceeding 
or civil action in which a violation of the Act or this regulation is 
alleged.
    (2) Loss of privilege. The report or results of a self-test are not 
privileged under paragraph (d)(1) of this section if

[[Page 30]]

the creditor or a person with lawful access to the report or results:
    (i) Voluntarily discloses any part of the report or results, or any 
other information privileged under this section, to an applicant or 
government agency or to the public;
    (ii) Discloses any part of the report or results, or any other 
information privileged under this section, as a defense to charges that 
the creditor has violated the Act or regulation; or
    (iii) Fails or is unable to produce written or recorded information 
about the self-test that is required to be retained under Sec. 
202.12(b)(6) when the information is needed to determine whether the 
privilege applies. This paragraph does not limit any other penalty or 
remedy that may be available for a violation of Sec. 202.12.
    (3) Limited use of privileged information. Notwithstanding paragraph 
(d)(1) of this section, the self-test report or results and any other 
information privileged under this section may be obtained and used by an 
applicant or government agency solely to determine a penalty or remedy 
after a violation of the Act or this regulation has been adjudicated or 
admitted. Disclosures for this limited purpose may be used only for the 
particular proceeding in which the adjudication or admission was made. 
Information disclosed under this paragraph (d)(3) remains privileged 
under paragraph (d)(1) of this section.



Sec. 202.16  Enforcement, penalties and liabilities.

    (a) Administrative enforcement. (1) As set forth more fully in 
section 704 of the Act, administrative enforcement of the Act and this 
regulation regarding certain creditors is assigned to the Comptroller of 
the Currency, Board of Governors of the Federal Reserve System, Board of 
Directors of the Federal Deposit Insurance Corporation, Office of Thrift 
Supervision, National Credit Union Administration, Surface 
Transportation Board, Secretary of Agriculture, Farm Credit 
Administration, Securities and Exchange Commission, Small Business 
Administration, and Secretary of Transportation.
    (2) Except to the extent that administrative enforcement is 
specifically assigned to other authorities, compliance with the 
requirements imposed under the Act and this regulation is enforced by 
the Federal Trade Commission.
    (b) Penalties and liabilities. (1) Sections 702(g) and 706(a) and 
(b) of the Act provide that any creditor that fails to comply with a 
requirement imposed by the Act or this regulation is subject to civil 
liability for actual and punitive damages in individual or class 
actions. Pursuant to sections 702(g) and 704(b), (c), and (d) of the 
Act, violations of the Act or this regulation also constitute violations 
of other federal laws. Liability for punitive damages can apply only to 
nongovernmental entities and is limited to $10,000 in individual actions 
and the lesser of $500,000 or 1 percent of the creditor's net worth in 
class actions. Section 706(c) provides for equitable and declaratory 
relief and section 706(d) authorizes the awarding of costs and 
reasonable attorney's fees to an aggrieved applicant in a successful 
action.
    (2) As provided in section 706(f), a civil action under the Act or 
this regulation may be brought in the appropriate United States district 
court without regard to the amount in controversy or in any other court 
of competent jurisdiction within two years after the date of the 
occurrence of the violation, or within one year after the commencement 
of an administrative enforcement proceeding or of a civil action brought 
by the Attorney General of the United States within two years after the 
alleged violation.
    (3) If an agency responsible for administrative enforcement is 
unable to obtain compliance with the Act or this regulation, it may 
refer the matter to the Attorney General of the United States. If the 
Board, the Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, the Office of Thrift Supervision, or the National Credit 
Union Administration has reason to believe that one or more creditors 
have engaged in a pattern or practice of discouraging or denying 
applications in violation of the Act or this regulation, the agency 
shall refer the matter to the Attorney General. If the agency has reason 
to believe that one or more creditors violated section 701(a) of the 
Act, the agency may refer a matter to the Attorney General.

[[Page 31]]

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

[Reg. B, 68 FR 13161, Mar. 18, 2003. Redesignated at 72 FR 63451, Nov. 
9, 2007]



        Sec. Appendix A to Part 202--Federal Enforcement Agencies

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

    National banks, and federal branches and federal agencies of foreign 
banks: Office of the Comptroller of the Currency, Customer Assistance 
Group, 1301 McKinney Street, Suite 3450, Houston, TX 77010-9050

    State member banks, branches and agencies of foreign banks (other 
than federal branches, federal agencies, and insured state branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25A of 
the Federal Reserve Act: Federal Reserve Consumer Help Center, P.O. Box 
1200, Minneapolis, MN 55480, toll-free number: (888) 851-1920, fax 
number: (877) 888-2520, TDD number: (877) 766-8533.

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

    Savings institutions insured under the Savings Association Insurance 
Fund of the FDIC and federally chartered savings banks insured under the 
Bank Insurance Fund of the FDIC (but not including state-chartered 
savings banks insured under the Bank Insurance Fund).
    Office of Thrift Supervision Regional Director for the region in 
which the institution is located.
Federal Credit Unions: Regional office of the National Credit Union 
Administration serving the area in which the federal credit union is 
located.
Air carriers: Assistant General Counsel for Aviation Enforcement and 
Proceedings, Department of Transportation, 400 Seventh Street, SW., 
Washington, DC 20590
Creditors Subject to Surface Transportation Board: Office of 
Proceedings, Surface Transportation Board, Department of Transportation, 
1925 K Street NW., Washington, DC 20423
Creditors Subject to Packers and Stockyards Act: Nearest Packers and 
Stockyards Administration area supervisor.
    Small Business Investment Companies: Associate Deputy Administrator 
for Capital Access, United States Small Business Administration, 409 
Third Street, SW., 8th Floor, Washington, DC 20416.
Brokers and Dealers: Securities and Exchange Commission, Washington, DC 
20549.
Federal Land Banks, Federal Land Bank Associations, Federal Intermediate 
Credit Banks, and Production Credit Associations: Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
Retailers, Finance Companies, and All Other Creditors Not Listed Above: 
FTC Regional Office for region in which the creditor operates or Federal 
Trade Commission, Equal Credit Opportunity, Washington, DC 20580.

[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 71 FR 11296, Mar. 7, 
2006; 71 FR 28563, May 17, 2006; 72 FR 55020, Sept. 28, 2007]

[[Page 32]]



          Sec. Appendix B to Part 202--Model Application Forms

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

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



         Sec. Appendix C to Part 202--Sample Notification Forms

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

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

            Statement of Credit Denial, Termination or Change

 Date:__________________________________________________________________

 Applicant's Name:______________________________________________________

 Applicant's Address:___________________________________________________

Description of Account, Transaction, or Requested Credit:

________________________________________________________________________

Description of Action Taken:

________________________________________________________________________
________________________________________________________________________

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

    This section must be completed in all instances.

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

[[Page 46]]

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

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

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

 Name:__________________________________________________________________

 Address:_______________________________________________________________

________________________________________________________________________

 [Toll-free] Telephone number:__________________________________________

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

 Creditor's address:____________________________________________________

 Creditor's telephone number:___________________________________________

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

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

Date

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

Your Income:

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

Your Employment:

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

Your Credit History:

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

Your Application:

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

[[Page 47]]

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

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

Date

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

 Creditor's Name:_______________________________________________________

 Address:_______________________________________________________________

________________________________________________________________________

 Telephone:_____________________________________________________________

    Sincerely,

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

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

Date

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

[[Page 48]]

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

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

Date

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

Creditor's Name
Address
Telephone Number

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

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

    Sincerely,

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

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

Creditor's name
Address
Telephone number

Date

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

    Sincerely,

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

Creditor's Name
Creditor's address

Date

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

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

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

Creditor's name
Creditor's address

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

[[Page 49]]

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

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

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

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

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

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



     Sec. Appendix D to Part 202--Issuance of Staff Interpretations

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



      Sec. Supplement I to Part 202--Official Staff Interpretations

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

                              Introduction

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

[[Page 50]]

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

              Section 202.1--Authority, Scope, and Purpose

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

                       Section 202.2--Definitions

    2(c) Adverse action.

                          Paragraph 2(c)(1)(i)

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

                          Paragraph 2(c)(1)(ii)

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

                          Paragraph 2(c)(2)(ii)

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

                         Paragraph 2(c)(2)(iii)

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

                          Paragraph 2(c)(2)(v)

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

[[Page 51]]

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

[[Page 52]]

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

[[Page 53]]

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

  Section 202.3--Limited Exceptions for Certain Classes of Transactions

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

                      Section 202.4--General Rules

                             Paragraph 4(a)

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

                             Paragraph 4(b)

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

[[Page 54]]

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

                             Paragraph 4(c)

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

                             Paragraph 4(d)

    1. Clear and conspicuous. This standard requires that disclosures be 
presented in a reasonably understandable format in a way that does not 
obscure the required information. No minimum type size is mandated, but 
the disclosures must be legible, whether typewritten, handwritten, or 
printed by computer.
    2. Form of disclosures. Whether the disclosures required to be on or 
with an application must be in electronic form depends upon the 
following:
    i. If an applicant accesses a credit application electronically 
other than in-person in a creditor's office (covered 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 applicant, this requirement would not be met.
    ii. In contrast, if an applicant is physically present in the 
creditor's office, and accesses a credit application electronically, 
such as via a terminal or kiosk, the creditor may provide disclosures in 
either electronic or paper form, provided the creditor complies with the 
timing, delivery, and retainability requirements of the regulation.

        Section 202.5--Rules Concerning Requests for Information

    5(a) General rules.

                            Paragraph 5(a)(1)

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

                            Paragraph 5(a)(2)

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

                            Paragraph 5(d)(1)

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

[[Page 55]]

    iv. The ownership of assets, which could disclose the interest of a 
spouse.

                            Paragraph 5(d)(2)

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

       Section 202.6--Rules Concerning Evaluation of Applications

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

                            Paragraph 6(b)(1)

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

                            Paragraph 6(b)(2)

    1. Favoring the elderly. Any system of evaluating creditworthiness 
may favor a credit applicant who is age 62 or older. A credit program 
that offers more favorable credit terms to applicants age 62 or older is 
also permissible; a program that offers more favorable credit terms to 
applicants at an age lower than 62 is permissible only if it meets the 
special-purpose credit requirements of Sec. 202.8.
    2. Consideration of age in a credit scoring system. Age may be taken 
directly into account in a credit scoring system that is ``demonstrably 
and statistically sound,'' as defined in Sec. 202.2(p), with one 
limitation: applicants age 62 years or older must be treated at least as 
favorably as applicants who are under age 62. If age is scored by 
assigning points to an applicant's age category, elderly applicants must 
receive the same or a greater number of points as the most favored class 
of nonelderly applicants.
    i. Age-split scorecards. Some credit systems segment the population 
and use different scorecards based on the age of an applicant. In such a 
system, one card may cover a narrow age range (for example, applicants 
in their twenties or younger) who are evaluated under attributes 
predictive for that age group. A second card may cover all other 
applicants, who are evaluated under the attributes predictive for that 
broader class. When a system uses a card covering a wide age range that 
encompasses elderly applicants, the credit scoring system is not deemed 
to score age. Thus, the system does not raise the issue of assigning a 
negative factor or value to the age of elderly applicants. But if a 
system segments the population by age into multiple scorecards, and 
includes elderly applicants in a narrower age range, the credit scoring 
system does score age. To comply with the Act and regulation in such a 
case, the creditor must ensure that the system does not assign a 
negative factor or value to the age of elderly applicants as a class.

[[Page 56]]

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

                            Paragraph 6(b)(5)

    1. Consideration of an individual applicant. A creditor must 
evaluate income derived from part-time employment, alimony, child 
support, separate maintenance payments, retirement benefits, or public 
assistance on an individual basis, not on the basis of aggregate 
statistics; and must assess its reliability or unreliability by 
analyzing the applicant's actual circumstances, not by analyzing 
statistical measures derived from a group.
    2. Payments consistently made. In determining the likelihood of 
consistent payments of alimony, child support, or separate maintenance, 
a creditor may consider factors such as whether payments are received 
pursuant to a written agreement or court decree; the length of time that 
the payments have been received; whether the payments are regularly 
received by the applicant; the availability of court or other procedures 
to compel payment; and the creditworthiness of the payor, including the 
credit history of the payor when it is available to the creditor.
    3. Consideration of income.
    i. A creditor need not consider income at all in evaluating 
creditworthiness. If a creditor does consider income, there are several 
acceptable methods, whether in a credit scoring or a judgmental system:
    A. A creditor may score or take into account the total sum of all 
income stated by the applicant without taking steps to evaluate the 
income for reliability.
    B. A creditor may evaluate each component of the applicant's income, 
and then score or take into account income determined to be reliable 
separately from other income; or the creditor may disregard that

[[Page 57]]

portion of income that is not reliable when it aggregates reliable 
income.
    C. A creditor that does not evaluate all income components for 
reliability must treat as reliable any component of protected income 
that is not evaluated.
    ii. In considering the separate components of an applicant's income, 
the creditor may not automatically discount or exclude from 
consideration any protected income. Any discounting or exclusion must be 
based on the applicant's actual circumstances.
    4. Part-time employment, sources of income. A creditor may score or 
take into account the fact that an applicant has more than one source of 
earned income--a full-time and a part-time job or two part-time jobs. A 
creditor may also score or treat earned income from a secondary source 
differently than earned income from a primary source. The creditor may 
not, however, score or otherwise take into account the number of sources 
for income such as retirement income, social security, supplemental 
security income, and alimony. Nor may the creditor treat negatively the 
fact that an applicant's only earned income is derived from, for 
example, a part-time job.

                            Paragraph 6(b)(6)

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

                            Paragraph 6(b)(7)

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

                            Paragraph 6(b)(8)

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

          Section 202.7--Rules Concerning Extensions of Credit

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

                            Paragraph 7(c)(1)

    1. Termination coincidental with marital status change. When an 
account holder's marital status changes, a creditor generally may not 
terminate the account unless it has evidence that the account holder is 
now unable or unwilling to repay. But the creditor may terminate an 
account on which both spouses are jointly liable, even if the action 
coincides with a change in marital status, when one or both spouses:
    i. Repudiate responsibility for future charges on the joint account.
    ii. Request separate accounts in their own names.
    iii. Request that the joint account be closed.

[[Page 58]]

    2. Updating information. A creditor may periodically request updated 
information from applicants but may not use events related to a 
prohibited basis--such as an applicant's retirement or reaching a 
particular age, or a change in name or marital status--to trigger such a 
request.

                            Paragraph 7(c)(2)

    1. Procedure pending reapplication. A creditor may require a 
reapplication from an account holder, even when there is no evidence of 
unwillingness or inability to repay, if (1) the credit was based on the 
qualifications of a person who is no longer available to support the 
credit and (2) the creditor has information indicating that the account 
holder's income may be insufficient to support the credit. While a 
reapplication is pending, the creditor must allow the account holder 
full access to the account under the existing contract terms. The 
creditor may specify a reasonable time period within which the account 
holder must submit the required information.
    7(d) Signature of spouse or other person.
    1. Qualified applicant. The signature rules ensure that qualified 
applicants are able to obtain credit in their own names. Thus, when an 
applicant requests individual credit, a creditor generally may not 
require the signature of another person unless the creditor has first 
determined that the applicant alone does not qualify for the credit 
requested.
    2. Unqualified applicant. When an applicant requests individual 
credit but does not meet a creditor's standards, the creditor may 
require a cosigner, guarantor, endorser, or similar partie--but cannot 
require that it be the spouse. (See commentary to Sec. 202.7(d)(5) and 
(6).)

                            Paragraph 7(d)(1)

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

                            Paragraph 7(d)(2)

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

[[Page 59]]

    2. Need for signature--reasonable belief. A creditor's reasonable 
belief as to what instruments need to be signed by a person other than 
the applicant should be supported by a thorough review of pertinent 
statutory and decisional law or an opinion of the state attorney 
general.

                            Paragraph 7(d)(3)

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

                            Paragraph 7(d)(4)

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

                            Paragraph 7(d)(5)

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

                            Paragraph 7(d)(6)

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

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credit-related casualty insurance or credit life, health, accident, or 
disability insurance is offered or provided to an applicant does not 
violate Regulation B.
    2. Insurance information. A creditor may obtain information about an 
applicant's age, sex, or marital status for insurance purposes. The 
information may only be used for determining eligibility and premium 
rates for insurance, however, and not in making the credit decision.

             Section 202.8--Special Purpose Credit Programs

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

                      Section 202.9--Notifications

    1. Use of the term adverse action. The regulation does not require 
that a creditor use the term adverse action in communicating to an 
applicant that a request for an extension of credit has not been 
approved. In notifying an

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applicant of adverse action as defined by Sec. 202.2(c)(1), a creditor 
may use any words or phrases that describe the action taken on the 
application.
    2. Expressly withdrawn applications. When an applicant expressly 
withdraws a credit application, the creditor is not required to comply 
with the notification requirements under Sec. 202.9. (The creditor must 
comply, however, with the record retention requirements of the 
regulation. See Sec. 202.12(b)(3).)
    3. When notification occurs. Notification occurs when a creditor 
delivers or mails a notice to the applicant's last known address or, in 
the case of an oral notification, when the creditor communicates the 
credit decision to the applicant.
    4. Location of notice. The notifications required under Sec. 202.9 
may appear on either or both sides of a form or letter.
    5. Prequalification requests. Whether a creditor must provide a 
notice of action taken for a prequalification request depends on the 
creditor's response to the request, as discussed in comment 2(f)-3. For 
instance, a creditor may treat the request as an inquiry if the creditor 
evaluates specific information about the consumer and tells the consumer 
the loan amount, rate, and other terms of credit the consumer could 
qualify for under various loan programs, explaining the process the 
consumer must follow to submit a mortgage application and the 
information the creditor will analyze in reaching a credit decision. On 
the other hand, a creditor has treated a request as an application, and 
is subject to the adverse action notice requirements of Sec. 202.9 if, 
after evaluating information, the creditor decides that it will not 
approve the request and communicates that decision to the consumer. For 
example, if the creditor tells the consumer that it would not approve an 
application for a mortgage because of a bankruptcy in the consumer's 
record, the creditor has denied an application for credit.
    9(a) Notification of action taken, ECOA notice, and statement of 
specific reasons.

                            Paragraph 9(a)(1)

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

                            Paragraph 9(a)(3)

    1. Coverage. In determining which rules in this paragraph apply to a 
given business credit application, a creditor may rely on the 
applicant's assertion about the revenue size of the business. 
(Applications to start a business are governed by the rules in Sec. 
202.9(a)(3)(i).) If an applicant applies for credit as a sole 
proprietor, the revenues of the sole proprietorship will determine which 
rules govern the application. However, if an applicant applies for 
business credit as an individual, the rules in Sec. 202.9(a)(3)(i) 
apply unless the application is for trade or similar credit.
    2. Trade credit. The term trade credit generally is limited to a 
financing arrangement that involves a buyer and a seller--such as a 
supplier who finances the sale of equipment, supplies, or inventory; it 
does not apply to an extension of credit by a bank or other financial 
institution for the financing of such items.
    3. Factoring. Factoring refers to a purchase of accounts receivable, 
and thus is not subject to the Act or regulation. If there is a

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credit extension incident to the factoring arrangement, the notification 
rules in Sec. 202.9(a)(3)(ii) apply, as do other relevant sections of 
the Act and regulation.
    4. Manner of compliance. In complying with the notice provisions of 
the Act and regulation, creditors offering business credit may follow 
the rules governing consumer credit. Similarly, creditors may elect to 
treat all business credit the same (irrespective of revenue size) by 
providing notice in accordance with Sec. 202.9(a)(3)(i).
    5. Timing of notification. A creditor subject to Sec. 
202.9(a)(3)(ii)(A) is required to notify a business credit applicant, 
orally or in writing, of action taken on an application within a 
reasonable time of receiving a completed application. Notice provided in 
accordance with the timing requirements of Sec. 202.9(a)(1) is deemed 
reasonable in all instances.
    9(b) Form of ECOA notice and statement of specific reasons.

                            Paragraph 9(b)(1)

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

                            Paragraph 9(b)(2)

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

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request because of an automatic-denial factor, the creditor must 
disclose that specific factor.
    9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure of 
the principal reasons for denying or taking other adverse action on an 
application for an extension of credit. The Fair Credit Reporting Act 
(FCRA) requires a creditor to disclose when it has based its decision in 
whole or in part on information from a source other than the applicant 
or its own files. Disclosing that a credit report was obtained and used 
in the denial of the application, as the FCRA requires, does not satisfy 
the ECOA requirement to disclose specific reasons. For example, if the 
applicant's credit history reveals delinquent credit obligations and the 
application is denied for that reason, to satisfy Sec. 202.9(b)(2) the 
creditor must disclose that the application was denied because of the 
applicant's delinquent credit obligations. To satisfy the FCRA 
requirement, the creditor must also disclose that a credit report was 
obtained and used in the denial of the application. Sample forms C-1 
through C-5 of Appendix C of the regulation provide for the two 
disclosures.
    9(c) Incomplete applications.

                            Paragraph 9(c)(1)

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

                            Paragraph 9(c)(2)

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

                            Paragraph 9(c)(3)

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

            Section 202.10--Furnishing of Credit Information

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

[[Page 64]]

    2. Request to change designation of account. A request to change the 
manner in which information concerning an account is furnished does not 
alter the legal liability of either spouse on the account and does not 
require a creditor to change the name in which the account is 
maintained.

                  Section 202.11--Relation to State Law

    11(a) Inconsistent state laws.
    1. Preemption determination--New York. The Board has determined that 
the following provisions in the state law of New York are preempted by 
the federal law, effective November 11, 1988:
    i. Article 15, section 296a(1)(b)--Unlawful discriminatory practices 
in relation to credit on the basis of race, creed, color, national 
origin, age, sex, marital status, or disability. This provision is 
preempted to the extent that it bars taking a prohibited basis into 
account when establishing eligibility for certain special-purpose credit 
programs.
    ii. Article 15, section 296a(1)(c)'Unlawful discriminatory practice 
to make any record or inquiry based on race, creed, color, national 
origin, age, sex, marital status, or disability. This provision is 
preempted to the extent that it bars a creditor from requesting and 
considering information regarding the particular characteristics (for 
example, race, national origin, or sex) required for eligibility for 
special-purpose credit programs.
    2. Preemption determination--Ohio. The Board has determined that the 
following provision in the state law of Ohio is preempted by the federal 
law, effective July 23, 1990:
    i. Section 4112.021(B)(1)--Unlawful discriminatory practices in 
credit transactions. This provision is preempted to the extent that it 
bars asking or favorably considering the age of an elderly applicant; 
prohibits the consideration of age in a credit scoring system; permits 
without limitation the consideration of age in real estate transactions; 
and limits the consideration of age in special-purpose credit programs 
to certain government-sponsored programs identified in the state law.

                    Section 202.12--Record Retention

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

                           Paragraph 12(b)(3)

    1. Withdrawn and brokered applications. In most cases, the 25-month 
retention period for applications runs from the date a notification is 
sent to the applicant granting or denying the credit requested. In 
certain transactions, a creditor is not obligated to provide a notice of 
the action taken. (See, for example, comment 9-2.) In such cases, the 
25-month requirement runs from the date of application, as when:
    i. An application is withdrawn by the applicant.
    ii. An application is submitted to more than one creditor on behalf 
of the applicant, and the application is approved by one of the other 
creditors.
    12(b)(6) Self-tests
    1. The rule requires all written or recorded information about a 
self-test to be retained for 25 months after a self-test has been 
completed. For this purpose, a self-test is completed after the creditor 
has obtained the results and made a determination about what corrective 
action, if any, is appropriate. Creditors are required to retain 
information about the scope of the self-test, the methodology used and 
time period covered by the self-test, the report or results of the self-
test including any analysis or conclusions, and any corrective action 
taken in response to the self-test.
    12(b)(7) Preapplication marketing information.
    1. Prescreened credit solicitations. The rule requires creditors to 
retain copies of prescreened credit solicitations. For purposes of this 
regulation, a prescreened solicitation is an ``offer of credit'' as 
described in 15 U.S.C. 1681a(1) of the Fair Credit Reporting Act. A 
creditor complies with this rule if it retains a copy of each 
solicitation mailing

[[Page 65]]

that contains different terms, such as the amount of credit offered, 
annual percentage rate, or annual fee.
    2. List of criteria. A creditor must retain the list of criteria 
used to select potential recipients. This includes the criteria used by 
the creditor both to determine the potential recipients of the 
particular solicitation and to determine who will actually be offered 
credit.
    3. Correspondence. A creditor may retain correspondence relating to 
consumers' complaints about prescreened solicitations in any manner that 
is reasonably accessible and is understandable to examiners. There is no 
requirement to establish a separate database or set of files for such 
correspondence, or to match consumer complaints with specific 
solicitation programs.

           Section 202.13--Information for Monitoring Purposes

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

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203), which generally requires creditors to report, among other things, 
the sex and race of an applicant on brokered applications or 
applications received through a correspondent.
    6. Inadvertent notation. If a creditor inadvertently obtains the 
monitoring information in a dwelling-related transaction not covered by 
Sec. 202.13, the creditor may process and retain the application 
without violating the regulation.
    13(c) Disclosure to applicants.
    1. Procedures for providing disclosures. The disclosure to an 
applicant regarding the monitoring information may be provided in 
writing. Appendix B contains a sample disclosure. A creditor may devise 
its own disclosure so long as it is substantially similar. The creditor 
need not orally request the monitoring information if it is requested in 
writing.
    13(d) Substitute monitoring program.
    1. Substitute program. An enforcement agency may adopt, under its 
established rulemaking or enforcement procedures, a program requiring 
creditors under its jurisdiction to collect information in addition to 
information required by this section.

          Section 202.14--Rules on Providing Appraisal Reports

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

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

    15(a) General rules.
    15(a)(1) Voluntary self-testing and correction.
    1. Activities required by any governmental authority are not 
voluntary self-tests. A governmental authority includes both 
administrative and judicial authorities for federal, state, and local 
governments.
    15(a)(2) Corrective action required.
    1. To qualify for the privilege, appropriate corrective action is 
required when the results of a self-test show that it is more likely 
than not that there has been a violation of the ECOA or this regulation. 
A self-test is also privileged when it identifies no violations.
    2. In some cases, the issue of whether certain information is 
privileged may arise before the self-test is complete or corrective 
actions are fully under way. This would not necessarily prevent a 
creditor from asserting the privilege. In situations where the self-test 
is not complete, for the privilege to apply the lender must satisfy the 
regulation's requirements within a reasonable period of time. To assert 
the privilege where the self-test shows a likely violation, the rule 
requires, at a minimum, that the creditor establish a plan for 
corrective action and a method to demonstrate progress in implementing 
the plan. Creditors must take appropriate corrective action on a timely 
basis after the results of the self-test are known.
    3. A creditor's determination about the type of corrective action 
needed, or a finding that no corrective action is required, is not

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conclusive in determining whether the requirements of this paragraph 
have been satisfied. If a creditor's claim of privilege is challenged, 
an assessment of the need for corrective action or the type of 
corrective action that is appropriate must be based on a review of the 
self-testing results, which may require an in camera inspection of the 
privileged documents.
    15(a)(3) Other privileges.
    1. A creditor may assert the privilege established under this 
section in addition to asserting any other privilege that may apply, 
such as the attorney-client privilege or the work-product privilege. 
Self-testing data may be privileged under this section whether or not 
the creditor's assertion of another privilege is upheld.
    15(b) Self-test defined.
    15(b)(1) Definition.

                          Paragraph 15(b)(1)(i)

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

                         Paragraph 15(b)(1)(ii)

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

                          Paragraph 15(b)(3)(i)

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

                         Paragraph 15(b)(3)(ii)

    1. Property appraisal reports, minutes of loan committee meetings or 
other documents reflecting the basis for a decision to approve or deny 
an application, loan policies or procedures, underwriting standards, and 
broker compensation records are examples of the types of records that 
are not privileged. If a creditor arranges for testers to submit loan 
applications for processing, the records are not related to actual 
credit transactions for purposes of this paragraph and may be privileged 
self-testing records.
    15(c) Appropriate corrective action.
    1. The rule only addresses the corrective actions required for a 
creditor to take advantage of the privilege in this section. A creditor 
may be required to take other actions or provide additional relief if a 
formal finding of discrimination is made.
    15(c)(1) General requirement.
    1. Appropriate corrective action is required even though no 
violation has been formally adjudicated or admitted by the creditor. In 
determining whether it is more likely than not that a violation 
occurred, a creditor must treat testers as if they are actual applicants 
for credit. A creditor may not refuse to take appropriate corrective 
action under this section because the self-test used fictitious loan 
applicants. The fact that a tester's agreement with the creditor waives 
the tester's legal right to assert a violation does not eliminate the 
requirement for the creditor to take corrective action, although no 
remedial relief for the tester is required under paragraph 15(c)(3).

[[Page 68]]

    15(c)(2) Determining the scope of appropriate corrective action.
    1. Whether a creditor has taken or is taking corrective action that 
is appropriate will be determined on a case-by-case basis. Generally, 
the scope of the corrective action that is needed to preserve the 
privilege is governed by the scope of the self-test. For example, a 
creditor that self-tests mortgage loans and discovers evidence of 
discrimination may focus its corrective actions on mortgage loans, and 
is not required to expand its testing to other types of loans.
    2. In identifying the policies or practices that are a likely cause 
of the violation, a creditor might identify inadequate or improper 
lending policies, failure to implement established policies, employee 
conduct, or other causes. The extent and scope of a likely violation may 
be assessed by determining which areas of operations are likely to be 
affected by those policies and practices, for example, by determining 
the types of loans and stages of the application process involved and 
the branches or offices where the violations may have occurred.
    3. Depending on the method and scope of the self-test and the 
results of the test, appropriate corrective action may include one or 
more of the following:
    i. If the self-test identifies individuals whose applications were 
inappropriately processed, offering to extend credit if the application 
was improperly denied and compensating such persons for out-of-pocket 
costs and other compensatory damages;
    ii. Correcting institutional policies or procedures that may have 
contributed to the likely violation, and adopting new policies as 
appropriate;
    iii. Identifying and then training and/or disciplining the employees 
involved;
    iv. Developing outreach programs, marketing strategies, or loan 
products to serve more effectively segments of the lender's markets that 
may have been affected by the likely discrimination; and
    v. Improving audit and oversight systems to avoid a recurrence of 
the likely violations.
    15(c)(3) Types of relief.

                         Paragraph 15(c)(3)(ii)

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

                         Paragraph 15(c)(3)(iii)

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

                          Paragraph 15(d)(2)(i)

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

                         Paragraph 15(d)(2)(ii)

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

[[Page 69]]

                         Paragraph 15(d)(2)(iii)

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

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

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

         Section 202.16--Enforcement, Penalties, and Liabilities

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

                   Appendix B--Model Application Forms

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

                  Appendix C--Sample Notification Forms

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

[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 72 FR 63451, Nov. 9, 
2007]

    Effective Date Note: At 72 FR 71057, Dec. 14, 2007, Supplement I to 
part 202, in Section 202.4--General Rules, Paragraph (4)(d), was amended 
by revising paragraph 2, effective Jan. 14, 2008. For the convenience of 
the user, the revised text is set forth as follows:



      Sec. Supplement I To Part 202--Official Staff Interpretations

                                * * * * *

                      Section 202.4--General Rules

                                * * * * *

                            Paragraph (4)(d)

                                * * * * *

    2. Form of disclosures. Whether the disclosures required to be on or 
with an application must be in electronic form depends upon the 
following:
    i. If an applicant accesses a credit application electronically 
(other than as described under ii below), such as online at a home 
computer, the creditor must provide the disclosures in electronic form 
(such as with the application form on its website) in order to meet the 
requirement to provide disclosures

[[Page 70]]

in a timely manner on or with the application. If the creditor instead 
mailed paper disclosures to the applicant, this requirement would not be 
met.
    ii. In contrast, if an applicant is physically present in the 
creditor's office, and accesses a credit application electronically, 
such as via a terminal or kiosk (or if the applicant uses a terminal or 
kiosk located on the premises of an affiliate or third party that has 
arranged with the creditor to provide applications to consumers), the 
creditor may provide disclosures in either electronic or paper form, 
provided the creditor complies with the timing, delivery, and 
retainability requirements of the regulation.

                                * * * * *



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




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

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

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

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



Sec. 203.1  Authority, purpose, and scope.

    (a) Authority. This regulation is issued by the Board of Governors 
of the Federal Reserve System (``Board'') pursuant to the Home Mortgage 
Disclosure Act (``HMDA'') (12 U.S.C. 2801 et seq.), as amended. The 
information-collection requirements have been approved by the U.S. 
Office of Management and Budget (``OMB'') under 44 U.S.C. 3501 et seq. 
and have been assigned OMB numbers for institutions reporting data to 
the Office of the Comptroller of the Currency (1557-0159), the Federal 
Deposit Insurance Corporation (3064-0046), the Office of Thrift 
Supervision (1550-0021), the Federal Reserve System (7100-0247), and the 
Department of Housing and Urban Development (``HUD'') (2502-0529). A 
number for the National Credit Union Administration is pending.
    (b) Purpose. (1) This regulation implements the Home Mortgage 
Disclosure Act, which is intended to provide the public with loan data 
that can be used:
    (i) To help determine whether financial institutions are serving the 
housing needs of their communities;
    (ii) To assist public officials in distributing public-sector 
investment so as to attract private investment to areas where it is 
needed; and
    (iii) To assist in identifying possible discriminatory lending 
patterns and enforcing antidiscrimination statutes.
    (2) Neither the act nor this regulation is intended to encourage 
unsound lending practices or the allocation of credit.
    (c) Scope. This regulation applies to certain financial 
institutions, including banks, savings associations, credit unions, and 
other mortgage lending institutions, as defined in Sec. 203.2(e). The 
regulation requires an institution to report data to its supervisory 
agency about home purchase loans, home improvement loans, and 
refinancings that it originates or purchases, or for which it receives 
applications; and to disclose certain data to the public.



Sec. 203.2  Definitions.

    In this regulation:
    (a) Act means the Home Mortgage Disclosure Act (``HMDA'') (12 U.S.C. 
2801 et seq.), as amended.
    (b) Application--(1) In general. Application means an oral or 
written request for a home purchase loan, a home improvement loan, or a 
refinancing that is made in accordance with procedures used by a 
financial institution for the type of credit requested.
    (2) Preapproval programs. A request for preapproval for a home 
purchase loan is an application under paragraph (b)(1) of this section 
if the request is reviewed under a program in which the financial 
institution, after a comprehensive analysis of the creditworthiness of 
the applicant, issues a written commitment to the applicant valid for a 
designated period of time to extend a home purchase loan up to a 
specified amount. The written commitment may not be subject to 
conditions other than:

[[Page 71]]

    (i) Conditions that require the identification of a suitable 
property;
    (ii) Conditions that require that no material change has occurred in 
the applicant's financial condition or creditworthiness prior to 
closing; and
    (iii) Limited conditions that are not related to the financial 
condition or creditworthiness of the applicant that the lender 
ordinarily attaches to a traditional home mortgage application (such as 
certification of a clear termite inspection).
    (c) Branch office means:
    (1) Any office of a bank, savings association, or credit union that 
is approved as a branch by a federal or state supervisory agency, but 
excludes free-standing electronic terminals such as automated teller 
machines; and
    (2) Any office of a for-profit mortgage-lending institution (other 
than a bank, savings association, or credit union) that takes 
applications from the public for home purchase loans, home improvement 
loans, or refinancings. A for-profit mortgage-lending institution is 
also deemed to have a branch office in an MSA or in a Metropolitan 
Division, if, in the preceding calendar year, it received applications 
for, originated, or purchased five or more home purchase loans, home 
improvement loans, or refinancings related to property located in that 
MSA or Metropolitan Division, respectively.
    (d) Dwelling means a residential structure (whether or not attached 
to real property) located in a state of the United States of America, 
the District of Columbia, or the Commonwealth of Puerto Rico. The term 
includes an individual condominium unit, cooperative unit, or mobile or 
manufactured home.
    (e) Financial institution means:
    (1) A bank, savings association, or credit union that:
    (i) On the preceding December 31 had assets in excess of the asset 
threshold established and published annually by the Board for coverage 
by the act, based on the year-to-year change in the average of the 
Consumer Price Index for Urban Wage Earners and Clerical Workers, not 
seasonally adjusted, for each twelve month period ending in November, 
with rounding to the nearest million;
    (ii) On the preceding December 31, had a home or branch office in an 
MSA;
    (iii) In the preceding calendar year, originated at least one home 
purchase loan (excluding temporary financing such as a construction 
loan) or refinancing of a home purchase loan, secured by a first lien on 
a one-to four-family dwelling; and
    (iv) Meets one or more of the following three criteria:
    (A) The institution is federally insured or regulated;
    (B) The mortgage loan referred to in paragraph (e)(1)(iii) of this 
section was insured, guaranteed, or supplemented by a federal agency; or
    (C) The mortgage loan referred to in paragraph (e)(1)(iii) of this 
section was intended by the institution for sale to Fannie Mae or 
Freddie Mac; and
    (2) A for-profit mortgage-lending institution (other than a bank, 
savings association, or credit union) that:
    (i) In the preceding calendar year, either:
    (A) Originated home purchase loans, including refinancings of home 
purchase loans, that equaled at least 10 percent of its loan-origination 
volume, measured in dollars; or
    (B) Originated home purchase loans, including refinancings of home 
purchase loans, that equaled at least $25 million; and
    (ii) On the preceding December 31, had a home or branch office in an 
MSA; and
    (iii) Either:
    (A) On the preceding December 31, had total assets of more than $10 
million, counting the assets of any parent corporation; or
    (B) In the preceding calendar year, originated at least 100 home 
purchase loans, including refinancings of home purchase loans.
    (f) Home-equity line of credit means an open-end credit plan secured 
by a dwelling as defined in Regulation Z (Truth in Lending), 12 CFR part 
226.
    (g) Home improvement loan means:
    (1) A loan secured by a lien on a dwelling that is for the purpose, 
in whole or in part, of repairing, rehabilitating, remodeling, or 
improving a dwelling or the real property on which it is located; and

[[Page 72]]

    (2) A non-dwelling secured loan that is for the purpose, in whole or 
in part, of repairing, rehabilitating, remodeling, or improving a 
dwelling or the real property on which it is located, and that is 
classified by the financial institution as a home improvement loan.
    (h) Home purchase loan means a loan secured by and made for the 
purpose of purchasing a dwelling.
    (i) Manufactured home means any residential structure as defined 
under regulations of the Department of Housing and Urban Development 
establishing manufactured home construction and safety standards (24 CFR 
3280.2).
    (j)(1) Metropolitan Statistical Area or MSA means a metropolitan 
statistical area as defined by the U.S. Office of Management and Budget.
    (2) Metropolitan Division or MD means a metropolitan division of an 
MSA, as defined by the U.S. Office of Management and Budget.
    (k) Refinancing means a new obligation that satisfies and replaces 
an existing obligation by the same borrower, in which:
    (1) For coverage purposes, the existing obligation is a home 
purchase loan (as determined by the lender, for example, by reference to 
available documents; or as stated by the applicant), and both the 
existing obligation and the new obligation are secured by first liens on 
dwellings; and
    (2) For reporting purposes, both the existing obligation and the new 
obligation are secured by liens on dwellings.

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



Sec. 203.3  Exempt institutions.

    (a) Exemption based on state law. (1) A state-chartered or state-
licensed financial institution is exempt from the requirements of this 
regulation if the Board determines that the institution is subject to a 
state disclosure law that contains requirements substantially similar to 
those imposed by this regulation and that contains adequate provisions 
for enforcement.
    (2) Any state, state-chartered or state-licensed financial 
institution, or association of such institutions, may apply to the Board 
for an exemption under paragraph (a) of this section.
    (3) An institution that is exempt under paragraph (a) of this 
section shall use the disclosure form required by its state law and 
shall submit the data required by that law to its state supervisory 
agency for purposes of aggregation.
    (b) Loss of exemption. An institution losing a state-law exemption 
under paragraph (a) of this section shall comply with this regulation 
beginning with the calendar year following the year for which it last 
reported loan data under the state disclosure law.



Sec. 203.4  Compilation of loan data.

    (a) Data format and itemization. A financial institution shall 
collect data regarding applications for, and originations and purchases 
of, home purchase loans, home improvement loans, and refinancings for 
each calendar year. An institution is required to collect data regarding 
requests under a preapproval program (as defined in Sec. 203.2(b)) only 
if the preapproval request is denied or results in the origination of a 
home purchase loan. All reportable transactions shall be recorded, 
within thirty calendar days after the end of the calendar quarter in 
which final action is taken (such as origination or purchase of a loan, 
or denial or withdrawal of an application), on a register in the format 
prescribed in Appendix A of this part. The data recorded shall include 
the following items:
    (1) An identifying number for the loan or loan application, and the 
date the application was received.
    (2) The type of loan or application.
    (3) The purpose of the loan or application.
    (4) Whether the application is a request for preapproval and whether 
it resulted in a denial or in an origination.
    (5) The property type to which the loan or application relates.
    (6) The owner-occupancy status of the property to which the loan or 
application relates.
    (7) The amount of the loan or the amount applied for.
    (8) The type of action taken, and the date.
    (9) The location of the property to which the loan or application 
relates, by MSA or by Metropolitan Division,

[[Page 73]]

by state, by county, and by census tract, if the institution has a home 
or branch office in that MSA or Metropolitan Division.
    (10) The ethnicity, race, and sex of the applicant or borrower, and 
the gross annual income relied on in processing the application.
    (11) The type of entity purchasing a loan that the institution 
originates or purchases and then sells within the same calendar year 
(this information need not be included in quarterly updates).
    (12) For originated loans subject to Regulation Z, 12 CFR part 226, 
the difference between the loan's annual percentage rate (APR) and the 
yield on Treasury securities having comparable periods of maturity, if 
that difference is equal to or greater than 3 percentage points for 
loans secured by a first lien on a dwelling, or equal to or greater than 
5 percentage points for loans secured by a subordinate lien on a 
dwelling. The lender shall use the yield on Treasury securities as of 
the 15th day of the preceding month if the rate is set between the 1st 
and the 14th day of the month and as of the 15th day of the current 
month if the rate is set on or after the 15th day, as prescribed in 
appendix A to this part.
    (13) Whether the loan is subject to the Home Ownership and Equity 
Protection Act of 1994.
    (14) The lien status of the loan or application (first lien, 
subordinate lien, or not secured by a lien on a dwelling).
    (b) Collection of data on ethnicity, race, sex, and income. (1) A 
financial institution shall collect data about the ethnicity, race, and 
sex of the applicant or borrower as prescribed in Appendix B of this 
part.
    (2) Ethnicity, race, sex, and income data may but need not be 
collected for loans purchased by the financial institution.
    (c) Optional data. A financial institution may report:
    (1) The reasons it denied a loan application;
    (2) Requests for preapproval that are approved by the institution 
but not accepted by the applicant; and
    (3) Home-equity lines of credit made in whole or in part for the 
purpose of home improvement or home purchase.
    (d) Excluded data. A financial institution shall not report:
    (1) Loans originated or purchased by the financial institution 
acting in a fiduciary capacity (such as trustee);
    (2) Loans on unimproved land;
    (3) Temporary financing (such as bridge or construction loans);
    (4) The purchase of an interest in a pool of loans (such as 
mortgage-participation certificates, mortgage-backed securities, or real 
estate mortgage investment conduits);
    (5) The purchase solely of the right to service loans; or
    (6) Loans acquired as part of a merger or acquisition, or as part of 
the acquisition of all of the assets and liabilities of a branch office 
as defined in Sec. 203.2(c)(1).
    (e) Data reporting for banks and savings associations that are 
required to report data on small business, small farm, and community 
development lending under CRA. Banks and savings associations that are 
required to report data on small business, small farm, and community 
development lending under regulations that implement the Community 
Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.) shall also collect the 
location of property located outside MSAs and Metropolitan Divisions in 
which the institution has a home or branch office, or outside any MSA.

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



Sec. 203.5  Disclosure and reporting.

    (a) Reporting to agency. (1) By March 1 following the calendar year 
for which the loan data are compiled, a financial institution shall send 
its complete loan/application register to the agency office specified in 
Appendix A of this part. The institution shall retain a copy for its 
records for at least three years.
    (2) A subsidiary of a bank or savings association shall complete a 
separate loan/application register. The subsidiary shall submit the 
register, directly or through its parent, to the agency that supervises 
its parent.
    (b) Public disclosure of statement. (1) The Federal Financial 
Institutions Examination Council (``FFIEC'') will prepare a disclosure 
statement from the

[[Page 74]]

data each financial institution submits.
    (2) An institution shall make its disclosure statement (prepared by 
the FFIEC) available to the public at its home office no later than 
three business days after receiving it from the FFIEC.
    (3) In addition, an institution shall either:
    (i) Make its disclosure statement available to the public, within 
ten business days of receiving it, in at least one branch office in each 
other MSA and each other Metropolitan Division where the institution has 
offices (the disclosure statement need only contain data relating to the 
MSA or Metropolitan Division where the branch is located); or
    (ii) Post the address for sending written requests in the lobby of 
each branch office in other MSAs and Metropolitan Divisions where the 
institution has offices; and mail or deliver a copy of the disclosure 
statement within fifteen calendar days of receiving a written request 
(the disclosure statement need only contain data relating to the MSA or 
Metropolitan Division for which the request is made). Including the 
address in the general notice required under paragraph (e) of this 
section satisfies this requirement.
    (c) Public disclosure of modified loan/application register. A 
financial institution shall make its loan/application register available 
to the public after removing the following information regarding each 
entry: the application or loan number, the date that the application was 
received, and the date action was taken. An institution shall make its 
modified register available following the calendar year for which the 
data are compiled, by March 31 for a request received on or before March 
1, and within thirty calendar days for a request received after March 1. 
The modified register need only contain data relating to the MSA or 
Metropolitan Division for which the request is made.
    (d) Availability of data. A financial institution shall make its 
modified register available to the public for a period of three years 
and its disclosure statement available for a period of five years. An 
institution shall make the data available for inspection and copying 
during the hours the office is normally open to the public for business. 
It may impose a reasonable fee for any cost incurred in providing or 
reproducing the data.
    (e) Notice of availability. A financial institution shall post a 
general notice about the availability of its HMDA data in the lobby of 
its home office and of each branch office located in an MSA and 
Metropolitan Division. An institution shall provide promptly upon 
request the location of the institution's offices where the statement is 
available for inspection and copying, or it may include the location in 
the lobby notice.
    (f) Loan aggregation and central data depositories. Using the loan 
data submitted by financial institutions, the FFIEC will produce reports 
for individual institutions and reports of aggregate data for each MSA 
and Metropolitan Division, showing lending patterns by property 
location, age of housing stock, and income level, sex, ethnicity, and 
race. These reports will be available to the public at central data 
depositories located in each MSA and Metropolitan Division. A listing of 
central data depositories can be obtained from the Federal Financial 
Institutions Examination Council, Washington, DC 20006.

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



Sec. 203.6  Enforcement.

    (a) Administrative enforcement. A violation of the Act or this 
regulation is subject to administrative sanctions as provided in section 
305 of the Act, including the imposition of civil money penalties, where 
applicable. Compliance is enforced by the agencies listed in section 
305(b) of the Act (12 U.S.C. 2804(b).
    (b) Bona fide errors. (1) An error in compiling or recording loan 
data is not a violation of the act or this regulation if the error was 
unintentional and occurred despite the maintenance of procedures 
reasonably adapted to avoid such errors.
    (2) An incorrect entry for a census tract number is deemed a bona 
fide error, and is not a violation of the act or this regulation, 
provided that the

[[Page 75]]

institution maintains procedures reasonably adapted to avoid such 
errors.
    (3) If an institution makes a good-faith effort to record all data 
concerning covered transactions fully and accurately within thirty 
calendar days after the end of each calendar quarter, and some data are 
nevertheless inaccurate or incomplete, the error or omission is not a 
violation of the act or this regulation provided that the institution 
corrects or completes the information prior to submitting the loan/
application register to its regulatory agency.



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

                     Paperwork Reduction Act Notice

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

       I. Instructions for Completion of Loan/Application Regsiter

                   A. Application or Loan Information

                      1. Application or Loan Number

    a. Enter an identifying loan number that can be used later to 
retrieve the loan or application file. It can be any number of your 
institution's choosing (not exceeding 25 characters). You may use 
letters, numerals, or a combination of both.

                      2. Date Application Received

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

                     3. Type of Loan or Application

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

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

                            4. Property Type

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

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

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

                    5. Purpose of Loan or Application

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

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

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

                           6. Owner Occupancy

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

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

    a. For purchased loans, use Code 1 unless the loan documents or 
application indicate that the property will not be owner-occupied as a 
principal residence.
    b. Use Code 2 for second homes or vacation homes, as well as for 
rental properties.
    c. Use Code 3 if the property to which the loan relates is a 
multifamily dwelling; is not located in an MSA; or is located in an MSA

[[Page 76]]

or an MD in which your institution has neither a home nor a branch 
office. Alternatively, at your institution's option, you may report the 
actual occupancy status, using Code 1 or 2 as applicable.

                             7. Loan Amount

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

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

    a. Enter code 2 if your institution has a covered preapproval 
program but the applicant does not request a preapproval.
    b. Enter code 3 if your institution does not have a preapproval 
program as defined in Sec. 203.2(b).
    c. Enter code 3 for applications or loans for home improvement or 
refinancing, and for purchased loans.

                             B. Action Taken

                            1. Type of Action

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

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

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

                            2. Date of Action

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

    C. Property Location. Except as otherwise provided, enter in these 
columns the applicable codes for the MSA, or the MD if the MSA

[[Page 77]]

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

                           2. State and County

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

                       7. Requests for Preapproval

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

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

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

                            1. Applicability

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

                  3. Ethnicity of Borrower or Applicant

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

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

                    4. Race of Borrower or Applicant

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

Code 1--American Indian or Alaska Native
Code 2--Asian
Code 3--Black or African American

[[Page 78]]

Code 4--Native Hawaiian or Other Pacific Islander
Code 5--White
Code 6--Information not provided by applicant in mail, Internet, or 
telephone application
Code 7--Not applicable
Code 8--No co-applicant

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

                     5. Sex of Borrower or Applicant

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

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

                                6. Income

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

                          E. Type of Purchaser

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

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

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

                          F. Reasons for Denial

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

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

    2. If your institution uses the model form for adverse action 
contained in the Appendix to Regulation B (Form C-1 in Appendix C, 
Sample Notification Form), use the foregoing codes as follows:
    a. Code 1 for: Income insufficient for amount of credit requested, 
and Excessive obligations in relation to income.
    b. Code 2 for: Temporary or irregular employment, and Length of 
employment.

[[Page 79]]

    c. Code 3 for: Insufficient number of credit references provided; 
Unacceptable type of credit references provided; No credit file; Limited 
credit experience; Poor credit performance with us; Delinquent past or 
present credit obligations with others; Garnishment, attachment, 
foreclosure, repossession, collection action, or judgment; and 
Bankruptcy.
    d. Code 4 for: Value or type of collateral not sufficient.
    e. Code 6 for: Unable to verify credit references; Unable to verify 
employment; Unable to verify income; and Unable to verify residence.
    f. Code 7 for: Credit application incomplete.
    g. Code 9 for: Length of residence; Temporary residence; and Other 
reasons specified on notice.

                         G. Pricing-Related Data

    1. Rate Spread
    a. For a home purchase loan, a refinancing, or a dwelling-secured 
home improvement loan that you originated, report the spread between the 
annual percentage rate (APR) and the applicable Treasury yield if the 
spread is equal to or greater than 3 percentage points for first-lien 
loans or 5 percentage points for subordinate-lien loans. To determine 
whether the rate spread meets this threshold, use the Treasury yield for 
securities of a comparable period of maturity as of the 15th day of a 
given month, depending on when the interest rate was set, and use the 
APR for the loan, as calculated and disclosed to the consumer under 
Sec. Sec. 226.6 or 226.18 of Regulation Z (12 CFR part 226). Use the 
15th day of a given month for any loan on which the interest rate was 
set on or after that 15th day through the 14th day of the next month. 
(For example, if the rate is set on September 17, 2004, use the Treasury 
yield as of September 15, 2004; if the interest rate is set on September 
3, 2004, use the Treasury yield as of August 15, 2004). To determine the 
applicable Treasury security yield, the financial institution must use 
the table published on the FFIEC's Web site (http://www.ffiec.gov/hmda) 
entitled ``Treasury Securities of Comparable Maturity under Regulation 
C.''
    b. If the loan is not subject to Regulation Z, or is a home 
improvement loan that is not dwelling-secured, or is a loan that you 
purchased, enter ``NA.''
    c. Enter ``NA'' in the case of an application that does not result 
in a loan origination.
    d. Enter the rate spread to two decimal places, and use a leading 
zero. For example, enter 03.29. If the difference between the APR and 
the Treasury yield is a figure with more than two decimal places, round 
the figure or truncate the digits beyond two decimal places.
    e. If the difference between the APR and the Treasury yield is less 
than 3 percentage points for a first-lien loan and less than 5 
percentage points for a subordinate-lien loan, enter ``NA.''
    2. Date the interest rate was set. The relevant date to use to 
determine the Treasury yield is the date on which the loan's interest 
rate was set by the financial institution for the final time before 
closing. If an interest rate is set pursuant to a ``lock-in'' agreement 
between the lender and the borrower, then the date on which the 
agreement fixes the interest rate is the date the rate was set. If a 
rate is re-set after a lock-in agreement is executed (for example, 
because the borrower exercises a float-down option or the agreement 
expires), then the relevant date is the date the rate is re-set for the 
final time before closing. If no lock-in agreement is executed, then the 
relevant date is the date on which the institution sets the rate for the 
final time before closing.

                             3. HOEPA Status

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

                             H. Lien Status

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

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

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

                    II. Federal Supervisory Agencies

    A. You are strongly encouraged to submit your loan/application 
register via Internet e-mail. If you elect to use this method of 
transmission and your institution is regulated by the Office of the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
the National Credit Union Administration, or the Office of Thrift 
Supervision, then you should submit your institution's files to the 
Internet e-mail address dedicated to that purpose by the Federal Reserve 
Board, which can be found on the Web

[[Page 80]]

site of the FFIEC. If your institution is regulated by one of the 
foregoing agencies and you elect to submit your data by regular mail, 
then use the following address: HMDA, Federal Reserve Board, Attention: 
HMDA Processing, (insert name of your institution's regulatory agency), 
20th & Constitution Ave, NW., MS N502, Washington, DC 20551-0001.
    B. If your institution is regulated by the Federal Reserve System, 
you should use the Internet e-mail or regular mail address of your 
district bank indicated on the Web site of the FFIEC. If your 
institution is regulated by the Department of Housing and Urban 
Development, then you should use the Internet e-mail or regular mail 
address indicated on the Web site of the FFIEC.

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



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

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

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

                             II. Procedures

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

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



             Sec. Supplement I to Part 203--Staff Commentary

                              Introduction

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

              Section 203.1--Authority, Purpose, and Scope

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

                       Section 203.2--Definitions

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

[[Page 87]]

the definition of an application does not include prequalification 
requests.
    2. Prequalification. A prequalification request is a request by a 
prospective loan applicant (other than a request for preapproval) for a 
preliminary determination on whether the prospective applicant would 
likely qualify for credit under an institution's standards, or for a 
determination on the amount of credit for which the prospective 
applicant would likely qualify. Some institutions evaluate 
prequalification requests through a procedure that is separate from the 
institution's normal loan application process; others use the same 
process. In either case, Regulation C does not require an institution to 
report prequalification requests on the HMDA/LAR, even though these 
requests may constitute applications under Regulation B for purposes of 
adverse action notices.
    3. Requests for preapproval. To be a covered preapproval program, 
the written commitment issued under the program must result from a full 
review of the creditworthiness of the applicant, including such 
verification of income, resources and other matters as is typically done 
by the institution as part of its normal credit evaluation program. In 
addition to conditions involving the identification of a suitable 
property and verification that no material change has occurred in the 
applicant's financial condition or creditworthiness, the written 
commitment may be subject only to other conditions (unrelated to the 
financial condition or creditworthiness of the applicant) that the 
lender ordinarily attaches to a traditional home mortgage application 
approval. These conditions are limited to conditions such as requiring 
an acceptable title insurance binder or a certificate indicating clear 
termite inspection, and, in the case where the applicant plans to use 
the proceeds from the sale of the applicant's present home to purchase a 
new home, a settlement statement showing adequate proceeds from the sale 
of the present home.
    2(c) Branch office. 1. Credit union. For purposes of Regulation C, a 
``branch'' of a credit union is any office where member accounts are 
established or loans are made, whether or not the office has been 
approved as a branch by a federal or state agency. (See 12 U.S.C. 1752.)
    2. Depository institution. A branch of a depository institution does 
not include a loan-production office, the office of an affiliate, or the 
office of a third party such as a loan broker. (But see Appendix A, 
paragraph I.C.6, which requires certain depository institutions to 
report property location even for properties located outside those MSAs 
or Metropolitan Divisions in which the institution has a home or branch 
office.)
    3. Nondepository institution. For a nondepository institution, 
``branch office'' does not include the office of an affiliate or other 
third party such as a loan broker. (But note that certain nondepository 
institutions must report property location even in MSAs or Metropolitan 
Divisions where they do not have a physical location.)
    2(d) Dwelling. 1. Coverage. The definition of ``dwelling'' is not 
limited to the principal or other residence of the applicant or 
borrower, and thus includes vacation or second homes and rental 
properties. A dwelling also includes a multifamily structure such as an 
apartment building.
    2. Exclusions. Recreational vehicles such as boats or campers are 
not dwellings for purposes of HMDA. Also excluded are transitory 
residences such as hotels, hospitals, and college dormitories--whose 
occupants have principal residences elsewhere.
    2(e) Financial institution. 1. General. An institution that met the 
test for coverage under HMDA in year 1, and then ceases to meet the test 
(for example, because its assets fall below the threshold on December 31 
of year 2) stops collecting HMDA data beginning with year 3. Similarly, 
an institution that did not meet the coverage test for a given year, and 
then meets the test in the succeeding year, begins collecting HMDA data 
in the calendar year following the year in which it meets the test for 
coverage. For example, a for-profit mortgage lending institution (other 
than a bank, savings association, or credit union) that, in year 1, 
falls below the thresholds specified in Sec. 203.2(e)(2)(ii)(A) and 
(B), but meets one of them in year 2, need not collect data in year 2, 
but begins collecting data in year 3.
    2. Adjustment of exemption threshold for depository institutions. 
For data collection in 2008, the asset-size exemption threshold is $37 
million. Depository institutions with assets at or below $37 million as 
of December 31, 2007 are exempt from collecting data for 2008.
    3. Coverage after a merger. Several scenarios of data-collection 
responsibilities for the calendar year of a merger are described below. 
Under all the scenarios, if the merger results in a covered institution, 
that institution must begin data collection January I of the following 
calendar year.
    i. Two institutions are not covered by Regulation C because of asset 
size. The institutions merge. No data collection is required for the 
year of the merger (even if the merger results in a covered 
institution).
    ii. A covered institution and an exempt institution merge. The 
covered institution is the surviving institution. For the year of the 
merger, data collection is required for the covered institution's 
transactions. Data collection is optional for transactions handled in 
offices of the previously exempt institution.
    iii. A covered institution and an exempt institution merge. The 
exempt institution is

[[Page 88]]

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

[[Page 89]]

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

                 Section 203.4--Compilation of Loan Data

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

[[Page 90]]

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

[[Page 91]]

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

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

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

               Section 203.5(a)--Disclosure and Reporting

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

[[Page 94]]

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

                   Home Mortgage Disclosure Act Notice

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

                       Section 203.6--Enforcement

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

[Reg. C, 67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43227, June 27, 
2002; 68 FR 31592, May 28, 2003; 68 FR 74833, Dec. 29, 2003; 69 FR 
77139, Dec. 27, 2004; 70 FR 75719, Dec. 21, 2005; 71 FR 77247, Dec. 26, 
2006; 72 FR 72235, Dec. 20, 2007]



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




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

                             Interpretations

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

[[Page 95]]

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

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



Sec. 204.1  Authority, purpose and scope.

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

[45 FR 56018, Aug. 22, 1980]



Sec. 204.2  Definitions.

    For purposes of this part, the following definitions apply unless 
otherwise specified:
    (a)(1) Deposit means:
    (i) The unpaid balance of money or its equivalent received or held 
by a depository institution in the usual course

[[Page 96]]

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

[[Page 97]]

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

[[Page 98]]

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

[[Page 99]]

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

    \1\ A time deposit, or a portion thereof, may be paid during the 
period when an early withdrawal penalty would otherwise be required 
under this part without imposing an early withdrawal penalty specified 
by this part:
    (a) Where the time deposit is maintained in an individual retirement 
account established in accordance with 26 U.S.C. 408 and is paid within 
seven days after establishment of the individual retirement account 
pursuant to 26 CFR 1.408-6(d)(4), where it is maintained in a Keogh 
(H.R. 10) plan, or where it is maintained in a 401(k) plan under 26 
U.S.C. 401(k); Provided that the depositor forfeits an amount at least 
equal to the simple interest earned on the amount withdrawn;
    (b) Where the depository institution pays all or a portion of a time 
deposit representing funds contributed to an individual retirement 
account or a Keogh (H.R.10) plan established pursuant to 26 U.S.C. 408 
or 26 U.S.C. 401 or to a 401(k) plan established pursuant to 26 U.S.C. 
401(k) when the individual for whose benefit the account is maintained 
attains age 59\1/2\ or is disabled (as defined in 26 U.S.C. 72(m)(7)) or 
thereafter;
    (c) Where the depository institution pays that portion of a time 
deposit on which federal deposit insurance has been lost as a result of 
the merger of two or more federally insured banks in which the depositor 
previously maintained separate time deposits, for a period of one year 
from the date of the merger;
    (d) Upon the death of any owner of the time deposit funds;
    (e) When any owner of the time deposit is determined to be legally 
incompetent by a court or other administrative body of competent 
jurisdiction; or
    (f) Where a time deposit is withdrawn within ten days after a 
specified maturity date even though the deposit contract provided for 
automatic renewal at the maturity date.
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    (A) Payable on a specified date not less than seven days after the 
date of deposit;
    (B) Payable at the expiration of a specified time not less than 
seven days after the date of deposit;
    (C) Payable only upon written notice that is actually required to be 
given by the depositor not less than seven days prior to withdrawal;
    (D) Held in club accounts (such as Christmas club accounts and 
vacation club accounts that are not maintained as savings deposits) that 
are deposited under written contracts providing that no withdrawal shall 
be made until a certain number of periodic deposits have been made 
during a period of not less than three months even though some of the 
deposits may be made within six days from the end of the period; or
    (E) Share certificates and certificates of indebtedness issued by 
credit unions, and certificate accounts and notice accounts issued by 
savings and loan associations;
    (ii) A savings deposit;
    (iii) An IBF time deposit meeting the requirements of Sec. 
204.8(a)(2); and
    (iv) Borrowings, regardless of maturity, represented by a promissory 
note, an acknowledgment of advance, or similar obligation described in 
Sec. 204.2(a)(1)(vii) that is issued to, or any bankers' acceptance 
(other than the type described in 12 U.S.C. 372) of the depository 
institution held by--
    (A) Any office located outside the United States of another 
depository institution or Edge or agreement corporation organized under 
the laws of the United States;
    (B) Any office located outside the United States of a foreign bank;
    (C) A foreign national government, or an agency or instrumentality 
thereof,\2\ engaged principally in activities which are ordinarily 
performed in the United States by governmental entities;
---------------------------------------------------------------------------

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

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

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

    (2) A time deposit may be represented by a transferable or 
nontransferable, or a negotiable or nonnegotiable, certificate, 
instrument, passbook, or statement, or by book entry or otherwise.

[[Page 100]]

    (d)(1) Savings deposit means a deposit or account with respect to 
which the depositor is not required by the deposit contract but may at 
any time be required by the depository institution to give written 
notice of an intended withdrawal not less than seven days before 
withdrawal is made, and that is not payable on a specified date or at 
the expiration of a specified time after the date of deposit. The term 
savings deposit includes a regular share account at a credit union and a 
regular account at a savings and loan association.
    (2) The term savings deposit also means: A deposit or account, such 
as an account commonly known as a passbook savings account, a statement 
savings account, or as a money market deposit account (MMDA), that 
otherwise meets the requirements of Sec. 204.2(d)(1) and from which, 
under the terms of the deposit contract or by practice of the depository 
institution, the depositor is permitted or authorized to make no more 
than six transfers and withdrawals, or a combination of such transfers 
and withdrawals, per calendar month or statement cycle (or similar 
period) of at least four weeks, to another account (including a 
transaction account) of the depositor at the same institution or to a 
third party by means of a preauthorized or automatic transfer, or 
telephonic (including data transmission) agreement, order or 
instruction, and no more than three of the six such transfers may be 
made by check, draft, debit card, or similar order made by the depositor 
and payable to third parties. A preauthorized transfer includes any 
arrangement by the depository institution to pay a third party from the 
account of a depositor upon written or oral instruction (including an 
order received through an automated clearing house (ACH)) or any 
arrangement by a depository institution to pay a third party from the 
account of the depositor at a predetermined time or on a fixed schedule. 
Such an account is not a transaction account by virtue of an arrangement 
that permits transfers for the purpose of repaying loans and associated 
expenses at the same depository institution (as originator or servicer) 
or that permits transfers of funds from this account to another account 
of the same depositor at the same institution or permits withdrawals 
(payments directly to the depositor) from the account when such 
transfers or withdrawals are made by mail, messenger, automated teller 
machine, or in person or when such withdrawals are made by telephone 
(via check mailed to the depositor) regardless of the number of such 
transfers or withdrawals.\4\
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    \4\ In order to ensure that no more than the permitted number of 
withdrawals or transfers are made, for an account to come within the 
definition in paragraph (d)(2) of this section, a depository institution 
must either:
    (a) Prevent withdrawals or transfers of funds from this account that 
are in excess of the limits established by paragraph (d)(2) of this 
section, or
    (b) Adopt procedures to monitor those transfers on an ex post basis 
and contact customers who exceed the established limits on more than an 
occasional basis.
    For customers who continue to violate those limits after they have 
been contacted by the depository institution, the depository institution 
must either close the account and place the funds in another account 
that the depositor is eligible to maintain, or take away the transfer 
and draft capacities of the account.
    An account that authorizes withdrawals or transfers in excess of the 
permitted number is a transaction account regardless of whether the 
authorized number of transactions are actually made. For accounts 
described in paragraph (d)(2) of this section, the institution at its 
option may use, on a consistent basis, either the date on the check, 
draft, or similar item, or the date the item is paid in applying the 
limits imposed by that section.
---------------------------------------------------------------------------

    (3) A deposit may continue to be classified as a savings deposit 
even if the depository institution exercises its right to require notice 
of withdrawal.
    (4) Savings deposit does not include funds deposited to the credit 
of the depository institution's own trust department where the funds 
involved are utilized to cover checks or drafts. Such funds are 
transaction accounts.
    (e) Transaction account means a deposit or account from which the 
depositor or account holder is permitted to make transfers or 
withdrawals by negotiable or transferable instrument, payment order of 
withdrawal, telephone transfer, or other similar device for the purpose 
of making payments or transfers to third persons or others or from which 
the depositor may make third party payments at an automated

[[Page 101]]

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

[[Page 102]]

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

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

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

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

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

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

    (B) For an Edge or Agreement Corporation, assets (including 
participations) acquired from its United States offices and held by its 
non-United States offices, by its IBF, by non-United States offices of 
its U.S. or foreign parent institution, or by non-United States offices 
of an affiliated Edge or Agreement Corporation; and
    (iii) Credit outstanding from its non-United States offices to 
United States residents (other than assets acquired and net balances due 
from its United

[[Page 103]]

States offices), except credit extended (A) from its non-United States 
offices in the aggregate amount of $100,000 or less to any United States 
resident, (B) by a non-United States office that at no time during the 
computation period had credit outstanding to United States residents 
exceeding $1 million, (C) to an international banking facility, or (D) 
to an institution that will be maintaining reserves on such credit 
pursuant to this part. Credit extended from non-United States offices or 
from IBFs to a foreign branch, office, subsidiary, affiliate of other 
foreign establishment (foreign affiliate) controlled by one or more 
domestic corporations is not regarded as credit extended to a United 
States resident if the proceeds will be used to finance the operations 
outside the United States of the borrower or of other foreign affiliates 
of the controlling domestic corporation(s).
    (2) For a United States branch or agency of a foreign bank, the sum, 
if positive, of the following:
    (i) Net balances due to its foreign bank (including offices thereof 
located outside the United States) and its international banking 
facility after deducting an amount equal to 8 per cent of the following: 
the United States branch's or agency's total assets less the sum of (A) 
cash items in process of collection; (B) unposted debits; (C) demand 
balances due from depository institutions organized under the laws of 
the United States and from other foreign banks; (D) balances due from 
foreign central banks; and (E) positive net balances due from its IBF, 
its foreign bank, and the foreign bank's United States and non-United 
States offices; and
    (ii) Assets (including participations) acquired from the United 
States branch or agency (other than assets required to be sold by 
Federal or State supervisory authorities) and held by its foreign bank 
(including offices thereof located outside the United States), by its 
parent holding company, by non-United States offices or an IBF of an 
affiliated Edge or Agreement Corporation, or by its IBFs.\8\
---------------------------------------------------------------------------

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

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

[[Page 104]]

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

[[Page 105]]

the number of shares voted for the election of directors, trustees or 
other persons exercising similar functions of a depository institution 
at the preceding election, or controls in any manner the election of a 
majority of the directors, trustees, or other persons exercising similar 
functions of a depository institution, or for the benefit of whose 
shareholders or members all or substantially all the capital stock of a 
depository institution is held by trustees.
    (r) United States means the States of the United States and the 
District of Columbia.
    (s) United States resident means (1) any individual residing (at the 
time of the transaction) in the United States; (2) any corporation, 
partnership, association or other entity organized in the United States 
(domestic corporation); and (3) any branch or office located in the 
United States of any entity that is not organized in the United States.
    (t) Any deposit that is payable only at an office located outside 
the United States means (1) a deposit of a United States resident \9\ 
that is in a denomination of $100,000 or more, and as to which the 
depositor is entitled, under the agreement with the institution, to 
demand payment only outside the United States or (2) a deposit of a 
person who is not a United States resident \9\ as to which the depositor 
is entitled, under the agreement with the institution, to demand payment 
only outside the United States.
---------------------------------------------------------------------------

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

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

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



Sec. 204.3  Computation and maintenance.

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

[[Page 106]]

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

[[Page 107]]

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

[[Page 108]]

    (2) $50,000, minus the depository institution's required charge-free 
band, if any. Any carryover not offset during the next period may not be 
carried over to subsequent periods.
    (i) Pass-through rules--(1) Procedure. (i) A nonmember depository 
institution, a U.S. branch or agency of a foreign bank, or an Edge or 
Agreement corporation required to maintain reserve balances (respondent) 
may select only one institution to pass through its required reserve 
balances, unless otherwise permitted by Federal Reserve Bank in whose 
district the respondent is located. Eligible institutions through which 
respondent required reserve balances may be passed (correspondents) are 
Federal Home Loan Banks, the National Credit Union Administration 
Central Liquidity Facility, and depository institutions, U.S. branches 
or agencies of foreign banks, and Edge and Agreement corporations that 
maintain required reserve balances at a Federal Reserve office. In 
addition, the Board reserves the right to permit other institutions, on 
a case-by-case basis, to serve as pass-through correspondents. The 
correspondent chosen must subsequently pass through the required reserve 
balances of its respondents directly to a Federal Reserve Bank. The 
correspondent placing funds with a Federal Reserve Bank on behalf of 
respondents will be responsible for account maintenance as described in 
paragraphs (i)(2) and (i)(3) of this section.
    (ii) Respondents or correspondents may institute, terminate, or 
change pass-through arrangements for the maintenance of required reserve 
balances by providing all documentation required for the establishment 
of the new arrangement or termination of the existing arrangement to the 
Federal Reserve Banks involved within the time period provided for such 
a change by those Reserve Banks.
    (2) Account maintenance. A correspondent that passes through 
required reserve balances of respondents shall maintain such balances, 
along with the correspondent's own required reserve balances (if any), 
in a single commingled account at the Federal Reserve Bank in whose 
District the correspondent is located, unless otherwise permitted by the 
Reserve Bank. The balances held by the correspondent in an account at a 
Reserve Bank are the property of the correspondent and represent a 
liability of the Reserve Bank solely to the correspondent, regardless of 
whether the funds represent the reserve balances of another institution 
that have been passed through the correspondent.
    (3) Responsibilities of parties. (i) Each individual depository 
institution, U.S. branch or agency of a foreign bank, or Edge or 
Agreement corporation is responsible for maintaining its required 
reserve balance either directly with a Federal Reserve Bank or through a 
pass-through correspondent.
    (ii) A pass-through correspondent shall be responsible for assuring 
the maintenance of the appropriate aggregate level of its respondents' 
required reserve balances. A Federal Reserve Bank will compare the total 
reserve balance required to be maintained in each account with the total 
actual reserve balance held in such account for purposes of determining 
required reserve deficiencies, imposing or waiving charges for 
deficiencies in required reserves, and for other reserve maintenance 
purposes. A charge for a deficiency in the aggregate level of the 
required reserve balance will be imposed by the Reserve Bank on the 
correspondent maintaining the account.
    (iii) Each correspondent is required to maintain detailed records 
for each of its respondents in a manner that permits Federal Reserve 
Banks to determine whether the respondent has provided a sufficient 
required reserve balance to the correspondent. A correspondent passing 
through a respondent's reserve balance shall maintain records and make 
such reports as the Board or Reserve Bank requires in order to insure 
the correspondent's compliance with its responsibilities for the 
maintenance of a respondent's reserve balance. Such records shall be 
available to the Reserve Banks as required.
    (iv) The Federal Reserve Bank may terminate any pass-through 
relationship in which the correspondent is deficient in its 
recordkeeping or other responsibilities.

[[Page 109]]

    (v) Interest paid on supplemental reserves (if such reserves are 
required under Sec. 204.6) held by a respondent will be credited to the 
account maintained by the correspondent.

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



Sec. 204.4  Transitional adjustments in mergers.

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

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


[61 FR 69025, Dec. 31, 1996]



Sec. 204.5  Emergency reserve requirement.

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

[45 FR 56018, Aug. 22, 1980]



Sec. 204.6  Supplemental reserve requirement.

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

[[Page 110]]

shall review and determine the need for continued maintenance of 
supplemental reserves and shall transmit annual reports to the Congress 
regarding the need for continuing such requirement.
    (2) Any supplemental reserve requirement shall terminate at the 
close of the first 90-day period after the requirement is imposed during 
which the average amount of supplemental reserves required are less than 
the amount of reserves which would be required if the ratios in effect 
on September 1, 1980, were applied.
    (c) Earnings Participation Account. A depository institutions's 
supplemental reserve requirement shall be maintained by the Federal 
Reserve Banks in an Earnings Participation Account. Such balances shall 
receive earnings to be paid by the Federal Reserve Banks during each 
calendar quarter at a rate not to exceed the rate earned on the 
securities portfolio of the Federal Reserve System during the previous 
calendar quarter. Additional rules and regulations maybe prescribed by 
the Board concerning the payment of earnings on Earnings Participation 
Accounts by Federal Reserve Banks.
    (d) Report to Congress. The Board shall transmit promptly to the 
Congress a report stating the basis for exercising its authority to 
require a supplemental reserve under this section.
    (e) Reserve requirements. At present, there are no supplemental 
reserve requirements imposed under this section.

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



Sec. 204.7  Penalties.

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

[[Page 111]]

subject to their jurisdiction under authority conferred by law to 
undertake cease and desist proceedings.

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



Sec. 204.8  International banking facilities.

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

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

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

[[Page 112]]

other foreign international or supranational entity specifically 
designated by the Board; \13\ or
---------------------------------------------------------------------------

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

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

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



Sec. 204.9  Reserve requirement ratios.

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

------------------------------------------------------------------------
                Category                       Reserve requirement
------------------------------------------------------------------------
Net transaction accounts:
    $0 to $9.3 million.................  0 percent of amount.
    Over $9.3 million and up to $43.9    3 percent of amount.
     million.
    Over $43.9 million.................  $1,038,000 plus 10 percent of
                                          amount over $43.9 million.
Nonpersonal time deposits..............  0 percent.
Eurocurrency liabilities...............  0 percent.
------------------------------------------------------------------------


[[Page 113]]


[Reg. D, 72 FR 55656, Oct. 1, 2007]

                             Interpretations



Sec. 204.121  Bankers' banks.

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

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

If a depository institution is unable to meet all of these requirements 
on a continuing basis, it will not be regarded as a bankers' bank and 
will be required to satisfy Federal reserve requirements on all of its 
transaction accounts and nonpersonal time deposits.
    (b) (1) Section 19(c)(1) of the Federal Reserve Act, as amended by 
the Monetary Control Act of 1980 (title I of Pub. L. 96-221) provides 
that Federal reserve requirements may be satisfied by the maintenance of 
vault cash or balances in a Federal Reserve Bank. Depository 
institutions that are not members of the Federal Reserve System may also 
satisfy reserve requirements by maintaining a balance in another 
depository institution that maintains required reserve balances at a 
Federal Reserve Bank, in a Federal Home Loan Bank, or in the National 
Credit Union Administration Central Liquidity Facility if the balances 
maintained by such institutions are subsequently passed through to the 
Federal Reserve Bank.
    (2) On August 27, 1980, the Board announced the procedures that will 
apply to such pass-through arrangements (45 FR 58099). Section 
204.3(i)(1) provides that the Board may permit, on a case-by-case basis, 
depository institutions that are not themselves required to maintain 
reserves (bankers' banks) to act as pass-through correspondents if 
certain criteria are satisfied. The Board has determined that a bankers'

[[Page 114]]

bank may act as a pass-through correspondent if it enters into an 
agreement with the Federal Reserve to accept responsibility for the 
maintenance of pass-through reserve accounts in accordance with 
Regulation D (12 CFR 204.3(i)) and if the Federal Reserve is satisfied 
that the quality of management and financial resources of the 
institution are adequate in order to enable the institution to serve as 
a pass-through correspondent in accordance with Regulation D. 
Satisfaction of these criteria will assure that pass-through 
arrangements are maintained properly without additional financial risk 
to the Federal Reserve.
    (3) In order to determine uniformly the adequacy of managerial and 
financial resources, the Board will consult with the Federal supervisor 
for the type of institution under consideration. Because the Board does 
not possess direct experience with supervising depository institutions 
other than commerical banks, and does not intend to involve itself in 
the direct supervision of such institutions, it will request the 
National Credit Union Administration to review requests from credit 
unions that qualify as bankers' banks and the Federal Home Loan Bank 
Board to review requests from savings and loan associations that qualify 
as bankers' banks, regardless of charter or insurance status. (The 
Board, itself, will consider requests from all commercial banks that 
qualify as bankers' banks.) If the Federal supervisor does not find the 
institution's managerial or financial resources to be adequate, the 
Board will not permit the institution to act as a pass-through 
correspondent. In order to assure the continued adequacy of managerial 
and financial resources, it is anticipated that the appropriate Federal 
supervisor will, on a periodic basis, review and evaluate the managerial 
and financial resources of the institution in order to determine whether 
it should continue to be permitted to act as a pass-through 
correspondent. It is anticipated that, with respect to state chartered 
institutions, the Federal supervisor may discuss the request with the 
institute State supervisor. The Board believes that this procedure will 
promote uniformity of treatment for all types of bankers' banks, and 
provide consistent advice concerning managerial ability and financial 
strength from supervisory authorities that are in a better position to 
evaluate these criteria for depository institutions that are not 
commercial banks.
    (4) Requests for a determination as to whether a depository 
institution will be regarded as a bankers' bank for purposes of the 
Federal Reserve Act or for permission to act as a pass-through 
correspondent may be addressed to the Federal Reserve Bank in whose 
District the main office of the depository institution is located or to 
the Secretary, Board of Governors of the Federal Reserve System, 
Washington, DC 20551. The Board will act promptly on all requests 
received directly or through Federal Reserve Banks.

[45 FR 69879, Oct. 22, 1980, as amended by Reg. D, at 72 FR 16990, Apr. 
6, 2007]



Sec. 204.122  Secondary market activities of international banking facilities.

    (a) Questions have been raised concerning the extent to which 
international banking facilities may purchase (or sell) IBF-eligible 
assets such as loans (including loan participations), securities, CDs, 
and bankers' acceptances from (or to) third parties. Under the Board's 
regulations, as specified in Sec. 204.8 of Regulation D, IBFs are 
limited, with respect to making loans and accepting deposits, to dealing 
only with certain customers, such as other IBFs and foreign offices of 
other organizations, and with the entity establishing the IBF. In 
addition, an IBF may extend credit to a nonbank customer only to finance 
the borrower's non-U.S. operations and may accept deposits from a 
nonbank customer that are used only to support the depositor's non-U.S. 
business.
    (b) Consistent with the Board's intent, IBFs may purchase IBF-
eligible assets \1\ from, or sell such assets to, any domestic or 
foreign customer provided that the transactions are at arm's length 
without recourse. However, an

[[Page 115]]

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

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

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

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



Sec. 204.123  Sale of Federal funds by investment companies or trusts in which the entire beneficial interest is held exclusively by depository institutions.

    (a) The Federal Reserve Act, as amended by the Monetary Control Act 
of 1980 (Title I of Pub. L. 96-221) imposes Federal Reserve requirements 
on transaction accounts and nonpersonnel time deposits held by 
depository institutions. The Board is empowered under the Act to 
determine what types of obligations shall be deemed a deposit. 
Regulation D--Reserve Requirements of Depository Institutions exempts 
from the definition of deposit those obligations of a depository 
institution that are issued or undertaken and held for the account of a 
domestic office of another depository institution (12 CFR 
204.2(a)(1)(vii)(A)(1)). These exemptions from the definition of deposit 
are known collectively as the Federal funds or interbank exemption.
    (b) Title IV of the Depository Institutions Deregulation and 
Monetary Control Act of 1980 authorizes Federal savings and loan 
associations to invest in open-ended management investment companies 
provided the funds' investment portfolios are limited to the types of 
investments that a Federal savings and loan association could hold 
without limit as to percentage of assets (12 U.S.C. 1464(c)(1)(Q)). Such 
investments include mortgages, U.S.

[[Page 116]]

Government and agency securities, securities of states and political 
subdivisions, sales of Federal funds and deposits held at banks insured 
by the Federal Deposit Insurance Corporation. The Federal Credit Union 
Act authorizes Federal credit unions to aggregate their funds in trusts 
provided the trust is limited to such investments that Federal credit 
unions could otherwise make. Such investments include loans to credit 
union members, obligations of the U.S. government or secured by the U.S. 
government, loans to other credit unions, shares or accounts held at 
savings and loan associations or mutual savings banks insured by FSLIC 
or FDIC, sales of Federal funds and shares of any central credit union 
whose investments are specifically authorized by the board of directors 
of the Federal credit union making the investment (12 U.S.C. 1757(7)).
    (c) The Board has considered whether an investment company or trust 
whose entire beneficial interest is held by depository institutions, as 
defined in Regulation D, would be eligible for the Federal funds 
exemption from Reserve requirements and interest rate limitations. The 
Board has determined that such investment companies or trusts are 
eligible to participate in the Federal funds market because, in effect, 
they act as mere conduits for the holders of their beneficial interest. 
To be regarded by the Board as acting as a conduit and, thus, be 
eligible for participation in the Federal funds market, an investment 
company or trust must meet each of the following conditions:
    (1) The entire beneficial interest in the investment company or 
trust must be held by depository institutions, as defined in Regulation 
D. These institutions presently may participate directly in the Federal 
funds market. If the entire beneficial interest in the investment 
company or trust is held only by depository institutions, the Board will 
regard the investment company or trust as a mere conduit for the holders 
of its beneficial interest.
    (2) The assets of the investment company or trust must be limited to 
investments that all of the holders of the beneficial interest could 
make directly without limit.
    (3) Holders of the beneficial interest in the investment company or 
trust must not be allowed to make third party payments from their 
accounts with the investment company or trust. The Board does not regard 
an investment company or trust that offers third party payment 
capabilities or other similar services which actively transform the 
nature of the funds passing between the holders of the beneficial 
interest and the Federal funds market as mere conduits.

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

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

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



Sec. 204.124  Repurchase agreement involving shares of a money market mutual fund whose portfolio consists wholly of United States Treasury and Federal agency 
          securities.

    (a) The Federal Reserve Act, as amended by the Monetary Control Act 
of 1980 (title I of Pub. L. 96-221) imposes Federal reserve requirements 
on transaction accounts and nonpersonal time deposits held by depository 
institutions. The Board is empowered under the Act to determine what 
types of obligations shall be deemed a deposit (12 U.S.C. 461). 
Regulation D--Reserve Requirements of Depository Institutions exempts 
from the definition of deposit those obligations of a depository 
institution that arise from a transfer of direct obligations of, or 
obligations that are fully guaranteed as to principal and interest by, 
the United States government or any agency thereof that the

[[Page 117]]

depository institution is obligated to repurchase (12 CFR 
204.2(a)(1)(vii)(B)).
    (b) The National Bank Act provides that a national bank may purchase 
for its own account investment securities under limitations and 
restrictions as the Comptroller may prescribe (12 U.S.C. 24, ] 7). The 
statute defines investment securities to mean marketable obligations 
evidencing indebtedness of any person in the form of bonds, notes, and 
debentures. The Act further limits a national bank's holdings of any one 
security to no more than an amount equal to 10 percent of the bank's 
capital stock and surplus. However, these limitations do not apply to 
obligations issued by the United States, general obligations of any 
state and certain obligations of Federal agencies. In addition, 
generally a national bank is not permitted to purchase for its own 
account stock of any corporation. These restrictions also apply to state 
member banks (12 U.S.C. 335).
    (c) The Comptroller of the Currency has permitted national banks to 
purchase for their own accounts shares of open-end investment companies 
that are purchased and sold at par (i.e., money market mutual funds) 
provided the portfolios of such companies consist solely of securities 
that a national bank may purchase directly (Banking Bulletin B-83-58). 
The Board of Governors has permitted state member banks to purchase, to 
the extent permitted under applicable state law, shares of money market 
mutual funds (MMMF) whose portfolios consist solely of securities that 
the state member bank may purchase directly (12 CFR 208.123).
    (d) The Board has determined that an obligation arising from a 
repurchase agreement involving shares of a MMMF whose portfolio consists 
wholly of securities of the United States government or any agency 
thereof \1\ would not be a deposit for purposes of Regulations D and Q. 
The Board believes that a repurchase agreement involving shares of such 
a MMMF is the functional equivalent of a repurchase agreement directly 
involving United States government or agency obligations. A purchaser of 
shares of a MMMF obtains an interest in a pro rata portion of the assets 
that comprise the MMMF's portfolio. Accordingly, regardless of whether 
the repurchase agreement involves United States government or agency 
obligations directly or shares in a MMMF whose portfolio consists 
entirely of United States government or agency obligations, an equitable 
and undivided interest in United States and agency government 
obligations is being transferred. Moreover, the Board believes that this 
interpretation will further the purpose of the exemption in Regulations 
D and Q for repurchase agreements involving United States government or 
Federal obligations by enhancing the market for such obligations.
---------------------------------------------------------------------------

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

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



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

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

                                 Europe

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

                              Latin America

Andean Development Corporation.
Andean Subregional Group.
Caribbean Development Bank.
Caribbean Free Trade Association
Caribbean Regional Development Agency.
Central American Bank for Economic Integration.
The Central American Institute for Industrial Research and Technology.
Central American Monetary Stabilization Fund.
East Caribbean Common Market.
Latin American Free Trade Association.
Organization for Central American States.

[[Page 118]]

Permanent Secretariat of the Central American General Treaty of Economic 
Integration.
River Plate Basin Commission.

                                 Africa

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

                                  Asia

Asia and Pacific Council.
Association of Southeast Asian Nations.
Bank of Taiwan.
Korea Exchange Bank.

                               Middle East

Central Treaty Organization.
Regional Cooperation for Development.

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



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

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

[52 FR 47695, Dec. 16, 1987]



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

    (a) The Board has considered whether the use of interdepository 
institution loan participations (IDLPs) which involve participation by 
third parties other than depository institutions in Federal funds 
transactions, comes within the exemption from deposit classification for 
certain obligations owed by a depository institution to an institution 
exempt in Sec. 204.2(a)(1)(vii)(A) of Regulation D. An IDLP transaction 
is one through which an institution that has

[[Page 119]]

sold Federal funds to a depository institution, subsequently sells or 
participates out that obligation to a nondepository third party without 
notifying the obligated institution.
    (b) The Board's interpretation regarding Federal funds transactions 
(12 CFR 204.126) clarified that a depository institutions's liability 
must be issued to an exempt institution described in Sec. 
204.2(a)(1)(vii)(A) of Regulation D for its own account in order to come 
within the nondeposit exemption for interdepository liabilities. The 
Board regards transactions which result in third parties gaining access 
to the Federal funds market as contrary to the exemption contained in 
Sec. 204.2(a)(1)(vii)(A) of Regulation D regardless of whether the 
nondepository institution third party is a party to the initial 
transaction or thereafter becomes a participant in the transaction 
through purchase of all or part of the obligation held by the selling 
depository institution.
    (c) The Board regards the notice requirements set out in 12 CFR 
204.126 as applicable to IDLP-type transactions as described herein so 
that a depository institution selling Federal funds must provide to the 
purchaser--
    (1) Notice of its intention, at the time of the initial transaction, 
to sell or participate out its loan contract to a nondepository third 
party, and
    (2) Full and prompt notice whenever it (the selling depository 
institution) subsequently sells or participates out its loan contract to 
a non-depository third party.

[52 FR 47695, Dec. 16, 1987]



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

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

[[Page 120]]

branches, subject to Eurocurrency liability reserve requirements.

[52 FR 47696, Dec. 16, 1987]



Sec. 204.130  Eligibility for NOW accounts.

    (a) Summary. In response to many requests for rulings, the Board has 
determined to clarify the types of entities that may maintain NOW 
accounts at member banks.
    (b) Individuals. (1) Any individual may maintain a NOW account 
regardless of the purposes that the funds will serve. Thus, deposits of 
an individual used in his or her business including a sole proprietor or 
an individual doing business under a trade name is eligible to maintain 
a NOW account in the individual's name or in the ``DBA'' name. However, 
other entities organized or operated to make a profit such as 
corporations, partnerships, associations, business trusts, or other 
organizations may not maintain NOW accounts.
    (2) Pension funds, escrow accounts, security deposits, and other 
funds held under various agency agreements may also be classified as NOW 
accounts if the entire beneficial interest is held by individuals or 
other entities eligible to maintain NOW accounts directly. The Board 
believes that these accounts are similar in nature to trust accounts and 
should be accorded identical treatment. Therefore, such funds may be 
regarded as eligible for classification as NOW accounts.
    (c) Nonprofit organizations. (1) A nonprofit organization that is 
operated primarily for religious, philanthropic, charitable, 
educational, political or other similar purposes may maintain a NOW 
account. The Board regards the following kinds of organizations as 
eligible for NOW accounts under this standard if they are not operated 
for profit:
    (i) Organizations described in section 501(c)(3) through (13), and 
(19) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 
501(c)(3) through (13) and (19));
    (ii) Political organizations described in section 527 of the 
Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 527); and
    (iii) Homeowners and condominium owners associations described in 
section 528 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) 
section 528), including housing cooperative associations that perform 
similar functions.
    (2) All organizations that are operated for profit are not eligible 
to maintain NOW accounts at depository institutions.
    (3) The following types of organizations described in the cited 
provisions of the Internal Revenue Code are among those not eligible to 
maintain NOW accounts:
    (i) Credit unions and other mutual depository institutions described 
in section 501(c)(14) of the Internal Revenue Code (26 U.S.C. (I.R.C. 
1954) section 501(c)(14));
    (ii) Mutual insurance companies described in section 501(c)(15) of 
the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(15));
    (iii) Crop financing organizations described in section 501(c)(16) 
of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 
501(c)(16));
    (iv) Organizations created to function as part of a qualified group 
legal services plan described in section 501(c)(20) of the Internal 
Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(20)); or
    (v) Farmers' cooperatives described in section 521 of the Internal 
Revenue Code (26 U.S.C. (I.R.C. 1954) section 521).
    (d) Governmental units. Governmental units are generally eligible to 
maintain NOW accounts at member banks. NOW accounts may consist of funds 
in which the entire beneficial interest is held by the United States, 
any State of the United States, county, municipality, or political 
subdivision thereof, the District of Columbia, the Commonwealth of 
Puerto Rico, American Samoa, Guam, any territory or possession of the 
United States, or any political subdivision thereof.
    (e) Funds held by a fiduciary. Under current provisions, funds held 
in a fiduciary capacity (either by an individual fiduciary or by a 
corporate fiduciary such as a bank trust department or a trustee in 
bankruptcy), including those awaiting distribution or investment, may be 
held in the form of NOW accounts if all of the beneficiaries are 
otherwise eligible to maintain NOW accounts. The Board believes that 
such a

[[Page 121]]

classification should continue since fiduciaries are required to invest 
even temporarily idle balances to the greatest extent feasible in order 
to responsibly carry out their fiduciary duties. The availability of NOW 
accounts provides a convenient vehicle for providing a short-term return 
on temporarily idle trust funds of beneficiaries eligible to maintain 
accounts in their own names.
    (f) Grandfather provision. In order to avoid unduly disrupting 
account relationships, a NOW account established at a member bank on or 
before August 31, 1981, that represents funds of a nonqualifying entity 
that previously qualified to maintain a NOW account may continue to be 
maintained in a NOW account.

[52 FR 47697, Dec. 16, 1987]



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

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

[[Page 122]]

market as an alternative to imposing the early withdrawal penalty.
    (d) Purchases by affiliates. On a consolidated basis, if an 
affiliate (as defined in Sec. 204.2(q) of Regulation D) of a depository 
institution purchases a CD issued by the depository institution, the 
purchase does not reduce their consolidated liabilities and could be 
accomplished primarily to assist the depository institution in avoiding 
the requirements of the Board's Regulation D. Because the effect of the 
early withdrawal penalty rule could be easily circumvented by purchases 
of time deposits by affiliates, such purchases are also regarded as an 
early withdrawals of the time deposit, and the purchase should be 
treated as if the depository institution made the purchase directly. 
Thus, the regulatory requirements for early withdrawal penalties apply 
to affiliates of a depository institution as well as to the institution 
itself.
    (e) Depository institution acting as broker. The Board believes that 
it is permissible for a depository institution to facilitate the 
secondary market for its own time deposits by finding a purchaser for a 
time deposit that a customer is trying to sell. In such instances, the 
depository institution will not be paying out any of its own funds, and 
the depositor does not have a guarantee that the depository institution 
will actually be able to find a buyer.
    (f) Third-party market-makers. A depository institution may also 
establish and advertise arrangements whereby an unaffiliated third party 
agrees in advance to purchase time deposits issued by the institution. 
The Board would not regard these transactions as inconsistent with the 
purposes that the early withdrawal penalty is intended to serve unless a 
depository institution pays a fee to the third party purchaser as 
compensation for making the purchases or to remove the risk from 
purchasing the deposits. In this regard, any interim financing provided 
to such a third party by a depository institution in connection with the 
institution's secondary market activity involving the institution's time 
deposits must be made substantially on the same terms, including 
interest rates and collateral, as those prevailing at the same time for 
comparable transactions with other similarly situated persons and may 
not involve more than the normal risk of repayment.
    (g) Reciprocal arrangements. Finally, while a depository institution 
may enter into an arrangement with an unaffiliated third party wherein 
the third party agrees to stand ready to purchase time deposits held by 
the depository institution's customers, the Board will regard a 
reciprocal arrangement with another depository institution for purchase 
of each other's time deposits as a circumvention of the early withdrawal 
penalty rule and the purposes it is designed to serve.

[52 FR 47697, Dec. 16, 1987]



Sec. 204.132  Treatment of loan strip participations.

    (a) Effective March 31, 1988, the glossary section of the 
instructions for the Report of Condition and Income (FFIEC 031-034; OMB 
control number 7100-0036; available from a depository institution's 
primary federal regulator) (Call Report) was amended to clarify that 
certain short-term loan participation arrangements (sometimes known or 
styled as loan strips or strip participations) are regarded as 
borrowings rather than sales for Call Report purposes in certain 
circumstances. Through this interpretation, the Board is clarifying that 
such transactions should be treated as deposits for purposes of 
Regulation D.
    (b) These transactions involve the sale (or placement) of a short-
term loan by a depository institution that has been made under a long-
term commitment of the depository institution to advance funds. For 
example, a 90-day loan made under a five-year revolving line of credit 
may be sold to or placed with a third party by the depository 
institution originating the loan. The depository institution originating 
the loan is obligated to renew the 90-day note itself (by advancing 
funds to its customer at the end of the 90-day period) in the event the 
original participant does not wish to renew the credit. Since, under 
these arrangements, the depository institution is obligated to make 
another loan at the end of 90 days (absent any event of default on

[[Page 123]]

the part of the borrower), the depository institution selling the loan 
or participation in effect must buy back the loan or participation at 
the maturity of the 90-day loan sold to or funded by the purchaser at 
the option of the purchaser. Accordingly, these transactions bear the 
essential characteristics of a repurchase agreement and, therefore, are 
reportable and reservable under Regulation D.
    (c) Because many of these transactions give rise to deposit 
liabilities in the form of promissory notes, acknowledgments of advance 
or similar obligations (written or oral) as described in Sec. 
204.2(a)(1)(vii) of Regulation D, the exemptions from the definition of 
deposit incorporated in that section may apply to the liability incurred 
by a depository institution when it offers or originates a loan strip 
facility. Thus, for example, loan strips sold to domestic offices of 
other depository institutions are exempt from Regulation D under Sec. 
204.2(a)(1)(vii)(A)(1) because they are obligations issued or undertaken 
and held for the account of a U.S. office of another depository 
institution. Similarly, some of these transactions result in 
Eurocurrency liabilities and are reportable and reservable as such.

[53 FR 24931, July 1, 1988]



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

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

    Example 1. (i) X wishes to open an account that maximizes his 
interest earnings but

[[Page 124]]

also permits X to draw up to ten checks a month against the account. X's 
Bank suggests an arrangement under which X establishes four savings 
deposits at Bank. Under the arrangement, X deposits funds in the first 
account and then draws three checks against that account. X then 
instructs Bank to transfer all funds in excess of the amount of the 
three checks to the second account and draws an additional three checks. 
Funds are continually shifted between accounts when additional checks 
are drawn so that no more than three checks are drawn against each 
account each month.
    (ii) Suggesting the use of four savings accounts in the name of X in 
this example is designed solely to permit the customer to exceed the 
transfer limitations on savings accounts. Accordingly, the savings 
accounts should be classified as transaction accounts.
    Example 2. (i) X is trustee of separate trusts for each of his four 
children. X's Bank suggests that X, as trustee, open a savings deposit 
in a depository institution for each of his four children in order to 
ensure an independent accounting of the funds held by each trust.
    (ii) X's Bank's suggestion to use four savings deposits in the name 
of X in this example is appropriate, and the third party transfers from 
one account should not be considered in determining whether the transfer 
and withdrawal limit was exceeded on any other account. X established a 
legitimate purpose, the segregation of the trust assets, for each 
account separate from the need to make third party transfers. 
Furthermore, there is no indication, such as by the direct or indirect 
transfer of funds from one account to another, that the accounts are 
being used for any purpose other than to make transfers to the 
appropriate trust.
    Example 3. (i) X opens four savings accounts with Bank. X regularly 
draws up to three checks against each account and transfers funds 
between the accounts in order to ensure that the checks on the separate 
accounts are covered. X's Bank did not suggest or otherwise promote the 
arrangement.
    (ii) X's Bank may treat the multiple accounts as savings deposits 
for Regulation D purposes, even if it discovers that X is using the 
accounts to increase the transfer limits applicable to savings accounts 
because X's Bank did not suggest or otherwise promote the establishment 
of or operation of the arrangement.

[57 FR 38427, Aug. 25, 1992]



Sec. 204.134  Linked time deposits and transaction accounts.

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

[[Page 125]]

used to pay checks drawn by other depositors participating in the 
arrangement, or the depositor may have an undivided interest in a series 
of time deposits.
    (2) Each day funds from the maturing time deposits are available to 
pay checks or other charges to the depositor's transaction account. The 
depository institution's decision concerning whether to pay checks drawn 
on an individual depositor's transaction account is based on the 
aggregate amount of funds that the depositor has invested in the 
arrangement, including any amount that may be invested in unmatured time 
deposits. Only if checks drawn by all participants in the arrangement 
exceed the total balance of funds available that day (i.e. funds from 
the time deposit that has matured that day as well as any deposits made 
to participating accounts during the day) is a time deposit withdrawn 
prior to maturity so as to incur an early withdrawal penalty. The 
arrangement may be marketed as providing the customer unlimited access 
to its funds with a high rate of interest.
    (c) Determination. In these arrangements, the aggregate deposit 
balances of all participants generally vary by a comparatively small 
amount, allowing the time deposits maturing on any day safely to cover 
any charges to the depositors' transaction accounts and avoiding any 
early withdrawal penalties. Thus, this arrangement substitutes time 
deposit balances for transaction accounts balances with no practical 
restrictions on the depositors' access to their funds, and serves no 
business purpose other than to allow the payment of higher interest 
through the avoidance of reserve requirements. As the time deposits may 
be used to provide funds indirectly for the purposes of making payments 
or transfers to third persons, the Board has determined that the time 
deposits should be considered to be transaction accounts for the 
purposes of Regulation D.

[57 FR 38428, Aug. 25, 1992]



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

    (a) Authority. Under section 19(a) of the Federal Reserve Act (12 
U.S.C. 461(a)) the Board is authorized to define terms used in section 
19, and to prescribe regulations to implement and to prevent evasions of 
the requirements of that section. Section 19(b)(2) establishes general 
reserve requirements on transaction accounts and nonpersonal time 
deposits. In addition to its authority to define terms under section 
19(a), section 19(g) of the Federal Reserve Act also give the Board the 
specific authority to define terms relating to deductions allowed in 
reserve computation, including ``balances due from other banks.'' This 
interpretation is adopted under these authorities.
    (b) Background. (1) Currently, the Board requires reserves of zero, 
three, or ten percent on transaction accounts, depending upon the amount 
of transaction deposits in the depository institution, and of zero 
percent on nonpersonal time deposits. In determining its reserve balance 
under Regulation D, a depository institution may deduct the balances it 
maintains in another depository institution located in the United States 
if those balances are subject to immediate withdrawal by the depositing 
depository institution (Sec. 204.3(f)). This deduction is commonly 
known as the ``due from'' deduction. In addition, Regulation D at Sec. 
204.2(a)(1)(vii)(A) exempts from the definition of ``deposit'' any 
liability of a depository institution on a promissory note or similar 
obligation that is issued or undertaken and held for the account of an 
office located in the United States of another depository institution. 
Transactions falling within this exemption from the definition of 
``deposit'' include federal funds or ``fed funds'' transactions.
    (2) Under section 19(b)(2) of the Federal Reserve Act (12 U.S.C. 
461(b)(2)), the Board is required to impose reserves of three percent on 
total transaction deposits at or below an amount determined under a 
formula. Transaction deposits falling within this amount are in the 
``low reserve tranche.'' Currently the low reserve tranche runs up to 
$42.2 million. Under section 19(b)(11) of the Federal Reserve

[[Page 126]]

Act (12 U.S.C. 461(b)(11)) the Board is also required to impose reserves 
of zero percent on reservable liabilities at or below an amount 
determined under a formula. Currently that amount is $3.6 million.
    (c) Shifting funds between depository institutions. The Board is 
aware that certain depository institutions with transaction account 
balances in an amount greater than the low reserve tranche have entered 
into transactions with affiliated depository institutions that have 
transaction account balances below the maximum low reserve tranche 
amount. These transactions are intended to lower the transaction 
reserves of the larger depository institution and leave the economic 
position of the smaller depository institutions unaffected, and have no 
apparent purpose other than to reduce required reserves of the larger 
institution. The larger depository institution places funds in a demand 
deposit at a small domestic depository institution. The larger 
depository institution considers those funds to be subject to the ``due 
from'' deduction, and accordingly reduces its transaction reserves in 
the amount of the demand deposit. The larger depository institution then 
reduces its transaction account reserves by 10 percent of the deposited 
amount. The small depository institution, because it is within the low 
reserve tranche, must maintain transaction account reserves of 3 percent 
on the funds deposited by the larger depository institution. The small 
depository institution then transfers all but 3 percent of the funds 
deposited by the larger depository institution back to the larger 
depository institution in a transaction that qualifies as a ``fed 
funds'' transaction. The 3 percent not transferred to the larger 
depository institution is the amount of the larger depository 
institution's deposit that the small depository institution must 
maintain as transaction account reserves. Because the larger depository 
institution books this second part of the transaction as a ``fed funds'' 
transaction, the larger depository institution does not maintain 
reserves on the funds that it receives back from the small depository 
institution. As a consequence, the larger depository institution has 
available for its use 97 percent of the amount transferred to the small 
depository institution. Had the larger depository institution not 
entered into the transaction, it would have maintained transaction 
account reserves of 10 percent on that amount, and would have had only 
90 percent of that amount for use in its business.
    (d) Determination. The Board believes that the practice described 
above generally is a device to evade the reserves imposed by Regulation 
D. Consequently, the Board has determined that, in the circumstances 
described above, the larger depository institution depositing funds in 
the smaller institution may not take a ``due from'' deduction on account 
of the funds in the demand deposit account if, and to the extent that, 
funds flow back to the larger depository institution from the small 
depository institution by means of a transaction that is exempt from 
transaction account reserve requirements.

[57 FR 38429, Aug. 25, 1992]



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

    (a) Authority. Under section 19(a) of the Federal Reserve Act (12 
U.S.C. 461(a)), the Board is authorized to define the terms used in 
section 19, and to prescribe regulations to implement and prevent 
evasions of the requirements of that section. Section 19(b) establishes 
general reserve requirements on transaction accounts and nonpersonal 
time deposits. Under section 19(b)(1)(F), the Board also is authorized 
to determine, by regulation or order, that an account or deposit is a 
transaction account if such account is used directly or indirectly for 
the purpose of making payments to third persons or others. This 
interpretation is adopted under these authorities.
    (b) Netting of trust account balances. (1) Not all depository 
institutions have treated overdrafts in trust accounts administered by a 
trust department in the same manner when calculating the balance in a 
commingled transaction account in the depository institution for the 
account of the trust department

[[Page 127]]

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

[57 FR 38429, Aug. 25, 1992]



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




Sec.
205.1 Authority and purpose.
205.2 Definitions.
205.3 Coverage.
205.4 General disclosure requirements; jointly offered services.
205.5 Issuance of access devices.
205.6 Liability of consumer for unauthorized transfers.
205.7 Initial disclosures.

[[Page 128]]

205.8 Change in terms notice; error resolution notice.
205.9 Receipts at electronic terminals; periodic statements.
205.10 Preauthorized transfers.
205.11 Procedures for resolving errors.
205.12 Relation to other laws.
205.13 Administrative enforcement; record retention.
205.14 Electronic fund transfer service provider not holding consumer's 
          account.
205.15 Electronic fund transfer of government benefits.
205.16 Disclosures at automated teller machines.
205.17 [Reserved]
205.18 Requirements for financial institutions offering payroll card 
          accounts.

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

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

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



Sec. 205.1  Authority and purpose.

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



Sec. 205.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a)(1) Access device means a card, code, or other means of access to 
a consumer's account, or any combination thereof, that may be used by 
the consumer to initiate electronic fund transfers.
    (2) An access device becomes an accepted access device when the 
consumer:
    (i) Requests and receives, or signs, or uses (or authorizes another 
to use) the access device to transfer money between accounts or to 
obtain money, property, or services;
    (ii) Requests validation of an access device issued on an 
unsolicited basis; or
    (iii) Receives an access device in renewal of, or in substitution 
for, an accepted access device from either the financial institution 
that initially issued the device or a successor.
    (b)(1) Account means a demand deposit (checking), savings, or other 
consumer asset account (other than an occasional or incidental credit 
balance in a credit plan) held directly or indirectly by a financial 
institution and established primarily for personal, family, or household 
purposes.
    (2) The term includes a ``payroll card account'' which is an account 
that is directly or indirectly established through an employer and to 
which electronic fund transfers of the consumer's wages, salary, or 
other employee compensation (such as commissions), are made on a 
recurring basis, whether the account is operated or managed by the 
employer, a third-party payroll processor, a depository institution or 
any other person. For rules governing payroll card accounts, see Sec. 
205.18.
    (3) The term does not include an account held by a financial 
institution under a bona fide trust agreement.
    (c) Act means the Electronic Fund Transfer Act (title IX of the 
Consumer Credit Protection Act, 15 U.S.C. 1693 et seq.).
    (d) Business day means any day on which the offices of the 
consumer's financial institution are open to the public for carrying on 
substantially all business functions.
    (e) Consumer means a natural person.
    (f) Credit means the right granted by a financial institution to a 
consumer to defer payment of debt, incur debt and defer its payment, or 
purchase property or services and defer payment therefor.

[[Page 129]]

    (g) Electronic fund transfer is defined in Sec. 205.3.
    (h) Electronic terminal means an electronic device, other than a 
telephone operated by a consumer, through which a consumer may initiate 
an electronic fund transfer. The term includes, but is not limited to, 
point-of-sale terminals, automated teller machines, and cash dispensing 
machines.
    (i) Financial institution means a bank, savings association, credit 
union, or any other person that directly or indirectly holds an account 
belonging to a consumer, or that issues an access device and agrees with 
a consumer to provide electronic fund transfer services.
    (j) Person means a natural person or an organization, including a 
corporation, government agency, estate, trust, partnership, 
proprietorship, cooperative, or association.
    (k) Preauthorized electronic fund transfer means an electronic fund 
transfer authorized in advance to recur at substantially regular 
intervals.
    (l) State means any state, territory, or possession of the United 
States; the District of Columbia; the Commonwealth of Puerto Rico; or 
any political subdivision of the above in this paragraph (l).
    (m) Unauthorized electronic fund transfer means an electronic fund 
transfer from a consumer's account initiated by a person other than the 
consumer without actual authority to initiate the transfer and from 
which the consumer receives no benefit. The term does not include an 
electronic fund transfer initiated:
    (1) By a person who was furnished the access device to the 
consumer's account by the consumer, unless the consumer has notified the 
financial institution that transfers by that person are no longer 
authorized;
    (2) With fraudulent intent by the consumer or any person acting in 
concert with the consumer; or
    (3) By the financial institution or its employee.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 71 FR 1481, Jan. 10, 
2006; 71 FR 51449, Aug. 30, 2006]



Sec. 205.3  Coverage.

    (a) General. This part applies to any electronic fund transfer that 
authorizes a financial institution to debit or credit a consumer's 
account. Generally, this part applies to financial institutions. For 
purposes of Sec. Sec. 205.3(b)(2) and (b)(3), 205.10(b), (d), and (e) 
and 205.13, this part applies to any person.
    (b) Electronic fund transfer--(1) Definition. The term electronic 
fund transfer means any transfer of funds that is initiated through an 
electronic terminal, telephone, computer, or magnetic tape for the 
purpose of ordering, instructing, or authorizing a financial institution 
to debit or credit a consumer's account. The term includes, but is not 
limited to--
    (i) Point-of-sale transfers;
    (ii) Automated teller machine transfers;
    (iii) Direct deposits or withdrawals of funds;
    (iv) Transfers initiated by telephone; and
    (v) Transfers resulting from debit card transactions, whether or not 
initiated through an electronic terminal.
    (2) Electronic fund transfer using information from a check. (i) 
This part applies where a check, draft, or similar paper instrument is 
used as a source of information to initiate a one-time electronic fund 
transfer from a consumer's account. The consumer must authorize the 
transfer.
    (ii) The person initiating an electronic fund transfer using the 
consumer's check as a source of information for the transfer must 
provide a notice that the transaction will or may be processed as an 
EFT, and obtain a consumer's authorization for each transfer. A consumer 
authorizes a one-time electronic fund transfer (in providing a check to 
a merchant or other payee for the MICR encoding, that is, the routing 
number of the financial institution, the consumer's account number and 
the serial number) when the consumer receives notice and goes forward 
with the underlying transaction. For point-of-sale transfers, the notice 
must be posted in a prominent and conspicuous location, and a copy 
thereof, or a substantially similar notice, must be provided to the 
consumer at the time of the transaction.

[[Page 130]]

    (iii) The person that initiates an electronic fund transfer using 
the consumer's check as a source of information for the transfer shall 
also provide a notice to the consumer at the same time it provides the 
notice required under paragraph (b)(2)(ii) that when a check is used to 
initiate an electronic fund transfer, funds may be debited from the 
consumer's account as soon as the same day payment is received, and, as 
applicable, that the consumer's check will not be returned by the 
financial institution holding the consumer's account. For point-of-sale 
transfers, the person initiating the transfer may post the notice 
required in this paragraph (b)(2)(iii) in a prominent and conspicuous 
location and need not include this notice on the copy of the notice 
given to the consumer under paragraph (b)(2)(ii). The requirements in 
this paragraph (b)(2)(iii) shall remain in effect until December 31, 
2009.
    (iv) A person may provide notices that are substantially similar to 
those set forth in Appendix A-6 to comply with the requirements of this 
paragraph (b)(2).
    (3) Collection of returned item fees via electronic fund transfer. 
(i) General. The person initiating an electronic fund transfer to 
collect a fee for the return of an electronic fund transfer or a check 
that is unpaid, including due to insufficient or uncollected funds in 
the consumer's account, must obtain the consumer's authorization for 
each transfer. A consumer authorizes a one-time electronic fund transfer 
from his or her account to pay the fee for the returned item or transfer 
if the person collecting the fee provides notice to the consumer stating 
that the person may electronically collect the fee, and the consumer 
goes forward with the underlying transaction. The notice must state that 
the fee will be collected by means of an electronic fund transfer from 
the consumer's account if the payment is returned unpaid and must 
disclose the dollar amount of the fee. If the fee may vary due to the 
amount of the transaction or due to other factors, then, except as 
otherwise provided in paragraph (b)(3)(ii) of this section, the person 
collecting the fee may disclose, in place of the dollar amount of the 
fee, an explanation of how the fee will be determined.
    (ii) Point-of-sale transactions. If a fee for an electronic fund 
transfer or check returned unpaid may be collected electronically in 
connection with a point-of-sale transaction, the person initiating an 
electronic fund transfer to collect the fee must post the notice 
described in paragraph (b)(3)(i) of this section in a prominent and 
conspicuous location. The person also must either provide the consumer 
with a copy of the posted notice (or a substantially similar notice) at 
the time of the transaction, or mail the copy (or a substantially 
similar notice) to the consumer's address as soon as reasonably 
practicable after the person initiates the electronic fund transfer to 
collect the fee. If the amount of the fee may vary due to the amount of 
the transaction or due to other factors, the posted notice may explain 
how the fee will be determined, but the notice provided to the consumer 
must state the dollar amount of the fee if the amount can be calculated 
at the time the notice is provided or mailed to the consumer.
    (iii) Delayed compliance date for fee disclosure. Through December 
31, 2007, the notice required to be provided to consumers under 
paragraph (b)(3)(ii) of this section in connection with a point-of-sale 
transaction, whether given to the consumer at the time of the 
transaction or subsequently mailed to the consumer, need not include 
either the dollar amount of any fee collected electronically for a check 
or electronic fund transfer returned unpaid or an explanation of how the 
amount of the fee will be determined.
    (c) Exclusions from coverage. The term electronic fund transfer does 
not include:
    (1) Checks. Any transfer of funds originated by check, draft, or 
similar paper instrument; or any payment made by check, draft, or 
similar paper instrument at an electronic terminal.
    (2) Check guarantee or authorization. Any transfer of funds that 
guarantees payment or authorizes acceptance of a check, draft, or 
similar paper instrument but that does not directly result in a debit or 
credit to a consumer's account.

[[Page 131]]

    (3) Wire or other similar transfers. Any transfer of funds through 
Fedwire or through a similar wire transfer system that is used primarily 
for transfers between financial institutions or between businesses.
    (4) Securities and commodities transfers. Any transfer of funds the 
primary purpose of which is the purchase or sale of a security or 
commodity, if the security or commodity is:
    (i) Regulated by the Securities and Exchange Commission or the 
Commodity Futures Trading Commission;
    (ii) Purchased or sold through a broker-dealer regulated by the 
Securities and Exchange Commission or through a futures commission 
merchant regulated by the Commodity Futures Trading Commission; or
    (iii) Held in book-entry form by a Federal Reserve Bank or federal 
agency.
    (5) Automatic transfers by account-holding institution. Any transfer 
of funds under an agreement between a consumer and a financial 
institution which provides that the institution will initiate individual 
transfers without a specific request from the consumer:
    (i) Between a consumer's accounts within the financial institution;
    (ii) From a consumer's account to an account of a member of the 
consumer's family held in the same financial institution; or
    (iii) Between a consumer's account and an account of the financial 
institution, except that these transfers remain subject to Sec. 
205.10(e) regarding compulsory use and sections 915 and 916 of the act 
regarding civil and criminal liability.
    (6) Telephone-initiated transfers. Any transfer of funds that:
    (i) Is initiated by a telephone communication between a consumer and 
a financial institution making the transfer; and
    (ii) Does not take place under a telephone bill-payment or other 
written plan in which periodic or recurring transfers are contemplated.
    (7) Small institutions. Any preauthorized transfer to or from an 
account if the assets of the account-holding financial institution were 
$100 million or less on the preceding December 31. If assets of the 
account-holding institution subsequently exceed $100 million, the 
institution's exemption for preauthorized transfers terminates one year 
from the end of the calendar year in which the assets exceed $100 
million. Preauthorized transfers exempt under this paragraph (c)(7) 
remain subject to Sec. 205.10(e) regarding compulsory use and sections 
915 and 916 of the act regarding civil and criminal liability.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 71 FR 1659, Jan. 10, 
2006; 71 FR 51456, Aug. 30, 2006]



Sec. 205.4  General disclosure requirements; jointly offered services.

    (a)(1) Form of disclosures. Disclosures required under this part 
shall be clear and readily understandable, in writing, and in a form the 
consumer may keep. The disclosures required by this part may be provided 
to the consumer in electronic form, subject to compliance with the 
consumer consent and other applicable provisions of the Electronic 
Signatures in Global and National Commerce Act (E-Sign Act)(15 U.S.C. 
7001 et seq.). A financial institution may use commonly accepted or 
readily understandable abbreviations in complying with the disclosure 
requirements of this part.
    (2) Foreign language disclosures. Disclosures required under this 
part may be made in a language other than English, provided that the 
disclosures are made available in English upon the consumer's request.
    (b) Additional information; disclosures required by other laws. A 
financial institution may include additional information and may combine 
disclosures required by other laws (such as the Truth in Lending Act (15 
U.S.C. 1601 et seq.) or the Truth in Savings Act (12 U.S.C. 4301 et 
seq.)) with the disclosures required by this part.
    (c) Multiple accounts and account holders--(1) Multiple accounts. A 
financial institution may combine the required disclosures into a single 
statement for a consumer who holds more than one account at the 
institution.
    (2) Multiple account holders. For joint accounts held by two or more 
consumers, a financial institution need provide only one set of the 
required

[[Page 132]]

disclosures and may provide them to any of the account holders.
    (d) Services offered jointly. Financial institutions that provide 
electronic fund transfer services jointly may contract among themselves 
to comply with the requirements that this part imposes on any or all of 
them. An institution need make only the disclosures required by 
Sec. Sec. 205.7 and 205.8 that are within its knowledge and within the 
purview of its relationship with the consumer for whom it holds an 
account.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 14532, Mar. 25, 
1998; 66 FR 17793, Apr. 4, 2001; 72 FR 63456, Nov. 9, 2007]



Sec. 205.5  Issuance of access devices.

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



Sec. 205.6  Liability of consumer for unauthorized transfers.

    (a) Conditions for liability. A consumer may be held liable, within 
the limitations described in paragraph (b) of this section, for an 
unauthorized electronic fund transfer involving the consumer's account 
only if the financial institution has provided the disclosures required 
by Sec. 205.7(b)(1), (2), and (3). If the unauthorized transfer 
involved an access device, it must be an accepted access device and the 
financial institution must have provided a means to identify the 
consumer to whom it was issued.
    (b) Limitations on amount of liability. A consumer's liability for 
an unauthorized electronic fund transfer or a series of related 
unauthorized transfers shall be determined as follows:
    (1) Timely notice given. If the consumer notifies the financial 
institution within two business days after learning of the loss or theft 
of the access device, the consumer's liability shall not exceed the 
lesser of $50 or the amount of unauthorized transfers that occur before 
notice to the financial institution.
    (2) Timely notice not given. If the consumer fails to notify the 
financial institution within two business days after learning of the 
loss or theft of the access device, the consumer's liability shall not 
exceed the lesser of $500 or the sum of:
    (i) $50 or the amount of unauthorized transfers that occur within 
the two business days, whichever is less; and
    (ii) The amount of unauthorized transfers that occur after the close 
of two business days and before notice to the institution, provided the 
institution establishes that these transfers would not have occurred had 
the consumer notified the institution within that two-day period.
    (3) Periodic statement; timely notice not given. A consumer must 
report an unauthorized electronic fund transfer that appears on a 
periodic statement within 60 days of the financial institution's 
transmittal of the statement to avoid liability for subsequent 
transfers. If the consumer fails to do so, the consumer's liability 
shall not exceed the amount of the unauthorized transfers that occur 
after the close of the 60 days and before notice to the institution, and 
that the institution establishes would not have occurred had the 
consumer notified the institution within the 60-day period. When an 
access device is involved in the unauthorized transfer, the consumer may 
be liable

[[Page 133]]

for other amounts set forth in paragraphs (b)(1) or (b)(2) of this 
section, as applicable.
    (4) Extension of time limits. If the consumer's delay in notifying 
the financial institution was due to extenuating circumstances, the 
institution shall extend the times specified above to a reasonable 
period.
    (5) Notice to financial institution. (i) Notice to a financial 
institution is given when a consumer takes steps reasonably necessary to 
provide the institution with the pertinent information, whether or not a 
particular employee or agent of the institution actually receives the 
information.
    (ii) The consumer may notify the institution in person, by 
telephone, or in writing.
    (iii) Written notice is considered given at the time the consumer 
mails the notice or delivers it for transmission to the institution by 
any other usual means. Notice may be considered constructively given 
when the institution becomes aware of circumstances leading to the 
reasonable belief that an unauthorized transfer to or from the 
consumer's account has been or may be made.
    (6) Liability under state law or agreement. If state law or an 
agreement between the consumer and the financial institution imposes 
less liability than is provided by this section, the consumer's 
liability shall not exceed the amount imposed under the state law or 
agreement.



Sec. 205.7  Initial disclosures.

    (a) Timing of disclosures. A financial institution shall make the 
disclosures required by this section at the time a consumer contracts 
for an electronic fund transfer service or before the first electronic 
fund transfer is made involving the consumer's account.
    (b) Content of disclosures. A financial institution shall provide 
the following disclosures, as applicable:
    (1) Liability of consumer. A summary of the consumer's liability, 
under Sec. 205.6 or under state or other applicable law or agreement, 
for unauthorized electronic fund transfers.
    (2) Telephone number and address. The telephone number and address 
of the person or office to be notified when the consumer believes that 
an unauthorized electronic fund transfer has been or may be made.
    (3) Business days. The financial institution's business days.
    (4) Types of transfers; limitations. The type of electronic fund 
transfers that the consumer may make and any limitations on the 
frequency and dollar amount of transfers. Details of the limitations 
need not be disclosed if confidentiality is essential to maintain the 
security of the electronic fund transfer system.
    (5) Fees. Any fees imposed by the financial institution for 
electronic fund transfers or for the right to make transfers.
    (6) Documentation. A summary of the consumer's right to receipts and 
periodic statements, as provided in Sec. 205.9, and notices regarding 
preauthorized transfers as provided in Sec. Sec. 205.10(a), and 
205.10(d).
    (7) Stop payment. A summary of the consumer's right to stop payment 
of a preauthorized electronic fund transfer and the procedure for 
placing a stop-payment order, as provided in Sec. 205.10(c).
    (8) Liability of institution. A summary of the financial 
institution's liability to the consumer under section 910 of the act for 
failure to make or to stop certain transfers.
    (9) Confidentiality. The circumstances under which, in the ordinary 
course of business, the financial institution may provide information 
concerning the consumer's account to third parties.
    (10) Error resolution. A notice that is substantially similar to 
Model Form A-3 as set out in Appendix A of this part concerning error 
resolution.
    (11) ATM fees. A notice that a fee may be imposed by an automated 
teller machine operator as defined in Sec. 205.16(a)(1), when the 
consumer initiates an electronic fund transfer or makes a balance 
inquiry, and by any network used to complete the transaction.
    (c) Addition of electronic fund transfer services. If an electronic 
fund transfer service is added to a consumer's account and is subject to 
terms and conditions different from those described

[[Page 134]]

in the initial disclosures, disclosures for the new service are 
required.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 66 FR 13412, Mar. 6, 
2001; 71 FR 1659, Jan. 10, 2006]



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

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



Sec. 205.9  Receipts at electronic terminals; periodic statements.

    (a) Receipts at electronic terminals--General. Except as provided in 
paragraph (e) of this section, a financial institution shall make a 
receipt available to a consumer at the time the consumer initiates an 
electronic fund transfer at an electronic terminal. The receipt shall 
set forth the following information, as applicable:
    (1) Amount. The amount of the transfer. A transaction fee may be 
included in this amount, provided the amount of the fee is disclosed on 
the receipt and displayed on or at the terminal.
    (2) Date. The date the consumer initiates the transfer.
    (3) Type. The type of transfer and the type of the consumer's 
account(s) to or from which funds are transferred. The type of account 
may be omitted if the access device used is able to access only one 
account at that terminal.
    (4) Identification. A number or code that identifies the consumer's 
account or accounts, or the access device used to initiate the transfer. 
The number or code need not exceed four digits or letters to comply with 
the requirements of this paragraph (a)(4).
    (5) Terminal location. The location of the terminal where the 
transfer is initiated, or an identification such as a code or terminal 
number. Except in limited circumstances where all terminals are located 
in the same city or state, if the location is disclosed, it shall 
include the city and state or foreign country and one of the following:
    (i) The street address; or
    (ii) A generally accepted name for the specific location; or
    (iii) The name of the owner or operator of the terminal if other 
than the account-holding institution.
    (6) Third party transfer. The name of any third party to or from 
whom funds are transferred.
    (b) Periodic statements. For an account to or from which electronic 
fund transfers can be made, a financial institution shall send a 
periodic statement for each monthly cycle in which an electronic fund 
transfer has occurred; and shall send a periodic statement at least 
quarterly if no transfer has occurred. The statement shall set forth the 
following information, as applicable:
    (1) Transaction information. For each electronic fund transfer 
occurring during the cycle:
    (i) The amount of the transfer;

[[Page 135]]

    (ii) The date the transfer was credited or debited to the consumer's 
account;
    (iii) The type of transfer and type of account to or from which 
funds were transferred;
    (iv) For a transfer initiated by the consumer at an electronic 
terminal (except for a deposit of cash or a check, draft, or similar 
paper instrument), the terminal location described in paragraph (a)(5) 
of this section; and
    (v) The name of any third party to or from whom funds were 
transferred.
    (2) Account number. The number of the account.
    (3) Fees. The amount of any fees assessed against the account during 
the statement period for electronic fund transfers, for the right to 
make transfers, or for account maintenance.
    (4) Account balances. The balance in the account at the beginning 
and at the close of the statement period.
    (5) Address and telephone number for inquiries. The address and 
telephone number to be used for inquiries or notice of errors, preceded 
by ``Direct inquiries to'' or similar language. The address and 
telephone number provided on an error resolution notice under Sec. 
205.8(b) given on or with the statement satisfies this requirement.
    (6) Telephone number for preauthorized transfers. A telephone number 
the consumer may call to ascertain whether preauthorized transfers to 
the consumer's account have occurred, if the financial institution uses 
the telephone-notice option under
    Sec. 205.10(a)(1)(iii).
    (c) Exceptions to the periodic statement requirement for certain 
accounts--(1) Preauthorized transfers to accounts. For accounts that may 
be accessed only by preauthorized transfers to the account the following 
rules apply:
    (i) Passbook accounts. For passbook accounts, the financial 
institution need not provide a periodic statement if the institution 
updates the passbook upon presentation or enters on a separate document 
the amount and date of each electronic fund transfer since the passbook 
was last presented.
    (ii) Other accounts. For accounts other than passbook accounts, the 
financial institution must send a periodic statement at least quarterly.
    (2) Intra-institutional transfers. For an electronic fund transfer 
initiated by the consumer between two accounts of the consumer in the 
same institution, documenting the transfer on a periodic statement for 
one of the two accounts satisfies the periodic statement requirement.
    (3) Relationship between paragraphs (c)(1) and (c)(2) of this 
section. An account that is accessed by preauthorized transfers to the 
account described in paragraph (c)(1) of this section and by intra-
institutional transfers described in paragraph (c)(2) of this section, 
but by no other type of electronic fund transfers, qualifies for the 
exceptions provided by paragraph (c)(1) of this section .
    (d) Documentation for foreign-initiated transfers. The failure by a 
financial institution to provide a terminal receipt for an electronic 
fund transfer or to document the transfer on a periodic statement does 
not violate this part if:
    (1) The transfer is not initiated within a state; and
    (2) The financial institution treats an inquiry for clarification or 
documentation as a notice of error in accordance with Sec. 205.11.
    (e) Exception for receipts in small-value transfers. A financial 
institution is not subject to the requirement to make available a 
receipt under paragraph (a) of this section if the amount of the 
transfer is $15 or less.

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 72 FR 36593, July 5, 
2007]



Sec. 205.10  Preauthorized transfers.

    (a) Preauthorized transfers to consumer's account--(1) Notice by 
financial institution. When a person initiates preauthorized electronic 
fund transfers to a consumer's account at least once every 60 days, the 
account-holding financial institution shall provide notice to the 
consumer by:
    (i) Positive notice. Providing oral or written notice of the 
transfer within two business days after the transfer occurs; or
    (ii) Negative notice. Providing oral or written notice, within two 
business days after the date on which the transfer was scheduled to 
occur, that the transfer did not occur; or

[[Page 136]]

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



Sec. 205.11  Procedures for resolving errors.

    (a) Definition of error--(1) Types of transfers or inquiries 
covered. The term error means:
    (i) An unauthorized electronic fund transfer;
    (ii) An incorrect electronic fund transfer to or from the consumer's 
account;
    (iii) The omission of an electronic fund transfer from a periodic 
statement;
    (iv) A computational or bookkeeping error made by the financial 
institution relating to an electronic fund transfer;
    (v) The consumer's receipt of an incorrect amount of money from an 
electronic terminal;
    (vi) An electronic fund transfer not identified in accordance with 
Sec. Sec. 205.9 or 205.10(a); or
    (vii) The consumer's request for documentation required by 
Sec. Sec. 205.9 or 205.10(a) or for additional information or 
clarification concerning an electronic fund transfer, including a 
request the consumer makes to determine whether an error exists under

[[Page 137]]

paragraphs (a)(1) (i) through (vi) of this section.
    (2) Types of inquiries not covered. The term error does not include:
    (i) A routine inquiry about the consumer's account balance;
    (ii) A request for information for tax or other recordkeeping 
purposes; or
    (iii) A request for duplicate copies of documentation.
    (b) Notice of error from consumer--(1) Timing; contents. A financial 
institution shall comply with the requirements of this section with 
respect to any oral or written notice of error from the consumer that:
    (i) Is received by the institution no later than 60 days after the 
institution sends the periodic statement or provides the passbook 
documentation, required by Sec. 205.9, on which the alleged error is 
first reflected;
    (ii) Enables the institution to identify the consumer's name and 
account number; and
    (iii) Indicates why the consumer believes an error exists and 
includes to the extent possible the type, date, and amount of the error, 
except for requests described in paragraph (a)(1)(vii) of this section.
    (2) Written confirmation. A financial institution may require the 
consumer to give written confirmation of an error within 10 business 
days of an oral notice. An institution that requires written 
confirmation shall inform the consumer of the requirement and provide 
the address where confirmation must be sent when the consumer gives the 
oral notification.
    (3) Request for documentation or clarifications. When a notice of 
error is based on documentation or clarification that the consumer 
requested under paragraph (a)(1)(vii) of this section, the consumer's 
notice of error is timely if received by the financial institution no 
later than 60 days after the institution sends the information 
requested.
    (c) Time limits and extent of investigation--(1) Ten-day period. A 
financial institution shall investigate promptly and, except as 
otherwise provided in this paragraph (c), shall determine whether an 
error occurred within 10 business days of receiving a notice of error. 
The institution shall report the results to the consumer within three 
business days after completing its investigation. The institution shall 
correct the error within one business day after determining that an 
error occurred.
    (2) Forty-five day period. If the financial institution is unable to 
complete its investigation within 10 business days, the institution may 
take up to 45 days from receipt of a notice of error to investigate and 
determine whether an error occurred, provided the institution does the 
following:
    (i) Provisionally credits the consumer's account in the amount of 
the alleged error (including interest where applicable) within 10 
business days of receiving the error notice. If the financial 
institution has a reasonable basis for believing that an unauthorized 
electronic fund transfer has occurred and the institution has satisfied 
the requirements of Sec. 205.6(a), the institution may withhold a 
maximum of $50 from the amount credited. An institution need not 
provisionally credit the consumer's account if:
    (A) The institution requires but does not receive written 
confirmation within 10 business days of an oral notice of error; or
    (B) The alleged error involves an account that is subject to 
Regulation T (Securities Credit by Brokers and Dealers, 12 CFR part 
220);
    (ii) Informs the consumer, within two business days after the 
provisional crediting, of the amount and date of the provisional 
crediting and gives the consumer full use of the funds during the 
investigation;
    (iii) Corrects the error, if any, within one business day after 
determining that an error occurred; and
    (iv) Reports the results to the consumer within three business days 
after completing its investigation (including, if applicable, notice 
that a provisional credit has been made final).
    (3) Extension of time periods. The time periods in paragraphs (c)(1) 
and (c)(2) of this section are extended as follows:
    (i) The applicable time is 20 business days in place of 10 business 
days under paragraphs (c)(1) and (c)(2) of this section if the notice of 
error involves an electronic fund transfer to or from the

[[Page 138]]

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

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



Sec. 205.12  Relation to other laws.

    (a) Relation to Truth in Lending. (1) The Electronic Fund Transfer 
Act and this part govern:
    (i) The addition to an accepted credit card, as defined in 
Regulation Z (12 CFR 226.12(a)(2), footnote 21), of the capability to 
initiate electronic fund transfers;
    (ii) The issuance of an access device that permits credit extensions 
(under a preexisting agreement between a consumer and a financial 
institution) only when the consumer's account is overdrawn or to 
maintain a specified minimum balance in the consumer's account; and
    (iii) A consumer's liability for an unauthorized electronic fund 
transfer and the investigation of errors involving an extension of 
credit that occurs under an agreement between the consumer and a 
financial institution to extend credit when the consumer's account is 
overdrawn or to maintain a specified minimum balance in the consumer's 
account.
    (2) The Truth in Lending Act and Regulation Z (12 CFR part 226), 
which prohibit the unsolicited issuance of credit cards, govern:
    (i) The addition of a credit feature to an accepted access device; 
and
    (ii) Except as provided in paragraph (a)(1)(ii) of this section, the 
issuance of a credit card that is also an access device.
    (b) Preemption of inconsistent state laws--(1) Inconsistent 
requirements. The Board shall determine, upon its own motion or upon the 
request of a state, financial institution, or other interested party, 
whether the act and this

[[Page 139]]

part preempt state law relating to electronic fund transfers. Only state 
laws that are inconsistent with the act and this part are preempted and 
then only to the extent of the inconsistency. A state law is not 
inconsistent with the act and this part if it is more protective of 
consumers.
    (2) Standards for determination. State law is inconsistent with the 
requirements of the act and this part if it:
    (i) Requires or permits a practice or act prohibited by the federal 
law;
    (ii) Provides for consumer liability for unauthorized electronic 
fund transfers that exceeds the limits imposed by the federal law;
    (iii) Allows longer time periods than the federal law for 
investigating and correcting alleged errors, or does not require the 
financial institution to credit the consumer's account during an error 
investigation in accordance with Sec. 205.11(c)(2)(i); or
    (iv) Requires initial disclosures, periodic statements, or receipts 
that are different in content from those required by the federal law 
except to the extent that the disclosures relate to consumer rights 
granted by the state law and not by the federal law.
    (c) State exemptions--(1) General rule. Any state may apply for an 
exemption from the requirements of the act or this part for any class of 
electronic fund transfers within the state. The Board shall grant an 
exemption if it determines that:
    (i) Under state law the class of electronic fund transfers is 
subject to requirements substantially similar to those imposed by the 
federal law; and
    (ii) There is adequate provision for state enforcement.
    (2) Exception. To assure that the federal and state courts continue 
to have concurrent jurisdiction, and to aid in implementing the act:
    (i) No exemption shall extend to the civil liability provisions of 
section 915 of the act; and
    (ii) When the Board grants an exemption, the state law requirements 
shall constitute the requirements of the federal law for purposes of 
section 915 of the act, except for state law requirements not imposed by 
the federal law.



Sec. 205.13  Administrative enforcement; record retention.

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



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

    (a) Provider of electronic fund transfer service. A person that 
provides an electronic fund transfer service to a consumer but that does 
not hold the consumer's account is subject to all requirements of this 
part if the person:
    (1) Issues a debit card (or other access device) that the consumer 
can use to access the consumer's account held by a financial 
institution; and
    (2) Has no agreement with the account-holding institution regarding 
such access.
    (b) Compliance by service provider. In addition to the requirements 
generally applicable under this part, the service provider shall comply 
with the following special rules:
    (1) Disclosures and documentation. The service provider shall give 
the disclosures and documentation required by Sec. Sec. 205.7, 205.8, 
and 205.9 that are within the purview of its relationship with the 
consumer. The service provider need not furnish the periodic statement 
required by Sec. 205.9(b) if the following conditions are met:
    (i) The debit card (or other access device) issued to the consumer 
bears the

[[Page 140]]

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



Sec. 205.15  Electronic fund transfer of government benefits.

    (a) Government agency subject to regulation. (1) A government agency 
is deemed to be a financial institution for purposes of the act and this 
part if directly or indirectly it issues an access device to a consumer 
for use in initiating an electronic fund transfer of government benefits 
from an account, other than needs-tested benefits in a program 
established under state or local law or administered by a state or local 
agency. The agency shall comply with all applicable requirements of the 
act and this part, except as provided in this section.
    (2) For purposes of this section, the term account means an account 
established by a government agency for distributing government benefits 
to a consumer electronically, such as through automated teller machines 
or point-of-sale terminals, but does not include an account for 
distributing needs-tested benefits in a program established under state 
or local law or administered by a state or local agency.
    (b) Issuance of access devices. For purposes of this section, a 
consumer is

[[Page 141]]

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

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



Sec. 205.16  Disclosures at automated teller machines.

    (a) Definition. Automated teller machine operator means any person 
that operates an automated teller machine at which a consumer initiates 
an electronic fund transfer or a balance inquiry and that does not hold 
the account to or from which the transfer is made, or about which an 
inquiry is made.
    (b) General. An automated teller machine operator that imposes a fee 
on a consumer for initiating an electronic fund transfer or a balance 
inquiry shall:
    (1) Provide notice that a fee will be imposed for providing 
electronic fund transfer services or a balance inquiry; and
    (2) Disclose the amount of the fee.
    (c) Notice requirement. To meet the requirements of paragraph (b) of 
this section, an automated teller machine operator must comply with the 
following:
    (1) On the machine. Post in a prominent and conspicuous location on 
or at

[[Page 142]]

the automated teller machine a notice that:
    (i) A fee will be imposed for providing electronic fund transfer 
services or for a balance inquiry; or
    (ii) A fee may be imposed for providing electronic fund transfer 
services or for a balance inquiry, but the notice in this paragraph 
(c)(1)(ii) may be substituted for the notice in paragraph (c)(1)(i) only 
if there are circumstances under which a fee will not be imposed for 
such services; and
    (2) Screen or paper notice. Provide the notice required by 
paragraphs (b)(1) and (b)(2) of this section either by showing it on the 
screen of the automated teller machine or by providing it on paper, 
before the consumer is committed to paying a fee.
    (d) Temporary exemption. Through December 31, 2004, the notice 
requirement in paragraph (c)(2) of this section does not apply to any 
automated teller machine that lacks the technical capability to provide 
such information.
    (e) Imposition of fee. An automated teller machine operator may 
impose a fee on a consumer for initiating an electronic fund transfer or 
a balance inquiry only if
    (1) The consumer is provided the notices required under paragraph 
(c) of this section, and
    (2) The consumer elects to continue the transaction or inquiry after 
receiving such notices.

[Reg. E, 66 FR 13412, Mar. 6, 2001, as amended at 71 FR 1659, Jan. 10, 
2006]



Sec. 205.17  [Reserved]



Sec. 205.18  Requirements for financial institutions offering payroll card accounts.

    (a) Coverage. A financial institution shall comply with all 
applicable requirements of the act and this part with respect to payroll 
card accounts except as provided in this section.
    (b) Alternative to periodic statements.
    (1) A financial institution need not furnish periodic statements 
required by Sec. 205.9(b) if the institution makes available to the 
consumer--
    (i) The consumer's account balance, through a readily available 
telephone line;
    (ii) An electronic history of the consumer's account transactions, 
such as through an Internet Web site, that covers at least 60 days 
preceding the date the consumer electronically accesses the account; and
    (iii) A written history of the consumer's account transactions that 
is provided promptly in response to an oral or written request and that 
covers at least 60 days preceding the date the financial institution 
receives the consumer's request.
    (2) The history of account transactions provided under paragraphs 
(b)(1)(ii) and (iii) of this section must include the information set 
forth in Sec. 205.9(b).
    (c) Modified requirements. A financial institution that provides 
information under paragraph (b) of this section, shall comply with the 
following:
    (1) Initial disclosures. The financial institution shall modify the 
disclosures under Sec. 205.7(b) by disclosing--
    (i) Account information. A telephone number that the consumer may 
call to obtain the account balance, the means by which the consumer can 
obtain an electronic account history, such as the address of an Internet 
Web site, and a summary of the consumer's right to receive a written 
account history upon request (in place of the summary of the right to 
receive a periodic statement required by Sec. 205.7(b)(6)), including a 
telephone number to call to request a history. The disclosure required 
by this paragraph (c)(1)(i) may be made by providing a notice 
substantially similar to the notice contained in paragraph A-7(a) in 
appendix A of this part.
    (ii) Error resolution. A notice concerning error resolution that is 
substantially similar to the notice contained in paragraph A-7(b) in 
appendix A of this part, in place of the notice required by Sec. 
205.7(b)(10).
    (2) Annual error resolution notice. The financial institution shall 
provide an annual notice concerning error resolution that is 
substantially similar to the notice contained in paragraph A-7(b) in 
appendix A of this part, in place of the notice required by Sec. 
205.8(b). Alternatively, a financial institution may include on or with 
each electronic

[[Page 143]]

and written history provided in accordance with Sec. 205.18(b)(1), a 
notice substantially similar to the abbreviated notice for periodic 
statements contained in paragraph A-3(b) in appendix A of this part, 
modified as necessary to reflect the error resolution provisions set 
forth in this section.
    (3) Limitations on liability. (i) For purposes of Sec. 205.6(b)(3), 
the 60-day period for reporting any unauthorized transfer shall begin on 
the earlier of:
    (A) The date the consumer electronically accesses the consumer's 
account under paragraph (b)(1)(ii) of this section, provided that the 
electronic history made available to the consumer reflects the transfer; 
or
    (B) The date the financial institution sends a written history of 
the consumer's account transactions requested by the consumer under 
paragraph (b)(1)(iii) of this section in which the unauthorized transfer 
is first reflected.
    (ii) A financial institution may comply with paragraph (c)(3)(i) of 
this section by limiting the consumer's liability for an unauthorized 
transfer as provided under Sec. 205.6(b)(3) for any transfer reported 
by the consumer within 120 days after the transfer was credited or 
debited to the consumer's account.
    (4) Error resolution. (i) The financial institution shall comply 
with the requirements of Sec. 205.11 in response to an oral or written 
notice of an error from the consumer that is received by the earlier 
of--
    (A) Sixty days after the date the consumer electronically accesses 
the consumer's account under paragraph (b)(1)(ii) of this section, 
provided that the electronic history made available to the consumer 
reflects the alleged error; or
    (B) Sixty days after the date the financial institution sends a 
written history of the consumer's account transactions requested by the 
consumer under paragraph (b)(1)(iii) of this section in which the 
alleged error is first reflected.
    (ii) In lieu of following the procedures in paragraph (c)(4)(i) of 
this section, a financial institution complies with the requirements for 
resolving errors in Sec. 205.11 if it investigates any oral or written 
notice of an error from the consumer that is received by the institution 
within 120 days after the transfer allegedly in error was credited or 
debited to the consumer's account.

[Reg. E, 71 FR 51449, Aug. 30, 2006]



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

                            Table of Contents

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

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

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

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

    (a) Consumer Liability (Sec. 205.7(b)(1)).
    (Tell us AT ONCE if you believe your [card] [code] has been lost or 
stolen, or if you believe that an electronic fund transfer has been made 
without your permission using information from your check. Telephoning 
is the best way of keeping your possible losses down. You could lose all 
the money in your account (plus your maximum overdraft line of credit). 
If you tell us within 2 business days after you learn of the loss or 
theft of your [card] [code], you can lose no more than $50 if someone 
used your [card][code] without your permission.)
    If you do NOT tell us within 2 business days after you learn of the 
loss or theft of your [card] [code], and we can prove we could have 
stopped someone from using your [card] [code] without your permission if 
you had told us, you could lose as much as $500.
    Also, if your statement shows transfers that you did not make, 
including those made by card, code or other means, tell us at once. If 
you do not tell us within 60 days after the statement was mailed to you, 
you may not get back any money you lost after the 60

[[Page 144]]

days if we can prove that we could have stopped someone from taking the 
money if you had told us in time. If a good reason (such as a long trip 
or a hospital stay) kept you from telling us, we will extend the time 
periods.
    (b) Contact in event of unauthorized transfer (Sec. 205.7(b)(2)). 
If you believe your [card] [code] has been lost or stolen, call: 
[Telephone number] or write: [Name of person or office to be notified] 
[Address]
    You should also call the number or write to the address listed above 
if you believe a transfer has been made using the information from your 
check without your permission.
    (c) Business days (Sec. 205.7(b)(3)). For purposes of these 
disclosures, our business days are (Monday through Friday) (Monday 
through Saturday) (any day including Saturdays and Sundays). Holidays 
are (not) included.
    (d) Transfer types and limitations (Sec. 205.7(b)(4))--(1) Account 
access. You may use your [card][code] to:
    (i) Withdraw cash from your [checking] [or] [savings] account.
    (ii) Make deposits to your [checking] [or] [savings] account.
    (iii) Transfer funds between your checking and savings accounts 
whenever you request.
    (iv) Pay for purchases at places that have agreed to accept the 
[card] [code].
    (v) Pay bills directly [by telephone] from your [checking] [or] 
[savings] account in the amounts and on the days you request.
    Some of these services may not be available at all terminals.
    (2) Electronic check conversion. You may authorize a merchant or 
other payee to make a one-time electronic payment from your checking 
account using information from your check to:
    (i) Pay for purchases.
    (ii) Pay bills.
    (3) Limitations on frequency of transfers--(i) You may make only 
[insert number, e.g., 3] cash withdrawals from our terminals each 
[insert time period, e.g., week].
    (ii) You can use your telephone bill-payment service to pay [insert 
number] bills each [insert time period] [telephone call].
    (iii) You can use our point-of-sale transfer service for [insert 
number] transactions each [insert time period].
    (iv) For security reasons, there are limits on the number of 
transfers you can make using our [terminals] [telephone bill-payment 
service] [point-of-sale transfer service].
    (4) Limitations on dollar amounts of transfers--(i) You may withdraw 
up to [insert dollar amount] from our terminals each [insert time 
period] time you use the [card] [code].
    (ii) You may buy up to [insert dollar amount] worth of goods or 
services each [insert time period] time you use the [card] [code] in our 
point-of-sale transfer service.
    (e) Fees (Sec. 205.7(b)(5))--(1) Per transfer charge. We will 
charge you [insert dollar amount] for each transfer you make using our 
[automated teller machines] [telephone bill-payment service] [point-of-
sale transfer service].
    (2) Fixed charge. We will charge you [insert dollar amount] each 
[insert time period] for our [automated teller machine service] 
[telephone bill-payment service] [point-of-sale transfer service].
    (3) Average or minimum balance charge. We will only charge you for 
using our [automated teller machines] [telephone bill-payment service] 
[point-of-sale transfer service] if the [average] [minimum] balance in 
your [checking account] [savings account] [accounts] falls below [insert 
dollar amount]. If it does, we will charge you [insert dollar amount] 
each [transfer] [insert time period].
    (f) Confidentiality (Sec. 205.7(b)(9)). We will disclose 
information to third parties about your account or the transfers you 
make:
    (i) Where it is necessary for completing transfers, or
    (ii) In order to verify the existence and condition of your account 
for a third party, such as a credit bureau or merchant, or
    (iii) In order to comply with government agency or court orders, or
    (iv) If you give us your written permission.
    (g) Documentation (Sec. 205.7(b)(6))--(1) Terminal transfers. You 
can get a receipt at the time you make any transfer to or from your 
account using one of our [automated teller machines] [or] [point-of-sale 
terminals].
    (2) Preauthorized credits. If you have arranged to have direct 
deposits made to your account at least once every 60 days from the same 
person or company, (we will let you know if the deposit is [not] made.) 
[the person or company making the deposit will tell you every time they 
send us the money] [you can call us at (insert telephone number) to find 
out whether or not the deposit has been made].
    (3) Periodic statements. You will get a [monthly] [quarterly] 
account statement (unless there are no transfers in a particular month. 
In any case you will get the statement at least quarterly).
    (4) Passbook account where the only possible electronic fund 
transfers are preauthorized credits. If you bring your passbook to us, 
we will record any electronic deposits that were made to your account 
since the last time you brought in your passbook.
    (h) Preauthorized payments (Sec. 205.7(b) (6), (7) and (8); Sec. 
205.10(d))--(1) Right to stop payment and procedure for doing so. If you 
have told us in advance to make regular payments out of your account, 
you can stop any of these payments. Here's how:
    Call us at [insert telephone number], or write us at [insert 
address], in time for us to receive your request 3 business days or more 
before the payment is scheduled to be made.

[[Page 145]]

If you call, we may also require you to put your request in writing and 
get it to us within 14 days after you call. (We will charge you [insert 
amount] for each stop-payment order you give.)
    (2) Notice of varying amounts. If these regular payments may vary in 
amount, [we] [the person you are going to pay] will tell you, 10 days 
before each payment, when it will be made and how much it will be. (You 
may choose instead to get this notice only when the payment would differ 
by more than a certain amount from the previous payment, or when the 
amount would fall outside certain limits that you set.)
    (3) Liability for failure to stop payment of preauthorized transfer. 
If you order us to stop one of these payments 3 business days or more 
before the transfer is scheduled, and we do not do so, we will be liable 
for your losses or damages.
    (i) Financial institution's liability (Sec. 205.7(b)(8)). If we do 
not complete a transfer to or from your account on time or in the 
correct amount according to our agreement with you, we will be liable 
for your losses or damages. However, there are some exceptions. We will 
not be liable, for instance:
    (1) If, through no fault of ours, you do not have enough money in 
your account to make the transfer.
    (2) If the transfer would go over the credit limit on your overdraft 
line.
    (3) If the automated teller machine where you are making the 
transfer does not have enough cash.
    (4) If the [terminal] [system] was not working properly and you knew 
about the breakdown when you started the transfer.
    (5) If circumstances beyond our control (such as fire or flood) 
prevent the transfer, despite reasonable precautions that we have taken.
    (6) There may be other exceptions stated in our agreement with you.
    (j) ATM fees (Sec. 205.7(b)(11)). When you use an ATM not owned by 
us, you may be charged a fee by the ATM operator [or any network used] 
(and you may be charged a fee for a balance inquiry even if you do not 
complete a fund transfer).

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

    (a) Initial and annual error resolution notice (Sec. Sec. 
205.7(b)(10) and 205.8(b)).
    In Case of Errors or Questions About Your Electronic Transfers 
Telephone us at [insert telephone number] Write us at [insert address] 
[or E-mail us at [insert electronic mail address]] as soon as you can, 
if you think your statement or receipt is wrong or if you need more 
information about a transfer listed on the statement or receipt. We must 
hear from you no later than 60 days after we sent the FIRST statement on 
which the problem or error appeared.
    (1) Tell us your name and account number (if any).
    (2) Describe the error or the transfer you are unsure about, and 
explain as clearly as you can why you believe it is an error or why you 
need more information.
    (3) Tell us the dollar amount of the suspected error.
    If you tell us orally, we may require that you send us your 
complaint or question in writing within 10 business days.
    We will determine whether an error occurred within 10 business days 
after we hear from you and will correct any error promptly. If we need 
more time, however, we may take up to 45 days to investigate your 
complaint or question. If we decide to do this, we will credit your 
account within 10 business days for the amount you think is in error, so 
that you will have the use of the money during the time it takes us to 
complete our investigation. If we ask you to put your complaint or 
question in writing and we do not receive it within 10 business days, we 
may not credit your account.
    For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your 
complaint or question. For new accounts, we may take up to 20 business 
days to credit your account for the amount you think is in error.
    We will tell you the results within three business days after 
completing our investigation. If we decide that there was no error, we 
will send you a written explanation. You may ask for copies of the 
documents that we used in our investigation.
    (b) Error resolution notice on periodic statements (Sec. 205.8(b)).
    In Case of Errors or Questions About Your Electronic Transfers 
Telephone us at [insert telephone number] or Write us at [insert 
address] as soon as you can, if you think your statement or receipt is 
wrong or if you need more information about a transfer on the statement 
or receipt. We must hear from you no later than 60 days after we sent 
you the FIRST statement on which the error or problem appeared.
    (1) Tell us your name and account number (if any).
    (2) Describe the error or the transfer you are unsure about, and 
explain as clearly as you can why you believe it is an error or why you 
need more information.
    (3) Tell us the dollar amount of the suspected error.
    We will investigate your complaint and will correct any error 
promptly. If we take more than 10 business days to do this, we will 
credit your account for the amount you think is in error, so that you 
will have the use of the money during the time it takes us to complete 
our investigation.

[[Page 146]]

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

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

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

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

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

  A-6 Model Clauses for Authorizing One-Time Electronic Fund Transfers 
           Using Information From a Check (Sec. 205.3(b)(2))

              (a)--Notice About Electronic Check Conversion

    When you provide a check as payment, you authorize us either to use 
information from your check to make a one-time electronic fund transfer 
from your account or to process the payment as a check transaction.

  (b)--Alternative Notice About Electronic Check Conversion (Optional)

    When you provide a check as payment, you authorize us to use 
information from your check to make a one-time electronic fund transfer 
from your account. In certain circumstances, such as for technical or 
processing reasons, we may process your payment as a check transaction.
    [Specify other circumstances (at payee's option).]

(c)--Notice For Providing Additional Information About Electronic Check 
                               Conversion

    When we use information from your check to make an electronic fund 
transfer, funds

[[Page 147]]

may be withdrawn from your account as soon as the same day [you make] 
[we receive] your payment[, and you will not receive your check back 
from your financial institution].

  A-7--Model Clauses for Financial Institutions Offering Payroll Card 
                       Accounts (Sec. 205.18(c))

(a)--Disclosure by financial institutions of information about obtaining 
   account information for payroll card accounts. Sec. 205.18(c)(1).

    You may obtain information about the amount of money you have 
remaining in your payroll card account by calling [telephone number]. 
This information, along with a 60-day history of account transactions, 
is also available on-line at [Internet address].
    You also have the right to obtain a 60-day written history of 
account transactions by calling [telephone number], or by writing us at 
[address].

      (b)--Disclosure of error-resolution procedures for financial 
 institutions that provide alternative means of obtaining payroll card 
        account information (Sec. 205.18(c)(1)(ii) and (c)(2)).

    In Case of Errors or Questions About Your Payroll Card Account 
Telephone us at [telephone number] or Write us at [address] [or E-mail 
us at [electronic mail address]] as soon as you can, if you think an 
error has occurred in your payroll card account. We must allow you to 
report an error until 60 days after the earlier of the date you 
electronically access your account, if the error could be viewed in your 
electronic history, or the date we sent the FIRST written history on 
which the error appeared. You may request a written history of your 
transactions at any time by calling us at [telephone number] or writing 
us at [address]. You will need to tell us:
    Your name and [payroll card account] number.
    Why you believe there is an error, and the dollar amount involved.
    Approximately when the error took place.
    If you tell us orally, we may require that you send us your 
complaint or question in writing within 10 business days.
    We will determine whether an error occurred within 10 business days 
after we hear from you and will correct any error promptly. If we need 
more time, however, we may take up to 45 days to investigate your 
complaint or question. If we decide to do this, we will credit your 
account within 10 business days for the amount you think is in error, so 
that you will have the money during the time it takes us to complete our 
investigation. If we ask you to put your complaint or question in 
writing and we do not receive it within 10 business days, we may not 
credit your account.
    For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your 
complaint or question. For new accounts, we may take up to 20 business 
days to credit your account for the amount you think is in error.
    We will tell you the results within three business days after 
completing our investigation. If we decide that there was no error, we 
will send you a written explanation.
    You may ask for copies of the documents that we used in our 
investigation.
    If you need more information about our error-resolution procedures, 
call us at [telephone number] [the telephone number shown above] [or 
visit [Internet address]].

A-8 MODEL CLAUSE FOR ELECTRONIC COLLECTION OF RETURNED ITEM FEES (Sec. 
                              205.3(b)(3))

    If your payment is returned unpaid, you authorize [us/ name of 
person collecting the fee electronically] to make a one-time electronic 
fund transfer from your account to collect a fee of [$----]. [If your 
payment is returned unpaid, you authorize [us/ name of person collecting 
the fee electronically] to make a one-time electronic fund transfer from 
your account to collect a fee. The fee will be determined [by]/ [as 
follows]: [----------------].]

[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 52118, Sept. 29, 
1998; 66 FR 13412, Mar. 6, 2001; 66 FR 17793, Apr. 4, 2001; 71 FR 1659, 
Jan. 10, 2006; 71 FR 51456, Aug. 30, 2006; 71 FR 69437, Dec. 1, 2006; 72 
FR 51450, Aug. 30, 2006]



        Sec. Appendix B to Part 205--Federal Enforcement Agencies

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

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

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

[[Page 148]]

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

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

   Nonmember insured banks and insured state branches of foreign banks

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

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

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

                          Federal Credit Unions

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

                              Air Carriers

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

                           Brokers and Dealers

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

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

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



     Sec. Appendix C to Part 205--Issuance of Staff Interpretations

                     Official Staff Interpretations

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

         Requests for Issuance of Official Staff Interpretations

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

                        Scope of Interpretations

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



      Sec. Supplement I to Part 205--Official Staff Interpretations

                       Section 205.2--Definitions

                           2(a) Access Device

    1. Examples. The term access device includes debit cards, personal 
identification numbers (PINs), telephone transfer and telephone bill 
payment codes, and other means that may be used by a consumer to 
initiate an electronic fund transfer (EFT) to or from a consumer 
account. The term does not include magnetic tape or other devices used 
internally by a financial institution to initiate electronic transfers.
    2. Checks used to capture information. The term ``access device'' 
does not include a check or draft used to capture the MICR (Magnetic Ink 
Character Recognition) encoding to initiate a one-time ACH debit. For 
example, if a consumer authorizes a one-time ACH debit from the 
consumer's account using a blank, partially completed, or fully 
completed and signed check for the merchant to capture the routing, 
account, and serial numbers to initiate the debit, the check is not an 
access device. (Although the check is not an access device under 
Regulation E, the transaction is nonetheless covered by the regulation. 
See comment 3(b)(1)-1.v.)

                              2(b) Account

    1. Consumer asset account. The term consumer asset account includes:
    i. Club accounts, such as vacation clubs. In many cases, however, 
these accounts are exempt from the regulation under Sec. 205.3(c)(5) 
because all electronic transfers to or from the account have been 
preauthorized by the consumer and involve another account of the 
consumer at the same institution.
    ii. A retail repurchase agreement (repo), which is a loan made to a 
financial institution by a consumer that is collateralized by

[[Page 149]]

government or government-insured securities.
    2. Certain employment-related cards not covered. The term ``payroll 
card account'' does not include a card used solely to disburse 
incentive-based payments (other than commissions which can represent the 
primary means through which a consumer is paid), such as bonuses, which 
are unlikely to be a consumer's primary source of salary or other 
compensation. The term also does not include a card used solely to make 
disbursements unrelated to compensation, such as petty cash 
reimbursements or travel per diem payments. Similarly, a payroll card 
account does not include a card that is used in isolated instances to 
which an employer typically does not make recurring payments, such as 
when providing final payments or in emergency situations when other 
payment methods are unavailable. However, all transactions involving the 
transfer of funds to or from a payroll card account are covered by the 
regulation, even if a particular transaction involves payment of a 
bonus, other incentive-based payment, or reimbursement, or the 
transaction does not represent a transfer of wages, salary, or other 
employee compensation.
    3. Examples of accounts not covered by Regulation E (12 CFR part 
205) include:
    i. Profit-sharing and pension accounts established under a trust 
agreement, which are exempt under Sec. 205.2(b)(2).
    ii. Escrow accounts, such as those established to ensure payment of 
items such as real estate taxes, insurance premiums, or completion of 
repairs or improvements.
    iii. Accounts for accumulating funds to purchase U.S. savings bonds.

                            Paragraph 2(b)(2)

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

                            2(d) Business Day

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

                        2(h) Electronic Terminal

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

               2(k) Preauthorized Electronic Fund Transfer

    1. Advance authorization. A ``preauthorized electronic fund 
transfer'' under Regulation E is one authorized by the consumer in 
advance of a transfer that will take place on a recurring basis, at 
substantially regular intervals, and will require no further action by

[[Page 150]]

the consumer to initiate the transfer. In a bill-payment system, for 
example, if the consumer authorizes a financial institution to make 
monthly payments to a payee by means of EFTs, and the payments take 
place without further action by the consumer, the payments are 
preauthorized EFTs. In contrast, if the consumer must take action each 
month to initiate a payment (such as by entering instructions on a 
touch-tone telephone or home computer), the payments are not 
preauthorized EFTs.

               2(m) Unauthorized Electronic Fund Transfer

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

                         Section 205.3--Coverage

                              3(a) General

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

                      3(b) Electronic Fund Transfer

                      Paragraph 3(b)(1)--Definition

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

[[Page 151]]

all payments to a particular payee or payees, will be solely by check, 
draft, or similar paper instrument drawn on the consumer's account, and 
the payee or payees that will be paid in this manner are identified to 
the consumer.
    2. Fund transfers not covered. The term electronic fund transfer 
does not include:
    i. A payment that does not debit or credit a consumer asset account, 
such as a payroll allotment to a creditor to repay a credit extension 
(which is deducted from salary).
    ii. A payment made in currency by a consumer to another person at an 
electronic terminal.
    iii. A preauthorized check drawn by the financial institution on the 
consumer's account (such as an interest or other recurring payment to 
the consumer or another party), even if the check is computer-generated.
    iv. Transactions arising from the electronic collection, 
presentment, or return of checks through the check collection system, 
such as through transmission of electronic check images.

  Paragraph 3(b)(2)--Electronic Fund Transfer Using Information From a 
                                  Check

    1. Notice at POS not furnished due to inadvertent error. If the copy 
of the notice under section 205.3(b)(2)(ii) for ECK transactions is not 
provided to the consumer at POS because of a bona fide unintentional 
error, such as when a terminal printing mechanism jams, no violation 
results if the payee maintains procedures reasonably adapted to avoid 
such occurrences.
    2. Authorization to process a transaction as an EFT or as a check. 
In order to process a transaction as an EFT or alternatively as a check, 
the payee must obtain the consumer's authorization to do so. A payee 
may, at its option, specify the circumstances under which a check may 
not be converted to an EFT. (See model clauses in Appendix A-6.)
    3. Notice for each transfer. Generally, a notice to authorize an 
electronic check conversion transaction must be provided for each 
transaction. For example, a consumer must receive a notice that the 
transaction will be processed as an EFT for each transaction at POS or 
each time a consumer mails a check in an accounts receivable (ARC) 
transaction to pay a bill, such as a utility bill, if the payee intends 
to convert a check received as payment. Similarly, the consumer must 
receive notice if the payee intends to collect a service fee for 
insufficient or uncollected funds via an EFT for each transaction 
whether at POS or if the consumer mails a check to pay a bill. The 
notice about when funds may be debited from a consumer's account and the 
non-return of consumer checks by the consumer's financial institution 
must also be provided for each transaction. However, if in an ARC 
transaction, a payee provides a coupon book to a consumer, for example, 
for mortgage loan payments, and the payment dates and amounts are set 
out in the coupon book, the payee may provide a single notice on the 
coupon book stating all of the required disclosures under paragraph 
(b)(2) of this section in order to obtain authorization for each 
conversion of a check and any debits via EFT to the consumer's account 
to collect any service fees imposed by the payee for insufficient or 
uncollected funds in the consumer's account. The notice must be placed 
on a conspicuous location of the coupon book that a consumer can 
retain--for example, on the first page, or inside the front cover.
    4. Multiple payments/multiple consumers. If a merchant or other 
payee will use information from a consumer's check to initiate an EFT 
from the consumer's account, notice to a consumer listed on the billing 
account that a check provided as payment during a single billing cycle 
or after receiving an invoice or statement will be processed as a one-
time EFT or as a check transaction constitutes notice for all checks 
provided in payment for the billing cycle or the invoice for which 
notice has been provided, whether the check(s) is submitted by the 
consumer or someone else. The notice applies to all checks provided in 
payment for the billing cycle or invoice until the provision of notice 
on or with the next invoice or statement. Thus, if a merchant or other 
payee receives a check as payment for the consumer listed on the billing 
account after providing notice that the check will be processed as a 
one-time EFT, the authorization from that consumer constitutes 
authorization to convert any other checks provided for that invoice or 
statement. Other notices required under this paragraph (b)(2) (for 
example, to collect a service fee for insufficient or uncollected funds 
via an EFT) provided to the consumer listed on the billing account also 
constitutes notice to any other consumer who may provide a check for the 
billing cycle or invoice.
    5. Additional disclosures about ECK transactions at POS. When a 
payee initiates an EFT at POS using information from the consumer's 
check, and returns the check to the consumer at POS, the payee need not 
provide a notice to the consumer that the check will not be returned by 
the consumer's financial institution.

Paragraph 3(b)(3)--Collection of Returned Item Fees via Electronic Fund 
                                Transfer

    1. Fees imposed by account-holding institution. The requirement to 
obtain a consumer's authorization to collect a fee via EFT for the 
return of an EFT or check unpaid applies only to the person that intends 
to initiate an EFT to collect the returned item fee from the consumer's 
account. The authorization

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requirement does not apply to any fees assessed by the consumer's 
account-holding financial institution when it returns the unpaid 
underlying EFT or check or pays the amount of an overdraft.
    2. Accounts receivable transactions. In an accounts receivable (ARC) 
transaction where a consumer sends in a payment for amounts owed (or 
makes an in-person payment at a biller's physical location, such as when 
a consumer makes a loan payment at a bank branch or places a payment in 
a dropbox), a person seeking to electronically collect a fee for items 
returned unpaid must obtain the consumer's authorization to collect the 
fee in this manner. A consumer authorizes a person to electronically 
collect a returned item fee when the consumer receives notice, typically 
on an invoice or statement, that the person may collect the fee through 
an EFT to the consumer's account, and the consumer goes forward with the 
underlying transaction by providing payment. The notice must also state 
the dollar amount of the fee. However, an explanation of how that fee 
will be determined may be provided in place of the dollar amount of the 
fee if the fee may vary due to the amount of the transaction or due to 
other factors, such as the number of days the underlying transaction is 
left outstanding. For example, if a state law permits a maximum fee of 
$30 or 10% of the underlying transaction, whichever is greater, the 
person collecting the fee may explain how the fee is determined, rather 
than state a specific dollar amount for the fee.
    3. Disclosure of dollar amount of fee for POS transactions. The 
notice provided to the consumer in connection with a POS transaction 
under Sec. 205.3(b)(3)(ii) must state the amount of the fee for a 
returned item if the dollar amount of the fee can be calculated at the 
time the notice is provided or mailed. For example, if notice is 
provided to the consumer at the time of the transaction, if the 
applicable state law sets a maximum fee that may be collected for a 
returned item based on the amount of the underlying transaction (such as 
where the amount of the fee is expressed as a percentage of the 
underlying transaction), the person collecting the fee must state the 
actual dollar amount of the fee on the notice provided to the consumer. 
Alternatively, if the amount of the fee to be collected cannot be 
calculated at the time of the transaction (for example, where the amount 
of the fee will depend on the number of days a debt continues to be 
owed), the person collecting the fee may provide a description of how 
the fee will be determined on both the posted notice as well as on the 
notice provided at the time of the transaction. However, if the person 
collecting the fee elects to send the consumer notice after the person 
has initiated an EFT to collect the fee, that notice must state the 
amount of the fee to be collected.
    4. Third party providing notice. The person initiating an EFT to a 
consumer's account to electronically collect a fee for an item returned 
unpaid may obtain the authorization and provide the notices required 
under Sec. 205.3(b)(3) through third parties, such as merchants.

                      3(c) Exclusions From Coverage

                        Paragraph 3(c)(1)--Checks

    1. Re-presented checks. The electronic re-presentment of a returned 
check is not covered by Regulation E because the transaction originated 
by check. Regulation E does apply, however, to any fee debited via an 
EFT from a consumer's account by the payee because the check was 
returned for insufficient or uncollected funds. The person debiting the 
fee electronically must obtain the consumer's authorization.
    2. Check used to capture information for a one-time EFT. See comment 
3(b)(1)-1.v.

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

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

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

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

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portion of the fund transfer is governed by the EFTA. The portion of the 
fund transfer that is governed by the EFTA is not governed by subpart B 
of Regulation J (12 CFR part 210).
    3. Similar fund transfer systems. Fund transfer systems that are 
similar to Fedwire include the Clearing House Interbank Payments System 
(CHIPS), Society for Worldwide Interbank Financial Telecommunication 
(SWIFT), Telex, and transfers made on the books of correspondent banks.

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

    1. Coverage. The securities exemption applies to securities and 
commodities that may be sold by a registered broker-dealer or futures 
commission merchant, even when the security or commodity itself is not 
regulated by the Securities and Exchange Commission or the Commodity 
Futures Trading Commission.
    2. Example of exempt transfer. The exemption applies to a transfer 
involving a transfer initiated by a telephone order to a stockbroker to 
buy or sell securities or to exercise a margin call.
    3. Examples of nonexempt transfers. The exemption does not apply to 
a transfer involving:
    i. A debit card or other access device that accesses a securities or 
commodities account such as a money market mutual fund and that the 
consumer uses for purchasing goods or services or for obtaining cash.
    ii. A payment of interest or dividends into the consumer's account 
(for example, from a brokerage firm or from a Federal Reserve Bank for 
government securities).

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

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

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

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

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

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

[[Page 154]]

Section 205.4--General Disclosure Requirements; Jointly Offered Services

                        4(a) Form of Disclosures

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

                Section 205.5--Issuance of Access Devices

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

                         5(a) Solicited Issuance

                            Paragraph 5(a)(1)

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

                            Paragraph 5(a)(2)

    1. One-for-one rule. In issuing a renewal or substitute access 
device, only one renewal or substitute device may replace a previously 
issued device. For example, only one new card and PIN may replace a card 
and PIN previously issued. A financial institution may provide 
additional devices at the time it issues the renewal or substitute 
access device, however, provided the institution complies with Sec. 
205.5(b). (See comment 5(b)-5.) If the replacement device or the 
additional device permits either fewer or additional types of electronic 
fund transfer services, a change-in-terms notice or new disclosures are 
required.
    2. Renewal or substitution by a successor institution. A successor 
institution is an entity that replaces the original financial 
institution (for example, following a corporate merger or acquisition) 
or that acquires accounts or assumes the operation of an EFT system.

                        5(b) Unsolicited Issuance

    1. Compliance. A financial institution may issue an unsolicited 
access device (such as the combination of a debit card and PIN) if the 
institution's ATM system has been programmed not to accept the access 
device until after the consumer requests and the institution validates 
the device. Merely instructing a consumer not to use an unsolicited 
debit card and PIN until after the institution verifies the consumer's 
identity does not comply with the regulation.
    2. PINS. A financial institution may impose no liability on a 
consumer for unauthorized transfers involving an unsolicited access 
device until the device becomes an ``accepted access device'' under the 
regulation. A card and PIN combination may be treated as an accepted 
access device once the consumer has used it to make a transfer.
    3. Functions of PIN. If an institution issues a PIN at the 
consumer's request, the issuance may constitute both a way of validating 
the debit card and the means to identify the consumer (required as a 
condition of imposing liability for unauthorized transfers).
    4. Verification of identity. To verify the consumer's identity, a 
financial institution may use any reasonable means, such as a 
photograph, fingerprint, personal visit, signature comparison, or 
personal information about the consumer. However, even if reasonable 
means were used, if an institution fails to verify correctly the 
consumer's identity and an imposter succeeds in having the device 
validated, the consumer is not liable for any unauthorized transfers 
from the account.
    5. Additional access devices in a renewal or substitution. A 
financial institution may issue more than one access device in 
connection with the renewal or substitution of a previously issued 
accepted access device, provided that any additional access device 
(beyond the device replacing the accepted access device) is not 
validated at the time it is issued, and the institution complies with 
the other requirements of Sec. 205.5(b). The institution may, if it 
chooses, set up the validation procedure such that both the device 
replacing the previously issued device and the additional device are not 
validated at the time they are issued, and validation will apply to both 
devices. If the institution sets up the validation procedure in this 
way, the institution should provide a clear and readily understandable 
disclosure to the consumer that both devices are unvalidated and that 
validation will apply to both devices.

     Section 205.6--Liability of Consumer for Unauthorized Transfers

                      6(a) Conditions for Liability

    1. Means of identification. A financial institution may use various 
means for identifying the consumer to whom the access device is issued, 
including but not limited to:
    i. Electronic or mechanical confirmation (such as a PIN).

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    ii. Comparison of the consumer's signature, fingerprint, or 
photograph.
    2. Multiple users. When more than one access device is issued for an 
account, the financial institution may, but need not, provide a separate 
means to identify each user of the account.

                 6(b) Limitations on Amount of Liability

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

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

    1. $50 limit applies. The basic liability limit is $50. For example, 
the consumer's card is lost or stolen on Monday and the consumer learns 
of the loss or theft on Wednesday. If the consumer notifies the 
financial institution within two business days of learning of the loss 
or theft (by midnight Friday), the consumer's liability is limited to 
$50 or the amount of the unauthorized transfers that occurred before 
notification, whichever is less.
    2. Knowledge of loss or theft of access device. The fact that a 
consumer has received a periodic statement that reflects unauthorized 
transfers may be a factor in determining whether the consumer had 
knowledge of the loss or theft, but cannot be deemed to represent 
conclusive evidence that the consumer had such knowledge.
    3. Two-business-day rule. The two-business-day period does not 
include the day the consumer learns of the loss or theft or any day that 
is not a business day. The rule is calculated based on two 24-hour 
periods, without regard to the financial institution's business hours or 
the time of day that the consumer learns of the loss or theft. For 
example, a consumer learns of the loss or theft at 6 p.m. on Friday. 
Assuming that Saturday is a business day and Sunday is not, the two-
business-day period begins on Saturday and expires at 11:59 p.m. on 
Monday, not at the end of the financial institution's business day on 
Monday.

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

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

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

    1. Unlimited liability applies. The standard of unlimited liability 
applies if unauthorized transfers appear on a periodic statement, and 
may apply in conjunction with the first two tiers of liability. If a 
periodic statement shows an unauthorized transfer made with a lost or 
stolen debit card, the consumer must notify the financial institution 
within 60 calendar days after the periodic statement was sent; 
otherwise, the consumer faces unlimited liability for all unauthorized 
transfers made after the 60-day period. The consumer's liability for 
unauthorized transfers before the statement is sent, and up to 60 days 
following, is determined based on the first two tiers of liability: up 
to $50 if the consumer notifies the financial institution within two 
business days of learning of the loss or theft of the card and up to 
$500 if the consumer notifies the institution after two business days of 
learning of the loss or theft.
    2. Transfers not involving access device. The first two tiers of 
liability do not apply to unauthorized transfers from a consumer's 
account made without an access device. If, however, the consumer fails 
to report such

[[Page 156]]

unauthorized transfers within 60 calendar days of the financial 
institution's transmittal of the periodic statement, the consumer may be 
liable for any transfers occurring after the close of the 60 days and 
before notice is given to the institution. For example, a consumer's 
account is electronically debited for $200 without the consumer's 
authorization and by means other than the consumer's access device. If 
the consumer notifies the institution within 60 days of the transmittal 
of the periodic statement that shows the unauthorized transfer, the 
consumer has no liability. However, if in addition to the $200, the 
consumer's account is debited for a $400 unauthorized transfer on the 
61st day and the consumer fails to notify the institution of the first 
unauthorized transfer until the 62nd day, the consumer may be liable for 
the full $400.

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

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

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

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

                   Section 205.7--Initial Disclosures

                       7(a) Timing of Disclosures

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

                       7(b) Content of Disclosures

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

    1. No liability imposed by financial institution. If a financial 
institution chooses to impose zero liability for unauthorized EFTs, it 
need not provide the liability disclosures. If the institution later 
decides to impose liability, however, it must first provide the 
disclosures.

[[Page 157]]

    2. Preauthorized transfers. If the only EFTs from an account are 
preauthorized transfers, liability could arise if the consumer fails to 
report unauthorized transfers reflected on a periodic statement. To 
impose such liability on the consumer, the institution must have 
disclosed the potential liability and the telephone number and address 
for reporting unauthorized transfers.
    3. Additional information. At the institution's option, the summary 
of the consumer's liability may include advice on promptly reporting 
unauthorized transfers or the loss or theft of the access device.

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

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

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

    1. Security limitations. Information about limitations on the 
frequency and dollar amount of transfers generally must be disclosed in 
detail, even if related to security aspects of the system. If the 
confidentiality of certain details is essential to the security of an 
account or system, these details may be withheld (but the fact that 
limitations exist must still be disclosed). For example, an institution 
limits cash ATM withdrawals to $100 per day. The institution may 
disclose that daily withdrawal limitations apply and need not disclose 
that the limitations may not always be in force (such as during periods 
when its ATMs are off-line).
    2. Restrictions on certain deposit accounts. A limitation on account 
activity that restricts the consumer's ability to make EFTs must be 
disclosed even if the restriction also applies to transfers made by 
nonelectronic means. For example, Regulation D (12 CFR Part 204) 
restricts the number of payments to third parties that may be made from 
a money market deposit account; an institution that does not execute 
fund transfers in excess of those limits must disclose the restriction 
as a limitation on the frequency of EFTs.
    3. Preauthorized transfers. Financial institutions are not required 
to list preauthorized transfers among the types of transfers that a 
consumer can make.
    4. One-time EFTs initiated using information from a check. Financial 
institutions must disclose the fact that one-time EFTs initiated using 
information from a consumer's check are among the types of transfers 
that a consumer can make. (See Appendix A-2.)

                         Paragraph 7(b)(5)--Fees

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

                   Paragraph 7(b)(9)--Confidentiality

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

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

    1. Substantially similar. The error resolution notice must be 
substantially similar to the

[[Page 158]]

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

           7(c) Addition of Electronic Fund Transfer Services

    1. Addition of electronic check conversion services. One-time EFTs 
initiated using information from a consumer's check are a new type of 
transfer requiring new disclosures, as applicable. (See Appendix A-2.)

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

                       8(a) Change-in-Terms Notice

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

                      8(b) Error Resolution Notice

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

  Section 205.9--Receipts at Electronic Terminals; Periodic Statements

                  9(a) Receipts at Electronic Terminals

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

                        Paragraph 9(a)(1)--Amount

    1. Disclosure of transaction fee. The required display of a fee 
amount on or at the terminal may be accomplished by displaying the fee 
on a sign at the terminal or on the terminal screen for a reasonable 
duration. Displaying the fee on a screen provides adequate notice,

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

                         Paragraph 9(a)(2)--Date

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

                         Paragraph 9(a)(3)--Type

    1. Identifying transfer and account. Examples identifying the type 
of transfer and the type of the consumer's account include ``withdrawal 
from checking,'' ``transfer from savings to checking,'' or ``payment 
from savings.''
    2. Exception. Identification of an account is not required when the 
consumer can access only one asset account at a particular time or 
terminal, even if the access device can normally be used to access more 
than one account. For example, the consumer may be able to access only 
one particular account at terminals not operated by the account-holding 
institution, or may be able to access only one particular account when 
the terminal is off-line. The exception is available even if, in 
addition to accessing one asset account, the consumer also can access a 
credit line.
    3. Access to multiple accounts. If the consumer can use an access 
device to make transfers to or from different accounts of the same type, 
the terminal receipt must specify which account was accessed, such as 
``withdrawal from checking I'' or ``withdrawal from checking II.'' If 
only one account besides the primary checking account can be debited, 
the receipt can identify the account as ``withdrawal from other 
account.''
    4. Generic descriptions. Generic descriptions may be used for 
accounts that are similar in function, such as share draft or NOW 
accounts and checking accounts. In a shared system, for example, when a 
credit union member initiates transfers to or from a share draft account 
at a terminal owned or operated by a bank, the receipt may identify a 
withdrawal from the account as a ``withdrawal from checking.''
    5. Point-of-sale transactions. There is no prescribed terminology 
for identifying a transfer at a merchant's POS terminal. A transfer may 
be identified, for example, as a purchase, a sale of goods or services, 
or a payment to a third party. When a consumer obtains cash from a POS 
terminal in addition to purchasing goods, or obtains cash only, the 
documentation need not differentiate the transaction from one involving 
the purchase of goods.

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

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

                          Paragraph 9(a)(5)(i)

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

[[Page 160]]

                          Paragraph 9(a)(5)(ii)

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

                         Paragraph 9(a)(5)(iii)

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

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

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

                        9(b) Periodic Statements

    1. Periodic cycles. Periodic statements may be sent on a cycle that 
is shorter than monthly. The statements must correspond to periodic 
cycles that are reasonably equal, that is, do not vary by more than four 
days from the regular cycle. The requirement of reasonably equal cycles 
does not apply when an institution changes cycles for operational or 
other reasons, such as to establish a new statement day or date.
    2. Interim statements. Generally, a financial institution must 
provide periodic statements for each monthly cycle in which an EFT 
occurs, and at least quarterly if a transfer has not occurred. Where 
EFTs occur between regularly-scheduled cycles, interim statements must 
be provided. For example, if an institution issues quarterly statements 
at the end of March, June, September and December, and the consumer 
initiates an EFT in February, an interim statement for February must be 
provided. If an interim statement contains interest or rate information, 
the institution must comply with Regulation DD, 12 CFR 230.6.
    3. Inactive accounts. A financial institution need not send 
statements to consumers whose accounts are inactive as defined by the 
institution.
    4. Statement pickup. A financial institution may permit, but may not 
require, consumers to pick up their periodic statements at the financial 
institution.
    5. Periodic statements limited to EFT activity. A financial 
institution that uses a passbook as the primary means for displaying 
account activity, but also allows the account to be debited 
electronically, may provide a periodic statement requirement that 
reflects only the EFTs and other required disclosures (such as charges, 
account balances, and address and telephone number for inquiries). (See 
Sec. 205.9(c)(1)(i) for the exception applicable to preauthorized 
transfers for passbook accounts.)
    6. Codes and accompanying documents. To meet the documentation 
requirements for periodic statements, a financial institution may:
    i. Include copies of terminal receipts to reflect transfers 
initiated by the consumer at electronic terminals;
    ii. Enclose posting memos, deposit slips, and other documents that, 
together with the statement, disclose all the required information;
    iii. Use codes for names of third parties or terminal locations and 
explain the information to which the codes relate on an accompanying 
document.

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

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

                          Paragraph 9(b)(1)(i)

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

                         Paragraph 9(b)(1)(iii)

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

                          Paragraph 9(b)(1)(iv)

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

[[Page 161]]

entity that owns or operates the terminal, plus the city and state.

                          Paragraph 9(b)(1)(v)

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

                         Paragraph 9(b)(3)--Fees

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

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

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

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

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

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

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

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

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

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

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

           9(d) Documentation for Foreign-Initiated Transfers

    1. Foreign-initiated transfers. An institution must make a good 
faith effort to provide all required information for foreign-initiated

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transfers. For example, even if the institution is not able to provide a 
specific terminal location, it should identify the country and city in 
which the transfer was initiated.

                 Section 205.10--Preauthorized Transfers

           10(a) Preauthorized Transfers to Consumer's Account

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

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

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

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

[[Page 163]]

error will depend upon the circumstances. Generally, requesting the 
consumer to specify whether the card to be used for the authorization is 
a debit (or check) card or a credit card is a reasonable procedure. 
Where the consumer has indicated that the card is a credit card (or that 
the card is not a debit or check card), the payee may rely on the 
consumer's statement without seeking further information about the type 
of card. If the payee believes, at the time of the authorization, that a 
credit card is involved, and later finds that the card used is a debit 
card (for example, because the consumer later brings the matter to the 
payee's attention), the payee must obtain a written and signed or (where 
appropriate) a similarly authenticated authorization as soon as 
reasonably possible, or cease debiting the consumer's account.

                 10(c) Consumer's Right To Stop Payment

    1. Stop-payment order. The financial institution must honor an oral 
stop-payment order made at least three business days before a scheduled 
debit. If the debit item is resubmitted, the institution must continue 
to honor the stop-payment order (for example, by suspending all 
subsequent payments to the payee-originator until the consumer notifies 
the institution that payments should resume).
    2. Revocation of authorization. Once a financial institution has 
been notified that the consumer's authorization is no longer valid, it 
must block all future payments for the particular debit transmitted by 
the designated payee-originator. (However, see comment 10(c)-3.) The 
institution may not wait for the payee-originator to terminate the 
automatic debits. The institution may confirm that the consumer has 
informed the payee-originator of the revocation (for example, by 
requiring a copy of the consumer's revocation as written confirmation to 
be provided within 14 days of an oral notification). If the institution 
does not receive the required written confirmation within the 14-day 
period, it may honor subsequent debits to the account.
    3. Alternative procedure for processing a stop-payment request. If 
an institution does not have the capability to block a preauthorized 
debit from being posted to the consumer's account--as in the case of a 
preauthorized debit made through a debit card network or other system, 
for example--the institution may instead comply with the stop-payment 
requirements by using a third party to block the transfer(s), as long as 
the consumer's account is not debited for the payment.

               10(d) Notice of Transfers Varying in Amount

                       Paragraph 10(d)(1)--Notice

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

                        Paragraph 10(d)(2)--Range

    1. Range. A financial institution or designated payee that elects to 
offer the consumer a specified range of amounts for debiting (in lieu of 
providing the notice of transfers varying in amount) must provide an 
acceptable range that could be anticipated by the consumer. For example, 
if the transfer is for payment of a gas bill, an appropriate range might 
be based on the highest bill in winter and the lowest bill in summer.
    2. Transfers to an account of the consumer held at another 
institution. A financial institution need not provide a consumer the 
option of receiving notice with each varying transfer, and may instead 
provide notice only when a debit to an account of the consumer falls 
outside a specified range or differs by more than a specified amount 
from the most recent transfer, if the funds are transferred and credited 
to an account of the consumer held at another financial institution. The 
specified range or amount, however, must be one that reasonably could be 
anticipated by the consumer, and the institution must notify the 
consumer of the range or amount at the time the consumer provides 
authorization for the preauthorized transfers. For example, if the 
transfer is for payment of interest for a fixed-rate certificate of 
deposit account, an appropriate range might be based on a month 
containing 28 days and a month containing 31 days.

                          10(e) Compulsory Use

                       Paragraph 10(e)(1)--Credit

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

[[Page 164]]

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

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

             Section 205.11--Procedures for Resolving Errors

                        11(a) Definition of Error

    1. Terminal location. With regard to deposits at an ATM, a 
consumer's request for the terminal location or other information 
triggers the error resolution procedures, but the financial institution 
need only provide the ATM location if it has captured that information.
    2. Verifying an account debit or credit. If the consumer contacts 
the financial institution to ascertain whether a payment (for example, 
in a home-banking or bill-payment program) or any other type of EFT was 
debited to the account, or whether a deposit made via ATM, preauthorized 
transfer, or any other type of EFT was credited to the account, without 
asserting an error, the error resolution procedures do not apply.
    3. Loss or theft of access device. A financial institution is 
required to comply with the error resolution procedures when a consumer 
reports the loss or theft of an access device if the consumer also 
alleges possible unauthorized use as a consequence of the loss or theft.
    4. Error asserted after account closed. The financial institution 
must comply with the error resolution procedures when a consumer 
properly asserts an error, even if the account has been closed.
    5. Request for documentation or information. A request for 
documentation or other information must be treated as an error unless it 
is clear that the consumer is requesting a duplicate copy for tax or 
other record-keeping purposes.
    6. Terminal receipts for transfers of $15 or less. The fact that an 
institution does not make a terminal receipt available for a transfer of 
$15 or less in accordance with Sec. 205.9(e) is not an error for 
purposes of Sec. Sec. 205.11(a)(1)(vi) or (vii).

                   11(b) Notice of Error From Consumer

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

    1. Content of error notice. The notice of error is effective even if 
it does not contain the consumer's account number, so long as the 
financial institution is able to identify the account in question. For 
example, the consumer could provide a Social Security number or other 
unique means of identification.
    2. Investigation pending receipt of information. While a financial 
institution may request a written, signed statement from the consumer 
relating to a notice of error, it may not delay initiating or completing 
an investigation pending receipt of the statement.
    3. Statement held for consumer. When a consumer has arranged for 
periodic statements to be held until picked up, the statement for a 
particular cycle is deemed to have been transmitted on the date the 
financial institution first makes the statement available to the 
consumer.
    4. Failure to provide statement. When a financial institution fails 
to provide the consumer with a periodic statement, a request for a copy 
is governed by this section if the consumer gives notice within 60 days 
from the date on which the statement should have been transmitted.
    5. Discovery of error by institution. The error resolution 
procedures of this section apply when a notice of error is received from 
the consumer, and not when the financial institution itself discovers 
and corrects an error.
    6. Notice at particular phone number or address. A financial 
institution may require the consumer to give notice only at the 
telephone number or address disclosed by the institution, provided the 
institution maintains reasonable procedures to refer the consumer to the 
specified telephone number or address if the consumer attempts to give 
notice to the institution in a different manner.
    7. Effect of late notice. An institution is not required to comply 
with the requirements of this section for any notice of error from the 
consumer that is received by the institution later than 60 days from the 
date on which the periodic statement first reflecting the error is sent. 
Where the consumer's assertion of error involves an unauthorized EFT, 
however, the institution must comply with Sec. 205.6 before it may 
impose any liability on the consumer.

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

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

[[Page 165]]

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

              11(c) Time Limits and Extent of Investigation

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

                          Paragraph 11(c)(2)(i)

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

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

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

                    Paragraph 11(c)(4)--Investigation

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

[[Page 166]]

the investigation required may vary depending on the facts and 
circumstances. However, a financial institution may not limit its 
investigation solely to the payment instructions where additional 
information within its own records pertaining to the particular account 
in question could help to resolve a consumer's claim.
    Information that may be reviewed as part of an investigation might 
include:
    i. The ACH transaction records for the transfer;
    ii. The transaction history of the particular account for a 
reasonable period of time immediately preceding the allegation of error;
    iii. Whether the check number of the transaction in question is 
notably out-of-sequence;
    iv. The location of either the transaction or the payee in question 
relative to the consumer's place of residence and habitual transaction 
area;
    v. Information relative to the account in question within the 
control of the institution's third-party service providers if the 
financial institution reasonably believes that it may have records or 
other information that could be dispositive; or
    vi. Any other information appropriate to resolve the claim.

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

    1. Error different from that alleged. When a financial institution 
determines that an error occurred in a manner or amount different from 
that described by the consumer, it must comply with the requirements of 
both Sec. 205.11 (c) and (d), as relevant. The institution may give the 
notice of correction and the explanation separately or in a combined 
form.

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

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

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

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

                       11(e) Reassertion of Error

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

                 Section 205.12--Relation to Other Laws

                   12(a) Relation to Truth in Lending

    1. Determining applicable regulation. i. For transactions involving 
access devices that also function as credit cards, whether Regulation E 
or Regulation Z (12 CFR part 226) applies depends on the nature of the 
transaction. For example, if the transaction solely involves an 
extension of credit, and does not include a debit to a checking account 
(or other consumer asset account), the liability limitations and error 
resolution requirements of Regulation Z apply. If the transaction debits 
a checking account only (with no credit extended), the provisions of 
Regulation E apply. If the transaction debits a checking account but 
also draws on an overdraft line of credit attached to the account, 
Regulation E's liability limitations apply, in addition to Sec. Sec. 
226.13 (d) and (g) of Regulation Z (which apply because of the extension 
of credit associated with the overdraft feature on the checking 
account). If a consumer's access device is also a credit card and the 
device is used to make unauthorized withdrawals from a checking account, 
but also is used to obtain unauthorized cash advances directly from a 
line of credit that is separate from the checking account, both 
Regulation E and Regulation Z apply.
    ii. The following examples illustrate these principles:
    A. A consumer has a card that can be used either as a credit card or 
a debit card. When used as a debit card, the card draws on the 
consumer's checking account. When used as a credit card, the card draws 
only on a separate line of credit. If the card is stolen and used as a 
credit card to make purchases or to get cash advances at an ATM from the 
line of credit, the liability limits and error resolution provisions of 
Regulation Z apply; Regulation E does not apply.

[[Page 167]]

    B. In the same situation, if the card is stolen and is used as a 
debit card to make purchases or to get cash withdrawals at an ATM from 
the checking account, the liability limits and error resolution 
provisions of Regulation E apply; Regulation Z does not apply.
    C. In the same situation, assume the card is stolen and used both as 
a debit card and as a credit card; for example, the thief makes some 
purchases using the card as a debit card, and other purchases using the 
card as a credit card. Here, the liability limits and error resolution 
provisions of Regulation E apply to the unauthorized transactions in 
which the card was used as a debit card, and the corresponding 
provisions of Regulation Z apply to the unauthorized transactions in 
which the card was used as a credit card.
    D. Assume a somewhat different type of card, one that draws on the 
consumer's checking account and can also draw on an overdraft line of 
credit attached to the checking account. There is no separate line of 
credit, only the overdraft line, associated with the card. In this 
situation, if the card is stolen and used, the liability limits and the 
error resolution provisions of Regulation E apply. In addition, if the 
use of the card has resulted in accessing the overdraft line of credit, 
the error resolution provisions of Sec. 226.13(d) and (g) of Regulation 
Z also apply, but not the other error resolution provisions of 
Regulation Z.
    2. Issuance rules. For access devices that also constitute credit 
cards, the issuance rules of Regulation E apply if the only credit 
feature is a preexisting credit line attached to the asset account to 
cover overdrafts (or to maintain a specified minimum balance). 
Regulation Z (12 CFR part 226) rules apply if there is another type of 
credit feature, for example, one permitting direct extensions of credit 
that do not involve the asset account.

               12(b) Preemption of Inconsistent State Laws

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

      Section 205.13--Administrative Enforcement; Record Retention

                         13(b) Record Retention

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

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

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

    1. Applicability. This section applies only when a service provider 
issues an access device to a consumer for initiating transfers to or 
from the consumer's account at a financial institution and the two 
entities have no agreement regarding this EFT service. If the service 
provider does not issue an access device to the consumer for accessing 
an account held by another institution, it does not qualify for the 
treatment accorded by Sec. 205.14. For example, this section does not 
apply to an institution that initiates preauthorized payroll deposits to 
consumer accounts on behalf of an employer. By contrast, Sec. 205.14 
can apply to an institution that issues a code for initiating telephone 
transfers to be carried out through the ACH from a consumer's account at 
another institution. This is the case even if the consumer has accounts 
at both institutions.

[[Page 168]]

    2. ACH agreements. The ACH rules generally do not constitute an 
agreement for purposes of this section. However, an ACH agreement under 
which members specifically agree to honor each other's debit cards is an 
``agreement,'' and thus this section does not apply.

      14(b) Compliance by Electronic Fund Transfer Service Provider

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

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

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

             14(c) Compliance by Account-Holding Institution

                           Paragraph 14(c)(1)

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

        Section 205.16--Disclosures at Automated Teller Machines

                              16(b) General

                           Paragraph 16(b)(1)

    1. Specific notices. An ATM operator that imposes a fee for a 
specific type of transaction--such as for a cash withdrawal, but not for 
a balance inquiry, or for some cash withdrawals, but not for others 
(such as where the card was issued by a foreign bank or by a card issuer 
that has entered into a special contractual relationship with the ATM 
operator regarding surcharges)--may provide a notice on or at the ATM 
that a fee will be imposed or a notice that a fee may be imposed for 
providing EFT services or may specify the type of EFT for which a fee is 
imposed. If, however, a fee will be imposed in all instances, the notice 
must state that a fee will be imposed.

                        Section 205.17 [Reserved]

 Sec. 205.18 Requirements for Financial Institutions Offering Payroll 
                             Card Accounts.

                             18(a) Coverage

    1. Issuance of access device. Consistent with Sec. 205.5(a), a 
financial institution may issue an access device only in response to an 
oral or written request for the device, or as a renewal or substitute 
for an accepted access device. A consumer is deemed to request an access 
device for a payroll card account when the consumer chooses to receive 
salary or other compensation through a payroll card account.
    2. Application to employers and service providers. Typically, 
employers and third-party service providers do not meet the definition 
of a ``financial institution'' subject to the regulation because they 
neither hold payroll card accounts nor issue payroll cards and agree 
with consumers to provide EFT services in connection with payroll card 
accounts. However, to the extent an employer or a service provider 
undertakes either of these functions, it would be deemed a financial 
institution under the regulation.

                18(b) Alternative to Periodic Statements

    1. Posted transactions. A history of transactions provided under 
Sec. Sec. 205.18(b)(1)(ii) and (iii) shall reflect transfers once they 
have been posted to the account. Thus, an institution does not need to 
include transactions that have been authorized, but that have not yet 
posted to the account.
    2. Electronic history. The electronic history required under Sec. 
205.18(b)(1)(ii) must be provided in a form that the consumer may keep, 
as required under Sec. 205.4(a)(1). Financial institutions may satisfy 
this requirement if they make the electronic history available in a 
format that is capable of being retained. For example, an institution 
satisfies the requirement if it provides a history at an Internet Web 
site in a format that is capable of being printed or stored 
electronically using an Internet web browser.

                       18(c) Modified Requirements

    1. Error resolution safe harbor provision. Institutions that choose 
to investigate notices of error provided up to 120 days from the date a 
transaction has posted to a consumer's account may still disclose the 
error resolution time period required by the regulation (as set forth in 
the Model Form in Appendix A-7). Specifically, an institution may 
disclose to payroll card account holders that the institution will 
investigate any notice of error provided within 60 days of the consumer 
electronically accessing an account or

[[Page 169]]

receiving a written history upon request that reflects the error, even 
if, for some or all transactions, the institution investigates any 
notice of error provided up to 120 days from the date that the 
transaction alleged to be in error has posted to the consumer's account. 
Similarly, an institution's summary of the consumer's liability (as 
required under Sec. 205.7(b)(1)) may disclose that liability is based 
on the consumer providing notice of error within 60 days of the consumer 
electronically accessing an account or receiving a written history 
reflecting the error, even if, for some or all transactions, the 
institution allows a consumer to assert a notice of error up to 120 days 
from the date of posting of the alleged error.
    2. Electronic access. A consumer is deemed to have accessed a 
payroll card account electronically when the consumer enters a user 
identification code or password or otherwise complies with a security 
procedure used by an institution to verify the consumer's identity. An 
institution is not required to determine whether a consumer has in fact 
accessed information about specific transactions to trigger the 
beginning of the 60-day periods for liability limits and error 
resolution under Sec. Sec. 205.6 and 205.11.
    3. Untimely notice of error. An institution that provides a 
transaction history under Sec. 205.18(b)(1) is not required to comply 
with the requirements of Sec. 205.11 for any notice of error from the 
consumer pertaining to a transfer that occurred more than 60 days prior 
to the earlier of the date the consumer electronically accesses the 
account or the date the financial institution sends a written history 
upon the consumer's request. (Alternatively, as provided in Sec. 
205.18(c)(4)(ii), an institution need not comply with the requirements 
of Sec. 205.11 with respect to any notice of error received from the 
consumer more than 120 days after the date of posting of the transfer 
allegedly in error.) Where the consumer's assertion of error involves an 
unauthorized EFT, however, the institution must comply with Sec. 205.6 
before it may impose any liability on the consumer.

             Appendix A--Model Disclosure Clauses and Forms

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

[Reg. E, 61 FR 19686, May 2, 1996, as amended at 66 FR 13412, Mar. 6, 
2001; 66 FR 15192, Mar. 16, 2001; 66 FR 17794, Apr. 4, 2001; 71 FR 1661, 
Jan. 10, 2006; 71 FR 69437, Dec. 1, 2006; 71 FR 1482, Jan. 10, 2006, 71 
FR 51450, Aug. 30, 2006; 72 FR 36593, July 5, 2007; 72 FR 63456, Nov. 9, 
2007]



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




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

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

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



Sec. 206.1  Authority, purpose, and scope.

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

[[Page 170]]

    (b) Scope. This part applies to all depository institutions insured 
by the Federal Deposit Insurance Corporation.

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



Sec. 206.2  Definitions.

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

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



Sec. 206.3  Prudential standards.

    (a) General. A bank shall establish and maintain written policies 
and procedures to prevent excessive exposure to any individual 
correspondent in relation to the condition of the correspondent.
    (b) Standards for selecting correspondents. (1) A bank shall 
establish policies and procedures that take into account credit and 
liquidity risks, including operational risks, in selecting 
correspondents and terminating those relationships.
    (2) Where exposure to a correspondent is significant, the policies 
and procedures shall require periodic reviews of the financial condition 
of the correspondent and shall take into account any deterioration in 
the correspondent's financial condition. Factors bearing on the 
financial condition of the correspondent include the capital level of 
the correspondent, level of nonaccrual and past due loans and leases, 
level of earnings, and other factors affecting the financial condition 
of the correspondent. Where public information on the financial 
condition of

[[Page 171]]

the correspondent is available, a bank may base its review of the 
financial condition of a correspondent on such information, and is not 
required to obtain non-public information for its review. However, for 
those foreign banks for which there is no public source of financial 
information, a bank will be required to obtain information for its 
review.
    (3) A bank may rely on another party, such as a bank rating agency 
or the bank's holding company, to assess the financial condition of or 
select a correspondent, provided that the bank's board of directors has 
reviewed and approved the general assessment or selection criteria used 
by that party.
    (c) Internal limits on exposure. (1) Where the financial condition 
of the correspondent and the form or maturity of the exposure create a 
significant risk that payments will not be made in full or in a timely 
manner, a bank's policies and procedures shall limit the bank's exposure 
to the correspondent, either by the establishment of internal limits or 
by other means. Limits shall be consistent with the risk undertaken, 
considering the financial condition and the form and maturity of 
exposure to the correspondent. Limits may be fixed as to amount or 
flexible, based on such factors as the monitoring of exposure and the 
financial condition of the correspondent. Different limits may be set 
for different forms of exposure, different products, and different 
maturities.
    (2) A bank shall structure transactions with a correspondent or 
monitor exposure to a correspondent, directly or through another party, 
to ensure that its exposure ordinarily does not exceed the bank's 
internal limits, including limits established for credit exposure, 
except for occasional excesses resulting from unusual market 
disturbances, market movements favorable to the bank, increases in 
activity, operational problems, or other unusual circumstances. 
Generally, monitoring may be done on a retrospective basis. The level of 
monitoring required depends on:
    (i) The extent to which exposure approaches the bank's internal 
limits;
    (ii) The volatility of the exposure; and
    (iii) The financial condition of the correspondent.
    (3) A bank shall establish appropriate procedures to address 
excesses over its internal limits.
    (d) Review by board of directors. The policies and procedures 
established under this section shall be reviewed and approved by the 
bank's board of directors at least annually.

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



Sec. 206.4  Credit exposure.

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

[[Page 172]]

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

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



Sec. 206.5  Capital levels of correspondents.

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

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

    (1) A total risk-based capital ratio, as defined in paragraph (e)(1) 
of this section, of 8.0 percent or greater;

[[Page 173]]

    (2) A Tier 1 risk-based capital ratio, as defined in paragraph 
(e)(2) of this section, of 4.0 percent or greater; and
    (3) A leverage ratio, as defined in paragraph (e)(3) of this 
section, of 4.0 percent or greater.
    (b) Frequency of monitoring capital levels. A bank shall obtain 
information to demonstrate that a correspondent is at least adequately 
capitalized on a quarterly basis, either from the most recently 
available Report of Condition and Income, Thrift Financial Report, 
financial statement, or bank rating report for the correspondent. For a 
foreign bank correspondent for which quarterly financial statements or 
reports are not available, a bank shall obtain such information on as 
frequent a basis as such information is available. Information obtained 
directly from a correspondent for the purpose of this section should be 
based on the most recently available Report of Condition and Income, 
Thrift Financial Report, or financial statement of the correspondent.
    (c) Foreign banks. A correspondent that is a foreign bank may be 
considered adequately capitalized under this section without regard to 
the minimum leverage ratio required under paragraph (a)(3) of this 
section.
    (d) Reliance on information. A bank may rely on information as to 
the capital levels of a correspondent obtained from the correspondent, a 
bank rating agency, or other party that it reasonably believes to be 
accurate.
    (e) Definitions. For the purposes of this section:
    (1) Total risk-based capital ratio means the ratio of qualifying 
total capital to weighted risk assets.
    (2) Tier 1 risk-based capital ratio means the ratio of Tier 1 
capital to weighted risk assets.
    (3) Leverage ratio means the ratio of Tier 1 capital to average 
total consolidated assets, as calculated in accordance with the capital 
adequacy guidelines of the correspondent's primary federal supervisor.
    (f) Calculation of capital ratios. (1) For a correspondent that is a 
U.S. depository institution, the ratios shall be calculated in 
accordance with the capital adequacy guidelines of the correspondent's 
primary federal supervisor.
    (2) For a correspondent that is a foreign bank organized in a 
country that has adopted the risk-based framework of the Basel Capital 
Accord, the ratios shall be calculated in accordance with the capital 
adequacy guidelines of the appropriate supervisory authority of the 
country in which the correspondent is chartered.
    (3) For a correspondent that is a foreign bank organized in a 
country that has not adopted the risk-based framework of the Basel 
Capital Accord, the ratios shall be calculated in accordance with the 
provisions of the Basel Capital Accord.

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



Sec. 206.6  Waiver.

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



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




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

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

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



Sec. 207.1  Purpose and scope of this part.

    (a) General. This part implements section 711 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1831y). That section requires any nongovernmental 
entity or person, insured depository institution,

[[Page 174]]

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



Sec. 207.2  Definition of covered agreement.

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

[[Page 175]]

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

[[Page 176]]

loan, extension of credit or loan commitment may be excluded for 
purposes of determining whether the agreement is a covered agreement.
    (f) Determining annual value of agreements that lack schedule of 
disbursements. For purposes of paragraph (a)(3) of this section, a 
multi-year agreement that does not include a schedule for the 
disbursement of payments, grants, loans or other consideration by the 
insured depository institution or affiliate, is considered to have a 
value in the first year of the agreement equal to all payments, grants, 
loans and other consideration to be provided at any time under the 
agreement.



Sec. 207.3  CRA communications.

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

[[Page 177]]

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

[[Page 178]]

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



Sec. 207.4  Fulfillment of the CRA.

    (a) List of factors that are in fulfillment of the CRA. Fulfillment 
of the CRA, for purposes of this part, means the following list of 
factors--
    (1) Comments to a Federal banking agency or included in CRA public 
file. Providing or refraining from providing written or oral comments or 
testimony to any Federal banking agency concerning the performance under 
the CRA of an insured depository institution or CRA affiliate that is a 
party to the agreement or an affiliate of a party to the agreement or 
written comments that are required to be included in the CRA public file 
of any such insured depository institution; or
    (2) Activities given favorable CRA consideration. Performing any of 
the following activities if the activity is of the type that is likely 
to receive favorable consideration by a Federal banking agency in 
evaluating the performance under the CRA of the insured depository 
institution that is a party to the agreement or an affiliate of a party 
to the agreement--
    (i) Home-purchase, home-improvement, small business, small farm, 
community development, and consumer

[[Page 179]]

lending, as described in Sec. 228.22 of Regulation BB (12 CFR 228.22), 
including loan purchases, loan commitments, and letters of credit;
    (ii) Making investments, deposits, or grants, or acquiring 
membership shares, that have as their primary purpose community 
development, as described in Sec. 228.23 of Regulation BB (12 CFR 
228.23);
    (iii) Delivering retail banking services, as described in Sec. 
228.24(d) of Regulation BB (12 CFR 228.24(d));
    (iv) Providing community development services, as described in Sec. 
228.24(e) of Regulation BB (12 CFR 228.24(e));
    (v) In the case of a wholesale or limited-purpose insured depository 
institution, community development lending, including originating and 
purchasing loans and making loan commitments and letters of credit, 
making qualified investments, or providing community development 
services, as described in Sec. 228.25(c) of Regulation BB (12 CFR 
228.25(c));
    (vi) In the case of a small insured depository institution, any 
lending or other activity described in Sec. 228.26(a) of Regulation BB 
(12 CFR 228.26(a)); or
    (vii) In the case of an insured depository institution that is 
evaluated on the basis of a strategic plan, any element of the strategic 
plan, as described in Sec. 228.27(f) of Regulation BB (12 CFR 
228.27(f)).
    (b) Agreements relating to activities of CRA affiliates. An insured 
depository institution or affiliate that is a party to a covered 
agreement that concerns any activity described in paragraph (a) of this 
section of a CRA affiliate must, prior to the time the agreement is 
entered into, notify each NGEP that is a party to the agreement that the 
agreement concerns a CRA affiliate.



Sec. 207.5  Related agreements considered a single agreement.

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



Sec. 207.6  Disclosure of covered agreements.

    (a) Applicability date. This section applies only to covered 
agreements entered into after November 12, 1999.
    (b) Disclosure of covered agreements to the public--(1) Disclosure 
required. Each NGEP and each insured depository institution or affiliate 
that enters into a covered agreement must promptly make a copy of the 
covered agreement available to any individual or entity upon request.
    (2) Nondisclosure of confidential and proprietary information 
permitted. In responding to a request for a covered agreement from any 
individual or entity under paragraph (b)(1) of this section, a NGEP, 
insured depository institution, or affiliate may withhold from public 
disclosure confidential or proprietary information that the party 
believes the relevant supervisory agency could withhold from disclosure 
under the Freedom of Information Act (5 U.S.C. 552 et seq.) (FOIA).
    (3) Information that must be disclosed. Notwithstanding paragraph 
(b)(2) of this section, a party must disclose any of the following 
information that is contained in a covered agreement--
    (i) The names and addresses of the parties to the agreement;
    (ii) The amount of any payments, fees, loans, or other consideration 
to be made or provided by any party to the agreement;
    (iii) Any description of how the funds or other resources provided 
under the agreement are to be used;

[[Page 180]]

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

[[Page 181]]

days of receiving a request from the agency for a copy of the agreement.
    (ii) The obligation of an insured depository institution or 
affiliate to provide a covered agreement to the relevant supervisory 
agency under this paragraph (d)(2) terminates 36 months after the end of 
the term of the agreement.
    (3) Joint filings. In the event that 2 or more insured depository 
institutions or affiliates are parties to a covered agreement, the 
insured depository institution(s) and affiliate(s) may jointly file the 
documents required by this paragraph (d). Any joint filing must identify 
the insured depository institution(s) and affiliate(s) for whom the 
filings are being made.



Sec. 207.7  Annual reports.

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

[[Page 182]]

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

[[Page 183]]

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

[[Page 184]]



Sec. 207.8  Release of information under FOIA.

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



Sec. 207.9  Compliance provisions.

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



Sec. 207.10  Transition provisions.

    (a) Disclosure of covered agreements entered into before the 
effective date of this part. The following disclosure requirements apply 
to covered agreements that were entered into after November 12, 1999, 
and that terminated before April 1, 2001.
    (1) Disclosure to the public. Each NGEP and each insured depository 
institution or affiliate that was a party to the agreement must make the 
agreement available to the public under Sec. 207.6 until at least April 
1, 2002.
    (2) Disclosure to the relevant supervisory agency--(i) Each NGEP 
that was a party to the agreement must make the agreement available to 
the relevant supervisory agency under Sec. 207.6 until at least April 
1, 2002.
    (ii) Each insured depository institution or affiliate that was a 
party to the agreement must, by June 30, 2001, provide each relevant 
supervisory agency either--
    (A) A copy of the agreement under Sec. 207.6(d)(1)(i); or
    (B) The information described in Sec. 207.6(d)(1)(ii) for each 
agreement.
    (b) Filing of annual reports that relate to fiscal years ending on 
or before December 31, 2000. In the event that a NGEP, insured 
depository institution or affiliate has any information to report under 
Sec. 207.7 for a fiscal year that ends on or before December 31, 2000, 
and that concerns a covered agreement entered into between May 12, 2000, 
and December 31, 2000, the annual report

[[Page 185]]

for that fiscal year must be provided no later than June 30, 2001, to--
    (1) Each relevant supervisory agency; or
    (2) In the case of a NGEP, to an insured depository institution or 
affiliate that is a party to the agreement in accordance with Sec. 
207.7(f)(2).



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

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

[[Page 186]]

    (l) Relevant supervisory agency. The ``relevant supervisory agency'' 
for a covered agreement means the appropriate Federal banking agency 
for--
    (1) Each insured depository institution (or subsidiary thereof) that 
is a party to the covered agreement;
    (2) Each insured depository institution (or subsidiary thereof) or 
CRA affiliate that makes payments or loans or provides services that are 
subject to the covered agreement; and
    (3) Any company (other than an insured depository institution or 
subsidiary thereof) that is a party to the covered agreement.
    (m) Term of agreement. An agreement that does not have a fixed 
termination date is considered to terminate on the last date on which 
any party to the agreement makes any payment or provides any loan or 
other resources under the agreement, unless the relevant supervisory 
agency for the agreement otherwise notifies each party in writing.



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




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

                     Subpart B_Investments and Loans

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

       Subpart C_Bank Securities and Securities-Related Activities

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

                   Subpart D_Prompt Corrective Action

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

          Subpart E_Real Estate Lending and Appraisal Standards

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

                  Subpart F_Miscellaneous Requirements

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

         Subpart G_Financial Subsidiaries of State Member Banks

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

[[Page 187]]

           Subpart H_Consumer Protection in Sales of Insurance

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

Appendix A to Subpart H--Consumer Grievance Process

                        Subpart I_Interpretations

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

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

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1820(d)(9), 1823(j), 1828(o), 
1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882, 2901-2907, 
3105, 3310, 3331-3351, and 3906-3909, 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78q, 78q-1, 78w, 1681s, 1681w, 6801 and 6805; 31 
U.S.C. 5318, 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

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



         Subpart A_General Membership and Branching Requirements

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



Sec. 208.1  Authority, purpose, and scope.

    (a) Authority. Subpart A of Regulation H (12 CFR part 208, Subpart 
A) is issued by the Board of Governors of the Federal Reserve System 
(Board) under 12 U.S.C. 24, 36; sections 9, 11, 21, 25 and 25A of the 
Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 
and 611); sections 1814, 1816, 1818, 1831o, 1831p-1, 1831r-1 and 1835a 
of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1814, 1816, 
1818, 1831o, 1831p-1, 1831r-1, and 1835); and 12 U.S.C. 3906-3909.
    (b) Purpose and scope of Part 208. The requirements of this part 208 
govern State member banks and state banks applying for admission to 
membership in the Federal Reserve System (System) under section 9 of the 
Federal Reserve Act (Act), except for Sec. 208.7, which also applies to 
certain foreign banks licensed by a State. This part 208 does not govern 
banks eligible for membership under section 2 or 19 of the Act.\1\ Any 
bank desiring to be admitted to the System under the provisions of 
section 2 or 19 should communicate with the Federal Reserve Bank with 
which it would like to become a member.
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    \1\ Under section 2 of the Federal Reserve Act, every national bank 
in any state shall, upon commencing business, or within 90 days after 
admission into the Union of the State in which it is located, become a 
member of the System. Under section 19 of the Federal Reserve Act, 
national banks and banks organized under local laws, located in a 
dependency or insular possession or any part of the United States 
outside of the States of the United States and the District of Columbia, 
are not required to become members of the System but may, with the 
consent of the board, become members of the System.
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    (c) Purpose and scope of Subpart A. This Subpart A describes the 
eligibility requirements for membership of state-chartered banking 
institutions in the System, the general conditions imposed upon members, 
including capital and dividend requirements, as well as the requirements 
for establishing and maintaining branches.



Sec. 208.2  Definitions.

    For the purposes of this part:

[[Page 188]]

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



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

    (a) Applications for membership and stock. (1) State banks applying 
for membership in the Federal Reserve System shall file with the 
appropriate Federal Reserve Bank an application for membership in the 
Federal Reserve System and for stock in the Reserve Bank,\2\ in 
accordance with this part and Sec. 262.3 of the Rules of Procedure, 
located at 12 CFR 262.3.
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    \2\ A mutual savings bank not authorized to purchase Federal Reserve 
Bank stock may apply for membership evidenced initially by a deposit, 
but if the laws under which the bank is organized are not amended at the 
first session of the legislature after its admission to authorize the 
purchase, or if the bank fails to purchase the stock within six months 
of the amendment, its membership shall be terminated.
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    (2) Board approval. If an applying bank conforms to all the 
requirements of the Federal Reserve Act and this section, and is 
otherwise qualified for membership, the Board may approve its 
application subject to such conditions as the Board may prescribe.
    (3) Effective date of membership. A State bank becomes a member of 
the Federal Reserve System on the date its Federal Reserve Bank stock is 
credited to its account (or its deposit is accepted, if it is a mutual 
savings bank not authorized to purchase Reserve Bank stock) in 
accordance with the Board's Regulation I (12 CFR part 209).

[[Page 189]]

    (b) Factors considered in approving applications for membership. 
Factors given special consideration by the Board in passing upon an 
application are:
    (1) Financial condition and management. The financial history and 
condition of the applying bank and the general character of its 
management.
    (2) Capital. The adequacy of the bank's capital in accordance with 
Sec. 208.4, and its future earnings prospects.
    (3) Convenience and needs. The convenience and needs of the 
community.
    (4) Corporate powers. Whether the bank's corporate powers are 
consistent with the purposes of the Federal Reserve Act.
    (c) Expedited approval for eligible banks and bank holding 
companies--(1) Availability of expedited treatment. The expedited 
membership procedures described in paragraph (c)(2) of this section are 
available to:
    (i) An eligible bank; and
    (ii) A bank that cannot be determined to be an eligible bank because 
it has not received CAMELS compliance or CRA ratings from a bank 
regulatory authority, if it is controlled by a bank holding company that 
meets the criteria for expedited processing under Sec. 225.14(c) of 
Regulation Y (12 CFR 225.14(c)).
    (2) Expedited procedures. A completed membership application filed 
with the appropriate Reserve Bank will be deemed approved on the 
fifteenth day after receipt of the complete application by the Board or 
appropriate Reserve Bank, unless the Board or the appropriate Reserve 
Bank notifies the bank that the application is approved prior to that 
date or the Board or the appropriate Federal Reserve Bank notifies the 
bank that the application is not eligible for expedited review for any 
reason, including, without limitation, that:
    (i) The bank will offer banking services that are materially 
different from those currently offered by the bank, or by the affiliates 
of the proposed bank;
    (ii) The bank or bank holding company does not meet the criteria 
under Sec. 208.3(c)(1);
    (iii) The application contains a material error or is otherwise 
deficient; or
    (iv) The application raises significant supervisory, compliance, 
policy or legal issues that have not been resolved, or a timely 
substantive adverse comment is submitted. A comment will be considered 
substantive unless it involves individual complaints, or raises 
frivolous, previously considered, or wholly unsubstantiated claims or 
irrelevant issues.
    (d) Conditions of membership--(1) Safety and soundness. Each member 
bank shall at all times conduct its business and exercise its powers 
with due regard to safety and soundness. Each member bank shall comply 
with the Interagency Guidelines Establishing Standards for Safety and 
Soundness prescribed pursuant to section 39 of the FDI Act (12 U.S.C. 
1831p-1), set forth in appendix D-1 to this part, and the Interagency 
Guidelines Establishing Information Security Standards prescribed 
pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15 
U.S.C. 6801 and 6805) and section 216 of the Fair and Accurate Credit 
Transactions Act of 2003 (15 U.S.C. 1681w), set forth in appendix D-2 to 
this part.
    (2) General character of bank's business. A member bank may not, 
without the permission of the Board, cause or permit any change in the 
general character of its business or in the scope of the corporate 
powers it exercises at the time of admission to membership.
    (3) Compliance with conditions of membership. Each member bank shall 
comply at all times with this Regulation H (12 CFR part 208) and any 
other conditions of membership prescribed by the Board.
    (e) Waivers--(1) Conditions of membership. A member bank may 
petition the Board to waive a condition of membership. The Board may 
grant a waiver of a condition of membership upon a showing of good cause 
and, in its discretion, may limit, among other items, the scope, 
duration, and timing of the waiver.
    (2) Reports of affiliates. Pursuant to section 21 of the Federal 
Reserve Act (12 U.S.C. 486), the Board waives the requirement for the 
submission of reports of affiliates of member banks, unless such reports 
are specifically requested by the Board.

[[Page 190]]

    (f) Voluntary withdrawal from membership. Voluntary withdrawal from 
membership becomes effective upon cancellation of the Federal Reserve 
Bank stock held by the member bank, and after the bank has made due 
provision to pay any indebtedness due or to become due to the Federal 
Reserve Bank in accordance with the Board's Regulation I (12 CFR part 
209).

[Reg. H, 63 FR 37637, July 13, 1998, as amended at 63 FR 58620, Nov. 2, 
1998; 66 FR 8634, Feb. 1, 2001; 69 FR 77617, Dec. 28, 2004]



Sec. 208.4  Capital adequacy.

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



Sec. 208.5  Dividends and other distributions.

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

[[Page 191]]

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



Sec. 208.6  Establishment and maintenance of branches.

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

[[Page 192]]

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

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

[[Page 193]]



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

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

[[Page 194]]

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

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



                     Subpart B_Investments and Loans

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



Sec. 208.20  Authority, purpose, and scope.

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

[[Page 195]]

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



Sec. 208.21  Investments in premises and securities.

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

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



Sec. 208.22  Community development and public welfare investments.

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

[[Page 196]]

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

[[Page 197]]

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



Sec. 208.23  Agricultural loan loss amortization.

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

[[Page 198]]

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



Sec. 208.24  Letters of credit and acceptances.

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

[[Page 199]]

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



Sec. 208.25  Loans in areas having special flood hazards.

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

[[Page 200]]

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

[[Page 201]]

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

[[Page 202]]

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

            Appendix A to Sec. 208.25 Sample Form of Notice

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

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

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



       Subpart C_Bank Securities and Securities-Related Activities

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



Sec. 208.30  Authority, purpose, and scope.

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

[[Page 203]]

1818, 1831p-1(a)(2)); and sections 78b, 78l(b), 78l(g), 78l(i), 78o-
4(c)(5), 78o-5, 78q, 78q-1, and 78w of the Securities Exchange Act of 
1934 (15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78o-5, 78q, 
78q-1, 78w).
    (b) Purpose and scope. This subpart C describes the requirements 
imposed upon member banks acting as transfer agents, registered clearing 
agencies, or sellers of securities under the Securities Exchange Act of 
1934. This subpart C also describes the reporting requirements imposed 
on member banks whose securities are subject to registration under the 
Securities Exchange Act of 1934.



Sec. 208.31  State member banks as transfer agents.

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



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

    (a) Notice requirement. Any member bank or any of its subsidiaries 
that is a registered clearing agency pursuant to section 17A(b) of the 
Securities Exchange Act of 1934 (the Act), and that:
    (1) Imposes any final disciplinary sanction on any participant 
therein;
    (2) Denies participation to any applicant; or
    (3) Prohibits or limits any person in respect to access to services 
offered by the clearing agency, shall file with the Board (and the 
appropriate regulatory agency, if other than the Board, for a 
participant or applicant) notice thereof in the manner prescribed in 
this section.
    (b) Notice of final disciplinary actions. (1) Any registered 
clearing agency for which the Board is the appropriate regulatory agency 
that takes any final disciplinary action with respect to any participant 
shall promptly file a notice thereof with the Board in accordance with 
paragraph (c) of this section. For the purposes of this paragraph (b), 
final disciplinary action means the imposition of any disciplinary 
sanction pursuant to section 17A(b)(3)(G) of the Act, or other action of 
a registered clearing agency which, after notice and opportunity for 
hearing, results in final disposition of charges of:
    (i) One or more violations of the rules of the registered clearing 
agency; or
    (ii) Acts or practices constituting a statutory disqualification of 
a type defined in paragraph (iv) or (v) (except prior convictions) of 
section 3(a)(39) of the Act.
    (2) However, if a registered clearing agency fee schedule specifies 
certain charges for errors made by its participants in giving 
instructions to the registered clearing agency which are de minimis on a 
per error basis, and whose purpose is, in part, to provide revenues to 
the clearing agency to compensate it for effort expended in beginning to 
process an erroneous instruction, such error charges shall not be 
considered a final disciplinary action for purposes of this paragraph 
(b).
    (c) Contents of final disciplinary action notice. Any notice filed 
pursuant to paragraph (b) of this section shall consist of the 
following, as appropriate:
    (1) The name of the respondent and the respondent's last known 
address, as reflected on the records of the clearing agency, and the 
name of the person, committee, or other organizational unit that brought 
the charges. However, identifying information as to any respondent found 
not to have violated a provision covered by a charge may be deleted 
insofar as the notice reports the disposition of that charge and, prior 
to the filing of the notice, the respondent does not request that 
identifying information be included in the notice;
    (2) A statement describing the investigative or other origin of the 
action;
    (3) As charged in the proceeding, the specific provision or 
provisions of the

[[Page 204]]

rules of the clearing agency violated by the respondent, or the 
statutory disqualification referred to in paragraph (b)(2) of this 
section, and a statement describing the answer of the respondent to the 
charges;
    (4) A statement setting forth findings of fact with respect to any 
act or practice in which the respondent was charged with having engaged 
in or omitted; the conclusion of the clearing agency as to whether the 
respondent violated any rule or was subject to a statutory 
disqualification as charged; and a statement of the clearing agency in 
support of its resolution of the principal issues raised in the 
proceedings;
    (5) A statement describing any sanction imposed, the reasons 
therefor, and the date upon which the sanction became or will become 
effective; and
    (6) Such other matters as the clearing agency may deem relevant.
    (d) Notice of final denial, prohibition, termination or limitation 
based on qualification or administrative rules. (1) Any registered 
clearing agency, for which the Board is the appropriate regulatory 
agency, that takes any final action that denies or conditions the 
participation of any person, or prohibits or limits access, to services 
offered by the clearing agency, shall promptly file notice thereof with 
the Board (and the appropriate regulatory agency, if other than the 
Board, for the affected person) in accordance with paragraph (e) of this 
section; but such action shall not be considered a final disciplinary 
action for purposes of paragraph (b) of this section where the action is 
based on an alleged failure of such person to:
    (i) Comply with the qualification standards prescribed by the rules 
of the registered clearing agency pursuant to section 17A(b)(4)(B) of 
the Act; or
    (ii) Comply with any administrative requirements of the registered 
clearing agency (including failure to pay entry or other dues or fees, 
or to file prescribed forms or reports) not involving charges of 
violations that may lead to a disciplinary sanction.
    (2) However, no such action shall be considered final pursuant to 
this paragraph (d) that results merely from a notice of such failure to 
comply to the person affected, if such person has not sought an 
adjudication of the matter, including a hearing, or otherwise exhausted 
the administrative remedies within the registered clearing agency with 
respect to such a matter.
    (e) Contents of notice required by paragraph (d) of this section. 
Any notice filed pursuant to paragraph (d) of this section shall consist 
of the following, as appropriate:
    (1) The name of each person concerned and each person's last known 
address, as reflected in the records of the clearing agency;
    (2) The specific grounds upon which the action of the clearing 
agency was based, and a statement describing the answer of the person 
concerned;
    (3) A statement setting forth findings of fact and conclusions as to 
each alleged failure of the person to comply with qualification 
standards or administrative obligations, and a statement of the clearing 
agency in support of its resolution of the principal issues raised in 
the proceeding;
    (4) The date upon which such action became or will become effective; 
and
    (5) Such other matters as the clearing agency deems relevant.
    (f) Notice of final action based on prior adjudicated statutory 
disqualifications. Any registered clearing agency for which the Board is 
the appropriate regulatory agency that takes any final action shall 
promptly file notice thereof with the Board (and the appropriate 
regulatory agency, if other than the Board, for the affected person) in 
accordance with paragraph (g) of this section, where the final action:
    (1) Denies or conditions participation to any person, or prohibits 
or limits access to services offered by the clearing agency; and
    (2) Is based upon a statutory disqualification of a type defined in 
paragraph (A), (B) or (C) of section 3(a)(39) of the Act, consisting of 
a prior conviction, as described in subparagraph (E) of section 3(a)(39) 
of the Act. However, no such action shall be considered final pursuant 
to this paragraph (f) that results merely from a notice of such 
disqualification to the person affected, if such person has not sought 
an adjudication of the matter, including a

[[Page 205]]

hearing, or otherwise exhausted the administrative remedies within the 
clearing agency with respect to such a matter.
    (g) Contents of notice required by paragraph (f) of this section. 
Any notice filed pursuant to paragraph (f) of this section shall consist 
of the following, as appropriate:
    (1) The name of each person concerned and each person's last known 
address, as reflected in the records of the clearing agency;
    (2) A statement setting forth the principal issues raised, the 
answer of any person concerned, and a statement of the clearing agency 
in support of its resolution of the principal issues raised in the 
proceeding;
    (3) Any description furnished by or on behalf of the person 
concerned of the activities engaged in by the person since the 
adjudication upon which the disqualification is based;
    (4) A copy of the order or decision of the court, appropriate 
regulatory agency, or self-regulatory organization that adjudicated the 
matter giving rise to the statutory disqualification;
    (5) The nature of the action taken and the date upon which such 
action is to be made effective; and
    (6) Such other matters as the clearing agency deems relevant.
    (h) Notice of summary suspension of participation. Any registered 
clearing agency for which the Board is the appropriate regulatory agency 
that summarily suspends or closes the accounts of a participant pursuant 
to the provisions of section 17A(b)(5)(C) of the Act shall, within one 
business day after such action becomes effective, file notice thereof 
with the Board and the appropriate regulatory agency for the 
participant, if other than the Board, of such action in accordance with 
paragraph (i) of this section.
    (i) Contents of notice of summary suspension. Any notice pursuant to 
paragraph (h) of this section shall contain at least the following 
information, as appropriate:
    (1) The name of the participant concerned and the participant's last 
known address, as reflected in the records of the clearing agency;
    (2) The date upon which the summary action became or will become 
effective;
    (3) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(i) of the Act, a copy of the relevant order or decision of 
the self-regulatory organization, if available to the clearing agency;
    (4) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(ii) of the Act, a statement describing the default of any 
delivery of funds or securities to the clearing agency;
    (5) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(iii) of the Act, a statement describing the financial or 
operating difficulty of the participant based upon which the clearing 
agency determined that the suspension and closing of accounts was 
necessary for the protection of the clearing agency, its participants, 
creditors, or investors;
    (6) The nature and effective date of the suspension; and
    (7) Such other matters as the clearing agency deems relevant.



Sec. 208.33  Application for stay or review of disciplinary sanctions imposed by registered clearing agency.

    (a) Stays. The rules adopted by the Securities and Exchange 
Commission (SEC) pursuant to section 19 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the 
SEC is the appropriate regulatory agency for stays of disciplinary 
sanctions or summary suspensions imposed by registered clearing agencies 
(17 CFR 240.19d-2) apply to applications by member banks. References to 
the ``Commission'' are deemed to refer to the Board.
    (b) Reviews. The regulations adopted by the Securities and Exchange 
Commission pursuant to section 19 of the Securities and Exchange Act of 
1934 (15 U.S.C. 78s) regarding applications by persons for whom the SEC 
is the appropriate regulatory agency for reviews of final disciplinary 
sanctions, denials of participation, or prohibitions or limitations of 
access to services imposed by registered clearing agencies (17 CFR 
240.19d-3(a)-(f)) apply to applications by member banks. References to 
the ``Commission'' are deemed to refer to the Board. The Board's Uniform 
Rules of Practice and Procedure (12 CFR part

[[Page 206]]

263) apply to review proceedings under this Sec. 208.33 to the extent 
not inconsistent with this Sec. 208.33.



Sec. 208.34  Recordkeeping and confirmation of certain securities transactions effected by State member banks.

    (a) Exceptions and safe and sound operations. (1) A State member 
bank may be excepted from one or more of the requirements of this 
section if it meets one of the following conditions of paragraphs 
(a)(1)(i) through (a)(1)(iv) of this section:
    (i) De minimis transactions. The requirements of paragraphs (c)(2) 
through (c)(4) and paragraphs (e)(1) through (e)(3) of this section 
shall not apply to banks having an average of less than 200 securities 
transactions per year for customers over the prior three calendar year 
period, exclusive of transactions in government securities;
    (ii) Government securities. The recordkeeping requirements of 
paragraph (c) of this section shall not apply to banks effecting fewer 
than 500 government securities brokerage transactions per year; provided 
that this exception shall not apply to government securities 
transactions by a State member bank that has filed a written notice, or 
is required to file notice, with the Federal Reserve Board that it acts 
as a government securities broker or a government securities dealer;
    (iii) Municipal securities. The municipal securities activities of a 
State member bank that are subject to regulations promulgated by the 
Municipal Securities Rulemaking Board shall not be subject to the 
requirements of this section; and
    (iv) Foreign branches. The requirements of this section shall not 
apply to the activities of foreign branches of a State member bank.
    (2) Every State member bank qualifying for an exemption under 
paragraph (a)(1) of this section that conducts securities transactions 
for customers shall, to ensure safe and sound operations, maintain 
effective systems of records and controls regarding its customer 
securities transactions that clearly and accurately reflect appropriate 
information and provide an adequate basis for an audit of the 
information.
    (b) Definitions. For purposes of this section:
    (1) Asset-backed security shall mean a security that is serviced 
primarily by the cash flows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms convert 
into cash within a finite time period plus any rights or other assets 
designed to assure the servicing or timely distribution of proceeds to 
the security holders.
    (2) Collective investment fund shall mean funds held by a State 
member bank as fiduciary and, consistent with local law, invested 
collectively as follows:
    (i) In a common trust fund maintained by such bank exclusively for 
the collective investment and reinvestment of monies contributed thereto 
by the bank in its capacity as trustee, executor, administrator, 
guardian, or custodian under the Uniform Gifts to Minors Act; or
    (ii) In a fund consisting solely of assets of retirement, pension, 
profit sharing, stock bonus or similar trusts which are exempt from 
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
    (3) Completion of the transaction effected by or through a state 
member bank shall mean:
    (i) For purchase transactions, the time when the customer pays the 
bank any part of the purchase price (or the time when the bank makes the 
book-entry for any part of the purchase price if applicable); however, 
if the customer pays for the security prior to the time payment is 
requested or becomes due, then the transaction shall be completed when 
the bank transfers the security into the account of the customer; and
    (ii) For sale transactions, the time when the bank transfers the 
security out of the account of the customer or, if the security is not 
in the bank's custody, then the time when the security is delivered to 
the bank; however, if the customer delivers the security to the bank 
prior to the time delivery is requested or becomes due then the 
transaction shall be completed when

[[Page 207]]

the banks makes payment into the account of the customer.
    (4) Crossing of buy and sell orders shall mean a security 
transaction in which the same bank acts as agent for both the buyer and 
the seller.
    (5) Customer shall mean any person or account, including any agency, 
trust, estate, guardianship, or other fiduciary account, for which a 
State member bank effects or participates in effecting the purchase or 
sale of securities, but shall not include a broker, dealer, bank acting 
as a broker or dealer, municipal securities broker or dealer, or issuer 
of the securities which are the subject of the transactions.
    (6) Debt security as used in paragraph (c) of this section shall 
mean any security, such as a bond, debenture, note or any other similar 
instrument which evidences a liability of the issuer (including any 
security of this type that is convertible into stock or similar 
security) and fractional or participation interests in one or more of 
any of the foregoing; provided, however, that securities issued by an 
investment company registered under the Investment Company Act of 1940, 
15 U.S.C. 80a-1 et seq., shall not be included in this definition.
    (7) Government security shall mean:
    (i) A security that is a direct obligation of, or obligation 
guaranteed as to principal and interest by, the United States;
    (ii) A security that is issued or guaranteed by a corporation in 
which the United States has a direct or indirect interest and which is 
designated by the Secretary of the Treasury for exemption as necessary 
or appropriate in the public interest or for the protection of 
investors;
    (iii) A security issued or guaranteed as to principal and interest 
by any corporation whose securities are designated, by statute 
specifically naming the corporation, to constitute exempt securities 
within the meaning of the laws administered by the Securities and 
Exchange Commission; or
    (iv) Any put, call, straddle, option, or privilege on a security as 
described in paragraphs (b)(7) (i), (ii), or (iii) of this section other 
than a put, call, straddle, option, or privilege that is traded on one 
or more national securities exchanges, or for which quotations are 
disseminated though an automated quotation system operated by a 
registered securities association.
    (8) Investment discretion with respect to an account shall mean if 
the State member bank, directly or indirectly, is authorized to 
determine what securities or other property shall be purchased or sold 
by or for the account, or makes decisions as to what securities or other 
property shall be purchased or sold by or for the account even though 
some other person may have responsibility for such investment decisions.
    (9) Municipal security shall mean a security which is a direct 
obligation of, or obligation guaranteed as to principal or interest by, 
a State or any political subdivision thereof, or any agency or 
instrumentality of a State or any political subdivision thereof, or any 
municipal corporate instrumentality of one or more States, or any 
security which is an industrial development bond (as defined in 26 
U.S.C. 103(c)(2) the interest on which is excludable from gross income 
under 26 U.S.C. 103(a)(1), by reason of the application of paragraph (4) 
or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5) and 
(7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26 U.S.C. 
103(c) does not apply to such security.
    (10) Periodic plan shall mean:
    (i) A written authorization for a State member bank to act as agent 
to purchase or sell for a customer a specific security or securities, in 
a specific amount (calculated in security units or dollars) or to the 
extent of dividends and funds available, at specific time intervals, and 
setting forth the commission or charges to be paid by the customer or 
the manner of calculating them (including dividend reinvestment plans, 
automatic investment plans, and employee stock purchase plans); or
    (ii) Any prearranged, automatic transfer or sweep of funds from a 
deposit account to purchase a security, or any prearranged, automatic 
redemption or sale of a security with the funds being transferred into a 
deposit account (including cash management sweep services).
    (11) Security shall mean:
    (i) Any note, stock, treasury stock, bond, debenture, certificate of 
interest

[[Page 208]]

or participation in any profit-sharing agreement or in any oil, gas, or 
other mineral royalty or lease, any collateral-trust certificate, 
preorganization certificate or subscription, transferable share, 
investment contract, voting-trust certificate, for a security, any put, 
call, straddle, option, or privilege on any security, or group or index 
of securities (including any interest therein or based on the value 
thereof), any instrument commonly known as a ``security''; or any 
certificate of interest or participation in, temporary or interim 
certificate for, receipt for, or warrant or right to subscribe to or 
purchase, any of the foregoing.
    (ii) But does not include a deposit or share account in a federally 
or state insured depository institution, a loan participation, a letter 
of credit or other form of bank indebtedness incurred in the ordinary 
course of business, currency, any note, draft, bill of exchange, or 
bankers acceptance which has a maturity at the time of issuance of not 
exceeding nine months, exclusive of days of grace, or any renewal 
thereof the maturity of which is likewise limited, units of a collective 
investment fund, interests in a variable amount (master) note of a 
borrower of prime credit, or U.S. Savings Bonds.
    (c) Recordkeeping. Except as provided in paragraph (a) of this 
section, every State member bank effecting securities transactions for 
customers, including transactions in government securities, and 
municipal securities transactions by banks not subject to registration 
as municipal securities dealers, shall maintain the following records 
with respect to such transactions for at least three years. Nothing 
contained in this section shall require a bank to maintain the records 
required by this paragraph in any given manner, provided that the 
information required to be shown is clearly and accurately reflected and 
provides an adequate basis for the audit of such information. Records 
may be maintained in hard copy, automated, or electronic form provided 
the records are easily retrievable, readily available for inspection, 
and capable of being reproduced in a hard copy. A bank may contract with 
third party service providers, including broker/dealers, to maintain 
records required under this part.
    (1) Chronological records of original entry containing an itemized 
daily record of all purchases and sales of securities. The records of 
original entry shall show the account or customer for which each such 
transaction was effected, the description of the securities, the unit 
and aggregate purchase or sale price (if any), the trade date and the 
name or other designation of the broker/dealer or other person from whom 
purchased or to whom sold;
    (2) Account records for each customer which shall reflect all 
purchases and sales of securities, all receipts and deliveries of 
securities, and all receipts and disbursements of cash with respect to 
transactions in securities for such account and all other debits and 
credits pertaining to transactions in securities;
    (3) A separate memorandum (order ticket) of each order to purchase 
or sell securities (whether executed or canceled), which shall include:
    (i) The account(s) for which the transaction was effected;
    (ii) Whether the transaction was a market order, limit order, or 
subject to special instructions;
    (iii) The time the order was received by the trader or other bank 
employee responsible for effecting the transaction;
    (iv) The time the order was placed with the broker/dealer, or if 
there was no broker/dealer, the time the order was executed or canceled;
    (v) The price at which the order was executed; and
    (vi) The broker/dealer utilized;
    (4) A record of all broker/dealers selected by the bank to effect 
securities transactions and the amount of commissions paid or allocated 
to each such broker during the calendar year; and
    (5) A copy of the written notification required by paragraphs (d) 
and (e) of this section.
    (d) Content and time of notification. Every State member bank 
effecting a securities transaction for a customer shall give or send to 
such customer either of the following types of notifications at or 
before completion of the transaction or; if the bank uses a broker/
dealer's confirmation, within

[[Page 209]]

one business day from the bank's receipt of the broker/dealer's 
confirmation:
    (1) A copy of the confirmation of a broker/dealer relating to the 
securities transaction; and if the bank is to receive remuneration from 
the customer or any other source in connection with the transaction, and 
the remuneration is not determined pursuant to a prior written agreement 
between the bank and the customer, a statement of the source and the 
amount of any remuneration to be received; or
    (2) A written notification disclosing:
    (i) The name of the bank;
    (ii) The name of the customer;
    (iii) Whether the bank is acting as agent for such customer, as 
agent for both such customer and some other person, as principal for its 
own account, or in any other capacity;
    (iv) The date of execution and a statement that the time of 
execution will be furnished within a reasonable time upon written 
request of such customer specifying the identity, price and number of 
shares or units (or principal amount in the case of debt securities) of 
such security purchased or sold by such customer;
    (v) The amount of any remuneration received or to be received, 
directly or indirectly, by any broker/dealer from such customer in 
connection with the transaction;
    (vi) The amount of any remuneration received or to be received by 
the bank from the customer and the source and amount of any other 
remuneration to be received by the bank in connection with the 
transaction, unless remuneration is determined pursuant to a written 
agreement between the bank and the customer, provided, however, in the 
case of Government securities and municipal securities, this paragraph 
(d)(2)(vi) shall apply only with respect to remuneration received by the 
bank in an agency transaction. If the bank elects not to disclose the 
source and amount of remuneration it has or will receive from a party 
other than the customer pursuant to this paragraph (d)(2)(vi), the 
written notification must disclose whether the bank has received or will 
receive remuneration from a party other than the customer, and that the 
bank will furnish within a reasonable time the source and amount of this 
remuneration upon written request of the customer. This election is not 
available, however, if, with respect to a purchase, the bank was 
participating in a distribution of that security; or with respect to a 
sale, the bank was participating in a tender offer for that security;
    (vii) The name of the broker/dealer utilized; or, where there is no 
broker/dealer, the name of the person from whom the security was 
purchased or to whom it was sold, or the fact that such information will 
be furnished within a reasonable time upon written request;
    (viii) In the case of a transaction in a debt security subject to 
redemption before maturity, a statement to the effect that the debt 
security may be redeemed in whole or in part before maturity, that the 
redemption could affect the yield represented and that additional 
information is available on request;
    (ix) In the case of a transaction in a debt security effected 
exclusively on the basis of a dollar price:
    (A) The dollar price at which the transaction was effected;
    (B) The yield to maturity calculated from the dollar price; 
provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to 
a transaction in a debt security that either has a maturity date that 
may be extended by the issuer with a variable interest payable thereon, 
or is an asset-backed security that represents an interest in or is 
secured by a pool of receivables or other financial assets that are 
subject to continuous prepayment;
    (x) In the case of a transaction in a debt security effected on the 
basis of yield:
    (A) The yield at which the transaction was effected, including the 
percentage amount and its characterization (e.g., current yield, yield 
to maturity, or yield to call) and if effected at yield to call, the 
type of call, the call date, and the call price; and
    (B) The dollar price calculated from the yield at which the 
transaction was effected; and
    (C) If effected on a basis other than yield to maturity and the 
yield to maturity is lower than the represented yield, the yield to 
maturity as well as

[[Page 210]]

the represented yield; provided, however, that this paragraph 
(c)(2)(x)(C) shall not apply to a transaction in a debt security that 
either has a maturity date that may be extended by the issuer with a 
variable interest rate payable thereon, or is an asset-backed security 
that represents an interest in or is secured by a pool of receivables or 
other financial assets that are subject to continuous prepayment;
    (xi) In the case of a transaction in a debt security that is an 
asset-backed security which represents an interest in or is secured by a 
pool of receivables or other financial assets that are subject 
continuously to prepayment, a statement indicating that the actual yield 
of such asset-backed security may vary according to the rate at which 
the underlying receivables or other financial assets are prepaid and a 
statement of the fact that information concerning the factors that 
affect yield (including at a minimum, the estimated yield, weighted 
average life, and the prepayment assumptions underlying yield) will be 
furnished upon written request of such customer; and
    (xii) In the case of a transaction in a debt security, other than a 
government security, that the security is unrated by a nationally 
recognized statistical rating organization, if that is the case.
    (e) Notification by agreement; alternative forms and times of 
notification. A State member bank may elect to use the following 
alternative procedures if a transaction is effected for:
    (1) Accounts (except periodic plans) where the bank does not 
exercise investment discretion and the bank and the customer agree in 
writing to a different arrangement as to the time and content of the 
notification; provided, however, that such agreement makes clear the 
customer's right to receive the written notification pursuant to 
paragraph (c) of this section at no additional cost to the customer;
    (2) Accounts (except collective investment funds) where the bank 
exercises investment discretion in other than an agency capacity, in 
which instance the bank shall, upon request of the person having the 
power to terminate the account or, if there is no such person, upon the 
request of any person holding a vested beneficial interest in such 
account, give or send to such person the written notification within a 
reasonable time. The bank may charge such person a reasonable fee for 
providing this information;
    (3) Accounts, where the bank exercises investment discretion in an 
agency capacity, in which instance:
    (i) The bank shall give or send to each customer not less frequently 
than once every three months an itemized statement which shall specify 
the funds and securities in the custody or possession of the bank at the 
end of such period and all debits, credits and transactions in the 
customer's accounts during such period; and
    (ii) If requested by the customer, the bank shall give or send to 
each customer within a reasonable time the written notification 
described in paragraph (c) of this section. The bank may charge a 
reasonable fee for providing the information described in paragraph (c) 
of this section;
    (4) A collective investment fund, in which instance the bank shall 
at least annually furnish a copy of a financial report of the fund, or 
provide notice that a copy of such report is available and will be 
furnished upon request, to each person to whom a regular periodic 
accounting would ordinarily be rendered with respect to each 
participating account. This report shall be based upon an audit made by 
independent public accountants or internal auditors responsible only to 
the board of directors of the bank;
    (5) A periodic plan, in which instance the bank:
    (i) Shall (except for a cash management sweep service) give or send 
to the customer a written statement not less than every three months if 
there are no securities transactions in the account, showing the 
customer's funds and securities in the custody or possession of the 
bank; all service charges and commissions paid by the customer in 
connection with the transaction; and all other debits and credits of the 
customer's account involved in the transaction; or
    (ii) Shall for a cash management sweep service or similar periodic 
plan as defined in Sec. 208.34(b)(10)(ii) give or send its customer a 
written statement

[[Page 211]]

in the same form as prescribed in paragraph (e)(3) above for each month 
in which a purchase or sale of a security takes place in a deposit 
account and not less than once every three months if there are no 
securities transactions in the account subject to any other applicable 
laws or regulations;
    (6) Upon the written request of the customer the bank shall furnish 
the information described in paragraph (d) of this section, except that 
any such information relating to remuneration paid in connection with 
the transaction need not be provided to the customer when paid by a 
source other than the customer. The bank may charge a reasonable fee for 
providing the information described in paragraph (d) of this section.
    (f) Settlement of securities transactions. All contracts for the 
purchase or sale of a security shall provide for completion of the 
transaction within the number of business days in the standard 
settlement cycle for the security followed by registered broker dealers 
in the United States unless otherwise agreed to by the parties at the 
time of the transaction.
    (g) Securities trading policies and procedures. Every State member 
bank effecting securities transactions for customers shall establish 
written policies and procedures providing:
    (1) Assignment of responsibility for supervision of all officers or 
employees who:
    (i) Transmit orders to or place orders with broker/dealers;
    (ii) Execute transactions in securities for customers; or
    (iii) Process orders for notification and/or settlement purposes, or 
perform other back office functions with respect to securities 
transactions effected for customers; provided that procedures 
established under this paragraph (g)(1)(iii) should provide for 
supervision and reporting lines that are separate from supervision of 
personnel under paragraphs (g)(1)(i) and (g)(1)(ii) of this section;
    (2) For the fair and equitable allocation of securities and prices 
to accounts when orders for the same security are received at 
approximately the same time and are placed for execution either 
individually or in combination;
    (3) Where applicable and where permissible under local law, for the 
crossing of buy and sell orders on a fair and equitable basis to the 
parties to the transaction; and
    (4) That bank officers and employees who make investment 
recommendations or decisions for the accounts of customers, who 
participate in the determination of such recommendations or decisions, 
or who, in connection with their duties, obtain information concerning 
which securities are being purchased or sold or recommended for such 
action, must report to the bank, within ten days after the end of the 
calendar quarter, all transactions in securities made by them or on 
their behalf, either at the bank or elsewhere in which they have a 
beneficial interest. The report shall identify the securities purchased 
or sold and indicate the dates of the transactions and whether the 
transactions were purchases or sales. Excluded from this requirement are 
transactions for the benefit of the officer or employee over which the 
officer or employee has no direct or indirect influence or control, 
transactions in mutual fund shares, and all transactions involving in 
the aggregate $10,000 or less during the calendar quarter. For purposes 
of this paragraph (g)(4), the term securities does not include 
government securities.



Sec. 208.35  Qualification requirements for transactions in certain securities. [Reserved]



Sec. 208.36  Reporting requirements for State member banks subject to the Securities Exchange Act of 1934.

    (a) Filing, disclosure and other requirements--(1) General. Except 
as otherwise provided in this section, a member bank whose securities 
are subject to registration pursuant to section 12(b) or section 12(g) 
of the Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 78l(b) 
and (g)) shall comply with the rules, regulations and forms adopted by 
the Securities and Exchange Commission (Commission) pursuant to--
    (i) Sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f) and 16 of 
the 1934 Act (15 U.S.C. 78f(m), 78l, 78m, 78n(a), (c), (d) and (f), and 
78p); and

[[Page 212]]

    (ii) Sections 302, 303, 304, 306, 401(b), 404, 406 and 407 of the 
Sarbanes-Oxley Act of 2002 (codified at 15 U.S.C. 7241, 7242, 7243, 
7244, 7261, 7262, 7264 and 7265).
    (2) References to the Commission. Any references to the ``Securities 
and Exchange Commission'' or the ``Commission'' in the rules, 
regulations and forms described in paragraph (a)(1) of this section 
shall with respect to securities issued by member banks be deemed to 
refer to the Board unless the context otherwise requires.
    (b) Elections permitted for member banks with total assets of $150 
million or less. (1) Notwithstanding paragraph (a) of this section or 
the rules and regulations promulgated by the Commission pursuant to the 
1934 Act a member bank that has total assets of $150 million or less as 
of the end of its most recent fiscal year, and no foreign offices, may 
elect to substitute for the financial statements required by the 
Commission's Form 10-Q, the balance sheet and income statement from the 
quarterly report of condition required to be filed by the bank with the 
Board under section 9 of the Federal Reserve Act (12 U.S.C. 324) 
(Federal Financial Institutions Examination Council Form 033 or 034).
    (2) A member bank qualifying for and electing to file financial 
statements from its quarterly report of condition pursuant to paragraph 
(b)(1) of this section in its form 10-Q shall include earnings per share 
or net loss per share data prepared in accordance with GAAP and disclose 
any material contingencies, as required by Article 10 of the 
Commission's Regulation S-X (17 CFR 210.10-01), in the Management's 
Discussion and Analysis of Financial Condition and Results of Operations 
section of Form 10-Q.
    (c) Required filings--(1) Place and timing of filing. All papers 
required to be filed with the Board, pursuant to the 1934 Act or 
regulations thereunder, shall be submitted to the Division of Banking 
Supervision and Regulation, Board of Governors of the Federal Reserve 
System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. 
Material may be filed by delivery to the Board, through the mails, or 
otherwise. The date on which papers are actually received by the Board 
shall be the date of filing thereof if all of the requirements with 
respect to the filing have been complied with.
    (2) Filing fees. No filing fees specified by the Commission's rules 
shall be paid to the Board.
    (3) Public inspection. Copies of the registration statement, 
definitive proxy solicitation materials, reports, and annual reports to 
shareholders required by this section (exclusive of exhibits) shall be 
available for public inspection at the Board's offices in Washington, 
DC, as well as at the Federal Reserve Banks of New York, Chicago, and 
San Francisco and at the Reserve Bank in the district in which the 
reporting bank is located.
    (d) Confidentiality of filing. Any person filing any statement, 
report, or document under the 1934 Act may make written objection to the 
public disclosure of any information contained therein in accordance 
with the following procedure:
    (1) The person shall omit from the statement, report, or document, 
when it is filed, the portion thereof that the person desires to keep 
undisclosed (hereinafter called the confidential portion). The person 
shall indicate at the appropriate place in the statement, report, or 
document that the confidential portion has been omitted and filed 
separately with the Board.
    (2) The person shall file the following with the copies of the 
statement, report, or document filed with the Board:
    (i) As many copies of the confidential portion, each clearly marked 
``CONFIDENTIAL TREATMENT,'' as there are copies of the statement, 
report, or document filed with the Board. Each copy of the confidential 
portion shall contain the complete text of the item and, notwithstanding 
that the confidential portion does not constitute the whole of the 
answer, the entire answer thereto; except that in case the confidential 
portion is part of a financial statement or schedule, only the 
particular financial statement or schedule need be included. All copies 
of the confidential portion shall be in the same form as the remainder 
of the statement, report, or document; and
    (ii) An application making objection to the disclosure of the 
confidential portion. The application shall be on a

[[Page 213]]

sheet or sheets separate from the confidential portion, and shall:
    (A) Identify the portion of the statement, report, or document that 
has been omitted;
    (B) Include a statement of the grounds of objection; and
    (C) Include the name of each exchange, if any, with which the 
statement, report, or document is filed.
    (3) The copies of the confidential portion and the application filed 
in accordance with this paragraph shall be enclosed in a separate 
envelope marked ``CONFIDENTIAL TREATMENT,'' and addressed to Secretary, 
Board of Governors of the Federal Reserve System, Washington, DC 20551.
    (4) Pending determination by the Board on the objection filed in 
accordance with this paragraph, the confidential portion shall not be 
disclosed by the Board.
    (5) If the Board determines to sustain the objection, a notation to 
that effect shall be made at the appropriate place in the statement, 
report, or document.
    (6) If the Board determines not to sustain the objection because 
disclosure of the confidential portion is in the public interest, a 
finding and determination to that effect shall be entered and notice of 
the finding and determination sent by registered or certified mail to 
the person.
    (7) If the Board determines not to sustain the objection, pursuant 
to paragraph (d)(6) of this section, the confidential portion shall be 
made available to the public:
    (i) 15 days after notice of the Board's determination not to sustain 
the objection has been given, as required by paragraph (d)(6) of this 
section, provided that the person filing the objection has not 
previously filed with the Board a written statement that he intends, in 
good faith, to seek judicial review of the finding and determination; or
    (ii) 60 days after notice of the Board's determination not to 
sustain the objection has been given as required by paragraph (d)(6) of 
this section and the person filing the objection has filed with the 
Board a written statement of intent to seek judicial review of the 
finding and determination, but has failed to file a petition for 
judicial review of the Board's determination; or
    (iii) Upon final judicial determination, if adverse to the party 
filing the objection.
    (8) If the confidential portion is made available to the public, a 
copy thereof shall be attached to each copy of the statement, report, or 
document filed with the Board.

[63 FR 37646, July 13, 1998, as amended at 67 FR 57941, Sept. 13, 2002; 
68 FR 4096, Jan. 28, 2003]



Sec. 208.37  Government securities sales practices.

    (a) Scope. This subpart is applicable to state member banks that 
have filed notice as, or are required to file notice as, government 
securities brokers or dealers pursuant to section 15C of the Securities 
Exchange Act (15 U.S.C. 78o-5) and Department of the Treasury rules 
under section 15C (17 CFR 400.1(d) and part 401).
    (b) Definitions. For purposes of this section:
    (1) Bank that is a government securities broker or dealer means a 
state member bank that has filed notice, or is required to file notice, 
as a government securities broker or dealer pursuant to section 15C of 
the Securities Exchange Act (15 U.S.C. 78o-5) and Department of the 
Treasury rules under section 15C (17 CFR 400.1(d) and Part 401).
    (2) Customer does not include a broker or dealer or a government 
securities broker or dealer.
    (3) Government security has the same meaning as this term has in 
section 3(a)(42) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(42)).
    (4) Non-institutional customer means any customer other than:
    (i) A bank, savings association, insurance company, or registered 
investment company;
    (ii) An investment adviser registered under section 203 of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-3); or
    (iii) Any entity (whether a natural person, corporation, 
partnership, trust, or otherwise) with total assets of at least $50 
million.
    (c) Business conduct. A bank that is a government securities broker 
or dealer shall observe high standards of commercial honor and just and 
equitable

[[Page 214]]

principles of trade in the conduct of its business as a government 
securities broker or dealer.
    (d) Recommendations to customers. In recommending to a customer the 
purchase, sale or exchange of a government security, a bank that is a 
government securities broker or dealer shall have reasonable grounds for 
believing that the recommendation is suitable for the customer upon the 
basis of the facts, if any, disclosed by the customer as to the 
customer's other security holdings and as to the customer'ancial 
situation and needs.
    (e) Customer information. Prior to the execution of a transaction 
recommended to a non-institutional customer, a bank that is a government 
securities broker or dealer shall make reasonable efforts to obtain 
information concerning:
    (1) The customer's financial status;
    (2) The customer's tax status;
    (3) The customer's investment objectives; and
    (4) Such other information used or considered to be reasonable by 
the bank in making recommendations to the customer.



                   Subpart D_Prompt Corrective Action

    Source: 63 FR 37652, July 13, 1998, unless otherwise noted.



Sec. 208.40  Authority, purpose, scope, other supervisory authority, and disclosure of capital categories.

    (a) Authority. Subpart D of Regulation H (12 CFR part 208, Subpart 
D) is issued by the Board of Governors of the Federal Reserve System 
(Board) under section 38 (section 38) of the FDI Act as added by section 
131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 
(Pub. L. 102-242, 105 Stat. 2236 (1991)) (12 U.S.C. 1831o).
    (b) Purpose and scope. This subpart D defines the capital measures 
and capital levels that are used for determining the supervisory actions 
authorized under section 38 of the FDI Act. (Section 38 of the FDI Act 
establishes a framework of supervisory actions for insured depository 
institutions that are not adequately capitalized.) This subpart also 
establishes procedures for submission and review of capital restoration 
plans and for issuance and review of directives and orders pursuant to 
section 38. Certain of the provisions of this subpart apply to officers, 
directors, and employees of state member banks. Other provisions apply 
to any company that controls a member bank and to the affiliates of the 
member bank.
    (c) Other supervisory authority. Neither section 38 nor this subpart 
in any way limits the authority of the Board under any other provision 
of law to take supervisory actions to address unsafe or unsound 
practices or conditions, deficient capital levels, violations of law, or 
other practices. Action under section 38 of the FDI Act and this subpart 
may be taken independently of, in conjunction with, or in addition to 
any other enforcement action available to the Board, including issuance 
of cease and desist orders, capital directives, approval or denial of 
applications or notices, assessment of civil money penalties, or any 
other actions authorized by law.
    (d) Disclosure of capital categories. The assignment of a bank under 
this subpart within a particular capital category is for purposes of 
implementing and applying the provisions of section 38. Unless permitted 
by the Board or otherwise required by law, no bank may state in any 
advertisement or promotional material its capital category under this 
subpart or that the Board or any other Federal banking agency has 
assigned the bank to a particular capital category.



Sec. 208.41  Definitions for purposes of this subpart.

    For purposes of this subpart, except as modified in this section or 
unless the context otherwise requires, the terms used have the same 
meanings as set forth in section 38 and section 3 of the FDI Act.
    (a) Control--(1) Control has the same meaning assigned to it in 
section 2 of the Bank Holding Company Act (12 U.S.C. 1841), and the term 
controlled shall be construed consistently with the term control.
    (2) Exclusion for fiduciary ownership. No insured depository 
institution or

[[Page 215]]

company controls another insured depository institution or company by 
virtue of its ownership or control of shares in a fiduciary capacity. 
Shares shall not be deemed to have been acquired in a fiduciary capacity 
if the acquiring insured depository institution or company has sole 
discretionary authority to exercise voting rights with respect to the 
shares.
    (3) Exclusion for debts previously contracted. No insured depository 
institution or company controls another insured depository institution 
or company by virtue of its ownership or control of shares acquired in 
securing or collecting a debt previously contracted in good faith, until 
two years after the date of acquisition. The two-year period may be 
extended at the discretion of the appropriate Federal banking agency for 
up to three one-year periods.
    (b) Controlling person means any person having control of an insured 
depository institution and any company controlled by that person.
    (c) Leverage ratio means the ratio of Tier 1 capital to average 
total consolidated assets, as calculated in accordance with the Board's 
Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage 
Measure (Appendix B to this part).
    (d) Management fee means any payment of money or provision of any 
other thing of value to a company or individual for the provision of 
management services or advice to the bank, or related overhead expenses, 
including payments related to supervisory, executive, managerial, or 
policy making functions, other than compensation to an individual in the 
individual's capacity as an officer or employee of the bank.
    (e) Risk-weighted assets means total weighted risk assets, as 
calculated in accordance with the Board's Capital Adequacy Guidelines 
for State Member Banks: Risk-Based Measure (Appendix A to this part).
    (f) Tangible equity means the amount of core capital elements as 
defined in the Board's Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure (Appendix A to this part), plus the amount of 
outstanding cumulative perpetual preferred stock (including related 
surplus), minus all intangible assets except mortgage servicing assets 
to the extent that the Board determines that mortgage servicing assets 
may be included in calculating the bank's Tier 1 capital.
    (g) Tier 1 capital means the amount of Tier 1 capital as defined in 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
    (h) Tier 1 risk-based capital ratio means the ratio of Tier 1 
capital to weighted risk assets, as calculated in accordance with the 
Board's Capital Adequacy Guidelines for State Member Banks: Risk-Based 
Measure (Appendix A to this part).
    (i) Total assets means quarterly average total assets as reported in 
a bank's Report of Condition and Income (Call Report), minus intangible 
assets as provided in the definition of tangible equity. At its 
discretion the Federal Reserve may calculate total assets using a bank's 
period-end assets rather than quarterly average assets.
    (j) Total risk-based capital ratio means the ratio of qualifying 
total capital to weighted risk assets, as calculated in accordance with 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).

[63 FR 37652, July 13, 1998, as amended at 63 FR 42674, Aug. 10, 1998]



Sec. 208.42  Notice of capital category.

    (a) Effective date of determination of capital category. A member 
bank shall be deemed to be within a given capital category for purposes 
of section 38 of the FDI Act and this subpart as of the date the bank is 
notified of, or is deemed to have notice of, its capital category, 
pursuant to paragraph (b) of this section.
    (b) Notice of capital category. A member bank shall be deemed to 
have been notified of its capital levels and its capital category as of 
the most recent date:
    (1) A Report of Condition and Income (Call Report) is required to be 
filed with the Board;
    (2) A final report of examination is delivered to the bank; or

[[Page 216]]

    (3) Written notice is provided by the Board to the bank of its 
capital category for purposes of section 38 of the FDI Act and this 
subpart or that the bank's capital category has changed as provided in 
paragraph (c) of this section or Sec. 208.43(c).
    (c) Adjustments to reported capital levels and capital category--(1) 
Notice of adjustment by bank. A member bank shall provide the Board with 
written notice that an adjustment to the bank's capital category may 
have occurred no later than 15 calendar days following the date that any 
material event occurred that would cause the bank to be placed in a 
lower capital category from the category assigned to the bank for 
purposes of section 38 and this subpart on the basis of the bank's most 
recent Call Report or report of examination.
    (2) Determination by Board to change capital category. After 
receiving notice pursuant to paragraph (c)(1) of this section, the Board 
shall determine whether to change the capital category of the bank and 
shall notify the bank of the Board's determination.



Sec. 208.43  Capital measures and capital category definitions.

    (a) Capital measures. For purposes of section 38 and this subpart, 
the relevant capital measures are:
    (1) The total risk-based capital ratio;
    (2) The Tier 1 risk-based capital ratio; and
    (3) The leverage ratio.
    (b) Capital categories. For purposes of section 38 and this subpart, 
a member bank is deemed to be:
    (1) ``Well capitalized'' if the bank:
    (i) Has a total risk-based capital ratio of 10.0 percent or greater; 
and
    (ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or 
greater; and
    (iii) Has a leverage ratio of 5.0 percent or greater; and
    (iv) Is not subject to any written agreement, order, capital 
directive, or prompt corrective action directive issued by the Board 
pursuant to section 8 of the FDI Act, the International Lending 
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, 
or any regulation thereunder, to meet and maintain a specific capital 
level for any capital measure.
    (2) ``Adequately capitalized'' if the bank:
    (i) Has a total risk-based capital ratio of 8.0 percent or greater; 
and
    (ii) Has a Tier 1 risk-based capital ratio of 4.0 percent or 
greater; and
    (iii) Has:
    (A) A leverage ratio of 4.0 percent or greater; or
    (B) A leverage ratio of 3.0 percent or greater if the bank is rated 
composite 1 under the CAMELS rating system in the most recent 
examination of the bank and is not experiencing or anticipating 
significant growth; and
    (iv) Does not meet the definition of a ``well capitalized'' bank.
    (3) ``Undercapitalized'' if the bank has:
    (i) A total risk-based capital ratio that is less than 8.0 percent; 
or
    (ii) A Tier 1 risk-based capital ratio that is less than 4.0 
percent; or
    (iii) Except as provided in paragraph (b)(2)(iii)(B) of this 
section, has a leverage ratio that is less than 4.0 percent; or
    (iv) A leverage ratio that is less than 3.0 percent, if the bank is 
rated composite 1 under the CAMELS rating system in the most recent 
examination of the bank and is not experiencing or anticipating 
significant growth.
    (4) ``Significantly undercapitalized'' if the bank has:
    (i) A total risk-based capital ratio that is less than 6.0 percent; 
or
    (ii) A Tier 1 risk-based capital ratio that is less than 3.0 
percent; or
    (iii) A leverage ratio that is less than 3.0 percent.
    (5) ``Critically undercapitalized'' if the bank has a ratio of 
tangible equity to total assets that is equal to or less than 2.0 
percent.
    (c) Reclassification based on supervisory criteria other than 
capital. The Board may reclassify a well capitalized member bank as 
adequately capitalized and may require an adequately-capitalized or an 
undercapitalized member bank to comply with certain mandatory or 
discretionary supervisory actions as if the bank were in the next lower 
capital category (except that the Board may not reclassify a 
significantly undercapitalized bank as critically undercapitalized) 
(each of these

[[Page 217]]

actions are hereinafter referred to generally as ``reclassifications'') 
in the following circumstances:
    (1) Unsafe or unsound condition. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that the 
bank is in unsafe or unsound condition; or
    (2) Unsafe or unsound practice. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that, in 
the most recent examination of the bank, the bank received and has not 
corrected, a less-than-satisfactory rating for any of the categories of 
asset quality, management, earnings, liquidity, or sensitivity to market 
risk.



Sec. 208.44  Capital restoration plans.

    (a) Schedule for filing plan--(1) In general. A member bank shall 
file a written capital restoration plan with the appropriate Reserve 
Bank within 45 days of the date that the bank receives notice or is 
deemed to have notice that the bank is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, unless the Board 
notifies the bank in writing that the plan is to be filed within a 
different period. An adequately capitalized bank that has been required, 
pursuant to Sec. 208.43(c), to comply with supervisory actions as if 
the bank were undercapitalized is not required to submit a capital 
restoration plan solely by virtue of the reclassification.
    (2) Additional capital restoration plans. Notwithstanding paragraph 
(a)(1) of this section, a bank that has already submitted and is 
operating under a capital restoration plan approved under section 38 and 
this subpart is not required to submit an additional capital restoration 
plan based on a revised calculation of its capital measures or a 
reclassification of the institution under Sec. 208.43(c), unless the 
Board notifies the bank that it must submit a new or revised capital 
plan. A bank that is notified that it must submit a new or revised 
capital restoration plan shall file the plan in writing with the 
appropriate Reserve Bank within 45 days of receiving such notice, unless 
the Board notifies the bank in writing that the plan is to be filed 
within a different period.
    (b) Contents of plan. All financial data submitted in connection 
with a capital restoration plan shall be prepared in accordance with the 
instructions provided on the Call Report, unless the Board instructs 
otherwise. The capital restoration plan shall include all of the 
information required to be filed under section 38(e)(2) of the FDI Act. 
A bank that is required to submit a capital restoration plan as the 
result of a reclassification of the bank pursuant to Sec. 208.43(c) 
shall include a description of the steps the bank will take to correct 
the unsafe or unsound condition or practice. No plan shall be accepted 
unless it includes any performance guarantee described in section 
38(e)(2)(C) of that Act by each company that controls the bank.
    (c) Review of capital restoration plans. Within 60 days after 
receiving a capital restoration plan under this subpart, the Board shall 
provide written notice to the bank of whether the plan has been 
approved. The Board may extend the time within which notice regarding 
approval of a plan shall be provided.
    (d) Disapproval of capital plan. If the Board does not approve a 
capital restoration plan, the bank shall submit a revised capital 
restoration plan within the time specified by the Board. Upon receiving 
notice that its capital restoration plan has not been approved, any 
undercapitalized member bank (as defined in Sec. 208.43(b)(3)) shall be 
subject to all of the provisions of section 38 and this subpart 
applicable to significantly undercapitalized institutions. These 
provisions shall be applicable until such time as the Board approves a 
new or revised capital restoration plan submitted by the bank.
    (e) Failure to submit capital restoration plan. A member bank that 
is undercapitalized (as defined in Sec. 208.43(b)(3)) and that fails to 
submit a written capital restoration plan within the period provided in 
this section shall, upon the expiration of that period, be subject to 
all of the provisions of section 38 and this subpart applicable to 
significantly undercapitalized institutions.
    (f) Failure to implement capital restoration plan. Any 
undercapitalized member bank that fails in any material respect to 
implement a capital restoration plan shall be subject to all of the

[[Page 218]]

provisions of section 38 and this subpart applicable to significantly 
undercapitalized institutions.
    (g) Amendment of capital plan. A bank that has filed an approved 
capital restoration plan may, after prior written notice to and approval 
by the Board, amend the plan to reflect a change in circumstance. Until 
such time as a proposed amendment has been approved, the bank shall 
implement the capital restoration plan as approved prior to the proposed 
amendment.
    (h) Notice to FDIC. Within 45 days of the effective date of Board 
approval of a capital restoration plan, or any amendment to a capital 
restoration plan, the Board shall provide a copy of the plan or 
amendment to the Federal Deposit Insurance Corporation.
    (i) Performance guarantee by companies that control a bank--(1) 
Limitation on Liability. (i) Amount limitation. The aggregate liability 
under the guarantee provided under section 38 and this subpart for all 
companies that control a specific member bank that is required to submit 
a capital restoration plan under this subpart shall be limited to the 
lesser of:
    (A) An amount equal to 5.0 percent of the bank's total assets at the 
time the bank was notified or deemed to have notice that the bank was 
undercapitalized; or
    (B) The amount necessary to restore the relevant capital measures of 
the bank to the levels required for the bank to be classified as 
adequately capitalized, as those capital measures and levels are defined 
at the time that the bank initially fails to comply with a capital 
restoration plan under this subpart.
    (ii) Limit on duration. The guarantee and limit of liability under 
section 38 and this subpart shall expire after the Board notifies the 
bank that it has remained adequately capitalized for each of four 
consecutive calendar quarters. The expiration or fulfillment by a 
company of a guarantee of a capital restoration plan shall not limit the 
liability of the company under any guarantee required or provided in 
connection with any capital restoration plan filed by the same bank 
after expiration of the first guarantee.
    (iii) Collection on guarantee. Each company that controls a bank 
shall be jointly and severally liable for the guarantee for such bank as 
required under section 38 and this subpart, and the Board may require 
and collect payment of the full amount of that guarantee from any or all 
of the companies issuing the guarantee.
    (2) Failure to provide guarantee. In the event that a bank that is 
controlled by a company submits a capital restoration plan that does not 
contain the guarantee required under section 38(e)(2) of the FDI Act, 
the bank shall, upon submission of the plan, be subject to the 
provisions of section 38 and this subpart that are applicable to banks 
that have not submitted an acceptable capital restoration plan.
    (3) Failure to perform guarantee. Failure by any company that 
controls a bank to perform fully its guarantee of any capital plan shall 
constitute a material failure to implement the plan for purposes of 
section 38(f) of the FDI Act. Upon such failure, the bank shall be 
subject to the provisions of section 38 and this subpart that are 
applicable to banks that have failed in a material respect to implement 
a capital restoration plan.



Sec. 208.45  Mandatory and discretionary supervisory actions under section 38.

    (a) Mandatory supervisory actions--(1) Provisions applicable to all 
banks. All member banks are subject to the restrictions contained in 
section 38(d) of the FDI Act on payment of capital distributions and 
management fees.
    (2) Provisions applicable to undercapitalized, significantly 
undercapitalized, and critically undercapitalized banks. Immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 208.42 or Sec. 208.44, that the bank is undercapitalized, 
significantly undercapitalized, or critically undercapitalized, the bank 
shall become subject to the provisions of section 38 of the FDI Act:
    (i) Restricting payment of capital distributions and management fees 
(section 38(d));
    (ii) Requiring that the Board monitor the condition of the bank 
(section 38(e)(1));

[[Page 219]]

    (iii) Requiring submission of a capital restoration plan within the 
schedule established in this subpart (section 38(e)(2));
    (iv) Restricting the growth of the bank's assets (section 38(e)(3)); 
and
    (v) Requiring prior approval of certain expansion proposals (section 
3(e)(4)).
    (3) Additional provisions applicable to significantly 
undercapitalized, and critically undercapitalized banks. In addition to 
the provisions of section 38 of the FDI Act described in paragraph 
(a)(2) of this section, immediately upon receiving notice or being 
deemed to have notice, as provided in Sec. 208.42 or Sec. 208.44, that 
the bank is significantly undercapitalized, or critically 
undercapitalized, or that the bank is subject to the provisions 
applicable to institutions that are significantly undercapitalized 
because the bank failed to submit or implement in any material respect 
an acceptable capital restoration plan, the bank shall become subject to 
the provisions of section 38 of the FDI Act that restrict compensation 
paid to senior executive officers of the institution (section 38(f)(4)).
    (4) Additional provisions applicable to critically undercapitalized 
banks. In addition to the provisions of section 38 of the FDI Act 
described in paragraphs (a)(2) and (a)(3) of this section, immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 208.32, that the bank is critically undercapitalized, the bank 
shall become subject to the provisions of section 38 of the FDI Act:
    (i) Restricting the activities of the bank (section 38(h)(1)); and
    (ii) Restricting payments on subordinated debt of the bank (section 
38(h)(2)).
    (b) Discretionary supervisory actions. In taking any action under 
section 38 that is within the Board's discretion to take in connection 
with: A member bank that is deemed to be undercapitalized, significantly 
undercapitalized, or critically undercapitalized, or has been 
reclassified as undercapitalized, or significantly undercapitalized; an 
officer or director of such bank; or a company that controls such bank, 
the Board shall follow the procedures for issuing directives under 12 
CFR 263.202 and 263.204, unless otherwise provided in section 38 or this 
subpart.



          Subpart E_Real Estate Lending and Appraisal Standards

    Source: 63 FR 37655, July 13, 1998, unless otherwise noted.



Sec. 208.50  Authority, purpose, and scope.

    (a) Authority. Subpart E of Regulation H (12 CFR part 208, subpart 
E) is issued by the Board of Governors of the Federal Reserve System 
under section 304 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991, 12 U.S.C. 1828(o) and Title 11 of the Financial 
Institutions Reform, Recovery, and Enforcement Act (12 U.S.C. 3331-
3351).
    (b) Purpose and scope. This subpart E prescribes standards for real 
estate lending to be used by member banks in adopting internal real 
estate lending policies. The standards applicable to appraisals rendered 
in connection with federally related transactions entered into by member 
banks are set forth in 12 CFR part 225, subpart G (Regulation Y).



Sec. 208.51  Real estate lending standards.

    (a) Adoption of written policies. Each state bank that is a member 
of the Federal Reserve System shall adopt and maintain written policies 
that establish appropriate limits and standards for extensions of credit 
that are secured by liens on or interests in real estate, or that are 
made for the purpose of financing permanent improvements to real estate.
    (b) Requirements of lending policies. (1) Real estate lending 
policies adopted pursuant to this section shall be:
    (i) Consistent with safe and sound banking practices;
    (ii) Appropriate to the size of the institution and the nature and 
scope of its operations; and
    (iii) Reviewed and approved by the bank's board of directors at 
least annually.
    (2) The lending policies shall establish:
    (i) Loan portfolio diversification standards;

[[Page 220]]

    (ii) Prudent underwriting standards, including loan-to-value limits, 
that are clear and measurable;
    (iii) Loan administration procedures for the bank's real estate 
portfolio; and
    (iv) Documentation, approval, and reporting requirements to monitor 
compliance with the bank's real estate lending policies.
    (c) Monitoring conditions. Each member bank shall monitor conditions 
in the real estate market in its lending area to ensure that its real 
estate lending policies continue to be appropriate for current market 
conditions.
    (d) Interagency guidelines. The real estate lending policies adopted 
pursuant to this section should reflect consideration of the Interagency 
Guidelines for Real Estate Lending Policies (contained in appendix C of 
this part) established by the Federal bank and thrift supervisory 
agencies.



                  Subpart F_Miscellaneous Requirements

    Source: 63 FR 37655, July 13, 1998, unless otherwise noted.



Sec. 208.60  Authority, purpose, and scope.

    (a) Authority. Subpart F of Regulation H (12 CFR part 208, subpart 
F) is issued by the Board of Governors of the Federal Reserve System 
under sections 9, 11, 21, 25 and 25A of the Federal Reserve Act (12 
U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 and 611), section 7 of the 
International Banking Act (12 U.S.C. 3105), section 3 of the Bank 
Protection Act of 1968 (12 U.S.C. 1882), sections 1814, 1816, 1818, 
1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C. 1814, 1816, 1818, 
1831o, 1831p-1 and 1831r-1), and the Bank Secrecy Act (31 U.S.C. 5318).
    (b) Purpose and scope. This subpart F describes a member bank's 
obligation to implement security procedures to discourage certain 
crimes, to file suspicious activity reports, and to comply with the Bank 
Secrecy Act's requirements for reporting and recordkeeping of currency 
and foreign transactions. It also describes the examination schedule for 
certain small insured member banks.



Sec. 208.61  Bank security procedures.

    (a) Authority, purpose, and scope. Pursuant to section 3 of the Bank 
Protection Act of 1968 (12 U.S.C. 1882), member banks are required to 
adopt appropriate security procedures to discourage robberies, 
burglaries, and larcenies, and to assist in the identification and 
prosecution of persons who commit such acts. It is the responsibility of 
the member bank's board of directors to comply with the provisions of 
this section and ensure that a written security program for the bank's 
main office and branches is developed and implemented.
    (b) Designation of security officer. Upon becoming a member of the 
Federal Reserve System, a member bank's board of directors shall 
designate a security officer who shall have the authority, subject to 
the approval of the board of directors, to develop, within a reasonable 
time, but no later than 180 days, and to administer a written security 
program for each banking office.
    (c) Security program. (1) The security program shall:
    (i) Establish procedures for opening and closing for business and 
for the safekeeping of all currency, negotiable securities, and similar 
valuables at all times;
    (ii) Establish procedures that will assist in identifying persons 
committing crimes against the institution and that will preserve 
evidence that may aid in their identification and prosecution. Such 
procedures may include, but are not limited to: maintaining a camera 
that records activity in the banking office; using identification 
devices, such as prerecorded serial-numbered bills, or chemical and 
electronic devices; and retaining a record of any robbery, burglary, or 
larceny committed against the bank;
    (iii) Provide for initial and periodic training of officers and 
employees in their responsibilities under the security program and in 
proper employee conduct during and after a burglary, robbery, or 
larceny; and
    (iv) Provide for selecting, testing, operating, and maintaining 
appropriate security devices, as specified in paragraph (c)(2) of this 
section.

[[Page 221]]

    (2) Security devices. Each member bank shall have, at a minimum, the 
following security devices:
    (i) A means of protecting cash and other liquid assets, such as a 
vault, safe, or other secure space;
    (ii) A lighting system for illuminating, during the hours of 
darkness, the area around the vault, if the vault is visible from 
outside the banking office;
    (iii) Tamper-resistant locks on exterior doors and exterior windows 
that may be opened;
    (iv) An alarm system or other appropriate device for promptly 
notifying the nearest responsible law enforcement officers of an 
attempted or perpetrated robbery or burglary; and
    (v) Such other devices as the security officer determines to be 
appropriate, taking into consideration: the incidence of crimes against 
financial institutions in the area; the amount of currency and other 
valuables exposed to robbery, burglary, or larceny; the distance of the 
banking office from the nearest responsible law enforcement officers; 
the cost of the security devices; other security measures in effect at 
the banking office; and the physical characteristics of the structure of 
the banking office and its surroundings.
    (d) Annual reports. The security officer for each member bank shall 
report at least annually to the bank's board of directors on the 
implementation, administration, and effectiveness of the security 
program.
    (e) Reserve Banks. Each Reserve Bank shall develop and maintain a 
written security program for its main office and branches subject to 
review and approval of the Board.



Sec. 208.62  Suspicious activity reports.

    (a) Purpose. This section ensures that a member bank files a 
Suspicious Activity Report when it detects a known or suspected 
violation of Federal law, or a suspicious transaction related to a money 
laundering activity or a violation of the Bank Secrecy Act. This section 
applies to all member banks.
    (b) Definitions. For the purposes of this section:
    (1) FinCEN means the Financial Crimes Enforcement Network of the 
Department of the Treasury.
    (2) Institution-affiliated party means any institution-affiliated 
party as that term is defined in 12 U.S.C. 1786(r), or 1813(u) and 
1818(b) (3), (4) or (5).
    (3) SAR means a Suspicious Activity Report on the form prescribed by 
the Board.
    (c) SARs required. A member bank shall file a SAR with the 
appropriate Federal law enforcement agencies and the Department of the 
Treasury in accordance with the form's instructions by sending a 
completed SAR to FinCEN in the following circumstances:
    (1) Insider abuse involving any amount. Whenever the member bank 
detects any known or suspected Federal criminal violation, or pattern of 
criminal violations, committed or attempted against the bank or 
involving a transaction or transactions conducted through the bank, 
where the bank believes that it was either an actual or potential victim 
of a criminal violation, or series of criminal violations, or that the 
bank was used to facilitate a criminal transaction, and the bank has a 
substantial basis for identifying one of its directors, officers, 
employees, agents or other institution-affiliated parties as having 
committed or aided in the commission of a criminal act regardless of the 
amount involved in the violation.
    (2) Violations aggregating $5,000 or more where a suspect can be 
identified. Whenever the member bank detects any known or suspected 
Federal criminal violation, or pattern of criminal violations, committed 
or attempted against the bank or involving a transaction or transactions 
conducted through the bank and involving or aggregating $5,000 or more 
in funds or other assets, where the bank believes that it was either an 
actual or potential victim of a criminal violation, or series of 
criminal violations, or that the bank was used to facilitate a criminal 
transaction, and the bank has a substantial basis for identifying a 
possible suspect or group of suspects. If it is determined prior to 
filing this report that the identified suspect or group of suspects has 
used an ``alias,'' then information regarding the true identity of the 
suspect or group of suspects, as well as alias identifiers, such as 
drivers' licenses or

[[Page 222]]

social security numbers, addresses and telephone numbers, must be 
reported.
    (3) Violations aggregating $25,000 or more regardless of a potential 
suspect. Whenever the member bank detects any known or suspected Federal 
criminal violation, or pattern of criminal violations, committed or 
attempted against the bank or involving a transaction or transactions 
conducted through the bank and involving or aggregating $25,000 or more 
in funds or other assets, where the bank believes that it was either an 
actual or potential victim of a criminal violation, or series of 
criminal violations, or that the bank was used to facilitate a criminal 
transaction, even though there is no substantial basis for identifying a 
possible suspect or group of suspects.
    (4) Transactions aggregating $5,000 or more that involve potential 
money laundering or violations of the Bank Secrecy Act. Any transaction 
(which for purposes of this paragraph (c)(4) means a deposit, 
withdrawal, transfer between accounts, exchange of currency, loan, 
extension of credit, purchase or sale of any stock, bond, certificate of 
deposit, or other monetary instrument or investment security, or any 
other payment, transfer, or delivery by, through, or to a financial 
institution, by whatever means effected) conducted or attempted by, at 
or through the member bank and involving or aggregating $5,000 or more 
in funds or other assets, if the bank knows, suspects, or has reason to 
suspect that:
    (i) The transaction involves funds derived from illegal activities 
or is intended or conducted in order to hide or disguise funds or assets 
derived from illegal activities (including, without limitation, the 
ownership, nature, source, location, or control of such funds or assets) 
as part of a plan to violate or evade any law or regulation or to avoid 
any transaction reporting requirement under federal law;
    (ii) The transaction is designed to evade any regulations 
promulgated under the Bank Secrecy Act; or
    (iii) The transaction has no business or apparent lawful purpose or 
is not the sort in which the particular customer would normally be 
expected to engage, and the bank knows of no reasonable explanation for 
the transaction after examining the available facts, including the 
background and possible purpose of the transaction.
    (d) Time for reporting. A member bank is required to file a SAR no 
later than 30 calendar days after the date of initial detection of facts 
that may constitute a basis for filing a SAR. If no suspect was 
identified on the date of detection of the incident requiring the 
filing, a member bank may delay filing a SAR for an additional 30 
calendar days to identify a suspect. In no case shall reporting be 
delayed more than 60 calendar days after the date of initial detection 
of a reportable transaction. In situations involving violations 
requiring immediate attention, such as when a reportable violation is 
on-going, the financial institution shall immediately notify, by 
telephone, an appropriate law enforcement authority and the Board in 
addition to filing a timely SAR.
    (e) Reports to state and local authorities. Member banks are 
encouraged to file a copy of the SAR with state and local law 
enforcement agencies where appropriate.
    (f) Exceptions. (1) A member bank need not file a SAR for a robbery 
or burglary committed or attempted that is reported to appropriate law 
enforcement authorities.
    (2) A member bank need not file a SAR for lost, missing, 
counterfeit, or stolen securities if it files a report pursuant to the 
reporting requirements of 17 CFR 240.17f-1.
    (g) Retention of records. A member bank shall maintain a copy of any 
SAR filed and the original or business record equivalent of any 
supporting documentation for a period of five years from the date of the 
filing of the SAR. Supporting documentation shall be identified and 
maintained by the bank as such, and shall be deemed to have been filed 
with the SAR. A member bank must make all supporting documentation 
available to appropriate law enforcement agencies upon request.
    (h) Notification to board of directors. The management of a member 
bank shall promptly notify its board of directors, or a committee 
thereof, of any report filed pursuant to this section.

[[Page 223]]

    (i) Compliance. Failure to file a SAR in accordance with this 
section and the instructions may subject the member bank, its directors, 
officers, employees, agents, or other institution affiliated parties to 
supervisory action.
    (j) Confidentiality of SARs. SARs are confidential. Any member bank 
subpoenaed or otherwise requested to disclose a SAR or the information 
contained in a SAR shall decline to produce the SAR or to provide any 
information that would disclose that a SAR has been prepared or filed 
citing this section, applicable law (e.g., 31 U.S.C. 5318(g)), or both, 
and notify the Board.
    (k) Safe harbor. The safe harbor provisions of 31 U.S.C. 5318(g), 
which exempts any member bank that makes a disclosure of any possible 
violation of law or regulation from liability under any law or 
regulation of the United States, or any constitution, law or regulation 
of any state or political subdivision, covers all reports of suspected 
or known criminal violations and suspicious activities to law 
enforcement and financial institution supervisory authorities, including 
supporting documentation, regardless of whether such reports are filed 
pursuant to this section or are filed on a voluntary basis.



Sec. 208.63  Procedures for monitoring Bank Secrecy Act compliance.

    (a) Purpose. This section is issued to assure that all state member 
banks establish and maintain procedures reasonably designed to assure 
and monitor their compliance with the provisions of the Bank Secrecy Act 
(31 U.S.C. 5311, et seq.) and the implementing regulations promulgated 
thereunder by the Department of Treasury at 31 CFR part 103, requiring 
recordkeeping and reporting of currency transactions.
    (b) Establishment of BSA compliance program--(1) Program 
requirement. Each bank shall develop and provide for the continued 
administration of a program reasonably designed to ensure and monitor 
compliance with the recordkeeping and reporting requirements set forth 
in subchapter II of chapter 53 of title 31, United States Code, the Bank 
Secrecy Act, and the implementing regulations promulgated thereunder by 
the Department of the Treasury at 31 CFR part 103. The compliance 
program shall be reduced to writing, approved by the board of directors, 
and noted in the minutes.
    (2) Customer identification program. Each bank is subject to the 
requirements of 31 U.S.C. 5318(l) and the implementing regulation 
jointly promulgated by the Board and the Department of the Treasury at 
31 CFR 103.121, which require a customer identification program to be 
implemented as part of the BSA compliance program required under this 
section.
    (c) Contents of compliance program. The compliance program shall, at 
a minimum:
    (1) Provide for a system of internal controls to assure ongoing 
compliance;
    (2) Provide for independent testing for compliance to be conducted 
by bank personnel or by an outside party;
    (3) Designate an individual or individuals responsible for 
coordinating and monitoring day-to-day compliance; and
    (4) Provide training for appropriate personnel.

[63 FR 37655, July 13, 1998, as amended at 68 FR 25111, May 9, 2003]



Sec. 208.64  Frequency of examination.

    (a) General. The Federal Reserve examines insured member banks 
pursuant to authority conferred by 12 U.S.C. 325 and the requirements of 
12 U.S.C. 1820(d). The Federal Reserve is required to conduct a full-
scope, on-site examination of every insured member bank at least once 
during each 12-month period.
    (b) 18-month rule for certain small institutions. The Federal 
Reserve may conduct a full-scope, on-site examination of an insured 
member bank at least once during each 18-month period, rather than each 
12-month period as provided in paragraph (a) of this section, if the 
following conditions are satisfied:
    (1) The bank has total assets of less than $500 million;
    (2) The bank is well capitalized as defined in subpart D of this 
part (Sec. 208.43);
    (3) At the most recent examination conducted by either the Federal 
Reserve or applicable State banking agency, the Federal Reserve--

[[Page 224]]

    (i) Assigned the bank a rating of 1 or 2 for management as part of 
the bank's rating under the Uniform Financial Institutions Rating System 
(commonly referred to as CAMELS); and
    (ii) Assigned the bank a composite CAMELS rating of 1 or 2 under the 
Uniform Financial Institutions Rating System;
    (4) The bank currently is not subject to a formal enforcement 
proceeding or order by the Federal Reserve or the FDIC; and
    (5) No person acquired control of the bank during the preceding 12-
month period in which a full-scope examination would have been required 
but for this paragraph (b).
    (c) Authority to conduct more frequent examinations. This section 
does not limit the authority of the Federal Reserve to examine any 
member bank as frequently as the agency deems necessary.

[63 FR 37655, July 13, 1998, as amended at 72 FR 17802, Apr. 10, 2007]



         Subpart G_Financial Subsidiaries of State Member Banks

    Source: Reg. H, 66 FR 42933, Aug. 16, 2001, unless otherwise noted.



Sec. 208.71  What are the requirements to invest in or control a financial subsidiary?

    (a) In general. A state member bank may control, or hold an interest 
in, a financial subsidiary only if:
    (1) The state member bank and each depository institution affiliate 
of the state member bank are well capitalized and well managed;
    (2) The aggregate consolidated total assets of all financial 
subsidiaries of the state member bank do not exceed the lesser of:
    (i) 45 percent of the consolidated total assets of the parent bank; 
or
    (ii) $50 billion, which dollar amount shall be adjusted according to 
an indexing mechanism jointly established by the Board and the Secretary 
of the Treasury;
    (3) The state member bank, if it is one of the largest 100 insured 
banks (based on consolidated total assets as of the end of the previous 
calendar year), meets the debt rating or alternative requirement of 
paragraph (b) of this section, if applicable; and
    (4) The Board or the appropriate Reserve Bank has approved the bank 
to acquire the interest in or control the financial subsidiary under 
Sec. 208.76.
    (b) Debt rating or alternative requirement for 100 largest insured 
banks--(1) General. A state member bank meets the debt rating or 
alternative requirement of this paragraph (b) if:
    (i) The bank has at least one issue of eligible debt outstanding 
that is currently rated in one of the three highest investment grade 
rating categories by a nationally recognized statistical rating 
organization; or
    (ii) If the bank is one of the second 50 largest insured banks 
(based on consolidated total assets as of the end of the previous 
calendar year), the bank has a current long-term issuer credit rating 
from at least one nationally recognized statistical rating organization 
that is within the three highest investment grade rating categories used 
by the organization.
    (2) Financial subsidiaries engaged in financial activities only as 
agent. This paragraph (b) does not apply to a state member bank if the 
financial subsidiaries of the bank engage in financial activities 
described in Sec. 208.72(a)(1) and (2) only in an agency capacity and 
not directly or indirectly as principal.



Sec. 208.72  What activities may a financial subsidiary conduct?

    (a) Authorized activities. A financial subsidiary of a state member 
bank may engage in only the following activities:
    (1) Any financial activity listed in Sec. 225.86(a), (b), or (c) of 
the Board's Regulation Y (12 CFR 225.86(a), (b), or (c));
    (2) Any activity that the Secretary of the Treasury, in consultation 
with the Board, has determined to be financial in nature or incidental 
to a financial activity and permissible for financial subsidiaries 
pursuant to Section 5136A(b) of the Revised Statutes of the United 
States (12 U.S.C. 24a(b)); and
    (3) Any activity that the state member bank is permitted to engage 
in directly (subject to the same terms and conditions that govern the 
conduct of the activity by the state member bank).

[[Page 225]]

    (b) Impermissible activities. Notwithstanding paragraph (a) of this 
section, a financial subsidiary may not engage as principal in the 
following activities:
    (1) Insuring, guaranteeing, or indemnifying against loss, harm, 
damage, illness, disability or death (except to the extent permitted 
under applicable state law and section 302 or 303(c) of the Gramm-Leach-
Bliley Act (15 U.S.C. 6712 or 6713(c));
    (2) Providing or issuing annuities the income of which is subject to 
tax treatment under section 72 of the Internal Revenue Code of 1986 (26 
U.S.C. 72);
    (3) Real estate development or real estate investment, unless 
otherwise expressly authorized by applicable state and Federal law; and
    (4) Any merchant banking or insurance company investment activity 
permitted for financial holding companies by section 4(k)(4)(H) or (I) 
of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H) and (I)).



Sec. 208.73  What additional provisions are applicable to state member banks with financial subsidiaries?

    (a) Capital deduction required. A state member bank that controls or 
holds an interest in a financial subsidiary must comply with the 
following rules in determining its compliance with applicable regulatory 
capital standards (including the well capitalized standard of Sec. 
208.71(a)(1)):
    (1) The bank must not consolidate the assets and liabilities of any 
financial subsidiary with those of the bank.
    (2) For purposes of determining the bank's risk-based capital ratios 
under Appendix A of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from both the bank's Tier 1 capital and Tier 2 capital; and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's risk-weighted assets.
    (3) For purposes of determining the bank's leverage capital ratio 
under Appendix B of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from the bank's Tier 1 capital; and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's average total assets.
    (4) For purposes of determining the bank's ratio of tangible equity 
to total assets under Sec. 208.43(b)(5), the bank must deduct the 
entire amount of the bank's outstanding equity investment (including 
retained earnings) in all financial subsidiaries from the bank's 
tangible equity and total assets.
    (5) If the deduction from Tier 2 capital required by paragraph 
(a)(2)(i) of this section exceeds the bank's Tier 2 capital, any excess 
must be deducted from the bank's Tier 1 capital.
    (b) Financial statement disclosure of capital deduction. Any 
published financial statement of a state member bank that controls or 
holds an interest in a financial subsidiary must, in addition to 
providing information prepared in accordance with generally accepted 
accounting principles, separately present financial information for the 
bank reflecting the capital deduction and adjustments required by 
paragraph (a) of this section.
    (c) Safeguards for the bank. A state member bank that establishes, 
controls or holds an interest in a financial subsidiary must:
    (1) Establish and maintain procedures for identifying and managing 
financial and operational risks within the state member bank and the 
financial subsidiary that adequately protect the state member bank from 
such risks; and
    (2) Establish and maintain reasonable policies and procedures to 
preserve the separate corporate identity and limited liability of the 
state member bank and the financial subsidiary.
    (d) Application of Sections 23A and 23B of the Federal Reserve Act. 
For purposes of sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1):
    (1) A financial subsidiary of a state member bank shall be deemed an 
affiliate, and not a subsidiary, of the bank;

[[Page 226]]

    (2) The restrictions contained in section 23A(a)(1)(A) of the 
Federal Reserve Act (12 U.S.C. 371c(a)(1)(A)) shall not apply with 
respect to covered transactions between the bank and any individual 
financial subsidiary of the bank;
    (3) The bank's investment in a financial subsidiary shall not 
include retained earnings of the financial subsidiary;
    (4) Any purchase of, or investment in, the securities of a financial 
subsidiary by an affiliate of the bank will be considered to be a 
purchase of, or investment in, such securities by the bank; and
    (5) Any extension of credit by an affiliate of the bank to a 
financial subsidiary of the bank will be considered to be an extension 
of credit by the bank to the financial subsidiary if the Board 
determines that such treatment is necessary or appropriate to prevent 
evasions of the Federal Reserve Act and the Gramm-Leach-Bliley Act.
    (e) Application of anti-tying prohibitions. A financial subsidiary 
of a state member bank shall be deemed a subsidiary of a bank holding 
company and not a subsidiary of the bank for purposes of the anti-tying 
prohibitions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971 et seq.).



Sec. 208.74  What happens if the state member bank or a depository institution affiliate fails to continue to meet certain requirements?

    (a) Qualifications and safeguards. The following procedures apply to 
a state member bank that controls or holds an interest in a financial 
subsidiary.
    (1) Notice by Board. If the Board finds that a state member bank or 
any of its depository institution affiliates fails to continue to be 
well capitalized and well managed, or the state member bank is not in 
compliance with the asset limitation set forth in Sec. 208.71(a)(2) or 
the safeguards set forth in Sec. 208.73(c), the Board will notify the 
state member bank in writing and identify the areas of noncompliance. 
The Board may provide this notice at any time before or after receiving 
notice from the state member bank under paragraph (a)(2) of this 
section.
    (2) Notification by state member bank. A state member bank must 
notify the appropriate Reserve Bank in writing within 15 calendar days 
of becoming aware that any depository institution affiliate of the bank 
has ceased to be well capitalized or well managed. The notification must 
identify the depository institution affiliate and the area(s) of 
noncompliance.
    (3) Execution of agreement. Within 45 days after receiving a notice 
from the Board under paragraph (a)(1) of this section, or such 
additional period of time as the Board may permit, the:
    (i) State member bank must execute an agreement acceptable to the 
Board to comply with all applicable capital, management, asset and 
safeguard requirements; and
    (ii) Any relevant depository institution affiliate of the state 
member bank must execute an agreement acceptable to its appropriate 
Federal banking agency to comply with all applicable capital and 
management requirements.
    (4) Agreement requirements. Any agreement required by paragraph 
(a)(3)(i) of this section must:
    (i) Explain the specific actions that the state member bank will 
take to correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken; and
    (iii) Provide any other information the Board may require.
    (5) Imposition of limits. Until the Board determines that the 
conditions described in the notice under paragraph (a)(1) of this 
section are corrected:
    (i) The Board may impose any limitations on the conduct or 
activities of the state member bank or any subsidiary of the bank as the 
Board determines to be appropriate under the circumstances and 
consistent with the purposes of section 121 of the Gramm-Leach-Bliley 
Act, including requiring the Board's prior approval for any financial 
subsidiary of the bank to acquire any company or engage in any 
additional activity; and
    (ii) The appropriate Federal banking agency for any relevant 
depository institution affiliate may impose any limitations on the 
conduct or activities of

[[Page 227]]

the depository institution or any subsidiary of that institution as the 
agency determines to be appropriate under the circumstances and 
consistent with the purposes of section 121 of the Gramm-Leach-Bliley 
Act.
    (6) Divestiture. The Board may require a state member bank to divest 
control of any financial subsidiary if the conditions described in a 
notice under paragraph (a)(1) of this section are not corrected within 
180 days of receipt of the notice or such additional period of time as 
the Board may permit. Any divestiture must be completed in accordance 
with any terms and conditions established by the Board.
    (7) Consultation. The Board will consult with all relevant Federal 
and state regulatory authorities in taking any action under this 
paragraph (a).
    (b) Debt rating or alternative requirement. If a state member bank 
does not continue to meet any applicable debt rating or alternative 
requirement of Sec. 208.71(b), the bank may not, directly or through a 
subsidiary, purchase or acquire any additional equity capital of any 
financial subsidiary until the bank restores its compliance with the 
requirements of that section. For purposes of this paragraph (b), the 
term ``equity capital'' includes, in addition to any equity instrument, 
any debt instrument issued by the financial subsidiary if the debt 
instrument qualifies as capital of the subsidiary under any Federal or 
state law, regulation or interpretation applicable to the subsidiary.



Sec. 208.75  What happens if the state member bank or any of its insured depository institution affiliates receives less than a ``satisfactory'' CRA rating?

    (a) Limits on establishment of financial subsidiaries and expansion 
of existing financial subsidiaries. If a state member bank, or any 
insured depository institution affiliate of the bank, has received less 
than a ``satisfactory'' rating in meeting community credit needs in its 
most recent examination under the Community Reinvestment Act of 1977 (12 
U.S.C. 2901 et seq.):
    (1) The state member bank may not, directly or indirectly, acquire 
control of any financial subsidiary; and
    (2) Any financial subsidiary controlled by the state member bank may 
not commence any additional activity or acquire control, including all 
or substantially all of the assets, of any company.
    (b) Exception for certain activities. The prohibition in paragraph 
(a)(2) of this section does not apply to any activity, or to the 
acquisition of control of any company that is engaged only in 
activities, that the state member bank is permitted to conduct directly 
and that are conducted on the same terms and conditions that govern the 
conduct of the activity by the state member bank.
    (c) Duration of prohibitions. The prohibitions described in 
paragraph (a) of this section shall continue in effect until such time 
as the state member bank and each insured depository institution 
affiliate of the state member bank has achieved at least a 
``satisfactory'' rating in meeting community credit needs in its most 
recent examination under the Community Reinvestment Act.



Sec. 208.76  What Federal Reserve approvals are necessary for financial subsidiaries?

    (a) Notice requirements. (1) A state member bank may not acquire 
control of, or an interest in, a financial subsidiary unless it files a 
notice (in letter form, with enclosures) with the appropriate Reserve 
Bank.
    (2) A state member bank may not engage in any additional activity 
pursuant to Sec. 208.72(a)(1) or (2) through an existing financial 
subsidiary unless the state member bank files a notice (in letter form, 
with enclosures) with the appropriate Reserve Bank.
    (b) Contents of Notice. Any notice required by paragraph (a) of this 
section must:
    (1) In the case of a notice filed under paragraph (a)(1) of this 
section, describe the transaction(s) through which the bank proposes to 
acquire control of, or an interest in, the financial subsidiary;
    (2) Provide the name and head office address of the financial 
subsidiary;
    (3) Provide a description of the current and proposed activities of 
the financial subsidiary and the specific authority permitting each 
activity;

[[Page 228]]

    (4) Provide the capital ratios as of the close of the previous 
calendar quarter for all relevant capital measures, as defined in 
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o), for 
the bank and each of its depository institution affiliates;
    (5) Certify that the bank and each of its depository institution 
affiliates was well capitalized at the close of the previous calendar 
quarter and is well capitalized as of the date the bank files its 
notice;
    (6) Certify that the bank and each of its depository institution 
affiliates is well managed as of the date the bank files its notice;
    (7) Certify that the bank meets the debt rating or alternative 
requirement of Sec. 208.71(b), if applicable; and
    (8) Certify that the bank and its financial subsidiaries are in 
compliance with the asset limit set forth in Sec. 208.71(a)(2) both 
before the proposal and on a pro forma basis.
    (c) Insurance activities. (1) If a notice filed under paragraph (a) 
of this section relates to the initial affiliation of the bank with a 
company engaged in insurance activities, the notice must describe the 
type of insurance activity that the company is engaged in or plans to 
conduct and identify each state where the company holds an insurance 
license and the state insurance regulatory authority that issued the 
license.
    (2) The appropriate Reserve Bank will send a copy of any notice 
described in paragraph (c)(1) of this section to the appropriate state 
insurance regulatory authorities and provide such authorities with an 
opportunity to comment on the proposal.
    (d) Approval procedures. A notice filed with the appropriate Reserve 
Bank under paragraph (a) of this section will be deemed approved on the 
fifteenth day after receipt of a complete notice by the appropriate 
Reserve Bank, unless prior to that date the Board or the appropriate 
Reserve Bank notifies the bank that the notice is approved, that the 
notice will require additional review, or that the bank does not meet 
the requirements of this subpart. Any notification of early approval of 
a notice must be in writing.



Sec. 208.77  Definitions.

    The following definitions shall apply for purposes of this subpart:
    (a) Affiliate, Company, Control, and Subsidiary. The terms 
``affiliate'', ``company'', ``control'', and ``subsidiary'' have the 
meanings given those terms in section 2 of the Bank Holding Company Act 
of 1956 (12 U.S.C. 1841).
    (b) Appropriate Federal Banking Agency, Depository Institution, 
Insured Bank and Insured Depository Institution. The terms ``appropriate 
Federal banking agency'', ``depository institution'', ``insured bank'' 
and ``insured depository institution'' have the meanings given those 
terms in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813).
    (c) Capital-related definitions.
    (1) The terms ``Tier 1 capital'', ``tangible equity'', ``risk-
weighted assets'' and ``total assets'' have the meanings given those 
terms in Sec. 208.41 of this part.
    (2) The terms ``Tier 2 capital'' and ``average total assets'' have 
the meanings given those terms in appendix A and appendix B of this 
part, respectively.
    (d) Eligible Debt. The term ``eligible debt'' means unsecured debt 
with an initial maturity of more than 360 days that:
    (1) Is not supported by any form of credit enhancement, including a 
guarantee or standby letter of credit; and
    (2) Is not held in whole or in any significant part by any 
affiliate, officer, director, principal shareholder, or employee of the 
bank or any other person acting on behalf of or with funds from the bank 
or an affiliate of the bank.
    (e) Financial Subsidiary--(1) In general. The term ``financial 
subsidiary'' means any company that is controlled by one or more insured 
depository institutions other than:
    (i) A subsidiary that engages only in activities that the state 
member bank is permitted to engage in directly and that are conducted on 
the same terms and conditions that govern the conduct of the activities 
by the state member bank; or
    (ii) A subsidiary that the state member bank is specifically 
authorized by the express terms of a Federal statute

[[Page 229]]

(other than section 9 of the Federal Reserve Act (12 U.S.C. 335)), and 
not by implication or interpretation, to control, such as by section 25 
or 25A of the Federal Reserve Act (12 U.S.C. 601-604a, 611-631) or the 
Bank Service Company Act (12 U.S.C. 1861 et seq.).
    (2) Subsidiaries of financial subsidiaries. A financial subsidiary 
includes any company that is directly or indirectly controlled by the 
financial subsidiary.
    (f) Long-term Issuer Credit Rating. The term ``long-term issuer 
credit rating'' means a written opinion issued by a nationally 
recognized statistical rating organization of the bank's overall 
capacity and willingness to pay on a timely basis its unsecured, dollar-
denominated financial obligations maturing in not less than one year.
    (g) Well Capitalized--(1) Insured depository institutions. An 
insured depository institution is ``well capitalized'' if it has and 
maintains at least the capital levels required to be well capitalized 
under the capital adequacy regulations or guidelines adopted by the 
institution's appropriate Federal banking agency under section 38 of the 
Federal Deposit Insurance Act (12 U.S.C. 1831o).
    (2) Uninsured depository institutions. A depository institution the 
deposits of which are not insured by the Federal Deposit Insurance 
Corporation is ``well capitalized'' if the institution has and maintains 
at least the capital levels required for an insured depository 
institution to be well capitalized.
    (h) Well Managed--(1) In general. The term ``well managed'' means:
    (i) Unless otherwise determined in writing by the appropriate 
Federal banking agency, the institution has received a composite rating 
of 1 or 2 under the Uniform Financial Institutions Rating System (or an 
equivalent rating under an equivalent rating system) and at least a 
rating of 2 for management (if such rating is given) in connection with 
its most recent examination or subsequent review by the institution's 
appropriate Federal banking agency (or the appropriate state banking 
agency in an examination described in section 10(d) of the Federal 
Deposit Insurance Act (12 U.S.C. 1820(d)); or
    (ii) In the case of any depository institution that has not been 
examined by its appropriate Federal banking agency or been subject to an 
examination by its appropriate state banking agency that meets the 
requirements of section 10(d) of the Federal Deposit Insurance Act (18 
U.S.C. 1820(d)), the existence and use of managerial resources that the 
appropriate Federal banking agency determines are satisfactory.
    (2) Merged depository institutions--(i) Merger involving well 
managed institutions. A depository institution that results from the 
merger of two or more depository institutions that are well managed will 
be considered to be well managed unless the appropriate Federal banking 
agency for the resulting depository institution determines otherwise.
    (ii) Merger involving a poorly rated institution. A depository 
institution that results from the merger of a well managed depository 
institution with one or more depository institutions that are not well 
managed or that have not been examined shall be considered to be well 
managed if the appropriate Federal banking agency for the resulting 
depository institution determines that the institution is well managed.



           Subpart H_Consumer Protection in Sales of Insurance

    Source: 65 FR 75841, Dec. 4, 2000, unless otherwise noted.



Sec. 208.81  Purpose and scope.

    This subpart establishes consumer protections in connection with 
retail sales practices, solicitations, advertising, or offers of any 
insurance product or annuity to a consumer by:
    (a) Any state member bank; or
    (b) Any other person that is engaged in such activities at an office 
of the bank or on behalf of the bank.



Sec. 208.82  Definitions for purposes of this subpart.

    As used in this subpart:
    (a) Affiliate means a company that controls, is controlled by, or is 
under common control with another company.
    (b) Bank means a state member bank.

[[Page 230]]

    (c) Company means any corporation, partnership, business trust, 
association or similar organization, or any other trust (unless by its 
terms the trust must terminate within twenty-five years or not later 
than twenty-one years and ten months after the death of individuals 
living on the effective date of the trust). It does not include any 
corporation the majority of the shares of which are owned by the United 
States or by any State, or a qualified family partnership, as defined in 
section 2(o)(10) of the Bank Holding Company Act of 1956, as amended (12 
U.S.C. 1841(o)(10)).
    (d) Consumer means an individual who purchases, applies to purchase, 
or is solicited to purchase from you insurance products or annuities 
primarily for personal, family, or household purposes.
    (e) Control of a company has the same meaning as in section 3(w)(5) 
of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(5)).
    (f) Domestic violence means the occurrence of one or more of the 
following acts by a current or former family member, household member, 
intimate partner, or caretaker:
    (1) Attempting to cause or causing or threatening another person 
physical harm, severe emotional distress, psychological trauma, rape, or 
sexual assault;
    (2) Engaging in a course of conduct or repeatedly committing acts 
toward another person, including following the person without proper 
authority, under circumstances that place the person in reasonable fear 
of bodily injury or physical harm;
    (3) Subjecting another person to false imprisonment; or
    (4) Attempting to cause or causing damage to property so as to 
intimidate or attempt to control the behavior of another person.
    (g) Electronic media includes any means for transmitting messages 
electronically between you and a consumer in a format that allows visual 
text to be displayed on equipment, for example, a personal computer 
monitor.
    (h) Office means the premises of a bank where retail deposits are 
accepted from the public.
    (i) Subsidiary has the same meaning as in section 3(w)(4) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(w)(4)).
    (j)(1) You means:
    (i) A bank; or
    (ii) Any other person only when the person sells, solicits, 
advertises, or offers an insurance product or annuity to a consumer at 
an office of the bank or on behalf of a bank.
    (2) For purposes of this definition, activities on behalf of a bank 
include activities where a person, whether at an office of the bank or 
at another location sells, solicits, advertises, or offers an insurance 
product or annuity and at least one of the following applies:
    (i) The person represents to a consumer that the sale, solicitation, 
advertisement, or offer of any insurance product or annuity is by or on 
behalf of the bank;
    (ii) If the bank refers a consumer to a seller of insurance products 
or annuities and the bank has a contractual arrangement to receive 
commissions or fees derived from the sale of an insurance product or 
annuity resulting from that referral; or
    (iii) Documents evidencing the sale, solicitation, advertising, or 
offer of an insurance product or annuity identify or refer to the bank.



Sec. 208.83  Prohibited practices.

    (a) Anticoercion and antitying rules. You may not engage in any 
practice that would lead a consumer to believe that an extension of 
credit, in violation of section 106(b) of the Bank Holding Company Act 
Amendments of 1970 (12 U.S.C. 1972), is conditional upon either:
    (1) The purchase of an insurance product or annuity from the bank or 
any of its affiliates; or
    (2) An agreement by the consumer not to obtain, or a prohibition on 
the consumer from obtaining, an insurance product or annuity from an 
unaffiliated entity.
    (b) Prohibition on misrepresentations generally. You may not engage 
in any practice or use any advertisement at any office of, or on behalf 
of, the bank or a subsidiary of the bank that could mislead any person 
or otherwise cause a reasonable person to reach an erroneous belief with 
respect to:

[[Page 231]]

    (1) The fact that an insurance product or annuity sold or offered 
for sale by you or any subsidiary of the bank is not backed by the 
Federal government or the bank or the fact that the insurance product or 
annuity is not insured by the Federal Deposit Insurance Corporation;
    (2) In the case of an insurance product or annuity that involves 
investment risk, the fact that there is an investment risk, including 
the potential that principal may be lost and that the product may 
decline in value; or
    (3) In the case of a bank or subsidiary of the bank at which 
insurance products or annuities are sold or offered for sale, the fact 
that:
    (i) The approval of an extension of credit to a consumer by the bank 
or subsidiary may not be conditioned on the purchase of an insurance 
product or annuity by the consumer from the bank or a subsidiary of the 
bank; and
    (ii) The consumer is free to purchase the insurance product or 
annuity from another source.
    (c) Prohibition on domestic violence discrimination. You may not 
sell or offer for sale, as principal, agent, or broker, any life or 
health insurance product if the status of the applicant or insured as a 
victim of domestic violence or as a provider of services to victims of 
domestic violence is considered as a criterion in any decision with 
regard to insurance underwriting, pricing, renewal, or scope of coverage 
of such product, or with regard to the payment of insurance claims on 
such product, except as required or expressly permitted under State law.



Sec. 208.84  What you must disclose.

    (a) Insurance disclosures. In connection with the initial purchase 
of an insurance product or annuity by a consumer from you, you must 
disclose to the consumer, except to the extent the disclosure would not 
be accurate, that:
    (1) The insurance product or annuity is not a deposit or other 
obligation of, or guaranteed by, the bank or an affiliate of the bank;
    (2) The insurance product or annuity is not insured by the Federal 
Deposit Insurance Corporation (FDIC) or any other agency of the United 
States, the bank, or (if applicable) an affiliate of the bank; and
    (3) In the case of an insurance product or annuity that involves an 
investment risk, there is investment risk associated with the product, 
including the possible loss of value.
    (b) Credit disclosure. In the case of an application for credit in 
connection with which an insurance product or annuity is solicited, 
offered, or sold, you must disclose that the bank may not condition an 
extension of credit on either:
    (1) The consumer's purchase of an insurance product or annuity from 
the bank or any of its affiliates; or
    (2) The consumer's agreement not to obtain, or a prohibition on the 
consumer from obtaining, an insurance product or annuity from an 
unaffiliated entity.
    (c) Timing and method of disclosures--(1) In general. The 
disclosures required by paragraph (a) of this section must be provided 
orally and in writing before the completion of the initial sale of an 
insurance product or annuity to a consumer. The disclosure required by 
paragraph (b) of this section must be made orally and in writing at the 
time the consumer applies for an extension of credit in connection with 
which insurance is solicited, offered, or sold.
    (2) Exceptions for transactions by mail. If a sale of an insurance 
product or annuity is conducted by mail, you are not required to make 
the oral disclosures required by paragraph (a) of this section. If you 
take an application for credit by mail, you are not required to make the 
oral disclosure required by paragraph (b) of this section.
    (3) Exception for transactions by telephone. If a sale of an 
insurance product or annuity is conducted by telephone, you may provide 
the written disclosures required by paragraph (a) of this section by 
mail within 3 business days beginning on the first business day after 
the sale, excluding Sundays and the legal public holidays specified in 5 
U.S.C 6103(a). If you take an application for such credit by telephone, 
you may provide the written disclosure required by paragraph (b) of this 
section by mail, provided you mail it to the consumer within three days 
beginning

[[Page 232]]

the first business day after the application is taken, excluding Sundays 
and the legal public holidays specified in 5 U.S.C. 6103(a).
    (4) Electronic form of disclosures. (i) Subject to the requirements 
of section 101(c) of the Electronic Signatures in Global and National 
Commerce Act (12 U.S.C. 7001(c)), you may provide the written 
disclosures required by paragraphs (a) and (b) of this section through 
electronic media instead of on paper, if the consumer affirmatively 
consents to receiving the disclosures electronically and if the 
disclosures are provided in a format that the consumer may retain or 
obtain later, for example, by printing or storing electronically (such 
as by downloading).
    (ii) Any disclosures required by paragraphs (a) or (b) of this 
section that are provided by electronic media are not required to be 
provided orally.
    (5) Disclosures must be readily understandable. The disclosures 
provided shall be conspicuous, simple, direct, readily understandable, 
and designed to call attention to the nature and significance of the 
information provided. For instance, you may use the following 
disclosures, in visual media, such as television broadcasting, ATM 
screens, billboards, signs, posters and written advertisements and 
promotional materials, as appropriate and consistent with paragraphs (a) 
and (b) of this section:

 NOT A DEPOSIT
 NOT FDIC-INSURED
 NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
 NOT GUARANTEED BY THE BANK
 MAY GO DOWN IN VALUE

    (6) Disclosures must be meaningful. (i) You must provide the 
disclosures required by paragraphs (a) and (b) of this section in a 
meaningful form. Examples of the types of methods that could call 
attention to the nature and significance of the information provided 
include:
    (A) A plain-language heading to call attention to the disclosures;
    (B) A typeface and type size that are easy to read;
    (C) Wide margins and ample line spacing;
    (D) Boldface or italics for key words; and
    (E) Distinctive type size, style, and graphic devices, such as 
shading or sidebars, when the disclosures are combined with other 
information.
    (ii) You have not provided the disclosures in a meaningful form if 
you merely state to the consumer that the required disclosures are 
available in printed material, but you do not provide the printed 
material when required and do not orally disclose the information to the 
consumer when required.
    (iii) With respect to those disclosures made through electronic 
media for which paper or oral disclosures are not required, the 
disclosures are not meaningfully provided if the consumer may bypass the 
visual text of the disclosures before purchasing an insurance product or 
annuity.
    (7) Consumer acknowledgment. You must obtain from the consumer, at 
the time a consumer receives the disclosures required under paragraphs 
(a) or (b) of this section, or at the time of the initial purchase by 
the consumer of an insurance product or annuity, a written 
acknowledgment by the consumer that the consumer received the 
disclosures. You may permit a consumer to acknowledge receipt of the 
disclosures electronically or in paper form. If the disclosures required 
under paragraphs (a) or (b) of this section are provided in connection 
with a transaction that is conducted by telephone, you must:
    (i) Obtain an oral acknowledgment of receipt of the disclosures and 
maintain sufficient documentation to show that the acknowledgment was 
given; and
    (ii) Make reasonable efforts to obtain a written acknowledgment from 
the consumer.
    (d) Advertisements and other promotional material for insurance 
products or annuities. The disclosures described in paragraph (a) of 
this section are required in advertisements and promotional material for 
insurance products or annuities unless the advertisements and 
promotional materials are of a general nature describing or listing the 
services or products offered by the bank.

[[Page 233]]



Sec. 208.85  Where insurance activities may take place.

    (a) General rule. A bank must, to the extent practicable, keep the 
area where the bank conducts transactions involving insurance products 
or annuities physically segregated from areas where retail deposits are 
routinely accepted from the general public, identify the areas where 
insurance product or annuity sales activities occur, and clearly 
delineate and distinguish those areas from the areas where the bank's 
retail deposit-taking activities occur.
    (b) Referrals. Any person who accepts deposits from the public in an 
area where such transactions are routinely conducted in the bank may 
refer a consumer who seeks to purchase an insurance product or annuity 
to a qualified person who sells that product only if the person making 
the referral receives no more than a one-time, nominal fee of a fixed 
dollar amount for each referral that does not depend on whether the 
referral results in a transaction.



Sec. 208.86  Qualification and licensing requirements for insurance sales personnel.

    A bank may not permit any person to sell or offer for sale any 
insurance product or annuity in any part of its office or on its behalf, 
unless the person is at all times appropriately qualified and licensed 
under applicable State insurance licensing standards with regard to the 
specific products being sold or recommended.



  Sec. Appendix A to Subpart H of Part 208--Consumer Grievance Process

    Any consumer who believes that any bank or any other person selling, 
soliciting, advertising, or offering insurance products or annuities to 
the consumer at an office of the bank or on behalf of the bank has 
violated the requirements of this subpart should contact the Consumer 
Complaints Section, Division of Consumer and Community Affairs, Board of 
Governors of the Federal Reserve System at the following address: 20th & 
C Streets, NW, Washington, D.C. 20551.



                        Subpart I_Interpretations

    Source: Reg. H, 63 FR 37658, July 13, 1998, unless otherwise noted. 
Redesignated at 65 FR 14814, Mar. 20, 2000. Redesignated further at 65 
FR 75841, Dec. 4, 2000.



Sec. 208.100  Sale of bank's money orders off premises as establishment of branch office.

    (a) The Board of Governors has been asked to consider whether the 
appointment by a member bank of an agent to sell the bank's money 
orders, at a location other than the premises of the bank, constitutes 
the establishment of a branch office.
    (b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is 
also applicable to member banks, defines the term branch as including 
``any branch bank, branch office, branch agency, additional office, or 
any branch place of business * * * at which deposits are received, or 
checks paid, or money lent.'' The basic question is whether the sale of 
a bank's money orders by an agent amounts to the receipt of deposits at 
a branch place of business within the meaning of this statute.
    (c) Money orders are classified as deposits for certain purposes. 
However, they bear a strong resemblance to traveler's checks that are 
issued by banks and sold off premises. In both cases, the purchaser does 
not intend to establish a deposit account in the bank, although a 
liability on the bank's part is created. Even though they result in a 
deposit liability, the Board is of the opinion that the issuance of a 
bank's money orders by an authorized agent does not involve the receipt 
of deposits at a ``branch place of business'' and accordingly does not 
require the Board's permission to establish a branch.



Sec. 208.101  Obligations concerning institutional customers.

    (a) As a result of broadened authority provided by the Government 
Securities Act Amendments of 1993 (15 U.S.C. 78o-3 and 78o-5), the Board 
is adopting sales practice rules for the government securities market, a 
market with a particularly broad institutional component. Accordingly, 
the Board believes it is appropriate to provide further guidance to 
banks on their suitability obligations when making recommendations to 
institutional customers.
    (b) The Board's Suitability Rule, Sec. 208.37(d), is fundamental to 
fair dealing and is intended to promote ethical sales practices and high 
standards of

[[Page 234]]

professional conduct. Banks' responsibilities include having a 
reasonable basis for recommending a particular security or strategy, as 
well as having reasonable grounds for believing the recommendation is 
suitable for the customer to whom it is made. Banks are expected to meet 
the same high standards of competence, professionalism, and good faith 
regardless of the financial circumstances of the customer.
    (c) In recommending to a customer the purchase, sale, or exchange of 
any government security, the bank shall have reasonable grounds for 
believing that the recommendation is suitable for the customer upon the 
basis of the facts, if any, disclosed by the customer as to the 
customer's other security holdings and financial situation and needs.
    (d) The interpretation in this section concerns only the manner in 
which a bank determines that a recommendation is suitable for a 
particular institutional customer. The manner in which a bank fulfills 
this suitability obligation will vary, depending on the nature of the 
customer and the specific transaction. Accordingly, the interpretation 
in this section deals only with guidance regarding how a bank may 
fulfill customer-specific suitability obligations under Sec. 
208.37(d).\7\
---------------------------------------------------------------------------

    \7\ The interpretation in this section does not address the 
obligation related to suitability that requires that a bank have''* * * 
a `reasonable basis' to believe that the recommendation could be 
suitable for at least some customers.'' In the Matter of the Application 
of F.J. Kaufman and Company of Virginia and Frederick J. Kaufman, Jr., 
50 SEC 164 (1989).
---------------------------------------------------------------------------

    (e) While it is difficult to define in advance the scope of a bank's 
suitability obligation with respect to a specific institutional customer 
transaction recommended by a bank, the Board has identified certain 
factors that may be relevant when considering compliance with Sec. 
208.37(d). These factors are not intended to be requirements or the only 
factors to be considered but are offered merely as guidance in 
determining the scope of a bank's suitability obligations.
    (f) The two most important considerations in determining the scope 
of a bank's suitability obligations in making recommendations to an 
institutional customer are the customer's capability to evaluate 
investment risk independently and the extent to which the customer is 
exercising independent judgement in evaluating a bank's recommendation. 
A bank must determine, based on the information available to it, the 
customer's capability to evaluate investment risk. In some cases, the 
bank may conclude that the customer is not capable of making independent 
investment decisions in general. In other cases, the institutional 
customer may have general capability, but may not be able to understand 
a particular type of instrument or its risk. This is more likely to 
arise with relatively new types of instruments, or those with 
significantly different risk or volatility characteristics than other 
investments generally made by the institution. If a customer is either 
generally not capable of evaluating investment risk or lacks sufficient 
capability to evaluate the particular product, the scope of a bank's 
customer-specific obligations under Sec. 208.37(d) would not be 
diminished by the fact that the bank was dealing with an institutional 
customer. On the other hand, the fact that a customer initially needed 
help understanding a potential investment need not necessarily imply 
that the customer did not ultimately develop an understanding and make 
an independent investment decision.
    (g) A bank may conclude that a customer is exercising independent 
judgement if the customer's investment decision will be based on its own 
independent assessment of the opportunities and risks presented by a 
potential investment, market factors and other investment 
considerations. Where the bank has reasonable grounds for concluding 
that the institutional customer is making independent investment 
decisions and is capable of independently evaluating investment risk, 
then a bank's obligations under Sec. 208.25(d) for a particular 
customer are fulfilled.\8\ Where a customer has delegated decision-
making authority to an agent, such as an investment advisor or a

[[Page 235]]

bank trust department, the interpretation in this section shall be 
applied to the agent.
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    \8\ See footnote 7 in paragraph (d) of this section.
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    (h) A determination of capability to evaluate investment risk 
independently will depend on an examination of the customer's capability 
to make its own investment decisions, including the resources available 
to the customer to make informed decisions. Relevant considerations 
could include:
    (1) The use of one or more consultants, investment advisers, or bank 
trust departments;
    (2) The general level of experience of the institutional customer in 
financial markets and specific experience with the type of instruments 
under consideration;
    (3) The customer's ability to understand the economic features of 
the security involved;
    (4) The customer's ability to independently evaluate how market 
developments would affect the security; and
    (5) The complexity of the security or securities involved.
    (i) A determination that a customer is making independent investment 
decisions will depend on the nature of the relationship that exists 
between the bank and the customer. Relevant considerations could 
include:
    (1) Any written or oral understanding that exists between the bank 
and the customer regarding the nature of the relationship between the 
bank and the customer and the services to be rendered by the bank;
    (2) The presence or absence of a pattern of acceptance of the bank's 
recommendations;
    (3) The use by the customer of ideas, suggestions, market views and 
information obtained from other government securities brokers or dealers 
or market professionals, particularly those relating to the same type of 
securities; and
    (4) The extent to which the bank has received from the customer 
current comprehensive portfolio information in connection with 
discussing recommended transactions or has not been provided important 
information regarding its portfolio or investment objectives.
    (j) Banks are reminded that these factors are merely guidelines that 
will be utilized to determine whether a bank has fulfilled its 
suitability obligation with respect to a specific institutional customer 
transaction and that the inclusion or absence of any of these factors is 
not dispositive of the determination of suitability. Such a 
determination can only be made on a case-by-case basis taking into 
consideration all the facts and circumstances of a particular bank/
customer relationship, assessed in the context of a particular 
transaction.
    (k) For purposes of the interpretation in this section, an 
institutional customer shall be any entity other than a natural person. 
In determining the applicability of the interpretation in this section 
to an institutional customer, the Board will consider the dollar value 
of the securities that the institutional customer has in its portfolio 
and/or under management. While the interpretation in this section is 
potentially applicable to any institutional customer, the guidance 
contained in this section is more appropriately applied to an 
institutional customer with at least $10 million invested in securities 
in the aggregate in its portfolio and/or under management.



   Sec. Appendix A to Part 208--Capital Adequacy Guidelines for State 
                    Member Banks: Risk-Based Measure

                               I. Overview

    The Board of Governors of the Federal Reserve System has adopted a 
risk-based capital measure to assist in the assessment of the capital 
adequacy of state member banks.\1\ The principal objectives of this 
measure are to: (i) Make regulatory capital requirements more sensitive 
to differences in risk profiles among banks; (ii) factor off-balance 
sheet exposures into the assessment of capital adequacy; (iii) minimize 
disincentives to holding liquid, low-risk assets; and (iv) achieve 
greater consistency in the evaluation of the capital adequacy of major 
banks throughout the world.\2\
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    \1\ Supervisory ratios that relate capital to total assets for state 
member banks are outlined in appendix B of this part and in appendix B 
to part 225 of the Federal Reserve's Regulation Y, 12 CFR part 225.
    \2\ The risk-based capital measure is based upon a framework 
developed jointly by supervisory authorities from the countries 
represented on the Basle Committee on Banking Regulations and 
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the 
Group of Ten Central Bank Governors. The framework is described in a 
paper prepared by the BSC entitled ``International Convergence of 
Capital Measurement,'' July 1988.

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[[Page 236]]

    The risk-based capital guidelines include both a definition of 
capital and a framework for calculating weighted risk assets by 
assigning assets and off-balance sheet items to broad risk categories. A 
bank's risk-based capital ratio is calculated by dividing its qualifying 
capital (the numerator of the ratio) by its weighted risk assets (the 
denominator).\3\ The definition of qualifying capital is outlined below 
in section II, and the procedures for calculating weighted risk assets 
are discussed in Section III. Attachment I illustrates a sample 
calculation of weighted risk assets and the risk-based capital ratio.
---------------------------------------------------------------------------

    \3\ Banks will initially be expected to utilize period-end amounts 
in calculating their risk-based capital ratios. When necessary and 
appropriate, ratios based on average balances may also be calculated on 
a case-by-case basis. Moreover, to the extent banks have data on average 
balances that can be used to calculate risk-based ratios, the Federal 
Reserve will take such data into account.
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    In addition, when certain banks that engage in trading activities 
calculate their risk-based capital ratio under this appendix A, they 
must also refer to appendix E of this part, which incorporates capital 
charges for certain market risks into the risk-based capital ratio. When 
calculating their risk-based capital ratio under this appendix A, such 
banks are required to refer to appendix E of this part for supplemental 
rules to determine qualifying and excess capital, calculate risk-
weighted assets, calculate market risk equivalent assets, and calculate 
risk-based capital ratios adjusted for market risk.
    The risk-based capital guidelines also establish a schedule for 
achieving a minimum supervisory standard for the ratio of qualifying 
capital to weighted risk assets and provide for transitional 
arrangements during a phase-in period to facilitate adoption and 
implementation of the measure at the end of 1992. These interim 
standards and transitional arrangements are set forth in section IV.
    The risk-based guidelines apply to all state member banks on a 
consolidated basis. They are to be used in the examination and 
supervisory process as well as in the analysis of applications acted 
upon by the Federal Reserve. Thus, in considering an application filed 
by a state member bank, the Federal Reserve will take into account the 
bank's risk-based capital ratio, the reasonableness of its capital 
plans, and the degree of progress it has demonstrated toward meeting the 
interim and final risk-based capital standards.
    The risk-based capital ratio focuses principally on broad categories 
of credit risk, although the framework for assigning assets and off-
balance-sheet items to risk categories does incorporate elements of 
transfer risk, as well as limited instances of interest rate and market 
risk. The framework incorporates risks arising from traditional banking 
activities as well as risks arising from nontraditional activities. The 
risk-based ratio does not, however, incorporate other factors that can 
affect an institution's financial condition. These factors include 
overall interest-rate exposure; liquidity, funding and market risks; the 
quality and level of earnings; investment, loan portfolio, and other 
concentrations of credit; certain risks arising from nontraditional 
activities; the quality of loans and investments; the effectiveness of 
loan and investment policies; and management's overall ability to 
monitor and control financial and operating risks, including the risks 
presented by concentrations of credit and nontraditional activities.
    In addition to evaluating capital ratios, an overall assessment of 
capital adequacy must take account of those factors, including, in 
particular, the level and severity of problem and classified assets as 
well as a bank's exposure to declines in the economic value of its 
capital due to changes in interest rates. For this reason, the final 
supervisory judgment on a bank's capital adequacy may differ 
significantly from conclusions that might be drawn solely from the level 
of its risk-based capital ratio.
    The risk-based capital guidelines establish minimum ratios of 
capital to weighted risk assets. In light of the considerations just 
discussed, banks generally are expected to operate well above the 
minimum risk-based ratios. In particular, banks contemplating 
significant expansion proposals are expected to maintain strong capital 
levels substantially above the minimum ratios and should not allow 
significant diminution of financial strength below these strong levels 
to fund their expansion plans. Institutions with high or inordinate 
levels of risk are also expected to operate well above minimum capital 
standards. In all cases, institutions should hold capital commensurate 
with the level and nature of the risks to which they are exposed. Banks 
that do not meet the minimum risk-based standard, or that are otherwise 
considered to be inadequately capitalized, are expected to develop and 
implement plans acceptable to the Federal Reserve for achieving adequate 
levels of capital within a reasonable period of time.
    The Board will monitor the implementation and effect of these 
guidelines in relation to domestic and international developments in the 
banking industry. When necessary and

[[Page 237]]

appropriate, the Board will consider the need to modify the guidelines 
in light of any significant changes in the economy, financial markets, 
banking practices, or other relevant factors.

  II. Definition of Qualifying Capital for the Risk-Based Capital Ratio

    A bank's qualifying total capital consists of two types of capital 
components: ``core capital elements'' (comprising tier 1 capital) and 
``supplementary capital elements'' (comprising tier 2 capital). These 
capital elements and the various limits, restrictions, and deductions to 
which they are subject, are discussed below and are set forth in 
Attachment II.
    The Federal Reserve will, on a case-by-case basis, determine whether 
and, if so, how much of any instrument that does not fit wholly within 
the terms of one of the capital categories set forth below or that does 
not have an ability to absorb losses commensurate with the capital 
treatment otherwise specified below will be counted as an element of 
tier 1 or tier 2 capital. In making such a determination, the Federal 
Reserve will consider the similarity of the instrument to instruments 
explicitly treated in the guidelines, the ability of the instrument to 
absorb losses while the bank operates as a going concern, the maturity 
and redemption features of the instrument, and other relevant terms and 
factors. To qualify as an element of tier 1 or tier 2 capital, a capital 
instrument may not contain or be covered by any covenants, terms, or 
restrictions that are inconsistent with safe and sound banking 
practices.
    Redemptions of permanent equity or other capital instruments before 
stated maturity could have a significant impact on a bank's overall 
capital structure. Consequently, a bank considering such a step should 
consult with the Federal Reserve before redeeming any equity or debt 
capital instrument (prior to maturity) if such redemption could have a 
material effect on the level or composition of the institution's capital 
base.\4\
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    \4\ Consultation would not ordinarily be necessary if an instrument 
were redeemed with the proceeds of, or replaced by, a like amount of a 
similar or higher quality capital instrument and the organization's 
capital position is considered fully adequate by the Federal Reserve.
---------------------------------------------------------------------------

                 A. The Components of Qualifying Capital

    1. Core capital elements (tier 1 capital). The tier 1 component of a 
bank's qualifying capital must represent at least 50 percent of 
qualifying total capital and may consist of the following items that are 
defined as core capital elements:
    (i) Common stockholders' equity;
    (ii) Qualifying noncumulative perpetual preferred stock (including 
related surplus); and
    (iii) Minority interest in the equity accounts of consolidated 
subsidiaries.
    Tier 1 capital is generally defined as the sum of core capital 
elements \5\ less any amounts of goodwill, other intangible assets, 
interest-only strips receivables and nonfinancial equity investments 
that are required to be deducted in accordance with section II.B. of 
this appendix A.
---------------------------------------------------------------------------

    \5\ [Reserved]
---------------------------------------------------------------------------

    a. Common stockholders' equity. For purposes of calculating the 
risk-based capital ratio, common stockholders' equity is limited to 
common stock; related surplus; and retained earnings, including capital 
reserves and adjustments for the cumulative effect of foreign currency 
translation, net of any treasury stock; less net unrealized holding 
losses on available-for-sale equity securities with readily determinable 
fair values. For this purpose, net unrealized holding gains on such 
equity securities and net unrealized holding gains (losses) on 
available-for-sale debt securities are not included in common 
stockholders' equity.
    b. Perpetual preferred stock. Perpetual preferred stock is defined 
as preferred stock that does not have a maturity date, that cannot be 
redeemed at the option of the holder of the instrument, and that has no 
other provisions that will require future redemption of the issue. 
Consistent with these provisions, any perpetual preferred stock with a 
feature permitting redemption at the option of the issuer may qualify as 
capital only if the redemption is subject to prior approval of the 
Federal Reserve. In general, preferred stock will qualify for inclusion 
in capital only if it can absorb losses while the issuer operates as a 
going concern (a fundamental characteristic of equity capital) and only 
if the issuer has the ability and legal right to defer or eliminate 
preferred dividends.
    The only form of perpetual preferred stock that state member banks 
may consider as an element of Tier 1 capital is noncumulative perpetual 
preferred. While the guidelines allow for the inclusion of noncumulative 
perpetual preferred stock in Tier 1, it is desirable from a supervisory 
standpoint that voting common stockholders' equity remain the dominant 
form of Tier 1 capital. Thus, state member banks should avoid 
overreliance on preferred stock or non-voting equity elements within 
Tier 1.
---------------------------------------------------------------------------

    \6\ [Reserved]
---------------------------------------------------------------------------

    Perpetual preferred stock in which the dividend is reset 
periodically based, in whole or in part, upon the bank's current credit

[[Page 238]]

standing (that is, auction rate perpetual preferred stock, including so-
called Dutch auction, money market, and remarketable preferred) will not 
qualify for inclusion in Tier 1 capital.\7\ Such instruments, however, 
qualify for inclusion in Tier 2 capital.
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    \7\ Adjustable rate noncumulative perpetual preferred stock (that 
is, perpetual preferred stock in which the dividend rate is not affected 
by the issuer's credit standing or financial condition but is adjusted 
periodically according to a formula based solely on general market 
interest rates) may be included in Tier 1.
---------------------------------------------------------------------------

    c. Minority interest in equity accounts of consolidated 
subsidiaries. This element is included in tier 1 capital because, as a 
general rule, it represents equity that is freely available to absorb 
losses in operating subsidiaries whose assets are included in a bank's 
risk-weighted asset base. While not subject to an explicit sublimit 
within tier 1, banks are expected to avoid using minority interest in 
the equity accounts of consolidated subsidiaries as an avenue for 
introducing into their capital structures elements that might not 
otherwise qualify as tier 1 capital or that would, in effect, result in 
an excessive reliance on preferred stock within tier 1. Minority 
interests in small business investment companies, investment funds that 
hold nonfinancial equity investments (as defined in section II.B.5.b. of 
this appendix A), and subsidiaries engaged in nonfinancial activities, 
are not included in the bank's tier 1 or total capital base if the 
bank's interest in the company or fund is held under one of the legal 
authorities listed in section II.B.5.b. In addition, minority interests 
in consolidated asset-backed commercial paper programs (ABCP) (as 
defined in section III.B.6. of this appendix A) that are sponsored by a 
bank are not to be included in the bank's tier 1 or total capital base 
if the bank excludes the consolidated assets of such programs from risk-
weighted assets pursuant to section III.B.6. of this appendix.
    2. Supplementary capital elements (tier 2 capital). The tier 2 
component of a bank's qualifying capital may consist of the following 
items that are defined as supplementary capital elements:
    (i) Allowance for loan and lease losses (subject to limitations 
discussed below);
    (ii) Perpetual preferred stock and related surplus (subject to 
conditions discussed below);
    (iii) Hybrid capital instruments (as defined below), and mandatory 
convertible debt securities;
    (iv) Term subordinated debt and intermediate-term preferred stock, 
including related surplus (subject to limitations discussed below);
    (v) Unrealized holding gains on equity securities (subject to 
limitations discussed in section II.A.2.e. of this appendix).
    The maximum amount of tier 2 capital that may be included in a 
bank's qualifying total capital is limited to 100 percent of tier 1 
capital (net of goodwill, other intangible assets, interest-only strips 
receivables and nonfinancial equity investments that are required to be 
deducted in accordance with section II.B. of this appendix A).
    The elements of supplementary capital are discussed in greater 
detail below.
---------------------------------------------------------------------------

    \8\ [Reserved]
---------------------------------------------------------------------------

    a. Allowance for loan and lease losses. Allowances for loan and 
lease losses are reserves that have been established through a charge 
against earnings to absorb future losses on loans or lease financing 
receivables. Allowances for loan and lease losses exclude ``allocated 
transfer risk reserves,'' \9\ and reserves created against identified 
losses.
---------------------------------------------------------------------------

    \9\ Allocated transfer risk reserves are reserves that have been 
established in accordance with Section 905(a) of the International 
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain 
assets whose value U.S. supervisory authorities have found to be 
significantly impaired by protracted transfer risk problems.
---------------------------------------------------------------------------

    During the transition period, the risk-based capital guidelines 
provide for reducing the amount of this allowance that may be included 
in an institution's total capital. Initially, it is unlimited. However, 
by year-end 1990, the amount of the allowance for loan and lease losses 
that will qualify as capital will be limited to 1.5 percent of an 
institution's weighted risk assets. By the end of the transition period, 
the amount of the allowance qualifying for inclusion in Tier 2 capital 
may not exceed 1.25 percent of weighted risk assets.\10\
---------------------------------------------------------------------------

    \10\ The amount of the allowance for loan and lease losses that may 
be included in Tier 2 capital is based on a percentage of gross weighted 
risk assets. A bank may deduct reserves for loan and lease losses in 
excess of the amount permitted to be included in Tier 2 capital, as well 
as allocated transfer risk reserves, from the sum of gross weighted risk 
assets and use the resulting net sum of weighted risk assets in 
computing the denominator of the risk-based capital ratio.
---------------------------------------------------------------------------

    b. Perpetual preferred stock. Perpetual preferred stock, as noted 
above, is defined as preferred stock that has no maturity date, that 
cannot be redeemed at the option of the holder, and that has no other 
provisions that will require future redemption of the issue. Such 
instruments are eligible for inclusion in Tier 2 capital without 
limit.\11\
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    \11\ Long-term preferred stock with an original maturity of 20 years 
or more (including related surplus) will also qualify in this category 
as an element of Tier 2. If the holder of such an instrument has a right 
to require the issuer to redeem, repay, or repurchase the instrument 
prior to the original stated maturity, maturity would be defined, for 
risk-based capital purposes, as the earliest possible date on which the 
holder can put the instrument back to the issuing bank.

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[[Page 239]]

    c. Hybrid capital instruments and mandatory convertible debt 
securities. Hybrid capital instruments include instruments that are 
essentially permanent in nature and that have certain characteristics of 
both equity and debt. Such instruments may be included in Tier 2 without 
limit. The general criteria hybrid capital instruments must meet in 
order to qualify for inclusion in Tier 2 capital are listed below:
    (1) The instrument must be unsecured; fully paid-up; and 
subordinated to general creditors and must also be subordinated to 
claims of depositors.
    (2) The instrument must not be redeemable at the option of the 
holder prior to maturity, except with the prior approval of the Federal 
Reserve. (Consistent with the Board's criteria for perpetual debt and 
mandatory convertible securities, this requirement implies that holders 
of such instruments may not accelerate the payment of principal except 
in the event of bankruptcy, insolvency, or reorganization.)
    (3) The instrument must be available to participate in losses while 
the issuer is operating as a going concern. (Term subordinated debt 
would not meet this requirement.) To satisfy this requirement, the 
instrument must convert to common or perpetual preferred stock in the 
event that the accumulated losses exceed the sum of the retained 
earnings and capital surplus accounts of the issuer.
    (4) The instrument must provide the option for the issuer to defer 
interest payments if: (a) The issuer does not report a profit in the 
preceding annual period (defined as combined profits for the most recent 
four quarters), and (b) the issuer eliminates cash dividends on common 
and preferred stock.
    Mandatory convertible debt securities in the form of equity contract 
notes that meet the criteria set forth in 12 CFR part 225, appendix B, 
also qualify as unlimited elements of Tier 2 capital. In accordance with 
that appendix, equity commitment notes issued prior to May 15, 1985 also 
qualify for inclusion in Tier 2.
    d. Subordinated debt and intermediate term preferred stock. (i) The 
aggregate amount of term subordinated debt (excluding mandatory 
convertible debt) and intermediate-term preferred stock that may be 
treated as supplementary capital is limited to 50 percent of Tier 1 
capital (net of goodwill and other intangible assets required to be 
deducted in accordance with section II.B.1.b. of this appendix). Amounts 
in excess of these limits may be issued and, while not included in the 
ratio calculation, will be taken into account in the overall assessment 
of a bank's funding and financial condition.
    (ii) Subordinated debt and intermediate-term preferred stock must 
have an original weighted average maturity of at least five years to 
qualify as supplementary capital. (If the holder has the option to 
require the issuer to redeem, repay, or repurchase the instrument prior 
to the original stated maturity, maturity would be defined, for risk-
based capital purposes, as the earliest possible date on which the 
holder can put the instrument back to the issuing bank.) \12\ In the 
case of subordinated debt, the instrument must be unsecured and must 
clearly state on its face that it is not a deposit and is not insured by 
a Federal agency. To qualify as capital in banks, debt must be 
subordinated to general creditors and claims of depositors. Consistent 
with current regulatory requirements, if a state member bank wishes to 
redeem subordinated debt before the stated maturity, it must receive 
prior approval of the Federal Reserve.
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    \12\ As a limited-life capital instrument approaches maturity it 
begins to take on characteristics of a short-term obligation. For this 
reason, the outstanding amount of term subordinated debt and limited-
life preferred stock eligible for inclusion in Tier 2 is reduced, or 
discounted, as these instruments approach maturity: one-fifth of the 
original amount (less redemptions) is excluded each year during the 
instrument's last five years before maturity. When the remaining 
maturity is less than one year, the instrument is excluded from Tier 2 
capital.
---------------------------------------------------------------------------

    e. Unrealized gains on equity securities and unrealized gains 
(losses) on other assets. Up to 45 percent of pretax net unrealized 
holding gains (that is, the excess, if any, of the fair value over 
historical cost) on available-for-sale equity securities with readily 
determinable fair values may be included in supplementary capital. 
However, the Federal Reserve may exclude all or a portion of these 
unrealized gains from Tier 2 capital if the Federal Reserve determines 
that the equity securities are not prudently valued. Unrealized gains 
(losses) on other types of assets, such as bank premises and available-
for-sale debt securities, are not included in supplementary capital, but 
the Federal Reserve may take these unrealized gains (losses) into 
account as additional factors when assessing a bank's overall capital 
adequacy.
    f. Revaluation reserves. i. Such reserves reflect the formal balance 
sheet restatement or revaluation for capital purposes of asset carrying 
values to reflect current market

[[Page 240]]

values. The federal banking agencies generally have not included 
unrealized asset appreciation in capital ratio calculations, although 
they have long taken such values into account as a separate factor in 
assessing the overall financial strength of a bank.
    ii. Consistent with long-standing supervisory practice, the excess 
of market values over book values for assets held by state member banks 
will generally not be recognized in supplementary capital or in the 
calculation of the risk-based capital ratio. However, all banks are 
encouraged to disclose their equivalent of premises (building) and 
security revaluation reserves. The Federal Reserve will consider any 
appreciation, as well as any depreciation, in specific asset values as 
additional considerations in assessing overall capital strength and 
financial condition.

            B. Deductions from Capital and Other Adjustments

    Certain assets are deducted from a bank's capital for the purpose of 
calculating the risk-based capital ratio.\13\ These assets include:
---------------------------------------------------------------------------

    \13\ Any assets deducted from capital in computing the numerator of 
the ratio are not included in weighted risk assets in computing the 
denominator of the ratio.
---------------------------------------------------------------------------

    (i)(a) Goodwill--deducted from the sum of core capital elements.
    (b) Certain identifiable intangible assets, that is, intangible 
assets other than goodwill--deducted from the sum of core capital 
elements in accordance with section II.B.1.b. of this appendix.
    (c) Certain credit-enhancing interest-only strips receivables--
deducted from the sum of core capital elements in accordance with 
sections II.B.1.c. through e. of this appendix.
    (ii) Investments in banking and finance subsidiaries that are not 
consolidated for accounting or supervisory purposes and, on a case-by-
case basis, investments in other designated subsidiaries or associated 
companies at the discretion of the Federal Reserve--deducted from total 
capital components.
    (iii) Reciprocal holdings of capital instruments of banking 
organizations--deducted from total capital components.
    (iv) Deferred tax assets--portions are deducted from the sum of core 
capital elements in accordance with section II.B.4. of this Appendix A.
    (v) Nonfinancial equity investments-portions are deducted from the 
sum of core capital elements in accordance with section II.B.5 of this 
appendix.
    1. Goodwill and other intangible assets.--a. Goodwill. Goodwill in 
an intangible asset that represents the excess of the purchase price 
over the fair market value of identifiable assets acquired less 
liabilities assumed in acquisitions accounted for under the purchase 
method of accounting. State member banks generally have not been allowed 
to include goodwill in regulatory capital under current supervisory 
policies. Consistent with this policy, all goodwill in state member 
banks will be deducted from Tier 1 capital.
    b. Other intangible assets. i. All servicing assets, including 
servicing assets on assets other than mortgages (i.e., nonmortgage 
servicing assets), are included in this appendix as identifiable 
intangible assets. The only types of identifiable intangible assets that 
may be included in, that is, not deducted from, a bank's capital are 
readily marketable mortgage servicing assets, nonmortgage servicing 
assets, and purchased credit card relationships. The total amount of 
these assets that may be included in capital is subject to the 
limitations described below in sections II.B.1.d. and e. of this 
appendix.
    ii. The treatment of identifiable intangible assets set forth in 
this section generally will be used in the calculation of a bank's 
capital ratios for supervisory and applications purposes. However, in 
making an overall assessment of a bank's capital adequacy for 
applications purposes, the Board may, if it deems appropriate, take into 
account the quality and composition of a bank's capital, together with 
the quality and value of its tangible and intangible assets.
    c. Credit-enhancing interest-only strips receivables (I/Os). i. 
Credit-enhancing I/Os are on-balance sheet assets that, in form or in 
substance, represent the contractual right to receive some or all of the 
interest due on transferred assets and expose the bank to credit risk 
directly or indirectly associated with transferred assets that exceeds a 
pro rata share of the bank's claim on the assets, whether through 
subordination provisions or other credit enhancement techniques. Such I/
Os, whether purchased or retained, including other similar ``spread'' 
assets, may be included in, that is, not deducted from, a bank's capital 
subject to the limitations described below in sections II.B.1.d. and e. 
of this appendix.
    ii. Both purchased and retained credit-enhancing I/Os, on a non-tax 
adjusted basis, are included in the total amount that is used for 
purposes of determining whether a bank exceeds the tier 1 limitation 
described below in this section. In determining whether an I/O or other 
types of spread assets serve as a credit enhancement, the Federal 
Reserve will look to the economic substance of the transaction.
    d. Fair value limitation. The amount of mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card relationships 
that a bank may include in capital shall be the lesser of 90 percent of 
their fair value, as determined in accordance with section II.B.1.f. of 
this appendix, or 100

[[Page 241]]

percent of their book value, as adjusted for capital purposes in 
accordance with the instructions in the commercial bank Consolidated 
Reports of Condition and Income (Call Reports). The amount of I/Os that 
a bank may include in capital shall be its fair value. If both the 
application of the limits on mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships and the 
adjustment of the balance sheet amount for these assets would result in 
an amount being deducted from capital, the bank would deduct only the 
greater of the two amounts from its core capital elements in determining 
tier 1 capital.
    e. Tier 1 capital limitation. i. The total amount of mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships that may be included in capital, in the aggregate, 
cannot exceed 100 percent of tier 1 capital. The aggregate of 
nonmortgage servicing assets and purchased credit card relationships are 
subject to a separate sublimit of 25 percent of tier 1 capital. In 
addition, the total amount of credit-enhancing I/Os (both purchased and 
retained) that may be included in capital cannot exceed 25 percent of 
tier 1 capital.\14\
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    \14\ Amounts of servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os (both retained and purchased) 
in excess of these limitations, as well as all other identifiable 
intangible assets, including core deposit intangibles and favorable 
leaseholds, are to be deducted from a bank's core capital elements in 
determining tier 1 capital. However, identifiable intangible assets 
(other than mortgage servicing assets and purchased credit card 
relationships) acquired on or before February 19, 1992, generally will 
not be deducted from capital for supervisory purposes, although they 
will continue to be deducted for applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage 
servicing assets, nonmortgage servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os, tier 1 capital is defined as 
the sum of core capital elements, net of goodwill, and net of all 
identifiable intangible assets other than mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card relationships, 
but prior to the deduction of any disallowed mortgage servicing assets, 
any disallowed nonmortgage servicing assets, any disallowed purchased 
credit card relationships, any disallowed credit-enhancing I/Os (both 
purchased and retained), any disallowed deferred tax assets, and any 
nonfinancial equity investments.
    iii. Banks may elect to deduct disallowed mortgage servicing assets, 
disallowed nonmortgage servicing assets, and disallowed credit-enhancing 
I/Os (both purchased and retained) on a basis that is net of any 
associated deferred tax liability. Deferred tax liabilities netted in 
this manner cannot also be netted against deferred-tax assets when 
determining the amount of deferred-tax assets that are dependent upon 
future taxable income.
    f. Valuation. Banks must review the book value of all intangible 
assets at least quarterly and make adjustments to these values as 
necessary. The fair value of mortgage servicing assets, nonmortgage 
servicing assets, purchased credit card relationships, and credit-
enhancing I/Os also must be determined at least quarterly. This 
determination shall include adjustments for any significant changes in 
original valuation assumptions, including changes in prepayment 
estimates or account attrition rates. Examiners will review both the 
book value and the fair value assigned to these assets, together with 
supporting documentation, during the examination process. In addition, 
the Federal Reserve may require, on a case-by-case basis, an independent 
valuation of a bank's intangible assets or credit-enhancing I/Os.
    g. Growing organizations. Consistent with long-standing Board 
policy, banks experiencing substantial growth, whether internally or by 
acquisition, are expected to maintain strong capital positions 
substantially above minimum supervisory levels, without significant 
reliance on intangible assets or credit-enhancing I/Os.
    2. Investments in certain subsidiaries. The aggregate amount of 
investments in banking or finance subsidiaries \15\ whose financial 
statements are not consolidated for accounting or bank regulatory 
reporting purposes will be deducted from a bank's total capital 
components.\16\ Generally, investments for this purpose are defined as 
equity and debt capital investments and any other instruments that are 
deemed to be capital in the particular subsidiary.
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    \15\ For this purpose, a banking and finance subsidiary generally is 
defined as any company engaged in banking or finance in which the parent 
institution holds directly or indirectly more than 50 percent of the 
outstanding voting stock, or which is otherwise controlled or capable of 
being controlled by the parent institution.
    \16\ An exception to this deduction would be made in the case of 
shares acquired in the regular course of securing or collecting a debt 
previously contracted in good faith. The requirements for consolidation 
are spelled out in the instructions to the Call Report.
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    Advances (that is, loans, extensions of credit, guarantees, 
commitments, or any other forms of credit exposure) to the subsidiary 
that are not deemed to be capital will generally not be deducted from a 
bank's capital. Rather, such advances generally will be included in the 
bank's consolidated assets

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and be assigned to the 100 percent risk category, unless such 
obligations are backed by recognized collateral or guarantees, in which 
case they will be assigned to the risk category appropriate to such 
collateral or guarantees. These advances may, however, also be deducted 
from the bank's capital if, in the judgment of the Federal Reserve, the 
risks stemming from such advances are comparable to the risks associated 
with capital investments or if the advances involve other risk factors 
that warrant such an adjustment to capital for supervisory purposes. 
These other factors could include, for example, the absence of 
collateral support.
    Inasmuch as the assets of unconsolidated banking and finance 
subsidiaries are not fully reflected in a bank's consolidated total 
assets, such assets may be viewed as the equivalent of off-balance sheet 
exposures since the operations of an unconsolidated subsidiary could 
expose the bank to considerable risk. For this reason, it is generally 
appropriate to view the capital resources invested in these 
unconsolidated entities as primarily supporting the risks inherent in 
these off-balance sheet assets, and not generally available to support 
risks or absorb losses elsewhere in the bank.
    The Federal Reserve may, on a case-by-case basis, also deduct from a 
bank's capital, investments in certain other subsidiaries in order to 
determine if the consolidated bank meets minimum supervisory capital 
requirements without reliance on the resources invested in such 
subsidiaries.
    The Federal Reserve will not automatically deduct investments in 
other consolidated subsidiaries or investments in joint ventures and 
associated companies.\17\ Nonetheless, the resources invested in these 
entities, like investments in unconsolidated banking and finance 
subsidiaries, support assets not consolidated with the rest of the 
bank's activities and, therefore, may not be generally available to 
support additional leverage or absorb losses elsewhere in the bank. 
Moreover, experience has shown that banks stand behind the losses of 
affiliated institutions, such as joint ventures and associated 
companies, in order to protect the reputation of the organization as a 
whole. In some cases, this has led to losses that have exceeded the 
investments in such organizations.
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    \17\ The definition of such entities is contained in the 
instructions to the commercial bank Call Report. Under regulatory 
reporting procedures, associated companies and joint ventures generally 
are defined as companies in which the bank owns 20 to 50 percent of the 
voting stock.
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    For this reason, the Federal Reserve will monitor the level and 
nature of such investments for individual banks and, on a case-by-case 
basis may, for risk-based capital purposes, deduct such investments from 
total capital components, apply an appropriate risk-weighted capital 
charge against the bank's proportionate share of the assets of its 
associated companies, require a line-by-line consolidation of the entity 
(in the event that the bank's control over the entity makes it the 
functional equivalent of a subsidiary), or otherwise require the bank to 
operate with a risk-based capital ratio above the minimum.
    In considering the appropriateness of such adjustments or actions, 
the Federal Reserve will generally take into account whether:
    (1) The bank has significant influence over the financial or 
managerial policies or operations of the subsidiary, joint venture, or 
associated company;
    (2) The bank is the largest investor in the affiliated company; or
    (3) Other circumstances prevail that appear to closely tie the 
activities of the affiliated company to the bank.
    3. Reciprocal holdings of banking organizations' capital 
instruments. Reciprocal holdings of banking organizations' capital 
instruments (that is, instruments that qualify as Tier 1 or Tier 2 
capital) \18\ will be deducted from a bank's total capital components 
for the purpose of determining the numerator of the risk-based capital 
ratio.
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    \18\ See 12 CFR part 225, appendix A for instruments that qualify as 
Tier 1 and Tier 2 capital for bank holding companies.
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    Reciprocal holdings are cross-holdings resulting from formal or 
informal arrangements in which two or more banking organizations swap, 
exchange, or otherwise agree to hold each other's capital instruments. 
Generally, deductions will be limited to intentional cross-holdings. At 
present, the Board does not intend to require banks to deduct non-
reciprocal holdings of such capital instruments.\19\
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    \19\ Deductions of holdings of capital securities also would not be 
made in the case of interstate ``stake out'' investments that comply 
with the Board's Policy Statement on Nonvoting Equity Investments, 12 
CFR 225.143 (Federal Reserve Regulatory Service 4-172.1; 68 Federal 
Reserve Bulletin 413 (1982)). In addition, holdings of capital 
instruments issued by other banking organizations but taken in 
satisfaction of debts previously contracted would be exempt from any 
deduction from capital. The Board intends to monitor nonreciprocal 
holdings of other banking organizations' capital instruments and to 
provide information on such holdings to the Basle Supervisors' Committee 
as called for under the Basle capital framework.

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[[Page 243]]

    4. Deferred-tax assets. a. The amount of deferred-tax assets that is 
dependent upon future taxable income, net of the valuation allowance for 
deferred-tax assets, that may be included in, that is, not deducted 
from, a bank's capital may not exceed the lesser of:
    i. The amount of these deferred-tax assets that the bank is expected 
to realize within one year of the calendar quarter-end date, based on 
its projections of future taxable income for that year,\20\ or
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    \20\ To determine the amount of expected deferred-tax assets 
realizable in the next 12 months, an institution should assume that all 
existing temporary differences fully reverse as of the report date. 
Projected future taxable income should not include net operating loss 
carry-forwards to be used during that year or the amount of existing 
temporary differences a bank expects to reverse within the year. Such 
projections should include the estimated effect of tax-planning 
strategies that the organization expects to implement to realize net 
operating losses or tax-credit carry-forwards that would otherwise 
expire during the year. Institutions do not have to prepare a new 12-
month projection each quarter. Rather, on interim report dates, 
institutions may use the future-taxable income projections for their 
current fiscal year, adjusted for any significant changes that have 
occurred or are expected to occur.
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    ii. 10 percent of tier 1 capital.
    b. The reported amount of deferred-tax assets, net of any valuation 
allowance for deferred-tax assets, in excess of the lesser of these two 
amounts is to be deducted from a bank's core capital elements in 
determining tier 1 capital. For purposes of calculating the 10 percent 
limitation, tier 1 capital is defined as the sum of core capital 
elements, net of goodwill and net of all identifiable intangible assets 
other than mortgage servicing assets, nonmortgage servicing assets, and 
purchased credit card relationships, but prior to the deduction of any 
disallowed mortgage servicing assets, any disallowed nonmortgage 
servicing assets, any disallowed purchased credit card relationships, 
any disallowed credit-enhancing I/Os, any disallowed deferred-tax 
assets, and any nonfinancial equity investments. There generally is no 
limit in tier 1 capital on the amount of deferred-tax assets that can be 
realized from taxes paid in prior carry-back years or from future 
reversals of existing taxable temporary differences.
    5. Nonfinancial equity investments--a. General. A bank must deduct 
from its core capital elements the sum of the appropriate percentages 
(as determined below) of the adjusted carrying value of all nonfinancial 
equity investments held by the ban