Last updated on April 2nd, 2024 at 11:13 pm
Title 12—Banks and Banking–Volume 2
CHAPTER II—FEDERAL RESERVE SYSTEM
SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PART 200 [RESERVED]
PART 201—EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION A)
§ 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.
§ 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 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 § 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.
§ 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 § 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. This section does not entitle any person or entity to obtain any credit or any increase, renewal or extension of maturity of any credit from a Federal Reserve Bank.
(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 § 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:
(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 § 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.
§ 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—(1) Authorization to extend credit. In unusual and exigent circumstances, the Board, by the affirmative vote of not less than five members,
(2) Approval of the Secretary of the Treasury. A program or facility may not be established under this paragraph (d) without obtaining the prior approval of the Secretary of the Treasury.
(3) Disclosure of justification and terms. As soon as is reasonably practicable, and no later than 7 days after a program or facility is authorized under this paragraph (d), the Board and the authorized Federal Reserve Bank or Federal Reserve Banks, as appropriate, will make publicly available a description of the program or facility, a description of the market or sector of the financial system to which the program or facility is intended to provide liquidity, a description of the unusual and exigent circumstances that exist, the intended effect of the program or facility, and the terms and conditions for participation in the program or facility. In addition, within the same 7-day period, the Board will provide a copy of this information to the Committee on Banking, Housing and Urban Affairs of the U.S. Senate and the Committee on Financial Services of the U.S. House of Representatives.
(4) Broad-based eligibility. (i) A program or facility established under this paragraph (d) must have broad-based eligibility in accordance with terms established by the Board.
(ii) For purposes of this paragraph (d), a program or facility has broad-based eligibility only if the program or facility is designed to provide liquidity to an identifiable market or sector of the financial system;
(iii) A program or facility will not be considered to have broad-based eligibility for purposes of this paragraph (d) if:
(A) The program or facility is designed for the purpose of assisting one or more specific companies avoid bankruptcy, resolution under Title II of Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 12 U.S.C. 5381 et seq.), or any other Federal or State insolvency proceeding, including by removing assets from the balance sheet of one or more such company;
(B) The program or facility is designed for the purpose of aiding one or more failing financial companies; or
(C) Fewer than five persons or entities would be eligible to participate in the program or facility.
(iv) A Federal Reserve Bank may extend credit through a program or facility with broad-based eligibility established under this paragraph (d) through such mechanism or vehicle as the Board determines would facilitate the extension of such credit.
(5) Insolvency. (i) A Federal Reserve Bank may not extend credit through a program or facility established under this paragraph (d) to any person or entity that is insolvent or to any person or entity that is borrowing for the purpose of lending the proceeds of the loan to a person or entity that is insolvent.
(ii) Before extending credit through a program or facility established under this paragraph (d) to any person or entity, the Federal Reserve Bank must obtain evidence that the person or entity is not insolvent.
(iii) A person or entity is “insolvent” for purposes of this paragraph (d) if:
(A) The person or entity is in bankruptcy, resolution under Title II of Public Law 111-203 (12 U.S.C. 5381 et seq.) or any other Federal or State insolvency proceeding;
(B) The person or entity is generally not paying its undisputed debts as they become due during the 90 days preceding the date of borrowing under the program or facility; or
(C) The Board or Federal Reserve Bank otherwise determines that the person or entity is insolvent.
(iv) For purposes of meeting the requirements of this paragraph (d)(5), the Board or Federal Reserve Bank, as relevant, may rely on:
(A) A written certification from the person or from the chief executive officer or other authorized officer of the entity, at the time the person or entity initially borrows under the program or facility, that the person or entity is not in bankruptcy, resolution under Title II of Public Law 111-203 (12 U.S.C. 5381 et seq.) or any other Federal or State insolvency proceeding, and has not failed to generally pay its undisputed debts as they become due during the 90 days preceding the date of borrowing under the program or facility;
(B) Recent audited financial statements of the person or entity; or
(C) Other information that the Board or the Federal Reserve Bank may determine to be relevant.
(v) A person or officer (or successor of either) that submits a written certification under this subparagraph must immediately notify the lending Federal Reserve Bank if the information in the certification changes.
(vi) Upon a finding by the Board or a Federal Reserve Bank that a participant, including a participant that has provided a certification under this paragraph (d)(5), is or has become insolvent, that participant is not eligible for any new extension of credit from a program or facility established under this paragraph (d) until such time as the Board or a Federal Reserve Bank determines that such participant is no longer insolvent.
(vii) If a participant or person has provided a certification under this paragraph (d)(5) or paragraph (d)(8)(ii) of this section that includes a knowing material misrepresentation in the certification, all extensions of credit made pursuant to this paragraph (d) that are outstanding to the relevant participant shall become immediately due and payable, and all accrued interest, fees and penalties shall become immediately due and payable. The Board or the lending Federal Reserve Bank will also refer the matter to the relevant law enforcement authorities for investigation and action in accordance with applicable criminal and civil law.
(6) Indorsement or other security. (i) All credit extended under a program or facility established under this paragraph (d) must be indorsed or otherwise secured, in each case, to the satisfaction of the lending Federal Reserve Bank.
(ii) In determining whether an extension of credit under any program or facility established under this paragraph (d) is secured to its satisfaction, a Federal Reserve Bank must, prior to or at the time the credit is initially extended, assign a lendable value to all collateral for the program or facility, consistent with sound risk management practices and to ensure protection for the taxpayer.
(7) Penalty rate and fees. (i) The Board will determine the interest rate to be charged on any credit extended through a program or facility established under this section in accordance with this paragraph (d) and the provisions of section 14, subdivision (d) of the Federal Reserve Act (12 U.S.C. 357). The Board may determine the interest rate by auction or such other method as the Board determines in accordance with section 14, subdivision (d) of the Federal Reserve Act (12 U.S.C. 357).
(ii) The interest rate established for credit extended through a program or facility established under this section will be set at a penalty level that:
(A) Is a premium to the market rate in normal circumstances;
(B) Affords liquidity in unusual and exigent circumstances; and
(C) Encourages repayment of the credit and discourages use of the program or facility as the unusual and exigent circumstances that motivated the program or facility recede and economic conditions normalize.
(iii) In determining the rate, the Board will consider the condition of affected markets and the financial system generally, the historical rate of interest for loans of comparable terms and maturity during normal times, the purpose of the program or facility, the risk of repayment, the collateral supporting the credit, the duration, terms and amount of the credit, and any other factor that the Board determines to be relevant to ensuring that the taxpayer is appropriately compensated for the risks associated with the credit extended under the program or facility and the purposes of this paragraph (d) are fulfilled.
(iv) In addition to the rate established and charged under this paragraph (d)(7), the Board may require the payment of any fees, penalties, charges or other consideration the Board determines to be appropriate to protect and appropriately compensate the taxpayer for the risks associated with the credit extended under the program or facility.
(8) Evidence regarding unavailability of adequate credit accommodation. (i) Each lending Federal Reserve Bank must obtain evidence that, under the prevailing circumstances, participants in a program or facility established under this paragraph (d) are unable to secure adequate credit accommodations from other banking institutions.
(ii) Evidence required under this paragraph (d)(8) may be based on economic conditions in the market or markets intended to be addressed by the program or facility, a written certification from the person or from the chief executive officer or other authorized officer of the entity at the time the person or entity initially borrows under the program or facility, or other evidence from participants or other sources.
(9) Termination of program or facility. (i) A program or facility established under this paragraph (d) shall cease extending new credit no later than one year after the date of the first extension of credit under the program or facility or the date of any extension of the program or facility by the Board under paragraph (d)(9)(ii) of this section.
(ii) A program or facility may be renewed upon the vote of not less than five members of the Board
(iii) The Board shall make the disclosures required under paragraph (d)(3) of this section to the public and the relevant congressional committees no later than 7 days after renewing a program or facility under this paragraph (d)(9).
(iv) The Board may at any time terminate a program or facility established under this paragraph (d). To ensure that the program or facility under this paragraph (d) is terminated in a timely and orderly fashion, the Board will periodically review, no less frequently than once every 6 months, the existence of unusual and exigent circumstances, the extent of usage of the program or facility, the extent to which the continuing authorization of the program or facility facilitates restoring or sustaining confidence in the identified financial markets, the ongoing need for the liquidity support provided by such program or facility, and such other factors as the Board may deem to be appropriate. The Board will terminate lending under a program or facility promptly upon finding that conditions no longer warrant the continuation of the program or facility or that continuation of the program or facility is no longer appropriate.
(v) A program or facility that has been terminated will cease extending new credit and will collect existing loans pursuant to the applicable terms and conditions.
(10) Reporting requirements. The Board will comply with the reporting requirements of 12 U.S.C. 248(s) and 12 U.S.C. 343(3)(C) pursuant to their terms.
(11) No obligation to extend credit. This paragraph (d) does not entitle any person or entity to obtain any credit or any increase, renewal or extension of maturity of any credit from a Federal Reserve Bank.
(12) Participation in programs and facilities and vendor selection. (i) Participation in any program or facility under this paragraph (d) shall not be limited or conditioned on the basis of any legally prohibited basis, such as the race, religion, color, gender, national origin, age or disability of the borrower.
(ii) The selection of any third-party vendor used in the design, marketing or implementation of any program or facility under this paragraph (d) shall be without regard to the race, religion, color, gender, national origin, age or disability of the vendor or any principal shareholder of the vendor, and, to the extent possible and consistent with law, shall involve a process designed to support equal opportunity and diversity.
(13) Short-term emergency credit secured solely by United States or agency obligations. In unusual and exigent circumstances and after consultation with the Board, a Federal Reserve Bank may extend credit under section 13(13) of the Federal Reserve Act if the collateral used to secure such credit consists solely of obligations of, or obligations fully guaranteed as to principal and interest by, the United States or an agency thereof. Prior to extending credit under this paragraph (d)(13), the Federal Reserve Bank must obtain evidence that credit is not available from other sources and failure to obtain such credit would adversely affect the economy. Credit extended under this paragraph (d)(13) may not be extended for a term exceeding 90 days, must be extended at a rate above the highest rate in effect for advances to depository institutions as determined in accordance with section 14(d) of the Federal Reserve Act, and is subject to such limitations and conditions as provided by the Board.
(e) Term auction facility. (1) A Federal Reserve Bank may make an advance to a depository institution pursuant to an auction conducted under this paragraph and at the rate specified in § 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 § 201.4(e)(1) shall expire on such date as set by the Board.
§ 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.
§ 201.51 Interest rates applicable to credit extended by a Federal Reserve Bank.
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(a) Primary credit. The interest rate at each Federal Reserve Bank for primary credit provided to depository institutions under § 201.4(a) is 5.5 percent.
(b) Secondary credit. The interest rate at each Federal Reserve Bank for secondary credit provided to depository institutions under § 201.4(b) is 6.0 percent.
(c) Seasonal credit. The rate for seasonal credit extended to depository institutions under § 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 or, if the Federal Open Market Committee has set a target range for the federal funds rate, the rate corresponding to the top of the target range, 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 § 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.
Interpretations
§ 201.104 Eligibility of consumer loans and finance company paper.
(a) The Board of Governors has clarified and modified its position with respect to the eligibility of consumer loans and finance company paper for discount with and as collateral for advances by the reserve banks.
(b) Section 13, paragraph 2, of the Federal Reserve Act authorizes a Federal Reserve Bank, under certain conditions, to discount for member banks
* * * notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Board of Governors of the Federal Reserve System to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of this Act.
(c) It continues to be the opinion of the Board that borrowing for the purpose of purchasing goods is borrowing for a commercial purpose, whether the borrower intends to use the goods himself or to resell them. Hence, loans made to enable consumers to purchase automobiles or other goods should be included under commercial, agricultural, and industrial paper within the meaning of the Federal Reserve Act, and as such are eligible for discounting with the Reserve Banks and as security for advances from the Reserve Banks under section 13, paragraph 8, of the Federal Reserve Act as long as they conform to requirements with respect to maturity and other matters. This applies equally to loans made directly by banks to consumers and to paper accepted by banks from dealers or finance companies. It also applies to notes of finance companies themselves as long as the proceeds of such notes are used to finance the purchase of consumer goods or for other purposes which are eligible within the meaning of the Federal Reserve Act.
(d) If there is any question as to whether the proceeds of a note of a finance company have been or are to be used for a commercial, agricultural, or industrial purpose, a financial statement of the finance company reflecting an excess of notes receivable which appear eligible for rediscount (without regard to maturity) over total current liabilities (i.e., notes due within 1 year) may be taken as an indication of eligibility. Where information is lacking as to whether direct consumer loans by a finance company are for eligible purposes, it may be assumed that 50 percent of such loans are “notes receivable which appear eligible for rediscount”. In addition, that language should be regarded as including notes given for the purchase of mobile homes that are acquired by a finance company from a dealer-seller of such homes.
(e) The principles stated above apply not only to notes of a finance company engaged in making consumer loans but also to notes of a finance company engaged in making loans for other eligible purposes, including business and agricultural loans. Under section 13a of 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.
§ 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.
§ 201.108 Obligations eligible as collateral for advances.
(a) Section 3(a) of Pub. L. 90-505, approved September 21, 1968, amended the eighth paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 347) to authorize advances thereunder to member banks “secured by such obligations as are eligible for purchase under section 14(b) of this Act.” The relevant part of such paragraph had previously referred only to “notes * * * eligible * * * for purchase”, which the Board had construed as not including obligations generally regarded as securities. (See 1962 Federal Reserve Bulletin 690, § 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.”
§ 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”
(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.
(e) Section 201.3(a) provides that a negotiable note maturing in 90 days or less is not eligible for discount if the proceeds are used “for permanent or fixed investments of any kind, such as land, buildings or machinery, or for any other fixed capital purpose”. However, the proceeds of a mortgage company’s commercial paper are not used by it for any permanent or fixed capital purpose, but only to carry temporarily an inventory of mortgage loans pending their “packaging” for sale to permanent investors that are usually recurrent customers.
(f) In view of the foregoing considerations the Board concluded that notes issued to finance such temporary “warehousing” of real estate mortgage loans are notes issued for an industrial or commercial purpose, that such mortgage loans do not constitute “investment securities”, as that term is used in section 13, and that the temporary holding of such mortgages in these circumstances is not a permanent investment by the mortgage banking company. Accordingly, the Board held that notes having not more than 90 days to run which are issued to finance the temporary holding of mortgage loans are eligible for discount by Reserve Banks.
§ 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.”
(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 § 204.1(f) of Regulation D and are subject to reserve requirements.
(c) In reviewing this matter, the Board has taken into consideration the changes that have occurred in commercial law and practice since 1933. Modern commercial law, embodied in the Uniform Commercial Code, refers to “perfecting security interests” rather than “securing title” to goods. The Board believes that if, under State law, the issuance of a field warehouse receipt provides the lender with a perfected security interest in the goods, the receipt should be regarded as a document “securing title” to goods for the purposes of section 13 of the Federal Reserve Act. It should be noted, however, that the mere existence of a perfected security interest alone is not sufficient; the Act requires that the acceptance be secured by a warehouse receipt or its equivalent.
(d) Under the U.C.C., evidence of an agreement between the secured party and the debtor must exist before a security interest can attach. [U.C.C. section 9-202.] This agreement may be evidence by: (1) A written security agreement signed by the debtor, or (2) the collateral being placed in the possession of the secured party or his agent [U.C.C. section 9-203]. Generally, a security interest is perfected by the filing of a financing statement, [U.C.C. section 9-302.] However, if the collateral is in the possession of a bailee, then perfection can be achieved by:
(1) Having warehouse receipts issued in the name of the secured party; (2) notifying the bailee of the secured party’s interest; or (3) having a financing statement filed. [U.C.C. section 9-304(3).]
(e) If the field warehousing operation is properly conducted, a security interest in the goods is perfected when a warehouse receipt is issued in the name of the secured party (the lending bank). Therefore, warehouse receipts issued pursuant to a bona fide field warehousing operation satisfy the legal requirements of section 13 of the Federal Reserve Act. Moreover, in a properly conducted field warehousing operation, the warehouse manager will be trained, bonded, supervised and audited by the field warehousing company. This procedure tends to insure that he will not be impermissibly controlled by his former (or sometimes present) employer, the borrower, even though he may look to the borrower for reemployment at some future time. A prudent lender will, of course, carefully review the field warehousing operation to ensure that stated procedures are satisfactory and that they are actually being followed. The lender may also wish to review the field warehousing company’s fidelity bonds and legal liability insurance policies to ensure that they provide satisfactory protection to the lender.
(f) If the warehousing operation is not conducted properly, however, and the manager remains under the control of the borrower, the security interest may be lost. Consequently, the lender may wish to require a written security agreement and the filing of a financing statement to insure that the lender will have a perfected security interest even if it is later determined that the field warehousing operation was not properly conducted. It should be noted however, that the Federal Reserve Act clearly requires that the bankers’ acceptance be secured by a warehouse receipt in order to satisfy the requirements of eligibility, and a written security agreement and a filed financing statement, while desirable, cannot 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 supersedes only the previous ¶ 1445 of the Published Interpretations [1933 BULLETIN 188], and is not intended to affect any other Board Interpretation regarding field warehousing.
PART 202—EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)
§ 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 § 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.
§ 202.2 Definitions.
For the purposes of this regulation, unless the context indicates otherwise, the following definitions apply.
(a) Account means an extension of credit. When employed in relation to an account, the word use refers only to open-end credit.
(b) Act means the Equal Credit Opportunity Act (title VII of the Consumer Credit Protection Act).
(c) Adverse action. (1) The term means:
(i) A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered;
(ii) A termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts; or
(iii) A refusal to increase the amount of credit available to an applicant who has made an application for an increase.
(2) The term does not include:
(i) A change in the terms of an account expressly agreed to by an applicant.
(ii) Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account;
(iii) A refusal or failure to authorize an account transaction at point of sale or loan, except when the refusal is a termination or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts, or when the refusal is a denial of an application for an increase in the amount of credit available under the account;
(iv) A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or
(v) A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.
(3) An action that falls within the definition of both paragraphs (c)(1) and (c)(2) of this section is governed by paragraph (c)(2) of this section.
(d) Age refers only to the age of natural persons and means the number of fully elapsed years from the date of an applicant’s birth.
(e) Applicant means any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of § 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 § 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 § 202.4(a) and (b), the term creditor also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made. A person is not a creditor regarding any violation of the Act or this regulation committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction. The term does not include a person whose only participation in a credit transaction involves honoring a credit card.
(m) Credit transaction means every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit (including, but not limited to, information requirements; investigation procedures; standards of creditworthiness; terms of credit; furnishing of credit information; revocation, alteration, or termination of credit; and collection procedures).
(n) Discriminate against an applicant means to treat an applicant less favorably than other applicants.
(o) Elderly means age 62 or older.
(p) Empirically derived and other credit scoring systems—(1) A credit scoring system is a system that evaluates an applicant’s creditworthiness mechanically, based on key attributes of the applicant and aspects of the transaction, and that determines, alone or in conjunction with an evaluation of additional information about the applicant, whether an applicant is deemed creditworthy. To qualify as an empirically derived, demonstrably and statistically sound, credit scoring system, the system must be:
(i) Based on data that are derived from an empirical comparison of sample groups or the population of creditworthy and noncreditworthy applicants who applied for credit within a reasonable preceding period of time;
(ii) Developed for the purpose of evaluating the creditworthiness of applicants with respect to the legitimate business interests of the creditor utilizing the system (including, but not limited to, minimizing bad debt losses and operating expenses in accordance with the creditor’s business judgment);
(iii) Developed and validated using accepted statistical principles and methodology; and
(iv) Periodically revalidated by the use of appropriate statistical principles and methodology and adjusted as necessary to maintain predictive ability.
(2) A creditor may use an empirically derived, demonstrably and statistically sound, credit scoring system obtained from another person or may obtain credit experience from which to develop such a system. Any such system must satisfy the criteria set forth in paragraph (p)(1)(i) through (iv) of this section; if the creditor is unable during the development process to validate the system based on its own credit experience in accordance with paragraph (p)(1) of this section, the system must be validated when sufficient credit experience becomes available. A system that fails this validity test is no longer an empirically derived, demonstrably and statistically sound, credit scoring system for that creditor.
(q) Extend credit and extension of credit mean the granting of credit in any form (including, but not limited to, credit granted in addition to any existing credit or credit limit; credit granted pursuant to an open-end credit plan; the refinancing or other renewal of credit, including the issuance of a new credit card in place of an expiring credit card or in substitution for an existing credit card; the consolidation of two or more obligations; or the continuance of existing credit without any 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.
§ 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 § 202.4(a), the general rule against discrimination on a prohibited basis, the requirements of this regulation do not apply to government credit.
§ 202.4 General rules.
(a) Discrimination. A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.
(b) Discouragement. A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.
(c) Written applications. A creditor shall take written applications for the dwelling-related types of credit covered by § 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 §§ 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 §§ 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.
§ 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.
(2) Required collection of information. Notwithstanding paragraphs (b) through (d) of this section, a creditor shall request information for monitoring purposes as required by § 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 § 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 § 202.15. A creditor that makes such an inquiry shall disclose orally or in writing, at the time the information is requested, that:
(i) The applicant will not be required to provide the information;
(ii) The creditor is requesting the information to monitor its compliance with the federal Equal Credit Opportunity Act;
(iii) Federal law prohibits the creditor from discriminating on the basis of this information, or on the basis of an applicant’s decision not to furnish the information; and
(iv) If applicable, certain information will be collected based on visual observation or surname if not provided by the applicant or other person.
(2) Sex. An applicant may be requested to designate a title on an application form (such as Ms., Miss, Mr., or Mrs.) if the form discloses that the designation of a title is optional. An application form shall otherwise use only terms that are neutral as to sex.
(c) Information about a spouse or former spouse—(1) General rule. Except as permitted in this paragraph, a creditor may not request any information concerning the spouse or former spouse of an applicant.
(2) Permissible inquiries. A creditor may request any information concerning an applicant’s spouse (or former spouse under paragraph (c)(2)(v) of this section) that may be requested about the applicant if:
(i) The spouse will be permitted to use the account;
(ii) The spouse will be contractually liable on the account;
(iii) The applicant is relying on the spouse’s income as a basis for repayment of the credit requested;
(iv) The applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested; or
(v) The applicant is relying on alimony, child support, or separate maintenance payments from a spouse or former spouse as a basis for repayment of the credit requested.
(3) Other accounts of the applicant. A creditor may request that an applicant list any account on which the applicant is contractually liable and to provide the name and address of the person in whose name the account is held. A creditor may also ask an applicant to list the names in which the applicant has previously received credit.
(d) Other limitations on information requests—(1) Marital status. If an applicant applies for individual unsecured credit, a creditor shall not inquire about the applicant’s marital status unless the applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested. If an application is for other than individual unsecured credit, a creditor may inquire about the applicant’s marital status, but shall use only the terms married, unmarried, and separated. A creditor may explain that the category unmarried includes single, divorced, and widowed persons.
(2) Disclosure about income from alimony, child support, or separate maintenance. A creditor shall not inquire whether income stated in an application is derived from alimony, child support, or separate maintenance payments unless the creditor discloses to the applicant that such income need not be revealed if the applicant does not want the creditor to consider it in determining the applicant’s creditworthiness.
(3) Childbearing, childrearing. A creditor shall not inquire about birth control practices, intentions concerning the bearing or rearing of children, or capability to bear children. A creditor may inquire about the number and ages of an applicant’s dependents or 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.
§ 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.
(b) Specific rules concerning use of information. (1) Except as provided in the Act and this regulation, a creditor shall not take a prohibited basis into account in any system of evaluating the creditworthiness of applicants.
(2) Age, receipt of public assistance. (i) Except as permitted in this paragraph, a creditor shall not take into account an applicant’s age (provided that the applicant has the capacity to enter into a binding contract) or whether an applicant’s income derives from any public assistance program.
(ii) In an empirically derived, demonstrably and statistically sound, credit scoring system, a creditor may use an applicant’s age as a predictive variable, provided that the age of an elderly applicant is not assigned a negative factor or value.
(iii) In a judgmental system of evaluating creditworthiness, a creditor may consider an applicant’s age or whether an applicant’s income derives from any public assistance program only for the purpose of determining a pertinent element of creditworthiness.
(iv) In any system of evaluating creditworthiness, a creditor may consider the age of an elderly applicant when such age is used to favor the elderly applicant in extending credit.
(3) Childbearing, childrearing. In evaluating creditworthiness, a creditor shall not make assumptions or use aggregate statistics relating to the likelihood that any category of persons will bear or rear children or will, for that reason, receive diminished or interrupted income in the future.
(4) Telephone listing. A creditor shall not take into account whether there is a telephone listing in the name of an applicant for consumer credit but may take into account whether there is a telephone in the applicant’s residence.
(5) Income. A creditor shall not discount or exclude from consideration the income of an applicant or the spouse of an applicant because of a prohibited basis or because the income is derived from part-time employment or is an annuity, pension, or other retirement benefit; a creditor may consider the amount and probable continuance of any income in evaluating an applicant’s creditworthiness. When an applicant relies on alimony, child support, or separate maintenance payments in applying for credit, the creditor shall consider such payments as income to the extent that they are likely to be consistently made.
(6) Credit history. To the extent that a creditor considers credit history in evaluating the creditworthiness of similarly qualified applicants for a similar type and amount of credit, in evaluating an applicant’s creditworthiness a creditor shall consider:
(i) The credit history, when available, of accounts designated as accounts that the applicant and the applicant’s spouse are permitted to use or for which both are contractually liable;
(ii) On the applicant’s request, any information the applicant may present that tends to indicate the credit history being considered by the creditor does not accurately reflect the applicant’s creditworthiness; and
(iii) On the applicant’s request, the credit history, when available, of any account reported in the name of the applicant’s spouse or former spouse that the applicant can demonstrate accurately reflects the applicant’s creditworthiness.
(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.
§ 202.7 Rules concerning extensions of credit.
(a) Individual accounts. A creditor shall not refuse to grant an individual account to a creditworthy applicant on the basis of sex, marital status, or any other prohibited basis.
(b) Designation of name. A creditor shall not refuse to allow an applicant to open or maintain an account in a birth-given first name and a surname that is the applicant’s birth-given surname, the spouse’s surname, or a combined surname.
(c) Action concerning existing open-end accounts—(1) Limitations. In the absence of evidence of the applicant’s inability or unwillingness to repay, a creditor shall not take any of the following actions regarding an applicant who is contractually liable on an existing open-end account on the basis of the applicant’s reaching a certain age or retiring or on the basis of a change in the applicant’s name or marital status:
(i) Require a reapplication, except as provided in paragraph (c)(2) of this section;
(ii) Change the terms of the account; or
(iii) Terminate the account.
(2) Requiring reapplication. A creditor may require a reapplication for an open-end account on the basis of a change in the marital status of an applicant who is contractually liable if the credit granted was based in whole or in part on income of the applicant’s spouse and if information available to the creditor indicates that the applicant’s income may not support the amount of credit currently available.
(d) Signature of spouse or other person—(1) Rule for qualified applicant. Except as provided in this paragraph, a creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.
(2) Unsecured credit. If an applicant requests unsecured credit and relies in part upon property that the applicant owns jointly with another person to satisfy the creditor’s standards of creditworthiness, the creditor may require the signature of the other person only on the instrument(s) necessary, or reasonably believed by the creditor to be necessary, under the law of the state in which the property is located, to enable the creditor to reach the property being relied upon in the event of the death or default of the applicant.
(3) Unsecured credit—community property states. If a married applicant requests unsecured credit and resides in a community property state, or if the applicant is relying on property located in such a state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if:
(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.
§ 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.
§ 202.9 Notifications.
(a) Notification of action taken, ECOA notice, and statement of specific reasons—(1) When notification is required. A creditor shall notify an applicant of action taken within:
(i) 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application;
(ii) 30 days after taking adverse action on an incomplete application, unless notice is provided in accordance with paragraph (c) of this section;
(iii) 30 days after taking adverse action on an existing account; or
(iv) 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.
(2) Content of notification when adverse action is taken. A notification given to an applicant when adverse action is taken shall be in writing and shall contain a statement of the action taken; the name and address of the creditor; a statement of the provisions of § 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
(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.
§ 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.
§ 202.11 Relation to state law.
(a) Inconsistent state laws. Except as otherwise provided in this section, this regulation alters, affects, or preempts only those state laws that are inconsistent with the Act and this regulation and then only to the extent of the inconsistency. A state law is not inconsistent if it is more protective of an applicant.
(b) Preempted provisions of state law. (1) A state law is deemed to be inconsistent with the requirements of the Act and this regulation and less protective of an applicant within the meaning of section 705(f) of the Act to the extent that the law:
(i) Requires or permits a practice or act prohibited by the Act or this regulation;
(ii) Prohibits the individual extension of consumer credit to both parties to a marriage if each spouse individually and voluntarily applies for such credit;
(iii) Prohibits inquiries or collection of data required to comply with the Act or this regulation;
(iv) Prohibits asking about or considering age in an empirically derived, demonstrably and statistically sound, credit scoring system to determine a pertinent element of creditworthiness, or to favor an elderly applicant; or
(v) Prohibits inquiries necessary to establish or administer a special purpose credit program as defined by § 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.
§ 202.12 Record retention.
(a) Retention of prohibited information. A creditor may retain in its files information that is prohibited by the Act or this regulation for use in evaluating applications, without violating the Act or this regulation, if the information was obtained:
(1) From any source prior to March 23, 1977;
(2) From consumer reporting agencies, an applicant, or others without the specific request of the creditor; or
(3) As required to monitor compliance with the Act and this regulation or other federal or state statutes or regulations.
(b) Preservation of records—(1) Applications. For 25 months (12 months for business credit, except as provided in paragraph (b)(5) of this section) after the date that a creditor notifies an applicant of action taken on an application or of incompleteness, the creditor shall retain in original form or a copy thereof:
(i) Any application that it receives, any information required to be obtained concerning characteristics of the applicant to monitor compliance with the Act and this regulation or other similar law, and any other written or recorded information used in evaluating the application and not returned to the applicant at the applicant’s request;
(ii) A copy of the following documents if furnished to the applicant in written form (or, if furnished orally, any notation or memorandum made by the creditor):
(A) The notification of action taken; and
(B) The statement of specific reasons for adverse action; and
(iii) Any written statement submitted by the applicant alleging a violation of the Act or this regulation.
(2) Existing accounts. For 25 months (12 months for business credit, except as provided in paragraph (b)(5) of this section) after the date that a creditor notifies an applicant of adverse action regarding an existing account, the creditor shall retain as to that account, in original form or a copy thereof:
(i) Any written or recorded information concerning the adverse action; and
(ii) Any written statement submitted by the applicant alleging a violation of the Act or this regulation.
(3) Other applications. For 25 months (12 months for business credit, except as provided in paragraph (b)(5) of this section) after the date that a creditor receives an application for which the creditor is not required to comply with the notification requirements of § 202.9, the creditor shall retain all written or recorded information in its possession concerning the applicant, including any notation of action taken.
(4) Enforcement proceedings and investigations. A creditor shall retain the information beyond 25 months (12 months for business credit, except as provided in paragraph (b)(5) of this section) if the creditor has actual notice that it is under investigation or is subject to an enforcement proceeding for an alleged violation of the Act or this part, by the Attorney General of the United States or by an enforcement agency charged with monitoring that creditor’s compliance with the Act and this regulation, or if it has been served with notice of an action filed pursuant to section 706 of the Act and § 202.16 of this part. The creditor shall retain the information until final disposition of the matter, unless an earlier time is allowed by order of the agency or court.
(5) Special rule for certain business credit applications. With regard to a business that had gross revenues in excess of $1 million in its preceding fiscal year, or an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit, the creditor shall retain records for at least 60 days after notifying the applicant of the action taken. If within that time period the applicant requests in writing the reasons for adverse action or that records be retained, the creditor shall retain records for 12 months.
(6) Self-tests. For 25 months after a self-test (as defined in § 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.
§ 202.13 Information for monitoring purposes.
(a) Information to be requested. (1) A creditor that receives an application for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence, where the extension of credit will be secured by the dwelling, shall request as part of the application the following information regarding the applicant(s):
(i) Ethnicity, using the categories Hispanic or Latino, and not Hispanic or Latino; and race, using the categories American Indian or Alaska Native, Asian, Black or African American, Native Hawaiian or Other Pacific Islander, and White;
(ii) Sex;
(iii) Marital status, using the categories married, unmarried, and separated; and
(iv) Age.
(2) Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes, but is not limited to, an individual condominium or cooperative unit and a mobile or other manufactured home.
(b) Obtaining information. Questions regarding ethnicity, race, sex, marital status, and age may be listed, at the creditor’s option, on the application form or on a separate form that refers to the application. The applicant(s) shall be asked but not required to supply the requested information. If the applicant(s) chooses not to provide the information or any part of it, that fact shall be noted on the form. The creditor shall then also note on the form, to the extent possible, the ethnicity, race, and sex of the applicant(s) on the basis of visual observation or surname.
(c) Disclosure to applicant(s). The creditor shall inform the applicant(s) that the information regarding ethnicity, race, sex, marital status, and age is being requested by the federal government for the purpose of monitoring compliance with federal statutes that prohibit creditors from discriminating against applicants on those bases. The creditor shall also inform the applicant(s) that if the applicant(s) chooses not to provide the information, the creditor is required to note the ethnicity, race and sex on the basis of visual observation or surname.
(d) Substitute monitoring program. A monitoring program required by an agency charged with administrative enforcement under section 704 of the Act may be substituted for the requirements contained in paragraphs (a), (b), and (c) of this section.
§ 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 § 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 § 202.9 of this regulation or 90 days after the application is withdrawn.
(b) Credit unions. A creditor that is subject to the regulations of the National Credit Union Administration on making copies of appraisal reports available is not subject to this section.
(c) Definitions. For purposes of paragraph (a) of this section, the term dwelling means a residential structure that contains one to four units whether or not that structure is attached to real property. The term includes, but is not limited to, an individual condominium or cooperative unit, and a mobile or other manufactured home. The term appraisal report means the document(s) relied upon by a creditor in evaluating the value of the dwelling.
§ 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 § 202.4(b)) in any proceeding or civil action in which a violation of the Act or this regulation is alleged.
(2) Loss of privilege. The report or results of a self-test are not privileged under paragraph (d)(1) of this section if the creditor or a person with lawful access to the report or results:
(i) Voluntarily discloses any part of the report or results, or any other information privileged under this section, to an applicant or government agency or to the public;
(ii) Discloses any part of the report or results, or any other information privileged under this section, as a defense to charges that the creditor has violated the Act or regulation; or
(iii) Fails or is unable to produce written or recorded information about the self-test that is required to be retained under § 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 § 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.
§ 202.16 Enforcement, penalties and liabilities.
(a) Administrative enforcement. (1) As set forth more fully in section 704 of the Act, administrative enforcement of the Act and this regulation regarding certain creditors is assigned to the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Board of Directors of the Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, Surface Transportation Board, Secretary of Agriculture, Farm Credit Administration, Securities and Exchange Commission, Small Business Administration, and Secretary of Transportation.
(2) Except to the extent that administrative enforcement is specifically assigned to other authorities, compliance with the requirements imposed under the Act and this regulation is enforced by the Federal Trade Commission.
(b) Penalties and liabilities. (1) Sections 702(g) and 706(a) and (b) of the Act provide that any creditor that fails to comply with a requirement imposed by the Act or this regulation is subject to civil liability for actual and punitive damages in individual or class actions. Pursuant to sections 702(g) and 704(b), (c), and (d) of the Act, violations of the Act or this regulation also constitute violations of other federal laws. Liability for punitive damages can apply only to nongovernmental entities and is limited to $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions. Section 706(c) provides for equitable and declaratory relief and section 706(d) authorizes the awarding of costs and reasonable attorney’s fees to an aggrieved applicant in a successful action.
(2) As provided in section 706(f), a civil action under the Act or this regulation may be brought in the appropriate United States district court without regard to the amount in controversy or in any other court of competent jurisdiction within two years after the date of the occurrence of the violation, or within one year after the commencement of an administrative enforcement proceeding or of a civil action brought by the Attorney General of the United States within two years after the alleged violation.
(3) If an agency responsible for administrative enforcement is unable to obtain compliance with the Act or this regulation, it may refer the matter to the Attorney General of the United States. If the Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration has reason to believe that one or more creditors have engaged in a pattern or practice of discouraging or denying applications in violation of the Act or this regulation, the agency shall refer the matter to the Attorney General. If the agency has reason to believe that one or more creditors violated section 701(a) of the Act, the agency may refer a matter to the Attorney General.
(4) On referral, or whenever the Attorney General has reason to believe that one or more creditors have engaged in a pattern or practice in violation of the Act or this regulation, the Attorney General may bring a civil action for such relief as may be appropriate, including actual and punitive damages and injunctive relief.
(5) If the Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration has reason to believe (as a result of a consumer complaint, a consumer compliance examination, or some other basis) that a violation of the Act or this regulation has occurred which is also a violation of the Fair Housing Act, and the matter is not referred to the Attorney General, the agency shall:
(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 §§ 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 §§ 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 § 202.13, the creditor may retain information and act on the application without violating the regulation.
§ 202.17 Data collection for credit applications by women-owned, minority-owned, or small businesses.
No motor vehicle dealer covered by section 1029(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. 5519(a), shall be required to comply with the requirements of section 704B of the Equal Credit Opportunity Act, 15 U.S.C. 1691c-2, until the effective date of final rules issued by the Board to implement section 704B of the Act, 15 U.S.C. 1691c-2. This paragraph shall not be construed to affect the effective date of section 704B of the Act for any person other than a motor vehicle dealer covered by section 1029(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Appendix A to Part 202—Federal Enforcement Agencies
The following list indicates the federal agencies that enforce Regulation B for particular classes of creditors. Any questions concerning a particular creditor should be directed to its enforcement agency. Terms that are not defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them in the International Banking Act of 1978 (12 U.S.C. 3101).
National banks, and federal branches and federal agencies of foreign banks: Office of the Comptroller of the Currency, Customer Assistance Group, 1301 McKinney Street, Suite 3450, Houston, TX 77010-9050
State member banks, branches and agencies of foreign banks (other than federal branches, federal agencies, and insured state branches of foreign banks), commercial lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act: Federal Reserve Consumer Help Center, P.O. Box 1200, Minneapolis, MN 55480.
Nonmember Insured Banks and Insured State Branches of Foreign Banks: FDIC Consumer Response Center, 1100 Walnut Street, Box #11, Kansas City, MO 64106.
Savings institutions under the Savings Association Insurance Fund of the FDIC and federally chartered savings banks insured under the Bank Insurance Fund of the FDIC (but not including state-chartered savings banks insured under the Bank Insurance Fund): Office of Thrift Supervision, Consumer Response Unit, 1700 G Street, NW., Washington, DC 20552.
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 § 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 § 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 § 202.5 of this regulation.
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 §§ 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 §§ 202.9(a)(1) and (2)(ii). Form C-6 is designed for use in notifying an applicant, under § 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 § 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 § 202.14. Form C-10 is designed for use in notifying an applicant for nonmortgage credit that the creditor is requesting applicant characteristic information.
2. Form C-1 contains the Fair Credit Reporting Act disclosure as required by sections 615(a) and (b) of that act. Forms C-2 through C-5 contain only the section 615(a) disclosure (that a creditor obtained information from a consumer reporting agency that was considered in the credit decision and, as applicable, a credit score used in taking adverse action along with related information). A creditor must provide the section 615(a) disclosure when adverse action is taken against a consumer based on information from a consumer reporting agency. A creditor must provide the section 615(b) disclosure when adverse action is taken based on information from an outside source other than a consumer reporting agency. In addition, a creditor must provide the section 615(b) disclosure if the creditor obtained information from an affiliate other than information in a consumer report or other than information concerning the affiliate’s own transactions or experiences with the consumer. Creditors may comply with the disclosure requirements for adverse action based on information in a consumer report obtained from an affiliate by providing either the section 615(a) or section 615(b) disclosure. Optional language in Forms C-1 through C-5 may be used to direct the consumer to the entity that provided the credit score for any questions about the credit score, along with the entity’s contact information. Creditors may use or not use this additional language without losing the safe harbor, since the language is optional.
3. The sample forms are illustrative and may not be appropriate for all creditors. They were designed to include some of the factors that creditors most commonly consider. If a creditor chooses to use the checklist of reasons provided in one of the sample forms in this appendix and if reasons commonly used by the creditor are not provided on the form, the creditor should modify the checklist by substituting or adding other reasons. For example, if “inadequate down payment” or “no deposit relationship with us” are common reasons for taking adverse action on an application, the creditor ought to add or substitute such reasons for those presently contained on the sample forms.
4. If the reasons listed on the forms are not the factors actually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed. For example, some creditors consider only references from banks or other depository institutions and disregard finance company references altogether; their statement of reasons should disclose “insufficient bank references,” not “insufficient credit references.” Similarly, a creditor that considers bank references and other credit references as distinct factors should treat the two factors separately and disclose them as appropriate. The creditor should either add such other factors to the form or check “other” and include the appropriate explanation. The creditor need not, however, describe how or why a factor adversely affected the application. For example, the notice may say “length of residence” rather than “too short a period of residence.”
5. A creditor may design its own notification forms or use all or a portion of the forms contained in this appendix. Proper use of Forms C-1 through C-4 will satisfy the requirement of § 202.9(a)(2)(i). Proper use of Forms C-5 and C-6 constitutes full compliance with §§ 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 § 202.9(a)(2)(i) and (ii), respectively, for applications for business credit. Proper use of Form C-9 will satisfy the requirements of § 202.14 of this part. Proper use of Form C-10 will satisfy the requirements of § 202.5(b)(1).
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
____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:____________
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.
[We also obtained your credit score from this consumer reporting agency and used it in making our credit decision. Your credit score is a number that reflects the information in your consumer report. Your credit score can change, depending on how the information in your consumer report changes.
[If you have any questions regarding your credit score, you should contact [entity that provided the credit score] at:
____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:
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).
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):
The consumer reporting agency contacted that provided information that influenced our decision in whole or in part was [name, address and [toll-free] telephone number of the reporting agency]. The reporting agency played no part in our decision and is unable to supply specific reasons why we have denied credit to you. You have a right under the Fair Credit Reporting Act to know the information contained in your credit file at the consumer reporting agency. You also have a right to a free copy of your report from the reporting agency, if you request it no later than 60 days after you receive this notice. In addition, if you find that any information contained in the report you receive is inaccurate or incomplete, you have the right to dispute the matter with the reporting agency. Any questions regarding such information should be directed to [consumer reporting agency]. If you have any questions regarding this letter, you should contact us at [creditor’s name, address and telephone number].
[We also obtained your credit score from this consumer reporting agency and used it in making our credit decision. Your credit score is a number that reflects the information in your consumer report. Your credit score can change, depending on how the information in your consumer report changes.
[If you have any questions regarding your credit score, you should contact [entity that provided the credit score] at:
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).
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.
[
We also obtained your credit score from this consumer reporting agency and used it in making our credit decision. Your credit score is a number that reflects the information in your consumer report. Your credit score can change, depending on how the information in your consumer report changes.
[If you have any questions regarding your credit score, you should contact [entity that provided the credit score] at:
If you have any questions regarding this letter, you should contact us at
Sincerely,
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).
Dear Applicant: Thank you for your application for ________. We are unable to offer you credit on the terms that you requested for the following reason(s):
We can, however, offer you credit on the following terms:
If this offer is acceptable to you, please notify us within [amount of time] at the following address: ________.
Our credit decision on your application was based in whole or in part on information obtained in a report from [name, address and [toll-free] telephone number of the consumer reporting agency]. You have a right under the Fair Credit Reporting Act to know the information contained in your credit file at the consumer reporting agency. The reporting agency played no part in our decision and is unable to supply specific reasons why we have denied credit to you. You also have a right to a free copy of your report from the reporting agency, if you request it no later than 60 days after you receive this notice. In addition, if you find that any information contained in the report you receive is inaccurate or incomplete, you have the right to dispute the matter with the reporting agency.
[We also obtained your credit score from this consumer reporting agency and used it in making our credit decision. Your credit score is a number that reflects the information in your consumer report. Your credit score can change, depending on how the information in your consumer report changes.
Scores range from a low of ____________ to a high of ____________
Key factors that adversely affected your credit score:
[If you have any questions regarding your credit score, you should contact [entity that provided the credit score] at:
You should know that the federal Equal Credit Opportunity Act prohibits creditors, such as ourselves, from discriminating against credit applicants on the basis of their race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract), because they receive income from a public assistance program, or because they may have exercised their rights under the Consumer Credit Protection Act. If you believe there has been discrimination in handling your application you should contact the [name and address of the appropriate federal enforcement agency listed in appendix A].
Sincerely,
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.
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:
[We also obtained your credit score from this consumer reporting agency and used it in making our credit decision. Your credit score is a number that reflects the information in your consumer report. Your credit score can change, depending on how the information in your consumer report changes.
Key factors that adversely affected your credit score:
[If you have any questions regarding your credit score, you should contact [entity that provided the credit score] at:
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).
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,
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].
If your application for business credit is denied, you have the right to a written statement of the specific reasons for the denial. To obtain the statement, please contact [name, address and telephone number of the person or office from which the statement of reasons can be obtained] within 60 days from the date you are notified of our decision. We will send you a written statement of reasons for the denial within 30 days of receiving your request for the statement.
Notice: The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The federal agency that administers compliance with this law concerning this creditor is [name and address as specified by the appropriate agency listed in appendix A].
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:]
We are requesting the following information to monitor our compliance with the federal Equal Credit Opportunity Act, which prohibits unlawful discrimination. You are not required to provide this information. We will not take this information (or your decision not to provide this information) into account in connection with your application or credit transaction. The law provides that a creditor may not discriminate based on this information, or based on whether or not you choose to provide it. [If you choose not to provide the information, we will note it by visual observation or surname].
Appendix D to Part 202—Issuance of Staff Interpretations
1. Official Staff Interpretations. Officials in the Board’s Division of Consumer and Community Affairs are authorized to issue official staff interpretations of this regulation. These interpretations provide the protection afforded under section 706(e) of the Act. Except in unusual circumstances, such interpretations will not be issued separately but will be incorporated in an official commentary to the regulation, which will be amended periodically.
2. Requests for Issuance of Official Staff Interpretations. A request for an official staff interpretation should be in writing and addressed to the Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, DC 20551. The request should contain a complete statement of all relevant facts concerning the issue, including copies of all pertinent documents.
3. Scope of Interpretations. No staff interpretations will be issued approving creditors’ forms or statements. This restriction does not apply to forms or statements whose use is required or sanctioned by a government agency.
Supplement I to Part 202—Official Staff Interpretations
Following is an official staff interpretation of Regulation B (12 CFR part 202) issued under authority delegated by the Federal Reserve Board to officials in the Division of Consumer and Community Affairs. References are to sections of the regulation or the Equal Credit Opportunity Act (15 U.S.C. 1601 et seq.).
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
3. Status of previous interpretations. Interpretations of Regulation B previously issued by the Federal Reserve Board and its staff have been incorporated into this commentary as appropriate. All other previous Board and staff interpretations, official and unofficial, are superseded by this commentary.
4. Footnotes. Footnotes in the regulation have the same legal effect as the text of the regulation, whether they are explanatory or illustrative in nature.
5. Comment designations. The comments are designated with as much specificity as possible according to the particular regulatory provision addressed. Each comment in the commentary is identified by a number and the regulatory section or paragraph that it interprets. For example, comments to § 202.2(c) are further divided by subparagraph, such as comment 2(c)(1)(ii)-1 and comment 2(c)(2)(ii)-1.
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.
2(c) Adverse action.
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.
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 § 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 § 202.9.
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 § 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.
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.
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 § 202.9.
2(e) Applicant.
1. Request to assume loan. If a mortgagor sells or transfers the mortgaged property and the buyer makes an application to the creditor to assume the mortgage loan, the mortgagee must treat the buyer as an applicant unless its policy is not to permit assumptions.
2(f) Application.
1. General. A creditor has the latitude under the regulation to establish its own application process and to decide the type and amount of information it will require from credit applicants.
2. Procedures used. The term “procedures” refers to the actual practices followed by a creditor for making credit decisions as well as its stated application procedures. For example, if a creditor’s stated policy is to require all applications to be in writing on the creditor’s application form, but the creditor also makes credit decisions based on oral requests, the creditor’s procedures are to accept both oral and written applications.
3. When an inquiry or prequalification request becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under § 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 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 § 202.4(a), the general rule prohibiting discrimination, and with § 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 § 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 § 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 § 202.4(a), a creditor may not discriminate against an applicant because of that person’s personal or business dealings with members of a certain religion, because of the national origin of any persons associated with the extension of credit (such as the tenants in the apartment complex being financed), or because of the race of other residents in the neighborhood where the property offered as collateral is located.
2. National origin. A creditor may not refuse to grant credit because an applicant comes from a particular country but may take the applicant’s immigration status into account. A creditor may also take into account any applicable law, regulation, or executive order restricting dealings with citizens (or the government) of a particular country or imposing limitations regarding credit extended for their use.
3. Public assistance program. Any federal, state, or local governmental assistance program that provides a continuing, periodic income supplement, whether premised on entitlement or need, is “public assistance” for purposes of the regulation. The term includes (but is not limited to) Temporary Aid to Needy Families, food stamps, rent and mortgage supplement or assistance programs, social security and supplemental security income, and unemployment compensation. Only physicians, hospitals, and others to whom the benefits are payable need consider Medicare and Medicaid as public assistance.
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 § 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 § 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 § 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.
1. Scope of rule. The general rule stated in § 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.
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—§ 202.4(b) covers acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit. Practices prohibited by this section include:
i. A statement that the applicant should not bother to apply, after the applicant states that he is retired.
ii. The use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy of exclusion in violation of the Act.
iii. The use of interview scripts that discourage applications on a prohibited basis.
2. Affirmative advertising. A creditor may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor.
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 § 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 § 202.13(b), Applications through electronic media and Applications through video.)
1. Clear and conspicuous. This standard requires that disclosures be presented in a reasonably understandable format in a way that does not obscure the required information. No minimum type size is mandated, but the disclosures must be legible, whether typewritten, handwritten, or printed by computer.
2. Form of disclosures. Whether the disclosures required to be on or with an application must be in electronic form depends upon the following:
i. If an applicant accesses a credit application electronically (other than as described under ii below), such as online at a home computer, the creditor must provide the disclosures in electronic form (such as with the application form on its website) in order to meet the requirement to provide disclosures in a timely manner on or with the application. If the creditor instead mailed paper disclosures to the applicant, this requirement would not be met.
ii. In contrast, if an applicant is physically present in the creditor’s office, and accesses a credit application electronically, such as via a terminal or kiosk (or if the applicant uses a terminal or kiosk located on the premises of an affiliate or third party that has arranged with the creditor to provide applications to consumers), the creditor may provide disclosures in either electronic or paper form, provided the creditor complies with the timing, delivery, and retainability requirements of the regulation.
5(a) General rules.
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.
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 § 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.
1. Indirect disclosure of prohibited information. The fact that certain credit-related information may indirectly disclose marital status does not bar a creditor from seeking such information. For example, the creditor may ask about:
i. The applicant’s obligation to pay alimony, child support, or separate maintenance income.
ii. The source of income to be used as the basis for repaying the credit requested, which could disclose that it is the income of a spouse.
iii. Whether any obligation disclosed by the applicant has a co-obligor, which could disclose that the co-obligor is a spouse or former spouse.
iv. The ownership of assets, which could disclose the interest of a spouse.
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.
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 § 202.5 from obtaining or from using for any purpose other than to conduct a self-test under § 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.
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 § 202.8.)
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 § 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 § 202.2(p), with one limitation: applicants age 62 years or older must be treated at least as favorably as applicants who are under age 62. If age is scored by assigning points to an applicant’s age category, elderly applicants must receive the same or a greater number of points as the most favored class of nonelderly applicants.
i. Age-split scorecards. Some credit systems segment the population and use different scorecards based on the age of an applicant. In such a system, one card may cover a narrow age range (for example, applicants in their twenties or younger) who are evaluated under attributes predictive for that age group. A second card may cover all other applicants, who are evaluated under the attributes predictive for that broader class. When a system uses a card covering a wide age range that encompasses elderly applicants, the credit scoring system is not deemed to score age. Thus, the system does not raise the issue of assigning a negative factor or value to the age of elderly applicants. But if a system segments the population by age into multiple scorecards, and includes elderly applicants in a narrower age range, the credit scoring system does score age. To comply with the Act and regulation in such a case, the creditor must ensure that the system does not assign a negative factor or value to the age of elderly applicants as a class.
3. Consideration of age in a judgmental system. In a judgmental system, defined in § 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 § 202.6(b)(2)(iv). In addition, under § 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 § 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.
1. Consideration of an individual applicant. A creditor must evaluate income derived from part-time employment, alimony, child support, separate maintenance payments, retirement benefits, or public assistance on an individual basis, not on the basis of aggregate statistics; and must assess its reliability or unreliability by analyzing the applicant’s actual circumstances, not by analyzing statistical measures derived from a group.
2. Payments consistently made. In determining the likelihood of consistent payments of alimony, child support, or separate maintenance, a creditor may consider factors such as whether payments are received pursuant to a written agreement or court decree; the length of time that the payments have been received; whether the payments are regularly received by the applicant; the availability of court or other procedures to compel payment; and the creditworthiness of the payor, including the credit history of the payor when it is available to the creditor.
3. Consideration of income.
i. A creditor need not consider income at all in evaluating creditworthiness. If a creditor does consider income, there are several acceptable methods, whether in a credit scoring or a judgmental system:
A. A creditor may score or take into account the total sum of all income stated by the applicant without taking steps to evaluate the income for reliability.
B. A creditor may evaluate each component of the applicant’s income, and then score or take into account income determined to be reliable separately from other income; or the creditor may disregard that portion of income that is not reliable when it aggregates reliable income.
C. A creditor that does not evaluate all income components for reliability must treat as reliable any component of protected income that is not evaluated.
ii. In considering the separate components of an applicant’s income, the creditor may not automatically discount or exclude from consideration any protected income. Any discounting or exclusion must be based on the applicant’s actual circumstances.
4. Part-time employment, sources of income. A creditor may score or take into account the fact that an applicant has more than one source of earned income—a full-time and a part-time job or two part-time jobs. A creditor may also score or treat earned income from a secondary source differently than earned income from a primary source. The creditor may not, however, score or otherwise take into account the number of sources for income such as retirement income, social security, supplemental security income, and alimony. Nor may the creditor treat negatively the fact that an applicant’s only earned income is derived from, for example, a part-time job.
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.
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.
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.
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 § 202.10 for rules governing the furnishing of credit history on accounts held by spouses.)
7(c) Action concerning existing open-end accounts.
1. Termination coincidental with marital status change. When an account holder’s marital status changes, a creditor generally may not terminate the account unless it has evidence that the account holder is now unable or unwilling to repay. But the creditor may terminate an account on which both spouses are jointly liable, even if the action coincides with a change in marital status, when one or both spouses:
i. Repudiate responsibility for future charges on the joint account.
ii. Request separate accounts in their own names.
iii. Request that the joint account be closed.
2. Updating information. A creditor may periodically request updated information from applicants but may not use events related to a prohibited basis—such as an applicant’s retirement or reaching a particular age, or a change in name or marital status—to trigger such a request.
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 § 202.7(d)(5) and (6).)
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.
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 (§ 202.7(d)(5));
B. Requesting that the credit be granted on a secured basis (§ 202.7(d)(4)); or
C. Providing the signature of the joint owner on an instrument that ensures access to the property in the event of the applicant’s death or default, but does not impose personal liability unless necessary under state law (such as a limited guarantee). A creditor may not routinely require, however, that a joint owner sign an instrument (such as a quitclaim deed) that would result in the forfeiture of the joint owner’s interest in the property.
2. Need for signature—reasonable belief. A creditor’s reasonable belief as to what instruments need to be signed by a person other than the applicant should be supported by a thorough review of pertinent statutory and decisional law or an opinion of the state attorney general.
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.
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.
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 § 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.
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 § 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 § 202.7(d)(2).
7(e) Insurance.
1. Differences in terms. Differences in the availability, rates, and other terms on which credit-related casualty insurance or credit life, health, accident, or disability insurance is offered or provided to an applicant does not violate Regulation B.
2. Insurance information. A creditor may obtain information about an applicant’s age, sex, or marital status for insurance purposes. The information may only be used for determining eligibility and premium rates for insurance, however, and not in making the credit decision.
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 § 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 § 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 § 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 §§ 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 §§ 202.5 and 202.6, and to require signatures that would otherwise be prohibited by § 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 § 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.
1. Use of the term adverse action. The regulation does not require that a creditor use the term adverse action in communicating to an applicant that a request for an extension of credit has not been approved. In notifying an applicant of adverse action as defined by § 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 § 202.9. (The creditor must comply, however, with the record retention requirements of the regulation. See § 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 § 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 § 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.
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 § 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 § 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.
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 § 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 § 202.9(a)(3)(i) apply unless the application is for trade or similar credit.
2. Trade credit. The term trade credit generally is limited to a financing arrangement that involves a buyer and a seller—such as a supplier who finances the sale of equipment, supplies, or inventory; it does not apply to an extension of credit by a bank or other financial institution for the financing of such items.
3. Factoring. Factoring refers to a purchase of accounts receivable, and thus is not subject to the Act or regulation. If there is a credit extension incident to the factoring arrangement, the notification rules in § 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 § 202.9(a)(3)(i).
5. Timing of notification. A creditor subject to § 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 § 202.9(a)(1) is deemed reasonable in all instances.
9(b) Form of ECOA notice and statement of specific reasons.
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 § 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.
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 §§ 202.9(a)(2) and (b)(2) must relate to and accurately describe the factors actually considered or scored by a creditor.
3. Description of reasons. A creditor need not describe how or why a factor adversely affected an applicant. For example, the notice may say “length of residence” rather than “too short a period of residence.”
4. Credit scoring system. If a creditor bases the denial or other adverse action on a credit scoring system, the reasons disclosed must relate only to those factors actually scored in the system. Moreover, no factor that was a principal reason for adverse action may be excluded from disclosure. The creditor must disclose the actual reasons for denial (for example, “age of automobile”) even if the relationship of that factor to predicting creditworthiness may not be clear to the applicant.
5. Credit scoring—method for selecting reasons. The regulation does not require that any one method be used for selecting reasons for a credit denial or other adverse action that is based on a credit scoring system. Various methods will meet the requirements of the regulation. One method is to identify the factors for which the applicant’s score fell furthest below the average score for each of those factors achieved by applicants whose total score was at or slightly above the minimum passing score. Another method is to identify the factors for which the applicant’s score fell furthest below the average score for each of those factors achieved by all applicants. These average scores could be calculated during the development or use of the system. Any other method that produces results substantially similar to either of these methods is also acceptable under the regulation.
6. Judgmental system. If a creditor uses a judgmental system, the reasons for the denial or other adverse action must relate to those factors in the applicant’s record actually reviewed by the person making the decision.
7. Combined credit scoring and judgmental system. If a creditor denies an application based on a credit evaluation system that employs both credit scoring and judgmental components, the reasons for the denial must come from the component of the system that the applicant failed. For example, if a creditor initially credit scores an application and denies the credit request as a result of that scoring, the reasons disclosed to the applicant must relate to the factors scored in the system. If the application passes the credit scoring stage but the creditor then denies the credit request based on a judgmental assessment of the applicant’s record, the reasons disclosed must relate to the factors reviewed judgmentally, even if the factors were also considered in the credit scoring component. If the application is not approved or denied as a result of the credit scoring, but falls into a gray band, and the creditor performs a judgmental assessment and denies the credit after that assessment, the reasons disclosed must come from both components of the system. The same result applies where a judgmental assessment is the first component of the combined system. As provided in comment 9(b)(2)-1, disclosure of more than a combined total of four reasons is not likely to be helpful to the applicant.
8. Automatic denial. Some credit decision methods contain features that call for automatic denial because of one or more negative factors in the applicant’s record (such as the applicant’s previous bad credit history with that creditor, the applicant’s declaration of bankruptcy, or the fact that the applicant is a minor). When a creditor denies the credit request because of an automatic-denial factor, the creditor must disclose that specific factor.
9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure of the principal reasons for denying or taking other adverse action on an application for an extension of credit. The Fair Credit Reporting Act (FCRA) requires a creditor to disclose when it has based its decision in whole or in part on information from a source other than the applicant or its own files. Disclosing that a consumer report was obtained and used in the denial of the application, as the FCRA requires, does not satisfy the ECOA requirement to disclose specific reasons. For example, if the applicant’s credit history reveals delinquent credit obligations and the application is denied for that reason, to satisfy § 202.9(b)(2) the creditor must disclose that the application was denied because of the applicant’s delinquent credit obligations. The FCRA also requires a creditor to disclose, as applicable, a credit score it used in taking adverse action along with related information, including up to four key factors that adversely affected the consumer’s credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor). Disclosing the key factors that adversely affected the consumer’s credit score does not satisfy the ECOA requirement to disclose specific reasons for denying or taking other adverse action on an application or extension of credit. Sample forms C-1 through C-5 of appendix C of the regulation provide for both the ECOA and FCRA disclosures. See also comment 9(a)(2)-1.
9(c) Incomplete applications.
1. Exception for preapprovals. The requirement to provide a notice of incompleteness does not apply to preapprovals that constitute applications under § 202.2(f).
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.
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 § 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 § 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.
1. Scope. The requirements of § 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 § 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 § 202.10. Thus, if a creditor receives a credit inquiry about the wife, it should be able to locate her credit file without asking the husband’s name.
10(a) Designation of accounts.
1. New parties. When new parties who are spouses undertake a legal obligation on an account, as in the case of a mortgage loan assumption, the creditor must change the designation on the account to reflect the new parties and must furnish subsequent credit information on the account in the new names.
2. Request to change designation of account. A request to change the manner in which information concerning an account is furnished does not alter the legal liability of either spouse on the account and does not require a creditor to change the name in which the account is maintained.
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.
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 § 202.12(a), the creditor may use the information in evaluating credit applications only if permitted to do so by § 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 § 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 § 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.
1. Withdrawn and brokered applications. In most cases, the 25-month retention period for applications runs from the date a notification is sent to the applicant granting or denying the credit requested. In certain transactions, a creditor is not obligated to provide a notice of the action taken. (See, for example, comment 9-2.) In such cases, the 25-month requirement runs from the date of application, as when:
i. An application is withdrawn by the applicant.
ii. An application is submitted to more than one creditor on behalf of the applicant, and the application is approved by one of the other creditors.
12(b)(6) Self-tests
1. The rule requires all written or recorded information about a self-test to be retained for 25 months after a self-test has been completed. For this purpose, a self-test is completed after the creditor has obtained the results and made a determination about what corrective action, if any, is appropriate. Creditors are required to retain information about the scope of the self-test, the methodology used and time period covered by the self-test, the report or results of the self-test including any analysis or conclusions, and any corrective action taken in response to the self-test.
12(b)(7) Preapplication marketing information.
1. Prescreened credit solicitations. The rule requires creditors to retain copies of prescreened credit solicitations. For purposes of this regulation, a prescreened solicitation is an “offer of credit” as described in 15 U.S.C. 1681a(1) of the Fair Credit Reporting Act. A creditor complies with this rule if it retains a copy of each solicitation mailing that contains different terms, such as the amount of credit offered, annual percentage rate, or annual fee.
2. List of criteria. A creditor must retain the list of criteria used to select potential recipients. This includes the criteria used by the creditor both to determine the potential recipients of the particular solicitation and to determine who will actually be offered credit.
3. Correspondence. A creditor may retain correspondence relating to consumers’ complaints about prescreened solicitations in any manner that is reasonably accessible and is understandable to examiners. There is no requirement to establish a separate database or set of files for such correspondence, or to match consumer complaints with specific solicitation programs.
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 § 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 § 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 § 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 § 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 § 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 § 202.13. A creditor can satisfy this requirement by recording on paper or by means of computer the information that the applicant provides orally and that the creditor normally considers in a credit decision.
3. Telephone, mail applications.
i. A creditor that accepts an application by telephone or mail must request the monitoring information.
ii. A creditor that accepts an application by mail need not make a special request for the monitoring information if the applicant has failed to provide it on the application form returned to the creditor.
iii. If it is not evident on the face of an application that it was received by mail, telephone, or via an electronic medium, the creditor should indicate on the form or other application record how the application was received.
4. Video and other electronic-application processes.
i. If a creditor takes an application through an electronic medium that allows the creditor to see the applicant, the creditor must treat the application as taken in person. The creditor must note the monitoring information on the basis of visual observation or surname, if the applicant chooses not to provide the information.
ii. If an applicant applies through an electronic medium without video capability, the creditor treats the application as if it were received by mail.
5. Applications through loan-shopping services. When a creditor receives an application through an unaffiliated loan-shopping service, it does not have to request the monitoring information for purposes of the ECOA or Regulation B. Creditors subject to the Home Mortgage Disclosure Act should be aware, however, that data collection may be called for under Regulation C (12 CFR part 203), which generally requires creditors to report, among other things, the sex and race of an applicant on brokered applications or applications received through a correspondent.
6. Inadvertent notation. If a creditor inadvertently obtains the monitoring information in a dwelling-related transaction not covered by § 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.
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 § 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.
15(a) General rules.
15(a)(1) Voluntary self-testing and correction.
1. Activities required by any governmental authority are not voluntary self-tests. A governmental authority includes both administrative and judicial authorities for federal, state, and local governments.
15(a)(2) Corrective action required.
1. To qualify for the privilege, appropriate corrective action is required when the results of a self-test show that it is more likely than not that there has been a violation of the ECOA or this regulation. A self-test is also privileged when it identifies no violations.
2. In some cases, the issue of whether certain information is privileged may arise before the self-test is complete or corrective actions are fully under way. This would not necessarily prevent a creditor from asserting the privilege. In situations where the self-test is not complete, for the privilege to apply the lender must satisfy the regulation’s requirements within a reasonable period of time. To assert the privilege where the self-test shows a likely violation, the rule requires, at a minimum, that the creditor establish a plan for corrective action and a method to demonstrate progress in implementing the plan. Creditors must take appropriate corrective action on a timely basis after the results of the self-test are known.
3. A creditor’s determination about the type of corrective action needed, or a finding that no corrective action is required, is not conclusive in determining whether the requirements of this paragraph have been satisfied. If a creditor’s claim of privilege is challenged, an assessment of the need for corrective action or the type of corrective action that is appropriate must be based on a review of the self-testing results, which may require an in camera inspection of the privileged documents.
15(a)(3) Other privileges.
1. A creditor may assert the privilege established under this section in addition to asserting any other privilege that may apply, such as the attorney-client privilege or the work-product privilege. Self-testing data may be privileged under this section whether or not the creditor’s assertion of another privilege is upheld.
15(b) Self-test defined.
15(b)(1) Definition.
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.
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.
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.
1. Property appraisal reports, minutes of loan committee meetings or other documents reflecting the basis for a decision to approve or deny an application, loan policies or procedures, underwriting standards, and broker compensation records are examples of the types of records that are not privileged. If a creditor arranges for testers to submit loan applications for processing, the records are not related to actual credit transactions for purposes of this paragraph and may be privileged self-testing records.
15(c) Appropriate corrective action.
1. The rule only addresses the corrective actions required for a creditor to take advantage of the privilege in this section. A creditor may be required to take other actions or provide additional relief if a formal finding of discrimination is made.
15(c)(1) General requirement.
1. Appropriate corrective action is required even though no violation has been formally adjudicated or admitted by the creditor. In determining whether it is more likely than not that a violation occurred, a creditor must treat testers as if they are actual applicants for credit. A creditor may not refuse to take appropriate corrective action under this section because the self-test used fictitious loan applicants. The fact that a tester’s agreement with the creditor waives the tester’s legal right to assert a violation does not eliminate the requirement for the creditor to take corrective action, although no remedial relief for the tester is required under paragraph 15(c)(3).
15(c)(2) Determining the scope of appropriate corrective action.
1. Whether a creditor has taken or is taking corrective action that is appropriate will be determined on a case-by-case basis. Generally, the scope of the corrective action that is needed to preserve the privilege is governed by the scope of the self-test. For example, a creditor that self-tests mortgage loans and discovers evidence of discrimination may focus its corrective actions on mortgage loans, and is not required to expand its testing to other types of loans.
2. In identifying the policies or practices that are a likely cause of the violation, a creditor might identify inadequate or improper lending policies, failure to implement established policies, employee conduct, or other causes. The extent and scope of a likely violation may be assessed by determining which areas of operations are likely to be affected by those policies and practices, for example, by determining the types of loans and stages of the application process involved and the branches or offices where the violations may have occurred.
3. Depending on the method and scope of the self-test and the results of the test, appropriate corrective action may include one or more of the following:
i. If the self-test identifies individuals whose applications were inappropriately processed, offering to extend credit if the application was improperly denied and compensating such persons for out-of-pocket costs and other compensatory damages;
ii. Correcting institutional policies or procedures that may have contributed to the likely violation, and adopting new policies as appropriate;
iii. Identifying and then training and/or disciplining the employees involved;
iv. Developing outreach programs, marketing strategies, or loan products to serve more effectively segments of the lender’s markets that may have been affected by the likely discrimination; and
v. Improving audit and oversight systems to avoid a recurrence of the likely violations.
15(c)(3) Types of relief.
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.
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.
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.
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.
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.
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.
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 §§ 202.12 and 202.13, this section requires that they be corrected prospectively.
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 § 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 § 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 § 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 § 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 § 202.13(d) may use the form as issued, in compliance with that substitute program.
1. Form C-9. Creditors may design their own form, add to, or modify the model form to reflect their individual policies and procedures. For example, a creditor may want to add:
i. A telephone number that applicants may call to leave their name and the address to which an appraisal report should be sent.
ii. A notice of the cost the applicant will be required to pay the creditor for the appraisal or a copy of the report.
PART 203 [RESERVED]
PART 204—RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS (REGULATION D)
§ 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 reserve requirements imposed on depository institutions 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.
§ 204.2 Definitions.
For purposes of this part, the following definitions apply unless otherwise specified:
(a)(1) Deposit means:
(i) The unpaid balance of money or its equivalent received or held by a depository institution in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to an account, including interest credited, or which is evidenced by an instrument on which the depository institution is primarily liable;
(ii) Money received or held by a depository institution, or the credit given for money or its equivalent received or held by the depository institution in the usual course of business for a special or specific purpose, regardless of the legal relationships established thereby, including escrow funds, funds held as security for securities loaned by the depository institution, funds deposited as advance payment on subscriptions to United States government securities, and funds held to meet its acceptances;
(iii) An outstanding teller’s check, or an outstanding draft, certified check, cashier’s check, money order, or officer’s check drawn on the depository institution, issued in the usual course of business for any purpose, including payment for services, dividends or purchases;
(iv) Any due bill or other liability or undertaking on the part of a depository institution to sell or deliver securities to, or purchase securities for the account of, any customer (including another depository institution), involving either the receipt of funds by the depository institution, regardless of the use of the proceeds, or a debit to an account of the customer before the securities are delivered. A deposit arises thereafter, if after three business days from the date of issuance of the obligation, the depository institution does not deliver the securities purchased or does not fully collateralize its obligation with securities similar to the securities purchased. A security is similar if it is of the same type and if it is of comparable maturity to that purchased by the customer;
(v) Any liability of a depository institution’s affiliate that is not a depository institution, on any promissory note, acknowledgment of advance, due bill, or similar obligation (written or oral), with a maturity of less than one and one-half years, to the extent that the proceeds are used to supply or to maintain the availability of funds (other than capital) to the depository institution, except any such obligation that, had it been issued directly by the depository institution, would not constitute a deposit. If an obligation of an affiliate of a depository institution is regarded as a deposit and is used to purchase assets from the depository institution, the maturity of the deposit is determined by the shorter of the maturity of the obligation issued or the remaining maturity of the assets purchased. If the proceeds from an affiliate’s obligation are placed in the depository institution in the form of a reservable deposit, no reserves need be maintained against the obligation of the affiliate since reserves are required to be maintained against the deposit issued by the depository institution. However, the maturity of the deposit issued to the affiliate shall be the shorter of the maturity of the affiliate’s obligation or the maturity of the deposit;
(vi) Credit balances;
(vii) Any liability of a depository institution on any promissory note, acknowledgment of advance, bankers’ acceptance, or similar obligation (written or oral), including mortgage-backed bonds, that is issued or undertaken by a depository institution as a means of obtaining funds, except any such obligation that:
(A) Is issued or undertaken and held for the account of:
(1) An office located in the United States of another depository institution, foreign bank, Edge or Agreement Corporation, or New York Investment (Article XII) Company;
(2) The United States government or an agency thereof; or
(3) The Export-Import Bank of the United States, Minbanc Capital Corporation, the Government Development Bank for Puerto Rico, a Federal Reserve Bank, a Federal Home Loan Bank, or the National Credit Union Administration Central Liquidity Facility;
(B) Arises from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States Government or any agency thereof that the depository institution is obligated to repurchase;
(C) Is not insured by a Federal agency, is subordinated to the claims of depositors, has a weighted average maturity of five years or more, and is issued by a depository institution with the approval of, or under the rules and regulations of, its primary Federal supervisor;
(D) Arises from a borrowing by a depository institution from a dealer in securities, for one business day, of proceeds of a transfer of deposit credit in a Federal Reserve Bank or other immediately available funds (commonly referred to as Federal funds), received by such dealer on the date of the loan in connection with clearance of securities transactions; or
(E) Arises from the creation, discount and subsequent sale by a depository institution of its bankers’ acceptance of the type described in paragraph 7 of section 13 of the Federal Reserve Act (12 U.S.C. 372).
(viii) Any liability of a depository institution that arises from the creation after June 20, 1983, of a bankers’ acceptance that is not of the type described in paragraph 7 of section 13 of the Federal Reserve Act (12 U.S.C. 372) except any such liability held for the account of an entity specified in § 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 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 § 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 § 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.
(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
(c) Where the depository institution pays that portion of a time deposit on which federal deposit insurance has been lost as a result of the merger of two or more federally insured banks in which the depositor previously maintained separate time deposits, for a period of one year from the date of the merger;
(d) Upon the death of any owner of the time deposit funds;
(e) When any owner of the time deposit is determined to be legally incompetent by a court or other administrative body of competent jurisdiction; or
(f) Where a time deposit is withdrawn within ten days after a specified maturity date even though the deposit contract provided for automatic renewal at the maturity date.
(A) Payable on a specified date not less than seven days after the date of deposit;
(B) Payable at the expiration of a specified time not less than seven days after the date of deposit;
(C) Payable only upon written notice that is actually required to be given by the depositor not less than seven days prior to withdrawal;
(D) Held in club accounts (such as Christmas club accounts and vacation club accounts that are not maintained as savings deposits) that are deposited under written contracts providing that no withdrawal shall be made until a certain number of periodic deposits have been made during a period of not less than three months even though some of the deposits may be made within six days from the end of the period; or
(E) Share certificates and certificates of indebtedness issued by credit unions, and certificate accounts and notice accounts issued by savings and loan associations;
(ii) An IBF time deposit meeting the requirements of § 204.8(a)(2); and
(iii) Borrowings, regardless of maturity, represented by a promissory note, an acknowledgment of advance, or similar obligation described in § 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,
(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.
(2) A time deposit may be represented by a transferable or nontransferable, or a negotiable or nonnegotiable, certificate, instrument, passbook, or statement, or by book entry or otherwise.
(d)(1) Savings deposit means a deposit or account with respect to which the depositor is not required by the deposit contract but may at any time be required by the depository institution to give written notice of an intended withdrawal not less than seven days before withdrawal is made, and that is not payable on a specified date or at the expiration of a specified time after the date of deposit. The term savings deposit includes a regular share account at a credit union and a regular account at a savings and loan association.
(2) The term “savings deposit” also means: A deposit or account, such as an account commonly known as a passbook savings account, a statement savings account, or as a money market deposit account (MMDA), that otherwise meets the requirements in paragraph (d)(1) of this section and from which, under the terms of the deposit contract or by practice of the depository institution, the depositor may be permitted or authorized to make transfers and withdrawals to another account (including a transaction account) of the depositor at the same institution or to a third party, regardless of the number of such transfers and withdrawals or the manner in which such transfers and withdrawals are made.
(3) A deposit may continue to be classified as a savings deposit even if the depository institution exercises its right to require notice of withdrawal.
(4) Savings deposit does not include funds deposited to the credit of the depository institution’s own trust department where the funds involved are utilized to cover checks or drafts. Such funds are transaction accounts.
(e) Transaction account means a deposit or account from which the depositor or account holder is permitted to make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal, telephone transfer, or other similar device for the purpose of making payments or transfers to third persons or others or from which the depositor may make third party payments at an automated teller machine (ATM) or a remote service unit, or other electronic device, including by debit card. 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, including accounts described in paragraph (d)(2) of this section (savings deposits) and 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, 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 withdrawals 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, regardless of the number of such transfers and withdrawals and regardless of the manner in which such transfers and withdrawals are made.
(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 deposits, including those accounts that are time deposits in form but that the Board has determined, by rule or order, to be transaction accounts.
(f)(1) Nonpersonal time deposit means:
(i) A time deposit, including an MMDA or any other savings deposit, representing funds in which any beneficial interest is held by a depositor which is not a natural person;
(ii) A time deposit, including an MMDA or any other savings deposit, that represents funds deposited to the credit of a depositor that is not a natural person, other than a deposit to the credit of a trustee or other fiduciary if the entire beneficial interest in the deposit is held by one or more natural persons;
(iii) A transferable time deposit. A time deposit is transferable unless it contains a specific statement on the certificate, instrument, passbook, statement or other form representing the account that it is not transferable. A time deposit that contains a specific statement that it is not transferable is not regarded as transferable even if the following transactions can be effected: a pledge as collateral for a loan, a transaction that occurs due to circumstances arising from death, incompetency, marriage, divorce, attachment, or otherwise by operation of law or a transfer on the books or records of the institution; and
(iv) A time deposit represented by a promissory note, an acknowledgment of advance, or similar obligation described in paragraph (a)(1)(vii) of this section that is issued to, or any bankers’ acceptance (other than the type described in 12 U.S.C. 372) of the depository institution held by:
(A) Any office located outside the United States of another depository institution or Edge or agreement corporation organized under the laws of the United States;
(B) Any office located outside the United States of a foreign bank;
(C) A foreign national government, or an agency or instrumentality thereof,
(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.
(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;
(B) For an Edge or Agreement Corporation, assets (including participations) acquired from its United States offices and held by its non-United States offices, by its IBF, by non-United States offices of its U.S. or foreign parent institution, or by non-United States offices of an affiliated Edge or Agreement Corporation; and
(iii) Credit outstanding from its non-United States offices to United States residents (other than assets acquired and net balances due from its United States offices), except credit extended (A) from its non-United States offices in the aggregate amount of $100,000 or less to any United States resident, (B) by a non-United States office that at no time during the computation period had credit outstanding to United States residents exceeding $1 million, (C) to an international banking facility, or (D) to an institution that will be maintaining reserves on such credit pursuant to this part. Credit extended from non-United States offices or from IBFs to a foreign branch, office, subsidiary, affiliate of other foreign establishment (foreign affiliate) controlled by one or more domestic corporations is not regarded as credit extended to a United States resident if the proceeds will be used to finance the operations outside the United States of the borrower or of other foreign affiliates of the controlling domestic corporation(s).
(2) For a United States branch or agency of a foreign bank, the sum, if positive, of the following:
(i) Net balances due to its foreign bank (including offices thereof located outside the United States) and its international banking facility after deducting an amount equal to 8 per cent of the following: the United States branch’s or agency’s total assets less the sum of (A) cash items in process of collection; (B) unposted debits; (C) demand balances due from depository institutions organized under the laws of the United States and from other foreign banks; (D) balances due from foreign central banks; and (E) positive net balances due from its IBF, its foreign bank, and the foreign bank’s United States and non-United States offices; and
(ii) Assets (including participations) acquired from the United States branch or agency (other than assets required to be sold by Federal or State supervisory authorities) and held by its foreign bank (including offices thereof located outside the United States), by its parent holding company, by non-United States offices or an IBF of an affiliated Edge or Agreement Corporation, or by its IBFs.
(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 § 204.3.
(k)(1) Vault cash means United States currency and coin owned and booked as an asset by a depository institution that may, at any time, be used to satisfy claims of that depository institution’s depositors and that meets the requirements of paragraph (k)(2)(i) or (k)(2)(ii) of this section.
(2) Vault cash must be either:
(i) Held at a physical location of the depository institution (including the depository institution’s proprietary ATMs) from which the institution’s depositors may make cash withdrawals; or
(ii) Held at an alternate physical location if—
(A) The depository institution claiming the currency and coin as vault cash at all times retains full rights of ownership in and to the currency and coin held at the alternate physical location;
(B) The depository institution claiming the currency and coin as vault cash at all times books the currency and coin held at the alternate physical location as an asset of the depository institution;
(C) No other depository institution claims the currency and coin held at the alternate physical location as vault cash in satisfaction of that other depository institution’s reserve requirements;
(D) The currency and coin held at the alternate physical location is reasonably nearby a location of the depository institution claiming the currency and coin as vault cash at which its depositors may make cash withdrawals (an alternate physical location is considered “reasonably nearby” if the depository institution that claims the currency and coin as vault cash can recall the currency and coin from the alternate physical location by 10 a.m. and, relying solely on ground transportation, receive the currency and coin not later than 4 p.m. on the same calendar day at a location of the depository institution at which its depositors may make cash withdrawals); and
(E) The depository institution claiming the currency and coin as vault cash has in place a written cash delivery plan and written contractual arrangements necessary to implement that plan that demonstrate that the currency and coin can be recalled and received in accordance with the requirements of paragraph (k)(2)(ii)(D) of this section at any time. The depository institution shall provide copies of the written cash delivery plan and written contractual arrangements to the Federal Reserve Bank that holds its account or to the Board upon request.
(3) “Vault cash” includes United States currency and coin in transit to a Federal Reserve Bank or a correspondent depository institution for which the reporting depository institution has not yet received credit, and United States currency and coin in transit from a Federal Reserve Bank or a correspondent depository institution when the reporting depository institution’s account at the Federal Reserve or correspondent bank has been charged for such shipment.
(4) Silver and gold coin and other currency and coin whose numismatic or bullion value is substantially in excess of face value is not vault cash for purposes of this part.
(l) Pass-through account means a balance maintained by a depository institution with a correspondent institution under § 204.5(d).
(m)(1) Depository institution means:
(i) Any insured bank as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)) or any bank that is eligible to apply to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
(ii) Any savings bank or mutual savings bank as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(f), (g));
(iii) Any insured credit union as defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752(7)) or any credit union that is eligible to apply to become an insured credit union under section 201 of such Act (12 U.S.C. 1781);
(iv) Any member as defined in section 2 of the Federal Home Loan Bank Act (12 U.S.C. 1422(4)); and
(v) Any insured institution as defined in section 401 of the National Housing Act (12 U.S.C. 1724(a)) or any institution which is eligible to apply to become an insured institution under section 403 of such Act (12 U.S.C. 1726).
(2) Depository institution does not include international organizations such as the World Bank, the Inter-American Development Bank, and the Asian Development Bank.
(n) Member bank means a depository institution that is a member of the Federal Reserve System.
(o) Foreign bank means any bank or other similar institution organized under the laws of any country other than the United States or organized under the laws of Puerto Rico, Guam, American Samoa, the Virgin Islands, or other territory or possession of the United States.
(p) [Reserved]
(q) Affiliate includes any corporation, association, or other organization:
(1) Of which a depository institution, directly or indirectly, owns or controls either a majority of the voting shares or more than 50 percent of the numbers of shares voted for the election of its directors, trustees, or other persons exercising similar functions at the preceding election, or controls in any manner the election of a majority of its directors, trustees, or other persons exercising similar functions;
(2) Of which control is held, directly or indirectly, through stock ownership or in any other manner, by the shareholders of a depository institution who own or control either a majority of the shares of such depository institution or more than 50 percent of the number of shares voted for the election of directors of such depository institution at the preceding election, or by trustees for the benefit of the shareholders of any such depository institution;
(3) Of which a majority of its directors, trustees, or other persons exercising similar functions are directors of any one depository institution; or
(4) Which owns or controls, directly or indirectly, either a majority of the shares of capital stock of a depository institution or more than 50 percent of the number of shares voted for the election of directors, trustees or other persons exercising similar functions of a depository institution at the preceding election, or controls in any manner the election of a majority of the directors, trustees, or other persons exercising similar functions of a depository institution, or for the benefit of whose shareholders or members all or substantially all the capital stock of a depository institution is held by trustees.
(r) United States means the States of the United States and the District of Columbia.
(s) United States resident means (1) any individual residing (at the time of the transaction) in the United States; (2) any corporation, partnership, association or other entity organized in the United States (domestic corporation); and (3) any branch or office located in the United States of any entity that is not organized in the United States.
(t) Any deposit that is payable only at an office located outside the United States means (1) a deposit of a United States resident
(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.
(v)-(x) [Reserved]
(y) Eligible institution means—
(1) Any depository institution as described in § 204.1(c) of this part;
(2) Any trust company;
(3) Any corporation organized under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.) or having an agreement with the Board under section 25 of the Federal Reserve Act (12 U.S.C. 601 et seq.); and
(4) Any branch or agency of a foreign bank (as defined in section 1(b) of the International Banking Act of 1978, 12 U.S.C. 3101(b)).
(z) Excess balance means the average balance maintained in an account at a Federal Reserve Bank by or on behalf of an institution over a reserve maintenance period that exceeds the top of the penalty-free band.
(aa) Excess balance account means an account at a Reserve Bank pursuant to § 204.10(d) of this chapter that is established by one or more eligible institutions through an agent and in which only balances of the participating eligible institutions may at any time be maintained. An excess balance account is not a “pass-through account” for purposes of this part.
(bb) Balance maintained to satisfy a reserve balance requirement means the average balance held in an account at a Federal Reserve Bank by or on behalf of an institution over a reserve maintenance period to satisfy a reserve balance requirement of this part.
(cc) Targeted federal funds rate means the federal funds rate established from time to time by the Federal Open Market Committee.
(dd) Term deposit means those funds of an eligible institution that are maintained by that institution for a specified maturity at a Federal Reserve Bank pursuant to section 204.10(e) of this part.
(ee) Reserve balance requirement means the balance that a depository institution is required to maintain on average over a reserve maintenance period in an account at a Federal Reserve Bank if vault cash does not fully satisfy the depository institution’s reserve requirement imposed by this part.
(ff) Deficiency means the bottom of the penalty-free band less the average balance maintained in an account at a Federal Reserve Bank by or on behalf of an institution over a reserve maintenance period.
(gg) Top of the penalty-free band means an amount equal to an institution’s reserve balance requirement plus an amount that is the greater of 10 percent of the institution’s reserve balance requirement or $50,000. The top of the penalty-free band for a pass-through correspondent is an amount equal to the aggregate reserve balance requirement of the correspondent (if any) and all of its respondents plus an amount that is the greater of 10 percent of that aggregate reserve balance requirement or $50,000.
(hh) Bottom of the penalty-free band means an amount equal to an institution’s reserve balance requirement less an amount that is the greater of 10 percent of the institution’s reserve balance requirement or $50,000. The bottom of the penalty-free band for a pass-through correspondent is an amount equal to the aggregate reserve balance requirement of the correspondent (if any) and all of its respondents less an amount that is the greater of 10 percent of that aggregate reserve balance requirement or $50,000. In no case will the penalty-free band be less than zero.
§ 204.3 Reporting and location.
(a) Every depository institution, U.S. branch or agency of a foreign bank, and Edge or Agreement corporation shall file a report of deposits (or any other form or statement that may be required by the Board or by a Federal Reserve Bank) with the Federal Reserve Bank in the Federal Reserve District in which it is located, regardless of the manner in which it chooses to maintain required reserve balances.
(b) A foreign bank’s U.S. branches and agencies and an Edge or Agreement corporation’s offices operating within the same State and the same Federal Reserve District shall prepare and file a report of deposits on an aggregated basis.
(c) For purposes of this part, the obligations of a majority-owned (50 percent or more) U.S. subsidiary (except an Edge or Agreement corporation) of a depository institution shall be regarded as obligations of the parent depository institution.
(d) A depository institution, a foreign bank, or an Edge or Agreement corporation shall, if possible, assign the low reserve tranche and reserve requirement exemption prescribed in § 204.4(f) to only one office or to a group of offices filing a single aggregated report of deposits. The amount of the reserve requirement exemption allocated to an office or group of offices may not exceed the amount of the low reserve tranche allocated to such office or offices. If the low reserve tranche or reserve requirement exemption cannot be fully utilized by a single office or by a group of offices filing a single report of deposits, the unused portion of the tranche or exemption may be assigned to other offices or groups of offices of the same institution until the amount of the tranche (or net transaction accounts) or exemption (or reservable liabilities) is exhausted. The tranche or exemption may be reallocated each year concurrent with implementation of the indexed tranche and exemption, or, if necessary during the course of the year to avoid underutilization of the tranche or exemption, at the beginning of a reserve computation period.
(e) Computation of transaction accounts. Overdrafts in demand deposit or other transaction accounts are not to be treated as negative demand deposits or negative transaction accounts and shall not be netted since overdrafts are properly reflected on an institution’s books as assets. However, where a customer maintains multiple transaction accounts with a depository institution, overdrafts in one account pursuant to a bona fide cash management arrangement are permitted to be netted against balances in other related transaction accounts for reserve requirement purposes.
(f) The Board and the Federal Reserve Banks will not hold a pass-through correspondent responsible for guaranteeing the accuracy of the reports of deposits submitted by its respondents.
(g)(1) For purposes of this section, a depository institution, a U.S. branch or agency of a foreign bank, or an Edge or Agreement corporation is located in the Federal Reserve District that contains the location specified in the institution’s charter, organizing certificate, license, or articles of incorporation, or as specified by the institution’s primary regulator, or if no such location is specified, the location of its head office, unless otherwise determined by the Board under paragraph (g)(2) of this section.
(2) If the location specified in paragraph (g)(1) of this section, in the Board’s judgment, is ambiguous, would impede the ability of the Board or the Federal Reserve Banks to perform their functions under the Federal Reserve Act, or would impede the ability of the institution to operate efficiently, the Board will determine the Federal Reserve District in which the institution is located, after consultation with the institution and the relevant Federal Reserve Banks. The relevant Federal Reserve Banks are the Federal Reserve Bank whose District contains the location specified in paragraph (g)(1) of this section and the Federal Reserve Bank in whose District the institution is proposed to be located. In making this determination, the Board will consider any applicable laws, the business needs of the institution, the location of the institution’s head office, the locations where the institution performs its business, and the locations that would allow the institution, the Board, and the Federal Reserve Banks to perform their functions efficiently and effectively.
§ 204.4 Computation of required reserves.
(a) In determining the reserve requirement under this part, the amount of cash items in process of collection and balances subject to immediate withdrawal due from other depository institutions located in the United States (including such amounts due from United States branches and agencies of foreign banks and Edge and Agreement corporations) may be deducted from the amount of gross transaction accounts. The amount that may be deducted may not exceed the amount of gross transaction accounts.
(b) United States branches and agencies of a foreign bank may not deduct balances due from another United States branch or agency of the same foreign bank, and United States offices of an Edge or Agreement Corporation may not deduct balances due from another United States office of the same Edge or Agreement Corporation.
(c) Balances “due from other depository institutions” do not include balances due from Federal Reserve Banks, pass-through accounts, or balances (payable in dollars or otherwise) due from banking offices located outside the United States. An institution exercising fiduciary powers may not include in balances “due from other depository institutions” amounts of trust funds deposited with other banks and due to it as a trustee or other fiduciary.
(d) For institutions that file a report of deposits weekly, reserve requirements are computed on the basis of the institution’s daily average balances of deposits and Eurocurrency liabilities during a 14-day computation period ending every second Monday.
(e) For institutions that file a report of deposits quarterly, reserve requirements are computed on the basis of the institution’s daily average balances of deposits and Eurocurrency liabilities during the 7-day computation period that begins on the third Tuesday of March, June, September, and December.
(f) For all depository institutions, Edge and Agreement corporations, and United States branches and agencies of foreign banks, required reserves are computed by applying the reserve requirement ratios in table 1 to this paragraph (f) to net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities of the institution during the computation period.
Table 1 to Paragraph
| Reservable liability | Reserve requirement |
|---|---|
| $0 to reserve requirement exemption amount ($36.1 million). | |
| Over reserve requirement exemption amount ($36.1 million) and up to low reserve tranche ($644.0 million) | 0 percent of amount. |
| Over low reserve tranche ($644.0 million) | $0 plus 0 percent of amount over $644.0 million. |
| Nonpersonal time deposits | 0 percent. |
| Eurocurrency liabilities | 0 percent. |
§ 204.5 Maintenance of required reserves.
(a)(1) A depository institution, a U.S. branch or agency of a foreign bank, and an Edge or Agreement corporation shall satisfy reserve requirements by maintaining vault cash and, if vault cash does not fully satisfy the institution’s reserve requirement, in the form of a balance maintained
(i) In the institution’s account at the Federal Reserve Bank in the Federal Reserve District in which the institution is located, or
(ii) With a pass-through correspondent in accordance with § 204.5(d).
(2) Each individual institution subject to this part is responsible for satisfying its reserve balance requirement, if any, either directly with a Federal Reserve Bank or through a pass-through correspondent.
(b)(1) For institutions that file a report of deposits weekly, the balances maintained to satisfy reserve balance requirements shall be maintained during a 14-day maintenance period that begins on the third Thursday following the end of a given computation period.
(2) For institutions that file a report of deposits quarterly, the balances maintained to satisfy reserve balance requirements shall be maintained during an interval of either six or seven consecutive 14-day maintenance periods, depending on when the interval begins and ends. The interval will begin on the fourth Thursday following the end of each quarterly reporting period if that Thursday is the first day of a 14-day maintenance period. If the fourth Thursday following the end of a quarterly reporting period is not the first day of a 14-day maintenance period, then the interval will begin on the fifth Thursday following the end of the quarterly reporting period. The interval will end on the fourth Wednesday following the end of the subsequent quarterly reporting period if that Wednesday is the last day of a 14-day maintenance period. If the fourth Wednesday following the end of the subsequent quarterly reporting period is not the last day of a 14-day maintenance period, then the interval will conclude on the fifth Wednesday following the end of the subsequent quarterly reporting period.
(c) Cash items forwarded to a Federal Reserve Bank for collection and credit are not included in an institution’s balance maintained to satisfy its reserve balance requirement until the expiration of the time specified in the appropriate time schedule established under Regulation J, “Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire” (12 CFR part 210). If a depository institution draws against items before that time, the charge will be made to its account if the balance is sufficient to pay it; any resulting deficiency in balances maintained to satisfy the institution’s reserve balance requirement will be subject to the penalties provided by law and to the 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 an account for any time for which the Federal Reserve Bank has not received payment in actually and finally collected funds.
(d)(1) A depository institution, a U.S. branch or agency of a foreign bank, or an Edge or Agreement corporation with a reserve balance requirement (“respondent”) may select only one pass-through correspondent under this section, unless otherwise permitted by the Federal Reserve Bank in whose District the respondent is located. Eligible pass-through 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 balances to satisfy their own reserve balance requirements which may be zero, in an account at a Federal Reserve Bank. In addition, the Board reserves the right to permit other institutions, on a case-by-case basis, to serve as pass-through correspondents.
(2) Respondents or correspondents may institute, terminate, or change pass-through correspondent agreements by providing all documentation required for the establishment of the new agreement or termination of or change to the existing agreement to the Federal Reserve Banks involved within the time period specified by those Reserve Banks.
(3) Balances maintained to satisfy reserve balance requirements of a correspondent’s respondents shall be maintained along with the balances maintained to satisfy a correspondent’s reserve balance requirement (if any), in a single commingled account of the correspondent at the Federal Reserve Bank in whose District the correspondent is located. Balances maintained in the correspondent’s account 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 balances maintained to satisfy the reserve balance requirement of a respondent.
(4)(i) A pass-through correspondent shall be responsible for maintaining balances to satisfy its own reserve balance requirement (if any) and the reserve balance requirements of all of its respondents. A charge for any deficiency in the correspondent’s account will be imposed by the Reserve Bank on the correspondent maintaining the account.
(ii) Each correspondent is required to maintain detailed records for each of its respondents that permit Reserve Banks to determine whether the respondent has provided a sufficient funds to the correspondent to satisfy the reserve balance requirement of the respondent. The correspondent shall maintain such records and make such reports as the Board or Reserve Bank may requires in order to ensure the correspondent’s compliance with its responsibilities under this section and shall make them available to the Board or Reserve Bank as required.
(iii) The Federal Reserve Bank may terminate any pass-through agreement under which the correspondent is deficient in its recordkeeping or other responsibilities.
(iv) Interest paid on supplemental reserves (if such reserves are required under § 204.7) held by a respondent will be credited to the account maintained by the correspondent.
§ 204.6 Charges for deficiencies.
(a) Federal Reserve Banks are authorized to assess charges for deficiencies at a rate of 1 percentage point per year above the primary credit rate, as provided in § 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.
(b) Reserve Banks may waive the charges for deficiencies based on an evaluation of the circumstances in each individual case.
(c) In individual cases, where a Federal supervisory authority waives a liquidity requirement, or waives the penalty for failing to satisfy a liquidity requirement, the Reserve Bank in the District where the involved depository institution is located shall waive the reserve requirement imposed under this part for such depository institution when requested by the Federal supervisory authority involved.
(d) Violations of this part may be subject to assessment of civil money penalties by the Board under authority of Section 19(1) of the Federal Reserve Act (12 U.S.C. 505) as implemented in 12 CFR part 263. In addition, the Board and any other Federal financial institution supervisory authority may enforce this part with respect to depository institutions subject to their jurisdiction under authority conferred by law to undertake cease and desist proceedings.
§ 204.7 Supplemental reserve requirement.
(a) Finding by Board. Upon the affirmative vote of at least five members of the Board and after consultation with the Board of Directors of the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, and the National Credit Union Administration Board, the Board may impose a supplemental reserve requirement on every depository institution of not more than 4 percent of its total transaction accounts. A supplemental reserve requirement may be imposed if:
(1) The sole purpose of the requirement is to increase the amount of reserves maintained to a level essential for the conduct of monetary policy;
(2) The requirement is not imposed for the purpose of reducing the cost burdens resulting from the imposition of basic reserve requirements;
(3) Such requirement is not imposed for the purpose of increasing the amount of balances needed for clearing purposes; and
(4) On the date on which supplemental reserve requirements are imposed, the total amount of basic reserve requirements is not less than the amount of reserves that would be required on transaction accounts and nonpersonal time deposits under the initial reserve ratios established by the Monetary Control Act of 1980 (Pub. L. 96-221) in effect on September 1, 1980.
(b) Term. (1) If a supplemental reserve requirement has been imposed for a period of one year or more, the Board shall review and determine the need for continued maintenance of supplemental reserves and shall transmit annual reports to the Congress regarding the need for continuing such requirement.
(2) Any supplemental reserve requirement shall terminate at the close of the first 90-day period after the requirement is imposed during which the average amount of supplemental reserves required are less than the amount of reserves which would be required if the ratios in effect on September 1, 1980, were applied.
(c) Earnings Participation Account. A depository institutions’s supplemental reserve requirement shall be maintained by the Federal Reserve Banks in an Earnings Participation Account. Such balances shall receive earnings to be paid by the Federal Reserve Banks during each calendar quarter at a rate not to exceed the rate earned on the securities portfolio of the Federal Reserve System during the previous calendar quarter. Additional rules and regulations maybe prescribed by the Board concerning the payment of earnings on Earnings Participation Accounts by Federal Reserve Banks.
(d) Report to Congress. The Board shall transmit promptly to the Congress a report stating the basis for exercising its authority to require a supplemental reserve under this section.
(e) Reserve requirements. At present, there are no supplemental reserve requirements imposed under this section.
§ 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,
(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,
(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 § 204.8(a)(2)(i)(B) and § 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 § 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 § 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.
§ 204.9 Emergency reserve requirement.
(a) Finding by Board. The Board may impose, after consulting with the appropriate committees of Congress, additional reserve requirements on depository institutions at any ratio on any liability upon a finding by at least five members of the Board that extraordinary circumstances require such action.
(b) Term. Any action taken under this section shall be valid for a period not exceeding 180 days, and may be extended for further periods of up to 180 days each by affirmative action of at least five members of the Board for each extension.
(c) Reports to Congress. The Board shall transmit promptly to Congress a report of any exercise of its authority under this paragraph and the reasons for the exercise of authority.
(d) Reserve requirements. At present, there are no emergency reserve requirements imposed under this section.
§ 204.10 Payment of interest on balances.
(a) General. (1) Except as provided in paragraph (c) of this section, interest on balances maintained at Federal Reserve Banks by or on behalf of an eligible institution shall be established by the Board in accordance with this section, at a rate or rates not to exceed the general level of short-term interest rates.
(2) For purposes of this section, the amount of a “balance” in an account maintained by or on behalf of an eligible institution at a Federal Reserve Bank is determined at the close of the Federal Reserve Bank’s business day.
(3) For purposes of this section, “short-term interest rates” are rates on obligations with maturities of no more than one year, such as the primary credit rate and rates on term federal funds, term repurchase agreements, commercial paper, term Eurodollar deposits, and other similar instruments.
(4) The payment of interest on balances under this section shall be subject to such other terms and conditions as the Board may prescribe.
(b) Payment of interest. Interest on balances maintained at Federal Reserve Banks by or on behalf of an eligible institution is established as set forth in paragraphs (b)(1) and (2) of this section.
(1) For balances maintained in an eligible institution’s master account, interest is the amount equal to the interest on reserve balances rate (“IORB rate”) on a day multiplied by the total balances maintained on that day. The IORB rate is 5.4 percent.
(2) For term deposits, interest is:
(i) The amount equal to the principal amount of the term deposit multiplied by a rate specified in advance by the Board, in light of existing short-term market rates, to maintain the federal funds rate at a level consistent with monetary policy objectives; or
(ii) The amount equal to the principal amount of the term deposit multiplied by a rate determined by the auction through which such term deposits are offered.
(3) For purposes of § 204.10(b), a “master account” is the record maintained by a Federal Reserve Bank of the debtor-creditor relationship between the Federal Reserve Bank and a single eligible institution with respect to deposit balances of the eligible institution that are maintained with the Federal Reserve Bank. A “master account” is not a “term deposit,” an “excess balance account,” a “joint account,” or any deposit account maintained with a Federal Reserve Bank governed by an agreement that states the account is not a master account.
(c) Pass-through balances. A pass-through correspondent that is an eligible institution may pass back to its respondent interest paid on balances maintained to satisfy a reserve balance requirement of that respondent. In the case of balances maintained by a pass-through correspondent that is not an eligible institution, a Reserve Bank may pay interest only on the balances maintained to satisfy a reserve balance requirement of one or more respondents up to the top of the penalty-free band, and the correspondent shall pass back to its respondents interest paid on balances in the correspondent’s account.
(d) Excess balance accounts. (1) A Reserve Bank may establish an excess balance account for eligible institutions under the provisions of this paragraph (d). Notwithstanding any other provisions of this part, the balances maintained by eligible institutions in an excess balance account represent a liability of the Reserve Bank solely to those participating eligible institutions.
(2) The participating eligible institutions in an excess balance account shall authorize another institution to act as agent of the participating institutions for purposes of general account management, including but not limited to transferring the balances of participating institutions in and out of the excess balance account. An excess balance account must be established at the Reserve Bank where the agent maintains its master account, unless otherwise determined by the Board. The agent may not commingle its own funds in the excess balance account.
(3) Balances maintained in an excess balance account may not be used for general payments or other activities.
(4) Interest on balances of eligible institutions maintained in an excess balance account is the amount equal to the IORB rate in effect on a day multiplied by the total balances maintained on that day.
(5) A Reserve Bank may establish additional terms and conditions consistent with this part with respect to the operation of an excess balance account, including, but not limited to, terms of and fees for services, conditions under which an institution may act as agent for an account, restrictions on the agent with respect to account management, penalties for noncompliance with this section or any terms and conditions, and account termination.
(e) Term deposits. (1) A Federal Reserve Bank may accept term deposits from eligible institutions under the provisions of this paragraph (e) subject to such terms and conditions as the Board may establish from time to time, including but not limited to conditions regarding the maturity of the term deposits being offered, maximum and minimum amounts that may be maintained by an eligible institution in a term deposit, the interest rate or rates offered, early withdrawal of term deposits, pledging term deposits as collateral and, if term deposits are offered through an auction mechanism, the size of the offering, maximum and minimum bid amounts, and other relevant terms.
(2) A term deposit will not satisfy any institution’s reserve balance requirement.
(3) A term deposit may not be used for general payments or settlement activities.
(f) Procedure for determination of rates. The Board anticipates that notice and public participation with respect to changes in the rate or rates of interest to be paid under this section will generally be impracticable, unnecessary, contrary to the public interest, or otherwise not required in the public interest, and that there will generally be reason and good cause in the public interest why the effective date should not be deferred for 30 days. The reason or reasons in such cases are generally expected to include that such notice, public participation, or deferment of effective date would prevent the action from becoming effective as promptly as necessary in the public interest, would permit speculators or others to reap unfair profits or to interfere with the Board’s actions taken with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country, would provoke other consequences contrary to the public interest, would not aid the persons affected, or would otherwise serve no useful purpose.
Interpretations
§ 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.
(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).
(b) (1) Section 19(c)(1) of the Federal Reserve Act, as amended by the Monetary Control Act of 1980 (title I of Pub. L. 96-221) provides that Federal reserve requirements may be satisfied by the maintenance of vault cash or balances in a Federal Reserve Bank. Depository institutions that are not members of the Federal Reserve System may also satisfy reserve requirements by maintaining a balance in another depository institution that maintains required reserve balances at a Federal Reserve Bank, in a Federal Home Loan Bank, or in the National Credit Union Administration Central Liquidity Facility if the balances maintained by such institutions are subsequently passed through to the Federal Reserve Bank.
(2) On August 27, 1980, the Board announced the procedures that will apply to such pass-through arrangements (45 FR 58099). Section 204.3(i)(1) provides that the Board may permit, on a case-by-case basis, depository institutions that are not themselves required to maintain reserves (bankers’ banks) to act as pass-through correspondents if certain criteria are satisfied. The Board has determined that a bankers’ bank may act as a pass-through correspondent if it enters into an agreement with the Federal Reserve to accept responsibility for the maintenance of pass-through reserve accounts in accordance with Regulation D (12 CFR 204.3(i)) and if the Federal Reserve is satisfied that the quality of management and financial resources of the institution are adequate in order to enable the institution to serve as a pass-through correspondent in accordance with Regulation D. Satisfaction of these criteria will assure that pass-through arrangements are maintained properly without additional financial risk to the Federal Reserve.
(3) In order to determine uniformly the adequacy of managerial and financial resources, the Board will consult with the Federal supervisor for the type of institution under consideration. Because the Board does not possess direct experience with supervising depository institutions other than commercial 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.
§ 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 § 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
(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.
§ 204.123 Sale of Federal funds by investment companies or trusts in which the entire beneficial interest is held exclusively by depository institutions.
(a) The Federal Reserve Act, as amended by the Monetary Control Act of 1980 (Title I of Pub. L. 96-221) imposes Federal Reserve requirements on transaction accounts and nonpersonnel time deposits held by depository institutions. The Board is empowered under the Act to determine what types of obligations shall be deemed a deposit. Regulation D—Reserve Requirements of Depository Institutions exempts from the definition of deposit those obligations of a depository institution that are issued or undertaken and held for the account of a domestic office of another depository institution (12 CFR 204.2(a)(1)(vii)(A)(1)). These exemptions from the definition of deposit are known collectively as the Federal funds or interbank exemption.
(b) Title IV of the Depository Institutions Deregulation and Monetary Control Act of 1980 authorizes Federal savings and loan associations to invest in open-ended management investment companies provided the funds’ investment portfolios are limited to the types of investments that a Federal savings and loan association could hold without limit as to percentage of assets (12 U.S.C. 1464(c)(1)(Q)). Such investments include mortgages, U.S. Government and agency securities, securities of states and political subdivisions, sales of Federal funds and deposits held at banks insured by the Federal Deposit Insurance Corporation. The Federal Credit Union Act authorizes Federal credit unions to aggregate their funds in trusts provided the trust is limited to such investments that Federal credit unions could otherwise make. Such investments include loans to credit union members, obligations of the U.S. government or secured by the U.S. government, loans to other credit unions, shares or accounts held at savings and loan associations or mutual savings banks insured by FSLIC or FDIC, sales of Federal funds and shares of any central credit union whose investments are specifically authorized by the board of directors of the Federal credit union making the investment (12 U.S.C. 1757(7)).
(c) The Board has considered whether an investment company or trust whose entire beneficial interest is held by depository institutions, as defined in Regulation D, would be eligible for the Federal funds exemption from Reserve requirements and interest rate limitations. The Board has determined that such investment companies or trusts are eligible to participate in the Federal funds market because, in effect, they act as mere conduits for the holders of their beneficial interest. To be regarded by the Board as acting as a conduit and, thus, be eligible for participation in the Federal funds market, an investment company or trust must meet each of the following conditions:
(1) The entire beneficial interest in the investment company or trust must be held by depository institutions, as defined in Regulation D. These institutions presently may participate directly in the Federal funds market. If the entire beneficial interest in the investment company or trust is held only by depository institutions, the Board will regard the investment company or 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.
(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.
(a) The Federal Reserve Act, as amended by the Monetary Control Act of 1980 (title I of Pub. L. 96-221) imposes Federal reserve requirements on transaction accounts and nonpersonal time deposits held by depository institutions. The Board is empowered under the Act to determine what types of obligations shall be deemed a deposit (12 U.S.C. 461). Regulation D—Reserve Requirements of Depository Institutions exempts from the definition of deposit those obligations of a depository institution that arise from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States government or any agency thereof that the depository institution is obligated to repurchase (12 CFR 204.2(a)(1)(vii)(B)).
(b) The National Bank Act provides that a national bank may purchase for its own account investment securities under limitations and restrictions as the Comptroller may prescribe (12 U.S.C. 24, ¶ 7). The statute defines investment securities to mean marketable obligations evidencing indebtedness of any person in the form of bonds, notes, and debentures. The Act further limits a national bank’s holdings of any one security to no more than an amount equal to 10 percent of the bank’s capital stock and surplus. However, these limitations do not apply to obligations issued by the United States, general obligations of any state and certain obligations of Federal agencies. In addition, generally a national bank is not permitted to purchase for its own account stock of any corporation. These restrictions also apply to state member banks (12 U.S.C. 335).
(c) The Comptroller of the Currency has permitted national banks to purchase for their own accounts shares of open-end investment companies that are purchased and sold at par (i.e., money market mutual funds) provided the portfolios of such companies consist solely of securities that a national bank may purchase directly (Banking Bulletin B-83-58). The Board of Governors has permitted state member banks to purchase, to the extent permitted under applicable state law, shares of money market mutual funds (MMMF) whose portfolios consist solely of securities that the state member bank may purchase directly (12 CFR 208.123).
(d) The Board has determined that an obligation arising from a repurchase agreement involving shares of a MMMF whose portfolio consists wholly of securities of the United States government or any agency thereof
§ 204.125 Foreign, international, and supranational entities referred to in §§ 204.2(c)(1)(iii)(E) and (f)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5).
The entities referred to in §§ 204.2(c)(1)(iii)(E) and (f)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5) are:
§ 204.126 Depository institution participation in “Federal funds” market.
(a) Under § 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 § 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 § 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.
§ 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 § 204.2(a)(1)(vii)(A) of Regulation D. An IDLP transaction is one through which an institution that has sold Federal funds to a depository institution, subsequently sells or participates out that obligation to a nondepository third party without notifying the obligated institution.
(b) The Board’s interpretation regarding Federal funds transactions (12 CFR 204.126) clarified that a depository institutions’s liability must be issued to an exempt institution described in § 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 § 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.
§ 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 § 204.2(t) of Regulation D, 12 CFR 204.2(t).
(c) The Board believes that this exemption from reserve requirements should be limited to deposits in foreign branches as to which the depositor is entitled, under his agreement with the depository institution, to demand payment only outside the United States, regardless of special circumstances. The exemption is intended principally to enable foreign branches of U.S. depository institutions to compete on a more nearly equal basis with banks in foreign countries in accordance with the laws and regulations of those countries. A customer who makes a deposit that is payable solely at a foreign branch of the depository institution assumes whatever risk may exist that the foreign country in which a branch is located might impose restrictions on withdrawals. When payment of a deposit in a foreign branch is guaranteed by a promise of payment at an office in the United States if not paid at the foreign office, the depositor no longer assumes this risk but enjoys substantially the same rights as if the deposit had been made in a U.S. office of the depository institution. To assure the effectiveness of Regulation D and to prevent evasions thereof, the Board considers that such guaranteed foreign-branch deposits must be subject to that regulation.
(d) Accordingly, a deposit in a foreign branch of a depository institution that is guaranteed by a domestic office is subject to the reserve requirements of Regulation D the same as if the deposit had been made in the domestic office. This interpretation is not designed in any respect to prevent the head office of a U.S. bank from repaying borrowings from, making advances to, or supplying capital funds to its foreign branches, subject to Eurocurrency liability reserve requirements.
§ 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 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.
§ 204.131 Participation by a depository institution in the secondary market for its own time deposits.
(a) Background. In 1982, the Board issued an interpretation concerning the effect of a member bank’s purchase of its own time deposits in the secondary market in order to ensure compliance with regulatory restrictions on the payment of interest on time deposits, with the prohibition against payment of interest on demand deposits, and with regulatory requirements designed to distinguish between time deposits and demand deposits for federal reserve requirement purposes (47 FR 37878, Aug. 27, 1982). The interpretation was designed to ensure that the regulatory early withdrawal penalties in Regulation Q used to achieve these three purposes were not evaded through the purchase by a member bank or its affiliate of a time deposit of the member bank prior to the maturity of the deposit.
(b) Because the expiration of the Depository Institutions Deregulation Act (title II of Pub. L. 96-221) on April 1, 1986, removed the authority to set interest rate ceilings on deposits, one of the purposes for adopting the interpretation was eliminated. The removal of the authority to set interest rate ceilings on deposits required the Board to revise the early withdrawal penalties which were also used to distinguish between types of deposits for reserve requirement purposes. Effective April 1, 1986, the Board amended its Regulation D to incorporate early withdrawal penalties applicable to all depository institutions for this purpose (51 FR 9629, Mar. 20, 1986). Although the new early withdrawal penalties differ from the penalties used to enforce interest rate ceilings, secondary market purchases still effectively shorten the maturities of deposits and may be used to evade reserve requirements. This interpretation replaces the prior interpretation and states the application of the new early withdrawal penalties to purchases by depository institutions and their affiliates of the depository institution’s time deposits. The interpretation applies only to situations in which the Board’s regulatory penalties apply.
(c) Secondary market purchases under the rule. The Board has determined that a depository institution purchasing a time deposit it has issued should be regarded as having paid the time deposit prior to maturity. The effect of the transaction is that the depository institution has cancelled a liability as opposed to having acquired an asset for its portfolio. Thus, the depository institution is required to impose any early withdrawal penalty required by Regulation D on the party from whom it purchases the instrument by deducting the amount of the penalty from the purchase price. The Board recognizes, however, that secondary market sales of time deposits are often done without regard to the identity of the original owner of the deposit. Such sales typically involve a pool of time deposits with the price based on the aggregate face value and average rate of return on the deposits. A depository institution purchasing time deposits from persons other than the person to whom the deposit was originally issued should be aware of the parties named on each of the deposits it is purchasing but through failure to inspect the deposits prior to the purchase may not be aware at the time it purchases a pool of time deposits that it originally issued one or more of the deposits in the pool. In such cases, if a purchasing depository institution does not wish to assess an applicable early withdrawal penalty, the deposit may be sold immediately in the secondary market as an alternative to imposing the early withdrawal penalty.
(d) Purchases by affiliates. On a consolidated basis, if an affiliate (as defined in § 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.
§ 204.132 Treatment of loan strip participations.
(a) Effective March 31, 1988, the glossary section of the instructions for the Report of Condition and Income (FFIEC 031-034; OMB control number 7100-0036; available from a depository institution’s primary federal regulator) (Call Report) was amended to clarify that certain short-term loan participation arrangements (sometimes known or styled as loan strips or strip participations) are regarded as borrowings rather than sales for Call Report purposes in certain circumstances. Through this interpretation, the Board is clarifying that such transactions should be treated as deposits for purposes of Regulation D.
(b) These transactions involve the sale (or placement) of a short-term loan by a depository institution that has been made under a long-term commitment of the depository institution to advance funds. For example, a 90-day loan made under a five-year revolving line of credit may be sold to or placed with a third party by the depository institution originating the loan. The depository institution originating the loan is obligated to renew the 90-day note itself (by advancing funds to its customer at the end of the 90-day period) in the event the original participant does not wish to renew the credit. Since, under these arrangements, the depository institution is obligated to make another loan at the end of 90 days (absent any event of default on the part of the borrower), the depository institution selling the loan or participation in effect must buy back the loan or participation at the maturity of the 90-day loan sold to or funded by the purchaser at the option of the purchaser. Accordingly, these transactions bear the essential characteristics of a repurchase agreement and, therefore, are reportable and reservable under Regulation D.
(c) Because many of these transactions give rise to deposit liabilities in the form of promissory notes, acknowledgments of advance or similar obligations (written or oral) as described in § 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 § 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.
§ 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 § 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 § 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:
(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.
(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.
(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.
§ 204.134 Linked time deposits and transaction accounts.
(a) Authority. Under section 19(a) of the Federal Reserve Act (12 U.S.C. 461(a)), the Board is authorized to define the terms used in section 19, and to prescribe regulations to implement and prevent evasions of the requirements of that section. Section 19(b)(2) establishes general reserve requirements on transaction accounts and nonpersonal time deposits. Under section 19(b)(1)(F), the Board also is authorized to determine, by regulation or order, that an account or deposit is a transaction account if such account is used directly or indirectly for the purpose of making payments to third persons or others. This interpretation is adopted under these authorities.
(b) Linked time deposits and transaction accounts. Some depository institutions are offering or proposing to offer account arrangements under which a group of participating depositors maintain transaction accounts and time deposits with a depository institution in an arrangement under which each depositor may draw checks up to the aggregate amount held by that depositor in these accounts. Under this account arrangement, at the end of the day funds over a specified balance in each depositor’s transaction account are swept from the transaction account into a commingled time deposit. A separate time deposit is opened on each business day with the balance of deposits received that day, as well as the proceeds of any time deposit that has matured that day that are not used to pay checks or withdrawals from the transaction accounts. The time deposits, which generally have maturities of seven days, are staggered so that one or more time deposits mature each business day. Funds are apportioned among the various time deposits in a manner calculated to minimize the possibility that the funds available on any given day would be insufficient to pay all items presented.
(1) The time deposits involved in such an arrangement may be held directly by the depositor or indirectly through a trust or other arrangement. The individual depositor’s interest in time deposits may be identifiable, with an agreement by the depositors that balances held in the arrangement may be used to pay checks drawn by other depositors participating in the arrangement, or the depositor may have an undivided interest in a series of time deposits.
(2) Each day funds from the maturing time deposits are available to pay checks or other charges to the depositor’s transaction account. The depository institution’s decision concerning whether to pay checks drawn on an individual depositor’s transaction account is based on the aggregate amount of funds that the depositor has invested in the arrangement, including any amount that may be invested in unmatured time deposits. Only if checks drawn by all participants in the arrangement exceed the total balance of funds available that day (i.e. funds from the time deposit that has matured that day as well as any deposits made to participating accounts during the day) is a time deposit withdrawn prior to maturity so as to incur an early withdrawal penalty. The arrangement may be marketed as providing the customer unlimited access to its funds with a high rate of interest.
(c) Determination. In these arrangements, the aggregate deposit balances of all participants generally vary by a comparatively small amount, allowing the time deposits maturing on any day safely to cover any charges to the depositors’ transaction accounts and avoiding any early withdrawal penalties. Thus, this arrangement substitutes time deposit balances for transaction accounts balances with no practical restrictions on the depositors’ access to their funds, and serves no business purpose other than to allow the payment of higher interest through the avoidance of reserve requirements. As the time deposits may be used to provide funds indirectly for the purposes of making payments or transfers to third persons, the Board has determined that the time deposits should be considered to be transaction accounts for the purposes of Regulation D.
§ 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 (§ 204.3(f)). This deduction is commonly known as the “due from” deduction. In addition, Regulation D at § 204.2(a)(1)(vii)(A) exempts from the definition of “deposit” any liability of a depository institution on a promissory note or similar obligation that is issued or undertaken and held for the account of an office located in the United States of another depository institution. Transactions falling within this exemption from the definition of “deposit” include federal funds or “fed funds” transactions.
(2) Under section 19(b)(2) of the Federal Reserve Act (12 U.S.C. 461(b)(2)), the Board is required to impose reserves of three percent on total transaction deposits at or below an amount determined under a formula. Transaction deposits falling within this amount are in the “low reserve tranche.” Currently the low reserve tranche runs up to $42.2 million. Under section 19(b)(11) of the Federal Reserve Act (12 U.S.C. 461(b)(11)) the Board is also required to impose reserves of zero percent on reservable liabilities at or below an amount determined under a formula. Currently that amount is $3.6 million.
(c) Shifting funds between depository institutions. The Board is aware that certain depository institutions with transaction account balances in an amount greater than the low reserve tranche have entered into transactions with affiliated depository institutions that have transaction account balances below the maximum low reserve tranche amount. These transactions are intended to lower the transaction reserves of the larger depository institution and leave the economic position of the smaller depository institutions unaffected, and have no apparent purpose other than to reduce required reserves of the larger institution. The larger depository institution places funds in a demand deposit at a small domestic depository institution. The larger depository institution considers those funds to be subject to the “due from” deduction, and accordingly reduces its transaction reserves in the amount of the demand deposit. The larger depository institution then reduces its transaction account reserves by 10 percent of the deposited amount. The small depository institution, because it is within the low reserve tranche, must maintain transaction account reserves of 3 percent on the funds deposited by the larger depository institution. The small depository institution then transfers all but 3 percent of the funds deposited by the larger depository institution back to the larger depository institution in a transaction that qualifies as a “fed funds” transaction. The 3 percent not transferred to the larger depository institution is the amount of the larger depository institution’s deposit that the small depository institution must maintain as transaction account reserves. Because the larger depository institution books this second part of the transaction as a “fed funds” transaction, the larger depository institution does not maintain 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.
§ 204.136 Treatment of trust overdrafts for reserve requirement reporting purposes.
(a) Authority. Under section 19(a) of the Federal Reserve Act (12 U.S.C. 461(a)), the Board is authorized to define the terms used in section 19, and to prescribe regulations to implement and prevent evasions of the requirements of that section. Section 19(b) establishes general reserve requirements on transaction accounts and nonpersonal time deposits. Under section 19(b)(1)(F), the Board also is authorized to determine, by regulation or order, that an account or deposit is a transaction account if such account is used directly or indirectly for the purpose of making payments to third persons or others. This interpretation is adopted under these authorities.
(b) Netting of trust account balances. (1) Not all depository institutions have treated overdrafts in trust accounts administered by a trust department in the same manner when calculating the balance in a commingled transaction account in the depository institution for the account of the trust department of the institution. In some cases, depository institutions carry the aggregate of the positive balances in the individual trust accounts as the balance on which reserves are computed for the commingled account. In other cases depository institutions net positive balances in some trust accounts against negative balances in other trust accounts, thus reducing the balance in the commingled account and lowering the reserve requirements. Except in limited circumstances, negative balances in individual trust accounts should not be netted against positive balances in other trust accounts when determining the balance in a trust department’s commingled transaction account maintained in a depository institution’s commercial department. The netting of positive and negative balances has the effect of reducing the aggregate of a commingled transaction account reported by the depository institution to the Federal Reserve and reduces the reserves the institution must hold against transaction accounts under Regulation D. Unless the governing trust agreement or state law authorizes the depository institution, as trustee, to lend money in one trust to another trust, the negative balances in effect, for purposes of Regulation D, represent a loan from the depository institution. Consequently, negative balances in individual trust accounts should not be netted against positive balances in other individual trust accounts, and the balance in any transaction account containing commingled trust balances should reflect positive or zero balances for each individual trust.
(2) For example, where a trust department engages in securities lending activities for trust accounts, overdrafts might occur because of the trust department’s attempt to “normalize” the effects of timing delays between the depository institution’s receipt of the cash collateral from the broker and the trust department’s posting of the transaction to the lending trust account. When securities are lent from a trust customer to a broker that pledges cash as collateral, the broker usually transfers the cash collateral to the depository institution on the day that 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.
PART 205—ELECTRONIC FUND TRANSFERS (REGULATION E)
§ 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.
§ 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 § 205.18.
(3) The term does not include an account held by a financial institution under a bona fide trust agreement.
(c) Act means the Electronic Fund Transfer Act (title IX of the Consumer Credit Protection Act, 15 U.S.C. 1693 et seq.).
(d) Business day means any day on which the offices of the consumer’s financial institution are open to the public for carrying on substantially all business functions.
(e) Consumer means a natural person.
(f) Credit means the right granted by a financial institution to a consumer to defer payment of debt, incur debt and defer its payment, or purchase property or services and defer payment therefor.
(g) Electronic fund transfer is defined in § 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.
§ 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 §§ 205.3(b)(2) and (b)(3), 205.10(b), (d), and (e), 205.13, and 205.20, this part applies to any person.
(b) Electronic fund transfer—(1) Definition. The term electronic fund transfer means any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account. The term includes, but is not limited to—
(i) Point-of-sale transfers;
(ii) Automated teller machine transfers;
(iii) Direct deposits or withdrawals of funds;
(iv) Transfers initiated by telephone; and
(v) Transfers resulting from debit card transactions, whether or not initiated through an electronic terminal.
(2) Electronic fund transfer using information from a check. (i) This part applies where a check, draft, or similar paper instrument is used as a source of information to initiate a one-time electronic fund transfer from a consumer’s account. The consumer must authorize the transfer.
(ii) The person initiating an electronic fund transfer using the consumer’s check as a source of information for the transfer must provide a notice that the transaction will or may be processed as an EFT, and obtain a consumer’s authorization for each transfer. A consumer authorizes a one-time electronic fund transfer (in providing a check to a merchant or other payee for the MICR encoding, that is, the routing number of the financial institution, the consumer’s account number and the serial number) when the consumer receives notice and goes forward with the underlying transaction. For point-of-sale transfers, the notice must be posted in a prominent and conspicuous location, and a copy thereof, or a substantially similar notice, must be provided to the consumer at the time of the transaction.
(iii) The person that initiates an electronic fund transfer using the consumer’s check as a source of information for the transfer shall also provide a notice to the consumer at the same time it provides the notice required under paragraph (b)(2)(ii) that when a check is used to initiate an electronic fund transfer, funds may be debited from the consumer’s account as soon as the same day payment is received, and, as applicable, that the consumer’s check will not be returned by the financial institution holding the consumer’s account. For point-of-sale transfers, the person initiating the transfer may post the notice required in this paragraph (b)(2)(iii) in a prominent and conspicuous location and need not include this notice on the copy of the notice given to the consumer under paragraph (b)(2)(ii). The requirements in this paragraph (b)(2)(iii) shall remain in effect until December 31, 2009.
(iv) A person may provide notices that are substantially similar to those set forth in appendix A-6 to comply with the requirements of this paragraph (b)(2).
(3) Collection of returned item fees via electronic fund transfer—(i) General. The person initiating an electronic fund transfer to collect a fee for the return of an electronic fund transfer or a check that is unpaid, including due to insufficient or uncollected funds in the consumer’s account, must obtain the consumer’s authorization for each transfer. A consumer authorizes a one-time electronic fund transfer from his or her account to pay the fee for the returned item or transfer if the person collecting the fee provides notice to the consumer stating that the person may electronically collect the fee, and the consumer goes forward with the underlying transaction. The notice must state that the fee will be collected by means of an electronic fund transfer from the consumer’s account if the payment is returned unpaid and must disclose the dollar amount of the fee. If the fee may vary due to the amount of the transaction or due to other factors, then, except as otherwise provided in paragraph (b)(3)(ii) of this section, the person collecting the fee may disclose, in place of the dollar amount of the fee, an explanation of how the fee will be determined.
(ii) Point-of-sale transactions. If a fee for an electronic fund transfer or check returned unpaid may be collected electronically in connection with a point-of-sale transaction, the person initiating an electronic fund transfer to collect the fee must post the notice described in paragraph (b)(3)(i) of this section in a prominent and conspicuous location. The person also must either provide the consumer with a copy of the posted notice (or a substantially similar notice) at the time of the transaction, or mail the copy (or a substantially similar notice) to the consumer’s address as soon as reasonably practicable after the person initiates the electronic fund transfer to collect the fee. If the amount of the fee may vary due to the amount of the transaction or due to other factors, the posted notice may explain how the fee will be determined, but the notice provided to the consumer must state the dollar amount of the fee if the amount can be calculated at the time the notice is provided or mailed to the consumer.
(iii) Delayed compliance date for fee disclosure. Through December 31, 2007, the notice required to be provided to consumers under paragraph (b)(3)(ii) of this section in connection with a point-of-sale transaction, whether given to the consumer at the time of the transaction or subsequently mailed to the consumer, need not include either the dollar amount of any fee collected electronically for a check or electronic fund transfer returned unpaid or an explanation of how the amount of the fee will be determined.
(c) Exclusions from coverage. The term electronic fund transfer does not include:
(1) Checks. Any transfer of funds originated by check, draft, or similar paper instrument; or any payment made by check, draft, or similar paper instrument at an electronic terminal.
(2) Check guarantee or authorization. Any transfer of funds that guarantees payment or authorizes acceptance of a check, draft, or similar paper instrument but that does not directly result in a debit or credit to a consumer’s account.
(3) Wire or other similar transfers. Any transfer of funds through Fedwire or through a similar wire transfer system that is used primarily for transfers between financial institutions or between businesses.
(4) Securities and commodities transfers. Any transfer of funds the primary purpose of which is the purchase or sale of a security or commodity, if the security or commodity is:
(i) Regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission;
(ii) Purchased or sold through a broker-dealer regulated by the Securities and Exchange Commission or through a futures commission merchant regulated by the Commodity Futures Trading Commission; or
(iii) Held in book-entry form by a Federal Reserve Bank or federal agency.
(5) Automatic transfers by account-holding institution. Any transfer of funds under an agreement between a consumer and a financial institution which provides that the institution will initiate individual transfers without a specific request from the consumer:
(i) Between a consumer’s accounts within the financial institution;
(ii) From a consumer’s account to an account of a member of the consumer’s family held in the same financial institution; or
(iii) Between a consumer’s account and an account of the financial institution, except that these transfers remain subject to § 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 § 205.10(e) regarding compulsory use and sections 915 and 916 of the act regarding civil and criminal liability.
§ 205.4 General disclosure requirements; jointly offered services.
(a)(1) Form of disclosures. Disclosures required under this part shall be clear and readily understandable, in writing, and in a form the consumer may keep, except as otherwise provided in this part. The disclosures required by this part may be provided to the consumer in electronic form, subject to compliance with the consumer-consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). A financial institution may use commonly accepted or readily understandable abbreviations in complying with the disclosure requirements of this part.
(2) Foreign language disclosures. Disclosures required under this part may be made in a language other than English, provided that the disclosures are made available in English upon the consumer’s request.
(b) Additional information; disclosures required by other laws. A financial institution may include additional information and may combine disclosures required by other laws (such as the Truth in Lending Act (15 U.S.C. 1601 et seq.) or the Truth in Savings Act (12 U.S.C. 4301 et seq.)) with the disclosures required by this part.
(c) Multiple accounts and account holders—(1) Multiple accounts. A financial institution may combine the required disclosures into a single statement for a consumer who holds more than one account at the institution.
(2) Multiple account holders. For joint accounts held by two or more consumers, a financial institution need provide only one set of the required disclosures and may provide them to any of the account holders.
(d) Services offered jointly. Financial institutions that provide electronic fund transfer services jointly may contract among themselves to comply with the requirements that this part imposes on any or all of them. An institution need make only the disclosures required by §§ 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.
§ 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 § 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.
(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 § 205.7(b)(1), (2), and (3). If the unauthorized transfer involved an access device, it must be an accepted access device and the financial institution must have provided a means to identify the consumer to whom it was issued.
(b) Limitations on amount of liability. A consumer’s liability for an unauthorized electronic fund transfer or a series of related unauthorized transfers shall be determined as follows:
(1) Timely notice given. If the consumer notifies the financial institution within two business days after learning of the loss or theft of the access device, the consumer’s liability shall not exceed the lesser of $50 or the amount of unauthorized transfers that occur before notice to the financial institution.
(2) Timely notice not given. If the consumer fails to notify the financial institution within two business days after learning of the loss or theft of the access device, the consumer’s liability shall not exceed the lesser of $500 or the sum of:
(i) $50 or the amount of unauthorized transfers that occur within the two business days, whichever is less; and
(ii) The amount of unauthorized transfers that occur after the close of two business days and before notice to the institution, provided the institution establishes that these transfers would not have occurred had the consumer notified the institution within that two-day period.
(3) Periodic statement; timely notice not given. A consumer must report an unauthorized electronic fund transfer that appears on a periodic statement within 60 days of the financial institution’s transmittal of the statement to avoid liability for subsequent transfers. If the consumer fails to do so, the consumer’s liability shall not exceed the amount of the unauthorized transfers that occur after the close of the 60 days and before notice to the institution, and that the institution establishes would not have occurred had the consumer notified the institution within the 60-day period. When an access device is involved in the unauthorized transfer, the consumer may be liable for other amounts set forth in paragraphs (b)(1) or (b)(2) of this section, as applicable.
(4) Extension of time limits. If the consumer’s delay in notifying the financial institution was due to extenuating circumstances, the institution shall extend the times specified above to a reasonable period.
(5) Notice to financial institution. (i) Notice to a financial institution is given when a consumer takes steps reasonably necessary to provide the institution with the pertinent information, whether or not a particular employee or agent of the institution actually receives the information.
(ii) The consumer may notify the institution in person, by telephone, or in writing.
(iii) Written notice is considered given at the time the consumer mails the notice or delivers it for transmission to the institution by any other usual means. Notice may be considered constructively given when the institution becomes aware of circumstances leading to the reasonable belief that an unauthorized transfer to or from the consumer’s account has been or may be made.
(6) Liability under state law or agreement. If state law or an agreement between the consumer and the financial institution imposes less liability than is provided by this section, the consumer’s liability shall not exceed the amount imposed under the state law or agreement.
§ 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 § 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 § 205.9, and notices regarding preauthorized transfers as provided in §§ 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 § 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 § 205.16(a)(1), when the consumer initiates an electronic fund transfer or makes a balance inquiry, and by any network used to complete the transaction.
(c) Addition of electronic fund transfer services. If an electronic fund transfer service is added to a consumer’s account and is subject to terms and conditions different from those described in the initial disclosures, disclosures for the new service are required.
§ 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 § 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 § 205.9(b).
§ 205.9 Receipts at electronic terminals; periodic statements.
(a) Receipts at electronic terminals—General. Except as provided in paragraph (e) of this section, a financial institution shall make a receipt available to a consumer at the time the consumer initiates an electronic fund transfer at an electronic terminal. The receipt shall set forth the following information, as applicable:
(1) Amount. The amount of the transfer. A transaction fee may be included in this amount, provided the amount of the fee is disclosed on the receipt and displayed on or at the terminal.
(2) Date. The date the consumer initiates the transfer.
(3) Type. The type of transfer and the type of the consumer’s account(s) to or from which funds are transferred. The type of account may be omitted if the access device used is able to access only one account at that terminal.
(4) Identification. A number or code that identifies the consumer’s account or accounts, or the access device used to initiate the transfer. The number or code need not exceed four digits or letters to comply with the requirements of this paragraph (a)(4).
(5) Terminal location. The location of the terminal where the transfer is initiated, or an identification such as a code or terminal number. Except in limited circumstances where all terminals are located in the same city or state, if the location is disclosed, it shall include the city and state or foreign country and one of the following:
(i) The street address; or
(ii) A generally accepted name for the specific location; or
(iii) The name of the owner or operator of the terminal if other than the account-holding institution.
(6) Third party transfer. The name of any third party to or from whom funds are transferred.
(b) Periodic statements. For an account to or from which electronic fund transfers can be made, a financial institution shall send a periodic statement for each monthly cycle in which an electronic fund transfer has occurred; and shall send a periodic statement at least quarterly if no transfer has occurred. The statement shall set forth the following information, as applicable:
(1) Transaction information. For each electronic fund transfer occurring during the cycle:
(i) The amount of the transfer;
(ii) The date the transfer was credited or debited to the consumer’s account;
(iii) The type of transfer and type of account to or from which funds were transferred;
(iv) For a transfer initiated by the consumer at an electronic terminal (except for a deposit of cash or a check, draft, or similar paper instrument), the terminal location described in paragraph (a)(5) of this section; and
(v) The name of any third party to or from whom funds were transferred.
(2) Account number. The number of the account.
(3) Fees. The amount of any fees assessed against the account during the statement period for electronic fund transfers, for the right to make transfers, or for account maintenance.
(4) Account balances. The balance in the account at the beginning and at the close of the statement period.
(5) Address and telephone number for inquiries. The address and telephone number to be used for inquiries or notice of errors, preceded by “Direct inquiries to” or similar language. The address and telephone number provided on an error resolution notice under § 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
§ 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 § 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.
(a) Preauthorized transfers to consumer’s account—(1) Notice by financial institution. When a person initiates preauthorized electronic fund transfers to a consumer’s account at least once every 60 days, the account-holding financial institution shall provide notice to the consumer by:
(i) Positive notice. Providing oral or written notice of the transfer within two business days after the transfer occurs; or
(ii) Negative notice. Providing oral or written notice, within two business days after the date on which the transfer was scheduled to occur, that the transfer did not occur; or
(iii) Readily-available telephone line. Providing a readily available telephone line that the consumer may call to determine whether the transfer occurred and disclosing the telephone number on the initial disclosure of account terms and on each periodic statement.
(2) Notice by payor. A financial institution need not provide notice of a transfer if the payor gives the consumer positive notice that the transfer has been initiated.
(3) Crediting. A financial institution that receives a preauthorized transfer of the type described in paragraph (a)(1) of this section shall credit the amount of the transfer as of the date the funds for the transfer are received.
(b) Written authorization for preauthorized transfers from consumer’s account. Preauthorized electronic fund transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer.
(c) Consumer’s right to stop payment—(1) Notice. A consumer may stop payment of a preauthorized electronic fund transfer from the consumer’s account by notifying the financial institution orally or in writing at least three business days before the scheduled date of the transfer.
(2) Written confirmation. The financial institution may require the consumer to give written confirmation of a stop-payment order within 14 days of an oral notification. An institution that requires written confirmation shall inform the consumer of the requirement and provide the address where confirmation must be sent when the consumer gives the oral notification. An oral stop-payment order ceases to be binding after 14 days if the consumer fails to provide the required written confirmation.
(d) Notice of transfers varying in amount—(1) Notice. When a preauthorized electronic fund transfer from the consumer’s account will vary in amount from the previous transfer under the same authorization or from the preauthorized amount, the designated payee or the financial institution shall send the consumer written notice of the amount and date of the transfer at least 10 days before the scheduled date of transfer.
(2) Range. The designated payee or the institution shall inform the consumer of the right to receive notice of all varying transfers, but may give the consumer the option of receiving notice only when a transfer falls outside a specified range of amounts or only when a transfer differs from the most recent transfer by more than an agreed-upon amount.
(e) Compulsory use—(1) Credit. No financial institution or other person may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer’s account.
(2) Employment or government benefit. No financial institution or other person may require a consumer to establish an account for receipt of electronic fund transfers with a particular institution as a condition of employment or receipt of a government benefit.
§ 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 §§ 205.9 or 205.10(a); or
(vii) The consumer’s request for documentation required by §§ 205.9 or 205.10(a) or for additional information or clarification concerning an electronic fund transfer, including a request the consumer makes to determine whether an error exists under paragraphs (a)(1) (i) through (vi) of this section.
(2) Types of inquiries not covered. The term error does not include:
(i) A routine inquiry about the consumer’s account balance;
(ii) A request for information for tax or other recordkeeping purposes; or
(iii) A request for duplicate copies of documentation.
(b) Notice of error from consumer—(1) Timing; contents. A financial institution shall comply with the requirements of this section with respect to any oral or written notice of error from the consumer that:
(i) Is received by the institution no later than 60 days after the institution sends the periodic statement or provides the passbook documentation, required by § 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 § 205.6(a), the institution may withhold a maximum of $50 from the amount credited. An institution need not provisionally credit the consumer’s account if:
(A) The institution requires but does not receive written confirmation within 10 business days of an oral notice of error; or
(B) The alleged error involves an account that is subject to Regulation T (Securities Credit by Brokers and Dealers, 12 CFR part 220);
(ii) Informs the consumer, within two business days after the provisional crediting, of the amount and date of the provisional crediting and gives the consumer full use of the funds during the investigation;
(iii) Corrects the error, if any, within one business day after determining that an error occurred; and
(iv) Reports the results to the consumer within three business days after completing its investigation (including, if applicable, notice that a provisional credit has been made final).
(3) Extension of time periods. The time periods in paragraphs (c)(1) and (c)(2) of this section are extended as follows:
(i) The applicable time is 20 business days in place of 10 business days under paragraphs (c)(1) and (c)(2) of this section if the notice of error involves an electronic fund transfer to or from the account within 30 days after the first deposit to the account was made.
(ii) The applicable time is 90 days in place of 45 days under paragraph (c)(2) of this section, for completing an investigation, if a notice of error involves an electronic fund transfer that:
(A) Was not initiated within a state;
(B) Resulted from a point-of-sale debit card transaction; or
(C) Occurred within 30 days after the first deposit to the account was made.
(4) Investigation. With the exception of transfers covered by § 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.
§ 205.12 Relation to other laws.
(a) Relation to Truth in Lending. (1) The Electronic Fund Transfer Act and this part govern—
(i) The addition to an accepted credit card as defined in Regulation Z (12 CFR 226.12, comment 12-2), of the capability to initiate electronic fund transfers;
(ii) The issuance of an access device that permits credit extensions (under a preexisting agreement between a consumer and a financial institution) only when the consumer’s account is overdrawn or to maintain a specified minimum balance in the consumer’s account, or under an overdraft service, as defined in § 205.17(a);
(iii) The addition of an overdraft service, as defined in § 205.17(a), to an accepted access device; and
(iv) A consumer’s liability for an unauthorized electronic fund transfer and the investigation of errors involving an extension of credit that occurs under an agreement between the consumer and a financial institution to extend credit when the consumer’s account is overdrawn or to maintain a specified minimum balance in the consumer’s account, or under an overdraft service, as defined in § 205.17(a).
(2) The Truth in Lending Act and Regulation Z (12 CFR part 226), which prohibit the unsolicited issuance of credit cards, govern—
(i) The addition of a credit feature to an accepted access device; and
(ii) Except as provided in paragraph (a)(1)(ii) of this section, the issuance of a credit card that is also an access device.
(b) Preemption of inconsistent state laws—(1) Inconsistent requirements. The Board shall determine, upon its own motion or upon the request of a state, financial institution, or other interested party, whether the act and this part preempt state law relating to electronic fund transfers, or dormancy, inactivity, or service fees, or expiration dates in the case of gift certificates, store gift cards, or general-use prepaid cards.
(2) Standards for determination. State law is inconsistent with the requirements of the act and this part if it:
(i) Requires or permits a practice or act prohibited by the federal law;
(ii) Provides for consumer liability for unauthorized electronic fund transfers that exceeds the limits imposed by the federal law;
(iii) Allows longer time periods than the federal law for investigating and correcting alleged errors, or does not require the financial institution to credit the consumer’s account during an error investigation in accordance with § 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.
§ 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.
§ 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 §§ 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 § 205.9(b) if the following conditions are met:
(i) The debit card (or other access device) issued to the consumer bears the service provider’s name and an address or telephone number for making inquiries or giving notice of error;
(ii) The consumer receives a notice concerning use of the debit card that is substantially similar to the notice contained in appendix A of this part;
(iii) The consumer receives, on or with the receipts required by § 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 § 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 § 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 §§ 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 § 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 § 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 § 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 § 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 § 205.11(d)(2)(ii).
§ 205.15 Electronic fund transfer of government benefits.
(a) Government agency subject to regulation. (1) A government agency is deemed to be a financial institution for purposes of the act and this part if directly or indirectly it issues an access device to a consumer for use in initiating an electronic fund transfer of government benefits from an account, other than needs-tested benefits in a program established under state or local law or administered by a state or local agency. The agency shall comply with all applicable requirements of the act and this part, except as provided in this section.
(2) For purposes of this section, the term account means an account established by a government agency for distributing government benefits to a consumer electronically, such as through automated teller machines or point-of-sale terminals, but does not include an account for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency.
(b) Issuance of access devices. For purposes of this section, a consumer is deemed to request an access device when the consumer applies for government benefits that the agency disburses or will disburse by means of an electronic fund transfer. The agency shall verify the identity of the consumer receiving the device by reasonable means before the device is activated.
(c) Alternative to periodic statement. A government agency need not furnish the periodic statement required by § 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 § 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 § 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 § 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 § 205.8(b).
(3) Limitations on liability. For purposes of § 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 § 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.
§ 205.16 Disclosures at automated teller machines.
(a) Definition. Automated teller machine operator means any person that operates an automated teller machine at which a consumer initiates an electronic fund transfer or a balance inquiry and that does not hold the account to or from which the transfer is made, or about which an inquiry is made.
(b) General. An automated teller machine operator that imposes a fee on a consumer for initiating an electronic fund transfer or a balance inquiry shall:
(1) Provide notice that a fee will be imposed for providing electronic fund transfer services or a balance inquiry; and
(2) Disclose the amount of the fee.
(c) Notice requirement. To meet the requirements of paragraph (b) of this section, an automated teller machine operator must comply with the following:
(1) On the machine. Post in a prominent and conspicuous location on or at the automated teller machine a notice that:
(i) A fee will be imposed for providing electronic fund transfer services or for a balance inquiry; or
(ii) A fee may be imposed for providing electronic fund transfer services or for a balance inquiry, but the notice in this paragraph (c)(1)(ii) may be substituted for the notice in paragraph (c)(1)(i) only if there are circumstances under which a fee will not be imposed for such services; and
(2) Screen or paper notice. Provide the notice required by paragraphs (b)(1) and (b)(2) of this section either by showing it on the screen of the automated teller machine or by providing it on paper, before the consumer is committed to paying a fee.
(d) Temporary exemption. Through December 31, 2004, the notice requirement in paragraph (c)(2) of this section does not apply to any automated teller machine that lacks the technical capability to provide such information.
(e) Imposition of fee. An automated teller machine operator may impose a fee on a consumer for initiating an electronic fund transfer or a balance inquiry only if
(1) The consumer is provided the notices required under paragraph (c) of this section, and
(2) The consumer elects to continue the transaction or inquiry after receiving such notices.
§ 205.17 Requirements for overdraft services.
(a) Definition. For purposes of this section, the term “overdraft service” means a service under which a financial institution assesses a fee or charge on a consumer’s account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account. The term “overdraft service” does not include any payment of overdrafts pursuant to—
(1) A line of credit subject to the Federal Reserve Board’s Regulation Z (12 CFR part 226), including transfers from a credit card account, home equity line of credit, or overdraft line of credit;
(2) A service that transfers funds from another account held individually or jointly by a consumer, such as a savings account; or
(3) A line of credit or other transaction exempt from the Federal Reserve Board’s Regulation Z (12 CFR part 226) pursuant to 12 CFR 226.3(d).
(b) Opt-in requirement—(1) General. Except as provided under paragraph (c) of this section, a financial institution holding a consumer’s account shall not assess a fee or charge on a consumer’s account for paying an ATM or one-time debit card transaction pursuant to the institution’s overdraft service, unless the institution:
(i) Provides the consumer with a notice in writing, or if the consumer agrees, electronically, segregated from all other information, describing the institution’s overdraft service;
(ii) Provides a reasonable opportunity for the consumer to affirmatively consent, or opt in, to the service for ATM and one-time debit card transactions;
(iii) Obtains the consumer’s affirmative consent, or opt-in, to the institution’s payment of ATM or one-time debit card transactions; and
(iv) Provides the consumer with confirmation of the consumer’s consent in writing, or if the consumer agrees, electronically, which includes a statement informing the consumer of the right to revoke such consent.
(2) Conditioning payment of other overdrafts on consumer’s affirmative consent. A financial institution shall not:
(i) Condition the payment of any overdrafts for checks, ACH transactions, and other types of transactions on the consumer affirmatively consenting to the institution’s payment of ATM and one-time debit card transactions pursuant to the institution’s overdraft service; or
(ii) Decline to pay checks, ACH transactions, and other types of transactions that overdraw the consumer’s account because the consumer has not affirmatively consented to the institution’s overdraft service for ATM and one-time debit card transactions.
(3) Same account terms, conditions, and features. A financial institution shall provide to consumers who do not affirmatively consent to the institution’s overdraft service for ATM and one-time debit card transactions the same account terms, conditions, and features that it provides to consumers who affirmatively consent, except for the overdraft service for ATM and one-time debit card transactions.
(c) Timing—(1) Existing account holders. For accounts opened prior to July 1, 2010, the financial institution must not assess any fees or charges on a consumer’s account on or after August 15, 2010 for paying an ATM or one-time debit card transaction pursuant to the overdraft service, unless the institution has complied with § 205.17(b)(1) and obtained the consumer’s affirmative consent.
(2) New account holders. For accounts opened on or after July 1, 2010, the financial institution must comply with § 205.17(b)(1) and obtain the consumer’s affirmative consent before the institution assesses any fee or charge on the consumer’s account for paying an ATM or one-time debit card transaction pursuant to the institution’s overdraft service.
(d) Content and format. The notice required by paragraph (b)(1)(i) of this section shall be substantially similar to Model Form A-9 set forth in Appendix A of this part, include all applicable items in this paragraph, and may not contain any information not specified in or otherwise permitted by this paragraph.
(1) Overdraft service. A brief description of the financial institution’s overdraft service and the types of transactions for which a fee or charge for paying an overdraft may be imposed, including ATM and one-time debit card transactions.
(2) Fees imposed. The dollar amount of any fees or charges assessed by the financial institution for paying an ATM or one-time debit card transaction pursuant to the institution’s overdraft service, including any daily or other overdraft fees. If the amount of the fee is determined on the basis of the number of times the consumer has overdrawn the account, the amount of the overdraft, or other factors, the institution must disclose the maximum fee that may be imposed.
(3) Limits on fees charged. The maximum number of overdraft fees or charges that may be assessed per day, or, if applicable, that there is no limit.
(4) Disclosure of opt-in right. An explanation of the consumer’s right to affirmatively consent to the financial institution’s payment of overdrafts for ATM and one-time debit card transactions pursuant to the institution’s overdraft service, including the methods by which the consumer may consent to the service; and
(5) Alternative plans for covering overdrafts. If the institution offers a line of credit subject to the Board’s Regulation Z (12 CFR part 226) or a service that transfers funds from another account of the consumer held at the institution to cover overdrafts, the institution must state that fact. An institution may, but is not required to, list additional alternatives for the payment of overdrafts.
(6) Permitted modifications and additional content. If applicable, the institution may modify the content required by § 205.17(d) to indicate that the consumer has the right to opt into, or opt out of, the payment of overdrafts under the institution’s overdraft service for other types of transactions, such as checks, ACH transactions, or automatic bill payments; to provide a means for the consumer to exercise this choice; and to disclose the associated returned item fee and that additional merchant fees may apply. The institution may also disclose the consumer’s right to revoke consent. For notices provided to consumers who have opened accounts prior to July 1, 2010, the financial institution may describe the institution’s overdraft service with respect to ATM and one-time debit card transactions with a statement such as “After August 15, 2010, we will not authorize and pay overdrafts for the following types of transactions unless you ask us to (see below).”
(e) Joint relationships. If two or more consumers jointly hold an account, the financial institution shall treat the affirmative consent of any of the joint consumers as affirmative consent for that account. Similarly, the financial institution shall treat a revocation of affirmative consent by any of the joint consumers as revocation of consent for that account.
(f) Continuing right to opt in or to revoke the opt-in. A consumer may affirmatively consent to the financial institution’s overdraft service at any time in the manner described in the notice required by paragraph (b)(1)(i) of this section. A consumer may also revoke consent at any time in the manner made available to the consumer for providing consent. A financial institution must implement a consumer’s revocation of consent as soon as reasonably practicable.
(g) Duration and revocation of opt-in. A consumer’s affirmative consent to the institution’s overdraft service is effective until revoked by the consumer, or unless the financial institution terminates the service.
§ 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 § 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 § 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 § 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 § 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 § 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 § 205.8(b). Alternatively, a financial institution may include on or with each electronic and written history provided in accordance with § 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 § 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 § 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 § 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 § 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.
§ 205.20 Requirements for gift cards and gift certificates.
(a) Definitions. For purposes of this section, except as excluded under paragraph (b), the following definitions apply:
(1) Gift certificate means a card, code, or other device that is:
(i) Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount that may not be increased or reloaded in exchange for payment; and
(ii) Redeemable upon presentation at a single merchant or an affiliated group of merchants for goods or services.
(2) Store gift card means a card, code, or other device that is:
(i) Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount, whether or not that amount may be increased or reloaded, in exchange for payment; and
(ii) Redeemable upon presentation at a single merchant or an affiliated group of merchants for goods or services.
(3) General-use prepaid card means a card, code, or other device that is:
(i) Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount, whether or not that amount may be increased or reloaded, in exchange for payment; and
(ii) Redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or usable at automated teller machines.
(4) Loyalty, award, or promotional gift card means a card, code, or other device that:
(i) Is issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in connection with a loyalty, award, or promotional program;
(ii) Is redeemable upon presentation at one or more merchants for goods or services, or usable at automated teller machines; and
(iii) Sets forth the following disclosures, as applicable:
(A) A statement indicating that the card, code, or other device is issued for loyalty, award, or promotional purposes, which must be included on the front of the card, code, or other device;
(B) The expiration date for the underlying funds, which must be included on the front of the card, code, or other device;
(C) The amount of any fees that may be imposed in connection with the card, code, or other device, and the conditions under which they may be imposed, which must be provided on or with the card, code, or other device; and
(D) A toll-free telephone number and, if one is maintained, a Web site, that a consumer may use to obtain fee information, which must be included on the card, code, or other device.
(5) Dormancy or inactivity fee. The terms “dormancy fee” and “inactivity fee” mean a fee for non-use of or inactivity on a gift certificate, store gift card, or general-use prepaid card.
(6) Service fee. The term “service fee” means a periodic fee for holding or use of a gift certificate, store gift card, or general-use prepaid card. A periodic fee includes any fee that may be imposed on a gift certificate, store gift card, or general-use prepaid card from time to time for holding or using the certificate or card.
(7) Activity. The term “activity” means any action that results in an increase or decrease of the funds underlying a certificate or card, other than the imposition of a fee, or an adjustment due to an error or a reversal of a prior transaction.
(b) Exclusions. The terms “gift certificate,” “store gift card,” and “general-use prepaid card”, as defined in paragraph (a) of this section, do not include any card, code, or other device that is:
(1) Useable solely for telephone services;
(2) Reloadable and not marketed or labeled as a gift card or gift certificate. For purposes of this paragraph (b)(2), the term “reloadable” includes a temporary non-reloadable card issued solely in connection with a reloadable card, code, or other device;
(3) A loyalty, award, or promotional gift card;
(4) Not marketed to the general public;
(5) Issued in paper form only; or
(6) Redeemable solely for admission to events or venues at a particular location or group of affiliated locations, or to obtain goods or services in conjunction with admission to such events or venues, at the event or venue or at specific locations affiliated with and in geographic proximity to the event or venue.
(c) Form of disclosures—(1) Clear and conspicuous. Disclosures made under this section must be clear and conspicuous. The disclosures may contain commonly accepted or readily understandable abbreviations or symbols.
(2) Format. Disclosures made under this section generally must be provided to the consumer in written or electronic form. Except for the disclosures in paragraphs (c)(3) and (h)(2), written and electronic disclosures made under this section must be in a retainable form. Only disclosures provided under paragraphs (c)(3) and (h)(2) of this section may be given orally.
(3) Disclosures prior to purchase. Before a gift certificate, store gift card, or general-use prepaid card is purchased, a person that issues or sells such certificate or card must disclose to the consumer the information required by paragraphs (d)(2), (e)(3), and (f)(1) of this section. The fees and terms and conditions of expiration that are required to be disclosed prior to purchase may not be changed after purchase.
(4) Disclosures on the certificate or card. Disclosures required by paragraphs (a)(4)(iii), (d)(2), (e)(3), and (f)(2) of this section must be made on the certificate or card, or in the case of a loyalty, award, or promotional gift card, on the card, code, or other device. A disclosure made in an accompanying terms and conditions document, on packaging surrounding a certificate or card, or on a sticker or other label affixed to the certificate or card does not constitute a disclosure on the certificate or card. For an electronic certificate or card, disclosures must be provided electronically on the certificate or card provided to the consumer. An issuer that provides a code or confirmation to a consumer orally must provide to the consumer a written or electronic copy of the code or confirmation promptly, and the applicable disclosures must be provided on the written copy of the code or confirmation.
(d) Prohibition on imposition of fees or charges. No person may impose a dormancy, inactivity, or service fee with respect to a gift certificate, store gift card, or general-use prepaid card, unless:
(1) There has been no activity with respect to the certificate or card, in the one-year period ending on the date on which the fee is imposed;
(2) The following are stated, as applicable, clearly and conspicuously on the gift certificate, store gift card, or general-use prepaid card:
(i) The amount of any dormancy, inactivity, or service fee that may be charged;
(ii) How often such fee may be assessed; and
(iii) That such fee may be assessed for inactivity; and
(3) Not more than one dormancy, inactivity, or service fee is imposed in any given calendar month.
(e) Prohibition on sale of gift certificates or cards with expiration dates. No person may sell or issue a gift certificate, store gift card, or general-use prepaid card with an expiration date, unless:
(1) The person has established policies and procedures to provide consumers with a reasonable opportunity to purchase a certificate or card with at least five years remaining until the certificate or card expiration date;
(2) The expiration date for the underlying funds is at least the later of:
(i) Five years after the date the gift certificate was initially issued, or the date on which funds were last loaded to a store gift card or general-use prepaid card; or
(ii) The certificate or card expiration date, if any;
(3) The following disclosures are provided on the certificate or card, as applicable:
(i) The expiration date for the underlying funds or, if the underlying funds do not expire, that fact;
(ii) A toll-free telephone number and, if one is maintained, a Web site that a consumer may use to obtain a replacement certificate or card after the certificate or card expires if the underlying funds may be available; and
(iii) Except where a non-reloadable certificate or card bears an expiration date that is at least seven years from the date of manufacture, a statement, disclosed with equal prominence and in close proximity to the certificate or card expiration date, that:
(A) The certificate or card expires, but the underlying funds either do not expire or expire later than the certificate or card, and;
(B) The consumer may contact the issuer for a replacement card; and
(4) No fee or charge is imposed on the cardholder for replacing the gift certificate, store gift card, or general-use prepaid card or for providing the certificate or card holder with the remaining balance in some other manner prior to the funds expiration date, unless such certificate or card has been lost or stolen.
(f) Additional disclosure requirements for gift certificates or cards. The following disclosures must be provided in connection with a gift certificate, store gift card, or general-use prepaid card, as applicable:
(1) Fee disclosures. For each type of fee that may be imposed in connection with the certificate or card (other than a dormancy, inactivity, or service fee subject to the disclosure requirements under paragraph (d)(2) of this section), the following information must be provided on or with the certificate or card:
(i) The type of fee;
(ii) The amount of the fee (or an explanation of how the fee will be determined); and
(iii) The conditions under which the fee may be imposed.
(2) Telephone number for fee information. A toll-free telephone number and, if one is maintained, a Web site, that a consumer may use to obtain information about fees described in paragraphs (d)(2) and (f)(1) of this section must be disclosed on the certificate or card.
(g) Compliance dates—(1) Effective date for gift certificates, store gift cards, and general-use prepaid cards. Except as provided in paragraph (h), the requirements of this section apply to any gift certificate, store gift card, or general-use prepaid card sold to a consumer on or after August 22, 2010, or provided to a consumer as a replacement for such certificate or card.
(2) Effective date for loyalty, award, or promotional gift cards. The requirements in paragraph (a)(4)(iii) apply to any card, code, or other device provided to a consumer in connection with a loyalty, award, or promotional program if the period of eligibility for such program began on or after August 22, 2010.
(h) Temporary exemption—(1) Delayed effective date. For any gift certificate, store gift card, or general-use prepaid card produced prior to April 1, 2010, the effective date of the requirements of paragraphs (c)(3), (d)(2), (e)(1), (e)(3), and (f) of this section is January 31, 2011, provided that an issuer of such certificate or card:
(i) Complies with all other provisions of this section;
(ii) Does not impose an expiration date with respect to the funds underlying such certificate or card;
(iii) At the consumer’s request, replaces such certificate or card if it has funds remaining at no cost to the consumer; and
(iv) Satisfies the requirements of paragraph (h)(2) of this section.
(2) Additional disclosures. Issuers relying on the delayed effective date in § 205.20(h)(1) must disclose through in-store signage, messages during customer service calls, Web sites, and general advertising, that:
(i) The underlying funds of such certificate or card do not expire;
(ii) Consumers holding such certificate or card have a right to a free replacement certificate or card, which must be accompanied by the packaging and materials typically associated with such certificate or card; and
(iii) Any dormancy, inactivity, or service fee for such certificate or card that might otherwise be charged will not be charged if such fees do not comply with Section 915 of the Electronic Fund Transfer Act.
(3) Expiration of additional disclosure requirements. The disclosures in paragraph (h)(2) of this section:
(i) Are not required to be provided on or after January 31, 2011, with respect to in-store signage and general advertising.
(ii) Are not required to be provided on or after January 31, 2013, with respect to messages during customer service calls and Web sites.
Appendix A to Part 205—Model Disclosure Clauses and Forms
(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) Consumer Liability (§ 205.7(b)(1)).
(Tell us AT ONCE if you believe your [card] [code] has been lost or stolen, or if you believe that an electronic fund transfer has been made without your permission using information from your check. Telephoning is the best way of keeping your possible losses down. You could lose all the money in your account (plus your maximum overdraft line of credit). If you tell us within 2 business days after you learn of the loss or theft of your [card] [code], you can lose no more than $50 if someone used your [card][code] without your permission.)
If you do NOT tell us within 2 business days after you learn of the loss or theft of your [card] [code], and we can prove we could have stopped someone from using your [card] [code] without your permission if you had told us, you could lose as much as $500.
Also, if your statement shows transfers that you did not make, including those made by card, code or other means, tell us at once. If you do not tell us within 60 days after the statement was mailed to you, you may not get back any money you lost after the 60 days if we can prove that we could have stopped someone from taking the money if you had told us in time. If a good reason (such as a long trip or a hospital stay) kept you from telling us, we will extend the time periods.
(b) Contact in event of unauthorized transfer (§ 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 (§ 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 (§ 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 (§ 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 (§ 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 (§ 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 (§ 205.7(b) (6), (7) and (8); § 205.10(d))—(1) Right to stop payment and procedure for doing so. If you have told us in advance to make regular payments out of your account, you can stop any of these payments. Here’s how:
Call us at [insert telephone number], or write us at [insert address], in time for us to receive your request 3 business days or more before the payment is scheduled to be made. If you call, we may also require you to put your request in writing and get it to us within 14 days after you call. (We will charge you [insert amount] for each stop-payment order you give.)
(2) Notice of varying amounts. If these regular payments may vary in amount, [we] [the person you are going to pay] will tell you, 10 days before each payment, when it will be made and how much it will be. (You may choose instead to get this notice only when the payment would differ by more than a certain amount from the previous payment, or when the amount would fall outside certain limits that you set.)
(3) Liability for failure to stop payment of preauthorized transfer. If you order us to stop one of these payments 3 business days or more before the transfer is scheduled, and we do not do so, we will be liable for your losses or damages.
(i) Financial institution’s liability (§ 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 (§ 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) Initial and annual error resolution notice (§§ 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 (§ 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.
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) Disclosure by government agencies of information about obtaining account balances and account histories (§ 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 (§ 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.
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].
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.
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).]
When we use information from your check to make an electronic fund transfer, funds may be withdrawn from your account as soon as the same day [you make] [we receive] your payment[, and you will not receive your check back from your financial institution].
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].
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]].
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]: [________________].]
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).
District office of the Office of the Comptroller of the Currency where the institution is located.
Federal Reserve Bank serving the District in which the institution is located.
Federal Deposit Insurance Corporation regional director for the region in which the institution is located.
Office of Thrift Supervision Regional Director for the region in which the institution is located.
Division of Consumer Affairs, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428
Assistant General Counsel for Aviation Enforcement and Proceedings, Department of Transportation, 400 Seventh Street, S.W., Washington, D.C. 20590.
Division of Market Regulation, Securities and Exchange Commission, Washington, D.C. 20549.
Federal Trade Commission, Electronic Fund Transfers, Washington, D.C. 20580.
Appendix C to Part 205—Issuance of 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.
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.
No staff interpretations will be issued approving financial institutions’ forms or statements. This restriction does not apply to forms or statements whose use is required or sanctioned by a government agency.
Supplement I to Part 205—Official Staff Interpretations
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.)
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 § 205.3(c)(5) because all electronic transfers to or from the account have been preauthorized by the consumer and involve another account of the consumer at the same institution.
ii. A retail repurchase agreement (repo), which is a loan made to a financial institution by a consumer that is collateralized by government or government-insured securities.
2. 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 § 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.
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.
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.
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 § 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.
1. Advance authorization. A “preauthorized electronic fund transfer” under Regulation E is one authorized by the consumer in advance of a transfer that will take place on a recurring basis, at substantially regular intervals, and will require no further action by the consumer to initiate the transfer. In a bill-payment system, for example, if the consumer authorizes a financial institution to make monthly payments to a payee by means of EFTs, and the payments take place without further action by the consumer, the payments are preauthorized EFTs. In contrast, if the consumer must take action each month to initiate a payment (such as by entering instructions on a touch-tone telephone or home computer), the payments are not preauthorized EFTs.
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).
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 § 205.2(l).
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 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.
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.
1. Fees imposed by account-holding institution. The requirement to obtain a consumer’s authorization to collect a fee via EFT for the return of an EFT or check unpaid applies only to the person that intends to initiate an EFT to collect the returned item fee from the consumer’s account. The authorization requirement does not apply to any fees assessed by the consumer’s account-holding financial institution when it returns the unpaid underlying EFT or check or pays the amount of an overdraft.
2. Accounts receivable transactions. In an accounts receivable (ARC) transaction where a consumer sends in a payment for amounts owed (or makes an in-person payment at a biller’s physical location, such as when a consumer makes a loan payment at a bank branch or places a payment in a dropbox), a person seeking to electronically collect a fee for items returned unpaid must obtain the consumer’s authorization to collect the fee in this manner. A consumer authorizes a person to electronically collect a returned item fee when the consumer receives notice, typically on an invoice or statement, that the person may collect the fee through an EFT to the consumer’s account, and the consumer goes forward with the underlying transaction by providing payment. The notice must also state the dollar amount of the fee. However, an explanation of how that fee will be determined may be provided in place of the dollar amount of the fee if the fee may vary due to the amount of the transaction or due to other factors, such as the number of days the underlying transaction is left outstanding. For example, if a state law permits a maximum fee of $30 or 10% of the underlying transaction, whichever is greater, the person collecting the fee may explain how the fee is determined, rather than state a specific dollar amount for the fee.
3. Disclosure of dollar amount of fee for POS transactions. The notice provided to the consumer in connection with a POS transaction under § 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 § 205.3(b)(3) through third parties, such as merchants.
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.
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.
1. Fedwire and ACH. If a financial institution makes a fund transfer to a consumer’s account after receiving funds through Fedwire or a similar network, the transfer by ACH is covered by the regulation even though the Fedwire or network transfer is exempt.
2. Article 4A. Financial institutions that offer telephone-initiated Fedwire payments are subject to the requirements of UCC section 4A-202, which encourages verification of Fedwire payment orders pursuant to a security procedure established by agreement between the consumer and the receiving bank. These transfers are not subject to Regulation E and the agreement is not considered a telephone plan if the service is offered separately from a telephone bill-payment or other prearranged plan subject to Regulation E. The Board’s Regulation J (12 CFR part 210) specifies the rules applicable to funds handled by Federal Reserve Banks. To ensure that the rules for all fund transfers through Fedwire are consistent, the Board used its preemptive authority under UCC section 4A-107 to determine that subpart B of Regulation J (12 CFR part 210), including the provisions of Article 4A, applies to all fund transfers through Fedwire, even if a portion of the fund transfer is governed by the EFTA. The portion of the fund transfer that is governed by the EFTA is not governed by subpart B of Regulation J (12 CFR part 210).
3. Similar fund transfer systems. Fund transfer systems that are similar to Fedwire include the Clearing House Interbank Payments System (CHIPS), Society for Worldwide Interbank Financial Telecommunication (SWIFT), Telex, and transfers made on the books of correspondent banks.
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).
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.
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.
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 § 205.10(e), and are therefore exempt from UCC Article 4A.
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.
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.
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).
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 § 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.
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 § 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.
1. Means of identification. A financial institution may use various means for identifying the consumer to whom the access device is issued, including but not limited to:
i. Electronic or mechanical confirmation (such as a PIN).
ii. Comparison of the consumer’s signature, fingerprint, or photograph.
2. Multiple users. When more than one access device is issued for an account, the financial institution may, but need not, provide a separate means to identify each user of the account.
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.
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.
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).
1. Unlimited liability applies. The standard of unlimited liability applies if unauthorized transfers appear on a periodic statement, and may apply in conjunction with the first two tiers of liability. If a periodic statement shows an unauthorized transfer made with a lost or stolen debit card, the consumer must notify the financial institution within 60 calendar days after the periodic statement was sent; otherwise, the consumer faces unlimited liability for all unauthorized transfers made after the 60-day period. The consumer’s liability for unauthorized transfers before the statement is sent, and up to 60 days following, is determined based on the first two tiers of liability: up to $50 if the consumer notifies the financial institution within two business days of learning of the loss or theft of the card and up to $500 if the consumer notifies the institution after two business days of learning of the loss or theft.
2. Transfers not involving access device. The first two tiers of liability do not apply to unauthorized transfers from a consumer’s account made without an access device. If, however, the consumer fails to report such unauthorized transfers within 60 calendar days of the financial institution’s transmittal of the periodic statement, the consumer may be liable for any transfers occurring after the close of the 60 days and before notice is given to the institution. For example, a consumer’s account is electronically debited for $200 without the consumer’s authorization and by means other than the consumer’s access device. If the consumer notifies the institution within 60 days of the transmittal of the periodic statement that shows the unauthorized transfer, the consumer has no liability. However, if in addition to the $200, the consumer’s account is debited for a $400 unauthorized transfer on the 61st day and the consumer fails to notify the institution of the first unauthorized transfer until the 62nd day, the consumer may be liable for the full $400.
1. Extenuating circumstances. Examples of circumstances that require extension of the notification periods under this section include the consumer’s extended travel or hospitalization.
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.
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.
1. No liability imposed by financial institution. If a financial institution chooses to impose zero liability for unauthorized EFTs, it need not provide the liability disclosures. If the institution later decides to impose liability, however, it must first provide the disclosures.
2. Preauthorized transfers. If the only EFTs from an account are preauthorized transfers, liability could arise if the consumer fails to report unauthorized transfers reflected on a periodic statement. To impose such liability on the consumer, the institution must have disclosed the potential liability and the telephone number and address for reporting unauthorized transfers.
3. Additional information. At the institution’s option, the summary of the consumer’s liability may include advice on promptly reporting unauthorized transfers or the loss or theft of the access device.
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.
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.)
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 § 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.)
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.
1. Substantially similar. The error resolution notice must be substantially similar to the model form in appendix A of part 205. An institution may use different wording so long as the substance of the notice remains the same, may delete inapplicable provisions (for example, the requirement for written confirmation of an oral notification), and may substitute substantive state law requirements affording greater consumer protection than Regulation E.
2. Extended time-period for certain transactions. To take advantage of the longer time periods for resolving errors under § 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 § 205.11(c)(2) for accounts subject to Regulation T (12 CFR part 220) must have disclosed accordingly.
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.)
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 § 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 § 205.6. (See also § 205.6(a) and the related commentary.)
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 § 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.
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.
1. Disclosure of transaction fee. The required display of a fee amount on or at the terminal may be accomplished by displaying the fee on a sign at the terminal or on the terminal screen for a reasonable duration. Displaying the fee on a screen provides adequate notice, as long as a consumer is given the option to cancel the transaction after receiving notice of a fee. (See § 205.16 for the notice requirements applicable to ATM operators that impose a fee for providing EFT services.)
2. Relationship between § 205.9(a)(1) and § 205.16. The requirements of §§ 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 § 205.9(a)(1) cannot be used to comply with the alternative paper disclosure procedure under § 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 § 205.16 applies only to ATMs.
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.
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.
1. Options for identifying terminal. The institution may provide either:
i. The city, state or foreign country, and the information in §§ 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.
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.
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.
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.
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.
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 § 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.
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.
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.
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.
1. Nonproprietary terminal in network. An institution need not reflect on the periodic statement the street addresses, identification codes, or terminal numbers for transfers initiated in a shared or interchange system at a terminal operated by an institution other than the account-holding institution. The statement must, however, specify the entity that owns or operates the terminal, plus the city and state.
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.
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.
1. Opening and closing balances. The opening and closing balances must reflect both EFTs and other account activity.
1. Telephone number. A single telephone number, preceded by the “direct inquiries to” language, will satisfy the requirements of § 205.9(b)(5) and (6).
1. Telephone number. See comment 9(b)(5)-1.
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.
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.)
1. Foreign-initiated transfers. An institution must make a good faith effort to provide all required information for foreign-initiated transfers. For example, even if the institution is not able to provide a specific terminal location, it should identify the country and city in which the transfer was initiated.
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.
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 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.
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.
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.
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.
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.
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.
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 § 205.9(e) is not an error for purposes of §§ 205.11(a)(1)(vi) or (vii).
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 § 205.6 before it may impose any liability on the consumer.
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 is delayed beyond 10 business days in getting to the right place because it was sent to the wrong address.
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 § 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 §§ 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 § 205.11(a)(1)(vii) by transmitting the requested information, clarification, or documentation within the time limits set forth in § 205.11(c). If the institution has provisionally credited the consumer’s account in accordance with § 205.11(c)(2), it may debit the amount upon transmitting the requested information, clarification, or documentation.
1. Compliance with all requirements. Financial institutions exempted from provisionally crediting a consumer’s account under § 205.11(c)(2)(i) (A) and (B) must still comply with all other requirements of § 205.11.
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.
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 § 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 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.
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 § 205.11 (c) and (d), as relevant. The institution may give the notice of correction and the explanation separately or in a combined form.
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.
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 § 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.
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.
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 §§ 226.13 (d) and (g) of Regulation Z (which apply because of the extension of credit associated with the overdraft feature on the checking account). If a consumer’s access device is also a credit card and the device is used to make unauthorized withdrawals from a checking account, but also is used to obtain unauthorized cash advances directly from a line of credit that is separate from the checking account, both Regulation E and Regulation Z apply.
ii. The following examples illustrate these principles:
A. A consumer has a card that can be used either as a credit card or a debit card. When used as a debit card, the card draws on the consumer’s checking account. When used as a credit card, the card draws only on a separate line of credit. If the card is stolen and used as a credit card to make purchases or to get cash advances at an ATM from the line of credit, the liability limits and error resolution provisions of Regulation Z apply; Regulation E does not apply.
B. In the same situation, if the card is stolen and is used as a debit card to make purchases or to get cash withdrawals at an ATM from the checking account, the liability limits and error resolution provisions of Regulation E apply; Regulation Z does not apply.
C. In the same situation, assume the card is stolen and used both as a debit card and as a credit card; for example, the thief makes some purchases using the card as a debit card, and other purchases using the card as a credit card. Here, the liability limits and error resolution provisions of Regulation E apply to the unauthorized transactions in which the card was used as a debit card, and the corresponding provisions of Regulation Z apply to the unauthorized transactions in which the card was used as a credit card.
D. Assume a somewhat different type of card, one that draws on the consumer’s checking account and can also draw on an overdraft line of credit attached to the checking account. There is no separate line of credit, only the overdraft line, associated with the card. In this situation, if the card is stolen and used, the liability limits and the error resolution provisions of Regulation E apply. In addition, if the use of the card has resulted in accessing the overdraft line of credit, the error resolution provisions of § 226.13(d) and (g) of Regulation Z also apply, but not the other error resolution provisions of Regulation Z.
2. Issuance rules. For access devices that also constitute credit cards, the issuance rules of Regulation E apply if the only credit feature is a preexisting credit line attached to the asset account to cover overdrafts (or to maintain a specified minimum balance) or an overdraft service, as defined in § 205.17(a). Regulation Z (12 CFR part 226) rules apply if there is another type of credit feature; for example, one permitting direct extensions of credit that do not involve the asset account.
3. Overdraft service. The addition of an overdraft service, as that term is defined in § 205.17(a), to an accepted access device does not constitute the addition of a credit feature subject to Regulation Z. Instead, the provisions of Regulation E apply, including the liability limitations (§ 205.6) and the requirement to obtain consumer consent to the service before any fees or charges for paying an overdraft may be assessed on the account (§ 205.17).
1. Specific determinations. The regulation prescribes standards for determining whether state laws that govern EFTs, and state laws regarding gift certificates, store gift cards, or general-use prepaid cards that govern dormancy, inactivity, or service fees, or expiration dates, are preempted by the act and the regulation. A state law that is inconsistent may be preempted even if the Board has not issued a determination. However, nothing in § 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 § 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 § 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 § 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.
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.
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 § 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, § 205.14 can apply to an institution that issues a code for initiating telephone transfers to be carried out through the ACH from a consumer’s account at another institution. This is the case even if the consumer has accounts at both institutions.
2. ACH agreements. The ACH rules generally do not constitute an agreement for purposes of this section. However, an ACH agreement under which members specifically agree to honor each other’s debit cards is an “agreement,” and thus this section does not apply.
1. Liability. The service provider is liable for unauthorized EFTs that exceed limits on the consumer’s liability under § 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.
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 § 205.11 as modified by § 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.
1. Periodic statements from account-holding institution. The periodic statement provided by the account-holding institution need only contain the information required by § 205.9(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.
1. Exempt securities- and commodities-related lines of credit. The definition of “overdraft service” does not include the payment of transactions in a securities or commodities account pursuant to which credit is extended by a broker-dealer registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission.
1. Scope.
i. Account-holding institutions. Section 205.17(b) applies to ATM and one-time debit card transactions made with a debit card issued by or on behalf of the account-holding institution. Section 205.17(b) does not apply to ATM and one-time debit card transactions made with a debit card issued by or through a third party unless the debit card is issued on behalf of the account-holding institution.
ii. Coding of transactions. A financial institution complies with the rule if it adapts its systems to identify debit card transactions as either one-time or recurring. If it does so, the financial institution may rely on the transaction’s coding by merchants, other institutions, and other third parties as a one-time or a preauthorized or recurring debit card transaction.
iii. One-time debit card transactions. The opt-in applies to any one-time debit card transaction, whether the card is used, for example, at a point-of-sale, in an on-line transaction, or in a telephone transaction.
iv. Application of fee prohibition. The prohibition on assessing overdraft fees under § 205.17(b)(1) applies to all institutions. For example, the prohibition applies to an institution that has a policy and practice of declining to authorize and pay any ATM or one-time debit card transactions when the institution has a reasonable belief at the time of the authorization request that the consumer does not have sufficient funds available to cover the transaction. However, the institution is not required to comply with §§ 205.17(b)(1)(i)-(iv), including the notice and opt-in requirements, if it does not assess overdraft fees for paying ATM or one-time debit card transactions that overdraw the consumer’s account. Assume an institution does not provide an opt-in notice, but authorizes an ATM or one-time debit card transaction on the reasonable belief that the consumer has sufficient funds in the account to cover the transaction. If, at settlement, the consumer has insufficient funds in the account (for example, due to intervening transactions that post to the consumer’s account), the institution is not permitted to assess an overdraft fee or charge for paying that transaction.
2. No affirmative consent. A financial institution may pay overdrafts for ATM and one-time debit card transactions even if a consumer has not affirmatively consented or opted in to the institution’s overdraft service. If the institution pays such an overdraft without the consumer’s affirmative consent, however, it may not impose a fee or charge for doing so. These provisions do not limit the institution’s ability to debit the consumer’s account for the amount overdrawn if the institution is permitted to do so under applicable law.
3. Overdraft transactions not required to be authorized or paid. Section 205.17 does not require a financial institution to authorize or pay an overdraft on an ATM or one-time debit card transaction even if the consumer has affirmatively consented to an institution’s overdraft service for such transactions.
4. Reasonable opportunity to provide affirmative consent. A financial institution provides a consumer with a reasonable opportunity to provide affirmative consent when, among other things, it provides reasonable methods by which the consumer may affirmatively consent. A financial institution provides such reasonable methods, if—
i. By mail. The institution provides a form for the consumer to fill out and mail to affirmatively consent to the service.
ii. By telephone. The institution provides a readily-available telephone line that consumers may call to provide affirmative consent.
iii. By electronic means. The institution provides an electronic means for the consumer to affirmatively consent. For example, the institution could provide a form that can be accessed and processed at its Web site, where the consumer may click on a check box to provide consent and confirm that choice by clicking on a button that affirms the consumer’s consent.
iv. In person. The institution provides a form for the consumer to complete and present at a branch or office to affirmatively consent to the service.
5. Implementing opt-in at account-opening. A financial institution may provide notice regarding the institution’s overdraft service prior to or at account-opening. A financial institution may require a consumer, as a necessary step to opening an account, to choose whether or not to opt into the payment of ATM or one-time debit card transactions pursuant to the institution’s overdraft service. For example, the institution could require the consumer, at account opening, to sign a signature line or check a box on a form (consistent with comment 17(b)-6) indicating whether or not the consumer affirmatively consents at account opening. If the consumer does not check any box or provide a signature, the institution must assume that the consumer does not opt in. Or, the institution could require the consumer to choose between an account that does not permit the payment of ATM or one-time debit card transactions pursuant to the institution’s overdraft service and an account that permits the payment of such overdrafts, provided that the accounts comply with § 205.17(b)(2) and § 205.17(b)(3).
6. Affirmative consent required. A consumer’s affirmative consent, or opt-in, to a financial institution’s overdraft service must be obtained separately from other consents or acknowledgements obtained by the institution, including a consent to receive disclosures electronically. An institution may obtain a consumer’s affirmative consent by providing a blank signature line or check box that the consumer could sign or select to affirmatively consent, provided that the signature line or check box is used solely for purposes of evidencing the consumer’s choice whether or not to opt into the overdraft service and not for other purposes. An institution does not obtain a consumer’s affirmative consent by including preprinted language about the overdraft service in an account disclosure provided with a signature card or contract that the consumer must sign to open the account and that acknowledges the consumer’s acceptance of the account terms. Nor does an institution obtain a consumer’s affirmative consent by providing a signature card that contains a pre-selected check box indicating that the consumer is requesting the service.
7. Confirmation. A financial institution may comply with the requirement in § 205.17(b)(1)(iv) to provide confirmation of the consumer’s affirmative consent by mailing or delivering to the consumer a copy of the consumer’s completed opt-in notice, or by mailing or delivering a letter or notice to the consumer acknowledging that the consumer has elected to opt into the institution’s service. The confirmation, which must be provided in writing, or electronically if the consumer agrees, must include a statement informing the consumer of the right to revoke the opt-in at any time. See § 205.17(d)(6), which permits institutions to include the revocation statement on the initial opt-in notice. An institution complies with the confirmation requirement if it has adopted reasonable procedures designed to ensure that overdraft fees are assessed only in connection with transactions paid after the confirmation has been mailed or delivered to the consumer.
8. Outstanding Negative Balance. If a fee or charge is based on the amount of the outstanding negative balance, an institution is prohibited from assessing any such fee if the negative balance is solely attributable to an ATM or one-time debit card transaction, unless the consumer has opted into the institution’s overdraft service for ATM or one-time debit card transactions. However, the rule does not prohibit an institution from assessing such a fee if the negative balance is attributable in whole or in part to a check, ACH, or other type of transaction not subject to the prohibition on assessing overdraft fees in § 205.17(b)(1).
9. Daily or Sustained Overdraft, Negative Balance, or Similar Fee or Charge
i. Daily or sustained overdraft, negative balance, or similar fees or charges. If a consumer has not opted into the institution’s overdraft service for ATM or one-time debit card transactions, the fee prohibition in § 205.17(b)(1) applies to all overdraft fees or charges for paying those transactions, including but not limited to daily or sustained overdraft, negative balance, or similar fees or charges. Thus, where a consumer’s negative balance is solely attributable to an ATM or one-time debit card transaction, the rule prohibits the assessment of such fees unless the consumer has opted in. However, the rule does not prohibit an institution from assessing daily or sustained overdraft, negative balance, or similar fees or charges if a negative balance is attributable in whole or in part to a check, ACH, or other type of transaction not subject to the fee prohibition. When the negative balance is attributable in part to an ATM or one-time debit card transaction, and in part to a check, ACH, or other type of transaction not subject to the fee prohibition, the date on which such a fee may be assessed is based on the date on which the check, ACH, or other type of transaction is paid into overdraft.
ii. Examples. The following examples illustrate how an institution complies with the fee prohibition. For each example, assume the following: (a) The consumer has not opted into the payment of ATM or one-time debit card overdrafts; (b) these transactions are paid into overdraft because the amount of the transaction at settlement exceeded the amount authorized or the amount was not submitted for authorization; (c) under the account agreement, the institution may charge a per-item fee of $20 for each overdraft, and a one-time sustained overdraft fee of $20 on the fifth consecutive day the consumer’s account remains overdrawn; (d) the institution posts ATM and debit card transactions before other transactions; and (e) the institution allocates deposits to account debits in the same order in which it posts debits.
a. Assume that a consumer has a $50 account balance on March 1. That day, the institution posts a one-time debit card transaction of $60 and a check transaction of $40. The institution charges an overdraft fee of $20 for the check overdraft but cannot assess an overdraft fee for the debit card transaction. At the end of the day, the consumer has an account balance of negative $70. The consumer does not make any deposits to the account, and no other transactions occur between March 2 and March 6. Because the consumer’s negative balance is attributable in part to the $40 check (and associated overdraft fee), the institution may charge a sustained overdraft fee on March 6 in connection with the check.
b. Same facts as in a., except that on March 3, the consumer deposits $40 in the account. The institution allocates the $40 to the debit card transaction first, consistent with its posting order policy. At the end of the day on March 3, the consumer has an account balance of negative $30, which is attributable to the check transaction (and associated overdraft fee). The consumer does not make any further deposits to the account, and no other transactions occur between March 4 and March 6. Because the remaining negative balance is attributable to the March 1 check transaction, the institution may charge a sustained overdraft fee on March 6 in connection with the check.
c. Assume that a consumer has a $50 account balance on March 1. That day, the institution posts a one-time debit card transaction of $60. At the end of that day, the consumer has an account balance of negative $10. The institution may not assess an overdraft fee for the debit card transaction. On March 3, the institution pays a check transaction of $100 and charges an overdraft fee of $20. At the end of that day, the consumer has an account balance of negative $130. The consumer does not make any deposits to the account, and no other transactions occur between March 4 and March 8. Because the consumer’s negative balance is attributable in part to the check, the institution may assess a $20 sustained overdraft fee. However, because the check was paid on March 3, the institution must use March 3 as the start date for determining the date on which the sustained overdraft fee may be assessed. Thus, the institution may charge a $20 sustained overdraft fee on March 8.
iii. Alternative approach. For a consumer who does not opt into the institution’s overdraft service for ATM and one-time debit card transactions, an institution may also comply with the fee prohibition in § 205.17(b)(1) by not assessing daily or sustained overdraft, negative balance, or similar fees or charges unless a consumer’s negative balance is attributable solely to check, ACH or other types of transactions not subject to the fee prohibition while that negative balance remains outstanding. In such case, the institution would not have to determine how to allocate subsequent deposits that reduce but do not eliminate the negative balance. For example, if a consumer has a negative balance of $30, of which $10 is attributable to a one-time debit card transaction, an institution complies with the fee prohibition if it does not assess a sustained overdraft fee while that negative balance remains outstanding.
1. Application of the same criteria. The prohibitions on conditioning in § 205.17(b)(2) generally require an institution to apply the same criteria for deciding when to pay overdrafts for checks, ACH transactions, and other types of transactions, whether or not the consumer has affirmatively consented to the institution’s overdraft service with respect to ATM and one-time debit card overdrafts. For example, if an institution’s internal criteria would lead the institution to pay a check overdraft if the consumer had affirmatively consented to the institution’s overdraft service for ATM and one-time debit card transactions, it must also apply the same criteria in a consistent manner in determining whether to pay the check overdraft if the consumer has not opted in.
2. No requirement to pay overdrafts on checks, ACH transactions, or other types of transactions. The prohibition on conditioning in § 205.17(b)(2) does not require an institution to pay overdrafts on checks, ACH transactions, or other types of transactions in all circumstances. Rather, the rule simply prohibits institutions from considering the consumer’s decision not to opt in when deciding whether to pay overdrafts for checks, ACH transactions, or other types of transactions.
1. Variations in terms, conditions, or features. A financial institution may not vary the terms, conditions, or features of an account provided to a consumer who does not affirmatively consent to the payment of ATM or one-time debit card transactions pursuant to the institution’s overdraft service. This includes, but is not limited to:
i. Interest rates paid and fees assessed;
ii. The type of ATM or debit card provided to the consumer. For instance, an institution may not provide consumers who do not opt in a PIN-only card while providing a debit card with both PIN and signature-debit functionality to consumers who opt in;
iii. Minimum balance requirements; or
iv. Account features such as on-line bill payment services.
2. Limited-feature bank accounts. Section 205.17(b)(3) does not prohibit institutions from offering deposit account products with limited features, provided that a consumer is not required to open such an account because the consumer did not opt in. For example, § 205.17(b)(3) does not prohibit an institution from offering a checking account designed to comply with state basic banking laws, or designed for consumers who are not eligible for a checking account because of their credit or checking account history, which may include features limiting the payment of overdrafts. However, a consumer who applies, and is otherwise eligible, for a full-service or other particular deposit account product may not be provided instead with the account with more limited features because the consumer has declined to opt in.
1. Early compliance. A financial institution may provide the notice required by § 205(b)(1)(i) and obtain the consumer’s affirmative consent to the financial institution’s overdraft service for ATM and one-time debit card transactions prior to July 1, 2010, provided that the financial institution complies with all of the requirements of this section.
2. Permitted fees or charges. Fees or charges for ATM and one-time debit card overdrafts may be assessed only for overdrafts paid on or after the date the financial institution receives the consumer’s affirmative consent to the institution’s overdraft service. See also comment 17(b)-7.
1. Overdraft service. The description of the institution’s overdraft service should indicate that the consumer has the right to affirmatively consent, or opt into payment of overdrafts for ATM and one-time debit card transactions. The description should also disclose the institution’s policies regarding the payment of overdrafts for other transactions, including checks, ACH transactions, and automatic bill payments, provided that this content is not more prominent than the description of the consumer’s right to opt into payment of overdrafts for ATM and one-time debit card transactions. As applicable, the institution also should indicate that it pays overdrafts at its discretion, and should briefly explain that if the institution does not authorize and pay an overdraft, it may decline the transaction.
2. Maximum fee. If the amount of a fee may vary from transaction to transaction, the financial institution may indicate that the consumer may be assessed a fee “up to” the maximum fee. The financial institution must disclose all applicable overdraft fees, including but not limited to:
i. Per item or per transaction fees;
ii. Daily overdraft fees;
iii. Sustained overdraft fees, where fees are assessed when the consumer has not repaid the amount of the overdraft after some period of time (for example, if an account remains overdrawn for five or more business days); or
iv. Negative balance fees.
3. Opt-in methods. The opt-in notice must include the methods by which the consumer may consent to the overdraft service for ATM and one-time debit card transactions. Institutions may tailor Model Form A-9 to the methods offered to consumers for affirmatively consenting to the service. For example, an institution need not provide the tear-off portion of Model Form A-9 if it is only permitting consumers to opt-in telephonically or electronically. Institutions may, but are not required, to provide a signature line or check box where the consumer can indicate that he or she declines to opt in.
4. Identification of consumer’s account. An institution may use any reasonable method to identify the account for which the consumer submits the opt-in notice. For example, the institution may include a line for a printed name and an account number, as shown in Model Form A-9. Or, the institution may print a bar code or use other tracking information. See also comment 17(b)-6, which describes how an institution obtains a consumer’s affirmative consent.
5. Alternative plans for covering overdrafts. If the institution offers both a line of credit subject to the Board’s Regulation Z (12 CFR part 226) and a service that transfers funds from another account of the consumer held at the institution to cover overdrafts, the institution must state in its opt-in notice that both alternative plans are offered. For example, the notice might state “We also offer overdraft protection plans, such as a link to a savings account or to an overdraft line of credit, which may be less expensive than our standard overdraft practices.” If the institution offers one, but not the other, it must state in its opt-in notice the alternative plan that it offers. If the institution does not offer either plan, it should omit the reference to the alternative plans.
1. Fees or charges for overdrafts incurred prior to revocation. Section 205.17(f)(1) provides that a consumer may revoke his or her prior consent at any time. If a consumer does so, this provision does not require the financial institution to waive or reverse any overdraft fees assessed on the consumer’s account prior to the institution’s implementation of the consumer’s revocation request.
1. Termination of overdraft service. A financial institution may, for example, terminate the overdraft service when the consumer makes excessive use of the service.
1. Issuance of access device. Consistent with § 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.
1. Posted transactions. A history of transactions provided under §§ 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 § 205.18(b)(1)(ii) must be provided in a form that the consumer may keep, as required under § 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.
1. Error resolution safe harbor provision. Institutions that choose to investigate notices of error provided up to 120 days from the date a transaction has posted to a consumer’s account may still disclose the error resolution time period required by the regulation (as set forth in the Model Form in Appendix A-7). Specifically, an institution may disclose to payroll card account holders that the institution will investigate any notice of error provided within 60 days of the consumer electronically accessing an account or receiving a written history upon request that reflects the error, even if, for some or all transactions, the institution investigates any notice of error provided up to 120 days from the date that the transaction alleged to be in error has posted to the consumer’s account. Similarly, an institution’s summary of the consumer’s liability (as required under § 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 §§ 205.6 and 205.11.
3. Untimely notice of error. An institution that provides a transaction history under § 205.18(b)(1) is not required to comply with the requirements of § 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 § 205.18(c)(4)(ii), an institution need not comply with the requirements of § 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 § 205.6 before it may impose any liability on the consumer.
1. Form of card, code, or device. Section 205.20 applies to any card, code, or other device that meets one of the definitions in § 205.20(a)(1) through (a)(3) (and is not otherwise excluded by § 205.20(b)), even if it is not issued in card form. Section 205.20 applies, for example, to an account number or bar code that can be used to access underlying funds. Similarly, § 205.20 applies to a device with a chip or other embedded mechanism that links the device to stored funds, such as a mobile phone or sticker containing a contactless chip that enables the consumer to access the stored funds. A card, code, or other device that meets the definition in § 205.20(a)(1) through (a)(3) includes an electronic promise (see comment 20(a)-2) as well as a promise that is not electronic. See, however, § 205.20(b)(5). In addition, § 205.20 applies if a merchant issues a code that entitles a consumer to redeem the code for goods or services, regardless of the medium in which the code is issued (see, however, § 205.20(b)(5)), and whether or not it may be redeemed electronically or in the merchant’s store. Thus, for example, if a merchant e-mails a code that a consumer may redeem in a specified amount either on-line or in the merchant’s store, that code is covered under § 205.20, unless one of the exclusions in § 205.20(b) apply.
2. Electronic promise. The term “electronic promise” as used in EFTA Sections 915(a)(2)(B), (a)(2)(C), and (a)(2)(D) means a person’s commitment or obligation communicated or stored in electronic form made to a consumer to provide payment for goods or services for transactions initiated by the consumer. The electronic promise is itself represented by a card, code or other device that is issued or honored by the person, reflecting the person’s commitment or obligation to pay. For example, if a merchant issues a code that can be given as a gift and that entitles the recipient to redeem the code in an on-line transaction for goods or services, that code represents an electronic promise by the merchant and is a card, code, or other device covered by § 205.20.
3. Cards, codes, or other devices redeemable for specific goods or services. Certain cards, codes, or other devices may be redeemable upon presentation for a specific good or service, or “experience,” such as a spa treatment, hotel stay, or airline flight. In other cases, a card, code, or other device may entitle the consumer to a certain percentage off the purchase of a good or service, such as 20% off of any purchase in a store. Such cards, codes, or other devices generally are not subject to the requirements of this section because they are not issued to a consumer “in a specified amount” as required under the definitions of “gift certificate,” “store gift card,” or “general-use prepaid card.” However, if the card, code, or other device is issued in a specified or denominated amount that can be applied toward the purchase of a specific good or service, such as a certificate or card redeemable for a spa treatment up to $50, the card, code, or other device is subject to this section, unless one of the exceptions in § 205.20(b) apply. See, e.g., § 205.20(b)(3). Similarly, if the card, code, or other device states a specific monetary value, such as “a $50 value,” the card, code, or other device is subject to this section, unless an exclusion in § 205.20(b) applies.
4. Issued primarily for personal, family, or household purposes. Section 205.20 only applies to cards, codes, or other devices that are sold or issued to a consumer primarily for personal, family, or household purposes. A card, code, or other device initially purchased by a business is subject to this section if the card, code, or other device is purchased for redistribution or resale to consumers primarily for personal, family, or household purposes. Moreover, the fact that a card, code, or other device may be primarily funded by a business, for example, in the case of certain rewards or incentive cards, does not mean the card, code, or other device is outside the scope of § 205.20, if the card, code, or other device will be provided to a consumer primarily for personal, family, or household purposes. But see § 205.20(b)(3). Whether a card, code, or other device is issued to a consumer primarily for personal, family, or household purposes will depend on the facts and circumstances. For example, if a program manager purchases store gift cards directly from an issuing merchant and sells those cards through the program manager’s retail outlets, such gift cards are subject to the requirements of § 205.20 because the store gift cards are sold to consumers primarily for personal, family, or household purposes. In contrast, a card, code, or other device generally would not be issued to consumers primarily for personal, family, or household purposes, and therefore would fall outside the scope of § 205.20, if the purchaser of the card, code, or device is contractually prohibited from reselling or redistributing the card, code, or device to consumers primarily for personal, family, or household purposes, and reasonable policies and procedures are maintained to avoid such sale or distribution for such purposes. However, if an entity that has purchased cards, codes, or other devices for business purposes sells or distributes such cards, codes, or other devices to consumers primarily for personal, family, or household purposes, that entity does not comply with § 205.20 if it has not otherwise met the substantive and disclosure requirements of the rule or unless an exclusion in § 205.20(b) applies.
5. Examples of cards, codes, or other devices issued for business purposes. Examples of cards, codes, or other devices that are issued and used for business purposes and therefore excluded from the definitions of “gift certificate,” “store gift card,” or “general-use prepaid card” include
i. Cards, codes, or other devices to reimburse employees for travel or moving expenses.
ii. Cards, codes, or other devices for employees to use to purchase office supplies and other business-related items.
1. Relationship between “gift certificate” and “store gift card”. The term “store gift card” in § 205.20(a)(2) includes “gift certificate” as defined in § 205.20(a)(1). For example, a numeric or alphanumeric code representing a specified dollar amount or value that is electronically sent to a consumer as a gift which can be redeemed or exchanged by the recipient to obtain goods or services may be both a “gift certificate” and a “store gift card” if the specified amount or value cannot be increased.
2. Affiliated group of merchants. The term “affiliated group of merchants” means two or more affiliated merchants or other persons that are related by common ownership or common corporate control (see, e.g., 12 CFR 227.3(b) and 12 CFR 223.2) and that share the same name, mark, or logo. For example, the term includes franchisees that are subject to a common set of corporate policies or practices under the terms of their franchise licenses. The term also applies to two or more merchants or other persons that agree among themselves, by contract or otherwise, to redeem cards, codes, or other devices bearing the same name, mark, or logo (other than the mark, logo, or brand of a payment network), for the purchase of goods or services solely at such merchants or persons. For example, assume a movie theatre chain and a restaurant chain jointly agree to issue cards that share the same “Flix and Food” logo that can be redeemed solely towards the purchase of movie tickets or concessions at any of the participating movie theatres, or towards the purchase of food or beverages at any of the participating restaurants. For purposes of § 205.20, the movie theatre chain and the restaurant chain would be considered to be an affiliated group of merchants, and the cards are considered to be “store gift cards.” However, merchants or other persons are not considered to be affiliated merely because they agree to accept a card that bears the mark, logo, or brand of a payment network.
3. Mall gift cards. See comment 20(a)(3)-2.
1. Redeemable upon presentation at multiple, unaffiliated merchants. A card, code, or other device is redeemable upon presentation at multiple, unaffiliated merchants if, for example, such merchants agree to honor the card, code, or device if it bears the mark, logo, or brand of a payment network, pursuant to the rules of the payment network.
2. Mall gift cards. Mall gift cards that are intended to be used or redeemed for goods or services at participating retailers within a shopping mall may be considered store gift cards or general-use prepaid cards depending on the merchants with which the cards may be redeemed. For example, if a mall card may only be redeemed at merchants within the mall itself, the card is more likely to be redeemable at an affiliated group of merchants and considered a store gift card. However, certain mall cards also carry the brand of a payment network and can be used at any retailer that accepts that card brand, including retailers located outside of the mall. Such cards are considered general-use prepaid cards.
1. Examples of loyalty, award, or promotional programs. Examples of loyalty, award or promotional programs under § 205.20(a)(4) include, but are not limited to
i. Consumer retention programs operated or administered by a merchant or other person that provide to consumers cards or coupons redeemable for or towards goods or services or other monetary value as a reward for purchases made or for visits to the participating merchant;
ii. Sales promotions operated or administered by a merchant or product manufacturer that provide coupons or discounts redeemable for or towards goods or services or other monetary value.
iii. Rebate programs operated or administered by a merchant or product manufacturer that provide cards redeemable for or towards goods or services or other monetary value to consumers in connection with the consumer’s purchase of a product or service and the consumer’s completion of the rebate submission process.
iv. Sweepstakes or contests that distribute cards redeemable for or towards goods or services or other monetary value to consumers as an invitation to enter into the promotion for a chance to win a prize.
v. Referral programs that provide cards redeemable for or towards goods or services or other monetary value to consumers in exchange for referring other potential consumers to a merchant.
vi. Incentive programs through which an employer provides cards redeemable for or towards goods or services or other monetary value to employees, for example, to recognize job performance, such as increased sales, or to encourage employee wellness and safety.
vii. Charitable or community relations programs through which a company provides cards redeemable for or towards goods or services or other monetary value to a charity or community group for their fundraising purposes, for example, as a reward for a donation or as a prize in a charitable event.
2. Issued for loyalty, award, or promotional purposes. To indicate that a card, code, or other device is issued for loyalty, award, or promotional purposes as required by § 205.20(a)(4)(iii), it is sufficient for the card, code, or other device to state on the front, for example, “Reward” or “Promotional.”
3. Reference to toll-free number and Web site. If a card, code, or other device issued in connection with a loyalty, award, or promotional program does not have any fees, the disclosure under § 205.20(a)(4)(iii)(D) is not required on the card, code, or other device.
1. Service fees. Under § 205.20(a)(6), a service fee includes a periodic fee for holding or use of a gift certificate, store gift card, or general-use prepaid card. A periodic fee includes any fee that may be imposed on a gift certificate, store gift card, or general-use prepaid card from time to time for holding or using the certificate or card, such as a monthly maintenance fee, a transaction fee, an ATM fee, a reload fee, a foreign currency transaction fee, or a balance inquiry fee, whether or not the fee is waived for a certain period of time or is only imposed after a certain period of time. A service fee does not include a one-time fee or a fee that is unlikely to be imposed more than once while the underlying funds are still valid, such as an initial issuance fee, a cash-out fee, a supplemental card fee, or a lost or stolen certificate or card replacement fee.
1. Activity. Under § 205.20(a)(7), any action that results in an increase or decrease of the funds underlying a gift certificate, store gift card, or general-use prepaid card, other than the imposition of a fee, or an adjustment due to an error or a reversal of a prior transaction, constitutes activity for purposes of § 205.20. For example, the purchase and activation of a certificate or card, the use of the certificate or card to purchase a good or service, or the reloading of funds onto a store gift card or general-use prepaid card constitutes activity. However, the imposition of a fee, the replacement of an expired, lost, or stolen certificate or card, and a balance inquiry do not constitute activity. In addition, if a consumer attempts to engage in a transaction with a gift certificate, store gift card, or general-use prepaid card, but the transaction cannot be completed due to technical or other reasons, such attempt does not constitute activity. Furthermore, if the funds underlying a gift certificate, store gift card, or general-use prepaid card are adjusted because there was an error or the consumer has returned a previously purchased good, the adjustment also does not constitute activity with respect to the certificate or card.
1. Application of exclusion. A card, code, or other device is excluded from the definition of “gift certificate,” “store gift card,” or “general-use prepaid card” if it meets any of the exclusions in § 205.20(b). An excluded card, code, or other device generally is not subject to any of the requirements of this section. (See, however, § 205.20(a)(4)(iii), requiring certain disclosures for loyalty, award, or promotional gift cards.)
2. Eligibility for multiple exclusions. A card, code, or other device may qualify for one or more exclusions. For example, a corporation may give its employees a gift card that is marketed solely to businesses for incentive-related purposes, such as to reward job performance or promote employee safety. In this case, the card may qualify for the exclusion for loyalty, award, or promotional gift cards under § 205.20(b)(3), or for the exclusion for cards, codes, or other devices not marketed to the general public under § 205.20(b)(4). In addition, as long as any one of the exclusions applies, a card, code, or other device is not covered by § 205.20, even if other exclusions do not apply. In the above example, the corporation may give its employees a type of gift card that can also be purchased by a consumer directly from a merchant. Under these circumstances, while the card does not qualify for the exclusion for cards, codes, or other devices not marketed to the general public under § 205.20(b)(4) because the card can also be obtained through retail channels, it is nevertheless exempt from the substantive requirements of § 205.20 because it is a loyalty, award, or promotional gift card. (See, however, § 205.20(a)(4)(iii), requiring certain disclosures for loyalty, award, or promotional gift cards.) Similarly, a person may market a reloadable card to teenagers for occasional expenses that enables parents to monitor spending. Although the card does not qualify for the exclusion for cards, codes, or other devices not marketed to the general public under § 205.20(b)(4), it may nevertheless be exempt from the requirements of § 205.20 under § 205.20(b)(2) if it is reloadable and not marketed or labeled as a gift card or gift certificate.
1. Examples of excluded products. The exclusion for products usable solely for telephone services applies to prepaid cards for long-distance telephone service, prepaid cards for wireless telephone service and prepaid cards for other services that function similar to telephone services, such as prepaid cards for voice over internet protocol (VoIP) access time.
1. Reloadable. A card, code, or other device is “reloadable” if the terms and conditions of the agreement permit funds to be added to the card, code, or other device after the initial purchase or issuance. A card, code, or other device is not “reloadable” merely because the issuer or processor is technically able to add functionality that would otherwise enable the card, code, or other device to be reloaded.
2. Marketed or labeled as a gift card or gift certificate. The term “marketed or labeled as a gift card or gift certificate” means directly or indirectly offering, advertising or otherwise suggesting the potential use of a card, code or other device, as a gift for another person. Whether the exclusion applies generally does not depend on the type of entity that makes the promotional message. For example, a card may be marketed or labeled as a gift card or gift certificate if anyone (other than the purchaser of the card), including the issuer, the retailer, the program manager that may distribute the card, or the payment network on which a card is used, promotes the use of the card as a gift card or gift certificate. A card, code, or other device, including a general-purpose reloadable card, is marketed or labeled as a gift card or gift certificate even if it is only occasionally marketed as a gift card or gift certificate. For example, a network-branded general purpose reloadable card would be marketed or labeled as a gift card or gift certificate if the issuer principally advertises the card as a less costly alternative to a bank account but promotes the card in a television, radio, newspaper, or Internet advertisement, or on signage as “the perfect gift” during the holiday season. However, the mere mention of the availability of gift cards or gift certificates in an advertisement or on a sign that also indicates the availability of other excluded prepaid cards does not by itself cause the excluded prepaid cards to be marketed as a gift card or a gift certificate. For example, the posting of a sign in a store that refers to the availability of gift cards does not by itself constitute the marketing of otherwise excluded prepaid cards that may also be sold in the store as gift cards or gift certificates, provided that a consumer acting reasonably under the circumstances would not be led to believe that the sign applies to all prepaid cards sold in the store. (See, however, comment 20(b)(2)-4.ii.)
3. Examples of marketed or labeled as a gift card or gift certificate.
i. Examples of marketed or labeled as a gift card or gift certificate include
A. Using the word “gift” or “present” on a card, certificate, or accompanying material, including documentation, packaging and promotional displays;
B. Representing or suggesting that a certificate or card can be given to another person, for example, as a “token of appreciation” or a “stocking stuffer,” or displaying a congratulatory message on the card, certificate or accompanying material;
C. Incorporating gift-giving or celebratory imagery or motifs, such as a bow, ribbon, wrapped present, candle, or congratulatory message, on a card, certificate, accompanying documentation, or promotional material;
ii. The term does not include
A. Representing that a card or certificate can be used as a substitute for a checking, savings, or deposit account;
B. Representing that a card or certificate can be used to pay for a consumer’s health-related expenses—for example, a card tied to a health savings account;
C. Representing that a card or certificate can be used as a substitute for travelers checks or cash;
D. Representing that a card or certificate can be used as a budgetary tool, for example, by teenagers, or to cover emergency expenses.
4. Reasonable policies and procedures to avoid marketing as a gift card. The exclusion for a card, code, or other device that is reloadable and not marketed or labeled as a gift card or gift certificate in § 205.20(b)(2) applies if a reloadable card, code, or other device is not marketed or labeled as a gift card or gift certificate and if persons subject to the rule, including issuers, program managers, and retailers, maintain policies and procedures reasonably designed to avoid such marketing. Such policies and procedures may include contractual provisions prohibiting a reloadable card, code, or other device from being marketed or labeled as a gift card or gift certificate, merchandising guidelines or plans regarding how the product must be displayed in a retail outlet, and controls to regularly monitor or otherwise verify that the card, code or other device is not being marketed as a gift card. Whether a reloadable card, code, or other device has been marketed as a gift card or gift certificate will depend on the facts and circumstances, including whether a reasonable consumer would be led to believe that the card, code, or other device is a gift card or gift certificate. The following examples illustrate the application of § 205.20(b)(2)
i. An issuer or program manager of prepaid cards agrees to sell general-purpose reloadable cards through a retailer. The contract between the issuer or program manager and the retailer establishes the terms and conditions under which the cards may be sold and marketed at the retailer. The terms and conditions prohibit the general-purpose reloadable cards from being marketed as a gift card or gift certificate, and require policies and procedures to regularly monitor or otherwise verify that the cards are not being marketed as such. The issuer or program manager sets up one promotional display at the retailer for gift cards and another physically separated display for excluded products under § 205.20(b), including general-purpose reloadable cards and wireless telephone cards, such that a reasonable consumer would not believe that the excluded cards are gift cards. The exclusion in § 205.20(b)(2) applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained, even if a retail clerk inadvertently stocks or a consumer inadvertently places a general-purpose reloadable card on the gift card display.
ii. Same facts as in i., except that the issuer or program manager sets up a single promotional display at the retailer on which a variety of prepaid cards are sold, including store gift cards and general-purpose reloadable cards. A sign stating “Gift Cards” appears prominently at the top of the display. The exclusion in § 205.20(b)(2) does not apply with respect to the general-purpose reloadable cards because policies and procedures reasonably designed to avoid the marketing of excluded cards as gift cards or gift certificates are not maintained.
iii. Same facts as in i., except that the issuer or program manager sets up a single promotional multi-sided display at the retailer on which a variety of prepaid card products, including store gift cards and general-purpose reloadable cards are sold. Gift cards are segregated from excluded cards, with gift cards on one side of the display and excluded cards on a different side of a display. Signs of equal prominence at the top of each side of the display clearly differentiate between gift cards and the other types of prepaid cards that are available for sale. The retailer does not use any more conspicuous signage suggesting the general availability of gift cards, such as a large sign stating “Gift Cards” at the top of the display or located near the display. The exclusion in § 205.20(b)(2) applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained, even if a retail clerk inadvertently stocks or a consumer inadvertently places a general-purpose reloadable card on the gift card display.
iv. Same facts as in i., except that the retailer sells a variety of prepaid card products, including store gift cards and general-purpose reloadable cards, arranged side-by-side in the same checkout lane. The retailer does not affirmatively indicate or represent that gift cards are available, such as by displaying any signage or other indicia at the checkout lane suggesting the general availability of gift cards. The exclusion in § 205.20(b)(2) applies because policies and procedures reasonably designed to avoid marketing the general-purpose reloadable cards as gift cards or gift certificates are maintained.
5. On-line sales of prepaid cards. Some Web sites may prominently advertise or promote the availability of gift cards or gift certificates in a manner that suggests to a consumer that the Web site exclusively sells gift cards or gift certificates. For example, a Web site may display a banner advertisement or a graphic on the home page that prominently states “Gift Cards,” “Gift Giving,” or similar language without mention of other available products, or use a Web address that includes only a reference to gift cards or gift certificates in the address. In such a case, a consumer acting reasonably under the circumstances could be led to believe that all prepaid products sold on the Web site are gift cards or gift certificates. Under these facts, the Web site has marketed all such products, including general-purpose reloadable cards, as gift cards or gift certificates, and the exclusion in § 205.20(b)(2) does not apply.
6. Temporary non-reloadable cards issued in connection with a general-purpose reloadable card. Certain general-purpose reloadable cards that are typically marketed as an account substitute initially may be sold or issued in the form of a temporary non-reloadable card. After the card is purchased, the cardholder is typically required to call the issuer to register the card and to provide identifying information in order to obtain a reloadable replacement card. In most cases, the temporary non-reloadable card can be used for purchases until the replacement reloadable card arrives and is activated by the cardholder. Because the temporary non-reloadable card may only be obtained in connection with the general-purpose reloadable card, the exclusion in § 205.20(b)(2) applies so long as the card is not marketed as a gift card or gift certificate.
1. Marketed to the general public. A card, code, or other device is marketed to the general public if the potential use of the card, code, or other device is directly or indirectly offered, advertised, or otherwise promoted to the general public. A card, code, or other device may be marketed to the general public through any advertising medium, including television, radio, newspaper, the Internet, or signage. However, the posting of a company policy that funds may be disbursed by prepaid card (such as a sign posted at a cash register or customer service center stating that store credit will be issued by prepaid card) does not constitute the marketing of a card, code, or other device to the general public. In addition, the method of distribution by itself is not dispositive in determining whether a card, code, or other device is marketed to the general public. Factors that may be considered in determining whether the exclusion applies to a particular card, code, or other device include the means or channel through which the card, code, or device may be obtained by a consumer, the subset of consumers that are eligible to obtain the card, code, or device, and whether the availability of the card, code, or device is advertised or otherwise promoted in the marketplace.
2. Examples. The following examples illustrate the application of the exclusion in § 205.20(b)(4)
i. A merchant sells its gift cards at a discount to a business which may give them to employees or loyal consumers as incentives or rewards. In determining whether the gift card falls within the exclusion in § 205.20(b)(4), the merchant must consider whether the card is of a type that is advertised or made available to consumers generally or can be obtained elsewhere. If the card can also be purchased through retail channels, the exclusion in § 205.20(b)(4) does not apply, even if the consumer obtained the card from the business as an incentive or reward. See, however, § 205.20(b)(3).
ii. A national retail chain decides to market its gift cards only to members of its frequent buyer program. Similarly, a bank may decide to sell gift cards only to its customers. If a member of the general public may become a member of the program or a customer of the bank, the card does not fall within the exclusion in § 205.20(b)(4) because the general public has the ability to obtain the cards. See, however, § 205.20(b)(3).
iii. A card issuer advertises a reloadable card to teenagers and their parents promoting the card for use by teenagers for occasional expenses, schoolbooks and emergencies and by parents to monitor spending. Because the card is marketed to and may be sold to any member of the general public, the exclusion in § 205.20(b)(4) does not apply. See, however, § 205.20(b)(2).
iv. An insurance company settles a policyholder’s claim and distributes the insurance proceeds to the consumer by means of a prepaid card. Because the prepaid card is simply the means for providing the insurance proceeds to the consumer and the availability of the card is not advertised to the general public, the exclusion in § 205.20(b)(4) applies.
v. A merchant provides store credit to a consumer following a merchandise return by issuing a prepaid card that clearly indicates that the card contains funds for store credit. Because the prepaid card is issued for the stated purpose of providing store credit to the consumer and the ability to receive refunds by a prepaid card is not advertised to the general public, the exclusion in § 205.20(b)(4) applies.
vi. A tax preparation company elects to distribute tax refunds to its clients by issuing prepaid cards, but does not advertise or otherwise promote the ability to receive proceeds in this manner. Because the prepaid card is simply the mechanism for providing the tax refund to the consumer, and the tax preparer does not advertise the ability to obtain tax refunds by a prepaid card, the exclusion in § 205.20(b)(4) applies. However, if the tax preparer promotes the ability to receive tax refund proceeds through a prepaid card as a way to obtain “faster” access to the proceeds, the exclusion in § 205.20(b)(4) does not apply.
1. Exclusion explained. To qualify for the exclusion in § 205.20(b)(5), the sole means of issuing the card, code, or other device must be in a paper form. Thus, the exclusion generally applies to certificates issued in paper form where solely the paper itself may be used to purchase goods or services. A card, code or other device is not issued solely in paper form simply because it may be reproduced or printed on paper. For example, a bar code, card or certificate number, or certificate or coupon electronically provided to a consumer and redeemable for goods and services is not issued in paper form, even if it may be reproduced or otherwise printed on paper by the consumer. In this circumstance, although the consumer might hold a paper facsimile of the card, code, or other device, the exclusion does not apply because the information necessary to redeem the value was initially issued in electronic form. A paper certificate is within the exclusion regardless of whether it may be redeemed electronically. For example, a paper certificate or receipt that bears a bar code, code, or account number falls within the exclusion in § 205.20(b)(5) if the bar code, code, or account number is not issued in any form other than on the paper. In addition, the exclusion in § 205.20(b)(5) continues to apply in circumstances where an issuer replaces a gift certificate that was initially issued in paper form with a card or electronic code (for example, to replace a lost paper certificate).
2. Examples. The following examples illustrate the application of the exclusion in § 205.20(b)(5)
i. A merchant issues a paper gift certificate that entitles the bearer to a specified dollar amount that can be applied towards a future meal. The merchant fills in the certificate with the name of the certificate holder and the amount of the certificate. The certificate falls within the exclusion in § 205.20(b)(5) because it is issued in paper form only.
ii. A merchant allows a consumer to prepay for a good or service, such as a car wash or time at a parking meter, and issues a paper receipt bearing a numerical or bar code that the consumer may redeem to obtain the good or service. The exclusion in § 205.20(b)(5) applies because the code is issued in paper form only.
iii. A merchant issues a paper certificate or receipt bearing a bar code or certificate number that can later be scanned or entered into the merchant’s system and redeemed by the certificate or receipt holder towards the purchase of goods or services. The bar code or certificate number is not issued by the merchant in any form other than paper. The exclusion in § 205.20(b)(5) applies because the bar code or certificate number is issued in paper form only.
iv. An on-line merchant electronically provides a bar code, card or certificate number, or certificate or coupon to a consumer that the consumer may print on a home printer and later redeem towards the purchase of goods or services. The exclusion in § 205.20(b)(5) does not apply because the bar code or card or certificate number was issued to the consumer in electronic form, even though it can be reproduced or otherwise printed on paper by the consumer.
1. Exclusion explained. The exclusion for cards, codes, or other devices that are redeemable solely for admission to events or venues at a particular location or group of affiliated locations generally applies to cards, codes, or other devices that are not redeemed for a specified monetary value, but rather solely for admission or entry to an event or venue. The exclusion also covers a card, code, or other device that is usable to purchase goods or services in addition to entry into the event or the venue, either at the event or venue or at an affiliated location or location in geographic proximity to the event or venue.
2. Examples. The following examples illustrate the application of the exclusion in § 205.20(b)(6)
i. A consumer purchases a prepaid card that entitles the holder to a ticket for entry to an amusement park. The prepaid card may only be used for entry to the park. The card qualifies for the exclusion in § 205.20(b)(6) because it is redeemable for admission or entry and for goods or services in conjunction with that admission. In addition, if the prepaid card does not have a monetary value, and therefore is not “issued in a specified amount,” the card does not meet the definitions of “gift certificate,” “store gift card,” or “general-use prepaid card” in § 205.20(a). See comment 20(a)-3.
ii. Same facts as in i., except that the gift card also entitles the holder of the gift card to a dollar amount that can be applied towards the purchase of food and beverages or goods or services at the park or at nearby affiliated locations. The card qualifies for the exclusion in § 205.20(b)(6) because it is redeemable for admission or entry and for goods or services in conjunction with that admission.
iii. A consumer purchases a $25 gift card that the holder of the gift card can use to make purchases at a merchant, or, alternatively, can apply towards the cost of admission to the merchant’s affiliated amusement park. The card is not eligible for the exclusion in § 205.20(b)(6) because it is not redeemable solely for the admission or ticket itself (or for goods and services purchased in conjunction with such admission). The card meets the definition of “store gift card” and is therefore subject to § 205.20, unless a different exclusion applies.
1. Clear and conspicuous standard. All disclosures required by this section must be clear and conspicuous. Disclosures are clear and conspicuous for purposes of this section if they are readily understandable and, in the case of written and electronic disclosures, the location and type size are readily noticeable to consumers. Disclosures need not be located on the front of the certificate or card, except where otherwise required, to be considered clear and conspicuous. Disclosures are clear and conspicuous for the purposes of this section if they are in a print that contrasts with and is otherwise not obstructed by the background on which they are printed. For example, disclosures on a card or computer screen are not likely to be conspicuous if obscured by a logo printed in the background. Similarly, disclosures on the back of a card that are printed on top of indentations from embossed type on the front of the card are not likely to be conspicuous if the indentations obstruct the readability of the disclosures. To the extent permitted, oral disclosures meet the standard when they are given at a volume and speed sufficient for a consumer to hear and comprehend them.
2. Abbreviations and symbols. Disclosures may contain commonly accepted or readily understandable abbreviations or symbols, such as “mo.” for month or a “/” to indicate “per.” Under the clear and conspicuous standard, it is sufficient to state, for example, that a particular fee is charged “$2.50/mo. after 12 mos.”
1. Electronic disclosures. Disclosures provided electronically pursuant to this section are not subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). Electronic disclosures must be in a retainable form. For example, a person may satisfy the requirement if it provides an online disclosure in a format that is capable of being printed. Electronic disclosures may not be provided through a hyperlink or in another manner by which the purchaser can bypass the disclosure. A person is not required to confirm that the consumer has read the electronic disclosures.
1. Method of purchase. The disclosures required by this paragraph must be provided before a certificate or card is purchased regardless of whether the certificate or card is purchased in person, online, by telephone, or by other means.
2. Electronic disclosures. Section 205.20(c)(3) provides that the disclosures required by this section must be provided to the consumer prior to purchase. For certificates or cards purchased electronically, disclosures made to the consumer after a consumer has initiated an online purchase of a certificate or card, but prior to completing the purchase of the certificate or card, would satisfy the prior-to-purchase requirement. However, electronic disclosures made available on a person’s Web site that may or may not be accessed by the consumer are not provided to the consumer and therefore would not satisfy the prior-to-purchase requirement.
3. Non-physical certificates and cards. If no physical certificate or card is issued, the disclosures must be provided to the consumer before the certificate or card is purchased. For example, where a gift certificate or card is a code that is provided by telephone, the required disclosures may be provided orally prior to purchase. See also § 205.20(c)(2).
1. Non-physical certificates and cards. If no physical certificate or card is issued, the disclosures required by this paragraph must be disclosed on the code, confirmation, or other written or electronic document provided to the consumer. For example, where a gift certificate or card is a code or confirmation that is provided to a consumer on-line or sent to a consumer’s e-mail address, the required disclosures may be provided electronically on the same document as the code or confirmation.
2. No disclosures on a certificate or card. Disclosures required by § 205.20(c)(4) need not be made on a certificate or card if it is accompanied by a certificate or card that complies with this section. For example, a person may issue or sell a supplemental gift card that is smaller than a standard size and that does not bear the applicable disclosures if it is accompanied by a fully compliant certificate or card. See also comment 20(c)(2)-2.
1. One-year period. Section 205.20(d) provides that a person may impose a dormancy, inactivity, or service fee only if there has been no activity with respect to a certificate or card for one year. The following examples illustrate this rule
i. A certificate or card is purchased on January 15 of year one. If there has been no activity on the certificate or card since the certificate or card was purchased, a dormancy, inactivity, or service fee may be imposed on the certificate or card on January 15 of year two.
ii. Same facts as i., and a fee was imposed on January 15 of year two. Because no more than one dormancy, inactivity, or service fee may be imposed in any given calendar month, the earliest date that another dormancy, inactivity, or service fee may be imposed, assuming there continues to be no activity on the certificate or card, is February 1 of year two. A dormancy, inactivity, or service fee is permitted to be imposed on February 1 of year two because there has been no activity on the certificate or card for the preceding year (February 1 of year one through January 31 of year two), and February is a new calendar month. The imposition of a fee on January 15 of year two is not activity for purposes of § 205.20(d). See comment 20(a)(7)-1.
iii. Same facts as i., and a fee was imposed on January 15 of year two. On January 31 of year two, the consumer uses the card to make a purchase. Another dormancy, inactivity, or service fee could not be imposed until January 31 of year three, assuming there has been no activity on the certificate or card since January 31 of year two.
2. Relationship between §§ 205.20(d)(2) and (c)(3). Sections 205.20(d)(2) and (c)(3) contain similar, but not identical, disclosure requirements. Section 205.20(d)(2) requires the disclosure of dormancy, inactivity, and service fees on a certificate or card. Section 205.20(c)(3) requires that vendor person that issues or sells such certificate or card disclose to a consumer any dormancy, inactivity, and service fees associated with the certificate or card before such certificate or card may be purchased. Depending on the context, a single disclosure that meets the clear and conspicuous requirements of both §§ 205.20(d)(2) and (c)(3) may be used to disclose a dormancy, inactivity, or service fee. For example, if the disclosures on a certificate or card, required by § 205.20(d)(2), are visible to the consumer without having to remove packaging or other materials sold with the certificate or card, for a purchase made in person, the disclosures also meet the requirements of § 205.20(c)(3). Otherwise, a dormancy, inactivity, or service fee may need to be disclosed multiple times to satisfy the requirements of §§ 205.20(d)(2) and (c)(3). For example, if the disclosures on a certificate or card, required by § 205.20(d)(2), are obstructed by packaging sold with the certificate or card, for a purchase made in person, they also must be disclosed on the packaging sold with the certificate or card to meet the requirements of § 205.20(c)(3).
3. Relationship between §§ 205.20(d)(2), (e)(3), and (f)(2). In addition to any disclosures required under § 205.20(d)(2), any applicable disclosures under §§ 205.20(e)(3) and (f)(2) of this section must also be provided on the certificate or card.
4. One fee per month. Under § 205.20(d)(3), no more than one dormancy, inactivity, or service fee may be imposed in any given calendar month. For example, if a dormancy fee is imposed on January 1, following a year of inactivity, and a consumer makes a balance inquiry on January 15, a balance inquiry fee may not be imposed at that time because a dormancy fee was already imposed earlier that month and a balance inquiry fee is a type of service fee. If, however, the dormancy fee could be imposed on January 1, following a year of inactivity, and the consumer makes a balance inquiry on the same date, the person assessing the fees may choose whether to impose the dormancy fee or the balance inquiry fee on January 1. The restriction in § 205.20(d)(3) does not apply to any fee that is not a dormancy, inactivity, or service fee. For example, assume a service fee is imposed on a general-use prepaid card on January 1, following a year of inactivity. If a consumer cashes out the remaining funds by check on January 15, a cash-out fee, to the extent such cash-out fee is permitted under § 205.20(e)(4), may be imposed at that time because a cash-out fee is not a dormancy, inactivity, or service fee.
5. Accumulation of fees. Section 205.20(d) prohibits the accumulation of dormancy, inactivity, or service fees for previous periods into a single fee because such a practice would circumvent the limitation in § 205.20(d)(3) that only one fee may be charged per month. For example, if a consumer purchases and activates a store gift card on January 1 but never uses the card, a monthly maintenance fee of $2.00 a month may not be accumulated such that a fee of $24 is imposed on January 1 the following year.
1. Reasonable opportunity. Under § 205.20(e)(1), no person may sell or issue a gift certificate, store gift card, or general-use prepaid card with an expiration date, unless there are policies and procedures in place to provide consumers with a reasonable opportunity to purchase a certificate or card with at least five years remaining until the certificate or card expiration date. Consumers are deemed to have a reasonable opportunity to purchase a certificate or card with at least five years remaining until the certificate or card expiration date if
i. There are policies and procedures established to prevent the sale of a certificate or card unless the certificate or card expiration date is at least five years after the date the certificate or card was sold or initially issued to a consumer; or
ii. A certificate or card is available to consumers to purchase five years and six months before the certificate or card expiration date.
2. Applicability to replacement certificates or cards. Section 205.20(e)(1) applies solely to the purchase of a certificate or card. Therefore, § 205.20(e)(1) does not apply to the replacement of such certificates or cards. Certificates or cards issued as a replacement may bear a certificate or card expiration date of less than five years from the date of issuance of the replacement certificate or card. If the certificate or card expiration date for a replacement certificate or card is later than the date set forth in § 205.20(e)(2)(i), then pursuant to § 205.20(e)(2), the expiration date for the underlying funds at the time the replacement certificate or card is issued must be no earlier than the expiration date for the replacement certificate or card. For purposes of § 205.20(e)(2), funds are not considered to be loaded to a store gift card or general-use prepaid card solely because a replacement card has been issued or activated for use.
3. Disclosure of funds expiration—date not required. Section 205.20(e)(3)(i) does not require disclosure of the precise date the funds will expire. It is sufficient to disclose, for example, “Funds expire 5 years from the date funds last loaded to the card.”; “Funds can be used 5 years from the date money was last added to the card.”; or “Funds do not expire.”
4. Disclosure not required if no expiration date. If the certificate or card and underlying funds do not expire, the disclosure required by § 205.20(e)(3)(i) need not be stated on the certificate or card. If the certificate or card and underlying funds expire at the same time, only one expiration date need be disclosed on the certificate or card.
5. Reference to toll-free telephone number and Web site. If a certificate or card does not expire, or if the underlying funds are not available after the certificate or card expires, the disclosure required by § 205.20(e)(3)(ii) need not be stated on the certificate or card. See, however, § 205.20(f)(2).
6. Relationship to § 226.20(f)(2). The same toll-free telephone number and Web site may be used to comply with §§ 226.20(e)(3)(ii) and (f)(2). Neither a toll-free number nor a Web site must be maintained or disclosed if no fees are imposed in connection with a certificate or card, and the certificate or card and the underlying funds do not expire.
7. Distinguishing between certificate or card expiration and funds expiration. If applicable, a disclosure must be made on the certificate or card that notifies a consumer that the certificate or card expires, but the funds either do not expire or expire later than the certificate or card, and that the consumer may contact the issuer for a replacement card. The disclosure must be made with equal prominence and in close proximity to the certificate or card expiration date. The close proximity requirement does not apply to oral disclosures. In the case of a certificate or card, close proximity means that the disclosure must be on the same side as the certificate or card expiration date. For example, if the disclosure is the same type size and is located immediately next to or directly above or below the certificate or card expiration date, without any intervening text or graphical displays, the disclosures would be deemed to be equally prominent and in close proximity. The disclosure need not be embossed on the certificate or card to be deemed equally prominent, even if the expiration date is embossed on the certificate or card. The disclosure may state on the front of the card, for example, “Funds expire after card. Call for replacement card.” or “Funds do not expire. Call for new card after 09/2016.” Disclosures made pursuant to § 205.20(e)(3)(iii)(A) may also fulfill the requirements of § 205.20(e)(3)(i). For example, making a disclosure that “Funds do not expire” to comply with § 205.20(e)(3)(iii)(A) also fulfills the requirements of § 205.20(e)(3)(i).
8. Expiration date safe harbor. A non-reloadable certificate or card that bears an expiration date that is at least seven years from the date of manufacture need not state the disclosure required by § 205.20(e)(3)(iii). However, § 205.20(e)(1) still prohibits the sale or issuance of such certificate or card unless there are policies and procedures in place to provide a consumer with a reasonable opportunity to purchase the certificate or card with at least five years remaining until the certificate or card expiration date. In addition, under § 205.20(e)(2), the funds may not expire before the certificate or card expiration date, even if the expiration date of the certificate or card bears an expiration date that is more than five years at the date of purchase. For purposes of this safe harbor, the date of manufacture is the date on which the certificate or card expiration date is printed on the certificate or card.
9. Relationship between §§ 205.20(d)(2), (e)(3), and (f)(2). In addition to any disclosures required to be made under § 205.20(e)(3), any applicable disclosures under §§ 205.20(d)(2) and (f)(2) must also be provided on the certificate or card.
10. Replacement or remaining balance of an expired certificate or card. When a certificate or card expires, but the underlying funds have not expired, an issuer, at its option in accordance with applicable state law, may provide either a replacement certificate or card or otherwise provide the certificate or card holder, for example, by check, with the remaining balance on the certificate or card. In either case, the issuer may not charge a fee for the service.
11. Replacement of a lost or stolen certificate or card not required. Section 205.20(e)(4) does not require the replacement of a certificate or card that has been lost or stolen.
12. Date of issuance or loading. For purposes of § 205.20(e)(2)(i), a certificate or card is not issued or loaded with funds until the certificate or card is activated for use.
13. Application of expiration date provisions after redemption of certificate or card. The requirement that funds underlying a certificate or card must not expire for at least five years from the date of issuance or date of last load ceases to apply once the certificate or card has been fully redeemed, even if the underlying funds are not used to contemporaneously purchase a specific good or service. For example, some certificates or cards can be used to purchase music, media, or virtual goods. Once redeemed by a consumer, the entire balance on the certificate or card is debited from the certificate or card and credited or transferred to another “account” established by the merchant of such goods or services. The consumer can then make purchases of songs, media, or virtual goods from the merchant using that “account” either at the time the value is transferred from the certificate or card or at a later time. Under these circumstances, once the card has been fully redeemed and the “account” credited with the amount of the underlying funds, the five-year minimum expiration term no longer applies to the underlying funds. However, if the consumer only partially redeems the value of the certificate or card, the five-year minimum expiration term requirement continues to apply to the funds remaining on the certificate or card.
1. Reference to toll-free telephone number and Web site. If a certificate or card does not have any fees, the disclosure under § 205.20(f)(2) is not required on the certificate or card. See, however, § 205.20(e)(3)(ii).
2. Relationship to § 226.20(e)(3)(ii). The same toll-free telephone number and Web site may be used to comply with §§ 226.20(e)(3)(ii) and (f)(2). Neither a toll-free number nor a Web site must be maintained or disclosed if no fees are imposed in connection with a certificate or card, and both the certificate or card and underlying funds do not expire.
3. Relationship between §§ 205.20(d)(2), (e)(3), and (f)(2). In addition to any disclosures required pursuant to § 205.20(f)(2), any applicable disclosures under §§ 205.20(d)(2) and (e)(3) must also be provided on the certificate or card.
1. Period of eligibility for loyalty, award, or promotional programs. For purposes of § 205.20(g)(2), the period of eligibility is the time period during which a consumer must engage in a certain action or actions to meet the terms of eligibility for a loyalty, award, or promotional program and obtain the card, code, or other device. Under § 205.20(g)(2), a gift card issued pursuant to a loyalty, award, or promotional program that began prior to August 22, 2010 need not state the disclosures in § 205.20(a)(4)(iii) regardless of whether the consumer became eligible to receive the gift card prior to August 22, 2010, or after that date. For example, a product manufacturer may provide a $20 rebate card to a consumer if the consumer purchases a particular product and submits a fully completed entry between January 1, 2010 and December 31, 2010. Similarly, a merchant may provide a $20 gift card to a consumer if the consumer makes $200 worth of qualifying purchases between June 1, 2010 and October 30, 2010. Under both examples, gift cards provided pursuant to these loyalty, award, or promotional programs need not state the disclosures in § 205.20(a)(4)(iii) to qualify for the exclusion in § 205.20(b)(3) for loyalty, award, or promotional gift cards because the period of eligibility for each program began prior to August 22, 2010.
1. Application to certificates or cards produced prior to April 1, 2010. Certificates or cards produced prior to April 1, 2010 may be sold to a consumer on or after August 22, 2010 without satisfying the requirements of § 205.20(c)(3), (d)(2), (e)(1), (e)(3), and (f) through January 30, 2011, provided that issuers of such certificates or cards comply with the additional substantive and disclosure requirements of §§ 205.20(h)(1)(i) through (iv). Issuers of certificates or cards produced prior to April 1, 2010 need not satisfy these additional requirements if the certificates or cards fully comply with the rule (§§ 205.20(a) through (f)). For example, the in-store signage and other disclosures required by § 205.20(h)(2) do not apply to gift cards produced prior to April 1, 2010 that do not have fees and do not expire, and which otherwise comply with the rule.
2. Expiration of temporary exemption. Certificates or cards produced prior to April 1, 2010 that do not fully comply with §§ 205.20(a) through (f) may not be issued or sold to consumers on or after January 31, 2011.
1. Disclosures through third parties. Issuers may make the disclosures required by § 205.20(h)(2) through a third party, such as a retailer or merchant. For example, an issuer may have a merchant install in-store signage with the disclosures required by § 205.20(h)(2) on the issuer’s behalf.
2. General advertising disclosures. Section 205.20(h)(2) does not impose an obligation on the issuer to advertise gift certificates, store gift cards, or general-use prepaid cards.
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.
PART 206—LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F)
§ 206.1 Authority, purpose, and scope.
(a) Authority and purpose. This part (Regulation F, 12 CFR part 206) is issued by the Board of Governors of the Federal Reserve System (Board) under authority of section 23 of the Federal Reserve Act (12 U.S.C. 371b-2). The purpose of this part is to limit the risks that the failure of a depository institution would pose to insured depository institutions.
(b) Scope. This part applies to all depository institutions insured by the Federal Deposit Insurance Corporation.
§ 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 a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), total capital means the bank’s Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter). 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 (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 § 206.2(a) of this part, other than an insured branch of a foreign bank.
§ 206.3 Prudential standards.
(a) General. A bank shall establish and maintain written policies and procedures to prevent excessive exposure to any individual correspondent in relation to the condition of the correspondent.
(b) Standards for selecting correspondents. (1) A bank shall establish policies and procedures that take into account credit and liquidity risks, including operational risks, in selecting correspondents and terminating those relationships.
(2) Where exposure to a correspondent is significant, the policies and procedures shall require periodic reviews of the financial condition of the correspondent and shall take into account any deterioration in the correspondent’s financial condition. Factors bearing on the financial condition of the correspondent include the capital level of the correspondent, level of nonaccrual and past due loans and leases, level of earnings, and other factors affecting the financial condition of the correspondent. Where public information on the financial condition of the correspondent is available, a bank may base its review of the financial condition of a correspondent on such information, and is not required to obtain non-public information for its review. However, for those foreign banks for which there is no public source of financial information, a bank will be required to obtain information for its review.
(3) A bank may rely on another party, such as a bank rating agency or 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.
§ 206.4 Credit exposure.
(a) Limits on credit exposure. (1) The policies and procedures on exposure established by a bank under § 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 § 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 § 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 § 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 §§ 206.4 (c) and (d) of this part, the credit exposure of a bank to a correspondent shall consist of the bank’s assets and off-balance sheet items that are subject to capital requirements under the capital adequacy guidelines of the bank’s primary federal supervisor, and that involve claims on the correspondent or capital instruments issued by the correspondent. For this purpose, off-balance sheet items shall be valued on the basis of current exposure. The term “credit exposure” does not include exposure related to the settlement of transactions, intraday exposure, transactions in an agency or similar capacity where losses will be passed back to the principal or other party, or other sources of exposure that are not covered by the capital adequacy guidelines.
(c) Netting. Transactions covered by netting agreements that are valid and enforceable under all applicable laws may be netted in calculating credit exposure.
(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.
§ 206.5 Capital levels of correspondents.
(a) Adequately capitalized correspondents.
(1) A total risk-based capital ratio, as defined in paragraph (e)(1) of this section, of 8.0 percent or greater;
(2) A Tier 1 risk-based capital ratio, as defined in paragraph (e)(2) of this section, of 4.0 percent or greater; and
(3) A leverage ratio, as defined in paragraph (e)(3) of this section, of 4.0 percent or greater.
(4) Notwithstanding paragraphs (a)(1) through (3) of this section, a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio (as defined in § 217.12 of this chapter) is considered to have met the minimum capital requirements in this paragraph (a).
(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.
§ 206.6 Waiver.
The Board may waive the application of § 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)
§ 207.1 Purpose and scope of this part.
(a) General. This part implements section 711 of the Gramm-Leach-Bliley Act (12 U.S.C. 1831y). That section requires any nongovernmental entity or person, insured depository institution, or affiliate of an insured depository institution that enters into a covered agreement to—
(1) Make the covered agreement available to the public and the appropriate Federal banking agency; and
(2) File an annual report with the appropriate Federal banking agency concerning the covered agreement.
(b) Scope of this part. The provisions of this part apply to—
(1) State member banks and their subsidiaries;
(2) Bank holding companies;
(3) Savings and loan holding companies;
(4) Affiliates of bank holding companies and savings and loan holding companies, other than banks, savings associations and subsidiaries of banks and savings associations; and
(5) Nongovernmental entities or persons that enter into covered agreements with any company listed in paragraph (b)(1) through (4) of this section.
(c) Relation to Community Reinvestment Act. This part does not affect in any way the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.), the Board’s Regulation BB (12 CFR part 228), or the Board’s interpretations or administration of that Act or regulation.
(d) Examples. (1) The examples in this part are not exclusive. Compliance with an example, to the extent applicable, constitutes compliance with this part.
(2) Examples in a paragraph illustrate only the issue described in the paragraph and do not illustrate any other issues that may arise in this part.
§ 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 § 207.4.
(5) The agreement is with a NGEP that has had a CRA communication as described in § 207.3 prior to entering into the agreement.
(b) Examples concerning written arrangements or understandings—(1) Example 1. A NGEP meets with an insured depository institution and states that the institution needs to make more community development investments in the NGEP’s community. The NGEP and insured depository institution do not reach an agreement concerning the community development investments the institution should make in the community, and the parties do not reach any mutual arrangement or understanding. Two weeks later, the institution unilaterally issues a press release announcing that it has established a general goal of making $100 million of community development grants in low- and moderate-income neighborhoods served by the insured depository institution over the next 5 years. The NGEP is not identified in the press release. The press release is not a written arrangement or understanding.
(2) Example 2. A NGEP meets with an insured depository institution and states that the institution needs to offer new loan programs in the NGEP’s community. The NGEP and the insured depository institution reach a mutual arrangement or understanding that the institution will provide additional loans in the NGEP’s community. The institution tells the NGEP that it will issue a press release announcing the program. Later, the insured depository institution issues a press release announcing the loan program. The press release incorporates the key terms of the understanding reached between the NGEP and the insured depository institution. The written press release reflects the mutual arrangement or understanding of the NGEP and the insured depository institution and is, therefore, a written arrangement or understanding.
(3) Example 3. An NGEP sends a letter to an insured depository institution requesting that the institution provide a $15,000 grant to the NGEP. The insured depository institution responds in writing and agrees to provide the grant in connection with its annual grant program. The exchange of letters constitutes a written arrangement or understanding.
(c) Loan agreements that are not covered agreements. A covered agreement does not include—
(1) Any individual loan that is secured by real estate; or
(2) Any specific contract or commitment for a loan or extension of credit to an individual, business, farm, or other entity, or group of such individuals or entities, if—
(i) The funds are loaned at rates that are not substantially below market rates; and
(ii) The loan application or other loan documentation does not indicate that the borrower intends or is authorized to use the borrowed funds to make a loan or extension of credit to one or more third parties.
(d) Examples concerning loan agreements—(1) Example 1. An insured depository institution provides an organization with a $1 million loan that is documented in writing and is secured by real estate owned or to-be-acquired by the organization. The agreement is an individual mortgage loan and is exempt from coverage under paragraph (c)(1) of this section, regardless of the interest rate on the loan or whether the organization intends or is authorized to re-loan the funds to a third party.
(2) Example 2. An insured depository institution commits to provide a $500,000 line of credit to a small business that is documented by a written agreement. The loan is made at rates that are within the range of rates offered by the institution to similarly situated small businesses in the market and the loan documentation does not indicate that the small business intends or is authorized to re-lend the borrowed funds. The agreement is exempt from coverage under paragraph (c)(2) of this section.
(3) Example 3. An insured depository institution offers small business loans that are guaranteed by the Small Business Administration (SBA). A small business obtains a $75,000 loan, documented in writing, from the institution under the institution’s SBA loan program. The loan documentation does not indicate that the borrower intends or is authorized to re-lend the funds. Although the rate charged on the loan is well below that charged by the institution on commercial loans, the rate is within the range of rates that the institution would charge a similarly situated small business for a similar loan under the SBA loan program. Accordingly, the loan is not made at substantially below market rates and is exempt from coverage under paragraph (c)(2) of this section.
(4) Example 4. A bank holding company enters into a written agreement with a community development organization that provides that insured depository institutions owned by the bank holding company will make $250 million in small business loans in the community over the next 5 years. The written agreement is not a specific contract or commitment for a loan or an extension of credit and, thus, is not exempt from coverage under paragraph (c)(2) of this section. Each small business loan made by the insured depository institution pursuant to this general commitment would, however, be exempt from coverage if the loan is made at rates that are not substantially below market rates and the loan documentation does not indicate that the borrower intended or was authorized to re-lend the funds.
(e) Agreements that include exempt loan agreements. If an agreement includes a loan, extension of credit or loan commitment that, if documented separately, would be exempt under paragraph (c) of this section, the exempt loan, extension of credit or loan commitment may be excluded for purposes of determining whether the agreement is a covered agreement.
(f) Determining annual value of agreements that lack schedule of disbursements. For purposes of paragraph (a)(3) of this section, a multi-year agreement that does not include a schedule for the disbursement of payments, grants, 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.
§ 207.3 CRA communications.
(a) Definition of CRA communication. A CRA communication is any of the following—
(1) Any written or oral comment or testimony provided to a Federal banking agency concerning the adequacy of the performance under the CRA of the insured depository institution, any affiliated insured depository institution, or any CRA affiliate.
(2) Any written comment submitted to the insured depository institution that discusses the adequacy of the performance under the CRA of the institution and must be included in the institution’s CRA public file.
(3) Any discussion or other contact with the insured depository institution or any affiliate about—
(i) Providing (or refraining from providing) written or oral comments or testimony to any Federal banking agency concerning the adequacy of the performance under the CRA of the insured depository institution, any affiliated insured depository institution, or any CRA affiliate;
(ii) Providing (or refraining from providing) written comments to the insured depository institution that concern the adequacy of the institution’s performance under the CRA and must be included in the institution’s CRA public file; or
(iii) The adequacy of the performance under the CRA of the insured depository institution, any affiliated insured depository institution, or any CRA affiliate.
(b) Discussions or contacts that are not CRA communications—(1) Timing of contacts with a Federal banking agency. An oral or written communication with a Federal banking agency is not a CRA communication if it occurred more than 3 years before the parties entered into the agreement.
(2) Timing of contacts with insured depository institutions and affiliates. A communication with an insured depository institution or affiliate is not a CRA communication if the communication occurred—
(i) More than 3 years before the parties entered into the agreement, in the case of any written communication;
(ii) More than 3 years before the parties entered into the agreement, in the case of any oral communication in which the NGEP discusses providing (or refraining from providing) comments or testimony to a Federal banking agency or written comments that must be included in the institution’s CRA public file in connection with a request to, or agreement by, the institution or affiliate to take (or refrain from taking) any action that is in fulfillment of the CRA; or
(iii) More than 1 year before the parties entered into the agreement, in the case of any other oral communication not described in paragraph (b)(2)(ii) of this section.
(3) Knowledge of communication by insured depository institution or affiliate. (i) A communication is only a CRA communication under paragraph (a) of this section if the insured depository institution or its affiliate has knowledge of the communication under this paragraph (b)(3)(ii) or (b)(3)(iii) of this section.
(ii) Communication with insured depository institution or affiliate. An insured depository institution or affiliate has knowledge of a communication by the NGEP to the institution or its affiliate under this paragraph only if one of the following representatives of the insured depository institution or any affiliate has knowledge of the communication.
(A) An employee who approves, directs, authorizes, or negotiates the agreement with the NGEP; or
(B) An employee designated with responsibility for compliance with the CRA or executive officer if the employee or executive officer knows that the institution or affiliate is negotiating, intends to negotiate, or has been informed by the NGEP that it expects to request that the institution or affiliate negotiate an agreement with the NGEP.
(iii) Other communications. An insured depository institution or affiliate is deemed to have knowledge of—
(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 § 207.11(a).) Accordingly, the NGEP had a CRA communication with an affiliate of the bank holding company.
(2) Examples of actions that are not CRA communications. The following are examples of actions that are not by themselves CRA communications. These examples are not exclusive.
(i) Example 1. A NGEP provides to a Federal banking agency comments or testimony concerning an insured depository institution or affiliate in response to a direct request by the agency for comments or testimony from that NGEP. Direct requests for comments or testimony do not include a general invitation by a Federal banking agency for comments or testimony from the public in connection with a CRA performance evaluation of, or application for a deposit facility (as defined in section 803 of the CRA (12 U.S.C. 2902(3)) by, an insured depository institution or an application by a company to acquire an insured depository institution.
(ii) Example 2. A NGEP makes a statement concerning an insured depository institution or affiliate at a widely attended conference or seminar regarding a general topic. A public or private meeting, public hearing, or other meeting regarding one or more specific institutions, affiliates or transactions involving an application for a deposit facility is not considered a widely attended conference or seminar.
(iii) Example 3. A NGEP, such as a civil rights group, community group 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 §§ 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.
§ 207.4 Fulfillment of the CRA.
(a) List of factors that are in fulfillment of the CRA. Fulfillment of the CRA, for purposes of this part, means the following list of factors—
(1) Comments to a Federal banking agency or included in CRA public file. Providing or refraining from providing written or oral comments or testimony to any Federal banking agency concerning the performance under the CRA of an insured depository institution or CRA affiliate that is a party to the agreement or an affiliate of a party to the agreement or written comments that are required to be included in the CRA public file of any such insured depository institution; or
(2) Activities given favorable CRA consideration. Performing any of the following activities if the activity is of the type that is likely to receive favorable consideration by a Federal banking agency in evaluating the performance under the CRA of the insured depository institution that is a party to the agreement or an affiliate of a party to the agreement—
(i) Home-purchase, home-improvement, small business, small farm, community development, and consumer lending, as described in § 228.22 of appendix G to 12 CFR part 228, 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 § 228.23 of appendix G to 12 CFR part 228;
(iii) Delivering retail banking services, as described in § 228.24(d) of appendix G to 12 CFR part 228;
(iv) Providing community development services, as described in § 228.24(e) of appendix G to 12 CFR part 228;
(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 § 228.25(c) of appendix G to 12 CFR part 228;
(vi) In the case of a small insured depository institution, any lending or other activity described in § 228.26(a) of appendix G to 12 CFR part 228; 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 § 228.27(f) of appendix G to 12 CFR part 228.
(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.
§ 207.5 Related agreements considered a single agreement.
The following rules must be applied in determining whether an agreement is a covered agreement under § 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.
§ 207.6 Disclosure of covered agreements.
(a) Applicability date. This section applies only to covered agreements entered into after November 12, 1999.
(b) Disclosure of covered agreements to the public—(1) Disclosure required. Each NGEP and each insured depository institution or affiliate that enters into a covered agreement must promptly make a copy of the covered agreement available to any individual or entity upon request.
(2) Nondisclosure of confidential and proprietary information permitted. In responding to a request for a covered agreement from any individual or entity under paragraph (b)(1) of this section, a NGEP, insured depository institution, or affiliate may withhold from public disclosure confidential or proprietary information that the party believes the relevant supervisory agency could withhold from disclosure under the Freedom of Information Act (5 U.S.C. 552 et seq.) (FOIA).
(3) Information that must be disclosed. Notwithstanding paragraph (b)(2) of this section, a party must disclose any of the following information that is contained in a covered agreement—
(i) The names and addresses of the parties to the agreement;
(ii) The amount of any payments, fees, loans, or other consideration to be made or provided by any party to the agreement;
(iii) Any description of how the funds or other resources provided under the agreement are to be used;
(iv) The term of the agreement (if the agreement establishes a term); and
(v) Any other information that the relevant supervisory agency determines is not properly exempt from public disclosure.
(4) Request for review of withheld information. Any individual or entity may request that the relevant supervisory 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 § 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 § 228.43 of appendix G to 12 CFR part 228.
(c) Disclosure by NGEPs of covered agreements to the relevant supervisory agency. (1) Each NGEP that is a party to a covered agreement must provide the following within 30 days of receiving a request from the relevant supervisory agency—
(i) A complete copy of the agreement; and
(ii) In the event the NGEP proposes the withholding of any information contained in the agreement in accordance with paragraph (b)(2) of this section, a public version of the agreement that excludes such information and an explanation justifying the exclusions. Any public version must include the information described in paragraph (b)(3) of this section.
(2) The obligation of a NGEP to provide a covered agreement to the relevant supervisory agency terminates 12 months after the end of the term of the covered agreement.
(d) Disclosure by insured depository institution or affiliate of covered agreements to the relevant supervisory agency—(1) In general. Within 60 days of the end of each calendar quarter, each insured depository institution and affiliate must provide each relevant supervisory agency with—
(i)(A) A complete copy of each covered agreement entered into by the insured depository institution or affiliate during the calendar quarter; and
(B) In the event the institution or affiliate proposes the withholding of any information contained in the agreement in accordance with paragraph (b)(2) of this section, a public version of the agreement that excludes such information (other than any information described in paragraph (b)(3) of this section) and an explanation justifying the exclusions; or
(ii) A list of all covered agreements entered into by the insured depository institution or affiliate during the calendar quarter that contains—
(A) The name and address of each insured depository institution or affiliate that is a party to the agreement;
(B) The name and address of each NGEP that is a party to the agreement;
(C) The date the agreement was entered into;
(D) The estimated total value of all payments, fees, loans and other consideration to be provided by the institution or any affiliate of the institution under the agreement; and
(E) The date the agreement terminates.
(2) Prompt filing of covered agreements contained in list required. (i) If an insured depository institution or affiliate files a list of the covered agreements entered into by the institution or affiliate pursuant to paragraph (d)(1)(ii) of this section, the institution or affiliate must provide any relevant supervisory agency a complete copy and public version of any covered agreement referenced in the list within 7 calendar days of receiving a request from the agency for a copy of the agreement.
(ii) The obligation of an insured depository institution or affiliate to provide a covered agreement to the relevant supervisory agency under this paragraph (d)(2) terminates 36 months 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.
§ 207.7 Annual reports.
(a) Applicability date. This section applies only to covered agreements entered into on or after May 12, 2000.
(b) Annual report required. Each NGEP and each insured depository institution or affiliate that is a party to a covered agreement must file an annual report with each relevant supervisory agency concerning the disbursement, receipt, and uses of funds or other resources under the covered agreement.
(c) Duration of reporting requirement—(1) NGEPs. A NGEP must file an annual report for a covered agreement for any fiscal year in which the NGEP receives or uses funds or other resources under the agreement.
(2) Insured depository institutions and affiliates. An insured depository institution or affiliate must file an annual report for a covered agreement for any fiscal year in which the institution or affiliate—
(i) provides or receives any payments, fees, or loans under the covered agreement that must be reported under paragraphs (e)(1)(iii) and (iv) of this section; or
(ii) has data to report on loans, investments, and services provided by a party to the covered agreement under the covered agreement under paragraph (e)(1)(vi) of this section.
(d) Annual reports filed by NGEP—(1) Contents of report. The annual report filed by a NGEP under this section must include the following—
(i) The name and mailing address of the NGEP filing the report;
(ii) Information sufficient to identify the covered agreement for which the annual report is being filed, such as by providing the names of the parties to the agreement and the date the agreement was entered into or by providing a copy of the agreement;
(iii) The amount of funds or resources received under the covered agreement during the fiscal year; and
(iv) A detailed, itemized list of how any funds or resources received by the NGEP under the covered agreement were used during the fiscal year, including the total amount used for—
(A) Compensation of officers, directors, and employees;
(B) Administrative expenses;
(C) Travel expenses;
(D) Entertainment expenses;
(E) Payment of consulting and professional fees; and
(F) Other expenses and uses (specify expense or use).
(2) More detailed reporting of uses of funds or resources permitted—(i) In general. If a NGEP allocated and used funds received under a covered agreement for a specific purpose, the NGEP may fulfill the requirements of paragraph (d)(1)(iv) of this section with respect to such funds by providing—
(A) A brief description of each specific purpose for which the funds or other resources were used; and
(B) The amount of funds or resources used during the fiscal year for each specific purpose.
(ii) Specific purpose defined. A NGEP allocates and uses funds for a specific purpose if the NGEP receives and uses the funds for a purpose that is more specific and limited than the categories listed in paragraph (d)(1)(iv) of this section.
(3) Use of other reports. The annual report filed by a NGEP may consist of or incorporate a report prepared for any other purpose, such as the Internal Revenue Service Return of Organization Exempt From Income Tax on Form 990, or any other Internal Revenue Service form, state tax form, report to members or shareholders, audited or unaudited financial statements, audit report, or other report, so long as the annual report filed by the NGEP contains all of the information required by this paragraph (d).
(4) Consolidated reports permitted. A NGEP that is a party to 2 or more covered agreements may file with each relevant supervisory agency a single consolidated annual report covering all the covered agreements. Any consolidated report must contain all the information required by this paragraph (d). The information reported under paragraphs (d)(1)(iv) and (d)(2) of this section may be reported on an aggregate basis for all covered agreements.
(5) Examples of annual report requirements for NGEPs—(i) Example 1. A NGEP receives an unrestricted grant of $15,000 under a covered agreement, includes the funds in its general operating budget and uses the funds during its fiscal year. The NGEP’s annual report for the fiscal year must provide the name and mailing address of the NGEP, information sufficient to identify the covered agreement, and state that the NGEP received $15,000 during the fiscal year. The report must also indicate the total expenditures made by the NGEP during the fiscal year for compensation, administrative expenses, travel expenses, entertainment expenses, consulting and professional fees, and other expenses and uses. The NGEP’s annual report may provide this information by submitting an Internal Revenue Service Form 990 that includes the required information. If the Internal Revenue Service Form does not include information for all of the required categories listed in this part, the NGEP must report the total expenditures in the remaining categories either by providing that information directly or by providing another form or report that includes the required information.
(ii) Example 2. An organization receives $15,000 from an insured depository institution under a covered agreement and allocates and uses the $15,000 during the fiscal year to purchase computer equipment to support its functions. The organization’s annual report must include the name and address of the organization, information sufficient to identify the agreement, and a statement that the organization received $15,000 during the year. In addition, since the organization allocated and used the funds for a specific purpose that is more narrow and limited than the categories of expenses included in the detailed, itemized list of expenses, the organization would have the option of providing either the total amount it used during the year for each category of expenses included in paragraph (d)(1)(iv) of this section, or a statement that it used the $15,000 to purchase computer equipment and a brief description of the equipment purchased.
(iii) Example 3. A community group receives $50,000 from an insured depository institution under a covered agreement. During its fiscal year, the community group specifically allocates and uses $5,000 of the funds to pay for a particular business trip and uses the remaining $45,000 for general operating expenses. The group’s annual report for the fiscal year must include the name and address of the group, information sufficient to identify the agreement, and a statement that the group received $50,000. Because the group did not allocate and use all of the funds for a specific purpose, the group’s annual report must provide the total amount of funds it used during the year for each category of expenses included in paragraph (d)(1)(iv) of this section. The group’s annual report also could state that it used $5,000 for a particular business trip and include a brief description of the trip.
(iv) Example 4. A community development organization is a party to two separate covered agreements with two unaffiliated insured depository institutions. Under each agreement, the organization receives $15,000 during its fiscal year and uses the funds to support its activities during that year. If the organization elects to file a consolidated annual report, the consolidated report must identify the organization and the two covered agreements, state that the organization received $15,000 during the fiscal year under each agreement, and provide the total amount that the organization used during the year for each category of expenses included in paragraph (d)(1)(iv) of this section.
(e) Annual report filed by insured depository institution or affiliate—(1) General. The annual report filed by an insured depository institution or affiliate must include the following—
(i) The name and principal place of business of the insured depository institution or affiliate filing the report;
(ii) Information sufficient to identify the covered agreement for which the annual report is being filed, such as by 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.
§ 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.
§ 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 §§ 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 § 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.
§ 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 § 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 § 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 § 207.6(d)(1)(i); or
(B) The information described in § 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 § 207.7 for a fiscal year that ends on or before December 31, 2000, and that concerns a covered agreement entered into between May 12, 2000, and December 31, 2000, the annual report for that fiscal year must be provided no later than June 30, 2001, to—
(1) Each relevant supervisory agency; or
(2) In the case of a NGEP, to an insured depository institution or affiliate that is a party to the agreement in accordance with § 207.7(f)(2).
§ 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 § 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 § 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 § 228.43 of appendix G to 12 CFR part 228.
(e) Executive officer. The term “executive officer” has the same meaning as in § 215.2(e)(1) of the Board’s Regulation O (12 CFR 215.2(e)(1)).
(f) Federal banking agency; appropriate Federal banking agency. The terms “Federal banking agency” and “appropriate Federal banking agency” have the same meanings as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(g) Fiscal year. (1) The fiscal year for a NGEP that does not have a fiscal year shall be the calendar year.
(2) Any NGEP, insured depository institution, or affiliate that has a fiscal year may elect to have the calendar year be its fiscal year for purposes of this part.
(h) Insured depository institution. “Insured depository institution” has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(i) NGEP. “NGEP” means a nongovernmental entity or person.
(j) Nongovernmental entity or person—(1) General. A “nongovernmental entity or person” is any partnership, association, trust, joint venture, joint stock company, corporation, limited liability corporation, company, firm, society, other organization, or individual.
(2) Exclusions. A nongovernmental entity or person does not include—
(i) The United States government, a state government, a unit of local government (including a county, city, town, township, parish, village, or other general-purpose subdivision of a state) or an Indian tribe or tribal organization established under Federal, state or Indian tribal law (including the Department of Hawaiian Home Lands), or a department, agency, or instrumentality of any such entity;
(ii) A federally-chartered public corporation that receives Federal funds appropriated specifically for that corporation;
(iii) An insured depository institution or affiliate of an insured depository institution; or
(iv) An officer, director, employee, or representative (acting in his or her capacity as an officer, director, employee, or representative) of an entity listed in paragraphs (i)(2)(i) through (iii) of this section.
(k) Party. The term “party” with respect to a covered agreement means each NGEP and each insured depository institution or affiliate that entered into the agreement.
(l) Relevant supervisory agency. The “relevant supervisory agency” for a covered agreement means the appropriate Federal banking agency for—
(1) Each insured depository institution (or subsidiary thereof) that is a party to the covered agreement;
(2) Each insured depository institution (or subsidiary thereof) or CRA affiliate that makes payments or loans or provides services that are subject to the covered agreement; and
(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)
Subpart A—General Membership and Branching Requirements
§ 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 § 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.
(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.
§ 208.2 Definitions.
For the purposes of this part:
(a) Board of Directors means the governing board of any institution performing the usual functions of a board of directors.
(b) Board means the Board of Governors of the Federal Reserve System.
(c) Branch. (1) Branch means any branch bank, branch office, branch agency, additional office, or any branch place of business that receives deposits, pays checks, or lends money. A branch may include a temporary, seasonal, or mobile facility that meets these criteria.
(2) Branch does not include:
(i) A loan origination facility where the proceeds of loans are not disbursed;
(ii) An office of an affiliated or unaffiliated institution that provides services to customers of the member bank on behalf of the member bank so long as the institution is not established or operated by the bank;
(iii) An automated teller machine;
(iv) A remote service unit;
(v) A facility to which the bank does not permit members of the public to have physical access for purposes of making deposits, paying checks, or borrowing money (such as an office established by the bank that receives deposits only through the mail); or
(vi) A facility that is located at the site of, or is an extension of, an approved main office or branch. The Board determines whether a facility is an extension of an existing main or branch office on a case-by-case basis.
(d) Capital stock and surplus means, unless otherwise provided in this part, or by statute:
(1) Tier 1 and tier 2 capital included in a member bank’s risk-based capital (as defined in § 217.2 of Regulation Q); and
(2) The balance of a member bank’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in its tier 2 capital for calculation of risk-based capital, based on the bank’s most recent Report of Condition and Income filed under 12 U.S.C. 324.
(3) For a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), capital stock and surplus means the bank’s Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowance for loan and lease losses or adjusted allowance for credit losses, as applicable.
(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.
§ 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) Board approval. If an applying bank conforms to all the requirements of the Federal Reserve Act and this section, and is otherwise qualified for membership, the Board may approve its application subject to such conditions as the Board may prescribe.
(3) Effective date of membership. A State bank becomes a member of the Federal Reserve System on the date its Federal Reserve Bank stock is credited to its account (or its deposit is accepted, if it is a mutual savings bank not authorized to purchase Reserve Bank stock) in accordance with the Board’s Regulation I (12 CFR part 209).
(b) Factors considered in approving applications for membership. Factors given special consideration by the Board in passing upon an application are:
(1) Financial condition and management. The financial history and condition of the applying bank and the general character of its management.
(2) Capital. The adequacy of the bank’s capital in accordance with § 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 § 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 § 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.
(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).
§ 208.4 Capital adequacy.
(a) Adequacy. A member bank’s capital, calculated in accordance with part 217, shall be at all times adequate in relation to the character and condition 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 measures, by which the Board evaluates the capital adequacy of member banks for risk-based capital purposes and for leverage measurement purposes, are located in part 217 of this chapter.
§ 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.
(d) Limitation on withdrawal of capital by dividend or otherwise. (1) A member bank may not declare or pay a dividend if the dividend would exceed the bank’s undivided profits as reportable on its Reports of Condition and Income, unless the bank has received the prior approval of the Board and of at least two-thirds of the shareholders of each class of stock outstanding.
(2) A member bank may not permit any portion of its permanent capital to be withdrawn unless the withdrawal has been approved by the Board and by at least two-thirds of the shareholders of each class of stock outstanding.
(3) If a member bank has capital surplus in excess of that required by law, the excess amount may be transferred to the bank’s undivided profits account and be available for the payment of dividends if:
(i) The amount transferred came from the earnings of prior periods, excluding earnings transferred as a result of stock dividends;
(ii) The bank’s board of directors approves the transfer of funds; and
(iii) The transfer has been approved by the Board.
(e) Payment of capital distributions. All member banks also are subject to the restrictions on payment of capital distributions contained in § 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.
§ 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 § 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 § 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 § 208.6. In the event that an interested person requests a copy of an application submitted under § 208.6, the Board may, in its discretion and based on the facts and circumstances, grant such person an extension of the comment period for up to 15 calendar days.
(b) Factors considered in approving domestic branch applications. Factors given special consideration by the Board in passing upon a branch application are:
(1) Financial condition and management. The financial history and condition of the applying bank and the general character of its management;
(2) Capital. The adequacy of the bank’s capital in accordance with § 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 § 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 § 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 § 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.
§ 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 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.
Subpart B—Investments and Loans
§ 208.20 Authority, purpose, and scope.
(a) Authority. Subpart B of Regulation H (12 CFR part 208, subpart B) is issued by the Board of Governors of the Federal Reserve System under 12 U.S.C. 24; sections 9, 11 and 21 of the Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), and 481-486); sections 1814, 1816, 1818, 1823(j), 1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C. 1814, 1816, 1818, 1823(j), 1831o, 1831p-1 and 1831r-1); and the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
(b) Purpose and scope. This subpart B describes certain investment limitations on member banks, statutory requirements for amortizing losses on agricultural loans and extending credit in areas having special flood hazards, as well as the requirements for issuing letters of credit and acceptances.
§ 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
(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.
§ 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 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 §§ 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 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.
§ 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 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 authorization 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 capital pursuant to part 217 of this chapter.
(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.
§ 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.
(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.
(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.
§ 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 Administrator 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) Administrator of FEMA means the Administrator of the Federal Emergency Management Agency.
(3) 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.
(4) 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.
(5) 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.
(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 NFIP.
(7) Mutual aid society means an organization—
(i) Whose members share a common religious, charitable, educational, or fraternal bond;
(ii) That covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and
(iii) That has a demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding.
(8) NFIP means the National Flood Insurance Program authorized under the Act.
(9) Private flood insurance means an insurance policy that:
(i) Is issued by an insurance company that is:
(A) Licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or
(B) Recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the State or jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property;
(ii) Provides flood insurance coverage that is at least as broad as the coverage provided under an SFIP for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer. To be at least as broad as the coverage provided under an SFIP, the policy must, at a minimum:
(A) Define the term “flood” to include the events defined as a “flood” in an SFIP;
(B) Contain the coverage specified in an SFIP, including that relating to building property coverage; personal property coverage, if purchased by the insured mortgagor(s); other coverages; and increased cost of compliance coverage;
(C) Contain deductibles no higher than the specified maximum, and include similar non-applicability provisions, as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender;
(D) Provide coverage for direct physical loss caused by a flood and may only exclude other causes of loss that are excluded in an SFIP. Any exclusions other than those in an SFIP may pertain only to coverage that is in addition to the amount and type of coverage that could be provided by an SFIP or have the effect of providing broader coverage to the policyholder; and
(E) Not contain conditions that narrow the coverage provided in an SFIP;
(iii) Includes all of the following:
(A) A requirement for the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to:
(1) The insured; and
(2) The member bank that made the designated loan secured by the property covered by the flood insurance, or the servicer acting on its behalf;
(B) Information about the availability of flood insurance coverage under the NFIP;
(C) A mortgage interest clause similar to the clause contained in an SFIP; and
(D) A provision requiring an insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy; and
(iv) Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.
(10) Residential improved real estate means real estate upon which a home or other residential building is located or to be located.
(11) 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.
(12) SFIP means, for purposes of paragraph (b)(9) of this section, a standard flood insurance policy issued under the NFIP in effect as of the date private flood insurance is provided to a member bank.
(13) 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 Administrator of FEMA.
(14) Table funding means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds.
(c) Requirement to purchase flood insurance where available—(1) In general. A member bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the 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 building or mobile home and any personal property that secures a loan and not the land itself.
(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.
(3) Private flood insurance—(i) Mandatory acceptance. A member bank must accept private flood insurance, as defined in paragraph (b)(9) of this section, in satisfaction of the flood insurance purchase requirement in paragraph (c)(1) of this section if the policy meets the requirements for coverage in paragraph (c)(1) of this section.
(ii) Compliance aid for mandatory acceptance. A member bank may determine that a policy meets the definition of private flood insurance in paragraph (b)(9) of this section, without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
(iii) Discretionary acceptance. A member bank may accept a flood insurance policy issued by a private insurer that is not issued under the NFIP and that does not meet the definition of private flood insurance in paragraph (b)(9) of this section in satisfaction of the flood insurance purchase requirement in paragraph (c)(1) of this section if the policy:
(A) Provides coverage in the amount required by paragraph (c)(1) of this section;
(B) Is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the State or jurisdiction where the property to be insured is located;
(C) Covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; and
(D) Provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the member bank documents its conclusion regarding sufficiency of the protection of the loan in writing.
(iv) Mutual aid societies. Notwithstanding the requirements of paragraph (c)(3)(iii) of this section, a member bank may accept a plan issued by a mutual aid society, as defined in paragraph (b)(7) of this section, in satisfaction of the flood insurance purchase requirement in paragraph (c)(1) of this section if:
(A) The Board has determined that such plans qualify as flood insurance for purposes of the Act.
(B) The plan provides coverage in the amount required by paragraph (c)(1) of this section;
(C) The plan covers both the mortgagor(s) and the mortgagee(s) as loss payees; and
(D) The plan provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the member bank documents its conclusion regarding sufficiency of the protection of the loan in writing.
(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 Administrator of FEMA, who publishes and periodically revises the list of States falling within this exemption;
(2) Property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less; or
(3) Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this paragraph (d)(3):
(i) “A structure that is a part of a residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes;
(ii) A structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure; and
(iii) “Serve as a residence” shall be based upon the good faith determination of the member bank that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.
(e) Escrow requirement—(1) In general—(i) Applicability. Except as provided in paragraphs (e)(1)(ii) or (e)(3) of this section, a member bank, or a servicer acting on its behalf, shall require the escrow of all premiums and fees for any flood insurance required under paragraph (c) of this section for any designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, payable with the same frequency as payments on the designated loan are required to be made for the duration of the loan.
(ii) Exceptions. Paragraph (e)(1)(i) of this section does not apply if:
(A) The loan is an extension of credit primarily for business, commercial, or agricultural purposes;
(B) The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage that meets the requirements of paragraph (c) of this section;
(C) Flood insurance coverage for the residential improved real estate or mobile home is provided by a policy that:
(1) Meets the requirements of paragraph (c) of this section;
(2) Is provided by a condominium association, cooperative, homeowners association, or other applicable group; and
(3) The premium for which is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense;
(D) The loan is a home equity line of credit;
(E) The loan is a nonperforming loan, which is a loan that is 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full; or
(F) The loan has a term of not longer than 12 months.
(iii) Duration of exception. If a member bank, or a servicer acting on behalf of the bank, determines at any time during the term of a designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, that an exception under paragraph (e)(1)(ii) of this section does not apply, then the bank or its servicer shall require the escrow of all premiums and fees for any flood insurance required under paragraph (c) of this section as soon as reasonably practicable and, if applicable, shall provide any disclosure required under section 10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA).
(iv) Escrow account. The member bank, or a servicer acting on its behalf, shall deposit the flood insurance premiums and fees on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of 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 Administrator 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.
(2) Notice. For any loan for which a member bank is required to escrow under paragraphs (e)(1) or (e)(3)(ii) of this section or may be required to escrow under paragraph (e)(1)(iii) of this section during the term of the loan, the member bank, or a servicer acting on its behalf, shall mail or deliver a written notice with the notice provided under paragraph (i) of this section informing the borrower that the member bank is required to escrow all premiums and fees for required flood insurance, using language that is substantially similar to model clauses on the escrow requirement in appendix A to this section.
(3) Small lender exception—(i) Qualification. Except as may be required under applicable State law, paragraphs (e)(1), (2), and (4) of this section do not apply to a member bank:
(A) That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years; and
(B) On or before July 6, 2012:
(1) Was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and
(2) Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.
(ii) Change in status. If a member bank previously qualified for the exception in paragraph (e)(3)(i) of this section, but no longer qualifies for the exception because it had assets of $1 billion or more for two consecutive calendar year ends, the member bank must escrow premiums and fees for flood insurance pursuant to paragraph (e)(1) of this section for any designated loan made, increased, extended, or renewed on or after July 1 of the first calendar year of changed status.
(4) Option to escrow—(i) In general. A member bank, or a servicer acting on its behalf, shall offer and make available to the borrower the option to escrow all premiums and fees for any flood insurance required under paragraph (c) of this section for any loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016, or July 1 of the first calendar year in which the member bank has had a change in status pursuant to paragraph (e)(3)(ii) of this section, unless:
(A) The loan or the member bank qualifies for an exception from the escrow requirement under paragraphs (e)(1)(ii) or (e)(3) of this section, respectively;
(B) The borrower is already escrowing all premiums and fees for flood insurance for the loan; or
(C) The member bank is required to escrow flood insurance premiums and fees pursuant to paragraph (e)(1) of this section.
(ii) Notice. For any loan subject to paragraph (e)(4)(i) of this section, the member bank, or a servicer acting on its behalf, shall mail or deliver to the borrower no later than June 30, 2016, or September 30 of the first calendar year in which the member bank has had a change in status pursuant to paragraph (e)(3)(ii) of this section, a notice in writing, or if the borrower agrees, electronically, informing the borrower of the option to escrow all premiums and fees for any required flood insurance and the method(s) by which the borrower may request the escrow, using language similar to the model clause in appendix B to this section.
(iii) Timing. The member bank or servicer must begin escrowing premiums and fees for flood insurance as soon as reasonably practicable after the member bank or servicer receives the borrower’s request to escrow.
(f) Required use of standard flood hazard determination form—(1) Use of form. A state member bank shall use the standard flood hazard determination form developed by the Administrator 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 state member bank may obtain the standard flood hazard determination form from FEMA’s Web site at www.fema.gov.
(2) Retention of form. A state 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 state member bank owns the loan.
(g) Force placement of flood insurance—(1) Notice and purchase of coverage. 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 member 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, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.
(2) Termination of force-placed insurance—(i) Termination and refund. Within 30 days of receipt by a member bank, or a servicer acting on its behalf, of a confirmation of a borrower’s existing flood insurance coverage, the member bank or its servicer shall:
(A) Notify the insurance provider to terminate any insurance purchased by the member bank or its servicer under paragraph (g)(1) of this section; and
(B) Refund to the borrower all premiums paid by the borrower for any insurance purchased by the member bank or its servicer under paragraph (g)(1) of this section during any period during which the borrower’s flood insurance coverage and the insurance coverage purchased by the member bank or its servicer were each in effect, and any related fees charged to the borrower with respect to the insurance purchased by the member bank or its servicer during such period.
(ii) Sufficiency of demonstration. For purposes of confirming a borrower’s existing flood insurance coverage under paragraph (g)(2) of this section, a member bank or its servicer shall accept from the borrower an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent.
(h) Determination fees.—(1) General. Notwithstanding any Federal or State law other than the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129), any member bank, or a servicer acting on behalf of the bank, may charge a reasonable fee for determining whether the building or mobile 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 Administrator of FEMA’s revision or updating of flood plain areas or flood-risk zones;
(iii) Reflects the Administrator 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 Administrator of FEMA, may reasonably require a determination whether the building or mobile home securing the loan is located in a special flood hazard area; or
(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 Administrator 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 from private insurance companies that issue standard flood insurance policies on behalf of the NFIP or directly from the NFIP;
(iv) A statement that flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP also may be available from a private insurance company that issues policies on behalf of the company;
(v) A statement that the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and that the borrower should direct inquiries regarding the availability, cost, and comparisons of flood insurance coverage to an insurance agent; and
(vi) 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 sample 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) of this section by providing written notice to the borrower containing the language presented in appendix A of this section within a reasonable time before the completion of the transaction. The notice presented in appendix A of this section satisfies the borrower notice requirements of the Act.
(j) Notice of servicer’s identity—(1) Notice requirement. When a member bank makes, increases, extends, renews, 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 Administrator of FEMA (or the Administrator’s designee) in writing of the identity of the servicer of the loan. The Administrator 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 Administrator of FEMA’s designee.
(2) Transfer of servicing rights. The member bank shall notify the Administrator of FEMA (or the Administrator’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 Administrator 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) of this section shall transfer to the transferee servicer.
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 Administrator 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 Administrator 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.
• 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 building or mobile home and any personal property that secures your loan and not the land itself.
• 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.
• Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose not to maintain flood insurance on a structure and it floods, you are responsible for all flood losses relating to that structure.
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 that provides the same level of coverage as a standard flood insurance policy under the NFIP may be available from private insurers that do not participate in the NFIP. You should compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and contact an insurance agent as to the availability, cost, and comparisons of flood insurance coverage.
Federal law may require a lender or its servicer to escrow all premiums and fees for flood insurance that covers any residential building or mobile home securing a loan that is located in an area with special flood hazards. If your lender notifies you that an escrow account is required for your loan, then you must pay your flood insurance premiums and fees to the lender or its servicer with the same frequency as you make loan payments for the duration of your loan. These premiums and fees will be deposited in the escrow account, which will be used to pay the flood insurance provider.]
____ 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.
You have the option to escrow all premiums and fees for the payment on your flood insurance policy that covers any residential building or mobile home that is located in an area with special flood hazards and that secures your loan. If you choose this option:
• Your payments will be deposited in an escrow account to be paid to the flood insurance provider.
• The escrow amount for flood insurance will be added to the regular mortgage payment that you make to your lender or its servicer.
• The payments you make into the escrow account will accumulate over time and the funds will be used to pay your flood insurance policy when your lender or servicer receives a notice from your flood insurance provider that the flood insurance premium is due.
To choose this option, follow the instructions below. If you have any questions about the option, contact [Insert Name of Lender or Servicer] at [Insert Contact Information].
[Insert Instructions for Selecting to Escrow]
Subpart C—Bank Securities and Securities-Related Activities
§ 208.30 Authority, purpose, and scope.
(a) Authority. Subpart C of Regulation H (12 CFR part 208, subpart C) is issued by the Board of Governors of the Federal Reserve System under 12 U.S.C. 24, 92a, 93a; sections 1818 and 1831p-1(a)(2) of the FDI Act (12 U.S.C. 1818, 1831p-1(a)(2)); and sections 78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78o-5, 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.
§ 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.
§ 208.32 Notice of disciplinary sanctions imposed by registered clearing agency.
(a) Notice requirement. Any member bank or any of its subsidiaries that is a registered clearing agency pursuant to section 17A(b) of the Securities Exchange Act of 1934 (the Act), and that:
(1) Imposes any final disciplinary sanction on any participant therein;
(2) Denies participation to any applicant; or
(3) Prohibits or limits any person in respect to access to services offered by the clearing agency, shall file with the Board (and the appropriate regulatory agency, if other than the Board, for a participant or applicant) notice thereof in the manner prescribed in this section.
(b) Notice of final disciplinary actions. (1) Any registered clearing agency for which the Board is the appropriate regulatory agency that takes any final disciplinary action with respect to any participant shall promptly file a notice thereof with the Board in accordance with paragraph (c) of this section. For the purposes of this paragraph (b), final disciplinary action means the imposition of any disciplinary sanction pursuant to section 17A(b)(3)(G) of the Act, or other action of a registered clearing agency which, after notice and opportunity for hearing, results in final disposition of charges of:
(i) One or more violations of the rules of the registered clearing agency; or
(ii) Acts or practices constituting a statutory disqualification of a type defined in paragraph (iv) or (v) (except prior convictions) of section 3(a)(39) of the Act.
(2) However, if a registered clearing agency fee schedule specifies certain charges for errors made by its participants in giving instructions to the registered clearing agency which are de minimis on a per error basis, and whose purpose is, in part, to provide revenues to the clearing agency to compensate it for effort expended in beginning to process an erroneous instruction, such error charges shall not be considered a final disciplinary action for purposes of this paragraph (b).
(c) Contents of final disciplinary action notice. Any notice filed pursuant to paragraph (b) of this section shall consist of the following, as appropriate:
(1) The name of the respondent and the respondent’s last known address, as reflected on the records of the clearing agency, and the name of the person, committee, or other organizational unit that brought the charges. However, identifying information as to any respondent found not to have violated a provision covered by a charge may be deleted insofar as the notice reports the disposition of that charge and, prior to the filing of the notice, the respondent does not request that identifying information be included in the notice;
(2) A statement describing the investigative or other origin of the action;
(3) As charged in the proceeding, the specific provision or provisions of the rules of the clearing agency violated by the respondent, or the statutory disqualification referred to in paragraph (b)(2) of this section, and a statement describing the answer of the respondent to the charges;
(4) A statement setting forth findings of fact with respect to any act or practice in which the respondent was charged with having engaged in or omitted; the conclusion of the clearing agency as to whether the respondent violated any rule or was subject to a statutory disqualification as charged; and a statement of the clearing agency in support of its resolution of the principal issues raised in the proceedings;
(5) A statement describing any sanction imposed, the reasons therefor, and the date upon which the sanction became or will become effective; and
(6) Such other matters as the clearing agency may deem relevant.
(d) Notice of final denial, prohibition, termination or limitation based on qualification or administrative rules. (1) Any registered clearing agency, for which the Board is the appropriate regulatory agency, that takes any final action that denies or conditions the participation of any person, or prohibits or limits access, to services offered by the clearing agency, shall promptly file notice thereof with the Board (and the appropriate regulatory agency, if other than the Board, for the affected person) in accordance with paragraph (e) of this section; but such action shall not be considered a final disciplinary action for purposes of paragraph (b) of this section where the action is based on an alleged failure of such person to:
(i) Comply with the qualification standards prescribed by the rules of the registered clearing agency pursuant to section 17A(b)(4)(B) of the Act; or
(ii) Comply with any administrative requirements of the registered clearing agency (including failure to pay entry or other dues or fees, or to file prescribed forms or reports) not involving charges of violations that may lead to a disciplinary sanction.
(2) However, no such action shall be considered final pursuant to this paragraph (d) that results merely from a notice of such failure to comply to the person affected, if such person has not sought an adjudication of the matter, including a hearing, or otherwise exhausted the administrative remedies within the registered clearing agency with respect to such a matter.
(e) Contents of notice required by paragraph (d) of this section. Any notice filed pursuant to paragraph (d) of this section shall consist of the following, as appropriate:
(1) The name of each person concerned and each person’s last known address, as reflected in the records of the clearing agency;
(2) The specific grounds upon which the action of the clearing agency was based, and a statement describing the answer of the person concerned;
(3) A statement setting forth findings of fact and conclusions as to each alleged failure of the person to comply with qualification standards or administrative obligations, and a statement of the clearing agency in support of its resolution of the principal issues raised in the proceeding;
(4) The date upon which such action became or will become effective; and
(5) Such other matters as the clearing agency deems relevant.
(f) Notice of final action based on prior adjudicated statutory disqualifications. Any registered clearing agency for which the Board is the appropriate regulatory agency that takes any final action shall promptly file notice thereof with the Board (and the appropriate regulatory agency, if other than the Board, for the affected person) in accordance with paragraph (g) of this section, where the final action:
(1) Denies or conditions participation to any person, or prohibits or limits access to services offered by the clearing agency; and
(2) Is based upon a statutory disqualification of a type defined in paragraph (A), (B) or (C) of section 3(a)(39) of the Act, consisting of a prior conviction, as described in subparagraph (E) of section 3(a)(39) of the Act. However, no such action shall be considered final pursuant to this paragraph (f) that results merely from a notice of such disqualification to the person affected, if such person has not sought an adjudication of the matter, including a hearing, or otherwise exhausted the administrative remedies within the clearing agency with respect to such a matter.
(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.
§ 208.33 Application for stay or review of disciplinary sanctions imposed by registered clearing agency.
(a) Stays. The rules adopted by the Securities and Exchange Commission (SEC) pursuant to section 19 of the Securities Exchange Act of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the SEC is the appropriate regulatory agency for stays of disciplinary sanctions or summary suspensions imposed by registered clearing agencies (17 CFR 240.19d-2) apply to applications by member banks. References to the “Commission” are deemed to refer to the Board.
(b) Reviews. The regulations adopted by the Securities and Exchange Commission pursuant to section 19 of the Securities and Exchange Act of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the SEC is the appropriate regulatory agency for reviews of final disciplinary sanctions, denials of participation, or prohibitions or limitations of access to services imposed by registered clearing agencies (17 CFR 240.19d-3(a)-(f)) apply to applications by member banks. References to the “Commission” are deemed to refer to the Board. The Board’s Uniform Rules of Practice and Procedure (12 CFR part 263) apply to review proceedings under this § 208.33 to the extent not inconsistent with this § 208.33.
§ 208.34 Recordkeeping and confirmation of certain securities transactions effected by State member banks.
(a) Exceptions and safe and sound operations. (1) A State member bank may be excepted from one or more of the requirements of this section if it meets one of the following conditions of paragraphs (a)(1)(i) through (a)(1)(iv) of this section:
(i) De minimis transactions. The requirements of paragraphs (c)(2) through (c)(4) and paragraphs (e)(1) through (e)(3) of this section shall not apply to banks having an average of less than 200 securities transactions per year for customers over the prior three calendar year period, exclusive of transactions in government securities;
(ii) Government securities. The recordkeeping requirements of paragraph (c) of this section shall not apply to banks effecting fewer than 500 government securities brokerage transactions per year; provided that this exception shall not apply to government securities transactions by a State member bank that has filed a written notice, or is required to file notice, with the Federal Reserve Board that it acts as a government securities broker or a government securities dealer;
(iii) Municipal securities. The municipal securities activities of a State member bank that are subject to regulations promulgated by the Municipal Securities Rulemaking Board shall not be subject to the requirements of this section; and
(iv) Foreign branches. The requirements of this section shall not apply to the activities of foreign branches of a State member bank.
(2) Every State member bank qualifying for an exemption under paragraph (a)(1) of this section that conducts securities transactions for customers shall, to ensure safe and sound operations, maintain effective systems of records and controls regarding its customer securities transactions that clearly and accurately reflect appropriate information and provide an adequate basis for an audit of the information.
(b) Definitions. For purposes of this section:
(1) Asset-backed security shall mean a security that is serviced primarily by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distribution of proceeds to the security holders.
(2) Collective investment fund shall mean funds held by a State member bank as fiduciary and, consistent with local law, invested collectively as follows:
(i) In a common trust fund maintained by such bank exclusively for the collective investment and reinvestment of monies contributed thereto by the bank in its capacity as trustee, executor, administrator, guardian, or custodian under the Uniform Gifts to Minors Act; or
(ii) In a fund consisting solely of assets of retirement, pension, profit sharing, stock bonus or similar trusts which are exempt from Federal income taxation under the Internal Revenue Code (26 U.S.C.).
(3) Completion of the transaction effected by or through a state member bank shall mean:
(i) For purchase transactions, the time when the customer pays the bank any part of the purchase price (or the time when the bank makes the book-entry for any part of the purchase price if applicable); however, if the customer pays for the security prior to the time payment is requested or becomes due, then the transaction shall be completed when the bank transfers the security into the account of the customer; and
(ii) For sale transactions, the time when the bank transfers the security out of the account of the customer or, if the security is not in the bank’s custody, then the time when the security is delivered to the bank; however, if the customer delivers the security to the bank prior to the time delivery is requested or becomes due then the transaction shall be completed when the banks makes payment into the account of the customer.
(4) Crossing of buy and sell orders shall mean a security transaction in which the same bank acts as agent for both the buyer and the seller.
(5) Customer shall mean any person or account, including any agency, trust, estate, guardianship, or other fiduciary account, for which a State member bank effects or participates in effecting the purchase or sale of securities, but shall not include a broker, dealer, bank acting as a broker or dealer, municipal securities broker or dealer, or issuer of the securities which are the subject of the transactions.
(6) Debt security as used in paragraph (c) of this section shall mean any security, such as a bond, debenture, note or any other similar instrument which evidences a liability of the issuer (including any security of this type that is convertible into stock or similar security) and fractional or participation interests in one or more of any of the foregoing; provided, however, that securities issued by an investment company registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq., shall not be included in this definition.
(7) Government security shall mean:
(i) A security that is a direct obligation of, or obligation guaranteed as to principal and interest by, the United States;
(ii) A security that is issued or guaranteed by a corporation in which the United States has a direct or indirect interest and which is designated by the Secretary of the Treasury for exemption as necessary or appropriate in the public interest or for the protection of investors;
(iii) A security issued or guaranteed as to principal and interest by any corporation whose securities are designated, by statute specifically naming the corporation, to constitute exempt securities within the meaning of the laws administered by the Securities and Exchange Commission; or
(iv) Any put, call, straddle, option, or privilege on a security as described in paragraphs (b)(7) (i), (ii), or (iii) of this section other than a put, call, straddle, option, or privilege that is traded on one or more national securities exchanges, or for which quotations are disseminated though an automated quotation system operated by a registered securities association.
(8) Investment discretion with respect to an account shall mean if the State member bank, directly or indirectly, is authorized to determine what securities or other property shall be purchased or sold by or for the account, or makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions.
(9) Municipal security shall mean a security which is a direct obligation of, or obligation guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond (as defined in 26 U.S.C. 103(c)(2) the interest on which is excludable from gross income under 26 U.S.C. 103(a)(1), by reason of the application of paragraph (4) or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5) and (7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26 U.S.C. 103(c) does not apply to such security.
(10) Periodic plan shall mean:
(i) A written authorization for a State member bank to act as agent to purchase or sell for a customer a specific security or securities, in a specific amount (calculated in security units or dollars) or to the extent of dividends and funds available, at specific time intervals, and setting forth the commission or charges to be paid by the customer or the manner of calculating them (including dividend reinvestment plans, automatic investment plans, and employee stock purchase plans); or
(ii) Any prearranged, automatic transfer or sweep of funds from a deposit account to purchase a security, or any prearranged, automatic redemption or sale of a security with the funds being transferred into a deposit account (including cash management sweep services).
(11) Security shall mean:
(i) Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, for a security, any put, call, straddle, option, or privilege on any security, or group or index of securities (including any interest therein or based on the value thereof), any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing.
(ii) But does not include a deposit or share account in a federally or state insured depository institution, a loan participation, a letter of credit or other form of bank indebtedness incurred in the ordinary course of business, currency, any note, draft, bill of exchange, or bankers acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited, units of a collective investment fund, interests in a variable amount (master) note of a borrower of prime credit, or U.S. Savings Bonds.
(c) Recordkeeping. Except as provided in paragraph (a) of this section, every State member bank effecting securities transactions for customers, including transactions in government securities, and municipal securities transactions by banks not subject to registration as municipal securities dealers, shall maintain the following records with respect to such transactions for at least three years. Nothing contained in this section shall require a bank to maintain the records required by this paragraph in any given manner, provided that the information required to be shown is clearly and accurately reflected and provides an adequate basis for the audit of such information. Records may be maintained in hard copy, automated, or electronic form provided the records are easily retrievable, readily available for inspection, and capable of being reproduced in a hard copy. A bank may contract with third party service providers, including broker/dealers, to maintain records required under this part.
(1) Chronological records of original entry containing an itemized daily record of all purchases and sales of securities. The records of original entry shall show the account or customer for which each such transaction was effected, the description of the securities, the unit and aggregate purchase or sale price (if any), the trade date and the name or other designation of the broker/dealer or other person from whom purchased or to whom sold;
(2) Account records for each customer which shall reflect all purchases and sales of securities, all receipts and deliveries of securities, and all receipts and disbursements of cash with respect to transactions in securities for such account and all other debits and credits pertaining to transactions in securities;
(3) A separate memorandum (order ticket) of each order to purchase or sell securities (whether executed or canceled), which shall include:
(i) The account(s) for which the transaction was effected;
(ii) Whether the transaction was a market order, limit order, or subject to special instructions;
(iii) The time the order was received by the trader or other bank employee responsible for effecting the transaction;
(iv) The time the order was placed with the broker/dealer, or if there was no broker/dealer, the time the order was executed or canceled;
(v) The price at which the order was executed; and
(vi) The broker/dealer utilized;
(4) A record of all broker/dealers selected by the bank to effect securities transactions and the amount of commissions paid or allocated to each such broker during the calendar year; and
(5) A copy of the written notification required by paragraphs (d) and (e) of this section.
(d) Content and time of notification. Every State member bank effecting a securities transaction for a customer shall give or send to such customer either of the following types of notifications at or before completion of the transaction or; if the bank uses a broker/dealer’s confirmation, within one business day from the bank’s receipt of the broker/dealer’s confirmation:
(1) A copy of the confirmation of a broker/dealer relating to the securities transaction; and if the bank is to receive remuneration from the customer or any other source in connection with the transaction, and the remuneration is not determined pursuant to a prior written agreement between the bank and the customer, a statement of the source and the amount of any remuneration to be received; or
(2) A written notification disclosing:
(i) The name of the bank;
(ii) The name of the customer;
(iii) Whether the bank is acting as agent for such customer, as agent for both such customer and some other person, as principal for its own account, or in any other capacity;
(iv) The date of execution and a statement that the time of execution will be furnished within a reasonable time upon written request of such customer specifying the identity, price and number of shares or units (or principal amount in the case of debt securities) of such security purchased or sold by such customer;
(v) The amount of any remuneration received or to be received, directly or indirectly, by any broker/dealer from such customer in connection with the transaction;
(vi) The amount of any remuneration received or to be received by the bank from the customer and the source and amount of any other remuneration to be received by the bank in connection with the transaction, unless remuneration is determined pursuant to a written agreement between the bank and the customer, provided, however, in the case of Government securities and municipal securities, this paragraph (d)(2)(vi) shall apply only with respect to remuneration received by the bank in an agency transaction. If the bank elects not to disclose the source and amount of remuneration it has or will receive from a party other than the customer pursuant to this paragraph (d)(2)(vi), the written notification must disclose whether the bank has received or will receive remuneration from a party other than the customer, and that the bank will furnish within a reasonable time the source and amount of this remuneration upon written request of the customer. This election is not available, however, if, with respect to a purchase, the bank was participating in a distribution of that security; or with respect to a sale, the bank was participating in a tender offer for that security;
(vii) The name of the broker/dealer utilized; or, where there is no broker/dealer, the name of the person from whom the security was purchased or to whom it was sold, or the fact that such information will be furnished within a reasonable time upon written request;
(viii) In the case of a transaction in a debt security subject to redemption before maturity, a statement to the effect that the debt security may be redeemed in whole or in part before maturity, that the redemption could affect the yield represented and that additional information is available on request;
(ix) In the case of a transaction in a debt security effected exclusively on the basis of a dollar price:
(A) The dollar price at which the transaction was effected;
(B) The yield to maturity calculated from the dollar price; provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to a transaction in a debt security that either has a maturity date that may be extended by the issuer with a variable interest payable thereon, or is an asset-backed security that represents an interest in or is secured by a pool of receivables or other financial assets that are subject to continuous prepayment;
(x) In the case of a transaction in a debt security effected on the basis of yield:
(A) The yield at which the transaction was effected, including the percentage amount and its characterization (e.g., current yield, yield to maturity, or yield to call) and if effected at yield to call, the type of call, the call date, and the call price; and
(B) The dollar price calculated from the yield at which the transaction was effected; and
(C) If effected on a basis other than yield to maturity and the yield to maturity is lower than the represented yield, the yield to maturity as well as the represented yield; provided, however, that this paragraph (c)(2)(x)(C) shall not apply to a transaction in a debt security that either has a maturity date that may be extended by the 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 § 208.34(b)(10)(ii) give or send its customer a written statement in the same form as prescribed in paragraph (e)(3) above for each month in which a purchase or sale of a security takes place in a deposit account and not less than once every three months if there are no securities transactions 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.
§ 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.
(a) Filing, disclosure and other requirements—(1) General. Except as otherwise provided in this section, a member bank whose securities are subject to registration pursuant to section 12(b) or section 12(g) of the Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 78l(b) and (g)) shall comply with the rules, regulations and forms adopted by the Securities and Exchange Commission (Commission) pursuant to—
(i) Sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f) and 16 of the 1934 Act (15 U.S.C. 78f(m), 78l, 78m, 78n(a), (c), (d) and (f), and 78p); and
(ii) Sections 302, 303, 304, 306, 401(b), 404, 406 and 407 of the Sarbanes-Oxley Act of 2002 (codified at 15 U.S.C. 7241, 7242, 7243, 7244, 7261, 7262, 7264 and 7265).
(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.
(3) Notwithstanding paragraph (b)(1) of this section, a member bank may, from December 2, 2020, through December 31, 2021, make the election described in paragraph (b)(1) of this section if it has no foreign offices and had total assets of $150 million or less, determined based on the lesser of total assets as of December 31, 2019, and total assets as of the end of the bank’s most recent fiscal year. The relief provided under this paragraph (b)(3) of this section does not apply to a member bank if the Board determines that permitting the member bank to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the member bank. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the member bank since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the member bank has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the member bank. In making a determination pursuant to this paragraph (b)(3), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(c) Required filings—(1) Place and timing of filing. All papers required to be filed with the Board, pursuant to the 1934 Act or regulations thereunder, shall be submitted to the Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. Material may be filed by delivery to the Board, through the mails, or otherwise. The date on which papers are actually received by the Board shall be the date of filing thereof if all of the requirements with respect to the filing have been complied with.
(2) Filing fees. No filing fees specified by the Commission’s rules shall be paid to the Board.
(3) Public inspection. Copies of the registration statement, definitive proxy solicitation materials, reports, and annual reports to shareholders required by this section (exclusive of exhibits) shall be available for public inspection at the Board’s offices in Washington, DC, as well as at the Federal Reserve Banks of New York, Chicago, and San Francisco and at the Reserve Bank in the district in which the reporting bank is located.
(d) Confidentiality of filing. Any person filing any statement, report, or document under the 1934 Act may make written objection to the public disclosure of any information contained therein in accordance with the following procedure:
(1) The person shall omit from the statement, report, or document, when it is filed, the portion thereof that the person desires to keep undisclosed (hereinafter called the confidential portion). The person shall indicate at the appropriate place in the statement, report, or document that the confidential portion has been omitted and filed separately with the Board.
(2) The person shall file the following with the copies of the statement, report, or document filed with the Board:
(i) As many copies of the confidential portion, each clearly marked “CONFIDENTIAL TREATMENT,” as there are copies of the statement, report, or document filed with the Board. Each copy of the confidential portion shall contain the complete text of the item and, notwithstanding that the confidential portion does not constitute the whole of the answer, the entire answer thereto; except that in case the confidential portion is part of a financial statement or schedule, only the particular financial statement or schedule need be included. All copies of the confidential portion shall be in the same form as the remainder of the statement, report, or document; and
(ii) An application making objection to the disclosure of the confidential portion. The application shall be on a sheet or sheets separate from the confidential portion, and shall:
(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.
§ 208.37 Government securities sales practices.
(a) Scope. This subpart is applicable to state member banks that have filed notice as, or are required to file notice as, government securities brokers or dealers pursuant to section 15C of the Securities Exchange Act (15 U.S.C. 78o-5) and Department of the Treasury rules under section 15C (17 CFR 400.1(d) and part 401).
(b) Definitions. For purposes of this section:
(1) Bank that is a government securities broker or dealer means a state member bank that has filed notice, or is required to file notice, as a government securities broker or dealer pursuant to section 15C of the Securities Exchange Act (15 U.S.C. 78o-5) and Department of the Treasury rules under section 15C (17 CFR 400.1(d) and Part 401).
(2) Customer does not include a broker or dealer or a government securities broker or dealer.
(3) Government security has the same meaning as this term has in section 3(a)(42) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(42)).
(4) Non-institutional customer means any customer other than:
(i) A bank, savings association, insurance company, or registered investment company;
(ii) An investment adviser registered under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3); or
(iii) Any entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.
(c) Business conduct. A bank that is a government securities broker or dealer shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of its 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’s financial 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
(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.
(e) Timing. The calculation of the definitions of common equity tier 1 capital, the common equity tier 1 risk-based capital ratio, the leverage ratio, the supplementary leverage ratio, tangible equity, tier 1 capital, the tier 1 risk-based capital ratio, total assets, total leverage exposure, the total risk-based capital ratio, and total risk-weighted assets under this subpart is subject to the timing provisions at 12 CFR 217.1(f) and the transitions at 12 CFR part 217, subpart G.
§ 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) Advanced approaches bank means a bank that is described in § 217.100(b)(1) of Regulation Q (12 CFR 217.100(b)(1)).
(b) Bank means an insured depository institution as defined in section 3 of the FDI Act (12 U.S.C. 1813).
(c) Common equity tier 1 capital means the amount of capital as defined in § 217.2 of Regulation Q (12 CFR 217.2).
(d) Common equity tier 1 risk-based capital ratio means the ratio of common equity tier 1 capital to total risk-weighted assets, as calculated in accordance with § 217.10(b)(1) or § 217.10(c)(1) of Regulation Q (12 CFR 217.10(b)(1), 12 CFR 217.10(c)(1)), as applicable.
(e) 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 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.
(f) Controlling person means any person having control of an insured depository institution and any company controlled by that person.
(g) Global systemically important BHC has the same meaning as in § 217.2 of Regulation Q (12 CFR 217.2).
(h) Leverage ratio means the ratio of tier 1 capital to average total consolidated assets, as calculated in accordance with § 217.10 of Regulation Q (12 CFR 217.10).
(i) 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.
(j) Supplementary leverage ratio means the ratio of tier 1 capital to total leverage exposure, as calculated in accordance with § 217.10 of Regulation Q (12 CFR 217.10).
(k) Tangible equity means the amount of tier 1 capital, plus the amount of outstanding perpetual preferred stock (including related surplus) not included in tier 1 capital.
(l) Tier 1 capital means the amount of capital as defined in § 217.20 of Regulation Q (12 CFR 217.20).
(m) Tier 1 risk-based capital ratio means the ratio of tier 1 capital to total risk-weighted assets, as calculated in accordance with § 217.10(b)(2) or § 217.10(c)(2) of Regulation Q (12 CFR 217.10(b)(2), 12 CFR 217.10(c)(2)), as applicable.
(n) Total assets means quarterly average total assets as reported in a bank’s Call Report, minus items deducted from tier 1 capital. At its discretion the Federal Reserve may calculate total assets using a bank’s period-end assets rather than quarterly average assets.
(o) Total leverage exposure means the total leverage exposure, as calculated in accordance with § 217.11 of Regulation Q (12 CFR 217.11).
(p) Total risk-based capital ratio means the ratio of total capital to total risk-weighted assets, as calculated in accordance with § 217.10(b)(3) or § 217.10(c)(3) of Regulation Q (12 CFR 217.10(b)(3), 12 CFR 217.10(c)(3)), as applicable.
(q) Total risk-weighted assets means standardized total risk-weighted assets, and for an advanced approaches bank also includes advanced approaches total risk-weighted assets, as defined in § 217.2 of Regulation Q (12 CFR 217.2).
§ 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
(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 § 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.
§ 208.43 Capital measures and capital category definitions.
(a) Capital measures. (1) For purposes of section 38 of the FDI Act and this subpart, the relevant capital measures are:
(i) Total Risk-Based Capital Measure: The total risk-based capital ratio;
(ii) Tier 1 Risk-Based Capital Measure: The tier 1 risk-based capital ratio;
(iii) Common Equity Tier 1 Capital Measure: The common equity tier 1 risk-based capital ratio; and
(iv) Leverage Measure:
(A) The leverage ratio; and
(B) With respect to an advanced approaches bank, on January 1, 2018, and thereafter, the supplementary leverage ratio.
(C) With respect to any bank that is a subsidiary (as defined in § 217.2 of this chapter) of a global systemically important BHC, on Jan. 1, 2018, and thereafter, the supplementary leverage ratio.
(2) For a qualifying community banking organization (as defined in § 217.12 of this chapter), that has elected to use the community bank leverage ratio framework (as defined in § 217.12 of this chapter), the leverage ratio calculated in accordance with § 217.12(b) of this chapter is used to determine the well capitalized capital category under paragraph (b)(1)(i)(A) through (D) of this section.
(b) Capital categories. For purposes of section 38 of the FDI Act and this subpart, a member bank is deemed to be:
(1)(i) “Well capitalized” if:
(A) Total Risk-Based Capital Measure: The bank has a total risk-based capital ratio of 10.0 percent or greater; and
(B) Tier 1 Risk-Based Capital Measure: The bank has a tier 1 risk-based capital ratio of 8.0 percent or greater; and
(C) Common Equity Tier 1 Capital Measure: The bank has a common equity tier 1 risk-based capital ratio of 6.5 percent or greater; and
(D) Leverage Measure:
(1) The bank has a leverage ratio of 5.0 percent or greater; and
(2) Beginning on January 1, 2018, with respect to any bank that is a subsidiary of a global systemically important BHC under the definition of “subsidiary” in § 217.2 of this chapter, the bank has a supplementary leverage ratio of 6.0 percent or greater; and
(E) The bank 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.
(ii) A qualifying community banking organization, as defined in § 217.12 of this chapter, that has elected to use the community bank leverage ratio framework under § 217.12 of this chapter, shall be considered to have met the capital ratio requirements for the well capitalized capital category in paragraph (b)(1)(i)(A) through (D) of this section.
(2) “Adequately capitalized” if:
(i) Total Risk-Based Capital Measure: the bank has a total risk-based capital ratio of 8.0 percent or greater;
(ii) Tier 1 Risk-Based Capital Measure: the bank has a tier 1 risk-based capital ratio of 6.0 percent or greater;
(iii) Common Equity Tier 1 Capital Measure: the bank has a common equity tier 1 risk-based capital ratio of 4.5 percent or greater;
(iv) Leverage Measure:
(A) The bank has a leverage ratio of 4.0 percent or greater; and
(B) With respect to an advanced approaches bank or bank that is a Category III Board-regulated institution (as defined in § 217.2 of this chapter), the bank has a supplementary leverage ratio of 3.0 percent or greater; and
(v) The bank does not meet the definition of a “well capitalized” bank.
(3) “Undercapitalized” if:
(i) Total Risk-Based Capital Measure: the bank has a total risk-based capital ratio of less than 8.0 percent;
(ii) Tier 1 Risk-Based Capital Measure: the bank has a tier 1 risk-based capital ratio of less than 6.0 percent;
(iii) Common Equity Tier 1 Capital Measure: the bank has a common equity tier 1 risk-based capital ratio of less than 4.5 percent; or
(iv) Leverage Measure:
(A) The bank has a leverage ratio of less than 4.0 percent; or
(B) With respect to an advanced approaches bank or bank that is a Category III Board-regulated institution (as defined in § 217.2 of this chapter), the bank has a supplementary leverage ratio of less than 3.0 percent.
(4) “Significantly undercapitalized” if:
(i) Total Risk-Based Capital Measure: the bank has a total risk-based capital ratio of less than 6.0 percent;
(ii) Tier 1 Risk-Based Capital Measure: the bank has a tier 1 risk-based capital ratio of less than 4.0 percent;
(iii) Common Equity Tier 1 Capital Measure: the bank has a common equity tier 1 risk-based capital ratio of less than 3.0 percent; or
(iv) Leverage Measure: the bank has a leverage ratio of 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 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.
§ 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 § 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 § 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 § 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 § 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 § 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 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.
§ 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 § 208.42 or § 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));
(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 § 208.42 or § 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 § 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, Appraisal Standards, and Minimum Requirements for Appraisal Management Companies
§ 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 pursuant to section 304 of the Federal Deposit Insurance Corporation Improvement Act of 1991, (12 U.S.C 1828(o)), Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act, (12 U.S.C 3331-3351), and section 1473 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, (12 U.S.C. 3353).
(b) Purpose and scope. This subpart prescribes standards for real estate lending to be used by state 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 and the minimum requirements for appraisal management companies are set forth in 12 CFR part 225, subparts G and M respectively (Regulation Y).
§ 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;
(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
§ 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.
§ 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.
(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.
§ 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 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.
(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.
§ 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.
§ 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 $3 billion;
(2) The bank is well capitalized as defined in subpart D of this part (§ 208.43);
(3) At the most recent examination conducted by either the Federal Reserve or applicable State banking agency, the Federal Reserve—
(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.
(d)(1) Except as provided in paragraph (c) of this section, from December 2, 2020, through December 31, 2021, for purposes of determining eligibility for the extended examination cycle described in paragraph (b) of this section, the total assets of a member bank shall be determined based on the lesser of:
(i) The assets of the member bank as of December 31, 2019; and
(ii) The assets of the member bank as of the end of the most recent calendar quarter.
(2) Nothing in paragraph (d)(1) of this section limits the authority of the Federal Reserve to examine any member bank as frequently as the agency deems necessary pursuant to paragraph (c) of this section.
Subpart G—Financial Subsidiaries of State Member Banks
§ 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 § 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 § 208.72(a)(1) and (2) only in an agency capacity and not directly or indirectly as principal.
§ 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 § 225.86(a), (b), or (c) of the Board’s Regulation Y (12 CFR 225.86(a), (b), or (c));
(2) Any activity that the Secretary of the Treasury, in consultation with the Board, has determined to be financial in nature or incidental to a financial activity and permissible for financial subsidiaries pursuant to Section 5136A(b) of the Revised Statutes of the United States (12 U.S.C. 24a(b)); and
(3) Any activity that the state member bank is permitted to engage in directly (subject to the same terms and conditions that govern the conduct of the activity by the state member bank).
(b) Impermissible activities. Notwithstanding paragraph (a) of this section, a financial subsidiary may not engage as principal in the following activities:
(1) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death (except to the 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)).
§ 208.73 What additional provisions are applicable to state member banks with financial subsidiaries?
(a) Capital deduction required prior to January 1, 2015, for state member banks that are not advanced approaches banks (as defined in § 208.41). 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 § 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 § 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) Capital requirements for advanced approaches banks (as defined in § 208.41) and, after January 1, 2015, all state member banks. Beginning on January 1, 2014, for a state member bank that is an advanced approaches bank, and beginning on January 1, 2015 for all state member banks, a state member bank that controls or holds an interest in a financial subsidiary must comply with the rules set forth in § 217.22(a)(7) of Regulation Q (12 CFR 217.22(a)(7)) in determining its compliance with applicable regulatory capital standards (including the well capitalized standard of § 208.71(a)(1)).
(c) 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.
(d) 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.
(e) Application of Sections 23A and 23B of the Federal Reserve Act. For purposes of sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c, 371c-1):
(1) A financial subsidiary of a state member bank shall be deemed an affiliate, and not a subsidiary, of the bank;
(2) The restrictions contained in section 23A(a)(1)(A) of the Federal Reserve Act (12 U.S.C. 371c(a)(1)(A)) shall not apply with respect to covered transactions between the bank and any individual financial subsidiary of the bank;
(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.
(f) 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.).
§ 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 § 208.71(a)(2) or the safeguards set forth in § 208.73(c), the Board will notify the state member bank in writing and identify the areas of noncompliance. The Board may provide this notice at any time before or after receiving notice from the state member bank under paragraph (a)(2) of this section.
(2) Notification by state member bank. A state member bank must notify the appropriate Reserve Bank in writing within 15 calendar days of becoming aware that any depository institution affiliate of the bank has ceased to be well capitalized or well managed. The notification must identify the depository institution affiliate and the area(s) of noncompliance.
(3) Execution of agreement. Within 45 days after receiving a notice from the Board under paragraph (a)(1) of this section, or such additional period of time as the Board may permit, the:
(i) State member bank must execute an agreement acceptable to the Board to comply with all applicable capital, management, asset and safeguard requirements; and
(ii) Any relevant depository institution affiliate of the state member bank must execute an agreement acceptable to its appropriate Federal banking agency to comply with all applicable capital and management requirements.
(4) Agreement requirements. Any agreement required by paragraph (a)(3)(i) of this section must:
(i) Explain the specific actions that the state member bank will take to correct all areas of noncompliance;
(ii) Provide a schedule within which each action will be taken; and
(iii) Provide any other information the Board may require.
(5) Imposition of limits. Until the Board determines that the conditions described in the notice under paragraph (a)(1) of this section are corrected:
(i) The Board may impose any limitations on the conduct or activities of the state member bank or any subsidiary of the bank as the Board determines to be appropriate under the circumstances and consistent with the purposes of section 121 of the Gramm-Leach-Bliley Act, including requiring the Board’s prior approval for any financial subsidiary of the bank to acquire any company or engage in any additional activity; and
(ii) The appropriate Federal banking agency for any relevant depository institution affiliate may impose any limitations on the conduct or activities of the depository institution or any subsidiary of that institution as the agency determines to be appropriate under the circumstances and consistent with the purposes of section 121 of the Gramm-Leach-Bliley Act.
(6) Divestiture. The Board may require a state member bank to divest control 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 § 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.
§ 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.
§ 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 § 208.72(a)(1) or (2) through an existing financial subsidiary unless the state member bank files a notice (in letter form, with enclosures) with the appropriate Reserve Bank.
(b) Contents of Notice. Any notice required by paragraph (a) of this section must:
(1) In the case of a notice filed under paragraph (a)(1) of this section, describe the transaction(s) through which the bank proposes to acquire control of, or an interest in, the financial subsidiary;
(2) Provide the name and head office address of the financial subsidiary;
(3) Provide a description of the current and proposed activities of the financial subsidiary and the specific authority permitting each activity;
(4) Provide the capital ratios as of the close of the previous calendar quarter for all relevant capital measures, as defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o), for the bank and each of its depository institution affiliates;
(5) Certify that the bank and each of its depository institution affiliates was 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 § 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 § 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.
§ 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) [Reserved]
(d) Eligible Debt. The term “eligible debt” means unsecured debt with an initial maturity of more than 360 days that:
(1) Is not supported by any form of credit enhancement, including a guarantee or standby letter of credit; and
(2) Is not held in whole or in any significant part by any affiliate, officer, director, principal shareholder, or employee of the bank or any other person acting on behalf of or with funds from the bank or an affiliate of the bank.
(e) Financial Subsidiary—(1) In general. The term “financial subsidiary” means any company that is controlled by one or more insured depository institutions other than:
(i) A subsidiary that engages only in activities that the state member bank is permitted to engage in directly and that are conducted on the same terms and conditions that govern the conduct of the activities by the state member bank; or
(ii) A subsidiary that the state member bank is specifically authorized by the express terms of a Federal statute (other than section 9 of the Federal Reserve Act (12 U.S.C. 335)), and not by implication or interpretation, to control, such as by section 25 or 25A of the Federal Reserve Act (12 U.S.C. 601-604a, 611-631) or the Bank Service Company Act (12 U.S.C. 1861 et seq.).
(2) Subsidiaries of financial subsidiaries. A financial subsidiary includes 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
§ 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.
§ 208.82 Definitions for purposes of this subpart.
As used in this subpart:
(a) Affiliate means a company that controls, is controlled by, or is under common control with another company.
(b) Bank means a state member bank.
(c) Company means any corporation, partnership, business trust, association or similar organization, or any other trust (unless by its terms the trust must terminate within twenty-five years or not later than twenty-one years and ten months after the death of individuals living on the effective date of the trust). It does not include any corporation the majority of the 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.
§ 208.83 Prohibited practices.
(a) Anticoercion and antitying rules. You may not engage in any practice that would lead a consumer to believe that an extension of credit, in violation of section 106(b) of the Bank Holding Company Act Amendments of 1970 (12 U.S.C. 1972), is conditional upon either:
(1) The purchase of an insurance product or annuity from the bank or any of its affiliates; or
(2) An agreement by the consumer not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity.
(b) Prohibition on misrepresentations generally. You may not engage in any practice or use any advertisement at any office of, or on behalf of, the bank or a subsidiary of the bank that could mislead any person or otherwise cause a reasonable person to reach an erroneous belief with respect to:
(1) The fact that an insurance product or annuity sold or offered for sale by you or any subsidiary of the bank is not backed by the Federal government or the bank or the fact that the insurance product or annuity is not insured by the Federal Deposit Insurance Corporation;
(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.
§ 208.84 What you must disclose.
(a) Insurance disclosures. In connection with the initial purchase of an insurance product or annuity by a consumer from you, you must disclose to the consumer, except to the extent the disclosure would not be accurate, that:
(1) The insurance product or annuity is not a deposit or other obligation of, or guaranteed by, the bank or an affiliate of the bank;
(2) The insurance product or annuity is not insured by the Federal Deposit Insurance Corporation (FDIC) or any other agency of the United States, the bank, or (if applicable) an affiliate of the bank; and
(3) In the case of an insurance product or annuity that involves an investment risk, there is investment risk associated with the product, including the possible loss of value.
(b) Credit disclosure. In the case of an application for credit in connection with which an insurance product or annuity is solicited, offered, or sold, you must disclose that the bank may not condition an extension of credit on either:
(1) The consumer’s purchase of an insurance product or annuity from the bank or any of its affiliates; or
(2) The consumer’s agreement not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity.
(c) Timing and method of disclosures—(1) In general. The disclosures required by paragraph (a) of this section must be provided orally and in writing before the completion of the initial sale of an insurance product or annuity to a consumer. The disclosure required by paragraph (b) of this section must be made orally and in writing at the time the consumer applies for an extension of credit in connection with which insurance is solicited, offered, or sold.
(2) Exceptions for transactions by mail. If a sale of an insurance product or annuity is conducted by mail, you are not required to make the oral disclosures required by paragraph (a) of this section. If you take an application for credit by mail, you are not required to make the oral disclosure required by paragraph (b) of this section.
(3) Exception for transactions by telephone. If a sale of an insurance product or annuity is conducted by telephone, you may provide the written disclosures required by paragraph (a) of this section by mail within 3 business days beginning on the first business day after the sale, excluding Sundays and the legal public holidays specified in 5 U.S.C 6103(a). If you take an application for such credit by telephone, you may provide the written disclosure required by paragraph (b) of this section by mail, provided you mail it to the consumer within three days beginning the first business day after the application is taken, excluding Sundays and the legal public holidays specified in 5 U.S.C. 6103(a).
(4) Electronic form of disclosures. (i) Subject to the requirements of section 101(c) of the Electronic Signatures in Global and National Commerce Act (12 U.S.C. 7001(c)), you may provide the 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:
(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.
§ 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.
§ 208.86 Qualification and licensing requirements for insurance sales personnel.
A bank may not permit any person to sell or offer for sale any insurance product or annuity in any part of its office or on its behalf, unless the person is at all times appropriately qualified and licensed under applicable State insurance licensing standards with regard to the specific products being sold or recommended.
Appendix A to Subpart H of Part 208—Consumer Grievance Process
Any consumer who believes that any bank or any other person selling, soliciting, advertising, or offering insurance products or annuities to the consumer at an office of the bank or on behalf of the bank has violated the requirements of this subpart should contact the Consumer Complaints Section, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System at the following address: 20th & C Streets, NW, Washington, D.C. 20551.
Subpart I [Reserved]
Subpart J—Interpretations
§ 208.110 Sale of bank’s money orders off premises as establishment of branch office.
(a) The Board of Governors has been asked to consider whether the appointment by a member bank of an agent to sell the bank’s money orders, at a location other than the premises of the bank, constitutes the establishment of a branch office.
(b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is also applicable to member banks, defines the term branch as including “any branch bank, branch office, branch agency, additional office, or any branch place of 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.
§ 208.111 Obligations concerning institutional customers.
(a) As a result of broadened authority provided by the Government Securities Act Amendments of 1993 (15 U.S.C. 78o-3 and 78o-5), the Board is adopting sales practice rules for the government securities market, a market with a particularly broad institutional component. Accordingly, the Board believes it is appropriate to provide further guidance to banks on their suitability obligations when making recommendations to institutional customers.
(b) The Board’s Suitability Rule, § 208.37(d), is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct. Banks’ responsibilities include having a reasonable basis for recommending a particular security or strategy, as well as having reasonable grounds for believing the recommendation is suitable for the customer to whom it is made. Banks are expected to meet the same high standards of competence, professionalism, and good faith regardless of the financial circumstances of the customer.
(c) In recommending to a customer the purchase, sale, or exchange of any government security, the bank shall have reasonable grounds for believing that the recommendation is suitable for the customer upon the basis of the facts, if any, disclosed by the customer as to the customer’s other security holdings and financial situation and needs.
(d) The interpretation in this section concerns only the manner in which a bank determines that a recommendation is suitable for a particular institutional customer. The manner in which a bank fulfills this suitability obligation will vary, depending on the nature of the customer and the specific transaction. Accordingly, the interpretation in this section deals only with guidance regarding how a bank may fulfill customer-specific suitability obligations under § 208.37(d).
(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 § 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 § 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 § 208.25(d) for a particular customer are fulfilled.
(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.
§ 208.112 Policy statement on section 9(13) of the Federal Reserve Act.
(a) Under section 9(13) of the Federal Reserve Act (12 U.S.C. 330), a state member bank may “exercise all corporate powers granted it by the State in which it was created . . . except that the [Board] may limit the activities of State member banks and subsidiaries of State member banks in a manner consistent with section 24 of the Federal Deposit Insurance Act.” The Board interprets this provision as vesting the Board with the authority to prohibit or otherwise restrict state member banks and their subsidiaries from engaging as principal in any activity (including acquiring or retaining any investment) that is not permissible for a national bank, unless the activity is permissible for state banks by federal statute or under part 362 of the Federal Deposit Insurance Corporation’s (FDIC) regulations, 12 CFR part 362. The Board reminds state member banks of the fundamental canon of federal banking law that activities are permissible for a national bank only if authority is provided under federal law, including the National Bank Act.
(b) The Board generally believes that the same bank activity, presenting the same risks, should be subject to the same regulatory framework, regardless of which agency supervises the bank. This principle of equal treatment helps to level the competitive playing field among banks with different charters and different federal supervisors and to mitigate the risks of regulatory arbitrage.
(c) In alignment with this principle, the Board generally presumes that it will exercise its discretion under section 9(13) of the Federal Reserve Act (12 U.S.C. 330) to limit state member banks and their subsidiaries to engaging as principal in only those activities that are permissible for national banks—in each case, subject to the terms, conditions, and limitations placed on national banks with respect to the activity—unless those activities are permissible for state banks by federal statute or under 12 CFR part 362. For example, if the OCC conditions permissibility on a national bank demonstrating, to the satisfaction of its supervisory office, that the bank has controls in place to conduct the activity in a safe and sound manner, and receiving a written nonobjection from OCC supervisory staff before engaging in a particular activity, then the activity would not be permissible for a state member bank unless the bank makes the same demonstration and receives a written nonobjection from Federal Reserve supervisory staff before commencing such activity.
(d) If a state member bank or its subsidiary proposes to engage in an activity as principal that is not permissible for a national bank or for an insured state member bank under federal statute or part 362 of this title, the state member bank or subsidiary may not engage in the activity unless the bank has received the prior permission of the Board under § 208.3(d)(2). Under that provision, a state member bank may not, without the permission of the Board, change the general character of its business or the scope of the corporate powers it exercises at the time of its admission. In determining whether to grant permission to engage in an activity under § 208.3(d)(2), the Board will rebuttably presume that a state member bank and its subsidiaries are prohibited from engaging as principal in any activity that is impermissible for national banks, unless the activity is permissible for state banks under federal statute or part 362 of this title. This presumption may be rebutted if there is a clear and compelling rationale for the Board to allow the proposed deviation in regulatory treatment among federally supervised banks, and the state member bank has robust plans for managing the risks of the proposed activity in accordance with principles of safe and sound banking. Depending on the applicant and the activity, an application to the FDIC may also be required under section 24 of the Federal Deposit Insurance Act (12 U.S.C. 1831a).
(e) This statement does not impact the legal obligation of insured state member banks to seek approval from the FDIC when required under section 24 of the Federal Deposit Insurance Act and part 362 of this title. As established under those provisions, insured state banks may not engage as principal in any type of activity that is not permissible for a national bank unless—(1) the FDIC has determined that the activity would pose no significant risk to the Deposit Insurance Fund; and (2) the state bank is, and continues to be, in compliance with applicable capital standards.
(f) The Board also reiterates to state member banks that legal permissibility is a necessary, but not sufficient, condition to establish that a state member bank may engage in a particular activity. Under § 208.3(d)(1), a state member bank must at all times conduct its business and exercise its powers with due regard to safety and soundness. Under appendix D-1 of this part, at a minimum, a state member bank should have in place and implement internal controls and information systems that are appropriate for the nature, scope, and risks of its activities. Further, under § 208.3(d)(3), a state member bank must comply at all times with this part and conditions of membership prescribed by the Board; in addition, a state member bank must comply with other applicable laws and regulations, including those related to consumer compliance and anti-money laundering. With respect to any novel and unprecedented activities, appropriate systems to monitor and control risks, including liquidity, credit, market, operational, and compliance risks, are particularly important; Federal Reserve supervisors will expect banks to be able to explain and demonstrate an effective control environment related to such activities.
Subpart K—Forms, Instructions and Reports
§ 208.120 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board under section 7 of the Federal Deposit Insurance Act, 12 U.S.C. 1817(a)(3) and (12), and section 9 of the Federal Reserve Act, 12 U.S.C. 324.
(b) Purpose and scope. This subpart informs a state member bank where it may obtain forms and instructions for reports of conditions and implements 12 U.S.C. 1817(a)(12) to allow reduced reporting for a covered depository institution when such institution makes its reports of condition for the first and third calendar quarters of a year.
§ 208.121 Definitions.
Covered depository institution means a state member bank that meets all of the following criteria:
(1) Has less than $5 billion in total consolidated assets as reported in its report of condition for the second calendar quarter of the preceding year, except that, during the calendar year 2021, a state member bank shall determine whether it meets the requirement in paragraph (1) of this section by using the lesser of its total consolidated assets as reported in its report of condition as of December 31, 2019, and its total consolidated assets as reported in its report of condition for the second calendar quarter of 2020. The relief provided under this paragraph (1) of this section does not apply to a state member bank if the Board determines that permitting the state member bank to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the state member bank. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the state member bank since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the state member bank has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the state member bank. In making a determination pursuant to this paragraph (1), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(2) Has no foreign offices, as defined in this section;
(3) Is not required to or has not elected to use 12 CFR part 217, subpart E, to calculate its risk-based capital requirements; and
(4) Is not a large institution or highly complex institution, as such terms are defined in 12 CFR 327.8, or treated as a large institution, as requested under 12 CFR 327.16(f).
Foreign country refers to one or more foreign nations, and includes the overseas territories, dependencies, and insular possessions of those nations and of the United States.
Foreign office means:
(1) A branch or consolidated subsidiary in a foreign country, unless the branch is located on a U.S. military facility;
(2) An international banking facility as such term is defined in 12 CFR 204.8;
(3) A majority-owned Edge Act or Agreement subsidiary including both its U.S. and its foreign offices; and
(4) For an institution chartered or headquartered in any U.S. state or the District of Columbia, a branch or consolidated subsidiary located in a U.S. territory or possession.
Report of condition means the FFIEC 031, FFIEC 041, or FFIEC 051 versions of the Consolidated Report of Condition and Income (Call Report) or the FFIEC 002 (Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks), as applicable, and as they may be amended or superseded from time to time in accordance with the Paperwork Reduction Act of 1995, 44 U.S.C. chapter 35.
Total consolidated assets means total assets as reported in a state member bank’s report of condition.
§ 208.122 Reporting.
(a) A state member bank is required to file the report of condition (Call Report) in accordance with the instructions for these reports. All assets and liabilities, including contingent assets and liabilities, must be reported in, or otherwise taken into account in the preparation of, the Call Report. The Board uses Call Report data to monitor the condition, performance, and risk profile of individual state member banks and the banking industry. Reporting state member banks must also submit annually such information on small business and small farm lending as the Board may need to assess the availability of credit to these sectors of the economy. The report forms and instructions can be obtained from Federal Reserve District Banks or through the website of the Federal Financial Institutions Examination Council, http://www.ffiec.gov/.
(b) Every insured U.S. branch of a foreign bank is required to file the FFIEC 002 version of the report of condition (Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks) in accordance with the instructions for the report. All assets and liabilities, including contingent assets and liabilities, must be reported in, or otherwise taken into account in the preparation of the report. The Board uses the reported data to monitor the condition, performance, and risk profile of individual insured branches and the banking industry. Insured branches must also submit annually such information on small business and small farm lending as the Board may need to assess the availability of credit to these sectors of the economy. The report forms and instructions can be obtained from Federal Reserve District Banks or through the website of the Federal Financial Institutions Examination Council, http://www.ffiec.gov/.
§ 208.123 Reduced reporting.
A covered depository institution may file the FFIEC 051 version of the report of condition, or any successor thereto, which shall provide for reduced reporting for the reports of condition for the first and third calendar quarters for a year.
(a) Notwithstanding § 208.123, the Board in consultation with the applicable state chartering authority may require an otherwise eligible covered depository institution to file the FFIEC 041 version of the report of condition, or any successor thereto, based on an institution-specific determination. In making this determination, the Board may consider criteria including, but not limited to, whether the institution is significantly engaged in one or more complex, specialized, or other higher risk activities, such as those for which limited information is reported in the FFIEC 051 version of the report of condition compared to the FFIEC 041 version of the report of condition. Nothing in this part shall be construed to limit the Board’s authority to obtain information from a state member bank.
(b) Nothing in this subpart limits the authority of the Board under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions or violations of law.
Appendixes A-B to Part 208 [Reserved]
Appendix C to Part 208—Interagency Guidelines for Real Estate Lending Policies
The agencies’ regulations require that each insured depository institution adopt and maintain a written policy that establishes appropriate limits and standards for all extensions of credit that are secured by liens on or interests in real estate or made for the purpose of financing the construction of a building or other improvements.
Each institution’s policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions’ business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.
The lending policy should contain a general outline of the scope and distribution of the institution’s credit facilities and the manner in which real estate loans are made, serviced, and collected. In particular, the institution’s policies on real estate lending should:
• Identify the geographic areas in which the institution will consider lending.
• Establish a loan portfolio diversification policy and set limits for real estate loans by type and geographic market (e.g., limits on higher risk loans).
• Identify appropriate terms and conditions by type of real estate loan.
• Establish loan origination and approval procedures, both generally and by size and type of loan.
• Establish prudent underwriting standards that are clear and measurable, including loan-to-value limits, that are consistent with these supervisory guidelines.
• Establish review and approval procedures for exception loans, including loans with loan-to-value percentages in excess of supervisory limits.
• Establish loan administration procedures, including documentation, disbursement, collateral inspection, collection, and loan review.
• Establish real estate appraisal and evaluation programs.
• Require that management monitor the loan portfolio and provide timely and adequate reports to the board of directors.
The institution should consider both internal and external factors in the formulation of its loan policies and strategic plan. Factors that should be considered include:
• The size and financial condition of the institution.
• The expertise and size of the lending staff.
• The need to avoid undue concentrations of risk.
• Compliance with all real estate related laws and regulations, including the Community Reinvestment Act, anti-discrimination laws, and for savings associations, the Qualified Thrift Lender test.
• Market conditions.
The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions. Market supply and demand factors that should be considered include:
• Demographic indicators, including population and employment trends.
• Zoning requirements.
• Current and projected vacancy, construction, and absorption rates.
• Current and projected lease terms, rental rates, and sales prices, including concessions.
• Current and projected operating expenses for different types of projects.
• Economic indicators, including trends and diversification of the lending area.
• Valuation trends, including discount and direct capitalization rates.
Prudently underwritten real estate loans should reflect all relevant credit factors, including:
• The capacity of the borrower, or income from the underlying property, to adequately service the debt.
• The value of the mortgaged property.
• The overall creditworthiness of the borrower.
• The level of equity invested in the property.
• Any secondary sources of repayment.
• Any additional collateral or credit enhancements (such as guarantees, mortgage insurance or takeout commitments).
The lending policies should reflect the level of risk that is acceptable to the board of directors and provide clear and measurable underwriting standards that enable the institution’s lending staff to evaluate these credit factors. The underwriting standards should address:
• The maximum loan amount by type of property.
• Maximum loan maturities by type of property.
• Amortization schedules.
• Pricing structure for different types of real estate loans.
• Loan-to-value limits by type of property.
For development and construction projects, and completed commercial properties, the policy should also establish, commensurate with the size and type of the project or property:
• Requirements for feasibility studies and sensitivity and risk analyses (e.g., sensitivity of income projections to changes in economic variables such as interest rates, vacancy rates, or operating expenses).
• Minimum requirements for initial investment and maintenance of hard equity by the borrower (e.g., cash or unencumbered investment in the underlying property).
• Minimum standards for net worth, cash flow, and debt service coverage of the borrower or underlying property.
• Standards for the acceptability of and limits on non-amortizing loans.
• Standards for the acceptability of and limits on the use of interest reserves.
• Pre-leasing and pre-sale requirements for income-producing property.
• Pre-sale and minimum unit release requirements for non-income-producing property loans.
• Limits on partial recourse or nonrecourse loans and requirements for guarantor support.
• Requirements for takeout commitments.
• Minimum covenants for loan agreements.
The institution should also establish loan administration procedures for its real estate portfolio that address:
• Documentation, including:
• Loan closing and disbursement.
• Payment processing.
• Escrow administration.
• Collateral administration.
• Loan payoffs.
• Collections and foreclosure, including:
• Claims processing (e.g., seeking recovery on a defaulted loan covered by a government guaranty or insurance program).
• Servicing and participation agreements.
Institutions should establish their own internal loan-to-value limits for real estate loans. These internal limits should not exceed the following supervisory limits:
| Loan category | Loan-to-value limit (percent) |
|---|---|
| Raw land | 65 |
| Land development | 75 |
| Construction: | |
| Commercial, multifamily, 1 and other nonresidential | 80 |
| 1- to 4-family residential | 85 |
| Improved property | 85 |
| Owner-occupied 1- to 4-family and home equity | ( 2) |
1 Multifamily construction includes condominiums and cooperatives.
2 A loan-to-value limit has not been established for permanent mortgage or home equity loans on owner-occupied, 1- to 4-family residential property. However, for any such loan with a loan-to-value ratio that equals or exceeds 90 percent at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.
The supervisory loan-to-value limits should be applied to the underlying property that collateralizes the loan. For loans that fund multiple phases of the same real estate project (e.g., a loan for both land development and construction of an office building), the appropriate loan-to-value limit is the limit applicable to the final phase of the project funded by the loan; however, loan disbursements should not exceed actual development or construction outlays. In situations where a loan is fully cross-collateralized by two or more properties or is secured by a collateral pool of two or more properties, the appropriate maximum loan amount under supervisory loan-to-value limits is the sum of the value of each property, less senior liens, multiplied by the appropriate loan-to-value limit for each property. To ensure that collateral margins remain within the supervisory limits, lenders should redetermine conformity whenever collateral substitutions are made to the collateral pool.
In establishing internal loan-to-value limits, each lender is expected to carefully consider the institution-specific and market factors listed under “Loan Portfolio Management Considerations,” as well as any other relevant factors, such as the particular subcategory or type of loan. For any subcategory of loans that exhibits greater credit risk than the overall category, a lender should consider the establishment of an internal loan-to-value limit for that subcategory that is lower than the limit for the overall category.
The loan-to-value ratio is only one of several pertinent credit factors to be considered when underwriting a real estate loan. Other credit factors to be taken into account are highlighted in the “Underwriting Standards” section above. Because of these other factors, the establishment of these supervisory limits should not be interpreted to mean that loans at these levels will automatically be considered sound.
The agencies recognize that appropriate loan-to-value limits vary not only among categories of real estate loans but also among individual loans. Therefore, it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits, based on the support provided by other credit factors. Such loans should be identified in the institutions’s records, and their aggregate amount reported at least quarterly to the institution’s board of directors. (See additional reporting requirements described under “Exceptions to the General Policy.”)
The aggregate amount of all loans in excess of the supervisory loan-to-value limits should not exceed 100 percent of total capital.
In determining the aggregate amount of such loans, institutions should: (a) Include all loans secured by the same property if any one of those loans exceeds the supervisory loan-to-value limits; and (b) include the recourse obligation of any such loan sold with recourse. Conversely, a loan should no longer be reported to the directors as part of aggregate totals when reduction in principal or senior liens, or additional contribution of collateral or equity (e.g., improvements to the real property securing the loan), bring the loan-to-value ratio into compliance with supervisory limits.
The agencies also recognize that there are a number of lending situations in which other factors significantly outweigh the need to apply the supervisory loan-to-value limits. These include:
• Loans guaranteed or insured by the U.S. government or its agencies, provided that the amount of the guaranty or insurance is at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit.
• Loans backed by the full faith and credit of a state government, provided that the amount of the assurance is at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit.
• Loans guaranteed or insured by a state, municipal or local government, or an agency thereof, provided that the amount of the guaranty or insurance is at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit, and provided that the lender has determined that the guarantor or insurer has the financial capacity and willingness to perform under the terms of the guaranty or insurance agreement.
• Loans that are to be sold promptly after origination, without recourse, to a financially responsible third party.
• Loans that are renewed, refinanced, or restructured without the advancement of new funds or an increase in the line of credit (except for reasonable closing costs), or loans that are renewed, refinanced, or restructured in connection with a workout situation, either with or without the advancement of new funds, where consistent with safe and sound banking practices and part of a clearly defined and well-documented program to achieve orderly liquidation of the debt, reduce risk of loss, or maximize recovery on the loan.
• Loans that facilitate the sale of real estate acquired by the lender in the ordinary course of collecting a debt previously contracted in good faith.
• Loans for which a lien on or interest in real property is taken as additional collateral through an abundance of caution by the lender (e.g., the institution takes a blanket lien on all or substantially all of the assets of the borrower, and the value of the real property is low relative to the aggregate value of all other collateral).
• Loans, such as working capital loans, where the lender does not rely principally on real estate as security and the extension of credit is not used to acquire, develop, or construct permanent improvements on real property.
• Loans for the purpose of financing permanent improvements to real property, but not secured by the property, if such security interest is not required by prudent underwriting practice.
Some provision should be made for the consideration of loan requests from creditworthy borrowers whose credit needs do not fit within the institution’s general lending policy. An institution may provide for prudently underwritten exceptions to its lending policies, including loan-to-value limits, on a loan-by-loan basis. However, any exceptions from the supervisory loan-to-value limits should conform to the aggregate limits on such loans discussed above.
The board of directors is responsible for establishing standards for the review and approval of exception loans. Each institution should establish an appropriate internal process for the review and approval of loans that do not conform to its own internal policy standards. The approval of any such loan should be supported by a written justification that clearly sets forth all of the relevant credit factors that support the underwriting decision. The justification and approval documents for such loans should be maintained as a part of the permanent loan file. Each institution should monitor compliance with its real estate lending policy and individually report exception loans of a significant size to its board of directors.
The real estate lending policies of institutions will be evaluated by examiners during the course of their examinations to determine if the policies are consistent with safe and sound lending practices, these guidelines, and the requirements of the regulation. In evaluating the adequacy of the institution’s real estate lending policies and practices, examiners will take into consideration the following factors:
• The nature and scope of the institution’s real estate lending activities.
• The size and financial condition of the institution.
• The quality of the institution’s management and internal controls.
• The expertise and size of the lending and loan administration staff.
• Market conditions.
Lending policy exception reports will also be reviewed by examiners during the course of their examinations to determine whether the institutions’ exceptions are adequately documented and appropriate in light of all of the relevant credit considerations. An excessive volume of exceptions to an institution’s real estate lending policy may signal a weakening of its underwriting practices, or may suggest a need to revise the loan policy.
For the purposes of these Guidelines:
Construction loan means an extension of credit for the purpose of erecting or rehabilitating buildings or other structures, including any infrastructure necessary for development.
Extension of credit or loan means:
(1) The total amount of any loan, line of credit, or other legally binding lending commitment with respect to real property; and
(2) The total amount, based on the amount of consideration paid, of any loan, line of credit, or other legally binding lending commitment acquired by a lender by purchase, assignment, or otherwise.
Improved property loan means an extension of credit secured by one of the following types of real property:
(1) Farmland, ranchland or timberland committed to ongoing management and agricultural production;
(2) 1- to 4-family residential property that is not owner-occupied;
(3) Residential property containing five or more individual dwelling units;
(4) Completed commercial property; or
(5) Other income-producing property that has been completed and is available for occupancy and use, except income-producing owner-occupied 1- to 4-family residential property.
Land development loan means an extension of credit for the purpose of improving unimproved real property prior to the erection of structures. The improvement of unimproved real property may include the laying or placement of sewers, water pipes, utility cables, streets, and other infrastructure necessary for future development.
Loan origination means the time of inception of the obligation to extend credit (i.e., when the last event or prerequisite, controllable by the lender, occurs causing the lender to become legally bound to fund an extension of credit).
Loan-to-value or loan-to-value ratio means the percentage or ratio that is derived at the time of loan origination by dividing an extension of credit by the total value of the property(ies) securing or being improved by the extension of credit plus the amount of any readily marketable collateral and other acceptable collateral that secures the extension of credit. The total amount of all senior liens on or interests in such property(ies) should be included in determining the loan-to-value ratio. When mortgage insurance or collateral is used in the calculation of the loan-to-value ratio, and such credit enhancement is later released or replaced, the loan-to-value ratio should be recalculated.
Other acceptable collateral means any collateral in which the lender has a perfected security interest, that has a quantifiable value, and is accepted by the lender in accordance with safe and sound lending practices. Other acceptable collateral should be appropriately discounted by the lender consistent with the lender’s usual practices for making loans secured by such collateral. Other acceptable collateral includes, among other items, unconditional irrevocable standby letters of credit for the benefit of the lender.
Owner-occupied, when used in conjunction with the term 1- to 4-family residential property means that the owner of the underlying real property occupies at least one unit of the real property as a principal residence of the owner.
Readily marketable collateral means insured deposits, financial instruments, and bullion in which the lender has a perfected interest. Financial instruments and bullion must be salable under ordinary circumstances with reasonable promptness at a fair market value determined by quotations based on actual transactions, on an auction or similarly available daily bid and ask price market. Readily marketable collateral should be appropriately discounted by the lender consistent with the lender’s usual practices for making loans secured by such collateral.
Value means an opinion or estimate, set forth in an appraisal or evaluation, whichever may be appropriate, of the market value of real property, prepared in accordance with the agency’s appraisal regulations and guidance. For loans to purchase an existing property, the term “value” means the lesser of the actual acquisition cost or the estimate of value.
1- to 4-family residential property means property containing fewer than five individual dwelling units, including manufactured homes permanently affixed to the underlying property (when deemed to be real property under state law).
Appendix D-1 to Part 208—Interagency Guidelines Establishing Standards for Safety and Soundness
A. Preservation of existing authority.
B. Definitions.
A. Internal controls and information systems.
B. Internal audit system.
C. Loan documentation.
D. Credit underwriting.
E. Interest rate exposure.
F. Asset growth.
G. Asset quality.
H. Earnings.
I. Compensation, fees and benefits.
A. Excessive compensation.
B. Compensation leading to material financial loss.
i. Section 39 of the Federal Deposit Insurance Act
ii. Section 39(a) requires the agencies to establish operational and managerial standards relating to: (1) Internal controls, information systems and internal audit systems, in accordance with section 36 of the FDI Act (12 U.S.C. 1831m); (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; and (6) compensation, fees, and benefits, in accordance with subsection (c) of section 39. Section 39(b) requires the agencies to establish standards relating to asset quality, earnings, and stock valuation that the agencies determine to be appropriate.
iii. Section 39(c) requires the agencies to establish standards prohibiting as an unsafe and unsound practice any compensatory arrangement that would provide any executive officer, employee, director, or principal shareholder of the institution with excessive compensation, fees or benefits and any compensatory arrangement that could lead to material financial loss to an institution. Section 39(c) also requires that the agencies establish standards that specify when compensation is excessive.
iv. If an agency determines that an institution fails to meet any standard established by guideline under subsection (a) or (b) of section 39, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. In the event that an institution fails to submit an acceptable plan within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency. The agency may, and in some cases must, take other supervisory actions until the deficiency has been corrected.
v. The agencies have adopted amendments to their rules and regulations to establish deadlines for submission and review of compliance plans.
vi. The following Guidelines set out the safety and soundness standards that the agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The agencies believe that the standards adopted in these Guidelines serve this end without dictating how institutions must be managed and operated. These standards are designed to identify potential safety and soundness concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance funds.
Neither section 39 nor these Guidelines in any way limits the authority of the agencies to address unsafe or unsound practices, violations of law, unsafe or unsound conditions, or other practices. Action under section 39 and these Guidelines may be taken independently of, in conjunction with, or in addition to any other enforcement action available to the agencies. Nothing in these Guidelines limits the authority of the FDIC pursuant to section 38(i)(2)(F) of the FDI Act (12 U.S.C. 1831(o)) and Part 325 of title 12 of the Code of Federal Regulations.
1. In general. For purposes of these Guidelines, except as modified in the Guidelines or unless the context otherwise requires, the terms used have the same meanings as set forth in sections 3 and 39 of the FDI Act (12 U.S.C. 1813 and 1831p-1).
2. Board of directors, in the case of a state-licensed insured branch of a foreign bank and in the case of a federal branch of a foreign bank, means the managing official in charge of the insured foreign branch.
3. Compensation means all direct and indirect payments or benefits, both cash and non-cash, granted to or for the benefit of any executive officer, employee, director, or principal shareholder, including but not limited to payments or benefits derived from an employment contract, compensation or benefit agreement, fee arrangement, perquisite, stock option plan, postemployment benefit, or other compensatory arrangement.
4. Director shall have the meaning described in 12 CFR 215.2(c).
5. Executive officer shall have the meaning described in 12 CFR 215.2(d).
6. Principal shareholder shall have the meaning described in 12 CFR 215.2(l).
A. Internal controls and information systems. An institution should have internal controls and information systems that are appropriate to the size of the institution and the nature, scope and risk of its activities and that provide for:
1. An organizational structure that establishes clear lines of authority and responsibility for monitoring adherence to established policies;
2. Effective risk assessment;
3. Timely and accurate financial, operational and regulatory reports;
4. Adequate procedures to safeguard and manage assets; and
5. Compliance with applicable laws and regulations.
B. Internal audit system. An institution should have an internal audit system that is appropriate to the size of the institution and the nature and scope of its activities and that provides for:
1. Adequate monitoring of the system of internal controls through an internal audit function. For an institution whose size, complexity or scope of operations does not warrant a full scale internal audit function, a system of independent reviews of key internal controls may be used;
2. Independence and objectivity;
3. Qualified persons;
4. Adequate testing and review of information systems;
5. Adequate documentation of tests and findings and any corrective actions;
6. Verification and review of management actions to address material weaknesses; and
7. Review by the institution’s audit committee or board of directors of the effectiveness of the internal audit systems.
C. Loan documentation. An institution should establish and maintain loan documentation practices that:
1. Enable the institution to make an informed lending decision and to assess risk, as necessary, on an ongoing basis;
2. Identify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner;
3. Ensure that any claim against a borrower is legally enforceable;
4. Demonstrate appropriate administration and monitoring of a loan; and
5. Take account of the size and complexity of a loan.
D. Credit underwriting. An institution should establish and maintain prudent credit underwriting practices that:
1. Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made;
2. Consider the nature of the markets in which loans will be made;
3. Provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed;
4. Establish a system of independent, ongoing credit review and appropriate communication to management and to the board of directors;
5. Take adequate account of concentration of credit risk; and
6. Are appropriate to the size of the institution and the nature and scope of its activities.
E. Interest rate exposure. An institution should:
1. Manage interest rate risk in a manner that is appropriate to the size of the institution and the complexity of its assets and liabilities; and
2. Provide for periodic reporting to management and the board of directors regarding interest rate risk with adequate information for management and the board of directors to assess the level of risk.
F. Asset growth. An institution’s asset growth should be prudent and consider:
1. The source, volatility and use of the funds that support asset growth;
2. Any increase in credit risk or interest rate risk as a result of growth; and
3. The effect of growth on the institution’s capital.
G. Asset quality. An insured depository institution should establish and maintain a system that is commensurate with the institution’s size and the nature and scope of its operations to identify problem assets and prevent deterioration in those assets. The institution should:
1. Conduct periodic asset quality reviews to identify problem assets;
2. Estimate the inherent losses in those assets and establish reserves that are sufficient to absorb estimated losses;
3. Compare problem asset totals to capital;
4. Take appropriate corrective action to resolve problem assets;
5. Consider the size and potential risks of material asset concentrations; and
6. Provide periodic asset reports with adequate information for management and the board of directors to assess the level of asset risk.
H. Earnings. An insured depository institution should establish and maintain a system that is commensurate with the institution’s size and the nature and scope of its operations to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. The institution should:
1. Compare recent earnings trends relative to equity, assets, or other commonly used benchmarks to the institution’s historical results and those of its peers;
2. Evaluate the adequacy of earnings given the size, complexity, and risk profile of the institution’s assets and operations;
3. Assess the source, volatility, and sustainability of earnings, including the effect of nonrecurring or extraordinary income or expense;
4. Take steps to ensure that earnings are sufficient to maintain adequate capital and reserves after considering the institution’s asset quality and growth rate; and
5. Provide periodic earnings reports with adequate information for management and the board of directors to assess earnings performance.
I. Compensation, fees and benefits. An institution should maintain safeguards to prevent the payment of compensation, fees, and benefits that are excessive or that could lead to material financial loss to the institution.
Excessive compensation is prohibited as an unsafe and unsound practice. Compensation shall be considered excessive when amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder, considering the following:
1. The combined value of all cash and non-cash benefits provided to the individual;
2. The compensation history of the individual and other individuals with comparable expertise at the institution;
3. The financial condition of the institution;
4. Comparable compensation practices at comparable institutions, based upon such factors as asset size, geographic location, and the complexity of the loan portfolio or other assets;
5. For postemployment benefits, the projected total cost and benefit to the institution;
6. Any connection between the individual and any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the institution; and
7. Any other factors the agencies determines to be relevant.
Compensation that could lead to material financial loss to an institution is prohibited as an unsafe and unsound practice.
Appendix D-2 to Part 208—Interagency Guidelines Establishing Information Security Standards
These Interagency Guidelines Establishing Standards for Safeguarding Customer Information (Guidelines) set forth standards pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805), in the same manner, to the extent practicable, as standards prescribed pursuant to section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1831p-1). These Guidelines address standards for developing and implementing administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of customer information. These Guidelines also address standards with respect to the proper disposal of consumer information, pursuant to sections 621 and 628 of the Fair Credit Reporting Act (15 U.S.C. 1681s and 1681w).
A. Scope. The Guidelines apply to customer information maintained by or on behalf of state member banks (banks) and their nonbank subsidiaries, except for brokers, dealers, persons providing insurance, investment companies, and investment advisors. Pursuant to §§ 211.9 and 211.24 of this chapter, these guidelines also apply to customer information maintained by or on behalf of Edge corporations, agreement corporations, and uninsured state-licensed branches or agencies of a foreign bank. These Guidelines also apply to the proper disposal of consumer information by or on behalf of such entities.
B. Preservation of Existing Authority. Neither section 39 nor these Guidelines in any way limit the authority of the Board to address unsafe or unsound practices, violations of law, unsafe or unsound conditions, or other practices. The Board may take action under section 39 and these Guidelines independently of, in conjunction with, or in addition to, any other enforcement action available to the Board.
C. Definitions.
1. Except as modified in the Guidelines, or unless the context otherwise requires, the terms used in these Guidelines have the same meanings as set forth in sections 3 and 39 of the Federal Deposit Insurance Act (12 U.S.C. 1813 and 1831p-1).
2. For purposes of the Guidelines, the following definitions apply:
a. Board of directors, in the case of a branch or agency of a foreign bank, means the managing official in charge of the branch or agency.
b. Consumer information means any record about an individual, whether in paper, electronic, or other form, that is a consumer report or is derived from a consumer report and that is maintained or otherwise possessed by or on behalf of the bank for a business purpose. Consumer information also means a compilation of such records. The term does not include any record that does not identify an individual.
i. Examples. (1) Consumer information includes:
(A) A consumer report that a bank obtains;
(B) Information from a consumer report that the bank obtains from its affiliate after the consumer has been given a notice and has elected not to opt out of that sharing;
(C) Information from a consumer report that the bank obtains about an individual who applies for but does not receive a loan, including any loan sought by an individual for a business purpose;
(D) Information from a consumer report that the bank obtains about an individual who guarantees a loan (including a loan to a business entity); or
(E) Information from a consumer report that the bank obtains about an employee or prospective employee.
(2) Consumer information does not include:
(A) Aggregate information, such as the mean credit score, derived from a group of consumer reports; or
(B) Blind data, such as payment history on accounts that are not personally identifiable, that may be used for developing credit scoring models or for other purposes.
c. Consumer report has the same meaning as set forth in the Fair Credit Reporting Act, 15 U.S.C. 1681a(d).
d. Customer means any customer of the bank as defined in § 1016.3(i) of this chapter.
e. Customer information means any record containing nonpublic personal information, as defined in § 1016.3(p) of this chapter, about a customer, whether in paper, electronic, or other form, that is maintained by or on behalf of the bank.
f. Customer information systems means any methods used to access, collect, store, use, transmit, protect, or dispose of customer information.
g. Service provider means any person or entity that maintains, processes, or otherwise is permitted access to customer information or consumer information through its provision of services directly to the bank.
h. Subsidiary means any company controlled by a bank, except a broker, dealer, person providing insurance, investment company, investment advisor, insured depository institution, or subsidiary of an insured depository institution.
A. Information Security Program. Each bank shall implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the size and complexity of the bank and the nature and scope of its activities. While all parts of the bank are not required to implement a uniform set of policies, all elements of the information security program must be coordinated. A bank also shall ensure that each of its subsidiaries is subject to a comprehensive information security program. The bank may fulfill this requirement either by including a subsidiary within the scope of the bank’s comprehensive information security program or by causing the subsidiary to implement a separate comprehensive information security program in accordance with the standards and procedures in sections II and III of this appendix that apply to banks.
B. Objectives. A bank’s information security program shall be designed to:
1. Ensure the security and confidentiality of customer information;
2. Protect against any anticipated threats or hazards to the security or integrity of such information;
3. Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer; and
4. Ensure the proper disposal of customer information and consumer information.
A. Involve the Board of Directors. The board of directors or an appropriate committee of the board of each bank shall:
1. Approve the bank’s written information security program; and
2. Oversee the development, implementation, and maintenance of the bank’s information security program, including assigning specific responsibility for its implementation and reviewing reports from management.
B. Assess Risk. Each bank shall:
1. Identify reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems.
2. Assess the likelihood and potential damage of these threats, taking into consideration the sensitivity of customer information.
3. Assess the sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks.
C. Manage and Control Risk. Each bank shall:
1. Design its information security program to control the identified risks, commensurate with the sensitivity of the information as well as the complexity and scope of the bank’s activities. Each bank must consider whether the following security measures are appropriate for the bank and, if so, adopt those measures the bank concludes are appropriate:
a. Access controls on customer information systems, including controls to authenticate and permit access only to authorized individuals and controls to prevent employees from providing customer information to unauthorized individuals who may seek to obtain this information through fraudulent means.
b. Access restrictions at physical locations containing customer information, such as buildings, computer facilities, and records storage facilities to permit access only to authorized individuals;
c. Encryption of electronic customer information, including while in transit or in storage on networks or systems to which unauthorized individuals may have access;
d. Procedures designed to ensure that customer information system modifications are consistent with the bank’s information security program;
e. Dual control procedures, segregation of duties, and employee background checks for employees with responsibilities for or access to customer information;
f. Monitoring systems and procedures to detect actual and attempted attacks on or intrusions into customer information systems;
g. Response programs that specify actions to be taken when the bank suspects or detects that unauthorized individuals have gained access to customer information systems, including appropriate reports to regulatory and law enforcement agencies; and
h. Measures to protect against destruction, loss, or damage of customer information due to potential environmental hazards, such as fire and water damage or technological failures.
2. Train staff to implement the bank’s information security program.
3. Regularly test the key controls, systems and procedures of the information security program. The frequency and nature of such tests should be determined by the bank’s risk assessment. Tests should be conducted or reviewed by independent third parties or staff independent of those that develop or maintain the security programs.
4. Develop, implement, and maintain, as part of its information security program, appropriate measures to properly dispose of customer information and consumer information in accordance with each of the requirements in this paragraph III.
D. Oversee Service Provider Arrangements. Each bank shall:
1. Exercise appropriate due diligence in selecting its service providers;
2. Require its service providers by contract to implement appropriate measures designed to meet the objectives of these Guidelines; and
3. Where indicated by the bank’s risk assessment, monitor its service providers to confirm that they have satisfied their obligations as required by paragraph D.2. As part of this monitoring, a bank should review audits, summaries of test results, or other equivalent evaluations of its service providers.
E. Adjust the Program. Each bank shall monitor, evaluate, and adjust, as appropriate, the information security program in light of any relevant changes in technology, the sensitivity of its customer information, internal or external threats to information, and the bank’s own changing business arrangements, such as mergers and acquisitions, alliances and joint ventures, outsourcing arrangements, and changes to customer information systems.
F. Report to the Board. Each bank shall report to its board or an appropriate committee of the board at least annually. This report should describe the overall status of the information security program and the bank’s compliance with these Guidelines. The reports should discuss material matters related to its program, addressing issues such as: risk assessment; risk management and control decisions; service provider arrangements; results of testing; security breaches or violations and management’s responses; and recommendations for changes in the information security program.
G. Implement the Standards.
1. Effective date. Each bank must implement an information security program pursuant to these Guidelines by July 1, 2001.
2. Two-year grandfathering of agreements with service providers. Until July 1, 2003, a contract that a bank has entered into with a service provider to perform services for it or functions on its behalf satisfies the provisions of section III.D., even if the contract does not include a requirement that the servicer maintain the security and confidentiality of customer information, as long as the bank entered into the contract on or before March 5, 2001.
3. Effective date for measures relating to the disposal of consumer information. Each bank must satisfy these Guidelines with respect to the proper disposal of consumer information by July 1, 2005.
4. Exception for existing agreements with service providers relating to the disposal of consumer information. Notwithstanding the requirement in paragraph III.G.3., a bank’s contracts with its service providers that have access to consumer information and that may dispose of consumer information, entered into before July 1, 2005, must comply with the provisions of the Guidelines relating to the proper disposal of consumer information by July 1, 2006.
This Guidance
Section 501(b) of the GLBA required the Agencies to establish appropriate standards for financial institutions subject to their jurisdiction that include administrative, technical, and physical safeguards, to protect the security and confidentiality of customer information. Accordingly, the Agencies issued Security Guidelines requiring every financial institution to have an information security program designed to:
1. Ensure the security and confidentiality of customer information;
2. Protect against any anticipated threats or hazards to the security or integrity of such information; and
3. Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.
1. The Security Guidelines direct every financial institution to assess the following risks, among others, when developing its information security program:
a. Reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems;
b. The likelihood and potential damage of threats, taking into consideration the sensitivity of customer information; and
c. The sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks.
2. Following the assessment of these risks, the Security Guidelines require a financial institution to design a program to address the identified risks. The particular security measures an institution should adopt will depend upon the risks presented by the complexity and scope of its business. At a minimum, the financial institution is required to consider the specific security measures enumerated in the Security Guidelines,
a. Access controls on customer information systems, including controls to authenticate and permit access only to authorized individuals and controls to prevent employees from providing customer information to unauthorized individuals who may seek to obtain this information through fraudulent means;
b. Background checks for employees with responsibilities for access to customer information; and
c. Response programs that specify actions to be taken when the financial institution suspects or detects that unauthorized individuals have gained access to customer information systems, including appropriate reports to regulatory and law enforcement agencies.
The Security Guidelines direct every financial institution to require its service providers by contract to implement appropriate measures designed to protect against unauthorized access to or use of customer information that could result in substantial harm or inconvenience to any customer.
Millions of Americans, throughout the country, have been victims of identity theft.
In addition, each institution should be able to address incidents of unauthorized access to customer information in customer information systems maintained by its domestic and foreign service providers. Therefore, consistent with the obligations in the Guidelines that relate to these arrangements, and with existing guidance on this topic issued by the Agencies,
1. At a minimum, an institution’s response program should contain procedures for the following:
a. Assessing the nature and scope of an incident, and identifying what customer information systems and types of customer information have been accessed or misused;
b. Notifying its primary Federal regulator as soon as possible when the institution becomes aware of an incident involving unauthorized access to or use of sensitive customer information, as defined below;
c. Consistent with the Agencies’ Suspicious Activity Report (“SAR”) regulations,
d. Taking appropriate steps to contain and control the incident to prevent further unauthorized access to or use of customer information, for example, by monitoring, freezing, or closing affected accounts, while preserving records and other evidence;
e. Notifying customers when warranted.
2. Where an incident of unauthorized access to customer information involves customer information systems maintained by an institution’s service providers, it is the responsibility of the financial institution to notify the institution’s customers and regulator. However, an institution may authorize or contract with its service provider to notify the institution’s customers or regulator on its behalf.
Financial institutions have an affirmative duty to protect their customers’ information against unauthorized access or use. Notifying customers of a security incident involving the unauthorized access or use of the customer’s information in accordance with the standard set forth below is a key part of that duty. Timely notification of customers is important to manage an institution’s reputation risk. Effective notice also may reduce an institution’s legal risk, assist in maintaining good customer relations, and enable the institution’s customers to take steps to protect themselves against the consequences of identity theft. When customer notification is warranted, an institution may not forgo notifying its customers of an incident because the institution believes that it may be potentially embarrassed or inconvenienced by doing so.
When a financial institution becomes aware of an incident of unauthorized access to sensitive customer information, the institution should conduct a reasonable investigation to promptly determine the likelihood that the information has been or will be misused. If the institution determines that misuse of its information about a customer has occurred or is reasonably possible, it should notify the affected customer as soon as possible. Customer notice may be delayed if an appropriate law enforcement agency determines that notification will interfere with a criminal investigation and provides the institution with a written request for the delay. However, the institution should notify its customers as soon as notification will no longer interfere with the investigation.
Under the Guidelines, an institution must protect against unauthorized access to or use of customer information that could result in substantial harm or inconvenience to any customer. Substantial harm or inconvenience is most likely to result from improper access to sensitive customer information because this type of information is most likely to be misused, as in the commission of identity theft. For purposes of this Guidance, sensitive customer information means a customer’s name, address, or telephone number, in conjunction with the customer’s social security number, driver’s license number, account number, credit or debit card number, or a personal identification number or password that would permit access to the customer’s account. Sensitive customer information also includes any combination of components of customer information that would allow someone to log onto or access the customer’s account, such as user name and password or password and account number.
If a financial institution, based upon its investigation, can determine from its logs or other data precisely which customers’ information has been improperly accessed, it may limit notification to those customers with regard to whom the institution determines that misuse of their information has occurred or is reasonably possible. However, there may be situations where the institution determines that a group of files has been accessed improperly, but is unable to identify which specific customers’ information has been accessed. If the circumstances of the unauthorized access lead the institution to determine that misuse of the information is reasonably possible, it should notify all customers in the group.
1. Customer notice should be given in a clear and conspicuous manner. The notice should describe the incident in general terms and the type of customer information that was the subject of unauthorized access or use. It also should generally describe what the institution has done to protect the customers’ information from further unauthorized access. In addition, it should include a telephone number that customers can call for further information and assistance.
a. A recommendation that the customer review account statements and immediately report any suspicious activity to the institution;
b. A description of fraud alerts and an explanation of how the customer may place a fraud alert in the customer’s consumer reports to put the customer’s creditors on notice that the customer may be a victim of fraud;
c. A recommendation that the customer periodically obtain credit reports from each nationwide credit reporting agency and have information relating to fraudulent transactions deleted;
d. An explanation of how the customer may obtain a credit report free of charge; and
e. Information about the availability of the FTC’s online guidance regarding steps a consumer can take to protect against identity theft. The notice should encourage the customer to report any incidents of identity theft to the FTC, and should provide the FTC’s Web site address and toll-free telephone number that customers may use to obtain the identity theft guidance and report suspected incidents of identity theft.
2. The Agencies encourage financial institutions to notify the nationwide consumer reporting agencies prior to sending notices to a large number of customers that include contact information for the reporting agencies.
Customer notice should be delivered in any manner designed to ensure that a customer can reasonably be expected to receive it. For example, the institution may choose to contact all customers affected by telephone or by mail, or by electronic mail for those customers for whom it has a valid e-mail address and who have agreed to receive communications electronically.
Appendixes E-F to Part 208 [Reserved]
PART 209—FEDERAL RESERVE BANK CAPITAL STOCK (REGULATION I)
§ 209.1 Authority, purpose, scope, and definitions.
(a) Authority. This part is issued pursuant to 12 U.S.C. 222, 248, 282, 286-288, 289, 321, 323, 327-328, and 466.
(b) Purpose. The purpose of this part is to implement the provisions of the Federal Reserve Act relating to the issuance and cancellation of Federal Reserve Bank stock upon becoming or ceasing to be a member bank, or upon changes in the capital and surplus of a member bank, of the Federal Reserve System. This part also implements the provisions of the Federal Reserve Act relating to the payment of dividends to member banks.
(c) Scope. This part applies to member banks of the Federal Reserve System, to national banks in process of organization, and to state banks applying for membership. National banks and locally-incorporated banks located in United States dependencies and possessions are eligible (with the consent of the Board) but not required to apply for membership under section 19(h) of the Federal Reserve Act, 12 U.S.C. 466.
(d) Definitions. For purposes of this part—
(1) Capital Stock and Surplus. Capital stock and surplus of a member bank means the paid-in capital stock
(2) Dividend proration basis means the use of a 360-day year of 12 30-day months for purposes of computing dividend payments.
(3) Total consolidated assets means the total assets on the stockholder’s balance sheet as reported by the stockholder on its Consolidated Report of Condition and Income (Call Report) as of the most recent December 31, except in the case of:
(i) A new member “total consolidated assets” means (until the next December 31 Call Report becomes available) the total consolidated assets of the new member at the time of its application for capital stock; and
(ii) A surviving stockholder after a merger “total consolidated assets” means (until the next December 31 Call Report becomes available) the total consolidated assets reported by that stockholder pursuant to § 209.3(d)(5).
§ 209.2 Banks desiring to become member banks.
(a) Application for stock or deposit. Each national bank in process of organization,
(b) Issuance of stock; acceptance of deposit. Upon authorization to commence business by the Comptroller of the Currency in the case of a national bank in organization or upon approval of conversion by the Comptroller of the Currency in the case of a state nonmember bank converting to a national bank, or when all applicable requirements have been complied with in the case of a state bank approved for membership, the Reserve Bank shall issue the appropriate number of shares by crediting the bank with the appropriate number of shares on its books. In the case of a national or state member bank in organization, such issuance shall be as of the date the bank opens for business. In the case of a mutual savings bank not authorized to purchase Reserve Bank shares, the Reserve Bank shall accept the deposit in place of issuing shares. The bank’s membership shall become effective on the date of such issuance or acceptance.
(c) Location of bank—(1) General rule. For purposes of this part, a national bank or a State bank is located in the Federal Reserve District that contains the location specified in the bank’s charter or organizing certificate, or as specified by the institution’s primary regulator, or if no such location is specified, the location of its head office, unless otherwise determined by the Board under paragraph (c)(2) of this section.
(2) Board determination. If the location of a bank as specified in paragraph (c)(1) of this section, in the judgment of the Board of Governors of the Federal Reserve System (Board), is ambiguous, would impede the ability of the Board or the Reserve Banks to perform their functions under the Federal Reserve Act, or would impede the ability of the bank to operate efficiently, the Board will determine the Federal Reserve District in which the bank is located, after consultation with the bank and the relevant Reserve Banks. The relevant Reserve Banks are the Reserve Bank whose District contains the location specified in paragraph (c)(1) of this section and the Reserve Bank in whose District the bank is proposed to be located. In making this determination, the Board will consider any applicable laws, the business needs of the bank, the location of the bank’s head office, the locations where the bank performs its business, and the locations that would allow the bank, the Board, and the Reserve Banks to perform their functions efficiently and effectively.
§ 209.3 Cancellation of Reserve Bank stock; mergers involving member banks.
(a) Application for cancellation. Any bank that desires to withdraw from membership in the Federal Reserve System (including a national bank that wants to convert into a nonmember bank), voluntarily liquidates or ceases business, is merged or consolidated into a nonmember bank, or is involuntarily liquidated by a receiver or conservator or otherwise, shall promptly file with its Reserve Bank an application for cancellation of all its Reserve Bank stock (or withdrawal of its deposit, as the case may be) and payment therefor in accordance with § 209.4.
(b) Involuntary termination of membership. If an application is not filed promptly after a cessation of business by a state member bank, a vote to place a member bank in voluntary liquidation, or the appointment of a receiver for (or a determination to liquidate the bank by a conservator of) a member bank, the Board may, after notice and an opportunity for hearing where required under Section 9(9) of the Federal Reserve Act (12 U.S.C. 327), order the membership of the bank terminated and all of its Reserve Bank stock canceled.
(c) Effective date of cancellation. Cancellation in whole of a bank’s Reserve Bank capital stock shall be effective, in the case of:
(1) Voluntary withdrawal from membership by a state bank, as of the date of such withdrawal;
(2) Merger into, consolidation with, or (for a national bank) conversion into, a nonmember bank, as of the effective date of the merger, consolidation, or conversion; and
(3) Involuntary termination of membership, as of the date the Board issues the order of termination.
(d) Exchange of stock on merger or change in location; stock adjustment upon merger with a nonmember bank; reporting of total consolidated assets following merger—(1) Applications. (i) Before a merger or consolidation of member banks, the nonsurviving member bank shall file an application with the appropriate Reserve Bank to cancel its shares of Reserve Bank stock (or in the case of a mutual savings bank not authorized to purchase Reserve Bank stock, shall file an application to transfer its deposit to the account of the surviving bank) and the surviving member bank shall file an application with the appropriate Reserve Bank for issue of a corresponding number of shares of Reserve Bank stock (or in the case of a mutual savings bank not authorized to purchase Reserve Bank stock, shall file an application to increase its deposit obligation).
(ii) Before a merger or consolidation of a member bank and a nonmember bank, a surviving member bank shall file an application with the appropriate Reserve Bank to adjust its Reserve Bank capital stock subscription to equal six percent of the member bank’s anticipated post-merger capital and surplus, or, in the case of member bank that is a mutual savings bank, six-tenths of 1 percent of the member bank’s anticipated post-merger total deposit liabilities. A mutual savings bank not authorized to purchase Reserve Bank stock shall file an application to adjust its deposit obligation in a like manner.
(2) Merger of member banks in the same Federal Reserve District. Upon a merger or consolidation of member banks located in the same Federal Reserve District, the Reserve Bank shall cancel the shares of the nonsurviving bank (or in the case of a mutual savings bank not authorized to purchase Reserve Bank stock, shall credit the deposit to the account of the surviving bank) and shall credit the appropriate number of shares on its books to (or in the case of a mutual savings bank not authorized to purchase Reserve Bank stock, shall accept an appropriate increase in the deposit of) the surviving bank, subject to paragraph (d)(3) of § 209.4.
(3) Change of location or merger of member banks in different Federal Reserve Districts. Upon a determination under paragraph (c)(2) of § 209.2 that a member bank is located in a Federal Reserve District other than the District of the Reserve Bank of which it is a member, or upon a merger or consolidation of member banks located in different Federal Reserve Districts,—
(i) The Reserve Bank of the member bank’s former District, or of the nonsurviving member bank, shall cancel the bank’s shares and transfer the amount paid in for those shares, plus accrued dividends (as specified in paragraph (d)(1)(ii) of § 209.4) and subject to paragraph (d)(3) of § 209.4 (or, in the case of a mutual savings bank member not authorized to purchase Federal Reserve Bank stock, the amount of its deposit, adjusted in a like manner), to the Reserve Bank of the bank’s new District or of the surviving bank; and
(ii) The Reserve Bank of the member bank’s new District or of the surviving bank shall issue the appropriate number of shares by crediting the bank with the appropriate number of shares on its books (or, in the case of a mutual savings bank, by accepting the deposit or an appropriate increase in the deposit).
(4) Merger with a nonmember bank. Upon a merger or consolidation of a member bank and a nonmember bank, the Reserve Bank will adjust the surviving member bank’s stock subscription to equal six percent of the member bank’s capital and surplus, or, in the case of a member bank that is a mutual savings bank, six-tenths of 1 percent of the member bank’s total deposit liabilities. If a mutual savings bank has a deposit with the appropriate Reserve Bank in lieu of Reserve Bank capital stock, its deposit obligation shall be adjusted in a like manner.
(5) Statement of total consolidated assets. When a member bank merges or consolidates with another bank and the surviving bank remains a Reserve Bank stockholder, the surviving stockholder must report whether its total consolidated assets exceed $12,517,000,000 in the application described in paragraph (d)(1) of this section.
(e) Voluntary withdrawal. Any bank withdrawing voluntarily from membership shall give 6 months written notice, and shall not cause the withdrawal of more than 25 percent of any Reserve Bank’s capital stock in any calendar year, unless the Board waives these requirements.
§ 209.4 Amounts and payments for subscriptions and cancellations; timing and rate of dividends.
(a) Amount of subscription. The total subscription of a member bank (other than a mutual savings bank) shall equal six percent of its capital and surplus as shown on its most recent Call Report. After a member bank files a Call Report, the appropriate Reserve Bank will adjust the member bank’s Reserve Bank capital stock subscription to equal six percent of the member bank’s capital and surplus.
(b) Mutual savings banks. The total subscription of a member bank that is a mutual savings bank shall equal six-tenths of 1 percent of its total deposit liabilities as shown on its most recent Call Report. After a member bank that is a mutual savings bank files a Call Report, the appropriate Reserve Bank will adjust the member bank’s Reserve Bank capital stock subscription to equal six-tenths of 1 percent of the member bank’s total deposit liabilities. If a mutual savings bank has a deposit with the appropriate Reserve Bank in lieu of Reserve Bank capital stock, its deposit obligation shall be adjusted in a like manner.
(c) Payment for subscriptions. (1) When a Reserve Bank issues capital stock to a member bank (or accepts a deposit in lieu thereof), the member bank shall pay the Reserve Bank—
(i) One-half of the subscription amount; and
(ii) Accrued dividends equal to the paid-in subscription amount in paragraph (c)(1)(i) of this section multiplied by—
(A) In the case of a bank with total consolidated assets of more than $12,517,000,000, an annual rate equal to the lesser of the high yield of the 10-year Treasury note auctioned at the last auction held prior to the date of the last dividend payment and 6 percent, adjusted to reflect the period from the last dividend payment date to the subscription date according to the dividend proration basis.
(B) In the case of a bank with total consolidated assets of $12,517,000,000 or less, 6 percent, adjusted to reflect the period from the last dividend payment date to the subscription date according to the dividend proration basis.
(2) A Reserve Bank shall obtain settlement for the payment described in paragraph (c)(1) of this section by debit to an account on the Reserve Bank’s books or other form of settlement to which the Reserve Bank agrees.
(3) Upon payment (and in the case of a national banks in organization or state nonmember bank converting into a national bank, upon authorization or approval by the Comptroller of the Currency), the Reserve Bank shall issue the appropriate number of shares by crediting the bank with the appropriate number of shares on its books. In the case of a mutual savings bank not authorized to purchase Reserve Bank stock, the Reserve Bank will accept the deposit or addition to the deposit in place of issuing shares. The remaining half of the subscription or additional subscription (including subscriptions for deposits or additions to deposits) shall be subject to call by the Board.
(4) If the dividend rate applied at the next scheduled dividend payment date is based on a different annual rate than the rate used to compute the amount of the accrued dividend payment pursuant to paragraph (c)(1)(ii) of this section, the amount of the dividends paid at the next scheduled dividend payment date should be adjusted accordingly. The amount of the adjustment should equal the difference between—
(i) The accrued dividend payment pursuant paragraph (c)(1)(ii) of this section, and
(ii) The result of multiplying the subscription amount paid pursuant to paragraph (c)(1)(i) of this section by the dividend rate applied at the next scheduled dividend payment, adjusted to reflect the period from the last dividend payment date to the subscription date according to the dividend proration basis.
(d) Payment for cancellations. (1) When a Reserve Bank cancels Reserve Bank capital stock of a member bank, or (in the case of involuntary termination of membership) upon the effective date of cancellation specified in § 209.3(c)(3), the Reserve Bank shall—
(i) Reduce the bank’s shareholding on the Reserve Bank’s books by the number of shares required to be canceled and shall pay the paid-in subscription of the canceled stock; and
(ii) Pay accrued dividends equal to the paid-in subscription of the canceled stock in paragraph (d)(1)(i) of this section multiplied by—
(A) In the case of a bank with total consolidated assets of more than $12,517,000,000, an annual rate equal to the lesser of the high yield of the 10-year Treasury note auctioned at the last auction held prior to the date of cancellation and 6 percent, adjusted to reflect the period from the last dividend payment date to the cancellation date according to the dividend proration basis; or
(B) In the case of a bank with total consolidated assets of $12,517,000,000 or less, 6 percent, adjusted to reflect the period from the last dividend payment date to the cancellation date according to the dividend proration basis.
(2) The sum of the payments under paragraph (d)(1) of this section cannot exceed the book value of the stock.
(3) In the case of any cancellation of Reserve Bank stock under this Part, the Reserve Bank may first apply such sum to any liability of the bank to the Reserve Bank and pay over the remainder to the bank (or receiver or conservator, as appropriate).
(e) Dividend. (1) After all necessary expenses of a Reserve Bank have been paid or provided for, the stockholders of a Reserve Bank shall be entitled to receive a dividend on paid-in capital stock of—
(i) in the case of a bank with total consolidated assets of more than $12,517,000,000, the lesser of the annual rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of such dividend and an annual rate of 6 percent, or
(ii) in the case of a bank with total consolidated assets of $12,517,000,000 or less, an annual rate of 6 percent.
(2) The dividend pursuant to paragraph (e)(1) of this section will be adjusted to reflect the period from the last dividend payment date to the current dividend payment date according to the dividend proration basis.
(3) The entitlement to dividends under paragraph (e)(1) of this section shall be cumulative.
(f) Annual adjustment to total consolidated assets. The dollar amounts for total consolidated assets specified in paragraphs (c), (d), and (e) of this section and §§ 209.2 and 209.3 shall be adjusted annually to reflect the change in the Gross Domestic Product Price Index, published by the Bureau of Economic Analysis.
(a) Electronic or written record. A member bank’s holding of Reserve Bank capital stock shall be represented by one (or at the option of the Reserve Bank, more than one) notation on the Reserve Bank’s books. Such books may be electronic or in writing. Upon any issue or cancellation of Reserve Bank capital stock, the Reserve Bank shall record the member bank’s new share position in its books (or eliminate the bank’s share position from its books, as the case may be).
(b) Certification. A Reserve Bank may certify on request as to the number of shares held by a member bank and purchased before March 28, 1942, or as to the purchase and cancellation dates and prices of shares cancelled, as the case may be.
PART 210—COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE BANKS AND FUNDS TRANSFERS THROUGH THE FEDWIRE FUNDS SERVICE AND THE FEDNOW SERVICE (REGULATION J)
Subpart A—Collection of Checks and Other Items By Federal Reserve Banks
§ 210.1 Authority, purpose, and scope.
The Board of Governors of the Federal Reserve System (Board) has issued this subpart pursuant to the Federal Reserve Act, sections 11 (i) and (j) (12 U.S.C. 248 (i) and (j)), section 13 (12 U.S.C. 342), section 16 (12 U.S.C. 248(o) and 360), and section 19(f) (12 U.S.C. 464); the Expedited Funds Availability Act (12 U.S.C. 4001 et seq.); the Check Clearing for the 21st Century Act (12 U.S.C. 5001-5018) and other laws. This subpart governs the collection of checks and other cash and noncash items and the handling of returned checks by Federal Reserve Banks. Its purpose is to provide rules for collecting and returning items and settling balances.
§ 210.2 Definitions.
As used in this subpart, unless the context otherwise requires:
Account means an account on the books of a Federal Reserve Bank. A subaccount is an informational record of a subset of transactions that affect an account and is not a separate account.
Actually and finally collected funds means cash or any other form of payment that is, or has become, final and irrevocable.
Administrative Reserve Bank with respect to an entity means the Reserve Bank in whose District the entity is located, as determined under the procedure described in § 204.3(g) of this chapter (Regulation D), even if the entity is not otherwise subject to that section.
Bank means any person engaged in the business of banking. A branch or separate office of a bank is a separate bank to the extent provided in the Uniform Commercial Code.
Bank draft means a check drawn by one bank on another bank.
Banking day means the part of a day on which a bank is open to the public for carrying on substantially all of its banking functions.
Cash item means—
(1) A check other than one classified as a noncash item under this section; or
(2) Any other item payable on demand and collectible at par that the Reserve Bank that receives the item is willing to accept as a cash item. Cash item does not include a returned check.
Check means a check or an electronic check, as those terms are defined in § 229.2 of this chapter (Regulation CC).
Clock hour and clock half-hour. (1) Clock hour means a time that is on the hour, such as 1:00, 2:00, etc.
(2) Clock half-hour means a time that is on the half-hour, such as 1:30, 2:30, etc.
Fedwire Funds Service and Fedwire have the same meaning as that set forth in § 210.26.
Item. (1) Means—
(i) An instrument or a promise or order to pay money, whether negotiable or not, that is—
(A) Payable in a Federal Reserve District
(B) Sent by a sender to a Reserve Bank for handling under this subpart; and
(C) Collectible in funds acceptable to the Reserve Bank of the District in which the instrument is payable; or
(ii) A check.
(2) Unless otherwise indicated, item includes both a cash and a noncash item, and includes a returned check sent by a paying or returning bank. Item does not include a check that cannot be collected at par, or a payment order as defined in § 210.26(i) and handled under subpart B of this part. The term also does not include an electronically-created item as defined in § 229.2 of this chapter (Regulation CC).
Nonbank payor means a payor of an item, other than a bank.
Noncash item means an item that a receiving Reserve Bank classifies in its operating circulars as requiring special handling. The term also means an item normally received as a cash item if a Reserve Bank decides that special conditions require that it handle the item as a noncash item.
Paying bank means—
(1) The bank by which an item is payable unless the item is payable or collectible at or through another bank and is sent to the other bank for payment or collection;
(2) The bank at or through which an item is payable or collectible and to which it sent for payment or collection; or
(3) The bank whose routing number appears on a check in the MICR line or in fractional form (or in the MICR-line information that accompanies an electronic item) and to which the check is sent for payment or collection.
Returned check means a cash item returned by a paying bank, including an electronic returned check as defined in § 229.2 of this chapter (Regulation CC) and a notice of nonpayment in lieu of a returned check, whether or not a Reserve Bank handled the check for collection.
Sender means any of the following entities that sends an item to a Reserve Bank for forward collection—
(1) A depository institution, as defined in section 19(b) of the Federal Reserve Act (12 U.S.C. 461(b));
(2) A member bank, as defined in section 1 of the Federal Reserve Act (12 U.S.C. 221);
(3) A clearing institution, defined as—
(i) An institution that is not a depository institution but that maintains with a Reserve Bank the balance referred to in the first paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
(ii) An Edge corporation or agreement corporation that maintains an account with a Reserve Bank in conformity with part 211 of this chapter (Regulation K);
(4) Another Reserve Bank;
(5) An international organization for which a Reserve Bank is empowered to act as depositary or fiscal agent and maintains an account;
(6) A foreign correspondent, defined as any of the following entities for which a Reserve Bank maintains an account: A foreign bank or banker, a foreign state as defined in section 25(b) of the Federal Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency referred to in section 14(e) of that act (12 U.S.C. 358); or
(7) A branch or agency of a foreign bank maintaining reserves under section 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 3105).
State means a State of the United States, the District of Columbia, Puerto Rico, or a territory, possession, or dependency of the United States.
Uniform Commercial Code and U.C.C. mean the Uniform Commercial Code as adopted in a state
Terms not defined in this section. Unless the context otherwise requires—
(1) The terms not defined herein have the meanings set forth in § 229.2 of this chapter applicable to subpart C or D of part 229 of this chapter (Regulation CC), as appropriate; and
(2) The terms not defined herein or in § 229.2 of this chapter have the meanings set forth in the Uniform Commercial Code.
§ 210.3 General provisions.
(a) General. Each Reserve Bank shall receive and handle items in accordance with this subpart, and shall issue operating circulars governing the details of its handling of items and other matters deemed appropriate by the Reserve Bank. The circulars may, among other things, classify cash items and noncash items, require separate sorts and letters, provide different closing times for the receipt of different classes or types of items, provide for instructions by an Administrative Reserve Bank to other Reserve Banks, set forth terms of services, and establish procedures for adjustments on a Reserve Bank’s books, including amounts, waiver of expenses, and payment of compensation. As deemed appropriate by the Reserve Bank, the circulars may also require the sender to provide warranties and indemnities that only items and any noncash items the Reserve Banks have agreed to handle will be sent to the Reserve Banks. The Reserve Banks may provide to a subsequent collecting bank and to the paying bank any warranties and indemnities provided by the sender pursuant to this paragraph (a).
(b) Binding effect. This subpart, together with subparts C and D of part 229 and the operating circulars of the Reserve Banks, are binding on all parties interested in an item handled by any Reserve Bank.
(c) Government items. As depositaries and fiscal agents of the United States, Reserve Banks handle certain items payable by the United States or certain Federal agencies as cash or noncash items. To the extent provided by regulations issued by, and arrangements made with, the United States Treasury Department and other Government departments and agencies, the handling of such items is governed by this subpart. The Reserve Banks shall include in their operating circulars such information regarding these regulations and arrangements as the Reserve Banks deem appropriate.
(d) Government senders. Except as otherwise provided by statutes of the United States, or regulations issued or arrangements made thereunder, this subpart and the operating circulars of the Reserve Banks apply to the following when acting as a sender: a department, agency, instrumentality, independent establishment, or office of the United States, or a wholly owned or controlled Government corporation, that maintains or uses an account with a Reserve Bank.
(e) Foreign items. A Reserve Bank also may receive and handle certain items payable outside a Federal Reserve District, as provided in its operating circulars. The handling of such items in a state is governed by this subpart, and the handling of such items outside a state is governed by the local law.
(f) Relation to other law. The provisions of this subpart supersede any inconsistent provisions of the Uniform Commercial Code, of any other state law, or of part 229 of this title, but only to the extent of the inconsistency.
§ 210.4 Sending items to Reserve Banks.
(a) Sending of items. A sender’s Administrative Reserve Bank may direct a sender other than a Reserve Bank to send any item to a specified Reserve Bank, whether or not the item is payable in the Reserve Bank’s district.
(b) Handling of items. (1) The following parties, in the following order, are deemed to have handled an item that is sent to a Reserve Bank for collection:
(i) The initial sender;
(ii) The initial sender’s Administrative Reserve Bank (which is deemed to have accepted deposit of the item from the initial sender);
(iii) The Reserve Bank that receives the item from the initial sender (if different from the initial sender’s Administrative Reserve Bank); and
(iv) Another Reserve Bank, if any, that receives the item from a Reserve Bank.
(2) A Reserve Bank that is not described in paragraph (b)(1) of this section is not a person that handles an item and is not a collecting bank with respect to an item.
(3) The identity and order of the parties under paragraph (b)(1) of this section determine the relationships and the rights and liabilities of the parties under this subpart, part 229 of this chapter (Regulation CC), section 13(1) and section 16(13) of the Federal Reserve Act, and the Uniform Commercial Code. An initial sender’s Administrative Reserve Bank that is deemed to accept an item for deposit or handle an item is also deemed to be a sender with respect to that item. The Reserve Banks that are deemed to handle an item are deemed to be agents or subagents of the owner of the item, as provided in § 210.6(a).
(c) Checks received at par. The Reserve Banks shall receive cash items and other checks at par.
§ 210.5 Sender’s agreement; recovery by Reserve Bank.
(a) Sender’s agreement. The warranties, indemnities, authorizations, and agreements made pursuant to this paragraph (a) may not be disclaimed and are made whether or not the item bears an indorsement of the sender. By sending an item to a Reserve Bank, the sender does all of the following.
(1) Authorization to handle item. The sender authorizes the sender’s Administrative Reserve Bank and any other Reserve Bank or collecting bank to which the item is sent to handle the item (and authorizes any Reserve Bank that handles settlement for the item to make accounting entries), subject to this subpart and to the Reserve Banks’ operating circulars, and warrants its authority to give this authorization.
(2) Warranties for all items. The sender warrants to each Reserve Bank handling the item that—
(i) The sender is a person entitled to enforce the item or authorized to obtain payment of the item on behalf of a person entitled to enforce the item;
(ii) The item has not been altered; and
(iii) The item bears all indorsements applied by parties that previously handled the item for forward collection or return.
(3) Warranties and indemnities as set forth in Regulation CC and U.C.C. As applicable and unless otherwise provided, the sender of an item makes to each Reserve Bank that handles the item all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC) and Article 4 of the U.C.C. The sender makes all the warranties set forth in and subject to the terms of 4-207 of the U.C.C. for an electronic check as if it were an item subject to the U.C.C.
(4) Warranties and indemnities as set forth in Reserve Bank operating circulars. The sender makes any warranties and indemnities regarding the sending of items as set forth in an operating circular issued in accordance with § 210.3(a).
(5) Sender’s liability to Reserve Bank. (i) Except as provided in paragraphs (a)(5)(ii) and (iii) of this section, the sender agrees to indemnify each Reserve Bank for any loss or expense sustained (including attorneys’ fees and expenses of litigation) resulting from—
(A) The sender’s lack of authority to make the warranty in paragraph (a)(1) of this section;
(B) Any action taken by the Reserve Bank within the scope of its authority in handling the item; or
(C) Any warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, the U.C.C., or, regarding the sending of items, an operating circular issued in accordance with § 210.3(a).
(ii) A sender’s liability for warranties and indemnities that the Reserve Bank makes for a substitute check, a paper or electronic representation thereof, or for an electronic check is subject to the following conditions and limitations—
(A) A sender of an original check shall not be liable under paragraph (a)(5)(i) of this section for any amount that the Reserve Bank pays under subpart D of part 229 of this chapter, or under § 229.34 of this chapter with respect to an electronic check, absent the sender’s agreement to the contrary; and
(B) Nothing in this subpart alters the liability of a sender of a substitute check or paper or electronic representation of a substitute check under subpart D of part 229 of this chapter, or a sender of an electronic check under § 229.34 of this chapter.
(iii) A sender shall not be liable for any amount that the Reserve Bank pays under this subpart or part 229 of this chapter that is attributable to the Reserve Bank’s own lack of good faith or failure to exercise ordinary care.
(b) Sender’s liability under other law. Nothing in paragraph (a) of this section limits any warranty or indemnity by a sender (or a person that handled an item prior to the sender) arising under state law or regulation (such as the U.C.C.), other federal law or regulation (such as part 229 of this chapter), or an agreement with a Reserve Bank.
(c) Recovery by Reserve Bank. (1) A Reserve Bank that has handled an item may recover as provided in paragraph (c)(2) of this section if an action or proceeding is brought against (or if defense is tendered to) the Reserve Bank based on—
(i) The alleged failure of the sender to have the authority to make the warranty and agreement in paragraph (a)(1) of this section;
(ii) Any action by the Reserve Bank within the scope of its authority in handling the item; or
(iii) Any warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, or the U.C.C.
(2) Upon entry of a final judgment or decree in an action or proceeding described in paragraph (c)(1) of this section, a Reserve Bank may recover from the sender the amount of attorneys’ fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, together with interest thereon.
(d) Methods of recovery. (1) The Reserve Bank may recover the amount stated in paragraph (c) of this section by charging any account on its books that is maintained or used by the sender (or by charging a Reserve Bank sender), if—
(i) The Reserve Bank made seasonable written demand on the sender to assume defense of the action or proceeding; and
(ii) The sender has not made any other arrangement for payment that is acceptable to the Reserve Bank.
(2) The Reserve Bank is not responsible for defending the action or proceeding before using this method of recovery. A Reserve Bank that has been charged under this paragraph (d) may recover from its sender in the manner and under the circumstances set forth in this paragraph (d).
(3) A Reserve Bank’s failure to avail itself of the remedy provided in this paragraph (d) does not prejudice its enforcement in any other manner of the indemnity agreement referred to in paragraph (a)(5) of this section.
(e) Security interest. When a sender sends an item to a Reserve Bank, the sender and any prior collecting bank grant to the sender’s Administrative Reserve Bank a security interest in all of their respective assets in the possession of, or held for the account of, any Reserve Bank to secure their respective obligations due or to become due to the Administrative Reserve Bank under this subpart or subpart C or D of part 229 of this chapter (Regulation CC). The security interest attaches when a warranty is breached or any other obligation to the Reserve Bank is incurred. If the Reserve Bank, in its sole discretion, deems itself insecure and gives notice thereof to the sender or prior collecting bank, or if the sender or prior collecting bank suspends payments or is closed, the Reserve Bank may take any action authorized by law to recover the amount of an obligation, including, but not limited to, the exercise of rights of set off, the realization on any available collateral, and any other rights it may have as a creditor under applicable law.
§ 210.6 Status, warranties, and liability of Reserve Bank.
(a)(1) Status. A Reserve Bank that handles an item shall act as agent or subagent of the owner with respect to the item. This agency terminates when a Reserve Bank receives final payment for the item in actually and finally collected funds, a Reserve Bank makes the proceeds available for use by the sender, and the time for commencing all actions against the Reserve Bank has expired.
(2) Limitations on Reserve Bank liability. A Reserve Bank shall not have or assume any liability with respect to an item or its proceeds except—
(i) For the Reserve Bank’s own lack of good faith or failure to exercise ordinary care;
(ii) As provided in paragraph (b) of this section;
(iii) As provided in an operating circular issued in accordance with § 210.3(a) regarding the sending of items; and
(iv) As provided in subparts C and D of part 229 of this chapter (Regulation CC).
(3) Reliance on routing designation appearing on item. A Reserve Bank may present or send an item based on the routing number or other designation of a paying bank or nonbank payor appearing in any form on the item when the Reserve Bank receives it. A Reserve Bank shall not be responsible for any delay resulting from its acting on any designation, whether inscribed by magnetic ink or by other means, and whether or not the designation acted on is consistent with any other designation appearing on the item.
(b) Warranties and liability. The following provisions apply when a Reserve Bank presents or sends an item.
(1) Warranties for all items. The Reserve Bank warrants to a subsequent collecting bank and to the paying bank and any other payor that—
(i) The Reserve Bank is a person entitled to enforce the item (or is authorized to obtain payment of the item on behalf of a person that is either entitled to enforce the item or authorized to obtain payment on behalf of a person entitled to enforce the item);
(ii) The item has not been altered; and
(iii) The item bears all indorsements applied by parties that previously handled the item for forward collection or return.
(2) Warranties and indemnities as set forth in Reserve Bank operating circulars. The Reserve Bank makes any warranties and indemnities regarding the sending of items as set forth in an operating circular issued in accordance with § 210.3(a).
(3) Warranties and indemnities as set forth in Regulation CC and U.C.C. As applicable and unless otherwise provided, the Reserve Bank makes all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC) and Article 4 of the U.C.C. The Reserve Bank makes all the warranties set forth in and subject to the terms of 4-207 of the U.C.C. for an electronic check as if it were an item subject to the U.C.C.
(4) Indemnity for substitute check created from an electronic check. (i) Except as provided in paragraph (b)(4)(ii) of this section, the Reserve Bank shall indemnify the bank to which it transfers or presents an electronic check (the recipient bank) for the amount of any losses that the recipient bank incurs under subpart D of part 229 of this chapter (Regulation CC) for an indemnity that the recipient bank was required to make under subpart D of part 229 of this chapter in connection with a substitute check later created from the electronic check.
(ii) The Reserve Bank shall not be liable under paragraph (b)(4)(i) of this section for any amount that the recipient bank pays under subpart D of part 229 of this chapter that is attributable to the lack of good faith or failure to exercise ordinary care of the recipient bank or a person that handled the item, in any form, after the recipient bank.
(c) Time for commencing action against Reserve Bank. (1) A claim against a Reserve Bank for lack of good faith or failure to exercise ordinary care shall be barred unless the action on the claim is commenced within two years after the claim accrues. Such a claim accrues on the date when a Reserve Bank’s alleged failure to exercise ordinary care or to act in good faith first results in damages to the claimant.
(2) A claim that arises under paragraph (b)(3) of this section shall be barred unless the action on the claim is commenced within one year after the claim accrues. Such a claim accrues as of the date on which the claimant first learns, or by which the claimant reasonably should have learned, of the facts and circumstances giving rise to the claim.
(3) This paragraph (c) does not alter the time limit for claims under § 229.38(g) of this chapter (which include claims for breach of warranty under § 229.34 of this chapter) or subpart D of part 229 of this chapter.
§ 210.7 Presenting items for payment.
(a) Presenting or sending. As provided under State law or as otherwise permitted by this section:
(1) A Reserve Bank or a subsequent collecting bank may present an item for payment or send the item for presentment and payment; and
(2) A Reserve Bank may send an item to a subsequent collecting bank with authority to present it for payment or to send it for presentment and payment.
(b) Place of presentment. A Reserve Bank or subsequent collecting bank may present an item—
(1) At a place requested by the paying bank;
(2) In accordance with § 229.36 of this chapter (Regulation CC);
(3) At a place requested by the nonbank payor, if the item is payable by a nonbank payor other than through or at a paying bank;
(4) Under a special collection agreement consistent with this subpart; or
(5) Through a clearinghouse and subject to its rules and practices.
(c) Presenting or sending direct. A Reserve Bank or subsequent collecting bank may, with respect to an item that may be sent to the paying bank or nonbank payor in the Reserve Bank’s District—
(1) Present or send the item direct to the paying bank, or to a place requested by the paying bank; or
(2) If the item is payable by a nonbank payor other than through a paying bank, present it direct to the nonbank payor. Documents, securities, or other papers accompanying a noncash item shall not be delivered to the nonbank payor before the item is paid unless the sender specifically authorizes delivery.
(d) Item sent to another district. A Reserve Bank receiving an item that may be sent to a paying bank or nonbank payor in another District ordinarily sends the item to the Reserve Bank of the other District, but with the agreement of the other Reserve Bank, may present or send the item as if it were sent to a paying bank or nonbank payor in its own District.
§ 210.8 Presenting noncash items for acceptance.
(a) A Reserve Bank or a subsequent collecting bank may, if instructed by the sender, present a noncash item for acceptance in any manner authorized by law if—
(1) The item provides that it must be presented for acceptance;
(2) The item may be presented elsewhere than at the residence or place of business of the payor; or
(3) The date of payment of the item depends on presentment for acceptance.
(b) Documents accompanying a noncash item shall not be delivered to the payor upon acceptance of the item unless the sender specifically authorizes delivery. A Reserve Bank shall not have or assume any other obligation to present or to send for presentment for acceptance any noncash item.
§ 210.9 Settlement and payment.
(a) Settlement through Administrative Reserve Bank. A paying bank shall settle for an item under this subpart with its Administrative Reserve Bank, whether or not the paying bank received the item from that Reserve Bank. A paying bank’s settlement with its Administrative Reserve Bank is deemed to be settlement with the Reserve Bank from which the paying bank received the item. A paying bank may settle for an item using any account on a Reserve Bank’s books by agreement with its Administrative Reserve Bank, any other Reserve Bank holding the settlement account, and the account-holder. The paying bank remains responsible for settlement if the Reserve Bank holding the settlement account does not, for any reason, obtain settlement in that account.
(b) Cash items—(1) Settlement obligation. On the day a paying bank receives
(1) On a day other than a banking day for it; or
(2) On a banking day for it, but after a “cut-off hour” established by it in accordance with state law.
(2) Time of settlement. (i) On the day a paying bank receives a cash item from a Reserve Bank, it shall settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank, or return the item, by the latest of—
(A) The next clock hour or clock half-hour that is at least one half-hour after the paying bank receives the item;
(B) 8:30 a.m. eastern time; or
(C) Such later time as provided in the Reserve Banks’ operating circulars.
(ii) If the paying bank fails to settle for or return a cash item in accordance with paragraph (b)(2)(i) of this section, it shall be subject to any applicable overdraft charges. Settlement under paragraph (b)(2)(i) of this section satisfies the settlement requirements of paragraph (b)(1) of this section.
(3) Paying bank closes voluntarily. (i) If a paying bank closes voluntarily so that it does not receive a cash item on a day that is a banking day for a Reserve Bank, and the Reserve Bank makes a cash item available to the paying bank on that day, the paying bank shall either—
(A) On that day, settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank, or return the item, by the latest of the next clock hour or clock half-hour that is at least one half-hour after it ordinarily would have received the item, 8:30 a.m. eastern time, or such later time as provided in the Reserve Banks’ operating circulars; or
(B) On the next day that is a banking day for both the paying bank and the Reserve Bank, settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by 8:30 a.m. eastern time on that day or such later time as provided in the Reserve Banks’ operating circulars; and compensate the Reserve Bank for the value of the float associated with the item in accordance with procedures provided in the Reserve Bank’s operating circular.
(ii) If a paying bank closes voluntarily so that it does not receive a cash item on a day that is a banking day for a Reserve Bank, and the Reserve Bank makes a cash item available to the paying bank on that day, the paying bank is not considered to have received the item until its next banking day, but it shall be subject to any applicable overdraft charges if it fails to settle for or return the item in accordance with paragraph (b)(3)(i) of this section. The settlement requirements of paragraphs (b)(1) and (2) of this section do not apply to a paying bank that settles in accordance with paragraph (b)(3)(i) of this section.
(4) Reserve Bank closed. If a paying bank receives a cash item from a Reserve Bank on a banking day that is not a banking day for the Reserve Bank, the paying bank shall—
(i) Settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by the close of the Fedwire Funds Service on the Reserve Bank’s next banking day, or return the item by midnight of the day it receives the item (if the paying bank fails to settle for or return a cash item in accordance with this paragraph (b)(4)(i), it shall become accountable for the amount of the item as of the close of its banking day on the day it receives the item); and
(ii) Settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by 8:30 a.m. eastern time on the Reserve Bank’s next banking day or such later time as provided in the Reserve Bank’s operating circular, or return the item by midnight of the day it receives the item. If the paying bank fails to settle for or return a cash item in accordance with this paragraph (b)(4)(ii), it shall be subject to any applicable overdraft charges. Settlement under this paragraph (b)(4)(ii) satisfies the settlement requirements of paragraph (b)(4)(i) of this section.
(5) Manner of settlement. Settlement with a Reserve Bank under paragraphs (b)(1) through (4) of this section shall be made by debit to an account on the Reserve Bank’s books or other form of settlement to which the Reserve Bank agrees, except that the Reserve Bank may, in its discretion, obtain settlement by charging the paying bank’s account. A paying bank may not set off against the amount of a settlement under this section the amount of a claim with respect to another cash item, cash letter, or other claim under § 229.34 of this chapter (Regulation CC) or other law.
(6) Notice in lieu of return. If a cash item is unavailable for return, the paying bank may send a notice in lieu of return as provided in § 229.31(f) of this chapter (Regulation CC).
(c) Noncash items. A Reserve Bank may require the paying or collecting bank to which it has presented or sent a noncash item to pay for the item by a debit to an account maintained or used by the paying or collecting bank on the Reserve Bank’s books or by any other form of settlement acceptable to the Reserve Bank.
(d) Nonbank payor. A Reserve Bank may require a nonbank payor to which it has presented an item to pay for it by debit to an account on the Reserve Bank’s books or other form of settlement acceptable to the Reserve Bank.
(e) Liability of Reserve Bank. Except as set forth in § 229.35(b) of this chapter (Regulation CC), a Reserve Bank shall not be liable for the failure of a collecting bank, paying bank, or nonbank payor to pay for an item, or for any loss resulting from the Reserve Bank’s acceptance of any form of payment other than cash authorized in paragraphs (b), (c), and (d) of this section. A Reserve Bank that acts in good faith and exercises ordinary care shall not be liable for the nonpayment of, or failure to realize upon, any non-cash form of payment that it accepts under paragraphs (b), (c), and (d) of this section.
§ 210.10 Time schedule and availability of credits for cash items and returned checks.
(a) Each Reserve Bank shall publish a time schedule indicating when the amount of any cash item or returned check received by it is counted toward the balance maintained to satisfy a reserve balance requirement for purposes of part 204 of this chapter (Regulation D) and becomes available for use by the sender or paying or returning bank. The Reserve Bank that holds the settlement account shall give either immediate or deferred credit to a sender, a paying bank, or a returning bank (other than a foreign correspondent) in accordance with the time schedule of the receiving Reserve Bank. A Reserve Bank ordinarily gives credit to a foreign correspondent only when the Reserve Bank receives payment of the item in actually and finally collected funds, but, in its discretion, a Reserve Bank may give immediate or deferred credit in accordance with its time schedule.
(b) Notwithstanding its time schedule, a Reserve Bank may refuse at any time to permit the use of credit given by it for any cash item or returned check, and may defer availability after credit is received by the Reserve Bank for a period of time that is reasonable under the circumstances.
§ 210.11 Availability of proceeds of noncash items; time schedule.
(a) Availability of credit. A Reserve Bank shall give credit to the sender for the proceeds of a noncash item when it receives payment in actually and finally collected funds (or advice from another Reserve Bank of such payment to it). The amount of the item is counted toward the balance maintained to satisfy a reserve balance requirement for purposes of part 204 of this chapter (Regulation D) and becomes available for use by the sender when the Reserve Bank receives the payment or advice, except as provided in paragraph (b) of this section.
(b) Time schedule. A Reserve Bank may give credit for the proceeds of a noncash item subject to payment in actually and finally collected funds in accordance with a published time schedule. The time schedule shall indicate when the proceeds of the noncash item will be counted toward the balance maintained to satisfy a reserve balance requirement for purposes of part 204 of this chapter (Regulation D) and become available for use by the sender. A Reserve Bank may, however, refuse at any time to permit the use of credit given by it for a noncash item for which the Reserve Bank has not yet received payment in actually and finally collected funds.
§ 210.12 Return of cash items and handling of returned checks.
(a) Return of items—(1) Return of cash items handled by Reserve Banks. A paying bank that receives a cash item from a Reserve Bank, other than for immediate payment over the counter, and that settles for the item as provided in § 210.9(b), may, before it has finally paid the item, return the item to any Reserve Bank (unless its Administrative Reserve Bank directs it to return the item to a specific Reserve Bank) in accordance with subpart C of part 229 of this chapter (Regulation CC), the Uniform Commercial Code, and the Reserve Banks’ operating circulars. A paying bank that receives a cash item from a Reserve Bank also may return the item prior to settlement, in accordance with § 210.9(b) and the Reserve Banks’ operating circulars. The rules or practices of a clearinghouse through which the item was presented, or a special collection agreement under which the item was presented, may not extend these return times, but may provide for a shorter return time.
(2) Return of checks not handled by Reserve Banks. A paying bank that receives a check, other than from a Reserve Bank, and that determines not to pay the check, may send the returned check to any Reserve Bank (unless its Administrative Reserve Bank directs it to send the returned check to a specific Reserve Bank) in accordance with subpart C of part 229 of this chapter (Regulation CC), the Uniform Commercial Code, and the Reserve Banks’ operating circulars. A returning bank may send a returned check to any Reserve Bank (unless its Administrative Reserve Bank directs it to send the returned check to a specific Reserve Bank) in accordance with subpart C of part 229 of this chapter (Regulation CC), the Uniform Commercial Code, and the Reserve Banks’ operating circulars.
(b) Handling of returned checks. (1) The following parties, in the following order, are deemed to have handled a returned check sent to a Reserve Bank under paragraph (a) of this section—
(i) The paying or returning bank;
(ii) The paying bank’s or returning bank’s Administrative Reserve Bank;
(iii) The Reserve Bank that receives the returned check from the paying or returning bank (if different from the paying bank’s or returning bank’s Administrative Reserve Bank); and
(iv) Another Reserve Bank, if any, that receives the returned check from a Reserve Bank.
(2) A Reserve Bank that is not described in paragraph (b)(1) of this section is not a person that handles a returned check and is not a returning bank with respect to a returned check.
(3) The identity and order of the parties under paragraph (b)(1) of this section determine the relationships and the rights and liabilities of the parties under this subpart, part 229 of this chapter (Regulation CC), and the Uniform Commercial Code.
(c) Paying bank’s and returning bank’s agreement. The warranties, indemnities, authorizations, and agreements made pursuant to this paragraph (c) may not be disclaimed and are made whether or not the returned check bears an indorsement of the paying bank or returning bank. By sending a returned check to a Reserve Bank, the paying bank or returning bank does all of the following.
(1) Authorization to handle returned check. The paying bank or returning bank authorizes the paying bank’s or returning bank’s Administrative Reserve Bank, and any other Reserve Bank or returning bank to which the returned check is sent, to handle the returned check (and authorizes any Reserve Bank that handles settlement for the returned check to make accounting entries) subject to this subpart and to the Reserve Banks’ operating circulars.
(2) Warranties for all returned checks. The paying bank or returning bank warrants to each Reserve Bank handling a returned check that the returned check bears all indorsements applied by parties that previously handled the returned check for forward collection or return.
(3) Warranties and indemnities as set forth in Regulation CC. As applicable and unless otherwise provided, a paying bank or returning bank makes to each Reserve Bank that handles the returned check all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC).
(4) Paying bank or returning bank’s liability to Reserve Bank. (i) Except as provided in paragraph (c)(4)(ii) and (iii) of this section, a paying bank or returning bank agrees to indemnify each Reserve Bank for any loss or expense (including attorneys’ fees and expenses of litigation) resulting from—
(A) The paying or returning bank’s lack of authority to give the authorization in paragraph (c)(1) of this section;
(B) Any action taken by a Reserve Bank within the scope of its authority in handling the returned check; or
(C) Any warranty or indemnity made by the Reserve Bank under paragraph (e) of this section or part 229 of this chapter.
(ii) A paying bank’s or returning bank’s liability for warranties and indemnities that a Reserve Bank makes for a returned check that is a substitute check, a paper or electronic representation thereof, or an electronic returned check is subject to the following conditions and limitations—
(A) A paying bank or returning bank that sent an original returned check shall not be liable for any amount that a Reserve Bank pays under subpart D of part 229 of this chapter, or under § 229.34 of this chapter with respect to an electronic returned check, absent the paying bank’s or returning bank’s agreement to the contrary; and
(B) Nothing in this subpart alters the liability under subpart D of part 229 of this chapter of a paying bank or returning bank that sent a substitute check or a paper or electronic representation of a substitute check or under § 229.34 of this chapter of a paying bank or returning bank that sent an electronic returned check; and
(iii) A paying bank or returning bank shall not be liable for any amount that the Reserve Bank pays under this subpart or part 229 of this chapter that is attributable to the Reserve Bank’s own lack of good faith or failure to exercise ordinary care.
(d) Paying bank or returning bank’s liability under other law. Nothing in paragraph (c) of this section limits any warranty or indemnity by a returning bank or paying bank (or a person that handled an item prior to that bank) arising under state law or regulation (such as the U.C.C.), other federal law or regulation (such as part 229 of this chapter), or an agreement with a Reserve Bank.
(e) Warranties by and liability of Reserve Bank—(1) Warranties and indemnities. The following provisions apply when a Reserve Bank handles a returned check under this subpart.
(i) Warranties for all items. The Reserve Bank warrants to the bank to which it sends the returned check that the returned check bears all indorsements applied by parties that previously handled the returned check for forward collection or return.
(ii) Warranties and indemnities as set forth in Regulation CC. As applicable and unless otherwise provided, the Reserve Bank makes all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC).
(2) Indemnity for substitute check created from electronic returned check. (i) Except as provided in paragraph (e)(2)(ii) of this section, the Reserve Bank shall indemnify the bank to which it transfers or presents an electronic returned check (the recipient bank) for the amount of any losses that the recipient bank incurs under subpart D of part 229 of this chapter (Regulation CC) for an indemnity that the recipient bank was required to make under subpart D of part 229 of this chapter in connection with a substitute check later created from the electronic returned check.
(ii) The Reserve Bank shall not be liable under paragraph (e)(2)(i) of this section for any amount that the recipient bank pays under subpart D of part 229 of this chapter that is attributable to the lack of good faith or failure to exercise ordinary care of the recipient bank or a person that handled the item, in any form, after the recipient bank.
(3) Liability of Reserve Bank. A Reserve Bank shall not have or assume any other liability to any person except—
(i) For the Reserve Bank’s own lack of good faith or failure to exercise ordinary care;
(ii) As provided in this paragraph (e); and
(iii) As provided in subparts C and D of part 229 of this chapter (Regulation CC).
(f) Recovery by Reserve Bank. (1) A Reserve Bank that has handled a returned check may recover as provided in paragraph (f)(2) of this section if an action or proceeding is brought against (or if defense is tendered to) the Reserve Bank based on—
(i) The alleged failure of the paying bank or returning bank to have the authority to give the authorization in paragraph (c)(1) of this section;
(ii) Any action by the Reserve Bank within the scope of its authority in handling the returned check; or
(iii) Any warranty or indemnity made by the Reserve Bank under paragraph (e) of this section or part 229 of this chapter; and
(2) Upon entry of a final judgment or decree in an action or proceeding described in paragraph (f)(1) of this section, a Reserve Bank may recover from the paying bank or returning bank the amount of attorneys’ fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, together with interest thereon.
(g) Methods of recovery. (1) The Reserve Bank may recover the amount stated in paragraph (f) of this section by charging any account on its books that is maintained or used by the paying bank or returning bank (or by charging another returning Reserve Bank), if—
(i) The Reserve Bank made seasonable written demand on the paying bank or returning bank to assume defense of the action or proceeding; and
(ii) The paying bank or returning bank has not made any other arrangement for payment that is acceptable to the Reserve Bank.
(2) The Reserve Bank is not responsible for defending the action or proceeding before using this method of recovery. A Reserve Bank that has been charged under this paragraph (g) may recover from the paying or returning bank in the manner and under the circumstances set forth in this paragraph (g).
(3) A Reserve Bank’s failure to avail itself of the remedy provided in this paragraph (g) does not prejudice its enforcement in any other manner of the indemnity agreement referred to in paragraph (c)(4) of this section.
(h) Reserve Bank’s responsibility. A Reserve Bank shall handle a returned check, or a notice of nonpayment, in accordance with subpart C of part 229 and its operating circular.
(i) Settlement. A subsequent returning bank or depositary bank shall settle with its Administrative Reserve Bank for returned checks in the same manner and by the same time as for cash items presented for payment under this subpart. Settlement with its Administrative Reserve Bank is deemed to be settlement with the Reserve Bank from which the returning bank or depositary bank received the item.
(j) Security interest. When a paying or returning bank sends a returned check to a Reserve Bank, the paying bank, returning bank, and any prior returning bank grant to the paying bank’s or returning bank’s Administrative Reserve Bank a security interest in all of their respective assets in the possession of, or held for the account of, any Reserve Bank, to secure their respective obligations due or to become due to the Administrative Reserve Bank under this subpart or subpart C of part 229 of this chapter (Regulation CC). The security interest attaches when a warranty is breached or any other obligation to the Reserve Bank is incurred. If the Reserve Bank, in its sole discretion, deems itself insecure and gives notice thereof to the paying bank, returning bank, or prior returning bank, or if the paying bank, returning bank, or prior returning bank suspends payments or is closed, the Reserve Bank may take any action authorized by law to recover the amount of an obligation, including, but not limited to, the exercise of rights of set off, the realization on any available collateral, and any other rights it may have as a creditor under applicable law.
§ 210.13 Unpaid items.
(a) Right of recovery. If a Reserve Bank does not receive payment in actually and finally collected funds for an item, the Reserve Bank shall recover by charge-back or otherwise the amount of the item from the sender, prior collecting bank, paying bank, or returning bank from or through which it was received, whether or not the item itself can be sent back. In the event of recovery from such a person, no person, including the owner or holder of the item, shall, for the purpose of obtaining payment of the amount of the item, have any interest in any reserve balance or other funds or property in the Reserve Bank’s possession of the bank that failed to make payment in actually and finally collected funds.
(b) Suspension or closing of bank. A Reserve Bank shall not pay or act on a draft, authorization to charge (including a charge authorized by § 210.9(b)(5)), or other order on a reserve balance or other funds in its possession for the purpose of settling for items under § 210.9 or § 210.12 after it receives notice of suspension or closing of the bank making the settlement for that bank’s own or another’s account.
§ 210.14 Extension of time limits.
If a bank (including a Reserve Bank) or nonbank payor is delayed in acting on an item beyond applicable time limits because of interruption of communication or computer facilities, suspension of payments by a bank or nonbank payor, war, emergency conditions, failure of equipment, or other circumstances beyond its control, its time for acting is extended for the time necessary to complete the action, if it exercises such diligence as the circumstances require.
§ 210.15 Direct presentment of certain warrants.
If a Reserve Bank elects to present direct to the payor a bill, note, or warrant that is issued and payable by a State or a political subdivision and that is a cash item not payable or collectible through a bank: (a) Sections 210.9, 210.12, and 210.13 and the operating circulars of the Reserve Banks apply to the payor as if it were a paying bank; (b) § 210.14 applies to the payor as if it were a bank; and (c) under § 210.9 each day on which the payor is open for the regular conduct of its affairs or the accommodation of the public is considered a banking day.
Subpart B—Funds Transfers Through the Fedwire Funds Service
§ 210.25 Authority, purpose, and scope.
(a) Authority and purpose. This subpart provides rules to govern funds transfers through the Fedwire Funds Service, and has been issued pursuant to the Federal Reserve Act—section 13 (12 U.S.C. 342), paragraph (f) of section 19 (12 U.S.C. 464), paragraph 14 of section 16 (12 U.S.C. 248(o)), and paragraphs (i) and (j) of section 11 (12 U.S.C. 248(i) and (j))—and other laws and has the force and effect of federal law. This subpart is not a funds-transfer system rule as defined in Section 4A-501(b) of Article 4A.
(b) Scope. (1) This subpart incorporates the provisions of Article 4A set forth in appendix A of this part. In the event of an inconsistency between the provisions of the sections of this subpart and appendix A of this part, the provisions of the sections of this subpart shall prevail. In the event of an inconsistency between the provisions this subpart and section 919 of the Electronic Fund Transfer Act, section 919 of the Electronic Fund Transfer Act shall prevail.
(2) Except as otherwise provided in paragraphs (b)(3) and (4) of this section, this subpart, including Article 4A as set forth in appendix A of this part and operating circulars of the Federal Reserve Banks issued in accordance with paragraph (c) of this section, governs the rights and obligations of the following parties with respect to the Fedwire Funds Service:
(i) Federal Reserve Banks that send or receive payment orders;
(ii) Senders that send payment orders directly to a Federal Reserve Bank;
(iii) Receiving banks that receive payment orders directly from a Federal Reserve Bank;
(iv) Beneficiaries that receive payment for payment orders by means of credit to an account maintained or used at a Federal Reserve Bank; and
(v) Other parties to a funds transfer any part of which is carried out through the Fedwire Funds Service to the same extent as if this subpart were considered a funds-transfer system rule under Article 4A.
(3) This subpart governs a funds transfer that is sent through the Fedwire Funds Service, as provided in paragraph (b)(2) of this section, even though a portion of the funds transfer is governed by the Electronic Fund Transfer Act, but the portion of such funds transfer that is governed by the Electronic Fund Transfer Act (other than section 919 governing remittance transfers) is not governed by this subpart.
(4) In the event that any portion of this Subpart establishes rights or obligations with respect to the availability of funds that are also governed by the Expedited Funds Availability Act or the Board’s Regulation CC, Availability of Funds and Collection of Checks, those provisions of the Expedited Funds Availability Act or Regulation CC shall apply and the portion of this Subpart, including Article 4A as incorporated herein, shall not apply.
(c) Operating Circulars. Each Federal Reserve Bank shall issue an Operating Circular consistent with this subpart that governs the details of its funds-transfer operations in connection with the Fedwire Funds Service and other matters it deems appropriate. Among other things, the Operating Circular may set cut-off times and funds-transfer business days; address security procedures offered by the Federal Reserve Banks to verify the authenticity of a payment order; specify format and media requirements for payment orders; specify the time and method of receipt, execution, and acceptance of a payment order and settlement of a Federal Reserve Bank’s payment obligation for purposes of Article 4A; specify service terms governing ancillary features of the Fedwire Funds Service; provide for the acceptance of documents in electronic form to the extent any provision in Article 4A requires an agreement or other document to be in writing; identify messages that are not payment orders; and impose charges for funds-transfer services.
(d) Government senders, receiving banks, and beneficiaries. Except as otherwise expressly provided by the statutes of the United States, the parties specified in paragraphs (b)(2)(ii) through (v) of this section include:
(1) A department, agency, instrumentality, independent establishment, or office of the United States, or a wholly-owned or controlled Government corporation;
(2) An international organization;
(3) A foreign central bank; and
(4) A department, agency, instrumentality, independent establishment, or office of a foreign government, or a wholly-owned or controlled corporation of a foreign government.
(e) Financial messaging standards. Financial messaging standards (e.g., ISO 20022), including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. This subpart, including Article 4A as set forth in appendix A of this part, and the operating circulars of the Reserve Banks issued in accordance with paragraph (c) of this section govern the rights and obligations of parties to funds transfers sent through the Fedwire Funds Service as provided in paragraph (b) of this section. To the extent there is any inconsistency between a financial messaging standard adopted by the Fedwire Funds Service and this subpart, this subpart shall prevail.
§ 210.26 Definitions.
As used in this subpart, the following definitions apply:
Article 4A means Article 4A of the Uniform Commercial Code as set forth in appendix A of this part, which is incorporated into this subpart in accordance with § 210.25(b).
Automated clearing house transfer means any transfer designated as an automated clearing house transfer in an operating circular issued by the Federal Reserve Banks.
Beneficiary has the same meaning as in Article 4A except that the term is limited to a beneficiary in a funds transfer any portion of which is sent through the Fedwire Funds Service.
Beneficiary’s bank has the same meaning as in Article 4A, except that:
(1) The term is limited to a beneficiary’s bank in a funds transfer any portion of which is sent through the Fedwire Funds Service;
(2) A Federal Reserve Bank need not be identified in the payment order in order to be the beneficiary’s bank; and
(3) The term includes a Federal Reserve Bank when that Federal Reserve Bank is the beneficiary of a payment order.
Fedwire Funds Service means the funds-transfer system owned and operated by the Federal Reserve Banks that is used primarily for the transmission and settlement of payment orders governed by this subpart. The Fedwire Funds Service does not include the FedNow Service or the system for making automated clearing house transfers.
Interdistrict transfer means a funds transfer involving entries to accounts maintained at two Federal Reserve Banks.
Intradistrict transfer means a funds transfer involving entries to accounts maintained at one Federal Reserve Bank.
Off-line bank means a bank that sends payment orders to and receives payment orders from a Federal Reserve Bank by telephone orally or by other means other than electronic data transmission.
Payment order has the same meaning as in Article 4A except that the term includes only instructions sent or received through the Fedwire Funds Service and does not include automated clearing house transfers or any communication designated in an operating circular issued by a Federal Reserve Bank under this subpart as not being a payment order.
Receiving bank has the same meaning as in Article 4A except that the term is limited to a receiving bank in a funds transfer any portion of which is sent through the Fedwire Funds Service.
Sender has the same meaning as in Article 4A except that the term is limited to a sender in a funds transfer any portion of which is sent through the Fedwire Funds Service.
Sender’s account, receiving bank’s account, and beneficiary’s account mean the reserve, clearing, or other funds deposit account at a Federal Reserve Bank maintained or used by the sender, receiving bank, or beneficiary, respectively.
Sender’s Federal Reserve Bank and receiving bank’s Federal Reserve Bank mean the Federal Reserve Bank at which the sender or receiving bank, respectively, maintains or uses an account.
§ 210.27 Reliance on identifying number.
(a) Reliance by a Federal Reserve Bank on number to identify an intermediary bank or beneficiary’s bank. A Federal Reserve Bank may rely on the number in a payment order that identifies the intermediary bank or beneficiary’s bank, even if it identifies a bank different from the bank identified by name in the payment order, if the Federal Reserve Bank does not know of such an inconsistency in identification. A Federal Reserve Bank has no duty to detect any such inconsistency in identification.
(b) Reliance by a Federal Reserve Bank on number to identify beneficiary. A Federal Reserve Bank, acting as a beneficiary’s bank, may rely on the number in a payment order that identifies the beneficiary, even if it identifies a person different from the person identified by name in the payment order, if the Federal Reserve Bank does not know of such an inconsistency in identification. A Federal Reserve Bank has no duty to detect any such inconsistency in identification.
§ 210.28 Agreement of sender.
(a) Payment of sender’s obligation to a Federal Reserve Bank. A sender (other than a Federal Reserve Bank), by maintaining or using an account with a Federal Reserve Bank, authorizes the sender’s Federal Reserve Bank to obtain payment for the sender’s payment orders by debiting the amount of the payment order from the sender’s account.
(b) Overdrafts. (1) A sender does not have the right to an overdraft in the sender’s account. In the event an overdraft is created, the overdraft shall be due and payable immediately, without the need for a demand by the Federal Reserve Bank, at the earliest of the following times:
(i) At the end of the Fedwire Funds Service funds-transfer business day;
(ii) At the time the Federal Reserve Bank, in its sole discretion, deems itself insecure and gives notice thereof to the sender; or
(iii) At the time the sender suspends payments or is closed.
(2) The sender shall have in its account, at the time the overdraft is due and payable, a balance of actually and finally collected funds sufficient to cover the aggregate amount of all its obligations to the Federal Reserve Bank, whether the obligations result from the execution of a payment order or otherwise.
(3) To secure any overdraft, as well as any other obligation due or to become due to its Federal Reserve Bank, each sender, by sending a payment order to a Federal Reserve Bank that is accepted by the Federal Reserve Bank, grants to the Federal Reserve Bank a security interest in all of the sender’s assets in the possession or control of, or held for the account of, the Federal Reserve Bank. The security interest attaches when an overdraft, or any other obligation to the Federal Reserve Bank, becomes due and payable.
(4) A Federal Reserve Bank may take any action authorized by law to recover the amount of an overdraft that is due and payable, including, but not limited to, the exercise of rights of set off, the realization on any available collateral, and any other rights it may have as a creditor under applicable law.
(5) If a sender, other than a government sender described in § 210.25(d), incurs an overdraft in its account as a result of a debit to the account by a Federal Reserve Bank under paragraph (a) of this section, the account will be subject to any applicable overdraft charges, regardless of whether the overdraft has become due and payable. A Federal Reserve Bank may debit a sender’s account under paragraph (a) of this section immediately on acceptance of the payment order.
(c) Review of payment orders. A sender, by sending a payment order to a Federal Reserve Bank, agrees that for the purposes of sections 4A-204(a) and 4A-304 of Article 4A, a reasonable time to notify a Federal Reserve Bank of the relevant facts concerning an unauthorized or erroneously executed payment order is within 30 calendar days after the sender receives notice that the payment order was accepted or executed, or that the sender’s account was debited with respect to the payment order.
§ 210.29 Agreement of receiving bank.
(a) Payment. A receiving bank (other than a Federal Reserve Bank) that receives a payment order from its Federal Reserve Bank authorizes that Federal Reserve Bank to pay for the payment order by crediting the amount of the payment order to the receiving bank’s account.
(b) Off-line banks. An off-line bank that does not expressly notify its Federal Reserve Bank in writing that it maintains an account for another bank warrants to that Federal Reserve Bank that the off-line bank does not act as an intermediary bank or a beneficiary’s bank with respect to payment orders received through the Fedwire Funds Service for a beneficiary that is a bank.
§ 210.30 Payment orders.
(a) Rejection. A sender shall not send a payment order to a Federal Reserve Bank unless authorized to do so by the Federal Reserve Bank. A Federal Reserve Bank may reject, or impose conditions that must be satisfied before it will accept, a payment order for any reason.
(b) Selection of an intermediary bank. For an interdistrict transfer through the Fedwire Funds Service, a Federal Reserve Bank is authorized and directed to execute a payment order through another Federal Reserve Bank. A sender shall not send a payment order to a Federal Reserve Bank that requires the Federal Reserve Bank to send a payment order to an intermediary bank (other than a Federal Reserve Bank) unless that intermediary bank is designated in the sender’s payment order. A sender shall not send to a Federal Reserve Bank a payment order through the Fedwire Funds Service that instructs use by a Federal Reserve Bank of a funds-transfer system or means of transmission other than the Fedwire Funds Service unless the Federal Reserve Bank agrees with the sender in writing to follow such instructions.
(c) Execution date and payment date. A sender shall not send a payment order through the Fedwire Funds Service that instructs a Federal Reserve Bank to execute the payment order or to pay the beneficiary on a funds-transfer business day that is later than the Fedwire Funds Service funds-transfer business day on which the order is received by the Federal Reserve Bank, unless the Federal Reserve Bank agrees with the sender in writing to follow such instructions.
§ 210.31 Payment by a Federal Reserve Bank to a receiving bank or beneficiary.
(a) Payment to a receiving bank. Payment of a Federal Reserve Bank’s obligation to pay a receiving bank (other than a Federal Reserve Bank) occurs at the earlier of the time when the amount of the payment order is credited to the receiving bank’s account or when the payment order is sent to the receiving bank.
(b) Payment to a beneficiary. Payment by a Federal Reserve Bank to a beneficiary of a payment order, where the Federal Reserve Bank is the beneficiary’s bank, occurs at the earlier of the time when the amount of the payment order is credited to the beneficiary’s account or when notice of the credit is sent to the beneficiary.
§ 210.32 Federal Reserve Bank liability; payment of compensation.
(a) Damages. In connection with its handling of a payment order under this subpart, a Federal Reserve Bank shall not be liable to a sender, receiving bank, beneficiary, or other Federal Reserve Bank, governed by this subpart, for any damages other than those payable under Article 4A. A Federal Reserve Bank shall not agree to be liable to a sender, receiving bank, beneficiary, or other Federal Reserve Bank for consequential damages under section 4A-305(d) of Article 4A.
(b) Payment of compensation. (1) A Federal Reserve Bank shall satisfy its obligation, or that of another Federal Reserve Bank, to pay compensation in the form of interest under Article 4A by paying such compensation in the form of interest to a sender, receiving bank, beneficiary, or another party to the funds transfer that is entitled to such payment in an amount that is calculated in accordance with section 4A-506 of Article 4A.
(2) If the sender or receiving bank that is the recipient of the payment of compensation is not the party entitled to compensation under Article 4A, the sender or receiving bank shall pass through the benefit of the compensation by making an interest payment, as of the day the compensation was paid by the Federal Reserve Bank, to the party entitled to compensation. The interest payment that is made to the party entitled to compensation shall not be less than the value of the compensation that was paid by the Federal Reserve Bank to the sender or receiving bank. The party entitled to compensation may agree to accept compensation in a form other than a direct interest payment, provided that such an alternative form of compensation is not less than the value of the interest payment that otherwise would be made.
(c) Nonwaiver of right of recovery. Nothing in this subpart or any Operating Circular issued hereunder shall constitute, or be construed as constituting, a waiver by a Federal Reserve Bank of a cause of action for recovery under any applicable law of mistake and restitution.
Appendix A to Subpart B of Part 210—Commentary
The Commentary provides background material to explain the intent of the Board of Governors of the Federal Reserve System (Board) in adopting a particular provision in the subpart and to help readers interpret that provision. In some comments, examples are offered. The Commentary constitutes an official Board interpretation of subpart B of this part. Commentary is not provided for every provision of subpart B of this part, as some provisions are self-explanatory.
(a) Authority and purpose. Section 210.25(a) states that the purpose of subpart B of this part is to provide rules to govern funds transfers through the Fedwire Funds Service and recites the Board’s rulemaking authority for this subpart. Subpart B of this part is Federal law and is not a “funds-transfer system rule” as defined in section 4A-501(b) of Article 4A, Funds Transfers, of the Uniform Commercial Code (UCC), as set forth in appendix A of this part. Certain provisions of Article 4A may not be varied by a funds-transfer system rule, but under section 4A-107, regulations of the Board and operating circulars of the Federal Reserve Banks supersede inconsistent provisions of Article 4A to the extent of the inconsistency. In addition, regulations of the Board may preempt inconsistent provisions of state law. Accordingly, subpart B of this part supersedes or preempts inconsistent provisions of state law. It does not affect state law governing funds transfers that does not conflict with the provisions of subpart B of this part, such as Article 4A as enacted in any state, as such state law may apply to parties to funds transfers through the Fedwire Funds Service whose rights and obligations are not governed by subpart B of this part.
(b) Scope. (1) Subpart B of this part incorporates the provisions of Article 4A set forth in appendix A of this part. The provisions set forth expressly in the sections of subpart B of this part supersede or preempt any inconsistent provisions of Article 4A as set forth in appendix A of this part or as enacted in any state. The official comments to Article 4A are not incorporated in subpart B of this part or this commentary to subpart B of this part, but the official comments may be useful in interpreting Article 4A as set forth in appendix A of this part. Because section 4A-105 refers to other provisions of the Uniform Commercial Code (e.g., definitions in article 1 of the UCC), these other provisions of the UCC, as approved by the National Conference of Commissioners on Uniform State Laws, which is now also known as the Uniform Law Commission, and the American Law Institute, from time to time, are also incorporated into subpart B of this part. Subpart B of this part applies to any party to a funds transfer over the Fedwire Funds Service that is in privity with a Federal Reserve Bank. These parties include a sender (bank or nonbank) that sends a payment order directly to a Federal Reserve Bank, a receiving bank that receives a payment order directly from a Federal Reserve Bank, and a beneficiary that receives credit to an account that it uses or maintains at a Federal Reserve Bank as payment for a payment order accepted by a Federal Reserve Bank. Other parties to a funds transfer over the Fedwire Funds Service are covered by subpart B of this part to the same extent subpart B would apply to them if subpart B were a “funds-transfer system rule” under Article 4A that selected subpart B of this part as the governing law.
(2) The scope of the applicability of a funds-transfer system rule under Article 4A is specified in section 4A-501(b), and the scope of the choice of law provision is specified in section 4A-507(c). Under section 4A-507(c), a choice of law provision is binding on the participants in a funds-transfer system and certain other parties having notice that the funds-transfer system might be used for the funds transfer and of the choice of law provision. The Uniform Commercial Code provides that a person has notice of a fact when the person has actual knowledge of it, receives a notice or notification of it, or has reason to know that it exists from all the facts and circumstances known to the person at the time in question. (See UCC section 1-202.) However, under sections 4A-507(b) and 4A-507(d), a choice of law by agreement of the parties takes precedence over a choice of law made by funds-transfer system rule.
(3) If originators, receiving banks, and beneficiaries that are not in privity with a Federal Reserve Bank have the notice contemplated by section 4A-507(c) or if those parties agree to be bound by subpart B of this part, subpart B of this part generally would apply to payment orders between those remote parties, including participants in other funds-transfer systems. For example, a payment order may be sent from an originator’s bank through a funds-transfer system other than the Fedwire Funds Service to a receiving bank which, in turn, executes that payment order by sending a payment order through the Fedwire Funds Service. Similarly, a Federal Reserve Bank may send a payment order through the Fedwire Funds Service to a receiving bank that sends it through a funds-transfer system other than the Fedwire Funds Service to the beneficiary’s bank. In the first example, if the originator’s bank has notice that the Fedwire Funds Service may be used to effect part of the funds transfer, the sending of the payment order through the other funds-transfer system to the receiving bank will be governed by subpart B of this part unless the parties to the payment order have agreed otherwise. In the second example, if the beneficiary’s bank has notice that the Fedwire Funds Service may be used to effect part of the funds transfer, the sending of the payment order to the beneficiary’s bank through the other funds-transfer system will be governed by subpart B of this part unless the parties have agreed otherwise. In both cases, the other funds-transfer system’s rules would also apply to, at a minimum, the portion of these funds transfers being made through that funds transfer system. Because subpart B of this part is Federal law, subpart B of this part will take precedence over any funds-transfer system rule applicable to the remote sender or receiving bank or to a Federal Reserve Bank to the extent of any inconsistency. If remote parties to a funds transfer, a portion of which is sent through the Fedwire Funds Service, have expressly selected by agreement, in accordance with section 4A-507(b), a law other than subpart B of this part, subpart B of this part would not take precedence over the choice of law made by the agreement even though the remote parties had notice that the Fedwire Funds Service might be used and of the governing law. (See section 4A-507(d).) In addition, subpart B of this part would not apply to a funds transfer sent through another funds-transfer system where no Federal Reserve Bank handles the funds transfer, even though settlement for the funds transfer is made by means of a separate net settlement or funds transfer through the Fedwire Funds Service.
(4) Under section 4A-108, Article 4A does not apply to a funds transfer any part of which is governed by the Electronic Fund Transfer Act (EFTA) (15 U.S.C. 1693 et seq.). In general, Fedwire funds transfers to or from consumer accounts are exempt from the EFTA and Regulation E (12 CFR part 1005). A funds transfer from a consumer originator or a funds transfer to a consumer beneficiary could be carried out in part through the Fedwire Funds Service and in part through an automated clearinghouse or other means that is subject to the EFTA or Regulation E. In these cases, subpart B would not govern the portion of the funds transfer that is governed by the EFTA or Regulation E. (See the commentary to § 210.26 in this appendix, “Payment Order”.)
(5) Section 919 of the EFTA, however, governs “remittance transfers,” which may include funds transfers over the Fedwire Funds Service. Section 919 of the EFTA sets out the obligations of remittance transfer providers with respect to consumer senders of remittance transfers. Section 919 of the EFTA generally does not affect the rights and obligations of financial institutions involved in a remittance transfer. To the extent that a Fedwire funds transfer is a “remittance transfer” governed by section 919 of the EFTA, it continues to be governed by subpart B of this part, except that, in the event of an inconsistency between the provisions of subpart B of this part and section 919 of the EFTA, section 919 of the EFTA shall prevail. For example, a consumer may initiate a remittance transfer governed by EFTA section 919 from the consumer’s account at a depository institution, and the depository institution may initiate that transfer by sending a payment order to a Federal Reserve Bank through the Fedwire Funds Service. If the consumer subsequently exercised the right to cancel the remittance transfer and obtain a refund under the terms of section 919 of the EFTA, the depository institution would be required to comply with section 919 even if the institution does not have a right to reverse the payment order sent to the Federal Reserve Bank under subpart B of this part.
(6) Finally, section 4A-404(a) provides that a beneficiary’s bank is obliged to pay the amount of a payment order to the beneficiary on the payment date unless acceptance of the payment order occurs on the payment date after the close of the funds-transfer business day of the bank. The Expedited Funds Availability Act provides that funds received by a bank by wire transfer shall be available for withdrawal not later than the business day after the business day on which such funds are received (12 U.S.C. 4002(a)). That act also preempts any provision of state law that was not effective on September 1, 1989, that is inconsistent with that act or its implementing Regulation CC (12 CFR part 229). Accordingly, the Expedited Funds Availability Act and Regulation CC may preempt section 4A-404(a) as enacted in any state. In order to ensure that section 4A-404(a), or other provisions of Article 4A, as incorporated in subpart B of this part, do not take precedence over provisions of the Expedited Funds Availability Act, this section 210.25(b)(4) provides that where subpart B of this part establishes rights or obligations that are also governed by the Expedited Funds Availability Act or Regulation CC, the Expedited Funds Availability Act or Regulation CC provision shall apply and subpart B of this part shall not apply.
(c) Operating Circulars. The Federal Reserve Banks issue Operating Circulars consistent with this subpart that contain additional provisions applicable to payment orders and other messages sent through the Fedwire Funds Service. Under section 4A-107, these Operating Circulars supersede inconsistent provisions of Article 4A, both as set forth in appendix A of this part and as enacted in any state. These Operating Circulars are not funds-transfer system rules, but, by their terms, they are binding on all parties covered by this subpart.
(d) Government senders, receiving banks, and beneficiaries. This section clarifies that unless a statute of the United States provides otherwise, subpart B of this part applies to governmental entities, domestic or foreign, including foreign central banks as specified in paragraph (b)(1) of this section.
(e) Financial messaging standards. This paragraph makes clear that financial messaging standards, including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. Instead, subpart B of this part and Federal Reserve Bank operating circulars govern the rights and obligations of parties to funds transfers sent through the Fedwire Funds Service as provided in § 210.25(b). Thus, to the extent there is any inconsistency between a financial messaging standard adopted by the Fedwire Funds Service and subpart B of this part, subpart B of this part, including Article 4A as adopted in appendix B to subpart B of this part, will prevail. In the ISO 20022 financial messaging standard, for example, the term agent is used to refer to a variety of bank parties to a funds transfer (e.g., debtor agent, creditor agent, intermediary agent). Notwithstanding use of that term in the standard and in message tags, such banks are not the agents of any party to a funds transfer and owe no duty to any other party to such a funds transfer except as provided in subpart B of this part (including Article 4A) or by express agreement. The ISO 20022 financial messaging standard also permits information to be carried in a funds-transfer message regarding persons that are not parties to that funds transfer (e.g., ultimate debtor, ultimate creditor, initiating party) for regulatory, compliance, remittance, or other purposes. An “ultimate debtor” is not an “originator” as defined in Article 4A. The relationship between the ultimate debtor and the originator (what the ISO 20022 standard calls the “debtor”) is determined by law other than Article 4A.
Article 4A defines many terms (e.g., beneficiary, intermediary bank, receiving bank, security procedure) used in subpart B of this part. These terms are defined or listed in sections 4A-103 through 4A-105. These terms, such as the term bank (defined in section 4A-105(d)(2)), may differ from comparable terms in subpart A and subpart C of this part. As subpart B of this part incorporates consistent provisions of Article 4A, it incorporates these definitions unless these terms are expressly defined otherwise in subpart B of this part. Subpart B modifies the definitions of five Article 4A terms, beneficiary, beneficiary’s bank, payment order, receiving bank, and sender. Subpart B also defines terms not defined in Article 4A.
Article 4A. Article 4A means the version of that article of the Uniform Commercial Code set forth in appendix A of this part. It does not refer to the law of any particular state unless the context indicates otherwise. Subject to the express provisions of this subpart, this version of Article 4A is incorporated into this subpart and made Federal law for transactions covered by subpart B of this part. (See § 210.25(b)(1) and accompanying commentary.) Because section 4A-105 refers to other provisions of the Uniform Commercial Code (e.g., definitions in article 1 of the UCC), these other provisions of the UCC, as approved by the National Conference of Commissioners on Uniform State Laws, which is now also known as the Uniform Law Commission, and the American Law Institute, from time to time, are also incorporated into subpart B of this part.
Beneficiary, beneficiary’s bank, receiving bank, and sender. The definitions of “beneficiary,” “beneficiary’s bank,” “receiving bank,” and “sender” in subpart B of this part differ from the definitions in sections 4A-103(a)(2) through (4). The subpart B definitions clarify that, for the purposes of subpart B of this part, these terms are limited to parties in a funds transfer that is sent through the Fedwire Funds Service. For example, the parties to a funds transfer that is sent through the FedNow Service would be governed by subpart C of this part, and would not be a “beneficiary,” “beneficiary’s bank,” “receiving bank,” or “sender” governed by subpart B of this part. The subpart B definition of “beneficiary’s bank” further clarifies that where a Federal Reserve Bank functions as the beneficiary’s bank, it need not be identified in the payment order as the beneficiary’s bank and that a Federal Reserve Bank that receives a payment order as beneficiary is also the beneficiary’s bank with respect to that payment order.
Fedwire Funds Service. This term refers to the funds-transfer system owned and operated by the Federal Reserve Banks that is governed by this subpart. The term does not refer to any particular computer, telecommunications facility, or funds transfer, but rather to the system as a whole, which may include transfers by telephone or by written instrument in particular circumstances. The term does not include the FedNow Service or the system used for automated clearing house transfers.
Off-line bank. Most Fedwire payment orders are sent electronically from a sender to a Federal Reserve Bank or from a Federal Reserve Bank to a receiving bank. Banks that send payment orders to Federal Reserve Banks electronically are often referred to as on-line banks. Some Fedwire Funds Service participants, however, send payment orders to a Federal Reserve Bank or receive payment orders from a Federal Reserve Bank orally by telephone or, in unusual circumstances, in writing. A bank that does not use either a terminal or a computer that links it electronically to a terminal or computer at its Federal Reserve Bank to send payment orders through the Fedwire Funds Service is an off-line bank.
Payment Order. (1) The definition of “payment order” in subpart B of this part differs from the section 4A-103(a)(1) definition. The subpart B definition clarifies that, for the purposes of subpart B of this part, the term includes only instructions transmitted through the Fedwire Funds Service. For example, instructions transmitted through the FedNow Service would be governed by subpart C of this part, and not subpart B of this part. Additionally, the subpart B definition provides that certain messages that are transmitted through the Fedwire Funds Service are not payment orders. Federal Reserve Banks and banks participating in the Fedwire Funds Service send various types of messages relating to payment orders or to other matters, through the Fedwire Funds Service, that are not intended to be payment orders. In some cases, messages sent through the Fedwire Funds Service, such as certain requests for credit transfer, may be payment orders under Article 4A, but are not treated as payment orders under subpart B because they are not an instruction to a Federal Reserve Bank to pay or cause another bank to pay money. Under the subpart B definition, these messages are not “payment orders” governed by subpart B of this part. The operating circulars of the Federal Reserve Banks may specify those messages that may be transmitted through the Fedwire Funds Service but that are not payment orders.
(2) Subpart B of this part, including its incorporation of Article 4A, governs a payment order even though the originator’s or beneficiary’s account may be a consumer account established primarily for personal, family, or household purposes. Under section 4A-108, Article 4A does not apply to a funds transfer any part of which is governed by the Electronic Fund Transfer Act. That act and Regulation E (12 CFR part 1005) implementing it do not apply to funds transfers through the Fedwire Funds Service (see 15 U.S.C. 1693a(7)(B) and 12 CFR 1005.3(c)(3)), except that section 919 of the Electronic Fund Transfer Act may govern a Fedwire funds transfer that is a “remittance transfer.” Such remittance transfers that are Fedwire funds transfers continue to be governed by subpart B. Thus, subpart B applies to all funds transfers through the Fedwire Funds Service even though some such transfers involve originators or beneficiaries who are consumers. (See also § 210.25(b) and accompanying commentary.)
(a) Reliance by a Federal Reserve Bank on number to identify intermediary bank or beneficiary’s bank. Section 4A-208 provides that a receiving bank, such as a Federal Reserve Bank, may rely on the routing number of an intermediary bank or the beneficiary’s bank specified in a payment order as identifying the appropriate intermediary bank or beneficiary’s bank, even if the payment order identifies another bank by name, provided that the receiving bank does not know of the inconsistency. Under section 4A-208(b)(2), if the sender of the payment order is not a bank, a receiving bank may rely on the number only if the sender had notice before the receiving bank accepted the sender’s order that the receiving bank might rely on the number. This section provides this notice to entities that are not banks, such as the Department of the Treasury, that send payment orders directly to a Federal Reserve Bank.
(b) Reliance by a Federal Reserve Bank on number to identify beneficiary. Section 4A-207 provides that a beneficiary’s bank, such as a Federal Reserve Bank, may rely on the number identifying a beneficiary, such as the beneficiary’s account number, specified in a payment order as identifying the appropriate beneficiary, even if the payment order identifies another beneficiary by name, provided that the beneficiary’s bank does not know of the inconsistency. Under section 4A-207(c)(2), if the originator is not a bank, an originator is not obliged to pay for a payment order if the originator did not have notice that the beneficiary’s bank might rely on the identifying number and the person paid on the basis of the identifying number was not entitled to receive payment. This section of subpart B provides this notice to entities that are not banks, such as the Department of the Treasury, that are originators of payment orders sent directly by the originators to a Federal Reserve Bank, where that Federal Reserve Bank or another Federal Reserve Bank is the beneficiary’s bank (see also section 4A-402(b), providing that a sender must pay a beneficiary’s bank for a payment order accepted by the beneficiary’s bank).
(a) Payment of sender’s obligation to a Federal Reserve Bank. When a sender sends a payment order to a Federal Reserve Bank and the Federal Reserve Bank accepts the payment order by issuing a conforming order executing the sender’s payment order, under section 4A-402 the sender is indebted to the Federal Reserve Bank for the amount of the payment order. Section 4A-403 specifies the various methods by which a sender may settle the obligation under section 4A-402. With respect to a payment order sent through the Fedwire Funds Service, the obligation of a sender (other than a Federal Reserve Bank) is settled by a debit to the account of the sender at a Federal Reserve Bank. Section 210.28(a) provides that a sender, other than a Federal Reserve Bank, that maintains or uses an account at a Federal Reserve Bank authorizes the Federal Reserve Bank to debit that account so that the Federal Reserve Bank can obtain payment for the payment order.
(b) Overdrafts. (1) In some cases, debits to a sender’s account will create an overdraft in the sender’s account. The Board and the Federal Reserve Banks have established policies concerning when a Federal Reserve Bank will permit a bank to incur an overdraft in its account at a Federal Reserve Bank. These policies do not give a bank or other sender a right to an overdraft in its account. Subpart B clarifies that a sender does not have a right to such an overdraft. If an overdraft arises, it becomes immediately due and payable at the earliest of the following times: The end of the Fedwire Funds Service funds-transfer business day; the time the Federal Reserve Bank, in its sole discretion, deems itself insecure and gives notice to the sender; or the time that the sender suspends payments or is closed by governmental action, such as the appointment of a receiver. In some cases, a Federal Reserve Bank extends its Fedwire Funds Service operations beyond the standard cut-off time for that funds-transfer business day. For the purposes of this section, unless otherwise specified by the Federal Reserve Bank making such an extension, an overdraft becomes due and payable at the end of the extended operating hours. An overdraft becomes due and payable prior to a Federal Reserve Bank’s cut-off time if the Federal Reserve Bank deems itself insecure and gives notice to the sender. A Federal Reserve Bank that deems itself insecure may give such notice in accordance with the provisions on notice in section 1-202(d) of the UCC, in accordance with any other applicable law or agreement, or by any other reasonable means. An overdraft also becomes due and payable at the time that a bank is closed or suspends payments. For example, an overdraft becomes due and payable if a receiver is appointed for the bank or the bank is prevented from making payments by governmental order. The Federal Reserve Bank need not make demand on the sender for the overdraft to become due and payable.
(2) A sender must cover any overdraft and any other obligation of the sender to the Federal Reserve Bank by the time the overdraft becomes due and payable. By sending a payment order to a Federal Reserve Bank, the sender grants a security interest to the Federal Reserve Bank in all of the assets of the sender possessed or controlled by, or held for the account of, the Federal Reserve Bank in order to secure all obligations due or to become due to the Federal Reserve Bank. The security interest attaches when the overdraft, or other obligation of the sender to the Federal Reserve Bank, becomes due and payable. The security interest does not apply to assets held by the sender as custodian or trustee for the sender’s customers or third parties. Once an overdraft is due and payable, a Federal Reserve Bank may exercise its right of setoff, liquidate collateral, or take other similar action to satisfy the obligation the sender owes to the Federal Reserve Bank.
(c) Review of payment orders. (1) Under section 4A-204, a receiving bank is required to refund the principal amount of an unauthorized payment order that the sender was not obliged to pay, together with interest on the refundable amount calculated from the date that the receiving bank received payment to the date of the refund. The sender is not entitled to compensation in the form of interest if the sender fails to exercise ordinary care to determine that the order was not authorized and to notify the receiving bank within a reasonable period of time after the sender receives a notice that the payment order was accepted or that the sender’s account was debited with respect to the order. Similarly, under section 4A-304, if a sender of a payment order that was erroneously executed does not notify the bank receiving the payment order within a reasonable time, the bank is not liable to the sender for compensation in the form of interest on any amount refundable to the sender. Section 210.28(c) establishes 30 calendar days as the reasonable period of time for the purposes of these provisions of Article 4A.
(2) Section 4A-505 provides that, in order for a customer to assert a claim objecting to a debit to its account by a receiving bank, the customer must notify the receiving bank of its objection within one year after the customer received notification reasonably identifying the payment order. Subpart B of this part does not vary this one-year claim preclusion period.
(b) Off-line banks. (1) Generally, an on-line bank receiving payment orders or advices of credit for payment orders from a Federal Reserve Bank receives the payment orders or advices electronically a short time after the corresponding payment orders are received by the on-line bank’s Federal Reserve Bank. An off-line bank receiving payment orders or advices of credit from a Federal Reserve Bank does not have an electronic connection with the Federal Reserve Bank; therefore, payment orders or advices are transmitted either by telephone on the day the payment order is received by the receiving bank’s Federal Reserve Bank, or sent by courier or mail along with the off-line bank’s daily account statement, on the funds-transfer business day following the day the payment order is received by the off-line bank’s Federal Reserve Bank.
(2) Under section 4A-302(a)(2), a Federal Reserve Bank must transmit payment orders at a time and by means reasonably necessary to allow payment to the beneficiary on the payment date, or as soon thereafter as is feasible. Therefore, where an off-line receiving bank is an intermediary bank or beneficiary’s bank in a payment order, its Federal Reserve Bank attempts to transmit the payment order to the off-line bank by telephone on the day the payment order is received by the Federal Reserve Bank. A Federal Reserve Bank can generally identify these payment orders from the type code designated in the payment order.
(3) Under section 4A-404(b), if a payment order instructs payment to the account of the beneficiary, the beneficiary’s bank must notify the beneficiary of the receipt of a payment order before midnight of the next funds-transfer business day following the payment date. Where an off-line bank is the beneficiary of a payment order, telephone notice by a Federal Reserve Bank to the off-line bank of the receipt of the order is not required by Article 4A because the Federal Reserve Bank sends notice to the off-line bank by courier or mail, along with its daily account statement, on the day after the payment order is received by its Federal Reserve Bank. Payment orders for which an off-line bank is the beneficiary of the order are generally designated as settlement transactions.
(4) If an off-line receiving bank maintains an account for another bank, the off-line bank may receive payment orders designated as settlement transactions in its capacity as beneficiary’s bank or intermediary bank. A Federal Reserve Bank cannot readily distinguish these payment orders from settlement transactions for which the off-line bank is the beneficiary of the order. If an off-line bank notifies its Federal Reserve Bank that it maintains an account for another bank, the Federal Reserve Bank will attempt to telephone the off-line bank with respect to all settlement transactions received by such bank, whether the off-line bank is the beneficiary, the beneficiary’s bank, or an intermediary bank in the payment order. Under this section, an off-line bank that does not expressly notify its Federal Reserve Bank in writing that it maintains an account for another bank warrants to that Federal Reserve Bank that it does not act as an intermediary bank or a beneficiary’s bank for a bank beneficiary with respect to payment orders received through Fedwire.
(a) Rejection. (1) A sender must make arrangements with its Federal Reserve Bank before it can send payment orders to the Federal Reserve Bank. Federal Reserve Banks reserve the right to reject or impose conditions on the acceptance of payment orders for any reason. For example, a Federal Reserve Bank might reject or impose conditions on accepting a payment order where a sender does not have sufficient funds in its account with the Federal Reserve Bank to cover the amount of the sender’s payment order and other obligations of the sender due or to become due to the Federal Reserve Bank. A Federal Reserve Bank may require a sender to execute a written agreement concerning security procedures or other matters before the sender may send payment orders to the Federal Reserve Bank.
(b) Selection of an intermediary bank. (1) Under section 4A-302, if a receiving bank (other than a beneficiary’s bank), such as a Federal Reserve Bank, accepts a payment order, it must issue a payment order that complies with the sender’s order. The sender’s order may include instructions concerning an intermediary bank to be used that must be followed by a receiving bank (see section 4A-302(a)(1)). If the sender does not designate any intermediary bank in its payment order, the receiving bank may select an intermediary bank through which the sender’s payment order can be expeditiously issued to the beneficiary’s bank so long as the receiving bank exercises ordinary care in selecting the intermediary bank (see section 4A-302(b)).
(2) This section provides that in an interdistrict transfer, a Federal Reserve Bank is authorized and directed to select another Federal Reserve Bank as an intermediary bank. A sender may, however, instruct a Federal Reserve Bank to use a particular intermediary bank by designating that bank as the bank to be credited by that Federal Reserve Bank (or the second Federal Reserve Bank in the case of an interdistrict transfer) in its payment order, in which case the Federal Reserve Bank will send the payment order to that bank if that bank receives payment orders through the Fedwire Funds Service. A sender may not instruct a Federal Reserve Bank to use its discretion to select an intermediary bank other than a Federal Reserve Bank or an intermediary bank designated by the sender. In addition, a sender may not send a payment order through the Fedwire Funds Service that instructs a Federal Reserve Bank to use a funds-transfer system or means of transmission other than the Fedwire Funds Service unless the sender and the Federal Reserve Bank agree in writing to the use of that funds-transfer system or means of transmission.
(c) Execution date and payment date. Generally, the Fedwire Funds Service is a same-day value transfer system through which funds may be transferred from the originator to the beneficiary on the same funds-transfer business day. A sender may not send a payment order to a Federal Reserve Bank that specifies an execution date or payment date later than the day on which the payment order is issued, unless the sender of the order and the Federal Reserve Bank agree in writing to the arrangement.
(a) Payment to a receiving bank. (1) Under section 4A-402, when a Federal Reserve Bank executes a sender’s payment order by issuing a conforming order to a receiving bank that accepts the payment order, the Federal Reserve Bank must pay the receiving bank the amount of the payment order. Section 210.29(a) authorizes a Federal Reserve Bank to make the payment by crediting the account at the Federal Reserve Bank maintained or used by the receiving bank. Section 210.31(a) provides that the payment occurs when the receiving bank’s account is credited or when the payment order is sent by the Federal Reserve Bank to the receiving bank, whichever is earlier. Ordinarily, payment will occur during the funds-transfer business day a short time after the payment order is received, even if the receiving bank is an off-line bank. This credit is final and irrevocable when made and constitutes final settlement under section 4A-403. Payment does not waive a Federal Reserve Bank’s right of recovery under the applicable law of mistake and restitution (see § 210.32(c)), affect a Federal Reserve Bank’s right to apply the funds to any obligation due or to become due to the Federal Reserve Bank, or affect legal process or claims by third parties on the funds.
(2) This section on final payment does not apply to settlement for payment orders between Federal Reserve Banks. These payment orders are settled by other means.
(b) Payment to a beneficiary. Section 210.31(b) specifies when a Federal Reserve Bank makes payment to a beneficiary for which it is the beneficiary’s bank. As in the case of payment to a receiving bank, this payment occurs at the earlier of the time that the Federal Reserve Bank credits the beneficiary’s account or sends notice of the credit to the beneficiary, and is final and irrevocable when made.
(a) Damages. (1) Under section 4A-305(d), damages for failure of a receiving bank to execute a payment order that it was obligated to execute by express agreement are limited to expenses in the transaction and incidental expenses and interest and do not include additional damages, including consequential damages, unless they are provided for in an express written agreement of the receiving bank. This section clarifies that in connection with the handling of payment orders, Federal Reserve Banks may not agree to be liable for consequential damages under this provision and shall not be liable for damages other than those that may be due under Article 4A to parties governed by this subpart. Any agreement in conflict with these provisions would not be effective, because it would be in violation of subpart B.
(2) This section does not affect the ability of other parties to a funds transfer to agree to be liable for consequential damages, the liability of a Federal Reserve Bank under section 4A-404 (relating to obligation of beneficiary’s bank to pay and give notice to beneficiary), or the liability to parties governed by subpart B for claims not based on the handling of a payment order under subpart B.
(b) Payment of compensation. (1) Under article 4A, a Federal Reserve Bank may be required to pay compensation in the form of interest to another party in connection with its handling of a funds transfer. For example, payment of compensation in the form of interest is required in certain situations pursuant to sections 4A-204 (relating to refund of payment and duty of customer to report with respect to unauthorized payment order), 4A-209 (relating to acceptance of payment order), 4A-210 (relating to rejection of payment order), 4A-304 (relating to duty of sender to report erroneously executed payment order), 4A-305 (relating to liability for late or improper execution or failure to execute a payment order), 4A-402 (relating to obligation of sender to pay receiving bank), and 4A-404 (relating to obligation of beneficiary’s bank to pay and give notice to beneficiary).
(2) Section 210.32(b) requires Federal Reserve Banks to provide compensation through payment in the form of interest. Under section 4A-506(a), the amount of such interest may be determined by agreement between the sender and receiving bank or by funds-transfer system rule. If there is no such agreement, under section 4A-506(b), the amount of interest is based on the Federal funds rate. Similarly, compensation in the form of interest will be paid to government senders, receiving banks, or beneficiaries described in § 210.25(d) if they are entitled to interest under subpart B. A Federal Reserve Bank may also, in its discretion, pay compensation in the form of interest directly to a remote party to a Fedwire funds transfer that is entitled to interest, rather than providing compensation to its sender or receiving bank.
(3) If a sender or receiving bank that received a payment of compensation is not the party entitled to compensation under Article 4A, the sender or receiving bank must pass the benefit of the payment made to it to the party that is entitled to compensation. The benefit may be passed on either in the form of a direct payment of interest or in the form of a compensating balance if the party entitled to interest agrees to accept the other form of compensation. In the latter case, the value of the compensating balance must be at least equivalent to the value of the interest payment that otherwise would have been provided.
(c) Nonwaiver of right of recovery. Several sections of Article 4A allow a party to a funds transfer to make a claim pursuant to the applicable law of mistake and restitution. Nothing in subpart B of this part or any operating circular issued in accordance with subpart B of this part waives any such claim by a Federal Reserve Bank. A Federal Reserve Bank, however, may waive such a claim by express written agreement in order to settle litigation or for other purposes.
Subpart C—Funds Transfers Through the FedNow Service
§ 210.40 Authority, purpose, and scope.
(a) Authority and purpose. This subpart provides rules to govern funds transfers through the FedNow Service, and has been issued pursuant to the Federal Reserve Act—section 13 (12 U.S.C. 342), paragraph (f) of section 19 (12 U.S.C. 464), paragraph 14 of section 16 (12 U.S.C. 248(o)), and paragraphs (i) and (j) of section 11 (12 U.S.C. 248(i) and (j))—and other laws and has the force and effect of Federal law. This subpart is not a funds-transfer system rule as defined in Section 4A-501(b) of Article 4A.
(b) Scope. (1) This subpart incorporates the provisions of Article 4A set forth in appendix A of this part. In the event of an inconsistency between the provisions of the sections of this subpart and appendix A of this part, the provisions of the sections of this subpart shall prevail.
(2) Except as otherwise provided in paragraphs (b)(3) and (4) of this section, this subpart, including Article 4A as incorporated herein and operating circulars of the Federal Reserve Banks issued in accordance with paragraph (c) of this section, governs the rights and obligations of the following parties with respect to the FedNow Service:
(i) Federal Reserve Banks that send or receive payment orders;
(ii) Senders that send payment orders directly to a Federal Reserve Bank;
(iii) Receiving banks that receive payment orders directly from a Federal Reserve Bank;
(iv) Beneficiaries that receive payment for payment orders by means of credit to the beneficiary’s settlement account; and
(v) Other parties to a funds transfer any part of which is carried out through the FedNow Service to the same extent as if this subpart were considered a funds-transfer system rule under Article 4A.
(3) A Federal Reserve Bank that is not the sender’s Federal Reserve Bank, receiving bank’s Federal Reserve Bank, or beneficiary’s Federal Reserve Bank is not a party to the funds transfer for purposes of this subpart and Article 4A.
(4) This subpart governs a funds transfer that is sent through the FedNow Service, even if a portion of the funds transfer is governed by the Electronic Fund Transfer Act, but in the event of an inconsistency between the provisions this subpart and the Electronic Fund Transfer Act, the Electronic Fund Transfer Act shall prevail to the extent of the inconsistency.
(c) Operating Circulars. Each Federal Reserve Bank shall issue an Operating Circular consistent with this subpart that governs the details of its funds-transfer operations in connection with the FedNow Service and other matters it deems appropriate. Among other things, the Operating Circular may: set cut-off times and funds-transfer business days; address security procedures offered by the Federal Reserve Banks to verify the authenticity of a payment order; specify format and media requirements for payment orders; specify the time and method of receipt, execution, and acceptance of a payment order and settlement of a Federal Reserve Bank’s payment obligation for purposes of Article 4A; prescribe time limits for the processing of payment orders; specify service terms governing ancillary features of the FedNow Service; provide for the acceptance of documents in electronic form to the extent any provision in Article 4A requires an agreement or other document to be in writing; identify messages that are not payment orders; and impose charges for funds-transfer services.
(d) Government senders, receiving banks, and beneficiaries. Except as otherwise expressly provided by the statutes of the United States, the parties specified in paragraphs (b)(2)(ii) through (v) of this section include a department, agency, instrumentality, independent establishment, or office of the United States, or a wholly-owned or controlled government corporation.
(e) Financial messaging standards. Financial messaging standards (e.g., ISO 20022), including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. This subpart, including Article 4A as incorporated herein, and the operating circulars of the Federal Reserve Banks issued in accordance with paragraph (c) of this section govern the rights and obligations of parties to funds transfers sent through the FedNow Service as provided in paragraph (b) of this section. To the extent there is any inconsistency between a financial messaging standard adopted by the Federal Reserve Banks for the FedNow Service and this subpart, this subpart shall prevail.
§ 210.41 Definitions.
As used in this subpart, the following definitions apply:
Article 4A means Article 4A of the Uniform Commercial Code as set forth in appendix A of this part, which is incorporated into this subpart in accordance with § 210.40(b).
Beneficiary has the same meaning as in Article 4A, except that the term is limited to a beneficiary in a funds transfer that is sent through the FedNow Service.
Beneficiary’s bank has the same meaning as in Article 4A, except that:
(1) The term is limited to a beneficiary’s bank in a funds transfer that is sent through the FedNow Service;
(2) A Federal Reserve Bank need not be identified in the payment order in order to be the beneficiary’s bank; and
(3) The term includes a Federal Reserve Bank when that Federal Reserve Bank is the beneficiary of a payment order.
Federal Reserve Bank with respect to an entity means the Federal Reserve Bank in whose District the entity is located, as determined under the procedure described in Part 204 of this chapter (Regulation D), even if the entity is not otherwise subject to that section, or, if the entity maintains an account on the books of a different Federal Reserve Bank, the Federal Reserve Bank at which the entity maintains an account.
FedNow Service means the funds-transfer system owned and operated by the Federal Reserve Banks to support instant payments that is used primarily for the transmission and settlement of payment orders governed by this subpart. The FedNow Service does not include the Fedwire Funds Service.
Interdistrict transfer means a funds transfer involving entries to settlement accounts maintained at two Federal Reserve Banks.
Payment order has the same meaning as in Article 4A, except that the term includes only instructions sent or received through the FedNow Service, and does not include automated clearing house transfers or any communication designated as not being a payment order in an Operating Circular issued by a Federal Reserve Bank under this subpart.
Receiving bank has the same meaning as in Article 4A, except that the term is limited to a receiving bank in a funds transfer that is sent through the FedNow Service.
Sender has the same meaning as in Article 4A, except that the term is limited to a sender in a funds transfer that is sent through the FedNow Service.
Sender’s settlement account, receiving bank’s settlement account, and beneficiary’s settlement account mean an account on the books of a Federal Reserve Bank maintained by the sender, receiving bank, or beneficiary, respectively. The term also includes any account on a Federal Reserve Bank’s books used with respect to the FedNow Service by the sender, receiving bank, or beneficiary, respectively, by agreement with its Federal Reserve Bank, any other Federal Reserve Bank on whose books the settlement account is maintained, and the account-holder.
§ 210.42 Reliance on identifying number.
(a) Reliance by a Federal Reserve Bank on number to identify a beneficiary’s bank. A Federal Reserve Bank that receives a payment order from a sender containing a number that identifies the beneficiary’s bank may rely on the number, even if it identifies a bank different from the bank identified by name in the payment order, if the Federal Reserve Bank does not know of such an inconsistency in identification. A Federal Reserve Bank has no duty to detect any such inconsistency in identification.
(b) Reliance by a Federal Reserve Bank on number to identify beneficiary. A Federal Reserve Bank, acting as a beneficiary’s bank, that receives a payment order from a sender containing a number that identifies the beneficiary may rely on the number, even if it identifies a person different from the person identified by name in the payment order, if the Federal Reserve Bank does not know of such an inconsistency in identification. A Federal Reserve Bank has no duty to detect any such inconsistency in identification.
§ 210.43 Agreement of sender.
(a) Payment of sender’s obligation to a Federal Reserve Bank. A sender (other than a Federal Reserve Bank), by maintaining or using a settlement account with a Federal Reserve Bank, authorizes the sender’s Federal Reserve Bank to obtain payment for the sender’s payment orders by debiting, or causing any other Federal Reserve Bank on whose books the settlement account is maintained to debit, the amount of the payment order from the settlement account. The sender remains responsible for payment if the Federal Reserve Bank on whose books the settlement account is maintained does not, for any reason, obtain payment by debiting that account.
(b) Overdrafts. (1) A sender does not have the right to an overdraft in its settlement account. In the event an overdraft is created, the overdraft shall be due and payable immediately, without the need for a demand by the Federal Reserve Bank, at the earliest of the following times:
(i) At the end of the FedNow funds-transfer business day;
(ii) At the time the Federal Reserve Bank, in its sole discretion, deems itself insecure and gives notice thereof to the sender; or
(iii) At the time the sender suspends payments or is closed.
(2) The sender shall have in its settlement account, at the time the overdraft is due and payable, a balance of actually and finally collected funds sufficient to cover the aggregate amount of all its obligations to the Federal Reserve Bank, whether the obligations result from the acceptance of a payment order or otherwise.
(3) To secure any overdraft, as well as any other obligation due or to become due to its Federal Reserve Bank, a sender, by sending a payment order to a Federal Reserve Bank that is accepted by the Federal Reserve Bank, grants to the Federal Reserve Bank a security interest in all of its assets in the possession or control of, or held for the account of, the Federal Reserve Bank. The security interest attaches when an overdraft, or any other obligation to the Federal Reserve Bank, becomes due and payable.
(4) A Federal Reserve Bank may take any action authorized by law to recover the amount of an overdraft that is due and payable, including, but not limited to, the exercise of rights of set off, the realization on any available collateral, and any other rights it may have as a creditor under applicable law.
(5) If a sender, other than a government sender described in § 210.40(d), incurs an overdraft in its settlement account as a result of a debit to the account by a Federal Reserve Bank under paragraph (a) of this section, the settlement account will be subject to any applicable overdraft charges, regardless of whether the overdraft has become due and payable. A Federal Reserve Bank may debit the settlement account under paragraph (a) of this section immediately on acceptance of the payment order.
(c) Review of payment orders. A sender, by sending a payment order to a Federal Reserve Bank, agrees that for the purposes of sections 4A-204(a) and 4A-304 of Article 4A, a reasonable time to notify a Federal Reserve Bank of the relevant facts concerning an unauthorized or erroneously executed payment order is within 60 calendar days after the sender receives notice that the payment order was accepted or that the sender’s settlement account was debited with respect to the payment order.
§ 210.44 Agreement of receiving bank.
(a) Payment. A receiving bank (other than a Federal Reserve Bank) that receives a payment order from its Federal Reserve Bank authorizes that Federal Reserve Bank to pay for the payment order by crediting, or causing any other Federal Reserve Bank on whose books the settlement account is maintained to credit, the amount of the payment order to the settlement account.
(b) Funds availability. (1) A beneficiary’s bank (other than a Federal Reserve Bank) that accepts a payment order over the FedNow Service is obliged to pay the amount of the order to the beneficiary of the order immediately after its acceptance of the payment order, by crediting an account of the beneficiary in accordance with section 4A-405(a) of Article 4A. The rights and obligations with respect to the availability of funds are also governed by the Expedited Funds Availability Act and the Board’s Regulation CC, Availability of Funds and Collection of Checks.
(2) Nothing in paragraph (b)(1) of this section or any Operating Circular issued hereunder shall create any rights that the beneficiary or any party other than a Federal Reserve Bank may assert against the beneficiary’s bank, or affect any liability of the beneficiary’s bank to the beneficiary or any party other than a Federal Reserve Bank under Article 4A or other law.
(3) In circumstances where the beneficiary’s bank (other than a Federal Reserve Bank) has reasonable cause to believe that the beneficiary is not entitled or permitted to receive payment, the beneficiary’s bank may notify its Federal Reserve Bank that it requires additional time to determine whether to accept the payment order. In the event the beneficiary’s bank gives such notice to its Federal Reserve Bank, for purposes of this subpart and Article 4A the beneficiary’s bank does not accept the payment order upon its receipt of payment in the amount of the payment order by a Federal Reserve Bank.
§ 210.45 Payment orders.
(a) Rejection. A sender shall not send a payment order to a Federal Reserve Bank unless authorized to do so by the Federal Reserve Bank. A Federal Reserve Bank may reject, or impose conditions that must be satisfied before it will accept, a payment order for any reason.
(b) Selection of an intermediary bank. For an interdistrict transfer through the FedNow Service, a Federal Reserve Bank is authorized and directed to execute a payment order through another Federal Reserve Bank. A sender shall not send a payment order to a Federal Reserve Bank that requires the Federal Reserve Bank to send a payment order to an intermediary bank (other than a Federal Reserve Bank). A sender shall not send to a Federal Reserve Bank a payment order through the FedNow Service that instructs use by a Federal Reserve Bank of a funds-transfer system or means of transmission other than the FedNow Service, unless the Federal Reserve Bank agrees with the sender in writing to follow such instructions.
(c) Execution date and payment date. A sender shall not issue a payment order through the FedNow Service that instructs a Federal Reserve Bank to execute the payment order or to pay the beneficiary on a FedNow funds-transfer business day that is later than the funds-transfer business day on which the order is received by the Federal Reserve Bank, unless the Federal Reserve Bank agrees with the sender in writing to follow such instructions.
§ 210.46 Payment by a Federal Reserve Bank to a receiving bank or beneficiary.
(a) Payment to a receiving bank. Payment of a Federal Reserve Bank’s obligation to pay a receiving bank (other than a Federal Reserve Bank) occurs at the earlier of the time when the amount of the payment order is credited to the receiving bank’s settlement account or when the payment order is sent to the receiving bank.
(b) Payment to a beneficiary. Payment by a Federal Reserve Bank to a beneficiary of a payment order, where the Federal Reserve Bank is the beneficiary’s bank, occurs at the earlier of the time when the amount of the payment order is credited to the beneficiary’s settlement account or when notice of the credit is sent to the beneficiary.
§ 210.47 Federal Reserve Bank liability; payment of compensation.
(a) Damages. In connection with its handling of a payment order under this subpart, a Federal Reserve Bank shall not be liable to a sender, receiving bank, beneficiary, or other Federal Reserve Bank, governed by this subpart, for any damages other than those payable under Article 4A. A Federal Reserve Bank shall not agree to be liable to a sender, receiving bank, beneficiary, or other Federal Reserve Bank for consequential damages under section 4A-305(d) of Article 4A.
(b) Payment of compensation. (1) A Federal Reserve Bank shall satisfy its obligation, or that of another Federal Reserve Bank, to pay compensation in the form of interest under Article 4A by paying such compensation to a sender, receiving bank, beneficiary, or another party to the funds transfer that is entitled to such payment in an amount that is calculated in accordance with section 4A-506 of Article 4A.
(2) If the sender or receiving bank that is the recipient of the payment of compensation is not the party entitled to compensation under Article 4A, the sender or receiving bank shall pass through the benefit of the compensation by making an interest payment, as of the day the compensation was paid by the Federal Reserve Bank, to the party entitled to compensation. The interest payment that is made to the party entitled to compensation shall not be less than the value of the compensation that was paid by the Federal Reserve Bank to the sender or receiving bank. The party entitled to compensation may agree to accept compensation in a form other than a direct interest payment, provided that such an alternative form of compensation is not less than the value of the interest payment that otherwise would be made.
(c) Nonwaiver of right of recovery. Nothing in this subpart or any operating circular issued hereunder shall constitute, or be construed as constituting, a waiver by a Federal Reserve Bank of a cause of action for recovery under any applicable law of mistake and restitution.
Appendix A to Subpart C of Part 210—Commentary
The Commentary provides background material to explain the intent of the Board of Governors of the Federal Reserve System (Board) in adopting a particular provision in the subpart and to help readers interpret that provision. In some comments, examples are offered. The Commentary constitutes an official Board interpretation of subpart C of this part. Commentary is not provided for every provision of subpart C of this part, as some provisions are self-explanatory.
(a) Authority and purpose. Section 210.40(a) states that the purpose of subpart C of this part is to provide rules to govern funds transfers through the FedNow Service and recites the Board’s rulemaking authority for this subpart. Subpart C of this part is Federal law and is not a “funds-transfer system rule,” as defined in section 4A-501(b) of Article 4A, Funds Transfers, of the Uniform Commercial Code (UCC), as set forth in appendix A of this part. Certain provisions of Article 4A may not be varied by a funds-transfer system rule, but under section 4A-107, regulations of the Board and Operating Circulars of the Federal Reserve Banks supersede inconsistent provisions of Article 4A to the extent of the inconsistency. In addition, regulations of the Board may preempt inconsistent provisions of state law. Accordingly, subpart C of this part supersedes or preempts inconsistent provisions of state law. It does not affect state law governing funds transfers that does not conflict with the provisions of subpart C of this part, such as Article 4A, as enacted in any state, as such state law may apply to parties to funds transfers through the FedNow Service whose rights and obligations are not governed by subpart C of this part.
(b) Scope. (1) Subpart C of this part incorporates the provisions of Article 4A set forth in appendix A of this part. The provisions set forth expressly in the sections of subpart C of this part supersede or preempt any inconsistent provisions of Article 4A as set forth in appendix A of this part or as enacted in any state. The official comments to Article 4A are not incorporated in subpart C of this part or this commentary to subpart C of this part, but the official comments may be useful in interpreting Article 4A as set forth in appendix A of this part. Because section 4A-105 refers to other provisions of the Uniform Commercial Code (e.g., definitions in article 1 of the UCC), these other provisions of the UCC, as approved by the National Conference of Commissioners on Uniform State Laws, which is now also known as the Uniform Law Commission, and the American Law Institute, from time to time, are also incorporated into subpart C of this part. Subpart C of this part applies to any party to a funds transfer sent through the FedNow Service that is in privity with a Federal Reserve Bank. These parties include a sender (bank or nonbank) that sends a payment order to a Federal Reserve Bank through the FedNow Service, a receiving bank that receives a payment order from a Federal Reserve Bank, and a beneficiary that receives credit to an account that it uses or maintains at a Federal Reserve Bank as payment for a payment order accepted by a Federal Reserve Bank. Subpart C of this part also applies to Federal Reserve Banks that send or receive payment orders over the FedNow Service. For example, if a sender settles its activity over the FedNow Service in the account of a correspondent bank, the sender’s Federal Reserve Bank would be a bank in the funds transfer chain, but the Federal Reserve Bank of the correspondent bank would not be a sender or receiving bank with respect to the payment order and would not be a party to the funds transfer. Other parties to a funds transfer sent through the FedNow Service are covered by this subpart to the same extent that this subpart would apply to them if this subpart were a “funds-transfer system rule” under Article 4A that selected subpart C of this part as the governing law.
(2) The scope of the applicability of a funds-transfer system rule under Article 4A is specified in section 4A-501(b), and the scope of the choice of law provision is specified in section 4A-507(c). Under section 4A-507(c), a choice of law provision is binding on the participants in a funds-transfer system and certain other parties having notice that the funds-transfer system might be used for the funds transfer and of the choice of law provision. The Uniform Commercial Code provides that a person has notice of a fact when the person has actual knowledge of it, receives a notice or notification of it, or has reason to know that it exists from all the facts and circumstances known to the person at the time in question. (See UCC sec. 1-202.) However, under sections 4A-507(b) and 4A-507(d), a choice of law by agreement of the parties takes precedence over a choice of law made by funds-transfer system rule.
(3) With respect to funds transfers sent through the FedNow Service, if originators and beneficiaries that are not in privity with a Federal Reserve Bank have the notice contemplated by Section 4A-507(c) or if those parties agree to be bound by subpart C of this part, subpart C of this part generally would apply to those remote parties. If remote parties to a funds transfer, a portion of which is sent through the FedNow Service, have expressly selected by agreement a law other than subpart C of this part under section 4A-507(b), subpart C of this part would not take precedence over the choice of law made by the agreement even though the remote parties had notice that the FedNow Service may be used and of the governing law. (See 4A-507(d).) In addition, subpart C of this part would not apply to a funds transfer sent through a funds-transfer system other than the FedNow Service, even though settlement for the funds transfer is made by means of a separate funds transfer through the FedNow Service.
(4) Under section 4A-108, Article 4A does not apply to a funds transfer, any part of which is governed by the Electronic Fund Transfer Act (EFTA) (15 U.S.C. 1693 et seq.). A funds transfer from a consumer originator or a funds transfer to a consumer beneficiary could be carried out through the FedNow Service and could potentially be subject to the EFTA and Regulation E (12 CFR part 1005) implementing it. If so, the funds transfer continues to also be governed by subpart C, except that, in the event of an inconsistency between the provisions of subpart C and the EFTA, the EFTA shall prevail to the extent of the inconsistency. (See also the commentary to section 210.41 in this appendix, “Payment Order.”) For example, a funds transfer may be initiated from a consumer’s account at a depository institution, and the depository institution may execute that payment order by sending a conforming payment order to a Reserve Bank through the FedNow Service. If that transfer is subject to the EFTA, then examples of how the provisions of subpart C may govern the transfer include, but are not limited to, the following:
(i) Where the consumer subsequently gives timely notice that the transfer was an unauthorized electronic fund transfer to its depository institution and exercises the right to obtain a refund under the EFTA, the depository institution would be required to comply with the EFTA and the applicable provisions of the EFTA would govern the institution’s obligations to its customer, even if under subpart C the institution does not have a right to receive a refund or reverse the payment order sent to the Reserve Bank through the FedNow Service.
(ii) Where the customer properly asserts an error under the EFTA with respect to the transfer and exercises the right to obtain a refund to correct the error under the EFTA, the depository institution would be required to comply with the EFTA and the applicable provisions of the EFTA would govern the institution’s obligations to its customer, even if under subpart C the institution is obliged to pay its payment order sent to the Reserve Bank through the FedNow Service.
(c) Operating Circulars. The Federal Reserve Banks issue Operating Circulars consistent with this subpart that contain additional provisions applicable to payment orders and other messages sent through the FedNow Service. Under section 4A-107, this Operating Circular supersedes inconsistent provisions of Article 4A, both as set forth in appendix A of this part and as enacted in any state. These Operating Circulars are not funds-transfer system rules, but, by their terms, they are binding on all parties covered by this subpart.
(d) Government senders, receiving banks, and beneficiaries. This section clarifies that unless a statute of the United States provides otherwise, subpart C of this part applies to governmental entities.
(e) Financial messaging standards. This paragraph makes clear that financial messaging standards, including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. Instead, subpart C of this part and Federal Reserve Bank operating circulars govern the rights and obligations of parties to funds transfers sent through the FedNow Service as provided in § 210.40(b). Thus, to the extent there is any inconsistency between a financial messaging standard adopted by the FedNow Service and subpart C of this part, subpart C of this part, including Article 4A as set forth in appendix A of this part, will prevail. In the ISO 20022 financial messaging standard, for example, the term agent is used to refer to a variety of bank parties to a funds transfer (e.g., debtor agent, creditor agent, intermediary agent). Notwithstanding use of that term in the standard and in message tags, such banks are not the agents of any party to a funds transfer and owe no duty to any other party to such a funds transfer except as provided in subpart C of this part (including Article 4A) or by express agreement. The ISO 20022 financial messaging standard also permits information to be carried in a funds-transfer message regarding persons that are not parties to that funds transfer (e.g., ultimate debtor, ultimate creditor, initiating party) for regulatory, compliance, remittance, or other purposes. An “ultimate debtor” is not an “originator” as defined in Article 4A. The relationship between the ultimate debtor and the originator (what the ISO 20022 standard calls the “debtor”) is determined by law other than Article 4A.
Article 4A defines many terms (e.g., beneficiary, intermediary bank, receiving bank, security procedure) used in this subpart. These terms are defined or listed in sections 4A-103 through 4A-105. These terms, such as the term bank (defined in section 4A-105(d)(2)), may differ from comparable terms in subpart A and subpart B of this part. As subpart C of this part incorporates consistent provisions of Article 4A, it incorporates these definitions unless these terms are expressly defined otherwise in subpart C of this part. This subpart modifies the definitions of five Article 4A terms: beneficiary, beneficiary’s bank, payment order, receiving bank, and sender. This subpart also defines terms not defined in Article 4A.
Article 4A. Article 4A means the version of that article of the Uniform Commercial Code set forth in appendix A of this part. It does not refer to the law of any particular state unless the context indicates otherwise. Subject to the express provisions of this Subpart, this version of Article 4A is incorporated into this subpart and made Federal law for transactions covered by this subpart. (See § 210.40(b)(1) and accompanying commentary.) Because section 4A-105 refers to other provisions of the Uniform Commercial Code (e.g., definitions in article 1 of the UCC) these other provisions of the UCC, as approved by the National Conference of Commissioners on Uniform State Laws, which is now also known as the Uniform Law Commission, and the American Law Institute, from time to time, are also incorporated in subpart C of this part.
Beneficiary, beneficiary’s bank, receiving bank, and sender. The definitions of “beneficiary,” “beneficiary’s bank,” “receiving bank,” and “sender” in subpart C of this part differ from the definitions in sections 4A-103(a)(2)-(4). The subpart C definition clarifies that, for the purposes of subpart C of this part, these terms are limited to parties in a funds transfer that is sent through the FedNow Service. For example, the parties to a funds transfer that is sent through the Fedwire Funds Service would be governed by subpart B of this part, and would not be a “beneficiary,” “beneficiary’s bank,” “receiving bank,” or “sender” governed by subpart C. The definition of “beneficiary’s bank” in subpart C further clarifies that where a Federal Reserve Bank functions as the beneficiary’s bank, it need not be identified in the payment order as the beneficiary’s bank and that a Federal Reserve Bank that receives a payment order as beneficiary is also the beneficiary’s bank with respect to that payment order.
The FedNow Service. The FedNow Service refers to the funds-transfer system owned and operated by the Federal Reserve Banks to support instant payments that is governed by this Subpart. The term does not refer to any particular computer, telecommunications facility, or funds transfer, but rather to the system as a whole. The FedNow Service does not include the Fedwire Funds Service or the system used for automated clearing house transfers.
Payment Order. (1) The definition of “payment order” in subpart C of this part differs from the section 4A-103(a)(1) definition. The subpart C definition clarifies that, for the purposes of subpart C of this part, the term includes only instructions transmitted through the FedNow Service. For example, instructions transmitted through the Fedwire Funds Service would be governed by subpart B of this part, and not subpart C.
Additionally, the subpart C definition provides that certain messages that are transmitted through the FedNow Service are not payment orders. Federal Reserve Banks and banks participating in the FedNow Service send various types of messages relating to payment orders or to other matters, through the FedNow Service, that are not intended to be payment orders. In some cases, messages sent through the FedNow Service, such as certain requests for payment, may be payment orders under Article 4A, but are not treated as payment orders under subpart C because they are not an instruction to a Federal Reserve Bank to pay or cause another bank to pay money. Under the subpart C definition, these messages are not “payment orders” governed by this subpart. The operating circulars of the Federal Reserve Banks may specify those messages that may be transmitted through the FedNow Service but that are not payment orders.
(2) Subpart C, including its incorporation of Article 4A, governs a payment order even though the originator’s or beneficiary’s account may be a consumer account established primarily for personal, family, or household purposes. Under section 4A-108, Article 4A does not apply to a funds transfer any part of which is governed by the Electronic Fund Transfer Act. That Act, and Regulation E (12 CFR part 1005) implementing it, may govern a transfer through the FedNow Service that is from a consumer originator or to a consumer beneficiary. In the event that a transfer through the FedNow Service is subject to the EFTA, the transfer continues to also be governed by this subpart, except that, in the event of an inconsistency between the provisions of subpart C and the EFTA, the EFTA shall prevail to the extent of the inconsistency. (See also § 210.40(b) and accompanying commentary.) Thus, this subpart applies to all funds transfers through the FedNow Service even though some such transfers involve originators or beneficiaries that are consumers.
Sender’s settlement account, receiving bank’s settlement account, and beneficiary’s settlement account. A FedNow participant must designate an account on the books of a Federal Reserve Bank that the Federal Reserve Banks may use to settle the participant’s activity over the FedNow Service. A FedNow participant may settle its activity over the FedNow Service in its master account. Alternatively, it may designate the account of a correspondent bank that the Federal Reserve Banks may use to settle activity through the service, subject to the correspondent bank’s agreement to any such designation.
(a) Reliance by a Federal Reserve Bank on number to identify intermediary bank or beneficiary’s bank. Section 4A-208 provides that a receiving bank, such as a Federal Reserve Bank, may rely on the routing number of an intermediary bank or the beneficiary’s bank specified in a payment order as identifying the appropriate intermediary bank or beneficiary’s bank, even if the payment order identifies another bank by name, provided that the receiving bank does not know of the inconsistency. Under section 4A-208(b)(2), if the sender of the payment order is not a bank, a receiving bank may rely on the number only if the sender had notice before the receiving bank accepted the sender’s order that the receiving bank might rely on the number. This section provides this notice to entities that are not banks, such as the Department of the Treasury, that send payment orders directly to a Federal Reserve Bank through the FedNow Service.
(b) Reliance by a Federal Reserve Bank on number to identify beneficiary. Section 4A-207 provides that a beneficiary’s bank, such as a Federal Reserve Bank, may rely on the number identifying a beneficiary, such as the beneficiary’s account number, specified in a payment order as identifying the appropriate beneficiary, even if the payment order identifies another beneficiary by name, provided that the beneficiary’s bank does not know of the inconsistency. Under section 4A-207(c)(2), if the originator is not a bank, an originator is not obliged to pay for a payment order if the originator did not have notice that the beneficiary’s bank might rely on the identifying number and the person paid on the basis of the identifying number was not entitled to receive payment. This section of subpart C provides this notice to entities that are not banks, such as the Department of the Treasury, that are originators of payment orders sent directly by the originators to a Federal Reserve Bank through the FedNow Service, where that Federal Reserve Bank or another Federal Reserve Bank is the beneficiary’s bank (see also section 4A-402(b), providing that a sender must pay a beneficiary’s bank for a payment order accepted by the beneficiary’s bank).
(a) Payment of sender’s obligation to a Federal Reserve Bank. When a sender sends a payment order to a Federal Reserve Bank and the Federal Reserve Bank accepts the payment order by issuing a conforming order executing the sender’s payment order, under section 4A-402, the sender is indebted to the Federal Reserve Bank for the amount of the payment order. Section 4A-403 specifies the various methods by which a sender may settle the obligation under section 4A-402. With respect to a payment order sent through the FedNow Service, the obligation of a sender (other than a Federal Reserve Bank) is settled by a debit to the account of the sender at a Federal Reserve Bank. Section 210.43(a) provides that a sender, other than a Federal Reserve Bank, that maintains or uses a settlement account at a Federal Reserve Bank authorizes its Federal Reserve Bank to debit, or cause any other Federal Reserve Bank on whose books the settlement account is maintained to debit, that account, so that the Federal Reserve Bank can obtain payment for the payment order.
(b) Overdrafts. (1) In some cases, debits to a sender’s settlement account will create an overdraft in the settlement account. The Board and the Federal Reserve Banks have established policies concerning when a Federal Reserve Bank will permit a bank to incur an overdraft in its account at a Federal Reserve Bank. These policies do not give a bank or other sender a right to an overdraft in its account. Subpart C clarifies that a sender does not have a right to such an overdraft. If an overdraft arises, it becomes immediately due and payable at the earliest of the following times: The end of the FedNow funds-transfer business day; the time the Federal Reserve Bank in its sole discretion, deems itself insecure and gives notice to the sender; or the time that the sender suspends payments or is closed by governmental action, such as the appointment of a receiver. In some cases, a Federal Reserve Bank extends its FedNow operations beyond the standard cut-off time for that FedNow funds-transfer business day. For the purposes of this section, unless otherwise specified by the Federal Reserve Bank making such an extension, an overdraft becomes due and payable at the end of the extended operating hours. An overdraft becomes due and payable prior to a Federal Reserve Bank’s cut-off time if the Federal Reserve Bank deems itself insecure and gives notice to the sender. A Federal Reserve Bank that deems itself insecure may give such notice in accordance with the provisions on notice in section 1-202(d) of the UCC, in accordance with any other applicable law or agreement, or by any other reasonable means. An overdraft also becomes due and payable at the time that a bank is closed or suspends payments. For example, an overdraft becomes due and payable if a receiver is appointed for the bank or the bank is prevented from making payments by governmental order. The Federal Reserve Bank need not make demand on the sender for the overdraft to become due and payable.
(2) A sender must cover any overdraft and any other obligation of the sender to the Federal Reserve Bank by the time the overdraft becomes due and payable. By sending a payment order to a Federal Reserve Bank, the sender grants a security interest to the Federal Reserve Bank in all of the assets of the sender possessed or controlled by, or held for the account of, the Federal Reserve Bank in order to secure all obligations due or to become due to the Federal Reserve Bank. The security interest attaches when the overdraft, or other obligation of the sender to the Federal Reserve Bank, becomes due and payable. The security interest does not apply to assets held by the sender as custodian or trustee for the sender’s customers or third parties. Once an overdraft is due and payable, a Federal Reserve Bank may exercise its right of set off, liquidate collateral, or take other similar action to satisfy the obligation the sender owes to the Federal Reserve Bank.
(c) Review of payment orders. (1) Under section 4A-204, a receiving bank is required to refund the principal amount of an unauthorized payment order that the sender was not obliged to pay, together with interest on the refundable amount calculated from the date that the receiving bank received payment to the date of the refund. The sender is not entitled to compensation in the form of interest if the sender fails to exercise ordinary care to determine that the order was not authorized and to notify the receiving bank within a reasonable time after the sender receives a notice that the payment order was accepted or that the sender’s account was debited with respect to the order. Similarly, under section 4A-304, if a sender of a payment order that was erroneously executed does not notify the bank receiving the payment order within a reasonable time, the bank is not liable to the sender for compensation in the form of interest on any amount refundable to the sender. Section 210.43(c) establishes 60 calendar days as the reasonable period of time for the purposes of these provisions of Article 4A.
(2) Section 4A-505 provides that in order for a customer to assert a claim objecting to a debit to its account by a receiving bank, the customer must notify the receiving bank of its objection within one year after the customer received notification reasonably identifying the payment order. Subpart C of this part does not vary this one-year claim preclusion period.
(b) Funds availability. (1) Section 4A-209(b) provides that a beneficiary’s bank accepts a payment order at the earliest of certain specified events, including when the bank receives payment for the entire amount of the order from the sender (see section 4A-209(b)(2)). Section 4A-404(a) provides that if a beneficiary’s bank accepts a payment order, it is obliged to pay the amount of a payment order to the beneficiary on the payment date unless acceptance of the payment order occurs on the payment date after the close of the funds-transfer business day of the bank. Section 4A-405(a) provides that if a beneficiary’s bank pays the beneficiary by crediting an account of the beneficiary on its own books, payment of the bank’s obligation under Section 4A-404(a) occurs when and to the extent (i) the bank notifies the beneficiary that it may withdraw the amount of the credit, (ii) the bank lawfully applies the credit to a debt of the beneficiary, or (iii) funds with respect to the payment order are otherwise made available to the beneficiary by the bank.
(2) Section 210.44(b)(1) provides that if a FedNow participant that is the beneficiary’s bank accepts a payment order, it must pay the beneficiary by credit to the beneficiary’s account in accordance with section 4A-405(a) of Article 4A, and it must do so immediately after its acceptance of the payment order. This section further clarifies that the provisions of the Expedited Funds Availability Act (12 U.S.C. 4002(a)) and its implementing regulation, Regulation CC (12 CFR part 229), also govern. Regulation CC provides that funds received by a bank by an electronic payment shall be available for withdrawal not later than the business day after the banking day on which such funds are received. (12 CFR 229.10(b).) Because Subpart C of this part requires funds to be made available on a more prompt basis than the availability requirements of the Expedited Funds Availability Act and Regulation CC, that act and Regulation CC do not preempt or invalidate subpart C. For example, if a beneficiary’s bank accepts a payment order through the FedNow Service at 10 a.m. but does not make funds available to the beneficiary until 5 p.m., the bank has failed to satisfy its obligations under subpart C of this part even if it has satisfied its obligations under Regulation CC.
(3) Section 210.44(b)(2) clarifies that the obligation for the beneficiary’s bank to provide immediate funds availability to the beneficiary under § 210.44(b)(1), and any Operating Circular issued in accordance with subpart C, should not be construed as creating any rights that the beneficiary or any party other than a Federal Reserve Bank may assert against the beneficiary’s bank, or affect any liability of the beneficiary’s bank to the beneficiary or any party other than a Federal Reserve Bank under Article 4A or other law. In the example above, where the beneficiary’s bank accepts a payment order through the FedNow Service at 10 a.m. but does not make funds available to the beneficiary until 5 p.m., the bank has failed to satisfy its obligations under § 210.44(b)(1) but the beneficiary would not have a claim or right to assert against the bank under that provision.
(4) Section 210.46(a) provides that payment by a Federal Reserve Bank to a receiving bank occurs when the receiving bank’s settlement account is credited or when the payment order is sent by the Federal Reserve Bank to the receiving bank, whichever is earlier, and would ordinarily be considered acceptance of the payment order by the beneficiary’s bank under section 4A-209(b). Section 210.44(b)(3) provides that notwithstanding section 4A-209(b), in certain circumstances a beneficiary’s bank is not deemed to accept a payment order at such time as it receives payment from its Federal Reserve Bank. Specifically, where the beneficiary’s bank has reasonable cause to believe that the beneficiary is not entitled or permitted to receive payment and the beneficiary’s bank notifies its Federal Reserve Bank that it requires additional time to determine whether to accept the payment order, this section provides that for purposes of subpart C and Article 4A, the beneficiary’s bank does not accept the payment order even if it has received payment for the entire amount of the order from its Federal Reserve Bank as provided in § 210.46.
For example, if the beneficiary’s bank has reasonable cause to believe that making funds available to the beneficiary may violate applicable U.S. sanctions, the beneficiary’s bank may notify its Federal Reserve Bank that it requires additional time to determine whether to accept the payment order, including to investigate if the beneficiary is subject to applicable sanctions. As an additional example, if the beneficiary’s bank has reasonable cause to believe that a particular payment order may be related to fraudulent activity, the beneficiary’s bank may notify its Federal Reserve Bank that it requires additional time to determine whether to accept the payment order, including to investigate the suspected fraudulent activity. In both examples, in the event the beneficiary’s bank gives such notice, the beneficiary’s bank would not be deemed to have accepted the payment order at the time it receives payment from its Federal Reserve Bank.
(a) Rejection. (1) A sender must make arrangements with its Federal Reserve Bank before it can send payment orders to the Federal Reserve Bank. Federal Reserve Banks reserve the right to reject or impose conditions on the acceptance of payment orders for any reason. For example, a Federal Reserve Bank might reject or impose conditions on accepting a payment order where a sender does not have sufficient funds in its settlement account with the Federal Reserve Bank to cover the amount of the sender’s payment order and other obligations of the sender due or to become due to the Federal Reserve Bank. As a further example, a Federal Reserve Bank may reject a payment order that is not successfully processed within time limits established by the Federal Reserve Banks. A Federal Reserve Bank may require a sender to execute a written agreement concerning security procedures or other matters before the sender may send payment orders to the Federal Reserve Bank.
(b) Selection of an intermediary bank. (1) Under section 4A-302, if a receiving bank (other than a beneficiary’s bank), such as a Federal Reserve Bank, accepts a payment order, it must issue a payment order that complies with the sender’s order. The sender’s order may include instructions concerning an intermediary bank to be used that must be followed by a receiving bank (see section 4A-302(a)(1)). If the sender does not designate any intermediary bank in its payment order, the receiving bank may select an intermediary bank through which the sender’s payment order can be expeditiously issued to the beneficiary’s bank so long as the receiving bank exercises ordinary care in selecting the intermediary bank (see section 4A-302(b)).
(2) This section provides that in an interdistrict transfer, a Federal Reserve Bank is authorized and directed to select another Federal Reserve Bank as an intermediary bank. A sender may not instruct a Federal Reserve Bank to use a particular intermediary bank or to use its discretion to select an intermediary bank other than a Federal Reserve Bank. In addition, a sender may not send a payment order through the FedNow Service that instructs a Federal Reserve Bank to use a funds-transfer system or means of transmission other than the FedNow Service, unless the sender and the Federal Reserve Bank agree in writing to the use of that funds-transfer system or means of transmission.
(c) Execution date and payment date. (1) Under 4A-301(b), the “execution date” of a payment order means the day on which the receiving bank may properly issue a payment order in execution of the sender’s order. Under section 4A-401, the “payment date” of a payment order is the day on which the amount of the order is payable to the beneficiary by the beneficiary’s bank. The execution date and the payment date may be determined by instruction of the sender but cannot be earlier than the day the order is received and, unless otherwise determined, is the day the order is received (see sections 4A-301(b) and 4A-401). Section 4A-106, provides for the time that a payment order is received, including in the event that a receiving bank fixes a cut-off time for the receipt and processing of payment orders. If the bank receives a payment order after its cut-off time, the bank may treat the payment order as received at the opening of the next funds-transfer business day (see section 4A-106(a)).
(2) The FedNow Service is designed to be an instant value transfer system through which funds may be transferred from the originator to the beneficiary on the same funds-transfer business day. This section provides that a sender may not send a payment order to a Federal Reserve Bank that specifies an execution date or payment date later than the day on which the payment order is issued, unless the sender of the order and the Federal Reserve Bank agree in writing to the arrangement.
(a) Payment to a receiving bank. (1) Under section 4A-402, when a Federal Reserve Bank executes a sender’s payment order by issuing a conforming order to a receiving bank that accepts the payment order, the Federal Reserve Bank must pay the receiving bank the amount of the payment order. Section 210.44(a) authorizes a Federal Reserve Bank to make the payment by crediting, or causing any other Federal Reserve Bank on whose books the settlement account is maintained to credit, the settlement account of the receiving bank. Section 210.46(a) provides that the payment occurs when the receiving bank’s settlement account is credited or when the payment order is sent by the Federal Reserve Bank to the receiving bank, whichever is earlier. Ordinarily, payment will occur during the FedNow funds-transfer business day a short time after the payment order is received. This credit is final and irrevocable when made and constitutes final settlement under section 4A-403. Payment does not waive a Federal Reserve Bank’s right of recovery under the applicable law of mistake and restitution (see § 210.47(c)), affect a Federal Reserve Bank’s right to apply the funds to any obligation due or to become due to the Federal Reserve Bank, or affect legal process or claims by third parties on the funds.
(2) This section on final payment does not apply to settlement for payment orders between Federal Reserve Banks. These payment orders are settled by other means.
(b) Payment to a beneficiary. Section 210.46(b) specifies when a Federal Reserve Bank makes payment to a beneficiary for which it is the beneficiary’s bank. As in the case of payment to a receiving bank, this payment occurs at the earlier of the time that the Federal Reserve Bank credits the beneficiary’s settlement account or sends notice of the credit to the beneficiary, and is final and irrevocable when made.
(a) Damages. (1) Under section 4A-305(d), damages for failure of a receiving bank to execute a payment order that it was obligated to execute by express agreement are limited to expenses in the transaction and incidental expenses and interest and do not include additional damages, including consequential damages, unless they are provided for in an express written agreement of the receiving bank. This section clarifies that in connection with the handling of payment orders, Federal Reserve Banks may not agree to be liable for consequential damages under this provision and shall not be liable for damages other than those that may be due under Article 4A to parties governed by this subpart. Any agreement in conflict with these provisions would not be effective, because it would be in violation of subpart C.
(2) This section does not affect the ability of other parties to a funds transfer to agree to be liable for consequential damages, the liability of a Federal Reserve Bank under section 4A-404 (relating to obligation of beneficiary’s bank to pay and give notice to beneficiary), or the liability to parties governed by subpart C for claims not based on the handling of a payment order under subpart C.
(b) Payment of compensation. (1) Under Article 4A, a Federal Reserve Bank may be required to pay compensation in the form of interest to another party in connection with its handling of a funds transfer. For example, payment of compensation in the form of interest is required in certain situations pursuant to sections 4A-204 (relating to refund of payment and duty of customer to report with respect to unauthorized payment order), 4A-209 (relating to acceptance of payment order), 4A-210 (relating to rejection of payment order), 4A-304 (relating to duty of sender to report erroneously executed payment order), 4A-305 (relating to liability for late or improper execution or failure to execute a payment order), 4A-402 (relating to obligation of sender to pay receiving bank), and 4A-404 (relating to obligation of beneficiary’s bank to pay and give notice to beneficiary).
(2) Section 210.47(b) requires Federal Reserve Banks to provide compensation through payment in the form of interest. Under section 4A-506(a), the amount of such interest may be determined by agreement between the sender and receiving bank or by funds-transfer system rule. If there is no such agreement, under section 4A-506(b), the amount of interest is based on the Federal funds rate. Similarly, compensation in the form of interest will be paid to government senders, receiving banks, or beneficiaries described in § 210.40(d) if they are entitled to interest under subpart C. A Federal Reserve Bank may also, in its discretion, pay compensation in the form of interest directly to a remote party to a transfer through the FedNow Service that is entitled to interest, rather than providing compensation to its sender or receiving bank.
(3) If a sender or receiving bank that received a payment of compensation is not the party entitled to compensation under Article 4A, the sender or receiving bank must pass the benefit of the compensation payment made to it to the party that is entitled to compensation. The benefit may be passed on either in the form of a direct payment of interest or in the form of a compensating balance, if the party entitled to interest agrees to accept the other form of compensation. In the latter case, the value of the compensating balance must be at least equivalent to the value of the interest payment that otherwise would have been provided.
(c) Nonwaiver of right of recovery. Several sections of Article 4A allow a party to a funds transfer to make a claim pursuant to the applicable law of mistake and restitution. Nothing in subpart C of this part or any Operating Circular issued in accordance with subpart C of this part waives any such claim by a Federal Reserve Bank. A Federal Reserve Bank, however, may waive such a claim by express written agreement in order to settle litigation or for other purposes.
Appendix A to Part 210—Article 4A, Funds Transfers
This Article may be cited as Uniform Commercial Code—Funds Transfers.
Except as otherwise provided in section 4A-108, this Article applies to funds transfers defined in section 4A-104.
(a) In this Article:
(1) Payment order means an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary if:
(i) The instruction does not state a condition to payment to the beneficiary other than time of payment,
(ii) The receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment from, the sender, and
(iii) The instruction is transmitted by the sender directly to the receiving bank or to an agent, funds-transfer system, or communication system for transmittal to the receiving bank.
(2) Beneficiary means the person to be paid by the beneficiary’s bank.
(3) “Beneficiary’s bank” means the bank identified in a payment order in which an account of the beneficiary is to be credited pursuant to the order or which otherwise is to make payment to the beneficiary if the order does not provide for payment to an account.
(4) Receiving bank means the bank to which the sender’s instruction is addressed.
(5) Sender means the person giving the instruction to the receiving bank.
(b) If an instruction complying with paragraph (a)(1) of this section is to make more than one payment to a beneficiary, the instruction is a separate payment order with respect to each payment.
(c) A payment order is issued when it is sent to the receiving bank.
In this Article:
(a) Funds transfer means the series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment order. A funds transfer is completed by acceptance by the beneficiary’s bank of a payment order for the benefit of the beneficiary of the originator’s payment order.
(b) Intermediary bank means a receiving bank other than the originator’s bank or the beneficiary’s bank.
(c) Originator means the sender of the first payment order in a funds transfer.
(d) Originator’s bank means:
(1) The receiving bank to which the payment order of the originator is issued if the originator is not a bank; or
(2) The originator if the originator is a bank.
(a) In this Article:
(1) Authorized account means a deposit account of a customer in a bank designated by the customer as a source of payment of payment orders issued by the customer to the bank. If a customer does not so designate an account, any account of the customer is an authorized account if payment of a payment order from that account is not inconsistent with a restriction on the use of that account.
(2) Bank means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company. A branch or separate office of a bank is a separate bank for purposes of this Article.
(3) Customer means a person, including a bank, having an account with a bank or from whom a bank has agreed to receive payment orders.
(4) Funds-transfer business day of a receiving bank means the part of a day during which the receiving bank is open for the receipt, processing, and transmittal of payment orders and cancellations and amendments of payment orders.
(5) Funds-transfer system means a wire transfer network, automated clearing house, or other communication system of a clearing house or other association of banks through which a payment order by a bank may be transmitted to the bank to which the order is addressed.
(6) Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing.
(7) Prove with respect to a fact means to meet the burden of establishing the fact (Section 1-201(8)).
(b) Other definitions applying to this Article and the sections in which they appear are:
(c) The following definitions in Article 4 apply to this Article:
(d) In addition Article 1 contains general definitions and principles of construction and interpretation applicable throughout this Article.
(a) The time of receipt of a payment order or communication canceling or amending a payment order is determined by the rules applicable to receipt of a notice stated in Section 1-201(27). A receiving bank may fix a cut-off time or times on a funds-transfer business day for the receipt and processing of payment orders and communications canceling or amending payment orders. Different cut-off times may apply to payment orders, cancellations, or amendments, or to different categories of payment orders, cancellations, or amendments. A cut-off time may apply to senders generally or different cut-off times may apply to different senders or categories of payment orders. If a payment order or communication canceling or amending a payment order is received after the close of a funds-transfer business day or after the appropriate cut-off time on a funds-transfer business day, the receiving bank may treat the payment order or communication as received at the opening of the next funds-transfer business day.
(b) If this Article refers to an execution date or payment date or states a day on which a receiving bank is required to take action, and the date or day does not fall on a funds-transfer business day, the next day that is a funds-transfer business day is treated as the date or day stated, unless the contrary is stated in this Article.
Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the inconsistency.
(a) Except as provided in subsection (b), this Article does not apply to a funds transfer any part of which is governed by the Electronic Fund Transfer Act of 1978 (Title XX, Pub. L. 95-630, 92 Stat. 3728, 15 U.S.C. 1693 et seq.) as amended from time to time.
(b) This Article applies to a funds transfer that is a remittance transfer as defined in the Electronic Fund Transfer Act (15 U.S.C. 1693o-1) as amended from time to time, unless the remittance transfer is an electronic fund transfer as defined in the Electronic Fund Transfer Act (15 U.S.C. 1693a) as amended from time to time.
(c) In a funds transfer to which this Article applies, in the event of an inconsistency between an applicable provision of this Article and an applicable provision of the Electronic Fund Transfer Act, the provision of the Electronic Fund Transfer Act governs to the extent of the inconsistency.
Security procedure means a procedure established by agreement of a customer and a receiving bank for the purpose of (i) verifying that a payment order or communication amending or canceling a payment order is that of the customer, or (ii) detecting error in the transmission or the content of the payment order or communication. A security procedure may require the use of algorithms or other codes, identifying words or numbers, encryption, callback procedures, or similar security devices. Comparison of a signature on a payment order or communication with an authorized specimen signature of the customer is not by itself a security procedure.
(a) A payment order received by the receiving bank is the authorized order of the person identified as sender if that person authorized the order or is otherwise bound by it under the law of agency.
(b) If a bank and its customer have agreed that the authenticity of payment orders issued to the bank in the name of the customer as sender will be verified pursuant to a security procedure, a payment order received by the receiving bank is effective as the order of the customer, whether or not authorized, if (i) the security procedure is a commercially reasonable method of providing security against unauthorized payment orders, and (ii) the bank proves that it accepted the payment order in good faith and in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name of the customer. The bank is not required to follow an instruction that violates a written agreement with the customer or notice of which is not received at a time and in a manner affording the bank a reasonable opportunity to act on it before the payment order is accepted.
(c) Commercial reasonableness of a security procedure is a question of law to be determined by considering the wishes of the customer expressed to the bank, the circumstances of the customer known to the bank, including the size, type, and frequency of payment orders normally issued by the customer to the bank, alternative security procedures offered to the customer, and security procedures in general use by customers and receiving banks similarly situated. A security procedure is deemed to be commercially reasonable if (i) the security procedure was chosen by the customer after the bank offered, and the customer refused, a security procedure that was commercially reasonable for that customer, and (ii) the customer expressly agreed in writing to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with the security procedure chosen by the customer.
(d) The term sender in this Article includes the customer in whose name a payment order is issued if the order is the authorized order of the customer under subsection (a) of this section, or it is effective as the order of the customer under subsection (b) of this section.
(e) This section applies to amendments and cancellations of payment orders to the same extent it applies to payment orders.
(f) Except as provided in this section and in section 4A-203(a)(1), rights and obligations arising under this section or section 4A-203 may not be varied by agreement.
(a) If an accepted payment order is not, under section 4A-202(a), an authorized order of a customer identified as sender, but is effective as an order of the customer pursuant to section 4A-202(b), the following rules apply:
(1) By express written agreement, the receiving bank may limit the extent to which it is entitled to enforce or retain payment of the payment order.
(2) The receiving bank is not entitled to enforce or retain payment of the payment order if the customer proves that the order was not caused, directly or indirectly, by a person (i) entrusted at any time with duties to act for the customer with respect to payment orders or the security procedure, or (ii) who obtained access to transmitting facilities of the customer or who obtained, from a source controlled by the customer and without authority of the receiving bank, information facilitating breach of the security procedure, regardless of how the information was obtained or whether the customer was at fault. Information includes any access device, computer software, or the like.
(b) This section applies to amendments of payment orders to the same extent it applies to payment orders.
(a) If a receiving bank accepts a payment order issued in the name of its customer as sender which is (i) not authorized and not effective as the order of the customer under section 4A-202, or (ii) not enforceable, in whole or in part, against the customer under section 4A-203, the bank shall refund any payment of the payment order received from the customer to the extent the bank is not entitled to enforce payment and shall pay interest on the refundable amount calculated from the date the bank received payment to the date of the refund. However, the customer is not entitled to interest from the bank on the amount to be refunded if the customer fails to exercise ordinary care to determine that the order was not authorized by the customer and to notify the bank of the relevant facts within a reasonable time not exceeding 90 days after the date the customer received notification from the bank that the order was accepted or that the customer’s account was debited with respect to the order The bank is not entitled to any recovery from the customer on account of a failure by the customer to give notification as stated in this section.
(b) Reasonable time under subsection (a) of this section may be fixed by agreement as stated in section 1-204(1), but the obligation of a receiving bank to refund payment as stated in subsection (a) may not otherwise be varied by agreement.
(a) If an accepted payment order was transmitted pursuant to a security procedure for the detection of error and the payment order (i) erroneously instructed payment to a beneficiary not intended by the sender, (ii) erroneously instructed payment in an amount greater than the amount intended by the sender, or (iii) was an erroneously transmitted duplicate of a payment order previously sent by the sender, the following rules apply:
(1) If the sender proves that the sender or a person acting on behalf of the sender pursuant to section 4A-206 complied with the security procedure and that the error would have been detected if the receiving bank had also complied, the sender is not obliged to pay the order to the extent stated in this paragraphs (2) and (3).
(2) If the funds transfer is completed on the basis of an erroneous payment order described in clause (i) or (iii) of subsection (a), the sender is not obliged to pay the order and the receiving bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.
(3) If the funds transfer is completed on the basis of a payment order described in clause (ii) of subsection (a), the sender is not obliged to pay the order to the extent the amount received by the beneficiary is greater than the amount intended by the sender. In that case, the receiving bank is entitled to recover from the beneficiary the excess amount received to the extent allowed by the law governing mistake and restitution.
(b) If (i) the sender of an erroneous payment order described in subsection (a) is not obliged to pay all or part of the order, and (ii) the sender receives notification from the receiving bank that the order was accepted by the bank or that the sender’s account was debited with respect to the order, the sender has a duty to exercise ordinary care, on the basis of information available to the sender, to discover the error with respect to the order and to advise the bank of the relevant facts within a reasonable time, not exceeding 90 days, after the bank’s notification was received by the sender. If the bank proves that the sender failed to perform that duty, the sender is liable to the bank for the loss the bank proves it incurred as a result of the failure, but the liability of the sender may not exceed the amount of the sender’s order.
(c) This section applies to amendments to payment orders to the same extent it applies to payment orders.
(a) If a payment order addressed to a receiving bank is transmitted to a funds-transfer system or other third-party communication system for transmittal to the bank, the system is deemed to be an agent of the sender for the purpose of transmitting the payment order to the bank. If there is a discrepancy between the terms of the payment order transmitted to the system and the terms of the payment order transmitted by the system to the bank, the terms of the payment order of the sender are those transmitted by the system. This section does not apply to a funds-transfer system of the Federal Reserve Banks.
(b) This section applies to cancellations and amendments of payment orders to the same extent it applies to payment orders.
(a) Subject to subsection (b), if, in a payment order received by the beneficiary’s bank, the name, bank account number, or other identification of the beneficiary refers to a nonexistent or unidentifiable person or account, no person has rights as a beneficiary of the order and acceptance of the order cannot occur.
(b) If a payment order received by the beneficiary’s bank identifies the beneficiary both by name and by an identifying or bank account number and the name and number identify different persons, the following rules apply:
(1) Except as otherwise provided in subsection (c), if the beneficiary’s bank does not know that the name and number refer to different persons, it may rely on the number as the proper identification of the beneficiary of the order. The beneficiary’s bank need not determine whether the name and number refer to the same person.
(2) If the beneficiary’s bank pays the person identified by name or knows that the name and number identify different persons, no person has rights as beneficiary except the person paid by the beneficiary’s bank if that person was entitled to receive payment from the originator of the funds transfer. If no person has rights as beneficiary, acceptance of the order cannot occur.
(c) If (i) a payment order described in subsection (b) is accepted, (ii) the originator’s payment order described the beneficiary inconsistently by name and number, and (iii) the beneficiary’s bank pays the person identified by number as permitted by subsection (b)(1), the following rules apply:
(1) If the originator is a bank, the originator is obliged to pay its order.
(2) If the originator is not a bank and proves that the person identified by number was not entitled to receive payment from the originator, the originator is not obliged to pay its order unless the originator’s bank proves that the originator, before acceptance of the originator’s order, had notice that payment of a payment order issued by the originator might be made by the beneficiary’s bank on the basis of an identifying or bank account number even if it identifies a person different from the named beneficiary. Proof of notice may be made by any admissible evidence. The originator’s bank satisfies the burden of proof if it proves that the originator, before the payment order was accepted, signed a writing stating the information to which the notice relates.
(d) In a case governed by subsection (b)(1), if the beneficiary’s bank rightfully pays the person identified by number and that person was not entitled to receive payment from the originator, the amount paid may be recovered from that person to the extent allowed by the law governing mistake and restitution as follows:
(1) If the originator is obliged to pay its payment order as stated in subsection (c), the originator has the right to recover.
(2) If the originator is not a bank and is not obliged to pay its payment order, the originator’s bank has the right to recover.
(a) This subsection applies to a payment order identifying an intermediary bank or the beneficiary’s bank only by an identifying number.
(1) The receiving bank may rely on the number as the proper identification of the intermediary or beneficiary’s bank and need not determine whether the number identifies a bank.
(2) The sender is obliged to compensate the receiving bank for any loss and expenses incurred by the receiving bank as a result of its reliance on the number in executing or attempting to execute the order.
(b) This subsection applies to a payment order identifying an intermediary bank or the beneficiary’s bank both by name and an identifying number if the name and number identify different persons.
(1) If the sender is a bank, the receiving bank may rely on the number as the proper identification of the intermediary or beneficiary’s bank if the receiving bank, when it executes the sender’s order, does not know that the name and number identify different persons. The receiving bank need not determine whether the name and number refer to the same person or whether the number refers to a bank. The sender is obliged to compensate the receiving bank for any loss and expenses incurred by the receiving bank as a result of its reliance on the number in executing or attempting to execute the order.
(2) If the sender is not a bank and the receiving bank proves that the sender, before the payment order was accepted, had notice that the receiving bank might rely on the number as the proper identification of the intermediary or beneficiary’s bank even if it identifies a person different from the bank identified by name, the rights and obligations of the sender and the receiving bank are governed by subsection (b)(1), as though the sender were a bank. Proof of notice may be made by any admissible evidence. The receiving bank satisfies the burden of proof if it proves that the sender, before the payment order was accepted, signed a writing stating the information to which the notice relates.
(3) Regardless of whether the sender is a bank, the receiving bank may rely on the name as the proper identification of the intermediary or beneficiary’s bank if the receiving bank, at the time it executes the sender’s order, does not know that the name and number identify different persons. The receiving bank need not determine whether the name and number refer to the same person.
(4) If the receiving bank knows that the name and number identify different persons, reliance on either the name or the number in executing the sender’s payment order is a breach of the obligation stated in section 4A-302(a)(1).
(a) Subject to subsection (d), a receiving bank other than the beneficiary’s bank accepts a payment order when it executes the order.
(b) Subject to subsections (c) and (d), a beneficiary’s bank accepts a payment order at the earliest of the following times:
(1) When the bank (i) pays the beneficiary as stated in section 4A-405(a) or 4A-405(b), or (ii) notifies the beneficiary of receipt of the order or that the account of the beneficiary has been credited with respect to the order unless the notice indicates that the bank is rejecting the order or that funds with respect to the order may not be withdrawn or used until receipt of payment from the sender of the order;
(2) When the bank receives payment of the entire amount of the sender’s order pursuant to section 4A-403(a)(1) or (2); or
(3) The opening of the next funds-transfer business day of the bank following the payment date of the order if, at that time, the amount of the sender’s order is fully covered by a withdrawable credit balance in an authorized account of the sender or the bank has otherwise received full payment from the sender, unless the order was rejected before that time or is rejected within (i) one hour after that time, or (ii) one hour after the opening of the next business day of the sender following the payment date if that time is later. If notice of rejection is received by the sender after the payment date and the authorized account of the sender does not bear interest, the bank is obliged to pay interest to the sender on the amount of the order for the number of days elapsing after the payment date to the day the sender receives notice or learns that the order was not accepted, counting that day as an elapsed day. If the withdrawable credit balance during that period falls below the amount of the order, the amount of interest payable is reduced accordingly.
(c) Acceptance of a payment order cannot occur before the order is received by the receiving bank. Acceptance does not occur under subsection (b)(2) or (3) if the beneficiary of the payment order does not have an account with the receiving bank, the account has been closed, or the receiving bank is not permitted by law to receive credits for the beneficiary’s account.
(d) A payment order issued to the originator’s bank cannot be accepted until the payment date if the bank is the beneficiary’s bank, or the execution date if the bank is not the beneficiary’s bank. If the originator’s bank executes the originator’s payment order before the execution date or pays the beneficiary of the originator’s payment order before the payment date and the payment order is subsequently canceled pursuant to section 4A-211(b), the bank may recover from the beneficiary any payment received to the extent allowed by the law governing mistake and restitution.
(a) A payment order is rejected by the receiving bank by a notice of rejection transmitted to the sender orally, electronically, or in writing. A notice of rejection need not use any particular words and is sufficient if it indicates that the receiving bank is rejecting the order or will not execute or pay the order. Rejection is effective when the notice is given if transmission is by a means that is reasonable in the circumstances. If notice of rejection is given by a means that is not reasonable, rejection is effective when the notice is received. If an agreement of the sender and receiving bank establishes the means to be used to reject a payment order, (i) any means complying with the agreement is reasonable, and (ii) any means not complying is not reasonable unless no significant delay in receipt of the notice resulted from the use of the noncomplying means.
(b) This subsection applies if a receiving bank other than the beneficiary’s bank fails to execute a payment order despite the existence on the execution date of a withdrawable credit balance in an authorized account of the sender sufficient to cover the order. If the sender does not receive notice of rejection of the order on the execution date and the authorized account of the sender does not bear interest, the bank is obliged to pay interest to the sender on the amount of the order for the number of days elapsing after the execution date to the earlier of the day the order is canceled pursuant to section 4A-211(d) or the day the sender receives notice or learns that the order was not executed, counting the final day of the period as an elapsed day. If the withdrawable credit balance during that period falls below the amount of the order, the amount of interest is reduced accordingly.
(c) If a receiving bank suspends payments, all unaccepted payment orders issued to it are deemed rejected at the time the bank suspends payments.
(d) Acceptance of a payment order precludes a later rejection of the order. Rejection of a payment order precludes a later acceptance of the order.
(a) A communication of the sender of a payment order canceling or amending the order may be transmitted to the receiving bank orally, electronically, or in writing. If a security procedure is in effect between the sender and the receiving bank, the communication is not effective to cancel or amend the order unless the communication is verified pursuant to the security procedure or the bank agrees to the cancellation or amendment.
(b) Subject to subsection (a), a communication by the sender canceling or amending a payment order is effective to cancel or amend the order if notice of the communication is received at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before the bank accepts the payment order.
(c) After a payment order has been accepted, cancellation or amendment of the order is not effective unless the receiving bank agrees or a funds-transfer system rule allows cancellation or amendment without agreement of the bank.
(1) With respect to a payment order accepted by a receiving bank other than the beneficiary’s bank, cancellation or amendment is not effective unless a conforming cancellation or amendment of the payment order issued by the receiving bank is also made.
(2) With respect to a payment order accepted by the beneficiary’s bank, cancellation or amendment is not effective unless the order was issued in execution of an unauthorized payment order, or because of a mistake by a sender in the funds transfer which resulted in the issuance of a payment order (i) that is a duplicate of a payment order previously issued by the sender, (ii) that orders payment to a beneficiary not entitled to receive payment from the originator, or (iii) that orders payment in an amount greater than the amount the beneficiary was entitled to receive from the originator. If the payment order is canceled or amended, the beneficiary’s bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.
(d) An unaccepted payment order is canceled by operation of law at the close of the fifth funds-transfer business day of the receiving bank after the execution date or payment date of the order.
(e) A canceled payment order cannot be accepted. If an accepted payment order is canceled, the acceptance is nullified and no person has any right or obligation based on the acceptance. Amendment of a payment order is deemed to be cancellation of the original order at the time of amendment and issue of a new payment order in the amended form at the same time.
(f) Unless otherwise provided in an agreement of the parties or in a funds-transfer system rule, if the receiving bank, after accepting a payment order, agrees to cancellation or amendment of the order by the sender or is bound by a funds-transfer system rule allowing cancellation or amendment without the bank’s agreement, the sender, whether or not cancellation or amendment is effective, is liable to the bank for any loss and expenses, including reasonable attorney’s fees, incurred by the bank as a result of the cancellation or amendment or attempted cancellation or amendment.
(g) A payment order is not revoked by the death or legal incapacity of the sender unless the receiving bank knows of the death or of an adjudication of incapacity by a court of competent jurisdiction and has reasonable opportunity to act before acceptance of the order.
(h) A funds-transfer system rule is not effective to the extent it conflicts with subsection (c)(2) of this section.
If a receiving bank fails to accept a payment order that it is obliged by express agreement to accept, the bank is liable for breach of the agreement to the extent provided in the agreement or in this Article, but does not otherwise have any duty to accept a payment order or, before acceptance, to take any action, or refrain from taking action, with respect to the order except as provided in this Article or by express agreement. Liability based on acceptance arises only when acceptance occurs as stated in section 4A-209, and liability is limited to that provided in this Article. A receiving bank is not the agent of the sender or beneficiary of the payment order it accepts, or of any other party to the funds transfer, and the bank owes no duty to any party to the funds transfer except as provided in this Article or by express agreement.
(a) A payment order is “executed” by the receiving bank when it issues a payment order intended to carry out the payment order received by the bank. A payment order received by the beneficiary’s bank can be accepted but cannot be executed.
(b) Execution date of a payment order means the day on which the receiving bank may properly issue a payment order in execution of the sender’s order. The execution date may be determined by instruction of the sender but cannot be earlier than the day the order is received and, unless otherwise determined, is the day the order is received. If the sender’s instruction states a payment date, the execution date is the payment date or an earlier date on which execution is reasonably necessary to allow payment to the beneficiary on the payment date.
(a) Except as provided in subsections (b) through (d), if the receiving bank accepts a payment order pursuant to section 4A-209(a), the bank has the following obligations in executing the order:
(1) The receiving bank is obliged to issue, on the execution date, a payment order complying with the sender’s order and to follow the sender’s instructions concerning (i) any intermediary bank or funds-transfer system to be used in carrying out the funds transfer, or (ii) the means by which payment orders are to be transmitted in the funds transfer. If the originator’s bank issues a payment order to an intermediary bank, the originator’s bank is obliged to instruct the intermediary bank according to the instruction of the originator. An intermediary bank in the funds transfer is similarly bound by an instruction given to it by the sender of the payment order it accepts.
(2) If the sender’s instruction states that the funds transfer is to be carried out telephonically or by wire transfer or otherwise indicates that the funds transfer is to be carried out by the most expeditious means, the receiving bank is obliged to transmit its payment order by the most expeditious available means, and to instruct any intermediary bank accordingly. If a sender’s instruction states a payment date, the receiving bank is obliged to transmit its payment order at a time and by means reasonably necessary to allow payment to the beneficiary on the payment date or as soon thereafter as is feasible.
(b) Unless otherwise instructed, a receiving bank executing a payment order may (i) use any funds-transfer system if use of that system is reasonable in the circumstances, and (ii) issue a payment order to the beneficiary’s bank or to an intermediary bank through which a payment order conforming to the sender’s order can expeditiously be issued to the beneficiary’s bank if the receiving bank exercises ordinary care in the selection of the intermediary bank. A receiving bank is not required to follow an instruction of the sender designating a funds-transfer system to be used in carrying out the funds transfer if the receiving bank, in good faith, determines that it is not feasible to follow the instruction or that following the instruction would unduly delay completion of the funds transfer.
(c) Unless subsection (a)(2) applies or the receiving bank is otherwise instructed, the bank may execute a payment order by transmitting its payment order by first class mail or by any means reasonable in the circumstances. If the receiving bank is instructed to execute the sender’s order by transmitting its payment order by the means stated or by any means as expeditious as the means stated.
(d) Unless instructed by the sender, (i) the receiving bank may not obtain payment of its charges for services and expenses in connection with the execution of the sender’s order by issuing a payment order in an amount equal to the amount of the sender’s order less the amount of the charges, and (ii) may not instruct a subsequent receiving bank to obtain payment of its charges in the same manner.
(a) A receiving bank that (i) executes the payment order of the sender by issuing a payment order in an amount greater than the amount of the sender’s order, or (ii) issues a payment order in execution of the sender’s order and then issues a duplicate order, is entitled to payment of the amount of the sender’s order under section 4A-402(c) if that subsection is otherwise satisfied. The bank is entitled to recover from the beneficiary of the erroneous order the excess payment received to the extent allowed by the law governing mistake and restitution.
(b) A receiving bank that executes the payment order of the sender by issuing a payment order in an amount less than the amount of the sender’s order is entitled to payment of the amount of the sender’s order under section 4A-402(c) if (i) that subsection is otherwise satisfied and (ii) the bank corrects its mistake by issuing an additional payment order for the benefit of the beneficiary of the sender’s order. If the error is not corrected, the issuer of the erroneous order is entitled to receive or retain payment from the sender of the order it accepted only to the extent of the amount of the erroneous order. This subsection does not apply if the receiving bank executes the sender’s payment order by issuing a payment order in an amount less than the amount of the sender’s order for the purpose of obtaining payment of its charges for services and expenses pursuant to instruction of the sender.
(c) If a receiving bank executes the payment order of the sender by issuing a payment order to a beneficiary different from the beneficiary of the sender’s order and the funds transfer is completed on the basis of that error, the sender of the payment order that was erroneously executed and all previous senders in the funds transfer are not obliged to pay the payment orders they issued. The issuer of the erroneous order is entitled to recover from the beneficiary of the order the payment received to the extent allowed by the law governing mistake and restitution.
If the sender of a payment order that is erroneously executed as stated in section 4A-303 receives notification from the receiving bank that the order was executed or that the sender’s account was debited with respect to the order, the sender has a duty to exercise ordinary care to determine, on the basis of information available to the sender, that the order was erroneously executed and to notify the bank of the relevant facts within a reasonable time not exceeding 90 days after the notification from the bank was received by the sender. If the sender fails to perform that duty, the bank is not obliged to pay interest on any amount refundable to the sender under section 4A-402(d) for the period before the bank learns of the execution error. The bank is not entitled to any recovery from the sender on account of a failure by the sender to perform the duty stated in this section.
(a) If a funds transfer is completed but execution of a payment order by the receiving bank in breach of section 4A-302 results in delay in payment to the beneficiary, the bank is obliged to pay interest to either the originator or the beneficiary of the funds transfer for the period of delay caused by the improper execution. Except as provided in subsection (c), additional damages are not recoverable.
(b) If execution of a payment order by a receiving bank in breach of section 4A-302 results in (i) noncompletion of the funds transfer, (ii) failure to use an intermediary bank designated by the originator, or (iii) issuance of a payment order that does not comply with the terms of the payment order of the originator, the bank is liable to the originator for its expenses in the funds transfer and for incidental expenses and interest losses, to the extent not covered by subsection (a), resulting from the improper execution. Except as provided in subsection (c), additional damages are not recoverable.
(c) In addition to the amounts payable under subsections (a) and (b), damages, including consequential damages, are recoverable to the extent provided in an express written agreement of the receiving bank.
(d) If a receiving bank fails to execute a payment order it was obliged by express agreement to execute, the receiving bank is liable to the sender for its expenses in the transaction and for incidential expenses and interest losses resulting from the failure to execute. Additional damages, including consequential damages, are recoverable to the extent provided in an express written agreement of the receiving bank, but are not otherwise recoverable.
(e) Reasonable attorney’s fees are recoverable if demand for compensation under subsection (a) or (b) of this section is made and refused before an action is brought on the claim. If a claim is made for breach of an agreement under subsection (d) and the agreement does not provide for damages, reasonable attorney’s fees are recoverable if demand for compensation under subsection (d) is made and refused before an action is brought on the claim.
(f) Except as stated in this section, the liability of a receiving bank under subsections (a) and (b) of this section may not be varied by agreement.
Payment date of a payment order means the day on which the amount of the order is payable to the beneficiary by the beneficiary’s bank. The payment date may be determined by instruction of the sender but cannot be earlier than the day the order is received by the beneficiary’s bank and, unless otherwise determined, is the day the order is received by the beneficiary’s bank.
(a) This section is subject to sections 4A-205 and 4A-207.
(b) With respect to a payment order issued to the beneficiary’s bank, acceptance of the order by the bank obliges the sender to pay the bank the amount of the order, but payment is not due until the payment date of the order.
(c) This subsection is subject to subsection (e) and to section 4A-303. With respect to a payment order issued to a receiving bank other than the beneficiary’s bank, acceptance of the order by the receiving bank obliges the sender to pay the bank the amount of the sender’s order. Payment by the sender is not due until the execution date of the sender’s order. The obligation of that sender to pay its payment order is excused if the funds transfer is not completed by acceptance by the beneficiary’s bank of a payment order instructing payment to the beneficiary of that sender’s payment order.
(d) If the sender of a payment order pays the order and was not obliged to pay all or part of the amount paid, the bank receiving payment is obliged to refund payment to the extent the sender was not obliged to pay. Except as provided in sections 4A-204 and 4A-304, interest is payable on the refundable amount from the date of payment.
(e) If a funds transfer is not completed as stated in subsection (c) and an intermediary bank is obliged to refund payment as stated in subsection (d) but is unable to do so because not permitted by applicable law or because the bank suspends payments, a sender in the funds transfer that executed a payment order in compliance with an instruction, as stated in section 4A-302(a)(1), to route the funds transfer through that intermediary bank is entitled to receive or retain payment from the sender of the payment order that it accepted. The first sender in the funds transfer that issued an instruction requiring routing through that intermediary bank is subrogated to the right of the bank that paid the intermediary bank to refund as stated in subsection (d) of this section.
(f) The right of the sender of a payment order to be excused from the obligation to pay the order as stated in this subsection (c) or to receive refund under subsection (d) may not be varied by agreement.
(a) Payment of the sender’s obligation under section 4A-402 to pay the receiving bank occurs as follows:
(1) If the sender is a bank, payment occurs when the receiving bank receives final settlement of the obligation through a Federal Reserve Bank or through a funds-transfer system.
(2) If the sender is a bank and the sender (i) credited an account of the receiving bank with the sender, or (ii) caused an account of the receiving bank in another bank to be credited, payment occurs when the credit is withdrawn or, if not withdrawn, at midnight of the day on which the credit is withdrawable and the receiving bank learns of that fact.
(3) If the receiving bank debits an account of the sender with the receiving bank, payment occurs when the debit is made to the extent the debit is covered by a withdrawable credit balance in the account.
(b) If the sender and receiving bank are members of a funds-transfer system that nets obligations multilaterally among participants, the receiving bank receives final settlement when settlement is complete in accordance with the rules of the system. The obligation of the sender to pay the amount of a payment order transmitted through the funds-transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against the sender’s obligation the right of the sender to receive payment from the receiving bank of the amount of any other payment order transmitted to the sender by the receiving bank through the funds-transfer system. The aggregate balance of obligations owed by each sender to each receiving bank in the funds-transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against that balance the aggregate balance of obligations owed to the sender by other members of the system. The aggregate balance is determined after the right of setoff stated in the second sentence of this subsection has been exercised.
(c) If two banks transmit payment orders to each other under an agreement that settlement of the obligations of each bank to the other under section 4A-402 will be made at the end of the day or other period, the total amount owed with respect to all orders transmitted by one bank shall be set off against the total amount owed with respect to all orders transmitted by the other bank. To the extent of the setoff, each bank has made payment to the other.
(d) In a case not covered by paragraph (a) of this section, the time when payment of the sender’s obligation under section 4A-402(b) or 4A-402(c) occurs is governed by applicable principles of law that determine when an obligation is satisfied.
(a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), if a beneficiary’s bank accepts a payment order, the bank is obliged to pay the amount of the order to the beneficiary of the order. Payment is due on the payment date of the order, but if acceptance occurs on the payment date after the close of the funds-transfer business day of the bank, payment is due on the next funds-transfer business day. If the bank refuses to pay after demand by the beneficiary and receipt of notice of particular circumstances that will give rise to consequential damages as a result of nonpayment, the beneficiary may recover damages resulting from the refusal to pay to the extent the bank had notice of the damages, unless the bank proves that it did not pay because of a reasonable doubt concerning the right of the beneficiary to payment.
(b) If a payment order accepted by the beneficiary’s bank instructs payment to an account of the beneficiary, the bank is obliged to notify the beneficiary of receipt of the order before midnight of the next funds-transfer business day following the payment date. If the payment order does not instruct payment to an account of the beneficiary, the bank is required to notify the beneficiary only if notice is required by the order. Notice may be given by first class mail or any other means reasonable in the circumstances. If the bank fails to give the required notice, the bank is obliged to pay interest to the beneficiary on the amount of the payment order from the day notice should have been given until the day the beneficiary learned of receipt of the payment order by the bank. No other damages are recoverable. Reasonable attorney’s fees are also recoverable if demand for interest is made and refused before an action is brought on the claim.
(c) The right of a beneficiary to receive payment and damages as stated in subsection (a) may not be varied by agreement or a funds-transfer system rule. The right of a beneficiary to be notified as stated in subsection (b) of this section may be varied by agreement of the beneficiary or by a funds-transfer system rule if the beneficiary is notified of the rule before initiation of the funds transfer.
(a) If the beneficiary’s bank credits an account of the beneficiary of a payment order, payment of the bank’s obligation under section 4A-404(a) occurs when and to the extent (i) the beneficiary is notified of the right to withdraw the credit, (ii) the bank lawfully applies the credit to a debt of the beneficiary, or (iii) funds with respect to the order are otherwise made available to the beneficiary by the bank.
(b) If the beneficiary’s bank does not credit an account of the beneficiary of a payment order, the time when payment of the bank’s obligation under section 4A-404(a) occurs is governed by principles of law that determine when an obligation is satisfied.
(c) Except as stated in paragraphs (d) and (e) of this section, if the beneficiary’s bank pays the beneficiary of a payment order under a condition to payment or agreement of the beneficiary giving the bank the right to recover payment from the beneficiary if the bank does not receive payment of the order, the condition to payment or agreement is not enforceable.
(d) A funds-transfer system rule may provide that payments made to beneficiaries of funds transfer made through the system are provisional until receipt of payment by the beneficiary’s bank of the payment order it accepted. A beneficiary’s bank that makes a payment that is provisional under the rule is entitled to refund from the beneficiary if (i) the rule requires that both the beneficiary and the originator be given notice of the provisional nature of the payment before the funds transfer is initiated, (ii) the beneficiary, the beneficiary’s bank and the originator’s bank agreed to be bound by the rule, and (iii) the beneficiary’s bank did not receive payment of the payment order that it accepted. If the beneficiary is obliged to refund payment to the beneficiary’s bank, acceptance of the payment order by the beneficiary’s bank is nullified and no payment by the originator of the funds transfer to the beneficiary occurs under section 4A-406.
(e) This paragraph applies to a funds transfer that includes a payment order transmitted over a funds-transfer system that (i) nets obligations-multilaterally among participants, and (ii) has in effect a loss-sharing agreement among participants for the purpose of providing funds necessary to complete settlement of the obligations of one or more participants that do not meet their settlement obligations. If the beneficiary’s bank in the funds transfer accepts a payment order and the system fails to complete settlement pursuant to its rules with respect to any payment order in the funds transfer, (i) the acceptance by the beneficiary’s bank is nullified and no person has any right or obligation based on the acceptance, (ii) the beneficiary’s bank is entitled to recover payment from the beneficiary, (iii) no payment by the originator to the beneficiary occurs under section 4A-406, and (iv) subject to section 4A-402(e), each sender in the funds transfer is excused from its obligation to pay its payment order under section 4A-402(c) because the funds transfer has not been completed.
(a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), the originator of a funds transfer pays the beneficiary of the originator’s payment order (i) at the time a payment order for the benefit of the beneficiary is accepted by the beneficiary’s bank in the funds transfer and (ii) in an amount equal to the amount of the order *40813 accepted by the beneficiary’s bank, but not more than the amount of the originator’s order.
(b) If payment under paragraph (a) of this section is made to satisfy an obligation, the obligation is discharged to the same extent discharge would result from payment to the beneficiary of the same amount in money, unless (i) the payment under subsection (a) was made by a means prohibited by the contract of the beneficiary with respect to the obligation; (ii) the beneficiary, within a reasonable time after receiving notice of receipt of the order by the beneficiary’s bank, notified the originator of the beneficiary’s refusal of the payment; (iii) funds with respect to the order were not withdrawn by the beneficiary or applied to a debt of the beneficiary; and (iv) the beneficiary would suffer a loss that could reasonably have been avoided if payment had been made by a means complying with the contract. If payment by the originator does not result in discharge under this section, the originator is subrogated to the rights of the beneficiary to receive payment from the beneficiary’s bank under section 4A-404(a).
(c) For the purpose of determining whether discharge of an obligation occurs under paragraph (b) of this section, if the beneficiary’s bank accepts a payment order in an amount equal to the amount of the originator’s payment order less charges of one or more receiving banks in the funds transfer, payment to the beneficiary is deemed to be in the amount of the originator’s order unless upon demand by the beneficiary the originator does not pay the beneficiary the amount of the deducted charges.
(d) Rights of the originator or of the beneficiary of a funds transfer under this section may be varied only by agreement of the originator and the beneficiary.
(a) Except as otherwise provided in this Article, the rights and obligations of a party to a funds transfer may be varied by agreement of the affected party.
(b) Funds-transfer system rule means a rule of an association of banks (i) governing transmission of payment orders by means of a funds-transfer system of the association or rights and obligations with respect to those orders, or (ii) to the extent the rule governs rights and obligations between banks that are parties to a funds transfer in which a Federal Reserve Bank, acting as an intermediary bank, sends a payment order to the beneficiary’s bank. Except as otherwise provided in this Article, a funds-transfer system rule governing rights and obligations between participating banks using the system may be effective even if the rule conflicts with this Article and indirectly affects another party to the funds transfer who does not consent to the rule. A funds-transfer system rule may also govern rights and obligations of parties other than participating banks using the system to the extent stated in sections 4A-404(c), 4A-405(d), and 4A-507(c).
(a) As used in this section, creditor process means levy, attachment, garnishment, notice of lien, sequestration, or similar process issued by or on behalf of a creditor or other claimant with respect to an account.
(b) This subsection applies to creditor process with respect to an authorized account of the sender of a payment order if the creditor process is served on the receiving bank. For the purpose of determining rights with respect to the creditor process, if the receiving bank accepts the payment order the balance in the authorized account is deemed to be reduced by the amount of the payment order to the extent the bank did not otherwise receive payment of the order, unless the creditor process is served at a time and in a manner affording the bank a reasonable opportunity to act on it before the bank accepts the payment order.
(c) If a beneficiary’s bank has received a payment order for payment to the beneficiary’s account in the bank, the following rules apply:
(1) The bank may credit the beneficiary’s account. The amount credited may be set off against an obligation owed by the beneficiary to the bank or may be applied to satisfy creditor process served on the bank with respect to the account.
(2) The bank may credit the beneficiary’s account and allow withdrawal of the amount credited unless creditor process with respect to the account is served at a time and in a manner affording the bank a reasonable opportunity to act to prevent withdrawal.
(3) If creditor process with respect to the beneficiary’s account has been served and the bank has had a reasonable opportunity to act on it, the bank may not reject the payment order except for a reason unrelated to the service of process.
(d) Creditor process with respect to a payment by the originator to the beneficiary pursuant to a funds transfer may be served only on the beneficiary’s bank with respect to the debt owned by that bank to the beneficiary. Any other bank served with the creditor process is not obliged to act with respect to the process.
For proper cause and in compliance with applicable law, a court may restrain:
(i) a person from issuing a payment order to initiate a funds transfer,
(ii) an originator’s bank from executing the payment order of the originator, or
(iii) the beneficiary’s bank from releasing funds to the beneficiary or the beneficiary from withdrawing the funds. A court may not otherwise restrain a person from issuing a payment order, paying or receiving payment of a payment order, or otherwise acting with respect to a funds transfer.
(a) If a receiving bank has received more than one payment order of the sender or one or more payment orders and other items that are payable from the sender’s account, the bank may charge the sender’s account with respect to the various orders and items in any sequence.
(b) In determining whether a credit to an account has been withdrawn by the holder of the account or applied to a debt of the holder of the account, credits first made to the account are first withdrawn or applied.
If a receiving bank has received payment from its customer with respect to a payment order issued in the name of the customer as sender and accepted by the bank, and the customer received notification reasonably identifying the order, the customer is precluded from asserting that the bank is not entitled to retain the payment unless the customer notifies the bank of the customer’s objection to the payment within one year after the notification was received by the customer.
(a) If, under this Article, a receiving bank is obliged to pay interest with respect to a payment order issued to the bank, the amount payable may be determined (i) by agreement of the sender and receiving bank, or (ii) by a funds-transfer system rule if the payment order is transmitted through a funds-transfer system.
(b) If the amount of interest is not determined by an agreement or rule as stated in subsection (a), the amount is calculated by multiplying the applicable Federal Funds rate by the amount on which interest is payable, and then multiplying the product by the number of days for which interest is payable. The applicable Federal Funds rate is the average of the Federal Funds rates published by the Federal Reserve Bank of New York for each of the days for which interest is payable divided by 360. The Federal Funds rate for any day on which a published rate is not available is the same as the published rate for the next preceding day for which there is a published rate. If a receiving bank that accepted a payment order is required to refund payment to the sender of the order because the funds transfer was not completed, but the failure to complete was not due to any fault by the bank, the interest payable is reduced by a percentage equal to the reserve requirement on deposits of the receiving bank.
(a) The following rules apply unless the affected parties otherwise agree or paragraph (c) of this section applies:
(1) The rights and obligations between the sender of a payment order and the receiving bank are governed by the law of the jurisdiction in which the receiving bank is located.
(2) The rights and obligations between the beneficiary’s bank and the beneficiary are governed by the law of the jurisdiction in which the beneficiary’s bank is located.
(3) The issue of when payment is made pursuant to a funds transfer by the originator to the beneficiary is governed by the law of the jurisdiction in which the beneficiary’s bank is located.
(b) If the parties described in each subsection of paragraph (a) of this section have made an agreement selecting the law of a particular jurisdiction to govern rights and obligations between each other, the law of that jurisdiction governs those rights and obligations, whether or not the payment order or the funds transfer bears a reasonable relation to that jurisdiction.
(c) A funds-transfer system rule may select the law of a particular jurisdiction to govern (i) rights and obligations between participating banks with respect to payment orders transmitted or processed through the system, or (ii) the rights and obligations of some or all parties to a funds transfer any part of which is carried out by means of the system. A choice of law made pursuant to clause (i) is binding on participating banks. A choice of law made pursuant to clause (ii) is binding on the originator, other sender, or a receiving bank having notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system when the originator, other sender, or receiving bank issued or accepted a payment order. The beneficiary of a funds transfer is bound by the choice of law if, when the funds transfer is initiated, the beneficiary has notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system. The law of a jurisdiction selected pursuant to this subsection may govern, whether or not that law bears a reasonable relation to the matter in issue.
(d) In the event of inconsistency between an agreement under paragraph (b) of this section and a choice-of-law rule under paragraph (c) of this section, the agreement under paragraph (b) prevails.
(e) If a funds transfer is made by use of more than one funds-transfer system and there is inconsistency between choice-of-law rules of the systems, the matter in issue is governed by the law of the selected jurisdiction that has the most significant relationship to the matter in issue.
PART 211—INTERNATIONAL BANKING OPERATIONS (REGULATION K)
Subpart A—International Operations of U.S. Banking Organizations
§ 211.1 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of the Federal Reserve System (Board) under the authority of the Federal Reserve Act (FRA) (12 U.S.C. 221 et seq.); the Bank Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.); and the International Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
(b) Purpose. This subpart sets out rules governing the international and foreign activities of U.S. banking organizations, including procedures for establishing foreign branches and Edge and agreement corporations to engage in international banking, and for investments in foreign organizations.
(c) Scope. This subpart applies to:
(1) Member banks with respect to their foreign branches and investments in foreign banks under section 25 of the FRA (12 U.S.C. 601-604a);
(2) Corporations organized under section 25A of the FRA (12 U.S.C. 611-631) (Edge corporations);
(3) Corporations having an agreement or undertaking with the Board under section 25 of the FRA (12 U.S.C. 601-604a) (agreement corporations); and
(4) Bank holding companies with respect to the exemption from the nonbanking prohibitions of the BHC Act afforded by section 4(c)(13) of that act (12 U.S.C. 1843(c)(13)).
§ 211.2 Definitions.
Unless otherwise specified, for purposes of this subpart:
(a) An affiliate of an organization means:
(1) Any entity of which the organization is a direct or indirect subsidiary; or
(2) Any direct or indirect subsidiary of the organization or such entity.
(b) Capital and surplus means, unless otherwise provided in this part:
(1) For organizations subject to the capital rule:
(i) Tier 1 and tier 2 capital included in an organization’s risk-based capital (under the capital rule); and
(ii) The balance of allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in an organization’s tier 2 capital for calculation of risk-based capital, based on the organization’s most recent consolidated Report of Condition and Income.
(iii) For qualifying community banking organizations (as defined in § 217.12 of this chapter) that are subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowances for loan and lease losses or adjusted allowance for credit losses, as applicable.
(2) For all other organizations, paid-in and unimpaired capital and surplus, and includes undivided profits but does not include the proceeds of capital notes or debentures.
(c) Capital rule means part 217 of this chapter.
(d) Directly or indirectly, when used in reference to activities or investments of an organization, means activities or investments of the organization or of any subsidiary of the organization.
(e) Eligible country means any country:
(1) For which an allocated transfer risk reserve is required pursuant to § 211.43 of this part and that has restructured its sovereign debt held by foreign creditors; and
(2) Any other country that the Board deems to be eligible.
(f) An Edge corporation is engaged in banking if it is ordinarily engaged in the business of accepting deposits in the United States from nonaffiliated persons.
(g) Engaged in business or engaged in activities in the United States means maintaining and operating an office (other than a representative office) or subsidiary in the United States.
(h) Equity means an ownership interest in an organization, whether through:
(1) Voting or nonvoting shares;
(2) General or limited partnership interests;
(3) Any other form of interest conferring ownership rights, including warrants, debt, or any other interests that are convertible into shares or other ownership rights in the organization; or
(4) Loans that provide rights to participate in the profits of an organization, unless the investor receives a determination that such loans should not be considered equity in the circumstances of the particular investment.
(i) Foreign or foreign country refers to one or more foreign nations, and includes the overseas territories, dependencies, and insular possessions of those nations and of the United States, and the Commonwealth of Puerto Rico.
(j) Foreign bank means an organization that:
(1) Is organized under the laws of a foreign country;
(2) Engages in the business of banking;
(3) Is recognized as a bank by the bank supervisory or monetary authority of the country of its organization or principal banking operations;
(4) Receives deposits to a substantial extent in the regular course of its business; and
(5) Has the power to accept demand deposits.
(k) Foreign branch means an office of an organization (other than a representative office) that is located outside the country in which the organization is legally established and at which a banking or financing business is conducted.
(l) Foreign person means an office or establishment located outside the United States, or an individual residing outside the United States.
(m) Investment means:
(1) The ownership or control of equity;
(2) Binding commitments to acquire equity;
(3) Contributions to the capital and surplus of an organization; or
(4) The holding of an organization’s subordinated debt when the investor and the investor’s affiliates hold more than 5 percent of the equity of the organization.
(n) Investment grade means a security that is rated in one of the four highest rating categories by:
(1) Two or more NRSROs; or
(2) One NRSRO if the security has been rated by only one NRSRO.
(o) Investor means an Edge corporation, agreement corporation, bank holding company, or member bank.
(p) Joint venture means an organization that has 20 percent or more of its voting shares held directly or indirectly by the investor or by an affiliate of the investor under any authority, but which is not a subsidiary of the investor or of an affiliate of the investor.
(q) Loans and extensions of credit means all direct and indirect advances of funds to a person made on the basis of any obligation of that person to repay the funds.
(r) NRSRO means a nationally recognized statistical rating organization as designated by the Securities and Exchange Commission.
(s) Organization means a corporation, government, partnership, association, or any other entity.
(t) Person means an individual or an organization.
(u) Portfolio investment means an investment in an organization other than a subsidiary or joint venture.
(v) Representative office means an office that:
(1) Engages solely in representational and administrative functions (such as soliciting new business or acting as liaison between the organization’s head office and customers in the United States); and
(2) Does not have authority to make any business decision (other than decisions relating to its premises or personnel) for the account of the organization it represents, including contracting for any deposit or deposit-like liability on behalf of the organization.
(w) Subsidiary means an organization that has more than 50 percent of its voting shares held directly or indirectly, or that otherwise is controlled or capable of being controlled, by the investor or an affiliate of the investor under any authority. Among other circumstances, an investor is considered to control an organization if:
(1) The investor or an affiliate is a general partner of the organization; or
(2) The investor and its affiliates directly or indirectly own or control more than 50 percent of the equity of the organization.
(x) Tier 1 capital has the same meaning as provided in § 217.2 of this chapter. A qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), calculates its tier 1 capital in accordance with § 217.12(b) of this chapter.
(y) Well capitalized means:
(1) In relation to a parent member or insured bank, that the standards set out in § 208.43(b)(1) of Regulation H (12 CFR 208.43(b)(1)) are satisfied;
(2) In relation to a bank holding company, that the standards set out in § 225.2(r)(1) of Regulation Y (12 CFR 225.2(r)(1)) are satisfied; and
(3) In relation to an Edge or agreement corporation, that it has tier 1 and total risk-based capital ratios of 6.0 and 10.0 percent, respectively, or greater.
(z) Well managed means that the Edge or agreement corporation, any parent insured bank, and the bank holding company either received a composite rating of 1 or 2 or is considered satisfactory under the applicable rating system, and has at least a satisfactory rating for management if such a rating is given, at their most recent examination or review.
§ 211.3 Foreign branches of U.S. banking organizations.
(a) General—(1) Definition of banking organization. For purposes of this section, a banking organization is defined as a member bank and its affiliates.
(2) A banking organization is considered to be operating a branch in a foreign country if it has an affiliate that is a member bank, Edge or agreement corporation, or foreign bank that operates an office (other than a representative office) in that country.
(3) For purposes of this subpart, a foreign office of an operating subsidiary of a member bank shall be treated as a foreign branch of the member bank and may engage only in activities permissible for a branch of a member bank.
(4) At any time upon notice, the Board may modify or suspend branching authority conferred by this section with respect to any banking organization.
(b)(1) Establishment of foreign branches. (i) Foreign branches may be established by any member bank having capital and surplus of $1,000,000 or more, an Edge corporation, an agreement corporation, any subsidiary the shares of which are held directly by the member bank, or any other subsidiary held pursuant to this subpart.
(ii) The Board grants its general consent under section 25 of the FRA (12 U.S.C. 601-604a) for a member bank to establish a branch in the Commonwealth of Puerto Rico and the overseas territories, dependencies, and insular possessions of the United States.
(2) Prior notice. Unless otherwise provided in this section, the establishment of a foreign branch requires 30 days’ prior written notice to the Board.
(3) Branching into additional foreign countries. After giving the Board 12 business days prior written notice, a banking organization that operates branches in two or more foreign countries may establish a branch in an additional foreign country.
(4) Additional branches within a foreign country. No prior notice is required to establish additional branches in any foreign country where the banking organization operates one or more branches.
(5) Branching by nonbanking affiliates. No prior notice is required for a nonbanking affiliate of a banking organization (i.e., an organization that is not a member bank, an Edge or agreement corporation, or foreign bank) to establish branches within a foreign country or in additional foreign countries.
(6) Expiration of branching authority. Authority to establish branches, when granted following prior written notice to the Board, shall expire one year from the earliest date on which the authority could have been exercised, unless extended by the Board.
(c) Reporting. Any banking organization that opens, closes, or relocates a branch shall report such change in a manner prescribed by the Board.
(d) Reserves of foreign branches of member banks. Member banks shall maintain reserves against foreign branch deposits when required by Regulation D (12 CFR part 204).
(e) Conditional approval; access to information. The Board may impose such conditions on authority granted by it under this section as it deems necessary, and may require termination of any activities conducted under authority of this section if a member bank is unable to provide information on its activities or those of its affiliates that the Board deems necessary to determine and enforce compliance with U.S. banking laws.
§ 211.4 Permissible activities and investments of foreign branches of member banks.
(a) Permissible activities and investments. In addition to its general banking powers, and to the extent consistent with its charter, a foreign branch of a member bank may engage in the following activities and make the following investments, so far as is usual in connection with the business of banking in the country where it transacts business:
(1) Guarantees. Guarantee debts, or otherwise agree to make payments on the occurrence of readily ascertainable events (including, but not limited to, nonpayment of taxes, rentals, customs duties, or costs of transport, and loss or nonconformance of shipping documents) if the guarantee or agreement specifies a maximum monetary liability; however, except to the extent that the member bank is fully secured, it may not have liabilities outstanding for any person on account of such guarantees or agreements which, when aggregated with other unsecured obligations of the same person, exceed the limit contained in section 5200(a)(1) of the Revised Statutes (12 U.S.C. 84) for loans and extensions of credit;
(2) Government obligations. (i) Underwrite, distribute, buy, sell, and hold obligations of:
(A) The national government of the country where the branch is located and any political subdivision of that country;
(B) An agency or instrumentality of the national government of the country where the branch is located where such obligations are supported by the taxing authority, guarantee, or full faith and credit of that government;
(C) The national government or political subdivision of any country, where such obligations are rated investment grade; and
(D) An agency or instrumentality of any national government where such obligations are rated investment grade and are supported by the taxing authority, guarantee or full faith and credit of that government.
(ii) No member bank, under authority of this paragraph (a)(2), may hold, or be under commitment with respect to, such obligations for its own account in relation to any one country in an amount exceeding the greater of:
(A) 10 percent of its tier 1 capital; or
(B) 10 percent of the total deposits of the bank’s branches in that country on the preceding year-end call report date (or the date of acquisition of the branch, in the case of a branch that has not been so reported);
(3) Other investments. (i) Invest in:
(A) The securities of the central bank, clearinghouses, governmental entities other than those authorized under paragraph (a)(2) of this section, and government-sponsored development banks of the country where the foreign branch is located;
(B) Other debt securities eligible to meet local reserve or similar requirements; and
(C) Shares of automated electronic-payments networks, professional societies, schools, and the like necessary to the business of the branch;
(ii) The total investments of a bank’s branches in a country under this paragraph (a)(3) (exclusive of securities held as required by the law of that country or as authorized under section 5136 of the Revised Statutes (12 U.S.C. 24, Seventh)) may not exceed 1 percent of the total deposits of the bank’s branches in that country on the preceding year-end call report date (or on the date of acquisition of the branch, in the case of a branch that has not been so reported);
(4) Real estate loans. Take liens or other encumbrances on foreign real estate in connection with its extensions of credit, whether or not of first priority and whether or not the real estate has been improved;
(5) Insurance. Act as insurance agent or broker;
(6) Employee benefits program. Pay to an employee of the branch, as part of an employee benefits program, a greater rate of interest than that paid to other depositors of the branch;
(7) Repurchase agreements. Engage in repurchase agreements involving securities and commodities that are the functional equivalents of extensions of credit;
(8) Investment in subsidiaries. With the Board’s prior approval, acquire all of the shares of a company (except where local law requires other investors to hold directors’ qualifying shares or similar types of instruments) that engages solely in activities:
(i) In which the member bank is permitted to engage; or
(ii) That are incidental to the activities of the foreign branch.
(b) Other activities. With the Board’s prior approval, engage in other activities that the Board determines are usual in connection with the transaction of the business of banking in the places where the member bank’s branches transact business.
§ 211.5 Edge and agreement corporations.
(a) Board Authority. The Board shall have the authority to approve:
(1) The establishment of Edge corporations;
(2) Investments in agreement corporations; and
(3) A member bank’s proposal to invest more than 10 percent of its capital and surplus in the aggregate amount of stock held in all Edge and agreement corporations.
(b) Organization of an Edge corporation—(1) Permit. A proposed Edge corporation shall become a body corporate when the Board issues a permit approving its proposed name, articles of association, and organization certificate.
(2) Name. The name of the Edge corporation shall include international, foreign, overseas, or a similar word, but may not resemble the name of another organization to an extent that might mislead or deceive the public.
(3) Federal Register notice. The Board shall publish in the
(4) Factors considered by Board. The factors considered by the Board in acting on a proposal to organize an Edge corporation include:
(i) The financial condition and history of the applicant;
(ii) The general character of its management;
(iii) The convenience and needs of the community to be served with respect to international banking and financing services; and
(iv) The effects of the proposal on competition.
(5) Authority to commence business. After the Board issues a permit, the Edge corporation may elect officers and otherwise complete its organization, invest in obligations of the U.S. government, and maintain deposits with depository institutions, but it may not exercise any other powers until at least 25 percent of the authorized capital stock specified in the articles of association has been paid in cash, and each shareholder has paid in cash at least 25 percent of that shareholder’s stock subscription.
(6) Expiration of unexercised authority. Unexercised authority to commence business as an Edge corporation shall expire one year after issuance of the permit, unless the Board extends the period.
(c) Other provisions regarding Edge corporations—(1) Amendments to articles of association. No amendment to the articles of association shall become effective until approved by the Board.
(2) Shareholders’ meeting. An Edge corporation shall provide in its bylaws that:
(i) A shareholders’ meeting shall be convened at the request of the Board within five business days after the Board gives notice of the request to the Edge corporation;
(ii) Any shareholder or group of shareholders that owns or controls 25 percent or more of the shares of the Edge corporation shall attend such a meeting in person or by proxy; and
(iii) Failure by a shareholder or authorized representative to attend such meeting in person or by proxy may result in removal or barring of the shareholder or representative from further participation in the management or affairs of the Edge corporation.
(3) Nature and ownership of shares—(i) Shares. Shares of stock in an Edge corporation may not include no-par-value shares and shall be issued and transferred only on its books and in compliance with section 25A of the FRA (12 U.S.C. 611 et seq.) and this subpart.
(ii) Contents of share certificates. The share certificates of an Edge corporation shall:
(A) Name and describe each class of shares, indicating its character and any unusual attributes, such as preferred status or lack of voting rights; and
(B) Conspicuously set forth the substance of:
(1) Any limitations on the rights of ownership and transfer of shares imposed by section 25A of the FRA (12 U.S.C. 611 et seq.); and
(2) Any rules that the Edge corporation prescribes in its bylaws to ensure compliance with this paragraph (c).
(4) Change in status of shareholder. Any change in status of a shareholder that causes a violation of section 25A of the FRA (12 U.S.C. 611 et seq.) shall be reported to the Board as soon as possible, and the Edge corporation shall take such action as the Board may direct.
(d) Ownership of Edge corporations by foreign institutions—(1) Prior Board approval. One or more foreign or foreign-controlled domestic institutions referred to in section 25A(11) of the FRA (12 U.S.C. 619) may apply for the Board’s prior approval to acquire, directly or indirectly, a majority of the shares of the capital stock of an Edge corporation.
(2) Conditions and requirements. Such an institution shall:
(i) Provide the Board with information related to its financial condition and activities and such other information as the Board may require;
(ii) Ensure that any transaction by an Edge corporation with an affiliate
(iii) Ensure that the Edge corporation will not provide funding on a continual or substantial basis to any affiliate or office of the foreign institution through transactions that would be inconsistent with the international and foreign business purposes for which Edge corporations are organized; and
(iv) Comply with the limitation on aggregate investments in all Edge and agreement corporations set forth in paragraph (h) of this section.
(3) Foreign institutions not subject to the BHC Act. In the case of a foreign institution not subject to section 4 of the BHC Act (12 U.S.C. 1843), that institution shall:
(i) Comply with any conditions that the Board may impose that are necessary to prevent undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices in the United States; and
(ii) Give the Board 30 days’ prior written notice before engaging in any nonbanking activity in the United States, or making any initial or additional investments in another organization, that would require prior Board approval or notice by an organization subject to section 4 of the BHC Act (12 U.S.C. 1843); in connection with such notice, the Board may impose conditions necessary to prevent adverse effects that may result from such activity or investment.
(e) Change in control of an Edge corporation—(1) Prior notice. (i) Any person shall give the Board 60 days’ prior written notice before acquiring, directly or indirectly, 25 percent or more of the voting shares, or otherwise acquiring control, of an Edge corporation.
(ii) The Board may extend the 60-day period for an additional 30 days by notifying the acquiring party.
(iii) A notice under this paragraph (e) need not be filed where a change in control is effected through a transaction requiring the Board’s approval under section 3 of the BHC Act (12 U.S.C. 1842).
(2) Board review. In reviewing a notice filed under this paragraph (e), the Board shall consider the factors set forth in paragraph (b)(4) of this section, and may disapprove a notice or impose any conditions that it finds necessary to assure the safe and sound operation of the Edge corporation, to assure the international character of its operation, and to prevent adverse effects, such as decreased or unfair competition, conflicts of interest, or undue concentration of resources.
(f) Domestic branching by Edge corporations—(1) Prior notice. (i) An Edge corporation may establish branches in the United States 30 days after the Edge corporation has given written notice of its intention to do so to its Reserve Bank, unless the Edge corporation is notified to the contrary within that time.
(ii) The notice to the Reserve Bank shall include a copy of the notice of the proposal published in a newspaper of general circulation in the communities to be served by the branch.
(iii) The newspaper notice may appear no earlier than 90 calendar days prior to submission of notice of the proposal to the Reserve Bank. The newspaper notice shall provide an opportunity for the public to give written comment on the proposal to the appropriate Federal Reserve Bank for at least 30 days after the date of publication.
(2) Factors considered. The factors considered in acting upon a proposal to establish a branch are enumerated in paragraph (b)(4) of this section.
(3) Expiration of authority. Authority to establish a branch under prior notice shall expire one year from the earliest date on which that authority could have been exercised, unless the Board extends the period.
(g) Agreement corporations—(1) General. With the prior approval of the Board, a member bank or bank holding company may invest in a federally or state-chartered corporation that has entered into an agreement or undertaking with the Board that it will not exercise any power that is impermissible for an Edge corporation under this subpart.
(2) Factors considered by Board. The factors considered in acting upon a proposal to establish an agreement corporation are enumerated in paragraph (b)(4) of this section.
(h)(1) Limitation on investment in Edge and agreement corporations. A member bank may invest up to 10 percent of its capital and surplus in the capital stock of Edge and agreement corporations or, with the prior approval of the Board, up to 20 percent of its capital and surplus in such stock.
(2) Factors considered by Board. The factors considered by the Board in acting on a proposal under paragraph (h)(1) of this section shall include:
(i) The composition of the assets of the bank’s Edge and agreement corporations;
(ii) The total capital invested by the bank in its Edge and agreement corporations when combined with retained earnings of the Edge and agreement corporations (including amounts invested in and retained earnings of any foreign bank subsidiaries) as a percentage of the bank’s capital;
(iii) Whether the bank, bank holding company, and Edge and agreement corporations are well-capitalized and well-managed;
(iv) Whether the bank is adequately capitalized after deconsolidating and deducting the aggregate investment in and assets of all Edge or agreement corporations and all foreign bank subsidiaries; and
(v) Any other factor the Board deems relevant to the safety and soundness of the member bank.
(i) Reserve requirements and interest rate limitations. The deposits of an Edge or agreement corporation are subject to Regulations D and Q (12 CFR parts 204 and 217) in the same manner and to the same extent as if the Edge or agreement corporation were a member bank.
(j) Liquid funds. Funds of an Edge or agreement corporation that are not currently employed in its international or foreign business, if held or invested in the United States, shall be in the form of:
(1) Cash;
(2) Deposits with depository institutions, as described in Regulation D (12 CFR part 204), and other Edge and agreement corporations;
(3) Money-market instruments (including repurchase agreements with respect to such instruments), such as bankers’ acceptances, federal funds sold, and commercial paper; and
(4) Short- or long-term obligations of, or fully guaranteed by, federal, state, and local governments and their instrumentalities.
(k) Reports by Edge and agreement corporations of crimes and suspected crimes. An Edge or agreement corporation, or any branch or subsidiary thereof, shall file a suspicious-activity report in accordance with the provisions of § 208.62 of Regulation H (12 CFR 208.62).
(l) Protection of customer information and consumer information. An Edge or agreement corporation shall comply with the Interagency Guidelines Establishing Information Security Standards prescribed pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805) and, with respect to the proper disposal of consumer information, section 216 of the Fair and Accurate Credit Transactions Act of 2003 (15 U.S.C. 1681w), set forth in appendix D-2 to part 208 of this chapter.
(m) Procedures for monitoring Bank Secrecy Act compliance.
(1) Establishment of Compliance Program. Each Edge corporation and each agreement corporation shall, in accordance with the provisions of § 208.63 of the Board’s Regulation H, 12 CFR 208.63, develop and provide for the continued administration of a program reasonably designed to assure and monitor compliance with the provisions of 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 Edge or agreement corporation is subject to the requirements of 31 U.S.C. 5318(l) and the implementing regulation jointly promulgated by the Board and the Department of the Treasury at 31 CFR 103.121, which require a customer identification program.
§ 211.6 Permissible activities of Edge and agreement corporations in the United States.
(a) Activities incidental to international or foreign business. An Edge or agreement corporation may engage, directly or indirectly, in activities in the United States that are permitted by section 25A(6) of the FRA (12 U.S.C. 615) and are incidental to international or foreign business, and in such other activities as the Board determines are incidental to international or foreign business. The following activities will ordinarily be considered incidental to an Edge or agreement corporation’s international or foreign business:
(1) Deposit-taking activities—(i) Deposits from foreign governments and foreign persons. An Edge or agreement corporation may receive in the United States transaction accounts, savings, and time deposits (including issuing negotiable certificates of deposits) from foreign governments and their agencies and instrumentalities, and from foreign persons.
(ii) Deposits from other persons. An Edge or agreement corporation may receive from any other person in the United States transaction accounts, savings, and time deposits (including issuing negotiable certificates of deposit) if such deposits:
(A) Are to be transmitted abroad;
(B) Consist of funds to be used for payment of obligations to the Edge or agreement corporation or collateral securing such obligations;
(C) Consist of the proceeds of collections abroad that are to be used to pay for exported or imported goods or for other costs of exporting or importing or that are to be periodically transferred to the depositor’s account at another financial institution;
(D) Consist of the proceeds of extensions of credit by the Edge or agreement corporation;
(E) Represent compensation to the Edge or agreement corporation for extensions of credit or services to the customer;
(F) Are received from Edge or agreement corporations, foreign banks, and other depository institutions (as described in Regulation D (12 CFR part 204)); or
(G) Are received from an organization that by its charter, license, or enabling law is limited to business that is of an international character, including foreign sales corporations, as defined in 26 U.S.C. 922; transportation organizations engaged exclusively in the international transportation of passengers or in the movement of goods, wares, commodities, or merchandise in international or foreign commerce; and export trading companies established under subpart C of this part.
(2) Borrowings. An Edge or agreement corporation may:
(i) Borrow from offices of other Edge and agreement corporations, foreign banks, and depository institutions (as described in Regulation D (12 CFR part 204));
(ii) Issue obligations to the United States or any of its agencies or instrumentalities;
(iii) Incur indebtedness from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof that the Edge or agreement corporation is obligated to repurchase; and
(iv) Issue long-term subordinated debt that does not qualify as a deposit under Regulation D (12 CFR part 204).
(3) Credit activities. An Edge or agreement corporation may:
(i) Finance the following:
(A) Contracts, projects, or activities performed substantially abroad;
(B) The importation into or exportation from the United States of goods, whether direct or through brokers or other intermediaries;
(C) The domestic shipment or temporary storage of goods being imported or exported (or accumulated for export); and
(D) The assembly or repackaging of goods imported or to be exported;
(ii) Finance the costs of production of goods and services for which export orders have been received or which are identifiable as being directly for export;
(iii) Assume or acquire participations in extensions of credit, or acquire obligations arising from transactions the Edge or agreement corporation could have financed, including acquisition of obligations of foreign governments;
(iv) Guarantee debts, or otherwise agree to make payments on the occurrence of readily ascertainable events (including, but not limited to, nonpayment of taxes, rentals, customs duties, or cost of transport, and loss or nonconformance of shipping documents), so long as the guarantee or agreement specifies the maximum monetary liability thereunder and is related to a type of transaction described in paragraphs (a)(3)(i) and (ii) of this section; and
(v) Provide credit and other banking services for domestic and foreign purposes to foreign governments and their agencies and instrumentalities, foreign persons, and organizations of the type described in paragraph (a)(1)(ii)(G) of this section.
(4) Payments and collections. An Edge or agreement corporation may receive checks, bills, drafts, acceptances, notes, bonds, coupons, and other instruments for collection abroad, and collect such instruments in the United States for a customer abroad; and may transmit and receive wire transfers of funds and securities for depositors.
(5) Foreign exchange. An Edge or agreement corporation may engage in foreign exchange activities.
(6) Fiduciary and investment advisory activities. An Edge or agreement corporation may:
(i) Hold securities in safekeeping for, or buy and sell securities upon the order and for the account and risk of, a person, provided such services for U.S. persons are with respect to foreign securities only;
(ii) Act as paying agent for securities issued by foreign governments or other entities organized under foreign law;
(iii) Act as trustee, registrar, conversion agent, or paying agent with respect to any class of securities issued to finance foreign activities and distributed solely outside the United States;
(iv) Make private placements of participations in its investments and extensions of credit; however, except to the extent permissible for member banks under section 5136 of the Revised Statutes (12 U.S.C. 24(Seventh)), no Edge or agreement corporation otherwise may engage in the business of underwriting, distributing, or buying or selling securities in the United States;
(v) Act as investment or financial adviser by providing portfolio investment advice and portfolio management with respect to securities, other financial instruments, real-property interests, and other investment assets,
(vi) Provide general economic information and advice, general economic statistical forecasting services, and industry studies, provided such services for U.S. persons shall be with respect to foreign economies and industries only.
(7) Banking services for employees. Provide banking services, including deposit services, to the officers and employees of the Edge or agreement corporation and its affiliates; however, extensions of credit to such persons shall be subject to the restrictions of Regulation O (12 CFR part 215) as if the Edge or agreement corporation were a member bank.
(b) Other activities. With the Board’s prior approval, an Edge or agreement corporation may engage, directly or indirectly, in other activities in the United States that the Board determines are incidental to their international or foreign business.
§ 211.7 Voluntary liquidation of Edge and agreement corporations.
(a) Prior notice. An Edge or agreement corporation desiring voluntarily to discontinue normal business and dissolve, shall provide the Board with 45 days’ prior written notice of its intent to do so.
(b) Waiver of notice period. The Board may waive the 45-day period if it finds that immediate action is required by the circumstances presented.
§ 211.8 Investments and activities abroad.
(a) General policy. Activities abroad, whether conducted directly or indirectly, shall be confined to activities of a banking or financial nature and those that are necessary to carry on such activities. In doing so, investors
(b) Direct investments by member banks. A member bank’s direct investments under section 25 of the FRA (12 U.S.C. 601 et seq.) shall be limited to:
(1) Foreign banks;
(2) Domestic or foreign organizations formed for the sole purpose of holding shares of a foreign bank;
(3) Foreign organizations formed for the sole purpose of performing nominee, fiduciary, or other banking services incidental to the activities of a foreign branch or foreign bank affiliate of the member bank; and
(4) Subsidiaries established pursuant to § 211.4(a)(8) of this part.
(c) Eligible investments. Subject to the limitations set out in paragraphs (b) and (d) of this section, an investor may, directly or indirectly:
(1) Investment in subsidiary. Invest in a subsidiary that engages solely in activities listed in § 211.10 of this part, or in such other activities as the Board has determined in the circumstances of a particular case are permissible; provided that, in the case of an acquisition of a going concern, existing activities that are not otherwise permissible for a subsidiary may account for not more than 5 percent of either the consolidated assets or consolidated revenues of the acquired organization;
(2) Investment in joint venture. Invest in a joint venture; provided that, unless otherwise permitted by the Board, not more than 10 percent of the joint venture’s consolidated assets or consolidated revenues are attributable to activities not listed in § 211.10 of this part; and
(3) Portfolio investments. Make portfolio investments in an organization, provided that:
(i) Individual investment limits. The total direct and indirect portfolio investments by the investor and its affiliates in an organization engaged in activities that are not permissible for joint ventures, when combined with all other shares in the organization held under any other authority, do not exceed:
(A) 40 percent of the total equity of the organization; or
(B) 19.9 percent of the organization’s voting shares.
(ii) Aggregate Investment Limit. Portfolio investments made under authority of this subpart shall be subject to the aggregate equity limit of § 211.10(a)(15)(iii).
(iii) Loans and extensions of credit. Any loans and extensions of credit made by an investor or its affiliates to the organization are on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions between the investor or its affiliates and nonaffiliated persons; and
(iv) Protecting shareholder rights. Nothing in this paragraph (c)(3) shall prohibit an investor from otherwise exercising rights it may have as shareholder to protect the value of its investment, so long as the exercise of such rights does not result in the investor’s direct or indirect control of the organization.
(d) Investment limit. In calculating the amount that may be invested in any organization under this section and §§ 211.9 and 211.10 of this part, there shall be included any unpaid amount for which the investor is liable and any investments in the same organization held by affiliates under any authority.
(e) Divestiture. An investor shall dispose of an investment promptly (unless the Board authorizes retention) if:
(1) The organization invested in:
(i) Engages in impermissible activities to an extent not permitted under paragraph (c) of this section; or
(ii) Engages directly or indirectly in other business in the United States that is not permitted to an Edge corporation in the United States; provided that an investor may:
(A) Retain portfolio investments in companies that derive no more than 10 percent of their total revenue from activities in the United States; and
(B) Hold up to 5 percent of the shares of a foreign company that engages directly or indirectly in business in the United States that is not permitted to an Edge corporation; or
(2) After notice and opportunity for hearing, the investor is advised by the Board that such investment is inappropriate under the FRA, the BHC Act, or this subpart.
(f) Debts previously contracted. Shares or other ownership interests acquired to prevent a loss upon a debt previously contracted in good faith are not subject to the limitations or procedures of this section; provided that such interests shall be disposed of promptly but in no event later than two years after their acquisition, unless the Board authorizes retention for a longer period.
(g) Investments made through debt-for-equity conversions—(1) Permissible investments. A bank holding company may make investments through the conversion of sovereign-or private-debt obligations of an eligible country, either through direct exchange of the debt obligations for the investment, or by a payment for the debt in local currency, the proceeds of which, including an additional cash investment not exceeding in the aggregate more than 10 percent of the fair value of the debt obligations being converted as part of such investment, are used to purchase the following investments:
(i) Public-sector companies. A bank holding company may acquire up to and including 100 percent of the shares of (or other ownership interests in) any foreign company located in an eligible country, if the shares are acquired from the government of the eligible country or from its agencies or instrumentalities.
(ii) Private-sector companies. A bank holding company may acquire up to and including 40 percent of the shares, including voting shares, of (or other ownership interests in) any other foreign company located in an eligible country subject to the following conditions:
(A) A bank holding company may acquire more than 25 percent of the voting shares of the foreign company only if another shareholder or group of shareholders unaffiliated with the bank holding company holds a larger block of voting shares of the company;
(B) The bank holding company and its affiliates may not lend or otherwise extend credit to the foreign company in amounts greater than 50 percent of the total loans and extensions of credit to the foreign company; and
(C) The bank holding company’s representation on the board of directors or on management committees of the foreign company may be no more than proportional to its shareholding in the foreign company.
(2) Investments by bank subsidiary of bank holding company. Upon application, the Board may permit an indirect investment to be made pursuant to this paragraph (g) through an insured bank subsidiary of the bank holding company, where the bank holding company demonstrates that such ownership is consistent with the purposes of the FRA. In granting its consent, the Board may impose such conditions as it deems necessary or appropriate to prevent adverse effects, including prohibiting loans from the bank to the company in which the investment is made.
(3) Divestiture—(i) Time limits for divestiture. A bank holding company shall divest the shares of, or other ownership interests in, any company acquired pursuant to this paragraph (g) within the longer of:
(A) Ten years from the date of acquisition of the investment, except that the Board may extend such period if, in the Board’s judgment, such an extension would not be detrimental to the public interest; or
(B) Two years from the date on which the bank holding company is permitted to repatriate in full the investment in the foreign company.
(ii) Maximum retention period. Notwithstanding the provisions of paragraph (g)(3)(i) of this section:
(A) Divestiture shall occur within 15 years of the date of acquisition of the shares of, or other ownership interests in, any company acquired pursuant to this paragraph (g); and
(B) A bank holding company may retain such shares or ownership interests if such retention is otherwise permissible at the time required for divestiture.
(iii) Report to Board. The bank holding company shall report to the Board on its plans for divesting an investment made under this paragraph (g) two years prior to the final date for divestiture, in a manner to be prescribed by the Board.
(iv) Other conditions requiring divestiture. All investments made pursuant to this paragraph (g) are subject to paragraph (e) of this section requiring prompt divestiture (unless the Board upon application authorizes retention), if the company invested in engages in impermissible business in the United States that exceeds in the aggregate 10 percent of the company’s consolidated assets or revenues calculated on an annual basis; provided that such company may not engage in activities in the United States that consist of banking or financial operations (as defined in § 211.23(f)(5)(iii)(B)) of this part, or types of activities permitted by regulation or order under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), except under regulations of the Board or with the prior approval of the Board.
(4) Investment procedures—(i) General consent. Subject to the other limitations of this paragraph (g), the Board grants its general consent for investments made under this paragraph (g) if the total amount invested does not exceed the greater of $25 million or 1 percent of the tier 1 capital of the investor.
(ii) All other investments shall be made in accordance with the procedures of § 211.9(f) and (g) of this part, requiring prior notice or specific consent.
(5) Conditions—(i) Name. Any company acquired pursuant to this paragraph (g) shall not bear a name similar to the name of the acquiring bank holding company or any of its affiliates.
(ii) Confidentiality. Neither the bank holding company nor its affiliates shall provide to any company acquired pursuant to this paragraph (g) any confidential business information or other information concerning customers that are engaged in the same or related lines of business as the company.
§ 211.9 Investment procedures.
(a) General provisions.
(1) Minimum capital adequacy standards. Except as the Board may otherwise determine, in order for an investor to make investments pursuant to the procedures set out in this section, the investor, the bank holding company, and the member bank shall be in compliance with applicable minimum standards for capital adequacy set out in the capital rule; provided that, if the investor is an Edge or agreement corporation, the minimum capital required is total and tier 1 capital ratios of 8 percent and 4 percent, respectively.
(2) Composite rating. Except as the Board may otherwise determine, in order for an investor to make investments under the general consent or limited general consent procedures of paragraphs (b) and (c) of this section, at the most recent examination the investor and any parent insured bank must have either received a composite rating of at least 2 or be considered satisfactory under the applicable rating system.
(3) Board’s authority to modify or suspend procedures. The Board, at any time upon notice, may modify or suspend the procedures contained in this section with respect to any investor or with respect to the acquisition of shares of organizations engaged in particular kinds of activities.
(4) Long-range investment plan. Any investor may submit to the Board for its specific consent a long-range investment plan. Any plan so approved shall be subject to the other procedures of this section only to the extent determined necessary by the Board to assure safety and soundness of the operations of the investor and its affiliates.
(5) Prior specific consent for initial investment. An investor shall apply for and receive the prior specific consent of the Board for its initial investment under this subpart in its first subsidiary or joint venture, unless an affiliate previously has received approval to make such an investment.
(6) Expiration of investment authority. Authority to make investments granted under prior notice or specific consent procedures shall expire one year from the earliest date on which the authority could have been exercised, unless the Board determines a longer period shall apply.
(7) Conditional approval; Access to information. The Board may impose such conditions on authority granted by it under this section as it deems necessary, and may require termination of any activities conducted under authority of this subpart if an investor is unable to provide information on its activities or those of its affiliates that the Board deems necessary to determine and enforce compliance with U.S. banking laws.
(b) General consent. The Board grants its general consent for a well capitalized and well managed investor to make investments, subject to the following:
(1) Well capitalized and well managed investor. In order to qualify for making investments under authority of this paragraph (b), both before and immediately after the proposed investment, the investor, any parent insured bank, and any parent bank holding company shall be well capitalized and well managed.
(2) Individual limit for investment in subsidiary. In the case of an investment in a subsidiary, the total amount invested directly or indirectly in such subsidiary (in one transaction or a series of transactions) does not exceed:
(i) 10 percent of the investor’s tier 1 capital, where the investor is a bank holding company; or
(ii) 2 percent of the investor’s tier 1 capital, where the investor is a member bank; or
(iii) The lesser of 2 percent of the tier 1 capital of any parent insured bank or 10 percent of the investor’s tier 1 capital, for any other investor.
(3) Individual limit for investment in joint venture. In the case of an investment in a joint venture, the total amount invested directly or indirectly in such joint venture (in one transaction or a series of transactions) does not exceed:
(i) 5 percent of the investor’s tier 1 capital, where the investor is a bank holding company; or
(ii) 1 percent of the investor’s tier 1 capital, where the investor is a member bank; or
(iii) The lesser of 1 percent of the tier 1 capital of any parent insured bank or 5 percent of the investor’s tier 1 capital, for any other investor.
(4) Individual limit for portfolio investment. In the case of a portfolio investment, the total amount invested directly or indirectly in such company (in one transaction or a series of transactions) does not exceed the lesser of $25 million, or
(i) 5 percent of the investor’s tier 1 capital in the case of a bank holding company or its subsidiary, or Edge corporation engaged in banking; or
(ii) 25 percent of the investor’s tier 1 capital in the case of an Edge corporation not engaged in banking.
(5) Investment in a general partnership or unlimited liability company. An investment in a general partnership or unlimited liability company may be made under authority of paragraph (b) of this section, subject to the limits set out in paragraph (c) of this section.
(6) Aggregate investment limits—(i) Investment limits. All investments made, directly or indirectly, during the previous 12-month period under authority of this section, when aggregated with the proposed investment, shall not exceed:
(A) 20 percent of the investor’s tier 1 capital, where the investor is a bank holding company;
(B) 10 percent of the investor’s tier 1 capital, where the investor is a member bank; or
(C) The lesser of 10 percent of the tier 1 capital of any parent insured bank or 50 percent of the tier 1 capital of the investor, for any other investor.
(ii) Downstream investments. In determining compliance with the aggregate limits set out in this paragraph (b), an investment by an investor in a subsidiary shall be counted only once, notwithstanding that such subsidiary may, within 12 months of the date of making the investment, downstream all or any part of such investment to another subsidiary.
(7) Application of limits. In determining compliance with the limits set out in this paragraph (b), an investor is not required to combine the value of all shares of an organization held in trading or dealing accounts under § 211.10(a)(15) of this part with investments in the same organization.
(c) Limited general consent—(1) Individual limit. The Board grants its general consent for an investor that is not well capitalized and well managed to make an investment in a subsidiary or joint venture, or to make a portfolio investment, if the total amount invested directly or indirectly (in one transaction or in a series of transactions) does not exceed the lesser of $25 million or:
(i) 5 percent of the investor’s tier 1 capital, where the investor is a bank holding company;
(ii) 1 percent of the investor’s tier 1 capital, where the investor is a member bank; or
(iii) The lesser of 1 percent of any parent insured bank’s tier 1 capital or 5 percent of the investor’s tier 1 capital, for any other investor.
(2) Aggregate limit. The amount of general consent investments made by any investor directly or indirectly under authority of this paragraph (c) during the previous 12-month period, when aggregated with the proposed investment, shall not exceed:
(i) 10 percent of the investor’s tier 1 capital, where the investor is a bank holding company;
(ii) 5 percent of the investor’s tier 1 capital, where the investor is a member bank; and
(iii) The lesser of 5 percent of any parent insured bank’s tier 1 capital or 25 percent of the investor’s tier 1 capital, for any other investor.
(3) Application of limits. In calculating compliance with the limits of this paragraph (c), the rules set forth in paragraphs (b)(6)(ii) and (b)(7) of this section shall apply.
(d) Other eligible investments under general consent. In addition to the authority granted under paragraphs (b) and (c) of this section, the Board grants its general consent for any investor to make the following investments:
(1) Investment in organization equal to cash dividends. Any investment in an organization in an amount equal to cash dividends received from that organization during the preceding 12 calendar months; and
(2) Investment acquired from affiliate. Any investment that is acquired from an affiliate at net asset value or through a contribution of shares.
(e) Investments ineligible for general consent. An investment in a foreign bank may not be made under authority of paragraphs (b) or (c) of this section if:
(1) After the investment, the foreign bank would be an affiliate of a member bank; and
(2) The foreign bank is located in a country in which the member bank and its affiliates have no existing banking presence.
(f) Prior notice. An investment that does not qualify for general consent under paragraph (b), (c), or (d) of this section may be made after the investor has given the Board 30 days’ prior written notice, such notice period to commence at the time the notice is received, provided that:
(1) The Board may waive the 30-day period if it finds the full period is not required for consideration of the proposed investment, or that immediate action is required by the circumstances presented; and
(2) The Board may suspend the 30-day period or act on the investment under the Board’s specific consent procedures.
(g) Specific consent. Any investment that does not qualify for either the general consent or the prior notice procedure may not be consummated without the specific consent of the Board.
§ 211.10 Permissible activities abroad.
(a) Activities usual in connection with banking. The Board has determined that the following activities are usual in connection with the transaction of banking or other financial operations abroad:
(1) Commercial and other banking activities;
(2) Financing, including commercial financing, consumer financing, mortgage banking, and factoring;
(3) Leasing real or personal property, or acting as agent, broker, or advisor in leasing real or personal property consistent with the provisions of Regulation Y (12 CFR part 225);
(4) Acting as fiduciary;
(5) Underwriting credit life insurance and credit accident and health insurance;
(6) Performing services for other direct or indirect operations of a U.S. banking organization, including representative functions, sale of long-term debt, name-saving, holding assets acquired to prevent loss on a debt previously contracted in good faith, and other activities that are permissible domestically for a bank holding company under sections 4(a)(2)(A) and 4(c)(1)(C) of the BHC Act (12 U.S.C. 1843(a)(2)(A), (c)(1)(C));
(7) Holding the premises of a branch of an Edge or agreement corporation or member bank or the premises of a direct or indirect subsidiary, or holding or leasing the residence of an officer or employee of a branch or subsidiary;
(8) Providing investment, financial, or economic advisory services;
(9) General insurance agency and brokerage;
(10) Data processing;
(11) Organizing, sponsoring, and managing a mutual fund, if the fund’s shares are not sold or distributed in the United States or to U.S. residents and the fund does not exercise managerial control over the firms in which it invests;
(12) Performing management consulting services, if such services, when rendered with respect to the U.S. market, shall be restricted to the initial entry;
(13) Underwriting, distributing, and dealing in debt securities outside the United States;
(14) Underwriting and distributing equity securities outside the United States as follows:
(i) Limits for well-capitalized and well-managed investor—(A) General. After providing 30 days’ prior written notice to the Board, an investor that is well capitalized and well managed may underwrite equity securities, provided that commitments by an investor and its subsidiaries for the shares of a single organization do not, in the aggregate, exceed:
(1) 15 percent of the bank holding company’s tier 1 capital, where the investor is a bank holding company;
(2) 3 percent of the investor’s tier 1 capital, where the investor is a member bank; or
(3) The lesser of 3 percent of any parent insured bank’s tier 1 capital or 15 percent of the investor’s tier 1 capital, for any other investor;
(B) Qualifying criteria. An investor will be considered well-capitalized and well-managed for purposes of paragraph (a)(14)(i) of this section only if each of the bank holding company, member bank, and Edge or agreement corporation qualify as well-capitalized and well-managed.
(ii) Limits for investor that is not well capitalized and well managed. After providing 30 days’ prior written notice to the Board, an investor that is not well capitalized and well managed may underwrite equity securities, provided that commitments by the investor and its subsidiaries for the shares of an organization do not, in the aggregate, exceed $60 million; and
(iii) Application of limits. For purposes of determining compliance with the limitations of this paragraph (a)(14), the investor may subtract portions of an underwriting that are covered by binding commitments obtained by the investor or its affiliates from sub-underwriters or other purchasers;
(15) Dealing in equity securities outside the United States as follows:
(i) Grandfathered authority. By an investor, or an affiliate, that had commenced such activities prior to March 27, 1991, and subject to the limitations in effect at that time (See 12 CFR part 211, revised January 1, 1991); or
(ii) Limit on shares of a single issuer. After providing 30 days’ prior written notice to the Board, an investor may deal in the shares of an organization where the shares held in the trading or dealing accounts of an investor and its affiliates under authority of this paragraph (a)(15) do not in the aggregate exceed the lesser of:
(A) $40 million; or
(B) 10 percent of the investor’s tier 1 capital;
(iii) Aggregate equity limit. The total shares held directly and indirectly by the investor and its affiliates under authority of this paragraph (a)(15) and § 211.8(c)(3) of this part in organizations engaged in activities that are not permissible for joint ventures do not exceed:
(A) 25 percent of the bank holding company’s tier 1 capital, where the investor is a bank holding company;
(B) 20 percent of the investor’s tier 1 capital, where the investor is a member bank;
(C) The lesser of 20 percent of any parent insured bank’s tier 1 capital or 100 percent of the investor’s tier 1 capital, for any other investor;
(iv) Determining compliance with limits—(A) General. For purposes of determining compliance with all limits set out in this paragraph (a)(15):
(1) Long and short positions in the same security may be netted; and
(2) Except as provided in paragraph (a)(15)(iv)(B)(4) of this section, equity securities held in order to hedge bank permissible equity derivatives contracts shall not be included.
(B) Use of internal hedging models. After providing 30 days’ prior written notice to the Board the investor may use an internal hedging model that:
(1) Nets long and short positions in the same security and offsets positions in a security by futures, forwards, options, and other similar instruments referenced to the same security, for purposes of determining compliance with the single issuer limits of paragraph (a)(15)(ii) of this section;
(2) Offsets its long positions in equity securities by futures, forwards, options, and similar instruments, on a portfolio basis, and for purposes of determining compliance with the aggregate equity limits of paragraph (a)(15)(iii) of this section.
(3) With respect to all equity securities held under authority of paragraph (a)(15) of this section, no net long position in a security shall be deemed to have been reduced by more than 75 percent through use of internal hedging models under this paragraph (a)(15)(iv)(B); and
(4) With respect to equity securities acquired to hedge bank permissible equity derivatives contracts under authority of paragraph (a)(1) of this section, any residual position that remains in the securities of a single issuer after netting and offsetting of positions relating to the security under the investor’s internal hedging models shall be included in calculating compliance with the limits of this paragraph (a)(15)(ii) and (iii).
(C) Underwriting commitments. Any shares acquired pursuant to an underwriting commitment that are held for longer than 90 days after the payment date for such underwriting shall be subject to the limits set out in paragraph (a)(15) of this section and the investment provisions of §§ 211.8 and 211.9 of this part.
(v) Authority to deal in shares of U.S. organization. The authority to deal in shares under paragraph (a)(15) of this section includes the authority to deal in the shares of a U.S. organization:
(A) With respect to foreign persons only; and
(B) Subject to the limitations on owning or controlling shares of a company in section 4(c)(6) of the BHC Act (12 U.S.C. 1843(c)(6)) and Regulation Y (12 CFR part 225).
(vi) Report to senior management. Any shares held in trading or dealing accounts for longer than 90 days shall be reported to the senior management of the investor;
(16) Operating a travel agency, but only in connection with financial services offered abroad by the investor or others;
(17) Underwriting life, annuity, pension fund-related, and other types of insurance, where the associated risks have been previously determined by the Board to be actuarially predictable; provided that:
(i) Investments in, and loans and extensions of credit (other than loans and extensions of credit fully secured in accordance with the requirements of section 23A of the FRA (12 U.S.C. 371c), or with such other standards as the Board may require) to, the company by the investor or its affiliates are deducted from the capital of the investor (with 50 percent of such capital deduction to be taken from tier 1 capital); and
(ii) Activities conducted directly or indirectly by a subsidiary of a U.S. insured bank are excluded from the authority of this paragraph (a)(17), unless authorized by the Board;
(18) Providing futures commission merchant services (including clearing without executing and executing without clearing) for nonaffiliated persons with respect to futures and options on futures contracts for financial and nonfinancial commodities; provided that prior notice under § 211.9(f) of this part shall be provided to the Board before any subsidiaries of a member bank operating pursuant to this subpart may join a mutual exchange or clearinghouse, unless the potential liability of the investor to the exchange, clearinghouse, or other members of the exchange, as the case may be, is legally limited by the rules of the exchange or clearinghouse to an amount that does not exceed applicable general consent limits under § 211.9 of this part;
(19) Acting as principal or agent in commodity-swap transactions in relation to:
(i) Swaps on a cash-settled basis for any commodity, provided that the investor’s portfolio of swaps contracts is hedged in a manner consistent with safe and sound banking practices; and
(ii) Contracts that require physical delivery of a commodity, provided that:
(A) Such contracts are entered into solely for the purpose of hedging the investor’s positions in the underlying commodity or derivative contracts based on the commodity;
(B) The contract allows for assignment, termination or offset prior to expiration; and
(C) Reasonable efforts are made to avoid delivery.
(b) Regulation Y activities. An investor may engage in activities that the Board has determined in § 225.28(b) of Regulation Y (12 CFR 225.28(b)) are closely related to banking under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)).
(c) Specific approval. With the Board’s specific approval, an investor may engage in other activities that the Board determines are usual in connection with the transaction of the business of banking or other financial operations abroad and are consistent with the FRA or the BHC Act.
§ 211.11 Advisory opinions under Regulation K.
(a) Request for advisory opinion. Any person may submit a request to the Board for an advisory opinion regarding the scope of activities permissible under any subpart of this part.
(b) Form and content of the request. Any request for an advisory opinion under this section shall be:
(1) Submitted in writing to the Board;
(2) Contain a clear description of the proposed parameters of the activity, or the service or product, at issue; and
(3) Contain a concise explanation of the grounds on which the submitter contends the activity is or should be considered by the Board to be permissible under this part.
(c) Response to request. In response to a request received under this section, the Board shall:
(1) Direct the submitter to provide such additional information as the Board may deem necessary to complete the record for a full consideration of the issue presented; and
(2) Provide an advisory opinion within 45 days after the record on the request has been determined to be complete.
§ 211.12 Lending limits and capital requirements.
(a) Acceptances of Edge corporations. (1) Limitations. An Edge corporation shall be and remain fully secured for acceptances of the types described in section 13(7) of the FRA (12 U.S.C. 372), as follows:
(i) All acceptances outstanding in excess of 200 percent of its tier 1 capital; and
(ii) All acceptances outstanding for any one person in excess of 10 percent of its tier 1 capital.
(2) Exceptions. These limitations do not apply if the excess represents the international shipment of goods, and the Edge corporation is:
(i) Fully covered by primary obligations to reimburse it that are guaranteed by banks or bankers; or
(ii) Covered by participation agreements from other banks, as described in 12 CFR 250.165.
(b) Loans and extensions of credit to one person—(1) Loans and extensions of credit defined. Loans and extensions of credit has the meaning set forth in § 211.2(q) of this part
(i) Acceptances outstanding that are not of the types described in section 13(7) of the FRA (12 U.S.C. 372);
(ii) Any liability of the lender to advance funds to or on behalf of a person pursuant to a guarantee, standby letter of credit, or similar agreements;
(iii) Investments in the securities of another organization other than a subsidiary; and
(iv) Any underwriting commitments to an issuer of securities, where no binding commitments have been secured from subunderwriters or other purchasers.
(2) Limitations. Except as the Board may otherwise specify:
(i) The total loans and extensions of credit outstanding to any person by an Edge corporation engaged in banking, and its direct or indirect subsidiaries, may not exceed 15 percent of the Edge corporation’s tier 1 capital;
(ii) The total loans and extensions of credit to any person by a foreign bank or Edge corporation subsidiary of a member bank, and by majority-owned subsidiaries of a foreign bank or Edge corporation, when combined with the total loans and extensions of credit to the same person by the member bank and its majority-owned subsidiaries, may not exceed the member bank’s limitation on loans and extensions of credit to one person.
(3) Exceptions. The limitations of paragraph (b)(2) of this section do not apply to:
(i) Deposits with banks and federal funds sold;
(ii) Bills or drafts drawn in good faith against actual goods and on which two or more unrelated parties are liable;
(iii) Any banker’s acceptance, of the kind described in section 13(7) of the FRA (12 U.S.C. 372), that is issued and outstanding;
(iv) Obligations to the extent secured by cash collateral or by bonds, notes, certificates of indebtedness, or Treasury bills of the United States;
(v) Loans and extensions of credit that are covered by bona fide participation agreements; and
(vi) Obligations to the extent supported by the full faith and credit of the following:
(A) The United States or any of its departments, agencies, establishments, or wholly owned corporations (including obligations, to the extent insured against foreign political and credit risks by the Export-Import Bank of the United States or the Foreign Credit Insurance Association), the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association, the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, or the European Bank for Reconstruction and Development;
(B) Any organization, if at least 25 percent of such an obligation or of the total credit is also supported by the full faith and credit of, or participated in by, any institution designated in paragraph (b)(3)(vi)(A) of this section in such manner that default to the lender would necessarily include default to that entity. The total loans and extensions of credit under this paragraph (b)(3)(vi)(B) to any person shall at no time exceed 100 percent of the tier 1 capital of the Edge corporation.
(c) Capitalization. (1) An Edge corporation shall at all times be capitalized in an amount that is adequate in relation to the scope and character of its activities.
(2) In the case of an Edge corporation engaged in banking, the minimum ratio of qualifying total capital to risk-weighted assets, as determined under the capital rule, shall not be less than 10 percent, of which at least 50 percent shall consist of tier 1 capital.
(3) For purposes of this paragraph (c), no limitation shall apply on the inclusion of subordinated debt that qualifies as tier 2 capital under the capital rule.
§ 211.13 Supervision and reporting.
(a) Supervision—(1) Foreign branches and subsidiaries. U.S. banking organizations conducting international operations under this subpart shall supervise and administer their foreign branches and subsidiaries in such a manner as to ensure that their operations conform to high standards of banking and financial prudence.
(i) Effective systems of records, controls, and reports shall be maintained to keep management informed of their activities and condition.
(ii) Such systems shall provide, in particular, information on risk assets, exposure to market risk, liquidity management, operations, internal controls, legal and operational risk, and conformance to management policies.
(iii) Reports on risk assets shall be sufficient to permit an appraisal of credit quality and assessment of exposure to loss, and, for this purpose, provide full information on the condition of material borrowers.
(iv) Reports on operations and controls shall include internal and external audits of the branch or subsidiary.
(2) Joint ventures. Investors shall maintain sufficient information with respect to joint ventures to keep informed of their activities and condition.
(i) Such information shall include audits and other reports on financial performance, risk exposure, management policies, operations, and controls.
(ii) Complete information shall be maintained on all transactions with the joint venture by the investor and its affiliates.
(3) Availability of reports and information to examiners. The reports specified in paragraphs (a)(1) and (2) of this section and any other information deemed necessary to determine compliance with U.S. banking law shall be made available to examiners of the appropriate bank supervisory agencies.
(b) Examinations. Examiners appointed by the Board shall examine each Edge corporation once a year. An Edge or agreement corporation shall make available to examiners information sufficient to assess its condition and operations and the condition and activities of any organization whose shares it holds.
(c) Reports—(1) Reports of condition. Each Edge or agreement corporation shall make reports of condition to the Board at such times and in such form as the Board may prescribe. The Board may require that statements of condition or other reports be published or made available for public inspection.
(2) Foreign operations. Edge and agreement corporations, member banks, and bank holding companies shall file such reports on their foreign operations as the Board may require.
(3) Acquisition or disposition of shares. Member banks, Edge and agreement corporations, and bank holding companies shall report, in a manner prescribed by the Board, any acquisition or disposition of shares.
(d) Filing and processing procedures—(1) Place of filing. Unless otherwise directed by the Board, applications, notices, and reports required by this part shall be filed with the Federal Reserve Bank of the District in which the parent bank or bank holding company is located or, if none, the Reserve Bank of the District in which the applying or reporting institution is located. Instructions and forms for applications, notices, and reports are available from the Reserve Banks.
(2) Timing. The Board shall act on an application under this subpart within 60 calendar days after the Reserve Bank has received the application, unless the Board notifies the investor that the 60-day period is being extended and states the reasons for the extension.
Subpart B—Foreign Banking Organizations
§ 211.20 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of the Federal Reserve System (Board) under the authority of the Bank Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.) and the International Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
(b) Purpose and scope. This subpart is in furtherance of the purposes of the BHC Act and the IBA. It applies to foreign banks and foreign banking organizations with respect to:
(1) The limitations on interstate banking under section 5 of the IBA (12 U.S.C. 3103);
(2) The exemptions from the nonbanking prohibitions of the BHC Act and the IBA afforded by sections 2(h) and 4(c)(9) of the BHC Act (12 U.S.C. 1841(h), 1843(c)(9));
(3) Board approval of the establishment of an office of a foreign bank in the United States under sections 7(d) and 10(a) of the IBA (12 U.S.C. 3105(d), 3107(a));
(4) The termination by the Board of a foreign bank’s representative office, state branch, state agency, or commercial lending company subsidiary under sections 7(e) and 10(b) of the IBA (12 U.S.C. 3105(e), 3107(b)), and the transmission of a recommendation to the Comptroller to terminate a federal branch or federal agency under section 7(e)(5) of the IBA (12 U.S.C. 3105(e)(5));
(5) The examination of an office or affiliate of a foreign bank in the United States as provided in sections 7(c) and 10(c) of the IBA (12 U.S.C. 3105(c), 3107(c));
(6) The disclosure of supervisory information to a foreign supervisor under section 15 of the IBA (12 U.S.C. 3109);
(7) The limitations on loans to one borrower by state branches and state agencies of a foreign bank under section 7(h)(2) of the IBA (12 U.S.C. 3105(h)(2));
(8) The limitation of a state branch and a state agency to conducting only activities that are permissible for a federal branch under section (7)(h)(1) of the IBA (12 U.S.C. 3105(h)(1)); and
(9) The deposit insurance requirement for retail deposit taking by a foreign bank under section 6 of the IBA (12 U.S.C. 3104).
(10) The management of shell branches (12 U.S.C. 3105(k)).
(c) Additional requirements. Compliance by a foreign bank with the requirements of this subpart and the laws administered and enforced by the Board does not relieve the foreign bank of responsibility to comply with the laws and regulations administered by the licensing authority.
§ 211.21 Definitions.
The definitions contained in §§ 211.1 and 211.2 apply to this subpart, except as a term is otherwise defined in this section:
(a) Affiliate of a foreign bank or of a parent of a foreign bank means any company that controls, is controlled by, or is under common control with, the foreign bank or the parent of the foreign bank.
(b) Agency means any place of business of a foreign bank, located in any state, at which credit balances are maintained, checks are paid, money is lent, or, to the extent not prohibited by state or federal law, deposits are accepted from a person or entity that is not a citizen or resident of the United States. Obligations shall not be considered credit balances unless they are:
(1) Incidental to, or arise out of the exercise of, other lawful banking powers;
(2) To serve a specific purpose;
(3) Not solicited from the general public;
(4) Not used to pay routine operating expenses in the United States such as salaries, rent, or taxes;
(5) Withdrawn within a reasonable period of time after the specific purpose for which they were placed has been accomplished; and
(6) Drawn upon in a manner reasonable in relation to the size and nature of the account.
(c)(1) Appropriate Federal Reserve Bank means, unless the Board designates a different Federal Reserve Bank:
(i) For a foreign banking organization, the Reserve Bank assigned to the foreign banking organization in § 225.3(b)(2) of Regulation Y (12 CFR 225.3(b)(2));
(ii) For a foreign bank that is not a foreign banking organization and proposes to establish an office, an Edge corporation, or an agreement corporation, the Reserve Bank of the Federal Reserve District in which the foreign bank proposes to establish such office or corporation; and
(iii) In all other cases, the Reserve Bank designated by the Board.
(2) The appropriate Federal Reserve Bank need not be the Reserve Bank of the Federal Reserve District in which the foreign bank’s home state is located.
(d) Banking subsidiary, with respect to a specified foreign bank, means a bank that is a subsidiary as the terms bank and subsidiary are defined in section 2 of the BHC Act (12 U.S.C. 1841).
(e) Branch means any place of business of a foreign bank, located in any state, at which deposits are received, and that is not an agency, as that term is defined in paragraph (b) of this section.
(f) Change the status of an office means to convert a representative office into a branch or agency, or an agency or limited branch into a branch, but does not include renewal of the license of an existing office.
(g) Commercial lending company means any organization, other than a bank or an organization operating under section 25 of the Federal Reserve Act (FRA) (12 U.S.C. 601-604a), organized under the laws of any state, that maintains credit balances permissible for an agency, and engages in the business of making commercial loans. Commercial lending company includes any company chartered under article XII of the banking law of the State of New York.
(h) Comptroller means the Office of the Comptroller of the Currency.
(i) Control has the same meaning as in section 2(a) of the BHC Act (12 U.S.C. 1841(a)), and the terms controlled and controlling shall be construed consistently with the term control.
(j) Domestic branch means any place of business of a foreign bank, located in any state, that may accept domestic deposits and deposits that are incidental to or for the purpose of carrying out transactions in foreign countries.
(k) A foreign bank engages directly in the business of banking outside the United States if the foreign bank engages directly in banking activities usual in connection with the business of banking in the countries where it is organized or operating.
(l) To establish means:
(1) To open and conduct business through an office;
(2) To acquire directly, through merger, consolidation, or similar transaction with another foreign bank, the operations of an office that is open and conducting business;
(3) To acquire an office through the acquisition of a foreign bank subsidiary that will cease to operate in the same corporate form following the acquisition;
(4) To change the status of an office; or
(5) To relocate an office from one state to another.
(m) Federal agency, federal branch, state agency, and state branch have the same meanings as in section 1 of the IBA (12 U.S.C. 3101).
(n) Foreign bank means an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States. The term foreign bank does not include a central bank of a foreign country that does not engage or seek to engage in a commercial banking business in the United States through an office.
(o) Foreign banking organization means:
(1) A foreign bank, as defined in section 1(b)(7) of the IBA (12 U.S.C. 3101(7)), that:
(i) Operates a branch, agency, or commercial lending company subsidiary in the United States;
(ii) Controls a bank in the United States; or
(iii) Controls an Edge corporation acquired after March 5, 1987; and
(2) Any company of which the foreign bank is a subsidiary.
(p) Home country, with respect to a foreign bank, means the country in which the foreign bank is chartered or incorporated.
(q) Home country supervisor, with respect to a foreign bank, means the governmental entity or entities in the foreign bank’s home country with responsibility for the supervision and regulation of the foreign bank.
(r) Licensing authority means:
(1) The relevant state supervisor, with respect to an application to establish a state branch, state agency, commercial lending company, or representative office of a foreign bank; or
(2) The Comptroller, with respect to an application to establish a federal branch or federal agency.
(s) Limited branch means a branch of a foreign bank that receives only such deposits as would be permitted for a corporation organized under section 25A of the Federal Reserve Act (12 U.S.C. 611-631).
(t) Office or office of a foreign bank means any branch, agency, representative office, or commercial lending company subsidiary of a foreign bank in the United States.
(u) A parent of a foreign bank means a company of which the foreign bank is a subsidiary. An immediate parent of a foreign bank is a company of which the foreign bank is a direct subsidiary. An ultimate parent of a foreign bank is a parent of the foreign bank that is not the subsidiary of any other company.
(v) Regional administrative office means a representative office that:
(1) Is established by a foreign bank that operates two or more branches, agencies, commercial lending companies, or banks in the United States;
(2) Is located in the same city as one or more of the foreign bank’s branches, agencies, commercial lending companies, or banks in the United States;
(3) Manages, supervises, or coordinates the operations of the foreign bank or its affiliates, if any, in a particular geographic area that includes the United States or a region thereof, including by exercising credit approval authority in that area pursuant to written standards, credit policies, and procedures established by the foreign bank; and
(4) Does not solicit business from actual or potential customers of the foreign bank or its affiliates.
(w) Relevant state supervisor means the state entity that is authorized to supervise and regulate a state branch, state agency, commercial lending company, or representative office.
(x) Representative office means any office of a foreign bank which is located in any state and is not a Federal branch, Federal agency, State branch, State agency, or commercial lending company subsidiary.
(y) State means any state of the United States or the District of Columbia.
(z) Subsidiary means any organization that:
(1) Has 25 percent or more of its voting shares directly or indirectly owned, controlled, or held with the power to vote by a company, including a foreign bank or foreign banking organization; or
(2) Is otherwise controlled, or capable of being controlled, by a foreign bank or foreign banking organization.
§ 211.22 Interstate banking operations of foreign banking organizations.
(a) Determination of home state. (1) A foreign bank that, as of December 10, 1997, had declared a home state or had a home state determined pursuant to the law and regulations in effect prior to that date shall have that state as its home state.
(2) A foreign bank that has any branches, agencies, commercial lending company subsidiaries, or subsidiary banks in one state, and has no such offices or subsidiaries in any other states, shall have as its home state the state in which such offices or subsidiaries are located.
(b) Change of home state—(1) Prior notice. A foreign bank may change its home state once, if it files 30 days’ prior notice of the proposed change with the Board.
(2) Application to change home state. (i) A foreign bank, in addition to changing its home state by filing prior notice under paragraph (b)(1) of this section, may apply to the Board to change its home state, upon showing that a national bank or state-chartered bank with the same home state as the foreign bank would be permitted to change its home state to the new home state proposed by the foreign bank.
(ii) A foreign bank may apply to the Board for such permission one or more times.
(iii) In determining whether to grant the request of a foreign bank to change its home state, the Board shall consider whether the proposed change is consistent with competitive equity between foreign and domestic banks.
(3) Effect of change in home state. The home state of a foreign bank and any change in its home state by a foreign bank shall not affect which Federal Reserve Bank or Reserve Banks supervise the operations of the foreign bank, and shall not affect the obligation of the foreign bank to file required reports and applications with the appropriate Federal Reserve Bank.
(4) Conforming branches to new home state. Upon any change in home state by a foreign bank under paragraph (b)(1) or (b)(2) of this section, the domestic branches of the foreign bank established in reliance on any previous home state of the foreign bank shall be conformed to those which a foreign bank with the new home state could permissibly establish or operate as of the date of such change.
(c) Prohibition against interstate deposit production offices. A covered interstate branch of a foreign bank may not be used as a deposit production office in accordance with the provisions in § 208.7 of Regulation H (12 CFR 208.7).
§ 211.23 Nonbanking activities of foreign banking organizations.
(a) Qualifying foreign banking organizations. Unless specifically made eligible for the exemptions by the Board, a foreign banking organization shall qualify for the exemptions afforded by this section only if, disregarding its United States banking, more than half of its worldwide business is banking; and more than half of its banking business is outside the United States.
(1) Meet at least two of the following requirements:
(i) Banking assets held outside the United States exceed total worldwide nonbanking assets;
(ii) Revenues derived from the business of banking outside the United States exceed total revenues derived from its worldwide nonbanking business; or
(iii) Net income derived from the business of banking outside the United States exceeds total net income derived from its worldwide nonbanking business; and
(2) Meet at least two of the following requirements:
(i) Banking assets held outside the United States exceed banking assets held in the United States;
(ii) Revenues derived from the business of banking outside the United States exceed revenues derived from the business of banking in the United States; or
(iii) Net income derived from the business of banking outside the United States exceeds net income derived from the business of banking in the United States.
(b) Determining assets, revenues, and net income. (1)(i) For purposes of paragraph (a) of this section, the total assets, revenues, and net income of an organization may be determined on a consolidated or combined basis.
(ii) The foreign banking organization shall include assets, revenues, and net income of companies in which it owns 50 percent or more of the voting shares when determining total assets, revenues, and net income.
(iii) The foreign banking organization may include assets, revenues, and net income of companies in which it owns 25 percent or more of the voting shares, if all such companies within the organization are included.
(2) Assets devoted to, or revenues or net income derived from, activities listed in § 211.10(a) shall be considered banking assets, or revenues or net income derived from the banking business, when conducted within the foreign banking organization by a foreign bank or its subsidiaries.
(c) Limited exemptions available to foreign banking organizations in certain circumstances. The following shall apply where a foreign bank meets the requirements of paragraph (a) of this section but its ultimate parent does not:
(1) Such foreign bank shall be entitled to the exemptions available to a qualifying foreign banking organization if its ultimate parent meets the requirements set forth in paragraph (a)(2) of this section and could meet the requirements in paragraph (a)(1) of this section but for the requirement in paragraph (b)(2) of this section that activities must be conducted by the foreign bank or its subsidiaries in order to be considered derived from the banking business;
(2) An ultimate parent as described in paragraph (c)(1) of this section shall be eligible for the exemptions available to a qualifying foreign banking organization except for those provided in § 211.23(f)(5)(iii).
(d) Loss of eligibility for exemptions—(1) Failure to meet qualifying test. A foreign banking organization that qualified under paragraph (a) or (c) of this section shall cease to be eligible for the exemptions of this section if it fails to meet the requirements of paragraphs (a) or (c) of this section for two consecutive years, as reflected in its annual reports (FR Y-7) filed with the Board.
(2) Continuing activities and investments. (i) A foreign banking organization that ceases to be eligible for the exemptions of this section may continue to engage in activities or retain investments commenced or acquired prior to the end of the first fiscal year for which its annual report reflects nonconformance with paragraph (a) or (c) of this section.
(ii) Termination or divestiture. Activities commenced or investments made after that date shall be terminated or divested within three months of the filing of the second annual report, or at such time as the Board may determine upon request by the foreign banking organization to extend the period, unless the Board grants consent to continue the activity or retain the investment under paragraph (e) of this section.
(3) Request for specific determination of eligibility. (i) A foreign banking organization that ceases to qualify under paragraph (a) or (c) of this section, or an affiliate of such foreign banking organization, that requests a specific determination of eligibility under paragraph (e) of this section may, prior to the Board’s determination on eligibility, continue to engage in activities and make investments under the provisions of paragraphs (f)(1), (2), (3), and (4) of this section.
(ii) The Board may grant consent for the foreign banking organization or its affiliate to make investments under paragraph (f)(5) of this section.
(e) Specific determination of eligibility for organizations that do not qualify for the exemptions—(1) Application. (i) A foreign organization that is not a foreign banking organization or a foreign banking organization that does not qualify under paragraph (a) or (c) of this section for some or all of the exemptions afforded by this section, or that has lost its eligibility for the exemptions under paragraph (d) of this section, may apply to the Board for a specific determination of eligibility for some or all of the exemptions.
(ii) A foreign banking organization may apply for a specific determination prior to the time it ceases to be eligible for the exemptions afforded by this section.
(2) Factors considered by Board. In determining whether eligibility for the exemptions would be consistent with the purposes of the BHC Act and in the public interest, the Board shall consider:
(i) The history and the financial and managerial resources of the foreign organization or foreign banking organization;
(ii) The amount of its business in the United States;
(iii) The amount, type, and location of its nonbanking activities, including whether such activities may be conducted by U.S. banks or bank holding companies;
(iv) Whether eligibility of the foreign organization or foreign banking organization would result in undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices; and
(v) The extent to which the foreign banking organization is subject to comprehensive supervision or regulation on a consolidated basis or the foreign organization is subject to oversight by regulatory authorities in its home country.
(3) Conditions and limitations. The Board may impose any conditions and limitations on a determination of eligibility, including requirements to cease activities or dispose of investments.
(4) Eligibility not granted. Determinations of eligibility generally would not be granted where a majority of the business of the foreign organization or foreign banking organization derives from commercial or industrial activities.
(f) Permissible activities and investments. A foreign banking organization that qualifies under paragraph (a) of this section may:
(1) Engage in activities of any kind outside the United States;
(2) Engage directly in activities in the United States that are incidental to its activities outside the United States;
(3) Own or control voting shares of any company that is not engaged, directly or indirectly, in any activities in the United States, other than those that are incidental to the international or foreign business of such company;
(4) Own or control voting shares of any company in a fiduciary capacity under circumstances that would entitle such shareholding to an exemption under section 4(c)(4) of the BHC Act (12 U.S.C. 1843(c)(4)) if the shares were held or acquired by a bank;
(5) Own or control voting shares of a foreign company that is engaged directly or indirectly in business in the United States other than that which is incidental to its international or foreign business, subject to the following limitations:
(i) More than 50 percent of the foreign company’s consolidated assets shall be located, and consolidated revenues derived from, outside the United States; provided that, if the foreign company fails to meet the requirements of this paragraph (f)(5)(i) for two consecutive years (as reflected in annual reports (FR Y-7) filed with the Board by the foreign banking organization), the foreign company shall be divested or its activities terminated within one year of the filing of the second consecutive annual report that reflects nonconformance with the requirements of this paragraph (f)(5)(i), unless the Board grants consent to retain the investment under paragraph (g) of this section;
(ii) The foreign company shall not directly underwrite, sell, or distribute, nor own or control more than 10 percent of the voting shares of a company that underwrites, sells, or distributes securities in the United States, except to the extent permitted bank holding companies;
(iii) If the foreign company is a subsidiary of the foreign banking organization, the foreign company must be, or must control, an operating company, and its direct or indirect activities in the United States shall be subject to the following limitations:
(A) The foreign company’s activities in the United States shall be the same kind of activities, or related to the activities, engaged in directly or indirectly by the foreign company abroad, as measured by the “establishment” categories of the Standard Industrial Classification (SIC). An activity in the United States shall be considered related to an activity outside the United States if it consists of supply, distribution, or sales in furtherance of the activity;
(B) The foreign company may engage in activities in the United States that consist of banking, securities, insurance, or other financial operations, or types of activities permitted by regulation or order under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), only under regulations of the Board or with the prior approval of the Board, subject to the following;
(1) Activities within Division H (Finance, Insurance, and Real Estate) of the SIC shall be considered banking or financial operations for this purpose, with the exception of acting as operators of nonresidential buildings (SIC 6512), operators of apartment buildings (SIC 6513), operators of dwellings other than apartment buildings (SIC 6514), and operators of residential mobile home sites (SIC 6515); and operating title abstract offices (SIC 6541); and
(2) The following activities shall be considered financial activities and may be engaged in only with the approval of the Board under paragraph (g) of this section: credit reporting services (SIC 7323); computer and data processing services (SIC 7371, 7372, 7373, 7374, 7375, 7376, 7377, 7378, and 7379); armored car services (SIC 7381); management consulting (SIC 8732, 8741, 8742, and 8748); certain rental and leasing activities (SIC 4741, 7352, 7353, 7359, 7513, 7514, 7515, and 7519); accounting, auditing, and bookkeeping services (SIC 8721); courier services (SIC 4215 and 4513); and arrangement of passenger transportation (SIC 4724, 4725, and 4729).
(g) Exemptions under section 4(c)(9) of the BHC Act. A foreign banking organization that is of the opinion that other activities or investments may, in particular circumstances, meet the conditions for an exemption under section 4(c)(9) of the BHC Act (12 U.S.C. 1843(c)(9)) may apply to the Board for such a determination by submitting to the appropriate Federal Reserve Bank a letter setting forth the basis for that opinion.
(h) Reports. The foreign banking organization shall report in a manner prescribed by the Board any direct activities in the United States by a foreign subsidiary of the foreign banking organization and the acquisition of all shares of companies engaged, directly or indirectly, in activities in the United States that were acquired under the authority of this section.
(i) Availability of information. If any information required under this section is unknown and not reasonably available to the foreign banking organization (either because obtaining it would involve unreasonable effort or expense, or because it rests exclusively within the knowledge of a company that is not controlled by the organization) the organization shall:
(1) Give such information on the subject as it possesses or can reasonably acquire, together with the sources thereof; and
(2) Include a statement showing that unreasonable effort or expense would be involved, or indicating that the company whose shares were acquired is not controlled by the organization, and stating the result of a request for information.
(a) Board approval of offices of foreign banks—(1) Prior Board approval of branches, agencies, commercial lending companies, or representative offices of foreign banks. (i) Except as otherwise provided in paragraphs (a)(2) and (a)(3) of this section, a foreign bank shall obtain the approval of the Board before it:
(A) Establishes a branch, agency, commercial lending company subsidiary, or representative office in the United States; or
(B) Acquires ownership or control of a commercial lending company subsidiary.
(2) Prior notice for certain offices. (i) After providing 45 days’ prior written notice to the Board, a foreign bank may establish:
(A) An additional office (other than a domestic branch outside the home state of the foreign bank established pursuant to section 5(a)(3) of the IBA (12 U.S.C. 3103(a)(3))), provided that the Board has previously determined the foreign bank to be subject to comprehensive supervision or regulation on a consolidated basis by its home country supervisor (comprehensive consolidated supervision or CCS); or
(B) A representative office, if:
(1) The Board has not yet determined the foreign bank to be subject to consolidated comprehensive supervision, but the foreign bank is subject to the BHC Act, either directly or through section 8(a) of the IBA (12 U.S.C. 3106(a)); or
(2) The Board previously has approved an application by the foreign bank to establish a branch or agency pursuant to the standard set forth in paragraph (c)(1)(iii) of this section; or
(3) The Board previously has approved an application by the foreign bank to establish a representative office.
(ii) The Board may waive the 45-day notice period if it finds that immediate action is required by the circumstances presented. The notice period shall commence at the time the notice is received by the appropriate Federal Reserve Bank. The Board may suspend the period or require Board approval prior to the establishment of such office if the notification raises significant policy or supervisory concerns.
(3) General consent for certain representative offices. (i) The Board grants its general consent for a foreign bank that is subject to the BHC Act, either directly or through section 8(a) of the IBA (12 U.S.C. 3106(a)), to establish:
(A) A representative office, but only if the Board has previously determined that the foreign bank proposing to establish a representative office is subject to consolidated comprehensive supervision;
(B) A regional administrative office; or
(C) An office that solely engages in limited administrative functions (such as separately maintaining back-office support systems) that:
(1) Are clearly defined;
(2) Are performed in connection with the U.S. banking activities of the foreign bank; and
(3) Do not involve contact or liaison with customers or potential customers, beyond incidental contact with existing customers relating to administrative matters (such as verification or correction of account information).
(4) Suspension of general consent or prior notice procedures. The Board may, at any time, upon notice, modify or suspend the prior notice and general consent procedures in paragraphs (a)(2) and (3) of this section for any foreign bank with respect to the establishment by such foreign bank of any U.S. office of such foreign bank.
(5) Temporary offices. The Board may, in its discretion, determine that a foreign bank has not established an office if the foreign bank temporarily operates at one or more additional locations in the same city of an existing branch or agency due to renovations, an expansion of activities, a merger or consolidation of the operations of affiliated foreign banks or companies, or other similar circumstances. The foreign bank must provide reasonable advance notice of its intent temporarily to utilize additional locations, and the Board may impose such conditions in connection with its determination as it deems necessary.
(6) After-the-fact Board approval. Where a foreign bank proposes to establish an office in the United States through the acquisition of, or merger or consolidation with, another foreign bank with an office in the United States, the Board may, in its discretion, allow the acquisition, merger, or consolidation to proceed before an application to establish the office has been filed or acted upon under this section if:
(i) The foreign bank or banks resulting from the acquisition, merger, or consolidation, will not directly or indirectly own or control more than 5 percent of any class of the voting securities of, or control, a U.S. bank;
(ii) The Board is given reasonable advance notice of the proposed acquisition, merger, or consolidation; and
(iii) Prior to consummation of the acquisition, merger, or consolidation, each foreign bank, as appropriate, commits in writing either:
(A) To comply with the procedures for an application under this section within a reasonable period of time; to engage in no new lines of business, or otherwise to expand its U.S. activities until the disposition of the application; and to abide by the Board’s decision on the application, including, if necessary, a decision to terminate the activities of any such U.S. office, as the Board or the Comptroller may require; or
(B) Promptly to wind-down and close any office, the establishment of which would have required an application under this section; and to engage in no new lines of business or otherwise to expand its U.S. activities prior to the closure of such office.
(7) Notice of change in ownership or control or conversion of existing office or establishment of representative office under general-consent authority. A foreign bank with a U.S. office shall notify the Board in writing within 10 days of the occurrence of any of the following events:
(i) A change in the foreign bank’s ownership or control, where the foreign bank is acquired or controlled by another foreign bank or company and the acquired foreign bank with a U.S. office continues to operate in the same corporate form as prior to the change in ownership or control;
(ii) The conversion of a branch to an agency or representative office; an agency to a representative office; or a branch or agency from a federal to a state license, or a state to a federal license; or
(iii) The establishment of a representative office under general-consent authority.
(8) Transactions subject to approval under Regulation Y. Subpart B of Regulation Y (12 CFR 225.11-225.17) governs the acquisition by a foreign banking organization of direct or indirect ownership or control of any voting securities of a bank or bank holding company in the United States if the acquisition results in the foreign banking organization’s ownership or control of more than 5 percent of any class of voting securities of a U.S. bank or bank holding company, including through acquisition of a foreign bank or foreign banking organization that owns or controls more than 5 percent of any class of the voting securities of a U.S. bank or bank holding company.
(b) Procedures for application—(1) Filing application. An application for the Board’s approval pursuant to this section shall be filed in the manner prescribed by the Board.
(2) Publication requirement—(i) Newspaper notice. Except with respect to a proposed transaction where more extensive notice is required by statute or as otherwise provided in paragraphs (b)(2)(ii) and (iii) of this section, an applicant under this section shall publish a notice in a newspaper of general circulation in the community in which the applicant proposes to engage in business.
(ii) Contents of notice. The newspaper notice shall:
(A) State that an application is being filed as of the date of the newspaper notice; and
(B) Provide the name of the applicant, the subject matter of the application, the place where comments should be sent, and the date by which comments are due, pursuant to paragraph (b)(3) of this section.
(iii) Copy of notice with application. The applicant shall furnish with its application to the Board a copy of the newspaper notice, the date of its publication, and the name and address of the newspaper in which it was published.
(iv) Exception. The Board may modify the publication requirement of paragraphs (b)(2)(i) and (ii) of this section in appropriate circumstances.
(v) Federal branch or federal agency. In the case of an application to establish a federal branch or federal agency, compliance with the publication procedures of the Comptroller shall satisfy the publication requirement of this section. Comments regarding the application should be sent to the Board and the Comptroller.
(3) Written comments. (i) Within 30 days after publication, as required in paragraph (b)(2) of this section, any person may submit to the Board written comments and data on an application.
(ii) The Board may extend the 30-day comment period if the Board determines that additional relevant information is likely to be provided by interested persons, or if other extenuating circumstances exist.
(4) Board action on application—(i) Time limits. (A) The Board shall act on an application from a foreign bank to establish a branch, agency, or commercial lending company subsidiary within 180 calendar days after the receipt of the application.
(B) The Board may extend for an additional 180 calendar days the period within which to take final action, after providing notice of and reasons for the extension to the applicant and the licensing authority.
(C) The time periods set forth in this paragraph (b)(4)(i) may be waived by the applicant.
(ii) Additional information. The Board may request any information in addition to that supplied in the application when the Board believes that the information is necessary for its decision, and may deny an application if it does not receive the information requested from the applicant or its home country supervisor in sufficient time to permit adequate evaluation of the information within the time periods set forth in paragraph (b)(4)(i) of this section.
(5) Coordination with other regulators. Upon receipt of an application by a foreign bank under this section, the Board shall promptly notify, consult with, and consider the views of the licensing authority.
(c) Standards for approval of U.S. offices of foreign banks—(1) Mandatory standards—(i) General. As specified in section 7(d) of the IBA (12 U.S.C. 3105(d)), the Board may not approve an application to establish a branch or an agency, or to establish or acquire ownership or control of a commercial lending company, unless it determines that:
(A) Each of the foreign bank and any parent foreign bank engages directly in the business of banking outside the United States and, except as provided in paragraph (c)(1)(iii) of this section, is subject to comprehensive supervision or regulation on a consolidated basis by its home country supervisor; and
(B) The foreign bank has furnished to the Board the information that the Board requires in order to assess the application adequately.
(ii) Basis for determining comprehensive consolidated supervision. In determining whether a foreign bank and any parent foreign bank is subject to comprehensive consolidated supervision, the Board shall determine whether the foreign bank is supervised or regulated in such a manner that its home country supervisor receives sufficient information on the worldwide operations of the foreign bank (including the relationships of the bank to any affiliate) to assess the foreign bank’s overall financial condition and compliance with law and regulation. In making such a determination, the Board shall assess, among other factors, the extent to which the home country supervisor:
(A) Ensures that the foreign bank has adequate procedures for monitoring and controlling its activities worldwide;
(B) Obtains information on the condition of the foreign bank and its subsidiaries and offices outside the home country through regular reports of examination, audit reports, or otherwise;
(C) Obtains information on the dealings and relationship between the foreign bank and its affiliates, both foreign and domestic;
(D) Receives from the foreign bank financial reports that are consolidated on a worldwide basis, or comparable information that permits analysis of the foreign bank’s financial condition on a worldwide, consolidated basis;
(E) Evaluates prudential standards, such as capital adequacy and risk asset exposure, on a worldwide basis.
(iii) Determination of comprehensive consolidated supervision not required in certain circumstances. (A) If the Board is unable to find, under paragraph (c)(1)(i) of this section, that a foreign bank is subject to comprehensive consolidated supervision, the Board may, nevertheless, approve an application by the foreign bank if:
(1) The home country supervisor is actively working to establish arrangements for the consolidated supervision of such bank; and
(2) All other factors are consistent with approval.
(B) In deciding whether to use its discretion under this paragraph (c)(1)(iii), the Board also shall consider whether the foreign bank has adopted and implemented procedures to combat money laundering. The Board also may take into account whether the home country supervisor is developing a legal regime to address money laundering or is participating in multilateral efforts to combat money laundering. In approving an application under this paragraph (c)(1)(iii), the Board, after requesting and taking into consideration the views of the licensing authority, may impose any conditions or restrictions relating to the activities or business operations of the proposed branch, agency, or commercial lending company subsidiary, including restrictions on sources of funding. The Board shall coordinate with the licensing authority in the implementation of such conditions or restrictions.
(2) Additional standards. In acting on any application under this subpart, the Board may take into account:
(i) Consent of home country supervisor. Whether the home country supervisor of the foreign bank has consented to the proposed establishment of the branch, agency, or commercial lending company subsidiary;
(ii) Financial resources. The financial resources of the foreign bank (including the foreign bank’s capital position, projected capital position, profitability, level of indebtedness, and future prospects) and the condition of any U.S. office of the foreign bank;
(iii) Managerial resources. The managerial resources of the foreign bank, including the competence, experience, and integrity of the officers and directors; the integrity of its principal shareholders; management’s experience and capacity to engage in international banking; and the record of the foreign bank and its management of complying with laws and regulations, and of fulfilling any commitments to, and any conditions imposed by, the Board in connection with any prior application;
(iv) Sharing information with supervisors. Whether the foreign bank’s home country supervisor and the home country supervisor of any parent of the foreign bank share material information regarding the operations of the foreign bank with other supervisory authorities;
(v) Assurances to Board. (A) Whether the foreign bank has provided the Board with adequate assurances that information will be made available to the Board on the operations or activities of the foreign bank and any of its affiliates that the Board deems necessary to determine and enforce compliance with the IBA, the BHC Act, and other applicable federal banking statutes.
(B) These assurances shall include a statement from the foreign bank describing the laws that would restrict the foreign bank or any of its parents from providing information to the Board;
(vi) Measures for prevention of money laundering. Whether the foreign bank has adopted and implemented procedures to combat money laundering, whether there is a legal regime in place in the home country to address money laundering, and whether the home country is participating in multilateral efforts to combat money laundering;
(vii) Compliance with U.S. law. Whether the foreign bank and its U.S. affiliates are in compliance with applicable U.S. law, and whether the applicant has established adequate controls and procedures in each of its offices to ensure continuing compliance with U.S. law, including controls directed to detection of money laundering and other unsafe or unsound banking practices; and (viii) The needs of the community and the history of operation of the foreign bank and its relative size in its home country, provided that the size of the foreign bank is not the sole factor in determining whether an office of a foreign bank should be approved.
(3) Additional standards for certain interstate applications. (i) As specified in section 5(a)(3) of the IBA (12 U.S.C. 3103(a)(3)), the Board may not approve an application by a foreign bank to establish a branch, other than a limited branch, outside the home state of the foreign bank under section 5(a)(1) or (2) of the IBA (12 U.S.C. 3103(a)(1), (2)) unless the Board:
(A) Determines that the foreign bank’s financial resources, including the capital level of the bank, are equivalent to those required for a domestic bank to be approved for branching under section 5155 of the Revised Statutes (12 U.S.C. 36) and section 44 of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1831u);
(B) Consults with the Department of the Treasury regarding capital equivalency;
(C) Applies the standards specified in section 7(d) of the IBA (12 U.S.C. 3105(d)) and this paragraph (c); and
(D) Applies the same requirements and conditions to which an application by a domestic bank for an interstate merger is subject under section 44(b)(1), (3), and (4) of the FDIA (12 U.S.C. 1831u(b)(1), (3), (4)); and
(ii) As specified in section 5(a)(7) of the IBA (12 U.S.C. 3103(a)(7)), the Board may not approve an application to establish a branch through a change in status of an agency or limited branch outside the foreign bank’s home state unless:
(A) The establishment and operation of such branch is permitted by such state; and
(B) Such agency or branch has been in operation in such state for a period of time that meets the state’s minimum age requirement permitted under section 44(a)(5) of the Federal Deposit Insurance Act (12 U.S.C. 183u(a)(5)).
(4) Board conditions on approval. The Board may impose any conditions on its approval as it deems necessary, including a condition which may permit future termination by the Board of any activities or, in the case of a federal branch or a federal agency, by the Comptroller, based on the inability of the foreign bank to provide information on its activities or those of its affiliates that the Board deems necessary to determine and enforce compliance with U.S. banking laws.
(d) Representative offices—(1) Permissible activities. A representative office may engage in:
(i) Representational and administrative functions. Representational and administrative functions in connection with the banking activities of the foreign bank, which may include soliciting new business for the foreign bank; conducting research; acting as liaison between the foreign bank’s head office and customers in the United States; performing preliminary and servicing steps in connection with lending;
(ii) Credit approvals under certain circumstances. Making credit decisions if the foreign bank also operates one or more branches or agencies in the United States, the loans approved at the representative office are made by a U.S. office of the bank, and the loan proceeds are not disbursed in the representative office; and
(iii) Other functions. Other functions for or on behalf of the foreign bank or its affiliates, such as operating as a regional administrative office of the foreign bank, but only to the extent that these other functions are not banking activities and are not prohibited by applicable federal or state law, or by ruling or order of the Board.
(2) Standards for approval of representative offices. As specified in section 10(a)(2) of the IBA (12 U.S.C. 3107(a)(2)), in acting on the application of a foreign bank to establish a representative office, the Board shall take into account, to the extent it deems appropriate, the standards for approval set out in paragraph (c) of this section. The standard regarding supervision by the foreign bank’s home country supervisor (as set out in paragraph (c)(1)(i)(A) of this section) will be met, in the case of a representative office application, if the Board makes a finding that the applicant bank is subject to a supervisory framework that is consistent with the activities of the proposed representative office, taking into account the nature of such activities and the operating record of the applicant.
(3) Special-purpose foreign government-owned banks. A foreign government-owned organization engaged in banking activities in its home country that are not commercial in nature may apply to the Board for a determination that the organization is not a foreign bank for purposes of this section. A written request setting forth the basis for such a determination may be submitted to the Reserve Bank of the District in which the foreign organization’s representative office is located in the United States, or to the Board, in the case of a proposed establishment of a representative office. The Board shall review and act upon each request on a case-by-case basis.
(4) Additional requirements. The Board may impose any additional requirements that it determines to be necessary to carry out the purposes of the IBA.
(e) Preservation of existing authority. Nothing in this subpart shall be construed to relieve any foreign bank or foreign banking organization from any otherwise applicable requirement of federal or state law, including any applicable licensing requirement.
(f) Reports of crimes and suspected crimes. Except for a federal branch or a federal agency or a state branch that is insured by the Federal Deposit Insurance Corporation (FDIC), a branch, agency, or representative office of a foreign bank operating in the United States shall file a suspicious activity report in accordance with the provisions of § 208.62 of Regulation H (12 CFR 208.62).
(g) Management of shell branches. (1) A state-licensed branch or agency shall not manage, through an office of the foreign bank which is located outside the United States and is managed or controlled by such state-licensed branch or agency, any type of activity that a bank organized under the laws of the United States or any state is not permitted to manage at any branch or subsidiary of such bank which is located outside the United States.
(2) For purposes of this paragraph (g), an office of a foreign bank located outside the United States is “managed or controlled” by a state-licensed branch or agency if a majority of the responsibility for business decisions, including but not limited to decisions with regard to lending or asset management or funding or liability management, or the responsibility for recordkeeping in respect of assets or liabilities for that non-U.S. office, resides at the state-licensed branch or agency.
(3) The types of activities that a state-licensed branch or agency may manage through an office located outside the United States that it manage or controls include the types of activities authorized to a U.S. bank by state or federal charters, regulations issued by chartering or regulatory authorities, and other U.S. banking laws, including the Federal Reserve Act, and the implementing regulations, but U.S. procedural or quantitative requirements that may be applicable to the conduct of such activities by U.S. banks shall not apply.
(h) Government securities sales practices. An uninsured state-licensed branch or agency of a foreign bank that is required to give notice to the Board under section 15C of the Securities Exchange Act of 1934 (15 U.S.C. 78o-5) and the Department of the Treasury rules under section 15C (17 CFR 400.1(d) and part 401) shall be subject to the provisions of 12 CFR 208.37 to the same extent as a state member bank that is required to give such notice.
(i) Protection of customer information and consumer information. An uninsured state-licensed branch or agency of a foreign bank shall comply with the Interagency Guidelines Establishing Information Security Standards prescribed pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805) and, with respect to the proper disposal of consumer information, section 216 of the Fair and Accurate Credit Transactions Act of 2003 (15 U.S.C. 1681w), set forth in appendix D-2 to part 208 of this chapter.
(j) Procedures for monitoring Bank Secrecy Act compliance—(1) Establishment of Compliance Program. Except for a Federal branch or a Federal agency or a state branch that is insured by the FDIC, a branch, agency, or representative office of a foreign bank operating in the United States shall, in accordance with the provisions of § 208.63 of the Board’s Regulation H, 12 CFR 208.63, develop and provide for the continued administration of a program reasonably designed to assure and monitor compliance with the provisions of 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, and either:
(i) Approved by the foreign bank’s board of directors and noted in the minutes, or
(ii) Approved by a delegee acting under the express authority of the board of directors to approve the Bank Secrecy Act compliance program.
(2) Customer identification program. Except for a federal branch or a federal agency or a state branch that is insured by the FDIC, a branch, agency, or representative office of a foreign bank operating in the United States is subject to the requirements of 31 U.S.C. 5318(l) and the implementing regulation jointly promulgated by the Board and the Department of the Treasury at 31 CFR 103.121, which require a customer identification program.
§ 211.25 Termination of offices of foreign banks.
(a) Grounds for termination—(1) General. Under sections 7(e) and 10(b) of the IBA (12 U.S.C. 3105(d), 3107(b)), the Board may order a foreign bank to terminate the activities of its representative office, state branch, state agency, or commercial lending company subsidiary if the Board finds that:
(i) The foreign bank is not subject to comprehensive consolidated supervision in accordance with § 211.24(c)(1), and the home country supervisor is not making demonstrable progress in establishing arrangements for the consolidated supervision of the foreign bank; or
(ii) Both of the following criteria are met:
(A) There is reasonable cause to believe that the foreign bank, or any of its affiliates, has committed a violation of law or engaged in an unsafe or unsound banking practice in the United States; and
(B) As a result of such violation or practice, the continued operation of the foreign bank’s representative office, state branch, state agency, or commercial lending company subsidiary would not be consistent with the public interest, or with the purposes of the IBA, the BHC Act, or the FDIA.
(2) Additional ground. The Board also may enforce any condition imposed in connection with an order issued under § 211.24.
(b) Factor. In making its findings under this section, the Board may take into account the needs of the community, the history of operation of the foreign bank, and its relative size in its home country, provided that the size of the foreign bank shall not be the sole determining factor in a decision to terminate an office.
(c) Consultation with relevant state supervisor. Except in the case of termination pursuant to the expedited procedure in paragraph (d)(3) of this section, the Board shall request and consider the views of the relevant state supervisor before issuing an order terminating the activities of a state branch, state agency, representative office, or commercial lending company subsidiary under this section.
(d) Termination procedures—(1) Notice and hearing. Except as otherwise provided in paragraph (d)(3) of this section, an order issued under paragraph (a)(1) of this section shall be issued only after notice to the relevant state supervisor and the foreign bank and after an opportunity for a hearing.
(2) Procedures for hearing. Hearings under this section shall be conducted pursuant to the Board’s Rules of Practice for Hearings (12 CFR part 263).
(3) Expedited procedure. The Board may act without providing an opportunity for a hearing, if it determines that expeditious action is necessary in order to protect the public interest. When the Board finds that it is necessary to act without providing an opportunity for a hearing, the Board, solely in its discretion, may:
(i) Provide the foreign bank that is the subject of the termination order with notice of the intended termination order;
(ii) Grant the foreign bank an opportunity to present a written submission opposing issuance of the order; or
(iii) Take any other action designed to provide the foreign bank with notice and an opportunity to present its views concerning the order.
(e) Termination of federal branch or federal agency. The Board may transmit to the Comptroller a recommendation that the license of a federal branch or federal agency be terminated if the Board has reasonable cause to believe that the foreign bank or any affiliate of the foreign bank has engaged in conduct for which the activities of a state branch or state agency may be terminated pursuant to this section.
(f) Voluntary termination. A foreign bank shall notify the Board at least 30 days prior to terminating the activities of any office. Notice pursuant to this paragraph (f) is in addition to, and does not satisfy, any other federal or state requirements relating to the termination of an office or the requirement for prior notice of the closing of a branch, pursuant to section 39 of the FDIA (12 U.S.C. 1831p).
§ 211.26 Examination of offices and affiliates of foreign banks.
(a) Conduct of examinations—(1) Examination of branches, agencies, commercial lending companies, and affiliates. The Board may examine:
(i) Any branch or agency of a foreign bank;
(ii) Any commercial lending company or bank controlled by one or more foreign banks, or one or more foreign companies that control a foreign bank; and
(iii) Any other office or affiliate of a foreign bank conducting business in any state.
(2) Examination of representative offices. The Board may examine any representative office in the manner and with the frequency it deems appropriate.
(b) Coordination of examinations. To the extent possible, the Board shall coordinate its examinations of the U.S. offices and U.S. affiliates of a foreign bank with the licensing authority and, in the case of an insured branch, the Federal Deposit Insurance Corporation (FDIC), including through simultaneous examinations of the U.S. offices and U.S. affiliates of a foreign bank.
(c) Frequency of on-site examination—(1) General. Each branch or agency of a foreign bank shall be examined on-site at least once during each 12-month period (beginning on the date the most recent examination of the office ended) by—
(i) The Board;
(ii) The FDIC, if the branch of the foreign bank accepts or maintains insured deposits;
(iii) The Comptroller, if the branch or agency of the foreign bank is licensed by the Comptroller; or
(iv) The state supervisor, if the office of the foreign bank is licensed or chartered by the state.
(2) 18-month cycle for certain small institutions—(i) Mandatory standards. The Board may conduct a full-scope, on-site examination at least once during each 18-month period, rather than each 12-month period as required in paragraph (c)(1) of this section, if the branch or agency—
(A) Has total assets of less than $3 billion;
(B) Has received a composite ROCA supervisory rating (which rates risk management, operational controls, compliance, and asset quality) of 1 or 2 at its most recent examination;
(C) Satisfies the requirement of either the following paragraph (c)(2)(i)(C)(1) or (2):
(1) The foreign bank’s most recently reported capital adequacy position consists of, or is equivalent to, tier 1 and total risk-based capital ratios of at least 6 percent and 10 percent, respectively, on a consolidated basis; or
(2) The branch or agency has maintained on a daily basis, over the past three quarters, eligible assets in an amount not less than 108 percent of the preceding quarter’s average third-party liabilities (determined consistent with applicable federal and state law) and sufficient liquidity is currently available to meet its obligations to third parties;
(D) Is not subject to a formal enforcement action or order by the Board, FDIC, or OCC; and
(E) Has not experienced a change in control during the preceding 12-month period in which a full-scope, on-site examination would have been required but for this section.
(ii) Discretionary standards. In determining whether a branch or agency of a foreign bank that meets the standards of paragraph (c)(2)(i) of this section should not be eligible for an 18-month examination cycle pursuant to this paragraph (c)(2), the Board may consider additional factors, including whether—
(A) Any of the individual components of the ROCA supervisory rating of a branch or agency of a foreign bank is rated “3” or worse;
(B) The results of any off-site surveillance indicate a deterioration in the condition of the office;
(C) The size, relative importance, and role of a particular office when reviewed in the context of the foreign bank’s entire U.S. operations otherwise necessitate an annual examination; and
(D) The condition of the foreign bank gives rise to such a need.
(iii)(A) Except as provided in paragraph (c)(2)(iii)(B) of this section, from December 2, 2020 through December 31, 2021, for purposes of determining eligibility for the extended examination cycle described in paragraph (c)(2) of this section, the total assets of a branch or agency shall be determined based on the lesser of:
(1) The total assets of the branch or agency as of December 31, 2019; and
(2) The total assets of the branch or agency as of the end of the most recent calendar quarter.
(B) The relief provided under paragraph (c)(2)(iii)(A) of this section does not apply to a branch or agency if the Board determines that permitting the branch or agency to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the branch or agency. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the branch or agency since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the branch or agency has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the branch or agency. In making a determination pursuant to this paragraph (c)(2)(iii)(B), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(3) Authority to conduct more frequent examinations. Nothing in paragraphs (c)(1) and (2) of this section limits the authority of the Board to examine any U.S. branch or agency of a foreign bank as frequently as it deems necessary.
§ 211.27 Disclosure of supervisory information to foreign supervisors.
(a) Disclosure by Board. The Board may disclose information obtained in the course of exercising its supervisory or examination authority to a foreign bank regulatory or supervisory authority, if the Board determines that disclosure is appropriate for bank supervisory or regulatory purposes and will not prejudice the interests of the United States.
(b) Confidentiality. Before making any disclosure of information pursuant to paragraph (a) of this section, the Board shall obtain, to the extent necessary, the agreement of the foreign bank regulatory or supervisory authority to maintain the confidentiality of such information to the extent possible under applicable law.
§ 211.28 Provisions applicable to branches and agencies: limitation on loans to one borrower.
(a) Limitation on loans to one borrower. Except as provided in paragraph (b) of this section, the total loans and extensions of credit by all the state branches and state agencies of a foreign bank outstanding to a single borrower at one time shall be aggregated with the total loans and extensions of credit by all federal branches and federal agencies of the same foreign bank outstanding to such borrower at the time; and shall be subject to the limitations and other provisions of section 5200 of the Revised Statutes (12 U.S.C. 84), and the regulations promulgated thereunder, in the same manner that extensions of credit by a federal branch or federal agency are subject to section 4(b) of the IBA (12 U.S.C. 3102(b)) as if such state branches and state agencies were federal branches and federal agencies.
(b) Preexisting loans and extensions of credit. Any loans or extensions of credit to a single borrower that were originated prior to December 19, 1991, by a state branch or state agency of the same foreign bank and that, when aggregated with loans and extensions of credit by all other branches and agencies of the foreign bank, exceed the limits set forth in paragraph (a) of this section, may be brought into compliance with such limitations through routine repayment, provided that any new loans or extensions of credit (including renewals of existing unfunded credit lines, or extensions of the maturities of existing loans) to the same borrower shall comply with the limits set forth in paragraph (a) of this section.
§ 211.29 Applications by state branches and state agencies to conduct activities not permissible for federal branches.
(a) Scope. A state branch or state agency shall file with the Board a prior written application for permission to engage in or continue to engage in any type of activity that:
(1) Is not permissible for a federal branch, pursuant to statute, regulation, official bulletin or circular, or order or interpretation issued in writing by the Comptroller; or
(2) Is rendered impermissible due to a subsequent change in statute, regulation, official bulletin or circular, written order or interpretation, or decision of a court of competent jurisdiction.
(b) Exceptions. No application shall be required by a state branch or state agency to conduct any activity that is otherwise permissible under applicable state and federal law or regulation and that:
(1) Has been determined by the FDIC, pursuant to 12 CFR 362.4(c)(3)(i) through (c)(3)(ii)(A), not to present a significant risk to the affected deposit insurance fund;
(2) Is permissible for a federal branch, but the Comptroller imposes a quantitative limitation on the conduct of such activity by the federal branch;
(3) Is conducted as agent rather than as principal, provided that the activity is one that could be conducted by a state-chartered bank headquartered in the same state in which the branch or agency is licensed; or
(4) Any other activity that the Board has determined may be conducted by any state branch or state agency of a foreign bank without further application to the Board.
(c) Contents of application. An application submitted pursuant to paragraph (a) of this section shall be in letter form and shall contain the following information:
(1) A brief description of the activity, including the manner in which it will be conducted, and an estimate of the expected dollar volume associated with the activity;
(2) An analysis of the impact of the proposed activity on the condition of the U.S. operations of the foreign bank in general, and of the branch or agency in particular, including a copy, if available, of any feasibility study, management plan, financial projections, business plan, or similar document concerning the conduct of the activity;
(3) A resolution by the applicant’s board of directors or, if a resolution is not required pursuant to the applicant’s organizational documents, evidence of approval by senior management, authorizing the conduct of such activity and the filing of this application;
(4) If the activity is to be conducted by a state branch insured by the FDIC, statements by the applicant:
(i) Of whether or not it is in compliance with 12 CFR 346.19 (Pledge of Assets) and 12 CFR 346.20 (Asset Maintenance);
(ii) That it has complied with all requirements of the FDIC concerning an application to conduct the activity and the status of the application, including a copy of the FDIC’s disposition of such application, if available; and
(iii) Explaining why the activity will pose no significant risk to the deposit insurance fund; and
(5) Any other information that the Reserve Bank deems appropriate.
(d) Factors considered in determination. (1) The Board shall consider the following factors in determining whether a proposed activity is consistent with sound banking practice:
(i) The types of risks, if any, the activity poses to the U.S. operations of the foreign banking organization in general, and the branch or agency in particular;
(ii) If the activity poses any such risks, the magnitude of each risk; and
(iii) If a risk is not de minimis, the actual or proposed procedures to control and minimize the risk.
(2) Each of the factors set forth in paragraph (d)(1) of this section shall be evaluated in light of the financial condition of the foreign bank in general and the branch or agency in particular and the volume of the activity.
(e) Application procedures. Applications pursuant to this section shall be filed with the appropriate Federal Reserve Bank. An application shall not be deemed complete until it contains all the information requested by the Reserve Bank and has been accepted. Approval of such an application may be conditioned on the applicant’s agreement to conduct the activity subject to specific conditions or limitations.
(f) Divestiture or cessation. (1) If an application for permission to continue to conduct an activity is not approved by the Board or, if applicable, the FDIC, the applicant shall submit a detailed written plan of divestiture or cessation of the activity to the appropriate Federal Reserve Bank within 60 days of the disapproval.
(i) The divestiture or cessation plan shall describe in detail the manner in which the applicant will divest itself of or cease the activity, and shall include a projected timetable describing how long the divestiture or cessation is expected to take.
(ii) Divestiture or cessation shall be complete within one year from the date of the disapproval, or within such shorter period of time as the Board shall direct.
(2) If a foreign bank operating a state branch or state agency chooses not to apply to the Board for permission to continue to conduct an activity that is not permissible for a federal branch, or which is rendered impermissible due to a subsequent change in statute, regulation, official bulletin or circular, written order or interpretation, or decision of a court of competent jurisdiction, the foreign bank shall submit a written plan of divestiture or cessation, in conformance with paragraph (f)(1) of this section within 60 days of the effective date of this part or of such change or decision.
§ 211.30 Criteria for evaluating U.S. operations of foreign banks not subject to consolidated supervision.
(a) Development and publication of criteria. Pursuant to the Foreign Bank Supervision Enhancement Act, Pub. L. 102-242, 105 Stat. 2286 (1991), the Board shall develop and publish criteria to be used in evaluating the operations of any foreign bank in the United States that the Board has determined is not subject to comprehensive consolidated supervision.
(b) Criteria considered by Board. Following a determination by the Board that, having taken into account the standards set forth in § 211.24(c)(1), a foreign bank is not subject to CCS, the Board shall consider the following criteria in determining whether the foreign bank’s U.S. operations should be permitted to continue and, if so, whether any supervisory constraints should be placed upon the bank in connection with those operations:
(1) The proportion of the foreign bank’s total assets and total liabilities that are located or booked in its home country, as well as the distribution and location of its assets and liabilities that are located or booked elsewhere;
(2) The extent to which the operations and assets of the foreign bank and any affiliates are subject to supervision by its home country supervisor;
(3) Whether the home country supervisor of such foreign bank is actively working to establish arrangements for comprehensive consolidated supervision of the bank, and whether demonstrable progress is being made;
(4) Whether the foreign bank has effective and reliable systems of internal controls and management information and reporting, which enable its management properly to oversee its worldwide operations;
(5) Whether the foreign bank’s home country supervisor has any objection to the bank continuing to operate in the United States;
(6) Whether the foreign bank’s home country supervisor and the home country supervisor of any parent of the foreign bank share material information regarding the operations of the foreign bank with other supervisory authorities;
(7) The relationship of the U.S. operations to the other operations of the foreign bank, including whether the foreign bank maintains funds in its U.S. offices that are in excess of amounts due to its U.S. offices from the foreign bank’s non-U.S. offices;
(8) The soundness of the foreign bank’s overall financial condition;
(9) The managerial resources of the foreign bank, including the competence, experience, and integrity of the officers and directors, and the integrity of its principal shareholders;
(10) The scope and frequency of external audits of the foreign bank;
(11) The operating record of the foreign bank generally and its role in the banking system in its home country;
(12) The foreign bank’s record of compliance with relevant laws, as well as the adequacy of its anti-money-laundering controls and procedures, in respect of its worldwide operations;
(13) The operating record of the U.S. offices of the foreign bank;
(14) The views and recommendations of the Comptroller or the relevant state supervisors in those states in which the foreign bank has operations, as appropriate;
(15) Whether the foreign bank, if requested, has provided the Board with adequate assurances that such information will be made available on the operations or activities of the foreign bank and any of its affiliates as the Board deems necessary to determine and enforce compliance with the IBA, the BHC Act, and other U.S. banking statutes; and
(16) Any other information relevant to the safety and soundness of the U.S. operations of the foreign bank.
(c) Restrictions on U.S. operations—(1) Terms of agreement. Any foreign bank that the Board determines is not subject to CCS may be required to enter into an agreement to conduct its U.S. operations subject to such restrictions as the Board, having considered the criteria set forth in paragraph (b) of this section, determines to be appropriate in order to ensure the safety and soundness of its U.S. operations.
(2) Failure to enter into or comply with agreement. A foreign bank that is required by the Board to enter into an agreement pursuant to paragraph (c)(1) of this section and either fails to do so, or fails to comply with the terms of such agreement, may be subject to:
(i) Enforcement action, in order to ensure safe and sound banking operations, under 12 U.S.C. 1818; or
(ii) Termination or a recommendation for termination of its U.S. operations, under § 211.25(a) and (e) and section (7)(e) of the IBA (12 U.S.C. 3105(e)).
Subpart C—Export Trading Companies
§ 211.31 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of the Federal Reserve System (Board) under the authority of the Bank Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.), the Bank Export Services Act (title II, Pub. L. 97-290, 96 Stat. 1235 (1982)) (BESA), and the Export Trading Company Act Amendments of 1988 (title III, Pub. L. 100-418, 102 Stat. 1384 (1988)) (ETC Act Amendments).
(b) Purpose and scope. This subpart is in furtherance of the purposes of the BHC Act, the BESA, and the ETC Act Amendments, the latter two statutes being designed to increase U.S. exports by encouraging investments and participation in export trading companies by bank holding companies and the specified investors. The provisions of this subpart apply to eligible investors as defined in this subpart.
§ 211.32 Definitions.
The definitions in §§ 211.1 and 211.2 of subpart A apply to this subpart, subject to the following:
(a) Appropriate Federal Reserve Bank has the same meaning as in § 211.21(c).
(b) Bank has the same meaning as in section 2(c) of the BHC Act (12 U.S.C. 1841(c)).
(c) Company has the same meaning as in section 2(b) of the BHC Act (12 U.S.C. 1841(b)).
(d) Eligible investors means:
(1) Bank holding companies, as defined in section 2(a) of the BHC Act (12 U.S.C. 1841(a));
(2) Edge and agreement corporations that are subsidiaries of bank holding companies but are not subsidiaries of banks;
(3) Banker’s banks, as described in section 4(c)(14)(F)(iii) of the BHC Act (12 U.S.C. 1843(c)(14)(F)(iii)); and
(4) Foreign banking organizations, as defined in § 211.21(o).
(e) Export trading company means a company that is exclusively engaged in activities related to international trade and, by engaging in one or more export trade services, derives:
(1) At least one-third of its revenues in each consecutive four-year period from the export of, or from facilitating the export of, goods and services produced in the United States by persons other than the export trading company or its subsidiaries; and
(2) More revenues in each four-year period from export activities as described in paragraph (e)(1) of this section than it derives from the import, or facilitating the import, into the United States of goods or services produced outside the United States. The four-year period within which to calculate revenues derived from its activities under this section shall be deemed to have commenced with the first fiscal year after the respective export trading company has been in operation for two years.
(f) Revenues shall include net sales revenues from exporting, importing, or third-party trade in goods by the export trading company for its own account and gross revenues derived from all other activities of the export trading company.
(g) Subsidiary has the same meaning as in section 2(d) of the BHC Act (12 U.S.C. 1841(d)).
(h) Well capitalized has the same meaning as in § 225.2(r) of Regulation Y (12 CFR 225.2(r)).
(i) Well managed has the same meaning as in § 225.2(s) of Regulation Y (12 CFR 225.2(s)).
§ 211.33 Investments and extensions of credit.
(a) Amount of investments. In accordance with the procedures of § 211.34, an eligible investor may invest no more than 5 percent of its consolidated capital and surplus in one or more export trading companies, except that an Edge or agreement corporation not engaged in banking may invest as much as 25 percent of its consolidated capital and surplus but no more than 5 percent of the consolidated capital and surplus of its parent bank holding company.
(b) Extensions of credit—(1) Amount. An eligible investor in an export trading company or companies may extend credit directly or indirectly to the export trading company or companies in a total amount that at no time exceeds 10 percent of the investor’s consolidated capital and surplus.
(2) Terms. (i) An eligible investor in an export trading company may not extend credit directly or indirectly to the export trading company or any of its customers or to any other investor holding 10 percent or more of the shares of the export trading company on terms more favorable than those afforded similar borrowers in similar circumstances, and such extensions of credit shall not involve more than the normal risk of repayment or present other unfavorable features.
(ii) For the purposes of this section, an investor in an export trading company includes any affiliate of the investor.
(3) Collateral requirements. Covered transactions between a bank and an affiliated export trading company in which a bank holding company has invested pursuant to this subpart are subject to the collateral requirements of section 23A of the Federal Reserve Act (12 U.S.C. 371c), except where a bank issues a letter of credit or advances funds to an affiliated export trading company solely to finance the purchase of goods for which:
(i) The export trading company has a bona fide contract for the subsequent sale of the goods; and
(ii) The bank has a security interest in the goods or in the proceeds from their sale at least equal in value to the letter of credit or the advance.
§ 211.34 Procedures for filing and processing notices.
(a) General policy. Direct and indirect investments by eligible investors in export trading companies shall be made in accordance with the general consent or prior notice procedures contained in this section. The Board may at any time, upon notice, modify or suspend the general-consent procedures with respect to any eligible investor.
(b) General consent—(1) Eligibility for general consent. Subject to the other limitations of this subpart, the Board grants its general consent for any investment an export trading company:
(i) If the eligible investor is well capitalized and well managed;
(ii) In an amount equal to cash dividends received from that export trading company during the preceding 12 calendar months; or
(iii) That is acquired from an affiliate at net asset value or through a contribution of shares.
(2) Post-investment notice. By the end of the month following the month in which the investment is made, the investor shall provide the Board with the following information:
(i) The amount of the investment and the source of the funds with which the investment was made; and
(ii) In the case of an initial investment, a description of the activities in which the export trading company proposes to engage and projections for the export trading company for the first year following the investment.
(c) Filing notice—(1) Prior notice. An eligible investor shall give the Board 60 days’ prior written notice of any investment in an export trading company that does not qualify under the general consent procedure.
(2) Notice of change of activities. (i) An eligible investor shall give the Board 60 days’ prior written notice of changes in the activities of an export trading company that is a subsidiary of the investor if the export trading company expands its activities beyond those described in the initial notice to include:
(A) Taking title to goods where the export trading company does not have a firm order for the sale of those goods;
(B) Product research and design;
(C) Product modification; or
(D) Activities not specifically covered by the list of activities contained in section 4(c)(14)(F)(ii) of the BHC Act (12 U.S.C. 1843(c)(14)(F)(ii)).
(ii) Such an expansion of activities shall be regarded as a proposed investment under this subpart.
(d) Time period for Board action. (1) A proposed investment that has not been disapproved by the Board may be made 60 days after the appropriate Federal Reserve Bank accepts the notice for processing. A proposed investment may be made before the expiration of the 60-day period if the Board notifies the investor in writing of its intention not to disapprove the investment.
(2) The Board may extend the 60-day period for an additional 30 days if the Board determines that the investor has not furnished all necessary information or that any material information furnished is substantially inaccurate. The Board may disapprove an investment if the necessary information is provided within a time insufficient to allow the Board reasonably to consider the information received.
(3) Within three days of a decision to disapprove an investment, the Board shall notify the investor in writing and state the reasons for the disapproval.
(e) Time period for investment. An investment in an export trading company that has not been disapproved shall be made within one year from the date of the notice not to disapprove, unless the time period is extended by the Board or by the appropriate Federal Reserve Bank.
Subpart D—International Lending Supervision
§ 211.41 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of the Federal Reserve System (Board) under the authority of the International Lending Supervision Act of 1983 (Pub. L. 98-181, title IX, 97 Stat. 1153) (International Lending Supervision Act); the Federal Reserve Act (12 U.S.C. 221 et seq.) (FRA), and the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.) (BHC Act).
(b) Purpose and scope. This subpart is issued in furtherance of the purposes of the International Lending Supervision Act. It applies to State banks that are members of the Federal Reserve System (State member banks); corporations organized under section 25A of the FRA (12 U.S.C. 611 through 631) (Edge Corporations); corporations operating subject to an agreement with the Board under section 25 of the FRA (12 U.S.C. 601 through 604a) (Agreement Corporations); and bank holding companies (as defined in section 2 of the BHC Act (12 U.S.C. 1841(a)) but not including a bank holding company that is a foreign banking organization as defined in § 211.21(o).
§ 211.42 Definitions.
For the purposes of this subpart:
(a) Administrative cost means those costs which are specifically identified with negotiating, processing and consummating the loan. These costs include, but are not necessarily limited to: legal fees; costs of preparing and processing loan documents; and an allocable portion of salaries and related benefits of employees engaged in the international lending function. No portion of supervisory and administrative expenses or other indirect expenses such as occupancy and other similar overhead costs shall be included.
(b) Banking institution means a State member bank; bank holding company; Edge Corporation and Agreement Corporation engaged in banking. Banking institution does not include a foreign banking organization as defined in § 211.21(o).
(c) Federal banking agencies means the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.
(d) International assets means those assets required to be included in banking institutions’ Country Exposure Report forms (FFIEC No. 009).
(e) International loan means a loan as defined in the instructions to the Report of Condition and Income for the respective banking institution (FFIEC Nos. 031 and 041) and made to a foreign government, or to an individual, a corporation, or other entity not a citizen of, resident in, or organized or incorporated in the United States.
(f) Restructured international loan means a loan that meets the following criteria:
(1) The borrower is unable to service the existing loan according to its terms and is a resident of a foreign country in which there is a generalized inability of public and private sector obligors to meet their external debt obligations on a timely basis because of a lack of, or restraints on the availability of, needed foreign exchange in the country; and
(2) The terms of the existing loan are amended to reduce stated interest or extend the schedule of payments; or
(3) A new loan is made to, or for the benefit of, the borrower, enabling the borrower to service or refinance the existing debt.
(g) Transfer risk means the possibility that an asset cannot be serviced in the currency of payment because of a lack of, or restraints on the availability of, needed foreign exchange in the country of the obligor.
§ 211.43 Allocated transfer risk reserve.
(a) Establishment of Allocated Transfer Risk Reserve. A banking institution shall establish an allocated transfer risk reserve (ATRR) for specified international assets when required by the Board in accordance with this section.
(b) Procedures and standards—(1) Joint agency determination. At least annually, the Federal banking agencies shall determine jointly, based on the standards set forth in paragraph (b)(2) of this section, the following:
(i) Which international assets subject to transfer risk warrant establishment of an ATRR;
(ii) The amount of the ATRR for the specified assets; and
(iii) Whether an ATRR established for specified assets may be reduced.
(2) Standards for requiring ATRR—(i) Evaluation of assets. The Federal banking agencies shall apply the following criteria in determining whether an ATRR is required for particular international assets:
(A) Whether the quality of a banking institution’s assets has been impaired by a protracted inability of public or private obligors in a foreign country to make payments on their external indebtedness as indicated by such factors, among others, as whether:
(1) Such obligors have failed to make full interest payments on external indebtedness; or
(2) Such obligors have failed to comply with the terms of any restructured indebtedness; or
(3) A foreign country has failed to comply with any International Monetary Fund or other suitable adjustment program; or
(B) Whether no definite prospects exist for the orderly restoration of debt service.
(ii) Determination of amount of ATRR. (A) In determining the amount of the ATRR, the Federal banking agencies shall consider:
(1) The length of time the quality of the asset has been impaired;
(2) Recent actions taken to restore debt service capability;
(3) Prospects for restored asset quality; and
(4) Such other factors as the Federal banking agencies may consider relevant to the quality of the asset.
(B) The initial year’s provision for the ATRR shall be ten percent of the principal amount of each specified international asset, or such greater or lesser percentage determined by the Federal banking agencies. Additional provision, if any, for the ATRR in subsequent years shall be fifteen percent of the principal amount of each specified international asset, or such greater or lesser percentage determined by the Federal banking agencies.
(3) Board notification. Based on the joint agency determinations under paragraph (b)(1) of this section, the Board shall notify each banking institution holding assets subject to an ATRR:
(i) Of the amount of the ATRR to be established by the institution for specified international assets; and
(ii) That an ATRR established for specified assets may be reduced.
(c) Accounting treatment of ATRR—(1) Charge to current income. A banking institution shall establish an ATRR by a charge to current income and the amounts so charged shall not be included in the banking institution’s capital or surplus.
(2) Separate accounting. A banking institution shall account for an ATRR separately from the Allowance for Loan and Lease Losses, and shall deduct the ATRR from “gross loans and leases” to arrive at “net loans and leases.” The ATRR must be established for each asset subject to the ATRR in the percentage amount specified.
(3) Consolidation. A banking institution shall establish an ATRR, as required, on a consolidated basis. For banks, consolidation should be in accordance with the procedures and tests of significance set forth in the instructions for preparation of Consolidated Reports of Condition and Income (FFIEC 031 and 041). For bank holding companies, the consolidation shall be in accordance with the principles set forth in the “Instructions to Consolidated Financial Statements for Bank Holding Companies” (Form F.R. Y-9C). Edge and Agreement corporations engaged in banking shall report in accordance with instructions for preparation of the Report of Condition for Edge and Agreement Corporations (Form F.R. 2886b).
(4) Alternative accounting treatment. A banking institution is not required to establish an ATRR if it writes down in the period in which the ATRR is required, or has written down in prior periods, the value of the specified international assets in the requisite amount for each such asset. For purposes of this paragraph, international assets may be written down by a charge to the Allowance for Loan and Lease Losses or the allowance for credit losses, as applicable, to the extent permitted under U.S. generally accepted accounting principles, or a reduction in the principal amount of the asset by application of interest payments or other collections on the asset. However, the Allowance for Loan and Lease Losses or allowance for credit losses, as applicable, must be replenished in such amount necessary to restore it to a level which adequately provides for the estimated losses inherent in the banking institution’s loan portfolio.
(5) Reduction of ATRR. A banking institution may reduce an ATRR when notified by the Board or, at any time, by writing down such amount of the international asset for which the ATRR was established.
§ 211.44 Reporting and disclosure of international assets.
(a) Requirements. (1) Pursuant to section 907(a) of the International Lending Supervision Act of 1983 (Title IX, Pub. L. 98-181, 97 Stat. 1153) (ILSA), a banking institution shall submit to the Board, at least quarterly, information regarding the amounts and composition of its holdings of international assets.
(2) Pursuant to section 907(b) of ILSA, a banking institution shall submit to the Board information regarding concentrations in its holdings of international assets that are material in relation to total assets and to capital of the institution, such information to be made publicly available by the Board on request.
(b) Procedures. The format, content and reporting and filing dates of the reports required under paragraph (a) of this section shall be determined jointly by the Federal banking agencies. The requirements to be prescribed by the Federal banking agencies may include changes to existing reporting forms (such as the Country Exposure Report, form FFIEC No. 009) or such other requirements as the Federal banking agencies deem appropriate. The Federal banking agencies also may determine to exempt from the requirements of paragraph (a) of this section banking institutions that, in the Federal banking agencies’ judgment, have de minimis holdings of international assets.
(c) Reservation of authority. Nothing contained in this rule shall preclude the Board from requiring from a banking institution such additional or more frequent information on the institution’s holding of international assets as the Board may consider necessary.
§ 211.45 Accounting for fees on international loans.
(a) Restrictions on fees for restructured international loans. No banking institution shall charge, in connection with the restructuring of an international loan, any fee exceeding the administrative cost of the restructuring unless it amortizes the amount of the fee exceeding the administrative cost over the effective life of the loan.
(b) Accounting treatment. Subject to paragraph (a) of this section, banking institutions shall account for fees on international loans in accordance with generally accepted accounting principles.
Interpretations
§ 211.601 Status of certain offices for purposes of the International Banking Act restrictions on interstate banking operations.
The Board has considered the question of whether a foreign bank’s California office that may accept deposits from certain foreign sources (e.g., a United States citizen residing abroad) is a branch or an agency for the purposes of the grandfather provisions of section 5 of the International Banking Act of 1978 (12 U.S.C. 3103(b)). The question has arisen as a result of the definitions in the International Banking Act of branch and agency, and the limited deposit-taking capabilities of certain California offices of foreign banks.
The International Banking Act defines agency as “any office * * * at which deposits may not be accepted from citizens or residents of the United States,” and defines branch as “any office * * * of a foreign bank * * * at which deposits are received” (12 U.S.C. 3101(1) and (3)). Offices of foreign banks in California prior to the International Banking Act were generally prohibited from accepting deposits by the requirement of State law that such offices obtain Federal deposit insurance (Cal. Fin. Code 1756); until the passage of the International Banking Act an office of a foreign bank could not obtain such insurance. California law, however, permits offices of foreign banks, with the approval of the Banking Department, to accept deposits from any person that resides, is domiciled, and maintains its principal place of business in a foreign country (Cal. Fin. Code 1756.2). Thus, under a literal reading of the definitions of branch and agency contained in the International Banking Act, a foreign bank’s California office that accepts deposits from certain foreign sources (e.g., a U.S. citizen residing abroad), is a branch rather than an agency.
Section 5 of the International Banking Act establishes certain limitations on the expansion of the domestic deposit-taking capabilities of a foreign bank outside its home State. It also grandfathers offices established or applied for prior to July 27, 1978, and permits a foreign bank to select its home State from among the States in which it operated branches and agencies on the grandfather date. If a foreign bank’s office that was established or applied for prior to June 27, 1978, is a branch as defined in the International Banking Act, then it is grandfathered as a branch. Accordingly, a foreign bank could designate a State other than California as its home State and subsequently convert its California office to a full domestic deposit-taking facility by obtaining Federal deposit insurance. If, however, the office is determined to be an agency, then it is grandfathered as such and the foreign bank may not expand its deposit-taking capabilities in California without declaring California its home State.
In the Board’s view, it would be inconsistent with the purposes and the legislative history of the International Banking Act to enable a foreign bank to expand its domestic interstate deposit-taking capabilities by grandfathering these California offices as branches because of their ability to receive certain foreign source deposits. The Board also notes that such deposits are of the same general type that may be received by an Edge Corporation and, hence in accordance with section 5(a) of the International Banking Act, by branches established and operated outside a foreign bank’s home State. It would be inconsistent with the structure of the interstate banking provisions of the International Banking Act to grandfather as full deposit-taking offices those facilities whose activities have been determined by Congress to be appropriate for a foreign bank’s out-of-home State branches.
Accordingly, the Board, in administering the interstate banking provisions of the IBA, regards as agencies those offices of foreign banks that do not accept domestic deposits but that may accept deposits from any person that resides, is domiciled, and maintains its principal place of business in a foreign country.
§ 211.602 Investments by United States Banking Organizations in foreign companies that transact business in the United States.
Section 25(a) of the Federal Reserve Act (12 U.S.C. 611, the “Edge Act”) provides for the establishment of corporations to engage in international or foreign banking or other international or foreign financial operations (“Edge Corporations”). Congress has declared that Edge Corporations are to serve the purpose of stimulating the provision of international banking and financing services throughout the United States and are to have powers sufficiently broad to enable them to compete effectively with foreign-owned institutions in the United States and abroad. The Board was directed by the International Banking Act of 1978 (12 U.S.C. 3101) to revise its regulations governing Edge Corporations in order to accomplish these and other objectives and was further directed to modify or eliminate any interpretations that impede the attainment of these purposes.
One of the powers of Edge Corporations is that of investing in foreign companies. Under the relevant statutes, however, an Edge Corporation is prohibited from investing in foreign companies that engage in the general business of buying or selling goods, wares, merchandise or commodities in the United States. In addition, an Edge Corporation may not invest in foreign companies that transact any business in the United States that is not, in the Board’s judgment, “incidental” to its international or foreign business. The latter limitation also applies to investments by bank holding companies (12 U.S.C. 1843(c)(13)) and member banks (12 U.S.C. 601).
The Board has been asked to determine whether an Edge Corporation’s minority investment (involving less than 25 percent of the voting shares) in a foreign company would continue to be permissible after the foreign company establishes or acquires a United States subsidiary that engages in domestic activities that are closely related to banking. The Board has also been asked to determine whether an Edge Corporation’s minority investment in a foreign bank would continue to be permissible after the foreign bank establishes a branch in the United States that engages in domestic banking activities. In the latter case, the branch would be located outside the State in which the Edge Corporation and its parent bank are located.
In the past the Board, in exercising its discretionary authority to determine those activities that are permissible in the United States, has followed the policy that an Edge Corporation could not hold even a minority interest in a foreign company that engaged, directly or indirectly, in any purely domestic business in the United States. The United States activities considered permissible were those internationally related activities that Edge Corporations may engage in directly. If this policy were applied to the subject requests, the Edge Corporations would be required to divest their interests in the foreign companies notwithstanding the fact that, in each case, the Edge Corporation, as a minority investor, did not control the decision to undertake activities in the United States, and that even after the United States activities are undertaken the business of the foreign company will remain predominantly outside the United States.
International banking and finance have undergone considerable growth and change in recent years. It is increasingly common, for example, for United States institutions to have direct or indirect offices in foreign countries and to engage in activities at those offices that are domestically as well as internationally oriented. In this climate, United States banking organizations would be placed at a competitive disadvantage if their minority investments in foreign companies were limited to those companies that do no domestic business in the United States. Moreover, continued adherence to the existing policy would be contrary to the declaration in the International Banking Act of 1978 that Edge Corporations’ powers are to be sufficiently broad to enable them to compete effectively in the United States and abroad. Furthermore, where the activities to be conducted in the United States by the foreign company are banking or closely related to banking, it does not appear that any regulatory or supervisory purpose would be served by prohibiting a minority investment in the foreign firm by a United States banking organization.
In view of these considerations, the Board has reviewed its policy relating to the activities that may be engaged in the United States by foreign companies (including foreign banks) in which Edge Corporations, member banks, and bank holding companies invest. As a result of that review, the Board has determined that it would be appropriate to interpret sections 25 and 25(a)of the Federal Reserve Act (12 U.S.C. 601, 611) and section 4(c)(13) of the Bank Holding Company Act (12 U.S.C. 1843(c)(13)) generally to allow United States banking organizations, with the prior consent of the Board, to acquire and hold investments in foreign companies that do business in the United States subject to the following conditions:
(1) The foreign company is engaged predominantly in business outside the United States or in internationally related activities in the United States;*
*This condition would ordinarily not be met where a foreign company merely maintains a majority of its business in international activities. Each case will be scrutinized to ensure that the activities in the United States do not alter substantially the international orientation of the foreign company’s business.
(2) The direct or indirect activities of the foreign company in the United States are either banking or closely related to banking; and
(3) The United States banking organization does not own 25 percent or more of the voting stock of, or otherwise control, the foreign company.
§ 211.603 Commodity swap transactions.
For text of interpretation relating to this subject, see § 208.128 of this chapter.
§ 211.604 Data processing activities.
(a) Introduction. As a result of a recent proposal by a bank holding company to engage in data processing activities abroad, the Board has considered the scope of permissible data processing activities under Regulation K (12 CFR part 211). This question has arisen as a result of the fact that § 211.5(d)(10) of Regulation K does not specifically indicate the scope of data processing as a permissible activity abroad.
(b) Scope of data processing activities. (1) Prior to 1979, the Board authorized specific banking organizations to engage in data processing activities abroad with the expectation that such activity would be primarily related to financial activities. When Regulation K was issued in 1979, data processing was included as a permissible activity abroad. Although the regulation did not provide specific guidance on the scope of this authority, the Board has considered such authority to be coextensive with the authority granted in specific cases prior to the issuance of Regulation K, which relied on the fact that most of the activity would relate to financial data. Regulation K does not address related activities such as the manufacture of hardware or the provision of software or related or incidental services.
(2) In 1979, when the activity was included in Regulation K for the first time, the data processing authority in Regulation K was somewhat broader than that permissible in the United States under Regulation Y (12 CFR part 225) at that time, as the Regulation K authority permitted limited non-financial data processing. In 1979, Regulation Y authorized only financial data processing activities for third parties, with very limited exceptions. By 1997, however, the scope of data processing activities under Regulation Y was expanded such that bank holding companies are permitted to derive up to 30 percent of their data processing revenues from processing data that is not financial, banking, or economic. Moreover, in other respects, the Regulation Y provision is broader than the data processing provision in Regulation K.
(3) In light of the fact that the permissible scope of data processing activities under Regulation Y is now equal to, and in some respects, broader than the activity originally authorized under Regulation K, the Board believes that § 211.5(d)(10) should be read to encompass all of the activities permissible under § 225.28(b)(14) of Regulation Y. In addition, the limitations of that section would also apply to § 211.5(d)(10).
(c) Applications. If a U.S. banking organization wishes to engage abroad in data processing or data transmission activities beyond those described in Regulation Y, it must apply for the Board’s prior consent under § 211.5(d)(20) of Regulation K. In addition, if any investor has commenced activities beyond those permitted under § 225.28(b)(14) of Regulation Y in reliance on Regulation K, it should consult with staff of the Board to determine whether such activities have been properly authorized under Regulation K.
§ 211.605 Permissible underwriting activities of foreign banks.
(a) Introduction. A number of foreign banks that are subject to the Bank Holding Company Act (“BHC Act”) have participated as co-managers in the underwriting of securities to be distributed in the United States despite the fact that the foreign banks in question do not have authority to engage in underwriting activity in the United States under either the Gramm-Leach-Bliley Act (“GLB Act”) or section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)). This interpretation clarifies the scope of existing restrictions on underwriting by such foreign banks with respect to securities that are distributed in the United States.
(b) Underwriting transactions engaged in by foreign banks. (1) In the transactions in question, a foreign bank typically becomes a member of the underwriting syndicate for securities that are registered and intended to be distributed in the United States. The lead underwriter, usually a registered U.S. broker-dealer not affiliated with the foreign bank, agrees to be responsible for distributing the securities being underwritten. The underwriting obligation is assumed by a foreign office or affiliate of the foreign bank.
(2) The foreign banks have used their U.S. offices or affiliates to act as liaison with the U.S. issuer and the lead underwriter in the United States, to prepare documentation and to provide other services in connection with the underwriting. In some cases, the U.S. offices or affiliates that assisted the foreign bank with the underwriting receive a substantial portion of the revenue generated by the foreign bank’s participation in the underwriting. In other cases, the U.S. offices receive “credit” from the head office of the foreign bank for their assistance in generating profits arising from the underwriting.
(3) By assuming the underwriting risk and booking the underwriting fees in their foreign offices or affiliates, the foreign banks are able to take advantage of an exemption under U.S. securities laws; a foreign underwriter is not required to register in the United States if the underwriter either does not distribute any of the securities in the United States or distributes them only through a registered broker-dealer.
(c) Permissible scope of underwriting activities. (1) A foreign bank that is subject to the BHC Act may engage in underwriting activities in the United States only if it has been authorized under section 4 of the Act. The foreign banks in question have argued that they are not engaged in underwriting activity in the United States because the underwriting activity takes place only outside the United States where the transaction is booked. The foreign banks refer to Regulation K, which defines “engaged in business” or “engaged in activities” to mean conducting an activity through an office or subsidiary in the United States. Because the underwriting is not booked in a U.S. office or subsidiary, the banks assert that the activity cannot be considered conducted in the United States.
(2) The Board believes that the position taken by the foreign banks is not supported by the Board’s regulations or policies. Section 225.124 of the Board’s Regulation Y (12 CFR 225.124(d)) states that a foreign bank will not be considered to be engaged in the activity of underwriting in the United States if the shares to be underwritten are distributed outside the United States. In the transactions in question, all of the securities to be underwritten by the foreign banks are distributed in the United States.
(3) Regulation K (12 CFR part 211) was amended in 1985 to provide clarification that a foreign bank may not own or control voting shares of a foreign company that directly underwrites, sells or distributes securities in the United States (emphasis added). 12 CFR 211.23(f)(5)(ii). In proposing this latter provision, the Board clarified that no part of the prohibited underwriting process may take place in the United States and that the prohibition on the activity does not depend on the activity being conducted through an office or subsidiary in the United States. Moreover, in the transactions in question, there was significant participation by U.S. offices and affiliates of the foreign banks in the underwriting process. In some transactions, the foreign office at which the transactions were booked did not have any documentation on the particular transactions; all documentation was maintained in the United States office. In all cases, the U.S. offices or affiliates provided virtually all technical support for participation in the underwriting process and benefitted from profits generated by the activity.
(4) The fact that some technological and regulatory constraints on the delivery of cross-border services into the United States have been eliminated since the Regulation K definition of “engaged in business” was adopted in 1979 creates greater scope for banking organizations to deal with customers outside the U.S. bank regulatory framework. The definition in Regulation K, however, does not authorize foreign banking organizations to evade regulatory restrictions on securities activities in the United States by directly underwriting securities to be distributed in the United States or by using U.S. offices and affiliates to facilitate the prohibited activity. In the GLB Act, Congress established a framework within which both domestic and foreign banking organizations may underwrite and deal in securities in the United States. The GLB Act requires that banking organizations meet certain financial and managerial requirements in order to be able to engage in these activities in the United States. The Board believes the practices described above undermine this legislative framework and constitute an evasion of the requirements of the GLB Act and the Board’s Regulation K. Foreign banking organizations that wish to conduct securities underwriting activity in the United States have long had the option of obtaining section 20 authority and now have the option of obtaining financial holding company status.
(d) Conclusion. The Board finds that the underwriting of securities to be distributed in the United States is an activity conducted in the United States, regardless of the location at which the underwriting risk is assumed and the underwriting fees are booked. Consequently, any banking organization that wishes to engage in such activity must either be a financial holding company under the GLB Act or have authority to engage in underwriting activity under section 4(c)(8) of the BHC Act (so-called “section 20 authority”). Revenue generated by underwriting bank-ineligible securities in such transactions should be attributed to the section 20 company for those foreign banks that operate under section 20 authority.
PART 212—MANAGEMENT OFFICIAL INTERLOCKS
§ 212.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the provisions of the Depository Institution Management Interlocks Act (Interlocks Act) (12 U.S.C. 3201 et seq.), as amended.
(b) Purpose. The purpose of the Interlocks Act and this part is to foster competition by generally prohibiting a management official from serving two nonaffiliated depository organizations in situations where the management interlock likely would have an anticompetitive effect.
(c) Scope. This part applies to management officials of state member banks, bank holding companies, and their affiliates.
§ 212.2 Definitions.
For purposes of this part, the following definitions apply:
(a) Affiliate. (1) The term affiliate has the meaning given in section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of that section 202, shares held by an individual include shares held by members of his or her immediate family. “Immediate family” means spouse, mother, father, child, grandchild, sister, brother, or any of their spouses, whether or not any of their shares are held in trust.
(2) For purposes of section 202(3)(B) of the Interlocks Act (12 U.S.C. 3201(3)(B)), an affiliate relationship based on common ownership does not exist if the Board determines, after giving the affected persons the opportunity to respond, that the asserted affiliation was established in order to avoid the prohibitions of the Interlocks Act and does not represent a true commonality of interest between the depository organizations. In making this determination, the Board considers, among other things, whether a person, including members of his or her immediate family, whose shares are necessary to constitute the group owns a nominal percentage of the shares of one of the organizations and the percentage is substantially disproportionate to that person’s ownership of shares in the other organization.
(b) Area median income means:
(1) The median family income for the metropolitan statistical area (MSA), if a depository organization is located in an MSA; or
(2) The statewide nonmetropolitan median family income, if a depository organization is located outside an MSA.
(c) Community means a city, town, or village, and contiguous and adjacent cities, towns, or villages.
(d) Contiguous or adjacent cities, towns, or villages means cities, towns, or villages whose borders touch each other or whose borders are within 10 road miles of each other at their closest points. The property line of an office located in an unincorporated city, town, or village is the boundary line of that city, town, or village for the purpose of this definition.
(e) Depository holding company means a bank holding company or a savings and loan holding company (as more fully defined in section 202 of the Interlocks Act (12 U.S.C. 3201)) having its principal office located in the United States.
(f) Depository institution means a commercial bank (including a private bank), a savings bank, a trust company, a savings and loan association, a building and loan association, a homestead association, a cooperative bank, an industrial bank, or a credit union, chartered under the laws of the United States and having a principal office located in the United States. Additionally, a United States office, including a branch or agency, of a foreign commercial bank is a depository institution.
(g) Depository institution affiliate means a depository institution that is an affiliate of a depository organization.
(h) Depository organization means a depository institution or a depository holding company.
(i) Low- and moderate-income areas means census tracts (or, if an area is not in a census tract, block numbering areas delineated by the United States Bureau of the Census) where the median family income is less than 100 percent of the area median income.
(j) Management official. (1) The term management official means:
(i) A director;
(ii) An advisory or honorary director of a depository institution with total assets of $100 million or more;
(iii) A senior executive officer as that term is defined in 12 CFR 225.71(c);
(iv) A branch manager;
(v) A trustee of a depository organization under the control of trustees; and
(vi) Any person who has a representative or nominee, as defined in paragraph (n) of this section, serving in any of the capacities in this paragraph (j)(1).
(2) The term management official does not include:
(i) A person whose management functions relate exclusively to the business of retail merchandising or manufacturing;
(ii) A person whose management functions relate principally to a foreign commercial bank’s business outside the United States; or
(iii) A person described in the provisos of section 202(4) of the Interlocks Act (referring to an officer of a State-chartered savings bank, cooperative bank, or trust company that neither makes real estate mortgage loans nor accepts savings).
(k) Office means a principal or branch office of a depository institution located in the United States. Office does not include a representative office of a foreign commercial bank, an electronic terminal, a loan production office, or any office of a depository holding company.
(l) Person means a natural person, corporation, or other business entity.
(m) Relevant metropolitan statistical area (RMSA) means an MSA, a primary MSA, or a consolidated MSA that is not comprised of designated Primary MSAs to the extent that these terms are defined and applied by the Office of Management and Budget.
(n) Representative or nominee means a natural person who serves as a management official and has an obligation to act on behalf of another person with respect to management responsibilities. The Board will find that a person has an obligation to act on behalf of another person only if the first person has an agreement, express or implied, to act on behalf of the second person with respect to management responsibilities. The Board will determine, after giving the affected persons an opportunity to respond, whether a person is a representative or nominee.
(o) Total assets. (1) The term total assets means assets measured on a consolidated basis and reported in the most recent fiscal year-end Consolidated Report of Condition and Income.
(2) The term total assets does not include:
(i) Assets of a diversified savings and loan holding company as defined by section 10(a)(1)(F) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)(1)(F)) other than the assets of its depository institution affiliate;
(ii) Assets of a bank holding company that is exempt from the prohibitions of section 4 of the Bank Holding Company Act of 1956 pursuant to an order issued under section 4(d) of that Act (12 U.S.C. 1843(d)) other than the assets of its depository institution affiliate; or
(iii) Assets of offices of a foreign commercial bank other than the assets of its United States branch or agency.
(3)(i) Notwithstanding paragraph (o)(1) of this section, and except as provided in paragraph (o)(3)(ii) of this section, from December 2, 2020, through December 31, 2021, the term total assets, with respect to a depository organization, means the lesser of assets of the depository organization reported on a consolidated basis as of December 31, 2019, and assets reported as of the end of the depository organization’s most recent fiscal year on a consolidated basis as of December 31, 2020.
(ii) The relief provided under paragraph (o)(3)(i) of this section does not apply to a depository organization if the Board determines that permitting the depository organization to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the depository organization. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the depository organization since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the depository organization has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the depository organization. In making a determination pursuant to this paragraph (o)(3)(ii), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(p) United States means the United States of America, any State or territory of the United States of America, the District of Columbia, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
§ 212.3 Prohibitions.
(a) Community. A management official of a depository organization may not serve at the same time as a management official of an unaffiliated depository organization if the depository organizations in question (or a depository institution affiliate thereof) have offices in the same community.
(b) RMSA. A management official of a depository organization may not serve at the same time as a management official of an unaffiliated depository organization if the depository organizations in question (or a depository institution affiliate thereof) have offices in the same RMSA and, in the case of depository institutions, each depository organization has total assets of $50 million or more.
(c) Major assets. A management official of a depository organization with total assets exceeding $10 billion (or any affiliate of such an organization) may not serve at the same time as a management official of an unaffiliated depository organization with total assets exceeding $10 billion (or any affiliate of such an organization), regardless of the location of the two depository organizations. The Board will adjust these thresholds, as necessary, based on the year-to-year change in the average of the Consumer Price Index for the Urban Wage Earners and Clerical Workers, not seasonally adjusted, with rounding to the nearest $100 million. The Board will announce the revised thresholds by publishing a final rule without notice and comment in the
§ 212.4 Interlocking relationships permitted by statute.
The prohibitions of § 212.3 do not apply in the case of any one or more of the following organizations or to a subsidiary thereof:
(a) A depository organization that has been placed formally in liquidation, or which is in the hands of a receiver, conservator, or other official exercising a similar function;
(b) A corporation operating under section 25 or section 25A of the Federal Reserve Act (12 U.S.C. 601 et seq. and 12 U.S.C. 611 et seq., respectively) (Edge Corporations and Agreement Corporations);
(c) A credit union being served by a management official of another credit union;
(d) A depository organization that does not do business within the United States except as an incident to its activities outside the United States;
(e) A State-chartered savings and loan guaranty corporation;
(f) A Federal Home Loan Bank or any other bank organized solely to serve depository institutions (a bankers’ bank) or solely for the purpose of providing securities clearing services and services related thereto for depository institutions and securities companies;
(g) A depository organization that is closed or is in danger of closing as determined by the appropriate Federal depository institution’s regulatory agency and is acquired by another depository organization. This exemption lasts for five years, beginning on the date the depository organization is acquired; and
(h)(1) A diversified savings and loan holding company (as defined in section 10(a)(1)(F) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)(1)(F)) with respect to the service of a director of such company who also is a director of an unaffiliated depository organization if:
(i) Both the diversified savings and loan holding company and the unaffiliated depository organization notify their appropriate Federal depository institutions regulatory agency at least 60 days before the dual service is proposed to begin; and
(ii) The appropriate regulatory agency does not disapprove the dual service before the end of the 60-day period.
(2) The Board may disapprove a notice of proposed service if it finds that:
(i) The service cannot be structured or limited so as to preclude an anticompetitive effect in financial services in any part of the United States;
(ii) The service would lead to substantial conflicts of interest or unsafe or unsound practices; or
(iii) The notificant failed to furnish all the information required by the Board.
(3) The Board may require that any interlock permitted under this paragraph (h) be terminated if a change in circumstances occurs with respect to one of the interlocked depository organizations that would have provided a basis for disapproval of the interlock during the notice period.
(a) Exemption. A management interlock that is prohibited by § 212.3 is permissible, if:
(1) The interlock is not prohibited by § 212.3(c); and
(2) The depository organizations (and their depository institution affiliates) hold, in the aggregate, no more than 20 percent of the deposits in each RMSA or community in which both depository organizations (or their depository institution affiliates) have offices. The amount of deposits shall be determined by reference to the most recent annual Summary of Deposits published by the FDIC for the RMSA or community.
(b) Confirmation and records. Each depository organization must maintain records sufficient to support its determination of eligibility for the exemption under paragraph (a) of this section, and must reconfirm that determination on an annual basis.
§ 212.6 General exemption.
(a) Exemption. The Board may, by agency order, exempt an interlock from the prohibitions in § 212.3, if the Board finds that the interlock would not result in a monopoly or substantial lessening of competition, and would not present safety and soundness concerns.
(b) Presumptions. In reviewing an application for an exemption under this section, the Board will apply a rebuttable presumption that an interlock will not result in a monopoly or substantial lessening of competition if the depository organization seeking to add a management official:
(1) Primarily serves low- and moderate-income areas;
(2) Is controlled or managed by persons who are members of a minority group, or women;
(3) Is a depository institution that has been chartered for less than two years; or
(4) Is deemed to be in “troubled condition” as defined in 12 CFR 225.71.
(c) Duration. Unless a shorter expiration period is provided in the Board approval, an exemption permitted by paragraph (a) of this section may continue so long as it does not result in a monopoly or substantial lessening of competition, or is unsafe or unsound. If the Board grants an interlock exemption in reliance upon a presumption under paragraph (b) of this section, the interlock may continue for three years, unless otherwise provided by the Board in writing.
§ 212.7 Change in circumstances.
(a) Termination. A management official shall terminate his or her service or apply for an exemption if a change in circumstances causes the service to become prohibited. A change in circumstances may include an increase in asset size of an organization, a change in the delineation of the RMSA or community, the establishment of an office, an increase in the aggregate deposits of the depository organization, or an acquisition, merger, consolidation, or reorganization of the ownership structure of a depository organization that causes a previously permissible interlock to become prohibited.
(b) Transition period. A management official described in paragraph (a) of this section may continue to serve the state member bank or bank holding company involved in the interlock for 15 months following the date of the change in circumstances. The Board may shorten this period under appropriate circumstances.
§ 212.8 Enforcement.
Except as provided in this section, the Board administers and enforces the Interlocks Act with respect to state member banks, bank holding companies, and affiliates of either, and may refer any case of a prohibited interlocking relationship involving these entities to the Attorney General of the United States to enforce compliance with the Interlocks Act and this part. If an affiliate of a state member bank or a bank holding company is subject to the primary regulation of another Federal depository organization supervisory agency, then the Board does not administer and enforce the Interlocks Act with respect to that affiliate.
§ 212.9 Effect of Interlocks Act on Clayton Act.
The Board regards the provisions of the first three paragraphs of section 8 of the Clayton Act (15 U.S.C. 19) to have been supplanted by the revised and more comprehensive prohibitions on management official interlocks between depository organizations in the Interlocks Act.
PART 213—CONSUMER LEASING (REGULATION M)
§ 213.1 Authority, scope, purpose, and enforcement.
(a) Authority. The regulation in this part, known as Regulation M, is issued by the Board of Governors of the Federal Reserve System to implement the consumer leasing provisions of the Truth in Lending Act, which is title I of the Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.). Information collection requirements contained in this regulation have been approved by the Office of Management and Budget under the provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB control number 7100-0202.
(b) Scope and purpose. This part applies to all persons that are lessors of personal property under consumer leases as those terms are defined in § 213.2(e)(1) and (h). The purpose of this part is:
(1) To ensure that lessees of personal property receive meaningful disclosures that enable them to compare lease terms with other leases and, where appropriate, with credit transactions;
(2) To limit the amount of balloon payments in consumer lease transactions; and
(3) To provide for the accurate disclosure of lease terms in advertising.
(c) Enforcement and liability. Section 108 of the act contains the administrative enforcement provisions. Sections 112, 130, 131, and 185 of the act contain the liability provisions for failing to comply with the requirements of the act and this part.
§ 213.2 Definitions.
For the purposes of this part the following definitions apply:
(a) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.) and the Consumer Leasing Act is chapter 5 of the Truth in Lending Act.
(b) Advertisement means a commercial message in any medium that directly or indirectly promotes a consumer lease transaction.
(c) Board refers to the Board of Governors of the Federal Reserve System.
(d) Closed-end lease means a consumer lease other than an open-end lease as defined in this section.
(e)(1) Consumer lease means a contract in the form of a bailment or lease for the use of personal property by a natural person primarily for personal, family, or household purposes, for a period exceeding four months and for a total contractual obligation not exceeding the applicable threshold amount, whether or not the lessee has the option to purchase or otherwise become the owner of the property at the expiration of the lease. The threshold amount is adjusted annually to reflect increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers, as applicable. See the official staff commentary to this paragraph (e) for the threshold amount applicable to a specific consumer lease. Unless the context indicates otherwise, in this part “lease” means “consumer lease.”
(2) The term does not include a lease that meets the definition of a credit sale in Regulation Z (12 CFR 226.2(a)). It also does not include a lease for agricultural, business, or commercial purposes or a lease made to an organization.
(3) This part does not apply to a lease transaction of personal property which is incident to the lease of real property and which provides that:
(i) The lessee has no liability for the value of the personal property at the end of the lease term except for abnormal wear and tear; and
(ii) The lessee has no option to purchase the leased property.
(f) Gross capitalized cost means the amount agreed upon by the lessor and the lessee as the value of the leased property and any items that are capitalized or amortized during the lease term, including but not limited to taxes, insurance, service agreements, and any outstanding prior credit or lease balance. Capitalized cost reduction means the total amount of any rebate, cash payment, net trade-in allowance, and noncash credit that reduces the gross capitalized cost. The adjusted capitalized cost equals the gross capitalized cost less the capitalized cost reduction, and is the amount used by the lessor in calculating the base periodic payment.
(g) Lessee means a natural person who enters into or is offered a consumer lease.
(h) Lessor means a person who regularly leases, offers to lease, or arranges for the lease of personal property under a consumer lease. A person who has leased, offered, or arranged to lease personal property more than five times in the preceding calendar year or more than five times in the current calendar year is subject to the act and this part.
(i) Open-end lease means a consumer lease in which the lessee’s liability at the end of the lease term is based on the difference between the residual value of the leased property and its realized value.
(j) Organization means a corporation, trust, estate, partnership, cooperative, association, or government entity or instrumentality.
(k) Person means a natural person or an organization.
(l) Personal property means any property that is not real property under the law of the state where the property is located at the time it is offered or made available for lease.
(m) Realized value means:
(1) The price received by the lessor for the leased property at disposition;
(2) The highest offer for disposition of the leased property; or
(3) The fair market value of the leased property at the end of the lease term.
(n) Residual value means the value of the leased property at the end of the lease term, as estimated or assigned at consummation by the lessor, used in calculating the base periodic payment.
(o) Security interest and security mean any interest in property that secures the payment or performance of an obligation.
(p) State means any state, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States.
§ 213.3 General disclosure requirements.
(a) General requirements. A lessor shall make the disclosures required by § 213.4, as applicable. The disclosures shall be made clearly and conspicuously in writing in a form the consumer may keep, in accordance with this section. The disclosures required by this part may be provided to the lessee 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.). For an advertisement accessed by the consumer in electronic form, the disclosures required by § 213.7 may be provided to the consumer in electronic form in the advertisement, without regard to the consumer consent or other provisions of the E-Sign Act.
(1) Form of disclosures. The disclosures required by § 213.4 shall be given to the lessee together in a dated statement that identifies the lessor and the lessee; the disclosures may be made either in a separate statement that identifies the consumer lease transaction or in the contract or other document evidencing the lease. Alternatively, the disclosures required to be segregated from other information under paragraph (a)(2) of this section may be provided in a separate dated statement that identifies the lease, and the other required disclosures may be provided in the lease contract or other document evidencing the lease. In a lease of multiple items, the property description required by § 213.4(a) may be given in a separate statement that is incorporated by reference in the disclosure statement required by this paragraph.
(2) Segregation of certain disclosures. The following disclosures shall be segregated from other information and shall contain only directly related information: §§ 213.4(b) through (f), (g)(2), (h)(3), (i)(1), (j), and (m)(1). The headings, content, and format for the disclosures referred to in this paragraph (a)(2) shall be provided in a manner substantially similar to the applicable model form in appendix A of this part.
(3) Timing of disclosures. A lessor shall provide the disclosures to the lessee prior to the consummation of a consumer lease.
(4) Language of disclosures. The disclosures required by § 213.4 may be made in a language other than English provided that they are made available in English upon the lessee’s request.
(b) Additional information; nonsegregated disclosures. Additional information may be provided with any disclosure not listed in paragraph (a)(2) of this section, but it shall not be stated, used, or placed so as to mislead or confuse the lessee or contradict, obscure, or detract attention from any disclosure required by this part.
(c) Multiple lessors or lessees. When a transaction involves more than one lessor, the disclosures required by this part may be made by one lessor on behalf of all the lessors. When a lease involves more than one lessee, the lessor may provide the disclosures to any lessee who is primarily liable on the lease.
(d) Use of estimates. If an amount or other item needed to comply with a required disclosure is unknown or unavailable after reasonable efforts have been made to ascertain the information, the lessor may use a reasonable estimate that is based on the best information available to the lessor, is clearly identified as an estimate, and is not used to circumvent or evade any disclosures required by this part.
(e) Effect of subsequent occurrence. If a required disclosure becomes inaccurate because of an event occurring after consummation, the inaccuracy is not a violation of this part.
(f) Minor variations. A lessor may disregard the effects of the following in making disclosures:
(1) That payments must be collected in whole cents;
(2) That dates of scheduled payments may be different because a scheduled date is not a business day;
(3) That months have different numbers of days; and
(4) That February 29 occurs in a leap year.
§ 213.4 Content of disclosures.
For any consumer lease subject to this part, the lessor shall disclose the following information, as applicable:
(a) Description of property. A brief description of the leased property sufficient to identify the property to the lessee and lessor.
(b) Amount due at lease signing or delivery. The total amount to be paid prior to or at consummation or by delivery, if delivery occurs after consummation, using the term “amount due at lease signing or delivery.” The lessor shall itemize each component by type and amount, including any refundable security deposit, advance monthly or other periodic payment, and capitalized cost reduction; and in motor-vehicle leases, shall itemize how the amount due will be paid, by type and amount, including any net trade-in allowance, rebates, noncash credits, and cash payments in a format substantially similar to the model forms in appendix A of this part.
(c) Payment schedule and total amount of periodic payments. The number, amount, and due dates or periods of payments scheduled under the lease, and the total amount of the periodic payments.
(d) Other charges. The total amount of other charges payable to the lessor, itemized by type and amount, that are not included in the periodic payments. Such charges include the amount of any liability the lease imposes upon the lessee at the end of the lease term; the potential difference between the residual and realized values referred to in paragraph (k) of this section is excluded.
(e) Total of payments. The total of payments, with a description such as “the amount you will have paid by the end of the lease.” This amount is the sum of the amount due at lease signing (less any refundable amounts), the total amount of periodic payments (less any portion of the periodic payment paid at lease signing), and other charges under paragraphs (b), (c), and (d) of this section. In an open-end lease, a description such as “you will owe an additional amount if the actual value of the vehicle is less than the residual value” shall accompany the disclosure.
(f) Payment calculation. In a motor-vehicle lease, a mathematical progression of how the scheduled periodic payment is derived, in a format substantially similar to the applicable model form in appendix A of this part, which shall contain the following:
(1) Gross capitalized cost. The gross capitalized cost, including a disclosure of the agreed upon value of the vehicle, a description such as “the agreed upon value of the vehicle [state the amount] and any items you pay for over the lease term (such as service contracts, insurance, and any outstanding prior credit or lease balance),” and a statement of the lessee’s option to receive a separate written itemization of the gross capitalized cost. If requested by the lessee, the itemization shall be provided before consummation.
(2) Capitalized cost reduction. The capitalized cost reduction, with a description such as “the amount of any net trade-in allowance, rebate, noncash credit, or cash you pay that reduces the gross capitalized cost.”
(3) Adjusted capitalized cost. The adjusted capitalized cost, with a description such as “the amount used in calculating your base [periodic] payment.”
(4) Residual value. The residual value, with a description such as “the value of the vehicle at the end of the lease used in calculating your base [periodic] payment.”
(5) Depreciation and any amortized amounts. The depreciation and any amortized amounts, which is the difference between the adjusted capitalized cost and the residual value, with a description such as “the amount charged for the vehicle’s decline in value through normal use and for any other items paid over the lease term.”
(6) Rent charge. The rent charge, with a description such as “the amount charged in addition to the depreciation and any amortized amounts.” This amount is the difference between the total of the base periodic payments over the lease term minus the depreciation and any amortized amounts.
(7) Total of base periodic payments. The total of base periodic payments with a description such as “depreciation and any amortized amounts plus the rent charge.”
(8) Lease payments. The lease payments with a description such as “the number of payments in your lease.”
(9) Base periodic payment. The total of the base periodic payments divided by the number of payment periods in the lease.
(10) Itemization of other charges. An itemization of any other charges that are part of the periodic payment.
(11) Total periodic payment. The sum of the base periodic payment and any other charges that are part of the periodic payment.
(g) Early termination—(1) Conditions and disclosure of charges. A statement of the conditions under which the lessee or lessor may terminate the lease prior to the end of the lease term; and the amount or a description of the method for determining the amount of any penalty or other charge for early termination, which must be reasonable.
(2) Early-termination notice. In a motor-vehicle lease, a notice substantially similar to the following: “Early Termination. You may have to pay a substantial charge if you end this lease early. The charge may be up to several thousand dollars. The actual charge will depend on when the lease is terminated. The earlier you end the lease, the greater this charge is likely to be.”
(h) Maintenance responsibilities. The following provisions are required:
(1) Statement of responsibilities. A statement specifying whether the lessor or the lessee is responsible for maintaining or servicing the leased property, together with a brief description of the responsibility;
(2) Wear and use standard. A statement of the lessor’s standards for wear and use (if any), which must be reasonable; and
(3) Notice of wear and use standard. In a motor-vehicle lease, a notice regarding wear and use substantially similar to the following: “Excessive Wear and Use. You may be charged for excessive wear based on our standards for normal use.” The notice shall also specify the amount or method for determining any charge for excess mileage.
(i) Purchase option. A statement of whether or not the lessee has the option to purchase the leased property, and:
(1) End of lease term. If at the end of the lease term, the purchase price; and
(2) During lease term. If prior to the end of the lease term, the purchase price or the method for determining the price and when the lessee may exercise this option.
(j) Statement referencing nonsegregated disclosures. A statement that the lessee should refer to the lease documents for additional information on early termination, purchase options and maintenance responsibilities, warranties, late and default charges, insurance, and any security interests, if applicable.
(k) Liability between residual and realized values. A statement of the lessee’s liability, if any, at early termination or at the end of the lease term for the difference between the residual value of the leased property and its realized value.
(l) Right of appraisal. If the lessee’s liability at early termination or at the end of the lease term is based on the realized value of the leased property, a statement that the lessee may obtain, at the lessee’s expense, a professional appraisal by an independent third party (agreed to by the lessee and the lessor) of the value that could be realized at sale of the leased property. The appraisal shall be final and binding on the parties.
(m) Liability at end of lease term based on residual value. If the lessee is liable at the end of the lease term for the difference between the residual value of the leased property and its realized value:
(1) Rent and other charges. The rent and other charges, paid by the lessee and required by the lessor as an incident to the lease transaction, with a description such as “the total amount of rent and other charges imposed in connection with your lease [state the amount].”
(2) Excess liability. A statement about a rebuttable presumption that, at the end of the lease term, the residual value of the leased property is unreasonable and not in good faith to the extent that the residual value exceeds the realized value by more than three times the base monthly payment (or more than three times the average payment allocable to a monthly period, if the lease calls for periodic payments other than monthly); and that the lessor cannot collect the excess amount unless the lessor brings a successful court action and pays the lessee’s reasonable attorney’s fees, or unless the excess of the residual value over the realized value is due to unreasonable or excessive wear or use of the leased property (in which case the rebuttable presumption does not apply).
(3) Mutually agreeable final adjustment. A statement that the lessee and lessor are permitted, after termination of the lease, to make any mutually agreeable final adjustment regarding excess liability.
(n) Fees and taxes. The total dollar amount for all official and license fees, registration, title, or taxes required to be paid in connection with the lease.
(o) Insurance. A brief identification of insurance in connection with the lease including:
(1) Through the lessor. If the insurance is provided by or paid through the lessor, the types and amounts of coverage and the cost to the lessee; or
(2) Through a third party. If the lessee must obtain the insurance, the types and amounts of coverage required of the lessee.
(p) Warranties or guarantees. A statement identifying all express warranties and guarantees from the manufacturer or lessor with respect to the leased property that apply to the lessee.
(q) Penalties and other charges for delinquency. The amount or the method of determining the amount of any penalty or other charge for delinquency, default, or late payments, which must be reasonable.
(r) Security interest. A description of any security interest, other than a security deposit disclosed under paragraph (b) of this section, held or to be retained by the lessor; and a clear identification of the property to which the security interest relates.
(s) Limitations on rate information. If a lessor provides a percentage rate in an advertisement or in documents evidencing the lease transaction, a notice stating that “this percentage may not measure the overall cost of financing this lease” shall accompany the rate disclosure. The lessor shall not use the term “annual percentage rate,” “annual lease rate,” or any equivalent term.
(t) Non-motor vehicle open-end leases. Non-motor vehicle open-end leases remain subject to section 182(10) of the act regarding end of term liability.
§ 213.5 Renegotiations, extensions, and assumptions.
(a) Renegotiation. A renegotiation occurs when a consumer lease subject to this part is satisfied and replaced by a new lease undertaken by the same consumer. A renegotiation requires new disclosures, except as provided in paragraph (d) of this section.
(b) Extension. An extension is a continuation, agreed to by the lessor and the lessee, of an existing consumer lease beyond the originally scheduled end of the lease term, except when the continuation is the result of a renegotiation. An extension that exceeds six months requires new disclosures, except as provided in paragraph (d) of this section.
(c) Assumption. New disclosures are not required when a consumer lease is assumed by another person, whether or not the lessor charges an assumption fee.
(d) Exceptions. New disclosures are not required for the following, even if they meet the definition of a renegotiation or an extension:
(1) A reduction in the rent charge;
(2) The deferment of one or more payments, whether or not a fee is charged;
(3) The extension of a lease for not more than six months on a month-to-month basis or otherwise;
(4) A substitution of leased property with property that has a substantially equivalent or greater economic value, provided no other lease terms are changed;
(5) The addition, deletion, or substitution of leased property in a multiple-item lease, provided the average periodic payment does not change by more than 25 percent; or
(6) An agreement resulting from a court proceeding.
§ 213.6 [Reserved]
§ 213.7 Advertising.
(a) General rule. An advertisement for a consumer lease may state that a specific lease of property at specific amounts or terms is available only if the lessor usually and customarily leases or will lease the property at those amounts or terms.
(b) Clear and conspicuous standard. Disclosures required by this section shall be made clearly and conspicuously.
(1) Amount due at lease signing or delivery. Except for the statement of a periodic payment, any affirmative or negative reference to a charge that is a part of the disclosure required under paragraph (d)(2)(ii) of this section shall not be more prominent than that disclosure.
(2) Advertisement of a lease rate. If a lessor provides a percentage rate in an advertisement, the rate shall not be more prominent than any of the disclosures in § 213.4, with the exception of the notice in § 213.4(s) required to accompany the rate; and the lessor shall not use the term “annual percentage rate,” “annual lease rate,” or equivalent term.
(c) Catalogs or other multipage advertisements; electronic advertisements. A catalog or other multipage advertisement , or an electronic advertisement (such as an advertisement appearing on an Internet Web site), that provides a table or schedule of the required disclosures shall be considered a single advertisement if, for lease terms that appear without all the required disclosures, the advertisement refers to the page or pages on which the table or schedule appears.
(d) Advertisement of terms that require additional disclosure—(1) Triggering terms. An advertisement that states any of the following items shall contain the disclosures required by paragraph (d)(2) of this section, except as provided in paragraphs (e) and (f) of this section:
(i) The amount of any payment; or
(ii) A statement of any capitalized cost reduction or other payment (or that no payment is required) prior to or at consummation or by delivery, if delivery occurs after consummation.
(2) Additional terms. An advertisement stating any item listed in paragraph (d)(1) of this section shall also state the following items:
(i) That the transaction advertised is a lease;
(ii) The total amount due prior to or at consummation or by delivery, if delivery occurs after consummation;
(iii) The number, amounts, and due dates or periods of scheduled payments under the lease;
(iv) A statement of whether or not a security deposit is required; and
(v) A statement that an extra charge may be imposed at the end of the lease term where the lessee’s liability (if any) is based on the difference between the residual value of the leased property and its realized value at the end of the lease term.
(e) Alternative disclosures—merchandise tags. A merchandise tag stating any item listed in paragraph (d)(1) of this section may comply with paragraph (d)(2) of this section by referring to a sign or display prominently posted in the lessor’s place of business that contains a table or schedule of the required disclosures.
(f) Alternative disclosures—television or radio advertisements—(1) Toll-free number or print advertisement. An advertisement made through television or radio stating any item listed in paragraph (d)(1) of this section complies with paragraph (d)(2) of this section if the advertisement states the items listed in paragraphs (d)(2)(i) through (iii) of this section, and:
(i) Lists a toll-free telephone number along with a reference that such number may be used by consumers to obtain the information required by paragraph (d)(2) of this section; or
(ii) Directs the consumer to a written advertisement in a publication of general circulation in the community served by the media station, including the name and the date of the publication, with a statement that information required by paragraph (d)(2) of this section is included in the advertisement. The written advertisement shall be published beginning at least three days before and ending at least ten days after the broadcast.
(2) Establishment of toll-free number. (i) The toll-free telephone number shall be available for no fewer than ten days, beginning on the date of the broadcast.
(ii) The lessor shall provide the information required by paragraph (d)(2) of this section orally, or in writing upon request.
§ 213.8 Record retention.
A lessor shall retain evidence of compliance with the requirements imposed by this part, other than the advertising requirements under § 213.7, for a period of not less than two years after the date the disclosures are required to be made or an action is required to be taken.
§ 213.9 Relation to state laws.
(a) Inconsistent state law. A state law that is inconsistent with the requirements of the act and this part is preempted to the extent of the inconsistency. If a lessor cannot comply with a state law without violating a provision of this part, the state law is inconsistent within the meaning of section 186(a) of the act and is preempted, unless the state law gives greater protection and benefit to the consumer. A state, through an official having primary enforcement or interpretative responsibilities for the state consumer leasing law, may apply to the Board for a preemption determination.
(b) Exemptions—(1) Application. A state may apply to the Board for an exemption from the requirements of the act and this part for any class of lease transactions within the state. The Board will grant such an exemption if the Board determines that:
(i) The class of leasing transactions is subject to state law requirements substantially similar to the act and this part or that lessees are afforded greater protection under state law; and
(ii) There is adequate provision for state enforcement.
(2) Enforcement and liability. After an exemption has been granted, the requirements of the applicable state law (except for additional requirements not imposed by federal law) will constitute the requirements of the act and this part. No exemption will extend to the civil liability provisions of sections 130, 131, and 185 of the act.
Appendix A to Part 213—Model Forms
Appendix B to Part 213—Federal Enforcement Agencies
The following list indicates which federal agency enforces Regulation M (12 CFR Part 213) for particular classes of business. Any questions concerning compliance by a particular business should be directed to the appropriate enforcement agency. Terms that are not defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them in the International Banking Act of 1978 (12 U.S.C. 3101).
Appendix C to Part 213—Issuance of Staff Interpretations
Officials in the Board’s Division of Consumer and Community Affairs are authorized to issue official staff interpretations of this Regulation M (12 CFR Part 213). These interpretations provide the formal protection afforded under section 130(f) of the act. Except in unusual circumstances, interpretations will not be issued separately but will be incorporated in an official commentary to Regulation M (Supplement I of this part), which will be amended periodically. No staff interpretations will be issued approving lessor’s forms, statements, or calculation tools or methods.
Supplement I to Part 213—Official Staff Commentary to Regulation M
1. Official status. The commentary in Supplement I is the vehicle by which the Division of Consumer and Community Affairs of the Federal Reserve Board issues official staff interpretations of Regulation M (12 CFR part 213). Good faith compliance with this commentary affords protection from liability under section 130(f) of the Truth in Lending Act (15 U.S.C. 1640(f)). Section 130(f) protects lessors from civil liability for any act done or omitted in good faith in conformity with any interpretation issued by a duly authorized official or employee of the Federal Reserve System.
2. Procedures for requesting interpretations. Under appendix C of Regulation M, anyone may request an official staff interpretation. Interpretations that are adopted will be incorporated in this commentary following publication in the
3. Comment designations. Each comment in the commentary is identified by a number and the regulatory section or paragraph that it interprets. The comments are designated with as much specificity as possible according to the particular regulatory provision addressed. For example, some of the comments to § 213.4(f) are further divided by subparagraph, such as comment 4(f)(1)-1 and comment 4(f)(2)-1. In other cases, comments have more general application and are designated, for example, as comment 4(a)-1. This introduction may be cited as comments I-1 through I-4. An appendix may be cited as comment app. A-1.
4. Illustrations. Lists that appear in the commentary may be exhaustive or illustrative; the appropriate construction should be clear from the context. Illustrative lists are introduced by phrases such as “including,” “such as,” “to illustrate,” and “for example.”
1. Foreign applicability. Regulation M applies to all persons (including branches of foreign banks or leasing companies located in the United States) that offer consumer leases to residents of any state (including foreign nationals) as defined in § 213.2(p). The regulation does not apply to a foreign branch of a U.S. bank or to a leasing company leasing to a U.S. citizen residing or visiting abroad or to a foreign national abroad.
1. Coverage. The term advertisement includes messages inviting, offering, or otherwise generally announcing to prospective customers the availability of consumer leases, whether in visual, oral, print or electronic media. Examples include:
i. Messages in newspapers, magazines, leaflets, catalogs, and fliers.
ii. Messages on radio, television, and public address systems.
iii. Direct mail literature.
iv. Printed material on any interior or exterior sign or display, in any window display, in any point-of-transaction literature or price tag that is delivered or made available to a lessee or prospective lessee in any manner whatsoever.
v. Telephone solicitations.
vi. On-line messages, such as those on the Internet.
2. Exclusions. The term does not apply to the following:
i. Direct personal contacts, including follow-up letters, cost estimates for individual lessees, or oral or written communications relating to the negotiation of a specific transaction.
ii. Informational material distributed only to businesses.
iii. Notices required by federal or state law, if the law mandates that specific information be displayed and only the mandated information is included in the notice.
iv. News articles controlled by the news medium.
v. Market research or educational materials that do not solicit business.
3. Persons covered. See the commentary to § 213.7(a).
1. General. In closed-end leases, sometimes referred to as “walk-away” leases, the lessee is not responsible for the residual value of the leased property at the end of the lease term.
1. Primary purposes. A lessor must determine in each case if the leased property will be used primarily for personal, family, or household purposes. If a question exists as to the primary purpose for a lease, the fact that a lessor gives disclosures is not controlling on the question of whether the transaction is covered. The primary purpose of a lease is determined before or at consummation and a lessor need not provide Regulation M disclosures where there is a subsequent change in the primary use.
2. Period of time. To be a consumer lease, the initial term of the lease must be more than four months. Thus, a lease of personal property for four months, three months or on a month-to-month or week-to-week basis (even though the lease actually extends beyond four months) is not a consumer lease and is not subject to the disclosure requirements of the regulation. However, a lease that imposes a penalty for not continuing the lease beyond four months is considered to have a term of more than four months. To illustrate:
i. A three-month lease extended on a month-to-month basis and terminated after one year is not subject to the regulation.
ii. A month-to-month lease with a penalty, such as the forfeiture of a security deposit for terminating before one year, is subject to the regulation.
3. Total contractual obligation. The total contractual obligation is not necessarily the same as the total of payments disclosed under § 213.4(e). The total contractual obligation includes nonrefundable amounts a lessee is contractually obligated to pay to the lessor, but excludes items such as:
i. Residual value amounts or purchase-option prices;
ii. Amounts collected by the lessor but paid to a third party, such as taxes, licenses, and registration fees.
4. Credit sale. The regulation does not cover a lease that meets the definition of a credit sale in Regulation Z, 12 CFR 226.2(a)(16), which is defined, in part, as a bailment or lease (unless terminable without penalty at any time by the consumer) under which the consumer:
i. Agrees to pay as compensation for use a sum substantially equivalent to, or in excess of, the total value of the property and services involved; and
ii. Will become (or has the option to become), for no additional consideration or for nominal consideration, the owner of the property upon compliance with the agreement.
5. Agricultural purpose. Agricultural purpose means a purpose related to the production, harvest, exhibition, marketing, transportation, processing, or manufacture of agricultural products by a natural person who cultivates, plants, propagates, or nurtures those agricultural products, including but not limited to the acquisition of personal property and services used primarily in farming. Agricultural products include horticultural, viticultural, and dairy products, livestock, wildlife, poultry, bees, forest products, fish and shellfish, and any products thereof, including processed and manufactured products, and any and all products raised or produced on farms and any processed or manufactured products thereof.
6. Organization or other entity. A consumer lease does not include a lease made to an organization such as a corporation or a government agency or instrumentality. Such a lease is not covered by the regulation even if the leased property is used (by an employee, for example) primarily for personal, family or household purposes, or is guaranteed by or subsequently assigned to a natural person.
7. Leases of personal property incidental to a service. The following leases of personal property are deemed incidental to a service and thus are not subject to the regulation:
i. Home entertainment systems requiring the consumer to lease equipment that enables a television to receive the transmitted programming.
ii. Security alarm systems requiring the installation of leased equipment intended to monitor unlawful entries into a home and in some cases to provide fire protection.
iii. Propane gas service where the consumer must lease a propane tank to receive the service.
8. Safe deposit boxes. The lease of a safe deposit box is not a consumer lease under § 213.2(e).
9. Threshold amount. A consumer lease is exempt from the requirements of this part if the total contractual obligation exceeds the threshold amount in effect at the time of consummation. The threshold amount in effect during a particular time period is the amount stated in comment 2(e)-11 for that period. The threshold amount is adjusted effective January 1 of each year by any annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) that was in effect on the preceding June 1. Comment 2(e)-11 will be amended to provide the threshold amount for the upcoming year after the annual percentage change in the CPI-W that was in effect on June 1 becomes available. Any increase in the threshold amount will be rounded to the nearest $100 increment. For example, if the annual percentage increase in the CPI-W would result in a $950 increase in the threshold amount, the threshold amount will be increased by $1,000. However, if the annual percentage increase in the CPI-W would result in a $949 increase in the threshold amount, the threshold amount will be increased by $900. If a consumer lease is exempt from the requirements of this part because the total contractual obligation exceeds the threshold amount in effect at the time of consummation, the lease remains exempt regardless of a subsequent increase in the threshold amount.
10. No increase in the CPI-W. If the CPI-W in effect on June 1 does not increase from the CPI-W in effect on June 1 of the previous year, the threshold amount effective the following January 1 through December 31 will not change from the previous year. When this occurs, for the years that follow, the threshold is calculated based on the annual percentage change in the CPI-W applied to the dollar amount that would have resulted, after rounding, if decreases and any subsequent increases in the CPI-W had been taken into account.
i. Net increases. If the resulting amount calculated, after rounding, is greater than the current threshold, then the threshold effective January 1 the following year will increase accordingly.
ii. Net decreases. If the resulting amount calculated, after rounding, is equal to or less than the current threshold, then the threshold effective January 1 the following year will not change, but future increases will be calculated based on the amount that would have resulted.
11. Threshold. For purposes of § 213.2(e)(1), the threshold amount in effect during a particular period is the amount stated below for that period.
i. Prior to July 21, 2011, the threshold amount is $25,000.
ii. From July 21, 2011, through December 31, 2011, the threshold amount is $50,000.
iii. From January 1, 2012, through December 31, 2012, the threshold amount is $51,800.
iv. From January 1, 2013, through December 31, 2013, the threshold amount is $53,000.
v. From January 1, 2014, through December 31, 2014, the threshold amount is $53,500.
vi. From January 1, 2015, through December 31, 2015, the threshold amount is $54,600.
vii. From January 1, 2016, through December 31, 2016, the threshold amount is $54,600.
viii. From January 1, 2017, through December 31, 2017, the threshold amount is $54,600.
ix. From January 1, 2018, through December 31, 2018, the threshold amount is $55,800.
x. From January 1, 2019, through December 31, 2019, the threshold amount is $57,200.
xi. From January 1, 2020, through December 31, 2020, the threshold amount is $58,300.
xii. From January 1, 2021, through December 31, 2021, the threshold amount is $58,300.
xiii. From January 1, 2022, through December 31, 2022, the threshold amount is $61,000.
xiv. From January 1, 2023, through December 31, 2023, the threshold amount is $66,400.
xv. From January 1, 2024, through December 31, 2024, the threshold amount is $69,500.
1. Guarantors. Guarantors are not lessees for purposes of the regulation.
1. Arranger of a lease. To “arrange” for the lease of personal property means to provide or offer to provide a lease that is or will be extended by another person under a business or other relationship pursuant to which the person arranging the lease (a) receives or will receive a fee, compensation, or other consideration for the service or (b) has knowledge of the lease terms and participates in the preparation of the contract documents required in connection with the lease. To illustrate:
i. An automobile dealer who, pursuant to a business relationship, completes the necessary lease agreement before forwarding it for execution to the leasing company (to whom the obligation is payable on its face) is “arranging” for the lease.
ii. An automobile dealer who, without receiving a fee for the service, refers a customer to a leasing company that will prepare all relevant contract documents is not “arranging” for the lease.
2. Consideration. The term “other consideration” as used in comment 2(h)-1 refers to an actual payment corresponding to a fee or similar compensation and not to intangible benefits, such as the advantage of increased business, which may flow from the relationship between the parties.
3. Assignees. An assignee may be a lessor for purposes of the regulation in circumstances where the assignee has substantial involvement in the lease transaction. See cf. Ford Motor Credit Co. v. Cenance, 452 U.S. 155 (1981) (held that an assignee was a creditor for purposes of the pre-1980 Truth in Lending Act and Regulation Z because of its substantial involvement in the credit transaction).
4. Multiple lessors. See the commentary to § 213.3(c).
1. Coverage. The term “organization” includes joint ventures and persons operating under a business name.
1. Coverage. Whether property is personal property depends on state or other applicable law. For example, a mobile home or houseboat may be considered personal property in one state but real property in another.
1. General. Realized value refers to either the retail or wholesale value of the leased property at early termination or at the end of the lease term. It is not a required disclosure. Realized value is relevant only to leases in which the lessee’s liability at early termination or at the end of the lease term typically is based on the difference between the residual value (or the adjusted lease balance) of the leased property and its realized value.
2. Options. Subject to the contract and to state or other applicable law, the lessor may calculate the realized value in determining the lessee’s liability at the end of the lease term or at early termination in one of the three ways stated in § 213.2(m). If the lessor sells the property prior to making the determination about liability, the price received for the property (or the fair market value) is the realized value. If the lessor does not sell the property prior to making that determination, the highest offer or the fair market value is the realized value.
3. Determination of realized value. Disposition charges are not subtracted in determining the realized value but amounts attributable to taxes may be subtracted.
4. Offers. In determining the highest offer for disposition, the lessor may disregard offers that an offeror has withdrawn or is unable or unwilling to perform.
5. Lessor’s appraisal. See commentary to § 213.4(l).
1. Disclosable interests. For purposes of disclosure, a security interest is an interest taken by the lessor to secure performance of the lessee’s obligation. For example, if a bank that is not a lessor makes a loan to a leasing company and takes assignments of consumer leases generated by that company to secure the loan, the bank’s security interest in the lessor’s receivables is not a security interest for purposes of this regulation.
2. General coverage. An interest the lessor may have in leased property must be disclosed only if it is considered a security interest under state or other applicable law. The term includes, but is not limited to, security interests under the Uniform Commercial Code; real property mortgages, deeds of trust, and other consensual or confessed liens whether or not recorded; mechanic’s, materialman’s, artisan’s, and other similar liens; vendor’s liens in both real and personal property; liens on property arising by operation of law; and any interest in a lease when used to secure payment or performance of an obligation.
3. Insurance exception. The lessor’s right to insurance proceeds or unearned insurance premiums is not a security interest for purposes of this regulation.
1. Basis of disclosures. Disclosures must reflect the terms of the legal obligation between the parties. For example:
i. In a three-year lease with no penalty for termination after a one-year minimum term, disclosures are based on the full three-year term of the lease. The one-year minimum term is only relevant to the early termination provisions of §§ 213.4 (g)(1), (k) and (l).
2. Clear and conspicuous standard. The clear and conspicuous standard requires that disclosures be reasonably understandable. For example, the disclosures must be presented in a way that does not obscure the relationship of the terms to each other; appendix A of this part contains model forms that meet this standard. In addition, although no minimum typesize is required, the disclosures must be legible, whether typewritten, handwritten, or printed by computer.
3. Multipurpose disclosure forms. A lessor may use a multipurpose disclosure form provided the lessor is able to designate the specific disclosures applicable to a given transaction, consistent with the requirement that disclosures be clearly and conspicuously provided.
4. Number of transactions. Lessors have flexibility in handling lease transactions that may be viewed as multiple transactions. For example:
i. When a lessor leases two items to the same lessee on the same day, the lessor may disclose the leases as either one or two lease transactions.
ii. When a lessor sells insurance or other incidental services in connection with a lease, the lessor may disclose in one of two ways: as a single lease transaction (in which case Regulation M, not Regulation Z, disclosures are required) or as a lease transaction and a credit transaction.
iii. When a lessor includes an outstanding lease or credit balance in a lease transaction, the lessor may disclose the outstanding balance as part of a single lease transaction (in which case Regulation M, not Regulation Z, disclosures are required) or as a lease transaction and a credit transaction.
1. Cross-references. Lessors may include in the nonsegregated disclosures a cross-reference to items in the segregated disclosures rather than repeat those items. A lessor may include in the segregated disclosures numeric or alphabetic designations as cross-references to related information so long as such references do not obscure or detract from the segregated disclosures.
2. Identification of parties. While disclosures must be made clearly and conspicuously, lessors are not required to use the word “lessor” and “lessee” to identify the parties to the lease transaction.
3. Lessor’s address. The lessor must be identified by name; an address (and telephone number) may be provided.
4. Multiple lessors and lessees. In transactions involving multiple lessors and multiple lessees, a single lessor may make all the disclosures to a single lessee as long as the disclosure statement identifies all the lessors and lessees.
5. Lessee’s signature. The regulation does not require that the lessee sign the disclosure statement, whether disclosures are separately provided or are part of the lease contract. Nevertheless, to provide evidence that disclosures are given before a lessee becomes obligated on the lease transaction, the lessor may, for example, ask the lessee to sign the disclosure statement or an acknowledgement of receipt, may place disclosures that are included in the lease documents above the lessee’s signature, or include instructions alerting a lessee to read the disclosures prior to signing the lease.
1. Location. The segregated disclosures referred to in § 213.3(a)(2) may be provided on a separate document and the other required disclosures may be provided in the lease contract, so long as all disclosures are given at the same time. Alternatively, all disclosures may be provided in a separate document or in the lease contract.
2. Additional information among segregated disclosures. The disclosures required to be segregated may contain only the information required or permitted to be included among the segregated disclosures.
3. Substantially similar. See commentary to appendix A of this part.
1. Consummation. When a contractual relationship is created between the lessor and the lessee is a matter to be determined under state or other applicable law.
1. State law disclosures. A lessor may include in the nonsegregated disclosures any state law disclosures that are not inconsistent with the act and regulation under § 213.9 as long as, in accordance with the standard set forth in § 213.3(b) for additional information, the state law disclosures are not used or placed to mislead or confuse or detract from any disclosure required by the regulation.
1. Multiple lessors. If a single lessor provides disclosures to a lessee on behalf of several lessors, all disclosures for the transaction must be given, even if the lessor making the disclosures would not otherwise have been obligated to make a particular disclosure.
1. Time of estimated disclosure. The lessor may, after making a reasonable effort to obtain information, use estimates to make disclosures if necessary information is unknown or unavailable at the time the disclosures are made.
2. Basis of estimates. Estimates must be made on the basis of the best information reasonably available at the time disclosures are made. The “reasonably available” standard requires that the lessor, acting in good faith, exercise due diligence in obtaining information. The lessor may rely on the representations of other parties. For example, the lessor might look to the consumer to determine the purpose for which leased property will be used, to insurance companies for the cost of insurance, or to an automobile manufacturer or dealer for the date of delivery. See commentary to § 213.4(n) for estimating official fees and taxes.
3. Residual value of leased property at termination. In an open-end lease where the lessee’s liability at the end of the lease term is based on the residual value of the leased property as determined at consummation, the estimate of the residual value must be reasonable and based on the best information reasonably available to the lessor (see § 213.4(m)). A lessor should generally use an accepted trade publication listing estimated current or future market prices for the leased property unless other information or a reasonable belief based on its experience provides the better information. For example:
i. An automobile lessor offering a three-year open-end lease assigns a wholesale value to the vehicle at the end of the lease term. The lessor may disclose as an estimate a wholesale value derived from a generally accepted trade publication listing current wholesale values.
ii. Same facts as above, except that the lessor discloses an estimated value derived by adjusting the residual value quoted in the trade publication because, in its experience, the trade publication values either understate or overstate the prices actually received in local used-vehicle markets. The lessor may adjust estimated values quoted in trade publications if the lessor reasonably believes based on its experience that the values are understated or overstated.
4. Retail or wholesale value. The lessor may choose either a retail or a wholesale value in estimating the value of leased property at termination of an open-end lease provided the choice is consistent with the lessor’s general practice when determining the value of the property at the end of the lease term. The lessor should indicate whether the value disclosed is a retail or wholesale value.
5. Labelling estimates. Generally, only the disclosure for which the exact information is unknown is labelled as an estimate. Nevertheless, when several disclosures are affected because of the unknown information, the lessor has the option of labelling as an estimate every affected disclosure or only the disclosure primarily affected.
1. Subsequent occurrences. Examples of subsequent occurrences include:
i. An agreement between the lessee and lessor to change from a monthly to a weekly payment schedule.
ii. An increase in official fees or taxes.
iii. An increase in insurance premiums or coverage caused by a change in the law.
iv. Late delivery of an automobile caused by a strike.
2. Redisclosure. When a disclosure becomes inaccurate because of a subsequent occurrence, the lessor need not make new disclosures unless new disclosures are required under § 213.5.
3. Lessee’s failure to perform. The lessor does not violate the regulation if a previously given disclosure becomes inaccurate when a lessee fails to perform obligations under the contract and a lessor takes actions that are necessary and proper in such circumstances to protect its interest. For example, the addition of insurance or a security interest by the lessor because the lessee has not performed obligations contracted for in the lease is not a violation of the regulation.
1. Placement of description. Although the description of leased property may not be included among the segregated disclosures, a lessor may choose to place the description directly above the segregated disclosures.
1. Consummation. See commentary to § 213.3(a)(3).
2. Capitalized cost reduction. A capitalized cost reduction is a payment in the nature of a downpayment on the leased property that reduces the amount to be capitalized over the term of the lease. This amount does not include any amounts included in a periodic payment paid at lease signing or delivery.
3. “Negative” equity trade-in allowance. If an amount owed on a prior lease or credit balance exceeds the agreed upon value of a trade-in, the difference is not reflected as a negative trade-in allowance under § 213.4(b). The lessor may disclose the trade-in allowance as zero or not applicable, or may leave a blank line.
4. Rebates. Only rebates applied toward an amount due at lease signing or delivery are required to be disclosed under § 213.4(b).
5. Balance sheet approach. In motor-vehicle leases, the total for the column labeled “total amount due at lease signing or delivery” must equal the total for the column labeled “how the amount due at lease signing or delivery will be paid.”
6. Amounts to be paid in cash. The term cash is intended to include payments by check or other payment methods in addition to currency; however, a lessor may add a line item under the column “how the amount due at lease signing or delivery will be paid” for non-currency payments such as credit cards.
1. Periodic payments. The phrase “number, amount, and due dates or periods of payments” requires the disclosure of all payments that are made at regular or irregular intervals and generally derived from rent, capitalized or amortized amounts such as depreciation, and other amounts that are collected by the lessor at the same interval(s), including, for example, taxes, maintenance, and insurance charges. Other periodic payments may, but need not, be disclosed under § 213.4(c).
1. Coverage. Section 213.4(d) requires the disclosure of charges that are anticipated by the parties incident to the normal operation of the lease agreement. If a lessor is unsure whether a particular fee is an “other charge,” the lessor may disclose the fee as such without violating § 213.4(d) or the segregation rule under § 213.3(a)(2).
2. Excluded charges. This section does not require disclosure of charges that are imposed when the lessee terminates early, fails to abide by, or modifies the terms of the existing lease agreement, such as charges for:
i. Late payment.
ii. Default.
iii. Early termination.
iv. Deferral of payments.
v. Extension of the lease.
3. Third-party fees and charges. Third-party fees or charges collected by the lessor on behalf of third parties, such as taxes, are not disclosed under § 213.4(d).
4. Relationship to other provisions. The other charges mentioned in this paragraph are charges that are not required to be disclosed under some other provision of § 213.4. To illustrate:
i. The price of a mechanical breakdown protection (MBP) contract is sometimes disclosed as an “other charge.” Nevertheless, the price of MBP is sometimes reflected in the periodic payment disclosure under § 213.4(c) or in states where MBP is regarded as insurance, the cost is be disclosed in accordance with § 213.4(o).
5. Lessee’s liabilities at the end of the lease term. Liabilities that the lessor imposes upon the lessee at the end of the scheduled lease term and that must be disclosed under § 213.4(d) include disposition and “pick-up” charges.
6. Optional “disposition” charges. Disposition and similar charges that are anticipated by the parties as an incident to the normal operation of the lease agreement must be disclosed under § 213.4(d). If, under a lease agreement, a lessee may return leased property to various locations, and the lessor charges a disposition fee depending upon the location chosen, under § 213.4(d), the lessor must disclose the highest amount charged. In such circumstances, the lessor may also include a brief explanation of the fee structure in the segregated disclosure. For example, if no fee or a lower fee is imposed for returning a leased vehicle to the originating dealer as opposed to another location, that fact may be disclosed. By contrast, if the terms of the lease treat the return of the leased property to a location outside the lessor’s service area as a default, the fee imposed is not disclosed as an “other charge,” although it may be required to be disclosed under § 213.4(q).
1. Open-end lease. The additional statement is required under § 213.4(e) for open-end leases because, with some limitations, a lessee is liable at the end of the lease term for the difference between the residual and realized values of the leased property.
1. Motor-vehicle lease. Whether leased property is a motor vehicle is determined by state or other applicable law.
2. Multiple-items. If a lease transaction involves multiple items of leased property, one of which is not a motor vehicle under state law, at their option, lessors may include all items in the disclosures required under § 213.4(f). See comment 3(a)-4 regarding disclosure of multiple transactions.
1. Agreed upon value of the vehicle. The agreed upon value of a motor vehicle includes the amount of capitalized items such as charges for vehicle accessories and options, and delivery or destination charges. The lessor may also include taxes and fees for title, licenses, and registration that are capitalized. Charges for service or maintenance contracts, insurance products, guaranteed automobile protection, or an outstanding balance on a prior lease or credit transaction are not included in the agreed upon value.
2. Itemization of the gross capitalized cost. The lessor may choose to provide the itemization of the gross capitalized cost only on request or may provide the itemization as a matter of course. In the latter case, the lessor need not provide a statement of the lessee’s option to receive an itemization. The gross capitalized cost must be itemized by type and amount. The lessor may include in the itemization an identification of the items and amounts of some or all of the items contained in the agreed upon value of the vehicle. The itemization must be provided at the same time as the other disclosures required by § 213.4, but it may not be included among the segregated disclosures.
1. Accuracy of disclosure. If the periodic payment calculation under § 213.4(f) has been calculated correctly, the amount disclosed under § 213.4(f)(7)—the total of base periodic payments—is correct for disclosure purposes even if that amount differs from the base periodic payment disclosed under § 213.4(f)(9) multiplied by the number of lease payments disclosed under § 213.4(f)(8), when the difference is due to rounding.
1. Lease Term. The lease term may be disclosed among the segregated disclosures.
1. Reasonableness of charges. See the commentary to § 213.4(q).
2. Description of the method. Section 213.4(g)(1) requires a full description of the method of determining an early termination charge. The lessor should attempt to provide consumers with clear and understandable descriptions of its early termination charges. Descriptions that are full, accurate, and not intended to be misleading will comply with § 213.4(g)(1), even if the descriptions are complex. In providing a full description of an early termination method, a lessor may use the name of a generally accepted method of computing the unamortized cost portion (also known as the “adjusted lease balance”) of its early termination charges. For example, a lessor may state that the “constant yield” method will be utilized in obtaining the adjusted lease balance, but must specify how that figure, and any other term or figure, is used in computing the total early termination charge imposed upon the consumer. Additionally, if a lessor refers to a named method in this manner, the lessor must provide a written explanation of that method if requested by the consumer. The lessor has the option of providing the explanation as a matter of course in the lease documents or on a separate document.
3. Timing of written explanation of a named method. While a lessor may provide an address or telephone number for the consumer to request a written explanation of the named method used to calculate the adjusted leased balance, if at consummation a consumer requests such an explanation, the lessor must provide a written explanation at that time. If a consumer requests an explanation after consummation, the lessor must provide a written explanation within a reasonable time after the request is made.
4. Default. When default is a condition for early termination of a lease, default charges must be disclosed under § 213.4(g)(1). See the commentary to § 213.4(q).
5. Lessee’s liability at early termination. When the lessee is liable for the difference between the unamortized cost and the realized value at early termination, the method of determining the amount of the difference must be disclosed under § 213.4(g)(1).
1. Standards for wear and use. No disclosure is required if a lessor does not set standards or impose charges for wear and use (such as excess mileage).
1. Mandatory disclosure of no purchase option. Generally the lessor need only make the specific required disclosures that apply to a transaction. In the case of a purchase option disclosure, however, a lessor must disclose affirmatively that the lessee has no option to purchase the leased property if the purchase option is inapplicable.
2. Existence of purchase option. Whether a purchase option exists under the lease is determined by state or other applicable law. The lessee’s right to submit a bid to purchase property at termination of the lease is not an option to purchase under § 213.4(i) if the lessor is not required to accept the lessee’s bid and the lessee does not receive preferential treatment.
3. Purchase-option fee. A purchase-option fee is disclosed under § 213.4(i), not § 213.4(d). The fee may be separately itemized or disclosed as part of the purchase-option price.
4. Official fees and taxes. Official fees such as those for taxes, licenses, and registration charged in connection with the exercise of a purchase option may be disclosed under § 213.4(i) as part of the purchase-option price (with or without a reference to their inclusion in that price) or may be separately disclosed and itemized by category. Alternatively, a lessor may provide a statement indicating that the purchase-option price does not include fees for tags, taxes, and registration.
5. Purchase-option price. Lessors must disclose the purchase-option price as a sum certain or as a sum certain to be determined at a future date by reference to a readily available independent source. The reference should provide sufficient information so that the lessee will be able to determine the actual price when the option becomes available. Statements of a purchase price as the “negotiated price” or the “fair market value” do not comply with the requirements of § 213.4(i).
1. Content. A lessor may delete inapplicable items from the disclosure. For example, if a lease contract does not include a security interest, the reference to a security interest may be omitted.
1. Disclosure inapplicable. The lessee does not have the right to an independent appraisal merely because the lessee is liable at the end of the lease term or at early termination for unreasonable wear or use. Thus, the disclosure under § 213.4(l) does not apply. For example:
i. The automobile lessor might expect a lessee to return an undented car with four good tires at the end of the lease term. Even though it may hold the lessee liable for the difference between a dented car with bald tires and the value of a car in reasonably good repair, the disclosure under § 213.4(l) is not required.
2. Lessor’s appraisal. If the lessor obtains an appraisal of the leased property to determine its realized value, that appraisal does not suffice for purposes of section 183(c) of the act; the lessor must disclose the lessee’s right to an independent appraisal under § 213.4(l).
3. Retail or wholesale. In providing the disclosures in § 213.4(l), a lessor must indicate whether the wholesale or retail appraisal value will be used.
4. Time restriction on appraisal. The regulation does not specify a time period in which the lessee must exercise the appraisal right. The lessor may require a lessee to obtain the appraisal within a reasonable time after termination of the lease.
1. Open-end leases. Section 213.4(m) applies only to open-end leases.
2. Lessor’s payment of attorney’s fees. Section 183(a) of the act requires that the lessor pay the lessee’s attorney’s fees in all actions under § 213.4(m), whether successful or not.
1. General. This disclosure is intended to represent the cost of financing an open-end lease based on charges and fees that the lessor requires the lessee to pay. Examples of disclosable charges, in addition to the rent charge, include acquisition, disposition, or assignment fees. Charges imposed by a third party whose services are not required by the lessor (such as official fees and voluntary insurance) are not included in the § 213.4(m)(1) disclosure.
1. Coverage. The disclosure limiting the lessee’s liability for the value of the leased property does not apply in the case of early termination.
2. Leases with a minimum term. If a lease has an alternative minimum term, the disclosures governing the liability limitation are not applicable for the minimum term.
3. Charges not subject to rebuttable presumption. The limitation on liability applies only to liability at the end of the lease term that is based on the difference between the residual value of the leased property and its realized value. The regulation does not preclude a lessor from recovering other charges from the lessee at the end of the lease term. Examples of such charges include:
i. Disposition charges.
ii. Excess mileage charges.
iii. Late payment and default charges.
iv. In simple-interest accounting leases, amount by which the unamortized cost exceeds the residual value because the lessee has not made timely payments.
1. Treatment of certain taxes. Taxes paid in connection with the lease are generally disclosed under § 213.4(n), but there are exceptions. To illustrate:
i. Taxes paid by lease signing or delivery are disclosed under § 213.4(b) and § 213.4(n).
ii. Taxes that are part of the scheduled payments are reflected in the disclosure under § 213.4(c), (f), and (n).
iii. A tax payable by the lessor that is passed on to the consumer and is reflected in the lease documentation must be disclosed under § 213.4(n). A tax payable by the lessor and absorbed as a cost of doing business need not be disclosed.
iv. Taxes charged in connection with the exercise of a purchase option are disclosed under § 213.4(i), not § 213.4(n).
2. Estimates. In disclosing the total amount of fees and taxes under § 213.4(n), lessors may need to base the disclosure on estimated tax rates or amounts and are afforded great flexibility in doing so. Where a rate is applied to the future value of leased property, lessors have flexibility in estimating that value, including, but not limited to, using the mathematical average of the agreed upon value and the residual value or published valuation guides; or a lessor could prepare estimates using the agreed upon value and disclose a reasonable estimate of the total fees and taxes. Lessors may include a statement that the actual total of fees and taxes may be higher or lower depending on the tax rates in effect or the value of the leased property at the time a fee or tax is assessed.
1. Coverage. If insurance is obtained through the lessor, information on the type and amount of insurance coverage (whether voluntary or required) as well as the cost, must be disclosed.
2. Lessor’s insurance. Insurance purchased by the lessor primarily for its own benefit, and absorbed as a business expense and not separately charged to the lessee, need not be disclosed under § 213.4(o) even if it provides an incidental benefit to the lessee.
3. Mechanical breakdown protection and other products. Whether products purchased in conjunction with a lease, such as mechanical breakdown protection (MBP) or guaranteed automobile protection (GAP), should be treated as insurance is determined by state or other applicable law. In states that do not treat MBP or GAP as insurance, § 213.4(o) disclosures are not required. In such cases the lessor may, however, disclose this information in accordance with the additional information provision in § 213.3(b). For MBP insurance contracts not capped by a dollar amount, lessors may describe coverage by referring to a limitation by mileage or time period, for example, by indicating that the mechanical breakdown contract insures parts of the automobile for up to 100,000 miles.
1. Brief identification. The statement identifying warranties may be brief and need not describe or list all warranties applicable to specific parts such as for air conditioning, radio, or tires in an automobile. For example, manufacturer’s warranties may be identified simply by a reference to the standard manufacturer’s warranty. If a lessor provides a comprehensive list of warranties that may not all apply, to comply with § 213.4(p) the lessor must indicate which warranties apply or, alternatively, which warranties do not apply.
2. Warranty disclaimers. Although a disclaimer of warranties is not required by the regulation, the lessor may give a disclaimer as additional information in accordance with § 213.3(b).
3. State law. Whether an express warranty or guaranty exists is determined by state or other law.
1. Collection costs. The automatic imposition of collection costs or attorney fees upon default must be disclosed under § 213.4(q). Collection costs or attorney fees that are not imposed automatically, but are contingent upon expenditures in conjunction with a collection proceeding or upon the employment of an attorney to effect collection, need not be disclosed.
2. Charges for early termination. When default is a condition for early termination of a lease, default charges must also be disclosed under § 213.4(g)(1). The § 213.4(q) and (g)(1) disclosures may, but need not, be combined. Examples of combined disclosures are provided in the model lease disclosure forms in appendix A.
3. Simple-interest leases. In a simple-interest accounting lease, the additional rent charge that accrues on the lease balance when a periodic payment is made after the due date does not constitute a penalty or other charge for late payment. Similarly, continued accrual of the rent charge after termination of the lease because the lessee fails to return the leased property does not constitute a default charge. But in either case, if the additional charge accrues at a rate higher than the normal rent charge, the lessor must disclose the amount of or the method of determining the additional charge under § 213.4(q).
4. Extension charges. Extension charges that exceed the rent charge in a simple-interest accounting lease or that are added separately are disclosed under § 213.4(q).
5. Reasonableness of charges. Pursuant to section 183(b) of the act, penalties or other charges for delinquency, default, or early termination may be specified in the lease but only in an amount that is reasonable in light of the anticipated or actual harm caused by the delinquency, default, or early termination, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.
1. Disclosable security interests. See § 213.2(o) and accompanying commentary to determine what security interests must be disclosed.
1. Segregated disclosures. A lease rate may not be included among the segregated disclosures referenced in § 213.3(a)(2).
1. Coverage. Section 213.5 applies only to existing leases that are covered by the regulation. It does not apply to the renegotiation or extension of leases with an initial term of four months or less, because such leases are not covered by the definition of consumer lease in.
§ 213.2(e). Whether and when a lease is satisfied and replaced by a new lease is determined by state or other applicable law.
1. Basis of disclosures. Lessors have flexibility in making disclosures so long as they reflect the legal obligation under the renegotiated lease. For example, assume that a 24-month lease is replaced by a 36-month lease. The initial lease began on January 1, 1998, and was renegotiated and replaced on July 1, 1998, so that the new lease term ends on January 1, 2001.
i. If the renegotiated lease covers the 36-month period beginning January 1, 1998, the new disclosures would reflect all payments made by the lessee on the initial lease and all payments on the renegotiated lease. In this example, since the renegotiated lease covers a 36-month period beginning January 1, 1998, the disclosures must reflect payments made since that date. On the model form, the “total of base periodic payments” disclosed under § 213.4(f)(7) should reflect periodic payments to be made over the entire 36-month term. Payments received since January 1, 1998, are added as a new line item disclosed as “total of payments received” and are subtracted from the “total of base periodic payments” in calculating a new item disclosed as the “total of base periodic payments remaining.” For example, if 6 monthly payments of $300 were received since January 1, 1998, the disclosure form should include a “total of base periodic payments” line from which $1,800 is subtracted to arrive at the “total of base periodic payments remaining.” The remainder of the disclosures would not change.
ii. If the renegotiated lease covers only the remaining 30 months, from July 1, 1998, to January 1, 2001, the disclosures would reflect only the charges incurred in connection with the renegotiation and the payments for the remaining period.
1. Time of extension disclosures. If a consumer lease is extended for a specified term greater than six months, new disclosures are required at the time the extension is agreed upon. If the lease is extended on a month-to-month basis and the cumulative extensions exceed six months, new disclosures are required at the commencement of the seventh month and at the commencement of each seventh month thereafter for as long as the extensions continue. If a consumer lease is extended for terms of varying durations, one of which will exceed six months beyond the originally scheduled termination date of the lease, new disclosures are required at the commencement of the term that will exceed six months beyond the originally scheduled termination date.
2. Content of disclosures for month-to-month extensions. The disclosures for a lease extended on a month-to-month basis for more than six months should reflect the month-to-month nature of the transaction.
3. Basis of disclosures. The disclosures should be based on the extension period, including any upfront costs paid in connection with the extension. For example, assume that initially a lease ends on March 1, 1999. In January 1999, agreement is reached to extend the lease until October 1, 1999. The disclosure would include any extension fee paid in January and the periodic payments for the seven-month extension period beginning in March.
1. Persons covered. All “persons” must comply with the advertising provisions in this section, not just those that meet the definition of a lessor in § 213.2(h). Thus, automobile dealers, merchants, and others who are not themselves lessors must comply with the advertising provisions of the regulation if they advertise consumer lease transactions. Pursuant to section 184(b) of the act, however, owners and personnel of the media in which an advertisement appears or through which it is disseminated are not subject to civil liability for violations under section 185(b) of the act.
2. “Usually and customarily.” Section 213.7(a) does not prohibit the advertising of a single item or the promotion of a new leasing program, but prohibits the advertising of terms that are not and will not be available. Thus, an advertisement may state terms that will be offered for only a limited period or terms that will become available at a future date.
3. Total contractual obligation of advertised lease. Section 213.7 applies to advertisements for consumer leases, as defined in § 213.2(e). Under § 213.2(e), a consumer lease is exempt from the requirements of this Part if the total contractual obligation exceeds the threshold amount in effect at the time of consummation. See comment 2(e)-9. Accordingly, § 213.7 does not apply to an advertisement for a specific consumer lease if the total contractual obligation for that lease exceeds the threshold amount in effect when the advertisement is made. If a lessor promotes multiple consumer leases in a single advertisement, the entire advertisement must comply with § 213.7 unless all of the advertised leases are exempt under § 213.2(e). For example
A. Assume that, in an advertisement, a lessor states that certain terms apply to a consumer lease for a specific automobile. The total contractual obligation of the advertised lease exceeds the threshold amount in effect when the advertisement is made. Although the advertisement does not refer to any other lease, some or all of the advertised terms for the exempt lease also apply to other leases offered by the lessor with total contractual obligations that do not exceed the applicable threshold amount. The advertisement is not required to comply with § 213.7 because it refers only to an exempt lease.
B. Assume that, in an advertisement, a lessor states certain terms (such as the amount due at lease signing) that will apply to consumer leases for automobiles of a particular brand. However, the advertisement does not refer to a specific lease. The total contractual obligations of the leases for some of the automobiles will exceed the threshold amount in effect when the advertisement is made, but the total contractual obligations of the leases for other automobiles will not exceed the threshold. The entire advertisement must comply with § 213.7 because it refers to terms for consumer leases that are not exempt.
C. Assume that, in a single advertisement, a lessor states that certain terms apply to consumer leases for two different automobiles. The total contractual obligation of the lease for the first automobile exceeds the threshold amount in effect when the advertisement is made, but the total contractual obligation of the lease for the second automobile does not exceed the threshold. The entire advertisement must comply with § 213.7 because it refers to a consumer lease that is not exempt.
1. Standard. The disclosures in an advertisement in any media must be reasonably understandable. For example, very fine print in a television advertisement or detailed and very rapidly stated information in a radio advertisement does not meet the clear and conspicuous standard if consumers cannot see and read or hear, and cannot comprehend, the information required to be disclosed.
1. Itemization not required. Only a total of amounts due at lease signing or delivery is required to be disclosed, not an itemization of its component parts. Such an itemization is provided in any transaction-specific disclosures provided under § 213.4.
2. Prominence rule. Except for a periodic payment, oral or written references to components of the total due at lease signing or delivery (for example, a reference to a capitalized cost reduction, where permitted) may not be more prominent than the disclosure of the total amount due at lease signing or delivery.
1. Location of statement. The notice required to accompany a percentage rate stated in an advertisement must be placed in close proximity to the rate without any other intervening language or symbols. For example, a lessor may not place an asterisk next to the rate and place the notice elsewhere in the advertisement. In addition, with the exception of the notice required by § 213.4(s), the rate cannot be more prominent than any other § 213.4 disclosure stated in the advertisement.
1. General rule. The multiple-page advertisements referred to in § 213.7(c) are advertisements consisting of a series of numbered pages—for example, a supplement to a newspaper. A mailing comprising several separate flyers or pieces of promotional material in a single envelope is not a single multiple-page advertisement.
2. Cross references. A catalog or other multiple-page advertisement or an electronic advertisement (such as an advertisement appearing on an Internet Web site) is a single advertisement (requiring only one set of lease disclosures) if it contains a table, chart, or schedule with the disclosures required under § 213.7(d)(2)(i) through (v). If one of the triggering terms listed in § 213.7(d)(1) appears in a catalog, or in a multiple-page or electronic advertisement, it must clearly direct the consumer to the page or location where the table, chart, or schedule begins. For example, in an electronic advertisement, a term triggering additional disclosures may be accompanied by a link that directly connects the consumer to the additional information.
1. Typical example. When any triggering term appears in a lease advertisement, the additional terms enumerated in § 213.7(d)(2) (i) through (v) must also appear. In a multi-lease advertisement, an example of one or more typical leases with a statement of all the terms applicable to each may be used. The examples must be labeled as such and must reflect representative lease terms that are made available by the lessor to consumers.
1. Third-party fees that vary by state or locality. The disclosure of a periodic payment or total amount due at lease signing or delivery may:
i. Exclude third-party fees, such as taxes, licenses, and registration fees and disclose that fact; or
ii. Provide a periodic payment or total that includes third-party fees based on a particular state or locality as long as that fact and the fact that fees may vary by state or locality are disclosed.
1. Multiple-item leases. Multiple-item leases that utilize merchandise tags requiring additional disclosures may use the alternate disclosure rule.
1. Publication in general circulation. A reference to a written advertisement appearing in a newspaper circulated nationally, for example, USA Today or the Wall Street Journal, may satisfy the general circulation requirement in § 213.7(f)(1)(ii).
2. Toll-free number, local or collect calls. In complying with the disclosure requirements of § 213.7(f)(1)(i), a lessor must provide a toll-free number for nonlocal calls made from an area code other than the one used in the lessor’s dialing area. Alternatively, a lessor may provide any telephone number that allows a consumer to reverse the phone charges when calling for information.
3. Multi-purpose number. When an advertised toll-free number responds with a recording, lease disclosures must be provided early in the sequence to ensure that the consumer receives the required disclosures. For example, in providing several dialing options—such as providing directions to the lessor’s place of business—the option allowing the consumer to request lease disclosures should be provided early in the telephone message to ensure that the option to request disclosures is not obscured by other information.
4. Statement accompanying toll free number. Language must accompany a telephone and television number indicating that disclosures are available by calling the toll-free number, such as “call 1-800-000-0000 for details about costs and terms.”
1. Manner of retaining evidence. A lessor must retain evidence of having performed required actions and of having made required disclosures. Such records may be retained in paper form, on microfilm, microfiche, or computer, or by any other method designed to reproduce records accurately. The lessor need retain only enough information to reconstruct the required disclosures or other records.
1. Exemptions granted. Effective October 1, 1982, the Board granted the following exemptions from portions of the Consumer Leasing Act:
i. Maine. Lease transactions subject to the Maine Consumer Credit Code and its implementing regulations are exempt from chapters 2, 4, and 5 of the federal act. (The exemption does not apply to transactions in which a federally chartered institution is a lessor.)
ii. Oklahoma. Lease transactions subject to the Oklahoma Consumer Credit Code are exempt from chapters 2 and 5 of the federal act. (The exemption does not apply to sections 132 through 135 of the federal act, nor does it apply to transactions in which a federally chartered institution is a lessor.)
1. Permissible changes. Although use of the model forms is not required, lessors using them properly will be deemed to be in compliance with the regulation. Generally, lessors may make certain changes in the format or content of the forms and may delete any disclosures that are inapplicable to a transaction without losing the act’s protection from liability. For example, the model form based on monthly periodic payments may be modified for single-payment lease transactions or for quarterly or other regular or irregular periodic payments. The model form may also be modified to reflect that a transaction is an extension. The content, format, and headings for the segregated disclosures must be substantially similar to those contained in the model forms; therefore, any changes should be minimal. The changes to the model forms should not be so extensive as to affect the substance and the clarity of the disclosures.
2. Examples of acceptable changes.
i. Using the first person, instead of the second person, in referring to the lessee.
ii. Using “lessee,” “lessor,” or names instead of pronouns.
iii. Rearranging the sequence of the nonsegregated disclosures.
iv. Incorporating certain state “plain English” requirements.
v. Deleting or blocking out inapplicable disclosures, filling in “N/A” (not applicable) or “0,” crossing out, leaving blanks, checking a box for applicable items, or circling applicable items (this should facilitate use of multipurpose standard forms).
vi. Adding language or symbols to indicate estimates.
vii. Adding numeric or alphabetic designations.
viii. Rearranging the disclosures into vertical columns, except for § 213.4 (b) through (e) disclosures.
ix. Using icons and other graphics.
3. Model closed-end or net vehicle lease disclosure. Model A-2 is designed for a closed-end or net vehicle lease. Under the “Early Termination and Default” provision a reference to the lessee’s right to an independent appraisal of the leased vehicle under § 213.4(l) is included for those closed-end leases in which the lessee’s liability at early termination is based on the vehicle’s realized value.
4. Model furniture lease disclosures. Model A-3 is a closed-end lease disclosure statement designed for a typical furniture lease. It does not include a disclosure of the appraisal right at early termination required under § 213.4(l) because few closed-end furniture leases base the lessee’s liability at early termination on the realized value of the leased property. The disclosure should be added if it is applicable.
PART 214—RELATIONS WITH FOREIGN BANKS AND BANKERS (REGULATION N)
Regulations
§ 214.1 Scope of part.
Pursuant to the authority conferred upon it by section 14 of the Federal Reserve Act, as amended (40 Stat. 235, 48 Stat. 181; 12 U.S.C. 358, 348a), and by other provisions of law, the Board of Governors of the Federal Reserve System prescribes the following regulations governing relationships and transactions between Federal Reserve Banks and foreign banks or bankers or groups of foreign banks, or bankers, or a foreign State as defined in section 25(b) of the Federal Reserve Act (55 Stat. 131; 12 U.S.C. 632).
§ 214.2 Information to be furnished to the Board.
In order that the Board of Governors of the Federal Reserve System may perform its statutory duty of exercising special supervision over all relationships and transactions of any kind entered into by any Federal Reserve Bank with any foreign bank or banker or with any group of foreign banks or bankers or with any foreign State, each Federal Reserve Bank shall promptly submit to the Board of Governors of the Federal Reserve System in writing full information concerning all existing relationships and transactions of any kind heretofore entered into by such Federal Reserve Bank with any foreign bank or banker or with any group of foreign banks or bankers or with any foreign State and copies of all written agreements between it and any foreign bank or banker or any group of foreign banks or bankers or any foreign State which are now in force, unless copies have heretofore been furnished to the Board. Each Federal Reserve Bank shall also keep the Board of Governors of the Federal Reserve System promptly and fully advised of all transactions with any foreign bank or banker or with any group of foreign banks or bankers or with any foreign State, except transactions of a routine character.
§ 214.3 Conferences and negotiations with foreign banks, bankers, or States.
(a) Without first obtaining the permission of the Board of Governors of the Federal Reserve System, no officer or other representative of any Federal Reserve Bank shall conduct negotiations of any kind with the officers or representatives of any foreign bank or banker or any group of foreign banks or bankers of any foreign State, except communications in the ordinary course of business in connection with transactions pursuant to agreements previously approved by the Board of Governors of the Federal Reserve System. Any request for the Board’s permission to conduct any such negotiations shall be submitted in writing and shall include a full statement of the occasion and objects of the proposed negotiations.
(b) The Board of Governors of the Federal Reserve System reserves the right, in its discretion, to be represented by such representatives as it may designate in any negotiations between any officer or other representative of any Federal Reserve Bank and any officers or representatives of any foreign bank or banker or any group of foreign banks or bankers or any foreign State; and the Board shall be given reasonable notice in advance of the time and place of any such negotiations; and may itself designate the time and place of any such negotiations.
(c) A full report of all such conferences or negotiations and all understandings or agreements arrived at or transactions agreed upon and all other material facts appertaining to such conferences or negotiations shall be filed with the Board of Governors of the Federal Reserve System in writing by a duly authorized officer of each Federal Reserve Bank which shall have participated in such conferences or negotiations, including copies of all correspondence appertaining thereto.
§ 214.4 Agreements with foreign banks, bankers, or States, and participation in foreign accounts.
(a) No Federal Reserve Bank shall enter into any agreement, contract, or understanding with any foreign bank or banker or with any group of foreign banks or bankers or with any foreign State without first obtaining the permission of the Board of Governors of the Federal Reserve System.
(b) When any Federal Reserve Bank, with the approval of the Board of Governors of the Federal Reserve System, has opened an account for any foreign bank or banker or group of foreign banks or bankers or for any foreign State, or has entered into any agreement, contract, or understanding with reference to opening or maintaining such an account, or with reference to any other matter or matters, any other Federal Reserve Bank may participate in such account, or in such agreement, contract, or understanding, and in operations and transactions performed therein or pursuant thereto, with the approval of the Board of Governors of the Federal Reserve System.
§ 214.5 Accounts with foreign banks.
(a) Any Federal Reserve Bank, with the consent of the Board, may open and maintain accounts payable in foreign currencies with such foreign banks as may be designated by the Board.
(b) Notwithstanding other provisions of this part, any officer or other representatives of the Federal Reserve Bank which maintains an account with a foreign bank may conduct such negotiations and enter into such agreements, contracts, or understandings with such foreign bank as may be authorized or directed by the Federal Open Market Committee in order to effectuate the conduct of open market transactions of the Federal Reserve Banks incident to the opening, maintenance, operation, increase, reduction, or discontinuance of such account; and, in any such case, such negotiations, agreements, contracts, or understandings shall be subject to such authorizations, directions, regulations, and limitations as may be prescribed by, or pursuant to authority of, the Federal Open Market Committee.
(c) Any Federal Reserve Bank may, when authorized or directed so to do by, or under the authority of, the Federal Open Market Committee, carry on or conduct, through any other Federal Reserve Bank which maintains an account with a foreign bank, any open market transactions authorized by section 14 of the Federal Reserve Act. Transactions authorized by section 14 which are not open market transactions may be carried on or conducted through such other Federal Reserve Bank only with the approval of the Board.
(d) Notwithstanding other provisions of this part, reports with respect to any accounts opened and maintained, and negotiations, agreements, contracts, and understandings entered into, pursuant to this section shall be made to the Board at least quarterly, and more frequently if so requested by the Board, by a duly authorized officer of the Federal Reserve Bank involved.
§ 214.6 Amendments.
The Board of Governors of the Federal Reserve System reserves the right, in its discretion, to alter, amend or repeal these regulations and to prescribe such additional regulations, conditions, and limitations as it may deem desirable, respecting relationships and transactions of any kind entered into by any Federal Reserve Bank with any foreign bank or banker or with any group of foreign banks or bankers or with any foreign State.
PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O)
§ 215.1 Authority, purpose, and scope.
(a) Authority. This part is issued pursuant to sections 11(a), 22(g), and 22(h) of the Federal Reserve Act (12 U.S.C. 248(a), 375a, and 375b), 12 U.S.C. 1817(k), section 306 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (Pub. L. 102-242, 105 Stat. 2236 (1991)), section 11 of the Home Owners’ Loan Act (12 U.S.C. 1468), and section 312(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412).
(b) Purpose and scope. (1) This part governs any extension of credit made by a member bank to an executive officer, director, or principal shareholder of the member bank, of any company of which the member bank is a subsidiary, and of any other subsidiary of that company.
(2) This part also applies to any extension of credit made by a member bank to a company controlled by such a person, or to a political or campaign committee that benefits or is controlled by such a person.
(3) This part also implements the reporting requirements of 12 U.S.C. 1817(k) concerning extensions of credit by a member bank to its executive officers or principal shareholders (or to the related interests of such persons).
(4) Extensions of credit made to an executive officer, director, or principal shareholder of a bank (or to a related interest of such person) by a correspondent bank also are subject to restrictions set forth in 12 U.S.C. 1972(2).
§ 215.2 Definitions.
For purposes of this part, the following definitions apply unless otherwise specified:
(a) Affiliate means any company of which a member bank is a subsidiary or any other subsidiary of that company.
(b) Company means any corporation, partnership, trust (business or otherwise), association, joint venture, pool syndicate, sole proprietorship, unincorporated organization, or any other form of business entity not specifically listed herein. However, the term does not include:
(1) An insured depository institution (as defined in 12 U.S.C. 1813); or
(2) A corporation the majority of the shares of which are owned by the United States or by any State.
(c)(1) Control of a company or bank means that a person directly or indirectly, or acting through or in concert with one or more persons:
(i) Owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company or bank;
(ii) Controls in any manner the election of a majority of the directors of the company or bank; or
(iii) Has the power to exercise a controlling influence over the management or policies of the company or bank.
(2) A person is presumed to have control, including the power to exercise a controlling influence over the management or policies, of a company or bank if:
(i) The person is:
(A) An executive officer or director of the company or bank; and
(B) Directly or indirectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of the company or bank; or
(ii)(A) The person directly or indirectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of the company or bank; and
(B) No other person owns, controls, or has the power to vote a greater percentage of that class of voting securities.
(3) An individual is not considered to have control, including the power to exercise a controlling influence over the management or policies, of a company or bank solely by virtue of the individual’s position as an officer or director of the company or bank.
(4) A person may rebut a presumption established by paragraph (c)(2) of this section by submitting to the appropriate Federal banking agency (as defined in 12 U.S.C. 1813(q)) written materials that, in the agency’s judgment, demonstrate an absence of control.
(d)(1) Director of a company or bank means any director of the company or bank, whether or not receiving compensation. An advisory director is not considered a director if the advisory director:
(i) Is not elected by the shareholders of the company or bank;
(ii) Is not authorized to vote on matters before the board of directors; and
(iii) Provides solely general policy advice to the board of directors.
(2) Extensions of credit to a director of an affiliate of a bank are not subject to §§ 215.4, 215.6, and 215.8 if—
(i) The director of the affiliate is excluded, by resolution of the board of directors or by the bylaws of the bank, from participation in major policymaking functions of the bank, and the director does not actually participate in such functions;
(ii) The affiliate does not control the bank;
(iii) As determined annually, the assets of the affiliate do not constitute more than 10 percent of the consolidated assets of the company that—
(A) Controls the bank; and
(B) Is not controlled by any other company; and
(iv) The director of the affiliate is not otherwise subject to §§ 215.4, 215.6, and 215.8.
(3) For purposes of paragraph (d)(2)(i) of this section, a resolution of the board of directors or a corporate bylaw may—
(i) Include the director (by name or by title) in a list of persons excluded from participation in such functions; or
(ii) Not include the director in a list of persons authorized (by name or by title) to participate in such functions.
(e)(1) Executive officer of a company or bank means a person who participates or has authority to participate (other than in the capacity of a director) in major policymaking functions of the company or bank, whether or not: the officer has an official title; the title designates the officer an assistant; or the officer is serving without salary or other compensation.
(2) Extensions of credit to an executive officer of an affiliate of a bank are not subject to §§ 215.4, 215.6, and 215.8 if—
(i) The executive officer is excluded, by resolution of the board of directors or by the bylaws of the bank, from participation in major policymaking functions of the bank, and the executive officer does not actually participate in such functions;
(ii) The affiliate does not control the bank;
(iii) As determined annually, the assets of the affiliate do not constitute more than 10 percent of the consolidated assets of the company that—
(A) Controls the bank; and
(B) Is not controlled by any other company; and
(iv) The executive officer of the affiliate is not otherwise subject to §§ 215.4, 215.6, and 215.8.
(3) For purposes of paragraphs (e)(1) and (e)(2)(i) of this section, a resolution of the board of directors or a corporate bylaw may—
(i) Include the executive officer (by name or by title) in a list of persons excluded from participation in such functions; or
(ii) Not include the executive officer in a list of persons authorized (by name or by title) to participate in such functions.
(f) Foreign bank has the meaning given in 12 U.S.C. 3101(7).
(g) Immediate family means the spouse of an individual, the individual’s minor children, and any of the individual’s children (including adults) residing in the individual’s home.
(h) Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person.
(i) Lending limit. The lending limit for a member bank is an amount equal to the limit of loans to a single borrower established by section 5200 of the Revised Statutes,
(1) The bank’s tier 1 and tier 2 capital included in the bank’s risk-based capital under the capital rule of the appropriate Federal banking agency, based on the bank’s most recent consolidated report of condition filed under 12 U.S.C. 1817(a)(3); and
(2) The balance of the bank’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, not included in the bank’s tier 2 capital for purposes of the calculation of risk-based capital under the capital rule of the appropriate Federal banking agency, based on the bank’s most recent consolidated reports of condition filed under 12 U.S.C. 1817(a)(3).
(3) Notwithstanding paragraphs (i)(1) and (2) of this section, for a member bank that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), unimpaired capital and unimpaired surplus equals Tier 1 capital (as defined in § 217.12 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowances for loan and lease losses or adjusted allowance for credit losses, as applicable.
(j) Member bank means any banking institution that is a member of the Federal Reserve System, including any subsidiary of a member bank. The term does not include any foreign bank that maintains a branch in the United States, whether or not the branch is insured (within the meaning of 12 U.S.C. 1813(s)) and regardless of the operation of 12 U.S.C. 1813(h) and 12 U.S.C. 1828(j)(3)(B).
(k) Pay an overdraft on an account means to pay an amount upon the order of an account holder in excess of funds on deposit in the account.
(l) Person means an individual or a company.
(m)(1) Principal shareholder means a person (other than an insured bank) that directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of any class of voting securities of a member bank or company. Shares owned or controlled by a member of an individual’s immediate family are considered to be held by the individual.
(2) A principal shareholder of a member bank does not include a company of which a member bank is a subsidiary.
(n) Related interest of a person means:
(1) A company that is controlled by that person; or
(2) A political or campaign committee that is controlled by that person or the funds or services of which will benefit that person.
(o) Subsidiary has the meaning given in 12 U.S.C. 1841(d), but does not include a subsidiary of a member bank.
§ 215.3 Extension of credit.
(a) An extension of credit is a making or renewal of any loan, a granting of a line of credit, or an extending of credit in any manner whatsoever, and includes:
(1) A purchase under repurchase agreement of securities, other assets, or obligations;
(2) An advance by means of an overdraft, cash item, or otherwise;
(3) Issuance of a standby letter of credit (or other similar arrangement regardless of name or description) or an ineligible acceptance, as those terms are defined in § 208.24 of this chapter;
(4) An acquisition by discount, purchase, exchange, or otherwise of any note, draft, bill of exchange, or other evidence of indebtedness upon which an insider may be liable as maker, drawer, endorser, guarantor, or surety;
(5) An increase of an existing indebtedness, but not if the additional funds are advanced by the bank for its own protection for:
(i) Accrued interest; or
(ii) Taxes, insurance, or other expenses incidental to the existing indebtedness;
(6) An advance of unearned salary or other unearned compensation for a period in excess of 30 days; and
(7) Any other similar transaction as a result of which a person becomes obligated to pay money (or its equivalent) to a bank, whether the obligation arises directly or indirectly, or because of an endorsement on an obligation or otherwise, or by any means whatsoever.
(b) An extension of credit does not include:
(1) An advance against accrued salary or other accrued compensation, or an advance for the payment of authorized travel or other expenses incurred or to be incurred on behalf of the bank;
(2) A receipt by a bank of a check deposited in or delivered to the bank in the usual course of business unless it results in the carrying of a cash item for or the granting of an overdraft (other than an inadvertent overdraft in a limited amount that is promptly repaid, as described in § 215.4(e) of this part);
(3) An acquisition of a note, draft, bill of exchange, or other evidence of indebtedness through:
(i) A merger or consolidation of banks or a similar transaction by which a bank acquires assets and assumes liabilities of another bank or similar organization; or
(ii) Foreclosure on collateral or similar proceeding for the protection of the bank, provided that such indebtedness is not held for a period of more than three years from the date of the acquisition, subject to extension by the appropriate Federal banking agency for good cause;
(4)(i) An endorsement or guarantee for the protection of a bank of any loan or other asset previously acquired by the bank in good faith; or
(ii) Any indebtedness to a bank for the purpose of protecting the bank against loss or of giving financial assistance to it;
(5) Indebtedness of $15,000 or less arising by reason of any general arrangement by which a bank:
(i) Acquires charge or time credit accounts; or
(ii) Makes payments to or on behalf of participants in a bank credit card plan, check credit plan, or similar open-end credit plan, provided:
(A) The indebtedness does not involve prior individual clearance or approval by the bank other than for the purposes of determining authority to participate in the arrangement and compliance with any dollar limit under the arrangement; and
(B) The indebtedness is incurred under terms that are not more favorable than those offered to the general public;
(6) Indebtedness of $5,000 or less arising by reason of an interest-bearing overdraft credit plan of the type specified in § 215.4(e);
(7) A discount of promissory notes, bills of exchange, conditional sales contracts, or similar paper, without recourse; or
(8) Except for purposes of § 215.5 of this part, a loan:
(i) Made pursuant to the “Paycheck Protection Program” in which the participation by the Small Business Administration on a deferred basis is 100 percent;
(ii) For which material terms, including the maturity and the interest rate, are set by the Small Business Administration;
(iii) That is made during the “covered period,” as that term is defined in 15 U.S.C. 636(a)(36)(A)(iii), but in no case later than March 31, 2022; and
(iv) That would not be prohibited by 13 CFR 120.110(o) or rules or interpretations thereof issued by the Small Business Administration.
(c) Non-interest-bearing deposits to the credit of a bank are not considered loans, advances, or extensions of credit to the bank of deposit; nor is the giving of immediate credit to a bank upon uncollected items received in the ordinary course of business considered to be a loan, advance or extension of credit to the depositing bank.
(d) For purposes of § 215.4 of this part, an extension of credit by a member bank is considered to have been made at the time the bank enters into a binding commitment to make the extension of credit.
(e) A participation without recourse is considered to be an extension of credit by the participating bank, not by the originating bank.
(f) Tangible economic benefit rule—(1) In general. An extension of credit is considered made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider.
(2) Exception. An extension of credit is not considered made to an insider under paragraph (f)(1) of this section if:
(i) The credit is extended on terms that would satisfy the standard set forth in § 215.4(a) of this part for extensions of credit to insiders; and
(ii) The proceeds of the extension of credit are used in a bona fide transaction to acquire property, goods, or services from the insider.
§ 215.4 General prohibitions.
(a) Terms and creditworthiness—(1) In general. No member bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit:
(i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and
(ii) Does not involve more than the normal risk of repayment or present other unfavorable features.
(2) Exception. Nothing in this paragraph (a) or paragraph (e)(2)(ii) of this section shall prohibit any extension of credit made pursuant to a benefit or compensation program—
(i) That is widely available to employees of the member bank and, in the case of extensions of credit to an insider of its affiliates, is widely available to employees of the affiliates at which that person is an insider; and
(ii) That does not give preference to any insider of the member bank over other employees of the member bank and, in the case of extensions of credit to an insider of its affiliates, does not give preference to any insider of its affiliates over other employees of the affiliates at which that person is an insider.
(b) Prior approval. (1) No member bank may extend credit (which term includes granting a line of credit) to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the member bank’s unimpaired capital and unimpaired surplus, unless:
(i) The extension of credit has been approved in advance by a majority of the entire board of directors of that bank; and
(ii) The interested party has abstained from participating directly or indirectly in the voting.
(2) In no event may a member bank extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with all other extensions of credit to that person, and all related interests of that person, exceeds $500,000, except by complying with the requirements of this paragraph (b).
(3) Approval by the board of directors under paragraphs (b)(1) and (b)(2) of this section is not required for an extension of credit that is made pursuant to a line of credit that was approved under paragraph (b)(1) of this section within 14 months of the date of the extension of credit. The extension of credit must also be in compliance with the requirements of § 215.4(a) of this part.
(4) Participation in the discussion, or any attempt to influence the voting, by the board of directors regarding an extension of credit constitutes indirect participation in the voting by the board of directors on an extension of credit.
(c) Individual lending limit. No member bank may extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit by the member bank to that person and to all related interests of that person, exceeds the lending limit of the member bank specified in § 215.2(i) of this part. This prohibition does not apply to an extension of credit by a member bank to a company of which the member bank is a subsidiary or to any other subsidiary of that company.
(d) Aggregate lending limit—(1) General limit. A member bank may not extend credit to any insider of the bank or insider of its affiliates unless the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to all such insiders, does not exceed the bank’s unimpaired capital and unimpaired surplus (as defined in § 215.2(i) of this part).
(2) Member banks with deposits of less than $100,000,000. (i) A member bank with deposits of less than $100,000,000 may by an annual resolution of its board of directors increase the general limit specified in paragraph (d)(1) of this section to a level not to exceed two times the bank’s unimpaired capital and unimpaired surplus, if:
(A) The board of directors determines that such higher limit is consistent with prudent, safe, and sound banking practices in light of the bank’s experience in lending to its insiders and is necessary to attract or retain directors or to prevent restricting the availability of credit in small communities;
(B) The resolution sets forth the facts and reasoning on which the board of directors bases the finding, including the amount of the bank’s lending to its insiders as a percentage of the bank’s unimpaired capital and unimpaired surplus as of the date of the resolution;
(C) The bank meets or exceeds, on a fully-phased in basis, all applicable capital requirements established by the appropriate Federal banking agency; and
(D) The bank received a satisfactory composite rating in its most recent report of examination.
(ii) If a member bank has adopted a resolution authorizing a higher limit pursuant to paragraph (d)(2)(i) of this section and subsequently fails to meet the requirements of paragraph (d)(2)(i)(C) or (d)(2)(i)(D) of this section, the member bank shall not extend any additional credit (including a renewal of any existing extension of credit) to any insider of the bank or its affiliates unless such extension or renewal is consistent with the general limit in paragraph (d)(1) of this section.
(3) Exceptions. (i) The general limit specified in paragraph (d)(1) of this section does not apply to the following:
(A) Extensions of credit secured by a perfected security interest in bonds, notes, certificates of indebtedness, or Treasury bills of the United States or in other such obligations fully guaranteed as to principal and interest by the United States;
(B) Extensions of credit to or secured by unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission or establishment of the United States or any corporation wholly owned directly or indirectly by the United States;
(C) Extensions of credit secured by a perfected security interest in a segregated deposit account in the lending bank; or
(D) Extensions of credit arising from the discount of negotiable or nonnegotiable installment consumer paper that is acquired from an insider and carries a full or partial recourse endorsement or guarantee by the insider, provided that:
(1) The financial condition of each maker of such consumer paper is reasonably documented in the bank’s files or known to its officers;
(2) An officer of the bank designated for that purpose by the board of directors of the bank certifies in writing that the bank is relying primarily upon the responsibility of each maker for payment of the obligation and not upon any endorsement or guarantee by the insider; and
(3) The maker of the instrument is not an insider.
(ii) The exceptions in paragraphs (d)(3)(i)(A) through (d)(3)(i)(C) of this section apply only to the amounts of such extensions of credit that are secured in the manner described therein.
(e) Overdrafts. (1) No member bank may pay an overdraft of an executive officer or director of the bank or executive officer or director of its affiliates
(i) A written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment; or
(ii) A written, preauthorized transfer of funds from another account of the account holder at the bank.
(2) The prohibition in paragraph (e)(1) of this section does not apply to payment of inadvertent overdrafts on an account in an aggregate amount of $1,000 or less, provided:
(i) The account is not overdrawn for more than 5 business days; and
(ii) The member bank charges the executive officer or director the same fee charged any other customer of the bank in similar circumstances.
§ 215.5 Additional restrictions on loans to executive officers of member banks.
The following restrictions on extensions of credit by a member bank to any of its executive officers apply in addition to any restrictions on extensions of credit by a member bank to insiders of itself or its affiliates set forth elsewhere in this part. The restrictions of this section apply only to executive officers of the member bank and not to executive officers of its affiliates.
(a) No member bank may extend credit to any of its executive officers, and no executive officer of a member bank shall borrow from or otherwise become indebted to the bank, except in the amounts, for the purposes, and upon the conditions specified in paragraphs (c) and (d) of this section.
(b) No member bank may extend credit in an aggregate amount greater than the amount permitted in paragraph (c)(4) of this section to a partnership in which one or more of the bank’s executive officers are partners and, either individually or together, hold a majority interest. For the purposes of paragraph (c)(4) of this section, the total amount of credit extended by a member bank to such partnership is considered to be extended to each executive officer of the member bank who is a member of the partnership.
(c) A member bank is authorized to extend credit to any executive officer of the bank:
(1) In any amount to finance the education of the executive officer’s children;
(2) In any amount to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer, provided:
(i) The extension of credit is secured by a first lien on the residence and the residence is owned (or expected to be owned after the extension of credit) by the executive officer; and
(ii) In the case of a refinancing, that only the amount thereof used to repay the original extension of credit, together with the closing costs of the refinancing, and any additional amount thereof used for any of the purposes enumerated in this paragraph (c)(2), are included within this category of credit;
(3) In any amount, if the extension of credit is secured in a manner described in § 215.4(d)(3)(i)(A) through (d)(3)(i)(C) of this part; and
(4) For any other purpose not specified in paragraphs (c)(1) through (c)(3) of this section, if the aggregate amount of extensions of credit to that executive officer under this paragraph does not exceed at any one time the higher of 2.5 per cent of the bank’s unimpaired capital and unimpaired surplus or $25,000, but in no event more than $100,000.
(d) Any extension of credit by a member bank to any of its executive officers shall be:
(1) Promptly reported to the member bank’s board of directors;
(2) In compliance with the requirements of § 215.4(a) of this part;
(3) Preceded by the submission of a detailed current financial statement of the executive officer; and
(4) Made subject to the condition in writing that the extension of credit will, at the option of the member bank, become due and payable at any time that the officer is indebted to any other bank or banks in an aggregate amount greater than the amount specified for a category of credit in paragraph (c) of this section.
No executive officer, director, or principal shareholder of a member bank or any of its affiliates shall knowingly receive (or knowingly permit any of that person’s related interests to receive) from a member bank, directly or indirectly, any extension of credit not authorized under this part.
§ 215.7 Extensions of credit outstanding on March 10, 1979.
(a) Any extension of credit that was outstanding on March 10, 1979, and that would, if made on or after March 10, 1979, violate § 215.4(c) of this part, shall be reduced in amount by March 10, 1980, to be in compliance with the lending limit in § 215.4(c) of this part. Any renewal or extension of such an extension of credit on or after March 10, 1979, shall be made only on terms that will bring the extension of credit into compliance with the lending limit of § 215.4(c) of this part by March 10, 1980. However, any extension of credit made before March 10, 1979, that bears a specific maturity date of March 10, 1980, or later, shall be repaid in accordance with its repayment schedule in existence on or before March 10, 1979.
(b) If a member bank is unable to bring all extensions of credit outstanding on March 10, 1979, into compliance as required by paragraph (a) of this section, the member bank shall promptly report that fact to the Comptroller of the Currency, in the case of a national bank, or to the appropriate Federal Reserve Bank, in the case of a State member bank, and explain the reasons why all the extensions of credit cannot be brought into compliance. The Comptroller or the Reserve Bank, as the case may be, is authorized, on the basis of good cause shown, to extend the March 10, 1980, date for compliance for any extension of credit for not more than two additional one-year periods.
§ 215.8 Records of member banks.
(a) In general. Each member bank shall maintain records necessary for compliance with the requirements of this part.
(b) Recordkeeping for insiders of the member bank. Any recordkeeping method adopted by a member bank shall:
(1) Identify, through an annual survey, all insiders of the bank itself; and
(2) Maintain records of all extensions of credit to insiders of the bank itself, including the amount and terms of each such extension of credit.
(c) Recordkeeping for insiders of the member bank’s affiliates. Any recordkeeping method adopted by a member bank shall maintain records of extensions of credit to insiders of the member bank’s affiliates by:
(1) Survey method. (i) Identifying, through an annual survey, each insider of the member bank’s affiliates; and
(ii) Maintaining records of the amount and terms of each extension of credit by the member bank to such insiders; or
(2) Borrower inquiry method. (i) Requiring as part of each extension of credit that the borrower indicate whether the borrower is an insider of an affiliate of the member bank; and
(ii) Maintaining records that identify the amount and terms of each extension of credit by the member bank to borrowers so identifying themselves.
(3) Alternative recordkeeping methods for insiders of affiliates. A member bank may employ a recordkeeping method other than those identified in paragraphs (c)(1) and (c)(2) of this section if the appropriate Federal banking agency determines that the bank’s method is at least as effective as the identified methods.
(d) Special rule for non-commercial lenders. A member bank that is prohibited by law or by an express resolution of the board of directors of the bank from making an extension of credit to any company or other entity that is covered by this part as a company is not required to maintain any records of the related interests of the insiders of the bank or its affiliates or to inquire of borrowers whether they are related interests of the insiders of the bank or its affiliates.
(a) Definitions. For the purposes of this section, the following definitions apply:
(1) Principal shareholder of a member bank means any person other than an insured bank, or a foreign bank as defined in 12 U.S.C. 3101(7), that, directly or indirectly, owns, controls, or has power to vote more than 10 percent of any class of voting securities of the member bank. The term includes a person that controls a principal shareholder (e.g., a person that controls a bank holding company). Shares of a bank (including a foreign bank), bank holding company, savings and loan holding company or other company owned or controlled by a member of an individual’s immediate family are presumed to be owned or controlled by the individual for the purposes of determining principal shareholder status.
(2) Related interest means:
(i) Any company controlled by a person; or
(ii) Any political or campaign committee the funds or services of which will benefit a person or that is controlled by a person. For the purpose of this section, a related interest does not include a bank or a foreign bank (as defined in 12 U.S.C. 3101(7)).
(b) Public disclosure. (1) Upon receipt of a written request from the public, a member bank shall make available the names of each of its executive officers and each of its principal shareholders to whom, or to whose related interests, the member bank had outstanding as of the end of the latest previous quarter of the year, an extension of credit that, when aggregated with all other outstanding extensions of credit at such time from the member bank to such person and to all related interests of such person, equaled or exceeded 5 percent of the member bank’s capital and unimpaired surplus or $500,000, whichever amount is less. No disclosure under this paragraph is required if the aggregate amount of all extensions of credit outstanding at such time from the member bank to the executive officer or principal shareholder of the member bank and to all related interests of such a person does not exceed $25,000.
(2) A member bank is not required to disclose the specific amounts of individual extensions of credit.
(c) Maintaining records. Each member bank shall maintain records of all requests for the information described in paragraph (b) of this section and the disposition of such requests. These records may be disposed of after two years from the date of the request.
§ 215.10 Reporting requirement for credit secured by certain bank stock.
Each executive officer or director of a member bank the shares of which are not publicly traded shall report annually to the board of directors of the member bank the outstanding amount of any credit that was extended to the executive officer or director and that is secured by shares of the member bank.
§ 215.11 Civil penalties.
Any member bank, or any officer, director, employee, agent, or other person participating in the conduct of the affairs of the bank, that violates any provision of this part (other than § 215.9) is subject to civil penalties as specified in section 29 of the Federal Reserve Act (12 U.S.C. 504).
§ 215.12 Application to savings associations.
The requirements of this part apply to savings associations, as defined in 12 CFR 238.2(l) (including any subsidiary of a savings association), in the same manner and to the same extent as if the savings association were a member bank; provided that a savings association’s unimpaired capital and unimpaired surplus will be determined under regulatory capital rules applicable to that savings association.
Appendix to Part 215—Section 5200 of the Revised Statutes Total Loans and Extensions of Credit
(a)(1) The total loans and extensions of credit by a national banking association to a person outstanding at one time and not fully secured, as determined in a manner consistent with paragraph (2) of this subsection, by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15 per centum of the unimpaired capital and unimpaired surplus of the association.
(2) The total loans and extensions of credit by a national banking association to a person outstanding at one time and fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the funds outstanding shall not exceed 10 per centum of the unimpaired capital and unimpaired surplus of the association. This limitation shall be separate from and in addition to the limitations contained in paragraph (1) of this subsection.
(b) For the purposes of this section—
(1) The term loans and extensions of credit shall include all direct or indirect advances of funds to a person made on the basis of any obligation of that person to repay the funds or repayable from specific property pledged by or on behalf of the person, and to the extent specified by the Comptroller of the Currency, such term shall also include any liability of a national banking association to advance funds to or on behalf of a person pursuant to a contractual commitment; and
(2) The term person shall include an individual, sole proprietorship, partnership, joint venture, association, trust, estate, business trust, corporation, sovereign government, or agency, instrumentality, or political subdivision thereof, or any similar entity or organization.
(c) The limitations contained in subsection (a) of this section shall be subject to the following exceptions:
(1) Loans or extensions of credit arising from the discount of commercial or business paper evidencing an obligation to the person negotiating it with recourse shall not be subject to any limitation based on capital and surplus.
(2) The purchase of bankers’ acceptances of the kind described in section 372 of this title and issued by other banks shall not be subject to any limitation based on capital and surplus.
(3) Loans and extensions of credit secured by bills of lading, warehouse receipts, or similar documents transferring or securing title to readily marketable staples shall be subject to a limitation of 35 per centum of capital and surplus in addition to the general limitations if the market value of the staples securing each additional loan or extension of credit at all times equals or exceeds 115 per centum of the outstanding amount of such loan or extension of credit. The staples shall be fully covered by insurance whenever it is customary to insure such staples.
(4) Loans or extensions of credit secured by bonds, notes, certificates of indebtedness, or Treasury bills of the United States or by other such obligations fully guaranteed as to principal and interest by the United States shall not be subject to any limitation based on capital and surplus.
(5) Loans or extensions of credit to or secured by unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission, or establishment of the United States or any corporation wholly owned directly or indirectly by the United States shall not be subject to any limitation based on capital and surplus.
(6) Loans or extensions of credit secured by a segregated deposit account in the lending bank shall not be subject to any limitation based on capital and surplus.
(7) Loans or extensions of credit to any financial institution or to any receiver, conservator, superintendent of banks, or other agent in charge of the business and property of such financial institution, when such loans or extensions of credit are approved by the Comptroller of the Currency, shall not be subject to any limitation based on capital and surplus.
(8)(A) Loans and extensions of credit arising from the discount of negotiable or nonnegotiable installment consumer paper which carries a full recourse endorsement or unconditional guarantee by the person transferring the paper shall be subject under this section to a maximum limitation equal to 25 per centum of such capital and surplus, notwithstanding the collateral requirements set forth in subsection (a)(2) of this section.
(B) If the bank’s files or the knowledge of its officers of the financial condition of each maker of such consumer paper is reasonably adequate, and an officer of the bank designated for that purpose by the board of directors of the bank certifies in writing that the bank is relying primarily upon the responsibility of each maker for payment of such loans or extensions of credit and not upon any full or partial recourse endorsement or guarantee by the transferor, the limitations of this section as to the loans or extensions of credit of each such maker shall be the sole applicable loan limitations.
(9)(A) Loans and extensions of credit secured by shipping documents or instruments transferring or securing title covering livestock or giving a lien on livestock when the market value of the livestock securing the obligation is not at any time less than 115 per centum of the face amount of the note covered, shall be subject under this section notwithstanding the collateral requirements set forth in subsection (a)(2) of this section, to a maximum limitation equal to 25 per centum of such capital and surplus.
(B) Loans and extensions of credit which arise from the discount by dealers in dairy cattle of paper given in payment for dairy cattle, which paper carries a full recourse endorsement or unconditional guarantee of the seller, and which are secured by the cattle being sold, shall be subject under this section, notwithstanding the collateral requirements set forth in paragraph (a)(2) of this section, to a limitation of 25 per centum of such capital and surplus.
(10) Loans or extensions of credit to the Student Loan Marketing Association shall not be subject to any limitation based on capital and surplus.
(d)(1) The Comptroller of the Currency may prescribe rules and regulations to administer and carry out the purposes of this section, including rules or regulations to define or further define terms used in this section and to establish limits or requirements other than those specified in this section for particular classes or categories of loans or extensions of credit.
(2) The Comptroller of the Currency also shall have authority to determine when a loan putatively made to a person shall for purposes of this section be attributed to another person.
PART 216 [RESERVED]
PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
Subpart A—General Provisions
(a) Purpose. This part establishes minimum capital requirements and overall capital adequacy standards for entities described in paragraph (c)(1) of this section. This part includes methodologies for calculating minimum capital requirements, public disclosure requirements related to the capital requirements, and transition provisions for the application of this part.
(b) Limitation of authority. Nothing in this part shall be read to limit the authority of the Board to take action under other provisions of law, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law or regulation, under section 8 of the Federal Deposit Insurance Act, section 8 of the Bank Holding Company Act, or section 10 of the Home Owners’ Loan Act.
(c) Applicability—(1)(i) Applicability in general. This part applies on a consolidated basis to every Board-regulated institution that is:
(A) A state member bank;
(B) A bank holding company domiciled in the United States that is not subject to 12 CFR part 225, appendix C, provided that the Board may by order apply any or all of this part to any bank holding company, based on the institution’s size, level of complexity, risk profile, scope of operations, or financial condition; or
(C) A covered savings and loan holding company domiciled in the United States, other than a savings and loan holding company that meets the requirements of 12 CFR part 225, appendix C, as if the savings and loan holding company were a bank holding company and the savings association were a bank. For purposes of compliance with the capital adequacy requirements and calculations in this part, savings and loan holding companies that do not file form FR Y-9C or form FR Q-1 should follow the instructions to the FR Y-9C.
(ii) Mid-tier holding companies of insurance depository institution holding companies. In the case of a bank holding company, or a covered savings and loan holding company, that does not calculate minimum risk-based capital requirements under subpart B of this part by operation of § 217.10(f)(1), this part applies to a depository institution holding company that is a subsidiary of such bank holding company or covered savings and loan holding company, provided that:
(A) The subsidiary depository institution holding company is an insurance mid-tier holding company; and
(B) The subsidiary depository institution holding company’s assets and liabilities are not consolidated with those of a depository institution holding company that controls the subsidiary for purposes of determining the parent depository institution holding company’s capital requirements and capital ratios under subparts B through F of this part.
(2) Minimum capital requirements and overall capital adequacy standards. Each Board-regulated institution must calculate its minimum capital requirements and meet the overall capital adequacy standards in subpart B of this part.
(3) Regulatory capital. Each Board-regulated institution must calculate its regulatory capital in accordance with subpart C of this part.
(4) Risk-weighted assets. (i) Each Board-regulated institution must use the methodologies in subpart D of this part (and subpart F of this part for a market risk Board-regulated institution) to calculate standardized total risk-weighted assets.
(ii) Each advanced approaches Board-regulated institution must use the methodologies in subpart E (and subpart F of this part for a market risk Board-regulated institution) to calculate advanced approaches total risk-weighted assets.
(5) Disclosures. (i) Except for an advanced approaches Board-regulated institution that is making public disclosures pursuant to the requirements in subpart E of this part, each Board-regulated institution with total consolidated assets of $50 billion or more must make the public disclosures described in subpart D of this part.
(ii) Each market risk Board-regulated institution must make the public disclosures described in subpart F of this part.
(iii) Each advanced approaches Board-regulated institution must make the public disclosures described in subpart E of this part.
(d) Reservation of authority—(1) Additional capital in the aggregate. The Board may require a Board-regulated institution to hold an amount of regulatory capital greater than otherwise required under this part if the Board determines that the Board-regulated institution’s capital requirements under this part are not commensurate with the Board-regulated institution’s credit, market, operational, or other risks.
(2) Regulatory capital elements. (i) If the Board determines that a particular common equity tier 1, additional tier 1, or tier 2 capital element has characteristics or terms that diminish its ability to absorb losses, or otherwise present safety and soundness concerns, the Board may require the Board-regulated institution to exclude all or a portion of such element from common equity tier 1 capital, additional tier 1 capital, or tier 2 capital, as appropriate.
(ii) Notwithstanding the criteria for regulatory capital instruments set forth in subpart C of this part, the Board may find that a capital element may be included in a Board-regulated institution’s common equity tier 1 capital, additional tier 1 capital, or tier 2 capital on a permanent or temporary basis consistent with the loss absorption capacity of the element and in accordance with § 217.20(e).
(3) Risk-weighted asset amounts. If the Board determines that the risk-weighted asset amount calculated under this part by the Board-regulated institution for one or more exposures is not commensurate with the risks associated with those exposures, the Board may require the Board-regulated institution to assign a different risk-weighted asset amount to the exposure(s) or to deduct the amount of the exposure(s) from its regulatory capital.
(4) Total leverage. If the Board determines that the total leverage exposure, or the amount reflected in the Board-regulated institution’s reported average total consolidated assets, for an on- or off-balance sheet exposure calculated by a Board-regulated institution under § 217.10 is inappropriate for the exposure(s) or the circumstances of the Board-regulated institution, the Board may require the Board-regulated institution to adjust this exposure amount in the numerator and the denominator for purposes of the leverage ratio calculations.
(5) Consolidation of certain exposures. The Board may determine that the risk-based capital treatment for an exposure or the treatment provided to an entity that is not consolidated on the Board-regulated institution’s balance sheet is not commensurate with the risk of the exposure and the relationship of the Board-regulated institution to the entity. Upon making this determination, the Board may require the Board-regulated institution to treat the exposure or entity as if it were consolidated on the balance sheet of the Board-regulated institution for purposes of determining the Board-regulated institution’s risk-based capital requirements and calculating the Board-regulated institution’s risk-based capital ratios accordingly. The Board will look to the substance of, and risk associated with, the transaction, as well as other relevant factors the Board deems appropriate in determining whether to require such treatment.
(6) Other reservation of authority. With respect to any deduction or limitation required under this part, the Board may require a different deduction or limitation, provided that such alternative deduction or limitation is commensurate with the Board-regulated institution’s risk and consistent with safety and soundness.
(e) Notice and response procedures. In making a determination under this section, the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(f) Timing. (1) Subject to the transition provisions in subpart G of this part, an advanced approaches Board-regulated institution that is not a savings and loan holding company must:
(i) Except as described in paragraph (f)(1)(ii) of this section, beginning on January 1, 2014, calculate advanced approaches total risk-weighted assets in accordance with subpart E and, if applicable, subpart F of this part and, beginning on January 1, 2015, calculate standardized total risk-weighted assets in accordance with subpart D and, if applicable, subpart F of this part;
(ii) From January 1, 2014 to December 31, 2014:
(A) Calculate risk-weighted assets in accordance with the general risk-based capital rules under 12 CFR parts 208 or 225, appendix A, and, if applicable, appendix E (state member banks or bank holding companies, respectively)
(B) If applicable, calculate general market risk equivalent assets in accordance with 12 CFR parts 208 or 225, appendix E, section 4(a)(3) (state member banks or bank holding companies, respectively) and substitute such general market risk equivalent assets for standardized market risk-weighted assets for purposes of § 217.20(d)(3); and
(C) Substitute the corresponding provision or provisions of 12 CFR parts 208 or 225, appendix A, and, if applicable, appendix E (state member banks or bank holding companies, respectively) for any reference to subpart D of this part in: § 217.121(c); § 217.124(a) and (b); § 217.144(b); § 217.154(c) and (d); § 217.202(b) (definition of covered position in paragraph (b)(3)(iv)); and § 217.211(b);
(iii) Beginning on January 1, 2014, calculate and maintain minimum capital ratios in accordance with subparts A, B, and C of this part, provided, however, that such Board-regulated institution must:
(A) From January 1, 2014 to December 31, 2014, maintain a minimum common equity tier 1 capital ratio of 4 percent, a minimum tier 1 capital ratio of 5.5 percent, a minimum total capital ratio of 8 percent, and a minimum leverage ratio of 4 percent; and
(B) From January 1, 2015 to December 31, 2017, an advanced approaches Board-regulated institution:
(1) Is not required to maintain a supplementary leverage ratio; and
(2) Must calculate a supplementary leverage ratio in accordance with § 217.10(c), and must report the calculated supplementary leverage ratio on any applicable regulatory reports.
(2) Subject to the transition provisions in subpart G of this part, a Board-regulated institution that is not an advanced approaches Board-regulated institution or a savings and loan holding company that is an advanced approaches Board-regulated institution must:
(i) Beginning on January 1, 2015, calculate standardized total risk-weighted assets in accordance with subpart D, and if applicable, subpart F of this part; and
(ii) Beginning on January 1, 2015, calculate and maintain minimum capital ratios in accordance with subparts A, B and C of this part, provided, however, that from January 1, 2015 to December 31, 2017, a savings and loan holding company that is an advanced approaches Board-regulated institution:
(A) Is not required to maintain a supplementary leverage ratio; and
(B) Must calculate a supplementary leverage ratio in accordance with § 217.10(c), and must report the calculated supplementary leverage ratio on any applicable regulatory reports.
(3) Beginning on January 1, 2016, and subject to the transition provisions in subpart G of this part, a Board-regulated institution is subject to limitations on distributions and discretionary bonus payments with respect to its capital conservation buffer, any applicable countercyclical capital buffer amount, and any applicable GSIB surcharge, in accordance with subpart B of this part.
(4) Beginning Jan. 1, 2018, a global systemically important BHC (as defined in § 217.2) is subject to limitations on distributions and discretionary bonus payments in accordance with the lower of the maximum payout amount as determined under § 217.11(a)(2)(iii) and the maximum leverage payout amount as determined under § 217.11(a)(2)(vi).
(5) A depository institution holding company, a U.S. intermediate holding company, or a state member bank that changes from one category of Board-regulated institution to another of such categories must comply with the requirements of its category in this part, including applicable transition provisions of the requirements in this part, no later than on the first day of the second quarter following the change in the company’s category.
(g) Depository institution holding companies and treatment of subsidiary state-regulated insurers, regulated foreign subsidiaries, and regulated foreign affiliates—(1) In general. In complying with the capital adequacy requirements of this part (except for the requirements and calculations of subpart J of this part), including any determination of applicability under § 217.100 or § 217.201, an insurance bank holding company, insurance savings and loan holding company, or insurance mid-tier holding company may elect not to consolidate the assets and liabilities of its subsidiary state-regulated insurers, regulated foreign subsidiaries, and regulated foreign affiliates. Such an institution that makes this election must either:
(i) Deduct from the sum of its common equity tier 1 capital elements the aggregate amount of its outstanding equity investment, including retained earnings, in such subsidiaries and affiliates; or
(ii) Include in the risk-weighted assets of the Board-regulated institution the aggregate amount of its outstanding equity investment, including retained earnings, in such subsidiaries and affiliates and assign to these assets a 400 percent risk weight.
(2) Method of election. (i) An insurance bank holding company, insurance savings and loan holding company, or insurance mid-tier holding company may make the election described in paragraph (g)(1) of this section by indicating that it has made this election on the applicable regulatory report, filed by the insurance bank holding company, insurance savings and loan holding company, or insurance mid-tier holding company for the first reporting period in which it is an insurance bank holding company, insurance savings and loan holding company, or insurance mid-tier holding company. The electing Board-regulated institution must indicate on the applicable regulatory report whether it elects to deduct from the sum of its common equity tier 1 capital elements in accordance with paragraph (g)(1)(i) of this section or whether it elects to include an amount in its risk-weighted assets in accordance with paragraph (g)(1)(ii) of this section.
(ii) An insurance bank holding company, insurance savings and loan holding company, or insurance mid-tier holding company that has not made an effective election pursuant to paragraph (g)(2)(i) of this section, or that seeks to change its election (or its choice of treatment under paragraph (g)(1) of this section) due to a change in control, business combination, or other legitimate business purpose, may do so only with the prior approval of the Board, effective as of the first reporting period after the period in which the Board approves the election, or such other date specified in the approval.
§ 217.2 Definitions.
As used in this part:
Additional tier 1 capital is defined in § 217.20(c).
Adjusted allowances for credit losses (AACL) means, with respect to a Board-regulated institution that has adopted CECL, valuation allowances that have been established through a charge against earnings or retained earnings for expected credit losses on financial assets measured at amortized cost and a lessor’s net investment in leases that have been established to reduce the amortized cost basis of the assets to amounts expected to be collected as determined in accordance with GAAP. For purposes of this part, adjusted allowances for credit losses include allowances for expected credit losses on off-balance sheet credit exposures not accounted for as insurance as determined in accordance with GAAP. Adjusted allowances for credit losses exclude “allocated transfer risk reserves” and allowances created that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities.
Advanced approaches Board-regulated institution means a Board-regulated institution that is described in § 217.100(b)(1).
Advanced approaches total risk-weighted assets means:
(1) The sum of:
(i) Credit-risk-weighted assets;
(ii) Credit valuation adjustment (CVA) risk-weighted assets;
(iii) Risk-weighted assets for operational risk; and
(iv) For a market risk Board-regulated institution only, advanced market risk-weighted assets; minus
(2) Excess eligible credit reserves not included in the Board-regulated institution’s tier 2 capital.
Advanced market risk-weighted assets means the advanced measure for market risk calculated under § 217.204 multiplied by 12.5.
Affiliate with respect to a company, means any company that controls, is controlled by, or is under common control with, the company.
Allocated transfer risk reserves means reserves that have been established in accordance with section 905(a) of the International Lending Supervision Act, against certain assets whose value U.S. supervisory authorities have found to be significantly impaired by protracted transfer risk problems.
Allowances for loan and lease losses (ALLL) means valuation allowances that have been established through a charge against earnings to cover estimated credit losses on loans, lease financing receivables or other extensions of credit as determined in accordance with GAAP. ALLL excludes “allocated transfer risk reserves.” For purposes of this part, ALLL includes allowances that have been established through a charge against earnings to cover estimated credit losses associated with off-balance sheet credit exposures as determined in accordance with GAAP.
Asset-backed commercial paper (ABCP) program means a program established primarily for the purpose of issuing commercial paper that is investment grade and backed by underlying exposures held in a bankruptcy-remote special purpose entity (SPE).
Asset-backed commercial paper (ABCP) program sponsor means a Board-regulated institution that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to participate in an ABCP program;
(3) Approves the exposures to be purchased by an ABCP program; or
(4) Administers the ABCP program by monitoring the underlying exposures, underwriting or otherwise arranging for the placement of debt or other obligations issued by the program, compiling monthly reports, or ensuring compliance with the program documents and with the program’s credit and investment policy.
Bank holding company means a bank holding company as defined in section 2 of the Bank Holding Company Act.
Bank Holding Company Act means the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.).
Bankruptcy remote means, with respect to an entity or asset, that the entity or asset would be excluded from an insolvent entity’s estate in receivership, insolvency, liquidation, or similar proceeding.
Basis derivative contract means a non-foreign-exchange derivative contract (i.e., the contract is denominated in a single currency) in which the cash flows of the derivative contract depend on the difference between two risk factors that are attributable solely to one of the following derivative asset classes: Interest rate, credit, equity, or commodity.
Board means the Board of Governors of the Federal Reserve System.
Board-regulated institution means a state member bank, bank holding company, or savings and loan holding company.
Call Report means Consolidated Reports of Condition and Income.
Carrying value means, with respect to an asset, the value of the asset on the balance sheet of a Board-regulated institution as determined in accordance with GAAP. For all assets other than available-for-sale debt securities or purchased credit deteriorated assets, the carrying value is not reduced by any associated credit loss allowance that is determined in accordance with GAAP.
Category II Board-regulated institution means:
(1) A depository institution holding company that is identified as a Category II banking organization pursuant to 12 CFR 252.5 or 12 CFR 238.10, as applicable;
(2) A U.S. intermediate holding company that is identified as a Category II banking organization pursuant to 12 CFR 252.5;
(3) A state member bank that is a subsidiary of a company identified in paragraph (1) of this definition; or
(4) A state member bank that:
(i) Is not a subsidiary of a depository institution holding company; and
(ii)(A) Has total consolidated assets, calculated based on the average of the state member bank’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, equal to $700 billion or more. If the state member bank has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets is calculated based on its total consolidated assets, as reported on the Call Report, for the most recent quarter or average of the most recent quarters, as applicable; or
(B) Has:
(1) Total consolidated assets, calculated based on the average of the state member bank’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, of $100 billion or more but less than $700 billion. If the state member bank has not filed the Call Report for each of the four most recent quarters, total consolidated assets is based on its total consolidated assets, as reported on the Call Report, for the most recent quarter or average of the most recent quarters, as applicable; and
(2) Cross-jurisdictional activity, calculated based on the average of its cross-jurisdictional activity for the four most recent calendar quarters, of $75 billion or more. Cross-jurisdictional activity is the sum of cross-jurisdictional claims and cross-jurisdictional liabilities, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form.
(iii) After meeting the criteria in paragraph (4)(i) of this section, a state member bank continues to be a Category II Board-regulated institution until the state member bank:
(A) Has:
(1) Less than $700 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters; and
(2) Less than $75 billion in cross-jurisdictional activity for each of the four most recent calendar quarters. Cross-jurisdictional activity is the sum of cross-jurisdictional claims and cross-jurisdictional liabilities, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form; or
(B) Has less than $100 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters.
Category III Board-regulated institution means:
(1) A depository institution holding company that is identified as a Category III banking organization pursuant to 12 CFR 252.5 or 12 CFR 238.10, as applicable;
(2) A U.S. intermediate holding company that is identified as a Category III banking organization pursuant to 12 CFR 252.5;
(3) A state member bank that is a subsidiary of a company identified in paragraph (1) of this definition;
(4) A depository institution that:
(i) Is not a subsidiary of a depository institution holding company;
(ii)(A) Has total consolidated assets, calculated based on the average of the state member bank’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, equal to $250 billion or more. If the state member bank has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets is calculated based on its total consolidated assets, as reported on the Call Report, for the most recent quarter or average of the most recent quarters, as applicable; or
(B) Has:
(1) Total consolidated assets, calculated based on the average of the state member bank’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, of $100 billion or more but less than $250 billion. If the state member bank has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets is calculated based its total consolidated assets, as reported on the Call Report, for the most recent quarter or average of the most recent quarters, as applicable; and
(2) At least one of the following in paragraphs (4)(i)(B)(2)(i) through (iii) of this definition, each calculated as the average of the four most recent calendar quarters:
(i) Total nonbank assets, calculated in accordance with the instructions to the FR Y-9LP or equivalent reporting form, equal to $75 billion or more;
(ii) Off-balance sheet exposure equal to $75 billion or more. Off-balance sheet exposure is a state member bank’s total exposure, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, minus the total consolidated assets of the state member bank, as reported on the Call Report; or
(iii) Weighted short-term wholesale funding, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, equal to $75 billion or more; or
(iii) [Reserved]
(iv) After meeting the criteria in paragraph (4)(ii) of this definition, a state member bank continues to be a Category III Board-regulated institution until the state member bank:
(A) Has:
(1) Less than $250 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters;
(2) Less than $75 billion in total nonbank assets, calculated in accordance with the instructions to the FR Y-9LP or equivalent reporting form, for each of the four most recent calendar quarters;
(3) Less than $75 billion in weighted short-term wholesale funding, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, for each of the four most recent calendar quarters; and
(4) Less than $75 billion in off-balance sheet exposure for each of the four most recent calendar quarters. Off-balance sheet exposure is a state member bank’s total exposure, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, minus the total consolidated assets of the state member bank, as reported on the Call Report; or
(B) Has less than $100 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters; or
(C) Is a Category II Board-regulated institution.
Central counterparty (CCP) means a counterparty (for example, a clearing house) that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts.
CFTC means the U.S. Commodity Futures Trading Commission.
Clean-up call means a contractual provision that permits an originating Board-regulated institution or servicer to call securitization exposures before their stated maturity or call date.
Cleared transaction means an exposure associated with an outstanding derivative contract or repo-style transaction that a Board-regulated institution or clearing member has entered into with a central counterparty (that is, a transaction that a central counterparty has accepted).
(1) The following transactions are cleared transactions:
(i) A transaction between a CCP and a Board-regulated institution that is a clearing member of the CCP where the Board-regulated institution enters into the transaction with the CCP for the Board-regulated institution’s own account;
(ii) A transaction between a CCP and a Board-regulated institution that is a clearing member of the CCP where the Board-regulated institution is acting as a financial intermediary on behalf of a clearing member client and the transaction offsets another transaction that satisfies the requirements set forth in § 217.3(a);
(iii) A transaction between a clearing member client Board-regulated institution and a clearing member where the clearing member acts as a financial intermediary on behalf of the clearing member client and enters into an offsetting transaction with a CCP, provided that the requirements set forth in § 217.3(a) are met; or
(iv) A transaction between a clearing member client Board-regulated institution and a CCP where a clearing member guarantees the performance of the clearing member client Board-regulated institution to the CCP and the transaction meets the requirements of § 217.3(a)(2) and (3).
(2) The exposure of a Board-regulated institution that is a clearing member to its clearing member client is not a cleared transaction where the Board-regulated institution is either acting as a financial intermediary and enters into an offsetting transaction with a CCP or where the Board-regulated institution provides a guarantee to the CCP on the performance of the client.
Clearing member means a member of, or direct participant in, a CCP that is entitled to enter into transactions with the CCP.
Clearing member client means a party to a cleared transaction associated with a CCP in which a clearing member acts either as a financial intermediary with respect to the party or guarantees the performance of the party to the CCP.
Client-facing derivative transaction means a derivative contract that is not a cleared transaction where the Board-regulated institution is either acting as a financial intermediary and enters into an offsetting transaction with a qualifying central counterparty (QCCP) or where the Board-regulated institution provides a guarantee on the performance of a client on a transaction between the client and a QCCP.
Collateral agreement means a legal contract that specifies the time when, and circumstances under which, a counterparty is required to pledge collateral to a Board-regulated institution for a single financial contract or for all financial contracts in a netting set and confers upon the Board-regulated institution a perfected, first-priority security interest (notwithstanding the prior security interest of any custodial agent), or the legal equivalent thereof, in the collateral posted by the counterparty under the agreement. This security interest must provide the Board-regulated institution with a right to close-out the financial positions and liquidate the collateral upon an event of default of, or failure to perform by, the counterparty under the collateral agreement. A contract would not satisfy this requirement if the Board-regulated institution’s exercise of rights under the agreement may be stayed or avoided:
(1) Under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar
(ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (1)(i) of this definition; or
(2) Other than to the extent necessary for the counterparty to comply with the requirements of subpart I of the Board’s Regulation YY (part 252 of this chapter), part 47 of this title, or part 382 of this title, as applicable.
Commercial end-user means an entity that:
(1)(i) Is using derivative contracts to hedge or mitigate commercial risk; and
(ii)(A) Is not an entity described in section 2(h)(7)(C)(i)(I) through (VIII) of the Commodity Exchange Act (7 U.S.C. 2(h)(7)(C)(i)(I) through (VIII)); or
(B) Is not a “financial entity” for purposes of section 2(h)(7) of the Commodity Exchange Act (7 U.S.C. 2(h)) by virtue of section 2(h)(7)(C)(iii) of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or
(2)(i) Is using derivative contracts to hedge or mitigate commercial risk; and
(ii) Is not an entity described in section 3C(g)(3)(A)(i) through (viii) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(3)(A)(i) through (viii)); or
(3) Qualifies for the exemption in section 2(h)(7)(A) of the Commodity Exchange Act (7 U.S.C. 2(h)(7)(A)) by virtue of section 2(h)(7)(D) of the Act (7 U.S.C. 2(h)(7)(D)); or
(4) Qualifies for an exemption in section 3C(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) by virtue of section 3C(g)(4) of the Act (15 U.S.C. 78c-3(g)(4)).
Commitment means any legally binding arrangement that obligates a Board-regulated institution to extend credit or to purchase assets.
Commodity derivative contract means a commodity-linked swap, purchased commodity-linked option, forward commodity-linked contract, or any other instrument linked to commodities that gives rise to similar counterparty credit risks.
Commodity Exchange Act means the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.)
Common equity tier 1 capital is defined in § 217.20(b).
Common equity tier 1 minority interest means the common equity tier 1 capital of a depository institution or foreign bank that is:
(1) A consolidated subsidiary of a Board-regulated institution; and
(2) Not owned by the Board-regulated institution.
Company means a corporation, partnership, limited liability company, depository institution, business trust, special purpose entity, association, or similar organization.
Control. A person or company controls a company if it:
(1) Owns, controls, or holds with power to vote 25 percent or more of a class of voting securities of the company; or
(2) Consolidates the company for financial reporting purposes.
Corporate exposure means an exposure to a company that is not:
(1) An exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, a multi-lateral development bank (MDB), a depository institution, a foreign bank, a credit union, or a public sector entity (PSE);
(2) An exposure to a GSE;
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A high volatility commercial real estate (HVCRE) exposure;
(7) A cleared transaction;
(8) A default fund contribution;
(9) A securitization exposure;
(10) An equity exposure; or
(11) An unsettled transaction.
(12) A policy loan;
(13) A separate account; or
(14) A Paycheck Protection Program covered loan as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)).
Country risk classification (CRC) with respect to a sovereign, means the most recent consensus CRC published by the Organization for Economic Cooperation and Development (OECD) as of December 31st of the prior calendar year that provides a view of the likelihood that the sovereign will service its external debt.
Covered debt instrument means an unsecured debt instrument that is:
(1) Issued by a global systemically important BHC and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or
(2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or
(3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where,
(i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or
(ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; for purposes of this paragraph (3)(ii) of this definition, if the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company and any instrument described in paragraph (3)(i) of this definition is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition if that instrument is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument ahead of or proportionally with any instrument described in paragraph (3)(i) of this definition; and
(4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to 12 CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer.
Covered savings and loan holding company means a top-tier savings and loan holding company other than an institution that—
(1) Meets the requirements of section 10(c)(9)(C) of the Home Owners’ Loan Act (12 U.S.C. 1467a(c)(9)(C)); and
(2) As of June 30 of the previous calendar year, derived 50 percent or more of its total consolidated assets or 50 percent of its total revenues on an enterprise-wide basis (as calculated under GAAP) from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)).
Credit derivative means a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure(s)) to another party (the protection provider) for a certain period of time.
Credit-enhancing interest-only strip (CEIO) means an on-balance sheet asset that, in form or in substance:
(1) Represents a contractual right to receive some or all of the interest and no more than a minimal amount of principal due on the underlying exposures of a securitization; and
(2) Exposes the holder of the CEIO to credit risk directly or indirectly associated with the underlying exposures that exceeds a pro rata share of the holder’s claim on the underlying exposures, whether through subordination provisions or other credit-enhancement techniques.
Credit-enhancing representations and warranties means representations and warranties that are made or assumed in connection with a transfer of underlying exposures (including loan servicing assets) and that obligate a Board-regulated institution to protect another party from losses arising from the credit risk of the underlying exposures. Credit-enhancing representations and warranties include provisions to protect a party from losses resulting from the default or nonperformance of the counterparties of the underlying exposures or from an insufficiency in the value of the collateral backing the underlying exposures. Credit-enhancing representations and warranties do not include:
(1) Early default clauses and similar warranties that permit the return of, or premium refund clauses covering, 1-4 family residential first mortgage loans that qualify for a 50 percent risk weight for a period not to exceed 120 days from the date of transfer. These warranties may cover only those loans that were originated within 1 year of the date of transfer;
(2) Premium refund clauses that cover assets guaranteed, in whole or in part, by the U.S. Government, a U.S. Government agency or a GSE, provided the premium refund clauses are for a period not to exceed 120 days from the date of transfer; or
(3) Warranties that permit the return of underlying exposures in instances of misrepresentation, fraud, or incomplete documentation.
Credit risk mitigant means collateral, a credit derivative, or a guarantee.
Credit-risk-weighted assets means 1.06 multiplied by the sum of:
(1) Total wholesale and retail risk-weighted assets as calculated under § 217.131;
(2) Risk-weighted assets for securitization exposures as calculated under § 217.142; and
(3) Risk-weighted assets for equity exposures as calculated under § 217.151.
Credit union means an insured credit union as defined under the Federal Credit Union Act (12 U.S.C. 1752 et seq.).
Current Expected Credit Losses (CECL) means the current expected credit losses methodology under GAAP.
Current exposure means, with respect to a netting set, the larger of zero or the fair value of a transaction or portfolio of transactions within the netting set that would be lost upon default of the counterparty, assuming no recovery on the value of the transactions.
Current exposure methodology means the method of calculating the exposure amount for over-the-counter derivative contracts in § 217.34(b).
Custodial banking organization means:
(1) A Board-regulated institution that is:
(i) A top-tier depository institution holding company domiciled in the United States that has assets under custody that are at least 30 times the amount of the depository institution holding company’s total assets; or
(ii) A state member bank that is a subsidiary of a depository institution holding company described in paragraph (1)(i) of this definition.
(2) For purposes of this definition, total assets are equal to the average of the banking organization’s total consolidated assets for the four most recent calendar quarters. Assets under custody are equal to the average of the Board-regulated institution’s assets under custody for the four most recent calendar quarters.
Custodian means a financial institution that has legal custody of collateral provided to a CCP.
Default fund contribution means the funds contributed or commitments made by a clearing member to a CCP’s mutualized loss sharing arrangement.
Depository institution means a depository institution as defined in section 3 of the Federal Deposit Insurance Act.
Depository institution holding company means a bank holding company or savings and loan holding company.
Derivative contract means a financial contract whose value is derived from the values of one or more underlying assets, reference rates, or indices of asset values or reference rates. Derivative contracts include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, credit derivative contracts, and any other instrument that poses similar counterparty credit risks. Derivative contracts also include unsettled securities, commodities, and foreign exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days.
Discretionary bonus payment means a payment made to an executive officer of a Board-regulated institution, where:
(1) The Board-regulated institution retains discretion as to whether to make, and the amount of, the payment until the payment is awarded to the executive officer;
(2) The amount paid is determined by the Board-regulated institution without prior promise to, or agreement with, the executive officer; and
(3) The executive officer has no contractual right, whether express or implied, to the bonus payment.
Distribution means:
(1) A reduction of tier 1 capital through the repurchase of a tier 1 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for:
(i) A common equity tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution’s common equity tier 1 capital, or
(ii) A common equity tier 1 or additional tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution’s tier 1 capital;
(2) A reduction of tier 2 capital through the repurchase, or redemption prior to maturity, of a tier 2 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase or redemption is announced, fully replaces a tier 2 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument;
(3) A dividend declaration or payment on any tier 1 capital instrument;
(4) A dividend declaration or interest payment on any tier 2 capital instrument if the Board-regulated institution has full discretion to permanently or temporarily suspend such payments without triggering an event of default; or
(5) Any similar transaction that the Board determines to be in substance a distribution of capital.
Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
Early amortization provision means a provision in the documentation governing a securitization that, when triggered, causes investors in the securitization exposures to be repaid before the original stated maturity of the securitization exposures, unless the provision:
(1) Is triggered solely by events not directly related to the performance of the underlying exposures or the originating Board-regulated institution (such as material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by borrowers on the underlying exposures even after the provision is triggered.
Effective notional amount means for an eligible guarantee or eligible credit derivative, the lesser of the contractual notional amount of the credit risk mitigant and the exposure amount (or EAD for purposes of subpart E of this part) of the hedged exposure, multiplied by the percentage coverage of the credit risk mitigant.
Eligible ABCP liquidity facility means a liquidity facility supporting ABCP, in form or in substance, that is subject to an asset quality test at the time of draw that precludes funding against assets that are 90 days or more past due or in default. Notwithstanding the preceding sentence, a liquidity facility is an eligible ABCP liquidity facility if the assets or exposures funded under the liquidity facility that do not meet the eligibility requirements are guaranteed by a sovereign that qualifies for a 20 percent risk weight or lower.
Eligible clean-up call means a clean-up call that:
(1) Is exercisable solely at the discretion of the originating Board-regulated institution or servicer;
(2) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization; and
(3)(i) For a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures (determined as of the inception of the securitization) is outstanding; or
(ii) For a synthetic securitization, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures (determined as of the inception of the securitization) is outstanding.
Eligible credit derivative means a credit derivative in the form of a credit default swap, n
(1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider;
(2) Any assignment of the contract has been confirmed by all relevant parties;
(3) If the credit derivative is a credit default swap or n
(i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld;
(7) If the credit derivative is a credit default swap or n
(8) If the credit derivative is a total return swap and the Board-regulated institution records net payments received on the swap as net income, the Board-regulated institution records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves).
Eligible credit reserves means:
(1) For a Board-regulated institution that has not adopted CECL, all general allowances that have been established through a charge against earnings to cover estimated credit losses associated with on- or off-balance sheet wholesale and retail exposures, including the ALLL associated with such exposures, but excluding allocated transfer risk reserves established pursuant to 12 U.S.C. 3904 and other specific reserves created against recognized losses; and
(2) For a Board-regulated institution that has adopted CECL, all general allowances that have been established through a charge against earnings or retained earnings to cover expected credit losses associated with on- or off-balance sheet wholesale and retail exposures, including AACL associated with such exposures. Eligible credit reserves exclude allocated transfer risk reserves established pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities, and other specific reserves created against recognized losses.
Eligible guarantee means a guarantee that:
(1) Is written;
(2) Is either:
(i) Unconditional, or
(ii) A contingent obligation of the U.S. government or its agencies, the enforceability of which is dependent upon some affirmative action on the part of the beneficiary of the guarantee or a third party (for example, meeting servicing requirements);
(3) Covers all or a pro rata portion of all contractual payments of the obligated party on the reference exposure;
(4) Gives the beneficiary a direct claim against the protection provider;
(5) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
(6) Except for a guarantee by a sovereign, is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced;
(7) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligated party on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment;
(8) Does not increase the beneficiary’s cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure;
(9) Is not provided by an affiliate of the Board-regulated institution, unless the affiliate is an insured depository institution, foreign bank, securities broker or dealer, or insurance company that:
(i) Does not control the Board-regulated institution; and
(ii) Is subject to consolidated supervision and regulation comparable to that imposed on depository institutions, U.S. securities broker-dealers, or U.S. insurance companies (as the case may be); and
(10) For purposes of §§ 217.141 through 217.145 and subpart D of this part, is provided by an eligible guarantor.
Eligible guarantor means:
(1) A sovereign, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage Corporation (Farmer Mac), the European Stability Mechanism, the European Financial Stability Facility, a multilateral development bank (MDB), a depository institution, a bank holding company, a savings and loan holding company, a credit union, a foreign bank, or a qualifying central counterparty; or
(2) An entity (other than a special purpose entity):
(i) That at the time the guarantee is issued or anytime thereafter, has issued and outstanding an unsecured debt security without credit enhancement that is investment grade;
(ii) Whose creditworthiness is not positively correlated with the credit risk of the exposures for which it has provided guarantees; and
(iii) That is not an insurance company engaged predominately in the business of providing credit protection (such as a monoline bond insurer or re-insurer).
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is collateralized exclusively by liquid and readily marketable debt or equity securities, or gold;
(ii) The collateral is marked-to-fair value daily, and the transaction is subject to daily margin maintenance requirements; and
(iii) The extension of credit is conducted under an agreement that provides the Board-regulated institution the right to accelerate and terminate the extension of credit and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, conservatorship, or similar proceeding, of the counterparty, provided that, in any such case:
(A) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(1) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs,
(2) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of this definition; and
(B) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of subpart I of the Board’s Regulation YY (part 252 of this chapter), part 47 of this title, or part 382 of this title, as applicable.
(2) In order to recognize an exposure as an eligible margin loan for purposes of this subpart, a Board-regulated institution must comply with the requirements of § 217.3(b) with respect to that exposure.
Eligible servicer cash advance facility means a servicer cash advance facility in which:
(1) The servicer is entitled to full reimbursement of advances, except that a servicer may be obligated to make non-reimbursable advances for a particular underlying exposure if any such advance is contractually limited to an insignificant amount of the outstanding principal balance of that exposure;
(2) The servicer’s right to reimbursement is senior in right of payment to all other claims on the cash flows from the underlying exposures of the securitization; and
(3) The servicer has no legal obligation to, and does not make advances to the securitization if the servicer concludes the advances are unlikely to be repaid.
Employee stock ownership plan has the same meaning as in 29 CFR 2550.407d-6.
Equity derivative contract means an equity-linked swap, purchased equity-linked option, forward equity-linked contract, or any other instrument linked to equities that gives rise to similar counterparty credit risks.
Equity exposure means:
(1) A security or instrument (whether voting or non-voting) that represents a direct or an indirect ownership interest in, and is a residual claim on, the assets and income of a company, unless:
(i) The issuing company is consolidated with the Board-regulated institution under GAAP;
(ii) The Board-regulated institution is required to deduct the ownership interest from tier 1 or tier 2 capital under this part;
(iii) The ownership interest incorporates a payment or other similar obligation on the part of the issuing company (such as an obligation to make periodic payments); or
(iv) The ownership interest is a securitization exposure;
(2) A security or instrument that is mandatorily convertible into a security or instrument described in paragraph (1) of this definition;
(3) An option or warrant that is exercisable for a security or instrument described in paragraph (1) of this definition; or
(4) Any other security or instrument (other than a securitization exposure) to the extent the return on the security or instrument is based on the performance of a security or instrument described in paragraph (1) of this definition.
ERISA means the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1001 et seq.).
Exchange rate derivative contract means a cross-currency interest rate swap, forward foreign-exchange contract, currency option purchased, or any other instrument linked to exchange rates that gives rise to similar counterparty credit risks.
Excluded covered debt instrument means an investment in a covered debt instrument held by a global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC that:
(1) Is held in connection with market making-related activities permitted under 12 CFR 248.4, provided that a direct exposure or an indirect exposure to a covered debt instrument is held for 30 business days or less; and
(2) Has been designated as an excluded covered debt instrument by the global systemically important BHC or the subsidiary of a global systemically important BHC pursuant to 12 CFR 217.22(c)(5)(iv)(A).
Executive officer means a person who holds the title or, without regard to title, salary, or compensation, performs the function of one or more of the following positions: President, chief executive officer, executive chairman, chief operating officer, chief financial officer, chief investment officer, chief legal officer, chief lending officer, chief risk officer, or head of a major business line, and other staff that the board of directors of the Board-regulated institution deems to have equivalent responsibility.
Expected credit loss (ECL) means:
(1) For a wholesale exposure to a non-defaulted obligor or segment of non-defaulted retail exposures that is carried at fair value with gains and losses flowing through earnings or that is classified as held-for-sale and is carried at the lower of cost or fair value with losses flowing through earnings, zero.
(2) For all other wholesale exposures to non-defaulted obligors or segments of non-defaulted retail exposures, the product of the probability of default (PD) times the loss given default (LGD) times the exposure at default (EAD) for the exposure or segment.
(3) For a wholesale exposure to a defaulted obligor or segment of defaulted retail exposures, the Board-regulated institution’s impairment estimate for allowance purposes for the exposure or segment.
(4) Total ECL is the sum of expected credit losses for all wholesale and retail exposures other than exposures for which the Board-regulated institution has applied the double default treatment in § 217.135.
Exposure amount means:
(1) For the on-balance sheet component of an exposure (other than an available-for-sale or held-to-maturity security, if the Board-regulated institution has made an AOCI opt-out election (as defined in § 217.22(b)(2)); an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the Board-regulated institution determines the exposure amount under § 217.37; a cleared transaction; a default fund contribution; or a securitization exposure), the Board-regulated institution’s carrying value of the exposure.
(2) For a security (that is not a securitization exposure, equity exposure, or preferred stock classified as an equity security under GAAP) classified as available-for-sale or held-to-maturity if the Board-regulated institution has made an AOCI opt-out election (as defined in § 217.22(b)(2)), the Board-regulated institution’s carrying value (including net accrued but unpaid interest and fees) for the exposure less any net unrealized gains on the exposure and plus any net unrealized losses on the exposure.
(3) For available-for-sale preferred stock classified as an equity security under GAAP if the Board-regulated institution has made an AOCI opt-out election (as defined in § 217.22(b)(2)), the Board-regulated institution’s carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the Board-regulated institution’s regulatory capital components.
(4) For the off-balance sheet component of an exposure (other than an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the Board-regulated institution calculates the exposure amount under § 217.37; a cleared transaction; a default fund contribution; or a securitization exposure), the notional amount of the off-balance sheet component multiplied by the appropriate credit conversion factor (CCF) in § 217.33.
(5) For an exposure that is an OTC derivative contract, the exposure amount determined under § 217.34.
(6) For an exposure that is a cleared transaction, the exposure amount determined under § 217.35.
(7) For an exposure that is an eligible margin loan or repo-style transaction for which the bank calculates the exposure amount as provided in § 217.37, the exposure amount determined under § 217.37.
(8) For an exposure that is a securitization exposure, the exposure amount determined under § 217.42.
Federal Deposit Insurance Act means the Federal Deposit Insurance Act (12 U.S.C. 1813).
Federal Deposit Insurance Corporation Improvement Act means the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401).
Fiduciary or custodial and safekeeping account means, for purposes of § 217.10(c)(2)(x), an account administered by a custodial banking organization for which the custodial banking organization provides fiduciary or custodial and safekeeping services, as authorized by applicable Federal or state law.
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the Board-regulated institution (including cash held for the Board-regulated institution by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that are not resecuritization exposures and that are investment grade;
(iv) Short-term debt instruments that are not resecuritization exposures and that are investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded; or
(vii) Money market fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; and
(2) In which the Board-regulated institution has a perfected, first-priority security interest or, outside of the United States, the legal equivalent thereof, (with the exception of cash on deposit; and notwithstanding the prior security interest of any custodial agent or any priority security interest granted to a CCP in connection with collateral posted to that CCP).
Financial institution means:
(1) A bank holding company; savings and loan holding company; nonbank financial institution supervised by the Board under Title I of the Dodd-Frank Act; depository institution; foreign bank; credit union; industrial loan company, industrial bank, or other similar institution described in section 2 of the Bank Holding Company Act; national association, state member bank, or state non-member bank that is not a depository institution; insurance company; securities holding company as defined in section 618 of the Dodd-Frank Act; broker or dealer registered with the SEC under section 15 of the Securities Exchange Act; futures commission merchant as defined in section 1a of the Commodity Exchange Act; swap dealer as defined in section 1a of the Commodity Exchange Act; or security-based swap dealer as defined in section 3 of the Securities Exchange Act;
(2) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Act;
(3) Any entity not domiciled in the United States (or a political subdivision thereof) that is supervised and regulated in a manner similar to entities described in paragraphs (1) or (2) of this definition; or
(4) Any other company:
(i) Of which the Board-regulated institution owns:
(A) An investment in GAAP equity instruments of the company with an adjusted carrying value or exposure amount equal to or greater than $10 million; or
(B) More than 10 percent of the company’s issued and outstanding common shares (or similar equity interest), and
(ii) Which is predominantly engaged in the following activities:
(A) Lending money, securities or other financial instruments, including servicing loans;
(B) Insuring, guaranteeing, indemnifying against loss, harm, damage, illness, disability, or death, or issuing annuities;
(C) Underwriting, dealing in, making a market in, or investing as principal in securities or other financial instruments; or
(D) Asset management activities (not including investment or financial advisory activities).
(5) For the purposes of this definition, a company is “predominantly engaged” in an activity or activities if:
(i) 85 percent or more of the total consolidated annual gross revenues (as determined in accordance with applicable accounting standards) of the company is either of the two most recent calendar years were derived, directly or indirectly, by the company on a consolidated basis from the activities; or
(ii) 85 percent or more of the company’s consolidated total assets (as determined in accordance with applicable accounting standards) as of the end of either of the two most recent calendar years were related to the activities.
(6) Any other company that the Board may determine is a financial institution based on activities similar in scope, nature, or operation to those of the entities included in paragraphs (1) through (4) of this definition.
(7) For purposes of this part, “financial institution” does not include the following entities:
(i) GSEs;
(ii) Small business investment companies, as defined in section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 662);
(iii) Entities designated as Community Development Financial Institutions (CDFIs) under 12 U.S.C. 4701 et seq. and 12 CFR part 1805;
(iv) Entities registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof;
(v) Entities to the extent that the Board-regulated institution’s investment in such entities would qualify as a community development investment under section 24 (Eleventh) of the National Bank Act; and
(vi) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of ERISA, a “governmental plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction.
First-lien residential mortgage exposure means a residential mortgage exposure secured by a first lien.
Foreign bank means a foreign bank as defined in § 211.2 of the Federal Reserve Board’s Regulation K (12 CFR 211.2) (other than a depository institution).
Forward agreement means a legally binding contractual obligation to purchase assets with certain drawdown at a specified future date, not including commitments to make residential mortgage loans or forward foreign exchange contracts.
FR Y-9LP means the Parent Company Only Financial Statements for Large Holding Companies.
FR Y-15 means the Systemic Risk Report.
GAAP means generally accepted accounting principles as used in the United States.
Gain-on-sale means an increase in the equity capital of a Board-regulated institution (as reported on [Schedule RC of the Call Report or Schedule HC of the FR Y-9C]) resulting from a traditional securitization (other than an increase in equity capital resulting from the Board-regulated institution’s receipt of cash in connection with the securitization or reporting of a mortgage servicing asset on [Schedule RC of the Call Report or Schedule HC of the FRY-9C]).
General obligation means a bond or similar obligation that is backed by the full faith and credit of a public sector entity (PSE).
Global systemically important BHC means a bank holding company that is identified as a global systemically important BHC pursuant to § 217.402.
Government-sponsored enterprise (GSE) means an entity established or chartered by the U.S. government to serve public purposes specified by the U.S. Congress but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. government.
GSIB surcharge means the capital surcharge applicable to a global systemically important BHC calculated pursuant to § 217.403.
Guarantee means a financial guarantee, letter of credit, insurance, or other similar financial instrument (other than a credit derivative) that allows one party (beneficiary) to transfer the credit risk of one or more specific exposures (reference exposure) to another party (protection provider).
High volatility commercial real estate (HVCRE) exposure means:
(1) A credit facility secured by land or improved real property that, prior to being reclassified by the Board-regulated institution as a non-HVCRE exposure pursuant to paragraph (6) of this definition—
(i) Primarily finances, has financed, or refinances the acquisition, development, or construction of real property;
(ii) Has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and
(iii) Is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility.
(2) An HVCRE exposure does not include a credit facility financing—
(i) The acquisition, development, or construction of properties that are—
(A) One- to four-family residential properties. Credit facilities that do not finance the construction of one- to four-family residential structures, but instead solely finance improvements such as the laying of sewers, water pipes, and similar improvements to land, do not qualify for the one- to four-family residential properties exclusion;
(B) Real property that would qualify as an investment in community development; or
(C) Agricultural land;
(ii) The acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the Board-regulated institution’s applicable loan underwriting criteria for permanent financings;
(iii) Improvements to existing income-producing improved real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the Board-regulated institution’s applicable loan underwriting criteria for permanent financings; or
(iv) Commercial real property projects in which—
(A) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the Board;
(B) The borrower has contributed capital of at least 15 percent of the real property’s appraised, `as completed’ value to the project in the form of—
(1) Cash;
(2) Unencumbered readily marketable assets;
(3) Paid development expenses out-of-pocket; or
(4) Contributed real property or improvements; and
(C) The borrower contributed the minimum amount of capital described under paragraph (2)(iv)(B) of this definition before the Board-regulated institution advances funds (other than the advance of a nominal sum made in order to secure the Board-regulated institution’s lien against the real property) under the credit facility, and such minimum amount of capital contributed by the borrower is contractually required to remain in the project until the HVCRE exposure has been reclassified by the Board-regulated institution as a non-HVCRE exposure under paragraph (6) of this definition;
(3) An HVCRE exposure does not include any loan made prior to January 1, 2015;
(4) An HVCRE exposure does not include a credit facility reclassified as a non-HVCRE exposure under paragraph (6) of this definition.
(5) Value of contributed real property: For the purposes of this definition of HVCRE exposure, the value of any real property contributed by a borrower as a capital contribution is the appraised value of the property as determined under standards prescribed pursuant to section 1110 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the extension of the credit facility or loan to such borrower.
(6) Reclassification as a non-HVCRE exposure: For purposes of this definition of HVCRE exposure and with respect to a credit facility and a Board-regulated institution, a Board-regulated institution may reclassify an HVCRE exposure as a non-HVCRE exposure upon—
(i) The substantial completion of the development or construction of the real property being financed by the credit facility; and
(ii) Cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property, in accordance with the Board-regulated institution’s applicable loan underwriting criteria for permanent financings.
(7) For purposes of this definition, a Board-regulated institution is not required to reclassify a credit facility that was originated on or after January 1, 2015 and prior to April 1, 2020.
Home country means the country where an entity is incorporated, chartered, or similarly established.
Independent collateral means financial collateral, other than variation margin, that is subject to a collateral agreement, or in which a Board-regulated institution has a perfected, first-priority security interest or, outside of the United States, the legal equivalent thereof (with the exception of cash on deposit; notwithstanding the prior security interest of any custodial agent or any prior security interest granted to a CCP in connection with collateral posted to that CCP), and the amount of which does not change directly in response to the value of the derivative contract or contracts that the financial collateral secures.
Indirect exposure means an exposure that arises from the Board-regulated institution’s investment in an investment fund which holds an investment in the Board-regulated institution’s own capital instrument or an investment in the capital of an unconsolidated financial institution. For an advanced approaches Board-regulated institution, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument.
Insurance bank holding company means:
(1)(i) A bank holding company that is an insurance underwriting company; or
(ii) A bank holding company that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies (other than assets associated with insurance underwriting for credit risk).
(2) For purposes of this definition, the company must calculate its total consolidated assets in accordance with GAAP, or if the company does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board.
Insurance company means an insurance company as defined in section 201 of the Dodd-Frank Act (12 U.S.C. 5381).
Insurance mid-tier holding company means a bank holding company, or savings and loan holding company, domiciled in the United States that:
(1) Is a subsidiary of:
(i) An insurance bank holding company to which subpart J of this part applies; or
(ii) An insurance savings and loan holding company to which subpart J of this part applies; and
(2) Is not an insurance underwriting company that is subject to state law capital requirements.
Insurance savings and loan holding company means:
(1)(i) A top-tier savings and loan holding company that is an insurance underwriting company; or
(ii) A top-tier savings and loan holding company that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies (other than assets associated with insurance underwriting for credit risk).
(2) For purposes of this definition, the company must calculate its total consolidated assets in accordance with GAAP, or if the company does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board.
Insurance underwriting company means an insurance company as defined in section 201 of the Dodd-Frank Act (12 U.S.C. 5381) that engages in insurance underwriting activities.
Insured depository institution means an insured depository institution as defined in section 3 of the Federal Deposit Insurance Act.
Interest rate derivative contract means a single-currency interest rate swap, basis swap, forward rate agreement, purchased interest rate option, when-issued securities, or any other instrument linked to interest rates that gives rise to similar counterparty credit risks.
International Lending Supervision Act means the International Lending Supervision Act of 1983 (12 U.S.C. 3901 et seq.).
Investing bank means, with respect to a securitization, a Board-regulated institution that assumes the credit risk of a securitization exposure (other than an originating Board-regulated institution of the securitization). In the typical synthetic securitization, the investing Board-regulated institution sells credit protection on a pool of underlying exposures to the originating Board-regulated institution.
Investment fund means a company:
(1) Where all or substantially all of the assets of the company are financial assets; and
(2) That has no material liabilities.
Investment grade means that the entity to which the Board-regulated institution is exposed through a loan or security, or the reference entity with respect to a credit derivative, has adequate capacity to meet financial commitments for the projected life of the asset or exposure. Such an entity or reference entity has adequate capacity to meet financial commitments if the risk of its default is low and the full and timely repayment of principal and interest is expected.
Investment in a covered debt instrument means a Board-regulated institution’s net long position calculated in accordance with § 217.22(h) in a covered debt instrument, including direct, indirect, and synthetic exposures to the debt instrument, excluding any underwriting positions held by the Board-regulated institution for five or fewer business days.
Investment in the capital of an unconsolidated financial institution means a net long position calculated in accordance with § 217.22(h) in an instrument that is recognized as capital for regulatory purposes by the primary supervisor of an unconsolidated regulated financial institution or is an instrument that is part of the GAAP equity of an unconsolidated unregulated financial institution, including direct, indirect, and synthetic exposures to capital instruments, excluding underwriting positions held by the Board-regulated institution for five or fewer business days.
Investment in the Board-regulated institution’s own capital instrument means a net long position calculated in accordance with § 217.22(h) in the Board-regulated institution’s own common stock instrument, own additional tier 1 capital instrument or own tier 2 capital instrument, including direct, indirect, or synthetic exposures to such capital instruments. An investment in the Board-regulated institution’s own capital instrument includes any contractual obligation to purchase such capital instrument.
Junior-lien residential mortgage exposure means a residential mortgage exposure that is not a first-lien residential mortgage exposure.
Main index means the Standard & Poor’s 500 Index, the FTSE All-World Index, and any other index for which the Board-regulated institution can demonstrate to the satisfaction of the Board that the equities represented in the index have comparable liquidity, depth of market, and size of bid-ask spreads as equities in the Standard & Poor’s 500 Index and FTSE All-World Index.
Market risk Board-regulated institution means a Board-regulated institution that is described in § 217.201(b).
Minimum transfer amount means the smallest amount of variation margin that may be transferred between counterparties to a netting set pursuant to the variation margin agreement.
Money market fund means an investment fund that is subject to 17 CFR 270.2a-7 or any foreign equivalent thereof.
Mortgage servicing assets (MSAs) means the contractual rights owned by a Board-regulated institution to service for a fee mortgage loans that are owned by others.
Multilateral development bank (MDB) means the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other multilateral lending institution or regional development bank in which the U.S. government is a shareholder or contributing member or which the Board determines poses comparable credit risk.
National Bank Act means the National Bank Act (12 U.S.C. 24).
Net independent collateral amount means the fair value amount of the independent collateral, as adjusted by the standard supervisory haircuts under § 217.132(b)(2)(ii), as applicable, that a counterparty to a netting set has posted to a Board-regulated institution less the fair value amount of the independent collateral, as adjusted by the standard supervisory haircuts under § 217.132(b)(2)(ii), as applicable, posted by the Board-regulated institution to the counterparty, excluding such amounts held in a bankruptcy remote manner or posted to a QCCP and held in conformance with the operational requirements in § 217.3.
Netting set means a group of transactions with a single counterparty that are subject to a qualifying master netting agreement. For derivative contracts, netting set also includes a single derivative contract between a Board-regulated institution and a single counterparty. For purposes of the internal model methodology under § 217.132(d), netting set also includes a group of transactions with a single counterparty that are subject to a qualifying cross-product master netting agreement and does not include a transaction:
(1) That is not subject to such a master netting agreement; or
(2) Where the Board-regulated institution has identified specific wrong-way risk.
Non-guaranteed separate account means a separate account where the insurance company:
(1) Does not contractually guarantee either a minimum return or account value to the contract holder; and
(2) Is not required to hold reserves (in the general account) pursuant to its contractual obligations to a policyholder.
Non-significant investment in the capital of an unconsolidated financial institution means an investment by an advanced approaches Board-regulated institution in the capital of an unconsolidated financial institution where the advanced approaches Board-regulated institution owns 10 percent or less of the issued and outstanding common stock of the unconsolidated financial institution.
N
Operating entity means a company established to conduct business with clients with the intention of earning a profit in its own right.
Original maturity with respect to an off-balance sheet commitment means the length of time between the date a commitment is issued and:
(1) For a commitment that is not subject to extension or renewal, the stated expiration date of the commitment; or
(2) For a commitment that is subject to extension or renewal, the earliest date on which the Board-regulated institution can, at its option, unconditionally cancel the commitment.
Originating Board-regulated institution, with respect to a securitization, means a Board-regulated institution that:
(1) Directly or indirectly originated or securitized the underlying exposures included in the securitization; or
(2) Serves as an ABCP program sponsor to the securitization.
Over-the-counter (OTC) derivative contract means a derivative contract that is not a cleared transaction. An OTC derivative includes a transaction:
(1) Between a Board-regulated institution that is a clearing member and a counterparty where the Board-regulated institution is acting as a financial intermediary and enters into a cleared transaction with a CCP that offsets the transaction with the counterparty; or
(2) In which a Board-regulated institution that is a clearing member provides a CCP a guarantee on the performance of the counterparty to the transaction.
Performance standby letter of credit (or performance bond) means an irrevocable obligation of a Board-regulated institution to pay a third-party beneficiary when a customer (account party) fails to perform on any contractual nonfinancial or commercial obligation. To the extent permitted by law or regulation, performance standby letters of credit include arrangements backing, among other things, subcontractors’ and suppliers’ performance, labor and materials contracts, and construction bids.
Policy loan means a loan by an insurance company to a policy holder pursuant to the provisions of an insurance contract that is secured by the cash surrender value or collateral assignment of the related policy or contract. A policy loan includes:
(1) A cash loan, including a loan resulting from early payment benefits or accelerated payment benefits, on an insurance contract when the terms of contract specify that the payment is a policy loan secured by the policy; and
(2) An automatic premium loan, which is a loan that is made in accordance with policy provisions which provide that delinquent premium payments are automatically paid from the cash value at the end of the established grace period for premium payments.
Pre-sold construction loan means any one-to-four family residential construction loan to a builder that meets the requirements of section 618(a)(1) or (2) of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991 (12 U.S.C. 1831n note) and the following criteria:
(1) The loan is made in accordance with prudent underwriting standards, meaning that the Board-regulated institution has obtained sufficient documentation that the buyer of the home has a legally binding written sales contract and has a firm written commitment for permanent financing of the home upon completion;
(2) The purchaser is an individual(s) that intends to occupy the residence and is not a partnership, joint venture, trust, corporation, or any other entity (including an entity acting as a sole proprietorship) that is purchasing one or more of the residences for speculative purposes;
(3) The purchaser has entered into a legally binding written sales contract for the residence;
(4) The purchaser has not terminated the contract; however, if the purchaser terminates the sales contract, the Board must immediately apply a 100 percent risk weight to the loan and report the revised risk weight in the next quarterly Call Report, for a state member bank, or the FR Y-9C, for a bank holding company or savings and loan holding company, as applicable,
(5) The purchaser has made a substantial earnest money deposit of no less than 3 percent of the sales price, which is subject to forfeiture if the purchaser terminates the sales contract; provided that, the earnest money deposit shall not be subject to forfeiture by reason of breach or termination of the sales contract on the part of the builder;
(6) The earnest money deposit must be held in escrow by the Board-regulated institution or an independent party in a fiduciary capacity, and the escrow agreement must provide that in an event of default arising from the cancellation of the sales contract by the purchaser of the residence, the escrow funds shall be used to defray any cost incurred by the Board-regulated institution;
(7) The builder must incur at least the first 10 percent of the direct costs of construction of the residence (that is, actual costs of the land, labor, and material) before any drawdown is made under the loan;
(8) The loan may not exceed 80 percent of the sales price of the presold residence; and
(9) The loan is not more than 90 days past due, or on nonaccrual.
Protection amount (P) means, with respect to an exposure hedged by an eligible guarantee or eligible credit derivative, the effective notional amount of the guarantee or credit derivative, reduced to reflect any currency mismatch, maturity mismatch, or lack of restructuring coverage (as provided in §§ 217.36 or 217.134, as appropriate).
Publicly-traded means traded on:
(1) Any exchange registered with the SEC as a national securities exchange under section 6 of the Securities Exchange Act; or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in question.
Public sector entity (PSE) means a state, local authority, or other governmental subdivision below the sovereign level.
Qualifying central bank means:
(1) A Federal Reserve Bank;
(2) The European Central Bank; and
(3) The central bank of any member country of the Organisation for Economic Co-operation and Development, if:
(i) Sovereign exposures to the member country would receive a zero percent risk-weight under § 217.32; and
(ii) The sovereign debt of the member country is not in default or has not been in default during the previous 5 years.
Qualifying central counterparty (QCCP) means a central counterparty that:
(1)(i) Is a designated financial market utility (FMU) under Title VIII of the Dodd-Frank Act;
(ii) If not located in the United States, is regulated and supervised in a manner equivalent to a designated FMU; or
(iii) Meets the following standards:
(A) The central counterparty requires all parties to contracts cleared by the counterparty to be fully collateralized on a daily basis;
(B) The Board-regulated institution demonstrates to the satisfaction of the Board that the central counterparty:
(1) Is in sound financial condition;
(2) Is subject to supervision by the Board, the CFTC, or the Securities Exchange Commission (SEC), or, if the central counterparty is not located in the United States, is subject to effective oversight by a national supervisory authority in its home country; and
(3) Meets or exceeds the risk-management standards for central counterparties set forth in regulations established by the Board, the CFTC, or the SEC under Title VII or Title VIII of the Dodd-Frank Act; or if the central counterparty is not located in the United States, meets or exceeds similar risk-management standards established under the law of its home country that are consistent with international standards for central counterparty risk management as established by the relevant standard setting body of the Bank of International Settlements; and
(2)(i) Provides the Board-regulated institution with the central counterparty’s hypothetical capital requirement or the information necessary to calculate such hypothetical capital requirement, and other information the Board-regulated institution is required to obtain under §§ 217.35(d)(3) and 217.133(d)(3);
(ii) Makes available to the Board and the CCP’s regulator the information described in paragraph (2)(i) of this definition; and
(iii) Has not otherwise been determined by the Board to not be a QCCP due to its financial condition, risk profile, failure to meet supervisory risk management standards, or other weaknesses or supervisory concerns that are inconsistent with the risk weight assigned to qualifying central counterparties under §§ 217.35 and 217.133.
(3) Exception. A QCCP that fails to meet the requirements of a QCCP in the future may still be treated as a QCCP under the conditions specified in § 217.3(f).
Qualifying master netting agreement means a written, legally enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the Board-regulated institution the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case:
(i) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar
(B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and
(ii) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of subpart I of the Board’s Regulation YY (part 252 of this chapter), part 47 of this title, or part 382 of this title, as applicable;
Regulated financial institution means a financial institution subject to consolidated supervision and regulation comparable to that imposed on the following U.S. financial institutions: Depository institutions, depository institution holding companies, nonbank financial companies supervised by the Board, designated financial market utilities, securities broker-dealers, credit unions, or insurance companies.
Regulated foreign subsidiary and regulated foreign affiliate means a person described in section 171(a)(6) of the Dodd-Frank Act (12 U.S.C. 5371(a)(6)) and any subsidiary of such a person other than a state-regulated insurer.
Repo-style transaction means a repurchase or reverse repurchase transaction, or a securities borrowing or securities lending transaction, including a transaction in which the Board-regulated institution acts as agent for a customer and indemnifies the customer against loss, provided that:
(1) The transaction is based solely on liquid and readily marketable securities, cash, or gold;
(2) The transaction is marked-to-fair value daily and subject to daily margin maintenance requirements;
(3)(i) The transaction is a “securities contract” or “repurchase agreement” under section 555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial contract under section 11(e)(8) of the Federal Deposit Insurance Act, or a netting contract between or among financial institutions under sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act or the Federal Reserve Board’s Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set forth in paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides the Board-regulated institution the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case:
(1) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar
(ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (3)(ii)(A)(1)(i) of this definition; and
(2) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of subpart I of the Board’s Regulation YY (part 252 of this chapter), part 47 of this title, or part 382 of this title, as applicable; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at any time by the Board-regulated institution; and
(2) Executed under an agreement that provides the Board-regulated institution the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set-off collateral promptly upon an event of counterparty default; and
(4) In order to recognize an exposure as a repo-style transaction for purposes of this subpart, a Board-regulated institution must comply with the requirements of § 217.3(e) of this part with respect to that exposure.
Resecuritization means a securitization which has more than one underlying exposure and in which one or more of the underlying exposures is a securitization exposure.
Resecuritization exposure means:
(1) An on- or off-balance sheet exposure to a resecuritization;
(2) An exposure that directly or indirectly references a resecuritization exposure.
(3) An exposure to an asset-backed commercial paper program is not a resecuritization exposure if either:
(i) The program-wide credit enhancement does not meet the definition of a resecuritization exposure; or
(ii) The entity sponsoring the program fully supports the commercial paper through the provision of liquidity so that the commercial paper holders effectively are exposed to the default risk of the sponsor instead of the underlying exposures.
Residential mortgage exposure means an exposure (other than a securitization exposure, equity exposure, statutory multifamily mortgage, or presold construction loan):
(1)(i) That is primarily secured by a first or subsequent lien on one-to-four family residential property; or
(ii) With an original and outstanding amount of $1 million or less that is primarily secured by a first or subsequent lien on residential property that is not one-to-four family; and
(2) For purposes of calculating capital requirements under subpart E of this part, managed as part of a segment of exposures with homogeneous risk characteristics and not on an individual-exposure basis.
Revenue obligation means a bond or similar obligation that is an obligation of a PSE, but which the PSE is committed to repay with revenues from the specific project financed rather than general tax funds.
Savings and loan holding company means a savings and loan holding company as defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1467a).
Securities and Exchange Commission (SEC) means the U.S. Securities and Exchange Commission.
Securities Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78).
Securitization exposure means:
(1) An on-balance sheet or off-balance sheet credit exposure (including credit-enhancing representations and warranties) that arises from a traditional securitization or synthetic securitization (including a resecuritization), or
(2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition.
Securitization special purpose entity (securitization SPE) means a corporation, trust, or other entity organized for the specific purpose of holding underlying exposures of a securitization, the activities of which are limited to those appropriate to accomplish this purpose, and the structure of which is intended to isolate the underlying exposures held by the entity from the credit risk of the seller of the underlying exposures to the entity.
Separate account means a legally segregated pool of assets owned and held by an insurance company and maintained separately from the insurance company’s general account assets for the benefit of an individual contract holder. To be a separate account:
(1) The account must be legally recognized as a separate account under applicable law;
(2) The assets in the account must be insulated from general liabilities of the insurance company under applicable law in the event of the insurance company’s insolvency;
(3) The insurance company must invest the funds within the account as directed by the contract holder in designated investment alternatives or in accordance with specific investment objectives or policies; and
(4) All investment gains and losses, net of contract fees and assessments, must be passed through to the contract holder, provided that the contract may specify conditions under which there may be a minimum guarantee but must not include contract terms that limit the maximum investment return available to the policyholder.
Servicer cash advance facility means a facility under which the servicer of the underlying exposures of a securitization may advance cash to ensure an uninterrupted flow of payments to investors in the securitization, including advances made to cover foreclosure costs or other expenses to facilitate the timely collection of the underlying exposures.
Significant investment in the capital of an unconsolidated financial institution means an investment by an advanced approaches Board-regulated institution in the capital of an unconsolidated financial institution where the advanced approaches Board-regulated institution owns more than 10 percent of the issued and outstanding common stock of the unconsolidated financial institution.
Small Business Act means the Small Business Act (15 U.S.C. 632).
Small Business Investment Act means the Small Business Investment Act of 1958 (15 U.S.C. 682).
Sovereign means a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government.
Sovereign default means noncompliance by a sovereign with its external debt service obligations or the inability or unwillingness of a sovereign government to service an existing loan according to its original terms, as evidenced by failure to pay principal and interest timely and fully, arrearages, or restructuring.
Sovereign exposure means:
(1) A direct exposure to a sovereign; or
(2) An exposure directly and unconditionally backed by the full faith and credit of a sovereign.
Specific wrong-way risk means wrong-way risk that arises when either:
(1) The counterparty and issuer of the collateral supporting the transaction; or
(2) The counterparty and the reference asset of the transaction, are affiliates or are the same entity.
Speculative grade means the reference entity has adequate capacity to meet financial commitments in the near term, but is vulnerable to adverse economic conditions, such that should economic conditions deteriorate, the reference entity would present an elevated default risk.
Standardized market risk-weighted assets means the standardized measure for market risk calculated under § 217.204 multiplied by 12.5.
Standardized total risk-weighted assets means:
(1) The sum of:
(i) Total risk-weighted assets for general credit risk as calculated under § 217.31;
(ii) Total risk-weighted assets for cleared transactions and default fund contributions as calculated under § 217.35;
(iii) Total risk-weighted assets for unsettled transactions as calculated under § 217.38;
(iv) Total risk-weighted assets for securitization exposures as calculated under § 217.42;
(v) Total risk-weighted assets for equity exposures as calculated under §§ 217.52 and 217.53; and
(vi) For a market risk Board-regulated institution only, standardized market risk-weighted assets; minus
(2) Any amount of the Board-regulated institution’s allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, that is not included in tier 2 capital and any amount of “allocated transfer risk reserves.”
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.
State member bank or member bank means a state bank that is a member of the Federal Reserve System.
State-regulated insurer means a person regulated by a state insurance regulator as defined in section 1002(22) of the Dodd-Frank Act (12 U.S.C. 5481(22)), and any subsidiary of such a person, other than a regulated foreign subsidiary and regulated foreign affiliate.
Statutory multifamily mortgage means a loan secured by a multifamily residential property that meets the requirements under section 618(b)(1) of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991, and that meets the following criteria:
(1) The loan is made in accordance with prudent underwriting standards;
(2) The principal amount of the loan at origination does not exceed 80 percent of the value of the property (or 75 percent of the value of the property if the loan is based on an interest rate that changes over the term of the loan) where the value of the property is the lower of the acquisition cost of the property or the appraised (or, if appropriate, evaluated) value of the property;
(3) All principal and interest payments on the loan must have been made on a timely basis in accordance with the terms of the loan for at least one year prior to applying a 50 percent risk weight to the loan, or in the case where an existing owner is refinancing a loan on the property, all principal and interest payments on the loan being refinanced must have been made on a timely basis in accordance with the terms of the loan for at least one year prior to applying a 50 percent risk weight to the loan;
(4) Amortization of principal and interest on the loan must occur over a period of not more than 30 years and the minimum original maturity for repayment of principal must not be less than 7 years;
(5) Annual net operating income (before making any payment on the loan) generated by the property securing the loan during its most recent fiscal year must not be less than 120 percent of the loan’s current annual debt service (or 115 percent of current annual debt service if the loan is based on an interest rate that changes over the term of the loan) or, in the case of a cooperative or other not-for-profit housing project, the property must generate sufficient cash flow to provide comparable protection to the Board-regulated institution; and
(6) The loan is not more than 90 days past due, or on nonaccrual.
Sub-speculative grade means the reference entity depends on favorable economic conditions to meet its financial commitments, such that should such economic conditions deteriorate the reference entity likely would default on its financial commitments.
Subsidiary means, with respect to a company, a company controlled by that company.
Synthetic exposure means an exposure whose value is linked to the value of an investment in the Board-regulated institution’s own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches Board-regulated institution, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument.
Synthetic securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying exposures is retained or transferred to one or more third parties through the use of one or more credit derivatives or guarantees (other than a guarantee that transfers only the credit risk of an individual retail exposure);
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures; and
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities).
Tier 1 capital means the sum of common equity tier 1 capital and additional tier 1 capital.
Tier 1 minority interest means the tier 1 capital of a consolidated subsidiary of a Board-regulated institution that is not owned by the Board-regulated institution.
Tier 2 capital is defined in § 217.20(d).
Total capital means the sum of tier 1 capital and tier 2 capital.
Total capital minority interest means the total capital of a consolidated subsidiary of a Board-regulated institution that is not owned by the Board-regulated institution.
Total leverage exposure is defined in § 217.10(c)(2).
Traditional securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties other than through the use of credit derivatives or guarantees;
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities);
(5) The underlying exposures are not owned by an operating company;
(6) The underlying exposures are not owned by a small business investment company defined in section 302 of the Small Business Investment Act;
(7) The underlying exposures are not owned by a firm an investment in which qualifies as a community development investment under section 24(Eleventh) of the National Bank Act;
(8) The Board may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a traditional securitization based on the transaction’s leverage, risk profile, or economic substance;
(9) The Board may deem a transaction that meets the definition of a traditional securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a traditional securitization based on the transaction’s leverage, risk profile, or economic substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as defined in 12 CFR 208.34);
(iii) An employee benefit plan (as defined in paragraphs (3) and (32) of section 3 of ERISA), a “governmental plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction;
(iv) A synthetic exposure to the capital of a financial institution to the extent deducted from capital under § 217.22; or
(v) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof.
Tranche means all securitization exposures associated with a securitization that have the same seniority level.
Two-way market means a market where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a relatively short time frame conforming to trade custom.
Unconditionally cancelable means with respect to a commitment, that a Board-regulated institution may, at any time, with or without cause, refuse to extend credit under the commitment (to the extent permitted under applicable law).
Underlying exposures means one or more exposures that have been securitized in a securitization transaction.
Unregulated financial institution means, for purposes of § 217.131, a financial institution that is not a regulated financial institution, including any financial institution that would meet the definition of “financial institution” under this section but for the ownership interest thresholds set forth in paragraph (4)(i) of that definition.
U.S. Government agency means an instrumentality of the U.S. Government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. Government.
U.S. intermediate holding company means the company that is required to be established or designated pursuant to 12 CFR 252.153.
Value-at-Risk (VaR) means the estimate of the maximum amount that the value of one or more exposures could decline due to market price or rate movements during a fixed holding period within a stated confidence interval.
Variation margin means financial collateral that is subject to a collateral agreement provided by one party to its counterparty to meet the performance of the first party’s obligations under one or more transactions between the parties as a result of a change in value of such obligations since the last time such financial collateral was provided.
Variation margin agreement means an agreement to collect or post variation margin.
Variation margin amount means the fair value amount of the variation margin, as adjusted by the standard supervisory haircuts under § 217.132(b)(2)(ii), as applicable, that a counterparty to a netting set has posted to a Board-regulated institution less the fair value amount of the variation margin, as adjusted by the standard supervisory haircuts under § 217.132(b)(2)(ii), as applicable, posted by the Board-regulated institution to the counterparty.
Variation margin threshold means the amount of credit exposure of a Board-regulated institution to its counterparty that, if exceeded, would require the counterparty to post variation margin to the Board-regulated institution pursuant to the variation margin agreement.
Volatility derivative contract means a derivative contract in which the payoff of the derivative contract explicitly depends on a measure of the volatility of an underlying risk factor to the derivative contract.
Wrong-way risk means the risk that arises when an exposure to a particular counterparty is positively correlated with the probability of default of such counterparty itself.
§ 217.3 Operational requirements for counterparty credit risk.
For purposes of calculating risk-weighted assets under subparts D and E of this part:
(a) Cleared transaction. In order to recognize certain exposures as cleared transactions pursuant to paragraphs (1)(ii), (iii) or (iv) of the definition of “cleared transaction” in § 217.2, the exposures must meet the applicable requirements set forth in this paragraph (a).
(1) The offsetting transaction must be identified by the CCP as a transaction for the clearing member client.
(2) The collateral supporting the transaction must be held in a manner that prevents the Board-regulated institution from facing any loss due to an event of default, including from a liquidation, receivership, insolvency, or similar proceeding of either the clearing member or the clearing member’s other clients. Omnibus accounts established under 17 CFR parts 190 and 300 satisfy the requirements of this paragraph (a).
(3) The Board-regulated institution must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from a default or receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the arrangements of paragraph (a)(2) of this section to be legal, valid, binding and enforceable under the law of the relevant jurisdictions.
(4) The offsetting transaction with a clearing member must be transferable under the transaction documents and applicable laws in the relevant jurisdiction(s) to another clearing member should the clearing member default, become insolvent, or enter receivership, insolvency, liquidation, or similar proceedings.
(b) Eligible margin loan. In order to recognize an exposure as an eligible margin loan as defined in § 217.2, a Board-regulated institution must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that the agreement underlying the exposure:
(1) Meets the requirements of paragraph (1)(iii) of the definition of eligible margin loan in § 217.2, and
(2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
(c) Qualifying cross-product master netting agreement. In order to recognize an agreement as a qualifying cross-product master netting agreement as defined in § 217.101, a Board-regulated institution must obtain a written legal opinion verifying the validity and enforceability of the agreement under applicable law of the relevant jurisdictions if the counterparty fails to perform upon an event of default, including upon receivership, insolvency, liquidation, or similar proceeding.
(d) Qualifying master netting agreement. In order to recognize an agreement as a qualifying master netting agreement as defined in § 217.2, a Board-regulated institution must:
(1) Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of the definition of qualifying master netting agreement in § 217.2; and
(ii) In the event of a legal challenge (including one resulting from default or from receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and
(2) Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of the definition of qualifying master netting agreement in § 217.2.
(e) Repo-style transaction. In order to recognize an exposure as a repo-style transaction as defined in § 217.2, a Board-regulated institution must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that the agreement underlying the exposure:
(1) Meets the requirements of paragraph (3) of the definition of repo-style transaction in § 217.2, and
(2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
(f) Failure of a QCCP to satisfy the rule’s requirements. If a Board-regulated institution determines that a CCP ceases to be a QCCP due to the failure of the CCP to satisfy one or more of the requirements set forth in paragraphs (2)(i) through (2)(iii) of the definition of a QCCP in § 217.2, the Board-regulated institution may continue to treat the CCP as a QCCP for up to three months following the determination. If the CCP fails to remedy the relevant deficiency within three months after the initial determination, or the CCP fails to satisfy the requirements set forth in paragraphs (2)(i) through (2)(iii) of the definition of a QCCP continuously for a three-month period after remedying the relevant deficiency, a Board-regulated institution may not treat the CCP as a QCCP for the purposes of this part until after the Board-regulated institution has determined that the CCP has satisfied the requirements in paragraphs (2)(i) through (2)(iii) of the definition of a QCCP for three continuous months.
§§ 217.4-217.9 [Reserved]
Subpart B—Capital Ratio Requirements and Buffers
§ 217.10 Minimum capital requirements.
(a) Minimum capital requirements. (1) A Board-regulated institution must maintain the following minimum capital ratios:
(i) A common equity tier 1 capital ratio of 4.5 percent.
(ii) A tier 1 capital ratio of 6 percent.
(iii) A total capital ratio of 8 percent.
(iv) A leverage ratio of 4 percent.
(v) For advanced approaches Board-regulated institutions or, for Category III Board-regulated institutions, a supplementary leverage ratio of 3 percent.
(2) A qualifying community banking organization (as defined in § 217.12), that is subject to the community bank leverage ratio framework (as defined § 217.12), is considered to have met the minimum capital requirements in this paragraph (a) of this section.
(b) Standardized capital ratio calculations. Other than as provided in paragraph (c) of this section:
(1) Common equity tier 1 capital ratio. A Board-regulated institution’s common equity tier 1 capital ratio is the ratio of the Board-regulated institution’s common equity tier 1 capital to standardized total risk-weighted assets;
(2) Tier 1 capital ratio. A Board-regulated institution’s tier 1 capital ratio is the ratio of the Board-regulated institution’s tier 1 capital to standardized total risk-weighted assets;
(3) Total capital ratio. A Board-regulated institution’s total capital ratio is the ratio of the Board-regulated institution’s total capital to standardized total risk-weighted assets; and
(4) Leverage ratio. A Board-regulated institution’s leverage ratio is the ratio of the Board-regulated institution’s tier 1 capital to the Board-regulated institution’s average total consolidated assets as reported on the Board-regulated institution’s Call Report, for a state member bank, or the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C), for a bank holding company or savings and loan holding company, as applicable minus amounts deducted from tier 1 capital under § 217.22(a), (c) and (d).
(c) Supplementary leverage ratio. (1) A Category III Board-regulated institution or advanced approaches Board-regulated institution must determine its supplementary leverage ratio in accordance with this paragraph, beginning with the calendar quarter immediately following the quarter in which the Board-regulated institution is identified as a Category III Board-regulated institution. An advanced approaches Board-regulated institution’s or a Category III Board-regulated institution’s supplementary leverage ratio is the ratio of its tier 1 capital to total leverage exposure, the latter of which is calculated as the sum of:
(i) The mean of the on-balance sheet assets calculated as of each day of the reporting quarter; and
(ii) The mean of the off-balance sheet exposures calculated as of the last day of each of the most recent three months, minus the applicable deductions under § 217.22(a), (c), and (d).
(2) For purposes of this part, total leverage exposure means the sum of the items described in paragraphs (c)(2)(i) through (viii) of this section, as adjusted pursuant to paragraph (c)(2)(ix) of this section for a clearing member Board-regulated institution and paragraph (c)(2)(x) of this section for a custodial banking organization:
(i) The balance sheet carrying value of all of the Board-regulated institution’s on-balance sheet assets, plus the value of securities sold under a repurchase transaction or a securities lending transaction that qualifies for sales treatment under GAAP, less amounts deducted from tier 1 capital under § 217.22(a), (c), and (d), and less the value of securities received in security-for-security repo-style transactions, where the Board-regulated institution acts as a securities lender and includes the securities received in its on-balance sheet assets but has not sold or re-hypothecated the securities received, and, for a Board-regulated institution that uses the standardized approach for counterparty credit risk under § 217.132(c) for its standardized risk-weighted assets, less the fair value of any derivative contracts;
(ii)(A) For a Board-regulated institution that uses the current exposure methodology under § 217.34(b) for its standardized risk-weighted assets, the potential future credit exposure (PFE) for each derivative contract or each single-product netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the Board-regulated institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), to which the Board-regulated institution is a counterparty as determined under § 217.34, but without regard to § 217.34(c), provided that:
(1) A Board-regulated institution may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 217.34, but without regard to § 217.34(c), provided that it does not adjust the net-to-gross ratio (NGR); and
(2) A Board-regulated institution that chooses to exclude the PFE of credit derivatives or other similar instruments through which it provides credit protection pursuant to paragraph (c)(2)(ii)(A) of this section must do so consistently over time for the calculation of the PFE for all such instruments; or
(B)(1) For a Board-regulated institution that uses the standardized approach for counterparty credit risk under section § 217.132(c) for its standardized risk-weighted assets, the PFE for each netting set to which the Board-regulated institution is a counterparty (including cleared transactions except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the Board-regulated institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), as determined under § 217.132(c)(7), in which the term C in § 217.132(c)(7)(i) equals zero, and, for any counterparty that is not a commercial end-user, multiplied by 1.4. For purposes of this paragraph (c)(2)(ii)(B)(1), a Board-regulated institution may set the value of the term C in § 217.132(c)(7)(i) equal to the amount of collateral posted by a clearing member client of the Board-regulated institution in connection with the client-facing derivative transactions within the netting set; and
(2) A Board-regulated institution may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 217.132(c), provided that it does so consistently over time for the calculation of the PFE for all such instruments;
(iii)(A)(1) For a Board-regulated institution that uses the current exposure methodology under § 217.34(b) for its standardized risk-weighted assets, the amount of cash collateral that is received from a counterparty to a derivative contract and that has offset the mark-to-fair value of the derivative asset, or cash collateral that is posted to a counterparty to a derivative contract and that has reduced the Board-regulated institution’s on-balance sheet assets, unless such cash collateral is all or part of variation margin that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; and
(2) The variation margin is used to reduce the current credit exposure of the derivative contract, calculated as described in § 217.34(b), and not the PFE; and
(3) For the purpose of the calculation of the NGR described in § 217.34(b)(2)(ii)(B), variation margin described in paragraph (c)(2)(iii)(A)(2) of this section may not reduce the net current credit exposure or the gross current credit exposure; or
(B)(1) For a Board-regulated institution that uses the standardized approach for counterparty credit risk under § 217.132(c) for its standardized risk-weighted assets, the replacement cost of each derivative contract or single product netting set of derivative contracts to which the Board-regulated institution is a counterparty, calculated according to the following formula, and, for any counterparty that is not a commercial end-user, multiplied by 1.4:
V equals the fair value for each derivative contract or each single-product netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the Board-regulated institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP);
CVM
CVM
(2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section, where multiple netting sets are subject to a single variation margin agreement, a Board-regulated institution must apply the formula for replacement cost provided in § 217.132(c)(10)(i), in which the term C
(3) For purposes of paragraph (c)(2)(iii)(B)(1), a Board-regulated institution must treat a derivative contract that references an index as if it were multiple derivative contracts each referencing one component of the index if the Board-regulated institution elected to treat the derivative contract as multiple derivative contracts under § 217.132(c)(5)(vi);
(C) For derivative contracts that are not cleared through a QCCP, the cash collateral received by the recipient counterparty is not segregated (by law, regulation, or an agreement with the counterparty);
(D) Variation margin is calculated and transferred on a daily basis based on the mark-to-fair value of the derivative contract;
(E) The variation margin transferred under the derivative contract or the governing rules of the CCP or QCCP for a cleared transaction is the full amount that is necessary to fully extinguish the net current credit exposure to the counterparty of the derivative contracts, subject to the threshold and minimum transfer amounts applicable to the counterparty under the terms of the derivative contract or the governing rules for a cleared transaction;
(F) The variation margin is in the form of cash in the same currency as the currency of settlement set forth in the derivative contract, provided that for the purposes of this paragraph (c)(2)(iii)(F), currency of settlement means any currency for settlement specified in the governing qualifying master netting agreement and the credit support annex to the qualifying master netting agreement, or in the governing rules for a cleared transaction; and
(G) The derivative contract and the variation margin are governed by a qualifying master netting agreement between the legal entities that are the counterparties to the derivative contract or by the governing rules for a cleared transaction, and the qualifying master netting agreement or the governing rules for a cleared transaction must explicitly stipulate that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin received or provided under the contract if a credit event involving either counterparty occurs;
(iv) The effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of a credit derivative, or other similar instrument, through which the Board-regulated institution provides credit protection, provided that:
(A) The Board-regulated institution may reduce the effective notional principal amount of the credit derivative by the amount of any reduction in the mark-to-fair value of the credit derivative if the reduction is recognized in common equity tier 1 capital;
(B) The Board-regulated institution may reduce the effective notional principal amount of the credit derivative by the effective notional principal amount of a purchased credit derivative or other similar instrument, provided that the remaining maturity of the purchased credit derivative is equal to or greater than the remaining maturity of the credit derivative through which the Board-regulated institution provides credit protection and that:
(1) With respect to a credit derivative that references a single exposure, the reference exposure of the purchased credit derivative is to the same legal entity and ranks pari passu with, or is junior to, the reference exposure of the credit derivative through which the Board-regulated institution provides credit protection; or
(2) With respect to a credit derivative that references multiple exposures, the reference exposures of the purchased credit derivative are to the same legal entities and rank pari passu with the reference exposures of the credit derivative through which the Board-regulated institution provides credit protection, and the level of seniority of the purchased credit derivative ranks pari passu to the level of seniority of the credit derivative through which the Board-regulated institution provides credit protection;
(3) Where a Board-regulated institution has reduced the effective notional amount of a credit derivative through which the Board-regulated institution provides credit protection in accordance with paragraph (c)(2)(iv)(A) of this section, the Board-regulated institution must also reduce the effective notional principal amount of a purchased credit derivative used to offset the credit derivative through which the Board-regulated institution provides credit protection, by the amount of any increase in the mark-to-fair value of the purchased credit derivative that is recognized in common equity tier 1 capital; and
(4) Where the Board-regulated institution purchases credit protection through a total return swap and records the net payments received on a credit derivative through which the Board-regulated institution provides credit protection in net income, but does not record offsetting deterioration in the mark-to-fair value of the credit derivative through which the Board-regulated institution provides credit protection in net income (either through reductions in fair value or by additions to reserves), the Board-regulated institution may not use the purchased credit protection to offset the effective notional principal amount of the related credit derivative through which the Board-regulated institution provides credit protection;
(v) Where a Board-regulated institution acting as a principal has more than one repo-style transaction with the same counterparty and has offset the gross value of receivables due from a counterparty under reverse repurchase transactions by the gross value of payables under repurchase transactions due to the same counterparty, the gross value of receivables associated with the repo-style transactions less any on-balance sheet receivables amount associated with these repo-style transactions included under paragraph (c)(2)(i) of this section, unless the following criteria are met:
(A) The offsetting transactions have the same explicit final settlement date under their governing agreements;
(B) The right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding; and
(C) Under the governing agreements, the counterparties intend to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement, (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where both transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement;
(vi) The counterparty credit risk of a repo-style transaction, including where the Board-regulated institution acts as an agent for a repo-style transaction and indemnifies the customer with respect to the performance of the customer’s counterparty in an amount limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, calculated as follows:
(A) If the transaction is not subject to a qualifying master netting agreement, the counterparty credit risk (E*) for transactions with a counterparty must be calculated on a transaction by transaction basis, such that each transaction i is treated as its own netting set, in accordance with the following formula, where E
(B) If the transaction is subject to a qualifying master netting agreement, the counterparty credit risk (E*) must be calculated as the greater of zero and the total fair value of the instruments, gold, or cash that the Board-regulated institution has lent, sold subject to repurchase or provided as collateral to a counterparty for all transactions included in the qualifying master netting agreement (ΣE
(vii) If a Board-regulated institution acting as an agent for a repo-style transaction provides a guarantee to a customer of the security or cash its customer has lent or borrowed with respect to the performance of the customer’s counterparty and the guarantee is not limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, the amount of the guarantee that is greater than the difference between the fair value of the security or cash its customer has lent and the value of the collateral the borrower has provided;
(viii) The credit equivalent amount of all off-balance sheet exposures of the Board-regulated institution, excluding repo-style transactions, repurchase or reverse repurchase or securities borrowing or lending transactions that qualify for sales treatment under GAAP, and derivative transactions, determined using the applicable credit conversion factor under § 217.33(b), provided, however, that the minimum credit conversion factor that may be assigned to an off-balance sheet exposure under this paragraph is 10 percent; and
(ix) For a Board-regulated institution that is a clearing member:
(A) A clearing member Board-regulated institution that guarantees the performance of a clearing member client with respect to a cleared transaction must treat its exposure to the clearing member client as a derivative contract for purposes of determining its total leverage exposure;
(B) A clearing member Board-regulated institution that guarantees the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client must treat its exposure to the CCP as a derivative contract for purposes of determining its total leverage exposure;
(C) A clearing member Board-regulated institution that does not guarantee the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client may exclude its exposure to the CCP for purposes of determining its total leverage exposure;
(D) A Board-regulated institution that is a clearing member may exclude from its total leverage exposure the effective notional principal amount of credit protection sold through a credit derivative contract, or other similar instrument, that it clears on behalf of a clearing member client through a CCP as calculated in accordance with paragraph (c)(2)(iv) of this section; and
(E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this section, a Board-regulated institution may exclude from its total leverage exposure a clearing member’s exposure to a clearing member client for a derivative contract, if the clearing member client and the clearing member are affiliates and consolidated for financial reporting purposes on the Board-regulated institution’s balance sheet.
(x) A custodial banking organization shall exclude from its total leverage exposure the lesser of:
(A) The amount of funds that the custodial banking organization has on deposit at a qualifying central bank; and
(B) The amount of funds in deposit accounts at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts at the custodial banking organization. For purposes of this paragraph (c)(2)(x), a deposit account is linked to a fiduciary or custodial and safekeeping account if the deposit account is provided to a client that maintains a fiduciary or custodial and safekeeping account with the custodial banking organization, and the deposit account is used to facilitate the administration of the fiduciary or custodial and safekeeping account.
(d) Advanced approaches capital ratio calculations. An advanced approaches Board-regulated institution that has completed the parallel run process and received notification from the Board pursuant to § 217.121(d) must determine its regulatory capital ratios as described in paragraphs (d)(1) through (3) of this section.
(1) Common equity tier 1 capital ratio. The Board-regulated institution’s common equity tier 1 capital ratio is the lower of:
(i) The ratio of the Board-regulated institution’s common equity tier 1 capital to standardized total risk-weighted assets; and
(ii) The ratio of the Board-regulated institution’s common equity tier 1 capital to advanced approaches total risk-weighted assets.
(2) Tier 1 capital ratio. The Board-regulated institution’s tier 1 capital ratio is the lower of:
(i) The ratio of the Board-regulated institution’s tier 1 capital to standardized total risk-weighted assets; and
(ii) The ratio of the Board-regulated institution’s tier 1 capital to advanced approaches total risk-weighted assets.
(3) Total capital ratio. The Board-regulated institution’s total capital ratio is the lower of:
(i) The ratio of the Board-regulated institution’s total capital to standardized total risk-weighted assets; and
(ii) The ratio of the Board-regulated institution’s advanced-approaches-adjusted total capital to advanced approaches total risk-weighted assets. A Board-regulated institution’s advanced-approaches-adjusted total capital is the Board-regulated institution’s total capital after being adjusted as follows:
(A) An advanced approaches Board-regulated institution must deduct from its total capital any allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, included in its tier 2 capital in accordance with § 217.20(d)(3); and
(B) An advanced approaches Board-regulated institution must add to its total capital any eligible credit reserves that exceed the Board-regulated institution’s total expected credit losses to the extent that the excess reserve amount does not exceed 0.6 percent of the Board-regulated institution’s credit risk-weighted assets.
(e) Capital adequacy. (1) Notwithstanding the minimum requirements in this part, a Board-regulated institution must maintain capital commensurate with the level and nature of all risks to which the Board-regulated institution is exposed. The supervisory evaluation of the Board-regulated institution’s capital adequacy is based on an individual assessment of numerous factors, including the character and condition of the institution’s assets and its existing and prospective liabilities and other corporate responsibilities.
(2) A Board-regulated institution must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital.
(f) Insurance depository institution holding companies. Notwithstanding paragraphs (a) through (d) of this section:
(1) An insurance bank holding company that is a state-regulated insurer, or an insurance savings and loan holding company that is a state-regulated insurer, is not required to meet the minimum capital ratio requirements in paragraphs (a)(1)(i) through (iii) of this section if the company is subject to subpart J of this part; and
(2) A Board-regulated institution that is an insurance bank holding company, insurance savings and loan holding company, or insurance mid-tier holding company is not required to meet the minimum capital ratio requirements in paragraphs (a)(1)(iv) and (v) of this section.
§ 217.11 Capital conservation buffer, countercyclical capital buffer amount, and GSIB surcharge.
(a) Capital conservation buffer—(1) Composition of the capital conservation buffer. The capital conservation buffer is composed solely of common equity tier 1 capital.
(2) Definitions. For purposes of this section, the following definitions apply:
(i) Eligible retained income. The eligible retained income of a Board-regulated institution is the greater of:
(A) The Board-regulated institution’s net income, calculated in accordance with the instructions to the FR Y-9C or Call Report, as applicable, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and
(B) The average of the Board-regulated institution’s net income, calculated in accordance with the instructions to the FR Y-9C or Call Report, as applicable, for the four calendar quarters preceding the current calendar quarter.
(ii) Maximum payout amount. A Board-regulated institution’s maximum payout amount for the current calendar quarter is equal to the Board-regulated institution’s eligible retained income, multiplied by its maximum payout ratio.
(iii) Maximum payout ratio. The maximum payout ratio is the percentage of eligible retained income that a Board-regulated institution can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. For a Board-regulated institution that is not subject to 12 CFR 225.8 or 238.170, the maximum payout ratio is determined by the Board-regulated institution’s capital conservation buffer, calculated as of the last day of the previous calendar quarter, as set forth in Table 1 to paragraph (a)(4)(iv) of this section. For a Board-regulated institution that is subject to 12 CFR 225.8 or 238.170, the maximum payout ratio is determined under paragraph (c)(1)(ii) of this section.
(iv) Private sector credit exposure. Private sector credit exposure means an exposure to a company or an individual that is not an exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the European Stability Mechanism, the European Financial Stability Facility, the International Monetary Fund, a MDB, a PSE, or a GSE.
(v) Leverage buffer requirement. A bank holding company’s leverage buffer requirement is 2.0 percent.
(vi) Stress capital buffer requirement. (A) The stress capital buffer requirement for a Board-regulated institution subject to 12 CFR 225.8 or 238.170 is the stress capital buffer requirement determined under 12 CFR 225.8 or 238.170 except as provided in paragraph (a)(2)(vi)(B) of this section.
(B) If a Board-regulated institution subject to 12 CFR 225.8 or 238.170 has not yet received a stress capital buffer requirement, its stress capital buffer requirement for purposes of this part is 2.5 percent.
(3) Calculation of capital conservation buffer. (i) A Board-regulated institution that is not subject to 12 CFR 225.8 or 238.170 has a capital conservation buffer equal to the lowest of the following ratios, calculated as of the last day of the previous calendar quarter:
(A) The Board-regulated institution’s common equity tier 1 capital ratio minus the Board-regulated institution’s minimum common equity tier 1 capital ratio requirement under § 217.10;
(B) The Board-regulated institution’s tier 1 capital ratio minus the Board-regulated institution’s minimum tier 1 capital ratio requirement under § 217.10; and
(C) The Board-regulated institution’s total capital ratio minus the Board-regulated institution’s minimum total capital ratio requirement under § 217.10; or
(ii) Notwithstanding paragraphs (a)(3)(i)(A) through (C) of this section, if a Board-regulated institution’s common equity tier 1, tier 1 or total capital ratio is less than or equal to the Board-regulated institution’s minimum common equity tier 1, tier 1 or total capital ratio requirement under § 217.10, respectively, the Board-regulated institution’s capital conservation buffer is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A Board-regulated institution that is not subject 12 CFR 225.8 or 238.170 shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed its maximum payout amount.
(ii) A Board-regulated institution that is not subject 12 CFR 225.8 or 238.170 and that has a capital conservation buffer that is greater than 2.5 percent plus 100 percent of its applicable countercyclical capital buffer amount in accordance with paragraph (b) of this section is not subject to a maximum payout amount under paragraph (a)(2)(ii) of this section.
(iii) Except as provided in paragraph (a)(4)(iv) of this section, a Board-regulated institution that is not subject to 12 CFR 225.8 or 238.170 may not make distributions or discretionary bonus payments during the current calendar quarter if the Board-regulated institution’s:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 2.5 percent as of the end of the previous calendar quarter.
(iv) Prior approval—notwithstanding the limitations in paragraphs (a)(4)(i) through (iii) of this section, the Board may permit a Board-regulated institution that is not subject to 12 CFR 225.8 or 238.170 to make a distribution or discretionary bonus payment upon a request of the Board-regulated institution, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the Board-regulated institution. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
Table 1 to § 217.11(
| Capital conservation buffer | Maximum payout ratio |
|---|---|
| Greater than 2.5 percent plus 100 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount | No payout ratio limitation applies. |
| Less than or equal to 2.5 percent plus 100 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount, | 60 percent. |
| Less than or equal to 1.875 percent plus 75 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount, | 40 percent. |
| Less than or equal to 1.25 percent plus 50 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount | 20 percent. |
| Less than or equal to 0.625 percent plus 25 percent of the Board-regulated institution’s applicable countercyclical capital buffer amount | 0 percent. |
(v) Other limitations on distributions. Additional limitations on distributions may apply under 12 CFR 225.4 and 263.202 to a Board-regulated institution that is not subject to 12 CFR 225.8 or 238.170.
(b) Countercyclical capital buffer amount—(1) General. An advanced approaches Board-regulated institution or a Category III Board-regulated institution must calculate a countercyclical capital buffer amount in accordance with this paragraph (b) for purposes of determining its maximum payout ratio under Table 1 to § 217.11(a)(4)(iv) and, if applicable, Table 2 to § 217.11(c)(4)(iii).
(i) Extension of capital conservation buffer. The countercyclical capital buffer amount is an extension of the capital conservation buffer as described in paragraph (a) or (c) of this section, as applicable.
(ii) Amount. An advanced approaches Board-regulated institution or a Category III Board-regulated institution has a countercyclical capital buffer amount determined by calculating the weighted average of the countercyclical capital buffer amounts established for the national jurisdictions where the Board-regulated institution’s private sector credit exposures are located, as specified in paragraphs (b)(2) and (3) of this section.
(iii) Weighting. The weight assigned to a jurisdiction’s countercyclical capital buffer amount is calculated by dividing the total risk-weighted assets for the Board-regulated institution’s private sector credit exposures located in the jurisdiction by the total risk-weighted assets for all of the Board-regulated institution’s private sector credit exposures. The methodology a Board-regulated institution uses for determining risk-weighted assets for purposes of this paragraph (b) must be the methodology that determines its risk-based capital ratios under § 217.10. Notwithstanding the previous sentence, the risk-weighted asset amount for a private sector credit exposure that is a covered position under subpart F of this part is its specific risk add-on as determined under § 217.210 multiplied by 12.5.
(iv) Location. (A) Except as provided in paragraphs (b)(1)(iv)(B) and (C) of this section, the location of a private sector credit exposure is the national jurisdiction where the borrower is located (that is, where it is incorporated, chartered, or similarly established or, if the borrower is an individual, where the borrower resides).
(B) If, in accordance with subpart D or E of this part, the Board-regulated institution has assigned to a private sector credit exposure a risk weight associated with a protection provider on a guarantee or credit derivative, the location of the exposure is the national jurisdiction where the protection provider is located.
(C) The location of a securitization exposure is the location of the underlying exposures, or, if the underlying exposures are located in more than one national jurisdiction, the national jurisdiction where the underlying exposures with the largest aggregate unpaid principal balance are located. For purposes of this paragraph (b), the location of an underlying exposure shall be the location of the borrower, determined consistent with paragraph (b)(1)(iv)(A) of this section.
(2) Countercyclical capital buffer amount for credit exposures in the United States—(i) Initial countercyclical capital buffer amount with respect to credit exposures in the United States. The initial countercyclical capital buffer amount in the United States is zero.
(ii) Adjustment of the countercyclical capital buffer amount. The Board will adjust the countercyclical capital buffer amount for credit exposures in the United States in accordance with applicable law.
(iii) Range of countercyclical capital buffer amount. The Board will adjust the countercyclical capital buffer amount for credit exposures in the United States between zero percent and 2.5 percent of risk-weighted assets.
(iv) Adjustment determination. The Board will base its decision to adjust the countercyclical capital buffer amount under this section on a range of macroeconomic, financial, and supervisory information indicating an increase in systemic risk including, but not limited to, the ratio of credit to gross domestic product, a variety of asset prices, other factors indicative of relative credit and liquidity expansion or contraction, funding spreads, credit condition surveys, indices based on credit default swap spreads, options implied volatility, and measures of systemic risk.
(v) Effective date of adjusted countercyclical capital buffer amount—(A) Increase adjustment. A determination by the Board under paragraph (b)(2)(ii) of this section to increase the countercyclical capital buffer amount will be effective 12 months from the date of announcement, unless the Board establishes an earlier effective date and includes a statement articulating the reasons for the earlier effective date.
(B) Decrease adjustment. A determination by the Board to decrease the established countercyclical capital buffer amount under paragraph (b)(2)(ii) of this section will be effective on the day following announcement of the final determination or the earliest date permissible under applicable law or regulation, whichever is later.
(vi) Twelve month sunset. The countercyclical capital buffer amount will return to zero percent 12 months after the effective date that the adjusted countercyclical capital buffer amount is announced, unless the Board announces a decision to maintain the adjusted countercyclical capital buffer amount or adjust it again before the expiration of the 12-month period.
(3) Countercyclical capital buffer amount for foreign jurisdictions. The Board will adjust the countercyclical capital buffer amount for private sector credit exposures to reflect decisions made by foreign jurisdictions consistent with due process requirements described in paragraph (b)(2) of this section.
(c) Calculation of buffers for Board-regulated institutions subject to 12 CFR 225.8 or 238.170—(1) Limits on distributions and discretionary bonus payments. (i) A Board-regulated institution that is subject to 12 CFR 225.8 or 238.170 shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed its maximum payout amount.
(ii) Maximum payout ratio. The maximum payout ratio of a Board-regulated institution that is subject to 12 CFR 225.8 or 238.170 is the lowest of the payout ratios determined by its standardized approach capital conservation buffer; if applicable, advanced approaches capital conservation buffer; and, if applicable, leverage buffer; as set forth in table 2 to § 217.11(c)(4)(iii).
(iii) Capital conservation buffer requirements. A Board-regulated institution that is subject to 12 CFR 225.8 or 238.170 has:
(A) A standardized approach capital conservation buffer requirement equal to its stress capital buffer requirement plus its applicable countercyclical capital buffer amount in accordance with paragraph (b) of this section plus its applicable GSIB surcharge in accordance with paragraph (d) of this section; and
(B) If the Board-regulated institution calculates risk-weighted assets under subpart E of this part, an advanced approaches capital conservation buffer requirement equal to 2.5 percent plus the Board-regulated institution’s countercyclical capital buffer amount in accordance with paragraph (b) of this section plus its applicable GSIB surcharge in accordance with paragraph (d) of this section.
(iv) No maximum payout amount limitation. A Board-regulated institution that is subject to 12 CFR 225.8 or 238.170 is not subject to a maximum payout amount under paragraph (a)(2)(ii) of this section if it has:
(A) A standardized approach capital conservation buffer, calculated under paragraph (c)(2) of this section, that is greater than its standardized approach capital conservation buffer requirement calculated under paragraph (c)(1)(iii)(A) of this section;
(B) If applicable, an advanced approaches capital conservation buffer, calculated under paragraph (c)(3) of this section, that is greater than the Board-regulated institution’s advanced approaches capital conservation buffer requirement calculated under paragraph (c)(1)(iii)(B) of this section; and
(C) If applicable, a leverage buffer, calculated under paragraph (c)(4) of this section, that is greater than its leverage buffer requirement as calculated under paragraph (a)(2)(v) of this section.
(v) Negative eligible retained income. Except as provided in paragraph (c)(1)(vi) of this section, a Board-regulated institution that is subject to 12 CFR 225.8 or 238.170 may not make distributions or discretionary bonus payments during the current calendar quarter if, as of the end of the previous calendar quarter, the Board-regulated institution’s:
(A) Eligible retained income is negative; and
(B)(1) Standardized approach capital conservation buffer was less than its stress capital buffer requirement; or
(2) If applicable, advanced approaches capital conservation buffer was less than 2.5 percent; or
(3) If applicable, leverage buffer was less than its leverage buffer requirement.
(vi) Prior approval. Notwithstanding the limitations in paragraphs (c)(1)(i) through (v) of this section, the Board may permit a Board-regulated institution that is subject to 12 CFR 225.8 or 238.170 to make a distribution or discretionary bonus payment upon a request of the Board-regulated institution, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the Board-regulated institution. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
(vii) Other limitations on distributions. Additional limitations on distributions may apply under 12 CFR 225.4, 225.8, 238.170, 252.63, 252.165, and 263.202 to a Board-regulated institution that is subject to 12 CFR 225.8 or 238.170.
(2) Standardized approach capital conservation buffer. (i) The standardized approach capital conservation buffer for Board-regulated institutions subject to 12 CFR 225.8 or 238.170 is composed solely of common equity tier 1 capital.
(ii) A Board-regulated institution that is subject to 12 CFR 225.8 or 238.170 has a standardized approach capital conservation buffer that is equal to the lowest of the following ratios, calculated as of the last day of the previous calendar quarter:
(A) The ratio calculated by the Board-regulated institution under § 217.10(b)(1) or (c)(1)(i), as applicable, minus the Board-regulated institution’s minimum common equity tier 1 capital ratio requirement under § 217.10(a);
(B) The ratio calculated by the Board-regulated institution under § 217.10(b)(2) or (c)(2)(i), as applicable, minus the Board-regulated institution’s minimum tier 1 capital ratio requirement under § 217.10(a); and
(C) The ratio calculated by the Board-regulated institution under § 217.10(b)(3) or (c)(3)(i), as applicable, minus the Board-regulated institution’s minimum total capital ratio requirement under § 217.10(a).
(iii) Notwithstanding paragraph (c)(2)(ii) of this section, if any of the ratios calculated by the Board-regulated institution under § 217.10(b)(1), (2), or (3), or if applicable § 217.10(c)(1)(i), (c)(2)(i), or (c)(3)(i) is less than or equal to the Board-regulated institution’s minimum common equity tier 1 capital ratio, tier 1 capital ratio, or total capital ratio requirement under § 217.10(a), respectively, the Board-regulated institution’s capital conservation buffer is zero.
(3) Advanced approaches capital conservation buffer. (i) The advanced approaches capital conservation buffer is composed solely of common equity tier 1 capital.
(ii) A Board-regulated institution that calculates risk-weighted assets under subpart E has an advanced approaches capital conservation buffer that is equal to the lowest of the following ratios, calculated as of the last day of the previous calendar quarter:
(A) The ratio calculated by the Board-regulated institution under § 217.10(c)(1)(ii) minus the Board-regulated institution’s minimum common equity tier 1 capital ratio requirement under § 217.10(a);
(B) The ratio calculated by the Board-regulated institution under § 217.10(c)(2)(ii) minus the Board-regulated institution’s minimum tier 1 capital ratio requirement under § 217.10(a); and
(C) The ratio calculated by the Board-regulated institution under § 217.10(c)(3)(ii) minus the Board-regulated institution’s minimum total capital ratio requirement under § 217.10(a).
(iii) Notwithstanding paragraph (c)(3)(ii) of this section, if any of the ratios calculated by the Board-regulated institution under § 217.10(c)(1)(ii), (c)(2)(ii), or (c)(3)(ii) is less than or equal to the Board-regulated institution’s minimum common equity tier 1 capital ratio, tier 1 capital ratio, or total capital ratio requirement under § 217.10(a), respectively, the Board-regulated institution’s advanced approaches capital conservation buffer is zero.
(4) Leverage buffer. (i) The leverage buffer is composed solely of tier 1 capital.
(ii) A global systemically important BHC has a leverage buffer that is equal to the global systemically important BHC’s supplementary leverage ratio minus 3 percent, calculated as of the last day of the previous calendar quarter.
(iii) Notwithstanding paragraph (c)(4)(ii) of this section, if the global systemically important BHC’s supplementary leverage ratio is less than or equal to 3 percent, the global systemically important BHC’s leverage buffer is zero.
Table 2 to § 217.11(
| Capital buffer 1 | Payout ratio |
|---|---|
| Greater than the Board-regulated institution’s buffer requirement 2 | No payout ratio limitation applies. |
| Less than or equal to 100 percent of the Board-regulated institution’s buffer requirement, | 60 percent. |
| Less than or equal to 75 percent of the Board-regulated institution’s buffer requirement, | 40 percent. |
| Less than or equal to 50 percent of the Board-regulated institution’s buffer requirement, | 20 percent. |
| Less than or equal to 25 percent of the Board-regulated institution’s buffer requirement | 0 percent. |
1 A Board-regulated institution’s “capital buffer” means each of, as applicable, its standardized approach capital conservation buffer, advanced approaches capital conservation buffer, and leverage buffer.
2 A Board-regulated institution’s “buffer requirement” means each of, as applicable, its standardized approach capital conservation buffer requirement, advanced approaches capital conservation buffer requirement, and leverage buffer requirement.
(d) GSIB surcharge. A global systemically important BHC must use its GSIB surcharge calculated in accordance with subpart H of this part for purposes of determining its maximum payout ratio under Table 2 to § 217.11(c)(4)(iii).
(e) Insurance depository institution holding companies. Notwithstanding any other provision of this section:
(1) A Board-regulated institution that is an insurance bank holding company that is subject to subpart J of this part calculates its capital conservation buffer in accordance with § 217.604;
(2) A Board-regulated institution that is an insurance savings and loan holding company that is subject to subpart J of this part calculates its capital conservation buffer in accordance with § 217.604; and
(3) A Board-regulated institution that is an insurance mid-tier holding company is not subject to the provisions of this section.
§ 217.12 Community bank leverage ratio framework.
(a) Community bank leverage ratio framework. (1) Notwithstanding any other provision in this part, a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under paragraph (a)(3) of this section shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 9 percent.
(2) For purposes of this section, a qualifying community banking organization means a Board-regulated institution that is not an advanced approaches Board-regulated institution and that satisfies all of the following criteria:
(i) Has a leverage ratio of greater than 9 percent;
(ii) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to the Call Report or to Form FR Y-9C, as applicable, as of the end of the most recent calendar quarter;
(iii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(iii)(A) through (I) of this section, divided by total consolidated assets, each as of the end of the most recent calendar quarter:
(A) The unused portion of commitments (except for unconditionally cancellable commitments);
(B) Self-liquidating, trade-related contingent items that arise from the movement of goods;
(C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit;
(D) Sold credit protection through guarantees and credit derivatives;
(E) Credit-enhancing representations and warranties;
(F) Securities lent and borrowed, calculated in accordance with the reporting instructions to the Call Report or to Form FR Y-9C, as applicable;
(G) Financial standby letters of credit;
(H) Forward agreements that are not derivative contracts; and
(I) Off-balance sheet securitization exposures; and
(iv) Has total trading assets and trading liabilities, calculated in accordance with the reporting instructions to the Call Report or to Form FR Y-9C, as applicable, of 5 percent or less of the Board-regulated institution’s total consolidated assets, each as of the end of the most recent calendar quarter.
(3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3).
(ii) For purposes of this paragraph (a)(3), a qualifying community banking organization makes an election to use the community bank leverage ratio framework by completing the applicable reporting requirements of its Call Report or of its Form FR Y-9C, as applicable.
(iii)(A) A qualifying community banking organization that has elected to use the community bank leverage ratio framework may opt out of the community bank leverage ratio framework by completing the applicable risk-based and leverage ratio reporting requirements necessary to demonstrate compliance with § 217.10(a)(1) in its Call Report or its Form FR Y-9C, as applicable, or by otherwise providing the information to the Board.
(B) A qualifying community banking organization that opts out of the community bank leverage ratio framework pursuant to paragraph (a)(3)(iii)(A) of this section must comply with § 217.10(a)(1) immediately.
(4) Temporary relief for 2020 and 2021. (i) Except as provided in paragraph (a)(4)(ii) of this section, from December 2, 2020, through December 31, 2021, for purposes of determining whether a Board-regulated institution satisfies the criterion in paragraph (a)(2)(ii) of this section, the total consolidated assets of a Board-regulated institution for purposes of paragraph (a)(2)(ii) of this section shall be determined based on the lesser of:
(A) The total consolidated assets reported by the institution in the Call Report, FR Y-9C, or FR Y-9SP, as applicable, as of December 31, 2019; and
(B) The total consolidated assets calculated in accordance with the reporting instructions to the Call Report or to Form FR Y-9C, as applicable, as of the end of the most recent calendar quarter.
(ii) The relief provided under this paragraph (a)(4)(i) does not apply to a Board-regulated institution if the Board determines that permitting the Board-regulated institution to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the Board-regulated institution. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the Board-regulated institution since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the Board-regulated institution has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the Board-regulated institution. In making a determination pursuant to this paragraph (a)(4)(ii), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(b) Calculation of the leverage ratio. A qualifying community banking organization’s leverage ratio is calculated in accordance with § 217.10(b)(4), except that a qualifying community banking organization is not required to:
(1) Make adjustments and deductions from tier 2 capital for purposes of § 217.22(c); or
(2) Calculate and deduct from tier 1 capital an amount resulting from insufficient tier 2 capital under § 217.22(f).
(c) Treatment when ceasing to meet the qualifying community banking organization requirements. (1) Except as provided in paragraphs (c)(5) and (6) of this section, if an Board-regulated institution ceases to meet the definition of a qualifying community banking organization, the Board-regulated institution has two reporting periods under its Call Report or Form FR Y-9C, as applicable (grace period) either to satisfy the requirements to be a qualifying community banking organization or to comply with § 217.10(a)(1) and report the required capital measures under § 217.10(a)(1) on its Call Report or its Form FR Y-9C, as applicable.
(2) The grace period begins as of the end of the calendar quarter in which the Board-regulated institution ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period.
(3) During the grace period, the Board-regulated institution continues to be treated as a qualifying community banking organization for the purpose of this part and must continue calculating and reporting its leverage ratio under this section unless the Board-regulated institution has opted out of using the community bank leverage ratio framework under paragraph (a)(3) of this section.
(4) During the grace period, the qualifying community banking organization continues to be considered to have met the minimum capital requirements under § 217.10(a)(1), the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1)(i)(A) through (D) of this chapter, and any other capital or leverage requirements to which the qualifying community banking organization is subject, and must continue calculating and reporting its leverage ratio under this section.
(5) Notwithstanding paragraphs (c)(1) through (4) of this section, a Board-regulated institution that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no grace period and immediately ceases to be a qualifying community banking organization. Such a Board-regulated institution must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it ceases to be a qualifying community banking organization.
(6) Notwithstanding paragraphs (c)(1) through (4) of this section, a Board-regulated institution that has a leverage ratio of 8 percent or less does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of 8 percent or less.
§§ 217.13-217.19 [Reserved]
Subpart C—Definition of Capital
§ 217.20 Capital components and eligibility criteria for regulatory capital instruments.
(a) Regulatory capital components. A Board-regulated institution’s regulatory capital components are:
(1) Common equity tier 1 capital;
(2) Additional tier 1 capital; and
(3) Tier 2 capital.
(b) Common equity tier 1 capital. Common equity tier 1 capital is the sum of the common equity tier 1 capital elements in this paragraph (b), minus regulatory adjustments and deductions in § 217.22. The common equity tier 1 capital elements are:
(1) Any common stock instruments (plus any related surplus) issued by the Board-regulated institution, net of treasury stock, and any capital instruments issued by mutual banking organizations, that meet all the following criteria:
(i) The instrument is paid-in, issued directly by the Board-regulated institution, and represents the most subordinated claim in a receivership, insolvency, liquidation, or similar proceeding of the Board-regulated institution;
(ii) The holder of the instrument is entitled to a claim on the residual assets of the Board-regulated institution that is proportional with the holder’s share of the Board-regulated institution’s issued capital after all senior claims have been satisfied in a receivership, insolvency, liquidation, or similar proceeding;
(iii) The instrument has no maturity date, can only be redeemed via discretionary repurchases with the prior approval of the Board to the extent otherwise required by law or regulation, and does not contain any term or feature that creates an incentive to redeem;
(iv) The Board-regulated institution did not create at issuance of the instrument through any action or communication an expectation that it will buy back, cancel, or redeem the instrument, and the instrument does not include any term or feature that might give rise to such an expectation;
(v) Any cash dividend payments on the instrument are paid out of the Board-regulated institution’s net income, retained earnings, or surplus related to common stock, and are not subject to a limit imposed by the contractual terms governing the instrument. State member banks are subject to other legal restrictions on reductions in capital resulting from cash dividends, including out of the capital surplus account, under 12 U.S.C. 324 and 12 CFR 208.5.
(vi) The Board-regulated institution has full discretion at all times to refrain from paying any dividends and making any other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restrictions on the Board-regulated institution;
(vii) Dividend payments and any other distributions on the instrument may be paid only after all legal and contractual obligations of the Board-regulated institution have been satisfied, including payments due on more senior claims;
(viii) The holders of the instrument bear losses as they occur equally, proportionately, and simultaneously with the holders of all other common stock instruments before any losses are borne by holders of claims on the Board-regulated institution with greater priority in a receivership, insolvency, liquidation, or similar proceeding;
(ix) The paid-in amount is classified as equity under GAAP;
(x) The Board-regulated institution, or an entity that the Board-regulated institution controls, did not purchase or directly or indirectly fund the purchase of the instrument;
(xi) The instrument is not secured, not covered by a guarantee of the Board-regulated institution or of an affiliate of the Board-regulated institution, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(xii) The instrument has been issued in accordance with applicable laws and regulations; and
(xiii) The instrument is reported on the Board-regulated institution’s regulatory financial statements separately from other capital instruments.
(2) Retained earnings.
(3) Accumulated other comprehensive income (AOCI) as reported under GAAP.
(4) Any common equity tier 1 minority interest, subject to the limitations in § 217.21.
(5) Notwithstanding the criteria for common stock instruments referenced above, a Board-regulated institution’s common stock issued and held in trust for the benefit of its employees as part of an employee stock ownership plan does not violate any of the criteria in paragraph (b)(1)(iii), paragraph (b)(1)(iv) or paragraph (b)(1)(xi) of this section, provided that any repurchase of the stock is required solely by virtue of ERISA for an instrument of a Board-regulated institution that is not publicly-traded. In addition, an instrument issued by a Board-regulated institution to its employee stock ownership plan does not violate the criterion in paragraph (b)(1)(x) of this section.
(c) Additional tier 1 capital. Additional tier 1 capital is the sum of additional tier 1 capital elements and any related surplus, minus the regulatory adjustments and deductions in § 217.22. Additional tier 1 capital elements are:
(1) Instruments (plus any related surplus) that meet the following criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to depositors, general creditors, and subordinated debt holders of the Board-regulated institution in a receivership, insolvency, liquidation, or similar proceeding;
(iii) The instrument is not secured, not covered by a guarantee of the Board-regulated institution or of an affiliate of the Board-regulated institution, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iv) The instrument has no maturity date and does not contain a dividend step-up or any other term or feature that creates an incentive to redeem; and
(v) If callable by its terms, the instrument may be called by the Board-regulated institution only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called earlier than five years upon the occurrence of a regulatory event that precludes the instrument from being included in additional tier 1 capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). In addition:
(A) The Board-regulated institution must receive prior approval from the Board to exercise a call option on the instrument.
(B) The Board-regulated institution does not create at issuance of the instrument, through any action or communication, an expectation that the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the Board-regulated institution must either: Replace the instrument to be called with an equal amount of instruments that meet the criteria under paragraph (b) of this section or this paragraph (c);
(vi) Redemption or repurchase of the instrument requires prior approval from the Board.
(vii) The Board-regulated institution has full discretion at all times to cancel dividends or other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of other restrictions on the Board-regulated institution except in relation to any distributions to holders of common stock or instruments that are pari passu with the instrument.
(viii) Any distributions on the instrument are paid out of the Board-regulated institution’s net income, retained earnings, or surplus related to other additional tier 1 capital instruments. State member banks are subject to other legal restrictions on reductions in capital resulting from cash dividends, including out of the capital surplus account, under 12 U.S.C. 324 and 12 CFR 208.5.
(ix) The instrument does not have a credit-sensitive feature, such as a dividend rate that is reset periodically based in whole or in part on the Board-regulated institution’s credit quality, but may have a dividend rate that is adjusted periodically independent of the Board-regulated institution’s credit quality, in relation to general market interest rates or similar adjustments.
(x) The paid-in amount is classified as equity under GAAP.
(xi) The Board-regulated institution, or an entity that the Board-regulated institution controls, did not purchase or directly or indirectly fund the purchase of the instrument.
(xii) The instrument does not have any features that would limit or discourage additional issuance of capital by the Board-regulated institution, such as provisions that require the Board-regulated institution to compensate holders of the instrument if a new instrument is issued at a lower price during a specified time frame.
(xiii) If the instrument is not issued directly by the Board-regulated institution or by a subsidiary of the Board-regulated institution that is an operating entity, the only asset of the issuing entity is its investment in the capital of the Board-regulated institution, and proceeds must be immediately available without limitation to the Board-regulated institution or to the Board-regulated institution’s top-tier holding company in a form which meets or exceeds all of the other criteria for additional tier 1 capital instruments.
(xiv) For an advanced approaches Board-regulated institution, the governing agreement, offering circular, or prospectus of an instrument issued after the date upon which the Board-regulated institution becomes subject to this part as set forth in § 217.1(f) must disclose that the holders of the instrument may be fully subordinated to interests held by the U.S. government in the event that the Board-regulated institution enters into a receivership, insolvency, liquidation, or similar proceeding.
(2) Tier 1 minority interest, subject to the limitations in § 217.21, that is not included in the Board-regulated institution’s common equity tier 1 capital.
(3)(i) Any and all instruments that qualified as tier 1 capital under the Board’s general risk-based capital rules under 12 CFR part 208, appendix A or 12 CFR part 225, appendix A, as then in effect, that were issued under the Small Business Jobs Act of 2010
(ii) Any preferred stock instrument issued under the U.S. Department of the Treasury’s Emergency Capital Investment Program pursuant to section 104A of the Community Development Banking and Financial Institutions Act of 1994, added by the Consolidated Appropriations Act, 2021.
(4) Notwithstanding the criteria for additional tier 1 capital instruments referenced above:
(i) An instrument issued by a Board-regulated institution and held in trust for the benefit of its employees as part of an employee stock ownership plan does not violate any of the criteria in paragraph (c)(1)(iii) of this section, provided that any repurchase is required solely by virtue of ERISA for an instrument of a Board-regulated institution that is not publicly-traded. In addition, an instrument issued by a Board-regulated institution to its employee stock ownership plan does not violate the criteria in paragraph (c)(1)(v) or paragraph (c)(1)(xi) of this section; and
(ii) An instrument with terms that provide that the instrument may be called earlier than five years upon the occurrence of a rating agency event does not violate the criterion in paragraph (c)(1)(v) of this section provided that the instrument was issued and included in a Board-regulated institution’s tier 1 capital prior to January 1, 2014, and that such instrument satisfies all other criteria under this § 217.20(c).
(d) Tier 2 Capital. Tier 2 capital is the sum of tier 2 capital elements and any related surplus, minus regulatory adjustments and deductions in § 217.22. Tier 2 capital elements are:
(1) Instruments (plus related surplus) that meet the following criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to depositors and general creditors of the Board-regulated institution;
(iii) The instrument is not secured, not covered by a guarantee of the Board-regulated institution or of an affiliate of the Board-regulated institution, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument in relation to more senior claims;
(iv) The instrument has a minimum original maturity of at least five years. At the beginning of each of the last five years of the life of the instrument, the amount that is eligible to be included in tier 2 capital is reduced by 20 percent of the original amount of the instrument (net of redemptions) and is excluded from regulatory capital when the remaining maturity is less than one year. In addition, the instrument must not have any terms or features that require, or create significant incentives for, the Board-regulated institution to redeem the instrument prior to maturity;
(v) The instrument, by its terms, may be called by the Board-regulated institution only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called sooner upon the occurrence of an event that would preclude the instrument from being included in tier 2 capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). In addition:
(A) The Board-regulated institution must receive the prior approval of the Board to exercise a call option on the instrument.
(B) The Board-regulated institution does not create at issuance, through action or communication, an expectation the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the Board-regulated institution must either: Replace any amount called with an equivalent amount of an instrument that meets the criteria for regulatory capital under this section;
(vi) The holder of the instrument must have no contractual right to accelerate payment of principal or interest on the instrument, except in the event of a receivership, insolvency, liquidation, or similar proceeding of the state member bank or depository institution holding company, as applicable, or of a major subsidiary depository institution of the depository institution holding company.
(vii) The instrument has no credit-sensitive feature, such as a dividend or interest rate that is reset periodically based in whole or in part on the Board-regulated institution’s credit standing, but may have a dividend rate that is adjusted periodically independent of the Board-regulated institution’s credit standing, in relation to general market interest rates or similar adjustments.
(viii) The Board-regulated institution, or an entity that the Board-regulated institution controls, has not purchased and has not directly or indirectly funded the purchase of the instrument.
(ix) If the instrument is not issued directly by the Board-regulated institution or by a subsidiary of the Board-regulated institution that is an operating entity, the only asset of the issuing entity is its investment in the capital of the Board-regulated institution, and proceeds must be immediately available without limitation to the Board-regulated institution or the Board-regulated institution’s top-tier holding company in a form that meets or exceeds all the other criteria for tier 2 capital instruments under this section.
(x) Redemption of the instrument prior to maturity or repurchase requires the prior approval of the Board.
(xi) For an advanced approaches Board-regulated institution, the governing agreement, offering circular, or prospectus of an instrument issued after the date on which the advanced approaches Board-regulated institution becomes subject to this part under § 217.1(f) must disclose that the holders of the instrument may be fully subordinated to interests held by the U.S. government in the event that the Board-regulated institution enters into a receivership, insolvency, liquidation, or similar proceeding.
(2) Total capital minority interest, subject to the limitations set forth in § 217.21, that is not included in the Board-regulated institution’s tier 1 capital.
(3) ALLL or AACL, as applicable, up to 1.25 percent of the Board-regulated institution’s standardized total risk-weighted assets not including any amount of the ALLL or AACL, as applicable (and excluding in the case of a market risk Board-regulated institution, its standardized market risk-weighted assets).
(4)(i) Any instrument that qualified as tier 2 capital under the Board’s general risk-based capital rules under 12 CFR part 208, appendix A, 12 CFR part 225, appendix A as then in effect, that were issued under the Small Business Jobs Act of 2010,
(ii) Any debt instrument issued under the U.S. Department of the Treasury’s Emergency Capital Investment Program pursuant to section 104A of the Community Development Banking and Financial Institutions Act of 1994, added by the Consolidated Appropriations Act, 2021.
(5) For a Board-regulated institution that makes an AOCI opt-out election (as defined in paragraph (b)(2) of § 217.22), 45 percent of pretax net unrealized gains on available-for-sale preferred stock classified as an equity security under GAAP and available-for-sale equity exposures.
(6) Notwithstanding the criteria for tier 2 capital instruments referenced above, an instrument with terms that provide that the instrument may be called earlier than five years upon the occurrence of a rating agency event does not violate the criterion in paragraph (d)(1)(v) of this section provided that the instrument was issued and included in a Board-regulated institution’s tier 1 or tier 2 capital prior to January 1, 2014, and that such instrument satisfies all other criteria under this paragraph (d).
(e) Board approval of a capital element. (1) A Board-regulated institution must receive Board prior approval to include a capital element (as listed in this section) in its common equity tier 1 capital, additional tier 1 capital, or tier 2 capital unless the element:
(i) Was included in a Board-regulated institution’s tier 1 capital or tier 2 capital prior to May 19, 2010 in accordance with the Board’s risk-based capital rules that were effective as of that date and the underlying instrument may continue to be included under the criteria set forth in this section; or
(ii) Is equivalent, in terms of capital quality and ability to absorb losses with respect to all material terms, to a regulatory capital element the Board determined may be included in regulatory capital pursuant to paragraph (e)(3) of this section.
(2) When considering whether a Board-regulated institution may include a regulatory capital element in its common equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the Federal Reserve Board will consult with the FDIC and OCC.
(3) After determining that a regulatory capital element may be included in a Board-regulated institution’s common equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the Board will make its decision publicly available, including a brief description of the material terms of the regulatory capital element and the rationale for the determination.
(f) A Board-regulated institution may not repurchase or redeem any common equity tier 1 capital, additional tier 1, or tier 2 capital instrument without the prior approval of the Board to the extent such prior approval is required by paragraph (b), (c), or (d) of this section, as applicable.
§ 217.21 Minority interest.
(a)(1) Applicability. For purposes of § 217.20, a Board-regulated institution that is not an advanced approaches Board-regulated institution is subject to the minority interest limitations in this paragraph (a) if a consolidated subsidiary of the Board-regulated institution has issued regulatory capital that is not owned by the Board-regulated institution.
(2) Common equity tier 1 minority interest includable in the common equity tier 1 capital of the Board-regulated institution. The amount of common equity tier 1 minority interest that a Board-regulated institution may include in common equity tier 1 capital must be no greater than 10 percent of the sum of all common equity tier 1 capital elements of the Board-regulated institution (not including the common equity tier 1 minority interest itself), less any common equity tier 1 capital regulatory adjustments and deductions in accordance with § 217.22 (a) and (b).
(3) Tier 1 minority interest includable in the tier 1 capital of the Board-regulated institution. The amount of tier 1 minority interest that a Board-regulated institution may include in tier 1 capital must be no greater than 10 percent of the sum of all tier 1 capital elements of the Board-regulated institution (not including the tier 1 minority interest itself), less any tier 1 capital regulatory adjustments and deductions in accordance with § 217.22(a) and (b).
(4) Total capital minority interest includable in the total capital of the Board-regulated institution. The amount of total capital minority interest that a Board-regulated institution may include in total capital must be no greater than 10 percent of the sum of all total capital elements of the Board-regulated institution (not including the total capital minority interest itself), less any total capital regulatory adjustments and deductions in accordance with § 217.22(a) and (b).
(b)(1) Applicability. For purposes of § 217.20, an advanced approaches Board-regulated institution is subject to the minority interest limitations in this paragraph (b) if:
(i) A consolidated subsidiary of the advanced approaches Board-regulated institution has issued regulatory capital that is not owned by the Board-regulated institution; and
(ii) For each relevant regulatory capital ratio of the consolidated subsidiary, the ratio exceeds the sum of the subsidiary’s minimum regulatory capital requirements plus its capital conservation buffer.
(2) Difference in capital adequacy standards at the subsidiary level. For purposes of the minority interest calculations in this section, if the consolidated subsidiary issuing the capital is not subject to capital adequacy standards similar to those of the advanced approaches Board-regulated institution, the advanced approaches Board-regulated institution must assume that the capital adequacy standards of the advanced approaches Board-regulated institution apply to the subsidiary.
(3) Common equity tier 1 minority interest includable in the common equity tier 1 capital of the Board-regulated institution. For each consolidated subsidiary of an advanced approaches Board-regulated institution, the amount of common equity tier 1 minority interest the advanced approaches Board-regulated institution may include in common equity tier 1 capital is equal to:
(i) The common equity tier 1 minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary’s common equity tier 1 capital that is not owned by the advanced approaches Board-regulated institution, multiplied by the difference between the common equity tier 1 capital of the subsidiary and the lower of:
(A) The amount of common equity tier 1 capital the subsidiary must hold, or would be required to hold pursuant this paragraph (b), to avoid restrictions on distributions and discretionary bonus payments under § 217.11 or equivalent standards established by the subsidiary’s home country supervisor; or
(B)(1) The standardized total risk-weighted assets of the advanced approaches Board-regulated institution that relate to the subsidiary multiplied by
(2) The common equity tier 1 capital ratio the subsidiary must maintain to avoid restrictions on distributions and discretionary bonus payments under § 217.11 or equivalent standards established by the subsidiary’s home country supervisor.
(4) Tier 1 minority interest includable in the tier 1 capital of the advanced approaches Board-regulated institution. For each consolidated subsidiary of the advanced approaches Board-regulated institution, the amount of tier 1 minority interest the advanced approaches Board-regulated institution may include in tier 1 capital is equal to:
(i) The tier 1 minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary’s tier 1 capital that is not owned by the advanced approaches Board-regulated institution multiplied by the difference between the tier 1 capital of the subsidiary and the lower of:
(A) The amount of tier 1 capital the subsidiary must hold, or would be required to hold pursuant to this paragraph (b), to avoid restrictions on distributions and discretionary bonus payments under § 217.11 or equivalent standards established by the subsidiary’s home country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced approaches Board-regulated institution that relate to the subsidiary multiplied by
(2) The tier 1 capital ratio the subsidiary must maintain to avoid restrictions on distributions and discretionary bonus payments under § 217.11 or equivalent standards established by the subsidiary’s home country supervisor.
(5) Total capital minority interest includable in the total capital of the Board-regulated institution. For each consolidated subsidiary of the advanced approaches Board-regulated institution, the amount of total capital minority interest the advanced approaches Board-regulated institution may include in total capital is equal to:
(i) The total capital minority interest of the subsidiary; minus
(ii) The percentage of the subsidiary’s total capital that is not owned by the advanced approaches Board-regulated institution multiplied by the difference between the total capital of the subsidiary and the lower of:
(A) The amount of total capital the subsidiary must hold, or would be required to hold pursuant to this paragraph (b), to avoid restrictions on distributions and discretionary bonus payments under § 217.11 or equivalent standards established by the subsidiary’s home country supervisor, or
(B)(1) The standardized total risk-weighted assets of the advanced approaches Board-regulated institution that relate to the subsidiary multiplied by
(2) The total capital ratio the subsidiary must maintain to avoid restrictions on distributions and discretionary bonus payments under § 217.11 or equivalent standards established by the subsidiary’s home country supervisor.
§ 217.22 Regulatory capital adjustments and deductions.
(a) Regulatory capital deductions from common equity tier 1 capital. A Board-regulated institution must deduct from the sum of its common equity tier 1 capital elements the items set forth in this paragraph (a):
(1) Goodwill, net of associated deferred tax liabilities (DTLs) in accordance with paragraph (e) of this section, including goodwill that is embedded in the valuation of a significant investment in the capital of an unconsolidated financial institution in the form of common stock (and that is reflected in the consolidated financial statements of the Board-regulated institution), in accordance with paragraph (d) of this section;
(2) Intangible assets, other than MSAs, net of associated DTLs in accordance with paragraph (e) of this section;
(3) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances and net of DTLs in accordance with paragraph (e) of this section;
(4) Any gain-on-sale in connection with a securitization exposure;
(5)(i) Any defined benefit pension fund net asset, net of any associated DTL in accordance with paragraph (e) of this section, held by a depository institution holding company. With the prior approval of the Board, this deduction is not required for any defined benefit pension fund net asset to the extent the depository institution holding company has unrestricted and unfettered access to the assets in that fund.
(ii) For an insured depository institution, no deduction is required.
(iii) A Board-regulated institution must risk weight any portion of the defined benefit pension fund asset that is not deducted under paragraphs (a)(5)(i) or (a)(5)(ii) of this section as if the Board-regulated institution directly holds a proportional ownership share of each exposure in the defined benefit pension fund.
(6) For an advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to § 217.121(d), the amount of expected credit loss that exceeds its eligible credit reserves; and
(7) Financial subsidiaries. (i) A state member bank must deduct the aggregate amount of its outstanding equity investment, including retained earnings, in its financial subsidiaries (as defined in 12 CFR 208.77) and may not consolidate the assets and liabilities of a financial subsidiary with those of the state member bank.
(ii) No other deduction is required under § 217.22(c) for investments in the capital instruments of financial subsidiaries.
(b) Regulatory adjustments to common equity tier 1 capital. (1) A Board-regulated institution must adjust the sum of common equity tier 1 capital elements pursuant to the requirements set forth in this paragraph (b). Such adjustments to common equity tier 1 capital must be made net of the associated deferred tax effects.
(i) A Board-regulated institution that makes an AOCI opt-out election (as defined in paragraph (b)(2) of this section), must make the adjustments required under § 217.22(b)(2)(i).
(ii) A Board-regulated institution that is an advanced approaches Board-regulated institution, and a Board-regulated institution that has not made an AOCI opt-out election (as defined in paragraph (b)(2) of this section), must deduct any accumulated net gains and add any accumulated net losses on cash flow hedges included in AOCI that relate to the hedging of items that are not recognized at fair value on the balance sheet.
(iii) A Board-regulated institution must deduct any net gain and add any net loss related to changes in the fair value of liabilities that are due to changes in the Board-regulated institution’s own credit risk. An advanced approaches Board-regulated institution must deduct the difference between its credit spread premium and the risk-free rate for derivatives that are liabilities as part of this adjustment.
(2) AOCI opt-out election. (i) A Board-regulated institution that is not an advanced approaches Board-regulated institution may make a one-time election to opt out of the requirement to include all components of AOCI (with the exception of accumulated net gains and losses on cash flow hedges related to items that are not fair-valued on the balance sheet) in common equity tier 1 capital (AOCI opt-out election). A Board-regulated institution that makes an AOCI opt-out election in accordance with this paragraph (b)(2) must adjust common equity tier 1 capital as follows:
(A) Subtract any net unrealized gains and add any net unrealized losses on available-for-sale securities;
(B) Subtract any net unrealized losses on available-for-sale preferred stock classified as an equity security under GAAP and available-for-sale equity exposures;
(C) Subtract any accumulated net gains and add any accumulated net losses on cash flow hedges;
(D) Subtract any amounts recorded in AOCI attributed to defined benefit postretirement plans resulting from the initial and subsequent application of the relevant GAAP standards that pertain to such plans (excluding, at the Board-regulated institution’s option, the portion relating to pension assets deducted under paragraph (a)(5) of this section); and
(E) Subtract any net unrealized gains and add any net unrealized losses on held-to-maturity securities that are included in AOCI.
(ii) A Board-regulated institution that is not an advanced approaches Board-regulated institution must make its AOCI opt-out election in the Call Report, for a state member bank, FR Y-9C, for bank holding companies or savings and loan holding companies:
(A) If the Board-regulated institution is a Category III Board-regulated institution or Category IV Board-regulated institution, during the first reporting period after the Board-regulated institution meets the definition of a Category III Board-regulated institution or Category IV Board-regulated institution in § 217.2; or
(B) If the A Board-regulated institution is not a Category III Board-regulated institution and not a Category IV Board-regulated institution, during the first reporting period after the Board-regulated institution is required to comply with subpart A of this part as set forth in § 217.1(f).
(iii) Each depository institution subsidiary of a Board-regulated institution that is not an advanced approaches Board-regulated institution must elect the same option as the Board-regulated institution pursuant to paragraph (b)(2).
(iv) With prior notice to the Board, a Board-regulated institution resulting from a merger, acquisition, or purchase transaction may make a new AOCI opt-out election in the Call Report (for a state member bank), or FR Y-9C or FR Y-9SP, as applicable (for bank holding companies or savings and loan holding companies) filed by the resulting Board-regulated institution for the first reporting period after it is required to comply with subpart A of this part as set forth in § 217.1(f) if:
(A) Other than as set forth in paragraph (b)(2)(iv)(C) of this section, the merger, acquisition, or purchase transaction involved the acquisition or purchase of all or substantially all of either the assets or voting stock of another banking organization that is subject to regulatory capital requirements issued by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, or the Office of the Comptroller of the Currency;
(B) Prior to the merger, acquisition, or purchase transaction, only one of the banking organizations involved in the transaction made an AOCI opt-out election under this section; and
(C) A Board-regulated institution may, with the prior approval of the Board, change its AOCI opt-out election under this paragraph (b) in the case of a merger, acquisition, or purchase transaction that meets the requirements set forth at paragraph (b)(2)(iv)(B) of this section, but does not meet the requirements of paragraph (b)(2)(iv)(A). In making such a determination, the Board may consider the terms of the merger, acquisition, or purchase transaction, as well as the extent of any changes to the risk profile, complexity, and scope of operations of the Board-regulated institution resulting from the merger, acquisition, or purchase transaction.
(3) Regulatory capital requirement for insurance underwriting risks. A bank holding company or savings and loan holding company must deduct an amount equal to the regulatory capital requirement for insurance underwriting risks established by the regulator of any insurance underwriting activities of the company. The bank holding company or savings and loan holding company must take the deduction 50 percent from tier 1 capital and 50 percent from tier 2 capital. If the amount deductible from tier 2 capital exceeds the Board-regulated institution’s tier 2 capital, the Board-regulated institution must deduct the excess from tier 1 capital.
(c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments
(i) A Board-regulated institution must deduct an investment in the Board-regulated institution’s own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 217.20(b)(1);
(ii) A Board-regulated institution must deduct an investment in the Board-regulated institution’s own additional tier 1 capital instruments from its additional tier 1 capital elements;
(iii) A Board-regulated institution must deduct an investment in the Board-regulated institution’s own tier 2 capital instruments from its tier 2 capital elements; and
(iv) An advanced approaches Board-regulated institution must deduct an investment in the institution’s own covered debt instruments from its tier 2 capital elements, as applicable. If the advanced approaches Board-regulated institution does not have a sufficient amount of tier 2 capital to effect this deduction, the institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital.
(2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), investments in the capital of unconsolidated financial institutions for a Board-regulated institution that is not an advanced approaches Board-regulated institution (as described in paragraph (c)(4) of this section), non-significant investments in the capital of unconsolidated financial institutions for an advanced approaches Board-regulated institution (as described in paragraph (c)(5) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions for an advanced approaches Board-regulated institution (as described in paragraph (c)(6) of this section). Under the corresponding deduction approach, a Board-regulated institution must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the Board-regulated institution itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the Board-regulated institution does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the Board-regulated institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 217.20, the Board-regulated institution must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders;
(C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and
(D) For an advanced approaches Board-regulated institution, a tier 2 capital instrument if it is a covered debt instrument.
(iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 217.300(c)), the Board-regulated institution must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was included in the issuer’s tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in the issuer’s tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial institutions. (i) A Board-regulated institution must deduct an investment in the capital of other financial institutions that it holds reciprocally, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(ii) An advanced approaches Board-regulated institution must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(4) Investments in the capital of unconsolidated financial institutions. A Board-regulated institution that is not an advanced approaches Board-regulated institution must deduct its investments in the capital of unconsolidated financial institutions (as defined in § 217.2) that exceed 25 percent of the sum of the Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(5) Non-significant investments in the capital of unconsolidated financial institutions. (i) An advanced approaches Board-regulated institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 217.2) that, in the aggregate and together with any investment in a covered debt instrument (as defined in § 217.2) issued by a financial institution in which the Board-regulated institution does not have a significant investment in the capital of the unconsolidated financial institution (as defined in § 217.2), exceeds 10 percent of the sum of the advanced approaches Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(ii) For an advanced approaches Board-regulated institution, the amount to be deducted under this paragraph (c)(5) from a specific capital component is equal to:
(A) The advanced approaches Board-regulated institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(5), exceeding the 10 percent threshold for non-significant investments, multiplied by
(B) The ratio of the advanced approaches Board-regulated institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the advanced approaches Board-regulated institution’s total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose.
(iii) For purposes of applying the deduction under paragraph (c)(5)(i) of this section, an advanced approaches Board-regulated institution that is not a global systemically important BHC or a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may exclude from the deduction the amount of the Board-regulated institution’s gross long position, in accordance with § 217.22(h)(2), in investments in covered debt instruments issued by financial institutions in which the Board-regulated institution does not have a significant investment in the capital of the unconsolidated financial institutions up to an amount equal to 5 percent of the sum of the Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section.
(iv) Prior to applying the deduction under paragraph (c)(5)(i) of this section:
(A) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in § 217.2.
(B) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC must deduct, according to the corresponding deduction approach in paragraph (c)(2) of this section, its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, but no longer qualifies as an excluded covered debt instrument.
(C) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section the amount of its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a direct or indirect investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, and has been held for more than thirty business days.
(D) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section its gross long position, calculated in accordance with paragraph (h)(2) of this section, of its aggregate position in excluded covered debt instruments that exceeds 5 percent of the sum of the Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section.
(6) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. If an advanced approaches Board-regulated institution has a significant investment in the capital of an unconsolidated financial institution, the advanced approaches Board-regulated institution must deduct from capital any such investment issued by the unconsolidated financial institution that is held by the Board-regulated institution other than an investment in the form of common stock, as well as any investment in a covered debt instrument issued by the unconsolidated financial institution, by applying the corresponding deduction approach in paragraph (c)(2) of this section.
(d) MSAs and certain DTAs subject to common equity tier 1 capital deduction thresholds. (1) A Board-regulated institution that is not an advanced approaches Board-regulated institution must make deductions from regulatory capital as described in this paragraph (d)(1).
(i) The Board-regulated institution must deduct from common equity tier 1 capital elements the amount of each of the items set forth in this paragraph (d)(1) that, individually, exceeds 25 percent of the sum of the Board-regulated institution’s common equity tier 1 capital elements, less adjustments to and deductions from common equity tier 1 capital required under paragraphs (a) through (c)(3) of this section (the 25 percent common equity tier 1 capital deduction threshold).
(ii) The Board-regulated institution must deduct from common equity tier 1 capital elements the amount of DTAs arising from temporary differences that the Board-regulated institution could not realize through net operating loss carrybacks, net of any related valuation allowances and net of DTLs, in accordance with paragraph (e) of this section. A Board-regulated institution is not required to deduct from the sum of its common equity tier 1 capital elements DTAs (net of any related valuation allowances and net of DTLs, in accordance with § 217.22(e)) arising from timing differences that the Board-regulated institution could realize through net operating loss carrybacks. The Board-regulated institution must risk weight these assets at 100 percent. For a state member bank that is a member of a consolidated group for tax purposes, the amount of DTAs that could be realized through net operating loss carrybacks may not exceed the amount that the state member bank could reasonably expect to have refunded by its parent holding company.
(iii) The Board-regulated institution must deduct from common equity tier 1 capital elements the amount of MSAs net of associated DTLs, in accordance with paragraph (e) of this section.
(iv) For purposes of calculating the amount of DTAs subject to deduction pursuant to paragraph (d)(1) of this section, a Board-regulated institution may exclude DTAs and DTLs relating to adjustments made to common equity tier 1 capital under paragraph (b) of this section. A Board-regulated institution that elects to exclude DTAs relating to adjustments under paragraph (b) of this section also must exclude DTLs and must do so consistently in all future calculations. A Board-regulated institution may change its exclusion preference only after obtaining the prior approval of the Board.
(2) An advanced approaches Board-regulated institution must make deductions from regulatory capital as described in this paragraph (d)(2).
(i) An advanced approaches Board-regulated institution must deduct from common equity tier 1 capital elements the amount of each of the items set forth in this paragraph (d)(2) that, individually, exceeds 10 percent of the sum of the advanced approaches Board-regulated institution’s common equity tier 1 capital elements, less adjustments to and deductions from common equity tier 1 capital required under paragraphs (a) through (c) of this section (the 10 percent common equity tier 1 capital deduction threshold).
(A) DTAs arising from temporary differences that the advanced approaches Board-regulated institution could not realize through net operating loss carrybacks, net of any related valuation allowances and net of DTLs, in accordance with paragraph (e) of this section. An advanced approaches Board-regulated institution is not required to deduct from the sum of its common equity tier 1 capital elements DTAs (net of any related valuation allowances and net of DTLs, in accordance with § 217.22(e)) arising from timing differences that the advanced approaches Board-regulated institution could realize through net operating loss carrybacks. The advanced approaches Board-regulated institution must risk weight these assets at 100 percent. For a state member bank that is a member of a consolidated group for tax purposes, the amount of DTAs that could be realized through net operating loss carrybacks may not exceed the amount that the state member bank could reasonably expect to have refunded by its parent holding company.
(B) MSAs net of associated DTLs, in accordance with paragraph (e) of this section.
(C) Significant investments in the capital of unconsolidated financial institutions in the form of common stock, net of associated DTLs in accordance with paragraph (e) of this section.
(ii) An advanced approaches Board-regulated institution must deduct from common equity tier 1 capital elements the items listed in paragraph (d)(2)(i) of this section that are not deducted as a result of the application of the 10 percent common equity tier 1 capital deduction threshold, and that, in aggregate, exceed 17.65 percent of the sum of the advanced approaches Board-regulated institution’s common equity tier 1 capital elements, minus adjustments to and deductions from common equity tier 1 capital required under paragraphs (a) through (c) of this section, minus the items listed in paragraph (d)(2)(i) of this section (the 15 percent common equity tier 1 capital deduction threshold). Any goodwill that has been deducted under paragraph (a)(1) of this section can be excluded from the significant investments in the capital of unconsolidated financial institutions in the form of common stock.
(iii) For purposes of calculating the amount of DTAs subject to the 10 and 15 percent common equity tier 1 capital deduction thresholds, an advanced approaches Board-regulated institution may exclude DTAs and DTLs relating to adjustments made to common equity tier 1 capital under paragraph (b) of this section. An advanced approaches Board-regulated institution that elects to exclude DTAs relating to adjustments under paragraph (b) of this section also must exclude DTLs and must do so consistently in all future calculations. An advanced approaches Board-regulated institution may change its exclusion preference only after obtaining the prior approval of the Board.
(e) Netting of DTLs against assets subject to deduction. (1) Except as described in paragraph (e)(3) of this section, netting of DTLs against assets that are subject to deduction under this section is permitted, but not required, if the following conditions are met:
(i) The DTL is associated with the asset; and
(ii) The DTL would be extinguished if the associated asset becomes impaired or is derecognized under GAAP.
(2) A DTL may only be netted against a single asset.
(3) For purposes of calculating the amount of DTAs subject to the threshold deduction in paragraph (d) of this section, the amount of DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, and of DTAs arising from temporary differences that the Board-regulated institution could not realize through net operating loss carrybacks, net of any related valuation allowances, may be offset by DTLs (that have not been netted against assets subject to deduction pursuant to paragraph (e)(1) of this section) subject to the conditions set forth in this paragraph (e).
(i) Only the DTAs and DTLs that relate to taxes levied by the same taxation authority and that are eligible for offsetting by that authority may be offset for purposes of this deduction.
(ii) The amount of DTLs that the Board-regulated institution nets against DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, and against DTAs arising from temporary differences that the Board-regulated institution could not realize through net operating loss carrybacks, net of any related valuation allowances, must be allocated in proportion to the amount of DTAs that arise from net operating loss and tax credit carryforwards (net of any related valuation allowances, but before any offsetting of DTLs) and of DTAs arising from temporary differences that the Board-regulated institution could not realize through net operating loss carrybacks (net of any related valuation allowances, but before any offsetting of DTLs), respectively.
(4) A Board-regulated institution may offset DTLs embedded in the carrying value of a leveraged lease portfolio acquired in a business combination that are not recognized under GAAP against DTAs that are subject to paragraph (d) of this section in accordance with this paragraph (e).
(5) A Board-regulated institution must net DTLs against assets subject to deduction under this section in a consistent manner from reporting period to reporting period. A Board-regulated institution may change its preference regarding the manner in which it nets DTLs against specific assets subject to deduction under this section only after obtaining the prior approval of the Board.
(f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a Board-regulated institution does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the Board-regulated institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches Board-regulated institution in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph (f). Notwithstanding any other provision of this section, a qualifying community banking organization (as defined in § 217.12) that has elected to use the community bank leverage ratio framework pursuant to § 217.12 is not required to deduct any shortfall of tier 2 capital from its additional tier 1 capital or common equity tier 1 capital.
(g) Treatment of assets that are deducted. A Board-regulated institution must exclude from standardized total risk-weighted assets and, as applicable, advanced approaches total risk-weighted assets any item that is required to be deducted from regulatory capital.
(h) Net long position—(1) In general. For purposes of calculating the amount of a Board-regulated institution’s investment in the Board regulated institution’s own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument under this section, the institution’s net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the Board-regulated institution in the same instrument subject to paragraph (h)(3) of this section.
(2) Gross long position. A gross long position is determined as follows:
(i) For an equity exposure that is held directly by the Board-regulated institution, the adjusted carrying value of the exposure as that term is defined in § 217.51(b);
(ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 217.2;
(iii) For each indirect exposure, the Board-regulated institution’s carrying value of its investment in an investment fund or, alternatively:
(A) A Board-regulated institution may, with the prior approval of the Board, use a conservative estimate of the amount of its indirect investment in the Board-regulated institution’s own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or
(B) A Board-regulated institution may calculate the gross long position for an indirect exposure to the Board-regulated institution’s own capital instruments, the capital of an unconsolidated financial institution, or a covered debt instrument by multiplying the Board-regulated institution’s carrying value of its investment in the investment fund by either:
(1) The highest stated investment limit (in percent) for an investment in the Board-regulated institution’s own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or
(2) The investment fund’s actual holdings (in percent) of the investment in the Board-regulated institution’s own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in a covered debt instrument, as applicable; and
(iv) For a synthetic exposure, the amount of the Board-regulated institution’s loss on the exposure if the reference capital or covered debt instrument were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met:
(i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the Board-regulated institution’s Call Report, for a state member bank, or FR Y-9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, if the Board-regulated institution has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the Board-regulated institution exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and
(iii) For an investment in a Board-regulated institution’s own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4) through (6) and (d) of this section (as applicable), and an investment in a covered debt instrument under paragraphs (c)(1), (5), and (6) of this section:
(A) The Board-regulated institution may only net a short position against a long position in an investment in the Board-regulated institution’s own capital instrument or own covered debt instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk;
(B) A gross long position in an investment in the Board-regulated institution’s own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index;
(C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and
(D) A short position in an index that is hedging a long cash or synthetic position in an investment in the Board-regulated institution’s own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or off-balance sheet) on the Board-regulated institution’s Call Report, for a state member bank, or FR Y-9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, and the hedge is deemed effective by the Board-regulated institution’s internal control processes, which have not been found to be inadequate by the Board.
§§ 217.23-217.29 [Reserved]
Subpart D—Risk-Weighted Assets—Standardized Approach
§ 217.30 Applicability.
(a) This subpart sets forth methodologies for determining risk-weighted assets for purposes of the generally applicable risk-based capital requirements for all Board-regulated institutions.
(b) Notwithstanding paragraph (a) of this section, a market risk Board-regulated institution must exclude from its calculation of risk-weighted assets under this subpart the risk-weighted asset amounts of all covered positions, as defined in subpart F of this part (except foreign exchange positions that are not trading positions, OTC derivative positions, cleared transactions, and unsettled transactions).
Risk-Weighted Assets For General Credit Risk
§ 217.31 Mechanics for calculating risk-weighted assets for general credit risk.
(a) General risk-weighting requirements. A Board-regulated institution must apply risk weights to its exposures as follows:
(1) A Board-regulated institution must determine the exposure amount of each on-balance sheet exposure, each OTC derivative contract, and each off-balance sheet commitment, trade and transaction-related contingency, guarantee, repo-style transaction, financial standby letter of credit, forward agreement, or other similar transaction that is not:
(i) An unsettled transaction subject to § 217.38;
(ii) A cleared transaction subject to § 217.35;
(iii) A default fund contribution subject to § 217.35;
(iv) A securitization exposure subject to §§ 217.41 through 217.45; or
(v) An equity exposure (other than an equity OTC derivative contract) subject to §§ 217.51 through 217.53.
(2) The Board-regulated institution must multiply each exposure amount by the risk weight appropriate to the exposure based on the exposure type or counterparty, eligible guarantor, or financial collateral to determine the risk-weighted asset amount for each exposure.
(b) Total risk-weighted assets for general credit risk equals the sum of the risk-weighted asset amounts calculated under this section.
§ 217.32 General risk weights.
(a) Sovereign exposures—(1) Exposures to the U.S. government. (i) Notwithstanding any other requirement in this subpart, a Board-regulated institution must assign a zero percent risk weight to:
(A) An exposure to the U.S. government, its central bank, or a U.S. government agency; and
(B) The portion of an exposure that is directly and unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency. This includes a deposit or other exposure, or the portion of a deposit or other exposure, that is insured or otherwise unconditionally guaranteed by the FDIC or National Credit Union Administration.
(ii) A Board-regulated institution must assign a 20 percent risk weight to the portion of an exposure that is conditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency. This includes an exposure, or the portion of an exposure, that is conditionally guaranteed by the FDIC or National Credit Union Administration.
(iii) A Board-regulated institution must assign a zero percent risk weight to a Paycheck Protection Program covered loan as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)).
(2) Other sovereign exposures. In accordance with Table 1 to § 217.32, a Board-regulated institution must assign a risk weight to a sovereign exposure based on the CRC applicable to the sovereign or the sovereign’s OECD membership status if there is no CRC applicable to the sovereign.
Table 1 to § 217.32—Risk Weights for Sovereign Exposures
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 0 |
| 2 | 20 |
| 3 | 50 |
| 4-6 | 100 |
| 7 | 150 |
| OECD Member with No CRC | 0 |
| Non-OECD Member with No CRC | 100 |
| Sovereign Default | 150 |
(3) Certain sovereign exposures. Notwithstanding paragraph (a)(2) of this section, a Board-regulated institution may assign to a sovereign exposure a risk weight that is lower than the applicable risk weight in Table 1 to § 217.32 if:
(i) The exposure is denominated in the sovereign’s currency;
(ii) The Board-regulated institution has at least an equivalent amount of liabilities in that currency; and
(iii) The risk weight is not lower than the risk weight that the home country supervisor allows Board-regulated institutions under its jurisdiction to assign to the same exposures to the sovereign.
(4) Exposures to a non-OECD member sovereign with no CRC. Except as provided in paragraphs (a)(3), (a)(5) and (a)(6) of this section, a Board-regulated institution must assign a 100 percent risk weight to an exposure to a sovereign if the sovereign does not have a CRC.
(5) Exposures to an OECD member sovereign with no CRC. Except as provided in paragraph (a)(6) of this section, a Board-regulated institution must assign a 0 percent risk weight to an exposure to a sovereign that is a member of the OECD if the sovereign does not have a CRC.
(6) Sovereign default. A Board-regulated institution must assign a 150 percent risk weight to a sovereign exposure immediately upon determining that an event of sovereign default has occurred, or if an event of sovereign default has occurred during the previous five years.
(b) Certain supranational entities and multilateral development banks (MDBs). A Board-regulated institution must assign a zero percent risk weight to an exposure to the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, or an MDB.
(c) Exposures to GSEs. (1) A Board-regulated institution must assign a 20 percent risk weight to an exposure to a GSE other than an equity exposure or preferred stock.
(2) A Board-regulated institution must assign a 100 percent risk weight to preferred stock issued by a GSE.
(d) Exposures to depository institutions, foreign banks, and credit unions—(1) Exposures to U.S. depository institutions and credit unions. A Board-regulated institution must assign a 20 percent risk weight to an exposure to a depository institution or credit union that is organized under the laws of the United States or any state thereof, except as otherwise provided under paragraph (d)(3) of this section.
(2) Exposures to foreign banks. (i) Except as otherwise provided under paragraphs (d)(2)(iii), (d)(2)(v), and (d)(3) of this section, a Board-regulated institution must assign a risk weight to an exposure to a foreign bank, in accordance with Table 2 to § 217.32, based on the CRC that corresponds to the foreign bank’s home country or the OECD membership status of the foreign bank’s home country if there is no CRC applicable to the foreign bank’s home country.
Table 2 to § 217.32—Risk Weights for Exposures to Foreign Banks
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 20 |
| 2 | 50 |
| 3 | 100 |
| 4-7 | 150 |
| OECD Member with No CRC | 20 |
| Non-OECD Member with No CRC | 100 |
| Sovereign Default | 150 |
(ii) A Board-regulated institution must assign a 20 percent risk weight to an exposure to a foreign bank whose home country is a member of the OECD and does not have a CRC.
(iii) A Board-regulated institution must assign a 20 percent risk-weight to an exposure that is a self-liquidating, trade-related contingent item that arises from the movement of goods and that has a maturity of three months or less to a foreign bank whose home country has a CRC of 0, 1, 2, or 3, or is an OECD member with no CRC.
(iv) A Board-regulated institution must assign a 100 percent risk weight to an exposure to a foreign bank whose home country is not a member of the OECD and does not have a CRC, with the exception of self-liquidating, trade-related contingent items that arise from the movement of goods, and that have a maturity of three months or less, which may be assigned a 20 percent risk weight.
(v) A Board-regulated institution must assign a 150 percent risk weight to an exposure to a foreign bank immediately upon determining that an event of sovereign default has occurred in the bank’s home country, or if an event of sovereign default has occurred in the foreign bank’s home country during the previous five years.
(3) A Board-regulated institution must assign a 100 percent risk weight to an exposure to a financial institution if the exposure may be included in that financial institution’s capital unless the exposure is:
(i) An equity exposure;
(ii) A significant investment in the capital of an unconsolidated financial institution in the form of common stock pursuant to § 217.22(d)(2)(i)(c);
(iii) Deducted from regulatory capital under § 217.22; or
(iv) Subject to a 150 percent risk weight under paragraph (d)(2)(iv) or Table 2 of paragraph (d)(2) of this section.
(e) Exposures to public sector entities (PSEs)—(1) Exposures to U.S. PSEs. (i) A Board-regulated institution must assign a 20 percent risk weight to a general obligation exposure to a PSE that is organized under the laws of the United States or any state or political subdivision thereof.
(ii) A Board-regulated institution must assign a 50 percent risk weight to a revenue obligation exposure to a PSE that is organized under the laws of the United States or any state or political subdivision thereof.
(2) Exposures to foreign PSEs. (i) Except as provided in paragraphs (e)(1) and (e)(3) of this section, a Board-regulated institution must assign a risk weight to a general obligation exposure to a PSE, in accordance with Table 3 to § 217.32, based on the CRC that corresponds to the PSE’s home country or the OECD membership status of the PSE’s home country if there is no CRC applicable to the PSE’s home country.
(ii) Except as provided in paragraphs (e)(1) and (e)(3) of this section, a Board-regulated institution must assign a risk weight to a revenue obligation exposure to a PSE, in accordance with Table 4 to § 217.32, based on the CRC that corresponds to the PSE’s home country; or the OECD membership status of the PSE’s home country if there is no CRC applicable to the PSE’s home country.
(3) A Board-regulated institution may assign a lower risk weight than would otherwise apply under Tables 3 or 4 to § 217.32 to an exposure to a foreign PSE if:
(i) The PSE’s home country supervisor allows banks under its jurisdiction to assign a lower risk weight to such exposures; and
(ii) The risk weight is not lower than the risk weight that corresponds to the PSE’s home country in accordance with Table 1 to § 217.32.
Table 3 to § 217.32—Risk Weights for Non-U.S. PSE General Obligations
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 20 |
| 2 | 50 |
| 3 | 100 |
| 4-7 | 150 |
| OECD Member with No CRC | 20 |
| Non-OECD Member with No CRC | 100 |
| Sovereign Default | 150 |
Table 4 to § 217.32—Risk Weights for Non-U.S. PSE Revenue Obligations
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 50 |
| 2-3 | 100 |
| 4-7 | 150 |
| OECD Member with No CRC | 50 |
| Non-OECD Member with No CRC | 100 |
| Sovereign Default | 150 |
(4) Exposures to PSEs from an OECD member sovereign with no CRC. (i) A Board-regulated institution must assign a 20 percent risk weight to a general obligation exposure to a PSE whose home country is an OECD member sovereign with no CRC.
(ii) A Board-regulated institution must assign a 50 percent risk weight to a revenue obligation exposure to a PSE whose home country is an OECD member sovereign with no CRC.
(5) Exposures to PSEs whose home country is not an OECD member sovereign with no CRC. A Board-regulated institution must assign a 100 percent risk weight to an exposure to a PSE whose home country is not a member of the OECD and does not have a CRC.
(6) A Board-regulated institution must assign a 150 percent risk weight to a PSE exposure immediately upon determining that an event of sovereign default has occurred in a PSE’s home country or if an event of sovereign default has occurred in the PSE’s home country during the previous five years.
(f) Corporate exposures. (1) A Board-regulated institution must assign a 100 percent risk weight to all its corporate exposures, except as provided in paragraphs (f)(2) and (f)(3) of this section.
(2) A Board-regulated institution must assign a 2 percent risk weight to an exposure to a QCCP arising from the Board-regulated institution posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 217.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a QCCP arising from the Board-regulated institution posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 217.35(b)(3)(i)(B).
(3) A Board-regulated institution must assign a 2 percent risk weight to an exposure to a QCCP arising from the Board-regulated institution posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 217.35(c)(3)(i).
(g) Residential mortgage exposures. (1) A Board-regulated institution must assign a 50 percent risk weight to a first-lien residential mortgage exposure that:
(i) Is secured by a property that is either owner-occupied or rented;
(ii) Is made in accordance with prudent underwriting standards, including relating to the loan amount as a percent of the appraised value of the property; A Board-regulated institution must base all estimates of a property’s value on an appraisal or evaluation of the property that satisfies subpart E of 12 CFR part 208.
(iii) Is not 90 days or more past due or carried in nonaccrual status; and
(iv) Is not restructured or modified.
(2) A Board-regulated institution must assign a 100 percent risk weight to a first-lien residential mortgage exposure that does not meet the criteria in paragraph (g)(1) of this section, and to junior-lien residential mortgage exposures.
(3) For the purpose of this paragraph (g), if a Board-regulated institution holds the first-lien and junior-lien(s) residential mortgage exposures, and no other party holds an intervening lien, the Board-regulated institution must combine the exposures and treat them as a single first-lien residential mortgage exposure.
(4) A loan modified or restructured solely pursuant to the U.S. Treasury’s Home Affordable Mortgage Program is not modified or restructured for purposes of this section.
(h) Pre-sold construction loans. A Board-regulated institution must assign a 50 percent risk weight to a pre-sold construction loan unless the purchase contract is cancelled, in which case a Board-regulated institution must assign a 100 percent risk weight.
(i) Statutory multifamily mortgages. A Board-regulated institution must assign a 50 percent risk weight to a statutory multifamily mortgage.
(j) High-volatility commercial real estate (HVCRE) exposures. A Board-regulated institution must assign a 150 percent risk weight to an HVCRE exposure.
(k) Past due exposures. Except for an exposure to a sovereign entity or a residential mortgage exposure or a policy loan, if an exposure is 90 days or more past due or on nonaccrual:
(1) A Board-regulated institution must assign a 150 percent risk weight to the portion of the exposure that is not guaranteed or that is unsecured;
(2) A Board-regulated institution may assign a risk weight to the guaranteed portion of a past due exposure based on the risk weight that applies under § 217.36 if the guarantee or credit derivative meets the requirements of that section; and
(3) A Board-regulated institution may assign a risk weight to the collateralized portion of a past due exposure based on the risk weight that applies under § 217.37 if the collateral meets the requirements of that section.
(l) Other assets. (1)(i) A bank holding company or savings and loan holding company must assign a zero percent risk weight to cash owned and held in all offices of subsidiary depository institutions or in transit, and to gold bullion held in a subsidiary depository institution’s own vaults, or held in another depository institution’s vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities.
(ii) A state member bank must assign a zero percent risk weight to cash owned and held in all offices of the state member bank or in transit; to gold bullion held in the state member bank’s own vaults or held in another depository institution’s vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities; and to exposures that arise from the settlement of cash transactions (such as equities, fixed income, spot foreign exchange and spot commodities) with a central counterparty where there is no assumption of ongoing counterparty credit risk by the central counterparty after settlement of the trade and associated default fund contributions.
(2) A Board-regulated institution must assign a 20 percent risk weight to cash items in the process of collection.
(3) A Board-regulated institution must assign a 100 percent risk weight to DTAs arising from temporary differences that the Board-regulated institution could realize through net operating loss carrybacks.
(4) A Board-regulated institution must assign a 250 percent risk weight to the portion of each of the following items to the extent it is not deducted from common equity tier 1 capital pursuant to § 217.22(d):
(i) MSAs; and
(ii) DTAs arising from temporary differences that the Board-regulated institution could not realize through net operating loss carrybacks.
(5) A Board-regulated institution must assign a 100 percent risk weight to all assets not specifically assigned a different risk weight under this subpart and that are not deducted from tier 1 or tier 2 capital pursuant to § 217.22.
(6) Notwithstanding the requirements of this section, a state member bank may assign an asset that is not included in one of the categories provided in this section to the risk weight category applicable under the capital rules applicable to bank holding companies and savings and loan holding companies under this part, provided that all of the following conditions apply:
(i) The Board-regulated institution is not authorized to hold the asset under applicable law other than debt previously contracted or similar authority; and
(ii) The risks associated with the asset are substantially similar to the risks of assets that are otherwise assigned to a risk weight category of less than 100 percent under this subpart.
(m) Insurance assets—(1) Assets held in a separate account. (i) A bank holding company or savings and loan holding company must risk-weight the individual assets held in a separate account that does not qualify as a non-guaranteed separate account as if the individual assets were held directly by the bank holding company or savings and loan holding company.
(ii) A bank holding company or savings and loan holding company must assign a zero percent risk weight to an asset that is held in a non-guaranteed separate account.
(2) Policy loans. A bank holding company or savings and loan holding company must assign a 20 percent risk weight to a policy loan.
§ 217.33 Off-balance sheet exposures.
(a) General. (1) A Board-regulated institution must calculate the exposure amount of an off-balance sheet exposure using the credit conversion factors (CCFs) in paragraph (b) of this section.
(2) Where a Board-regulated institution commits to provide a commitment, the Board-regulated institution may apply the lower of the two applicable CCFs.
(3) Where a Board-regulated institution provides a commitment structured as a syndication or participation, the Board-regulated institution is only required to calculate the exposure amount for its pro rata share of the commitment.
(4) Where a Board-regulated institution provides a commitment, enters into a repurchase agreement, or provides a credit-enhancing representation and warranty, and such commitment, repurchase agreement, or credit-enhancing representation and warranty is not a securitization exposure, the exposure amount shall be no greater than the maximum contractual amount of the commitment, repurchase agreement, or credit-enhancing representation and warranty, as applicable.
(b) Credit conversion factors—(1) Zero percent CCF. A Board-regulated institution must apply a zero percent CCF to the unused portion of a commitment that is unconditionally cancelable by the Board-regulated institution.
(2) 20 percent CCF. A Board-regulated institution must apply a 20 percent CCF to the amount of:
(i) Commitments with an original maturity of one year or less that are not unconditionally cancelable by the Board-regulated institution; and
(ii) Self-liquidating, trade-related contingent items that arise from the movement of goods, with an original maturity of one year or less.
(3) 50 percent CCF. A Board-regulated institution must apply a 50 percent CCF to the amount of:
(i) Commitments with an original maturity of more than one year that are not unconditionally cancelable by the Board-regulated institution; and
(ii) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit.
(4) 100 percent CCF. A Board-regulated institution must apply a 100 percent CCF to the amount of the following off-balance-sheet items and other similar transactions:
(i) Guarantees;
(ii) Repurchase agreements (the off-balance sheet component of which equals the sum of the current fair values of all positions the Board-regulated institution has sold subject to repurchase);
(iii) Credit-enhancing representations and warranties that are not securitization exposures;
(iv) Off-balance sheet securities lending transactions (the off-balance sheet component of which equals the sum of the current fair values of all positions the Board-regulated institution has lent under the transaction);
(v) Off-balance sheet securities borrowing transactions (the off-balance sheet component of which equals the sum of the current fair values of all non-cash positions the Board-regulated institution has posted as collateral under the transaction);
(vi) Financial standby letters of credit; and
(vii) Forward agreements.
§ 217.34 Derivative contracts.
(a) Exposure amount for derivative contracts—(1) Board-regulated institution that is not an advanced approaches Board-regulated institution. (i) A Board-regulated institution that is not an advanced approaches Board-regulated institution must use the current exposure methodology (CEM) described in paragraph (b) of this section to calculate the exposure amount for all its OTC derivative contracts, unless the Board-regulated institution makes the election provided in paragraph (a)(1)(ii) of this section.
(ii) A Board-regulated institution that is not an advanced approaches Board-regulated institution may elect to calculate the exposure amount for all its OTC derivative contracts under the standardized approach for counterparty credit risk (SA-CCR) in § 217.132(c) by notifying the Board, rather than calculating the exposure amount for all its derivative contracts using CEM. A Board-regulated institution that elects under this paragraph (a)(1)(ii) to calculate the exposure amount for its OTC derivative contracts under SA-CCR must apply the treatment of cleared transactions under § 217.133 to its derivative contracts that are cleared transactions and to all default fund contributions associated with such derivative contracts, rather than applying § 217.35. A Board-regulated institution that is not an advanced approaches Board-regulated institution must use the same methodology to calculate the exposure amount for all its derivative contracts and, if a Board-regulated institution has elected to use SA-CCR under this paragraph (a)(1)(ii), the Board-regulated institution may change its election only with prior approval of the Board.
(2) Advanced approaches Board-regulated institution. An advanced approaches Board-regulated institution must calculate the exposure amount for all its derivative contracts using SA-CCR in § 217.132(c) for purposes of standardized total risk-weighted assets. An advanced approaches Board-regulated institution must apply the treatment of cleared transactions under § 217.133 to its derivative contracts that are cleared transactions and to all default fund contributions associated with such derivative contracts for purposes of standardized total risk-weighted assets.
(b) Current exposure methodology exposure amount—(1) Single OTC derivative contract. Except as modified by paragraph (c) of this section, the exposure amount for a single OTC derivative contract that is not subject to a qualifying master netting agreement is equal to the sum of the Board-regulated institution’s current credit exposure and potential future credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a single OTC derivative contract is the greater of the fair value of the OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract, including an OTC derivative contract with a negative fair value, is calculated by multiplying the notional principal amount of the OTC derivative contract by the appropriate conversion factor in Table 1 to this section.
(B) For purposes of calculating either the PFE under this paragraph (b)(1)(ii) or the gross PFE under paragraph (b)(2)(ii)(A) of this section for exchange rate contracts and other similar contracts in which the notional principal amount is equivalent to the cash flows, notional principal amount is the net receipts to each party falling due on each value date in each currency.
(C) For an OTC derivative contract that does not fall within one of the specified categories in Table 1 to this section, the PFE must be calculated using the appropriate “other” conversion factor.
(D) A Board-regulated institution must use an OTC derivative contract’s effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC derivative contract) rather than the apparent or stated notional principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is capped at the net present value of the amount of unpaid premiums.
Table 1 to § 217.34—Conversion Factor Matrix for Derivative Contracts
1
| Remaining maturity 2 | Interest rate | Foreign exchange rate and gold | Credit (investment grade reference asset) 3 | Credit (non-investment-grade reference asset) | Equity | Precious metals (except gold) | Other |
|---|---|---|---|---|---|---|---|
| One year or less | 0.00 | 0.01 | 0.05 | 0.10 | 0.06 | 0.07 | 0.10 |
| Greater than one year and less than or equal to five years | 0.005 | 0.05 | 0.05 | 0.10 | 0.08 | 0.07 | 0.12 |
| Greater than five years | 0.015 | 0.075 | 0.05 | 0.10 | 0.10 | 0.08 | 0.15 |
1 For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
3 A Board-regulated institution must use the column labeled “Credit (investment-grade reference asset)” for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A Board-regulated institution must use the column labeled “Credit (non-investment-grade reference asset)” for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying master netting agreement. Except as modified by paragraph (c) of this section, the exposure amount for multiple OTC derivative contracts subject to a qualifying master netting agreement is equal to the sum of the net current credit exposure and the adjusted sum of the PFE amounts for all OTC derivative contracts subject to the qualifying master netting agreement.
(i) Net current credit exposure. The net current credit exposure is the greater of the net sum of all positive and negative fair values of the individual OTC derivative contracts subject to the qualifying master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE amounts, Anet, is calculated as Anet = (0.4 × Agross) + (0.6 × NGR × Agross), where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as determined under paragraph (b)(1)(ii) of this section for each individual derivative contract subject to the qualifying master netting agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (b)(1)(i) of this section) of all individual derivative contracts subject to the qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC derivative contracts. (1) A Board-regulated institution using CEM under paragraph (b) of this section may recognize the credit risk mitigation benefits of financial collateral that secures an OTC derivative contract or multiple OTC derivative contracts subject to a qualifying master netting agreement (netting set) by using the simple approach in § 217.37(b).
(2) As an alternative to the simple approach, a Board-regulated institution using CEM under paragraph (b) of this section may recognize the credit risk mitigation benefits of financial collateral that secures such a contract or netting set if the financial collateral is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement by applying a risk weight to the uncollateralized portion of the exposure, after adjusting the exposure amount calculated under paragraph (b)(1) or (2) of this section using the collateral haircut approach in § 217.37(c). The Board-regulated institution must substitute the exposure amount calculated under paragraph (b)(1) or (2) of this section for ΣE in the equation in § 217.37(c)(2).
(d) Counterparty credit risk for credit derivatives—(1) Protection purchasers. A Board-regulated institution that purchases a credit derivative that is recognized under § 217.36 as a credit risk mitigant for an exposure that is not a covered position under subpart F of this part is not required to compute a separate counterparty credit risk capital requirement under this subpart provided that the Board-regulated institution does so consistently for all such credit derivatives. The Board-regulated institution must either include all or exclude all such credit derivatives that are subject to a qualifying master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes.
(2) Protection providers. (i) A Board-regulated institution that is the protection provider under a credit derivative must treat the credit derivative as an exposure to the underlying reference asset. The Board-regulated institution is not required to compute a counterparty credit risk capital requirement for the credit derivative under this subpart, provided that this treatment is applied consistently for all such credit derivatives. The Board-regulated institution must either include all or exclude all such credit derivatives that are subject to a qualifying master netting agreement from any measure used to determine counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant counterparties for risk-based capital purposes unless the Board-regulated institution is treating the credit derivative as a covered position under subpart F of this part, in which case the Board-regulated institution must compute a supplemental counterparty credit risk capital requirement under this section.
(e) Counterparty credit risk for equity derivatives. (1) A Board-regulated institution must treat an equity derivative contract as an equity exposure and compute a risk-weighted asset amount for the equity derivative contract under §§ 217.51 through 217.53 (unless the Board-regulated institution is treating the contract as a covered position under subpart F of this part).
(2) In addition, the Board-regulated institution must also calculate a risk-based capital requirement for the counterparty credit risk of an equity derivative contract under this section if the Board-regulated institution is treating the contract as a covered position under subpart F of this part.
(3) If the Board-regulated institution risk weights the contract under the Simple Risk-Weight Approach (SRWA) in § 217.52, the Board-regulated institution may choose not to hold risk-based capital against the counterparty credit risk of the equity derivative contract, as long as it does so for all such contracts. Where the equity derivative contracts are subject to a qualified master netting agreement, a Board-regulated institution using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure.
(f) Clearing member Board-regulated institution’s exposure amount. The exposure amount of a clearing member Board-regulated institution using CEM under paragraph (b) of this section for a client-facing derivative transaction or netting set of client-facing derivative transactions equals the exposure amount calculated according to paragraph (b)(1) or (2) of this section multiplied by the scaling factor the square root of
Additionally, the Board may require the Board-regulated institution to set a longer holding period if the Board determines that a longer period is appropriate due to the nature, structure, or characteristics of the transaction or is commensurate with the risks associated with the transaction.
§ 217.35 Cleared transactions.
(a) General requirements—(1) Clearing member clients. A Board-regulated institution that is a clearing member client must use the methodologies described in paragraph (b) of this section to calculate risk-weighted assets for a cleared transaction.
(2) Clearing members. A Board-regulated institution that is a clearing member must use the methodologies described in paragraph (c) of this section to calculate its risk-weighted assets for a cleared transaction and paragraph (d) of this section to calculate its risk-weighted assets for its default fund contribution to a CCP.
(3) Alternate requirements. Notwithstanding any other provision of this section, an advanced approaches Board-regulated institution or a Board-regulated institution that is not an advanced approaches Board-regulated institution and that has elected to use SA-CCR under § 217.34(a)(1) must apply § 217.133 to its derivative contracts that are cleared transactions rather than this section.
(b) Clearing member client Board-regulated institutions—(1) Risk-weighted assets for cleared transactions. (i) To determine the risk-weighted asset amount for a cleared transaction, a Board-regulated institution that is a clearing member client must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(2) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client Board-regulated institution’s total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is either a derivative contract or a netting set of derivative contracts, the trade exposure amount equals:
(A) The exposure amount for the derivative contract or netting set of derivative contracts, calculated using the methodology used to calculate exposure amount for OTC derivative contracts under § 217.34; plus
(B) The fair value of the collateral posted by the clearing member client Board-regulated institution and held by the CCP, clearing member, or custodian in a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, the trade exposure amount equals:
(A) The exposure amount for the repo-style transaction calculated using the methodologies under § 217.37(c); plus
(B) The fair value of the collateral posted by the clearing member client Board-regulated institution and held by the CCP, clearing member, or custodian in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction with a QCCP, a clearing member client Board-regulated institution must apply a risk weight of:
(A) 2 percent if the collateral posted by the Board-regulated institution to the QCCP or clearing member is subject to an arrangement that prevents any losses to the clearing member client Board-regulated institution due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member client Board-regulated institution has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding and enforceable under the law of the relevant jurisdictions; or
(B) 4 percent if the requirements of § 217.35(b)(3)(A) are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client Board-regulated institution must apply the risk weight appropriate for the CCP according to this subpart D.
(4) Collateral. (i) Notwithstanding any other requirements in this section, collateral posted by a clearing member client Board-regulated institution that is held by a custodian (in its capacity as custodian) in a manner that is bankruptcy remote from the CCP, clearing member, and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.
(ii) A clearing member client Board-regulated institution must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member, or custodian in connection with a cleared transaction in accordance with the requirements under this subpart D.
(c) Clearing member Board-regulated institutions—(1) Risk-weighted assets for cleared transactions.
(i) To determine the risk-weighted asset amount for a cleared transaction, a clearing member Board-regulated institution must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (c)(2) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (c)(3) of this section.
(ii) A clearing member Board-regulated institution’s total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. A clearing member Board-regulated institution must calculate its trade exposure amount for a cleared transaction as follows:
(i) For a cleared transaction that is either a derivative contract or a netting set of derivative contracts, the trade exposure amount equals:
(A) The exposure amount for the derivative contract, calculated using the methodology to calculate exposure amount for OTC derivative contracts under § 217.34; plus
(B) The fair value of the collateral posted by the clearing member Board-regulated institution and held by the CCP in a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals:
(A) The exposure amount for repo-style transactions calculated using methodologies under § 217.37(c); plus
(B) The fair value of the collateral posted by the clearing member Board-regulated institution and held by the CCP in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weight. (i) A clearing member Board-regulated institution must apply a risk weight of 2 percent to the trade exposure amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member Board-regulated institution must apply the risk weight appropriate for the CCP according to this subpart D.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, a clearing member Board-regulated institution may apply a risk weight of zero percent to the trade exposure amount for a cleared transaction with a CCP where the clearing member Board-regulated institution is acting as a financial intermediary on behalf of a clearing member client, the transaction offsets another transaction that satisfies the requirements set forth in § 217.3(a), and the clearing member Board-regulated institution is not obligated to reimburse the clearing member client in the event of the CCP default.
(4) Collateral. (i) Notwithstanding any other requirement in this section, collateral posted by a clearing member Board-regulated institution that is held by a custodian in a manner that is bankruptcy remote from the CCP is not subject to a capital requirement under this section.
(ii) A clearing member Board-regulated institution must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member, or a custodian in connection with a cleared transaction in accordance with requirements under this subpart D.
(d) Default fund contributions—(1) General requirement. A clearing member Board-regulated institution must determine the risk-weighted asset amount for a default fund contribution to a CCP at least quarterly, or more frequently if, in the opinion of the Board-regulated institution or the Board, there is a material change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to non-qualifying CCPs. A clearing member Board-regulated institution’s risk-weighted asset amount for default fund contributions to CCPs that are not QCCPs equals the sum of such default fund contributions multiplied by 1,250 percent, or an amount determined by the Board, based on factors such as size, structure and membership characteristics of the CCP and riskiness of its transactions, in cases where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to QCCPs. A clearing member Board-regulated institution’s risk-weighted asset amount for default fund contributions to QCCPs equals the sum of its capital requirement, K
(i) Method 1. The hypothetical capital requirement of a QCCP (K
(A) EBRM
(1) For purposes of this section, in calculating the exposure amount the Board-regulated institution may replace the formula provided in § 217.34(a)(2)(ii) with the following: Anet = (0.15 × Agross) + (0.85 × NGR × Agross); and
(2) For option derivative contracts that are cleared transactions, the PFE described in § 217.34(a)(1)(ii) must be adjusted by multiplying the notional principal amount of the derivative contract by the appropriate conversion factor in Table 1 to § 217.34 and the absolute value of the option’s delta, that is, the ratio of the change in the value of the derivative contract to the corresponding change in the price of the underlying asset.
(3) For repo-style transactions, when applying § 217.37(c)(2), the Board-regulated institution must use the methodology in § 217.37(c)(3);
(B) VM
(C) IM
(D) DF
(E) RW = 20 percent, except when the Board has determined that a higher risk weight is more appropriate based on the specific characteristics of the QCCP and its clearing members; and
(F) Where a QCCP has provided its K
(ii) For a Board-regulated institution that is a clearing member of a QCCP with a default fund supported by funded commitments, K
Subscripts 1 and 2 denote the clearing members with the two largest A
(B) N = the number of clearing members in the QCCP;
(C) DF
(D) DF
(E) DF = DF
(1) DF
(2) DF
(3) K*
(B) For a Board-regulated institution that is a clearing member of a QCCP with a default fund supported by unfunded commitments and is unable to calculate K
(1) IM
(2) IM
(3)K*
(iv) Method 2. A clearing member Board-regulated institution’s risk-weighted asset amount for its default fund contribution to a QCCP, RWA
(A) TE = the Board-regulated institution’s trade exposure amount to the QCCP, calculated according to section 35(c)(2);
(B) DF = the funded portion of the Board-regulated institution’s default fund contribution to the QCCP.
(4) Total risk-weighted assets for default fund contributions. Total risk-weighted assets for default fund contributions is the sum of a clearing member Board-regulated institution’s risk-weighted assets for all of its default fund contributions to all CCPs of which the Board-regulated institution is a clearing member.
§ 217.36 Guarantees and credit derivatives: substitution treatment.
(a) Scope—(1) General. A Board-regulated institution may recognize the credit risk mitigation benefits of an eligible guarantee or eligible credit derivative by substituting the risk weight associated with the protection provider for the risk weight assigned to an exposure, as provided under this section.
(2) This section applies to exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the Board-regulated institution and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative.
(3) Exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) generally are securitization exposures subject to §§ 217.41 through 217.45.
(4) If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in this section, a Board-regulated institution may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-weighted asset amount for each separate exposure as described in paragraph (c) of this section.
(5) If a single eligible guarantee or eligible credit derivative covers multiple hedged exposures described in paragraph (a)(2) of this section, a Board-regulated institution must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-weighted asset amount for each exposure as described in paragraph (c) of this section.
(b) Rules of recognition. (1) A Board-regulated institution may only recognize the credit risk mitigation benefits of eligible guarantees and eligible credit derivatives.
(2) A Board-regulated institution may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative’s reference exposure used for determining the derivative’s cash settlement value, deliverable obligation, or occurrence of a credit event if:
(i) The reference exposure ranks pari passu with, or is subordinated to, the hedged exposure; and
(ii) The reference exposure and the hedged exposure are to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to ensure payments under the credit derivative are triggered when the obligated party of the hedged exposure fails to pay under the terms of the hedged exposure.
(c) Substitution approach—(1) Full coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is greater than or equal to the exposure amount of the hedged exposure, a Board-regulated institution may recognize the guarantee or credit derivative in determining the risk-weighted asset amount for the hedged exposure by substituting the risk weight applicable to the guarantor or credit derivative protection provider under this subpart D for the risk weight assigned to the exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is less than the exposure amount of the hedged exposure, the Board-regulated institution must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize the credit risk mitigation benefit of the guarantee or credit derivative.
(i) The Board-regulated institution may calculate the risk-weighted asset amount for the protected exposure under this subpart D, where the applicable risk weight is the risk weight applicable to the guarantor or credit derivative protection provider.
(ii) The Board-regulated institution must calculate the risk-weighted asset amount for the unprotected exposure under this subpart D, where the applicable risk weight is that of the unprotected portion of the hedged exposure.
(iii) The treatment provided in this section is applicable when the credit risk of an exposure is covered on a partial pro rata basis and may be applicable when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraphs (d), (e), or (f) of this section.
(d) Maturity mismatch adjustment. (1) A Board-regulated institution that recognizes an eligible guarantee or eligible credit derivative in determining the risk-weighted asset amount for a hedged exposure must adjust the effective notional amount of the credit risk mitigant to reflect any maturity mismatch between the hedged exposure and the credit risk mitigant.
(2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligated party of the hedged exposure is scheduled to fulfil its obligation on the hedged exposure. If a credit risk mitigant has embedded options that may reduce its term, the Board-regulated institution (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the Board-regulated institution (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the Board-regulated institution to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant.
(4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to one year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the Board-regulated institution must apply the following adjustment to reduce the effective notional amount of the credit risk mitigant: Pm = E × (t−0.25)/(T−0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant, adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = the lesser of T or the residual maturity of the credit risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the hedged exposure, expressed in years.
(e) Adjustment for credit derivatives without restructuring as a credit event. If a Board-regulated institution recognizes an eligible credit derivative that does not include as a credit event a restructuring of the hedged exposure involving forgiveness or postponement of principal, interest, or fees that results in a credit loss event (that is, a charge-off, specific provision, or other similar debit to the profit and loss account), the Board-regulated institution must apply the following adjustment to reduce the effective notional amount of the credit derivative: Pr = Pm × 0.60, where:
(1) Pr = effective notional amount of the credit risk mitigant, adjusted for lack of restructuring event (and maturity mismatch, if applicable); and
(2) Pm = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch, if applicable).
(f) Currency mismatch adjustment. (1) If a Board-regulated institution recognizes an eligible guarantee or eligible credit derivative that is denominated in a currency different from that in which the hedged exposure is denominated, the Board-regulated institution must apply the following formula to the effective notional amount of the guarantee or credit derivative: Pc = Pr × (1−H
(i) Pc = effective notional amount of the credit risk mitigant, adjusted for currency mismatch (and maturity mismatch and lack of restructuring event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch and lack of restructuring event, if applicable); and
(iii) H
(2) A Board-regulated institution must set H
(3) A Board-regulated institution must adjust H
§ 217.37 Collateralized transactions.
(a) General. (1) To recognize the risk-mitigating effects of financial collateral, a Board-regulated institution may use:
(i) The simple approach in paragraph (b) of this section for any exposure; or
(ii) The collateral haircut approach in paragraph (c) of this section for repo-style transactions, eligible margin loans, collateralized derivative contracts, and single-product netting sets of such transactions.
(2) A Board-regulated institution may use any approach described in this section that is valid for a particular type of exposure or transaction; however, it must use the same approach for similar exposures or transactions.
(b) The simple approach—(1) General requirements. (i) A Board-regulated institution may recognize the credit risk mitigation benefits of financial collateral that secures any exposure.
(ii) To qualify for the simple approach, the financial collateral must meet the following requirements:
(A) The collateral must be subject to a collateral agreement for at least the life of the exposure;
(B) The collateral must be revalued at least every six months; and
(C) The collateral (other than gold) and the exposure must be denominated in the same currency.
(2) Risk weight substitution. (i) A Board-regulated institution may apply a risk weight to the portion of an exposure that is secured by the fair value of financial collateral (that meets the requirements of paragraph (b)(1) of this section) based on the risk weight assigned to the collateral under this subpart D. For repurchase agreements, reverse repurchase agreements, and securities lending and borrowing transactions, the collateral is the instruments, gold, and cash the Board-regulated institution has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the transaction. Except as provided in paragraph (b)(3) of this section, the risk weight assigned to the collateralized portion of the exposure may not be less than 20 percent.
(ii) A Board-regulated institution must apply a risk weight to the unsecured portion of the exposure based on the risk weight applicable to the exposure under this subpart.
(3) Exceptions to the 20 percent risk-weight floor and other requirements. Notwithstanding paragraph (b)(2)(i) of this section:
(i) A Board-regulated institution may assign a zero percent risk weight to an exposure to an OTC derivative contract that is marked-to-market on a daily basis and subject to a daily margin maintenance requirement, to the extent the contract is collateralized by cash on deposit.
(ii) A Board-regulated institution may assign a 10 percent risk weight to an exposure to an OTC derivative contract that is marked-to-market daily and subject to a daily margin maintenance requirement, to the extent that the contract is collateralized by an exposure to a sovereign that qualifies for a zero percent risk weight under § 217.32.
(iii) A Board-regulated institution may assign a zero percent risk weight to the collateralized portion of an exposure where:
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure to a sovereign that qualifies for a zero percent risk weight under § 217.32, and the Board-regulated institution has discounted the fair value of the collateral by 20 percent.
(c) Collateral haircut approach—(1) General. A Board-regulated institution may recognize the credit risk mitigation benefits of financial collateral that secures an eligible margin loan, repo-style transaction, collateralized derivative contract, or single-product netting set of such transactions, and of any collateral that secures a repo-style transaction that is included in the Board-regulated institution’s VaR-based measure under subpart F of this part by using the collateral haircut approach in this section. A Board-regulated institution may use the standard supervisory haircuts in paragraph (c)(3) of this section or, with prior written approval of the Board, its own estimates of haircuts according to paragraph (c)(4) of this section.
(2) Exposure amount equation. A Board-regulated institution must determine the exposure amount for an eligible margin loan, repo-style transaction, collateralized derivative contract, or a single-product netting set of such transactions by setting the exposure amount equal to max {0, [(ΣE − ΣC) + Σ(Es × Hs) + Σ(Efx × Hfx)]}, where:
(i)(A) For eligible margin loans and repo-style transactions and netting sets thereof, ΣE equals the value of the exposure (the sum of the current fair values of all instruments, gold, and cash the Board-regulated institution has lent, sold subject to repurchase, or posted as collateral to the counterparty under the transaction (or netting set)); and
(B) For collateralized derivative contracts and netting sets thereof, ΣE equals the exposure amount of the OTC derivative contract (or netting set) calculated under § 217.34(b)(1) or (2).
(ii) ΣC equals the value of the collateral (the sum of the current fair values of all instruments, gold and cash the Board-regulated institution has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the transaction (or netting set));
(iii) Es equals the absolute value of the net position in a given instrument or in gold (where the net position in the instrument or gold equals the sum of the current fair values of the instrument or gold the Board-regulated institution has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current fair values of that same instrument or gold the Board-regulated institution has borrowed, purchased subject to resale, or taken as collateral from the counterparty);
(iv) Hs equals the market price volatility haircut appropriate to the instrument or gold referenced in Es;
(v) Efx equals the absolute value of the net position of instruments and cash in a currency that is different from the settlement currency (where the net position in a given currency equals the sum of the current fair values of any instruments or cash in the currency the Board-regulated institution has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current fair values of any instruments or cash in the currency the Board-regulated institution has borrowed, purchased subject to resale, or taken as collateral from the counterparty); and
(vi) Hfx equals the haircut appropriate to the mismatch between the currency referenced in Efx and the settlement currency.
(3) Standard supervisory haircuts. (i) A Board-regulated institution must use the haircuts for market price volatility (Hs) provided in Table 1 to § 217.37, as adjusted in certain circumstances in accordance with the requirements of paragraphs (c)(3)(iii) and (iv) of this section.
Table 1 to § 217.37—Standard Supervisory Market Price Volatility Haircuts
1
| Residual maturity | Haircut (in percent) assigned based on: | Investment grade securitization exposures (in percent) | |||||
|---|---|---|---|---|---|---|---|
| Sovereign issuers risk weight under § 217.32 (in percent) 2 | Non-sovereign issuers risk weight under § 217.32 (in percent) | ||||||
| Zero | 20 or 50 | 100 | 20 | 50 | 100 | ||
| Less than or equal to 1 year | 0.5 | 1.0 | 15.0 | 1.0 | 2.0 | 4.0 | 4.0 |
| Greater than 1 year and less than or equal to 5 years | 2.0 | 3.0 | 15.0 | 4.0 | 6.0 | 8.0 | 12.0 |
| Greater than 5 years | 4.0 | 6.0 | 15.0 | 8.0 | 12.0 | 16.0 | 24.0 |
| Main index equities (including convertible bonds) and gold | 15.0 | ||||||
| Other publicly traded equities (including convertible bonds) | 25.0 | ||||||
| Mutual funds | Highest haircut applicable to any security in which the fund can invest. | ||||||
| Cash collateral held | Zero. | ||||||
| Other exposure types | 25.0 | ||||||
1 The market price volatility haircuts in Table 1 to § 217.37 are based on a 10 business-day holding period.
2 Includes a foreign PSE that receives a zero percent risk weight.
(ii) For currency mismatches, a Board-regulated institution must use a haircut for foreign exchange rate volatility (Hfx) of 8.0 percent, as adjusted in certain circumstances under paragraphs (c)(3)(iii) and (iv) of this section.
(iii) For repo-style transactions and client-facing derivative transactions, a Board-regulated institution may multiply the standard supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section by the square root of
(iv) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a Board-regulated institution must adjust the supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section upward on the basis of a holding period of twenty business days for the following quarter except in the calculation of the exposure amount for purposes of § 217.35. If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, a Board-regulated institution must adjust the supervisory haircuts upward on the basis of a holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the Board-regulated institution must adjust the supervisory haircuts upward for that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set. A Board-regulated institution must adjust the standard supervisory haircuts upward using the following formula:
(A) T
(B) H
(C) T
(v) If the instrument a Board-regulated institution has lent, sold subject to repurchase, or posted as collateral does not meet the definition of financial collateral, the Board-regulated institution must use a 25.0 percent haircut for market price volatility (H
(4) Own internal estimates for haircuts. With the prior written approval of the Board, a Board-regulated institution may calculate haircuts (Hs and Hfx) using its own internal estimates of the volatilities of market prices and foreign exchange rates:
(i) To receive Board approval to use its own internal estimates, a Board-regulated institution must satisfy the following minimum standards:
(A) A Board-regulated institution must use a 99th percentile one-tailed confidence interval.
(B) The minimum holding period for a repo-style transaction and client-facing derivative transaction is five business days and for an eligible margin loan and a derivative contract other than a client-facing derivative transaction is ten business days except for transactions or netting sets for which paragraph (c)(4)(i)(C) of this section applies. When a Board-regulated institution calculates an own-estimates haircut on a T
(1) T
(2) T
(3) H
(C) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a Board-regulated institution must calculate the haircut using a minimum holding period of twenty business days for the following quarter except in the calculation of the exposure amount for purposes of § 217.35. If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, a Board-regulated institution must calculate the haircut using a minimum holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the Board-regulated institution must calculate the haircut for transactions in that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set.
(D) A Board-regulated institution is required to calculate its own internal estimates with inputs calibrated to historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate to the security or category of securities.
(E) A Board-regulated institution must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the Board-regulated institution’s own internal estimates for haircuts under this section and must be able to provide empirical support for the period used. The Board-regulated institution must obtain the prior approval of the Board for, and notify the Board if the Board-regulated institution makes any material changes to, these policies and procedures.
(F) Nothing in this section prevents the Board from requiring a Board-regulated institution to use a different period of significant financial stress in the calculation of own internal estimates for haircuts.
(G) A Board-regulated institution must update its data sets and calculate haircuts no less frequently than quarterly and must also reassess data sets and haircuts whenever market prices change materially.
(ii) With respect to debt securities that are investment grade, a Board-regulated institution may calculate haircuts for categories of securities. For a category of securities, the Board-regulated institution must calculate the haircut on the basis of internal volatility estimates for securities in that category that are representative of the securities in that category that the Board-regulated institution has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. In determining relevant categories, the Board-regulated institution must at a minimum take into account:
(A) The type of issuer of the security;
(B) The credit quality of the security;
(C) The maturity of the security; and
(D) The interest rate sensitivity of the security.
(iii) With respect to debt securities that are not investment grade and equity securities, a Board-regulated institution must calculate a separate haircut for each individual security.
(iv) Where an exposure or collateral (whether in the form of cash or securities) is denominated in a currency that differs from the settlement currency, the Board-regulated institution must calculate a separate currency mismatch haircut for its net position in each mismatched currency based on estimated volatilities of foreign exchange rates between the mismatched currency and the settlement currency.
(v) A Board-regulated institution’s own estimates of market price and foreign exchange rate volatilities may not take into account the correlations among securities and foreign exchange rates on either the exposure or collateral side of a transaction (or netting set) or the correlations among securities and foreign exchange rates between the exposure and collateral sides of the transaction (or netting set).
Risk-Weighted Assets for Unsettled Transactions
§ 217.38 Unsettled transactions.
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies.
(3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the market standard for the instrument underlying the transaction and equal to or less than five business days.
(4) Positive current exposure of a Board-regulated institution for a transaction is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the Board-regulated institution to the counterparty.
(b) Scope. This section applies to all transactions involving securities, foreign exchange instruments, and commodities that have a risk of delayed settlement or delivery. This section does not apply to:
(1) Cleared transactions that are marked-to-market daily and subject to daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style transactions;
(3) One-way cash payments on OTC derivative contracts; or
(4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts as provided in § 217.34).
(c) System-wide failures. In the case of a system-wide failure of a settlement, clearing system or central counterparty, the Board may waive risk-based capital requirements for unsettled and failed transactions until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. A Board-regulated institution must hold risk-based capital against any DvP or PvP transaction with a normal settlement period if the Board-regulated institution’s counterparty has not made delivery or payment within five business days after the settlement date. The Board-regulated institution must determine its risk-weighted asset amount for such a transaction by multiplying the positive current exposure of the transaction for the Board-regulated institution by the appropriate risk weight in Table 1 to § 217.38.
Table 1 to § 217.38—Risk Weights for Unsettled DvP and PvP Transactions
| Number of business days after contractual settlement date | Risk weight to be applied to positive current exposure (in percent) |
|---|---|
| From 5 to 15 | 100.0 |
| From 16 to 30 | 625.0 |
| From 31 to 45 | 937.5 |
| 46 or more | 1,250.0 |
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (1) A Board-regulated institution must hold risk-based capital against any non-DvP/non-PvP transaction with a normal settlement period if the Board-regulated institution has delivered cash, securities, commodities, or currencies to its counterparty but has not received its corresponding deliverables by the end of the same business day. The Board-regulated institution must continue to hold risk-based capital against the transaction until the Board-regulated institution has received its corresponding deliverables.
(2) From the business day after the Board-regulated institution has made its delivery until five business days after the counterparty delivery is due, the Board-regulated institution must calculate the risk-weighted asset amount for the transaction by treating the current fair value of the deliverables owed to the Board-regulated institution as an exposure to the counterparty and using the applicable counterparty risk weight under this subpart D.
(3) If the Board-regulated institution has not received its deliverables by the fifth business day after counterparty delivery was due, the Board-regulated institution must assign a 1,250 percent risk weight to the current fair value of the deliverables owed to the Board-regulated institution.
(f) Total risk-weighted assets for unsettled transactions. Total risk-weighted assets for unsettled transactions is the sum of the risk-weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP transactions.
§§ 217.39-217.40 [Reserved]
Risk-Weighted Assets for Securitization Exposures
§ 217.41 Operational requirements for securitization exposures.
(a) Operational criteria for traditional securitizations. A Board-regulated institution that transfers exposures it has originated or purchased to a securitization SPE or other third party in connection with a traditional securitization may exclude the exposures from the calculation of its risk-weighted assets only if each condition in this section is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any credit risk it retains in connection with the securitization. A Board-regulated institution that fails to meet these conditions must hold risk-based capital against the transferred exposures as if they had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the transaction. The conditions are:
(1) The exposures are not reported on the Board-regulated institution’s consolidated balance sheet under GAAP;
(2) The Board-regulated institution has transferred to one or more third parties credit risk associated with the underlying exposures;
(3) Any clean-up calls relating to the securitization are eligible clean-up calls; and
(4) The securitization does not:
(i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For synthetic securitizations, a Board-regulated institution may recognize for risk-based capital purposes the use of a credit risk mitigant to hedge underlying exposures only if each condition in this paragraph (b) is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any credit risk of the exposures it retains in connection with the synthetic securitization. A Board-regulated institution that fails to meet these conditions or chooses not to recognize the credit risk mitigant for purposes of this section must instead hold risk-based capital against the underlying exposures as if they had not been synthetically securitized. The conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral;
(ii) A guarantee that meets all criteria as set forth in the definition of “eligible guarantee” in § 217.2, except for the criteria in paragraph (3) of that definition; or
(iii) A credit derivative that meets all criteria as set forth in the definition of “eligible credit derivative” in § 217.2, except for the criteria in paragraph (3) of the definition of “eligible guarantee” in § 217.2.
(2) The Board-regulated institution transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
(ii) Require the Board-regulated institution to alter or replace the underlying exposures to improve the credit quality of the underlying exposures;
(iii) Increase the Board-regulated institution’s cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the Board-regulated institution in response to a deterioration in the credit quality of the underlying exposures; or
(v) Provide for increases in a retained first loss position or credit enhancement provided by the Board-regulated institution after the inception of the securitization;
(3) The Board-regulated institution obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible clean-up calls.
(c) Due diligence requirements for securitization exposures. (1) Except for exposures that are deducted from common equity tier 1 capital and exposures subject to § 217.42(h), if a Board-regulated institution is unable to demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the Board-regulated institution must assign the securitization exposure a risk weight of 1,250 percent. The Board-regulated institution’s analysis must be commensurate with the complexity of the securitization exposure and the materiality of the exposure in relation to its capital.
(2) A Board-regulated institution must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section, for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure, and documenting such analysis within three business days after acquiring the exposure, considering:
(A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the exposure, and deal-specific definitions of default;
(B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average LTV ratio; and industry and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask spread, most recent sales price and historic price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
(D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (c)(1) of this section for each securitization exposure.
§ 217.42 Risk-weighted assets for securitization exposures.
(a) Securitization risk weight approaches. Except as provided elsewhere in this section or in § 217.41:
(1) A Board-regulated institution must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from a securitization and apply a 1,250 percent risk weight to the portion of a CEIO that does not constitute after-tax gain-on-sale.
(2) If a securitization exposure does not require deduction under paragraph (a)(1) of this section, a Board-regulated institution may assign a risk weight to the securitization exposure using the simplified supervisory formula approach (SSFA) in accordance with §§ 217.43(a) through 217.43(d) and subject to the limitation under paragraph (e) of this section. Alternatively, a Board-regulated institution that is not subject to subpart F of this part may assign a risk weight to the securitization exposure using the gross-up approach in accordance with § 217.43(e), provided, however, that such Board-regulated institution must apply either the SSFA or the gross-up approach consistently across all of its securitization exposures, except as provided in paragraphs (a)(1), (a)(3), and (a)(4) of this section.
(3) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and the Board-regulated institution cannot, or chooses not to apply the SSFA or the gross-up approach to the exposure, the Board-regulated institution must assign a risk weight to the exposure as described in § 217.44.
(4) If a securitization exposure is a derivative contract (other than protection provided by a Board-regulated institution in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a Board-regulated institution may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (c) of this section.
(b) Total risk-weighted assets for securitization exposures. A Board-regulated institution’s total risk-weighted assets for securitization exposures equals the sum of the risk-weighted asset amount for securitization exposures that the Board-regulated institution risk weights under §§ 217.41(c), 217.42(a)(1), and 217.43, 217.44, or 217.45, and paragraphs (e) through (j) of this section, as applicable.
(c) Exposure amount of a securitization exposure—(1) On-balance sheet securitization exposures. The exposure amount of an on-balance sheet securitization exposure (excluding an available-for-sale or held-to-maturity security where the Board-regulated institution has made an AOCI opt-out election under § 217.22(b)(2), a repo-style transaction, eligible margin loan, OTC derivative contract, or cleared transaction) is equal to the carrying value of the exposure.
(2) On-balance sheet securitization exposures held by a Board-regulated institution that has made an AOCI opt-out election. The exposure amount of an on-balance sheet securitization exposure that is an available-for-sale or held-to-maturity security held by a Board-regulated institution that has made an AOCI opt-out election under § 217.22(b)(2) is the Board-regulated institution’s carrying value (including net accrued but unpaid interest and fees), less any net unrealized gains on the exposure and plus any net unrealized losses on the exposure.
(3) Off-balance sheet securitization exposures. (i) Except as provided in paragraph (j) of this section, the exposure amount of an off-balance sheet securitization exposure that is not a repo-style transaction, eligible margin loan, cleared transaction (other than a credit derivative), or an OTC derivative contract (other than a credit derivative) is the notional amount of the exposure. For an off-balance sheet securitization exposure to an ABCP program, such as an eligible ABCP liquidity facility, the notional amount may be reduced to the maximum potential amount that the Board-regulated institution could be required to fund given the ABCP program’s current underlying assets (calculated without regard to the current credit quality of those assets).
(ii) A Board-regulated institution must determine the exposure amount of an eligible ABCP liquidity facility for which the SSFA does not apply by multiplying the notional amount of the exposure by a CCF of 50 percent.
(iii) A Board-regulated institution must determine the exposure amount of an eligible ABCP liquidity facility for which the SSFA applies by multiplying the notional amount of the exposure by a CCF of 100 percent.
(4) Repo-style transactions, eligible margin loans, and derivative contracts. The exposure amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or derivative contract (other than a credit derivative) is the exposure amount of the transaction as calculated under § 217.34 or § 217.37, as applicable.
(d) Overlapping exposures. If a Board-regulated institution has multiple securitization exposures that provide duplicative coverage to the underlying exposures of a securitization (such as when a Board-regulated institution provides a program-wide credit enhancement and multiple pool-specific liquidity facilities to an ABCP program), the Board-regulated institution is not required to hold duplicative risk-based capital against the overlapping position. Instead, the Board-regulated institution may apply to the overlapping position the applicable risk-based capital treatment that results in the highest risk-based capital requirement.
(e) Implicit support. If a Board-regulated institution provides support to a securitization in excess of the Board-regulated institution’s contractual obligation to provide credit support to the securitization (implicit support):
(1) The Board-regulated institution must include in risk-weighted assets all of the underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization; and
(2) The Board-regulated institution must disclose publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The risk-based capital impact to the Board-regulated institution of providing such implicit support.
(f) Undrawn portion of a servicer cash advance facility. (1) Notwithstanding any other provision of this subpart, a Board-regulated institution that is a servicer under an eligible servicer cash advance facility is not required to hold risk-based capital against potential future cash advance payments that it may be required to provide under the contract governing the facility.
(2) For a Board-regulated institution that acts as a servicer, the exposure amount for a servicer cash advance facility that is not an eligible servicer cash advance facility is equal to the amount of all potential future cash advance payments that the Board-regulated institution may be contractually required to provide during the subsequent 12 month period under the contract governing the facility.
(g) Interest-only mortgage-backed securities. Regardless of any other provisions in this subpart, the risk weight for a non-credit-enhancing interest-only mortgage-backed security may not be less than 100 percent.
(h) Small-business loans and leases on personal property transferred with retained contractual exposure. (1) Regardless of any other provision of this subpart, a Board-regulated institution that has transferred small-business loans and leases on personal property (small-business obligations) with recourse must include in risk-weighted assets only its contractual exposure to the small-business obligations if all the following conditions are met:
(i) The transaction must be treated as a sale under GAAP.
(ii) The Board-regulated institution establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the Board-regulated institution’s reasonably estimated liability under the contractual obligation.
(iii) The small-business obligations are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act (15 U.S.C. 632 et seq.).
(iv)(A) In the case of a state member bank, the bank is well capitalized, as defined in 12 CFR 208.43. For purposes of determining whether a state member bank is well capitalized for purposes of this paragraph (h), the state member bank’s capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations under this paragraph (h).
(B) In the case of a bank holding company or savings and loan holding company, the bank holding company or savings and loan holding company is well capitalized, as defined in 12 CFR 225.2. For purposes of determining whether a bank holding company or savings and loan holding company is well capitalized for purposes of this paragraph (h), the bank holding company or savings and loan holding company’s capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section.
(2) The total outstanding amount of contractual exposure retained by a Board-regulated institution on transfers of small-business obligations receiving the capital treatment specified in paragraph (h)(1) of this section cannot exceed 15 percent of the Board-regulated institution’s total capital.
(3) If a Board-regulated institution ceases to be well capitalized under 12 CFR 208.43 or exceeds the 15 percent capital limitation provided in paragraph (h)(2) of this section, the capital treatment under paragraph (h)(1) of this section will continue to apply to any transfers of small-business obligations with retained contractual exposure that occurred during the time that the Board-regulated institution was well capitalized and did not exceed the capital limit.
(4) The risk-based capital ratios of the Board-regulated institution must be calculated without regard to the capital treatment for transfers of small-business obligations specified in paragraph (h)(1) of this section for purposes of:
(i) Determining whether a Board-regulated institution is adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized under the Board’s prompt corrective action regulations; and
(ii) Reclassifying a well-capitalized Board-regulated institution to adequately capitalized and requiring an adequately capitalized Board-regulated institution to comply with certain mandatory or discretionary supervisory actions as if the Board-regulated institution were in the next lower prompt-corrective-action category.
(i) N
(2) For purposes of determining the risk weight for an n
(i) The attachment point (parameter A) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the Board-regulated institution’s exposure to the total notional amount of all underlying exposures. The ratio is expressed as a decimal value between zero and one. In the case of a first-to-default credit derivative, there are no underlying exposures that are subordinated to the Board-regulated institution’s exposure. In the case of a second-or-subsequent-to-default credit derivative, the smallest (n-1) notional amounts of the underlying exposure(s) are subordinated to the Board-regulated institution’s exposure.
(ii) The detachment point (parameter D) equals the sum of parameter A plus the ratio of the notional amount of the Board-regulated institution’s exposure in the n
(3) A Board-regulated institution that does not use the SSFA to determine a risk weight for its n
(4) Protection purchaser—(i) First-to-default credit derivatives. A Board-regulated institution that obtains credit protection on a group of underlying exposures through a first-to-default credit derivative that meets the rules of recognition of § 217.36(b) must determine its risk-based capital requirement for the underlying exposures as if the Board-regulated institution synthetically securitized the underlying exposure with the smallest risk-weighted asset amount and had obtained no credit risk mitigant on the other underlying exposures. A Board-regulated institution must calculate a risk-based capital requirement for counterparty credit risk according to § 217.34 for a first-to-default credit derivative that does not meet the rules of recognition of § 217.36(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) A Board-regulated institution that obtains credit protection on a group of underlying exposures through a n
(1) The Board-regulated institution also has obtained credit protection on the same underlying exposures in the form of first-through-(n-1)-to-default credit derivatives; or
(2) If n-1 of the underlying exposures have already defaulted.
(B) If a Board-regulated institution satisfies the requirements of paragraph (i)(4)(ii)(A) of this section, the Board-regulated institution must determine its risk-based capital requirement for the underlying exposures as if the Board-regulated institution had only synthetically securitized the underlying exposure with the n
(C) A Board-regulated institution must calculate a risk-based capital requirement for counterparty credit risk according to § 217.34 for a n
(j) Guarantees and credit derivatives other than n
(2) Protection purchaser. (i) A Board-regulated institution that purchases a guarantee or OTC credit derivative (other than an n
(ii) If a Board-regulated institution cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 217.45, the Board-regulated institution must determine the exposure amount of the credit derivative under § 217.34.
(A) If the Board-regulated institution purchases credit protection from a counterparty that is not a securitization SPE, the Board-regulated institution must determine the risk weight for the exposure according to this subpart D.
(B) If the Board-regulated institution purchases the credit protection from a counterparty that is a securitization SPE, the Board-regulated institution must determine the risk weight for the exposure according to section § 217.42, including § 217.42(a)(4) for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments).
§ 217.43 Simplified supervisory formula approach (SSFA) and the gross-up approach.
(a) General requirements for the SSFA. To use the SSFA to determine the risk weight for a securitization exposure, a Board-regulated institution must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contracts governing the underlying exposures of the securitization require payments on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. A Board-regulated institution that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a risk weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a securitization exposure using the SSFA, a Board-regulated institution must have accurate information on the following five inputs to the SSFA calculation:
(1) K
(2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Except as provided in § 217.42(i) for n
(4) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Except as provided in section 42(i) for n
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. K
(1) When the detachment point, parameter D, for a securitization exposure is less than or equal to K
(2) When the attachment point, parameter A, for a securitization exposure is greater than or equal to K
(3) When A is less than K
(e) Gross-up approach—(1) Applicability. A Board-regulated institution that is not subject to subpart F of this part may apply the gross-up approach set forth in this section instead of the SSFA to determine the risk weight of its securitization exposures, provided that it applies the gross-up approach to all of its securitization exposures, except as otherwise provided for certain securitization exposures in §§ 217.44 and 217.45.
(2) To use the gross-up approach, a Board-regulated institution must calculate the following four inputs:
(i) Pro rata share, which is the par value of the Board-regulated institution’s securitization exposure as a percent of the par value of the tranche in which the securitization exposure resides;
(ii) Enhanced amount, which is the par value of tranches that are more senior to the tranche in which the Board-regulated institution’s securitization resides;
(iii) Exposure amount of the Board-regulated institution’s securitization exposure calculated under § 217.42(c); and
(iv) Risk weight, which is the weighted-average risk weight of underlying exposures of the securitization as calculated under this subpart.
(3) Credit equivalent amount. The credit equivalent amount of a securitization exposure under this section equals the sum of:
(i) The exposure amount of the Board-regulated institution’s securitization exposure; and
(ii) The pro rata share multiplied by the enhanced amount, each calculated in accordance with paragraph (e)(2) of this section.
(4) Risk-weighted assets. To calculate risk-weighted assets for a securitization exposure under the gross-up approach, a Board-regulated institution must apply the risk weight required under paragraph (e)(2) of this section to the credit equivalent amount calculated in paragraph (e)(3) of this section.
(f) Limitations. Notwithstanding any other provision of this section, a Board-regulated institution must assign a risk weight of not less than 20 percent to a securitization exposure.
§ 217.44 Securitization exposures to which the SSFA and gross-up approach do not apply.
(a) General requirement. A Board-regulated institution must assign a 1,250 percent risk weight to all securitization exposures to which the Board-regulated institution does not apply the SSFA or the gross-up approach under § 217.43, except as set forth in this section.
(b) Eligible ABCP liquidity facilities. A Board-regulated institution may determine the risk-weighted asset amount of an eligible ABCP liquidity facility by multiplying the exposure amount by the highest risk weight applicable to any of the individual underlying exposures covered by the facility.
(c) A securitization exposure in a second loss position or better to an ABCP program—(1) Risk weighting. A Board-regulated institution may determine the risk-weighted asset amount of a securitization exposure that is in a second loss position or better to an ABCP program that meets the requirements of paragraph (c)(2) of this section by multiplying the exposure amount by the higher of the following risk weights:
(i) 100 percent; and
(ii) The highest risk weight applicable to any of the individual underlying exposures of the ABCP program.
(2) Requirements. (i) The exposure is not an eligible ABCP liquidity facility;
(ii) The exposure must be economically in a second loss position or better, and the first loss position must provide significant credit protection to the second loss position;
(iii) The exposure qualifies as investment grade; and
(iv) The Board-regulated institution holding the exposure must not retain or provide protection to the first loss position.
§ 217.45 Recognition of credit risk mitigants for securitization exposures.
(a) General. (1) An originating Board-regulated institution that has obtained a credit risk mitigant to hedge its exposure to a synthetic or traditional securitization that satisfies the operational criteria provided in § 217.41 may recognize the credit risk mitigant under §§ 217.36 or 217.37, but only as provided in this section.
(2) An investing Board-regulated institution that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant under §§ 217.36 or 217.37, but only as provided in this section.
(b) Mismatches. A Board-regulated institution must make any applicable adjustment to the protection amount of an eligible guarantee or credit derivative as required in § 217.36(d), (e), and (f) for any hedged securitization exposure. In the context of a synthetic securitization, when an eligible guarantee or eligible credit derivative covers multiple hedged exposures that have different residual maturities, the Board-regulated institution must use the longest residual maturity of any of the hedged exposures as the residual maturity of all hedged exposures.
§§ 217.46-217.50 [Reserved]
Risk-Weighted Assets for Equity Exposures
§ 217.51 Introduction and exposure measurement.
(a) General. (1) To calculate its risk-weighted asset amounts for equity exposures that are not equity exposures to an investment fund, a Board-regulated institution must use the Simple Risk-Weight Approach (SRWA) provided in 217.52. A Board-regulated institution must use the look-through approaches provided in § 217.53 to calculate its risk-weighted asset amounts for equity exposures to investment funds.
(2) A Board-regulated institution must treat an investment in a separate account (as defined in § 217.2) as if it were an equity exposure to an investment fund as provided in § 217.53.
(3) Stable value protection. (i) Stable value protection means a contract where the provider of the contract is obligated to pay:
(A) The policy owner of a separate account an amount equal to the shortfall between the fair value and cost basis of the separate account when the policy owner of the separate account surrenders the policy; or
(B) The beneficiary of the contract an amount equal to the shortfall between the fair value and book value of a specified portfolio of assets.
(ii) A Board-regulated institution that purchases stable value protection on its investment in a separate account must treat the portion of the carrying value of its investment in the separate account attributable to the stable value protection as an exposure to the provider of the protection and the remaining portion of the carrying value of its separate account as an equity exposure to an investment fund.
(iii) A Board-regulated institution that provides stable value protection must treat the exposure as an equity derivative with an adjusted carrying value determined as the sum of paragraphs (b)(1) and (3) of this section.
(b) Adjusted carrying value. For purposes of §§ 217.51 through 217.53, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure (other than an equity exposure that is classified as available-for-sale where the Board-regulated institution has made an AOCI opt-out election under § 217.22(b)(2)), the Board-regulated institution’s carrying value of the exposure;
(2) For the on-balance sheet component of an equity exposure that is classified as available-for-sale where the Board-regulated institution has made an AOCI opt-out election under § 217.22(b)(2), the Board-regulated institution’s carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the Board-regulated institution’s regulatory capital components;
(3) For the off-balance sheet component of an equity exposure that is not an equity commitment, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) given a small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section; and
(4) For a commitment to acquire an equity exposure (an equity commitment), the effective notional principal amount of the exposure is multiplied by the following conversion factors (CFs):
(i) Conditional equity commitments with an original maturity of one year or less receive a CF of 20 percent.
(ii) Conditional equity commitments with an original maturity of over one year receive a CF of 50 percent.
(iii) Unconditional equity commitments receive a CF of 100 percent.
§ 217.52 Simple risk-weight approach (SRWA).
(a) General. Under the SRWA, a Board-regulated institution’s total risk-weighted assets for equity exposures equals the sum of the risk-weighted asset amounts for each of the Board-regulated institution’s individual equity exposures (other than equity exposures to an investment fund) as determined under this section and the risk-weighted asset amounts for each of the Board-regulated institution’s individual equity exposures to an investment fund as determined under § 217.53.
(b) SRWA computation for individual equity exposures. A Board-regulated institution must determine the risk-weighted asset amount for an individual equity exposure (other than an equity exposure to an investment fund) by multiplying the adjusted carrying value of the equity exposure or the effective portion and ineffective portion of a hedge pair (as defined in paragraph (c) of this section) by the lowest applicable risk weight in this paragraph (b).
(1) Zero percent risk weight equity exposures. An equity exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, an MDB, and any other entity whose credit exposures receive a zero percent risk weight under § 217.32 may be assigned a zero percent risk weight.
(2) 20 percent risk weight equity exposures. An equity exposure to a PSE, Federal Home Loan Bank or the Federal Agricultural Mortgage Corporation (Farmer Mac) must be assigned a 20 percent risk weight.
(3) 100 percent risk weight equity exposures. The equity exposures set forth in this paragraph (b)(3) must be assigned a 100 percent risk weight.
(i) Community development equity exposures. (A) For state member banks and bank holding companies, an equity exposure that qualifies as a community development investment under 12 U.S.C. 24 (Eleventh), excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a consolidated small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(B) For savings and loan holding companies, an equity exposure that is designed primarily to promote community welfare, including the welfare of low- and moderate-income communities or families, such as by providing services or employment, and excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(ii) Effective portion of hedge pairs. The effective portion of a hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding significant investments in the capital of an unconsolidated financial institution in the form of common stock and exposures to an investment firm that would meet the definition of a traditional securitization were it not for the application of paragraph (8) of that definition in § 217.2 and has greater than immaterial leverage, to the extent that the aggregate adjusted carrying value of the exposures does not exceed 10 percent of the Board-regulated institution’s total capital.
(A) To compute the aggregate adjusted carrying value of a Board-regulated institution’s equity exposures for purposes of this section, the Board-regulated institution may exclude equity exposures described in paragraphs (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a Board-regulated institution does not know the actual holdings of the investment fund, the Board-regulated institution may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund’s permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the Board-regulated institution must assume for purposes of this section that the investment fund invests to the maximum extent possible in equity exposures.
(B) When determining which of a Board-regulated institution’s equity exposures qualify for a 100 percent risk weight under this paragraph (b), a Board-regulated institution first must include equity exposures to unconsolidated small business investment companies or held through consolidated small business investment companies described in section 302 of the Small Business Investment Act, then must include publicly traded equity exposures (including those held indirectly through investment funds), and then must include non-publicly traded equity exposures (including those held indirectly through investment funds).
(4) 250 percent risk weight equity exposures. Significant investments in the capital of unconsolidated financial institutions in the form of common stock that are not deducted from capital pursuant to § 217.22(d)(2) are assigned a 250 percent risk weight.
(5) 300 percent risk weight equity exposures. A publicly traded equity exposure (other than an equity exposure described in paragraph (b)(7) of this section and including the ineffective portion of a hedge pair) must be assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure (other than an equity exposure described in paragraph (b)(7)) of this section that is not publicly traded must be assigned a 400 percent risk weight.
(7) 600 percent risk weight equity exposures. An equity exposure to an investment firm must be assigned a 600 percent risk weight, provided that the investment firm:
(i) Would meet the definition of a traditional securitization were it not for the application of paragraph (8) of that definition; and
(ii) Has greater than immaterial leverage.
(c) Hedge transactions—(1) Hedge pair. A hedge pair is two equity exposures that form an effective hedge so long as each equity exposure is publicly traded or has a return that is primarily based on a publicly traded equity exposure.
(2) Effective hedge. Two equity exposures form an effective hedge if the exposures either have the same remaining maturity or each has a remaining maturity of at least three months; the hedge relationship is formally documented in a prospective manner (that is, before the Board-regulated institution acquires at least one of the equity exposures); the documentation specifies the measure of effectiveness (E) the Board-regulated institution will use for the hedge relationship throughout the life of the transaction; and the hedge relationship has an E greater than or equal to 0.8. A Board-regulated institution must measure E at least quarterly and must use one of three alternative measures of E as set forth in this paragraph (c).
(i) Under the dollar-offset method of measuring effectiveness, the Board-regulated institution must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the changes in value of one equity exposure to the cumulative sum of the changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals 0. If RVC is negative and greater than or equal to −1 (that is, between zero and −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring effectiveness:
(iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then E equals zero.
(3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
§ 217.53 Equity exposures to investment funds.
(a) Available approaches. (1) Unless the exposure meets the requirements for a community development equity exposure under § 217.52(b)(3)(i), a Board-regulated institution must determine the risk-weighted asset amount of an equity exposure to an investment fund under the full look-through approach described in paragraph (b) of this section, the simple modified look-through approach described in paragraph (c) of this section, or the alterative modified look-through approach described paragraph (d) of this section, provided, however, that the minimum risk weight that may be assigned to an equity exposure under this section is 20 percent.
(2) The risk-weighted asset amount of an equity exposure to an investment fund that meets the requirements for a community development equity exposure in § 217.52(b)(3)(i) is its adjusted carrying value.
(3) If an equity exposure to an investment fund is part of a hedge pair and the Board-regulated institution does not use the full look-through approach, the Board-regulated institution must use the ineffective portion of the hedge pair as determined under § 217.52(c) as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value.
(b) Full look-through approach. A Board-regulated institution that is able to calculate a risk-weighted asset amount for its proportional ownership share of each exposure held by the investment fund (as calculated under this subpart as if the proportional ownership share of the adjusted carrying value of each exposure were held directly by the Board-regulated institution) may set the risk-weighted asset amount of the Board-regulated institution’s exposure to the fund equal to the product of:
(1) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the Board-regulated institution; and
(2) The Board-regulated institution’s proportional ownership share of the fund.
(c) Simple modified look-through approach. Under the simple modified look-through approach, the risk-weighted asset amount for a Board-regulated institution’s equity exposure to an investment fund equals the adjusted carrying value of the equity exposure multiplied by the highest risk weight that applies to any exposure the fund is permitted to hold under the prospectus, partnership agreement, or similar agreement that defines the fund’s permissible investments (excluding derivative contracts that are used for hedging rather than speculative purposes and that do not constitute a material portion of the fund’s exposures).
(d) Alternative modified look-through approach. Under the alternative modified look-through approach, a Board-regulated institution may assign the adjusted carrying value of an equity exposure to an investment fund on a pro rata basis to different risk weight categories under this subpart based on the investment limits in the fund’s prospectus, partnership agreement, or similar contract that defines the fund’s permissible investments. The risk-weighted asset amount for the Board-regulated institution’s equity exposure to the investment fund equals the sum of each portion of the adjusted carrying value assigned to an exposure type multiplied by the applicable risk weight under this subpart. If the sum of the investment limits for all exposure types within the fund exceeds 100 percent, the Board-regulated institution must assume that the fund invests to the maximum extent permitted under its investment limits in the exposure type with the highest applicable risk weight under this subpart and continues to make investments in order of the exposure type with the next highest applicable risk weight under this subpart until the maximum total investment level is reached. If more than one exposure type applies to an exposure, the Board-regulated institution must use the highest applicable risk weight. A Board-regulated institution may exclude derivative contracts held by the fund that are used for hedging rather than for speculative purposes and do not constitute a material portion of the fund’s exposures.
§§ 217.54-217.60 [Reserved]
Disclosures
§ 217.61 Purpose and scope.
Sections 217.61 through 217.63 of this subpart establish public disclosure requirements related to the capital requirements described in subpart B of this part for a Board-regulated institution with total consolidated assets of $50 billion or more as reported on the Board-regulated institution’s most recent year-end Call Report, for a state member bank, or FR Y-9C, for a bank holding company or savings and loan holding company, as applicable that is not an advanced approaches Board-regulated institution making public disclosures pursuant to § 217.172. An advanced approaches Board-regulated institution that has not received approval from the Board to exit parallel run pursuant to § 217.121(d) is subject to the disclosure requirements described in §§ 217.62 and 217.63. A Board-regulated institution with total consolidated assets of $50 billion or more as reported on the Board-regulated institution’s most recent year-end Call Report, for a state member bank, or FR Y-9C, for a bank holding company or savings and loan holding company, as applicable, that is not an advanced approaches Board-regulated institution making public disclosures subject to § 217.172 must comply with § 217.62 unless it is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to the disclosure requirements of § 217.62 or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction. For purposes of this section, total consolidated assets are determined based on the average of the Board-regulated institution’s total consolidated assets in the four most recent quarters as reported on the Call Report, for a state member bank, or FR Y-9C, for a bank holding company or savings and loan holding company, as applicable; or the average of the Board-regulated institution’s total consolidated assets in the most recent consecutive quarters as reported quarterly on the Board-regulated institution’s Call Report, for a state member bank, or FR Y-9C, for a bank holding company or savings and loan holding company, as applicable if the Board-regulated institution has not filed such a report for each of the most recent four quarters.
§ 217.62 Disclosure requirements.
(a) A Board-regulated institution described in § 217.61 must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 217.63. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the Board-regulated institution’s capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be disclosed as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the Board-regulated institution’s risk management objectives and policies, reporting system, and definitions) may be disclosed annually after the end of the fourth calendar quarter, provided that any significant changes are disclosed in the interim. The Board-regulated institution’s management may provide all of the disclosures required by §§ 217.61 through 217.63 in one place on the Board-regulated institution’s public Web site or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Board-regulated institution publicly provides a summary table specifically indicating the location(s) of all such disclosures.
(b) A Board-regulated institution described in § 217.61 must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. One or more senior officers of the Board-regulated institution must attest that the disclosures meet the requirements of this subpart.
(c) If a Board-regulated institution described in § 217.61 concludes that specific commercial or financial information that it would otherwise be required to disclose under this section would be exempt from disclosure by the Board under the Freedom of Information Act (5 U.S.C. 552), then the Board-regulated institution is not required to disclose that specific information pursuant to this section, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
§ 217.63 Disclosures by Board-regulated institutions described in § 217.61.
(a) Except as provided in § 217.62, a Board-regulated institution described in § 217.61 must make the disclosures described in Tables 1 through 10 of this section. The Board-regulated institution must make these disclosures publicly available for each of the last three years (that is, twelve quarters) or such shorter period beginning on January 1, 2015.
(b) A Board-regulated institution must publicly disclose each quarter the following:
(1) Common equity tier 1 capital, additional tier 1 capital, tier 2 capital, tier 1 and total capital ratios, including the regulatory capital elements and all the regulatory adjustments and deductions needed to calculate the numerator of such ratios;
(2) Total risk-weighted assets, including the different regulatory adjustments and deductions needed to calculate total risk-weighted assets;
(3) Regulatory capital ratios during any transition periods, including a description of all the regulatory capital elements and all regulatory adjustments and deductions needed to calculate the numerator and denominator of each capital ratio during any transition period; and
(4) A reconciliation of regulatory capital elements as they relate to its balance sheet in any audited consolidated financial statements.
Table 1 to § 217.63—Scope of Application
| Qualitative Disclosures | (a) | The name of the top corporate entity in the group to which subpart D of this part applies. |
| (b) | A brief description of the differences in the basis for consolidating entities 1 for accounting and regulatory purposes, with a description of those entities: | |
| (1) That are fully consolidated; | ||
| (2) That are deconsolidated and deducted from total capital; | ||
| (3) For which the total capital requirement is deducted; and | ||
| (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). | ||
| (c) | Any restrictions, or other major impediments, on transfer of funds or total capital within the group. | |
| (d) | The aggregate amount of surplus capital of insurance subsidiaries included in the total capital of the consolidated group. | |
| (e) | The aggregate amount by which actual total capital is less than the minimum total capital requirement in all subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies. |
1 Entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and significant minority equity investments in insurance, financial and commercial entities.
Table 2 to § 217.63—Capital Structure
| Qualitative Disclosures | (a) | Summary information on the terms and conditions of the main features of all regulatory capital instruments. |
| Quantitative Disclosures | (b) | The amount of common equity tier 1 capital, with separate disclosure of: |
| (1) Common stock and related surplus; | ||
| (2) Retained earnings; | ||
| (3) Common equity minority interest; | ||
| (4) AOCI; and | ||
| (5) Regulatory adjustments and deductions made to common equity tier 1 capital. | ||
| (c) | The amount of tier 1 capital, with separate disclosure of: | |
| (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and | ||
| (2) Regulatory adjustments and deductions made to tier 1 capital. | ||
| (d) | The amount of total capital, with separate disclosure of: | |
| (1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included in tier 1 capital; and | ||
| (2) Regulatory adjustments and deductions made to total capital. |
Table 3 to § 217.63—Capital Adequacy
| Qualitative disclosures | (a) | A summary discussion of the Board-regulated institution’s approach to assessing the adequacy of its capital to support current and future activities. |
| Quantitative disclosures | (b) | Risk-weighted assets for: |
| (1) Exposures to sovereign entities; | ||
| (2) Exposures to certain supranational entities and MDBs; | ||
| (3) Exposures to depository institutions, foreign banks, and credit unions; | ||
| (4) Exposures to PSEs; | ||
| (5) Corporate exposures; | ||
| (6) Residential mortgage exposures; | ||
| (7) Statutory multifamily mortgages and pre-sold construction loans; | ||
| (8) HVCRE exposures; | ||
| (9) Past due loans; | ||
| (10) Other assets; | ||
| (11) Cleared transactions; | ||
| (12) Default fund contributions; | ||
| (13) Unsettled transactions; | ||
| (14) Securitization exposures; and | ||
| (15) Equity exposures. | ||
| (c) | Standardized market risk-weighted assets as calculated under subpart F of this part. | |
| (d) | Common equity tier 1, tier 1 and total risk-based capital ratios: | |
| (1) For the top consolidated group; and | ||
| (2) For each depository institution subsidiary. | ||
| (e) | Total standardized risk-weighted assets. |
Table 4 to § 217.63—Capital Conservation Buffer
| Quantitative Disclosures | (a) | At least quarterly, the Board-regulated institution must calculate and publicly disclose the capital conservation buffer as described under § 217.11. |
| (b) | At least quarterly, the Board-regulated institution must calculate and publicly disclose the eligible retained income of the Board-regulated institution, as described under § 217.11. | |
| (c) | At least quarterly, the Board-regulated institution must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer framework described under § 217.11, including the maximum payout amount for the quarter. |
(c) General qualitative disclosure requirement. For each separate risk area described in Tables 5 through 10, the Board-regulated institution must describe its risk management objectives and policies, including: Strategies and processes; the structure and organization of the relevant risk management function; the scope and nature of risk reporting and/or measurement systems; policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.
Table 5 to § 217.63
1—Credit Risk: General Disclosures
| Qualitative Disclosures | (a) | The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 6), including the: |
| (1) Policy for determining past due or delinquency status; | ||
| (2) Policy for placing loans on nonaccrual; | ||
| (3) Policy for returning loans to accrual status; | ||
| (4) Definition of and policy for identifying impaired loans (for financial accounting purposes); | ||
| (5) Description of the methodology that the Board-regulated institution uses to estimate its allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, including statistical methods used where applicable; | ||
| (6) Policy for charging-off uncollectible amounts; and | ||
| (7) Discussion of the Board-regulated institution’s credit risk management policy. | ||
| Quantitative Disclosures | (b) | Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, Board-regulated institutions could use categories similar to that used for financial statement purposes. Such categories might include, for instance |
| (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; | ||
| (2) Debt securities; and | ||
| (3) OTC derivatives. 2 | ||
| (c) | Geographic distribution of exposures, categorized in significant areas by major types of credit exposure. 3 | |
| (d) | Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. | |
| (e) | By major industry or counterparty type: | |
| (1) Amount of impaired loans for which there was a related allowance under GAAP; | ||
| (2) Amount of impaired loans for which there was no related allowance under GAAP; | ||
| (3) Amount of loans past due 90 days and on nonaccrual; | ||
| (4) Amount of loans past due 90 days and still accruing; 4 | ||
| (5) The balance in the allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, at the end of each period, disaggregated on the basis of the Board-regulated institution’s impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and | ||
| (6) Charge-offs during the period. | ||
| (f) | Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area, 5 further categorized as required by GAAP. | |
| (g) | Reconciliation of changes in ALLL or AACL, as applicable. 6 | |
| (h) | Remaining contractual maturity delineation (for example, one year or less) of the whole portfolio, categorized by credit exposure. |
1 Table 5 does not cover equity exposures, which should be reported in Table 9.
2
3 Geographical areas may consist of individual countries, groups of countries, or regions within countries. A Board-regulated institution might choose to define the geographical areas based on the way the Board-regulated institution’s portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified.
4 A Board-regulated institution is encouraged also to provide an analysis of the aging of past-due loans.
5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately.
6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.
Table 6 to § 217.63—General Disclosure for Counterparty Credit Risk-Related Exposures
| Qualitative Disclosures | (a) | The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including a discussion of: |
| (1) The methodology used to assign credit limits for counterparty credit exposures; | ||
| (2) Policies for securing collateral, valuing and managing collateral, and establishing credit reserves; | ||
| (3) The primary types of collateral taken; and | ||
| (4) The impact of the amount of collateral the Board-regulated institution would have to provide given a deterioration in the Board-regulated institution’s own creditworthiness. | ||
| Quantitative Disclosures | (b) | Gross positive fair value of contracts, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure. 1 A Board-regulated institution also must disclose the notional value of credit derivative hedges purchased for counterparty credit risk protection and the distribution of current credit exposure by exposure type. 2 |
| (c) | Notional amount of purchased and sold credit derivatives, segregated between use for the Board-regulated institution’s own credit portfolio and in its intermediation activities, including the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. |
1 Net unsecured credit exposure is the credit exposure after considering both the benefits from legally enforceable netting agreements and collateral arrangements without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
Table 7 to § 217.63—Credit Risk Mitigation
1 2
| Qualitative Disclosures | (a) | The general qualitative disclosure requirement with respect to credit risk mitigation, including: |
| (1) Policies and processes for collateral valuation and management; | ||
| (2) A description of the main types of collateral taken by the Board-regulated institution; | ||
| (3) The main types of guarantors/credit derivative counterparties and their creditworthiness; and | ||
| (4) Information about (market or credit) risk concentrations with respect to credit risk mitigation. | ||
| Quantitative Disclosures | (b) | For each separately disclosed credit risk portfolio, the total exposure that is covered by eligible financial collateral, and after the application of haircuts. |
| (c) | For each separately disclosed portfolio, the total exposure that is covered by guarantees/credit derivatives and the risk-weighted asset amount associated with that exposure. |
1 At a minimum, a Board-regulated institution must provide the disclosures in Table 7 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, Board-regulated institutions are encouraged to give further information about mitigants that have not been recognized for that purpose.
2 Credit derivatives that are treated, for the purposes of this subpart, as synthetic securitization exposures should be excluded from the credit risk mitigation disclosures and included within those relating to securitization (Table 8).
Table 8 to § 217.63—Securitization
| Qualitative Disclosures | (a) | The general qualitative disclosure requirement with respect to a securitization (including synthetic securitizations), including a discussion of: |
| (1) The Board-regulated institution’s objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the Board-regulated institution to other entities and including the type of risks assumed and retained with resecuritization activity; 1 | ||
| (2) The nature of the risks (e.g., liquidity risk) inherent in the securitized assets; | ||
| (3) The roles played by the Board-regulated institution in the securitization process 2 and an indication of the extent of the Board-regulated institution’s involvement in each of them; | ||
| (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; | ||
| (5) The Board-regulated institution’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and | ||
| (6) The risk-based capital approaches that the Board-regulated institution follows for its securitization exposures including the type of securitization exposure to which each approach applies. | ||
| (b) | A list of: | |
| (1) The type of securitization SPEs that the Board-regulated institution, as sponsor, uses to securitize third-party exposures. The Board-regulated institution must indicate whether it has exposure to these SPEs, either on- or off-balance sheet; and | ||
| (2) Affiliated entities: | ||
| (i) That the Board-regulated institution manages or advises; and | ||
| (ii) That invest either in the securitization exposures that the Board-regulated institution has securitized or in securitization SPEs that the Board-regulated institution sponsors. 3 | ||
| (c) | Summary of the Board-regulated institution’s accounting policies for securitization activities, including: | |
| (1) Whether the transactions are treated as sales or financings; | ||
| (2) Recognition of gain-on-sale; | ||
| (3) Methods and key assumptions applied in valuing retained or purchased interests; | ||
| (4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes; | ||
| (5) Treatment of synthetic securitizations; | ||
| (6) How exposures intended to be securitized are valued and whether they are recorded under subpart D of this part; and | ||
| (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the Board-regulated institution to provide financial support for securitized assets. | ||
| (d) | An explanation of significant changes to any quantitative information since the last reporting period. | |
| Quantitative Disclosures | (e) | The total outstanding exposures securitized by the Board-regulated institution in securitizations that meet the operational criteria provided in § 217.41 (categorized into traditional and synthetic securitizations), by exposure type, separately for securitizations of third-party exposures for which the bank acts only as sponsor. 4 |
| (f) | For exposures securitized by the Board-regulated institution in securitizations that meet the operational criteria in § 217.41: | |
| (1) Amount of securitized assets that are impaired/past due categorized by exposure type; 5 and | ||
| (2) Losses recognized by the Board-regulated institution during the current period categorized by exposure type. 6 | ||
| (g) | The total amount of outstanding exposures intended to be securitized categorized by exposure type. | |
| (h) | Aggregate amount of: | |
| (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and | ||
| (2) Off-balance sheet securitization exposures categorized by exposure type. | ||
| (i) | (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g., SSFA); and | |
| (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: | ||
| (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital; and | ||
| (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. | ||
| (j) | Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by exposure type. | |
| (k) | Aggregate amount of resecuritization exposures retained or purchased categorized according to: | |
| (1) Exposures to which credit risk mitigation is applied and those not applied; and | ||
| (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. |
1 The Board-regulated institution should describe the structure of resecuritizations in which it participates; this description should be provided for the main categories of resecuritization products in which the Board-regulated institution is active.
2 For example, these roles may include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider.
3 Such affiliated entities may include, for example, money market funds, to be listed individually, and personal and private trusts, to be noted collectively.
4 “Exposures securitized” include underlying exposures originated by the bank, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the bank’s balance sheet and underlying exposures acquired by the bank from third-party entities) in which the originating bank does not retain any securitization exposure should be shown separately but need only be reported for the year of inception. Banks are required to disclose exposures regardless of whether there is a capital charge under this part.
5 Include credit-related other than temporary impairment (OTTI).
6 For example, charge-offs/allowances (if the assets remain on the bank’s balance sheet) or credit-related OTTI of interest-only strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the bank with respect to securitized assets.
Table 9 to § 217.63—Equities Not Subject to Subpart F of This Part
| Qualitative Disclosures | (a) | The general qualitative disclosure requirement with respect to equity risk for equities not subject to subpart F of this part, including: |
| (1) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and | ||
| (2) Discussion of important policies covering the valuation of and accounting for equity holdings not subject to subpart F of this part. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. | ||
| Quantitative Disclosures | (b) | Value disclosed on the balance sheet of investments, as well as the fair value of those investments; for securities that are publicly traded, a comparison to publicly-quoted share values where the share price is materially different from fair value. |
| (c) | The types and nature of investments, including the amount that is: (1) Publicly traded; and (2) Non publicly traded. | |
| (d) | The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. | |
| (e) | (1) Total unrealized gains (losses). 1 | |
| (2) Total latent revaluation gains (losses). 2 | ||
| (3) Any amounts of the above included in tier 1 or tier 2 capital. | ||
| (f) | Capital requirements categorized by appropriate equity groupings, consistent with the Board-regulated institution’s methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding regulatory capital requirements. |
1 Unrealized gains (losses) recognized on the balance sheet but not through earnings.
2 Unrealized gains (losses) not recognized either on the balance sheet or through earnings.
Table 10 to § 217.63—Interest Rate Risk for Non-Trading Activities
| Qualitative disclosures | (a) | The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. |
| Quantitative disclosures | (b) | The increase (decline) in earnings or economic value (or relevant measure used by management) for upward and downward rate shocks according to management’s method for measuring interest rate risk for non-trading activities, categorized by currency (as appropriate). |
(d) A Category III Board-regulated institution that is required to publicly disclose its supplementary leverage ratio pursuant to § 217.172(d) is subject to the supplementary leverage ratio disclosure requirement at § 217.173(a)(2).
(e) A Category III Board-regulated institution that is required to calculate a countercyclical capital buffer pursuant to § 217.11 is subject to the disclosure requirement at Table 4 to § 217.173, “Capital Conservation and Countercyclical Capital Buffers,” and not to the disclosure requirement at Table 4 to this section, “Capital Conservation Buffer.”
§§ 217.64-217.99 [Reserved]
Subpart E—Risk-Weighted Assets—Internal Ratings-Based and Advanced Measurement Approaches
§ 217.100 Purpose, applicability, and principle of conservatism.
(a) Purpose. This subpart E establishes:
(1) Minimum qualifying criteria for Board-regulated institutions using institution-specific internal risk measurement and management processes for calculating risk-based capital requirements; and
(2) Methodologies for such Board-regulated institutions to calculate their total risk-weighted assets.
(b) Applicability. (1) This subpart applies to:
(i) A top-tier bank holding company or savings and loan holding company domiciled in the United States that:
(A) Is not a consolidated subsidiary of another bank holding company or savings and loan holding company that uses this subpart to calculate its risk-based capital requirements; and
(B) That:
(1) Is identified as a global systemically important BHC pursuant to § 217.402;
(2) Is identified as a Category II banking organization pursuant to 12 CFR 252.5 or 12 CFR 238.10; or
(3) Has a subsidiary depository institution that is required, or has elected, to use 12 CFR part 3, subpart E (OCC), this subpart (Board), or 12 CFR part 324, subpart E (FDIC), to calculate its risk-based capital requirements;
(ii) A state member bank that:
(A) Is a subsidiary of a global systemically important BHC;
(B) Is a Category II Board-regulated institution;
(C) Is a subsidiary of a depository institution that uses 12 CFR part 3, subpart E (OCC), this subpart (Board), or 12 CFR part 324, subpart E (FDIC), to calculate its risk-based capital requirements; or
(D) Is a subsidiary of a bank holding company or savings and loan holding company that uses this subpart to calculate its risk-based capital requirements; or
(iii) Any Board-regulated institution that elects to use this subpart to calculate its risk-based capital requirements.
(2) A market risk Board-regulated institution must exclude from its calculation of risk-weighted assets under this subpart the risk-weighted asset amounts of all covered positions, as defined in subpart F of this part (except foreign exchange positions that are not trading positions, over-the-counter derivative positions, cleared transactions, and unsettled transactions).
(c) Principle of conservatism. Notwithstanding the requirements of this subpart, a Board-regulated institution may choose not to apply a provision of this subpart to one or more exposures provided that:
(1) The Board-regulated institution can demonstrate on an ongoing basis to the satisfaction of the Board that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure greater than that which would otherwise be required under this subpart;
(2) The Board-regulated institution appropriately manages the risk of each such exposure;
(3) The Board-regulated institution notifies the Board in writing prior to applying this principle to each such exposure; and
(4) The exposures to which the Board-regulated institution applies this principle are not, in the aggregate, material to the Board-regulated institution.
§ 217.101 Definitions.
(a) Terms that are set forth in § 217.2 and used in this subpart have the definitions assigned thereto in § 217.2.
(b) For the purposes of this subpart, the following terms are defined as follows:
Advanced internal ratings-based (IRB) systems means an advanced approaches Board-regulated institution’s internal risk rating and segmentation system; risk parameter quantification system; data management and maintenance system; and control, oversight, and validation system for credit risk of wholesale and retail exposures.
Advanced systems means an advanced approaches Board-regulated institution’s advanced IRB systems, operational risk management processes, operational risk data and assessment systems, operational risk quantification systems, and, to the extent used by the Board-regulated institution, the internal models methodology, advanced CVA approach, double default excessive correlation detection process, and internal models approach (IMA) for equity exposures.
Backtesting means the comparison of a Board-regulated institution’s internal estimates with actual outcomes during a sample period not used in model development. In this context, backtesting is one form of out-of-sample testing.
Benchmarking means the comparison of a Board-regulated institution’s internal estimates with relevant internal and external data or with estimates based on other estimation techniques.
Bond option contract means a bond option, bond future, or any other instrument linked to a bond that gives rise to similar counterparty credit risk.
Business environment and internal control factors means the indicators of a Board-regulated institution’s operational risk profile that reflect a current and forward-looking assessment of the Board-regulated institution’s underlying business risk factors and internal control environment.
Credit default swap (CDS) means a financial contract executed under standard industry documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure(s)) to another party (the protection provider) for a certain period of time.
Credit valuation adjustment (CVA) means the fair value adjustment to reflect counterparty credit risk in valuation of OTC derivative contracts.
Default—For the purposes of calculating capital requirements under this subpart:
(1) Retail. (i) A retail exposure of a Board-regulated institution is in default if:
(A) The exposure is 180 days past due, in the case of a residential mortgage exposure or revolving exposure;
(B) The exposure is 120 days past due, in the case of retail exposures that are not residential mortgage exposures or revolving exposures; or
(C) The Board-regulated institution has taken a full or partial charge-off, write-down of principal, or material negative fair value adjustment of principal on the exposure for credit-related reasons.
(ii) Notwithstanding paragraph (1)(i) of this definition, for a retail exposure held by a non-U.S. subsidiary of the Board-regulated institution that is subject to an internal ratings-based approach to capital adequacy consistent with the Basel Committee on Banking Supervision’s “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” in a non-U.S. jurisdiction, the Board-regulated institution may elect to use the definition of default that is used in that jurisdiction, provided that the Board-regulated institution has obtained prior approval from the Board to use the definition of default in that jurisdiction.
(iii) A retail exposure in default remains in default until the Board-regulated institution has reasonable assurance of repayment and performance for all contractual principal and interest payments on the exposure.
(2) Wholesale. (i) A Board-regulated institution’s wholesale obligor is in default if:
(A) The Board-regulated institution determines that the obligor is unlikely to pay its credit obligations to the Board-regulated institution in full, without recourse by the Board-regulated institution to actions such as realizing collateral (if held); or
(B) The obligor is past due more than 90 days on any material credit obligation(s) to the Board-regulated institution.
(ii) An obligor in default remains in default until the Board-regulated institution has reasonable assurance of repayment and performance for all contractual principal and interest payments on all exposures of the Board-regulated institution to the obligor (other than exposures that have been fully written-down or charged-off).
Dependence means a measure of the association among operational losses across and within units of measure.
Economic downturn conditions means, with respect to an exposure held by the Board-regulated institution, those conditions in which the aggregate default rates for that exposure’s wholesale or retail exposure subcategory (or subdivision of such subcategory selected by the Board-regulated institution) in the exposure’s national jurisdiction (or subdivision of such jurisdiction selected by the Board-regulated institution) are significantly higher than average.
Effective maturity (M) of a wholesale exposure means:
(1) For wholesale exposures other than repo-style transactions, eligible margin loans, and OTC derivative contracts described in paragraph (2) or (3) of this definition:
(i) The weighted-average remaining maturity (measured in years, whole or fractional) of the expected contractual cash flows from the exposure, using the undiscounted amounts of the cash flows as weights; or
(ii) The nominal remaining maturity (measured in years, whole or fractional) of the exposure.
(2) For repo-style transactions, eligible margin loans, and OTC derivative contracts subject to a qualifying master netting agreement for which the Board-regulated institution does not apply the internal models approach in section 132(d), the weighted-average remaining maturity (measured in years, whole or fractional) of the individual transactions subject to the qualifying master netting agreement, with the weight of each individual transaction set equal to the notional amount of the transaction.
(3) For repo-style transactions, eligible margin loans, and OTC derivative contracts for which the Board-regulated institution applies the internal models approach in § 217.132(d), the value determined in § 217.132(d)(4).
Eligible double default guarantor, with respect to a guarantee or credit derivative obtained by a Board-regulated institution, means:
(1) U.S.-based entities. A depository institution, a bank holding company, a savings and loan holding company, or a securities broker or dealer registered with the SEC under the Securities Exchange Act, if at the time the guarantee is issued or anytime thereafter, has issued and outstanding an unsecured debt security without credit enhancement that is investment grade.
(2) Non-U.S.-based entities. A foreign bank, or a non-U.S.-based securities firm if the Board-regulated institution demonstrates that the guarantor is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, or securities broker-dealers) if at the time the guarantee is issued or anytime thereafter, has issued and outstanding an unsecured debt security without credit enhancement that is investment grade.
Eligible operational risk offsets means amounts, not to exceed expected operational loss, that:
(1) Are generated by internal business practices to absorb highly predictable and reasonably stable operational losses, including reserves calculated consistent with GAAP; and
(2) Are available to cover expected operational losses with a high degree of certainty over a one-year horizon.
Eligible purchased wholesale exposure means a purchased wholesale exposure that:
(1) The Board-regulated institution or securitization SPE purchased from an unaffiliated seller and did not directly or indirectly originate;
(2) Was generated on an arm’s-length basis between the seller and the obligor (intercompany accounts receivable and receivables subject to contra-accounts between firms that buy and sell to each other do not satisfy this criterion);
(3) Provides the Board-regulated institution or securitization SPE with a claim on all proceeds from the exposure or a pro rata interest in the proceeds from the exposure;
(4) Has an M of less than one year; and
(5) When consolidated by obligor, does not represent a concentrated exposure relative to the portfolio of purchased wholesale exposures.
Expected exposure (EE) means the expected value of the probability distribution of non-negative credit risk exposures to a counterparty at any specified future date before the maturity date of the longest term transaction in the netting set. Any negative fair values in the probability distribution of fair values to a counterparty at a specified future date are set to zero to convert the probability distribution of fair values to the probability distribution of credit risk exposures.
Expected operational loss (EOL) means the expected value of the distribution of potential aggregate operational losses, as generated by the Board-regulated institution’s operational risk quantification system using a one-year horizon.
Expected positive exposure (EPE) means the weighted average over time of expected (non-negative) exposures to a counterparty where the weights are the proportion of the time interval that an individual expected exposure represents. When calculating risk-based capital requirements, the average is taken over a one-year horizon.
Exposure at default (EAD) means:
(1) For the on-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, a repo-style transaction or eligible margin loan for which the Board-regulated institution determines EAD under § 217.132, a cleared transaction, or default fund contribution), EAD means the Board-regulated institution’s carrying value (including net accrued but unpaid interest and fees) for the exposure or segment less any allocated transfer risk reserve for the exposure or segment.
(2) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, a repo-style transaction or eligible margin loan for which the Board-regulated institution determines EAD under § 217.132, cleared transaction, or default fund contribution) in the form of a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the Board-regulated institution’s best estimate of net additions to the outstanding amount owed the Board-regulated institution, including estimated future additional draws of principal and accrued but unpaid interest and fees, that are likely to occur over a one-year horizon assuming the wholesale exposure or the retail exposures in the segment were to go into default. This estimate of net additions must reflect what would be expected during economic downturn conditions. For the purposes of this definition:
(i) Trade-related letters of credit are short-term, self-liquidating instruments that are used to finance the movement of goods and are collateralized by the underlying goods.
(ii) Transaction-related contingencies relate to a particular transaction and include, among other things, performance bonds and performance-based letters of credit.
(3) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, a repo-style transaction, or eligible margin loan for which the Board-regulated institution determines EAD under § 217.132, cleared transaction, or default fund contribution) in the form of anything other than a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the notional amount of the exposure or segment.
(4) EAD for OTC derivative contracts is calculated as described in § 217.132. A Board-regulated institution also may determine EAD for repo-style transactions and eligible margin loans as described in § 217.132.
Exposure category means any of the wholesale, retail, securitization, or equity exposure categories.
External operational loss event data means, with respect to a Board-regulated institution, gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at organizations other than the Board-regulated institution.
IMM exposure means a repo-style transaction, eligible margin loan, or OTC derivative for which a Board-regulated institution calculates its EAD using the internal models methodology of § 217.132(d).
Internal operational loss event data means, with respect to a Board-regulated institution, gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at the Board-regulated institution.
Loss given default (LGD) means:
(1) For a wholesale exposure, the greatest of:
(i) Zero;
(ii) The Board-regulated institution’s empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the Board-regulated institution would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the Board-regulated institution to the exposure) were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or
(iii) The Board-regulated institution’s empirically based best estimate of the economic loss, per dollar of EAD, the Board-regulated institution would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the Board-regulated institution to the exposure) were to default within a one-year horizon during economic downturn conditions.
(2) For a segment of retail exposures, the greatest of:
(i) Zero;
(ii) The Board-regulated institution’s empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the Board-regulated institution would expect to incur if the exposures in the segment were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or
(iii) The Board-regulated institution’s empirically based best estimate of the economic loss, per dollar of EAD, the Board-regulated institution would expect to incur if the exposures in the segment were to default within a one-year horizon during economic downturn conditions.
(3) The economic loss on an exposure in the event of default is all material credit-related losses on the exposure (including accrued but unpaid interest or fees, losses on the sale of collateral, direct workout costs, and an appropriate allocation of indirect workout costs). Where positive or negative cash flows on a wholesale exposure to a defaulted obligor or a defaulted retail exposure (including proceeds from the sale of collateral, workout costs, additional extensions of credit to facilitate repayment of the exposure, and draw-downs of unused credit lines) occur after the date of default, the economic loss must reflect the net present value of cash flows as of the default date using a discount rate appropriate to the risk of the defaulted exposure.
Obligor means the legal entity or natural person contractually obligated on a wholesale exposure, except that a Board-regulated institution may treat the following exposures as having separate obligors:
(1) Exposures to the same legal entity or natural person denominated in different currencies;
(2)(i) An income-producing real estate exposure for which all or substantially all of the repayment of the exposure is reliant on the cash flows of the real estate serving as collateral for the exposure; the Board-regulated institution, in economic substance, does not have recourse to the borrower beyond the real estate collateral; and no cross-default or cross-acceleration clauses are in place other than clauses obtained solely out of an abundance of caution; and
(ii) Other credit exposures to the same legal entity or natural person; and
(3)(i) A wholesale exposure authorized under section 364 of the U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural person who is a debtor-in-possession for purposes of Chapter 11 of the Bankruptcy Code; and
(ii) Other credit exposures to the same legal entity or natural person.
Operational loss means a loss (excluding insurance or tax effects) resulting from an operational loss event. Operational loss includes all expenses associated with an operational loss event except for opportunity costs, forgone revenue, and costs related to risk management and control enhancements implemented to prevent future operational losses.
Operational loss event means an event that results in loss and is associated with any of the following seven operational loss event type categories:
(1) Internal fraud, which means the operational loss event type category that comprises operational losses resulting from an act involving at least one internal party of a type intended to defraud, misappropriate property, or circumvent regulations, the law, or company policy excluding diversity- and discrimination-type events.
(2) External fraud, which means the operational loss event type category that comprises operational losses resulting from an act by a third party of a type intended to defraud, misappropriate property, or circumvent the law. Retail credit card losses arising from non-contractual, third-party-initiated fraud (for example, identity theft) are external fraud operational losses. All other third-party-initiated credit losses are to be treated as credit risk losses.
(3) Employment practices and workplace safety, which means the operational loss event type category that comprises operational losses resulting from an act inconsistent with employment, health, or safety laws or agreements, payment of personal injury claims, or payment arising from diversity- and discrimination-type events.
(4) Clients, products, and business practices, which means the operational loss event type category that comprises operational losses resulting from the nature or design of a product or from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements).
(5) Damage to physical assets, which means the operational loss event type category that comprises operational losses resulting from the loss of or damage to physical assets from natural disaster or other events.
(6) Business disruption and system failures, which means the operational loss event type category that comprises operational losses resulting from disruption of business or system failures.
(7) Execution, delivery, and process management, which means the operational loss event type category that comprises operational losses resulting from failed transaction processing or process management or losses arising from relations with trade counterparties and vendors.
Operational risk means the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events (including legal risk but excluding strategic and reputational risk).
Operational risk exposure means the 99.9th percentile of the distribution of potential aggregate operational losses, as generated by the Board-regulated institution’s operational risk quantification system over a one-year horizon (and not incorporating eligible operational risk offsets or qualifying operational risk mitigants).
Other retail exposure means an exposure (other than a securitization exposure, an equity exposure, a residential mortgage exposure, a pre-sold construction loan, a qualifying revolving exposure, or the residual value portion of a lease exposure) that is managed as part of a segment of exposures with homogeneous risk characteristics, not on an individual-exposure basis, and is either:
(1) An exposure to an individual for non-business purposes; or
(2) An exposure to an individual or company for business purposes if the Board-regulated institution’s consolidated business credit exposure to the individual or company is $1 million or less.
Probability of default (PD) means:
(1) For a wholesale exposure to a non-defaulted obligor, the Board-regulated institution’s empirically based best estimate of the long-run average one-year default rate for the rating grade assigned by the Board-regulated institution to the obligor, capturing the average default experience for obligors in the rating grade over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the rating grade.
(2) For a segment of non-defaulted retail exposures, the Board-regulated institution’s empirically based best estimate of the long-run average one-year default rate for the exposures in the segment, capturing the average default experience for exposures in the segment over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the segment.
(3) For a wholesale exposure to a defaulted obligor or segment of defaulted retail exposures, 100 percent.
Qualifying cross-product master netting agreement means a qualifying master netting agreement that provides for termination and close-out netting across multiple types of financial transactions or qualifying master netting agreements in the event of a counterparty’s default, provided that the underlying financial transactions are OTC derivative contracts, eligible margin loans, or repo-style transactions. In order to treat an agreement as a qualifying cross-product master netting agreement for purposes of this subpart, a Board-regulated institution must comply with the requirements of § 217.3(c) of this part with respect to that agreement.
Qualifying revolving exposure (QRE) means an exposure (other than a securitization exposure or equity exposure) to an individual that is managed as part of a segment of exposures with homogeneous risk characteristics, not on an individual-exposure basis, and:
(1) Is revolving (that is, the amount outstanding fluctuates, determined largely by a borrower’s decision to borrow and repay up to a pre-established maximum amount, except for an outstanding amount that the borrower is required to pay in full every month);
(2) Is unsecured and unconditionally cancelable by the Board-regulated institution to the fullest extent permitted by Federal law; and
(3)(i) Has a maximum contractual exposure amount (drawn plus undrawn) of up to $100,000; or
(ii) With respect to a product with an outstanding amount that the borrower is required to pay in full every month, the total outstanding amount does not in practice exceed $100,000.
(4) A segment of exposures that contains one or more exposures that fails to meet paragraph (3)(ii) of this definition must be treated as a segment of other retail exposures for the 24 month period following the month in which the total outstanding amount of one or more exposures individually exceeds $100,000.
Retail exposure means a residential mortgage exposure, a qualifying revolving exposure, or an other retail exposure.
Retail exposure subcategory means the residential mortgage exposure, qualifying revolving exposure, or other retail exposure subcategory.
Risk parameter means a variable used in determining risk-based capital requirements for wholesale and retail exposures, specifically probability of default (PD), loss given default (LGD), exposure at default (EAD), or effective maturity (M).
Scenario analysis means a systematic process of obtaining expert opinions from business managers and risk management experts to derive reasoned assessments of the likelihood and loss impact of plausible high-severity operational losses. Scenario analysis may include the well-reasoned evaluation and use of external operational loss event data, adjusted as appropriate to ensure relevance to a Board-regulated institution’s operational risk profile and control structure.
Total wholesale and retail risk-weighted assets means the sum of:
(1) Risk-weighted assets for wholesale exposures that are not IMM exposures, cleared transactions, or default fund contributions to non-defaulted obligors and segments of non-defaulted retail exposures;
(2) Risk-weighted assets for wholesale exposures to defaulted obligors and segments of defaulted retail exposures;
(3) Risk-weighted assets for assets not defined by an exposure category;
(4) Risk-weighted assets for non-material portfolios of exposures;
(5) Risk-weighted assets for IMM exposures (as determined in § 217.132(d));
(6) Risk-weighted assets for cleared transactions and risk-weighted assets for default fund contributions (as determined in § 217.133); and
(7) Risk-weighted assets for unsettled transactions (as determined in § 217.136).
Unexpected operational loss (UOL) means the difference between the Board-regulated institution’s operational risk exposure and the Board-regulated institution’s expected operational loss.
Unit of measure means the level (for example, organizational unit or operational loss event type) at which the Board-regulated institution’s operational risk quantification system generates a separate distribution of potential operational losses.
Wholesale exposure means a credit exposure to a company, natural person, sovereign, or governmental entity (other than a securitization exposure, retail exposure, pre-sold construction loan, or equity exposure).
Wholesale exposure subcategory means the HVCRE or non-HVCRE wholesale exposure subcategory.
§§ 217.102-217.120 [Reserved]
Qualification
§ 217.121 Qualification process.
(a) Timing. (1) A Board-regulated institution that is described in § 217.100(b)(1)(i) and (ii) must adopt a written implementation plan no later than six months after the date the Board-regulated institution meets a criterion in that section. The implementation plan must incorporate an explicit start date no later than 36 months after the date the Board-regulated institution meets at least one criterion under § 217.100(b)(1)(i) and (ii). The Board may extend the start date.
(2) A Board-regulated institution that elects to be subject to this subpart under § 217.101(b)(1)(iii) must adopt a written implementation plan.
(b) Implementation plan. (1) The Board-regulated institution’s implementation plan must address in detail how the Board-regulated institution complies, or plans to comply, with the qualification requirements in § 217.122. The Board-regulated institution also must maintain a comprehensive and sound planning and governance process to oversee the implementation efforts described in the plan. At a minimum, the plan must:
(i) Comprehensively address the qualification requirements in § 217.122 for the Board-regulated institution and each consolidated subsidiary (U.S. and foreign-based) of the Board-regulated institution with respect to all portfolios and exposures of the Board-regulated institution and each of its consolidated subsidiaries;
(ii) Justify and support any proposed temporary or permanent exclusion of business lines, portfolios, or exposures from the application of the advanced approaches in this subpart (which business lines, portfolios, and exposures must be, in the aggregate, immaterial to the Board-regulated institution);
(iii) Include the Board-regulated institution’s self-assessment of:
(A) The Board-regulated institution’s current status in meeting the qualification requirements in § 217.122; and
(B) The consistency of the Board-regulated institution’s current practices with the Board’s supervisory guidance on the qualification requirements;
(iv) Based on the Board-regulated institution’s self-assessment, identify and describe the areas in which the Board-regulated institution proposes to undertake additional work to comply with the qualification requirements in § 217.122 or to improve the consistency of the Board-regulated institution’s current practices with the Board’s supervisory guidance on the qualification requirements (gap analysis);
(v) Describe what specific actions the Board-regulated institution will take to address the areas identified in the gap analysis required by paragraph (b)(1)(iv) of this section;
(vi) Identify objective, measurable milestones, including delivery dates and a date when the Board-regulated institution’s implementation of the methodologies described in this subpart will be fully operational;
(vii) Describe resources that have been budgeted and are available to implement the plan; and
(viii) Receive approval of the Board-regulated institution’s board of directors.
(2) The Board-regulated institution must submit the implementation plan, together with a copy of the minutes of the board of directors’ approval, to the Board at least 60 days before the Board-regulated institution proposes to begin its parallel run, unless the Board waives prior notice.
(c) Parallel run. Before determining its risk-weighted assets under this subpart and following adoption of the implementation plan, the Board-regulated institution must conduct a satisfactory parallel run. A satisfactory parallel run is a period of no less than four consecutive calendar quarters during which the Board-regulated institution complies with the qualification requirements in § 217.122 to the satisfaction of the Board. During the parallel run, the Board-regulated institution must report to the Board on a calendar quarterly basis its risk-based capital ratios determined in accordance with § 217.10(b)(1) through (3) and § 217.10(d)(1) through (3). During this period, the Board-regulated institution’s minimum risk-based capital ratios are determined as set forth in subpart D of this part.
(d) Approval to calculate risk-based capital requirements under this subpart. The Board will notify the Board-regulated institution of the date that the Board-regulated institution must begin to use this subpart for purposes of § 217.10 if the Board determines that:
(1) The Board-regulated institution fully complies with all the qualification requirements in § 217.122;
(2) The Board-regulated institution has conducted a satisfactory parallel run under paragraph (c) of this section; and
(3) The Board-regulated institution has an adequate process to ensure ongoing compliance with the qualification requirements in § 217.122.
§ 217.122 Qualification requirements.
(a) Process and systems requirements. (1) A Board-regulated institution must have a rigorous process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital.
(2) The systems and processes used by a Board-regulated institution for risk-based capital purposes under this subpart must be consistent with the Board-regulated institution’s internal risk management processes and management information reporting systems.
(3) Each Board-regulated institution must have an appropriate infrastructure with risk measurement and management processes that meet the qualification requirements of this section and are appropriate given the Board-regulated institution’s size and level of complexity. Regardless of whether the systems and models that generate the risk parameters necessary for calculating a Board-regulated institution’s risk-based capital requirements are located at any affiliate of the Board-regulated institution, the Board-regulated institution itself must ensure that the risk parameters and reference data used to determine its risk-based capital requirements are representative of long run experience with respect to its own credit risk and operational risk exposures.
(b) Risk rating and segmentation systems for wholesale and retail exposures. (1)(i) A Board-regulated institution must have an internal risk rating and segmentation system that accurately, reliably, and meaningfully differentiates among degrees of credit risk for the Board-regulated institution’s wholesale and retail exposures. When assigning an internal risk rating, a Board-regulated institution may consider a third-party assessment of credit risk, provided that the Board-regulated institution’s internal risk rating assignment does not rely solely on the external assessment.
(ii) If a Board-regulated institution uses multiple rating or segmentation systems, the Board-regulated institution’s rationale for assigning an obligor or exposure to a particular system must be documented and applied in a manner that best reflects the obligor or exposure’s level of risk. A Board-regulated institution must not inappropriately allocate obligors or exposures across systems to minimize regulatory capital requirements.
(iii) In assigning ratings to wholesale obligors and exposures, including loss severity ratings grades to wholesale exposures, and assigning retail exposures to retail segments, a Board-regulated institution must use all relevant and material information and ensure that the information is current.
(iv) When assigning an obligor to a PD rating or retail exposure to a PD segment, a Board-regulated institution must assess the obligor or retail borrower’s ability and willingness to contractually perform, taking a conservative view of projected information.
(2) For wholesale exposures:
(i) A Board-regulated institution must have an internal risk rating system that accurately and reliably assigns each obligor to a single rating grade (reflecting the obligor’s likelihood of default). A Board-regulated institution may elect, however, not to assign to a rating grade an obligor to whom the Board-regulated institution extends credit based solely on the financial strength of a guarantor, provided that all of the Board-regulated institution’s exposures to the obligor are fully covered by eligible guarantees, the Board-regulated institution applies the PD substitution approach in § 217.134(c)(1) to all exposures to that obligor, and the Board-regulated institution immediately assigns the obligor to a rating grade if a guarantee can no longer be recognized under this part. The Board-regulated institution’s wholesale obligor rating system must have at least seven discrete rating grades for non-defaulted obligors and at least one rating grade for defaulted obligors.
(ii) Unless the Board-regulated institution has chosen to directly assign LGD estimates to each wholesale exposure, the Board-regulated institution must have an internal risk rating system that accurately and reliably assigns each wholesale exposure to a loss severity rating grade (reflecting the Board-regulated institution’s estimate of the LGD of the exposure). A Board-regulated institution employing loss severity rating grades must have a sufficiently granular loss severity grading system to avoid grouping together exposures with widely ranging LGDs.
(iii) A Board-regulated institution must have an effective process to obtain and update in a timely manner relevant and material information on obligor and exposure characteristics that affect PD, LGD and EAD.
(3) For retail exposures:
(i) A Board-regulated institution must have an internal system that groups retail exposures into the appropriate retail exposure subcategory and groups the retail exposures in each retail exposure subcategory into separate segments with homogeneous risk characteristics that provide a meaningful differentiation of risk. The Board-regulated institution’s system must identify and group in separate segments by subcategories exposures identified in § 217.131(c)(2)(ii) and (iii).
(ii) A Board-regulated institution must have an internal system that captures all relevant exposure risk characteristics, including borrower credit score, product and collateral types, as well as exposure delinquencies, and must consider cross-collateral provisions, where present.
(iii) The Board-regulated institution must review and, if appropriate, update assignments of individual retail exposures to segments and the loss characteristics and delinquency status of each identified risk segment. These reviews must occur whenever the Board-regulated institution receives new material information, but generally no less frequently than quarterly, and, in all cases, at least annually.
(4) The Board-regulated institution’s internal risk rating policy for wholesale exposures must describe the Board-regulated institution’s rating philosophy (that is, must describe how wholesale obligor rating assignments are affected by the Board-regulated institution’s choice of the range of economic, business, and industry conditions that are considered in the obligor rating process).
(5) The Board-regulated institution’s internal risk rating system for wholesale exposures must provide for the review and update (as appropriate) of each obligor rating and (if applicable) each loss severity rating whenever the Board-regulated institution obtains relevant and material information on the obligor or exposure that affects PD, LGD and EAD, but no less frequently than annually.
(c) Quantification of risk parameters for wholesale and retail exposures. (1) The Board-regulated institution must have a comprehensive risk parameter quantification process that produces accurate, timely, and reliable estimates of the risk parameters on a consistent basis for the Board-regulated institution’s wholesale and retail exposures.
(2) A Board-regulated institution’s estimates of PD, LGD, and EAD must incorporate all relevant, material, and available data that is reflective of the Board-regulated institution’s actual wholesale and retail exposures and of sufficient quality to support the determination of risk-based capital requirements for the exposures. In particular, the population of exposures in the data used for estimation purposes, the lending standards in use when the data were generated, and other relevant characteristics, should closely match or be comparable to the Board-regulated institution’s exposures and standards. In addition, a Board-regulated institution must:
(i) Demonstrate that its estimates are representative of long run experience, including periods of economic downturn conditions, whether internal or external data are used;
(ii) Take into account any changes in lending practice or the process for pursuing recoveries over the observation period;
(iii) Promptly reflect technical advances, new data, and other information as they become available;
(iv) Demonstrate that the data used to estimate risk parameters support the accuracy and robustness of those estimates; and
(v) Demonstrate that its estimation technique performs well in out-of-sample tests whenever possible.
(3) The Board-regulated institution’s risk parameter quantification process must produce appropriately conservative risk parameter estimates where the Board-regulated institution has limited relevant data, and any adjustments that are part of the quantification process must not result in a pattern of bias toward lower risk parameter estimates.
(4) The Board-regulated institution’s risk parameter estimation process should not rely on the possibility of U.S. government financial assistance, except for the financial assistance that the U.S. government has a legally binding commitment to provide.
(5) The Board-regulated institution must be able to demonstrate which variables have been found to be statistically significant with regard to EAD. The Board-regulated institution’s EAD estimates must reflect its specific policies and strategies with regard to account management, including account monitoring and payment processing, and its ability and willingness to prevent further drawdowns in circumstances short of payment default. The Board-regulated institution must have adequate systems and procedures in place to monitor current outstanding amounts against committed lines, and changes in outstanding amounts per obligor and obligor rating grade and per retail segment. The Board-regulated institution must be able to monitor outstanding amounts on a daily basis.
(6) At a minimum, PD estimates for wholesale obligors and retail segments must be based on at least five years of default data. LGD estimates for wholesale exposures must be based on at least seven years of loss severity data, and LGD estimates for retail segments must be based on at least five years of loss severity data. EAD estimates for wholesale exposures must be based on at least seven years of exposure amount data, and EAD estimates for retail segments must be based on at least five years of exposure amount data. If the Board-regulated institution has relevant and material reference data that span a longer period of time than the minimum time periods specified above, the Board-regulated institution must incorporate such data in its estimates, provided that it does not place undue weight on periods of favorable or benign economic conditions relative to periods of economic downturn conditions.
(7) Default, loss severity, and exposure amount data must include periods of economic downturn conditions, or the Board-regulated institution must adjust its estimates of risk parameters to compensate for the lack of data from periods of economic downturn conditions.
(8) The Board-regulated institution’s PD, LGD, and EAD estimates must be based on the definition of default in § 217.101.
(9) If a Board-regulated institution uses internal data obtained prior to becoming subject to this subpart E or external data to arrive at PD, LGD, or EAD estimates, the Board-regulated institution must demonstrate to the Board that the Board-regulated institution has made appropriate adjustments if necessary to be consistent with the definition of default in § 217.101. Internal data obtained after the Board-regulated institution becomes subject to this subpart E must be consistent with the definition of default in § 217.101.
(10) The Board-regulated institution must review and update (as appropriate) its risk parameters and its risk parameter quantification process at least annually.
(11) The Board-regulated institution must, at least annually, conduct a comprehensive review and analysis of reference data to determine relevance of the reference data to the Board-regulated institution’s exposures, quality of reference data to support PD, LGD, and EAD estimates, and consistency of reference data to the definition of default in § 217.101.
(d) Counterparty credit risk model. A Board-regulated institution must obtain the prior written approval of the Board under § 217.132 to use the internal models methodology for counterparty credit risk and the advanced CVA approach for the CVA capital requirement.
(e) Double default treatment. A Board-regulated institution must obtain the prior written approval of the Board under § 217.135 to use the double default treatment.
(f) Equity exposures model. A Board-regulated institution must obtain the prior written approval of the Board under § 217.153 to use the internal models approach for equity exposures.
(g) Operational risk. (1) Operational risk management processes. A Board-regulated institution must:
(i) Have an operational risk management function that:
(A) Is independent of business line management; and
(B) Is responsible for designing, implementing, and overseeing the Board-regulated institution’s operational risk data and assessment systems, operational risk quantification systems, and related processes;
(ii) Have and document a process (which must capture business environment and internal control factors affecting the Board-regulated institution’s operational risk profile) to identify, measure, monitor, and control operational risk in the Board-regulated institution’s products, activities, processes, and systems; and
(iii) Report operational risk exposures, operational loss events, and other relevant operational risk information to business unit management, senior management, and the board of directors (or a designated committee of the board).
(2) Operational risk data and assessment systems. A Board-regulated institution must have operational risk data and assessment systems that capture operational risks to which the Board-regulated institution is exposed. The Board-regulated institution’s operational risk data and assessment systems must:
(i) Be structured in a manner consistent with the Board-regulated institution’s current business activities, risk profile, technological processes, and risk management processes; and
(ii) Include credible, transparent, systematic, and verifiable processes that incorporate the following elements on an ongoing basis:
(A) Internal operational loss event data. The Board-regulated institution must have a systematic process for capturing and using internal operational loss event data in its operational risk data and assessment systems.
(1) The Board-regulated institution’s operational risk data and assessment systems must include a historical observation period of at least five years for internal operational loss event data (or such shorter period approved by the Board to address transitional situations, such as integrating a new business line).
(2) The Board-regulated institution must be able to map its internal operational loss event data into the seven operational loss event type categories.
(3) The Board-regulated institution may refrain from collecting internal operational loss event data for individual operational losses below established dollar threshold amounts if the Board-regulated institution can demonstrate to the satisfaction of the Board that the thresholds are reasonable, do not exclude important internal operational loss event data, and permit the Board-regulated institution to capture substantially all the dollar value of the Board-regulated institution’s operational losses.
(B) External operational loss event data. The Board-regulated institution must have a systematic process for determining its methodologies for incorporating external operational loss event data into its operational risk data and assessment systems.
(C) Scenario analysis. The Board-regulated institution must have a systematic process for determining its methodologies for incorporating scenario analysis into its operational risk data and assessment systems.
(D) Business environment and internal control factors. The Board-regulated institution must incorporate business environment and internal control factors into its operational risk data and assessment systems. The Board-regulated institution must also periodically compare the results of its prior business environment and internal control factor assessments against its actual operational losses incurred in the intervening period.
(3) Operational risk quantification systems. (i) The Board-regulated institution’s operational risk quantification systems:
(A) Must generate estimates of the Board-regulated institution’s operational risk exposure using its operational risk data and assessment systems;
(B) Must employ a unit of measure that is appropriate for the Board-regulated institution’s range of business activities and the variety of operational loss events to which it is exposed, and that does not combine business activities or operational loss events with demonstrably different risk profiles within the same loss distribution;
(C) Must include a credible, transparent, systematic, and verifiable approach for weighting each of the four elements, described in paragraph (g)(2)(ii) of this section, that a Board-regulated institution is required to incorporate into its operational risk data and assessment systems;
(D) May use internal estimates of dependence among operational losses across and within units of measure if the Board-regulated institution can demonstrate to the satisfaction of the Board that its process for estimating dependence is sound, robust to a variety of scenarios, and implemented with integrity, and allows for uncertainty surrounding the estimates. If the Board-regulated institution has not made such a demonstration, it must sum operational risk exposure estimates across units of measure to calculate its total operational risk exposure; and
(E) Must be reviewed and updated (as appropriate) whenever the Board-regulated institution becomes aware of information that may have a material effect on the Board-regulated institution’s estimate of operational risk exposure, but the review and update must occur no less frequently than annually.
(ii) With the prior written approval of the Board, a state member bank may generate an estimate of its operational risk exposure using an alternative approach to that specified in paragraph (g)(3)(i) of this section. A state member bank proposing to use such an alternative operational risk quantification system must submit a proposal to the Board. In determining whether to approve a state member bank’s proposal to use an alternative operational risk quantification system, the Board will consider the following principles:
(A) Use of the alternative operational risk quantification system will be allowed only on an exception basis, considering the size, complexity, and risk profile of the state member bank;
(B) The state member bank must demonstrate that its estimate of its operational risk exposure generated under the alternative operational risk quantification system is appropriate and can be supported empirically; and
(C) A state member bank must not use an allocation of operational risk capital requirements that includes entities other than depository institutions or the benefits of diversification across entities.
(h) Data management and maintenance. (1) A Board-regulated institution must have data management and maintenance systems that adequately support all aspects of its advanced systems and the timely and accurate reporting of risk-based capital requirements.
(2) A Board-regulated institution must retain data using an electronic format that allows timely retrieval of data for analysis, validation, reporting, and disclosure purposes.
(3) A Board-regulated institution must retain sufficient data elements related to key risk drivers to permit adequate monitoring, validation, and refinement of its advanced systems.
(i) Control, oversight, and validation mechanisms. (1) The Board-regulated institution’s senior management must ensure that all components of the Board-regulated institution’s advanced systems function effectively and comply with the qualification requirements in this section.
(2) The Board-regulated institution’s board of directors (or a designated committee of the board) must at least annually review the effectiveness of, and approve, the Board-regulated institution’s advanced systems.
(3) A Board-regulated institution must have an effective system of controls and oversight that:
(i) Ensures ongoing compliance with the qualification requirements in this section;
(ii) Maintains the integrity, reliability, and accuracy of the Board-regulated institution’s advanced systems; and
(iii) Includes adequate governance and project management processes.
(4) The Board-regulated institution must validate, on an ongoing basis, its advanced systems. The Board-regulated institution’s validation process must be independent of the advanced systems’ development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the advanced systems;
(ii) An ongoing monitoring process that includes verification of processes and benchmarking; and
(iii) An outcomes analysis process that includes backtesting.
(5) The Board-regulated institution must have an internal audit function or equivalent function that is independent of business-line management that at least annually:
(i) Reviews the Board-regulated institution’s advanced systems and associated operations, including the operations of its credit function and estimations of PD, LGD, and EAD;
(ii) Assesses the effectiveness of the controls supporting the Board-regulated institution’s advanced systems; and
(iii) Documents and reports its findings to the Board-regulated institution’s board of directors (or a committee thereof).
(6) The Board-regulated institution must periodically stress test its advanced systems. The stress testing must include a consideration of how economic cycles, especially downturns, affect risk-based capital requirements (including migration across rating grades and segments and the credit risk mitigation benefits of double default treatment).
(j) Documentation. The Board-regulated institution must adequately document all material aspects of its advanced systems.
§ 217.123 Ongoing qualification.
(a) Changes to advanced systems. A Board-regulated institution must meet all the qualification requirements in § 217.122 on an ongoing basis. A Board-regulated institution must notify the Board when the Board-regulated institution makes any change to an advanced system that would result in a material change in the Board-regulated institution’s advanced approaches total risk-weighted asset amount for an exposure type or when the Board-regulated institution makes any significant change to its modeling assumptions.
(b) Failure to comply with qualification requirements. (1) If the Board determines that a Board-regulated institution that uses this subpart and that has conducted a satisfactory parallel run fails to comply with the qualification requirements in § 217.122, the Board will notify the Board-regulated institution in writing of the Board-regulated institution’s failure to comply.
(2) The Board-regulated institution must establish and submit a plan satisfactory to the Board to return to compliance with the qualification requirements.
(3) In addition, if the Board determines that the Board-regulated institution’s advanced approaches total risk-weighted assets are not commensurate with the Board-regulated institution’s credit, market, operational, or other risks, the Board may require such a Board-regulated institution to calculate its advanced approaches total risk-weighted assets with any modifications provided by the Board.
§ 217.124 Merger and acquisition transitional arrangements.
(a) Mergers and acquisitions of companies without advanced systems. If a Board-regulated institution merges with or acquires a company that does not calculate its risk-based capital requirements using advanced systems, the Board-regulated institution may use subpart D of this part to determine the risk-weighted asset amounts for the merged or acquired company’s exposures for up to 24 months after the calendar quarter during which the merger or acquisition consummates. The Board may extend this transition period for up to an additional 12 months. Within 90 days of consummating the merger or acquisition, the Board-regulated institution must submit to the Board an implementation plan for using its advanced systems for the acquired company. During the period in which subpart D of this part applies to the merged or acquired company, any ALLL or AACL, as applicable, net of allocated transfer risk reserves established pursuant to 12 U.S.C. 3904, associated with the merged or acquired company’s exposures may be included in the acquiring Board-regulated institution’s tier 2 capital up to 1.25 percent of the acquired company’s risk-weighted assets. All general allowances of the merged or acquired company must be excluded from the Board-regulated institution’s eligible credit reserves. In addition, the risk-weighted assets of the merged or acquired company are not included in the Board-regulated institution’s credit-risk-weighted assets but are included in total risk-weighted assets. If a Board-regulated institution relies on this paragraph (a), the Board-regulated institution must disclose publicly the amounts of risk-weighted assets and qualifying capital calculated under this subpart for the acquiring Board-regulated institution and under subpart D of this part for the acquired company.
(b) Mergers and acquisitions of companies with advanced systems. (1) If a Board-regulated institution merges with or acquires a company that calculates its risk-based capital requirements using advanced systems, the Board-regulated institution may use the acquired company’s advanced systems to determine total risk-weighted assets for the merged or acquired company’s exposures for up to 24 months after the calendar quarter during which the acquisition or merger consummates. The Board may extend this transition period for up to an additional 12 months. Within 90 days of consummating the merger or acquisition, the Board-regulated institution must submit to the Board an implementation plan for using its advanced systems for the merged or acquired company.
(2) If the acquiring Board-regulated institution is not subject to the advanced approaches in this subpart at the time of acquisition or merger, during the period when subpart D of this part applies to the acquiring Board-regulated institution, the ALLL or AACL, as applicable, associated with the exposures of the merged or acquired company may not be directly included in tier 2 capital. Rather, any excess eligible credit reserves associated with the merged or acquired company’s exposures may be included in the Board-regulated institution’s tier 2 capital up to 0.6 percent of the credit-risk-weighted assets associated with those exposures.
§§ 217.125-217.130 [Reserved]
Risk-Weighted Assets for General Credit Risk
§ 217.131 Mechanics for calculating total wholesale and retail risk-weighted assets.
(a) Overview. A Board-regulated institution must calculate its total wholesale and retail risk-weighted asset amount in four distinct phases:
(1) Phase 1—categorization of exposures;
(2) Phase 2—assignment of wholesale obligors and exposures to rating grades and segmentation of retail exposures;
(3) Phase 3—assignment of risk parameters to wholesale exposures and segments of retail exposures; and
(4) Phase 4—calculation of risk-weighted asset amounts.
(b) Phase 1—Categorization. The Board-regulated institution must determine which of its exposures are wholesale exposures, retail exposures, securitization exposures, or equity exposures. The Board-regulated institution must categorize each retail exposure as a residential mortgage exposure, a QRE, or another retail exposure. The Board-regulated institution must identify which wholesale exposures are HVCRE exposures, sovereign exposures, OTC derivative contracts, repo-style transactions, eligible margin loans, eligible purchased wholesale exposures, cleared transactions, default fund contributions, and unsettled transactions to which § 217.136 applies, and eligible guarantees or eligible credit derivatives that are used as credit risk mitigants. The Board-regulated institution must identify any on-balance sheet asset that does not meet the definition of a wholesale, retail, equity, or securitization exposure, any non-material portfolio of exposures described in paragraph (e)(4) of this section, and for bank holding companies and savings and loan holding companies, any on-balance sheet asset that is held in a non-guaranteed separate account.
(c) Phase 2—Assignment of wholesale obligors and exposures to rating grades and retail exposures to segments—(1) Assignment of wholesale obligors and exposures to rating grades.
(i) The Board-regulated institution must assign each obligor of a wholesale exposure to a single obligor rating grade and must assign each wholesale exposure to which it does not directly assign an LGD estimate to a loss severity rating grade.
(ii) The Board-regulated institution must identify which of its wholesale obligors are in default.
(2) Segmentation of retail exposures. (i) The Board-regulated institution must group the retail exposures in each retail subcategory into segments that have homogeneous risk characteristics.
(ii) The Board-regulated institution must identify which of its retail exposures are in default. The Board-regulated institution must segment defaulted retail exposures separately from non-defaulted retail exposures.
(iii) If the Board-regulated institution determines the EAD for eligible margin loans using the approach in § 217.132(b), the Board-regulated institution must identify which of its retail exposures are eligible margin loans for which the Board-regulated institution uses this EAD approach and must segment such eligible margin loans separately from other retail exposures.
(3) Eligible purchased wholesale exposures. A Board-regulated institution may group its eligible purchased wholesale exposures into segments that have homogeneous risk characteristics. A Board-regulated institution must use the wholesale exposure formula in Table 1 of this section to determine the risk-based capital requirement for each segment of eligible purchased wholesale exposures.
(d) Phase 3—Assignment of risk parameters to wholesale exposures and segments of retail exposures—(1) Quantification process. Subject to the limitations in this paragraph (d), the Board-regulated institution must:
(i) Associate a PD with each wholesale obligor rating grade;
(ii) Associate an LGD with each wholesale loss severity rating grade or assign an LGD to each wholesale exposure;
(iii) Assign an EAD and M to each wholesale exposure; and
(iv) Assign a PD, LGD, and EAD to each segment of retail exposures.
(2) Floor on PD assignment. The PD for each wholesale obligor or retail segment may not be less than 0.03 percent, except for exposures to or directly and unconditionally guaranteed by a sovereign entity, the Bank for International Settlements, the International Monetary Fund, the European Commission, the European Central Bank, the European Stability Mechanism, the European Financial Stability Facility, or a multilateral development bank, to which the Board-regulated institution assigns a rating grade associated with a PD of less than 0.03 percent.
(3) Floor on LGD estimation. The LGD for each segment of residential mortgage exposures may not be less than 10 percent, except for segments of residential mortgage exposures for which all or substantially all of the principal of each exposure is either:
(i) Directly and unconditionally guaranteed by the full faith and credit of a sovereign entity; or
(ii) Guaranteed by a contingent obligation of the U.S. government or its agencies, the enforceability of which is dependent upon some affirmative action on the part of the beneficiary of the guarantee or a third party (for example, meeting servicing requirements).
(4) Eligible purchased wholesale exposures. A Board-regulated institution must assign a PD, LGD, EAD, and M to each segment of eligible purchased wholesale exposures. If the Board-regulated institution can estimate ECL (but not PD or LGD) for a segment of eligible purchased wholesale exposures, the Board-regulated institution must assume that the LGD of the segment equals 100 percent and that the PD of the segment equals ECL divided by EAD. The estimated ECL must be calculated for the exposures without regard to any assumption of recourse or guarantees from the seller or other parties.
(5) Credit risk mitigation: credit derivatives, guarantees, and collateral. (i) A Board-regulated institution may take into account the risk reducing effects of eligible guarantees and eligible credit derivatives in support of a wholesale exposure by applying the PD substitution or LGD adjustment treatment to the exposure as provided in § 217.134 or, if applicable, applying double default treatment to the exposure as provided in § 217.135. A Board-regulated institution may decide separately for each wholesale exposure that qualifies for the double default treatment under § 217.135 whether to apply the double default treatment or to use the PD substitution or LGD adjustment treatment without recognizing double default effects.
(ii) A Board-regulated institution may take into account the risk reducing effects of guarantees and credit derivatives in support of retail exposures in a segment when quantifying the PD and LGD of the segment. In doing so, a Board-regulated institution must consider all relevant available information.
(iii) Except as provided in paragraph (d)(6) of this section, a Board-regulated institution may take into account the risk reducing effects of collateral in support of a wholesale exposure when quantifying the LGD of the exposure, and may take into account the risk reducing effects of collateral in support of retail exposures when quantifying the PD and LGD of the segment. In order to do so, a Board-regulated institution must have established internal requirements for collateral management, legal certainty, and risk management processes.
(6) EAD for OTC derivative contracts, repo-style transactions, and eligible margin loans. A Board-regulated institution must calculate its EAD for an OTC derivative contract as provided in § 217.132 (c) and (d). A Board-regulated institution may take into account the risk-reducing effects of financial collateral in support of a repo-style transaction or eligible margin loan and of any collateral in support of a repo-style transaction that is included in the Board-regulated institution’s VaR-based measure under subpart F of this part through an adjustment to EAD as provided in § 217.132(b) and (d). A Board-regulated institution that takes collateral into account through such an adjustment to EAD under § 217.132 may not reflect such collateral in LGD.
(7) Effective maturity. An exposure’s M must be no greater than five years and no less than one year, except that an exposure’s M must be no less than one day if the exposure is a trade related letter of credit, or if the exposure has an original maturity of less than one year and is not part of a Board-regulated institution’s ongoing financing of the obligor. An exposure is not part of a Board-regulated institution’s ongoing financing of the obligor if the Board-regulated institution:
(i) Has a legal and practical ability not to renew or roll over the exposure in the event of credit deterioration of the obligor;
(ii) Makes an independent credit decision at the inception of the exposure and at every renewal or roll over; and
(iii) Has no substantial commercial incentive to continue its credit relationship with the obligor in the event of credit deterioration of the obligor.
(8) EAD for exposures to certain central counterparties. A Board-regulated institution may attribute an EAD of zero to exposures that arise from the settlement of cash transactions (such as equities, fixed income, spot foreign exchange, and spot commodities) with a central counterparty where there is no assumption of ongoing counterparty credit risk by the central counterparty after settlement of the trade and associated default fund contributions.
(e) Phase 4—Calculation of risk-weighted assets—(1) Non-defaulted exposures. (i) A Board-regulated institution must calculate the dollar risk-based capital requirement for each of its wholesale exposures to a non-defaulted obligor (except for eligible guarantees and eligible credit derivatives that hedge another wholesale exposure, IMM exposures, cleared transactions, default fund contributions, unsettled transactions, and exposures to which the Board-regulated institution applies the double default treatment in § 217.135) and segments of non-defaulted retail exposures by inserting the assigned risk parameters for the wholesale obligor and exposure or retail segment into the appropriate risk-based capital formula specified in Table 1 and multiplying the output of the formula (K) by the EAD of the exposure or segment. Alternatively, a Board-regulated institution may apply a 300 percent risk weight to the EAD of an eligible margin loan if the Board-regulated institution is not able to meet the Board’s requirements for estimation of PD and LGD for the margin loan.
(ii) The sum of all the dollar risk-based capital requirements for each wholesale exposure to a non-defaulted obligor and segment of non-defaulted retail exposures calculated in paragraph (e)(1)(i) of this section and in § 217.135(e) equals the total dollar risk-based capital requirement for those exposures and segments.
(iii) The aggregate risk-weighted asset amount for wholesale exposures to non-defaulted obligors and segments of non-defaulted retail exposures equals the total dollar risk-based capital requirement in paragraph (e)(1)(ii) of this section multiplied by 12.5.
(2) Wholesale exposures to defaulted obligors and segments of defaulted retail exposures—(i) Not covered by an eligible U.S. government guarantee: The dollar risk-based capital requirement for each wholesale exposure not covered by an eligible guarantee from the U.S. government to a defaulted obligor and each segment of defaulted retail exposures not covered by an eligible guarantee from the U.S. government equals 0.08 multiplied by the EAD of the exposure or segment.
(ii) Covered by an eligible U.S. government guarantee: The dollar risk-based capital requirement for each wholesale exposure to a defaulted obligor covered by an eligible guarantee from the U.S. government and each segment of defaulted retail exposures covered by an eligible guarantee from the U.S. government equals the sum of:
(A) The sum of the EAD of the portion of each wholesale exposure to a defaulted obligor covered by an eligible guarantee from the U.S. government plus the EAD of the portion of each segment of defaulted retail exposures that is covered by an eligible guarantee from the U.S. government and the resulting sum is multiplied by 0.016, and
(B) The sum of the EAD of the portion of each wholesale exposure to a defaulted obligor not covered by an eligible guarantee from the U.S. government plus the EAD of the portion of each segment of defaulted retail exposures that is not covered by an eligible guarantee from the U.S. government and the resulting sum is multiplied by 0.08.
(iii) The sum of all the dollar risk-based capital requirements for each wholesale exposure to a defaulted obligor and each segment of defaulted retail exposures calculated in paragraph (e)(2)(i) of this section plus the dollar risk-based capital requirements each wholesale exposure to a defaulted obligor and for each segment of defaulted retail exposures calculated in paragraph (e)(2)(ii) of this section equals the total dollar risk-based capital requirement for those exposures and segments.
(iv) The aggregate risk-weighted asset amount for wholesale exposures to defaulted obligors and segments of defaulted retail exposures equals the total dollar risk-based capital requirement calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5.
(3) Assets not included in a defined exposure category. (i) A bank holding company or savings and loan holding company may assign a risk-weighted asset amount of zero to cash owned and held in all offices of subsidiary depository institutions or in transit; and for gold bullion held in a subsidiary depository institution’s own vaults, or held in another depository institution’s vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities.
(ii) A state member bank may assign a risk-weighted asset amount to cash owned and held in all offices of the state member bank or in transit and for gold bullion held in the state member bank’s own vaults, or held in another depository institution’s vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities.
(iii) A Board-regulated institution must assign a risk-weighted asset amount equal to 50 percent of the carrying value to a pre-sold construction loan unless the purchase contract is cancelled, in which case a Board-regulated institution must assign a risk-weighted asset amount equal to a 100 percent of the carrying value of the pre-sold construction loan.
(iv) The risk-weighted asset amount for the residual value of a retail lease exposure equals such residual value.
(v) The risk-weighted asset amount for DTAs arising from temporary differences that the Board-regulated institution could realize through net operating loss carrybacks equals the carrying value, netted in accordance with § 217.22.
(vi) The risk-weighted asset amount for MSAs, DTAs arising from temporary timing differences that the Board-regulated institution could not realize through net operating loss carrybacks, and significant investments in the capital of unconsolidated financial institutions in the form of common stock that are not deducted pursuant to § 217.22(d) equals the amount not subject to deduction multiplied by 250 percent.
(vii) The risk-weighted asset amount for any other on-balance-sheet asset that does not meet the definition of a wholesale, retail, securitization, IMM, or equity exposure, cleared transaction, or default fund contribution and is not subject to deduction under § 217.22(a), (c), or (d) equals the carrying value of the asset.
(viii) The risk-weighted asset amount for a Paycheck Protection Program covered loan as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) equals zero.
(4) Non-material portfolios of exposures. The risk-weighted asset amount of a portfolio of exposures for which the Board-regulated institution has demonstrated to the Board’s satisfaction that the portfolio (when combined with all other portfolios of exposures that the Board-regulated institution seeks to treat under this paragraph (e)) is not material to the Board-regulated institution is the sum of the carrying values of on-balance sheet exposures plus the notional amounts of off-balance sheet exposures in the portfolio. For purposes of this paragraph (e)(4), the notional amount of an OTC derivative contract that is not a credit derivative is the EAD of the derivative as calculated in § 217.132.
(5) Assets held in non-guaranteed separate accounts. The risk-weighted asset amount for an on-balance sheet asset that is held in a non-guaranteed separate account is zero percent of the carrying value of the asset.
§ 217.132 Counterparty credit risk of repo-style transactions, eligible margin loans, and OTC derivative contracts.
(a) Methodologies for collateral recognition. (1) Instead of an LGD estimation methodology, a Board-regulated institution may use the following methodologies to recognize the benefits of financial collateral in mitigating the counterparty credit risk of repo-style transactions, eligible margin loans, collateralized OTC derivative contracts and single product netting sets of such transactions, and to recognize the benefits of any collateral in mitigating the counterparty credit risk of repo-style transactions that are included in a Board-regulated institution’s VaR-based measure under subpart F of this part:
(i) The collateral haircut approach set forth in paragraph (b)(2) of this section;
(ii) The internal models methodology set forth in paragraph (d) of this section; and
(iii) For single product netting sets of repo-style transactions and eligible margin loans, the simple VaR methodology set forth in paragraph (b)(3) of this section.
(2) A Board-regulated institution may use any combination of the three methodologies for collateral recognition; however, it must use the same methodology for transactions in the same category.
(3) A Board-regulated institution must use the methodology in paragraph (c) of this section, or with prior written approval of the Board, the internal model methodology in paragraph (d) of this section, to calculate EAD for an OTC derivative contract or a set of OTC derivative contracts subject to a qualifying master netting agreement. To estimate EAD for qualifying cross-product master netting agreements, a Board-regulated institution may only use the internal models methodology in paragraph (d) of this section.
(4) A Board-regulated institution must also use the methodology in paragraph (e) of this section to calculate the risk-weighted asset amounts for CVA for OTC derivatives.
(b) EAD for eligible margin loans and repo-style transactions—(1) General. A Board-regulated institution may recognize the credit risk mitigation benefits of financial collateral that secures an eligible margin loan, repo-style transaction, or single-product netting set of such transactions by factoring the collateral into its LGD estimates for the exposure. Alternatively, a Board-regulated institution may estimate an unsecured LGD for the exposure, as well as for any repo-style transaction that is included in the Board-regulated institution’s VaR-based measure under subpart F of this part, and determine the EAD of the exposure using:
(i) The collateral haircut approach described in paragraph (b)(2) of this section;
(ii) For netting sets only, the simple VaR methodology described in paragraph (b)(3) of this section; or
(iii) The internal models methodology described in paragraph (d) of this section.
(2) Collateral haircut approach—(i) EAD equation. A Board-regulated institution may determine EAD for an eligible margin loan, repo-style transaction, or netting set by setting EAD equal to max
(A) ΣE equals the value of the exposure (the sum of the current fair values of all instruments, gold, and cash the Board-regulated institution has lent, sold subject to repurchase, or posted as collateral to the counterparty under the transaction (or netting set));
(B) ΣC equals the value of the collateral (the sum of the current fair values of all instruments, gold, and cash the Board-regulated institution has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the transaction (or netting set));
(C) E
(D) H
(E) E
(F) H
(ii) Standard supervisory haircuts. (A) Under the standard supervisory haircuts approach:
(1) A Board-regulated institution must use the haircuts for market price volatility (H
Table 1 to § 217.132—Standard Supervisory Market Price Volatility Haircuts
1
| Residual maturity | Haircut (in percent) assigned based on: | Investment grade securitization exposures (in percent) | |||||
|---|---|---|---|---|---|---|---|
| Sovereign issuers risk weight under § 217.132 2 (in percent) | Non-sovereign issuers risk weight under § 217.132 (in percent) | ||||||
| Zero | 20 or 50 | 100 | 20 | 50 | 100 | ||
| Less than or equal to 1 year | 0.5 | 1.0 | 15.0 | 1.0 | 2.0 | 4.0 | 4.0 |
| Greater than 1 year and less than or equal to 5 years | 2.0 | 3.0 | 15.0 | 4.0 | 6.0 | 8.0 | 12.0 |
| Greater than 5 years | 4.0 | 6.0 | 15.0 | 8.0 | 12.0 | 16.0 | 24.0 |
| Main index equities (including convertible bonds) and gold | 15.0 | ||||||
| Other publicly traded equities (including convertible bonds) | 25.0 | ||||||
| Mutual funds | Highest haircut applicable to any security in which the fund can invest. | ||||||
| Cash collateral held | Zero | ||||||
| Other exposure types | 25.0 | ||||||
1 The market price volatility haircuts in Table 1 to § 217.132 are based on a 10 business-day holding period.
2 Includes a foreign PSE that receives a zero percent risk weight.
(2) For currency mismatches, a Board-regulated institution must use a haircut for foreign exchange rate volatility (H
(3) For repo-style transactions and client-facing derivative transactions, a Board-regulated institution may multiply the supervisory haircuts provided in paragraphs (b)(2)(ii)(A)(1) and (2) of this section by the square root of
(4) A Board-regulated institution must adjust the supervisory haircuts upward on the basis of a holding period longer than ten business days (for eligible margin loans) or five business days (for repo-style transactions), using the formula provided in paragraph (b)(2)(ii)(A)(6) of this section where the conditions in this paragraph (b)(2)(ii)(A)(4) apply. If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a Board-regulated institution must adjust the supervisory haircuts upward on the basis of a minimum holding period of twenty business days for the following quarter (except when a Board-regulated institution is calculating EAD for a cleared transaction under § 217.133). If a netting set contains one or more trades involving illiquid collateral, a Board-regulated institution must adjust the supervisory haircuts upward on the basis of a minimum holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted longer than the holding period, then the Board-regulated institution must adjust the supervisory haircuts upward for that netting set on the basis of a minimum holding period that is at least two times the minimum holding period for that netting set.
(5)(i) A Board-regulated institution must adjust the supervisory haircuts upward on the basis of a holding period longer than ten business days for collateral associated with derivative contracts (five business days for client-facing derivative contracts) using the formula provided in paragraph (b)(2)(ii)(A)(6) of this section where the conditions in this paragraph (b)(2)(ii)(A)(5)(i) apply. For collateral associated with a derivative contract that is within a netting set that is composed of more than 5,000 derivative contracts that are not cleared transactions, a Board-regulated institution must use a minimum holding period of twenty business days. If a netting set contains one or more trades involving illiquid collateral or a derivative contract that cannot be easily replaced, a Board-regulated institution must use a minimum holding period of twenty business days.
(ii) Notwithstanding paragraph (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) of this section, for collateral associated with a derivative contract in a netting set under which more than two margin disputes that lasted longer than the holding period occurred during the two previous quarters, the minimum holding period is twice the amount provided under paragraph (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) of this section.
(6) A Board-regulated institution must adjust the standard supervisory haircuts upward, pursuant to the adjustments provided in paragraphs (b)(2)(ii)(A)(3) through (5) of this section, using the following formula:
(7) If the instrument a Board-regulated institution has lent, sold subject to repurchase, or posted as collateral does not meet the definition of financial collateral, the Board-regulated institution must use a 25.0 percent haircut for market price volatility (Hs).
(iii) Own internal estimates for haircuts. With the prior written approval of the Board, a Board-regulated institution may calculate haircuts (H
(A) To receive Board approval to use its own internal estimates, a Board-regulated institution must satisfy the following minimum quantitative standards:
(1) A Board-regulated institution must use a 99th percentile one-tailed confidence interval.
(2) The minimum holding period for a repo-style transaction is five business days and for an eligible margin loan is ten business days except for transactions or netting sets for which paragraph (b)(2)(iii)(A)(3) of this section applies. When a Board-regulated institution calculates an own-estimates haircut on a T
(i) T
(ii) T
(iii) H
(3) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a Board-regulated institution must calculate the haircut using a minimum holding period of twenty business days for the following quarter (except when a Board-regulated institution is calculating EAD for a cleared transaction under § 217.133). If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, a Board-regulated institution must calculate the haircut using a minimum holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the Board-regulated institution must calculate the haircut for transactions in that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set.
(4) A Board-regulated institution is required to calculate its own internal estimates with inputs calibrated to historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate to the security or category of securities.
(5) A Board-regulated institution must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the Board-regulated institution’s own internal estimates for haircuts under this section and must be able to provide empirical support for the period used. The Board-regulated institution must obtain the prior approval of the Board for, and notify the Board if the Board-regulated institution makes any material changes to, these policies and procedures.
(6) Nothing in this section prevents the Board from requiring a Board-regulated institution to use a different period of significant financial stress in the calculation of own internal estimates for haircuts.
(7) A Board-regulated institution must update its data sets and calculate haircuts no less frequently than quarterly and must also reassess data sets and haircuts whenever market prices change materially.
(B) With respect to debt securities that are investment grade, a Board-regulated institution may calculate haircuts for categories of securities. For a category of securities, the Board-regulated institution must calculate the haircut on the basis of internal volatility estimates for securities in that category that are representative of the securities in that category that the Board-regulated institution has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. In determining relevant categories, the Board-regulated institution must at a minimum take into account:
(1) The type of issuer of the security;
(2) The credit quality of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the security.
(C) With respect to debt securities that are not investment grade and equity securities, a Board-regulated institution must calculate a separate haircut for each individual security.
(D) Where an exposure or collateral (whether in the form of cash or securities) is denominated in a currency that differs from the settlement currency, the Board-regulated institution must calculate a separate currency mismatch haircut for its net position in each mismatched currency based on estimated volatilities of foreign exchange rates between the mismatched currency and the settlement currency.
(E) A Board-regulated institution’s own estimates of market price and foreign exchange rate volatilities may not take into account the correlations among securities and foreign exchange rates on either the exposure or collateral side of a transaction (or netting set) or the correlations among securities and foreign exchange rates between the exposure and collateral sides of the transaction (or netting set).
(3) Simple VaR methodology. With the prior written approval of the Board, a Board-regulated institution may estimate EAD for a netting set using a VaR model that meets the requirements in paragraph (b)(3)(iii) of this section. In such event, the Board-regulated institution must set EAD equal to max {0, [(ΣE − ΣC) + PFE]}, where:
(i) ΣE equals the value of the exposure (the sum of the current fair values of all instruments, gold, and cash the Board-regulated institution has lent, sold subject to repurchase, or posted as collateral to the counterparty under the netting set);
(ii) ΣC equals the value of the collateral (the sum of the current fair values of all instruments, gold, and cash the Board-regulated institution has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the netting set); and
(iii) PFE (potential future exposure) equals the Board-regulated institution’s empirically based best estimate of the 99th percentile, one-tailed confidence interval for an increase in the value of (ΣE − ΣC) over a five-business-day holding period for repo-style transactions, or over a ten-business-day holding period for eligible margin loans except for netting sets for which paragraph (b)(3)(iv) of this section applies using a minimum one-year historical observation period of price data representing the instruments that the Board-regulated institution has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. The Board-regulated institution must validate its VaR model by establishing and maintaining a rigorous and regular backtesting regime.
(iv) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a Board-regulated institution must use a twenty-business-day holding period for the following quarter (except when a Board-regulated institution is calculating EAD for a cleared transaction under § 217.133). If a netting set contains one or more trades involving illiquid collateral, a Board-regulated institution must use a twenty-business-day holding period. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the Board-regulated institution must set its PFE for that netting set equal to an estimate over a holding period that is at least two times the minimum holding period for that netting set.
(c) EAD for derivative contracts—(1) Options for determining EAD. A Board-regulated institution must determine the EAD for a derivative contract using the standardized approach for counterparty credit risk (SA-CCR) under paragraph (c)(5) of this section or using the internal models methodology described in paragraph (d) of this section. If a Board-regulated institution elects to use SA-CCR for one or more derivative contracts, the exposure amount determined under SA-CCR is the EAD for the derivative contract or derivatives contracts. A Board-regulation institution must use the same methodology to calculate the exposure amount for all its derivative contracts and may change its election only with prior approval of the Board. A Board-regulated institution may reduce the EAD calculated according to paragraph (c)(5) of this section by the credit valuation adjustment that the Board-regulated institution has recognized in its balance sheet valuation of any derivative contracts in the netting set. For purposes of this paragraph (c)(1), the credit valuation adjustment does not include any adjustments to common equity tier 1 capital attributable to changes in the fair value of the Board-regulated institution’s liabilities that are due to changes in its own credit risk since the inception of the transaction with the counterparty.
(2) Definitions. For purposes of this paragraph (c) of this section, the following definitions apply:
(i) End date means the last date of the period referenced by an interest rate or credit derivative contract or, if the derivative contract references another instrument, by the underlying instrument, except as otherwise provided in paragraph (c) of this section.
(ii) Start date means the first date of the period referenced by an interest rate or credit derivative contract or, if the derivative contract references the value of another instrument, by underlying instrument, except as otherwise provided in paragraph (c) of this section.
(iii) Hedging set means:
(A) With respect to interest rate derivative contracts, all such contracts within a netting set that reference the same reference currency;
(B) With respect to exchange rate derivative contracts, all such contracts within a netting set that reference the same currency pair;
(C) With respect to credit derivative contract, all such contracts within a netting set;
(D) With respect to equity derivative contracts, all such contracts within a netting set;
(E) With respect to a commodity derivative contract, all such contracts within a netting set that reference one of the following commodity categories: Energy, metal, agricultural, or other commodities;
(F) With respect to basis derivative contracts, all such contracts within a netting set that reference the same pair of risk factors and are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such contracts within a netting set that reference one of interest rate, exchange rate, credit, equity, or commodity risk factors, separated according to the requirements under paragraphs (c)(2)(iii)(A) through (E) of this section.
(H) If the risk of a derivative contract materially depends on more than one of interest rate, exchange rate, credit, equity, or commodity risk factors, the Board may require a Board-regulated institution to include the derivative contract in each appropriate hedging set under paragraphs (c)(1)(iii)(A) through (E) of this section.
(3) Credit derivatives. Notwithstanding paragraphs (c)(1) and (c)(2) of this section:
(i) A Board-regulated institution that purchases a credit derivative that is recognized under § 217.134 or § 217.135 as a credit risk mitigant for an exposure that is not a covered position under subpart F of this part is not required to calculate a separate counterparty credit risk capital requirement under this section so long as the Board-regulated institution does so consistently for all such credit derivatives and either includes or excludes all such credit derivatives that are subject to a master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes.
(ii) A Board-regulated institution that is the protection provider in a credit derivative must treat the credit derivative as a wholesale exposure to the reference obligor and is not required to calculate a counterparty credit risk capital requirement for the credit derivative under this section, so long as it does so consistently for all such credit derivatives and either includes all or excludes all such credit derivatives that are subject to a master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes (unless the Board-regulated institution is treating the credit derivative as a covered position under subpart F of this part, in which case the Board-regulated institution must calculate a supplemental counterparty credit risk capital requirement under this section).
(4) Equity derivatives. A Board-regulated institution must treat an equity derivative contract as an equity exposure and compute a risk-weighted asset amount for the equity derivative contract under §§ 217.151-217.155 (unless the Board-regulated institution is treating the contract as a covered position under subpart F of this part). In addition, if the Board-regulated institution is treating the contract as a covered position under subpart F of this part, and under certain other circumstances described in § 217.155, the Board-regulated institution must also calculate a risk-based capital requirement for the counterparty credit risk of an equity derivative contract under this section.
(5) Exposure amount. (i) The exposure amount of a netting set, as calculated under paragraph (c) of this section, is equal to 1.4 multiplied by the sum of the replacement cost of the netting set, as calculated under paragraph (c)(6) of this section, and the potential future exposure of the netting set, as calculated under paragraph (c)(7) of this section.
(ii) Notwithstanding the requirements of paragraph (c)(5)(i) of this section, the exposure amount of a netting set subject to a variation margin agreement, excluding a netting set that is subject to a variation margin agreement under which the counterparty to the variation margin agreement is not required to post variation margin, is equal to the lesser of the exposure amount of the netting set calculated under paragraph (c)(5)(i) of this section and the exposure amount of the netting set calculated under paragraph (c)(5)(i) of this section as if the netting set were not subject to a variation margin agreement.
(iii) Notwithstanding the requirements of paragraph (c)(5)(i) of this section, the exposure amount of a netting set that consists of only sold options in which the premiums have been fully paid by the counterparty to the options and where the options are not subject to a variation margin agreement is zero.
(iv) Notwithstanding the requirements of paragraph (c)(5)(i) of this section, the exposure amount of a netting set in which the counterparty is a commercial end-user is equal to the sum of replacement cost, as calculated under paragraph (c)(6) of this section, and the potential future exposure of the netting set, as calculated under paragraph (c)(7) of this section.
(v) For purposes of the exposure amount calculated under paragraph (c)(5)(i) of this section and all calculations that are part of that exposure amount, a Board-regulated institution may elect to treat a derivative contract that is a cleared transaction that is not subject to a variation margin agreement as one that is subject to a variation margin agreement, if the derivative contract is subject to a requirement that the counterparties make daily cash payments to each other to account for changes in the fair value of the derivative contract and to reduce the net position of the contract to zero. If a Board-regulated institution makes an election under this paragraph (c)(5)(v) for one derivative contract, it must treat all other derivative contracts within the same netting set that are eligible for an election under this paragraph (c)(5)(v) as derivative contracts that are subject to a variation margin agreement.
(vi) For purposes of the exposure amount calculated under paragraph (c)(5)(i) of this section and all calculations that are part of that exposure amount, a Board-regulated institution may elect to treat a credit derivative contract, equity derivative contract, or commodity derivative contract that references an index as if it were multiple derivative contracts each referencing one component of the index.
(6) Replacement cost of a netting set—(i) Netting set subject to a variation margin agreement under which the counterparty must post variation margin. The replacement cost of a netting set subject to a variation margin agreement, excluding a netting set that is subject to a variation margin agreement under which the counterparty is not required to post variation margin, is the greater of:
(A) The sum of the fair values (after excluding any valuation adjustments) of the derivative contracts within the netting set less the sum of the net independent collateral amount and the variation margin amount applicable to such derivative contracts;
(B) The sum of the variation margin threshold and the minimum transfer amount applicable to the derivative contracts within the netting set less the net independent collateral amount applicable to such derivative contracts; or
(C) Zero.
(ii) Netting sets not subject to a variation margin agreement under which the counterparty must post variation margin. The replacement cost of a netting set that is not subject to a variation margin agreement under which the counterparty must post variation margin to the Board-regulated institution is the greater of:
(A) The sum of the fair values (after excluding any valuation adjustments) of the derivative contracts within the netting set less the sum of the net independent collateral amount and variation margin amount applicable to such derivative contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a single variation margin agreement. Notwithstanding paragraphs (c)(6)(i) and (ii) of this section, the replacement cost for multiple netting sets subject to a single variation margin agreement must be calculated according to paragraph (c)(10)(i) of this section.
(iv) Netting set subject to multiple variation margin agreements or a hybrid netting set. Notwithstanding paragraphs (c)(6)(i) and (ii) of this section, the replacement cost for a netting set subject to multiple variation margin agreements or a hybrid netting set must be calculated according to paragraph (c)(11)(i) of this section.
(7) Potential future exposure of a netting set. The potential future exposure of a netting set is the product of the PFE multiplier and the aggregated amount.
(i) PFE multiplier. The PFE multiplier is calculated according to the following formula:
(ii) Aggregated amount. The aggregated amount is the sum of all hedging set amounts, as calculated under paragraph (c)(8) of this section, within a netting set.
(iii) Multiple netting sets subject to a single variation margin agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this section and when calculating the potential future exposure for purposes of total leverage exposure under § 217.10(c)(2)(ii)(B), the potential future exposure for multiple netting sets subject to a single variation margin agreement must be calculated according to paragraph (c)(10)(ii) of this section.
(iv) Netting set subject to multiple variation margin agreements or a hybrid netting set. Notwithstanding paragraphs (c)(7)(i) and (ii) of this section and when calculating the potential future exposure for purposes of total leverage exposure under § 217.10(c)(2)(ii)(B), the potential future exposure for a netting set subject to multiple variation margin agreements or a hybrid netting set must be calculated according to paragraph (c)(11)(ii) of this section.
(8) Hedging set amount—(i) Interest rate derivative contracts. To calculate the hedging set amount of an interest rate derivative contract hedging set, a Board-regulated institution may use either of the formulas provided in paragraphs (c)(8)(i)(A) and (B) of this section:
(A) Formula 1 is as follows:
(B) Formula 2 is as follows:
(ii) Exchange rate derivative contracts. For an exchange rate derivative contract hedging set, the hedging set amount equals the absolute value of the sum of the adjusted derivative contract amounts, as calculated under paragraph (c)(9) of this section, within the hedging set.
(iii) Credit derivative contracts and equity derivative contracts. The hedging set amount of a credit derivative contract hedging set or equity derivative contract hedging set within a netting set is calculated according to the following formula:
(iv) Commodity derivative contracts. The hedging set amount of a commodity derivative contract hedging set within a netting set is calculated according to the following formula:
(v) Basis derivative contracts and volatility derivative contracts. Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, a Board-regulated institution must calculate a separate hedging set amount for each basis derivative contract hedging set and each volatility derivative contract hedging set. A Board-regulated institution must calculate such hedging set amounts using one of the formulas under paragraphs (c)(8)(i) through (iv) that corresponds to the primary risk factor of the hedging set being calculated.
(9) Adjusted derivative contract amount—(i) Summary. To calculate the adjusted derivative contract amount of a derivative contract, a Board-regulated institution must determine the adjusted notional amount of derivative contract, pursuant to paragraph (c)(9)(ii) of this section, and multiply the adjusted notional amount by each of the supervisory delta adjustment, pursuant to paragraph (c)(9)(iii) of this section, the maturity factor, pursuant to paragraph (c)(9)(iv) of this section, and the applicable supervisory factor, as provided in Table 3 to this section.
(ii) Adjusted notional amount. (A)(1) For an interest rate derivative contract or a credit derivative contract, the adjusted notional amount equals the product of the notional amount of the derivative contract, as measured in U.S. dollars using the exchange rate on the date of the calculation, and the supervisory duration, as calculated by the following formula:
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit derivative contract that is a variable notional swap, the notional amount is equal to the time-weighted average of the contractual notional amounts of such a swap over the remaining life of the swap; and
(ii) For an interest rate derivative contract or a credit derivative contract that is a leveraged swap, in which the notional amount of all legs of the derivative contract are divided by a factor and all rates of the derivative contract are multiplied by the same factor, the notional amount is equal to the notional amount of an equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted notional amount is the notional amount of the non-U.S. denominated currency leg of the derivative contract, as measured in U.S. dollars using the exchange rate on the date of the calculation. If both legs of the exchange rate derivative contract are denominated in currencies other than U.S. dollars, the adjusted notional amount of the derivative contract is the largest leg of the derivative contract, as measured in U.S. dollars using the exchange rate on the date of the calculation.
(2) Notwithstanding paragraph (c)(9)(ii)(B)(1) of this section, for an exchange rate derivative contract with multiple exchanges of principal, the Board-regulated institution must set the adjusted notional amount of the derivative contract equal to the notional amount of the derivative contract multiplied by the number of exchanges of principal under the derivative contract.
(C)(1) For an equity derivative contract or a commodity derivative contract, the adjusted notional amount is the product of the fair value of one unit of the reference instrument underlying the derivative contract and the number of such units referenced by the derivative contract.
(2) Notwithstanding paragraph (c)(9)(ii)(C)(1) of this section, when calculating the adjusted notional amount for an equity derivative contract or a commodity derivative contract that is a volatility derivative contract, the Board-regulated institution must replace the unit price with the underlying volatility referenced by the volatility derivative contract and replace the number of units with the notional amount of the volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative contract that is not an option contract or collateralized debt obligation tranche, the supervisory delta adjustment is 1 if the fair value of the derivative contract increases when the value of the primary risk factor increases and −1 if the fair value of the derivative contract decreases when the value of the primary risk factor increases.
(B)(1) For a derivative contract that is an option contract, the supervisory delta adjustment is determined by the following formulas, as applicable:
(2) As used in the formulas in Table 2 to this section:
(i) Φ is the standard normal cumulative distribution function;
(ii) P equals the current fair value of the instrument or risk factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest contractual exercise date of the option;
(v) λ equals zero for all derivative contracts except interest rate options for the currencies where interest rates have negative values. The same value of λ must be used for all interest rate options that are denominated in the same currency. To determine the value of λ for a given currency, a Board-regulated institution must find the lowest value L of P and K of all interest rate options in a given currency that the Board-regulated institution has with all counterparties. Then, λ is set according to this formula:
λ = max{−L + 0.1%, 0}; and
(vi) σ equals the supervisory option volatility, as provided in Table 3 to this section.
(C)(1) For a derivative contract that is a collateralized debt obligation tranche, the supervisory delta adjustment is determined by the following formula:
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this section:
(i) A is the attachment point, which equals the ratio of the notional amounts of all underlying exposures that are subordinated to the Board-regulated institution’s exposure to the total notional amount of all underlying exposures, expressed as a decimal value between zero and one;
(ii) D is the detachment point, which equals one minus the ratio of the notional amounts of all underlying exposures that are senior to the Board-regulated institution’s exposure to the total notional amount of all underlying exposures, expressed as a decimal value between zero and one; and
(iii) The resulting amount is designated with a positive sign if the collateralized debt obligation tranche was purchased by the Board-regulated institution and is designated with a negative sign if the collateralized debt obligation tranche was sold by the Board-regulated institution.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative contract that is subject to a variation margin agreement, excluding derivative contracts that are subject to a variation margin agreement under which the counterparty is not required to post variation margin, is determined by the following formula:
Where MPOR refers to the period from the most recent exchange of collateral covering a netting set of derivative contracts with a defaulting counterparty until the derivative contracts are closed out and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a client-facing derivative transaction, MPOR cannot be less than ten business days plus the periodicity of re-margining expressed in business days minus one business day;
(ii) For a derivative contract that is a client-facing derivative transaction, cannot be less than five business days plus the periodicity of re-margining expressed in business days minus one business day; and
(iii) For a derivative contract that is within a netting set that is composed of more than 5,000 derivative contracts that are not cleared transactions, or a netting set that contains one or more trades involving illiquid collateral or a derivative contract that cannot be easily replaced, MPOR cannot be less than twenty business days.
(3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) and (2) of this section, for a netting set subject to more than two outstanding disputes over margin that lasted longer than the MPOR over the previous two quarters, the applicable floor is twice the amount provided in paragraphs (c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not subject to a variation margin agreement, or derivative contracts under which the counterparty is not required to post variation margin, is determined by the following formula:
Where M equals the greater of 10 business days and the remaining maturity of the contract, as measured in business days.
(C) For purposes of paragraph (c)(9)(iv) of this section, if a Board-regulated institution has elected pursuant to paragraph (c)(5)(v) of this section to treat a derivative contract that is a cleared transaction that is not subject to a variation margin agreement as one that is subject to a variation margin agreement, the Board-regulated institution must treat the derivative contract as subject to a variation margin agreement with maturity factor as determined according to (c)(9)(iv)(A) of this section, and daily settlement does not change the end date of the period referenced by the derivative contract.
(v) Derivative contract as multiple effective derivative contracts. A Board-regulated institution must separate a derivative contract into separate derivative contracts, according to the following rules:
(A) For an option where the counterparty pays a predetermined amount if the value of the underlying asset is above or below the strike price and nothing otherwise (binary option), the option must be treated as two separate options. For purposes of paragraph (c)(9)(iii)(B) of this section, a binary option with strike K must be represented as the combination of one bought European option and one sold European option of the same type as the original option (put or call) with the strikes set equal to 0.95 * K and 1.05 * K so that the payoff of the binary option is reproduced exactly outside the region between the two strikes. The absolute value of the sum of the adjusted derivative contract amounts of the bought and sold options is capped at the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a combination of standard option payoffs (such as collar, butterfly spread, calendar spread, straddle, and strangle), a Board-regulated institution must treat each standard option component as a separate derivative contract.
(C) For a derivative contract that includes multiple-payment options, (such as interest rate caps and floors), a Board-regulated institution may represent each payment option as a combination of effective single-payment options (such as interest rate caplets and floorlets).
(D) A Board-regulated institution may not decompose linear derivative contracts (such as swaps) into components.
(10) Multiple netting sets subject to a single variation margin agreement—(i) Calculating replacement cost. Notwithstanding paragraph (c)(6) of this section, a Board-regulated institution shall assign a single replacement cost to multiple netting sets that are subject to a single variation margin agreement under which the counterparty must post variation margin, calculated according to the following formula:
(ii) Calculating potential future exposure. Notwithstanding paragraph (c)(5) of this section, a Board-regulated institution shall assign a single potential future exposure to multiple netting sets that are subject to a single variation margin agreement under which the counterparty must post variation margin equal to the sum of the potential future exposure of each such netting set, each calculated according to paragraph (c)(7) of this section as if such nettings sets were not subject to a variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or a hybrid netting set—(i) Calculating replacement cost. To calculate replacement cost for either a netting set subject to multiple variation margin agreements under which the counterparty to each variation margin agreement must post variation margin, or a netting set composed of at least one derivative contract subject to variation margin agreement under which the counterparty must post variation margin and at least one derivative contract that is not subject to such a variation margin agreement, the calculation for replacement cost is provided under paragraph (c)(6)(i) of this section, except that the variation margin threshold equals the sum of the variation margin thresholds of all variation margin agreements within the netting set and the minimum transfer amount equals the sum of the minimum transfer amounts of all the variation margin agreements within the netting set.
(ii) Calculating potential future exposure. (A) To calculate potential future exposure for a netting set subject to multiple variation margin agreements under which the counterparty to each variation margin agreement must post variation margin, or a netting set composed of at least one derivative contract subject to variation margin agreement under which the counterparty to the derivative contract must post variation margin and at least one derivative contract that is not subject to such a variation margin agreement, a Board-regulated institution must divide the netting set into sub-netting sets (as described in paragraph (c)(11)(ii)(B) of this section) and calculate the aggregated amount for each sub-netting set. The aggregated amount for the netting set is calculated as the sum of the aggregated amounts for the sub-netting sets. The multiplier is calculated for the entire netting set.
(B) For purposes of paragraph (c)(11)(ii)(A) of this section, the netting set must be divided into sub-netting sets as follows:
(1) All derivative contracts within the netting set that are not subject to a variation margin agreement or that are subject to a variation margin agreement under which the counterparty is not required to post variation margin form a single sub-netting set. The aggregated amount for this sub-netting set is calculated as if the netting set is not subject to a variation margin agreement.
(2) All derivative contracts within the netting set that are subject to variation margin agreements in which the counterparty must post variation margin and that share the same value of the MPOR form a single sub-netting set. The aggregated amount for this sub-netting set is calculated as if the netting set is subject to a variation margin agreement, using the MPOR value shared by the derivative contracts within the netting set.
Table 3 to § 217.132—Supervisory Option Volatility, Supervisory Correlation Parameters, and Supervisory Factors for Derivative Contracts
| Asset class | Category | Type | Supervisory option volatility (percent) | Supervisory correlation factor (percent) | Supervisory factor 1 (percent) |
|---|---|---|---|---|---|
| Interest rate | N/A | N/A | 50 | N/A | 0.50 |
| Exchange rate | N/A | N/A | 15 | N/A | 4.0 |
| Credit, single name | Investment grade | N/A | 100 | 50 | 0.46 |
| Speculative grade | N/A | 100 | 50 | 1.3 | |
| Sub-speculative grade | N/A | 100 | 50 | 6.0 | |
| Credit, index | Investment Grade | N/A | 80 | 80 | 0.38 |
| Speculative Grade | N/A | 80 | 80 | 1.06 | |
| Equity, single name | N/A | N/A | 120 | 50 | 32 |
| Equity, index | N/A | N/A | 75 | 80 | 20 |
| Commodity | Energy | Electricity | 150 | 40 | 40 |
| Other | 70 | 40 | 18 | ||
| Metals | N/A | 70 | 40 | 18 | |
| Agricultural | N/A | 70 | 40 | 18 | |
| Other | N/A | 70 | 40 | 18 |
1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this Table 3, and the applicable supervisory factor for volatility derivative contract hedging sets is equal to 5 times the supervisory factor provided in this Table 3.
(d) Internal models methodology. (1)(i) With prior written approval from the Board, a Board-regulated institution may use the internal models methodology in this paragraph (d) to determine EAD for counterparty credit risk for derivative contracts (collateralized or uncollateralized) and single-product netting sets thereof, for eligible margin loans and single-product netting sets thereof, and for repo-style transactions and single-product netting sets thereof.
(ii) A Board-regulated institution that uses the internal models methodology for a particular transaction type (derivative contracts, eligible margin loans, or repo-style transactions) must use the internal models methodology for all transactions of that transaction type. A Board-regulated institution may choose to use the internal models methodology for one or two of these three types of exposures and not the other types.
(iii) A Board-regulated institution may also use the internal models methodology for derivative contracts, eligible margin loans, and repo-style transactions subject to a qualifying cross-product netting agreement if:
(A) The Board-regulated institution effectively integrates the risk mitigating effects of cross-product netting into its risk management and other information technology systems; and
(B) The Board-regulated institution obtains the prior written approval of the Board.
(iv) A Board-regulated institution that uses the internal models methodology for a transaction type must receive approval from the Board to cease using the methodology for that transaction type or to make a material change to its internal model.
(2) Risk-weighted assets using IMM. Under the IMM, a Board-regulated institution uses an internal model to estimate the expected exposure (EE) for a netting set and then calculates EAD based on that EE. A Board-regulated institution must calculate two EEs and two EADs (one stressed and one unstressed) for each netting set as follows:
(i) EAD
(ii) EAD
(iii) The Board-regulated institution must use its internal model’s probability distribution for changes in the fair value of a netting set that are attributable to changes in market variables to determine EE; and
(iv) Under the internal models methodology, EAD = Max (0, α × effective EPE − CVA), or, subject to the prior written approval of Board as provided in paragraph (d)(10) of this section, a more conservative measure of EAD.
(A) CVA equals the credit valuation adjustment that the Board-regulated institution has recognized in its balance sheet valuation of any OTC derivative contracts in the netting set. For purposes of this paragraph (d), CVA does not include any adjustments to common equity tier 1 capital attributable to changes in the fair value of the Board-regulated institution’s liabilities that are due to changes in its own credit risk since the inception of the transaction with the counterparty.
(C) α = 1.4 except as provided in paragraph (d)(6) of this section, or when the Board has determined that the Board-regulated institution must set α higher based on the Board-regulated institution’s specific characteristics of counterparty credit risk or model performance.
(v) A Board-regulated institution may include financial collateral currently posted by the counterparty as collateral (but may not include other forms of collateral) when calculating EE.
(vi) If a Board-regulated institution hedges some or all of the counterparty credit risk associated with a netting set using an eligible credit derivative, the Board-regulated institution may take the reduction in exposure to the counterparty into account when estimating EE. If the Board-regulated institution recognizes this reduction in exposure to the counterparty in its estimate of EE, it must also use its internal model to estimate a separate EAD for the Board-regulated institution’s exposure to the protection provider of the credit derivative.
(3) Prior approval relating to EAD calculation. To obtain Board approval to calculate the distributions of exposures upon which the EAD calculation is based, the Board-regulated institution must demonstrate to the satisfaction of the Board that it has been using for at least one year an internal model that broadly meets the following minimum standards, with which the Board-regulated institution must maintain compliance:
(i) The model must have the systems capability to estimate the expected exposure to the counterparty on a daily basis (but is not expected to estimate or report expected exposure on a daily basis);
(ii) The model must estimate expected exposure at enough future dates to reflect accurately all the future cash flows of contracts in the netting set;
(iii) The model must account for the possible non-normality of the exposure distribution, where appropriate;
(iv) The Board-regulated institution must measure, monitor, and control current counterparty exposure and the exposure to the counterparty over the whole life of all contracts in the netting set;
(v) The Board-regulated institution must be able to measure and manage current exposures gross and net of collateral held, where appropriate. The Board-regulated institution must estimate expected exposures for OTC derivative contracts both with and without the effect of collateral agreements;
(vi) The Board-regulated institution must have procedures to identify, monitor, and control wrong-way risk throughout the life of an exposure. The procedures must include stress testing and scenario analysis;
(vii) The model must use current market data to compute current exposures. The Board-regulated institution must estimate model parameters using historical data from the most recent three-year period and update the data quarterly or more frequently if market conditions warrant. The Board-regulated institution should consider using model parameters based on forward-looking measures, where appropriate;
(viii) When estimating model parameters based on a stress period, the Board-regulated institution must use at least three years of historical data that include a period of stress to the credit default spreads of the Board-regulated institution’s counterparties. The Board-regulated institution must review the data set and update the data as necessary, particularly for any material changes in its counterparties. The Board-regulated institution must demonstrate, at least quarterly, and maintain documentation of such demonstration, that the stress period coincides with increased CDS or other credit spreads of the Board-regulated institution’s counterparties. The Board-regulated institution must have procedures to evaluate the effectiveness of its stress calibration that include a process for using benchmark portfolios that are vulnerable to the same risk factors as the Board-regulated institution’s portfolio. The Board may require the Board-regulated institution to modify its stress calibration to better reflect actual historic losses of the portfolio;
(ix) A Board-regulated institution must subject its internal model to an initial validation and annual model review process. The model review should consider whether the inputs and risk factors, as well as the model outputs, are appropriate. As part of the model review process, the Board-regulated institution must have a backtesting program for its model that includes a process by which unacceptable model performance will be determined and remedied;
(x) A Board-regulated institution must have policies for the measurement, management and control of collateral and margin amounts; and
(xi) A Board-regulated institution must have a comprehensive stress testing program that captures all credit exposures to counterparties, and incorporates stress testing of principal market risk factors and creditworthiness of counterparties.
(4) Calculating the maturity of exposures. (i) If the remaining maturity of the exposure or the longest-dated contract in the netting set is greater than one year, the Board-regulated institution must set M for the exposure or netting set equal to the lower of five years or M(EPE), where:
(ii) If the remaining maturity of the exposure or the longest-dated contract in the netting set is one year or less, the Board-regulated institution must set M for the exposure or netting set equal to one year, except as provided in § 217.131(d)(7).
(iii) Alternatively, a Board-regulated institution that uses an internal model to calculate a one-sided credit valuation adjustment may use the effective credit duration estimated by the model as M(EPE) in place of the formula in paragraph (d)(4)(i) of this section.
(5) Effects of collateral agreements on EAD. A Board-regulated institution may capture the effect on EAD of a collateral agreement that requires receipt of collateral when exposure to the counterparty increases, but may not capture the effect on EAD of a collateral agreement that requires receipt of collateral when counterparty credit quality deteriorates. Two methods are available to capture the effect of a collateral agreement, as set forth in paragraphs (d)(5)(i) and (ii) of this section:
(i) With prior written approval from the Board, a Board-regulated institution may include the effect of a collateral agreement within its internal model used to calculate EAD. The Board-regulated institution may set EAD equal to the expected exposure at the end of the margin period of risk. The margin period of risk means, with respect to a netting set subject to a collateral agreement, the time period from the most recent exchange of collateral with a counterparty until the next required exchange of collateral, plus the period of time required to sell and realize the proceeds of the least liquid collateral that can be delivered under the terms of the collateral agreement and, where applicable, the period of time required to re-hedge the resulting market risk upon the default of the counterparty. The minimum margin period of risk is set according to paragraph (d)(5)(iii) of this section; or
(ii) As an alternative to paragraph (d)(5)(i) of this section, a Board-regulated institution that can model EPE without collateral agreements but cannot achieve the higher level of modeling sophistication to model EPE with collateral agreements can set effective EPE for a collateralized netting set equal to the lesser of:
(A) An add-on that reflects the potential increase in exposure of the netting set over the margin period of risk, plus the larger of:
(1) The current exposure of the netting set reflecting all collateral held or posted by the Board-regulated institution excluding any collateral called or in dispute; or
(2) The largest net exposure including all collateral held or posted under the margin agreement that would not trigger a collateral call. For purposes of this section, the add-on is computed as the expected increase in the netting set’s exposure over the margin period of risk (set in accordance with paragraph (d)(5)(iii) of this section); or
(B) Effective EPE without a collateral agreement plus any collateral the Board-regulated institution posts to the counterparty that exceeds the required margin amount.
(iii) For purposes of this part, including paragraphs (d)(5)(i) and (ii) of this section, the margin period of risk for a netting set subject to a collateral agreement is:
(A) Five business days for repo-style transactions subject to daily remargining and daily marking-to-market, and ten business days for other transactions when liquid financial collateral is posted under a daily margin maintenance requirement, or
(B) Twenty business days if the number of trades in a netting set exceeds 5,000 at any time during the previous quarter (except if the Board-regulated institution is calculating EAD for a cleared transaction under § 217.133) or contains one or more trades involving illiquid collateral or any derivative contract that cannot be easily replaced. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the margin period of risk, then the Board-regulated institution must use a margin period of risk for that netting set that is at least two times the minimum margin period of risk for that netting set. If the periodicity of the receipt of collateral is N-days, the minimum margin period of risk is the minimum margin period of risk under this paragraph (d) plus N minus 1. This period should be extended to cover any impediments to prompt re-hedging of any market risk.
(C) Five business days for an OTC derivative contract or netting set of OTC derivative contracts where the Board-regulated institution is either acting as a financial intermediary and enters into an offsetting transaction with a CCP or where the Board-regulated institution provides a guarantee to the CCP on the performance of the client. A Board-regulated institution must use a longer holding period if the Board-regulated institution determines that a longer period is appropriate. Additionally, the Board may require the Board-regulated institution to set a longer holding period if the Board determines that a longer period is appropriate due to the nature, structure, or characteristics of the transaction or is commensurate with the risks associated with the transaction.
(6) Own estimate of alpha. With prior written approval of the Board, a Board-regulated institution may calculate alpha as the ratio of economic capital from a full simulation of counterparty exposure across counterparties that incorporates a joint simulation of market and credit risk factors (numerator) and economic capital based on EPE (denominator), subject to a floor of 1.2. For purposes of this calculation, economic capital is the unexpected losses for all counterparty credit risks measured at a 99.9 percent confidence level over a one-year horizon. To receive approval, the Board-regulated institution must meet the following minimum standards to the satisfaction of the Board:
(i) The Board-regulated institution’s own estimate of alpha must capture in the numerator the effects of:
(A) The material sources of stochastic dependency of distributions of fair values of transactions or portfolios of transactions across counterparties;
(B) Volatilities and correlations of market risk factors used in the joint simulation, which must be related to the credit risk factor used in the simulation to reflect potential increases in volatility or correlation in an economic downturn, where appropriate; and
(C) The granularity of exposures (that is, the effect of a concentration in the proportion of each counterparty’s exposure that is driven by a particular risk factor).
(ii) The Board-regulated institution must assess the potential model uncertainty in its estimates of alpha.
(iii) The Board-regulated institution must calculate the numerator and denominator of alpha in a consistent fashion with respect to modeling methodology, parameter specifications, and portfolio composition.
(iv) The Board-regulated institution must review and adjust as appropriate its estimates of the numerator and denominator of alpha on at least a quarterly basis and more frequently when the composition of the portfolio varies over time.
(7) Risk-based capital requirements for transactions with specific wrong-way risk. A Board-regulated institution must determine if a repo-style transaction, eligible margin loan, bond option, or equity derivative contract or purchased credit derivative to which the Board-regulated institution applies the internal models methodology under this paragraph (d) has specific wrong-way risk. If a transaction has specific wrong-way risk, the Board-regulated institution must treat the transaction as its own netting set and exclude it from the model described in § 217.132(d)(2) and instead calculate the risk-based capital requirement for the transaction as follows:
(i) For an equity derivative contract, by multiplying:
(A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 217.131 using the PD of the counterparty and LGD equal to 100 percent, by
(B) The maximum amount the Board-regulated institution could lose on the equity derivative.
(ii) For a purchased credit derivative by multiplying:
(A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 217.131 using the PD of the counterparty and LGD equal to 100 percent, by
(B) The fair value of the reference asset of the credit derivative.
(iii) For a bond option, by multiplying:
(A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 217.131 using the PD of the counterparty and LGD equal to 100 percent, by
(B) The smaller of the notional amount of the underlying reference asset and the maximum potential loss under the bond option contract.
(iv) For a repo-style transaction or eligible margin loan by multiplying:
(A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 217.131 using the PD of the counterparty and LGD equal to 100 percent, by
(B) The EAD of the transaction determined according to the EAD equation in § 217.132(b)(2), substituting the estimated value of the collateral assuming a default of the counterparty for the value of the collateral in Σc of the equation.
(8) Risk-weighted asset amount for IMM exposures with specific wrong-way risk. The aggregate risk-weighted asset amount for IMM exposures with specific wrong-way risk is the sum of a Board-regulated institution’s risk-based capital requirement for purchased credit derivatives that are not bond options with specific wrong-way risk as calculated under paragraph (d)(7)(ii) of this section, a Board-regulated institution’s risk-based capital requirement for equity derivatives with specific wrong-way risk as calculated under paragraph (d)(7)(i) of this section, a Board-regulated institution’s risk-based capital requirement for bond options with specific wrong-way risk as calculated under paragraph (d)(7)(iii) of this section, and a Board-regulated institution’s risk-based capital requirement for repo-style transactions and eligible margin loans with specific wrong-way risk as calculated under paragraph (d)(7)(iv) of this section, multiplied by 12.5.
(9) Risk-weighted assets for IMM exposures. (i) The Board-regulated institution must insert the assigned risk parameters for each counterparty and netting set into the appropriate formula specified in Table 1 of § 217.131 and multiply the output of the formula by the EAD
(ii) The Board-regulated institution must insert the assigned risk parameters for each wholesale obligor and netting set into the appropriate formula specified in Table 1 of § 217.131 and multiply the output of the formula by the EAD
(iii) The Board-regulated institution’s dollar risk-based capital requirement under the internal models methodology equals the larger of K
(10) Other measures of counterparty exposure. (i) With prior written approval of the Board, a Board-regulated institution may set EAD equal to a measure of counterparty credit risk exposure, such as peak EAD, that is more conservative than an alpha of 1.4 times the larger of EPE
(A) For material portfolios of new OTC derivative products, the Board-regulated institution may assume that the standardized approach for counterparty credit risk pursuant to paragraph (c) of this section meets the conservatism requirement of this section for a period not to exceed 180 days.
(B) For immaterial portfolios of OTC derivative contracts, the Board-regulated institution generally may assume that the standardized approach for counterparty credit risk pursuant to paragraph (c) of this section meets the conservatism requirement of this section.
(ii) To calculate risk-weighted assets for purposes of the approach in paragraph (d)(10)(i) of this section, the Board-regulated institution must insert the assigned risk parameters for each counterparty and netting set into the appropriate formula specified in Table 1 of § 217.131, multiply the output of the formula by the EAD for the exposure as specified above, and multiply by 12.5.
(e) Credit valuation adjustment (CVA) risk-weighted assets—(1) In general. With respect to its OTC derivative contracts, a Board-regulated institution must calculate a CVA risk-weighted asset amount for its portfolio of OTC derivative transactions that are subject to the CVA capital requirement using the simple CVA approach described in paragraph (e)(5) of this section or, with prior written approval of the Board, the advanced CVA approach described in paragraph (e)(6) of this section. A Board-regulated institution that receives prior Board approval to calculate its CVA risk-weighted asset amounts for a class of counterparties using the advanced CVA approach must continue to use that approach for that class of counterparties until it notifies the Board in writing that the Board-regulated institution expects to begin calculating its CVA risk-weighted asset amount using the simple CVA approach. Such notice must include an explanation of the Board-regulated institution’s rationale and the date upon which the Board-regulated institution will begin to calculate its CVA risk-weighted asset amount using the simple CVA approach.
(2) Market risk Board-regulated institutions. Notwithstanding the prior approval requirement in paragraph (e)(1) of this section, a market risk Board-regulated institution may calculate its CVA risk-weighted asset amount using the advanced CVA approach if the Board-regulated institution has Board approval to:
(i) Determine EAD for OTC derivative contracts using the internal models methodology described in paragraph (d) of this section; and
(ii) Determine its specific risk add-on for debt positions issued by the counterparty using a specific risk model described in § 217.207(b).
(3) Recognition of hedges. (i) A Board-regulated institution may recognize a single name CDS, single name contingent CDS, any other equivalent hedging instrument that references the counterparty directly, and index credit default swaps (CDS
(ii) A Board-regulated institution shall not recognize as a CVA hedge any tranched or n
(4) Total CVA risk-weighted assets. Total CVA risk-weighted assets is the CVA capital requirement, K
(5) Simple CVA approach. (i) Under the simple CVA approach, the CVA capital requirement, K
(A) w
(B) M
(C) EAD
(D) M
(E) B
(F) M
(G) B
(H) w
(ii) The Board-regulated institution may treat the notional amount of the index attributable to a counterparty as a single name hedge of counterparty i (B
Table 4 to § 217.132—Assignment of Counterparty Weight
| Internal PD (in percent) | Weight (in percent) |
|---|---|
| 0.00-0.07 | 0.70 |
| >0.070-0.15 | 0.80 |
| >0.15-0.40 | 1.00 |
| >0.40-2.00 | 2.00 |
| >2.00-6.00 | 3.00 |
| >6.00 | 10.00 |
(6) Advanced CVA approach. (i) A Board-regulated institution may use the VaR model that it uses to determine specific risk under § 217.207(b) or another VaR model that meets the quantitative requirements of § 217.205(b) and § 217.207(b)(1) to calculate its CVA capital requirement for a counterparty by modeling the impact of changes in the counterparties’ credit spreads, together with any recognized CVA hedges, on the CVA for the counterparties, subject to the following requirements:
(A) The VaR model must incorporate only changes in the counterparties’ credit spreads, not changes in other risk factors. The VaR model does not need to capture jump-to-default risk;
(B) A Board-regulated institution that qualifies to use the advanced CVA approach must include in that approach any immaterial OTC derivative portfolios for which it uses the standardized approach to counterparty credit risk in paragraph (c) of this section according to paragraph (e)(6)(viii) of this section; and
(C) A Board-regulated institution must have the systems capability to calculate the CVA capital requirement for a counterparty on a daily basis (but is not required to calculate the CVA capital requirement on a daily basis).
(ii) Under the advanced CVA approach, the CVA capital requirement, K
(A) t
(B) t
(C) s
(D) LGD
(E) EE
(F) D
(G) Exp is the exponential function.
(H) The subscript j refers either to a stressed or an unstressed calibration as described in paragraphs (e)(6)(iv) and (v) of this section.
(iii) Notwithstanding paragraphs (e)(6)(i) and (e)(6)(ii) of this section, a Board-regulated institution must use the formulas in paragraphs (e)(6)(iii)(A) or (e)(6)(iii)(B) of this section to calculate credit spread sensitivities if its VaR model is not based on full repricing.
(A) If the VaR model is based on credit spread sensitivities for specific tenors, the Board-regulated institution must calculate each credit spread sensitivity according to the following formula:
(iv) To calculate the CVA
(A) Use the EE
(B) Use the historical observation period required under § 217.205(b)(2).
(v) To calculate the CVA
(A) Use the EE
(B) Calibrate VaR model inputs to historical data from the most severe twelve-month stress period contained within the three-year stress period used to calculate EE
(vi) If a Board-regulated institution captures the effect of a collateral agreement on EAD using the method described in paragraph (d)(5)(ii) of this section, for purposes of paragraph (e)(6)(ii) of this section, the Board-regulated institution must calculate EE
(A) Half of the longest maturity of a transaction in the netting set, and
(B) The notional weighted average maturity of all transactions in the netting set.
(vii) For purposes of paragraph (e)(6) of this section, the Board-regulated institution’s VaR model must capture the basis between the spreads of any CDS
(viii) If a Board-regulated institution uses the standardized approach for counterparty credit risk pursuant to paragraph (c) of this section to calculate the EAD for any immaterial portfolios of OTC derivative contracts, the Board-regulated institution must use that EAD as a constant EE in the formula for the calculation of CVA with the maturity equal to the maximum of:
(A) Half of the longest maturity of a transaction in the netting set; and
(B) The notional weighted average maturity of all transactions in the netting set.
§ 217.133 Cleared transactions.
(a) General requirements—(1) Clearing member clients. A Board-regulated institution that is a clearing member client must use the methodologies described in paragraph (b) of this section to calculate risk-weighted assets for a cleared transaction.
(2) Clearing members. A Board-regulated institution that is a clearing member must use the methodologies described in paragraph (c) of this section to calculate its risk-weighted assets for a cleared transaction and paragraph (d) of this section to calculate its risk-weighted assets for its default fund contribution to a CCP.
(b) Clearing member client Board-regulated institutions—(1) Risk-weighted assets for cleared transactions. (i) To determine the risk-weighted asset amount for a cleared transaction, a Board-regulated institution that is a clearing member client must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(2) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client Board-regulated institution’s total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a derivative contract or a netting set of derivative contracts, trade exposure amount equals the EAD for the derivative contract or netting set of derivative contracts calculated using the methodology used to calculate EAD for derivative contracts set forth in § 217.132(c) or (d), plus the fair value of the collateral posted by the clearing member client Board-regulated institution and held by the CCP or a clearing member in a manner that is not bankruptcy remote. When the Board-regulated institution calculates EAD for the cleared transaction using the methodology in § 217.132(d), EAD equals EAD
(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals the EAD for the repo-style transaction calculated using the methodology set forth in § 217.132(b)(2) or (3) or (d), plus the fair value of the collateral posted by the clearing member client Board-regulated institution and held by the CCP or a clearing member in a manner that is not bankruptcy remote. When the Board-regulated institution calculates EAD for the cleared transaction under § 217.132(d), EAD equals EAD
(3) Cleared transaction risk weights. (i) For a cleared transaction with a QCCP, a clearing member client Board-regulated institution must apply a risk weight of:
(A) 2 percent if the collateral posted by the Board-regulated institution to the QCCP or clearing member is subject to an arrangement that prevents any loss to the clearing member client Board-regulated institution due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member client Board-regulated institution has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client Board-regulated institution must apply the risk weight applicable to the CCP under subpart D of this part.
(4) Collateral. (i) Notwithstanding any other requirement of this section, collateral posted by a clearing member client Board-regulated institution that is held by a custodian (in its capacity as a custodian) in a manner that is bankruptcy remote from the CCP, clearing member, and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.
(ii) A clearing member client Board-regulated institution must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member or a custodian in connection with a cleared transaction in accordance with requirements under subparts E or F of this part, as applicable.
(c) Clearing member Board-regulated institution—(1) Risk-weighted assets for cleared transactions. (i) To determine the risk-weighted asset amount for a cleared transaction, a clearing member Board-regulated institution must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (c)(2) of this section by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (c)(3) of this section.
(ii) A clearing member Board-regulated institution’s total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. A clearing member Board-regulated institution must calculate its trade exposure amount for a cleared transaction as follows:
(i) For a cleared transaction that is a derivative contract or a netting set of derivative contracts, trade exposure amount equals the EAD calculated using the methodology used to calculate EAD for derivative contracts set forth in § 217.132(c) or (d), plus the fair value of the collateral posted by the clearing member Board-regulated institution and held by the CCP in a manner that is not bankruptcy remote. When the clearing member Board-regulated institution calculates EAD for the cleared transaction using the methodology in § 217.132(d), EAD equals EAD
(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals the EAD calculated under § 217.132(b)(2) or (3) or (d), plus the fair value of the collateral posted by the clearing member Board-regulated institution and held by the CCP in a manner that is not bankruptcy remote. When the clearing member Board-regulated institution calculates EAD for the cleared transaction under § 217.132(d), EAD equals EAD
(3) Cleared transaction risk weights. (i) A clearing member Board-regulated institution must apply a risk weight of 2 percent to the trade exposure amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member Board-regulated institution must apply the risk weight applicable to the CCP according to subpart D of this part.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, a clearing member Board-regulated institution may apply a risk weight of zero percent to the trade exposure amount for a cleared transaction with a QCCP where the clearing member Board-regulated institution is acting as a financial intermediary on behalf of a clearing member client, the transaction offsets another transaction that satisfies the requirements set forth in § 217.3(a), and the clearing member Board-regulated institution is not obligated to reimburse the clearing member client in the event of the QCCP default.
(4) Collateral. (i) Notwithstanding any other requirement of this section, collateral posted by a clearing member Board-regulated institution that is held by a custodian (in its capacity as a custodian) in a manner that is bankruptcy remote from the CCP, clearing member, and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.
(ii) A clearing member Board-regulated institution must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member or a custodian in connection with a cleared transaction in accordance with requirements under subparts E or F of this part, as applicable.
(d) Default fund contributions—(1) General requirement. A clearing member Board-regulated institution must determine the risk-weighted asset amount for a default fund contribution to a CCP at least quarterly, or more frequently if, in the opinion of the Board-regulated institution or the Board, there is a material change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to nonqualifying CCPs. A clearing member Board-regulated institution’s risk-weighted asset amount for default fund contributions to CCPs that are not QCCPs equals the sum of such default fund contributions multiplied by 1,250 percent, or an amount determined by the Board, based on factors such as size, structure, and membership characteristics of the CCP and riskiness of its transactions, in cases where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to QCCPs. A clearing member Board-regulated institution’s risk-weighted asset amount for default fund contributions to QCCPs equals the sum of its capital requirement, K
(4) Capital requirement for default fund contributions to a QCCP. A clearing member Board-regulated institution’s capital requirement for its default fund contribution to a QCCP (K
(5) Hypothetical capital requirement of a QCCP. Where a QCCP has provided its K
(6) EAD of a QCCP to a clearing member. (i) The EAD of a QCCP to a clearing member is equal to the sum of the EAD for derivative contracts determined under paragraph (d)(6)(ii) of this section and the EAD for repo-style transactions determined under paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the QCCP and the clearing member that are cleared transactions and any guarantees that the clearing member has provided to the QCCP with respect to performance of a clearing member client on a derivative contract, the EAD is equal to the exposure amount of the QCCP to the clearing member for all such derivative contracts and guarantees of derivative contracts calculated under SA-CCR in § 217.132(c) (or, with respect to a QCCP located outside the United States, under a substantially identical methodology in effect in the jurisdiction) using a value of 10 business days for purposes of § 217.132(c)(9)(iv); less the value of all collateral held by the QCCP posted by the clearing member or a client of the clearing member in connection with a derivative contract for which the clearing member has provided a guarantee to the QCCP and the amount of the prefunded default fund contribution of the clearing member to the QCCP.
(iii) With respect to any repo-style transactions between the QCCP and a clearing member that are cleared transactions, EAD is equal to:
(iv) EAD must be calculated separately for each clearing member’s sub-client accounts and sub-house account (i.e., for the clearing member’s proprietary activities). If the clearing member’s collateral and its client’s collateral are held in the same default fund contribution account, then the EAD of that account is the sum of the EAD for the client-related transactions within the account and the EAD of the house-related transactions within the account. For purposes of determining such EADs, the independent collateral of the clearing member and its client must be allocated in proportion to the respective total amount of independent collateral posted by the clearing member to the QCCP.
(v) If any account or sub-account contains both derivative contracts and repo-style transactions, the EAD of that account is the sum of the EAD for the derivative contracts within the account and the EAD of the repo-style transactions within the account. If independent collateral is held for an account containing both derivative contracts and repo-style transactions, then such collateral must be allocated to the derivative contracts and repo-style transactions in proportion to the respective product specific exposure amounts, calculated, excluding the effects of collateral, according to § 217.132(b) for repo-style transactions and to § 217.132(c)(5) for derivative contracts.
(vi) Notwithstanding any other provision of paragraph (d) of this section, with the prior approval of the Board, a Board-regulated institution may determine the risk-weighted asset amount for a default fund contribution to a QCCP according to § 217.35(d)(3)(ii).
§ 217.134 Guarantees and credit derivatives: PD substitution and LGD adjustment approaches.
(a) Scope. (1) This section applies to wholesale exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the Board-regulated institution and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative.
(2) Wholesale exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) are securitization exposures subject to § 217.141 through § 217.145.
(3) A Board-regulated institution may elect to recognize the credit risk mitigation benefits of an eligible guarantee or eligible credit derivative covering an exposure described in paragraph (a)(1) of this section by using the PD substitution approach or the LGD adjustment approach in paragraph (c) of this section or, if the transaction qualifies, using the double default treatment in § 217.135. A Board-regulated institution’s PD and LGD for the hedged exposure may not be lower than the PD and LGD floors described in § 217.131(d)(2) and (d)(3).
(4) If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in paragraph (a)(1) of this section, a Board-regulated institution may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-based capital requirement for each separate exposure as described in paragraph (a)(3) of this section.
(5) If a single eligible guarantee or eligible credit derivative covers multiple hedged wholesale exposures described in paragraph (a)(1) of this section, a Board-regulated institution must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-based capital requirement for each exposure as described in paragraph (a)(3) of this section.
(6) A Board-regulated institution must use the same risk parameters for calculating ECL as it uses for calculating the risk-based capital requirement for the exposure.
(b) Rules of recognition. (1) A Board-regulated institution may only recognize the credit risk mitigation benefits of eligible guarantees and eligible credit derivatives.
(2) A Board-regulated institution may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative’s reference exposure used for determining the derivative’s cash settlement value, deliverable obligation, or occurrence of a credit event if:
(i) The reference exposure ranks pari passu (that is, equally) with or is junior to the hedged exposure; and
(ii) The reference exposure and the hedged exposure are exposures to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to assure payments under the credit derivative are triggered when the obligor fails to pay under the terms of the hedged exposure.
(c) Risk parameters for hedged exposures—(1) PD substitution approach—(i) Full coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is greater than or equal to the EAD of the hedged exposure, a Board-regulated institution may recognize the guarantee or credit derivative in determining the Board-regulated institution’s risk-based capital requirement for the hedged exposure by substituting the PD associated with the rating grade of the protection provider for the PD associated with the rating grade of the obligor in the risk-based capital formula applicable to the guarantee or credit derivative in Table 1 of § 217.131 and using the appropriate LGD as described in paragraph (c)(1)(iii) of this section. If the Board-regulated institution determines that full substitution of the protection provider’s PD leads to an inappropriate degree of risk mitigation, the Board-regulated institution may substitute a higher PD than that of the protection provider.
(ii) Partial coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and P of the guarantee or credit derivative is less than the EAD of the hedged exposure, the Board-regulated institution must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize the credit risk mitigation benefit of the guarantee or credit derivative.
(A) The Board-regulated institution must calculate its risk-based capital requirement for the protected exposure under § 217.131, where PD is the protection provider’s PD, LGD is determined under paragraph (c)(1)(iii) of this section, and EAD is P. If the Board-regulated institution determines that full substitution leads to an inappropriate degree of risk mitigation, the Board-regulated institution may use a higher PD than that of the protection provider.
(B) The Board-regulated institution must calculate its risk-based capital requirement for the unprotected exposure under § 217.131, where PD is the obligor’s PD, LGD is the hedged exposure’s LGD (not adjusted to reflect the guarantee or credit derivative), and EAD is the EAD of the original hedged exposure minus P.
(C) The treatment in paragraph (c)(1)(ii) of this section is applicable when the credit risk of a wholesale exposure is covered on a partial pro rata basis or when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraphs (d), (e), or (f) of this section.
(iii) LGD of hedged exposures. The LGD of a hedged exposure under the PD substitution approach is equal to:
(A) The lower of the LGD of the hedged exposure (not adjusted to reflect the guarantee or credit derivative) and the LGD of the guarantee or credit derivative, if the guarantee or credit derivative provides the Board-regulated institution with the option to receive immediate payout upon triggering the protection; or
(B) The LGD of the guarantee or credit derivative, if the guarantee or credit derivative does not provide the Board-regulated institution with the option to receive immediate payout upon triggering the protection.
(2) LGD adjustment approach—(i) Full coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is greater than or equal to the EAD of the hedged exposure, the Board-regulated institution’s risk-based capital requirement for the hedged exposure is the greater of:
(A) The risk-based capital requirement for the exposure as calculated under § 217.131, with the LGD of the exposure adjusted to reflect the guarantee or credit derivative; or
(B) The risk-based capital requirement for a direct exposure to the protection provider as calculated under § 217.131, using the PD for the protection provider, the LGD for the guarantee or credit derivative, and an EAD equal to the EAD of the hedged exposure.
(ii) Partial coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is less than the EAD of the hedged exposure, the Board-regulated institution must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize the credit risk mitigation benefit of the guarantee or credit derivative.
(A) The Board-regulated institution’s risk-based capital requirement for the protected exposure would be the greater of:
(1) The risk-based capital requirement for the protected exposure as calculated under § 217.131, with the LGD of the exposure adjusted to reflect the guarantee or credit derivative and EAD set equal to P; or
(2) The risk-based capital requirement for a direct exposure to the guarantor as calculated under § 217.131, using the PD for the protection provider, the LGD for the guarantee or credit derivative, and an EAD set equal to P.
(B) The Board-regulated institution must calculate its risk-based capital requirement for the unprotected exposure under § 217.131, where PD is the obligor’s PD, LGD is the hedged exposure’s LGD (not adjusted to reflect the guarantee or credit derivative), and EAD is the EAD of the original hedged exposure minus P.
(3) M of hedged exposures. For purposes of this paragraph (c), the M of the hedged exposure is the same as the M of the exposure if it were unhedged.
(d) Maturity mismatch. (1) A Board-regulated institution that recognizes an eligible guarantee or eligible credit derivative in determining its risk-based capital requirement for a hedged exposure must adjust the effective notional amount of the credit risk mitigant to reflect any maturity mismatch between the hedged exposure and the credit risk mitigant.
(2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligor is scheduled to fulfil its obligation on the exposure. If a credit risk mitigant has embedded options that may reduce its term, the Board-regulated institution (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the Board-regulated institution (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the Board-regulated institution to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant.
(4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to one year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the Board-regulated institution must apply the following adjustment to the effective notional amount of the credit risk mitigant:
(i) P
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = the lesser of T or the residual maturity of the credit risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the hedged exposure, expressed in years.
(e) Credit derivatives without restructuring as a credit event. If a Board-regulated institution recognizes an eligible credit derivative that does not include as a credit event a restructuring of the hedged exposure involving forgiveness or postponement of principal, interest, or fees that results in a credit loss event (that is, a charge-off, specific provision, or other similar debit to the profit and loss account), the Board-regulated institution must apply the following adjustment to the effective notional amount of the credit derivative:
(1) P
(2) P
(f) Currency mismatch. (1) If a Board-regulated institution recognizes an eligible guarantee or eligible credit derivative that is denominated in a currency different from that in which the hedged exposure is denominated, the Board-regulated institution must apply the following formula to the effective notional amount of the guarantee or credit derivative:
(i) P
(ii) P
(iii) H
(2) A Board-regulated institution must set H
(i) The own-estimates haircuts in § 217.132(b)(2)(iii);
(ii) The simple VaR methodology in § 217.132(b)(3); or
(iii) The internal models methodology in § 217.132(d).
(3) A Board-regulated institution must adjust H
§ 217.135 Guarantees and credit derivatives: double default treatment.
(a) Eligibility and operational criteria for double default treatment. A Board-regulated institution may recognize the credit risk mitigation benefits of a guarantee or credit derivative covering an exposure described in § 217.134(a)(1) by applying the double default treatment in this section if all the following criteria are satisfied:
(1) The hedged exposure is fully covered or covered on a pro rata basis by:
(i) An eligible guarantee issued by an eligible double default guarantor; or
(ii) An eligible credit derivative that meets the requirements of § 217.134(b)(2) and that is issued by an eligible double default guarantor.
(2) The guarantee or credit derivative is:
(i) An uncollateralized guarantee or uncollateralized credit derivative (for example, a credit default swap) that provides protection with respect to a single reference obligor; or
(ii) An n
(3) The hedged exposure is a wholesale exposure (other than a sovereign exposure).
(4) The obligor of the hedged exposure is not:
(i) An eligible double default guarantor or an affiliate of an eligible double default guarantor; or
(ii) An affiliate of the guarantor.
(5) The Board-regulated institution does not recognize any credit risk mitigation benefits of the guarantee or credit derivative for the hedged exposure other than through application of the double default treatment as provided in this section.
(6) The Board-regulated institution has implemented a process (which has received the prior, written approval of the Board) to detect excessive correlation between the creditworthiness of the obligor of the hedged exposure and the protection provider. If excessive correlation is present, the Board-regulated institution may not use the double default treatment for the hedged exposure.
(b) Full coverage. If a transaction meets the criteria in paragraph (a) of this section and the protection amount (P) of the guarantee or credit derivative is at least equal to the EAD of the hedged exposure, the Board-regulated institution may determine its risk-weighted asset amount for the hedged exposure under paragraph (e) of this section.
(c) Partial coverage. If a transaction meets the criteria in paragraph (a) of this section and the protection amount (P) of the guarantee or credit derivative is less than the EAD of the hedged exposure, the Board-regulated institution must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize double default treatment on the protected portion of the exposure:
(1) For the protected exposure, the Board-regulated institution must set EAD equal to P and calculate its risk-weighted asset amount as provided in paragraph (e) of this section; and
(2) For the unprotected exposure, the Board-regulated institution must set EAD equal to the EAD of the original exposure minus P and then calculate its risk-weighted asset amount as provided in § 217.131.
(d) Mismatches. For any hedged exposure to which a Board-regulated institution applies double default treatment under this part, the Board-regulated institution must make applicable adjustments to the protection amount as required in § 217.134(d), (e), and (f).
(e) The double default dollar risk-based capital requirement. The dollar risk-based capital requirement for a hedged exposure to which a Board-regulated institution has applied double default treatment is K
(1)
(2) PD
(3) PD
(4) LGD
(i) The lower of the LGD of the hedged exposure (not adjusted to reflect the guarantee or credit derivative) and the LGD of the guarantee or credit derivative, if the guarantee or credit derivative provides the Board-regulated institution with the option to receive immediate payout on triggering the protection; or
(ii) The LGD of the guarantee or credit derivative, if the guarantee or credit derivative does not provide the Board-regulated institution with the option to receive immediate payout on triggering the protection; and
(5) ρ
(6) b (maturity adjustment coefficient) is calculated according to the formula for b provided in Table 1 in § 217.131, with PD equal to the lesser of PD
(7) M (maturity) is the effective maturity of the guarantee or credit derivative, which may not be less than one year or greater than five years.
§ 217.136 Unsettled transactions.
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies.
(3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the market standard for the instrument underlying the transaction and equal to or less than five business days.
(4) The positive current exposure of a Board-regulated institution for a transaction is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the Board-regulated institution to the counterparty.
(b) Scope. This section applies to all transactions involving securities, foreign exchange instruments, and commodities that have a risk of delayed settlement or delivery. This section does not apply to:
(1) Cleared transactions that are subject to daily marking-to-market and daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style transactions (which are addressed in §§ 217.131 and 132);
(3) One-way cash payments on OTC derivative contracts (which are addressed in §§ 217. 131 and 132); or
(4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts and addressed in §§ 217.131 and 132).
(c) System-wide failures. In the case of a system-wide failure of a settlement or clearing system, or a central counterparty, the Board may waive risk-based capital requirements for unsettled and failed transactions until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. A Board-regulated institution must hold risk-based capital against any DvP or PvP transaction with a normal settlement period if the Board-regulated institution’s counterparty has not made delivery or payment within five business days after the settlement date. The Board-regulated institution must determine its risk-weighted asset amount for such a transaction by multiplying the positive current exposure of the transaction for the Board-regulated institution by the appropriate risk weight in Table 1 to § 217.136.
Table 1 to § 217.136—Risk Weights for Unsettled DvP and PvP Transactions
| Number of business days after contractual settlement date | Risk weight to be applied to positive current exposure (in percent) |
|---|---|
| From 5 to 15 | 100 |
| From 16 to 30 | 625 |
| From 31 to 45 | 937.5 |
| 46 or more | 1,250 |
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (1) A Board-regulated institution must hold risk-based capital against any non-DvP/non-PvP transaction with a normal settlement period if the Board-regulated institution has delivered cash, securities, commodities, or currencies to its counterparty but has not received its corresponding deliverables by the end of the same business day. The Board-regulated institution must continue to hold risk-based capital against the transaction until the Board-regulated institution has received its corresponding deliverables.
(2) From the business day after the Board-regulated institution has made its delivery until five business days after the counterparty delivery is due, the Board-regulated institution must calculate its risk-based capital requirement for the transaction by treating the current fair value of the deliverables owed to the Board-regulated institution as a wholesale exposure.
(i) A Board-regulated institution may use a 45 percent LGD for the transaction rather than estimating LGD for the transaction provided the Board-regulated institution uses the 45 percent LGD for all transactions described in paragraphs (e)(1) and (2) of this section.
(ii) A Board-regulated institution may use a 100 percent risk weight for the transaction provided the Board-regulated institution uses this risk weight for all transactions described in paragraphs (e)(1) and (2) of this section.
(3) If the Board-regulated institution has not received its deliverables by the fifth business day after the counterparty delivery was due, the Board-regulated institution must apply a 1,250 percent risk weight to the current fair value of the deliverables owed to the Board-regulated institution.
(f) Total risk-weighted assets for unsettled transactions. Total risk-weighted assets for unsettled transactions is the sum of the risk-weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP transactions.
§§ 217.137-217.140 [Reserved]
Risk-Weighted Assets for Securitization Exposures
§ 217.141 Operational criteria for recognizing the transfer of risk.
(a) Operational criteria for traditional securitizations. A Board-regulated institution that transfers exposures it has originated or purchased to a securitization SPE or other third party in connection with a traditional securitization may exclude the exposures from the calculation of its risk-weighted assets only if each of the conditions in this paragraph (a) is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any securitization exposures it retains in connection with the securitization. A Board-regulated institution that fails to meet these conditions must hold risk-based capital against the transferred exposures as if they had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the transaction. The conditions are:
(1) The exposures are not reported on the Board-regulated institution’s consolidated balance sheet under GAAP;
(2) The Board-regulated institution has transferred to one or more third parties credit risk associated with the underlying exposures;
(3) Any clean-up calls relating to the securitization are eligible clean-up calls; and
(4) The securitization does not:
(i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For synthetic securitizations, a Board-regulated institution may recognize for risk-based capital purposes under this subpart the use of a credit risk mitigant to hedge underlying exposures only if each of the conditions in this paragraph (b) is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any credit risk of the exposures it retains in connection with the synthetic securitization. A Board-regulated institution that fails to meet these conditions or chooses not to recognize the credit risk mitigant for purposes of this section must hold risk-based capital under this subpart against the underlying exposures as if they had not been synthetically securitized. The conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral; or
(ii) A guarantee that meets all of the requirements of an eligible guarantee in § 217.2 except for paragraph (3) of the definition; or
(iii) A credit derivative that meets all of the requirements of an eligible credit derivative except for paragraph (3) of the definition of eligible guarantee in § 217.2.
(2) The Board-regulated institution transfers credit risk associated with the underlying exposures to third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
(ii) Require the Board-regulated institution to alter or replace the underlying exposures to improve the credit quality of the underlying exposures;
(iii) Increase the Board-regulated institution’s cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the Board-regulated institution in response to a deterioration in the credit quality of the underlying exposures; or
(v) Provide for increases in a retained first loss position or credit enhancement provided by the Board-regulated institution after the inception of the securitization;
(3) The Board-regulated institution obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible clean-up calls.
(c) Due diligence requirements for securitization exposures. (1) Except for exposures that are deducted from common equity tier 1 capital and exposures subject to § 217.142(k), if a Board-regulated institution is unable to demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the Board-regulated institution must assign a 1,250 percent risk weight to the securitization exposure. The Board-regulated institution’s analysis must be commensurate with the complexity of the securitization exposure and the materiality of the position in relation to regulatory capital according to this part.
(2) A Board-regulated institution must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section, for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure and document such analysis within three business days after acquiring the exposure, considering:
(A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the position, and deal-specific definitions of default;
(B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask spreads, most recent sales price and historical price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
(D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under this section for each securitization exposure.
§ 217.142 Risk-based capital requirement for securitization exposures.
(a) Hierarchy of approaches. Except as provided elsewhere in this section and in § 217.141:
(1) A Board-regulated institution must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from a securitization and must apply a 1,250 percent risk weight to the portion of any CEIO that does not constitute after tax gain-on-sale;
(2) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section, the Board-regulated institution must apply the supervisory formula approach in § 217.143 to the exposure if the Board-regulated institution and the exposure qualify for the supervisory formula approach according to § 217.143(a);
(3) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section and does not qualify for the supervisory formula approach, the Board-regulated institution may apply the simplified supervisory formula approach under § 217.144;
(4) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section, does not qualify for the supervisory formula approach in § 217.143, and the Board-regulated institution does not apply the simplified supervisory formula approach in § 217.144, the Board-regulated institution must apply a 1,250 percent risk weight to the exposure; and
(5) If a securitization exposure is a derivative contract (other than protection provided by a Board-regulated institution in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a Board-regulated institution may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (e) of this section rather than apply the hierarchy of approaches described in paragraphs (a)(1) through (4) of this section.
(b) Total risk-weighted assets for securitization exposures. A Board-regulated institution’s total risk-weighted assets for securitization exposures is equal to the sum of its risk-weighted assets calculated using §§ 217.141 through 146.
(c) Deductions. A Board-regulated institution may calculate any deduction from common equity tier 1 capital for a securitization exposure net of any DTLs associated with the securitization exposure.
(d) Maximum risk-based capital requirement. Except as provided in § 217.141(c), unless one or more underlying exposures does not meet the definition of a wholesale, retail, securitization, or equity exposure, the total risk-based capital requirement for all securitization exposures held by a single Board-regulated institution associated with a single securitization (excluding any risk-based capital requirements that relate to the Board-regulated institution’s gain-on-sale or CEIOs associated with the securitization) may not exceed the sum of:
(1) The Board-regulated institution’s total risk-based capital requirement for the underlying exposures calculated under this subpart as if the Board-regulated institution directly held the underlying exposures; and
(2) The total ECL of the underlying exposures calculated under this subpart.
(e) Exposure amount of a securitization exposure. (1) The exposure amount of an on-balance sheet securitization exposure that is not a repo-style transaction, eligible margin loan, OTC derivative contract, or cleared transaction is the Board-regulated institution’s carrying value.
(2) Except as provided in paragraph (m) of this section, the exposure amount of an off-balance sheet securitization exposure that is not an OTC derivative contract (other than a credit derivative), repo-style transaction, eligible margin loan, or cleared transaction (other than a credit derivative) is the notional amount of the exposure. For an off-balance-sheet securitization exposure to an ABCP program, such as an eligible ABCP liquidity facility, the notional amount may be reduced to the maximum potential amount that the Board-regulated institution could be required to fund given the ABCP program’s current underlying assets (calculated without regard to the current credit quality of those assets).
(3) The exposure amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or OTC derivative contract (other than a credit derivative) or cleared transaction (other than a credit derivative) is the EAD of the exposure as calculated in § 217.132 or § 217.133.
(f) Overlapping exposures. If a Board-regulated institution has multiple securitization exposures that provide duplicative coverage of the underlying exposures of a securitization (such as when a Board-regulated institution provides a program-wide credit enhancement and multiple pool-specific liquidity facilities to an ABCP program), the Board-regulated institution is not required to hold duplicative risk-based capital against the overlapping position. Instead, the Board-regulated institution may assign to the overlapping securitization exposure the applicable risk-based capital treatment under this subpart that results in the highest risk-based capital requirement.
(g) Securitizations of non-IRB exposures. Except as provided in § 217.141(c), if a Board-regulated institution has a securitization exposure where any underlying exposure is not a wholesale exposure, retail exposure, securitization exposure, or equity exposure, the Board-regulated institution:
(1) Must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization and apply a 1,250 percent risk weight to the portion of any CEIO that does not constitute gain-on-sale, if the Board-regulated institution is an originating Board-regulated institution;
(2) May apply the simplified supervisory formula approach in § 217.144 to the exposure, if the securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (g)(1) of this section;
(3) Must assign a 1,250 percent risk weight to the exposure if the securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (g)(1) of this section, does not qualify for the supervisory formula approach in § 217.143, and the Board-regulated institution does not apply the simplified supervisory formula approach in § 217.144 to the exposure.
(h) Implicit support. If a Board-regulated institution provides support to a securitization in excess of the Board-regulated institution’s contractual obligation to provide credit support to the securitization (implicit support):
(1) The Board-regulated institution must calculate a risk-weighted asset amount for underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization; and
(2) The Board-regulated institution must disclose publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The regulatory capital impact to the Board-regulated institution of providing such implicit support.
(i) Undrawn portion of a servicer cash advance facility. (1) Notwithstanding any other provision of this subpart, a Board-regulated institution that is a servicer under an eligible servicer cash advance facility is not required to hold risk-based capital against potential future cash advance payments that it may be required to provide under the contract governing the facility.
(2) For a Board-regulated institution that acts as a servicer, the exposure amount for a servicer cash advance facility that is not an eligible servicer cash advance facility is equal to the amount of all potential future cash advance payments that the Board-regulated institution may be contractually required to provide during the subsequent 12 month period under the contract governing the facility.
(j) Interest-only mortgage-backed securities. Regardless of any other provisions in this part, the risk weight for a non-credit-enhancing interest-only mortgage-backed security may not be less than 100 percent.
(k) Small-business loans and leases on personal property transferred with recourse. (1) Notwithstanding any other provisions of this subpart E, a Board-regulated institution that has transferred small-business loans and leases on personal property (small-business obligations) with recourse must include in risk-weighted assets only the contractual amount of retained recourse if all the following conditions are met:
(i) The transaction is a sale under GAAP.
(ii) The Board-regulated institution establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the Board-regulated institution’s reasonably estimated liability under the recourse arrangement.
(iii) The loans and leases are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act (15 U.S.C. 632 et seq.); and
(iv)(A) In the case of a state member bank, the bank is well capitalized, as defined in section 208.43 of this chapter. For purposes of determining whether a state member bank is well capitalized for purposes of this paragraph, the state member bank’s capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in this paragraph (k)(1).
(B) In the case of a bank holding company or savings and loan holding company, the bank holding company or savings and loan holding company is well capitalized, as defined in 12 CFR 225.2. For purposes of determining whether a bank holding company or savings and loan holding company is well capitalized for purposes of this paragraph, the bank holding company or savings and loan holding company’s capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in this paragraph (k)(1).
(2) The total outstanding amount of recourse retained by a Board-regulated institution on transfers of small-business obligations subject to paragraph (k)(1) of this section cannot exceed 15 percent of the Board-regulated institution’s total capital.
(3) If a Board-regulated institution ceases to be well capitalized or exceeds the 15 percent capital limitation in paragraph (k)(2) of this section, the preferential capital treatment specified in paragraph (k)(1) of this section will continue to apply to any transfers of small-business obligations with recourse that occurred during the time that the Board-regulated institution was well capitalized and did not exceed the capital limit.
(4) The risk-based capital ratios of a Board-regulated institution must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section.
(l) N
(2) For purposes of determining the risk weight for an n
(i) The attachment point (parameter A) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the Board-regulated institution’s exposure to the total notional amount of all underlying exposures. For purposes of the SSFA, parameter A is expressed as a decimal value between zero and one. For purposes of using the SFA to calculate the risk weight for its exposure in an n
(ii) The detachment point (parameter D) equals the sum of parameter A plus the ratio of the notional amount of the Board-regulated institution’s exposure in the n
(3) A Board-regulated institution that does not use the SFA or the SSFA to determine a risk weight for its exposure in an n
(4) Protection purchaser—(i) First-to-default credit derivatives. A Board-regulated institution that obtains credit protection on a group of underlying exposures through a first-to-default credit derivative that meets the rules of recognition of § 217.134(b) must determine its risk-based capital requirement under this subpart for the underlying exposures as if the Board-regulated institution synthetically securitized the underlying exposure with the lowest risk-based capital requirement and had obtained no credit risk mitigant on the other underlying exposures. A Board-regulated institution must calculate a risk-based capital requirement for counterparty credit risk according to § 217.132 for a first-to-default credit derivative that does not meet the rules of recognition of § 217.134(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) A Board-regulated institution that obtains credit protection on a group of underlying exposures through a n
(1) The Board-regulated institution also has obtained credit protection on the same underlying exposures in the form of first-through-(n-1)-to-default credit derivatives; or
(2) If n-1 of the underlying exposures have already defaulted.
(B) If a Board-regulated institution satisfies the requirements of paragraph (l)(3)(ii)(A) of this section, the Board-regulated institution must determine its risk-based capital requirement for the underlying exposures as if the bank had only synthetically securitized the underlying exposure with the n
(C) A Board-regulated institution must calculate a risk-based capital requirement for counterparty credit risk according to § 217.132 for a n
(m) Guarantees and credit derivatives other than n
(2) Protection purchaser. (i) A Board-regulated institution that purchases an OTC credit derivative (other than an n
(ii) If a Board-regulated institution cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 217.145, the Board-regulated institution must determine the exposure amount of the credit derivative under § 217.132(c).
(A) If the Board-regulated institution purchases credit protection from a counterparty that is not a securitization SPE, the Board-regulated institution must determine the risk weight for the exposure according § 217.131.
(B) If the Board-regulated institution purchases the credit protection from a counterparty that is a securitization SPE, the Board-regulated institution must determine the risk weight for the exposure according to this section, including paragraph (a)(5) of this section for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments.
§ 217.143 Supervisory formula approach (SFA).
(a) Eligibility requirements. A Board-regulated institution must use the SFA to determine its risk-weighted asset amount for a securitization exposure if the Board-regulated institution can calculate on an ongoing basis each of the SFA parameters in paragraph (e) of this section.
(b) Mechanics. The risk-weighted asset amount for a securitization exposure equals its SFA risk-based capital requirement as calculated under paragraph (c) and (d) of this section, multiplied by 12.5.
(c) The SFA risk-based capital requirement. (1) If K
(2) If K
(i) F · T (where F is 0.016 for all securitization exposures); or
(ii) S[L + T]−S[L].
(3) If K
(i) F · (T−(K
(ii) S[L + T]−S[K
(d) The supervisory formula:
(e) SFA parameters. For purposes of the calculations in paragraphs (c) and (d) of this section:
(1) Amount of the underlying exposures (UE). UE is the EAD of any underlying exposures that are wholesale and retail exposures (including the amount of any funded spread accounts, cash collateral accounts, and other similar funded credit enhancements) plus the amount of any underlying exposures that are securitization exposures (as defined in § 217.142(e)) plus the adjusted carrying value of any underlying exposures that are equity exposures (as defined in § 217.151(b)).
(2) Tranche percentage (TP). TP is the ratio of the amount of the Board-regulated institution’s securitization exposure to the amount of the tranche that contains the securitization exposure.
(3) Capital requirement on underlying exposures (K
(A) The sum of the risk-based capital requirements for the underlying exposures plus the expected credit losses of the underlying exposures (as determined under this subpart E as if the underlying exposures were directly held by the Board-regulated institution); to
(B) UE.
(ii) The calculation of K
(iii) All assets related to the securitization are treated as underlying exposures, including assets in a reserve account (such as a cash collateral account).
(4) Credit enhancement level (L). (i) L is the ratio of:
(A) The amount of all securitization exposures subordinated to the tranche that contains the Board-regulated institution’s securitization exposure; to
(B) UE.
(ii) A Board-regulated institution must determine L before considering the effects of any tranche-specific credit enhancements.
(iii) Any gain-on-sale or CEIO associated with the securitization may not be included in L.
(iv) Any reserve account funded by accumulated cash flows from the underlying exposures that is subordinated to the tranche that contains the Board-regulated institution’s securitization exposure may be included in the numerator and denominator of L to the extent cash has accumulated in the account. Unfunded reserve accounts (that is, reserve accounts that are to be funded from future cash flows from the underlying exposures) may not be included in the calculation of L.
(v) In some cases, the purchase price of receivables will reflect a discount that provides credit enhancement (for example, first loss protection) for all or certain tranches of the securitization. When this arises, L should be calculated inclusive of this discount if the discount provides credit enhancement for the securitization exposure.
(5) Thickness of tranche (T). T is the ratio of:
(i) The amount of the tranche that contains the Board-regulated institution’s securitization exposure; to
(ii) UE.
(6) Effective number of exposures (N). (i) Unless the Board-regulated institution elects to use the formula provided in paragraph (f) of this section,
(ii) Multiple exposures to one obligor /must be treated as a single underlying exposure.
(iii) In the case of a resecuritization, the Board-regulated institution must treat each underlying exposure as a single underlying exposure and must not look through to the originally securitized underlying exposures.
(7) Exposure-weighted average loss given default (EWALGD). EWALGD is calculated as:
(f) Simplified method for computing N and EWALGD. (1) If all underlying exposures of a securitization are retail exposures, a Board-regulated institution may apply the SFA using the following simplifications:
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in §§ 217.143(f)(3) and (f)(4), a Board-regulated institution may employ a simplified method for calculating N and EWALGD.
(3) If C
(i) C
(ii) The level of m is to be selected by the Board-regulated institution.
(4) Alternatively, if only C
§ 217.144 Simplified supervisory formula approach (SSFA).
(a) General requirements for the SSFA. To use the SSFA to determine the risk weight for a securitization exposure, a Board-regulated institution must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contracts governing the underlying exposures of the securitization require payments on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. A Board-regulated institution that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a risk weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a securitization exposure using the SSFA, a Board-regulated institution must have accurate information on the following five inputs to the SSFA calculation:
(1) K
(2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Except as provided in section 142(l) for n
(4) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Except as provided in section 142(l) for n
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. K
(1) When the detachment point, parameter D, for a securitization exposure is less than or equal to K
(2) When the attachment point, parameter A, for a securitization exposure is greater than or equal to K
(3) When A is less than K
§ 217.145 Recognition of credit risk mitigants for securitization exposures.
(a) General. An originating Board-regulated institution that has obtained a credit risk mitigant to hedge its securitization exposure to a synthetic or traditional securitization that satisfies the operational criteria in § 217.141 may recognize the credit risk mitigant, but only as provided in this section. An investing Board-regulated institution that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant, but only as provided in this section.
(b) Collateral—(1) Rules of recognition. A Board-regulated institution may recognize financial collateral in determining the Board-regulated institution’s risk-weighted asset amount for a securitization exposure (other than a repo-style transaction, an eligible margin loan, or an OTC derivative contract for which the Board-regulated institution has reflected collateral in its determination of exposure amount under § 217.132) as follows. The Board-regulated institution’s risk-weighted asset amount for the collateralized securitization exposure is equal to the risk-weighted asset amount for the securitization exposure as calculated under the SSFA in § 217.144 or under the SFA in § 217.143 multiplied by the ratio of adjusted exposure amount (SE*) to original exposure amount (SE),
(i) SE* = max {0, [SE−C × (1−H
(ii) SE = the amount of the securitization exposure calculated under § 217.142(e);
(iii) C = the current fair value of the collateral;
(iv) H
(v) H
(3) Standard supervisory haircuts. Unless a Board-regulated institution qualifies for use of and uses own-estimates haircuts in paragraph (b)(4) of this section:
(i) A Board-regulated institution must use the collateral type haircuts (H
(ii) A Board-regulated institution must use a currency mismatch haircut (H
(iii) A Board-regulated institution must multiply the supervisory haircuts obtained in paragraphs (b)(3)(i) and (ii) of this section by the square root of 6.5 (which equals 2.549510); and
(iv) A Board-regulated institution must adjust the supervisory haircuts upward on the basis of a holding period longer than 65 business days where and as appropriate to take into account the illiquidity of the collateral.
(4) Own estimates for haircuts. With the prior written approval of the Board, a Board-regulated institution may calculate haircuts using its own internal estimates of market price volatility and foreign exchange volatility, subject to § 217.132(b)(2)(iii). The minimum holding period (T
(c) Guarantees and credit derivatives—(1) Limitations on recognition. A Board-regulated institution may only recognize an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution’s risk-weighted asset amount for a securitization exposure.
(2) ECL for securitization exposures. When a Board-regulated institution recognizes an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution’s risk-weighted asset amount for a securitization exposure, the Board-regulated institution must also:
(i) Calculate ECL for the protected portion of the exposure using the same risk parameters that it uses for calculating the risk-weighted asset amount of the exposure as described in paragraph (c)(3) of this section; and
(ii) Add the exposure’s ECL to the Board-regulated institution’s total ECL.
(3) Rules of recognition. A Board-regulated institution may recognize an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution’s risk-weighted asset amount for the securitization exposure as follows:
(i) Full coverage. If the protection amount of the eligible guarantee or eligible credit derivative equals or exceeds the amount of the securitization exposure, the Board-regulated institution may set the risk-weighted asset amount for the securitization exposure equal to the risk-weighted asset amount for a direct exposure to the eligible guarantor (as determined in the wholesale risk weight function described in § 217.131), using the Board-regulated institution’s PD for the guarantor, the Board-regulated institution’s LGD for the guarantee or credit derivative, and an EAD equal to the amount of the securitization exposure (as determined in § 217.142(e)).
(ii) Partial coverage. If the protection amount of the eligible guarantee or eligible credit derivative is less than the amount of the securitization exposure, the Board-regulated institution may set the risk-weighted asset amount for the securitization exposure equal to the sum of:
(A) Covered portion. The risk-weighted asset amount for a direct exposure to the eligible guarantor (as determined in the wholesale risk weight function described in § 217.131), using the Board-regulated institution’s PD for the guarantor, the Board-regulated institution’s LGD for the guarantee or credit derivative, and an EAD equal to the protection amount of the credit risk mitigant; and
(B) Uncovered portion. (1) 1.0 minus the ratio of the protection amount of the eligible guarantee or eligible credit derivative to the amount of the securitization exposure); multiplied by
(2) The risk-weighted asset amount for the securitization exposure without the credit risk mitigant (as determined in §§ 217.142 through 146).
(4) Mismatches. The Board-regulated institution must make applicable adjustments to the protection amount as required in § 217.134(d), (e), and (f) for any hedged securitization exposure and any more senior securitization exposure that benefits from the hedge. In the context of a synthetic securitization, when an eligible guarantee or eligible credit derivative covers multiple hedged exposures that have different residual maturities, the Board-regulated institution must use the longest residual maturity of any of the hedged exposures as the residual maturity of all the hedged exposures.
§§ 217.146-217.150 [Reserved]
Risk-Weighted Assets for Equity Exposures
§ 217.151 Introduction and exposure measurement.
(a) General. (1) To calculate its risk-weighted asset amounts for equity exposures that are not equity exposures to investment funds, a Board-regulated institution may apply either the Simple Risk Weight Approach (SRWA) in § 217.152 or, if it qualifies to do so, the Internal Models Approach (IMA) in § 217.153. A Board-regulated institution must use the look-through approaches provided in § 217.154 to calculate its risk-weighted asset amounts for equity exposures to investment funds.
(2) A Board-regulated institution must treat an investment in a separate account (as defined in § 217.2), as if it were an equity exposure to an investment fund as provided in § 217.154.
(3) Stable value protection. (i) Stable value protection means a contract where the provider of the contract is obligated to pay:
(A) The policy owner of a separate account an amount equal to the shortfall between the fair value and cost basis of the separate account when the policy owner of the separate account surrenders the policy, or
(B) The beneficiary of the contract an amount equal to the shortfall between the fair value and book value of a specified portfolio of assets.
(ii) A Board-regulated institution that purchases stable value protection on its investment in a separate account must treat the portion of the carrying value of its investment in the separate account attributable to the stable value protection as an exposure to the provider of the protection and the remaining portion of the carrying value of its separate account as an equity exposure to an investment fund.
(iii) A Board-regulated institution that provides stable value protection must treat the exposure as an equity derivative with an adjusted carrying value determined as the sum of § 217.151(b)(1) and (2).
(b) Adjusted carrying value. For purposes of this subpart, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the Board-regulated institution’s carrying value of the exposure;
(2) For the off-balance sheet component of an equity exposure, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) for a given small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section.
(3) For unfunded equity commitments that are unconditional, the effective notional principal amount is the notional amount of the commitment. For unfunded equity commitments that are conditional, the effective notional principal amount is the Board-regulated institution’s best estimate of the amount that would be funded under economic downturn conditions.
§ 217.152 Simple risk weight approach (SRWA).
(a) General. Under the SRWA, a Board-regulated institution’s aggregate risk-weighted asset amount for its equity exposures is equal to the sum of the risk-weighted asset amounts for each of the Board-regulated institution’s individual equity exposures (other than equity exposures to an investment fund) as determined in this section and the risk-weighted asset amounts for each of the Board-regulated institution’s individual equity exposures to an investment fund as determined in § 217.154.
(b) SRWA computation for individual equity exposures. A Board-regulated institution must determine the risk-weighted asset amount for an individual equity exposure (other than an equity exposure to an investment fund) by multiplying the adjusted carrying value of the equity exposure or the effective portion and ineffective portion of a hedge pair (as defined in paragraph (c) of this section) by the lowest applicable risk weight in this section.
(1) Zero percent risk weight equity exposures. An equity exposure to an entity whose credit exposures are exempt from the 0.03 percent PD floor in § 217.131(d)(2) is assigned a zero percent risk weight.
(2) 20 percent risk weight equity exposures. An equity exposure to a Federal Home Loan Bank or the Federal Agricultural Mortgage Corporation (Farmer Mac) is assigned a 20 percent risk weight.
(3) 100 percent risk weight equity exposures. The following equity exposures are assigned a 100 percent risk weight:
(i) Community development equity exposures. (A) For state member banks and bank holding companies, an equity exposure that qualifies as a community development investment under 12 U.S.C. 24 (Eleventh), excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a consolidated small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(B) For savings and loan holding companies, an equity exposure that is designed primarily to promote community welfare, including the welfare of low- and moderate-income communities or families, such as by providing services or employment, and excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(ii) Effective portion of hedge pairs. The effective portion of a hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding significant investments in the capital of an unconsolidated institution in the form of common stock and exposures to an investment firm that would meet the definition of a traditional securitization were it not for the Board’s application of paragraph (8) of that definition in § 217.2 and has greater than immaterial leverage, to the extent that the aggregate adjusted carrying value of the exposures does not exceed 10 percent of the Board-regulated institution’s total capital.
(A) To compute the aggregate adjusted carrying value of a Board-regulated institution’s equity exposures for purposes of this section, the Board-regulated institution may exclude equity exposures described in paragraphs (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a Board-regulated institution does not know the actual holdings of the investment fund, the Board-regulated institution may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund’s permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the Board-regulated institution must assume for purposes of this section that the investment fund invests to the maximum extent possible in equity exposures.
(B) When determining which of a Board-regulated institution’s equity exposures qualifies for a 100 percent risk weight under this section, a Board-regulated institution first must include equity exposures to unconsolidated small business investment companies or held through consolidated small business investment companies described in section 302 of the Small Business Investment Act, then must include publicly traded equity exposures (including those held indirectly through investment funds), and then must include non-publicly traded equity exposures (including those held indirectly through investment funds).
(4) 250 percent risk weight equity exposures. Significant investments in the capital of unconsolidated financial institutions in the form of common stock that are not deducted from capital pursuant to § 217.22(b)(4) are assigned a 250 percent risk weight.
(5) 300 percent risk weight equity exposures. A publicly traded equity exposure (other than an equity exposure described in paragraph (b)(7) of this section and including the ineffective portion of a hedge pair) is assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure (other than an equity exposure described in paragraph (b)(7) of this section) that is not publicly traded is assigned a 400 percent risk weight.
(7) 600 percent risk weight equity exposures. An equity exposure to an investment firm that:
(i) Would meet the definition of a traditional securitization were it not for the Board’s application of paragraph (8) of that definition in § 217.2; and
(ii) Has greater than immaterial leverage is assigned a 600 percent risk weight.
(c) Hedge transactions—(1) Hedge pair. A hedge pair is two equity exposures that form an effective hedge so long as each equity exposure is publicly traded or has a return that is primarily based on a publicly traded equity exposure.
(2) Effective hedge. Two equity exposures form an effective hedge if the exposures either have the same remaining maturity or each has a remaining maturity of at least three months; the hedge relationship is formally documented in a prospective manner (that is, before the Board-regulated institution acquires at least one of the equity exposures); the documentation specifies the measure of effectiveness (E) the Board-regulated institution will use for the hedge relationship throughout the life of the transaction; and the hedge relationship has an E greater than or equal to 0.8. A Board-regulated institution must measure E at least quarterly and must use one of three alternative measures of E:
(i) Under the dollar-offset method of measuring effectiveness, the Board-regulated institution must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the periodic changes in value of one equity exposure to the cumulative sum of the periodic changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals zero. If RVC is negative and greater than or equal to −1 (that is, between zero and −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring effectiveness:
(iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then the value of E is zero.
(3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
§ 217.153 Internal models approach (IMA).
(a) General. A Board-regulated institution may calculate its risk-weighted asset amount for equity exposures using the IMA by modeling publicly traded and non-publicly traded equity exposures (in accordance with paragraph (c) of this section) or by modeling only publicly traded equity exposures (in accordance with paragraphs (c) and (d) of this section).
(b) Qualifying criteria. To qualify to use the IMA to calculate risk-weighted assets for equity exposures, a Board-regulated institution must receive prior written approval from the Board. To receive such approval, the Board-regulated institution must demonstrate to the Board’s satisfaction that the Board-regulated institution meets the following criteria:
(1) The Board-regulated institution must have one or more models that:
(i) Assess the potential decline in value of its modeled equity exposures;
(ii) Are commensurate with the size, complexity, and composition of the Board-regulated institution’s modeled equity exposures; and
(iii) Adequately capture both general market risk and idiosyncratic risk.
(2) The Board-regulated institution’s model must produce an estimate of potential losses for its modeled equity exposures that is no less than the estimate of potential losses produced by a VaR methodology employing a 99th percentile one-tailed confidence interval of the distribution of quarterly returns for a benchmark portfolio of equity exposures comparable to the Board-regulated institution’s modeled equity exposures using a long-term sample period.
(3) The number of risk factors and exposures in the sample and the data period used for quantification in the Board-regulated institution’s model and benchmarking exercise must be sufficient to provide confidence in the accuracy and robustness of the Board-regulated institution’s estimates.
(4) The Board-regulated institution’s model and benchmarking process must incorporate data that are relevant in representing the risk profile of the Board-regulated institution’s modeled equity exposures, and must include data from at least one equity market cycle containing adverse market movements relevant to the risk profile of the Board-regulated institution’s modeled equity exposures. In addition, the Board-regulated institution’s benchmarking exercise must be based on daily market prices for the benchmark portfolio. If the Board-regulated institution’s model uses a scenario methodology, the Board-regulated institution must demonstrate that the model produces a conservative estimate of potential losses on the Board-regulated institution’s modeled equity exposures over a relevant long-term market cycle. If the Board-regulated institution employs risk factor models, the Board-regulated institution must demonstrate through empirical analysis the appropriateness of the risk factors used.
(5) The Board-regulated institution must be able to demonstrate, using theoretical arguments and empirical evidence, that any proxies used in the modeling process are comparable to the Board-regulated institution’s modeled equity exposures and that the Board-regulated institution has made appropriate adjustments for differences. The Board-regulated institution must derive any proxies for its modeled equity exposures and benchmark portfolio using historical market data that are relevant to the Board-regulated institution’s modeled equity exposures and benchmark portfolio (or, where not, must use appropriately adjusted data), and such proxies must be robust estimates of the risk of the Board-regulated institution’s modeled equity exposures.
(c) Risk-weighted assets calculation for a Board-regulated institution using the IMA for publicly traded and non-publicly traded equity exposures. If a Board-regulated institution models publicly traded and non-publicly traded equity exposures, the Board-regulated institution’s aggregate risk-weighted asset amount for its equity exposures is equal to the sum of:
(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i) (as determined under § 217.152) and each equity exposure to an investment fund (as determined under § 217.154); and
(2) The greater of:
(i) The estimate of potential losses on the Board-regulated institution’s equity exposures (other than equity exposures referenced in paragraph (c)(1) of this section) generated by the Board-regulated institution’s internal equity exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution’s publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund;
(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs; and
(C) 300 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution’s equity exposures that are not publicly traded, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund.
(d) Risk-weighted assets calculation for a Board-regulated institution using the IMA only for publicly traded equity exposures. If a Board-regulated institution models only publicly traded equity exposures, the Board-regulated institution’s aggregate risk-weighted asset amount for its equity exposures is equal to the sum of:
(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under §§ 217.152(b)(1) through (b)(3)(i) (as determined under § 217.152), each equity exposure that qualifies for a 400 percent risk weight under § 217.152(b)(5) or a 600 percent risk weight under § 217.152(b)(6) (as determined under § 217.152), and each equity exposure to an investment fund (as determined under § 217.154); and
(2) The greater of:
(i) The estimate of potential losses on the Board-regulated institution’s equity exposures (other than equity exposures referenced in paragraph (d)(1) of this section) generated by the Board-regulated institution’s internal equity exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution’s publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund; and
(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs.
§ 217.154 Equity exposures to investment funds.
(a) Available approaches. (1) Unless the exposure meets the requirements for a community development equity exposure in § 217.152(b)(3)(i), a Board-regulated institution must determine the risk-weighted asset amount of an equity exposure to an investment fund under the full look-through approach in paragraph (b) of this section, the simple modified look-through approach in paragraph (c) of this section, or the alternative modified look-through approach in paragraph (d) of this section.
(2) The risk-weighted asset amount of an equity exposure to an investment fund that meets the requirements for a community development equity exposure in § 217.152(b)(3)(i) is its adjusted carrying value.
(3) If an equity exposure to an investment fund is part of a hedge pair and the Board-regulated institution does not use the full look-through approach, the Board-regulated institution may use the ineffective portion of the hedge pair as determined under § 217.152(c) as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value.
(b) Full look-through approach. A Board-regulated institution that is able to calculate a risk-weighted asset amount for its proportional ownership share of each exposure held by the investment fund (as calculated under this subpart E of this part as if the proportional ownership share of each exposure were held directly by the Board-regulated institution) may either:
(1) Set the risk-weighted asset amount of the Board-regulated institution’s exposure to the fund equal to the product of:
(i) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the Board-regulated institution; and
(ii) The Board-regulated institution’s proportional ownership share of the fund; or
(2) Include the Board-regulated institution’s proportional ownership share of each exposure held by the fund in the Board-regulated institution’s IMA.
(c) Simple modified look-through approach. Under this approach, the risk-weighted asset amount for a Board-regulated institution’s equity exposure to an investment fund equals the adjusted carrying value of the equity exposure multiplied by the highest risk weight assigned according to subpart D of this part that applies to any exposure the fund is permitted to hold under its prospectus, partnership agreement, or similar contract that defines the fund’s permissible investments (excluding derivative contracts that are used for hedging rather than speculative purposes and that do not constitute a material portion of the fund’s exposures).
(d) Alternative modified look-through approach. Under this approach, a Board-regulated institution may assign the adjusted carrying value of an equity exposure to an investment fund on a pro rata basis to different risk weight categories assigned according to subpart D of this part based on the investment limits in the fund’s prospectus, partnership agreement, or similar contract that defines the fund’s permissible investments. The risk-weighted asset amount for the Board-regulated institution’s equity exposure to the investment fund equals the sum of each portion of the adjusted carrying value assigned to an exposure class multiplied by the applicable risk weight. If the sum of the investment limits for all exposure types within the fund exceeds 100 percent, the Board-regulated institution must assume that the fund invests to the maximum extent permitted under its investment limits in the exposure type with the highest risk weight under subpart D of this part, and continues to make investments in order of the exposure type with the next highest risk weight under subpart D of this part until the maximum total investment level is reached. If more than one exposure type applies to an exposure, the Board-regulated institution must use the highest applicable risk weight. A Board-regulated institution may exclude derivative contracts held by the fund that are used for hedging rather than for speculative purposes and do not constitute a material portion of the fund’s exposures.
§ 217.155 Equity derivative contracts.
(a) Under the IMA, in addition to holding risk-based capital against an equity derivative contract under this part, a Board-regulated institution must hold risk-based capital against the counterparty credit risk in the equity derivative contract by also treating the equity derivative contract as a wholesale exposure and computing a supplemental risk-weighted asset amount for the contract under § 217.132.
(b) Under the SRWA, a Board-regulated institution may choose not to hold risk-based capital against the counterparty credit risk of equity derivative contracts, as long as it does so for all such contracts. Where the equity derivative contracts are subject to a qualified master netting agreement, a Board-regulated institution using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure.
§§ 217.156-217.160 [Reserved]
Risk-Weighted Assets for Operational Risk
§ 217.161 Qualification requirements for incorporation of operational risk mitigants.
(a) Qualification to use operational risk mitigants. A Board-regulated institution may adjust its estimate of operational risk exposure to reflect qualifying operational risk mitigants if:
(1) The Board-regulated institution’s operational risk quantification system is able to generate an estimate of the Board-regulated institution’s operational risk exposure (which does not incorporate qualifying operational risk mitigants) and an estimate of the Board-regulated institution’s operational risk exposure adjusted to incorporate qualifying operational risk mitigants; and
(2) The Board-regulated institution’s methodology for incorporating the effects of insurance, if the Board-regulated institution uses insurance as an operational risk mitigant, captures through appropriate discounts to the amount of risk mitigation:
(i) The residual term of the policy, where less than one year;
(ii) The cancellation terms of the policy, where less than one year;
(iii) The policy’s timeliness of payment;
(iv) The uncertainty of payment by the provider of the policy; and
(v) Mismatches in coverage between the policy and the hedged operational loss event.
(b) Qualifying operational risk mitigants. Qualifying operational risk mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated company that the Board-regulated institution deems to have strong capacity to meet its claims payment obligations and the obligor rating category to which the Board-regulated institution assigns the company is assigned a PD equal to or less than 10 basis points;
(ii) Has an initial term of at least one year and a residual term of more than 90 days;
(iii) Has a minimum notice period for cancellation by the provider of 90 days;
(iv) Has no exclusions or limitations based upon regulatory action or for the receiver or liquidator of a failed depository institution; and
(v) Is explicitly mapped to a potential operational loss event;
(2) Operational risk mitigants other than insurance for which the Board has given prior written approval. In evaluating an operational risk mitigant other than insurance, the Board will consider whether the operational risk mitigant covers potential operational losses in a manner equivalent to holding total capital.
§ 217.162 Mechanics of risk-weighted asset calculation.
(a) If a Board-regulated institution does not qualify to use or does not have qualifying operational risk mitigants, the Board-regulated institution’s dollar risk-based capital requirement for operational risk is its operational risk exposure minus eligible operational risk offsets (if any).
(b) If a Board-regulated institution qualifies to use operational risk mitigants and has qualifying operational risk mitigants, the Board-regulated institution’s dollar risk-based capital requirement for operational risk is the greater of:
(1) The Board-regulated institution’s operational risk exposure adjusted for qualifying operational risk mitigants minus eligible operational risk offsets (if any); or
(2) 0.8 multiplied by the difference between:
(i) The Board-regulated institution’s operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The Board-regulated institution’s risk-weighted asset amount for operational risk equals the Board-regulated institution’s dollar risk-based capital requirement for operational risk determined under sections 162(a) or (b) multiplied by 12.5.
§§ 217.163-217.170 [Reserved]
Disclosures
§ 217.171 Purpose and scope.
§§ 217.171 through 217.173 establish public disclosure requirements related to the capital requirements of a Board-regulated institution that is an advanced approaches Board-regulated institution.
§ 217.172 Disclosure requirements.
(a) A Board-regulated institution that is an advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to section 121(d) of subpart E of this part must publicly disclose each quarter its total and tier 1 risk-based capital ratios and their components as calculated under this subpart (that is, common equity tier 1 capital, additional tier 1 capital, tier 2 capital, total qualifying capital, and total risk-weighted assets).
(b) A Board-regulated institution that is an advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to section 121(d) of subpart E of this part must comply with paragraph (c) of this section unless it is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to these disclosure requirements or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction.
(c)(1) A Board-regulated institution described in paragraph (b) of this section must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 217.173. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the Board-regulated institution’s capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be disclosed as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the Board-regulated institution’s risk management objectives and policies, reporting system, and definitions) may be disclosed annually after the end of the fourth calendar quarter, provided that any significant changes to these are disclosed in the interim. Management may provide all of the disclosures required by this subpart in one place on the Board-regulated institution’s public Web site or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Board-regulated institution publicly provides a summary table specifically indicating the location(s) of all such disclosures.
(2) A Board-regulated institution described in paragraph (b) of this section must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. One or more senior officers of the Board-regulated institution must attest that the disclosures meet the requirements of this subpart.
(3) If a Board-regulated institution described in paragraph (b) of this section believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public information that is either proprietary or confidential in nature, the Board-regulated institution is not required to disclose those specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
(d)(1) A Board-regulated institution that meets any of the criteria in § 217.100(b)(1) before January 1, 2015, must publicly disclose each quarter its supplementary leverage ratio and the components thereof (that is, tier 1 capital and total leverage exposure) as calculated under subpart B of this part, beginning with the first quarter in 2015. This disclosure requirement applies without regard to whether the Board-regulated institution has completed the parallel run process and received notification from the Board pursuant to § 217.121(d).
(2) A Board-regulated that meets any of the criteria in § 217.100(b)(1) on or after January 1, 2015, or a Category III Board-regulated institution must publicly disclose each quarter its supplementary leverage ratio and the components thereof (that is, tier 1 capital and total leverage exposure) as calculated under subpart B of this part beginning with the calendar quarter immediately following the quarter in which the Board-regulated institution becomes an advanced approaches Board-regulated institution or a Category III Board-regulated institution. This disclosure requirement applies without regard to whether the Board-regulated institution has completed the parallel run process and has received notification from the Board pursuant to § 217.121(d).
§ 217.173 Disclosures by certain advanced approaches Board-regulated institutions and Category III Board-regulated institutions.
(a)(1) An advanced approaches Board-regulated institution described in § 217.172(b) must make the disclosures described in Tables 1 through 12 to § 217.173.
(2) An advanced approaches Board-regulated institution and a Category III Board-regulated institution that is required to publicly disclose its supplementary leverage ratio pursuant to § 217.172(d) must make the disclosures required under Table 13 to this section unless the Board-regulated institution is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to these disclosure requirements or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction.
(3) The disclosures described in Tables 1 through 12 to § 217.173 must be made publicly available for twelve consecutive quarters beginning on January 1, 2014, or a shorter period, as applicable, for the quarters after the Board-regulated institution has completed the parallel run process and received notification from the Board pursuant to § 217.121(d). The disclosures described in Table 13 to § 217.173 must be made publicly available for twelve consecutive quarters beginning on January 1, 2015, or a shorter period, as applicable, for the quarters after the Board-regulated institution becomes subject to the disclosure of the supplementary leverage ratio pursuant to § 217.172(d) and § 217.173(a)(2).
Table 1 to § 217.173—Scope of Application
| Qualitative disclosures | (a) | The name of the top corporate entity in the group to which subpart E of this part applies. |
| (b) | A brief description of the differences in the basis for consolidating entities 1 for accounting and regulatory purposes, with a description of those entities: | |
| (1) That are fully consolidated; | ||
| (2) That are deconsolidated and deducted from total capital; | ||
| (3) For which the total capital requirement is deducted; and | ||
| (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). | ||
| (c) | Any restrictions, or other major impediments, on transfer of funds or total capital within the group. | |
| Quantitative disclosures | (d) | The aggregate amount of surplus capital of insurance subsidiaries included in the total capital of the consolidated group. |
| (e) | The aggregate amount by which actual total capital is less than the minimum total capital requirement in all subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies. |
1 Such entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), and significant minority equity investments in insurance, financial and commercial entities.
Table 2 to § 217.173—Capital Structure
| Qualitative disclosures | (a) | Summary information on the terms and conditions of the main features of all regulatory capital instruments. |
| Quantitative disclosures | (b) | The amount of common equity tier 1 capital, with separate disclosure of: |
| (1) Common stock and related surplus; | ||
| (2) Retained earnings; | ||
| (3) Common equity minority interest; | ||
| (4) AOCI (net of tax) and other reserves; and | ||
| (5) Regulatory adjustments and deductions made to common equity tier 1 capital. | ||
| (c) | The amount of tier 1 capital, with separate disclosure of: | |
| (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and | ||
| (2) Regulatory adjustments and deductions made to tier 1 capital. | ||
| (d) | The amount of total capital, with separate disclosure of: | |
| (1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included in tier 1 capital; and | ||
| (2) Regulatory adjustments and deductions made to total capital. | ||
| (e) | (1) Whether the Board-regulated institution has elected to phase in recognition of the transitional amounts as defined in § 217.300(f). | |
| (2) The Board-regulated institution’s common equity tier 1 capital, tier 1 capital, and total capital without including the transitional amounts as defined in § 217.300(f). |
Table 3 to § 217.173—Capital Adequacy
| Qualitative disclosures | (a) | A summary discussion of the Board-regulated institution’s approach to assessing the adequacy of its capital to support current and future activities. |
| Quantitative disclosures | (b) | Risk-weighted assets for credit risk from: |
| (1) Wholesale exposures; | ||
| (2) Residential mortgage exposures; | ||
| (3) Qualifying revolving exposures; | ||
| (4) Other retail exposures; | ||
| (5) Securitization exposures; | ||
| (6) Equity exposures: | ||
| (7) Equity exposures subject to the simple risk weight approach; and | ||
| (8) Equity exposures subject to the internal models approach. | ||
| (c) | Standardized market risk-weighted assets and advanced market risk-weighted assets as calculated under subpart F of this part: | |
| (1) Standardized approach for specific risk; and | ||
| (2) Internal models approach for specific risk. | ||
| (d) | Risk-weighted assets for operational risk. | |
| (e) | (1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 217.300(f): | |
| (A) For the top consolidated group; and | ||
| (2) For each depository institution subsidiary. | ||
| (f) | Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL: | |
| (1) For the top consolidated group; and | ||
| (2) For each depository institution subsidiary. | ||
| (g) | Total risk-weighted assets. |
Table 4 to § 217.173—Capital Conservation and Countercyclical Capital Buffers
| Qualitative disclosures | (a) | The Board-regulated institution must publicly disclose the geographic breakdown of its private sector credit exposures used in the calculation of the countercyclical capital buffer. |
| Quantitative disclosures | (b) | At least quarterly, the Board-regulated institution must calculate and publicly disclose the capital conservation buffer and the countercyclical capital buffer as described under § 217.11 of subpart B. |
| (c) | At least quarterly, the Board-regulated institution must calculate and publicly disclose the buffer retained income of the Board-regulated institution, as described under § 217.11 of subpart B. | |
| (d) | At least quarterly, the Board-regulated institution must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer and the countercyclical capital buffer framework described under § 217.11 of subpart B, including the maximum payout amount for the quarter. |
(b) General qualitative disclosure requirement. For each separate risk area described in Tables 5 through 12 to § 217.173, the Board-regulated institution must describe its risk management objectives and policies, including:
(1) Strategies and processes;
(2) The structure and organization of the relevant risk management function;
(3) The scope and nature of risk reporting and/or measurement systems; and
(4) Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.
Table 5
1 to § 217.173—Credit Risk: General Disclosures
| Qualitative disclosures | (a) | The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 7 to § 217.173), including: |
| (1) Policy for determining past due or delinquency status; | ||
| (2) Policy for placing loans on nonaccrual; | ||
| (3) Policy for returning loans to accrual status; | ||
| (4) Definition of and policy for identifying impaired loans (for financial accounting purposes). | ||
| (5) Description of the methodology that the entity uses to estimate its allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, including statistical methods used where applicable; | ||
| (6) Policy for charging-off uncollectible amounts; and | ||
| (7) Discussion of the Board-regulated institution’s credit risk management policy. | ||
| Quantitative disclosures | (b) | Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, 2 without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, Board-regulated institutions could use categories similar to that used for financial statement purposes. Such categories might include, for instance: |
| (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; | ||
| (2) Debt securities; and | ||
| (3) OTC derivatives. | ||
| (c) | Geographic 3 distribution of exposures, categorized in significant areas by major types of credit exposure. | |
| (d) | Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. | |
| (e) | By major industry or counterparty type: | |
| (1) Amount of impaired loans for which there was a related allowance under GAAP; | ||
| (2) Amount of impaired loans for which there was no related allowance under GAAP; | ||
| (3) Amount of loans past due 90 days and on nonaccrual; | ||
| (4) Amount of loans past due 90 days and still accruing; 4 | ||
| (5) The balance in the allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, at the end of each period, disaggregated on the basis of the entity’s impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and | ||
| (6) Charge-offs during the period. | ||
| (f) | Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area, 5 further categorized as required by GAAP. | |
| (g) | Reconciliation of changes in ALLL or AACL, as applicable. 6 | |
| (h) | Remaining contractual maturity breakdown (for example, one year or less) of the whole portfolio, categorized by credit exposure. |
1 Table 5 to § 217.173 does not cover equity exposures, which should be reported in Table 9.
2
3 Geographical areas may comprise individual countries, groups of countries, or regions within countries. A Board-regulated institution might choose to define the geographical areas based on the way the company’s portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified.
4 A Board-regulated institution is encouraged also to provide an analysis of the aging of past-due loans.
5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately.
6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.
Table 6 to § 217.173—Credit Risk: Disclosures for Portfolios Subject to IRB Risk-Based Capital Formulas
| Qualitative disclosures | (a) | Explanation and review of the: |
| (1) Structure of internal rating systems and if the Board-regulated institution considers external ratings, the relation between internal and external ratings; | ||
| (2) Use of risk parameter estimates other than for regulatory capital purposes; | ||
| (3) Process for managing and recognizing credit risk mitigation (see Table 8 to § 217.173); and | ||
| (4) Control mechanisms for the rating system, including discussion of independence, accountability, and rating systems review. | ||
| (b) | Description of the internal ratings process, provided separately for the following: | |
| (1) Wholesale category; | ||
| (2) Retail subcategories; | ||
| (i) Residential mortgage exposures; | ||
| (ii) Qualifying revolving exposures; and | ||
| (iii) Other retail exposures. | ||
| For each category and subcategory above the description should include: | ||
| (A) The types of exposure included in the category/subcategories; and | ||
| (B) The definitions, methods and data for estimation and validation of PD, LGD, and EAD, including assumptions employed in the derivation of these variables. 1 | ||
| Quantitative disclosures: risk assessment | (c) | (1) For wholesale exposures, present the following information across a sufficient number of PD grades (including default) to allow for a meaningful differentiation of credit risk: 2 |
| (i) Total EAD; 3 | ||
| (ii) Exposure-weighted average LGD (percentage); | ||
| (iii) Exposure-weighted average risk weight; and | ||
| (iv) Amount of undrawn commitments and exposure-weighted average EAD including average drawdowns prior to default for wholesale exposures. | ||
| (2) For each retail subcategory, present the disclosures outlined above across a sufficient number of segments to allow for a meaningful differentiation of credit risk. | ||
| Quantitative disclosures: historical results | (d) | Actual losses in the preceding period for each category and subcategory and how this differs from past experience. A discussion of the factors that impacted the loss experience in the preceding period—for example, has the Board-regulated institution experienced higher than average default rates, loss rates or EADs. |
| (e) | The Board-regulated institution’s estimates compared against actual outcomes over a longer period. 4 At a minimum, this should include information on estimates of losses against actual losses in the wholesale category and each retail subcategory over a period sufficient to allow for a meaningful assessment of the performance of the internal rating processes for each category/subcategory. 5 Where appropriate, the Board-regulated institution should further decompose this to provide analysis of PD, LGD, and EAD outcomes against estimates provided in the quantitative risk assessment disclosures above. 6 |
1 This disclosure item does not require a detailed description of the model in full—it should provide the reader with a broad overview of the model approach, describing definitions of the variables and methods for estimating and validating those variables set out in the quantitative risk disclosures below. This should be done for each of the four category/subcategories. The Board-regulated institution must disclose any significant differences in approach to estimating these variables within each category/subcategories.
2 The PD, LGD and EAD disclosures in Table 6 (c) to § 217.173 should reflect the effects of collateral, qualifying master netting agreements, eligible guarantees and eligible credit derivatives as defined under this part. Disclosure of each PD grade should include the exposure-weighted average PD for each grade. Where a Board-regulated institution aggregates PD grades for the purposes of disclosure, this should be a representative breakdown of the distribution of PD grades used for regulatory capital purposes.
3 Outstanding loans and EAD on undrawn commitments can be presented on a combined basis for these disclosures.
4 These disclosures are a way of further informing the reader about the reliability of the information provided in the “quantitative disclosures: Risk assessment” over the long run. The disclosures are requirements from year-end 2010; in the meantime, early adoption is encouraged. The phased implementation is to allow a Board-regulated institution sufficient time to build up a longer run of data that will make these disclosures meaningful.
5 This disclosure item is not intended to be prescriptive about the period used for this assessment. Upon implementation, it is expected that a Board-regulated institution would provide these disclosures for as long a set of data as possible—for example, if a Board-regulated institution has 10 years of data, it might choose to disclose the average default rates for each PD grade over that 10-year period. Annual amounts need not be disclosed.
6 A Board-regulated institution must provide this further decomposition where it will allow users greater insight into the reliability of the estimates provided in the “quantitative disclosures: Risk assessment.” In particular, it must provide this information where there are material differences between its estimates of PD, LGD or EAD compared to actual outcomes over the long run. The Board-regulated institution must also provide explanations for such differences.
Table 7 to § 217.173—General Disclosure for Counterparty Credit Risk of OTC Derivative Contracts, Repo-Style Transactions, and Eligible Margin Loans
| Qualitative Disclosures | (a) | The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including: |
| (1) Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures; | ||
| (2) Discussion of policies for securing collateral, valuing and managing collateral, and establishing credit reserves; | ||
| (3) Discussion of the primary types of collateral taken; | ||
| (4) Discussion of policies with respect to wrong-way risk exposures; and | ||
| (5) Discussion of the impact of the amount of collateral the Board-regulated institution would have to provide if the Board-regulated institution were to receive a credit rating downgrade. | ||
| Quantitative Disclosures | (b) | Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure. 1 Also report measures for EAD used for regulatory capital for these transactions, the notional value of credit derivative hedges purchased for counterparty credit risk protection, and, for Board-regulated institutions not using the internal models methodology in § 217.132(d) , the distribution of current credit exposure by types of credit exposure. 2 |
| (c) | Notional amount of purchased and sold credit derivatives, segregated between use for the Board-regulated institution’s own credit portfolio and for its intermediation activities, including the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. | |
| (d) | The estimate of alpha if the Board-regulated institution has received supervisory approval to estimate alpha. |
1 Net unsecured credit exposure is the credit exposure after considering the benefits from legally enforceable netting agreements and collateral arrangements, without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
Table 8 To § 217.173—Credit Risk Mitigation
1 2
| Qualitative disclosures | (a) | The general qualitative disclosure requirement with respect to credit risk mitigation, including: |
| (1) Policies and processes for, and an indication of the extent to which the Board-regulated institution uses, on- or off-balance sheet netting; | ||
| (2) Policies and processes for collateral valuation and management; | ||
| (3) A description of the main types of collateral taken by the Board-regulated institution; | ||
| (4) The main types of guarantors/credit derivative counterparties and their creditworthiness; and | ||
| (5) Information about (market or credit) risk concentrations within the mitigation taken. | ||
| Quantitative disclosures | (b) | For each separately disclosed portfolio, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees/credit derivatives. |
1 At a minimum, a Board-regulated institution must provide the disclosures in Table 8 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, Board-regulated institutions are encouraged to give further information about mitigants that have not been recognized for that purpose.
2 Credit derivatives and other credit mitigation that are treated for the purposes of this subpart as synthetic securitization exposures should be excluded from the credit risk mitigation disclosures (in Table 8 to § 217.173) and included within those relating to securitization (in Table 9 to § 217.173).
Table 9 to § 217.173—Securitization
| Qualitative disclosures | (a) | The general qualitative disclosure requirement with respect to securitization (including synthetic securitizations), including a discussion of: |
| (1) The Board-regulated institution’s objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the Board-regulated institution to other entities and including the type of risks assumed and retained with resecuritization activity; 1 | ||
| (2) The nature of the risks (e.g. liquidity risk) inherent in the securitized assets; | ||
| (3) The roles played by the Board-regulated institution in the securitization process 2 and an indication of the extent of the Board-regulated institution’s involvement in each of them; | ||
| (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; | ||
| (5) The Board-regulated institution’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and | ||
| (6) The risk-based capital approaches that the Board-regulated institution follows for its securitization exposures including the type of securitization exposure to which each approach applies. | ||
| (b) | A list of: | |
| (1) The type of securitization SPEs that the Board-regulated institution, as sponsor, uses to securitize third-party exposures. The Board-regulated institution must indicate whether it has exposure to these SPEs, either on- or off- balance sheet; and | ||
| (2) Affiliated entities: | ||
| (i) That the Board-regulated institution manages or advises; and | ||
| (ii) That invest either in the securitization exposures that the Board-regulated institution has securitized or in securitization SPEs that the Board-regulated institution sponsors. 3 | ||
| (c) | Summary of the Board-regulated institution’s accounting policies for securitization activities, including: | |
| (1) Whether the transactions are treated as sales or financings; (2) Recognition of gain-on-sale; | ||
| (3) Methods and key assumptions and inputs applied in valuing retained or purchased interests; | ||
| (4) Changes in methods and key assumptions and inputs from the previous period for valuing retained interests and impact of the changes; | ||
| (5) Treatment of synthetic securitizations; | ||
| (6) How exposures intended to be securitized are valued and whether they are recorded under subpart E of this part; and | ||
| (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the Board-regulated institution to provide financial support for securitized assets. | ||
| (d) | An explanation of significant changes to any of the quantitative information set forth below since the last reporting period. | |
| Quantitative disclosures | (e) | The total outstanding exposures securitized 4 by the Board-regulated institution in securitizations that meet the operational criteria in § 217.141 (categorized into traditional/synthetic), by underlying exposure type 5 separately for securitizations of third-party exposures for which the bank acts only as sponsor. |
| (f) | For exposures securitized by the Board-regulated institution in securitizations that meet the operational criteria in § 217.141: | |
| (1) Amount of securitized assets that are impaired 6/past due categorized by exposure type; and | ||
| (2) Losses recognized by the Board-regulated institution during the current period categorized by exposure type. 7 | ||
| (g) | The total amount of outstanding exposures intended to be securitized categorized by exposure type. | |
| (h) | Aggregate amount of: | |
| (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and | ||
| (2) Off-balance sheet securitization exposures categorized by exposure type. | ||
| (i) | (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g. SA, SFA, or SSFA). | |
| (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: | ||
| (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital; and | ||
| (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. | ||
| (j) | Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by asset type. | |
| (k) | Aggregate amount of resecuritization exposures retained or purchased categorized according to: | |
| (1) Exposures to which credit risk mitigation is applied and those not applied; and | ||
| (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. |
1 The Board-regulated institution must describe the structure of resecuritizations in which it participates; this description must be provided for the main categories of resecuritization products in which the Board-regulated institution is active.
2 For example, these roles would include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider.
3 For example, money market mutual funds should be listed individually, and personal and private trusts, should be noted collectively.
4 “Exposures securitized” include underlying exposures originated by the bank, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the bank’s balance sheet and underlying exposures acquired by the bank from third-party entities) in which the originating bank does not retain any securitization exposure should be shown separately but need only be reported for the year of inception.
5 A Board-regulated institution is required to disclose exposures regardless of whether there is a capital charge under this part.
6 A Board-regulated institution must include credit-related other than temporary impairment (OTTI).
7 For example, charge-offs/allowances (if the assets remain on the bank’s balance sheet) or credit-related OTTI of I/O strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the bank with respect to securitized assets.
Table 10 to § 217.173—Operational Risk
| Qualitative disclosures | (a) | The general qualitative disclosure requirement for operational risk. |
| (b) | Description of the AMA, including a discussion of relevant internal and external factors considered in the Board-regulated institution’s measurement approach. | |
| (c) | A description of the use of insurance for the purpose of mitigating operational risk. |
Table 11 to § 217.173—Equities Not Subject to Subpart F of This Part
| Qualitative disclosures | (a) | The general qualitative disclosure requirement with respect to the equity risk of equity holdings not subject to subpart F of this part, including: |
| (1) Differentiation between holdings on which capital gains are expected and those held for other objectives, including for relationship and strategic reasons; and | ||
| (2) Discussion of important policies covering the valuation of and accounting for equity holdings not subject to subpart F of this part. This includes the accounting methodology and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. | ||
| Quantitative disclosures | (b) | Carrying value on the balance sheet of equity investments, as well as the fair value of those investments. |
| (c) | The types and nature of investments, including the amount that is: | |
| (1) Publicly traded; and | ||
| (2) Non-publicly traded. | ||
| (d) | The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. | |
| (e) | (1) Total unrealized gains (losses) 1 | |
| (2) Total latent revaluation gains (losses) 2 | ||
| (3) Any amounts of the above included in tier 1 and/or tier 2 capital. | ||
| (f) | Capital requirements categorized by appropriate equity groupings, consistent with the Board-regulated institution’s methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding total capital requirements. 3 |
1 Unrealized gains (losses) recognized in the balance sheet but not through earnings.
2 Unrealized gains (losses) not recognized either in the balance sheet or through earnings.
3 This disclosure must include a breakdown of equities that are subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400 percent, and 600 percent risk weights, as applicable.
Table 12 to § 217.173—Interest Rate Risk for Non-Trading Activities
| Qualitative disclosures | (a) | The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. |
| Quantitative disclosures | (b) | The increase (decline) in earnings or economic value (or relevant measure used by management) for upward and downward rate shocks according to management’s method for measuring interest rate risk for non-trading activities, categorized by currency (as appropriate). |
(c) Except as provided in § 217.172(b), a Board-regulated institution described in § 217.172(d) must make the disclosures described in Table 13 to § 217.173; provided, however, the disclosures required under this paragraph are required without regard to whether the Board-regulated institution has completed the parallel run process and has received notification from the Board pursuant to § 217.121(d). The Board-regulated institution must make these disclosures publicly available beginning on January 1, 2015.
Table 13 to § 217.173—Supplementary Leverage Ratio
| Dollar amounts in thousands | ||||
|---|---|---|---|---|
| Tril | Bil | Mil | Thou | |
| 1 Total consolidated assets as reported in published financial statements | ||||
| 2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation | ||||
| 3 Adjustment for fiduciary assets recognized on balance sheet but excluded from total leverage exposure | ||||
| 4 Adjustment for derivative exposures | ||||
| 5 Adjustment for repo-style transactions | ||||
| 6 Adjustment for off-balance sheet exposures (that is, conversion to credit equivalent amounts of off-balance sheet exposures) | ||||
| 7 Other adjustments | ||||
| 8 Total leverage exposure | ||||
| 1 On-balance sheet assets (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) | ||||
| 2 LESS: Amounts deducted from tier 1 capital | ||||
| 3 Total on-balance sheet exposures (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) (sum of lines 1 and 2) | ||||
| 4 Current exposure for derivative exposures (that is, net of cash variation margin) | ||||
| 5 Add-on amounts for potential future exposure (PFE) for derivative exposures | ||||
| 6 Gross-up for cash collateral posted if deducted from the on-balance sheet assets, except for cash variation margin | ||||
| 7 LESS: Deductions of receivable assets for cash variation margin posted in derivative transactions, if included in on-balance sheet assets | ||||
| 8 LESS: Exempted CCP leg of client-cleared transactions | ||||
| 9 Effective notional principal amount of sold credit protection | ||||
| 10 LESS: Effective notional principal amount offsets and PFE adjustments for sold credit protection | ||||
| 11 Total derivative exposures (sum of lines 4 to 10) | ||||
| 12 On-balance sheet assets for repo-style transactions, except include the gross value of receivables for reverse repurchase transactions. Exclude from this item the value of securities received in a security-for-security repo-style transaction where the securities lender has not sold or re-hypothecated the securities received. Include in this item the value of securities that qualified for sales treatment that must be reversed | ||||
| 13 LESS: Reduction of the gross value of receivables in reverse repurchase transactions by cash payables in repurchase transactions under netting agreements | ||||
| 14 Counterparty credit risk for all repo-style transactions | ||||
| 15 Exposure for repo-style transactions where a banking organization acts as an agent | ||||
| 16 Total exposures for repo-style transactions (sum of lines 12 to 15) | ||||
| 17 Off-balance sheet exposures at gross notional amounts | ||||
| 18 LESS: Adjustments for conversion to credit equivalent amounts | ||||
| 19 Off-balance sheet exposures (sum of lines 17 and 18) | ||||
| 20 Tier 1 capital | ||||
| 21 Total leverage exposure (sum of lines 3, 11, 16 and 19) | ||||
| 22 Supplementary leverage ratio | (in percent) | |||
§§ 217.174-217.200 [Reserved]
Subpart F—Risk-Weighted Assets—Market Risk
(a) Purpose. This subpart F establishes risk-based capital requirements for Board-regulated institutions with significant exposure to market risk, provides methods for these Board-regulated institutions to calculate their standardized measure for market risk and, if applicable, advanced measure for market risk, and establishes public disclosure requirements.
(b) Applicability. (1) This subpart applies to any Board-regulated institution with aggregate trading assets and trading liabilities (as reported in the Board-regulated institution’s most recent quarterly Call Report, for a state member bank, or FR Y-9C, for a bank holding company or savings and loan holding company, as applicable, any savings and loan holding company that does not file the FR Y-9C should follow the instructions to the FR Y-9C) equal to:
(i) 10 percent or more of quarter-end total assets as reported on the most recent quarterly [Call Report or FR Y-9C]; or
(ii) $1 billion or more.
(2) The Board may apply this subpart to any Board-regulated institution if the Board deems it necessary or appropriate because of the level of market risk of the Board-regulated institution or to ensure safe and sound banking practices.
(3) The Board may exclude a Board-regulated institution that meets the criteria of paragraph (b)(1) of this section from application of this subpart if the Board determines that the exclusion is appropriate based on the level of market risk of the Board-regulated institution and is consistent with safe and sound banking practices.
(c) Reservation of authority (1) The Board may require a Board-regulated institution to hold an amount of capital greater than otherwise required under this subpart if the Board determines that the Board-regulated institution’s capital requirement for market risk as calculated under this subpart is not commensurate with the market risk of the Board-regulated institution’s covered positions. In making determinations under paragraphs (c)(1) through (c)(3) of this section, the Board will apply notice and response procedures generally in the same manner as the notice and response procedures set forth in 12 CFR 263.202.
(2) If the Board determines that the risk-based capital requirement calculated under this subpart by the Board-regulated institution for one or more covered positions or portfolios of covered positions is not commensurate with the risks associated with those positions or portfolios, the Board may require the Board-regulated institution to assign a different risk-based capital requirement to the positions or portfolios that more accurately reflects the risk of the positions or portfolios.
(3) The Board may also require a Board-regulated institution to calculate risk-based capital requirements for specific positions or portfolios under this subpart, or under subpart D or subpart E of this part, as appropriate, to more accurately reflect the risks of the positions.
(4) Nothing in this subpart limits the authority of the Board under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law.
§ 217.202 Definitions.
(a) Terms set forth in § 217.2 and used in this subpart have the definitions assigned thereto in § 217.2.
(b) For the purposes of this subpart, the following terms are defined as follows:
Backtesting means the comparison of a Board-regulated institution’s internal estimates with actual outcomes during a sample period not used in model development. For purposes of this subpart, backtesting is one form of out-of-sample testing.
Commodity position means a position for which price risk arises from changes in the price of a commodity.
Corporate debt position means a debt position that is an exposure to a company that is not a sovereign entity, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, a multilateral development bank, a depository institution, a foreign bank, a credit union, a public sector entity, a GSE, or a securitization.
Correlation trading position means:
(1) A securitization position for which all or substantially all of the value of the underlying exposures is based on the credit quality of a single company for which a two-way market exists, or on commonly traded indices based on such exposures for which a two-way market exists on the indices; or
(2) A position that is not a securitization position and that hedges a position described in paragraph (1) of this definition; and
(3) A correlation trading position does not include:
(i) A resecuritization position;
(ii) A derivative of a securitization position that does not provide a pro rata share in the proceeds of a securitization tranche; or
(iii) A securitization position for which the underlying assets or reference exposures are retail exposures, residential mortgage exposures, or commercial mortgage exposures.
Covered position means the following positions:
(1) A trading asset or trading liability (whether on- or off-balance sheet),
(i) The position is a trading position or hedges another covered position;
(ii) The position is free of any restrictive covenants on its tradability or the Board-regulated institution is able to hedge the material risk elements of the position in a two-way market;
(2) A foreign exchange or commodity position, regardless of whether the position is a trading asset or trading liability (excluding any structural foreign currency positions that the Board-regulated institution chooses to exclude with prior supervisory approval); and
(3) Notwithstanding paragraphs (1) and (2) of this definition, a covered position does not include:
(i) An intangible asset, including any servicing asset;
(ii) Any hedge of a trading position that the Board determines to be outside the scope of the Board-regulated institution’s hedging strategy required in paragraph (a)(2) of § 217.203;
(iii) Any position that, in form or substance, acts as a liquidity facility that provides support to asset-backed commercial paper;
(iv) A credit derivative the Board-regulated institution recognizes as a guarantee for risk-weighted asset amount calculation purposes under subpart D or subpart E of this part;
(v) Any position that is recognized as a credit valuation adjustment hedge under § 217.132(e)(5) or § 217.132(e)(6), except as provided in § 217.132(e)(6)(vii);
(vi) Any equity position that is not publicly traded, other than a derivative that references a publicly traded equity and other than a position in an investment company as defined in and registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), provided that all the underlying equities held by the investment company are publicly traded;
(vii) Any equity position that is not publicly traded, other than a derivative that references a publicly traded equity and other than a position in an entity not domiciled in the United States (or a political subdivision thereof) that is supervised and regulated in a manner similar to entities described in paragraph (3)(vi) of this definition;
(viii) Any position a Board-regulated institution holds with the intent to securitize; or
(ix) Any direct real estate holding.
Debt position means a covered position that is not a securitization position or a correlation trading position and that has a value that reacts primarily to changes in interest rates or credit spreads.
Default by a sovereign entity has the same meaning as the term sovereign default under § 217.2.
Equity position means a covered position that is not a securitization position or a correlation trading position and that has a value that reacts primarily to changes in equity prices.
Event risk means the risk of loss on equity or hybrid equity positions as a result of a financial event, such as the announcement or occurrence of a company merger, acquisition, spin-off, or dissolution.
Foreign exchange position means a position for which price risk arises from changes in foreign exchange rates.
General market risk means the risk of loss that could result from broad market movements, such as changes in the general level of interest rates, credit spreads, equity prices, foreign exchange rates, or commodity prices.
Hedge means a position or positions that offset all, or substantially all, of one or more material risk factors of another position.
Idiosyncratic risk means the risk of loss in the value of a position that arises from changes in risk factors unique to that position.
Incremental risk means the default risk and credit migration risk of a position. Default risk means the risk of loss on a position that could result from the failure of an obligor to make timely payments of principal or interest on its debt obligation, and the risk of loss that could result from bankruptcy, insolvency, or similar proceeding. Credit migration risk means the price risk that arises from significant changes in the underlying credit quality of the position.
Market risk means the risk of loss on a position that could result from movements in market prices.
Resecuritization position means a covered position that is:
(1) An on- or off-balance sheet exposure to a resecuritization; or
(2) An exposure that directly or indirectly references a resecuritization exposure in paragraph (1) of this definition.
Securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties;
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches that reflect different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities);
(5) For non-synthetic securitizations, the underlying exposures are not owned by an operating company;
(6) The underlying exposures are not owned by a small business investment company described in section 302 of the Small Business Investment Act;
(7) The underlying exposures are not owned by a firm an investment in which qualifies as a community development investment under section 24(Eleventh) of the National Bank Act;
(8) The Board may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a securitization based on the transaction’s leverage, risk profile, or economic substance;
(9) The Board may deem an exposure to a transaction that meets the definition of a securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a securitization based on the transaction’s leverage, risk profile, or economic substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as defined in 12 CFR 208.34.
(iii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of ERISA, a “governmental plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction; or
(iv) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or foreign equivalents thereof.
Securitization position means a covered position that is:
(1) An on-balance sheet or off-balance sheet credit exposure (including credit-enhancing representations and warranties) that arises from a securitization (including a resecuritization); or
(2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition.
Sovereign debt position means a direct exposure to a sovereign entity.
Specific risk means the risk of loss on a position that could result from factors other than broad market movements and includes event risk, default risk, and idiosyncratic risk.
Structural position in a foreign currency means a position that is not a trading position and that is:
(1) Subordinated debt, equity, or minority interest in a consolidated subsidiary that is denominated in a foreign currency;
(2) Capital assigned to foreign branches that is denominated in a foreign currency;
(3) A position related to an unconsolidated subsidiary or another item that is denominated in a foreign currency and that is deducted from the Board-regulated institution’s tier 1 or tier 2 capital; or
(4) A position designed to hedge a Board-regulated institution’s capital ratios or earnings against the effect on paragraphs (1), (2), or (3) of this definition of adverse exchange rate movements.
Term repo-style transaction means a repo-style transaction that has an original maturity in excess of one business day.
Trading position means a position that is held by the Board-regulated institution for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.
Two-way market means a market where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a relatively short time frame conforming to trade custom.
Value-at-Risk (VaR) means the estimate of the maximum amount that the value of one or more positions could decline due to market price or rate movements during a fixed holding period within a stated confidence interval.
§ 217.203 Requirements for application of this subpart F.
(a) Trading positions—(1) Identification of trading positions. A Board-regulated institution must have clearly defined policies and procedures for determining which of its trading assets and trading liabilities are trading positions and which of its trading positions are correlation trading positions. These policies and procedures must take into account:
(i) The extent to which a position, or a hedge of its material risks, can be marked-to-market daily by reference to a two-way market; and
(ii) Possible impairments to the liquidity of a position or its hedge.
(2) Trading and hedging strategies. A Board-regulated institution must have clearly defined trading and hedging strategies for its trading positions that are approved by senior management of the Board-regulated institution.
(i) The trading strategy must articulate the expected holding period of, and the market risk associated with, each portfolio of trading positions.
(ii) The hedging strategy must articulate for each portfolio of trading positions the level of market risk the Board-regulated institution is willing to accept and must detail the instruments, techniques, and strategies the Board-regulated institution will use to hedge the risk of the portfolio.
(b) Management of covered positions—(1) Active management. A Board-regulated institution must have clearly defined policies and procedures for actively managing all covered positions. At a minimum, these policies and procedures must require:
(i) Marking positions to market or to model on a daily basis;
(ii) Daily assessment of the Board-regulated institution’s ability to hedge position and portfolio risks, and of the extent of market liquidity;
(iii) Establishment and daily monitoring of limits on positions by a risk control unit independent of the trading business unit;
(iv) Daily monitoring by senior management of information described in paragraphs (b)(1)(i) through (b)(1)(iii) of this section;
(v) At least annual reassessment of established limits on positions by senior management; and
(vi) At least annual assessments by qualified personnel of the quality of market inputs to the valuation process, the soundness of key assumptions, the reliability of parameter estimation in pricing models, and the stability and accuracy of model calibration under alternative market scenarios.
(2) Valuation of covered positions. The Board-regulated institution must have a process for prudent valuation of its covered positions that includes policies and procedures on the valuation of positions, marking positions to market or to model, independent price verification, and valuation adjustments or reserves. The valuation process must consider, as appropriate, unearned credit spreads, close-out costs, early termination costs, investing and funding costs, liquidity, and model risk.
(c) Requirements for internal models. (1) A Board-regulated institution must obtain the prior written approval of the Board before using any internal model to calculate its risk-based capital requirement under this subpart.
(2) A Board-regulated institution must meet all of the requirements of this section on an ongoing basis. The Board-regulated institution must promptly notify the Board when:
(i) The Board-regulated institution plans to extend the use of a model that the Board has approved under this subpart to an additional business line or product type;
(ii) The Board-regulated institution makes any change to an internal model approved by the Board under this subpart that would result in a material change in the Board-regulated institution’s risk-weighted asset amount for a portfolio of covered positions; or
(iii) The Board-regulated institution makes any material change to its modeling assumptions.
(3) The Board may rescind its approval of the use of any internal model (in whole or in part) or of the determination of the approach under § 217.209(a)(2)(ii) for a Board-regulated institution’s modeled correlation trading positions and determine an appropriate capital requirement for the covered positions to which the model would apply, if the Board determines that the model no longer complies with this subpart or fails to reflect accurately the risks of the Board-regulated institution’s covered positions.
(4) The Board-regulated institution must periodically, but no less frequently than annually, review its internal models in light of developments in financial markets and modeling technologies, and enhance those models as appropriate to ensure that they continue to meet the Board’s standards for model approval and employ risk measurement methodologies that are most appropriate for the Board-regulated institution’s covered positions.
(5) The Board-regulated institution must incorporate its internal models into its risk management process and integrate the internal models used for calculating its VaR-based measure into its daily risk management process.
(6) The level of sophistication of a Board-regulated institution’s internal models must be commensurate with the complexity and amount of its covered positions. A Board-regulated institution’s internal models may use any of the generally accepted approaches, including but not limited to variance-covariance models, historical simulations, or Monte Carlo simulations, to measure market risk.
(7) The Board-regulated institution’s internal models must properly measure all the material risks in the covered positions to which they are applied.
(8) The Board-regulated institution’s internal models must conservatively assess the risks arising from less liquid positions and positions with limited price transparency under realistic market scenarios.
(9) The Board-regulated institution must have a rigorous and well-defined process for re-estimating, re-evaluating, and updating its internal models to ensure continued applicability and relevance.
(10) If a Board-regulated institution uses internal models to measure specific risk, the internal models must also satisfy the requirements in paragraph (b)(1) of § 217.207.
(d) Control, oversight, and validation mechanisms. (1) The Board-regulated institution must have a risk control unit that reports directly to senior management and is independent from the business trading units.
(2) The Board-regulated institution must validate its internal models initially and on an ongoing basis. The Board-regulated institution’s validation process must be independent of the internal models’ development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the internal models;
(ii) An ongoing monitoring process that includes verification of processes and the comparison of the Board-regulated institution’s model outputs with relevant internal and external data sources or estimation techniques; and
(iii) An outcomes analysis process that includes backtesting. For internal models used to calculate the VaR-based measure, this process must include a comparison of the changes in the Board-regulated institution’s portfolio value that would have occurred were end-of-day positions to remain unchanged (therefore, excluding fees, commissions, reserves, net interest income, and intraday trading) with VaR-based measures during a sample period not used in model development.
(3) The Board-regulated institution must stress test the market risk of its covered positions at a frequency appropriate to each portfolio, and in no case less frequently than quarterly. The stress tests must take into account concentration risk (including but not limited to concentrations in single issuers, industries, sectors, or markets), illiquidity under stressed market conditions, and risks arising from the Board-regulated institution’s trading activities that may not be adequately captured in its internal models.
(4) The Board-regulated institution must have an internal audit function independent of business-line management that at least annually assesses the effectiveness of the controls supporting the Board-regulated institution’s market risk measurement systems, including the activities of the business trading units and independent risk control unit, compliance with policies and procedures, and calculation of the Board-regulated institution’s measures for market risk under this subpart. At least annually, the internal audit function must report its findings to the Board-regulated institution’s board of directors (or a committee thereof).
(e) Internal assessment of capital adequacy. The Board-regulated institution must have a rigorous process for assessing its overall capital adequacy in relation to its market risk. The assessment must take into account risks that may not be captured fully in the VaR-based measure, including concentration and liquidity risk under stressed market conditions.
(f) Documentation. The Board-regulated institution must adequately document all material aspects of its internal models, management and valuation of covered positions, control, oversight, validation and review processes and results, and internal assessment of capital adequacy.
§ 217.204 Measure for market risk.
(a) General requirement. (1) A Board-regulated institution must calculate its standardized measure for market risk by following the steps described in paragraph (a)(2) of this section. An advanced approaches Board-regulated institution also must calculate an advanced measure for market risk by following the steps in paragraph (a)(2) of this section.
(2) Measure for market risk. A Board-regulated institution must calculate the standardized measure for market risk, which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures all as defined under this paragraph (a)(2), (except, that the Board-regulated institution may not use the SFA in section 210(b)(2)(vii)(B) of this subpart for purposes of this calculation)[, plus any additional capital requirement established by the Board]. An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notifications from the Board pursuant to § 217.121(d) also must calculate the advanced measure for market risk, which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures as defined under this paragraph (a)(2) [, plus any additional capital requirement established by the Board].
(i) VaR-based capital requirement. A Board-regulated institution’s VaR-based capital requirement equals the greater of:
(A) The previous day’s VaR-based measure as calculated under § 217.205; or
(B) The average of the daily VaR-based measures as calculated under § 217.205 for each of the preceding 60 business days multiplied by three, except as provided in paragraph (b) of this section.
(ii) Stressed VaR-based capital requirement. A Board-regulated institution’s stressed VaR-based capital requirement equals the greater of:
(A) The most recent stressed VaR-based measure as calculated under § 217.206; or
(B) The average of the stressed VaR-based measures as calculated under § 217.206 for each of the preceding 12 weeks multiplied by three, except as provided in paragraph (b) of this section.
(iii) Specific risk add-ons. A Board-regulated institution’s specific risk add-ons equal any specific risk add-ons that are required under § 217.207 and are calculated in accordance with § 217.210.
(iv) Incremental risk capital requirement. A Board-regulated institution’s incremental risk capital requirement equals any incremental risk capital requirement as calculated under section 208 of this subpart.
(v) Comprehensive risk capital requirement. A Board-regulated institution’s comprehensive risk capital requirement equals any comprehensive risk capital requirement as calculated under section 209 of this subpart.
(vi) Capital requirement for de minimis exposures. A Board-regulated institution’s capital requirement for de minimis exposures equals:
(A) The absolute value of the fair value of those de minimis exposures that are not captured in the Board-regulated institution’s VaR-based measure or under paragraph (a)(2)(vi)(B) of this section; and
(B) With the prior written approval of the Board, the capital requirement for any de minimis exposures using alternative techniques that appropriately measure the market risk associated with those exposures.
(b) Backtesting. A Board-regulated institution must compare each of its most recent 250 business days’ trading losses (excluding fees, commissions, reserves, net interest income, and intraday trading) with the corresponding daily VaR-based measures calibrated to a one-day holding period and at a one-tail, 99.0 percent confidence level. A Board-regulated institution must begin backtesting as required by this paragraph (b) no later than one year after the later of January 1, 2014 and the date on which the Board-regulated institution becomes subject to this subpart. In the interim, consistent with safety and soundness principles, a Board-regulated institution subject to this subpart as of January 1, 2014 should continue to follow backtesting procedures in accordance with the Board’s supervisory expectations.
(1) Once each quarter, the Board-regulated institution must identify the number of exceptions (that is, the number of business days for which the actual daily net trading loss, if any, exceeds the corresponding daily VaR-based measure) that have occurred over the preceding 250 business days.
(2) A Board-regulated institution must use the multiplication factor in Table 1 to § 217.204 that corresponds to the number of exceptions identified in paragraph (b)(1) of this section to determine its VaR-based capital requirement for market risk under paragraph (a)(2)(i) of this section and to determine its stressed VaR-based capital requirement for market risk under paragraph (a)(2)(ii) of this section until it obtains the next quarter’s backtesting results, unless the Board notifies the Board-regulated institution in writing that a different adjustment or other action is appropriate.
Table 1 to § 217.204—Multiplication Factors Based on Results of Backtesting
| Number of exceptions | Multiplication factor |
|---|---|
| 4 or fewer | 3.00 |
| 5 | 3.40 |
| 6 | 3.50 |
| 7 | 3.65 |
| 8 | 3.75 |
| 9 | 3.85 |
| 10 or more | 4.00 |
§ 217.205 VaR-based measure.
(a) General requirement. A Board-regulated institution must use one or more internal models to calculate daily a VaR-based measure of the general market risk of all covered positions. The daily VaR-based measure also may reflect the Board-regulated institution’s specific risk for one or more portfolios of debt and equity positions, if the internal models meet the requirements of paragraph (b)(1) of § 217.207. The daily VaR-based measure must also reflect the Board-regulated institution’s specific risk for any portfolio of correlation trading positions that is modeled under § 217.209. A Board-regulated institution may elect to include term repo-style transactions in its VaR-based measure, provided that the Board-regulated institution includes all such term repo-style transactions consistently over time.
(1) The Board-regulated institution’s internal models for calculating its VaR-based measure must use risk factors sufficient to measure the market risk inherent in all covered positions. The market risk categories must include, as appropriate, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk. For material positions in the major currencies and markets, modeling techniques must incorporate enough segments of the yield curve—in no case less than six—to capture differences in volatility and less than perfect correlation of rates along the yield curve.
(2) The VaR-based measure may incorporate empirical correlations within and across risk categories, provided the Board-regulated institution validates and demonstrates the reasonableness of its process for measuring correlations. If the VaR-based measure does not incorporate empirical correlations across risk categories, the Board-regulated institution must add the separate measures from its internal models used to calculate the VaR-based measure for the appropriate market risk categories (interest rate risk, credit spread risk, equity price risk, foreign exchange rate risk, and/or commodity price risk) to determine its aggregate VaR-based measure.
(3) The VaR-based measure must include the risks arising from the nonlinear price characteristics of options positions or positions with embedded optionality and the sensitivity of the fair value of the positions to changes in the volatility of the underlying rates, prices, or other material risk factors. A Board-regulated institution with a large or complex options portfolio must measure the volatility of options positions or positions with embedded optionality by different maturities and/or strike prices, where material.
(4) The Board-regulated institution must be able to justify to the satisfaction of the Board the omission of any risk factors from the calculation of its VaR-based measure that the Board-regulated institution uses in its pricing models.
(5) The Board-regulated institution must demonstrate to the satisfaction of the Board the appropriateness of any proxies used to capture the risks of the Board-regulated institution’s actual positions for which such proxies are used.
(b) Quantitative requirements for VaR-based measure. (1) The VaR-based measure must be calculated on a daily basis using a one-tail, 99.0 percent confidence level, and a holding period equivalent to a 10-business-day movement in underlying risk factors, such as rates, spreads, and prices. To calculate VaR-based measures using a 10-business-day holding period, the Board-regulated institution may calculate 10-business-day measures directly or may convert VaR-based measures using holding periods other than 10 business days to the equivalent of a 10-business-day holding period. A Board-regulated institution that converts its VaR-based measure in such a manner must be able to justify the reasonableness of its approach to the satisfaction of the Board.
(2) The VaR-based measure must be based on a historical observation period of at least one year. Data used to determine the VaR-based measure must be relevant to the Board-regulated institution’s actual exposures and of sufficient quality to support the calculation of risk-based capital requirements. The Board-regulated institution must update data sets at least monthly or more frequently as changes in market conditions or portfolio composition warrant. For a Board-regulated institution that uses a weighting scheme or other method for the historical observation period, the Board-regulated institution must either:
(i) Use an effective observation period of at least one year in which the average time lag of the observations is at least six months; or
(ii) Demonstrate to the Board that its weighting scheme is more effective than a weighting scheme with an average time lag of at least six months representing the volatility of the Board-regulated institution’s trading portfolio over a full business cycle. A Board-regulated institution using this option must update its data more frequently than monthly and in a manner appropriate for the type of weighting scheme.
(c) A Board-regulated institution must divide its portfolio into a number of significant subportfolios approved by the Board for subportfolio backtesting purposes. These subportfolios must be sufficient to allow the Board-regulated institution and the Board to assess the adequacy of the VaR model at the risk factor level; the Board will evaluate the appropriateness of these subportfolios relative to the value and composition of the Board-regulated institution’s covered positions. The Board-regulated institution must retain and make available to the Board the following information for each subportfolio for each business day over the previous two years (500 business days), with no more than a 60-day lag:
(1) A daily VaR-based measure for the subportfolio calibrated to a one-tail, 99.0 percent confidence level;
(2) The daily profit or loss for the subportfolio (that is, the net change in price of the positions held in the portfolio at the end of the previous business day); and
(3) The p-value of the profit or loss on each day (that is, the probability of observing a profit that is less than, or a loss that is greater than, the amount reported for purposes of paragraph (c)(2) of this section based on the model used to calculate the VaR-based measure described in paragraph (c)(1) of this section).
§ 217.206 Stressed VaR-based measure.
(a) General requirement. At least weekly, a Board-regulated institution must use the same internal model(s) used to calculate its VaR-based measure to calculate a stressed VaR-based measure.
(b) Quantitative requirements for stressed VaR-based measure. (1) A Board-regulated institution must calculate a stressed VaR-based measure for its covered positions using the same model(s) used to calculate the VaR-based measure, subject to the same confidence level and holding period applicable to the VaR-based measure under § 217.205, but with model inputs calibrated to historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate to the Board-regulated institution’s current portfolio.
(2) The stressed VaR-based measure must be calculated at least weekly and be no less than the Board-regulated institution’s VaR-based measure.
(3) A Board-regulated institution must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the Board-regulated institution’s stressed VaR-based measure under this section and must be able to provide empirical support for the period used. The Board-regulated institution must obtain the prior approval of the Board for, and notify the Board if the Board-regulated institution makes any material changes to, these policies and procedures. The policies and procedures must address:
(i) How the Board-regulated institution links the period of significant financial stress used to calculate the stressed VaR-based measure to the composition and directional bias of its current portfolio; and
(ii) The Board-regulated institution’s process for selecting, reviewing, and updating the period of significant financial stress used to calculate the stressed VaR-based measure and for monitoring the appropriateness of the period to the Board-regulated institution’s current portfolio.
(4) Nothing in this section prevents the Board from requiring a Board-regulated institution to use a different period of significant financial stress in the calculation of the stressed VaR-based measure.
§ 217.207 Specific risk.
(a) General requirement. A Board-regulated institution must use one of the methods in this section to measure the specific risk for each of its debt, equity, and securitization positions with specific risk.
(b) Modeled specific risk. A Board-regulated institution may use models to measure the specific risk of covered positions as provided in paragraph (a) of section 205 of this subpart (therefore, excluding securitization positions that are not modeled under section 209 of this subpart). A Board-regulated institution must use models to measure the specific risk of correlation trading positions that are modeled under § 217.209.
(1) Requirements for specific risk modeling. (i) If a Board-regulated institution uses internal models to measure the specific risk of a portfolio, the internal models must:
(A) Explain the historical price variation in the portfolio;
(B) Be responsive to changes in market conditions;
(C) Be robust to an adverse environment, including signaling rising risk in an adverse environment; and
(D) Capture all material components of specific risk for the debt and equity positions in the portfolio. Specifically, the internal models must:
(1) Capture event risk and idiosyncratic risk; and
(2) Capture and demonstrate sensitivity to material differences between positions that are similar but not identical and to changes in portfolio composition and concentrations.
(ii) If a Board-regulated institution calculates an incremental risk measure for a portfolio of debt or equity positions under section 208 of this subpart, the Board-regulated institution is not required to capture default and credit migration risks in its internal models used to measure the specific risk of those portfolios.
(2) Specific risk fully modeled for one or more portfolios. If the Board-regulated institution’s VaR-based measure captures all material aspects of specific risk for one or more of its portfolios of debt, equity, or correlation trading positions, the Board-regulated institution has no specific risk add-on for those portfolios for purposes of paragraph (a)(2)(iii) of § 217.204.
(c) Specific risk not modeled. (1) If the Board-regulated institution’s VaR-based measure does not capture all material aspects of specific risk for a portfolio of debt, equity, or correlation trading positions, the Board-regulated institution must calculate a specific-risk add-on for the portfolio under the standardized measurement method as described in § 217.210.
(2) A Board-regulated institution must calculate a specific risk add-on under the standardized measurement method as described in § 217.210 for all of its securitization positions that are not modeled under § 217.209.
§ 217.208 Incremental risk.
(a) General requirement. A Board-regulated institution that measures the specific risk of a portfolio of debt positions under § 217.207(b) using internal models must calculate at least weekly an incremental risk measure for that portfolio according to the requirements in this section. The incremental risk measure is the Board-regulated institution’s measure of potential losses due to incremental risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions. With the prior approval of the Board, a Board-regulated institution may choose to include portfolios of equity positions in its incremental risk model, provided that it consistently includes such equity positions in a manner that is consistent with how the Board-regulated institution internally measures and manages the incremental risk of such positions at the portfolio level. If equity positions are included in the model, for modeling purposes default is considered to have occurred upon the default of any debt of the issuer of the equity position. A Board-regulated institution may not include correlation trading positions or securitization positions in its incremental risk measure.
(b) Requirements for incremental risk modeling. For purposes of calculating the incremental risk measure, the incremental risk model must:
(1) Measure incremental risk over a one-year time horizon and at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions.
(i) A constant level of risk assumption means that the Board-regulated institution rebalances, or rolls over, its trading positions at the beginning of each liquidity horizon over the one-year horizon in a manner that maintains the Board-regulated institution’s initial risk level. The Board-regulated institution must determine the frequency of rebalancing in a manner consistent with the liquidity horizons of the positions in the portfolio. The liquidity horizon of a position or set of positions is the time required for a Board-regulated institution to reduce its exposure to, or hedge all of its material risks of, the position(s) in a stressed market. The liquidity horizon for a position or set of positions may not be less than the shorter of three months or the contractual maturity of the position.
(ii) A constant position assumption means that the Board-regulated institution maintains the same set of positions throughout the one-year horizon. If a Board-regulated institution uses this assumption, it must do so consistently across all portfolios.
(iii) A Board-regulated institution’s selection of a constant position or a constant risk assumption must be consistent between the Board-regulated institution’s incremental risk model and its comprehensive risk model described in section 209 of this subpart, if applicable.
(iv) A Board-regulated institution’s treatment of liquidity horizons must be consistent between the Board-regulated institution’s incremental risk model and its comprehensive risk model described in section 209, if applicable.
(2) Recognize the impact of correlations between default and migration events among obligors.
(3) Reflect the effect of issuer and market concentrations, as well as concentrations that can arise within and across product classes during stressed conditions.
(4) Reflect netting only of long and short positions that reference the same financial instrument.
(5) Reflect any material mismatch between a position and its hedge.
(6) Recognize the effect that liquidity horizons have on dynamic hedging strategies. In such cases, a Board-regulated institution must:
(i) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions;
(ii) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement;
(iii) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and
(iv) Capture in the incremental risk model any residual risks arising from such hedging strategies.
(7) Reflect the nonlinear impact of options and other positions with material nonlinear behavior with respect to default and migration changes.
(8) Maintain consistency with the Board-regulated institution’s internal risk management methodologies for identifying, measuring, and managing risk.
(c) Calculation of incremental risk capital requirement. The incremental risk capital requirement is the greater of:
(1) The average of the incremental risk measures over the previous 12 weeks; or
(2) The most recent incremental risk measure.
§ 217.209 Comprehensive risk.
(a) General requirement. (1) Subject to the prior approval of the Board, a Board-regulated institution may use the method in this section to measure comprehensive risk, that is, all price risk, for one or more portfolios of correlation trading positions.
(2) A Board-regulated institution that measures the price risk of a portfolio of correlation trading positions using internal models must calculate at least weekly a comprehensive risk measure that captures all price risk according to the requirements of this section. The comprehensive risk measure is either:
(i) The sum of:
(A) The Board-regulated institution’s modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; and
(B) A surcharge for the Board-regulated institution’s modeled correlation trading positions equal to the total specific risk add-on for such positions as calculated under section 210 of this subpart multiplied by 8.0 percent; or
(ii) With approval of the Board and provided the Board-regulated institution has met the requirements of this section for a period of at least one year and can demonstrate the effectiveness of the model through the results of ongoing model validation efforts including robust benchmarking, the greater of:
(A) The Board-regulated institution’s modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; or
(B) The total specific risk add-on that would apply to the bank’s modeled correlation trading positions as calculated under section 210 of this subpart multiplied by 8.0 percent.
(b) Requirements for modeling all price risk. If a Board-regulated institution uses an internal model to measure the price risk of a portfolio of correlation trading positions:
(1) The internal model must measure comprehensive risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions.
(2) The model must capture all material price risk, including but not limited to the following:
(i) The risks associated with the contractual structure of cash flows of the position, its issuer, and its underlying exposures;
(ii) Credit spread risk, including nonlinear price risks;
(iii) The volatility of implied correlations, including nonlinear price risks such as the cross-effect between spreads and correlations;
(iv) Basis risk;
(v) Recovery rate volatility as it relates to the propensity for recovery rates to affect tranche prices; and
(vi) To the extent the comprehensive risk measure incorporates the benefits of dynamic hedging, the static nature of the hedge over the liquidity horizon must be recognized. In such cases, a Board-regulated institution must:
(A) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions;
(B) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement;
(C) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and
(D) Capture in the comprehensive risk model any residual risks arising from such hedging strategies;
(3) The Board-regulated institution must use market data that are relevant in representing the risk profile of the Board-regulated institution’s correlation trading positions in order to ensure that the Board-regulated institution fully captures the material risks of the correlation trading positions in its comprehensive risk measure in accordance with this section; and
(4) The Board-regulated institution must be able to demonstrate that its model is an appropriate representation of comprehensive risk in light of the historical price variation of its correlation trading positions.
(c) Requirements for stress testing. (1) A Board-regulated institution must at least weekly apply specific, supervisory stress scenarios to its portfolio of correlation trading positions that capture changes in:
(i) Default rates;
(ii) Recovery rates;
(iii) Credit spreads;
(iv) Correlations of underlying exposures; and
(v) Correlations of a correlation trading position and its hedge.
(2) Other requirements. (i) A Board-regulated institution must retain and make available to the Board the results of the supervisory stress testing, including comparisons with the capital requirements generated by the Board-regulated institution’s comprehensive risk model.
(ii) A Board-regulated institution must report to the Board promptly any instances where the stress tests indicate any material deficiencies in the comprehensive risk model.
(d) Calculation of comprehensive risk capital requirement. The comprehensive risk capital requirement is the greater of:
(1) The average of the comprehensive risk measures over the previous 12 weeks; or
(2) The most recent comprehensive risk measure.
§ 217.210 Standardized measurement method for specific risk.
(a) General requirement. A Board-regulated institution must calculate a total specific risk add-on for each portfolio of debt and equity positions for which the Board-regulated institution’s VaR-based measure does not capture all material aspects of specific risk and for all securitization positions that are not modeled under § 217.209. A Board-regulated institution must calculate each specific risk add-on in accordance with the requirements of this section. Notwithstanding any other definition or requirement in this subpart, a position that would have qualified as a debt position or an equity position but for the fact that it qualifies as a correlation trading position under paragraph (2) of the definition of correlation trading position in § 217.2, shall be considered a debt position or an equity position, respectively, for purposes of this section 210 of this subpart.
(1) The specific risk add-on for an individual debt or securitization position that represents sold credit protection is capped at the notional amount of the credit derivative contract. The specific risk add-on for an individual debt or securitization position that represents purchased credit protection is capped at the current fair value of the transaction plus the absolute value of the present value of all remaining payments to the protection seller under the transaction. This sum is equal to the value of the protection leg of the transaction.
(2) For debt, equity, or securitization positions that are derivatives with linear payoffs, a Board-regulated institution must assign a specific risk-weighting factor to the fair value of the effective notional amount of the underlying instrument or index portfolio, except for a securitization position for which the Board-regulated institution directly calculates a specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this section. A swap must be included as an effective notional position in the underlying instrument or portfolio, with the receiving side treated as a long position and the paying side treated as a short position. For debt, equity, or securitization positions that are derivatives with nonlinear payoffs, a Board-regulated institution must risk weight the fair value of the effective notional amount of the underlying instrument or portfolio multiplied by the derivative’s delta.
(3) For debt, equity, or securitization positions, a Board-regulated institution may net long and short positions (including derivatives) in identical issues or identical indices. A Board-regulated institution may also net positions in depositary receipts against an opposite position in an identical equity in different markets, provided that the Board-regulated institution includes the costs of conversion.
(4) A set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge has a specific risk add-on of zero if:
(i) The debt or securitization position is fully hedged by a total return swap (or similar instrument where there is a matching of swap payments and changes in fair value of the debt or securitization position);
(ii) There is an exact match between the reference obligation of the swap and the debt or securitization position;
(iii) There is an exact match between the currency of the swap and the debt or securitization position; and
(iv) There is either an exact match between the maturity date of the swap and the maturity date of the debt or securitization position; or, in cases where a total return swap references a portfolio of positions with different maturity dates, the total return swap maturity date must match the maturity date of the underlying asset in that portfolio that has the latest maturity date.
(5) The specific risk add-on for a set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge that does not meet the criteria of paragraph (a)(4) of this section is equal to 20.0 percent of the capital requirement for the side of the transaction with the higher specific risk add-on when:
(i) The credit risk of the position is fully hedged by a credit default swap or similar instrument;
(ii) There is an exact match between the reference obligation of the credit derivative hedge and the debt or securitization position;
(iii) There is an exact match between the currency of the credit derivative hedge and the debt or securitization position; and
(iv) There is either an exact match between the maturity date of the credit derivative hedge and the maturity date of the debt or securitization position; or, in the case where the credit derivative hedge has a standard maturity date:
(A) The maturity date of the credit derivative hedge is within 30 business days of the maturity date of the debt or securitization position; or
(B) For purchased credit protection, the maturity date of the credit derivative hedge is later than the maturity date of the debt or securitization position, but is no later than the standard maturity date for that instrument that immediately follows the maturity date of the debt or securitization position. The maturity date of the credit derivative hedge may not exceed the maturity date of the debt or securitization position by more than 90 calendar days.
(6) The specific risk add-on for a set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge that does not meet the criteria of either paragraph (a)(4) or (a)(5) of this section, but in which all or substantially all of the price risk has been hedged, is equal to the specific risk add-on for the side of the transaction with the higher specific risk add-on.
(b) Debt and securitization positions. (1) The total specific risk add-on for a portfolio of debt or securitization positions is the sum of the specific risk add-ons for individual debt or securitization positions, as computed under this section. To determine the specific risk add-on for individual debt or securitization positions, a Board-regulated institution must multiply the absolute value of the current fair value of each net long or net short debt or securitization position in the portfolio by the appropriate specific risk-weighting factor as set forth in paragraphs (b)(2)(i) through (b)(2)(vii) of this section.
(2) For the purpose of this section, the appropriate specific risk-weighting factors include:
(i) Sovereign debt positions. (A) In accordance with Table 1 to § 217.210, a Board-regulated institution must assign a specific risk-weighting factor to a sovereign debt position based on the CRC applicable to the sovereign, and, as applicable, the remaining contractual maturity of the position, or if there is no CRC applicable to the sovereign, based on whether the sovereign entity is a member of the OECD. Notwithstanding any other provision in this subpart, sovereign debt positions that are backed by the full faith and credit of the United States are treated as having a CRC of 0.
Table 1 to § 217.210—Specific Risk-Weighting Factors for Sovereign Debt Positions
| Specific risk-weighting factor | ||
| (in percent) | ||
| CRC: | ||
| 0-1 | 0.0 | |
| 2-3 | Remaining contractual maturity of 6 months or less | 0.25 |
| Remaining contractual maturity of greater than 6 and up to and including 24 months | 1.0 | |
| Remaining contractual maturity exceeds 24 months | 1.6 | |
| 4-6 | 8.0 | |
| 7 | 12.0 | |
| OECD Member with No CRC | 0.0 | |
| Non-OECD Member with No CRC | 8.0 | |
| Sovereign Default | 12.0 | |
(B) Notwithstanding paragraph (b)(2)(i)(A) of this section, a Board-regulated institution may assign to a sovereign debt position a specific risk-weighting factor that is lower than the applicable specific risk-weighting factor in Table 1 to § 217.210 if:
(1) The position is denominated in the sovereign entity’s currency;
(2) The Board-regulated institution has at least an equivalent amount of liabilities in that currency; and
(3) The sovereign entity allows banks under its jurisdiction to assign the lower specific risk-weighting factor to the same exposures to the sovereign entity.
(C) A Board-regulated institution must assign a 12.0 percent specific risk-weighting factor to a sovereign debt position immediately upon determination a default has occurred; or if a default has occurred within the previous five years.
(D) A Board-regulated institution must assign a 0.0 percent specific risk-weighting factor to a sovereign debt position if the sovereign entity is a member of the OECD and does not have a CRC assigned to it, except as provided in paragraph (b)(2)(i)(C) of this section.
(E) A Board-regulated institution must assign an 8.0 percent specific risk-weighting factor to a sovereign debt position if the sovereign is not a member of the OECD and does not have a CRC assigned to it, except as provided in paragraph (b)(2)(i)(C) of this section.
(ii) Certain supranational entity and multilateral development bank debt positions. A Board-regulated institution may assign a 0.0 percent specific risk-weighting factor to a debt position that is an exposure to the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, or an MDB.
(iii) GSE debt positions. A Board-regulated institution must assign a 1.6 percent specific risk-weighting factor to a debt position that is an exposure to a GSE. Notwithstanding the foregoing, a Board-regulated institution must assign an 8.0 percent specific risk-weighting factor to preferred stock issued by a GSE.
(iv) Depository institution, foreign bank, and credit union debt positions. (A) Except as provided in paragraph (b)(2)(iv)(B) of this section, a Board-regulated institution must assign a specific risk-weighting factor to a debt position that is an exposure to a depository institution, a foreign bank, or a credit union, in accordance with Table 2 to § 217.210, based on the CRC that corresponds to that entity’s home country or the OECD membership status of that entity’s home country if there is no CRC applicable to the entity’s home country, and, as applicable, the remaining contractual maturity of the position.
Table 2 to § 217.210—Specific Risk-Weighting Factors for Depository Institution, Foreign Bank, and Credit Union Debt Positions
| Specific risk-weighting factor | ||
| (in percent) | ||
| CRC 0-2 or OECD Member with No CRC | Remaining contractual maturity of 6 months or less | 0.25 |
| Remaining contractual maturity of greater than 6 and up to and including 24 months | 1.0 | |
| Remaining contractual maturity exceeds 24 months | 1.6 | |
| CRC 3 | 8.0 | |
| CRC 4-7 | 12.0 | |
| Non-OECD Member with No CRC | 8.0 | |
| Sovereign Default | 12.0 | |
(B) A Board-regulated institution must assign a specific risk-weighting factor of 8.0 percent to a debt position that is an exposure to a depository institution or a foreign bank that is includable in the depository institution’s or foreign bank’s regulatory capital and that is not subject to deduction as a reciprocal holding under § 217.22.
(C) A Board-regulated institution must assign a 12.0 percent specific risk-weighting factor to a debt position that is an exposure to a foreign bank immediately upon determination that a default by the foreign bank’s home country has occurred or if a default by the foreign bank’s home country has occurred within the previous five years.
(v) PSE debt positions. (A) Except as provided in paragraph (b)(2)(v)(B) of this section, a Board-regulated institution must assign a specific risk-weighting factor to a debt position that is an exposure to a PSE in accordance with Tables 3 and 4 to § 217.210 depending on the position’s categorization as a general obligation or revenue obligation based on the CRC that corresponds to the PSE’s home country or the OECD membership status of the PSE’s home country if there is no CRC applicable to the PSE’s home country, and, as applicable, the remaining contractual maturity of the position, as set forth in Tables 3 and 4 of this section.
(B) A Board-regulated institution may assign a lower specific risk-weighting factor than would otherwise apply under Tables 3 and 4 of this section to a debt position that is an exposure to a foreign PSE if:
(1) The PSE’s home country allows banks under its jurisdiction to assign a lower specific risk-weighting factor to such position; and
(2) The specific risk-weighting factor is not lower than the risk weight that corresponds to the PSE’s home country in accordance with Tables 3 and 4 of this section.
(C) A Board-regulated institution must assign a 12.0 percent specific risk-weighting factor to a PSE debt position immediately upon determination that a default by the PSE’s home country has occurred or if a default by the PSE’s home country has occurred within the previous five years.
Table 3 to § 217.210—Specific Risk-Weighting Factors for PSE General Obligation Debt Positions
| General obligation specific risk-weighting factor | ||
| (in percent) | ||
| CRC 0-2 or OECD Member with No CRC | Remaining contractual maturity of 6 months or less | 0.25 |
| Remaining contractual maturity of greater than 6 and up to and including 24 months | 1.0 | |
| Remaining contractual maturity exceeds 24 months | 1.6 | |
| CRC 3 | 8.0 | |
| CRC 4-7 | 12.0 | |
| Non-OECD Member with No CRC | 8.0 | |
| Sovereign Default | 12.0 | |
Table 4 to § 217.210—Specific Risk-Weighting Factors for PSE Revenue Obligation Debt Positions
| Revenue obligation specific risk-weighting factor | ||
| (in percent) | ||
| CRC 0-1 or OECD Member with No CRC | Remaining contractual maturity of 6 months or less | 0.25 |
| Remaining contractual maturity of greater than 6 and up to and including 24 months | 1.0 | |
| Remaining contractual maturity exceeds 24 months | 1.6 | |
| CRC 2-3 | 8.0 | |
| CRC 4-7 | 12.0 | |
| Non-OECD Member with No CRC | 8.0 | |
| Sovereign Default | 12.0 | |
(vi) Corporate debt positions. Except as otherwise provided in paragraph (b)(2)(vi)(B) of this section, a Board-regulated institution must assign a specific risk-weighting factor to a corporate debt position in accordance with the investment grade methodology in paragraph (b)(2)(vi)(A) of this section.
(A) Investment grade methodology. (1) For corporate debt positions that are exposures to entities that have issued and outstanding publicly traded instruments, a Board-regulated institution must assign a specific risk-weighting factor based on the category and remaining contractual maturity of the position, in accordance with Table 5 to § 217.210. For purposes of this paragraph (b)(2)(vi)(A)(1), the Board-regulated institution must determine whether the position is in the investment grade or not investment grade category.
Table 5 to § 217.210—Specific Risk-Weighting Factors for Corporate Debt Positions Under the Investment Grade Methodology
| Category | Remaining contractual maturity | Specific risk-weighting factor (in percent) |
|---|---|---|
| Investment Grade | 6 months or less | 0.50 |
| Greater than 6 and up to and including 24 months | 2.00 | |
| Greater than 24 months | 4.00 | |
| Non-investment Grade | 12.00 | |
(2) A Board-regulated institution must assign an 8.0 percent specific risk-weighting factor for corporate debt positions that are exposures to entities that do not have publicly traded instruments outstanding.
(B) Limitations. (1) A Board-regulated institution must assign a specific risk-weighting factor of at least 8.0 percent to an interest-only mortgage-backed security that is not a securitization position.
(2) A Board-regulated institution shall not assign a corporate debt position a specific risk-weighting factor that is lower than the specific risk-weighting factor that corresponds to the CRC of the issuer’s home country, if applicable, in table 1 of this section.
(vii) Securitization positions—(A) General requirements. (1) A Board-regulated institution that is not an advanced approaches Board-regulated institution or is a U.S. intermediate holding company that is required to be established or designated pursuant to 12 CFR 252.153 and that is not calculating risk-weighted assets according to Subpart E must assign a specific risk-weighting factor to a securitization position using either the simplified supervisory formula approach (SSFA) in paragraph (b)(2)(vii)(C) of this section (and § 217.211) or assign a specific risk-weighting factor of 100 percent to the position.
(2) A Board-regulated institution that is an advanced approaches Board-regulated institution or is a U.S. intermediate holding company that is required to be established or designated pursuant to 12 CFR 252.153 and that is calculating risk-weighted assets according to Subpart E must calculate a specific risk add-on for a securitization position in accordance with paragraph (b)(2)(vii)(B) of this section if the Board-regulated institution and the securitization position each qualifies to use the SFA in § 217.143. A Board-regulated institution that is an advanced approaches Board-regulated institution or is a U.S. intermediate holding company that is required to be established or designated pursuant to 12 CFR 252.153 and that is calculating risk-weighted assets according to Subpart E with a securitization position that does not qualify for the SFA under paragraph (b)(2)(vii)(B) of this section may assign a specific risk-weighting factor to the securitization position using the SSFA in accordance with paragraph (b)(2)(vii)(C) of this section or assign a specific risk-weighting factor of 100 percent to the position.
(3) A Board-regulated institution must treat a short securitization position as if it is a long securitization position solely for calculation purposes when using the SFA in paragraph (b)(2)(vii)(B) of this section or the SSFA in paragraph (b)(2)(vii)(C) of this section.
(B) SFA. To calculate the specific risk add-on for a securitization position using the SFA, a Board-regulated institution that is an advanced approaches Board-regulated institution must set the specific risk add-on for the position equal to the risk-based capital requirement as calculated under § 217.143.
(C) SSFA. To use the SSFA to determine the specific risk-weighting factor for a securitization position, a Board-regulated institution must calculate the specific risk-weighting factor in accordance with § 217.211.
(D) N
(1) For purposes of determining the specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this section or the specific risk-weighting factor for an n
(i) The attachment point (parameter A) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the Board-regulated institution’s position to the total notional amount of all underlying exposures. For purposes of the SSFA, parameter A is expressed as a decimal value between zero and one. For purposes of using the SFA in paragraph (b)(2)(vii)(B) of this section to calculate the specific add-on for its position in an n
(ii) The detachment point (parameter D) equals the sum of parameter A plus the ratio of the notional amount of the Board-regulated institution’s position in the n
(2) A Board-regulated institution that does not use the SFA in paragraph (b)(2)(vii)(B) of this section to determine a specific risk-add on, or the SSFA in paragraph (b)(2)(vii)(C) of this section to determine a specific risk-weighting factor for its position in an n
(c) Modeled correlation trading positions. For purposes of calculating the comprehensive risk measure for modeled correlation trading positions under either paragraph (a)(2)(i) or (a)(2)(ii) of § 217.209, the total specific risk add-on is the greater of:
(1) The sum of the Board-regulated institution’s specific risk add-ons for each net long correlation trading position calculated under this section; or
(2) The sum of the Board-regulated institution’s specific risk add-ons for each net short correlation trading position calculated under this section.
(d) Non-modeled securitization positions. For securitization positions that are not correlation trading positions and for securitizations that are correlation trading positions not modeled under § 217.209, the total specific risk add-on is the greater of:
(1) The sum of the Board-regulated institution’s specific risk add-ons for each net long securitization position calculated under this section; or
(2) The sum of the Board-regulated institution’s specific risk add-ons for each net short securitization position calculated under this section.
(e) Equity positions. The total specific risk add-on for a portfolio of equity positions is the sum of the specific risk add-ons of the individual equity positions, as computed under this section. To determine the specific risk add-on of individual equity positions, a Board-regulated institution must multiply the absolute value of the current fair value of each net long or net short equity position by the appropriate specific risk-weighting factor as determined under this paragraph (e):
(1) The Board-regulated institution must multiply the absolute value of the current fair value of each net long or net short equity position by a specific risk-weighting factor of 8.0 percent. For equity positions that are index contracts comprising a well-diversified portfolio of equity instruments, the absolute value of the current fair value of each net long or net short position is multiplied by a specific risk-weighting factor of 2.0 percent.
(2) For equity positions arising from the following futures-related arbitrage strategies, a Board-regulated institution may apply a 2.0 percent specific risk-weighting factor to one side (long or short) of each position with the opposite side exempt from an additional capital requirement:
(i) Long and short positions in exactly the same index at different dates or in different market centers; or
(ii) Long and short positions in index contracts at the same date in different, but similar indices.
(3) For futures contracts on main indices that are matched by offsetting positions in a basket of stocks comprising the index, a Board-regulated institution may apply a 2.0 percent specific risk-weighting factor to the futures and stock basket positions (long and short), provided that such trades are deliberately entered into and separately controlled, and that the basket of stocks is comprised of stocks representing at least 90.0 percent of the capitalization of the index. A main index refers to the Standard & Poor’s 500 Index, the FTSE All-World Index, and any other index for which the Board-regulated institution can demonstrate to the satisfaction of the Board that the equities represented in the index have liquidity, depth of market, and size of bid-ask spreads comparable to equities in the Standard & Poor’s 500 Index and FTSE All-World Index.
(f) Due diligence requirements for securitization positions. (1) A Board-regulated institution must demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a securitization position that would materially affect the performance of the position by conducting and documenting the analysis set forth in paragraph (f)(2) of this section. The Board-regulated institution’s analysis must be commensurate with the complexity of the securitization position and the materiality of the position in relation to capital.
(2) A Board-regulated institution must demonstrate its comprehensive understanding for each securitization position by:
(i) Conducting an analysis of the risk characteristics of a securitization position prior to acquiring the position and document such analysis within three business days after acquiring position, considering:
(A) Structural features of the securitization that would materially impact the performance of the position, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the position, and deal-specific definitions of default;
(B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask spreads, most recent sales price and historical price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
(D) For resecuritization positions, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures.
(ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (f)(1) of this section for each securitization position.
§ 217.211 Simplified supervisory formula approach (SSFA).
(a) General requirements. To use the SSFA to determine the specific risk-weighting factor for a securitization position, a Board-regulated institution must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contracts governing the underlying exposures of the securitization require payments on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. A Board-regulated institution that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a specific risk-weighting factor of 100 percent to the position.
(b) SSFA parameters. To calculate the specific risk-weighting factor for a securitization position using the SSFA, a Board-regulated institution must have accurate information on the five inputs to the SSFA calculation described in paragraphs (b)(1) through (b)(5) of this section.
(1) K
(2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the position, which represents the threshold at which credit losses will first be allocated to the position. Except as provided in § 217.210(b)(2)(vii)(D) for n
(4) Parameter D is the detachment point for the position, which represents the threshold at which credit losses of principal allocated to the position would result in a total loss of principal. Except as provided in § 217.210(b)(2)(vii)(D) for n
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization positions that are not resecuritization positions and equal to 1.5 for resecuritization positions.
(c) Mechanics of the SSFA. K
(1) When the detachment point, parameter D, for a securitization position is less than or equal to K
(2) When the attachment point, parameter A, for a securitization position is greater than or equal to K
(3) When A is less than K
(i) The weight assigned to 1.00 equals
§ 217.212 Market risk disclosures.
(a) Scope. A Board-regulated institution must comply with this section unless it is a consolidated subsidiary of a bank holding company or a depository institution that is subject to these requirements or of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction. A Board-regulated institution must make timely public disclosures each calendar quarter. If a significant change occurs, such that the most recent reporting amounts are no longer reflective of the Board-regulated institution’s capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be provided as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter may be disclosed annually, provided any significant changes are disclosed in the interim. If a Board-regulated institution believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public certain information that is either proprietary or confidential in nature, the Board-regulated institution is not required to disclose these specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed. The Board-regulated institution’s management may provide all of the disclosures required by this section in one place on the Board-regulated institution’s public Web site or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Board-regulated institution publicly provides a summary table specifically indicating the location(s) of all such disclosures.
(b) Disclosure policy. The Board-regulated institution must have a formal disclosure policy approved by the board of directors that addresses the Board-regulated institution’s approach for determining its market risk disclosures. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management must ensure that appropriate verification of the disclosures takes place and that effective internal controls and disclosure controls and procedures are maintained. One or more senior officers of the Board-regulated institution must attest that the disclosures meet the requirements of this subpart, and the board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this section.
(c) Quantitative disclosures. (1) For each material portfolio of covered positions, the Board-regulated institution must provide timely public disclosures of the following information at least quarterly:
(i) The high, low, and mean VaR-based measures over the reporting period and the VaR-based measure at period-end;
(ii) The high, low, and mean stressed VaR-based measures over the reporting period and the stressed VaR-based measure at period-end;
(iii) The high, low, and mean incremental risk capital requirements over the reporting period and the incremental risk capital requirement at period-end;
(iv) The high, low, and mean comprehensive risk capital requirements over the reporting period and the comprehensive risk capital requirement at period-end, with the period-end requirement broken down into appropriate risk classifications (for example, default risk, migration risk, correlation risk);
(v) Separate measures for interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk used to calculate the VaR-based measure; and
(vi) A comparison of VaR-based estimates with actual gains or losses experienced by the Board-regulated institution, with an analysis of important outliers.
(2) In addition, the Board-regulated institution must disclose publicly the following information at least quarterly:
(i) The aggregate amount of on-balance sheet and off-balance sheet securitization positions by exposure type; and
(ii) The aggregate amount of correlation trading positions.
(d) Qualitative disclosures. For each material portfolio of covered positions, the Board-regulated institution must provide timely public disclosures of the following information at least annually after the end of the fourth calendar quarter, or more frequently in the event of material changes for each portfolio:
(1) The composition of material portfolios of covered positions;
(2) The Board-regulated institution’s valuation policies, procedures, and methodologies for covered positions including, for securitization positions, the methods and key assumptions used for valuing such positions, any significant changes since the last reporting period, and the impact of such change;
(3) The characteristics of the internal models used for purposes of this subpart. For the incremental risk capital requirement and the comprehensive risk capital requirement, this must include:
(i) The approach used by the Board-regulated institution to determine liquidity horizons;
(ii) The methodologies used to achieve a capital assessment that is consistent with the required soundness standard; and
(iii) The specific approaches used in the validation of these models;
(4) A description of the approaches used for validating and evaluating the accuracy of internal models and modeling processes for purposes of this subpart;
(5) For each market risk category (that is, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk), a description of the stress tests applied to the positions subject to the factor;
(6) The results of the comparison of the Board-regulated institution’s internal estimates for purposes of this subpart with actual outcomes during a sample period not used in model development;
(7) The soundness standard on which the Board-regulated institution’s internal capital adequacy assessment under this subpart is based, including a description of the methodologies used to achieve a capital adequacy assessment that is consistent with the soundness standard;
(8) A description of the Board-regulated institution’s processes for monitoring changes in the credit and market risk of securitization positions, including how those processes differ for resecuritization positions; and
(9) A description of the Board-regulated institution’s policy governing the use of credit risk mitigation to mitigate the risks of securitization and resecuritization positions.
§§ 217.213-217.299 [Reserved]
Subpart G—Transition Provisions
§ 217.300 Transitions.
(a) Capital conservation and countercyclical capital buffer. (1) From January 1, 2014 through December 31, 2015, a Board-regulated institution is not subject to limits on distributions and discretionary bonus payments under § 217.11 of subpart B of this part notwithstanding the amount of its capital conservation buffer or any applicable countercyclical capital buffer amount.
(2) Notwithstanding § 217.11, beginning January 1, 2016 through December 31, 2018 a Board-regulated institution’s maximum payout ratio shall be determined as set forth in Table 1 to § 217.300.
Table 1 to § 217.300
| Transition period | Capital conservation buffer | Maximum payout ratio (as a percentage of eligible retained income) |
|---|---|---|
| Calendar year 2016 | Greater than 0.625 percent plus 25 percent of any applicable countercyclical capital buffer amount and 25 percent of any applicable GSIB surcharge | No payout ratio limitation applies under this section. |
| Less than or equal to 0.625 percent plus 25 percent of any applicable countercyclical capital buffer amount and 25 percent of any applicable GSIB surcharge, | 60 percent. | |
| Less than or equal to 0.469 percent plus 17.25 percent of any applicable countercyclical capital buffer amount and 17.25 percent of any applicable GSIB surcharge, | 40 percent. | |
| Less than or equal to 0.313 percent plus 12.5 percent of any applicable countercyclical capital buffer amount and 12.5 percent of any applicable GSIB surcharge, | 20 percent. | |
| Less than or equal to 0.156 percent plus 6.25 percent of any applicable countercyclical capital buffer amount and 6.25 percent of any applicable GSIB surcharge | 0 percent. | |
| Calendar year 2017 | Greater than 1.25 percent plus 50 percent of any applicable countercyclical capital buffer amount and 50 percent of any applicable GSIB surcharge | No payout ratio limitation applies under this section. |
| Less than or equal to 1.25 percent plus 50 percent of any applicable countercyclical capital buffer amount and 50 percent of any applicable GSIB surcharge, | 60 percent. | |
| Less than or equal to 0.938 percent plus 37.5 percent of any applicable countercyclical capital buffer amount and 37.5 percent of any applicable GSIB surcharge, | 40 percent. | |
| Less than or equal to 0.625 percent plus 25 percent of any applicable countercyclical capital buffer amount and 25 percent of any applicable GSIB surcharge, | 20 percent. | |
| Less than or equal to 0.313 percent plus 12.5 percent of any applicable countercyclical capital buffer amount and 12.5 percent of any applicable GSIB surcharge | 0 percent. | |
| Calendar year 2018 | Greater than 1.875 percent plus 75 percent of any applicable countercyclical capital buffer amount and 75 percent of any applicable GSIB surcharge | No payout ratio limitation applies under this section. |
| Less than or equal to 1.875 percent plus 75 percent of any applicable countercyclical capital buffer amount and 75 percent of any applicable GSIB surcharge, | 60 percent. | |
| Less than or equal to 1.406 percent plus 56.25 percent of any applicable countercyclical capital buffer amount and 56.25 percent of any applicable GSIB surcharge, | 40 percent | |
| Less than or equal to 0.938 percent plus 37.5 percent of any applicable countercyclical capital buffer amount and 37.5 percent of any applicable GSIB surcharge, | 20 percent. | |
| Less than or equal to 0.469 percent plus 18.75 percent of any applicable countercyclical capital buffer amount and 18.75 percent of any applicable GSIB surcharge | 0 percent. |
(b) [Reserved]
(c) Non-qualifying capital instruments—(1) Depository institution holding companies with total consolidated assets of more than $15 billion as of December 31, 2009 that were not mutual holding companies prior to May 19, 2010. The transition provisions in this paragraph (c)(1) apply to debt or equity instruments that do not meet the criteria for additional tier 1 or tier 2 capital instruments in § 217.20, but that were issued and included in tier 1 or tier 2 capital, respectively (or, in the case of a savings and loan holding company, would have been included in tier 1 or tier 2 capital if the savings and loan holding company had been subject to the general risk-based capital rules under 12 CFR part 225, appendix A), prior to May 19, 2010 (non-qualifying capital instruments), and that were issued by a depository institution holding company with total consolidated assets greater than or equal to $15 billion as of December 31, 2009 that was not a mutual holding company prior to May 19, 2010 (2010 MHC) (depository institution holding company of $15 billion or more).
(i) A depository institution holding company of $15 billion or more may include in tier 1 and tier 2 capital non-qualifying capital instruments up to the applicable percentage set forth in Table 8 to § 217.300 of the aggregate outstanding principal amounts of non-qualifying tier 1 and tier 2 capital instruments, respectively, that are outstanding as of January 1, 2014, beginning January 1, 2014, for a depository institution holding company of $15 billion or more that is an advanced approaches Board-regulated institution that is not a savings and loan holding company, and beginning January 1, 2015, for all other depository institution holding companies of $15 billion or more.
(ii) A depository institution holding company of $15 billion or more must apply the applicable percentages set forth in Table 8 to § 217.300 separately to the aggregate amounts of its tier 1 and tier 2 non-qualifying capital instruments.
(iii) The amount of non-qualifying capital instruments that must be excluded from additional tier 1 capital in accordance with this section may be included in tier 2 capital without limitation, provided the instruments meet the criteria for tier 2 capital set forth in § 217.20(d).
(iv) Non-qualifying capital instruments that do not meet the criteria for tier 2 capital set forth in § 217.20(d) may be included in tier 2 capital as follows:
(A) A depository institution holding company of $15 billion or more that is not an advanced approaches Board-regulated institution may include non-qualifying capital instruments that have been phased-out of tier 1 capital in tier 2 capital, and
(B) During calendar years 2014 and 2015, a depository institution holding company of $15 billion or more that is an advanced approaches Board-regulated institution may include non-qualifying capital instruments in tier 2 capital that have been phased out of tier 1 capital in accordance with Table 8 to § 217.300. Beginning January 1, 2016, a depository institution holding company of $15 billion or more that is an advanced approaches Board-regulated institution may include non-qualifying capital instruments in tier 2 capital that have been phased out of tier 1 capital in accordance with Table 8, up to the applicable percentages set forth in Table 9 to § 217.300.
(2) Mergers and acquisitions. (i) A depository institution holding company of $15 billion or more that acquires after December 31, 2013 either a depository institution holding company with total consolidated assets of less than $15 billion as of December 31, 2009 (depository institution holding company under $15 billion) or a depository institution holding company that is a 2010 MHC, may include in regulatory capital the non-qualifying capital instruments issued by the acquired organization up to the applicable percentages set forth in Table 8 to § 217.300.
(ii) If a depository institution holding company under $15 billion acquires after December 31, 2013 a depository institution holding company under $15 billion or a 2010 MHC, and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization’s FR Y-9C for the period in which the transaction occurred, the resulting organization may include in regulatory capital non-qualifying instruments of the resulting organization up to the applicable percentages set forth in Table 8 to § 217.300.
Table 8 to § 217.300
| Transition period (calendar year) | Percentage of non-qualifying capital instruments includable in additional tier 1 or tier 2 capital for a depository institution holding company of $15 billion or more |
|---|---|
| Calendar year 2014 | 50 |
| Calendar year 2015 | 25 |
| Calendar year 2016 and thereafter | 0 |
(3) Depository institution holding companies under $15 billion and 2010 MHCs. (i) Non-qualifying capital instruments issued by depository institution holding companies under $15 billion and 2010 MHCs prior to May 19, 2010, may be included in additional tier 1 or tier 2 capital if the instrument was included in tier 1 or tier 2 capital, respectively, as of January 1, 2014.
(ii) Non-qualifying capital instruments includable in tier 1 capital are subject to a limit of 25 percent of tier 1 capital elements, excluding any non-qualifying capital instruments and after applying all regulatory capital deductions and adjustments to tier 1 capital.
(iii) Non-qualifying capital instruments that are not included in tier 1 as a result of the limitation in paragraph (c)(3)(ii) of this section are includable in tier 2 capital.
(4) Depository institutions. (i) Beginning on January 1, 2014, a depository institution that is an advanced approaches Board-regulated institution, and beginning on January 1, 2015, all other depository institutions, may include in regulatory capital debt or equity instruments issued prior to September 12, 2010 that do not meet the criteria for additional tier 1 or tier 2 capital instruments in § 217.20 but that were included in tier 1 or tier 2 capital respectively as of September 12, 2010 (non-qualifying capital instruments issued prior to September 12, 2010) up to the percentage of the outstanding principal amount of such non-qualifying capital instruments as of January 1, 2014 in accordance with Table 9 to § 217.300.
(ii) Table 9 to § 217.300 applies separately to tier 1 and tier 2 non-qualifying capital instruments.
(iii) The amount of non-qualifying capital instruments that cannot be included in additional tier 1 capital under this section may be included in tier 2 capital without limitation, provided that the instruments meet the criteria for tier 2 capital instruments under § 217.20(d).
Table 9 to § 217.300
| Transition period (calendar year) | Percentage of non-qualifying capital instruments includable in additional tier 1 or tier 2 capital | |
|---|---|---|
| Calendar year 2014 | 80 | |
| Calendar year 2015 | 70 | |
| Calendar year 2016 | 60 | |
| Calendar year 2017 | 50 | |
| Calendar year 2018 | 40 | |
| Calendar year 2019 | 30 | |
| Calendar year 2020 | 20 | |
| Calendar year 2021 | 10 | |
| Calendar year 2022 and thereafter | 0 |
(d) [Reserved]
(e) Prompt corrective action. For purposes of 12 CFR part 208, subpart D, a Board-regulated institution must calculate its capital measures and tangible equity ratio in accordance with the transition provisions in this section.
(f) Until July 21, 2015, this part will not apply to any bank holding company subsidiary of a foreign banking organization that is currently relying on Supervision and Regulation Letter SR 01-01 issued by the Board (as in effect on May 19, 2010).
(g) A Board-regulated institution that is not an advanced approaches Board-regulated institution may apply the treatment under §§ 217.21 and 217.22(c)(2), (5), (6), and (d)(2) applicable to an advanced approaches Board-regulated institution during the calendar quarter beginning January 1, 2020. During the quarter beginning January 1, 2020, a Board-regulated institution that makes such an election must deduct 80 percent of the amount otherwise required to be deducted under § 217.22(d)(2) and must apply a 100 percent risk weight to assets not deducted under § 217.22(d)(2). In addition, during the quarter beginning January 1, 2020, a Board-regulated institution that makes such an election must include in its regulatory capital 20 percent of any minority interest that exceeds the amount of minority interest includable in regulatory capital under § 217.21 as it applies to an advanced approaches Board-regulated institution. A Board-regulated institution that is not an advanced approaches Board-regulated institution must apply the treatment under §§ 217.21 and 217.22 applicable to a Board-regulated institution that is not an advanced approaches Board-regulated institution beginning April 1, 2020, and thereafter.
(h) SA-CCR. An advanced approaches Board-regulated institution may use CEM rather than SA-CCR for purposes of §§ 217.34(a) and 217.132(c) until January 1, 2022. A Board-regulated institution must provide prior notice to the Board if it decides to begin using SA-CCR before January 1, 2022. On January 1, 2022, and thereafter, an advanced approaches Board-regulated institution must use SA-CCR for purposes of §§ 217.34(a), 217.132(c), and 217.135(d). Once an advanced approaches Board-regulated institution has begun to use SA-CCR, the advanced approaches Board-regulated institution may not change to use CEM.
(i) Default fund contributions. Prior to January 1, 2022, a Board-regulated institution that calculates the exposure amounts of its derivative contracts under the standardized approach for counterparty credit risk in § 217.132(c) may calculate the risk-weighted asset amount for a default fund contribution to a QCCP under either method 1 under § 217.35(d)(3)(i) or method 2 under § 217.35(d)(3)(ii), rather than under § 217.133(d).
§ 217.301 Current expected credit losses (CECL) transition.
(a) CECL transition provision. (1) Except as provided in paragraph (d) of this section, a Board-regulated institution may elect to use a CECL transition provision pursuant to this section only if the Board-regulated institution records a reduction in retained earnings due to the adoption of CECL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL.
(2) Except as provided in paragraph (d) of this section, a Board-regulated institution that elects to use the CECL transition provision must elect to use the CECL transition provision in the first Call Report or FR Y-9C that includes CECL filed by the Board-regulated institution after it adopts CECL.
(3) A Board-regulated institution that does not elect to use the CECL transition provision as of the first Call Report or FR Y-9C that includes CECL filed as described in paragraph (a)(2) of this section may not elect to use the CECL transition provision in subsequent reporting periods.
(b) Definitions. For purposes of this section, the following definitions apply:
(1) Transition period means the three-year period beginning the first day of the fiscal year in which a Board-regulated institution adopts CECL and reflects CECL in its first Call Report or FR Y-9C filed after that date; or, for the 2020 CECL transition provision under paragraph (d) of this section, the five-year period beginning on the earlier of the date a Board-regulated institution was required to adopt CECL for accounting purposes under GAAP (as in effect January 1, 2020), or the first day of the fiscal year that begins during the 2020 calendar year in which the Board-regulated institution files regulatory reports that include CECL.
(2) CECL transitional amount means the difference net of any DTAs, in the amount of a Board-regulated institution’s retained earnings as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution’s retained earnings as of the closing of the fiscal year-end immediately prior to the Board-regulated institution’s adoption of CECL.
(3) DTA transitional amount means the difference in the amount of a Board-regulated institution’s DTAs arising from temporary differences as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution’s DTAs arising from temporary differences as of the closing of the fiscal year-end immediately prior to the Board-regulated institution’s adoption of CECL.
(4) AACL transitional amount means the difference in the amount of a Board-regulated institution’s AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL and the amount of the Board-regulated institution’s ALLL as of the closing of the fiscal year-end immediately prior to the Board-regulated institution’s adoption of CECL.
(5) Eligible credit reserves transitional amount means the difference in the amount of a Board-regulated institution’s eligible credit reserves as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution’s eligible credit reserves as of the closing of the fiscal year-end immediately prior to the Board-regulated institution’s adoption of CECL.
(c) Calculation of the three-year CECL transition provision. (1) For purposes of the election described in paragraph (a)(1) of this section and except as provided in paragraph (d) of this section, a Board-regulated institution must make the following adjustments in its calculation of regulatory capital ratios:
(i) Increase retained earnings by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase retained earnings by fifty percent of its CECL transitional amount during the second year of the transition period, and increase retained earnings by twenty-five percent of its CECL transitional amount during the third year of the transition period;
(ii) Decrease amounts of DTAs arising from temporary differences by seventy-five percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the second year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the third year of the transition period;
(iii) Decrease amounts of AACL by seventy-five percent of its AACL transitional amount during the first year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the second year of the transition period, and decrease amounts of AACL by twenty-five percent of its AACL transitional amount during the third year of the transition period; and
(iv) Increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by twenty-five percent of its CECL transitional amount during the third year of the transition period.
(2) For purposes of the election described in paragraph (a)(1) of this section, an advanced approaches or Category III Board-regulated institution must make the following additional adjustments to its calculation of its applicable regulatory capital ratios:
(i) Increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twenty-five percent of its CECL transitional amount during the third year of the transition period; and
(ii) An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to § 217.121(d) must decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the second year of the transition provision, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the third year of the transition period.
(d) 2020 CECL transition provision. Notwithstanding paragraph (a) of this section, a Board-regulated institution that adopts CECL for accounting purposes under GAAP as of the first day of a fiscal year that begins during the 2020 calendar year may elect to use the transitional amounts and modified transitional amounts in paragraph (d)(1) of this section with the 2020 CECL transition provision calculation in paragraph (d)(2) of this section to adjust its calculation of regulatory capital ratios during each quarter of the transition period in which a Board-regulated institution uses CECL for purposes of its Call Report or FR Y-9C. A Board-regulated institution may use the transition provision in this paragraph (d) if it has a positive modified CECL transitional amount during any quarter ending in 2020, and makes the election in the Call Report or FR Y-9C filed for the same quarter. A Board-regulated institution that does not calculate a positive modified CECL transitional amount in any quarter is not required to apply the adjustments in its calculation of regulatory capital ratios in paragraph (d)(2) of this section in that quarter.
(1) Definitions. For purposes of the 2020 CECL transition provision calculation in paragraph (d)(2) of this section, the following definitions apply:
(i) Modified CECL transitional amount means:
(A) During the first two years of the transition period, the difference between AACL as reported in the most recent Call Report or FR Y-9C, and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the CECL transitional amount; and
(B) During the last three years of the transition period, the difference between AACL as reported in the Call Report or Y-9C at the end of the second year of the transition period and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the CECL transitional amount.
(ii) Modified AACL transitional amount means:
(A) During the first two years of the transition period, the difference between AACL as reported in the most recent Call Report or FR Y-9C, and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the AACL transitional amount; and
(B) During the last three years of the transition period, the difference between AACL as reported in the Call Report or FR Y-9C at the end of the second year of the transition period and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the AACL transitional amount.
(2) Calculation of 2020 CECL transition provision. (i) A Board-regulated institution that has elected the 2020 CECL transition provision described in this paragraph (d) may make the following adjustments in its calculation of regulatory capital ratios:
(A) Increase retained earnings by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase retained earnings by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase retained earnings by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase retained earnings by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase retained earnings by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period;
(B) Decrease amounts of DTAs arising from temporary differences by one-hundred percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by one hundred percent of its DTA transitional amount during the second year of the transition period, decrease amounts of DTAs arising from temporary differences by seventy-five percent of its DTA transitional amount during the third year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the fourth year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the fifth year of the transition period;
(C) Decrease amounts of AACL by one-hundred percent of its modified AACL transitional amount during the first year of the transition period, decrease amounts of AACL by one hundred percent of its modified AACL transitional amount during the second year of the transition period, decrease amounts of AACL by seventy-five percent of its modified AACL transitional amount during the third year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the fourth year of the transition period, and decrease amounts of AACL by twenty-five percent of its AACL transitional amount during the fifth year of the transition period; and
(D) Increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period.
(ii) An advanced approaches or Category III Board-regulated institution that has elected the 2020 CECL transition provision described in this paragraph (d) may make the following additional adjustments to its calculation of its applicable regulatory capital ratios:
(A) Increase total leverage exposure for purposes of the supplementary leverage ratio by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period; and
(B) An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to § 217.121(d) must decrease amounts of eligible credit reserves by one-hundred percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by one hundred percent of its eligible credit reserves transitional amount during the second year of the transition period, decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the third year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the fourth year of the transition period, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the fifth year of the transition period.
(e) Eligible credit reserves shortfall. An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to § 217.121(d), whose amount of expected credit loss exceeded its eligible credit reserves immediately prior to the adoption of CECL, and that has an increase in common equity tier 1 capital as of the beginning of the fiscal year in which it adopts CECL after including the first year portion of the CECL transitional amount (or modified CECL transitional amount) must decrease its CECL transitional amount used in paragraph (c) of this section (or modified CECL transitional amount used in paragraph (d) of this section) by the full amount of its DTA transitional amount.
(f) Business combinations. Notwithstanding any other requirement in this section, for purposes of this paragraph (f), in the event of a business combination involving a Board-regulated institution where one or both Board-regulated institutions have elected the treatment described in this section:
(1) If the acquirer Board-regulated institution (as determined under GAAP) elected the treatment described in this section, the acquirer Board-regulated institution must continue to use the transitional amounts (unaffected by the business combination) that it calculated as of the date that it adopted CECL through the end of its transition period.
(2) If the acquired company (as determined under GAAP) elected the treatment described in this section, any transitional amount of the acquired company does not transfer to the resulting Board-regulated institution.
§ 217.302 Exposures Related the Money Market Mutual Fund Liquidity Facility.
Notwithstanding any other section of this part, a Board-regulated institution may exclude exposures acquired pursuant to a non-recourse loan that is provided as part of the Money Market Mutual Fund Liquidity Facility, announced by the Board on March 18, 2020, from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. For the purpose of this provision, a board-regulated institution’s liability under the facility must be reduced by the purchase price of the assets acquired with funds advanced from the facility.
§ 217.303 Temporary exclusions from total leverage exposure.
(a) In general. Subject to paragraphs (b) through (g) of this section and notwithstanding any other requirement in this part, when calculating on-balance sheet assets as of each day of a reporting quarter for purposes of determining the Board-regulated institution’s total leverage exposure under § 217.10(c), a Board-regulated institution that is a depository institution holding company or a U.S. intermediate holding company must, and a Board-regulated institution that is a state member bank may, exclude the balance sheet carrying value of the following items:
(1) U.S. Treasury securities; and
(2) Funds on deposit at a Federal Reserve Bank.
(b) Opt-in period. Before applying the relief provided in paragraph (a) of this section, a state member bank must first notify the Board before July 1, 2020.
(c) Calculation of relief. When calculating on-balance sheet assets as of each day of a reporting quarter, the relief provided in paragraph (a) of this section applies from the beginning of the reporting quarter in which the state member bank filed an opt-in notice through the termination date specified in paragraph (d) of this section.
(d) Termination of exclusions. This section shall cease to be effective after the reporting period that ends March 31, 2021.
(e) Custodial banking organizations. A custodial banking organization must reduce the amount in § 217.10(c)(2)(x)(A) (to no less than zero) by any amount excluded under paragraph (a)(2) of this section.
(f) Disclosure. Notwithstanding Table 13 to § 217.173, a Board-regulated institution that is required to make the disclosures pursuant to § 217.173 must exclude the items excluded pursuant to paragraph (a) of this section from Table 13 to § 217.173.
(g) Board approval for distributions. During the calendar quarter beginning on July 1, 2020, and until March 31, 2021, no state member bank that has opted in to the relief provided under paragraph (a) of this section may make a distribution, or create an obligation to make such a distribution, without prior Board approval. When reviewing a request under this paragraph (g), the Board will consider all relevant factors, including whether the distribution would be contrary to the safety and soundness of the state member bank; the nature, purpose, and extent of the request; and the particular circumstances giving rise to the request.
§ 217.304 Temporary changes to the community bank leverage ratio framework.
(a)(1) A Board-regulated institution that is not an advanced approaches Board-regulated institution and that meets all the criteria to be a qualifying community banking organization under § 217.12(a)(2) but for § 217.12(a)(2)(i) is a qualifying community banking organization if it has a leverage ratio equal to or greater than 8 percent.
(2) Notwithstanding § 217.12(a)(1), a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under § 217.12(a)(3) shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, if applicable, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio equal to or greater than 8 percent.
(b) Notwithstanding § 217.12(c)(6) and subject to § 217.12(c)(5), a Board-regulated institution that has a leverage ratio of 7 percent or greater has the grace period described in § 217.12(c)(1) through (4). A Board-regulated institution that has a leverage ratio of less than 7 percent does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of less than 7 percent.
(c) Pursuant to section 4012 of the Coronavirus Aid, Relief, and Economic Security Act, the requirements provided under paragraphs (a) and (b) of this section are effective during the period beginning on April 23, 2020 and ending on the sooner of:
(1) The termination date of the national emergency concerning the novel coronavirus disease outbreak declared by the President on March 13, 2020, under the National Emergencies Act (50 U.S.C. 1601 et seq.); or
(2) December 31, 2020.
(d) Upon the termination of the requirements in paragraphs (a) and (b) of this section as provided in paragraph (c) of this section, a Board-regulated institution is subject to the following:
(1) Through December 31, 2020:
(i) A Board-regulated institution that is not an advanced approaches Board-regulated institution and that meets all the criteria to be a qualifying community banking organization under § 217.12(a)(2) but for § 217.12(a)(2)(i) is a qualifying banking organization if it has a leverage ratio greater than 8 percent.
(ii) Notwithstanding § 217.12(a)(1), a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under § 217.12(a)(3) shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, if applicable, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 8 percent.
(iii) Notwithstanding § 217.12(c)(6) and subject to § 217.12(c)(5), a Board-regulated institution that has a leverage ratio of greater than 7 percent has the grace period described in § 217.12(c)(1) through (4). A Board-regulated institution that has a leverage ratio of 7 percent or less does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of 7 percent or less.
(2) From January 1, 2021, through December 31, 2021:
(i) A Board-regulated institution that is not an advanced approaches Board-regulated institution and that meets all the criteria to be a qualifying community banking organization under § 217.12(a)(2) but for § 217.12(a)(2)(i) is a qualifying banking organization if it has a leverage ratio greater than 8.5 percent.
(ii) Notwithstanding § 217.12(a)(1), a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under § 217.12(a)(3) shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, if applicable, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 8.5 percent.
(iii) Notwithstanding § 217.12(c)(6) and subject to § 217.12(c)(5), a Board-regulated institution that has a leverage ratio of greater than 7.5 percent has the grace period described in § 217.12(c)(1) through (4). A Board-regulated institution that has a leverage ratio of 7.5 percent or less does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of 7.5 percent or less.
Notwithstanding any other section of this part, a Board-regulated institution may exclude exposures pledged as collateral for a non-recourse loan that is provided as part of the Paycheck Protection Program Lending Facility, announced by the Board on April 7, 2020, from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. For the purpose of this section, a Board-regulated institution’s liability under the facility must be reduced by the principal amount of the loans pledged as collateral for funds advanced under the facility.
§ 217.306 Building Block Approach (BBA) capital conservation buffer transition.
(a) Notwithstanding any provision of this part and subject to paragraph (b) of this section, an insurance bank holding company, or insurance savings and loan holding company, that, on January 1, 2023, was not subject to this part is not subject to any restrictions on distributions or discretionary bonus payments under §§ 217.11 and 217.604.
(b) This section ceases to be effective after March 31, 2026.
Subpart H—Risk-based Capital Surcharge for Global Systemically Important Bank Holding Companies
§ 217.400 Purpose and applicability.
(a) Purpose. This subpart implements provisions of section 165 of the Dodd-Frank Act (12 U.S.C. 5365), by establishing a risk-based capital surcharge for global systemically important bank holding companies.
(b) Applicability—(1) General. This subpart applies to a bank holding company that:
(i) Is an advanced approaches Board-regulated institution or a Category III Board-regulated institution;
(ii) Is not a consolidated subsidiary of a bank holding company; and
(iii) Is not a consolidated subsidiary of a foreign banking organization.
(2) Effective date of calculation and surcharge requirements. (i) A bank holding company identified in § 217.400(b)(1) is subject to § 217.402 of this part and must determine whether it qualifies as a global systemically important BHC by December 31 of the year immediately following the year in which the bank holding company becomes an advanced approaches Board-regulated institution or a Category III Board-regulated institution; and
(ii) A bank holding company that becomes a global systemically important BHC pursuant to § 217.402 must calculate its GSIB surcharge pursuant to § 217.403 by December 31 of the year in which the bank holding company is identified as a global systemically important BHC and must use that GSIB surcharge for purposes of determining its maximum payout ratio under Table 1 to § 217.11 beginning on January 1 of the year that is immediately following the full calendar year after it is identified as a global systemically important BHC.
(c) Reservation of authority. (1) The Board may apply this subpart to any Board-regulated institution, in whole or in part, by order of the Board based on the institution’s capital structure, size, level of complexity, risk profile, scope of operations, or financial condition.
(2) The Board may adjust the amount of the GSIB surcharge applicable to a global systemically important BHC, or extend or accelerate any compliance date of this subpart, if the Board determines that the adjustment, extension, or acceleration is appropriate in light of the capital structure, size, complexity, risk profile, and scope of operations of the global systemically important BHC. In increasing the size of the GSIB surcharge for a global systemically important BHC, the Board shall follow the notice and response procedures in 12 CFR part 263, subpart E.
§ 217.401 Definitions.
As used in this subpart:
(a) Aggregate global indicator amount means, for each systemic indicator, the aggregate measure of that indicator, which is equal to the most recent annual dollar figure published by the Board that represents the sum of systemic indicator values of:
(1) The 75 largest global banking organizations, as measured by the Basel Committee on Banking Supervision; and
(2) Any other banking organization that the Basel Committee on Banking Supervision includes in its sample total for that year.
(b) Assets under custody means assets held as a custodian on behalf of customers, as reported by the bank holding company on the FR Y-15.
(c) Average risk-weighted assets means the four-quarter average of the measure of total risk-weighted assets associated with the lower of the bank holding company’s common equity tier 1 risk-based capital ratios, as reported on the bank holding company’s FR Y-9C for each quarter of the previous calendar year.
(d) Brokered deposit has the meaning set forth in 12 CFR 249.3.
(e) Consolidated subsidiary has the meaning set forth in 12 CFR 249.3.
(f) Covered asset exchange means a transaction in which a bank holding company has provided assets of a given liquidity category to a counterparty in exchange for assets of a higher liquidity category, and the bank holding company and the counterparty agreed to return such assets to each other at a future date. Categories of assets, in descending order of liquidity, are level 1 liquid assets, level 2A liquid assets, level 2B liquid assets, and assets that are not HQLA. Covered asset exchanges do not include secured funding transactions.
(g) Financial sector entity has the meaning set forth in 12 CFR 249.3.
(h) GAAP means generally accepted accounting principles as used in the United States.
(i) High-quality liquid asset (HQLA) has the meaning set forth in 12 CFR 249.3.
(j) Cross-jurisdictional claims means foreign claims on an ultimate risk basis, as reported by the bank holding company on the FR Y-15.
(k) Cross-jurisdictional liabilities means total cross-jurisdictional liabilities, as reported by the bank holding company on the FR Y-15.
(l) Intra-financial system assets means total intra-financial system assets, as reported by the bank holding company on the FR Y-15.
(m) Intra-financial system liabilities means total intra-financial system liabilities, as reported by the bank holding company on the FR Y-15.
(n) Level 1 liquid asset is an asset that qualifies as a level 1 liquid asset pursuant to 12 CFR 249.20(a).
(o) Level 2A liquid asset is an asset that qualifies as a level 2A liquid asset pursuant to 12 CFR 249.20(b).
(p) Level 2B liquid asset is an asset that qualifies as a level 2B liquid asset pursuant to 12 CFR 249.20(c).
(q) Level 3 assets means assets valued using Level 3 measurement inputs, as reported by the bank holding company on the FR Y-15.
(r) Notional amount of over-the-counter (OTC) derivatives means the total notional amount of OTC derivatives, as reported by the bank holding company on the FR Y-15.
(s) Operational deposit has the meaning set forth in 12 CFR 249.3.
(t) Payments activity means payments activity, as reported by the bank holding company on the FR Y-15.
(u) Retail customer or counterparty has the meaning set forth in 12 CFR 249.3.
(v) Secured funding transaction has the meaning set forth in 12 CFR 249.3.
(w) Securities outstanding means total securities outstanding, as reported by the bank holding company on the FR Y-15.
(x) Short position means a transaction in which a bank holding company has borrowed or otherwise obtained a security from a counterparty and sold that security, and the bank holding company must return the security to the initial counterparty in the future.
(y) Systemic indicator includes the following indicators included on the FR Y-15:
(1) Total exposures;
(2) Intra-financial system assets;
(3) Intra-financial system liabilities;
(4) Securities outstanding;
(5) Payments activity;
(6) Assets under custody;
(7) Underwritten transactions in debt and equity markets;
(8) Notional amount of over-the-counter (OTC) derivatives;
(9) Trading and available-for-sale (AFS) securities;
(10) Level 3 assets;
(11) Cross-jurisdictional claims; or
(12) Cross-jurisdictional liabilities.
(z) Total exposures means total exposures as reported by the bank holding company on the FR Y-15.
(aa) Trading and AFS securities means total adjusted trading and available-for-sale securities as reported by the bank holding company on the FR Y-15.
(bb) Underwritten transactions in debt and equity markets means total underwriting activity as reported by the bank holding company on the FR Y-15.
(cc) Unsecured wholesale funding has the meaning set forth in 12 CFR 249.3.
(dd) Wholesale customer or counterparty has the meaning set forth in 12 CFR 249.3.
§ 217.402 Identification as a global systemically important BHC.
A bank holding company is a global systemically important BHC if its method 1 score, as calculated under § 217.404, equals or exceeds 130 basis points. Subject to § 217.400(b)(2), a bank holding company must calculate its method 1 score on an annual basis by December 31 of each year.
§ 217.403 GSIB surcharge.
(a) General. Subject to § 217.400(b)(2), a company identified as a global systemically important BHC pursuant to § 217.402 must calculate its GSIB surcharge on an annual basis by December 31 of each year. For any given year, subject to paragraph (d) of this section, the GSIB surcharge is equal to the greater of:
(1) The method 1 surcharge calculated in accordance with paragraph (b) of this section; and
(2) The method 2 surcharge calculated in accordance with paragraph (c) of this section.
(b) Method 1 surcharge—(1) General. The method 1 surcharge of a global systemically important BHC is the amount set forth in Table 1 of this section that corresponds to the global systemically important BHC’s method 1 score, calculated pursuant to § 217.404.
Table 1 to § 217.403—Method 1 Surcharge
| Method 1 score | Method 1 surcharge |
|---|---|
| Below 130 | 0.0 percent. |
| 130—229 | 1.0 percent. |
| 230—329 | 1.5 percent. |
| 330—429 | 2.0 percent. |
| 430—529 | 2.5 percent. |
| 530—629 | 3.5 percent. |
(2) Higher method 1 surcharges. To the extent that the method 1 score of a global systemically important BHC equals or exceeds 630 basis points, the method 1 surcharge equals the sum of:
(i) 4.5 percent; and
(ii) An additional 1.0 percent for each 100 basis points that the global systemically important BHC’s score exceeds 630 basis points.
(c) Method 2 surcharge—(1) General. The method 2 surcharge of a global systemically important BHC is the amount set forth in Table 2 of this section that corresponds to the global systemically important BHC’s method 2 score, calculated pursuant to § 217.405.
Table 2 to § 217.403: Method 2 Surcharge
| Method 2 score | Method 2 surcharge |
|---|---|
| Below 130 | 0.0 percent. |
| 130—229 | 1.0 percent. |
| 230—329 | 1.5 percent. |
| 330—429 | 2.0 percent. |
| 430—529 | 2.5 percent. |
| 530—629 | 3.0 percent. |
| 630—729 | 3.5 percent. |
| 730—829 | 4.0 percent. |
| 830—929 | 4.5 percent. |
| 930—1029 | 5.0 percent. |
| 1030—1129 | 5.5 percent. |
(2) Higher method 2 surcharges. To the extent that the method 2 score of a global systemically important BHC equals or exceeds 1130 basis points, the method 2 surcharge equals the sum of:
(i) 6.5 percent; and
(ii) An additional 0.5 percent for each 100 basis points that the global systemically important BHC’s score exceeds 1130 basis points.
(d) Effective date of an adjusted GSIB surcharge—(1) Increase in GSIB surcharge. An increase in the GSIB surcharge of a global systemically important BHC will take effect (i.e., be incorporated into the maximum payout ratio under Table 1 to § 217.11) on January 1 of the year that is one full calendar year after the increased GSIB surcharge was calculated.
(2) Decrease in GSIB surcharge. A decrease in the GSIB surcharge of a global systemically important BHC will take effect (i.e., be incorporated into the maximum payout ratio under Table 1 to § 217.11) on January 1 of the year immediately following the calendar year in which the decreased GSIB surcharge was calculated.
§ 217.404 Method 1 score.
(a) General. A bank holding company’s method 1 score is the sum of its systemic indicator scores for the twelve systemic indicators set forth Table 1 of this section, as determined under paragraph (b) of this section.
(b) Systemic indicator score. (1) Except as provided in paragraph (b)(2) of this section, the systemic indicator score in basis points for a given systemic indicator is equal to:
(i) The ratio of:
(A) The amount of that systemic indicator, as reported by the bank holding company as of December 31 of the previous calendar year; to
(B) The aggregate global indicator amount for that systemic indicator published by the Board in the fourth quarter of that year;
(ii) Multiplied by 10,000; and
(iii) Multiplied by the indicator weight corresponding to the systemic indicator as set forth in Table 1 of this section.
(2) Maximum substitutability score. The sum of the systemic indicator scores for the indicators in the substitutability category (assets under custody, payments systems activity, and underwriting activity) will not exceed 100 basis points.
Table 1 to § 217.404—Systemic Indicator Weights
| Category | Systemic indicator | Indicator weight |
|---|---|---|
| Size | Total exposures | 20 percent. |
| Interconnectedness | Intra-financial system assets | 6.67 percent. |
| Intra-financial system liabilities | 6.67 percent. | |
| Securities outstanding | 6.67 percent. | |
| Substitutability | Payments activity | 6.67 percent. |
| Assets under custody | 6.67 percent. | |
| Underwritten transactions in debt and equity markets | 6.67 percent. | |
| Complexity | Notional amount of over-the-counter (OTC) derivatives | 6.67 percent. |
| Trading and available-for-sale (AFS) securities | 6.67 percent. | |
| Level 3 assets | 6.67 percent. | |
| Cross-jurisdictional activity | Cross-jurisdictional claims | 10 percent. |
| Cross-jurisdictional liabilities | 10 percent. |
§ 217.405 Method 2 score.
(a) General. A global systemically important BHC’s method 2 score is equal to:
(1) The sum of:
(i) The global systemically important BHC’s systemic indicator scores for the nine systemic indicators set forth Table 1 of this section, as determined under paragraph (b) of this section; and
(ii) The global systemically important BHC’s short-term wholesale funding score, calculated pursuant to § 217.406.
(b) Systemic indicator score. A global systemically important BHC’s score for a systemic indicator is equal to:
(1) The amount of the systemic indicator, as reported by the bank holding company as of December 31 of the previous calendar year, expressed in billions of dollars;
(2) Multiplied by the coefficient corresponding to the systemic indicator set forth in Table 1 of this section.
Table 1 to § 217.405—Coefficients for Systemic Indicators
| Category | Systemic indicator | Coefficient value (%) |
|---|---|---|
| Size | Total exposures | 4.423 |
| Interconnectedness | Intra-financial system assets | 12.007 |
| Intra-financial system liabilities | 12.490 | |
| Securities outstanding | 9.056 | |
| Complexity | Notional amount of over-the-counter (OTC) derivatives | 0.155 |
| Trading and available-for-sale (AFS) securities | 30.169 | |
| Level 3 assets | 161.177 | |
| Cross-jurisdictional activity | Cross-jurisdictional claims | 9.277 |
| Cross-jurisdictional liabilities | 9.926 |
§ 217.406 Short-term wholesale funding score.
(a) General. Except as provided in § 217.400(b)(3)(ii), a global systemically important BHC’s short-term wholesale funding score is equal to:
(1) The average of the global systemically important BHC’s weighted short-term wholesale funding amount (defined in paragraph (b) of this section);
(2) Divided by the global systemically important BHC’s average risk-weighted assets; and
(3) Multiplied by a fixed factor of 350.
(b) Weighted short-term wholesale funding amount. (1) To calculate its weighted short-term wholesale funding amount, a global systemically important BHC must calculate the amount of its short-term wholesale funding on a consolidated basis for each business day of the previous calendar year and weight the components of short-term wholesale funding in accordance with Table 1 of this section.
(2) Short-term wholesale funding includes the following components, each as defined in paragraph (c) of this section:
(i) All funds that the bank holding company must pay under each secured funding transaction, other than an operational deposit, with a remaining maturity of 1 year or less;
(ii) All funds that the bank holding company must pay under all unsecured wholesale funding, other than an operational deposit, with a remaining maturity of 1 year or less;
(iii) The fair value of an asset as determined under GAAP that a bank holding company must return under a covered asset exchange with a remaining maturity of 1 year or less;
(iv) The fair value of an asset as determined under GAAP that the bank holding company must return under a short position to the extent that the borrowed asset does not qualify as a Level 1 liquid asset or a Level 2A liquid asset; and
(v) All brokered deposits held at the bank holding company provided by a retail customer or counterparty.
(3) For purposes of calculating the short-term wholesale funding amount and the components thereof, a bank holding company must assume that each asset or transaction described in paragraph (b)(2) of this section matures in accordance with the criteria set forth in 12 CFR 249.31.
Table 1 to § 217.406—Short-Term Wholesale Funding Components and Weights
| Component of short-term wholesale funding | Remaining maturity of 30 days of less or no maturity | Remaining maturity of 31 to 90 days | Remaining maturity of 91 to 180 days | Remaining maturity of 181 to 365 days |
|---|---|---|---|---|
| 25 percent | 10 percent | 0 percent | 0 percent. | |
| (1) Secured funding transaction secured by a level 1 liquid asset; | ||||
| (2) Unsecured wholesale funding where the customer or counterparty is not a financial sector entity or a consolidated subsidiary thereof; | ||||
| (3) Brokered deposits provided by a retail customer or counterparty; and | ||||
| (4) Short positions where the borrowed asset does not qualify as either a level 1 liquid asset or level 2A liquid asset. | ||||
| 50 percent | 25 percent | 10 percent | 0 percent. | |
| (1) Secured funding transaction secured by a level 2A liquid asset; and | ||||
| (2) Covered asset exchanges involving the future exchange of a Level 1 liquid asset for a Level 2A liquid asset. | ||||
| 75 percent | 50 percent | 25 percent | 10 percent. | |
| (1) Secured funding transaction secured by a level 2B liquid asset; | ||||
| (2) Covered asset exchanges (other than those described in Category 2); and | ||||
| (3) Unsecured wholesale funding (other than unsecured wholesale funding described in Category 1). | ||||
| 100 percent | 75 percent | 50 percent | 25 percent. | |
| Any other component of short-term wholesale funding. |
Subpart I—Application of Capital Rules
§ 217.501 The Board’s Regulatory Capital Framework for Depository Institution Holding Companies Organized as Non-Stock Companies.
(a) Applicability. (1) This section applies to all depository institution holding companies that are organized as legal entities other than stock corporations and that are subject to this part (Regulation Q, 12 CFR part 217).
(2) Notwithstanding §§ 217.2 and 217.10, a bank holding company or covered savings and loan holding company that is organized as a legal entity other than a stock corporation and has issued capital instruments that do not qualify as common equity tier 1 capital under § 217.20 by virtue of the requirements set forth in this section may treat those capital instruments as common equity tier 1 capital until July 1, 2016.
(b) Common equity tier 1 capital criteria applied to capital instruments issued by non-stock companies. (1) Subpart C of this part provides criteria for capital instruments to qualify as common equity tier 1 capital. This section describes how certain criteria apply to capital instruments issued by bank holding companies and covered savings and loan holding companies that are organized as legal entities other than stock corporations, such as limited liability companies (LLCs) and partnerships.
(2) Holding companies are organized using a variety of legal structures, including corporate forms, LLCs, partnerships, and similar structures.
(3) Common equity tier 1 capital is defined in § 217.20(b). To qualify as common equity tier 1 capital, capital instruments must satisfy a number of criteria. This section provides examples of the application of certain common equity tier 1 capital criteria that relate to the economic interests in the company represented by particular capital instruments.
(c) Examples. The following examples show how the criteria for common equity tier 1 capital apply to particular partnership or LLC structures.
(1) LLC with one class of membership interests. (i) An LLC issues one class of membership interests that provides that all holders of the interests bear losses and receive dividends proportionate to their levels of ownership.
(ii) Provided that the other criteria in § 217.20(b) are met, the membership interests would qualify as common equity tier 1 capital.
(2) Partnership with limited and general partners. (i) A partnership has two classes of interests: General partnership interests and limited partnership interests. The general partners and the limited partners bear losses and receive distributions allocated proportionately to their capital contributions. In addition, the general partner has unlimited liability for the debts of the partnership.
(ii) Provided that the other criteria in § 217.20(b) are met, the general and limited partnership interests would qualify as common equity tier 1 capital. The fact of unlimited liability of the general partner is not relevant in the context of the eligibility criteria of common equity tier 1 capital instruments, provided that the general partner and limited partners share losses equally to the extent of the assets of the partnership, and the general partner is liable after the assets of the partnership are exhausted. In this regard, the general partner’s unlimited liability is similar to a guarantee provided by the general partner, rather than a feature of the general partnership interest.
(3) Senior and junior classes of capital instruments. (i) An LLC issues two types of membership interests, Class A and Class B. Holders of Class A and Class B interests participate equally in operating distributions and have equal voting rights. However, in liquidation, holders of Class B interests must receive the entire amount of their contributed capital in order for any distributions to be made to holders of Class A interests.
(ii) Class B interests have a preference over Class A interests in liquidation and, therefore, would not qualify as common equity tier 1 capital as the Class B interests are not the most subordinated claim (criterion (i)) and do not share losses proportionately (criterion (viii) (§ 217.20(b)(1)(i) and (viii), respectively).
(A) If all other criteria are satisfied, Class A interests would qualify as common equity tier 1 capital.
(B) Class B interests may qualify as additional tier 1 capital, or tier 2 capital, if the Class B interests meet the applicable criteria (§ 217.20(c) and (d)).
(4) LLC with two classes of membership interests. (i) An LLC issues two types of membership interests, Class A and Class B. To the extent that the LLC makes a distribution, holders of Class A and Class B interests share proportionately in any losses and receive proportionate shares of contributed capital. To the extent that a capital distribution includes an allocation of profits, holders of Class A and Class B interests share proportionately up to the point where all holders receive a specific annual rate of return on capital contributions, and, if the distribution exceeds that point, holders of Class B interests receive double their proportional share and holders of Class A interests receive the remainder of the distribution.
(ii) Class A and Class B interests would both qualify as common equity tier 1 capital, provided that under all circumstances they share losses proportionately, as measured with respect to each distribution, and that they satisfy the common equity tier 1 capital criteria. The holders of Class A and Class B interests may receive different allocations of profits with respect to a distribution, provided that the distribution is made simultaneously to all members of Class A and Class B interests. Despite the potential for disproportionate profits, Class A and Class B interests have the same level of seniority with regard to potential losses and therefore they both satisfy all the criteria in § 217.20(b), including criterion (ii) (§ 217.20(b)(1)(ii)).
(5) Alternative LLC with two classes of membership interests. (i) An LLC issues two types of membership interests, Class A and Class B. In the event that the LLC makes a distribution, holders of Class A interests bear a disproportionately low level of any losses, such that the Class B interests bear a disproportionately high level of losses at the distribution. In contrast to the example in paragraph (c)(4) of this section, the different participation rights apply to distributions in situations where losses are allocated, including losses at liquidation.
(ii) Because holders of the Class A interests do not bear a proportional interest in the losses (criterion (ii) (§ 217.20(b)(1)(ii)), the Class A interests would not qualify as common equity tier 1 capital.
(A) Companies with such structures may revise their capital structures in order to provide for a sufficiently large class of capital instruments that proportionally bear first losses in liquidation (that is, the Class B interests in this example).
(B) Alternatively, companies with such structures could revise their capital structure to ensure that all classes of capital instruments that are intended to qualify as common equity tier 1 capital share equally in losses in liquidation consistent with criteria (i), (ii), (vii), and (viii) in § 217.20(b)(1)(i), (ii), (vii), respectively, even if each class of capital instruments has different rights to allocations of profits, as in paragraph (c)(4) of this section.
(6) Mandatory distributions. (i) A partnership agreement contains provisions that require distributions to holders of one or more classes of capital instruments on the occurrence of particular events, such as upon specific dates or following a significant sale of assets, but not including any final distributions in liquidation.
(ii) Any class of capital instruments that provides holders with rights to mandatory distributions would not qualify as common equity tier 1 capital because a holding company must have full discretion at all times to refrain from paying any dividends and making any other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restriction on the holding company (criterion (vi) in § 217.20(b)(1)(vi)). Companies must ensure that they have a sufficient amount of capital instruments that do not have such rights and that meet the other criteria of common equity tier 1 capital, in order to meet the requirements of Regulation Q.
(7) Features that Reallocate Prior Distributions. (i) An LLC issues two types of membership interests, Class A and Class B. The terms of the LLC’s membership interests provide that, under certain circumstances, holders of Class A interests must return a portion of earlier distributions, which are then distributed to holders of Class B interests (sometimes called a “clawback”).
(ii) If the reallocation of prior distributions described in paragraph (c)(7)(i) of this section could result in holders of the Class B interests bearing fewer losses on an aggregate basis than Class A interests, the Class B interests would not qualify as common equity tier 1 capital. However, where the membership interests provide for disproportionate allocation of profits, such as described in the example in paragraph (c)(4) of this section, and the reallocation of prior distributions would be limited to reversing the disproportionate portions of prior distributions, both the Class A and Class B interests could qualify as common equity tier 1 capital provided that they met all the other criteria in § 217.20(b).
§ 217.502 Application of the Board’s Regulatory Capital Framework to Employee Stock Ownership Plans that are Depository Institution Holding Companies and Certain Trusts that are Savings and Loan Holding Companies.
(a) Employee Stock Ownership Plans. Notwithstanding § 217.1(c), a bank holding company or covered savings and loan holding company that is an employee stock ownership plan is exempt from this part until the Board adopts regulations that directly relate to the application of capital regulations to employee stock ownership plans.
(b) Personal or Family Trusts. Notwithstanding § 217.1(c), a covered savings and loan holding company is exempt from this part if it is a personal or family trust and not a business trust until the Board adopts regulations that apply capital regulations to such a covered savings and loan holding company.
Subpart J—Risk-Based Capital Requirements for Board-Regulated Institutions Significantly Engaged in Insurance Activities
(a) Purpose. This subpart establishes a framework for assessing overall risk-based capital for Board-regulated institutions that are significantly engaged in insurance activities. The framework in this subpart is used to measure available capital resources and capital requirements across a Board-regulated institution and its subsidiaries that are subject to diverse capital frameworks, aggregate available capital resources and capital requirements and calculate a ratio that reflects the overall capital adequacy of the Board-regulated institution.
(b) Applicability. This subpart applies to every Board-regulated institution that is:
(1) A top-tier depository institution holding company that is an insurance underwriting company; or
(2) A top-tier depository institution holding company, that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in insurance underwriting companies (other than assets associated with insurance underwriting for credit risk). For purposes of this paragraph (b)(2), the Board-regulated institution must calculate its total consolidated assets in accordance with GAAP, or if the Board-regulated institution does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board; or
(3) Depository institution holding company in a supervised insurance organization; or
(4) An institution that is otherwise made subject to this subpart by the Board.
(c) Exclusion of certain depository institution holding companies. Notwithstanding paragraph (b) of this section, this subpart does not apply to a top-tier depository institution holding company that—
(1) Exclusively files financial statements in accordance with Statutory Accounting Principles (SAP);
(2) Is not subject to a state insurance capital requirement; and
(3) Has no subsidiary depository institution holding company that—
(i) Is subject to a capital requirement; or
(ii) Does not exclusively file financial statements in accordance with SAP.
(d) Reservation of authority—(1) Regulatory capital resources. (i) If the Board determines that a particular company capital element has characteristics or terms that diminish its ability to absorb losses, or otherwise present safety and soundness concerns, the Board may require the supervised insurance organization to exclude all or a portion of such element from building block available capital for a depository institution holding company in the supervised insurance organization.
(ii) Notwithstanding any provision of § 217.608, the Board may find that a capital resource may be included in the building block available capital of a depository institution holding company on a permanent or temporary basis consistent with the loss absorption capacity of the capital resource and in accordance with § 217.608(g).
(2) Required capital amounts. If the Board determines that the building block capital requirement for any depository institution holding company is not commensurate with the risks of the depository institution holding company, the Board may adjust the building block capital requirement and building block available capital for the supervised insurance organization.
(3) Structural requirements. In order to achieve the appropriate application of this subpart, the Board may require a supervised insurance organization to take any of the following actions with respect to the application of this subpart, if the Board determines that such action would better reflect the risk profile of an inventory company or the supervised insurance organization:
(i) Identify components under this subpart differently than as done by the supervised insurance organization. This could include a different identification of a top-tier depository institution holding company, an inventory company, a material financial entity, or a building block parent, then that made by the supervised insurance organization; or
(ii) Set a building block parent’s allocation share of a downstream building block parent equal to 100 percent.
(4) Other reservation of authority. With respect to any treatment required under this subpart, the Board may require a different treatment, provided that such alternative treatment is commensurate with the supervised insurance organization’s risk and consistent with safety and soundness.
(e) Notice and response procedures. In making any determinations under paragraph (d) of this section, the Board will apply notice and response procedures in the same manner as the notice and response procedures in § 263.202 of this chapter.
§ 217.602 Definitions.
(a) Terms that are set forth in § 217.2 and used in this subpart have the definitions assigned thereto in § 217.2.
(b) For the purposes of this subpart, the following terms are defined as follows:
Allocation share means the portion of a downstream building block’s available capital or building block capital requirement that a building block parent must aggregate in calculating its own building block available capital or building block capital requirement, as applicable, and calculated in accordance with § 217.605(d).
Assignment means the process of associating an inventory company with one or more building block parents for purposes of inclusion in the building block parents’ building blocks.
BBA ratio is defined in § 217.603.
Building block means a building block parent and all downstream companies and subsidiaries assigned to the building block parent.
Building block available capital has the meaning set out in § 217.608.
Building block capital requirement has the meaning set out in § 217.607.
Building block parent means the lead company of a building block whose indicated capital framework must be applied to all members of a building block for purposes of determining building block available capital and the building block capital requirement.
Capital-regulated company means a company that is—
(i) A depository institution, foreign bank, or company engaged in the business of insurance in a supervised insurance organization; and
(ii) Directly subject to a regulatory capital framework.
Common capital framework means NAIC RBC.
Company available capital means, for a company, the amount of its capital elements, net of any adjustments and deductions, as determined in accordance with the company’s indicated capital framework.
Company capital element means any part, item, component, balance sheet account, instrument, or other element qualifying as regulatory capital under a company’s indicated capital framework prior to any adjustments and deductions under that framework.
Company capital requirement means:
(i) For a company whose indicated capital framework is NAIC RBC, the Authorized Control Level risk-based capital requirement as set forth in NAIC RBC;
(ii) For a company whose indicated capital framework is a U.S. Federal banking capital rule, the total risk-weighted assets; and
(iii) For any other company, a risk-sensitive measure of required capital used to determine the jurisdictional intervention point applicable to that company.
Downstream building block parent means a building block parent that is a downstream company of another building block parent.
Downstream company means a company whose company capital element is directly or indirectly owned, in whole or in part, by another company in the supervised insurance organization.
Downstreamed capital means direct ownership of a downstream company’s company capital element that is accretive to a downstream building block parent’s building block available capital. When calculating building block available capital, the amount of the downstreamed capital is calculated as the amount, excluding any impact on taxes, of the company available capital of the building block parent of the upstream building block, if the owner were to deduct the downstreamed capital.
Financial entity means:
(i) A bank holding company; a savings and loan holding; a U.S. intermediate holding company established or designated for purposes of compliance with part 252 of this chapter;
(ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a Federal credit union or state credit union; a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity; an industrial loan company, an industrial bank, or other similar institution;
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers; or
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer;
(iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act (7 U.S.C. 1 et seq.), or an entity that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.);
(v) A securities holding company as defined in section 618 of the Dodd-Frank Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C) of that Act; or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to 17 CFR 270.3a-7 (Investment Company Act Rule 3a-7 of the U.S. Securities and Exchange Commission);
(vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act (7 U.S.C. 1a(28));
(viii) An entity that is organized as an insurance company, primarily engaged in underwriting insurance or reinsuring risks underwritten by insurance companies;
(ix) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Act (12 U.S.C. 5462); and
(x) An entity that would be a financial entity described in paragraphs (i) through (ix) of this definition, if it were organized under the laws of the United States or any State thereof.
Indicated capital framework is defined in § 217.605, provided that for purposes of § 217.605(b)(2), the NAIC RBC frameworks for life insurance and fraternal insurers, property and casualty (P&C) insurance, and health insurance companies are different indicated capital frameworks.
Inventory company means a company identified pursuant to § 217.605(b)(1).
Material means, for a company in the supervised insurance organization:
(i) Where the top-tier depository institution holding company’s total exposure to the company exceeds 5 percent of the maximum of—
(A) Top-tier depository institution holding company’s company available capital; and
(B) The largest company available capital of all capital regulated companies reported in the supervised insurance organization’s inventory; or
(ii) The company is otherwise significant when assessing the building block available capital or building block capital requirement of the top-tier depository institution holding company based on factors including risk exposure, activities, organizational structure, complexity, affiliate guarantees or recourse rights, and size.
(iii) For purposes of this definition, total exposure includes:
(A) The absolute value of the top-tier depository institution holding company’s direct or indirect interest in the company capital elements of the company;
(B) The maximum possible loss from a guarantee (explicit or implicit) the top-tier depository institution holding company or any other company in the supervised insurance organization provides for the benefit of the company; and
(C) Maximum potential counterparty credit risk to the top-tier depository institution holding company or any other company in the supervised insurance organization arising from any derivative or similar instrument, reinsurance or similar arrangement, or other contractual agreement.
Material financial entity means a financial entity that, together with its subsidiaries, but excluding any subsidiary capital-regulated company (or subsidiary thereof), is material, provided that an inventory company is not eligible to be a material financial entity if:
(i) The supervised insurance organization has elected pursuant to § 217.605(c) not to treat the company as a material financial entity; or
(ii) The inventory company is a financial subsidiary, as defined in section 121 of the Gramm-Leach-Bliley Act.
Member means, with respect to a building block, the building block parent or any of its downstream companies or subsidiaries that have been assigned to a building block.
NAIC means the National Association of Insurance Commissioners.
NAIC RBC means the most recent version of the Risk-Based Capital (RBC) For Insurers Model Act, together with the RBC instructions, as adopted in a substantially similar manner by an NAIC member and published in the NAIC’s Model Regulation Service.
Permitted accounting practice means an accounting practice, specifically requested by a state-regulated insurer, that departs from SAP and state prescribed accounting practices and has been approved by the state-regulated insurer’s domiciliary state regulatory authority.
Prescribed accounting practice means an accounting practice that is incorporated directly or by reference to state laws, regulations, and general administrative rules applicable to all insurance companies domiciled in a particular state.
Principles based reserving (PBR) means the valuation standard adopted for certain life insurance reserves by the NAIC effective as of January 1, 2020.
Recalculated building block capital requirement means, for a downstream building block parent and an upstream building block parent, the downstream building block parent’s building block capital requirement recalculated assuming that the downstream building block parent had no upstream investment in the upstream building block parent.
Regulatory capital framework means, with respect to a company, the applicable legal requirements, excluding this subpart, specifying the minimum amount of total regulatory capital the company must hold to avoid restrictions on distributions and discretionary bonus payments, regulatory intervention on the basis of capital adequacy levels for the company, or equivalent standards; provided that the NAIC RBC frameworks for life and fraternal insurance, P&C insurance, and health insurance companies are different regulatory capital frameworks.
SAP means Statutory Accounting Principles as promulgated by the NAIC and adopted by a jurisdiction for purposes of financial reporting by insurance companies.
Scalar compatible means a capital framework:
(i) For which the Board has determined scalars; or
(ii) That is an insurance capital regulatory framework, and exhibits each of the following three attributes:
(A) The framework is clearly defined and broadly applicable;
(B) The framework has an identifiable regulatory intervention point that can be used to calibrate a scalar; and
(C) The framework provides a risk-sensitive measure of required capital reflecting material risks to a company’s financial strength.
Scaling means the translation of building block available capital and building block capital requirement from one indicated capital framework to another by application of § 217.606.
Submission date means the date as of which form FR Q-1 is filed with the Board.
Supervised insurance organization means:
(i) In the case of a depository institution holding company, the set of companies consisting of:
(A) A top-tier depository institution holding company that is an insurance underwriting company, together with its inventory companies; or
(B) A top-tier depository institution holding company, together with its inventory companies, that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in insurance underwriting companies (other than assets associated with insurance underwriting for credit risk). For purposes of this paragraph (i)(B), the supervised firm must calculate its total consolidated assets in accordance with GAAP, or if the firm does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board; or
(ii) An institution that is otherwise subject to this subpart, as determined by the Board, together with its inventory companies.
Tier 2 capital instruments has the meaning set out in § 217.608(a).
Top-tier depository institution holding company means a depository institution holding company that is not controlled by another depository institution holding company.
Upstream building block parent means an upstream company that is a building block parent.
Upstream company means a company within a supervised insurance organization that directly or indirectly controls a downstream company, or directly or indirectly owns part or all of a downstream company’s company capital elements.
Upstream investment means any direct or indirect investment by a downstream building block parent in an upstream building block parent. When calculating adjusted downstream building block available capital, the amount of the upstream investment is calculated as the impact, excluding any impact on taxes, on the downstream building block parent’s building block available capital if the owner were to deduct the investment.
U.S. Federal banking capital rules mean this part, other than this subpart, and the regulatory capital rules promulgated by the Federal Deposit Insurance Corporation at chapter III of this title and the Office of the Comptroller of the Currency at chapter I of this title.
§ 217.603 BBA ratio and minimum requirements.
(a) In general. A supervised insurance organization must determine its BBA ratio, subject to the minimum requirement set out in this section and buffer set out in § 217.604, for each depository institution holding company within its enterprise by:
(1) Establishing an inventory that includes the supervised insurance organization and every company that meets the requirements of § 217.605(b)(1);
(2) Identifying all building block parents as required under § 217.605(b)(3);
(3) Determining the available capital and capital requirement for each building block parent in accordance with its indicated capital framework;
(4) Determining the building block available capital and building block capital requirement for each building block, reflecting adjustments and scaling as set out in this subpart;
(5) Rolling up building block available capital and building block capital requirement amounts across all building blocks in the supervised insurance organization’s enterprise to determine the same for any depository institution holding companies in the enterprise; and
(6) Determining the ratio of building block available capital to building block capital requirement for each depository institution holding company in the supervised insurance organization.
(b) Determination of BBA ratio. For a depository institution holding company in a supervised insurance organization, the BBA ratio is the ratio of the company’s building block available capital to the company’s building block capital requirement, each scaled to the common capital framework in accordance with § 217.606.
(c) Minimum capital requirement. A depository institution holding company in a supervised insurance organization must maintain a BBA ratio of at least 250 percent.
(d) Capital adequacy. (1) Notwithstanding the minimum requirement in this subpart, a depository institution holding company in a supervised insurance organization must maintain capital commensurate with the level and nature of all risks to which it is exposed. The supervisory evaluation of the depository institution holding company’s capital adequacy is based on an individual assessment of numerous factors, including the character and condition of the company’s assets and its existing and prospective liabilities and other corporate responsibilities.
(2) A depository institution holding company in a supervised insurance organization must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital.
§ 217.604 Capital conservation buffer.
(a) Capital conservation buffer—(1) Composition of the capital conservation buffer. The capital conservation buffer is composed solely of building block available capital excluding tier 2 capital instruments and additional tier 1 capital instruments.
(2) Definitions. For purposes of this section, the following definitions apply:
(i) Distribution means:
(A) A reduction of tier 1 capital through the repurchase of a tier 1 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for:
(1) A common equity tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution’s common equity tier 1 capital; or
(2) A common equity tier 1 or additional tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution’s tier 1 capital;
(B) A reduction of tier 2 capital through the repurchase, or redemption prior to maturity, of a tier 2 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase or redemption is announced, fully replaces a tier 2 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument;
(C) A dividend declaration or payment on any tier 1 capital instrument;
(D) A dividend declaration or interest payment on any tier 2 capital instrument if the Board-regulated institution has full discretion to permanently or temporarily suspend such payments without triggering an event of default;
(E) A discretionary dividend payment on participating insurance policies; or
(F) Any similar transaction that the Board determines to be in substance a distribution of capital.
(ii) Eligible retained income means, for a depository institution holding company in a supervised insurance organization, the annual change in the company’s building block available capital, calculated as of the last day of the current and immediately preceding calendar years based on the supervised insurance organization’s most recent form FR Q-1, net of any distributions and accretion to building block available capital from capital instruments issued in the current or immediately preceding calendar year, excluding issuances corresponding with retirement of capital instruments under paragraph (a)(2)(i)(A) of this section.
(iii) Maximum payout amount means, for the current calendar year, is equal to the Board-regulated institution’s eligible retained income, multiplied by its maximum payout ratio.
(iv) Maximum payout ratio means the percentage of eligible retained income that a Board-regulated institution can pay out in the form of distributions and discretionary bonus payments during the current calendar year. The maximum payout ratio is determined by the Board-regulated institution’s capital conservation buffer, calculated as of the last day of the previous calendar year, as set forth in table 1 to this section.
(3) Calculation of capital conservation buffer. The capital conservation buffer for a depository institution holding company in a supervised insurance organization is the greater of its BBA ratio, calculated as of the last day of the previous calendar year based on the supervised insurance organization’s most recent form FR Q-1, minus the minimum capital requirement under § 217.603(c), and zero.
(4) Limits on distributions and discretionary bonus payments. (i) A top-tier depository institution holding company in a supervised insurance organization shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar year that, in the aggregate, exceed its maximum payout amount.
(ii) A top-tier depository institution holding company in a supervised insurance organization and that has a capital conservation buffer that is greater than 150 percent is not subject to a maximum payout amount under this section.
(iii) Except as provided in paragraph (a)(4)(iv) of this section, a top-tier depository institution holding company in a supervised insurance organization may not make distributions or discretionary bonus payments during the current calendar year if the Board-regulated institution’s:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 150 percent as of the end of the previous calendar year.
(iv) Notwithstanding the limitations in paragraphs (a)(4)(i) through (iii) of this section, the Board may permit a top-tier depository institution holding company in a supervised insurance organization to make a distribution or discretionary bonus payment upon a request of the depository institution holding company, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the depository institution holding company. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
(b) [Reserved]
Table 1 to § 217.604—Calculation of Maximum Payout Amount
| Capital conservation buffer | Maximum payout ratio (as a percentage of eligible retained income) |
|---|---|
| Greater than 150 percent | No payout ratio limitation applies. |
| Less than or equal to 150 percent, | 60 percent. |
| Less than or equal to 113 percent, | 40 percent. |
| Less than or equal to 75 percent, | 20 percent. |
| Less than or equal to 38 percent | 0 percent. |
§ 217.605 Determination of building blocks.
(a) In general. A supervised insurance organization must identify each building block parent and its allocation share of any downstream building block parent, as applicable.
(b) Operation. To identify building block parents and determine allocation shares, a supervised insurance organization must take the following steps in the following order:
(1) Inventory of companies. A supervised insurance organization must identify as inventory companies:
(i) All companies that are—
(A) Required to be reported on the FR Y-6;
(B) Required to be reported on the FR Y-10; or
(C) Classified as affiliates in accordance with NAIC Statement of Statutory Accounting Principles (SSAP) No. 25 and Schedule Y;
(ii) Any company, special purpose entity, variable interest entity, or similar entity that:
(A) Enters into one or more reinsurance or derivative transactions with inventory companies identified pursuant to paragraph (b)(1)(i) of this section;
(B) Is material;
(C) Is engaged in activities such that one or more inventory companies identified pursuant to paragraph (b)(1)(i) of this section are expected to absorb more than 50 percent of its expected losses; and
(D) Is not otherwise identified as an inventory company; and
(iii) Any other company that the Board determines must be identified as an inventory company.
(2) Determination of indicated capital framework. (i) A supervised insurance organization must:
(A) Determine the indicated capital framework for each inventory company; and
(B) Identify inventory companies that are subject to a regulatory capital framework.
(ii) The indicated capital framework for an inventory company is:
(A) If the inventory company is not engaged in insurance or reinsurance underwriting, the U.S. Federal banking capital rules, in particular:
(1) If the inventory company is not a depository institution, subparts A through F of this part; and
(2) If the inventory company is a depository institution, the regulatory capital framework applied to the depository institution by the appropriate primary Federal regulator—that is, subparts A through F of this part (Board), part 3 of this title (Office of the Comptroller of the Currency), or part 324 of this title (Federal Deposit Insurance Corporation), as applicable;
(B) If the inventory company is engaged in insurance or reinsurance underwriting and subject to a regulatory capital framework that is scalar compatible, the regulatory capital framework; and
(C) If the inventory company is engaged in insurance or reinsurance underwriting and not subject to a regulatory capital framework that is scalar compatible, then NAIC RBC for life and fraternal insurers, health insurers, or property & casualty insurers based on the company’s primary source of premium revenue.
(3) Identification of building block parents. A supervised insurance organization must identify all building block parents according to the following procedure:
(i)(A) Identify all top-tier depository institution holding companies in the supervised insurance organization.
(B) Any top-tier depository institution holding company is a building block parent.
(ii)(A) Identify any inventory company that is a depository institution holding company.
(B) An inventory company identified in paragraph (b)(3)(ii)(A) of this section is a building block parent.
(iii) Identify all inventory companies that are capital-regulated companies (that is, inventory companies that are subject to a regulatory capital framework) or material financial entities.
(iv)(A) Of the inventory companies identified in paragraph (b)(3)(iii) of this section, identify any inventory company that:
(1) Is assigned an indicated capital framework that is different from the indicated capital framework of any next upstream inventory company identified in paragraphs (b)(3)(i) through (iii) of this section or does not have a next upstream inventory company; and
(i) In a simple structure, an inventory company would compare its indicated capital framework to the indicated capital framework of its parent company. However, if the parent company does not meet the criteria to be identified as a building block parent, the inventory company must compare its capital framework to the next upstream company that is eligible to be identified as a building block parent. For purposes of this paragraph (b)(3)(iv), a company is “next upstream” to a downstream company if it controls or owns, in whole or in part, a company capital element of the downstream company either directly, or indirectly other than through a company identified in paragraphs (b)(3)(ii) and (iii) of this section.
(ii) [Reserved]
(2) Is assigned an indicated capital framework for which the Board has determined a scalar or, if the company in aggregate with all other companies subject to the same indicated capital framework are material, a provisional scalar;
(B) Of the inventory companies identified in paragraph (b)(3)(iii) of this section, identify any inventory company that:
(1) Is assigned an indicated capital framework that is the same as the indicated capital framework of each next upstream inventory company identified in paragraphs (b)(3)(i) through (iii) of this section;
(2) Is assigned an indicated capital framework for which the Board has determined a scalar or, if the company in aggregate with all other companies subject to the same indicated capital framework is material, a provisional scalar; and
(3) Is owned, in whole or part, by an inventory company that is subject to the same regulatory capital framework, and the owner:
(i) Applies a charge on the inventory company’s equity value in calculating its company capital requirement; or
(ii) Deducts all or a portion of its investment in the inventory company in calculating its company available capital.
(C) An inventory company identified in paragraph (b)(3)(iv)(A) through (B) of this section is a building block parent.
(v) Include any inventory company identified in paragraph (b)(1)(ii) of this section as a building block parent.
(vi)(A) Identify any inventory company—
(1) For which more than one building block parent, as identified pursuant to paragraphs (b)(3)(i) through (v) of this section, owns a company capital element either directly or indirectly other than through another such building block parent; and
(2)(i) Is consolidated under any such building block parent’s indicated capital framework; or
(ii) Owns downstreamed capital.
(B) An inventory company identified in paragraph (b)(3)(vi)(A) of this section is a building block parent.
(4) Building blocks. (i) Except as provided in paragraph (b)(4)(ii) of this section, a supervised insurance organization must assign an inventory company to the building block of any building block parent that owns a company capital element of the inventory company, or of which the inventory company is a subsidiary, directly or indirectly through any company other than a building block parent, unless the inventory company is a building block parent.
(A) For purposes of this section, subsidiary includes a company that is required to be reported on the FR Y-6, FR Y-10, or NAIC’s Schedule Y, as applicable.
(B) [Reserved]
(ii) A supervised insurance organization is not required to assign to a building block any inventory company that is not a downstream company or subsidiary of a top-tier depository institution holding company.
(5) Financial statements. The supervised insurance organization must:
(i) For any inventory company whose indicated capital framework is NAIC RBC, prepare financial statements in accordance with SAP; and
(ii) For any building block parent whose indicated capital framework is subparts A through F of this part:
(A) Apply the same elections and treatment of exposures as are applied to the subsidiary depository institution;
(B) Apply subparts A through F of this part, to the members of the building block of which the building block parent is a member, on a consolidated basis, to the same extent as if the building block parent were a Board-regulated institution; and
(C) Where the building block parent is not the top-tier depository institution holding company, not deduct investments in capital of unconsolidated financial institutions, nor exclude these investments from the calculation of risk-weighted assets.
(6) Allocation share. A supervised insurance organization must, for each building block parent, identify any downstream building block parent owned directly or indirectly through any company other than a building block parent, and determine the building block parent’s allocation share of these downstream building block parents pursuant to paragraph (d) of this section.
(c) Material financial entity election. (1) A supervised insurance organization may elect not to treat an inventory company meeting the criteria in paragraph (c)(2) of this section as a material financial entity. An election under this paragraph (c)(1) must be included with the first financial statements submitted to the Board after the company is included in the supervised insurance organization’s inventory.
(2) The election in paragraph (c)(1) of this section is available to an inventory company if:
(i) The company engages in transactions consisting solely of either—
(A) Transactions for the purpose of transferring risk from one or more affiliates within the supervised insurance organization to one or more third parties; or
(B) Transactions to invest assets contributed to the company by one or more affiliates within the supervised insurance organization, where the company is established for purposes of limiting tax obligation or legal liability; and
(ii) The supervised insurance organization is able to calculate the adjustment required in § 217.607(b)(4).
(d) Allocation share. (1) Except as provided in paragraph (d)(2) of this section, a building block parent’s allocation share of a downstream building block parent is calculated as the percentage of equity ownership of a downstream building block parent, including associated paid-in capital, held by an upstream building block parent directly or indirectly through a member of the upstream building block parent’s building block.
(2) The top-tier depository institution holding company’s allocation share of a building block parent that has no outstanding common equity or that is identified under paragraph (b)(3)(v) of this section is 100 percent. Any other building block parent’s allocation share of such building block parent is zero.
§ 217.606 Scaling parameters.
(a) Scaling specified by the Board—(1) Scaling between the U.S. Federal banking capital rules and NAIC RBC—(i) Scaling capital requirement. When calculating the building block capital requirement for a building block parent in accordance with § 217.607, where the indicated capital framework is NAIC RBC or the U.S. Federal banking capital rules, and where the indicated capital framework of the appropriate downstream building block parent is NAIC RBC or the U.S. Federal banking capital rules, the capital requirement scaling modifier is provided by table 1 to this paragraph (a)(1)(i).
Table 1 to Paragraph
| Upstream building block parent’s indicated capital framework: | ||
|---|---|---|
| NAIC RBC | U.S. Federal banking capital rules | |
| Downstream building block parent’s indicated capital framework: | ||
| U.S. Federal banking capital rules | 0.0106 | 1 |
| NAIC RBC | 1 | 94.3 |
(ii) Scaling available capital. When calculating the building block available capital for a building block parent in accordance with § 217.608, where the indicated capital framework is NAIC RBC or the U.S. Federal banking capital rules, and where the indicated capital framework of the appropriate downstream building block parent is NAIC RBC or the U.S. Federal banking capital rules, the available capital scaling modifier is provided by table 2 to this paragraph (a)(1)(ii).
Table 2 to Paragraph
| Upstream building block parent’s indicated capital framework: | ||
|---|---|---|
| NAIC RBC | U.S. Federal banking capital rules | |
| Downstream building block parent’s indicated capital framework: | ||
| U.S. Federal banking capital rules | Recalculated building block capital requirement * 0.063 | 0. |
| NAIC RBC | 0 | Recalculated building block capital requirement * 5.9. |
| Capital framework: | ||
| NAIC RBC | 0 | Recalculated building block capital requirement * 5.9. |
(2) Scaling to determine BBA ratio. For purposes of determining the BBA ratio under § 217.603(b)—
(i) A depository institution holding company for which the indicated capital framework is the U.S. Federal banking capital rules scales its building block available capital and building block capital requirement the common capital framework by using the methods described in paragraphs (a)(1) of this section. For purposes of scaling under this paragraph (a)(2)(i), the downstream building block parent’s indicated capital framework is the U.S. Federal banking capital rules and the upstream building block parent’s indicated capital framework is NAIC RBC; and
(ii) A depository institution holding company for which the indicated capital framework is NAIC RBC does not scale its building block available capital or building block capital requirement.
(b) Scaling not specified by the Board but framework is scalar compatible. Where a scaling modifier to be used in § 217.607 or § 217.608 is not specified in paragraph (a) of this section, and the building block parent’s indicated capital framework (i.e., jurisdictional capital framework) is scalar compatible, a building block parent determines the scaling modifier as follows:
(1) Definitions. For purposes of this section, the following definitions apply:
(i) Jurisdictional intervention point. The jurisdictional intervention point is the capital level, under the laws of the jurisdiction for its domestic insurers, at which the supervisory authority in the jurisdiction may intervene as to a company subject its capital framework by imposing restrictions on distributions and discretionary bonus payments by the company or, if no such intervention may occur in a jurisdiction, then the capital level at which the supervisory authority would first have the authority to take action against a company based on its capital level.
(ii) Jurisdiction adjustment. The jurisdictional adjustment is the risk adjustment set forth in table 3 to this paragraph (b)(1)(ii), based on the country risk classification set by the Organization for Economic Cooperation and Development (OECD) for the jurisdiction. This adjustment is applied to the jurisdictional intervention point.
Table 3 to Paragraph (
| OECD CRC | Jurisdictional adjustment (percent) |
|---|---|
| 0-1, including jurisdictions with no OECD country risk classification | 0 |
| 2 | 20 |
| 3 | 50 |
| 4-6 | 100 |
| 7 | 150 |
(2) Scaling capital requirement. When calculating the building block capital requirement for a building block parent in accordance with § 217.607, where the indicated capital framework of the appropriate downstream building block parent is a scalar-compatible framework for which the Board has not specified a capital requirement scaling modifier, the capital requirement scaling modifier is calculated according to the following formula:
(3) Scaling available capital. When calculating the building block available capital for a building block parent in accordance with § 217.608, where the indicated capital framework of the appropriate downstream building block parent is a scalar-compatible framework for which the Board has not specified an available capital scaling modifier, the available capital scaling modifier is equal to zero.
§ 217.607 Capital requirements under the Building Block Approach.
(a) Determination of building block capital requirement. For each building block parent, building block capital requirement means the sum of the items in paragraphs (a)(1) and (2) of this section:
(1) The company capital requirement of the building block parent; that is:
(i) Recalculated under the assumption that members of the building block parent’s building block had no investment in any downstream building block parent; and is:
(ii) Adjusted pursuant to paragraph (b) of this section;
(2) For each downstream building block parent, the adjusted downstream building block capital requirement (BBCR
(b) Adjustments in determining the building block capital requirement. A supervised insurance organization must adjust the company capital requirement for any building block parent as follows:
(1) Internal credit risk charges. A supervised insurance organization must deduct from the building block parent’s company capital requirement any difference between:
(i) The building block parent’s company capital requirement; and
(ii) The building block parent’s company capital requirement recalculated excluding capital requirements related to potential for the possibility of default of any company in the supervised insurance organization.
(2) Permitted accounting practices and prescribed accounting practices. A supervised insurance organization must adjust the building block parent’s company capital requirement by any difference between:
The adjustment can be either positive or negative depending on the permitted or prescribed practices. In most cases, the reversal of the permitted or prescribed practice would result in an increase in the building block parent’s company required capital. In rare cases, a permitted or prescribed practice could increase the insurers required capital. In this instance, this adjustment would reduce the building block parent’s company required capital.
(i) The building block parent’s company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section; and
(ii) The building block parent’s company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section, recalculated under the assumption that neither the building block parent, nor any company that is a member of that building block parent’s building block, had prepared its financial statements with the application of any permitted accounting practice, prescribed accounting practice, or other practice, including legal, regulatory, or accounting procedures or standards, that departs from a solvency framework as promulgated for application in a jurisdiction.
(3) Risks of certain intermediary entities. Where a supervised insurance organization has made an election with respect to a company not to treat that company as a material financial entity pursuant to § 217.605(c), the supervised insurance organization must add to the company capital requirement of any building block parent, whose building block contains a member, with which the company engages in one or more transactions, and for which the company engages in one or more transactions described in § 217.605(c)(2) with a third party, any difference between:
(i) The building block parent’s company capital requirement; and
(ii) The building block parent’s company capital requirement recalculated taking into account the risks of the company, excluding internal credit risks described in paragraph (b)(1) of this section, allocated to the building block parent, reflecting the transaction(s) that the company engages in with any member of the building block parent’s building block. Note, the total allocation of the risks of the intermediary entity to building block parents must capture all material risks and avoid double counting.
(4) Investments in own capital instruments—(i) In general. A supervised insurance organization must deduct from the building block parent’s company capital requirement any difference between:
(A) The building block parent’s company capital requirement; and
(B) The building block parent’s company capital requirement recalculated after assuming that neither the building block parent, nor any company that is a member of the building block parent’s building block, held any investment in the building block parent’s own capital instrument(s), including any net long position determined in accordance with paragraph (b)(5)(ii) of this section.
(ii) Net long position. For purposes of calculating an investment in a building block parent’s own capital instrument under this section, the net long position is determined in accordance with § 217.22(h), provided that a separate account asset or associated guarantee is not regarded as an indirect exposure unless the net long position of the fund underlying the separate account asset (determined in accordance with § 217.22(h) without regard to this paragraph (b)(4)(ii)) equals or exceeds 5 percent of the value of the fund.
(5) Risks relating to title insurance. A supervised insurance organization must add to the building block parent’s company capital requirement the amount of the building block parent’s reserves for claims pertaining to title insurance, multiplied by 300 percent.
§ 217.608 Available capital resources under the Building Block Approach.
(a) Qualifying capital instruments—(1) General criteria. A qualifying capital instrument with respect to a building block parent is a capital instrument that meets the following criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to depositors and general creditors of the building block parent;
(iii) The instrument is not secured, not covered by a guarantee of the building block parent or of an affiliate of the building block parent, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument in relation to more senior claims;
(iv) The instrument has a minimum original maturity of at least five years. At the beginning of each of the last five years of the life of the instrument, the amount that is eligible to be included in building block available capital is reduced by 20 percent of the original amount of the instrument (net of redemptions), and is excluded from building block available capital when the remaining maturity is less than one year. In addition, the instrument must not have any terms or features that require, or create significant incentives for, the building block parent to redeem the instrument prior to maturity; and
A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.
(v) The instrument, by its terms, may be called by the building block parent only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called sooner upon the occurrence of an event that would preclude the instrument from being included in the building block parent’s company available capital or building block available capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). In addition:
(A) The top-tier depository institution holding company must receive the prior approval of the Board to exercise a call option on the instrument.
(B) The building block parent does not create at issuance, through action or communication, an expectation the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the top-tier depository institution holding company must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for qualifying capital instruments under this section; or demonstrate to the satisfaction of the Board that following redemption, the top-tier depository institution holding company would continue to hold an amount of capital that is commensurate with its risk.
A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.
(vi) Redemption of the instrument prior to maturity or repurchase requires the prior approval of the Board.
(vii) The instrument meets the criteria in § 217.20(d)(1)(vi) through (ix) and (xi), except that each instance of “Board-regulated institution” is replaced with “building block parent” and, in § 217.20(d)(1)(ix), “tier 2 capital instruments” is replaced with “qualifying capital instruments”.
(2) Additional tier 1 capital instruments. Additional tier 1 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and meet all of the following criteria:
For purposes of this paragraph (a)(2), the supervised insurance organization evaluates the criteria in paragraph (a)(1) of this section with regard to the building block in which the issuing inventory company is a member.
(i) The instrument is subordinated to depositors, general creditors, and subordinated debt holders of the building block parent in a receivership, insolvency, liquidation, or similar proceeding;
(ii) The instrument is not secured, not covered by a guarantee of the building block parent or of an affiliate of the building block parent, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) The instrument has no maturity date and does not contain a dividend step-up or any other term or feature that creates an incentive to redeem; and
(iv) If callable by its terms, the instrument may be called only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called earlier than five years upon the occurrence of a regulatory event that precludes the instrument from being included in the building block parent’s company available capital or building block available capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). In addition:
(A) The top-tier depository institution holding company must receive the prior approval of the Board to exercise a call option on the instrument.
(B) The building block parent does not create at issuance, through action or communication, an expectation that the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the top-tier depository institution holding company must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for additional tier 1 capital instruments or common equity tier 1 instruments under this section; or demonstrate to the satisfaction of the Board that following redemption, the top-tier depository institution holding company would continue to hold an amount of capital that is commensurate with its risk.
A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.
(v) Redemption or repurchase of the instrument requires prior approval of the Board.
(vi) The paid-in amount would be classified as equity under GAAP.
(vii) The instrument meets the criteria in § 217.20(c)(1)(vii) through (ix) and (xi) through (xiv), except that each instance of “Board-regulated institution” is replaced with “building block parent”.
(3) Common equity tier 1 capital instruments. Common equity tier 1 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and that meet all of the following criteria:
For purposes of this paragraph (a)(3), the supervised insurance organization evaluates the criteria in paragraph (a)(1) of this section with regard to the building block in which the issuing inventory company is a member.
(i) The holders of the instrument bear losses, as they occur, equally, proportionately, and simultaneously with the holders of all other qualifying capital instruments (other than additional tier 1 capital instruments or tier 2 capital instruments) before any losses are borne by holders of claims on the building block parent any with greater priority in a receivership, insolvency, liquidation, or similar proceeding.
(ii) The paid-in amount would be classified as equity under GAAP.
(iii) The instrument meets the criteria in § 217.20(b)(1)(i) through (vii) and (x) through (xiii).
(4) Tier 2 capital instruments. Tier 2 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and are not additional tier 1 capital instruments or common equity tier 1 capital instruments.
(b) Determination of building block available capital—(1) In general. For each building block parent, building block available capital means the sum of the items described in paragraphs (b)(1)(i) and (ii) of this section:
(i) The company available capital of the building block parent:
(A) Less the amount of downstreamed capital owned by any member of the building block parent’s building block; and
(B) Adjusted pursuant to paragraph (c) of this section.
(ii) For each downstream building block parent, the adjusted downstream building block available capital (BBAC
(2) Combining tiers of capital. If there is more than one tier of company available capital under a building block parent’s indicated capital framework, the amounts of company available capital from all tiers are combined in calculating building block available capital in accordance with paragraph (b) of this section.
(c) Adjustments in determining building block available capital. For purposes of the calculations required in paragraph (b) of this section, a supervised insurance organization must adjust the company available capital for any building block parent as follows:
(1) Nonqualifying capital instruments. A supervised insurance organization must deduct from the building block parent’s company available capital any accretion arising from any instrument issued by any company that is a member of the building block parent’s building block, where the instrument is not a qualifying capital instrument.
(2) Insurance underwriting RBC. When applying the U.S. Federal banking capital rules as the indicated capital framework for a building block parent, a supervised insurance organization must add back into the building block parent’s company available capital any amounts deducted pursuant to § 3.22(b)(3) of this title, § 217.22(b)(3), or § 324.22(b)(3) of this title, as applicable.
(3) Permitted accounting practices and prescribed accounting practices. A supervised insurance organization must adjust the building block parent’s company available capital by any difference between:
(i) The building block parent’s company available capital; and
(ii) The building block parent’s company available capital recalculated under the assumption that neither the building block parent, nor any company that is a member of that building block parent’s building block, had prepared its financial statements with the application of any permitted accounting practice, prescribed accounting practice, or other practice, including legal, regulatory, or accounting procedures or standards, that departs from a solvency framework as promulgated for application in a jurisdiction.
(4) Adjusting certain life insurance reserves. A supervised insurance organization must adjust the building block parent’s company available capital by any difference between:
(i) The building block parent’s company available capital; and
(ii) The building block parent’s company available capital recalculated based on using a 40 percent factor applied to all term life insurance accounted for using an approach based on the Valuation of Life Insurance Policies Model Regulation and a 90 percent factor applied to all secondary-guaranteed universal life insurance products accounted for using Actuarial Guideline XXXVIII—The Application of the Valuation of Life Insurance Policies Model Regulation.
(5) Deduction of investments in own capital instruments—(i) In general. A supervised insurance organization must deduct from the building block parent’s company available capital any investment by the building block parent in its own capital instrument(s), or any investment by any member of the building block parent’s building block in capital instruments of the building block parent, including any net long position determined in accordance with paragraph (c)(5)(ii) of this section, to the extent that such investment(s) would otherwise be accretive to the building block parent’s building block available capital.
(ii) Net long position. For purposes of calculating an investment in a building block parent’s own capital instrument under this section, the net long position is determined in accordance with § 217.22(h), provided that a separate account asset or associated guarantee is not regarded as an indirect exposure unless the net long position of the fund underlying the separate account asset (determined in accordance with § 217.22(h) without regard to this paragraph (c)(5)(ii)) equals or exceeds 5 percent of the value of the fund.
(6) Reciprocal cross holdings in the capital of financial institutions. A supervised insurance organization must deduct from the building block parent’s company available capital any investment(s) by the building block parent in the capital of unaffiliated financial institutions that it holds reciprocally, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, to the extent that such investment(s) would otherwise be accretive to the building block parent’s building block available capital.
(d) Limits on certain elements in building block available capital of top-tier depository institution holding companies—(1) Investment in capital of unconsolidated financial institutions. (i) A top-tier depository institution holding company must deduct from its building block available capital any accreted capital from an investment in the capital of an unconsolidated financial institution that is not an inventory company, that exceeds twenty-five percent of the amount of its building block available capital, prior to application of this adjustment, excluding tier 2 capital instruments. For purposes of this paragraph (d)(1), the amount of an investment in the capital of an unconsolidated financial institution is calculated in accordance with § 217.22(h), except that a separate account asset or associated guarantee is not an indirect exposure.
(ii) The deductions described in this paragraph (d)(1) are net of associated deferred tax liabilities in accordance with § 217.22(e).
(2) Adjustments to accretions from tier 2 capital instruments. A top-tier depository institution holding company must adjust accretions from tier 2 capital instruments in accordance with this paragraph (d)(2).
(i) A top-tier depository institution holding company must deduct any accretions from tier 2 capital instruments that, in the aggregate, exceed the greater of:
(A) 150 percent of the amount of its building block capital requirement; and
(B) The amount of instruments subject to paragraph (e) or (f) of this section that are outstanding as of the submission date; and
(ii) A top-tier depository institution holding company must increase accretions from tier 2 capital instruments by any amount deducted from accretions from additional tier 1 capital instruments by operation of paragraph (d)(3) of this section.
(3) Limitation on additional tier 1 capital instruments. A top-tier depository institution holding company must deduct any accretions from additional tier 1 capital instruments that, in the aggregate, exceed the greater of:
(i) 100 percent of the amount of its building block capital requirement; and
(ii) The amount of instruments subject to paragraph (f) of this section that are outstanding as of the submission date.
(e) Treatment of outstanding surplus notes. A surplus note issued by any company in a supervised insurance organization is deemed to meet the criteria in paragraphs (a)(1)(iii) and (vi) of this section if:
(1) The instrument was issued prior to the later of—
(i) November 1, 2019; and
(ii) The earliest date on which any depository institution holding company in the group became a depository institution holding company;
(2) The surplus note is a company capital element for the issuing company;
(3) The surplus note is not owned by an affiliate of the issuer; and
(4) The surplus note is outstanding as of the submission date.
(f) Treatment of certain callable instruments. Notwithstanding the criteria under paragraph (a)(1) of this section, an instrument with terms that provide that the instrument may be called earlier than five years upon the occurrence of a rating event does not violate the criterion in paragraph (a)(1)(v) of this section, provided that the instrument was a company capital element issued prior to January 1, 2014, and that such instrument satisfies all other criteria under paragraph (a)(1) of this section.
(g) Board approval of a capital instrument. (1) A supervised insurance organization must receive Board prior approval to include in its building block available capital for any building block an instrument (as listed in this section), issued by any company in the supervised insurance organization, unless the instrument:
(i) Was a capital element for the issuer prior to May 19, 2010, in accordance with the indicated capital framework that was effective as of that date and the underlying instrument meets the criteria to be a qualifying capital instrument (as defined in paragraph (a) of this section); or
(ii) Is equivalent, in terms of capital quality and ability to absorb losses with respect to all material terms, to a company capital element that the Board determined may be included in regulatory capital pursuant to paragraph (g)(2) of this section, or may be included in the regulatory capital of a Board-regulated institution pursuant to § 217.20(e)(3).
(2) After determining that an instrument may be included in a supervised insurance organization’s regulatory capital under this subpart, the Board will make its decision publicly available, including a brief description of the material terms of the instrument and the rationale for the determination.
Appendix A to Part 217—The Federal Reserve Board’s Framework for Implementing the Countercyclical Capital Buffer
(a) In 2013, the Board of Governors of the Federal Reserve System (Board) issued a final regulatory capital rule (Regulation Q) in coordination with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) that strengthened risk-based and leverage capital requirements applicable to insured depository institutions and depository institution holding companies (banking organizations).
(b) The CCyB is a supplemental, macroprudential policy tool that the Board can increase during periods of rising vulnerabilities in the financial system and reduce when vulnerabilities recede. It is designed to increase the resilience of large banking organizations when there is an elevated risk of above-normal losses. Increasing the resilience of large banking organizations will, in turn, improve the resilience of the broader financial system. Above-normal losses often follow periods of rapid asset price appreciation or credit growth that are not well supported by underlying economic fundamentals. The circumstances in which the Board would most likely begin to increase the CCyB above zero percent to augment minimum capital requirements and other capital buffers would be when systemic vulnerabilities are meaningfully above normal. By requiring large banking organizations to hold additional capital during those periods of excess and removing the requirement to hold additional capital when the vulnerabilities have diminished, the CCyB also is expected to moderate fluctuations in the supply of credit over time. Moderating the supply of credit may mitigate or prevent the conditions that contribute to above-normal losses, such as elevated asset prices and excessive leverage, and prevent or mitigate reductions in lending to creditworthy borrowers that can amplify an economic downturn. In this way, implementation of the CCyB also responds to the Dodd-Frank Act’s requirement that the Board seek to make its capital requirements countercyclical.
(c) Regulation Q established the initial CCyB amount with respect to private sector credit exposures located in the United States (U.S.-based credit exposures) at zero percent and provided that the maximum potential amount of the CCyB for credit exposures in the United States was 2.5 percent of risk-weighted assets.
This Policy Statement describes the framework that the Board will follow in setting the amount of the CCyB for U.S.-based credit exposures. The framework consists of a set of principles for translating assessments of financial system vulnerabilities that are regularly undertaken by the Board into the appropriate level of the CCyB. Those assessments are informed by a broad array of quantitative indicators of financial and economic performance and a set of empirical models. In addition, the framework includes an assessment of whether the CCyB is the most appropriate policy instrument (among available policy instruments) to address the highlighted financial system vulnerabilities.
(a) The objectives of the CCyB are to strengthen banking organizations’ resilience against the build-up of systemic vulnerabilities and reduce fluctuations in the supply of credit. The CCyB supplements the minimum capital requirements and the capital conservation buffer, which themselves are designed to provide substantial resilience to unexpected losses created by normal fluctuations in economic and financial conditions. The capital surcharge on global systemically important banking organizations adds an additional layer of defense for the largest and most systemically important institutions, whose financial distress can have outsized effects on the rest of the financial system and the real economy.
(b) The CCyB is expected to help provide additional resilience for advanced approaches institutions, and by extension the broader financial system, against elevated vulnerabilities primarily in two ways. First, advanced approaches institutions will likely hold more capital to avoid limitations on capital distributions and discretionary bonus payments resulting from implementation of the CCyB. Strengthening their capital positions when financial conditions are accommodative would increase the capacity of advanced approaches institutions to absorb outsized losses during a future significant economic downturn or period of financial instability, thus making them more resilient.
(c) The second and related goal of the CCyB is to promote a more sustainable supply of credit over the economic cycle. During a credit cycle downturn, better-capitalized institutions have been shown to be more likely than weaker institutions to have continued access to funding. Better-capitalized institutions also are less likely to take actions that lead to broader financial-sector distress and its associated macroeconomic costs, such as large-scale sales of assets at prices below their fundamental value and sharp contractions in credit supply.
(d) During a period of cyclically increasing vulnerabilities, advanced approaches institutions might react to an increase in the CCyB by raising lending standards, otherwise reducing their risk exposure, augmenting their capital, or some combination of those actions. They may choose to raise capital by taking actions that would increase net income, reducing capital distributions such as share repurchases or dividends, or issuing new equity. In this regard, an increase in the CCyB would not prevent advanced approaches institutions from maintaining their important role as credit intermediaries, but would reduce the likelihood that banking organizations with insufficient capital would foster unsustainable credit growth or engage in imprudent risk taking. The specific combination of adjustments and the relative size of each adjustment will depend in part on the initial capital positions of advanced approaches institutions, the cost of debt and equity financing, and the earnings opportunities presented by the economic situation at the time.
(a) The Board regularly monitors and assesses threats to financial stability by synthesizing information from a comprehensive set of financial-sector and macroeconomic indicators, supervisory information, surveys, and other interactions with market participants.
(b) The Board intends to monitor a wide range of financial and macroeconomic quantitative indicators including, but not limited to, measures of relative credit and liquidity expansion or contraction, a variety of asset prices, funding spreads, credit condition surveys, indices based on credit default swap spreads, option implied volatilities, and measures of systemic risk.
(c) However, no single indictor or fixed set of indicators can adequately capture all the vulnerabilities in the U.S. economy and financial system. Moreover, adjustments in the CCyB that were tightly linked to a specific model or set of models could be imprecise due to the relatively short period that some indicators are available, the limited number of past crises against which the models can be calibrated, and limited experience with the CCyB as a macroprudential tool. As a result, the types of indicators and models considered in assessments of the appropriate level of the CCyB are likely to change over time based on advances in research and the experience of the Board with this new macroprudential tool.
(d) The Board will determine the appropriate level of the CCyB for U.S.-based credit exposures based on its analysis of the above factors. Generally, a zero percent U.S. CCyB amount would reflect an assessment that U.S. economic and financial conditions are broadly consistent with a financial system in which levels of system-wide vulnerabilities are within or near their normal range of values. The Board could increase the CCyB as vulnerabilities build. A 2.5 percent CCyB amount for U.S.-based credit exposures, which is the maximum level under the Board’s rule, would reflect an assessment that the U.S. financial sector is experiencing a period of significantly elevated or rapidly increasing system-wide vulnerabilities. Importantly, as a macroprudential policy tool, the CCyB will be activated and deactivated based on broad developments and trends in the U.S. financial system, rather than the activities of any individual banking organization.
(e) Similarly, the Board would remove or reduce the CCyB when the conditions that led to its activation abate or lessen. Additionally, the Board would remove or reduce the CCyB when release of CCyB capital would promote financial stability. Indeed, for the CCyB to be most effective, the CCyB should be deactivated or reduced in a timely manner. Deactivating the CCyB in a timely manner could, for example, promote the prompt realization of loan losses by advanced approaches institutions and the removal of such loans from their balance sheets and would reduce the likelihood that advanced approaches institutions would significantly pare their risk-weighted assets in order to maintain their capital ratios during a downturn.
(f) The pace and magnitude of changes in the CCyB will depend importantly on the underlying conditions in the financial sector and the economy as well as the desired effects of the proposed change in the CCyB. If vulnerabilities are rising gradually, then incremental increases in the level of the CCyB may be appropriate. Incremental increases would allow banks to augment their capital primarily through retained earnings and allow policymakers additional time to assess the effects of the policy change before making subsequent adjustments. However, if vulnerabilities in the financial system are building rapidly, then larger or more frequent adjustments may be necessary to increase loss-absorbing capacity sooner and potentially to mitigate the rise in vulnerabilities.
(g) The Board will also consider whether the CCyB is the most appropriate of its available policy instruments to address the financial system vulnerabilities highlighted by the framework’s judgmental assessments and empirical models. The CCyB primarily is intended to address cyclical vulnerabilities, rather than structural vulnerabilities that do not vary significantly over time. Structural vulnerabilities are better addressed through targeted reforms or permanent increases in financial system resilience. Two central factors for the Board to consider are whether advanced approaches institutions are exposed—either directly or indirectly—to the vulnerabilities identified in the comprehensive judgmental assessment or by the quantitative indicators that suggest activation of the CCyB and whether advanced approaches institutions are contributing—either directly or indirectly—to these highlighted vulnerabilities.
(h) In setting the CCyB for advanced approaches institutions that it supervises, the Board plans to consult with the OCC and FDIC on their analyses of financial system vulnerabilities and on the extent to which advanced approaches banking organizations are either exposed to or contributing to these vulnerabilities.
(a) The Board expects to consider at least once per year the applicable level of the U.S. CCyB. The Board will review financial conditions regularly throughout the year and may adjust the CCyB more frequently as a result of those monitoring activities.
(b) Further, the Board will continue to communicate with the public in other formats regarding its assessment of U.S. financial stability, including financial system vulnerabilities. In the event that the Board considered that a change in the CCyB were appropriate, it would, in proposing the change, include a discussion of the reasons for the proposed action as determined by the particular circumstances. In addition, the Board’s biannual Monetary Policy Report to Congress, usually published in February and July, will continue to contain a section that reports on developments pertaining to the stability of the U.S. financial system.
(a) The effects of the U.S. CCyB ultimately will depend on the level at which it is set, the size and nature of any adjustments in the level, and the timeliness with which it is increased or decreased. The extent to which the CCyB may affect vulnerabilities in the broader financial system depends upon a complex set of interactions between required capital levels at the largest banking organizations and the economy and financial markets. In addition to the direct effects, the secondary economic effects could be amplified if financial markets extract a signal from the announcement of a change in the CCyB about subsequent actions that might be taken by the Board. Moreover, financial market participants might react by updating their expectations about future asset prices in specific markets or broader economic activity based on the concerns expressed by the regulators in communications announcing a policy change.
(b) The Board will monitor and analyze adjustments by banking organizations and other financial institutions to the CCyB: whether a change in the CCyB leads to observed changes in risk-based capital ratios at advanced approaches institutions, as well as whether those adjustments are achieved passively through retained earnings, or actively through changes in capital distributions or in risk-weighted assets. Other factors to be monitored include the extent to which loan growth and interest rate spreads on loans made by affected banking organizations change relative to loan growth and loan spreads at banking organizations that are not subject to the buffer. Another consideration in setting the CCyB and other macroprudential tools is the extent to which the adjustments by advanced approaches institutions to higher capital buffers lead to migration of credit market activity outside of those banking organizations, especially to the nonbank financial sector. Depending on the amount of migration, which institutions are affected by it, and the remaining exposures of advanced approaches institutions, those adjustments could cause the Board to favor either a higher or a lower value of the CCyB.
(c) The Board will also monitor information regarding the levels of and changes in the CCyB in other countries. The Basel Committee on Banking Supervision is expected to maintain this information for member countries in a publicly available form on its Web site.
PART 218—EXCEPTIONS FOR BANKS FROM THE DEFINITION OF BROKER IN THE SECURITIES EXCHANGE ACT OF 1934 (REGULATION R)
§ 218.100 Definition.
For purposes of this part the following definition shall apply: Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
§ 218.700 Defined terms relating to the networking exception from the definition of “broker.”
When used with respect to the Third Party Brokerage Arrangements (“Networking”) Exception from the definition of the term “broker” in section 3(a)(4)(B)(i) of the Act (15 U.S.C. 78c(a)(4)(B)(i)) in the context of transactions with a customer, the following terms shall have the meaning provided:
(a) Contingent on whether the referral results in a transaction means dependent on whether the referral results in a purchase or sale of a security; whether an account is opened with a broker or dealer; whether the referral results in a transaction involving a particular type of security; or whether it results in multiple securities transactions; provided, however, that a referral fee may be contingent on whether a customer:
(1) Contacts or keeps an appointment with a broker or dealer as a result of the referral; or
(2) Meets any objective, base-line qualification criteria established by the bank or broker or dealer for customer referrals, including such criteria as minimum assets, net worth, income, or marginal federal or state income tax rate, or any requirement for citizenship or residency that the broker or dealer, or the bank, may have established generally for referrals for securities brokerage accounts.
(b)(1) Incentive compensation means compensation that is intended to encourage a bank employee to refer customers to a broker or dealer or give a bank employee an interest in the success of a securities transaction at a broker or dealer. The term does not include compensation paid by a bank under a bonus or similar plan that is:
(i) Paid on a discretionary basis; and
(ii) Based on multiple factors or variables and:
(A) Those factors or variables include multiple significant factors or variables that are not related to securities transactions at the broker or dealer;
(B) A referral made by the employee is not a factor or variable in determining the employee’s compensation under the plan; and
(C) The employee’s compensation under the plan is not determined by reference to referrals made by any other person.
(2) Nothing in this paragraph (b) shall be construed to prevent a bank from compensating an officer, director or employee under a bonus or similar plan on the basis of any measure of the overall profitability or revenue of:
(i) The bank, either on a stand-alone or consolidated basis;
(ii) Any affiliate of the bank (other than a broker or dealer), or any operating unit of the bank or an affiliate (other than a broker or dealer), if the affiliate or operating unit does not over time predominately engage in the business of making referrals to a broker or dealer; or
(iii) A broker or dealer if:
(A) Such measure of overall profitability or revenue is only one of multiple factors or variables used to determine the compensation of the officer, director or employee;
(B) The factors or variables used to determine the compensation of the officer, director or employee include multiple significant factors or variables that are not related to the profitability or revenue of the broker or dealer;
(C) A referral made by the employee is not a factor or variable in determining the employee’s compensation under the plan; and
(D) The employee’s compensation under the plan is not determined by reference to referrals made by any other person.
(c) Nominal one-time cash fee of a fixed dollar amount means a cash payment for a referral, to a bank employee who was personally involved in referring the customer to the broker or dealer, in an amount that meets any of the following standards:
(1) The payment does not exceed:
(i) Twice the average of the minimum and maximum hourly wage established by the bank for the current or prior year for the job family that includes the employee; or
(ii) 1/1000th of the average of the minimum and maximum annual base salary established by the bank for the current or prior year for the job family that includes the employee; or
(2) The payment does not exceed twice the employee’s actual base hourly wage or 1/1000th of the employee’s actual annual base salary; or
(3) The payment does not exceed twenty-five dollars ($25), as adjusted in accordance with paragraph (f) of this section.
(d) Job family means a group of jobs or positions involving similar responsibilities, or requiring similar skills, education or training, that a bank, or a separate unit, branch or department of a bank, has established and uses in the ordinary course of its business to distinguish among its employees for purposes of hiring, promotion, and compensation.
(e) Referral means the action taken by one or more bank employees to direct a customer of the bank to a broker or dealer for the purchase or sale of securities for the customer’s account.
(f) Inflation adjustment—(1) In general. On April 1, 2012, and on the 1st day of each subsequent 5-year period, the dollar amount referred to in paragraph (c)(3) of this section shall be adjusted by:
(i) Dividing the annual value of the Employment Cost Index For Wages and Salaries, Private Industry Workers (or any successor index thereto), as published by the Bureau of Labor Statistics, for the calendar year preceding the calendar year in which the adjustment is being made by the annual value of such index (or successor) for the calendar year ending December 31, 2006; and
(ii) Multiplying the dollar amount by the quotient obtained in paragraph (f)(1)(i) of this section.
(2) Rounding. If the adjusted dollar amount determined under paragraph (f)(1) of this section for any period is not a multiple of $1, the amount so determined shall be rounded to the nearest multiple of $1.
§ 218.701 Exemption from the definition of “broker” for certain institutional referrals.
(a) General. A bank that meets the requirements for the exception from the definition of “broker” under section 3(a)(4)(B)(i) of the Act (15 U.S.C. 78c(a)(4)(B)(i)), other than section 3(a)(4)(B)(i)(VI) of the Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)), is exempt from the conditions of section 3(a)(4)(B)(i)(VI) of the Act solely to the extent that a bank employee receives a referral fee for referring a high net worth customer or institutional customer to a broker or dealer with which the bank has a contractual or other written arrangement of the type specified in section 3(a)(4)(B)(i) of the Act, if:
(1) Bank employee. (i) The bank employee is:
(A) Not registered or approved, or otherwise required to be registered or approved, in accordance with the qualification standards established by the rules of any self-regulatory organization;
(B) Predominantly engaged in banking activities other than making referrals to a broker or dealer; and
(C) Not subject to statutory disqualification, as that term is defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except subparagraph (E) of that section; and
(ii) The high net worth customer or institutional customer is encountered by the bank employee in the ordinary course of the employee’s assigned duties for the bank.
(2) Bank determinations and obligations—(i) Disclosures. The bank provides the high net worth customer or institutional customer the information set forth in paragraph (b) of this section
(A) In writing prior to or at the time of the referral; or
(B) Orally prior to or at the time of the referral and
(1) The bank provides such information to the customer in writing within 3 business days of the date on which the bank employee refers the customer to the broker or dealer; or
(2) The written agreement between the bank and the broker or dealer provides for the broker or dealer to provide such information to the customer in writing in accordance with paragraph (a)(3)(i) of this section.
(ii) Customer qualification. (A) In the case of a customer that is a not a natural person, the bank has a reasonable basis to believe that the customer is an institutional customer before the referral fee is paid to the bank employee.
(B) In the case of a customer that is a natural person, the bank has a reasonable basis to believe that the customer is a high net worth customer prior to or at the time of the referral.
(iii) Employee qualification information. Before a referral fee is paid to a bank employee under this section, the bank provides the broker or dealer the name of the employee and such other identifying information that may be necessary for the broker or dealer to determine whether the bank employee is registered or approved, or otherwise required to be registered or approved, in accordance with the qualification standards established by the rules of any self-regulatory organization or is subject to statutory disqualification, as that term is defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except subparagraph (E) of that section.
(iv) Good faith compliance and corrections. A bank that acts in good faith and that has reasonable policies and procedures in place to comply with the requirements of this section shall not be considered a “broker” under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) solely because the bank fails to comply with the provisions of this paragraph (a)(2) with respect to a particular customer if the bank:
(A) Takes reasonable and prompt steps to remedy the error (such as, for example, by promptly making the required determination or promptly providing the broker or dealer the required information); and
(B) Makes reasonable efforts to reclaim the portion of the referral fee paid to the bank employee for the referral that does not, following any required remedial action, meet the requirements of this section and that exceeds the amount otherwise permitted under section 3(a)(4)(B)(i)(VI) of the Act (15 U.S.C. 78c(a)(4)(B)(i)(VI)) and § 218.700.
(3) Provisions of written agreement. The written agreement between the bank and the broker or dealer shall require that:
(i) Broker-dealer written disclosures. If, pursuant to paragraph (a)(2)(i)(B)(2) of this section, the broker or dealer is to provide the customer in writing the disclosures set forth in paragraph (b) of this section, the broker or dealer provides such information to the customer in writing:
(A) Prior to or at the time the customer begins the process of opening an account at the broker or dealer, if the customer does not have an account with the broker or dealer; or
(B) Prior to the time the customer places an order for a securities transaction with the broker or dealer as a result of the referral, if the customer already has an account at the broker or dealer.
(ii) Customer and employee qualifications. Before the referral fee is paid to the bank employee:
(A) The broker or dealer determine that the bank employee is not subject to statutory disqualification, as that term is defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except subparagraph (E) of that section; and
(B) The broker or dealer has a reasonable basis to believe that the customer is a high net worth customer or an institutional customer.
(iii) Suitability or sophistication determination by broker or dealer—(A) Contingent referral fees. In any case in which payment of the referral fee is contingent on completion of a securities transaction at the broker or dealer, the broker or dealer, before such securities transaction is conducted, perform a suitability analysis of the securities transaction in accordance with the rules of the broker or dealer’s applicable self-regulatory organization as if the broker or dealer had recommended the securities transaction.
(B) Non-contingent referral fees. In any case in which payment of the referral fee is not contingent on the completion of a securities transaction at the broker or dealer, the broker or dealer, before the referral fee is paid, either:
(1) Determine that the customer:
(i) Has the capability to evaluate investment risk and make independent decisions; and
(ii) Is exercising independent judgment based on the customer’s own independent assessment of the opportunities and risks presented by a potential investment, market factors and other investment considerations; or
(2) Perform a suitability analysis of all securities transactions requested by the customer contemporaneously with the referral in accordance with the rules of the broker or dealer’s applicable self-regulatory organization as if the broker or dealer had recommended the securities transaction.
(iv) Notice to the customer. The broker or dealer inform the customer if the broker or dealer determines that the customer or the securities transaction(s) to be conducted by the customer does not meet the applicable standard set forth in paragraph (a)(3)(iii) of this section.
(v) Notice to the bank. The broker or dealer promptly inform the bank if the broker or dealer determines that:
(A) The customer is not a high net worth customer or institutional customer, as applicable; or
(B) The bank employee is subject to statutory disqualification, as that term is defined in section 3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), except subparagraph (E) of that section.
(b) Required disclosures. The disclosures provided to the high net worth customer or institutional customer pursuant to paragraphs (a)(2)(i) or (a)(3)(i) of this section shall clearly and conspicuously disclose:
(1) The name of the broker or dealer; and
(2) That the bank employee participates in an incentive compensation program under which the bank employee may receive a fee of more than a nominal amount for referring the customer to the broker or dealer and payment of this fee may be contingent on whether the referral results in a transaction with the broker or dealer.
(c) Receipt of other compensation. Nothing in this section prevents or prohibits a bank from paying or a bank employee from receiving any type of compensation that would not be considered incentive compensation under § 218.700(b)(1) or that is described in § 218.700(b)(2).
(d) Definitions. When used in this section:
(1) High net worth customer—(i) General. High net worth customer means:
(A) Any natural person who, either individually or jointly with his or her spouse, has at least $5 million in net worth excluding the primary residence and associated liabilities of the person and, if applicable, his or her spouse; and
(B) Any revocable, inter vivos or living trust the settlor of which is a natural person who, either individually or jointly with his or her spouse, meets the net worth standard set forth in paragraph (d)(1)(i)(A) of this section.
(ii) Individual and spousal assets. In determining whether any person is a high net worth customer, there may be included in the assets of such person
(A) Any assets held individually;
(B) If the person is acting jointly with his or her spouse, any assets of the person’s spouse (whether or not such assets are held jointly); and
(C) If the person is not acting jointly with his or her spouse, fifty percent of any assets held jointly with such person’s spouse and any assets in which such person shares with such person’s spouse a community property or similar shared ownership interest.
(2) Institutional customer means any corporation, partnership, limited liability company, trust or other non-natural person that has, or is controlled by a non-natural person that has, at least:
(i) $10 million in investments; or
(ii) $20 million in revenues; or
(iii) $15 million in revenues if the bank employee refers the customer to the broker or dealer for investment banking services.
(3) Investment banking services includes, without limitation, acting as an underwriter in an offering for an issuer; acting as a financial adviser in a merger, acquisition, tender offer or similar transaction; providing venture capital, equity lines of credit, private investment-private equity transactions or similar investments; serving as placement agent for an issuer; and engaging in similar activities.
(4) Referral fee means a fee (paid in one or more installments) for the referral of a customer to a broker or dealer that is:
(i) A predetermined dollar amount, or a dollar amount determined in accordance with a predetermined formula (such as a fixed percentage of the dollar amount of total assets placed in an account with the broker or dealer), that does not vary based on:
(A) The revenue generated by or the profitability of securities transactions conducted by the customer with the broker or dealer; or
(B) The quantity, price, or identity of securities transactions conducted over time by the customer with the broker or dealer; or
(C) The number of customer referrals made; or
(ii) A dollar amount based on a fixed percentage of the revenues received by the broker or dealer for investment banking services provided to the customer.
(e) Inflation adjustments—(1) In general. On April 1, 2012, and on the 1st day of each subsequent 5-year period, each dollar amount in paragraphs (d)(1) and (d)(2) of this section shall be adjusted by:
(i) Dividing the annual value of the Personal Consumption Expenditures Chain-Type Price Index (or any successor index thereto), as published by the Department of Commerce, for the calendar year preceding the calendar year in which the adjustment is being made by the annual value of such index (or successor) for the calendar year ending December 31, 2006; and
(ii) Multiplying the dollar amount by the quotient obtained in paragraph (e)(1)(i) of this section.
(2) Rounding. If the adjusted dollar amount determined under paragraph (e)(1) of this section for any period is not a multiple of $100,000, the amount so determined shall be rounded to the nearest multiple of $100,000.
§ 218.721 Defined terms relating to the trust and fiduciary activities exception from the definition of “broker.”
(a) Defined terms for chiefly compensated test. For purposes of this part and section 3(a)(4)(B)(ii) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)), the following terms shall have the meaning provided:
(1) Chiefly compensated—account-by-account test. Chiefly compensated shall mean the relationship-total compensation percentage for each trust or fiduciary account of the bank is greater than 50 percent.
(2) The relationship-total compensation percentage for a trust or fiduciary account shall be the mean of the yearly compensation percentage for the account for the immediately preceding year and the yearly compensation percentage for the account for the year immediately preceding that year.
(3) The yearly compensation percentage for a trust or fiduciary account shall be
(i) Equal to the relationship compensation attributable to the trust or fiduciary account during the year divided by the total compensation attributable to the trust or fiduciary account during that year, with the quotient expressed as a percentage; and
(ii) Calculated within 60 days of the end of the year.
(4) Relationship compensation means any compensation a bank receives attributable to a trust or fiduciary account that consists of:
(i) An administration fee, including, without limitation, a fee paid—
(A) For personal services, tax preparation, or real estate settlement services;
(B) For disbursing funds from, or for recording receipt of payments to, a trust or fiduciary account;
(C) In connection with securities lending or borrowing transactions;
(D) For custody services; or
(E) In connection with an investment in shares of an investment company for personal service, the maintenance of shareholder accounts or any service described in paragraph (a)(4)(iii)(C) of this section;
(ii) An annual fee (payable on a monthly, quarterly or other basis), including, without limitation, a fee paid for assessing investment performance or for reviewing compliance with applicable investment guidelines or restrictions;
(iii) A fee based on a percentage of assets under management, including, without limitation, a fee paid
(A) Pursuant to a plan under § 270.12b-1;
(B) In connection with an investment in shares of an investment company for personal service or the maintenance of shareholder accounts;
(C) Based on a percentage of assets under management for any of the following services—
(1) Providing transfer agent or sub-transfer agent services for beneficial owners of investment company shares;
(2) Aggregating and processing purchase and redemption orders for investment company shares;
(3) Providing beneficial owners with account statements showing their purchases, sales, and positions in the investment company;
(4) Processing dividend payments for the investment company;
(5) Providing sub-accounting services to the investment company for shares held beneficially;
(6) Forwarding communications from the investment company to the beneficial owners, including proxies, shareholder reports, dividend and tax notices, and updated prospectuses; or
(7) Receiving, tabulating, and transmitting proxies executed by beneficial owners of investment company shares;
(D) Based on the financial performance of the assets in an account; or
(E) For the types of services described in paragraph (a)(4)(i)(C) or (D) of this section if paid based on a percentage of assets under management;
(iv) A flat or capped per order processing fee, paid by or on behalf of a customer or beneficiary, that is equal to not more than the cost incurred by the bank in connection with executing securities transactions for trust or fiduciary accounts; or
(v) Any combination of such fees.
(5) Trust or fiduciary account means an account for which the bank acts in a trustee or fiduciary capacity as defined in section 3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)).
(6) Year means a calendar year, or fiscal year consistently used by the bank for recordkeeping and reporting purposes.
(b) Revenues derived from transactions conducted under other exceptions or exemptions. For purposes of calculating the yearly compensation percentage for a trust or fiduciary account, a bank may at its election exclude the compensation associated with any securities transaction conducted in accordance with the exceptions in section 3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii)-(xi) of the Act (15 U.S.C. 78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)-(xi)) and the rules issued thereunder, including any exemption related to such exceptions jointly adopted by the Commission and the Board, provided that if the bank elects to exclude such compensation, the bank must exclude the compensation from both the relationship compensation (if applicable) and total compensation for the account.
(c) Advertising restrictions—
(1) In general. A bank complies with the advertising restriction in section 3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II)) if advertisements by or on behalf of the bank do not advertise—
(i) That the bank provides securities brokerage services for trust or fiduciary accounts except as part of advertising the bank’s broader trust or fiduciary services; and
(ii) The securities brokerage services provided by the bank to trust or fiduciary accounts more prominently than the other aspects of the trust or fiduciary services provided to such accounts.
(2) Advertisement. For purposes of this section, the term advertisement has the same meaning as in § 218.760(h)(2).
§ 218.722 Exemption allowing banks to calculate trust and fiduciary compensation on a bank-wide basis.
(a) General. A bank is exempt from meeting the “chiefly compensated” condition in section 3(a)(4)(B)(ii)(I) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(I)) to the extent that it effects transactions in securities for any account in a trustee or fiduciary capacity within the scope of section 3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)) if:
(1) The bank meets the other conditions for the exception from the definition of the term “broker” under sections 3(a)(4)(B)(ii) and 3(a)(4)(C) of the Act (15 U.S.C. 78c(a)(4)(B)(ii) and 15 U.S.C. 78c(a)(4)(C)), including the advertising restrictions in section 3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(II) as implemented by § 218.721(c); and
(2) The aggregate relationship-total compensation percentage for the bank’s trust and fiduciary business is at least 70 percent.
(b) Aggregate relationship-total compensation percentage. For purposes of this section, the aggregate relationship-total compensation percentage for a bank’s trust and fiduciary business shall be the mean of the bank’s yearly bank-wide compensation percentage for the immediately preceding year and the bank’s yearly bank-wide compensation percentage for the year immediately preceding that year.
(c) Yearly bank-wide compensation percentage. For purposes of this section, a bank’s yearly bank-wide compensation percentage for a year shall be
(1) Equal to the relationship compensation attributable to the bank’s trust and fiduciary business as a whole during the year divided by the total compensation attributable to the bank’s trust and fiduciary business as a whole during that year, with the quotient expressed as a percentage; and
(2) Calculated within 60 days of the end of the year.
(d) Revenues derived from transactions conducted under other exceptions or exemptions. For purposes of calculating the yearly compensation percentage for a trust or fiduciary account, a bank may at its election exclude the compensation associated with any securities transaction conducted in accordance with the exceptions in section 3(a)(4)(B)(i) or sections 3(a)(4)(B)(iii)-(xi) of the Act (15 U.S.C. 78c(a)(4)(B)(i) or 78c(a)(4)(B)(iii)-(xi)) and the rules issued thereunder, including any exemption related to such sections jointly adopted by the Commission and the Board, provided that if the bank elects to exclude such compensation, the bank must exclude the compensation from both the relationship compensation (if applicable) and total compensation of the bank.
§ 218.723 Exemptions for special accounts, transferred accounts, foreign branches and a de minimis number of accounts.
(a) Short-term accounts. A bank may, in determining its compliance with the chiefly compensated test in § 218.721(a)(1) or § 218.722(a)(2), exclude any trust or fiduciary account that had been open for a period of less than 3 months during the relevant year.
(b) Accounts acquired as part of a business combination or asset acquisition. For purposes of determining compliance with the chiefly compensated test in § 218.721(a)(1) or § 218.722(a)(2), any trust or fiduciary account that a bank acquired from another person as part of a merger, consolidation, acquisition, purchase of assets or similar transaction may be excluded by the bank for 12 months after the date the bank acquired the account from the other person.
(c) Non-shell foreign branches—(1) Exemption. For purposes of determining compliance with the chiefly compensated test in § 218.722(a)(2), a bank may exclude the trust or fiduciary accounts held at a non-shell foreign branch of the bank if the bank has reasonable cause to believe that trust or fiduciary accounts of the foreign branch held by or for the benefit of a U.S. person as defined in 17 CFR 230.902(k) constitute less than 10 percent of the total number of trust or fiduciary accounts of the foreign branch.
(2) Rules of construction. Solely for purposes of this paragraph (c), a bank will be deemed to have reasonable cause to believe that a trust or fiduciary account of a foreign branch of the bank is not held by or for the benefit of a U.S. person if
(i) The principal mailing address maintained and used by the foreign branch for the accountholder(s) and beneficiary(ies) of the account is not in the United States; or
(ii) The records of the foreign branch indicate that the accountholder(s) and beneficiary(ies) of the account is not a U.S. person as defined in 17 CFR 230.902(k).
(3) Non-shell foreign branch. Solely for purposes of this paragraph (c), a non-shell foreign branch of a bank means a branch of the bank
(i) That is located outside the United States and provides banking services to residents of the foreign jurisdiction in which the branch is located; and
(ii) For which the decisions relating to day-to-day operations and business of the branch are made at that branch and are not made by an office of the bank located in the United States.
(d) Accounts transferred to a broker or dealer or other unaffiliated entity. Notwithstanding section 3(a)(4)(B)(ii)(I) of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(I)) and § 218.721(a)(1) of this part, a bank operating under § 218.721(a)(1) shall not be considered a broker for purposes of section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) solely because a trust or fiduciary account does not meet the chiefly compensated standard in § 218.721(a)(1) if, within 3 months of the end of the year in which the account fails to meet such standard, the bank transfers the account or the securities held by or on behalf of the account to a broker or dealer registered under section 15 of the Act (15 U.S.C. 78o) or another entity that is not an affiliate of the bank and is not required to be registered as a broker or dealer.
(e) De minimis exclusion. A bank may, in determining its compliance with the chiefly compensated test in § 218.721(a)(1), exclude a trust or fiduciary account if:
(1) The bank maintains records demonstrating that the securities transactions conducted by or on behalf of the account were undertaken by the bank in the exercise of its trust or fiduciary responsibilities with respect to the account;
(2) The total number of accounts excluded by the bank under this paragraph (d) does not exceed the lesser of—
(i) 1 percent of the total number of trust or fiduciary accounts held by the bank, provided that if the number so obtained is less than 1 the amount shall be rounded up to 1; or
(ii) 500; and
(3) The bank did not rely on this paragraph (e) with respect to such account during the immediately preceding year.
§ 218.740 Defined terms relating to the sweep accounts exception from the definition of “broker.”
For purposes of section 3(a)(4)(B)(v) of the Act (15 U.S.C. 78c(a)(4)(B)(v)), the following terms shall have the meaning provided:
(a) Deferred sales load has the same meaning as in 17 CFR 270.6c-10.
(b) Money market fund means an open-end company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) that is regulated as a money market fund pursuant to 17 CFR 270.2a-7.
(c)(1) No-load, in the context of an investment company or the securities issued by an investment company, means, for securities of the class or series in which a bank effects transactions, that:
(i) That class or series is not subject to a sales load or a deferred sales load; and
(ii) Total charges against net assets of that class or series of the investment company’s securities for sales or sales promotion expenses, for personal service, or for the maintenance of shareholder accounts do not exceed 0.25 of 1% of average net assets annually.
(2) For purposes of this definition, charges for the following will not be considered charges against net assets of a class or series of an investment company’s securities for sales or sales promotion expenses, for personal service, or for the maintenance of shareholder accounts:
(i) Providing transfer agent or sub-transfer agent services for beneficial owners of investment company shares;
(ii) Aggregating and processing purchase and redemption orders for investment company shares;
(iii) Providing beneficial owners with account statements showing their purchases, sales, and positions in the investment company;
(iv) Processing dividend payments for the investment company;
(v) Providing sub-accounting services to the investment company for shares held beneficially;
(vi) Forwarding communications from the investment company to the beneficial owners, including proxies, shareholder reports, dividend and tax notices, and updated prospectuses; or
(vii) Receiving, tabulating, and transmitting proxies executed by beneficial owners of investment company shares.
(d) Open-end company has the same meaning as in section 5(a)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-5(a)(1)).
(e) Sales load has the same meaning as in section 2(a)(35) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(35)).
§ 218.741 Exemption for banks effecting transactions in money market funds.
(a) A bank is exempt from the definition of the term “broker” under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) to the extent that it effects transactions on behalf of a customer in securities issued by a money market fund, provided that:
(1) The bank either
(i) Provides the customer, directly or indirectly, any other product or service, the provision of which would not, in and of itself, require the bank to register as a broker or dealer under section 15(a) of the Act (15 U.S.C. 78o(a)); or
(ii) Effects the transactions on behalf of another bank as part of a program for the investment or reinvestment of deposit funds of, or collected by, the other bank; and
(2)(i) The class or series of securities is no-load; or
(ii) If the class or series of securities is not no-load
(A) The bank or, if applicable, the other bank described in paragraph (a)(1)(B) of this section provides the customer, not later than at the time the customer authorizes the securities transactions, a prospectus for the securities; and
(B) The bank and, if applicable, the other bank described in paragraph (a)(1)(B) of this section do not characterize or refer to the class or series of securities as no-load.
(b) Definitions. For purposes of this section:
(1) Money market fund has the same meaning as in § 218.740(b).
(2) No-load has the same meaning as in § 218.740(c).
§ 218.760 Exemption from definition of “broker” for banks accepting orders to effect transactions in securities from or on behalf of custody accounts.
(a) Employee benefit plan accounts and individual retirement accounts or similar accounts. A bank is exempt from the definition of the term “broker” under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) to the extent that, as part of its customary banking activities, the bank accepts orders to effect transactions in securities for an employee benefit plan account or an individual retirement account or similar account for which the bank acts as a custodian if:
(1) Employee compensation restriction and additional conditions. The bank complies with the employee compensation restrictions in paragraph (c) of this section and the other conditions in paragraph (d) of this section;
(2) Advertisements. Advertisements by or on behalf of the bank do not:
(i) Advertise that the bank accepts orders for securities transactions for employee benefit plan accounts or individual retirement accounts or similar accounts, except as part of advertising the other custodial or safekeeping services the bank provides to these accounts; or
(ii) Advertise that such accounts are securities brokerage accounts or that the bank’s safekeeping and custody services substitute for a securities brokerage account; and
(3) Advertisements and sales literature for individual retirement or similar accounts. Advertisements and sales literature issued by or on behalf of the bank do not describe the securities order-taking services provided by the bank to individual retirement accounts or similar accounts more prominently than the other aspects of the custody or safekeeping services provided by the bank to these accounts.
(b) Accommodation trades for other custodial accounts. A bank is exempt from the definition of the term “broker” under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) to the extent that, as part of its customary banking activities, the bank accepts orders to effect transactions in securities for an account for which the bank acts as custodian other than an employee benefit plan account or an individual retirement account or similar account if:
(1) Accommodation. The bank accepts orders to effect transactions in securities for the account only as an accommodation to the customer;
(2) Employee compensation restriction and additional conditions. The bank complies with the employee compensation restrictions in paragraph (c) of this section and the other conditions in paragraph (d) of this section;
(3) Bank fees. Any fee charged or received by the bank for effecting a securities transaction for the account does not vary based on:
(i) Whether the bank accepted the order for the transaction; or
(ii) The quantity or price of the securities to be bought or sold;
(4) Advertisements. Advertisements by or on behalf of the bank do not state that the bank accepts orders for securities transactions for the account;
(5) Sales literature. Sales literature issued by or on behalf of the bank:
(i) Does not state that the bank accepts orders for securities transactions for the account except as part of describing the other custodial or safekeeping services the bank provides to the account; and
(ii) Does not describe the securities order-taking services provided to the account more prominently than the other aspects of the custody or safekeeping services provided by the bank to the account; and
(6) Investment advice and recommendations. The bank does not provide investment advice or research concerning securities to the account, make recommendations to the account concerning securities or otherwise solicit securities transactions from the account; provided, however, that nothing in this paragraph (b)(6) shall prevent a bank from:
(i) Publishing, using or disseminating advertisements and sales literature in accordance with paragraphs (b)(4) and (b)(5) of this section; and
(ii) Responding to customer inquiries regarding the bank’s safekeeping and custody services by providing:
(A) Advertisements or sales literature consistent with the provisions of paragraphs (b)(4) and (b)(5) of this section describing the safekeeping, custody and related services that the bank offers;
(B) A prospectus prepared by a registered investment company, or sales literature prepared by a registered investment company or by the broker or dealer that is the principal underwriter of the registered investment company pertaining to the registered investment company’s products;
(C) Information based on the materials described in paragraphs (b)(6)(ii)(A) and (B) of this section; or
(iii) Responding to inquiries regarding the bank’s safekeeping, custody or other services, such as inquiries concerning the customer’s account or the availability of sweep or other services, so long as the bank does not provide investment advice or research concerning securities to the account or make a recommendation to the account concerning securities.
(c) Employee compensation restriction. A bank may accept orders pursuant to this section for a securities transaction for an account described in paragraph (a) or (b) of this section only if no bank employee receives compensation, including a fee paid pursuant to a plan under 17 CFR 270.12b-1, from the bank, the executing broker or dealer, or any other person that is based on whether a securities transaction is executed for the account or that is based on the quantity, price, or identity of securities purchased or sold by such account, provided that nothing in this paragraph shall prohibit a bank employee from receiving compensation that would not be considered incentive compensation under § 218.700(b)(1) as if a referral had been made by the bank employee, or any compensation described in § 218.700(b)(2).
(d) Other conditions. A bank may accept orders for a securities transaction for an account for which the bank acts as a custodian under this section only if the bank:
(1) Does not act in a trustee or fiduciary capacity (as defined in section 3(a)(4)(D) of the Act (15 U.S.C. 78c(a)(4)(D)) with respect to the account, other than as a directed trustee;
(2) Complies with section 3(a)(4)(C) of the Act (15 U.S.C. 78c(a)(4)(C)) in handling any order for a securities transaction for the account; and
(3) Complies with section 3(a)(4)(B)(viii)(II) of the Act (15 U.S.C. 78c(a)(4)(B)(viii)(II)) regarding carrying broker activities.
(e) Non-fiduciary administrators and recordkeepers. A bank that acts as a non-fiduciary and non-custodial administrator or recordkeeper for an employee benefit plan account for which another bank acts as custodian may rely on the exemption provided in this section if:
(1) Both the custodian bank and the administrator or recordkeeper bank comply with paragraphs (a), (c) and (d) of this section; and
(2) The administrator or recordkeeper bank does not execute a cross-trade with or for the employee benefit plan account or net orders for securities for the employee benefit plan account, other than:
(i) Crossing or netting orders for shares of open-end investment companies not traded on an exchange, or
(ii) Crossing orders between or netting orders for accounts of the custodian bank that contracted with the administrator or recordkeeper bank for services.
(f) Subcustodians. A bank that acts as a subcustodian for an account for which another bank acts as custodian may rely on the exemptions provided in this section if:
(1) For employee benefit plan accounts and individual retirement accounts or similar accounts, both the custodian bank and the subcustodian bank meet the requirements of paragraphs (a), (c) and (d) of this section;
(2) For other custodial accounts, both the custodian bank and the subcustodian bank meet the requirements of paragraphs (b), (c) and (d) of this section; and
(3) The subcustodian bank does not execute a cross-trade with or for the account or net orders for securities for the account, other than:
(i) Crossing or netting orders for shares of open-end investment companies not traded on an exchange, or
(ii) Crossing orders between or netting orders for accounts of the custodian bank.
(g) Evasions. In considering whether a bank meets the terms of this section, both the form and substance of the relevant account(s), transaction(s) and activities (including advertising activities) of the bank will be considered in order to prevent evasions of the requirements of this section.
(h) Definitions. When used in this section:
(1) Account for which the bank acts as a custodian means an account that is:
(i) An employee benefit plan account for which the bank acts as a custodian;
(ii) An individual retirement account or similar account for which the bank acts as a custodian;
(iii) An account established by a written agreement between the bank and the customer that sets forth the terms that will govern the fees payable to, and rights and obligations of, the bank regarding the safekeeping or custody of securities; or
(iv) An account for which the bank acts as a directed trustee.
(2) Advertisement means any material that is published or used in any electronic or other public media, including any Web site, newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or telephone directories (other than routine listings).
(3) Directed trustee means a trustee that does not exercise investment discretion with respect to the account.
(4) Employee benefit plan account means a pension plan, retirement plan, profit sharing plan, bonus plan, thrift savings plan, incentive plan, or other similar plan, including, without limitation, an employer-sponsored plan qualified under section 401(a) of the Internal Revenue Code (26 U.S.C. 401(a)), a governmental or other plan described in section 457 of the Internal Revenue Code (26 U.S.C. 457), a tax-deferred plan described in section 403(b) of the Internal Revenue Code (26 U.S.C. 403(b)), a church plan, governmental, multiemployer or other plan described in section 414(d), (e) or (f) of the Internal Revenue Code (26 U.S.C. 414(d), (e) or (f)), an incentive stock option plan described in section 422 of the Internal Revenue Code (26 U.S.C. 422); a Voluntary Employee Beneficiary Association Plan described in section 501(c)(9) of the Internal Revenue Code (26 U.S.C. 501(c)(9)), a non-qualified deferred compensation plan (including a rabbi or secular trust), a supplemental or mirror plan, and a supplemental unemployment benefit plan.
(5) Individual retirement account or similar account means an individual retirement account as defined in section 408 of the Internal Revenue Code (26 U.S.C. 408), Roth IRA as defined in section 408A of the Internal Revenue Code (26 U.S.C. 408A), health savings account as defined in section 223(d) of the Internal Revenue Code (26 U.S.C. 223(d)), Archer medical savings account as defined in section 220(d) of the Internal Revenue Code (26 U.S.C. 220(d)), Coverdell education savings account as defined in section 530 of the Internal Revenue Code (26 U.S.C. 530), or other similar account.
(6) Sales literature means any written or electronic communication, other than an advertisement, that is generally distributed or made generally available to customers of the bank or the public, including circulars, form letters, brochures, telemarketing scripts, seminar texts, published articles, and press releases concerning the bank’s products or services.
(7) Principal underwriter has the same meaning as in section 2(a)(29) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(29)).
§ 218.771 Exemption from the definition of “broker” for banks effecting transactions in securities issued pursuant to Regulation S.
(a) A bank is exempt from the definition of the term “broker” under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent that, as agent, the bank:
(1) Effects a sale in compliance with the requirements of 17 CFR 230.903 of an eligible security to a purchaser who is not in the United States;
(2) Effects, by or on behalf of a person who is not a U.S. person under 17 CFR 230.902(k), a resale of an eligible security after its initial sale with a reasonable belief that the eligible security was initially sold outside of the United States within the meaning of and in compliance with the requirements of 17 CFR 230.903 to a purchaser who is not in the United States or a registered broker or dealer, provided that if the resale is made prior to the expiration of any applicable distribution compliance period specified in 17 CFR 230.903(b)(2) or (b)(3), the resale is made in compliance with the requirements of 17 CFR 230.904; or
(3) Effects, by or on behalf of a registered broker or dealer, a resale of an eligible security after its initial sale with a reasonable belief that the eligible security was initially sold outside of the United States within the meaning of and in compliance with the requirements of 17 CFR 230.903 to a purchaser who is not in the United States, provided that if the resale is made prior to the expiration of any applicable distribution compliance period specified in 17 CFR 230.903(b)(2) or (b)(3), the resale is made in compliance with the requirements of 17 CFR 230.904.
(b) Definitions. For purposes of this section:
(1) Distributor has the same meaning as in 17 CFR 230.902(d).
(2) Eligible security means a security that:
(i) Is not being sold from the inventory of the bank or an affiliate of the bank; and
(ii) Is not being underwritten by the bank or an affiliate of the bank on a firm-commitment basis, unless the bank acquired the security from an unaffiliated distributor that did not purchase the security from the bank or an affiliate of the bank.
(3) Purchaser means a person who purchases an eligible security and who is not a U.S. person under 17 CFR 230.902(k).
§ 218.772 Exemption from the definition of “broker” for banks engaging in securities lending transactions.
(a) A bank is exempt from the definition of the term “broker” under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)), to the extent that, as an agent, it engages in or effects securities lending transactions, and any securities lending services in connection with such transactions, with or on behalf of a person the bank reasonably believes to be:
(1) A qualified investor as defined in section 3(a)(54)(A) of the Act (15 U.S.C. 78c(a)(54)(A)); or
(2) Any employee benefit plan that owns and invests on a discretionary basis, not less than $ 25,000,000 in investments.
(b) Securities lending transaction means a transaction in which the owner of a security lends the security temporarily to another party pursuant to a written securities lending agreement under which the lender retains the economic interests of an owner of such securities, and has the right to terminate the transaction and to recall the loaned securities on terms agreed by the parties.
(c) Securities lending services means:
(1) Selecting and negotiating with a borrower and executing, or directing the execution of the loan with the borrower;
(2) Receiving, delivering, or directing the receipt or delivery of loaned securities;
(3) Receiving, delivering, or directing the receipt or delivery of collateral;
(4) Providing mark-to-market, corporate action, recordkeeping or other services incidental to the administration of the securities lending transaction;
(5) Investing, or directing the investment of, cash collateral; or
(6) Indemnifying the lender of securities with respect to various matters.
§ 218.775 Exemption from the definition of “broker” for banks effecting certain excepted or exempted transactions in investment company securities.
(a) A bank that meets the conditions for an exception or exemption from the definition of the term “broker” except for the condition in section 3(a)(4)(C)(i) of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is exempt from such condition to the extent that it effects a transaction in a covered security, if:
(1) Any such security is neither traded on a national securities exchange nor through the facilities of a national securities association or an interdealer quotation system;
(2) The security is distributed by a registered broker or dealer, or the sales charge is no more than the amount permissible for a security sold by a registered broker or dealer pursuant to any applicable rules adopted pursuant to section 22(b)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-22(b)(1)) by a securities association registered under section 15A of the Act (15 U.S.C. 78o-3); and
(3) Any such transaction is effected:
(i) Through the National Securities Clearing Corporation; or
(ii) Directly with a transfer agent or with an insurance company or separate account that is excluded from the definition of transfer agent in Section 3(a)(25) of the Act.
(b) Definitions. For purposes of this section:
(1) Covered security means:
(i) Any security issued by an open-end company, as defined by section 5(a)(1) of the Investment Company Act (15 U.S.C. 80a-5(a)(1)), that is registered under that Act; and
(ii) Any variable insurance contract funded by a separate account, as defined by section 2(a)(37) of the Investment Company Act (15 U.S.C. 80a-2(a)(37)), that is registered under that Act.
(2) Interdealer quotation system has the same meaning as in 17 CFR 240.15c2-11.
(3) Insurance company has the same meaning as in 15 U.S.C. 77b(a)(13).
§ 218.776 Exemption from the definition of “broker” for banks effecting certain excepted or exempted transactions in a company’s securities for its employee benefit plans.
(a) A bank that meets the conditions for an exception or exemption from the definition of the term “broker” except for the condition in section 3(a)(4)(C)(i) of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is exempt from such condition to the extent that it effects a transaction in the securities of a company directly with a transfer agent acting for the company that issued the security, if:
(1) No commission is charged with respect to the transaction;
(2) The transaction is conducted by the bank solely for the benefit of an employee benefit plan account;
(3) Any such security is obtained directly from:
(i) The company; or
(ii) An employee benefit plan of the company; and
(4) Any such security is transferred only to:
(i) The company; or
(ii) An employee benefit plan of the company.
(b) For purposes of this section, the term employee benefit plan account has the same meaning as in § 218.760(h)(4).
§ 218.780 Exemption for banks from liability under section 29 of the Securities Exchange Act of 1934.
(a) No contract entered into before March 31, 2009, shall be void or considered voidable by reason of section 29(b) of the Act (15 U.S.C. 78cc(b)) because any bank that is a party to the contract violated the registration requirements of section 15(a) of the Act (15 U.S.C. 78o(a)), any other applicable provision of the Act, or the rules and regulations thereunder based solely on the bank’s status as a broker when the contract was created.
(b) No contract shall be void or considered voidable by reason of section 29(b) of the Act (15 U.S.C. 78cc(b)) because any bank that is a party to the contract violated the registration requirements of section 15(a) of the Act (15 U.S.C. 78o(a)) or the rules and regulations thereunder based solely on the bank’s status as a broker when the contract was created, if:
(1) At the time the contract was created, the bank acted in good faith and had reasonable policies and procedures in place to comply with section 3(a)(4)(B) of the Act (15 U.S.C. 78c(a)(4)(B)) and the rules and regulations thereunder; and
(2) At the time the contract was created, any violation of the registration requirements of section 15(a) of the Act by the bank did not result in any significant harm or financial loss or cost to the person seeking to void the contract.
§ 218.781 Exemption from the definition of “broker” for banks for a limited period of time.
A bank is exempt from the definition of the term “broker” under section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) until the first day of its first fiscal year commencing after September 30, 2008.
PART 219—REIMBURSEMENT FOR PROVIDING FINANCIAL RECORDS; RECORDKEEPING REQUIREMENTS FOR CERTAIN FINANCIAL RECORDS (REGULATION S)
Subpart A—Reimbursement to Financial Institutions for Providing Financial Records
§ 219.1 Authority, purpose and scope.
This subpart of Regulation S (12 CFR part 219, subpart A) is issued by the Board of Governors of the Federal Reserve System (the Board) under section 1115 of the Right to Financial Privacy Act (the Act) (12 U.S.C. 3415). It establishes the rates and conditions for reimbursement of reasonably necessary costs directly incurred by financial institutions in assembling or providing customer financial records to a government authority pursuant to the Act.
§ 219.2 Definitions.
For the purposes of this subpart, the following definitions shall apply:
Customer means any person or authorized representative of that person who uses any service of a financial institution, or for whom a financial institution acts or has acted as a fiduciary in relation to an account maintained in the person’s name. Customer does not include corporations or partnerships comprised of more than five persons.
Financial institution means any office of a bank, savings bank, card issuer as defined in section 103 of the Consumers Credit Protection Act (15 U.S.C. 1602(n)), industrial loan company, trust company, savings association, building and loan, or homestead association (including cooperative banks), credit union, or consumer finance institution, located in any State or territory of the United States, the District of Columbia, Puerto Rico, Guam, American Samoa, or the Virgin Islands.
Financial record means an original or copy of, or information known to have been derived from, any record held by a financial institution pertaining to a customer’s relationship with the financial institution.
Government authority means any agency or department of the United States, or any officer, employee or agent thereof.
Person means an individual or a partnership of five or fewer individuals.
§ 219.3 Cost reimbursement.
(a) Fees payable. (1) Except as provided in § 219.4 of this part, a government authority seeking access to financial records pertaining to a customer, by written request, through:
(i) A court order;
(ii) A subpoena issued pursuant to the Federal Rules of Criminal Procedure or the Federal Rules of Civil Procedure; or
(iii) Other agency administrative procedures, including administrative subpoenas, voluntary requests, or other process shall reimburse the financial institution for reasonably necessary costs directly incurred in searching for, reproducing or transporting books, papers, records, or other data as set forth in this section.
(2) The reimbursement schedule for a financial institution is set forth in appendix A to this section. If a financial institution has financial records that are stored at an independent storage facility that charges a fee to search for, reproduce, or transport particular records requested, these costs are considered to be directly incurred by the financial institution and may be included in the reimbursement.
(b) Search and processing costs. (1) Reimbursement of search and processing costs shall cover the total amount of personnel time spent in locating, retrieving, reproducing, and preparing financial records for shipment. Search and processing costs shall not cover analysis of material or legal advice.
(2) If itemized separately, search and processing costs may include the actual cost of extracting electronically stored records, based on computer time and necessary supplies; however, personnel time for computer searches may be paid for at the rates set for computer support specialist, specified in appendix A to this section, but only when compliance with the request for information requires that the financial institution use programming or other higher level technical services of a computer support specialist in order to reproduce electronically stored information in the format requested by the government authority.
(3) Rates for Search and Processing in appendix A shall be recalculated as follows on October 1, 2012, and on October 1 of each subsequent three-year period utilizing Bureau of Labor Statistics (“BLS”) data or equivalent data (as so designated by the Board) by replacing the existing hourly rates with the sum of:
(i) Base labor rate recalculation—Using the most recently available wage data from the Occupational Employment Statistics program (http://www.bls.gov/oes/home.htm) for the BLS industry category “Credit Intermediation and Related Activities” (NAICS Code Number 522000) (or successor category):
(A) [Clerical/Technical category] the average of the median hourly rates for the “Information and Records Clerk” and “Computer Operator” job categories (SOC Code Number 43-4199 and 43-9011) (or any successor job categories);
(B) [Manager/Supervisor category] the median hourly rate for the “first-line supervisors/managers of office” job category (SOC Code Number 43-1011) (or successor category), and
(C) [Computer Support Specialist category] the median hourly rate for the “computer support specialist” job category (SOC Code Number 15-1041) (or successor category); plus
(ii) Benefits Adjustment—an amount for each hourly rate category that is equal to the product of:
(A) The hourly rates set forth in paragraph (b)(3)(i) of this section, and
(B) The most recently available “percent of total compensation” represented by “total benefits” for the “Credit Intermediation and Related Activities” industry category (private sector) set out in the Employment Cost Trends section of the National Compensation Survey (http://data.bls.gov/PDQ/outside.jsp?survey=cm); and
(iii) If the recalculated rates for Search and Processing (including the Base labor rate and the benefits adjustment) are not a multiple of $1, the recalculated rates shall be rounded up to the next multiple of $1.
(c) Reproduction costs. The reimbursement rates for reproduction costs for requested information are set forth in appendix A to this section, subject to the Conditions for Payment set forth in § 219.5 of this part. Copies of photographs, films and other materials not listed in appendix A to this section are reimbursed at actual cost.
(d) Transportation or delivery costs. Reimbursement for transportation or delivery costs shall be for the reasonably necessary costs directly incurred to transport personnel to locate and retrieve the requested information, and to deliver such material to the place of examination.
| Reproduction: | |
| Photocopy, per page | $0.25 |
| Paper copies of microfiche, per frame | 0.25 |
| Duplicate Microfiche, per microfiche | 0.50 |
| Storage media | Actual cost. |
| Search and Processing: | |
| Clerical/Technical, hourly rate | 22.00 |
| Computer Support Specialist, hourly rate | 30.00 |
| Manager/Supervisory, hourly rate | 30.00 |
§ 219.4 Exceptions.
A financial institution is not entitled to reimbursement under this subpart for costs incurred in assembling or providing financial records or information related to:
(a) Security interests, bankruptcy claims, debt collection. Any financial records provided as an incident to perfecting a security interest, proving a claim in bankruptcy, or otherwise collecting on a debt owing either to the financial institution itself or in its role as a fiduciary.
(b) Government loan programs. Financial records that are necessary to permit the appropriate government authority to carry out its responsibilities under a government loan, loan guaranty or loan insurance program.
(c) Nonidentifiable information. Financial records that are not identified with or identifiable as being derived from the financial records of a particular customer.
(d) Financial supervisory agencies. Financial records disclosed to a financial supervisory agency in the exercise of its supervisory, regulatory, or monetary functions with respect to a financial institution.
(e) Internal Revenue summons. Financial records disclosed in accordance with procedures authorized by the Internal Revenue Code.
(f) Federally required reports. Financial records required to be reported in accordance with any federal statute or rule promulgated thereunder.
(g) Government civil or criminal litigation. Financial records sought by a government authority under the Federal Rules of Civil or Criminal Procedure or comparable rules of other courts in connection with litigation to which the government authority and the customer are parties.
(h) Administrative agency subpoenas. Financial records sought by a government authority pursuant to an administrative subpoena issued by an administrative law judge in an adjudicatory proceeding subject to 5 U.S.C. 554, and to which the government authority and the customer are parties.
(i) Investigation of financial institution or its noncustomer. Financial records sought by a government authority in connection with a lawful proceeding, investigation, examination, or inspection directed at the financial institution in possession of such records, or at an entity that is not a customer as defined in § 219.2 of this part.
(j) General Accounting Office requests. Financial records sought by the General Accounting Office pursuant to an authorized proceeding, investigation, examination, or audit directed at a government authority.
(k) Federal Housing Finance Board requests. Financial records or information sought by the Federal Housing Finance Board (FHFB) or any of the Federal home loan banks in the exercise of the FHFB’s authority to extend credit to financial institutions or others.
(l) Department of Veterans Affairs. The disclosure of the name and address of any customer to the Department of Veterans Affairs where such disclosure is necessary to, and used solely for, the proper administration of benefits programs under laws administered by that Department.
§ 219.5 Conditions for payment.
(a) Direct costs. Payment shall be made only for costs that are both directly incurred and reasonably necessary to provide requested material. Search and processing, reproduction, and transportation or delivery costs shall be considered separately when determining whether the costs are reasonably necessary. Photocopying or microfiche charges are reasonably necessary only if the institution has reproduced financial records that were not stored electronically (i.e., where the information requested was stored only on paper or in microfiche), or where the government authority making the request has specifically asked for printed copies of electronically stored records.
(b) Compliance with legal process, request, or authorization. No payment may be made to a financial institution until it satisfactorily complies with the legal process, the formal written request, or the customer authorization. When the legal process or formal written request is withdrawn, or the customer authorization is revoked, or where the customer successfully challenges disclosure to a grand jury or government authority, the financial institution shall be reimbursed for the reasonably necessary costs incurred in assembling the requested financial records prior to the time the financial institution is notified of such event.
(c) Itemized bill or invoice. No reimbursement is required unless a financial institution submits an itemized bill or invoice specifically detailing its search and processing, reproduction, and transportation costs. Search and processing time should be billed in 15-minute increments.
§ 219.6 Payment procedures.
(a) Notice to submit invoice. Promptly following a service of legal process or request, the court or government authority shall notify the financial institution that it must submit an itemized bill or invoice in order to obtain payment and shall furnish an address for this purpose.
(b) Special notice. If a grand jury or government authority withdraws the legal process or formal written request, or if the customer revokes the authorization, or if the legal process or request has been successfully challenged by the customer, the grand jury or government authority shall promptly notify the financial institution of these facts, and shall also notify the financial institution that it must submit an itemized bill or invoice in order to obtain payment of costs incurred prior to the time the financial institution receives this notice.
Subpart B—Recordkeeping and Reporting Requirements for Funds Transfers and Transmittals of Funds
§ 219.21 Authority, purpose and scope.
This subpart of Regulation S (12 CFR part 219, subpart B) is issued by the Board under the authority of section 21(b) of the Federal Deposit Insurance Act (12 U.S.C. 1829b), as amended by the Annunzio-Wylie Anti-Money Laundering Act of 1992 (Pub. L. 102-550, title XV; 106 Stat. 3672, 4044), which authorizes the Board and the Secretary of the Treasury jointly to prescribe recordkeeping and reporting requirements for domestic wire transfers by insured depository institutions; and which also requires the Board and the Treasury jointly to prescribe recordkeeping and reporting requirements for international wire transfers by insured depository institutions and by nonbank financial institutions. The definitions and recordkeeping and reporting requirements referenced in this subpart are promulgated and administered jointly by the Board and the Treasury and are codified in 31 CFR 1010.100, 1010.410(e), and 1020.410(a). This subpart does not apply to a particular person or class of persons or a particular transaction or class of transactions to the extent that the Treasury has determined that 31 CFR 1010.410(e) or 1020.410(a) do not apply to that person, transaction, or class of persons or transactions. These recordkeeping and reporting requirements will assist in the prosecution of money laundering activities and are determined to have a high degree of usefulness in criminal, tax or regulatory investigations or proceedings.
§ 219.22 Definitions.
The following terms are defined in 31 CFR 1010.100 under the joint authority of the Board and the Treasury:
§ 219.23 Recordkeeping and reporting requirements.
(a) Domestic and international funds transfers by insured depository institutions. The Board and the Treasury are authorized to promulgate jointly recordkeeping and reporting requirements for domestic and international funds transfers by insured depository institutions whenever the agencies determine that the maintenance of such records has a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. These regulations are codified at 31 CFR 1020.410(a). For the purposes of this subpart, the provisions of 31 CFR 1020.410(a) apply only to funds transfers by insured depository institutions.
(b) International transmittals of funds by financial institutions other than insured depository institutions. The Board and the Treasury are required to promulgate jointly reporting and recordkeeping requirements for international transmittals of funds by financial institutions, including brokers and dealers in securities and businesses that provide money transmitting services. In prescribing these requirements, the Board and the Treasury take into account the usefulness of these records in criminal, tax, or regulatory investigations or proceedings and the effect the recordkeeping will have on the cost and efficiency of the payment system. These regulations are codified at 31 CFR 1010.410(e). For the purposes of this subpart, the provisions of 31 CFR 1010.410(e) apply only to international transmittals of funds.
§ 219.24 Retention period.
All records that are required to be retained by this subpart shall be retained for a period of five years. All these records shall be filed or stored in such a way as to be accessible within a reasonable period of time, taking into consideration the nature of the record and the amount of time that has expired since the record was made. Any records required to be retained by this subpart shall be made available to the Board upon request.