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FED ER A L R ESER VE BANK
O F N EW YO RK
r C ircu lar
L
No. 8 7 8
M arch 26, 1980
1 “1
J
CREDIT RESTRAINT PROGRAM
Questions and Answers
To All Member Banks, and Others Concerned,
in the Second Federal Reserve District:
Printed on the following pages is a series of questions and answers regarding (1) Regula
tion CC (P art 229) of the Board of Governors of the Federal Reserve System (special deposits
—consumer credit, money market mutual funds, and nonmember commercial banks), (2) the Spe
cial Credit Restraint Program, (3) Marginal Reserves on Managed Liabilities (Regulation D ),
and (4) Application of Regulation Q to Bank Holding Companies. These questions and answers
represent the views of the legal staffs of the Federal Reserve Bank of New York and the Board of
Governors of the Federal Reserve System.
Additional questions regarding this material or other matters relating to the Credit Restraint
Program may be directed to the following:
Special Credit Restraint Program
Banking Institutions—
• Questions relating to the administration of the Program — Donald E. Schmid. Manager, Brink Analysis
Department (Tel. No. 212-791-6611).
• Questions relating to the completion of forms— Nathan Bednarsh, Chief, Bank Analysis Division (Tel.
No. 212-791-6710).
Finance companies and selected large corporations—
• Questions relating to the administration of the Program —Eugene P. Emond, Manager, Credit and Dis
count Department (Tel. No. 212-791-6146).
• Questions relating to the completion of forms— Credit Analysis Division (Tel. Nos. 212-791-6148, 6153
and 6154).
• Legal questions— Raleigh M. Tozer, Senior Attorney, Legal Department (Tel. No. 212-791-5009).
Consumer Credit Restraint Program
• Legal questions—Donald L. Bittker, Assistant Counsel, Legal Department (Tel. No. 212-791-5036).
• All other questions—Tel. Nos. 212-344-1358, 1359, 2258, 2259, 2876, 3858, 3864, 3865, 4117, 4118
and 4119.
Money Market Mutual Funds Program
• Legal questions—W alker F. Todd, Assistant Counsel, Legal Department (Tel. No. 212-791-5041).
• All other questions—Tel. Nos. 212-344-3923 and 3924.
Marginal Reserves ISpecial Deposits on Managed Liabilities
• Legal questions— Bradley K. Sabel, Assistant Counsel, Legal Department (Tel. No. 212-791-5033).
• All other questions—Thomas J. Campbell, Accounting Officer (Tel. No. 212-791-5262) ; also Bank Rela
tions Department (Tel. Nos. 212-791-6600 through 6606, 6071 and 6072).
Interest Rate Ceilings on Certain Bank Holding Company Obligations
• Questions relating to the Regulation Q amendment— Bank Relations Department (Tel. No. 212-791-6600
through 6606, 6071 and 6072) or Bank Regulations Division (Tel. No. 212-791-5914).
• Legal questions— Bradley K. Sabel, Assistant Counsel, Legal Department (Tel. No. 212-791-5033).
Surcharge on the Discount Rate
• All questions—Eugene P. Emond, Manager, Credit and Discount Department (Tel. No. 212-791-6146).
Additional copies of this circular will be furnished upon request to the Circulars Division of
this Bank.
T h o m a s M. T i m l e n ,
First Vice President.
Subpart A of Regulation CC —
A-l.
A-2.
A-3.
A-4.
Special deposits on consumer credit
Q:
R e g u l a t i o n Z, v a r i o u s state laws, and p o s s i b l y other
F e d e r a l 'regu l a t i o n s require a creditor to give a c o n
sumer advance n o t i c e (the Board's Di v i s i o n of Consumer
A f fairs has e s t i m a t e d this m a y range from 15 to 105
days' notice) of adverse changes in the terms of a c o n
sumer credit agreement.
Many c r e ditors believe that
in order to m i n i m i z e the amount of the special deposit
required by the Board's credit restraint r egulation
they will have to m o d i f y the terms of existing credit
accounts.
Will the Board amend R e g u l a t i o n Z and p r e
empt Federal and State law in order to accelerate the
effective d a tes of m o d i f i e d account terms?
A:
The matter will be p r e s e n t e d to the Board
future for its c o nsideration.
Q:
A supplier of home heating fuels extends credit to its
customers p u r c h a s i n g such fuels.
Does this c o n s titute
covered credit?
A:
No.
Such c r e d i t falls w i t h i n the e x c lusion
extended by p r o v i d e r s of ut i l i t y services.
Q:
A farmer p u r c h a s e s a large d e n o m i n a t i o n time de p o s i t from
a financial institution.
During the course of the next
year, the farmer borrows funds from the financial insti
tution secured by the time deposit.
The p u r chase of the
b o r r o w i n g s is to p r o v i d e funds for a griculture p r o d u c t i o n
including living expenses of the farmer's family during
the p r o d u c t i o n period.
Do such b o r r o w i n g s constitute
covered credit?
A:
Such b o r r o w i n g s would be c onsidered to be for a griculture
and business p u r p o s e s and would not be covered credit.
Q:
A borrower refi n a n c e s his auto m o b i l e loan with the o r i g i
nal lender.
The original loan was not covered credit.
Does the refi n a n c i n g c o n s titute covered credit?
A:
R e f i n a n c i n g s of e x empt credit with the original creditor
does not c o n s t i t u t e covered credit.
However, if a d d i
tional funds beyond the o u t s t a n d i n g balance are provided
to the borrower, that additional amount would c o n s titute
covered credit.
If refinancing is obtained through a
creditor other than the original creditor, the entire
amount of the r e f i n ancing would c onstitute covered credit
in the near
for credit
- 2 -
A-5.
Q:
To which Federal Reserve Bank should a creditor report if
it has offices in m ore than one Federal Reserve D i s t rict?
A:
The creditor should select one of its offices as its
reporting office and should report to the Federal Reserve
Bank in the d i s t r i c t in which that reporting office is
located.
At its discretion, a Federal Reserve Bank m a y
instruct the creditor to file reports at a branch office
of the Reserve Bank.
A - 6. Q:
A-7.
Many c r e d itors b e l ieve that in order to mi n i m i z e the
amount of the special d e p osit they will have to m o d i f y
the terms of existing credit accounts.
Across the board
m o d i f i c a t i o n s of a c c ount terms m a y have a d i s p a r a t e
effect on c e r tain p r o t ected classes of borrowers.
Will
the Board amend or interpret R e g u l a t i o n B to p r o t e c t a
creditor that m a k e s such m o d i f i c a t i o n s against a l l e g a
tions of R e g u l a t i o n B v i o l a t i o n s ?
A:
This matter
Q:
May a creditor reduce the amount of its covered credit
o utstanding by any bad debt reserves it m a i n t a i n s for
that credit?
A:
No.
A - 8 . Q:
A:
A - 9. Q:
A:
A-10
,-10. Q:
is c u r r e n t l y under
consideration.
Covered credit t ransferred on n o n - r e c o u r s e basis is treated
as covered credit of the transferee.
Many tran s f e r o r s
"hold back" a p o r t i o n of the pur c h a s e price as a reserve
against losses resulting from p o s s i b l e breach of w a r r a n t y
upon transfer.
May the transferee reduce the amount of
its covered credit outs t a n d i n g by the amount of that "hold
back"?
No.
Is a retail installment sale in which the seller retains
the goods until the final p a y m e n t is mad e covered credit?
No, because it is secured credit in which the pr o c e e d s
of the cred i t are used to p u r chase the collateral.
Covered credit trans ferred on a n o n - r e c o u r s e basis is
treated as c o v ered credit of the transferee.
May the
transferee adjust its base in such a case?
-3-
A-ll.
A-12.
A-13.
A:
No, except in the case of c e r tain m e r g e r s or c o n s o l i d a
tions which are exp l a i n e d in Q u e s t i o n A-ll.
Q:
May a creditor that a c q uires 100 p e r c e n t of another
cre d i t o r ' s assets through a merger or c o n s o l i d a t i o n
adjust its base?
A:
Yes, such a creditor m a y adjust its base as follows:
(a) the acquiring creditor m a y increase its base as of
the date of a c q u i s i t i o n by adding the actual amount of
covered cred i t the acquiring creditor had on the base
date to the actual amount of covered credit the seller
had on the base date (for example, a creditor with $3
m i l l i o n of covered credit outs t a n d i n g on the base date
which a c q uires a creditor with $1.5 m i l l i o n of o u t
standing on the base date will have its base adjusted
$4.5 million); or, (b) if such data are not available,
the acquiring creditor m a y continue to use its p r e
a c q u i s i t i o n base, or in lieu of that, m a y select as
its new base the selling cre d i t o r ' s base.
If the
selling creditor is a subsidiary, its former parent
m u s t mak e a d j u s t m e n t s in its base if the base of the
s u b s i d i a r y is either assumed by, or added to the base
of, the acquiring organization.
Q:
May a creditor adjust its base when it acquires, other
than through merger or c o n s o l idation, either 100 p e r
cent of a c e r t a i n kind of covered credit (e.g., the
credit card o p e r a t i o n s of a financial institution) or
less than 100 p e r c e n t of all the covered credit of
another creditor?
A:
No.
However, if such sale is with recourse,
credit remains that of the selling creditor.
Q:
Many c r e d i t o r s have m ade second m o r t g a g e ("home equity")
loans (a) for home improvement, (b) for both home
i mprovement and other purposes, and (c) for purposes
unrelated to home improvement.
How should a creditor
w h i c h does not c u r r e n t l y c a t e g o r i z e by purpose its
second m o r t g a g e loans cal c u l a t e d the amount of the
those loans which are covered in computing its base?
A:
If the creditor w i s h e s to include any second m o r t g a g e
credit in its base, the creditor should take a r e p r e
s e n t ative sample of second m o r t g a g e loans outstanding
on the base date.
It should apply the p r o p o r t i o n of
loans in the sample that fall in c a t e g o r i e s (b) and
the covered
-4-
(c) above to the total in its base.
Thereafter, the
creditor is required to m a i n t a i n records w h i c h a d e
q u a t e l y d o c u m e n t the p u r poses of the loan, and that
po r t i o n of m u l t i p u r p o s e loans that c o n s t i t u t e s covered
credit should be reflected in its m o n t h l y reports.
A - 14.
Q:
In trying to d e t e r m i n e its base of covered credit, a
creditor only has records of its outs t a n d i n g credit
cate g o r i z e d by secured and unsecured lending.
Does
that creditor have to go through all of its individual
records on its secured loans to d e t e r m i n e w h i c h of
those loans were extended to purchase the coll a t e r a l ?
A:
No.
If such a creditor w i shes to include any secured
credit in its base, the creditor should take a r e p r e
sentative sample of its secured credit o u t s t a n d i n g on
the base date.
It should apply the p r o p o r t i o n of loans
in the sample w h ich were not extended to pur c h a s e the
collateral to the total amount of secured loans, and
should include the resulting amount in its base.
There
after, the creditor is required to m a i n t a i n records
which a d e q u a t e l y d o c u m e n t whether the c o l l ateral was
purchased with the loan proceeds.
If the c ollateral
was not pur c h a s e d with the loan proceeds, such credit
should be reflected in its m o n t h l y reports.
A - l 5. Q:
A:
A - l 6. Q:
If a creditor e x t ends cred i t that is secured by c o l l a t
eral pur c h a s e d from the loan p r o c e e d s but whose value
is less than the total amount of the loan (for example,
an a u t o mobile loan for $5,000 w h e r e the price of the
a u t o mobile is $4,000), ho w should the loan be treated?
If a creditor w i s h e s to include in its base any p o r t i o n
of such credit, the creditor should take a r e p r e s e n t a
tive sample of its secured loans outs t a n d i n g on the base
date.
It should apply the p r o p o r t i o n of loans in the
sample which are p a r t i a l l y secured by the c o l l a t e r a l
p u r c hased to the total amount of loans and should include
the resulting amount in its base.
Thereafter, the creditor
is required to m a i n t a i n records w h ich a d e q u a t e l y d o c u m e n t
the p u r poses of the loan, and that p o r t i o n of secured
loans that c o n s t i t u t e s covered credit should be reflected
in its m o n t h l y reports.
Will the Board of G o v e r n o r s revise the p r o g r a m to permit,
instead of a special deposit, a reduction in consumer
lending?
-5
A - 17.
A:
No.
W h e n a c r e d i t o r ' s covered credit is reduced,
amount of the special d e p o s i t is reduced.
Q:
Are c o m m i t m e n t s
to make consumer
A:
No.
include credit outstanding.
A - 1 8 . Q:
A - 19•
A - 20.
A - 21.
Loans onl y
loans
the
"covered credit"?
Is the p u r c h a s e of a g o v e r n m e n t secur i t y by a bank from
a consumer a "covered credit"?
Section 202(h) of the
C r edit Control A ct d e f ines " e x t ension of credit" as in
cluding the supplying of funds through the a c q u i s i t i o n
of securities.
A:
No.
Q:
If a retailer
higher base?
A:
No.
Covered c r e d i t e x t ended by the new store m u s t be
added with the reta i l e r ' s other covered credit.
Q:
Prior to the base date, a covered creditor has sold a
p o r t i o n of its consumer loan p o r t f o l i o on a wi t h o u t
recourse basis.
Is the amount of that credit "covered
credit" of the seller?
A:
No.
Covered cred i t sold on a n o n - r e c o u r s e basis on or
before March 14 should not be included in the seller's
base but is included in the covered credit of the buyer.
Q:
A law firm does p e r sonal legal work for clients and
issues bills p e r i o d i c a l l y .
Is covered credit extended
w h ile the work is being done?
Is covered credit
extended from the period that the bill is issued until
it is paid by the client?
A:
Covered credit is extended when the bill is issued,
long as the c r e ditor bills on a regular basis.
A - 2 2. Q:
A:
opens a new store, will
it receive a
so
A f o reign c o m p a n y has two United States subsi d i a r i e s
which are c o v e r e d creditors. May the two subsi d i a r i e s
file separate reports and m a i n t a i n separate special
deposits?
No.
As p r o v i d e d in S e c tion 229.2(g) of S u b part A of the
r e g u l a t i o n the foreign c o m p a n y and its two s ubsidiaries
c o n s t i t u t e one c o v ered creditor.
-6-
A-23.
A-24.
A - 25.
Q:
Is a holding c o m p a n y and all its subs i d i a r i e s a single
covered creditor for the purpose of filing reports and
m a i n t a i n i n g special deposits?
A:
A holding c o m pany and its m a j o r i t y - o w n e d s u b s i diaries
should file one report and m a i n t a i n one d e p o s i t account.
Q:
Whe n is c r e d i t - c a r d credit extended
deciding on the o u t s t anding amount?
A:
C r e d it-card cred i t is to be con s i d e r e d extended and
o utstanding whe n it is charged to the account of the
customer to w hom the c r edit card is issued.
Q:
The Board's press release states that "credit extended
for utilities, h e a l t h or e d u c ational services" is not
covered.
This c l e a r l y exempts all credit extended for
such services, regardless of who extends the credit.
On the other hand, the r e g u lation states that "covered
credit does not include . . . c r edit extended by . . .
pr o v i d e r s of utility, health, or e ducational services,
limiting the e x e m p t i o n to credit extended by pro v i d e r s
of such services.
W h i c h is correct?
A:
The r egulation is correct.
The e x e mption is limited
to credit e x t ended by p r o v i d e r s of utility, health,
or e d u cation services.
Note, however, that credit
extended under State or Federal G o v e r n m e n t g u a r a n t e e d
loan programs, such as student l o a n s , is also exempt.
Subpart C of R e g u l a t i o n CC and R e g u l a t i o n D —
special deposits on m a n a g e d l iabilities
C-l.
for p u r poses of
Marginal
reserves/
Q:
For p u r poses of d e t e r m i n i n g the amount of reduction in an
institution's m a n a g e d l i a b i lities base, are the assets of
a bank's foreign bra nc h e s representing loans to non- U n i t e d
States residents and balances due from foreign o f f ices
of other institutions taken into account in such c o m p u t a
tion?
A:
No.
A member bank's base will be reduced only by the
greater of 7 p e r c e n t of its m a n a g e d l i a b ilities base (as
d e t e rmined for the base period September 13-26, 1979) or
the reduction in its d o m estic office loans to non- U n i t e d
States residents and gross ba l a n c e s due from foreign
offices of other i n stitutions or the time d e p osits of
which are exempt from the rate l i m i tations of R e g u l a
tion Q p u r s u a n t to Section 217.3(g).
In the future,
after March 19, a bank's base will be further reduced
by dec r e a s e s in such d o m estic office loans and balances.
-7-
Special C r e d i t R e s t r a i n t P r o g r a m
S-l.
S-2.
Q:
Does the Special Credit R e s t r a i n t P r o gram apply to sales
of Federal funds?
A:
No.
Q:
Are loans to n o n - U n i t e d
lines under the Special
A:
Loans by d o m e s t i c or foreign offices to n o n - United States
residents are not covered.
However, ex c e s s i v e g r owth in
such loans m a y have an u n d e s i r a b l e effect on the liquidity
and capital assets of the bank.
Banks making such loans
should ensure, to the extent possible, that the proceeds
are used o u t s i d e the United States.
Regulation Q —
Interest
pan y obli g a t i o n s
Q-l.
States residents covered by g u i d e
Credit R e s t r a i n t Program?
rate ceilings on certain bank holding c o m
Q:
Are the interest rate ceilings appl i c a b l e to those bank
holding c o mpany o b l i g a t i o n s that were issued prior to
March 14, 1980, the e f f ective date of the amendment?
A:
No.
@FedFRASER