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AX CIRCULAR NO. A p ril 30, 1993 To All Depository Institutions in the Second Federal Reserve District, and Others Maintaining Sets of Board Regulations: E nclosed is a copy of a new R egulation H pam phlet, "M em bership o f S ta te Banking Institutions in th e F e d e ra l R eserve System," effective M arch 19, 1993, o f th e B oard of G overnors o f th e F e d e ra l R eserve System. T his pam phlet supersedes th e previous printing of th e regulation, d ated Jan u ary 25, 1991, an d all subsequent am endm ents thereto. C irculars D ivision FED ER A L R ESE R V E BANK O F NEW YORK B o a rd o f G o v e rn o rs o f th e F e d e ra l R eserv e S ystem Regulation H Membership of State Banking Institutions in the Federal Reserve System 12 C F R 208; as am ended effective M arch 19, 1993 .• ’ oFGOW-**. A n y inquiry relating to this regulation should be addressed to the Federal R eserve Bank o f the Federal R eserve D istrict in w hich the inquiry arises. M arch 1993 Contents Page Page Subpart A — General Provisions Section 20 8.1— D efinitions................ 1 Section 20 8.2— Eligibility requirements . Section 20 8.3— Insurance o f deposits . . . Section 208.4— Application for m em bership..................................... (a ) State bank other than a mutual savings b a n k ......................... 3 (b ) Mutual savings bank ................... (c ) Mutual savings bank which is not authorized to purchase stock of Federal Reserve Bank at time of adm ission ....................................... E xecution and filing o f application ..................................... Section 2 0 8 .5 — A pproval o f application . (j ) 2 2 3 3 3 (d ) 3 3 (a ) M atters given special consideration by B o a r d ............... 3 (b ) Procedure for adm ission to m em bership after approval o f application ..................................... 3 Section 2 0 8 .6 — Privileges and requirem ents o f m e m b e r s h ip ................ 4 Section 2 0 8 .7 — C onditions o f m e m b ersh ip .............................................. Section 2 0 8 .8 — B anking p r a c tic e s ........... ( a ) S c o p e ................................................ ( b ) W a iv e r .............................................. ( c ) E ffect on other banking practices ( d ) Letters o f credit and acceptances ( e ) Loans by state m em ber banks in identified flood hazard areas . . . . ( f ) State m em ber banks as transfer agents .............................................. ( g ) State m em ber banks as registered clearing a g e n c ie s ............................ (h ) Applications for stays of disciplinary sanctions or summary suspensions by a registered clearing a g e n c y .......... ( i) Application for review o f final disciplinary sanctions, denials o f participation or prohibitions or limitations o f access to services imposed by registered clearing agen cies......................................... 4 5 5 5 5 5 6 7 7 10 State m em ber banks, and subsidiaries, departm ents, and divisions thereof, w h ich are m unicipal securities d e a le r s .......... 11 ( k ) R ecordkeeping and confirm ation o f certain securities transactions effected by state m em ber b a n k s . . 12 A ppendix A to section 2 0 8 .8 — Sam ple n o t i c e s ................................................. 15 Section 2 0 8 .9 — E stablishm ent or m aintenance o f b ran ch es................ 16 ( a ) G e n e r a l............................................ 16 (b ) Branches in the U n ited States . . . 16 ( c ) A pplication for approval o f branches in the U n ited States . . . 17 ( d ) Foreign b r a n c h e s ........................... 17 ( e ) A pplication for approval o f foreign b r a n c h e s ............................. 18 Section 2 0 8 .1 0 — P ublication o f reports o f m em ber banks and their affiliates . . . . 18 ( a ) R eports o f m em ber b a n k s ........... 18 ( b ) R eports o f affiliates ...................... 18 ( c ) W aiver o f reports o f affiliates . . . 19 Section 2 0 8 .1 1 — V oluntary w ithdraw al from (a ) (b ) (c ) Federal R eserve S y s te m ................ G e n e r a l............................................ N o tic e o f intention o f w ithdraw al T im e and m ethod o f effecting actual w ith d ra w a l........................... ( d ) W ithdraw al o f n o t i c e .................... Section 2 0 8 .1 2 — Board fo r m s.................... Section 2 0 8 .1 3 — C apital a d e q u a c y ......... Section 2 0 8 .1 4 — Procedures for m onitoring Bank Secrecy A ct c o m p lia n c e ........... .................................. ( a ) P u r p o s e .......................................... ( b ) E stablishm ent o f com pliance p rogram .......................................... ( c ) C ontents o f com pliance p rogram .......................................... Section 2 0 8 .1 5 — A gricultural loan loss am ortization .......................................... (a ) (b ) 19 19 19 20 20 20 20 20 20 21 21 21 10 21 (c ) D efin ition s ................................... L oss am ortization and reappraisal................................... A ccou n tin g for am ortization . . (d ) Eligibility ................................... 22 21 22 i Contents Regulation H Page (e ) (f) (g ) C onditions on a c c e p ta n c e ......... Subm ission o f p ro p o sa ls........... R evocation o f e lig ib ility ........... Section 2 0 8 .1 6 — R eporting requirem ents for state m em ber banks subject to the Securities Exchange A c t o f 1 9 3 4 . . . . ( a ) F ilin g r e q u ir e m e n ts.................... ( b ) E lections perm itted o f state m em ber banks w ith total assets o f $ 15 0 m illion or le s s .................... ( c ) F iling instructions, inspection o f docum ents, and nondisclosure o f certain inform ation f i l e d ......... Section 2 0 8 .1 7 — D isclosure o f financial inform ation by state m em ber banks . . (a ) (b ) (c ) Purpose and s c o p e ...................... D e f in i t io n s ................................... A vailability o f financial in fo r m a tio n ................................... (d ) F inancial inform ation to be provided by state m em ber banks Financial inform ation to be provided by other covered in s tit u tio n s ................................... D isc la im e r..................................... (e ) (f) ( g ) ......................................................... Section 2 0 8 .1 8 — A ppraisal standards for federally related tr a n s a c tio n s............. Section 2 0 8 .1 9 — Paym ent o f dividends ( a ) C apital lim itations on paym ent o f d iv id en d s............................ ( b ) Earnings lim itations on paym ent o f d iv id e n d s........... 22 22 23 23 23 23 (a) Schedule for filing p la n ...... 25 (b ) (c ) 27 28 Subpart C— Real Estate Lending Standards 25 25 25 26 26 26 27 27 27 Section 2 0 8.51— Purpose and sco p e. . . . Section 20 8.52— Real estate lending stan d ard s.......................................... 29 A u t h o r it y ................................. 29 (b ) P u r p o s e ..................................... 29 S c o p e ......................................... O ther supervisory authority . D isclosu re o f capital categories ................................. Section 2 0 8 .3 1 — D e fin itio n s.................... Section 2 0 8 .3 2 — N o tice o f capital c a te g o r y .................................................... 32 Contents o f p la n ........... 32 Review o f capital-restoration p la n s .............................. 33 (d ) Disapproval o f capital plan .. 33 (e ) Failure to submit capitalrestoration plan ..................... 33 ( f) Failure to implement capitalrestoration plan ..................... 33 (g ) Amendment o f capital plan . . 33 (h ) N otice to F D I C ........... 33 ( i) Performance guarantee by companies that control a bank 33 Section 2 0 8.35— Mandatory and discretionary supervisory actions under section 38 ................................. 34 (a ) Mandatory supervisory actions . 34 (b ) Discretionary supervisory a c t io n s ...................................... 34 (a ) (c ) (d ) (e ) Adjustments to reported capital levels and capital category..................................... 31 Section 2 0 8.33— Capital measures and capital-category definitions................... 31 (a ) Capital measures ..................... 31 (b ) Capital categories..................... 31 (c ) Reclassification based on supervisory criteria other than c a p ita l....................................... 32 Section 208.34— Capital-restoration p la n s.................................................. 32 24 Subpart B— Prom pt C orrective A ction Section 2 0 8 .3 0 — A uthority, purpose, scope, other supervisory authority, and disclosure o f capital c a te g o r ie s........... Page (c ) 29 29 30 30 35 35 A ppendix A — Capital adequacy guidelines for state m em ber banks: risk-based m easure* A ppendix B— C apital guidelines for state m em ber banks: tier 1 leverage m easure* A ppendix C— Interagency guidelines for real estate lending p o l i c i e s ............. 35 31 (a ) E ffective date o f determ ination o f capital c a t e g o r y .................... 31 (b ) N o tice o f capital c a t e g o r y ---- 31 ii * See Board pamphlet “Capital Adequacy Guidelines.” Regulation H Membership of State Banking Institutions in the Federal Reserve System 12 C F R 208: as am ended effective M arch 19, 1993 Subpart A — G eneral Provisions Section 208.1 2 0 8 .2 2 0 8 .3 2 0 8 .4 2 0 8 .5 2 0 8 .6 2 0 8 .7 2 0 8 .8 2 0 8 .9 2 0 8 .1 0 2 0 8 .1 1 2 0 8 .1 2 2 0 8 .1 3 2 0 8 .1 4 2 0 8 .1 5 2 0 8 .1 6 2 0 8 .1 7 2 0 8 .1 8 2 0 8 .1 9 D efinitions E ligibility requirem ents Insurance o f deposits A pplication for m em bership A pproval o f application Privileges and requirem ents o f m em bership C onditions o f m em bership Banking practices E stablishm ent or m aintenance o f branches P ublication o f reports o f mem ber banks and their affiliates V oluntary w ithdraw al from Federal R eserve System Board form s Capital adequacy Procedures for m onitoring Bank Se crecy A ct com pliance A gricultural loan loss am ortization R eporting requirem ents for state m em ber banks subject to the Securi ties E xchange A ct o f 1 9 3 4 D isclosu re o f financial inform ation by state m em ber banks A ppraisal standards for federally re lated transactions Paym ent o f dividends Subpart B— Prom pt C orrective A ction Section 2 0 8 .3 0 A uthority, purpose, scope, other su pervisory authority, and disclosure 2 0 8 .3 1 2 0 8 .3 2 2 0 8 .3 3 2 0 8 .3 4 2 0 8 .3 5 o f capital categories D efinitions N otice o f capital category Capital measures and capital-catego ry definitions Capital-restoration plans M andatory and discretionary super visory actions under section 38 Subpart C— R eal E state L ending Standards Section 2 0 8 .5 1 2 0 8 .5 2 Purpose and scope R eal estate lending standards A ppendix A — Capital adequacy guidelines for state m em ber banks: risk-based measure A ppendix B— C apital adequacy guidelines for states m em ber banks: tier 1 leverage m easure A ppendix C— Interagency guidelines for real estate lending policies SU BPA R T A — G E N E R A L P R O V IS IO N S S E C T IO N 2 0 8 .1 — D e fin itio n s F or the purpose o f this part*: “state bank ( a ) T he term ” m eans any bank or trust com pany incorporated under a special or general law o f a state or under a general law for the D istrict o f C olum bia, any m utual savings bank (u n less otherw ise in d icated ), and any M orris Plan bank or other incorpo rated banking institution engaged in similar b usiness.* 1 * The words “this part’’ as used herein, mean Regulation H (Code of Federal Regulations, title 12, chapter II, part 208) The Board of Governors of the Federal Reserve Sys tem has delegated authority to exercise certain functions contained in this part. See the Board’s “Rules Regarding Delegation of Authority” (12 CFR 265). 1 Under the provisions of section 19 of the Federal Re serve Act, national banks and banks organized under local laws, located in a dependency or insular possession or any part of the United States outside the states of the United States and the District of Columbia are not required to become members of the Federal Reserve System but may, with the consent of the Board, become members of the System. However, this part 208 is applicable only to the admission of banks eligible for admission to membership under section 9 of the Federal Reserve Act and does not cover the admission of banks eligible under section 19 of the act. Any bank desiring to be admitted to the System under the provisions of section 19 should communicate with the Federal Reserve Bank with which it desires to do business. 1 §208.1 Regulation H mutual savings bank” ( b ) T he term “ m eans a bank w ithout capital stock transacting a sav ings bank business, the net earnings o f w hich inure w holly to the benefit o f its depositors after paym ent o f obligations for any advances by its organizers, and in addition thereto in clu d es any other banking institution the capi tal o f w hich consists o f w eekly or other tim e deposits w hich are segregated from all other deposits and are regarded as capital stock forthe purposes o f taxation and the declara tion o f dividends. “Board” ( c ) T he term m eans the Board o f G overnors o f the Federal R eserve System. board of directors” ( d ) T he term “ m eans the governing board o f any institution perform ing the usual functions o f a board o f directors. surplus in an am ount equal to that w hich w ould be required for the establishm ent o f a national banking association in the place in w hich it is located, shall be adm itted to m em bership unless it is, or has been, ap proved for deposit insurance under the F ed eral D ep osit Insurance A ct. ( 2 ) A m utual savings bank m ust possess surplus and undivided profits n ot less than the am ount o f capital required for the orga nization o f a national bank in the place where it is situated. ( b ) T he m inim um capital required for the or ganization o f a national bank, referred to hereinbefore in connection w ith the capital re quired for adm ission to m em bership in the Federal R eserve System , is as follows: Federal Reserve Bank stock” ( e ) T he term “ includes the deposit w hich m ay be m ade w ith a Federal R eserve Bank in lieu o f a subscrip tion for stock by a m utual savings bank w hich is n ot perm itted to purchase stock in a F eder al R eserve Bank, unless otherw ise indicated. capital” capital stock” ( f ) T he term s “ and “ m ean com m on stock, preferred stock and le gally issued capital notes and debentures pur chased by the R econstruction Finance C orpo ration w hich m ay be considered capital and capital stock for purposes o f m em bership in the Federal R eserve System under the provi sions o f section 9 o f the Federal R eserve A ct. Minimum capital I f located in a city or tow n w ith a population: N o t exceed in g 6 ,0 0 0 in h a b it a n ts ............. $ 50,0 0 0 E x ceed in g 6 ,0 0 0 but n ot exceedin g 5 0 ,0 0 0 in h a b ita n ts...................................... 100,000 E x ceed in g 50,0 0 0 inhabitants (e x cep t as stated b e l o w ) ................................................ In an ou tly in g district o f a city w ith a p op u lation exceed in g 50,0 0 0 in h abi 2 0 0 ,0 0 0 tants; p rovided state law perm its orga n ization o f state banks in su ch location w ith a capital o f $ 100,000 or l e s s .......... 100,000 W ith certain exceptions n ot here applicable, a national bank m ust have surplus equal to 2 0 percent o f its capital in order to com m ence business. SECTION 208.2—Eligibility Requirements ( a ) U nd er the term s o f section 9 o f the F ed eral R eserve A ct, as amended, to be eligible for adm ission to m em bership in the Federal R eserve System: ( 1 ) A state bank, other than a m utual sav ings bank, m ust possess capital stock and surplus w hich, in the judgm ent o f the Board, are adequate in relation to the char acter and condition o f its assets and to its existing and prospective deposit liabilities and other corporate responsibilities: That no bank engaged in the business o f receiving deposits other than trust funds, w hich does not possess capital stock and ed, 2 Provid SECTION 208.3—Insurance of Deposits A n y state bank becom ing a m em ber o f the Federal R eserve System w h ich is engaged in the business o f receiving deposits other than trust funds and w hich is n ot at the tim e an insured bank under the provisions o f the F ed eral D ep osit Insurance A ct, w ill becom e an insured bank under the provisions o f that act on the date upon w h ich it becom es a mem ber o f the Federal R eserve System .2 In the case o f 2 In the case of a state bank which is engaged in the business of receiving deposits other than trust funds and which at the time of its admission to membership in the Continued Regulation H § 208.5 an insured bank which is admitted to mem Reserve Bank, it shall subscribe on Form F.R. bership in the Federal Reserve System, the 83D for the appropriate amount of stock in bank will continue to be an insured bank. the Federal Reserve Bank whenever such laws are amended so as to authorize it to purchase stock in a Federal Reserve Bank.3* SECTION 208.4— Application for Membership (d ) Execution and filing of application. Each application made under the provisions of this (a ) State bank, other than a mutual savings section and the exhibits referred to in the ap bank. A state bank, other than a mutual sav plication blank shall be executed and filed, in ings bank, applying for membership, shall duplicate, with the Federal Reserve Bank of make application on Form F.R. 83A to the the District in which the applying bank is Board for an amount of capital stock in the located. Federal Reserve Bank of its district equal to 6 percent of the paid-up capital stock and sur plus of the applying institution. SECTION 208.5—Approval of (b ) Mutual savings bank. A mutual savings Application bank applying for membership shall make ap (a ) Matters given special consideration by plication on Form F.R. 83B to the Board for Board. In passing upon an application, the an amount of capital stock in the Federal Re following matters will be given special serve Bank of its District equal to six-tenths of consideration: 1 percent of its total deposit liabilities as (1 ) The financial history and condition of shown by the most recent report of examina the applying bank and the general character tion of such institution preceding its admis of its management; sion to membership, or, if such institution be (2 ) The adequacy of its capital structure in not permitted by the laws under which it was relation to the character and condition of organized to purchase stock in a Federal Re its assets and to its existing and prospective serve Bank, on Form F.R. 83C, for permis deposit liabilities and other corporate re sion to deposit with the Federal Reserve Bank sponsibilities; and its future earnings an amount equal to the amount which it prospects; would have been required to pay in on ac (3 ) The convenience and needs of the com count of a subscription to capital stock. munity to be served by the bank; and (4 ) Whether its corporate powers are con (c ) Mutual savings bank which is not autho sistent with the purposes of the Federal Re rized to purchase stock of Federal Reserve serve Act. Bank at time of admission. If a mutual savings bank be admitted to membership on the basis (b ) Procedure for admission to membership of a deposit of the required amount with the after approval of application. If an applying Federal Reserve Bank in lieu of payment upon bank conforms to all the requirements of the capital stock because the laws under which Federal Reserve Act and this part and is oth such bank was organized do not at that time erwise qualified for membership, its applica authorize it to purchase stock in the Federal tion will be approved subject to such condi tions as may be prescribed pursuant to the Continued Federal Reserve System is not an insured bank, the Board is required under the provisions of sections 4 and 6 of the Federal Deposit Insurance Act to issue a certificate to the Federal Deposit Insurance Corporation to the effect that the bank is a member of the Federal Reserve System and that consideration has been given to the financial history and condition of the bank, the adequacy of its capital struc ture, its future earnings prospects, the general character of its management, the convenience and needs of the commu nity to be served by the bank, and whether or not its corpo rate powers are consistent with the purposes of the Federal Deposit Insurance Act. 3 The Federal Reserve Act provides that, if the laws un der which any such savings bank was organized be not amended at the first session of the legislature following the admission of the savings bank to membership so as to au thorize mutual savings banks to purchase Federal Reserve Bank stock, or if such laws be so amended and the bank fail within six months thereafter to purchase such stock, all of its rights and privileges as a member bank shall be forfeited and its membership in the Federal Reserve System shall be terminated in the manner prescribed in section 9 of the Federal Reserve Act. 3 § 208.5 provisions of the Federal Reserve Act. When the conditions prescribed have been accepted by the applying bank, it should pay to the Federal Reserve Bank of its District one-half of the amount of its subscription and, upon receipt of advice from the Federal Reserve Bank as to the required amount, one-half of 1 percent of its paid-up subscription for each month from the period of the last dividend.4 The remaining half of the bank’s subscription shall be subject to call when deemed necessary by the Board. The bank’s membership in the Federal Reserve System shall become effective on the date as of which a certificate of stock of the Federal Reserve Bank is issued to it pursu ant to its application for membership or, in the case of a mutual savings bank which is not authorized to subscribe for stock, on the date as of which a certificate representing the ac ceptance of a deposit with the Federal Reserve Bank in place of a payment on account of a subscription to stock is issued to it pursuant to its application for membership. Regulation H Board in connection with the admission of such bank to membership in the Federal Re serve System; and (d ) Shall not reduce its capital stock except with the prior consent of the Board.5 SECTION 208.7—Conditions of Membership (a ) Pursuant to the authority contained in the first paragraph of section 9 of the Federal Reserve Act, which authorizes the Board to permit applying state banks to become mem bers of the Federal Reserve System “subject to the provisions of this Act and to such condi tions as it may prescribe pursuant thereto,” the Board, except as hereinafter stated, will prescribe the following conditions of member ship for each state bank hereafter applying for admission to the Federal Reserve System, and, in addition, such other conditions as may be considered necessary or advisable in the particular case: (1 ) Such bank at all times shall conduct its business and exercise its powers with due SECTION 208.6—Privileges and regard to the safety of its depositors, and, Requirements of Membership except with the permission of the Board of Every state bank while a member of the Fed Governors of the Federal Reserve System, eral Reserve System— such bank shall not cause or permit any change to be made in the general character (a ) Shall retain its full charter and statutory of its business or in the scope of the corpo rights subject to the provisions of the Federal rate powers exercised by it at the time of Reserve Act and other acts of Congress appli admission to membership.6 cable to member state banks, to the regula (2 ) The net capital and surplus funds of tions of the Board made pursuant to law, and such bank shall be adequate in relation to to the conditions prescribed by the Board and agreed to by such bank prior to its admission; 5 This applies to capital stock of all classes and to capital notes and debentures legally issued and purchased by the Reconstruction Finance Corporation which, under the Federal Reserve Act, are considered as capital stock for purposes of membership. 6 For many years, the Board prescribed, as standard con ditions of membership, a condition which, in general, pro hibited banks from engaging as a business in the sale of real estate loans to the public and certain conditions relating to the exercise of trust powers, including one which prohibit (c ) Shall comply at all times with any and all ed self-dealing in the investment of trust funds. The elimi nation of these conditions as standard conditions of mem conditions of membership prescribed by the bership does not reflect any change in the Board’s position as to the undesirability of the practices formerly prohibited by 4 In the case of a mutual savings bank which is not per such conditions; and attention is called to the fact that mitted by the laws under which it was organized to pur engaging as a business in the sale of real estate loans to the public or failing to conduct trust business in accordance chase stock in a Federal Reserve Bank, it shall deposit with the Federal Reserve Bank an amount equal to the amount with the applicable state laws and sound principles of trust which it would have been required to pay in on account of administration may constitute unsafe or unsound practices a subscription to capital stock. and violate the condition set forth in this subparagraph. (b ) Shall enjoy all the privileges and observe all the requirements of the Federal Reserve Act and other acts of Congress applicable to member state banks and of the regulations of the Board made pursuant to law which are applicable to member state banks; 4 Regulation H the character and condition of its assets and to its deposit liabilities and other corporate responsibilities. (b ) The acquisition by a member state bank of the assets of another institution through merger, consolidation, or purchase may result in a change in the general character of its business or in the scope of its corporate pow ers within the meaning of the condition set forth in paragraph (a )(1 ) of this section, and if at any time a bank subject to such condition anticipates making any such acquisition a de tailed report setting forth all the facts in con nection with the transaction shall be made promptly to the Federal Reserve Bank of the District in which such bank is located. (c ) If at any time, in the light of all the cir cumstances, the aggregate amount of a mem ber state bank’s net capital and surplus funds appears to be inadequate, the bank, within such period as shall be deemed by the Board to be reasonable for this purpose, shall in crease the amount thereof to an amount which in the judgment of the Board shall be adequate in relation to the character and con dition of its assets and to its deposit liabilities and other corporate responsibilities. SECTION 208.8—Banking Practices (a ) Scope. No state member bank shall en gage in practices which are unsafe or unsound or which result in a violation of law, rule, or regulation, or which violate any condition im posed by or agreements entered into with the Board. This section outlines certain of the practices in which state member banks should not engage. (b ) Waiver. A state member bank has the right to petition the Board to waive the condi tions of section 208.8. A waiver may be grant ed upon a showing of good cause. The Board in its discretion may choose to limit, among other items, the scope, duration, and timing of the waiver. § 208.8 to deal with any banking practice which is deemed to be unsafe or unsound or otherwise not in accordance with law, rule, or regulation or which violates any condition imposed in writing by the Board in connection with the granting of any application or other request by a state member bank, or any written agree ment entered into by such bank with the Board. Compliance with the provisions of this section shall neither relieve a state member bank of its duty to conduct all operations in a safe and sound manner nor prevent the Board from taking whatever action it deems neces sary and desirable to deal with general or spe cific acts or practices which, although perhaps not violating the provisions of this section, are considered nevertheless to be an unsafe or un sound banking practice. (d ) Letters of credit and acceptances. Definitions. For the purpose of this paragraph, “standby letters of credit’’ in clude every letter of credit (or similar ar rangement however named or designated) which represents an obligation to the bene ficiary 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 account party in the performance of an obligation.68 An “ineligi ble acceptance” is a time draft accepted by a bank, which does not meet the require ments for discount with a Federal Reserve Bank. (2 ) Restrictions. (i) A state member bank shall not issue, renew, extend, or amend a standby letter of credit (or other similar arrangement, however named or described) or make an ineligible acceptance or grant any other extension of credit if, in the aggregate, the amount of all standby letters of credit and ineligible acceptances issued, re newed, extended, or amended on or after (1 ) 68 As defined, “standby letter of credit” would not include (1) commercial letters of credit and similar instruments where the (c ) Effect on other banking practices. Noth issuing bank expects the beneficiary to draw upon the issuer and which do not “guaranty” payment of a money obligation or (2) a ing in this section shall be construed as re guaranty or similar obligation issued by a foreign branch in ac stricting in any manner the Board’s authority cordance with and subject to the limitations of Regulation K. 5 § 208.8 the effective date of this amendment, when combined with other extensions of credit issued by the bank would exceed the legal limitations on loans imposed by the state (including limitations to any one customer or on aggregate extensions of credit) or exceed legal limits pertain ing to loans to affiliates under federal law (12 USC 371(c)); provided that, if any state has a separate limitation on the issu ance of letters of credit or acceptances which apply to a standby letter of credit or to ineligible acceptances respectively, then the separate limitation shall apply in lieu of the standard loan limitation. (ii) No state member bank shall issue a standby letter of credit or ineligible ac ceptance unless the credit standing of the account party under any letter of credit, and the customer of an ineligible accept ance, is the subject of credit analysis equivalent to that applicable to a poten tial borrower in an ordinary loan situation. (iii) If several banks participate in the issuance of a standby letter of credit or ineligible acceptance under a bona fide binding agreement which provides that, regardless of any event, each participant shall be liable only up to a certain per centage or certain amount of the total amount of the standby letter of credit or ineligible acceptance issued, a state mem ber bank need only include the amount of its participation for purposes of this sec tion; otherwise, the entire amount of the letter of credit or acceptance must be included. (3 ) Disclosure; recordkeeping. The amount of all outstanding standby letters of credit and ineligible acceptances, regardless of when issued, shall be adequately disclosed in the bank’s published financial statements. Each state member bank shall maintain adequate control and subsidiary records of its standby letters of credit comparable to the records maintained in connection with the bank’s direct loans so that at all times the bank’s potential liability thereunder and the bank’s compliance with this section (d ) may be readily determined. (4 ) Exceptions. A standby letter of credit is 6 Regulation H not subject to the restrictions set forth above in the following situations: (i) prior to or at the time of issuance of the credit, the issuing bank is paid an amount equal to the bank’s maximum li ability under the standby letter of credit or (ii) prior to or at the time of issuance, the bank has set aside sufficient funds in a segregated, clearly earmarked deposit ac count to cover the bank’s maximum lia bility under the standby letter of credit. (e ) Loans by state member banks in identified flood hazard areas. ( 1 ) Property securing loan must be insured against flood. No state member bank shall make, increase, extend or renew any loan secured by improved real estate or a mobile home located or to be located in an area that has been identified by the secretary of Housing and Urban De velopment as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968, unless the building or mobile home and any personal pro p erty securing such loan is covered for the term of the loan by flood insurance in an amount at least equal to the outstanding principal balance of the loan or to the maxi mum limit of coverage made available with respect to the particular type of property under the act, whichever is less. Notwith standing the foregoing provision, flood in surance shall not be required on any stateowned property that is covered under an adequate policy of self-insurance satisfacto ry to the secretary of Housing and Urban Development who shall publish and period ically revise the list of states falling within the exemption provided in this paragraph. (2 ) Records of compliance. Each state member bank shall maintain, in connection with all loans secured by improved real es tate or a mobile home, sufficient records to indicate the method used by the bank to determine whether or not such loans fall within the provisions of this section 208.8(e). ( 3 ) (i) Notice of special flood hazards and availability offederal disaster relief assist ance. Each state member bank shall, as a Regulation H § 208.8 condition of making, increasing, extend which would be required to be registered ing or renewing any loan secured by im except for the exemption from registration proved real estate or a mobile home lo provided by subsection (g )(2 )(B ) or cated or to be located in an area that has (g )(2 )(G ) of that section, unless it shall been identified by the secretary of Hous have filed a registration statement with the ing and Urban Development as an area Board in conformity with the requirements having special flood hazards, mail or de of Form TA-1, which registration state ment shall have become effective as herein liver as soon as feasible but not less than after provided. Any registration statement 10 days in advance of closing of the transaction (or not later than the bank’s filed by a state member bank or its subsidi commitment, if any, if the period be ary shall become effective on the thirtieth day after filing with the Board unless the tween commitment and closing is less than 10 days) a written notice to the bor Board takes affirmative action to accelerate, rower stating: (a ) That the property se deny or postpone such registration in ac curing the loan is or will be located in an cordance with the provisions of section 17A(c) of the act. Such filings with the area so identified, or in lieu of such notifi cation a state member bank may obtain Board will constitute filings with the Securi satisfactory written assurances from a ties and Exchange Commission for purpos seller or lessor stating that such seller or es of section 1 7 (c )(1 ) of the act. (2 ) If the information contained in Form lessor has notified the borrower, prior to TA-1 becomes inaccurate, misleading or in the execution of any agreement for sale complete for any reason, the bank or its or lease, that the property securing the subsidiary shall, within 60 calendar days loan is or will be located in an area so thereafter, file an amendment to Form TAidentified; and (b ) whether, in the event 1 correcting the inaccurate, misleading or of damage to the property caused by incomplete information. flooding in a federally declared disaster, (3 ) Each registration statement on Form federal disaster relief assistance will be TA-1 or amendment thereto shall consti available for such property. Each state tute a “report” or “application” within the member bank shall require the borrower, prior to closing, to provide the bank with meaning of section 17, 17A(c) and 32(a) of the act. a written acknowledgment that the prop erty securing the loan is or will be located in an area so identified and that the bor (g ) State member banks as registered clearing rower has received the above-required agencies. ( 1) Requirement of notice. Any state mem notice regarding federal disaster relief assistance. ber bank or any of its subsidiaries that is a (ii) Sample notices. A state member registered clearing agency pursuant to sec tion 17A(b) of the Securities Exchange Act bank providing written notice containing of 1934 (the “act”), which imposes any fi the language presented in appendix A nal disciplinary sanction on any participant [page 15] within the time limits pre therein, denies participation to any appli scribed in paragraph (a ) of this section will be considered to be in compliance cant or prohibits or limits any person in re with the notice requirements of para spect to access to services offered by such registered clearing agency, shall file with graph (a ) of this section. the Board and the appropriate regulatory agency (if other than the Board) for a par (f) State member banks as transfer agents. ticipant or applicant notice thereof in the (1 ) On or after December 1, 1975, no state member bank or any of its subsidiaries shall manner prescribed herein. (2 ) Notice of final disciplinary action. Any act as transfer agent, as defined in section registered clearing agency for which the 3 (a ) (25) of the Securities Exchange Act of 1934 ( “act”), with respect to any security Board is the appropriate regulatory agency that takes any final disciplinary action with registered under section 12 of the act or 7 § 208.8 respect to any participant shall promptly file a notice thereof with the Board in ac cordance with paragraph (g )(3 ) of this section. For the purposes of this paragraph “final disciplinary action” shall mean the imposition of any disciplinary sanction pur suant to section 1 7 A (b )(3 )(G ) of the act or other action of a registered clearing agency which, after notice and opportunity for hearing, results in any final disposition of charges of: (i) one or more violations of the rules of such registered clearing agency; or (ii) acts or practices constituting a stat utory disqualification of a type defined in subparagraph (iv) or (v) (except prior convictions) of section 3 (a ) (39) of the act. However, if a registered clearing agency fee schedule specifies certain charges for errors made by its participants in giving instruc tions to the registered clearing agency which are de minimis on a per error basis and whose purpose is in part to provide rev enues to the registered clearing agency to compensate it for effort expended in begin ning to process an erroneous instruction, such error charges shall not be considered a “final disciplinary action” for purposes of this paragraph. (3 ) Content of notice required by paragraph (g)(2). Any notice filed pursuant to para graph (g ) (2 ) of this section shall consist of the following, as appropriate: (i) the name of the respondent con cerned together with the respondent’s last known address as reflected on the records of the registered clearing agency and the name of the person, committee, or other organizational unit that brought the charges involved; except that, as to any respondent who has been found not to have violated a provision covered by a charge, identifying information with re spect to such person may be deleted inso far 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. (ii) a statement describing the investiga tive or other origin of the action; 8 Regulation H (iii) as charged in the proceeding, the specific provision or provisions of the rules of the registered clearing agency vi olated by such person or the statutory disqualification referred to in paragraph (g ) (2 ) (ii) of this section and a state ment describing the answer of the re spondent to the charges; (iv) a statement setting forth findings of fact with respect to any act or practice in which such respondent was charged with having engaged in or omitted; the conclu sion of the registered clearing agency as to whether such respondent violated any rule or was subject to a statutory disqual ification as charged; and a statement of the registered clearing agency in support of its resolution of the principal issues raised in the proceedings; (v) a statement describing any sanction imposed, the reasons therefor, and the date upon which such sanction has or will become effective; and (vi) such other matters as the registered clearing agency may deem relevant. (4 ) Notice of final denial, prohibition, ter mination or limitation based on qualification or administrative rules. Any registered clearing agency for which the Board is the appropriate regulatory agency that takes any final action which denies participation to, or conditions the participation of, any person or prohibits or limits any person with respect to access to services offered by the clearing agency based on an alleged fail ure of such person to— (i) comply with the qualification stan dards prescribed by the rules of such reg istered clearing agency pursuant to sec tion 1 7 A (b )(4 )(B ) of the act; or (ii) comply with any administrative re quirements of such 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 which may lead to a discipli nary sanction shall not be considered a “final disciplinary action” for purposes of paragraph (g )(2 ) of this section, but notice thereof shall be promptly filed with the Board and the ap propriate regulatory agency (if other than Regulation H the Board) for the affected person in ac cordance with paragraph (g )(5 ) of this section; provided however, that no such ac tion shall be considered “final” pursuant to this subparagraph that results merely from a notice of such failure to the person affect ed, if such person has not sought an adjudi cation of the matter, including a hearing, or otherwise exhausted his administrative remedies within the registered clearing agency with respect to such a matter. (5 ) Content of notice required by paragraph (g)(4). Any notice filed pursuant to para graph (g )(4 ) of this section shall consist of the following, as appropriate: (i) the name of each person concerned together with each such person’s last known address as reflected in the records of the registered clearing agency; (ii) the specific grounds upon which the action of the registered clearing agency was based, and a statement describing the answer of the person concerned; (iii) a statement setting forth findings of fact and conclusions as to each alleged failure of the person to comply with qual ification standards, or comply with ad ministrative obligations, and a statement of the registered clearing agency in sup port of the resolution of the principal is sues raised in the proceeding; (iv) the date upon which such action has or will become effective; and (v ) such other matters as the registered clearing agency deems relevant. (6 ) Notice of final action based upon prior adjudicated statutory disqualifications. Any registered clearing agency for which the Board is the appropriate regulatory agency that takes any final action with respect to any person that: (i) denies or conditions participation to any person or prohibits or limits access to service offered by such registered clearing agency; and (ii) is based upon a statutory disqualifi cation of a type defined in subparagraph (A ), (B ) or (C ) of section 3 (a ) (39) of the act of consisting of a prior conviction as described in subparagraph (E ) of said section 3(a ) (39) shall promptly file no tice thereof with the Board and the ap § 208.8 propriate regulatory agency (if other than the Board) for the affected person in accordance with paragraph (g )(7 ) of this section; provided, however, that no such action shall be considered “final” pursuant to this subparagraph which re sults merely from a notice of such failure to the person affected, if such person has not sought an adjudication of the matter, including a hearing, or otherwise ex hausted his administrative remedies with in the registered clearing agency with re spect to such a matter. (7 ) Content of notice required by paragraph (g)(6). Any notice filed pursuant to para graph (g) (6 ) of this section shall consist of the following, as appropriate: (i) the name of the person concerned, together with each such person’s last known address as reflected in the records of the registered clearing agency; (ii) a statement setting forth the princi pal issues raised, the answer of any per son concerned, and a statement of the registered clearing agency in support of its resolution of the principal issues raised in the proceeding; (iii) any description furnished by or on behalf of the person concerned of the ac tivities engaged in by the person since the adjudication upon which the disqualifica tion is based; (iv) a copy of the order or decision of the court, the appropriate regulatory agency or the self-regulatory organiza tion which adjudicated the matter giving rise to such statutory disqualification; (v) the nature of the action taken and the date upon which such action is to be made effective; and (vi) such other matters as the registered clearing agency deems relevant. ( 8 ) Notice of summary suspension ofpartic ipation. Any registered clearing agency for which the Board is the appropriate regula tory agency that summarily suspends or closes the accounts of a participant pursu ant to the provisions of section 17A (b )(5 )(C ) of the act shall within one busi ness day after the effectiveness of such ac tion file notice thereof with the Board and the appropriate regulatory agency for the 9 § 208.8 Regulation H participant (if other than the Board) of agency may file with the Board, by telegram such action in accordance with paragraph or otherwise, a request for a stay of imposition (g )(9 ) of this section. of such action. Such request shall be in writ (9 ) Content of notice of summary suspen ing and shall include a statement as to why sion of participation. Any notice pursuant to such stay should be granted. paragraph (g )(8 ) of this section shall con tain at least the following information, as (i) Application for review of final disciplinary sanctions, denials of participation or prohibi appropriate: (i) the name of the participant con tions or limitations of access to services imposed cerned together with the participant’s by registered clearing agencies. last known address as reflected in the rec (1 ) Scope. Proceedings on an application ords of the registered clearing agency; to the Board under section 1 9 (d )(2 ) of the (ii) the date upon which such summary act by a person that is subject to the Board’s jurisdiction for review of any action action has or will become effective; (iii) if such summary action is based by a registered clearing agency for which upon the provisions of section 17A the Securities and Exchange Commission is (b ) (5 )( C ) (i ) of the act, a copy of the not the appropriate regulatory agency shall relevant order or decision of the self-reg be governed by this paragraph. (2 ) Procedure. ulatory organization if available to the (i) An application for review pursuant registered clearing agency; (iv) if such summary action is based to section 1 9 (d )(2 ) of the act shall be upon the provisions of section 17A filed with the Board within 30 days after (b ) (5 ) (C ) (ii) of the act, a statement de notice is filed by the registered clearing scribing the default of any delivery of agency pursuant to section 1 9 (d )(1 ) of the act and received by the aggrieved per funds or securities to the registered clear son applying for review, or within such ing agency; (v ) if such summary action is based longer period as the Board may deter mine. The secretary of the Board shall upon the provisions of section serve a copy of the application on the 1 7 A (b )(5 )(C )(iii) of the act, a state ment describing the financial or operat registered clearing agency, which shall, within 10 days after receipt of the appli ing difficulty of the participant based cation, certify and file with the Board one upon which the registered clearing agen copy of the record upon which the action cy determined that such suspension and closing of accounts was necessary for the complained was taken, together with protection of the clearing agency, its par three copies of an index to such record. ticipants, creditors or investors; The secretary shall serve upon the parties (vi) the nature and effective date of the copies of such index and any papers sub sequently filed. suspension; and (ii) Within 20 days after receipt of a (vii) such other matters as the registered copy of the index, the applicant shall file clearing agency deems relevant. a brief or other statement in support of his application which shall state the spe (h ) Applications for stays of disciplinary sanc tions or summary suspensions by a registered cific grounds on which the application is based, the particular findings of the regis clearing agency. If a registered clearing agency tered clearing agency to which objection for which the Securities and Exchange Com mission is not the appropriate regulatory is taken, the relief sought. Any applica tion not perfected by such timely brief agency imposes any final disciplinary sanction or statement may be dismissed as pursuant to section 1 7 A (b )(3 )(G ) of the act, or summarily suspends or limits or prohibits abandoned. (iii) Within 20 days after receipt of the access pursuant to section 1 7 A (b )(5 )(C ) of applicant’s brief or statement the regis the act, any participant aggrieved thereby for tered clearing agency may file an answer which the Board is the appropriate regulatory 10 Regulation H thereto, and within 10 days of receipt of any such answer the applicant may file a reply. Any such papers not filed within the time provided by items (A ), (B ), or (C ) will not be received except upon spe cial permission of the Board. (iv) On its own motion, the Board may direct that the record under review be supplemented with such additional evi dence as it may deem relevant. Neverthe less, the registered clearing agency and persons who may be aggrieved by such clearing agency’s action shall not be enti tled to adduce evidence not presented in the proceedings before the registered clearing agency unless it is shown to the satisfaction of the Board that such addi tional evidence is material and that there were reasonable grounds for failure to present such evidence in the proceedings before the registered clearing agency. Any request for leave to adduce addition al evidence shall be filed promptly so as not to delay the disposition of the proceeding. (v ) Oral argument before the Board may be requested by the applicant or the registered clearing agency as follows: (A ) by the applicant with his brief or statement or within 10 days after re ceipt of the registered clearing agency’s answer, or (B ) by the registered clearing agency with its answer. The Board, in its discretion, may grant or deny any request for oral argument and, where it deems it appropriate to do so, the Board will consider an application on the basis of the papers filed by the parties, without oral argument. (vi) The Board’s Rules of Practice for Formal Hearings shall apply to review proceedings under this rule to the extent that they are not inconsistent with this rule. Attention is directed particularly to section 263.21 of the Rules of Practice relating to formal requirements as to the papers filed. (j) State member banks, and subsidiaries, de partments, and divisions thereof, which are municipal securities dealers. § 208.8 (1 ) For purposes of this paragraph, the terms herein have the meanings given them in section 3 (a ) of the Securities Exchange Act of 1934 (15 USC 7 8c (a)) and the rules of the Municipal Securities Rulemaking Board. The term “act” shall mean the Secu rities Exchange Act of 1934 (15 USC 78a et seq.). (2 ) On and after October 31, 1977, a state member bank of the Federal Reserve Sys tem, or a subsidiary or a department of a division thereof, that is a municipal securi ties dealer shall not permit a person to be associated with it as a municipal securities principal or municipal securities representa tive unless it has filed with the Board an original and two copies of Form MSD-4, “Uniform Application for Municipal Secu rities Principal or Municipal Securities Representative Associated with a Bank Municipal Securities Dealer,” completed in accordance with the instructions contained therein, for that person. Form MSD-4 is prescribed by the Board for purposes of paragraph (b ) of Municipal Securities Rulemaking Board Rule G-7, “Information Concerning Associated Persons.” (3 ) Whenever a municipal securities dealer receives a statement pursuant to paragraph (c ) of Municipal Securities Rulemaking Board Rule G-7, “Information Concerning Associated Persons,” from a person for whom it has filed a Form MSD-4 with the Board pursuant to paragraph ( j ) ( 2) of this paragraph, such dealer shall, within ten days thereafter, file three copies of that statement with the Board accompanied by an original and two copies of a transmittal letter which includes the name of the dealer and a reference to the material transmitted identifying the person involved and is signed by a municipal securities principal associated with the dealer. (4 ) Within 30 days after the termination of the association of a municipal securities principal or municipal securities representa tive with a municipal dealer that has filed a Form MSD-4 with the Board for that per son pursuant to paragraph(j)(2) of this section, such dealer shall file an original and two copies of a notification of termina tion with the Board on Form MSD-5, 11 § 208.8 “Uniform Termination Notice for Munici pal Securities Principal or Municipal Secu rities Representative Associated with a Bank Municipal Securities Dealer,” com pleted in accordance with instructions con tained therein. (5 ) A municipal securities dealer that files a Form MSD-4, Form MSD-5, or state ment with the Board under this paragraph shall retain a copy of each such Form MSD-4, Form MSD-5, or statement until at least three years after the termination of the employment or other association with such dealer of the municipal securities principal or municipal securities representative to whom the form or statement relates. (6 ) The date that the Board receives a Form MSD-4, Form MSD-5, or statement filed with the Board under this paragraph shall be the date of filing. Such a Form MSD-4, Form MSD-5, or statement which is not prepared and executed in accordance with the applicable requirements may be re turned as unacceptable for filing. Accept ance for filing shall not constitute any find ing that a Form MSD-4, Form MSD-5, or statement has been completed in accord ance with the applicable requirements or that any information reported therein is true, current, complete, or not misleading. Every Form MSD-4, Form MSD-5, or statement filed with the Board under this paragraph shall constitute a filing with the Securities and Exchange Commission for purposes of section 1 7 (c )(1 ) of the act (15 USC 7 8 q (c )(l)) and a “report,” “applica tion,” or “document” within the meaning of section 32(a) of the act (15 USC 78ff(a)). (k ) Recordkeeping and confirmation of cer tain securities transactions effected by state member banks. (1 ) Definitions. For purposes of this para graph (k): (i) “customer” shall mean any person or account, including any agency, trust, estate, guardianship, com mittee 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, dealer bank or issuer of 12 Regulation H the securities which are the subject of the transactions; (ii) “collective investment fund” means funds held by a state member bank as fi duciary and, consistent with local law, invested collectively (A ) in a common trust fund maintained by such bank ex clusively for the collective investment and reinvestment of monies contributed thereto by the bank in its capacity as trustee, executor, administrator, guardi an, or custodian under the Uniform Gifts to Minors Act, or (B ) in a fund consist ing solely of assets of retirement, pension, profit sharing, stock bonus or similar trusts which are exempt from federal in come taxation under the Internal Reve nue Code; (iii) a bank shall be deemed to exercise “investment discretion” with respect to an account if, directly or indirectly, the bank (A ) is authorized to determine what securities or other property shall be purchased or sold by or for the account, or (B ) make decisions as to what securi ties or other property shall be purchased or sold by or for the account even though some other person may have responsibili ty for such investment decisions. (iv) “periodic plan” (including dividend reinvestment plans, automatic invest ment plans and employee stock purchase plans) means any written authorization for a state member bank acting as agent to purchase or sell for a customer a spe cific security or securities, in specific amounts (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 in connection therewith or the manner of calculating them; (v ) “security” means any interest or instrument commonly known as a “secu rity” whether in the nature of debt or eq uity, including any stock, bond, note, de benture, evidence of indebtedness or any participation in or right to subscribe to or purchase any of the foregoing. The term “security” does not include (A ) a deposit or share account in a federally or state- Regulation H insured depository institution, (B ) a loan participation, (C ) a letter of credit or other form of bank indebtedness incurred in the ordinary course of business, (D ) currency, (E ) any note, draft, bill of ex change, 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 matu rity of which is likewise limited, (F ) units of a collective investment fund, (G ) in terests in a variable amount (master) note of a borrower of prime credit, or (H ) U.S. Savings Bonds. (2 ) Recordkeeping. Every state member bank effecting securities transactions for customers shall maintain the following rec ords with respect to such transactions for at least three years: (i) chronological records of original en try 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; (ii) account records for each customer which shall reflect all purchases and sales of securities, all receipts and deliveries of securities, and all receipts and disburse ments of cash with respect to transac tions in securities for such account and all other debits and credits pertaining to transactions in securities. (iii) a separate memorandum (order ticket) of each order to purchase or sell securities (whether executed or can celled), which shall include: (A ) the account(s) for which the transaction was effected; (B ) whether the transaction was a market order, limit order, or subject to special instructions; (C ) the time the order was received by the trader or other bank em ployee responsible for effecting the transaction; (D ) the time the order was placed § 208.8 with the broker-dealer, or if there was no broker-dealer, the time the order was executed or cancelled; (E ) the price at which the order was executed; and (F ) the broker-dealer utilized; (iv) a record of all broker-dealers select ed by the bank to effect securities trans actions and the amount of commissions paid or allocated to each such broker during the calendar year. Nothing contained in this subpara graph shall require a bank to maintain the records required by this rule in any given manner, provided that the informa tion required to be shown is clearly and accurately reflected and provides an ade quate basis for the audit of such information. (3 ) Form of notification. Every state mem ber bank effecting a securities transaction for a customer shall maintain for at least three years and, except as provided in subparagraph (4 ), shall mail or otherwise fur nish to such customer either of the follow ing types of notifications: (i) (A ) a copy of the confirmation of a broker-dealer relating to the securities transaction; and (B ) if the bank is to re ceive 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 cus tomer, a statement of the source and the amount of any remuneration to be re ceived; or (ii) a written notification disclosing: (A ) the name of the bank; (B ) the name of the customer; (C ) 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 ac count, or in any other capacity; (D ) the date of execution and a state ment that the time of execution will be furnished within a reasonable time upon written request of such customer, and the identity, price and number of shares or units (or principal amount in the case of debt securities) of such se 13 § 208.8 curity purchased or sold by such a customer; (E ) 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; (F ) 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 remunera tion is determined pursuant to a writ ten agreement between the bank and the customer, provided, however, in the case of U.S. government securities, federal agency obligations and munici pal obligations, this subparagraph (F ) shall apply only with respect to remu neration received by the bank in an agency transaction; and (G ) the name of the broker-dealer utilized; or, where there is no brokerdealer, 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. (4 ) Time of notification. The time for mail ing or otherwise furnishing the written noti fication described in paragraph (k )(3 ) of this section shall be five business days from the date of the transaction, or if a brokerdealer is utilized, within five business days from the receipt by the bank of the brokerdealer’s confirmation, but the bank may elect to use the following alternative proce dures if the transaction is effected for: (i) accounts (except periodic plans) where the bank does not exercise invest ment 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 cus tomer’s right to receive the written notifi cation within the above-prescribed time period at no additional cost to the customer; (ii) accounts (except collective invest ment funds) where the bank exercises in 14 Regulation H vestment discretion in other than an agency capacity, in which instance the bank shall, upon request of the person having the power to terminate the ac count or, if there is no such person, upon the request of any person holding a vest ed beneficial interest in such account, mail or otherwise furnish to such person the written notification within a reason able time. The bank may charge such person a reasonable fee for providing this information. (iii) accounts, where the bank exercises investment discretion in an agency capac ity, in which instance (A ) the bank shall mail or otherwise furnish to each custom er not less frequently than once every three months an itemized statement which shall specify the funds and securi ties 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 (B ) if requested by the customer, the bank shall mail or otherwise furnish to each such customer within a reasonable time the written notification described in paragraph (k )(3 ) of this section. The bank may charge a reasonable fee for providing the information described in paragraph (k )(3 ) of this section. (iv) a collective investment fund, in which instance the bank shall at least an nually furnish a copy of a financial report of the fund, or provide notice that a copy of such report is available and will be fur nished upon request, to each person to whom a regular periodic accounting would ordinarily be rendered with re spect to each participating account. This report shall be based upon an audit made by independent public accountants or in ternal auditors responsible only to the board of directors of the bank. (v ) a periodic plan, in which instance the bank shall mail or otherwise furnish to the customer as promptly as possible after each transaction a written statement showing the funds and securities in the custody or possession of the bank, all service charges and commissions paid by the customer in connection with the Regulation H transaction, and all other debits and credits of the customer’s account in volved in the transaction; provided that upon the written request of the customer the bank shall furnish the information described in subparagraph (3 ), except that any such information relating to re muneration 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 infor mation described in subparagraph (3 ). (5 ) Securities trading policies and proce dures. Every state member bank effecting securities transactions for customers shall establish written policies and procedures providing: (i) assignment of responsibility for su pervision of all officers or employees who (A ) transmit orders to or place orders with broker-dealers, or (B ) execute transactions in securities for customers; (ii) 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; (iii) where applicable and where permis sible under local law, for the crossing of buy and sell orders on a fair and equita ble basis to the parties to the transaction; and (iv) that bank officers and employees who make investment recommendations or decisions for the accounts of custom ers, who participate in the determination of such recommendations or decisions, or who, in connection with their duties, ob tain information concerning which secu rities are being purchased or sold or rec ommended for such action, must report to the bank, within 10 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 pur chased or sold and indicate the dates of the transactions and whether the transac tions were purchases or sales. Excluded § 208.8 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,O X or less during the calendar quar C) ter. For purposes of this paragraph (k )(iv ), the term “securities” does not include U.S. government or federal agen cy obligations. (6 ) Exceptions. The following exceptions to paragraph (k ) shall apply: (i) the requirements of subparagraph (k ) (2 ) (ii) through (k )(2 )(iv ) and subparagraph ( k ) ( 5 ) (i) through (k )(5 ) (iii) shall not apply to banks having an average of less than 200 securities trans actions per year for customers over the prior three-calendar-year period, exclu sive of transactions in U.S. government and federal agency obligations; (ii) activities of a state member bank that are subject to regulations promulgat ed by the Municipal Securities Rulemak ing Board shall not be subject to the re quirements of this paragraph (k); and (iii) activities of foreign branches of a state member bank shall not be subject to the requirements of this paragraph (k). APPENDIX A TO SECTION 208.8— Sample Notices (1 ) ards. Notice to borrower of special flood haz Notice is hereby given t o _______ that the improved real estate or mobile home de scribed in the attached instrument is or will be located in an area designated by the secretary of the Department of Housing and Urban De velopment as an area having special flood haz ards. This area is delineated on _______ ’s Flood Insurance Rate Map ( “FIRM”) or, if the FIRM is unavailable, on the community’s Flood Hazard Boundary Map ( “FHBM”). This area has a 1 percent chance of being flooded within any given year. The risk of ex ceeding the 1 percent chance increases with time periods longer than 1 year. For example, during the life of a 30-year mortgage, a struc ture located in a special flood-hazardous area has a 26 percent chance of being flooded. 15 § 208.8 (2 ) Notice to borrower about federal disaster relief assistance, (a ) Notice in participating communities. The improved real estate or mobile home securing your loan is or will be located in a community that is now par ticipating in the National Flood Insurance program. In the event such property is damaged by flooding in a federally declared disaster, federal disaster relief assistance may be available. However, such assistance will be unavailable if your community has been identified as a special flood-hazardous area for one year or longer and is not par ticipating in the National Flood Insurance program at the time assistance would be ap proved. This assistance, usually in the form of a loan with a favorable interest rate, may be available for damages incurred in excess of your flood insurance. (b ) Notice in nonparticipating communi ties. The improved real estate or mobile home securing your loan is or will be locat ed in a community that is not participating in the National Flood Insurance program. This means that such property is not eligi ble for federal flood insurance. In the event such property is damaged by flooding in a federally declared disaster, federal disaster relief assistance will be unavailable if your community has been identified as a special flood-hazardous area for one year or longer. Such assistance may be available only if at the time assistance would be approved your community is participating in the National Flood Insurance program or has been iden tified as a special flood-hazardous area for less than one year. Regulation H dency or insular possession thereof or in a for eign country. Under the provisions of section 9, member state banks establishing and oper ating branches in the United States beyond the corporate limits of the city, town, or vil lage in which the parent bank is situated must conform to the same terms, conditions, limita tions, and restrictions as are applicable to the establishment of branches by national banks under the provisions of section 5155 of the Revised Statutes of the United States relating to the establishment of branches in the United States, except that the approval of any such branches must be obtained from the Board rather than from the Comptroller of the Cur rency. The approval of the Board must like wise be obtained before any member state bank establishes any branch after July 15, 1952, within the corporate limits of the city, town, or village in which the parent bank is situated (except within the District of Colum bia). Under the provisions of section 9, mem ber state banks establishing and operating branches in a dependency or insular posses sion of the United States or in a foreign coun try must conform to the terms, conditions, limitations, and restrictions contained in sec tion 25 of the Federal Reserve Act relating to the establishment by national banks of branches in such places. (b ) Branches in the United States. (1 ) Before a member state bank establishes a branch (except within the District of Columbia), it must obtain the approval of the Board. (2 ) Before any nonmember state bank hav ing a branch or branches established after February 25, 1927, beyond the corporate limits of the city, town, or village in which the bank is situated is admitted to member SECTION 208.9—Establishment or ship in the Federal Reserve System, it must Maintenance of Branches obtain the approval of the Board for the re tention of such branches. (a ) In general. Every state bank which is or (3 ) A member state bank located in a state hereafter becomes a member of the Federal which by statute law permits the mainte Reserve System is subject to the provisions of nance of branches within county or greater section 9 of the Federal Reserve Act relating limits may, with the approval of the Board, to the establishment and maintenance of branches 7 in the United States or in a depen office, branch agency, additional office, or any branch place 7 Section 5155 of the Revised Statutes of the United of business located in any State or territory of the United States or in the District of Columbia at which deposits are States provides that: “(0 The term ‘branch’ as used in this received, or checks paid, or money lent.” section shall be held to include any branch bank, branch 16 Regulation H establish and operate, without regard to the capital requirements of section 5155 of the Revised Statutes, a seasonal agency in any resort community within the limits of the county in which the main office of such bank is located for the purpose of receiving and paying out deposits, issuing and cash ing checks and drafts, and doing business incident thereto, if no bank is located and doing business in the place where the pro posed agency is to be located; and any per mit issued for the establishment of such an agency shall be revoked upon the opening of a state or national bank in the communi ty where the agency is located. (4 ) Except as stated in paragraph (b )(3 ) of this section, in order for a member state bank to establish a branch beyond the cor porate limits of the city, town, or village in which it is situated, the aggregate capital stock of the member state bank and its branches shall at no time be less than the aggregate minimum capital stock required by law for the establishment of an equal number of national banking associations sit uated in the various places where such member state bank and its branches are situated.8* (5 ) A member state bank may not estab lish a branch beyond the corporate limits of the city, town, or village in which it is situ ated unless such establishment and opera tion are at the time authorized to state banks by the statute law of the state in question by language specifically granting such authority affirmatively and not merely by implication or recognition. (6 ) Any member state bank which, on February 25, 1927, had established and was actually operating a branch or branches in conformity with the state law is permitted to retain and operate the same while re maining a member of the Federal Reserve § 208.9 System, regardless of the location of such branch or branches. (7 ) The removal of a branch of a member state bank from one town to another town constitutes the establishment of a branch in such other town and, accordingly, requires the approval of the Board. The removal of a branch of a member state bank from one location in a town to another location in the same town will require the approval of the Board if the circumstances of the removal are such that the effect thereof is to consti tute the establishment of a new branch as distinguished from the mere relocation of an existing branch in the immediate neigh borhood without affecting the nature of its business or customers served. (c ) Application for approval of branches in United States. Any member state bank desir ing to establish a branch should submit a re quest for the approval by the Board of any such branch to the Federal Reserve Bank of the district in which the bank is located. Any nonmember state bank applying for member ship and desiring to retain any branch estab lished after February 25, 1927, beyond the corporate limits of the city, town, or village in which the bank is situated should submit a similar request. Any such request should be accompanied by advice as to the scope of the functions and the character of the business which are or will be performed by the branch and detailed information regarding the policy followed or proposed to be followed with ref erence to supervision of the branch by the head office; and the bank may be required in any case to furnish additional information which will be helpful to the Board in deter mining whether to approve such request. (d ) Foreign branches. With prior Board ap proval, a member state bank having capital and surplus of $1,000,000 or more may estab lish branches in “foreign countries”, as 8 The requirement of this paragraph is met if the aggre defined in section 211.2(f) of Regulation K gate capital stock of a member state bank having branches is not less than the total amount of capital stock which (12 CFR 211.2(f)). If a member state bank would be required for the establishment of one national has established a branch in such a country, it bank in each of the places in which the head office and may, unless otherwise advised by the Board, branches of the member state bank are located, irrespective of the number of offices which the bank may have in any establish other branches therein after 30 days’ such place. There are no additional capital requirements for notice to the Board with respect to each such additional branches within the city, town, or village in branch. which the head office is located. 17 § 208.9 (e ) Application for approval of foreign branches. Any member state bank desiring to establish such a branch and any nonmember state bank applying for membership and desir ing to retain any such branch established after February 25, 1927, should submit a request for the approval by the Board of any such branch to the Federal Reserve Bank of the District in which the bank is located. Any such request should be accompanied by advice as to the scope of the functions and the char acter of the business which are or will be per formed by the branch and detailed informa tion regarding the policy followed or proposed to be followed with reference to supervision of the branch by the head office; and the bank may be required in any case to furnish addi tional information which will be helpful to the Board in determining whether to approve such request. SECTION 208.10—Publication of Reports of Member Banks and Their Affiliates 9 (a ) Reports of member banks. (1 ) Each re port of condition made by a member state bank to its Federal Reserve Bank pursuant to a call therefor by the Board shall be pub lished by such member bank within 20 days from the date the call is issued, unless such time is extended by the Reserve Bank as provided in section 265.2(f) (16) of this chapter (Rules Regarding Delegation of Authority). (2 ) The report shall be printed in a news paper published in the place where the bank Regulation H is located or, if there be no newspaper pub lished in the place where the bank is locat ed, then in a newspaper published in the same or in an adjoining county and in gen eral circulation in the place where the bank is located. The term “newspaper”, for the purpose of this Part, means a publication with a general circulation published not less frequently than once a week, one of the pri mary functions of which is the dissemina tion of news of general interest. (3 ) The copy of the report for the use of the printer for publication should be pre pared on the form supplied or authorized for the purpose by the Federal Reserve Bank. Except as permitted in the Instruc tions for preparation of reports of condition (Forms FFIEC 031-034), the published in formation shall agree in every respect with that shown on the face of the report of con dition submitted to the Federal Reserve Bank. All signatures shall be the same in the published statement (although they may be typed or otherwise copied on the report for publication): (i) as in the original report submitted to the Federal Reserve Bank if the bank does not submit its report of condition electronically, or (ii) as retained in the bank’s files in hard copy if the bank has filed its report of condition electronically. The hard copy retained in the bank’s file must be made available to examiners upon request. (4 ) A copy of the printed report shall be retained in the bank’s files and made avail able to examiners upon request. (b ) Report of affiliates.10 (1 ) If reports of af 9 Under the provisions of section 9 of the Federal Re filiates are requested by the Board of Gov serve Act, reports of condition of member state banks ernors of the Federal Reserve System, each which, under that section, must be made to the respective Federal Reserve Banks on call dates fixed by the Board of 10 Section 21 of the Federal Reserve Act, among other Governors of the Federal Reserve System “shall be pub lished by the reporting banks in such manner and in ac things, provides as follows: “Whenever member banks are required to obtain reports from affiliates, or whenever affili cordance with such regulations as the said Board may ates of member banks are required to submit to examina prescribe.” tion, the Board of Governors of the Federal Reserve Sys Section 9 also provides that the reports of affiliates of a tem or the Comptroller of the Currency, as the case may member state bank which are required by that section to be be, may waive such requirements with respect to any such furnished to the respective Federal Reserve Banks “shall be report or examination of any affiliate if in the judgment of published by the bank under the same conditions as govern the said Board or Comptroller, respectively, such report or its own condition reports”. The term “affiliates,” as used in examination is not necessary to disclose fully the relations this provision of section 9, under the express terms of that section, includes “holding company affiliates as well as oth between such affiliate and such bank and the effect thereof upon the affairs of such bank.” In any case where the er affiliates,” but a member state bank is not required to Board has waived the filing of a report of an affiliate, no furnish to a Federal Reserve Bank the report of an affiliated publication of a report of an affiliate is required. member bank. 18 §208.11 Regulation H report of an affiliate of a member state bank, including a holding company affiliate, shall be published at the same time and in the same newspaper as the affiliated bank’s own condition report submitted to the Fed eral Reserve Bank, unless an extension of time for submission of the report of the af filiate has been granted under authority of the Board of Governors of the Federal Re serve System. When such extension of time has been granted, the report of the affiliate must be submitted and published before the expiration of such extended period in the same newspaper as the condition report of the bank was published. (2 ) The copy of the report for the use of the printer for publication should be pre pared on Form F.R. 220a. The published information shall agree in every respect with that shown on the face of the report of the affiliate furnished to the Federal Re serve Bank by the affiliated member bank, except that any item appearing under the caption “Financial relations with bank” against which the word “none” appears on the report furnished to the Federal Reserve Bank may be omitted in the published state ment of the affiliate: Provided, That if the word “none” is shown against all of the items appearing under such caption in the report furnished to the Federal Reserve Bank the caption “Financial relations with bank” shall appear in the published state ment followed by the word “none.” All sig natures shall be the same in the published statement as in the original report submit ted to the Federal Reserve Bank, but the signatures may be typewritten or otherwise copied on the report for publication. (3 ) A copy of the printed report shall be submitted to the Federal Reserve Bank. (c ) Waiver of reports of affiliates. Pursuant to section 21 of the Federal Reserve Act (12 USC 486), the Board of Governors of the Federal Reserve System waives the require ment for the submission of reports of affiliates of state bank members of the Federal Reserve System, unless such reports are specifically re quested by the Board of Governors. The Board of Governors of the Federal Reserve System may require the submission of reports which are necessary to disclose fully relations between member banks and their affiliates and the effect thereof upon the affairs of member banks. SECTION 208.11—Voluntary Withdrawal from Federal Reserve System (a ) General Any state bank desiring to with draw from membership in a Federal Reserve Bank may do so after six months’ written no tice has been filed with the Board;11 and the Board, in its discretion, may waive such six months’ notice in any individual case and may permit such bank to withdraw from member ship in a Federal Reserve Bank, subject to such conditions as the Board may prescribe, prior to the expiration of six months from the date of the written notice of its intention to withdraw. (b ) Notice of intention of withdrawal. (1 ) Any state bank desiring to withdraw from membership in a Federal Reserve Bank should signify its intention to do so, with the reasons therefor, in a letter addressed to the Board and mailed to the Federal Re serve Bank of which such bank is a mem ber. Any such bank desiring to withdraw from membership prior to the expiration of six months from the date of written notice of its intention to withdraw should so state in the letter signifying its intention to with draw and should state the reason for its de sire to withdraw prior to the expiration of six months. (2 ) Every notice of intention of a bank to withdraw from membership in the Federal Reserve System and every application for the waiver of such notice should be accom panied by a certified copy of a resolution duly adopted by the board of directors of such bank authorizing the withdrawal of such bank from membership in the Federal 11 Under specific provisions of section 9 of the Federal Reserve Act, however, no Federal Reserve Bank shall, ex cept upon express authority of the Board, cancel within the same calendar year more than 25 percent of its capital stock for the purpose of effecting voluntary withdrawals during that year. All applications for voluntary withdraw als are required by the law to be dealt with in the order in which they are filed with the Board. 19 §208.11 Reserve System and authorizing a certain officer or certain officers of such bank to file such notice or application, to surrender for cancellation the Federal Reserve Bank stock held by such bank, to receive and re ceipt for any moneys or other property due to such bank from the Federal Reserve Bank and to do such other things as may be necessary to effect the withdrawal of such bank from membership in the Federal Re serve System. (3 ) Notice of intention to withdraw or ap plication for waiver of six months’ notice of intention to withdraw by any bank which is in the hands of a conservator or other state official acting in a capacity similar to that of a conservator should be accompanied by advice from the conservator or other such state official that he joins in such notice or application. (c ) Time and method of effecting actual with drawal. Upon the expiration of six months af ter notice of intention to withdraw or upon the waiving of such six months’ notice by the Board, such bank may surrender its stock and its certificate of membership to the Federal Reserve Bank and request that same be can celed and that all amounts due to it from the Federal Reserve Bank be refunded.12 Unless withdrawal is thus effected within eight months after notice of intention to withdraw is first given, or unless the bank requests and the Board grants an extension of time, such bank will be presumed to have abandoned its intention of withdrawing from membership and will not be permitted to withdraw without Regulation H again giving six months’ written notice or ob taining the waiver of such notice. (d ) Withdrawal of notice. Any bank which has given notice of its intention to withdraw from membership in a Federal Reserve Bank may withdraw such notice at any time before its stock has been canceled and upon doing so may remain a member of the Federal Reserve System. The notice rescinding the former no tice should be accompanied by a certified copy of an appropriate resolution duly adopted by the board of directors of the bank. SECTION 208.12—Board Forms All forms referred to in this part and all such forms as they may be amended from time to time shall be a part of the regulations in this part. SECTION 208.13—Capital Adequacy The standards and guidelines by which the capital adequacy of state member banks will be evaluated by the Board are set forth in ap pendix A to part 208 for risk-based capital purposes, and, with respect to the ratios relat ing capital to total assets, in appendix B to part 208 and in appendix B to the Board’s Regulation Y, 12 CFR 225. SECTION 208.14— Procedures for Monitoring Bank Secrecy Act Compliance (a ) Purpose. This section in issued to ensure 12 A bank’s withdrawal from membership in the Federal Reserve System is effective on the date on which the Feder that all state member banks establish and al Reserve Bank stock held by it is duly canceled. Until maintain procedures reasonably designed to such stock has been canceled, such bank remains a member ensure and monitor their compliance with the of the Federal Reserve System, is entitled to all the privi provisions of subchapter II of chapter 53 of leges of membership, and is required to comply with all provisions of law and all regulations of the Board pertain title 31, United States Code, the Bank Secrecy ing to member banks and with all conditions of member Act, and the implementing regulations ship applicable to it. Upon the cancellation of such stock, promulgated thereunder by the Department all rights and privileges of such bank as a member bank shall terminate. of Treasury at 31 CFR 103, requiring record Upon the cancellation of such stock, and after due provi keeping and reporting of currency sion has been made for any indebtedness due or to become due to the Federal Reserve Bank, such bank shall be enti transactions.13 tled to a refund of its cash paid subscription with interest at 13 Recordkeeping requirements contained in this section the rate of one-half of 1 percent per month from the date of have been approved by the Board under delegated authori last dividend, the amount refunded in no event to exceed ty from the Office of Management and Budget under the the book value of the stock at that time, and shall likewise be entitled to the repayment of deposits and of any other provisions of chapter 35 of title 44, United States Code, and balance due from the Federal Reserve Bank. have been assigned OMB No. 7100-0196. 20 Regulation H (b ) Establishment of compliance program. On or before April 27, 1987, each bank shall develop and provide for the continued admin istration of a program reasonably designed to ensure and monitor compliance with the rec ordkeeping 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 promulgat ed thereunder by the Department of Treasury at 31 CFR 103. The compliance program shall be reduced to writing, approved by the board of directors, and noted in the minutes. (c ) Contents of compliance program. The compliance program shall, at a minimum— (1 ) provide for a system of internal con trols to ensure ongoing compliance; (2 ) provide for independent testing for compliance to be conducted by bank per sonnel or by an outside party; (3 ) designate an individual or individuals responsible for coordinating and monitor ing day-to-day compliance; and (4 ) provide training for appropriate personnel. SECTION 208.15—Agricultural Loan Loss Amortization (a ) Definitions. For purposes of this sec tion— (1 ) “Agricultural bank” means a bank— (i) the deposits of which are insured by the Federal Deposit Insurance Corporation; (ii) which is located in an area of the country the economy of which is depen dent on agriculture; (iii) which has total assets of $100,000,000 or less as of the most recent Report of Condition; and (iv) which has— (A ) at least 25 percent of its total loans in qualified agricultural loans and agriculturally related other prop erty; or (B ) less than 25 percent of its total loans in qualified agricultural loans and agriculturally related other prop erty, but which bank the Board or the Reserve Bank in whose District the §208.15 bank is located or its primary state reg ulator has recommended to the Feder al Deposit Insurance Corporation for eligibility under this part. (2 ) “Qualified agricultural loan” means— (i) loans qualifying as “loans to finance agricultural production and other loans to farmers” or as “loans secured by farm land” for purposes of Schedule RC-C of the FFIEC Consolidated Report of Con dition 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 clas sification as an agricultural loan by the Federal Reserve; and in whose District the bank is located; and (iv) the remaining unpaid balance of any loans, described in (i), (ii), and (iii), that have been charged off" since January 1, 1984, and that qualify for de ferral under this section. (3 ) “Accepting official” means— (i) the Reserve Bank in whose District the bank is located; or (ii) the director of the Division of Bank ing Supervision and Regulation in cases in which the Reserve Bank cannot deter mine that the bank qualifies under the regulation. (4 ) “Agriculturally related other proper ty” means any property, real or personal, that the bank owned on January 1, 1983, and any such additional property that it ac quires prior to January 1, 1992, in connec tion with a qualified agricultural loan. For the purposes of sections 208.15(a) (l )(i v ) and 208.15(e), the value of such property shall include the amount previously charged off as loss. (b ) Loss amortization and reappraisal. (1 ) Provided that there is no evidence that the loss resulted from fraud or criminal abuse on the part of the bank, its officers, directors, or principal shareholders, a bank that has been accepted under this section may, in the manner described below, amor tize in its Reports of Condition and In come— (i) Any loss that the bank would be re21 § 208.15 quired to reflect in its financial state ments for any period between and includ ing 1984 and 1991. (ii) Any loss that the bank would be required to reflect in its financial state ments for any period between and includ ing 1983 and 1991 resulting from a reap praisal 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 ba sis 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 which is permitted to amortize losses in ac cordance with paragraph (b ), above, may re state its capital and other relevant accounts and account for future authorized deferrals and amortizations in accordance with the in structions to the FFIEC Consolidated Re ports of Condition and Income. Any resulting increase in the capital account shall be includ ed in primary capital as per section 208.13 of this part. (d ) Eligibility. A proposal submitted in ac cord with paragraph (f) shall be accepted, subject to the conditions described in para graph (e), if the accepting official finds— (1 ) the proposing bank is an agricultural bank; (2 ) the proposing bank’s current capital is in need of restoration, but the bank remains an economically viable, fundamentally sound institution; (3 ) there is no evidence that fraud or crim inal abuse by the bank or its officers, direc tors, or principal shareholders led to signifi cant losses on qualified agricultural loans or from a reappraisal or sale of agriculturally related other property; (4 ) the proposing bank has submitted a capital plan approved by the accepting offi cial that will restore its capital to an accept able level. (e) Conditions on acceptance. All acceptances of proposals shall be subject to the following conditions: 22 Regulation H (1 ) the bank shall fully adhere to the ap proved capital plan and shall obtain the pri or approval of the accepting official for any modifications to the plan; (2 ) with respect to each asset subject to loss deferral under the program, the bank shall maintain accounting records adequate to document the amount and timing of the deferrals, repayments and amortizations; (3 ) the financial condition of the bank shall not deteriorate to the point where it is no longer a viable, fundamentally sound institution; (4 ) the bank agrees to make a reasonable effort, consistent with safe and sound bank ing practices, to maintain in its loan portfo lio a percentage of agricultural loans, in cluding agriculturally related other proper ty, not lower than the percentage of such loans in its loan portfolio on January 1, 1986; and (5 ) the bank shall agree to provide the ac cepting official, upon request, with such in formation as the accepting official deems necessary to monitor the bank’s amortiza tion, its compliance with conditions, and its continued eligibility. (f) Submission of proposals. (1 ) A bank wishing to amortize losses on qualified agricultural loans or from reap praisal or sale of agriculturally related other property shall submit a proposal to the ap propriate accepting official. (2 ) The proposal shall contain the follow ing information: (i) name and address of the bank; (ii) information establishing that the bank is located in an area the economy of which is dependent on agriculture; the in formation could consist of a description of the bank’s location, dominant lines of commerce in its service area, and any other information the bank believes will support the contention that it is located in such an area. (iii) a copy of the bank’s most recent Report of Condition and Income; (iv) if the Report of Condition and In come fails to show that at least 25 per cent of the bank’s total loans are qualified Regulation H agricultural loans, the basis upon which the bank believes that it should be de clared eligible to amortize losses; (v ) a capital plan demonstrating that the bank will achieve an acceptable capi tal level not later than the end of the bank’s amortization period. The plan should provide for a realistic improve ment in the bank’s capital, over the course of the amortization period, from earnings retention, capital injections, or other sources; and include specific infor mation regarding dividend levels, com pensation to directors, executive officers and individuals who have a controlling interest and in turn to their related inter ests, and payments for services or prod ucts furnished by affiliated companies. (vi) a list of the loans and agriculturally related other property upon which the bank proposes to defer loss, including for each such loan or property the following information: (A ) the name of the borrower, the amount of the loan that resulted in the loss, and the amount of the loss; (B ) the date on which the loss was declared; (C ) the basis upon which the loss re sulted from a qualified agricultural loan; (vii) a certification by the bank’s chief executive officer that there is no evidence that the losses resulted from fraud or criminal abuse by the bank, its officers, directors, or principal shareholders; (viii) a copy of a resolution by the bank’s Board of Directors authorizing submission of the proposal; and (ix) such other information as the ac cepting official may require. (g ) Revocation of eligibility. The failure to comply with any condition in an acceptance or with the capital restoration plan is grounds for revocation of acceptance for loss amortiza tion and for an administrative action against the bank under 12 USC 1818(b). Additional ly, acceptance of a bank for loss amortization will not foreclose any administrative action against the bank that the Board may deem appropriate. §208.16 SECTION 208.16— Reporting Requirements for State Member Banks Subject to the Securities Exchange Act of 1934 (a ) Filing requirements. Except as otherwise provided in this section, a state member bank the securities of which are subject to registra tion pursuant to section 12(b) or section 12(g) of the Securities Exchange Act of 1934 (the “ 1934 act”) (15 USC 78/(b) and (g )) shall comply with the rules, regulations and forms adopted by the Securities and Exchange Commission ( “Commission”) pursuant to sections 12, 13, 14(a), 14(c), 14(d), 14(f) and 16 of the 1934 Act (15 USC 78/, 78m, 78n(a), (c ), (d ), (f) and 78p). The term “Commission” as used in those rules and reg ulations shall with respect to securities issued by state member banks be deemed to refer to the Board unless the context otherwise requires. (b ) Elections permitted of state member banks with total assets of $150 million or less. (1 ) Notwithstanding paragraph (a ) of this section or the rules and regulations promul gated by the Commission pursuant to the 1934 act, a state member bank that has to tal 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 such bank with the Board under section 9 of the Federal Reserve Act (12 USC 324) (Federal Financial Institutions Examina tion Council Forms 033 or 034). (2 ) A state member bank may not elect to file financial statements from its quarterly report of condition pursuant to paragraph (1 ) if the amounts reported for net income, total assets or total equity capital in those statements, which are prepared on the basis of federal bank regulatory reporting stan dards, would differ materially from such amounts reported in financial statements prepared in accordance with generally ac cepted accounting principles (GAAP). ( 3 ) A state member bank qualifying for and electing to file financial statements from its 23 §208.16 quarterly report of condition pursuant to par agraph (1 ) in its Form 10-Q shall include earnings per share or net loss per share data prepared in accordance with GAAP and dis close any material contingencies as required by article 10 of the Commission’s Regulation S-X (15 CFR 210.10-01), in the Manage ment’s Discussion and Analysis of Financial Condition and Results of Operations section of Form 10-Q. (c ) Filing instructions, inspection of docu ments, and nondisclosure of certain informa tion filed. (1 ) 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 Ave nue, N.W., Washington, D.C. 20551. Mate rial 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 ) No filing fees specified by the Commis sion’s rules shall be paid to the Board. (3 ) Copies of the registration statement, definitive proxy solicitation materials, re ports and annual reports to shareholders re quired by this section (exclusive of exhib its) will be available for public inspection at the Board’s offices in Washington, D.C., 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. (4 ) Any person filing any statement, re port, or document under the 1934 act may make written objection to the public disclo sure of any information contained therein in accordance with the procedure set forth below: (i) The person shall omit from the state ment, report, or document, when it is filed, the portion thereof that the person desires to keep undisclosed (hereinafter called the confidential portion). The per son shall indicate at the appropriate place in the statement, report, or document 24 Regulation H that the confidential portion has been so omitted and filed separately with the Board. (ii) The person shall file with the copies of the statement, report, or document filed with the Board— (A ) as many copies of the confidential portion, each clearly marked “CON FIDENTIAL TREATMENT”, as there are copies of the statement, re port, 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 con stitute the whole of the answer, the en tire answer thereto; except that in case the confidential portion is part of a fi nancial statement or schedule, only the particular financial statement or sched ule 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 (B ) an application making objection to the disclosure of the confidential portion. Such application shall be on a sheet or sheets separate from the confi dential portion, and shall (1 ) identify the portion of the statement, report, or document that has been omitted, (2 ) include a statement of the grounds of objection, and (3 ) include the name of each exchange, if any, with which the statement, report, or document is filed. The copies of the confidential portion and the application filed in accordance with this subparagraph shall be en closed in a separate envelope marked “CONFIDENTIAL TREATMENT” and addressed to Secretary, Board of Governors of the Federal Reserve Sys tem, Washington, D.C. 20551. (iii) Pending the determination by the Board on the objection filed in accord ance with this paragraph, the confidential portion will not be disclosed by the Board. (iv) If the Board determines that the ob jection shall be sustained, a notation to that effect will be made at the appropri- Regulation H ate place in the statement, report, or document. (v ) If the Board determines that the ob jection shall not be sustained because dis closure of the confidential portion is in the public interest, a finding and determi nation to that effect will be entered and notice of the finding and determination will be sent by registered or certified mail to the person. (vi) If the Board determines that the ob jection shall not be sustained pursuant to paragraph (c )(4 )(v ), the confidential portion shall be made available to the public— (A ) 15 days after notice of the Board’s determination not to sustain the objection has been given as re quired by paragraph (c ) (4 ) (v ) 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; (B ) 60 days after notice of the Board’s determination not to sustain the objection has been given as re quired by paragraph (c ) (4 ) (v) of this section and the person filing the objec tion has filed with the Board a written statement that he intends to seek judi cial review of the finding and determi nation but has failed to file a petition for judicial review of the Board’s deter mination; or (C ) upon final judicial determination, if adverse to the party filing the objection. (vii) 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. SECTION 208.17—Disclosure of Financial Information by State Member Banks (a ) Purpose and scope. The purpose of this section is to facilitate the dissemination of §208.17 publicly available information regarding the financial condition of state member banks, state-licensed agencies of foreign banks, and state-licensed branches of foreign banks that are not insured by the Federal Deposit Insur ance Corporation. This section requires all state-chartered banks that are members of the Federal Reserve System and all other covered institutions (1 ) to make year-end call reports or Reports of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks or, in the case of state member banks, other alter native financial information, available to shareholders, customers, and the general pub lic upon request; and (2 ) to advise sharehold ers and the public of the availability of this information. This section does not amend or modify the publication requirements of sec tion 208.10, or any other section of this regulation. (b ) Definitions. For purposes of this section, the following definitions apply: (1 ) “Call report” means the Consolidated Reports of Condition and Income (OMB No. 7100-0036) filed pursuant to 12 USC 324 and section 208.10 of this regulation (12 CFR 208.10). (2 ) “State member bank” means a bank that is chartered by a state and is a member of the Federal Reserve System. (3 ) “Other covered institutions” means state-licensed agencies of foreign banks, or state-licensed branches of foreign banks that are not insured by the Federal Deposit Insurance Corporation. (c ) Availability of financial information. (1 ) Shareholders. Each state member bank shall advise its shareholders, by a written announcement, which may be included in the notice of the annual shareholders’ meet ing, that one copy of certain financial infor mation is available free of charge upon re quest. The announcement shall include, at a minimum, an address or telephone number to which requests may be directed. (2 ) General public. State member banks and other covered institutions shall use rea sonable means at their disposal to advise the public of the availability of information pursuant to this section. Bankers’ banks, as defined by the Federal Reserve Act, as 25 §208.17 amended by the Monetary Control Act of 1980 (title I of Pub. L. 96-221), and 12 CFR 204.121, are exempt from this require ment. The notification to the public shall state that one copy of the information is available free of charge upon request and state an address or telephone number to which requests may be directed. (d ) Financial information to be provided by state member banks. The bank shall have dis cretion to determine which type of informa tion, identified in this subsection, to release. The bank shall make the information it choos es to release available as soon as is reasonably possible but not later than April 1 of the year immediately following the end of the year to which the most recently available information pertains. State member banks shall fulfill the requirements of this section by providing, upon request, at least one free copy to each requestor of the following information: (1 ) copies of their entire call report for the most recent year-end and the prior yearend, excluding any information for which confidential treatment is permitted pursu ant to the call report instructions; or (2 ) copies of only the following schedules from their call reports for the most recent year-end and the prior year-end, excluding any information for which confidential treatment is permitted pursuant to the call report instructions: (i) Schedule RC (Balance Sheet); (ii) Schedule RC-N (Past-Due and Nonaccrual Loans and Leases); (iii) Schedule RI (Income Statement); (iv) Schedule RI-A (Changes in Equity Capital); and (v ) Schedule RI-B (Charge-Offs and Recoveries and Changes in Allowance for Loan and Lease Losses)—Part I may be omitted; or (3 ) in the case of a bank required to file statements and reports pursuant to the Board’s Regulation H, a copy of the bank’s annual report to shareholders for meetings at which directors are to be elected or the bank’s annual report; or (4 ) in the case of a bank with independent ly audited financial statements, copies of the audited financial statements and the 26 Regulation H certificate or report of the independent ac countant if such statements contain infor mation for the two most recent year-ends comparable to that specified in subsection (d )(2 ); or (5 ) in the case of a bank that is the only bank subsidiary of a bank holding compa ny, that is majority-owned by that bank holding company, and that has assets equal to 95 percent or more of the bank holding company’s consolidated total assets, a copy of either (i) the annual report of the bank holding company prepared in conformity with the regulations of the Securities and Exchange Commission; or (ii) if the hold ing company has consolidated assets of $150 million or more, the sections in the bank holding company’s consolidated finan cial statements for the most recent year-end and the prior year-end on Form FY-Y-9C (Consolidated Financial Statements for Bank Holding Companies with Total Con solidated Assets of $150 Million or More, or with More Than One Subsidiary Bank (OMB No. 7100-0128)) prepared pursuant to the Board’s Regulation Y, and compara ble to the call report schedules enumerated in paragraph (d ) (2 ) of this section. (e ) Financial information to be provided by other covered institutions. Other covered insti tutions shall fulfill the requirements of this section by providing, upon request, at least one free copy to each requestor of the follow ing schedules from the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (OMB No. 7100-0032) for the most recent year-end and the prior year-end: (1 ) Schedule RAL (Assets and Lia bilities); (2 ) Schedule E (Deposit Liabilities and Credit Balances); (3 ) Schedule P (Other Borrowed Money). The institution shall make the information available as soon as is reasonably possible but not later than April 1 of the year immediately following the end of the year to which the most recently available information pertains. (f) Disclaimer. The following legend shall be included with any financial information pro vided pursuant to this section: “This financial information has not been reviewed, or con- Regulation H firmed for accuracy or relevance, by the Fed eral Reserve System.” (g ) This section is not intended to create a private right of action against any institution disclosing documents pursuant to this section. SECTION 208.18—Appraisal Standards for Federally Related Transactions The standards applicable to appraisals ren dered in connection with federally related transactions entered into by state member banks are set forth in subpart G of the Board’s Regulation Y, 12 CFR 225. SECTION 208.19—Payment of Dividends (a ) Capital limitations on payment of divi dends. No state member bank shall, during the time it continues its banking operations, withdraw, or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital. If losses have at any time been sustained by a state member bank that equal or exceed its undivided profits then on hand, no dividend shall be paid. No divi dend shall be paid by a state member bank while it continues its banking operations, to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts. (1 ) Exceptions. Exceptions to the limita tions contained in this paragraph (a ) may be made only with the prior approval of the Board and of at least two-thirds of the shares of each class of stock outstanding. (2 ) Dividends on common and preferred stock. The provisions of this paragraph (a ) shall apply to the payment of dividends on both common and preferred stock. (3 ) “Bad debt. ” Under paragraph (a ), bad debts must be deducted from the net profits then on hand in computing funds available for the payment of dividends. The term “bad debt” includes matured obligations due a bank on which the interest is past due and unpaid for six months unless the debts are well secured and in the process of col lection. Obligations include every type of §208.19 indebtedness owed to the bank, including, for example, loans, investment securities, time deposits in other depository institu tions, and leases. The six-month period of default may begin at any time, regardless of when the debt matures. (i) Matured debt. Whether a debt has matured for the purposes of this subsec tion usually will be determined by appli cable contract law. Generally, a debt is matured when all or a part of the princi pal is due and payable as a result of de mand, arrival of the stated maturity date, or acceleration by contract or by opera tion of law. Nevertheless, any demand debt on which the payment of interest is six months past due will be considered matured even though payment on the debt has not been demanded. Installment loans on which any payment is six months past due will be considered ma tured even though acceleration of the to tal debt may not have occurred. (ii) Well-secured debt. A debt is well se cured if it is secured by collateral in the form of liens on, or pledges of, real or personal property, including securities, having realizable value sufficient to dis charge the debt in full, or by the guaranty of a financially responsible party. If a loan that would otherwise be considered a bad debt is partially secured, that por tion not properly secured will be consid ered a bad debt. (iii) Debt in process of collection. A debt is in the process of collection if collection of the debt is proceeding in due course, either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through col lection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restora tion to current status. In any case, the bank should have a plan of collection set ting forth the reasons for the selected method of collection, the responsibilities of the bank and the borrower, and the expected date of repayment of the debt or its restoration to current status. (iv) Debts of bankrupt or deceased debt ors. A claim duly filed against the estate 27 §208.19 of a bankrupt or deceased debtor is con sidered as being in the process of collec tion. The obligation is well secured if it meets the criteria set forth in paragraph 3 (a ) (ii) of this section or if the claim of the bank against the estate has been duly filed and the statutory period for filing has expired and the assets of the estate are adequate to discharge all obligations in full. (v ) Documentation. The bank must maintain in its files documentation to support its evaluation of the obligation. In addition, the bank must retain, at a minimum, monthly progress reports on its collection efforts, noting and explain ing any deviation from the collection plan. (4 ) “Undivided profits then on hand”. For the purpose of this section, the terms “undi vided profits then on hand” and “net profits then on hand” shall have the same mean ing, and shall be referred to herein as “un divided profits then on hand”. (i) Allowance for loan and lease losses. When calculating the amount of divi dends a bank can pay under 12 USC 56 and this paragraph, the bank may not add the balance in its allowance for loan and lease losses to its undivided profits for the purpose of determining undivided profits then on hand. The terms “allow ance for loan and lease losses” and “un divided profits” shall have the same meaning as set forth in the instructions for the Reports of Condition and Income. (ii) Bad debts. When deducting its bad debts from its undivided profits then on hand, a bank shall first subtract the sum of its bad debts from the balance of its allowance for loan and lease losses ac count. If the sum of a bank’s bad debts is greater than its allowance for loan and lease losses, the excess bad debt shall then be deducted from the bank’s undi vided profits then on hand. (iii) Surplus surplus. State member banks are required to comply with state law provisions concerning the mainte nance of surplus funds in addition to common capital. To the extent a bank has capital surplus in excess of that re 28 Regulation H quired under applicable state law, the bank has “surplus surplus.” Only that portion of the surplus surplus that meets the following conditions may be trans ferred to the undivided-profits account and be available for the payment of dividends: (A ) The bank’s board of directors ap proves the transfer of funds from capi tal surplus to undivided profits; and (B ) The transfer has been approved by the Board. The bank must be able to demonstrate to the Board that the portion of the surplus surplus to be transferred came from the earnings of prior periods, excluding earnings transferred as a result of stock divi dends. Requests for Board approval shall be submitted to the appropriate Federal Reserve Bank. The bank may consider the transfer to be approved if the Board or the Reserve Bank does not notify the bank within 30 days af ter the Reserve Bank’s receipt of the notice that the transfer has been disap proved or that it is subject to continu ing consideration. (b ) Earnings limitations on payment of divi dends. A state member bank may not pay a dividend if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two calendar years, less any required transfers to surplus or to a fund for the retirement of any preferred stock, unless the bank has re ceived the prior approval of the Board for the dividend under paragraph (b )(3 ) of this section. (1 ) Dividends on common and preferred stock The provisions of this paragraph (b ) apply to the payment of dividends on both preferred and common stock. (2 ) “Net profits.” “Net profits” shall be equal to the net income or loss as reported by a state member bank in its Reports of Condition and Income. When computing its “net profits” under this section, a bank should not add its provisions for loan and lease losses to, nor deduct net charge-offs from, its reported net income. Regulation H (3 ) Retained net profits. Retained net prof its of any period shall be equal to the net income or loss as reported in the Reports of Condition and Income less any common or preferred stock dividends declared or other wise charged to the undivided profits of the period for which retained net profits are computed. (4 ) Approval of dividends. A bank must re quest and receive the approval of the Board before declaring a dividend if the amount of all dividends (common and preferred), in cluding the proposed dividend, declared by the bank in any calendar year exceeds the total of the bank’s net profits of that year to date combined with its retained net profits of the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of any preferred stock. Requests for the Board’s approval shall be submitted to the appropriate Federal Re serve Bank. (5 ) Effective date and transition provisions. (i) For the purpose of computing “net profits” pursuant to 12 USC 60, a state member bank must apply paragraph (b ) (2 ) of this section no later than Janu ary 1, 1991. A bank may elect to use this paragraph (b )(2 ) of this section to cal culate net profits for 1990, if it applies this provision on a full calendar year to date basis. (ii) Whether a bank chooses to use para graph (b )(2 ) of this section beginning as of January 1, 1990 or 1991, it may elect to apply the paragraph (b )(2 ) to recal culate retained net profits for one or both of the prior two years. (iii) Once a bank has elected to calculate net profits or retained net profits for a particular year applying the provisions of paragraph (b )(2 ) of this section, re tained net profits and net profits for all subsequent periods in the calculation must also be calculated using paragraph (b ) (2 ) of this section. If a state member bank has elected to use paragraph (b ) (2 ) of this section for a particular year, the bank may not change the method of cal culation used for that year during subse quent periods. § 208.30 SUBPART B—PROM PT CORRECTIVE ACTION SECTION 208.30—Authority, Purpose, Scope, Other Supervisory Authority, and Disclosure of Capital Categories (a ) Authority. This subpart is issued by the Board of Govemers of the Federal Reserve System (Board) pursuant to section 38 (sec tion 38) of the Federal Deposit Insurance Act (FDI Act) (12 USC 1831o) as added by sec tion 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (Pub. L. 102-242, 105 Stat. 2236 (19 91)). (b ) Purpose. Section 38 of the FDI Act estab lishes a framework of supervisory actions for insured depository institutions that are not adequately capitalized. The principal purpose of this subpart is to define, for state member banks, the capital measures and capital levels that are used for determining the supervisory actions authorized under section 38 of the FDI Act. This subpart also establishes proce dures for submission and review of capitalrestoration plans and for issuance and review of directives and orders pursuant to section 38. (c ) Scope. This subpart implements the pro visions of section 38 of the FDI Act as they apply to state member banks. Certain of these provisions also apply to officers, directors, and employees of state member banks. Other pro visions apply to any company that controls a state member bank and to the affiliates of a state member bank. (d ) Other supervisory authority. Neither sec tion 38 nor this subpart in any way limits the authority of the Board under any other provi sion of law to take supervisory actions to ad dress unsafe or unsound practices, deficient capital levels, violations of law, unsafe or un sound conditions, or other practices. Action under section 38 of the FDI Act and this sub part may be taken independently of, in con junction with, or in addition to any other enforcement action available to the Board, in cluding issuance of cease-and-desist orders, capital directives, approval or denial of appli cations or notices, assessment of civil money penalties, or any other actions authorized by law. 29 Regulation H § 208.30 (e) Disclosure of capital categories. The as signment 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 captial category under this subpart or that the Board or any other federal banking agency has assigned the bank to a particular capital category. capital to average total consolidated assets, as calculated in accordance with the Board’s Capital Adequacy Guidelines for State Mem ber Banks: Tier 1 Leverage Measure (appen dix B). ( a ) (1 ) Control has the same meaning as signed to it in section 2 of the Bank Holding Company Act (12 USC 1841), and the term “controlled” shall be construed con sistently with the term “control.” (2 ) Exclusion for fiduciary ownership. No insured depository institution or company controls another insured depository institu tion 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 ac quiring insured depository institution or company has sole discretionary authority to exercise voting rights with respect thereto. (3 ) Exclusion for debts previously con tracted. No insured depository institution or company controls another insured de pository 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 af ter 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. Measure (appendix A). (d ) Management fee means any payment of money or provision of any other thing of val ue to a company or individual for the provi sion of management services or advice to the bank or related overhead expenses, including payments related to supervisory, executive, managerial, or policymaking functions, other than compensation to an individual in the in SECTION 208.31—Definitions dividual’s capacity as an officer or employee of For purposes of this subpart, except as modi the bank. fied in this section or unless the context other (e ) Risk-weighted assets means total weight wise requires, the terms used have the same ed-risk assets, as calculated in accordance meanings as set forth in section 38 and section with the Board’s Capital Adequacy Guide 3 of the FDI Act. lines for State Member Banks: Risk-Based (f) Tangible equity means the amount of core capital elements in the Board’s Capital Ade quacy Guidelines for State Member Banks: Risk-Based Measure (appendix A ), plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets except purchased mortgage-servicing rights to the extent that the Board determines pursuant to section 475 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 USC 1828 note) that purchased mortgage servicing rights may be included in calculating the bank’s tier 1 capital. (g) Tier 1 capital means the amount of tier 1 capital as defined in the Board’s Capital Ade quacy Guidelines for State Member Banks: Risk-Based Measure (appendix A). (h ) Tier 1 risk-based capital ratio means the ratio of tier 1 capital to weighted risk assets, as calculated in accordance with the Board’s Cap ital Adequacy Guidelines for State Member Banks: Risk-Based Measure (appendix A). (b ) Controlling person means any person having control of an insured depository insti tution and any company controlled by that person. (i) Total assets means quarterly average total assets as reported in a bank’s Report of Con dition and Income ( “call report”), minus in tangible assets as provided in the definition of tangible equity. (c ) Leverage ratio means the ratio of tier 1 (j) Total risk-based capital ratio means the 30 Regulation H ratio of qualifying total capital to weightedrisk assets, as calculated in accordance with the Board’s Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure (appendix A). § 208.33 change the capital category of the bank and shall notify the bank of the Board’s determination. SECTION 208.33 —Capital Measures and Capital-Category Definitions SECTION 208.32— Notice of Capital Category (a ) Effective date of determination of capital category. A state 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 subsection (b). (b ) Notice of capital category. A state mem ber 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 deliv ered to the bank; or (3 ) written notice is provided by the Board to the bank of its capital category for pur poses 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 section 208.33(c) of this part. (c ) Adjustments to reported capital levels and capital category. (1 ) Notice of adjustment by bank. A state 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 has occurred that would cause the bank to be placed in a lower capital category from the category as signed 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 the Board to change capital category. After receiving notice pur suant to paragraph (c )(1 ) of this section, the Board shall determine whether to (a ) Capital measures. For purposes o f section 38 and this subpart, the relevant capital mea sures shall be— ( 1 ) the total risk-based capital ratio; ( 2 ) the tier 1 risk-based capital ratio; and ( 3 ) the leverage ratio. (b ) Capital categories. For purposes o f sec tion 38 and this subpart, a state member bank shall be deemed to be— ( 1 ) “well capitalized” if the bank— ( i) has a total risk-based capital ratio of 10.0 percent or greater, and (ii) has a tier 1 risk-based capital ratio o f 6.0 percent or greater, and (iii) has a leverage ratio o f 5.0 percent or greater, and (iv ) is not subject to any written agree ment, order, capital directive, or promptcorrective-action directive issued by the Board pursuant to section 8 o f the F D I Act, the International Lending Supervi sion A ct o f 1983, or section 38 o f the F D I Act, or any regulation thereunder, to meet and maintain a specific capital level for any capital measure; ( 2 ) “adequately capitalized” if the bank— (i) has a total risk-based capital ratio of 8.0 percent or greater, and (ii) has a tier 1 risk-based capital ratio of 4 .0 percent or greater, and (iii) has (A ) a leverage ratio o f 4 .0 percent or greater, or (B ) a leverage ratio o f 3.0 percent or greater if the bank is rated composite 1 under the CAM EL rating system in the most recent examination o f the bank and is not experiencing or antici pating significant growth; and (iv ) does not meet the definition of a “well-capitalized” bank; ( 3 ) “undercapitalized” if the bank— ( i) has a total risk-based capital ratio that is less than 8.0 percent, or 31 § 208.33 (ii) has a tier 1 risk-based capital ratio that is less than 4.0 percent, or (iii) (A ) except as provided in clause (B ), has a leverage ratio that is less than 4.0 percent, or (B ) has a leverage ratio that is less than 3.0 percent, if the bank is rated composite 1 under the CAMEL rating system in the most recent examination of the bank and is not experiencing or anticipating significant growth; (4 ) “significantly undercapitalized” if the bank has— (i) a total risk-based capital ratio that is less than 6.0 percent, or (ii) a tier 1 risk-based capital ratio that is less than 3.0 percent, or (iii) a leverage ratio that is less than 3.0 percent; (5 ) “critically undercapitalized” if the bank has a ratio of tangible equity to total assets that is equal to or less than 2.0 percent. Regulation H S E C T IO N 2 0 8 .3 4 — C ap ital-R estoration P lan s (a ) Schedule for filing plan. (1 ) In general. A state member bank shall file a written capital-restoration plan with the appropriate Reserve Bank within 45 days of the date that the bank receives no tice or is deemed to have notice that the bank is undercapitalized, significantly un dercapitalized, or critically undercapital ized, 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 section 208.33(c) to comply with supervi sory actions as if the bank were undercapi talized is not required to submit a capitalrestoration 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 addi (c ) Reclassification based on supervisory crite tional capital-restoration plan based on a ria other than capital. The Board may reclassi revised calculation of its capital measures fy a well-capitalized state member bank as or a reclassification of the institution under adequately capitalized and may require an ad section 208.33(c) unless the Board notifies equately capitalized or an undercapitalized the bank that it must submit a new or re state member bank to comply with certain vised capital plan. A bank that is notified mandatory or discretionary supervisory ac that it must submit a new or revised capitaltions as if the bank were in the next lower restoration plan shall file the plan in writing capital category (except that the Board may with the appropriate Reserve Bank within not reclassify a significantly undercapitalized 45 days of receiving such notice, unless the bank as critically undercapitalized) (each of Board notifies the bank in writing that the these actions are hereinafter referred to gener plan is to be filed within a different period. ally as “reclassifications”) in the following circumstances: (b ) Contents of plan. All financial data sub (1 ) Unsafe or unsound condition. The mitted in connection with a capital-restora Board has determined, after notice and op tion plan shall be prepared in accordance with portunity for hearing pursuant to section the instructions provided on the call report, 263.203 of this chapter, that the bank is in unless the Board instructs otherwise. The cap unsafe or unsound condition; or ital-restoration plan shall include all of the in (2 ) Unsafe or unsound practice. The Board formation required to be filed under section has determined, after notice and opportuni 3 8 (e )(2 ) of the FDI Act. A bank that is re ty for hearing pursuant to section 263.203 quired to submit a capital-restoration plan as of this chapter, that, in the most recent ex the result of a reclassification of the bank pur amination of the bank, the bank received suant to section 208.33(c) shall include a de and has not corrected, a less-than-satisfac- scription of the steps the bank will take to tory rating for any of the categories of asset correct the unsafe or unsound condition or quality, management, earnings, or liquidity. practice. No plan shall be accepted unless it 32 Regulation H § 208.34 (h ) Notice to FDIC. Within 45 days of the effective date of Board approval of a capitalrestoration plan, or any amendment to a capi tal-restoration plan, the Board shall provide a (c ) Review of capital-restoration plans. With copy of the plan or amendment to the Federal in 60 days after receiving a capital-restoration Deposit Insurance Corporation. plan under this subpart, the Board shall pro vide written notice to the bank of whether the plan has been approved. The Board may ex (i) Performance guarantee by companies that tend the time within which notice regarding control a bank. approval of a plan shall be provided. (1 ) Limitation on liability, (i) Amount limitation. The aggregate liability under (d ) Disapproval of capital plan. If a capitalthe guarantee provided under section 38 restoration plan is not approved by the Board, and this subpart for all companies that the bank shall submit a revised capital-resto control a specific state member bank that ration plan within the time specified by the is required to submit a capital-restoration Board. Upon receiving notice that its capitalplan under this subpart shall be limited restoration plan has not been approved, any to the lesser of— undercapitalized state member bank (as de (A ) an amount equal to 5.0 percent of fined in section 208.33(b) (3 ) ) shall be subject the bank’s total assets at the time the to all of the provisions of section 38 and this bank was notified or deemed to have subpart applicable to significantly undercapi notice that the bank was undercapital talized institutions. These provisions shall be ized; or applicable until such time as a new or revised (B ) the amount necessary to restore capital-restoration plan submitted by the bank the relevant capital measures of the has been approved by the Board. bank to the levels required for the bank (e ) Failure to submit capital-restoration plan. to be classified as adequately capital A state member bank that is undercapitalized ized, as those capital measures and lev (as defined in section 2 0 8 .3 3 (b )(3 )) and that els are defined at the time that the fails to submit a written capital-restoration bank initially fails to comply with a plan within the period provided in this section capital-restoration plan under this shall, upon the expiration of that period, be subpart. subject to all of the provisions of section 38 (ii) Limit on duration. The guarantee and this subpart applicable to significantly un and limit of liability under section 38 and dercapitalized institutions. this subpart shall expire after the Board notifies the bank that it has remained ad (f) Failure to implement capital-restoration equately capitalized for each of four con plan. Any undercapitalized state member secutive calendar quarters. The expira bank that fails in any material respect to im tion or fulfillment by a company of a plement a capital-restoration plan shall be guarantee of a capital restoration plan subject to all of the provisions of section 38 shall not limit the liability of the compa and this subpart applicable to significantly un ny under any guarantee required or pro dercapitalized institutions. vided in connection with any capital-res toration plan filed by the same bank after (g ) Amendment of capital plan. A bank that expiration of the first guarantee. has filed an approved capital-restoration plan (iii) Collection on guarantee. Each com may, after prior written notice to and approv pany that controls a given bank shall be al by the Board, amend the plan to reflect a jointly and severally liable for the guar change in circumstance. Until such time as a antee for such bank as required under proposed amendment has been approved, the section 38 and this subpart, and the bank shall implement the capital-restoration Board may require and collect payment plan as approved prior to the proposed of the full amount of that guarantee from amendment. includes any performance guarantee described in section 3 8 (e )(2 )(C ) of that act by each company that controls the bank. 33 § 208.34 any or all of the companies issuing the guarantee. (2 ) Failure to provide guarantee. In the event that a bank that is controlled by any company submits a capital-restoration plan that does not contain the guarantee re quired under section 3 8 (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 accept able 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 appli cable to banks that have failed in a material respect to implement a capital-restoration plan. S E C T IO N 2 0 8 .3 5 — M a n d a to ry and D iscretio n a ry Supervisory A c tio n s und er S ection 3 8 (a ) Mandatory supervisory actions. (1 ) Provisions applicable to all banks. All state member banks are subject to the re strictions contained in section 38(d) of the FDI Act on payment of capital distribu tions and management fees. (2 ) Provisions applicable to undercapital ized, significantly undercapitalized, and crit ically undercapitalized banks. Immediately upon receiving notice or being deemed to have notice, as provided in section 208.32 or section 208.34 of this subpart, that the bank is undercapitalized, significantly un dercapitalized, or critically undercapital ized, the bank shall become subject to the provisions of section 38 of the FDI Act— (i) restricting payment of capital distri butions and management fees (section 38(d )); (ii) requiring that the Board monitor the condition of the bank (section 3 8 (e )(1 )); (iii) requiring submission of a capital34 Regulation H restoration plan within the schedule es tablished in this subpart (section 3 8 (e )(2 )); (iv) restricting the growth of the bank’s assets (section 3 8 (e )(3 )); and (v ) requiring prior approval of certain expansion proposals (section 3 8 (e )(4 )). (3 ) Additional provisions applicable to sig nificantly undercapitalized, and critically undercapitalized banks. In addition to the provisions of section 38 of the FDI Act de scribed in paragraph (a )(2 ) of this section, immediately upon receiving notice or being deemed to have notice, as provided in sec tion 208.32 or section 208.34 of this sub part, that the bank is significantly under capitalized, or critically undercapitalized, or that the bank is subject to the provisions applicable to institutions that are signifi cantly undercapitalized because the bank failed to submit or implement in any mate rial respect an acceptable capital-restora tion 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 3 8 ( 0 (4 ) ). (4 ) Additional provisions applicable to crit ically undercapitalized banks. In addition to the provisions of section 38 of the FDI Act described in paragraphs (a )(2 ) and (3 ) of this section, immediately upon receiving notice or being deemed to have notice, as provided in section 208.32 of this subpart, that the bank is critically undercapitalized, the bank shall become subject to the provi sions of section 38 of the FDI Act— (i) restricting the activities of the bank (section 3 8 (h )(1 )); and (ii) restricting payments on subordinat ed debt of the bank (section 3 8 (h )(2 )). (b ) Discretionary supervisory actions. In tak ing any action under section 38 that is within the Board’s discretion to take in connection with (1 ) a state member bank that is deemed to be undercapitalized, significantly undercap italized, or critically undercapitalized, or has been reclassified as undercapitalized, or signif icantly undercapitalized; (2 ) an officer or di rector of such bank; or (3 ) a company that controls such bank, the Board shall follow the Regulation H procedures for issuing directives under section 263.202 and 263.204 of this chapter, unless otherwise provided in section 38 or this subpart. SUBPART C—REAL ESTATE L EN D IN G STANDARDS SECTION —Purpose and Scope This subpart, issued pursuant to section 304 of the Federal Deposit Insurance Corporation Improvement Act of 1991, 12 USC 1828(o), prescribes standards for real estate lending to be used by state member banks in adopting internal real estate lending policies. SECTION —Real Estate Lending Standards Appendix C ance with the bank’s real estate lending policies. (c ) Each state member bank must monitor conditions in the real estate market in its lend ing area to ensure that its real estate lending policies continue to be appropriate for current market conditions. (d ) The real estate lending policies adopted pursuant to this section should reflect consid eration of the Interagency Guidelines for Real Estate Lending Policies established by the fed eral bank and thrift supervisory agencies [ap pendix C]. A PPEN D IX A—Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure See the Board pamphlet “Capital Adequacy Guidelines.’’ (a ) Each state bank that is a member of the A PPEN D IX B—Capital Adequacy Federal Reserve System shall adopt and main Guidelines for State Member Banks: Tier tain written policies that establish appropriate 1 Leverage Measure limits and standards for extensions of credit that are secured by liens on or interests in real See the Board pamphlet “Capital Adequacy estate, or that are made for the purpose of Guidelines.” financing permanent improvements to real estate. A PPEN D IX C—Interagency Guidelines ( b ) (1 ) Real estate lending policies adopted for Real Estate Lending Policies pursuant to this section must— (i) be consistent with safe and sound banking practices; (ii) be appropriate to the size of the in stitution and the nature and scope of its operations; and (iii) be reviewed and approved by the bank’s board of directors at least annually. (2 ) The lending policies must establish— (i) loan portfolio diversification standards; (ii) prudent-underwriting standards, in cluding 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 re porting requirements to monitor compli The agencies’ regulations require that each in sured depository institution adopt and main tain a written policy that establishes appropri ate limits and standards for all extensions of credit that are secured by hens on or interests in real estate or made for the purpose of fi nancing the construction of a building or oth er improvements.1 These guidelines are in tended to assist institutions in the formulation and maintenance of a real estate lending poli cy that is appropriate to the size of the institu tion and the nature and scope of its individual operations, as well as satisfies the require ments of the regulation. 1 The agencies have adopted a uniform rule on real estate lending. See 12 CFR 365 (FDIC); 12 CFR 208, subpart C (FRB); 12 CFR 34, subpart D (OCC); and 12 CFR 563.100-101 (OTS). 35 Appendix C Each institution’s policies must be compre hensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and accord ing to standards that are reviewed and ap proved at least annually by the board of direc tors. 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. Regulation H • • • • • Loan Portfolio Management Considerations The lending policy should contain a general outline of the scope and distribution of the institution’s credit facilities and the manner in which real estate loans are made, serviced, and collected. In particular, the institution’s policies on real estate lending should— • identify the geographic areas in which the institution will consider lending; • establish a loan portfolio-diversification policy and set limits for real estate loans by type and geographic market (e.g., lim its 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 su pervisory limits; • establish loan-administration procedures, including documentation, disbursement, collateral inspection, collection, and loan review; • establish real estate appraisal and evalua tion programs; • require that management monitor the loan portfolio and provide timely and adequate reports to the board of directors. the size and financial condition o f the institution; the expertise and size o f the lending staff; the need to avoid undue concentrations of risk; compliance with all real estate-related laws and regulations, including the Com munity Reinvestment Act, antidiscrimina tion 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 de cisions. Market supply and demand factors that should be considered include— • • • • • • • demographic indicators, including popula tion and employment trends; zoning requirements; current and projected vacancy, construc tion, and absorption rates; current and projected lease terms, rental rates, and sales prices, including concessions; current and projected operating expenses for different types o f projects; economic indicators, including trends and diversification o f the lending area; valuation trends, including discount and direct capitalization rates. Underwriting Standards Prudently underwritten real estate loans should reflect all relevant credit factors, in cluding— • • • • • • the capacity o f the borrower, or income from the underlying property, to adequate ly service the debt; the value o f the mortgaged property; the overall creditworthiness o f the borrower; the level o f equity invested in the property; any secondary sources o f repayment; any additional collateral or credit en hancements (such as guarantees, mortgage insurance, or take-out com m itments). The institution should consider both inter nal and external factors in the formulation of its loan policies and strategic plan. Factors The lending policies should reflect the level of risk that is acceptable to the board o f directors that should be considered include— 36 Regulation H Appendix C and provide clear and measurable underwrit ing 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 proprty. • • • • • • For development and construction projects, and completed commercial properties, the policy should also establish, commensurate with the size and type of the project or prop erty— • requirements for feasibility studies and sensitivity and risk analyses (e.g., sensitiv ity of income projections to changes in economic variables such as interest rates, vacancy rates, or operating expenses); • minimum requirements for initial invest ment 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 bor rower or underlying property; • standards for the acceptability of and lim its on nonamortizing loans. • standards for the acceptability of and lim its on the use of interest reserves; • pre-leasing and pre-sale requirements for income-producing property; • pre-sale and minimum-unit release re quirements for non-income-producing property loans; • limits on partial recourse or nonrecourse loans and requirements for guarantor support; • requirements for takeout commitments; • Minimum covenants for loan agreements. Loan Administration The institution should also establish loan administration procedures for its real estate portfolio that address— • documentation, including— • • — type and frequency o f financial state ments, including requirements for verifi cation o f information provided by the borrower; — type and frequency o f collateral evalua tions (appraisals and other estimates of value); loan closing and disbursement; payment processing; escrow administration; collateral administration; loan payoffs; collections and foreclosure, including— — delinquency followup procedures; — foreclosure timing; — extensions and other forms of forbearance; — acceptance o f deeds in lieu of foreclosure; claims processing (e.g., seeking recovery on a defaulted loan covered by a govern ment guaranty or insurance program); servicing and participation agreements. Supervisory Loan-to- Value Limits Institutions should establish their own inter nal loan-to-value limits for real estate loans. These internal limits should not exceed the following supervisory limits: Loan Category Loan-to- Value Limit R a w land 65% L and d evelop m en t 15% C onstruction: C om m ercial, m u lti fa m ily,* and other nonresidential O ne- to four-fam ily residential Im p roved property O w n er-occu p ied on e- to four-fam ily and h om e equity 80% 85% 85% ♦* * Multifamily construction includes condominiums and cooperatives. ** A loan-to-value limit has not been established for per manent mortgage or home-equity loans on owner-occupied, one- to four-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 ap propriate credit enhancement in the form of either mort gage insurance or readily marketable collateral. 37 Regulation H Appendix C The supervisory loan-to-value limits should be applied to the underlying property that col lateralizes the loan. For loans that fund multi ple phases of the same real estate project (e.g., a loan for both land development and con struction of an office building), the appropri ate 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 situtations 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 en sure 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 list ed under “Loan Portfolio Management Con siderations,” as well as any other relevant fac tors, such as the particular subcategory or type of loan. For any subcategory of loans that exhibits greater credit risk than the over all category, a lender should consider the es tablishment 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 sever al 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 consid ered sound. Loans in Excess of the Supervisory Loan-toValue Limits The agencies recognize that appropriate loanto-value limits vary not only among categories of real estate loans but also among individual loans. Therefore, it may be appropriate in in 38 dividual cases to originate or purchase loans with loan-to-value ratios in excess of the su pervisory loan-to-value limits, based on the support provided by other credit factors. Such loans should be identified in the institution’s records, and their aggregate amount reported at least quarterly to the institution’s board of directors. (See additional reporting require ments 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.2 More over, within the aggregate limit, total loans for all commercial, agricultural, multifamily or other non-one- to four-family residential properties should not exceed 30 percent of to tal capital. An institution will come under in creased supervisory scrutiny as the total of such loans approaches these levels. 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-tovalue limits; and (b ) include the recourse ob ligation of any such loan sold with recourse. Conversely, a loan should no longer be report ed 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 se curing the loan), bring the loan-to-value ratio into compliance with supervisory limits. Excluded Transactions The agencies also recognize that there are a number of lending situations in which other factors significantly outweigh the need to ap ply 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 2 For state member banks, the term “total capital” means “total risk-based capital” as defined in appendix A to 12 CFR 208. For insured state nonmember banks, “total capital” refers to that term as described in table I of appen dix A to 12 CFR 325. For national banks, the term “total capital” is defined at 12 CFR 3.2(e). For savings associa tions, the term “total capital” is defined at 12 CFR 567.5(c). Regulation H • • • • • • • 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 ex ceeds the supervisory loan-to-value limit, and provided that the lender has deter mined 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 finan cially responsible third party; loans that are renewed, refinanced, or re structured without the advancement of new funds or an increase in the line of credit (except for reasonable closing costs), or loans that are renewed, refi nanced, or restructured in connection with a workout situation, either with or without the advancement of new funds, where con sistent with safe and sound banking prac tices and part of a clearly defined and welldocumented 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 con tracted 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; Appendix C • loans for the purpose of financing perma nent improvements to real property, but not secured by the property, if such securi ty interest is not required by prudent un derwriting practice. Exceptions to the General Lending Policy Some provision should be made for the con sideration of loan requests from creditworthy borrowers whose credit needs do not fit within the institution’s general lending policy. An in stitution may provide for prudently under written exceptions to its lending policies, in cluding loan-to-value limits, on a loan-by-loan basis. However, any exceptions from the su pervisory loan-to-value limits should conform to the aggregate limits on such loans discussed above. The board of directors is responsible for es tablishing standards for the review and ap proval of exception loans. Each institution should establish an appropriate internal pro cess 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 deci sion. The justification and approval docu ments for such loans should be maintained as a part of the permanent loan file. Each institu tion should monitor compliance with its real estate lending policy and individually report exception loans of a significant size to its board of directors. Supervisory Review of Real Estate Lending Policies and Practices 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 re quirements 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 39 Appendix C • the quality of the institution’s manage ment 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 institution’s exceptions are adequately docu mented 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. Regulation H of credit for the purposes of improving unim proved real property prior to the erection of structures. The improvement of unimproved real property may include the laying or place ment 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 Definitions property (ies) securing or being improved by the extension of credit plus the amount of any For the purposes of these guidelines: readily marketable collateral and other ac “Construction loan’’ means an extension of ceptable collateral that secures the extension credit for the purpose of erecting or rehabili of credit. The total amount of all senior liens tating buildings or other structures, including on or interests in such property (ies) should any infrastructure necessary for development. be included in determining the loan-to-value ratio. When mortgage insurance or collateral “Extension of credit” or “loan” means— (1 ) the total amount of any loan, line of is used in the calculation of the loan-to-value credit, or other legally binding lending ratio, and such credit enhancement is later re commitment with respect to real property; leased or replaced, the loan-to-value ratio should be recalculated. and (2 ) the total amount, based on the amount “Other acceptable collateral” means any col of consideration paid, of any loan, line of lateral in which the lender has a perfected se credit, or other legally binding lending curity interest, that has a quantifiable value, commitment acquired by a lender by pur and is accepted by the lender in accordance chase, assignment or otherwise. with safe and sound lending practices. Other “Improved property loan” means an exten acceptable collateral should be appropriately sion of credit secured by one of the following discounted by the lender consistent with the lender’s usual practices for making loans se types of real property: (1 ) farmland, ranchland or timberland cured by such collateral. Other acceptable col committed to ongoing management and ag lateral includes, among other items, uncondi tional irrevocable standby letters of credits for ricultural production; (2 ) one- to four-family residential property the benefit of the lender. that is not owner-occupied; “Owner-occupied”, when used in conjunction (3 ) residential property containing five or with the term “one- to four-family residential more individual dwelling units; property” means that the owner of the under (4 ) completed commercial property; or lying real property occupies at least one unit (5 ) other income-producing property that of the real property as a principal residence of has been completed and is available for oc the owner. cupancy and use, except income-producing “Readily marketable collateral” means in owner-occupied one- to four-family residen sured deposits, financial instruments, and bul tial property. lion in which the lender has a perfected inter “Land development loan” means an extension est. Financial instruments and bullion must be 40 Regulation H salable under ordinary circumstances with reasonable promptness at a fair market value determined by quotations based on actual transactions, on an auction or similarly avail able 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 se cured 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 Appendix C real property, prepared in accordance with the agency’s appraisal regulations and guid ance. For loans to purchase an existing prop erty, the term “value” means the lesser of the actual acquisition cost or the estimate of value. “One- to four-family residential property” means property containing fewer than five in dividual dwelling units, including manufac tured homes permanently affixed to the under lying property (when deemed to be real property under state law). 41
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