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FEDERAL RESERVE BANK OF NEW YORK A T - lO Z Z ^ ) January 5, 1996 To All Depository Institutions in the Second Federal Reserve District, and Others Maintaining Sets o f Board Regulations: Enclosed is a copy of Regulation H, "Membership of State Banking Institutions in the Federal Reserve System," as revised effective January 2, 1996. The revised pamphlet supersedes the previous printing of this regulation and any subsequent amendments thereto. These pamphlets have been punched with an additional hole so that they can be inserted into our new, two-volume, 8-1/2 x 11 size binders. Circulars Division Board of Governors of the Federal Reserve System Regulation H Membership of State Banking Institutions in the Federal Reserve System 12 CFR 208, as amended effective January 2, 1996 Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the Federal Reserve District in which the inquiry arises. October 1995 C ontents Page Subpart A—General Provisions Section 208.1—Definitions........................ 1 (a) State bank........................................ 1 (b) Mutual savings bank......................... 2 (c) Board............................................... 2 (d) Board of directors ........................... 2 (e) Federal Reserve Bank stock.............. 2 (f) Capital; capital stock......................... 2 Section 208.2—Eligibility requirements . . Section 208.3—Insurance ofdeposits..... 2 Section 208.4—Application for membership............................................. 3 (a) State bank, other than a mutual savings bank.................................... 3 (b) Mutual savings bank......................... 3 (c) Mutual savings bank which is not authorized to purchase stock of Federal Reserve Bank at time of admission.................................... 3 (d) Execution and filing of application........................................ 3 Section 208.5—Approval of application . . 3 (a) Matters given special consideration by Board................. 3 (b) Procedure for admission to membership after approval of application..................................... 4 Section 208.6—Privileges and requirements of membership.................. 4 Section 208.7—Conditions of membership............................................ 4 Section 208.8—Banking practices............. 5 (a) Scope........................................... 5 (b) W aiver......................................... 5 (c) Effect on other banking practices . . 5 (d) Letters of credit and acceptances . . 5 (e) Loans by state member banks in identified flood hazard a re a s........ 6 (f) State member banks as transfer agents........................................... 7 (g) State member banks as registered clearing agencies ............................. 8 (h) Applications for stays of disciplinary sanctions or summary suspensions by a registered clearing agency............................. 10 Page (i) Application for review of final disciplinary sanctions, denials of participation or prohibitions or limitations of access to services imposed by registered clearing agencies ........................................ (j) State member banks, and subsidiaries, departments, and divisions thereof, which are 2 municipal securities dealers............ (k) Recordkeeping and confirmation of certain securities transactions effected by state memberbanks . . . Appendix A to section 208.8—Sample notices......................... Section 208.9—Establishment or maintenance of branches...................... (a) General........................................... (b) Branches in the United States . . . . (c) Application for approval of branches in the United States . . . . (d) Foreign branches........................... (e) Application for approval of foreign branches............................. Section 208.10—Waiver of reports of affiliates............................................... Section 208.11—Voluntary withdrawal from Federal Reserve System.............. (a) General........................................... (b) Notice of intention of withdrawal . (c) Time and method of effecting actual withdrawal........................... (d) Withdrawal of notice.................... Section 208.12—Board forms.................. Section 208.13—Capital adequacy........... Section 208.14—Procedures for monitoring Bank Secrecy Act compliance........................................... (a) Purpose........................................... (b) Establishment of compliance program ........................................ (c) Contents of compliance program . Section 208.15—Agricultural loan loss amortization.......................................... (a) Definitions...................................... (b) Loss amortization and reappraisal . (c) Accounting for amortization........... 10 11 12 16 16 16 17 17 18 18 18 18 18 18 19 19 19 19 19 19 20 20 20 20 21 21 i Contents Page (d) Eligibility ...................................... (e) Conditions on acceptance ............. (f) Submission of proposals................ (g) Revocation of eligibility................ Section 208.16—Reporting requirements for state member banks subject to the Securities Exchange Actof 1934 . (a) Filing requirements......................... (b) Elections permitted of state member banks with total assets of $150 million or less.................. (c) Filing instructions, inspection of documents, and nondisclosure of certain information file d ................ Section 208.17—Disclosure of financial information by state member banks . . . (a) Purpose and scope......................... (b) Definitions...................................... (c) Availability of financial information.................................... (d) Financial information to be provided by state member banks . (e) Financial information to be provided by other covered institutions...................................... (f) Disclaimer...................................... (g) ...................................................... Section 208.18—Appraisal standards for federally related transactions................ Section 208.19—Payment of dividends. . . (a) Capital limitations on payment of dividends........................................ (b) Earnings limitations on payment of dividends.................................... Section 208.20—Reports of crimes and suspected crim es................................. (a) Purpose.......................................... (b) Institution-affiliatedparty................. (c) Reports required............................. (d) Time for reporting........................ (e) Reporting to state and local authorities...................................... (f) Exceptions...................................... (g) Retention of records...................... (h) Notification to board of directors . (i) Penalty.......................................... Section 208.21—Community development and public-welfare investments.......................................... (a) Definitions.................................... ii 21 21 21 22 22 22 22 23 24 24 24 24 25 25 25 26 26 26 26 27 28 28 28 28 29 29 29 29 29 29 29 29 Page (b) Investments that do not require prior Board approval...................... (c) Notice............................................. (d) Investments requiring Board approval........................................ (e) Divestiture of investments.............. (f) Preexisting investments................... Section 208.22—Investment in bank premises............................................... 29 30 30 31 31 31 Subpart B—Prompt Corrective Action Section 208.30—Authority, purpose, scope, other supervisory authority, and disclosure of capital categories . . . (a) Authority........................................ (b) Purpose.......................................... (c) Scope............................................. (d) Other supervisory authority........... (e) Disclosure of capital categories . . . Section 208.31—Definitions.................... Section 208.32—Notice of capital category............................................... (a) Effective date of determination of capital category............................. (b) Notice of capital category.............. (c) Adjustments to reported capital levels and capital category.............. Section 208.33—Capital measures and capital-category definitions.................... (a) Capital measures ........................... (b) Capital categories........................... (c) Reclassification based on supervisory criteria other than capital............................................. Section 208.34—Capital-restoration p lan s................................................... (a) Schedule for filing plan.................. (b) Contents of plan ........................... (c) Review of capital-restoration plans............................................... (d) Disapproval of capital p la n ........... (e) Failure to submit capitalrestoration plan ............................. (f) Failure to implement capitalrestoration plan ............................. (g) Amendment of capital plan........... (h) Notice to FDIC............................. (i) Performance guarantee by companies that control a bank . . . . 31 31 32 32 32 32 32 33 33 33 33 33 33 33 34 34 34 35 35 35 35 35 35 35 35 Contents Page Section 208.35—Mandatory and discretionary supervisory actions under section 3 8 ........................... 36 (a) Mandatory supervisory actions . . . . 36 (b) Discretionary supervisory actions . 37 Subpart C—Real Estate Lending Standards Section 208.51—Purpose and scope.......... 37 Section 208.52—Real estate lending standards........................................ 37 Subpart D—Standards for Safety and Soundness Section 208.60—Standards for safety and soundness...................................... Page Appendix A—Capital adequacy guidelines for state member banks: risk-based measure* Appendix B—Capital guidelines for state member banks: tier 1 leverage measure* Appendix C—Interagency guidelines for real estate lending policies .................. 38 Appendix D—Interagency guidelines establishing standards for safety and soundness............................................. 43 * See Board pamphlet “Capital Adequacy Guidelines.” 38 iii R egu lation H M em bership o f State B anking Institutions in the Federal R eserve S y stem 12 CFR 208; as amended effective January 2, 1996 Subpart A—General Provisions Section 208.1 208.2 208.3 208.4 208.5 208.6 208.7 208.8 208.9 208.10 208.11 208.12 208.13 208.14 208.15 208.16 208.17 208.18 208.19 208.20 208.21 208.22 Definitions Eligibility requirements Insurance of deposits Application for membership Approval of application Privileges and requirements of membership Conditions of membership Banking practices Establishment or maintenance of branches Waiver of reports of affiliates Voluntary withdrawal from Federal Reserve System Board forms Capital adequacy Procedures for monitoring Bank Secrecy Act compliance Agricultural loan loss amortization Reporting requirements for state member banks subject to the Securities Exchange Act of 1934 Disclosure of financial information by state member banks Appraisal standards for federally related transactions Payment of dividends Reports of crimes and suspected crimes Community development and publicwelfare investments Investment in bank premises Subpart B—Prompt Corrective Action Section 208.30 Authority, purpose, scope, other supervisory authority, and disclosure of capital categories 208.31 Definitions 208.32 Notice of capital category 208.33 Capital measures and capitalcategory definitions 208.34 Capital-restoration plans 208.35 Mandatory and discretionary supervisory actions under section 38 Subpart C—Real Estate Lending Standards Section 208.51 Purpose and scope 208.52 Real estate lending standards Subpart D—Standards for Safety and Soundness Section 208.60 Standards for safety and soundness Appendix A—Capital adequacy guidelines for state member banks: risk-based measure Appendix B—Capital adequacy guidelines for state member banks: tier 1 leverage measure Appendix C—Interagency guidelines for real estate lending policies Appendix D—Interagency guidelines estab lishing safety-and-soundness standards SUBPART A—GENERAL PROVISIONS SECTION 208.1—Definitions For the purpose of this part*: (a) The term “state bank” means any bank or trust company incorporated under a special or general law of a state or under a general law for the District of Columbia, any mutual savings bank (unless otherwise indicated), and any Morris Plan bank or other incorpo rated banking institution engaged in similar business.* 1 * The words “this part” as used herein, mean Regulation H (Code o f Federal Regulations, title 12, chapter II, part 208). The Board o f Governors o f the Federal Reserve Sys tem has delegated authority to exercise certain functions contained in this part. See the Board’s “Rules Regarding Delegation o f Authority” (12 CFR 265). 1 Under the provisions o f section 19 o f the Federal Re serve Act, national banks and banks organized under local laws, located in a dependency or insular possession or any part o f the United States outside the states o f the United Continued 1 § 208.1 (b) The term “mutual savings bank’’ means a bank without capital stock transacting a sav ings bank business, the net earnings of which inure wholly to the benefit of its depositors after payment of obligations for any advances by its organizers, and in addition thereto in cludes any other banking institution the capital of which consists of weekly or other time de posits which are segregated from all other de posits and are regarded as capital stock for the purposes of taxation and the declaration of dividends. (c) The term “Board” means the Board of Governors of the Federal Reserve System. (d) The term “board of directors ” means the governing board of any institution performing the usual functions of a board of directors. (e) The term “Federal Reserve Bank stock” includes the deposit which may be made with a Federal Reserve Bank in lieu of a subscrip tion for stock by a mutual savings bank which is not permitted to purchase stock in a Federal Reserve Bank, unless otherwise indicated. (f) The terms “capital” and “capital stock” mean common stock, preferred stock and le gally issued capital notes and debentures pur chased by the Reconstruction Finance Corpo ration which may be considered capital and capital stock for purposes of membership in the Federal Reserve System under the provi sions of section 9 of the Federal Reserve Act. SECTION 208.2—Eligibility Requirements (a) Under the terms of section 9 of the Fed eral Reserve Act, as amended, to be eligible for admission to membership in the Federal Reserve System:* Continued States and the District o f Columbia are not required to be com e members o f the Federal Reserve System but may, with the consent o f the Board, become members o f the System. However, this part 208 is applicable only to the admission o f banks eligible for admission to membership under section 9 o f the Federal Reserve A ct and does not cover the admission o f banks eligible under section 19 o f the act. Any bank desiring to be admitted to the System under the provisions o f section 19 should communicate with the Federal Reserve Bank with which it desires to do business. 2 Regulation H (1) A state bank, other than a mutual sav ings bank, must possess capital stock and surplus which, in the judgment of the Board, are adequate in relation to the char acter and condition of its assets and to its existing and prospective deposit liabilities and other corporate responsibilities: Pro vided, That no bank engaged in the busi ness of receiving deposits other than trust funds, which does not possess capital stock and surplus in an amount equal to that which would be required for the establish ment of a national banking association in the place in which it is located, shall be admitted to membership unless it is, or has been, approved for deposit insurance under the Federal Deposit Insurance Act. (2) A mutual savings bank must possess surplus and undivided profits not less than the amount of capital required for the or ganization of a national bank in the place where it is situated. (b) The minimum capital required for the or ganization of a national bank, referred to herein before in connection with the capital required for admission to membership in the Federal Reserve System, is as follows: Minimum capital If located in a city or town with a population: Not exceeding 6,000 inhabitants . . . $ 50,000 Exceeding 6,000 but not exceeding 50,000 inhabitants ....................... 100,000 Exceeding 50,000 inhabitants (except as stated below) ............................ 200,000 In an outlying district of a city with a population exceeding 50,000 inhabi tants; provided state law permits or ganization of state banks in such location with a capital of $100,000 or less ............................................. 100,000 With certain exceptions not here applicable, a national bank must have surplus equal to 20 percent of its capital in order to commence business. SECTION 208.3—Insurance of Deposits Any state bank becoming a member of the Federal Reserve System which is engaged in the business of receiving deposits other than Regulation H trust funds and which is not at the time an insured bank under the provisions of the Fed eral Deposit Insurance Act, will become an insured bank under the provisions of that act on the date upon which it becomes a member of the Federal Reserve System.2 In the case of an insured bank which is admitted to member ship in the Federal Reserve System, the bank will continue to be an insured bank. SECTION 208.4— Application for Membership (a) State bank, other than a mutual savings bank. A state bank, other than a mutual sav ings bank, applying for membership, shall make application on Form F.R. 83A to the Board for an amount of capital stock in the Federal Reserve Bank of its district equal to 6 percent of the paid-up capital stock and sur plus of the applying institution. (b) Mutual savings bank. A mutual savings bank applying for membership shall make ap plication on Form F.R. 83B to the Board for an amount of capital stock in the Federal Re serve Bank of its District equal to six-tenths of 1 percent of its total deposit liabilities as shown by the most recent report of examina tion of such institution preceding its admission to membership, or, if such institution be not permitted by the laws under which it was or ganized to purchase stock in a Federal Re serve Bank, on Form F.R. 83C, for permission to deposit with the Federal Reserve Bank an amount equal to the amount which it would have been required to pay in on account of a subscription to capital stock. § 208.5 ized to purchase stock of Federal Reserve Bank at time of admission. If a mutual savings bank be admitted to membership on the basis of a deposit of the required amount with the Federal Reserve Bank in lieu of payment upon capital stock because the laws under which such bank was organized do not at that time authorize it to purchase stock in the Federal Reserve Bank, it shall subscribe on Form F.R. 83D for the appropriate amount of stock in the Federal Reserve Bank whenever such laws are amended so as to authorize it to purchase stock in a Federal Reserve Bank.3* (d) Execution and filing of application. Each application made under the provisions of this section and the exhibits referred to in the ap plication blank shall be executed and filed, in duplicate, with the Federal Reserve Bank of the District in which the applying bank is located. SECTION 208.5—Approval of Application (a) Matters given special consideration by Board. In passing upon an application, the fol lowing matters will be given special consideration: (1) The financial history and condition of the applying bank and the general character of its management; (2) The adequacy of its capital structure in relation to the character and condition of its assets and to its existing and prospective deposit liabilities and other corporate re sponsibilities; and its future earnings prospects; (3) The convenience and needs of the com munity to be served by the bank; and (c) Mutual savings bank which is not author(4) Whether its corporate powers are con 2 In the case o f a state bank which is engaged in the sistent with the purposes of the Federal Re business o f receiving deposits other than trust funds and serve Act. which at the time o f its admission to membership in the Federal Reserve System is not an insured bank, the Board is required under the provisions o f sections 4 and 6 o f the Federal Deposit Insurance Act to issue a certificate to the Federal Deposit Insurance Corporation to the effect that the bank is a member o f the Federal Reserve System and that consideration has been given to the financial history and condition o f the bank, the adequacy o f its capital structure, its future earnings prospects, the general character o f its management, the convenience and needs o f the community to be served by the bank, and whether or not its corporate powers are consistent with the purposes o f the Federal D e posit Insurance Act. 3 The Federal Reserve A ct provides that, if the laws under which any such savings bank was organized be not amended at the first session o f the legislature following the admission o f 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 fails within six months thereafter to purchase such stock, all o f 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 o f the Federal Reserve Act. 3 § 208.5 (b) Procedure for admission to membership after approval of application. If an applying bank conforms to all the requirements of the Federal Reserve Act and this part and is oth erwise qualified for membership, its applica tion will be approved subject to such condi tions as may be prescribed pursuant to the 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 neces sary by the Board. The bank’s membership in the Federal Reserve System shall become ef fective on the date as of which a certificate of stock of the Federal Reserve Bank is issued to it pursuant 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 represent ing the acceptance of a deposit with the Fed eral Reserve Bank in place of a payment on account of a subscription to stock is issued to it pursuant to its application for membership. SECTION 208.6— Privileges and Requirements of Membership Every state bank while a member of the Fed eral Reserve System— (a) Shall retain its full charter and statutory rights subject to the provisions of the Federal Reserve Act and other acts of Congress appli cable to member state banks, to the regula tions of the Board made pursuant to law, and to the conditions prescribed by the Board and agreed to by such bank prior to its admission; Regulation H 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; (c) Shall comply at all times with any and all conditions of membership prescribed by the 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 Re serve Act, which authorizes the Board to per mit applying state banks to become members of the Federal Reserve System “subject to the provisions of this Act and to such conditions as it may prescribe pursuant thereto,” the Board, except as hereinafter stated, will pre scribe the following conditions of membership for each state bank hereafter applying for ad mission to the Federal Reserve System, and, in addition, such other conditions as may be considered necessary or advisable in the par ticular case: (1) Such bank at all times shall conduct its business and exercise its powers with due regard to the safety of its depositors, and, except with the permission of the Board of Governors of the Federal Reserve System, such bank shall not cause or permit any change to be made in the general character of its business or in the scope of the corpo rate powers exercised by it at the time of admission to membership.6 5 This applies to capital stock o f all classes and to capital notes and debentures legally issued and purchased by the Reconstruction Finance Corporation which, under the Fed eral Reserve Act, are considered as capital stock for pur (b) Shall enjoy all the privileges and observe poses o f membership. 6 For many years, the Board prescribed, as standard con all the requirements of the Federal Reserve ditions o f membership, a condition which, in general, pro hibited banks from engaging as a business in the sale o f 4 In the case o f a mutual savings bank which is not per real estate loans to the public and certain conditions relat ing to the exercise o f trust powers, including one which mitted by the law s under which it w as organized to prohibited self-dealing in the investment o f trust funds. The purchase stock in a Federal Reserve Bank, it shall deposit elimination o f these conditions as standard conditions o f with the Federal Reserve Bank an amount equal to the membership does not reflect any change in the Board’s poamount which it would have been required to pay in on Continued account o f a subscription to capital stock. 4 Regulation H (2) The net capital and surplus funds of such bank shall be adequate in relation to 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 bus iness or in the scope of its corporate powers 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 an ticipates 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 ade quate in relation to the character and condition 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 Continued sition as to the undesirability o f the practices formerly pro hibited by such conditions; and attention is called to the fact that engaging as a business in the sale o f real estate loans to the public or failing to conduct trust business in accordance with the applicable state laws and sound princi ples o f trust administration may constitute unsafe or un sound practices and violate the condition set forth in this subparagraph. § 208.8 tions of section 208.8. A waiver may be granted 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. (c) Effect on other banking practices. Nothing in this section shall be construed as restricting in any manner the Board’s authority to deal with any banking practice which is deemed to be unsafe or unsound or otherwise not in ac cordance with law, rule, or regulation or which violates any condition imposed in writ ing by the Board in connection with the grant ing of any application or other request by a state member bank, or any written agreement 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 tak ing whatever action it deems necessary and desirable to deal with general or specific acts or practices which, although perhaps not vio lating the provisions of this section, are con sidered nevertheless to be an unsafe or un sound banking practice. (d) Letters of credit and acceptances. (1) 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.63 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. 61 As defined, “ standby letter o f credit” would not in clude (1) commercial letters o f credit and similar instru ments where the issuing bank expects the beneficiary to draw upon the issuer and which do not “ guaranty” pay ment o f a money obligation or (2) a guaranty or similar obligation issued by a foreign branch in accordance with and subject to the limitations o f Regulation K. 5 § 208.8 (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 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 pertaining to loans to affiliates under federal law (12 USC 371(c)); provided that, if any state has a separate limitation on the is suance 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 is suance of a standby letter of credit or in eligible 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 6 Regulation H 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 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 lia bility 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 account to cover the bank’s maximum li ability 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 Development 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 property 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 maximum limit of coverage made available with respect to the particular type of property under the act, whichever is less. Notwithstanding the foregoing provi sion, flood insurance shall not be required on any state-owned property that is covered under an adequate policy of self-insurance satisfactory to the secretary of Housing and Urban Development who shall publish and periodically revise the list of states falling within the exemption provided in this paragraph. Regulation H (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 of federal disaster relief as sistance. Each state member bank shall, as a condition of making, increasing, ex tending or renewing 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 Development as an area having special flood hazards, mail or deliver as soon as feasible but not less than 10 days in advance of closing of the transaction (or not later than the bank’s commitment, if any, if the period be tween commitment and closing is less than 10 days) a written notice to the bor rower stating: (a) That the property se curing the loan is or will be located in an area so identified, or in lieu of such noti fication a state member bank may obtain satisfactory written assurances from a seller or lessor stating that such seller or lessor has notified the borrower, prior to the execution of any agreement for sale or lease, that the property securing the loan is or will be located in an area so identified; and (b) whether, in the event of damage to the property caused by flooding in a federally declared disaster, federal disaster relief assistance will be available for such property. Each state member bank shall require the borrower, prior to closing, to provide the bank with a written acknowledgment that the prop erty securing the loan is or will be lo cated in an area so identified and that the borrower has received the above-required notice regarding federal disaster relief assistance. (ii) Sample notices. A state member bank providing written notice containing the language presented in appendix A within the time limits prescribed in paragraph (a) of this section will be considered to § 208.8 be in compliance with the notice require ments of paragraph (a) of this section. (4) Required use of standard flood hazard determination form. A state member bank shall use the standard flood hazard determi nation form developed by the director of the Federal Emergency Management Agency (the FEMA) (as set forth in appen dix A of 44 CFR 65) when determining whether improved real estate or a mobile home offered as collateral security for a loan is located in an area identified by the director of the FEMA as having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968. The standard flood hazard determination form may be used in a printed, computerized, or elec tronic manner. (f) State member banks as transfer agents. (1) On or after December 1, 1975, no state member bank or any of its subsidiaries shall act as transfer agent, as defined in sec tion 3(a)(25) of the Securities Exchange Act of 1934 (“act”), with respect to any secur ity registered under section 12 of the act or which would be required to be registered except for the exemption from registration provided by subsection (g)(2)(B) or (g)(2)(G) of that section, unless it shall have filed a registration statement with the Board in conformity with the requirements of Form TA-1, which registration statement shall have become effective as hereinafter provided. Any registration statement filed by a state member bank or its subsidiary shall become effective on the thirtieth day after filing with the Board unless the Board takes affirmative action to accelerate, deny or postpone such registration in accordance with the provisions of section 17A(c) of the act. Such filings with the Board will consti tute filings with the Securities and Ex change Commission for purposes of section 17(c)(1) of the act. (2) If the information contained in Form TA-1 becomes inaccurate, misleading or in complete for any reason, the bank or its subsidiary shall, within 60 calendar days thereafter, file an amendment to Form TA-1 7 § 208.8 correcting the inaccurate, misleading or in complete information. (3) Each registration statement on Form TA-1 or amendment thereto shall constitute a “report” or “application” within the meaning of section 17, 17A(c) and 32(a) of the act. (g) State member banks as registered clearing agencies. (1) Requirement of notice. Any state mem ber bank or any of its subsidiaries that is a registered clearing agency pursuant to sec tion 17A(b) of the Securities Exchange Act of 1934 (the “act”), which imposes any fi nal disciplinary sanction on any participant therein, denies participation to any applicant or prohibits or limits any person in respect to access to services offered by such regis tered clearing agency, shall file with the Board and the appropriate regulatory agency (if other than the Board) for a par ticipant or applicant notice thereof in the manner prescribed herein. (2) Notice of final disciplinary action. Any registered clearing agency for which the Board is the appropriate regulatory agency that takes any final disciplinary action with respect to any participant shall promptly file a notice thereof with the Board in accor dance with paragraph (g)(3) of this section. For the purposes of this paragraph “final disciplinary action” shall mean the imposi tion of any disciplinary sanction pursuant to section 17A(b)(3)(G) of the act or other ac tion of a registered clearing agency which, after notice and opportunity for hearing, re sults 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 statu tory 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 revenues to the registered clearing agency 8 Regulation H to compensate it for effort expended in be ginning 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 para graph (g)(2). Any notice filed pursuant to paragraph (g)(2) of this section shall consist of the following, as appropriate: (i) the name of the respondent concerned 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 organi zational unit that brought the charges in volved; except that, as to any respondent who has been found not to have violated a provision covered by a charge, identify ing information with respect to such per son may be deleted insofar as the notice reports the disposition of that charge and, prior to the filing of the notice, the re spondent does not request that identifying information be included in the notice. (ii) a statement describing the investiga tive or other origin of the action; (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 statement describing the answer of the respondent 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 Regulation H mination or limitation based on qualifica tion 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 re spect to access to services offered by the clearing agency based on an alleged failure 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 17A(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 disci plinary 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 the Board) for the affected person in accor dance with paragraph (g)(5) of this section; provided however, that no such action shall be considered “final” pursuant to this subparagraph that results 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 other wise exhausted his administrative remedies within the registered clearing agency with respect to such a matter. (5) Content of notice required by para graph (g)(4). Any notice filed pursuant to paragraph (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 § 208.8 qualification standards, or comply with administrative obligations, and a state ment of the registered clearing agency in support of the resolution of the principal issues 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 disqualifica tion 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 notice thereof with the Board and the appropri ate regulatory agency (if other than the Board) for the affected person in accor dance with paragraph (g)(7) of this sec tion; provided, however, that no such ac tion shall be considered “final” pursuant to this subparagraph which results merely from a notice of such failure to the per son affected, if such person has not sought an adjudication of the matter, in cluding a hearing, or otherwise exhausted his administrative remedies within the registered clearing agency with respect to such a matter. (7) Content of notice required by para graph (g)(6). Any notice filed pursuant to paragraph (g)(6) of this section shall consist of the following, as appropriate: (i) the name of the person concerned, to gether with each such person’s last known address as reflected in the records of the registered clearing agency; (ii) a statement setting forth the principal issues raised, the answer of any person concerned, and a statement of the regis tered clearing agency in support of its 9 § 208.8 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 disquali fication is based; (iv) a copy of the order or decision of the court, the appropriate regulatory agency or the self-regulatory organization 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 of par ticipation. Any registered clearing agency for which the Board is the appropriate regu latory agency that summarily suspends or closes the accounts of a participant pursuant to the provisions of section 17A (b)(5)(C) of the act shall within one business day af ter the effectiveness of such action file no tice thereof with the Board and the appro priate regulatory agency for the participant (if other than the Board) of such action in accordance with paragraph (g)(9) of this section. (9) Content of notice of summary suspen sion of participation. Any notice pursuant to paragraph (g)(8) of this section shall con tain at least the following information, as appropriate: (i) the name of the participant concerned together with the participant’s last known address as reflected in the records of the registered clearing agency; (ii) the date upon which such summary action has or will become effective; (iii) if such summary action is based upon the provisions of section 17A (b)(5)(C)(i) of the act, a copy of the rele vant order or decision of the self-regula tory organization if available to the regis tered clearing agency; (iv) if such summary action is based upon the provisions of section 17A (b)(5)(C)(ii) of the act, a statement describing the default of any delivery of 10 Regulation H funds or securities to the registered clear ing agency; (v) if such summary action is based upon the provisions of section 17A (b)(5)(C)(iii) of the act, a statement describing the financial or operating diffi culty of the participant based upon which the registered clearing agency determined that such suspension and closing of ac counts was necessary for the protection of the clearing agency, its participants, creditors or investors; (vi) the nature and effective date of the suspension; and (vii) such other matters as the registered clearing agency deems relevant. (h) Applications for stays of disciplinary sanctions or summary suspensions by a regis tered clearing agency. If a registered clearing agency for which the Securities and Exchange Commission is not the appropriate regulatory agency imposes any final disciplinary sanction pursuant to section 17A(b)(3)(G) of the act, or summarily suspends or limits or prohibits ac cess pursuant to section 17A(b)(5)(C) of the act, any participant aggrieved thereby for which the Board is the appropriate regulatory agency may file with the Board, by telegram or otherwise, a request for a stay of imposi tion of such action. Such request shall be in writing and shall include a statement as to why such stay should be granted. (i) Application for review of final disciplinary sanctions, denials of participation or prohibi tions or limitations of access to services im posed by registered clearing agencies. (1) Scope. Proceedings on an application to the Board under section 19(d)(2) of the act by a person that is subject to the Board’s jurisdiction for review of any action by a registered clearing agency for which the Se curities and Exchange Commission is not the appropriate regulatory agency shall be governed by this paragraph. (2) Procedure. (i) An application for review pursuant to section 19(d)(2) of the act shall be filed with the Board within 30 days after no tice is filed by the registered clearing agency pursuant to section 19(d)(1) of the act and received by the aggrieved Regulation H § 208.8 (v) Oral argument before the Board may person applying for review, or within be requested by the applicant or the reg such longer period as the Board may de istered clearing agency as follows: termine. The secretary of the Board shall (A) by the applicant with his brief or serve a copy of the application on the statement or within 10 days after re registered clearing agency, which shall, ceipt of the registered clearing within 10 days after receipt of the appli agency’s answer, or cation, certify and file with the Board (B) by the registered clearing agency one copy of the record upon which the with its answer. action complained was taken, together The Board, in its discretion, may grant or with three copies of an index to such re deny any request for oral argument and, cord. The secretary shall serve upon the where it deems it appropriate to do so, parties copies of such index and any pa the Board will consider an application on pers subsequently filed. the basis of the papers filed by the par (ii) Within 20 days after receipt of a ties, without oral argument. copy of the index, the applicant shall file (vi) The Board’s Rules of Practice for a brief or other statement in support of Formal Hearings shall apply to review his application which shall state the spe proceedings under this rule to the extent cific grounds on which the application is that they are not inconsistent with this based, the particular findings of the regis rule. Attention is directed particularly to tered clearing agency to which objection section 263.21 of the Rules of Practice is taken, the relief sought. Any applica relating to formal requirements as to the tion not perfected by such timely brief or papers filed. statement may be dismissed as abandoned. (iii) Within 20 days after receipt of the (j) State member banks, and subsidiaries, de applicant’s brief or statement the regis partments, and divisions thereof, which are tered clearing agency may file an answer municipal securities dealers. thereto, and within 10 days of receipt of (1) For purposes of this paragraph, the terms herein have the meanings given them any such answer the applicant may file a in section 3(a) of the Securities Exchange reply. Any such papers not filed within Act of 1934 (15 USC 78c(a)) and the rules the time provided by items (A), (B), or of the Municipal Securities Rulemaking (C) will not be received except upon spe Board. The term “act” shall mean the Se cial permission of the Board. curities Exchange Act of 1934 (15 USC 78a (iv) On its own motion, the Board may et seq.). direct that the record under review be (2) On and after October 31, 1977, a state supplemented with such additional evi member bank of the Federal Reserve Sys dence as it may deem relevant. Neverthe tem, or a subsidiary or a department of a less, the registered clearing agency and division thereof, that is a municipal securi persons who may be aggrieved by such ties dealer shall not permit a person to be clearing agency’s action shall not be enti associated with it as a municipal securities tled to adduce evidence not presented in principal or municipal securities representa the proceedings before the registered tive unless it has filed with the Board an clearing agency unless it is shown to the original and two copies of Form MSD-4, satisfaction of the Board that such addi “Uniform Application for Municipal Securi tional evidence is material and that there ties Principal or Municipal Securities Rep were reasonable grounds for failure to resentative Associated with a Bank Munici present such evidence in the proceedings pal Securities Dealer,” completed in before the registered clearing agency. accordance with the instructions contained Any request for leave to adduce addi therein, for that person. Form MSD-4 is tional evidence shall be filed promptly so prescribed by the Board for purposes of as not to delay the disposition of the paragraph (b) of Municipal Securities proceeding. 11 § 208.8 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 sec tion, such dealer shall file an original and tw'o copies of a notification of termination with the Board on Form MSD-5, “Uniform Termination Notice for Municipal Securities Principal or Municipal Securities Represen tative Associated with a Bank Municipal Securities Dealer,” completed in accordance with instructions contained therein. (5) A municipal securities dealer that files a Form MSD-4, Form MSD-5, or statement 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 em ployment 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 12 Regulation H statement has been completed in accordance 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 sec tion 17(c)(1) of the act (15 USC 78q(c)(l)) and a “report,” “application,” or “docu ment” within the meaning of section 32(a) of the act (15 USC 78ff(a)). (k) Recordkeeping and confirmation of certain securities transactions effected by state mem ber banks. (1) Definitions. For purposes of this para graph (k): (i) “customer” shall mean any person or account, including any agency, trust, es tate, guardianship, committee or other fi duciary account, for which a state mem ber bank effects or participates in effecting the purchase or sale of securi ties, but shall not include a broker, dealer, dealer bank or issuer of the secur ities which are the subject of the transactions; (ii) “collective investment fund” means funds held by a state member bank as fiduciary 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, guardian, or custodian under the Uniform Gifts to Minors Act, or (B) in a fund consisting solely of assets of retirement, pension, profit sharing, stock bonus or similar trusts which are exempt from federal in come taxation under the Internal Revenue 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 pur chased or sold by or for the account, or (B) make decisions as to what securities or other property shall be purchased or Regulation H sold by or for the account even though some other person may have responsibil ity for such investment decisions. (iv) “periodic plan” (including dividend reinvestment plans, automatic investment 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 specific 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 in strument commonly known as a “secur ity” whether in the nature of debt or eq uity, including any stock, bond, note, debenture, 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-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 banker’s 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 ma turity of which is likewise limited, (F) units of a collective investment fund, (G) interests 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 records with respect to such transactions for at least three years: (i) chronological records of original entry containing an itemized daily record of all purchases and sales of securities. The records of original entry shall show the account or customer for which each such transaction was effected, the description of the securities, the unit and aggregate § 208.8 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 transactions 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 trans action was effected; (B) whether the transaction was a mar ket order, limit order, or subject to special instructions; (C) the time the order was received by the trader or other bank employee re sponsible for effecting the transaction; (D) the time the order was placed 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 se lected by the bank to effect securities transactions and the amount of commis sions paid or allocated to each such bro ker during the calendar year. Nothing contained in this subparagraph shall require a bank to maintain the records required by this rule in any given manner, provided that the information re quired to be shown is clearly and accu rately reflected and provides an adequate 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 13 § 208.8 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 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 written 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 uti lized; 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 14 Regulation H 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 broker-dealer 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 cus tomer agree in writing to a different ar rangement 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 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 vested beneficial interest in such account, mail or otherwise furnish to such person the written notification within a reasona ble time. The bank may charge such per son 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 cus tomer 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 cus tomer’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 Regulation H paragraph (k)(3) of this section. The bank may charge a reasonable fee for provid ing the information described in para graph (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 furnished upon request, to each person to whom a regular periodic accounting would ordinarily be rendered with respect to each participating account. This report shall be based upon an audit made by independent public accountants or inter nal 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 af ter 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 transaction, and all other debits and cred its of the customer’s account involved 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 remuneration paid in connection with the transaction need not be provided to the customer when paid by a source other than the customer. The bank may charge a reasonable fee for providing the information described in 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 super vision of all officers or employees who (A) transmit orders to or place orders with broker-dealers, or (B) execute trans actions 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 § 208.8 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 securi ties 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 be half, 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 from this requirement are transactions for the benefit of the officer or employee over which the officer or employee has no direct or indirect influence or control, transactions in mutual fund shares, and all transactions involving in the aggregate $10,000 or less during the calendar quar ter. For purposes of this paragraph (k)(iv), the term “securities” does not in clude U.S. government or federal agency obligations. (6) Exceptions. The following exceptions to paragraph (k) shall apply: (i) the requirements of subparagraph (k)(2)(ii) through (k)(2)(iv) and subpara graph (k)(5)(i) through (k)(5)(iii) shall not apply to banks having an average of less than 200 securities transactions per year for customers over the prior threecalendar-year period, exclusive of trans actions in U.S. government and federal agency obligations; (ii) activities of a state member bank that are subject to regulations promulgated by the Municipal Securities Rulemaking Board shall not be subject to the require ments of this paragraph (k); and 15 § 208.8 (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) Notice to borrower o f special flood hazards. Notice is hereby given to _______ that the improved real estate or mobile home described in the attached instru ment is or will be located in an area desig nated by the secretary of the Department of Housing and Urban Development as an area having special flood hazards. This area is de lineated on_______ ’s Flood Insurance Rate Map (“FIRM”) or, if the FIRM is unavaila ble, on the community’s Flood Hazard Bound ary 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. (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 participating in the National Flood Insurance program. In the event such property is damaged by flooding in a federally declared disaster, federal dis aster relief assistance may be available. However, such assistance will be unavaila ble if your community has been identified as a special flood-hazardous area for one year or longer and is not participating in the National Flood Insurance program at the time assistance would be approved. This as sistance, 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 communities. The improved real estate or mobile home securing your loan is or will be located in a community that is not participating in the National Flood Insurance program. This 16 Regulation H means that such property is not eligible for federal flood insurance. In the event such property is damaged by flooding in a feder ally declared disaster, federal disaster relief assistance will be unavailable if your com munity 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. SECTION 208.9—Establishment or Maintenance of Branches (a) In general. Every state bank which is or hereafter becomes a member of the Federal Reserve System is subject to the provisions of section 9 of the Federal Reserve Act relating to the establishment and maintenance of branches7 in the United States or in a depen dency or insular possession thereof or in a foreign country. Under the provisions of sec tion 9, member state banks establishing and operating branches in the United States be yond the corporate limits of the city, town, or village in which the parent bank is situated must conform to the same terms, conditions, limitations, 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 re lating 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 Currency. The approval of the Board must likewise 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 7 Section 5155 o f the R evised Statutes o f the United States provides that: “ ( 0 The term ‘branch’ as used in this section shall be held to include any branch bank, branch office, branch agency, additional office, or any branch place o f business located in any State or territory o f the United States or in the District o f Columbia at which deposits are received, or checks paid, or money lent.” Regulation H 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 Co lumbia), 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 ship in the Federal Reserve System, it must obtain the approval of the Board for the re tention of such branches. (3) A member state bank located in a state which by statute law permits the mainte nance of branches within county or greater limits may, with the approval of the Board, 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 commu nity 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 § 208.9 member state bank and its branches are situated.8 (5) A member state bank may not establish a branch beyond the corporate limits of the city, town, or village in which it is situated unless such establishment and operation are at the time authorized to state banks by the statute law of the state in question by lan guage specifically granting such authority affirmatively and not merely by implication or recognition. (6) Any member state bank which, on Feb ruary 25, 1927, had established and was ac tually 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 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 8 The requirement o f this paragraph is met if the aggre gate capital stock o f a member state bank having branches is not less than the total amount o f capital stock which would be required for the establishment o f one national bank in each o f the places in which the head office and branches o f the member state bank are located, irrespective o f the number o f offices which the bank may have in any such place. There are no additional capital requirements for additional branches within the city, town, or village in which the head office is located. 17 § 208.9 Regulation H 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. the Federal Reserve System waives the re quirement for the submission of reports of af filiates of state bank members of the Federal Reserve System, unless such reports are spe cifically requested by the Board of Governors. The Board of Governors of the Federal Re serve System may require the submission of reports which are necessary to disclose fully relations between member banks and their af filiates and the effect thereof upon the affairs of member banks. (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 de fined in section 211.2(f) of Regulation K (12 CFR 211.2(f)). If a member state bank has established a branch in such a country, it may, unless otherwise advised by the Board, estab lish other branches therein after 30 days’ no tice to the Board with respect to each such branch. SECTION 208.11—Voluntary Withdrawal from Federal Reserve System (e) Application for approval o f 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 information 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—Waiver of Reports of Affiliates Pursuant to section 21 of the Federal Reserve Act (12 USC 486), the Board of Governors of 18 (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;9 and the Board, in its discretion, may waive such six months’ notice in any individual case and may permit such bank to withdraw from membership in a Federal Reserve Bank, sub ject to such conditions as the Board may pre scribe, prior to the expiration of six months from the date of the written notice of its in tention 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 ad dressed to the Board and mailed to the Fed eral Reserve Bank of which such bank is a member. Any such bank desiring to with draw from membership prior to the expira tion of six months from the date of written notice of its intention to withdraw should so state in the letter signifying its intention to withdraw and should state the reason for its desire to withdraw prior to the expira tion of six months. (2) Every notice of intention of a bank to ’ Under specific provisions o f section 9 o f the Federal Reserve Act, however, no Federal Reserve Bank shall, ex cept upon express authority o f the Board, cancel within the same calendar year more than 25 percent o f its capital stock for the purpose o f effecting voluntary withdrawals during that year. A ll applications for voluntary withdrawals are required by the law to be dealt with in the order in which they are filed with the Board. § 208.14 Regulation H 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 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 accompa nied 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.10 Unless 10 A bank’s withdrawal from membership in the Federal Reserve System is effective on the date on which the Fed eral Reserve Bank stock held by it is duly canceled. Until such stock has been canceled, such bank remains a member o f the Federal Reserve System, is entitled to all the privi leges o f membership, and is required to comply with all provisions o f law and all regulations o f the Board pertain ing to member banks and with all conditions o f member ship applicable to it. Upon the cancellation o f such stock, all rights and privileges o f such bank as a member bank shall terminate. Upon the cancellation o f such stock, and after due provi sion has been made for any indebtedness due or to become due to the Federal Reserve Bank, such bank shall be enti tled to a refund o f its cash paid subscription with interest at the rate o f one-half o f 1 percent per month from the date o f last dividend, the amount refunded in no event to exceed the book value o f the stock at that time, and shall likewise Continued 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 inten tion of withdrawing from membership and will not be permitted to withdraw without 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 is issued to ensure that all state member banks establish and maintain procedures reasonably designed to ensure and monitor their compliance with the Continued be entitled to the repayment o f deposits and o f any other balance due from the Federal Reserve Bank. 19 § 208.14 provisions of subchapter II of chapter 53 of title 31, United States Code, the Bank Secrecy Act, and the implementing regulations promul gated thereunder by the Department of Trea sury at 31 CFR 103, requiring recordkeeping and reporting of currency transactions.11 (b) Establishment of compliance program. On or before April 27, 1987, each bank shall de velop and provide for the continued adminis tration of a program reasonably designed to ensure and monitor compliance with the re cordkeeping and reporting requirements set forth in subchapter II of chapter 53 of title 31, United States Code, the Bank Secrecy Act, and the implementing regulations promulgated thereunder by the Department of Treasury at 31 CFR part 103. The compliance program shall be reduced to writing, approved by the board of directors, and noted in the minutes. (c) Contents of compliance program. The compliance program shall, at a minimum— (1) provide for a system of internal controls 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 monitoring day-to-day compliance; and (4) provide training for appropriate personnel. SECTION 208.15—Agricultural Loan Loss Amortization** (a) Definitions. For purposes of this section— (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 11 Recordkeeping requirements contained in this section have been approved by the Board under delegated authority from the Office o f Management and Budget under the pro visions o f chapter 35 o f title 44, United States Code, and have been assigned OMB No. 7100-0196. * See Federal Deposit Insurance Act section 13(j), the statutory authority for this section. 20 Regulation H $100,000,000 or less as of the most re cent Report of Condition; and (iv) which has— (A) at least 25 percent of its total loans in qualified agricultural loans and agriculturally related other property; or (B) less than 25 percent of its total loans in qualified agricultural loans and agriculturally related other property, but which bank the Board or the Re serve Bank in whose District the bank is located or its primary state regulator has recommended to the Federal De posit Insurance Corporation for eligi bility 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 Condi tion 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 deferral 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 property” means any property, real or personal, that the bank owned on January 1, 1983, and any such additional property that it acquires prior to January 1, 1992, in connection with a qualified agricultural loan. For the pur poses of sections 208.15(a)(l)(iv) and 208.15(e), the value of such property shall include the amount previously charged off as loss. Regulation H (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 Income— (i) Any loss that the bank would be re quired to reflect in its financial statements for any period between and including 1984 and 1991. (ii) Any loss that the bank would be re quired to reflect in its financial statements for any period between and including 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 basis com mencing in the first quarter after the loan was or is charged off so as to be fully am ortized not later than December 31, 1998. (c) Accounting for amortization. Any bank which is permitted to amortize losses in accor dance with paragraph (b), above, may restate its capital and other relevant accounts and ac count for future authorized deferrals and amortizations in accordance with the instruc tions to the FFIEC Consolidated Reports of Condition and Income. Any resulting increase in the capital account shall be included in pri mary capital as per section 208.13 of this part. (d) Eligibility. A proposal submitted in accord with paragraph (f) shall be accepted, subject to the conditions described in paragraph (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 crimi nal 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; § 208.15 (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: (1) the bank shall fully adhere to the ap proved capital plan and shall obtain the prior 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 property, 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. 21 § 208.15 (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 quali fied agricultural loans, the basis upon which the bank believes that it should be declared eligible to amortize losses; (v) a capital plan demonstrating that the bank will achieve an acceptable capital level not later than the end of the bank’s amortization period. The plan should pro vide for a realistic improvement in the bank’s capital, over the course of the amortization period, from earnings reten tion, capital injections, or other sources; and include specific information regard ing dividend levels, compensation to di rectors, executive officers and individuals who have a controlling interest and in turn to their related interests, and pay ments for services or products 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 22 Regulation H the bank under 12 USC 1818(b). Additionally, acceptance of a bank for loss amortization will not foreclose any administrative action against the bank that the Board may deem appropriate. 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 Com mission (“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 regulations shall with re spect 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 total assets of $150 million or less as of the end of its most recent fiscal year and no foreign offices may elect to substitute for the finan cial statements required by the Commis sion’s Form 10-Q the balance sheet and in come statement from the quarterly report of condition required to be filed by such bank with the Board under section 9 of the Fed eral Reserve Act (12 USC 324) (Federal Fi nancial Institutions Examination 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 Regulation H 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 quarterly report of condition pursuant to paragraph (1) in its Form 10-Q shall in clude earnings per share or net loss per share data prepared in accordance with GAAP and disclose any material contingen cies as required by article 10 of the Com mission’s Regulation S-X (15 CFR 210.1001), in the Management’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 regula tions thereunder shall be submitted to the Division of Banking Supervision and Regu lation, Board of Governors of the Federal Reserve System, 20th Street and Constitu tion Avenue, N.W., Washington, D.C. 20551. Material may be filed by delivery to the Board, through the mails, or otherwise. The date on which papers are actually re ceived 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, de finitive proxy solicitation materials, reports and annual reports to shareholders required by this section (exclusive of exhibits) 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, report, or document under the 1934 act may make written objection to the public disclosure of § 208.16 any information contained therein in accor dance 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 that the confidential portion has been so omit ted 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 “CONFI DENTIAL TREATMENT” , as there are copies of the statement, report, or document filed with the Board. Each copy of the confidential portion shall contain the complete text of the item and, notwithstanding that the confiden tial portion does not constitute the whole of the answer, the entire answer thereto; except that in case the confi dential portion is part of a financial statement or schedule, only the particu lar financial statement or schedule need be included. All copies of the confi dential 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 por tion. 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. 23 § 208.16 (iii) Pending the determination by the Board on the objection filed in accor dance with this paragraph, the confiden tial 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 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 por tion shall be made available to the public— (A) 15 days after notice of the Board’s determination not to sustain the objec tion has been given as required by paragraph (c)(4)(v) of this section, pro vided that the person filing the objec tion has not previously filed with the Board a written statement that he in tends in good faith to seek judicial re view of the finding and determination; (B) 60 days after notice of the Board’s determination not to sustain the objec tion has been given as required by paragraph (c)(4)(v) of this section and the person filing the objection has filed with the Board a written statement that he intends to seek judicial review of the finding and determination but has failed to file a petition for judicial re view of the Board’s determination; 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. 24 Regulation H 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 publicly available information regarding the fi nancial 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. (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 In surance 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 Regulation H the public of the availability of information pursuant to this section. Bankers’ banks, as defined by the Federal Reserve Act, as 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 chooses to release available as soon as is rea sonably possible but not later than April 1 of the year immediately following the end of the year to which the most recently available in formation pertains. State member banks shall fulfill the requirements of this section by pro viding, 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 pursuant 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 Non accrual Loans and Leases); (iii) Schedule RI (Income Statement); (iv) Schedule RI-A (Changes in Equity Capital); and (v) Schedule RI-B (Charge-Offs and Re coveries 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 § 208.17 (4) in the case of a bank with indepen dently audited financial statements, copies of the audited financial statements and the certificate or report of the independent ac countant if such statements contain informa tion for the two most recent year-ends com parable 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 com pany, 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 holding company has consolidated assets of $150 million or more, the sections in the bank holding company’s consolidated financial statements for the most recent year-end and the prior year-end on Form FY-Y-9C (Con solidated Financial Statements for Bank Holding Companies with Total Consolidated 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 comparable 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 Liabilities); (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 25 § 208.17 vided pursuant to this section: “This financial information has not been reviewed, or con 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, with draw, 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 dividend shall be paid by a state member bank while it con tinues its banking operations, to an amount greater than its net profits then on hand, de ducting 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 26 Regulation H lection. Obligations include every type of 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 guar anty of a financially responsible party. If a loan that would otherwise be consid ered a bad debt is partially secured, that portion not properly secured will be con sidered a bad debt. (iii) Debt in process of collection. A debt is in the process of collection if collec tion of the debt is proceeding in due course, either through legal action, in cluding judgment enforcement proce dures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably ex pected to result in repayment of the debt or in its restoration to current status. In any case, the bank should have a plan of collection setting forth the reasons for the selected method of collection, the respon sibilities of the bank and the borrower, and the expected date of repayment of the debt or its restoration to current status. Regulation H (iv) Debts of bankrupt or deceased debt ors. A claim duly filed against the estate 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 main tain in its files documentation to support its evaluation of the obligation. In addi tion, the bank must retain, at a minimum, monthly progress reports on its collection efforts, noting and explaining any devia tion from the collection plan. (4) “Undivided profits then on hand”. For the purpose of this section, the terms “un divided profits then on hand” and “net profits then on hand” shall have the same meaning, and shall be referred to herein as “undivided 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 maintenance of surplus funds in addition to common cap ital. To the extent a bank has capital sur § 208.19 plus in excess of that required under ap plicable state law, the bank has “surplus surplus.” Only that portion of the surplus surplus that meets the following condi tions may be transferred to the undi vided-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 por tion of the surplus surplus to be trans ferred came from the earnings of prior periods, excluding earnings transferred as a result of stock dividends. 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 after the Reserve Bank’s receipt of the notice that the transfer has been disapproved or that it is subject to continuing 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. (3) Retained net profits. Retained net profits 27 § 208.19 of any period shall be equal to the net in come 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 calcu late 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 recalcu late 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, retained net profits and net profits for all subse quent 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 calcula tion used for that year during subsequent periods. 28 Regulation H SECTION 208.20—Reports of Crimes and Suspected Crimes (a) Purpose. This section applies to known or suspected crimes involving state member banks. This section ensures that law enforce ment agencies are notified by means of crimi nal referral reports when unexplained losses or known or suspected criminal acts are discov ered. Based on these reports, the federal gov ernment will take appropriate measures and will maintain an interagency database that is derived from these reports. (b) Institution-affiliated party. Institution-affil iated party means any institution-affiliated party as that term is defined in sections 3(u) and 8(b)(3) and (4) of the FDIA (12 USC 1813(u) and 1818(b)(3) and (4)). (c) Reports required. A state member bank shall file a criminal referral report using a standardized form (Form),12 in accordance with instructions for the Form, in every situa tion where— (1) the state member bank suspects one of its directors, officers, employees, agents, or other institution-affiliated parties of having committed or aided in the commission of a crime; (2) There is an actual or potential loss to the state member bank (before reimburse ment or recovery) of more than $1,000 where the state member bank has a substan tial basis for identifying a possible suspect or group of suspects and the suspect(s) is not a director, officer, employer, agent, or institution-affiliated party of the state mem ber bank; (3) there is an actual or potential loss to the state member bank (before reimburse ment or recovery) of $5,000 or more and where the state member bank has no sub stantial basis for identifying a possible sus pect or group of suspects; or (4) the state member bank suspects that it is being used as a conduit for criminal ac tivity, such as money laundering or struc turing transactions to evade the Bank Se crecy Act reporting requirements. 12 Copies o f the Form (FR 2230) are available from the Federal Reserve Banks. The Form may be prepared using a computer shell that is distributed by the Board. Regulation H (d) Time for reporting. (1) A state member bank shall file the re port required by paragraph (c) of this sec tion no later than 30 calendar days after the date of detection of the loss or the known or suspected criminal violation or activity. If no suspect has been identified within 30 calendar days after the date of the detection of the loss or the known, attempted, or sus pected criminal violation or activity, report ing may be delayed an additional 30 calen dar days or until a suspect has been identified; but in no case shall reporting of known or suspected crimes be delayed more than 60 calendar days after the date of the detection of the loss or the known, at tempted, or suspected criminal violation or activity. When a report requirement is trig gered by the identification of a suspect or group of suspects, the reporting period commences with the identification of each suspect or group of suspects. (2) When a state member bank detects a pattern of crimes committed by an identifi able individual, the state member bank shall file a report no later than 30 calendar days after the aggregated amount of the crimes exceeds $1,000. (3) In situations involving violations requir ing immediate attention or where a reporta ble violation is ongoing, the state member bank shall immediately notify by telephone the appropriate law enforcement agency and the appropriate Federal Reserve Bank in ad dition to filing a timely written report. (e) Reporting to state and local authorities. State member banks are encouraged to file copies of the Form with state and local au thorities where appropriate. (f) Exceptions. A state member bank need not file the Form— (1) for those robberies and burglaries that are reported to local law enforcement au thorities; and (2) for lost, missing, counterfeit, or stolen securities if a report is filed pursuant to the reporting requirements of 17 CFR 240.17f1. (g) Retention of records. A state member bank shall maintain copies of any Form that it § 208.21 filed and the originals of all related documents for a period of 10 years from the date of the report. (h) Notification to board of directors. The management of a state member bank shall promptly notify its board of directors of any report filed pursuant to this section. (i) Penalty. Failure to file a report in accor dance with the instructions on the Form and this regulation may subject the state member bank, its directors, officers, employees, agents, or other institution-affiliated parties to supervi sory action. SECTION 208.21—Community Development and Public-Welfare Investments (a) Definitions. (1) Low- or moderate-income area means— (i) one or more census tracts in a metro politan statistical area where the median family income adjusted for family size in each census tract is less than 80 percent of the median family income adjusted for family size of the metropolitan statistical area; or (ii) if not in a metropolitan statistical area, one or more census tracts or blocknumbered areas where the median family income adjusted for family size in each census tract or block-numbered area is less than 80 percent of the median family income adjusted for family size of the state. (2) Low- and moderate-income persons has the same meaning as low- and moderateincome persons as defined in 42 USC 5302(a)(20)(A). (3) Small business means a business that meets the size-eligibility standards of 13 CFR 121.802(a)(2). (b) Investments that do not require prior Board approval. Notwithstanding the provi sions of section 5136 of the Revised Statutes (12 USC 24 (Seventh)) made applicable to state member banks by paragraph 20 of sec tion 9 of the Federal Reserve Act (12 USC 335), a state member bank may make an in 29 § 208.21 vestment, without prior Board approval, if the following conditions are met: (1) The investment is in a corporation, lim ited partnership, or other entity— (i) where the Board has determined that an investment in that entity or class of entities is a public-welfare investment under paragraph 23 of section 9 of the Federal Reserve Act (12 USC 338a), or a community development investment under Regulation Y (12 CFR 225.25(b)(6)); (ii) where the Comptroller of the Cur rency has determined, by order or regula tion, that an investment in that entity by a national bank is a public-welfare in vestment under section 5136 of the Re vised Statutes (12 USC 24 (Eleventh)); (iii) where that entity is a community de velopment financial institution as defined in section 103(5) of the Community De velopment Banking and Financial Institu tions Act of 1994 (12 USC 4702(5)); or (iv) where that entity, directly or indi rectly, engages solely in or makes loans solely for the purposes of one or more of the following community development activities: (A) investing in, developing, rehabili tating, managing, selling, or renting residential property if a majority of the units will be occupied by low- and moderate-income persons or if the property is a “qualified low-income building” as defined in section 42(c)(2) of the Internal Revenue Code (26 USC 42(c)(2)); (B) investing in, developing, rehabili tating, managing, selling, or renting nonresidential real property or other assets located in a low- or moderateincome area and targeted towards lowand moderate-income persons; (C) investing in one or more small businesses located in a low- or moder ate-income area to stimulate economic development; (D) investing in, developing, or other wise assisting job training or place ment facilities or programs that will be targeted towards low- and moderateincome persons; 30 Regulation H (E) investing in an entity located in a low- or moderate-income area if that entity creates long-term employment opportunities, a majority of which (based on full time equivalent posi tions) will be held by low- and moder ate-income persons; and (F) providing technical assistance, credit counseling, research, and pro gram development assistance to lowand moderate-income persons, small businesses, or nonprofit corporations to help achieve community development; (2) the investment is permitted by state law; (3) the investment will not expose the state member bank to liability beyond the amount of the investment; (4) the investment does not exceed the sum of 2 percent of the state member bank’s capital stock and surplus as de fined under 12 CFR 250.162; (5) the aggregate of all such investments of the state member bank does not ex ceed the sum of 5 percent of its capital stock and surplus as defined under 12 CFR 250.162; (6) the state member bank is well capi talized or adequately capitalized under section 208.33(b)(1) and (2); (7) the state member bank received a composite CAMEL rating of 1 or 2 under the Uniform Financial Institutions Rating System as of its most recent ex amination and an overall rating of at least “satisfactory” as of its most recent con sumer compliance examination; and (8) the state member bank is not subject to any written agreement, cease-and-desist order, capital directive, prompt-cor rective-action directive, or memorandum of understanding issued by the Board or a Federal Reserve Bank. (c) Notice. Not more than 30 days after mak ing an investment under paragraph (b) of this section, the state member bank shall advise its Federal Reserve Bank of the investment, in cluding the amount of the investment and the identity of the entity in which the investment is made. (d) Investments requiring Board approval. Regulation H (1) With prior Board approval, a state member bank may make public-welfare in vestments under paragraph 23 of section 9 of the Federal Reserve Act (12 USC 338a), other than those specified in paragraph (b) of this section. (2) Requests for approval under this para graph should include, at a minimum, the amount of the proposed investment, a description of the entity in which the in vestment is to be made, an explanation of why the investment is a public-welfare in vestment under paragraph 23 of section 9 of the Federal Reserve Act (12 USC 338a), a description of the state member bank’s po tential liability under the proposed invest ment, the amount of the state member bank’s aggregate outstanding public-welfare investments under paragraph 23 of section 9 of the Federal Reserve Act, and the amount of the state member bank’s capital stock and surplus as defined in 12 CFR 250.162. (3) The Board will act on a request under this paragraph within 60 calendar days after receipt of a request that meets the require ments of paragraph (d)(2) of this section, unless the Board notifies the requesting state member bank that a longer time period will be required. (e) Divestiture of investments. A state member bank shall divest itself of an investment made under paragraph (b), (d), or (f) of this section to the extent that the investment exceeds the scope of, or ceases to meet, the requirements of paragraphs (b)(1) through (b)(5), or para graph (d) of this section. The divestiture shall be made in the manner specified in 12 CFR 225.140, Regulation Y, for interests acquired by a lending subsidiary of a bank holding company or the bank holding company itself in satisfaction of a debt previously contracted. (f) Preexisting investments. (1) For ongoing investments made prior to the final rule’s effective date that are cov ered by paragraph (b) of this section, a state member bank shall notify its Federal Re serve Bank of the investment not more than 60 days after the final rule’s effective date. (2) For other ongoing investments made § 208.30 prior to the final rule’s effective date, a state member bank shall request Board ap proval not more than one year after the fi nal rule’s effective date. SECTION 208.22—Investment in Bank Premises (a) Under section 24A of the Federal Reserve Act, state member bank investments in bank premises or in the stock, bonds, debentures, or other such obligations of any corporation holding the premises of the bank, and loans on the security of the stock of such corpora tion, do not require the approval of the Board if the aggregate of all such investments and loans, together with the indebtedness incurred by any such corporation that is an affiliate of the bank (as defined in section 2 of the Bank ing Act of 1933, as amended, 12 USC 221a)— (1) does not exceed the capital stock amount of the bank; or (2) does not exceed 50 percent of the bank’s tier 1 capital and the bank— (i) is well capitalized as defined in sec tion 208.33(b)(1) of this part; (ii) received a composite CAMEL rating of 1 or 2 as of its most recent examina tion by the relevant Federal Reserve Bank or state regulatory authority; and (iii) is not subject to any written agree ment, cease-and-desist order, capital di rective, or prompt-corrective-action direc tive issued by the Board or a Federal Reserve Bank. SUBPART B—PROMPT 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 31 § 208.30 Corporation Improvement Act of 1991 (Pub. L. 102-242, 105 Stat. 2236 (1991)). (b) Purpose. Section 38 of the FDI Act estab lishes a framework of supervisory actions for insured depository institutions that are not ad equately 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 procedures for submission and review of capital-restora tion plans and for issuance and review of di rectives and orders pursuant to section 38. (c) Scope. This subpart implements the provi sions 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 en forcement action available to the Board, including 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. (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 capital category under this subpart or that the Board or any other federal banking agency has assigned the bank to a particular capital category. 32 Regulation H SECTION 208.31—Definitions For purposes of this subpart, except as modi fied in this section or unless the context other wise requires, the terms used have the same meanings as set forth in section 38 and sec tion 3 of the FDI Act. (a) (1) Control has the same meaning as signed to it in section 2 of the Bank Hold ing 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 deposi tory 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 pe riod may be extended at the discretion of the appropriate federal banking agency for up to three one-year periods. (b) Controlling person means any person hav ing control of an insured depository institution and any company controlled by that person. (c) Leverage ratio means the ratio of tier 1 capital to average total consolidated assets, as calculated in accordance with the Board’s Capital Adequacy Guidelines for State Mem ber Banks: Tier 1 Leverage Measure (appen dix B). (d) Management fee means any payment of money or provision of any other thing of value to a company or individual for the pro vision of management services or advice to the bank or related overhead expenses, includ ing payments related to supervisory, execu tive, managerial, or policymaking functions, other than compensation to an individual in Regulation H § 208.33 the individual’s capacity as an officer or em ployee of the bank. of, or is deemed to have notice of, its capital category, pursuant to subsection (b). (e) Risk-weighted assets means total weighted-risk assets, as calculated in accor dance with the Board’s Capital Adequacy Guidelines for State Member Banks: RiskBased Measure (appendix A). (b) Notice of capital category. A state mem ber bank shall be deemed to have been noti fied of its capital levels and its capital cate gory 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. (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 to part 208), plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets except mortgage-servicing rights to the extent that the Board determines that 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 Capital Adequacy Guidelines for State Mem ber Banks: Risk-Based Measure (appendix A). (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. (j) Total risk-based capital ratio means the 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). (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 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 (a) Capital measures. For purposes of 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 of sec33 § 208.33 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 of 6.0 percent or greater, and (iii) has a leverage ratio of 5.0 percent or greater, and (iv) is not subject to any written agree ment, order, capital directive, or promptcorrective-action directive issued by the Board pursuant to section 8 of the FDI Act, the International Lending Supervi sion Act of 1983, or section 38 of the FDI Act, or any regulation thereunder, to meet and maintain a specific capital level for any capital measure; (2) “adequately capitalized” if the bank— (i) has a total risk-based capital ratio of 8.0 percent or greater, and (ii) has a tier 1 risk-based capital ratio of 4.0 percent or greater, and (iii) has— (A) a leverage ratio of 4.0 percent or greater, or (B) a leverage ratio of 3.0 percent or greater if the bank is rated composite 1 under the CAMEL rating system in the most recent examination of the bank and is not experiencing or anticipating significant growth; and (iv) does not meet the definition of a “well-capitalized” bank; (3) “undercapitalized” if the bank— (i) has a total risk-based capital ratio that is less than 8.0 percent, or (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 34 Regulation H (ii) a tier 1 risk-based capital ratio that is less than 3.0 percent, or (iii) a leverage ratio that is less than 3.0 percent; (5) “critically undercapitalized” if the bank has a ratio of tangible equity to total assets that is equal to or less than 2.0 percent. (c) Reclassification based on supervisory cri teria other than capital. The Board may re classify a well-capitalized state member bank as adequately capitalized and may require an adequately capitalized or an undercapitalized state member bank to comply with certain mandatory or discretionary supervisory actions as if the bank were in the next lower capital category (except that the Board may not re classify a significantly undercapitalized bank as critically undercapitalized) (each of these actions are hereinafter referred to generally as “ reclassifications” ) in the following circumstances: (1) Unsafe or unsound condition. The Board has determined, after notice and op portunity for hearing pursuant to section 263.203 of this chapter, that the bank is in unsafe or unsound condition; or (2) Unsafe or unsound practice. The Board has determined, after notice and opportunity for hearing pursuant to section 263.203 of this chapter, that, in the most recent exami nation of the bank, the bank received and has not corrected, a less-than-satisfactory rating for any of the categories of asset quality, management, earnings, or liquidity. SECTION 208.34— Capital-Restoration Plans (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 undercapitalized, unless the Board notifies the bank in writ ing that the plan is to be filed within a dif ferent period. An adequately capitalized bank that has been required pursuant to sec tion 208.33(c) to comply with supervisory Regulation H actions as if the bank were undercapitalized is not required to submit a capital-restora tion 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 tional capital-restoration plan based on a re vised calculation of its capital measures or a reclassification of the institution under section 208.33(c) unless the Board notifies the bank that it must submit a new or re vised capital plan. A bank that is notified that it must submit a new or revised capi tal-restoration plan shall file the plan in writing with the appropriate Reserve Bank within 45 days of receiving such notice, un less the Board notifies the bank in writing that the plan is to be filed within a different period. (b) Contents of plan. All financial data sub mitted in connection with a capital-restoration plan shall be prepared in accordance with the instructions provided on the call report, unless the Board instructs otherwise. The capital-res toration plan shall include all of the informa tion required to be filed under section 38(e)(2) of the FDI Act. A bank that is required to submit a capital-restoration plan as the result of a reclassification of the bank pursuant to section 208.33(c) shall include a description of the steps the bank will take to correct the unsafe or unsound condition or practice. No plan shall be accepted unless it includes any performance guarantee described in section 38(e)(2)(C) of that act by each company that controls the bank. (c) Review o f capital-restoration plans. Within 60 days after receiving a capital-resto ration plan under this subpart, the Board shall provide written notice to the bank of whether the plan has been approved. The Board may extend the time within which notice regarding approval of a plan shall be provided. (d) Disapproval of capital plan. If a capitalrestoration plan is not approved by the Board, the bank shall submit a revised capital-restora § 208.34 tion plan within the time specified by the Board. Upon receiving notice that its capitalrestoration plan has not been approved, any undercapitalized state member bank (as de fined in section 208.33(b)(3)) shall be subject to all of the provisions of section 38 and this subpart applicable to significantly undercapi talized institutions. These provisions shall be applicable until such time as a new or revised capital-restoration plan submitted by the bank has been approved by the Board. (e) Failure to submit capital-restoration plan. A state member bank that is undercapitalized (as defined in section 208.33(b)(3)) and that fails to submit a written capital-restoration plan within the period provided in this section shall, upon the expiration of that period, be subject to all of the provisions of section 38 and this subpart applicable to significantly un dercapitalized institutions. (f) Failure to implement capital-restoration plan. Any undercapitalized state member bank that fails in any material respect to implement a capital-restoration plan shall be subject to all of the provisions of section 38 and this sub part applicable to significantly undercapital ized institutions. (g) Amendment of capital plan. A bank that has filed an approved capital-restoration plan may, after prior written notice to and approval by the Board, amend the plan to reflect a change in circumstance. Until such time as a proposed amendment has been approved, the bank shall implement the capital-restoration plan as approved prior to the proposed amendment. (h) Notice to FDIC. Within 45 days of the effective date of Board approval of a capitalrestoration plan, or any amendment to a capi tal-restoration plan, the Board shall provide a copy of the plan or amendment to the Federal Deposit Insurance Corporation. (i) Performance guarantee by companies that control a bank. (1) Limitation on liability. (i) Amount limitation. The aggregate lia bility under the guarantee provided under section 38 and this subpart for all compa nies that control a specific state member 35 § 208.34 bank that is required to submit a capitalrestoration plan under this subpart shall be limited to the lesser of— (A) an amount equal to 5.0 percent of the bank’s total assets at the time the bank was notified or deemed to have notice that the bank was undercapital ized; or (B) the amount necessary to restore the relevant capital measures of the bank to the levels required for the bank to be classified as adequately capitalized, as those capital measures and levels are defined at the time that the bank initially fails to comply with a capital-restoration plan under this subpart. (ii) Limit on duration. The guarantee and limit of liability under section 38 and this subpart shall expire after the Board noti fies the bank that it has remained ade quately capitalized for each of four con secutive calendar quarters. The expiration or fulfillment by a company of a guaran tee of a capital-restoration plan shall not limit the liability of the company under any guarantee required or provided in connection with any capital-restoration plan filed by the same bank after expira tion of the first guarantee. (iii) Collection on guarantee. Each com pany that controls a given bank shall be jointly and severally liable for the guar antee for such bank as required under section 38 and this subpart, and the Board may require and collect payment of the full amount of that guarantee from any or all of the companies issuing the guarantee. (2) Failure to provide guarantee. In the event that a bank that is controlled by any company submits a capital-restoration plan that does not contain the guarantee required under section 38(e)(2) of the FDI Act, the bank shall, upon submission of the plan, be subject to the provisions of section 38 and this subpart that are applicable to banks that have not submitted an acceptable capitalrestoration plan. (3) Failure to perform guarantee. Failure by any company that controls a bank to perform fully its guarantee of any capital 36 Regulation H 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 applica ble to banks that have failed in a material respect to implement a capital-restoration plan. SECTION 208.35—Mandatory and Discretionary Supervisory Actions under Section 38 (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 distributions 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 undercapitalized, the bank shall become subject to the provi sions of section 38 of the FDI Act— (i) restricting payment of capital distribu tions and management fees (section 38(d)); (ii) requiring that the Board monitor the condition of the bank (section 38(e)(1)); (iii) requiring submission of a capitalrestoration plan within the schedule es tablished in this subpart (section 38(e)(2)); (iv) restricting the growth of the bank’s assets (section 38(e)(3)); and (v) requiring prior approval of certain expansion proposals (section 38(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 Regulation H 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-restoration plan, the bank shall become subject to the provisions of section 38 of the FDI Act that restrict compensation paid to senior execu tive officers of the institution (section 38(f)(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 no tice or being deemed to have notice, as pro vided in section 208.32 of this subpart, that the bank is critically undercapitalized, the bank shall become subject to the provisions of section 38 of the FDI Act— (i) restricting the activities of the bank (section 38(h)(1)); and (ii) restricting payments on subordinated debt of the bank (section 38(h)(2)). § 208.52 prescribes standards for real estate lending to be used by state member banks in adopting internal real estate lending policies. SECTION 208.52—Real Estate Lending Standards (a) Each state bank that is a member of the Federal Reserve System shall adopt and main tain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interests in real estate, or that are made for the purpose of financing permanent improvements to real estate. (b) (1) Real estate lending policies adopted pursuant to this section must— (i) be consistent with safe and sound banking practices; (ii) be appropriate to the size of the insti tution and the nature and scope of its op erations; and (iii) be reviewed and approved by the (b) Discretionary supervisory actions. In tak bank’s board of directors at least ing any action under section 38 that is within annually. the Board’s discretion to take in connection (2) The lending policies must establish— with (1) a state member bank that is deemed (i) loan portfolio diversification to be undercapitalized, significantly undercapi standards; talized, or critically undercapitalized, or has (ii) prudent-underwriting standards, in been reclassified as undercapitalized, or signif cluding loan-to-value limits, that are clear icantly undercapitalized; (2) an officer or di and measurable; rector of such bank; or (3) a company that (iii) loan administration procedures for controls such bank, the Board shall follow the the bank’s real estate portfolio; and procedures for issuing directives under section (iv) documentation, approval, and report 263.202 and 263.204 of this chapter, unless ing requirements to monitor compliance otherwise provided in section 38 or this with the bank’s real estate lending subpart. policies. SUBPART C—REAL ESTATE LENDING STANDARDS SECTION 208.51—Purpose and Scope This subpart, issued pursuant to section 304 of the Federal Deposit Insurance Corporation Im provement Act of 1991, 12 USC 1828(o), (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] 37 § 208.52 SUBPART D—STANDARDS FOR SAFETY AND SOUNDNESS SECTION 208.60—Standards for Safety and Soundness The Interagency Guidelines Establishing Stan dards for Safety and Soundness prescribed pursuant to section 39 of the Federal Deposit Insurance Act (12 USC 1831p-l), as set forth as appendix D to this part, apply to all state member banks. APPENDIX A—Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure See the Board pamphlet “Capital Adequacy Guidelines.” APPENDIX B—Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage Measure See the Board pamphlet “Capital Adequacy Guidelines.” APPENDIX C—Interagency Guidelines for Real Estate Lending Policies 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 liens on or interests in real estate or made for the purpose of fi nancing the construction of a building or other improvements. 1 These guidelines are intended to assist institutions in the formulation and maintenance of a real estate lending policy that is appropriate to the size of the institution and the nature and scope of its individual op erations, as well as satisfies the requirements of the regulation. Each institution’s policies must be compre hensive, and consistent with safe and sound 1 The agencies have adopted a uniform rule on real estate lending. See 12 CFR 365 (FDIC); 12 CFR 208, subpart C (FR B); 12 CFR 34, subpart D (OCC); and 12 CFR 563.100-101 (OTS). 38 Regulation H lending practices, and must ensure that the in stitution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many in stitutions’ business plans and, when under taken in a prudent manner, will not be subject to examiner criticism. 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., limits on higher-risk loans); • identify appropriate terms and conditions by type of real estate loan; • establish loan-origination and approval pro cedures, 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 institution should consider both internal and external factors in the formulation of its loan policies and strategic plan. Factors that should be considered include— • the size and financial condition of the insti tution; Regulation H • the expertise and size of the lending staff; • the need to avoid undue concentrations of risk; • compliance with all real estate-related laws and regulations, including the Community Reinvestment Act, antidiscrimination 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 deci sions. 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 conces sions; • current and projected operating expenses for different types of projects; • economic indicators, including trends and diversification of the lending area; • valuation trends, including discount and di rect capitalization rates. Underwriting Standards Prudently underwritten real estate loans should reflect all relevant credit factors, including— • the capacity of the borrower, or income from the underlying property, to adequately service the debt; • the value of the mortgaged property; • the overall creditworthiness of the bor rower; • the level of equity invested in the property; • any secondary sources of repayment; • any additional collateral or credit enhance ments (such as guarantees, mortgage insur ance, or take-out commitments). The lending policies should reflect the level of risk that is acceptable to the board of directors and provide clear and measurable underwrit ing standards that enable the institution’s lend Appendix C ing staff to evaluate these credit factors. The underwriting standards should address— • the maximum loan amount by type of property; • maximum loan maturities by type of property; • amortization schedules; • pricing structure for different types of real estate loans; • loan-to-value limits by type of property. For development and construction projects, and completed commercial properties, the pol icy should also establish, commensurate with the size and type of the project or property— • requirements for feasibility studies and sen sitivity and risk analyses (e.g., sensitivity of income projections to changes in eco nomic variables such as interest rates, va cancy 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 limits on nonamortizing loans; • standards for the acceptability of and limits on the use of interest reserves; • pre-leasing and pre-sale requirements for income-producing property; • pre-sale and minimum-unit release require ments 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 ad ministration procedures for its real estate port folio that address— • documentation, including— —type and frequency of financial statements, including requirements for 39 Regulation H Appendix C • • • • • • • • verification of information provided by the borrower; —type and frequency of collateral evaluations (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 of 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 internal loan-to-value limits for real estate loans. These internal limits should not exceed the following supervisory limits: Loan Category Loan-to-Value Limit Raw land Land development Construction: Commercial, multi family,* and other nonresidential One- to four-family residential 65% 75% Improved property Owner-occupied one- to four-family and home equity 85% 80% 85% ** * M u ltifam ily con stru ction in clu d es con d om in iu m s 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 o f either mortgage insurance or readily marketable collateral. 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 40 (e.g., a loan for both land development and construction of an office building), the appro priate loan-to-value limit is the limit applica ble to the final phase of the project funded by the loan; however, loan disbursements should not exceed actual development or construction outlays. In situations where a loan is fully cross-collateralized by two or more properties or is secured by a collateral pool of two or more properties, the appropriate maximum loan amount under supervisory loan-to-value limits is the sum of the value of each prop erty, less senior liens, multiplied by the appro priate loan-to-value limit for each property. To ensure that collateral margins remain within the supervisory limits, lenders should redeter mine conformity whenever collateral substitu tions are made to the collateral pool. In establishing internal loan-to-value limits, each lender is expected to carefully consider the institution-specific and market factors listed under “Loan Portfolio Management Considerations,” as well as any other relevant factors, such as the particular subcategory or type of loan. For any subcategory of loans that exhibits greater credit risk than the 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 sev eral pertinent credit factors to be considered when underwriting a real estate loan. Other credit factors to be taken into account are highlighted in the “Underwriting Standards” section above. Because of these other factors, the establishment of these supervisory limits should not be interpreted to mean that loans at these levels will automatically be considered sound. 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 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 Appendix C Regulation H 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 loanto-value limits; and (b) include the recourse obligation of any such loan sold with re course. Conversely, a loan should no longer be reported to the directors as part of aggre gate totals when reduction in principal or se nior liens, or additional contribution of collat eral or equity (e.g., improvements to the real property securing the loan), bring the loan-tovalue 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 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 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 capi tal” refers to that term as described in table I o f appendix A to 12 CFR 325. For national banks, the term “total capi tal” is defined at 12 CFR 3.2(e). For savings associations, the term “total capital” is defined at 12 CFR 567.5(c). • • • the portion of the loan that exceeds the su pervisory loan-to-value limit; loans guaranteed or insured by a state, mu nicipal or local government, or an agency thereof, provided that the amount of the guaranty or insurance is at least equal to the portion of the loan that exceeds the su pervisory loan-to-value limit, and provided that the lender has determined that the guarantor or insurer has the financial ca pacity 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 financial ly 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, refinanced, or re structured in connection with a workout sit uation, either with or without the advancement of new funds, where consis tent with safe and sound banking practices and part of a clearly defined and well-doc umented program to achieve orderly liqui dation 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 cred it is not used to acquire, develop, or con struct permanent improvements on real property; loans for the purpose of financing perma nent improvements to real property, but not secured by the property, if such security interest is not required by prudent under writing practice. 41 Appendix C 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 underwrit ten exceptions to its lending policies, includ ing 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 dis cussed 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 decision. The justification and approval documents for such loans should be maintained as a part of the permanent loan file. Each institution should monitor compliance with its real estate lending policy and individually report excep tion 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 lend ing policies and practices, examiners will take into consideration the following factors: • the nature and scope of the institution’s real estate lending activities • the size and financial condition of the institution • the quality of the institution’s management and internal controls • the expertise and size of the lending and loan-administration staff • market conditions 42 Regulation H 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. Definitions For the purposes of these guidelines: “Construction loan” means an extension of credit for the purpose of erecting or rehabili tating buildings or other structures, including any infrastructure necessary for development. “Extension of credit” or “loan” means— (1) the total amount of any loan, line of credit, or other legally binding lending commitment with respect to real property; and (2) the total amount, based on the amount of consideration paid, of any loan, line of credit, or other legally binding lending commitment acquired by a lender by purchase, assignment or otherwise. “Improved property loan” means an extension of credit secured by one of the following types of real property: (1) farmland, ranchland or timberland com mitted to ongoing management and agricul tural production; (2) one- to four-family residential property that is not owner-occupied; (3) residential property containing five or more individual dwelling units; (4) completed commercial property; or (5) other income-producing property that has been completed and is available for oc cupancy and use, except income-producing owner-occupied one- to four-family residen tial property. “Land development loan” means an extension 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, Appendix D Regulation H streets, and other infrastructure necessary for future development. “Loan origination” means the time of incep tion of the obligation to extend credit (i.e., when the last event or prerequisite, controlla ble by the lender, occurs, causing the lender to become legally bound to fund an extension of credit). “Loan-to-value” or “loan-to-value ratio” means the percentage or ratio that is derived at the time of loan origination by dividing an extension of credit by the total value of the property(ies) securing or being improved by the extension of credit plus the amount of any readily marketable collateral and other accept able collateral that secures the extension of credit. The total amount of all senior liens on or interests in such property(ies) should be in cluded in determining the loan-to-value ratio. When mortgage insurance or collateral is used in the calculation of the loan-to-value ratio, and such credit enhancement is later released or replaced, the loan-to-value ratio should be recalculated. “Other acceptable collateral” means any col lateral in which the lender has a perfected se curity interest, that has a quantifiable value, and is accepted by the lender in accordance with safe and sound lending practices. Other acceptable collateral should be appropriately discounted by the lender consistent with the lender’s usual practices for making loans se cured by such collateral. Other acceptable col lateral includes, among other items, uncondi tional irrevocable standby letters of credits for the benefit of the lender. “Owner-occupied”, when used in conjunction with the term “one- to four-family residential property” means that the owner of the under lying real property occupies at least one unit of the real property as a principal residence of the owner. “Readily marketable collateral” means in sured deposits, financial instruments, and bul lion in which the lender has a perfected inter est. Financial instruments and bullion must be salable under ordinary circumstances with rea sonable promptness at a fair market value de termined by quotations based on actual trans actions, on an auction or similarly available daily bid and ask price market. Readily mar ketable collateral should be appropriately dis counted 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 real property, prepared in accordance with the agency’s appraisal regulations and guidance. For loans to purchase an existing property, the term “value” means the lesser of the actual acquisition cost or the estimate of value. “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). APPENDIX D—Interagency Guidelines Establishing Standards for Safety and Soundness I. Introduction A. Preservation o f existing authority B. Definitions II. Operational and Managerial Standards A. Internal controls and information systems B. Internal audit system C. Loan documentation D. Credit underwriting E. Interest-rate exposure F. Asset growth G. [Reserved] H. [Reserved] I. Compensation, fees, and benefits III. Prohibition on Compensation That Con stitutes an Unsafe and Unsound Practice A. Excessive compensation B. Compensation leading to material financial loss I. Introduction i. Section 39 of the Federal Deposit Insurance 43 Appendix D Act1 (FDI Act) requires each federal banking agency (collectively, the agencies) to establish certain safety-and-soundness standards by reg ulation or by guideline for all insured deposi tory institutions. Under section 39, the agen cies must establish three types of standards: (1) operational and managerial standards; (2) compensation standards; and (3) such stan dards relating to asset quality, earnings, and stock valuation as they determine to be appropriate. ii. Section 39(a) requires the agencies to establish operational and managerial standards relating to (1) internal controls, information systems, and internal audit systems, in accor dance with section 36 of the FDI Act (12 USC 1831m); (2) loan documentation; (3) credit underwriting; (4) interest-rate exposure; (5) asset growth; and (6) compensation, fees, and benefits, in accordance with subsection (c) of section 39. Section 39(b) requires the agen cies to establish standards relating to asset quality, earnings, and stock valuation that the agencies determine to be appropriate. iii. Section 39(c) requires the agencies to establish standards prohibiting as an unsafe and unsound practice any compensatory ar rangement that would provide any executive officer, employee, director, or principal share holder of the institution with excessive com pensation, fees, or benefits and any compensa tory arrangement that could lead to material financial loss to an institution. Section 39(c) also requires that the agencies establish stan dards that specify when compensation is excessive. iv. If an agency determines that an institu tion fails to meet any standard established by guideline under subsection (a) or (b) of sec tion 39, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. In the event that an institution fails to submit an ac ceptable plan within the time allowed by the 1 Section 39 o f the Federal Deposit Insurance Act (12 USC 1831p -l) was added by section 132 o f the Federal Deposit Insurance Corporation Improvement Act o f 1991 (FDICIA), Pub. L. 102-242, 105 Stat. 2236 (1991), and amended by section 956 o f the Housing and Community Development Act o f 1992, Pub. L. 102-550, 106 Stat. 3895 (1992) and section 318 o f the Riegle Community Develop ment and Regulatory Improvement Act o f 1994, Pub. L. 103-325, 108 Stat. 2160 (1994). 44 Regulation H agency or fails in any material respect to im plement an accepted plan, the agency must, by order, require the institution to correct the de ficiency. The agency may, and in some cases must, take other supervisory actions until the deficiency has been corrected. v. The agencies have adopted amendments to their rules and regulations to establish deadlines for submission and review of com pliance plans.2 vi. The following guidelines set out the safety-and-soundness standards that the agen cies use to identify and address problems at insured depository institutions before capital becomes impaired. The agencies believe that the standards adopted in these guidelines serve this end without dictating how institutions must be managed and operated. These stan dards are designed to identify potential safetyand-soundness concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance funds. A. Preservation of existing authority. Neither section 39 nor these guidelines in any way limits the authority of the agencies to address unsafe or unsound practices, violations of law, unsafe or unsound conditions, or other prac tices. Action under section 39 and these guidelines may be taken independently of, in conjunction with, or in addition to any other enforcement action available to the agencies. Nothing in these guidelines limits the author ity of the FDIC pursuant to section 38(i)(2)(F) of the FDI Act (12 USC 1831(o)) and part 325 of title 12 of the Code of Federal Regulations. B. Definitions. 1. In general. For purposes of these guide lines, except as modified in the guidelines or unless the context otherwise requires, the terms used have the same meanings as set forth in sections 3 and 39 of the FDI Act (12 USC 1813 and 1831p-l). 2. Board of directors, in the case of a state2 For the Office o f the Comptroller o f the Currency, these regulations appear at 12 CFR 30; for the Board o f Gover nors o f the Federal Reserve System, these regulations ap pear at 12 CFR 263; for the Federal Deposit Insurance Corporation, these regulations appear at 12 CFR 308, sub part R; and for the Office o f Thrift Supervision, these regu lations appear at 12 CFR 570. Regulation H licensed insured branch of a foreign bank and in the case of a federal branch of a foreign bank, means the managing official in charge of the insured foreign branch. 3. Compensation means all direct and indi rect payments or benefits, both cash and noncash, granted to or for the benefit of any executive officer, employee, director, or principal shareholder, including but not lim ited to payments or benefits derived from an employment contract, compensation or benefit agreement, fee arrangement, perqui site, stock option plan, postemployment benefit, or other compensatory arrangement. 4. Director shall have the meaning de scribed in 12 CFR 215.2(c).3 5. Executive officer shall have the meaning described in 12 CFR 215.2(d).4 6. Principal shareholder shall have the meaning described in 12 CFR 215.2(/).5 II. Operational and Managerial Standards A. Internal controls and information systems. An institution should have internal controls and information systems that are appropriate to the size of the institution and the nature, scope, and risk of its activities and that pro vide for— 1. an organizational structure that establishes clear lines of authority and responsibility for monitoring adherence to established policies; 2. effective risk assessment; 3. timely and accurate financial, operational, and regulatory reports; 4. adequate procedures to safeguard and man age assets; and 5. compliance with applicable laws and regu lations. B. Internal audit system. An institution should have an internal audit system that is appropri ate to the size of the institution and the nature and scope of its activities and that provides for— 3 In applying these definitions for savings associations, pursuant to 12 USC 1464, savings associations shall use the terms “ savings association” and “insured savings associa tion” in place o f the terms “member bank” and “insured bank.” 4 See footnote 3 in section I.B.4. o f this appendix. 5 See footnote 3 in section I.B.4. o f this appendix. Appendix D 1. adequate monitoring of the system of inter nal controls through an internal audit func tion. (For an institution whose size, complexity, or scope of operations does not warrant a full-scale internal audit function, a system of independent reviews of key in ternal controls may be used.); 2. independence and objectivity; 3. qualified persons; 4. adequate testing and review of information systems; 5. adequate documentation of tests and find ings and any corrective actions; 6. verification and review of management ac tions to address material weaknesses; and 7. review by the institution’s audit committee or board of directors of the effectiveness of the internal audit systems. C. Loan documentation. An institution should establish and maintain loan documentation practices that— 1. enable the institution to make an informed lending decision and to assess risk, as nec essary, on an ongoing basis; 2. identify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner; 3. ensure that any claim against a borrower is legally enforceable; 4. demonstrate appropriate administration and monitoring of a loan; and 5. take account of the size and complexity of a loan. D. Credit underwriting. An institution should establish and maintain prudent credit-under writing practices that— 1. are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made; 2. consider the nature of the markets in which loans will be made; 3. provide for consideration, prior to credit commitment, of the borrower’s overall fi nancial condition and resources, the finan cial responsibility of any guarantor, the nature and value of any underlying collat eral, and the borrower’s character and will ingness to repay as agreed; 45 Appendix D 4. establish a system of independent, ongoing credit review and appropriate communica tion to management and to the board of directors; 5. take adequate account of concentration of credit risk; and 6. are appropriate to the size of the institution and the nature and scope of its activities. E. Interest-rate exposure. An institution should— 1. manage interest-rate risk in a manner that is appropriate to the size of the institution and the complexity of its assets and liabili ties; and 2. provide for periodic reporting to manage ment and the board of directors regarding interest-rate risk with adequate information for management and the board of directors to assess the level of risk. F. Asset growth. An institution’s asset growth should be prudent and consider— 1. the source, volatility, and use of the funds that support asset growth; 2. any increase in credit risk or interest-rate risk as a result of growth; and 3. the effect of growth on the institution’s capital. G. [Reserved] H. [Reserved] I. Compensation, fees, and benefits. An insti tution should maintain safeguards to prevent the payment of compensation, fees, and bene 46 Regulation H fits that are excessive or that could lead to material financial loss to the institution. III. Prohibition on Compensation That Constitutes an Unsafe and Unsound Practice A. Excessive compensation. Excessive com pensation is prohibited as an unsafe and un sound practice. Compensation shall be consid ered excessive when amounts paid are unreasonable or disproportionate to the ser vices performed by an executive officer, em ployee, director, or principal shareholder, con sidering the following: 1. the combined value of all cash and non cash benefits provided to the individual; 2. the compensation history of the individual and other individuals with comparable ex pertise at the institution; 3. the financial condition of the institution; 4. comparable compensation practices at com parable institutions, based upon such fac tors as asset size, geographic location, and the complexity of the loan portfolio or oth er assets; 5. for postemployment benefits, the projected total cost and benefit to the institution; 6. any connection between the individual and any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the institution; and 7. any other factors the agencies determine to be relevant. B. Compensation leading to material financial loss. Compensation that could lead to material financial loss to an institution is prohibited as an unsafe and unsound practice.
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