consumer compliance handbook - federal reservethis consumer compliance handbook provides federal...

ConsumerComplianceHandbookDivision of Consumer and Community Affairs

Inquiries and comments relating to the contents of this handbook should be addressed to Manager, Reserve Bank Oversight Division of Consumer and Community Affairs Board of Governors of the Federal Reserve System Washington, DC 20551

Copies of this handbook can be obtained from Publications Fulfillment Mail Stop 127 Board of Governors of the Federal Reserve System Washington, DC 20551

The price is $50 per copy. Remittance may be made by either check or money order, drawn on a U.S. bank, and should be made payable to the Board of Governors of the Federal Reserve System. Updates are available at an additional charge. For information, call 202-452-3244 or write Publications Fulfillment at [email protected].

About this Handbook

Since the late 1960s, Congress has enacted anumber of consumer protection and civil rightslaws directly related to the activities of financialinstitutions. Most transactions involving consumersand financial institutions are covered by these laws.The Board of Governors is responsible for admin-istering and enforcing the laws for state-charteredbanks that are members of the Federal ReserveSystem (state member banks)—and, with respectto some of the laws, for foreign banking organiza-tions. Oversight of this area is assigned to theBoard’s Division of Consumer and CommunityAffairs; direct supervision of individual institutionsto determine their compliance with the laws, andthe implementing regulations, is largely the respon-sibility of the Federal Reserve Banks, operatingunder delegated authority. Specially trained con-sumer compliance examination staff help carry outthe Board’s consumer compliance supervisionprogram.

Intended Use

This Consumer Compliance Handbook providesFederal Reserve examiners (and other Systemcompliance personnel) with background on theconsumer compliance regulations and statutescovered by the Board’s consumer compliancesupervision program and guidelines for conductingconsumer compliance examinations. Others in thecompliance profession may also find it useful.

The Handbook describes each regulation (or, ifno regulation exists, the statute) and, for most of theregulations, provides examination objectives,examination procedures, and a detailed examina-tion checklist. Although most of the regulations arediscussed in some detail, the discussions are notintended as a substitute for the regulation (or thestatute). For complete information, examinersshould refer to the regulation itself, as well as thestatute, official interpretations, and any related CALetters issued by the Division of Consumer andCommunity Affairs.

The Handbook primarily concerns examinationsof state member banks, but it also covers supervi-sory activities related to foreign banking offices. Forsimplicity, most discussions refer to ‘‘state memberbanks’’ (or just ‘‘banks’’), even when they mayapply to foreign banking offices. In addition, thematerial on risk-focused consumer compliancesupervision, which is currently being revised,applies in part to the supervision of LCBOs (large

complex banking organizations), including thosewithout a state member bank.1

Contents

The first part of the Handbook covers aspects ofthe examination process in general; the remainingparts focus on individual regulations (or, in somecases, individual statutes):

I. Risk-focused consumer compliance supervision

II. Deposit-related regulations and statutes

III. Credit-related regulations and statutes

IV. Other regulations, rules, policies, and statutes

V. Federal fair lending regulations and statutes

VI. Community Reinvestment Act

Relationship toFFIEC-Issued Material

The Handbook has been prepared specifically forFederal Reserve examiners. Some of the chaptersconcerning regulations or statutes for which theFFIEC has issued supervisory materials are adaptedfrom FFIEC documents. The differences betweentheHandbook and FFIECmaterials are not substan-tive and primarily involve formatting or other minorchanges to increase consistency among individualHandbook chapters.

Updates

Informal updates will be provided to System staffthrough CA Letters, conference calls, and othermeans of internal communication, as circum-stances dictate. Formal updates will be distributedat least annually.

Questions

Questions and comments about this Handbookshould be directed to the Manager, Reserve BankOversight, Division of Consumer and CommunityAffairs.

An electronic version of this printed handbook isavailable on the Board’s web site, at http://www.federalreserve.gov/boarddocs/SupManual/default.htm.

1. The material on risk-focused consumer compliance super-vision is not included in this edition of the Handbook.

Consumer Compliance Handbook iii (11/07)

Consumer Compliance HandbookContents

About this Handbook

I. Risk-Focused Consumer Compliance Supervision Framework

II. Deposit-Related Regulations and Statutes

Regulation E (Electronic Fund Transfers)

Regulations Q and D (Interest on Demand Deposits/Reserve Requirements)

Regulation CC (Availability of Funds and Collection of Checks)

Regulation DD (Truth in Savings)

III. Credit-Related Regulations and Statutes

Regulation C (Home Mortgage Disclosure)

Regulation H (Flood Insurance)

Fair Credit Reporting

Regulation Z (Truth in Lending)

Fair Debt Collection Practices Act

Homeowners Protection Act

Homeownership Counseling

Real Estate Settlement Procedures Act

IV. Other Regulations, Rules, Policies, and Statutes

Regulation G (Disclosure and Reporting of CRA-Related Agreements: CRA Sunshine Requirements)

Regulation H (Section 109 of the Riegle–Neal Interstate Banking and Branching Efficiency Act)

Regulation M (Consumer Leasing)

Regulation P (Privacy of Consumer Financial Information)

Regulation AA (Unfair or Deceptive Acts or Practices: Credit Practices Rule)

Branch Closings

Children’s Online Privacy Protection Act

Right to Financial Privacy Act

V. Federal Fair Lending Regulations and Statutes

Overview

Regulation B (Equal Credit Opportunity)

Fair Housing Act

Examination procedures

Appendix

Alternative Examination Approach for Low-Risk Banks

Consumer Compliance Handbook v (11/07)

VI. Community Reinvestment Act

Regulation BB (Community Reinvestment)

Small Institutions

Intermediate Small Institutions

Large Institutions

Institutions with Strategic Plans

Wholesale or Limited-Purpose Institutions

Supplementary Guidance

Contents

Consumer Compliance Handbookvi (11/07)

Risk-FocusedConsumer Compliance Supervision Framework

Overview of the Program

The Board adopted a program for risk-focusedconsumer compliance supervision in 1997. Sincethen, the program has been modified several timesto increase its efficiency and effectiveness in anevolving banking environment. The proceduresimplementing the risk-focused consumer compli-ance supervision program are currently beingrevised to, among other things, incorporate a widerange of existing supervisory guidance.1 Once therevised procedures have been tested and formallyapproved, they will be added to this ConsumerCompliance Handbook.

The risk-focused consumer compliance supervi-sion program is designed to reasonably ensure thatall organizations supervised by the Federal Reservecomply with consumer protection laws and regula-tions. It is founded on the expectation that con-sumer compliance risk management is an integralpart of the corporate-wide risk management func-tion of each state member bank and bank holdingcompany.

The risk-focused supervision program directsSystem resources to organizations, and to theactivities within those organizations, commensu-rate with the level of risk to both the organizationand consumers. This focusing of resources reducesburden on those organizations that already haveappropriate risk mitigators in place. In recognitionof the rapidity of change in the financial servicesindustry, the program is designed to be adaptableto different types of organizations and risk profiles.

Particularly in a period of rapid change, the moreinformed organizations are about the regulatoryenvironment in which they operate, the greater theopportunity for them to achieve compliance on theirown. For that reason, the program supplementstraditional supervisory activities with timely commu-nications concerning consumer compliance regu-latory and supervisory matters. Given the interrela-tionship among different types of risk, the program

requires examination reports and other products ofthe supervision process to be meaningful to allstakeholders, including the supervised entities, theFederal Reserve, and state banking authorities.

Following are some highlights of the program:

• Provides for the efficient and effective deploy-ment of System resources by allowing ReserveBanks to tailor supervisory activities to the size,structure, complexity, and risk of the bank. As aresult, both the frequency and depth of reviewshould be commensurate with a bank’s riskprofile. Sufficient information about the use ofresources will be captured and analyzed to helpdirect future decision making at the System andReserve Bank levels.

• Incorporates guidelines for evaluating compli-ance management programs in the context ofrisk to the organization as well as to consumers.These guidelines will be evaluated routinely andupdated as necessary to reflect changing riskwithin the financial services industry. The pro-gram will provide specific guidance on evaluat-ing the efficacy of internal controls and auditprograms as well as on applying appropriatetesting methodologies.

• Requires coordination with other supervisorydisciplines and other regulators, as warranted, toensure a full understanding of the organization’srisk profile such that consumer compliance risksare incorporated into overall risk assessmentsand consumer compliance ratings influenceoverall management ratings and risk manage-ment ratings as appropriate. The form of specificsupervisory products will be dictated by theneeds of relevant stakeholders.

• Promotes communication between supervisedorganizations and Reserve Banks, outside of thesupervisory process, for the purpose of sharingtimely information about industry developmentsand consumer compliance risk managementpractices as well as changes to laws andregulations. Resulting improvement in institu-tions’ risk management programs should allowfor more-efficient use of examiner time andresources while reducing regulatory burden.

1. The procedures are also being revised to incorporaterevised guidance related in part to the supervision of LCBOs(large complex banking organizations), including those without astate member bank.

Consumer Compliance Handbook Overview • 1 (1/06)

Regulation EElectronic Fund Transfers

Background

Regulation E (12 CFR 205) implements the Elec-tronic Fund Transfer Act (EFTA) (15 USC 1693 etseq.), which was enacted in November 1978. TheEFTA establishes the rights, liabilities, and respon-sibilities of participants in electronic fund transfer(EFT) systems. Its primary objective is to protectindividual consumers in their dealings with thesesystems. Examples of EFT services are automatedteller machine (ATM) transfers, telephone billpayment services, point-of-sale terminal transfersin retail stores, transfers initiated via the Internet,electronic check conversion transactions, preau-thorized transfers to or from a consumer’s account(for example, direct deposit of Social Securitypayments), and debit card transactions whether ornot initiated through an electronic terminal.

As defined in the EFTA, the term electronic fundtransfer refers to a transaction initiated through anelectronic terminal or by telephone, computer, ormagnetic tape that instructs a financial institution toeither credit or debit a consumer’s asset account.Electronic terminals include point-of-sale terminals,automated teller machines, and cash-dispensingmachines. Asset accounts include consumerchecking, savings, share, and money marketaccounts held by an institution and established bythe consumer primarily for family, personal, orhousehold purposes. Consumers are usually issuedan access device—a card or a code, or both—thatcan be used to initiate electronic fund transfers.

Coverage—Section 205.3

Regulation E governs electronic fund transfers to orfrom an account held primarily for personal, family,or household purposes.

The following are not covered by Regulation E:

• Transfers originated by check

• Check-guarantee and check-authorization ser-vices that do not directly result in a debit or creditto a consumer’s account

• Any transfer of funds for a consumer through asystem that is used primarily to transfer fundsbetween financial institutions or businesses, forexample, a wire transfer of funds for a consumerthrough Fedwire or a similar network

• Any transaction that has as its primary purposethe purchase or sale of securities or commoditiesregulated by the Securities and Exchange Com-mission or the Commodity Futures TradingCommission

• Intra-institutional automatic transfers

– Between a consumer’s account and the insti-tution itself (except that EFTA sections 913,915, and 916 are applicable so as to restrictcompulsory use)

– Between two accounts of the consumer withinthe institution

– From a consumer’s account to a familymember’s account within the institution

• Telephone-initiated transfers not under a prear-ranged plan contemplating periodic or recurringtransfers

• Preauthorized transfers to or from an accountheld at a financial institution with assets of$100 million or less (except that EFTA sec-tions 913, 915, and 916 are applicable)

General Disclosure Requirements;Jointly Offered Services—Section 205.4

Disclosures required by Regulation E must beclear, easily understandable, in writing, and in aform consumers can keep. At the institution’soption, disclosures required by other laws (forexample, Truth in Lending disclosures) may bemade in combination with Regulation E disclo-sures. In addition, disclosures may be made in alanguage other than English, provided that disclo-sures in English are made available at the consum-er’s request.

If a consumer holds two or more accounts at aninstitution, the institution may combine the requireddisclosures into a single statement. Thus, a singleperiodic statement or error resolution notice issufficient for multiple accounts. Also, an institutionneed provide only one set of disclosures foraccounts held jointly by two or more consumers.

Two or more institutions that jointly provide EFTservices may contract among themselves to fulfillthe requirements that the regulation imposes onany or all of them. When making disclosures undersection 205.7 (initial disclosures) and section 205.8(change-in-terms and error resolution notices),each institution that makes its own disclosures in ashared system need make only those requireddisclosures that are within its knowledge and thepurview of its relationship with the consumer forwhom it holds an account.

Consumer Compliance Handbook Reg. E • 1 (1/06)

Issuance of Access Devices—Section 205.5

In general, an institution may issue an accessdevice to a consumer only if it has been

• Requested (in writing or orally) or applied for

• Issued as a renewal of, or in substitution for, anaccepted access device (as defined in section205.2(a))

An institution may issue an access device toeach account holder (on a joint account) for whomthe requesting holder specifically requests anaccess device.

An institution may issue an unsolicited accessdevice only if the following four conditions aresatisfied:

• The access device is not validated, that is, itcannot be used to initiate an electronic fundtransfer.

• The access device is validated only upon oral orwritten request from the consumer and afterverification of the consumer’s identity by somereasonable means.

• The access device is accompanied by theexplanation that it is not validated and of how itcan be disposed of if the consumer does notwish to keep it.

• The access device is accompanied by a com-plete disclosure, in accordance with section205.7, of the rights and liabilities that will apply ifthe access device is validated.

These conditions are intended to reduce the poten-tial for unauthorized use if the access device is lostor stolen en route to the consumer and to ensurethat the consumer is informed of account terms andconditions before deciding whether to accept theresponsibilities of having an access device.

Consumer Liability for UnauthorizedTransfers—Section 205.6

A consumer may be held liable for unauthorizedelectronic fund transfers (EFTs) (as defined insection 205.2(m)) only if all the following conditionshave been met:

• The access device is ‘‘accepted’’ (as defined insection 205.2(a)).

• The institution has provided a means of identify-ing the consumer to whom the access devicewas issued.

• The institution has provided the following writtendisclosures to the consumer:

– A summary of the consumer’s liability forunauthorized EFTs,

– The telephone number and address for report-ing that an unauthorized EFT has been or maybe made, and

– The institution’s business days.

The table shows the relationship between thetime when a consumer notifies the institution of thetheft or loss of an access device and his or hermaximum liability.

Event Timing of consumer notification to institution Maximum liability

Loss or theft ofaccess device 1

Within 2 business days after learning of the lossor theft

Lesser of $50 or total amount of unauthorizedtransfers

Loss or theft ofaccess device 1

More than 2 business days after learning ofthe loss or theft

Lesser of $500 or the sum of• $50 or the total amount of unauthorized

transfers occurring in the first 2 businessdays, whichever is less, and

• the amount of unauthorized transfersoccurring after 2 business days and beforenotice to the institution 2

More than 60 calendar days after transmittalof the statement showing the first unauthorizedtransfer made with the access device

For transfers occurring within the 60-dayperiod, the lesser of $500 or the sum of• the lesser of $50 or the amount of

unauthorized transfers in the first2 business days and

• the amount of unauthorized transfersoccurring after 2 business days

For transfers occurring after the 60-dayperiod, unlimited liability (until the institutionis notified) 3

1. Includes, for example, a personal identification number (PIN) if used without a card in a telephone transaction.2. Provided the financial institution demonstrates that these transfers would not have occurred had notice been given within the

two-business-day period.3. Provided the financial institution demonstrates that these transfers would not have occurred had notice been given within the sixty-day

period.

Electronic Fund Transfers

2 (1/06) • Reg. E Consumer Compliance Handbook

If a consumer’s delay in notifying an institutionwas due to extenuating circumstances, such asextended travel or hospitalization, the institutionmust extend the time periods for notification to areasonable time (section 205.6(b)(4)). Also, if anylesser liability limits are imposed by applicablestate law or by agreement with the consumer, thoselimits apply, rather than the limits set by section205.6(b)(5).

Notice of unauthorized use is considered givento an institution when the consumer takes whateversteps are reasonably necessary to provide theinstitution with the pertinent information, whether ornot any particular employee, in fact, receives theinformation. At the consumer’s option, notice maybe given in person, by telephone, or in writing.Notice in writing is considered given at the time theconsumer deposits the notice in the mail or deliversthe notice for transmission by any other usualmeans to the institution. Notice is also consideredgiven when the institution becomes aware ofcircumstances that indicate that an unauthorizedtransfer has been or may be made.

Initial Disclosure—Section 205.7

An institution must provide a consumer with thefollowing disclosures, in written, retainable form,before the first electronic fund transfer is made or atthe time the consumer contracts for an EFT service:

• A summary of the consumer’s liability undersection 205.6 or other applicable law oragreement

• The telephone number and address of theperson or office to notify in the event of loss orunauthorized use

• The institution’s business days

• The types of EFTs the consumer may make andany limitations on the frequency and dollaramount of transfers (the details of the limitationsmay be withheld if the security of the systemrequires confidentiality)

• Any charges for EFTs or for the right to makeEFTs

• A summary of the consumer’s right to receivedocumentation of EFTs as provided in sections205.9, 205.10(a), and 205.10(d)

• A summary of the consumer’s right to stoppayment of a preauthorized electronic fundtransfer and the procedure for initiating a stop-payment order

• A summary of the institution’s liability for its failureto make or stop certain transfers

• The circumstances under which the institution inthe ordinary course of business will disclose

information to third parties concerning the con-sumer’s account

• An error resolution notice substantially similar tothe notice in appendix A to Regulation E

• A notice that a fee may be imposed by anotherinstitution if the consumer uses an ATM ownedand operated by that other institution

Change in Terms and ErrorResolution Notices—Section 205.8

If an institution changes a term or conditionrequired to be disclosed under section 205.7(b),the institution must mail or deliver a written notice tothe consumer at least twenty-one days before theeffective date of the change if the change wouldresult in any of the following:

• Increased fees or charges for the consumer

• Increased liability for the consumer

• Fewer types of available EFTs

• Stricter limitations on the frequency or dollaramounts of transfers

If an immediate change in terms or conditions isnecessary to maintain or restore the security of anEFT system or account, the institution need not giveprior notice. However, if such a change is to bepermanent, the institution must provide writtennotice of the change to the consumer on or with thenext regularly scheduled periodic statement orwithin thirty days, unless disclosures would jeopar-dize the security of the system or account.

An error resolution notice as set forth in appendixA to the regulation—the same form included withthe initial disclosures—must be mailed or deliveredto the consumer at least once each calendar year.Alternatively, an error resolution notice substantiallysimilar to the notice set forth in appendix A—theshort-form notice—may be included with eachperiodic statement.

Documentation of Transfers—Section 205.9

Receipts at Electronic Terminals(§ 205.9(a))

A receipt must be given to a consumer at the timethe consumer initiates an electronic fund transfer atan electronic terminal. The receipt must include, asapplicable,

• The amount of the transfer—A charge for makingthe transfer may be included in the amount,provided that the charge is (1) disclosed on thereceipt and (2) displayed either on a sign postedon or at the terminal or on the terminal screen



(Note, however, that section 205.16 requiresdisclosure of the fee on both the sign and thescreen.)

• The calendar date of the transfer

• The type of transfer and type of account—Descriptions such as ‘‘withdrawal from check-ing’’ and ‘‘transfer from savings to checking’’ areappropriate, even if the account is only similarin function to a checking account (for example,a share draft or NOW account) or a savingsaccount (for example, a share account). If theaccess device used can access only oneaccount at that terminal, the type-of-accountrequirement does not apply.

• A number or code identifying the consumer, theconsumer’s account, or the access device usedfor the transfer—An institution is in compliancewith this account-identification requirement evenif numbers or codes are truncated to four or moredigits or letters.

• The location of the terminal—The location maybe given in the form of a code or terminalnumber.

• The name of any third party to or from whomfunds are transferred—A code may be used toidentify the party, but only if the code is explainedon the receipt. This requirement does not apply ifthe name of the party is provided by theconsumer in a manner the terminal cannotduplicate on the receipt, such as on a paymentstub.

Periodic Statements (§ 205.9(b))

Periodic statements generally must be sent monthlyif an electronic fund transfer has occurred, orquarterly if no EFT has occurred. For each EFTmade during the cycle, the statement must include,as applicable,

• The amount of the transfer—If a charge wasimposed at an electronic terminal by the owneror operator of the terminal, that charge may beincluded in the amount.

• The date the transfer was posted to the account

• The type of transfer and type of account to orfrom which the funds were transferred

• For transfers (except deposits to the consumer’saccount) initiated at electronic terminals, thelocation of the terminal, using one of the followingdescriptions:

– The street address of the terminal, includingthe city and state, or foreign country

– A generally accepted name for the location ofthe terminal (such as an airport, shoppingcenter, or branch of an institution), includingthe city and state, or foreign country

– The name of the entity (except the institutionproviding the statement) that owns or operatesthe terminal, such as a store, along with thecity and state, or foreign country

• The name of any third-party payee or payor

• The account number(s) for which the statementis being issued

• The total amount of any fees and charges, otherthan a finance charge as defined by Regula-tion Z, assessed during the period for makingEFTs, for the right to make EFTs, or for accountmaintenance

• The balances of each account at the beginningand the close of the statement period

• The address and telephone number to be usedby the consumer to make inquiries or give noticeof errors—If the institution has elected to sendthe shorter error notice with every periodicstatement, the address and telephone numbermay appear on that document.

• If the institution has provided a telephonenumber that the consumer can call to find outwhether or not a preauthorized transfer has takenplace, that telephone number (see section205.10(a))

If a consumer’s passbook cannot be accessedby an electronic fund transfer, other than apreauthorized transfer to the account, a periodicstatement need not be sent, provided that thefinancial institution updates the consumer’s pass-book or provides the required information on aseparate document at the consumer’s request.Passbook updates must list the amount and date ofeach EFT made since the passbook was lastpresented.

If the consumer has a non-passbook accountthat cannot be accessed by an EFT, other than apreauthorized transfer to the account, a periodicstatement need be sent only quarterly.

Preauthorized Transfers—Section 205.10

Notice Requirements

If an account is scheduled to be credited by apreauthorized electronic fund transfer from thesame payor at least once every sixty days, someform of notice must be provided to the consumer sothat the consumer can determine whether or not thetransfer occurred.

The notice requirement is satisfied if the payornotifies the consumer that the transfer has beeninitiated. If the payor does not notify the consumer,the burden is on the institution to do so. The



institution may provide the notice in one of threeways:

• Positive notice—Provide an oral or written noticeto the consumer every time a preauthorizedtransfer occurs, within two business days afterthe transfer occurred

• Negative notice—Provide an oral or writtennotice to the consumer, within two business daysafter the date on which a transfer was scheduledto occur, that the transfer did not occur

• Notice by telephone—Establish a telephone linethat the consumer may access to determinewhether a preauthorized transfer has occurred.The telephone number must be disclosed on theinitial disclosures and on each periodic state-ment. The telephone line must be ‘‘readilyavailable’’ so that consumers calling to inquireabout their transfers are able to have their callsanswered with little difficulty. In addition, it isexpected that these telephone notice systemswill be designed so that consumers within theinstitution’s primary service area do not have tobear the cost of long-distance calls to inquireabout transfers. Therefore, a multibranch institu-tion with a statewide customer base could eitherprovide consumers with a toll-free number ordesignate local numbers for different communi-ties within the state.

Preauthorized transfers must be credited to aconsumer’s account as of the day the funds arereceived. The institution need not, however, makethe funds available as of the day they are credited.

Authorization of Preauthorized Transfers

Preauthorized transfers from a consumer’s accountmay be authorized only by a writing signed by theconsumer or ‘‘similarly authenticated’’ by the con-sumer (such as an electronic communication withan electronic signature). The party that obtains theauthorization from the consumer must provide theconsumer with a copy of the authorization.

Right to Stop Payment

A consumer has the right to stop payment of apreauthorized transfer from an account. To exercisethis right, the consumer must notify the institution,orally or in writing, at any time up to three businessdays before the scheduled date of the transfer. Aninstitution may require a consumer to provide awritten confirmation of an oral stop-payment orderwithin fourteen days of the consumer’s oral notifi-cation. However, the institution may impose thiswritten confirmation requirement only if the con-sumer was informed of the requirement at the timethe oral notice was given and was provided with theaddress to which the confirmation must be sent. If

the institution requires written confirmation, the oralstop-payment order ceases to be binding fourteendays after the date it was made.

Notice of Preauthorized TransfersVarying in Amount

An institution or designated payee must notify theconsumer in writing if a preauthorized transfer fromthe consumer’s account will vary in amount fromthe previous transfer under the same authorizationor from the preauthorized amount. The notificationmust be mailed or delivered to the consumer atleast ten days before the scheduled transfer dateand must specify the amount and scheduled dateof the transfer. However, if the institution or thepayee informs the consumer of his or her right toreceive advance notice of varying transfer amounts,the consumer may elect to receive notice onlywhen the amount varies from the most recenttransfer by more than an agreed-upon amount orwhen it falls outside a specified range.

Prohibition against Required Use ofPreauthorized Transfers

A financial institution or other person may notrequire the repayment of a loan through recurring,preauthorized electronic transfers and may notcondition the receipt of a loan on the electronicrepayment of that loan. A creditor may, however,make available to consumers a program that offersa reduced annual percentage rate or other cost-related benefit as an incentive to choose auto-mated payment, provided that this program is notthe only loan program offered for the type of creditrequested.

The regulation also prohibits the compulsory useof an account at a particular institution that receiveselectronic fund transfers as a condition of employ-ment or receipt of government benefits. For exam-ple, a financial institution or other person may notrequire a consumer to open or establish an accountfor receipt of EFTs at a particular institution in orderto be hired or to receive public assistancepayments.

Procedures for Resolving Errors—Section 205.11

Definition of Error

Generally, the term error means

• An unauthorized electronic fund transfer

• An incorrect EFT to or from a consumer’saccount

• The omission of an EFT to or from the consumer’s



account that should have been listed on theperiodic statement

• An EFT-related computational or bookkeepingerror made by the institution

• A consumer’s receipt of an incorrect amount ofmoney from an electronic terminal

• Failure to identify an EFT in accordance with therequirements of section 205.9 or 205.10(a)

• A consumer’s request for any documentationrequired by section 205.9 or 205.10(a), or foradditional information or clarification concerningan EFT

The term ‘‘error’’ does not include a routineinquiry about the balance in the consumer’saccount, a request for duplicate copies of docu-mentation, or a request for information that is madeonly for tax or other recordkeeping purposes.

Timing and Contentof the Error Notice

An error notice is an oral or written notice from aconsumer and received by an institution no laterthan sixty days after the institution transmitted thefirst periodic statement or other documentation thatreflects the alleged error. The error notice mustenable the institution to identify the consumer’sname and account number and, to the extentpossible, the type, date, and amount of the error. Aninstitution may require a written confirmation of anoral notice of error within ten business days if theconsumer is so advised when the oral notice isgiven. If written confirmation is not received, theinstitution must still comply with the error resolutionprocedures but need not comply with the require-ment (discussed below) to provisionally recredit theaccount if it takes longer than ten business days toresolve the matter.

Investigation of the Error—Time Limits and Actions

After receiving an error notice, an institution isrequired to investigate the alleged error promptlyand to complete its investigation within ten busi-ness days. If the institution is unable to completethe investigation within ten business days, it mayextend the investigation period to forty-five calen-dar days from the receipt of the error notice,provided it takes the following actions:

• Provisionally recredits the funds (including inter-est, if applicable) to the consumer’s accountwithin the ten-business-day period

• Advises the consumer within two business daysof the provisional recrediting

• Gives the consumer full use of the provisionallyrecredited funds during the investigation

An institution need not provisionally recredit theaccount under two circumstances: (1) the institu-tion requires but does not receive timely writtenconfirmation of an oral notice of an error or (2) thenotice of error involves an account subject to themargin requirements or other aspects of Regula-tion T (12 CFR 220).

Extension of Time

Regulation E allows additional time for resolvingerrors involving certain types of transactions. Forexample, if an alleged error involves an electronicfund transfer that was not initiated within a state (asdefined in section 205.2(l)) or involves an EFTresulting from a point-of-sale debit card transac-tion, the institution may take up to ninety calendardays from the receipt of the error notice, instead offorty-five calendar days, to resolve the error.

If a notice of an error involves an EFT to or froma new account (that is, an account open no morethan thirty days), the institution may take up totwenty business days, instead of ten, to resolve theerror. Errors that cannot be resolved within this timeframe must be resolved within ninety calendar daysof the receipt of the error notice.

Post-Error-Investigation Procedures

If, after investigating the alleged error, the institutiondetermines that an error has been made, it has onebusiness day from the completion of the investiga-tion to correct the error, recredit any interest (ifapplicable), and refund any fees or other chargesimposed as a result of the error. The institution hasthree business days from the completion of theinvestigation to notify the customer orally or inwriting that a correction has been made to theaccount or that provisional credit has been madefinal.

If the institution determines that no error wasmade or that an error was made in a manner oramount different from that described by theconsumer, the institution must mail or deliver awritten explanation of its findings within threebusiness days after concluding its investigation.The explanation must include a notice of theconsumer’s right to request the documents onwhich the institution relied in making itsdetermination.

Upon debiting a provisionally recredited amount,the institution must provide oral or written notice tothe consumer of the date and amount of the debitand the fact that the institution will honor (withoutcharge) checks, drafts, or similar paper instru-ments payable to third parties and preauthorizeddebits for five business days after transmittal of thenotice. An institution must honor these items,



however, only to the extent that these items wouldhave been honored if the provisionally recreditedfunds had not been debited. Upon request from theconsumer, the institution must promptly mail ordeliver to the consumer copies of documents onwhich it relied in making its determination.

Relation to Other Laws—Section 205.12

Relationship to Truth in Lending Act

The Electronic Fund Transfer Act (EFTA) and theTruth in Lending Act (TILA) have distinct rulesgoverning such areas as liability and error resolu-tion. In general, for access devices that also serveas credit cards, the nature of the transactiondetermines which rules apply.

For example, the EFTA governs with respect tothe

• Addition of a feature enabling an ‘‘accepted’’credit card to initiate EFTs

• Issuance of access devices whose only creditfeature is a pre-existing agreement to extendcredit to cover account overdrafts or to maintaina minimum account balance

• Issuance of debit cards and other accessdevices that lack credit features

On the other hand, the TILA, which is imple-mented by Regulation Z, governs with respect tothe

• Issuance of credit cards as defined in Regula-tion Z, section 226.2(a)(15)

• Addition of a credit feature to a debit card orother access device

• Issuance of a credit card that is also an accessdevice

When an EFT also involves an extension of creditunder an agreement between a creditor and aninstitution to extend credit when the consumer’saccount is overdrawn or to maintain a specifiedminimum balance in the consumer’s account, theinstitution must comply with the error resolutionrequirements of Regulation E rather than therequirements of Regulation Z, sections 226.13(a)–(c), (e), (f), and (h). (The institution must alsocomply with Regulation Z, sections 226.13(d) and(g), which set forth rules protecting consumerspending, and subsequent to, error resolution.)

The consumer liability provisions outlined insection 205.6 of Regulation E also apply tounauthorized EFTs initiated by a combinationaccess device–credit card, including an accessdevice with overdraft privileges. They do not apply,however, to the unauthorized use of a combinationaccess device–credit card when no EFT is involved

(for example, when the card is used to draw cashadvances directly from a credit line).

Preemption of State Law

The EFTA and Regulation E preempt state laws thatare inconsistent with the act and the regulation, butonly to the extent of the inconsistency. The FederalReserve Board has the authority to determinewhether or not a state law is inconsistent. Aninstitution, state, or other interested party mayrequest that the Board make such a determination.A state law will not be deemed inconsistent if it ismore protective of the consumer than the EFTA orRegulation E.

State Exemptions

A state may apply to the Board for an exemptionfrom the requirements of the EFTA or any class ofelectronic fund transfers within the state. To receivean exemption, the state must have state laws thatare substantially similar to the federal law and haveadequate provisions for enforcing these laws.

Administrative Enforcement andRecord Retention—Section 205.13

Section 917 of the Electronic Fund Transfer Actspecifically directs the federal financial institutionsupervisory agencies to enforce compliance withthe provisions of the act.

Institutions are required to maintain evidence ofcompliance with the EFTA and Regulation E for aperiod of at least two years. The period may beextended by the agency supervising the institution.It may also be extended if the institution is subjectto an action filed under section 910, 915, or 916(a)of the EFTA relating to the liability of institutions formaking EFTs and to institutions’ civil and criminalliability for failure to comply with the act and theregulation. Persons subject to the EFTA who haveactual notice that they are being investigated orare subject to an enforcement proceeding mustretain records until disposition of the proceeding.Records may be stored on microfiche, microfilm,or magnetic tape or in any other manner capableof accurately retaining and reproducing theinformation.

Services Offered by a FinancialInstitution Not Holding Consumer’sAccount—Section 205.14

Sometimes one institution (a retailer, for example)provides an EFT service for and issues an accessdevice to a consumer whose account is held at asecond institution. In such cases, the transfers



initiated by the service-providing institution areoften cleared through an automated clearinghouse.Section 205.14 covers instances in which noagreement exists between the institutions. It appor-tions the compliance responsibilities between thetwo institutions, placing the greater responsibilityon the service-providing institution. The compli-ance responsibilities of the service-providing insti-tution are set forth in section 205.14(b), and theduties of the account-holding institution are setforth in section 205.14(c).

Electronic Fund Transferof Government Benefits—Section 205.15

Rules governing accounts established by a gov-ernment agency for the electronic distribution ofgovernment benefits through an ATM or point-of-sale terminal are set forth in section 205.15. Amongthe topics addressed are the types of accountsexcluded from coverage, options for providingalternatives to the periodic statement, and thespecial rules imposed on the agency if it does notfurnish a periodic statement. Also discussed areinitial disclosures, requirements for error resolutionnotices, limits on liability, and error resolutionprocedures.

Disclosures at Automated TellerMachines (ATMs)—Section 205.16

Any ATM fee charged to a consumer for making anelectronic fund transfer or a balance inquiry at anATM that is not owned or operated by an institutionthat holds the account of the consumer must bedisclosed. The disclosure, including the amount ofthe fee, must be provided to the consumer prior tocompletion of the transaction. Moreover, the feemay not be charged unless the consumer elects tocontinue the transaction after receiving the notice.Notice of the fee must be posted on or at themachine and provided either electronically on theATM screen or on a paper copy.

Requirements for ElectronicCommunication—Section 205.17

In accordance with the Electronic Signatures inGlobal and National Commerce Act (the E-SignAct), Regulation E allows financial institutions toprovide electronic disclosures to a consumer’shome computer or electronic address. Theseelectronic disclosures, which are made in lieu ofthose required to be in writing, may also beavailable at a location other than the consumer’selectronic address, such as an Internet web site. To

use another location, however, a bank must firstnotify the consumer electronically about the loca-tion of the Internet site and make the disclosureavailable on the site for ninety days.1

Electronic disclosures are subject to the regula-tion’s format, timing, and retainability rules and theclear-and-readily-understandable standard.

Suspension of Obligations andWaiver of Rights

Under certain circumstances, the Electronic FundTransfer Act suspends a consumer’s obligation toanother person in the event a malfunction in an EFTsystem prevents payment to the person. Generally,this suspension extends until the malfunction iscorrected and the funds are transferred. (EFTA,section 912)

The act also states that no writing or otheragreement between a consumer and any otherperson may contain any provision that constitutes awaiver of any right conferred or cause of actioncreated by the act. However, the act does notprohibit any writing or other agreement that grantsthe consumer greater protection or a more exten-sive right or remedy than that provided by the act.

Liability

Three sections of the Electronic Fund Transfer Actdiscuss specific liability provisions.

Liability of Financial Institutions

As provided by section 910 of the act, institutionssubject to the act are liable for all damagesproximately caused by failure to make an electronicfund transfer in accordance with the terms andconditions of the account, in a timely manner, or inthe correct amount, when properly instructed by aconsumer to do so. Also discussed in section 910of the act are the conditions under which aninstitution is not liable for failing to make an EFT andthe circumstances under which an institution isliable for failure to stop payment of preauthorizeddebits.

Civil Liability

Civil liability is addressed in section 915 of the act.Unless an error is resolved in accordance with theerror resolution procedures outlined in the act andimplemented by Regulation E, an institution may beliable for civil damages for failure to comply with thelaw. In a successful individual action, the institution

1. Compliance with the interim rule for electionic delivery offederally mandated disclosures dated March 2001 is optional.



would have to pay actual damages and statutorydamages between $100 and $1,000, as deter-mined by the court. In a successful class actionsuit, the institution would have to pay actualdamages and statutory damages up to the lesser of$500,000 or 1 percent of the institution’s net worth.In successful individual and class actions, courtcosts and a reasonable attorney’s fee would berecovered by the consumer.

An institution generally is not liable for violationscaused by unintentional bona fide errors thatoccurred despite the maintenance of proceduresreasonably adopted to avoid such errors. Also, theinstitution is not liable if it acted in accordance withan official interpretation issued by the Board ofGovernors of the Federal Reserve System or itsstaff. Moreover, an institution cannot be held liable

for improper disclosure if it appropriately used amodel clause approved by the Board of Governors.An institution can avoid liability by taking correc-tive action, including adjustment to a consumer’saccount and payment of appropriate damages,prior to a court case.

Criminal Liability

Individuals who knowingly and willfully fail tocomply with any provision of the Electronic FundTransfer Act may be fined up to $5,000 orimprisoned up to one year, or both. Those whofraudulently use a debit card may be fined up to$10,000 and imprisoned up to ten years, or both.(EFTA, section 916)



Regulation EExamination Objectives and Procedures

EXAMINATION OBJECTIVES

1. To determine that the institution has proce-dures in place to ensure compliance with theElectronic Fund Transfer Act

2. To determine that the institution is in compli-ance with the provisions of the Electronic FundTransfer Act

EXAMINATION PROCEDURES

1. Determine if the institution issues any accessdevices that offer credit privileges and there-fore must be evaluated for compliance withapplicable portions of Regulation Z (Truth inLending).

2. Obtain and review copies of the following:

a. Disclosure forms

b. Account agreements

c. Procedural manuals and written policies

d. Merchant agreements

e. Automated teller machine receipts andperiodic statements

f. Error resolution statements

g. Form letters used in case of errors orquestions concerning an account

h. Any agreements with third parties allocatingcompliance responsibilities

i. Consumer complaint file

3. While performing these examination proce-dures, test for compliance with written policiesand internal controls.

4. For each type of EFT service provided, reviewitems given to customers at the time accountsare opened, or prior to the first EFT transaction,to determine that all required disclosures arefurnished. (§ 205.7)

5. If the institution has, since the last examination,made any changes in the terms or conditionsthat require that a written notice be sent tocustomers, determine that the proper noticewas provided in a timely manner. (§ 205.8(a))

6. Review a sample of periodic statements todetermine that they contain sufficient informa-tion for consumers to adequately identifytransactions and that they otherwise comply.(§ 205.9)

7. Review consumer complaints regarding EFTtransactions to determine compliance witherror resolution procedures and to isolate anyapparent deficiencies in the institution’soperations. (§ 205.11)

8. Review the institution’s policies regarding lia-bility for unauthorized transfers, verify that thepolicies comply with the regulation, and deter-mine whether they are applied in practice.(§ 205.6)

9. Review policies regarding issuance of accessdevices, ascertain whether they comply withthe requirements of the regulation, and deter-mine whether they are applied in practice.(§ 205.5)

10. Review policies regarding preauthorized deb-its and credits, ascertain whether they complywith the requirements of the regulation, anddetermine whether they are applied in prac-tice. (§ 205.10)

11. Verify that the financial institution does notrequire compulsory use of EFTs, except asauthorized. (§ 205.10(e))

12. Determine that the financial institution is main-taining records of compliance for a period of atleast two years from the date disclosures arerequired to be made or action is required to betaken. (§ 205.13(b))


Regulation EExamination Checklist

Issuance of Access Devices—Section 205.5

1. Does the institution issue validated access devices only

a. In response to requests or applications or (§ 205.5(a)(1)) Yes No

b. As a renewal or substitution for an accepted access device (§ 205.5(a)(2)) Yes No

2. Does the institution issue unsolicited access devices only when the devicesare

a. Not validated, (§ 205.5(b)(1)) Yes No

b. Accompanied by an explanation that the device is not validated, and howto dispose of the device if the customer does not want it, (§§ 205.5(b)(2)and 205.7(a)) Yes No

c. Accompanied by required disclosures, and (§ 205.5(b)(3)) Yes No

d. Validated only on consumer request and after proper identification ismade (§ 205.5(b)(4)) Yes No

3. Does the institution verify the consumer’s identity (by means of, for example, aphotograph, personal visit, or signature)? (§ 205.5(b)(4)) Yes No

Consumer Liability for Unauthorized Transfers—Section 205.6

1. Does the institution impose liability on the consumer for unauthorized transferonly if

a. An access device has been accepted, (§ 205.6(a)) Yes No

b. The institution has provided a means of identifying the consumer to whomit was issued, and Yes No

c. The institution has provided the disclosures required by sections 205.7(b)(2)and 205.7(b)(3) Yes No

2. Does the institution NOT use consumer negligence as a basis for imposinggreater liability than is permissible under Regulation E? (Official staffcommentary, § 205.6(b)) Yes No

3. Is the consumer’s liability for unauthorized use of a lost or stolen access devicelimited to the lesser of $50 or actual loss if the consumer notifies the institutionwithin two business days of discovery of loss or theft of the access device?(§ 205.6(b)(1)) Yes No

4. If the consumer fails to notify the institution of loss or theft of an access devicewithin two business days of discovery of loss or theft, is the consumer’s liabilitylimited to the lesser of $500 or the sum of (§ 205.6(b)(2))

a. $50 or actual loss within the first two business days, whichever is less, and Yes No

b. Unauthorized transfer amounts that occur after the two business days andbefore notification (provided the institution proves that these unauthorizedtransfers could have been prevented had notification occurred within thetwo business days) Yes No

5. If a consumer fails to notify the institution of an unauthorized transfer withinsixty days of transmittal of the periodic statement on which that transferappears, is consumer liability limited to (§ 205.6(b)(3))

a. $50 or actual loss that appears on the statement or occurs during the sixty-day period, whichever is less, and Yes No


b. The amount of unauthorized transfers that occur after the close of sixty daysand before notice to the institution (provided the institution proves that theunauthorized transfers could have been prevented had notificationoccurred within the sixty days) Yes No

Initial Disclosures—Section 205.7

1. Does the institution make the following disclosures?

a. A summary of the consumer’s liability under section 205.6 (or lesser liabilityunder state law or agreement) (§ 205.7(b)(1)) Yes No

b. The telephone number and address of the person or office to be notifiedwhen the consumer believes that an unauthorized electronic fund transferhas been or may be made (§ 205.7(b)(2)) Yes No

c. The institution’s business days, as determined under section 205.2(d)(§ 205.7(b)(3)) Yes No

d. The type of electronic fund transfers that the consumer may make, andany limitations on the frequency and dollar amount of these transfers(§ 205.7(b)(4)) Yes No

(If details on the limitations on frequency and dollar amount of transfers areessential to maintain the security of the system, they need not be disclosed.)

e. Any charges for electronic fund transfers or for the right to make transfer(§ 205.7(b)(5)) Yes No

f. A summary of the consumer’s right to receive documentation of electronicfund transfers, as provided in sections 205.9, 205.10(a), and 205.10(d)(§ 205.7(b)(6)) Yes No

g. A summary of the consumer’s right to stop payment of a preauthorizedelectronic fund transfer and the procedure for initiating a stop-paymentorder, as provided in section 205.10(c) (§ 205.7(b)(7)) Yes No

h. A summary of the institution’s liability to the consumer for its failure to makeor to stop certain transfers under section 910 of the Electronic FundTransfer Act (§ 205.7(b)(8)) Yes No

i. Circumstances under which the institution in the ordinary course ofbusiness will disclose information to third parties concerning the consum-er’s account (§ 205.7(b)(9)) Yes No

j. An error resolution notice meeting the requirements of section 205.7(b)(10)) Yes No

k. A notice that a fee may be imposed at an ATM operated by anotherinstitution Yes No

Change in Terms and Error Resolution Notices—Section 205.8

1. Since the last examination, has the institution made any change in a term orcondition that required that a written notice be sent to consumers? Such achange may include increased fees, increased liability for the consumer, fewertypes of electronic fund transfers available, or stricter limitations on thefrequency or dollar amounts of transfers. (§ 205.8(a)) Yes No

If so, was the notice provided at least twenty-one days before the effectivedate of the change? (§ 205.8(a)) Yes No

2. Does the institution provide either the long-form error resolution notice at leastonce every calendar year or the short-form error resolution notice on eachperiodic statement? (§ 205.8(b)) Yes No

Electronic Fund Transfers: Examination Checklist


Receipts at Electronic Terminals and Periodic Statements—Section 205.91. Does the institution make a receipt, in a retainable form, available to the

consumer at the time an electronic fund transfer is initiated? (§ 205.9(a)) Yes No

2. Does the receipt contain the following items, as applicable? (§ 205.9) Yes No

a. The amount of the transfer (amount may be combined with any transfercharge if certain conditions are met) (§ 205.9(a)(1)) Yes No

b. The calendar date the transfer was initiated (§ 205.9(a)(2)) Yes No

c. The type of transfer and account to or from which funds were transferred(Transactions are exempt from the type-of-account requirement if theaccess device used can access only one account.) (§ 205.9(a)(3)) Yes No

d. A number or code that identifies one of the following:

i. The consumer’s account or Yes No

ii. The access device used (§ 205.9(a)(4)) Yes No

(Note: The number or code need not exceed four digits or letters.)

e. Identification or location of the terminal (§ 205.9(a)(5)) Yes No

f. The name of any third party to or from whom funds are transferred unlessthe name is provided in a non-machine-readable form (§ 205.9(a)(6)) Yes No

3. Does the institution mail or deliver a periodic statement for each monthly orshorter cycle in which an electronic fund transfer has occurred? (§ 205.9(b)) Yes No

4. If no electronic fund transfers have occurred, has the institution mailed ordelivered a periodic statement at least quarterly for non-passbook accounts?(§ 205.9(b)) Yes No

5. Does the periodic statement or accompanying documents contain thefollowing items? (§ 205.9(b)(1))

a. The amount of the transfer (amount may include transfer charge if it wasadded in accordance with the terminal receipt requirements)(§ 205.9(b)(1)(i)) Yes No

b. The date the transfer was posted to the account (§ 205.9(b)(1)(ii)) Yes No

c. The type of transfer and account (§ 205.9(b)(1)(iii)) Yes No

d. The location of the terminal (§ 205.9(b)(1)(iv)) Yes No

e. The name of any third party to or from whom funds were transferred(§ 205.9(b)(1)(v)) Yes No

f. The account number(s) (§ 205.9(b)(2)) Yes No

g. The total amount of any fees or charges assessed during the statementperiod for electronic fund transfers, for the right to make electronic fundtransfers, or for account maintenance (excluding any finance chargesunder Regulation Z, overdraft or stop-payment charges, and any transfercharges combined with transfer amounts under section 205.9(a))(§ 205.9(b)(3)) Yes No

h. The beginning and ending balances (§ 205.9(b)(4)) Yes No

i. The address and telephone number to be used for inquiries or notice oferrors (§ 205.9(b)(5)) Yes No

j. If applicable, the telephone number to be used to find out whether apreauthorized credit has been made as scheduled (§ 205.9(b)(6)) Yes No



6. For passbook accounts that receive only preauthorized credits, does theinstitution, upon presentation by the consumer, enter in a passbook or on aseparate document the amount and date of each electronic fund transfermade since the passbook was last presented? (§ 205.9(c)) Yes No

Preauthorized Transfers—Section 205.101. If a consumer’s account is to be credited by a preauthorized electronic fund

transfer from the same payor at least once every sixty days, (§ 205.10(a)(1))

a. Does the institution provide oral or written notice, within two business daysafter the transfer occurs or was scheduled to occur, that the transfer did ordid not occur or Yes No

b. If the telephone alternative is selected, does the institution disclose, in initialdisclosures and on each periodic statement, the telephone number theconsumer can call to determine whether the transfer occurred and Yes No

c. Is the telephone number ‘‘readily available’’ during the institution’s businesshours Yes No

2. Does the institution credit the consumer’s account for preauthorized electronicfund transfers as of the day the funds are received? (§ 205.10(a)(3)) Yes No

3. Does institution obtain authorization from the consumer for preauthorizedelectronic fund transfers from the consumer’s account? (§ 205.10(b)) Yes No

4. Does the institution comply with section 205.10(c) regarding stop-paymentorders? Yes No

5. If a preauthorized electronic fund transfer from a consumer’s account varies inamount from the previous transfer under the same authorization or from thepreauthorized amount, does the institution provide proper notice at least tendays before the scheduled date of transfer? (§ 205.10(d)) Yes No

(Note: If the designated payee makes the notification, the institution isabsolved of this requirement.)

6. Does the institution refrain from conditioning an extension of credit to aconsumer on repayment by preauthorized electronic fund transfers?(§ 205.10(e)(1)) Yes No

7. Does the institution refrain from requiring a consumer to establish an accountwith a particular institution for receipt of electronic fund transfers as a conditionof employment or receipt of a government benefit? (§ 205.10(e)(2)) Yes No

Procedures for Resolving Errors—Section 205.111. If the institution requires written confirmation of an error within ten business

days of an oral notice, is this requirement disclosed to the consumer, alongwith the address to which the written confirmation must be sent?(§ 205.11(b)(2)) Yes No

2. Does the institution promptly investigate alleged errors and resolve them withinten business days of receiving a notice of error? (§ 205.11(c)(1)) Yes No

3. Does the institution inform the consumer of the results of the investigationwithin three business days after completing the investigation? (§ 205.11(c)(1)) Yes No

4. After the institution determines that an error occurred, is the error correctedwithin one business day? (§ 205.11(c)(1)) Yes No



5. If the institution needs more time and informs the consumer that it may take upto forty-five calendar days, does the institution (§ 205.11(c)((2))

a. Provisionally recredit the amount of the alleged error (including interest, ifapplicable) to the consumer’s account within ten business days of the initialreport (except when written confirmation is required but not received withinten business days) (§ 205.11(c)(2)(i)) Yes No

b. Notify the consumer within two business days of the amount and date of theprovisional recrediting and the fact that the consumer will have full use offunds pending the outcome of the investigation (§ 205.11(c)(2)(ii)) Yes No

c. Give the consumer full use of the funds during the investigation period(§ 205.11(c)(2)(ii)) Yes No

6. If the institution provisionally credited the consumer’s account and deter-mines that an error has occurred, have procedures been established to(§ 205.11(c)(2))

a. Correct the error (including crediting interest or refunding fees) within onebusiness day (§ 205.11(c)(2)(iii)) Yes No

b. Notify the consumer within three business days of the correction and that aprovisional credit has been made final (§ 205.11(c)(2)(iv)) Yes No

7. If the institution determines that no error has occurred, have procedures beenestablished to

a. Within three business days of concluding the investigation, provide awritten explanation of its findings and include the notice of the consumer’sright to request the documents on which the institution relied in making itsdetermination (§ 205.11(d)(1)) Yes No

b. Provide copies of documents Yes No

c. Upon debiting a provisionally credited amount, notify the consumer of thedate and amount of the debit and the fact that the institution honors checksand drafts to third parties and preauthorized transfers for five businessdays after notification (specifying the calendar date debiting will occur) tothe extent that they would have been paid if the provisionally recreditedfunds had not been debited (§ 205.11(d)(2)) Yes No

Administrative Enforcement—Section 205.131. Has the institution preserved evidence of compliance with the requirements

of the Electronic Fund Transfer Act for two years, or longer if required?(§ 205.13(b)) Yes No

Electronic Fund Transfer of Government Benefits—Section 205.151. If a government agency does not provide a periodic statement for electronic

government benefits, does the agency

a. Make the consumer’s account balance available through a readily availabletelephone line and at a terminal, (§ 205.15(c) Yes No

b. In response to a request, promptly provide a written history of theconsumer’s account transactions that covers at least sixty days precedingthe date of request by the consumer, and (§ 205.15(c)(2)) Yes No

c. Provide modified initial disclosures according to section 205.15(d)(1) andan annual error resolution notice according to section 205.15(d)(2) Yes No



Internal Control Procedures1. Does the institution have adequate procedures to ensure that notification of

loss, theft, or unauthorized use promptly results in halting unauthor-ized transfers from a consumer’s account and recrediting amounts whenappropriate? Yes No

2. Do the institution’s procedures indicate a willingness to resolve consumercomplaints regarding EFT matters? Yes No

3. Does a review of statements indicate that transaction identifications are incompliance with Regulation E? Yes No

4. Do automated teller and point-of-sale transfer receipts provide a cleardescription of the transaction that is in compliance with Regulation E? Yes No

5. Is the institution’s advertising of EFT services free of ambiguous and deceptivestatements? Yes No

6. Is the consumer’s responsibility with regard to personal access codesexplained? Yes No

7. Does a review of merchant agreements and internal controls indicate that thetreatment of consumers is consistent with what has been disclosed to them (insuch areas as transaction limitations, costs, documentation, and identifica-tion)? Yes No

8. Does the institution maintain any log or tracking sheet for error resolution? Yes No

9. Are personnel able to distinguish between the applicability of Regulations Eand Z as part of the issuance of debit and credit cards, error resolutionprocedures, and consumer liability? Yes No



Regulations Q and DInterest on Demand Deposits/Reserve Requirements

Regulation Q (Prohibition against Payment ofInterest on Demand Deposits) and Regulation D(Reserve Requirements of Depository Institutions)are two of the four regulations that examiners needto refer to when conducting the deposit operationssegment of consumer compliance examinations.The other two regulations—Regulation CC (Avail-ability of Funds and Collection of Checks) andRegulation DD (Truth in Savings)—are covered insubsequent chapters.

Regulation Q contains only a couple of importantdefinitions. Regulation D, besides giving additionaldefinitions, lays out rules governing such topics aspenalties for early withdrawal and customer noticesof intent to withdraw funds.

Background

Regulation Q originated in the 1930s as part of acongressional response to banking practices andproblems encountered during the Depression. Bythe late 1970s and early 1980s, new types ofaccounts—such as money market mutual fundsissued by investment companies and securitiesfirms that were not subject to federal interest rateregulation—were giving commercial banks stiffcompetition for funds. In response to both bankers’concerns about the competition from these unregu-lated deposit accounts and the deregulatory envi-ronment that prevailed at the time, Congresspassed the Depository Institutions Deregulation Actof 1980, with the purpose of eliminating all federalinterest rate ceilings on deposit accounts within sixyears. The last remaining interest rate ceilings wereremoved in March 1986, and most of the remainingprovisions of Regulation Q were subsequentlytransferred to Regulation D.

Today, Regulation Q is relatively short andincludes only the definition of ‘‘interest’’ and theprohibition against the payment of interest ondemand deposits. Regulation D now containsdefinitions for the various categories of depositaccounts (transaction, demand, time, and savings)and places certain types of accounts, such asNOW accounts and money market depositaccounts, within those categories. Regulation Dalso provides for mandatory penalties for earlywithdrawals from time deposits.

Technically, Regulation D is a monetary policyregulation, not a consumer regulation. It specifieshow depository institutions must classify differenttypes of deposit accounts for the purpose ofcomplying with reserve requirements, an integral

tool in implementing monetary policy.1

Definitions

Two key terms are referred to in the definitions oftypes of accounts:

• Interest—‘‘Any payment to or for the account ofany depositor as compensation for the use offunds constituting a deposit. A member bank’sabsorption of expenses incident to providing anormal banking function or its forbearance fromcharging a fee in connection with such a serviceis not considered a payment of interest.’’ (Regu-lation Q, section 217.2(d))

• Natural person—‘‘An individual or a sole propri-etorship. The term does not mean a corporationowned by an individual, a partnership or otherassociation.’’ (Regulation D, section 204.2(g))

Types of Accounts Covered

Regulation D defines deposit and divides depositaccounts into two categories—transaction andnontransaction accounts. Transaction accounts arethe primary vehicle for calculating reserverequirements.

Transaction Accounts

A transaction account is an account from which thedepositor or account holder is permitted to ‘‘maketransfers or withdrawals by negotiable or transfer-able instrument, payment order of withdrawal,telephone transfer, or other similar device for thepurpose of making payments or transfers to thirdpersons or others or from which the depositor maymake third-party payments at an automated tellermachine or a remote service unit, or other elec-tronic device . . . .’’ The following types of accountsare transaction accounts (section 204.2(e)):

• Demand deposit accounts

• NOW accounts

• ATS accounts

Savings deposit accounts are specifically excludedfrom the definition of transaction account, eventhough they permit third-party transfers.

1. All depository institutions, including commercial banks,savings banks, savings and loan associations, credit unions, andagencies and branches of foreign banks located in the UnitedStates, are subject to reserve requirements. Required reserves aremaintained either in the form of vault cash or as non-interest-bearing balances at a Federal Reserve Bank or a correspondent.

Consumer Compliance Handbook Regs. Q and D • 1 (1/06)

Transaction accounts have the following charac-teristics:

• Limited to demand, NOW, and ATS accounts

• Permit a depositor or account holder to makeunlimited transfers or payments to third parties

• Permit a depositor to make unlimited transfersbetween accounts of the same depositor at thesame institution

Demand Deposit Accounts

Demand deposit accounts are payable on de-mand, or on less than seven days’ notice. Theygenerally have no maturity period and do notrequire the account holder to give notice of theintent to withdraw funds. If they do require notice ofintent to withdraw funds, the notice period must beless than seven days and the requirement must bestated in the deposit contract. Both businesses andconsumers may hold demand accounts. There areno eligibility restrictions on this type of account.

Demand deposits include deposits that for somereason have been reclassified as demanddeposits—for example, matured certificates ofdeposit and savings deposits for which the transferor withdrawal limitations have been exceeded.

Demand deposit accounts have the followingcharacteristics:

• No maturity period (or maturity period of lessthan seven days)

• Payable on demand (or on less than seven days’notice)

• May not be interest-bearing

• No limit on the number of withdrawals ortransfers an account holder may make

• No eligibility requirements

NOW Accounts

NOW (negotiable order of withdrawal) accountsallow unlimited transactions, and they are classifiedas transaction accounts for purposes of reserverequirements. They share certain characteristicswith savings deposit accounts, in that banks mustreserve the right to require seven days’ notice ofintent to withdraw funds from NOW accounts (inpractice, this right is rarely, if ever, exercised).Unlike savings deposit accounts, however, NOWaccounts are available only to individuals; soleproprietorships; governmental units; and corpora-tions, partnerships, associations, and organiza-tions that are operated primarily for religious,philanthropic, charitable, educational, fraternal, orother similar purposes and not for profit.

Because NOW accounts are transaction accounts,the funds in a NOW account may be accessed in

several ways. For example, account holders mayuse negotiable instruments (checks), drafts, tele-phonic or electronic orders or instructions, or othersimilar devices to make payments or transfers tothird persons or to others. The account holder maymake an unlimited number of transfers to another ofhis or her accounts at the same institution.

NOW accounts have the following characteris-tics:

• Have no maturity date

• Bank must reserve the right to require at leastseven days’ prior written notice of intent towithdraw or transfer funds

• May be interest-bearing

• Permit unlimited transactions (transfers andwithdrawals)

• May be accessed by check, draft, telephonic orelectronic order or instruction, or other similarinstrument to

– Pay third parties or others

– Transfer funds to another of the depositor’saccounts at the same institution

• May be held only by individuals, sole proprietor-ships, governmental units, and nonprofit organi-zations

• Are classified as transaction accounts underRegulation D

ATS Accounts

ATS (automatic transfer service) accounts, whichare classified as transaction accounts for reserverequirement purposes, are accounts that providefor transfers or withdrawals to be made automati-cally to the bank itself or to another of thedepositor’s accounts at the same institution. ATSaccounts were relatively common in the past butare rarely seen today. As with NOW accounts andsavings deposit accounts, banks must reserve theright to require seven days’ notice of intent towithdraw funds from ATS accounts. Unlike NOWaccounts and savings deposit accounts, eligibilityfor ATS accounts is limited to individuals (includingsole proprietorships). Businesses, governmentalunits, and nonprofit organizations are not eligiblefor ATS accounts.

ATS accounts have the following characteristics:

• Must reserve the right to require at least sevendays’ notice of intent to withdraw funds

• Provide for automatic transfers between at leasttwo accounts at the same financial institution

• Eligibility limited to individuals (including soleproprietorships)

• Are classified as transaction accounts underRegulation D

Interest on Demand Deposits/Reserve Requirements

2 (1/06) • Regs. Q and D Consumer Compliance Handbook

Nontransaction Accounts

Time Deposit Accounts

Time deposit accounts have a maturity of at leastseven days from the date of deposit. They may bepayable on a specified date not less than sevendays after the date of deposit or after the expirationof a specified period of time not less than sevendays after the date of deposit (for example, thirtydays after the date of deposit). Or they may bepayable upon receipt of written notice from thedepositor (required in the contract) not less thanseven days prior to withdrawal. If funds arewithdrawn from a time deposit account within sixdays of the date of deposit or within six days of themost recent partial withdrawal, the specified earlywithdrawal penalty must be imposed (see ‘‘EarlyWithdrawal Penalties,’’ below). There are no restric-tions on who may hold a time deposit account.

Club accounts, such as Christmas or vacationclub accounts, are considered time depositaccounts. Generally, funds are deposited into clubaccounts under a written contract that prohibitswithdrawal until a certain number of deposits havebeen made during a period of not less than threemonths (even though some of the deposits may bemade within six days from the end of the period).

Time deposits may be negotiable or nonnego-tiable, transferable or nontransferable. They maybe represented by a certificate, instrument, pass-book, statement, book-entry notation, or otherwise.If the deposit is automatically renewable, that factshould be indicated on the certificate or otherrepresentation, along with the terms of renewal.

Time deposit accounts have the followingcharacteristics:

• Must have a maturity of at least seven days fromthe date of deposit

• May require at least seven days’ prior writtennotice of intent to withdraw funds

• Must be subject to early withdrawal penalties iffunds are withdrawn within six days of the date ofdeposit or the date of the immediately precedingpartial withdrawal


• May be evidenced by a negotiable or nonnego-tiable, transferable or nontransferable certificate,instrument, passbook, book entry, or other simi-lar instrument

• Include club accounts (such as Christmas clubor vacation club accounts)

• No eligibility requirements

Early Withdrawal Penalties. The presence (orabsence) of an early withdrawal penalty differenti-ates time deposit accounts on the one hand andsavings deposit accounts and transaction accounts

on the other hand. The early withdrawal penaltymust be at least seven days’ simple interest onamounts withdrawn within the first six days afterdeposit or within six days after the most recentpartial withdrawal. If funds are withdrawn more thansix days after the date of deposit or more than sixdays after the most recent partial withdrawal, nointerest penalty is required by federal law.

Penalties listed under Regulation D are theminimum federal penalties required by RegulationD and the Federal Reserve Act. Banks are free toimpose greater penalties by contract with thedepositor.

If a bank fails to impose early withdrawalpenalties when they are required by Regulation D,the account ceases to be a time deposit account. Ifthe account meets all the necessary requirementsfor a savings deposit account, the bank couldreclassify it as such. Otherwise, the account mayhave to be reclassified as a transaction account.

The penalty provisions of time deposit accountsshould be disclosed in writing to the customer atthe time the account is opened. During thecompliance examination, examiners should checkthat the bank has penalties in place that are at leastequal to those required by Regulation D. As part ofthe examination, examiners should also verify theaccuracy of the interest penalties assessed on asample of time deposit accounts from which earlywithdrawals were permitted.

Savings Deposit Accounts

Savings deposit accounts are a subcategory of‘‘time deposits,’’ but they generally have no speci-fied maturity period. They may be interest-bearing,with interest computed or paid daily, weekly,quarterly, or on any other basis.

The most significant feature of savings depositaccounts is the regulatory limit on the number of‘‘convenient’’ transfers or withdrawals that may bemade per month (or per statement cycle of at leastfour weeks) from the account. A depositor maymake no more than six ‘‘convenient’’ transfers permonth from a savings deposit account, and nomore than three of these transfers may be made bycheck, debit card, or similar order made by thedepositor and payable to third parties. ‘‘Conve-nient’’ transfers, for purposes of this limit, includepreauthorized or automatic transfers (such asoverdraft-protection transfers and direct bill pay-ments) and transfers initiated by a depositor bytelephone, facsimile, or computer. Other, less-convenient types of transfers, such as withdrawalsor transfers made in person at the bank, by mail, orby using an ATM, do not count toward thesix-per-month limit and do not affect the account’sstatus as a savings account. Also, a withdrawal



request by telephone does not count toward thelimit, provided that the withdrawal is disbursed viacheck mailed to the depositor.

Examiners should be particularly wary of abank’s practices for handling telephone transfers.As noted, an unlimited number of telephone-initiated withdrawals are allowed so long as acheck for the withdrawn funds is mailed to thedepositor. Otherwise, the limit is six telephonetransfers per month. The limit applies to telephonictransfers to move savings deposit funds to anothertype of deposit account and to make payments tothird parties.

The limit on telephone transfers applies to bothbusiness and personal accounts, but banks shouldhandle accounts that exceed the limit differently.Generally, if a savings deposit account exceeds, oris authorized to exceed, the ‘‘convenient’’ transferlimit, the bank should take away the transfer anddraft capabilities of the account or close theaccount and place the funds in another accountthat the depositor is eligible to maintain. If thedepositor is a natural person, the funds may beplaced in a NOW account. If the depositor is not anatural person, the bank may be required toreclassify the account as a demand account, asbusinesses are not allowed to hold NOW accounts.

Savings deposit accounts have the followingcharacteristics:

• Have no set maturity

• Bank must reserve the right to require at leastseven days’ notice of intent to withdraw funds (inpractice, this right is rarely, if ever, exercised)


• Allow no more than six transfers or withdrawalsper calendar month or statement cycle of at leastfour weeks for the purpose of transferring fundsto another of the depositor’s accounts at thesame institution or making third-party paymentsby means of preauthorized, automatic, or tele-phonic transfers

• Allow no more than three of the six transfers to bemade by check, draft, debit card, or similar ordermade by the depositor and payable to thirdparties

• Allow unlimited withdrawals by mail, messenger,ATM, in person, or by telephone (via checkmailed to the depositor)

• Have no eligibility requirements

• May be reclassified as demand deposit accountsif held by a non-natural person and the with-drawal or transfer limit is exceeded

• May be reclassified as NOW accounts if held bya natural person and the withdrawal or transferlimit is exceeded

• Include money market deposit accounts (MMDAs)

Money Market Deposit Accounts

Before the mid-1980s, money market depositaccounts (MMDAs) had characteristics that distin-guished them from ordinary savings depositaccounts. Now, however, they have the samecharacteristics as savings deposit accounts andare subject to the same transfer and withdrawallimits.

Highlights of Regulations Q and Dthat Affect Consumers

Seven-Day Notice Period

Banks must reserve the right to require at leastseven days’ notice of a customer’s intent towithdraw funds from savings accounts, NOWaccounts, and ATS accounts. Banks have theoption of enforcing this notice requirement, and inpractice it is rarely, if ever, enforced.

If all or a portion of the funds in a time depositaccount are withdrawn within six days of the date ofdeposit or of the most recent partial withdrawal, theaccount must be subject to an early withdrawalpenalty. This penalty, which is the minimum penaltythat may be imposed, is the loss of seven days’simple interest on the amount withdrawn.

If a bank allows customers to make partialwithdrawals from time deposit accounts, the bankmust impose the early withdrawal penalty onamounts withdrawn. For example, suppose acustomer deposits $1,000 into a new time depositon the 1st of the month, withdraws $100 on the 4th,and another $100 on the 9th. The customer wouldbe subject to an early withdrawal penalty for thefirst $100 withdrawal in the amount of seven days’simple interest on $100, and another early with-drawal penalty for the second $100 withdrawal inthe amount of seven days’ simple interest on $100because the second withdrawal occurred within sixdays of the first withdrawal. If the bank does notimpose the second early withdrawal penalty, theaccount ceases to be a time deposit account andshould be reclassified as either a savings account(provided the account meets the characteristics ofa savings account) or a transaction account.

Interest-Period Extension

‘‘Time deposits,’’ as defined in Regulation D,include ‘‘time deposits that have matured or timedeposits upon which the contractual requirednotice of withdrawal was given and the noticeperiod has expired and which have not beenrenewed. . . .’’ Nonetheless, banks are permitted,


4 (1/06) • Regs. Q and D Consumer Compliance Handbook

under Regulation Q, to continue to pay interest on amatured time deposit for up to ten days after itsmaturity under certain conditions. First, interestmay be paid during such a period if the depositaccount agreement specifies that interest willcontinue to be paid if the funds are withdrawnwithin ten days after the maturity date. Second,interest may be paid during the time betweenmaturity and renewal of the time deposit account

(either automatically or by action of the depositor) ifthe renewal occurs within ten days or less of thematurity date. Otherwise, if the contract is notautomatically renewable (or is not renewed) withinten days of the date of maturity and the bankcontinues to pay interest on the account during thatperiod, the bank would be considered to be payinginterest on a demand deposit.



Regulation CCAvailability of Funds and Collection of Checks

Background

Regulation CC (12 CFR 229) implements twolaws—the Expedited Funds Availability Act (EFAAct), which was enacted in August 1987 andbecame effective in September 1988, and theCheck Clearing for the 21st Century Act (Check21), which was enacted in October 2003 andbecame effective on October 28, 2004. Theregulation sets forth the requirements that deposi-tory institutions make funds deposited into transac-tion accounts available according to specified timeschedules and that they disclose their fundsavailability policies to their customers. It alsoestablishes rules designed to speed the collectionand return of unpaid checks and describes require-ments that affect banks that create or receivesubstitute checks, including requirements relatedto consumer disclosures and expedited recreditprocedures.

Regulation CC contains four subparts. The firstthree implement the EFA Act, and the fourthimplements Check 21. Specifically,

• Subpart A—Defines terms and provides foradministrative enforcement

• Subpart B—Specifies availability schedules, ortime frames within which banks must make fundsavailable for withdrawal; also includes rulesconcerning exceptions to the schedules, disclo-sure of funds availability policies, and paymentof interest

• Subpart C—Sets forth rules concerning theexpeditious return of checks, the responsibilitiesof paying and returning banks, authorization ofdirect returns, notification of nonpayment oflarge-dollar returns by the paying bank, check-endorsement standards, and other relatedchanges to the check-collection system

• Subpart D—Contains provisions concerning therequirements a substitute check must meet to bethe legal equivalent of an original check; bankduties, warranties, and indemnities associatedwith substitute checks; expedited recredit proce-dures for consumers and banks; and consumerdisclosures regarding substitute checks

The appendixes to the regulation provide addi-tional information:

• Appendixes A and B—Routing number guide

• Appendix C—Model forms and clauses thatbanks may use to meet their disclosure respon-sibilities under the regulation

• Appendix D—Standards for check endorsementby banks

SUBPART A—GENERAL

Definitions—Section 229.2

Bank

The term bank refers to FDIC-insured banks,mutual savings banks, savings banks, and savingsassociations; federally insured credit unions; non-federally insured banks, credit unions, and thriftinstitutions; agencies and branches of foreignbanks; and Federal Home Loan Bank (FHLB)members.

For purposes of subparts C and D, ‘‘bank’’ alsoincludes any person engaged in the business ofbanking, Federal Reserve Banks, FHLBs, and stateand local governments to the extent that the gov-ernment unit pays checks.

For purposes of subpart D only, ‘‘bank’’ alsorefers to the U.S. Treasury and the U.S. PostalService (USPS) to the extent that they act aspayors.

• The term paying bank applies to any bank atwhich or through which a check is payable andto which it is sent for payment or collection. Forpurposes of subpart D, ‘‘paying bank’’ alsoincludes the U.S. Treasury and the USPS. Theterm also includes Federal Reserve Banks,FHLBs, state and local governments, and, if thecheck is not payable by a bank, the bankthrough which a check is payable.

• A reconverting bank is the bank that creates asubstitute check or is the first bank to transfer orpresent a substitute check to another party.

Check

The term check includes both original checks andsubstitute checks.1

• An original check is the first paper check issuedwith respect to a particular payment transaction.

• A substitute check is a paper reproduction of anoriginal check that

– Contains an image of the front and back of theoriginal check,

– Bears a MICR line containing all of the

1. The term ‘‘check’’ does not include checks drawn in aforeign currency or checks drawn on a bank located outside theUnited States.

Consumer Compliance Handbook Reg. CC • 1 (1/06)

information encoded on the original check’sMICR line, except as provided in the industrystandard for substitute checks,2

– Conforms in dimension, paper stock, andotherwise with industry standards for substi-tute checks, and

– Is suitable for automated processing in thesame manner as the original check.

A substitute check for which a bank has providedthe warranties described in section 229.52 is thelegal equivalent of an original check if the substi-tute check accurately represents all of the informa-tion on the front and back of the original check andbears the legend ‘‘This is a legal copy of yourcheck. You can use it the same way you would usethe original check.’’

• A copy of an original check is any paperreproduction of an original check, including apaper printout of an electronic image, a photo-copy, or a substitute check. A sufficient copy is acopy of an original check that accurately repre-sents all of the information on the front and backof the check at the time of truncation or isotherwise sufficient to establish the validity of aclaim.

• Truncate means to remove an original checkfrom the forward collection or return process andreplace it with a substitute check or, by agree-ment, information relating to the original check.The truncating bank may or may not choose toprovide subsequent delivery of the originalcheck.

• A local check is a check deposited in adepositary bank that is located in the sameFederal Reserve check-processing region as thepaying bank. A nonlocal check is a checkdeposited in a check-processing region differentfrom that of the paying bank.

Account

For purposes of subparts B and C, an account is a‘‘deposit’’ (as defined in the Board’s Regulation D,in 12 CFR 204.2(a)(1)(i)) that is a ‘‘transactionaccount’’ (as defined in 12 CFR 204.2(e)).‘‘Account’’ encompasses consumer and corporateaccounts and includes accounts from which theaccount holder is permitted to make transfers orwithdrawals by any of the following:

• Negotiable instrument

• Payment order of withdrawal

• Telephone transfer

• Electronic payment

For purposes of subpart B, ‘‘account’’ does notinclude accounts for which the account holder is abank, a foreign bank, or the Treasury of the UnitedStates.

For purposes of subpart D, ‘‘account’’ means anydeposit at a bank, including a demand deposit orother transaction account and a savings deposit orother time deposit. Many deposits that are notaccounts for purposes of the other subparts ofRegulation CC, such as savings deposits, areaccounts for purposes of subpart D.

Consumers and Customers

• A consumer is a natural person who draws acheck on a consumer account or cashes ordeposits a returned check against a consumeraccount.

• A consumer account is an account used prima-rily for personal, family, or household purposes.

• A customer is a person who has an account witha bank.

Business and Banking Days

• A business day is any day except Saturday,Sunday, and a legal holiday (standard FederalReserve holiday schedule).

• A banking day is a business day on which a bankis open for substantially all its banking activities.

Even though a bank may be open for regularbusiness on a Saturday, that day is not considereda banking day for purposes of Regulation CCbecause Saturday is never a ‘‘business day’’ underthe regulation. The fact that one branch is open tothe public for substantially all its banking activitiesdoes not necessarily mean that that day is abanking day for the other branches of the bank.

Administrative Enforcement—Section 229.3

Regulation CC is to be enforced for banks throughsection 8 of the Federal Deposit Insurance Act(12 USC 1818) and through the Federal CreditUnion Act (12 USC 1751 et seq.). In addition, asupervisory agency may enforce compliancethrough any other authority conferred on it by law.The Federal Reserve Board is responsible forenforcing the requirements of Regulation CC fordepository institutions that are not specifically theresponsibility of another government agency.

2. ‘‘MICR (magnetic ink character recognition) line’’ refers tothe numbers—including routing number, account number, checknumber, and check amount—that are printed across the bottom ofa check in magnetic ink. The industry standard for substitutechecks is American National Standard Specifications for an ImageReplacement Document-IRD, X9.100-140. ANS X9.100-140 speci-fies ways in which the content of a substitute check’s MICR linemay vary from the content of the original check’s MICR line. ANSX9.100-140 also specifies circumstances in which a substitutecheck MICR line need not be printed in magnetic ink.

Availability of Funds and Collection of Checks

2 (1/06) • Reg. CC Consumer Compliance Handbook

SUBPART B—AVAILABILITY OF FUNDSAND DISCLOSURE OFFUNDS AVAILABILITY POLICIES

Next-Day Availability—Section 229.10

Rules governing next-day availability of funds areset forth in section 229.10.

General Rules (§§ 229.10(a)–229.10(c))

Cash, electronic payments, and certain checkdeposits must generally be made available forwithdrawal the business day after the banking dayon which they were received. Among the coveredcheck deposits are cashier’s, certified, and teller’schecks; government checks (including U.S. Trea-sury checks, U.S. Postal Service money orders,state and local government checks, and checksdrawn on a Federal Reserve Bank or a FederalHome Loan Bank); and certain on-us checks(checks drawn on the same bank, or a branchthereof).

Generally, to qualify for next-day availability, thedeposit must be both

• Made at a staffed teller station and

• Deposited into an account held by the payee ofthe check.

Exceptions are U.S. Treasury checks and on-uschecks, which must receive next-day availabilityeven if the deposit is not made at a staffed tellerstation. Cash and other next-day check deposits(such as Postal Service money orders, cashier’schecks, certified checks, checks drawn on a stateor local government, and checks drawn on aReserve Bank or a Federal Home Loan Bank) thatare not made at a staffed teller station must beavailable for withdrawal on the second businessday after the day of deposit. (§§ 229.10(a)(2) and229.10(c)(2))

Additional Rules

A few additional rules also apply:

• State and local government checks—For stateand local government checks to receive next-day availability, the depositary bank must belocated in the same state as the governmentalunit issuing the check. (§§ 229.10(c)(1)(iv) and229.10(c)(1)(v))

• Special deposit slips or envelopes—For depositsof state and local government checks, as wellas deposits of cashier’s, certified, and teller’schecks, the depositary bank may require the useof special deposit slips or envelopes. If thedepositary bank requires the use of special

deposit slips or envelopes, it must either providethe slips or tell customers how they can beobtained. (§ 229.10(c)(3))

• On-us checks—For an on-us check to receivenext-day availability, it must be drawn on thesame branch or another branch of the bankwhere it is deposited. In addition, both branchesmust be located in the same state or check-processing region. (§ 229.10(c)(1)(vi))

• $100 rule—Under a special rule for checkdeposits not subject to next-day availability, thedepositary bank must provide next-day avail-ability for withdrawal of the lesser of $100 or theaggregate amount deposited to all accounts,including individual and joint accounts, held bythe same customer on any one banking day. The$100 rule does not apply to deposits received atnonproprietary ATMs. (§ 229.10(c)(1)(vii))

Availability Schedule—Section 229.12

General Rules (§§ 229.12(a)–229.12(c)and 229.12(f))

Under the permanent availability schedule, whichbecame effective in September 1990 (figures 1 and2), local check deposits must be made available nolater than the second business day following theday on which the funds were deposited. Depositsof nonlocal checks must be made available no laterthan the fifth business day following the bankingday of deposit. Funds deposited at nonproprietaryATMs, including cash and all checks, must bemade available no later than the fifth business dayfollowing the banking day on which they weredeposited.

Checks that would normally receive next-dayavailability are treated as local or nonlocal checkdeposits if they do not meet all the criteria fornext-day availability under section 229.10(c). (Asnoted in the preceding section, certain checksgenerally deposited at a staffed teller station andinto an account held by the payee of the checkreceive next-day availability. However, state andlocal government checks and certain on-us checksare subject to additional rules.)

U.S. Treasury checks and Postal Service moneyorders that do not meet all the requirements fornext-day or second-day availability outlined insection 229.10(c) receive funds availability as ifthey were local checks. Cashier’s, certified, teller’s,and state and local government checks andchecks drawn on a Federal Reserve Bank orFederal Home Loan Bank that do not meet all therequirements in section 229.10(c) receive fundsavailability as either local or nonlocal checksaccording to the location of the bank on which theyare drawn.



Special Rules for Cash Withdrawals(§ 229.12(d))

Special rules apply to cash withdrawals from localand nonlocal check deposits. While the depositarybank is allowed to extend the availability schedulefor cash or similar withdrawals by one day, thecustomer must still be allowed to withdraw the first$100 of any check deposit not subject to next-dayavailability on the business day following the day ofdeposit. In addition to the first $100, a customermust also be allowed to withdraw $400 of thedeposited funds (or the maximum amount that maybe withdrawn from an ATM, but not more than $400)no later than 5:00 p.m. on the day the fundsbecome available for check withdrawals. Theremainder of the deposited funds would be avail-able for cash withdrawal on the following businessday.

Extension of the Schedule forCertain Deposits (§ 229.12(e))

Banks in Alaska, Hawaii, Puerto Rico, and the VirginIslands that receive checks drawn on or payablethrough banks located in another state may extend

the availability schedules for local and nonlocalchecks by one day. The exception does not applyto checks drawn on banks in these states orterritories and deposited in banks located in thecontinental United States.

Exceptions to the AvailabilitySchedule—Section 229.13

The regulation provides for exceptions that allowbanks to exceed the maximum hold periodsspecified in the availability schedule. The excep-tions are considered ‘‘safeguards’’ because theyoffer institutions a means of reducing risk based onthe size of the deposit, the depositor’s pastperformance, the absence of a record on thedepositor’s past performance, or a belief that thedeposit may not be collectible.

Categories of Exception(§§ 229.13(a)–229.13(f))

The regulation provides for exceptions in sixsituations:

Figure 1Availability of Different Types of Checks Deposited on the Same Day

MONDAY(Day 0)

TUESDAY(Day 1)

WEDNESDAY(Day 2)

THURSDAY(Day 3)

FRIDAY(Day 4)

MONDAY(Day 5)

TUESDAY(Day 6)

WEDNESDAY(Day 7)

THURSDAY(Day 8)

LOCAL

NONLOCAL

$1,000

$1,000

$1001

$1001 $9003

$9002

$4004$1001

$1001 $5005$4004

$5005

Deposit

Cash withdrawals

Check-writing

1. The first $100 of a day’s deposit must be made available foreither cash withdrawal or check-writing purposes at the start of thenext business day. (§ 229.10(c)(1)(vii))

2. Local checks must be made available for check-writingpurposes by the second business day following deposit.(§ 229.12(b))

3. Nonlocal checks must be made available for check-writingpurposes by the fifth business day following deposit. (§ 229.12(c))

4. $400 of the deposit must be made available for cashwithdrawal no later than 5:00 p.m. on the day specified in theschedule. This is in addition to the $100 that must be madeavailable on the business day following deposit. (§ 229.12(d))

5. The remainder of the deposit must be made available forcash withdrawal at the start of business the following day.(§ 229.12(d))



• New accounts

• Deposits in excess of $5,000 on any one day

• Checks that have been returned unpaid and arebeing redeposited

• Deposits to accounts that have been repeatedlyoverdrawn

• Cases in which the bank has reasonable causeto believe the check being deposited is uncol-lectible

• Emergency conditions

Although banks may exceed the time frames foravailability in these situations, the exceptionsgenerally may not be invoked if the deposit wouldordinarily receive next-day availability.

New Accounts (§ 229.13(a))

An account is considered a ‘‘new’’ account, undersection 229.13(a), for the first thirty calendar days itis open, beginning on the date the account isestablished. An account is not considered ‘‘new’’ if‘‘each customer on the account has had, withinthirty calendar days before the account is estab-

lished, another account at the . . . bank for at leastthirty calendar days.’’

The new-account exception does not cover alldeposits made to the account. New accounts areexempted from the availability schedules for depos-its of local and nonlocal checks, but next-dayavailability is required for deposits of cash and forelectronic payments. Also, the first $5,000 of aday’s aggregate deposits of government checks(including federal, state, and local governments),cashier’s, certified, teller’s, depository, or traveler’schecks must be given next-day availability. Theamount in excess of $5,000 must be madeavailable no later than the ninth business dayfollowing the day of deposit.

To qualify for next-day availability, deposits into anew account generally must be made in person toan employee of the depositary bank. If the depositsare not made in person to an employee of thedepositary bank—for instance, if they are made atan ATM—availability may be provided on thesecond business day after the day of deposit.Treasury check deposits, however, must be givennext-day availability regardless of whether they are

Figure 2Availability of Different Types of Checks Deposited on Separate Days

MONDAY(Day 0)

TUESDAY(Day 1)

WEDNESDAY(Day 2)

THURSDAY(Day 3)

FRIDAY(Day 4)

MONDAY(Day 5)

TUESDAY(Day 6)

WEDNESDAY(Day 7)

THURSDAY(Day 8)

NONLOCAL

LOCAL

$1,000

$1,000

$1001

$1001 $9003

$9002

$4004

$1001

$1001

$1,4005

Deposit

Cash withdrawals

Check-writing

1. The first $100 of a day’s deposit must be made available foreither cash withdrawal or check-writing purposes at the start of thenext business day. (§ 229.10(c)(1)(vii))

2. Local checks must be made available for check-writingpurposes by the second business day following deposit.(§ 229.12(b))

3. Nonlocal checks must be made available for check-writingpurposes by the fifth business day following deposit. (§ 229.12(c))

4. $400 of the deposit must be made available for cashwithdrawal no later than 5:00 p.m. on the day specified in theschedule. This applies to the aggregate amount of deposits thatmust be made available on a specified day, and is in addition tothe $100 that must be made available on the business dayfollowing deposit. (§ 229.12(d))

5. The remainder of the deposit must be made available forcash withdrawal at the start of business the following day.(§ 229.12(d))



made at staffed teller stations or ATMs. Banks arenot required to make the first $100 of a day’sdeposits of local and nonlocal checks, or the fundsfrom on-us checks, available on the next businessday.

Large Deposits (Deposits over $5,000)(§ 229.13(b))

A depositary bank may extend hold scheduleswhen deposits other than cash or electronicpayments exceed $5,000 on any one day. A holdmay be applied to the amount in excess of $5,000.To apply the rule, the depositary bank mayaggregate deposits made to multiple accountsheld by the same customer, even if the customer isnot the sole owner of the accounts.

Redeposited Checks (§ 229.13(c))

A depositary bank may delay making the fundsfrom a check available if the check had previouslybeen deposited and returned unpaid. The excep-tion does not apply to checks that were previouslyreturned unpaid because of a missing endorse-ment or because the check was postdated whenpresented.

Repeated Overdrafts (§ 229.13(d))

If a customer’s account, or accounts, have beenrepeatedly overdrawn during the preceding sixmonths, the bank may delay making the funds froma check available. A customer’s account may beconsidered repeatedly overdrawn in two ways.First, the exception may be applied if the accountwas overdrawn, or would have been overdrawnhad check or other charges been paid, for six ormore banking days during the preceding sixmonths.

Second, the exception may be applied tocustomers who incurred overdrafts on two bankingdays within the preceding six-month period if thenegative balance in the account(s) at that time was$5,000 or more. The exception may also apply if theaccount would have been overdrawn by $5,000 ormore had the check or other charges been paid.

Reasonable Cause to Doubt Collectibility(§ 229.13(e))

This exception may be applied to all types ofchecks. To trigger the exception, the depositaryinstitution must have reasonable cause to believethat the check is not collectible and must disclosethe basis for the extended hold to the customer.The basis for reasonable cause may include, forexample, communication with the paying bankindicating that

• A stop-payment order has been placed on thecheck

• There are insufficient funds in the drawer’saccount to cover the check

• The check will be returned unpaid

The reasonable-cause exception may also beinvoked in cases in which

• The check was deposited six months after thedate of the check (stale date)

• The check was postdated (future date)

• The depositary bank believes that the depositormay be engaged in check kiting

• The depositary bank has other confidentialinformation, such as the insolvency or pendinginsolvency of the customer

The reasonable-cause exception may not beinvoked because of either

• The race or national origin of the depositor or

• The fact that the paying bank is located in a ruralarea and the depositary bank will not have timeto learn of nonpayment of the check before thefunds have to be made available under theavailability schedules in place.

If the depositary bank intends to use thisexception, it must notify the customer, in writing, atthe time of deposit. If the deposit is not made inperson or the decision to place the hold is basedon facts that become known to the bank at a laterdate, the bank must mail the notice by the businessday after the day the deposit is made or the factsbecome known. The notice must indicate thatavailability is being delayed and must include thereason the bank believes the funds are uncollect-ible. If a hold is placed on the basis of confidentialinformation, as when check kiting is suspected, thebank need only disclose to the customer that thehold is based on confidential information indicatingthat the check may not be paid.

If the depositary bank asserts that the hold wasbased on confidential information, it must note thereason on the notice it retains as a record ofcompliance. The bank must maintain a record ofeach exception notice, including documents and abrief description of the facts supporting thereasonable-cause exception, for two years.

Overdraft and returned-check fees(§ 229.13(e)(2))

If a depositary bank invokes the reasonable-causeexception and does not inform the customer inwriting at the time of the deposit, it may not chargethe customer any overdraft or returned-check feesresulting from the hold if



• The deposited check is paid by the paying bankand

• The overdraft would not have occurred or thecheck would not have been returned had thedepositary bank not imposed the reasonable-cause hold.

However, the depositary bank may assess over-draft or returned-check fees if the exception holdnotice states that the customer may be entitled to arefund of any overdraft or returned-check feesimposed and describes how the customer canobtain the refund. The bank must then refund thefees upon request.

Emergency Conditions (§ 229.13(f))

Banks may suspend the availability schedule underthe following emergency conditions:

• An interruption of communications or computeror other equipment facilities

• Suspension of payments by another depositoryinstitution

• War

• Any emergency condition beyond the control ofthe depositary bank

Notices of Exception (§ 229.13(g))

Whenever a bank invokes one of the exceptions tothe availability schedules (except the new-accountexception), it must notify the customer in writing.The bank may send a notice that complies solelywith section 229.13(g)(1) (the ‘‘general exceptionnotice’’) or one of the two alternative noticesdescribed below.

General Exception Notice (§ 229.13(g)(1))

The general notice of exception must include thefollowing:

• The customer’s account number

• The date and amount of the deposit

• The amount of the deposit that will be delayed

• The reason the exception was invoked

• The day the funds will be available for withdrawal(unless unknown, as in an emergency situation)

If the deposit is made at a staffed facility, thenotice may be given to the person making thedeposit, regardless of whether that person is thecustomer who holds the account. If the deposit isnot made at a staffed facility, the exception noticemay be mailed to the customer no later than thebusiness day following the banking day of deposit.If the depositary bank discovers a reason to delaythe funds subsequent to the time the notice should

have been given, the bank must notify the customerabout the hold as soon as possible, but no laterthan the business day after the facts becomeknown. Certain exception holds due to emergencyconditions do not require notification of customers.For example, if the deposited funds that weresubject to a hold during an emergency becomeavailable for withdrawal before the time the noticemust be sent, the depositary bank need not send anotice.

One-Time Exception Notice forNonconsumer Accounts (§ 229.13(g)(2))

If most of the check deposits into a particularnonconsumer account qualify for either the large-deposit exception or the redeposited-check excep-tion, the bank may send a one-time notice ratherthan a notice complying with section 229.13(g)(1)each time the exception is invoked. The one-timenotice must be sent either the first time theexception is invoked or before that time. It muststate both

• The reason the exception may be invoked and

• The time period when the funds will generally bemade available.

Exception Notice for Repeated Overdrafts(§ 229.13(g)(3))

If most of the check deposits into a particularaccount qualify for the repeated-overdraft excep-tion, the bank may send an exception notice thatcovers a specified period of time rather than anotice complying with section 229.13(g)(1) eachtime the exception is invoked. The ‘‘specifiedperiod’’ notice must be sent when the overdraftexception is first invoked. It must state all of thefollowing:


• The fact that access to the funds is beingdelayed because the repeated-overdraft excep-tion is being invoked

• The time period during which the exception willapply

• The time period within which the funds generallywill be available for withdrawal

Availability of DepositsSubject to Exceptions (§ 229.13(h))

For deposits subject to exceptions to the availabil-ity schedules, other than deposits into newaccounts, the depositary bank is permitted to delayavailability for a reasonable time beyond theschedule. Generally, a reasonable period is con-sidered to be no more than one business day for



on-us checks, five business days for local checks,and six business days for nonlocal checks. If adepositary bank extends its availability beyondthese time frames, it must be able to prove that theextended delay is reasonable.

Payment of Interest—Section 229.14

General Rule (§ 229.14(a))

A depositary bank must begin accruing interest oninterest-bearing accounts no later than the businessday on which it receives provisional credit for thedeposited funds. A depositary bank typicallyreceives credit on checks within one or two daysfollowing deposit. It receives credit on cashdeposits, electronic payments, and checks that aredrawn on itself on the day the cash, check, orelectronic payment is received. And if a nonpropri-etary ATM is involved, it usually receives credit onthe day the bank that operates the ATM credits thedepositary bank for the amount of deposit.

A depositary bank may rely on the availabilityschedule of its Federal Reserve Bank, FederalHome Loan Bank, or correspondent bank whendetermining when the depositary bank receivescredit (section 229.14(a)(1)). If availability is de-layed beyond the time specified in that schedule, abank may charge back to the account any interesterroneously paid or accrued on the basis of thatschedule.

A depositary bank may accrue interest onchecks deposited to all of its interest-bearingaccounts based on an average of when the bankreceives credit for all checks sent for payment orcollection (section 229.14(a)(2)). For example, if abank receives credit on 20 percent of the fundsdeposited by check on the business day of deposit(for example, via on-us checks), 70 percent on thebusiness day following deposit, and 10 percent onthe second business day following deposit, thebank may apply these percentages to determinethe day on which interest must begin to accrue forcheck deposits into all interest-bearing accounts,regardless of when the bank received credit fordeposits into any particular account. Consequently,a bank may begin accruing interest uniformlyacross all interest-bearing accounts rather thanhaving to track the type of check deposited to eachaccount.

Nothing in the general rule limits a depositarybank policy that provides that interest may accrueonly on balances that exceed a specified amountor on the minimum balance maintained in theaccount during a given period. However, thebalance must be determined according to the datethe bank receives credit for the funds. Nor is there

a limit on a policy that provides that interest mayaccrue sooner than required by the regulation.

Money market deposit accounts, savings depositaccounts, and time deposit accounts are notsubject to the general rule concerning the timing ofinterest payment. However, for simplicity of opera-tion, a bank may accrue interest on such depositsin the same manner that it accrues interest ontransaction accounts.

Exemption for Certain Credit Unions(§ 229.14(b))

Credit unions that do not begin to accrue interest ordividends on their members’ accounts until a datelater than the day the credit union receives creditfor those deposits, including cash deposits, areexempt from the general rule for payment ofinterest (section 229.14(a)) as long as they providenotice of their interest-accrual policies in accor-dance with section 229.16(d).

Exception for Checks Returned Unpaid(§ 229.14(c))

Banks are not required to pay interest on fundsdeposited in an interest-bearing account by acheck that has been returned unpaid, regardless ofthe reason for return.

General DisclosureRequirements—Section 229.15

Form of Disclosures (§ 229.15(a))

A bank must disclose its funds availability policy toits customers. The disclosures must be clear andconspicuous and must be in writing. Disclosuresother than those posted at locations where employ-ees accept consumer deposits, at ATMs, or onpreprinted deposit slips must be in a form thatcustomers can keep. They must be grouped andmust not contain information unrelated to therequirements of Regulation CC. If other accountterms are included in the same document,disclosures related to the regulation should behighlighted, for example, by having a separateheading.

Uniform Reference to Day of Availability(§ 229.15(b))

A bank must refer to the day on which funds will beavailable for withdrawal in a uniform manner in allits disclosures. The statement should describefunds as being available for withdrawal on ‘‘the

business day after’’ the day of deposit. Thefirst business day is the business day following thebanking day the deposit was received, and the last



business day is the day on which the funds aremade available.

Multiple Accounts andMultiple Account Holders (§ 229.15(c))

A bank is not required to give multiple disclosuresto customers who have more that one account if theaccounts are subject to the same availabilitypolicies. Nor is a bank required to give separatedisclosures to joint account holders; a singledisclosure to one of the holders of the joint accountis sufficient.

Dormant or Inactive Accounts(§ 229.15(d))

A bank is not required to give disclosures tocustomers who have dormant or inactive accounts.

Specific Availability PolicyDisclosure—Section 229.16

The disclosure describing its funds availabilitypolicy that a bank must provide to its customersmust reflect the policy followed by the institution inmost cases. If the institution wishes to reserve itsright to impose longer delays on a case-by-casebasis or by invoking one of the exceptionsspecified in section 229.13, its policy regardingthese situations must be reflected in the disclosure.

Content of Specific Availability PolicyDisclosure (§ 229.16(b))

A bank’s specific availability policy disclosure mustinclude, as applicable, the following:

• A summary of the bank’s availability policy

• A description of the categories of deposits orchecks used by the bank when it delaysavailability, such as local or nonlocal checks;how to determine the category to which aparticular deposit or check (such as a payable-through draft) belongs; and when each categorywill be available for withdrawal (including adescription of the bank’s business days andwhen a deposit is considered received)

• A description of any of the exceptions specifiedin section 229.13 that may be invoked by thebank, including the time at which the depositedfunds generally will become available for with-drawal and a statement that the bank will notifythe customer if the bank invokes one of theexceptions

• A description of any case-by-case policy ofdelaying availability that may result in depositedfunds being available for withdrawal later than

the time periods stated in the bank’s availabilitypolicy (specific requirements are laid out insection 229.16(c)(1))

Longer Delays on a Case-by-Case Basis(§ 229.16(c))

A bank that has a policy of making deposited fundsavailable for withdrawal sooner than required mayextend the time when funds are available up to thetime periods allowed under the regulation on acase-by-case basis. However, the bank mustinclude the following in its specific policy disclo-sure:

• A statement that the time when deposited fundsare available for withdrawal may be extended insome cases, and a statement of the latest timedeposited funds will be available for withdrawal

• A statement that the bank will notify the customerif funds deposited in the customer’s account willnot be available for withdrawal until after the timeperiods stated in its availability policy

• A statement that customers should ask if theyneed to know when a particular deposit will beavailable for withdrawal

When a depositary bank extends the time thatfunds will be available for withdrawal on a case-by-case basis, it must provide the depositor with awritten notice. The notice must include all of thefollowing information:


• The date and amount of the deposit

• The amount of the deposit that is being delayed

• The day the funds will be available for withdrawal

The notice must be provided at the time of thedeposit, unless the deposit was not made in personto an employee of the depositary bank or thedecision to delay availability was made after thetime of the deposit. If notice is not given at the timeof the deposit, the depositary bank must mail ordeliver the notice to the customer no later than thefirst business day following the banking day thedeposit was made.

A depositary bank that extends the time whenfunds will be available for withdrawal on a case-by-case basis and does not furnish the depositor withwritten notice at the time of deposit may not assessany fees for any subsequent overdrafts (includinguse of a line of credit) or return of checks or otherdebits to the account if

• The overdraft or return of the check or other debitwould not have occurred except for the fact thatthe deposited funds were delayed under section229.16(c)(1) of the regulation and



• The deposited check was paid by the payingbank.

However, the depositary bank may assess anoverdraft or returned-check fee if it includes anotice concerning overdraft and returned-checkfees with the disclosure required in section229.16(c)(2) and, when required, refunds any suchfees upon the request of the customer. The over-draft and returned-check notice must state that thecustomer may be entitled to a refund of overdraft orreturned-check fees that are assessed if the checksubject to the delay is paid, and also must statehow to obtain a refund.

Credit Union Notice ofInterest-Payment Policy (§ 229.16(d))

If a credit union begins to accrue interest ordividends on all deposits made into an interest-bearing account, including cash deposits, at a latertime than the day specified in section 229.14(a),the institution’s specific policy disclosures mustexplain when interest or dividends on depositedfunds will begin to accrue.

Initial Disclosures—Section 229.17

A bank must provide potential customers with thedisclosures described in section 229.16 before anaccount is opened.

Additional Disclosure Requirements—Section 229.18

Deposit Slips (§ 229.18(a))

All preprinted deposit slips given to customersmust include a notice that deposits may not beavailable for immediate withdrawal.

Locations Where Employees AcceptConsumer Deposits (§ 229.18(b))

A bank must post, at a conspicuous place at eachlocation where its employees receive deposits toconsumer accounts, a notice that sets forth the timeperiods applicable to the availability of fundsdeposited.

Automated Teller Machines (§ 229.18(c))

At each of its ATM locations, a depositary bankmust post or provide a notice that funds depositedin the ATM may not be available for immediatewithdrawal. A depositary bank that operates an off-premises ATM from which deposits are removednot more than two times each week, as describedin section 229.19(a)(4), must disclose at or on the

ATM the days on which deposits made at the ATMwill be considered received.

Upon Request (§ 229.18(d))

A bank must provide a copy of its specificavailability policy disclosure (described in section229.16) to any person who requests it.

Changes in Policy (§ 229.18(e))

Thirty days before implementing a change in itsavailability policy, a bank must send notification ofthe change to all account holders adverselyaffected by the change. Changes that result infaster availability may be disclosed no later thanthirty days after implementation.

Miscellaneous Provisions—Section 229.19

When Funds Are Considered Deposited(§ 229.19(a))

For purposes of subpart B of Regulation CC(sections 229.10–229.21), the time at which fundsmust be made available for withdrawal is measuredfrom the day the funds are considered deposited(or ‘‘received’’ by the bank). When funds areconsidered officially deposited differs according towhere, how, and when they are deposited:

• Funds deposited at a staffed teller station ora staffed ATM—Considered deposited whenreceived by the teller or placed in the ATM.

• Funds mailed to the depository bank—Considered deposited on the banking day theyare received by the depositary bank; in this case,funds are considered ‘‘received’’ at the time themail is delivered to the bank, even if it is initiallydelivered to a mail room rather than the check-processing area.

• Funds deposited at a night depository—Considered deposited on the banking day thefunds are removed from the night depository andare accessible to the depositary bank for pro-cessing. For example, some businesses deposittheir funds in a locked bag at the night depos-itory late in the evening and return to the bank thefollowing day to open the bag; others have anagreement with the bank that the deposit bagmust be opened under the dual control of thebank and the depositor. In both cases, the fundsare considered deposited when the customerreturns to the bank and opens the deposit bag.

• Funds deposited through a lock boxarrangement—Considered deposited on the daythe funds are removed from the lock box and are



accessible to the depositary bank for process-ing. A lock box is a post office box that is typicallyused by a corporation for the collection of billpayments or other check receipts.

• Funds deposited at off-premises ATMs that arenot serviced more than twice a week—Considered deposited on the day they areremoved from the ATM. This special provisionis geared toward banks whose practice is toservice remote ATMs infrequently. A depositarybank that uses this provision must post a noticeat the ATM informing depositors that fundsdeposited at the ATM may not be consideredreceived on the date of deposit.

• Funds deposited on a day the depositary bank isclosed or after the bank’s cutoff hour—May beconsidered deposited on the next banking day.

Cutoff Hours

Generally, a bank may establish a cutoff hour of2:00 p.m. or later for receipt of deposits at its mainoffice or branch offices and a cutoff hour of 12:00noon or later for deposits made at ATMs, lockboxes, night depositories, or other off-premisesfacilities. (As specified in the commentary to sec-tion 229.19(a), the 12:00 noon cutoff time relates tothe local time at the branch or other location of thedepository bank where the account is maintainedor the local time at the ATM or off-premises facility.)

Different cutoff hours may be established fordifferent types of deposits—for example, a2:00 p.m. cutoff for receipt of check deposits and alater time for receipt of wire transfers is permissible.Location can also play a role in the establishment ofcutoff hours; for example, different cutoff hours maybe established for ATM deposits and over-the-counter deposits, or for different teller stations atthe same branch. With the exception of the 12:00noon cutoff hour for deposits at ATMs and off-premises facilities, the cutoff hour for receipt ofdeposits may not be earlier than 2:00 p.m.

Hour of Funds Availability (§ 229.19(b))

Generally, funds must be available for withdrawalby 9:00 a.m. or the time a depositary bank’s tellerfacilities, including ATMs, are available for cus-tomer account withdrawals, whichever is later.(Under certain circumstances, there is a specialexception for cash withdrawals—see section229.12(d).) Thus, if a bank has no ATMs and itsbranch facilities are available for customer transac-tions beginning at 10:00 a.m., funds must beavailable for withdrawal by 10:00 a.m. If a bank has24-hour ATM service, funds must be available forATM withdrawals by 9:00 a.m.

The start of business is determined by the localtime at the branch or depositary bank holding theaccount. For example, if funds in an account at aWest Coast bank are first made available at thestart of business on a given day and a customerattempts to withdraw the funds at an East CoastATM, the depositary bank is not required to makefunds available until 9:00 a.m. West Coast time(12:00 noon East Coast time).

Effects of the Regulation on DepositaryBank Policies (§ 229.19(c))

Essentially, a depositary bank is permitted toprovide availability to its customers in a shorter timethan that prescribed in the regulation. The bankmay also adopt different funds availability policiesfor different segments of its customer base, so longas each policy meets the schedules in the regula-tion. For example, it may differentiate between itscorporate and consumer customers, or may adoptdifferent policies for its consumer customers basedon whether a customer has an overdraft line ofcredit associated with his or her account.

The regulation does not affect a depositarybank’s right to accept or reject a check for deposit,to ‘‘charge back’’ the customer’s account for theamount of a check based on the return of the checkor receipt of a notice of nonpayment of the check,or to claim a refund for any credit provided to thecustomer.

Nothing in the regulation requires a depositarybank to have its facilities open for customers tomake withdrawals at specified times or on specificdays. For example, even though the special cashwithdrawal rule set forth in section 229.12(d) statesthat a bank must make up to $400 available forcash withdrawals no later than 5:00 p.m. onspecific business days, if a bank does not partici-pate in an ATM system and does not have any tellerwindows open at or after 5:00 p.m., the bank neednot join an ATM system or keep offices open. Inthis case, the bank complies with the rule if thefunds that are required to be available for cashwithdrawal at 5:00 p.m. on a particular day areavailable for withdrawal at the start of business onthe following day. Similarly, if a depositary bankis closed for customer transactions, including ATMtransactions, on a day on which funds must bemade available for withdrawal, the regulation doesnot require the bank to open.

If a bank has a policy of limiting cash withdrawalsat ATMs to $250 a day, the regulation does notrequire that the bank dispense $400 of theproceeds of the customer’s deposit that must bemade available for cash withdrawal on that day.

Some small financial institutions do not keepcash on their premises and do not offer cash



withdrawal services to their customers. Others limitthe amount of cash on their premises, for reasonsrelated to bonding, and as a result reserve the rightto limit the amount of cash a customer may with-draw on a given day or to require advance noticefor large cash withdrawals. Nothing in the regula-tion is intended to prohibit these practices if theyare applied uniformly and are based on security,operating, or bonding requirements and if the pol-icy is not dependent on the length of time the fundshave been in the customer’s account, as long asthe permissible hold has expired. However, theregulation does not authorize such policies if theyare otherwise prohibited by statutory, regulatory, orcommon law.

Calculated Availability forNonconsumer Accounts (§ 229.19(d))

Under calculated availability, a specified percent-age of funds from check deposits may be madeavailable to the customer on the next business day,with the remaining percentage deferred until sub-sequent days. The determination of the percentageof deposited funds that will be made available eachday is based on the customer’s typical depositmix as determined by a sample of the customer’sdeposits. Use of calculated availability is permittedonly if, on average, the availability terms that resultfrom the sample are equivalent to or more promptthan the requirements of the regulation.

Holds on Other Funds (§ 229.19(e))

If a customer deposits a check, the bank may placea hold on any of the customer’s funds to the extentthat the funds held do not exceed the amount of thecheck deposited and if the total amount of fundsheld are made available for withdrawal within thetimes required in the regulation. For example, if acustomer cashes a check (other than an on-uscheck) over-the-counter, the depositary bank mayplace a hold on any of the customer’s funds to theextent that the funds held do not exceed theamount of the check cashed.

Employee Training and Compliance(§ 229.19(f))

The Expedited Funds Availability Act requiresbanks to inform each employee who performsduties subject to the act about its requirements.The act and Regulation CC also require banks toestablish and maintain procedures designed toensure and monitor employee compliance with therequirements.

Effects of Mergers (§ 229.19(g))

Merged banks may be treated as separate banksfor a period of up to one year after consummation ofthe merger transaction. However, a customer ofany bank that is a party to the merger transactionand has an established account with the mergingbank may not be treated as a new account holderunder the new-account exception of section229.13(a). A deposit in any branch of the mergedbank is considered deposited in the bank forpurposes of the availability schedules in accor-dance with section 220.19(a).

This rule affects the status of the combined entityin a number of areas, for example,

• When the resulting bank is a participant in acheck clearinghouse association

• When an ATM is a proprietary ATM

• When a check is drawn on a branch of thedepositary bank

Relation to State Law—Section 229.20

General Rule (§ 229.20(a))

If a state has a shorter hold for a certain category ofchecks than is provided for under federal law, thestate requirement supersedes the federal provi-sion. For example, most state laws base some holdperiods on whether the check deposited is drawnon an in-state or out-of-state bank. If a statecontains more than one check-processing region,the state’s hold period for in-state checks may beshorter than the federal maximum hold period fornonlocal checks. Accordingly, the state schedulesupersedes the federal schedule to the extent thatit applies to in-state, nonlocal checks.

The Expedited Funds Availability Act also indi-cates that any state law providing availability in ashorter period of time than required by federal lawis applicable to all federally insured institutions inthat state, including federally chartered institutions.If a state law provides shorter availability only fordeposits in accounts in certain categories of banks,such as commercial banks, the superseding statelaw continues to apply to only those categories ofbanks, rather than to all federally insured banks inthe state.

Preemption of Inconsistent Law(§ 229.20(b))

Provisions of state laws that are inconsistent withfederal law, other than those discussed in thepreceding section (‘‘General Rule’’), are pre-empted. State laws requiring disclosure of availabil-ity policies for transaction accounts are preempted



by Regulation CC. Preemption does not require adetermination by the Federal Reserve Board to beeffective.

Preemption Standards andDeterminations (§§ 229.20(c) and (d))

The Federal Reserve Board may issue a preemp-tion determination upon request by an interestedparty in a state. The determination will relate only tothe provisions of subparts A and B of Regula-tion CC.

Civil Liability—Section 229.21

Statutory Penalties (§ 229.21(a))

Statutory penalties can be imposed as a result ofa successful individual or class action suit broughtfor violations of subpart B of Regulation CC.Basically, a bank can be held liable for

• Actual damages,

• No less than $100 nor more than $1,000 in thecase of an individual action,

• The lesser of $500,000 or 1 percent of the networth of the bank involved in the case of a classaction, and

• The costs of the action, together with reasonableattorney’s fees as determined by the court.

These penalties also apply to provisions of statelaw that supersede provisions of the regulation,such as requirements that funds deposited inaccounts at banks be made available morepromptly than required by the regulation, but theydo not apply to other provisions of state law. (Seecommentary to appendix D, section 229.20.)

Bona Fide Errors (§ 229.21(c))

A bank will not be considered liable for violations ofRegulation CC if it can demonstrate, by a prepon-derance of evidence, that violations resulted frombona fide errors and that it maintains proceduresdesigned to avoid such errors.

Reliance on Federal Reserve BoardRulings (§ 229.21(e))

A bank will not be held liable if it acts in good faithin reliance on any rule, regulation, model form (ifthe disclosure actually corresponds to the bank’savailability policy), or interpretation of the FederalReserve Board, even if that rule, regulation, form,or interpretation is subsequently determined to beinvalid. Banks may rely on the commentary as wellas on the regulation itself.

Exclusions (§ 229.21(f))

The liability established by section 229.21 does notapply to violations of subpart C (Collection ofChecks) of Regulation CC or to actions for wrongfuldishonor of a check by a paying bank’s customer.(Separate liability provisions applying to subpart Care found in section 229.38.)

SUBPART C—COLLECTION OF CHECKS

Subpart C covers the check-collection system andincludes rules to speed the collection and returnof checks. Basically, these rules cover the returnresponsibilities of paying and returning banks,authorization of direct returns, notification of non-payment on large-dollar returns of the paying bank,and mandatory check endorsement standards.

Sections 229.30 and 229.31 require paying andreturning banks to return checks expeditiouslyusing one of two standards: the ‘‘two-day/four-day’’test and the ‘‘forward collection’’ test. Under thetwo-day/four-day test, a return is considered expe-ditious if a local check is received by the depositorybank two business days after presentment, and anonlocal bank four business days after present-ment. Under the forward collection test, a return isconsidered expeditious if the paying bank uses, forreturns, transportation methods and banks com-parable to those used for forward collection. Thepaying bank may return checks directly to thedepository bank of any bank agreeing to processthe returns, including the Federal Reserve.

Subpart C, in section 229.33, also requires abank to provide notification of nonpayment if itdetermines not to pay a check of $2,500 or more,regardless of the channel of collection. The regula-tion addresses the depository bank’s duty to notifyits customers that a check is being returned andthe paying bank’s responsibility for giving notice ofnonpayment.

Other areas that are covered in subpart C areendorsement standards, warranties by paying andreturning banks, bona fide errors and liability,variations by agreement, insolvency of banks, andthe effect of merger transactions.

The provisions of subpart C, section 229.41,supersede any state law, but only to the extent thatstate law is inconsistent with Regulation CC.

The expeditious-return requirements of section229.42 do not apply to checks drawn on the U.S.Treasury, U.S. Postal Service money orders, andchecks drawn on states and units of general localgovernment that are presented directly to the stateor units of general local government and that arenot payable through or at a bank.



SUBPART D—SUBSTITUTE CHECKS

General Provisions GoverningSubstitute Checks—Section 229.51

A substitute check for which a bank has providedthe warranties described in section 229.523 is thelegal equivalent of an original check if the substi-tute check

• Accurately represents all of the information onthe front and back of the original check and

• Bears the legend ‘‘This is a legal copy of yourcheck. You can use it the same way you woulduse the original check.’’4

The reconverting bank must adhere to Regula-tion CC’s standards for preserving bank endorse-ments and identifications. A reconverting bank thatreceives consideration for a substitute check that ittransfers, presents, or returns is also the first bankto provide the warranties described in section229.52 and the indemnity described in section229.53.

Substitute Check Warranties andIndemnity—Sections 229.52 and229.53

Starting with the reconverting bank, any bank thattransfers, presents, or returns a substitute check (ora paper or electronic representation of a substitutecheck) and receives consideration for that checkwarrants that the substitute check meets the legal-equivalence requirements and that a check thathas already been paid will not be presented forsubsequent payment.

Such a bank also provides an indemnity to coverlosses that the recipient and any subsequentrecipient of the substitute check incur because ofthe receipt of a substitute check instead of theoriginal check.

Expedited Recredit for Consumers—Section 229.54

Section 229.54(a) sets forth the conditions underwhich a consumer may make an expedited recreditclaim for losses associated with the consumer’sreceipt of a substitute check. To use the expeditedrecredit procedure, the consumer must be able toassert in good faith that

• The consumer’s account was charged for a

substitute check that was provided to theconsumer,

• The consumer’s account was improperly chargedor the consumer has a warranty claim,

• The consumer suffered a loss, and

• The consumer needs the original check or asufficient copy to determine the validity of theclaim.

To make a claim, the consumer must comply withthe timing, content, and form requirements in sec-tion 229.54(b). This section generally provides thata consumer’s claim must be received by the bankthat holds the consumer’s account no later than thefortieth calendar day after the later of

• The calendar day on which the bank mailed (ordelivered by a means agreed to by the con-sumer) the periodic statement describing thecontested transaction or

• The calendar day on which the bank mailed (ordelivered by a means agreed to by the con-sumer) the substitute check itself.

Section 229.54(b)(1)(ii) requires the bank to givethe consumer an additional, reasonable period oftime if the consumer experiences ‘‘extenuatingcircumstances’’ that prevent timely submission ofthe claim.

The commentary to section 229.60 provides thatthe bank may voluntarily give the consumer moretime to submit a claim than the rule allows.

Under section 229.54(b)(2)(ii), a complaint is notconsidered complete, and thus does not consti-tute a claim, until it contains all of the requiredinformation the rule requires. The rule requires thatthe claim contain5

• A description of why the consumer believes theaccount was improperly charged or the nature ofthe consumer’s warranty claim,

• A statement that the consumer has suffered aloss, and an estimate of the amount of the loss,

• A reason why the original check (or a copy of thecheck that is better than the substitute check theconsumer already received) is necessary todetermine whether the consumer’s claim is valid,and

• Sufficient information to allow the bank to identifythe substitute check and investigate the claim.

A bank, at its discretion, may require theconsumer to submit the claim in writing. If aconsumer makes an oral claim to a bank thatrequires a written claim, the bank must inform theconsumer of the written requirement at that time.

3. A person other than a bank that creates a substitute checkcould transfer that check only by agreement unless and until abank provides the substitute check warranties.

4. A bank may not vary the language of the legal-equivalencelegend.

5. If a consumer submits an incomplete complaint, the bankmust so inform the consumer and must tell the consumer whatinformation is missing.



Under those circumstances, the bank must receivethe written claim by the later of ten business daysfrom the date of an oral claim or the expiration ofthe consumer’s initial forty-day period for submit-ting a timely claim. As long as the original oral claimfell within the forty-day requirement for notificationand a complete written claim was received withinthe additional ten-day window, the claim meetsthe timing requirements (sections 229.54(b)(1) and229.54(b)(3)), even if the written claim was receivedafter the expiration of the initial forty-day period.

Bank’s Action on Claims

Section 229.54(c) requires a bank to act on aconsumer’s claim no later than the tenth businessday after the banking day on which it received theconsumer’s claim:

• If the bank determines that the consumer’s claimis valid, it must recredit the consumer’s accountno later than the end of the business day after thebanking day on which it makes that determina-tion. The amount of the recredit should equal theamount of the consumer’s loss, up to the amountof the substitute check, plus interest on thatamount if the account is an interest-bearingaccount. The bank must then notify the con-sumer of the recredit using the notice discussedbelow (‘‘Notices Relating to Expedited RecreditClaims’’).

• If the bank determines that the consumer’s claimis invalid, it must notify the consumer of thatdecision using the notice discussed below(‘‘Notices Relating to Expedited Recredit Claims’’).

• If the bank has not determined the validity of theconsumer’s claim by the tenth business day afterthe banking day on which it received the claim,the bank must recredit the consumer’s accountfor the amount of the consumer’s loss, up tothe amount of the substitute check or $2,500,whichever is less. The bank must also recreditinterest on that amount if the consumer’s accountis an interest-bearing account. The bank mustsend a notice to that effect to the consumer usingthe notice discussed below (‘‘Notices Relating toExpedited Recredit Claims’’). If the consumer’sloss was more than $2,500, the bank has until theend of the forty-fifth calendar day from the dateof the claim to recredit any remaining amount ofthe consumer’s loss, up to the amount of thesubstitute check (plus interest), unless it deter-mines prior to that time that the claim was invalidand notifies the consumer of that decision.

Section 229.54(d) generally requires that recred-ited funds receive next-day availability. However,a bank that provisionally recredits funds pendingfurther investigation may invoke safeguard excep-tions to delay availability of the recredit under

the limited circumstances described in section229.54(d)(2). The safeguard exceptions apply tonew accounts and repeatedly overdrawn accountsand also when the bank has reasonable causeto suspect that the claim is fraudulent. A bankmay delay availability of a provisionally recreditedamount until the start of the earlier of (1) the busi-ness day after the banking day on which the bankdetermines that the consumer’s claim is valid or(2) the forty-fifth calendar day after the banking dayon which the bank received the claim if the accountis new, the account is overdrawn, or the bank hasreasonable cause to believe that the claim isfraudulent. When the bank delays availability underthis section, it may not impose overdraft fees onchecks drawn against the provisionally creditedfunds until the fifth calendar day after the day onwhich the bank sent the notice regarding thedelayed availability.

If, after providing the recredit, the bank deter-mines that the consumer’s claim was invalid, thebank may reverse the recredit. This reversal mustbe accompanied by a consumer notification usingthe notice discussed below (‘‘Notices Relating toExpedited Recredit Claims’’).

Notices Relating toExpedited Recredit Claims

Section 229.54(e) outlines the requirements forproviding consumer notices related to expeditedrecredit:

• The bank must send the notice of recredit nolater than the business day after the banking dayon which the bank recredits the consumer’saccount. The notice must include the amount ofthe recredit and the date the recredited funds willbe available for withdrawal.

• The bank must send notice that the consumer’sclaim is not valid no later than the business dayafter the banking day on which the bank makesthis determination. The notice must include theoriginal check or a sufficient copy of it (except asprovided in section 229.58; see below). Also, itmust demonstrate to the consumer why the claimis not valid. Further, the notice must includeeither any information or document that the bankused in making its determination or an indicationthat the consumer may request copies of thisinformation.

• The bank must send the notice of a reversal ofrecredit no later than the business day after thebanking day on which the bank made thereversal. The notice must include all the informa-tion required in a notice of invalid claim plus theamount (including interest) and date of thereversal (section 229.54(e)(3)(i)).



Appendix C to Regulation CC contains modelforms (models C-23 through C-25) that a bank mayuse to craft the various notices required in section229.54(e). The Board published these models toassist banks in complying with section 229.54(e).Appropriate use of the models, however, does notoffer banks a statutory safe harbor.

Expedited Recredit for Banks—Section 229.55

Section 229.55 sets forth expedited recredit proce-dures applicable between banks. A claimant bankmust adhere to the timing, content, and formrequirements of section 229.55(b) in order for theclaim to be valid. A bank against which aninterbank recredit claim is made has ten businessdays within which to act on the claim (section229.55(c)). The provisions of section 229.55 maybe varied by agreement. (No other provisions ofsubpart D may be varied by agreement.)

Liability—Section 229.56

Section 229.56 describes the damages for which abank or person would be liable in the event ofbreach of warranty or failure to comply with sub-part D:

• The amount of the actual loss, up to the amountof the substitute check, resulting from the breachor failure and

• Interest and expenses (including costs, reason-able attorney’s fees, and other expenses ofrepresentation) related to the substitute check.

These amounts could be reduced in the event ofnegligence or failure to act in good faith. It is alsoimportant to note that section 229.56 contains aspecific exception that allows for greater recoveryas provided in the indemnity section. Thus, aperson who has an indemnity claim that alsoinvolves a breach of a substitute check warrantycould recover all damages proximately caused bythe warranty breach.

Section 229.56(b) excuses failure to meet thissubpart’s time limits because of circumstancesbeyond a bank’s control. Section 229.56(c) pro-vides that an action to enforce a claim under thissubpart may be brought in any U.S. district court.Section 229.56(c) also provides the subpart’sstatute of limitations: one year from the date onwhich a person’s cause of action accrues.6 Section229.56(d) states that if a person fails to provide

notice of a claim for more than thirty days from thedate on which a cause of action accrues, thewarranting or indemnifying bank is dischargedfrom liability to the extent of any loss caused by thedelay in giving notice of the claim.

Consumer Awareness—Section 229.57

Content Requirements

A bank must provide its consumer customers with adisclosure that explains that a substitute check isthe legal equivalent of the original check anddescribes the consumer’s recredit rights for substi-tute checks. A bank may use, but is not requiredto use, the Board’s model form (model C-5A inappendix C to Regulation CC) to meet the con-tent requirements for this notice. A bank that usesthe model form appropriately is deemed to bein compliance with the content requirements forwhich it uses language from the model form. A bankmay provide the notice required by section 229.57along with other information.

Distribution to Consumer CustomersWho Receive Canceled Checks withPeriodic Account Statements

Under section 229.57(b)(1), a bank must providethis disclosure to existing consumer customerswho routinely receive their canceled checks in theirperiodic statement no later than the first statementafter October 28, 2004. For customer relationshipsestablished after that date, a bank must providethe disclosure to a new consumer customer whowill routinely receive canceled checks in periodicstatements at the time the customer relationship isestablished.

Distribution to Consumer CustomersWho Receive a Substitute CheckOccasionally

Under section 229.57(b)(2), a bank must alsoprovide the disclosure to a consumer customerwho receives a substitute check on an occasionalbasis, including when a consumer receives asubstitute check in response to a request for acheck or a copy of a check and when a checkdeposited by the consumer is returned to theconsumer as an unpaid item in the form of asubstitute check. A bank must provide the disclo-sure to a consumer customer in these cases even ifthe bank previously provided the disclosure to theconsumer.

When the consumer contacts the bank to requesta check or a copy of a check and the bank

6. For purposes of this paragraph, a cause of action accrues asof the date on which the injured person first learns, or reasonablyshould have learned, of the facts giving rise to the claim, includingthe identity of the warranting or indemnifying bank against whichthe action is brought.



responds by providing a substitute check, the bankmust provide this disclosure at the time of therequest, if feasible. Otherwise, the bank mustprovide the disclosure no later than when the bankprovides a substitute check in response to theconsumer’s request. It would not be feasible toprovide the disclosure at the time of the request if,for example, the consumer made his or her requestby telephone or if the bank did not know at the timeof the request whether it would provide a substitutecheck or some other document in response. A bankis not required to provide the disclosure if the bankresponds to the consumer’s request by providingsomething other than an actual substitute check(such as a photocopy of an original check or asubstitute check).

When a bank returns a deposited item unpaid toa consumer in the form of a substitute check, thebank must provide the disclosure when it providesthe substitute check.

Mode of Delivery of Information—Section 229.58

Section 229.58 provides that banks may deliverany notice or other information required under thissubpart by U.S. mail or by any other means towhich the recipient has agreed to receive accountinformation, including electronically. A bank that isrequired to provide an original check or a sufficientcopy (each of which is defined as a specific paperdocument) instead may provide an electronicimage of the original check or sufficient copy if therecipient has agreed to receive that informationelectronically.



Regulation CCExamination Objectives and Procedures

Note: The examination objectives and examinationprocedures for this regulation are broken down byregulation subpart: Section I covers subparts A andB, and section II covers subpart D. Subpart C of theregulation, ‘‘Collection of Checks,’’ is not coveredhere, as it addresses payments system issuesexclusively and therefore does not present anyconsumer-related regulatory compliance issues tobe reviewed during a consumer compliance exami-nation.

I. SUBPARTS A AND B


1. To determine that the financial institution’s fundsavailability policies are in compliance withRegulation CC

2. To determine that the financial institution hasestablished internal controls for compliance withRegulation CC

3. To determine that the financial institution hasestablished a training program for applicableemployees concerning their duties with respectto Regulation CC

4. To determine that the financial institution main-tains records of compliance with Regulation CCfor a period of two years


A financial institution may delay funds availabilityfor some deposits on a case-by-case basis and forother deposits on an automatic basis. In addition,the institution may make decisions concerningholds and maintain records at branches as wellas at the main office. Therefore, to check on aninstitution’s compliance with its holds policies, theexaminer must determine not only the types ofholds policies the institution has, but how decisionsare made and where records are maintained. If abranch makes its own decision and maintains itsown records, such as in a decentralized structure,sampling may be done at the branch. If decisionsto delay availability are either centralized or madeat a regional processing center and records aremaintained there, sampling for compliance may bemade at that location.

General

1. Determine the types of transaction accounts,as defined in Regulation D, section 204.2(e)

(demand deposits, NOW accounts, and ATSaccounts), offered by the financial institution.

2. Obtain copies of the forms used by the institu-tion for transaction accounts, as applicable:

• Specific availability policy disclosures

• Exception hold notices

• Case-by-case hold notices

• Special deposit slips

• Change-in-terms notices

3. Determine, by account type, the institution’sspecific funds availability policies with regard todeposits.

4. Determine which individuals actually performthe various activities necessary to comply withthe provisions of Regulation CC, subpart B,including, for example, personnel engaged in

• Distributing disclosure statements

• Employee training

• Internal reviews

• Computer program development for depositaccounts (not necessarily a computerprogrammer)

• Deposit operations

• Overdraft administration

• ATM deposit processing

• Determining case-by-case holds orexceptions

5. Review the institution’s training manual, internalaudit or similar reports for Regulation CC,written procedures given to employees detailingtheir responsibilities under the regulation, andsimilar materials.

6. Determine the extent and adequacy of theinstruction and training received by thoseemployees to enable them to carry out theirassigned responsibilities in conformance withRegulation CC.

7. Verify that the institution provides each employeewith a written statement regarding the institu-tion’s procedures that pertain to that employee’sfunction. (§ 229.19(f))

Initial Disclosures andSubsequent Changes

1. Review the financial institution’s specific avail-ability policy disclosures. Determine if the dis-closures accurately reflect the institution’s fundsavailability policies and meet the requirementsfor content under section 229.16.


2. Determine if the institution provides the initialdisclosure statement prior to accepting funds toopen a new transaction account, or mails thedisclosures within one business day of receivinga written request by mail or telephone to open anew account. (§ 229.17(a))

3. Determine if the institution provides its fundsavailability policy upon an oral or written requestwithin a reasonable time period. (§ 229.18(d))

4. Determine if the institution has made changesto its availability policies since the last exam-ination. If it has, determine whether deposi-tors were notified in accordance with section229.18(e).

Automatic (or Automated)Hold Policies

1. Review the financial institution’s schedules orother materials relating to its funds availabilitytime periods for the following types of deposits:

• Cash (§ 229.10(a))

• Electronic payments (§ 229.10(b))

• U.S. Treasury checks (§§ 229.10(c)(1)(i)and 229.12(b)(2))

• U.S. Postal Service money orders(§§ 229.10(c)(1)(ii), 229.10(c)(2), and229.12(b)(3))

• Checks drawn on Federal Reserve Banksand Federal Home Loan Banks(§§ 229.10(c)(1)(iii), 229.10(c)(2),229.12(b)(4), and 229.12(c)(1)(ii))

• State or local government checks(§§ 229.10(c)(1)(iv), 229.10(c)(2),229.12(b)(4), and 229.12(c)(1)(ii))

• Cashier’s, certified, and teller’s checks(§§ 229.10(c)(1)(v), 229.10(c)(2),229.12(b)(4), and 229.12(c)(1)(ii))

• On-us checks (§§ 229.10(c)(1)(vi) and229.11(c)(1)(ii))

• Local checks (§ 229.12(b)(1))

• Nonlocal checks (§ 229.12(c)(1)(i))

• Credit union share draft accounts (commen-tary to § 229.16(b))

2. Determine that the institution’s policy for provid-ing funds availability is in accordance withregulatory requirements.

3. Determine the institution’s procedures for plac-ing holds.

4. Selectively sample each of the types of depositslisted in item 1 and verify the funds availabilitytime frames. Determine, for each deposit cate-gory, whether the financial institution’s pro-cedures provide funds availability within the

required time periods. Determine that the pro-cedures and disclosed policy are the same.

Deposits at Nonproprietary ATMs—Section 229.12(f)

(See also sections 229.19(a)(4) and 229.19(a)(5)(ii)and commentary to sections 229.19(a) and229.19(b) for off-premises ATMs.)

1. Determine that the institution makes fundsdeposited in an account at a nonproprietaryATM by cash or check available for withdrawalnot later than the fifth business day following theday of deposit.

Availability Rules—$100 and $400—Sections 229.10(c)(1)(vii) and229.11(b)(2)

1. Determine the financial institution’s proceduresfor complying with the $100 availability rule and,if applicable, the $400 cash withdrawal rule.

2. Review records that detail holds placed onaccounts. Determine if holds are in accordancewith the regulation.

3. Sample deposit accounts with deposits subjectto the $100 availability rule and the $400 cashwithdrawal rule and verify the institution’s com-pliance with the rules. Verify that actual prac-tices and policies match.

Extended Holds

Case-by-Case Holds

1. Determine if the financial institution places holdson a case-by-case basis. If it does, review theinstitution’s procedures for placing case-by-case holds.

2. Review the institution’s specific availability pol-icy disclosures to determine whether the case-by-case hold policy has been disclosed.

3. Review any physical records or reports gener-ated from holds placed. (Sample should includerecords from the main office as well as branchoffices, depending on the type of branch systemoperated.)

4. Sample a few of the case-by-case holds anddetermine whether the institution makes thefunds available for withdrawal within the re-quired time frames.

5. Determine whether the institution provides thecustomer with a notice of the case-by-case holdas required by section 229.16(c)(2). Determineif the notices meet the timing and contentrequirements.

Availability of Funds: Examination Objectives and Procedures


6. If the institution does not provide the notice atthe time of deposit, determine whether it eitherdiscloses the availability of refunds of overdraftand returned-check fees or does not assessthese fees when the requirements of section229.16(c)(3) are met.

Exception Holds (§ 229.13)

1. Determine whether the financial institution placesholds on an exception basis. If it does, review itsprocedures for placing exception holds.

2. Review the institution’s specific availability pol-icy disclosures to determine whether it hasdisclosed its exception-holds policy.

3. Review any physical records or reports gener-ated from holds placed. (Sample should includerecords from the main office as well as branchoffices, depending on the type of branch systemoperated.)

4. Sample a few of the exception holds anddetermine when the institution makes the fundsavailable for withdrawal. Determine that theinstitution does not add more than one businessday for on-us checks, five business days forlocal checks, and six business days for nonlocalchecks to the maximum time periods in thefederal availability schedule for the depositunless it can show that a longer delay isreasonable. (§ 229.13(h))

5. With the exception of new accounts, determinewhether the institution provides the customerwith an exception-hold notice as required bysection 229.13(g).

6. Review hold notices. Determine if the noticesmeet the timing and content requirements foreach type of exception hold. (Note: Institutionsare required to retain copies of reasonable-cause hold notices.)

New Accounts (§ 229.13(a))

1. Review financial institution policies for newaccounts.

2. Determine how the institution defines a new-account relationship. Determine if the institu-tion’s definition is in compliance with Regu-lation CC.

3. Review the institution’s specific availability pol-icy disclosure to determine whether the institu-tion has disclosed its availability policy regard-ing new accounts.

4. Review a new-account report or listing of new-account holders. Determine if any holds wereplaced on the accounts.

5. Sample deposit accounts, and ask the institu-tion to provide documentation concerning the

composition of the opening deposit or the mostrecent deposit.

6. Review holds placed and determine if they arewithin regulatory limits with respect to time andamount (see section 229.13(a)(1)). (Note: Noregulatory time limits are set forth for fundsavailability for local and nonlocal check depos-its into new accounts.)

Large Deposits (§ 229.13(b))

1. Determine whether the financial institution hasprocedures and a special hold policy for largedeposits. If it does, determine whether theinstitution considers a large deposit, for pur-poses of the large-deposit exception, to be aday’s aggregate deposit of checks exceeding$5,000.

2. Determine that the institution does not invokethe large-deposit exception for cash or elec-tronic payments.

3. Review at least one account deposit on whicha large-deposit hold was placed and ensurethat the hold was placed only on the amount bywhich a day’s deposits of checks exceeded$5,000.

4. Determine if the institution provided the cus-tomer with a written exception notice thatmeets the requirements of section 229.13(g)(1)or 229.13(g)(2).

5. Determine if the notice was provided within thetime frames prescribed in section 229.13(g)(1)or 229.13(g)(2).

Redeposited Checks (§ 229.13(c))

1. Determine if the financial institution has proce-dures and a special hold policy for redepositedchecks.

2. If it does, determine if the institution refrains fromimposing this exception solely because of amissing endorsement or because the checkwas postdated.

3. Determine if the institution provided the cus-tomer with a written exception notice that meetsthe requirements of section 229.13(g)(1) or229.13(g)(2).

4. Determine if the notice was provided within thetime frames prescribed in section 229.13(g)(1)or 229.13(g)(2).

Repeated Overdrafts (§ 229.13(d))

1. Determine whether the financial institution hasprocedures or a special hold policy for custom-ers with repeated overdrafts.



2. If it does, review the institution’s definition ofaccounts ‘‘repeatedly overdrawn’’ and deter-mine whether it meets the regulatory definition insection 229.13(d).

3. Determine that the institution returns the accountto the institution’s normal account status whenthe account has not been repeatedly overdrawnfor a six-month period following the time theaccount was characterized as repeatedly over-drawn.

4. Review the financial institution’s list of custom-ers whose accounts are repeatedly overdrawn.(Note: This list may or may not be the sameoverdraft list maintained in the ordinary courseof business. The institution may maintain a list ofrecent overdrafts as well as a list of customerswhose accounts are repeatedly overdrawn.)

5. Review an account classified as repeatedlyoverdrawn. Determine if the institution properlyclassified the account and followed the regula-tory procedures outlined in section 229.13(d).

6. Determine the date the account was placed in‘‘repeated overdraft’’ exception status. Reviewaccount statements for the six months beforethe account was identified as an overdraftexception.

7. Determine whether the institution provided thecustomer with an exception notice when anexception hold was placed on the account. Ifit did, review the content of the notice anddetermine if it meets the requirements of section229.13(g)(1) or 229.13(g)(3).

8. Determine if notice was given within the requiredtime frames. (§ 229.12(g)(1) or 229.12(g)(3))

Reasonable Cause to Doubt Collectibility(§ 229.13(e))

1. Determine if the financial institution has proce-dures or a special policy for placing reasonable-cause holds.

2. If it does, determine who initiates reasonable-cause holds.

3. Obtain a list of accounts or checks to which thisexception was applied. Review the exceptionnotice given to the customer.

4. Determine if the reason for invoking the excep-tion was reasonable.

5. Review the content of the notice and deter-mine if it meets the requirements of section229.13(g)(1).

6. Determine if notice was given within the requiredtime frames. (§ 229.13(g)(1))

7. If the institution imposes a reasonable-causeexception hold and does not provide the noticeat the time of deposit, determine whether it

either discloses the availability of refunds ofoverdraft and returned-check fees or does notassess these fees when the requirements ofsection 229.13(e)(2) are met.

Emergency Conditions (§ 229.13(f))

1. Determine if the financial institution has proce-dures or a special policy for placing emergency-condition holds. If it does, review the institution’sprocedures for placing these holds.

2. Determine whether the institution invokes thisexception only under the conditions specified insection 229.13(f).

3. Determine whether the institution makes thefunds available for withdrawal within a reason-able time after either the termination of theemergency or the time at which the depositwould normally be available for withdrawal,whichever is later. (Note: A reasonable period foron-us checks is one business day; for localchecks, five business days; and for nonlocalchecks, usually six days. (§§ 229.13(h)(3) and229.13(h)(4))

Miscellaneous Provisions

Special Deposit Slips (§ 229.10(c)(3))

1. Determine if the financial institution requires aspecial deposit slip for state or local govern-ment, cashier’s, certified, or teller’s checks inorder to provide next-business-day availabilityon the deposits. (§ 229.10(c)(3)(i))

2. If the institution requires a special deposit slip,determine that it does one of the following:(§ 229.10(c)(3)(ii))

• Provides the deposit slip to its customers

• Informs its customers of how to obtain andprepare the slips

• Makes the special deposit slips ‘‘reasonablyavailable’’

Additional Disclosure Requirements(§ 229.18)

1. Determine if the financial institution displays anotice of its availability policy in a conspicuousplace at locations where employees receiveconsumer deposits. (§ 229.18(b)) (Note: Thenotice is not required at drive-up windows andnight depositories. See commentary to section229.18(b).)

2. Determine if the institution displays a notice ateach of its proprietary ATMs stating that thefunds deposited in the ATM may not be availablefor immediate withdrawal. (§ 229.18(c)(1))



3. If the institution has off-premises ATMs fromwhich funds are not collected more than twice aweek, determine if the institution discloses on orat the ATM the days on which the deposits madeat the ATM will be considered ‘‘received.’’(§ 229.18(c)(2))

4. Determine if the institution includes a notice onall preprinted deposit slips that the depositedfunds may not be available for immediatewithdrawal. (§ 229.18(a))

Payment of Interest—Section 229.14

1. Determine whether the financial institution paysinterest as of the date of the deposit or as of thedate provisional credit is granted.

2. If the institution pays interest as of the dateprovisional credit is granted, review the institu-tion’s schedule for provisional credit. (Thisschedule may be from a Federal Reserve Bankor may be based on the time credit is generallyreceived from a correspondent bank.) Select aNOW account statement and ask the institutionto give a detailed explanation of how the interestwas calculated.

3. Review the institution’s method for calculatinginterest on deposits reviewed. Select anotherNOW account and, using the institution’s pro-cedures for calculating interest, verify that theinstitution accrues interest as of the date pro-visional credit is received.

Calculated Availability—Nonconsumer Transaction Accounts—Section 229.19(d)

1. Determine if the financial institution uses aformula for calculating funds availability fornonconsumer transaction accounts.

2. If it does, review a copy of the institution’sformula.

3. Select a large corporate account subject tothe formula. Ask the institution to demonstratehow funds are made available to the customer.Determine whether it appears that the formulaaccurately reflects the type of deposit mixreasonably expected for this type of accountholder. (For example, a local grocery storemay have 90% of its deposits made up of localcheck deposits. Therefore, a formula providinga deposit mix of at least 90% availability withintwo days may be reasonable. A mail order firm,on the other hand, may have a large percent-age of nonlocal checks in its check deposits.Therefore, the institution’s formula may allow forlengthier availability schedules.)

Record Retention—Sections 229.21(g) and 229.13(g)(4)

1. Determine that the financial institution retains fortwo years the notices required when a ‘‘reason-able cause’’ exception is invoked.

II. SUBPART D


1. Determine the financial institution’s compliancewith subpart D notice content and timingrequirements (general consumer-awareness dis-closures regarding substitute checks and no-tices that respond to a consumer’s expeditedrecredit claim regarding a substitute-checkerror)

2. Ascertain whether the financial institution com-plies with timing requirements for acting on asubstitute-check expedited recredit claim.


Whether a financial institution will or will not functionas a ‘‘reconverting bank,’’1 the interlinked natureof the payments system virtually guarantees thatevery financial institution will at some time receive asubstitute check that is subject to the provisionsof subpart D, the ‘‘Check 21’’ section of Regula-tion CC. While some financial institutions will rapidlymigrate toward electronic check exchange, otherswill proceed more hesitantly. Regardless, becausethe Check 21 Act provides that a properly preparedsubstitute check is the ‘‘legal equivalent of theoriginal check for all purposes,’’ all banks must beprepared to accept a substitute check in place ofthe original after the act’s effective date of Octo-ber 28, 2004.

One of a bank’s regulatory compliance obli-gations is to apprise consumer customers whoreceive canceled checks with their periodic accountstatements or who otherwise occasionally receivesubstitute checks of their rights under the new lawthrough a consumer-awareness disclosure. A bankthat provides a substitute check to a consumermust also be prepared to comply with the Check 21Act’s expedited recredit procedure for addressingerrors relating to substitute checks. Even if thecustomer does not receive actual canceled checksin a monthly statement but instead receives atruncated summary, the individual may eventuallyreceive a substitute check, either in response toa request for a check or a copy of a check or

1. A reconverting bank is the bank that creates a substitutecheck; if a nonbank creates a substitute check, the reconvertingbank is the first bank to transfer, present, or return the substitutecheck (or the first paper or electronic representation of thatsubstitute check) for consideration.



because a check that the consumer deposited wasreturned unpaid to the consumer in the form of asubstitute check. Some increase in the potentialfor duplicate posting (substitute check and origi-nal) may also involve a degree of consumer edu-cation and explanation. The regulation specifiesthe appropriate timing for the distribution of theconsumer-awareness disclosure and also providesmodel language. Finally, institutions will likely wantto train their personnel so that they can adequatelyconvey to customers the impact of this new instru-ment in the payments system.

General

1. Obtain copies of the documents associated withthe financial institution’s Check 21 compliance,including but not limited to the following:

• Consumer-awareness disclosure(s)

• Sample (test) substitute checks, if available

• Direct mail correspondence, statementstuffers, and the like, describing Check21/substitute check implementation to con-sumer customers

• Notices relating to expedited recredit claims:

– Notice of valid claim and refund

– Notice of provisional refund

– Denial of claim

– Reversal of refund

• Any other relevant documents

2. Identify the individuals within the institution whomay have responsibilities associated with Check21. The following is a non-exhaustive list of suchindividuals:

• New-accounts personnel

• Employee training department

• Internal auditors, reviewers

• Deposit operations, bookkeeping

3. Review the institution’s training manual, internalaudit or similar reports for Regulation CC,written procedures given to employees detailingtheir responsibilities under the regulation, andsimilar materials.

4. Determine the training methods used by theinstitution in conveying specific responsibilitiesto employees. Are written procedures distrib-uted to employees?

Consumer Awareness—Section 229.57

(Note: Model disclosure language is provided inappendix C of the regulation.)

Determine whether the bank distributes only asingle version of its consumer-awareness disclo-sure or maintains variations of the disclosure to beused depending on the circumstances giving riseto distribution. Each notice should reflect thefollowing:

1. General disclosure content—Determine whetherthe disclosure notice states

• That a substitute check is the legal equiva-lent of an original check and (§ 229.57(a)(1))

• The consumer recredit rights that applywhen a consumer in good faith believes thata substitute check was not properly chargedto his or her account. (§ 229.57(a)(2))

2. Timing and distribution—A bank is required toprovide its consumer customers with a consumer-awareness disclosure prior to the receipt of asubstitute check.

• For those who receive canceled checks withperiodic statements:

– Existing customers as of October 28,2004—Determine that the bank providedthe disclosure no later than the firstregularly scheduled communication withthe consumer after October 28, 2004 (foreach consumer who is a customer of thebank on that date). (§ 229.57(b)(1)(i))

– New customers after October 28, 2004—Determine that the bank providedthe disclosure at the time the cus-tomer relationship was established.(§ 229.57(b)(1)(ii))

• For those who do not receive canceledchecks with periodic statements and who willreceive substitute checks only occasionally:

– Upon customer request for an originalcheck or a copy of a check—Determinethat the bank provides the disclosure toa consumer customer who requested anoriginal check or a copy of a check andreceived a substitute check in response.(§ 229.57(b)(2)(i))

– Upon customer’s receipt of a returnedsubstitute check—Determine that the bankprovides the disclosure to a consumercustomer of the bank who receives areturned substitute check (at the time thebank provides such substitute check).(§ 229.57(b)(2)(ii))

3. Mode of delivery of information (§ 229.58)—Determine whether the bank employed oneof the following in delivering its consumer-awareness disclosure(s) and expedited recreditnotice(s):

• U.S. mail



• Any other means to which the recipientagreed to receive account information,including electronically

Expedited Recredit for Consumers—Section 229.54

1. Determine whether any financial institution cus-tomer has raised a Check 21-related claim ofloss since the last examination. If yes, review forthe following. (At financial institutions at whichmultiple Check 21-related claims have beenraised and resolved, the examiner need onlyreview a sampling sufficient to ensure that thebank’s processing is consistent and in compli-ance with subpart D.)

• Necessary preconditions (consumer mustallege all of these)—(§§ 229.54(a)(1)–229.54(a)(4))

– Was the consumer’s account charged fora substitute check that was provided tothe consumer? (The consumer need notbe in possession of the substitute checkat the time of claim submission.)

– Was the consumer’s account not properlycharged? (Alternatively, a consumer’saccount could be properly charged yetstill give rise to a warranty claim, forexample, in the case of a substitute-check image that is illegible.)

– Did the consumer suffer a resulting finan-cial loss?

– Was the production of the original checkor a sufficient copy necessary to deter-mine whether or not the consumer’s claimwas valid?

• Procedural steps for consumer’s claim

– Did the consumer submit a timely claim?(§ 229.54(b)(1))

– Did the claim contain a description of theclaim, a statement and estimate of loss,the reason why the original check or asufficient copy is necessary, and suffi-cient information for the bank to investi-gate? (§ 229.54(b)(2))

– If the consumer attempted to make aclaim but failed to provide all of thenecessary information (as listed above),did the bank inform the consumer thatthe claim was incomplete and iden-tify the information that was missing?(§ 229.54(b)(2)(D)(ii))

– Was the claim submitted in a form accept-able to the financial institution? Did thebank compute the time for action accu-rately? (§ 229.54(b)(3))

• Procedural steps for financial institutionresponse—If the financial institution con-cluded that (1) all necessary prerequisites tothe filing of a consumer claim existed and(2) the consumer followed the appropriatesteps in filing the claim, verify that the bankprovided the following appropriate response:

Claim deemed valid:

In the event of a valid consumer claim, didthe bank

– Recredit the account for the amount of theloss, up to the amount of the substitutecheck (plus interest, if applicable), nolater than the end of the business dayafter the banking day on which the bankmade its determination, (§ 229.54(c)(1)(i))

– Draft a notice of recredit stating (1) theamount of the recredit and (2) the dateon which funds will be available forwithdrawal, and (§§ 229.54(e)(1)(i) and229.54(e)(1)(ii))

– Send the notice no later than the businessday after the banking day on which thebank recredit occurred? (§ 229.54(e)(1))

Claim deemed invalid:

In the event of an invalid consumer claim,determine whether the bank

– Sent a notice stating that the claim wasinvalid and included the original check ora sufficient copy, (§ 229.54(e)(2)(i))

– Demonstrated to the consumer that thesubstitute check was properly charged(or that the consumer’s warranty claimwas not valid), and (§ 29.54(e)(2)(ii))

– Included the information or documents(in addition to the original check), ifany, relied upon by the bank in makingits determination (or a statement thatthe consumer may request such).(§ 229.54(e)(2)(iii))

Claim not resolved within initial ten days,pending further investigation:

If the bank could not resolve the claim beforethe end of the tenth business day after thebanking day on which the bank received theclaim, determine whether the bank

– Recredited the consumer’s account forthe amount of the loss, up to the lesser ofthe amount of the substitute check or$2,500 (plus interest, if applicable),(§ 229.54(c)(3)(i)(A))

– Drafted a notice of recredit stating (1) theamount of the recredit and (2) the dateon which the funds would be available forwithdrawal, (§§ 229.54(e)(1)(i) and229.54(e)(1)(ii))



– Recredited the consumer’s account forthe remaining amount of the loss, if any,up to the amount of the substitute check(plus interest, if applicable), no later thanthe end of the forty-fifth calendar day afterthe banking day on which the bankreceived the claim, and (§ 229.54(c)(3)(ii))

– Sent the notice of recredit no later thanthe business day after the banking dayon which the bank recredit occurred.(§ 229.54(e)(1))

Claim resulting in reversal of recredit:

In some instances it may be necessary for abank to reverse a recredit made previouslyto a consumer’s account (plus any interestpaid, if applicable). If such a circumstancehas occurred, determine whether the bank

– Concluded that the consumer’s claim wasnot valid and (§ 229.54(c)(4)(i))

– Drafted a notice of reversal of recredit(§ 229.54(e)(3)), accompanied by thefollowing:

– The original check or a sufficient copy,(§ 229.54(e)(2)(i))

– Information or explanation to demon-strate to the consumer that the substi-tute check was properly charged (orthat the consumer’s warranty claimwas not valid), (§ 229.54(e)(2)(ii))

– Information or documents (in additionto the original check or a sufficientcopy), if any, on which the bank reliedin making its determination (or a state-ment that the consumer can requestsuch), (§ 229.54(e)(2)(iii))

– A description of the amount of thereversal, including both the amount ofthe recredit and the amount of interest

paid on the recredited amount, if any,being reversed, and (§ 229.54(e)(3)(i))

– The date on which the bank made thereversal. (§ 229.54(e)(3)(ii))

– Sent the notice no later than the businessday after the banking day on which thebank made the reversal (§ 229.54(e)(3))

• Availability of recredited funds—Under cir-cumstances detailed above, when the finan-cial institution determined that it was appro-priate to recredit its consumer customer’saccount, determine whether the bank tookthe following actions:

– Next day availability—Did the bank makeany recredited amount available for with-drawal no later than the start of thebusiness day after the banking day onwhich the recredit was provided?(§ 229.54(d)(1))

– Safeguard exceptions—If necessary forreasons of (1) new-account status,(2) overdrawn-account status, or (3) well-reasoned suspicion of fraud, did the bankinvoke its right to delay immediate avail-ability of recredited funds? If so, was thedelay invoked because the bank had notyet determined the validity of the claim?Were the funds made available no laterthan the business day after the bankingday on which the final determination wasmade or the forty-fifth calendar day afterthe bank received the claim, whicheveroccurred earlier? (§ 229.54(d)(2))

– Overdraft fees—If the bank chose toinvoke its right to delay immediate avail-ability of recredited funds, did it refrainfrom imposing an overdraft fee until theappropriate five-day period had elapsed?(§ 229.54(d)(3))



Regulation CCExamination Checklist

General Operations

Date of Deposit1. Does the bank consider every day except Saturday, Sunday, and federal

holidays a ‘‘business day’’? (§ 229.2(g)) Yes No

2. Does the bank consider ‘‘banking days’’ those business days on which anoffice of the bank is open for substantially all of its business? (§ 229.2(f)) Yes No

3. Does the bank have a cutoff for receipt of deposits of 2:00 p.m. or later forbank offices and 12:00 noon or later for ATMs? (§ 229.19(a)(5)(ii)) Yes No

4. Does the bank comply with the following rules in determining when funds areconsidered to have been deposited?

A. Deposits over the counter or at ATMs are considered deposited when‘‘received.’’ (§ 229.19(a)(1)) Yes No

B. Mail deposits are considered deposited when they are received by themail room of the bank. (§ 229.19(a)(2)) Yes No

C. Deposits in a night depository, lock box, or similar facility are consideredreceived when the deposits are removed from the facility and are availablefor processing. (§ 229.19(a)(3)) Yes No

D. Deposits at an off-premises ATM (not within fifty feet of the bank) that is notserviced more than twice a week are considered received as of the datethe deposits are removed from the ATM by the bank. (§ 229.19(a)(4)) Yes No

5. Does the bank consider deposits made on a nonbanking day to have beenreceived no later than the next banking day? (§ 229.19(a)(5)(i)) Yes No

6. When funds must be available on a given ‘‘business day,’’ does the bankmake the funds available at the later of 9:00 a.m. or the time the bank’steller facilities (including ATMs) are available for account withdraw-als? (§ 229.19(b)) Yes No

7. If the bank limits cash withdrawals, does it make $400 available for cashwithdrawals no later than 5:00 p.m. on the appropriate business day (secondday for local checks, fifth for nonlocal checks) following the day of deposit?(§ 229.12(d)) Yes No

Required Next-Day Availability8. Does the bank make funds from the following types of deposits available for

withdrawal no later than the first business day following the date of deposit?

A. Electronic payments (§ 229.10(b)) Yes No

B. Checks drawn on the U.S. Treasury and deposited to the payee’s account(§ 229.10(c)(1)(i)) Yes No

C. On-us checks and checks that are drawn on and deposited in branchesof the same bank in the same state or check-processing region(§ 229.10(c)(1)(vi)) Yes No

9. Does the bank make funds from the following deposits available no later thanthe first business day after the day of deposit if the deposit is made in personto a bank employee, or no later than the second business day if the depositis not made in person to a bank employee?

A. Cash deposits (§§ 229.10(a)(1) and 229.10(a)(2)) Yes No


B. U.S. Postal Service money orders deposited in an account held by thepayee of the check (§§ 229.10(c)(1)(ii) and 229.10(c)(2)) Yes No

C. Checks drawn on a Federal Reserve Bank or Federal Home Loan Bankdeposited in an account held by the payee of the check(§§ 229.10(c)(1)(iii) and 229.10(c)(2)) Yes No

D. Checks drawn by a state or local governmental unit and deposited

• In an account held by the payee of the check,(§§ 229.10(c)(1)(iv)(A) and 229.10(c)(2)) Yes No

• In a depositary bank located in the same state as the governmental unitissuing the check, and (§§ 229.10(c)(1)(iv)(B) and 229.10(c)(2)) Yes No

• Accompanied by a special deposit slip (if required by the bank to makethe funds available on the next business day).(§§ 229.10(c)(1)(iv)(D) and 229.10(c)(3)) Yes No

E. Cashier’s checks, certified checks, and teller’s checks (as defined insection 229.2) deposited in an account held by the payee of the checkwhen

• The check is accompanied by a special deposit slip (if required by thebank to make the funds available on the next business day)(§§ 229.10(c)(1)(v)(C) and 229.10(c)(3)) Yes No

10. If the bank requires the special deposit slips, for the checks covered inchecklist items 9(D) and 9(E), does it provide the slip to its customers or tellits customers how to prepare or obtain the slips? (§ 229.10(c)(3)(ii)) Yes No

Are the special deposit slips reasonably available? (§ 229.10(c)(3)(ii)) Yes No

11. Is the first $100 of a customer’s daily aggregate deposits of checks notsubject to the next-day availability rules available on the next business day?(§ 229.10(c)(1)(vii)) Yes No

12. Is the $100 in addition to other deposited amounts that must be affordednext-day availability? (§229.10(c)(1)(vii)) Yes No

Local Checks and Certain Other Deposits13. Are funds from local checks generally available no later than the second

business day after the day of deposit? (§ 229.12(b)(1)) Yes No

14. If a bank limits cash withdrawals, (§ 229.12(d))

A. Is the $100 available on the next business day after the day of deposit forwithdrawal in cash or by check? Yes No

B. Is the $400 available for cash withdrawal sometime before 5:00 p.m. onthe second business day after the day of deposit? Yes No

C. Are any remaining funds available for withdrawal the business day afterthe $400 was made available? Yes No

15. For Treasury checks and U.S. Postal Service money orders that do not meetthe criteria for next-day (or second-day) availability, does the bank makefunds available no later than the second business day after the date ofdeposit? (§§ 229.12(b)(2) and 229.12(b) (3)) Yes No

16. Are funds deposited by cash or check at a nonproprietary ATM available nolater than the fifth business day after the banking day of deposit? (§ 229.12(f)) Yes No

Availability of Funds: Examination Checklist


Nonlocal Checks17. Are funds from nonlocal checks generally available no later than the fifth

business day after the day of deposit? (§ 229.12(c)(1)) Yes No

18. If the bank is located in a city listed in appendix B to Regulation CC, does ithave procedures to make funds for certain nonlocal checks available on ashorter schedule as required by the appendix? (§ 229.12(c)(2)) Yes No

19. If the bank limits cash withdrawals, (§ 229.12(d))

A. Is $100 available on the next business day after the day of deposit forwithdrawal in cash or by check? Yes No

B. Is $400 available for cash withdrawal sometime before 5:00 p.m. on thefifth business day after the day of deposit? Yes No

C. Are any remaining funds available for cash withdrawal on the businessday after the $400 is made available? Yes No

Payable-Through Checks20. Does the bank’s policy distinguish between local and nonlocal checks (are

funds from local and nonlocal checks available on the second business dayfollowing the day of deposit)? (§ 229.16(b)(2), footnote 3(a)) Yes No

21. If local and nonlocal checks are treated differently,

A. Does the policy state that payable-through checks will be treated as localor nonlocal based on the location of the bank where the check is payable?(§ 229.16(b)(2)) Yes No

B. Does the policy do one of the following? (§229.16(b)(2), footnote 3(a))

• Describe how the customer can determine whether the checks will betreated as local or nonlocal or Yes No

• State that special rules apply and that the customer may ask about theavailability of these checks Yes No

Extended Holds

Case-by-Case Holds22. Does the bank’s specific availability policy disclosure indicate that case-by-

case holds may be placed? (§ 229.16(c)(1)) Yes No

If it does, does the disclosure do the following?

A. State that the bank may extend the time period when deposited funds areavailable for withdrawal (§ 229.16(c)(1)(i)) Yes No

B. State the latest time a deposit will be available for withdrawal, if theavailability time frame is extended (§ 229.16(c)(1)(i)) Yes No

C. State that the bank will notify the customer if funds from a particulardeposit will not be available for withdrawal until after the time period statedin the bank’s funds availability policy (§ 229.16(c)(1)(ii)) Yes No

D. Encourage customers to ask when particular deposits will be madeavailable for withdrawal (§ 229.16(c)(1)(iii)) Yes No

23. When case-by-case holds are placed, does the bank provide the customerwith a written notice of the hold? (§ 229.16(c)(2)) Yes No

24. Does the notice include the following?

A. The customer’s account number (§ 229.16(c)(2)(i)(A)) Yes No



B. The date and amount of the deposit (§ 229.16(c)(2)(i)(B)) Yes No

C. The amount of the deposit that is being delayed (§ 229.16(c)(2)(i)(C)) Yes No

D. The day the funds will be available for withdrawal (§ 229.16(c)(2)(i)(D)) Yes No

25. Does the bank provide the notice at the time the deposit is made, if thedeposit is made to an employee of the depositary bank? (§ 229.16(c)(2)(ii)) Yes No

26. If the notice is not given at the time of deposit, does the depositary bank mailor deliver the notice to the customer not later than the first business day afterthe day of the deposit? (§ 229.16(c)(2)(ii)) Yes No

27. If the bank does not provide the notice at the time of deposit, does it refrainfrom charging the customer overdraft or return check fees if

A. The overdraft or other fee would not have occurred if the deposited checkhad not been delayed and Yes No

B. The deposited check was paid by the paying bank (§ 229.16(c)(3)) Yes No

28. If the bank does not provide the notice at the time of deposit and chargesoverdraft fees, does it notify the customer of the right to a refund of such feesand how to obtain the refund? (§ 229.16(c)(3)) Yes No

29. Does the bank refund the fees if the conditions listed in checklist item 27above are met and the customer requests a refund? (§ 229.16.(c)(3)) Yes No

Exception-Based Holds30. When invoking an exception hold for accounts other than new accounts,

does the bank provide the customer with a written notice that includes thefollowing?

A. The customer’s account number (§ 229.13(g)(1)(i)(A)) Yes No

B. The date and amount of the deposit (§ 229.13(g)(1)(i)(B)) Yes No

C. The amount of the deposit that is being delayed (§ 229.13(g)(1)(i)(C)) Yes No

D. The reason the exception was invoked (§ 229.13(g)(1)(i)(D)) Yes No

E. The day the funds will be available for withdrawal (unless the emergency-conditions exception is invoked and the bank does not know when thefunds will become available) (§ 229.13(g)(1)(i)(E)) Yes No

31. Does the bank refrain from delaying funds availability beyond a reasonabletime period? (Note: Five days for local checks and six days for nonlocalchecks is considered reasonable.) (§ 229.13(h)(4)) Yes No

Exceptions

New Accounts (§ 229.13(a))32. Does the bank’s definition of a new account comply with the definition under

section 229.13(a)(2)? (Note: If a customer has had another transactionaccount at the bank within the thirty days prior to opening an account, thecustomer does not qualify for the new-account exception.) Yes No

33. If the bank’s definition is different, does it delay availability to new-accountholders beyond the limits set forth in the regulation? Yes No

34. Do bank disclosures accurately reflect the bank’s practice for makingdeposited funds available for new accounts? Yes No

35. Do cash deposits made in person to a bank employee become available forwithdrawal on the first business day following the day of deposit?(§§ 229.13(a)(1)(i) and 229.10(a)(1)) Yes No



36. Are cash deposits not made in person to a bank employee available forwithdrawal on the second business day following the day of deposit?(§§ 229.13(a)(1)(i) and 229.10(a)(2)) Yes No

37. Are electronic transfers into new accounts available for withdrawal on thebusiness day following the day the transfer is received? (§§ 229.13(a)(1)(i)and 229.10(b)) Yes No

38. Is the first $5,000 from any of the following types of check deposits availablefor withdrawal from a new account not later than the first business day afterthe day of the deposit, if the deposits meet the requirements of section229.10(c)? (§ 229.13(a)(1)(ii)) (For more information, see checklist section‘‘Required Next-Day Availability.’’)

A. Treasury checks (§ 229.10(c)(1)(i)) Yes No

B. U.S. Postal Service money orders (§ 29.10(c)(1)(ii)) Yes No

C. Federal Reserve and Federal Home Loan Bank checks (§ 229.10(c)(1)(iii)) Yes No

D. State or local government checks (§ 229.10(c)(1)(iv)) Yes No

E. Cashier’s, certified, and teller’s checks (§ 229.10(c)(1)(v)) Yes No

F. Traveler’s checks (§ 229.10(c)(1)(v)) Yes No

39. Is the amount of any deposit of the types listed in checklist item 38 exceeding$5,000 available for withdrawal no later than the ninth business day followingthe day of deposit? (§ 229.13(a)(1)(ii)) Yes No

Large Deposits (§ 229.13(b))40. If the bank invokes the large-deposit rule, does it do so for only that portion

of the aggregate local and nonlocal check deposits that exceeds $5,000 onany one banking day? (§ 229.13(b)) Yes No

41. Does the bank refrain from applying this exception to deposits made in cash,to deposits made by electronic payment, or to checks that must receivenext-day availability under section 229.10(c)? (See commentary to section229.13(b).) Yes No

42. Does the bank provide customers with a written notice of the longer delay?(§ 229.13(g)(1)) Yes No

Is the notice (§ 229.13(g)(2))

A. Provided at the time of the deposit, when the deposit is received in personby an employee of the bank or Yes No

B. Mailed on or before the first business day after the day the bank learns ofthe facts giving rise to the exception Yes No

Redeposited Checks (§ 229.13(c))43. Does the bank refrain from applying the redeposited exception to the

following?

A. Checks that are returned because an indorsement is missing and aresubsequently indorsed and redeposited (§ 229.13(c)(1)) Yes No

B. Checks that were returned because they were postdated but are notpostdated when redeposited (§ 229.13(c)(2)) Yes No

44. Does the bank consider the day the check was redeposited to be the dayof deposit when determining when funds must be made available forwithdrawal? (commentary to section 229.13(c)) Yes No



Repeated Overdrafts (§ 229.13(d))45. Does the bank impose longer holds for depositors who have a history of

overdrafts? Yes No

46. Does the bank invoke the repeated-overdraft exception only when theaccount balance has been negative (or would have been negative hadchecks or other charges been paid)

A. Six or more times during the preceding six months or (§ 229.13(d)(1)) Yes No

B. Two or more times during the preceding six months, if the amount of anynegative balance would have been $5,000 or more (§ 229.13(d)(2)) Yes No

47. Is this practice articulated in the bank’s written policy and initial disclosurestatement? (§ 229.16(a)) Yes No

48. When the bank imposes the longer delay, is the depositor notified of thereason, in writing, at the time of deposit? If not, is a notice mailed on or beforethe first business day after the day of the deposit or the day the bank learnsof the facts giving rise to the exception? (§ 229.13(g)) Yes No

49. Does the bank return the account to the normal availability schedule whenthe account is no longer repeatedly overdrawn? (Note: Banks may use thisexception for six months after the last overdraft that made the depositoreligible for the repeated-overdraft exception. See checklist item 46.)(§ 229.13(d)) Yes No

Reasonable Cause to Doubt Collectibility (§ 229.13(e))50. Does the bank refrain from applying the reasonable-cause exception to the

following? (§ 229.13(e)(1))

A. U.S. Treasury checks Yes No

B. U.S. Postal Service money orders Yes No

C. State and local government checks Yes No

D. On-us checks Yes No

51. When the bank invokes a reasonable-cause exception, does it provide thecustomer with a written notice of exception at the time the deposit is made,if the deposit is made in person to an employee of the bank? (§ 229.13(g)(1)(ii)) Yes No

52. If the deposit is not made in person to an employee of the bank, or if the holdis placed because of information learned subsequent to the receipt of thedeposit, does the institution mail the exception notice to the customer?(§ 229.13(g)(1)(ii)) Yes No

53. Does the bank retain a copy of each reasonable-cause exception notice,along with a brief statement of the facts that led to the hold, for a period of twoyears? (§ 229.13(g)(4)) Yes No

54. Does the depositary bank refrain from invoking the reasonable-causeexception on the basis of the race or national origin of the depositor or theclass of the check? (§ 229.13(e)(1)) Yes No

55. Does the bank refrain from assessing a fee for any subsequent overdraft,returned check, or other unpaid charge (or advise customers of their right toa refund of such fees, and refund the fees upon request) if all of the followingconditions are met?

A. The depositary bank extended the availability period on the basis of itsbelief that the check was uncollectible (§ 229.13(e)(1)) Yes No

B. The depositor was not provided with the written notice required by section229.13(g)(1) at the time of deposit (§ 229.13(e)(2)) Yes No



C. The overdraft or return would not have occurred if the availability periodhad not been extended (§ 229.13(e)(2)(i)) Yes No

D. The deposited check was finally paid by the paying bank (§ 229.13(e)(2)(ii)) Yes No

56. Does the exception notice tell the customer where to direct a request for arefund of the overdraft fees? (§ 229.13(e)(2)) Yes No

Emergency Conditions (§ 229.13(f))57. Does the bank refrain from imposing emergency-condition holds on checks

subject to next-day availability under section 229.10(c)? (commentary to§ 229.13(f)) Yes No

58. Does the bank invoke the emergency-conditions exception only in thefollowing circumstances and when the bank has exercised necessarydiligence as circumstances require?A. An interruption of communications or computer or other equipment

(§ 229.13(f)(1)) Yes No

B. Suspension of payments by another bank (§ 229.13(f)(2)) Yes No

C. War (§ 229.13(f)(3)) Yes No

D. An emergency condition beyond the control of the bank (§ 229.13(f)(4)) Yes No

59. Does the bank make funds available for withdrawal no later than a reasonableperiod after the emergency has ended or within the time period establishedby the temporary and permanent schedules, whichever is later?(§ 229.13(h)(3)) (As stated in the commentary to section 229.13(h)(4), areasonable period is five business days for local checks and six for nonlocalchecks.) Yes No

60. Does the bank provide customers with a written notice of the longer delay?(§ 229.13(g)(1)) Yes No

61. Is the notice provided at the time of the deposit, if the deposit is received inperson by an employee of the bank, or is the notice mailed on or before thefirst business day after the day the bank learns of the facts giving rise to theexception? (§ 229.13(g)(1)(ii)) Yes No

Miscellaneous

Calculated Availability—Nonconsumer Transaction Accounts(§ 229.19(d))62. Does the bank calculate funds availability for nonconsumer accounts on the

basis of a sample of the customer’s deposits? If it does, obtain a copy of thebank’s formula for determining its availability schedule. Review a sample ofchecks similar to that used by the bank to calculate funds availability andanswer the following questions:

A. Is the sample of checks large enough to accurately use the formula? Yes No

B. Does the formula accurately represent the average composition of thecustomer’s deposits? Yes No

C. Does the specified percentage of available funds appear reasonable?(Is a set percentage available the next business day, with remaining fundsavailable according to the customer’s deposit mix?) Yes No

63. Based on the sample, are the terms of availability for the account equivalentto or more prompt than the terms outlined in the regulation? Yes No



Payment of Interest

Review a copy of the bank’s availability schedule for check deposits creditedthrough the Reserve Bank or its correspondent bank. Determine the time that thebank receives provisional credit for check deposits.

64. For each interest-bearing transaction account offered by the bank (forexample, NOW accounts and ATS accounts), does the bank begin to accrueinterest on the funds deposited no later than the business day on which thebank receives provisional credit for the funds? (§ 229.14) Yes No



Regulation CCWorkpaper Appendix for Districts withBanks Located outside the Continental U.S.

For deposits at offices located outside the continental United States, availabilitymay be extended one day under certain strictly defined circumstances and forlimited types of deposits. If a check is deposited at a bank office in Alaska, Hawaii,Puerto Rico, or the U.S. Virgin Islands and the paying bank is not located in thesame jurisdiction, a one-day extension is permitted for deposits other than thosethat must be available on the next business day. (Note: This extension appliesonly to check deposits at bank offices located outside the continental UnitedStates. Check deposits received at a bank inside the continental United Statesbut drawn on a bank located outside the continental United States, such as onein Alaska or Hawaii, are not granted an extension.)

1. For offices located in Alaska, Hawaii, Puerto Rico, and the U.S. Virgin Islands,does the bank extend availability for check deposits drawn on banks in otherstates? (§ 229.11(e)(1)) Yes No

2. If yes,

A. Is the extension limited to checks drawn on banks in a different state? (AHawaiian bank, for example, could receive a ‘‘local’’ check drawn on a bankin Honolulu or a bank in San Francisco. Only the San Francisco check maybe delayed.) (§ 229.12(e)(2)) Yes No

B. Is the extension limited to one day? (§ 229.12(e)) Yes No


Regulation DDTruth in Savings

Background

Regulation DD, which implements the Truth inSavings Act (TISA) (12 USC 4301 et seq.), becameeffective in June 1993. The TISA was enacted inDecember 1991 as subtitle F of the Federal DepositInsurance Corporation Improvement Act of 1991.Amendments to the TISA were enacted in October1992 in titles IX and XVI of the Housing andCommunity Development Act of 1992 (Pub. L. 102-550, 106 Stat. 3672).

In general, Regulation DD covers accounts heldby consumers at depository institutions. A con-sumer account is an account such as a checking,savings, or time account held by an individualprimarily for personal, family, or household pur-poses. A depository institution is an institution(other than a credit union) that either is federallyinsured or is eligible to apply for federal insurance.

The purpose behind Regulation DD is to enableconsumers to make better-informed decisionsabout their accounts at depository institutionsthrough the use of uniform disclosures. The disclo-sures aid comparison shopping by informing con-sumers about the fees, annual percentage yield,interest rate, and other terms for deposit accounts.A consumer is entitled to receive disclosures abouthis or her account upon request; when an accountis opened; when the terms of the account arechanged; before maturity, for most time accounts;and when a periodic statement is sent. Also, insti-tutions must pay interest on the full balance inconsumer accounts each day and must choosebetween two methods of calculating the balance onwhich interest is paid.

Payment of Interest

General Requirements

The interest rate is the annual rate of interest paidon an account and does not reflect compound-ing. In general, an institution pays interest throughthe application of a periodic rate to an accountbalance. Interest does not include the absorption ofexpenses, forbearance in charging fees, or thepayment of bonuses.

An institution is not required to pay consumersinterest for the use of funds in an account. However,if an institution does pay interest on an account, thefollowing rules apply:

• Interest must be paid on the full principalbalance in the account each day. A daily rate of

at least 1/365 (or 1/366 in a leap year) of theinterest rate must be applied to the balance. Aninstitution may apply a daily periodic rate that isgreater than 1/365 of the interest rate (forexample, a daily periodic rate of 1/360) as longas it is applied 365 days a year.

• Either the daily balance method or the averagedaily balance method must be used to calculatethe balance on which interest is paid. The dailybalance method applies a daily periodic rate tothe entire principal balance every day. Theaverage daily balance method applies a dailyperiodic rate to the average principal balance.The average principal balance is the sum of theentire principal balance for each day of aspecified period, divided by the number of daysin the period.

• Consumers may be required to maintain aminimum balance to earn interest. An institutionusing the daily balance method may choose notto pay interest for those days on which balancesdrop below the required daily minimum balance.An institution using the average daily balancemethod may choose not to pay interest if theaverage balance for the period falls below theminimum. If an institution imposes a minimumbalance, it must use the same method to cal-culate whether the minimum balance is met asit uses to calculate interest. If it would benefitconsumers unequivocally, an additional method(described in the commentary to the regulation)may be used to determine if the minimum bal-ance requirement is met.

• An institution may choose how often it will creditinterest to interest-bearing accounts. It may alsochoose whether to compound interest and, if it sochooses, how often the compounding will occur.If a consumer closes an account betweencrediting dates, an institution may choose not topay accrued but uncredited interest.

• Interest must begin to accrue no later than thetime at which the institution must begin accru-ing interest for interest-bearing accounts undersection 606 of the Expedited Funds Availabil-ity Act (12 USC 4005 et seq.) and Regula-ion CC (12 CFR 229.14). In addition, onceinterest starts to accrue, it must continue toaccrue until funds are withdrawn. However, aninstitution need not pay interest (1) during agrace period for automatically renewable timeaccounts if the consumer decides during thegrace period not to renew the account or (2) aftermaturity, for non-automatically renewable timeaccounts.

Consumer Compliance Handbook Reg. DD • 1 (1/06)

Terminology

Two terms are used to describe the rate paid toconsumers. The term annual percentage yield,which must be used in account disclosures andadvertising, represents an annualized rate measur-ing the total amount of interest paid on an accountbased on the interest rate and the frequency ofcompounding. The term annual percentage yieldearned represents an annualized rate that is tieddirectly to the amount of interest earned and theaccount balance for the period covered by theperiodic statement; it reflects the relationshipbetween the amount of interest actually earnedand the average balance in the account for thestatement period or, in limited cases, for theinterest-accrual period.

Account Disclosures

General Disclosure Requirements

Account disclosures must be in writing; must reflectthe legal obligation, or the contract between theparties; and must be in a form that consumers canretain. The information must be presented clearlyand conspicuously, so that consumers can readilyunderstand the terms of the account. An institutionmay have a separate disclosure for each type ofaccount or may combine Regulation DD disclo-sures for several accounts in a single document(for example, in a brochure that describes severalvariations of NOW accounts). If the disclosures arecombined, it must clear which disclosures apply tothe consumer’s accounts.

Regulation DD requires specific terminology forthree figures. First, the annual percentage yieldmust be labeled as such in account disclosuresand advertisements. Second, the interest rate mustbe labeled as such if it is used in accountdisclosures and advertisements. Finally, the annualpercentage yield earned must be labeled as suchon periodic statements.

The annual percentage yield and the annualpercentage yield earned must be shown to twodecimal places and rounded to the nearest one-hundredth of 1 percent (.01 percent). (For example,an annual percentage yield of 5.644 percent wouldbe shown as 5.64 percent, and a yield of 5.645 per-cent would be shown as 5.65 percent.) The samerule applies to interest rates except that thecontract interest rate may be shown at more thantwo decimal places in account disclosures.

The annual percentage yield and annual percent-age yield earned are considered accurate if theyare no more than 1/20 of 1 percent (.05 percent)above or below the actual annual percentage yieldas determined in accordance with appendix A to

Regulation DD (Annual Percentage Yield Calcula-tion). An institution may not purposely incorporatethe tolerance as part of its calculations. There is nocorresponding tolerance for the accuracy of theinterest rate.

Provision of Disclosures

An institution must provide an account disclosureto a consumer before an account is opened or aservice is provided, whichever is earlier. If theconsumer is not present when an account isopened, the disclosure must be mailed or deliveredwithin ten business days of the time the account isopened. An institution must also provide a disclo-sure to a consumer for each account for which theconsumer requests information.

Disclosures must be accurate when provided toconsumers. For disclosures given upon request,the annual percentage yield and maturity of timeaccounts are accurate if the institution provides anannual percentage yield and interest rate that arecurrent within the most recent seven calendardays, a statement that the rates are accurate as ofa given date, and a telephone number to call forrates currently available.

Content of Disclosures

The following information must be disclosed, asapplicable:

Rate information—The annual percentage yield(computed in accordance with part I of appendix Ato Regulation DD), using that term; and the interestrate, using that term (The corresponding periodicrate is the only other rate that may be disclosed.)

• For fixed-rate accounts, the period of time theinterest rate will be in effect after the account isopened

– For stepped-rate and tiered-rate accounts, allannual percentage yields and interest rates

– A stepped-rate account has two or moreinterest rates that take effect in succeedingperiods and are known when the account isopened. A single, composite annual percent-age yield must be disclosed along with theinterest rates and the time periods duringwhich each rate will apply.

– A tiered-rate account has two or moreinterest rates that are applicable to speci-fied balance levels. The interest rate and thecorresponding annual percentage yield foreach balance level must be disclosed.

• For variable-rate accounts—A variable-rateaccount is an account for which the interest ratemay change after the account is opened, unlessthe institution contracts to give at least thirty

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2 (1/06) • Reg. DD Consumer Compliance Handbook

calendar days’ advance written notice of a ratedecrease. Variable-rate accounts include thosefor which the rate change is determined byreference to an index, by use of a formula, ormerely at the discretion of the institution. If aninstitution offers variable-rate accounts, it mustdisclose the following:

– That the interest rate and annual percentageyield may change

– How the interest rate is determined—If aninstitution reserves the right to change ratesand does not tie changes to an index, it mustdisclose the fact that rate changes are solelywithin the institution’s discretion.

– The frequency with which the interest rate maychange—An institution that reserves the rightto change rates at any time must state thatfact.

– Any limit on the amount the interest rate willchange at any one time or during a specifiedperiod

Compounding and crediting interest—If an institu-tion compounds or credits interest, it must disclosethe frequency, such as daily, monthly, or quarterly.In addition, an institution must disclose if consum-ers will forfeit interest if they close an accountbefore accrued interest has been credited.

Balance information

• Minimum balance requirements—An institutionmust disclose any minimum balance required toopen the account, to avoid the imposition of fees,or to obtain the annual percentage yield. Aninstitution must also describe how it determinesany minimum balance, except the balance toopen the account.

• Balance-computation method—An institutionmust describe the method it uses to compute thebalance on which interest on the account iscalculated.

When interest begins to accrue—An institution muststate when interest begins to accrue.

Fees—An institution must disclose the amount of allfees that may be assessed in connection with theaccount, including maintenance fees; fees relatedto deposits or withdrawals, whether by check orelectronic transfer; fees for special account ser-vices; and fees to open or close accounts. Theinstitution must also disclose the conditions underwhich the fees may be charged.

Transaction limitations—An institution must stateany limitations on the number or dollar amount ofdeposits to, withdrawals from, or checks written

on an account during a specified time period. Ifwithdrawals from or deposits to time accounts arenot allowed, that fact must be disclosed.

Features of time accounts—For time accounts, aninstitution must make the following disclosures:

• Time requirements—Except when responding torequests for disclosures, an institution must statethe account’s maturity date.

• Early withdrawal penalties—An institution mustdisclose that an early withdrawal penalty will, ormay, be imposed; how the penalty is calculated;and the conditions under which the penalty willbe assessed.

• Withdrawal of interest prior to maturity—If intereston the time account is compounded during theaccount’s term, an institution must disclose thatthe annual percentage yield assumes that inter-est will remain on deposit until account maturityand that a withdrawal will reduce the earnings onthe account.

• Renewal policies—An institution must statewhether or not a time account will automaticallyrenew at maturity. If the account will renewautomatically, the institution must disclosewhether a grace period will be provided and, if itwill be, the length of the grace period. Fornon-automatically renewable time accounts, theinstitution must disclose whether interest will bepaid after maturity if the account is not renewed.

Bonuses—If bonuses are offered on accounts, aninstitution must state the amount and type of bonus,when the bonus will be paid, and any minimumbalance or time requirements that must be met inorder to obtain the bonus.

Subsequent Disclosures

Notices of a Change in Terms

If an institution changes a term that is required to bedisclosed for an account and the change mightreduce the annual percentage yield or otherwiseadversely affect consumers, the institution mustsend a written notice thirty calendar days beforethe effective date of the change. Institutions are notrequired to send rate-change notices for variable-rate accounts or for time accounts with maturities ofone month or less. In addition, institutions are notrequired to send change-in-terms notices in con-nection with an increase in check-printing fees.

Notices for Maturing Time Accounts(Also see table)

Regulation DD requires an institution to providedisclosures for certain maturing time accounts.

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If the annual percentage yield and interest rate fora renewing time account are not known whenthe maturity notice must be sent, the institution mayexplain that this information is not available andprovide the date when the yield and ratewill become known plus a telephone numberconsumers may call to learn about the new yieldand rate.

• If an automatically renewable time account has amaturity of more than one year, an institutionmust provide the maturity date for the existingaccount and all disclosures required for a newaccount. These disclosures must be sent either(1) thirty calendar days before the scheduledmaturity date or (2) twenty calendar days beforethe end of a grace period following maturity, aslong as the grace period is at least five days.

• If an automatically renewable time account has a

maturity of more than one month but not morethan one year, an institution must either (1) pro-vide the disclosures required for automaticallyrenewable time accounts with maturities of morethan one year or (2) disclose the maturity datesfor the new and maturing accounts and anydifference between the terms of the new accountand those required to be disclosed for theexisting account. The time frames within whichthese disclosures must be sent are the same asthose for automatically renewable time accountswith a maturity of more than one year.

• If a non-automatically renewable time accounthas a term longer than one year, an institutionmust send a notice ten calendar days beforematurity that states the maturity date of theexisting account and whether interest will bepaid after maturity.

Disclosure Requirements for Maturing Time AccountsAccount maturity period Automatically renewable (‘‘rollover’’)

time accountsNon-automatically renewable (‘‘non-rollover’’)time accounts

More than 1 month butless than or equal to 1year

Timing:

30 calendar days before maturity or

20 calendar days before end of grace period,if a grace period of at least 5 calendar days isprovided

No notice required

Content:

For existing accounts• The maturity date of the account

For accounts that may be renewed• The interest rate and APY (or a statement

that rates have not been determined,when they will be determined, and atelephone number for consumers to callfor rates)

• Full disclosures (as stated in section230.4(b) of the regulation)

• Any changes in terms from the existingaccount

• The maturity of the account

More than 1 year Timing:

Same as for accounts having a maturity ofmore than 1 month but not more than 1 year

Timing:

10 calendar days before maturity

Content:

For existing accounts• The maturity of the account

For accounts that may be renewed• Full disclosures (as stated in section

230.4(b) of the regulation)

Content:

Maturity date, and whether or not interest willbe paid after maturity

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Periodic-Statement Disclosures

Regulation DD does not require an institution tosend periodic statements to consumers, but if itdoes, the statement must include certain informa-tion. An institution is considered to be providingperiodic statements to consumers if its statementsset forth account information and are provided toconsumers on a regular basis four or more times ayear. Statements providing information to consum-ers about time accounts and passbook savingsaccounts are not covered.

An institution that provides periodic statementsmust disclose the following information for thestatement period, as applicable:

• Annual percentage yield earned—An institutionmust disclose the annual percentage yieldearned (computed in accordance with appendixA, part II, of the regulation), using that term.

• Amount of interest—An institution must show theamount of interest earned during the statementperiod.

• Fees—An institution must disclose fees (re-quired to be disclosed under section 230.4(b)(4))that have actually been debited to the accountduring the period, itemized by type and dollaramount.

• Length of period—An institution must disclosethe total number of days in the statement period.Alternatively, the institution may state the begin-ning and ending dates of the statement period,as long as it is clear whether or not both of thesedays are included in the period.

• For institutions that use the average daily bal-ance method and that calculate interest for aperiod other than the statement period, theannual percentage yield earned and the interestearned must be based on that other period.

Advertising

An advertisement is any commercial messageappearing in any medium (for example, news-paper, television, lobby boards, and telephoneresponse machines) if it directly or indirectly pro-motes the availability of an account. Regulation DDpermits abbreviated disclosure requirements foradvertisements made through broadcast or elec-tronic media, such as radio and television; outdoormedia, such as billboards; and telephone responsemachines. Limited disclosure rules apply to signsinside the institution’s premises. If such an indoorsign states a rate of return, it must state the rateas an annual percentage yield, using that termor the abbreviation APY. Indoor signs must alsocontain a statement advising consumers to contactan employee for further information about applica-ble fees and terms.

An institution may not make any misleading orinaccurate statements in its advertisements. Usingthe term profit, for example, which implies a returnon an investment, is a misleading advertisement.Using the term free or no-cost (or a similar term) todescribe an account is misleading if any mainte-nance or activity fee might be imposed on theaccount.

If any rate or yield is advertised, it must be statedas an annual percentage yield (computed inaccordance with appendix A, part I). The interestrate that corresponds to the advertised annualpercentage yield may be displayed (using the term‘‘interest rate’’) in conjunction with the annualpercentage yield, but not more conspicuously. Theannual percentage yield may be abbreviated asAPY if the term is printed or stated in full elsewherein the advertisement.

An institution triggers additional disclosure re-quirements if advertisements display either anannual percentage yield or a bonus. For example,advertisements that contain annual percentageyield information must disclose the following, asapplicable:

• Variable rates—For a variable-rate account,advertisements must display the fact that the ratemay vary after the account is opened.

• Time period the annual percentage yield isoffered—An institution must state how long theadvertised annual percentage yield is offered, forexample, ‘‘from March 7 through March 13,’’ orthat the APY is accurate as of a specified date,for example, ‘‘annual percentage yield effectiveas of March 7.’’

• Minimum balances—If the account must have aminimum balance to obtain the advertised annualpercentage yield, the minimum balance must bestated.

• Minimum opening deposit—An institution muststate any minimum opening deposit requirement.

• Effect of fees—An institution must state that feescould reduce earnings on the account.

• Features of time accounts—The term of a timeaccount (‘‘three months,’’ for example) must bestated. An institution must also state if a penaltywill (or may) be imposed for early withdrawals.For accounts with a maturity of more than oneyear that do not compound interest on an annualor more-frequent basis, disclosures must alsostate any required interest payouts.

• Bonus—If a bonus is advertised, an institutionmust disclose (1) any time requirement to obtainthe bonus, (2) when the bonus will be provided,(3) any required minimum balance to open theaccount or obtain the bonus, and (4) the annual

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percentage yield (which disclosure in turn trig-gers additional disclosures).

For advertisements that are subject to abbrevi-ated or limited requirements (such as advertise-ments in certain media or on indoor signs), seesection 230.8(e) of the regulation.

Effect on State Laws

Regulation DD preempts state law requirementsthat are inconsistent with the requirements of theTruth in Savings Act or Regulation DD. A state law isinconsistent if it contradicts the definitions, disclo-sure requirements, or interest-calculation methodsoutlined in the act or the regulation. The regulationalso provides that interested parties may requestthe Board to determine if a state law is inconsistentwith the TISA.

Record Retention

An institution must retain records regarding compli-ance with Regulation DD for a minimum of two

years after disclosures are required to be made oractions are required to be taken. It must keepevidence that disclosures were provided but is notrequired to keep a copy of each disclosureprovided to every consumer. Instead, an institutioncan establish compliance by demonstrating that ithas established procedures for providing disclo-sures, has followed the procedures, and hasretained sample disclosures, copies of advertise-ments and change-in-terms notices, and informa-tion about interest rates and APYs offered. Aninstitution must keep sufficient rate and balanceinformation to enable examiners to verify theamount of interest paid on an account.

Records may be stored by use of microfiche,microfilm, magnetic tape, or other methods capableof accurately retaining and reproducing information(for example, computer files). An institution neednot retain disclosures in hard copy, as long asenough information is retained to reconstruct therequired disclosures or other records.

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Regulation DDExamination Objectives and Procedures


1. To verify that the institution has procedures inplace to ensure compliance with all provisionsof the regulation

2. To verify that all required deposit accountdisclosures are accurate, reflect the terms ofthe legal obligation between the consumer andthe institution, and are provided to consumerson a timely basis

3. To verify that the institution complies with thesubsequent disclosure requirements of theregulation, including change-in-terms and ma-turity notices

4. To verify that periodic statements provided fordeposit accounts accurately disclose allrequired information

5. To verify that the method used by the institutionto calculate interest payments is permissible,and to verify the accuracy of other calculations(for example, the methods used to calculatedaily balances, average daily balances, andminimum balances)

6. To determine that the institution’s advertise-ments are not misleading or inaccurate andthat they include all required information


Management and Policy-RelatedProcedures

1. Determine the extent and adequacy of theinstitution’s policies, procedures, and prac-tices for ensuring compliance with the regula-tion, including whether the institution has anadequate mechanism in place to monitor theeffectiveness of its compliance with theregulation.

2. Determine the extent and adequacy of thetraining received by individuals whose respon-sibilities relate to compliance with the regula-tion. Review any training materials pertainingto the regulation.

3. Determine the institution’s procedures or poli-cies for ensuring that account disclosureinformation is provided to new and potentialdeposit account customers within the appro-priate time frames.

4. Determine if the institution’s procedures en-sure subsequent disclosure of any changes interms that must be disclosed under section

230.4(b). Determine that exceptions to noticerequirements are limited to those set forth insection 230.5(a)(2).

5. Determine if the institution’s method of payinginterest is permissible. Review the dates onwhich interest begins to accrue on deposits toaccounts, and determine if hold times complywith the Expedited Funds Availability Act.

6. Determine if the institution’s advertising poli-cies are consistent with the requirements of theregulation.

Transaction-Related Procedures

Examination procedures call for testing the insti-tution’s procedures, policies, and practices withrespect to the regulation.

The examiner should review a sample of thedeposit account disclosures and notices requiredby the regulation and a sample of the institution’sadvertisements. The examiner should use judg-ment in deciding how large each sample shouldbe. The sample size for each type of requiredaction, deposit account disclosure, and advertise-ment should be increased until the examiner isconfident that all aspects of the institution’s activi-ties and policies that are subject to the regulationare reviewed.

Account Disclosures

7. Determine the types of deposit accountsoffered by the institution to consumers (includ-ing accounts usually offered to commercialcustomers that may occasionally be offered toconsumers) as well as the characteristics ofeach type of deposit account (for example,bonuses offered, minimum balances, balance-computation method, frequency of interestcrediting, fixed or variable rates, fees imposed,and frequency of periodic statements).

8. Review each deposit account disclosure todetermine whether the contents are accurate,include all information required by the regula-tion, and reflect the legal obligation betweenthe consumer and the institution.

9. Determine whether the institution provides therequired deposit account disclosures on atimely basis in connection with the opening ofan account or upon request.


Notice of Change in Terms andNotice before Maturity

10. Determine whether the institution sends outchange-in-terms notices to consumers at leastthirty calendar days in advance of the effectivedate of any change that may reduce the APY orthat otherwise adversely affects consumers.Review a sample of these notices to ensurethat they include all required information andare sent on a timely basis.

11. For time accounts, determine whether theinstitution sends out notices before maturity.Review a sample of these notices to ensurethat they contain all required information andare sent on a timely basis.

Periodic-Statement Disclosures

An institution is not required to send a periodicstatement; however, if it does, it must comply withthe provisions of the regulation concerning periodicstatements.

12. Determine the accounts for which the institu-tion sends periodic statements and the fre-quency with which the statements are sent.

13. Obtain and review a sample of periodicstatements for each type of deposit accountthat illustrate the various activities permitted foreach type of account. Determine if the periodicstatements include all required disclosuresand that the disclosures are accurate.

Payment of Interest

14. Review a sample of each type of depositaccount to determine whether the institution’s

method of calculating interest complies withthe regulation.

15. Determine if interest begins to accrue no laterthan the business day specified for interest-bearing accounts in section 606 of the Expe-dited Funds Availability Act (Regulation CC)and that interest accrues until the day fundsare withdrawn.

16. Determine that accrued interest is not forfeitedwhen a consumer closes his or her accountbefore interest is credited unless this practiceis stated in the initial account disclosures.

Advertising Requirements

17. Determine the types of advertisements placedby the institution, including, but not limited to,radio, television, and newspaper ads; bro-chures; and statement stuffers.

18. Review a sample of each type of advertise-ment to determine if the advertisements aremisleading or inaccurate or misrepresentthe deposit contract. In addition, verify thatthe advertisements include all requireddisclosures.

Record-Retention Requirements

19. Review a sample of the institution’s records,including rate information and advertising, todetermine whether the institution has main-tained evidence of compliance for a minimumof two years after disclosures are required tobe made or action is required to be taken.

Truth in Savings: Examination Objectives and Procedures


Regulation DDExamination Checklist

General Disclosure Requirements—Section 230.31. a. Does the institution make the required disclosures clearly and conspicu-

ously in writing and in a form the consumer may keep? (§ 230.3(a)) Yes No N/A

b. If the disclosures required by the regulation are combined withdisclosures for the institution’s other accounts, is it clear which disclosuresare applicable to the consumer’s account? (§ 230.3(a)) Yes No N/A

2. Do the disclosures reflect the terms of the legal obligation between theconsumer and the institution? (§ 230.3(b)) Yes No N/A

3. When orally responding to a consumer’s inquiry about interest rates, does theinstitution state the annual percentage yield? (§ 230.3(e)) Yes No N/A

4. Are all annual percentage yields accurate to within .05% above or below theannual percentage yield determined in accordance with appendix A of theregulation? (§ 230.3(f)(2)) Yes No N/A

Account Disclosures—Section 230.45. a. Does the institution provide initial disclosures before an account is opened

or a service is provided, whichever is earlier? (§ 230.4(a)(1)) Yes No N/A

b. If the consumer is not present, does the institution mail or deliver thedisclosures no later than 10 business days after the account is opened orthe service is provided? (§ 230.4(a)(1)) Yes No N/A

6. a. Does the institution provide account disclosures to consumers uponrequest? (§ 230.4(a)(2)(i)) Yes No N/A

b. If a consumer request is not made in person, does the institution mail ordeliver the account disclosures within a reasonable time after it receivesthe request? (§ 230.4(a)(2)(i)) Yes No N/A

c. In providing disclosures upon request, does the institution do thefollowing?

• Specify an interest rate and APY that were offered within the most recent7 calendar days Yes No N/A

• State that the rate and yield are accurate as of an identified date Yes No N/A

• Provide a telephone number consumers may call to obtain current rateinformation (§ 230.4(a)(2)(ii)(a)) Yes No N/A

7. Do account disclosures include the following rate information (as applica-ble)? (§ 230.4(b)(1)(i))

a. The annual percentage yield and interest rate, using those terms Yes No N/A

b. For fixed-rate accounts, the period of time the interest rate will be in effect Yes No N/A

8. Do disclosures for variable-rate accounts include the following?(§ 230.4(b)(1)(ii))

a. The fact that the interest rate and APY may change Yes No N/A

b. How the interest rate is determined Yes No N/A

c. The frequency with which the interest rate may change Yes No N/A

d. Any limitation on the amount the interest rate may change Yes No N/A


9. Do the account disclosures describe the frequency with which interest iscompounded and credited? (§ 230.4(b)(2)(i)) Yes No N/A

10. Do the account disclosures include a statement that interest will not be paidif the consumer closes the account before accrued interest is credited?(§ 230.4(b)(2)(ii)) Yes No N/A

11. a. Do the account disclosures describe the minimum balance requirementsnecessary to open an account, avoid the imposition of a fee, or obtain theAPY disclosed? Yes No N/A

b. Do the account disclosures state how the minimum balance requirement(except the balance to open the account) is determined for thesepurposes? (§ 230.4(b)(3)(i)) Yes No N/A

12. Do the account disclosures include an explanation of the balance-computation method used to calculate interest on the account?(§ 230.4(b)(3)(ii)) Yes No N/A

13. Do the account disclosures state when interest begins to accrue on noncashdeposits? (§ 230.4(b)(3)(iii)) Yes No N/A

14. Do the account disclosures state the amount of any fee that may be imposedin connection with the account (or how the fee will be determined) and theconditions under which the fee may be imposed? (§ 230.4(b)(4)) Yes No N/A

15. Do the account disclosures include any limitations on the number or dollaramount of withdrawals or deposits? (§ 230.4(b)(5)) Yes No N/A

16. For time accounts, do the account disclosures include the following?(§ 230.4(b)(6))

a. The maturity date (§ 230.4(b)(6)(i)) Yes No N/A

b. Early withdrawal penalties (§ 230.4(b)(6)(ii)) Yes No N/A

c. If compounding occurs and interest may be withdrawn during the term, astatement that the APY assumes that interest remains on deposit and thata withdrawal will reduce earnings (§ 230.4(b)(6)(iii)) Yes No N/A

d. Information regarding renewal policies: (§ 230.4(b)(6)(iv))

• Whether the account will renew automatically Yes No N/A

• If the account renews automatically, whether there is a grace periodand, if so, the length of the grace period Yes No N/A

• If the account does not renew automatically, whether interest will bepaid after maturity Yes No N/A

17. Do account disclosures state the amount or type of any bonus and theconditions under which the bonus will be paid? (§ 230.4(b)(7)) Yes No N/A

Subsequent Disclosures—Section 230.518. a. Does the institution provide advance notification to depositors of any

change to a term required to be disclosed under section 230.4(b) if thechange may reduce the APY or adversely affect the consumer? Yes No N/A

b. Does the notice include the effective date of the change? Yes No N/A

c. Is the notice mailed or delivered at least 30 days before the effective dateof the change? (§ 230.5(a)(1)) Yes No N/A

19. Are exceptions to the notice requirements limited to the following?

a. Variable-rate changes (§ 230.5(a)(2)(i)) Yes No N/A

b. Check-printing fees (§ 230.5(a)(2)(ii)) Yes No N/A

Truth in Savings: Examination Checklist


c. Short-term time accounts (1 month or less) (§ 230.5(a)(2)(iii)) Yes No N/A

20. Are the proper subsequent disclosures provided for the following timeaccounts?

a. Accounts with maturities of more than 1 year that renew automatically(§ 230.5(b)(1)) Yes No N/A

b. Accounts with maturities of more than 1 month but not more than 1 yearthat renew automatically (§ 230.5(b)(2)) Yes No N/A

c. Accounts with maturities of more than 1 year that do not renewautomatically (§ 230.5(d)) Yes No N/A

Periodic-Statement Disclosures—Section 230.621. a. Is the annual percentage yield earned disclosed on the periodic

statement, using that term? Yes No N/A

b. Is the APY earned calculated in accordance with appendix A of theregulation? (§ 230.6(a)(1)) Yes No N/A

22. Is the amount of interest earned during the statement period accuratelydisclosed? (§ 230.6(a)(2)) Yes No N/A

23. Are the fees required to be disclosed under section 230.4(b) that weredebited to the account during the statement period itemized by dollar andtype? (§ 230.6(a)(3)) Yes No N/A

24. Is the total number of days in the statement period, or the beginning andending dates of the period, disclosed? (§ 230.6(a)(4)) Yes No N/A

25. If the institution uses the average daily balance method and calculatesinterest for a period other than the statement period, is the APY earned andthe amount of interest earned based on that period rather than the statementperiod? (§ 230.6(b)) Yes No N/A

Payment of Interest—Section 230.726. Does the institution calculate interest on the full amount of principal in the

account each day by using either the daily balance method or the averagedaily balance method? (§ 230.7(a)(1)) Yes No N/A

27. Does the institution use the same method to determine any minimum balancerequired to earn interest as it uses to determine the balance on which interestis calculated? (§ 230.7(a)(2)) Yes No N/A

28. a. Does interest begin to accrue no later than the business day specified forinterest-bearing accounts in section 606 of the Expedited FundsAvailability Act? Yes No N/A

b. Does interest accrue until the day the funds are withdrawn? (§ 230.7(c)) Yes No N/A

Advertising Requirements—Section 230.829. a. Do the advertisements refrain from misleading or inaccurate statements,

and do they accurately represent the deposit contract? Yes No N/A

b. Do the advertisements refrain from using the term ‘‘free’’ or ‘‘no cost’’ if anymaintenance or activity fee may be imposed? Yes No N/A

c. Do the advertisements refrain from using the word ‘‘profit’’ when referringto interest paid on an account? (§ 230.8(a)) Yes No N/A



30. a. If the institution advertises rates on accounts, are the rates stated asannual percentage yields? Yes No N/A

b. If the institution uses the abbreviation ‘‘APY,’’ has the term ‘‘annualpercentage yield’’ been stated at least once in the advertisement? Yes No N/A

c. If the institution states the interest rate, using that term, in conjunction withthe APY, is it not more conspicuous than the APY? (§ 230.8(b)) Yes No N/A

d. Are the annual percentage yields and interest rates rounded to thenearest one-hundredth of 1 percent (.01%) and expressed to two decimalplaces? (§ 230.3(f)(1)) Yes No N/A

31. If the institution advertises tiered-rate accounts, does the institution state allthe APYs, including ranges where applicable, as well as the correspondingminimum balance requirements? (§ 230.8(b)) Yes No N/A

32. If the institution advertises stepped-rate accounts, does the institutionaccurately disclose the APY? (§ 230.8(b)) Yes No N/A

33. If the institution’s deposit advertisements state the APY, are the followingdisclosures stated clearly and conspicuously to the extent applicable?

a. Variable-rate notice (§ 230.8(c)(1)) Yes No N/A

b. Time the APY is offered (§ 230.8(c)(2)) Yes No N/A

c. Minimum balance to obtain the APY (§ 230.8(c)(3)) Yes No N/A

d. Minimum opening deposit (§ 230.8(c)(4)) Yes No N/A

e. Effect of fees (§ 230.8(c)(5)) Yes No N/A

f. For time accounts, the following features: (§ 230.8(c)(6))

• Time requirements (§ 230.8(c)(6)(i)) Yes No N/A

• Applicable early withdrawal penalties (§ 230.8(c)(6)(ii)) Yes No N/A

34. If a bonus is stated in an advertisement, does the advertisement state thefollowing information, as applicable?

a. The annual percentage yield, using that term (§ 230.8(d)(1)) Yes No N/A

b. Time requirement to obtain the bonus (§ 230.8(d)(2)) Yes No N/A

c. Minimum balance required to obtain the bonus (§ 230.8(d)(3)) Yes No N/A

d. Minimum balance required to open the account (if that amount is greaterthan the minimum balance necessary to obtain the bonus) (§ 230.8(d)(4)) Yes No N/A

e. When the bonus will be provided (§ 230.8(d)(5)) Yes No N/A

35. Are exemptions to the requirements made for those media set forth undersection 230.8(e)? Yes No N/A

Record-Retention Requirements—Section 230.936. Has the institution retained evidence of compliance for a minimum of 2 years

after the date disclosures are required to be made or action is required to betaken? (§ 230.9(c)) Yes No N/A



Regulation CHome Mortgage Disclosure

Background

Regulation C (12 CFR 203) implements the HomeMortgage Disclosure Act (HMDA), which wasenacted by Congress in 1975. The period 1988through 1992 saw substantial changes to HMDA.Especially significant were the amendments to theact resulting from the Financial Institutions Reform,Recovery, and Enforcement Act of 1989 (FIRREA).The FIRREA amendments expanded coverage tomany independent nondepository mortgage lend-ers in addition to the previously covered banks,savings associations, and credit unions. Coverageof independent mortgage bankers was furtherexpanded in 1993 with implementation of amend-ments contained in the Federal Deposit InsuranceCorporation Improvement Act of 1991 (FDICIA). Fora detailed discussion of the history of HMDA, seethe Federal Financial Institutions Examination Coun-cil’s web site (www.ffiec.gov/hmda/history2.htm).

HMDA grew out of public concern about creditshortages in certain urban neighborhoods. Con-gress believed that some financial institutions hadcontributed to the decline of some geographicareas by their failure to provide adequate homefinancing to qualified applicants on reasonableterms and conditions. Thus, one purpose of HMDAand Regulation C is to provide the public withinformation that will help show whether financialinstitutions are serving the housing credit needs ofthe neighborhoods and communities in which theyare located. A second purpose is to aid publicofficials in distributing public-sector investments soas to attract private investment to areas where it isneeded. A third purpose is to assist in identifyingpossible discriminatory lending patterns andenforcing anti-discrimination statutes.

As the name implies, HMDA is a disclosure law. Itrelies on public scrutiny for its effectiveness. It doesnot prohibit any specific lender activity, and it doesnot establish a quota for mortgage lending in anymetropolitan statistical area (MSA) or other geo-graphic area defined by the Office of Managementand Budget.

Lenders must report data on loan originations,applications, and purchases as well as requestsunder a preapproval program (as defined insection 203.2(b) of Regulation C) if the preapprovalrequest is denied or results in the origination of ahome purchase loan. They must also report theethnicity, race, gender, and gross income ofmortgage applicants and borrowers. In addition,lenders must report information on the pricing ofeach loan and whether the loan is subject to

the Home Ownership and Equity Protection Act(15 USC 1639). Additionally, lenders must identifythe type of purchaser for each mortgage loan theysell. Some lenders have the option of indicating thereasons for their decision to deny a loan applica-tion. (Lenders regulated by the Office of theComptroller of the Currency or the Office of ThriftSupervision must indicate the reasons for denial.)

Regulation C requires institutions to report lend-ing data to their supervisory agencies on a loan-by-loan and application-by-application basis byway of a ‘‘register’’ reporting format. The supervi-sory agencies, through the Federal Financial Insti-tutions Examination Council (FFIEC), compile thisinformation to produce individual disclosure state-ments for each institution and aggregate reports forall covered institutions within each MSA. In addi-tion, the FFIEC produces other aggregate reportsthat show lending patterns by median age ofhomes and by the central-city or non-central-citylocation of the property. The public can obtain theindividual disclosure statements and the aggre-gate reports from the FFIEC or from centraldepositories located in each MSA. Individual dis-closure statements can also be obtained fromfinancial institutions.

Applicability

Regulation C covers two categories of financialinstitutions. One is depository institution, which theregulation defines as a bank, savings association,or credit union that

• On the preceding December 31 had assets inexcess of the annually published asset threshold,

• On the preceding December 31 had a home orbranch office in an MSA,

• In the preceding calendar year originated atleast one first-lien home purchase loan (or arefinancing of such a loan) on a one- tofour-family dwelling, and

• Meets one of the following criteria: (1) theinstitution is federally insured or regulated,(2) the mortgage loan referred to is federallyguaranteed, insured, or supplemented, or (3) theinstitution intended to sell the loan to Fannie Maeor Freddie Mac.

The other category is for-profit, nondepositorymortgage lending institution. A for-profit, nonde-pository mortgage lending institution is covered byRegulation C if

• In the preceding calendar year, it originated

Consumer Compliance Handbook Reg. C • 1 (1/06)

home purchase loans (including refinancings ofhome purchase loans) that either (1) totaled10 percent or more of its loan origination volume,measured in dollars, or (2) totaled $25 million ormore,

• On the preceding December 31, it had a home orbranch office in an MSA1, and

• Either (1) on the preceding December 31, it hadtotal assets of more than $10 million, countingthe assets of any parent corporation, or (2) in thepreceding calendar year, it originated at least100 home purchase loans or refinancings ofhome purchase loans.

For purposes of this discussion and the exami-nation procedures, the term ‘‘financial institution’’signifies both a depository institution and a nonde-pository institution. The term ‘‘mortgage lendinginstitution’’ applies to majority-owned mortgagelending subsidiaries of depository institutions and,since 1990, to independent mortgage companies.Mortgage lending subsidiaries of bank and savingsand loan holding companies, as well as of savingsand loan service corporations, have been coveredby HMDA since 1988. Mortgage lending subsidi-aries are treated as entities distinct from their‘‘parent’’ and must file separate reports with theirparent’s supervisory agency.

The Board may exempt from Regulation C astate-chartered or state-licensed financial institu-tion that is covered by a substantially similar statelaw that contains adequate provision for enforce-ment by the state. As of January 1, 2005, noexemptions were in effect.

Compilation of Loan Data

For each calendar year, a financial institution mustreport data on its applications that resulted inoriginations of

• Home purchase loans

• Home improvement loans

• Refinancings

Data must also be reported for loan purchases.In addition, data must be reported for applicationsthat did not result in originations:

• Applications that were approved by the institu-tion but were not accepted by the applicant

• Applications that were denied, withdrawn, orclosed for incompleteness

Finally, data must be reported on certain denialsof requests for preapproval of a home purchase

loan under a program whereby a lender issuesa written commitment covering a specific periodof time to lend a creditworthy borrower up to aspecific amount.

Loans secured by real estate that are neitherrefinancings nor made for home purchase or homeimprovement need not be reported.

Loan Information

For each application, financial institutions mustidentify the purpose of the requested or originatedloan (home purchase, home improvement, orrefinancing), the lien status of the property relatingto the application, and whether the property will beowner-occupied as a principal dwelling. Regula-tion C defines terms as follows:

• Dwelling—A residential structure that may ormay not be attached to real property located in astate, the District of Columbia, or the Common-wealth of Puerto Rico, including an individualcondominium or cooperative unit, a mobile ormanufactured home, and a multifamily structuresuch as an apartment building

• Home purchase loan—A loan secured by adwelling and made for the purpose of purchas-ing that (or another) dwelling

• Home improvement loan—A loan that is to beused at least in part for the purpose of repairing,rehabilitating, remodeling, or improving a dwell-ing or the real property on which the dwelling islocated (Home improvement loans not securedby a dwelling are to be reported only if theinstitution classifies the loan as a home improve-ment loan; dwelling-secured home improvementloans are to be reported without regard toclassification.)

• Refinancing—A transaction in which a newobligation satisfies and replaces an existingobligation by the same borrower. To determinewhether or not a loan is covered by HMDA, theexisting obligation must be a home purchaseloan and both the new and the existing obliga-tions must be secured by a first lien on adwelling. For reporting purposes, both the exist-ing and new obligations must be secured by alien on a dwelling.

Financial institutions are also required to identifythe following general loan types: conventional,FHA-insured, VA-guaranteed, and FSA/RHS-guaranteed. In addition, they must report theproperty type as a one- to four-family dwelling, amultifamily dwelling, or manufactured housing.Finally, they must report the amount of the loan (orthe loan applied for), the application date, theaction date, and the type of action taken.

1. The institution may or may not have a physical presence inthe MSA (section 203.2(c)(2)).

Home Mortgage Disclosure

2 (1/06) • Reg. C Consumer Compliance Handbook

Property Location

For loans on, and applications for loans on,properties located in any MSA in which theinstitution has a home or branch office, certaingeographic location information must be reported.2For loans on properties located outside theseMSAs, and outside any MSA, reporting of geo-graphic information is optional—except in the caseof large financial institutions subject to additionaldata reporting requirements under the CommunityReinvestment Act (CRA). The geographic informa-tion consists of the MSA or MD number, codesidentifying the state and county, and the censustract number of the property to which the loan orloan application relates.

Large financial institutions subject to both theCRA and HMDA must collect and report geo-graphic information for all loans and applications(whether located in an MSA or not), not just forloans and applications relating to property in MSAsin which the institution has a home or branchoffice.3 Under the CRA, a large institution is a bankor savings association that has assets of $1 billionor more or a subsidiary of a holding company thathas total banking and thrift assets of $1 billion ormore.

Applicant Information

For applications and originated loans, financialinstitutions must report data on the applicant’s orborrower’s ethnicity, race, sex, and annual income;for purchased loans, reporting of these data isoptional. The institution must request informationregarding the ethnicity, race, and sex of allapplicants and borrowers, including those whoapply entirely by telephone, mail, or Internet. If theapplicant does not provide the information and theapplication is submitted in person, the lender mustnote the information on the basis of visual obser-vation or surname. Regulation C contains a modelform that can be used to collect data on ethnicity,race, and sex. Alternatively, the form used to obtainmonitoring information under section 202.13 ofRegulation B (Equal Credit Opportunity) may beused.

If an institution originates or purchases a loanand then sells it in the same calendar year, it mustreport the type of entity that purchased the loan.Except in the case of large secondary-marketpurchasers such as Fannie Mae and Freddie Mac,the exact purchaser need not be identified. Forexample, the institution may indicate that it sold

a loan to a bank without identifying the particularbank.

Pricing-Related Data

For originations of home purchase loans, dwelling-secured home improvement loans, and refinanc-ings, financial institutions must report the spreadbetween the annual percentage rate (APR) on aloan at consummation and the yield on comparableTreasury securities if the spread is 3 percentagepoints or more for first-lien loans or 5 percentagepoints or more for subordinate-lien loans. Thefollowing are excluded from the rate-spread report-ing requirement: (1) applications that are incom-plete, withdrawn, denied, or approved but notaccepted, (2) purchased loans, (3) home improve-ment loans not secured by a dwelling, (4) assump-tions, (5) home equity lines of credit, and (6) loansnot subject to Regulation Z (Truth in Lending). Todetermine the applicable Treasury security yield,the institution must use the table ‘‘Treasury Securi-ties of Comparable Maturity under Regulation C’’on the FFIEC web site (www.ffiec.gov/ratespread/help.aspx).

Financial institutions must report whether theloan is subject to the Home Ownership and EquityProtection Act (HOEPA) (15 USC 1639). A loanbecomes subject to HOEPA when the APR or thepoints and fees on the loan exceed the HOEPAtriggers. (Additional information on HOEPA cov-erage can be found in the FFIEC examinationprocedures for the Truth in Lending Act andHOEPA.)

Financial institutions must also report the lienstatus of any property related to the loan orapplication (first lien, subordinate lien, or notsecured by a lien on a dwelling).

Optional Data

Financial institutions supervised by the FederalReserve (and the FDIC) may, at their option, reporttheir reasons for denying a loan application.(Financial institutions regulated by the OCC andthe OTS, including subsidiaries of national banksand savings associations, are required to providereasons for denials, as are credit unions, which areregulated by the NCUA.) Institutions may alsochoose to report certain requests for preapprovalthat are approved by the institution but notaccepted by the applicant, and home equity linesof credit made in whole or in part for the purpose ofhome improvement or home purchase.

Excluded Data

Financial institutions are not required to report loandata for

2. In the case of an MSA divided into metropolitan divisions(MDs), the relevant unit for this purpose is the MD.

3. For loans and applications on properties located in a countywith a population of less than 30,000, the institution may enter‘‘NA.’’



• Loans originated or purchased by the institutionacting as trustee or in some other fiduciarycapacity

• Loans on unimproved land

• Temporary financing (such as bridge or construc-tion loans)

• The purchase of an interest in a pool of loans(such as mortgage-participation certificates)

• The purchase of mortgage loan servicing rights

• Loans acquired as part of a merger or acquisi-tion or the acquisition of all the assets andliabilities of a branch office

Reporting Format

Financial institutions are required to record data oneach application for, and each origination andpurchase of, home purchase loans, home improve-ment loans, and refinancings on a form titled‘‘Loan/Application Register,’’ or ‘‘HMDA-LAR.’’ Theymust also record data on requests under apreapproval program (as defined in section203.2(b)), but only if the preapproval request isdenied or results in the origination of a homepurchase loan. Transactions are to be reported forthe calendar year in which final action was taken. Ifa loan application is pending at the end of thecalendar year, it is to be reported on the HMDA-LAR for the following year, when the final disposi-tion is made. Loans originated or purchased duringthe calendar year must be reported for thecalendar year of origination, even if they weresubsequently sold.

The HMDA-LAR is accompanied by a list ofcodes to be used for each entry on the form.Detailed instructions and guidance on the require-ments for the register are contained in appendix Ato Regulation C. Additional information is availablein the FFIEC publication ‘‘A Guide to HMDAReporting—Getting it Right!’’ and on the FFIEC website.

Financial institutions must record data on theirHMDA-LAR within thirty calendar days of the end ofthe calendar quarter in which final action wastaken. They do, however, have flexibility in deter-mining how to maintain the register, as the entriesneed not be grouped in any prescribed fashion. Forexample, an institution could record home pur-chase loans on one HMDA-LAR and home improve-ment loans on another; alternatively, both types ofloans could be reported on one register. Similarly, aseparate register may be kept at each branchoffice, or a single register for the entire institutionmay be maintained at a central location. Theseseparate registers must be combined into a singleconsolidated register, however, when submitted tothe appropriate supervisory agency.

For each calendar year, a financial institutionmust submit to its supervisory agency its HMDA-LAR, accompanied by a transmittal sheet. Unless ithas twenty-five or fewer reportable transactions,the institution must submit its data in automatedform. For registers submitted in paper form, twocopies must be mailed to the supervisory agency.For both automated and hard-copy submissions,the layout of the register must conform exactly tothat of the register in appendix A to Regulation C.

The HMDA-LAR must be submitted by March 1following the calendar year covered by the data.The FFIEC then produces a disclosure statementfor each institution, cross-tabulating data on indi-vidual loans in various groupings, as well as anaggregate report for each MSA.

Disclosure

As a result of amendments to HMDA incorporatedin the Housing and Community Development Act of1992, an institution must make its disclosurestatement available to the public at its home officewithin three business days of its receipt from theFFIEC. The institution must also either (1) make thisdisclosure statement available to the public in atleast one branch office in each additional MSA orMD in which it has offices within ten business daysof receipt or (2) post, in each branch office in eachadditional MSA or MD in which it has offices, theaddress to which requests for copies of thestatement should be sent, and then send thedisclosure statement within fifteen calendar daysafter receiving a written request.

Also, an institution must make its loan applicationregister available to the public, after modifying theregister by deleting the following fields: applicationor loan number, date application was received, anddate action was taken. These deletions are requiredso as to protect the privacy interests of applicantsand borrowers. For application register requestsreceived on or before March 1, the modifiedHMDA-LAR for a given year must be available byMarch 31; for requests received after March 1, itmust be available within thirty days of receipt of therequest. The modified register need contain onlydata relating to the metropolitan area for which therequest is made.

The FFIEC also produces aggregate tables toillustrate the lending activity of all covered financialinstitutions in each MSA or MD. These tables andthe individual disclosure statements are sent tocentral data depositories, such as public libraries,in each MSA or MD. A list of depositories isavailable from the FFIEC.

A financial institution must retain its full (unmodi-fied) HMDA-LAR for at least three years for



examination purposes. It must also be prepared tomake each modified HMDA-LAR available for threeyears and each FFIEC disclosure statement avail-able for five years. When responding to specificrequests for copies of the data, institutions maycharge reasonable fees to cover the costs incurredin providing or producing the data for publicrelease.

Finally, an institution must post a notice at itshome office and at each branch in an MSA toadvise the public of the availability of the disclosurestatements.

Enforcement

Administrative sanctions, including civil moneypenalties, may be imposed by the institution’ssupervisory agency. An error in compiling orrecording loan data is not a violation of the act orthe regulation if it was unintentional and occurreddespite the maintenance of procedures reasonablyadopted to avoid such errors.



Regulation CAppendix A. HMDA Sampling Procedures

The following sampling procedures should beapplied when reviewing HMDA-LAR data foraccuracy:

1. Identify and select the LAR to be reviewed. Foreach HMDA reporter, review both the currentyear’s data and data submitted since the mostrecent consumer examination. Examinationsconducted after April 30 of each year shouldinclude a review of the current year’s data.Examinations conducted before April 30 shouldinclude a review of the current year’s data to theextent that the institution has already entereddata for the current year on the LAR. The datafrom a single year’s LAR is the universe fromwhich the sample is taken.

2. Determine the total number of files to besampled, based on the size of the universe, byreferring to column A of the HMDA SamplingSchedule (appendix B to this chapter). Forbanks at which HMDA data are not relied on inconducting fair lending or CRA examinations,the product module and examination matrix mayindicate a Level II review, involving sampling asappropriate. In these instances, the examinershould choose a judgmental sample that issufficiently large to ensure confidence in theoverall accuracy of the data.

3. Select the total random sample.

A. From an automated download—The mostimportant thing to remember is that thesample must be randomly selected from theuniverse. A variety of tools, including afeature in Excel, can be used to select arandom sample of data electronically. Thefollowing instructions will assist you in work-ing with Excel:

1. Generate a random order to the universeof files from which the sample will beselected using Excel’s ‘‘Random NumberGeneration’’ tool by taking the followingsteps:

a. Select the following from the Excelmenu:

• Tools

• Add-Ins

• Analysis Tool Pak (check the boxand click ‘‘OK’’)

• Tools (again)

• Data Analysis

• Random Number Generation (high-light and click ‘‘OK’’)

b. Respond to the items on the ‘‘RandomNumber Generation’’ screen as follows:

• Number of Variables (leave blank)

• Number of Random Numbers (leaveblank)

• Distribution (select ‘‘Uniform’’ fromlist)

• Parameters (leave the default asis—it is set at 0 and 1)

• Random Seed (leave blank)

• Output Options (click on the ‘‘Out-put Range’’ circle, and then on thesmall box to the right for ‘‘OutputRange’’)

c. A small screen titled ‘‘Random NumberGeneration’’ will appear. Do not enterany information directly on that screen.Rather, select the range (output loca-tion) for the random numbers byhighlighting the column on the spread-sheet where you want the randomnumbers to go. (Use the ‘‘Shift’’ keyand the down arrow to highlight thecolumn.) Hint: Designating a column atthe end of the spreadsheet may workbest.

d. Click on the small box on the ‘‘RandomNumber Generation’’ screen (or press‘‘Enter’’).

e. Click on ‘‘OK.’’

f. The random numbers are automati-cally assigned and placed into thedesignated column.

g. Sort the files in ascending order byrandom number by (1) highlighting allthe data, (2) selecting ‘‘Data,’’(3) selecting ‘‘Sort,’’ (4) identifying thecolumn (containing the random num-bers) by which you will sort, (5) select-ing ‘‘Ascending,’’ and (6) selecting‘‘OK.’’

2. Once the loans are placed in a randomorder, simply take the sample needed forHMDA verification starting at the top of thelist. Be sure to save this information as asupporting workpaper.

B. From hard-copy LAR—As with electronicdata, the sample of files selected from ahard-copy LAR must be randomly selectedfrom the universe.


1. Divide the number of files in the ‘‘uni-verse’’ by the desired size of the sampleto determine the ‘‘interval.’’ If necessary,round down the interval to reach a wholenumber.

2. Randomly pick a number between zeroand the interval.

3. Starting with the first file in the universe,count the items until reaching the numberrandomly picked. The file correspondingto the random number is the first file in thesample.

4. Starting with the next file as number 1,count the files until reaching the numbercorresponding to the interval and selectthat file for the sample.

5. Repeat step 4 throughout the universeuntil reaching the chosen sample size.

4. Review the number of files indicated for theinitial file review (column B in the HMDASampling Schedule) according to current FRBHMDA data review procedures.

5. The examiner may stop the HMDA samplingprocess after reviewing the initial number of filesif the results indicate that a very small number offiles had errors in key fields.1 This number isgiven in column D of the HMDA SamplingSchedule (‘‘Maximum number of files witherrors—Stop sampling’’).

For example, if the HMDA universe contains150 files, a total random sample of 56 filesshould be taken. The examiner may initiallyreview 29 files. If the review of the initial 29 filesidentifies no more than 1 file with an error orerrors in a key field, the examiner may end thereview for that HMDA reporter for that universe.The examiner may then reach a statisticallyreliable conclusion that the findings are indica-tive of the universe, and resubmission is notnecessary.

6. The examiner must complete a review of theentire random sample of files if a larger numberof errors in key fields are found during the initialfile review.

The need for additional file review can bedetermined by referring to column E of theHMDA Sampling Schedule (‘‘Number of fileswith errors—Additional file review required’’). Ifthe number of files with errors in key fieldsidentified in the initial review is shown in columnE, the examiner must review the additional filesin the random sample.

For example, if the HMDA universe contains150 files, a total random sample of 56 filesshould be taken. The examiner may initiallyreview 29 files. If the review of the initial 29 filesidentifies 4 files with an error or errors in keyfields, the examiner should then review 27additional files, for a total sample size of 56 files.After completing review of the additional 27files, the examiner should determine the totalnumber of key-field errors and apply the currentBoard HMDA resubmission standards to theentire sample.

7. If the examiner determines that a large numberof files reviewed in the initial file review have anerror or errors in key fields, the examiner maystop HMDA data verification after the initial filereview is completed and should apply thecurrent Board HMDA resubmission standards.

This ‘‘large’’ number can be determined byreferring to column F of the HMDA SamplingSchedule (‘‘Minimum number of files witherrors—Stop sampling and apply resubmissionstandards’’). For example, if the HMDA universecontains 150 files, a total random sample of 56files should be taken. The examiner may initiallyreview 29 files. If the review of the initial 29 filesidentifies 6 (or more) files with an error or errorsin key fields, the examiner should stop thereview. Sufficient statistical evidence has beenobtained to conclude that a larger sample wouldhave an unacceptable number of errors, thusrequiring resubmission. At this point, the exam-iner should apply the current Board HMDAresubmission standards to the entire sample.

Provisional HMDA DataSampling Procedures

In 2004, the Board temporarily revised the HMDAsampling procedures in light of errors in 2004 datain some of the new key data fields.2 Specifically, theBoard increased the required sample sizes, to helpensure the integrity of the HMDA data reported bybanks and used by examiners in fair lending andCRA analyses. The provisional sampling proce-dures, which are described below, are to be ineffect until further notice.

Using the sampling procedures described ear-lier in this appendix and the sample sizes given inappendix B as a starting point, review the sampledloans and possibly increase the number of loans inthe sample to ensure that loans originated by thebank (HMDA action code 1) make up at least

1. Key fields are defined as loan type; loan purpose; propertytype; owner occupancy; loan amount; action taken type; requestfor preapproval; application date and action date; MSA; state;county; census tract; ethnicity, race, and sex of the applicant andco-applicant; income; type of purchaser; rate spread; HOEPAstatus; and lien status.

2. These new fields include race, ethnicity, sex, lien status,Home Ownership and Equity Protection Act status, and loanpricing data.

Home Mortgage Disclosure: Appendix A


50 percent of the items in the sample.3 If in theoriginal randomly selected sample fewer than50 percent of applications were originated by thebank, continue to randomly select applications withaction code 1 until the number of originationsreaches at least 50 percent of the number of itemsrequired to be sampled. For example,

HMDA universe 100Sample size according to CA 04-04 39

guidelines

Random sample selectedAction code 1 (Originations) (28%) 11Action code 2 (Approved not 4

accepted)Action code 3 (Denied) 7Action code 4 (Withdrawn) 4Action code 5 (Incomplete) 2Action code 6 (Purchased) 5Action code 7 (Preapproval denied) 4Action code 8 (Preapproval not 2

accepted)Additional originations required for 9

the sampleRevised sample size 48

Special Sampling Method forHOEPA Loan Originations

This sampling method is designed to determine ifthe bank’s procedures for calculating APR spreadsand identifying HOEPA loans are accurate andto ensure that those loans that were reported asHOEPA loans, as well as those that were not, wereidentified correctly. If the random sample selectedfor HMDA data verification, as outlined earlier in thisappendix, does not include enough loans to fulfillthe sampling requirements described below, atargeted sample of loans should be selected tomeet the minimum requirements. The targetedloans should be reviewed only to determine if the

rate spread was accurately computed and theHOEPA status correctly reported.

• Banks at which fewer than 10 percent oforiginated loans have APRs above HOEPAthresholds—Review 6 first-lien loans and 6subordinate-lien loans, for a total of 12 loans (seesection 226.32 of Regulation Z for a discussion ofthresholds). If possible, in each set of 6 loansinclude 3 high-cost non-HOEPA loans having anAPR of 1 point or less below the HOEPA triggerand 3 HOEPA loans having an APR of 1 point orless above the trigger. If the bank does not havethat many loans with an APR within 1 point aboveor below the trigger, select loans with an APRbeyond the 1 point margin to bring the totalsampled to 12.

This methodology has been selected becauselooking at close cases is most likely to revealwhether the creditor is correctly designatingHOEPA loans. For both first and subordinateliens, if the bank originated fewer than 3high-cost non-HOEPA loans with APRs below theHOEPA thresholds or fewer than 3 loans withAPRs above the thresholds, review all the loansin that category.

• Banks at which more than 10 percent oforiginated loans have APRs above the HOEPAthresholds—Review a minimum of 10 first-lienand 10 subordinate-lien loans, for a total of 20loans. If possible, in each set of 10 loans include5 high-cost non-HOEPA loans having an APR of1 point or less below the HOEPA trigger and 5HOEPA loans having an APR of 1 point or lessabove the trigger. If the bank does not have thatmany loans with an APR within 1 point above orbelow the trigger, select loans with an APRbeyond the 1 point margin.

For both first and subordinate liens, if the bankoriginated fewer than 5 high-cost non-HOEPAloans having APRs below the HOEPA thresholdsor fewer than 5 loans with APRs above thethresholds (but nonetheless meets the 10 per-cent criterion), review all the loans in thatcategory.

3. The sampling guidance in this chapter is based on CA Letter04-4.

Home Mortgage Disclosure: Appendix A


Regulation CAppendix B. HMDA Sampling Schedule

HMDAuniverse

Initial file review Additionalfilereview

Additionalnumber ofloansoriginatedby bank

Totalrandomsample2

Initialfilereview

Minimumnumber ofloansoriginatedby bank

Maximumnumber offiles witherrors1—Stopsampling

Number offiles witherrors1—Additionalfile reviewrequired(go tocolumn G)

Minimumnumber offiles witherrors1—Stopsamplingand applyresub-missionstandards

(A) (B) (C) (D) (E) (F) (G) (H) (I)

1–11 Review all 6

12–20 12 6 0 1 2 Review all Review all All

21–30 13 7 0 1 2 Review all Review all All

31–50 15 8 0 1–2 3 13 7 28

51–70 17 9 0 1–2 3 12 6 29

71–90 18 9 0 1–3 4 20 10 38

91–110 28 14 1 2–3 4 11 6 39

111–130 29 15 1 2–4 5 18 9 47

131–140 29 15 1 2–4 5 20 10 49

141–170 29 15 1 2–5 6 27 14 56

171–190 30 15 1 2–5 6 27 14 57

191–270 30 15 1 2–5 6 29 15 59

271–380 30 15 1 2–6 7 38 19 68

381–750 31 16 1 2–6 7 38 19 69

751–1,100

31 16 1 2–7 8 48 24 79

1,101or more

32 16 1 2–7 8 47 24 79

1. Files with one or more errors in key fields. Key fields are defined as loan type; loan purpose; property type; owner occupancy; loanamount; action taken type; request for preapproval; application date and action date; MSA; state; county; census tract; ethnicity, race, andsex of the applicant and co-applicant; income; type of purchaser; rate spread; HOEPA status; and lien status.

2. The total random sample could be larger if the minimum number of loans originated by the bank is not found in the original sample.


Regulation CAppendix C. HMDA Resubmission Standards

To ensure the integrity of the HMDA data used foranalysis, the following guidelines should be fol-lowed when considering whether to have aninstitution resubmit HMDA data. The guidelinescover two general categories of assessments:assessments of the accuracy of the data inindividual data fields, and assessments of overallaccuracy.

Individual Data Fields

Institutions should be required to correct andresubmit data in certain ‘‘key’’ fields on theHMDA-LAR when at least 5.0 percent of the filessampled contain inaccurate data within a key field.These fields are

• Loan type

• Loan purpose

• Property type

• Owner occupancy

• Loan amount

• Action taken type

• Request for preapproval

• Application date

• Action date

• MSA

• State

• County

• Census tract

• Ethnicity of the applicant and co-applicant

• Race of the applicant and co-applicant

• Sex of the applicant and co-applicant

• Income

• Type of purchaser

• Rate spread

• HOEPA status

• Lien status

Errors in rounding amounts in the ‘‘loan amount’’and ‘‘income’’ fields should not be counted towardthe 5 percent resubmission standard, although theviolations should be cited and the bank shouldreport the data correctly in the future. When theregression program is used during an examination,each of the key fields except ‘‘state,’’ ‘‘county,’’‘‘census tract,’’ ‘‘applicant sex,’’ and ‘‘co-applicantsex’’ must have an error rate of less than 5.0 per-cent before the step 1 regression program is run.

Overall Accuracy

If at least 10.0 percent of the sampled files containan error in at least one key field, the entireHMDA-LAR must be resubmitted. The institutionmust verify the data in each of the fields, not just inthose with an error rate greater than 5.0 percent.


Regulation CExamination Objectives and Procedures


1. To appraise the quality of the financial institu-tion’s compliance risk management system toensure compliance with the Home MortgageDisclosure Act and Regulation C

2. To determine how much reliance can beplaced on the financial institution’s compliancerisk management system for ensuring itscompliance with the Home Mortgage Disclo-sure Act and Regulation C, including suchelements as internal controls, policies, proce-dures, and compliance review and auditfunctions

3. To determine the accuracy and timeliness ofthe financial institution’s submitted HMDA-LAR

4. To initiate corrective action when policies orinternal controls are deficient or when viola-tions of law or regulation are identified


A. Initial Procedures

Depository Institutions

1. Determine whether the depository institutionis subject to the requirements of HMDA andRegulation C by determining if the regulatorycriteria addressed in sections 203.2(e)(1)(i)–203.2(e)(1)(iv) are met.

Mortgage Subsidiaries

1. Determine whether the depository institutionhas a majority ownership in a mortgagesubsidiary that meets relevant criteria in sec-tions 203.2(e)(2)(i)–203.2(e)(2)(iii). If all rel-evant criteria are met, the subsidiary is subjectto the requirements of HMDA and Regula-tion C.

2. Determine whether the depository institutionhas been involved in any mergers or acquisi-tions since January 1 of the preceding calen-dar year.

a. If it has been, determine whether therequired HMDA data for the acquired finan-cial institution(s) were reported separatelyor in consolidation. The examination proce-dures in the following sections that concernaccuracy and disclosure also apply to anacquired financial institution’s data, even ifthose data are reported separately.

Note: If HMDA and Regulation C are appli-cable, the following examination proce-dures should be completed separately forthe depository institution and any of itsmajority-owned mortgage subsidiaries, anda separate checklist should be completedfor each institution subject to HMDA andRegulation C. Also, when determiningwhether a financial institution is subject toHMDA, the examiner should remain cogni-zant of any newly created MSAs andchanges in MSA boundaries, including theaddition or deletion of counties to or from anMSA, thus causing a financial institutioneither to become a new HMDA reporter or tono longer be a HMDA reporter. For a list ofcounties in an MSA, by state, see the FFIECweb site and the publication ‘‘A Guide toHMDA Reporting—Getting It Right!’’

B. Evaluation ofCompliance Management

The examiner should obtain the information neces-sary to make a reasonable assessment of thefinancial institution’s ability to collect data onapplications for, and originations and purchases of,home purchase loans, home improvement loans,and refinancings for each calendar year, in accor-dance with the requirements of HMDA and Regu-lation C.

The examiner should determine, through areview of written policies, internal controls, and theHMDA Loan/Application Register(s) (HMDA-LAR)and discussions with management, whether thefinancial institution has adopted and implementedcomprehensive procedures to ensure adequatecompilation of home mortgage disclosure informa-tion in accordance with sections 203.4(a)–203.4(e).

During the review of the financial institution’ssystem for maintaining compliance with HMDA andRegulation C, the examiner should obtain andreview policies and procedures, along with anyapplicable audit and compliance program materi-als, to determine whether

1. Policies, procedures, and training are ade-quate, on an ongoing basis, to ensure compli-ance with Regulation C

2. Internal review procedures and audit sched-ules comprehensively cover all the pertinentregulatory requirements associated with Regu-lation C


3. The audits or internal analysis performedinclude a reasonable amount of transactionalanalysis and a reasonable number of writtenreports that detail findings and recommenda-tions for corrective action

4. Internal reviews include any regulatory changesthat may have occurred since the priorexamination

5. The financial institution has assigned one ormore individuals responsibility for oversight,data update, and data entry, as well as fortimeliness of the institution’s data submission.The examiner should also determine whetherthe institution’s board of directors is informedof the results of all analyses.

6. The individuals who have been assignedresponsibility for data entry receive appropri-ate training for completion of the HMDA-LARand also receive copies of instructions—appendix A to Regulation C (Forms andInstructions for Completion of the HMDA-LAR);the staff commentary to Regulation C; and theFFIEC publication ‘‘Guide to HMDA Reporting—Getting it Right!’’—in a timely manner

7. The financial institution has ensured effectivecorrective action in response to previouslyidentified deficiencies

8. The financial institution performs HMDA-LARvolume analysis from year to year to detectincreases or decreases in activity that mightindicate omissions of data

9. The financial institution maintains documenta-tion for those loans it packages and sells toother institutions

C. Evaluation of Policiesand Procedures

Evaluate whether the financial institution’s informalprocedures and internal controls are adequate toensure compliance with Regulation C. Consider thefollowing:

1. Whether the individuals assigned responsibil-ity for the financial institution’s compliance withRegulation C have an adequate level ofknowledge and have established a method forstaying abreast of changes to laws andregulations

2. If the financial institution ensures that individu-als assigned compliance responsibility receiveadequate training to ensure compliance withthe requirements of the regulation

3. Whether the individuals assigned complianceresponsibility know whom to contact, at the

financial institution or their supervisory agency,if they have questions not answered by thewritten materials

4. If the financial institution has established andimplemented adequate controls to ensure theseparation of duties (for example, data entry,review, oversight, and approval)

5. Any internal reports or records documentingrevisions to policies and procedures, as wellas any informal self-assessments of the finan-cial institution’s compliance with the regulation

6. If the financial institution offers preapprovals,whether the institution’s preapproval programmeets the specifications detailed in the HMDAregulation; and, if so, whether the institution’spolicies and procedures provide adequateguidance for the reporting of preapprovalrequests that are approved or denied, inaccordance with the regulation

7. Whether the financial institution’s policies andprocedures address the reporting of (1) non-dwelling-secured loans that are originated inwhole or in part for home improvement andare classified as such by the institution and(2) dwelling-secured loans that are originatedin whole or in part for home improvement,whether or not classified as such

8. Whether the financial institution has estab-lished a method for determining and reportingthe lien status of property associated with alloriginated loans and applications

9. Whether the financial institution’s policies andprocedures contain guidance for collectingethnicity, race, and sex data for all loanapplications, including applications made bytelephone, mail, and Internet

10. Whether the financial institution’s policies andprocedures address the collection of data onthe rate spread (the difference between theAPR on the loan and the comparable Treasuryyield), and whether the institution has estab-lished a system for tracking rate ‘‘lock dates’’and calculating the rate spread

11. Whether the financial institution’s policies andprocedures address how to determine if a loanis subject to the Home Ownership and EquityProtection Act and the reporting of applicationsinvolving loans for manufactured homes

12. Whether the HMDA-LAR is updated withinthirty days after the end of each calendarquarter

13. Whether data are collected at all branchesand, if so, whether the appropriate personnelare sufficiently trained to ensure that allbranches are reporting data under the sameguidelines

Home Mortgage Disclosure: Examination Objectives and Procedures


14. Whether the financial institution’s loan officers,including loan officers in the commercial loandepartment who may handle loan applicationsreportable under HMDA (including loans andapplications for multifamily and mixed-useproperties and small business refinancessecured by residential real estate), are informedof the reporting requirements necessary toassemble the information

15. Whether the financial institution’s board ofdirectors has established an independentreview of the policies, procedures, and HMDAdata to ensure compliance and accuracy andis advised each year of the accuracy andtimeliness of the institution’s data submissions

16. What procedures the financial institution hasput in place to comply with the requirement tosubmit data in machine-readable form, andwhether the institution has some mechanism inplace to ensure the accuracy of the data thatare submitted in machine-readable form

17. Whether the financial institution’s loan officersare familiar with the disclosure, reporting, andretention requirements associated with loan/application registers and FFIEC public disclo-sure statements

18. Whether the financial institution’s loan officersare familiar with the disclosure statements thatwill be produced from the data

19. Whether the financial institution’s loan officersare aware that civil money penalties may beimposed if an institution has submitted errone-ous data and has not established adequateprocedures to ensure the accuracy of the data

20. Whether the financial institution’s loan officersare aware that correction and resubmission oferroneous data may be required when data forat least 5 percent of loan/application recordsare incorrectly reported

D. Transaction Testing

Verify that the financial institution accurately com-piled home mortgage disclosure information on aregister in the format prescribed in appendix A toRegulation C, by reviewing a sample of applica-tions. For submitted data, the review should includea sample of the applications represented on theHMDA-LAR. A sample of the current year’s datashould also be reviewed. In both cases, the sampleshould include

1. Approved and denied transactions subject toHMDA

2. Housing-related purchased loans

3. Withdrawn housing-related loan applications

E. Disclosure and Reporting

1. Determine whether the financial institution

a. Submits its HMDA-LAR to the appropriatesupervisory agency no later than March 1following the calendar year for which thedata are compiled and maintains its HMDA-LAR for at least three years thereafter

Note: Financial institutions that report twenty-five or fewer entries on their HMDA-LARmay collect and report HMDA data in paperform. Financial institutions opting to submittheir data in such a manner must send twotyped or computer-printed copies. Theymust use the format of the HMDA-LAR butneed not use the form itself.

b. Makes its FFIEC disclosure statement avail-able to the public at its home office no laterthan three business days after receiving itsstatement from the FFIEC

c. Either (1) makes its FFIEC disclosure state-ment available to the public in at least onebranch office in each additional MSA or MDin which it has offices within ten businessdays after receiving the disclosure state-ment from the FFIEC or (2) posts, in thelobby of each branch office in additionalMSAs or MDs in which it has offices, theaddress to which written requests for thedisclosure statement should be sent, andthen mails or delivers a copy of thedisclosure statement within fifteen calendardays of receiving a written request

d. Makes its modified HMDA-LAR (modifiedby removal of loan application numbers,dates applications were received, and datesaction was taken) available to the public byMarch 31 for requests received on or beforeMarch 1 and within thirty days for requestsreceived after March 1

e. Has retained its modified HMDA-LARs forthree years and its disclosure statementsfor five years, and has policies and proce-dures to ensure that its modified HMDA-LARs and disclosure statements are avail-able to the public during those terms

f. Makes its modified HMDA-LARs and disclo-sure statements available for inspectionand copying during the hours the office isnormally open to the public for business. Ifit imposes a fee for costs incurred inproviding or reproducing the data, the feeshould be reasonable.

g. Posts a general notice about the availabilityof its HMDA data in the lobby of its homeoffice and of each branch office located inan MSA



h. Provides promptly, upon request, the loca-tion of the financial institution’s officeswhere the statement is available for inspec-tion and copying, or includes the location inthe lobby notice

2. If the financial institution has a subsidiarycovered by HMDA, determine that the subsid-iary completed a separate HMDA-LAR andsubmitted it either directly or through its parentto the parent’s supervisory agency.

3. Determine that the HMDA-LAR transmittalsheet was completed accurately and that anofficer of the financial institution signed andcertified to the accuracy of the data containedin the register. (Refer to appendix A of Regula-tion C.) Note: If the HMDA-LAR was submittedvia the Internet, the signature should beretained on file at the institution.

4. Review the financial institution’s most recentdisclosure statement, HMDA-LAR, modifiedHMDA-LAR, and any applicable correspon-dence, such as notices of noncompliance.Determine whether errors occurred during theprevious reporting period and, if errors didoccur, what steps the institution took to correctand prevent such errors in the future.

5. Determine whether the financial institution hasthe necessary tools to compile the geographicinformation.

a. Determine whether the financial institutionuses the FFIEC geocoding web site(www.ffiec.gov/geocode/default.htm); theU.S. Census Bureau’s Census Tract StreetAddress Lookup Resources for 2000; theCensus Bureau’s 2000 Census Tract Out-line Maps; LandView 5-equivalent materialsavailable from the Census Bureau or from aprivate publisher; or an automated geocod-ing system to obtain census tract numbers.

b. If the financial institution relies on outsideassistance to obtain census tract numbers(for example, private ‘‘geocoding’’ servicesor real estate appraisals), verify that ad-equate procedures are in place to ensurethat the census tract numbers are obtained

when they are not provided by the outsidesource. For example, if the institution usu-ally uses property appraisals to obtaincensus tract numbers, it must have proce-dures to obtain this information when anappraisal is not received, such as when aloan application is denied before anappraisal is made.

c. Verify that the financial institution has takensteps to ensure that the provider of outsideservices is using the appropriate 2000Census Bureau data.

d. Verify that the financial institution usescurrent MSA and MD definitions to deter-mine MSA and MD numbers and bound-aries. MSA definitions and numbers (andstate and county codes) are available fromthe supervisory agency and from the FFIECpublication ‘‘A Guide to HMDA Reporting—Getting it Right!’’

6. For financial institutions required under theCRA to report data on small business, smallfarm, and community development lending,verify that they also collect accurate data onproperty located outside MSAs or MDs inwhich they have a home or branch office, oroutside any MSA or MD.

F. Examination Conclusions1. Summarize the findings, supervisory concerns,

and regulatory violations.

2. For the violations noted, determine the rootcause by identifying weaknesses in internalcontrols, audit and compliance reviews, train-ing, management oversight, or other factors;also, determine if the violations are repetitive,isolated, or systemic.

3. Identify action needed to correct violations andweaknesses in the financial institution’s com-pliance system.

4. Discuss findings with the financial institution’smanagement, and obtain a commitment totake corrective action.



Regulation CExamination Checklist

Applicability

Depository Institutions

1. Is the depository institution a bank, savings association, or credit union thatin the preceding calendar year originated at least one home purchase loan(or refinancing of a home purchase loan) secured by a first lien on a one- tofour-family dwelling? (§ 203.2(e)(1)(iii)) Yes No

2. Does the depository institution meet at least one of the following criteria?

a. The depository institution is a federally insured or regulated institution(§ 203.2(e)(1)(iv)(A)) Yes No

b. The depository institution originated a mortgage loan (see question 1)that was insured, guaranteed, or supplemented by a federal agency(§ 203.2(e)(1)(iv)(B)) Yes No

c. The depository institution originated a mortgage loan (see question 1)intending to sell it to Fannie Mae or Freddie Mac (§ 203.2(e)(1)(iv)(C)) Yes No

3. Did the depository institution have either a home or a branch office in an MSAon December 31 of the preceding calendar year? (§ 203.2(e)(1)(ii)) Yes No

4. On the preceding December 31 did the depository institution have assets inexcess of the asset threshold that is adjusted annually and publishedannually by the Federal Reserve Board? (§ 203.2(e)(1)(i)) Yes No

If the answers to questions 1–4 are ‘‘yes,’’ the depository institution is subject tothe requirements of HMDA and Regulation C, and the examiner should completethe remainder of the checklist

Mortgage Subsidiaries

5. Is the depository institution a majority owner of a for-profit mortgagesubsidiary? Yes No

If the answer to question 5 is ‘‘yes,’’ complete questions 6–8; otherwise, proceedto question 9.

6. In the preceding calendar year, did the mortgage subsidiary either

a. Originate home purchase loans or refinancings of home purchase loansthat together equaled at least 10 percent of its total loan-originationvolume, measured in dollars, or (§ 203.2(e)(2)(i)(A)) Yes No

b. Originate home purchase loans or refinancings of home purchase loansthat together equaled at least $25 million (§ 203.2(e)(2)(i)(B)) Yes No

7. Did the mortgage subsidiary have a home or branch office in an MSA as ofDecember 31 of the previous year?1 (§ 203.2(e)(2)(ii)) Yes No

8. Does the mortgage subsidiary meet at least one of the following criteria?(§ 203.2(e)(2)(iii))

a. The mortgage subsidiary had total assets (when combined with the assetsof the parent corporation) exceeding $10 million on the previousDecember 31 Yes No

1. A nondepository institution is deemed to have a branch office in an MSA or MD if, in the precedingcalendar year, it received applications for, originated, or purchased five or more home purchase loans,home improvement loans, or refinancings in that MSA or MD.


b. The mortgage subsidiary originated at least 100 home purchase loans(including refinancings of home purchase loans) in the precedingcalendar year Yes No

If the answers to questions 6–8 are ‘‘yes,’’ the mortgage subsidiary is subject tothe requirements of HMDA and Regulation C. If the depository institution that hasa majority interest in the mortgage subsidiary is also subject to HMDA andRegulation C, the examiner should complete a separate checklist for each entity,beginning with question 9 for the mortgage subsidiary. If the depository institutionthat has a majority interest in the mortgage subsidiary is not subject toRegulation C and HMDA, the examiner should use the remaining portion of thischecklist for the mortgage subsidiary. The examiner should note the financialinstitution to which the remaining checklist questions apply.

Compilation of Loan Data

9. Does the financial institution collect the following data in accordance withsection 203.4(a) and appendix A of the regulation?

a. An identifying number (that does not include the applicant’s name orSocial Security number) for the loan or loan application, and the date theapplication was received (§ 203.4(a)(1)) Yes No

b. The type of the loan or application (§ 203.4(a)(2)) Yes No

c. The purpose of the loan or application (§ 203.4(a)(3)) Yes Nod. Whether the application was for a preapproval, and whether it resulted in

a denial or an origination (§ 203.4(a)(4)) Yes No

e. The property type to which the loan or application relates (§ 203.4(a)(5)) Yes No

f. The owner-occupancy status of the property to which the loan orapplication relates (§ 203.4(a)(6)) Yes No

g. The loan amount or the amount requested on the application(§ 203.4(a)(7)) Yes No

h. The type of action taken (§ 203.4(a)(8)) Yes No

i. The date such action was taken (§ 203.4(a)(8)) Yes No

j. The location of the property to which the loan or application relates, by(§ 203.4(a)(9))

i. MSA or MD number (5 digits) Yes No

ii. State (2 digits) Yes No

iii. County (3 digits) Yes No

iv. Census tract number (6 digits) Yes No

k. The ethnicity and race of the applicant or borrower (§ 203.4(a)(10)) Yes No

l. The ethnicity and race of the co-applicant or co-borrower(§ 203.4(a)(10)) Yes No

m. The sex of the applicant or borrower (§ 203.4(a)(10)) Yes No

n. The sex of the co-applicant or co-borrower (§ 203.4(a)(10)) Yes No

Note: Collection of data on ethnicity, race, and sex is mandatory for alltransactions unless the financial institution purchased the loans or theborrower is not a natural person (that is, is a corporation or partnership).

Home Mortgage Disclosure: Examination Checklist


o. The gross annual income relied on in processing the applicant’s request(§ 203.4(a)(10)) Yes No

Note: Collection of data on annual income is mandatory for all transactionsunless the financial institution purchased the loan, the borrower is not anatural person, the loan is for a multifamily dwelling, income was not reliedon in the credit decision, or the loan was made to an employee.

p. The type of entity purchasing a loan that the financial institution originatesor purchases and then sells within the same calendar year(§ 203.4(a)(11)) Yes No

q. For originated loans subject to Regulation Z, the difference between theloan’s APR and the yield on Treasury securities having a comparablematurity period, if the APR equals the yield on the Treasury security witha comparable maturity period or exceeds it by 3 percentage pointsfor first-lien loans and 5 percentage points for subordinate-lien loans(§ 203.4(a)(12)) Yes No

r. Whether the loan is subject to HOEPA (§ 203.4(a)(13)) Yes No

s. The lien status of the property relating to the loan or application(§ 203.4(a)(14)) Yes No

t. Does the institution provide the reasons for denial of an application?(§ 203.4(c)(1)) Yes No

If it does, are the reasons accurate? Yes No

u. Is the HMDA-LAR updated within thirty calendar days after the end of thequarter in which final action is taken? (§ 203.4(a)) Yes No

10. Does the institution request ethnicity, race, and sex data for all telephone,mail, and Internet applications in accordance with appendix B to Regula-tion C? (§ 203.4(b)(1)) Yes No

11. For applications taken face to face, does the institution note data concerningethnicity, race, and sex on the basis of visual observation or surname if theapplicant chooses not to provide this information? (§ 203.4(b)(1)) Yes No

Note: If the applicant fails to provide this information in mail, telephone, orInternet applications, ethnicity, race, and sex are not recorded; instead, anapplicable code number is provided—ethnicity, 3; race, 6; and sex, 3 (‘‘NA’’should not be used for these three situations).

Disclosure and Reporting12. Is the loan or applicant data presented in the format prescribed in appendix

A to Regulation C? (§ 203.4(a)) Yes No

13. Has the institution reported all applications for, originations of, and purchasesof home purchase loans, home improvement loans, and refinancings?(§ 203.4(a)) Yes No

14. Has the financial institution refrained from reporting the following?(§ 203.4(d))

a. Loans originated or purchased by the financial institution acting in afiduciary capacity (such as trustee) Yes No

b. Loans on unimproved land Yes No

c. Temporary financing (such as a bridge or construction loan) Yes No

d. Purchase of an interest in a pool of loans (such as mortgage-participationcertificates, mortgage-backed securities, or real estate mortgage invest-ment conduits) Yes No

e. Purchase solely of the right to service loans Yes No



f. Loans acquired as part of a merger or acquisition or as part of theacquisition of all assets and liabilities of a branch office Yes No

g. A refinancing if, under the loan agreement, the financial institution isunconditionally obligated to refinance the obligation, or is obligated torefinance the obligation subject to conditions under the borrower’s control(Regulation C, appendix A, I(A)(5a)) Yes No

15. Did the financial institution submit its completed HMDA-LAR to theappropriate supervisory agency in automated machine-readable format byMarch 1 following the calendar year during which the data were compiled?(§ 203.5(a)) Yes No

Note: Financial institutions that report twenty-five or fewer entries on theirHMDA-LAR may collect and report their HMDA data in paper form. Financialinstitutions opting to submit their data in such a manner must send two typedor computer-printed copies. The institution must use the format of theHMDA-LAR but need not use the form itself.

16. Has an officer of the financial institution signed the HMDA-LAR transmittalsheet certifying the accuracy of the data contained in the register? Yes No

17. Is the transmittal sheet accurately completed? Yes No

18. Has the financial institution maintained its HMDA-LAR in its records for atleast three years? (§ 203.5(a)) Yes No

19. Has the financial institution made its FFIEC-prepared disclosure statement

a. Available to the public at its home office no later than three business daysafter receiving it from the FFIEC and Yes No

b. Available within ten business days in at least one branch office in eachadditional MSA or MD in which it has offices; or posted, in the lobby ofeach branch office in other MSAs or MDs in which it has offices, theaddress to which written requests should be sent, and delivered a copy ofthe disclosure statement within fifteen calendar days of receiving a writtenrequest (§ 203.5(b)) Yes No

20. Has the financial institution made its modified HMDA-LAR (modified byremoval of loan application numbers, dates applications were received, anddates of action taken) for the preceding calendar year available to the publicby March 31 for requests received on or before March 1 and within thirty daysfor requests received after March 1? (§ 203.5(c)) Yes No

21. Has the financial institution retained its modified HMDA-LARs for three years? Yes No

Does the institution have policies and procedures to ensure that its modifiedHMDA-LARs are available to the public during that term? (§ 203.5(d)) Yes No

22. Has the financial institution retained its disclosure statements for five years?(§ 203.5(d)) Yes No

23. Does the financial institution have policies and procedures to ensure thatits disclosure statements are available to the public during that term?(§ 203.5(d)) Yes No

24. Does the financial institution make its modified HMDA-LARs and disclosurestatements available for inspection and copying during the hours the office isnormally open to the public for business? Yes No

If it imposes a fee for costs incurred in providing or reproducing the data, isthe fee reasonable? (§ 203.5(d)) Yes No

25. Has the financial institution posted a general notice about the availability of itsdisclosure statement in the lobby of its home office and in each branch officelocated in an MSA? (§ 203.5(e)) Yes No



26. Does the institution provide promptly, upon request, the location of theinstitution’s offices where the statement is available for inspection andcopying, or include the location in the lobby notice? (§ 203.5(e)) Yes No

27. Did errors occur in the previous reporting period? (Review the financialinstitution’s most recent disclosure statement, HMDA-LAR, modified HMDA-LAR, and any applicable correspondence from the regulatory agency, suchas notices of noncompliance.) Yes No

28. If errors did occur, has the financial institution taken appropriate steps tocorrect and prevent such errors in the future?

a. Do individuals who are responsible for all data entry

i. Receive appropriate training in the completion of the HMDA-LAR Yes No

ii. Receive copies of Regulation C, including instructions for completionof the HMDA-LAR and the FFIEC publication ‘‘A Guide to HMDAReporting—Getting it Right!’’ Yes No

iii. Know whom to contact, at the financial institution or the institution’ssupervisory agency, if they have questions not answered by the writtenmaterials Yes No

b. Are the financial institution’s loan officers, including loan officers in thecommercial loan department who may handle loan applications for HMDAreportable loans (such as multifamily and mixed-use properties and smallbusiness refinances secured by residential real estate),

i. Informed of the reporting requirements so they can assemble thenecessary information, and do they understand the importance ofaccuracy Yes No

ii. Familiar with the disclosure statements that are produced from thedata and cognizant of the ramifications for the financial institution if thedata are wrong Yes No

iii. Do they maintain appropriate documentation of the informationentered on the HMDA-LAR? Yes No

c. If data are collected at more than one branch, are the appropriatepersonnel sufficiently trained to ensure that all branches are reportingdata using the same guidelines? Yes No

d. Does the financial institution have internal control processes to ensure thatthe individuals who capture and code the data are doing so accuratelyand consistently? Yes No

e. Does the financial institution have established controls to ensure theseparation of duties (for example, data entry, review, oversight, andapproval)? Yes No



Regulation HFlood Insurance

Background

The Board’s Regulation H (Membership of StateBanking Institutions in the Federal Reserve System)implements the flood insurance provisions of theNational Flood Insurance Act of 1968 for statemember banks. This legislation made federallysubsidized flood insurance available to owners ofimproved real estate or mobile homes located ina special flood hazard area if their communityparticipates in the National Flood Insurance Pro-gram. The Flood Disaster Protection Act of 1973directed the Board and other federal financialregulatory agencies to adopt rules requiring regu-lated lenders to require flood insurance on improvedreal estate or mobile homes serving as collateralfor a loan if the property was located in, or wasto be located in, a special flood hazard area in aparticipating community.1

The National Flood Insurance Reform Act of 1994(Reform Act; Title V of the Riegle CommunityDevelopment and Regulatory Improvement Act of1994) comprehensively revised the federal floodinsurance statutes.2 The reforms were aimed atincreasing compliance with flood insurance require-ments, increasing participation in the NationalFlood Insurance Program (and thereby providingadditional income to the National Flood InsuranceFund), and decreasing the financial burden offlooding on the federal government, taxpayers, andflood victims.3

The Reform Act required the federal financialregulatory agencies to revise their existing floodinsurance regulations and brought the Farm CreditAdministration under the act. Because none of theflood-related laws provide rule-writing authoritysolely to one financial regulator, in August 1996 theagencies jointly issued a final rule (61 FR 45684)that incorporated the changes to the agencies’flood regulations.

The Reform Act also applied flood insurancerequirements directly to the loans purchased by theFederal National Mortgage Association (FannieMae) and the Federal Home Loan MortgageCorporation (Freddie Mac) and to agencies thatprovide government insurance or guarantees, suchas the Small Business Administration, the Federal

Housing Administration, and the Department ofVeterans Affairs.

The objectives of the Flood Disaster ProtectionAct (FDPA) include

• Providing flood insurance to owners of improvedreal estate located in special flood hazard areas(SFHAs) of communities participating in theNational Flood Insurance Program (NFIP)

• Requiring communities to enact measuresdesigned to reduce or avoid future flood lossesas a condition for making federally subsidizedflood insurance available

• Requiring federal financial regulatory agenciesto adopt regulations prohibiting their regulatedlending institutions from making, increasing,extending, or renewing a loan secured byimproved real estate or a mobile home located,or to be located, in an SFHA of a communityparticipating in the NFIP unless the propertysecuring the loan is covered by flood insurance

• Prohibiting federal agencies, such as the FederalHousing Administration, the Small BusinessAdministration, and the Department of VeteransAffairs, from subsidizing, insuring, or guarantee-ing any loan if the property securing the loan is inan SFHA of a community not participating in theNFIP

The National Flood Insurance Program is admin-istered by the Federal Emergency ManagementAgency (FEMA).4 Its responsibilities include

• Identifying communities with SFHAs

• Issuing flood-boundary and flood-rate maps forflood-prone areas

• Making flood insurance available through theNFIP ‘‘Write Your Own’’ program, which enablesthe public to purchase NFIP coverage fromprivate companies that have entered into agree-ments with the Federal Insurance Administration

• Assisting communities in adopting floodplain-management requirements

• Administering the insurance program (Licensedproperty and casualty insurance agents andbrokers provide the primary connection betweenthe NFIP and the insured party. Licensed agentssell flood insurance, complete the insured party’sapplication form, report claims, and follow upwith the insured for renewals of the policies.)1. The two acts are codified at 42 USC 4001–4129. The

regulatory agencies are the OCC, FDIC, OTS, NCUA, and theFederal Reserve.

2. Pub. L. 103-325, tit. V, 108 Stat. 2160, 2255–87 (September23, 1994).

3. H.R. Conf. Rep. No. 652, 103d Cong., 2d Sess. 195 (1994)(Conference Report).

4. FEMA regulations implementing the NFIP appear at 44 CFR59–77.

Consumer Compliance Handbook Reg. H – Flood • 1 (1/06)

Requirements for Lending Institutions

Basic Requirements

A lending institution must require flood insurancefor the term of a loan when all three of the followingfactors are present:

• The institution makes, increases, extends, orrenews a loan (commercial or consumer) securedby improved real estate or a mobile home that isaffixed to a permanent foundation,

• The loan is secured by property located in aspecial flood hazard area as identified by FEMA,and

• The community participates in the NFIP. (Infor-mation on whether a community participates inthe NFIP can be obtained from FEMA’s web site,www.fema.gov.)

In the case of mobile homes, the criteria forcoverage relate to whether the mobile home isaffixed to a permanent foundation. An institutiondoes not have to obtain a security interest in theunderlying real estate in order for the loan to becovered.

Institutions are not prohibited from making,increasing, extending, or renewing a conventionalloan in an SFHA if the community in which thesecurity property is located has been mapped byFEMA but does not participate in the NFIP.However, federal flood insurance is not available inthese communities. Moreover, institutions may notmake government-guaranteed or government-insured loans if the community has been mappedby FEMA and does not participate in the NFIP.

Flood insurance requirements also apply to loanswhere a security interest in improved real propertyis taken only ‘‘out of an abundance of caution.’’Section 102(b)(1) of the FDPA, as amended by theReform Act, provides that a regulated lendinginstitution may not make, increase, extend, orrenew any loan secured by improved real propertythat is located in a special flood hazard area unlessthe improved real property is covered by theminimum amount of flood insurance required bystatute.5

Special Situation—Table-Funded Loans

In the typical table-funding situation, the partyproviding the funding reviews and approves thecredit standing of the borrower and issues acommitment to the broker or dealer to purchase theloan at the time the loan is originated. Frequently, allloan documentation and other statutorily mandatednotices are supplied by the party providing thefunding, rather than the broker or dealer. The

funding party provides the original funding ‘‘at thetable’’ when the broker or dealer and the borrowerclose the loan. Concurrent with the loan closing, thefunding party acquires the loan from the broker ordealer. While the transaction is, in substance, aloan made by the funding party, it is structured as aloan purchase.

A typical table-funded transaction should beconsidered a loan that is made, rather thanpurchased, by the entity that actually supplies thefunds. Regulated institutions that provide tablefunding to close loans originated by a mortgagebroker or mobile home dealer are considered to be‘‘making’’ a loan for purposes of the flood insurancerequirements.

Treating table-funded loans as loans made bythe funding entity need not result in duplication offlood-hazard determinations and borrower notices.The funding entity may delegate to the broker ordealer originating the transaction the responsibilityfor fulfilling the flood insurance requirements ormay otherwise divide the responsibilities with thebroker or dealer, as is currently done with respectto the requirements under the Real Estate Settle-ment Procedures Act.

Exemptions from thePurchase Requirement

The flood insurance purchase requirement doesnot apply to the following two loan situations:

• Loans on state-owned property covered underan adequate policy of self-insurance satisfactoryto the director of FEMA (The director willperiodically publish a list of state property fallingwithin this exemption.)

• Loans having (1) an original principal balance of$5,000 or less and (2) an original repayment termof one year or less

A lending institution may not exempt a loan fromflood coverage on the basis of its own interpretationof the elevations at which floods may occur. OnlyFEMA has the authority to revise or amend floodmaps and to make flood-level determinations thatexempt a loan from the required purchase of floodinsurance. As part of its duties, FEMA providesofficial elevation determinations, makes map revi-sions or amendments, and issues formal Letters ofMap Amendments (LOMAs) and Letters of MapRevisions (LOMRs).

Amount of Flood Insurance Required

The amount of flood insurance required must be atleast equal to the lesser of (1) the outstandingprincipal balance of the loan, (2) the maximumamount available under the NFIP, or (3) the total5. See 42 USC 4012a(b)(1).

Flood Insurance

2 (1/06) • Reg. H – Flood Consumer Compliance Handbook

value of the secured property (land and improve-ments) minus the total value of the land.

Flood insurance is not available, and thus is notrequired, for the value of any land that serves assecurity for a loan. As a result, when determiningthe amount of flood insurance required, an institu-tion should deduct the value of the land from thetotal value of the secured property (land plusimproved real property or mobile home) to estimatean amount for flood coverage. Unless a structure(improved real property or mobile home) locatedon the land is specifically excluded from serving assecurity for the loan, flood insurance should berequired on all insurable structures located on thesecured property, including cases in which thevalue of the land alone would more than adequatelycover the loan amount. In such cases, the lenderdoes not have the option of exempting the borrowerfrom the flood insurance purchase requirementsfor insurable structures located on the securedproperty.

Since March 1995, the maximum amounts ofcoverage for flood policies have been

• $250,000 for residential property structures and$100,000 for contents

• $500,000 for nonresidential structures and$500,000 for contents

Waiting Period

Flood insurance policies that are not issued inconjunction with a loan origination, refinance,modification, or forced placement have a thirty-daywaiting period. The congressional intent behindthis waiting period was to prevent the purchase offlood insurance (and any direct loss to the U.S.government, which backs the insurance) in times ofimminent loss.

There is no waiting period for policies issued inconjunction with a loan to purchase, refinance, ormodify an existing mortgage. Nor is there a waitingperiod for second mortgages, home equity loans,‘‘forced placements’’ (see later section), or recom-mendations by the insurer to increase insuranceamounts at renewal.6

Initial purchases of flood insurance made inconnection with a map revision or an update tofloodplain areas of flood zones are also exemptedfrom a waiting period. In these cases, however, theflood insurance purchase must occur within oneyear of FEMA’s publication of the notice of maprevision or updating.

Special Situations—Second Mortgagesand Home Equity Loans

Both second mortgages and home equity loanscome within the purchase provisions of the FDPA.As only one NFIP policy may be issued for abuilding, an institution should not request a newflood insurance policy if one already exists. Instead,the institution should have the borrower contact theinsurance agent

• To inform the agent of the intention to obtain aloan involving a subordinate lien

• To obtain verification of the existence of a floodinsurance policy

• To check whether the amount of insurancecovers all loan amounts

After obtaining this information, the insuranceagent should increase the amount of coverage, ifnecessary, and issue an endorsement that identi-fies the institution as a lien holder.

For loans with approved lines of credit to be usedin the future, calculating the amount of insurancefor the loan may be difficult, as the borrower will bedrawing down differing amounts on the credit lineat different times. In those instances in which thereis no policy on the collateral, the borrower must, ata minimum, obtain a policy as a requirement fordrawing on the line. As a matter of administrativeconvenience to ensure compliance with the require-ments, an institution may take the followingapproaches:

• Review its records periodically so that as drawsare made against the line or repayments aremade to the account, the appropriate amount ofinsurance coverage is maintained

• Upon origination, require the purchase of floodinsurance for the total amount of the loan, themaximum amount of flood insurance coverageavailable, or the value of the secured propertyminus the land, whichever is less

Special Situation—Condominium Policies

Condominium associations are able to managetheir flood insurance needs and meet their by-lawrequirements without relying on the actions of theunit owners under a special type of flood insurancepolicy issued by FEMA—a Residential Condo-minium Building Association Policy (RCBAP).

A unit owner’s mortgage lender has no directinterest in an RCBAP and should not be named onthe policy. However, a unit owner should provide itsmortgage lender evidence of the RCBAP bysupplying a copy of the declarations page docu-menting the specific dollar amount of coverage. If6. FEMA Policy Issuance 5-98, effective October 1, 1998.

Flood Insurance


the unit owner’s mortgage lender determines thatthe coverage purchased under the RCBAP isinsufficient to meet the mandatory purchase require-ments, it should request that the borrower ask theassociation to carry adequate limits or shouldrequire the borrower to purchase a separate policy.

The maximum amount of building coverage thatmay be purchased on a high-rise or low-risecondominium under the RCBAP is the replacementcost value of the building or the total number ofunits in the condominium building multiplied by$250,000, whichever is less. The maximum allow-able contents coverage is the actual cash value ofthe commonly owned contents up to a maximum of$100,000 per building.

Escrow Requirements

An institution must require the escrow of floodinsurance premiums for loans secured by ‘‘residen-tial improved real estate’’ if it requires the escrow ofother funds to cover other charges associated withthe loan, such as taxes, premiums for hazard or fireinsurance, or other fees. Depending on the typeof loan, the escrow account for flood insurancepremiums may be subject to section 10 of the RealEstate Settlement Procedures Act (RESPA),(12 USC 2609). This section generally limits theamount that may be maintained in escrow accountsfor consumer mortgage loans and requires noticescontaining escrow account statements for thoseaccounts. RESPA escrow requirements apply to‘‘federally related mortgage loans,’’ a category ofloans that is narrower in scope than the ReformAct’s ‘‘residential improved real estate.’’ An escrowaccount for ‘‘residential improved real estate’’ thatis not also a ‘‘federally related mortgage loan’’ mustcomply with the escrow requirements of the ReformAct but does not need to comply with section 10 ofRESPA.

The escrow provisions are designed to improvecompliance with flood insurance requirements byensuring that homeowners located in special floodhazard areas obtain and maintain flood insurancefor the life of the loan. However, the Reform Act itselfdoes not restrict the flood insurance escrowrequirement to consumer mortgage loans. Thedeterminative factor in the coverage of the escrowrequirement is not the purpose of the loan, but thepurpose of the building—whether it is used prima-rily for residential purposes or for other purposes.Because the Reform Act defines ‘‘residentialimproved real estate’’ as ‘‘improved real estate forwhich the improvement is a residential building,’’the escrow provisions cover, for example, multi-family properties containing five or more residentialunits.

Types of Escrow Accounts Covered

The escrow requirement does not apply if theinstitution does not require the maintenance ofother escrows or the establishment of an escrowaccount in connection with the particular type ofloan, even if permitted by the loan documents. Indetermining whether an escrow account arrange-ment is voluntary, it is appropriate to look to the loanpolicies and practices of the institution and thecontractual agreement underlying the loan. If theloan documentation permits the institution to requirean escrow account and its loan policies normallywould require an escrow account for a loan withparticular characteristics, an escrow account inconnection with such a loan generally would not beconsidered to be voluntary.

Voluntary payments for credit life insurance donot constitute escrows for purposes of RESPA.7 Asa result, payments for credit life insurance andsimilar types of contracts should not trigger theescrow of flood insurance premiums.

Standard Flood HazardDetermination Form

Whenever an institution makes, increases, extends,or renews any loan secured by improved realproperty or a mobile home, it must use theStandard Flood Hazard Determination Form(SFHDF) developed by FEMA. This form, whichmay be used in printed or electronic format, helpslenders determine whether the improved realproperty or mobile home securing the loan islocated in a special flood hazard area.

The institution must retain a copy of the com-pleted form, in either hard copy or electronicformat, for the period of time it owns the loan. If ituses an electronic format, the institution may alterthe format and need not follow the layout of theSFHDF exactly. However, the institution must usethe fields and elements listed on the form. A copyof the form is available on FEMA’s web site(www.fema.gov).

Reliance on Prior Determination

When determining whether flood insurance isrequired, an institution may consider the conclu-sions from a previous flood hazard area determina-tion if both of the following conditions are met:

• The previous determination is not more thanseven years old.

• The basis for that determination was recorded onthe SFHDF mandated by the Reform Act.

7. See 60 FR 24733 (May 9, 1995) (revising 24 CFR 3500.17).

Flood Insurance


An institution may not rely on a previous deter-mination in two situations:

• If FEMA’s map revisions or updates show that thesecurity property is now located in an SFHA

• If the lender contacts FEMA and learns that maprevisions or updates affecting the security prop-erty have been made since the date of theprevious determination

An institution may not rely on a previous deter-mination set forth on an SFHDF when it makes aloan—only when it increases, extends, renews, orpurchases a loan. Subsequent transactions by thesame institution with respect to the same property,such as assumptions, refinancings, and second-lien loans, are to be treated as loan renewals. Inthose limited circumstances, a new determinationis not required, assuming that the other require-ments are met.

Forced-Placement Requirements

Although an institution is not required to monitor formap changes, if at any time during the life of theloan the institution or its servicer determines thatflood insurance is required or is deficient, theinstitution must take steps to ‘‘force place’’ therequired insurance.

Under the Reform Act, an institution, or a serviceracting on its behalf, must purchase, or force-place,flood insurance for the borrower if the institution orthe servicer determines that the security property isnot covered by any insurance or by an adequateamount of flood insurance. Before purchasing floodinsurance in the appropriate amount on the bor-rower’s behalf, however, the institution must firstprovide the borrower with a notice of the deficiencyand the opportunity to obtain the correct amount ofinsurance. If the borrower fails to obtain theinsurance within forty-five days of the date of thenotice, the institution may force-place the insurance.

As long as an institution owns a loan subject toflood insurance requirements, the institution or itsservicer continues to be responsible for ensuringthat flood insurance is maintained as required. If aborrower allows a required policy to lapse, theinstitution or its servicer is required to commenceforced-placement procedures.8

Forced placement is not a consideration at thetime an institution makes, increases, extends, orrenews a loan, as a lender is obligated to requirethat flood insurance be in place prior to closing.Forced-placement authority is designed to be used

when an institution or its servicer, during the courseof the loan, determines that flood insurance cov-erage on the security property is required andis either deficient or missing. There is no requiredspecific form of notice to borrowers for use inconnection with the forced-placement procedures.An institution or its servicer may choose to send thenotice directly or may use the insurance companythat issues the forced-placement policy to send thenotice.

An optional program—the Mortgage PortfolioProtection Program—has been developed by FEMAto assist lenders with the placement of insurancewhen only limited underwriting information is avail-able. The rates that may be charged for force-placed policies are considerably higher than therates available for voluntary policies because of theabsence of underwriting data.

Determination Fees

An institution or its servicer may charge a reason-able fee to the borrower for the costs of making aflood-hazard determination under the followingcircumstances:

• The determination is triggered by a borrower-initiated transaction (that is, the lender is making,increasing, extending, or renewing a loan at theborrower’s request).

• The determination reflects FEMA’s revision ofmaps.

• The determination results in the purchase offlood insurance by the lender under the forced-placement provision.

The authority to charge a borrower a reasonablefee for a flood-hazard determination extends to afee for life-of-loan monitoring by either the insti-tution, its servicer, or a third party, such as aflood-hazard-determination company.

Truth in Lending Act Issues

The official staff commentary to Regulation Z statesthat fees associated with real estate mortgagetransactions are excluded from the finance chargeif they are imposed solely in connection with theinitial decision to grant credit.9 Thus, the fee forconducting an initial flood-hazard determination isexcluded from the finance charge. However, theexclusion does not apply to fees for services to beperformed periodically during the term of the loan,regardless of when the fee is collected. Thus, a feefor one or more determinations of the current floodinsurance requirements during the loan term is a

8. The insurance carrier should notify the institution or itsservicer, along with the borrower, when the insurance contract isdue for renewal. The insurance carrier also notifies these parties ifit has not received the policy renewal. 9. See 12 CFR 226.4(c)(7)-3 of the official staff commentary.

Flood Insurance


finance charge, regardless of whether the fee isimposed at closing or when the service is per-formed. If a creditor is uncertain about what portionof a fee to be paid at consummation or loan closingis related to the initial decision to grant credit, theentire fee may be treated as a finance charge.

Notice Requirements

When the security property is or will be located in aSFHA, the institution must provide a written noticeto the borrower and the servicer. The notice mustbe provided whether the security property islocated in a participating or a nonparticipatingcommunity. The notice must also be provided evenif the lender is relying on a prior determination.

The written notice must contain the followinginformation:

• A warning that the building or mobile home is orwill be located in a SFHA

• A description of the flood insurance purchaserequirements contained in section 102(b) of theFDPA, as amended

• A statement as to whether flood insurancecoverage is available under the NFIP and mayalso be available from private insurers

• A statement as to whether federal disaster reliefassistance may be available in the event ofdamage to the building or mobile home causedby flooding in a federally declared disaster

An institution may use the sample form containedin appendix A to section 208.25 of Regulation H tocomply with the notice requirements. Lenders arefree to add information to the form, personalize theform, or change its format if they wish. However, toensure compliance with the notice requirements, alender-revised notice must provide the borrower, ata minimum, with the information required by theregulation.

Reliance on Assurancesby the Seller or Lessor

An institution may rely on assurances from a selleror lessor that the seller or lessor has provided therequisite notice to the purchaser or lessee. Thisalternate form of notice might be used in a situationin which the lender is providing financing through adeveloper for the purchase of condominium unitsby multiple borrowers. Because the lender may notdeal directly with individual condominium unitpurchasers, the lender need not provide notice toeach purchaser but may instead rely on thedeveloper or seller’s assurances that the developeror seller has given the required notice. The samemay be true for a cooperative conversion, in whichthe sponsor of the conversion may be providing

the required notice to the purchasers of thecooperative shares. A purchaser of shares in acooperative may be considered a ‘‘lessee’’ ratherthan a purchaser with respect to the underlying realproperty.

Timing of Notice

Delivery of notice must take place within a ‘‘reason-able time’’ before completion of the transaction.What constitutes ‘‘reasonable’’ notice will necessar-ily vary according to the circumstances of particu-lar transactions. In any case, a borrower shouldreceive notice in time to ensure that he or she hasthe opportunity to

• Become aware of the borrower’s responsibilitiesunder the NFIP and

• Purchase flood insurance before completion ofthe loan transaction, if applicable.

The Board (and the other agencies) generallycontinues to regard ten days as a ‘‘reasonable’’time interval.

Notice to the Servicer

Loan servicers must also be notified of loanssecured by properties located in special floodhazard areas. In many cases, however, the servic-er’s identity is not known until well after the closing;consequently, notification to the servicer in advanceof the closing would not be possible or would serveno purpose. As a result, notice to the servicershould be given as promptly as practicable afterthe institution provides notice to the borrower, andno later than at the time the lender transmits to theservicer other loan data concerning hazard insur-ance and taxes. The delivery of a copy of theborrower’s notice to the servicer will suffice asnotice to the servicer.

Notice to the Director of FEMA

An institution must notify the director of FEMA, orthe director’s designee, of the identity of the loanservicer and of any change in the servicer. FEMAhas designated the insurance carrier as its desig-nee to receive notice of the servicer’s identity andof any change therein. Notice of the identity of theservicer enables FEMA’s designee to providenotice to the servicer forty-five days before expira-tion of a flood insurance contract.

An institution must also notify the director ofFEMA (or its designee) within sixty days of theeffective date of the transfer of servicing. Thenotice may be given electronically or by othermeans acceptable to FEMA’s designee. Althoughno standard form of notice is required, the informa-

Flood Insurance


tion should be sufficient to enable the director, orthe director’s designee, to identify the securityproperty and the loan as well as the new servicerand its address.

Recordkeeping Requirements

An institution must retain

• Copies of completed SFHD forms, in either hardcopy or electronic format, for as long as theinstitution owns the loan

• Records of the receipt of the notice to theborrower and the servicer for as long as theinstitution owns the loan

No particular form is required for the record ofreceipt; however, the record should contain astatement from the borrower indicating that theborrower has received the notification. Examples ofrecords of receipt include

• A borrower’s signed acknowledgment on a copyof the notice

• A borrower-initialed list of documents and disclo-sures that the lender provided the borrower

• A scanned electronic image of a receipt or otherdocument signed by the borrower

An institution may keep the record of receiptprovided by the borrower and the servicer in the

form that best suits the institution’s business.Institutions that retain these records electronicallymust be able to retrieve them within a reasonabletime.

Penalties and Liabilities

Civil money penalties may be imposed for viola-tions of the following:

• Flood insurance purchase requirements

• Escrow requirements

• Notice requirements

• Forced-placement requirements

If an institution is found to have a pattern orpractice of committing violations, the agenciesmust assess civil penalties in an amount not toexceed $385 per violation, with a total amountagainst any one regulated institution not to exceed$125,000 in any calendar year. (These amounts areperiodically adjusted for inflation. The most recentadjustments occurred in 2004.) Penalties are paidinto the National Flood Mitigation Fund. Liability forviolations may not be transferred to a subsequentpurchaser of a loan. Liability for penalties expiresfour years from the time of the occurrence of theviolation.

Flood Insurance


Regulation H—Flood InsuranceExamination Objectives and Procedures


1. To determine whether an institution performsrequired flood determinations for loans securedby improved real estate or a mobile homeaffixed to a permanent foundation in accor-dance with the regulation

2. To determine if the institution requires floodinsurance in the correct amount when it makes,increases, extends, or renews a loan secured byimproved real estate or a mobile home locatedor to be located in a standard flood hazard area(SFHA)

3. To determine if the institution provides therequired notices to the borrower, the servicer,and the director of the Federal EmergencyManagement Agency (FEMA) whenever floodinsurance is required as a condition of the loan

4. To determine if the institution requires floodinsurance premiums to be escrowed when floodinsurance is required on a residential buildingand other items are required to be escrowed

5. To determine whether the institution complieswith the forced-placement provisions if at anytime during the term of a loan it determines thatflood insurance on the loan is not sufficient tomeet the requirements of Regulation H

6. To initiate corrective action when policies orinternal controls are deficient, or when violationsof law or regulation are identified


The examination procedures should be followed,as appropriate, by

• Reviewing previous examinations and supervi-sory correspondence

• Obtaining copies of and reviewing the institu-tion’s policies, procedures, and other pertinentinformation

• Reviewing the institution’s system of internalcontrols

• Discussing issues with management

• Reviewing a sample of loan files

Coverage and Internal Control

1. Determine the method(s) used by the institutionto ascertain whether improved real estate ormobile homes are or will be located in an SFHA.

2. Verify that the process used accurately identi-fies SFHAs.

3. For those SFHAs identified, determine if thecommunities in which they are located partici-pate in the National Flood Insurance Program(NFIP).

4. If the institution provides ‘‘table funding’’ to closeloans originated by mortgage brokers or deal-ers, verify that it complies with regulatoryrequirements.

5. If the institution purchases servicing rights,review the contractual obligations placed on theinstitution, as servicer, by the owner of the loansto ascertain if flood insurance requirements areidentified and compliance responsibilities areadequately addressed.

6. If the institution uses a third party to serviceloans, review the contractual obligationsbetween the parties to ascertain that floodinsurance requirements are identified and com-pliance responsibilities are adequatelyaddressed.

Property Determination Requirements

1. Verify that flood-zone determinations are accu-rately prepared on the Standard Flood HazardDetermination Form (SFHDF).

2. Verify that the institution relies on a previousdetermination only if the determination is nomore than seven years old and is recorded onthe SFHDF and that the property is not in acommunity that has been remapped.

3. If the institution uses a third party to prepareflood-zone determinations, review the contrac-tual obligations between the parties to ascertainthat flood insurance requirements are identifiedand compliance responsibilities are adequatelycovered, including provisions concerning theextent of the third party’s guarantee of work andthe procedures in place to resolve disputesrelating to determinations.

4. Verify that the institution retains a copy of thecompleted SFHDF, in either hard copy orelectronic format, for as long as it owns the loan.

Purchase Requirements

1. For loans that require flood insurance, deter-mine that sufficient insurance was obtainedprior to loan closing and is maintained for the lifeof the loan.


2. If the institution makes loans insured or guaran-teed by a government agency (Small BusinessAdministration, Department of Veterans Affairs,or Federal Housing Administration), determinehow it complies with the requirement not tomake these loans if the security property is in aSFHA within a nonparticipating community.

Determination-Fee Requirements

1. Determine that any fees the institution chargesto the borrower for flood-zone determinationsare (absent some other authority, such ascontract language) charged only when a loan

• Is made, increased, renewed, or extended

• Is made in response to a remapping byFEMA

• Results in the purchase of flood insuranceunder the forced-placement provisions

2. If other authority permits the institution to chargefees for determinations in situations other thanthe ones listed in item 1, determine if theinstitution is consistent in this practice.

3. Determine the reasonableness of any feescharged to a borrower for flood determinationsby evaluating the method used by the institutionto determine the amount of the charge. Con-sider, for example, the relationship of the feescharged to the cost of the services provided.

Notice Requirements

1. Ascertain that written notice is mailed or deliv-ered to the borrower within a reasonable timeprior to loan closing.

2. Verify that the notice contains

• A warning that the property securing the loanis or will be located in a SFHA

• A description of the flood insurance pur-chase requirements

• A statement, if applicable, that flood insur-ance coverage is available under the NFIPand may also be available from privateinsurers

• A statement as to whether federal disasterrelief assistance may be available in theevent of damage to the property caused byflooding in a federally declared disaster

3. If the seller or lessor provided the notice to thepurchaser or lessee, verify that the institutionobtained satisfactory written assurance that the

notice was provided within a reasonable timebefore completion of the sale or lease transac-tion.

4. Verify that the institution retains a record ofreceipt of the notice provided to the borrower foras long as it owns the loan.

5. If applicable, verify that the institution hasprovided written notice to the servicer of theloan within the prescribed time frames and thatthe institution retains a record of receipt of thenotice for as long as it owns the loan.

6. If the institution transfers the servicing of loansto another servicer, ascertain whether it pro-vides notice of the new servicer’s identity to theflood insurance carrier (the director of FEMA’sdesignee) within sixty days of the effective dateof the transfer of the servicing.

Escrow Requirements

1. If the institution’s policies or loan documentsrequire the escrow of funds to cover suchcharges as taxes, premiums for hazard insur-ance, or other fees, verify that the institutionrequires the escrow of funds for loans securedby residential improved real estate to coverpremiums and other charges associated withflood insurance.

2. For loans closed after October 1, 1996, if floodinsurance is required and the loan is subject tothe Real Estate Settlement Procedures Act(RESPA), verify that the institution’s escrowprocedures comply with section 10 of RESPA(section 3500.17 of HUD Regulation X).

Forced-Placement Requirements

1. If the institution determines that flood insurancecoverage is less than the amount required bythe Flood Disaster Protection Act of 1973,ascertain that is has appropriate policies andprocedures in place to exercise its forced-placement authority.

2. If the institution is required to force-placeinsurance, verify that

• The institution provides written notice to theborrower that flood insurance is required

• If the borrower does not purchase therequired insurance within forty-five days fromthe time the institution provides the writtennotice, that the institution purchases therequired insurance on the borrower’s behalf

Flood Insurance: Examination Objectives and Procedures


Regulation H—Flood InsuranceExamination Checklist

Coverage1. Does the institution offer or extend credit (consumer or commercial) that is

secured by improved real estate or mobile homes as defined in Regulation H? Yes No

• If it does, complete the remainder of this checklist.

2. If the institution provides ‘‘table funding’’ to close loans originated by mortgagebrokers or dealers, does it have procedures to ensure that the requirements ofthe regulation are followed? Yes No

3. If the institution purchases servicing rights to loans covered by the regulation,do the documents between the parties specify the contractual obligations onthe institution with respect to flood insurance compliance? Yes No

4. If the institution uses third parties to service loans covered by the regulation,do the contractual documents between the parties meet the requirements ofthe regulation? Yes No

Property Determination1. If the institution uses a third party to prepare flood-zone determinations, do the

contractual documents between the parties

• Provide for the third party’s guarantee of work Yes No

• Contain provisions to resolve disputes relating to determinations, to allocateresponsibility for compliance, and to address which party will beresponsible for penalties incurred for noncompliance Yes No

2. Are the determinations prepared on the Standard Flood Hazard DeterminationForm (SFHDF) developed and authorized by the Federal EmergencyManagement Agency (FEMA)? Yes No

• If the form is maintained in electronic format, does it contain the elementsrequired by FEMA? Yes No

3. Does the institution maintain a record of the SFHDF in either hard copy orelectronic format for as long as it owns the loan? Yes No

4. Does the institution rely on a prior determination only if it was made on theSFHDF and is no more than seven years old and the community has not beenremapped? Yes No

Determination Fees1. Absent some other authority (such as contract language), does the institution

charge a fee to the borrower for a flood determination only when thedetermination is made or results from

• A loan origination, increase, renewal, or extension Yes No

• A response to a remapping by FEMA Yes No

• The purchase of flood insurance under the forced-placement provisions Yes No

2. If the institution has other authority to charge fees for determinations insituations other than those noted in item 1, is the practice followedconsistently? Yes No


3. If the institution requires the borrower to obtain life-of-loan monitoring andpasses that charge along to the borrower

• Does it either break out the original determination charge from the chargefor life-of-loan monitoring or include the full amount of the charge as afinance charge for those loans subject to the Truth in Lending Act? Yes No

4. Are the fees charged by the institution for making a flood determinationreasonable? Yes No

Notice Requirements1. Are borrowers whose security property is located in a special flood hazard

area (SFHA) provided written notice within a reasonable time prior to loanclosing? Yes No

2. Does the notice contain the following required information?

• A warning that the building or mobile home is located in a SFHA Yes No

• A description of the flood insurance requirements Yes No

• A statement that flood insurance is available under the National FloodInsurance Program and may also be available from private insurers Yes No

• A statement as to whether federal disaster relief assistance may beavailable in the event of damage to a building or mobile home caused byflooding in a federally declared disaster Yes No

3. If the institution uses the alternate notice procedures in certain instances aspermitted by Regulation H, does it obtain the required satisfactory writtenassurance from the seller or lessor? Yes No

4. Does the institution provide a copy of the borrower notification to the servicerof the loan within the required time frames? Yes No

5. Does the institution retain a record of receipt of the notifications provided to theborrower and the servicer for as long as it owns the loan? Yes No

Insurance Requirements1. If an improved property or mobile home is located in a SFHA and flood

insurance is required, does the institution have the borrower obtain a policy,with the institution as loss payee, in the correct amount prior to closing? Yes No

2. When multiple properties securing the loan are located in SFHAs, does theinstitution have sufficient insurance, through either a single policy with ascheduled list of several buildings or multiple policies, to meet the minimumrequirements of Regulation H? Yes No

Escrow Requirements1. Does the institution have policies requiring escrows for property taxes, hazard

insurance, or other fees on residential buildings? Yes No

• If it does, does the institution escrow premiums for flood insurance on thoseloans closed on or after October 1, 1996? Yes No

2. If the institution has no specific policies regarding escrows, do its loandocuments permit it to escrow for the charges mentioned in item 1? Yes No

• If they do, does the institution escrow premiums for flood insurance onthose loans closed on or after October 1, 1996? Yes No

Flood Insurance: Examination Checklist


3. On loans closed on or after October 1, 1996, that are subject to the Real EstateSettlement Procedures Act (RESPA) and when flood insurance is required,does the institution comply with the provisions of section 10 of RESPA (section3500.17 of HUD Regulation X) for those escrows? Yes No

Forced-Placement Requirements1. If at any time during the life of the loan the institution determines that the

security property lacks adequate flood insurance coverage,

• Does the institution provide written notice to the borrower stating that thenecessary coverage must be obtained within forty-five days of the notice orthe institution will purchase it on the borrower’s behalf? Yes No

• Does the institution purchase the coverage on the borrower’s behalf if theborrower does not obtain the required policy within the required timeperiod? Yes No

Notice to the Director of FEMA1. Does the institution provide the appropriate notice to the carrier of the

insurance policy (who FEMA has designated to receive these notices)regarding the identity of the loan servicer? Yes No

2. If the institution sells or transfers the servicing of designated loans to anotherparty, does it have procedures in place to provide the appropriate notice to thedirector’s designee within sixty days of the effective date of the transfer of theservicing? Yes No

Flood Insurance: Examination Checklist



Background

The Fair Credit Reporting Act (FCRA) deals with the rights of consumers in relation to their credit reports and the obligations of credit reporting agencies and the businesses that provide information to them. The FCRA has been revised numerous times since it took effect in 1971, notably by passage of the Consumer Credit Reporting Reform Act of 1996, the Gramm-Leach-Bliley Act of 1999, and the Fair and Accurate Credit Transactions Act of 2003 (FACT Act).

The FACT Act created new responsibilities for consumer reporting agencies and users of consumer reports, many concerning consumer disclosures and identity theft. It also created new rights for consumers, including the right to free annual consumer reports and improved access to report information, with the aim of making data in the consumer reporting system more accurate.

Coverage

Business entities that are consumer reporting agencies have significant responsibilities under the FCRA; business entities that are not consumer reporting agencies have somewhat lesser responsibilities. Generally, financial institutions are not considered consumer reporting agencies; however, those that engage in certain types of information-sharing practices can be deemed consumer reporting agencies. In addition, the FCRA applies to financial institutions that operate as

• Procurers and users of information (for example, when granting credit, purchasing dealer paper, or opening deposit accounts),

• Furnishers and transmitters of information (by reporting information to consumer reporting agencies or other third parties, or to affiliates),

• Marketers of credit or insurance products, or

• Employers.

Key Definitions

Key definitions used throughout the FCRA include the following:

Consumer

A consumer is an individual.

Consumer Report

A consumer report is any written, oral, or other communication of any information by a consumer reporting agency that bears on a consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living that is used (or is expected to be used) or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for

• Credit or insurance to be used primarily for personal, family, or household purposes;

• Employment purposes; or

• Any other purpose authorized under FCRA, section 604.

The term ‘‘consumer report’’ does not include

• Any report containing information solely about transactions or experiences between the consumer and the institution making the report;

• Any communication of that transaction or experience information among entities related by common ownership or affiliated by corporate control (for example, different banks that are members of the same holding company, or subsidiary companies of a bank);

• Communication of other information among persons related by common ownership or affiliated by corporate control if

– It is clearly and conspicuously disclosed to the consumer that the information may be communicated among such persons, and

– The consumer is given the opportunity, before the time the information is communicated, to direct that the information not be communicated among such persons;

• Any authorization or approval of a specific extension of credit directly or indirectly by the issuer of a credit card or similar device;

• Any report in which a person who has been requested by a third party to make a specific extension of credit directly or indirectly to a consumer (such as a lender who has received a request from a broker) conveys his or her decision with respect to such request, if the third party advises the consumer of the name and address of the person to whom the request was made, and such person makes the disclosures to

Consumer Compliance Handbook FCRA • 1 (11/06)

1. Other FCRA provisions—including section 628 (Disposal Rules)—are covered in other functional examinations, such as safety and soundness examinations, and therefore are not part of these procedures.


the consumer required under FCRA, section 615; or

• A communication described in FCRA, subsection 603(o) or (x) (which relate to certain investigative reports and certain reports to prospective employers).

Person

A person is any individual, partnership, corporation, trust, estate, cooperative, association, government or governmental subdivision or agency, or other entity.

Investigative Consumer Report

An investigative consumer report is a consumer report or portion thereof for which information on a consumer’s character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends, or associates of the consumer, or with others with whom the consumer is acquainted or who may have knowledge concerning any such information. However, such information does not include specific factual information on a consumer’s credit record obtained directly from a creditor of the consumer or from a consumer reporting agency when such information was obtained directly from a creditor of the consumer or from the consumer.

Adverse Action

With regard to credit transactions, the term adverse action has the same meaning as used in section 701(d)(6) of the Equal Credit Opportunity Act (ECOA), Regulation B, and the official staff commentary. Under the ECOA, an ‘‘adverse action’’ is a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the same amount or on terms substantially similar to those requested. Under the ECOA, the term does not include a refusal to extend additional credit under an existing credit arrangement when the applicant is delinquent or otherwise in default, or when such additional credit would exceed a previously established credit limit.

For non-credit transactions, the term has the following additional meanings for purposes of the FCRA:

• A denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of any insurance, existing or applied for, in connection with the underwriting of insurance

• A denial of employment, or any other decision for

2 (11/06) • FCRA

employment purposes that adversely affects any current or prospective employee

• A denial or cancellation of, an increase in any charge for, or any other adverse or unfavorable change in the terms of any license or benefit described in FCRA, section 604(a)(3)(D)

• An action taken or determination that (1) is made in connection with an application made by, or transaction initiated by, any consumer, or in connection with a review of an account to determine whether the consumer continues to meet the terms of the account, and (2) is adverse to the interests of the consumer

Employment Purposes

A consumer report used for employment purposes is a report used for the purpose of evaluating a consumer for employment, promotion, reassignment, or retention as an employee.

Consumer Reporting Agency

A consumer reporting agency is any person that (1) for monetary fees, dues, or on a cooperative nonprofit basis regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information, or other information on consumers, for the purpose of furnishing consumer reports to third parties, and (2) uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.

Implementation of the FCRA

Some of the requirements for financial institutions imposed by the FCRA are written directly into the statute; others are contained in regulations issued jointly by the FFIEC agencies; still others are spelled out in regulations issued by the Federal Reserve Board and/or the Federal Trade Commission.

For examination purposes, similar requirements have been grouped together, creating a series of examination modules. The five modules that have been completed to date cover requirements applicable to financial institutions that are not consumer reporting agencies. A sixth module will cover institutions that are considered consumer reporting agencies. The five completed examination modules are listed below with the statutory or regulatory cites for the FCRA requirements they cover.1

Consumer Compliance Handbook


Module 1: Obtaining Consumer Reports

• Permissible Purposes of Consumer Reports, and Investigative Consumer Reports—FCRA, Sections 604 and 606

Module 2: Obtaining Information and Sharing among Affiliates

• Consumer Report and Information Sharing— FCRA, Section 603(d)

• Protection of Medical Information—FCRA, Section 604(g), and Regulation V, Subpart D

• Affiliate Marketing Opt-Out—FCRA, Section 624

Module 3: Disclosures to Consumers and Miscellaneous Requirements

• Use of Consumer Reports for Employment Purposes—FCRA, Section 604(b)

• Prescreened Consumer Reports and Opt-Out Notice—FCRA, Sections 604(c) and 615(d); FTC Regulations, Parts 642 and 698

• Truncation of Credit and Debit Card Account Numbers—FCRA, Section 605(g)

• Disclosure of Credit Scores by Certain Mortgage Lenders—FCRA, Section 609(g)

• Adverse Action Disclosures—FCRA, Sections 615(a) and (b)

• Debt Collector Communications concerning Identity Theft—FCRA, Section 615(g)

• Risk-Based Pricing Notice—FCRA, Section 615(h)

Module 4: Financial Institutions as Furnishers of Information

• Furnishers of Information—General—FCRA, Section 623

• Prevention of Re-Pollution of Consumer Reports— FCRA, Section 623(a)(6)

• Negative Information Notice—FCRA, Section 623(a)(7)

Module 5: Consumer Alerts and Identity Theft Protections

• Fraud and Active Duty Alerts—FCRA, Section 605A(h)

• Information Available to Victims—FCRA, Section 609(e)

Module 6: Requirements for Consumer Reporting Agencies

Organization of Examination Procedures

The modules in this chapter contain both general information about each of the requirements and examination procedures. Preceding the modules are the objectives and initial procedures for fair credit reporting examinations.


Fair Credit Reporting Examination Objectives and Initial Examination Procedures


1. To determine the financial institution’s compliance with the FCRA

2. To assess the quality of the financial institution’s compliance management systems and its policies and procedures for implementing the FCRA

3. To determine the reliance that can be placed on the financial institution’s internal controls and procedures for monitoring the institution’s compliance with the FCRA

4. To direct corrective action when violations of law are identified or when policies or internal controls are deficient

INITIAL EXAMINATION PROCEDURES

The initial examination procedures are designed to acquaint examiners with the operations and processes of the institution being examined. They focus on the institution’s systems, controls, policies, and procedures, including audits and previous examination findings.

The applicability of the various sections of the FCRA and the implementing regulations depends on an institution’s unique operations. The functional examination requirements for an institution’s FCRA responsibilities are presented topically in modules 1 through 6.

Initially, examiners should

1. Through discussions with management and a review of available information, determine whether the institution’s internal controls are adequate to ensure compliance in the area under review. Consider the following:

a. Organization charts

b. Process flowcharts

c. Policies and procedures

d. Loan documentation

e. Checklists

f. Computer program documentation (for example, records that illustrate the fields and types of data reported to consumer reporting agencies, and automated records that track customer opt-outs for FCRA affiliate information sharing)

2. Review any compliance audit material, including workpapers and reports, to determine whether

a. The scope of the audit addresses all provisions as applicable;

b. Corrective actions were taken to follow up on previously identified deficiencies;

c. The testing includes samples covering all product types and decision centers;

d. The work performed is accurate;

e. Significant deficiencies and their causes are included in reports to management and/or to the board of directors; and

f. The frequency of review is appropriate.

3. Review the financial institution’s training materials to determine whether

a. Appropriate training is provided to individuals responsible for FCRA compliance and operational procedures, and

b. The training is comprehensive and covers the various aspects of the FCRA that apply to the individual financial institution’s operations.

4. Through discussions with management, determine which portions of the six examination modules will apply.

5. Complete appropriate examination modules; document and form conclusions regarding the quality of the financial institution’s compliance management systems and compliance with the FCRA.


2. Use of consumer reports for employment purposes requires specific advance authorization and disclosure notices and, if applicable, adverse action notices. These issues are addressed in module 3 of these examination procedures.

Fair Credit Reporting Examination Module 1: Obtaining Consumer Reports

Overview

Consumer reporting agencies have a significant amount of personal information about consumers. This information is invaluable in assessing a consumer’s creditworthiness for a variety of products and services, including loan and deposit accounts, insurance, and telephone services. Access to this information is governed by the Fair Credit Reporting Act (FCRA) to ensure that it is obtained for permissible purposes and is not used for illegitimate purposes.

The FCRA requires any prospective ‘‘user’’ of a consumer report—for example a lender, insurer, landlord, or employer—to have a legally permissible purpose for obtaining a report.

Permissible Purposes of Consumer Reports (FCRA, Section 604) and Investigative Consumer Reports (FCRA, Section 606)

Legally Permissible Purposes

The FCRA allows a consumer reporting agency to furnish a consumer report under the following circumstances and no other:

• In response to a court order or federal grand jury subpoena

• In accordance with the written instructions of the consumer

• To a person, including a financial institution, that it has reason to believe

– Intends to use the report in connection with a credit transaction involving the consumer (including extending, reviewing, and collecting credit);

– Intends to use the information for employment purposes;2

– Intends to use the information in connection with the underwriting of insurance involving the consumer;

– Intends to use the information in connection with a determination of the consumer’s eligibility for a license or other benefit granted by a governmental instrumentality that is required by


law to consider an applicant’s financial responsibility;

– Intends to use the information, as a potential investor or servicer or a current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation; or

– Otherwise has a legitimate business need for the information

a. In connection with a business transaction that is initiated by the consumer, or

b. To review an account to determine whether the consumer continues to meet the terms of the account

• In response to a request by the head of a state or local child support enforcement agency (or authorized appointee), if the person certifies various information to the consumer reporting agency regarding the need to obtain the report. (Generally, a financial institution that is not a consumer reporting agency is not involved in such a situation.)

Prescreened Consumer Reports

Users of consumer reports, such as financial institutions, are allowed to obtain prescreened consumer reports in order to make firm offers of credit or insurance to consumers, unless the consumers have elected to opt out of being included on pre-screened lists. The FCRA contains many requirements, including an opt-out notice requirement, when prescreened consumer reports are used. In addition to defining prescreened consumer reports, module 3 covers these requirements.

Investigative Consumer Reports

FCRA, section 606, contains specific requirements concerning the use of investigative consumer reports. Such reports contain information about a consumer’s character, general reputation, personal characteristics, or mode of living that is obtained in whole or in part through personal interviews with the consumer’s neighbors, friends, or associates. If a financial institution procures an investigative consumer report, or causes one to be prepared, the institution must meet the following requirements:

• The institution must clearly and accurately disclose to the consumer that an investigative consumer report may be obtained.

• The disclosure must contain a statement of the

Fair Credit Reporting: Examination Module 1

consumer’s right to request other information about the report and a summary of the consumer’s rights under the FCRA.

• The disclosure must be in writing and must be mailed or otherwise delivered to the consumer not later than three business days after the date on which the report was first requested.

• The financial institution procuring the report must certify to the consumer reporting agency that it has complied with the disclosure requirements and will comply in the event that the consumer requests additional disclosures about the report.

Institution Procedures

Given the preponderance of electronically avail

able information and the growth of identity theft, financial institutions should manage the risks associated with obtaining and using consumer reports. They should employ procedures, controls, or other safeguards to ensure that consumer reports are obtained and used only in situations for which there are permissible purposes. Access to, storage of, and destruction of this information should be dealt with under an institution’s information-security program; however, obtaining consumer reports initially must be done in compliance with the FCRA.

8 (11/06) • FCRA Consumer Compliance Handbook

Fair Credit Reporting—Module 1 Examination Procedures

Permissible Purposes of Consumer Reports (FCRA, Section 604) and Investigative Consumer Reports (FCRA, Section 606) 1. Determine whether the financial institution obtains

consumer reports.

2. Determine whether the financial institution obtains prescreened consumer reports and/or reports for employment purposes. If it does, complete the appropriate sections of module 3.

3. Determine whether the financial institution procures, or causes to be prepared, investigative consumer reports. If it does, determine whether the appropriate disclosure is given to consumers within the required time periods. In addition, determine whether the institution certifies compliance with the disclosure requirements to the consumer reporting agency.

4. Evaluate the financial institution’s procedures to ensure that consumer reports are obtained only for permissible purposes. Confirm that the institution certifies to the consumer reporting

agency the purposes for which it will obtain reports. (The certification is usually contained in the institution’s contract with the consumer reporting agency.)

5. If procedural weaknesses or other risks requiring further investigation are noted, such as the receipt of several consumer complaints, review a sample of consumer reports obtained from a consumer reporting agency and determine whether the financial institution had permissible purposes for obtaining the reports. For example,

• Obtain a copy of a billing statement or other list of consumer reports obtained by the financial institution from the consumer reporting agency over a period of time.

• Compare this list, or a sample from this list, with the institution’s records to ensure that there was a permissible purpose for obtaining the report(s)—for instance, the consumer applied for credit, insurance, or employment. The institution may also obtain a report in connection with the review of an existing account.


Fair Credit Reporting Examination Module 2: Obtaining Information and Sharing among Affiliates

Overview

The Fair Credit Reporting Act (FCRA) sets forth many substantive compliance requirements for consumer reporting agencies that are designed to help ensure the accuracy and integrity of the consumer reporting system. As noted in the first section of this FCRA chapter, a consumer reporting agency is a person that generally furnishes consumer reports to third parties. By their very nature, banks, credit unions, and thrifts hold a significant amount of consumer information that could constitute a consumer report. Communication of this information could cause the institution to become a consumer reporting agency. The FCRA contains several exceptions that enable a financial institution to communicate this type of information, within strict guidelines, without becoming a consumer reporting agency.

Rather than containing strict information-sharing prohibitions, the FCRA creates a business disincentive such that if a financial institution shares consumer report information outside of the exceptions, the institution becomes a consumer reporting agency and is subject to the significant, substantive requirements of the FCRA applicable to those entities. Typically, a financial institution will structure its information-sharing practices within the exceptions to avoid becoming a consumer reporting agency. This examination module generally covers the information-sharing practices within these exceptions.

If upon completion of this module, examiners determine that the financial institution’s information-sharing practices fall outside of these exceptions, the institution may be considered a consumer reporting agency, and the examination procedures in module 6 should be completed.

Consumer Report and Information Sharing (FCRA, Section 603(d))

FCRA, section 603(d), defines a consumer report to include information about a consumer that bears on a consumer’s creditworthiness, character, and credit capacity, among other characteristics. Communication of this information may cause a person, including a financial institution, to become a consumer reporting agency. The statutory definition contains key exceptions to this definition that enable a financial institution to share this type of information under certain circumstances without becoming a consumer reporting agency. Specifi

cally, the term ‘‘consumer report’’ does not include the following:

• A report containing information solely related to transactions or experiences between the consumer and the financial institution making the report. A person, including a financial institution, may share information strictly related to its own transactions or experiences with a consumer (such as the consumer’s record with a loan or savings account at an institution) with any third party, without regard to affiliation, without becoming a consumer reporting agency. This type of information sharing may, however, be restricted under the Privacy of Consumer Financial Information regulations that implement the Gramm-Leach-Bliley Act (GLBA) because the information meets the definition of nonpublic personal information under the Privacy regulations; sharing it with nonaffiliated third parties may be subject to opt-out provisions under the Privacy regulations. In turn, the FCRA may restrict activities that the GLBA permits. For example, the GLBA permits a financial institution to share lists of its customers and information about those customers, such as their credit scores, with another financial institution for the purpose of jointly marketing or sponsoring other financial products or services. Such a communication may be considered a consumer report under the FCRA and could cause the sharing institution to become a consumer reporting agency.

• Communication of such transaction or experience information among persons, including financial institutions, related by common ownership or affiliated by corporate control.

• Communication of other information (that is, other than transaction or experience information) among persons, including financial institutions, related by common ownership or affiliated by corporate control (1) if it is clearly and conspicuously disclosed to the consumer that the information will be communicated among such entities and (2) if, before the information is initially communicated, the consumer is given the opportunity to opt out of the communication. Thus, a financial institution is allowed to share information (other than information about its own transactions or experiences) that could otherwise constitute a consumer report without becoming a consumer reporting agency under the following circumstances:

– The sharing of the ‘‘other’’ information is done with affiliates



– Consumers are provided with the notice and an opportunity to opt out of this sharing before the information is first communicated among affiliates

‘‘Other’’ information can include, for example, information provided by a consumer on an application form concerning accounts with other financial institutions. It can also include information obtained by a financial institution from a consumer reporting agency, such as the consumer’s credit score. If a financial institution shares other information with affiliates without providing a notice and an opportunity to opt out, the institution may become a consumer reporting agency subject to the FCRA requirements.

The opt-out right required by this section must be stated in a financial institution’s privacy notice, as required by the GLBA and its implementing regulations.

Other Exceptions

Specific Extensions of Credit

In addition, the term ‘‘consumer report’’ does not include the communication of a specific extension of credit directly or indirectly by the issuer of a credit card or similar device. For example, this exception allows a lender to communicate an authorization through a credit card network to a retailer, to enable a consumer to complete a purchase using a credit card.

Credit Decision to Third Party

The term ‘‘consumer report’’ also does not include any report in which a person, including a financial institution, that has been requested by a third party (such as an automobile dealer) to make a specific extension of credit directly or indirectly to a consumer conveys the decision with respect to the request. The third party must advise the consumer of the name and address of the financial institution to which the request was made, and the financial institution must make the adverse action disclosures when required by FCRA, section 615. For example, this exception allows a lender to communicate a credit decision to an automobile dealer that is arranging financing for the purchase of an automobile by a consumer who requires a loan to finance the transaction.

‘‘Joint User’’ Rule

The Federal Trade Commission staff commentary discusses another exception, known as the Joint User Rule. Under this exception, users of con

sumer reports, including financial institutions, may share information with each other if they are jointly involved in the decision to approve a consumer’s request for a product or service, provided that each has a permissible purpose for obtaining a consumer report on the individual. For example, a consumer applies for a mortgage loan that will have a high loan-to-value ratio, and thus the lender will require private mortgage insurance (PMI) in order to approve the application. The PMI will be provided by an outside company. The lender and the PMI company may share consumer report information about the consumer because both entities have permissible purposes for obtaining the information and they are jointly involved in the decision to grant products to the consumer.

This exception applies both to entities that are affiliated and to nonaffiliated third parties. It is important to note that the GLBA still applies to the sharing of nonpublic personal information with nonaffiliated third parties; therefore, financial institutions should be aware that sharing under the FCRA Joint User Rule may still be limited or prohibited by the GLBA.

Protection of Medical Information (FCRA, Section 604(g); and Regulation V, Subpart D)

Section 604(g) generally prohibits creditors from obtaining and using medical information in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit. The statute contains no prohibition regarding creditors’ obtaining or using medical information for other purposes that are not in connection with a determination of the consumer’s eligibility, or continued eligibility, for credit.

Section 604(g)(5)(A) required the FFIEC agencies to prescribe regulations that permit transactions determined to be necessary and appropriate to protect legitimate operational, transactional, risk, consumer, and other needs (including administrative verification purposes) and that are consistent with the congressional intent to restrict the use of medical information for inappropriate purposes. The agencies published final rules in the Federal Register (70 FR 70664) on November 22, 2005; subpart D of Regulation V implements the requirements for entities supervised by the Federal Reserve. The rules contain the general prohibition regarding obtaining or using medical information and provide exceptions for the limited circumstances under which medical information may be used. The rules define ‘‘credit’’ and ‘‘creditor’’ as having the same meanings as in section 702 of the Equal Credit Opportunity Act.



Obtaining and Using Unsolicited Medical Information (Regulation V, § 222.30(c))

A creditor does not violate the prohibition on obtaining medical information if it receives the medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit without specifically requesting medical information. However, the creditor may use this medical information only in connection with a determination of the consumer’s eligibility, or continued eligibility, for credit in accordance with either the financial information exception or one of the specific other exceptions provided in the rules. These exceptions are discussed below.

Financial Information Exception (Regulation V, § 222.30(d))

A creditor is allowed to obtain and use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit, so long as all of the following conditions are met:

• The information is the type of information routinely used in making credit eligibility determinations, such as information relating to debts, expenses, income, benefits, assets, collateral, or the purpose of the loan, including the use of the loan proceeds.

• The creditor uses the medical information in a manner and to an extent that is no less favorable than it would use comparable information that is not medical information in a credit transaction.

• The creditor does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.

The financial information exception is designed in part to allow a creditor to consider a consumer’s medical debts and expenses in the assessment of that consumer’s ability to repay the loan according to the loan terms. The financial information exception also allows a creditor to consider the dollar amount and continued eligibility for disability income, worker’s compensation income, or other benefits related to health or a medical condition that is relied on as a source of repayment.

The creditor may use the medical information in a manner and to an extent that is no less favorable than it would use comparable nonmedical information. For example, a consumer includes on an application for credit information about two $20,000 debts. One debt is to a hospital; the other is to a retailer. The creditor may use and consider the debt


to the hospital in the same manner in which it considers the debt to the retailer, such as including the debts in the calculation of the consumer’s proposed debt-to-income ratio. In addition, the consumer’s history of payment of the debt to the hospital may be considered in the same manner as payment of the debt to the retailer. For example, if the creditor does not grant loans to applicants who have debts that are ninety days past due, the creditor could consider the past-due status of a debt to the hospital in the same manner as it considers the past-due status of a debt to the retailer.

A creditor may use medical information in a manner that is more favorable to the consumer, according to its regular policies and procedures. For example, if a creditor has a routine policy of declining consumers who have a ninety-day past-due installment loan to a retailer but does not decline consumers who have a ninety-day past-due debt to a hospital, the financial information exception would allow the creditor to continue this policy without violating the rules, because in such a case, the creditor’s treatment of the hospital debt is more favorable to the consumer.

A creditor may not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any determination regarding the consumer’s eligibility, or continued eligibility, for credit. The creditor may consider only the financial implications as discussed above, such as the status of a debt to a hospital or the continuance of disability income.

Specific Exceptions for Obtaining and Using Medical Information (Regulation V, § 222.30(e))

In addition to the financial information exception, the rules provide for the following nine specific exceptions under which a creditor may obtain and use medical information in its determination of the consumer’s eligibility, or continued eligibility, for credit:

1. To determine whether the use of a power of attorney or legal representative that is triggered by a medical condition or event is necessary and appropriate, or whether the consumer has the legal capacity to contract when a person seeks to exercise a power of attorney or act as a legal representative for a consumer on the basis of an asserted medical condition or event. For example, if person A is attempting to act on behalf of person B under a power of attorney that is invoked on the basis of a medical event, a creditor is allowed to obtain and use medical information to verify that person B has experienced a medical condition or event such that


person A is allowed to act under the power of attorney.

2. To comply with applicable requirements of local, state, or federal laws

3. To determine, at the consumer’s request, whether the consumer qualifies for a legally permissible special credit program or credit-related assistance program that is

• Designed to meet the special needs of consumers with medical conditions, and

• Established and administered pursuant to a written plan that

– Identifies the class of persons that the program is designed to benefit, and

– Sets forth the procedures and standards for extending credit or providing other credit-related assistance under the program

4. To the extent necessary for purposes of fraud prevention or detection

5. In the case of credit for the purpose of financing medical products or services, to determine and verify the medical purpose of the loan and the use of the proceeds

6. Consistent with safe and sound banking practices, if the consumer or the consumer’s legal representative requests that the creditor use medical information in determining the consumer’s eligibility, or continued eligibility, for credit to accommodate the consumer’s particular circumstances, and such request is documented by the creditor. For example, at the consumer’s request, a creditor may grant an exception to its ordinary policy to accommodate a medical condition that the consumer has experienced. This exception allows a creditor to consider medical information in this context, but it does not require a creditor to make such an accommodation, nor does it require a creditor to grant a loan that is unsafe or unsound.

7. Consistent with safe and sound practices, to determine whether the provisions of a forbearance practice or program that is triggered by a medical condition or event apply to a consumer. For example, if a creditor has a policy of delaying foreclosure in cases in which a consumer is experiencing a medical hardship, this exception allows the creditor to use medical information to determine if the policy would apply to the consumer. Like exception 6 above, this exception does not require a creditor to grant forbearance; it merely provides an exception so that a creditor may consider medical information in these instances.

8. To determine the consumer’s eligibility for, the


triggering of, or the reactivation of a debt-cancellation contract or debt-suspension agreement if a medical condition or event is a triggering event for the provision of benefits under the contract or agreement

9. To determine the consumer’s eligibility for, the triggering of, or the reactivation of a credit insurance product if a medical condition or event is a triggering event for the provision of benefits under the product

Limits on Redisclosure of Information (Regulation V, § 222.31(b))

If a creditor subject to the medical information rules receives medical information about a consumer from a consumer reporting agency or its affiliate, the creditor must not disclose that information to any other person, except as necessary to carry out the purpose for which the information was initially disclosed or as otherwise permitted by statute, regulation, or order.

Sharing Medical Information with Affiliates (Regulation V, § 222.32(b))

In general, the exclusions from the definition of ‘‘consumer report’’ in FCRA, section 603(d)(2), allow the sharing of information among affiliates. With regard to medical information, FCRA, section 603(d)(3), provides that the exclusions in section 603(d)(2) do not apply when a person subject to the medical information rules shares information of the following types with an affiliate:

• Medical information

• An individualized list or description based on the payment transactions of the consumer for medical products or services

• An aggregate list of identified consumers based on payment transactions for medical products or services

If a person that is subject to the medical rules shares with an affiliate information of one of the types listed above, the exclusions from the definition of ‘‘consumer report’’ do not apply. Effectively, this means that if a person shares medical information, that person becomes a consumer reporting agency, subject to all the other substantive requirements of the FCRA.

The rules provide exceptions to these limitations on sharing medical information with affiliates (Regulation V, section 222.32(c)). A covered entity, such as a state member bank, may share medical information with its affiliates without becoming a consumer reporting agency under one or more of


the following circumstances:

• In connection with the business of insurance or annuities (including the activities described in section 18B of the model Privacy of Consumer Financial and Health Information Regulation issued by the National Association of Insurance Commissioners, as in effect on January 1, 2003)

• For any purpose permitted without authorization under the regulations issued by the Department of Health and Human Services pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA)

• For any purpose referred to in section 1179 of HIPAA

• For any purpose described in section 502(e) of the Gramm-Leach-Bliley Act

• In connection with a determination of the consumer’s eligibility, or continued eligibility, for credit consistent with the financial information exceptions or specific exceptions

• As otherwise permitted by order of an FFIEC agency

Affiliate Marketing Opt-Out (FCRA, Section 624)

FCRA, section 624, requires that consumers be provided with a notice and an opportunity to opt out of an entity’s use of certain information received from an affiliate to make solicitations to the consumer. The federal banking agencies, the National Credit Union Administration, the Federal Trade Commission, and the Securities and Exchange Commission are currently (as of August 2006) in the process of developing final regulations to implement this new opt-out requirement. Financial institutions will not be subject to these requirements until the final rules are implemented and effective. This section of the examination procedures will be written upon publication of the final regulations.



Consumer Report and Information Sharing (FCRA, Section 603(d)) 1. Review the financial institution’s policies, proce

dures, and practices concerning the sharing of consumer information with third parties, including both affiliated and nonaffiliated third parties. Determine the type of information shared and with whom the information is shared. (This portion of the examination may overlap with a review of the institution’s compliance with Regulation P, Privacy of Consumer Financial Information, which implements the Gramm-Leach-Bliley Act.)

2. Determine whether the financial institution’s information-sharing practices fall within the exceptions to the definition of a consumer report. If they do not, the financial institution could be considered a consumer reporting agency, in which case the examination procedures in module 6 should be completed.

3. If the financial institution shares information other than transaction and experience information with affiliates subject to opt-out provisions, determine whether the institution’s GLBA privacy notice contains information regarding how to opt out, as required by Regulation P.

4. If procedural weaknesses or other risks requiring further investigation are noted, obtain a sample of opt-out rights exercised by consumers and determine whether the financial institution honored the opt-out requests by not sharing ‘‘other information’’ about those consumers with the institution’s affiliates after receiving the opt-out requests.

Protection of Medical Information (FCRA, Section 604(g); and Regulation V, Subpart D) 1. Review the financial institution’s policies, proce

dures, and practices concerning the collection and use of consumer medical information in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit.

2. If the financial institution’s policies, procedures, and practices allow for obtaining and using consumer medical information in the context of a credit transaction, determine whether there are adequate controls in place to ensure that the information is used only subject to the financial information exception or one of the specific exceptions set forth in Regulation V.

3. If procedural weaknesses or other risks requiring further investigation are noted, obtain samples of credit transactions to determine whether the use of consumer medical information was done strictly under the financial information exception or one of the specific exceptions in Regulation V.

4. Determine whether the financial institution has adequate policies and procedures in place to limit the redisclosure of consumer medical information that was received from a consumer reporting agency or an affiliate.

5. Determine whether the financial institution shares medical information about a consumer with its affiliates. If it does, determine whether the sharing occurred in accordance with an exception in Regulation V that enables the institution to share the information without becoming a consumer reporting agency.

Affiliate Marketing Opt-Out (FCRA, Section 624)

FCRA, section 624, requires that consumers be provided with a notice and an opportunity to opt out of an entity’s use of certain information received from an affiliate to make solicitations to the consumer. The federal banking agencies, the National Credit Union Administration, the Federal Trade Commission, and the Securities and Exchange Commission are currently (as of August 2006) in the process of developing final regulations to implement the new opt-out requirements. Financial institutions will not be subject to these requirements until the final rules are implemented and effective. This section of the examination procedures will be written upon publication of the final regulations.


Fair Credit Reporting Examination Module 3: Disclosures to Consumers and Miscellaneous Requirements

Overview

The Fair Credit Reporting Act (FCRA) requires financial institutions to provide consumers with various notices and information under a variety of circumstances. This module deals with examination responsibilities for these various areas.

Use of Consumer Reports for Employment Purposes (FCRA, Section 604(b))

FCRA, section 604(b), sets forth specific requirements for financial institutions that obtain consumer reports on its employees or prospective employees prior to, and/or during, the term of employment. The FCRA generally requires the written permission of the consumer to procure a consumer report for ‘‘employment purposes.’’ Moreover, a clear and conspicuous disclosure that a consumer report may be obtained for employment purposes must be provided in writing to the consumer prior to procuring a report.

Prior to taking any adverse action involving employment that is based in whole or in part on the consumer report, the user generally must provide to the consumer

• A copy of the report, and

• A description in writing of the rights of the consumer, as prescribed by the Federal Trade Commission (FTC) in FCRA, section 609(c)(1).

At the time a financial institution takes adverse action in an employment situation, the consumer must also be provided with an adverse action notice, as required by FCRA, section 615, and described later in this module.

Prescreened Consumer Reports and Opt-Out Notice (FCRA, Sections 604(c) and 615(d); and FTC Regulations, Parts 642 and 698)

FCRA, section 604(c)(1)(B), allows persons, including financial institutions, to obtain and use consumer reports on any consumer in connection with any credit or insurance transaction that is not initiated by the consumer, for the purpose of making firm offers of credit or insurance. This process, known as prescreening, occurs when a financial institution obtains, from a consumer reporting agency, a list of consumers who meet certain predetermined creditworthiness criteria and who have not elected to be


excluded from such lists. These lists may contain only the following information:

• The name and address of a consumer

• An identifier that is not unique to the consumer and that is used by the person solely for the purpose of verifying the identity of the consumer

• Other information pertaining to a consumer that does not identify the relationship or experience of the consumer with respect to a particular creditor or other entity

Each name on the list is considered an individual consumer report. In order to obtain and use these lists, the financial institution must make a ‘‘firm offer of credit or insurance,’’ as defined in FCRA, section 603(l), to each person on the list. The institution is not required to grant credit or insurance if the consumer is found to be not creditworthy or insurable or cannot furnish required collateral, provided that the underwriting criteria are determined in advance.

Example 1. Assume that a home mortgage lender obtains from a consumer reporting agency a list of everyone in county X who has a current home mortgage loan and a credit score of 700. The lender will use this list to market a second-lien home equity loan product. Besides the criteria used to create the prescreened list for this product, the lender’s criteria include a total debt-to-income ratio (DTI) of 50 percent or less. Some of these other criteria can be screened by the consumer reporting agency, but others, such as the DTI, must be determined from an application or other sources when consumers respond to the offer. If a consumer who responds to the offer has a DTI of 60 percent, the lender does not have to grant the loan.

In addition, the financial institution is allowed to obtain a full consumer report on anyone responding to the offer in order to verify that the consumer continues to meet the creditworthiness criteria. If the consumer no longer meets those criteria, the institution does not have to grant the loan.

Example 2. On January 1, a credit card lender obtains from a consumer reporting agency a list of consumers in county Y who have credit scores of 720 and no previous bankruptcy records. On January 2, the lender mails solicitations offering a preapproved credit card to everyone on the list. On January 31, a consumer responds to the offer and the lender obtains and reviews a full consumer report, which shows that a bankruptcy record was added on January 15. Since this

consumer no longer meets the lender’s predetermined criteria, the lender is not required to issue the credit card.

These basic requirements seek to ensure that financial institutions that obtain prescreened lists follow through with an offer of credit or insurance. An institution must maintain a list of the criteria used for the product (including the criteria used to generate the prescreened list and any other criteria, such as collateral requirements) on file for three years, beginning on the date that the offer was made to the consumer.

Technical Notice and Opt-Out Requirements

FCRA, section 615(d), sets forth consumer protections and technical notice requirements concerning prescreened offers of credit or insurance. The FCRA requires consumer reporting agencies that operate nationwide to jointly operate an ‘‘opt-out’’ system whereby consumers can elect to be excluded from prescreened lists by calling a toll-free number.

When a financial institution obtains and uses such lists, it must provide consumers with a ‘‘prescreen opt-out notice’’ along with a written offer of credit or insurance. The notice alerts consumers that they are receiving the offer because they meet certain creditworthiness criteria. The notice must also provide the toll-free telephone number operated by the nationwide consumer reporting agencies for consumers to call to opt out of prescreened lists.

The FCRA sets forth the basic requirement concerning the provision of notices to consumers at the time prescreened offers are made. The FTC’s implementing regulation, which spells out the technical requirements of the notice, are at 16 CFR 642 and 698. This regulation—which is applicable to anyone, including banks, credit unions, and thrifts, that obtains and uses prescreened consumer reports—became effective on August 1, 2005; however, the requirement to provide a notice containing the toll-free opt-out telephone number has existed under the FCRA for many years.

Requirements Beginning August 1, 2005

The FTC regulations—16 CFR 642 and 698— require that a ‘‘short’’ notice and a ‘‘long’’ notice of the ‘‘prescreen opt-out’’ information be given with each written solicitation made to consumers on the basis of prescreened consumer reports. These regulations, which were published on January 31, 2005, at 70 FR 5022, also contain specific requirements concerning the content and appearance of these notices. The requirements are listed below.

The short notice must be a clear and conspicuous, simple, and easy-to-understand statement, as follows:

• Content. The short notice must state that the consumer has the right to opt out of receiving prescreened solicitations, must provide the toll-free number, must direct consumers to the existence and location of the long notice, and must state the title of the long notice. It may not contain any other information.

• Form. The short notice must be in a type size larger than the principal text on the same page, but it may not be smaller than 12 point type. If the notice is provided by electronic means, it must be larger than the type size of the principal text on the same page.

• Location. The short notice must be on the front side of the first page of the principal promotional document in the solicitation or, if provided electronically, on the same page and in close proximity to the principal marketing message. The statement must be located so that it is distinct from other information, such as inside a border, and must be in a distinct type style, such as bolded, italicized, underlined, and/or in a color that contrasts with the principal text on the page, if the solicitation is provided in more than one color.

The long notice must also be a clear and conspicuous, simple, and easy-to-understand statement, as follows:

• Content. The long notice must state the information required by FCRA, section 615(d), and may not include any other information that interferes with, detracts from, contradicts, or otherwise undermines the purpose of the notice.

• Form. The long notice must appear in the solicitation and be in a type size that is no smaller than the type size of the principal text on the same page; for solicitations provided other than by electronic means, the type size may not be smaller than 8-point. The notice must begin with a heading, in capital letters and underlined, identifying the long notice as the ‘‘PRESCREEN & OPT OUT NOTICE.’’ Also, the notice must be in a type style that is distinct from the principal type style used on the same page, such as bolded, italicized, underlined, and/or in a color that contrasts with the principal text, if the solicitation is in more than one color. Further, the notice must be set apart from other text on the page, such as by including a blank line above and below the statement, and by indenting both the left and right margins from other text on the page.

Model prescreen opt-out notices developed by the FTC, along with complete sample solicitations



showing context, appear in appendix A to 16 CFR 698. The model notice text is shown below.

Sample Short Notice

You can choose to stop receiving ‘‘prescreened’’ offers of [credit or insurance] from this and other companies by calling toll-free [toll-free number]. See PRESCREEN & OPT-OUT NOTICE on other side [or other location] for more information about prescreened offers.

Sample Long Notice

PRESCREEN & OPT-OUT NOTICE: This ‘‘prescreened’’ offer of [credit or insurance] is based on information in your credit report indicating that you meet certain criteria. This offer is not guaranteed if you do not meet our criteria [including providing acceptable property as collateral]. If you do not want to receive prescreened offers of [credit or insurance] from this and other companies, call the consumer reporting agencies [or name of consumer reporting agency] toll-free, [toll-free number]; or write: [consumer reporting agency name and mailing address].

Truncation of Credit and Debit Card Account Numbers (FCRA, Section 605(g))

FCRA, section 605(g), provides that persons, including financial institutions, that accept debit and credit cards for the transaction of business are prohibited from issuing electronically generated receipts that contain more than the last five digits of the card number, or the card expiration date, at the point of sale or transaction. This requirement applies only to electronically developed receipts and does not apply to handwritten receipts or those developed with an imprint of the card.

For automatic teller machines (ATMs) and point-of-sale (POS) terminals or other machines that were put into operation before January 1, 2005, this requirement is effective on December 4, 2006. For those that were put into operation on or after January 1, 2005, the effective date is the date of installation.

Disclosure of Credit Scores by Certain Mortgage Lenders (FCRA, Section 609(g))

FCRA, section 609(g), requires financial institutions that make or arrange mortgage loans using credit scores to provide the score, with accompanying information, to applicants.


Credit Score

For purposes of this section, credit score is defined as a numerical value or a categorization derived from a statistical tool or modeling system used by a person that makes or arranges a loan to predict the likelihood of certain credit behaviors, including default (the numerical value or the categorization derived from such analysis may also be referred to as a ‘‘risk predictor’’ or ‘‘risk score’’). A credit score does not include

• Any mortgage score or rating by an automated underwriting system that considers one or more factors in addition to credit information, such as the loan-to-value ratio, the amount of down payment, or the financial assets of a consumer, or

• Any other elements of the underwriting process or underwriting decision.

Covered Transactions

The disclosure requirement applies to both closed-end and open-end loans that are for consumer purposes and are secured by one- to four-family residential real properties, including purchase and refinance transactions. The requirement does not apply in circumstances that do not involve a consumer purpose, such as when a borrower obtains a loan secured by his or her residence to finance his or her small business.

Specific Required Notice

Financial institutions that are engaged in covered transactions and that use credit scores must provide a disclosure containing the specific language shown below, which is contained in FCRA, section 609(g)(1)(D):

Notice to the Home Loan Applicant

In connection with your application for a home loan, the lender must disclose to you the score that a consumer reporting agency distributed to users and the lender used in connection with your home loan, and the key factors affecting your credit scores.

The credit score is a computer generated summary calculated at the time of the request and based on information that a consumer reporting agency or lender has on file. The scores are based on data about your credit history and payment patterns. Credit scores are important because they are used to assist the lender in determining whether you will obtain a loan. They may also be used to determine what interest rate you may be offered on the mortgage. Credit scores can change over time, depending on your conduct, how your credit history and payment patterns change, and how credit scoring technologies change.



Because the score is based on information in your credit history, it is very important that you review the credit-related information that is being furnished to make sure it is accurate. Credit records may vary from one company to another.

If you have questions about your credit score or the credit information that is furnished to you, contact the consumer reporting agency at the address and telephone number provided with this notice, or contact the lender, if the lender developed or generated the credit score. The consumer reporting agency plays no part in the decision to take any action on the loan application and is unable to provide you with specific reasons for the decision on a loan application.

If you have questions concerning the terms of the loan, contact the lender.

The notice must include the name, address, and telephone number of each consumer reporting agency that provided a credit score that was used.

Credit Score and Key Factors Disclosed

In addition to providing the notice to home loan applicants, financial institutions must disclose the credit score, the range of possible scores, the date on which the score was created, and the ‘‘key factors’’ used in calculating the score. Key factors are all relevant elements or reasons adversely affecting the credit score for the particular individual, listed in the order of their importance based on their effect on the credit score. The total number of factors to be disclosed must not exceed four. However, if one of the key factors is the number of inquiries into a consumer’s credit information, then the total number of factors must not exceed five. These key factors come from information supplied by the consumer reporting agencies with any consumer report that was furnished containing a credit score. (FCRA, section 605(d)(2))

This disclosure requirement applies to any application for a covered transaction, regardless of the final action on the application taken by the lender. The FCRA requires a financial institution to disclose all of the credit scores that were used in these transactions. For example, if two applicants jointly apply for a mortgage loan to purchase a single-family residence and the lender uses the credit scores of both, then both scores need to be disclosed. The statute specifically does not require that more than one disclosure be provided per loan; therefore, if multiple scores are used, all of them can be included in one disclosure containing the Notice to the Home Loan Applicant.

If a financial institution uses a credit score that was not obtained directly from a consumer reporting agency but may contain some information from a consumer reporting agency, this disclosure

22 (11/06) • FCRA

requirement can be satisfied by providing a score and associated key factor information that were supplied by the consumer reporting agency. For example, certain automated underwriting systems generate scores used in credit decisions. These systems are often populated by data obtained from consumer reporting agencies. If a financial institution uses such an automated system, the disclosure requirement can be satisfied by providing the applicants with a score and list of key factors supplied by a consumer reporting agency based on the data, including the credit score(s), that were imported into the automated system. Doing so will provide applicants with information about their credit history and its role in the credit decision, in the spirit of this section of the statute.

Timing

The statute requires that the disclosure be provided as soon as is reasonably practicable after the credit score is used.

Adverse Action Disclosures (FCRA, Sections 615(a) and (b))

The FCRA requires certain disclosures when adverse actions are taken with respect to consumers on the basis of information received from third parties. Specific disclosures are required depending on whether the source of the information is a consumer reporting agency, a third party other than a consumer reporting agency, or an affiliate. The disclosure requirements are discussed separately below.

Information Obtained from a Consumer Reporting Agency

Section 615(a) provides that when adverse action is taken with respect to any consumer that is based in whole or in part on any information contained in a consumer report, the financial institution must do all of the following:

• Provide oral, written, or electronic notice of the adverse action to the consumer

• Provide to the consumer, orally, in writing, or electronically,

– The name, address, and telephone number of the consumer reporting agency from which it received the information (including a toll-free telephone number established by the agency, if the agency maintains files on a nationwide basis)

– A statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to give the

Consumer Compliance Handbook


consumer the specific reasons for the adverse action

• Provide to the consumer an oral, written, or electronic notice of (1) the consumer’s right to obtain a free copy of the consumer report from the consumer reporting agency, within sixty days of receiving notice of the adverse action, and (2) the consumer’s right to dispute the accuracy or completeness of any information in the consumer report with the consumer reporting agency

Information Obtained from a Source Other Than a Consumer Reporting Agency

Section 615(b)(1) provides that if credit for personal, family, or household purposes involving a consumer is denied or if the charge for such credit is increased, partially or wholly on the basis of information that was obtained from a person other than a consumer reporting agency and that bears on the consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living, the financial institution,

• At the time the adverse action is communicated to the consumer, must clearly and accurately disclose the consumer’s right to file a written request for the reasons for the adverse action, and

• If it receives such a request within sixty days after the consumer learns of the adverse action, must disclose, within a reasonable period of time, the nature of the adverse information. The information should be sufficiently detailed to enable the consumer to evaluate its accuracy. The source of the information need not be, but may be, disclosed. In some instances, it may be impossible to identify the nature of certain information without also revealing the source.

Information Obtained from an Affiliate

Section 615(b)(2) provides that if a person, including a financial institution, takes an adverse action involving credit (in connection with a transaction initiated by a consumer), insurance, or employment in whole or in part on the basis of information provided by an affiliate, it must notify the consumer that the information

• Is furnished to the person taking the action by a person related by common ownership, or affiliated by common corporate control, to the person taking the action;

• Bears upon the consumer’s creditworthiness, credit standing, credit capacity, character, gen-


eral reputation, personal characteristics, or mode of living;

• Is not information solely involving transactions or experiences between the consumer and the person furnishing the information; and

• Is not information in a consumer report.

The notification must inform the consumer of the adverse action and that the consumer may obtain a disclosure of the nature of the information relied on by making a written request within sixty days of transmittal of the adverse action notice. If the consumer makes such a request, the user must disclose the nature of the information received from the affiliate not later than thirty days after receiving the request.

Debt Collector Communications concerning Identity Theft (FCRA, Section 615(g))

Section 615(g) sets forth specific requirements for financial institutions that act as debt collectors, that is, financial institutions that collect debts on behalf of a third party that is a creditor or other user of a consumer report. The requirements do not apply when a financial institution is collecting its own loans. When a financial institution is notified that any information relating to a debt that it is attempting to collect may be fraudulent or may be the result of identity theft, the institution must notify the third party of this fact. In addition, if the consumer to whom the debt purportedly relates requests information about the transaction, the financial institution must provide all of the information the consumer would otherwise be entitled to if the consumer wished to dispute the debt under other provisions of law applicable to the financial institution.

Risk-Based Pricing Notice (FCRA, Section 615(h))

Section 615(h) requires users of consumer reports that grant credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers who get credit from or through that person to provide a notice to those consumers who did not receive the most favorable terms. Implementing regulations for this section are currently (as of August 2006) under development jointly by the Federal Reserve Board and the Federal Trade Commission. Financial institutions do not have to provide this notice until final regulations are implemented and effective. This section of the examination procedures will be written upon publication of final rules.


Use of Consumer Reports for Employment Purposes (FCRA, Section 604(b)) 1. Determine whether the financial institution

obtains consumer reports on current or prospective employees.

2. Assess the financial institution’s policies and procedures to determine if appropriate disclosures are provided to current and prospective employees when consumer reports are obtained for employment purposes, including in situations in which adverse actions are taken on the basis of consumer report information.

3. If procedural weaknesses or other risks requiring further investigation are noted, review a sample of the disclosures to determine if they are accurate and in compliance with the technical FCRA requirements.

Prescreened Consumer Reports and Opt-Out Notice (FCRA, Sections 604(c) and 615(d); and FTC Regulations, Parts 642 and 698) 1. Determine whether the financial institution

obtained and used prescreened consumer reports in connection with offers of credit and/or insurance.

2. Evaluate the institution’s policies and procedures to determine if a list of the criteria used for prescreened offers, including all post-application criteria, is maintained in the institution’s files and the criteria are applied consistently when consumers respond to the offers.

3. Determine whether written solicitations contain the required disclosures of consumers’ right to opt out of prescreened solicitations and comply with all requirements applicable at the time of the offer.

4. If procedural weaknesses or other risks requiring further investigation are noted, obtain and review a sample of approved and denied responses to the offers to ensure that criteria were appropriately applied.

Truncation of Credit and Debit Card Account Numbers (FCRA, Section 605(g)) 1. Determine whether the financial institution’s


policies and procedures ensure that electronically generated receipts from automated teller machines and point-of-sale terminals or other machines do not contain more than the last five digits of the card number and do not contain the expiration date.

2. For ATMs and POS terminals or other machines that were put into operation before January 1, 2005, determine if the institution has brought the terminals into compliance or has begun a plan to ensure that these terminals comply by the mandatory compliance date of December 4, 2006.

3. If procedural weaknesses or other risks requiring further investigation are noted, review samples of actual receipts to ensure compliance.

Disclosure of Credit Scores by Certain Mortgage Lenders (FCRA, Section 609(g)) 1. Determine whether the financial institution uses

credit scores in connection with applications for closed-end or open-end loans secured by one-to four-family residential real property.

2. Evaluate the institution’s policies and procedures to determine whether accurate disclosures are provided to applicants as soon as is reasonably practicable after using credit scores.

3. If procedural weaknesses or other risks requiring further investigation are noted, review a sample of disclosures given to home loan applicants to determine technical compliance with the requirements.

Adverse Action Disclosures (FCRA, Sections 615(a) and (b)) 1. Determine whether the financial institution’s

policies and procedures adequately ensure that appropriate disclosures are provided when adverse action is taken against consumers on the basis of information received from consumer reporting agencies, other third parties, and/or affiliates.

2. Review the financial institution’s policies and procedures for responding to requests for information in response to these adverse action notices.

3. If procedural weaknesses or other risks requiring further investigation are noted, review a


sample of adverse action notices to determine if they are accurate and in technical compliance.

Debt Collector Communications concerning Identity Theft (FCRA, Section 615(g)) 1. Determine whether the financial institution col

lects debts for third parties.

2. Determine whether the financial institution has policies and procedures to ensure that the third parties are notified if the financial institution obtains any information that may indicate that the debt in question is the result of fraud or identity theft.

3. Determine if the institution has effective policies and procedures for providing information to consumers to whom the fraudulent debts relate.

4. If procedural weaknesses or other risks requiring further investigation are noted, review a sample of instances in which consumers have alleged identity theft and requested information

related to transactions to determine if all of the appropriate information was provided to the consumers.

Risk-Based Pricing Notice (FCRA, Section 615(h))

Section 615(h) requires users of consumer reports that grant credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers who get credit from or through that person to provide a notice to those consumers who did not receive the most favorable terms. Implementing regulations for this section are currently (as of August 2006) under development jointly by the Federal Reserve Board and the Federal Trade Commission. Financial institutions do not have to provide this notice until final regulations are implemented and effective. This section of the examination procedures will be written upon publication of final rules.


Fair Credit Reporting Examination Module 4: Financial Institutions as Furnishers of Information

Overview

The Fair Credit Reporting Act (FCRA) sets forth many responsibilities for financial institutions that furnish information to consumer reporting agencies. Those responsibilities generally concern ensuring the accuracy of the data that are placed in the consumer reporting system. This examination module addresses the various areas associated with furnishers of information; it does not apply to financial institutions that do not furnish information to consumer reporting agencies.

Furnishers of Information—General (FCRA, Section 623)

The examination procedures for this subsection will be amended upon completion of interagency guidance for institutions regarding the accuracy and integrity of information furnished to consumer reporting agencies (the guidance is required by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act)). An interagency working group will develop and publish the guidance for comment and will finalize it at a later date. The agencies will also, at a later date, write regulations regarding when furnishers must handle direct disputes from consumers.

In the interim, institutions that furnish information to consumer reporting agencies must comply with the existing FCRA requirements, which generally require accurate reporting and prompt investigation and resolution of disputes over accuracy. The examination procedures presented here are based largely on the procedures last approved by the FFIEC Task Force on Consumer Compliance in March 2000, but they have been revised to include new requirements under the 2003 amendments to the FCRA that do not require implementing regulations.

Duties of Furnishers to Provide Accurate Information

Section 623(a) states that a person, including a financial institution, may, but need not, specify an address to which consumers may send notices concerning inaccurate information. If the financial institution specifies such an address, then it may not furnish information relating to a consumer to any consumer reporting agency if (1) the institution has been notified by the consumer, at the specified address, that the information is inaccurate and (2) the information is in fact inaccurate. If the


financial institution does not specify an address, then it may not furnish any information relating to a consumer to any consumer reporting agency if it knows or has reasonable cause to believe that the information is inaccurate.

When a financial institution that (regularly and in the ordinary course of business) furnishes information to one or more consumer reporting agencies about its transactions or experiences with any consumer determines that any such information is not complete or accurate, the institution must promptly notify the consumer reporting agency of that determination. Corrections to that information or any additional information necessary to make the information complete and accurate must be provided to the consumer reporting agency. Further, any information that remains incomplete or inaccurate must not thereafter be furnished to the consumer reporting agency.

If the completeness or accuracy of any information furnished by a financial institution to a consumer reporting agency is disputed by a consumer, that financial institution may not furnish the information to any consumer reporting agency without notice that the information is disputed by the consumer.

Voluntary Closures of Accounts

Section 623(a)(4) requires that any person, including a financial institution, that (regularly and in the ordinary course of business) furnishes information to a consumer reporting agency regarding a consumer who has a credit account with that institution notify the agency of the voluntary closure of the account by the consumer, in information regularly furnished for the period in which the account is closed.

Notice Involving Delinquent Accounts

Section 623(a)(5) requires that a person, including a financial institution, that furnishes information to a consumer reporting agency about a delinquent account being placed for collection, charged off, or subjected to any similar action, not later than ninety days after furnishing the information to the agency, notify the agency of the month and year of the commencement of the delinquency that immediately preceded the action.

Duties upon Notice of Dispute

Section 623(b) requires the financial institution to


do the following whenever it receives a notice of dispute from a consumer reporting agency regarding the accuracy or completeness of any information provided by the institution to the agency pursuant to FCRA, section 611 (Procedure in Case of Disputed Accuracy):

• Conduct an investigation regarding the disputed information

• Review all relevant information provided by the consumer reporting agency along with the notice

• Report the results of the investigation to the consumer reporting agency

• If the disputed information is found to be incomplete or inaccurate, report those results to all nationwide consumer reporting agencies to which the financial institution previously provided the information

• If the disputed information is incomplete, inaccurate, or not verifiable by the financial institution, for purposes of reporting to the consumer reporting agency,

– Modify the item of information,

– Delete the item of information, or

– Permanently block the reporting of that item of information

The investigations, reviews, and reports required to be made must be completed within thirty days. The time period may be extended for fifteen days if a consumer reporting agency receives additional relevant information from the consumer.

Prevention of Re-Pollution of Consumer Reports (FCRA, Section 623(a)(6))

Section 623(a)(6) has specific requirements for furnishers of information, including financial institutions, to a consumer reporting agency that receive notice from a consumer reporting agency that the information furnished may be fraudulent as a result of identity theft. FCRA, section 605B, requires consumer reporting agencies to notify furnishers of information, including financial institutions, that the information may be fraudulent as a result of identity theft, that an identity theft report has been filed, and that a block has been requested. Section 623(a)(6) requires financial institutions, upon receiving such notice, to establish and follow reasonable procedures to ensure that this information is not re-reported to the consumer reporting agency, thus ‘‘re-polluting’’ the victim’s consumer report.

FCRA, section 615(f), also prohibits a financial institution from selling or transferring debt resulting from an alleged identity theft.


Negative Information Notice (FCRA, Section 623(a)(7))

Section 623(a)(7) requires financial institutions to provide consumers with a notice either before negative information is provided to a nationwide consumer reporting agency or within thirty days after reporting the negative information.

Financial institutions may provide this disclosure on or with any notice of default, any billing statement, or any other materials provided to the customer, as long as the notice is clear and conspicuous. Institutions may also choose to provide this notice to all customers as an abundance of caution. However, this notice may not be included in the initial disclosures provided under section 127(a) of the Truth in Lending Act.

Negative Information

For these purposes, negative information is any information concerning a customer’s delinquencies, late payments, insolvency, or any form of default.

Nationwide Consumer Reporting Agency

FCRA, section 603(p), defines a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis as one that regularly engages in the practice of assembling or evaluating and maintaining the following two pieces of information about consumers residing nationwide, for the purpose of furnishing consumer reports to third parties bearing on a consumer’s creditworthiness, credit standing, or credit capacity:

• Public record information

• Credit account information from persons who furnish that information regularly and in the ordinary course of business

Model Notices

As required by the FCRA, the Federal Reserve Board developed the following model notices that financial institutions may use to comply with these requirements. One model notice is to be used when an institution chooses to provide a notice before furnishing negative information. The other is to be used when an institution provides a notice within thirty days after reporting negative information:

• Notice prior to communicating negative information (model B-1). ‘‘We may report information about your account to credit bureaus. Late payments, missed payments, or other defaults on


your account may be reflected in your credit report.’’

• Notice within thirty days after communicating negative information (model B-2). ‘‘We have told a credit bureau about a late payment, missed payment or other default on your account. This information may be reflected in your credit report.’’

Use of the model notices is not required; however, proper use of the model notices provides financial institutions with a safe harbor from liability. Financial institutions may make certain changes to the language or format of the model notices without losing the safe harbor from liability provided by the models, but the changes may not be so extensive as to affect the substance, clarity, or meaningful

sequence of the language in the models. Institutions making such extensive revisions will lose the safe harbor from liability that the model notices provide. Acceptable changes include, for example,

• Rearranging the order of the references to ‘‘late payment(s)’’ or ‘‘missed payment(s)’’;

• Pluralizing the terms ‘‘credit bureau,’’ ‘‘credit report,’’ and ‘‘account’’;

• Specifying the particular type of account on which information may be furnished, such as ‘‘credit card account’’; and

• Rearranging, in model B-1, the phrases ‘‘information about your account’’ and ‘‘to credit bureaus’’ such that it would read ‘‘We may report to credit bureaus information about your account.’’



Furnishers of Information—General (FCRA, Section 623) 1. Determine whether the financial institution

provides information to consumer reporting agencies.

2. Review the financial institution’s policies and procedures for ensuring compliance with the FCRA requirements for furnishing information to consumer reporting agencies.

3. If procedural weaknesses or other risks requiring further investigation are noted, such as a high number of complaints from consumers regarding the accuracy of their consumer report information furnished by the financial institution, select a sample of reported items and the corresponding loan or collection file to determine that the institution did the following:

a. Did not report information that it knew, or had reasonable cause to believe, was inaccurate (§ 623(a)(1)(A))

b. Did not report information to a consumer reporting agency if it was notified by the consumer that the information was inaccurate and the information was, in fact, inaccurate (§ 623(a)(1)(B))

c. Provided the consumer reporting agency with corrections or additional information to make the information complete and accurate, and thereafter did not send the consumer reporting agency the inaccurate or incomplete information (§ 623(a)(2))

d. Furnished a notice to a consumer reporting agency of a dispute in situations in which a consumer disputed the completeness or accuracy of any information the institution furnished, and the institution continued furnishing the information to a consumer reporting agency (§ 623(a)(3))

e. Notified the consumer reporting agency of a voluntary account-closing by the consumer, and did so as part of the information regularly furnished for the period in which the account was closed (§ 623(a)(4))

f. Notified the consumer reporting agency of the month and year of commencement of a delinquency that immediately preceded the action of placing the delinquent account for collection, charging it off, or similar action. The notification to the agency must be made within ninety days of furnishing information to the agency about a delinquent account

being placed for collection, charged off, or subjected to any similar action (§ 623(a)(5))

4. If weaknesses within the financial institution’s procedures for investigating errors are revealed, review a sample of notices of disputes received from a consumer reporting agency and determine whether the institution did the following:

a. Conducted an investigation with respect to the disputed information (§ 623(b)(1)(A))

b. Reviewed all relevant information provided by the consumer reporting agency (§ 623(b)(1)(B))

c. Reported the results of the investigation to the consumer reporting agency (§ 623(b)(1)(C))

d. Reported the results of the investigation to all other nationwide consumer reporting agencies to which the information was furnished, if the investigation found that the reported information was inaccurate or incomplete (§ 623(b)(1)(D))

e. Modified, deleted, or blocked the reporting of information that could not be verified

Prevention of Re-Pollution of Consumer Reports (FCRA, Section 623(a)(6)) 1. If the financial institution provides information to

a consumer reporting agency, review the institution’s policies and procedures for ensuring that items of information blocked because of an alleged identity theft are not re-reported to the consumer reporting agency.

2. If weaknesses are noted within the financial institution’s policies and procedures, review a sample of notices from a consumer reporting agency of allegedly fraudulent information due to identity theft furnished by the financial institution, to determine whether the institution does not re-report the item to a consumer reporting agency.

3. If procedural weaknesses or other risks requiring further investigation are noted, verify that the financial institution has not sold or transferred a debt that resulted from an alleged identity theft.

Negative Information Notice (FCRA, Section 623(a)(7)) 1. If the financial institution provides negative

information to a nationwide consumer reporting



agency, verify that the institution’s policies and procedures ensure that the appropriate notices are provided to customers.

2. If procedural weaknesses or other risks requir-

ing further investigation are noted, review a sample of notices provided to consumers to determine compliance with the technical content and timing requirements.


Fair Credit Reporting Examination Module 5: Consumer Alerts and Identity Theft Protections

Overview

The Fair Credit Reporting Act (FCRA) contains several provisions for both consumer reporting agencies and users of consumer reports, including financial institutions, that are designed to help combat identity theft. This module applies to financial institutions that are not consumer reporting agencies but are users of consumer reports.

There are two primary requirements: (1) a user of a consumer report that contains a fraud or active duty alert must take steps to verify the identity of the individual to whom the consumer report relates and (2) a financial institution must disclose certain information when consumers allege that they are the victim of identity theft.

Fraud and Active Duty Alerts (FCRA, Section 605A(h))

Initial Fraud and Active Duty Alerts

A consumer who suspects that he or she may be the victim of fraud, including identity theft, may ask nationwide consumer reporting agencies to place initial fraud alerts in his or her consumer reports. These alerts must remain in the consumer’s report for no less than ninety days. In addition, members of the armed services who are called to active duty may request that active duty alerts be placed in their consumer reports. Active duty alerts must remain in these service members’ files for no less than twelve months.

Section 605A(h)(1)(B) requires users of consumer reports, including financial institutions, to verify a consumer’s identity if a consumer report includes a fraud or active duty alert. Unless the financial institution uses reasonable policies and procedures to form a reasonable belief that it knows the identity of the person making the request, the financial institution may not

• Establish a new credit plan or extension of credit (other than under an open-end credit plan) in the name of the consumer,

• Issue an additional card on an existing account, or

• Increase a credit limit.

Extended Alerts

Consumers who allege that they are the victim of identity theft may also place an extended alert, which lasts seven years, on their consumer report. Extended alerts require consumers to submit


identity theft reports and appropriate proof of identity to the nationwide consumer reporting agencies.

Section 605A(h)(2)(B) requires a financial institution that obtains a consumer report that contains an extended alert to contact the consumer in person, or by the method listed by the consumer in the alert, prior to taking any of the three actions listed above.

Information Available to Victims (FCRA, Section 609(e))

Section 609(e) requires financial institutions to provide records of fraudulent transactions to victims of identity theft within thirty days after receiving a request for the records. These records include the application and business transaction records under the control of the financial institution, whether maintained by the institution or another person on behalf of the institution (such as a service provider). This information should be provided to one of the following:

• The victim

• Any federal, state, or local government law enforcement agency or officer specified by the victim in the request

• Any law enforcement agency investigating the identity theft that was authorized by the victim to take receipt of these records

The request for the records must be made by the victim in writing and must be sent to the financial institution to the address specified by the institution for this purpose. The financial institution may ask the victim to provide information, if known, regarding the date of the transaction or application and any other identifying information, such as an account or transaction number.

Unless the financial institution, at its discretion, otherwise has a high degree of confidence that it knows the identity of the victim making the request for information, before disclosing any information to the victim it must take prudent steps to positively identify the person requesting the information. Proof of identity can include any of the following:

• A government-issued identification card

• Personally identifying information of the same type that was provided to the financial institution by the unauthorized person

• Personally identifying information that the finan-


cial institution typically requests from new applicants or for new transactions

At the election of the financial institution, the victim must also provide the institution with proof of an identity theft complaint, which may consist of a copy of a police report evidencing the claim of identity theft and a properly completed affidavit. The affidavit may be either the standardized affidavit form prepared by the Federal Trade Commission (published in April 2005 in the Federal Register at 70 FR 21792) or an ‘‘affidavit of fact’’ that is acceptable to the financial institution for this purpose.

When these conditions are met, the financial institution must provide the information at no

charge to the victim. However, the institution is not required to provide any information if, acting in good faith, it determines that

• Section 609(e) does not require disclosure of the information;

• It does not have a high degree of confidence in knowing the true identity of the requestor, based on the identification and/or proof provided;

• The request for information is based on a misrepresentation of fact by the requestor; or

• The information requested is Internet navigational data or similar information about a person’s visit to a web site or online service.



Fraud and Active Duty Alerts (FCRA, Section 605A(h)) 1. Determine whether the financial institution has

effective policies and procedures in place to verify the identity of consumers in situations in which consumer reports include fraud and/or active duty military alerts.

2. Determine if the financial institution has effective policies and procedures in place to contact consumers in situations in which consumer reports include extended alerts.

3. If procedural weaknesses or other risks requiring further investigation are noted, review a sample of transactions in which consumer reports including these types of alerts were obtained. Verify that the financial institution complied with the identity verification and/or consumer contact requirements.

Information Available to Victims (FCRA, Section 609(e)) 1. Review financial institution policies, procedures,

and/or practices to determine whether identities and claims of fraudulent transactions are verified and whether information is properly disclosed to victims of identity theft and/or appropriately authorized law enforcement agents.

2. If procedural weaknesses or other risks requiring further investigation are noted, review a sample of requests of these types to determine whether the financial institution properly verified the requestor’s identity prior to disclosing the information.


Fair Credit Reporting Examination Module 6: Requirements for Consumer Reporting Agencies

Module 6, covering institutions that are considered consumer reporting agencies, will be added later.


Regulation ZTruth in Lending

Background

Regulation Z (12 CFR 226) implements the Truth inLending Act (TILA) (15 USC 1601 et seq.), whichwas enacted in 1968 as title I of the ConsumerCredit Protection Act (Pub. L. 90-321). Since itsimplementation, the regulation has been amendedmany times to incorporate changes to the TILA orto address changes in the consumer creditmarketplace.

Regulation Z was first revised in 1970 to prohibitcreditors from sending consumers unsolicited creditcards. Subsequent revisions to the regulation in the1970s implemented billing dispute provisions of theFair Credit Billing Act of 1974 and the ConsumerLeasing Act of 1976.

During the 1980s, Regulation Z was changedsignificantly, first in connection with the Truth inLending Simplification and Reform Act of 1980. In1981, all consumer leasing provisions in theregulation were transferred to the Board’s Regula-tion M. During the late 1980s, Regulation Z wasamended to implement the rate limitations forhome-secured loans set forth in section 1204 of theCompetitive Equality Banking Act of 1987 and torequire disclosures for adjustable-rate mortgageloans. Other Regulation Z amendments imple-mented the Fair Credit and Charge Card DisclosureAct of 1988 and the Home Equity Loan ConsumerProtection Act of 1988, which required disclosure ofkey terms at the time of application.

In the 1990s, Regulation Z was amended toimplement the Home Ownership and Equity Protec-tion Act of 1994, which imposed new disclosurerequirements and substantive limitations on certainhigher-cost closed-end mortgage loans andincluded new disclosure requirements for reversemortgage transactions. The regulation was alsorevised to reflect the 1995 Truth in Lendingamendments that dealt primarily with tolerances forloans secured by real estate and limitations onlenders’ liability for disclosure errors for these typesof loans. Regulation Z amendments resulting fromthe Economic Growth and Regulatory PaperworkReduction Act of 1996 simplified adjustable-ratemortgage disclosures.

Applicability

In general, Regulation Z applies to individuals andbusinesses that offer or extend credit, when all thefollowing conditions are met:

• The credit is offered or extended to consumers

• The offering or extension of credit is doneregularly (see the definition of ‘‘creditor’’ insection 226.2(a))

• The credit is subject to a finance charge or ispayable by a written agreement in more than fourinstallments

• The credit is primarily for personal, family, orhousehold purposes

The regulation also includes special provisions forcredit offered by credit card issuers and specificrequirements for persons who are not creditors butwho provide applications for home equity loans.

Organization of Regulation Z

The disclosure rules of Regulation Z differ depend-ing on whether the credit is open-end (credit cardsand home equity lines, for example) or closed-end(such as car loans and mortgages). Regulation Z isstructured accordingly.

• Subpart A—Provides general information thatapplies to both open-end and closed-end credittransactions, including definitions, explanationsof coverage and exemptions, and rules fordetermining which fees are finance charges

• Subpart B—Covers open-end credit, includinghome equity loans and credit and chargeaccounts; sets forth rules for providing disclo-sures, resolving billing errors, calculating annualpercentage rates and credit balances, andadvertising; describes special rules for creditcard transactions (such as prohibitions on theissuance of credit cards and restrictions on theright to offset a cardholder’s indebtedness); andprovides special rules for home equity lines ofcredit (such as prohibitions against closingaccounts and changing account terms)

• Subpart C—Covers closed-end credit, includingresidential mortgage transactions, demand loans,and installment credit contracts (including directloans by banks and purchased dealer paper);sets forth rules for disclosures related to regularand variable-rate loans, refinancings and as-sumptions, and credit balances; also gives rulesfor calculating annual percentage rates andadvertising closed-end credit

• Subpart D—For both open- and closed-endcredit, sets forth the duty of creditors to retainevidence of compliance with the regulation,clarifies the relationship between the regulationand state law, and requires creditors to set an

Consumer Compliance Handbook Reg. Z • 1 (1/06)

interest rate cap for variable-rate transactionssecured by a consumer’s dwelling

• Subpart E—Requires additional disclosures for,sets limits on, and prohibits specific acts andpractices in connection with certain home mort-gage transactions having rates or fees above acertain percentage or amount; also sets forthdisclosure requirements for reverse mortgagetransactions (both open- and closed-end credit)

• Appendixes—Provide model forms and clausesthat creditors may use when providing dis-closures; detailed rules for calculating APRs foropen- and closed-end credit; and instructionsfor computing the total annual loan cost ratefor reverse mortgage transactions, along withtables giving assumed loan periods for thosetransactions

• Official staff interpretations—Published in a com-mentary normally updated annually, in March;include mandates concerning disclosures notnecessarily explicit in the regulation and informa-tion on other actions required of creditors (Goodfaith compliance with the commentary protectscreditors from civil liability under the act; it isvirtually impossible to comply with the regulationwithout reference to, and reliance on, thecommentary.)

Note: This chapter does not attempt to discuss allof Regulation Z, but rather highlights areas thathave caused the most problems in relation tocalculation of the finance charge and the annualpercentage rate.

General Information (Subpart A)

Purpose of the TILA and Regulation Z

The Truth in Lending Act is intended to ensure thatcredit terms are disclosed in a meaningful way sothat consumers can compare credit terms morereadily and more knowledgeably. Before its enact-ment, consumers were faced with a vast array ofcredit terms and rates. It was difficult to compareloans because the terms and rates were seldompresented in the same format. Now, all creditorsmust use the same credit terminology and expres-sions of rates. In addition to providing a uniformsystem for disclosures, the act is designed to

• Protect consumers from inaccurate and unfaircredit billing and credit card practices

• Provide consumers with rescission rights

• Provide for rate caps on certain dwelling-secured loans

• Impose limitations on home equity lines of creditand certain closed-end home mortgages

The TILA and Regulation Z do not tell financialinstitutions how much interest they may charge orwhether they must grant a loan to a particularconsumer.

Coverage and Exemptions(§§ 226.1−226.3)

Lenders must carefully consider several factorswhen deciding whether a loan requires Truth inLending disclosures or is subject to other Regula-tion Z requirements. Broad coverage consider-ations are included in section 226.1(c) of theregulation, and relevant definitions appear insection 226.2. Coverage considerations areaddressed in more detail in the commentary to theregulation.

The following transactions are exempt fromRegulation Z under section 226.3:

• Credit extended primarily for a business, com-mercial, or agricultural purpose

• Credit extended to other than a natural person(including credit to government agencies orinstrumentalities)

• Credit in excess of $25,000 not secured by realor personal property used as the consumer’sprincipal dwelling

• Public utility credit

• Credit extended by a broker−dealer registeredwith the Securities and Exchange Commission orthe Commodity Futures Trading Commissioninvolving securities or commodities accounts

• Home fuel budget plans

• Certain student loan programs

Footnote 4 in Regulation Z provides that if acredit card is involved, credit that is generallyexempt from the requirements of Regulation Z (forexample, credit for a business or agriculturalpurpose) is still subject to requirements that governthe issuance of credit cards and liability for theirunauthorized use. (Credit cards must not be issuedon an unsolicited basis, and if a credit card is lostor stolen, the cardholder must not be held liable formore than $50 for the unauthorized use of thecard.)

When determining whether credit is for consumerpurposes, the creditor must evaluate the followingfive factors:

• Information obtained from the consumer describ-ing the purpose of the loan proceeds

– A statement that the proceeds will be used fora vacation trip, for example, would indicate aconsumer purpose.

– If the consumer states that the loan has amixed purpose (for example, that the pro-

Truth in Lending

2 (1/06) • Reg. Z Consumer Compliance Handbook

ceeds will be used to buy a car that will beused for both personal and business pur-poses), the lender must look to the primarypurpose of the loan to decide whether disclo-sures are necessary. A statement of purposeby the consumer will help the lender make thatdecision.

– A checked box indicating that the loan is for abusiness purpose could, absent any documen-tation showing the intended use of the pro-ceeds, be insufficient evidence that the loandoes not have a consumer purpose.

• The consumer’s primary occupation and how itrelates to the use of the loan proceeds

– The higher the correlation between the con-sumer’s occupation and the property pur-chased from the loan proceeds, the greaterthe likelihood that the loan has a businesspurpose. For example, proceeds used topurchase dental supplies for a dentist wouldindicate a business purpose.

• Personal management of the assets purchasedfrom the loan proceeds

– The less the borrower is personally involved inthe management of the investment or enter-prise purchased by the proceeds, the lesslikely the loan has a business purpose. Forexample, borrowing money to purchase stockin an automobile company by an individualwho does not work for that company wouldindicate a personal investment and a con-sumer purpose.

• The size of the transaction

– The larger the transaction, the more likely theloan has a business purpose. For example, aloan amount of $5,000,000 for a real estatetransaction might indicate a business pur-pose.

• The amount of income derived from the propertyacquired by the loan proceeds relative to theborrower’s total income

– The less the income derived from the acquiredproperty, the more likely the loan has aconsumer purpose. For example, if the bor-rower has an annual salary of $100,000,receiving about $500 in annual dividends fromthe acquired property would indicate a con-sumer purpose.

The lender must evaluate all five factors beforeconcluding that disclosures are not necessary.Normally, evidence suggested by a single factor is,by itself, insufficient to draw a conclusion aboutwhether the transaction is covered by Regulation Z.The diagram ‘‘Coverage Considerations underRegulation Z’’ may be helpful in making thedetermination. In any case, the financial institution

may choose to furnish disclosures to consumers.Disclosure under such circumstances does notcontrol whether the transaction is covered but canensure protection to the financial institution andcompliance with the law.

Determination of theFinance Charge and the APR

Finance Charge (Open-End andClosed-End Credit) (§ 226.4)

The finance charge is a measure of the cost ofconsumer credit represented in dollars and cents.Along with APR disclosures, the disclosure of thefinance charge is central to the uniform credit costdisclosure envisioned by the TILA.

Generally, the finance charge includes anycharges or fees payable directly or indirectly by theconsumer and imposed directly or indirectly by thefinancial institution either incident to or as acondition of an extension of consumer credit. Forexample, the finance charge on a loan alwaysincludes any interest charges and, often, othercharges, such as points, transaction fees, orservice fees.

Regulation Z provides examples, applicable toboth open-end and closed-end credit transactions,of what must, must not, or need not be included inthe disclosed finance charge (section 226.4(b)).

The finance charge does not include any chargeof a type payable in a comparable cash transac-tion, such as taxes, title fees, license fees, orregistration fees paid in connection with an auto-mobile purchase.

Calculation of the Finance Charge(Closed-End Credit)

One of the more complex tasks under Regulation Zis determining whether a charge associated with anextension of credit must be included in, or excludedfrom, the disclosed finance charge. The financecharge initially includes any charge that is, or willbe, connected with a specific loan. Chargesimposed by third parties are finance charges if theinstitution requires use of the third party. Chargesimposed by settlement or closing agents arefinance charges if the institution requires thespecific service that gave rise to the charge andthe charge is not otherwise excluded.

The ‘‘Finance Charges’’ diagram summarizesincluded and excluded charges and may behelpful in determining whether a loan-relatedcharge is a finance charge.

Truth in Lending


Coverage Considerations under Regulation Z

Is the amount

fi nanced or credit limit $25,000 or

less?

Yes

Yes

Is the credit for personal,

family, or household

use?

Regulation Z does not apply, except the rules concerning issu-ance of and unauthorized-use liability for credit cards. (Exempt credit includes loans with a business or agricultural purpose and certain student loans. Credit extended to acquire or im-prove rental property that is not owner-occupied is considered business-purpose credit.)

Is the credit extended to a

consumer?

Regulation Z does not apply. (Credit that is extended to a land trust is deemed to be credit extended to a consumer.)

Is the credit extended by a

creditor?

The institution is not a “creditor” and Regulation Z does not ap-ply unless at least one of the following tests is met:(1) The institution extends consumer credit regularly and

(a) The obligation is initially payable to the institution and(b) The obligation either is payable by written agreement

in more than four installments or is subject to a fi nance charge

(2) The institution is a card issuer that extends closed-end credit that is subject to a fi nance charge or is payable by written agreement in more than four installments

(3) The institution is a card issuer that extends open-end credit or credit that is not subject to a fi nance charge and is not payable by written agreement in more than four installments

For limited purposes, a person that honors a credit card may also be a creditor.

(Note: All persons, including noncreditors, must comply with the advertising provisions of Regulation Z.)

Is the loan

or credit plan secured by real property or by the consumer’s principal

dwelling?

Regulation Z does not apply, but it may apply later if the loan is refi nanced for $25,000 or less. If the principal dwelling is taken as col-lateral after consummation, rescission rights apply and, in the case of open-end credit, billing disclosures and other provisions of Regulation Z apply.

No

No

No

Yes

Yes

No No

Regulation Z applies

Yes

Truth in Lending


Finance Charges

FINANCE CHARGE = DOLLAR COST OF CONSUMER CREDIT: Includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as a condition of or incident to the extension of credit

CHARGES ALWAYS INCLUDED

(A)

Interest

Loan origination fees Consumer points

Credit-guarantee insurance premiums

Charges imposed on the creditor for

purchasing the loan that are passed on to

the consumer

Discounts for inducing payment

by means other than credit

Mortgage broker fees

Other examples: Fee for preparing TILA disclosures; real

estate construction loan inspection

fees; fees for post-consummation tax or fl ood insurance

requirements; required credit life insurance charges

CHARGES INCLUDED UNLESS CONDITIONS ARE

MET

(B)

Premiums for credit life, accident and health, or loss-of-income insurance

Premiums for property or liability

insurance

Premiums for vendor’s single interest (VSI)

insurance

Security interest charges (fi ling fees),

insurance in lieu of fi ling fees, and

certain notary fees

Charges imposed by third parties

Charges imposed by third-party closing

agents

Appraisal and credit-report fees

CONDITIONS FOR EXCLUSION

(Any loan)

(C)

Insurance not required, disclosures

are made, and consumer authorizes

Consumer selects insurance company and disclosures are

made

Insurer waives right of subrogation,

consumer selects insurance company, and disclosures are

made

The fee is for lien purposes, is

prescribed by law, is payable to a

public offi cial, and is itemized and

disclosed

Use of the third party is not required to obtain loan, and creditor does not retain the charge

Creditor does not require and does not retain the fee for the

particular service

Application fees, if charged to all

applicants, are not fi nance charges.

Application fees may include appraisal or

credit-report fees

EXCLUDABLE CHARGES* (Residential mortgage

transactions and loans secured by real

estate) (D)

Fees for title insurance, title

examination, property survey, etc.

Amounts required to be paid into escrow,

if not otherwise included in the fi nance charge

Notary fees

Pre-consummation fl ood and pest inspection fees

Appraisal and credit report fees

CHARGES NEVER INCLUDED

(E)

Charges payable in a comparable cash

transaction

Seller’s points

Participation or membership fees

Discount offered by the seller to induce payment by cash

or other means not involving the use of a

credit card

Interest forfeited as a result of interest reduction required

by law

Charges absorbed by the creditor as a cost

of doing business

Transaction fees

Debt-cancellation fees

Coverage not required, disclosures

are made, and consumer authorizes

Fees for preparing loan documents, mortgages, and other settlement

documentsOverdraft fees not agreed to in writing

Fees for unanticipated late

payments

*To be excludable, fees must be bona fi de and reasonable.

Truth in Lending


• Charges always included (col. A)—Lists chargesgiven in the regulation or commentary asexamples of finance charges

• Charges included unless conditions are met(col. B)—Lists charges that must be included inthe finance charge unless the creditor meetsspecific disclosure or other conditions to excludethe charges from the finance charge

• Conditions for exclusion (col. C)—Notes theconditions that must be met if the charges listedin column B may be excluded from the financecharge. Although most charges in column B maybe considered part of the finance charge at thecreditor’s option, third-party charges and appli-cation fees must be excluded from the financecharge if the relevant conditions are met; how-ever, inclusion of appraisal and credit-reportcharges as part of the application fee isoptional.

• Excludable charges (col. D)—Identifies fees orcharges that may be excluded from the financecharge if they are bona fide and reasonable inamount and the credit transaction is secured byreal property or is a residential mortgage trans-action. For example, if a consumer loan issecured by a vacant lot or by commercialreal estate, any appraisal fees connected withthe loan may be excluded from the financecharge.

• Charges never included (col. E)—Lists chargesgiven in the regulation as examples of chargesthat automatically are not finance charges(for example, fees for unanticipated latepayments).

Prepaid Finance Charges (§ 226.18(b))

A prepaid finance charge is any finance chargethat (1) is paid separately to the financial institutionor to a third party, in cash or by check, before or atclosing, settlement, or consummation of a transac-tion or (2) is withheld from the proceeds of thecredit at any time. Prepaid finance charges effec-tively reduce the amount of funds available for theconsumer’s use, usually before or at the time thetransaction is consummated.

Examples of finance charges frequently prepaidby consumers are borrower’s points, loan origina-tion fees, real estate construction inspection fees,odd days’ interest (interest attributable to part of thefirst payment period when that period is longer thana regular payment period), mortgage guaranteeinsurance fees paid to the Federal Housing Admin-istration, private mortgage insurance paid to suchcompanies as the Mortgage Guaranty InsuranceCompany, and, in non-real-estate transactions,credit-report fees.

Precomputed Finance Charges

A precomputed finance charge includes, for exam-ple, interest added to the note amount that iscomputed by the add-on, discount, or simpleinterest method. If reflected in the face amount ofthe debt instrument as part of the consumer’sobligation, finance charges that are not viewed asprepaid finance charges are treated as precom-puted finance charges that are earned over the lifeof the loan.

Accuracy Tolerances (Closed-End Credit)(§§ 226.18(d) and 226.23(h))

The finance charge tolerances for closed-endcredit provided by Regulation Z are for legalaccuracy and should not be confused with thosetolerances provided in the TILA for reimbursementunder regulatory agency orders. As with disclosedAPRs, if a disclosed finance charge is legallyaccurate, it is not subject to reimbursement.

Generally, tolerances for finance charge errors ina closed-end transaction are $5 if the amountfinanced is $1,000 or less and $10 if the amountfinanced exceeds $1,000 (see diagrams on follow-ing pages). For certain transactions consummatedon or after September 30, 1995, the tolerances aredifferent, as noted below:

• Credit secured by real property or a dwelling(closed-end credit only):

– The disclosed finance charge is consideredaccurate if it does not vary from the actualfinance charge by more than $100.

– Overstatements are not violations.

• Rescission rights after the three-business-dayrescission period (closed-end credit only):

– The disclosed finance charge is consideredaccurate if it does not vary from the actualfinance charge by more than one-half of1 percent of the credit extended.

– The disclosed finance charge is consideredaccurate if it does not vary from the actualfinance charge by more than 1 percent of thecredit extended for the initial and subsequentrefinancings of residential mortgage transac-tions when the new loan is made at a differentfinancial institution. (This category excludeshigh-cost mortgage loans subject to section226.32, transactions in which there are newadvances, and new consolidations.)

• Rescission rights in foreclosure:

– The disclosed finance charge is consideredaccurate if it does not vary from the actualfinance charge by more than $35.

Truth in Lending


– Overstatements are not considered violations.

– The consumer is entitled to rescind if amortgage broker fee is not included as afinance charge.

Note: Normally, the finance charge tolerance fora rescindable transaction is either 0.5 percent ofthe credit transaction or, for certain refinancings,1 percent of the credit transaction. However,in the event of a foreclosure, the consumer mayexercise the right of rescission if the disclosedfinance charge is understated by more than$35.

Neither the TILA nor Regulation Z provides anytolerances for finance charge errors in open-endcredit disclosures. Open-end credit disclosuresmust be accurate.

Annual Percentage Rate(Closed-End Credit) (§ 226.22)

Credit costs may vary depending on the interestrate, the amount of the loan and other charges, thetiming and amounts of advances, and the repay-ment schedule. The APR, which must be disclosedin nearly all consumer credit transactions, isdesigned to take into account all relevant factorsand to provide a uniform measure for comparingthe costs of various credit transactions.

The APR is a measure of the total cost of credit,expressed as a nominal yearly rate. It relates theamount and timing of value received by theconsumer to the amount and timing of paymentsmade by the consumer. The disclosure of the APRis central to the uniform credit cost disclosureenvisioned by the TILA.

The APR for closed-end credit must be disclosedas a single rate only, whether the loan has a singleinterest rate, a variable interest rate, a discountedvariable interest rate, or graduated paymentsbased on separate interest rates (step rates). Also,the APR must appear with the ‘‘segregated’’disclosures—disclosures grouped together andnot containing any information not directly relatedto the disclosures required under section 226.18.

As the APR is a measure of the total cost of credit,including such costs as transaction charges andpremiums for credit-guarantee insurance, it is notan interest rate as that term is generally used. APRcalculations do not rely on definitions of interest instate law and often include charges, such as acommitment fee paid by the consumer, that are notviewed by some state usury statutes as interest.Conversely, APR calculations might not includecharges, such as a credit-report fee in a realproperty transaction, that some state laws view asinterest for usury purposes. Furthermore, measur-ing the timing of value received and of payments

made, which is essential if APR calculations are tobe accurate, must be consistent with parametersunder Regulation Z.

The APR is often considered to be the financecharge expressed as a percentage. However, twoloans could have the same finance charge and stillhave different APRs because of differing values ofthe amount financed or differing payment sched-ules. For example, the APR on a loan with anamount financed of $5,000 and 36 equal monthlypayments of $166.07 each is 12 percent, while theAPR on a loan with an amount financed of $4,500and 35 equal monthly payments of $152.18 each,plus a final payment of $152.22, is 13.26 percent. Inboth cases the finance charge is $978.52. TheAPRs on these loans are not the same because anAPR reflects more than the finance charge. Itrelates the amount and timing of value received bythe consumer to the amount and timing of pay-ments made by the consumer.

The APR is a function of

• The amount financed, which is not necessarilyequivalent to the loan amount

– If the consumer must pay a separate 1 percentloan origination fee (a prepaid finance charge)on a $100,000 residential mortgage loan atclosing, the loan amount is $100,000 but theamount financed is $100,000 less the $1,000loan fee, or $99,000.

• The finance charge, which is not necessarilyequivalent to the total interest amount

– If the consumer must pay a $25 credit-reportfee for an auto loan, the fee must be includedin the finance charge. The finance charge inthis case is the sum of the interest on the loan(that is, the interest generated by the applica-tion of a percentage rate against the loanamount) plus the $25 credit-report fee.

– If the consumer must pay a $25 credit-reportfee for a home improvement loan secured byreal property, the credit-report fee must beexcluded from the finance charge. The financecharge in this case would be only the intereston the loan.

• Interest, which is defined by state or otherfederal law but not by Regulation Z

• The payment schedule, which does not neces-sarily include only principal and interest (P + I)payments

– If the consumer borrows $2,500 for a vacationtrip at 14 percent simple interest per annumand repays that amount with 25 equal monthlypayments beginning one month from consum-mation of the transaction, the monthly P + Ipayment would be $115.87, if all months areconsidered equal, and the amount financed

Truth in Lending


Closed-End Credit: Accuracy Tolerances for Finance Charges

Does the refi nancing involve a

consolidation or new advance?

NoYes

Is this a

closed-end credit TILA

claim asserting rescission

rights?

Is the rescission

claim a defense to foreclosure

action?

Is the transaction secured by

real estate or a dwelling?

Did the transaction

originate before 9/30/95?

Finance charge tolerance is $35. An overstated fi nance charge is not considered a violation.

Yes

Finance charge tolerance is one-half of 1% of the loan amount or $100, whichever is greater. An overstated fi nance charge is not considered a violation.

Is the transaction a refi nancing?

Yes

No

Is the

transaction a high-cost

mortgage loan?*

No

No

Finance charge tolerance is 1% of the loan amount or $100, whichever is greater. An overstated fi nance charge is not considered a violation.

The fi nance charge is considered accurate if it is not more than $5 above or below the exact fi nance charge in a transaction involving an amount fi nanced of $1,000 or less, or not more than $10 above or below the exact fi nance charge in a transaction involving an amount fi nanced of more than $1,000.

Finance charge tolerance is $200 for understatements. An overstated fi nance charge is not considered a violation.

Finance charge tolerance is $100 for understatements. An overstated fi nance charge is not considered a violation.

No

YesNo

Yes

* See 15 USC 160(aa) and 12 CFR 226.32.

No

Yes

Yes

Truth in Lending


Closed-End Credit: Accuracy Tolerances forOverstated Finance Charges

Is the loan secured by real estate or a dwelling?

Is the amount financed more than $1,000?

Finance charge violation

Is the disclosed finance charge, less $10, more than the correct finance charge?

Is the disclosed finance charge, less $5, more than the correct finance charge?

No violation Finance charge violation

YesNo

YesNo

YesNo

No violation

YesNo

No violation

Truth in Lending


Closed-End Credit: Accuracy and Reimbursement Tolerances forUnderstated Finance Charges


Is the disclosed finance charge plus the finance charge reimbursement

tolerance (based on a one-quarter of 1 percentage point APR tolerance) less than the

correct finance charge?

Is the disclosed finance charge plus the finance charge reimbursement

tolerance (based on a one-eighth of 1 percentage point APR tolerance) less than the

correct finance charge?

Is the amount financed greater than $1,000?

Is the disclosed finance charge understated by more than $100 (or $200 if the loan originated before 9/30/95)?

Finance charge violation

Is the disclosed finance charge understated by more

than $10?

Is the disclosed finance charge understated by more

than $5?

No violation Finance charge violation No violation Finance charge

violation

Is the loan term more than 10 years?

Is the loan a regular loan?

No reimbursement

Subject to reimbursement

YesNo

YesNo

YesNo

YesNo

Yes No

YesNo

YesNo

Yes No YesNo

Truth in Lending


would be $2,500. If the consumer’s paymentsare increased $2.00 a month to pay anonfinanced $50 loan fee over the life of theloan, the amount financed would remain at$2,500 but the monthly payment wouldincrease to $117.87, the finance charge wouldincrease $50, and there would be a corre-sponding increase in the APR. This would bethe case whether or not state law defines the$50 loan fee as interest.

– If the loan in the preceding example has 55days to the first payment and the consumerprepays interest at consummation ($24.31 tocover the first 25 days), the amount financedwould be $2,500 less $24.31, or $2,475.69.Although the amount financed is reducedbecause the amount available to the con-sumer at consummation is less, the timeinterval during which the consumer has use ofthe $2,475.69—55 days to the first payment—isunchanged. To ease creditor compliance,Regulation Z allows creditors to disregardcertain minor irregularities in the first paymentperiod (see section 226.17(c)(4)). In this case,however, because the first payment periodexceeds the limitations of the regulation’s‘‘minor irregularities’’ provisions, the first pay-ment period of 55 days may not be treated as‘‘regular.’’ In calculating the APR, the firstpayment period must not be reduced 25 days(that is, the first payment period may not betreated as one month).

Financial institutions may, if permitted by state orother law, precompute interest by applying a rateagainst a loan balance using a simple interest,add-on, discount, or other method and may earninterest using a simple-interest accrual system, theRule of 78s (if permitted by law), or some othermethod. Unless the financial institution’s internalinterest earnings and accrual methods involve asimple interest rate based on a 360-day year that isapplied over actual days (important only fordetermining the accuracy of the payment sched-ule), the institution’s method of earning interest isnot relevant in calculating an APR, because an APRis not an interest rate (as that term is commonlyused under state or other law). As the APR normallyneed not rely on the internal accrual systems of afinancial institution, it may always be computedafter the loan terms have been agreed on (as longas it is disclosed before actual consummation ofthe transaction).

Special Requirements for Calculating theFinance Charge and APR

Proper calculation of the finance charge and APR isvery important. Regulation Z requires that the terms

‘‘finance charge’’ and ‘‘annual percentage rate,’’when required to be disclosed with a correspond-ing amount or percentage rate, be disclosed moreconspicuously than any other required disclosure.The finance charge and APR, more than any otherdisclosures, enable consumers to understand thecost of the credit and to comparison shop for credit.Failure to disclose those values accurately canresult in significant monetary damages to thecreditor, either from a class action lawsuit or from aregulatory agency’s order to reimburse consumersfor violations of law.

Footnote 45d to section 226.22 states that if anannual percentage rate or finance charge isdisclosed incorrectly, the error is not, in itself, aviolation of the regulation if

• The error resulted from a corresponding error ina calculation tool used in good faith by thefinancial institution

• Upon discovery of the error, the financial institu-tion promptly discontinues use of that calculationtool for disclosure purposes

• The financial institution notifies the FederalReserve Board in writing of the error in thecalculation tool

When a financial institution claims that it used acalculation tool in good faith, it assumes a reason-able degree of responsibility for ensuring that thetool in question provides the accuracy required bythe regulation. To check on the tool’s accuracy, theinstitution might verify the results obtained usingthe tool with figures obtained using a differentcalculation tool. It might also check that the tool, ifit is designed to operate under the actuarialmethod, produces figures similar to those providedby the examples in appendix J to the regula-tion. The calculation tool should be checked foraccuracy before it is first used and periodicallythereafter.

Open-End Credit (Subpart B)

This discussion does not address all the require-ments for open-end credit in the Truth in LendingAct and Regulation Z. Instead, it focuses on someof the more difficult issues presented in sections226.5 through 226.16 of the regulation. Additionalguidance is provided in the commentary for thesesections.

Finance Charge (§ 226.6(a))

Each finance charge imposed must be individuallyitemized. An aggregate amount of the financecharge need not be disclosed.

Truth in Lending


Determining the Balance andComputing the Finance Charge

To compute the finance charge, the examiner mustknow how to determine the balance to which theperiodic rate is applied. Common methods are theprevious balance method, the daily balancemethod, and the average daily balance method.

• Previous balance method—The balance to whichthe periodic rate is applied is the balanceoutstanding at the start of the billing cycle. Theperiodic rate is multiplied by this balance tocompute the finance charge.

• Daily balance method—The balance to whichthe periodic rate is applied is either the balanceon each day in the billing cycle or the sum of thebalances on each day in the cycle. If a dailyperiodic rate is multiplied by the balance oneach day in the billing cycle, the finance chargeis the sum of the products. If the daily periodicrate is multiplied by the sum of all the dailybalances, the finance charge is the product.

• Average daily balance method—The balance towhich the periodic rate is applied is the sum ofthe daily balances (either including or excludingcurrent transactions) divided by the number ofdays in the billing cycle. The periodic rate ismultiplied by the average daily balance todetermine the finance charge. If the periodic rateis a daily rate, the product of the rate multipliedby the average balance is multiplied by thenumber of days in the cycle.

In addition to those common methods, financialinstitutions have other ways of calculating thebalance to which the periodic rate is applied. Byreading the institution’s explanation, the examinershould be able to calculate the balance to whichthe periodic rate was applied. In some cases theexaminer may need to obtain additional informationfrom the institution to verify the explanation dis-closed. Any inability to understand the disclosedexplanation should be discussed with manage-ment, who should be reminded of Regulation Z’srequirement that disclosures be clear andconspicuous.

If the balance is determined without first deduct-ing all credits given and payments made during thebilling cycle, that fact, as well as the amounts of thecredits and payments, must be disclosed.

If the financial institution uses the daily balancemethod and applies a single daily periodic rate,disclosure of the balance to which the rate wasapplied may be stated as any of the following:

• A balance for each day in the billing cycle—Thedaily periodic rate is multiplied by the balance oneach day, and the sum of the products is thefinance charge.

• A balance for each day in the billing cycle onwhich the balance in the account changes—Thedaily periodic rate is multiplied by the balance oneach day, and the sum of the products is thefinance charge, as above, but the statementshows the balance for only those days on whichthe balance changed.

• The sum of the daily balances during the billingcycle—The daily periodic rate is multiplied bythe sum of all the daily balances in the billingcycle, and that product is the finance charge.

• The average daily balance during the billingcycle—If this balance is the one disclosed, theinstitution must explain somewhere on the peri-odic statement or in an accompanying documentthat the finance charge is or may be determinedby multiplying the average daily balance by thenumber of days in the billing cycle rather thanby multiplying the product by the daily periodicrate.

If the financial institution uses the daily balancemethod but applies two or more daily periodicrates, the sum of the daily balances may not beused. Acceptable ways of disclosing the balancesinclude

• A balance for each day in the billing cycle

• A balance for each day in the billing cycle onwhich the balance in the account changed

• Two or more average daily balances—If thebalance is disclosed in this way, the institutionmust indicate on the periodic statement or in anaccompanying document that the finance chargeis or may be determined by (1) multiplying eachof the average daily balances by the number ofdays in the billing cycle (or if the daily rate varies,multiplying the number of days that the applica-ble rate was in effect), (2) multiplying each of theresults by the applicable daily periodic rate, and(3) summing the products.

In explaining the method used to determine thebalance on which the finance charge is computed,the financial institution need not reveal how itallocates payments or credits. That informationmay be disclosed as additional information, but allrequired information must be clear and conspicuous.

Finance Charge Resulting fromTwo or More Periodic Rates

Some financial institutions use more than oneperiodic rate in computing the finance charge. Forexample, one rate may apply to balances up to acertain amount and another rate to balances overthat amount. If two or more periodic rates apply, theinstitution must disclose all rates and conditions.The range of balances to which each rate appliesmust also be disclosed. It is not necessary,

Truth in Lending


however, to break the finance charge into separatecomponents based on the different rates.

Annual Percentage Rate

Accuracy Tolerance (§ 226.14)

The disclosed annual percentage rate on anopen-end credit account is considered accurate ifit is within one-eighth of 1 percentage point of theAPR calculated under Regulation Z.

Determining the APR

Regulation Z describes two basic methods fordetermining the APR in open-end credit transac-tions. One method involves multiplying each peri-odic rate by the number of periods in a year. Thismethod is used for disclosing

• The corresponding APR in initial disclosures

• The corresponding APR on periodic statements

• The APR in early disclosures for credit cardaccounts

• The APR in early disclosures for home equityplans

• The APR in advertising

• The APR in oral disclosures

The corresponding APR is prospective. In otherwords, it is not based on the account’s actualoutstanding balance and the finance charges thatare imposed.

The other method is the quotient method, used incomputing the APR for periodic statements. Thequotient method reflects the annualized equivalentof the rate that was actually applied during a cycle.This rate, also known as the historical APR, willdiffer from the corresponding APR if the creditorapplies minimum, fixed, or transaction charges tothe account during the cycle.

If the finance charge is determined by applyingone or more periodic rates to a balance and doesnot include any of those charges (minimum, fixed,or transaction), the financial institution may com-pute the historical rate using the quotient method.In the quotient method, the total finance charge forthe cycle is divided by the sum of the balances towhich the periodic rates were applied, and thequotient (expressed as a percentage) is multipliedby the number of cycles in a year.

Alternatively, the financial institution may com-pute the historical APR using the method forcomputing the corresponding APR. In that method,each periodic rate is multiplied by the number ofperiods in one year. If the finance charge includesa minimum, fixed, or transaction charge, theinstitution must use the appropriate variation of the

quotient method. When transaction charges areimposed, the financial institution should refer toappendix F to Regulation Z for computationalexamples.

Regulation Z also contains a computation rule forsmall finance charges. If the finance chargeincludes a minimum, fixed, or transaction chargeand the total finance charge for the cycle does notexceed 50 cents, the financial institution maymultiply each applicable periodic rate by thenumber of periods in a year to compute the APR.

Regulation Z also provides optional calculationmethods for accounts involving daily periodic rates(see section 226.14(d)).

Calculating the APR for Periodic Statements

Note: Assume monthly billing cycles for each of thecalculations.

I. APR when finance charge is determined solelyby applying one or more periodic rates

A. Monthly periodic rates

1. Monthly rate × 12 = APRor

2. (Total finance charge ÷ Applicable bal-ance) × 12 = APR1

The preceding calculations may be usedwhen different rates apply to differentbalances.

B. Daily periodic rates

1. Daily rate x 365 = APRor

2. (Total finance charge ÷ Average dailybalance) × 12 = APRor

3. (Total finance charge ÷ Sum of balances)× 365 = APR

II. APR when finance charge includes a minimum,fixed, or other charge that is not calculatedusing a periodic rate (and does not includecharges related to a specific transaction, suchas a cash advance fee)

A. Monthly periodic rates

1. (Total finance charge ÷ Amount of appli-cable balance2) × 12 = APR3

B. Daily periodic rates

1. (Total finance charge ÷ Amount of appli-cable balance) × 365 = APR4, 5

1. If the applicable balance is zero, the APR cannot bedetermined.

2. See footnote 1.3. Loan fees, points, or similar finance charges that relate to the

opening of the account must not be included in the calculation ofthe APR.

4. See footnote 1.5. See footnote 3.

Truth in Lending


2. The following may be used if at least aportion of the finance charge is deter-mined by the application of a dailyperiodic rate. If not, use the formulaabove.

a. (Total finance charge ÷ Average dailybalance) x 12 = APR6

or

b. (Total finance charge ÷ Sum of bal-ances) x 365 = APR7

C. Monthly and daily periodic rates

1. If the finance charge imposed during thebilling cycle does not exceed 50 centsfor a monthly or longer billing cycle (or aprorated part of 50 cents for a billingcycle shorter than one month), the APRmay be calculated by multiplying themonthly rate by 12 or the daily rate by365.

III. If the total finance charge includes a chargerelated to a specific transaction (such as a cashadvance fee), even if the total finance chargealso includes any other minimum, fixed, or othercharge not calculated using a periodic rate,then the monthly and daily APRs are calculatedas follows: (Total finance charge ÷ The greaterof (1) the transaction amounts that created thetransaction fees or (2) the sum of the balancesand other amounts on which a finance chargewas imposed during the billing cycle8) multi-plied by the number of billing cycles in a year(12) = APR.9

Closed-End Credit (Subpart C)

The information presented here does not provide acomplete discussion of the closed-end creditrequirements of the Truth in Lending Act. Instead, itis offered to clarify otherwise confusing terms andrequirements. Refer to sections 226.17 through226.24 of Regulation Z and related commentary fora more thorough understanding of the act.

Finance Charge (§ 226.17(a))

The total amount of the finance charge must bedisclosed. Each finance charge imposed need notbe individually itemized and must not be itemizedwith the segregated disclosures.

Annual Percentage Rate (§ 226.22)

Accuracy Tolerances

The disclosed APR on a closed-end transaction isconsidered accurate

• If for regular transactions (including any single-advance transaction with equal payments andequal payment periods or transactions with anirregular first or last payment and/or an irregularfirst payment period), the APR is within one-eighth of 1 percentage point of the APR calcu-lated under Regulation Z (section 226.22(a)(2))

• If for irregular transactions (including multiple-advance transactions and other transactions notconsidered regular), the APR is within one-quarter of 1 percentage point of the APRcalculated under Regulation Z (section226.22(a)(3))

• If for mortgage transactions, the APR is withinone-eighth of 1 percentage point for regulartransactions or one-quarter of 1 percentagepoint for irregular transactions and

− The rate results from the disclosed financecharge and

− The disclosed finance charge would be con-sidered accurate under section 226.18(d)(1)or section 226.23(g) or (h) of Regulation Z(section 226.22(a)(4))

Note: An additional tolerance is granted formortgage loans when the disclosed financecharge is calculated incorrectly but is con-sidered accurate under section 226.18(d)(1) orsection 226.23(g) or (h) of Regulation Z (sec-tion 226.22(a)(5)).

See the diagrams for more information on accuracytolerances.

Construction Loans (§ 226.17(c)(6)and Appendix D)

Construction loans and certain other multiple-advance loans pose special problems in comput-ing the finance charge and the APR. In manyinstances, the amount and dates of advances arenot predictable with certainty because they dependon the progress of the work. Regulation Z providesthat, for disclosure purposes, the APR and financecharge for such loans may be estimated.

A financial institution may, at its option, rely on therepresentations of other parties to acquire neces-sary information (for example, it might look to theconsumer for the dates of advances). In addition, ifany of the amounts or the dates of advances areunknown (even if some of them are known), theinstitution may, at its option, refer to appendix D tothe regulation to make calculations and disclo-

6. See footnote 1.7. See footnote 1.8. The sum of the balances may include amounts computed by

either the average daily balance, adjusted balance, or previousbalance method. When a portion of the finance charge isdetermined by application of one or more daily periodic rates, thesum of the balances also means the average of daily balances.

9. If the product is less than the highest periodic rate applied,expressed as an APR, the higher figure must be disclosed as theAPR.

Truth in Lending


Closed-End Credit: Accuracy Tolerances for Overstated APRs

Is this a “regular” loan?(12 CFR 226, footnote 46)

Is the disclosed APR more than the correct APR by more than one-quarter of

1 percentage point?

Is the disclosed APR more than the correct APR by more than one-eighth of

1 percentage point?


YesNo

YesNo

YesNoYes No

Is the disclosed finance charge more than the correct

finance charge?

APR violation

APR violation

Was the finance charge disclosure error the cause of

the APR disclosure error?

No Yes

APR violation No violation

Yes No

No violation

Truth in Lending


Closed-End Credit: Accuracy and Reimbursement Tolerancesfor Understated APRs

Is this a “regular” loan?

Is the disclosed APR understated by more than one-quarter

of 1 percentage point?

Is the disclosed APR understated by more than one-eighth of 1 percentage point?


YesNo

YesNo

YesNoYes No

Is the finance charge understated by more than• $100 if the loan originated on or after 9/30/95?• $200 if the loan originated before 9/30/95?

APR violation

APR violation

Was the finance charge disclosure error the cause of the APR disclosure error?

No Yes

APR violation No violation

YesNo

No violation

Is the loan term greater than 10 years?

Is the loan a “regular” loan?

Is the disclosed APR understated by more than one-eighth of 1 percentage point?

Is the disclosed APR understated by more than one-quarter of 1 percentage point?

No reimbursement

Subject to reimbursement

YesNo

YesNo

YesNo

NoYes

Truth in Lending


sures. The finance charge and payment scheduleobtained by referring to appendix D may be usedwith volume 1 of the Board’s APR tables or with anyother appropriate computation tool to determinethe APR (the Board’s APR tables are availablethrough the System publications catalog on theNew York Reserve Bank’s web site). If the institutionelects not to use appendix D, or if appendix Dcannot be applied to a loan (for example, appendixD does not apply to a combined construction–permanent loan if the payments for the permanentloan begin during the construction period), theinstitution must make its estimates under section226.17(c)(2) and calculate the APR using multiple-advance formulas.

For loans involving a series of advances underan agreement to extend credit up to a certainamount, a financial institution may treat all theadvances as a single transaction or disclose eachadvance as a separate transaction. If advances aredisclosed separately, disclosures must be pro-vided before each advance occurs, and thedisclosures for the first advance must be providedbefore consummation.

In a transaction that finances the construction ofa dwelling that may or will be permanently financedby the same financial institution, the construction–permanent financing phases may be disclosed inone of the following ways:

• As a single transaction, with one disclosurecovering both phases

• As two separate transactions, with one disclo-sure for each phase

• As more than two transactions, with one disclo-sure for each advance and one for thepermanent-financing phase

If two or more disclosures are furnished, buyer’spoints or similar amounts imposed on the con-sumer may be allocated among the transactions inany manner the financial institution chooses, aslong as the charges are not applied more thanonce. In addition, if the financial institution choosesto give two sets of disclosures and the consumer isobligated for both construction and permanentphases at the outset, both sets of disclosures mustbe given to the consumer initially, before consum-mation of each transaction occurs.

If the creditor requires interest reserves forconstruction loans, special rules set forth in appen-dix D to Regulation Z apply that can make thedisclosure calculations quite complicated. Theamount of interest reserves included in the commit-ment amount must not be treated as a prepaidfinance charge.

If the lender uses appendix D for construction-only loans with required interest reserves, construc-

tion interest must be estimated using the interest-reserve formula in appendix D. The lender’s owninterest-reserve values must be completely disre-garded for disclosure purposes.

If the lender uses appendix D for combinationconstruction–permanent loans, the calculationscan be much more complex. The appendix is usedto estimate the construction interest, which is thenmeasured against the lender’s contractual interestreserves.

If the interest-reserve portion of the lender’scontractual-commitment amount exceeds theamount of construction interest estimated underappendix D, the excess value is considered part ofthe amount financed if the lender has contracted todisburse those amounts, whether or not theyultimately are needed to pay for accrued construc-tion interest. If the lender will not disburse theexcess amount if it is not needed to pay for accruedconstruction interest, the excess amount must beignored for disclosure purposes.

Calculating the Annual Percentage Rate(§ 226.22)

The APR must be determined under one of thefollowing methods:

• The actuarial method, which is defined byRegulation Z and explained in appendix J to theregulation

• The U.S. Rule, which is permitted by RegulationZ and is briefly explained in appendix J to theregulation (The U.S. Rule is an accrual methodthat seems to have first surfaced officially in anearly nineteenth century U.S. Supreme Courtcase, Story v. Livingston (38 U.S. 359).)

Whichever method the financial institution uses, therate calculated will be considered accurate if it isable to ‘‘amortize’’ the amount financed whilegenerating the finance charge under the accrualmethod selected. Institutions also may rely onminor irregularities and accuracy tolerances in theregulation, both of which effectively permit thedisclosure of somewhat imprecise, but still legal,APRs.

360-Day and 365-Day Years(§ 226.17(c)(3))

Confusion often arises over whether to use a360-day or 365-day year in computing interest,particularly when the finance charge is computedby applying a daily rate to an unpaid balance.Many single-payment loans and loans payable ondemand are in this category. Also in this categoryare loans that call for periodic installment payments.

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Regulation Z does not require the use of onemethod of interest computation in preference toanother (although state law may). It does, however,permit financial institutions to disregard the fact thatmonths have different numbers of days whencalculating and making disclosures. This meansthat financial institutions may base their disclosureson calculation tools that assume that all monthshave an equal number of days, even if theirpractice is to take account of the variations inmonths to collect interest. For example, an institu-tion may calculate disclosures using a financialcalculator based on a 360-day year with 30-daymonths when, in fact, it collects interest by applyinga factor of 1⁄365 of the annual interest rate to actualdays.

Disclosure violations may occur, however, whena financial institution applies a daily interest factorbased on a 360-day year to the actual number ofdays between payments. In those situations, theinstitution must disclose the higher values of thefinance charge, the APR, and the payment sched-ule resulting from this practice. For example, a12 percent simple interest rate divided by 360 daysresults in a daily rate of .033333 percent. If nocharges are imposed except interest and theamount financed is the same as the loan amount,applying the daily rate on a daily basis for a365-day year on a $10,000 one-year, single-payment, unsecured loan results in an APR of12.17 percent (.033333 × 365 = 12.17) and afinance charge of $1,216.67. There would be aviolation if the APR were disclosed as 12 percent orthe finance charge were disclosed as $1,200 (12%× $10,000). However, if no other charges exceptinterest are imposed, the application of a 360-day-year daily rate over 365 days on a regular loanwould not result in an APR in excess of theone-eighth of 1 percentage point APR toleranceunless the nominal interest rate is greater than9 percent. For irregular loans, with one-quarter of1 percentage point APR tolerance, the nominalinterest rate would have to be greater than18 percent to exceed the tolerance.

Variable-Rate Loans (§ 226.18(f))

If the terms of the legal obligation allow the financialinstitution, after consummation of the transaction, toincrease the APR, the financial institution mustfurnish the consumer with certain information onvariable rates. Graduated-payment mortgages andstep-rate transactions without a variable-rate fea-ture are not considered variable-rate transactions.In addition, variable-rate disclosures are not appli-cable to rate increases resulting from delinquency,default, assumption, acceleration, or transfer of thecollateral. Some of the more important transaction-

specific variable-rate disclosure requirements undersection 226.18 follow:

• Disclosures for variable-rate loans must coverthe full term of the transaction and must bebased on the terms in effect at the time ofconsummation.

• If the variable-rate transaction includes either aseller buydown that is reflected in a contract or aconsumer buydown, the disclosed APR shouldbe a composite rate based on the lower rate forthe buydown period and the rate that is the basisfor the variable-rate feature for the remainder ofthe term.

• If the initial rate is not determined by the index orformula used to make later interest rate adjust-ments, as in a discounted variable-rate transac-tion, the disclosed APR must reflect a compositerate based on the initial rate for as long as it isapplied and, for the remainder of the term, therate that would have been applied using theindex or formula at the time of consummation(that is, the fully indexed rate).

– If a loan contains a rate or payment cap thatwould prevent the initial rate or payment, at thetime of the adjustment, from changing to thefully indexed rate, the effect of that rate orpayment cap needs to be reflected in thedisclosure.

– The index at consummation need not be usedif the contract provides for a delay in imple-mentation of changes in an index value (forexample, the contract indicates that futurerate changes are based on the index valuein effect for some specified period, suchas forty-five days before the change date).Instead, the financial institution may use anyrate from the date of consummation back tothe beginning of the specified period (forexample, during the previous forty-five-dayperiod).

• If the initial interest rate is set according to theindex or formula used for later adjustments but isset at a value as of a date before consummation,disclosures should be based on the initialinterest rate, even though the index may havechanged by the consummation date.

For variable-rate consumer loans that are notsecured by the consumer’s principal dwelling orthat are secured by the consumer’s principaldwelling but have a term of one year or less,creditors must disclose the circumstances underwhich the rate may increase, any limitations on theincrease, the effect of an increase, and an exampleof the payment terms that would result from anincrease (section 226.18(f)(1)).

For variable-rate consumer loans that are securedby the consumer’s principal dwelling and have a

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maturity of more than one year, creditors must statethat the loan has a variable-rate feature and thatdisclosures were previously given (section226.18(f)(2)). Extensive disclosures about the loanprogram must be provided when consumers applyfor such a loan (section 226.19(b)) and throughoutthe loan term when the rate or payment amount ischanged (section 226.20(c)).

Payment Schedule (§ 226.18(g))

The disclosed payment schedule must reflect allcomponents of the finance charge, including allscheduled payments to repay loan principal,interest on the loan, and any other finance chargepayable by the consumer after consummation ofthe transaction. Any finance charge paid sepa-rately before or at consummation (for example, odddays’ interest) is not to be treated as part of thepayment schedule; it is a prepaid finance chargeand must be reflected as a reduction in the value ofthe amount financed.

At the creditor’s option, the payment schedulemay include amounts beyond the amount financedand the finance charge (for example, certaininsurance premiums or real estate escrow amounts,such as taxes added to payments). However, thecreditor must disregard such amounts when calcu-lating the APR.

If the obligation is a renewable balloon-paymentinstrument that unconditionally obligates the finan-cial institution to renew the short-term loan at theconsumer’s option or to renew the loan subject toconditions within the consumer’s control, the pay-ment schedule must be disclosed using the longerterm of the renewal period or periods. The variable-rate feature for the long-term loan must bedisclosed.

If the instrument has no renewal conditions or thefinancial institution guarantees to renew the obliga-tion in a refinancing, the payment schedule mustbe disclosed using the shorter balloon-paymentterm. The short-term loan must be disclosed as afixed-rate loan, unless it contains a variable-ratefeature during the initial loan term.

Amount Financed (§ 226.18(b))

Definition

The amount financed is the net amount of creditextended for the consumer’s use. It should not beassumed that under the regulation, the amountfinanced is equivalent to the note amount, theproceeds, or the principal amount of the loan. Theamount financed normally equals the total ofpayments less the finance charge.

To calculate the amount financed, all amountsand charges connected with the transaction, eitherpaid separately or included in the note amount,must first be identified. Any prepaid, precomputed,or other finance charge must then be determined.

The amount financed must not include anyfinance charges. If finance charges have beenincluded in the obligation (either prepaid or pre-computed), they must be subtracted from the faceamount of the obligation when determining theamount financed. The resulting value must bereduced further by an amount equal to any prepaidfinance charge paid separately. The final resultingvalue is the amount financed.

When calculating the amount financed, financecharges (whether in the note amount or paidseparately) should not be subtracted more thanonce from the total amount of an obligation.Charges not in the note amount and not included inthe finance charge (for example, an appraisal feepaid separately, in cash, on a real estate loan) neednot be disclosed under Regulation Z and must notbe included in the amount financed.

In a multiple-advance construction loan, pro-ceeds placed in a temporary escrow account andawaiting disbursement to the developer in drawsare not considered part of the amount financed untilthey are actually disbursed. Thus, if the entirecommitment amount is disbursed into the lender’sescrow account, the lender must not base disclo-sures on the assumption that all funds weredisbursed immediately, even if the lender paysinterest on the escrowed funds.

Required Deposit (§ 226.18(r))

A required deposit, with certain exceptions, is onethat the financial institution requires the consumerto maintain as a condition of the specific credittransaction. It can include a compensating balanceor a deposit balance that secures the loan. Theeffect of a required deposit is not reflected in theAPR. Also, a required deposit is not a financecharge, as it is eventually released to the con-sumer. A deposit that earns at least 5 percent peryear need not be considered a required deposit.

Calculating the Amount Financed

Suppose that a consumer signs a note secured byreal property in the amount of $5,435. The noteamount includes $5,000 in proceeds disbursed tothe consumer, $400 in precomputed interest, $25paid to a credit-reporting agency for a credit report,and a $10 service charge. Additionally, the con-sumer pays a $50 loan fee separately, in cash, atconsummation. The consumer has no other debt

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with the financial institution. The amount financed is$4,975.

The amount financed may be calculated by firstsubtracting all finance charges included in the noteamount ($5,435 − $400 − $10 = $5,025). The $25credit-report fee is not a finance charge becausethe loan is secured by real property. The $5,025 isfurther reduced by the amount of prepaid financecharges paid separately, for an amount financed of$5,025 − $50 = $4,975. The answer is the samewhether finance charges included in the obligationare considered prepaid or precomputed financecharges.

The financial institution may treat the $10 servicecharge as an addition to the loan amount and notas a prepaid finance charge. If it does, the loanprincipal would be $5,000. The $5,000 loan princi-pal does not include either the $400 or the $10precomputed finance charge in the note. The loanprincipal is increased by other amounts financedthat are not part of the finance charge (the $25credit-report fee) and reduced by any prepaidfinance charges (the $50 loan fee, but not the $10service charge) to arrive at the amount financed of$5,000 + $25 − $50 = $4,975.

Other Calculations

In the preceding example, the financial institutionmay treat the $10 service charge as a prepaidfinance charge. If it does, the loan principal wouldbe $5,010. The $5,010 loan principal does notinclude the $400 precomputed finance charge. Theloan principal is increased by other amountsfinanced that are not part of the finance charge (the$25 credit-report fee) and reduced by any pre-paid finance charges (the $50 loan fee and the$10 service charge withheld from the loan pro-ceeds) to arrive at the same amount financed of$5,010 + $25 − $50 − $10 = $4,975.

Refinancings (§ 226.20)

When an obligation is satisfied and replaced by anew obligation to the original financial institution (ora holder or servicer of the original obligation) and isundertaken by the same consumer, it must betreated as a refinancing for which a complete set ofnew disclosures must be furnished. A refinancingmay involve the consolidation of several existingobligations, disbursement of new money to theconsumer, or the rescheduling of payments underan existing obligation. In any form, the newobligation must completely replace the earlier oneto be considered a refinancing under Regulation Z.The finance charge on the new disclosure mustinclude any unearned portion of the old finance

charge that is not credited to the existing obligation(section 226.20(a)).

The following transactions are not consideredrefinancings even if the existing obligation hasbeen satisfied and replaced by a new obligationundertaken by the same consumer:

• A renewal of an obligation with a single paymentof principal and interest or with periodic interestpayments and a final payment of principal withno change in the original terms

• An APR reduction with a corresponding changein the payment schedule

• An agreement involving a court proceeding

• Changes in credit terms arising from the consum-er’s default or delinquency

• The renewal of optional insurance purchased bythe consumer and added to an existing transac-tion, if required disclosures were provided for theinitial purchase of the insurance

However, even if it is not accomplished by thecancellation of the old obligation and substitution ofa new one, a new transaction subject to newdisclosures results if the financial institution doeseither of the following:

• Increases the rate based on a variable-ratefeature that was not previously disclosed

• Adds a variable-rate feature to the obligation

If the rate is increased at the time a loan is renewed,the increase is not considered a variable-ratefeature. It is the cost of renewal, similar to a flat fee,as long as the new rate remains fixed during theremaining life of the loan. If the original debt is notcanceled in connection with such a renewal, newdisclosures are not required. Also, changing theindex of a variable-rate transaction to a compa-rable index is not considered adding a variable-rate feature to the obligation.

Miscellaneous Provisions (Subpart D)

Civil Liability (TILA § 130)

If a creditor fails to comply with any requirements ofthe TILA, other than with the advertising provisionsof chapter 3, it may be held liable to the consumerfor both

• Actual damage

• The cost of any legal action together withreasonable attorney’s fees in a successful action

If the creditor violates certain requirements of theTILA, it may also be held liable for either of thefollowing:

• In an individual action, twice the amount of thefinance charge involved, but not less than $100

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or more than $1,000. However, in an individualaction relating to a closed-end credit transactionsecured by real property or a dwelling, twice theamount of the finance charge involved, but notless than $200 or more than $2,000.

• In a class action, such amount as the court mayallow. However, the total amount of recovery maynot be more than $500,000 or 1 percent of thecreditor’s net worth, whichever is less.

Civil actions that may be brought against acreditor may also be maintained against anyassignee of the creditor if the violation is apparenton the face of the disclosure statement or otherdocuments assigned, except when the assignmentwas involuntary.

A creditor that fails to comply with the TILA’srequirements for high-cost mortgage loans may beheld liable to the consumer for all finance chargesand fees paid to the creditor. Any subsequentassignee is subject to all claims and defenses thatthe consumer could assert against the creditor,unless the assignee demonstrates that it could notreasonably have determined that the loan wassubject to section 226.32 of Regulation Z.

Criminal Liability (TILA § 112)

Anyone who willingly and knowingly fails to complywith any requirement of the TILA will be fined notmore than $5,000 or imprisoned not more than oneyear, or both.

Administrative Actions (TILA § 108)

The TILA authorizes federal regulatory agencies torequire financial institutions to make monetary andother adjustments to a consumer’s account whenthe true finance charge or APR exceeds thedisclosed finance charge or APR by more than aspecified accuracy tolerance. That authorizationextends to unintentional errors, including isolatedviolations (for example, an error that occurred onlyonce or errors, often without a common cause, thatoccurred infrequently and randomly).

Under certain circumstances, the TILA requiresfederal regulatory agencies to order financialinstitutions to reimburse consumers when under-statement of the APR or finance charge involves

• Patterns or practices of violations (for example,errors that occurred, often with a common cause,consistently or frequently, reflecting a pattern inrelation to a specific type or types of consumercredit)

• Gross negligence

• Willful noncompliance intended to mislead theperson to whom the credit was extended

Any proceeding that may be brought by aregulatory agency against a creditor may bemaintained against any assignee of the creditorif the violation is apparent on the face of thedisclosure statement or other documents assigned,except when the assignment was involuntary (TILAsection 131).

Federal Reserve examiners follow the FFIEC’sinteragency Regulation Z policy guide when deter-mining the applicability and amount of any reim-bursements. Although the policy guide appears torequire reimbursement only in cases in which apattern or practice was discovered, System policyrequires banks to make reimbursements whenisolated cases are discovered as well. Unlike thediscovery of a pattern or practice of violations,which requires the bank to conduct a file search todetermine the extent of the pattern or practice, thediscovery of an isolated instance does not require afile search. Isolated violations are technical andnonsubstantive in nature, are not cited in theexamination report, and may be communicated inan informal manner.

Relationship to State Law (TILA § 111)

State laws providing rights, responsibilities, orprocedures for consumers or financial institutionsfor consumer credit contracts may be

• Preempted by federal law

• Appropriate under state law and not preemptedby federal law

• Substituted in lieu of TILA and Regulation Zrequirements

State law provisions are preempted to the extentthat they contradict the requirements in the follow-ing chapters of the TILA and the implementingsections of Regulation Z:

• Chapter 1, ‘‘General Provisions,’’ which containsdefinitions and acceptable methods for determin-ing finance charges and annual percentagerates. For example, a state law would bepreempted if it required a bank to include in thefinance charge any fees that the federal lawexcludes, such as seller’s points.

• Chapter 2, ‘‘Credit Transactions,’’ which containsdisclosure requirements, rescission rights, andcertain credit card provisions. For example, astate law would be preempted if it required abank to use the term ‘‘nominal annual interestrate’’ in lieu of ‘‘annual percentage rate.’’

• Chapter 3, ‘‘Credit Advertising,’’ which containsrules for consumer credit advertising and require-ments for the oral disclosure of annual percent-age rates.

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Conversely, state law provisions may be appro-priate and are not preempted under federal law ifthey call for, without contradicting chapters 1, 2, or3 of the TILA or the implementing sections ofRegulation Z, either of the following:

• Disclosure of information not otherwise required.A state law that requires disclosure of theminimum periodic payment for open-end credit,for example, would not be preempted because itdoes not contradict federal law.

• Disclosures more detailed than those required. Astate law that requires itemization of the amountfinanced, for example, would not be preempted,unless it contradicts federal law by requiring theitemization to appear with the disclosure of theamount financed in the segregated closed-endcredit disclosures.

Two preemption standards apply to TILA chap-ter 4. One applies to section 161 (Correction ofBilling Errors) and 162 (Regulation of CreditReports), the other to the remaining provisions ofchapter 4 (sections 163–171).

State law provisions are preempted if they differfrom the rights, responsibilities, or procedurescontained in section 161 or 162 of the TILA. Anexception is made, however, for state law thatallows a consumer to inquire about an account andrequires the bank to respond to such inquirybeyond the time limits provided by federal law.Such a state law would not be preempted for theextra time period.

State law provisions are preempted if they resultin violations of sections 163 through 171 ofchapter 4 of the TILA. For example, a state law thatallows the card issuer to offset the consumer’scredit card indebtedness against funds held by thecard issuer would be preempted, as it would violatesection 226.12(d) of Regulation Z. Conversely, astate law that requires periodic statements to besent more than fourteen days before the end of afree-ride period would not be preempted, as noviolation of federal law is involved.

A bank, state, or other interested party may askthe Federal Reserve Board to determine whetherstate law contradicts chapters 1 through 3 of theTILA or Regulation Z. They may also ask if the statelaw is different from, or would result in violations of,chapter 4 of the TILA and the implementingprovisions of Regulation Z. If the Board determinesthat a disclosure required by state law (other than arequirement relating to the finance charge, theannual percentage rate, or the disclosures requiredunder section 226.32 of the regulation) is substan-tially the same in meaning as a disclosure requiredunder the act or the regulation, generally, creditorsin that state may make the state disclosure in lieu ofthe federal disclosure.

Special Rules for Certain HomeMortgage Transactions (Subpart E)

General Rules (§ 226.31)

The requirements and limitations of subpart E are inaddition to and not in lieu of those contained inother subparts of Regulation Z. The disclosures forhigh-cost and reverse mortgage transactions mustbe made clearly and conspicuously in writing, in aform that the consumer can keep.

Certain Closed-End Home Mortgages(§ 226.32)

The requirements of section 226.32 apply to aconsumer credit transaction secured by the con-sumer’s principal dwelling in which either

• The APR at consummation will exceed by morethan 8 percentage points for first-lien mortgageloans, or by more than 10 percentage points forsubordinate-lien mortgage loans, the yield onTreasury securities having periods of maturitycomparable to the loan’s maturity (as of the 15thday of the month immediately preceding themonth in which the application for the extensionof credit is received by the creditor)

• The total points and fees (see definition below)payable by the consumer at or before loanclosing will exceed the greater of 8 percent of thetotal loan amount or a dollar amount that isadjusted annually on the basis of changes in theconsumer price index (See staff commentary tosection 226.32(a)(1)(ii) of Regulation Z for ahistorical list of dollar amount adjustments. Forcalendar year 2005, the dollar amount was$510.) (section 226.32(a)(1))

Exemptions

The following are exempt from section 226.32:

• Residential mortgage transactions (generally,purchase money mortgages)

• Reverse mortgage transactions subject to sec-tion 226.33 of Regulation Z

• Open-end credit plans subject to subpart B ofthe regulation

Points and Fees

Points and fees include the following:

• All items required to be disclosed under sections226.4(a) and (b) of Regulation Z except interestor the time–price differential

• All compensation paid to mortgage brokers

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• All items listed in section 226.4(c)(7) other thanamounts held for future taxes, unless all of thefollowing conditions are met:

– The charge is reasonable

– The creditor receives no direct or indirectcompensation in connection with the charge

– The charge is not paid to an affiliate of thecreditor

• Premiums or other charges, paid at or beforeclosing whether paid in cash or financed, foroptional credit life, accident, health, or loss-of-income insurance, and other debt-protection ordebt-cancellation products written in connectionwith the credit transaction (section 226.32(b)(1))

Reverse Mortgages (§ 226.33)

A reverse mortgage is a non-recourse transactionsecured by the consumer’s principal dwelling thatties repayment (other than upon default) to thehomeowner’s death or permanent move from, ortransfer of the title of, the home.

Specific Defenses—TILA Section 108

Defense against Civil, Criminal, andAdministrative Actions

A financial institution in violation of the TILA mayavoid liability by doing all of the following:

• Discovering the error before an action is broughtagainst the institution, or before the consumernotifies the institution, in writing, of the error

• Notifying the consumer of the error within sixtydays of discovery

• Making the necessary adjustments to the con-sumer’s account, also within sixty days ofdiscovery (The consumer will pay no more thanthe lesser of the finance charge actually dis-closed or the dollar equivalent of the APRactually disclosed.)

Taking these three actions may also allow thefinancial institution to avoid a regulatory order toreimburse the customer.

An error is ‘‘discovered’’ if it is

• Discussed in a final, written report of examination

• Identified through the financial institution’s ownprocedures

• An inaccurately disclosed APR or finance chargeincluded in a regulatory agency notification tothe financial institution

When a disclosure error occurs, the financialinstitution is not required to re-disclose after a loanhas been consummated or an account has beenopened. If the institution corrects a disclosure error

by merely re-disclosing required information accu-rately, without adjusting the consumer’s account,the financial institution may still be subject to civilliability and an order from its regulator to reimburse.

The circumstances under which a financialinstitution may avoid liability under the TILA do notapply to violations of the Fair Credit Billing Act(chapter 4 of the TILA).

Additional Defenses against Civil Actions

A financial institution may avoid liability in a civilaction if it shows, by a preponderance of evidence,that the violation was not intentional and resultedfrom a bona fide error that occurred despite themaintenance of procedures to avoid the error.

A bona fide error may be a clerical, calculation,programming, or printing error or a computermalfunction. It does not include an error of legaljudgment.

Showing that a violation occurred unintentionallycould be difficult if the financial institution is unableto produce evidence that explicitly indicates that ithas an internal controls program designed toensure compliance. The financial institution’s dem-onstrated commitment to compliance and its adop-tion of policies and procedures to detect errorsbefore disclosures are furnished to consumerscould strengthen its defense.

Statute of Limitations—TILA Sections 108 and 130

Civil actions may be brought within one year afterthe violation occurred. After that time, and ifallowed by state law, the consumer may still assertthe violation as a defense if a financial institutionbrings an action to collect the consumer’s debt.Criminal actions are not subject to the TILAone-year statute of limitations.

Regulatory administrative enforcement actionsalso are not subject to the one-year statute oflimitations. However, enforcement actions underthe FFIEC policy guide involving erroneously dis-closed APRs and finance charges are subject totime limitations by the TILA. Those limitations rangefrom the date of the most recent regulatoryexamination of the financial institution to as far backas 1969, depending on when the loan was made,when the violation was identified, whether theviolation was a repeat violation, and other factors.

There is no time limitation on willful violationsintended to mislead the consumer. The followingsummarize the various time limitations:

• For open-end credit, reimbursement applies toviolations not older than two years.

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• For closed-end credit, reimbursement is gener-ally applied to loans with violations occurringsince the immediately preceding examination.

Rescission Rights (Open-Endand Closed-End Credit)—Sections 226.15 and 226.23

The TILA provides that for certain transactionssecured by a consumer’s principal dwelling, theconsumer has three business days after becomingobligated on the debt to rescind the transaction.The right of rescission allows the consumer time toreexamine the credit agreement and cost disclo-sures and to reconsider whether he or she wants toplace his or her home at risk by offering it assecurity for the credit. Transactions exempt fromthe right of rescission include residential mortgagetransactions (section 226.2(a)(24)) and refinanc-ings or consolidations with the original creditorwhen no ‘‘new money’’ is advanced.

If a transaction is rescindable, a consumer mustbe given a notice explaining that the creditor has asecurity interest in the consumer’s home, that theconsumer may rescind, how the consumer mayrescind, the effects of rescission, and the date therescission period expires.

To rescind a transaction, the consumer mustnotify the creditor in writing by midnight of the thirdbusiness day after the latest of three events:(1) consummation of the transaction, (2) delivery ofmaterial TILA disclosures, or (3) receipt of therequired notice of the right to rescind. For purposesof rescission, business day means every calendar

day except Sundays and legal public holidays(section 226.2(a)(6)). Material disclosures is definedin section 226.23(a)(3) to mean the requireddisclosures of the annual percentage rate, thefinance charge, the amount financed, the total ofpayments, the payment schedule, and the disclo-sures and limitations referred to in sections226.32(c) and 226.32(d).

The creditor may not disburse any monies(except into an escrow account) and may notprovide services or materials until the three-dayrescission period has elapsed and the creditor isreasonably satisfied that the consumer has notrescinded. If the consumer rescinds the transac-tion, the creditor must refund all amounts paid bythe consumer (even amounts disbursed to thirdparties) and terminate its security interest in theconsumer’s home.

A consumer may waive the three-day rescissionperiod and receive immediate access to loanproceeds if he or she has a ‘‘bona fide personalfinancial emergency.’’ The consumer must give thecreditor a signed and dated waiver statement thatdescribes the emergency, specifically waives theright, and bears the signatures of all consumersentitled to rescind the transaction. The consumerprovides the explanation for the bona fide personalfinancial emergency, but the creditor decides thesufficiency of the emergency.

If the required rescission notice or material TILAdisclosures are not delivered or if they are inaccu-rate, the consumer’s right to rescind may beextended from three days after becoming obli-gated on a loan to up to three years.

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Regulation ZExamination Objectives and Procedures


1. To appraise the quality of the financial institu-tion’s compliance management system for theTruth in Lending Act and Regulation Z

2. To determine the reliance that can be placedon the financial institution’s compliance man-agement system, including internal controlsand procedures performed by the person(s)responsible for monitoring the financial institu-tion’s compliance review function for the Truthin Lending Act and Regulation Z

3. To determine the financial institution’s compli-ance with the Truth in Lending Act andRegulation Z

4. To initiate corrective action when policies orinternal controls are deficient, or when viola-tions of law or regulation are identified

5. To determine whether the institution will berequired to make adjustments to consumeraccounts under the restitution provisions of theact


General Procedures

1. Obtain information pertinent to the area ofexamination from the financial institution’scompliance management system program (his-torical examination findings, complaint informa-tion, and significant findings from compliancereviews and audits).

2. Through discussions with management andreview of the following documents, determinewhether the financial institution’s internal con-trols are adequate to ensure compliance in thearea under review. Identify procedures useddaily to detect errors and violations promptly.Also, review the procedures used to ensurecompliance when changes occur (for exam-ple, changes in interest rates, service charges,computation methods, and software programs).

• Organization charts

• Process flow charts

• Policies and procedures

• Loan documentation and disclosures

• Checklists, worksheets, and review docu-ments

• Computer programs

3. Review compliance reviews and audit work-papers and determine whether

a. The procedures used address all regula-tory provisions (see ‘‘Transaction Testing’’section, later in these procedures)

b. Steps are taken to follow up on previouslyidentified deficiencies

c. The procedures used include samples thatcover all product types and decision centers

d. The work performed is accurate (by review-ing some transactions)

e. Significant deficiencies, and the root causeof the deficiencies, are included in reportsto management and the board

f. Corrective actions are timely and appropriate

g. The area is reviewed at an appropriateinterval

Disclosure Forms

4. Determine whether the financial institution haschanged any preprinted TILA disclosure formsor if there are forms that have not beenpreviously reviewed for accuracy. If so, verifythe accuracy of each preprinted disclosure byreviewing the following:

• Note and/or contract forms (including thosefurnished to dealers)

• Standard closed-end credit disclosures(§§ 226.17(a) and 226.18)

• ARM disclosures (§ 226.19(b))

• High-cost mortgage disclosures(§ 226.32(c))

• Initial disclosures (§§ 226.6(a)−(d)) and, ifapplicable, additional home equity line ofcredit (HELC) disclosures (§ 226.6(e))

• Credit card application and solicitationdisclosures (§§ 226.5a(b)−(e))

• HELC disclosures (§§ 226.5b(d) and226.5b(e))

• Statement of billing rights and change-in-terms notice (§ 226.9(a))

• Reverse mortgage disclosures (§ 226.33(b))

Forms for Closed-End Credit

a. Determine that the disclosures are clear,conspicuous, grouped, and segregated.The terms ‘‘finance charge’’ and ‘‘APR’’should be more conspicuous than otherterms. (§ 226.17(a))


b. Determine that the disclosures include thefollowing, as applicable: (§ 226.18)

(1) Identity of the creditor

(2) Brief description of the finance charge

(3) Brief description of the APR

(4) Variable-rate verbiage (§ 226.18(f)(1)or 226.18(f)(2))

(5) Payment schedule

(6) Brief description of the total ofpayments

(7) Demand feature

(8) For a credit sale, description of totalsales price

(9) Prepayment penalties or rebates

(10) Late-payment amount or percentage

(11) Description of security interest

(12) Various insurance verbiage (§ 226.4(d))

(13) Statement referring to the contract

(14) Statement regarding assumption ofthe note

(15) Statement regarding required deposits

c. Determine whether all variable-rate loanswith a maturity of more than 1 year securedby a principal dwelling are given thefollowing disclosures at the time of applica-tion: (§ 226.19)

(1) Consumer handbook on adjustable-rate mortgages, or a substitute

(2) Statement that interest rate paymentsand terms can change

(3) The index or formula and a source ofinformation

(4) Explanation of the interest rate, pay-ment determination, and margin

(5) Statement that the consumer shouldask for the current interest rate andmargin

(6) Statement that the interest rate isdiscounted, if applicable

(7) Frequency of interest rate and paymentchanges

(8) Rules relating to all changes

(9) Either (1) a historical example, basedon a $10,000 loan amount, illustratinghow payments and the loan balancewould have been affected by interestrate changes implemented accordingto the terms of the loan program overthe past 15 years or (2) the initial andmaximum interest rates and paymentsfor a $10,000 loan, along with astatement that the periodic paymentmay substantially increase or decrease

and a statement of a maximum interestrate and payment

(10) Explanation of how to compute theloan payment, and an example

(11) Demand feature, if applicable

(12) Statement regarding the content andtiming of adjustment notices

(13) Statement that other variable-rate loanprogram disclosures are available, ifapplicable

d. Determine that the disclosures required forhigh-cost mortgage transactions clearlyand conspicuously include the followingitems: (§ 226.32(c); see form H-16 inappendix H to Regulation Z)

(1) The required statement ‘‘You are notrequired to complete this agreementmerely because you have receivedthese disclosures or have signed aloan application. If you obtain thisloan, the lender will have a mortgageon your home. You could lose yourhome, and any money you have putinto it, if you do not meet yourobligations under the loan.’’

(2) Annual percentage rate

(3) Amount of the regular monthly (orother periodic) payment and amountof any balloon payment. The regularpayment should include amounts forvoluntary items, such as credit lifeinsurance or debt-cancellation cover-age, only if the consumer has previ-ously agreed to the amount. (See staffcommentary to § 226.32(c)(3).)

(4) For variable-rate loans, a statementthat the interest rate may increase,and the amount of the single maximummonthly payment, based on the maxi-mum interest rate allowed under thecontract, if applicable

(5) For mortgage refinancings, the totalamount borrowed, as reflected by theface amount of the note; and if theamount borrowed includes premiumsor other charges for optional creditinsurance or debt-cancellation cover-age, a statement to that effect (groupedtogether with the amount borrowed)

Forms for Open-End Credit

a. Determine that the initial disclosure state-ment is provided before the first transactionunder the account and includes the follow-ing items, as applicable: (§ 226.6)

Truth in Lending: Examination Objectives and Procedures


(1) Statement of when a finance chargewould accrue and whether a graceperiod exists

(2) Statement of the periodic rates andthe corresponding APR

(3) Explanation of the method of determin-ing the balance on which the financecharge may be computed

(4) Explanation of how the finance chargewould be determined

(5) Statement of the amount of any othercharges

(6) Statement of the creditor’s securityinterest in the property

(7) Statement of billing rights (§§ 226.12and 226.13)

(8) Certain home equity plan information,if not provided with the application,in a form the consumer can keep(§ 226.6(e)(7))

b. Determine that the following credit carddisclosures were made clearly and con-spicuously on or with a solicitation oran application. Disclosures in 12-pointtype are deemed to comply with therequirements. See commentary to sec-tion 226.5a(a)(2)-1. The APR for purchases(other than an introductory rate that is lowerthan the rate that will apply after theintroductory rate expires) must be in at least18-point type. (§ 226.5a)

(1) APR for purchases, cash advances,and balance transfers, including pen-alty rates that may apply. If the rate isvariable, the index or formula and themargin must be identified.

(2) Fee for issuance of the card

(3) Minimum finance charge

(4) Transaction fees

(5) Length of the grace period

(6) Balance-computation method

(7) Statement that charges incurred byusing the charge card are due whenthe periodic statement is received

Note: Items 1−7 must be provided in aprominent location in the form of a table.The following items (8–10) may be includedin the same table or clearly and conspicu-ously elsewhere in the same document.An explanation of specific events that mayresult in the imposition of a penalty ratemust be placed outside the table, with anasterisk inside the table (or other means)directing the consumer to the additionalinformation.

(8) Cash-advance fees

(9) Late-payment fees

(10) Fees for exceeding the credit limit

c. Determine that the disclosure of items 1−7in ‘‘b,’’ above, are made orally for creditor-initiated telephone applications and pre-approved solicitations. Also, determine forapplications or solicitations made to thegeneral public that the card issuer makesone of the optional disclosures. (§§ 226.5a(d)and 226.5a(e))

d. Determine that the following home equityinformation was provided clearly and con-spicuously at the time of application:(§ 226.5b)

(1) Home equity brochure

(2) Statement that the consumer shouldretain a copy of the disclosure

(3) Statement of the time the specificterms are available

(4) Statement that terms are subject tochange before the plan opens

(5) Statement that the consumer mayreceive a full refund of all fees

(6) Statement that the consumer’s dwell-ing secures the credit

(7) Statement that the consumer couldlose the dwelling

(8) Statement of the creditor’s right tochange, freeze, or terminate theaccount

(9) Statement that information about con-ditions for adverse action is availableupon request

(10) Statement of payment terms, includingthe length of the draw and repaymentperiods, how the minimum payment isdetermined, the timing of payments,and an example based on $10,000and a recent APR

(11) A recent APR imposed under the planand a statement that the rate does notinclude costs other than interest (fixed-rate plans only)

(12) Itemization of all fees to be paid to thecreditor

(13) Estimate of any fees payable to thirdparties to open the account and astatement that the consumer mayreceive a good-faith itemization ofthird-party fees

(14) Statement regarding negative amorti-zation, as applicable

(15) Statement of transaction requirements



(16) Statement that the consumer shouldconsult a tax advisor regarding thedeductibility of interest and chargesunder the plan

(17) For variable-rate home equity plans,disclosures including

i. That the APR, payment, or termmay change

ii. That the APR excludes costs otherthan interest

iii. The index and its source

iv. How the rate will be determined

v. That the consumer should requestinformation on the current indexvalue, margin, discount, premium,or APR

vi. That the initial rate is discounted,and the duration of the discount, ifapplicable

vii. Frequency of APR changes

viii. Rules relating to changes in theindex, APR, and payment amount

ix. Lifetime rate cap and any annualcaps, or that there is no annuallimitation

x. The minimum payment require-ment, using the maximum APR,and when the maximum APR maybe imposed

xi. A table, based on a $10,000balance, reflecting all significantplan terms

xii. That rate information will be pro-vided on or with each periodicstatement

e. Determine when the last statement of billingrights was furnished to customers andwhether the institution used the short-formnotice with each periodic statement.(§ 226.9(a))

f. Determine that the notice of any change interms was provided 15 days prior to theeffective date of the change. (§ 226.9(b))

g. Determine that items 1−7 in ‘‘b,’’ above, aredisclosed when the account is renewed.This disclosure must also state how andwhen the cardholder may terminate thecredit to avoid paying the renewal fee.(§ 226.9(e))

h. Determine that a statement regarding themaximum interest rate that may be imposedduring the term of the obligation is made forany loan for which the APR may increaseduring the plan. (§ 226.30(b))

Forms for Reverse Mortgages(Both Open- and Closed-End)

a. Determine that the disclosures required forreverse mortgage transactions are substan-tially similar to the model form in appendix Kto Regulation Z and include the followingitems:

(1) A statement that the consumer is notobligated to complete the reversemortgage transaction merely becausehe or she has received the disclosuresor signed an application

(2) A good-faith projection of the total costof the credit expressed as a table of‘‘total annual loan cost rates,’’ includ-ing payments to the consumer, addi-tional creditor compensation, limita-tions on consumer liability, assumedannual appreciation, and the assumedloan period

(3) An itemization of loan terms, charges,the age of the youngest borrower, andthe appraised property value

(4) An explanation of the table of totalannual loan cost rates

Note: Forms that include or involve currenttransactions, such as change-in-terms no-tices, periodic billing statements, rescissionnotices, and billing-error communications,should be verified for accuracy when thefile review worksheets are completed.

Timing of Disclosures

5. Review financial institution policies, proce-dures, and systems to determine, either sepa-rately or when completing the actual filereview, whether the applicable disclosureslisted below are furnished when required byRegulation Z. Take into account products thathave different features, such as closed-endloans or credit card accounts that are fixed orvariable rate.

a. Credit card application and solicitationdisclosures—On or with the application(§ 226.5a(b))

b. HELC disclosures—At the time the applica-tion is provided or within 3 business daysunder certain circumstances (§ 226.5b(b))

c. Open-end credit initial disclosures—Beforethe first transaction is made under the plan(§ 226.5(b)(1))

d. Periodic disclosures—At the end of a billingcycle if the account has a debit or creditbalance of $1 or more or if a finance chargehas been imposed (§ 226.5(b)(2))



e. Statement of billing rights—At least once ayear (§ 226.9(a))

f. Supplemental credit devices—Before thefirst transaction under the plan (§ 226.9(b))

g. Open-end credit change in terms—15 daysprior to the effective change date (§ 226.9(c))

h. Finance charge imposed at time oftransaction—Prior to imposing any fee(§ 226.9(d))

i. Disclosures upon renewal of credit orcharge card—30 days or 1 billing cycle,whichever is less, before the delivery of theperiodic statement on which the renewalfee is charged. Alternatively, notice may bedelayed until the mailing or delivery of theperiodic statement on which the renewalfee is charged to the accounts if the noticemeets certain requirements. (§ 226.9(e))

j. Change in credit account insuranceprovider—Certain information 30 days be-fore the change in provider occurs, andcertain information 30 days after the changein provider occurs. The institution mayprovide a combined disclosure 30 daysbefore the change in provider occurs.(§ 226.9(f))

k. Closed-end credit disclosures—Before con-summation (§ 226.17(b))

l. Disclosures for certain closed-end homemortgages—3 business days prior to con-summation (§ 226.31(c)(1))

m. Disclosures for reverse mortgages—3 daysprior to consummation of a closed-endcredit transaction or prior to the first trans-action under an open-end credit plan(§ 226.31(c)(2))

n. Disclosures for adjustable-rate mortgages—At least once each year during which aninterest rate adjustment is implementedwithout an accompanying payment change,and at least 25, but no more than 120,calendar days before a new paymentamount is due, or in accordance with othervariable-rate subsequent-disclosure regula-tions issued by a supervisory agency(§ 226.20(c))

Record Retention

6. Review the financial institution’s record-retention practices to determine whether evi-dence of compliance (for other than theadvertising requirements) is retained for atleast 2 years after the disclosure was requiredto be made or other action was required to betaken. (§ 226.25)

Transaction Testing

Note: When verifying APR accuracies, use theOCC’s APR calculation model or other acceptablecalculation tool.

Advertising

7. Sample advertising copy, including any Inter-net advertising, since the previous examinationand verify that the terms of credit are specific.If triggering terms are used, determine that therequired disclosures are made. (§§ 226.16 and226.24)

For advertisements for closed-end credit,determine,

• If a rate of finance charge was stated, that itwas stated as an APR

• If an APR will increase after consummation,that a statement to that effect is made

Closed-End Credit

8. For each type of closed-end loan being tested,determine the accuracy of the disclosures bycomparing the disclosures with the contractand other financial institution documents.(§ 226.17)

9. Determine whether the required disclosureswere made before consummation of the trans-action, and ensure the presence and accuracyof the items below, as applicable. (§ 226.18)

a. Amount financed

b. Itemization of the amount financed (RESPAgood-faith estimate may be substituted)

c. Finance charge

d. APR

e. Variable-rate verbiage, as follows, for loansnot secured by a principal dwelling or loanswith terms of 1 year or less:

(1) Circumstances that permit a rateincrease

(2) Limitations on the increase (periodicor lifetime)

(3) Effects of the increase

(4) Hypothetical example of new paymentterms

f. Payment schedule, including amount, tim-ing, and number of payments

g. Total of payments

h. Total sales price (credit sale)

i. Description of security interest



j. Credit life insurance premium is included inthe finance charge, unless all three of thefollowing conditions are met:

(1) Insurance is not required

(2) Premium for the initial term is disclosed

(3) Consumer signs or initials an affirma-tive written request for the insurance

k. Property insurance available from the credi-tor is excluded from the finance charge ifthe premium for the initial term of theinsurance is disclosed

l. Required deposit

10. Determine, for adjustable-rate mortgage loansthat are secured by the borrower’s principaldwelling and have maturities of more than1 year, that the required early and subsequentdisclosures are complete, accurate, and timely.Early disclosures required by section 226.19(a)are verified during the closed-end credit formsreview. Subsequent disclosures should includethe items below, as applicable: (§ 226.20(c))

a. Current and prior interest rates

b. Index values used to determine current andprior interest rates

c. Extent to which the creditor has foregone anincrease in the interest rate

d. Contractual effects of the adjustment (newpayment and loan balance)

e. Payment required to avoid negative amorti-zation

Note: The accuracy of the adjusted interestrates and indexes should be verified bycomparing them with the contract and withearly disclosures. Refer to the ‘‘AdditionalVariable-Rate Testing’’ section of theseexamination procedures.

11. Determine, for each type of closed-end rescind-able loan being tested, whether 2 copies of therescission notice are provided to each personwhose ownership interest is or will be subject tothe security interest. The rescission notice mustdisclose the following items: (§ 226.23(b))

a. Security interest taken in the consumer’sprincipal dwelling

b. Consumer’s right to rescind the transaction

c. How to exercise the right to rescind, with aform for that purpose, stating the address ofthe creditor’s place of business

d. Effects of rescission

e. Date the rescission period expires

12. Ensure that funding was delayed until therescission period expired. (§ 226.23(c))

13. Determine if the institution has received anyrequests to waive the 3-day right to rescind

since the previous examination. If applicable,test rescission waivers. (§ 226.23(e))

14. Determine whether the maximum interest ratein the contract is disclosed for any adjustable-rate consumer credit contract secured by adwelling. (§ 226.30(a))

Open-End Credit

15. For each open-end credit product tested,determine the accuracy of the disclosures bycomparing the disclosures with the contractsand other financial institution documents.(§ 226.5(c))

16. Review the financial institution’s policies, pro-cedures, and practices to determine whether itprovides appropriate disclosures for creditor-initiated direct mail applications and solicita-tions to open charge card accounts, telephoneapplications and solicitations to open chargecard accounts, and applications and solicita-tions made available to the general public toopen charge card accounts. (§§ 226.5a(b)–(d))

17. Determine, for all home equity plans with avariable rate, that the APR is based on anindependent index. Further, ensure that homeequity plans are terminated or terms arechanged only if certain conditions exist.(§ 226.5b(f))

18. Determine that if any consumer rejected ahome equity plan because a disclosed termchanged before the plan was opened, all feeswere refunded. Verify that nonrefundable feeswere not imposed until 3 business days afterthe consumer received the required disclo-sures and brochure. (§§ 226.5b(g) and226.5b(h))

19. Review consecutive periodic billing statementsfor each major type of open-end credit activityoffered (overdraft and home equity lines ofcredit, credit card programs, and so forth).Determine whether disclosures were calcu-lated accurately and are consistent with theinitial disclosure statement furnished in connec-tion with the accounts (or any subsequentchange-in-terms notice) and the underlyingcontractual terms governing the plan(s). Theperiodic statement must disclose the followingitems, as applicable: (§ 226.7)

a. Previous balance

b. Identification of transactions

c. Dates and amounts of any credits

d. Periodic rates and corresponding APRs; forvariable-rate plans, that the periodic ratesmay vary

e. Balance on which the finance charge is



computed, and an explanation of how thebalance is determined

f. Amount of the finance charge, with anitemization of each of the components ofthe finance charge

g. Annual percentage rate

h. Itemization of other charges

i. Closing date and balance

j. Payment date, if there is a ‘‘free ride’’ period

k. Address for notice of billing errors

20. Verify that the institution credits a payment toan open-end account as of the date of receipt.(§ 226.10)

21. Determine how the institution handles creditbalances. Specifically, if an account’s creditbalance is in excess of $1, the institution musttake the following actions: (§ 226.11)

a. Credit the amount to the consumer’s account

b. Refund any part of the remaining creditbalance within 7 business days from receiv-ing a written request from the consumer

c. Make a good-faith effort to refund theamount of the credit to a deposit account ofthe consumer if the credit remains for morethan 6 months

22. Review samples of billing-error-resolution filesand correspondence from consumers assert-ing a claim or defense against the financialinstitution for a credit card dispute regardingproperty or services. Verify the following:(§§ 226.12 and 226.13)

a. Credit cards are issued only upon request

b. Liability for unauthorized credit card use islimited to $50

c. Disputed amounts are not reported asdelinquent unless remaining unpaid afterthe dispute has been settled

d. Offsetting credit card indebtedness isprohibited

e. Errors are resolved within two completebilling cycles

23. Determine, for each type of open-end rescind-able loan being tested, that two copies of therescission notice are provided to each personwhose ownership interest is or will be subjectto the security interest and follow procedures11, 12, and 13 in the section ‘‘Closed-EndCredit.’’

Additional Variable-Rate Testing

24. Verify that when accounts were opened orloans were consummated, the loan contractterms were recorded correctly in the financial

institution’s calculation systems (for example,its computer). Determine the accuracy of thefollowing recorded information:

a. Index value

b. Margin and method of calculating ratechanges

c. Rounding method

d. Adjustment caps (periodic and lifetime)

25. Using a sample of periodic disclosures foropen-end variable-rate accounts (for example,home equity accounts) and closed-end rate-change notices for adjustable-rate mortgageloans,

a. Compare the rate-change date and rate onthe credit obligation with the actual rate-change date and rate imposed.

b. Determine that the index disclosed andimposed is based on the terms of thecontract (Example: The weekly averageof 1-year Treasury constant maturities, asof 45 days before the change date).(§§ 226.7(g) and 226.20(c)(2))

c. Determine that the new interest rate iscorrectly disclosed by adding the correctindex value with the margin stated in thenote, plus or minus any contractual frac-tional adjustment. (§§ 226.7(g) and 226.20(c)(1))

d. Determine that the new payment disclosed(section 226.20(c)(4)) was based on aninterest rate and loan balance in effect atleast 25 days before the payment changedate (consistent with the contract).(§ 226.20(c))

Certain Home Mortgage Transactions

26. Determine whether the financial institutionoriginates consumer credit transactions sub-ject to subpart E of Regulation Z, specifically,certain closed-end home mortgages (high-cost mortgages (section 226.32) and reversemortgages (section 226.33)).

27. Examiners may use the worksheet at the end ofthese examination procedures as an aid inidentifying and reviewing high-cost mortgages.

28. Review both high-cost and reverse mortgagesto ensure that

a. Required disclosures are provided to con-sumers in addition to, not in lieu of, thedisclosures contained in other subparts ofRegulation Z (§ 226.31(a))

b. Disclosures are clear and conspicuous, inwriting, and in a form that the consumer cankeep (§ 226.31(b))



c. Disclosures are furnished at least 3 busi-ness days prior to consummation of amortgage transaction covered by section226.32 or a closed-end reverse mortgagetransaction (or at least 3 business daysprior to the first transaction under anopen-end reverse mortgage) (§ 226.31(c))

d. Disclosures reflect the terms of the legalobligation between the parties (§ 226.31(d))

e. The institution abides by the disclosurerules for multiple consumers and multiplecreditors. If the obligation involves multipleconsumers, the disclosures may be pro-vided to any consumer who is primarilyliable on the obligation. However, forrescindable transactions, the disclosuresmust be provided to each consumer whohas the right to rescind. If the transactioninvolves more than one creditor, only onecreditor should provide the disclosures.(§ 226.31(e))

f. The APR is accurately calculated anddisclosed in accordance with the require-ments and within the tolerances allowed insection 226.22 (§ 226.31(g))

29. For high-cost mortgages (section 226.32),ensure that

a. In addition to other required disclosures,the creditor gives the following at least 3business days prior to consummation (seethe model disclosure in appendix H-16):

(1) Notice containing the prescribed lan-guage (§ 226.32(c)(1))

(2) Annual percentage rate (§ 226.32(c)(2))

(3) Amount of regular loan payment andamount of any balloon payment(§ 226.32(c)(3))

(4) For variable-rate loans, a statementthat the interest rate and monthlypayment may increase, and theamount of the single maximum monthlypayment allowed under the contract(§ 226.32(c)(4))

(5) For mortgage refinancings, the totalamount the consumer will borrow (theface amount), and if this amountincludes premiums or other chargesfor optional credit insurance or debt-cancellation coverage, that fact. Thisdisclosure is to be treated as accu-rate if the disclosed face amount iswithin $100 of the actual amount.(§ 226.32(c)(5))

(6) A new disclosure is required if subse-quent to providing the additional dis-closure but prior to consummation,

there are changes in any terms thatmake the disclosures inaccurate. Forexample, if a consumer purchasesoptional credit insurance and, as aresult, the monthly payment differsfrom the payment previously dis-closed, redisclosure is required and anew 3-day waiting period applies.(§ 226.31(c)(1)(i))

(7) If a creditor provides new disclosuresby telephone when the consumerinitiates a change in terms, then atconsummation (§ 226.31(c)(1)(ii))

• The creditor must provide new writ-ten disclosures and both partiesmust sign a statement that thesenew disclosures were provided bytelephone at least 3 days prior toconsummation.

(8) If a consumer waives the right to a3-day waiting period to meet a bonafide personal financial emergency, theconsumer’s waiver must be a datedwritten statement (not a preprintedform) describing the emergency andbearing the signature of all entitled tothe waiting period (a consumer maywaive only after receiving the requireddisclosures and prior to consumma-tion). (§ 26.31(c)(1)(iii))

b. High-cost mortgage transactions do notinclude any of the following terms:

(1) Balloon payment (if the term is lessthan 5 years, with exceptions)(§§ 226.32(d)(1)(i) and 226.32(d)(1)(ii))

(2) Negative amortization (§ 226.32(d)(2))

(3) Advance payments from the proceedsof more than two periodic payments(§ 226.32(d)(3))

(4) Increased interest rate after default(§ 226.32(d)(4))

(5) A rebate of interest, arising from aloan acceleration due to default, thatis calculated by a method less favor-able than the actuarial method(§ 226.32(d)(5))

(6) Prepayment penalties (but permittedin the first 5 years if certain conditionsare met) (§§ 226.32(d)(6) and226.32(d)(7))

(7) A due-on-demand clause permittingthe creditor to terminate the loan inadvance of maturity and acceleratethe balance, with certain exceptions(§ 226.32(d)(8))

c. The creditor is not engaged in the following



acts and practices for high-cost mortgages:

(1) Home improvement contracts—Payinga contractor under a home improve-ment contract from the proceeds of amortgage unless certain conditionsare met (§ 226.34(a)(1))

(2) Notice to assignee—Selling or other-wise assigning a high-cost mortgagewithout furnishing the required state-ment to the purchaser or assignee(§ 226.34(a)(2))

(3) Refinancing within 1 year of extendingcredit—Within 1 year of making ahigh-cost mortgage loan, a creditormay not refinance any high-cost mort-gage loan to the same borrower intoanother high-cost mortgage loan thatis not in the borrower’s interest. Thisrestriction also applies to assigneesthat hold or service the high-costmortgage loan. Commentary to sec-tion 226.34(a)(3) has examples thatapply the refinancing prohibition andaddress ‘‘borrower’s interest.’’

(4) Consumer’s ability to repay—Engagingin a pattern or practice of extendinghigh-cost mortgages based on theconsumer’s collateral without regardto repayment ability, including theconsumer’s current and expectedincome, current obligations, and em-ployment. A violation is presumed ifthere is a pattern or practice of makingsuch mortgage loans without verifyingand documenting the consumer’srepayment ability.

A. A creditor may consider anyexpected income of the consumer,including

i. Regular salary or wages

ii. Gifts

iii. Expected retirement payments

iv. Income from self-employment

B. Equity income that would be real-ized from the collateral may not beconsidered.

C. Creditors may verify and docu-ment a consumer’s income andobligations through any reliablesource that provides the creditorwith a reasonable basis for believ-ing that there are sufficient funds tosupport the loan. Reliable sourcesinclude

i. Credit reports

ii. Tax return

iii. Pension statements

iv. Payment records for employ-ment income

D. If a loan transaction includes adiscounted introductory rate, thecreditor must consider the consum-er’s ability to repay on the basis ofthe nondiscounted or fully indexedrate.

Note: Commentary to section226.34(a)(4) contains guidance onincome that may be considered, on‘‘pattern or practice,’’ and on ‘‘verify-ing and documenting’’ income andobligations.

30. Ensure that the creditor does not structure ahome-secured loan as an open-end plan(‘‘spurious open-end credit’’) to evade therequirements of Regulation Z. See staff com-mentary to section 226.34(b) for factors to beconsidered.

Administrative Enforcement

31. If there is noncompliance involving under-stated finance charges or understated APRssubject to reimbursement under the FFIECPolicy Guide on Reimbursement, continue withprocedure 32.

32. Document the date on which the administra-tive enforcement of the TILA policy statementwould apply for reimbursement purposesby determining the date of the precedingexamination.

33. If the noncompliance involves indirect (third-party paper) disclosure errors and affectedconsumers have not been reimbursed,

a. Prepare comments, discussing the need forimproved internal controls, to be included inthe report of examination.

b. Notify your supervisory office for follow upwith the regulator that has primary respon-sibility for the original creditor.

If the noncompliance involves direct credit,

c. Make an initial determination as to whetherthe violation is a pattern or practice.

d. Calculate the reimbursement for the loansor accounts in an expanded sample of theidentified population.

e. Estimate the total impact on the populationbased on the expanded sample.

f. Inform management that reimbursementmay be necessary under the law and theFFIEC policy guide, and discuss all sub-stantive facts, including the sample loansand calculations.



g. Inform management of the financial institu-tion’s options, under section 130 of theTILA, for avoiding civil liability and of itsoption under the policy guide and section

108(e)(6) of the TILA for avoiding a regula-tory agency’s order to reimburse affectedborrowers.



HIGH-COST-MORTGAGE (§ 226.32) WORKSHEET

Borrower’s name Loan number

COVERAGE Yes No

Is the loan secured by the consumer’s principal dwelling?

(§§ 226.2(a)(19) and 226.32(a)(1))

If the answer is No, STOP HERE

Is the loan for the following purpose?

1 Residential mortgage transaction (§ 226.2(a)(24))

2 Reverse mortgage transaction (§ 226.33)

3 Open-end credit plan (Subpart B)

(Note prohibition against structuring loans as open-end plansto evade sections 226.32−226.34(b))

If the answer is Yes in Box 1, 2, or 3, STOP HERE. If No, continue to Test 1.

TEST 1: CALCULATION OF APR

A Disclosed APR

B Treasury security yield of comparable maturity

Obtain the Treasury constant maturities yield from the Board’s H.15 statistical release,‘‘Selected Interest Rates’’ (on the Board’s web site (www.federalreserve.gov/releases/h15/data.htm), the ‘‘Business’’ links display daily yields). Use the yield that has thematurity most comparable to the loan term and is from the 15th day of the month thatimmediately precedes the month of the application. If the 15th is not a business day,use the yield for the business day immediately preceding the 15th. If the loan termis exactly halfway between two published security maturities, use the lower of thetwo yields. Note: Creditors may use the interest rates in the H.15 release or theactual auction results. See staff commentary to Regulation Z for further details.(§ 226.32(a)(1)(i))

C Treasury security yield of comparable maturity (from Box B)

Plus: 8 percentage points for first-lien loan or10 percentage points for subordinate-lien loan

Yes No

D Is Box A greater than Box C?

If Yes, the transaction is a high-cost mortgage. If No, continue to Test 2.



HIGH-COST MORTGAGE (§ 226.32) WORKSHEET—continued

TEST 2: CALCULATION OF POINTS AND FEES

STEP 1: Identify all charges paid by the consumer at or before loan closing

A Finance charges (§§ 226.4(a) and (b))(Interest, including per-diem interest, and time–price differential are excluded from these amounts.)

Fee

Loan points

Mortgage broker fee

Loan service fees

Required closing agent/third-party fees

Required credit insurance

Private mortgage insurance

Life-of-loan charges (flood, taxes, etc.)

Any other fees considered finance charges

Subtotal

B Certain non-finance charges under section 226.4(c)(7)

Include fees paid by consumers only if the amount of the fee is unreasonable, the creditor receivesdirect or indirect compensation from the charge, or the charge is paid to an affiliate of the bank.(See the example in section 226.32(b)(1)(ii) of the commentary for further explanation.)

Fee

Title examination

Title insurance

Property survey

Document preparation charge

Credit report

Appraisal

Fee for ‘‘initial’’ flood hazard determination

Pest inspection

Any other fees not considered finance charges

Subtotal

C Premiums or other charges for optional credit life, accident,health, or loss-of-income insurance or debt-cancellationcoverage Subtotal

D Total points and fees: Add subtotals for Boxes A, B, and C



HIGH-COST MORTGAGE (§ 226.32) WORKSHEET—continued

TEST 2—continued

STEP 2: Determine the total loan amount for cost calculation (§ 226.32(a)(1)(ii))

A Determine the amount financed (§ 226.18(b))

Principal loan amount

Plus: Other amounts financed by the lender (not already included in the principaland not part of the finance charge)

Less: Prepaid finance charges (§ 226.2(a)(23))

EQUALS: Amount financed

B Deduct costs included in the points and fees under sections 226.32(b)(1)(iii) and(iv) (Step 1, Box B and Box C) that are financed by the creditor

C Total loan amount (Step 2, Box A minus Box B)

STEP 3: Perform high-fee cost calculation

A 8 percent of the total loan amount (from Step 2, Box C)

B Annual adjustment amount (§ 226.32(a)(1)(ii))

1999 $4412000 $4512001 $4652002 $480

2003 $4882004 $4992005 $5102006 $528

(Use the dollar amount corresponding to the year of the loan’s origination.)

C Total points and fees (from Step 1, Box D)

Yes No

In Step 3, does Box C exceed the greater of Box A or Box B?

If Yes, the transaction is a high-cost mortgage. If No, the transaction is not a high-cost mortgageunder Test 2.




Background

The Fair Debt Collection Practices Act (FDCPA)(15 USC 1692 et seq.), which became effective inMarch 1978, was designed to eliminate abusive,deceptive, and unfair debt collection practices. Italso protects reputable debt collectors from unfaircompetition and encourages consistent state actionto protect consumers from abuses in debtcollection.

Coverage

Debt That Is Covered

The FDCPA applies only to the collection of debtincurred by a consumer primarily for personal,family, or household purposes. It does not apply tothe collection of corporate debt or debt owed forbusiness or agricultural purposes.

Debt Collectors That Are Covered

The FDCPA defines a debt collector as any personwho regularly collects, or attempts to collect,consumer debts for another person or institution oruses some name other than its own when collectingits own consumer debts. The definition includes, forexample, an institution that regularly collects debtsfor an unrelated institution, such as an institutionthat, under a reciprocal service arrangement,solicits the help of another in collecting a defaulteddebt from a customer who has moved.

Debt Collectors That Are Not Covered

An institution is not considered a debt collectorunder the FDCPA when it collects

• Another institution’s debts in isolated instances

• Its own debts under its own name

• Debts it originated and then sold but continues toservice (for example, mortgage and studentloans)

• Debts that were not in default when they wereobtained

• Debts that were obtained as security for acommercial credit transaction (for example,accounts receivable financing)

• Debts incidental to a bona fide fiduciary relation-ship or escrow arrangement (for example, a debtheld in the institution’s trust department ormortgage loan escrow for taxes and insurance)

• Debts, regularly, for other institutions to which it isrelated by common ownership or corporatecontrol

Other debt collectors that are not covered by theFDCPA include

• Officers or employees of an institution whocollect debts owed to the institution in theinstitution’s name

• Legal-process servers

Communications in Connection withDebt Collection

Definition of Consumer

For communications with a consumer or third partyin connection with the collection of a debt, the termconsumer is defined to include the borrower’sspouse, parent (if the borrower is a minor),guardian, executor, or administrator.

When, Where, and with WhomCommunication Is Permitted

Communicating with Consumers

A debt collector may not communicate with aconsumer at any unusual time (generally before8:00 a.m. or after 9:00 p.m. in the consumer’s timezone) or at any place that is inconvenient to theconsumer, unless the consumer or a court ofcompetent jurisdiction has given permission forsuch contacts. A debt collector may not contact theconsumer at his or her place of employment if thecollector has reason to believe the employerprohibits such communications.

If the debt collector knows that the consumer hasretained an attorney to handle the debt and caneasily ascertain the attorney’s name and address,all contacts must be with that attorney, unless theattorney is unresponsive or agrees to allow directcommunication with the consumer.

Ceasing Communication with Consumers

When a consumer refuses, in writing, to pay a debtor requests that the debt collector cease furthercommunication, the collector must cease all furthercommunication, except to advise the consumerthat

• The collection effort is being stopped

Consumer Compliance Handbook FDCPA • 1 (1/06)

• Certain specified remedies ordinarily invokedmay be pursued or, if appropriate, that a specificremedy will be pursued

• Mailed notices from the consumer are officialwhen they are received by the debt collector

Communicating with Third Parties

The only third parties that a debt collector maycontact when trying to collect a debt are

• The consumer

• The consumer’s attorney

• A consumer reporting agency (if permitted bylocal law)

• The creditor

• The creditor’s attorney

• The debt collector’s attorney

The consumer or a court of competent jurisdictionmay, however, give the debt collector specificpermission to contact other third parties. In addi-tion, a debt collector who is unable to locate aconsumer may ask a third party for the consumer’shome address, telephone number, and place ofemployment (location information). The debt collec-tor must give his or her name and must state that heor she is confirming or correcting information aboutthe consumer’s location. Unless specifically asked,the debt collector may not name the collection firmor agency or reveal that the consumer owes anydebt.

No third party may be contacted more than onceunless the collector believes that the informationfrom the first contact was wrong or incomplete andthat the third party has since received betterinformation, or unless the third party specificallyrequests additional contact.

Contact with any third party by postcard, letter, ortelegram is allowed only if the envelope or contentof the communication does not indicate the natureof the collector’s business.

Validation of Debts

A debt collector must provide the consumer withcertain basic information. If that information was notin the initial communication and if the consumerhas not paid the debt five days after the initialcommunication, all of the following informationmust be sent to the consumer in written form:

• The amount of the debt

• The name of the creditor to whom the debt isowed

• Notice that the consumer has thirty days todispute the debt before it is assumed to be valid

• Notice that upon such written dispute, the debtcollector will send the consumer a verification ofthe debt or a copy of any judgment

• If the original creditor is different from the currentcreditor, notice that if the consumer makes awritten request for the name and address of theoriginal creditor within the thirty-day period, thedebt collector will provide that information

If, within the thirty-day period, the consumerdisputes in writing any portion of the debt orrequests the name and address of the originalcreditor, the collector must stop all collection effortsuntil he or she mails the consumer a copy of ajudgment or verification of the debt, or the nameand address of the original creditor, as applicable.

Prohibited Practices

Harassing or Abusive Practices

A debt collector, in collecting a debt, may notharass, oppress, or abuse any person. Specifically,a debt collector may not

• Use or threaten to use violence or other criminalmeans to harm the physical person, reputation,or property of any person

• Use obscene, profane, or other language thatabuses the hearer or reader

• Publish a list of consumers who allegedly refuseto pay debts, except to a consumer reportingagency or to persons meeting the requirementsof section 603(f) or 604(3) of the FDCPA

• Advertise a debt for sale to coerce payment

• Annoy, abuse, or harass persons by repeatedlycalling their telephone number or allowing theirtelephone to ring continually

• Make telephone calls without properly identifyinghimself or herself, except as allowed to obtainlocation information

False or Misleading Representations

A debt collector, in collecting a debt, may not useany false, deceptive, or misleading representation.Specifically, a debt collector may not

• Falsely represent or imply that he or she isvouched for, bonded by, or affiliated with theUnited States or any state, including the use ofany badge, uniform, or similar identification

• Falsely represent the character, amount, or legalstatus of the debt, or of any services rendered, orcompensation he or she may receive for collect-ing the debt

• Falsely represent or imply that he or she is anattorney or that communications are from anattorney


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• Threaten to take any action that is not legal orintended

• Falsely represent or imply that nonpayment ofany debt will result in the arrest or imprisonmentof any person or the seizure, garnishment,attachment, or sale of any property or wages ofany person, unless such action is lawful andintended by the debt collector or creditor

• Falsely represent or imply that the sale, referral,or other transfer of the debt will cause theconsumer to lose a claim or a defense topayment, or become subject to any practiceprohibited by the FDCPA

• Falsely represent or imply that the consumercommitted a crime or other conduct to disgracethe consumer

• Communicate, or threaten to communicate, falsecredit information or information that should beknown to be false, including not identifyingdisputed debts as such

• Use or distribute written communications madeto look like or falsely represent documentsauthorized, issued, or approved by any court,official, or agency of the United States or anystate if the appearance or wording would give afalse impression of the document’s source,authorization, or approval

• Use any false representation or deceptive meansto collect or attempt to collect a debt or to obtaininformation about a consumer

• Fail to disclose in the initial written communica-tion with the consumer, and the initial oralcommunication if it precedes the initial writtencommunication, that the debt collector is attempt-ing to collect a debt and that any informationobtained will be used for that purpose. Inaddition, the debt collector must disclose insubsequent communications that the communi-cation is from a debt collector. (These disclo-sures do not apply to a formal pleading made inconnection with a legal action.)

• Falsely represent or imply that accounts havebeen sold to innocent purchasers for value

• Falsely represent or imply that documents arelegal process

• Use any name other than the true name of thedebt collector’s business, company, or organiza-tion

• Falsely represent or imply that documents arenot legal-process forms or do not require actionby the consumer

• Falsely represent or imply that the debt collectoroperates or is employed by a consumer report-ing agency

Unfair Practices

A debt collector may not use unfair or unconscion-able means to collect or attempt to collect a debt.Specifically, a debt collector may not

• Collect any interest, fee, charge, or expenseincidental to the principal obligation unless it wasauthorized by the original debt agreement or isotherwise permitted by law

• Accept a check or other instrument postdated bymore than five days, unless he or she notifies theconsumer, in writing, of any intention to depositthe check or instrument; the notice must bemade no more than ten nor less than threebusiness days before the date of deposit

• Solicit a postdated check or other postdatedpayment instrument to use as a threat or toinstitute criminal prosecution

• Deposit or threaten to deposit a postdated checkor other postdated payment instrument beforethe date on the check or instrument

• Cause communication charges, such as chargesfor collect telephone calls and telegrams, to bemade to any person by concealing the truepurpose of the communication

• Take or threaten to repossess or disable propertywhen the creditor has no enforceable right to theproperty or does not intend to do so, or if, underlaw, the property may not be taken, repos-sessed, or disabled

• Use a postcard to contact a consumer about adebt

Multiple Debts

If a consumer owes several debts that are beingcollected by the same debt collector, paymentsmust be applied according to the consumer’sinstructions. No payment may be applied to adisputed debt.

Legal Actions by Debt Collectors

A debt collector may file a lawsuit to enforce asecurity interest in real property only in the judicialdistrict in which the real property is located. Otherlegal actions may be brought only in the judicialdistrict in which the consumer lives or in which theoriginal contract creating the debt was signed.

Furnishing Certain Deceptive Forms

No one may design, compile, or furnish any formthat creates the false impression that someoneother than the creditor (for example, a debtcollector) is participating in the collection of a debt.



Civil Liability

A debt collector who fails to comply with anyprovision of the FDCPA is liable for

• Any actual damages sustained as a result of thatfailure

• Punitive damages as allowed by the court:

– In an individual action, up to $1,000

– In a class action, up to $1,000 for each namedplaintiff and an award to be divided among allmembers of the class of an amount up to$500,000 or 1 percent of the debt collector’snet worth, whichever is less

• Costs and a reasonable attorney’s fee in anysuch action

In determining punitive damages, the court mustconsider the nature, frequency, and persistency ofthe violations and the extent to which they wereintentional. In a class action, the court must alsoconsider the resources of the debt collector and thenumber of persons adversely affected.

Defenses

A debt collector is not liable for a violation if apreponderance of the evidence shows that theviolation was not intentional and was the result of abona fide error that arose despite proceduresreasonably designed to avoid any such error. Thecollector is also not liable if he or she, in good faith,relied on an advisory opinion of the Federal TradeCommission, even if the ruling is later amended,rescinded, or determined to be invalid for anyreason.

Jurisdiction and Statute of Limitations

Action against debt collectors for violations of theFDCPA may be brought in any appropriate U.S.district court or other court of competent jurisdic-tion. The consumer has one year from the date onwhich the violation occurred to start such an action.


The Federal Trade Commission (FTC) is the primaryenforcement agency for the FDCPA. The variousfinancial regulatory agencies enforce the FDCPAfor the institutions they supervise. Neither the FTCnor any other agency may issue regulationsgoverning the collection of consumer debts bydebt collectors. The FTC may, however, issueadvisory opinions under the Federal Trade Com-mission Act on the meaning and application of theFDCPA.

Relation to State Law

The FDCPA preempts state law only to the extentthat a state law is inconsistent with the FDCPA. Astate law that is more protective of the consumer isnot considered inconsistent with the FDCPA.

Exemption for State Regulation

The FTC may exempt certain classes of debtcollection practices from the requirements of theFDCPA if the FTC has determined that state lawsimpose substantially similar requirements and thatthere is adequate provision for enforcement.


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Fair Debt Collection Practices ActExamination Objectives and Procedures


1. To determine the adequacy of the institution’sinternal procedures and controls to ensureconsistent compliance with the FDCPA

2. To determine if the institution complies withthe requirements of the FDCPA in collectingor attempting to collect third-party consumerdebts


The following procedures are to be completedthrough interviews with personnel knowledgeableabout and directly engaged in the institution’scollection activities and through reviews of anywritten collection procedures, reciprocal collectionagreements, collection letters, dunning notices,envelopes, scripts used by collection personnel,validation notices, individual collection files, com-plaint files, and other relevant records.

1. Determine if the institution is a debt collectorunder the FDCPA.

2. Determine if the institution has establishedinternal procedures and controls to ensurecompliance with the FDCPA.

3. If the institution has acted or is acting as a debtcollector under the FDCPA, determine if theinstitution has

a. Communicated with the consumer or thirdparties in any prohibited manner

b. Furnished the written validation notice withinthe required time period and otherwisecomplied with applicable validation require-ments

c. Used any harassing, abusive, unfair, ordeceptive collection practice prohibited bythe FDCPA

d. Collected any amount not expressly autho-rized by the agreement creating the debt orby state law

e. Applied all payments received as instructedand, where no instruction was given, appliedpayments only to undisputed debts

f. Filed suit in an authorized forum if theinstitution sued to collect the debt


Fair Debt Collection Practices ActExamination Checklist

1. Is the institution aware of the circumstances in which the FDCPA applies, and,as appropriate, has it established internal procedures and controls to ensurecompliance with the FDCPA? Yes No

2. Has the institution acted as a ‘‘debt collector’’ under the FDCPA by either

a. Regularly attempting to collect defaulted consumer debts owed to others or Yes No

b. Attempting to collect its own consumer debts in a name other than its own Yes No

If the answers to questions 2a and 2b are ‘‘no,’’ the institution has not acted as adebt collector under the FDCPA and the examiner should not complete theremainder of the checklist.

3. In attempting to collect consumer debts as a ‘‘debt collector’’ under theFDCPA, did the institution

a. Communicate with the consumer or any third party in a prohibited manner Yes No

b. Adhere to the required debt-validation procedure Yes No

c. Use any harassing, abusive, unfair, or deceptive practice or means Yes No

d. Collect any more than authorized by the debt instrument or state law Yes No

e. Properly apply any payment received in the case of multiple debts owed bythe same consumer Yes No

f. Bring legal action only in a judicial district permitted under the FDCPA Yes No



Background

The Homeowners Protection Act of 1998 becameeffective in July 1999. The act, also known as thePMI Cancellation Act, addresses the difficultieshomeowners have experienced in canceling pri-vate mortgage insurance (PMI) coverage. It estab-lishes provisions for the cancellation and termina-tion of PMI,1 sets forth disclosure and notificationrequirements, and requires the return of unearnedpremiums.

Historically, lenders have viewed an 80 percentloan-to-value (LTV) ratio (and a corresponding20 percent down payment) as a prudent standardfor making consumer real estate loans. This ratiohas served to ensure that the borrower had enoughof an interest in the property to continue to makethe payments and, in the event the borrower wasunable to make the payments, that the lender hadsufficient equity available to cover lender foreclo-sure costs.

As housing prices increased (and the corre-sponding down payment amounts increased),saving for a sufficient down payment becamedifficult for many prospective homeowners. To fur-ther the goal of making homeownership attainablefor more Americans, lenders began to look for waysto balance the increasing demand for home loanswith the risks inherent in providing loans that felloutside the 80 percent LTV standard. PMI, whichis activated only if the borrower defaults on theloan, helps address a lender’s risk by covering thedifference between the amount a borrower hasavailable to put down and the amount suggestedby the standard 20 percent down payment rule. Ineffect, PMI helps mitigate a lender’s risk on loansfor which the down payment is less than 20 percentof the sales price or, for a refinancing, when theamount financed is greater than 80 percent of theappraised value.

PMI protects lenders from the risk of default andforeclosure. It allows prospective buyers whocannot, or choose not to, make a significant downpayment to obtain mortgage financing at anaffordable rate. It is used extensively to facilitate‘‘high-ratio’’ loans (generally, loans for which theloan-to-value ratio exceeds 80 percent). With PMI,the lender is able to recover the costs associated

with the resale of foreclosed property as well as theaccrued interest payments and the fixed costs,such as taxes and insurance policies, paid beforethe resale. Once the consumer’s loan balance fallswithin the 80 percent LTV ratio, PMI is no longerneeded. Excessive PMI coverage provides littleextra protection for a lender and does not benefitthe borrower.

Before implementation of the act, many home-owners experienced problems in canceling PMI.In some instances, lenders may have agreed toterminate coverage when the borrower’s equityreached 20 percent, but the policies and pro-cedures used for canceling or terminating PMIcoverage varied widely among lenders. Homeown-ers had limited recourse when lenders refused tocancel their PMI coverage. Even homeowners inthe few states that had laws pertaining to PMIcancellation or termination noted difficulties in can-celing or terminating their PMI policies. The actprotects homeowners by prohibiting life-of-loanPMI coverage for borrower-paid PMI products andestablishing uniform procedures for the cancella-tion and termination of PMI policies.

Scope and Effective Date

The act applies primarily to residential mortgagetransactions, defined as mortgage loan transac-tions consummated on or after July 29, 1999, thepurpose of which is to finance the acquisition, initialconstruction, or refinancing2 of a single-familydwelling that serves as a borrower’s primaryresidence.3 It also includes provisions relating toannual written disclosures for residential mort-gages, defined as mortgages, loans, or otherevidences of a security interest created withrespect to a single-family dwelling that is theborrower’s primary residence. Condominiums,townhouses, and cooperative or mobile homes areconsidered single-family dwellings covered by theact.

The act’s requirements vary depending onwhether the mortgage

• Is a residential mortgage or a residential mort-gage transaction

• Is defined as high risk (either by the lender, in the

1. The act does not apply to mortgage insurance madeavailable under the National HousingAct, title 38 of the U.S. Code,or title V of the HousingAct of 1949, including mortgage insuranceon loans made by the Federal Housing Administration andguarantees on mortgage loans made by the Veterans Administra-tion.

2. For purposes of this discussion, refinancing means therefinancing of a loan any portion of which is intended to providefinancing for the acquisition or initial construction of a single-familydwelling that serves as a borrower’s primary residence.3. For purposes of this discussion, junior mortgages that

provide financing for the acquisition, initial construction, orrefinancing of a single-family dwelling that serves as a borrower’sprimary residence are covered.

Consumer Compliance Handbook HOPA • 1 (11/07)

case of nonconforming loans, or by Fannie Maeor Freddie Mac, in the case of conforming loans)

• Has a fixed rate or an adjustable rate

• Is covered by borrower-paid or lender-paidprivate mortgage insurance

Cancellation and Termination of PMI:Non-High-Risk Residential MortgageTransactions

Borrower-Requested Cancellations

A borrower may initiate cancellation of PMI cover-age by submitting a written request to the servicer.The servicer must take action to cancel PMI when

• The principal balance of the loan

– Is first scheduled to reach 80 percent of the‘‘original value’’4 (regardless of the outstand-ing balance), based on

– The initial amortization schedule (in thecase of a fixed-rate loan)

– The amortization schedules (in the case ofan adjustable-rate loan) or

– Reaches 80 percent of the ‘‘original value,’’based on actual payments

• The borrower has a good payment history5

• The borrower satisfies any requirement of themortgage holder for

– Evidence of a type established in advancethat the value of the property has not declinedbelow the original value and

– Certification that the borrower’s equity in theproperty is not subject to a subordinate lien

Once PMI is canceled, the servicer may notrequire further PMI payments or premiums morethan thirty days after the later of (1) the date onwhich the written request was received or (2) thedate on which the borrower satisfied the mortgageholder’s evidence and certification requirements,described above.

Automatic Termination

A servicer must automatically terminate PMI forresidential mortgage transactions on the earliestdate that both

• The principal balance of the mortgage is first

scheduled to reach 78 percent of the originalvalue of the secured property (based solely onthe initial amortization schedule, in the case of afixed-rate loan, or on the amortization schedules,in the case of an adjustable-rate loan, regardlessof the outstanding balance) and

• The borrower is current on mortgage payments.

If PMI is terminated, the servicer may not requirefurther payments or premiums of PMI more thanthirty days after (1) the termination date or (2) thedate following the termination date on which theborrower becomes current on the payments, which-ever is sooner.

There is no provision in the automatic-terminationsection of the act, as there is in the borrower-requested PMI cancellation section, that protectsthe lender against declines in property value orsubordinate liens. The automatic-termination provi-sions make no reference to good payment history(as prescribed in the borrower-requested provi-sions) but state only that the borrower must becurrent on mortgage payments.

Final Termination

If PMI coverage on a residential mortgage transac-tion was not canceled at the borrower’s request orby the automatic-termination provision, the servicermust terminate PMI coverage by the first day of themonth following the date that is the midpoint ofthe loan’s amortization period if, on that date, theborrower is current on the payments required bythe terms of the mortgage.

The servicer may not require further payments orpremiums of PMI more than thirty days after PMI isterminated.

Exclusions

The cancellation and termination provisions applyonly to residential mortgage transactions for whichthe borrower pays the PMI. The provisions do notapply to those for which someone other than theborrower makes the payments.

Return of Unearned Premiums

The servicer must return all unearned PMI premi-ums to the borrower within forty-five days aftercancellation or termination of PMI coverage. Withinthirty days after notification by the servicer ofcancellation or termination of PMI coverage, amortgage insurer must return to the servicer anyamount of unearned premiums it is holding, topermit the servicer to return such premiums to theborrower.

4. Original value is defined as the lesser of the sales price ofthe secured property, as reflected in the purchase contract, or theappraised value at the time of loan consummation.5. A borrower has a good payment history if he or she (1) has

not made a payment that was sixty days or more past due withinthe first twelve months of the last two years prior to thecancellation date or (2) has not made a payment that was thirtydays or more past due within twelve months of the cancellationdate.


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Exceptions to Cancellation andTermination of PMI: High-RiskResidential Mortgage Transactions

The borrower-requested cancellation at 80 percentLTV and the automatic termination at 78 percentLTV requirements do not apply to high-risk loans.However, high-risk loans are subject to finaltermination and are divided into two categories—conforming (Fannie Mae- and Freddie Mac-definedhigh-risk loans) and nonconforming (lender-defined high-risk loans).

Conforming Loans

Conforming loans are loans that have an originalprincipal balance not exceeding Freddie Mac’slimit for conforming loans.6 Fannie Mae andFreddie Mac are authorized under the act toestablish a category of residential mortgage trans-actions that are not subject to the act’s require-ments for borrower-requested cancellation or auto-matic termination due to the high risk associatedwith them.7 Such transactions are, however, sub-ject to the final-termination provision of the act. Assuch, PMI on a conforming high-risk loan must beterminated by the first day of the month followingthe date that is the midpoint of the loan’s initialamortization schedule (in the case of a fixed-rateloan) or amortization schedules (in the case of anadjustable-rate loan) if, on that date, the borrower iscurrent on the loan. If the borrower is not current onthat date, PMI must be terminated when theborrower does become current.

Nonconforming Loans

Nonconforming loans are residential mortgagetransactions that have an original principal balanceexceeding Freddie Mac’s and Fannie Mae’s con-forming loan limit. Lender-defined high-risk loansare not subject to the act’s requirements forborrower-requested cancellation or automatic ter-mination. However, if a residential mortgage trans-action is a lender-defined high-risk loan, PMI mustbe terminated on the date on which the principalbalance of the mortgage—based solely on theinitial amortization schedule (in the case of afixed-rate loan) or the amortization schedules(in the case of an adjustable-rate loan) for thatmortgage—is first scheduled to reach 77 percentof the original value of the property securing theloan, regardless of the outstanding balance for thatmortgage on that date.

Like conforming loans that are determined byFreddie Mac and Fannie Mae to be high risk, aresidential mortgage transaction that is a lender-defined high-risk loan is subject to the final-termination provision of the act.

Basic Disclosure and NoticeRequirements Applicable toResidential Mortgage Transactionsand Residential Mortgages

At the time of consummation of a residentialmortgage transaction, the lender must give theborrower certain disclosures that describe theborrower’s rights with regard to PMI cancellationand termination. The requirements for initial disclo-sures vary depending on whether the transaction isa fixed-rate mortgage, an adjustable-rate mort-gage, or a high-risk loan. Borrowers must also begiven certain annual and other notices concerningPMI cancellation and termination. Borrowers maynot be charged for any disclosure required by theact.

Initial Disclosures for Fixed-RateResidential Mortgage Transactions

When PMI is required for non-high-risk fixed-ratemortgages, the lender must provide to the borrowerat the time the transaction is consummated

• A written initial amortization schedule and

• A written notice that discloses

– The borrower’s right to request cancellation ofPMI and, based on the initial amortizationschedule, the date on which the loan balanceis scheduled to reach 80 percent of theoriginal value of the property;

– The borrower’s right to request cancellation onan earlier date, if actual payments bring theloan balance to 80 percent of the original valueof the property sooner than the date based onthe initial amortization schedule;

– That PMI will automatically terminate when theLTV ratio reaches 78 percent of the originalvalue of the property, and the date on whichthat is projected to occur (based on the initialamortization schedule); and

– That the act provides for exemptions to thecancellation and automatic-termination provi-sions for high-risk mortgages, and whetherthese exemptions apply to the borrower’sloan.

6. The limit for 2005 was $359,650.7. As of the date of this publication Fannie Mae and Freddie

Mac have not established such a category.



Initial Disclosures for Adjustable-RateResidential Mortgage Transactions

When PMI is required for non-high-risk adjustable-rate mortgages, the lender must provide to theborrower, at the time the transaction is consum-mated, a written notice that discloses

• The borrower’s right to request cancellation ofPMI on (1) the date on which the loan balance isfirst scheduled to reach 80 percent of the originalvalue of the property based on the amortizationschedules or (2) the date on which the balanceactually reaches 80 percent of the original valueof the property based on actual payments. Thenotice must also state that the servicer will notifythe borrower when either (1) or (2) occurs.

• That PMI will automatically terminate when theloan balance is first scheduled to reach 78 per-cent of the original value of the property basedon the amortization schedules. The notice mustalso state that the borrower will be notified whenPMI is terminated (or that termination will occurwhen the borrower becomes current onpayments).

• That there are exemptions to the cancellationand automatic-termination provisions for high-risk mortgages, and whether such exemptionsapply to the borrower’s loan

Initial Disclosures for High-RiskResidential Mortgage Transactions

When PMI is required for high-risk residentialmortgage transactions, the lender must provide tothe borrower a written notice stating that PMI willnot be required beyond the date that is themidpoint of the loan’s amortization schedule if, onthat date, the borrower is current on the paymentsas required by the terms of the loan. The lendermust provide this notice at consummation. Thelender need not provide disclosure of the termina-tion at 77 percent LTV for lender-defined high-riskmortgages.

Annual Disclosures forResidential Mortgage Transactions

For all residential mortgage transactions, includinghigh-risk mortgages for which PMI is required, theservicer must provide to the borrower an annualwritten statement that sets forth the rights of theborrower to cancel and terminate PMI and theaddress and telephone number that the borrowermay use to contact the servicer to determinewhether the borrower may cancel PMI.

Disclosures forExisting Residential Mortgages

For residential mortgages consummated beforethe act took effect (on July 29, 1999), if PMI wasrequired, the servicer must provide to the borroweran annual written statement that

• States that PMI may be canceled with theconsent of the lender or in accordance with statelaw and

• Provides the servicer’s address and telephonenumber so that the borrower can contact theservicer to determine whether the borrower maycancel PMI.

Notification upon Cancellation orTermination of PMI Relating toResidential MortgageTransactions


Not later than thirty days after PMI relating to aresidential mortgage transaction is canceled orterminated, the servicer must notify the borrower inwriting that

• PMI has terminated and the borrower no longerhas PMI and

• No further premiums, payments, or other fees aredue or payable by the borrower in connectionwith PMI.

Notice of Grounds, andTiming of Notice

If a servicer determines that a borrower in aresidential mortgage transaction does not qualifyfor cancellation or automatic termination of PMI, theservicer must provide to the borrower a writtennotice of the grounds relied on for making thatdetermination. If an appraisal was used in makingthe determination, the servicer must give the resultsof the appraisal to the borrower. If a borrower doesnot qualify for cancellation, the notice must beprovided not later than thirty days following the laterof (1) the date the borrower’s request for cancella-tion was received or (2) the date on which theborrower satisfied any of the mortgage holder’sevidence and certification requirements. If theborrower does not meet the requirements forautomatic termination, the notice must be providednot later than thirty days following the scheduledtermination date.



Disclosure Requirements forLender-Paid Mortgage Insurance

Definitions

• Borrower-paid mortgage insurance (BPMI)—PMIthat is required in connection with a residentialmortgage transaction, the payments for whichare made by the borrower

• Lender-paid mortgage insurance (LPMI)—PMIthat is required in connection with a residentialmortgage transaction, the payments for whichare made by a person other than the borrower

• Loan commitment—A prospective lender’s writ-ten confirmation of its approval of a prospectiveborrower’s application for a residential mortgageloan (including any applicable closing conditions)

Initial Notice

In the case of LPMI that is required in connectionwith a residential mortgage transaction, the lendermust provide a written notice to the borrower notlater than the date on which a loan commitment ismade. The written notice must advise the borrowerof the differences between LPMI and BPMI bynotifying the borrower that LPMI

• Differs from BPMI because it cannot be canceledby the borrower or automatically terminated asprovided under the act,

• Usually results in a mortgage having a higherinterest rate than it would in the case of BPMI,and

• Terminates only when the mortgage is refi-nanced, paid off, or otherwise terminated.

The notice must also contain

• A statement that both LPMI and BPMI havebenefits and disadvantages,

• A generic analysis of the costs and benefits of amortgage in the case of LPMI versus BPMI overa ten-year period, assuming prevailing interestand property appreciation rates, and

• A statement that LPMI may be tax deductible forpurposes of federal income taxes, if the borroweritemizes expenses for that purpose.

Notice at Termination Date

Not later than thirty days after the termination datethat would apply in the case of BPMI, the servicermust provide to the borrower a written noticeindicating that the borrower may wish to reviewfinancing options that could eliminate the require-ment for LPMI in connection with the mortgage.

Fees for Disclosures

As stated previously, no fee or other cost may beimposed on borrowers for the disclosures andnotifications that lenders and servicers are requiredto give them.

Civil Liability

Liability Dependent on Type of Action

Servicers, lenders, and mortgage insurers thatviolate the act are liable to borrowers as follows:

• Individual action—In the case of individualborrowers,

– Actual damages (including interest accruingon such damages),

– Statutory damages not to exceed $2,000,

– Costs of the action, and

– Reasonable attorney’s fees.

• Class action

In the case of a class action suit against adefendant that is subject to section 10 of theact (that is, an entity regulated by a federalbanking agency, the NCUA, or the Farm CreditAdministration),

– Such statutory damages as the court mayallow up to the lesser of $500,000 or 1 percentof the liable party’s net worth,



In the case of a class action suit against adefendant that is not subject to section 10 of the act(that is, an entity not regulated by a federal bankingagency, NCUA, or the Farm Credit Administration),

– Actual damages (including interest accruingon such damages),

– Statutory damages up to $1,000 per classmember but not to exceed the lesser of$500,000 or 1 percent of the liable party’sgross revenues,



Statute of Limitations

A borrower must bring an action under the actwithin two years after the borrower discovers theviolation.

Mortgage-Servicer Liability Limitation

A servicer is not liable for its failure to comply withthe requirements of the act if the servicer’s failure to



comply is due to the mortgage insurer’s or lender’sfailure to comply with the act.

Federal Preemption

For residential mortgage transactions, the provi-sions of the act supersede state laws, except forthose states that had PMI laws in effect as ofJanuary 2, 1998.8 Laws in these states are pre-empted only to the extent that they are lessprotective than the act. These states were permit-ted two years from the date of enactment (that is,until July 29, 2000) to amend their laws in light ofthe provisions of the act.

The provisions of the act also supersede anyconflicting provision contained in any agreementrelating to the servicing of a residential mortgageloan entered into by Fannie Mae, Freddie Mac, or

any private investor or note holder (or any succes-sor thereto).

Enforcement

The act directs the federal banking agencies toenforce the act under 12 USC 1818 or any otherauthority conferred upon the agencies by law. Theagencies are required to

• Notify applicable lenders or servicers of anyfailure to comply with the act,

• Require the lender or servicer, as applicable, tocorrect the borrower’s account to reflect the dateon which PMI should have been canceled orterminated under the act, and

• Require the lender or servicer, as applicable, toreturn unearned PMI premiums to a borrowerwho paid premiums after the date on which theborrower’s obligation to pay PMI premiumsceased under the act.

8. Eight states (California, Colorado, Connecticut, Maryland,Massachusetts, Minnesota, Missouri, and New York) had PMI lawsin effect prior to January 2, 1998. See 144 Cong. Rec. 5,432 (dailyed. July 14, 1998; statement by Rep. LaFalce).



Homeowners Protection ActExamination Objectives and Procedures


1. To determine the financial institution’s compli-ance with the Homeowners Protection Act of1998 (HOPA)

2. To assess the quality of the financial institu-tion’s policies and procedures for implement-ing the HOPA

3. To determine the reliance that can be placedon the financial institution’s internal controlsand procedures for monitoring the institution’scompliance with the HOPA

4. To initiate corrective action when violations ofHOPA are identified or when policies or internalcontrols are deficient


1. Through discussions with management andreview of available information, determine if theinstitution’s internal controls are adequate toensure compliance with the Homeowners Pro-tection Act. Consider the following:

a. Organization charts

b. Process flow charts

c. Policies and procedures

d. Loan documentation

e. Checklists

f. Training

g. Computer program documentation

2. Review any compliance audit materials, includ-ing workpapers and reports, to determinewhether

a. The institution’s procedures address allapplicable provisions of the HOPA

b. Steps are taken to follow up on previouslyidentified deficiencies

c. The procedures used include samplescovering all product types and decisioncenters

d. The compliance audit work performed isaccurate

e. Significant deficiencies and their causesare included in reports to management andto the board of directors

f. Corrective action is taken in a timely andappropriate manner

g. The frequency of compliance review isappropriate

3. Complete the HOPA worksheet by reviewingdisclosure and notification forms and thefinancial institution’s policies and procedures.As applicable, the forms should include

• Initial disclosures for (1) fixed-rate mort-gages, (2) adjustable-rate mortgages,(3) high-risk loans, and (4) lender-paidmortgage insurance

• Annual notices for (1) fixed- and adjustable-rate mortgages and high-risk loans and(2) existing residential mortgages

• Notices of (1) cancellation, (2) termination,(3) grounds for not canceling PMI,(4) grounds for not terminating PMI, (5) can-cellation date for adjustable-rate mort-gages, and (6) termination date for lender-paid mortgage insurance

4. Confirm that borrowers are not charged for anyrequired disclosures or notifications. (§ 7 of theHOPA)

5. Obtain and review a sample of recent writtenrequests from borrowers to cancel their PMI onnon-high-risk residential mortgage transac-tions. Verify that the insurance was canceledon either (1) the date on which the principalbalance of the loan was first scheduled toreach 80% of the original value of the propertybased on the initial amortization schedule (inthe case of a fixed-rate loan) or the amortiza-tion schedules (in the case of an adjustable-rate loan) or (2) the date on which the princi-pal balance of the loan actually reached 80%of the original value of the property based onactual payments, if all the applicable provi-sions in section 3(a) of the HOPA were sat-isfied (that is, good payment history and, ifrequired by the lender, evidence that thevalue of the mortgaged property did notdecline, and certification that the borrower’sequity was unencumbered by a subordinatelien). (§ 3(a))

6. Obtain and review a sample of non-high-riskPMI residential mortgage transactions. Verifythat PMI was terminated, based on the initialamortization schedule (in the case of a fixed-rate loan) or the amortization schedules (in thecase of an adjustable-rate loan), on the date onwhich the principal balance of the loan wasfirst scheduled to reach 78% of the originalvalue of the mortgaged property, assumingthat the borrower was current, or on the earliestdate thereafter on which the borrower becamecurrent. (§ 3(b))


7. Obtain a sample of PMI-covered residentialmortgage transactions (including high-riskloans, if any) that have reached the midpoint oftheir amortization period. Determine whetherPMI was terminated by the first day of thefollowing month if the loan was current. If theloan was not current at the midpoint, determinethat PMI was terminated by the first day of themonth following the day the loan becamecurrent. If at the time of the examination a loanat the midpoint is not current, determinewhether the financial institution is monitoringthe loan and has systems in place to ensurethat PMI is terminated when the borrowerbecomes current. (§§ 3(c) and 3(f)(2))

8. Determine if the financial institution has madeany lender-defined high-risk residential mort-gage transactions. If so, select a sample ofthese transactions and verify that PMI wascanceled, based on the initial amortizationschedule (in the case of a fixed-rate loan) orthe amortization schedules (in the case of anadjustable-rate loan), on the date on which theprincipal balance of the loan was scheduled toreach 77% of the original value of the mort-gaged property. (§ 3(f)(1)(B))

9. Obtain a sample of loans that have had PMIcanceled or terminated. For PMI loans can-celed upon the borrower’s request, determinethat the financial institution did not require anyPMI payments beyond 30 days of the borrow-er’s satisfying the evidence and certificationrequirements to cancel PMI. (§ 3(d)(1)) For

PMI loans that received automatic terminationor final termination, determine that the financialinstitution did not require any PMI paymentsbeyond 30 days of termination. (§§ 3(d)(2) and3(d)(3))

10. Using the samples in steps 5, 6, and 7,determine if the financial institution returnsunearned premiums, if any, to the borrowerwithin 45 days after cancellation or terminationof PMI. (§ 3(e)(1))

Conclusions

11. Summarize all violations.

12. If the violation (or violations) noted representsa pattern or practice, determine the root causeby identifying weaknesses in internal controls,compliance review, training, management over-sight, or other factors.

13. Identify action needed to correct violations andweaknesses in the institution’s compliancesystem, as appropriate.

14. Discuss findings with the institution’s manage-ment, and obtain a commitment for correctiveaction.

15. Determine if enforcement action is appropri-ate. If so, contact appropriate Reserve Bankpersonnel for guidance. Section 10(c) of theact contains a provision requiring restitution ofunearned PMI premiums.

Homeowners Protection Act: Examination Objectives and Procedures


Homeowners Protection ActWorksheet

1. For fixed-rate residential mortgage transactions, does the lender provide, atconsummation, written initial disclosures that include the following?

a. A written amortization schedule (§ 4(a)(1)(A)(i)) Yes No N/Ab. A notice that the borrower may submit a written request to cancel PMI as

of the date that, based on the initial amortization schedule, the princi-pal balance is first scheduled to reach 80% of the original value ofthe mortgaged property, regardless of the outstanding balance of themortgage; or such earlier date that, based on actual payments, theprincipal balance actually reaches 80% of the original value of the mort-gaged property, and provided that the borrower has a good paymenthistory and has satisfied the lender’s requirements that the value of themortgaged property has not declined and is unencumbered by subordi-nate liens (§§ 4(a)(1)(A)(ii)(I) and 4(a)(1)(A)(ii)(II)) Yes No N/A

c. The specific date, based on the initial amortization schedule, on whichthe loan balance is scheduled to reach 80% of the original value of themortgaged property (§ 4(a)(1)(A)(ii)(I)) Yes No N/A

d. A notice that PMI will automatically terminate on the date that, based onthe amortization schedule and regardless of the outstanding balanceof the mortgage, the principal balance is first scheduled to reach 78% ofthe original value of the mortgaged property, provided that the loan iscurrent (§ 4(a)(1)(A)(ii)(III)) Yes No N/A

e. The specific date the loan balance is scheduled to reach 78% LTV(§ 4(a)(1)(A)(ii)(III)) Yes No N/A

f. Notice that exemptions to the borrower’s right to cancel PMI andautomatic PMI termination exist for high-risk loans, and whether suchexemptions apply (§ 4(a)(1)(A)(ii)(IV)) Yes No N/A

2. For adjustable-rate residential mortgage transactions, does the lenderprovide, at consummation, written initial disclosures that include a notice thata. The borrower may submit a written request to cancel PMI as of the date

that, based on the amortization schedule(s) and regardless of theoutstanding balance of the mortgage, the principal balance is firstscheduled to reach 80% of the original value of the mortgaged property;or such earlier date that, based on actual payments, the principal balanceactually reaches 80% of the original value of the mortgaged property andthe borrower has a good payment history and has satisfied the lender’srequirements that the value of the mortgaged property has not declinedand is unencumbered by subordinate liens (§ 4(a)(1)(B)(i)) Yes No N/A

b. The servicer will notify the borrower when the cancellation date isreached, that is, when the loan balance represents 80% of the originalvalue of the mortgaged property (§ 4(a)(1)(B)(I)) Yes No N/A

c. PMI will automatically terminate when the loan balance is first scheduledto reach 78% of the original value of the mortgaged property, regardlessof the outstanding balance of the mortgage, and the loan is current(§ 4(a)(1)(B)(ii)) Yes No N/A

d. On the termination date the borrower will be notified of the termination orthe fact that PMI will be terminated when the loan is brought current(§ 4(a)(1)(B)(ii)) Yes No N/A


e. Exemptions to the borrower’s right to cancel PMI and automatic PMItermination exist for high-risk loans, and whether such exemptionsapply (§ 4(a)(1)(B)(iii)) Yes No N/A

3. Does the lender have established standards regarding the type of evidenceit requires borrowers to provide to demonstrate that the value of the mortgageproperty has not declined, and are they provided when a request forcancellation occurs? Yes No N/A

4. For high-risk residential mortgage transactions (as defined by the lender orFannie Mae or Freddie Mac), does the lender provide, at consummation,written initial disclosures that PMI will not be required beyond the midpoint ofthe amortization period of the loan, if the loan is current? (§ 4(a)(2)) Yes No N/A

5. If the financial institution acts as servicer for residential mortgage transac-tions, does it provide an annual written statement to the borrowers explainingtheir rights to cancel or terminate PMI and an address and telephone numberwhere the servicer can be contacted to determine whether they may cancelPMI? (§ 4(a)(3)) (Note: This disclosure may be included on the RESPAannual escrow account disclosure or the IRS interest payment disclosures.) Yes No N/A

6. If the financial institution acts as servicer, does it provide an annual writtenstatement to each borrower who entered into a residential mortgage prior toJuly 29, 1999, that includes

a. A statement that PMI may, under certain circumstances, be canceled bythe borrower with the consent of the lender or in accordance withapplicable state law (§ 4(b)(1)) Yes No N/A

b. An address and telephone number that the borrower may use to contactthe servicer to determine whether the borrower may cancel thePMI (§ 4(b)(2)) Yes No N/A

(Note: This disclosure may be included on the RESPA annual escrow accountdisclosure or the IRS interest payment disclosure.)

7. If the financial institution acts as servicer for residential mortgage transac-tions, does it provide borrowers written notice within 30 days after the date ofcancellation or termination of PMI that the borrower no longer has PMI andthat no further PMI payments or related fees are due? (§ 5(a)) Yes No N/A

8. If the financial institution services residential mortgage transactions, does itreturn all unearned PMI premiums to the borrower within 45 days of eithertermination upon the borrower’s request or automatic termination under theHOPA? (§ 3(e)) Yes No N/A

9. If the financial institution acts as servicer for residential mortgage transac-tions, does it provide borrowers written notice of the grounds it relied on(including the results of any appraisal) to deny a borrower’s request for PMIcancellation no later than 30 days after the date the request is received orthe date on which the borrower satisfies any evidence and certificationrequirements established by the lender, whichever is later? (§§ 5(b)(1) and5(b)(2)(A)) Yes No N/A

10. If the financial institution acts as servicer for residential mortgage transac-tions, does it provide borrowers written notice of the grounds it relied on(including the results of any appraisal) in refusing to automatically termi-nate PMI not later than 30 days after the scheduled termination date?(§ 5(b)(2)(B)) Yes No N/A

Homeowners Protection Act: Worksheet


(Note: The scheduled termination date is reached when, based on the initialamortization schedule (in the case of a fixed-rate loan) or the amortizationschedules (in the case of an adjustable-rate loan), the principal balance ofthe loan is first scheduled to reach 78% of the original value of the mortgagedproperty, assuming that the borrower is current on that date, or the earliestdate thereafter on which the borrower becomes current.)

11. If the financial institution acts as a servicer for adjustable-rate residentialmortgage transactions, does it notify borrowers that the cancellation date hasbeen reached? (§ 4(a)(1)(B)(i)) Yes No N/A

12. If the financial institution acts as a servicer for adjustable-rate residentialmortgage transactions, does it notify the borrowers on the termination datethat PMI has been canceled or will be canceled as soon as the borrower iscurrent on loan payments? (§ 4(a)(1)(B)(ii)) Yes No N/A

13. If the financial institution requires ‘‘lender paid mortgage insurance’’ (LPMI)for residential mortgage transactions, does it provide a written notice to aprospective borrower on or before the loan commitment date that includesthe following?

a. A statement that LPMI differs from borrower-paid mortgage insurance(BPMI) in that the borrower may not cancel LPMI, while BPMI is subject tocancellation and automatic termination under the HOPA (§ 6(c)(1)(A)) Yes No N/A

b. A statement that LPMI usually results in a mortgage with a higher interestrate than BPMI (§ 6(c)(1)(B)(i)) Yes No N/A

c. A statement that LPMI terminates only when the transaction is refinanced,paid off, or otherwise terminated (§ 6(c)(1)(B)(ii)) Yes No N/A

d. A statement that both LPMI and BPMI have benefits and disadvantages,and a generic analysis reflecting the differing costs and benefits of eachover a 10-year period, assuming prevailing interest and propertyappreciation rates (§ 6(c)(1)(C)) Yes No N/A

e. A statement that LPMI may be tax deductible on federal income taxes ifthe borrower itemizes expenses for that purpose (§ 6(c)(1)(D)) Yes No N/A

14. If the lender requires LPMI for residential mortgage transactions and thefinancial institution acts as servicer, does it notify the borrower in writing within30 days of the termination date that would have applied, if it were a BPMItransaction, that the borrower may wish to review financing options that couldeliminate the requirement for PMI? (§ 6(c)(2)) Yes No N/A

15. Does the financial institution prohibit borrower-paid fees for the disclosuresand notifications required under the HOPA? (§ 7) Yes No N/A

Homeowners Protection Act: Worksheet


Homeownership Counseling

Background

Section 106(c)(5) of the Housing and UrbanDevelopment Act of 1968 (12 USC 1701x(c)(5))provides for homeownership counseling notifica-tion by creditors to eligible homeowners. The acthas been amended at various times, most recentlyin November 2001 when the Departments ofVeterans Affairs and Housing and Urban Develop-ment, and Independent Agencies AppropriationsAct of 2002 (Pub. L. 107-73) was enacted.1 Section205 of that act repealed the previous sunsetprovision.

Applicability

All creditors that service loans secured by amortgage or lien on a single-family residence(home loans) are subject to the homeownershipcounseling notification requirements. Home loansinclude conventional mortgage loans and loansinsured by the Department of Housing and UrbanDevelopment (HUD).

Requirements

Notice Requirements

A creditor must provide notification of the availabil-ity of homeownership counseling to a homeownerwho is eligible for counseling and who fails to payany amount by the due date under the terms of thehome loan.2

Eligibility

A homeowner is eligible for counseling if

• The loan is secured by the homeowner’s princi-pal residence,

• The home loan is not assisted by the FarmersHome Administration, and

• The homeowner is, or is expected to be, unableto make payments, correct a home loan delin-quency within a reasonable time, or resume fullhome loan payments due to a reduction in thehomeowner’s income because of

– An involuntary loss of, or reduction in, thehomeowner’s employment, the homeowner’sself-employment, or income from the pursuit ofthe homeowner’s occupation or

– Any similar loss or reduction experienced byany person who contributes to the homeown-er’s income.

Contents of Notice

The notice must

• Notify the homeowner of the availability of anyhomeownership counseling offered by the credi-tor and

• Provide either a list of HUD-approved nonprofithomeownership counseling organizations or thetoll-free number HUD has established throughwhich a list of such organizations can beobtained.3

Timing of Notice

The notice must be given to a delinquent home-owner borrower no later than forty-five days afterthe date on which the homeowner becomesdelinquent. If, within the forty-five-day period, theborrower brings the loan current again, no notifica-tion is required.

Definitions

For purposes of these requirements, the followingdefinitions apply:

• Creditor—A person or entity that is servicing ahome loan on behalf of itself or another person orentity

• Home loan—A loan secured by a mortgage orlien on residential property

• Homeowner—A person who is obligated under ahome loan

• Residential property—A single-family residence,including a single-family unit in a condominiumproject, a membership interest and occupancyagreement in a cooperative housing project, anda manufactured home and the lot on which thehome is situated

1. Section 577 of the National Affordable Housing Act of 1990(Pub. L. 101-625) extended the homeownership counselingprovisions to September 30, 1992; section 162 of the Housing andCommunity Development Act of 1992 (Pub. L. 102-550) extendedthe provisions to September 30, 1994; and section 594 of theDepartments of Veterans Affairs and Housing and Urban Devel-opment, and Independent Agencies Appropriations Act of 1999(Pub. L. 105-276) extended the provisions to September 30, 2000.

2. The FFIEC Consumer Compliance Task Force has requestedclarification from HUD on HUD’s current position regarding noticerequirements related to first-time homebuyers. The interagencyexamination procedures included in this chapter are currentlylimited to determining compliance with the act’s notice provisionsrelated to delinquent borrowers. However, should a response fromHUD to the task force indicate that notices to first-time homebuy-ers should be provided under the act, the examination procedureswill be expanded to cover notices to first-time homebuyers. 3. The toll-free number is 1-800-569-4287.

Consumer Compliance Handbook Homeownership • 1 (1/06)

Homeownership CounselingExamination Objectives and Procedures


To determine whether the financial institution hasestablished procedures regarding homeownershipcounseling notification requirements in order toensure that it is in compliance with the provisions ofsection 106(c)(5) of the Housing and UrbanDevelopment Act of 1968.


1. Determine if the financial institution is informingeligible homeowners, within 45 days of initialloan default, of (1) the availability of any

homeownership counseling offered by the credi-tor and (2) the availability of any homeownershipcounseling by nonprofit organizations approvedby HUD, or the toll-free telephone numberthrough which the homeowner can obtain a listof such organizations.


Homeownership CounselingExamination Checklist

1. Does the financial institution notify eligible homeowners, within 45 days ofinitial loan default, of any homeownership counseling the institution (creditor)provides? Yes No

2. Does the financial institution provide eligible homeowners with the names ofnonprofit organizations approved by HUD or the toll-free telephone number tocall to obtain a list of such organizations? Yes No



Background

The Real Estate Settlement Procedures Act of 1974(RESPA) (12 USC 2601-17), which is implementedby the Department of Housing and Urban Devel-opment’s Regulation X (24 CFR 3500), becameeffective in June 1975. The act requires lenders,mortgage brokers, and servicers of home loans toprovide borrowers with pertinent and timely disclo-sures about the nature and costs of the real estatesettlement process. It also protects borrowersagainst certain abusive practices, such as kick-backs, and places limitations on the use of escrowaccounts.

Since its enactment, RESPA has been amendedseveral times to cover, among other things, subor-dinate loans; required disclosures for the transfer,sale, or assignment of mortgage servicing; rules formortgage escrow accounts, including the account-ing method to be used for these accounts; requireddisclosures; and the established formats and pro-cedures for initial and annual escrow statements.

Coverage—Section 3500.5(a)

RESPA is applicable to all federally related mort-gage loans. Federally related mortgage loans areloans, including refinances, secured by a first orsubordinate lien on residential real property uponwhich

• A one- to four-family structure is located or is tobe constructed using proceeds of the loan(including individual units of condominiums andcooperatives) or

• A manufactured home is located or is to beconstructed using proceeds of the loan

In addition, the federally related mortage loan mustmeet one of the following conditions:

• Made by a lender,1 creditor,2 or dealer3

• Made by or insured by an agency of the federalgovernment

• Made in connection with a housing or urbandevelopment program administered by anagency of the federal government

• Made by and intended to be sold by theoriginating lender or creditor to FNMA, GNMA, orFHLMC (or its successor)4

• Subject of a home equity conversion mortgageor a reverse mortgage issued by a lender orcreditor subject to the regulation

• Made by a lender, dealer, or creditor subject tothe regulation and used in whole or in part tofund an installment sales contract, land contract,or contract for deed on otherwise qualifyingresidential property

Exemptions—Section 3500.5(b)

The following transactions are exempt from RESPA:

• A loan on property of twenty-five acres or more(whether or not a dwelling is located on theproperty)

• A loan primarily for business, commercial, oragricultural purposes (as defined in section226.3(a)(1) of Regulation Z)

• A temporary loan, such as a construction loan(The exemption does not apply if the loan is usedas, or may be converted to, permanent financingby the same financial institution.) If the lenderissues a commitment for permanent financing,the loan is covered. A construction loan with aterm of two years or more is covered unless it ismade to a bona fide contractor. ‘‘Bridge’’ and‘‘swing’’ loans are not covered.

• A loan secured by vacant or unimproved prop-erty when no proceeds of the loan will be used toconstruct a one- to four-family residential struc-ture. If the proceeds will be used to locate amanufactured home or construct a structurewithin two years from the date of settlement, theloan is covered.

• An assumption, unless the mortgage instrumentsrequire lender approval for the assumption andthe lender actually approves the assumption

• A renewal or modification when the originalobligation (note) is still in effect but modified

• A bona fide transfer of a loan obligation in thesecondary market (However, the mortgageservicing transfer disclosure requirements of

1. A lender includes a financial institution either regulated by orwhose deposits or accounts are insured by any agency of thefederal government.

2. A creditor is defined in section 103(f) of the Consumer CreditProtection Act (15 USC 1602(f)). RESPA covers any creditor thatmakes or invests in residential real estate loans aggregating tomore than $1,000,000 a year.

3. Dealer is defined in Regulation X as a seller, contractor, orsupplier of goods or services. Dealer loans are covered by RESPAif the obligations are to be assigned before the first payment isdue to any lender or creditor otherwise subject to the regulation.

4. FNMA, Federal National Mortgage Association; GNMA,Government National Mortgage Association; FHLMC, FederalHome Loan Mortgage Corporation.

Consumer Compliance Handbook RESPA • 1 (1/06)

24 CFR 3500.21 still apply.) Mortgage brokertransactions that are table-funded (that is, theloan is funded by a contemporaneous advanceof loan funds and an assignment of the loanto the person advancing the funds) are notsecondary-market transactions and therefore arecovered by RESPA.

The exemption does not apply if there is a transferof title to the property.

Requirements

Special Information Booklet (§ 3500.6)

A financial institution is required to provide aborrower with a copy of the ‘‘special informationbooklet’’ at the time a written application is sub-mitted or no later than three business days after theapplication is received. If the application is deniedbefore the end of the three-business-day period,the institution is not required to provide the booklet.If the borrower uses a mortgage broker, the brokerrather than the institution must provide the booklet.

• An application includes the submission of aborrower’s financial information, either written orcomputer generated, for a credit decision on afederally related mortgage loan. To be consid-ered a written application, the submission muststate or identify a specific property. The subse-quent addition of an identified property to thesubmission converts the submission to an appli-cation for a federally related mortgage loan.(section 3500.2(b))

• A financial institution that complies with Regula-tion Z for open-end home equity plans is deemedto have complied with this section of theregulation.

• The booklet does not need to be given forrefinancing transactions, closed-end subordinate-lien mortgage loans, or reverse mortgage trans-actions or for any other federally related mort-gage loan not intended for the purchase of aone- to four-family residential property.

Part 1 of the booklet describes the settlementprocess and the nature of charges and suggestsquestions to be asked of lenders, attorneys, andothers to clarify what services they will provide forthe charges quoted. It also contains information onthe rights and remedies available under RESPA andalerts borrowers to unfair or illegal practices.

Part 2 contains an itemized explanation ofsettlement services and costs, as well as sampleforms and worksheets for comparing costs. Theappendix in the booklet has a list of consumerliterature on home purchasing, maintenance pro-tection, and related topics.

Good Faith Estimates of the Amount orRange of Settlement Costs (§ 3500.7)

A financial institution must provide, in a clear andconcise form, a good faith estimate (GFE) of theamount of settlement charges the borrower is likelyto incur. The GFE must include all charges that willbe listed in section L of the HUD-1 settlementstatement and must be provided no later than threebusiness days after the written application isreceived. The estimate for each settlement servicemay be an estimate of the dollar amount or a rangeof dollar amounts. However the estimate is stated(amount or range), for each charge the estimate(1) must bear a reasonable relationship to theborrower’s ultimate cost for each settlement chargeand (2) must be based on experience in the localityor area in which the property involved is located.A suggested form is set forth in appendix C toRegulation X. If the application is denied before theend of the three-business-day period, the institutionis not required to provide a GFE.

• A financial institution that complies with Regula-tion Z for open-end home equity plans is deemedto have complied with this section.

• For ‘‘no cost’’ or ‘‘no point’’ loans, the GFE mustdisclose any payments to be made to affiliated orindependent settlement service providers. Thesepayments should be shown as P.O.C. (paidoutside of closing).

• For dealer loans, the institution is responsible forproviding the GFE directly to the consumer or forensuring that it is provided by the dealer.

• For brokered loans, if the mortgage broker is theexclusive agent of the institution, either theinstitution or the broker must provide the GFEwithin three business days after the brokerreceives or prepares the application. When thebroker is not the exclusive agent of the institution,the institution is not required to provide the GFEif the broker has already provided it. However,the funding lender must ascertain that the GFEhas been delivered.

If the financial institution requires the use of aparticular settlement service provider and requiresthe borrower to pay all or a portion of the cost ofthose services, the institution must include with theGFE the following disclosures:

• A statement that use of the provider is requiredand that the estimate is based on the charges ofthe designated provider

• The name, address, and telephone number ofthe designated provider

• A description of the nature of any relationshipbetween each such provider and the institu-


2 (1/06) • RESPA Consumer Compliance Handbook

tion. A relationship exists if any of the followingapply:

– The provider is an associate of the institution,as defined in section 3(8) of RESPA (12 USC2602(8))

– The provider has maintained an account withthe institution or had an outstanding loan orcredit arrangement with the institution withinthe past twelve months

– The institution has repeatedly used or requiredborrowers to use the provider’s services withinthe past twelve months

• A statement explaining that except for a providerthat is the institution’s chosen attorney, credit-reporting agency, or appraiser, if the institutionhas an affiliated business relationship with theprovider, the institution may not require use ofthat provider (24 CFR 3500.15)

If the institution maintains a controlled list ofrequired providers (five or more for each discreteservice) or relies on a list maintained by others andat the time of the application has not decided whichprovider will be selected, the institution maycomply with this section by

• Providing a written statement that the institutionwill require a particular provider from an approvedlist and

• Disclosing in the GFE the range of costs for therequired providers and providing the name of thespecific provider and the actual cost on the HUDsettlement statement

If the list contains fewer than five providers ofservice, the names, addresses, telephone num-bers, and costs are required along with anexplanation of the business relationship.

Uniform Settlement Statements(HUD-1 and HUD-1A) (§ 3500.8)

The HUD-1 and HUD-1A settlement statementsmust be completed by the person (settlementagent) conducting the closing and must conspicu-ously and clearly itemize all charges related to thetransaction. The HUD-1 is used for transactions inwhich there is a borrower and a seller. It may alsobe used for transactions in which there is a bor-rower but no seller (refinancings and subordinate-lien loans) by completing the borrower’s side of thestatement; alternatively, the HUD-1A may be usedfor borrower-only transactions.

No settlement statement is required for home equityplans subject to the Truth in Lending Act andRegulation Z.

Appendix A to Regulation X gives instructions forcompleting the two forms.

Printing and Duplicationof Settlement Statements(§ 3500.9)

Financial institutions have numerous options forlayout and format in reproducing the HUD-1 andHUD-1A settlement statements. The following varia-tions do not require prior HUD approval: size ofpages; tint or color of pages; size and style of typeor print; spacing; printing on separate pages, thefront and back of a single page, or one continuouspage; use of multicopy tear-out sets; printing onrolls for computer purposes; addition of signaturelines; and translation into any language. Otherchanges may be made only with the approval of theSecretary of Housing and Urban Development.

One-Day Advance Inspectionof Settlement Statements(§ 3500.10)

Upon request by the borrower, the HUD-1 orHUD-1A settlement statement must be completedand made available for inspection during the busi-ness day immediately preceding the day of settle-ment. The statement must set forth those itemsknown at that time by the person conducting theclosing.

Delivery of Settlement Statements(§§ 3500.10(a) and 3500.10(b))

The completed HUD-1 or HUD-1A settlementstatement must be mailed or delivered to theborrower, the seller (if there is one), and the lender(if the lender is not the settlement agent) or theiragents at or before settlement. However, the bor-rower may waive the right of delivery by execut-ing a written waiver at or before settlement. If theborrower or the borrower’s agent does not attendthe settlement, the settlement statement must bemailed or delivered as soon as practicable aftersettlement.

Retention of Settlement Statements(§ 3500.10(e))

The financial institution must retain each completedHUD-1 or HUD-1A settlement statement and relateddocuments for five years after settlement, unlessthe institution disposes of its interest in the mort-gage and does not service the mortgage. If theloan is transferred, the institution must provide acopy of the statement to the owner or servicer ofthe mortgage as part of the transfer. The owner orservicer must retain the statement for the remainderof the five-year period.



Prohibition of Fees for PreparingFederal Disclosures—Section 3500.12

For loans subject to RESPA, no fee may be chargedfor preparing the settlement statement or theescrow account statement or any disclosuresrequired by the Truth in Lending Act.

Prohibition against Kickbacks andUnearned Fees—Section 3500.14

Any person who gives or receives a fee or a thing ofvalue (a payment, commission, fee, gift, or specialprivilege) for the referral of settlement business is inviolation of section 8 of RESPA. Payments in excessof the reasonable value of goods provided orservices rendered are considered kickbacks.Appendix B to Regulation X provides guidance onthe meaning and coverage of the prohibitionagainst kickbacks and unearned fees.

Penalties and Liabilities

Civil and criminal liability is provided for violatingthe prohibition against kickbacks and unearnedfees, including

• Civil liability to the parties affected equal to threetimes the amount of any charge paid for suchsettlement service

• The possibility that the costs associated with anycourt proceeding, together with reasonableattorney’s fees, could be recovered

• A fine of not more than $10,000 or imprisonmentfor not more than one year, or both, for eachviolation

Affiliated Business Arrangements—Section 3500.15

If a financial institution has either an affiliaterelationship or a direct or beneficial ownershipinterest of more than 1 percent in a provider ofsettlement services and the lender directly orindirectly refers business to the provider, thisrelationship is an affiliated business arrangement.An affiliated business arrangement is not a viola-tion of section 8 of RESPA or of section 3500.14of Regulation X if the following conditions aresatisfied:

• Prior to the referral, the person making eachreferral has provided, to each person whosebusiness is referred, an affiliated businessarrangement disclosure statement (Appendix Dto Regulation X). This disclosure must specifyboth

– The nature of the relationship (explaining theownership and financial interest) between theprovider and the financial institution and

– The estimated charge or range of chargesgenerally made by such provider

This disclosure must also be provided on aseparate piece of paper either at the time of loanapplication, or with the GFE, or at the time of thereferral.

Generally, the institution may not require the useof such a provider. The institution may, however,require a buyer, borrower, or seller to pay for theservices of an attorney, credit-reporting agency, orreal estate appraiser chosen by the institution torepresent its interest. The only thing of value theinstitution may receive is a return on an ownershipor franchise interest or a payment otherwise per-mitted by RESPA.

Title Companies—Section 3500.16

Financial institutions that hold legal title to theproperty being sold are prohibited from requiringborrowers, either directly or indirectly, to use aparticular title company. Civil liability for violatingthis provision is an amount equal to three times thetotal of all charges made for such title insurance.

Escrow Accounts—Section 3500.17

HUD’s escrow accounting rule, known as aggre-gate accounting, establishes formats and pro-cedures for initial and annual escrow accountstatements.

Under the rule, the amount of escrow funds thatmay be collected at settlement or upon creation ofan escrow account is restricted to an amountsufficient to pay charges, such as taxes andinsurance, that are attributable to the period fromthe date such payments were last paid until theinitial payment date. Throughout the life of anescrow account, the servicer may charge theborrower a monthly sum equal to one-twelfth of thetotal annual escrow payments that the servicerreasonably anticipates paying from the account.In addition, the servicer may add an amount tomaintain a cushion no greater than one-sixth of theestimated total annual payment from the account.

Escrow Account Analysis(§§ 3500.17(c)(2) and 3500.17(c)(3))

Before establishing an escrow account, a servicermust conduct an analysis to determine the periodicpayments and the amount to be deposited. Theservicer must use an escrow disbursement date



that is on or before the earlier of (1) the deadline totake advantage of discounts, if available, or (2) thedeadline to avoid a penalty. The servicer must alsoanalyze each account at the completion of thecomputation year to determine the borrower’smonthly payments for the next computation year.

Transfer of Servicing (§ 3500.17(e))

If a new servicer changes either the monthlypayment amount or the accounting method usedby the former servicer, it must provide the borrowerwith an initial escrow account statement within sixtydays of the date of transfer. When the new servicerprovides an initial escrow account statement, itmust use the effective date of the transfer ofservicing to establish the new escrow accountcomputation year. In addition, if the new servicerretains the monthly payments and accountingmethod used by the former servicer, the newservicer may continue to use the same compu-tation year established by the former servicer ormay choose a different one, using a short-yearstatement.

Shortages, Surpluses, and DeficienciesRequirements (§ 3500.17(f))

The servicer must conduct an annual escrowaccount analysis to determine whether a surplus,shortage, or deficiency exists, as defined in section3500.17(b).

If the escrow account analysis discloses asurplus, the servicer must, within thirty days fromthe date of the analysis, refund the surplus to theborrower if the surplus is $50 or more. If the surplusis less than $50, the servicer may refund suchamount to the borrower or credit the amountagainst the next year’s escrow payments. Theseprovisions apply as long as the borrower’s mort-gage payment is current at the time of the analysis.

If the escrow account analysis discloses ashortage of less than one month’s escrow pay-ments, the servicer may do any of the following:

• Allow the shortage to exist and do nothing tochange it

• Require the borrower to repay the shortageamount within thirty days

• Require the borrower to repay the shortageamount in equal monthly payments over at leasta twelve-month period

If the analysis shows a shortage more than orequal to one month’s escrow payment, the servicermay do either of the following:

• Allow the shortage to exist and do nothing tochange it

• Require the borrower to repay the shortage inequal monthly payments over at least a twelve-month period

If the escrow account analysis discloses adeficiency, the servicer may require the borrower topay additional monthly deposits to the account toeliminate the deficiency. If the deficiency is lessthan one month’s escrow account payment, theservicer may do any of the following:

• Allow the deficiency to exist and do nothing tochange it

• Require the borrower to repay the deficiencywithin thirty days

• Require the borrower to repay the deficiency intwo or more equal monthly payments

If the deficiency is equal to or more than onemonth’s escrow payment, the servicer may doeither of the following:

• Allow the deficiency to exist and do nothing tochange it

• Require the borrower to repay the deficiency intwo or more equal monthly payments

These provisions for eliminating deficiencies andshortages apply as long as the borrower’s mort-gage payment is current at the time of the escrowaccount analysis.

A servicer must notify the borrower at least onceduring the escrow account computation year if ashortage or deficiency exists in the account.

Initial Escrow Account Statement(§ 3500.17(g))

After analyzing each escrow account, a servicermust submit an initial escrow account statement tothe borrower at settlement or within forty-fivecalendar days of settlement for escrow accountsthat are established as a condition of the loan. Theinitial escrow account statement must include themonthly mortgage payment; the portion going toescrow; itemized estimated taxes, insurance pre-miums, and other charges; the anticipated disburse-ment dates of those charges; the amount of thecushion; and a trial running balance.

Annual Escrow Account Statement(§ 3500.17(i))

A servicer must submit to the borrower an annualstatement for each escrow account within thirtydays of the completion of the computation year. Theservicer must conduct an escrow account analysisbefore submitting the annual statement to theborrower.



The annual escrow account statement mustcontain an account history; a projection for the nextyear; the amount of the current mortgage paymentand the portion going to escrow; the amount of thepast year’s monthly mortgage payment and theportion that went to escrow; the total amount paidinto the escrow account during the past year; theamount paid from the account for taxes, insurancepremiums, and other charges; the balance at theend of the period; an explanation of how thesurplus, shortage, or deficiency is being handled;and, if applicable, the reasons why the estimatedlow monthly balance was not reached.

Short-Year Statements (§ 3500.17(i)(4))

A short-year escrow account statement may beissued to end one escrow account computationyear and establish the beginning date of the newcomputation year. Such a statement may beprovided upon the transfer of servicing and isrequired upon loan payoff. The statement must besubmitted to the borrower within sixty days afterreceipt of the payoff funds.

Timely Payments (§ 3500.17(k))

The servicer must pay escrow disbursements bythe disbursement date. In calculating the disburse-ment date, the servicer must use a date on orbefore the earlier of the deadline to take advantageof discounts, if available, or the deadline to avoid apenalty.

Recordkeeping (§ 3500.17(l))

The servicer must keep easily retrievable recordsthat reflect the servicer’s handling of each borrow-er’s escrow account. The records for each escrowaccount must be maintained for at least five yearsafter the servicer last serviced the account.

Penalties (§ 3500.17(m))

Failure to provide an initial or annual escrowaccount statement to a borrower can result in thefinancial institution’s or servicer’s being assessed acivil penalty of $55 for each such failure, with thetotal for any twelve-month period not to exceed$110,000. If the violation is due to intentionaldisregard, the penalty is $110 for each failure, withno annual cap on liability.

Mortgage Servicing Disclosures—Section 3500.21

Disclosures related to the transfer of mortgageservicing are required for first mortgage liens,

including all refinancing transactions. Subordinate-lien loans and open-end lines of credit (homeequity plans) that are covered under the Truth inLending Act and Regulation Z are exempt from thissection of Regulation X.

A financial institution that receives an applicationfor a federally related mortgage loan is required toprovide the servicing disclosure statement to theborrower at the time of application if there is aface-to-face interview; otherwise, it must providethe statement within three business days afterreceiving the application.

When a federally related mortgage loan isassigned, sold, or transferred, the transferor (thecurrent servicer) must provide a disclosure at leastfifteen days before the effective date of the transfer.The same notice from the transferee (the newservicer) must be provided not more than fifteendays after the effective date of the transfer. Bothnotices may be combined in one notice if deliveredto the borrower at least fifteen days before theeffective date of the transfer. The disclosure mustinclude

• The effective date of the transfer

• The name, address for consumer inquiries, andtoll-free or collect-call telephone number of thetransferee

• A toll-free or collect-call telephone number for anemployee of the transferor who can be contactedby the borrower to answer servicing questions

• The date on which the transferor will ceaseaccepting payments relating to the loan and thedate on which the transferee will begin acceptingsuch payments. The dates must be either thesame or consecutive dates.

• Any information concerning the effect of thetransfer on the terms or continued availability ofmortgage life or disability insurance or any othertype of optional insurance, and any action theborrower must take to maintain coverage

• A statement that the transfer does not affect theterms or conditions of the mortgage (except asrelated to servicing)

• A statement of the borrower’s rights in connec-tion with complaint resolution

During the sixty-day period beginning on the dateof transfer, no late fee may be imposed on aborrower who has made the payment to the wrongservicer.

The following transfers are not considered anassignment, sale, or transfer of mortgage loanservicing for purposes of this requirement if there isno change in the payee, the address to whichpayment must be delivered, the account number,or the amount of payment due:



• Transfers between affiliates

• Transfers resulting from mergers or acquisitionsof servicers or subservicers

• Transfers between master servicers, when thesubservicer remains the same

Servicers Must Respond toBorrower Inquiries (§ 3500.21(e))

A financial institution servicer must respond to aborrower’s qualified written inquiry and must takeappropriate action within established time framesafter receiving the inquiry. Generally, the institutionmust provide written acknowledgment within twentybusiness days and must take certain specifiedactions within sixty business days after receivingthe inquiry. The inquiry must include the name andaccount number of the borrower and the reasonsthe borrower believes the account is in error.

During the sixty-business-day period followingreceipt of a qualified written request from aborrower relating to a disputed payment, a financialinstitution may not provide information to anyconsumer reporting agency regarding any overduepayment relating to this period or to the qualifiedwritten request.

Relationship to State Law (§ 3500.21(h))

Financial institutions complying with the mortgageservicing transfer disclosure requirements of RESPA

are considered to have complied with any state lawor regulation requiring notice to a borrower at thetime of application or transfer of a mortgage.

State laws are not affected by the act, except tothe extent that they are inconsistent, and then onlyto the extent of the inconsistency. The Secretary ofHousing and Urban Development is authorized,after consulting with the appropriate federal agen-cies, to determine whether such inconsistenciesexist.

Penalties and Liabilities (§ 3500.21(f))

Failure to comply with any provision of section3500.21 of Regulation X will result in actualdamages and, if there is a pattern or practice ofnoncompliance, any additional damages in anamount not to exceed $1,000. In class actioncases, each borrower will receive actual damagesand additional damages, as the court allows, up to$1,000 for each member of the class, except thatthe total amount of damages in any class actionmay not exceed the lesser of $500,000 or 1 percentof the net worth of the servicer. In addition, in anysuccessful action, the entity that failed to complywill be liable for the costs of the action andreasonable attorney’s fees.



Real Estate Settlement Procedures ActExamination Objectives and Procedures


1. To determine if the financial institution hasestablished procedures to ensure compliancewith RESPA

2. To determine that the financial institution doesnot engage in any practices prohibited byRESPA, such as kickbacks, payment or receiptof referral fees or unearned fees, or excessiveescrow assessments

3. To determine if the special information booklet,good faith estimate, uniform settlement state-ment (form HUD-1 or HUD 1A), mortgageservicing transfer disclosures, and otherrequired disclosures are in a form that com-plies with Regulation X, are properly com-pleted, and are provided to borrowers withinprescribed time periods

4. To determine if the institution is submitting therequired initial and annual escrow accountstatements to borrowers, as applicable, andis complying with established limitations onescrow account arrangements

5. To determine whether the institution is respond-ing to borrower inquiries for information relat-ing to the servicing of their loans in compliancewith the provisions of RESPA


If the financial institution has loans covered by theact, determine whether the institution’s policies,practices, and procedures are in compliance.

1. Review the types of loans covered by RESPAand applicable exemptions.

2. Review the special information booklet, goodfaith estimate (GFE) form, uniform settlementstatement form (HUD-1 or HUD-1A), mortgageservicing transfer disclosure forms, and affili-ated business arrangement disclosure form forcompliance with the requirements of Regula-tion X. Review model forms in the appendixesto the regulation and after section 3500.21.

3. Review written loan policies and operatingprocedures in connection with federally relatedmortgage loans and discuss them with institu-tion personnel.

4. Interview mortgage lending personnel todetermine

a. The identity of persons or entities referringfederally related mortgage loan business

b. The nature of services provided by referralsources, if any

c. The settlement service providers used bythe institution

d. When the special information booklet isgiven

e. The timing of the good faith estimate, andhow fee information is determined

f. Any providers whose services are requiredby the institution

g. How borrower inquiries regarding loanservicing are handled, and within what timeframes

h. Whether escrow arrangements exist formortgage loans

5. Assess the overall level of knowledge andunderstanding of mortgage lending personnel.

Special Information Booklet

6. Determine through discussion with manage-ment and review of credit files whether thespecial information booklet, if required, isprovided within three business days after thefinancial institution or broker receives a writtenapplication for a loan. (§ 3500.6(a)(1))

Good Faith Estimate

7. Determine whether the financial institutionprovides a good faith estimate of charges forsettlement services, if required, within threebusiness days after receipt of a written appli-cation. (§ 3500.7(a))

8. Review appendix C to Regulation X to deter-mine if the good faith estimate appears in asimilar form and contains the following re-quired elements: (§§ 3500.7(c) and 3500.7(d))

a. The lender’s name—If the GFE is beinggiven by a broker, instead of the lender, theGFE must contain a legend in accordancewith appendix C.

b. An estimate of all charges listed in section Lof the HUD-1 or HUD-1A, expressed aseither a dollar amount or a range—For ‘‘nocost’’ or ‘‘no point’’ loans, the charges to beshown on the GFE include payments to bemade to affiliated or independent settle-ment service providers (shown on HUD-1 orHUD-1A as ‘‘paid outside of closing’’).

c. An estimate of any other charge the bor-


rower will pay based on common practicein the locality of the mortgaged property

9. Review the HUD-1 or HUD-1A prepared inconnection with the lending transaction todetermine if amounts shown on the GFE arereasonably similar to fees actually paid by theborrower. (§ 3500.7(c)(2)) (Note: The definitionof ‘‘reasonably’’ is subject to interpretation byHUD.)

10. Determine through review of the institution’sgood faith estimates, HUD-1 and HUD-1Aforms, and discussions with managementwhether the financial institution requires theborrower to use a particular individual or firmfor settlement services. (§ 3500.7(e))

a. In cases in which the lender requires theuse of a particular provider of a settlementservice (except the lender’s own employ-ees) and requires the borrower to pay anyportion of the cost, determine if the GFEincludes all of the following:

i. The fact that the particular provider isrequired

ii. The fact that the estimate is based onthe charges of the designated provider

iii. The name, address, and telephonenumber of each provider

iv. The specific nature of any relationshipbetween the provider and the lender(see section 3500.7(e)(2))

11. If the lender maintains a list of requiredproviders (five or more for each service) and atthe time of application has not chosen theprovider to be selected from the list, determinethat the lender satisfies the GFE requirementsby providing a written statement that the lenderwill require a particular provider from a lender-controlled list and by providing the range ofcosts for the required providers. The name andactual cost must be reflected on the HUD-1 orHUD-1A.

Uniform Settlement Statement Forms(HUD-1 and HUD-1A)

12. Determine if the financial institution uses thecurrent uniform settlement statement (theHUD-1 and HUD-1A forms) as appropriate(section 3500.8 (a)) and that

a. Charges for both borrower and seller areproperly itemized in accordance with theinstructions for completion of the HUD-1 orHUD-1A (appendix A to Regulation X)

b. All charges paid to someone other than thelender are itemized, and the recipient isnamed (§ 3500.8(b); appendix A)

c. Charges required by the financial institutionbut paid outside of closing are itemized onthe settlement statement and marked as‘‘paid outside of closing’’ or ‘‘P.O.C.,’’ butare not included in totals (§ 3500.8(b);appendix A)

13. If the financial institution conducts settlement,determine whether

a. The borrower, upon request, is allowedto inspect the HUD-1 or HUD-1A at leastone business day before settlement(§ 3500.10(a))

b. The HUD-1 or HUD-1A is provided to theborrower and seller at or before settlement(§ 3500.10(b))

c. In cases in which the right to delivery iswaived or the transaction is exempt, thestatement is mailed as soon as possibleafter settlement (§ 3500.10(b),(c), and (d))

14. Determine whether HUD-1 and HUD-1A formsare retained for five years. If the financialinstitution disposes of its interest in the mort-gage and does not service the loan, the HUD-1or HUD-1A form must be transferred with theloan file. (§ 3500.10(e))

Mortgage Servicing TransferDisclosure

15. Determine that the applicant received themortgage servicing transfer disclosure at thetime of application. If the application was nottaken face-to-face, the disclosure must havebeen provided within three business days afterreceipt of the application. (§ 3500.21(c))

16. Determine that the disclosure states whetherthe loan may be assigned or transferred whileit is outstanding. (§ 3500.21(b)(3))

Notice to Borrower of Transfer ofMortgage Servicing17. Determine whether the institution has trans-

ferred or received mortgage servicing rights.

18. If the financial institution has transferred ser-vicing rights, determine whether notice to theborrower was given at least fifteen days prior tothe transfer. (§ 3500.21(d)(2))

19. If the financial institution has received servic-ing rights, determine whether notice was givento the borrower within fifteen days after thetransfer. (§ 3500.21(d)(2))

20. Determine whether the notices by transferorand transferee include the following informa-tion (sample language for the notice of trans-fer is contained in appendix B to section3500.21(d)(3)):

Real Estate Settlement Procedures Act: Examination Objectives and Procedures


a. The effective date of the transfer

b. The name, consumer inquiry addresses(including, at the option of the servicer, aseparate address to which qualified writtenrequests must be sent), and a toll-free orcollect-call telephone number for anemployee or department of the transfereeservicer

c. A toll-free or collect-call telephone numberfor an employee or department of thetransferor servicer that can be contacted bythe borrower for answers to servicing trans-fer inquiries

d. The date on which the current servicer willcease accepting payments and the datethe new servicer will begin acceptingpayments relating to the transferred loan

e. Any information concerning the effect of thetransfer on the availability or terms ofoptional insurance, and any action theborrower must take to maintain coverage

f. A statement that the transfer does not affectthe terms or conditions of the mortgage,other than terms directly related to itsservicing

g. A statement of the borrower’s rights inconnection with complaint resolution(appendix MS-2 to Regulation X)

Responsibilities of Servicer

21. Through a review of late notices, or otherwise ifthe transferor servicer received payment, deter-mine that no late fees have been imposed andthat no payments have been treated as latewithin sixty days following a transfer of servic-ing. (§ 3500.21(d)(5))

22. Determine that the institution, as loan servicerfor mortgage loans and refinancings subject toRESPA, responds to borrower inquiries relatingto these loans as prescribed in the regulation,including

a. Provides the notice of receipt of inquiry forqualified written correspondence from bor-rowers within twenty business days (unlessthe action requested is taken within thatperiod and the borrower is notified in writingof that action) (§ 3500.21(e)(1))

b. Provides written notification of the correc-tions taken on the account, a statement ofthe reasons the account is correct, or anexplanation of why the information request-ed is unavailable not later than sixty busi-ness days after receipt of the qualifiedwritten correspondence from the borrower(§ 3500.21(e)(3))

c. Does not provide information to any con-sumer reporting agency regarding overduepayment when investigating a qualifiedwritten request from a borrower regardingdisputed payments during the sixty-business-day period (§ 3500.21(e)(4)(i))

No Fees for RESPA Disclosures

23. Determine whether the financial institutioncharges a fee specifically for preparing anddistributing HUD-1 forms, escrow statements,or documents required under the Truth inLending Act. (§ 3500.12)

Purchase of Title Insurance

24. When the financial institution owns the propertybeing sold, determine whether it requires orgives the impression that title insurance isrequired from a particular company. (§ 3500.16)

Payment or Receipt ofReferral or Unearned Fees

25. Determine if management is aware of theprohibitions against payment or receipt ofkickbacks and unearned fees. (§ 3500.14)

26. Through interviews with institution manage-ment and personnel, file reviews, and reviewsof good faith estimates and HUD-1 andHUD-1A forms, determine if federally relatedmortgage loan transactions are referred bybrokers, affiliates, or other parties. Identifythose parties. Also, identify persons or entitiesto which the institution refers services inconnection with a federally related mortgagetransaction.

a. Identify the types of services rendered bythe broker, affiliate, or service provider.

b. By a review of the institution’s generalledger or otherwise, determine if feeswere paid to the institution or any partiesidentified.

c. Confirm that any fees paid to the broker,affiliate, service provider, or other partymeet the requirements of section 3500.14(g)and are for goods or facilities actuallyfurnished or services actually performed.These fees include payments to an affiliateor the affiliate’s employees.

Affiliated Business Arrangements

27. Determine from the HUD-1 or HUD-1A andfrom interviews with institution managementif an affiliated business arrangement exists



between a referring party and any provider ofsettlement services. (§ 3500.15)

If such an arrangement exists, determinewhich providers the lender requires and thatthe affiliated business arrangement disclosurestatement (appendix D to the regulation) wasprovided as required by section 3500.15(b)(1).

28. Determine whether the use of a provider ofsettlement services, other than an attorney,credit reporting agency, or appraiser represent-ing the lender, was required. (§ 3500.15(b)(2))

Escrow Accounts

If the institution maintains escrow accounts inconnection with a federally related mortgage loan,complete the following procedures.

29. Determine whether the institution performed aninitial escrow analysis (section 3500.17(c)(2))and provided the initial escrow statementrequired by section 3500.17(g). The statementmust contain the following:

a. Amount of monthly payment

b. Portion of the monthly payment beingplaced in escrow

c. Charges to be paid from the escrowaccount during the first twelve months

d. Disbursement dates

e. Amount of cushion

30. Determine if the statement was given to theborrower at settlement or within forty-five daysafter the escrow account was established. This

statement may be incorporated into the HUD-1statement. (§ 3500.17(g)(1))

31. Determine whether the institution performsan annual analysis of the escrow account.(§§ 3500.17(c)(3), 3500.17(c)(7), and3500.17(i))

32. Determine whether the annual escrow accountstatement is provided to the borrower withinthirty days of the end of the computation year.(§ 3500.17(i))

33. Determine if the annual escrow statementcontains the following:

a. Amount of monthly mortgage payment andportion that was placed in escrow

b. Amount of past year’s monthly mortgagepayment and portion that went into escrow

c. Total amount paid into escrow during thepast computation year

d. Total amount paid out of escrow for taxes,insurance, and other charges during thesame period

e. Balance in the escrow account at the end ofthe period

f. How a surplus, shortage, or deficiency is tobe paid or handled

g. If applicable, the reason the estimated lowmonthly balance was not reached

34. Determine whether monthly escrow paymentsfollowing settlement are within the limits ofsection 3500.17(c).



Real Estate Settlement Procedures ActExamination Checklist

1. Are written loan policies in connection with federally related mortgage loansin compliance with Regulation X? Yes No

2. Does the institution have established operating procedures that address therequirements of Regulation X? Yes No

3. Are mortgage lending personnel knowledgeable of the requirements ofRESPA and Regulation X? Yes No

Special Information Booklet4. For applicable transactions, is the special information booklet provided within

three business days after the financial institution or broker receives orprepares a written application for a loan? Yes No

Good Faith Estimate5. Is a good faith estimate of charges for settlement services, if required,

provided within three business days after an application is received orprepared? Yes No

6. Does the good faith estimate appear in a form similar to that in appendix C toRegulation X? Yes No

7. Does the good faith estimate (GFE) contain the following required elements?

a. The lender’s name or, if the GFE is being given by a broker, the legendrequired in accordance with appendix C to Regulation X Yes No

b. An estimate of all charges listed in section L of the HUD-1 or HUD-1A form,expressed as either a dollar amount or a range Yes No

c. For ‘‘no cost’’ or ‘‘no point’’ loans, payments to be made to an affiliated orindependent settlement service provider (shown on the HUD-1 or HUD-1Aform as ‘‘paid outside of closing’’) Yes No

d. An estimate of any other charge the borrower will pay based on commonpractice in the locality of the mortgaged property Yes No

8. From a review of the HUD-1 or HUD-1A form prepared in connection with thefederally related mortgage loan transaction, are amounts shown on the goodfaith estimate reasonably similar to the fees actually paid by the borrower? Yes No

9. Does the financial institution require the borrower to use a particular indi-vidual or firm for settlement services? Yes No

a. In cases in which the lender requires the use of a particular provider ofa settlement service (except the lender’s own employees) and requiresthe borrower to pay any portion of the cost, does the GFE include thefollowing?

i. The fact that the particular provider is required Yes No

ii. The fact that the estimate is based on the charges of the designatedprovider Yes No

iii. The name, address, and telephone number of each provider Yes No

iv. The specific nature of any relationship between the provider and thelender Yes No


b. If the lender maintains a list of required providers (five or more for eachservice) and at the time of application has not chosen the provider to beselected from the list, does the lender satisfy the GFE requirements byproviding a written statement that the lender will require a particularprovider from a lender-controlled list and by providing the range of costsfor the required providers? Yes No

10. If an affiliated business arrangement exists between a referring party and anyprovider of settlement services, does the lender require the services ofparticular providers? Yes No

a. If an affiliated business arrangement exists, is the lender’s only requireduse that of the attorney, credit bureau, or appraiser? Yes No

b. Did the financial institution provide a disclosure in the format of thedisclosure statement form in appendix D to Regulation X? Yes No

Uniform Settlement Statement Forms (HUD-1 and HUD-1A)11. Does the financial institution use the current uniform settlement statement

(HUD-1 or HUD-1A) as appropriate? Yes No

12. Does the HUD-1 or HUD-1A contain the following?

a. Charges for both borrower and seller, properly itemized in accordancewith the instructions for completion of the HUD-1 or HUD-1A Yes No

b. All charges paid to someone other than the lender, itemized, and therecipient named Yes No

c. Charges required by the financial institution but paid outside of closing,itemized and marked as ‘‘paid outside of closing’’ or ‘‘P.O.C.’’ but notincluded in totals Yes No

13. If the financial institution conducts settlement,

a. Is the borrower, upon request, allowed to inspect the HUD-1 or HUD-1A atleast one day prior to settlement? Yes No

b. Is the HUD-1 or HUD-1A provided to the borrower and seller atsettlement? Yes No

c. In cases in which the right to delivery is waived or the transaction isexempt, is the statement mailed as soon as possible after settlement? Yes No

14. Are the HUD-1 and HUD-1A forms retained for five years? Yes No

Mortgage Servicing Transfer Disclosure15. Does the applicant receive the mortgage servicing transfer disclosure at the

time of application or, if the application was not taken face-to-face, withinthree business days after receipt of the application? Yes No

16. Does the disclosure state whether the loan may be assigned or transferredwhile it is outstanding? Yes No

Notice to Borrower of Transfer of Mortgage Servicing17. If the institution has transferred servicing rights, was notice to the borrower

given at least fifteen days prior to the transfer? Yes No

18. If the institution has received servicing rights, was notice given to theborrower within fifteen days after the transfer? Yes No

Real Estate Settlement Procedures Act: Examination Checklist


19. Does the notice by the transferor (the current servicer) and the transferee (thenew servicer) include the following information, as contained in appendixMS-2 to section 3500.21?

a. The effective date of the transfer Yes No

b. The new servicer’s name, address, and toll-free or collect-call telephonenumber Yes No

c. A toll-free or collect-call telephone number for the current servicer toanswer inquiries relating to the transfer Yes No

d. The date on which the current servicer will cease accepting payments andthe date the new servicer will begin accepting payments relating to thetransferred loan Yes No

e. Any information concerning the effect of the transfer on the availability orterms of optional insurance, and any action the borrower must take tomaintain coverage Yes No

f. A statement that the transfer does not affect the terms or conditions of themortgage, other than terms directly related to its servicing Yes No

g. A statement of the borrower’s rights in connection with complaintresolution Yes No

Responding to Borrower Inquiries20. Have late fees been imposed within sixty days following a transfer of

servicing, or were payments treated as late when received by the transferorrather than the transferee? Yes No

21. Does the institution respond to borrower inquiries relating to the servicing ofRESPA-covered mortgage loans and refinancings as prescribed in theregulation? Specifically, does the institution Yes No

a. Provide a written response acknowledging receipt of a qualified writtenrequest for information relating to the servicing of the loan within twentybusiness days? Yes No

b. If not, was the requested action taken within the twenty-business-dayperiod, and was the borrower notified in writing of that action? Yes No

c. Within sixty business days after receipt of a qualified written request, doesthe institution make appropriate corrections in the account of the borrowerand provide a written notification of the correction (including in the noticethe name and telephone number of a representative of the institution whocan provide assistance)? Yes No

or

Provide the borrower with a written explanation

i. Stating the reasons the account is correct (including the name andtelephone number of a representative of the institution who can provideassistance) or Yes No

ii. Explaining why the information requested is unavailable or cannot beobtained by the institution (including the name and telephone numberof a representative of the institution who can provide assistance) Yes No

22. Does the institution provide information regarding an overdue payment to anyconsumer reporting agency during the sixty-day period beginning on thedate the institution received a qualified written request relating to a disputeregarding the borrower’s payments? Yes No



Escrow Accounts23. Does the institution perform an escrow analysis when an escrow account is

established? Yes No

24. Is the initial escrow statement given to the borrower within forty-five days afterthe escrow account is established? Yes No

25. For continuing escrow arrangements, is an annual escrow statementprovided to the borrower at least once every twelve months? Yes No

26. Does the initial annual escrow statement itemize the following information?

a. Amount of monthly mortgage payment Yes No

b. Portion of the monthly payment being placed in escrow Yes No

c. Charges to be paid from the escrow account during the first twelvemonths Yes No

d. Disbursement date Yes No

e. Amount of cushion Yes No

27. Is the escrow statement provided within thirty days of the end of the escrowaccount computation year? Yes No

28. Does the annual escrow statement itemize the following information?

a. Current payment and portion going to escrow Yes No

b. Amount of last year’s mortgage payment and portion that went to escrow Yes No

c. Total amount paid into escrow during the past computation year Yes No

d. Total amount paid from escrow during the year for taxes, insurancepremiums, and other charges Yes No

e. Balance in the escrow account at the end of the period Yes No

f. Explanation of how any surplus is being handled Yes No

g. Explanation of how any shortage or deficiency is to be paid by theborrower Yes No

h. If applicable, the reason(s) the estimated low monthly balance was notreached Yes No

29. Are monthly escrow payments following settlement larger than one-twelfth ofthe amount expected to be paid for taxes, insurance premiums, and othercharges in the following twelve months, plus one-sixth of that amount? Yes No

30. Does the servicer notify the borrower at least annually of any shortage ordeficiency in the escrow account? Yes No

31. Does the institution make payments from the escrow account for taxes,insurance premiums, and other charges in a timely manner as they becomedue? Yes No

No Fees for RESPA Disclosures32. Does the financial institution charge a fee specifically for preparing and

distributing HUD-1 forms, escrow statements, or documents required underthe Truth in Lending Act? Yes No



Purchase of Title Insurance33. When the financial institution owns the property being sold, does it require or

give the impression that title insurance is required from a particularcompany? Yes No

Payment or Receipt of Referral or Unearned Fees34. Is institution management aware of the prohibitions against payment or

receipt of kickbacks and unearned fees? Yes No

35. Are federally related mortgage loan transactions referred by brokers,affiliates, or other parties? Yes No

or

Does the institution refer services to brokers, affiliates, or other parties? Yes No

36. If fees were paid to the institution or any parties identified,

a. Were all fees paid to the broker, affiliate, service provider, or other partyconsistent with the requirements of section 3500.14(g) and for goods orfacilities actually furnished or services actually performed? Yes No

b. Were payments made to an affiliate or the affiliate’s employees? Yes No



Regulation GDisclosure and Reporting ofCRA-Related Agreements(CRA Sunshine Requirements)

Background

Regulation G, Disclosure and Reporting of CRA-Related Agreements, implements the CRA Sun-shine Requirements, which were added to theFederal Deposit Insurance Act (FDI Act), assection 48, by section 711 of the Gramm–Leach–Bliley Act (GLBA). The CRA Sunshine Require-ments require nongovernmental entities and per-sons (NGEPs), insured depository institutions (IDIs),and affiliates of insured depository institutions thatare parties to certain agreements that are in ful-fillment of the Community Reinvestment Act (CRA)to make the agreements available to the public andthe appropriate federal banking agency, and to fileannual reports concerning the agreements with theappropriate agency. The Sunshine Requirements—and the interagency regulations implementingthem (including the Board’s Regulation G)—do notaffect the Community Reinvestment Act of 1977,its implementing regulations, or the agencies’interpretations or administration of that act or thoseregulations.

Regulation G identifies the types of writtenagreements that are covered by the statute (referredto as covered agreements), defines many of theterms used in the statute, describes how the partiesto a covered agreement must make the agreementavailable to the public and to the appropriateagencies, and explains the type of information thatmust be included in the annual report filed by aparty to a covered agreement. However, neitherGLBA nor Regulation G gives the Federal Reserveany authority to enforce the provisions of anycovered agreement.

Regulation G became effective in April 2001. Asdescribed in the regulation (and outlined in thetables at the end of this chapter summarizing therequirements), the disclosure requirements applyto covered agreements entered into after Novem-ber 12, 1999. The annual reporting requirementsapply to covered agreements entered into on orafter May 12, 2000.

Applicability

The CRA Sunshine Requirements of Regulation Gapply to

• State member banks and their subsidiaries

• Bank holding companies

• Affiliates of bank holding companies, other thanbanks, savings associations, and subsidiaries ofbanks and savings associations

• Nongovernmental entities or persons that enterinto covered agreements with any entity listedabove

Definitions

Selected terms used in Regulation G are definedbelow; other terms, including ‘‘affiliate’’ and ‘‘term ofagreement,’’ are defined in section 207.11 of theregulation.

Covered Agreement

A covered agreement is any contract, arrange-ment, or understanding that meets all of thefollowing criteria:

• The agreement is in writing.

• The parties to the agreement include

– One or more insured depository institutions oraffiliates of an insured depository institutionand

– One or more NGEPs.

• The agreement provides for the insured deposi-tory institution or any affiliate to

– Provide to one or more individuals or entities(whether or not parties to the agreement) cashpayments, grants, or other considerations(except loans) that have an aggregate value ofmore than $10,000 in any calendar year or

– Make to one or more individuals or entities(whether or not parties to the agreement) loansthat have an aggregate principal amount ofmore than $50,000 in any calendar year.

• The agreement is made pursuant to, or inconnection with, the fulfillment of the CRA.

• The agreement is with a NGEP that has had aCRA communication prior to entering into theagreement.

A covered agreement does not include

• Any individual loan that is secured by real estate

• Any specific contract or commitment for a loanor extension of credit to an individual, business,farm, or other entity, or group of such individualsor entities, if

Consumer Compliance Handbook Reg. G • 1 (1/06)

– The funds are loaned at rates that are notsubstantially below market rates and

– The loan application or other loan documen-tation does not indicate that the borrowerintends or is authorized to use the borrowedfunds to make a loan or extension of credit toone or more third parties.

CRA Affiliate

A CRA affiliate of an insured depository institution isany company that is an affiliate of an insureddepository institution to the extent, and only to theextent, that the activities of the affiliate wereconsidered by the appropriate federal bankingagency when evaluating the CRA performanceof the institution at its CRA examination prior tothe agreement. An insured depository institution oraffiliate also may designate any company as a CRAaffiliate at any time prior to the time a coveredagreement is entered into, by informing the NGEPthat is a party to the agreement of such designation.

CRA Communications

A CRA communication is any of the following thatmeets the timing and knowledge requirements ofsection 207.3(b) of Regulation G:

• Any written or oral comment or testimony pro-vided to a federal banking agency concerningthe adequacy of the CRA performance of theinsured depository institution, any affiliated in-sured depository institution, or any CRA affiliate

• Any written comment submitted to the insureddepository institution that discusses the ade-quacy of its CRA performance and must beincluded in the institution’s CRA public file

• Any discussion or other contact with the insureddepository institution or any affiliate about

– Providing (or refraining from providing) writtenor oral comments or testimony to any federalbanking agency concerning the adequacy ofthe CRA performance of the insured deposi-tory institution, any affiliated insured deposi-tory institution, or any CRA affiliate,

– Providing (or refraining from providing) writtencomments to the insured depository institutionthat concern the adequacy of the institution’sCRA performance and must be included in theinstitution’s CRA public file, or

– The adequacy of the CRA performance of theinsured depository institution, any affiliatedinsured depository institution, or any CRAaffiliate

Examples of actions that are CRA communi-cations can be found in section 207.3(c)(1), andexamples of actions that are not CRA communica-tions can be found in section 207.3(c)(2).

Fulfillment of the CRA

Factors that are in fulfillment of the CRA:

• Comments to a federal banking agency orincluded in the CRA public file—Providing orrefraining from providing written or oral com-ments or testimony to any federal bankingagency concerning the performance under theCRA of an insured depository institution or CRAaffiliate that is a party to the agreement or anaffiliate of a party to the agreement, or writtencomments that are required to be included in theCRA public file of any such insured depositoryinstitution, or

• Activities given favorable CRA consideration—Performing any of the following activities if theactivity is of the type that is likely to receivefavorable consideration by a federal bankingagency in evaluating the performance under theCRA of the insured depository institution that is aparty to the agreement or of an affiliate of a partyto the agreement:

– Engaging in home purchase, home improve-ment, small business, small farm, communitydevelopment, and consumer lending, asdescribed in section 228.22 of Regulation BB,which implements the CRA, including purchas-ing loans, making loan commitments, andextending letters of credit

– Making investments, deposits, or grants oracquiring membership shares that have astheir primary purpose community develop-ment, as described in section 228.23 ofRegulation BB

– Delivering retail banking services, as describedin section 228.24(d) of Regulation BB

– Providing community development services,as described in section 228.24(e) of Regula-tion BB

– In the case of a wholesale or limited purposeinsured depository institution, engaging incommunity development lending, includingoriginating and purchasing loans, making loancommitments, extending letters of credit, mak-ing qualified investments, and providing com-munity development services, as described insection 228.25(c) of Regulation BB

– In the case of a small insured depositoryinstitution, engaging in any lending or otheractivity described in section 228.26(a) ofRegulation BB

– In the case of an insured depository institutionthat is evaluated on the basis of a strategicplan, fulfilling any element of the strategicplan, as described in section 228.27 ofRegulation BB

CRA-Related Agreements

2 (1/06) • Reg. G Consumer Compliance Handbook

Insured Depository Institution

Insured depository institution means any bank orsavings association whose deposits are insured bythe FDIC. The definition includes any uninsuredbranch or agency of a foreign bank or a commer-cial lending company owned or controlled by aforeign bank for purposes of section 8 of the FDIAct.

Nongovernmental Entity or Person

A nongovernmental entity or person (NGEP) is anypartnership, association, trust, joint venture, jointstock company, corporation, limited liability corpo-ration, company, firm, society, other organization,or individual.

An NGEP does not include

• The U.S. government, a state government, a unitof local government (including a county, city,town, township, parish, village, or other general-purpose subdivision of a state), or an Indian tribeor tribal organization established under federal,state, or Indian tribal law (including the Depart-ment of Hawaiian Home Lands); or a depart-ment, agency, or instrumentality of any suchentity

• A federally chartered public corporation thatreceives federal funds appropriated specificallyfor that corporation

• An insured depository institution or affiliate of aninsured depository institution

• An officer, director, employee, or representative(acting in his or her capacity as an officer,director, employee, or representative) of theabove-mentioned entities

Relevant Supervisory Agency

The relevant supervisory agency for a coveredagreement means the appropriate federal bankingagency for

• Each insured depository institution (or subsid-iary thereof) that is a party to the coveredagreement

• Each insured depository institution (or subsidiarythereof) or CRA affiliate that makes payments orloans or provides services that are subject to thecovered agreement

• Any company (other than an insured depositoryinstitution or subsidiary thereof) that is a party tothe covered agreement

CRA-Related Agreements


Regulation GExamination Objectives and Procedures


To determine whether the institution

• Is aware of its responsibilities under section 48 ofthe FDI Act and the implementing CRA SunshineRegulation (Regulation G)

• Has identified any written agreements that wouldtrigger the section 48 requirements

• Discloses covered agreements and files annualreports as required by the regulation


1. Determine whether the institution can appropri-ately identify any written contract, arrangement,or understanding covered under Regulation G.

2. With regard to covered agreements that theinstitution has identified, determine whether theinstitution discloses covered agreements to thepublic and the relevant supervisory agency in atimely manner and files annual reports relatingto covered agreements in a timely manner.

3. Require appropriate corrective action.

4. Document findings.


Regulation GSummary of Disclosure and Reporting Requirements

A. Disclosure of Covered Agreements to the Public

Requirement Nongovernmental Entitiesand Persons

Insured Depository Institutions(IDIs) and Affiliates

Which agreements must bedisclosed to the public?

Covered agreements enteredinto after 11/12/99


When does my duty to disclosea covered agreement to thepublic begin?

4/1/01 4/1/01

What event triggers my obliga-tion to disclose a coveredagreement to a member of thepublic?

An individual or entity mustrequest that you make a cov-ered agreement available.

An individual or entity mustrequest that you make a cov-ered agreement available.

How do I disclose a coveredagreement to the public?

You must promptly make acopy of the covered agreementavailable. You may withholdinformation that is confidentialand proprietary under FOIAstandards. However, you mustdisclose certain enumerateditems of information identified insection 207.6(b)(3) of Regula-tion G.

You must promptly make acopy of the covered agreementavailable. You may withholdinformation that is confidentialand proprietary under FOIAstandards. However, you mustdisclose certain enumerateditems of information identified insection 207.6(b)(3) of Regula-tion G.

An IDI or affiliate may make anagreement available by placinga copy of the covered agree-ment in the IDI’s CRA public file.The IDI must make the agree-ment available in accordancewith the CRA rule on public files.

When does my duty to disclosea covered agreement to thepublic end?

Twelve months after the end ofthe term of the agreement.However, if your agreementterminated before 4/1/01, yourobligation to disclose terminates4/1/02.

Twelve months after the end ofthe term of the agreement.However, if your agreementterminated before 4/1/01, yourobligation to disclose terminates4/1/02.


B. Disclosure of Covered Agreementsto the Relevant Supervisory Agency (RSA)

Requirement Nongovernmental Entitiesand Persons


What agreements must bedisclosed to the RSA?



When does my duty to disclosea covered agreement to the RSAbegin?

4/1/01 4/1/01

When must I disclose a coveredagreement to the RSA?

You must disclose your coveredagreement to the RSA within 30days after the RSA requests acopy of the agreement.

You must disclose your coveredagreement to the RSA within 60days of the end of the calendarquarter after the agreement isentered into.

How do I disclose a coveredagreement to the RSA?

You must provide the RSA with acomplete copy of the agree-ment. If you propose the with-holding of any information thatmay be withheld from disclosureunder FOIA, you must alsoprovide a public version of theagreement that excludes suchinformation and an explanationjustifying the exclusion. Thepublic version must includecertain information. See section207.6(b)(3) of Regulation G.

You must provide the RSA with acomplete copy of the agree-ment. If you propose the with-holding of any information thatmay be withheld from disclosureunder FOIA, you must alsoprovide a public version of theagreement that excludes suchinformation and an explanationjustifying the exclusion. Thepublic version must includecertain information. See section207.6(b)(3) of Regulation G.

Alternatively, you may provide alist of all covered agreementsthat you entered into during thecalendar quarter and include theinformation described in section207.6(d)(1). If the RSA requestsa copy of an agreement refer-enced in the list, you mustprovide a copy of the agreementand a public version (if applica-ble) within 7 calendar days.

When does my duty to disclosea covered agreement to the RSAend?

Twelve months after the end ofthe term of the agreement.

If you provide a list, yourobligation to provide a copy ofan agreement referenced in thelist terminates 36 months afterthe end of the term of theagreement.

CRA-Related Agreements: Disclosure and Reporting Requirements

8 (1/06) • Reg. G Consumer Compliance Handbook

C. Filing of Annual Reports with the Relevant Supervisory Agency (RSA)

Requirement Nongovernmental Entitiesand Persons (NGEPs)


What agreements are subject tothe requirements for annualreporting to the RSA?

Covered agreements enteredinto on or after 5/12/00

Covered agreements enteredinto on or after 5/12/00

What periods require an annualreport?

You must report for each fiscalyear in which you receive or usefunds or other resources underthe covered agreement. Alterna-tively, you may file your reporton a calendar year basis.

You must report for each fiscalyear in which you have anyreportable data concerning thecovered agreement described insection 207.7(e)(1)(iii), (e)(1)(iv),or (e)(1)(vi). Alternatively, youmay file your report on a calen-dar year basis.

When must I file the annualreport?

For fiscal years that end after1/1/01, you must file the reportwith each RSA within 6 monthsafter the end of the fiscal yearcovered by the report.

For fiscal years that end after1/1/01, you must file the reportwith each RSA within 6 monthsafter the end of the fiscal yearcovered by the report.

Alternatively, you may, within this6-month period, provide thereport to an IDI or affiliate that isa party to the agreement. Youmust include written instructionsrequiring the IDI or affiliate topromptly forward the report tothe RSA(s).

If an NGEP has provided itsreport to you, you must also filethat report with the RSA(s) onbehalf of the NGEP within 30days of receipt.

May I file a consolidated annualreport?

If you are a party to two or morecovered agreements, you mayfile a single consolidated annualreport concerning all the cov-ered agreements.

If you are a party to two or morecovered agreements, you mayfile a single consolidated annualreport concerning all the cov-ered agreements.

If you and your affiliates areparties to the same coveredagreement, you may file a singleconsolidated annual report relat-ing to the agreement.

What must I include in theannual report?

You must include the informationdescribed in section 207.7(d) ofRegulation G.

You must include the informationdescribed in section 207.7(e) ofRegulation G.

CRA-Related Agreements: Disclosure and Reporting Requirements


Regulation HSection 109 of the Riegle–Neal Interstate Bankingand Branching Efficiency Act

Background

The Riegle–Neal Interstate Banking and BranchingEfficiency Act of 1994 (Interstate Act) allows banksto branch across state lines. Section 109 of the act,however, prohibits a bank from establishing oracquiring a branch or branches outside its homestate, pursuant to the act, primarily for the purposeof deposit production. Congress enacted sec-tion 109 to ensure that interstate branches wouldnot take deposits from a community without thebank’s reasonably helping to meet the credit needsof that community. Interagency regulations imple-menting section 109 became effective in October1997. The Board’s rules implementing the provisionfor state member banks are located in sec-tion 208.7 of Regulation H, Membership of StateBanking Institutions in the Federal Reserve System.

Section 106 of the Gramm–Leach–Bliley Act of1999 (GLBA) expanded the coverage of sec-tion 109 by changing the definition of an ‘‘interstatebranch.’’ As a result, section 109 also applies toany bank or branch of a bank controlled by anout-of-state bank holding company. Interagencyregulations implementing this amendment becameeffective October 1, 2002.

The language of section 109 and its legislativehistory make clear that section 109 is to beadministered without imposing additional regula-tory burden on banks. Consequently, the Board’sregulation does not impose additional data-reporting requirements or require banks to pro-duce, or assist in producing, relevant data.

Coverage

Section 109 applies to any bank that has coveredinterstate branches. (Examples of covered inter-state branches follow the examination checklist atthe end of this chapter.)

Definitions

Covered Interstate Branch

A covered interstate branch is

• Any branch of a bank; any federal branch of aforeign bank; and any uninsured or insuredbranch of a foreign bank licensed by a state that

– Is established or acquired outside the bank’shome state pursuant to the interstate branch-ing authority granted by the Interstate Act or

by any amendment made by the Interstate Actto any other provision of law or

– Could not have been established or acquiredoutside the bank’s home state but for theestablishment or acquisition of a branchdescribed immediately above and

• Any bank or branch of a bank controlled by anout-of-state bank holding company.

Home State

Home state is defined as follows:

• For state banks, the state that chartered the bank

• For national banks, the state in which the mainoffice of the bank is located

• For bank holding companies, the state in whichthe total deposits of all banking subsidiaries ofthe company are the largest on the later of

– July 1, 1966, or

– The date on which the company becomes aholding company under the Bank HoldingCompany Act

• For foreign banks,

– For purposes of determining whether a U.S.branch of a foreign bank is a coveredinterstate branch, the home state of the foreignbank as determined in accordance with 12USC 3103(c) and section 211.22 of theBoard’s regulations (12 CFR 211.22) and

– For purposes of determining whether a branchof a U.S. bank controlled by a foreign bank isa covered interstate branch, the state in whichthe total deposits of all banking subsidiaries ofthe foreign bank are the largest on the later of

– July 1, 1966, or

– The date on which the foreign bankbecomes a bank holding company underthe Bank Holding Company Act

Host State

Host state means a state in which a coveredinterstate branch is established or acquired.

Host State Loan-to-Deposit Ratio

The host state loan-to-deposit ratio relates to allbanks that have that state as their home state and

Consumer Compliance Handbook Reg. H – Sec. 109 • 1 (1/06)

is the ratio of those banks’ total loans in the hoststate to their total deposits from the host state.

Out-of-State Bank Holding Company

An out-of-state bank holding company is, withrespect to any state, a bank holding companywhose home state is another state.

Statewide Loan-to-Deposit Ratio

The statewide loan-to-deposit ratio relates to anindividual bank and is the ratio of the bank’s loansto its deposits in a particular state in which it hasone or more covered interstate branches.

The Two-Step Test

Beginning no earlier than one year after a coveredinterstate branch is acquired by or established as astate member bank, the Board must determinewhether a bank is complying with the provisions ofsection 109. Section 109 provides a two-step testfor determining compliance with the prohibitionagainst interstate deposit-production offices:

1. Compare loan-to-deposit ratios—The first stepis to conduct a loan-to-deposit (LTD) ratio test tomeasure the lending and deposit activities of abank’s covered interstate branches and thencompare the bank’s statewide LTD ratio with thehost state LTD ratio. If the bank’s statewide LTDratio is at least one-half of the relevant host stateLTD ratio, the bank passes the section 109evaluation and no further review is required.Host state ratios are prepared annually by theBoard and are made public in press releasesavailable on the Board’s public web site underthe title ‘‘Banking agencies issue host stateloan-to-deposit ratios.’’

2. Determine whether the bank is meeting creditneeds—The second step, necessary if a bankfails the LTD ratio test or the LTD ratio cannot becalculated because data are not sufficient or arenot reasonably available, is to determine whetherthe bank is reasonably helping to meet thecredit needs of the communities served by thebank in the host state. This step requires theexaminer to review the activities of the bank,such as its lending activity and its performanceunder the CRA. Banks may provide the exam-iner with any relevant information, including loandata, if a credit-needs determination is con-ducted.

Although section 109 specifically requires theexaminer to consider a bank’s CRA rating whenmaking a credit-needs determination, the bank’sCRA rating should not be the only factor consid-ered. However, it is expected that banks rated

‘‘satisfactory’’ or better on CRA will receive afavorable credit-needs determination. Banks ratedlower than ‘‘satisfactory’’ on CRA may receive anadverse credit-needs determination unless circum-stances are mitigated by the other factors enumer-ated in section 109. To ensure consistency, abank’s compliance with section 109 generallyshould be reviewed in conjunction with the evalua-tion of its CRA performance.

For institutions designated as wholesale orlimited purpose banks, the credit-needs determina-tion should consider the bank’s performance usingthe appropriate CRA performance test providedin the CRA regulations. For banks not subject toCRA, including certain special-purpose banks anduninsured branches of foreign banks,1 the CRAregulations should be used only as a guidelinewhen making a credit-needs determination. Sec-tion 109 does not obligate such banks to have arecord of performance under the CRA or requirethem to pass any CRA performance tests.

Enforcement and Sanctions

Before a bank may be sanctioned under sec-tion 109, the examiner must demonstrate that thebank failed the LTD ratio test and failed toreasonably help meet the credit needs of thecommunities in the host state served by the bank.Because the bank must fail both the LTD ratio testand the credit-needs determination to be in non-compliance with section 109, the examiner has anobligation to apply the LTD ratio test before seek-ing sanctions, regardless of the regulatory burdenimposed. Thus, if a bank receives an adversecredit-needs determination, the LTD ratio test mustbe applied even if the data necessary to calculatethe appropriate ratio are not readily available.Consequently, the examiner is required to obtainthe necessary data to calculate the bank’s state-wide LTD ratio before sanctions are imposed.

If a bank fails both steps of the section 109evaluation, sanctions may be imposed, as speci-fied in the statute:

• Ordering the closing of the interstate branch inthe host state and

• Prohibiting the bank from opening a new branchin the host state

Sanctions may not be warranted, however, if thebank provides reasonable assurances, to thesatisfaction of the Board, that it has an acceptable

1. A special-purpose bank that does not provide commercial orretail banking services by granting credit to the public in theordinary course of business is not evaluated for CRA perfor-mance. Likewise, a branch of a foreign bank, unless the branch isinsured or resulted from an acquisition as described in theInternational Banking Act, 12 USC 3101 et seq., is not evaluatedfor CRA performance.

Section 109 of the Riegle–Neal Interstate Banking and Branching Efficiency Act

2 (1/06) • Reg. H – Sec. 109 Consumer Compliance Handbook

plan that will reasonably help meet the credit needsof the communities served, or to be served. FederalReserve examiners should consult with ReserveBank management and the Board before discuss-

ing possible sanctions with any bank. Beforesanctions are imposed, the Reserve Bank shouldalso consult with state banking authorities.

Section 109 of the Riegle–Neal Interstate Banking and Branching Efficiency Act


Regulation H–Section 109Examination Objectives and Procedures


• To ensure that a bank is not operating a coveredinterstate branch, as defined, primarily for thepurpose of deposit production, by determining ifthe bank meets

– The loan-to-deposit (LTD) ratio test or

– The credit-needs determination requirementsof section 109 of the Interstate Act


(Examples of covered interstate branches followthe examination checklist at the end of thischapter.)

A. Identification ofCovered Interstate Branches

1. Banks controlled by an out-of-state bank hold-ing company

(a) Determine if the bank is controlled by anout-of-state bank holding company by iden-tifying the home state of the bank and thehome state of the bank holding company. Todetermine the home state of a bank, referto the definition. To determine the homestate of a bank holding company, refer tohome state data available from the Boardand confirm the home state with bankmanagement.

(b) If the bank is not controlled by a bankholding company, or if the home state of thebank holding company is the same state asthe home state of the bank, the bank doesnot have any covered interstate branchesunder examination procedure 1. Go to pro-cedure 2.

(c) If the home state of the bank holdingcompany is not the same as the home stateof the bank, the bank meets the definition ofa covered interstate branch and is subjectto section 109. Go to procedures 2 and 3.

2. Banks with interstate branchesDetermine if the bank has any branches thatwere established or acquired pursuant to theInterstate Act in states other than the bank’shome state. If it does, the bank has a coveredinterstate branch. Go to procedure 3. If the bankhas no covered interstate branches underprocedures 1 and 2, the bank is not subject tosection 109, and no further review is necessary.

3. One-year ruleFor the covered interstate branches identified inprocedure 1 or 2, determine if any have beencovered interstate branches for one year ormore. Note that if any of a bank’s coveredinterstate branches within a particular statehave been covered interstate branches for oneyear or more, then all of the bank’s coveredinterstate branches within that state are subjectto review. If any branch has been a coveredinterstate branch for one year or more, go toprocedure 4. If not, no further review is neces-sary at this time.

B. Assessment of Compliance withthe LTD Ratio Test

4. For a covered interstate branch subject tosection 109, determine if the bank has sufficientdata to calculate a statewide LTD ratio for eachhost state. (The bank is not required to providethis information or to assist in providing thisinformation.) For states for which the bank hassufficient data, go to procedure 5. For states forwhich the bank does not have sufficient data, goto procedure 6.

5. For each host state for which the bank canprovide loan and deposit data, calculate andcompare the bank’s statewide LTD ratio with theapplicable host state LTD ratio provided by theBoard. If the bank’s statewide LTD ratio isone-half or greater than one-half of the relevanthost state LTD ratio, the bank passes the LTDratio test and the section 109 evaluation in thatstate, and no further review is necessary. If thebank’s statewide LTD ratio is less than one-halfof the host state LTD ratio in that state, the bankfails the LTD ratio test. Go to procedure 6.

C. Credit-Needs Determination

6. For each host state identified in procedure 4 or5, determine whether the bank is reasonablyhelping to meet the credit needs of communitiesserved by the bank in the host state. Whenmaking this determination, consider all of thefollowing:

(a) Whether the covered interstate brancheswere formerly part of a failed or failingdepository institution

(b) Whether the covered interstate brancheswere acquired under circumstances in whichthere was a low LTD ratio because of the


nature of the acquired institution’s businessor loan portfolio

(c) Whether the covered interstate brancheshave a higher concentration of commercialor credit card lending, trust services, orother specialized activities, including theextent to which the covered interstatebranches accept deposits in the host state

(d) The most recent ratings (overall rating,multistate MSA rating, and state ratings)received by the bank under the CommunityReinvestment Act (CRA)

(e) Economic conditions, including the level ofloan demand, within the communities servedby the covered interstate branches

(f) The safe and sound operation and conditionof the bank

(g) The CRA regulation, examination proce-dures, and interpretations of the regulation

If the bank passes the credit-needs deter-mination test, it is in compliance with sec-tion 109, and no further review is necessary.If the bank fails the credit-needs determina-tion test but a LTD ratio test has not beenconducted, go to procedure 7. If the bank

fails the credit-needs determination test andhas failed the LTD ratio test, the bank is innoncompliance with section 109. Go to pro-cedure 8.

D. Determination of WhetherSanctions Are Warranted

7. Calculate the bank’s statewide LTD ratio foreach host state in which the bank failed thecredit-needs determination test. The data usedto calculate these ratios may be obtained fromany reliable source. The bank may, but is notrequired to, provide the examiner with additionaldata at any time during the examination. If thebank’s statewide LTD ratio(s) is one-half of orgreater than one-half of the host state LTD ratio,the bank is in compliance with section 109requirements, and no further review is neces-sary. If the bank’s statewide LTD ratio is lessthan one-half of the host state LTD ratio, thebank is not in compliance with section 109. Goto procedure 8.

8. Consult with Reserve Bank management andthe Board to determine whether sanctions arewarranted.

Section 109: Examination Objectives and Procedures


Regulation H–Section 109Examination Checklist

Identify Covered Interstate Branches Subject to Section 109 Evaluation

1. Does the bank have any covered interstate branches? Determine

(a) If the bank has established or acquired any branches outside the bank’shome state pursuant to the interstate branching authority granted by theRiegle–Neal Interstate Banking and Branching Efficiency Act of 1994 or Yes No

(b) Whether the bank, including a bank consisting of only a main office, iscontrolled by an out-of-state bank holding company as defined in section2(o)(7) of the Bank Holding Company Act of 1956 Yes No

Note: If the answer to both (a) and (b) is ‘‘no,’’ no further review is necessary.

2. Have any covered interstate branches been covered interstate branches forone year or more? If any of a bank’s covered interstate branches within aparticular state have been covered interstate branches for one year or more,all the bank’s covered interstate branches within that state are subject toreview. Yes No

Note: If the answer is ‘‘no,’’ no further review is necessary.

Assess Compliance with the Loan-to-Deposit (LTD) Ratio Test3. For covered interstate branches subject to section 109, does the bank have

sufficient data to calculate a statewide LTD ratio(s) for each respective hoststate? Yes No

Note: For each host state for which the answer is ‘‘no,’’ proceed to checklistitem 5.

4. For each host state in which a covered interstate branch exists, calculate thebank’s statewide LTD ratio. Is the statewide LTD ratio equal to or greater thanone-half of the host state LTD ratio? Yes No

Note: For each host state for which the answer is ‘‘yes,’’ the bank is incompliance with section 109, and no further review is necessary. For each hoststate for which the answer is ‘‘no,’’ proceed to checklist item 5.

Perform Credit-Needs Determination Test5. For each host state identified in checklist item 3 or 4, is the bank reasonably

helping to meet the credit needs of the communities served by the bank in thehost state? Yes No

When making this determination, consider the following:

• Whether the covered interstate branches were formerly part of a failed orfailing depository institution

• Whether the covered interstate branches were acquired under circum-stances in which there was a low LTD ratio because of the nature of theacquired institution’s business or loan portfolio

• Whether the covered interstate branches have a higher concentration ofcommercial or credit card lending, trust services, or other specializedactivities, including the extent to which the covered interstate branchesaccept deposits in the host state


• The most recent ratings (overall rating, multistate MSA rating, and stateratings) received by the bank under the Community Reinvestment Act(CRA)

• Economic conditions, including the level of loan demand, within thecommunities served by the covered interstate branches

• The safe and sound operation and condition of the bank

• The CRA regulation, examination procedures, and interpretations

Note: If the bank passes the credit-needs determination test, the bankcomplies with section 109, and no further review is necessary. If the bank failsthe credit-needs determination test but the LTD ratio test has not yet beenconducted, go to checklist item 6. If the bank fails the credit-needsdetermination test and has failed the LTD ratio test, go to item 7.

Determine if Sanctions Are Warranted6. Calculate the statewide LTD ratio for each host state for which the bank failed

the credit-needs determination test. Is this ratio equal to or greater thanone-half of the host state LTD ratio? Yes No

Note: If the answer is ‘‘yes,’’ the bank is in compliance with section 109, andno further review is necessary. If the answer is ‘‘no,’’ the bank is innoncompliance with section 109 (go to checklist item 7).

7. After consultation with Reserve Bank management and the Board, aresanctions warranted? Yes No

Section 109: Examination Checklist


Regulation H–Section 109Examples of Covered Interstate Branches

Bank with Branches outside Its Home State

Bank A is an interstate bank with branches inPennsylvania that were established or acquiredunder the Interstate Act. Bank A’s home state isNew York and its host state is Pennsylvania. ThePennsylvania branches are covered interstatebranches subject to the section 109 review. BankA’s statewide loan-to-deposit (LTD) ratio in Penn-sylvania is compared with the host state LTD ratiofor Pennsylvania.

The section 109 test is conducted at the sametime the bank’s CRA examination is conducted.

Bank Consisting of Only a Main Office andControlled by an Out-of-State Bank Holding Company

Banks B and C are controlled by a bank holdingcompany whose home state is New York. Bank B isan intrastate bank and is not subject to the section109 review.

Bank C’s home state is Connecticut; it is subjectto the section 109 review because it is controlled byan out-of-state bank holding company whose homestate is New York. Bank C’s statewide LTD ratio inConnecticut is compared with the host state LTDratio for Connecticut.


New York branches

Bank ANew York

Pennsylvania branches

New York branches

BHCNew York

Bank BNew York

Bank C Connecticut

Note: Bold type indicates that the bank or branch is subject to the section 109 review.


Covered Interstate Branchesunder a Multitiered Bank Holding Company Structure

This example illustrates the need to look to thetop-tier bank holding company when determiningwhether to conduct the section 109 review. BanksJ, K, L, and M are controlled by a top-tier holdingcompany whose home state is New York.

Out-of-state bank holding company

Banks J and M are subject to section 109 reviewsbecause an out-of-state top-tier bank holdingcompany controls both of them. Bank J’s homestate is Pennsylvania; its statewide LTD ratio inPennsylvania is compared with the host state LTDratio for Pennsylvania. Bank M’s home state isConnecticut; its statewide LTD ratio in Connecticutis compared with the host state LTD ratio forConnecticut.

Out-of-state branches

Bank M’s branches in New York also are subject tothe section 109 review, because Bank M is aninterstate bank. Bank M’s home state is Connecti-cut; its statewide LTD ratio in New York is comparedwith the host state LTD ratio for New York.

Bank L’s branches in Pennsylvania also aresubject to the section 109 review because Bank L isan interstate bank. Bank L’s home state is NewYork; its statewide LTD ratio in Pennsylvania iscompared with the host state LTD ratio forPennsylvania.

Not subject to 109 review

Bank K is not subject to review for section 109compliance because an out-of-state bank holdingcompany does not control it and it does not haveinterstate branches.


New Yorkbranches

Connecticutbranches

Pennsylvaniabranches

New Yorkbranches

Bank KNew York

Bank L New York

Bank MConnecticut

Bank JPennsylvania

BHCPennsylvania

BHCConnecticut

BHC New York

Note: Bold type indicates that the bank or branch is subject to the section 109 review.

Section 109: Examples of Covered Interstate Branches


Regulation MConsumer Leasing

Background

Regulation M, Consumer Leasing, implements theConsumer Leasing Act (15 USC 1667 et seq.),which was enacted in 1976. A major purpose of theact is to ensure that consumers receive meaningfuland accurate disclosure of the terms of a leasebefore entering into a contract to lease personalproperty. Such disclosure is intended to helpconsumers compare one lease with another, as wellas compare the cost of leasing with the cost ofbuying on credit or the opportunity cost of payingcash. The act also sets limits on balloon paymentssometimes due at the end of a lease and regulatesadvertising.

The Consumer Leasing Act, which is part of theTruth in Lending Act, was originally implemented byRegulation Z, Truth in Lending. When Regulation Zwas revised in 1981, the provisions of the regulationgoverning consumer leases were moved to Regu-lation M.

Today, a relatively small number of banks engagein consumer leasing. The trend seems to be forleasing to be carried out through specialized banksubsidiaries, vehicle finance companies, otherfinance companies, or directly by retailers.

Key Definitions

Understanding certain key terms plays an integralrole in understanding the requirements imposed bythe Consumer Leasing Act.

Lessee

A lessee is a natural person who enters into or isoffered a consumer lease.

Lessor

A lessor is a natural person or organization whoregularly leases, offers to lease, or arranges for thelease of personal property under a consumerlease. A person who leased or offered to leasemore than five times in the preceding calendar yearor the current calendar year meets this definition.

Consumer Lease

A consumer lease is a lease contract between alessor and a lessee

• For the use of personal property by an individual(natural person)

• For personal property to be used primarily forpersonal, family, or household purposes

• For a period of more than four months (week-to-week and month-to-month leases do not meetthis criterion, even though they may be extendedbeyond four months) and with a total contractualcost of no more than $25,000

Specifically excluded from coverage by Regula-tion M are leases

• For business, agricultural, or commercial pur-poses or made to an organization

• For real property

• For personal property incidental to the lease ofreal property, subject to certain conditions

• For credit sales, as defined in Regulation Z,section 226.2(a)(16)

A lease meeting all the criteria for a consumerlease is covered by the Consumer Leasing Act andRegulation M. If any one of the criteria is not met, forexample, if the leased property is to be usedprimarily for business purposes or the total contrac-tual cost exceeds $25,000, the act and theregulation do not apply.

Consumer leases fall into one of two categories:closed-end and open-end. The information thatmust be disclosed to consumers varies accordingto the category of lease, so it is important to notethe differences between the categories. To under-stand the differences, one must first understand‘‘realized value’’ and ‘‘residual value.’’

Realized Value

The realized value is (1) the price received by thelessor of the leased property at disposition, (2) thehighest offer for disposition of the leased property,or (3) the fair market value of the leased property atthe end of the lease term.

Residual Value

The residual value is the value of the leasedproperty at the end of the lease, as estimated orassigned by the lessor at consummation of thelease.

Open-End Lease

An open-end lease is a lease in which the amountowed at the end of the lease term is based on thedifference between the residual value and the

Consumer Compliance Handbook Reg. M • 1 (1/06)

realized value of the leased property. If the realizedvalue is less than the residual value, the consumermay have to pay all or part of the difference; if therealized value is greater than the residual value, theconsumer may receive a refund.

Closed-End Lease

A closed-end lease is any lease other than anopen-end lease. This type of lease allows theconsumer to ‘‘walk away’’ at the end of the contractperiod with no further payment obligation—unlessthe property has been damaged or has sustainedabnormal wear and tear.

Gross Capitalized Cost

The gross capitalized cost is the amount agreedupon by the lessor and lessee as the value of theleased property, plus any items that are capitalizedor amortized during the lease term, such as taxes,insurance, service agreements, and any outstand-ing prior credit or lease balance.

Capitalized Cost Reduction

The capitalized cost reduction is the total amount ofany rebate, cash payment, net trade-in allowance,and noncash credit that reduces the gross capital-ized cost.

Adjusted Capitalized Cost

The adjusted capitalized cost is the gross capital-ized cost less the capitalized cost reduction. It isthe amount used by the lessor in calculating thebase periodic payment.


Format of Disclosures

Lessors are required to provide the consumer withleasing cost information and other disclosures in aformat similar to the model disclosure forms inappendix A to Regulation M. Certain pieces of thisinformation must be kept together and must besegregated from other lease information. All theinformation stated must be accurate, clear andconspicuous, and provided in writing in a form thatthe consumer may keep.1

Content of Disclosures

Disclosure requirements are outlined in section213.4 of the regulation. Briefly, leasing disclosuresmust contain the following information, as applicable:

• Description of the leased property

• Amount due at lease signing or delivery

• Payment schedule and total amount of periodicpayments

• Other charges

• Total of payments

• Payment calculation

• Early-termination information

• Maintenance responsibilities

• Purchase option

• Statement referencing nonsegregated disclo-sures

• Liability resulting from a difference between theresidual value and the realized value

• Right of appraisal

• Liability at the end of the lease term based on theresidual value

• Fees and taxes

• Insurance

• Warranties or guarantees

• Penalties and other charges for delinquency

• Security interest

• Limitations on rate information

• Additional disclosures for non-motor-vehicleopen-end leases

Timing of Disclosures

A dated disclosure statement must be given to theconsumer before the lease is signed. The disclo-sure must contain all the information detailed insection 213.4 of the regulation.

Renegotiations and Extensions

New disclosures must generally be provided whena consumer renegotiates or extends a leasebeyond six months.

Multiple Lessors and Lessees

In the event of multiple lessors, one lessor maymake the required disclosures on behalf of all thelessors. If the lease involves more than one lessee,the required disclosures may be given to anylessee who is primarily liable.

Advertising

Advertisements concerning consumer leases mustalso comply with certain disclosure requirements.All advertisements must be accurate. If a printedad includes any reference to certain triggering

1. If agreed to by the consumer, the information may,alternatively, be provided electronically.

Consumer Leasing

2 (1/06) • Reg. M Consumer Compliance Handbook

terms—the amount of any payment or a statementof a capitalized cost reduction (that is, a downpayment) or other payment required before or atlease signing or delivery (or that no such paymentis required)—the ad must also state the following:

• That the transaction is a lease

• The total amount due prior to or at lease signingor delivery

• The number, amounts, and due dates or periodsof the scheduled payments

• Whether or not a security deposit is required

Advertisements for open-end leases must alsoinclude a statement that extra charges may beimposed at the end of the lease based on thedifference between the residual value and therealized value at the end of the lease term.

If a percentage rate is given in an advertisement,the rate must not be more prominent than any of theother required disclosures, with the exception ofthe notice described in section 213.4(s). Such anad must also include the statement, ‘‘This percent-age may not measure the overall cost of financingthis lease.’’ The term ‘‘annual percentage rate’’ or‘‘annual lease rate,’’ or any equivalent term, maynot be used.

Some fees (license, registration, taxes, andinspection fees) may vary by state or locality. Anadvertisement may exclude these third-party feesfrom the disclosure of a periodic payment or a totalamount due at lease signing or delivery, providedthat the ad states that these fees have beenexcluded. Otherwise, an ad may include these feesin the periodic payment or total amount due,

provided that it states that the fees are based on aparticular state or locality and indicates that thefees may vary.

Limits on Balloon Payments

To limit balloon payments that may be required ofthe consumer, certain sections of the regulation callfor reasonable calculations and estimates. Theseprovisions protect the consumer at early termina-tion of a lease, at the end of the lease term, or in theevent of delinquency, default, or late-paymentstatus. They limit the lessee’s liability at the end ofthe lease term and set reasonableness standardsfor wear and use charges, early-terminationcharges, and penalties or fees for delinquency.

Penalties and Liability

Criminal and civil liability provisions of the Truth inLending Act also apply to the Consumer LeasingAct. Actions alleging failure to disclose the requiredinformation or to otherwise comply with the Con-sumer Leasing Act must be brought within one yearof the termination of the lease agreement.

Record Retention

Lessors are required to maintain evidence ofcompliance with the requirements of Regulation M,other than the advertising requirements undersection 213.7, for a period of at least two years afterthe date the disclosures are required to be made oran action is required to be taken.

Consumer Leasing


Regulation MExamination Objectives and Procedures


1. To assess the quality of the financial institution’scompliance management system for the Con-sumer Leasing Act

2. To determine that lessees of personal propertyare given meaningful and accurate disclosuresof lease terms

3. To determine if the limits of liability are clearlyindicated to lessees and are correctly enforcedby the institution

4. To ensure that the institution provides accuratedisclosures of its leasing terms in all advertising



A. Review the institution’s procedures for provid-ing disclosures to ensure that it has adequatecontrols and procedures to effect compliance.

B. Review the disclosures provided by the institu-tion.

1. Are the disclosures clear and conspicuousand provided in writing in a form theconsumer can keep? Alternatively, are theyprovided electronically when agreed to bythe consumer?1 (§§ 213.3(a) and 213.3(a)(5))

2. Are the disclosures given in a dated state-ment and in the prescribed format?(§ 213.3(a)(1))

3. Is the information required by sections213.4(b) through (f), (g)(2), (h)(3), (i)(1), (j),and (m)(1) segregated and in a form sub-stantially similar to the model in appendix Ato Regulation M? (§ 213.3(a)(2))

4. Are the disclosures timely? (§ 213.3(a)(3))

5. If the lease involves more than one lessee,are the disclosures provided to any lesseewho is primarily liable? (§ 213.3(c))

6. If additional information is provided, is itprovided in a manner such that it does notmislead or confuse the lessee? (§ 213.3(b))

7. Are all estimates clearly identified and rea-sonable? (§ 213.3(d))

8. Are the disclosures accurate, and do theycontain the information required by sections213.4(a)–213.4(t)?

9. Are disclosures given to lessees when theyrenegotiate or extend their leases? (§ 213.5)

Lessee Liability

Review the lease estimates and calculations toensure that no unreasonable balloon payment isexpected of the lessee in the following circum-stances:

A. At early termination

1. Does the lessor disclose the conditionsunder which the lease may be terminatedearly and the amount, and method of deter-mining the amount, of any early-terminationcharges? (§ 213.4(g)(1))

2. Are any early-termination charges reason-able? (§ 213.4(g)(1))

B. At end of lease term (for wear and use)

1. If the lessor sets standards for wear and useof the leased vehicle, are the amounts of, ormethod of determining the amounts of, anycharge for excess mileage disclosed?(§ 213.4(h)(3))

2. Are standards for wear and use reason-able? (§ 213.4(h)(2))

C. At end of lease term (for open-end leases)

1. Does the lessor disclose the limitations onthe lessee’s liabilities at the end of the leaseterm? (§ 213.4(m)(2))

2. Are the lessee and lessor permitted to makea mutually agreeable final adjustment regard-ing excess liability? (§ 213.4(m)(3))

D. In the event of delinquency, default, or latepayment

1. Does the lessor disclose penalties or othercharges for delinquency, default, or latepayments? (§ 213.4(q))

2. Are the penalties or other charges reason-able? (§ 213.4(q))

Advertising

A. Review advertising policies and proceduresused by the institution to ensure that it hasadequate controls and procedures to effectcompliance.

B. Review a sample of the institution’sadvertisements.

1. Do the advertisements contain terms that areusually and customarily available? (§ 213.7(a))

1. The provisions to provide disclosures electronically arecurrently not mandatory. (7/2002)


2. Are the disclosures contained in the adver-tisements clear and conspicuous? (§ 213.7(b))

3. Do catalog or multiple-page advertisementscomply with the page-reference require-ments? (§ 213.7(c))

4. When triggering terms are used, do theadvertisements contain the additional requiredinformation? (§ 213.7(d))

5. Do merchandise tags that use triggeringterms refer to a sign or display that containsthe additional required disclosures?(§ 213.7(e))

6. If television or radio advertisements that usetriggering terms do not contain the additionalterms required by section 213.7(d)(2), dothey use alternative disclosure methods (thatis, do they direct consumers to a toll-free number or a written advertisement)?(§ 213.7(f))

Miscellaneous

1. Are records and other evidence of complianceretained for at least two years? (§ 213.8)

Consumer Leasing: Examination Objectives and Procedures


Regulation MExamination Checklist

1. Does the institution engage in consumer leasing or purchase consumerleases from lessors? (§ 213.2(h)) Yes No

(If it does not, there is no need to complete this checklist.)

2. Are the disclosures made prior to consummation of the lease (that is, at thetime a binding order is made or the lease is signed)? (§ 213.3(a)(3)) Yes No

3. Are the disclosures clear and conspicuous and provided in writing in a formthe consumer can keep? (§ 213.3(a)) Yes No

4. Are the disclosures given in a dated statement and made in either (i) aseparate statement that identifies the consumer lease transaction, (ii) thecontract, or (iii) other document evidencing the lease? (§ 213.3(a)(1)) Yes No

5. Is the information required by sections 213.4(b)–(f), (g)(2), (h)(3), (i)(1), (j),and (m)(1) segregated and in a form substantially similar to the model inappendix A to Regulation M? (§ 213.3(a)(2)) Yes No

6. If the lease involves more than one lessee, are the disclosures provided toany lessee who is primarily liable? (§ 213.3(c)) Yes No

7. Alternatively, are the disclosures provided electronically when agreed to bythe consumer? (§ 213.3(a)(5))1 Yes No

8. If additional information is provided, is it provided in a manner such that itdoes not mislead or confuse the lessee? (§ 213.3(b)) Yes No

9. Are disclosures provided to at least one lessee when there are multiplelessees and by at least one lessor when there are multiple lessors?(§ 213.3(c)) Yes No

10. Are all estimates clearly identified and reasonable? (§ 213.3(d)) Yes No

11. Are the following disclosures made in the lease?

A. Description of property (§ 213.4(a)) Yes No

B. Amount due at lease signing or delivery (§ 213.4(b)) Yes No

C. Payment schedule and total amount of periodic payments (§ 213.4(c)) Yes No

D. Other charges (§ 213.4(d)) Yes No

E. Total of payments (§ 213.4(e)) Yes No

F. Regarding payment calculations,

i. Gross capitalized cost (§ 213.4(f)(1)) Yes No

ii. Capitalized cost reduction (§ 213.4(f)(2)) Yes No

iii. Adjusted capitalized cost (§ 213.4(f)(3)) Yes No

iv. Residual value (§ 213.4(f)(4)) Yes No

v. Depreciation and any amortized amounts (§ 213.4(f)(5)) Yes No

vi. Rent charge (§ 213.4(f)(6)) Yes No

vii. Total of base periodic payments (§ 213.4(f)(7)) Yes No

viii. Lease payments (§ 213.4(f)(8)) Yes No

ix. Base periodic payment (§ 213.4(f)(9)) Yes No

1. The provisions to provide disclosures electronically are currently not mandatory. (7/2002)


x. Itemization of other charges (§ 213.4(f)(10)) Yes No

xi. Total periodic payment (§ 213.4(f)(11)) Yes No

G. Regarding early termination,

i. Conditions under which the lessee or lessor may terminate the leaseprior to the end of the lease term (§ 213.4(g)(1)) Yes No

ii. The amount of or description of the method for determining the amountof any penalty or other charges for early termination (§ 213.4(g)(1)) Yes No

iii. In a form substantially similar to the sample (§ 213.4(g)(2)) Yes No

H. Regarding notice of wear and use,

i. Whether the lessor or the lessee is responsible for maintaining orservicing the leased property, with a description of the responsibility(§ 213.4(h)(1)) Yes No

ii. Lessor’s standards for wear and use, which must be reasonable(§ 213.4(h)(2)) Yes No

iii. In a form substantially similar to the sample (§ 213.4(h)(3)) Yes No

I. Purchase option (§ 213.4(i)) Yes No

J. Statement referencing other nonsegregated disclosures (§ 213.4(j)) Yes No

K. Liability between residual and realized values (§ 213.4(k)) Yes No

L. Right of appraisal (§ 213.4(l)) Yes No

M. For open-end leases,

i. The rent and other charges paid by the lessee (§ 213.4(m)(1)) Yes No

ii. Liability at end of lease term based on residual value and any excessliability (§ 213.4(m)(2)) Yes No

iii. Mutually agreeable final adjustment (§ 213.4(m)(3)) Yes No

N. Fees and taxes (§ 213.4(n)) Yes No

O. Regarding insurance,

i. Types and amounts of insurance that the lessee is required to have(§ 213.4(o)) Yes No

ii. If the lessor provides insurance, types, amounts, and cost(§ 213.4(o)(1)) Yes No

P. Warranties or guarantees (§ 213.4(p)) Yes No

Q. Penalties and other charges for late payments, delinquency, or default(§ 213.4(q)) Yes No

R. Security interest other than a security deposit (§ 213.4(r)) Yes No

S. Regarding any information on rates,

i. Does the lessor use the term ‘‘annual percentage rate,’’ ‘‘annual leaserate,’’ or any equivalent term in the lease disclosure? (§ 213.4(s)) Yes No

ii. If so, does a statement that ‘‘This percentage may not measure theoverall cost of financing this lease’’ accompany the rate? (§ 213.4(s)) Yes No

12. Are disclosures given to lessees when they renegotiate or extend theirlease? (§ 213.5) Yes No

Consumer Leasing: Examination Checklist


13. Does the bank advertise its leasing program? If it does,

A. Do the advertisements contain terms that are usually and customarilyavailable? (§ 213.7(a)) Yes No

B. Are the advertisements clear and conspicuous? (§ 213.7(b)) Yes No

i. Are any affirmative or negative references to a charge that is part ofthe disclosure required under section 213.7(d)(2)(ii) less prominentthan the disclosure (except for the statement of a periodic pay-ment)? (§ 213.7(b)(1)) Yes No

ii. Are the advertisements of lease rates less prominent than anydisclosure required by section 213.4 (except the notice of thelimitations on the rate)? (§ 213.7(b)(2)) Yes No

C. Do catalog and multiple-page advertisements comply with the page-reference requirements? (§ 213.7(c)) Yes No

D. If any triggering terms are used, are all the following disclosuresmade? (§ 213.7(d)(2))

i. That the transaction advertised is a lease Yes No

ii. The total amount due prior to or at consummation or by delivery, ifdelivery occurs after consummation Yes No

iii. The number, amounts, and due dates or periods of scheduledpayments under the lease Yes No

iv. Whether or not a security deposit is required Yes No

v. A statement that an extra charge may be imposed at the end of thelease term when the lessee’s liability (if any) is based on the differencebetween the residual value of the leased property and its realized valueat the end of the lease term Yes No

14. Do merchandise tags that use triggering terms refer to a sign or display thatcontains the additional required disclosures? (§ 213.7(e)) Yes No

15. Do television and radio advertisements that do not contain the additionalinformation required by section 213.4(d)(2) direct consumers to a toll-freenumber or a written advertisement for additional information when triggeringterms are used? (§ 213.7) Yes No

A. Is the toll-free number listed along with a statement that the number maybe used by consumers to obtain the information? (§ 213.7(f)(1)(i)) Yes No

B. i. Is the written advertisement in a publication that is in generalcirculation in the community served by the station? Yes No

ii. Does the broadcast include the name and date of the publication? Yes No

iii. Is the publication published beginning at least three days before, andending at least ten days after, the broadcast? (§ 213.7(f)(1)(ii)) Yes No

C. Was the toll-free telephone number available for at least ten days,beginning on the date of broadcast? (§ 213.7(f)(2)(i)) Yes No

D. Does the lessor provide the information required by section 213.7(d)(2) viathe toll-free number orally, or in writing upon request? (§ 213.7(f)(2)(ii)) Yes No

16. Are records and other evidence of compliance retained for at least twoyears? (§ 213.8) Yes No

Consumer Leasing: Examination Checklist


Regulation PPrivacy of Consumer Financial Information

Background

Regulation P, Privacy of Consumer Financial Infor-mation, implements the privacy provisions of theGramm−Leach−Bliley Act for state member banks.Generally, the act, which was signed into law inNovember 1999 and took effect in November 2000,

• Prohibits financial institutions from disclosingnonpublic personal information about consum-ers to nonaffiliated third parties, (1) unless theinstitution satisfies various notice and opt-outrequirements and (2) provided that the con-sumer has not elected to opt out of the disclosure

• Requires institutions to provide notice of itsprivacy policies and practices to its customers

Regulation P establishes rules governing theduties of a financial institution to provide particularnotices and limitations on its disclosure of nonpub-lic personal information. Compliance with the ruleshas been required since July 1, 2001. Generally, afinancial institution

• Must provide a notice of its privacy policies toconsumers and allow consumers to opt out of thedisclosure of their nonpublic personal informa-tion to nonaffiliated third parties (subject tocertain exceptions) if the disclosure is outside ofthe exceptions

• Must provide a notice of its privacy policies to itscustomers, whether or not the institution sharesnonpublic personal information

• May not disclose customer account numbers toany nonaffiliated third party for marketingpurposes

• Must follow reuse and redisclosure limitations onany nonpublic personal information it receivesfrom nonaffiliated financial institutions

Scope

Regulation P applies only to nonpublic personalinformation about individuals who obtain financialproducts or services primarily for personal, family,or household purposes. It does not apply tobusinesses or to individuals who obtain financialproducts or services for business, commercial, oragricultural purposes.

Definitions and Key Concepts

Regulation P employs a number of key conceptswhen discussing the duties and limitations im-posed by the regulation. These concepts are briefly

discussed below. A more complete explanation ofeach appears in the regulation.

Financial Institution

A financial institution is any institution whosebusiness is engaging in activities that are financialin nature or incidental to such financial activities, asdetermined by section 4(k) of the Bank HoldingCompany Act of 1956. Financial institutions caninclude banks, securities brokers and dealers,insurance underwriters and agents, finance com-panies, mortgage bankers, and travel agents.1

Nonpublic Personal Information

Generally, nonpublic personal information is anyfinancial information that is personally identifiableand not publicly available, including informationthat

• A consumer provides to a financial institution toobtain a financial product or service from theinstitution

• Results from a transaction between the con-sumer and the institution involving a financialproduct or service

• A financial institution otherwise obtains about aconsumer in connection with providing a finan-cial product or service

Information is considered publicly available ifthe institution has a reasonable basis for believingthat the general public may lawfully access theinformation from government records, widely dis-tributed media, or legally required disclosures tothe general public. Examples include informationlisted in a telephone book or a publicly recordeddocument, such as a mortgage or securities filing.

Nonpublic personal information may includeindividual items of information as well as lists ofinformation. For example, names, addresses, phonenumbers, Social Security numbers, income, creditscores, and information obtained through Internetcollection devices (that is, cookies) may be non-public information.

Regulation P includes special rules for lists.Publicly available information is considered non-public if it is derived from a source of nonpublic

1. Certain functionally regulated subsidiaries, such as brokers,dealers, and investment advisers, are subject to privacy regula-tions issued by the Securities and Exchange Commission.Insurance entities may be subject to privacy regulations issued bytheir respective state insurance authorities.

Consumer Compliance Handbook Reg. P • 1 (1/06)

personal information. For example, a list of thenames and addresses of a financial institution’sdepositors derived from the financial institution’srecords (which are not publicly available) wouldbe considered nonpublic personal informationeven though the names and addresses of theseindividuals might be published in local telephonedirectories.

However, if the financial institution has a reason-able basis for believing that certain customerrelationships are a matter of public record, then anylist of these relationships would be consideredpublicly available information. For instance, a list ofmortgage customers whose mortgages are recordedin public records would be considered publiclyavailable information. The institution could providea list of such customers, and include on the list anyother publicly available information it has aboutthose customers, without having to provide to itscustomers a notice or the possibility of opting out.

Nonaffiliated Third Party

A nonaffiliated third party is any person, except afinancial institution’s affiliate or a person employedjointly by a financial institution and a company, thatis not the institution’s affiliate. An affiliate of afinancial institution is any company that controls, iscontrolled by, or is under common control with thefinancial institution.

Opt-Out Right and Exceptions

Opt-Out Right

With certain exceptions, consumers must be giventhe right to opt out of the disclosure of theirnonpublic personal information—that is, to preventa financial institution from disclosing nonpublicpersonal information about them to a nonaffiliatedthird party—including a reasonable opportunityand a reasonable means of opting out. Whatconstitutes a reasonable opportunity to opt outdepends on the circumstances surrounding theconsumer’s transaction, but a consumer must beprovided a reasonable amount of time to exercisethe opt-out right. For example, thirty days from thedate a notice is mailed or a customer acknowl-edges receipt of an electronic notice would be areasonable amount of time for the customer toreturn an opt-out direction.

A reasonable means to opt out may include acheck-off box, a reply form, or a toll-free telephonenumber, again depending on the circumstancessurrounding the consumer’s transaction. It is notreasonable to require a consumer to write his or herown letter as the only means of opting out.

Exceptions

Exceptions to the opt-out right are detailed insections 13, 14, and 15 of Regulation P. Financialinstitutions need not comply with opt-out require-ments if they limit their disclosure of nonpublicpersonal information

• To a nonaffiliated third party to perform servicesfor the financial institution or to function on itsbehalf, including marketing the institution’s ownproducts or services or those offered jointly bythe institution and another financial institution.The exception is permitted only if the financialinstitution provides notice of these arrangementsand by contract prohibits the third party fromdisclosing or using the information for other thanthe specified purposes. The contract mustprovide that the parties to the agreement arejointly offering, sponsoring, or endorsing a finan-cial product or service. However, if the service orfunction is covered by the exceptions in section14 or 15 (discussed below), the financial institu-tion does not have to comply with the additionaldisclosure and confidentiality requirements ofsection 13. Disclosure under this exceptioncould include the outsourcing of marketing to anadvertising company. (section 13)

• As necessary to effect, administer, or enforce atransaction that a consumer requests or autho-rizes, or under certain other circumstancesrelating to existing relationships with customers.Disclosures under this exception could be inconnection with the audit of credit information orthe administration of a rewards program or toprovide an account statement. (section 14)

• For specified other disclosures that a financialinstitution normally makes, such as to protectagainst or prevent actual or potential fraud; to thefinancial institution’s attorneys, accountants, andauditors; or to comply with applicable legalrequirements, such as the disclosure of informa-tion to regulators. (section 15)

Consumer and Customer

The distinction between consumers and customersis significant because financial institutions haveadditional disclosure duties with respect to custom-ers. All customers covered by the regulation areconsumers, but not all consumers are customers.

A consumer is an individual, or that individual’slegal representative, who obtains or has obtainedfrom a financial institution a financial product orservice that is to be used primarily for personal,family, or household purposes. A financial serviceincludes a financial institution’s evaluation of orbrokerage of information that the institution collectsin connection with a request or an application from

Privacy of Consumer Financial Information

2 (1/06) • Reg. P Consumer Compliance Handbook

a consumer for a financial product or service. Forexample, a financial service includes a lender’sevaluation of an application for a consumer loan orfor opening a deposit account, even if the applica-tion is ultimately rejected or withdrawn.

A customer is a consumer who has a customerrelationship with a financial institution. A customerrelationship is a continuing relationship between aconsumer and a financial institution under whichthe institution provides one or more financialproducts or services to the consumer that are to beused primarily for personal, family, or householdpurposes. For example, a customer relationshipmay be established when a consumer engages inone of the following activities with a financialinstitution:

• Maintains a deposit or investment account

• Obtains a loan

• Enters into a lease of personal property

• Obtains financial, investment, or economic advi-sory services for a fee

Customers are entitled to receive an initial and anannual privacy notice regardless of the information-disclosure practices of their financial institution.

Consumers who are not customers are entitled toan initial privacy and opt-out notice only if thefinancial institution wants to share their nonpublicpersonal information with nonaffiliated third partiesoutside of the exceptions.

There is a special rule for loans. When a financialinstitution sells the servicing rights for a loan toanother financial institution, the customer relation-ship transfers with the servicing rights. However, ifthe institution sells the servicing rights, any infor-mation the institution retains about the borrowermust be accorded the protections due anyconsumer.

Note that isolated transactions alone will notcause a consumer to be treated as a customer. Forexample, if an individual purchases a bank checkfrom a financial institution at which he or she doesnot have an account, the individual is a consumerbut not a customer of that institution because he orshe has not established a customer relationship.Likewise, if an individual uses the ATM of a financialinstitution at which he or she has no account, evenuses that ATM repeatedly, the individual is aconsumer but is not a customer of that institution.

Financial Institution Duties

Regulation P establishes specific duties and limita-tions for a financial institution according to itsactivities. Institutions that intend to disclose non-public personal information outside the exceptions

must provide opt-out rights to their customers andto consumers who are not customers. All financialinstitutions must provide an initial and annual noticeof their privacy policies to their customers. And allinstitutions must abide by the regulatory limits onthe disclosure of account numbers to nonaffiliatedthird parties and on the redisclosure and reuse ofnonpublic personal information received from non-affiliated financial institutions. A summary of finan-cial institution duties and limitations follows.

Notice and Opt-out Duties to Consumers

If a financial institution intends to disclose nonpub-lic personal information about any of its consumers(whether or not they are customers) to a nonaffili-ated third party and an exception does not apply,the institution must provide to the consumer

• An initial notice of its privacy policies

• An opt-out notice (including, among other things,a reasonable means of opting out)

• A reasonable opportunity, before the institutiondiscloses the information to the nonaffiliated thirdparty, to opt out

Generally, a financial institution may not discloseany nonpublic personal information to nonaffiliatedthird parties unless these notices have beenprovided and the consumer has not opted out.Additionally, the institution must provide a revisednotice before it begins to share a new category ofnonpublic personal information or shares informa-tion with a new category of nonaffiliated thirdparties in a manner that was not described in theprevious notice.

Note that a financial institution need not complywith the initial and opt-out notice requirements forconsumers who are not customers if the institutionlimits disclosure of nonpublic personal informationto the exceptions.

Notice Duties to Customers

In addition to the duties to consumers described inthe preceding section, financial institutions haveseveral duties specifically to customers. In particu-lar, regardless of whether the institution disclosesor intends to disclose nonpublic personal informa-tion, it must provide notice to its customers of itsprivacy policies and practices at various times.Briefly, a financial institution

• Must provide an initial notice of its privacypolicies and practices to each customer, no laterthan the time a customer relationship is estab-lished. Instances in which the notice may beprovided after the customer relationship has



been established are described in section 4(e) ofthe regulation.

• Must provide an annual notice at least once inany period of twelve consecutive months duringthe continuation of the customer relationship

• Must provide a new notice to an existingcustomer when the customer obtains a newfinancial product or service from the institution ifthe initial or annual notice most recently providedto the customer was not accurate with respect tothe new financial product or service

• Has the option of providing a simplified noticewhen the institution does not disclose nonpublicpersonal information (other than as permittedunder section 14 and section 15 exceptions) anddoes not reserve the right to do so

Requirements for Notices

Clear and Conspicuous

Privacy notices must be clear and conspicuous,meaning that they must be reasonably understand-able and designed to call attention to the natureand significance of the information contained in thenotice. While the regulation does not prescribespecific methods for making a notice clear andconspicuous, it does suggest ways in which toachieve the standard, such as using short explana-tory sentences or bullet lists, plain-language head-ings, and easily readable typefaces and type sizes.Privacy notices also must accurately reflect theinstitution’s privacy practices.

Delivery Rules

Privacy notices must be provided so that eachrecipient can reasonably be expected to receiveactual notice in writing or, if the consumer agrees,electronically. To meet this standard, a financialinstitution could, for example, (1) hand-deliver aprinted copy of the notice to a consumer, (2) mail aprinted copy of the notice to the consumer’s lastknown address, or (3) for consumers who conducttransactions electronically, post the notice on theinstitution’s web site and require the consumer toacknowledge receipt of the notice before complet-ing the transaction.

For customers only, a financial institution mustprovide the initial notice (as well as the annualnotice and any revised notice) so that a customercan retain or subsequently access the notice. Awritten notice satisfies this requirement. For cus-tomers who obtain financial products or serviceselectronically and agree to receive their notices onthe institution’s web site, the institution may providethe current version of its privacy notice on its website.

Notice Content

A privacy notice must contain specific disclosures.However, a financial institution may provide con-sumers who are not customers a ‘‘short form’’ initialnotice together with an opt-out notice (1) statingthat the institution’s privacy notice is available uponrequest and (2) explaining a reasonable means forthe consumer to obtain it. The following informationregarding nonpublic personal information must beprovided in privacy notices, as applicable:

• Categories of information collected

• Categories of information disclosed

• Categories of affiliates and nonaffiliated thirdparties to whom the institution may discloseinformation

• Policies with respect to the treatment of formercustomers’ information

• Information disclosed to service providers andjoint marketers (section 13)

• Explanation of the opt-out right and methods ofopting out

• Any opt-out notices the institution must provideunder the Fair Credit Reporting Act with respectto affiliate information sharing

• Policies for protecting the security and confiden-tiality of information

• A statement that the institution makes disclo-sures to other nonaffiliated third parties aspermitted by law (sections 14 and 15)

Limitations on Disclosureof Account Numbers

A financial institution must not disclose an accountnumber or similar form of access number or accesscode for a credit card, deposit account, ortransaction account to any nonaffiliated third party(other than a consumer reporting agency) for use intelemarketing, direct mail marketing, or othermarketing through electronic mail to the consumer.Encrypted account numbers without an accompa-nying means of decryption, however, are notsubject to this prohibition.

The regulation also expressly allows financialinstitutions to disclose account numbers to anagent to market the institution’s own products orservices (although the institution must not authorizethe agent to initiate charges to the customer’saccount). Also not barred are disclosures toparticipants in private-label or affinity card pro-grams, for which the participants are identified tothe customer when the customer enters theprogram.



Redisclosure and Reuse Limitationson Nonpublic PersonalInformation Received

If a financial institution receives nonpublic personalinformation from a nonaffiliated financial institution,the disclosure and use of this information is limited.

• For nonpublic personal information receivedunder a section 14 or 15 exception, the financialinstitution is limited to

– Disclosing the information to the affiliates ofthe financial institution from which it receivedthe information

– Disclosing the information to its own affiliates,who may, in turn, disclose and use theinformation only to the extent that the financialinstitution may do so

– Disclosing and using the information to carryout the activities covered by a section 14 or 15exception (for example, an institution receiv-ing information for account processing coulddisclose the information to its auditors)

• For nonpublic personal information not receivedunder a section 14 or 15 exception, the recipi-ent’s use of the information is unlimited, but itsdisclosure of the information is limited to

– Disclosing the information to the affiliates ofthe financial institution from which it receivedthe information

– Disclosing the information to its own affiliates,who may, in turn disclose the information onlyto the extent that the financial institution maydo so

– Disclosing the information to any other person,if the disclosure would be lawful if madedirectly to that person by the financial institu-tion from which it received the information. Forexample, an institution that received a cus-tomer list from another financial institutioncould disclose the list (1) in accordance withthe privacy policy of the financial institutionthat provided the list, (2) subject to any opt-outelection or revocation by the consumers onthe list, and (3) in accordance with appropri-ate exceptions under sections 14 and 15.

Other Matters

Fair Credit Reporting Act

Regulation P does not modify, limit, or supersedethe operation of the Fair Credit Reporting Act.

State Law

Regulation P does not supersede, alter, or affectany state statute, regulation, order, or interpreta-tion, except to the extent that it is inconsistent withthe regulation. A state statute, regulation, order, orother interpretation is consistent with the regulationif it affords any consumer greater protection thanthat provided under the regulation, as determinedby the Federal Trade Commission.

Grandfathered Service Contracts

Contracts that a financial institution entered into onor before July 1, 2000, with a nonaffiliated thirdparty to perform services for the financial institutionor functions on its behalf, as described in sec-tion 13, satisfied the confidentiality requirementsof section 13(a)(1)(ii) until July 1, 2002, even if thecontract did not include a requirement that the thirdparty maintain the confidentiality of nonpublicpersonal information.

Guidelines forProtecting Customer Information

Regulation P requires a financial institution todisclose its policies and practices for protectingthe confidentiality, security, and integrity of nonpub-lic personal information about consumers (whetheror not they are customers). The disclosure need notdescribe these policies and practices in detail.Instead, the disclosures may describe in generalterms who is authorized to have access to theinformation and whether the institution has securitypractices and procedures in place to ensure theconfidentiality of the information in accordance withthe institution’s policies.

The FFIEC (Federal Financial Institutions Exami-nation Council) has published guidelines, pursuantto section 501(b) of the Gramm−Leach−Bliley Act,that address the steps a financial institution shouldtake in order to protect customer information. Theguidelines relate only to information about custom-ers, rather than all consumers. Compliance exam-iners should consider the findings of a 501(b)inspection during the compliance examination of afinancial institution for purposes of evaluating theaccuracy of the institution’s disclosure regardingdata security.



Regulation PExamination Objectives andInitial Examination Procedures


1. To assess the quality of a financial institution’scompliance management policies and proce-dures for implementing Regulation P, specifi-cally, ensuring consistency between what thefinancial institution tells consumers in its noticesabout its policies and practices and what itactually does

2. To determine the reliance that can be placed ona financial institution’s internal controls andprocedures for monitoring the institution’s com-pliance with Regulation P

3. To determine a financial institution’s compliancewith Regulation P, specifically in meeting thefollowing requirements:

• Providing to customers notices of its privacypolicies and practices that are timely, accu-rate, clear and conspicuous, and deliveredso that each customer can reasonably beexpected to receive actual notice

• Disclosing nonpublic personal information tononaffiliated third parties, other than underan exception, after first meeting the applica-ble requirements for giving consumers noticeand the right to opt out

• Appropriately honoring consumer opt-outdirections

• Lawfully using or disclosing nonpublic per-sonal information received from a nonaffili-ated financial institution

• Disclosing account numbers only accordingto the limits in the regulation

4. To initiate effective corrective actions whenviolations of law are identified, or when policiesor internal controls are deficient

INITIAL EXAMINATION PROCEDURES

A. Through discussions with management andreview of available information, identify theinstitution’s practices of sharing information withaffiliates and nonaffiliated third parties (andchanges in those practices); how the institutiontreats nonpublic personal information; and howit administers opt-outs. Consider the following,as appropriate:

1. Notices (initial, annual, revised, opt-out, short-form, and simplified)

2. Institutional privacy policies and procedures,including those to

• Process requests for nonpublic personal

information, including requests for aggre-gated data

• Deliver notices to consumers

• Manage consumer opt-out directions (forexample, designating opt-out files, allow-ing a reasonable time to opt out, provid-ing new opt-out and privacy notices whennecessary, receiving opt-out directions,handling joint account holders)

• Prevent the unlawful disclosure and useof the information received from nonaffili-ated financial institutions

• Prevent the unlawful disclosure of accountnumbers

3 Information-sharing agreements between theinstitution and affiliates as well as serviceagreements or contracts between the institu-tion and nonaffiliated third parties to obtain orprovide information or services

4. Complaint logs, telemarketing scripts, andany other information obtained from nonaffili-ated third parties (Note: Review telemarket-ing scripts to determine whether the contrac-tual terms set forth under section 13 are metand whether the institution is disclosingaccount-number information in violation ofsection 12.)

5. Categories of nonpublic personal informationcollected from or about consumers whenobtaining a financial product or service(for example, in the application process fordeposit, loan, or investment products; foran over-the-counter purchase of a bankcheck; from e-banking products or services,including the data collected electronicallythrough Internet cookies; or through ATMtransactions)

6. Categories of nonpublic personal informationshared with, or received from, each nonaffili-ated third party

7. Consumer complaints regarding the treat-ment of nonpublic personal information,including complaints received electronically

8. Records that reflect the bank’s categoriza-tion of its information-sharing practices undersections 13, 14, and 15 and outside theseexceptions

9. Results of a 501(b) inspection (used todetermine the accuracy of the institution’sprivacy disclosures regarding data security)

B. Use the information gathered via procedure A towork through the ‘‘Privacy Notices and Opt-Out


Provisions’’ decision tree (appendix A at the endof this chapter). Identify which of the sixexamination procedures modules is (are) appli-cable. (The modules follow this set of initialprocedures.)

C. Use the information gathered via procedure A towork through the ‘‘Reuse and Redisclosure’’and ‘‘Account-Number Sharing’’ decision trees,as necessary (appendixes B and C at the endof this chapter). Identify the applicable exami-nation procedures module(s).

D. Determine the adequacy of the financial institu-tion’s internal controls and procedures to ensurecompliance with Regulation P. Consider all ofthe following:

1. Sufficiency of internal policies, procedures,and controls, including those related to newproducts and services and controls overservicing arrangements and marketingarrangements

2. Effectiveness of management informationsystems, including exception reports, thestandardization of forms and procedures,and the use of technology for monitoring

3. Frequency and effectiveness of monitoringprocedures

4. Adequacy and regularity of the institution’straining program

5. Suitability of the compliance audit programfor ensuring that

• The procedures address all regulatoryprovisions, as applicable

• The work is accurate and comprehensivewith respect to the institution’s information-sharing practices

• The frequency is appropriate

• Conclusions are appropriately reachedand presented to responsible parties

• Steps are taken to correct deficienciesand to follow up on previously identifieddeficiencies

6. Knowledge level of management andpersonnel

E. Ascertain areas of risk associated with thefinancial institution’s sharing practices (espe-cially those within section 13 and those that falloutside the exceptions) and any weaknessesfound within the compliance management pro-gram. Follow up on any outstanding deficien-cies identified in the audit when completing themodules.

F. On the basis of the results of the foregoing initialprocedures and discussions with management,determine which procedures in the applicableexamination procedures module, if any, shouldbe completed, focusing on areas of particularrisk. The selection of procedures to be com-pleted depends on the adequacy of the institu-tion’s compliance management system and thelevel of risk identified. Each module contains aset of general instructions for verifying compli-ance, cross-referenced to cites within the regu-lation. Each module also contains cross-references to more questions, which theexaminer may use if needed to evaluate com-pliance in more detail.

G. Evaluate any additional information or documen-tation discovered during the course of theexamination according to these procedures.Note that this may reveal new or differentsharing practices, necessitating reapplicationof the decision trees and completion of addi-tional or different modules.

H. Formulate conclusions.

1. Summarize all findings.

2. For violation(s) noted, determine the causeby identifying weaknesses in internal con-trols, compliance review, training, manage-ment oversight, or other areas.

3. Identify action needed to correct violationsand weaknesses in the institution’s compli-ance system, as appropriate.

4. Discuss findings with management, andobtain a commitment for corrective action.

Privacy of Consumer Financial Information: Initial Examination Procedures


Regulation PExamination Procedures—Module 1

For reviewing the sharing of nonpublic personalinformation with nonaffiliated third parties undersections 14 and/or 15 of Regulation P and outsidethe exceptions (with or without also sharing undersection 13)

(Note: Financial institutions whose practices fallwithin this category engage in the most expansivedegree of information sharing permissible. Conse-quently, these institutions are held to the mostcomprehensive compliance standards imposed bythe privacy regulation.)

A. Disclosure of Nonpublic Personal Information

1. Select a sample of third-party relationshipswith nonaffiliated third parties, and then asample of data shared between the institu-tion and the third party both inside andoutside the exceptions. The sample shouldinclude a cross-section of relationships butshould emphasize those that are higher riskin nature as determined by the initial proce-dures. Make the following comparisons toevaluate the financial institution’s compli-ance with disclosure limitations:

a. Compare the categories of data sharedand the entities with which the data wereshared with the categories stated in theprivacy notice. Verify that what the institu-tion tells consumers (customers and thosewho are not customers) in its noticesabout its policies and practices in thisregard is consistent with what the institu-tion actually does. (§§ 216.10 and 6)

b. Compare the data shared with a sampleof opt-out directions and verify that onlynonpublic personal information coveredunder the exceptions, or from consumers(customers and those who are not cus-tomers) who chose not to opt out, isshared. (§ 216.10)

2. If the financial institution also shares informa-tion under section 13, obtain and reviewcontracts with nonaffiliated third parties thatperform services for the financial institutionthat are not covered by the exceptions insection 14 or 15. Determine whether thecontracts prohibit the third party from disclos-ing or using the information other than tocarry out the purposes for which the informa-tion was disclosed. Note that the ‘‘grand-father’’ provisions of section 18 may apply tocertain contracts. (§ 216.13(a))

B. Presentation, Content, and Deliveryof Privacy Notices

1. Review the financial institution’s initial, annual,and revised notices as well as any short-formnotices that the institution may use forconsumers who are not customers. Deter-mine whether or not these notices

a. Are clear and conspicuous (§§ 216.3(b),4(a), 5(a)(1), and 8(a)(1))

b. Accurately reflect the institution’s policiesand practices (§§ 216.4(a), 5(a)(1), and8(a)(1)) (Note: This includes practicesdisclosed in the notices that exceedregulatory requirements.)

c. Include, and adequately describe, allrequired items of information and containexamples, as applicable (§ 216.6) (Notethat if the institution shares informationunder section 13, the notice provisions forthat section also apply.)

2. Through discussions with management, areview of the institution’s policies and proce-dures, and a sample of electronic or writtenconsumer records when available, deter-mine if the institution has adequate proce-dures in place to provide notices to consum-ers, as appropriate. Assess the following:

a. Timeliness of delivery (§§ 216.4(a), 7(c),and 8(a))

b. Reasonableness of the method of delivery(for example, by hand; by mail; electroni-cally, if the consumer agrees; or as anecessary step of a transaction) (§ 216.9)

c. For customers only, review the timelinessof delivery (§§ 216.4(d), 4(e), and 5(a)),the means of delivery of the annual notice(§ 216.9(c)), and the accessibility of orability to retain the notice (§ 216.9(e)).

C. Opt-Out Right

1. Review the financial institution’s opt-out no-tices. An opt-out notice may be combinedwith the institution’s privacy notices. Regard-less, determine whether the opt-out notices

a. Are clear and conspicuous (§§ 216.3(b)and 7(a)(1))

b. Accurately explain the right to opt out(§ 216.7(a)(1))

c. Include and adequately describe thethree required items of information (the


institution’s policy regarding disclosure ofnonpublic personal information, the con-sumer’s opt-out right, and the means toopt out) (§ 216.7(a)(1))

d. Describe how the institution treats jointconsumers (customers and those who arenot customers), as applicable (§ 216.7(d))

2. Through discussions with management, areview of the institution’s policies and proce-dures, and a sample of electronic or writtenrecords where available, determine if theinstitution has adequate procedures in placeto provide the opt-out notice and comply withthe opt-out directions of consumers (custom-ers and those who are not customers), asappropriate. Assess the following:

a. Timeliness of delivery (§ 216.10(a)(1))


c. Reasonableness of the opportunity to optout (the time period, and the meansby which the consumer may opt out)(§§ 216.10(a)(1)(iii) and 10(a)(3))

d. Adequacy of procedures to implementand track the status of consumers’ (cus-tomers and those who are not customers)opt-out directions, including those offormer customers (§ 216.7(e), (f), and (g))

D. Checklist Cross-References

Regulationsection

Subject Checklistquestions

216.4(a), 6(a, b, c,e), and 9(a, b, g)

Privacy notices(presentation,content, anddelivery)

2, 8–11, 14,18, 35, 36,and 40

216.4(a, c, d, e), 5,and 9(c, e)

Rules for deliveringcustomer notices

1, 3–7, 37,and 38

216.13 Section 13 noticeand contractingrules (asapplicable)

12 and 47

216.6(d) Short-form noticerules (optional forconsumers only)

15–17

216.7, 8, and 10 Opt-out rules 19–34 and41–43

216.14 and 15 Exceptions 48−50

Privacy of Consumer Financial Information: Examination Procedures—Module 1



For reviewing the sharing of nonpublic personalinformation with nonaffiliated third parties undersections 13, 14, and 15 of Regulation P, but notoutside these exceptions


1. Select a sample of third-party relationshipswith nonaffiliated third parties, and then asample of data shared between the institu-tion and the third party. The sample shouldinclude a cross-section of relationships butshould emphasize those that are higher riskin nature as determined by the initial proce-dures. Make the following comparisons toevaluate the financial institution’s compli-ance with disclosure limitations:

a. Review the data shared and the entitieswith which the data were shared to ensurethat the institution accurately categorizedits information-sharing practices and isnot sharing nonpublic personal informa-tion outside the exceptions. (§§ 216.13–15)

b. Compare the categories of data sharedand the entities with which the data wereshared with the categories stated in theprivacy notice. Verify that what the institu-tion tells consumers in its notices about itspolicies and practices in this regard isconsistent with what the institution actu-ally does. (§§ 216.10 and 6)

2. Review contracts with nonaffiliated thirdparties that perform services for the financialinstitution that are not covered by the excep-tions in section 14 or 15. Determine whetherthe contracts adequately prohibit the thirdparty from disclosing or using the informationother than to carry out the purposes for whichthe information was disclosed. Note that the‘‘grandfather’’ provisions of section 18 applyto certain of these contracts. (§ 216.13(a))


1. Review the financial institution’s initial andannual privacy notices. Determine whetheror not they

a. Are clear and conspicuous (§§ 216.3(b),4(a), and 5(a)(1))

b. Accurately reflect the institution’s policiesand practices (§ 216.4(a) and 5(a)(1))(Note: This includes practices disclosedin the notices that exceed regulatoryrequirements.)

c. Include, and adequately describe, allrequired items of information and containexamples as applicable (§§ 216.6 and13)

2. Through discussions with management, areview of the institution’s policies and proce-dures, and a sample of electronic or writtenconsumer records when available, deter-mine if the institution has adequate proce-dures in place to provide notices to consum-ers, as appropriate. Assess the following:

a. Timeliness of delivery (§ 216.4(a))


c. For customers only, review the timelinessof delivery (§§ 216.4(d), 4(e), and 5(a)),the means of delivery of the annual notice(§ 216.9(c)), and the accessibility of orability to retain the notice. (§ 216.9(e))

C. Checklist Cross-References

Regulationsection


216.4(a), 6(a, b, c,e), and 9(a, b, g)

Privacy notices(presentation,content, anddelivery)

2, 8–11, 14,18, 35, 36,and 40

216.13 Section 13 noticeand contractingrules (asapplicable)

12 and 47

216.4(a, c, d, e), 5,and 9(c, e)

Rules for deliveringcustomer notices

1, 3–7, 37,and 38

216.14 and 15 Exceptions 48–50



For reviewing the sharing of nonpublic personalinformation with nonaffiliated third parties onlyunder sections 14 and 15 of Regulation P

(Note: This module applies only to customers.)


1. Select a sample of third-party relationshipswith nonaffiliated third parties, and then asample of data shared between the institu-tion and the third party.

2. Review the data shared and the entities withwhich the data were shared to ensure thatthe institution accurately states its information-sharing practices and is not sharing non-public personal information outside theexceptions.


1. Obtain and review the financial institution’sinitial and annual notices, as well as anysimplified notice the institution may use. Notethat the institution may use the simplifiednotice only when it does not also sharenonpublic personal information with affiliatesoutside section 14 and 15 exceptions. Deter-mine whether or not these notices

a. Are clear and conspicuous (§§ 216.3(b),4(a), and 5(a)(1))

b. Accurately reflect the institution’s policiesand practices (§§ 216.4(a) and 5(a)(1))(Note: This includes practices disclosedin the notices that exceed regulatoryrequirements.)

c. Include, and adequately describe, allrequired items of information (§ 216.6)

2. Through discussions with management, areview of the institution’s policies and proce-dures, and a sample of electronic or writtencustomer records when available, determineif the institution has adequate procedures inplace to provide notices to customers, asappropriate. Assess the following:

a. Timeliness of delivery (§§ 216.4(a), 4(d),4(e), and 5(a))

b. Reasonableness of the method of delivery(for example, by hand; by mail; electroni-cally, if the customer agrees; or as anecessary step of a transaction) (§ 216.9)and the accessibility of or ability to retainthe notice (§ 216.9(e))


Regulationsection


216.6 Customer-noticecontent andpresentation

8–11, 14, and18

216.6(c)(5) Simplified-noticecontent (optional)

13

216.4(a, d, e), 5,and 9

Customer-noticedelivery process

1, 3–7, and35–40

216.14 and 15 Exceptions 48–50



For reviewing the reuse and redisclosure of non-public personal information received from a non-affiliated financial institution under sections 14 and15 of Regulation P

A. Through discussions with management and areview of the institution’s procedures, determinewhether the institution has adequate practicesin place to prevent the unlawful redisclosureand reuse of information when the institution isthe recipient of nonpublic personal information.(§ 216.11(a))

B. Select a sample of data received from nonaffili-ated financial institutions to evaluate the finan-cial institution’s compliance with reuse andredisclosure limitations.

1. Verify that the institution redisclosed informa-tion only to affiliates of the financial institutionfrom which the information was obtained orto the institution’s own affiliates, except asotherwise allowed. (§ 216.11(a)(1)(i) and (ii))

2. Verify that the institution uses and shares thedata only pursuant to an exception in sec-tions 14 and 15. (§ 216.11(a)(1)(iii))


Regulationsection

Subject Checklistquestion

216.11(a) Reuse andredisclosure

44



For reviewing the redisclosure of nonpublic per-sonal information received from a nonaffiliatedfinancial institution outside sections 14 and 15 ofRegulation P

A. Through discussions with management and areview of the institution’s procedures, determinewhether the institution has adequate practicesin place to prevent the unlawful redisclosure ofinformation when the institution is the recipientof nonpublic personal information. (§ 216.11(b))

B. Select a sample of data received from nonaffili-ated financial institutions and shared with othersto evaluate the financial institution’s compliancewith the redisclosure limitations.

1. Verify that the institution’s redisclosure of theinformation was only to affiliates of thefinancial institution from which the informa-tion was obtained or to the institution’s own

affiliates, except as otherwise allowed.(§§ 216.11(b)(1)(i) and (ii))

2. If the institution shares information, verify thatthe institution’s information-sharing practicesconform to those in the nonaffiliated financialinstitution’s privacy notice. (§ 216.11(b)(1)(iii))

3. Also, review the procedures used by theinstitution to ensure that the information-sharing reflects the opt-out status of theconsumers of the nonaffiliated financial insti-tution. (§§ 216.10 and 11(b)(1)(iii))


Regulationsection


216.11(b) Reuse andredisclosure

45



For reviewing the sharing of account numbers

A. If available, review a sample of telemarketingscripts used when making sales calls, todetermine whether the scripts indicate that thetelemarketers have the account numbers of theinstitution’s consumers. (§ 216.12)

B. Obtain and review a sample of contracts withagents or service providers to whom thefinancial institution discloses account numbersfor use in connection with marketing the institu-tion’s own products or services. Determinewhether the institution shares account numberswith nonaffiliated third parties only to conductmarketing for the institution’s own products andservices. Ensure that the contracts do notauthorize these nonaffiliated third parties to

directly initiate charges to customer’s accounts.(§ 216.12(b)(1))

C. Obtain a sample of materials and informationprovided to the consumer upon entering aprivate-label or affinity credit card program.Determine if the participants in each programare identified to the customer when the cus-tomer enters into the program. (§ 216.12(b)(2))

D. Checklist Cross-References

Regulationsection


216.12 Account-numbersharing

46


Regulation PExamination Checklist

SUBPART A

Initial Privacy Notice1. Does the institution provide a clear and conspicuous notice that accurately

reflects its privacy policies and practices to all customers not later than whenthe customer relationship is established, other than as allowed in para-graph (e) of section 216.4 of Regulation P? (§ 216.4(a)(1)) Yes No

Note: No notice is required if nonpublic personal information is disclosed tononaffiliated third parties only under an exception in sections 216.14 and 15and there is no customer relationship. (§ 216.4(b)) With respect to creditrelationships, an institution establishes a customer relationship when itoriginates a consumer loan. If the institution subsequently sells the servicingrights to the loan to another financial institution, the customer relationshiptransfers with the servicing rights. (§ 216.4(c))

2. Does the institution provide a clear and conspicuous notice that accuratelyreflects its privacy policies and practices to all consumers who are notcustomers before any nonpublic personal information about the consumer isdisclosed to a nonaffiliated third party, other than under an exception insection 216.14 or 15? (§ 216.4(a)(2)) Yes No

3. Does the institution provide to existing customers who obtain a new financialproduct or service an initial privacy notice that covers the customer’s newfinancial product or service, if the most recent notice provided to thecustomer was not accurate with respect to the new financial product orservice? (§ 216.4(d)(1)) Yes No

4. After establishing a customer relationship, does the institution provide initialnotice only under one of the following circumstances?

a. The customer relationship is not established at the customer’s election(§ 216.4(e)(1)(i)) Yes No

b. To do otherwise would substantially delay the customer’s transaction (forexample, in the case of a telephone application) and the customer agreesto the subsequent delivery (§ 216.4 (e)(1)(ii)) Yes No

5. When the subsequent delivery of a privacy notice is permitted, does theinstitution provide notice after establishing a customer relationship within areasonable time? (§ 216.4(e)) Yes No

Annual Privacy Notice6. Does the institution provide a clear and conspicuous notice that accurately

reflects its privacy policies and practices at least annually (that is, at leastonce in any period of 12 consecutive months) to all customers, throughoutthe customer relationship? (§§ 216.5(a)(1)and (2)) Yes No

Note: Annual notices are not required for former customers. (§§ 216.5(b)(1)and (2))

7. Does the institution provide an annual privacy notice to each customer forwhom the institution owns the loan-servicing rights? (§§ 216.5(c) and4(c)(2)) Yes No


Content of Privacy Notices8. Do the initial, annual, and revised privacy notices include each of the

following, as applicable?

a. The categories of nonpublic personal information that the institutioncollects (§ 216.6(a)(1)) Yes No

b. The categories of nonpublic personal information that the institutiondiscloses (§ 216.6(a)(2)) Yes No

c. The categories of affiliates and nonaffiliated third parties to whom theinstitution discloses nonpublic personal information, other than parties towhom information is disclosed under an exception in section 216.14 or 15(§ 216.6(a)(3)) Yes No

d. The categories of nonpublic personal information disclosed about formercustomers, and the categories of affiliates and nonaffiliated third parties towhom the institution discloses that information, other than those parties towhom the institution discloses information under an exception in section216.14 or 15 (§ 216.6(a)(4)) Yes No

e. If the institution discloses nonpublic personal information to a nonaffiliatedthird party under section 216.13 and no exception under section 216.14 or15 applies, a separate statement of the categories of information theinstitution discloses and the categories of third parties with whom theinstitution has contracted (§ 216.6(a)(5)) Yes No

f. An explanation of the opt-out right, including the method(s) of opting outthat the consumer may use at the time of the notice (§ 216.6(a)(6)) Yes No

g. Any disclosures the institution makes under section 603(d)(2)(A)(iii) of theFair Credit Reporting Act (§ 216.6(a)(7)) Yes No

h. The institution’s policies and practices with respect to protecting theconfidentiality and security of nonpublic personal information (§ 216.6(a)(8)) Yes No

i. A general statement—with no specific reference to the exceptions or to thethird parties—that the institution makes disclosures to other nonaffiliatedthird parties as permitted by law (§§ 216.6(a)(9) and (b)) Yes No

Note: Sample clauses for these items appear in appendix A to Regulation P.

9. Does the institution list the following categories of nonpublic personalinformation that it collects, as applicable?

a. Information from the consumer (§ 216.6(c)(1)(i)) Yes No

b. Information about the consumer’s transactions with the institution or itsaffiliates (§ 216.6(c)(1)(ii)) Yes No

c. Information about the consumer’s transactions with nonaffiliated thirdparties (§ 216.6(c)(1)(iii)) Yes No

d. Information from a consumer reporting agency (§ 216.6(c)(1)(iv)) Yes No

10. Does the institution list the following categories of nonpublic personalinformation that it discloses, as applicable, and a few examples of each or,alternatively, state that it reserves the right to disclose all the nonpublicpersonal information that it collects?

a. Information from the consumer Yes No

b. Information about the consumer’s transactions with the institution or itsaffiliates Yes No

c. Information about the consumer’s transactions with nonaffiliated thirdparties Yes No

Privacy of Consumer Financial Information: Examination Checklist


d. Information from a consumer reporting agency (§ 216.6(c)(2)) Yes No

Note: Examples are recommended under section 216.6(c)(2), although notunder section 216.6(c)(1).

11. Does the institution list the following categories of affiliates and nonaffiliatedthird parties to whom it discloses information, as applicable, and a fewexamples to illustrate the types of third parties in each category?

a. Financial service providers (§ 216.6(c)(3)(i)) Yes No

b. Nonfinancial companies (§ 216.6(c)(3)(ii)) Yes No

c. Others (§ 216.6(c)(3)(iii)) Yes No

12. Does the institution make the following disclosures regarding serviceproviders and joint marketers to whom it discloses nonpublic personalinformation under section 216.13?

a. As applicable, the same categories and examples of nonpublic personalinformation disclosed as described in paragraphs (a)(2) and (c)(2) ofsection 216.6 (see questions 8b and 10) (§ 216.6(c)(4)(i)) Yes No

b. That the third party is a service provider that performs marketing on theinstitution’s behalf or on behalf of the institution and another financialinstitution or (§ 216.6(c)(4)(ii)(A)) Yes No

c. That the third party is a financial institution with which the institution has ajoint marketing agreement (§ 216.6(c)(4)(ii)(B)) Yes No

13. If the institution does not disclose nonpublic personal information and doesnot reserve the right to do so, other than under exceptions in sections 216.14and 15, does the institution provide a simplified privacy notice that contains,at a minimum, all of the following?

a. A statement to this effect Yes No

b. The categories of nonpublic personal information it collects Yes No

c. The policies and practices the institution uses to protect the confidentialityand security of nonpublic personal information Yes No

d. A general statement that the institution makes disclosures to othernonaffiliated third parties as permitted by law (§ 216.6(c)(5)) Yes No

Note: Use of this type of simplified notice is optional; an institution may alwaysuse a full notice.

14. Does the institution describe the following about its policies and practiceswith respect to protecting the confidentiality and security of nonpublicpersonal information?

a. Who is authorized to have access to the information (§ 216.6(c)(6)(i)) Yes No

b. Whether security practices and policies are in place to ensure theconfidentiality of the information in accordance with the institution’s policy(§ 216.6(c)(6)(ii)) Yes No

Note: The institution is not required to describe technical information aboutthe safeguards used in this respect.

15. If the institution provides a short-form initial privacy notice with the opt-outnotice, does the institution do so only to consumers with whom the institutiondoes not have a customer relationship? (§ 216.6(d)(1)) Yes No

16. If the institution provides a short-form initial privacy notice according tosection 216.6(d)(1), does the short-form initial notice

a. Conform to the definition of ‘‘clear and conspicuous,’’ (§ 216.6(d)(2)(i)) Yes No



b. State that the institution’s full privacy notice is available upon requestand, (§ 216.6(d)(2)(ii)) Yes No

c. Explain a reasonable means by which the consumer may obtain the notice(§ 216.6(d)(2)(iii)) Yes No

Note: The institution is not required to deliver the full privacy notice with theshort-form initial notice. (§ 216.6(d)(3))

17. Does the institution provide consumers who receive the short-form initialnotice with a reasonable means of obtaining the longer initial notice, such as

a. A toll-free telephone number that the consumer may call to request thenotice or (§ 216.6(d)(4)(i)) Yes No

b. Copies available for immediate hand-delivery to consumers who conductbusiness in person at the institution’s office (§ 216.6(d)(4)(ii)) Yes No

18. If the institution, in its privacy policies, reserves the right to disclosenonpublic personal information to nonaffiliated third parties in the future, doesthe privacy notice include the following, as applicable?

a. Categories of nonpublic personal information that the institution reservesthe right to disclose in the future but does not currently disclose and(§ 216.6(e)(1)) Yes No

b. Categories of affiliates or nonaffiliated third parties to whom the institutionreserves the right in the future to disclose, but to whom it does notcurrently disclose, nonpublic personal information (§ 216.6(e)(2)) Yes No

Opt-Out Notice19. If the institution discloses nonpublic personal information about a consumer

to a nonaffiliated third party and the exceptions under sections 216.13−15 donot apply, does the institution provide the consumer with a clear andconspicuous opt-out notice that accurately explains the right to opt out?(§ 216.7(a)(1)) Yes No

20. Does the opt-out notice state the following?

a. That the institution discloses or reserves the right to disclose nonpublicpersonal information about the consumer to a nonaffiliated third party(§ 216.7(a)(1)(i)) Yes No

b. That the consumer has the right to opt out of that disclosure(§ 216.7(a)(1)(ii)) Yes No

c. A reasonable means by which the consumer may opt out (§ 216.7(a)(1)(iii)) Yes No

21. Does the institution provide the consumer with the following information aboutthe right to opt out?

a. All the categories of nonpublic personal information that the institutiondiscloses or reserves the right to disclose (§ 216.7(a)(2)(i)(A)) Yes No

b. All the categories of nonaffiliated third parties to whom the information isdisclosed (§ 216.7(a)(2)(i)(A)) Yes No

c. That the consumer has the right to opt out of the disclosure of thatinformation (§ 216.7(a)(2)(i)(A)) Yes No

d. The financial products or services that the consumer obtains to which theopt-out direction would apply (§ 216.7(a)(2)(i)(B)) Yes No

22. Does the institution provide the consumer with at least one of the followingreasonable means of opting out, or with another reasonable means?

a. Check-off boxes prominently displayed on the relevant forms with theopt-out notice (§ 216.7(a)(2)(ii)(A)) Yes No



b. A reply form included with the opt-out notice (§ 216.7(a)(2)(ii)(B)) Yes No

c. An electronic means to opt out, such as a form that can be sent viaelectronic mail or a process at the institution’s web site, if the consumeragrees to the electronic delivery of information (§ 216.7(a)(2)(ii)(C)) Yes No

d. A toll-free telephone number (§ 216.7(a)(2)(ii)(D)) Yes No

Note: The institution may require the consumer to use one specific means ofopting out, as long as that means is reasonable for that consumer.(§ 216.7(a)(iv))

23. If the institution delivers the opt-out notice after the initial notice, does theinstitution provide the initial notice once again with the opt-out notice?(§ 216.7(c)) Yes No

24. Does the institution provide an opt-out notice, to at least one party in a jointconsumer relationship, explaining how the institution will treat opt-outdirections by the joint consumers? (§ 216.7(d)(1)) Yes No

25. Does the institution permit each of the joint consumers in a joint relationshipto opt out? (§ 216.7(d)(2)) Yes No

26. Does the opt-out notice to joint consumers state that either

a. The institution will consider an opt-out by a joint consumer as applying toall associated joint consumers or (§ 216.7(d)(2)(i)) Yes No

b. Each joint consumer is permitted to opt out separately (§ 216.7(d)(2)(ii)) Yes No

27. If each joint consumer may opt out separately, does the institution permit

a. One joint consumer to opt out on behalf of all of the joint consumers,(§ 216.7(d)(3)) Yes No

b. The joint consumers to notify the institution in a single response, and(§ 216.7(d)(5)) Yes No

c. Each joint consumer to opt out for himself or herself or for another jointconsumer (§ 216.7(d)(5)) Yes No

28. Does the institution refrain from requiring all joint consumers to opt out beforeimplementing any opt-out direction with respect to the joint account?(§ 216.7(d)(4)) Yes No

29. Does the institution comply with a consumer’s direction to opt out as soon asis reasonably practicable after receiving it? (§ 216.7(e)) Yes No

30. Does the institution allow the consumer to opt out at any time? (§ 216.7(f)) Yes No

31. Does the institution continue to honor the consumer’s opt-out direction untilrevoked by the consumer in writing or, if the consumer agrees, electronically?(§ 216.7(g)(1)) Yes No

32. When a customer relationship ends, does the institution continue to apply thecustomer’s opt-out direction to the nonpublic personal information collectedduring, or related to, that specific customer relationship (but not to newrelationships, if any, subsequently established by that customer)?(§ 216.7(g)(2)) Yes No

Revised Notices33. Except as permitted by sections 216.13−15, does the institution refrain from

disclosing any nonpublic personal information about a consumer to anonaffiliated third party, other than as described in the initial privacy noticeprovided to the consumer, unless



a. The institution has provided the consumer with a clear and conspicuousrevised notice that accurately describes the institution’s privacy policiesand practices, (§ 216.8(a)(1)) Yes No

b. The institution has provided the consumer with a new opt-out notice,(§ 216.8(a)(2)) Yes No

c. The institution has given the consumer a reasonable opportunity to opt outof the disclosure, before disclosing any information, and (§ 216.8(a)(3)) Yes No

d. The consumer has not opted out (§ 216.8(a)(4)) Yes No

34. Does the institution deliver a revised privacy notice when it does any one ofthe following?

a. Discloses a new category of nonpublic personal information to anonaffiliated third party (§ 216.8(b)(1)(i)) Yes No

b. Discloses nonpublic personal information to a new category of nonaffili-ated third party (§ 216.8(b)(1)(ii)) Yes No

c. Discloses nonpublic personal information about a former customer to anonaffiliated third party, if that former customer has not had theopportunity to exercise an opt-out right regarding that disclosure(§ 216.8(b)(1)(iii)) Yes No

Note: A revised notice is not required if the institution adequately describedthe nonaffiliated third party or information to be disclosed in the prior privacynotice. (§ 216.8(b)(2))

Delivery Methods35. Does the institution deliver the privacy and opt-out notices, including the

short-form notice, so that the consumer can reasonably be expected toreceive the actual notice in writing or, if the consumer agrees, electronically?(§ 216.9(a)) Yes No

36. Does the institution use a reasonable means for delivering the notices, suchas the following?

a. Hand-delivery of a printed copy (§ 216.9(b)(1)(i)) Yes No

b. Mailing a printed copy to the last known address of the consumer(§ 216.9(b)(1)(ii)) Yes No

c. For the consumer who conducts transactions electronically, posting thenotice clearly and conspicuously on the institution’s electronic site andrequiring the consumer to acknowledge receipt as a necessary step toobtaining a financial product or service (§ 216.9(b)(1)(iii)) Yes No

d. For isolated transactions, such as ATM transactions, posting the notice onthe screen and requiring the consumer to acknowledge receipt as anecessary step to obtaining the financial product or service(§ 216.9(b)(1)(iv)) Yes No

Note: Insufficient or unreasonable means of delivery include exclusively oralnotice, in person or by telephone; branch or office signs or generallypublished advertisements; and electronic mail to a customer who does notobtain products or services electronically. (§§ 216.9(b)(2)(i) and (ii) and216.9(d))

37. For annual notices only, if the institution does not employ one of the methodsdescribed in question 36, does the institution employ one of the followingreasonable means of delivering the notice?



a. For the customer who uses the institution’s web site to access productsand services electronically and who agrees to receive notices at the website, continuously posting the current privacy notice on the web site in aclear and conspicuous manner (§ 216.9(c)(1)) Yes No

b. For the customer who has requested that the institution refrain fromsending any information about the customer relationship, making copiesof the current privacy notice available upon customer request(§ 216.9(c)(2)) Yes No

38. For customers only, does the institution ensure that the initial, annual, andrevised notices can be retained or obtained later by the customer in writingor, if the customer agrees, electronically? (§ 216.9(e)(1)) Yes No

39. Does the institution use an appropriate means to ensure that notices can beretained or obtained later, such as one of the following?

a. Hand-delivery of a printed copy of the notice (§ 216.9(e)(2)(i)) Yes No

b. Mailing a printed copy to the last known address of the customer(§ 216.9(e)(2)(ii)) Yes No

c. Making the current privacy notice available on the institution’s web site (orvia a link to the notice at another site) for the customer who agrees toreceive the notice at the web site (§ 216.9(e)(2)(iii)) Yes No

40. Does the institution provide at least one initial, annual, and revised notice, asapplicable, to joint consumers? (§ 216.9(g)) Yes No

SUBPART B

Limits on Disclosure to Nonaffiliated Third Parties41. Does the institution refrain from disclosing any nonpublic personal informa-

tion about a consumer to a nonaffiliated third party, other than as permittedunder sections 216.13–15, unless all of the following have occurred?

a. It has provided the consumer with an initial notice. (§ 216.10(a)(1)(i)) Yes No

b. It has provided the consumer with an opt-out notice. (§ 216.10(a)(1)(ii)) Yes No

c. It has given the consumer a reasonable opportunity to opt out before thedisclosure. (§ 216.10(a)(1)(iii)) Yes No

d. The consumer has not opted out. (§ 216.10(a)(1)(iv)) Yes No

Note: This disclosure limitation applies to consumers as well as to customers(§ 216.10(b)(1)), and to all nonpublic personal information regardless ofwhether it was collected before or after receiving an opt-out direction.(§ 216.10(b)(2))

42. Does the institution provide the consumer with a reasonable opportunity toopt out, such as by one of the following?

a. Mailing the notices required by section 216.10 and allowing the consumerto respond by toll-free telephone number, return mail, or other reasonablemeans (see question 22) within 30 days from the date mailed(§ 216.10(a)(3)(i)) Yes No

b. Where the consumer opens an online account with the institution andagrees to receive the notices required by section 216.10 electronically,allowing the consumer to opt out by any reasonable means (see question22) within 30 days from consumer acknowledgement of receipt of thenotice in conjunction with opening the account (§ 216.10(a)(3)(ii)) Yes No



c. For isolated transactions, providing the notices required by section 216.10at the time of the transaction and requesting that the consumer decide, asa necessary part of the transaction, whether to opt out before completionof the transaction (§ 216.10(a)(3)(iii)) Yes No

43. Does the institution allow the consumer to select certain nonpublic personalinformation or certain nonaffiliated third parties with respect to which theconsumer wishes to opt out? (§ 216.10(c)) Yes No

Note: An institution may allow partial opt-outs in addition to, but may not allowthem instead of, a comprehensive opt-out.

Limits on Redisclosure and Reuse of Information44. If the institution receives information from a nonaffiliated financial institution

under an exception in section 216.14 or 15, does the institution refrain fromusing or disclosing the information except under the following circumstances?

a. Disclosure to the affiliates of the financial institution from which it receivedthe information (§ 216.11(a)(1)(i)) Yes No

b. Disclosure to its own affiliates, which are in turn limited by the samedisclosure and use restrictions as the recipient institution(§ 216.11(a)(1)(ii)) Yes No

c. Disclosure and use of the information pursuant to an exception in section216.14 or 15 in the ordinary course of business to carry out the activitycovered by the exception under which the information was received(§ 216.11(a)(1)(iii)) Yes No

Note: The disclosure or use described in part c of this question need not bedirectly related to the activity covered by the applicable exception. Forinstance, an institution receiving information for fraud-prevention purposescould provide the information to its auditors. But ‘‘in the ordinary course ofbusiness’’ does not include marketing. (§ 216.11(a)(2))

45. If the institution receives information from a nonaffiliated financial institutionother than under an exception in section 216.14 or 15, does the institutionrefrain from disclosing the information except under the followingcircumstances?

a. To the affiliates of the financial institution from which it received theinformation (§ 216.11(b)(1)(i)) Yes No

b. To its own affiliates, which are in turn limited by the same disclosurerestrictions as the recipient institution (§ 216.11(b)(1)(ii)) Yes No

c. To any other person, if the disclosure would be lawful if made directly tothat person by the institution from which the recipient institution receivedthe information (§ 216.11(b)(1)(iii)) Yes No

Limits on Sharing Account-Number Information forMarketing Purposes46. Does the institution refrain from disclosing, directly or through affiliates,

account numbers or similar forms of access numbers or access codes for aconsumer’s credit card account, deposit account, or transaction account toany nonaffiliated third party (other than to a consumer reporting agency) fortelemarketing, direct mail, or electronic mail marketing to the consumer,except under the following circumstances?



a. To the institution’s agents or service providers solely to market theinstitution’s own products or services, as long as the agent or serviceprovider is not authorized to directly initiate charges to the account(§ 216.12(b)(1)) Yes No

b. To a participant in a private-label credit card program or an affinity orsimilar program in which the participants in the program are identified tothe customer when the customer enters into the program (§ 216.12(b)(2)) Yes No

Note: An ‘‘account number or similar form of access number or access code’’does not include numbers in encrypted form, so long as the institution doesnot provide the recipient with a means of decryption. (§ 216.12(c)(1)) Atransaction account does not include an account to which third partiescannot initiate charges. (§ 216.12(c)(2))

SUBPART C

Exception to Opt-Out Requirements for Service Providersand Joint Marketing47. If the institution discloses nonpublic personal information to a nonaffiliated

third party without permitting the consumer to opt out, do the opt-outrequirements of sections 216.7 and 10 and the revised notice requirements insection 216.8 not apply because

a. The institution disclosed the information to a nonaffiliated third party whoperforms services for, or functions on behalf of, the institution (includingjoint marketing of financial products and services offered pursuant to ajoint agreement as defined in paragraph (b) of section 216.13),(§ 216.13(a)(1)) Yes No

b. The institution has provided consumers with the initial notice, and(§ 216.13(a)(1)(i)) Yes No

c. The institution has entered into a contract with that party prohibiting theparty from disclosing or using the information except to carry out thepurposes for which the information was disclosed, including use under anexception in section 216.14 or 15 in the ordinary course of business tocarry out those purposes (§ 216.3(a)(1)(ii)) Yes No

Exceptions to Notice and Opt-Out Requirements forProcessing and Servicing Transactions48. If the institution discloses nonpublic personal information to nonaffiliated third

parties, do certain requirements—for initial notice in section 216.4(a)(2); opt-out in sections 216.7 and 10; revised notice in section 216.8; and serviceproviders and joint marketing in section 216.13—not apply because theinformation is disclosed as necessary to effect, administer, or enforce atransaction that the consumer requests or authorizes, or in connection withany of the following?

a. Servicing or processing a financial product or service requested orauthorized by the consumer (§ 216.14(a)(1)) Yes No

b. Maintaining or servicing the consumer’s account with the institution or withanother entity as part of a private-label credit card program or other creditextension on behalf of the entity (§ 216.14(a)(2)) Yes No

c. Effecting a proposed or actual securitization, secondary-market sale(including sale of servicing rights), or other, similar transaction related toa transaction of the consumer (§ 216.14(a)(3)) Yes No



49. If the institution uses a section 216.14 exception as necessary to effect,administer, or enforce a transaction, is the disclosure of nonpublic personalinformation

a. Required, or one of the lawful or appropriate methods to enforce the rightsof the institution or other persons engaged in carrying out the transactionor providing the product or service, or (§ 216.14(b)(1)) Yes No

b. Required, or a usual, appropriate, or acceptable method under sec-tion 216.14(b)(2), to

i. Carry out the transaction or the product or service business of whichthe transaction is a part, including recording, servicing, or maintainingthe consumer’s account in the ordinary course of business,(§ 216.14(b)(2)(i)) Yes No

ii. Administer or service benefits or claims, (§ 216.14(b)(2)(ii)) Yes No

iii. Confirm or provide a statement or other record of the transaction orinformation on the status or value of the financial service or financialproduct to the consumer or the consumer’s agent or broker,(§ 216.14(b)(2)(iii)) Yes No

iv. Accrue or recognize incentives or bonuses, (§ 216.14(b)(2)(iv)) Yes No

v. Underwrite insurance or provide for reinsurance or for certain otherpurposes related to a consumer’s insurance, or (§ 216.14(b)(2)(v)) Yes No

vi. In connection with one of the following:

(1) The authorization, settlement, billing, processing, clearing, trans-ferring, reconciling, or collection of amounts charged, debited, orotherwise paid by using a debit, credit, or other payment card,check, or account number, or by other payment means(§ 216.14(b)(2)(vi)(A)) Yes No

(2) The transfer of receivables, accounts, or interests therein(§ 216.4(b)(2)(vi)(B)) Yes No

(3) The audit of debit, credit, or other payment information(§ 216.14(b)(2)(vi)(C)) Yes No

Other Exceptions to Notice and Opt-Out Requirements50. If the institution discloses nonpublic personal information to nonaffiliated third

parties, do certain requirements—for initial notice in section 216.4(a)(2); opt-out in sections 216.7 and 10; revised notice in section 216.8; and serviceproviders and joint marketers in section 216.13—not apply because theinstitution makes the disclosure

a. With the consent or at the direction of the consumer (§ 216.15(a)(1)) Yes No

b. i. To protect the confidentiality or security of records (§ 216.15(a)(2)(i)) Yes No

ii. To protect against or prevent actual or potential fraud, unauthorizedtransactions, claims, or other liability (§ 216.15(a)(2)(ii)) Yes No

iii. For required institutional risk control or for resolving consumer disputesor inquiries (§ 216.15(a)(2)(iii)) Yes No

iv. To persons holding a legal or beneficial interest relating to theconsumer (§ 216.15(a)(2)(iv)) Yes No

v. To persons acting in a fiduciary or representative capacity on behalf ofthe consumer (§ 216.15(a)(2)(v)) Yes No

c. To insurance rate advisory organizations, guaranty funds or agencies,agencies rating the institution, persons assessing compliance, and theinstitution’s attorneys, accountants, and auditors (§ 216.15(a)(3)) Yes No



d. In compliance with the Right to Financial Privacy Act, or to lawenforcement agencies (§ 216.15(a)(4)) Yes No

e. To a consumer reporting agency in accordance with the Fair CreditReporting Act or from a consumer report reported by a consumerreporting agency (§ 216.15(a)(5)) Yes No

f. In connection with a proposed or actual sale, merger, transfer, orexchange of all or a portion of a business or operating unit, if thedisclosure of nonpublic personal information concerns only consumers ofsuch business or unit (§ 216.15(a)(6)) Yes No

g. To comply with federal, state, or local laws, rules, or legal requirements(§ 216.15(a)(7)(i)) Yes No

h. To comply with a properly authorized civil, criminal, or regulatoryinvestigation, or a subpoena or summons by federal, state, or localauthorities (§ 216.15(a)(7)(ii)) Yes No

i. To respond to judicial process or government regulatory authorities havingjurisdiction over the institution for examination, compliance, or otherpurposes as authorized by law (§ 216.15(a)(7)(iii)) Yes No

Note: The regulation gives the following as an example of the exceptiondescribed in part a of this question: ‘‘A consumer may specifically consent todisclosure to a nonaffiliated insurance company of the fact that the consumerhas applied to [the institution] for a mortgage so that the insurance companycan offer homeowner’s insurance to the consumer.’’



Regulation PAppendix A. Decision Tree: Privacy Noticesand Opt-Out Provisions

No

Does the fi nancial institution share nonpublic personal information with nonaffi liated third parties under section 14 and/or section 15 and outside the exceptions (with or without also sharing under section 13)?

Does the fi nancial institution share nonpublic personal information with nonaffi liated third parties under sections 13 and 14 and/or section 15 but not outside the exceptions?

No

Does the fi nancial institution share nonpublic personal information with nonaffi liated third parties only under section 14 and/or section 15?

Yes

MODULE 1• Privacy notice (presentation, content,

and delivery) (with or without section 13 notice and contracting)

• Short-form notice (optional for consumers)

• Customer notice delivery rules• Opt-out rules

MODULE 2• Privacy notice• Customer notice delivery rules• Section 13 notice and contracting

MODULE 3• Privacy notice• Simplifi ed notice (if applicable)• Customer notice delivery rules

Yes

Yes


Regulation PAppendix B. Decision Tree: Reuse and Redisclosureof Nonpublic Personal Information Received fromNonaffiliated Financial Institutions

(Sections 11(a) and 11(b))

Yes

Does the fi nancial institution receive nonpublic personal information from nonaffi liated fi nancial institutions?

No No review necessary

MODULE 5• Receipt of information

outside section 14 and/or section 15

MODULE 4• Receipt of information under

section 14 and/or section 15

How is that information received?

Outsidesections 14 and 15

Under sections 14 and/or 15


Regulation PAppendix C. Decision Tree: Account-Number Sharing

(Section 12)

Yes

Does the fi nancial institution share account numbers or similar access numbers or codes* with nonaffi liated third parties (other than a consumer reporting agency) for telemarketing, direct mail, or electronic mail marketing purposes?

NoNo review necessary

MODULE 6• Account-number

sharing

* Including encrypted account numbers—but not the decryption key.


Regulation AAUnfair or Deceptive Acts or Practices:Credit Practices Rule

Background

The Credit Practices Rule, which was adopted bythe Federal Reserve Board under section 18(f)(1)of the Federal Trade Commission Act (15 USC 45)in response to a similar rule adopted by the Fed-eral Trade Commission, is contained in subpart Bof Regulation AA.1 It became effective in January1986.

The rule prohibits banks and their subsidiariesfrom using (1) certain provisions in their consumercredit contracts, (2) a late-charge accountingpractice known as pyramiding, and (3) deceptivecosigner practices. It also requires that a disclo-sure notice be given to a cosigner prior to thecosigner’s becoming obligated. Finally, the ruleprohibits banks and their subsidiaries from enforc-ing in purchased contracts the same provisionsthey are prohibited from including in their ownconsumer credit contracts.

Scope of the Rule

The Credit Practices Rule applies to consumercredit contracts other than those for the purchaseof real estate. Dwellings such as mobile homes andhouseboats are not considered real estate if theyare considered personal property under state law.A consumer is defined as a natural person whoseeks or acquires goods, services, or money forpersonal, family, or household purposes. There isno monetary limit on the coverage of the rule.

Prohibited Contract Provisions

In general, banks are prohibited from entering intocredit contracts that contain any of the provisionsdescribed in the following paragraphs.

Confession of Judgment

A confession of judgment is a contract clause(sometimes also known as a cognovit or a warrantof attorney) in which the borrower waives the rightto notice and the opportunity to be heard in court inthe event of a creditor-initiated lawsuit to enforce anobligation.

The following are not prohibited:

• Confessions executed after default or the filing ofa suit on the debt

• Powers of attorney contained in a mortgage ordeed of trust for foreclosure purposes

• Powers of attorney given to expedite the disposalof repossessed collateral or the transfer ofpledged securities

• Confessions in Louisiana for the purpose ofexecutory process

Waiver of Exemption

Under a waiver of exemption, a consumer relin-quishes the right granted under state law to protecthis or her home (a right known as the homesteadexemption), possessions, or wages from seizureto satisfy a judgment. Under the rule, a waiver ispermitted if it pertains solely to the property givenas collateral in connection with a consumer creditobligation.

Any other types of waivers (for example, waiversof demand, presentment, protest, notice of dis-honor, and notice of protest) are not prohibited.

Assignment of Wages

An assignment of wages is a contract provision thatgives banks the right to receive the consumer’sfuture wages or earnings directly from the consum-er’s employer in the event the consumer defaults onthe loan.


• An assignment that by its terms is revocable atwill by the consumer

• A payroll deduction or preauthorized-paymentplan (whether or not revocable by the consumer)commencing at loan consummation and autho-rized for the purpose of making periodic pay-ments on the debt

• A revocable preauthorized-payment plan(subject to the Electronic Fund Transfer Act)for electronic fund transfers to accounts fromwages

• An assignment of wages already earned at thetime of the assignment

• Garnishment

Earnings are defined as compensation paid orpayable to an individual, or for the individual’saccount, for personal services rendered or to berendered by the consumer, whether in the formof wages, salary, commission, or bonus, includingperiodic payments pursuant to a pension, retire-ment, or disability program.

1. The Office of Thrift Supervision has a rule for savings banksidentical to the Federal Reserve’s rule for state member banks andtheir subsidiaries.

Consumer Compliance Handbook Reg. AA • 1 (1/06)

Security Interest in Household Goods

A nonpossessory security interest in householdgoods is prohibited unless such goods are pur-chased with credit extended by the financialinstitution.


• Security interests in household goods not pur-chased with credit extended by the bank if thegoods are placed in the bank’s possession

• Security interests in all other real and personalproperty of the consumer other than householdgoods as defined in the rule

Household goods include the clothing, furniture,appliances, linens, china, crockery, kitchenware,and personal effects of the consumer and theconsumer’s dependents. The following are nothousehold goods:

• Works of art

• Electronic equipment (other than one televisionand one radio)

• Items acquired as antiques, including such itemsthat have been repaired or renovated withoutchanging their original form or character (To beconsidered an antique, an item must be morethan 100 years old.)

• Jewelry (other than wedding rings)

• Automobiles, boats, snowmobiles, cameras andcamera equipment (including darkroom), pianos,home workshops, and the like

Examples ofProhibited Contract Provisions

Confession of Judgment

• If you fail to carry out the terms of this notice, youappoint or as your attorney-in-fact for the purpose of confessing judgment againstyou, and you authorize either of them to confessjudgment against you in favor of us in the Clerk’sOffice of the City/County of Powatan, Virginia, or inany other court of proper jurisdiction for the unpaidbalance of this Note plus costs, expenses, andattorney’s fees as provided on the reverse side ofthis Note.

• You and any CoMaker, jointly and severally, autho-rize the Prothonotary, Clerk, and any attorney of anycourt of record to appear for you and any CoMakerand confess judgment in our favor or in favor of anyother holder of this Note. Judgment by confessionmay be entered either prior to or after an event ofdefault, as often as necessary, for such sums as areor may become due on this Note, with costs of suitand 20 percent added as actual and reasonable

attorney’s fees. You and CoMaker agree, to theextent permitted by law, to all rights of appeal,appraisement, stay of execution, and exemptionnow or later enforced. If a copy of this Note is filedin connection with the entry of judgment, it shall notbe necessary to file the original Note as a Warrant ofAttorney, if the copy is verified by affidavit.

Waiver of Exemption

• I waive my homestead exemption.

• In consideration of the credit extended, Mortgagorwaives and relinquishes, with respect to the Prop-erty and all other property now or hereafter ownedby Mortgagor, the benefit of any and all stay andextension laws, and further expressly waives noticeand delay accorded by Louisiana Code of CivilProcedure Articles 2331, 2639, and 2722 andLa. R. S. 12:4363–4366, including, but not limited to,any and all homestead and other claims to exemp-tion from seizure that under existing or future lawsmight be asserted against enforcement of paymentof the indebtedness secured hereby, and consentsto the immediate seizure, advertisement, and sale ofsaid property in the event of institution of executoryor other legal proceedings.

• Debtor hereby acknowledges express intent tohereby waive and abandon all personal propertyexemptions granted by law upon the goods, whichare the subject of this Agreement. Notice: Bysigning this Agreement, Debtor waives all rightsprovided by law to claim such goods exempt fromprocess.

• I waive (to the extent permitted by law) certain rightsI might otherwise have. All exemptions in and to anyof the property are hereby waived.


Pyramiding of Late Charges

Pyramiding is an accounting method that results inthe assessment of multiple delinquency charges asa consequence of a single delinquent payment forthe current month. For example, when a borrower’spayment is received late, the lender deducts a latecharge directly from the payment received, whichthen results in an insufficient payment. Although thenext payment may be received on time, becausethe first payment was considered insufficient, a latecharge is again applied. This continues until eitherthe borrower pays the late charge separately or theloan matures. The examiner should not confuse thissituation with one in which a payment is missed andnever made up, triggering late charges each monthuntil the entire payment is made and the account isbrought entirely up to date or is paid in full.

Credit Practices Rule

2 (1/06) • Reg. AA Consumer Compliance Handbook

Cosigner Deception

The institution may not misrepresent the nature andextent of a cosigner’s liability to any person.

Disclosures to Cosigners

A financial institution must provide, either in aseparate document or in the credit obligation, aclear and conspicuous notice that is substantiallysimilar to the example below. This notice must begiven to the cosigner prior to the time he or shebecomes obligated. In the case of open-end creditplans, the notice must be given prior to the time thecosigner becomes obligated for fees or transac-tions on the account.

Sample Notice to Cosigner

You are being asked to guarantee this debt. Thinkcarefully before you do. If the borrower doesn’t pay thedebt, you will have to. Be sure you can afford to pay thedebt if you have to, and that you want to accept thisresponsibility.

You may have to pay up to the full amount of the debtif the borrower does not pay. You may also have to paylate fees or collection costs, which may increase thisamount.

The bank can collect this debt from you without firsttrying to collect from the borrower. The bank can use thesame collection methods against you that can be usedagainst the borrower, such as suing you or garnishingyour wages. If this debt is ever in default, that fact maybecome a part of your credit record.

This notice is not the contract that makes you liable forthe debt.

A cosigner is defined as

• Any person who assumes personal liability, inany capacity, for the obligation of another

consumer without receiving goods, services, ormoney in return for the obligation. This includesany person whose signature is requested toallow a consumer to obtain credit or to preventcollection of a consumer’s obligation that is indefault.

• A person who meets the above definition,whether or not he or she is designated as such inthe contract

• For open-end credit, a person who signs thedebt instrument but does not have the contrac-tual right to obtain credit under the account

A cosigner is not

• A spouse whose signature is required on a creditobligation to perfect a security interest pursuantto state law

• A person who does not assume personal liability,but rather only provides collateral for the obliga-tion of another person

• A person who has the contractual right to obtaincredit under an open-end account, whetherexercised or not

Civil Liability

There is no express provision for civil liability ineither the Federal Trade Commission Act or Regu-lation AA.


Regulation AA is to be enforced for banks throughsection 8 of the Federal Deposit Insurance Act(12 USC 1818). In addition, the Federal Reservemay enforce compliance through any other author-ity conferred on it by law (15 USC 57a(f)(4)).

Credit Practices Rule


Regulation AAInteragency Guidance concerningUnfair or Deceptive Practices byState-Chartered Banks

Purpose

The Board of Governors of the Federal ReserveSystem and the Federal Deposit Insurance Corpo-ration (the Board and the FDIC, or, collectively, theagencies) are issuing this statement to outline thestandards that will be considered by the agenciesas they carry out their responsibility to enforce theprohibitions against unfair or deceptive tradepractices found in section 5 of the Federal TradeCommission Act (FTC Act)1 as they apply to actsand practices of state-chartered banks. The agen-cies will apply these standards when weighing theneed to take supervisory and enforcement actionsand when seeking to ensure that unfair or decep-tive practices do not recur.

This statement also contains a section on man-aging risks relating to unfair or deceptive acts orpractices that includes best practices, as well asgeneral guidance on measures that state-charteredbanks can take to avoid engaging in such acts orpractices.

Although the majority of insured banks adhere toa high level of professional conduct, banks mustremain vigilant against possible unfair or deceptiveacts or practices both to protect consumers and tominimize their own risks.

Coordination of Enforcement Efforts

Section 5(a) of the FTC Act prohibits ‘‘unfair ordeceptive acts or practices in or affecting com-merce’’2 and applies to all persons engaged incommerce, including banks. The agencies eachhave affirmed their authority under section 8 of theFederal Deposit Insurance Act to take appropriateaction when unfair or deceptive acts or practicesare discovered.3

A number of regulators have authority to combatunfair or deceptive acts or practices. For example,the Federal Trade Commission has broad authorityto enforce the requirements of section 5 of the FTCAct against many non-bank entities.4 In addition,state authorities have primary responsibility forenforcing state statutes against unfair or deceptive

acts or practices. The agencies intend to work withthese other regulators as appropriate in investi-gating and responding to allegations of unfair ordeceptive acts or practices that involve state banksand other entities supervised by the agencies.

Standards for Determining What IsUnfair or Deceptive

The FTC Act prohibits unfair or deceptive acts orpractices. Congress drafted this provision broadlyin order to provide sufficient flexibility in the lawto address changes in the market and unfair ordeceptive practices that may emerge.5

An act or practice may be found to be unfairwhere it ‘‘causes or is likely to cause substantialinjury to consumers which is not reasonablyavoidable by consumers themselves and notoutweighed by countervailing benefits to consum-ers or to competition.’’6 A representation, omission,or practice is deceptive if it is likely to misleada consumer acting reasonably under the circum-stances and is likely to affect a consumer’s conductor decision regarding a product or service.

The standards for unfairness and deception areindependent of each other. While a specific act orpractice may be both unfair and deceptive, an actor practice is prohibited by the FTC Act if it is eitherunfair or deceptive. Whether an act or practice isunfair or deceptive will in each instance dependupon a careful analysis of the facts and circum-stances. In analyzing a particular act or practice,the agencies will be guided by the body of law andofficial interpretations for defining unfair or decep-tive acts or practices developed by the courtsand the FTC. The agencies will also consider fac-tually similar cases brought by the FTC and otherregulators to ensure that these standards areapplied consistently.

Unfair Acts or Practices

Assessing Whether an Act or PracticeIs Unfair

An act or practice is unfair where it (1) causes or islikely to cause substantial injury to consumers,

1. 15 USC 45.2. 15 USC 45(a).3. 12 USC 1818(b)(1), (e)(1), and (i)(2). See letter from

Chairman Alan Greenspan to the Hon. John J. LaFalce (May 30,2002) and ‘‘Unfair or Deceptive Acts or Practices: Applicability ofthe Federal Trade Commission Act,’’ FIL 57-2002 (May 30, 2002).

4. 15 USC 45(a)(2) and Gramm−Leach−Bliley Act, section 133,published in notes to 15 USC 41.

5. See FTC Policy Statement on Unfairness (December 17,1980) and FTC Policy Statement on Deception (October 14,1983).

6. This standard was first issued as a policy by the FTC andlater codified into the FTC Act as 15 USC 45(n).


(2) cannot be reasonably avoided by consumers,and (3) is not outweighed by countervailing bene-fits to consumers or to competition. Public policymay also be considered in the analysis of whethera particular act or practice is unfair. Each of theseelements is discussed further below.

• The act or practice must cause or be likely tocause substantial injury to consumers—To beunfair, an act or practice must cause or be likelyto cause substantial injury to consumers. Sub-stantial injury usually involves monetary harm.An act or practice that causes a small amountof harm to a large number of people may bedeemed to cause substantial injury. An injurymay be substantial if it raises a significant riskof concrete harm. Trivial or merely speculativeharms are typically insufficient for a finding ofsubstantial injury. Emotional impact and othermore subjective types of harm will not ordinarilymake a practice unfair.

• Consumers must not reasonably be able to avoidthe injury—A practice is not considered unfair ifconsumers may reasonably avoid injury. Consum-ers cannot reasonably avoid injury from an actor practice if it interferes with their ability toeffectively make decisions. Withholding materialprice information until after the consumer hascommitted to purchase the product or servicewould be an example of preventing a consumerfrom making an informed decision. A practicemay also be unfair where consumers are subjectto undue influence or are coerced into purchas-ing unwanted products or services.

The agencies will not second-guess the wisdomof particular consumer decisions. Instead, theagencies will consider whether a bank’s behaviorunreasonably creates or takes advantage of anobstacle to the free exercise of consumer decisionmaking.

• The injury must not be outweighed by counter-vailing benefits to consumers or to competition—To be unfair, the act or practice must be injuriousin its net effects—that is, the injury must not beoutweighed by any offsetting consumer or com-petitive benefits that are also produced by theact or practice. Offsetting benefits may includelower prices or a wider availability of productsand services.

Costs that would be incurred for remedies ormeasures to prevent the injury are also taken intoaccount in determining whether an act orpractice is unfair. These costs may include thecosts to the bank in taking preventive measuresand the costs to society as a whole of anyincreased burden and similar matters.

• Public policy may be considered—Public policy,as established by statute, regulation, or judicial

decisions, may be considered with all otherevidence in determining whether an act orpractice is unfair. For example, the fact that aparticular lending practice violates a state lawor a banking regulation may be consideredas evidence in determining whether the act orpractice is unfair. Conversely, the fact that aparticular practice is affirmatively allowed bystatute may be considered as evidence that thepractice is not unfair. Public policy considera-tions by themselves, however, will not serve asthe primary basis for determining that an act orpractice is unfair.

Deceptive Acts and Practices

Assessing Whether an Act or PracticeIs Deceptive

A three-part test is used to determine whether arepresentation, omission, or practice is ‘‘decep-tive.’’ First, the representation, omission, or prac-tice must mislead or be likely to mislead theconsumer. Second, the consumer’s interpretationof the representation, omission, or practice mustbe reasonable under the circumstances. Lastly, themisleading representation, omission, or practicemust be material. Each of these elements is dis-cussed below in greater detail.

• There must be a representation, omission, orpractice that misleads or is likely to mislead theconsumer—An act or practice may be found tobe deceptive if there is a representation, omis-sion, or practice that misleads or is likely tomislead the consumer. Deception is not limited tosituations in which a consumer has already beenmisled. Instead, an act or practice may be foundto be deceptive if it is likely to mislead consum-ers. A representation may be in the form ofexpress or implied claims or promises and maybe written or oral. Omission of information maybe deceptive if disclosure of the omitted informa-tion is necessary to prevent a consumer frombeing misled.

In determining whether an individual state-ment, representation, or omission is misleading,the statement, representation, or omission willnot be evaluated in isolation. The agencies willevaluate it in the context of the entire adver-tisement, transaction, or course of dealing todetermine whether it constitutes deception. Actsor practices that have the potential to bedeceptive include making misleading cost orprice claims; using bait-and-switch techniques;offering to provide a product or service that is notin fact available; omitting material limitations orconditions from an offer; selling a product unfit

Credit Practices Rule: Interagency Guidance


for the purposes for which it is sold; and failing toprovide promised services.

• The act or practice must be considered from theperspective of the reasonable consumer—Indetermining whether an act or practice ismisleading, the consumer’s interpretation of orreaction to the representation, omission, orpractice must be reasonable under the circum-stances. The test is whether the consumer’sexpectations or interpretation are reasonable inlight of the claims made. When representationsor marketing practices are targeted to a specificaudience, such as the elderly or the financiallyunsophisticated, the standard is based upon theeffects of the act or practice on a reasonablemember of that group.

If a representation conveys two or moremeanings to reasonable consumers and onemeaning is misleading, the representation maybe deceptive. Moreover, a consumer’s interpre-tation or reaction may indicate that an act orpractice is deceptive under the circumstances,even if the consumer’s interpretation is notshared by a majority of the consumers in therelevant class, so long as a significant minority ofsuch consumers is misled.

In evaluating whether a representation, omis-sion, or practice is deceptive, the agencies willlook at the entire advertisement, transaction, orcourse of dealing to determine how a reasonableconsumer would respond. Written disclosuresmay be insufficient to correct a misleadingstatement or representation, particularly wherethe consumer is directed away from qualifyinglimitations in the text or is counseled that readingthe disclosures is unnecessary. Likewise, oraldisclosures or fine print may be insufficient tocure a misleading headline or prominent writtenrepresentation.

• The representation, omission, or practice mustbe material—A representation, omission, or prac-tice is material if it is likely to affect a consumer’sdecision regarding a product or service. Ingeneral, information about costs, benefits, orrestrictions on the use or availability of a productor service is material. When express claims aremade with respect to a financial product orservice, the claims will be presumed to bematerial. Similarly, the materiality of an impliedclaim will be presumed when it is demonstratedthat the institution intended that the consumerdraw certain conclusions based upon the claim.

Claims made with the knowledge that they arefalse will also be presumed to be material.Omissions will be presumed to be material whenthe financial institution knew or should haveknown that the consumer needed the omittedinformation to evaluate the product or service.

Relationship to Other Laws

Acts or practices that are unfair or deceptive withinthe meaning of section 5 of the FTC Act may alsoviolate other federal or state statutes. On the otherhand, there may be circumstances in which an actor practice violates section 5 of the FTC Act eventhough the institution is in technical compliancewith other applicable laws, such as consumerprotection and fair lending laws. Banks should bemindful of both possibilities. The following lawswarrant particular attention in this regard.

Truth in Lendingand Truth in Savings Acts

Pursuant to the Truth in Lending Act (TILA),creditors must ‘‘clearly and conspicuously’’ dis-close the costs and terms of credit.7 The Truth inSavings Act (TISA) requires depository institutionsto provide interest and fee disclosures for depositaccounts so that consumers can compare depositproducts.8 TISA also provides that advertisementsmust not be misleading or inaccurate and must notmisrepresent an institution’s deposit contract. Anact or practice that does not comply with theseprovisions of TILA or TISA may also violate the FTCAct. On the other hand, a transaction that is intechnical compliance with TILA or TISA maynevertheless violate the FTC Act. For example,consumers could be misled by advertisements of‘‘guaranteed’’ or ‘‘lifetime’’ interest rates when thecreditor or depository institution intends to changethe rates, whether or not the disclosures satisfy thetechnical requirements of TILA or TISA.

Equal Credit Opportunityand Fair Housing Acts

The Equal Credit Opportunity Act (ECOA) prohibitsdiscrimination against persons in any aspect of acredit transaction on the basis of race, color,religion, national origin, sex, marital status, age(provided the applicant has the capacity to con-tract), the fact that an applicant’s income derivesfrom any public assistance program, and the factthat the applicant has in good faith exercised anyright under the Consumer Credit Protection Act.Similarly, the Fair Housing Act (FHA) prohibitscreditors involved in residential real estate transac-tions from discriminating against any person on thebasis of race, color, religion, sex, handicap, familialstatus, or national origin. Unfair or deceptive prac-tices that target or have a disparate impact onconsumers who are members of these protectedclasses may violate the ECOA or the FHA, as wellas the FTC Act.

7. 15 USC 1632(a).8. 12 USC 4301 et seq.




The Fair Debt Collection Practices Act prohibitsunfair, deceptive, and abusive practices related tothe collection of consumer debts. Although thisstatute does not by its terms apply to banks thatcollect their own debts, failure to adhere to thestandards set by this act may support a claim ofunfair or deceptive practices in violation of theFTC Act. Moreover, banks that either affirmativelyor through lack of oversight permit a third-partydebt collector acting on their behalf to engage indeception, harassment, or threats in the collectionof monies due may be exposed to liability forapproving or assisting in an unfair or deceptive actor practice.

Managing Risks Related to Unfair orDeceptive Acts or Practices

Since the release of the FDIC’s statement and theBoard’s letter on unfair and deceptive practices inMay 2002, bankers have asked for guidance onstrategies for managing risk in this area. Thissection outlines guidance on best practices toaddress some areas with the greatest potential forunfair or deceptive acts and practices, includingadvertising and solicitation, servicing and collec-tions, and the management and monitoring ofemployees and third-party service providers. Banksshould also monitor compliance with their ownpolicies in these areas and should have proce-dures for receiving and addressing consumercomplaints and monitoring activities performed bythird parties on behalf of the bank.

To avoid engaging in unfair or deceptive activity,the agencies encourage use of the followingpractices, which have already been adopted bymany institutions:

• Review all promotional materials, marketingscripts, and customer agreements and disclo-sures to ensure that they fairly and adequatelydescribe the terms, benefits, and material limita-tions of the product or service being offered,including any related or optional products orservices, and that they do not misrepresent suchterms either affirmatively or by omission. Ensurethat these materials do not use fine print, sep-arate statements, or inconspicuous disclosuresto correct potentially misleading headlines, andensure that there is a reasonable factual basis forall representations made.

• Draw the attention of customers to key terms,including limitations and conditions, that areimportant in enabling the customer to make aninformed decision regarding whether the prod-uct or service meets the customer’s needs.

• Clearly disclose all material limitations or condi-tions on the terms or availability of products orservices, such as a limitation that applies aspecial interest rate only to balance transfers; theexpiration date for terms that apply only duringan introductory period; material prerequisites forobtaining particular products, services, or terms(for example, minimum transaction amounts,introductory or other fees, or other qualifica-tions); or conditions for canceling a servicewithout charge when the service is offered on afree trial basis.

• Inform consumers in a clear and timely mannerabout any fees, penalties, or other charges(including charges for any force-placed prod-ucts) that have been imposed, and the reasonsfor their imposition.

• Clearly inform customers of contract provisionsthat permit a change in the terms and conditionsof an agreement.

• When using terms such as ‘‘preapproved’’ or‘‘guaranteed,’’ clearly disclose any limitations,conditions, or restrictions on the offer.

• Clearly inform consumers when the accountterms approved by the bank for the consumerare less favorable than the advertised terms orterms previously disclosed.

• Tailor advertisements, promotional materials, dis-closures, and scripts to take account of thesophistication and experience of the targetaudience. Do not make claims, representations,or statements that mislead members of the targetaudience about the cost, value, availability, costsavings, benefits, or terms of the product orservice.

• Avoid advertising that a particular service will beprovided in connection with an account if thebank does not intend, or is not able, to providethe service to account holders.

• Clearly disclose when optional products andservices—such as insurance, travel services,credit protection, and consumer report updateservices that are offered simultaneously withcredit—are not required to obtain credit orconsidered in decisions to grant credit.

• Ensure that the costs and benefits of optional orrelated products and services are not misrepre-sented or presented in an incomplete manner.

• When making claims about amounts of creditavailable to consumers, accurately and com-pletely represent the amount of potential, ap-proved, or usable credit that the consumer willreceive.

• Avoid advertising terms that are not available tomost customers and using unrepresentativeexamples in advertising, marketing, and promo-tional materials.



• Avoid making representations to consumers thatthey may pay less than the minimum amountrequired by the account terms without ade-quately disclosing any late fees, over-limit fees,or other account fees that will result from theconsumer’s paying such a reduced amount.

• Clearly disclose a telephone number or mailingaddress (and, as an addition, an e-mail or website address if available) that consumers mayuse to contact the bank or its third-partyservicers regarding any complaints they mayhave, and maintain appropriate procedures forresolving complaints. Consumer complaintsshould also be reviewed by banks to identifypractices that have the potential to be mislead-ing to customers.

• Implement and maintain effective risk and super-visory controls to select and manage third-partyservicers.

• Ensure that employees and third parties whomarket or promote bank products, or serviceloans, are adequately trained to avoid makingstatements or taking actions that might be unfairor deceptive.

• Review compensation arrangements for bankemployees as well as third-party vendors andservicers to ensure that they do not createunintended incentives to engage in unfair ordeceptive practices.

• Ensure that the institution and its third-partyservicers have and follow procedures to creditconsumer payments in a timely manner. Consum-

ers should be clearly told when and if monthlypayments are applied to fees, penalties, or othercharges before being applied to regular princi-pal and interest.

The need for clear and accurate disclosures thatare sensitive to the sophistication of the targetaudience is heightened for products and servicesthat have been associated with abusive practices.Accordingly, banks should take particular care inmarketing credit and other products and servicesto the elderly, the financially vulnerable, and cus-tomers who are not financially sophisticated. Inaddition, creditors should pay particular attentionto ensure that disclosures are clear and accuratewith respect to the points and other charges thatwill be financed as part of home-secured loans; theterms and conditions related to insurance offeredin connection with loans; loans covered by theHome Ownership and Equity Protection Act; reversemortgages; credit cards designed to rehabilitatethe credit position of the cardholder; and loans withprepayment penalties, temporary introductoryterms, or terms that are not available as advertisedto all consumers.

Conclusion

The development and implementation of policiesand procedures in these areas and the other stepsoutlined above will help banks ensure that productsand services are provided in a manner that is fair,allows informed customer choice, and is consistentwith the FTC Act.



Regulation AAExamination Objectives and Procedures


1. To determine if the financial institution hasestablished an effective system for ensuringthat it

a. Does not originate, acquire, or enforcecontracts that contain prohibited provisions

b. Does not ‘‘pyramid’’ late charges

c. Does not engage in deceptive cosignerpractices

d. Provides the required disclosure to cosign-ers prior to their becoming obligated

2. To determine whether the credit contractsoriginated or purchased by the institutioncontain prohibited provisions

3. To determine whether the institution usedimpermissible late-charge accounting practices

4. To determine if the institution advised cosign-ers prior to their becoming contractually liableof the nature and extent of their liability

5. To determine if the institution provides therequired notices to cosigners prior to theirbecoming obligated or, in the case of open-end credit plans, prior to the time they becomeobligated for fees or transactions on theaccount

6. To determine if the institution has attempted toenforce prohibited provisions in contracts ithas originated or acquired


1. Obtain and review blank notes (contracts) anddisclosures (including those furnished to deal-ers) used by the financial institution in extend-ing consumer credit for the following prohib-ited contract provisions:

a. Confession of judgment—A waiver by theconsumer of the right to notice and theopportunity to be heard in court in the eventof a suit on the obligation (§ 227.13(a))

b. Waiver of statutory property exemption—Awaiver by the consumer of the statutoryright to protect his or her home (known asthe homestead exemption), possessions, orwages from seizure to satisfy a judgmentunless the waiver is given on property thatwill serve as security for the obligation(§ 227.13(b))

c. Assignment of wages—A provision givingthe bank the right to receive the consumer’swages or earnings directly from the con-

sumer’s employer (§ 227.13(c)). However,such an assignment is permitted if

i. It is revocable at will by the consumer

ii. It is a payroll deduction plan or a pre-authorized payment plan (whether or notrevocable by the consumer), commenc-ing at consummation, for the purpose ofmaking loan payments

iii. It applies only to wages or earningsalready earned at the time of theassignment

d. Blanket security interest in householdgoods—A provision that allows the institu-tion to hold as collateral the clothing,furniture, appliances, and personal effectsof the consumer’s dependents (§ 227.13(d))

2. Determine through discussions with manage-ment and staff if the institution attempts toenforce confessions of judgment, waivers ofexemption, assignments of wages, or securityinterests in household goods in originated oracquired contracts.

3. Review the bank’s collection policies, proce-dures, and practices to ensure that staffmembers are not using an assignment ofwages except where permissible. (§ 227.13(c))

4. Judgmentally sample an adequate number ofloan files to ensure that prohibited contractprovisions are not included in contracts (orrelated documents) originated by, or enforcedin contracts acquired by, the institution.

5. Judgmentally sample an adequate number ofoverdue loans to determine if the institutioncollects or attempts to collect overdue pay-ments through assignment of wages.(§ 227.13(c))

6. Judgmentally sample an adequate number ofoverdue loans to determine if the institutioncollects or attempts to collect a late charge ona timely payment because of the consumer’sfailure to pay a late charge attributable to aprior delinquent payment. (§ 227.15))

7. Determine through a review of procedures,policies, and practices whether the institutiontakes steps to prevent its staff from engagingin prohibited cosigner practices on loans itoriginated or acquired. (§ 227.14(a))

8. Determine through discussions with manage-ment and staff if there is evidence that theinstitution engages in prohibited cosigner prac-tices (for example, misrepresenting a cosign-


er’s liability or contractually obligating cosign-ers prior to informing them of their liability).

9. Determine through discussions with manage-ment and staff whether the nature and extent ofa cosigner’s liability is properly representedto cosigners prior to the time signatures areobtained. (§ 227.14(a))

10. Judgmentally sample the documents evidenc-ing the credit obligation and determine if theycontain the required notice to cosigners.(§ 227.14(b))

a. If the notice to cosigners is contained in thenote or disclosure, it must be clear, con-spicuous, and substantially similar to that

provided in the regulation and must beprovided before the cosigner becomesobligated.

b. If the notice to cosigners is contained in aseparate document, also

i. Interview applicable employees to deter-mine if they are aware that the noticemust be provided prior to the cosigner’sbecoming obligated.

ii. Review the institution’s polices, proce-dures, and practices to ensure that staffmembers are aware that cosigners mustbe provided with the notice prior to theirbecoming obligated.

Credit Practices Rule: Examination Objectives and Procedures


Regulation AAExamination Checklist

1. Do the consumer contracts originated by the bank contain any of the followingprohibited provisions?

a. Confession of judgment (§ 227.13(a)) Yes No

b. Waiver of statutory property exemption (unless the waiver applies solely tothe property that will serve as security for the loan) (§ 227.13(b)) Yes No

c. Assignment of wages or other earnings (except where permitted)(§ 227.13(c)) Yes No

d. Blanket security interests in household goods (§ 227.13(d)) Yes No

2. Does the bank acquire loans originated by other creditors? Yes No

If so, does it attempt to enforce any of the following prohibited practices?

a. Confession of judgment (§ 227.13(a)) Yes No

b. Waiver of statutory property exemption (unless the waiver applies solely tothe property that will serve as security for the loan) (§ 227.13(b)) Yes No

c. Assignment of wages or other earnings (except where permitted)(§ 227.13(c)) Yes No

d. Blanket security interests in household goods (§ 227.13(d)) Yes No

3. Does the bank take a nonpossessory security interest in household goods(as defined in section 227.12(d)) not purchased with the loan proceeds?(Review bank security agreement forms.) Yes No

4. Has the bank attempted to enforce any prohibited practices with respect to theconsumer credit contracts it has originated? (§ 227.13(a) or 227.13(b)) Yes No

5. Does the bank collect or attempt to collect a late charge on a timely paymentbecause of the consumer’s failure to pay a late charge attributable to a priordelinquent payment? (§ 227.15) Yes No

6. Has the bank engaged in any prohibited cosigner practices (for example,misrepresenting the cosigner’s liability or obligating cosigners prior toproviding the required notification)? (§ 227.14(a)) Yes No

7. Does the bank provide to each cosigner, prior to his or her becomingcontractually obligated, the required notice or one that is substantially similar(whether separate or contained in the credit documents)? (§ 227.14(b)) Yes No


Branch Closings

Background

State member banks are required, by section 42of the Federal Deposit Insurance Act (FDI Act)(12 USC 1831r-1), to submit a notice of any pro-posed branch closing to the Federal Reserve atleast ninety days before the date of the proposedclosing.1 The notice must include a detailed state-ment of the reasons for the decision to close thebranch and statistical or other information in sup-port of those reasons.

These banks are also required to notify custom-ers of the proposed closing, both by posting anotice at the branch proposed for closure and bymailing a notice of the closure to affected consum-ers. The notice provided on the branch premisesmust be posted in a conspicuous manner at leastthirty days before the proposed closing. The mailednotice must be provided to branch customers atleast ninety days before the proposed closing.

An interstate bank regulated by the FederalReserve that proposes to close a branch locatedin a low- or moderate-income area is requiredto include in its notice to customers the mailingaddress of its Reserve Bank supervisor and astatement that comments on the closing may bemailed to the Reserve Bank.2 In those cases, aperson from the affected area may submit a writtenrequest to the Reserve Bank relating to theproposed closing, stating specific reasons for therequest and including a discussion of the adverseeffect the closing may have on the availability ofbanking services in the affected area. If theReserve Bank, in conjunction with the Board,determines that the request is not frivolous, it must

convene a meeting of appropriate individuals,organizations, depository institutions, and FederalReserve and other regulatory agency representa-tives, as determined by the Federal Reserve at itsdiscretion, to explore the feasibility of obtainingadequate alternative facilities and services for theaffected area following the closing of the branch.

Finally, each institution must adopt policiesregarding closings of branches of the institution.

Applicability

The bank closure provisions apply to traditionalbrick-and-mortar branches or similar banking facili-ties at which deposits are received, checks arepaid, or money is lent.3 Notice is not required for theclosing of a nonbranch facility, such as an ATM,a remote service facility, a loan-production office,or a temporary branch.4 Nor does section 42 applyto mergers, consolidations, or other acquisitions,including branch sales, that do not result in anybranch closings.

Mergers

An institution must file a branch closing noticewhenever it closes a branch, including when theclosing occurs in the context of a merger, con-solidation, or other form of acquisition.5 Branchclosings that occur in the context of transactionssubject to the Bank Merger Act (12 USC 1828)require a branch closing notice, even if thetransaction received expedited treatment underthat act. The responsibility for filing the notice lieswith the acquiring or resulting institution, but eitherparty to such a transaction may give the notice.Thus, for example, the purchaser may give thenotice prior to consummation of the transactionwhen the purchaser intends to close a branchfollowing consummation, or the seller may give thenotice because it intends to close a branch at orprior to consummation. In the latter example, if thetransaction were to close ahead of schedule, thepurchaser, if authorized by the Federal Reserve,

1. Section 42, which was added to the Federal DepositInsurance Act by section 228 of the Federal Deposit InsuranceCorporation Improvement Act of 1991 (Pub. L. 102-242, 105 Stat.2236), became effective in December 1991. Section 42 wasamended by section 106 of the Riegle–Neal Interstate Bankingand Branching Efficiency Act of 1994 and by the EconomicGrowth and Regulatory Paperwork Reduction Act of 1996. Thischapter is adapted from the Joint Policy Statement regardingBranch Closings issued by the Board, the Federal DepositInsurance Corporation, the Office of the Comptroller of theCurrency, and the Office of Thrift Supervision, effective June 29,1999. The statement is available at www.federalreserve.gov/boarddocs/press/boardacts/1999/19990707/r-1036.pdf.

2. An interstate bank is a bank that maintains branches in morethan one state. A low- or moderate-income area is a census tractfor which the median family income is (1) less than 80 percent ofthe median family income for the metropolitan statistical area (asdesignated by the director of the Office of Management andBudget) in which the census tract is located or (2) in the case ofa census tract that is not located in a metropolitan statistical area,less than 80 percent of the median family income for the state inwhich the census tract is located, as determined without takinginto account family income in metropolitan statistical areas in thestate (12 USC 1831r(d)(4)).

3. Insured branches of foreign banks are not considered‘‘branches’’ for purposes of section 42 because they are subjectto separate liquidation procedures as specified in 12 CFR 28.22(federal branches of foreign banks) and 12 CFR 211.25(f) (statebranches of foreign banks).

4. The 1996 amendment expressly stated that section 42 doesnot apply with respect to automated teller machines (Pub. L.104208, 110 Stat. 3009).

5. See the section ‘‘Other Applicability Considerations’’ forinformation on certain branches closed in connection withemergency acquisitions or FDIC assistance or a branch subse-quently transferred back to the FDIC pursuant to an acquisitionagreement.

Consumer Compliance Handbook Branch Closings • 1 (1/06)

could operate the branch to complete compliancewith the ninety-day requirement and would notneed to give an additional notice.

Relocations and Consolidations

Section 42 does not apply when a branch isrelocated or is consolidated with one or more otherbranches, provided that the relocation or consoli-dation occurs within the immediate neighborhoodand does not substantially affect the nature of thebusiness or customers served.

A branch relocation is a movement within thesame immediate neighborhood that does notsubstantially affect the nature of the business orcustomers served. Generally, relocations will befound to have occurred only when short distancesare involved—for example, across the street,around the corner, or a block or two away. Moves ofless than 1,000 feet will generally be consideredrelocations. In less densely populated areas, whereneighborhoods extend farther and a long movewould not significantly affect the nature of thebusiness or the customers served by the branch, arelocation may occur over substantially longerdistances.

Generally, consolidations of branches are con-sidered relocations if the branches are locatedwithin the same neighborhood and the nature of thebusiness or customers served is not affected. Thus,for example, a consolidation of two branches on thesame block following a merger would not constitutea branch closing. The same guidelines apply toconsolidations as to relocations.

Other Applicability Considerations

A change in the services offered at a branch is notconsidered a branch closing, provided that theremaining facility constitutes a branch (as definedherein).6

Section 42 also does not apply when a branchceases operation but is not closed by an institution.Thus, it does not apply to

• A temporary interruption of service caused by anevent beyond the institution’s control (for exam-ple, a natural catastrophe), if the insured deposi-tory institution plans to restore branching ser-vices at the site in a timely manner7

• The transferal back to the FDIC, pursuant to theterms of an acquisition agreement, of a branch ofa failed bank operated on an interim basis inconnection with the acquisition of all or part ofa failed bank, as long as the transfer occurswithin the option period or within an occupancyperiod, not to exceed 180 days, specified in theagreement

• A branch that is closed in connection with anemergency acquisition under section 11(n), 13(f),or 13(k) of the FDI Act or with any assistanceprovided by the FDIC under section 13(c) of theFDI Act (12 USC 182(n), 1823(f) and (k), and1823(c))

Notice of Branch Closingto the Federal Reserve

A state member bank’s notice of a proposedbranch closing to the Federal Reserve must includethe following:

• The identity of the branch to be closed

• The proposed date of closing

• A detailed statement of the reasons for thedecision to close the branch

• Statistical or other information in support of thosereasons consistent with the institution’s writtenpolicy for branch closings

If an institution believes that certain informationincluded in the notice is confidential in nature, itshould prepare that information separately andrequest confidential treatment. The Federal Reservewill decide whether to treat the information confi-dentially under the Freedom of Information Act(5 USC 552).

If a notice provided to a state supervisory agencypursuant to state law contains the informationoutlined above, the institution may provide a copyof that notice to the Federal Reserve, provided thatthe notice is filed at least ninety days prior to thedate of the branch closing.

Notice of Branch Closingto Customers

Customer Allocation

For purposes of providing notice of the proposedclosing to the customers of the branch, a customerof a branch is a patron of a state memberdepository institution who has been identified witha particular branch by the institution through use,in good faith, of a reasonable method of allocat-ing customers to specific branches. An institutionthat allocates customers on the basis of wherea customer opened his or her deposit or loan

6. If after a reduction in services the resulting facility no longerqualifies as a branch, section 42 would apply. Thus, notices ofbranch closing would be required if an institution were to replacea traditional brick-and-mortar branch with an ATM.

7. Section 42 would apply, however, if the institution did notreopen the branch following the incident. Although prior noticewould not be possible in such a case, the institution should notifythe customers of the branch and the Federal Reserve in themanner specified by section 42 to the extent possible and as soonas possible after the decision to close the branch has been made.

Branch Closings

2 (1/06) • Branch Closings Consumer Compliance Handbook

account is presumed to have reasonably identifiedeach customer of a branch. Although the use of thismeans of allocation, and perhaps others, mayresult in certain facilities that technically constitutebranches being assigned no customers, this resultis permissible so long as the means of allocation isreasonable; if such a branch is closed, notificationto the Federal Reserve and posting of a notice onthe branch premises will suffice. Finally, a statemember institution need not change its recordkeep-ing system in order to make a reasonable determi-nation of who is a customer of a branch.

An institution must include a customer notice atleast ninety days in advance of the proposedclosing in at least one of the regular accountstatements mailed to customers, or in a separatemailing. If the branch closing occurs after theproposed date of closing, an additional noticeneed not be mailed to customers (or provided tothe Federal Reserve) if the institution acted in goodfaith in projecting the date for closing and insubsequently delaying the closing.

Content

The mailed customer notice should state thelocation of the branch to be closed and theproposed date of closing and should either identifyanother location at which customers can obtainservice after the closing or provide a telephonenumber that customers can call to learn aboutalternative sites. If a notice of branch closingprovided to customers pursuant to state lawcontains this information, a separate notice neednot be sent, provided that the notice is sent at leastninety days prior to the closing.

Low- and Moderate-Income AreasServed by Interstate Banks

If the state member bank maintains branches inmore than one state and the branch to be closed islocated in a low- or moderate-income area, themailed customer notice must contain the mailingaddress of the appropriate Reserve Bank and astatement that comments on the proposed branchclosing may be mailed to that entity. The noticeshould also state that the Federal Reserve does nothave the authority to approve or prevent the branchclosing.

Additional rules apply if the System receives awritten request concerning the proposed closingfrom a person within a low- or moderate-incomearea served by the branch. In this case, if therequest states specific reasons for the request,including a discussion of the adverse effect of theclosing on the availability of banking services in the

affected area, and if the Federal Reserve con-cludes that the request is not frivolous, the FederalReserve must convene a meeting of FederalReserve representatives, other interested deposi-tory institution regulatory agencies, communityleaders, and other appropriate individuals, organi-zations, and depository institutions, as determinedby the Federal Reserve at its discretion. Thepurpose of the meeting shall be to explore thefeasibility of obtaining adequate alternate facilitiesand services for the affected area, including theestablishment of a new branch by another deposi-tory institution, the chartering of a new depositoryinstitution, or the establishment of a communitydevelopment credit union, following the closing ofthe branch.

In the case of an institution that will become aninterstate bank prior to the closure of a branch in alow- or moderate-income area, such informationmust be included in the notice unless the closurewill occur immediately upon consummation of thetransaction that causes the institution to becomeinterstate.

No action by the Federal Reserve under thisprovision shall affect the authority of an interstatebank to close a branch (including the timing of theclosing) if the requirements of section 42(a) and (b)of the FDI Act (regarding notice to the appropriatefederal banking agency and notice to the institu-tion’s customers) have been met by such bank withrespect to the branch being closed.

On-Site Notice

The on-site notice to branch customers should beposted in a conspicuous manner on the branchpremises at least thirty days prior to the proposedclosing. The notice should state the proposed dateof closing and should identify another locationwhere customers can obtain service after that dateor provide a telephone number that customers cancall to learn about alternative sites. An institutionmay revise the notice to extend the projectedclosing date without triggering a new thirty-daynotice period.

Contingent Notices

In some situations, an institution, at its discretionand to expedite transactions, may mail and postnotices to customers of a proposed branch clos-ing that is contingent upon an event. For example,in the case of a proposed merger or acquisition,an institution may notify customers of its intent toclose a branch upon the Federal Reserve Board’sapproval of the proposed merger or acquisition.

Branch Closings


Policies for Branch Closings

The law requires all insured depository institutionsto adopt policies for branch closings. Each institu-tion with one or more branches must adopt such apolicy. If an institution currently has no branches, itmust adopt a policy for branch closing before itestablishes its first branch. The policy should be inwriting, should be appropriate for the size of theinstitution, and should meet the needs of theinstitution.

The branch closing policy should include criteriafor determining which branch is to be closed andwhich customers should be notified as well asprocedures for providing the required notices.

Compliance

Compliance with the requirements to adopt abranch closing policy and provide the noticeswhen a branch is to be closed is determined duringroutine compliance examinations. Failure to complymay result in adverse findings in the complianceevaluation or in an enforcement action.

Examination Tips

Workpapers

Federal Reserve System examiners review thetechnical aspects of section 42 during routinecompliance examinations and evaluate the effect ofany branch closures on low- and moderate-incomecommunities during CRA examinations. Because

branch closure issues may be raised in bankholding company or other CRA-related applica-tions outside the examination process, examinersshould ensure that their workpapers adequatelysupport conclusions about a bank’s branch closurepolicy and any specific branch closures reviewed.For example, in addition to answering the questionsin the examination checklist, examiners should notewhether the bank has an adequate written branchclosing policy in place, whether this policy wasfollowed for any branch closings, and whether thebank adequately documented the reasons for theclosure. Documentation related to the branchclosure, including the dates the notice was mailedto the appropriate parties and posted on thebranch premises, specific reasons for the closure,and other data used by the bank to support itsdecision to close the branch (such as statisticaldata concerning branch profitability or loss), shouldbe included in the workpapers.

Meetings

Regulators have no authority to tell a bank that itmay not close a branch. Meetings convened todiscuss state member bank branch closures inlow- and moderate-income areas pursuant tosection 42 are generally not considered publicmeetings. Instead, these are more on the order ofprivate meetings to discuss alternatives to provid-ing banking services to the affected community. Asa result, attendance at these meetings should belimited to parties invited by the Federal Reserveand may be held after the branch is closed.

Branch Closings


Branch ClosingsExamination Objectives and Procedures


1. To determine whether the institution is in com-pliance with the statutory requirements forbranch closings, including those relating to thefollowing:

a. Providing prior notification of any branchclosing to its appropriate federal bankingagency and to customers of the branch

b. Establishing internal policies for branchclosings


1. Determine whether the institution has anybranches that would subject it to the Joint PolicyStatement regarding Branch Closings and sec-tion 42 of the Federal Deposit Insurance Act.

2. Determine whether the institution has adopted abranch closing policy that ensures compliancewith the policy statement regarding branchclosings and section 42 of the FDI Act.

3. Determine whether the institution’s proceduresfor closing a branch have been followed sincethe last examination in which compliance withthe policy statement for branch closing noticesand section 42 of the FDI Act was assessed.

4. For any branch closed since the last examina-tion, determine whether the institution providedadequate notice of any branch closing to theFederal Reserve at least 90 days prior to theproposed closing.

5. For any branch closed since the last examina-tion, determine if the institution mailed anadequate notice to its customers at least 90days prior to the proposed closing.

6. For any branch closed since the last examina-tion, determine if the institution posted a noticeto the branch customers in a conspicuousmanner on the branch premises at least 30 daysprior to the proposed closing.


Branch ClosingsExamination Checklist

1. Does the insured depository institution have any branches, as defined in theJoint Policy Statement regarding Branch Closings, that would make it subjectto the policy statement and to section 42 of the Federal Deposit InsuranceAct? Yes No

or

Since the last exam, has the insured depository institution closed any of itsbranches, making it subject to the notification requirements of the policystatement and section 42 of the FDI Act? Yes No

Note: If the answer to both questions is ‘‘no,’’ do not proceed with thischecklist.

2. Has the institution provided written notice of any branch closing to theFederal Reserve at least 90 days in advance of the closing? (§ 42(a)(1)) Yes No

3. Did the notice to the Federal Reserve contain

a. The identity of the branch to be closed (§ 42(a)(1)) Yes No

b. The proposed closing date (§ 42(a)(1)) Yes No

c. The specific reasons for the closure (§ 42(a)(2)(A)) Yes No

d. Statistical or other information in support of the reason(s) and consistentwith the institution’s written policy for branch closings (§ 42(a)(2)(B)) Yes No

4. Did the institution provide to customers written notice of the branch closure,in a regular account statement or separate mailing, at least 90 days beforethe closing? (§ 42(b)(2)(B)) Yes No

5. Did the mailed customer notice contain

a. The location of the branch to be closed (§ 42(b)(1)) Yes No

b. The proposed closing date (§ 42(b)(2)(B)) Yes No

c. A list of alternative banking locations or a phone number to call to obtaininformation about possible alternatives (§ 42(b)(1)) Yes No

6. Did the institution conspicuously display a notice to customers on thepremises of the branch to be closed at least 30 days before theclosing? (§ 42(b)(2)(A)) Yes No

7. Did the notice that was posted on the bank premises contain

a. The proposed closing date (§ 42(b)(2)(A)) Yes No

b. A list of alternative banking locations or a phone number to call to obtaininformation about possible alternatives (§ 42(b)(1)) Yes No

8. Has the institution adopted a written branch closing policy? (§ 42(c)) Yes No

9. Does the written branch closing policy include (§ 42(c))

a. Factors for determining which branch to close Yes No

b. Factors for determining which customers to notify Yes No

c. Procedures for providing the required notices Yes No

10. Pursuant to state law, did the institution provide notifications consistent withthe requirements of section 42 to the customers of the branch to be closed?(See checklist items 5 and 7.) (Note: If the answer is ‘‘yes,’’ a second noticeneed not be sent in order to comply with the policy statement.) Yes No


11. If, pursuant to state law, the institution provided its state supervisor with anotice of a branch closing,

a. Did the institution also provide a copy of that notice to the FederalReserve? (§ 42(a)(1)) Yes No

b. Did the notice contain information consistent with the notice required bysection 42? (See checklist item 3.) Yes No

c. Was the notice filed with the Federal Reserve at least 90 days before thedate of the proposed branch closing? (§ 42(a)(1)) Yes No

Branch Closings: Examination Checklist



Background

Financial institutions that operate one or more websites or online services directed at children (or aportion of such a web site or service), or that haveknowledge that they are collecting or maintain-ing personal information from a child online, aresubject to certain regulatory requirements. Thoserequirements, which are set forth in the Children’sOnline Privacy Protection Act of 1998 (COPPA)(15 USC 6501 et seq.), address the collection, use,and disclosure of personal information aboutchildren collected from children through web sitesor other online services. The regulation that imple-ments COPPA (16 CFR 312) was issued inNovember 1999 by the Federal Trade Commissionand became effective in April 2000. Each of thefederal financial regulatory agencies has enforce-ment authority for COPPA over the institutions itsupervises.

Definitions

• Child (children)—An individual (individuals) underthe age of 13

• Operator—Any person who operates a web sitelocated on the Internet or an online service andwho collects or maintains personal informationfrom or about the users of, or visitors to, such aweb site, or on whose behalf such information iscollected or maintained where the web site oronline service is used for commercial purposes

• Personal information—Individually identifiableinformation about an individual collected online,including first and last names, home address,e-mail address, telephone number, Social Secu-rity number, or any combination of informationthat permits physical or online contact


Operators of web sites or online services directedat children, and operators who have knowledgethat they are collecting or maintaining personalinformation from children, are required to

• Provide, on the web site or online service, a clear,complete, and understandable written notice ofinformation-collection practices with regard tochildren, describing how the operator collects,uses, and discloses the information (§ 312.4)

• Obtain, through reasonable efforts and withlimited exceptions, verifiable parental consent

before collecting, using, or disclosing personalinformation from children (§ 312.5)

• Provide a parent, upon request, with the meansof reviewing the personal information collectedfrom his or her child and of refusing to permit theinformation’s further use or maintenance (§ 312.6)

• Limit collection of personal information for thepurpose of facilitating a child’s online participa-tion in a game, prize offer, or other activity to thatinformation that is reasonably necessary for theactivity (§ 312.7)

• Establish and maintain reasonable proceduresto protect the confidentiality, security, and integ-rity of the personal information collected fromchildren (§ 312.8)

Notice on Web Site

Placement of Notice

An operator of a web site or online service directedat children must post, on its home page andeverywhere on the site or service where it collectspersonal information from any child, a link takingviewers to a notice of its information practices withregard to children. An operator of a general-audience web site that has a separate children’sarea must post a link to its notice on the home pageof the children’s area.

Such links must be placed in a clear andprominent place on the home page of the web siteor online service. To make the link clear andprominent, an operator may, for example, use alarger font size in a different color on a contrastingbackground. A link in small print at the bottom of ahome page or a link that is indistinguishable fromadjacent links does not satisfy the ‘‘clear andprominent’’ guidelines.

Content of Notice

The web site notice must, among other require-ments, state

• The name, address, telephone number, ande-mail address of all operators collecting ormaintaining personal information from childrenthrough the web site or online service; or thesame information for one operator who willrespond to all inquiries, in addition to the namesof all the operators

• The types of personal information collected fromchildren, and how the information is collected

Consumer Compliance Handbook COPPA • 1 (1/06)

• How the operator uses or may use the personalinformation

• Whether the operator discloses information col-lected to third parties. If it does, the notice muststate

– The types of business engaged in by the thirdparties

– The purposes for which the information is used

– Whether the third parties have agreed tomaintain the confidentiality, security, and integ-rity of the information

– That the parent has the option of consentingto the collection and use of the informationwithout consenting to the disclosure of theinformation to third parties

• That the operator may not require, as a conditionof participation in an activity, that a child disclosemore information than is reasonably necessary toparticipate in the activity

• That a parent may review his or her child’spersonal information, have it deleted, and refuseto allow any further collection or use of the child’sinformation. Procedures for parental review,deletion, and refusal to allow further collection oruse must also be included in the notice.

Notice to Parent

Content of Notice

An operator is required to obtain verifiable parentalconsent before collecting, using, or disclosingpersonal information from children. An operatormust also make reasonable efforts to provide aparent with notice of the operator’s informationpractices with regard to children, as describedabove, and, in the case of a notice seekingconsent, must state the following:

• That the operator wishes to collect personalinformation from the parent’s child

• That the parent’s consent is required for thecollection, use, and disclosure of the information

• How the parent can provide consent

Parental Consent andReview of Information

Methods of Obtaining Parental Consent

Obtaining verifiable parental consent may be doneby any of several methods. Currently, operatorsmay take a ‘‘sliding-scale’’ approach whereby themethod of obtaining parental consent depends onhow the financial institution intends to use thechild’s personal information.

Under the sliding-scale approach, if the informa-tion is to be used solely for internal purposes

(including use by an operating subsidiary or anaffiliate), the required method of obtaining consentis less rigorous. A financial institution that uses theinformation internally may obtain parental consentvia e-mail, provided that the operator takes addi-tional steps to verify that the person providingconsent is in fact the child’s parent by, for example,confirming receipt of consent by e-mail, letter, ortelephone call. Operators who use such methodsmust provide notice that the parent may revokeconsent.

The sliding-scale approach was adopted inanticipation that technical developments wouldeventually allow the use of more-reliable methodsto verify identities. This approach, which wasoriginally scheduled to be phased out by April 15,2005, has been extended indefinitely by the FTC.

If, in contrast, the information is to be disclosedto others (for example, to chat rooms, messageboards, or third parties), putting the child’s privacyat greater risk, a more-reliable method of consent isrequired. These more-reliable methods include

• Obtaining a signed consent form from a parentvia mail or fax

• Accepting and verifying a credit card number

• Taking a call from a parent, through a toll-freetelephone number staffed by trained personnel

• Receiving e-mail accompanied by a digitalsignature

• Receiving e-mail accompanied by a PIN orpassword obtained through one of the verifica-tion methods described in the bullet items above

Parent-Permitted Disclosures to Third Parties

A parent may permit an operator of a web site oronline service to collect and use information abouta child while prohibiting the operator from dis-closing the child’s information to third parties. Anoperator must give a parent this option.

Parental Consent to Material Changes

An operator must send a new notice and requestfor consent to a parent if there is a material changein the collection, use, or disclosure practices towhich the parent has previously agreed.

Exceptions toPrior-Parental-Consent Requirement

A financial institution does not need prior parentalconsent to collect

• A parent’s or child’s name or online contactinformation solely to obtain consent or to providenotice. If the operator has not obtained parental


2 (1/06) • COPPA Consumer Compliance Handbook

consent in a reasonable time after the informa-tion was collected, the operator must delete theinformation from its records

• A child’s online contact information solely torespond on a one-time basis to a specificrequest from the child. In such an instance, thecontact information must not be used tore-contact the child and must be deleted.

• A child’s online contact information to respondmore than once to a specific request made bythe child (for example, a request to receive amonthly online newsletter), if the parent is noti-fied and allowed to request that the informationnot be used in any other way

• The name and online contact information of thechild to be used solely to protect the child’ssafety

• The name and online contact information of thechild solely to protect the security of the site, totake precautions against liability, or to respond tojudicial process, law enforcement agencies, oran investigation related to public safety

Parental Right to Review Information

An operator of a web site or online service isrequired to provide a parent with a means ofobtaining any personal information collected fromhis or her child. At a parent’s request, the operatormust provide the parent with a description of thetypes of personal information it has collected fromthe child and an opportunity to review the informa-tion collected from the child.

Before a parent is permitted to review a child’sinformation, the operator must take steps to ensurethat the person making the request is the child’sparent. An operator or its agent will not be heldliable under any federal or state laws for anydisclosures made in good faith and after havingfollowed reasonable procedures to verify therequester’s identity.

Parents may refuse to permit an operator tocontinue to use or collect a child’s personalinformation in the future and may instruct theoperator to delete the information. If a parent doesso, the operator may terminate its service to thatchild.

Other Requirements

Confidentiality, Security, andIntegrity of Personal InformationCollected from a Child

The operator of a web site or an online service isrequired to establish and maintain reasonableprocedures to protect the confidentiality, security,and integrity of personal information collected froma child. Operators must have adequate policiesand procedures for protecting a child’s personalinformation from loss, misuse, unauthorized access,or disclosure. Operators are permitted to select anappropriate method for implementing this provision.

Safe Harbor

With prior FTC approval, industry groups, financialinstitutions, and others may establish a self-regulatory program. Web site operators and onlineservices that comply with FTC-approved self-regulatory guidelines will receive a ‘‘safe harbor’’from the requirements of COPPA and the regula-tion. Self-regulatory guidelines must require theimplementation of substantially similar require-ments that provide the same or greater protectionsfor a child as sections 312.2 through 312.9 of theregulation. The guidelines must also include aneffective, mandatory mechanism for assessingoperators’ compliance as well as incentives toensure that an operator will comply.



Children’s Online Privacy Protection ActExamination Objectives and Procedures


1. To assess the quality of a financial institution’scompliance management policies and proce-dures for implementing COPPA, specifically, forensuring consistency between an institution’snotices about policies and practices and what itactually does

2. To determine the degree of reliance that can beplaced on a financial institution’s internal con-trols and procedures for monitoring compliancewith COPPA

3. To determine a financial institution’s compliancewith COPPA, specifically, in meeting the follow-ing requirements:

• Providing, on the web site or online service, aclear, complete, and understandable writtennotice of its information-collection practiceswith regard to children that describes howthe operator collects, uses, and disclosesthe information

• Obtaining, through reasonable efforts andwith limited exceptions, verifiable parentalconsent prior to the collection, use, ordisclosure of personal information fromchildren

• Providing a parent, upon request, with themeans of reviewing the personal informationcollected from his or her child and the meanswith which to refuse its further use ormaintenance

• Complying with any direction or request of aparent concerning his or her child’sinformation

• Limiting collection of personal information fora child’s online participation in a game, prizeoffer, or other activity to information that isreasonably necessary for the activity

• Establishing and maintaining reasonable pro-cedures to protect the confidentiality, secu-rity, and integrity of the personal informationcollected from children

4. To initiate effective corrective actions whenviolations of law are identified or when policiesor internal controls are deficient


Initial Procedures

1. From direct observation of the financial institu-tion’s web site or online service and throughdiscussions with appropriate management offi-cials, ascertain whether the institution is subjectto COPPA by determining if it operates a website or online service that

• Is directed at children

• Knowingly collects or maintains personalinformation from children

Note: Stop here if the institution does not currentlyoperate a web site that is directed to children ordoes not knowingly collect information about chil-dren. In these cases the institution is not subject toCOPPA, and no further examination for COPPA isnecessary.

2. Determine if the financial institution is participat-ing in an FTC-approved self-regulatory program.

• If it is, obtain a copy of the program andsupporting documentation, such as reviewsor audits, that demonstrate the financialinstitution’s compliance with the program. Ifthe self-regulatory authority (SRA) deter-mined that the financial institution was incompliance with COPPA at the most recentreview or audit or has not yet made adetermination, no further examination forCOPPA is necessary. If, on the other hand,the SRA determined that the institution wasnot in compliance with COPPA and theinstitution has not taken appropriate correc-tive action, continue with the remainingprocedures.

• If the financial institution is not participatingin a FTC-approved self-regulatory program,continue with the remaining procedures.

3. Determine, through a review of available infor-mation, whether the financial institution’s internalcontrols are adequate to ensure compliancewith COPPA. Consider the following:

• Organization chart, to determine who isresponsible for the financial institution’s com-pliance with COPPA


• Process flowcharts, to determine how theinstitution’s COPPA compliance is plannedfor, evaluated, and achieved

• Policies and procedures that relate to COPPAcompliance

• Methods of collecting or maintaining per-sonal information from the web site or onlineservice

• List of data elements collected from anychildren and a description of how the dataare used and protected

• List of data elements collected from anychildren that are disclosed to third parties,and any contracts or agreements with thosethird parties governing the use of thatinformation

• Complaints regarding the treatment of datacollected from a child

• Internal checklists, worksheets, and otherreview documents

4. Review applicable audit and compliance reviewmaterial, including workpapers, checklists, andreports, to determine whether

• The procedures address the COPPA provi-sions applicable to the institution

• Effective corrective action occurred inresponse to previously identified deficiencies

• The audits and reviews performed werereasonable and accurate

• Deficiencies, their causes, and the effectivecorrective actions are consistently reportedto management or members of the board ofdirectors

• The frequency of the compliance review issatisfactory

5. Review, as available, a sample of complaintsthat allege the inappropriate collection, sharing,or use of data from a child to determine whetherthere are any areas of concern.

6. Based on the results of the foregoing, determinethe depth of the examination review, focusing onthe areas of particular risk. The procedures tobe employed depend on the adequacy of theinstitution’s compliance management systemand the level of risk identified.

Verification Procedures

1. Review the notice describing the financialinstitution’s information practices with regard tochildren to determine whether it is clearly andprominently placed on the web site and con-tains all information required by the regula-tion. (§ 312.4)

2. Obtain a sample of data collected from children,

including data shared with third parties, ifapplicable, and determine whether

• The institution has established and main-tained reasonable procedures to protectthe confidentiality, security, and integrity ofpersonal information collected from a child(§§ 312.3 and 312.8)

• Data are collected, used, and shared inaccordance with the institution’s web sitenotice (§§ 312.3 and 312.4)

• Parental permission was obtained prior to theuse, collection, or sharing of information,including consent to any material change insuch practices (§ 312.5(a))

• Data are collected, used, and shared inaccordance with parental consent (§§ 312.5and 312.6)

3. Through testing or management’s demonstra-tion of the web site or online service and areview of a sample of parental consent formsor other documentation, determine whether theinstitution has a reasonable method for verifyingthat the person providing the consent is thechild’s parent. (§ 312.5(b)(2))

4. Review a sample of parental requests forpersonal information provided by their children,and verify that the institution

• Provided, upon request, a description of thespecific types of personal information col-lected (§ 312.6(a)(1))

• Complied with a parent’s instructions con-cerning the collection, use, maintenance, ordisclosure of his or her child’s informa-tion (§ 312.6(a)(2))

• Allowed a parent to review any personalinformation collected from the child(§ 312.6(a)(3))

• Verified that the person requesting informa-tion is a parent of the child (§ 312.6(a)(3))

5. Through testing or management’s demonstra-tion of the web site or online service, verify thatthe institution does not condition a child’sparticipation in a game, offering of a prize, oranother activity on the child’s disclosure of morepersonal information than is reasonably neces-sary to participate in the activity. (§ 312.7)

Conclusions

1. Summarize all findings, supervisory concerns,and regulatory violations.

2. Determine the root cause of any violations byidentifying weaknesses in internal controls,audit and compliance reviews, training, manage-

Children’s Online Privacy Protection Act: Examination Objectives and Procedures


ment oversight, or other factors; also, determinewhether the violations are repetitive or systemic.

3. Identify any action needed to correct violationsand weaknesses in the financial institution’scompliance system.

4. Discuss findings with the institution’s manage-ment and obtain a commitment for correctiveaction.

Children’s Online Privacy Protection Act: Examination Objectives and Procedures


Children’s Online Privacy Protection ActWorksheet

Notice on Web Site1. Does the financial institution knowingly collect or maintain personal

information from a child in a manner that violates the regulation? (§ 312.3) Yes No

2. Is the link to the notice clearly labeled as a notice of the web site’s informationpractices with regard to children, and is it placed in a clear and prominentplace on the home page of the web site and at each area on the web sitewhere a child directly provides or is asked to provide personal informa-tion? (§ 312.4(b)(1)) Yes No

3. Does the notice state

• The name, address, telephone number, and e-mail address of alloperators collecting or maintaining personal information from any childrenthrough the web site or online service, or the same information for oneoperator who will respond to all inquiries along with the names of alloperators (§ 312.4(b)(2)(i)) Yes No

• The types of information collected from a child, and whether theinformation is collected directly or passively (§ 312.4(b)(2)(ii)) Yes No

• How such information is or may be used (§ 312.4(b)(2)(iii)) Yes No

• Whether such information is disclosed to third parties. If it is, determinewhether the notice states

– The types of businesses engaged in by the third parties Yes No

– The purposes for which the information is used Yes No

– That the third parties have agreed to maintain the confidentiality,security, and integrity of the information Yes No

– That a parent has the option to consent to the collection and use of theinformation without consenting to the disclosure of the information tothird parties (§ 312.4(b)(2)(iv)) Yes No

• That the operator is prohibited from conditioning a child’s participation inan activity on the disclosure of more information than is reasonablynecessary to participate in such activity (§ 312.4(b)(2)(v)) Yes No

• That a parent may review and have deleted the child’s personalinformation, may refuse to permit further collection or use of the child’sinformation, and is provided with the procedures for doing so(§ 312.4(b)(2)(vi)) Yes No

Notice to a Parent4. Does the financial institution make reasonable efforts to ensure that a parent

of the child receives the notice? (§ 312.4(c)) Yes No

5. Does the notice to the parent state

• That the operator wishes to collect information from the child(§ 312.4(c)(1)(i)(A)) Yes No

• The institution’s practices regarding children, as noted on its web site(§§ 312.4(b)(2) and 312.4(c)(1)(i)(B)) Yes No

• That the parent’s consent is required for the collection, use, anddisclosure of such information, and the means by which the parent canprovide verifiable consent to the collection of information (§ 312.4(c)(1)(ii)) Yes No


• If the operator has collected information from a child that will be used torespond directly more than once to a specific request from the child, doesthe notice state

– That the operator has collected the child’s online contact information torespond to the child’s request for information, and that the requestedinformation will require more than one contact with the child Yes No

– That the parent may refuse to permit further contact with the child andrequire the deletion of the information, and how the parent can do so Yes No

– That if the parent fails to respond to the notice, the operator may use theinformation for the purpose(s) stated in the notice (§ 312.4(c)(1)(iii)) Yes No

• If the purpose behind the collection of information is to protect the safetyof the child, does the notice state

– That the operator has collected the child’s name and online contactinformation to protect the safety of the child Yes No

– That the parent may refuse to permit further contact with the child andrequire the deletion of the information, and how the parent can do so Yes No

– If the parent fails to respond to the notice, that the operator may use theinformation for the purpose(s) stated in the notice (§ 312.4(c)(1)(iv)) Yes No

Parental Consent6. Does the financial institution obtain the consent of the parent prior to any

collection, use, or disclosure of personal information from any children,outside the exceptions listed in section 312.5(c)? (§ 312.5(a)(1)) Yes No

7. If changes to the policy on collecting, using, or disclosing data on childrenoccurred, does the institution request and review updated consent formsor documentation and determine whether parental permission is still ineffect? (§ 312.5(a)) Yes No

8. Does the institution have a reasonable method for verifying that the personproviding the consent is the child’s parent? (§ 312.5(b)(2)) Yes No

Right of Parent to Review Personal Information Provided by a Child9. Does the financial institution respond to parental requests to review

information provided by their children by providing

• A description of the specific types of personal information collected(§ 312.6(a)(1)) Yes No

• The opportunity for the parent to refuse to permit the further use orcollection of personal information and to direct the financial institution todelete the child’s personal information (§ 312.6(a)(2)) Yes No

• Procedures for reviewing any personal information collected from thechild (§ 312.6(a)(3)) Yes No

• Adequate procedures to ensure that those persons requesting informationare parents of the child in question (§ 312.6(a)(3)) Yes No

Prohibition against Conditioning a Child’s Participationon Collection of Personal Information10. Does the operator refrain from conditioning a child’s participation in a game,

the offering of a prize, or another activity on the child’s disclosure of morepersonal information than necessary to participate? (§ 312.7) Yes No

Children’s Online Privacy Protection Act: Worksheet


Confidentiality, Security, and Integrity of Personal InformationCollected from a Child11. Does the financial institution maintain reasonable policies and procedures for

protecting a child’s personal information from loss, misuse, unauthorizedaccess, or disclosure? (§ 312.8) Yes No

Children’s Online Privacy Protection Act: Worksheet



Background

The Right to Financial Privacy Act of 1978 wasenacted to provide the financial records of financialinstitution customers a reasonable amount ofprivacy from federal government scrutiny. Theact, which became effective in March 1979,establishes specific procedures that governmentauthorities must follow when requesting a cus-tomer’s financial records from a bank or otherfinancial institution. It also imposes duties andlimitations on financial institutions prior to therelease of information sought by governmentagencies. In addition, the act generally requiresthat customers receive

• A written notice of the federal authority’s intent toobtain financial records

• An explanation of the purpose for which therecords are sought

• A statement describing procedures to follow ifthe customer does not wish such records orinformation to be made available

Certain exceptions allow for delayed notice or nocustomer notice at all.

Prior to passage of the act, bank customers werenot informed that their personal financial recordswere being turned over to a government authorityand could not challenge government access to therecords. In United States v. Miller (425 U.S. 435(1976)), the Supreme Court held that becausefinancial records are maintained by a financialinstitution, the records belong to the institutionrather than the customer; therefore, the customerhas no protectable legal interest in the bank’srecords and cannot limit government access tothose records. It was principally in response to thisdecision that the Right to Financial Privacy Act wasenacted.

Coverage

Coverage under the act specifically extends tocustomers of financial institutions. A customeris defined as any person or authorized repre-sentative of that person who uses or has usedany service of a financial institution. The defini-tion also includes any person for whom the finan-cial institution acts as a fiduciary. Corporationsand partnerships of six or more individuals arenot considered customers for purposes of theact.

Requirements

To obtain access to, copies of, or informationcontained in a customer’s financial records, agovernment authority, generally, must first obtainone of the following:

• An authorization, signed and dated by thecustomer, that identifies the records, the reasonsthe records are being requested, and thecustomer’s rights under the act

• An administrative subpoena or summons• A search warrant• A judicial subpoena• A formal written request by a government agency

(to be used only if no administrative summons orsubpoena authority is available)

A financial institution may not release a custom-er’s financial records until the government authorityseeking the records certifies in writing that it hascomplied with the applicable provision of the act. Inaddition, the institution must maintain a record of allinstances in which a customer’s records aredisclosed to a government authority pursuant tocustomer authorization. The records should includethe date, the name of the government authority,and an identification of the records disclosed.Generally, the customer has a right to inspect therecords.

Although there are no specific record-retentionrequirements in the act, financial institutions shouldretain copies of all administrative and judicialsubpoenas, search warrants, and formal writtenrequests given to them by federal governmentagencies or departments along with the writtencertification required.

A financial institution must begin assembling therequired information upon receipt of the agency’ssummons or subpoena or a judicial subpoena andmust be prepared to deliver the records uponreceipt of the written certificate of compliance.

Cost Reimbursement

With certain exceptions, government entities mustreimburse financial institutions for the cost ofproviding the information. This reimbursement mayinclude costs for assembling or providing records,reproduction and transportation costs, or any othercosts reasonably necessary or incurred in gather-ing and delivering the requested information. TheBoard’s Regulation S establishes rates and theconditions under which these payments may bemade.

Consumer Compliance Handbook RFPA • 1 (1/06)

Exceptions toNotice and Certification Requirements

In general, exceptions to the notice and certifica-tion requirements cover situations pertinent toroutine banking business, information requested bysupervisory agencies, and requests subject toother statutory requirements. Specific exceptionsinclude records

• Submitted by financial institutions to any court oragency when perfecting a security interest,proving a claim in bankruptcy, or collecting adebt for itself or a fiduciary

• Requested by a supervisory agency in connec-tion with its supervisory, regulatory, or monetaryfunctions (including regular examinations andany investigations relating to consumercomplaints)

• Sought in accordance with procedures autho-rized by the Internal Revenue Code (records thatare intended to be accessed by proceduresauthorized by the Tax Reform Act of 1976)

• Required to be reported in accordance with anyfederal statute (or rule promulgated thereunder,such as the Bank Secrecy Act)

• Requested by the Government AccountabilityOffice for an authorized proceeding, investiga-tion, examination, or audit directed at a federalagency

• Subject to a subpoena issued in conjunction withproceedings before a grand jury (with theexception of cost reimbursement and therestricted use of grand jury information)

• Requested by a government authority subject toa lawsuit involving the bank customer (Therecords may be obtained under the FederalRules of Civil and Criminal Procedure.)

The act also allows financial institutions to

• Release records that are not individually identifi-able with a particular customer

• Notify law enforcement officials if it has informa-tion relevant to a violation of the law

Exceptions to Notice RequirementsBut Not to Certification Requirements

In certain cases, the act does not require thecustomer to be notified of the request but stillrequires the federal agency requesting the informa-tion to certify in writing that it has complied with allapplicable provisions of the act. Exceptions to thenotice provisions include

• Instances in which a financial institution, ratherthan a customer, is being investigated

• Requests for records incidental to the process-ing of a government loan, loan guaranty, loaninsurance agreement, or default on a government-guaranteed or government-insured loan (In thiscase, the federal agency must give the loanapplicant a notice of the government’s rights toaccess financial records when the customerinitially applies for the loan. The financial institu-tion is then required to keep a record of alldisclosures made to government authorities, andthe customer is entitled to inspect this record.)

• Instances in which the government is engagingin authorized foreign intelligence activities or theSecret Service is carrying out its protectivefunctions

Although the Securities and Exchange Commis-sion is covered by the act, it can obtain customerrecords from an institution without prior notice to thecustomer by obtaining an order from a U.S. districtcourt. The agency must, however, provide thecertificate of compliance to the institution alongwith the court order prohibiting disclosure of thefact that the documents have been obtained. Thecourt order will set a delay-of-notification date, afterwhich the customer will be notified by the institutionthat the SEC has obtained his or her records.

Delayed-Notice Requirements

Under certain circumstances, a government entitymay request a court order delaying the customernotice for up to ninety days. This delay may begranted if the court finds that earlier notice wouldresult in endangering the life or physical safety ofany person, flight from prosecution, destruction ofor tampering with evidence, or intimidation ofpotential witnesses or would otherwise seriouslyjeopardize or unduly delay an investigation, trial, orofficial proceeding. Delayed notice of up to ninetydays is also allowed for search warrants.

Civil Liability

A customer may collect civil penalties from anygovernment agency or department that obtains, orany financial institution or employee of the institu-tion who discloses, information in violation of theact. These penalties include (1) actual damages,(2) $100, regardless of the volume of recordsinvolved, (3) court costs and reasonable attorney’sfees, and (4) such punitive damages as the courtmay allow for willful or intentional violations. Anaction may be brought up to three years after thedate of the violation or the date the violation wasdiscovered. A financial institution that relies in goodfaith on a federal agency’s certification may not beheld liable to a customer for the disclosure offinancial records.


2 (1/06) • RFPA Consumer Compliance Handbook

Right to Financial Privacy ActExamination Procedures

1. Determine if the financial institution has receivedany requests for customer financial recordscovered by the act since the most recentcompliance examination. If no requests havebeen received, determine if the institution isaware of its responsibilities under the act. Ifrequests have been received, complete theremaining procedures.

2. Determine if the financial institution has estab-lished procedures and internal controls forfulfilling requests by government authorities forconsumer financial records that are adequate toensure that all requests are handled in compli-ance with the act.

3. Determine if the financial institution providescustomers’ financial records to governmentauthorities only after receiving the written certi-fication required by the act.

4. Determine if the financial institution’s internalprocedures require that the institution refrain

from requiring a customer’s authorization fordisclosure of financial records as a condition ofdoing business.

5. Determine if the financial institution keepsappropriate records of those instances in whicha customer’s financial records are disclosed toa government authority upon authorization bythe customer, including a copy of the requestand the identity of the government authority.Determine if the institution provides customers acopy of the records upon request (unless acourt order blocking access has beenobtained).

6. Determine if the financial institution maintainsappropriate records of all disclosures of acustomer’s records made to a governmentauthority in connection with a government loan,guaranty, or insurance program. Determine ifthe institution allows customers to examinethese records upon request.


Right to Financial Privacy ActExamination Checklist

1. Has the financial institution received any requests for customer financialrecords covered by the Right to Financial Privacy Act since the lastexamination? Yes No

If it has, answer questions 2–7.

2. Has the financial institution, in compliance with the act, establishedprocedures for fulfilling requests by government authorities for customers’financial records? Yes No

3. Does the financial institution have adequate internal controls in place to ensurethat all requests are handled in compliance with the act? Yes No

4. As required by section 1103(b) of the act, does the financial institution providecustomers’ financial records to government authorities only after receiving thewritten certification required by the act? Yes No

5. Does the financial institution refrain from requiring a customer’s authorizationfor disclosure of financial records as a condition of doing business?(§ 1104(b)) Yes No

6. Does the financial institution maintain records of all disclosures of customerrecords made to a government authority in connection with a government loan,guaranty, or insurance program? (§ 1113(h)(6)) Yes No

a. Does the financial institution allow customers to examine these recordsupon request? Yes No

7. Does the financial institution keep adequate records of those instances inwhich a customer’s financial records are disclosed to a government authorityupon authorization by the customer, including a copy of the request and theidentity of the government authority? (§ 1104(c)) Yes No

a. Does the financial institution allow customers to examine these recordsupon request (unless blocked by a court order)? Yes No

Each question 2–7 answered ‘‘no’’ requires an explanation of how the financialinstitution intends to comply with the requirements of the act.


Federal Fair Lending Regulations and StatutesOverview

The federal fair lending laws—the Equal CreditOpportunity Act and the Fair Housing Act—prohibitdiscrimination in credit transactions, includingtransactions related to residential real estate.

The Statutes andImplementing Regulations

The Equal Credit Opportunity Act (ECOA), which isimplemented by the Board’s Regulation B (12 CFR202), prohibits discrimination in any aspect of acredit transaction. It applies to any extension ofcredit, including residential real estate lending andextensions of credit to small businesses, corpora-tions, partnerships, and trusts.

The ECOA prohibits discrimination based on

• Race or color

• Religion

• National origin

• Sex

• Marital status

• Age (provided the applicant has the capacity tocontract)

• The applicant’s receipt of income derived fromany public assistance program

• The applicant’s exercise, in good faith, of anyright under the Consumer Credit Protection Act

Lending acts and practices that are specificallyprohibited, permitted, or required are described inthe regulation. Official staff interpretations of theregulation are contained in supplement I to theregulation.

The Fair Housing Act (FHAct), which is imple-mented by HUD regulations,1 prohibits discrimina-tion in all aspects of residential real estate–relatedtransactions, including, but not limited to,

• Making loans to buy, build, repair, or improve adwelling

• Purchasing real estate loans

• Selling, brokering, or appraising residential realestate

• Selling or renting a dwelling

The FHAct prohibits discrimination based on

• Race or color

• Religion

• National origin

• Sex

• Familial status (that is, discrimination againsthouseholds having children under the age of 18living with a parent or legal custodian, pregnantwomen, or persons with legal custody of childrenunder 18)

• Handicap

Because both the FHAct and the ECOA apply tomortgage lending, lenders may not discriminate inmortgage lending on the basis of any of theprohibited factors listed. In addition, with respect toresidential real estate–related lending, under bothlaws, a lender may not, on the basis of a prohibitedfactor,

• Fail to provide information or services relating to,or provide different information or servicesrelating to, any aspect of the lending process,including credit availability, application proce-dures, and lending standards

• Discourage or selectively encourage applicantswith respect to inquiries about or applications forcredit

• Refuse to extend credit, or use different stan-dards in determining whether to extend credit

• Vary the terms of credit offered, including theamount, interest rate, duration, and type of loan

• Use different standards to evaluate collateral

• Treat a borrower differently in servicing a loan orinvoking default remedies

• Use different standards for pooling or packaginga loan in the secondary market

A lender may not express, orally or in writing, apreference that is based on a prohibited factor orindicate that it will treat applicants differently on thebasis of a prohibited factor. Moreover, a lender maynot discriminate on a prohibited basis because ofthe characteristics of

• An applicant, prospective applicant, or borrower

• A person associated with an applicant, prospec-tive applicant, or borrower (for example, aco-applicant, spouse, business partner, or live-inaide)

• The present or prospective occupants of eitherthe property to be financed or the neighborhoodor other area in which the property to be financedis located

Note: This overview is adapted from the introduction to theInteragency Fair Lending Examination Procedures, which wererevised in 2004 and distributed by the Board as an attachment toCA Letter 04-8.

1. HUD’s regulations are at 24 CFR 100.

Consumer Compliance Handbook Fair Lending: Overview • 1 (1/06)

Finally, the FHAct requires lenders to makereasonable accommodations for a person withdisabilities when such accommodations are neces-sary to afford the person an equal opportunity toapply for credit.

Types of Lending Discrimination

The courts have recognized three types of proof oflending discrimination under the ECOA and theFHAct:

• Overt evidence of disparate treatment

• Comparative evidence of disparate treatment

• Evidence of disparate impact

Disparate Treatment

The existence of illegal disparate treatment may beestablished either by statements revealing that alender explicitly considered prohibited factors(overt evidence) or by differences in treatment thatare not fully explained by legitimate nondiscrimina-tory factors (comparative evidence).

Overt Evidence of Disparate Treatment

Overt evidence of discrimination exists when alender openly discriminates on a prohibited basis.

Example. A lender offers a credit card with a limitof up to $750 for applicants age 21–30 and$1,500 for applicants over 30. This policy violatesthe ECOA’s prohibition on discrimination on thebasis of age.

Overt evidence of discrimination also exists evenwhen a lender expresses—but does not act on—adiscriminatory preference.

Example. A lending officer tells a customer, ‘‘Wedo not like to make home mortgages to NativeAmericans, but the law says we may notdiscriminate and we have to comply with thelaw.’’ This statement violates the FHAct’s prohi-bition against statements expressing a discrimi-natory preference as well as section 202.5(a) ofRegulation B, which prohibits discouraging appli-cants on a prohibited basis.

Comparative Evidenceof Disparate Treatment

Disparate treatment occurs when a lender treats acredit applicant differently on the basis of one of theprohibited factors. Showing that, beyond the differ-ence in treatment, the treatment was motivated byprejudice or by conscious intention to discriminateagainst a person is not required. Different treatmentis considered by courts to be intentional discrimi-

nation because the difference in treatment on aprohibited basis has no credible, nondiscriminatoryexplanation.

Disparate treatment may be more likely to occurin the treatment of applicants who are neitherclearly well qualified nor clearly unqualified. Dis-crimination may more readily affect applicants inthis middle group for two reasons. First, applica-tions that are ‘‘close cases’’ have more room andneed for lender discretion. Second, whether or notan applicant qualifies may depend on the level ofassistance provided by the lender in completing anapplication. The lender may, for example, proposesolutions to credit or other problems relevant to anapplication, identify compensating factors, andprovide encouragement to the applicant. Lendersare under no obligation to provide such assistance,but to the extent that they do, the assistance mustbe provided in a nondiscriminatory way.

Example. A nonminority couple applies for anautomobile loan. The lender finds adverse infor-mation in the couple’s credit report. The lenderdiscusses the credit report with the couple anddetermines that the adverse information, a judg-ment against the couple, was incorrect, as thejudgment had been vacated. The nonminoritycouple was granted a loan. A minority coupleapplied for a similar loan with the same lender.Upon discovering adverse information in theminority couple’s credit report, the lender deniesthe loan application on the basis of the adverseinformation without giving the couple an oppor-tunity to discuss the report.

The foregoing is an example of disparate treat-ment of similarly situated applicants—apparentlyon the basis of a prohibited factor—in the amountof assistance and information provided.

If a lender has apparently treated similar appli-cants differently on the basis of a prohibited factor,it must explain the difference. If the explanation isfound to be not credible, the Federal Reserve mayconclude that the lender intentionally discrimi-nated.

Redlining is a form of illegal disparate treatmentwhereby a lender provides unequal access tocredit, or unequal terms of credit, because of therace, color, national origin, or other prohibitedcharacteristic(s) of the residents of the area inwhich the credit seeker resides or will reside or inwhich the residential property to be mortgaged islocated. Redlining may violate both the FHAct andthe ECOA.

Disparate Impact

A disparate impact occurs when a lender applies aracially (or otherwise) neutral policy or practice

Federal Fair Lending Regulations and Statutes: Overview

2 (1/06) • Fair Lending: Overview Consumer Compliance Handbook

equally to all credit applicants but the policy orpractice disproportionately excludes or burdenscertain persons on a prohibited basis.

Example. A lender’s policy is to deny loanapplications for single-family residences for lessthan $60,000. The policy has been in effect forten years. This minimum loan amount policy isshown to disproportionately exclude potentialminority applicants from consideration becauseof their income levels or the value of the housesin the areas in which they live.

Although the law on disparate impact as itapplies to lending discrimination continues todevelop, it has been clearly established that apolicy or practice that creates a disparity on aprohibited basis is not, by itself, proof of a violation.

When an examiner finds that a lender’s policy orpractice has a disparate impact, the next step is todetermine whether the policy or practice is justifiedby ‘‘business necessity.’’ The justification must bemanifest and may not be hypothetical or specula-tive. Factors that may be relevant to the justificationinclude cost and profitability. But even if a policy orpractice that has a disparate impact on a prohib-ited basis can be justified by business necessity, itmay still be found to be in violation if an alternativepolicy or practice could serve the same purposewith less discriminatory effect. Finally, evidence ofdiscriminatory intent is not necessary to establishthat a lender’s adoption or implementation of apolicy or practice that has a disparate impact is inviolation of the FHAct or the ECOA.

Federal Fair Lending Regulations and Statutes: Overview

Consumer Compliance Handbook Fair Lending: Overview • 3 (1/06)

Federal Fair Lending Regulations and StatutesEqual Credit Opportunity (Regulation B)

Background

The Equal Credit Opportunity Act (ECOA) of 1974,which is implemented by the Board’s Regulation B,applies to all creditors. The statute requires finan-cial institutions and other firms engaged in theextension of credit to ‘‘make credit equally availableto all creditworthy customers without regard to sexor marital status.’’ Moreover, the statute makes itunlawful for ‘‘any creditor to discriminate againstany applicant with respect to any aspect of a credittransaction (1) on the basis of race, color, religion,national origin, sex or marital status, or age(provided the applicant has the capacity to con-tract); (2) because all or part of the applicant’sincome derives from any public assistance pro-gram; or (3) because the applicant has in goodfaith exercised any right under the ConsumerCredit Protection Act.’’ In keeping with the broadreach of the prohibition, the regulation coverscreditor activities before, during, and after theextension of credit.

Under the ECOA, the Federal Reserve Board isresponsible for drafting and interpreting the imple-menting regulation. Enforcement responsibility, how-ever, rests with a creditor’s functional regulator or,for any category not so assigned, with the FederalTrade Commission. A synopsis of some of the moreimportant points of Regulation B follows.


Regulation B contains two basic and comprehen-sive prohibitions against discriminatory lendingpractices (section 202.4):

• A creditor shall not discriminate against anapplicant on a prohibited basis regarding anyaspect of a credit transaction.

• A creditor shall not make any oral or writtenstatement, in advertising or otherwise, to appli-cants or prospective applicants that woulddiscourage, on a prohibited basis, a reasonableperson from making or pursuing an application.

Note that the regulation is concerned not only withthe treatment of persons who have initiated theapplication process, but also with lender behaviorbefore the application is even taken. Lendingofficers and employees must be careful to take noaction that would, on a prohibited basis, discour-age anyone from applying for a loan. For example,a bank may not advertise its credit services andpractices in ways that would tend to encouragesome types of borrowers and discourage others on

a prohibited basis. In addition, a bank may not useprescreening tactics likely to discourage potentialapplicants on a prohibited basis. Instructions toloan officers or brokers to use scripts, rate quotes,or other means to discourage minority applicantsfrom applying for credit are also prohibited.

The prohibition against discouraging applicantsapplies to in-person oral and telephone inquiries aswell as to written applications. Lending officersmust refrain from requesting prohibited informationin conversations with applicants during the pre-interview phase (that is, before the application istaken) as well as when taking the written application.

To prevent discrimination in the credit-grantingprocess, the regulation imposes a delicate balancebetween the creditor’s need to know as much aspossible about a prospective borrower and theborrower’s right not to disclose information irrel-evant to the credit transaction. To this end, theregulation prescribes rules for taking, evaluating,and acting on applications as well as rules forfurnishing and maintaining credit information.

Rules for Taking Applications—Section 202.5

Regulation B prohibits creditors from requestingand collecting specific personal information aboutan applicant that has no bearing on the applicant’sability or willingness to repay the credit requestedand could be used to discriminate against theapplicant.

Applicant Characteristics

Creditors may not request or collect informationabout an applicant’s race, color, religion, nationalorigin, or sex. Exceptions to this rule generallyinvolve situations in which the information isnecessary to test for compliance with fair lendingrules or is required by a state or federal regulatoryagency or other government entity for a particularpurpose, such as to determine eligibility for aparticular program. For example, a creditor mayrequest prohibited information

• In connection with a self-test being conductedby the creditor (provided that the self-test meetscertain requirements)

• For monitoring purposes in relation to creditsecured by real estate

• To determine an applicant’s eligibility for special-purpose credit programs

Consumer Compliance Handbook Reg. B • 1 (1/06)

Information about a Spouse orFormer Spouse (§ 202.5(c))

A bank may not request information about anapplicant’s spouse or former spouse except underthe following circumstances:

• The non-applicant spouse will be a user of orjoint obligor on the account. (Note: The term‘‘user’’ applies only to open-end accounts.)

• The non-applicant spouse will be contractuallyliable on the account.

• The applicant is relying on the spouse’s income,at least in part, as a source of repayment.

• The applicant resides in a community propertystate, or the property upon which the applicant isrelying as a basis for repayment of the creditrequested is located in such a state.

• The applicant is relying on alimony, child sup-port, or separate maintenance income as a basisfor obtaining the credit.

Marital status(§§ 202.5(d)(1) and 202.5(d)(3))

Individual Credit

When an applicant applies for individual credit, thebank may not ask the applicant’s marital status.There are two exceptions to this rule:

• If the credit transaction is to be secured, thebank may ask the applicant’s marital status. (Thisinformation may be necessary to determine whatwould be required to gain access to the collateralin the event of default.)

• If the applicant either resides in a communityproperty state or lists assets to support the debtthat are located in such a state, the bank mayask the applicant’s marital status. (In communityproperty states, assets owned by a marriedindividual may also be owned by the spouse,thus complicating the accessibility of the collat-eral in the event of default.)

Joint Credit

When a request for credit is joint (made by two ormore individuals who will be primarily liable), thebank may ask the applicant’s marital status,regardless of whether the credit is to be secured orunsecured, but may use only the terms ‘‘married,’’‘‘unmarried,’’ and ‘‘separated.’’ This requirementapplies to oral as well as written requests for maritalstatus information. ‘‘Unmarried’’ may be defined toinclude divorced, widowed, or never married, butthe application must not be structured in such away as to encourage the applicant to distinguishamong these.

Alimony, Child Support, or SeparateMaintenance Income (§ 202.5(d)(2))

A bank may ask if an applicant is receiving alimony,child support, or separate maintenance payments.However, the bank must first disclose to theapplicant that such income need not be revealedunless the applicant wishes to rely on that incomein the determination of creditworthiness. An appro-priate notice to that effect must be given wheneverthe bank makes a general request concerningincome and the source of that income. Therefore, abank either must ask questions designed to solicitonly information about specific income (for exam-ple, ‘‘salary,’’ ‘‘wages,’’ ‘‘employment,’’ or otherspecified categories of income) or must state thatdisclosure of alimony, child support, or separatemaintenance payments is not required.

Residency and Immigration Status(§ 202.5(e))

The bank may inquire about the applicant’s perma-nent residence and immigration status in order todetermine creditworthiness.

Rules for Evaluating Applications—Section 202.6

General Rule

A creditor may consider any information in evaluat-ing applicants, so long as the use of the informationdoes not have the intent or the effect of discrimi-nating against an applicant on a prohibited basis.Generally, a creditor may not

• Consider any of the prohibited bases, includingage (providing the applicant is old enough,under state law, to enter into a binding contract)and the receipt of public assistance

• Use childbearing or childrearing information,assumptions, or statistics to determine whetheran applicant’s income may be interrupted ordecreased

• Consider whether there is a telephone listing inthe applicant’s name (but the creditor mayconsider whether there is a telephone in theapplicant’s home)

• Discount or exclude part-time income from anapplicant or the spouse of an applicant

Systems for Analyzing Credit

Regulation B neither requires nor endorses anyparticular method of credit analysis. Creditors mayuse traditional methods, such as judgmental sys-tems that rely on a credit officer’s subjectiveevaluation of an applicant’s creditworthiness, or

Fair Lending: Equal Credit Opportunity

2 (1/06) • Reg. B Consumer Compliance Handbook

they may use more-objective, statistically devel-oped techniques such as credit scoring.

Credit Scoring Systems

Section 202.2(p) of Regulation B prescribes thestandards that a credit scoring system must meetto qualify as an ‘‘empirically derived, demonstrablyand statistically sound, credit system.’’ All forms ofcredit analysis that do not meet the standards areautomatically classified as ‘‘judgmental’’ systems.This distinction is important because creditors thatuse a ‘‘demonstrably and statistically sound’’system may take applicant age directly intoaccount as a predictive variable, whereas judgmen-tal systems may not.

Judgmental Evaluation Systems

Any system other than one that is empiricallyderived and demonstrably and statistically soundis a judgmental system (including any creditscoring system that does not meet the prescribedtechnical standards). Such a system may not takeapplicant age directly into account in evaluatingcreditworthiness. The act and the regulation do,however, permit a creditor to consider the appli-cant’s age for the purpose of evaluating otherapplicant information that has a demonstrablerelationship to creditworthiness.

Rules for Extensions of Credit—Section 202.7

Section 202.7 of Regulation B provides a set ofrules proscribing certain discriminatory practicesregarding the creation and continuation of creditaccounts.

Signature Requirements

The primary purpose of the signature requirementsis to permit creditworthy individuals (particularlywomen) to obtain credit on their own. Two generalrules apply:

• A bank may not require a signature other than theapplicant’s or joint applicant’s if under the bank’sstandards of creditworthiness the applicant quali-fies for the amount and terms of the creditrequested.

• A bank has more latitude in seeking signatureson instruments necessary to reach property usedas security, or in support of the customer’screditworthiness, than it has in obtaining thesignatures of persons other than the applicant ondocuments that establish the contractual obliga-tion to repay.

The subsections dealing with signatures havebeen, for many creditors, some of the mostcommonly misunderstood provisions of RegulationB. For that reason, and to increase examiners’ability to facilitate lender compliance and deter-mine whether a particular signature practice is or isnot a violation of the regulation, additional guid-ance is provided in CA Letter 02-1, ClarifyingSignature Provisions under Sec. 202.7(d) of Regu-lation B. Examiners should consult that CA letterwhen assessing the level of a bank’s compliancewith the signature requirements.

Special-Purpose Credit Programs—Section 202.8

The ECOA and Regulation B allow creditors toestablish special-purpose credit programs for appli-cants who meet certain eligibility requirements.Generally, these programs target an economicallydisadvantaged class of individuals and are autho-rized by federal or state law. Some are offered bynot-for-profit organizations that meet certain IRSguidelines, and some by for-profit organizationsthat meet specific tests outlined in section 202.8.

Experience has shown that creditors rarely seekto use section 202.8. Additionally, as stated in thecommentary (supplement I to the regulation), theFederal Reserve ‘‘does not determine whetherindividual programs qualify for special-purposecredit status, or whether a particular programbenefits an ‘economically disadvantaged class ofpersons.’ The agency or creditor administering oroffering the loan program must make these deci-sions regarding the status of its program.’’ Conse-quently, examiners are encouraged, if an issuearises regarding such a program, to consult withBoard staff.

Notifications—Section 202.9

A bank must notify an applicant of action taken onthe applicant’s request for credit, whether favor-able or adverse, within thirty days after receiving acompleted application. Notice of approval may beexpressly stated or implied (for example, the bankmay give the applicant the credit card, money,property, or services for which the applicantapplied). Notification of adverse action taken on anexisting account must also be made within thirtydays.

Under at least two circumstances, the bank neednot comply with the thirty-day notification rule:

• The bank must notify an applicant of adverseaction within ninety days after making a counter-offer unless the applicant accepts or uses thecredit during that time.



• The bank may not have to notify an applicant ofadverse action if the application was incompleteand the bank sent the applicant a notice ofincompleteness that met certain requirementsset forth in section 202.9(c).

Adverse Action Notice (§ 202.9(a)(2))

A notification of adverse action must be in writingand must contain certain information, including thename and address of the bank and the nature of theaction that was taken. In addition, the bank mustprovide an ECOA notice that includes the identity ofthe federal agency responsible for enforcing com-pliance with the act for that bank. This notice isgenerally included on the notification of adverseaction. The bank must also either provide theapplicant with the specific principal reason for theaction taken or disclose that the applicant has theright to request the reason(s) for denial within sixtydays of receipt of the bank’s notification, along withthe name, address, and telephone number of theperson who can provide the specific reason(s) forthe adverse action. The reason may be given orallyif the bank also advises the applicant of the right toobtain the reason in writing upon request.

Incomplete Applications (§ 202.9(c))

When a bank receives an incomplete application, itmay send one of two alternative notifications to theapplicant. One is a notice of adverse action; theother is a notice of incompleteness. The notice ofincompleteness must be in writing and mustspecify the information the bank needs if it is toconsider the application; it must also provide areasonable period of time for the applicant tofurnish the missing information.

Applications Submittedthrough a Third Party (§ 202.9(g))

When more than one bank is involved in atransaction and adverse action is taken withrespect to the application for credit by all the banksinvolved, each bank that took such action mustprovide a notice of action taken. The notificationmay be given by a third party; however, the noticemust disclose the identity of each bank on whosebehalf the notice is given. If one of the banksapproves the application, the banks that tookadverse action need not provide notification.

Notification to Business CreditApplicants (§ 202.9(a)(3))

The notification requirements for business creditapplicants are different from those for consumercredit applicants and are more extensive if the

business had gross revenues of $1,000,000 or lessin the preceding fiscal year. Extensions of tradecredit, credit incident to a factoring agreement, andsimilar types of credit are subject to the same rulesas those that apply to businesses that had grossrevenues of more than $1,000,000.

Generally, a bank must comply with the samenotification requirements for business credit appli-cants with gross revenues of $1,000,000 or less asit does for consumer credit applicants. However,the bank has more options when dealing with thesebusiness credit applicants. First, the bank may tellthe business credit applicant orally of the actiontaken. Second, if the bank chooses to provide anotice informing the business credit applicant ofthe right to request the reason for action taken, itmay, rather than disclose the reason itself, providethe notice at the time of application. If the bankchooses to inform the applicant of the right torequest a reason, however, it must provide adisclosure with an ECOA notice that is in retainableform and that gives the applicant the sameinformation that must be provided to consumercredit applicants when this option is used (seesection 202.9(a)2)(ii)). Finally, if the application wasmade entirely over the phone, the bank mayprovide an oral statement of action taken and of theapplicant’s right to a statement of reasons foradverse action.

The notification requirements for business creditapplicants with gross revenues of more than$1,000,000 are relatively simple. The bank mustnotify the applicant of the action taken within areasonable time period. The notice may be oral orin writing; a written statement of the reasons foradverse action and the ECOA notice need beprovided only if the applicant makes a writtenrequest within sixty days of the bank’s notificationof the action taken.

Designation of Accounts—Section 202.10(a)

A creditor that furnishes credit information to aconsumer reporting agency must designate

• Any new account to reflect the participation ofboth spouses if the applicant’s spouse is permit-ted to use or is contractually liable on theaccount

• Any existing account to reflect the participationof both spouses within ninety days after receiv-ing a written request to do so from one of thespouses

If a creditor furnishes credit information to aconsumer reporting agency, the creditor mustfurnish the information in the name of the spouseabout whom the information was requested.



Record Retention—Section 202.12

Applications

In general, a bank must preserve all written orrecorded information connected with an applica-tion for twenty-five months (twelve months forbusiness credit) after the date on which the bankinformed the applicant of action taken on anapplication or of incompleteness of an application.

Prohibited Information

A bank may retain information in its files that it maynot use in evaluating applications. However, theinformation must have been obtained inadvertentlyor in accordance with federal or state law orregulation.

Existing Accounts

A bank must preserve any written or recordedinformation concerning adverse action on anexisting account as well as any written statementsubmitted by the applicant alleging a violation ofthe ECOA or Regulation B. This evidence must bekept for twenty-five months (twelve months forbusiness credit).

Prescreened Solicitations

The twenty-five-month retention rule also applieswhen a bank makes an offer of credit to potentialcustomers. In such cases, the bank must retain fortwenty-five months following the date of the solici-tation

• The text of any prescreened solicitation,

• The list of criteria the creditor used to selectpotential recipients of the solicitation, and

• Any correspondence related to complaints (for-mal or informal) about the solicitation.

Rules for Providing AppraisalReports—Section 202.14

Regulation B requires that banks provide a copy ofthe appraisal report used in connection with anapplication for credit to be secured by a lien on adwelling. A bank may provide the copy eitherroutinely (whether or not credit is granted or theapplication is withdrawn) or upon an applicant’swritten request. If the bank provides an appraisalreport only upon request, it must inform theapplicant in writing of the right to receive a copy ofthe report.

Incentives for Self-Testing andSelf-Correction—Section 202.15

A self-test, as discussed in section 202.15 ofRegulation B, must meet two criteria. First, it mustbe a program, practice, or study that a lenderdesigns and uses specifically to determine theextent or effectiveness of its compliance with theregulation. Second, the results of the self-test mustcreate data or factual information that is otherwisenot available and cannot be derived from loan orapplication files or other records related to credittransactions. The findings of a self-test that isconducted voluntarily by a creditor and thatmeets the conditions set forth in section 202.15are privileged against discovery or use by (1) agovernment agency in any examination or investi-gation related to the ECOA or Regulation B or (2) agovernment agency or an applicant in any legalproceeding involving an alleged violation of theECOA or Regulation B. Privileged informationincludes the report or results of the test; data orother information created by the test; and anyanalysis, opinions, or conclusions regarding theresults of the test. The privilege does not coverinformation about whether a test was conducted;the methodology, scope, time period, or datescovered by the test; loan or application files orother business records; and information derivedfrom such files and records, even if aggregated,summarized, or reorganized.

Requirements for ElectronicCommunication—Section 202.16

Subject to the specific provisions of section 202.16regarding disclosures, consumer consent, redeliv-ery, electronic signatures, and exceptions, a credi-tor may provide by electronic communication anydisclosure otherwise required by the regulation tobe in writing.

Enforcement, Penalties, andLiabilities—Section 202.17

In addition to actual damages, Regulation Bprovides for punitive damages of up to $10,000 inindividual lawsuits and up to the lesser of $500,000or 1 percent of the bank’s net worth in class actionsuits. Successful complainants are also entitled toan award of court costs and attorney’s fees.

A bank is not liable for failure to comply with thenotification requirements of section 202.9 if thefailure was caused by an inadvertent error and thebank, after discovering the error, (1) corrects theerror as soon as possible and (2) begins compli-ance with the requirements of the regulation.‘‘Inadvertent errors’’ include mechanical, elec-



tronic, and clerical errors that the bank can show(1) were not intentional and (2) occurred despitethe fact that the bank maintains proceduresreasonably adapted to avoid such errors. Similarly,failure to comply with sections 202.6(b)(6), 202.10,

202.12, and 202.13 is not considered a violation if itresults from an inadvertent error and the bank takesthe corrective action noted above. Errors involvingsections 202.12 and 202.13 may be correctedprospectively by the bank.



Federal Fair Lending Regulations and StatutesFair Housing Act

The Fair Housing Act (FHAct), which is title VIII ofthe Civil Rights Act of 1968, as amended (42 USC3601 et seq.), makes it unlawful for any lender todiscriminate in its housing-related lending activitiesagainst any person because of race, color, religion,national origin, sex, handicap, or familial status.Anyone who is in the business of providinghousing-related loans is subject to the FHAct (aswell as the Equal Credit Opportunity Act).

Key Provisions of theFair Housing Act

The Fair Housing Act specifically applies to thefinancing of a loan secured by residential realestate. As noted in section 805 of the act, a bankmay not deny a loan or other financial assistancefor the purpose of purchasing, constructing, improv-ing, repairing, or maintaining a dwelling because ofthe race, color, religion, national origin, handicap,familial status, or sex of the

• Loan applicant

• Any person associated with the loan applicant

• Any current or prospective owner of the dwelling

• Any lessees

• Any tenants or occupants

The FHAct also makes it unlawful for a creditor touse a prohibited basis to discriminate in fixing theamount, interest rates, duration, or other terms ofthe credit. In addition, because residential realestate−related transactions include any transac-tions secured by residential real estate, the act’sprohibitions (and regulatory requirements in certainareas, such as advertising) apply to home equitylines of credit as well as to home purchase loans.These prohibitions also apply to the selling, renting,brokering, or appraising of residential real propertyand to secondary-mortgage-market activities. Con-sequently, a bank’s practices in the area of housinglending should be examined in a general way toensure that they do not ‘‘otherwise make unavail-able or deny’’ housing, even when no specific actor practice may violate any specifically namedprohibition of the FHAct.

Unlawfully DiscriminatoryLending Practices under the FHAct

Like the other civil rights statues, the Fair HousingAct was broadly written by Congress. A variety of

lending practices have been found to be illegalunder the act, including some that are not specifi-cally mentioned in the act but that have beendetermined to be illegal because they violaterequirements and prohibitions that are implicit inthe act’s language. Some of the practices that thecourts have determined to be prohibited aredescribed below.

Redlining

Redlining is the practice of denying a creditworthyapplicant a loan for housing in a certain neighbor-hood even though the applicant may otherwise beeligible for the loan. The term refers to thepresumed practice of mortgage lenders of drawingred lines around portions of a map to indicate areasor neighborhoods in which they do not want tomake loans.

Redlining on a racial basis has been held by thecourts to be an illegal practice. It is unlawful underthe FHAct only when done on a prohibited basis.Redlining an area on the basis of such consider-ations as the fact that the area lies on a fault line ora flood plain is not prohibited.

The prohibition against redlining does not meanthat a lending institution is expected to approve allhousing loan applications or to make all loans onidentical terms. Denying loans or granting loans onmore-stringent terms and conditions, however,must be justified on the basis of economic factorsand without regard to the race, color, religion,national origin, sex, or marital status of theprospective borrowers or the residents of theneighborhood in which the property is located. Forexample, a bank may consider such economicfactors as

• An applicant’s income or credit history

• The condition, use, or design of the proposedsecurity property (or of those nearby propertiesthat clearly affect the value of the proposedsecurity property), provided that such determi-nants are strictly economic or physical in nature

• The availability of neighborhood amenities or cityservices

• The need of the lender to hold a balanced realestate loan portfolio, with a reasonable distribu-tion of loans among various neighborhoods,types of property, and loan amounts

Each of the factors must be applied without regardto any of the prohibited bases.

Consumer Compliance Handbook FHAct • 1 (1/06)

Lowballing

Lowballing—the practice of making an excessivelylow appraisal in relation to the purchase price onthe basis of prohibited considerations—is one formof redlining. Lending more than the appraisedvalue of the collateral is not sound bankingpractice, and lowballing forces a borrower eitherto cancel the purchase contract or the loanapplication, or both, or to make a larger downpayment on a property in order to make up thedifference between the sales price and theappraised price.

Use of Racially Exclusive Images

The use of racially exclusive images has repeat-edly been found to be illegal in the employmentcontext even when there was little or no evidenceof a discriminatory policy directed toward anygiven individual applicant. This practice has beenheld to violate the Fair Housing Act as well. Forexample, a housing lender might exploit an exclu-sive image by showing only applicants of aparticular race in advertisements for home loans.Using only white individuals in advertisements forhome equity loans, for instance, may suggest toviewers that only white applicants need applyor that the lender is looking only for applicantswho resemble the individuals in its housingadvertisements.

In addition to prohibiting the use of raciallyexclusive images, the FHAct makes it unlawful tomake or print a statement or advertisement withrespect to the sale or rental of a dwelling thatindicates a preference, limitation, or discriminationbased on race, color, religion, sex, handicap,familial status, or national origin or the intention tomake any such preference, limitation, or discrimi-nation. The courts have applied this prohibition tonewspaper advertisements soliciting tenants andhomebuyers who speak only certain languages.For example, a Korean bank that advertises only inKorean-language publications targeting Koreanswhile ignoring other minority groups in the bank’scommunity may be discouraging other minorityapplicants from applying. Although it is recognizedthat a determination of the impact of an advertisingpolicy will depend on all the facts of the situation,some advertising guidelines issued by the Secre-tary of the Department of Housing and UrbanDevelopment may be useful to banks and exam-iners in determining the kinds of advertisingpractices that should be encouraged or avoided.Banks should ensure that their advertising policiesdo not have the effect, even inadvertently, ofprescreening applications for credit on prohibitedbases.

Discriminatory Acts That Have aNegative Impact on Nonminorities

The courts have held that discriminatory acts thathave a negative impact on nonminorities, such aswhite individuals, are illegal and that such individu-als have standing to sue.

Use of Excessively BurdensomeQualification Standards

The use of excessively burdensome qualificationstandards to deny, or that have the effect ofdenying, housing to minority applicants is alsoillegal under the FHAct.

Imposition of More-OnerousInterest Rates or Other Terms,Conditions, or Requirements

The imposition of more-onerous interest rates, orother more-onerous terms, conditions, or require-ments, on minority loan applicants is explicitlyprohibited. The phrase ‘‘terms or conditions’’ asused in the act covers many types of discriminatorypractices.

Application of Different Standards orProcedures for the Same Process

The application of different standards or proce-dures in administering foreclosures, late charges,penalties, reinstatements, or other collection proce-dures is unlawful.

Insurance

The FHAct and the ECOA diverge on the treatmentof discrimination in the terms or availability ofinsurance. The ECOA does not prohibit a creditorwho sells or participates in the sale of insurancefrom differentiating, on a prohibited basis, in theterms and availability of insurance. Nor does itprohibit discrimination in the availability or terms ofcredit on the basis that insurance is unavailable,except when the insurance has been denied on thebasis of age. When it comes to housing-relatedlending, however, the result may be different. TheDepartment of Justice has taken the position thatthe FHAct is violated when insurance required forhousing credit is denied, or is made more difficult toobtain, on a basis prohibited by the FHAct.

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Racial Steering

Racial steering—deliberately guiding loan appli-cants or potential purchasers toward or away fromcertain types of loans or geographic areas becauseof race—is illegal.

In summary, banks are not expected to makeunsound real estate loans or to render services on

more-favorable terms to applicants solely becauseof the applicant’s status as a member of aprotected class. However, denying loans or ser-vices on this basis is illegal.

Fair Lending: Fair Housing Act

Consumer Compliance Handbook FHAct • 3 (1/06)

Federal Fair Lending Regulations and StatutesExamination Procedures

The fair lending examination procedures detailedhere emphasize discrimination in residential trans-actions on the basis of race and national origin.However, the key principles can be applied to otherprohibited bases and to nonresidential transac-tions. The procedures focus on analyzing lendercompliance with the broad nondiscriminationrequirements of the ECOA and the FHAct. Explicitand technical compliance provisions, such as thesignature rules and adverse action notice require-ments set forth in sections 202.7 and 202.9 ofRegulation B, respectively, are not addressed.

The procedures are grouped to reflect majorphases of the examination process:

• Establishing the scope of the examination (dis-cussed in part I of this chapter)

• Reviewing the institution’s compliance manage-ment program (part II)

• Conducting the examination (part III)

• Closing the examination (part IV)

Following the procedures is an appendix contain-ing a checklist for reviewing compliance manage-ment programs, additional procedures, and othersupplemental material.

I. GUIDELINES FORSCOPING THE EXAMINATION

Background

A fair lending examination encompasses severalelements— the prohibited-basis and control groupsto be analyzed during the examination, along withthe loan products, markets, decision centers, andapplicable time frame. In these examination proce-dures, each potential combination of these ele-ments is referred to as a ‘‘focal point.’’ Establishingthe scope of an examination involves first identify-ing all the potential focal points that appearworthwhile to examine and then selecting—on thebasis of risk factors, the bank’s record from pastexaminations, priorities established in these proce-dures or by the Federal Reserve, and other relevantguidance—the focal points that will constitute thescope of the examination. Planning for the exami-nation also includes reviewing an institution’scompliance management system as it relates to fairlending.

When selecting focal points for review, examin-ers may determine that the institution has per-formed ‘‘self-tests’’ or ‘‘self-evaluations’’ related tospecific lending products. The institution mustshare all information related to self-evaluations andcertain limited information related to self-tests withexaminers. It may voluntarily disclose additionalinformation about self-tests. Examiners shouldmake sure that the institution understands thatvoluntarily sharing the results of self-tests will resultin a loss of confidential status of those tests. Usinginformation from self-evaluations and self-tests maymake it possible to streamline the scoping phaseof an examination. (For details, see the section‘‘Streamlining Examinations’’ at the end of theappendix to these procedures.)

Scoping may disclose the existence ofcircumstances—such as the use of credit scoringor a large volume of residential lending—thatrequire the use of regression analysis or otherstatistical methods of identifying potential discrimi-nation with respect to one or more loan products.When that is the case, the Board’s specializedprocedures should be used for those loan prod-ucts, rather than the procedures set forth below.

Setting the intensity of an examination meansdetermining the breadth and depth of the analysisthat will be conducted in connection with theselected loan products. This process entails amore involved analysis of the institution’s compli-ance risk management processes that relate toselected products. Part of this analysis involvesdetermining the appropriate number of files andwhether certain aspects of the credit processdeserve heightened scrutiny.

This part of these examination procedures (thatis, part I) provides guidance on establishing thescope of the examination. Part II, which addressesthe compliance management review, providesguidance on determining the intensity of theexamination. There is naturally some interdepen-dence between these two phases. Ultimately, thescope and intensity of the examination will helpdetermine the record of performance, which servesas the foundation for the examiner’s conclusionsabout the institution’s compliance with its fairlending obligations. Examiners should use theseprocedures and guidelines to arrive at a well-reasoned and practical conclusion about how toconduct a particular institution’s fair lendingexamination.

Information already available may suggestexamination priorities and institutional risks; such

Note: These examination procedures are adapted, with a fewminor format, stylistic, and wording changes where appropriate,from the Interagency Fair Lending Examination Proceduresrevised in August 2004 and distributed as an attachment toCA Letter 04-8.

Consumer Compliance Handbook Fair Lending Exams • 1 (1/06)

information may expedite the scoping process andmake it unnecessary to work through all the stepsdetailed in this chapter. For example, the report ofthe previous fair lending examination may haveincluded recommendations for the focus of the nextexamination.

The scoping process may be performed eitheroff-site or on-site, or both, depending on whateveris determined to be most feasible. In the interest ofminimizing burdens on both the examination teamand the lender, requests for information from theinstitution should be carefully thought out so as toinclude only the information that will clearly beuseful in the examination process. Also, anyrequests for information to be reviewed off-siteshould be made sufficiently in advance of theon-site visit to give the institution adequate time toassemble and provide the information to theexamination team. (See the section ‘‘PotentialScoping Information’’ in the appendix to theseprocedures for guidance on additional informationthat examiners might wish to consider including ina request.)

Examiners should focus the examination on thebasis of

• An understanding of the credit operations of theinstitution

• The risk that discriminatory conduct may occur ineach area of those operations

• The feasibility of developing a factually reliablerecord of an institution’s performance and fairlending compliance in each area of thoseoperations

Understanding Credit Operations

Before evaluating the potential for discriminatoryconduct, examiners should review sufficient infor-mation about the institution and its market tounderstand the credit operations of the institutionand the representation of prohibited-basis-groupresidents within the markets in which the institutiondoes business. The level of detail of the informationshould be sufficient to determine whether any of therisk factors in the steps described in the nextsection are present. Relevant information includes

• The types and terms of credit products offered,differentiating among residential, consumer, andother categories of credit

• The volume of, or growth in, lending for each ofthe credit products offered

• The demographics (for example, race andnational origin) of the credit markets in which theinstitution is doing business

• The organization of the institution’s credit-decision-making process, including the delega-

tion of separate lending authorities and theextent to which discretion in pricing or settingcredit terms and conditions is delegated tovarious levels of managers, employees, or inde-pendent brokers or dealers

• The types of relevant documentation or data thatare available for various loan products, and therelative quantity, quality, and accessibility ofsuch information (For which loan products willthe information available be most likely tosupport a sound and reliable fair lendinganalysis?)

• The extent to which information requests can bereadily organized and coordinated with othercompliance examination components to reduceundue burden on the institution (Do not requestmore information than the exam team can beexpected to use during the anticipated course ofthe examination.)

In thinking about an institution’s credit markets,examiners should recognize that these marketsmay or may not coincide with the institution’s CRAassessment area(s). When appropriate, examinersshould review the demographics of a broadergeographic area than the assessment area.

If an institution has multiple underwriting or loanprocessing centers or subsidiaries, each with fullyindependent credit-granting authority, examinersshould consider evaluating each center or subsid-iary separately, provided that a sufficient number ofloans exists to support a meaningful analysis. Indetermining the scope of the examination for suchan institution, examiners should consider

• Whether subsidiaries should be examined—Aninstitution will be held responsible for violationsby its direct subsidiaries, but typically not forviolations by its affiliates (unless the affiliate hasacted as the agent for the institution or theviolation by the affiliate was known, or shouldhave been known, to the institution before itbecame involved in the transaction or purchasedthe affiliate’s loans). When seeking to determinean institution’s relationship with affiliates that arenot supervised financial institutions, examinersshould limit the inquiry to what can be learned atthe institution and should not contact the affiliate.

• Whether the underwriting standards and proce-dures used by the entity being reviewed areused by related entities not scheduled for theplanned examination—This will help examinersrecognize the potential effect of policy-basedviolations.

• Whether the institution’s portfolio consists ofapplications from a purchased institution—If itdoes, examiners should, for scoping purposes,consider the applications as if they were made tothe purchasing institution. (Applications evalu-

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ated under the purchased institution’s standardsshould not be compared with applicationsevaluated under the purchasing institution’sstandards.)

• Whether the portfolio includes purchased loans—If it does, examiners should look for indicationsthat the institution chose which loans to purchaseon the basis of a prohibited factor or caused aprohibited factor to influence the originationprocess.

• Whether a complete decision can be made atone of the several underwriting or loan process-ing centers, each with independent authority—Insuch a situation, it is best to conduct a separatecomparative analysis, on-site, at each under-writing center. If covering multiple centers dur-ing the planned examination is not feasible,examiners should review one center duringthe planned examination and others in laterexaminations.

• Whether decision-making responsibility for asingle transaction may involve more than oneunderwriting center—For example, it may bethat an institution has authority to decline mort-gage applicants but only the mortgage com-pany subsidiary may approve them. In sucha situation, examiners should learn whichstandards are applied by each entity and thelocation of records needed for the plannedcomparisons.

• Whether any third parties, such as brokers orcontractors, are involved in the credit decision,and how responsibility is allocated among themand the institution—The institution’s familiaritywith third-party actions may be important, for abank may be in violation if it participates in credittransactions in which it knew, or reasonablyought to have known, that other parties werediscriminating.

If the institution is large and geographicallydiverse, examiners should select only as manymarkets or underwriting centers as can be readilyreviewed in depth, rather than selecting proportion-ally to cover every market. As needed, examinersshould narrow the focus to the metropolitan statis-tical area or underwriting center that is determinedto present the greatest risk of discrimination.Examiners should use HMDA-LAR data that areorganized by underwriting center, if available. Aftercalculating denial rates for the control group andminorities for each underwriting center, examinersshould select the centers with the highest dispari-ties. If underwriting centers have fewer than fiveblack, Hispanic, or Native American denials, exam-iners should not examine for racial discriminationbut instead should shift the focus to other loanproducts or prohibited bases.

Evaluating the Potential forDiscriminatory Conduct

Step 1. Develop an overview

On the basis of an understanding of the institution’scredit operations and product offerings, examinersshould determine the nature and amount of infor-mation required for the scoping process andshould obtain and organize that information. Nosingle examination can reasonably be expected toevaluate compliance performance relative to everyprohibited basis, every product, or every underwrit-ing center or subsidiary of an institution. In additionto considering the information gathered in order tounderstand the institution’s credit operations (seepreceding section), examiners should keep in mindthe following factors when selecting products forthe scoping review:

• Which products and prohibited bases werereviewed during the most recent examinationsand, conversely, which products and prohibitedbases have not been reviewed recently

• Which prohibited-basis groups make up a sig-nificant portion of the institution’s market for thedifferent credit products offered

• Which products and prohibited-basis groups theinstitution reviewed using either a voluntarilydisclosed self-test or a self-evaluation

Having considered the foregoing factors, exam-iners should request information for all residentialand other loan products considered appropriate forscoping in the current examination cycle. Inaddition, when feasible, examiners should conductpreliminary interviews with the lender’s key under-writing personnel. Using the accumulated informa-tion, examiners should evaluate the following, asapplicable:

• Underwriting guidelines, policies, and standards

• Credit scoring systems, including factors scored,cutoff scores, extent of validation, and anyguidance for handling overrides and exceptions(see part A of ‘‘Procedures for Credit ScoringAnalysis’’ in the appendix to these examinationprocedures for guidance)

• Applicable pricing policies, and guidance forexercising discretion over loan terms andconditions

• The institution’s corporate relationships with anyfinance companies, subprime mortgage or con-sumer lending entities, or similar institutions

• Loan application forms

• Either HMDA-LARs or other loan registers, andlists of declined applications



• Descriptions of databases maintained for theloan products to be reviewed, especially anyrecords of exceptions to underwriting guidelines

• Copies of any consumer complaints allegingdiscrimination, and related loan files

• Descriptions of any compensation system basedon loan production or pricing

• Compliance program materials (particularly fairlending policies), training manuals, and organi-zation charts, as well as recordkeeping andmonitoring protocols

• Copies of marketing materials or descriptions ofcurrent or previous marketing plans or programs

Step 2. Identify compliance programdiscrimination risk factors

Review information from agency examination work-papers, institutional records, and discussions withmanagement representatives in sufficient detail tounderstand the organization, staffing, training,recordkeeping, auditing, and policies of the institu-tion’s fair lending compliance systems. Reviewthese systems and note whether any of thefollowing risk factors are present:

C1. Overall institution compliance record is weak

C2. Prohibited-basis monitoring information isincomplete

C3. Data or recordkeeping problems compro-mised reliability of previous examinationreviews

C4. Fair lending problems were previously foundin one or more bank products

C5. The size, scope, and quality of the compliancemanagement program, including senior man-agement’s involvement, is materially inferior toprograms customarily found in institutions ofsimilar size, market demographics, and creditcomplexity

C6. The institution has not updated its complianceguidance to reflect changes in law or inagency policy

These risk factors and their impact on particularlending products and practices should be consid-ered as the product-specific risk review is beingconducted during scoping steps 3–8 (immediatelybelow). If the review identifies fair lending com-pliance system deficiencies, the factors shouldbe given appropriate consideration as part ofthe compliance management program reviewdescribed in part II of these procedures.

Step 3. Review residential loan products

Although home mortgages may not be the ultimatesubject of every fair lending examination, thisproduct line must at least be considered in the

course of scoping every institution that is engagedin residential lending.

Divide home mortgage loans into three groups:home purchase, home improvement, and refi-nances. Subdivide those groups further if theinstitution does a significant amount of residentiallending of any of the following types or forms, andconsider those loans separately:

• Government-insured loans

• Mobile home or factory housing loans

• Wholesale, indirect, and brokered loans

• Portfolio lending (including portfolios of FannieMae or Freddie Mac rejections)

In addition, determine whether the institutionoffers any conventional ‘‘affordable’’ housing loanprograms and whether the terms and conditions ofthose loans make them incompatible, for compara-tive purposes, with regular conventional loans. Ifso, consider them separately.

Examiners may limit the focus of the currentexamination to alternative underwriting or process-ing centers, or to other residential products thathave received less scrutiny in the past, if previousexaminations have demonstrated the following:

• A strong fair lending compliance program

• No record of discriminatory transactions atparticular decision centers or in particular resi-dential products

• No indication of a significant change in person-nel, operations, or underwriting standards atthose centers or in those residential products

• No unresolved fair lending complaints, adminis-trative proceedings, litigation, or similar factors

Step 4. Identify residential lendingdiscrimination risk factors

• Review the lending policies, marketing plans,underwriting, appraisal, and pricing guidelines,broker−agent agreements, and loan applicationforms for each residential loan product thatrepresents an appreciable proportion of theinstitution’s residential lending or that has grownnoticeably since the most recent examination.

• Review any available data on the geographicdistribution of the institution’s loan originationswith respect to the racial and national originmakeup of the census tracts in the institution’sassessment areas—or its residential loan prod-uct lending areas, if different from its CRAassessment areas.

• Interview loan officers and other employees oragents in the residential lending process con-cerning adherence to and understanding oflending policies and appraisal and pricing



guidelines, as well as any relevant operatingpractices.

In the course of conducting the foregoinginquiries, look for the following risk factors. Thefactors are identified by an alphanumeric code,with the letter relating to the type of factor:

O Overt indicator of discrimination

U Indicator of potential disparate treatment inunderwriting

P Indicator of potential disparate treatment inpricing

S Indicator of potential disparate treatment bysteering

R Indicator of potential discriminatory redlining

M Indicator of potential disparate treatment in themarketing of residential products

Overt indicators of discrimination

O1. Including explicit prohibited-basis identifiersin underwriting criteria or pricing standards

O2. Collecting information, conducting inquiries,or imposing conditions contrary to the expressrequirements of Regulation B

O3. Including variables in a credit scoring systemthat constitute a basis or factor prohibited byRegulation B or, for residential loan scoringsystems, the FHAct (If a credit scoring systemscores age, refer to part E of ‘‘Procedures forCredit Scoring Analysis’’ in the appendix tothese examination procedures.)

O4. Statements made by the institution’s officers,employees, or agents that constitute anexpress or implicit indication that one or moresuch persons have engaged in or do engagein discrimination on a prohibited basis in anyaspect of a credit transaction

O5. Employee or institutional statements that evi-dence attitudes based on prohibited-basisprejudices or stereotypes

For the risk factors in the following lists that aremarked with an asterisk, examiners need notattempt to calculate the indicated ratios for racial ornational origin characteristics if the institution is nota HMDA reporter. However, consideration shouldbe given in such cases to whether or not suchcalculations should be made on the basis ofgender or racial−ethnic surrogates.

Indicators of potential disparate treatmentin underwriting

*U1. Substantial disparities among the approval ordenial rates for applicants by monitoredprohibited-basis characteristic (especiallywithin income categories)

*U2. Substantial disparities among the applicationprocessing times for applicants by monitoredprohibited-basis characteristic (especiallywithin denial-reason groups)

*U3. Substantially higher proportion of withdrawnor incomplete applications from prohibited-basis-group applicants than from otherapplicants

U4. Vague or unduly subjective underwritingcriteria

U5. Lack of clear guidance on making exceptionsto underwriting criteria, including credit scor-ing overrides

U6. Lack of clear loan file documentation regard-ing reasons for any exceptions to normalunderwriting standards, including credit scor-ing overrides

U7. Relatively high percentages of either excep-tions to underwriting criteria or overrides ofcredit score cutoffs

U8. Loan officer or broker compensation basedon loan volume (especially loans approvedper period of time)

U9. Consumer complaints alleging discriminationin loan processing or in the approval or denialof residential loans

Indicators of potential disparate treatmentin pricing (interest rates, fees, or points)P1. Relationship between loan pricing and com-

pensation of loan officers or brokers

P2. Presence of broad discretion in pricing orother transaction costs

P3. Use of a system of risk-based pricing that isnot empirically based and statistically sound

*P4. Substantial disparities among prices beingquoted or charged to applicants who differas to their monitored prohibited-basischaracteristics

P5. Consumer complaints alleging discriminationin residential loan pricing

Indicators of potential disparate treatmentby steering

S1. For an institution that has one or moresubprime mortgage subsidiaries or affiliates,any significant differences, by loan product, inthe percentage of prohibited-basis applicantsof the institution compared with the percent-age of prohibited-basis applicants of anysubsidiary or affiliate

S2. Lack of clear, objective standards for (1) refer-ring applicants to subsidiaries or affiliates,(2) classifying applicants as ‘‘prime’’ or



‘‘subprime’’ borrowers, or (3) deciding whatkinds of alternative loan products should beoffered or recommended to applicants

S3. For an institution that makes both conventionaland FHA mortgages, any significant differ-ences in the percentages of prohibited-basis-group applicants for each of these two loanproducts, particularly with respect to loanamounts of $100,000 or more

S4. For an institution that makes both prime andsubprime loans for the same purpose, anysignificant differences in percentages ofprohibited-basis-group borrowers in each ofthe alternative loan product categories

S5. Consumer complaints alleging discriminationin residential loan pricing

S6. A lender with a subprime mortgage companysubsidiary or affiliate that integrates loanapplication processing for both entities in sucha way that steering between the prime andsubprime products can occur almostseamlessly—that is, a single loan processorcould simultaneously attempt to qualify anyapplicant, whether to the bank or the mortgagecompany, under either the bank’s prime crite-ria or the mortgage company’s subprimecriteria

S7. Loan officers having broad discretion regard-ing whether to promote conventional or FHAloans, or both, to applicants but the lender hasnot issued guidelines for the exercise of thisdiscretion

S8. A lender that has most of its branches inpredominantly white neighborhoods and whosesubprime mortgage subsidiary has brancheslocated primarily in predominantly minorityneighborhoods

Indicators of potentialdiscriminatory redlining

*R1. Significant differences, as revealed in HMDAdata, between the number of loans originatedin areas in the lender’s market that haverelatively high concentrations of minority groupresidents and the number originated in areaswith relatively low concentrations of minorityresidents

*R2. Significant differences between approval anddenial rates for all applicants (minority andnonminority) in areas with relatively highconcentrations of minority group residentsand rates in areas with relatively low concen-trations of minority residents

*R3. Significant differences between denial ratesbased on insufficient collateral for applicantsfrom areas with relatively high concentrations

of minority residents and rates for applicantsfrom areas with relatively low concentrationsof minority residents

R4. Other patterns of lending identified during themost recent CRA examination that differ bythe concentration of minority residents

R5. Explicit demarcation of credit product mar-kets that excludes MSAs, political subdivi-sions, census tracts, or other geographicareas within the institution’s lending marketand having relatively high concentrations ofminority residents

R6. Policies on receipt and processing of appli-cations, pricing, conditions, or appraisals andvaluation, or on any other aspect of providingresidential credit, that vary between areaswith relatively high concentrations of minorityresidents and those with relatively lowconcentrations

R7. Employee statements that reflect an aversionto doing business in areas with relatively highconcentrations of minority residents

R8. Complaints or other allegations by consumersor community representatives that the lenderexcludes or restricts access to credit forareas with relatively high concentrations ofminority residents. Examiners should reviewcomplaints against the lender filed with theiragency; the CRA public comment file; com-munity contact forms; and responses toquestions about redlining, discrimination, anddiscouragement of applications and aboutmeeting the needs of racial or national originminorities, asked as part of ‘‘obtaining localperspectives on the performance of financiallenders’’ during prior CRA examinations.Note: Broad allegations or complaints are

not, by themselves, sufficient justification toshift the focus of an examination from theroutine comparative review of applications toa redlining analysis. Such a shift should bebased on complaints or allegations of specificpractices or incidents that are consistent withredlining, along with the existence of otherrisk factors.

R9. A lender that has most of its branches inpredominantly white neighborhoods at thesame time the lender’s subprime mortgagesubsidiary has branches located primarily inpredominantly minority neighborhoods

Indicators of potential disparate treatmentin marketing of residential products

M1. Advertising patterns or practices that areasonable person would believe indicatethat prohibited-basis customers are lessdesirable



M2. Advertising only in media serving nonminorityareas of the market

M3. Marketing through brokers or other agentsthat the lender knows (or has reason to know)would serve only one racial or ethnic group inthe market

M4. Using marketing programs or proceduresfor residential loan products that excludeone or more regions or geographies withinthe lender’s assessment or marketing areathat have significantly higher percentagesof minority group residents than does theremainder of the assessment or marketingarea

M5. Using mailing or other distribution lists orother marketing techniques for prescreenedor other offerings of residential loan productsthat– Explicitly exclude groups of prospective

borrowers on a prohibited basis or– Exclude geographies (for example, census

tracts or ZIP codes) within the institution’smarketing area that have significantlyhigher percentages of minority group resi-dents than does the remainder of themarketing areaNote: Prescreened solicitations of poten-

tial applicants on a prohibited basis does notviolate the ECOA. Such solicitations are,however, covered by the FHAct. Conse-quently, analyses of this form of potentialmarketing discrimination should be limited toresidential loan products subject to coverageunder the FHAct.

*M6. Proportion of monitored prohibited-basisapplicants is significantly lower than thatgroup’s representation in the total populationof the market area

M7. Consumer complaints alleging discriminationin the advertising or marketing of loans

Step 5. Organize and focusresidential risk analysis

Review the risk factors identified in step 4, above.For each loan product that displays risk factors,articulate the possible discriminatory effects en-countered and organize the examination of thoseloan products in accordance with the followingguidance:

• When overt evidence of discrimination, asdescribed in risk factors O1–O5, has been foundin connection with a product, document thosefindings, as described in part III-A, below, andcomplete the remainder of the planned examina-tion analysis.

• When any of the risk factors U1–U9 are present,consider conducting an underwriting compara-tive file analysis, as described in part III-B.

• When any of the risk factors P1–P5 are present,consider conducting a pricing comparative fileanalysis, as described in part III-C.

• When any of the risk factors S1–S8 are present,consider conducting a steering analysis, asdescribed in part III-D.

• When any of the risk factors R1–R9 are present,consult Reserve Bank management about con-ducting an analysis for redlining, as described inpart III-F.

• When any of the risk factors M1–M7 are present,consult Reserve Bank management about con-ducting a marketing analysis, as described inpart III-G.

• When an institution uses age in any creditscoring system, consider conducting an exami-nation analysis of that credit scoring system’scompliance with the requirements of RegulationB, as described in part III-H.

Step 6. Identify consumer lendingdiscrimination risk factors

For credit card, motor vehicle, home equity andother consumer loan products selected in step 1(above) for risk analysis in the current examinationcycle, conduct a risk factor review similar to thatconducted for residential lending products insteps 3–5 (above). Consult with Reserve Bankmanagement regarding the potential use of surro-gates to identify possible prohibited-basis-groupindividuals.

Note: The term ‘‘surrogate’’ in this context refersto any factor related to a loan applicant thatpotentially identifies that applicant’s race, color, orother prohibited-basis characteristic in instances inwhich no direct evidence of that characteristic isavailable. Thus, for consumer lending, for whichmonitoring data is generally unavailable, an out-wardly Hispanic or Asian surname could constitutea surrogate for an applicant’s race or nationalorigin, because examiners can assume that thelender (who can rebut the presumption) perceivedthe person to be Hispanic or Asian. Similarly, anapplicant’s given name could serve as a surrogatefor his or her gender. A surrogate for a prohibited-basis characteristic may be used to set up acomparative analysis with nonminority applicantsor borrowers.

Using decision rules in steps 3–5, above, forresidential lending products, articulate the possiblediscriminatory patterns encountered and considerexamining those products determined to havesufficient risk of discriminatory conduct.



Step 7. Analyze commercial lendingdiscrimination risk

If an institution does a substantial amount oflending in the commercial lending market, mostnotably small business lending (and the producthas not recently been examined or the underwritingstandards have changed since the last examina-tion of the product), examiners should considerconducting a risk factor review similar to thatperformed for residential lending products, asfeasible given the limited information available.Such an analysis should generally be limited todetermining risk potential based on risk factorsU4–U8, P1–P3, R4–R7, and M1–M3.

If the institution makes commercial loans insuredby the Small Business Administration (SBA), deter-mine from Reserve Bank supervisory staff whetherSBA loan data (which codes race and other factors)for the institution are available, and evaluate thosedata pursuant to instructions accompanying them.

For large institutions reporting small businessloans for CRA purposes, if the institution alsovoluntarily geocodes loan denials, look for mate-rial discrepancies in ratios of approval to denialfor applications in areas with relatively highconcentrations of minority residents comparedwith applications in areas with relatively lowconcentrations.

Articulate the possible discriminatory patternsidentified, and consider further examining thoseproducts determined to have sufficient risk ofdiscriminatory conduct in accordance with theprocedures for commercial lending described inpart III-E.

Step 8. Complete the scoping process

To complete the scoping process, examinersshould review the results of the preceding stepsand, on the basis of the relative risk levelsidentified, select those focal points that warrantexamination. To remain within the Reserve Bank’sresource allowances, examiners may need tochoose a smaller number of focal points fromamong all those selected on the basis of risk. Insuch instances, examiners should set the scope byfirst prioritizing focal points on the basis of (1) highnumber and/or relative severity of risk factors,(2) high data quality and other factors affecting thelikelihood of obtaining reliable examination results,(3) high loan volume and the likelihood of wide-spread risk to applicants and borrowers, and(4) low quality of any compliance program—andthen selecting for examination review as many focalpoints as resources permit.

If the judgment among competing focal points isa close call, information gathered during thecompliance management program review, dis-

cussed in part II, can be used to further refine theselection.

II. REVIEW OF THE INSTITUTION’SCOMPLIANCE MANAGEMENTPROGRAM

The compliance management review enables theexamination team to determine

• The intensity of the current examination, on thebasis of an evaluation of the compliance man-agement measures employed by an institution

• The reliability of the institution’s practices andprocedures for ensuring continued fair lendingcompliance

Generally, the review should focus on

• Determining whether the institution’s policies andprocedures enable management to prevent, oridentify and self-correct, illegal disparate treat-ment in the transactions that relate to theproducts and issues identified for further analy-sis in part I of these procedures

• Obtaining a thorough understanding of themanner in which management addresses its fairlending responsibilities with respect to (1) theinstitution’s lending practices and standards,(2) training and other application-processingaids, (3) guidance to employees or agents indealing with customers, and (4) its marketing orother promotion of products and services

To conduct this review, examiners should con-sider information from institutional records andinterviews with appropriate management personnelin the lending, compliance, audit, and legal func-tions. Examiners should also refer to the ‘‘Checklistfor Compliance Management Analysis’’ in theappendix to these procedures to evaluate thestrength of the compliance programs in terms oftheir capacity to prevent, or identify and self-correct, fair lending violations in connection withthe products or issues selected for analysis. Basedon this evaluation, examiners should

• Set the intensity of the transaction analysis byminimizing sample sizes within the guidelinesestablished in part III of these procedures andillustrated by the sample size tables in theappendix, to the extent warranted by the strengthand thoroughness of the compliance programsapplicable to those focal points selected forexamination

• Identify any compliance program or systemdeficiencies that merit correction or improve-ment, and present these to management inaccordance with part IV of these procedures



If the institution performs a self-evaluation or hasvoluntarily disclosed the report or results of aself-test of any product or issue that has beenselected for analysis pursuant to part I of theseprocedures, examiners may streamline the exami-nation, consistent with Reserve Bank instructions,provided that the self-test or self-evaluation meetsthe requirements set forth in the section ‘‘Stream-lining Examinations’’ at the end of the appendix tothese procedures.

III. EXAMINATION PROCEDURES

Once the scope and intensity of the examinationhave been determined, examiners should assessthe institution’s fair lending performance by apply-ing the following procedures, as appropriate, toeach examination focal point selected.

A. Documentation of Overt Evidenceof Disparate Treatment

If the scoping process or any other sourceidentifies overt evidence of disparate treatment,assess the nature of the policy or statement andthe extent of its impact on affected applicants byconducting the following analysis:

Step 1. When an indicator of overt discrimination isfound in or based on a written policy (for example,a credit scorecard) or communication, determineand document

a. The precise language of the apparently discrimi-natory policy or communication and the natureof the fair lending concerns that it raises

b. The lender’s stated purpose in adopting thepolicy or communication, and the identity of theperson on whose authority it was issued oradopted

c. How and when the policy or communication wasput into effect

d. How widely the policy or communication wasapplied

e. Whether, and to what extent, applicants wereadversely affected by the policy orcommunication

Step 2. When any indicator of overt discriminationwas an oral statement or unwritten practice,determine and document

a. The precise nature of the statement or practiceand the fair lending concerns that it raises

b. The identity of (1) the persons making thestatement or applying the practice and theirdescriptions of the reasons for it and (2) thepersons authorizing or directing the use of thestatement or practice

c. How and when the statement or practice wasdisseminated or put into effect

d. How widely the statement was disseminated orthe practice applied

e. Whether, and to what extent, applicants wereadversely affected by the statement or practice

Assemble findings and supporting documenta-tion for presentation to management in connectionwith part IV of these procedures.

B. Transactional UnderwritingAnalysis—Residential andConsumer Loans

Step 1. Set sample size

a. For each focal point selected for this analysis,use two samples: (1) prohibited-basis-groupdenials and (2) control group approvals—bothidentified either directly from monitoring infor-mation (in the case of residential loan appli-cations) or through the use of application dataor surrogates (in the case of consumerapplications)

b. Refer to fair lending sample size table A in theappendix to these procedures and determinethe size of the initial sample for each focal point,based on the number of prohibited-basis-groupdenials and the number of control groupapprovals by the lender during the twelve-month (or calendar-year) period of lendingactivity preceding the examination. In the eventthat the number of denials and/or approvalsacted on during the preceding twelve-monthperiod substantially exceeds the maximumsample size shown in table A, reduce the timeperiod from which that sample is selected to ashorter period. (In doing so, make every effort toselect a period in which the lender’s underwrit-ing standards are most representative of thosein effect during the full twelve-month periodpreceding the examination.)

c. If the number of prohibited-basis-group denialsor control group approvals for a given focalpoint during the twelve-month period refer-enced in step 1b (immediately above) does notmeet the minimum standards set forth in thesample size table, examiners need not attempta transactional analysis for that focal point. Ifother risk factors favor analyzing such a focalpoint, consult with Reserve Bank managementon possible alternative methods of judgmentalcomparative analysis.

d. If System policy calls for a different approach tosampling (for example, a form of statisticalanalysis or a mathematical formula) for a limited



class of institutions, examiners should followthat approach.

Step 2. Determine sample composition

a. To the extent that the institution maintainsrecords of loan outcomes resulting from excep-tions to its credit underwriting standards or otherpolicies (for example, overrides to credit scorecutoffs), request such records for both approv-als and denials, sorted by loan product andbranch or decision center if the lender can doso. Include in the initial sample for each focalpoint all exceptions or overrides applicable tothat focal point.

b. Using HMDA-LAR data or, for consumer loans,comparable loan register data to the extentavailable, choose approved and denied appli-cations on the basis of selection criteria that willmaximize the likelihood of finding marginallyapproved and denied applicants, as discussedbelow.

c. To the extent that the above factors are inappli-cable, or other selection criteria are unavailableor do not facilitate selection of the entire samplesize of files, complete the initial sample selec-tion by making random file selections from theappropriate sample categories in the samplesize table.

Step 3. Compare approved anddenied applications

Although a creditor’s written policies and proce-dures may appear to be nondiscriminatory, lendingpersonnel may interpret or apply policies in adiscriminatory manner. To detect any disparatetreatment among applicants, examiners should firsteliminate all but ‘‘marginal transactions’’ (see step3b, below) from each selected focal point sample.Then they should record a detailed profile of eachmarginal applicant’s qualifications, the level ofassistance received during the application pro-cess, the reasons for denial, the loan terms, andother information on an ‘‘applicant profile spread-sheet.’’ Once the target and control groups areprofiled, examiners can compare the groups forevidence that similarly qualified applicants havebeen treated differently as to either the institution’scredit decision or the quality of assistance provided.

a. Create applicant profile spreadsheet—Basedon the lender’s written or articulated creditstandards and loan policies, identify categoriesof data that should be recorded for eachapplicant and provide a field for each of thesecategories on a worksheet or computerizedspreadsheet. Certain data (for example, income,loan amount, and debt) should always beincluded in the spreadsheet, while the other

data selected should be tailored for each loanproduct and lender on the basis of applicableunderwriting criteria and such issues as branchlocation and underwriter. If credit bureau scoresand/or application scores are an element of thelender’s underwriting criteria (or if such informa-tion is regularly recorded in loan files, whetherexpressly used or not), include a data field forthis information in the spreadsheet.To facilitate comparisons of the quality of

assistance provided to target and control groupapplicants, every worksheet should provide a‘‘comments’’ block, appropriately labeled, asthe site for recording observations from the fileor interviews regarding how an applicant was, orwas not, assisted in overcoming credit deficien-cies or otherwise qualifying for approval.

b. Complete applicant profiles—From the applica-tion files sample for each focal point, completeapplicant profiles for the denied and approvedapplications selected, as follows:

• A principal goal is to identify cases in whichsimilarly qualified prohibited-basis and con-trol group applicants had different creditoutcomes. As the supervisory agencies havefound, discrimination, including differences ingranting assistance during the approval pro-cess, is more likely to occur with respect toapplicants who are neither clearly qualifiednor clearly unqualified, that is, are ‘‘marginal’’applicants. The examiner-in-charge should,during the following steps, judgmentally selectfrom the initial sample only those denied andapproved applications that constitute mar-ginal transactions. (See the section ‘‘MarginalTransactions’’ in the appendix to these proce-dures for guidance.)

• If few marginal control group applicants areidentified from the initial sample, reviewadditional files of approved control groupapplicants. This review will either increase thenumber of marginal approvals or confirm thatmarginal approvals are so infrequent that themarginal denials are unlikely to involve dis-parate treatment.

• The judgmental selection of marginal-deniedand marginal-approved applicant loan filesshould be done together, in a ‘‘back andforth’’ manner, to facilitate close matches andprovide a more consistent definition of ‘‘mar-ginal’’ between these two types of loan files.

• Once the marginal files have been identified,extract and note the data elements called foron the profile spreadsheet.

• At the same time, examiners should simulta-neously look for, and document on thespreadsheet, any evidence found in marginalfiles regarding the following:



– The extent of any assistance, includingboth affirmative aid and waivers or partialwaivers of credit policy provisions orrequirements, that appears to have beenprovided to marginal-approved controlgroup applicants and enabled them toovercome one or more credit deficiencies,such as excessive debt-to-income ratios

– The extent to which marginal-denied targetgroup applicants with similar deficiencieswere, or were not, provided similar affir-mative aid, waivers, or other forms ofassistance

c. Review and compare profiles

• For each focal point, review all marginalprofiles to determine if the underwriter fol-lowed institution lending policies in denyingapplications and whether the reason(s) fordenial was supported by facts documented inthe loan file and properly disclosed to theapplicant pursuant to Regulation B. If any(1) unexplained deviations from credit stan-dards, (2) inaccurate reasons for denial, or(3) incorrect disclosures are noted (whether ina judgmental underwriting system, a scoredsystem, or a mixed system), examiners shouldobtain an explanation from the underwriterand document the response on an appropri-ate workpaper.

Note: In constructing the applicant profilesto be compared, examiners must adjust thefacts compared so that assistance, waiv-ers, or acts of discretion are treated consis-tently between applicants. For example, if acontrol group applicant’s debt-to-incomeratio was lowered to 42% because thelender decided to include short-term over-time income and a prohibited-basis-groupapplicant who was denied because of‘‘insufficient income’’ would have had hisratio drop from 46% to 41% had hisshort-term overtime income been consid-ered, then examiners should consider 41%,not 46%, in determining the benchmark.

• For each reason for denial identified within thetarget group, rank the denied prohibited-basis applicants, beginning with the appli-cant whose qualifications related to thatreason for denial were least deficient. (Thetop-ranked denied applicant in each suchranking is referred to below as the ‘‘bench-mark’’ applicant.)

• Compare each marginal control groupapproval with the benchmark applicant ineach reason-for-denial ranking developed instep 3b, above. If there are no approvals whoare equally or less qualified, then there are noinstances of disparate treatment for the

lender to account for. For all such approvalsthat appear no better qualified than thedenied benchmark applicant

– Identify the approved loan on the work-sheet or spreadsheet as an ‘‘overlapapproval’’ and

– Compare that overlap approval with othermarginal prohibited-basis denials in theranking to determine whether additionaloverlaps exist. If they do, identify alloverlapping approvals and denials asabove.

• If the focal point involves use of a creditscoring system, the analysis for disparatetreatment is similar to the procedures set forthin step 3c, above, and should focus primarilyon overrides of the scoring system itself. Forguidance on this type of analysis, refer topart C of ‘‘Procedures for Credit ScoringAnalysis’’ in the appendix to these examina-tion procedures.

Step 4. If there is some evidence of violations in theunderwriting process but not enough to clearlyestablish the existence of a pattern or practice,expand the sample as necessary to determinewhether a pattern or practice does or does not exist

Step 5. Discuss all findings resulting from theabove comparisons with bank management, anddocument both the findings and all conversationson an appropriate worksheet

C. Analyzing Potential Disparities inTerms and Conditions

Step 1. Set sample size

For each focal point selected for this analysis, usetwo samples: (1) prohibited-basis-group approvalsand (2) control group approvals—both sets iden-tified either directly from monitoring information(in the case of residential loan applications) orthrough the use of application data or surrogates(in the case of consumer or commercial applica-tions). Refer to fair lending sample size table B inthe appendix and determine the size of the initialsample for each focal point. Sample selectionsshould be based on (1) the number of prohibited-basis-group approvals and the number of controlgroup approvals received by the lender during thetwelve months preceding the examination and(2) the outcome of the compliance managementprogram review conducted in part II.

Step 2. Determine sample composition

Note: A sample drawn for the purpose of compar-ing price and other terms and conditions should



initially be based on controlling for two nondiscrimi-natory variables that can have a significant impacton loan terms: whether the loan was sold, and theloan closing date. Other variables, such as house-hold income and loan amount, will be accountedfor on a case-by-case basis during the filecomparison process.

a. Disposition of loan—Determine whether theapproved loans from which the sample is to bedrawn have been consistently sold to thesecondary market or held in portfolio. If both,determine the proportion for each category anduse that proportion in selecting loans for thesample. If the number of loans in either the soldor portfolio category is too small to complete theminimum proportional sample for that category,ignore loans in that category and complete thesample using loans solely from the largercategory.

b. Period of review—Sort loans selected in step 1,above, by date of loan closing, and matchbatches of prohibited-basis and control grouploans that closed either on the same date orwithin a range of dates during which thelender’s pricing policies were the same. If datesof loan closing are not consistently available,consider substituting the application date forthe closing date.

Step 3. Create applicant profile spreadsheet

Identify data that should be recorded for each loanto allow for a valid comparison of terms andconditions, and enter the data on a spreadsheet.Certain data must always be included in thespreadsheet, while the other data selected will betailored for each loan product and lender on thebasis of loan terms offered and such issues asbranch location and underwriter.

Step 4. Review terms and conditions, and comparethem with applicant outcomes

a. Determine which loan terms and conditions(rates, points, fees, maturity variations, loan-to-value ratios (LTVs), collateral requirements, andso forth) are left, in whole or in part, to thediscretion of loan officers or underwriters. Foreach such term or condition, identify (1) anyapproved prohibited-basis-group applicants inthe sample who appear to have been treatedunfavorably with respect to that term or condi-tion and (2) any approved control group appli-cants who appear to have been treated favor-ably with respect to that term or condition. Theanalysis should be thoroughly documented inthe workpapers.

b. Identify from the sample any approved controlgroup applicants who appear to have been

treated more favorably than one or more of theabove-identified prohibited-basis-group appli-cants and who have negative creditworthinessfactors (under the lender’s standards) that areequal to or worse than those of the prohibited-basis-group applicant(s).

c. Obtain explanations from the appropriate loanofficer or other employee for any differences thatexist, and re-analyze the sample for evidence ofdiscrimination.

d. If there is some evidence of violations in theimposition of terms and conditions but notenough to clearly establish the existence of apattern or practice, examiners should expandthe sample as necessary to determine whethera pattern or practice does or does not exist.

e. Discuss differences in comparable loans withthe institution’s management, and document allconversations on an appropriate worksheet. Foradditional guidance on evaluating manage-ment’s responses, refer to part A, responses1–5, in the section ‘‘Evaluating Responses toEvidence of Disparate Treatment’’ in the appen-dix following this chapter.

D. Steering Analysis

Institutions that make FHA and conventional loans,as well as those that lend in both prime (or ‘‘A’’) andsubprime markets (either directly or through sub-sidiaries or affiliates), present opportunities for loanofficers to refer or ‘‘steer’’ applicants from oneproduct or market to another. Steering is notunlawful per se, and in many instances theavailability of a more expensive form of credit mayenable an applicant with credit problems to obtaina loan that might otherwise be unavailable. Steer-ing can, however, raise fair lending issues if itoccurs differently and less advantageously forprohibited-basis-group applicants than for similarlysituated nonminority applicants. If the scopinganalysis reveals the presence of one or more riskfactors S1–S8 for any selected focal point, consultwith managers about conducting a steering analy-sis as described below.

From the perspective of fair lending analysis, allsteering scenarios involve a decision by thelender’s personnel to guide an applicant’s choicebetween a more favorable loan and one or moreless favorable alternatives (for example, referral toa more expensive subprime mortgage subsidiary).As a result, a steering analysis should be directedto the following activities:

Step 1. Clarify which of the options available tocustomers are the more favorable and the lessfavorable



Through interviews with appropriate personnel ofthe institution and a review of policy manuals,procedure guidelines, and other directives, obtainand verify the following information for eachproduct−alternative product pairing or groupingidentified above:

a. All underwriting criteria for the product and foralternative products that are offered by theinstitution or by a subsidiary or affiliate

b. Pricing or other costs applicable to the productand alternative products, including interestrates, points, and all fees

Step 2. Document the policies, conditions, orcriteria that have been adopted by the lender fordetermining how referrals are to be made andchoices are to be presented to customers

a. Obtain not only information regarding the prod-uct offered by the lender and alternative prod-ucts offered by subsidiaries or affiliates, but alsoinformation on products and alternatives offeredsolely by the lender itself—for example, conven-tional and FHA loans, secured and unsecuredhome improvement loans, prime and subprimemortgages.

b. Obtain any information regarding a subsidiaryof the lender directly from that entity, but seekinformation regarding an affiliate or holdingcompany subsidiary only from the lender itself.

c. Obtain all appropriate documentation, and docu-ment all discussions with loan personnel andmanagers.

d. Obtain documentation or employee estimatesas to the volume of referrals made from or to theinstitution, for each product, during a relevanttime period.

e. Resolve to the extent possible any discrepan-cies between information found in the lender’sdocuments and information obtained in inter-views, by conducting appropriate follow-upinterviews.

f. Identify any policies and procedures estab-lished by the institution and its subsidiary oraffiliate for (1) referring a person who applies tothe institution, but does not meet its criteria, to asubsidiary or affiliate; (2) offering to a personwho applies to the institution for a specificproduct, but does not meet its criteria, one ormore alternative loan products; or (3) referringto the institution a person who applies to asubsidiary or affiliate for its product but whoappears be qualified for a loan from theinstitution.

g. Determine whether loan personnel are encour-aged, through monetary incentives or other-

wise, to make referrals, either from the institutionto a subsidiary or affiliate or vice versa.

Step 3. Determine how both the decisions and thelender’s policies, conditions, or criteria are sup-posed to be documented in loan files, policymanuals, directives, and so forth.

Determine how, if at all, a referral from the institutionto a subsidiary or affiliate, or vice versa, and thereason for it, would be documented in the loan filesor in any other records of either the referring or thereceiving entity.

Step 4. Determine to what extent individual loanpersonnel are able to exercise personal discretionin deciding what loan products or other creditalternatives will be made available to a givenapplicant

Step 5. Determine whether the lender’s statedpolicies, conditions, or criteria are adhered to byindividual decision makers. If they are not, doesit appear that different policies or practices areactually in effect?

Enter data from the prohibited-basis-group sampleon the spreadsheets, and determine whether thelender is, in fact, applying its criteria as stated. Forexample, if one announced criterion for receivinga ‘‘more favorable’’ prime mortgage loan was aback-end debt ratio of no more than 38%, reviewthe spreadsheets to determine whether that crite-rion was adhered to. If the lender’s actual treat-ment of prohibited-basis-group applicants appearsto differ from its stated criteria, document suchdifferences for subsequent discussion with man-agement.

Step 6. To the extent that individual loan personnelhave any discretion in deciding what credit alter-natives to offer applicants (for example, conven-tional vs. FHA/VA), conduct a comparative analysisto determine whether that discretion has beenexercised in a nondiscriminatory manner

Compare the lender’s, or its subsidiary or affiliate’s,treatment of control group and prohibited-basis-group applicants by adapting the ‘‘benchmark’’and ‘‘overlap’’ technique discussed in part III-B ofthese procedures. For purposes of this steeringanalysis, that technique should be applied asfollows:

a. For each focal point to be analyzed, select asample of prohibited-basis-group applicantswho received ‘‘less favorable’’ treatment (forexample, applicants referred to a finance com-pany or a subprime mortgage subsidiary orthose who received counteroffers of less favor-able product alternatives).



Note: In selecting the sample, follow theguidance of sample size table B in the appendixand select ‘‘marginal applicants’’ as instructedin part III-B.

b. Prepare a spreadsheet for the sample thatcontains data entry categories for those under-writing and referral criteria that the lenderidentified in step 1b as being used in reachingunderwriting and referral decisions between thepairs of products.

c. Review the ‘‘less favorably’’ treated prohibited-basis-group sample and rank this sample fromleast qualified to most qualified.

d. From the sample, identify the most qualifiedprohibited-basis-group applicant, based on thecriteria identified for the control group, above.This applicant will be the ‘‘benchmark’’ appli-cant. Rank order the remaining applicants frommost to least qualified.

e. Select a sample of control group applicants.Identify those who were treated ‘‘more favor-ably’’ with respect to the same product–alternative product pair as the prohibited-basisgroup. (Again, refer to sample size table B andthe marginal applicant processes noted abovein selecting the sample.)

f. Compare the qualifications of the benchmarkapplicant with those of the control groupapplicants, beginning with the least qualifiedmember of that sample. Any control groupapplicant who appears less qualified than thebenchmark applicant should be identified onthe spreadsheet as a ‘‘control group overlap.’’

g. Compare all control group overlaps with other,less qualified prohibited-basis-group applicantsto determine whether additional overlaps exist.

h. Document all overlaps as possible disparitiesin treatment. Discuss all overlaps and relatedfindings (for example, any differences betweenstated and actual underwriting criteria)with management, documenting all suchconversations.

E. Transactional UnderwritingAnalysis—Commercial Loans

Unlike consumer credit, for which loan productsand prices are generally homogenous and under-writing involves the evaluation of a limited numberof credit variables, commercial loans are generallyunique, and underwriting methods and loan pricingmay vary depending on a large number of creditvariables. The additional credit analysis that isinvolved in underwriting commercial credit prod-ucts entails additional complexity in the samplingand discrimination analysis process. Although theECOA prohibits discrimination in all the commercial

credit activities of a covered institution, the super-visory agencies recognize that small businesses(sole proprietorships, partnerships, and small,closely held corporations), including those oper-ated by prohibited-basis-group members, mayhave less experience in borrowing. Therefore, inimplementing these procedures, examiners shouldgenerally focus on small business credit (commer-cial applicants that had gross revenues of$1,000,000 or less in the preceding fiscal year),absent some evidence that a focus on othercommercial products would be more appropriate.

Step 1. Understand commercial loan policies

For the commercial product line selected foranalysis, first review credit policy guidelines andinterview appropriate commercial loan managersand officers to obtain written and articulatedstandards used by the lender in evaluating com-mercial loan applications.

Step 2. Conduct initial sampling

a. Select all (up to a maximum of ten) deniedapplications that were acted on during thethree-month period prior to the examination. Tothe extent feasible, include denied applicationsfrom businesses that (1) are located in minorityor integrated geographies or (2) appear, on thebasis of the names of the principals shown onapplications or related documents, to be ownedby women or minority group members. (In thecase of banks that do a significant volume ofcommercial lending, consider reviewing morethan ten applications.)

b. For each of the denied commercial applicationsselected, record specific information gatheredfrom loan files and through interviews with theappropriate loan officers—information about theprincipal owners, the purpose of the loan, andthe specific financial information about thecommercial enterprise (including type of busi-ness, such as retail, manufacturing, or service)—that was used by the lender to evaluate thecredit request. In addition, inquire with the loanofficer as to the gender and race, if known, ofthe principals of the business.

c. Select ten approved loans that appear to besimilar, with regard to business type, purpose ofloan, loan amount, loan terms, and type ofcollateral, to the denied loans sampled. Forexample, if the denied loan sample includesapplications for lines of credit to cover inventorypurchases for retail businesses, select ap-proved applications for lines of credit from retailbusinesses.

d. For each approved commercial loan applicationselected, obtain and record information parallel



to that obtained for denied applications, includ-ing the gender and race of the principals.

e. Compare the credit criteria considered in thecredit process for each of the approved anddenied applications with established underwrit-ing standards, rather than comparing filesdirectly.

f. Identify any deviations from credit standards forboth approved and denied credit requests, andidentify differences in loan terms granted forapproved credit requests.

g. Discuss each instance in which deviations fromcredit standards and terms were noted, butwere not explained in the file, with the commer-cial credit underwriter, and document eachdiscussion.

Step 3. Conduct targeted sampling

a. If deviations from credit standards or pricing arenot sufficiently explained by other factors docu-mented in the credit file, or if the commercialunderwriter was not able to provide a reason-able explanation for the difference, determine ifdeviations were detrimental to any protectedclasses of applicants.

b. Consider employing the same techniques fordetermining the race and gender characteris-tics of commercial applicants as those outlinedin the consumer loan sampling procedures.

c. If it is determined that there are members of oneor more prohibited-basis groups among com-mercial credit requests that were not underwrit-ten according to established standards orreceived less favorable terms, select additionalcommercial loans for which applicants aremembers of the same prohibited-basis groupand then select similarly situated control groupcredit requests. These additional files should bechosen on basis of any specific applicantcircumstances that appear to have been vieweddifferently by lending personnel on a prohibitedbasis.

d. If the original sample period does not provideenough similarly situated applicants from whichto draw a reasonable conclusion, expand thesample period. The expanded sample periodshould generally not extend back beyond thedate of the prior examination.

Sampling Guidelines

a. Generally, the task of selecting an appropriateexpanded sample of prohibited-basis and con-trol group applications for commercial loans willrequire examiner judgment. The sample shouldbe large enough to allow examiners to draw areasonable conclusion.

b. First, select from the applications that wereacted on during the initial sample period butwere not included in the initial sample. Then,select applications from prior time periods asnecessary.

c. The expanded sample should include bothapproved and denied prohibited-basis andcontrol group applications in which similarcredit was requested by similar enterprises forsimilar purposes.

F. Analysis ofPotential Discriminatory Redlining

For purposes of this analysis, redlining is a form ofillegal disparate treatment in which a lenderprovides unequal access to credit, or unequalterms of credit, because of the race, color, nationalorigin, or other prohibited characteristics of theresidents of the area in which the credit seekerresides or will reside or in which the residentialproperty to be mortgaged is located.

The redlining analysis may be applied to deter-mine whether, on a prohibited-basis,

• A lender fails or refuses to extend credit in suchan area;

• A lender makes loans in such an area but at arestricted level or on less favorable terms orconditions relative to contrasting areas; or

• A lender omits or excludes such an area fromefforts to market residential loans or solicitcustomers for residential credit.

This guidance focuses on possible discrimina-tion against racial or national origin minorities. Thesame analysis could be adapted to evaluaterelative access to credit for areas of geographicalconcentration on other prohibited bases—for exam-ple, age.

Note: It is true that neither the Equal CreditOpportunity Act nor the Fair Housing Act specifi-cally uses the term ‘‘redlining.’’ However, federalcourts, as well as agencies that have enforce-ment responsibilities for the FHAct, have inter-preted that act as prohibiting lenders fromhaving different marketing or lending practicesfor certain geographic areas, compared withothers, if the purpose or effect of such differ-ences would be to discriminate on a prohibitedbasis. Similarly, the ECOA would prohibit treatingapplicants for credit differently on the basis of theracial or ethnic composition of their respectiveneighborhoods.

Like other forms of disparate treatment, redliningcan be proved by overt or comparative evidence. If



any written or oral policy or statement of the lender(see risk factors R5, R6, and R7 in part I, above)suggests that the lender links the racial or nationalorigin character of an area to limits on the access toor terms of credit, examiners should refer to theguidance in section A of this part (part III), ondocumenting and evaluating overt evidence ofdiscrimination.

Overt evidence includes not only explicit state-ments, but also a lender’s use of geographicalterms that would, to a reasonable person familiarwith the community in question, suggest a specificracial or national origin character. For example, ifthe principal information conveyed by the phrase‘‘north of 110th Street’’ is that the indicated area isprincipally occupied by Hispanics, then a policy ofnot making credit available ‘‘north of 110th Street’’is overt evidence of potential redlining on the basisof national origin.

Overt evidence is relatively uncommon. Conse-quently, the redlining analysis will usually focuson comparative evidence (similar to analyses ofpossible disparate treatment of individual cus-tomers), comparing the lender’s treatment ofareas having contrasting racial or national origincharacteristics.

When the scoping process (including consulta-tion within the Federal Reserve System as called forby the procedures) indicates that a redlininganalysis should be initiated, examiners shouldcomplete the following steps of comparativeanalysis:

• Identify and delineate any areas within thelender’s CRA assessment area or market area forresidential products that are of a racial ornational origin minority character.

• Determine whether any minority area identified instep 1 (see ‘‘Comparative Analysis for Redlin-ing,’’ below) appears to be excluded, under-served, selectively excluded from marketingefforts, or otherwise treated less favorably in anyway by the lender.

• Identify and delineate any areas within thelender’s CRA assessment area or market area forresidential products that are nonminority incharacter and that the lender appears to treatmore favorably.

• Obtain the lender’s explanation for the apparentdifference in treatment between the areas, andevaluate whether the explanation is credible andreasonable.

• Obtain and evaluate other information that maysupport or contradict an interpretation of identi-fied disparities as the result of intentional illegaldiscrimination.

These steps are discussed in detail below.

Using Information Obtainedduring Scoping

Although the five tasks listed below are listed asexamination steps in the order presented above,examiners should recognize that a different ordermay be preferable in any given examination. Forexample, the lender’s explanation (step 4) for oneof the policies or patterns in question may alreadybe documented in the CRA materials reviewed(step 2), and the CRA examiners may already haveverified the explanation, which may be sufficient forpurposes of the redlining analysis.

As another example, as part of the scopingprocess, examiners may have reviewed an analysisof the geographic distribution of the lender’s loanoriginations with respect to the racial and nationalorigin composition of census tracts within its CRAassessment or residential market area. The analy-sis may have documented the existence of signifi-cant discrepancies between areas, by degree ofminority concentration, in loans originated (riskfactor R1), approval/denial rates (risk factor R2),and/or rates of denials because of insufficientcollateral (risk factor R3). In such a situation, one inwhich the scoping process has produced a reliablefactual record, examiners could begin with step 4(obtaining an explanation) of the redlining analysisdescribed below.

In contrast, when the scoping process yieldsonly partial or questionable information, or the riskfactors on which the redlining analysis is based arecomplaints or allegations against the lender, steps1, 2, and/or 3 must be addressed.

Comparative Analysis for Redlining

Step 1. Identify and delineate any areas within thelender’s CRA assessment area or market area forresidential products that are of a racial or nationalorigin minority character

Note: The CRA assessment area can be aconvenient unit for redlining analysis becauseinformation about it typically is already in hand.However, the CRA assessment area may be toolimited. The redlining analysis focuses on thelender’s decisions about how much access tocredit to provide to different geographical areas.The areas for which those decisions can best becompared are areas in which the lender actuallymarketed and provided credit and in which itcould reasonably be expected to have marketedand provided credit. Some of those areas mightbe beyond or otherwise different from the CRAassessment area.

If there are no areas identifiable for their racial ornational origin minority character within the lender’s



CRA assessment area or market area for residentialproducts, a redlining analysis is not appropriate. (Ifthere is a substantial but dispersed minoritypopulation, potential disparate treatment can beevaluated by a routine comparative file review ofapplicants.)

This step may have been substantially com-pleted during scoping, but unresolved matters mayremain. (For example, several community spokes-persons may allege that the lender is redlining butdisagree in defining the area.) Examiners should

a. Describe as precisely as possible why aspecific area is recognized in the community(perceptions of residents, and so forth) or isobjectively identifiable (on the basis of censusor other data) as having a particular racial ornational origin minority character.

• The most obvious identifier is the predom-inant race or national origin of the residentsof the area. Examiners should document thepercentages of racial or national origin minor-ities residing within the census tracts thatmake up the area. However, they shouldbear in mind that it is illegal for the lenderto consider a prohibited factor in any way.For example, an area might be only 20%black, but if a lender refuses to extend creditthere because the lender believes the areais ‘‘changing to black,’’ that, too, is a violation.Contacts with community groups can behelpful in learning whether there are suchsubtle features of racial or ethnic character.

• Geographical groupings that are convenientfor CRA may obscure racial patterns. Forexample, an underserved, low-income, pre-dominantly minority neighborhood that lieswithin a larger low-income area that consistsprimarily of nonminority neighborhoods mayseem adequately served when the entirelow-income area is analyzed as a unit.However, a racial pattern of underservice tominority areas might be revealed if thelow-income minority neighborhood shares aborder with an underserved, middle-incomeminority area and those two minority areaswere grouped together for purposes ofanalysis. Review the analysis from prior CRAexaminations of whether the assessment areaappears to have been influenced by pro-hibited factors. If there are minority areas thatthe lender improperly excluded from theassessment area, consider whether thoseareas ought to be included in the redlininganalysis.

b. Describe how the racial or national origincharacter changes across the suspected redlin-ing area’s various boundaries.

c. Document or estimate the amount, within theminority area, of types of housing for which thelender offers residential credit. If the minorityarea does not have a significant amount of suchhousing, the area is not appropriate for aredlining analysis.

Step 2. Determine whether any minority areaidentified in step 1 is excluded, underserved,selectively excluded from marketing efforts, orotherwise less favorably treated in any way by thelender

Examiners should begin with the risk factorsidentified during the scoping process. The unfavor-able treatment may have been substantially docu-mented during scoping and need only to befinished in this step. If not, this step will verify andmeasure the extent to which HMDA data show theminority areas identified in step 1 to be under-served and how the lender’s explicit policies treatthem less favorably.

a. Review prior CRA lending test analyses to learnwhether they have identified any excluded orotherwise underserved areas or other significantgeographical disparities in the institution’s lend-ing. Determine whether any of those are theminority areas identified in step 1.

b. Learn from the lender itself whether, as a matterof policy, it treats any separate or distinctgeographical areas within its marketing orservice area differently from other areas. Thisinformation may have been gathered com-pletely or partially during scoping analysisrelated to risk factors R5, R6, and R7. Thedifferences in treatment can be in marketing,branch operations, appraisal practices, appli-cation processing, approval requirements, pric-ing, loan conditions, evaluation of collateral, orany other policy or practice materially related toaccess to credit. Determine whether any ofthose less-favored areas are the minority areasidentified in step 1.

c. Obtain from the lender (1) its reasons for suchdifferences in policy, (2) how the differences areimplemented, and (3) any specific conditionsthat must exist in an area for it to receive theparticular treatment (more favorable or lessfavorable) that the lender has indicated.

Step 3. Identify and delineate any areas within thelender’s CRA assessment area or market area forresidential products that are nonminority in charac-ter and that the lender appears to treat morefavorably

To the extent not already completed during scoping,

a. Document the percentages of whites and ofracial or national origin minorities residing within



the census tract(s) that make up the nonminorityarea.

b. Document the nature of the housing stock in thearea.

c. Describe, to the extent known, how the lender’spractices, policies, or rate of lending changefrom less to more favorable as one leaves theminority area at its various boundaries. (Exam-iners should be particularly attentive to instancesin which the boundaries between favored anddisfavored areas deviate from boundaries thelender would reasonably be expected to follow,such as political boundaries or transportationbarriers.)

d. Examiners should particularly consider whether,within a large area that is composed predomi-nantly of racial or national origin minorityhouseholds, there are enclaves that are predomi-nantly nonminority or whether, along the area’sborders, there are irregularities where the non-minority group is predominant. As part of theoverall comparison, examiners should deter-mine whether credit access within those smallnonminority areas differs from credit access inthe larger minority area.

Step 4. Obtain the lender’s explanation for theapparent difference in treatment between theareas, and evaluate whether the explanation iscredible and reasonable

This step completes the comparative analysis bysoliciting from the lender any additional informationnot yet considered by examiners that might showthat there is a nondiscriminatory explanation for theapparent disparate treatment based on race orethnicity.

For each matter that requires explanation, pro-vide the lender full information about apparentdifferences in the treatment of minority and non-minority areas and how examiners reached theirpreliminary conclusions at this stage of the analysis.

a. Evaluate whether the conditions identified bythe lender in step 2 as justifying more favorabletreatment pursuant to institutional policy existedin minority neighborhoods that did not receivethe favorable treatment called for by institutionalpolicy. If there are minority areas for which thoseconditions existed, ask the lender to explain whythe areas were treated differently despite thesimilar conditions.

b. Evaluate whether the conditions identified bythe lender in step 2 as justifying less favorabletreatment pursuant to institutional policy existedin nonminority neighborhoods that receivedfavorable treatment nevertheless. If there arenonminority areas for which those conditionsexisted, ask the lender to explain why those

areas were treated differently despite the similarconditions.

c. Obtain explanations from the lender for anyapparent differences in treatment observed byexaminers but not called for by the lender’spolicies.

• If the lender’s explanation cites any specificconditions in the nonminority areas to justifymore favorable treatment, determine whetherthe minority areas identified in step 1 satisfiedthose conditions. If there are minority areasfor which those conditions existed, ask thelender to explain why the areas were treateddifferently despite the similar conditions.

• If the lender’s explanation cites any specificconditions in the minority areas to justify less-favorable treatment, determine whether thenonminority areas had those conditions. Ifthere are nonminority areas for which thoseconditions existed, ask the lender to explainwhy those areas were treated differentlydespite the similar conditions.

d. Evaluate the lender’s responses by applyingappropriate principles selected from the section‘‘Evaluating Responses to Evidence of Dispar-ate Treatment’’ in the appendix to theseprocedures.

Step 5. Obtain and evaluate specific types of otherinformation that may support or contradict aninterpretation of identified disparities as the resultof intentional illegal discrimination

As a legal matter, discriminatory intent can beinferred simply from the lack of a legitimateexplanation for clearly less favorable treatment ofracial or national origin minorities. That might be thesituation after step 4. Nevertheless, if the lender’sexplanations do not adequately account for adocumented difference in treatment, examinersshould consider additional information that mightsupport or contradict the interpretation that thedifference in treatment was intended.

a. Comparative file review—If a comparative filereview was conducted in conjunction with theredlining examination, review the results; or, if itis necessary and feasible to do so to clarify whatappears to be discriminatory redlining, comparedenied applications from within the suspectedredlined area with approved applications fromthe contrasting area.

• Determine whether there were any denials offully qualified applicants from the suspectedredlined area. If so, that tends to support theview that the lender wanted to avoid doingbusiness in the area.

• Determine whether the file review identifiedinstances of illegal disparate treatment against



applicants of the same race or national originas the suspected redlined area. If so, thattends to support the view that the lenderwanted to avoid doing business with appli-cants of that group, such as the residents ofthe suspected redlined area. Learn whetherany such identified victims applied for trans-actions in the suspected redlined area.

• If there are instances of either of the above,identify any denied nonminority residents, ifany, of the suspected redlined area andreview their application files to learn whetherthey appear to have been treated in anirregular or less favorable way. If so, thattends to support the view that the character ofthe area, rather than of the applicants them-selves, appears to have influenced the creditdecisions.

• Review withdrawn and incomplete applica-tions for the suspected redlined area, if thosecan readily be identified from the HMDA-LAR,and determine whether there are reliableindications that the lender discouraged thoseapplicants from applying. If so, that tends tosupport the view that the lender did not wantto do business in the area and may constituteevidence of a violation of section 202.5(a) ofRegulation B.

Conversely, if the comparisons of individualtransactions show that the lender treated minor-ity and nonminority applicants within and out-side the suspected redlined area similarly, thattends to contradict the conclusion that thelender avoided the area because it had minorityresidents.

b. Interviews of third parties—The perspectives ofthird parties will have been taken into account tosome degree through the review of availablematerials during scoping. Later in the examina-tion, in appropriate circumstances, informationfrom third parties may help in interpretingwhether the lender’s apparent differences intreatment of minority and nonminority areaswere intended.

• Identify persons (such as housing or creditcounselors, home improvement contractors,or real estate and mortgage brokers) whomay have extensive experience dealing withcredit applicants from the suspected redlinedarea.

• After obtaining appropriate authorization andguidance from the Board, interview thosepersons to learn of their first-hand experi-ences related to

– Oral statements or written indications by alender’s representatives that loan applica-

tions from a suspected redlined area werediscouraged

– Whether the lender treated applicants fromthe suspected redlined area as called forin its own procedures (as the examinersunderstand them) or whether it treatedthem similarly to applicants from nonminor-ity areas (as the examiners are familiar withthose transactions)

– Any unusual delays or irregularities in loanprocessing for transactions in the sus-pected redlined area

– Differences in the lender’s pricing, loanconditions, property valuation practices,and so forth, in the suspected redlined areacompared with contrasting areas

Also, learn from the third parties the names ofany consumers they described as having expe-rienced the questionable behavior recounted bythe third party, and consider contacting thoseconsumers.

If third parties witnessed specific conduct bythe lender that indicates that the lender wantedto avoid business from the area or prohibited-basis group in question, this would tend tosupport an interpretation that the difference intreatment was intended. Conversely, if thirdparties report proper treatment or positiveactions toward such an area or prohibited-basisgroup, this would tend to contradict the viewthat the lender intended to discriminate.

c. Marketing—A clear exclusion of the suspectedredlined area from the lender’s marketing ofresidential loan products supports the view thatthe lender did not want to do business in thearea. Marketing decisions are affirmative acts toinclude or exclude areas. Disparities in market-ing between two areas may reveal that thelender prefers one to the other. If sufficientlystark and supported by other evidence, adifference in marketing to racially different areascould itself be treated as a redlining violation ofthe Fair Housing Act. Even below that level ofdifference, marketing patterns can support orcontradict the view that disparities in lendingpractices were intentional.

• Review materials that show how the lenderhas marketed in the suspected redlined areaand in nonminority areas. Begin with availableCRA materials and discuss the issues withCRA examiners, then review other materialsas appropriate. The materials may include, forexample, the lender’s guidance for the geo-graphical distribution of preapproved solicita-tions for credit cards or home equity lines ofcredit, advertisements in local media orbusiness or telephone directories, business



development calls to real estate brokers, andcalls by telemarketers.

d. Peer performance—Market share analysis andother comparisons with competitors are insuffi-cient by themselves to prove that a lenderengaged in illegal redlining. By the same token,a lender cannot justify its own failure to marketor lend in an area by citing other lenders’failures to lend or market there.

However, a lender’s inactivity in an under-served area where its acknowledged competi-tors are active would tend to support theinterpretation that it intends to avoid doingbusiness in the area. Conversely, if it is as activeas other lenders, that would suggest that itintends to compete for, rather than avoid,business in the area.

• Develop a list of the institution’s competitors.

• Determine the level of lending in the sus-pected redlined area by competitors. Checkany public evaluations of similarly situatedcompetitors obtained by CRA examiners aspart of evaluating the performance context, orobtain such evaluations independently.

e. Institution’s record—Request from the lenderinformation about its overall record of serving orattempting to serve the racial or national originminority group with which the suspected red-lined area is identified. The record may reveal anintent to serve that group that tends to contra-dict the view that the lender intends to discrimi-nate against the group.

Step 6. For any information that supports interpret-ing the situation as illegal discrimination, obtainand evaluate an explanation from the institution ascalled for in part IV

Note: If the lender’s explanation is that the dispar-ate results are the consequence of a specific,neutral policy or practice that the lender appliesbroadly, such as not making loans on homes belowa certain value, review the guidance on dispropor-tionate adverse impact in the ‘‘Special Analyses’’section of the appendix to these procedures andconsult Reserve Bank management.

G. Analysis of PotentialDiscriminatory MarketingPractices

If scoping identifies significant risk factors relatedto marketing (M1–M7), examiners should consulttheir managers and experts about a possiblemarketing discrimination analysis. If the managersagree to proceed, examiners should collect infor-mation as follows:

Step 1. Identify the bank’s marketing initiatives

a. Preapproved solicitations

• Determine whether the bank sends out pre-approved solicitations

– For home purchase loans

– For home improvement loans

– For refinance loans

• Determine how the bank selects recipients forsuch solicitations.

– Learn from the bank its criteria for suchselections.

– Review any guidance or other informationthe bank provided credit reporting compa-nies or other companies that supply suchlists.

b. Media use

• Determine in which newspapers and broad-cast media the bank advertises.

– Identify any racial or national origin identityassociated with those media.

– Determine whether those media focus ongeographical communities of a particularracial or national origin character.

• Determine the bank’s strategies for geo-graphic and demographic distribution ofadvertisements.

• Obtain and review copies of the bank’sprinted advertising and promotional materials.

• Determine what criteria the bank communi-cates to media about what is an attractivecustomer or an attractive area in which tocultivate business.

• Determine whether advertising and marketingare the same to racial and national originminority areas as to nonminority areas.

c. Self-produced promotional materials

• Determine how the bank distributes its ownpromotional materials, both methods andgeographical distribution.

• Determine what the bank regards as thetarget audience(s) for those materials.

d. Realtors, brokers, contractors, and other inter-mediaries

• Determine whether the bank solicits businessfrom specific realtors, brokers, home improve-ment contractors, and other conduits.

– Learn how the bank decides which inter-mediaries it will solicit.

– Identify the parties contacted, and deter-mine the distribution between minority andnonminority areas.

– Obtain and review the types of informationthe bank distributes to intermediaries.



– Determine how often the bank contactsintermediaries.

• Determine what criteria the bank communi-cates to intermediaries about the type ofcustomers it seeks or the nature of thegeographic areas in which it wishes to dobusiness.

Step 2. Determine whether the bank’s activitiesshow a significantly lower level of marketing efforttoward minority areas or toward media or interme-diaries that tend to reach minority areas

Step 3. If there is any such disparity, document thebank’s explanation for it. For additional guidance,refer to part C of the ‘‘Special Analyses’’ section ofthe appendix to these procedures.

H. Credit Scoring

If the scoping process results in the selection of afocal point that includes a credit or mortgagescored loan product, refer to part B of ‘‘Proceduresfor Credit Scoring Analysis’’ in the appendix tothese examination procedures.

If the institution uses a credit scoring programthat scores age for any loan product selected forreview in the scoping stage, either as the soleunderwriting determinant or only as a guide tomaking loan decisions, refer to part D of ‘‘Proce-dures for Credit Scoring Analysis’’ in the appendix.

I. Disparate-Impact Issues

These procedures have thus far focused onexamining comparative evidence for possibleunlawful disparate treatment. Disparate impact wasdescribed briefly in the ‘‘Overview’’ on federal fairlending regulations and statutes. If a particularlender policy or practice appears to have adisparate impact on a prohibited basis, examinersshould refer to part A of the ‘‘Special Analyses’’section of the appendix to these procedures orconsult with Reserve Bank management for furtherguidance.

IV. OBTAINING AND EVALUATINGRESPONSES FROM THE LENDERAND CONCLUDING THEEXAMINATION

Step 1. Present to the institution’s managementfor explanation

a. Any overt evidence of disparate treatment on aprohibited basis

b. All instances of apparent disparate treatment(for example, overlaps) in either the underwrit-ing of loans or in loan prices, terms, orconditions

c. All instances of apparent disparate treatment inthe form of discriminatory steering, redlining, ormarketing policies or practices

d. All instances in which a denied prohibited-basisapplicant was not afforded the same level ofassistance or the same benefit of discretion asan approved control group applicant who wasno better qualified with regard to the reason fordenial

e. All instances in which a prohibited-basis appli-cant received conspicuously less-favorabletreatment by the lender than was customary forthe lender or was required by the lender’s policy

f. Any statistically significant average difference ineither the frequency or the amount of pricingdisparities between control group and prohibited-basis-group applicants

g. Any evidence of neutral policies, procedures, orpractices that appear to have a disparateimpact or effect on a prohibited basis

Explain that unless there are legitimate, nondis-criminatory explanations (or in the case of dispar-ate impact, a compelling business justification) foreach of the preliminary findings of discriminationidentified in this part, the Reserve Bank couldconclude that the lender is in violation of theapplicable fair lending laws.

Step 2. Document all responses that have beenprovided by the institution, not just its ‘‘best’’ or‘‘final’’ response

Document each discussion with dates, names,titles, questions, responses, any information thatsupports or undercuts the lender’s credibility, andany other information that bears on the issuesraised in the discussion(s).

Step 3. Evaluate whether the responses areconsistent with previous statements, informationobtained from file review, documents, reasonablebanking practices, and other sources and satisfycommonsense standards of logic and credibility

a. Do not speculate or assume that the institution’sdecision maker had specific intentions or con-siderations in mind when he or she took theactions being evaluated. Do not, for example,conclude that because you have noticed alegitimate, nondiscriminatory reason for a denial(such as an applicant’s credit weakness), nodiscrimination occurred, unless it is clear that atthe time of the denial the lender actually basedthe denial on that reason.



b. Perform follow-up file reviews and comparativeanalyses, as necessary, to determine the accu-racy and credibility of the lender’s explanations.

c. Refer to the section ‘‘Evaluating Responses toEvidence of Disparate Treatment’’ in the appen-dix to these procedures for guidance as tocommon types of responses.

d. Refer to ‘‘Disproportionate-Adverse-ImpactViolations’’ in the ‘‘Special Analyses’’ section ofthe appendix for guidance on evaluating theinstitution’s responses to apparent disparateimpact.

Step 4. If, after completing steps 1–3, above, youconclude that the institution has failed to demon-strate adequately that one or more apparentviolations had a legitimate nondiscriminatory basisor were otherwise lawful, prepare a documented listor discussion of violations, or a draft examinationreport, as prescribed by System policy

Step 5. Consult with Reserve Bank managementand the Board regarding (1) whether any violationsshould be referred to the Department of Justice orthe Department of Housing and Urban Develop-ment and (2) enforcement action that should beundertaken



Federal Fair Lending Regulations and StatutesExamination Procedures: Appendix

This appendix contains supplementary materials to be used in conjuction with the fair lending examinationprocedures presented in the preceding chapter:

• Checklist for conducting a compliance management analysis

• Procedures for conducting a credit scoring analysis

• Guidance for evaluating lender responses to evidence of disparate treatment

• Tables for determining sample sizes for fair lending exams

• Explanation of ‘‘marginal transactions’’

• List of potential scoping information

• Procedures for conducting ‘‘special analyses’’ in the event of apparent disproportionate-adverse-impactviolations, discriminatory pre-application screening, or discriminatory marketing

• Procedures for streamlining examinations using lender self-examinations

CHECKLIST FOR COMPLIANCE MANAGEMENT ANALYSIS

This checklist is for use in conjunction with part II of the fair lending examination procedures and focuseson an institution’s compliance management program. It is intended as a tool for evaluating the quality ofpreventive and corrective measures, identifying worthwhile innovations, and offering suggestions forimprovement. The checklist is not intended to be an absolute test of a lender’s compliance managementprogram. Lender programs containing all or most of the features described in the checklist may nonethelessbe flawed for other reasons; conversely, a compliance program that encompasses only some of the featuresmay nonetheless adequately support a strong program under appropriate circumstances. In short,examiners must exercise their best judgment in using the checklist and in assessing the overall quality of alender’s efforts to ensure fair lending compliance.

If the transactions included in the proposed scope of the examination are covered by a self-compliancemeasure shown on the checklist, check the box in the left column (labeled ‘‘Within proposed scope’’).Reduce the intensity (mainly the sample size) of the planned comparative file review to the degree that theself-compliance measures cover transactions within the proposed scope. Document findings in sufficientdetail to justify any resulting reduction in the intensity of the examination.

Examiners are not required to determine whether self-compliance measures apply to specific productsoutside the proposed scope. However, if the information obtained shows that the self-compliance measureis a general practice of the lender, check the box in the right column (labeled ‘‘Lender-wide’’) to assist withfuture examination planning.

A. Preventive Measures

Determine whether policies and procedures exist that help to prevent illegal disparate treatment in thetransactions you plan to examine. There is no legal or System requirement for institutions to incorporatepreventive activities, and the absence of any of these policies and practices is never, by itself, a violation.

Withinproposedscope

Lender-wide

1. Lending practices and standards

a. Principal policy issues

Are underwriting practices clear and similar to industry standards?Is pricing within reasonably confined ranges, with guidance linkingvariations to risk and/or cost factors?

Note: This appendix is adapted, with a few minor format, stylistic, and wording changes where appropriate, from the Interagency FairLending Examiniation Procedures Appendix revised in August 2004 and distributed as an attachment to CA Letter 04-8.

Consumer Compliance Handbook Fair Lending Exams: Appendix • 23 (1/06)

Withinproposedscope

Lender-wide

Does management monitor the nature and frequency of exceptions to itsstandards?Are denial reasons accurately and promptly communicated to unsuccess-ful applicants?

Note: The preceding four items are not compliance measures, but they arefundamental features of lending that tend to work against disparatetreatment.

b. Do training, application-processing aids, and other guidance correctly andadequately describe

Prohibited bases under the ECOA, Regulation B, and the Fair Housing Act(FHAct)Other substantive credit access requirements of Regulation B (forexample, spousal signatures, improper inquiries, protected income)

c. Is it specifically communicated to employees that they must not, on aprohibited basis,

Refuse to deal with individuals inquiring about credit

Discourage inquiries or applicants by delays, discourtesy, or other means

Provide different, incomplete, or misleading information about the avail-ability of loans, application requirements, and processing and approvalstandards or procedures (including selectively informing applicants aboutcertain loan products while failing to inform them of alternatives)

Encourage or more vigorously assist only certain inquirers or applicants

Refer credit seekers to other lenders

Waive or grant exceptions to application procedures or credit standards

State a willingness to negotiate

Use different procedures or standards to evaluate applications

Use different procedures to obtain and evaluate appraisals

Provide certain applicants opportunities to correct or explain adverse orinadequate information, or to provide additional information

Accept alternative proofs of creditworthiness

Require cosigners

Offer or authorize loan modifications

Suggest or permit loan assumptions

Impose late charges, reinstatement fees, etc.

Initiate collection or foreclosure proceedings

d. Has the institution taken specific initiatives to prevent forms of unintentionaldiscrimination, including

Basing credit decisions on assumptions derived from racial, gender, andother stereotypes, rather than facts

Seeking customers from a particular racial, ethnic, or religious group, or ofa particular gender, to the exclusion of other types of customers, on thebasis of how ‘‘comfortable’’ the employee may feel in dealing with thosedifferent from himself or herself

Fair Lending: Examination Procedures: Appendix

24 (1/06) • Fair Lending Exams: Appendix Consumer Compliance Handbook

Withinproposedscope

Lender-wide

Limiting the exchange of credit-related information or the institution’s effortto qualify the applicant because of its discomfort or unease in dealing withcustomers who are of a particular race, ethnicity, religion, or sex

Is the institution’s CRA assessment area drawn without unreasonablyexcluding minority areas?

e. Does the institution have procedures to ensure that it does not

State racial or ethnic limitations in advertisements

Employ code words in advertisements that convey racial or ethniclimitations

Place advertisements that a reasonable person would regard as indi-cating that minority individuals are less-desirable customers

Advertise only in media serving nonminority areas of the market

Conduct other forms of marketing only in nonminority areas of the market

Market only through brokers known to serve only one racial or ethnicgroup in the market

Use a prohibited basis in any prescreened solicitation

2. Compliance audit function: Does the institution attempt to detect prohibiteddisparate treatment by self-test or self-evaluation?

Note: A self-test is any program, practice, or study that is designed andspecifically used to assess the institution’s compliance with the ECOA andthe FHAct statute or regulation and that creates data or factual informationthat is not otherwise available and cannot be derived from loan, application,or other records related to credit transactions (12 CFR 202.15(b)(1) and24 CFR 100.141). The report, results, and many other records associated witha self-test are privileged unless an institution voluntarily discloses the reportor results or otherwise forfeits the privilege. See 12 CFR 202.15(b)(2) and24 CFR 100.142(a) for a complete listing of the types of information coveredby the privilege. A self-evaluation, while generally having the same purposeas a self-test, does not create any new data or factual information, but usesdata readily available in loan or application files and other records used incredit transactions, and therefore does not meet the self-test definition. Seethe section ‘‘Streamlining Examinations’’ at the end of this appendix for moreinformation about self-tests and self-evaluations.

While examiners may request the results of self-evaluations, they should notrequest the results of self-tests or any of the information listed in 12 CFR202.15(b)(2) and 24 CFR 100.142(a). If an institution discloses the self-testreport or results to its regulator, it will lose the privilege. The following items areintended to obtain information about the bank’s approach to self-testing andself-evaluation, not the findings. Complete the checklist below for eachself-evaluation and each self-test for which the institution voluntarily disclosesthe report or results. Evaluating the results of self-evaluations and voluntarilydisclosed self-tests is described in the section ‘‘Streamlining Examinations’’ atthe end of this appendix.

For transactions within the proposed scope of the examination, check the‘‘Lender-wide’’ box if the answer to the following questions is ‘‘yes.’’

a. Are the transactions reviewed by an independent analyst who

Is directed to report objective results

Has an adequate level of expertise

Produces written conclusions



Withinproposedscope

Lender-wide

b. Does the bank’s approach to self-testing or self-evaluation call for

Attempting to explain major patterns shown in the HMDA or other loandataDetermining whether actual practices and standards differ from statedones, and basing the evaluation on the actual practices

Evaluating whether the reasons cited for denial are supported by factsrelied on by the decision maker at the time of the decision

Comparing the treatment of prohibited-basis-group applicants with thetreatment of control group applicants

Obtaining explanations from decision makers for any unfavorable treat-ment of the prohibited-basis group that departed from policy or customarypractice

Covering significant decision points in the loan process where disparatetreatment or discouragement might occur, including

The decision to approve or deny

Pricing

Other terms and conditions

Covering at least as many transactions as examiners would indepen-dently cover if they were using the fair lending sample size tables for aproduct having the application volumes of the product to be evaluated

Maintaining information concerning personal characteristics collected aspart of a self-test separately from application or loan files

Providing timely analysis of the data

Taking appropriate and timely corrective action

c. In the bank’s plan for comparing the treatment of prohibited-basis-groupapplicants with that of control group applicants,

Are control and prohibited-basis groups based on a prohibited basisfound in the ECOA or the FHAct and defined clearly to isolate that pro-hibited basis for analysis?

Are appropriate data required to document treatment of applicants andthe relative qualifications vis-a-vis the requirement in question?

Are the data required the data on which decisions were based, not lateror irrelevant information?

Are the denied applicants’ qualifications related to the stated reasonfor denial compared with the corresponding qualifications of approvedapplicants?

Are comparisons designed to identify instances in which prohibited-basis-group applicants were treated less favorably than control group appli-cants who were no better qualified?

Is the evaluation designed to determine whether control and prohibited-basis-group applicants were treated differently in the processes by whichthe bank helped applicants overcome obstacles and by which theirqualifications were enhanced?



Withinproposedscope

Lender-wide

Are responses and explanations required for any apparent disparatetreatment on a prohibited basis or other apparent violations of creditrights?

Are reasons cited by credit decision makers to justify or explain instancesof apparent disparate treatment verified?

d. For self-tests under the ECOA that involved the collection of applicantpersonal characteristics, did the institution

• Develop a written plan that describes or identifies the

Specific purpose of the self-test

Methodology to be used

Geographic areas to be covered

Types of credit transactions to be reviewed

Entity that will conduct the test and analyze the data

Timing of the test, including start and end dates or the duration of theself-test

Other related self-test data that are not privileged

• Disclose at the time applicant characteristic information is requested that

The applicant will not be required to provide the information

The creditor is requesting the information to monitor its compliance withthe ECOA

Federal law prohibits the creditor from discriminating on the basis of thisinformation or on the basis of an applicant’s decision not to furnish theinformation

If applicable, certain information will be collected based on visualobservation or applicant surname if not provided by the applicant

3. Correcting discriminatory conduct

a. Determine whether the lender has provisions to take appropriate correctiveaction and provide adequate relief to victims for any violations in thetransactions planned for review.

• Who is to receive the results of a self-evaluation or voluntarily disclosedself-test?

• What decision process is supposed to follow delivery of the information?

• Is feedback to be given to staff whose actions are reviewed?

• What types of corrective action may occur?

• Are customers to be

Offered credit if they were improperly denied

Compensated for any damages, both out-of-pocket and compensatory

Notified of their legal rights



Withinproposedscope

Lender-wide

b. Other corrective actionAre institutional policies or procedures that may have contributed to thediscrimination to be corrected?

Are employees involved to be trained and/or disciplined?Is the need for community outreach programs and/or changes in marketingstrategy or loan products to better serve minority segments of the lender’smarket to be considered?

Are audit and oversight systems to be improved in order to ensure that thereis no recurrence of any identified discrimination?



PROCEDURES FORCREDIT SCORING ANALYSIS

The procedures in this section are intended toassist examiners in arriving at supportable conclu-sions with respect to an institution’s record ofnondiscrimination when the focal point involves aproduct for which the institution uses automatedunderwriting or when credit scoring risk factorsmake such a product the focal point.

A. Structure and Organization of theScoring System

Determine the use of credit scoring at the institu-tion, including

1. For each customized credit scoring model orscorecard for any product, or for any creditscoring model used in connection with a prod-uct held in portfolio, identify

a. The number of models or scorecards appliedto a particular product, and how the modulesrelate to each other

b. The purposes for which each scorecard isemployed (for example, to arrive at anapproval decision, set credit limits, set pric-ing, determine processing requirements)

c. The developer of each scorecard used (forexample, in-house department, affiliate, inde-pendent vendor) and the development popu-lation used

d. The types of monitoring reports generated(including front-end, back-end, account man-agement, and any disparate-impact analy-ses), the frequency of generation, and recentcopies of each report

e. All policies applicable to the use of creditscoring

f. Training materials and programs on creditscoring for employees, agents, and brokersinvolved in any aspect of retail lending

g. Any action taken to revalidate or recalibrateany model or scorecard used during theexam period, and the reasons for the action

h. The number of all high-side and low-sideoverrides for each type of override occurringduring the exam period, and any guidancegiven to employees on their ability to override

i. All cutoffs used for each product scorecardthroughout the exam period, and the reasonsfor any change made during the period

j. All variables scored by each product score-card, and the values that each variable maytake

k. The method used to select for disclosurethose adverse action reasons arising fromapplication of the model or scorecard

2. For each judgmental underwriting system thatincludes as an underwriting criterion a standardcredit bureau or secondary-market credit score,identify

a. The vendor of each credit score, and anyvendor recommendation or guidance on theuse of the score relied upon by the institution

b. The institution’s basis for using the particularbureau or secondary-market score, the cutoffstandards for each product’s underwritingsystem, and the reasons for any changes tothese during the exam period

c. The number of exceptions or overrides madeto the credit score component of the under-writing criteria, and the basis for thoseexceptions or overrides, including any guid-ance given to employees on their abilityto depart from credit score underwritingstandards

d. The types of monitoring reports generated onthe judgmental system or its credit scoringcomponent (including front-end, back-end,differential processing, and disparate-impactanalysis), the frequency of generation, andrecent copies of each report

B. Adverse Action Disclosure Notices

1. Determine the methodology used to select thereasons for denial based on the applicant’scredit score. Compare the methodology usedwith the examples cited in the commentaryto Regulation B and determine acceptabilityagainst that standard. Identify any consumerrequests for reconsideration of credit scoredenial, and review the action taken by manage-ment for consistency across applicant groups.

2. When a credit score is used to differentiateapplication processing and an applicant isdenied for failure to attain a judgmental under-writing standard that would not be applied ifthe applicant had received a better credit score(thereby being considered in a different—presumably less stringent—application-processing group), ensure that the adverseaction notice also discloses the bases on whichthe applicant failed to attain the credit scorerequired for consideration in the less-stringentprocessing group.



C. Disparate Treatmentin the Application ofCredit Scoring Programs

1. Determine what controls and policies manage-ment has implemented to ensure that theinstitution’s credit scoring models or creditscore criteria are not applied in a discriminatorymanner. In particular,

a. Examine institution guidance on using thecredit scoring system, on handling overrides,and on processing applicants. Determinehow well that guidance is understood andfollowed by the targeted employees andwhether management monitors compliancewith the guidance.

b. Examine institution policies that permit over-rides or that provide for different processingor underwriting requirements based on geo-graphic identifiers or borrower score ranges,to ensure that they do not treat protected-group applicants differently from other, simi-larly situated applicants.

2. Determine whether any of the reasons forgranting credit to control group applicants whoare low-side overrides apply to any prohibited-basis denials whose credit score was equal toor greater than the lowest score among thelow-side overrides. If such cases are identified,obtain and evaluate management’s explanationfor the different treatment and determine whethera fair lending violation exists.

3. Determine whether any of the bases for denyingcredit to any prohibited-basis applicants whoare high-side overrides apply to any controlgroup approvals whose credit score was equalto or less than the highest score among theprohibited-basis high-side overrides. If suchcases are identified, obtain and evaluate man-agement’s explanation of why such differenttreatment is not a fair lending violation.

4. If credit scores are used to sort applicants intogroups that receive different processing or arerequired to meet additional underwriting require-ments (for example, ‘‘tiered-risk underwriting’’),perform a comparative file review that evalu-ates whether all applicants within each groupare treated equally, or confirm the results andadequacy of management’s comparative filereview.

D. Credit Scoring Systems ThatInclude Age

Regulation B does not require initial validation orperiodic revalidation of a credit scoring system

unless it considers age. There are two ways a creditscoring system can consider age: (1) the systemcan be split into different scorecards depending onthe age of the applicant or (2) age may be directlyscored as a variable. Both features may be presentin some systems. Regulation B requires all creditscoring systems that consider age in either of theseways to be validated (in the language of theregulation, empirically derived, demonstrably andstatistically sound (EDDSS)).

1. Age-split scorecards—If a system is split intoonly two cards and one card covers a wide agerange that encompasses elderly applicants(applicants 62 or older), the system is treatedas considering, but not scoring, age. Typically,the younger scorecard in an age-split systemis used for applicants under a specific agebetween 25 and 30. It de-emphasizes factorssuch as the number of trade lines and the lengthof employment and increases the negativeweight of any derogatory information on thecredit report. Systems such as these do notraise the issue of assigning a negative factoror value to the age of an elderly applicant.However, if age is directly scored as a variable(whether or not the system is age-split), or ifelderly applicants are included in a card with anarrow age range in an age-split system, thesystem is treated as scoring age.

2. Scorecards that score age—If a scorecardscores age directly, in addition to meeting theEDDSS requirement, the creditor must ensurethat the age of an elderly applicant is notassigned a negative factor or value. (See staffcommentary about 12 CFR 202.2(p) and202.6(b)(2).) A negative factor or value meansusing a factor, value, or weight that is lessfavorable than the creditor’s experience war-rants or is less favorable than the factor, value,or weight assigned to the most favored agegroup below the age of 62 (12 CFR 202.2(v)).

E. Examination forEmpirical Derivation andStatistical Soundness

Regulation B requires credit scoring systems thatuse age to be empirically derived and demon-strably and statistically sound. This means thata system must fulfill the requirements of section202.2(p)(1)(i)–(iv). Obtain documentation providedby the developer of the system and consult theBoard’s most recent guidance for making thatdetermination.



EVALUATING RESPONSESTO EVIDENCE OFDISPARATE TREATMENT

A. Responses to ComparativeEvidence of Disparate Treatment

The following are responses that a lender mayoffer—separately or in combination—to explainthat the appearance of illegal disparate treatmentis misleading and that no violation has in factoccurred. The responses, if true, rebut the appear-ance of disparate treatment. Examiners mustcarefully evaluate the validity and credibility of theresponses.

1. The lender’s personnel were unaware of theprohibited-basis identity of the applicant(s)—Ifthe lender claims to have been unaware of theprohibited-basis identity (race, etc.) of an appli-cant or neighborhood, ask it to show that theapplication in question was processed in sucha way that the institution’s staff that made thedecisions could not have learned the prohibited-basis identity of the applicant.

If the product is one for which the institutionmaintains prohibited-basis monitoring informa-tion, assume that all employees could havetaken those facts into account. Assume thesame if there was face-to-face contact betweenany employee and the customer.

If there are other facts about the applicationfrom which an ordinary person would haverecognized the applicant’s prohibited-basisidentity (for example, the surname appears tobe Hispanic), assume that the institution’s staffdrew the same conclusions. If the racial char-acter of a community is in question, ask theinstitution to provide persuasive evidence whyits staff would not know the racial character ofany community in its service area.

2. The difference in treatment was justified bydifferences in the applicants (applicants not‘‘similarly situated’’)—Ask the lender to accountfor the difference in treatment by pointing out aspecific difference between the applicants’qualifications. This difference may include somefactor that was not captured in the applicationbut that legitimately makes one applicant moreor less attractive to the lender, or some nonpro-hibited factor related to the processing of theirapplications. The difference identified by thelender must be one that is important enough tojustify the different treatment in question, not ameaningless difference.

The factors commonly cited to show thatapplicants are not similarly situated fall into twogroups: those that can be evaluated by howconsistently they are handled in other transac-

tions and those that cannot be evaluated in thatway.

a. Verifying ‘‘not similarly situated’’ explanationsby consistency—If a factor cited by thelender to justify favorable treatment for acontrol group applicant also exists for anotherwise similar prohibited-basis applicantwho was treated unfavorably, the appear-ance of disparate treatment remains. Simi-larly, the appearance of disparate treatmentremains if a factor cited by the lender tojustify unfavorable treatment for a prohibited-basis applicant also exists for a controlgroup applicant who received favorabletreatment. If this is not so, ask the lenderto demonstrate that the factor cited in itsexplanation was used consistently for controlgroup and prohibited-basis applicants.

Among the responses that should beevaluated this way are

• Customer relationship—Ask the lender todocument that a customer relationshipwas also sometimes considered to thebenefit of prohibited-basis applicants orthat its absence worked against controlgroup customers.

• ‘‘Loan not saleable or insurable’’—If thefile review is still in progress, be alert forloans approved despite the claimed fatalproblem. At a minimum, ask the lender toproduce the text of the secondary-marketor insurer’s requirement in question.

• Difference in standards or proceduresbetween branches or underwriters—Askthe lender to provide transactions docu-menting that the two branches or under-writers consistently applied its standardsor procedures to the prohibited-basis andcontrol group applications it processed,and that each served similar proportionsof the prohibited-basis group.

• Difference in applying the same standard(difference in ‘‘strictness’’) between under-writer, branches, or similar group—Askthe lender to provide transactions doc-umenting that the stricter employee,branch, or similar group was strict forboth prohibited-basis and control groupapplicants and that the other was lenientfor both, and that the two entities servedsimilar proportions of the prohibited-basisgroup. The best support for this ‘‘samestandard’’ approach would be evidencethat prohibited-basis applicants receivedfavorable treatment from the ‘‘lenient’’branch and control group applicantsreceived less-favorable treatment fromthe ‘‘strict’’ branch.



• Standards or procedures changed dur-ing period reviewed—Ask the lender toprovide transactions documenting thatduring each period the standards wereapplied consistently to both prohibited-basis and control group applicants.

• Employee misunderstood standards orprocedures—Ask the lender to providetransactions documenting that the misun-derstanding influenced both prohibited-basis and control group applications. Ifsuch documentation is not available andif the misunderstanding is a reasonablemistake, conclude that no violation exists.

b. Evaluating ‘‘not similarly situated’’ explana-tions by other means—If consistency cannotbe evaluated, consider an explanation favor-ably even without examples of its consistentuse if

• The factor is documented to exist in (or beabsent from) the transactions, as claimedby the institution

• The factor is one a prudent lender wouldconsider

• A file review found no evidence that thefactor is applied selectively on a prohib-ited basis (in other words, the lender’sexplanation is ‘‘not inconsistent with avail-able information’’)

• The lender’s description of the transactionis generally consistent and reasonable

Some factors that may be impossible tocompare for consistency are

• An unusual underwriting standard—Askthe lender to show that the standard isprudent. If the standard is prudent andnot inconsistent with other information,accept this explanation even though thereis no documentation that it is usedconsistently.

• ‘‘Close calls’’—The lender may claim thatunderwriters’ opposite decisions on simi-lar applicants reflects legitimate discre-tion that examiners should not secondguess. This explanation is not accept-able for identical applicants with differentresults, but it is acceptable when theapplicants have differing strengths andweaknesses that different underwritersmight reasonably weigh differently. How-ever, do not accept the explanation ifother files reveal that these ‘‘strengths’’ or‘‘weaknesses’’ are counted or ignoredselectively on a prohibited basis.

• ‘‘Character loan’’—Expect the lender toidentify a specific history or specific factsthat make the applicant treated favorably

a better risk than those treated lessfavorably.

• ‘‘Accommodation loan’’—There are manylegitimate reasons that may make atransaction appealing to a lender apartfrom the familiar qualifications demandedby the secondary market and insurers.For example, a customer may be anemployee of an important business cus-tomer, related to or referred by an impor-tant customer, or a political or entertain-ment figure who would bring prestige tothe institution. It is not illegal discrimina-tion to make a loan to an otherwiseunqualified control group applicant whohas such attributes, while denying a loanto an otherwise similar prohibited-basisapplicant who does not. However, beskeptical when the lender cites reasonsfor ‘‘accommodations’’ that an ordinaryprudent lender would not value.

• ‘‘Gut feeling’’—Be skeptical when lendersjustify an approval or denial by a generalperception or reaction to the customer.Such a perception or reaction may belinked to a racial or other stereotype thatlegally must not influence credit deci-sions. Ask whether any specific event orfact generated the reaction. Often, thelender can cite something specific thatmade him or her confident or uncomfort-able about the customer. There is nodiscrimination if it is credible that thelender indeed considered such a factorand did not apply it selectively on a pro-hibited basis.

c. Following up with customer—If the lender’sexplanation of the handling of a particulartransaction is based on customer traits,actions, or desires not evident from the file,consider obtaining Board authorization tocontact the customer to verify the lender’sdescription. Such contacts need not belimited to possible victims of discriminationbut may include control group applicants orother witnesses.

3. The different results stemmed from an inadvert-ent error—If the lender claims that an identifiederror, such as miscalculation or misunderstand-ing, caused the favorable or unfavorable resultin question, evaluate whether the facts supportthe assertion that such an event occurred.

If the lender claims that an unidentified errorcaused the favorable or unfavorable result inquestion, expect the lender to provide evidencethat discrimination is inconsistent with its dem-onstrated conduct, and therefore that discrimi-nation is the less logical interpretation of the



situation. Consider the context (as describedbelow).

4. The apparent disparate treatment on a prohib-ited basis is a misleading portion of a largerpattern of random inconsistencies—Ask theinstitution to provide evidence that the unfavor-able treatment is not limited to the prohibited-basis group and that the favorable treatmentis not limited to the control group. Without suchexamples, do not accept a lender’s unsup-ported claim that otherwise inexplicable differ-ences in treatment are distributed randomly.

If the lender can document that similarlysituated prohibited-basis applicants receivedthe favorable treatment in question approxi-mately as frequently as, and in comparabledegree to, the control group applicants, con-clude that there is no violation.

Note: ‘‘Random inconsistency’’ may be areasonable explanation only if ‘‘similarly situ-ated’’ control group applicants were alsotreated unequally.

5. Loan terms and conditions—The same analysesdescribed in the preceding sections with regardto decisions to approve or deny loans also applyto pricing differences. Risks and costs arelegitimate considerations in setting prices andother terms and conditions of loan products.However, generalized reference by the lender to‘‘cost factors’’ is insufficient to explain pricingdifferences.

If the lender claims that specific borrowersreceived different terms or conditions becauseof cost or risk considerations, ask the lender toidentify the specific risk or cost differencesbetween them.

If the lender claims that specific borrowersreceived different terms or conditions becausethey were not similarly situated as negotiators,consider whether application records mightprovide relevant evidence. If the records are nothelpful, consider seeking authorization to con-tact customers to learn whether the lender infact behaved comparably toward prohibited-basis and control group customers. The objec-tive of the contacts would be to obtain suchinformation as the lender’s opening quote ofterms to the customer and an account of theprogress of the negotiations.

If the institution responds that an averageprice difference between the control andprohibited-basis groups is based on cost or riskfactors, ask the lender to identify specific risk orcost differences that are significant enough tojustify the pricing differences between individualcontrol group applicants that received thelowest rates and prohibited-basis-group appli-cants that received the highest rates. If thedistinguishing factors cited by the institution are

legitimate and verifiable as described in thesections above, remove those applications fromthe average price calculation. If the averageprices for the remaining control group andprohibited-basis-group members still differ morethan minimally, consult with an economist at theReserve Bank or the Board about obtaining ananalysis of whether the difference is statisticallysignificant. Conclude that a violation exists onlyif (1) there is evidence of disparate treatmentof similarly situated borrowers or (2) there is aparticular risk factor that meets all the criteria fora disproportionate-adverse-impact violation.

B. Responses to Overt Evidence ofDisparate Treatment

1. Descriptive references vs. lending consider-ations—A reference to race, gender, or otherprohibited basis does not constitute a viola-tion if it is merely descriptive—for example, ‘‘theapplicant was young.’’ In contrast, when thereference reveals that the prohibited factorinfluenced the lender’s decisions or customerbehavior, treat the situation as an apparentviolation to which the lender must respond.

2. Personal opinions vs. lending considerations—Ifan employee involved with credit availabilitystates unfavorable views regarding a racialgroup, gender, or other prohibited basis butdoes not explicitly relate those views to creditdecisions, review that employee’s credit deci-sions for possible disparate treatment of theprohibited-basis group described unfavorably.If there are no instances of apparent disparatetreatment, treat the employee’s views as permis-sible private opinions. Inform the lender thatsuch views create a risk of future violations.

3. Stereotypes related to credit decisions—When aprohibited factor influences a credit decisionthrough a stereotype related to creditworthi-ness, there is an apparent violation, even if theaction based on the stereotype seems wellintended—for example, a loan denial because‘‘a single woman could not maintain a largehouse.’’ If the stereotyped beliefs are offeredas ‘‘explanations’’ for unfavorable treatment,regard such unfavorable treatment as apparentillegal disparate treatment. If the stereotype isonly a general observation unrelated to particu-lar transactions, review that employee’s creditdecisions for possible disparate treatment of theprohibited-basis group in question. Inform thelender that such views create a risk of futureviolations.

4. Indirect reference to a prohibited factor—Ifnegative views related to creditworthiness aredescribed in non-prohibited terms, consider



whether the terms would commonly be under-stood as surrogates for prohibited terms. If so,treat the situation as if explicit prohibited-basisterms were used. For example, a lender’sstatement that ‘‘It’s too risky to lend north of110th Street’’ might be reasonably interpretedas a refusal to lend because of race if thatportion of the lender’s lending area north of110th Street was predominantly black and thearea south was predominantly white.

5. Lawful use of a prohibited factor

a. Special-Purpose Credit Program (SPCP)—Ifa lender claims that its use of a prohibitedfactor is lawful because it is operating anSPCP, ask the lender to document that itsprogram conforms to the requirements ofRegulation B. An SPCP must be defined ina written plan that existed before the lendermade any decisions on loan applicationsunder the program. The written plan must

• Demonstrate that the program will benefitpersons who would otherwise be deniedcredit or receive credit on less favorableterms and

• State the time period the program will bein effect, or when it will be re-evaluated.

No provision of an SPCP should deprivepeople who are not part of the target group ofrights or opportunities they otherwise wouldhave. Qualified programs operating on anotherwise-prohibited basis will not be citedas a violation.

Note: Advise the lender that even thoughexaminers found that a program is a lawfulSPCP, this finding is not absolute securityagainst legal challenge by private parties.

Suggest that an institution concerned aboutlegal challenge from other quarters useexclusions or limitations that are not pro-hibited by the ECOA or the FHAct, such as‘‘first-time homebuyer.’’

b. Second-review program—Such programs arepermissible if they do no more than ensurethat lending standards are applied fairly anduniformly to all applicants. For example, it ispermissible to review the proposed denial ofapplicants who are members of a prohibited-basis group by comparing their applicationswith the approved applications of similarlyqualified individuals who are in the controlgroup to determine if the applications wereevaluated consistently.

Ask the lender to demonstrate that theprogram is a safety net that merely attemptsto prevent discrimination and does notinvolve underwriting terms or practices thatare preferential on a prohibited basis.

Statements indicating that the mission ofthe program is to apply different standards orefforts on behalf of a particular racial or othergroup constitute overt evidence of dispa-rate treatment. Similarly, there is a violation ifcomparative analysis of applicants who areprocessed through the second review andthose who are not discloses dual standardsrelated to the prohibited basis.

c. Affirmative marketing and advertisingprograms—Affirmative marketing and adver-tising efforts that do not involve application ofdifferent lending standards are permissibleunder both the ECOA and the FHAct. Forexample, special outreach to a minoritycommunity is permissible.



TABLES FOR DETERMINING SAMPLE SIZES FOR FAIR LENDING EXAMINATIONS

A. Underwriting (Accept/Deny) ComparisonsSample 1

Prohibited-basis denialsNumber of denials

Sample 2Control group approvals

Number of approvals

5–50 51–150Morethan 150 20–50 51–250

Morethan 250

Minimum toreview

All 51 75 20 51 100

Maximum toreview

50 100 150 5× prohibited-basis sample(up to 50)

5× prohibited-basis sample(up to 125)


B. Terms-and-Conditions ComparisonsSample 1

Prohibited-basis denialsNumber of approvals

Sample 2Control group approvals

Number of approvals

5–25 26–100Morethan 100 20–50 51–250

Morethan 250

Minimum toreview

All 26 50 20 40 60

Maximum toreview

25 50 75 5× prohibited-basis sample(up to 50)



Explanatory notes for sample size tables

1. If both underwriting and terms-and-conditions comparisons are being conducted, use the same controlgroup approval sample for both tasks.

2. If there are fewer than five prohibited-basis denials or fewer than twenty control group approvals, refer tothe instructions regarding sample size in the ‘‘Examination Procedures’’ chapter.

3. ‘‘Minimum’’ and ‘‘maximum’’ sample sizes—Select a sample size between the minimum and maximumbased on the outcome of the compliance management review conducted as described in part II of theexamination procedures. Once the sample size has been determined, select individual transactionsjudgmentally. Refer to the procedures.

4. If two prohibited-basis groups (for example, black and Hispanic) are being compared with one controlgroup, select a control group that is five times larger than the larger prohibited-basis-group sample, upto the maximum.

5. If the institution’s discrimination risk profile identifies significant differences in withdrawal or incompleteactivity between the control and prohibited-basis groups, or if the number of marginal prohibited-basis-group files available for sampling is small, consider supplementing samples by applying the followingrules:• Determine whether the applications from the prohibited-basis group are characterized correctly.

Applications classified as withdrawn or incomplete after the applicant received an offer of credit thatincludes pricing should have been reported under Regulation C as approved but not accepted. As aresult, these applications should be included as prohibited-basis-group approvals in a terms-and-conditions comparative file analysis.

• Consider whether applications classified as incompletes should be reclassified as denials. Determineif the ‘‘incomplete’’ classification for the prohibited-basis group occurred because the applicants failedto answer a question on the application that would have resulted in a denial. If so, include those groupincompletes as denials for that reason when conducting an underwriting comparative file analysis.



MARGINAL TRANSACTIONS

A. Marginal Denials

Denied applications with any or all the followingcharacteristics are ‘‘marginal.’’ Such denials arecompared with marginal approved applications.Marginal denials include those that

• Were close to satisfying the requirement that theadverse action notice said was the reason fordenial

• Were denied by the lender’s rigid interpretationof inconsequential processing requirements

• Were denied quickly for a reason that normallywould take a longer time for an underwriter toevaluate

• Involved an unfavorable subjective evaluation offacts that another person might reasonably haveinterpreted more favorably (for example, whetherlate payments actually showed a ‘‘pattern,’’ orwhether an explanation for a break in employ-ment was ‘‘credible’’)

• Resulted from the lender’s failure to take reason-able steps to obtain necessary information

• Received unfavorable treatment as the result of adeparture from customary practices or statedpolicies. For example, if it is the lender’s statedpolicy to request an explanation of derogatorycredit information, a failure to do so for aprohibited-basis applicant would be a departurefrom customary practices or stated policies,even if the derogatory information seems to beegregious.

• Were similar to approved control group applica-tions that received unusual consideration orservice but were not provided such consider-ation or service

• Received unfavorable treatment (for example,were denied or given various conditions or moreprocessing obstacles) but appeared to meet thelender’s stated requirements for favorable treat-ment (for example, approval on the termssought)

• Received unfavorable treatment related to apolicy or practice that was vague, or lackedfile documentation of the applicant’s qualifica-

tions related to the reason for denial or otherfactor

• Met common secondary-market or industry stan-dards even though failing to meet the lender’smore-rigid standards

• Had a strength that a prudent lender mightbelieve outweighed the weaknesses cited as thebasis for denial

• Were submitted by applicants who had a historyof previously meeting a monthly housing obliga-tion equivalent to or higher than the proposeddebt

• Were denied for an apparently ‘‘serious’’ defi-ciency that might easily have been overcome.For example, an applicant’s total debt ratio of50%, which grossly exceeds the lender’s guide-line of 36%, may be easily corrected if the appli-cation lists sufficient assets to pay off nonhous-ing debts and reduce the ratio to the guide-line, or if the lender were to count excluded part-time earnings described in the application.

B. Marginal Approvals

Approved applications with any or all of thefollowing characteristics are ‘‘marginal.’’ Such ap-provals are compared with marginal denied appli-cations. Marginal approvals include those

• Whose qualifications satisfied the lender’s statedstandard, but very narrowly

• That bypassed stated processing requirements(such as verifications or deadlines)

• For which stated creditworthiness requirementswere relaxed or waived

• That fell short of common secondary-market orindustry lending standards because the lender’sown standards were not clear

• That a prudent, conservative lender might havedenied

• Whose qualifications were raised to a qualifyinglevel by assistance, proposals, counteroffers,favorable characterizations or questionable quali-fications, or similar means

• That in any way received unusual service orconsideration that facilitated obtaining the credit



POTENTIAL SCOPING INFORMATION

Listed below is a full range of documentation andother information that might be reviewed in anexamination. In that sense, the list is a ‘‘menu’’ ofresources to be considered and selected from,depending on the nature and scope of the exam-ination being conducted. The selection of one ormore particular items from the list for review in aparticular examination should, of course, be basedon consideration of any burdens to the ReserveBank and the lender in assembling and providingthe selected item.

A. Internal Agency Documentsand Records

1. Previous examination reports and related work-papers for the most recent compliance, CRA,and safety and soundness examinations

2. Demographic data for the institution’s communityComment. Examiners should review the mostrecent agency demographic data to obtaininformation on the characteristics of the insti-tution’s assessment or market areas.

B. Information from the Institution

Comment. Before beginning a compliance exami-nation, examiners should request that the institu-tion provide the information outlined below. Thisrequest should be made far enough in advance ofthe on-site phase of the examination to facilitatecompliance by the institution. For some institutions,examiners may not be able to review some of thisinformation until the on-site examination.

1. Institution’s compliance program (for examina-tions that will include analysis of the lender’scompliance program)

a. Organization charts identifying those individ-uals who have lending responsibilities orcompliance, HMDA, or CRA responsibili-ties, together with job descriptions for eachposition

b. Lists of any pending litigation or administra-tive proceedings concerning fair lendingmatters

c. Results of self-evaluations or self-tests if theinstitution chooses to share the report orresults; and copies of audit or compliancereviews of the institution’s program for com-pliance with fair lending laws and regula-tions, including both internal and indepen-dent audits

Note: The request should advise thelender that it is not required to disclose thereport or results of any self-tests of the type

protected under amendments to the ECOAand the FHAct.

d. Complaint file

e. Any written or printed statements describ-ing the lender’s fair lending policies orprocedures

f. Training materials related to fair lendingissues, including records of attendance

2. Lending policies and loan volume

a. Internal underwriting guidelines and lendingpolicies for all consumer and commercialloan products

Comment. If guidelines or policies differby branch or other geographic location,request copies of each variation.

b. A description of any credit scoring systemsin use now or during the exam period

Comment. Inquire as to whether a vendoror in-house system is used; the date ofthe last verification; the factors relied onto construct any in-house system; and, ifapplicable, any judgmental criteria used inconjunction with the scoring system.

c. Pricing policies for each loan product and forboth direct and indirect loans

Comment. The lender should be specifi-cally asked whether its pricing policiesfor any loan products include the useof ‘‘overages.’’ The lender should alsobe asked whether the lender offers any‘‘subprime’’ loan products for ‘‘B,’’ ‘‘C,’’ or‘‘D’’ risk-level customers or otherwise usesany form of risk-based pricing. A similarinquiry should be made regarding the useof any cost-based pricing. If any of thesethree forms are or have been in use sincethe last exam, the lender should providepricing policy and practice details for eachaffected product, including the lender’scriteria for differentiating between eachrisk or cost level. Regarding indirect lend-ing, the lender should be asked to pro-vide any forms of agreement (includingcompensation) with brokers or dealers,together with a description of the roles thatboth the lender and the broker or dealerplay at each stage of the lending process.

d. A description of each form of compensationfor all lending personnel and managers

e. Advertising copy for all loan products

f. The most recent HMDA-LAR, including unre-ported data if available (Information shouldbe provided on diskette, if possible.)

Comment. The integrity of the institution’sHMDA-LAR data should be verified prior tothe pre-examination analysis. Verificationshould take place approximately two to



three months before the on-site phase ofthe examination.

g. Any existing loan registers for each non-HMDA loan product

Comment. Loan registers for the three-month period preceding the date of theexamination, together with any availablelists of declined loan applicants for thesame period, should be requested. Regis-ters and lists should contain, to the extentavailable, the complete name and addressof loan applicants and applicable loanterms, including loan amount, interest rate,fees, repayment schedule, and collateralcodes.

h. A description of any databases maintainedfor each loan product, including a descrip-tion of all data fields within the database

i. Forms used in the application and creditevaluation process for each loan product

Comment. At a minimum, this requestshould include all types of credit applica-tions, forms requesting financial informa-tion, underwriter worksheets, any formused for the collection of monitoring infor-mation, and any quality-control or second-review forms or worksheets.

j. Lists of service providersComment. Service providers may includerealtors, real estate developers, apprais-

ers, home improvement contractors, andprivate mortgage insurance companies.Request the full name and address andgeographic area served by each provider.Also request documentation as to any fairlending requirements imposed on, or com-mitments required of, any of the lender’sservice providers.

k. Addresses of any Internet site(s)Comment. Internet ‘‘home pages’’ or simi-lar sites that a lender may install on theInternet may provide information concern-ing the availability of credit or the meansof obtaining it. All such information mustcomply with the nondiscrimination require-ments of the fair lending laws. Moreover,future enhancements to the Internet mayinclude the capacity to conduct partialor complete credit transactions via thatmedium. Accordingly, it is important forexaminers to review a lender’s Internetsites to ensure that all the information orprocedures found at the sites are in com-pliance with applicable provisions of thefair lending statutes and regulations.

3. Community information

a. Demographic information prepared or usedby the institution

b. Any fair lending complaints received, andlender responses to these complaints



SPECIAL ANALYSES

A. Disproportionate-Adverse-ImpactViolations

When all five conditions listed below exist, discusswith Reserve Bank management whether to presentthe situation to the lender and solicit an explanationof the lender’s business justification for the policy orcriterion that appears to cause the disproportionateadverse impact. Note that condition 5 can be satis-fied by either of two alternatives.

The contacts between examiners and lendersdescribed in this section are information-gatheringcontacts within the context of the examination andare not intended to serve as the formal notices andopportunities for response that an agency’s enforce-ment process might provide. Also, the five condi-tions are not intended as authoritative statements ofthe legal elements of a disproportionate-adverse-impact proof of discrimination; they are para-phrases intended to give examiners practicalguidance on situations that call for more scrutinyand on what additional information is relevant.

Note: Even if it appears likely that a policy orcriterion causes a disproportionate adverse impacton a prohibited basis (condition 3), do not pro-ceed with this analysis if the policy or criterion isobviously related to predicting creditworthiness orto some other basic aspect of prudent lending andif there appears to be no equally effective alterna-tive for it. Examples are reliance on credit reportsand use of debt-to-income ratios.

Conditions

1. A specific policy or criterion is involved—Thepolicy or criterion suspected of producing adisproportionate adverse impact on a prohib-ited basis must be clear enough that the natureof the action to correct the situation can bedetermined.

Note: Gross HMDA denial or approval ratedisparities are not appropriate for adisproportionate-adverse-impact analysisbecause they typically cannot be attributedto a specific policy or criterion. Similarly, alender’s policies of allowing employees toexercise discretion and to negotiate terms orconditions of credit can better be describedas the absence of policies or criteria than asa situation in which a policy or criteriongenerates a disproportionate adverse impact.Although broad discretion and vague stan-dards raise concerns about discrimination,examiners should focus on possible disparatetreatment.

2. The stated terms of the policy or criterion are

neutral with respect to the prohibited bases ofdiscrimination.

3. The disparity on a prohibited basis is significant—The difference between the rate at whichprohibited-basis-group members are harmed orexcluded by the policy or criterion and the ratefor control group members must be largeenough that it is unlikely that it could haveoccurred by chance. If there is reason tosuspect that a significant disproportionateadverse impact may exist, consult with theBoard.

4. There is a causal relationship between thepolicy or criterion and the adverse result—Thelink between the policy or criterion and theharmful or exclusionary effect must not bespeculative. It must be clear that changing orterminating the policy or criterion would reducethe disproportion in the adverse result.

5. Either a or b:

a. The policy or criterion has no clear rationale,appears to exist merely for convenience or toavoid a minimal expense, or is far removedfrom commonsense or standard industryunderwriting considerations or lendingpractices.

The legal doctrine of disproportionateadverse impact says that the policy orcriterion that causes the impact must bejustified by ‘‘business necessity’’ if the lenderis to avoid a violation. There is very littleauthoritative legal interpretation of that termwith regard to lending, but that should notstop examiners from making the preliminaryinquiries called for in these examinationprocedures. For example, the rationale is notclear for basing credit decisions on factorssuch as location of residence, income level(per se rather than relative to debt), andaccounts with a finance company. If blackapplicants were denied loans significantlymore frequently than white ones becausethey failed a lender’s minimum incomerequirement, it would appear that the firstfour conditions plus 5a existed; therefore,examiners should consult with Reserve Bankmanagement about obtaining the lender’sresponse, as described in the next section.

b. Alternatively, even if there is a sound justifi-cation for the policy, it appears that theremay be an equally effective alternative foraccomplishing the same objective with asmaller disproportionate adverse impact.

The law does not require a lender toabandon a policy or criterion that is clearlythe most effective method of accomplishinga business objective. However, if an alterna-tive that is approximately as effective is



available that would cause a less-severeimpact, the policy or criterion in question willbe a violation.

At any stage of the analysis of possibledisproportionate adverse impact, if thereappears to be such an alternative and thefirst four conditions exist, consult with theBoard about how to evaluate whether thealternative would be equally effective andwould cause a less-severe impact. If theconclusion is that it would, solicit a responsefrom the lender, as described in the nextsection.

Obtaining the Lender’s Response

If the first four conditions plus either 5a or 5bappear to exist, consult with Reserve Bank man-agement about whether and how to inform thelender of the situation and solicit the lender’sbusiness justification. The communication with thelender should explain

• The specific neutral policy or criterion thatappears to cause a disproportionate adverseimpact

• How the examiners learned about the policy

• How widely the examiners understand the policyto be implemented

• How strictly the examiners understand the policyto be applied

• The prohibited basis on which the impact occurs

• The magnitude of the impact

• The nature of the injury to individuals

• The data from which the impact was computed

The communication should state that no violationexists if the policy or criterion is used because ofbusiness necessity and there is no alternative thatwould accomplish the lender’s objective with asmaller disproportionate adverse impact. It shouldinform the lender that cost and profitability arefactors the Reserve Bank will consider in evaluatingthe lender’s business necessity. It should ask thelender to describe any alternatives it consideredbefore adopting the policy or criterion at issue.

Evaluating and Following Up Onthe Response

Analyses of ‘‘business necessity’’ and ‘‘less-discriminatory alternative’’ tend to converge be-cause of the close relationship between thepurpose the policy or criterion serves and the mosteffective means to accomplish that purpose.

Evaluate whether the lender’s response persua-sively contradicts the existence of the significantdisparity or establishes a business justification.Consult the Reserve Bank and Board as appropriate.

B. DiscriminatoryPre-Application Screening

Obtain an explanation for any

• Withdrawals by applicants in prohibited-basisgroups without documentation of customer intentto withdraw,

• Denials of applicants in prohibited-basis groupswithout any documentation as to whether theapplicants were qualified, or

• On a prohibited basis, selectively quoting stronglyunfavorable terms (for example, high fees orhigh down-payment requirements) to prospec-tive applicants or quoting strongly unfavorableterms to all prospective applicants but waivingsuch terms for control group applicants (evi-dence of this might be found in withdrawn orincomplete files).

If the lender cannot explain the situations satis-factorily, examiners should consider obtainingauthorization to contact customers to verify thelender’s description of the transactions. Informationfrom customers may help determine whether aviolation occurred.

In some instances, such as possible ‘‘prescreen-ing’’ of applicants by lender personnel, the resultsof the procedures discussed so far, includinginterviews with customers, may be inconclusive indetermining whether a violation has occurred. Inthose cases, examiners should, if authorized bythe Board, consult with management regardingthe possible use of ‘‘testers’’ to compare how thelender treats them in the application process.These testers would pose as apparently similarlysituated applicants, differing only as to race orother applicable prohibited-basis characteristic.

C. Possible Discriminatory Marketing

1. Obtain full documentation of the nature andextent of, together with management’s explana-tion for, any

• Prohibited-basis limitations stated in adver-tisements

• Code words in advertisements that conveyprohibited limitations

• Advertising patterns or practices that areasonable person would believe indicatethat prohibited-basis customers are lessdesirable

2. Obtain full documentation as to the nature andextent of, together with management’s explana-tion for, any situation in which the lender, despitethe availability of other options in the market,



• Advertises only in media serving nonminorityareas of the market

• Markets through brokers or other agents thatthe lender knows, or could reasonably beexpected to know, to serve only one racial orethnic group in the market

• Uses mailing or other distribution lists ormarketing techniques for prescreened orother offerings of residential loan productsthat

– Explicitly exclude groups of prospectiveborrowers on a prohibited basis or

– Exclude geographies (for example, cen-sus tracts or ZIP codes) within the institu-tion’s marketing area that have demon-strably higher percentages of minoritygroup residents than does the remainderof the marketing area but that have

income and other credit-related charac-teristics similar to the geographies thatwere targeted for marketing.

Note: Prescreened solicitation of potentialapplicants on a prohibited basis does notviolate the ECOA. Such solicitations are,however, covered by the FHAct. Conse-quently, analyses of this form of potentialmarketing discrimination should be limitedto residential loan products subject to theFHAct.

3. Evaluate management’s response particularlywith regard to the credibility of any nondiscrimi-natory reasons offered as explanations for anyof the foregoing practices. Refer to the section‘‘Evaluating Responses to Evidence of Dis-parate Treatment’’ earlier in this appendix forguidance.



STREAMLINING EXAMINATIONS

Institutions may find it advantageous to conductself-tests or self-evaluations to measure or monitortheir compliance with the ECOA and Regulation B.A self-test is any program, practice, or study thatis designed and specifically used to assess theinstitution’s compliance with fair lending laws andthat creates data not available or derived from loan,application, or other records related to credittransactions (12 CFR 202.15(b)(1) and 24 CFR100.140–100.148). For example, using testers todetermine whether there is disparate treatmentin the pre-application stage of credit shoppingis a self-test. The information set forth in 12 CFR202.15(b)(2) and 24 CFR 100.142(a) is privilegedunless an institution voluntarily discloses the reportor results or otherwise forfeits the privilege. Aself-evaluation, while generally having the samepurpose as a self-test, does not create any newdata or factual information, but uses data readilyavailable in loan or application files and other credittransaction records, and therefore does not meetthe self-test definition.

Examiners should not request any informationrelated to self-tests that is privileged. If the insti-tution discloses the results of any self-tests, orhas performed any self-evaluations, and examinerscan confirm the reliability and appropriateness ofthe self-tests or self-evaluations (or even parts ofthem), they need not repeat those tasks.

Note: In the following discussion, the term‘‘self-evaluation’’ also includes self-tests if theinstitution has voluntarily disclosed the report orresults.

If the institution has performed a self-evaluationinvolving any of the products selected for exami-nation, obtain a copy of that self-evaluation andproceed through the remaining steps in thissection. If the institution has conducted a self-evaluation involving a product not selected forinclusion in the examination, consider whether theproduct evaluated by the institution is appropri-ate under the scoping guidelines as a substitutefor another product that was selected. If such asubstitution is considered appropriate, obtain theresults of the self-evaluation for the substitutedproduct and proceed through the remaining stepsin this section.

Determine whether the research and analysis ofthe planned examination would duplicate theinstitution’s own efforts. If the answers to questionsA and B below are ‘‘yes,’’ then each successive‘‘yes’’ answer to questions C through L indicatesthat the institution’s work up to that point can serveas a basis for eliminating examination steps.

If the answer to either question A or B is ‘‘no,’’ the

self-evaluation cannot serve as a basis for eliminat-ing examination steps. However, examiners shouldstill evaluate the self-evaluation to the degreepossible in light of the remaining questions andcommunicate the findings to the lender so that itcan improve its self-evaluation process.

A. Did the transactions covered by the self-evaluation occur not longer ago than two yearsprior to the examination? If the self-evaluationextended back more than two years prior to theexamination, incorporate into the examinationfindings only the results from transactions in themost recent two years.

B. Did the self-evaluation cover the same product,prohibited basis, decision center, and stage ofthe lending process (for example, underwritingor the setting of loan terms) as the plannedexamination?

C. Did the self-evaluation include comparative filereview? (Note: One type of ‘‘comparative filereview’’ is statistical modeling to determinewhether similar control group and prohibited-basis-group applicants were treated similarly.If a lender offers self-evaluation results basedon a statistical model, consult appropriately withan economist at the Reserve Bank or theBoard.)

D. Were control and prohibited-basis groupsdefined accurately and consistently with theECOA and/or the FHAct?

E. Were the transactions selected for the self-evaluation chosen so as to focus on marginalapplicants or, in the alternative, selectedrandomly?

F. Were the data abstracted from files accurate?Were those data actually relied on by the creditdecision makers at the time of the decisions?

To answer questions E–G, for the institution’scontrol group sample and each of its prohibited-basis-group samples, request to review 10%(but not more than 50 files for each group) ofthe transactions covered by the self-evaluation.For example, if the institution’s self-evaluationreviewed 250 transactions by whites and 75 byblacks, plan to verify the data for 25 white and7 black transactions.

G. Did the 10% sample reviewed for question Falso show that customer assistance and lenderjudgment that aided or enabled applicants toqualify were recorded systematically and accu-rately and were compared for differences onany prohibited bases?

H. Were prohibited-basis-group applicants’ quali-fications related to the underwriting factorreviewed compared with corresponding qualifi-cations of control group approvals? Specifically,for self-evaluations of approve or deny deci-



sions, were the denied applicants’ qualifica-tions related to the stated reason for denialcompared with the corresponding qualificationsfor approved applicants?

I. Did the self-evaluation sample cover at leastas many transactions at the initial stageof review as examiners would initially havereviewed using the sampling guidance in theseprocedures?

If the lender’s samples were significantlysmaller than those in the sampling guidance butits methodology otherwise was sound, reviewadditional transactions until the numbers ofreviewed control group and prohibited-basis-group transactions equal the minimums for theinitial stage of review in the sampling guidance.

J. Did the self-evaluation identify instances inwhich prohibited-basis-group applicants weretreated less favorably than control group appli-cants who were no better qualified?

K. Were explanations for such instances solicitedfrom the persons responsible for the decisions?

L. Were the reasons cited by credit decisionmakers to justify or explain instances of appar-ent disparate treatment supported by legitimate,persuasive facts or reasoning?

If all of the questions are answered ‘‘yes,’’incorporate the findings of the self-evaluation(whether supporting compliance or violations) intothe examination findings. Indicate that those find-ings are based on verified data from the institution’sself-evaluation. In addition, consult appropriatelywith Reserve Bank management about whetheror not to conduct corroborative file analyses inaddition to those performed by the lender.

If not all of the questions are answered ‘‘yes,’’resume the examination procedures at the pointwhere the lender’s reliable work would not beduplicated. In other words, use the reliable portionof the self-evaluation and correspondingly reduceindependent comparative file review by examiners.For example, if the institution conducted a com-parative file review that compared applicants’qualifications without taking account of the reasonsthey were denied, examiners could use the qualifi-cation data abstracted by the institution (if accu-rate) but would have to construct independentcomparisons structured around the reasons fordenial.



Federal Fair Lending Regulations and StatutesAlternative Examination Approach for Low-Risk Banks

The alternative approach to fair lending examina-tions is designed for banks found during the fairlending scoping process to be at low risk ofdiscriminatory practices. These low-risk bankstypically are stable community banks located insuburban or rural areas that have a very lowproportion of minority residents; they often arepredominantly commercial or agricultural lendersthat offer standard loan products and may lacksufficient prohibited-basis denials to conduct anunderwriting analysis. These banks also tend tohave stable staffing, no significant changes in bankpolicy and procedures since the most recentexamination, and no history of fair lending concerns.

Use of this alternative examination approachshould help validate the conclusions reachedduring the scoping process and should reduce thenumber of resources devoted to examinations ofbanks whose risk level clearly is not high enough towarrant extensive comparative analysis.

Successful use of this alternative examinationapproach depends on the integrity of the scopingprocess. As a result, it is important that all relevantareas of credit operations, including commercialand agricultural lending, are considered during thescoping process. If no risk factors are identifiedduring scoping, examiners should proceed with thefollowing steps:

1. Select a judgmental sample of loans for reviewto test how the lending criteria are actuallyapplied. The sample should be representative ofthe major product lines of the institution andshould include denials as well as approvalsthat were processed in the preceding twelvemonths.

2. Review the transactions to determine if theywere underwritten according to the bank’sarticulated lending criteria. The transactionsshould not, therefore, be compared with eachother, as they are in a benchmark or overlapanalysis. Deviations in underwriting should beinvestigated and documented. This review will

verify actual underwriting practices and mayresult in the identification of risk factors.

3. Use the same sample to review the bank’spricing practices (it may be necessary to add afew more approvals to take the place of thedenials in the original sample). Loan pricingshould be compared with the bank’s pricingmethodology that was described to examinersduring the scoping process. The transactionsshould not be compared with each other, as isthe practice for the terms-and-conditions analy-sis. Pricing deviations should be investigatedand documented. This review will verify actualpricing practices and may result in the identifi-cation of risk factors.

4. If no risk factors are identified using thesealternative procedures, then the low-risk conclu-sion drawn in the scoping process is validated.At this point, the discrimination analysis iscomplete.

5. If risk factors are identified through either theunderwriting or the pricing review, a focal pointshould be established and the sample expandedfor that particular product line to do a fullanalysis using either a benchmark or overlapanalysis or the terms-and-conditions examina-tion procedures. Sample sizes should corre-spond to those in the sample size tables in theappendix to the examination procedures andshould be focused on marginal applicants.

6. The fair lending scoping for the next examina-tion should not assume that the bank remainslow-risk. The scoping process should make anew determination of the risk level of the bank.

The fair lending scope memo should documentthe reasons the bank was determined to be low-risk. The fair lending section of the Report ofExamination should state that the alternative exami-nation approach was used because the bankexhibited low discrimination risk. Any appropriatecomments about the bank’s underwriting or pricingpractices should be included.

Consumer Compliance Handbook Fair Lending Exams: Low-Risk Banks • 1 (1/06)

Regulation BBCommunity Reinvestment

Background and Summary

The Community Reinvestment Act (CRA) of 1977(12 USC 2901), as amended, encourages eachinsured depository institution covered by the act tohelp meet the credit needs of the communities inwhich it operates. The CRA requires that eachfederal financial supervisory agency assess therecord of each covered depository institution inhelping to meet the credit needs of its entirecommunity, including low- and moderate-incomeneighborhoods, consistent with safe and soundoperations; an agency will take that record intoaccount when deciding whether to approve aninstitution’s application for a deposit facility. TheCRA has undergone numerous changes since itsinception in 1977. In August 2005, the Board ofGovernors of the Federal Reserve System, theFederal Deposit Insurance Corporation, and theOffice of the Comptroller of the Currency (theagencies) jointly adopted significant amendmentsto the CRA.

Neither the CRA nor its implementing regulationsinject hard and fast rules or ratios into theexamination or application processes. Rather, thelaw seeks to evaluate each lender’s record whileaccommodating a lender’s individual circum-stances. Neither the CRA nor its implementingregulations require financial institutions to makehigh-risk loans that jeopardize their safety. To thecontrary, the law makes it clear that an institution’slending to meet its CRA responsibilities should beconducted within the bounds of safety and sound-ness. Rebuilding and revitalizing communitiesthrough sound lending and good business judg-ment should benefit both communities and finan-cial institutions.

An institution’s capacity to help meet communitycredit needs is influenced by many factors, includ-ing its financial condition and size, constraints onits resources, legal impediments, and local eco-nomic conditions that could affect the demand andsupply of credit. Examiners must consider thesefactors when evaluating an institution’s perfor-mance under CRA. This approach is consistentwith a fundamental underpinning of the CRAregulations—that the differences in institutions andthe communities in which they do business pre-clude rigid and inflexible rules. Clear, flexible, andsensible performance criteria that accommodatedifferences in institutions and their communities,that minimize burden, that promote consistencyand objectivity, and that allow examiners to beguided by common sense rather than adherence to

mechanistic procedures are embodied in the CRAregulations and the examination procedures thathelp to implement them.

For example, the CRA regulations provide differ-ent evaluation methods in response to basicdifferences in institutions’ structures and opera-tions. The regulations provide (1) a streamlinedassessment method for small institutions thatemphasizes lending performance; (2) an assess-ment method for intermediate small institutions thatuses the same lending test used in the small-institution examination method, as well as a flexiblecommunity development test; (3) an assessmentmethod for large retail institutions that focuses onlending, investment, and service performance; and(4) an assessment method for wholesale andlimited-purpose institutions that is based on com-munity development activities. Further, the regula-tions give any institution, regardless of its size orbusiness strategy, the choice to be evaluatedunder a strategic plan. This type of flexibility andcustomizing should permit institutions to be evalu-ated fairly and in conformance with their businessapproach.

Examination-Burden Reduction

The complementary regulatory themes of flexibility,responsiveness, and objectivity are extended tothe examination process as part of an overarchingeffort to, among other things, reduce the burden ofthe regulations and the CRA examination oninstitutions. Indeed, both the regulations and theexamination procedures reflect a conscientiouseffort to minimize the burden on financial institu-tions. For example, the agencies’ conscious at-tempt to minimize the burden on supervisedinstitutions can be seen in the fact that examinersare encouraged to draw on the results of previousexaminations of an institution for information aboutits major product lines, business strategy, andsupervisory restrictions. This information is typicallyavailable from agency sources and can often bereviewed off-site. Further, examiners may alreadyhave knowledge of an institution’s community andlocal demographics from their own past visits to theinstitution or to other institutions in the same area. Inthese cases, examiners should be able to developa good understanding of the context in which aninstitution operates before the actual examinationbegins. Examiners can then supplement andupdate that understanding upon arrival at theinstitution. Lastly, it should be noted that there are

Consumer Compliance Handbook CRA • 1 (6/07)

no CRA data-reporting obligations for small institu-tions.

Similarly, the regulations focus on performance-based criteria, not on an institution’s processes ordocumentation alone. Institutions are not to beevaluated on how well they ascertain communitycredit needs, how well they market and advertisetheir products, or how actively members of theirboards of directors participate in local communityorganizations or civic groups.

This performance-based focus sets the stage fora constructive, credible, efficient, and unobtrusiveexamination process that concentrates on results.Both the regulations and the examination proce-dures promote and establish evaluation methodsthat are based on reviewing objective data; institu-tions can also use these methods to measure theirown performance. Because examination results aremore understandable and more predictable underthese performance-based examination proce-dures, the burden on financial institutions is furtherminimized.

Rather than a one-size-fits-all examination, sepa-rate procedures have been developed for small,intermediate small, and large institutions, as well asfor wholesale or limited-purpose institutions andinstitutions that are operating under an approvedstrategic plan. Further, examiners are expected touse their common sense to tailor an examination toa particular institution, thereby mitigating the bur-den on the institution. For example, examiners maybe able to perform some procedures in advance ofthe on-site examination. This tailoring allows exam-iners to take reasonable steps to reduce theburden on an institution and ensure that theexamination process is more understandable forthe institution.

Performance Context

An institution’s performance under the regulatoryassessment criteria is evaluated in the context ofinformation about the institution, its community, andits competitors. The examiner will review demo-graphic and economic data about the institution’sassessment area(s), in addition to informationabout local economic conditions; the institution’smajor business products and strategies; and itsfinancial condition, capacity, and ability to lend orinvest in its community. Often, this review will befacilitated by gathering information from examina-tions of other institutions serving the same or similarassessment areas, reviewing information from otherrecent community contacts, and reviewing informa-tion about the assessment area developed coop-eratively by the different agencies.

The examiner will also review information aninstitution chooses to provide about the lending,

investment, and service opportunities in its assess-ment area(s). The examiner will not, however,require the institution to create such information,nor will the examiner ask for any information otherthan what the institution may already have devel-oped as part of its normal business practice. Anexaminer should not evaluate an institution on itsefforts to ascertain community credit needs, marketits products, geocode its loans, or record CRA-related discussions in its board minutes; aninstitution should also not be rated on the basis ofthe quality of any contextual information that it mayprovide.

Role of Community Contacts

Interviews with local community, civic, or govern-ment leaders can help examiners learn about thecommunity and its economic base, as well as localcommunity development needs and initiatives.Interviews can also help examiners understandpublic perceptions about how well local institutionsare responding to the community’s credit needs.An examiner can use information obtained fromthese interviews to balance his or her understand-ing of the institution’s performance context. Com-munity contact interviews normally take the form ofpersonal meetings, but telephone conversations orlarger group meetings may also be appropriate.

Information from community contacts can pro-vide valuable insights to examiners, particularly tothose who have relatively little experience orfamiliarity with an institution’s assessment area.Contacts may be made during an examination orprior to the start of an examination. Typically, theexaminers responsible for the CRA examination willconduct the interviews. However, whenever pos-sible, the agencies will draw on recent localinterviews conducted by other agency staff or byother regulatory agencies that have CRA responsi-bilities in the area.

Assessment-Area Considerations

Institutions are required to identify one or moreassessment areas within which the agencies willevaluate the institution’s performance. In mostcases, an institution’s assessment area will be thetown, the municipality, the county, or some otherpolitical subdivision or the metropolitan statisticalarea (MSA) in which its branches are located and asubstantial portion of its loans are made. If aninstitution chooses, however, its assessment areaneed not coincide with the boundaries of one ormore political subdivisions (e.g., counties, cities,and towns or MSAs), so long as the adjustments tothose boundaries reflect the fact that the institu-tion’s assessment area(s) would otherwise be too

Community Reinvestment

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large for the institution to serve, have an unusualconfiguration, or include significant geographicbarriers. When the assessment area coincides withrecognized political subdivisions, or when it has notchanged in any way since the previous examina-tion, examiners may not have to conduct acomprehensive reevaluation of the assessmentarea.

When evaluating an institution’s performance,the examiner will use the assessment area desig-nated by an institution, provided the assessmentarea meets regulatory criteria. Only if the criteriahave not been satisfied will the examiner revise theassessment area so that it complies with theregulations. The revisions will be discussed withinstitution management, and the revised assess-ment area will be used to evaluate performance.However, unless the assessment area reflectsillegal discrimination, examiners will not considerproblems with the designation of the assessmentarea when assigning a rating to the institution.

Performance Criteria forSmall Institutions

Often, the burden of regulations and examinationsis most pronounced in small institutions. Theirlimited financial resources and staffing, in additionto other competitive factors, may influence the waythat small institutions meet their CRA responsibili-ties. In recognition of these factors, the regulationsestablished a streamlined assessment method forsmall institutions that significantly reduces exami-nation burden. The regulations contain only fiveperformance criteria for small institutions:

1. The institution’s loan-to-deposit ratio, adjustedfor seasonal variation, and, as appropriate,other lending-related activities, such as loanoriginations for sale to the secondary markets,community development loans, or qualifiedinvestments

2. The percentage of loans and, as appropriate,other lending-related activities located in theinstitution’s assessment area(s)

3. The institution’s record of lending to and, asappropriate, engaging in other lending-relatedactivities for borrowers of different income levelsand businesses and farms of different sizes

4. The geographic distribution of the institution’sloans

5. The institution’s record of taking action, ifwarranted, in response to written complaintsabout its performance in helping to meet creditneeds in its assessment area(s)

In carrying out their examination responsibilities,examiners should exercise common sense whendeciding how much material to review and whatsteps are necessary to reach an accurate and

well-supported conclusion. For example, if aninstitution’s assessment area is composed of only afew geographies, a geographic analysis of loanswithin the assessment area may be inappropriateor unnecessary. Or, if an institution has analyzedwhere and to whom it is making loans in itsassessment area as part of its business efforts,examiners may be able to validate and then use theinstitution’s analysis rather than conduct a detailedanalysis of their own. In other words, whenevaluating the performance criteria, examinersshould always consider and use available, reliableinformation.

Similarly, if an institution’s loan-to-deposit ratioappears low, the examination procedures ask theexaminer to evaluate the institution’s lending-related activities, such as loan sales and commu-nity development lending and investments, todetermine if they materially supplement its lendingperformance as reflected in its loan-to-depositratio. However, such an analysis may not benecessary, or a less extensive analysis may besufficient if the loan-to-deposit ratio is high.

Performance Criteria forIntermediate Small Institutions

Intermediate small institutions are evaluated undertwo component tests: the small-institution lendingtest and the flexible community development testfor intermediate small institutions. The lending testencompasses the same five performance criteriaused for small institutions:

1. The institution’s loan-to-deposit ratio, adjustedfor seasonal variation, and, as appropriate,other lending-related activities, such as loanoriginations for sale to the secondary markets,community development loans, or qualifiedinvestments

2. The percentage of loans and, as appropriate,other lending-related activities located in theinstitution’s assessment area(s)

3. The institution’s record of lending to and, asappropriate, engaging in other lending-relatedactivities for borrowers of different income levelsand businesses and farms of different sizes

4. The geographic distribution of the institution’sloans

5. The institution’s record of taking action, ifwarranted, in response to written complaintsabout its performance in helping to meet creditneeds in its assessment area(s)

The second component test for intermediatesmall institutions is the community developmenttest that was created as a result of the 2005regulatory changes. The intermediate-small-institution community development test considersthe following four criteria:



1. The number and amount of community develop-ment loans

2. The number and amount of qualified invest-ments

3. The extent to which the institution providescommunity development services

4. The institution’s responsiveness through suchactivities to community development lending,investment, and services needs

Under the community development test, interme-diate small institutions will be evaluated on theirrecord of providing community development loans,qualified investments, and community develop-ment services under one single component rating,unlike the large-institution evaluation method, whichconsiders and evaluates these three activitiesseparately. Intermediate small institutions are ex-pected to allocate resources among the differentcategories of community development loans, quali-fied investments, and community developmentservices that are the most responsive to thecommunity development needs and opportunitiesin the area. Although the agencies expect interme-diate small institutions to generally engage in acombination of community development loans,qualified investments, and community develop-ment services, the appropriate levels of theseactivities are very institution-specific and will bedetermined by an institution’s capacity and busi-ness strategy, as well as by the communitydevelopment needs and opportunities in the area.

As they do when conducting other examinationprocedures, examiners should exercise judgmentand common sense to minimize the burden im-posed on an institution by the examination process.However, examiner judgment must be consistentwith obtaining a complete and accurate assess-ment of an institution’s performance. For example,examiners may be able to use economic anddemographic data that were analyzed in anexamination of one institution when they examineother institutions serving the same or similarassessment areas. Information from communitycontacts may cover more than one institution in agiven market. When an institution has analyzed itsCRA performance, examiners may use thoseanalyses, after verifying their accuracy and reliabil-ity, and should supplement those analyses whenquestions are raised. Examiners should considerany performance-related information offered by aninstitution but should not request information notcalled for by examination procedures.

Performance Criteria forLarge Institutions

Large institutions are evaluated and rated underthree separate performance tests: the lending test,

the investment test, and the service test.

Lending Test

The lending test evaluates a large institution’s retaillending, as well as its community developmentlending, using five performance criteria:

1. The number and dollar amount of the institu-tion’s home mortgage, small business, smallfarm, and consumer loans, if applicable, in theinstitution’s assessment area(s)

2. The geographic distribution of the institution’shome mortgage, small business, small farm,and consumer loans, if applicable, based on theloan location

3. The distribution of the institution’s home mort-gage, small business, small farm, and con-sumer loans, if applicable, to borrowers ofdifferent income levels and businesses andfarms of different sizes

4. The number and dollar amount of communitydevelopment loans and their complexity andinnovativeness

5. The institution’s use of innovative and flexiblelending practices

Investment Test

The investment test evaluates an institution’s recordof making qualified investments, using the followingfour performance criteria:

1. The dollar amount of qualified investments2. The innovativeness or complexity of qualified

investments3. The responsiveness of qualified investments to

credit and community development needs4. The degree to which the qualified investments

are not routinely provided by private investors

Service Test

The service test evaluates an institution’s use ofretail and community development services tomeet the needs of the assessment area. Theinstitution’s retail services are evaluated in the retailservice test, which includes four performancecriteria:

1. The current distribution of the institution’sbranches among low-, moderate-, middle- andupper-income geographies

2. The institution’s record of opening and closingbranches, particularly branches located in low-or moderate-income geographies or primarilyserving low- or moderate-income individuals

3. The availability and effectiveness of the institu-tion’s alternative systems for delivering ser-vices to low- and moderate-income areas andindividuals



4. The range of services provided in low-,moderate-, middle-, and upper-income geogra-phies and the degree to which the services aretailored to meet the needs of those geographies

An institution’s community development servicesare considered using the two performance criteriain the community development service test:

1. The extent to which the institution providescommunity development services

2. The innovativeness and responsiveness of com-munity development services

As mentioned previously under the small-institution and intermediate-small-institution exami-nation procedures, examiners are expected toexercise judgment and common sense to minimizethe burden of the examination process, consistentwith obtaining a complete and accurate assess-ment of performance. However, large institutionsface burdens that small institutions do not, particu-larly the burden of data collection and reporting.Nevertheless, because large-institution data existin an automated form, examiners can conductmuch of their necessary analysis before the on-siteexamination—thereby reducing disruptions causedby the presence of examiners at the institution. Asthey do in small institutions, examiners must besensitive to the burden of the examination processand use their judgment and common sense todetermine what examination steps are necessary toarrive at an accurate assessment of an institution’sperformance.

Performance Criteria for Wholesaleor Limited-Purpose Institutions

To be evaluated under the community develop-ment test, an institution must be designated as awholesale or limited-purpose institution. An institu-tion receives this designation by submitting awritten request to its primary regulator. Once aninstitution has received a designation, it will notnormally have to reapply for it. The designation willremain in effect until the institution requests that itbe revoked or until one year after the agencydetermines that the institution no longer satisfiesthe criteria for designation and notifies the institu-tion of this determination.

Wholesale or limited-purpose institutions areevaluated on the basis of their

1. Community development lending, qualified in-vestments, or community development ser-vices;

2. Use of innovative or complex qualified invest-ments, community development loans, or com-munity development services and the extent towhich investments are not routinely provided byprivate investors; and

3. Responsiveness to community credit and devel-opment needs.

Examiners must be cognizant of the context withinwhich a wholesale or limited-purpose institutionoperates. Examiners should recognize that theseinstitutions may tailor their community developmentactivities on the basis of their own circumstancesand the community development opportunitiesavailable to them in their assessment areas or in thebroader statewide or regional areas that includethe assessment areas.

Institutions need not engage in all three catego-ries of community development activities to beconsidered Satisfactory under the community de-velopment test. Community development loans,investments, and services can be directed to astatewide or regional market that includes theinstitution’s assessment area; these activities stillqualify for consideration under the communitydevelopment test as benefiting the assessmentarea. Moreover, if an institution has a Satisfactorycommunity development record in its assessmentarea, all community development activities regard-less of their locations should be considered.

In applying the community development test,examiners should perform only those analyses thatare necessary to reach an accurate conclusionabout the institution’s performance; use all avail-able, reliable information; and avoid duplication ofeffort to reduce the examination burden on aninstitution.

Strategic Plans

The regulations permit any institution to develop astrategic plan for addressing its CRA responsibili-ties. An institution must submit its strategic plan toits primary supervisory agency for approval. Theregulations require that the plan be developed inconsultation with members of the public and bepublished for public comment. The plan mustcontain measurable annual goals. A single planmay contain goals designed to achieve only aSatisfactory rating; at the institution’s option, a planmay also contain goals designed to achieve aSatisfactory rating, as well as goals designed toachieve an Outstanding rating.

The strategic-plan approach to addressing aninstitution’s CRA responsibilities presents an oppor-tunity for a very straightforward examination. Thefirst question an examiner should investigate iswhether the goals were met. If they were, theappropriate rating should be assigned. The appro-priateness of the goals will have already beendetermined during the public comment period forthe plan and as part of the appropriate agency’sreview and approval of the plan. Consequently,



further investigation relating to the context of theinstitution should not be necessary. Obviously, ifsome or all of the plan’s goals were not met, theexaminer will be required to evaluate issues suchas whether the goals were substantially met; indoing so, the examiner will have to exercise somejudgment about the degree goals were missed andthe causes.

However, an examiner should approach anexamination of an institution operating under astrategic plan understanding the primary purposeof the regulatory provisions on strategic plans: togive an institution significant latitude to design aprogram that is appropriate to its own capabilities,business strategies, and organizational framework,as well as to the communities it serves. Conse-quently, the institution may develop plans for asingle assessment area that it serves; for some, butnot all, of the assessment areas that it serves; or forall of them. It may also develop a plan thatincorporates and coordinates the activities of

various affiliates. The examiner’s challenge is toevaluate institutions operating under one plan orunder a number of plans in a way that accuratelyreflects the results achieved and that sensiblywraps that evaluation into the overall assessment ofthe institution.

Again, an examiner should, to the greatest extentpossible, use information available from the agen-cies to evaluate an institution’s performance undera strategic plan. However, it is likely that someelements of a plan under review will not bereflected in public or other agency data. Conse-quently, the examiner may, of necessity, have toask the institution for the data necessary todetermine whether it has met its goals. To theextent possible, the examiner should ask theinstitution to provide data for review before theon-site potion of the examination. The examinershould also seek to mitigate the burden on theinstitution by, wherever possible, using data in theform maintained by the institution.



Small InstitutionsExamination Procedures and Sample Format forPublic Disclosure of Examination Results

The Examination Procedures for Small Institutions (which include the CRA Ratings Matrix for SmallInstitutions) and the Sample Format for Public Disclosure of Examination Results follow. Both documents arealso available on the web site of the Federal Financial Institutions Examination Council.

Examination Procedures: www.ffiec.gov/cra/pdf/cra_exsmall.pdf

Sample Format for Public Disclosure of Examination Results: www.ffiec.gov/cra/pdf/ex_instruct_s.pdf


Small-Institution Performance EvaluationsInteragency Guidance on Using the StreamlinedAssessment Method

This guidance, issued on November 26, 1996, wasadopted by the Board of Governors of the FederalReserve System, the Federal Deposit InsuranceCorporation, the Office of the Comptroller of theCurrency, and the Office of Thrift Supervision.

This interagency guidance supplements the CRAexamination procedures for small institutions. Theguidance is designed to facilitate the proper use ofthe examination procedures and to promote con-sistency among the agencies in presenting exami-nation findings.

Public evaluations should include efficient, sub-stantive, and complete discussions of facts, data,and analysis that lead to conclusions about perfor-mance. The determination of the ‘‘reasonableness’’of the loan-to-deposit ratio, the proportion oflending within an institution’s assessment area, orthe geographic and borrower distribution of lend-ing is clearly not a simple task. It is precisely thisdifficulty that places an increased importance uponthe written explanation of the examiner’s analysisand conclusions, and prompts the issuance of thisguidance.

Description of the Assessment Area

Demographic Information

The interagency public evaluation format requiresthat the discussion of an institution’s assessmentarea include descriptive information regardingpopulation, median income, employment, commu-nity credit needs, and business opportunities. Anyinformation that was considered by the examiner informing overall conclusions regarding the institu-tion’s performance should be included in thisdescription.

Information regarding the racial or ethnic com-position of an assessment area should be includedin the public evaluation only where a finding ofracial discrimination impacted the institution’s per-formance. The CRA regulation focuses primarily onlending to borrowers and geographies of differentincome levels. An institution’s fair lending recordaffects its CRA record in cases where substantiveviolations of the fair lending laws are found. Theinclusion of race and national origin data in eachpublic evaluation, whether or not fair lending issuesare present, may contribute to public confusionregarding the purpose of the Community Reinvest-ment Act as compared to the fair lending laws.

Assessment-area descriptions should include,however, information regarding the number and

percentage of low-, moderate-, middle-, and upper-income geographies and families within the assess-ment area since this information is always relevantto conclusions regarding an institution’s CRAperformance. It may be useful to use tablesindicating the percentage of geographies andfamilies in each income category to convey thisinformation clearly.

Assessment-Area Delineation

Regulation BB makes it clear that an institution’sability to properly draw an assessment area is not aconsideration in evaluating its performance. As aresult, the public evaluation should not refer to theassessment area’s compliance with regulatoryrequirements. If the examiner finds that the assess-ment area does not comply with regulatory require-ments, that fact should be noted in the report ofexamination. The public evaluation should bebased on the appropriate (redrawn) assessmentarea.

Community Contacts

The description of the assessment area should alsoinclude information obtained from community con-tacts that the examiner used in forming conclusionsabout the institution’s performance. Communitycontacts provide insight that can help update, andlend perspective to, data gathered from othersources. These contacts are a very important partof the CRA examination. The public evaluationshould note information from recent relevant con-tacts that were made in connection with the CRAexamination being conducted, as well as in con-nection with other examinations, including thoseconducted by staff from other agencies.

Examiners should include as much informationas possible about community contacts to give thereader of the public evaluation an understanding ofthe contact’s background and knowledge of thearea. General statements that ‘‘several contacts’’were made and the information was used inevaluating the institution’s performance are notadequately descriptive.

It is usually sufficient to identify the types ofcontacts made without indicating the name of thecontact or the organization represented. A discus-sion of community contacts in the public evaluationmight state, for example, ‘‘Two contacts were madeduring the examination. One contact was a repre-sentative from an organization that provides afford-able housing to low-income residents in the county.


The other contact focused on small businessdevelopment. Information from a community con-tact made by [another agency] with a governmen-tal housing authority was also used in analyzing theinstitution’s lending record.’’

Information regarding comments made by com-munity contacts should be included in the publicevaluation, absent a request to the contrary by theperson contacted. Those comments should bespecific enough that the reader can understandhow conclusions were reached later in the publicevaluation, but not so specific as to identify thecontact.

Conclusions with Respect toPerformance Criteria

Facts, Data, and Analysis

As noted in the format for small-institution publicevaluations, overall conclusions must address keyaspects of an institution’s CRA performance basedupon an analysis of facts and data derived from theexamination process. The public evaluation shouldbe written in a way that allows the reader tounderstand how the examiner arrived at conclu-sions for each of the performance criteria. Com-ments in this section should explicitly relate factsand data regarding the institution’s performance tothe examiner’s findings.

For example, the statement that ‘‘an institutionmakes virtually all of its loans in its assessmentarea’’ is not sufficient. If applicable, a betterpresentation of this conclusion would be ‘‘Examin-ers reviewed and verified the institution’s internalanalysis of credit extensions made during theexamination period. A substantial majority of theinstitution’s lending was conducted within its as-sessment area. The review included the institution’stwo major product lines, commercial and one- tofour-family mortgage loans. The examination foundthat 94 percent of the commercial loans and 96percent of the mortgage loans made by theinstitution were within its assessment area. Byvolume, 84 percent of commercial loans and88 percent of mortgage loans made by theinstitution were inside its assessment area.’’

Likewise, statements asserting that lending tolow- and moderate-income individuals reflects thepopulation within the assessment area withoutfurther explanation are not sufficiently informative.This type of a statement implies that the creditneeds in this assessment area were proportional tothe various income levels represented in the overallpopulation. This is not, however, always true,necessary, or relevant. Perhaps, there were limitedlending opportunities in one or more incomecategories. For instance, a mortgage lender may

be unable to tap the very low-income geographiesbecause of a high number of rental properties.Alternatively, a consumer lender may be equallyunable to make consumer credit available tohigh-income residents who prefer to take onsecond mortgages. To avoid this problem, publicevaluations should include an analysis of perfor-mance that includes information from the materialsused to develop the examiner’s understanding ofthe performance context about loan demand in thevarious areas with income levels, as appropriate.

Loan-to-Deposit Ratio

Discussions of the loan-to-deposit ratio in thepublic evaluations should reference the informationthat is used to support the conclusion that the ratiois or is not reasonable. This may, for instance,require a discussion of other similarly situatedlenders in the assessment area under review orother support, as appropriate. If, for instance, aninstitution has a lower average loan-to-deposit ratiothan other similarly situated lenders in its assess-ment area and the examiner finds this delineation‘‘reasonable,’’ the discussion should distinguish theinstitution under review from the similarly situatedlenders in the assessment area. Consulting recentexaminations performed in the assessment areasmay assist in this analysis.

It is important to remember that the loan-to-deposit ratio is a quick reference for determiningwhether an institution is lending. As such, it is notusually of central importance in the streamlinedexamination. Furthermore, by calling for an analysisof the adequacy of the loan-to-deposit ratio, theagencies do not intend to foster lending levels thatmight be considered unsafe or unsound. There isno fixed ratio that can be considered reasonable.Rather, loan-to-deposit ratios will vary dependingon an institution’s charter, its business strategy, thedemographics of its assessment area, and otherfactors that make up the context in which theinstitution performs. There are occasions, however,where a loan-to-deposit ratio is so low that itbecomes a central issue in the examination. Forinstance, where an institution makes very few loansduring an examination cycle, the distribution ofthose loans is clearly not as relevant to theinstitution’s performance rating as the fact that theinstitution may not be lending very much in anycase.

Origination

When analyzing an institution’s lending perfor-mance, Regulation BB directs examiners to focuson loans originated since the last examination. Tothis end, the public evaluation should indicate thenumber and types of loans that were reviewed to

Interagency Guidance on Using the Streamlined Assessment Method


conduct the analysis. Applications and denials aregenerally not relevant to the analysis and, there-fore, are not discussed in the examination proce-dures. A discussion of applications and denialsmay be appropriate, however, in a larger discus-sion of an institution’s performance context. Forinstance, a discussion of applications and denialsmay be useful in explaining poor performance dueto a lack of credit demand.

Activities that are in the planning stages thathave not resulted in loan originations should not beconsidered in evaluating the institution’s perfor-mance. This would include situations where aninstitution participates in a consortium developedto revitalize a downtown area but, at the time of theexamination, has made no loans and the size of theloan pool has not yet been determined. In thisexample, there is no performance to evaluateduring the examination period even though theactivity would likely receive positive considerationonce loans are made.

Loans to Small Businesses and SmallFarms

Where loans to small businesses and small farmsare a major product line for the institution, it isimportant to analyze the distribution of lending tobusinesses or farms of different sizes. It is oftendifficult to determine the number of small busi-nesses and farms using the statistical data gath-ered prior to the examination. Reliable data on thenumber of small businesses or farms in any givenarea is often scarce. Possible sources of informa-tion include local farm bureaus, extension agen-cies, and chambers of commerce. Supportingconclusions regarding the geographic or borrowerdistribution of small business and farm loansrequires an analysis of the institution’s smallbusiness and farm loans to businesses and farmsof different sizes. This analysis is particularlyimportant where the examination concludes thatthe institution exceeds the standards for Satisfac-tory performance.

Geographic and Borrower Distribution

Examiners should refrain from including broadstatements regarding the dispersion of loansthroughout an assessment area without furtherdiscussing the adequacy of an institution’s geo-graphic distribution of lending at the income level.Dispersion is only one element of an analysis ofgeographic distribution. Specifically, a dispersionanalysis is done to determine whether any signifi-cant gaps or lapses in lending are present in theinstitution’s assessment area. The main focus ofthis analysis is the institution’s geographic distribu-tion of loans among low-, moderate-, middle-, and

upper-income geographies. The regulation andexamination procedures specifically direct that theanalysis be conducted with respect to each of thefour income categories separately. Examiners mayuse an institution’s internal analysis of geographicdistribution after verifying its accuracy. If such ananalysis is not available, a sample of loan files mustbe used to conduct a geographic distributionanalysis.

Similarly, examiners may use an institution’sinternal analysis of its lending by borrower income,if available, after verifying its accuracy. If theinstitution has not prepared a reliable analysis, loanfiles should be sampled to analyze lending distri-bution by borrower income. If the informationnecessary to do a distribution analysis by borrowerincome is not available in loan files, the examinermay use other available information as a proxy forsuch information. Of course, any information usedto reach conclusions regarding lending distributionby borrower income or geography must be dis-cussed in the public evaluation.

Finally, there may be situations where an analysisof lending distribution by geography and borrowerincome appears to exceed standards for a Satis-factory rating but, upon closer analysis, the institu-tion’s overall lending activity is very low. Forinstance, if an institution has only made a dozenloans since its last examination, it would be verydifficult to justify a conclusion that the distribution ofits loans met the standards for a Satisfactory rating,even if each loan was in a low- or moderate-incomearea or to a low- or moderate-income individual.

Where there is insufficient information availableto perform a meaningful geographic- or borrower-distribution analysis, examiners should type ‘‘analy-sis was not meaningful’’ across the appropriaterows of the performance evaluation grid. Thediscussion of the analysis should explain why theanalysis could not be performed. For example,where an assessment area consists entirely ofmiddle-income census tracts and the examiner hasconcluded that proxies that would enable a mean-ingful geographic analysis are not available, thepublic evaluation should state that fact.

Elements Supporting an OutstandingRating

A rating of Outstanding will normally be accompa-nied by an explanation that expressly considers notonly a small institution’s lending but also itsperformance in qualified investments and deliveryof retail services. Although a small institution canreceive an Outstanding rating based on thestrength of its lending performance, the appendixto the CRA regulation makes it clear that inassessing whether an institution’s performance is



Outstanding, the [agency] considers the extent towhich the institution exceeds each of the perfor-mance standards for a Satisfactory rating and itsperformance in making qualified investments andits performance in providing branches and otherservices and delivery systems that enhance creditavailability in its assessment area. Consequently,the examination procedures provide that a smallinstitution can receive an Outstanding rating with-out a review of investments and services only whenits lending performance is so exceptional that theexaminer determines that a review of investmentsand services would not further improve the institu-tion’s performance level. In other words, the reviewof investments and services would be superfluousin the presence of what is already considered to bean Outstanding level of performance based onlending alone.

Note that an Outstanding institution is character-ized not only by a high loan-to-deposit ratio and ahigh percentage of loans in its assessment area butalso by an ‘‘excellent’’ penetration of borrowers atall income levels and an ‘‘excellent’’ dispersion ofloans throughout geographies of different incomesin its assessment area.

The examination procedures recognize that insti-tutions can exceed the standards for Satisfactoryperformance in varying degrees. In CRA (as inother rating systems), the Satisfactory categoryembraces a rather broad range of different perfor-mance levels. Some institutions that have stronglending records will end up with the same rating asother institutions that are marginally Satisfactory.Nevertheless, there is a difference between institu-tions rated Outstanding and those rated at the highend of the Satisfactory range.

An institution may exceed standards for Satisfac-tory performance in three ratable categories andstill not merit an Outstanding. To receive anOutstanding on the strength of its lending perfor-mance, the institution must materially exceed thestandards for Satisfactory in some or all of thecriteria. The judgment that an institution materiallyexceeds Satisfactory standards and warrants anOutstanding rating should be based on largelyindisputable evidence that an entire community isbeing served, including an excellent penetration oflow and moderate borrowers and geographieswithin its assessment area(s). Remember that theCommunity Reinvestment Act specifically requiresthe agencies ‘‘to assess the institution’s record ofmeeting the credit needs of its entire community,including low- and moderate-income neighbor-hoods.’’ Application of the streamlined examinationdoes not alter the policy focus of the overallevaluation. Serving the credit needs of low- andmoderate-income borrowers and neighborhoods

should not get lost in the process of calculatingloan-to-deposit ratios and ‘‘in-out’’ percentages.

While small institutions do not go through thesame rigors as the large-institution examinations,small institutions are not intended to be undulyfavored when it comes to assigning ratings for theirperformance. In addition to determining whether aninstitution has exceeded some or all of thestandards for a Satisfactory rating, the agencieswill consider a small institution’s investment andservice performance based on a broad range ofinvestment and service activities. For example, theexamination procedures permit an Outstandingrating if the institution’s performance with respect tothe five core criteria generally exceeds Satisfactoryand its performance in making qualified invest-ments and providing branches and other servicesand delivery systems in the assessment area(s)supplements its performance under the five corecriteria sufficiently to warrant an overall rating ofOutstanding.

Additional Observations

Information Regarding Process-OrientedActivities

Process-oriented activities, such as the internalmonitoring of the geographic distribution of loans,needs ascertainment, marketing, and efforts toachieve CRA objectives, rarely substantiate strongperformance or explain poor performance. Theseactivities may, on occasion, be discussed toexplain elements of the performance context thataffect the institution.

Consideration of Prior Ratings

The performance-context procedures require ex-aminers to consider the prior performance rating,among other factors, when evaluating the institu-tion. The prior rating is of interest to the public andshould be considered in assessing current perfor-mance.

Fair Lending

The fair lending portion of the compliance exami-nation is the appropriate medium for analyzing aninstitution’s performance with respect to makingcredit decisions in compliance with the EqualCredit Opportunity Act and the Fair Housing Act.Findings of discrimination on a prohibited basis,however, should be discussed in the CRA andexamination report in accordance with the guid-ance provided in the sample Public Evaluation.



Small-Institution Performance EvaluationsInstructions for Sampling at Small Institutions

These instructions were distributed as attachmentB to CA 02-3 (January 24, 2002).

Examiners are required to estimate three propor-tions in connection with examinations of smallinstitutions: the proportion of loans inside andoutside of an assessment area; the proportion ofloans in low-, moderate-, middle-, and upper-income geographies in an assessment area; andthe proportion of loans to low-, moderate-, middle-,and upper-income borrowers within an assessmentarea. Examiners are to interpret the estimatedproportions based on the performance context andother information obtained during the examination.

Under the revised regulation, small banks are notrequired to collect data for CRA examinationpurposes. However, some small institutions maychoose to provide data regarding their loans,including the census-tract locations and borrowerincomes, similar to those being required for largeinstitutions. Some institutions may even provide asummary of their distribution of loans. In this case,as long as the examiner is able to verify the bank’sinformation using the guidance provided withrespect to sampling with data accuracy in CA 01-8,the examiner will not need to perform sampling toevaluate the bank’s CRA performance but may usethe data supplied by the bank.

Step 1

Examiners should select samples for one or moremajor product lines, taking into account factorssuch as the institution’s business strategy and itsareas of expertise. As an initial matter, it will beacceptable to select for review for these purposesamong the same categories of loans that are to beused when reviewing large banks, i.e. mortgages,small business and farm loans, and consumerloans.1

Step 2

The total number of loans, both originated andpurchased by the institution, for a major productcategory will be defined as the ‘‘universe’’ of loans.In order to determine the number of loans for thesample (known as the sample size), examinersshould know the number of loans in the universe,even if this requires them to count the number ofloans manually.

This universe can include

• The total number of loans since the last exami-nation, or

• The total number of loans in the previous year, or• The total number of loans in the previous sixmonths.

The universe of loans should cover at least theactivity in the six months prior to the examination. Itshould cover at least the prior year if the number ofloans made in the last six months is less than 50. Ifthe universe of loans for the previous year for anyparticular product category is less than 50, then allloans made or purchased since the last examina-tion for that product should be included in theuniverse. Moreover, when selecting the universe,examiners should ensure that loans included in theuniverse are representative of the bank’s loanactivity during the entire examination period.

Step 3

The examiner should determine the number ofloans to be sampled. Use the sampling software todetermine the appropriate number of loans to beselected for each product category being exam-ined. The software computes the sample sizebased on the universe of loans for each productand the desired confidence and precision levels.

Initially, examiners should select samples basedon a 90 percent confidence interval, with a plus orminus 5 percent level of precision. This means thatthere is a 90 percent chance that the results fromthe sample will be within 5 percent of the trueproportion, for whichever criteria are being evalu-ated. This confidence interval was chosen becauseit should ensure an acceptable reliability of results.However, examination reports for small banksshould be monitored closely during the first year ofexperience with this new sampling approach sothat a review of the results of implementing thispolicy can be done when there has been adequatefield experience. For loan products or institutionsthat require further investigation or are undergoinggreater scrutiny for any reason, a 95 percentconfidence level with plus or minus 5 percentprecision should be used. A more stringent statis-tical framework using a higher confidence level isnecessary because in these cases examiners willneed results with a higher degree of reliability.

How to Select a Random Sample

Once the number of loans to be sampled is known,

1. According to Regulation BB, the major consumer productcategories are defined as home equity, motor vehicle, othersecured, other unsecured, and credit card.


the examiners should select these loans from a listof loans unique to that product, if one is availablefrom the bank. If no unique list or other sortingsystem is available for use, the examiner mustrestrict the random sampling procedures below toeach product category that can be segregated.

To select files, the examiner should calculate theinterval to use for sampling by dividing the numberof loans in the universe by the number of loans inthe sample and rounding up to the nearest wholenumber. For example, if there are 150 loans in theuniverse and 86 in the sample, the calculation is150/86=1.74, which, when rounded, is 2. Theexaminer should start by choosing either the first orsecond loan and then proceed through the list of150 loans and select every other file. After the firstpass through the list, the examiner would haveselected 75 of the 86 needed for the sample. Toselect the 11 additional files, the examiner shouldfollow the same process with the remaining files onthe list. Dividing 75 (the remaining files not alreadyselected for the sample) by 11 yields 6.82, whichrounds up to 7. This time the examiner would startby selecting any of the first 7 loans on the list andthen select every seventh file thereafter. This willadd 10 to the sample. Having done this, 85 files willhave been selected for the sample and 65 files notselected. Selecting 1 more file, at random, from the65 not already selected, will complete the sample.

Calculating Proportion Estimates andResulting Reliability

The next step is to calculate the proportionestimates as itemized in the examination proce-dures. Once the loan data are entered, the softwareprogram will generate the following reports forexaminer use:

Comparisons of Credit Extended Inside andOutside of the Assessment Area2

• The percentage of the number of loans (byproduct type) inside and outside the assessmentarea

• The percentage of the dollar amount of loans (byproduct type) inside and outside the assessmentarea

The results from the sample will be accompaniedby a precision range (or confidence interval), plusor minus, around the estimate. For example,sampling for the percentage of loans (within aproduct type) outside of the assessment area mayresult in a proportion estimate of 32.5 percent with

a plus or minus 5 percent precision interval at the90 percent confidence level. This means that thereis a 90 percent probability that the percentage ofthe institution’s loans of this type outside theassessment area is between 27.5 percent to37.5 percent. The resulting precision interval isinfluenced by a range of factors, including theconfidence level, and the incidence of missingdata. In general, the narrower the range around theresulting estimate, the more accuracy that hasbeen achieved from the sampling procedures.

Distribution of Credit within the AssessmentArea(s)3

In accordance with the examination procedures,examiners should tabulate the following propor-tions based on only those loan records from thesample that are within the assessment area foreach product category:

• The number and percentage of loan originations(by product type, if applicable) in low-, moderate-,middle-, and upper-income geographies

• The dollar amount and percentage of loanoriginations (by product type, if applicable) inlow-, moderate-, middle-, and upper-incomegeographies

• The number and percentage of loan originations(by product type, if applicable) to low-,moderate-, middle-, and upper-income borrowers

• The dollar amount and percentage of loanoriginations (by product type, if applicable) inlow-, moderate-, middle-, and upper-incomeborrowers

• The number and percentage of loan originationsto small businesses/farms of different sizes (byrevenue)

• The dollar amount and percentage of loanoriginations to small businesses/farms of differ-ent sizes (by revenue)

Examiners are to follow the guidelines in theexamination procedures to interpret the resultsfrom the sampling and, ultimately, to assign a ratingto the institution’s lending performance. Note thatthe precision ranges for the distribution estimatesmay be broader than those for the ‘‘In/Out’’analysis. This may be the case because the originalsample size will have been reduced by those loanslocated outside the assessment area. Though itwould be possible to augment the sample withadditional loan records, this is not required in mostcases because the time and expense involved donot seem justified by the greater precision of theresults obtained. However, if the precision intervalin such circumstances is more than 15 percent, theexaminer should select, and enter, additional files

2. Sampling software will compute the proportion estimates forthe examiner if they are available. Examiners will evaluate theresults following the criteria outlined in the examination proce-dures.

3. Again, the sampling software will compute these results forexaminers once the necessary data have been entered.

Instructions for Sampling at Small Institutions


from within the assessment area in order to reducethe precision interval below 15 percent.

Examiners should take particular care in theirinterpretations of proportion estimates to low- ormoderate-income geographies that are in thesingle digits. Even a high degree of precision in thesampling will not allow examiners to make finedistinctions when dealing with small proportionestimates. For example, if the total number of loanoriginations in a product line was 500 since the lastexamination and the sample results show a 2 per-cent penetration to low- and moderate-income

areas, then the resulting precision interval could bebetween .8 percent and 4.6 percent, using a90 percent confidence level. Such a result does notallow the examiner to distinguish a .8 percent froma 4.0 percent penetration.

Examiners should also understand that theanalytical reports do not identify specific tracts, orgeographic ‘‘gaps,’’ in a bank’s lending. Therefore,while the software can be used to determine thedistribution of loans made to different incomegeographies, examiners cannot rely on it to identifysignificant gaps in a bank’s lending.

Instructions for Sampling at Small Institutions


Intermediate Small InstitutionsExamination Procedures and Sample Format forPublic Disclosure of Examination Results

The Examination Procedures for Intermediate Small Institutions and the Sample Format for Public Disclosureof Examination Results follow. Both documents are also available on the web site of the Federal FinancialInstitutions Examination Council.

Examination Procedures: www.ffiec.gov/cra/pdf/isbank.pdf

Sample Format for Public Disclosure of Examination Results: www.ffiec.gov/cra/pdf/ex_instruct_sinter.pdf


Large InstitutionsExamination Procedures and Sample Format forPublic Disclosure of Examination Results

The Examination Procedures for Large Institutions and the Sample Format for Public Disclosure ofExamination Results follow. Both documents are also available on the web site of the Federal FinancialInstitutions Examination Council.

Examination Procedures: www.ffiec.gov/cra/pdf/cra_exlarge9.pdf

Sample Format for Public Disclosure of Examination Results: www.ffiec.gov/cra/pdf/ex_instruct_l.pdf


Large InstitutionsRatings Matrixes

Lending-Test MatrixCharacteristic Outstanding High

SatisfactoryLow Satisfactory Needs to Improve Substantial

NoncomplianceLending activity Lending levels

reflect excellentresponsiveness toassessment-areacredit needs.

Lending levelsreflect goodresponsiveness toassessment-areacredit needs.

Lending levelsreflect adequateresponsiveness toassessment-areacredit needs.

Lending levelsreflect poorresponsiveness toassessment-areacredit needs.

Lending levelsreflect very poorresponsiveness toassessment-areacredit needs.

Assessment-area(s)concentration

A substantialmajority of loansare made in theinstitution’sassessmentarea(s).

A highpercentage ofloans are made inthe institution’sassessmentarea(s).

An adequatepercentage ofloans are made inthe institution’sassessmentarea(s).

A smallpercentage ofloans are made inthe institution’sassessmentarea(s).

A very smallpercentage ofloans are made inthe institution’sassessmentarea(s).

Geographicdistributions ofloans

The geographicdistribution ofloans reflectsexcellentpenetrationthroughout theassessmentarea(s).

The geographicdistribution ofloans reflectsgood penetrationthroughout theassessmentarea(s).

The geographicdistribution ofloans reflectsadequatepenetrationthroughout theassessmentarea(s).

The geographicdistribution ofloans reflectspoor penetrationthroughout theassessmentarea(s),particularly tolow- ormoderate-incomegeographies inthe assessmentarea(s).

The geographicdistribution ofloans reflects verypoor penetrationthroughout theassessmentarea(s),particularly to low-or moderate-incomegeographies in theassessmentarea(s).

Borrowers’ profile The distribution ofborrowersreflects, given theproduct linesoffered by theinstitution,excellentpenetrationamong retailcustomers ofdifferent incomelevels and amongbusinesscustomers ofdifferent sizes.

The distribution ofborrowersreflects, given theproduct linesoffered by theinstitution, goodpenetrationamong retailcustomers ofdifferent incomelevels and amongbusinesscustomers ofdifferent sizes.

The distribution ofborrowersreflects, given theproduct linesoffered by theinstitution,adequatepenetrationamong retailcustomers ofdifferent incomelevels and amongbusinesscustomers ofdifferent sizes.

The distribution ofborrowersreflects, given theproduct linesoffered by theinstitution, poorpenetrationamong retailcustomers ofdifferent incomelevels and amongbusinesscustomers ofdifferent sizes.

The distribution ofborrowers reflects,given the productlines offered bythe institution, verypoor penetrationamong retailcustomers ofdifferent incomelevels and amongbusinesscustomers ofdifferent sizes.


Lending-Test Matrix—continuedCharacteristic Outstanding High

SatisfactoryLow Satisfactory Needs to Improve Substantial

NoncomplianceResponsiveness tocredit needs ofhighlyeconomicallydisadvantagedgeographies andto low-incomepersons and smallbusiness

The institutionexhibits anexcellent recordof serving thecredit needs ofthe mosteconomicallydisadvantagedarea(s) of itsassessmentarea(s),low-incomeindividuals,and/or very smallbusinesses,consistent withsafe and soundbankingpractices.

The institutionexhibits a goodrecord of servingthe credit needsof the mosteconomicallydisadvantagedarea(s) of itsassessmentarea(s),low-incomeindividuals,and/or very smallbusinesses,consistent withsafe and soundbankingpractices.

The institutionexhibits anadequate recordof serving thecredit needs ofthe mosteconomicallydisadvantagedarea(s) of itsassessmentarea(s),low-incomeindividuals,and/or very smallbusinesses,consistent withsafe and soundbankingpractices.

The institutionexhibits a poorrecord of servingthe credit needsof the mosteconomicallydisadvantagedarea(s) of itsassessmentarea(s),low-incomeindividuals,and/or very smallbusinesses,consistent withsafe and soundbankingpractices.

The institutionexhibits a verypoor record ofserving the creditneeds of the mosteconomicallydisadvantagedarea of itsassessmentarea(s),low-incomeindividuals, and/orvery smallbusinesses,consistent withsafe and soundbanking practices.

Communitydevelopmentlending activities

The institution is aleader in makingcommunitydevelopmentloans.

The institution hasmade a relativelyhigh level ofcommunitydevelopmentloans.

The institution hasmade anadequate level ofcommunitydevelopmentloans.

The institution hasmade a low levelof communitydevelopmentloans.

The institution hasmade few, if any,communitydevelopmentloans.

Product innovation The institutionmakes extensiveuse of innovativeand/or flexiblelending practicesin order to serveassessment-areacredit needs.

The institutionuses innovativeand/or flexiblelending practicesin order to serveassessment-areacredit needs.

The institutionmakes limited useof innovativeand/or flexiblelending practicesin order to serveassessment-areacredit needs.

The institutionmakes little use ofinnovative and/orflexible lendingpractices in orderto serveassessment-areacredit needs.

The institutionmakes no use ofinnovative and/orflexible lendingpractices in orderto serveassessment-areacredit needs.

Ratings Matrixes


Investment-Test MatrixCharacteristic Outstanding High Satisfactory Low Satisfactory Needs to Improve Substantial

NoncomplianceInvestment andgrant activity

The institution hasan excellent levelof qualifiedcommunitydevelopmentinvestment andgrants, often in aleadershipposition,particularly thosethat are notroutinely providedby privateinvestors.

The institution hasa significant levelof qualifiedcommunitydevelopmentinvestments andgrants,occasionally in aleadershipposition,particularly thosethat are notroutinely providedby privateinvestors.

The institution hasan adequate levelof qualifiedcommunitydevelopmentinvestments andgrants, althoughrarely in aleadershipposition,particularly thosethat are notroutinely providedby privateinvestors.

The institution hasa poor level ofqualifiedcommunitydevelopmentinvestments andgrants, but not ina leadershipposition,particularly thosethat are notroutinely providedby privateinvestors.

The institution hasa few, if any,qualifiedcommunitydevelopmentinvestments orgrants, particularlythose that are notroutinely providedby privateinvestors.

Responsiveness tocredit andcommunitydevelopmentneeds

The institutionexhibits excellentresponsiveness tocredit andcommunityeconomicdevelopmentneeds.

The institutionexhibits goodresponsiveness tocredit andcommunityeconomicdevelopmentneeds.

The institutionexhibits adequateresponsiveness tocredit andcommunityeconomicdevelopmentneeds.

The institutionexhibits poorresponsiveness tocredit andcommunityeconomicdevelopmentneeds.

The institutionexhibits very poorresponsiveness tocredit andcommunityeconomicdevelopmentneeds.

Communitydevelopmentinitiatives

The institutionmakes extensiveuse of innovativeand/or complexinvestments tosupportcommunitydevelopmentinitiatives.

The institutionmakes significantuse of innovativeand/or complexinvestments tosupportcommunitydevelopmentinitiatives.

The institutionoccasionally usesinnovative and/orcomplexinvestments tosupportcommunitydevelopmentinitiatives.

The institutionrarely usesinnovative and/orcomplexinvestments tosupportcommunitydevelopmentinitiatives.

The institutiondoes not useinnovative and/orcomplexinvestments tosupportcommunitydevelopmentinitiatives.

Ratings Matrixes


Service-Test MatrixCharacteristic Outstanding High Satisfactory Low Satisfactory Needs to Improve Substantial

NoncomplianceAccessibility ofdelivery systems

Delivery systemsare readilyaccessible to allportions of theinstitution’sassessmentarea(s).

Delivery systemsare accessible toessentially allportions of theinstitution’sassessmentarea(s).

Delivery systemsare reasonablyaccessible toessentially allportions of theinstitution’sassessmentarea(s).

Delivery systemsare accessible tolimited portions ofthe institution’sassessmentarea(s).

Delivery systemsare inaccessible tosignificant portionsof the assessmentarea(s),particularly low-and moderate-incomegeographiesand/or low- andmoderate-incomeindividuals.

Changes inbranch locations

To the extentchanges havebeen made, theinstitution’s recordof opening andclosing brancheshas improved theaccessibility of itsdelivery systems,particularly in low-and moderate-incomegeographiesand/or to low-and moderate-incomeindividuals.

To the extentchanges havebeen made, theinstitution’sopening andclosing ofbranches has notadverselyaffected theaccessibility of itsdelivery systems,particularly in low-and moderate-incomegeographiesand/or to low-and moderate-incomeindividuals.

To the extentchanges havebeen made, theinstitution’sopening andclosing ofbranches hasgenerally notadverselyaffected theaccessibility of itsdelivery systems,particularly in low-and moderate-incomegeographiesand/or to low-and moderate-incomeindividuals.

To the extentchanges havebeen made, theinstitution’s recordof opening andclosing brancheshas adverselyaffected theaccessibility of itsdelivery systems,particularly in low-and moderate-incomegeographiesand/or to low-and moderate-incomeindividuals.

To the extentchanges havebeen made, theinstitution’sopening andclosing ofbranches hassignificantlyadversely affectedthe accessibility ofits deliverysystems,particularly in low-and moderate-incomegeographiesand/or to low- andmoderate-incomeindividuals.

Reasonablenessof business hoursand services inmeetingassessment-area(s) needs

Services(including whereappropriate,business hours)are tailored to theconvenience andneeds of theassessmentarea(s),particularly low-and moderate-incomegeographiesand/orindividuals.

Services(including, whereappropriate,business hours)do not vary in away thatinconveniencescertain portions ofthe assessmentarea(s),particularly low-and moderate-incomegeographiesand/orindividuals.

Services(including, whereappropriate,business hours)do not vary in away thatinconveniencesportions of theassessmentarea(s),particularly low-and moderate-incomegeographiesand/orindividuals.

Services(including, whereappropriate,business hours)vary in a way thatinconveniencescertain portions ofthe assessmentarea(s),particularly low-and moderate-incomegeographiesand/orindividuals.

Services(including, whereappropriate,business hours)vary in a way thatsignificantlyinconveniencesmany portions ofthe assessmentarea(s),particularly low-and moderate-incomegeographiesand/or individuals.

Communitydevelopmentservices

The institution is aleader inprovidingcommunitydevelopmentservices.

The institutionprovides arelatively highlevel ofcommunitydevelopmentservices.

The institutionprovides anadequate level ofcommunitydevelopmentservices.

The institutionprovides a limitedlevel ofcommunitydevelopmentservices.

The institutionprovides few, ifany, communitydevelopmentservices.

Ratings Matrixes


Large InstitutionsFormat Guidance forPublic Disclosure of Examination Results

This following guidance was transmitted in CA 02-7 (June 13, 2002). The guidance may be applied to thenew large-bank performance evaluation templates transmitted in CA 05-7 (September 16, 2005).


SAMPLE LARGE INSTITUTION EVALUATION

PUBLIC DISCLOSURE

(Date of Evaluation)

COMMUNITY REINVESTMENT ACTPERFORMANCE EVALUATION

Name of Depository Institution

Institution’s Identification Number

Address of Institution

Name of Supervisory Agency

Address of Supervisory Agency

NOTE: This document is an evaluation of this institution’s record of meeting the credit needs of its entirecommunity, including low- and moderate-income neighborhoods, consistent with safe and soundoperation of the institution. This evaluation is not, nor should it be construed as, an assessment ofthe financial condition of this institution. The rating assigned to this institution does not representan analysis, conclusion, or opinion of the federal financial supervisory agency concerning thesafety and soundness of this financial institution.

Format Guidance for Public Disclosure of Examination Results

Large Institution Performance Evaluation Federal Reserve Bank GuidanceSeptember 2000 June 2002


TABLE OF CONTENTS

NOTE

This table of contents is a sample for a large, multistate institution, and should be adjusted, asappropriate, to reflect the scope of the institution’s operations. Refer to the Instructions for WritingPublic Evaluations for further guidance.

Institution Rating

Institution’s CRA Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Table of Performance Test Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Summary of Major Factors Supporting Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Institution

Description of Institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Scope of Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Conclusions With Respect to Performance Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Multistate Metropolitan Area

Multistate Metropolitan Area Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Scope of Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Description of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Conclusions With Respect to Performance Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

State

State Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Scope of Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Description of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Conclusions With Respect to Performance Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Metropolitan Area (Full Review)

Description of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Conclusions With Respect to Performance Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Metropolitan Area (Limited Review) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Non-Metropolitan Area (Full Review)

Description of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Conclusions With Respect to Performance Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Non-metropolitan Statewide Area (Limited Review) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Appendices

CRA Appendix A: Scope of Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29CRA Appendix B: Summary of State and Multistate Metropolitan Area Ratings . . . . . . . . . . . . . . 32CRA Appendix C: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33CRA Appendix D: Core CRA Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36CRA Appendix E: Assessment Area Maps (optional) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

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INSTITUTION’S RATINGINSTITUTION’S CRA RATING: Name of financial institutionis rated‘‘ [BOLDFACE CAPS].’’

The following table indicates the performance level of name of financial institution with respect to thelending, investment, and service tests.[Indicate the performance level under each criteria by marking an‘‘ X’’ in the appropriate row.]

PERFORMANCELEVELS

NAME OF FINANCIAL INSTITUTIONPERFORMANCE TESTS

LendingTest*

InvestmentTest

ServiceTest

OutstandingHigh SatisfactoryLow SatisfactoryNeeds to ImproveSubstantialNoncompliance

* The lending test is weighted more heavily than the investment and service tests in determining the overallrating.

Summarize the major factors supporting the institution’s rating. When illegal discrimination ordiscouragement has been identified and has affected the rating, the summary should include a statementthat the rating was influenced by violations of the substantive provisions of the antidiscrimination laws.The summary should not mention any technical violations of the antidiscrimination laws.

NOTE

Present a bullet point summary of the major factors supporting the institution’s rating with respectto each test.



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INSTITUTION

DESCRIPTION OF INSTITUTION

Write a brief description of the institution. Include relevant information regarding the institution’s holdingcompany and affiliates, if any, the states and assessment areas served, the institution’s ability to meetvarious credit needs based on its financial condition and size, product offerings, prior performance, legalimpediments and other factors. Other information that may be important includes total assets, asset/loanportfolio mix, primary business focus, branching network, and any merger or acquisition activity.

NOTE

In addition to the above, remember: (1) When describing the bank’s assessment areas, indicate if therehas been any change in assessment areas since the prior examination. If so, explain the changes brieflywith any necessary details. (2) A conclusion must be stated regarding the bank’s ability to meet thevarious credit needs in its assessment areas but do not disclose confidential information, in accordancewith the prohibition in 12 CFR 261.2(c)(1)(i). (3) You may include a map of the bank’s assessmentareas in an appendix.



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SCOPE OF EXAMINATION

NOTE

Scope information orients the reader and, when presented here, eliminates repetition later in thedocument. At a minimum, the following items should be discussed: the specific lending productsreviewed; the names of any affiliates reviewed and their corresponding lending, investment or serviceactivities; the institution’s assessment areas and whether its activities in the assessment areas werereviewed using the full examination procedures; and the period covered in the review. Indicate if anyproducts or assessment areas were given greater weight in reaching conclusions. Indicate that theinformation presented here pertains throughout the evaluation unless specifically noted otherwise.

CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS

Discuss the institution’s overall CRA performance. The facts, data and analyses that were used to form aconclusion about the rating should be reflected in the narrative, including institution strengths and areas forimprovement. The narrative should clearly demonstrate how the results of each of the performance testanalyses and relevant information from the performance context factored into the overall institution rating.Charts and tables should be used whenever possible to summarize and effectively present the most criticalor informative data used by the examiner in analyzing the institution’s performance and reachingconclusions.

Write a paragraph about the institution’s record of complying with the antidiscrimination laws (ECOA,FHA, or HMDA) using the following guidelines.

When substantive violations involving illegal discrimination or discouragement are found by the[Agency] or identified through self-assessment(s), state that substantive violations were found, whetherthey caused the CRA rating to be adjusted downward, and why the rating was or was not adjusted.Identify the law(s) and regulations(s) violated, the extent of the violation(s) (for example, widespread,or limited to a particular state, office, division, or subsidiary) and characterize management’sresponsiveness in acting upon the violation(s). Determine whether the institution has policies,procedures, training programs, internal assessment efforts, or other practices in place to preventdiscriminatory or other illegal credit practices.

If no substantive violations were found, state that no violations of the substantive provisions of theantidiscrimination laws and regulations were identified. Even if discrimination has not been found,comments related to the institution’s fair lending policies, procedures, training programs and internalassessment efforts may still be appropriate. If applicable, technical violations cited in the report of



3


examination should be presented in general terms. Discuss whether management has [proposed/taken]steps that [have/would if implemented] address(ed) the technical violation(s).

NOTE

Use the following format for the discussion:

LENDING TEST

State the rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect tothe lending test and provide a brief explanation to support the rating. This explanation should includethe ratings of the states or conclusions about the full-scope MSAs, whichever is applicable, evaluatedat the examination. Explain when any areas were given greater weight than others were.

Lending Activity: State the conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regardinglending activity. Use the Total Lending Activity Table below to show the total number and dollar valueof all applicable loans originated or purchased by the bank and its affiliates. (Adjust table if consumeror other loan types are being evaluated.) If no affiliate lending is included, do not use the Total LendingActivity Table. Instead, refer to the combined totals from the Assessment Area Lending Table discussedbelow.

EXHIBIT 1Summary of Lending Activity

Loan Type # % $(000s) %HMDA home purchase 3,994 -- 758,385 --HMDA refinancings 2,081 -- 399,258 --HMDA home improvement 626 -- 2,831 --HMDA multifamily 52 -- 130,041 --Total HMDA-related 6,753 68 1,290,515 75Total small business 3,239 32 424,913 25TOTAL LOANS 9,992 100 $1,715,428 100

Note: Affiliate loans include only loans originated or purchased within the bank’s assessment areas.



4


Assessment Area Concentration: Discuss the level of lending activity inside and outside all the bank’sassessment areas, using the Assessment Area Lending Table below. (Adjust the table if small farm,consumer, or other loan types are being evaluated.) It is not necessary to state a conclusion regardingassessment area concentration since this is factored into the overall lending activity conclusion. Providea discussion if there is a high level of lending outside the assessment area. Refer to Core Table 1:Lending Volume, for additional information about assessment area lending.

EXHIBIT 2Lending Inside and Outside the Assessment Area

Inside Outside# % $ (000s) % # % $ (000s) %

HMDA home improvement 617 99 2,786 98 9 1 45 2HMDA multifamily 45 87 111,581 86 7 13 18,460 14Total HMDA-related 662 98 114,367 86 16 2 18,505 14Total small business 3,180 98 414,159 97 59 2 10,754 3TOTAL LOANS 3,842 98 $528,526 98 75 2 $29,259 5

Note: Affiliate loans not included.



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Geographic and Borrower Distribution: State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’‘‘ adequate’’ ) regarding each of these elements of the lending test. Remember that overall conclusionsare based on performance in the various assessment areas. It is not necessary to recalculate geographicand borrower distribution data for all the bank’s assessment areas combined. Support your conclusionsby specifying the ratings/conclusions in the various assessment areas states or MAs (as applicable) thatwere factored into the conclusions about the bank’s overall performance. Discuss performance ingeneral. Detailed discussions should be reserved for assessment area write-ups.

With respect to geographic distribution, note whether or not any significant lending gaps in contiguousgeographies unexplained by performance context were found. If there were such lending gaps indicatein which assessment area(s) they occurred and include a cross-reference to the appropriate section ofthe evaluation.

In addition, discuss any significant qualitative aspects that may have augmented the bank’s overallgeographic or borrower performance. This can include innovative or flexible lending practices orproducts that are available in all assessment areas. Describe the product or practice briefly and indicatein what way it assisted low- and moderate-income (LMI) geographies and/or LMI borrowers. State thevolume of loans originated through the programs and that they are included in the overall volume ofloans evaluated. If the products or practices are unique to specific states or assessment areas, theyshould be mentioned only briefly, and the reader should be directed to the appropriate section of theevaluation for a more detailed discussion.

Community Development Lending: State a conclusion about the level of community developmentlending (for example, ‘‘ the bank is a leader,’’ ‘‘ its level of . . . is relatively high,’’ ‘‘ its level of . . . isadequate’’ ) overall and in states or full-scope MAs, whichever is applicable. Note if any activity wasoutside the bank’s assessment area and explain why such activity was given consideration. Explainwhen any areas were given greater weight than others were. Refer as appropriate to issues relating toperformance context and availability of opportunities. Provide the total of community developmentloans (number and dollar amount) in all the bank’s assessment areas combined. Similarly, provide thesetotals for ‘‘ other community development lending activity’’ that was considered, such as letters ofcredit. Include general comments and specific examples of qualitative aspects of the activity that mayhave augmented performance, such as responsiveness to need, degree of innovation, or complexity.Other than in the examples, details about the qualitative aspects of the loans should be presented in thediscussions of the state or assessment area where the loans are located. Refer to Core Table 1 forinformation on the level of community development lending in the individual assessment areas.



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INVESTMENT TEST

State the rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect tothe investment test overall and provide a brief explanation to support this rating. This explanationshould include the ratings of the states or conclusions about full-scope MAs, whichever is applicable.Note if any activity was outside the bank’s assessment area and explain why such activity was givenconsideration. Explain when any areas were given greater weight than others were. Provide the totalamount of investments (number and dollar amount) in all the assessment areas combined, and state aconclusion (for example, ‘‘ excellent,’’ ‘‘ significant,’’ ‘‘ adequate’’ ) regarding the level of activity. Noteif any investments were given greater weight than others were and explain why. Give the details of anyinvestments that assist the overall, regional, or multiple assessment areas. Indicate if the amounts ofsuch investments are in addition to or included in the specific assessment area activity shown in CoreTable 14, which should be cross-referenced. Make general comments and provide specific examples ofthe qualitative aspects that may have augmented performance, such as responsiveness to need, degreeof innovation, or complexity. Other than in the examples, details about the qualitative aspects ofinvestments should be presented in the discussions of the state or assessment area to which theinvestments relate.

SERVICE TEST

State the rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect tothe service test. Support your rating by specifying the ratings/conclusions in the various assessmentareas (states or MAs as applicable) that were factored into the conclusions about the bank’s overallperformance. State general conclusions regarding each element of the retail service portion as well asthe community development service portion of the test, using the terminology of Appendix A toRegulation BB, which describes the various performance levels. Detailed discussions should bereserved for assessment area write-ups. However, if there are particular assessment areas in whichperformance was exceptionally good or bad, you may mention the assessment area(s) and provide across-reference to the section of the evaluation in which detailed information is presented. Productsshould be described generally, and a statement should be made that they are available as describedthroughout all the assessment areas unless otherwise noted.

COMPLIANCE WITH ANTIDISCRIMINATION LAWS

As previously noted, write a paragraph about the institution’s record of complying with theantidiscrimination laws. Use the guidelines on page 3.



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MULTISTATE METROPOLITAN AREACRA RATING FOR (Name of Multistate Metropolitan Area, Including State Names):1

The lending test is rated:The investment test is rated:The service test is rated:

[Complete for each multistate metropolitan area where an institution has branches in two or more stateswithin the multistate metropolitan area.]

Summarize the major factors supporting the institution’s multistate metropolitan area rating. When illegaldiscrimination or discouragement has been identified and has affected the rating, the conclusion shouldinclude a statement that the rating was influenced by violations of the substantive provisions of theantidiscrimination laws. The conclusion should not mention any technical violations of the antidiscrimi-nation laws.

NOTE

Present a bullet point summary supporting the ratings with respect to each test.


Write a short description of the scope of the examination within the multistate MA. Discuss how CRAactivities in the multistate MA were reviewed (using the examination procedures or through an analysis ofavailable facts and data), and the time period covered in the review.

NOTE

In addition to the above, indicate any variance from the information presented in the scope section ofthe institution portion of this document and explain the reason(s) for the variance. If there is more thanone assessment area in the multistate metropolitan area, refer to the state and metropolitan area portionsof this document for guidance.

1. This rating reflects performance within the multistate metropolitan area. The statewide evaluations are adjusted and do not reflectperformance in the parts of those states contained within the multistate metropolitan area.



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DESCRIPTION OF INSTITUTION’S OPERATIONS IN (NAME OFMULTISTATE METROPOLITAN AREA)

Describe the institution’s operations within the multistate metropolitan area, including a description of eachof the assessment area(s) that it serves within the multistate metropolitan area. Information that may beimportant includes: total assets; asset/loan portfolio mix; primary business focus; branching network; andany merger or acquisition activity. For each of the assessment areas served, include key information suchas the number of branches within the assessment area and the number of individuals and geographies ineach income category. Indicate how many of those assessment areas were reviewed using the examinationprocedures.

Other information that may be important includes population trends, type and condition of housing stock,available employment, and general business activity. Also include a summary of any credit needs identifiedand particular lending opportunities which were noted. Discuss, if appropriate, the number and kinds ofCRA-related community contacts that were consulted and relevant information obtained and used, if any,in the CRA evaluation. Typically, more detailed information will be presented for assessment areasreviewed using the examination procedures. Charts and tables may be used to effectively presentinformation as appropriate, particularly for assessment areas that are not reviewed using the examinationprocedures.

NOTE

In addition to the above, identify the states, counties and major cities that constitute the MA and providethe following data: total deposits in the MA, MA deposits as a percentage of the state’s overall totaldeposits, and the institution’s deposit share in the MA. Discuss qualitative aspects that may haveinfluenced the bank’s performance, such as the level of competition and length of time in the market.Insert the demographic information table below, which provides most demographic details. In addition,discuss HUD adjusted-income ranges, unemployment rates and major employers, and provide anoverview of the economy together with any other relevant performance context information you used,including information obtained from community contacts.



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EXHIBIT 3Assessment Area Demographics

IncomeCategories

TractDistribution

Families byTract Income

Families < PovertyLevel as % of

Families by Tract

Families byFamily Income

# % # % # % # %

Low-income 39 14.6 37,694 7.8 15,579 41.3 113,168 23.3

Moderate-income 57 21.3 90,481 18.6 20,899 23.1 79,578 16.4

Middle-income 96 36.0 192,219 39.6 23,846 12.4 93,094 19.2

Upper-income 75 28.1 164,819 34.0 8,355 5.1 199,373 41.1

Total Assessment Area 267 100.0 485,213 100.0 68,679 14.2 485,213 100.0

HousingUnits by

Tract

Housing Types by Tract

Owner-occupied Rental Vacant

# % % # % # %

Low-income 71,485 12,252 3.3 17.1 50,122 70.1 9,111 12.7

Moderate-income 150,066 48,351 12.9 32.2 87,510 58.3 14,205 9.5

Middle-income 292,074 153,540 40.8 52.6 110,334 37.8 28,200 9.7

Upper-income 257,663 161,863 43.0 62.8 68,383 26.5 27,417 10.6

Total Assessment Area 771,288 375,006 100.0 48.8 316,349 41.0 78,933 10.2

Total Businessesby Tract

Businesses by Tract & Revenue Size

Less Than or =$1 Million

Over $1 MillionRevenue Not

Reported

# % # % # % # %

Low-income 8,402 10.1 7,096 9.9 1,306 10.9 0 --

Moderate-income 15,865 19.0 13,177 18.4 2,688 22.5 0 --

Middle-income 25,892 31.0 23,028 32.2 2,864 23.9 0 --

Upper-income 33,388 40.0 28,274 39.5 5,114 42.7 0 --

Tract not reported 0 0.0 0 0.0 0 0 0 --

Total Assessment Area 83,547 100.0 71,575 100.0 11,972 100.0 0 --

Percentage of Total Business: 85.7 14.3



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CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN(NAME OF MULTISTATE METROPOLITAN AREA)

Discuss the institution’s CRA performance within the multistate metropolitan area, including institutionstrengths and areas for improvement. The narrative should clearly demonstrate how the results of each ofthe performance test analyses factored into the rating. Support your conclusions with an analysis of factsand data, such as the number and volume of loans and investments, by type, across geographies andborrower categories in the assessment areas reviewed using the examination procedures. In addition,support your conclusions with a discussion of facts and data for assessment areas reviewed using thelimited examination procedures when appropriate. Indicate whether the institution’s performance in theassessment areas reviewed without using the examination procedures is consistent with the institution’srecord in assessment areas reviewed using the examination procedures in the multistate metropolitan area.Charts and tables should be used whenever possible to summarize and effectively present the most criticalor informative data used by the examiner in analyzing the institution’s performance and reachingconclusions.



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NOTE

The discussion of conclusions should reflect the following format:

LENDING TEST

State a rating with respect to the lending test (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ lowsatisfactory’’ ) and briefly explain the basis for the rating.

Lending Activity: State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regardinglending activity and refer to Core Table 1: Lending Volume for details. Explain the basis of yourconclusion, and, as applicable, include performance context information.

Geographic Distribution: State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ )regarding the overall geographic distribution of loans and refer to Core Tables 2 through 7 and Table13, as applicable, for details. Explain the basis of your conclusion, with reference to applicableperformance context and community contact information. Discuss performance with respect to each ofthe following loan products, as applicable: HMDA-related (for example, home purchase loans,refinancings) small business, small farm, and consumer. For each product category:

1. State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) concerning the evaluation ofperformance in relation to the appropriate demographic and aggregate data contained in the coretables, and insert key numbers as necessary.

2. Discuss separately performance in LMI geographies.

3. Discuss any significant lending gaps in contiguous geographies.

4. Discuss any qualitative aspects of lending performance that may have augmented performance, suchas innovative or flexible lending practices or products. Products or practices already discussed indetail at the institution level should be mentioned only briefly. However, for those products orpractices unique to the multistate metropolitan area, provide a more detailed description of theproduct(s)or practice(s) and indicate in what way LMI geographies were assisted. Includeinformation on the volume of loans originated through the programs and indicate that the loans areincluded in the overall volume of loans evaluated.



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Distribution by Borrower Income and Revenue Size of the Business: State a conclusion (forexample, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regarding the overall distribution of loans by borrowerincome and revenue size of the business. Refer to Core Tables 8 through 13, as applicable, for details.Explain the basis of your conclusion, and include applicable performance context and communitycontact information. Discuss separately performance with respect to HMDA-related, small businessloans, consumer and small farm loans, as applicable. For each product category:

1. State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regarding the evaluation ofperformance in relation to the appropriate demographic and aggregate information provided in thetables, using key numbers as necessary.

2. For HMDA-related and consumer loans, discuss performance separately in relation to LMIborrowers.

3. Discuss any qualitative aspects of lending performance that may have augmented performancelevels, such as innovative or flexible lending practices or products. Products or practices alreadydiscussed in detail at the institution level should be mentioned only briefly. However, for thoseproducts or practices unique to the multistate metropolitan area, provide general descriptions of theproduct(s) or practice(s) and indicate in what way LMI borrowers were assisted. Include informationabout the volume of loans originated through the programs and indicate that the loans are includedin the overall volume of loans evaluated.

Community Development Loans: State a conclusion about the level of community developmentlending (for example, ‘‘ the bank is a leader,’’ ‘‘ makes a relatively high level of’’ or, ‘‘ makes an adequatelevel of . . .’’ ) and refer as appropriate to issues relating to performance context and availability ofopportunities. State the total of community development loans (number and dollar amount) in themultistate area, and reference Core Table 1 for loan volume in the individual assessment areas. Inaddition, state the total in the multistate area of ‘‘ other community development activity’’ considered,such as letters of credit. Provide details on and specific examples of the qualitative aspects that mayhave augmented performance, such as responsiveness to need, degree of innovation, or complexity.

INVESTMENT TEST

State a rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect to theinvestment test. Note the combined total, in number and dollar amount, of all investments in the MAassessment area, and direct the reader to Core Table 14 for MA details. Note if any investments weregiven greater weight than others were and explain why. Comment on the qualitative aspects that mayhave augmented performance, such as responsiveness to need, degree of innovation, or complexity.Provide significant examples of qualified investments to substantiate your conclusions.



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SERVICE TEST

State a rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect to theoverall service test and briefly explain the basis for the rating.

Retail Services

For retail services, state a conclusion regarding each of the following items. Use the terminology ofAppendix A of Regulation BB for describing the various performance levels:

1. Accessibility of branches, with a reference to Core Table 15 for details and a comparison of branchlocations with the population information provided in the table.

2. Availability of alternative delivery systems that may effectively enhance service to LMI geographiesor persons.

3. Changes in branch locations (as shown in Table 15) and the impact on LMI geographies or persons.

4. Reasonableness of services if it differs from the overall.

Community Development Services

State a conclusion (for example, ‘‘ leader in providing,’’ ‘‘ provides a relatively high level’’ ) regardingcommunity development services and provide details and specific examples representative of theinstitution’s activity.



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STATECRA RATING FOR (Name of State):2

The lending test is rated:The investment test is rated:The service test is rated:

[Complete for each state in which an institution has branches if the institution has branches in two or morestates. For an institution that has branches in only one state, complete the Metropolitan Area andNon-Metropolitan Statewide Area presentations only for that state, as applicable in light of the location ofthe branches.]

Summarize the major factors supporting the institution’s state rating. When illegal discrimination ordiscouragement has been identified and has affected the rating, the conclusion should include a statementthat the rating was influenced by violations of the substantive provisions of the antidiscrimination laws.The conclusion should not mention any technical violations of the antidiscrimination laws.

NOTE

Present a bullet point summary to support the ratings with respect to each test.


Write a short description of the scope of the examination within the state. Discuss how CRA activities inthe state were reviewed (which metropolitan areas or non-metropolitan statewide areas includedassessment areas that were reviewed using the full examination procedures and which metropolitan areaswere reviewed through an analysis of available facts and data), and the time period covered in the review.

NOTE

In addition to the above, indicate any variance from the information presented in the scope section ofthe institution portion of the document and explain the reason(s) for the variance. Specify whichassessment areas had full reviews and which had limited ones and note if any areas fully reviewed weregiven greater weight in reaching conclusions.

2. For institutions with branches in two or more states in a multistate metropolitan area, this statewide evaluation is adjusted and doesnot reflect performance in the parts of those states contained within the multistate metropolitan area. Refer to the multistate metropolitanarea rating and discussion for the rating and evaluation of the institution’s performance in that area.



15


DESCRIPTION OF INSTITUTION’S OPERATIONS IN (NAME OFSTATE)

Describe the institution’s operations within the state, including a description of the assessment area(s)served. Information that may be important includes: total statewide assets; asset/loan portfolio mix;primary business focus; branching network; any merger or acquisition activity; and a brief description ofthe metropolitan areas, non-metropolitan areas, and assessment areas served within the state.

NOTE

In addition to the above, specify the MAs that are included in the state’s assessment areas and theirgeneral location in the state, and provide data on the following: total deposits in the state, state depositsas a percentage of the bank’s overall total deposits, and the bank’s deposit share in the state. In addition,discuss qualitative aspects that may have influenced the bank’s performance, such as the level ofcompetition and length of time in the market. General information concerning the total population ofthe combined assessment areas, income ranges and unemployment levels, and a broad economicoverview should also be presented. Include a general discussion of credit needs in the assessmentarea(s) and any information from community contacts that is applicable to the entire state. Specificdemographic information is to be presented in the discussions relating to the individual assessmentareas.

CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN(NAME OF STATE)

Discuss the institution’s CRA performance within the state. The facts, data and analyses that were used toform a conclusion about the rating should be reflected in the narrative, including institution strengths andareas for improvement. The narrative should clearly demonstrate how the results of each of theperformance test analyses factored into the rating. Charts and tables should be used whenever possible tosummarize and effectively present the most critical or informative data used by the examiner in analyzingthe institution’s performance and reaching conclusions.

NOTE

Use the following format for the discussion of conclusions:

LENDING TEST

State the rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect tothe lending test and provide a brief explanation to support the rating. The explanation should includethe conclusions for the full-scope MAs evaluated at the examination. Explain when any areas weregiven greater weight than others were.

Lending Activity: State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regarding



16


lending activity. Insert the Total Lending Activity Table into the text (see example in institution section)showing the number and dollar value of all applicable loans originated or purchased by the bank andits affiliates, if applicable, in all assessment areas in the state. Make reference to Core Table 1: LendingVolume for further information about lending in specific assessment areas. You may note strengths orweaknesses in lending activity in specific assessment areas if necessary; however, details should usuallybe given only in the discussions of the specific assessment areas.

Geographic and Borrower Distribution: State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’‘‘ adequate’’ ) regarding each of these elements of the lending test. Remember that overall conclusionsare based on performance in the various assessment areas, and it is not necessary to calculateperformance data for all the assessment areas in the state. Provide support by specifying the conclusionsin the various assessment areas that were factored into the bank’s overall performance. Discussperformance in general. Detailed discussions should be reserved for assessment area write-ups.

With respect to geographic distribution, provide a general discussion of any significant lending gaps incontiguous geographies that were found. Details should be provided in the discussion of the assessmentarea concerned.

In addition, discuss any significant qualitative aspects that may have augmented the bank’s performancelevels in the state, for example, innovative or flexible lending practices or products that are availablethroughout the assessment areas in the state. Provide a general description of the product(s) orpractice(s) and indicate in what way LMI geographies and/or LMI borrowers were assisted. Includeinformation on the volume of loans originated under the programs and indicate that the loans areincluded in the overall volume of loans evaluated. If such products or practices are unique to specificassessment areas, they should be mentioned only briefly and the reader should be directed to theappropriate section(s) of the evaluation for details.

Community Development Loans: State a conclusion about the level of community developmentlending (for example, ‘‘ the bank is a leader,’’ ‘‘ makes a relatively high level,’’ ‘‘ makes an adequatelevel’’ ) overall and in full-scope MAs. Explain when any areas were given greater weight than otherswere. Refer as appropriate to issues pertaining to performance context and availability of opportunities.State the total of community development loans (number and dollar amount) in all the assessment areasin the state combined, and direct the reader to Core Table 1 for data on the volume of loans in eachassessment area. In addition, state the total of ‘‘ other community development activity’’ considered,such as letters of credit. Provide general comments and specific examples of qualitative aspects thatmay have augmented performance, such as responsiveness to need, degree of innovation, or complexity.Other than in the examples, details about the qualitative aspects of loans should be presented in thediscussions of the assessment areas in which the loans are located.



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INVESTMENT TEST

State the rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect tothe investment test in the state and in the full-scope MAs. Explain when any areas were given greaterweight than others were. Provide the total amount of investments (number and dollar) for all theassessment areas in the state combined and state a conclusion regarding evaluation of the level ofactivity (for example, ‘‘ excellent,’’ ‘‘ significant,’’ ‘‘ adequate’’ ). Note if any investments were givengreater weight than others were and explain why. Describe the details of any investments that assist thestate’s overall assessment areas. Indicate if such amounts are in addition to or included in the specificassessment area activity shown in Core Table 14: Qualified Investments, and direct the reader to thattable. Comment generally on the qualitative aspects that may have augmented performance, such asresponsiveness to need, degree of innovation, or complexity. Details of qualitative aspects ofinvestments should be presented in the discussions of the assessment areas to which the investmentsrelate.

SERVICE TEST

State the rating (for example, ‘‘ outstanding,’’ ‘‘ high satisfactory,’’ ‘‘ low satisfactory’’ ) with respect tothe service test and support your rating by specifying the conclusions in the various assessment areasthat were factored into the rating of the bank’s performance. State conclusions about performanceregarding each element of the retail service portion of the test as well as to the community developmentservice portion. Use the terminology of Regulation BB Appendix A, which describes the variousperformance levels. Detailed discussions should be reserved for assessment area write-ups. However,if there are particular assessment areas in which performance was exceptionally good or bad, you maymention the assessment area(s) and refer to the section(s) of the document in which detailed informationis presented. Discuss any differences in products offered that are unique to the state.



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METROPOLITAN AREAS(For metropolitan areas with some or all assessment areas

reviewed using the examination procedures.)

DESCRIPTION OF INSTITUTION’S OPERATIONS IN (Name ofMetropolitan Area & State)

Describe the institution’s operations within the metropolitan area, including a description of each of theassessment area(s) that it serves within the metropolitan area. Information that may be important includes:the number of branches within the assessment areas and the number of individuals and geographies in eachincome category. Indicate how many of those assessment areas were reviewed using the full examinationprocedures. Other information that may be important includes population trends, income levels, type andcondition of housing stock, available employment, and general business activity. Also include a summaryof any credit needs identified and particular lending opportunities which were noted.

Discuss, if appropriate, the number and kinds of CRA-related community contacts that were consulted andrelevant information obtained and used, if any, in the CRA evaluation. Typically, more detailed informationwill be presented for assessment areas reviewed using the full examination procedures. Charts and tablesmay be used to effectively present information as appropriate, particularly for assessment areas that arereviewed using the limited examination procedures.

NOTE

In addition to the above, specify the counties and major cities that make up the MA and include dataon the following: total deposits in the MA, MA deposits as a percentage of the state’s overall totaldeposits, and the bank’s deposit share in the MA. Discuss qualitative aspects that may have influencedthe bank’s performance, such as the level of competition and length of time in the market. Insert thedemographic information table below, which provides primary demographic details. Finally, discussHUD adjusted-income levels, unemployment rates and major employers, and provide an overview ofthe economy and any other relevant performance context information you used, including informationobtained from community contacts.



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EXHIBIT 3Assessment Area Demographics(Insert name of assessment area)

IncomeCategories

TractDistribution

Families byTract Income

Families < PovertyLevel as % of

Families by Tract

Families byFamily Income

# % # % # % # %

Low-income 39 14.6 37,694 7.8 15,579 41.3 113,168 23.3

Moderate-income 57 21.3 90,481 18.6 20,899 23.1 79,578 16.4

Middle-income 96 36.0 192,219 39.6 23,846 12.4 93,094 19.2

Upper-income 75 28.1 164,819 34.0 8,355 5.1 199,373 41.1

Total Assessment Area 267 100.0 485,213 100.0 68,679 14.2 485,213 100.0

HousingUnits by

Tract

Housing Types by Tract

Owner-occupied Rental Vacant

# % % # % # %

Low-income 71,485 12,252 3.3 17.1 50,122 70.1 9,111 12.7

Moderate-income 150,066 48,351 12.9 32.2 87,510 58.3 14,205 9.5

Middle-income 292,074 153,540 40.8 52.6 110,334 37.8 28,200 9.7

Upper-income 257,663 161,863 43.0 62.8 68,383 26.5 27,417 10.6

Total Assessment Area 771,288 375,006 100.0 48.8 316,349 41.0 78,933 10.2

Total Businesses byTract

Businesses by Tract & Revenue Size

Less Than or =$1 Million

Over $1 MillionRevenue Not

Reported

# % # % # % # %

Low-income 8,402 10.1 7,096 9.9 1,306 10.9 0 --

Moderate-income 15,865 19.0 13,177 18.4 2,688 22.5 0 --

Middle-income 25,892 31.0 23,028 32.2 2,864 23.9 0 --

Upper-income 33,388 40.0 28,274 39.5 5,114 42.7 0 --

Tract not reported 0 0.0 0 0.0 0 0 0 --

Total Assessment Area 83,547 100.0 71,575 100.0 11,972 100.0 0 --

Percentage of Total Business: 85.7 14.3

CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN(NAME OF METROPOLITAN AREA AND STATE)

Discuss the institution’s CRA performance within the metropolitan area, including institution strengths andareas for improvement. The narrative should clearly demonstrate how the results of each of theperformance test analyses factored into the conclusions. Support your conclusions with an analysis of factsand data, such as the number and volume of loans and investments, by type, across geographies andborrower categories in the assessment areas reviewed using the full examination procedures. In addition,support your conclusions with a discussion of facts and data for assessment areas reviewed using thelimited examination procedures when appropriate. Indicate whether the institution’s performance in theassessment areas reviewed using the limited examination procedures is consistent with the institution’srecord in assessment areas reviewed using the full examination procedures in the metropolitan area. Charts



20


and tables should be used whenever possible to summarize and effectively present the most critical orinformative data used by the examiner in analyzing the institution’s performance and reaching conclusions.

NOTE

Use the following format for the discussion:

LENDING TEST

State a conclusion with respect to the lending test (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) andprovide a brief explanation, including performance context information, as applicable, to support theconclusion.

Lending Activity: State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate,’’ ) regardinglending activity and direct the reader to Core Table 1: Lending Volume for details. Explain the basis ofyour conclusion, with reference to any applicable performance context information.

Geographic Distribution: State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ )regarding the overall geographic distribution of loans and direct the reader to Core Tables 2 through 7and Table 13, as applicable, for details. Explain the basis of your conclusion, with reference to anyapplicable performance context and community contact information. Discuss separately performancewith respect to HMDA-related products, such as home purchase loans and refinancings, as well as withrespect to small business and small farm loans and consumer loans, as applicable. For each productcategory:

1. State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regarding performance, withreference to the appropriate demographic and aggregate information contained in the core tables, andinsert key numbers as necessary.

2. Discuss separately performance in LMI geographies.

3. Discuss any significant lending gaps in contiguous geographies.

4. Discuss any qualitative aspects of lending performance that may have augmented performance.These may include innovative or flexible lending practices or products that are available throughoutthe bank’s assessment areas or that are unique to the particular assessment area. Products or practicesalready discussed in detail at the institution or state level should be mentioned only briefly. However,for those products or practices unique to the assessment area, provide details about the product(s) orpractice(s) and indicate in what way LMI geographies were assisted. Include information concerningthe volume of loans originated under the programs and indicate that the loans are included in theoverall volume of loans evaluated.



21


Distribution by Borrower Income and Revenue Size of the Business: State a conclusion (forexample, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regarding the overall distribution of loans by borrowerincome and revenue size of the business. Refer to Core Tables 8 through 13, as applicable, for details.Explain the basis of your conclusion, with reference to any applicable performance context andcommunity contact information. Discuss separately performance with respect to HMDA-related loans,small business loans, small farm loans, and consumer loans, as applicable. For each product category:

1. State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regarding performance inrelation to the appropriate demographic and aggregate information provided in the tables, using keynumbers as necessary.

2. For HMDA-related and consumer loans, discuss separately performance with respect to LMIborrowers.

3. Discuss any qualitative aspects of lending performance that may have augmented performancelevels. These may include innovative or flexible lending practices or products that are availablethroughout the bank’s assessment areas or that are unique to the particular assessment area. Productsor practices already discussed in detail at the institution or state level should be mentioned onlybriefly. However, for those products or practices unique to the assessment area, provide a moredetailed description of the product(s) or practice(s) and indicate in what way LMI borrowers wereassisted. Include information on the volume of loans originated under the programs and indicate thatthey are included in the overall volume of loans evaluated.

Community Development Lending: State a conclusion (for example, ‘‘ the bank is a leader,’’ ‘‘ makesa relatively high level of . . . ,’’ ‘‘ makes an adequate level of . . .’’ ) for community developmentlending, and refer to performance context and availability of opportunities issues, as appropriate. Statethe volume of loans originated and purchased, and note any ‘‘ other community development activity’’that was considered, such as letters of credit. Indicate the level (number and dollar amount) ofcommunity development lending directed toward each of the four community development categories(for example, affordable housing) and include significant examples as warranted.

INVESTMENT TEST

State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) regarding the level of investments.Note the number and dollar amount of investments in the assessment area, and direct the reader to CoreTable 14 for details. Note if any investments were given greater weight than others were and explainwhy. Comment on the qualitative aspects that may have augmented performance levels, such asresponsiveness to need, degree of innovation, or complexity. Provide significant examples of qualifiedinvestments to substantiate your conclusions.

SERVICE TEST

State a conclusion (for example, ‘‘ excellent,’’ ‘‘ good,’’ ‘‘ adequate’’ ) for the overall service test and thebasis for the conclusion.



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Retail Services

For retail services, using the terminology in Appendix A to Regulation BB, state a conclusion based onthe following:

1. Accessibility of branches, with a reference to Core Table 15 for details and a comparison of branchlocations with the population information provided in the table.

2. Availability of alternative delivery systems that may effectively enhance service to LMI geographiesor persons.

3. Changes in branch locations (as shown in Table 15) and the impact on LMI geographies or persons.

4. Reasonableness of services if conclusion differs from that for the services overall.

Community Development Services:

State a conclusion (for example, ‘‘ leader in providing,’’ ‘‘ provides a relatively high level’’ ) regardingcommunity development services and provide details concerning and examples of the bank’s activity.



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METROPOLITAN AREAS(For each metropolitan area where no assessment areas were

reviewed using the examination procedures.)

DESCRIPTION OF INSTITUTION’S OPERATIONS IN (NAME OFMETROPOLITAN AREA AND STATE)

Describe the institution’s operations within the metropolitan area, including a description of each of theassessment area(s) that it serves within the metropolitan area. Include key information such as the numberof branches within the assessment areas and the number of individuals and geographies in each incomecategory.

CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN(NAME OF METROPOLITAN AREA AND STATE)

Summarize the facts and data that were reviewed, including demographic information on the assessmentareas and information on the institution’s performance. Indicate whether the institution’s performance inthe assessment areas reviewed using the limited examination procedures is consistent with the institution’srecord [overall/in the state], using one of the two following statements:

a. The institution’s [lending, investment, service] performance in the area is consistent with theinstitution’s [lending, investment, service] performance overall [or in the state].

b. The institution’s [lending, investment, service] performance in the area [exceeds/is below], theinstitution’s [lending, investment, service] performance for the [institution/state]; however, it does notchange the rating for the [institution/state]

NOTE

Activity and performance context information for assessment areas having limited reviews is presentedin the core tables and should not be repeated here. Conclusions (consistent, exceeds, or below)regarding performance should be entered into a table that includes all limited review assessment areasin a particular state. If there is only one such area, conclusions can be presented in text and no table isnecessary.

Please use the following text in your public evaluation:‘‘ Facts and data reviewed, including performance and demographic information, can be found in thetables accompanying this report. Conclusions regarding performance, which did not impact theoverall (insert either ‘‘ institution’’ or ‘‘ state’’ ) rating, are as follows:’’



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AssessmentArea

Lending Test Investment Test Service Test



25


NON-METROPOLITAN STATEWIDE AREA3

(If some or all of the assessment areas within the non-metropolitan statewide area were reviewedusing the examination procedures.)

NOTE

For guidance in preparing this portion of the public evaluation, see METROPOLITAN AREASbeginning on page 19.

DESCRIPTION OF INSTITUTION’S OPERATIONS IN (NAME OFNON-METROPOLITAN AREA AND STATE)

Describe the institution’s operations within the non-metropolitan statewide area, including a description ofeach of the assessment area(s) that it serves within the non-metropolitan statewide area. Information thatmay be important includes the number of branches within the assessment areas and the number ofindividuals and geographies in each income category. Indicate how many of those assessment areas werereviewed using the full examination procedures. Other information that may be important includespopulation trends, income levels, type and condition of housing stock, available employment, and generalbusiness activity. Also include a summary of any credit needs identified and particular lendingopportunities which were noted.

Discuss, if appropriate, the number and kinds of CRA-related community contacts that were consulted andrelevant information obtained and used, if any, in the CRA evaluation. Typically, more detailed informationwill be presented for assessment areas reviewed using the full examination procedures. Charts and tablesmay be used to effectively present information as appropriate, particularly for assessment areas that arereviewed using the limited examination procedures.

3. The discussion of an institution’s CRA performance within a non-metropolitan statewide area is only required for institutions withbranches in two or more states. A separate discussion of CRA performance within a non-metropolitan statewide area for intrastate banksthat have branches in metropolitan and non-metropolitan areas is optional because the performance in the non-metropolitan areas havebeen reviewed and discussed in the overall evaluation of the institution. Examiners may wish to discuss in greater detail, however, theassessment areas within non-metropolitan areas that were reviewed using the examination procedures for intrastate banks with branchesin metropolitan and non-metropolitan areas, or for intrastate banks with branches only in non-metropolitan areas.



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CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN(NAME OF NON-METROPOLITAN AREA AND STATE)

Discuss the institution’s CRA performance within the non-metropolitan statewide area. The facts, data andanalyses that were used to form a conclusion should be reflected in the narrative, including institutionstrengths and areas for improvement. The narrative should clearly demonstrate how the results of each ofthe performance test analyses factored into the conclusions for the non-metropolitan statewide area.Support your conclusions with an analysis of facts and data, such as the number and volume of loans andinvestments, by type, across geographies and borrower categories in the assessment areas reviewed usingthe full examination procedures. In addition, support your conclusions with a discussion of facts and datafor assessment areas reviewed using the limited examination procedures when appropriate. Indicatewhether the institution’s performance in the assessment areas reviewed using the limited examinationprocedures is consistent with the institution’s record in assessment areas reviewed using the fullexamination procedures in the non-metropolitan statewide area.

Charts and tables should be used whenever possible to summarize and effectively present the most criticalor informative data used by the examiner in analyzing the institution’s performance and reachingconclusions.



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NON-METROPOLITAN STATEWIDE AREA4

(If none of the assessment areas within the non-metropolitan statewide area were reviewed usingthe examination procedures.)

DESCRIPTION OF INSTITUTION’S OPERATIONS IN (NAME OFNON-METROPOLITAN AREA AND STATE)

Describe the institution’s operations within the non-metropolitan statewide area, including a description ofeach of the assessment area(s) that it serves. Include key information such as the number of branches withineach assessment area and the number of individuals and geographies in each income category.

CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN(NAME OF NON-METROPOLITAN STATEWIDE AREA)

Summarize the facts and data that were reviewed, including demographic information on the assessmentareas and information on the institution’s performance. Indicate whether the institution’s performance inthe assessment areas reviewed using the limited examination procedures is consistent with the institution’srecord [overall/in the state], using one of the two following statements:

a. The institution’s [lending, investment, service] performance in the area is consistent with theinstitution’s [lending, investment, service] performance overall [or in the state].

b. The institution’s [lending, investment, service] performance in the area [exceeds/is below], theinstitution’s [lending, investment, service] performance for the [institution/state]; however, it does notchange the rating for the [institution/state].

NOTE

For guidance in preparing this portion of the public evaluation, see METROPOLITAN AREASbeginning on page 24.

4. The discussion of an institution’s CRA performance within a non-metropolitan statewide area is only required for institutions withbranches in two or more states. A separate discussion of CRA performance within a non-metropolitan statewide area for intrastate banksthat have branches in metropolitan and non-metropolitan areas is optional. Examiners may wish to discuss in greater detail, however, theassessment areas within the non-metropolitan areas that were reviewed using the examination procedures for intrastate banks withbranches in metropolitan and non-metropolitan areas, or for intrastate banks with branches only in non-metropolitan areas.



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CRA APPENDIX A


NOTE

The Scope of Examination discussion has been moved to the front of the public disclosure. On thispage, refer the reader to that discussion, which is on page 3 in this document. There is a statutoryrequirement that the written evaluation of a multistate institution’s performance must list the individualbranches examined in each state. Therefore, this appendix must be used for multistate institutions. Inaddition, large institutions with multiple assessment areas or affiliates subject to examination maywarrant the use of charts that convey information regarding the scope of the examination. The followingchart may be used as a supplement to the discussion of the scope. If it is used, please refer to AppendixA in your discussion.



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SCOPE OF EXAMINATION [SAMPLE]

TIME PERIOD REVIEWED 1/1/95 TO 6/30/96

FINANCIAL INSTITUTIONXYZ State BankGrand Rapids, MI

PRODUCTSREVIEWED• Small Business• Small Farm• Consumer

• Unsecured

AFFILIATE(S) AFFILIATERELATIONSHIP

PRODUCTSREVIEWED

XYZ Mortgage Company Bank subsidiary Mortgage loansXYZ Community InvestmentCorporation

Holding company subsidiary Investments

XYZ Credit Card Corporation Holdingcompanysubsidiary

Credit Cards



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LIST OF ASSESSMENT AREAS AND TYPE OF EXAMINATION

ASSESSMENT AREA TYPE OFEXAMINATION

BRANCHESVISITED5

OTHERINFORMATION

ILLINOISMSA 0008 DecaturAdams CountyNon-MSA rural Illinois

Full proceduresLtd. proceduresFull procedures

Mortgage loansnot offered innon-MSA ruralareas.

MICHIGANMSA 0001 Grand RapidsCity of MarcellusNon-MSA rural Michigan

Full proceduresFull proceduresLtd. procedures

The scope ofexamination fornon-MSA ruralMichiganbranchesencompassesactivities for thepast six months,coinciding withtheir acquisitiondate.

NOTE

In the ‘‘ branches visited’’ column, insert the names and addresses of the branches where examinerschecked for technical compliance (sign and public file, if applicable). Under the table insert thefollowing text:

‘‘ Note: ‘‘ Branches visited’’ indicates where technical compliance with the CRA (signs, public file,etc.) was confirmed. The evaluation of the institution’s CRA performance takes into considerationactivity from all branch locations, as described in the ‘‘ Scope of Examination.’’

5. There is a statutory requirement that the written evaluation of a multistate institution’s performance must list the individual branchesexamined in each state.



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CRA APPENDIX B

SUMMARY OF STATE AND MULTISTATE MSA RATINGS

State orMultistate

MetropolitanArea Name

Lending TestRating

InvestmentTest

Rating

Service TestRating

Overall StateRating



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NOTE

The following appendix has been added to the public disclosure. It is based on the definitions used inrelation to the FFIEC core tables. Please do not delete or change any items listed here. You may additems that are appropriate for a particular examination.

CRA APPENDIX C

GLOSSARY

Aggregate lending: The number of loans originated and purchased by all reporting lenders in specifiedincome categories as a percentage of the aggregate number of loans originated and purchased by allreporting lenders in the metropolitan area/assessment area.

Block numbering area (‘‘BNA’’): A statistical subdivision of a county for grouping and numbering blocksin non-metropolitan counties where local census statistical area committees have not established censustracts. A BNA does not cross county lines.

Census tract: A small subdivision of metropolitan and other densely populated counties. Census tractboundaries do not cross county lines; however, they may cross the boundaries of metropolitan statisticalareas. Census tracts usually have between 2,500 and 8,000 persons, and their physical size varies widelydepending upon population density. Census tracts are designed to be homogeneous with respect topopulation characteristics, economic status, and living conditions to allow for statistical comparisons.

Community development: Affordable housing (including multifamily rental housing) for low- ormoderate-income individuals; community services targeted to low- or moderate-income individuals;activities that promote economic development by financing businesses or farms that meet the sizeeligibility standards of the Small Business Administration’s Development Company or Small BusinessInvestment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less; or,activities that revitalize or stabilize low- or moderate-income geographies.

Consumer loan(s): A loan(s) to one or more individuals for household, family, or other personalexpenditures. A consumer loan does not include a home mortgage, small business, or small farm loan. Thisdefinition includes the following categories: motor vehicle loans, credit card loans, home equity loans,other secured consumer loans, and other unsecured consumer loans.

Family: Includes a householder and one or more other persons living in the same household who arerelated to the householder by birth, marriage, or adoption. The number of family households always equalsthe number of families; however, a family household may also include non-relatives living with the family.Families are classified by type as either a married-couple family or other family, which is further classifiedinto ‘male householder’ (a family with a male householder and no wife present) or ‘ female householder’(a family with a female householder and no husband present).



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Full review: Performance under the Lending, Investment, and Service Tests is analyzed consideringperformance context, quantitative factors (for example, geographic distribution, borrower distribution, andtotal number and dollar amount of investments), and qualitative factors (for example, innovativeness,complexity, and responsiveness).

Geography: A census tract or a block numbering area delineated by the United States Bureau of the Censusin the most recent decennial census.

Home Mortgage Disclosure Act (HMDA): The statute that requires certain mortgage lenders that dobusiness or have banking offices in a metropolitan statistical area to file annual summary reports of theirmortgage lending activity. The reports include such data as the race, gender, and the income of applications,the amount of loan requested, and the disposition of the application (for example, approved, denied, andwithdrawn).

Home mortgage loans: Includes home purchase and home improvement loans as defined in the HMDAregulation. This definition also includes multifamily (five or more families) dwelling loans, loans for thepurchase of manufactured homes and refinancings of home improvement and home purchase loans.

Household: Includes all persons occupying a housing unit. Persons not living in households are classifiedas living in group quarters. In 100 percent tabulations, the count of households always equals the count ofoccupied housing units.

Limited review: Performance under the Lending, Investment, and Service Tests is analyzed using onlyquantitative factors (for example, geographic distribution, borrower distribution, total number and dollaramount of investments, and branch distribution).

Low-income: Individual income that is less than 50 percent of the area median income, or a median familyincome that is less than 50 percent, in the case of a geography.

Market share: The number of loans originated and purchased by the institution as a percentage of theaggregate number of loans originated and purchased by all reporting lenders in the MA/assessment area.

Metropolitan area (MA): Any primary metropolitan statistical area (‘‘ PMSA’’ ), metropolitan statisticalarea (‘‘ MSA’’ ), or consolidated metropolitan area (‘‘ CMSA’’ ), as defined by the Office of Management andBudget, with a population of 250,000 or more, and any other area designated as such by the appropriatefederal financial supervisory agency.

Middle-income: Individual income that is at least 80 percent and less than 120 percent of the area medianincome, or a median family income that is at least 80 percent and less than 120 percent, in the case of ageography.



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Moderate-income: Individual income that is at least 50 percent and less than 80 percent of the area medianincome, or a median family income that is at least 50 percent and less than 80 percent, in the case of ageography.

Multifamily: Refers to a residential structure that contains five or more units.

Other products: Includes any unreported optional category of loans for which the institution collects andmaintains data for consideration during a CRA examination. Examples of such activity include consumerloans and other loan data an institution may provide concerning its lending performance.

Owner-occupied units: Includes units occupied by the owner or co-owner, even if the unit has not beenfully paid for or is mortgaged.

Qualified investment: A qualified investment is defined as any lawful investment, deposit, membershipshare, or grant that has as its primary purpose community development.

Rated area: A rated area is a state or multi-state metropolitan area. For an institution with domesticbranches in only one state, the institution’s CRA rating would be the state rating. If an institution maintainsdomestic branches in more than one state, the institution will receive a rating for each state in which thosebranches are located. If an institution maintains domestic branches in two or more states within amulti-state metropolitan area, the institution will receive a rating for the multi-state metropolitan area.

Small loan(s) to business(es): A loan included in ‘ loans to small businesses’ as defined in the ConsolidatedReport of Condition and Income (Call Report) and the Thrift Financial Reporting (TFR) instructions. Theseloans have original amounts of $1 million or less and typically are either secured by nonfarm ornonresidential real estate or are classified as commercial and industrial loans. However, thrift institutionsmay also exercise the option to report loans secured by nonfarm residential real estate as ‘‘ small businessloans’’ if the loans are reported on the TFR as nonmortgage, commercial loans.

Small loan(s) to farm(s): A loan included in ‘ loans to small farms’ as defined in the instructions forpreparation of the Consolidated Report of Condition and Income (Call Report). These loans have originalamounts of $500,000 or less and are either secured by farmland, or are classified as loans to financeagricultural production and other loans to farmers.

Upper-income: Individual income that is more than 120 percent of the area median income, or a medianfamily income that is more than 120 percent, in the case of a geography.



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CRA APPENDIX D

CORE CRA TABLES

NOTE

Insert all applicable CRA core tables here.



36


CRA APPENDIX E

ASSESSMENT AREA MAPS

NOTE

You may include a map of the bank’s assessment areas in this optional appendix.



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Wholesale or Limited-Purpose InstitutionsExamination Procedures and Sample Format forPublic Disclosure of Examination Results

The Examination Procedures for Wholesale or Limited-Purpose Institutions and the Sample Format for PublicDisclosure of Examination Results follow. Both documents are also available on the web site of the FederalFinancial Institutions Examination Council.

Examination Procedures: www.ffiec.gov/cra/pdf/cra_exwhole.pdf

Sample Format for Public Disclosure of Examination Results: www.ffiec.gov/cra/pdf/ex_instruct_w.pdf


Institutions with Strategic PlansExamination Procedures and Sample Format forPublic Disclosure of Examination Results

The Examination Procedures for Institutions with Strategic Plans and the Sample Format for Public Disclosureof Examination Results follow. Both documents are also available on the web site of the Federal FinancialInstitutions Examination Council.

Examination Procedures: www.ffiec.gov/cra/pdf/cra_exsplan.pdf

Sample Format for Public Disclosure of Examination Results: www.ffiec.gov/cra/pdf/ex_instruct_sp.pdf


Community Reinvestment ActSampling and Resubmission of CRA Data

In August 2001, the Board adopted a uniformpolicy for the sampling and resubmission of datacollected and maintained by state member banks,in accordance with Regulation BB. Although thesampling approach and data-resubmission policyare similar to those used for the verification andresubmission of data required to be reported underthe Home Mortgage Disclosure Act,1 there are twodifferences. First, the key fields are different.2Second, examiners will need to verify the accuracyof the CRA data aggregation for those banks thatdo not use the FFIEC data entry software for editingand reporting small business and small farm loandata.

As with the HMDA sampling procedures, theapproach outlined in the ‘‘Data-Integrity SamplingProcedures’’ section of this chapter and illustratedby the ‘‘CRA Sampling Schedule’’ employs atwo-tier sampling method that allows examiners incertain scenarios to stop their file review after aminimal number of files have been reviewed. Forexample, if the institution reported data for 150 loanfiles, the total number of files that should berandomly sampled during the exam is 56. Thepolicy, however, allows examiners to review asmaller number of loans initially and subsequentlydecrease the sample size, provided that no morethan 1 file in the initial sample contains errors in anykey field.

For example, as noted in the CRA samplingschedule, for a universe of 150 files, the initialreview would encompass 29 files. If, after complet-ing the review of these 29 files, the examiner notedno more than one error in any key field for thesefiles, the examiner should stop the file review. Noadditional files should be reviewed.

However, if the examiner finds that between 2and 5 files have one or more errors in key fields, theexaminer must continue reviewing the 27 additionalfiles, for a total sample size of 56 files. Aftercompleting the review of the total sample of 56 files,the examiner should determine the total number offiles that have key-field errors and apply the new

CRA data-resubmission policy (see the ‘‘Data-Resubmission Standards’’ section of this chapter)to the entire sample, if necessary.

If, however, in a universe of 150 files, theexaminer finds 6 or more files that have an error orerrors in key fields during the initial file review, theexaminer should stop after completing a review ofthe initial 29 files. In this case, the findings basedon the initial files reviewed would constitute suffi-cient statistical evidence to conclude that a largersample would have an unacceptable error rate,thus requiring resubmission. At this point, theexaminer should apply the CRA data-resubmissionstandards to the total sample.

After analyzing the errors found during thesampling process, examiners may choose toperform supplemental targeted random sampling.For example, after completing a review of a CRAsample, an examiner may discover that CRA dataerrors appear to be coming from one particularloan decision center or are most prevalent in aparticular product type. The examiner might decideto select a supplemental random sample of loanrecords specifically tied to that loan decision centeror loan product. In these instances, supplementalsamples should follow the same sampling processas the original sample, utilizing the two-tierapproach found in the CRA sampling schedule.The statistical validity of this approach relies uponreview of a random sample from the data main-tained at each bank, as well as on a review ofinformation year by year (separate universes) andnot combined into one universe.

The following sections, ‘‘Data-Integrity SamplingProcedures,’’ ‘‘CRA Sampling Schedule for DataAccuracy,’’ and ‘‘Data-Resubmission Standards,’’are based on attachments I, II, and III, respectively,to CA 00-2.

Data-Integrity Sampling Procedures

The following CRA data-integrity sampling proce-dures should be applied when reviewing datacollected and maintained by state member banks,in accordance with the data collection, reporting,and disclosure requirements of Regulation BB:

1. Identify and select the loan files to be reviewed.For each CRA reporter, review applicable loandata for the current year and all other yearssince the last examination. The data collectedand maintained for a single year constitute theuniverse from which a sample is taken. As a

1. These procedures are outlined in CA 00-2 and in the‘‘Data-Integrity Sampling Procedures’’ section of this chapter.2. Key fields for CRA are

• For small business and small farm loans: the loan amount atorigination, the loan location (MSA, state, county, census tract),and an indicator whether the loan was to a business or farm withgross annual revenues of $1 million or less;

• For community development loans: the loan amount atorigination or purchase and an accurate community develop-ment purpose, as documented in supporting loan files; and

• For consumer loans collected and maintained at the bank’soption: the loan amount at origination or purchase, the loanlocation, and the gross annual income of the borrower.


result, it may be necessary to select multiplesamples.

2. Determine the total number of files to besampled from column G in the ‘‘CRA SamplingSchedule for Data Accuracy’’ table, based onthe size of the universe. (This table, which will bereferred to as the schedule, can be found in thenext section of this chapter.)

3. Select the total random sample. (Instructions forselecting a random sample are contained inattachment 1 to CA 00-2.)

4. Review the initial number of files shown incolumn B of the schedule.

5. The examiner may stop the sampling processafter review of the initial number of files iscompleted, if the results indicate that a verysmall number of files had errors in key fields.(See footnote 2 for a description of the keyfields.) Using the schedule, this number can bedetermined by referencing column C.

For example, if a CRA universe contains 150files, a total random sample of 56 files should betaken. The examiner may initially begin filereview on 29 files. If, upon completing review ofthe initial 29 files, the examiner finds no morethan 1 file with any error or errors in key fields,the examiner may end the sampling process forthat CRA reporter for that universe. The exam-iner may then reach a statistically reliableconclusion that the findings are indicative of theuniverse and resubmission3 is not necessary.

6. The examiner must complete a review of thetotal random sample of files if a larger numberof files with errors in key fields are foundduring the initial file review. The need for thisadditional file review can be determined byusing the schedule and referencing column Dtitled ‘‘Number of files with errors—Additionalfile review required.’’ If the number of files thathave errors in key fields from the initial reviewfalls within the number reflected in this column,the examiner must review the additional files tocomplete the total random sample.

For example, if a CRA universe contains 150files, a total random sample of 56 files shouldbe taken. The examiner may initially begin filereview on 29 files. If, upon completing reviewof the initial 29 files, the examiner finds 4 fileswith an error (or errors) in key fields, theexaminer should then review 27 additionalfiles, for a total sample size of 56 files. Aftercompleting review of the additional 27 files, theexaminer should determine the total number offiles that have key-field errors and apply theCRA data-resubmission standards to the totalsample. (See the ‘‘Data Resubmission Stan-dards’’ section of this chapter.)

7. If an examiner determines that a large numberof files reviewed in the initial file review have anerror or errors in key fields, the examiner maystop the verification of loan data after the initialfile review is completed and should apply thedata-resubmission standards. This maximumnumber can be determined by using theschedule and referencing column E. Forexample, if a CRA universe contains 150 files, atotal random sample of 56 files should be taken.The examiner may initially begin file review on29 files. If, upon completing review of the initial29 files, the examiner finds 6 (or more) files thathave an error or errors in key fields, theexaminer should stop the file review. Sufficientstatistical evidence has been obtained to con-clude that a larger sample would have anunacceptable number of errors, thus requiringresubmission. At this point, the examiner shouldapply the CRA data-resubmission standards tothe total sample.

8. Determine the software used by the bank forediting and reporting small business and smallfarm loan data. If the bank uses the FFIEC dataentry software for editing and reporting smallbusiness and small farm loan data, no furtherreview is needed. If the bank does not use theFFIEC software, verify the accuracy of the CRAdata aggregation.

3. For consumer loan data, the decision would not be whetherto require resubmission but if the data collected and maintainedare used as part of the CRA examination. If a bank elects to haveconsumer lending data considered during its CRA examination,the data must meet these accuracy standards. If consumerlending constitutes a substantial majority of a bank’s business, theexaminer should evaluate the bank’s consumer lending in one ormore of the categories specified in section 228.12(k) of Regula-tion BB (motor vehicle loan, credit card loan, home equity loan,other secured consumer loan, or other unsecured consumer loan)using loan files sampled by the examiner.

Sampling and Resubmission of CRA Data


CRA Sampling Schedule for Data Accuracy

A B C D E F G

INITIAL FILE REVIEW

CRAUNIVERSE

Initialfile

review

Maximumnumber offiles witherrors*—Stop

sampling

Number offiles witherrors*—Additionalfile reviewrequired

(go to column F)

Minimumnumber offiles witherrors*—

Stop sampling& apply

resubmissionstandards

ADDITIONALFILE

REVIEW

TOTALRANDOMSAMPLE

1-12 Reviewall

12-20 12 0 1 2 Review all All21-30 13 0 1 2 Review all All31-50 15 0 1-2 3 13 2851-70 17 0 1-2 3 12 2971-90 18 0 1-3 4 20 3891-110 28 1 2-3 4 11 39111-130 29 1 2-4 5 18 47131-140 29 1 2-4 5 20 49141-170 29 1 2-5 6 27 56171-190 30 1 2-5 6 27 57191-270 30 1 2-5 6 29 59271-380 30 1 2-6 7 38 68381-750 31 1 2-6 7 38 69751-1100 31 1 2-7 8 48 791101- 32 1 2-7 8 47 79

*Files with one or more errors in key fields. See footnote 2 for a description of the key fields.

Data-Resubmission Standards

To ensure the integrity of the CRA data used foranalysis, the following guidelines should be usedwhen considering whether to have an institutionresubmit CRA data.

Institutions should be required to correct andresubmit CRA small business and small farm datawhen at least 5.0 percent of the data collected andmaintained in accordance with section 42(a) ofRegulation BB were recorded incorrectly. The keyfields covered by this 5.0 percent rule are

• The loan amount at origination,• The loan location (MSA, state, county, census

tract), and• An indicator whether the loan was to a business

or farm with gross annual revenues of $1 millionor less.

Institutions are required to correct the aggregatenumber and aggregate amount of communitydevelopment loans originated or purchased if datafor 5.0 percent or more of the number or amount ofthe underlying loans do not meet the definition ofcommunity development.

Rounding errors in the loan amount and incomefields should not be counted towards resubmis-sion.

In addition to basing a resubmission on the errorrate for an individual field, if at least 10.0 percent ofthe institution’s records have an error in at least oneof the key fields, then the entire CRA file must beresubmitted. In this instance, the institution mustverify the data in each of the fields and not justthose with greater than a 5.0 percent error rate.

Sampling and Resubmission of CRA Data


Community Reinvestment ActCommunity Contact Procedures

General Guidelines

The primary objectives of conducting interviewswith local community contacts are to

• Gather information that might assist in thedevelopment of a community profile;

• Determine opportunities for participation byfinancial institutions in helping to meet localcredit needs;

• Understand perceptions on the performance offinancial institutions in helping meet local creditneeds; and

• Provide a context on the community to assist inthe evaluation of an institution’s CRA perfor-mance.

This section provides information and proceduresfor conducting community contact interviews. Itbroadly addresses a wide variety of subjects toaccommodate varying communities and types ofinstitutions. As a result, it is not meant to be used inthe order presented. Examiners should selectthose steps and procedures that apply to theunique circumstances of the institution and/or thecommunity.

Coverage and Frequency ofCommunity Contacts

Community contacts typically take the form ofpersonal meetings. Telephone conversations orlarger group meetings are permitted as necessaryand appropriate. Information from other financialregulatory agencies is also available in electronicform. At least in conjunction with each examination,the [agency] will conduct community contacts inthe MSA, county, or assessment area(s) that thefinancial institution in question is serving. Whenpossible, those community contacts should beconducted early in the examination to help toprovide a context on the community to assist in theevaluation of performance.

Selection of Community Contacts

The number and nature of contacts will dependupon a variety of factors, including the complexityof the community, the size and type of theinstitution examined, and the amount and age ofcommunity-driven information already available tothe examiner.

Treatment of Confidential Information

Confidentiality of Institution’s Records

Examiners must maintain the confidentiality of anyinstitution’s proprietary information. When makingcommunity contacts, the examiner should notreveal any confidential information obtained fromthe institution’s files or through discussions withmanagement, or any conclusions drawn about theinstitution’s performance or CRA rating.

Protection of Community Contacts

Maintaining the confidentiality of the communitycontact’s identity, when requested to do so, isessential. Examiners must not reveal the name orother identifying information about a communitycontact to anyone outside the agency without thecontact’s permission to do so.

Report of Examination and CRAPerformance Evaluation

Include in the Report of Examination and the CRAPerformance Evaluation, as appropriate, a discus-sion of the number and kinds of CRA-relatedcommunity contacts that were consulted andrelevant information obtained and used, if any, inthe CRA evaluation. Information should be factual.While opinions of contacts may be included whenapplicable, examiners should refrain from drawingconclusions or making judgments based solely onanecdotal evidence.

Sharing Information

The agencies routinely share information obtainedduring outreach contacts. Whenever communitycontacts are made, the examiner initiating thecontact should complete the Community ContactForm and submit it to the party designated withineach agency. The designee will distribute copies ofthe form to their counterparts at the other regulatoryagencies.

Preparation for the Interview

Before conducting interviews, review relevant back-ground information to identify additional areas ofinquiry. Adequate preparation for the interviewsincludes reviewing information on the assessmentarea, selecting community contacts, and structur-ing the interview.


Review of Information on AssessmentArea

A review of all available background materialsprior to the community contact process is vital indeveloping a working understanding of thecommunity you are about to enter. The nature,extent, and age of the information available priorto conducting community contacts influences yourobjectives for the community contact process. Awell-developed context also allows for moredetailed and in-depth community contact inter-views. The examiner should

• Assess prevailing economic conditions anddemographic characteristics within and near theassessment area. This includes a review ofavailable data on various population segmentswithin the community, trends in migration, laborand employment characteristics, comparisons tostate and county/MSA data, and housing andreal estate market statistics.

• Assess infrastructural and geographic character-istics within the assessment area. This includes areview of maps; natural areas; major thorough-fares; access to public transportation; locationsof low- and moderate-income census tracts;names of specific low- and moderate-incomeneighborhoods; and proximity of the assessmentarea to military bases, airport facilities, andmetropolitan centers. Internal mapping software;information from the financial institution; andinformation from local planning, transportation,economic development, or real estate boardsare good sources for possible information.

• Assess distribution and availability of branchand ATM services, especially with regard tolow-income areas within the community. Includea review of check-cashing facilities, if possible.Internal mapping software, if available, can allowthe examiner to map these locations.

• Assess, to the extent information is available,local development issues and priorities in theareas of affordable housing, commercialactivity, and economic and communitydevelopment.

A summary of such information may beavailable from the Community Affairs function.In addition, the examiner may wish to reviewprevious community contacts for this locality,including those from other regulatory agencies.If the examiner is reviewing an MSA, he or sheshould contact the city’s municipality andobtain a copy of its Consolidated Plan (Con-plans). Conplans list the needs of an MSA asidentified and prioritized by its officials. Theexaminer may also consider obtaining publicreports from multiple listings services (MLS)and news articles on local development projects.

Quantitative sources may include feasibilitystudies, market analysis, or commercial ap-praisal reports for local development projects.State or local economic development agencies,utility companies, real estate organizations, anduniversities present in the immediate or surround-ing area are often good sources for suchmaterial. Section II, ‘‘Identification of PotentialContacts,’’ contains additional potential sourcesfor these types of material.

• Determine the priorities of the community and theopportunities for financial institutions to partici-pate with local governmental and nonprofitorganizations in the areas of affordable housing,small business/farm development, and eco-nomic and community development. Review thenumber and nature of government agencies,nonprofit, and neighborhood organizations thatprovide programs and resources to the assess-ment area for these purposes. If possible, notethe amount of funds devoted to these purposes.Also, attempt to determine which programs ororganizations are particularly active with respectto the low-income individuals and/or areaslocated in the assessment area.

Sources of information for this step includeprior community contacts in this area, informa-tion on local programs from the institution, anddiscussions with appropriate agency staff.

• Based upon information reviewed, above, iden-tify areas that require further inquiry through thecommunity contacts process. For example

a. Are there any significant conflicting pieces ofinformation that may require further investiga-tion in the contact interviews?

b. Are there any pieces of quantitative informa-tion, such as housing and rental values, thatare considerably outdated and need to beverified in the contact interviews?

c. Do the data suggest particular areas of‘‘need’’ in affordable housing, such as hous-ing rehabilitation, multifamily development, orsingle-family home purchase, that you caninvestigate further and verify through thecontact interviews? Or alternatively, are needsfor specific areas of the population, such ashousing for the elderly, still unclear andtherefore require further study through thecontact interviews?

d. Do the data suggest particular areas of needin services, such as ATMs, branches, orbilingual services, that can be investigatedfurther and verified through the contactinterviews?

e. Does the review identify organizations orprojects requiring additional information?

Community Contact Procedures


Identification of Potential CommunityContacts

This section discusses the number of types ofcommunity contacts that should be made during anexamination. It also identifies potential communitycontacts and provides guidance on the sources ofinformation that are available from them.

Number and Type of Contacts

Select contacts that can best provide informationon the assessment area(s). Consider the nature ofthe information you are seeking to complete youranalysis of the assessment area(s) and the pur-pose of the organizations in the assessmentarea(s). Examiners may wish to initially consult orselect organizations on the telephone to determinewhich can best comment on particular issues.

Time constraints can limit the number of contactsthat the examiner is able to conduct. The followingfactors may be considered when determining theappropriate number of contacts to make:

• The nature of any information provided by theinstitution, including information that specifiescredit, service, or community development needsin the institution’s assessment area

• The nature of public comments, including infor-mation that specifies credit, service, or commu-nity development needs in the institution’s assess-ment area

• The amount of community contact informationavailable from other examinations conducted forthis area, both in number and substance, and thedate the information was gathered

• The complexity of the community, including thesize of its population, its geographic breadth,and the diversity of its population

• The characteristics of the institution examined

Organization Types

1. Grassroots Community Groups

Grassroots groups are formed when concernedindividuals come together to solve common prob-lems. Groups whose primary aim is to further theobjectives of low-income residents are of particularinterest. These groups can be difficult to identifybecause they tend to be smaller neighborhoodgroups and may not have readily recognizablenames. However, they will often share the followingcharacteristics:

• Low-income representation is evident in policyand implementation aspects of organization.This may be evident at the board level, in thecommittee structure, or in the day-to-daymanagement.

• Input from low-income residents is clearly soughtin functional/program aspects and informationdistribution to low-income individuals is a priority.Examples of this include door-to-door surveysand frequent neighborhood meetings.

• Low-income individuals are encouraged orempowered to solve problems collectively.

Types of organizations: Churches, block clubs,tenants associations, low-income advocacy groups,housing or credit counseling programs, seniorcitizen groups, shelter providers, health clinics,and community network/collaborative groups.

Types of information available: Developmentpriorities and concerns of the local low-incomepopulations; available development programs andresources; current partnerships and/or develop-ment projects in the area; and the role of financialinstitutions in the assessment area.

Secondary information: Completed questionnairesor surveys.

2. Community-Based Development orFinancial Intermediaries

The primary aim of these organizations is typicallyto increase the economic standard of low-incomeindividuals or areas. Thus, they tend to be involvedin technical aspects of development, such asresidential and commercial real estate ventures orfinancing. Though these groups encourage repre-sentation of low-income individuals, they are alsolikely to have a higher degree of staff or decision-makers who live outside of the low-income areasthat the organization is serving.

Types of organizations: Nonprofit organizations,such as community development corporations(CDCs); church-based economic development pro-grams; community loan funds; small businessinvestment corporations (SBICs); specialized smallbusiness investment corporations (SSBICs); low-income housing organizations; technical assis-tance providers, low-income credit unions; devel-opment institutions; and micro-enterprise groups.

Types of information available: Low-income credit,service, and community development issues at theneighborhood level; quantitative information onhousing values and actual real estate projects;qualitative information on financial institutions andfinancial practices of low-income individuals; tech-nical details on financing and lending mechanismsfor programs they offer; and information on othergovernment and program resources or ventures inthe community.

Secondary information: Feasibility studies, appraisalinformation on specific neighborhoods, localneeds assessments, surveys of institutions’ activ-



ity, surveys of financial practices of low-incomeclientele, and lending agreements by groups oflocal financial institutions.

3. Government Offices

Types of organizations:

• Local branches of federal agencies, such as theDepartment of Housing and Development (HUD),Small Business Administration (SBA), Depart-ment of Commerce Economic Development Ad-ministration (EDA), Farmers Home Administration(FmHA), Bureau of Indian Affairs (BIA), and U.S.Department of Agriculture (USDA)

• Local groups of federally funded or mandatedprograms: community action agencies (CAAs),neighborhood revitalization programs, and Officeof Minority Business Enterprise (OMBE) businessdevelopment centers

• Local elected officials: mayors, commissioners,tribal chiefs, city council members, and tribalcouncil members

• State and local housing agencies or authorities

• Economic development agencies, includingindustrial and redevelopment agencies or authori-ties, county or regional planning agencies, trans-portation agencies, utility companies, rural elec-tric cooperatives, economic developmentcorporations (EDCs), and local planning oreconomic development directors

• School board superintendent and officials

Types of information available: Types of loan, grant,guarantee, or other programs available for use byinstitutions and housing, community, and economicdevelopment groups; the amount of funding avail-able through such programs in the institution’sassessment area(s); the extent to which localfinancial institutions participate in such programsand perspectives on barriers or issues related totheir participation; specific project opportunities inwhich institutions could participate; and informationon underserved neighborhoods or areas.

Secondary information available: Housing, smallbusiness, agriculture, and general economic con-ditions and trends in the assessment area; publiclysponsored comprehensive or general developmentand redevelopment plans and maps; other plansand studies, such as housing plans (e.g., theConsolidated Plan), economic development plans,and studies; and various community service needsin the assessment area. School boards can updatecensus information by providing demographic

information on the makeup of their student body.This information is typically collected annually.

4. Business and Labor Groups

Types of organizations: Chambers of commerce,downtown and neighborhood merchants associa-tions, small andminority business advocacy groups,realtors, minority and nonminority real estate agents,local venture capital companies, SBA/college-supported small business development centers(SBDCs), feed stores, cattlemen’s associations,actual small business owners, and small businesstechnical assistance providers (such as businessincubators and local union representatives).

Types of information available: Data and perspec-tives on local business, economic conditions,recent economic activity, and trends in the commu-nity; the nature and extent of small businessactivity; the level of referrals from financial institu-tions to SBDCs; the existence of active SBA 504programs, or SBIC or SSBIC programs; perspec-tives on financial institution efforts to providefinancing and services to small businesses/smallfarms; the level of institution participation in otherpublic/private programs for small business devel-opment and employment training; and other privateand public sources of financing available for smallbusinesses and small farms in the assessmentarea.

Secondary information available:Mortgage interestrate sheets from financial institutions or mortgagecompanies obtained from realtors.

5. Civil Rights and Consumer ProtectionGroups

Types of organizations: Open housing/fair housingorganizations; local chapters of the National Asso-ciation for the Advancement of Colored People(NAACP), Urban League, Urban Coalition, andNational Organization of Women (NOW); legalaid/legal services offices; human relations commis-sions; and state attorney general or consumerprotection offices.

Types of information available: Credit needs,issues, or priorities for any protected classes;complaints against specific financial institutions;and general perspectives on financial institutions inthe assessment area.

Secondary information available: Studies usingtesters in financial institutions, formal complaints, orcase write-ups.



6. Other

Types of organizations: Universities, research insti-tutions, foundations, and hospitals or hospitalextension programs.

Types of information available: Many and varied.Specific community projects by universities orhospitals may be involved.

Secondary information available:Demographic andeconomic data; independent research studies orreports on community development topics; andstudies and data collection on development andeconomic trends or opportunities in the area.Automated ‘‘Conplans’’ may also be available.

Conducting the Interview

Having determined the groups and/or individuals tobe contacted and the information to be solicitedfrom each interview, the examiner must then planthe structure and content of questions prior to theinterview. This section provides a sample list ofquestions that the examiner may wish to consider.The examiner should select and tailor questionsfrom the list of sample questions that would be themost effective for each specific contact.

The questions highlight the type of informationthat the examiner is seeking through the communitycontact process. They are meant to serve as aguide to assist the examiner in planning thesubstance and structure of the interview. Obvi-ously, not all questions will be appropriate to eachspecific contact. Nor is the list all-inclusive; particu-lar questions may generate significant discussionsand examiners are expected to probe and conductfollow-up questions appropriately. Examiners areencouraged to review the entire list before structur-ing their interview. As examiners gain experience,they are encouraged to engage in discussion withthe community contact and not undertake a‘‘question and answer’’ format.

Background Information on CommunityContact

The examiner should ascertain the organization’sarea of expertise and the role that it plays in thecommunity.

General:

a. What geographic areas does the organizationserve?

b. How old is the organization? How was itstarted? How much involvement by local resi-dents and/or low-income residents was thereinitially?

c. Whom does the organization represent? Roughlywhat percentage of your client base is very low-(defined as 25–50 percent of median areaincome), low-, moderate- or middle-income?

d. What are the mission and the primary goals ofthis organization? What are the goals for thisyear?

e. Is there a board of directors? What is therepresentation on the board? Are there low-income neighborhood residents on the board?Are banks/lenders or other financial institutionson the board?

f. What projects or programs are you currentlyworking on? Aside from programs, are thereother means in which the mission is carried out?

g. How many ‘‘clients’’ does this organizationserve on a monthly or annual basis? If theorganization is involved in development, howmany real estate projects have been completedin the organization’s history? How many areongoing?

h. If direct loans have been provided through anyprograms, what type of loans are they? Whatsegments of the community have benefitedfrom these loans (low-, very low-, or moderate-income; the elderly; etc.)? What is the numberand dollar volume of loans generated?

i. What are the amounts and sources of theorganization’s funding? How is the fundingdisbursed (i.e., what activities does it fund andhow much of the budget is devoted to eachactivity)?

j. Could you list the organization’s major accom-plishments in the past five years? Is there sucha list that you may have for purposes of yourfunders or funding proposals that I may have acopy of?

k. What are some of the limits the organization isfacing in serving its community? In what areasis it currently encountering opportunity?

l. Is the organization interested in expanding itsprogram or project areas at this time? In whatarea? Is there a timeline in place to implementthese activities or expected to be in place?

Specific to Economic Development Agencies(Including Utility Companies):

a. Are there empowerment zones (EZs), enter-prise communities (ECs), or foreign trade zones(FTZs) in your area? Where? What types ofmonetary incentives are offered?

b. What are examples of small business, smallfarm, and community-based development thatthe agency has been involved in? Has activity



been concentrated in a few areas? Which ones?

c. Does the economic development agency alsocoordinate the housing program and monies forthis jurisdiction? If not, is economic develop-ment coordinated with housing officials? Whatpriority is accorded to affordable housing?What priorities, if any, are accorded to specificpopulation segments (e.g., elderly, specialassistance, female heads of households, home-less, other)?

d. Are the economic development strategies orthe availability of the programs communicatedto local residents in any way? How? [Note toexaminer: Did you find that local residents orcommunity representatives were able to articu-late strategies or various programs?]

e. Does the agency have working relationshipsestablished with community organizations atthe neighborhood level? Who? What are thenames of the individuals that the agency hasworked with? If so, what is the extent of thepartnership that has been established?

Specific to Local Government:

a. What is the structure of the local government?Is there an economic development depart-ment? Is this separate from housing development?

b. Which department has responsibility for eco-nomic development policy?

c. Does the local government have programsthat target affordable housing, small businessdevelopment, and/or community developmentprojects? How much funding do they have?

d. Has the local government identified priorities forits housing and economic development funds?Has the government determined what impactthis will have for the population (e.g., for theelderly, low-income families, individuals withspecial needs, the homeless)? To the agency’sknowledge, what has been the impact of itsfunds in the last several years?

e. How much money has been allocated foraffordable housing, elderly needs, specialneeds, etc.? What is the time frame for thedisbursement of funds, particularly CDBGfunds?

Specific to Real Estate Brokers:

a. Do you have brokers who specialize in low- ormoderate-income housing (single or multifamily)?

Obtaining a Community Profile

One of the primary objectives of the contact

process is to update the community profile. Theexaminer is expected to obtain and update infor-mation on current economic conditions and trends,current demographic characteristics, and existingcredit needs.

General:

a. What is the current demographic makeup of thecommunity? What were the most significantdemographics changes in the past five to tenyears, if any (e.g., migration patterns, racialcomposition)?

b. Which neighborhoods are in transition, if any?Has gentrification or the displacement of low- ormoderate-income individuals become an issuein certain neighborhoods? In which neighbor-hoods? Is the potential displacement of individu-als being managed in some process, forexample, a relocation package? If so, how andwho is involved?

c. What major employers have either entered orleft the community in the last few years? Hasthis impacted certain categories of the labormarket and not others? If so, who was positivelyimpacted? Negatively? How?

d. Who or what organizations are the drivingforces in the community (examples includechurches, government, community groups,etc.)?

e. What priorities have you identified for this area?

f. Have you conducted any studies (e.g., neigh-borhood surveys or feasibility studies) that mayprovide insight into local credit, service, orcommunity development needs? What were theresults? (Obtain a copy, if available.) How wasthe study used and what was the distribution(any banks included)?

g. Do zoning restrictions play a role in theavailability of affordable housing units? How?Which neighborhoods are most impacted?

h. Are absentee landlords a problem? For whom?In which neighborhoods?

i. In your opinion, what credit needs have notbeen adequately satisfied by area financialinstitutions? (Give example: small businessloans, home improvement loans, installmentloans, etc.)

j. To what extent are financial services availablein the assessment area? What is the availabilityof ATMs or branches in this neighborhood?

k. Are there many women- or minority-ownedbusinesses in the area? If so, are they concen-trated in any geographic location or occupa-tional field?



Specific to Community-Based Organizations

a. Does this community have a significant numberof people who would be ‘‘uncounted’’ in officialcensus figures? If so, why? Does your organi-zation give estimates of the uncounted or realpopulation?

b. What are the primary and secondary issues thatlow-income people in this area are concernedwith in the short term? In the long term?

c. What are the most pressing concerns—e.g.,adequate housing, access to retail goods,adequate public transportation facilities, adulteducation, job training and placement, Englishas a second language (ESL), health facilities—that you have been able to identify facinglow-income residents?

d. What language(s) are spoken in the commu-nity?

Specific to Economic Development Agencies(Including Utility Companies):

a. What are the primary economic strengths of thisarea? Primary weaknesses? (Note: Economicdevelopment agencies typically operate at thecounty or MSA level. Using follow-up questionsand probing techniques, attempt to get as localan assessment as possible.)

b. Are there development plans currently under-way for infrastructure-related projects, such asbridges, sewers, etc.? If so, what is thesuggested timetable? Will the project generateor is it generating jobs for low- or moderate-income residents?

c. What are the main economic developmentstrategies (examples include business attrac-tion, business retention, marketing, small busi-ness development, etc.) that you are currentlypursuing for the overall county or MSA? For aparticular neighborhood? What priority is givento small business, small farm, and community-based development (such as grocery stores,day care facilities, etc.)?

Specific to Housing Organizations (State,Local, Etc.):

a. What is the waiting list for various affordablehousing programs in the area?

b. Have you received complaints from tenants thatbuildings are not in compliance with localbuilding codes? In your perception, how wide-spread is this problem?

c. What is the nature of demand for affordablehousing? How does this compare to availablehousing stock, both in terms of number of units

and types of units?

d. How would you rate the need for housingamong various sectors of the community, suchas the elderly, individuals on special assis-tance, female heads of households, the home-less, others?

e. Are there structural inadequacies in the type ofhousing stock available for low-income popula-tions in this area? Is housing rehabilitation apriority issue among those your organizationhas identified?

Specific to Real Estate Brokers:

a. (Refer to specific geographic areas.) What arethe current economic conditions in this generalarea? Are housing values going up or down? Ifit is an ‘‘up’’ market, what are some of the forcescontributing to its success? If down, what aresome of the issues contributing to its decline?

b. Has there been any recent development activityin this area? What is the nature of the develop-ment (commercial, residential, affordable hous-ing, public projects)? What has been the impacton the neighborhood?

c. Are there mobile homes or concentrations ofmobile homes, such as mobile-home parks, inany area?

d. What is the average length of time that single-family homes are on the market in this neigh-borhood?

e. Other types of residences? Other neighbor-hoods?

f. Do you know of any changes in the near futurethat would impact the market for residential/commercial properties in a specific area? Whatare these changes (political, environmental,legal, etc.)?

g. Do you have copies of any appraisal reports forcommercial and residential properties? Forwhich areas (obtain, when possible)?

h. Are you aware of appraisal-related problemsin this neighborhood, such as the lack ofcomparables?

i. What credit products do your customers typi-cally use to purchase a home? Conventionalmortgages? Government loans? Land con-tracts? Why?

j. What are the various sources of financing thatyour customers typically use? Banks? Thrifts?Mortgage companies? Home improvement deal-ers? Credit unions? Employer-related sources(i.e., GMAC)? Others? Are particular combina-tions of sources more typical than others?

k. What are the characteristics of likely investors



for multifamily housing properties in a specificneighborhood? What are the likely financialrisks and rewards for investors in this area?(Compare with other neighborhoods.)

Specific to Foundations:

a. What types of eligibility criteria are currentlyestablished for community developmentprograms?

b. Which organizations and projects do you fund?How much money is committed to theseorganizations and/or projects for this year?

c. How long is the money committed for?

d. Out of the programs and/or organizations thatyou funded in this area, which are the mosteffective in the affordable housing area? In thesmall business development or communitydevelopment area?

Assessing Opportunities for FinancialInstitution Participation

The degree to which financial institutions areinvolved in community development projects orservices depends in some part on the extent ofother resources and partners available within thecommunity. Examiners are expected to obtaininformation on the availability of resources dedi-cated to the local credit or development needs thathave been identified. Examiners are also expectedto gauge the level of the contact’s efforts inapproaching local financial institutions and themechanisms of any financing involved, if any.

In addition to any background materials reviewedin the preparation portion of the examination,contacts can provide relevant information on

• The number and nature of community develop-ment or credit-related projects being developedfor the benefit of the community,

• The number of organizations or governmentprograms committed to those activities,

• The extent to which partnerships or other forms ofcoordination are evident in the area,

• The level of resources devoted to these activities,and

• How active these programs or resources are withrespect to promoting the credit or banking needsthat local representatives or residents haveidentified.

Community-Based Organizations:

a. Has your organization ever participated inactivities, either formally or informally, withfinancial institutions? If so, which ones? For

what projects or products? For what clients(e.g., what were the income characteristics ofthose who benefited)?

b. Does your organization partner with othergroups, including religious organizations, gov-ernment agencies, and neighborhood organi-zations, in conducting any of its programactivities?

c. Tell me about any other organizations you workwith in meeting your clients’ needs. What otherorganizations serve this community in the areasof affordable housing? Small business develop-ment? Commercial, day care, or othercommunity-related facilities? Job training? Creditcounseling? Low-income advocacy?

d. Which of these organizations do you considermost active? If I wanted more information fromthem, whom should I contact?

e. Which financial intermediaries do you considerparticularly effective? Why?

f. Are you seeking funds from local financialinstitutions for any current projects?

g. What is the nature of the project? Is it adevelopment-based product? Is it related tocredit needs in the community? Is there aspecific neighborhood or group of individualsthat this project will benefit? How?

h. What are the specific requirements for thefinancing that you are seeking?

i. Are you aware of similar projects that otherorganizations are working on? What can you tellme about those? Whom can I contact to learnmore?

State and Local Economic DevelopmentAgencies, Government Agencies:

a. What, if any, commercial development projectsare underway? Where are they located? Arejobs created? Will low- or moderate-incomeindividuals benefit? How?

b. What are the number and nature of variouseconomic development programs funded bythe city or state? How many residents do theseprograms benefit annually?

c. Which of these programs, if any, are designedto leverage funds from financial institutions?What are the mechanics of the program? Howmany projects have been funded to date?Which financial institutions have participated inthese programs? Is there a particular area orgroup that these funds target?

d. Do you have programs designed specifically foraffordable housing or small business develop-ment? If so, how many small businesses and/or



small farms benefit? What is your definition ofsmall business?

e. What are the funding levels of these programs?How many projects have been funded to date?Is there a particular neighborhood or group thatthese funds target? If so, what are they?

f. Have any financial institutions participated inthese programs? If so, which ones?

g. Do you currently have other projects or haveyou had projects in the past that required eitherinvestment or other forms of financing from afinancial institution? What are/were the charac-teristics of the project? Its financing? Includeprojects involving bond issuances, etc. Whatwere the results? Innovative? Risky?

h. What financing mechanisms are needed,planned, or in place for any development orinfrastructure-related projects?

Real Estate Brokers:

a. Do you know about local or state financingprograms for affordable housing, small busi-ness, or commercial development? How didyou hear of these programs?

b. Are there specific home insurance or financingprograms that you utilize or to whom you refercustomers? Which ones? Which do you utilizespecifically for your low-income customers?

c. Which financial institutions in the area are youaware of that access these programs? Howactively? Which do not?

Obtaining Local Perspectives on thePerformance of Financial Institutions

In addition, another function of the communitycontact process is to obtain feedback from thecommunity on the performance of local financialinstitutions. The examiner is expected to gatherinformation on the willingness and responsivenessof financial institutions, including the institutionunder examination, to work with local residents andprofessionals in meeting credit and communityeconomic development needs.

General:

a. With which banks, savings and loans, ormortgage companies have you been involved?What was the nature of your involvement?

b. Has your organization ever participated inactivities, either formally or informally, withfinancial institutions? If so, which ones? How didthis professional relationship develop?

c. What were the results of your involvement with

financial institutions? In what ways has financialinstitution participation had a positive impact?In what ways has it had a negative impact?Probe for such project aspects as timing,financing terms, etc.

d. Are local financial institutions proactive indeveloping relationships or offering assistance?If so, which ones?

e. What financial institution(s) does your grouprecommend to your constituents? Why?

f. What obstacles, if any, prevent greater involve-ment from financial institutions in meeting localcredit needs?

g. Have you ever been invited by institutions toparticipate in institution-sponsored activities? Ifyes, specify the activities’ purpose and the roleyou played.

h. Has your organization ever received complaintsabout individual institutions?

i. Did the people affected know about the com-plaint process or were they informed about it?

j. Did any of the complaints involve allegationsthat the institution(s) discouraged people fromsubmitting an application? Did any complaintsinvolve geographic or racial redlining, or anyother forms of discrimination? What happened?

k. Is anyone in your group or known to your groupwilling to offer specific evidence of discrimina-tory actions by specific institutions? (If allega-tions of discrimination, discouragement, orredlining are made with respect to an institutionregulated by your agency, forward the relevantinformation to the institution’s primary regula-tor.)

l. In your opinion, which institutions in the areahave been particularly outstanding in meetingthe community’s needs? Why? What, specifi-cally, has been done by these institutions?

m. In your opinion, which area institutions havebeen particularly notable for their unwillingnessto respond to the community’s needs? Why?

n. In your opinion, how well does [institution name]meet the credit needs of this community?

Community-Based Organizations:

a. Have you discussed local credit needs with anyfinancial institutions? What were the results?

b. Do any institutions provide in-kind services, i.e,loaned executives, etc.?

c. What efforts are made to inform institutionsand obtain their participation in the organiza-tion’s activities? Which institutions participateand to what degree? Which institutions, if any,



declined to participate?

d. If your organization works with governmentenhancement programs, do financial institu-tions work with you on that product? If so, whichones?

e. What efforts have you employed to improveyour organization’s relationship with any institu-tions? Which institutions? How successful haveyour efforts been?

Real Estate Brokers:

(Be sure to include those operating in low- ormoderate-income areas.)

a. Do you frequently work with financial institu-tions or other lenders that originate homemortgages?

b. Which institutions do you receive rate sheetsfrom on a consistent basis? How are theytypically delivered to you?

c. Are local lenders willing to work with you forfirst-time homebuyers? If so, which ones? Whyor why not?

d. Are local lenders willing to work with you onexceptions on credit reports? If so, which ones?Why or why not?

e. What knowledge, if any, do you have of creditstandards being adjusted in either a preferen-tial or discriminatory manner? Which lenders?What were the circumstances?

f. Have you worked with lenders that have takencustomers under the Fannie Mae 97 percentprogram? Freddie Mac? Others?

g. Which lenders do not receive your referrals forhome purchases and why? Which lenders do

not receive your referrals for small businessesand why?

h. What percentage of referred homebuyers nor-mally go to the recommended lenders?

i. What percentage of referred homebuyers nor-mally get loans from recommended lenders?

j. What other methods could be used to increasethe use of insured financial institutions bypeople in your market area? In particular, aresome financial institutions attracting portions ofthe market and not others? For which products?

k. Do women or minorities have more difficultythan men in obtaining mortgage loans? If so,why? Which institutions are perceived as notmeeting the needs of women or minorityapplicants?

l. Are there outreach activities by particularinstitutions for women or minority customers?Do you perceive these programs as positive?

m. In your experience, are there certain institutionsfavored in the minority and/or women’s busi-ness community?

Business, Labor, or Consumer GroupsWorking with the Women’s or MinorityBusiness Community:

a. What is the general perception of financialinstitutions in the minority business community?In the women’s business community? Why?

b. Do any financial institutions have a smallbusiness department targeting women orminorities? Which ones? How is it done?

c. Which institutions have separate minority orsmall business counseling services? Do thecounselors also have lending authority?



Community Reinvestment ActFFIEC Community Contact Form

Examiners should summarize each interview they conduct on the Community Contact Form. The purpose ofthis form is to provide a consistent means by which financial institution regulators can share informationobtained through interviews for a particular community. The individual conducting the interview should informthe interviewees that this information will be shared with other regulatory agencies.

1. Regulatory agency:

2. Date of contact:

3. Interviewee information:Name: Title:Organization represented:Type/organization category:Address:City: State:Interviewee’s telephone:Add area served:

Served state(s): Served MSA(s): Served counties:

4. Was this the first contact with this organization (in connection with a current examination) or a follow-upcontact?First Follow-up

5. Was the interview conducted in conjunction with an examination? If yes, list financial institutions.Institution name Cert Charter Docket RSSD

6. Summarize the organization’s purposes, functions, and sources of funding. Include the organization’simpact if applicable (for example, number of low-income clients served, number of units built, etc.).

7. Political or geographic boundaries of area focused on during this specific contact.

8. Interview summary.(a) Community profile:

Current economic conditions; current demographic characteristics; general banking and credit needs; other (e.g.,identifying names of low- or moderate-income neighborhoods).

(b) Opportunities for participation by local financial institutions:Community development, other credit-related projects, or financing programs; level of opportunity for bankinvolvement.

(c) Performance of local financial institutions:Perceptions or experience regarding the degree of involvement of the local financial institution industry and of thespecific financial institution (if obtained) in the community.

9. Person in charge of examination:Interviewer:Reviewed by:


Community Reinvestment ActInstructions for Writing Public Evaluations

The format of all of the public evaluation templatesfollows the provisions of amendments to theCommunity Reinvestment Act that require theBoard of Governors of the Federal Reserve System,Office of the Comptroller of the Currency, andFederal Deposit Insurance Corporation (agencies)to

1. Rate the institution’s overall performance inmeeting the credit needs of its community;

2. For an interstate institution, rate each state inwhich the bank has branches or multistatemetropolitan statistical area (MSA) in which theinstitution has branches in more than one state;and

3. Separately present the conclusions for theperformance test(s) or criteria considered inarriving at the rating as well as the facts and datasupporting those conclusions for each MSA inwhich the institution has branches.

The contents of the public evaluation will varydepending on the nature of the institution examinedand the examination method used. Public evalua-tion templates for small institutions, intermediatesmall institutions, large institutions, wholesale andlimited-purpose institutions, and institutions operat-ing under approved strategic plans have beenprepared by the agencies. These templates pro-vide guidance regarding the structure and con-tents of the public evaluations. Except for theintrastate public evaluations for small institutionsand intermediate small institutions, the templatesare structured to meet the requirements that theCRA imposes on public evaluations for interstateinstitutions. The samples can easily be adjusted tosuit the requirements for institutions with branchesin only one state.

Evaluations for Institutions withBranches in Only One State

Regardless of the examination method used, thepublic evaluation for institutions with branches inonly one state must contain the institution’s overallCRA rating and the conclusions for the perfor-mance test(s) or criteria upon which the rating isbased. No state or multistate MSA rating is neededfor intrastate institutions. Also, there is no require-ment to rate an institution’s performance in eachassessment area. Rather, the public evaluationmust present conclusions about the institution’sperformance in the assessment area(s) subject tothe following guidance:

1. If the institution has branches in more than oneMSA, the public evaluation must present theconclusions for each performance test(s) orcriterion, along with supporting facts and data,separately for each MSA.

2. If the institution has defined more than oneassessment area within a nonmetropolitan state-wide area, separate discussion of CRA perfor-mance within a nonmetropolitan statewide areafor intrastate institutions that have branches inmetropolitan and nonmetropolitan areas is op-tional because the performance in the nonmet-ropolitan areas has been discussed in theoverall evaluation of the institution. Examinersmay wish to discuss in greater detail, however,the assessment areas within the nonmetropoli-tan statewide areas that were reviewed using theexamination procedures for (1) intrastate institu-tions with branches in MSAs or nonmetropolitanareas or (2) intrastate institutions with branchesonly in only nonmetropolitan areas.

More-detailed discussions of each assessmentarea examined should follow the appropriate MSAand nonmetropolitan-area presentation.

Evaluations for Interstate Institutions

In addition to the institution’s overall CRA rating,public evaluations for interstate institutions mustcontain ratings for each state in which the institutionhas branches and multistate MSA in which theinstitution has branches in more than one state ofthe multistate MSA. The public evaluation forinterstate institutions is, therefore, organized topresent the institution’s overall rating first, followedby the multistate MSA rating(s), and then the staterating(s). The discussion of the overall institution,multistate MSA, and state ratings must include theconclusions for the performance test(s) or criteriaupon which the rating(s) is based. An institution’sperformance in each assessment area is not rated.Rather, the public evaluation must present theconclusions about the institution’s performance inthe assessment area(s) subject to the followingguidance:

1. Multistate MSA presentations should be followedby discussions of the performance within assess-ment area(s) within the multistate MSA.

2. Separate MSA presentations for each MSAwhere the institution has branches should followthe appropriate state presentation. A discussionof an institution’s CRA performance within anonmetropolitan area statewide area is required


for institutions with branches in two or morestates. Include a discussion about how theexamination of the institution was performed,including a list of the individual branchesexamined.

Again, more-detailed assessment-area discus-sions should follow the applicable MSA andnonmetropolitan-area discussions.

Conclusions Based on PerformanceTests

The CRA requires the agencies to present conclu-sions for each of the performance test(s) or criteriaconsidered in arriving at a rating. The performanceevaluations should reflect the conclusions reachedunder these performance tests.

• For large institutions, the public evaluation mustindicate the conclusions reached under thelending, investment, and service tests.

• For intermediate small institutions, the publicevaluation must indicate the conclusions underthe lending and community development tests.

• For small institutions, the streamlined assess-ment method for small institutions focuses onlending performance. However, to the extent thatinvestment and service performance were con-sidered in rating a small institution Outstanding,the conclusions for each must be in the publicevaluation.

• For wholesale and limited-purpose institutions,conclusions for the community development testmust be discussed in the performance evaluation.

• Finally, for institutions that operate under anapproved strategic plan, the performance evalu-ation for those institutions must contain conclu-sions for the tests used in the examination.

Hybrid Performance Evaluations

When an institution is examined under more thanone examination method, the examiner shoulddevelop a hybrid performance evaluation. Theevaluation should state the examination methodsused in the ‘‘General Information’’ section. Inaddition, the discussion of the scope shouldindicate the examination method that was used ineach assessment area examined. Finally, discus-sions of the analysis used under each assessment-area presentation should note the applicableexamination method.

Charts, Tables, and Appendices

Charts and tables should be used throughout thepublic evaluation to facilitate discussion of theinstitution’s performance. In addition, the inclusionof one or more appendices may facilitate thepresentation of information in the public evalua-tion. For example, appendix A is a chartdescribing the scope of the examination andshould be used for institutions with numerousassessment areas. Appendix B should be used tosummarize the state ratings for interstate institu-tions. Other charts and tables may be used toassist the reader and amplify the discussion of aninstitution’s performance.

Instructions for Writing Public Evaluations
