FRB: Consumer Affairs Letter CA 04 - 3 - Assessments of Foreign Banking Organizations and Special Purpose Banks

SUBJECT: Assessments of Foreign Banking Organizations and Special Purpose Banks

This CA Letter provides guidance to be used when assessing whether a compliance or CRA examination of a Foreign Banking Organization (FBO) or special purpose bank is necessary.¹

Using the data elements included in Attachment I, Reserve Bank staff should assess whether the FBO or special purpose bank engages in activities subject to consumer protection laws and regulations, including the Community Reinvestment Act.² The data elements may be obtained by:

• having a Consumer Affairs examiner complete a checklist or questionnaire during an onsite

• having an examiner from another specialty area complete a checklist or questionnaire during

• querying other resources within the Reserve Bank such as NED, compliance risk profiles, or

Reserve Bank staff is expected to verify data elements obtained from the institution and, in that regard, may use resources within the Reserve Bank such as NED or examination information from the safety and soundness examiners. Other resources which may be useful in verifying information include, but are not limited to: annual reports, recent balance sheets, audit reports and schedules, policy and procedures manuals, underwriting guidelines, loan trial balances, lists of denied loan applications, samples of documents and disclosures, deposit account trial balances, and logs of government requests for customer information.

If the Reserve Bank concludes that an FBO or special purpose bank is not engaging in activities subject to consumer protection laws and regulations, no examination should be conducted and no rating should be assigned to the institution. When an examination is not warranted:

• A notification letter should be sent to institution management apprising them of the fact that

an examination was not deemed necessary and a rating will not be assigned. A notification

• The ratings field in CARES should reflect "Not Rated" and the examination scope should be

• The ratings field in NED should reflect "0" and the examination scope should be reflected as

• The Reserve Bank should maintain work papers (see CA 02-5) to support its conclusion.

If the assessment reveals that an FBO or special purpose bank is engaging in activities subject to consumer laws and regulations, the institution should be examined for compliance with applicable laws and regulations.⁵ These examinations should be conducted pursuant to the risk-focused examination procedures found in CA 03-13, including a review of the institution's compliance management program.

• A Report of Examination, with appropriate rating, should be issued to the FBO or special

• The examination scope in CARES should be reflected as "Special" and a rating should be

• The examination scope in NED should be reflected as "Special" and a rating should be

FBOs and special purpose banks are subject to the monitoring timeframes in CA 03-12, as well as the risk-focused consumer compliance supervision program procedures in CA 03-13. A large number of FBOs and special purpose banks are low-risk since they do not engage in activities that subject them to consumer laws and regulations. As a result, the monitoring activities for these entities may be limited to determining if any changes have occurred, either through telephone contact or by mailing a questionnaire to the FBO or special purpose bank for completion. Interim monitoring activities at routine intervals are not required for certain special purpose banks with assets greater than $250 million.

While most of the assessment process focuses on consumer protection laws and regulations other than the Community Reinvestment Act, Reserve Bank staff should be aware that an uninsured state branch of a foreign banking organization may be subject to the Community Reinvestment Act if: (1) the branch was acquired from an insured bank and was located in a State in which the FBO does not maintain a branch; and (2) the FBO does not limit its deposit-taking to foreigners.⁶ Branches of foreign banking organizations with federal deposit insurance (insured branches) are regulated by the Federal Deposit Insurance Corporation (state charters) or the Office of the Comptroller of the Currency (national charters).

Banks that are considered special purpose banks typically engage in specialized activities that do not involve granting credit to the public in the ordinary course of business. These special purpose institutions typically serve as correspondent banks, trust companies or clearing agents or engage only in specialized services such as cash management controlled disbursement services. As such, these special purpose banks are not subject to CRA. Such exemption would no longer be available, however, if the bank subsequently engaged in activities that involve granting credit to the public in the ordinary course of business.

If you have any questions about this information, please contact the review examiner assigned to your district.

^1. 12 CFR 228.11(c)(3) Return to Text
^2. Such assessments should be conducted pursuant to the mandates included in CA 03-12. Return to Text
^3. Relevant information may be available within the Reserve Bank in documents developed by other specialty areas. If such information is utilized, reference should be made to the appropriate documents. Return to Text
^4. Copies should be submitted pursuant to the current process for transmitting examination reports to the Board. Return to Text
^5. If a Reserve Bank confirms that there are no new activities since the last assessment, an examination is not warranted. However, if a Reserve Bank confirms that the institution has participated in any new activity (e.g. consumer lending to an extent that the institution is subject to Regulation Z), an examination may be limited to determining compliance with the regulations applicable to that particular activity. Consequently, the examination report would specifically address the scope and findings and would identify the appropriate rating. Return to Text
^6. 12 CFR 228.11(c), 12 CFR 211.21(s), and 12 CFR 211.6(a)(1). Return to Text