Frequently Asked Questions about Regulation H
Membership of State Banking Institutions in the Federal Reserve System
Staff of the Board of Governors of the Federal Reserve System has developed the following frequently asked questions (FAQs) to assist entities in complying with the Board's Regulation H. Except as noted below, these FAQs are staff interpretations and have not been approved by the Board of Governors. Staff may supplement or revise these FAQs as necessary or appropriate in the future. Any questions regarding these FAQs, or requests for modification, rescission, or waiver, should be submitted through the Board's Contact Us form.
In General
12 CFR 208.3 (Application and conditions for membership in the Federal Reserve System)
12 CFR 208.5 (Dividends and other distributions)
12 CFR 208.6 (Establishment and maintenance of branches)
12 CFR 208.21 (Investments in premises and securities)
12 CFR 208.22 (Community development and public welfare investments)
In General
Q1: Are state member banks required to follow the branch closing procedures specified in section 42 of the Federal Deposit Insurance Act (12 U.S.C. § 1831r-1) before temporarily closing a branch?
A1: No. Section 42 of the Federal Deposit Insurance Act requires state member banks to give 90 days prior written notice of any branch closing to the Federal Reserve and branch customers, and to post a notice at the branch site at least 30 days prior to closing. However, such requirements do not apply when a state member bank temporarily ceases operating a branch but does not permanently close it. Reasons for temporary closures of a branch include, but are not limited to, natural disaster, repairing significant maintenance issues, and renovation. State member banks are encouraged to advise the responsible Federal Reserve Bank of a temporary branch closure and to contact their state banking regulator, as there may be requirements applicable to the temporary closure under applicable state law. In addition, state member banks should inform customers of a temporary branch closure, including through email, notice on the bank’s website, notice at the branch, or other means.
If a state member bank decides to permanently close a branch that has been temporarily closed, it is required to follow the branch closing procedures set forth in section 42 of the Federal Deposit Insurance Act to the extent possible and as soon as possible after the decision to close the branch permanently has been made.
If in connection with the temporary closure of a branch, a state member bank opens a temporary branch at a separate location, notice pursuant to section 42 of the Federal Deposit Insurance Act would not be required prior to terminating services at the temporary site, as section 42 does not apply to temporary branches.
Source: 12 U.S.C. § 1831r-1; Joint Policy Statement Concerning Branch Closing Notices and Policies (June 29, 1999), available here; “Branch Closings,” Board of Governors of the Federal Reserve System, Consumer Compliance Handbook (January 2006), available here.
Posted: 12/30/2021
Q2: What notices must a state member bank provide to the Federal Reserve and branch customers before closing a seasonal branch?
A2: A "seasonal branch" is a branch that is operated by a state member bank for multiple limited periods of time to provide branch banking services (i) at a specified recurring event, (ii) on the grounds or premises where the event is held or at a fixed site adjacent to the grounds or premises where the event is held, and (iii) exclusively during the occurrence of the event. Examples of a seasonal branch include the operation of a branch during school registration periods on the campus of a college or at a fixed site adjacent to the campus, and the operation of a branch during a state fair on state fairgrounds or at a fixed site adjacent to the fairgrounds. Seasonal branches are not considered temporary branches, and the branch closure notice requirements under section 42 of the Federal Deposit Insurance Act apply to the closure of seasonal branches.
Section 42 requires a state member bank that proposes to close any branch to provide notice of the proposed closing to the Federal Reserve at least 90 days prior to closing, to mail notice to affected customers informing them of the planned closing at least 90 days prior to closing, and to post a notice at the branch site at least 30 days prior to closing. Seasonal branches, however, are often open for less than 30 consecutive days at a time. In these cases, Board staff has considered the 30-day notice posting requirement to be fulfilled where notice of the planned closure is posted at the seasonal branch for the entire duration that the branch is open, even if the branch is open for less than 30 days. The notice posting requirement may also be fulfilled by posting notice for the full 30 days at the site of the recurring event at any time prior to closure of the seasonal branch, even if the event is not occurring during that 30-day period. The seasonal branch would then be deemed closed once all notice requirements, including the 90-day notice to the Federal Reserve and the 90-day notice to customers, are fulfilled.
Source: 12 U.S.C. § 1831r-1.
Posted: 12/30/2021
12 CFR 208.3 (Application and conditions for membership in the Federal Reserve System)
Q1: What constitutes a change in the general character of a state member bank's business for purposes of section 208.3(d)(2) of Regulation H?
A1: Under Regulation H, a member bank must "at all times conduct its business and exercise its powers with due regard to safety and soundness" and "may not, without the permission of the Board, cause or permit any change in the general character of its business or in the scope of the corporate powers it exercises at the time of admission to membership." 12 CFR 208.3(d)(1) and (2). Changes in the general character of a bank's business are ones that fundamentally or materially change a bank's core business plan. Examples include becoming a primarily internet-focused or an internet-only operation, or concentrating solely on subprime lending or leasing activities. A change to primarily or exclusively focus on such activities would generally constitute a change in the general character of a bank's business because: (i) such activities may present novel risks for the bank, depending on how they are conducted and managed, and may present risks to the deposit insurance fund; and (ii) such activities may involve aggressive growth plans that may give rise to significant financial, managerial, and other supervisory issues.
Source: SR 02-9, "Guidance Regarding Significant Changes in the General Character of a State Member Bank's Business and Compliance with Regulation H" (March 20, 2002), available here.
Posted: 3/31/2021
12 CFR 208.5 (Dividends and other distributions)
Q1: What requirements must be satisfied before a state member bank may declare and pay a dividend of property other than cash?
A1: Pursuant to section 9(6) of the Federal Reserve Act, a state member bank must obtain the prior approval of the Board before it may declare a dividend of property other than cash. 12 U.S.C. § 324. The Board has delegated to the Federal Reserve Banks the authority to approve a request by a state member bank to declare a dividend of property other than cash if the request does not raise significant legal, supervisory, or policy issues.
Source: Board Order Delegating Authority to Approve Requests to Make Dividends of Property Other Than Cash (April 27, 2018), available here.
Posted: 3/31/2021
12 CFR 208.6 (Establishment and maintenance of branches)
Q1: What kinds of banking facilities are not considered "branches" for purposes of section 42 of the Federal Deposit Insurance Act (12 U.S.C. § 1831r-1), and thus do not require agency notice if they are closed?
A1: Section 42 of the Federal Deposit Insurance Act requires that insured depository institutions follow a notice process for branch closings. A 1999 joint policy statement on branch closings issued by the federal banking agencies clarified that automated teller machines, remote service facilities, loan production offices, temporary branches, and insured branches of foreign banks are not branches for purposes of section 42 of the Federal Deposit Insurance Act. The policy statement also clarified that a bank's main office is not a branch for purposes of section 42.
This is an official interpretation of the Board.
Source: Joint Policy Statement Concerning Branch Closing Notices and Policies (June 29, 1999), available here.
Posted: 3/31/2021
Q2: If a state member bank acquires a savings association through merger or other form of business combination, may the state member bank continue to operate branches at the locations of the branches of the acquired savings association?
A2: Yes. Section 341 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides authority for savings associations that become banks (including by means of merger with a bank) to continue to operate the branches that they operated immediately before becoming banks. 12 U.S.C. § 5451.
Source: See, e.g., M&T Bank Corporation, FRB Order No. 2012-2 at n. 74 (September 30, 2015).
Posted: 3/31/2021
Q3: Is a state member bank that relocates its main office required to file a branch application and be approved to continue conducting branch activities at the location of its former main office?
A3: No. A state member bank’s main office is not considered a branch even if branch activities (receiving deposits, paying checks, or lending money) are conducted at the site. Nevertheless, when a state member bank relocates its main office from a location where it already conducts branch activities, no regulatory purpose would be served by requiring the bank to submit an application to continue conducting branch activities at that location. Therefore, a state member bank that conducts branch activities at its main office may continue to conduct branch activities at the site following a main office relocation without filing a branch application. State member banks should contact the appropriate state banking regulator regarding applicable state laws with respect to the continuation of branch activities at the site of a former main office.
Source: 12 U.S.C. § 36(j).
Posted: 12/30/2021
12 CFR 208.21 (Investments in premises and securities)
Q1: Under what conditions may a state member bank invest in a company that engages solely in activities permissible for the parent bank to engage in directly?
A1: Under the Federal Reserve Act, state member banks are subject to the same limitations and conditions with respect to the purchasing, selling, underwriting, and holding of stock as apply to national banks. The Federal Reserve Act does not prohibit a state member bank from acquiring equity interests of a company that engages solely in activities permissible for the parent bank to engage in directly, provided that the bank "controls" the company. Such companies are called "operations subsidiaries." A state member bank controls a target company if the state member bank (i) directly or indirectly owns, controls, or holds with the power to vote 25 percent or more of the outstanding shares of any class of voting securities of the target company; (ii) exercises control in any manner over the election of a majority of the directors, trustees, or general partners of the company; or (iii) has the power to exercise, directly or indirectly, a controlling influence over the management or policies of the company. In determining control for these purposes, the Board considers the same factors it considers under the Bank Holding Company Act and Regulation Y.
A member bank may only organize and operate operations subsidiaries at locations in the United States. A member bank must use authority under Regulation K to acquire foreign subsidiaries. Ownership interests in operations subsidiaries must comply with all state and other federal law.
This is an official interpretation of the Board.
Source: Letter from Jennifer J. Johnson, Secretary of the Board, to Ronald C. Mayer, Esq. (August 16, 2000), available here; 12 CFR 250.143.
Posted: 3/31/2021
Q2: May a state member bank make a noncontrolling equity investment in a company that engages solely in activities permissible for the investing bank to engage in directly?
A2: In general, the Federal Reserve Act prohibits a state member bank from making a noncontrolling equity investment in a company, even if the company's activities are limited to those in which the investing bank could engage directly.
In limited circumstances, Board staff would not recommend that the Board take an enforcement action against a bank for violation of the Federal Reserve Act with respect to a noncontrolling equity investment in another company. These circumstances include where (i) the company's activities are limited to those that are permissible for the bank; (ii) the bank has the ability to withdraw from or terminate the investment at any time; and (iii) the structure of the investment limits the bank's exposure, as a legal and accounting matter, to liability resulting from the actions of the company's other investors.
State member banks may consult with Federal Reserve staff regarding whether a proposed noncontrolling equity investment would be prohibited under the Federal Reserve Act. Equity investments must comply with all state and other federal law.
Source: 12 U.S.C. § 335; Letter from J. Virgil Mattingly, General Counsel of the Board, to Shane B. Hansen, Esq. (July 11, 1996), available here.
Posted: 3/31/2021
Q3: Does section 9(20) of the Federal Reserve Act prohibit a state member bank from acquiring equity securities solely for the purpose of hedging exposures arising from equity derivative transactions that the bank lawfully enters into with third parties?
A3: Section 9(20) of the Federal Reserve Act does not prohibit a state member bank from purchasing equity securities to hedge the risks arising from equity derivative transactions lawfully entered into by the bank with an unaffiliated third party, provided that (i) such purchases are made in accordance with the same conditions and restrictions applicable to national banks, and (ii) the state member bank receives the approval of the Director of the Division of Supervision and Regulation before acquiring any equity security for hedging purposes. 12 U.S.C. § 335.
In approving a state member bank to acquire equity securities for hedging purposes in 2007, the Board relied on commitments by the bank that it (i) would conduct its equity hedging activities in accordance with the conditions and restrictions applicable to the equity hedging activities of national banks, (ii) would not acquire equity securities for speculative or investment purposes, and (iii) would not acquire more than 5 percent of any class of equity securities of any issuer in connection with the bank's equity hedging activities. Consistent with the prohibition under federal law on a state member bank's engaging in underwriting and dealing in any equity security, the bank also committed not to hold itself out to the public as being willing to purchase or sell any equity security or act as a market-maker in any security by continuously quoting "bid" and "ask" prices for the security.
Source: Board Statement Concerning the Acquisition of Stock by State Member Banks to Hedge Equity Derivative Transactions (February 21, 2002), available here; Letter from Robert deV. Frierson, Deputy Secretary of the Board, to Stephen Johnson, Esq. (May 4, 2007), available here.
Posted: 3/31/2021
Q4: Under what conditions may a state member bank acquire a debt obligation under its general powers to lend under state law?
A4: Under section 9(20) of the Federal Reserve Act (12 U.S.C. § 335), state member banks are subject to the same limitations and conditions with respect to the purchasing, selling, underwriting, and holding of “investment securities” (that is, certain marketable debt obligations) as apply to national banks.
In general, the Federal Reserve Act prohibits a bank from purchasing investment securities if the aggregate par value of the bank’s investment securities issued by the obligor would exceed 10 percent of the bank’s “capital and surplus,” defined for this purpose as the sum of the bank’s tier 1 capital, tier 2 capital, and allowances for loan and lease losses (or adjusted allowances for credit losses, as applicable) not included in tier 2 capital. For a bank that elects to use the community bank leverage ratio framework, “capital and surplus” is the sum of the bank’s tier 1 capital and allowances for loan and lease losses (or adjusted allowances for credit losses, as applicable).
State member banks may be permitted under state law to acquire a debt obligation as an exercise of general lending powers. Board staff would not interpret the Federal Reserve Act’s limits and conditions on holdings of investment securities as applying to acquisitions of debt obligations that (i) are an exercise of the state member bank’s general lending powers under applicable state law and (ii) would be an exercise of the general lending powers of a similarly situated national bank. When considering whether an acquisition would be an exercise of the general lending powers of a similarly situated national bank, Board staff considers, consistent with interpretations of the Office of the Comptroller of the Currency, whether the bank would meet the prudential standards applicable to loan participation transactions, including whether the bank would have (i) the full credit information of the obligor at the time of acquisition and (ii) contractual rights to full credit information throughout the life of the obligation.
In addition, when considering whether an acquisition would be an exercise of the general lending powers of a similarly situated national bank, Board staff considers the circumstances at the time the bank acquired the obligation. Accordingly, a state member bank may not recharacterize past purchases of investment securities as exercises of the bank’s general lending powers.
Purchases of investment securities by a state member bank must also comply with state-law single-obligor limits and other applicable law.
Source: 12 U.S.C. § 335; 12 CFR part 1.
Posted: 12/30/2021
12 CFR 208.22 (Community development and public welfare investments)
Q1: May a state member bank make a public welfare investment without prior approval in a project that is eligible to receive tax credits under the Department of Treasury's New Markets Tax Credit (NMTC) program?
A1: A NMTC-eligible investment, directly or indirectly, in an entity that is a "qualified community development entity" as defined in section 45D(c)(l) of the Internal Revenue Code (26 U.S.C. § 45D(c)(1)) is "designed primarily to promote the public welfare" within the meaning of section 9(23) of the Federal Reserve Act (12 U.S.C. § 338a). Accordingly, state member banks are authorized to make investments qualifying for the NMTC program under section 9(23) of the Federal Reserve Act, and may also be eligible for the Regulation H post-notice procedure, as long as those investments comply with all other applicable statutory and regulatory criteria.
Source: CA Letter 19-1, "New Markets Tax Credits and Public Welfare Investments" (February 26, 2019), available here.
Posted: 3/31/2021
Q2: May a state member bank make a public welfare investment without prior approval in a project that is not located in a low- and moderate-income area (LMI area), but that is located in an elevated poverty rate area?
A2: State member banks may make certain investments in "elevated poverty areas" without prior Board approval when the investments are "designed primarily to promote the public welfare" within the meaning of section 9(23) of the Federal Reserve Act. 12 U.S.C. § 338a. "Elevated poverty areas" are areas within a census tract (or a group of contiguous census tracts) where 20 percent or more of the population lives below the federally defined poverty level. Thus, an investment in an entity that conducts activities in an elevated poverty area would be a permissible public welfare investment if an investment in an entity that conducts those same activities in an LMI area would be a permissible public welfare investment. As a result, state member banks are authorized to make investments in such entities under section 9(23) of the Federal Reserve Act, and may also be eligible for the Regulation H post-notice procedure, as long as those investments comply with all other applicable statutory and regulatory criteria.
Source: CA Letter 20-9, "Investments in Areas with Elevated Poverty and Public Welfare Investments" (May 21, 2020), available here.
Posted: 3/31/2021
Q3: Can a state member bank make a public welfare investment in a housing project that includes multiple residential buildings?
A3: Section 9(23) of the Federal Reserve Act (12 U.S.C. § 338a) permits a state member bank to make public welfare investments if they are designed primarily to promote the public welfare, including the welfare of LMI communities or families. Regulation H permits a state member bank to make public welfare investments for the purpose of investing in, developing, rehabilitating, managing, selling, or renting residential property, provided that a majority of the units will be occupied by LMI persons. 12 CFR 208.22(b)(1)(iv)(A). In some cases, a state member bank may seek to make such an investment in a single housing project consisting of multiple buildings. For that investment to be considered a single investment, the buildings must be “contiguous.” “Contiguous” means the buildings must be physically adjacent to one another (for example, the property boundaries of each building must be connected and not separated by another property or space not associated with the project), or otherwise physically connected to one another by means of a dedicated underground, ground-level, or above-ground path such that residents of the buildings can traverse between the buildings in an uninterrupted manner. Buildings which are separated by other structures, properties, spaces, or public roads would not be considered contiguous, even if they are accessible by persons via public sidewalks. The two examples below illustrate the definition of “contiguous” buildings. In cases where contiguity is unclear, state member banks are encouraged to consult with Federal Reserve staff.
- Example 1: A state member bank proposes to make a public welfare investment in a housing project consisting of four separate residential buildings that are not physically adjacent but are connected by underground pedestrian tunnels accessible by building residents. In this case, the buildings would be considered contiguous. Each building contains 100 residential units—80 units in building 1 would be occupied by LMI persons, 70 units in building 2 would be occupied by LMI persons, 30 units in building 3 would be occupied by LMI persons, and 30 units in building 4 would be occupied by LMI persons. Of the 400 total units, 210 would be occupied by LMI persons. Because a majority of units in the four contiguous buildings would be occupied by LMI persons, the investment would be permissible as a single public welfare investment under section 208.22(b)(1)(iv)(A). The same analysis would apply in a case where four separate residential buildings are all connected by an outdoor common area specifically reserved for residents of the buildings.
- Example 2: A state member bank proposes to make a public welfare investment in a housing project consisting of four separate residential buildings that are located on three city streets. The residential buildings are separated by commercial buildings not associated with the housing project, and no physical connections exist between the residential buildings. In this case, the residential buildings would not be considered contiguous, and the investment in each building would be analyzed on an individual basis to determine permissibility as a public welfare investment. As in example 1 above, each of the four residential buildings contains 100 residential units—80 units in building 1 would be occupied by LMI persons, 70 units in building 2 would be occupied by LMI persons, 30 units in building 3 would be occupied by LMI persons, and 30 units in building 4 would be occupied by LMI persons. Because a majority of the units would be occupied by LMI persons only in buildings 1 and 2, only the individual investments in those buildings would be permissible public welfare investments under section 208.22(b)(1)(iv)(A). Where the investments in buildings 3 and 4 do not qualify as public welfare investments under Regulation H on any other basis, the investments in those buildings would not be permissible public welfare investments.
Source: 12 U.S.C. § 338a; 12 CFR 208.22.
Posted: 12/30/2021
Q4: When a state member bank makes a public welfare investment through a subsidiary and the investment is funded by (1) the bank’s equity investment and (2) a nonrecourse loan from an unaffiliated party to the subsidiary for which neither the bank nor its subsidiaries or affiliates are liable for any unpaid amounts (a “leverage loan”), must the portion of the investment attributable to the leverage loan be included in the bank’s public welfare investment amount, which is used to determine compliance with the aggregate public welfare investment limits under section 9(23) of the Federal Reserve Act, 12 U.S.C. § 338a, and section 208.22 of the Board’s Regulation H?
A4: Whether the amount attributable to the leverage loan is included in the state member bank’s public welfare investment amount, which is used to determine compliance with the aggregate public welfare investment limits, depends on the structure and terms of the investment.
State member banks may structure public welfare investments through a consolidated subsidiary or an unconsolidated entity. The subsidiary or entity receives the leverage loan and combines it with the equity investment to fund one or more public welfare investments.
In an unconsolidated investment structure, only the bank’s equity investment is reflected on the bank’s balance sheet. Accordingly, the amount of the leverage loan is not an exposure of the bank, either from an economic (because the third-party lender has no recourse to the bank) or accounting perspective. Therefore, in this situation, the bank does not need to include the amount of the investment attributable to the leverage loan in its public welfare investment amount.
In a consolidated investment structure, although the third-party lender has no recourse to the bank if the leverage loan is not repaid, the entire investment made by the subsidiary, using the proceeds from both the equity investment and the leverage loan, is reflected as an asset on the bank’s balance sheet (and the leverage loan is reflected as a liability). Accordingly, as a general rule, the entire amount of the investment made by the subsidiary is treated as a public welfare investment made by the bank. However, under these circumstances, a state member bank may exclude from its public welfare investment amount the amount attributable to the leverage loan if the investment is eligible for New Markets Tax Credits (NMTCs), 26 U.S.C. § 45D, or Low-Income Housing Tax Credits (LIHTCs), 26 U.S.C. § 42, a majority of the bank’s equity return derives from such tax credits, and the bank’s equity investment is written down as the tax credits are received. This approach to NMTC and LIHTC investments facilitates the ability of a state member bank to make these types of public welfare investments in a safe and sound manner without unnecessarily constraining the amount of capital that the bank may allocate to such investments within the aggregate public welfare investment limits.
State member banks must continue to ensure that public welfare investments made pursuant to section 208.22(b) of Regulation H meet the applicable permissibility criteria, including that such investments do not expose the bank to liability beyond the amount of the investment. 12 CFR 208.22(b)(3). For purposes of determining the appropriate accounting treatment for public welfare investments and related investment structures, including whether an entity must be consolidated, state member banks should refer to the Call Report instructions and U.S. generally accepted accounting principles.
Source: 12 U.S.C. § 338a; 12 CFR 208.22.
Posted: 4/18/2023