Title 12--Banks and Banking CHAPTER II--FEDERAL RESERVE SYSTEM PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION A) |
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(a) Authority and scope. This part is issued under the authority of
sections 10A, 10B, 13, 13A, and 19 of the FRA (12 U.S.C. 347a, 347b, 343
et seq., 347c, 348 et seq., 374, 374a, and 461), other provisions of the
FRA, and section 7(b) of the International Banking Act of 1978 (12
U.S.C. 347d) and relates to extensions of credit by Federal Reserve
Banks to depository institutions and others.
(b) Purpose. This part establishes rules under which Federal Reserve
Banks may extend credit to depository institutions and others. Extending
credit to depository institutions to accommodate commerce, industry, and
agriculture is a principal function of Federal Reserve Banks. While open
market operations are the primary means of affecting the overall supply
of reserves, the lending function of the Federal Reserve Banks is an
effective method of supplying reserves to meet the particular credit
needs of individual depository institutions. The lending functions of
the Federal Reserve System are conducted with due regard to the basic
objectives of monetary policy and the maintenance of a sound and orderly
financial system.
[58 FR 68512, Dec. 28, 1993] |
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For purposes of this part, the following definitions shall apply:
(a) Appropriate Federal banking agency has the same meaning as in
section 3 of the FDI Act (12 U.S.C. 1813(q)).
(b) Critically undercapitalized insured depository institution means
any insured depository institution as defined in section 3 of the FDI
Act (12 U.S.C. 1813(c)(2)) that is deemed to be critically
undercapitalized under section 38 of the FDI Act (12 U.S.C.
1831o(b)(1)(E)) and the implementing regulations.
(c)(1) Depository institution means an institution that maintains
reservable transaction accounts or nonpersonal time deposits and is:
(i) An insured bank as defined in section 3 of the FDI Act (12
U.S.C. 1813(h)) or a bank which is eligible to make application to
become an insured bank under section 5 of such Act (12 U.S.C. 1815);
(ii) A mutual savings bank as defined in section 3 of the FDI Act
(12 U.S.C. 1813(f)) or a bank which is eligible to make application to
become an insured bank under section 5 of such Act (12 U.S.C. 1815);
(iii) A savings bank as defined in section 3 of the FDI Act (12
U.S.C. 1813(g)) or a bank which is eligible to make application to
become an insured bank under section 5 of such Act (12 U.S.C. 1815);
(iv) An insured credit union as defined in section 101 of the
Federal Credit Union Act (12 U.S.C. 1752(7)) or a credit
[[Page 6]]
union which is eligible to make application to become an insured credit
union pursuant to section 201 of such Act (12 U.S.C. 1781);
(v) A member as defined in section 2 of the Federal Home Loan Bank
Act (12 U.S.C. 1422(4)); or
(vi) A savings association as defined in section 3 of the FDI Act
(12 U.S.C. 1813(b)) which is an insured depository institution as
defined in section 3 of the Act (12 U.S.C. 1813(c)(2)) or is eligible to
apply to become an insured depository institution under section 5 of the
Act (12 U.S.C. 1815(a)).
(2) The term depository institution does not include a financial
institution that is not required to maintain reserves under Regulation D
(12 CFR part 204) because it is organized solely to do business with
other financial institutions, is owned primarily by the financial
institutions with which it does business, and does not do business with
the general public.
(d) Liquidation loss means the loss that any deposit insurance fund
in the FDIC would have incurred if the FDIC had liquidated the
institution:
(1) In the case of an undercapitalized insured depository
institution, as of the end of the later of:
(i) Sixty days:
(A) In any 120-day period;
(B) During which the institution was an undercapitalized insured
depository institution; and
(C) During which advances or discounts were outstanding to the
depository institution from any Federal Reserve Bank; or
(ii) The 60 calendar day period following the receipt by a Federal
Reserve Bank of a written certification from the Chairman of the Board
of Governors or the head of the appropriate Federal banking agency that
the institution is viable.
(2) In the case of a critically undercapitalized insured depository
institution, as of the end of the 5-day period beginning on the date the
institution became a critically undercapitalized insured depository
institution.
(e) Increased loss means the amount of loss to any deposit insurance
fund in the FDIC that exceeds the liquidation loss due to:
(1) An advance under section 10B(1)(a) of the FRA that is
outstanding to an undercapitalized or critically undercapitalized
insured depository institution without payment having been demanded as
of the end of the periods specified in paragraphs (d)(1) and (2) of this
section; or
(2) An advance under section 10B(1)(a) of the Federal Reserve Act
that is made after the end of such periods.
(f) Excess loss means the lesser of the increased loss or that
portion of the increased loss equal to the lesser of:
(1) The loss the Board of Governors or any Federal Reserve Bank
would have incurred on the amount by which advances under section
10B(1)(a) exceed the amount of advances outstanding at the end of the
periods specified in paragraphs (d)(1) and (2) of this section if those
increased advances had been unsecured; or
(2) The interest received on the amount by which the advances under
section 10B(1)(a) exceed the amount of advances outstanding, if any, at
the end of the periods specified in paragraphs (d)(1) and (2) of this
section.
(g) Transaction account and nonpersonal time deposit have the
meanings specified in Regulation D (12 CFR part 204).
(h) Undercapitalized insured depository institution means any
insured depository institution as defined in section 3 of the FDI Act
(12 U.S.C. 1813(c)(2)) that:
(1) Is not a critically undercapitalized insured depository
institution; and
(2)(i) Is deemed to be undercapitalized under section 38 of the FDI
Act (12 U.S.C. 1831o(b)(1)(C)) and the implementing regulations; or
(ii) Has received from its appropriate Federal banking agency a
composite CAMEL rating of 5 under the Uniform Financial Institutions
Rating System (or an equivalent rating by its appropriate Federal
banking agency under a comparable rating system) as of the most recent
examination of such institution.
(i) Viable, with respect to a depository institution, means that the
Board of Governors or the appropriate Federal banking agency has
determined,
[[Page 7]]
giving due regard to the economic conditions and circumstances in the
market in which the institution operates, that the institution is not
critically undercapitalized, is not expected to become critically
undercapitalized, and is not expected to be placed in conservatorship or
receivership. Although there are a number of criteria that may be used
to determine viability, the Board of Governors believes that ordinarily
an undercapitalized insured depository institution is viable if the
appropriate Federal banking agency has accepted a capital restoration
plan for the depository institution under 12 U.S.C. 1831o(e)(2) and the
depository institution is complying with that plan.
(j) Eligible institution means a depository institution that is in
sound financial condition in the judgment of the lending Federal Reserve
Bank.
(k) Targeted federal funds rate means the federal funds rate
targeted by the Federal Open Market Committee.
[58 FR 68512, Dec. 28, 1993, as amended at 64 FR 41769, Aug. 2, 1999]
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(a) Adjustment credit. Federal Reserve Banks extend adjustment
credit on a short-term basis to depository institutions to assist in
meeting temporary requirements for funds or to cushion more persistent
shortfalls of fundspending an orderly adjustment of a borrowing
institution's assets and liabilities. Such credit generally is available
only for appropriate purposes and after reasonable alternative sources
of funds have been fully used, including credit from special industry
lenders such as Federal Home Loan Banks, the National Credit Union
Administration's Central Liquidity Facility, and corporate central
credit unions. Adjustment credit is usually granted at the basic
discount rate, but under certain circumstances a special rate or rates
above the basic discount rate may be applied.
(b) Seasonal credit. Federal Reserve Banks extend seasonal credit
for periods longer than those permitted under adjustment credit to
assist smaller depository institutions in meeting regular needs for
funds arising from expected patterns of movement in their deposits and
loans. A special rate or rates at or above the basic discount rate may
be applied to seasonal credit.
(1) Seasonal credit is only available if:
(i) The depository institution's seasonal needs exceed a threshold
that the institution is expected to meet from other sources of liquidity
(this threshold is calculated as certain percentages, established by the
Board of Governors, of the institution's average total deposits in the
preceding calendar year);
(ii) The Federal Reserve Bank is satisfied that the institution's
qualifying need for funds is seasonal and will persist for at least four
weeks; and
(iii) Similar assistance is not available from special industry
lenders.
(2) The Board may establish special terms for seasonal credit when
depository institutions are experiencing unusual seasonal demands for
credit in a period of liquidity strain.
(c) Extended credit. Federal Reserve Banks extend credit to
depository institutions under extended credit arrangements where similar
assistance is not reasonably available from other sources, including
special industry lenders. Such credit may be provided where there are
exceptional circumstances or practices affecting a particular depository
institution including sustained deposit drains, impaired access to money
market funds, or sudden deterioration in loan repayment performance.
Extended credit may also be provided to accommodate the needs of
depository institutions, including those with longer term asset
portfolios, that may be experiencing difficulties adjusting to changing
money market conditions over a longer period, particularly at times of
deposit disintermediation. A special rate or rates above the basic
discount rate may be applied to extended credit.
(d) Emergency credit for others. In unusual and exigent
circumstances, a Federal Reserve Bank may, after consultation with the
Board of Governors, advance credit to individuals, partnerships, and
corporations that are not depository institutions if, in the judgment of
the Federal Reserve Bank, credit is not available from other sources and
failure to obtain such credit would adversely affect the economy.
[[Page 8]]
The rate applicable to such credit will be above the highest rate in
effect for advances to depository institutions. Where the collateral
used to secure such credit consists of assets other than obligations of,
or fully guaranteed as to principal and interest by, the United States
or an agency thereof, an affirmative vote of five or more members of the
Board of Governors is required before credit may be extended.
(e) Special liquidity facility for century date change. Federal
Reserve Banks may extend credit between and including October 1, 1999,
and April 7, 2000, or such later date as determined by the Board, under
a special liquidity facility to ease liquidity pressures during the
century date change period. This type of credit is available only to
eligible institutions. This type of credit is granted at a special rate
above the basic discount rate and other market rates for funds, is
available for the entire length of the period, and is not subject to the
conditions regarding specific use or exhaustion of other liquidity
sources as is adjustment credit under paragraph (a) of this section.
[58 FR 68513, Dec. 28, 1993, as amended at 64 FR 41769, Aug. 2, 1999]
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Sec. 201.4 Limitations on availability and assessments. |
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(a) Advances to or discounts for undercapitalized insured depository
institutions. A Federal Reserve Bank may make or have outstanding
advances to or discounts for a depository institution that it knows to
be an undercapitalized insured depository institution, only:
(1) If, in any 120-day period, advances or discounts from any
Federal Reserve Bank to that depository institution are not outstanding
for more than 60 days during which the institution is an
undercapitalized insured depository institution; or
(2) During the 60 calendar days after the receipt of a written
certification from the Chairman of the Board of Governors or the head of
the appropriate Federal banking agency that the borrowing depository
institution is viable; or
(3) After consultation with the Board of Governors.\1\
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\1\ In unusual circumstances, when prior consultation with the Board
is not possible, a Federal Reserve Bank should consult with the Board as
soon as possible after extending credit that requires consultation under
this paragraph.
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(b) Advances to or discounts for critically undercapitalized insured
depository institutions. A Federal Reserve Bank may make or have
outstanding advances to or discounts for a depository institution that
it knows to be a critically undercapitalized insured depository
institution only:
(1) During the 5-day period beginning on the date the institution
became a critically undercapitalized insured depository institution; or
(2) After consultation with the Board of Governors.\2\
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\2\ See footnote 1 in Sec. 201.4(a)(3).
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(c) Assessments. The Board of Governors will assess the Federal
Reserve Banks for any amount that it pays to the FDIC due to any excess
loss. Each Federal Reserve Bank shall be assessed that portion of the
amount that the Board of Governors pays to the FDIC that is attributable
to an extension of credit by that Federal Reserve Bank, up to one
percent of its capital as reported at the beginning of the calendar year
in which the assessment is made. The Board of Governors will assess all
of the Federal Reserve Banks for the remainder of the amount it pays to
the FDIC in the ratio that the capital of each Federal Reserve Bank
bears to the total capital of all Federal Reserve Banks at the beginning
of the calendar year in which the assessment is made, provided, however,
that if any assessment exceeds 50 percent of the total capital and
surplus of all Federal Reserve Banks, whether to distribute the excess
over such 50 percent shall be made at the discretion of the Board of
Governors.
(d) Information. Before extending credit a Federal Reserve Bank
should ascertain if an institution is an undercapitalized insured
depository institution or a critically undercapitalized insured
depository institution.
[58 FR 68514, Dec. 28, 1993]
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Sec. 201.5 Advances and discounts. |
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(a) Federal Reserve Banks may lend to depository institutions either
through advances secured by acceptable collateral or through the
discount of certain types of paper. Credit extended by the Federal
Reserve Banks generally takes the form of an advance.
(b) Federal Reserve Banks may make advances to any depository
institution if secured to the satisfaction of the Federal Reserve Bank.
Satisfactory collateral generally includes United States government and
Federal agency securities, and, if of acceptable quality, mortgage notes
covering 1-4 family residences, State and local government securities,
and business, consumer and other customer notes.
(c) If a Federal Reserve Bank concludes that a depository
institution will be better accommodated by the discount of paper than by
an advance, it may discount any paper endorsed by the depository
institution that meets the requirements specified in the FRA.
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Sec. 201.6 General requirements |
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(a) Credit for capital purposes. Federal Reserve credit is not a
substitute for capital.
(b) Compliance with law and regulation. All credit extended under
this part shall comply with applicable requirements of law and of this
part. Each Federal Reserve Bank:
(1) Shall keep itself informed of the general character and amount
of the loans and investments of depository institutions with a view to
ascertaining whether undue use is being made of depository institution
credit for the speculative carrying of or trading in securities, real
estate, or commodities, or for any other purpose inconsistent with the
maintenance of sound credit conditions; and
(2) Shall consider such information in determining whether to extend
credit.
(c) Information. A Federal Reserve Bank shall require any
information it believes appropriate or desirable to insure that paper
tendered as collateral for advances or for discount is acceptable and
that the credit provided is used in a manner consistent with this part.
(d) Indirect credit for others. Except for depository institutions
that receive credit under the Special Liquidity Facility described in
Sec. 201.3(e), no depository institution shall act as the medium or
agent of another depository institution in receiving Federal Reserve
credit except with the permission of the Federal Reserve bank extending
credit.
[58 FR 68514, Dec. 28, 1993, as amended at 64 FR 41770, Aug. 2, 1999]
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Sec. 201.7 Branches and agencies. |
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(a) Except as may be otherwise provided, this part shall be
applicable to United States branches and agencies of foreign banks
subject to reserve requirements under Regulation D (12 CFR part 204) in
the same manner and to the same extent as depository institutions.
(b) This part applies to a United States branch or agency of a
foreign bank in the same manner and to the same extent as an eligible
institution if the foreign bank is in sound financial condition in the
judgment of the lending Federal Reserve Bank.
[58 FR 68514, Dec. 28, 1993, as amended at 64 FR 41770, Aug. 2, 1999]
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Sec. 201.8 Federal Intermediate Credit Banks. |
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A Federal Reserve Bank may discount for any Federal Intermediate Credit Bank agricultural paper or notes payable to and bearing the endorsement of the Federal Intermediate Credit Bank that cover loans or advances made under subsections (a) and (b) of section 2.3 of the Farm Credit Act of 1971 (12 U.S.C. 2074) and that are secured by paper eligible for discount by Federal Reserve Banks. Any paper so discounted shall have a period remaining to maturity at the time of discount of not more than nine months. [58 FR 68514, Dec. 28, 1993] |
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Sec. 201.9 No obligation to make advances or discounts. |
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A Federal Reserve Bank shall have no obligation to make, increase, renew, or extend any advance or discount to any depository institution. [58 FR 68514, Dec. 28, 1993] [[Page 10]] |
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Sec. 201.51 Adjustment credit for depository institutions. |
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The rates for adjustment credit provided to depository institutions
under Sec. 201.3(a) are:
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Federal Reserve Bank Rate Effective
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Boston.............................. 6.0 May 16, 2000.
New York............................ 6.0 May 19, 2000.
Philadelphia........................ 6.0 May 18, 2000.
Cleveland........................... 6.0 May 16, 2000.
Richmond............................ 6.0 May 16, 2000.
Atlanta............................. 6.0 May 17, 2000.
Chicago............................. 6.0 May 17, 2000.
St. Louis........................... 6.0 May 18, 2000.
Minneapolis......................... 6.0 May 18, 2000.
Kansas City......................... 6.0 May 17, 2000.
Dallas.............................. 6.0 May 17, 2000.
San Francisco....................... 6.0 May 16, 2000.
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[65 FR 34048, May 26, 2000]
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Sec. 201.52 Other credit for depository institutions. |
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(a) Seasonal credit. The rate for seasonal credit extended to
depository institutions under Sec. 201.3(b) is a flexible rate that
takes into account rates on market sources of funds, but in no case will
the rate charged be less than the rate for adjustment credit as set out
in Sec. 201.51.
(b) Extended credit. For extended credit to depository institutions
under Sec. 201.3(c), for credit outstanding for more than 30 days, a
flexible rate will be charged that takes into account rates on market
sources of funds, but in no case will the rate charged be less than the
rate for adjustment credit, as set out in Sec. 201.51, plus one-half
percentage point. At the discretion of the Federal Reserve Bank, the 30-
day time period may be shortened.
(c) Special liquidity facility. The rate for credit extended to
eligible institutions under the special liquidity facility provisions in
Sec. 201.3(e) is equal to the targeted federal funds rate plus 1.5
percentage points on each day the credit is outstanding.
[Reg. A, 59 FR 29538, June 8, 1994, as amended at 59 FR 60700, Nov. 28,
1994; 64 FR 41770, Aug. 2, 1999]
Interpretations
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Sec. 201.104 Eligibility of consumer loans and finance company paper. |
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(a) The Board of Governors has clarified and modified its position
with respect to the eligibility of consumer loans and finance company
paper for discount with and as collateral for advances by the reserve
banks.
(b) Section 13, paragraph 2, of the Federal Reserve Act authorizes a
Federal Reserve Bank, under certain conditions, to discount for member
banks
* * * notes, drafts, and bills of exchange arising out of actual
commercial transactions; that is, notes, drafts, and bills of exchange
issued or drawn for agricultural, industrial, or commercial purposes, or
the proceeds of which have been used, or are to be used, for such
purposes, the Board of Governors of the Federal Reserve System to have
the right to determine or define the character of the paper thus
eligible for discount, within the meaning of this Act.
(c) It continues to be the opinion of the Board that borrowing for
the purpose of purchasing goods is borrowing for a commercial purpose,
whether the borrower intends to use the goods himself or to resell them.
Hence, loans made to enable consumers to purchase automobiles or other
goods should be included under commercial, agricultural, and industrial
paper within the meaning of the Federal Reserve Act, and as such are
eligible for discounting with the Reserve Banks and as security for
advances from the Reserve Banks under section 13, paragraph 8, of the
Federal Reserve Act as long as they conform to requirements with respect
to maturity and other matters. This applies equally to loans made
directly by banks to consumers and to paper accepted by banks from
dealers or finance companies. It also applies to notes of finance
companies themselves as long as the proceeds of such notes are used to
finance the purchase of consumer goods or for other purposes which are
eligible within the meaning of the Federal Reserve Act.
(d) If there is any question as to whether the proceeds of a note of
a finance company have been or are to be used for a commercial,
agricultural, or industrial purpose, a financial statement of the
finance company reflecting an excess of notes receivable which appear
eligible for rediscount (without regard to maturity) over total current
liabilities (i.e., notes due within 1 year) may be taken as an
indication of eligibility. Where information is lacking as
[[Page 11]]
to whether direct consumer loans by a finance company are for eligible
purposes, it may be assumed that 50 percent of such loans are ``notes
receivable which appear eligible for rediscount''. In addition, that
language should be regarded as including notes given for the purchase of
mobile homes that are acquired by a finance company from a dealer-seller
of such homes.
(e) The principles stated above apply not only to notes of a finance
company engaged in making consumer loans but also to notes of a finance
company engaged in making loans for other eligible purposes, including
business and agricultural loans. Under section 13a of the Federal
Reserve Act, paper representing loans to finance the production,
marketing, and carrying of agricultural products or the breeding,
raising, fattening, or marketing of livestock is eligible for discount
if the paper has a maturity of not exceeding 9 months. Consequently, a
note of a finance company the proceeds of which are used by it to make
loans for such purposes is eligible for discount or as security for a
Federal Reserve advance, and such a note, unlike the note of a finance
company making consumer loans, may have a maturity of up to 9 months.
[37 FR 4701, Mar. 4, 1972]
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| Sec. 201.107 Eligibility of demand paper for discount and as security for advances by Reserve Banks. | |||||||||||||||||||||||||||||||||||||||||||||||||
(a) The Board of Governors has reconsidered a ruling made in 1917
that demand notes are ineligible for discount under the provisions of
the Federal Reserve Act. (1917 Federal Reserve Bulletin 378.)
(b) The basis of that ruling was the provision in the second
paragraph of section 13 of the Federal Reserve Act that notes, drafts,
and bills of exchange must have a maturity at the time of discount of
not more than 90 days, exclusive of grace. The ruling stated that
a demand note or bill is not eligible under the provisions of the
act, since it is not in terms payable within the prescribed 90 days,
but, at the option of the holder, may not be presented for payment until
after that time.
(c) It is well settled as a matter of law, however, that demand
paper is due and payable on the date of its issue. The generally
accepted legal view is stated in Beutel's Brannan on Negotiable
Instruments Law, at page 305, as follows:
The words on demand serve the same purpose as words making
instruments payable at a specified time. They fix maturity of the
obligation and do not make demand necessary, but mean that the
instrument is due, payable and matured when made and delivered.
(d) Accordingly, the Board has concluded that, since demand paper is
due and payable on the date of its issue, it satisfies the maturity
requirements of the statute. Demand paper which otherwise meets the
eligibility requirements of the Federal Reserve Act and this part
Regulation A, therefore, is eligible for discount and as security for
advances by Reserve Banks.
[31 FR 5443, Apr. 16, 1966]
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Sec. 201.108 Obligations eligible as collateral for advances. |
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(a) Section 3(a) of Pub. L. 90-505, approved September 21, 1968,
amended the eighth paragraph of section 13 of the Federal Reserve Act
(12 U.S.C. 347) to authorize advances thereunder to member banks
``secured by such obligations as are eligible for purchase under section
14(b) of this Act.'' The relevant part of such paragraph had previously
referred only to ``notes * * * eligible * * * for purchase'', which the
Board had construed as not including obligations generally regarded as
securities. (See 1962 Federal Reserve Bulletin 690, Sec. 201.103(d).)
(b) Under section 14(b) direct obligations of, and obligations fully
guaranteed as to principal and interest by, the United States are
eligible for purchase by Reserve Banks. Such obligations include
certificates issued by the trustees of Penn Central Transportation Co.
that are fully guaranteed by the Secretary of Transportation. Under
section 14(b) direct obligations of, and obligations fully guaranteed as
to principal and interest by, any agency of the United States are also
eligible for purchase by Reserve Banks. Following are the principal
agency obligations eligible as collateral for advances:
(1) Federal Intermediate Credit Bank debentures;
[[Page 12]]
(2) Federal Home Loan Bank notes and bonds;
(3) Federal Land Bank bonds;
(4) Bank for Cooperative debentures;
(5) Federal National Mortgage Association notes, debentures and
guaranteed certificates of participation;
(6) Obligations of or fully guaranteed by the Government National
Mortgage Association;
(7) Merchant Marine bonds;
(8) Export-Import Bank notes and guaranteed participation
certificates;
(9) Farmers Home Administration insured notes;
(10) Notes fully guaranteed as to principal and interest by the
Small Business Administration;
(11) Federal Housing Administration debentures;
(12) District of Columbia Armory Board bonds;
(13) Tennessee Valley Authority bonds and notes;
(14) Bonds and notes of local urban renewal or public housing
agencies fully supported as to principal and interest by the full faith
and credit of the United States pursuant to section 302 of the Housing
Act of 1961 (42 U.S.C. 1421a(c), 1452(c)).
(15) Commodity Credit Corporation certificates of interest in a
price-support loan pool.
(16) Federal Home Loan Mortgage Corporation notes, debentures, and
guaranteed certificates of participation.
(17) U.S. Postal Service obligations.
(18) Participation certificates evidencing undivided interests in
purchase contracts entered into by the General Services Administration.
(19) Obligations entered into by the Secretary of Health, Education,
and Welfare under the Public Health Service Act, as amended by the
Medical Facilities Construction and Modernization Amendments of 1970.
(20) Obligations guaranteed by the Overseas Private Investment
Corp., pursuant to the provisions of the Foreign Assistance Act of 1961,
as amended.
(c) Nothing less than a full guarantee of principal and interest by
a Federal agency will make an obligation eligible. For example, mortgage
loans insured by the Federal Housing Administration are not eligible
since the insurance contract is not equivalent to an unconditional
guarantee and does not fully cover interest payable on the loan.
Obligations of international institutions, such as the Inter-American
Development Bank and the International Bank for Reconstruction and
Development, are also not eligible, since such institutions are not
agencies of the United States.
(d) Also eligible for purchase under section 14(b) are ``bills,
notes, revenue bonds, and warrants with a maturity from date of purchase
of not exceeding 6 months, issued in anticipation of the collection of
taxes or in anticipation of the receipt of assured revenues by any
State, county, district, political subdivision, or municipality in the
continental United States, including irrigation, drainage and
reclamation districts.''\3\ In determining the eligibility of such
obligations as collateral for advances, but the Reserve Bank will
satisfy itself that sufficient tax or other assured revenues earmarked
for payment of such obligations will be available for that purpose at
maturity, or within 6 months from the date of the advance if no maturity
is stated. Payments due from Federal, State or other governmental units
may, in the Reserve Bank's discretion, be regarded as ``other assured
revenues''; but neither the proceeds of a prospective issue of
securities nor future tolls, rents or similar collections for the
voluntary use of government property for non-governmental purposes will
normally be so regarded. Obligations with original maturities exceeding
1 year would not ordinarily be self-liquidating as contemplated by the
statute, unless at the time of issue provision is made for a redemption
or sinking fund that will be sufficient to pay such obligations at
maturity.
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\3\ Paragraph 3 of section 1 of the Federal Reserve Act (12 U.S.C.
221) defines the continental United States to mean ``the States of the
United States and the District of Columbia'', thus including Alaska and
Hawaii.
[Reg. A, 33 FR 17231, Nov. 21, 1968, as amended at 34 FR 1113, Jan. 24,
1969; 34 FR 6417, Apr. 12, 1969; 36 FR 8441, May 6, 1971; 37 FR 24105,
Nov. 14, 1972; 43 FR 53709, Nov. 17, 1978; 58 FR 68515, Dec. 28, 1993]
[[Page 13]]
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Sec. 201.109 Eligibility for discount of mortgage company notes. |
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(a) The question has arisen whether notes issued by mortgage banking
companies to finance their acquisition and temporary holding of real
estate mortgages are eligible for discount by Reserve Banks.
(b) Under section 13 of the Federal Reserve Act the Board has
authority to define what are ``agricultural, industrial, or commercial
purposes'', which is the statutory criterion for determining the
eligibility of notes and drafts for discount. However, such definition
may not include paper ``covering merely investments or issued or drawn
for the purpose of carrying or trading in stocks, bonds, or other
investment securities''.
(c) The legislative history of section 13 suggests that Congress
intended to make eligible for discount ``any paper drawn for a
legitimate business purpose of any kind'' \4\ and that the Board, in
determining what paper is eligible, should place a ``broad and adaptable
construction'' \5\ upon the terms in section 13. It may also be noted
that Congress apparently considered paper issued to carry investment
securities as paper issued for a ``commercial purpose'', since it
specifically prohibited the Board from making such paper eligible for
discount. If ``commercial'' is broad enough to encompass investment
banking, it would also seem to include mortgage banking.
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\4\ House Report No. 69, 63d Cong., p. 48.
\5\ 50 Cong. Rec. 4675 (1913) (remarks of Rep. Phelan).
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(d) In providing for the discount of commercial paper by Reserve
Banks, Congress obviously intended to facilitate the current financing
of agriculture, industry, and commerce, as opposed to long-term
investment.\6\ In the main, trading in stocks and bonds is investment-
oriented; most securities transactions do not directly affect the
production or distribution of goods and services. Mortgage banking, on
the other hand, is essential to the construction industry and thus more
closely related to industry and commerce. Although investment bankers
also perform similar functions with respect to newly issued securities,
Congress saw fit to deny eligibility to all paper issued to finance the
carrying of securities. Congress did not distinguish between newly
issued and outstanding securities, perhaps covering the larger area in
order to make certain that the area of principal concern (i.e., trading
in outstanding stocks and bonds) was fully included. Speculation was
also a major Congressional concern, but speculation is not a material
element in mortgage banking operations. Mortgage loans would not
therefore seem to be within the purpose underlying the exclusions from
eligibility in section 13.
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\6\ 50 Cong. Rec. 5021 (1913) (remarks of Rep. Thompson of
Oklahoma); 50 Cong. Rec. 4731-32 (1913) (remarks of Rep. Borland).
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(e) Section 201.3(a) provides that a negotiable note maturing in 90
days or less is not eligible for discount if the proceeds are used ``for
permanent or fixed investments of any kind, such as land, buildings or
machinery, or for any other fixed capital purpose''. However, the
proceeds of a mortgage company's commercial paper are not used by it for
any permanent or fixed capital purpose, but only to carry temporarily an
inventory of mortgage loans pending their ``packaging'' for sale to
permanent investors that are usually recurrent customers.
(f) In view of the foregoing considerations the Board concluded that
notes issued to finance such temporary ``warehousing'' of real estate
mortgage loans are notes issued for an industrial or commercial purpose,
that such mortgage loans do not constitute ``investment securities'', as
that term is used in section 13, and that the temporary holding of such
mortgages in these circumstances is not a permanent investment by the
mortgage banking company. Accordingly, the Board held that notes having
not more than 90 days to run which are issued to finance the temporary
holding of mortgage loans are eligible for discount by Reserve Banks.
[35 FR 527, Jan. 15, 1970, as amended at 58 FR 68515, Dec. 28, 1993]
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Sec. 201.110 Goods held by persons employed by owner. |
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(a) The Board has been asked to review an Interpretation it issued
in 1933
[[Page 14]]
concerning the eligibility for rediscount by a Federal Reserve Bank of
bankers' acceptances issued against field warehouse receipts where the
custodian of the goods is a present or former employee of the borrower.
[para. 1445 Published Interpretations, 1933 BULLETIN 188] The Board
determined at that time that the acceptances were not eligible because
such receipts do not comply with the requirement of section 13 of the
Federal Reserve Act that a banker's acceptance be ``secured at the time
of acceptance by a warehouse receipt or other such document conveying or
securing title covering readily marketable staples,'' nor with the
requirement of section XI of the Board's Regulation A that it be
``secured at the time of acceptance by a warehouse, terminal, or other
similar receipt, conveying security title to such staples, issued by a
party independent of the customer.''
The requirement that the receipt be ``issued by a party independent of
the customer'' was deleted from Regulation A in 1973, and thus the
primary issue for the Board's consideration is whether a field warehouse
receipt is a document `'securing title'' to readily marketable staples.
(b) While bankers' acceptances secured by field warehouse receipts
are rarely offered for rediscount or as collateral for an advance, the
issue of ``eligibility'' is still significant. If an ineligible
acceptance is discounted and then sold by a member bank, the proceeds
are deemed to be ``deposits'' under Sec. 204.1(f) of Regulation D and
are subject to reserve requirements.
(c) In reviewing this matter, the Board has taken into consideration
the changes that have occurred in commercial law and practice since
1933. Modern commercial law, embodied in the Uniform Commercial Code,
refers to ``perfecting security interests'' rather than ``securing
title'' to goods. The Board believes that if, under State law, the
issuance of a field warehouse receipt provides the lender with a
perfected security interest in the goods, the receipt should be regarded
as a document ``securing title'' to goods for the purposes of section 13
of the Federal Reserve Act. It should be noted, however, that the mere
existence of a perfected security interest alone is not sufficient; the
Act requires that the acceptance be secured by a warehouse receipt or
its equivalent.
(d) Under the U.C.C., evidence of an agreement between the secured
party and the debtor must exist before a security interest can attach.
[U.C.C. section 9-202.] This agreement may be evidence by: (1) A written
security agreement signed by the debtor, or (2) the collateral being
placed in the possession of the secured party or his agent [U.C.C.
section 9-203]. Generally, a security interest is perfected by the
filing of a financing statement, [U.C.C. section 9-302.] However, if the
collateral is in the possession of a bailee, then perfection can be
achieved by:
(1) Having warehouse receipts issued in the name of the secured
party; (2) notifying the bailee of the secured party's interest; or (3)
having a financing statement filed. [U.C.C. section 9-304(3).]
(e) If the field warehousing operation is properly conducted, a
security interest in the goods is perfected when a warehouse receipt is
issued in the name of the secured party (the lending bank). Therefore,
warehouse receipts issued pursuant to a bona fide field warehousing
operation satisfy the legal requirements of section 13 of the Federal
Reserve Act. Moreover, in a properly conducted field warehousing
operation, the warehouse manager will be trained, bonded, supervised and
audited by the field warehousing company. This procedure tends to insure
that he will not be impermissibly controlled by his former (or sometimes
present) employer, the borrower, even though he may look to the borrower
for reemployment at some future time. A prudent lender will, of course,
carefully review the field warehousing operation to ensure that stated
procedures are satisfactory and that they are actually being followed.
The lender may also wish to review the field warehousing company's
fidelity bonds and legal liability insurance policies to ensure that
they provide satisfactory protection to the lender.
(f) If the warehousing operation is not conducted properly, however,
and the manager remains under the control of the borrower, the security
interest
[[Page 15]]
may be lost. Consequently, the lender may wish to require a written
security agreement and the filing of a financing statement to insure
that the lender will have a perfected security interest even if it is
later determined that the field warehousing operation was not properly
conducted. It should be noted however, that the Federal Reserve Act
clearly requires that the bankers' acceptance be secured by a warehouse
receipt in order to satisfy the requirements of eligibility, and a
written security agreement and a filed financing statement, while
desirable, cannot serve as a substitute for a warehouse receipt.
(g) This Interpretation is based on facts that have been presented
in regard to field warehousing operations conducted by established,
professional field warehouse companies, and it does not necessarily
apply to all field warehousing operations. Thus para. 1430 and para.
1440 of the Published Interpretations [1918 BULLETIN 31 and 1918
BULLETIN 862] maintain their validity with regard to corporations formed
for the purpose of conducting limited field warehousing operations.
Furthermore, the prohibition contained in para. 1435 Published
Interpretations [1918 BULLETIN 634] that ``the borrower shall not have
access to the premises and shall exercise no control over the goods
stored'' retains its validity, except that access for inspection
purposes is still permitted under para. 1450 [1926 BULLETIN 666]. The
purpose for the acceptance transaction must be proper and cannot be for
speculation [para. 1400, 1919 BULLETIN 858] or for the purpose of
furnishing working capital [para. 1405, 1922 BULLETIN 52].
(h) This interpretation suspersedes only the previous para. 1445 of
the Published Interpretations [1933 BULLETIN 188], and is not intended
to affect any other Board Interpretation regarding field warehousing.
(12 U.S.C. 342 et seq.)
[43 FR 21434, May 18, 1978]
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