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Compliance Examination Handbook

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X. Other Compliance Issues


Advertisement of Membership—Part 328 of FDIC Rules and Regulations
Introduction
These examination procedures were developed to assist examiners in the review of advertisements and signs for compliance with Part 328 of the FDIC Rules and Regulations.

The regulation contained in this part describes the official signs of the FDIC and prescribes their use by insured depository institutions. It also prescribes the official advertising statement insured banks must include in their advertisements. Insured banks which maintain offices that are not insured in foreign countries are not required to include the advertising statement in advertisements published in foreign countries. For purposes of this Part 328, the term "insured bank" includes a foreign bank having an insured branch.

Examination Objective
The objective of the examination is to:

  • Determine whether public advertisements and signs comply with applicable regulatory requirements.
Examination Procedures
  1. Determine that the required official (FDIC) sign is displayed at each station or window where deposits are received. (§328)

    NOTE: Display of the official sign at automated teller machines (ATMs) is not required.

    NOTE: If required posters, signs, etc., are missing or obsolete, inform management of the availability of these items from the FDIC Warehouse upon request and may be obtained by faxing a written request on bank letterhead to:

      FAX: (703) 516-5201
      Or via FDICconnect at:

    Requests should indicate the number of each requested item needed and the name and address of the financial institution.

  2. If the financial institution has on-premises investment services or offers municipal securities or retail repurchase agreements (uninsured investment services and products), determine that promotional materials, including lobby signs and brochures, do not mislead consumers as to the product’s insured status.
  3. Determine if the official advertisement statement "Member FDIC" is properly included in print and broadcast (television, radio) advertisements. (§328.3)


    4. NOTE: Section 328.3(c) lists the types of advertisements that do not require the "Member FDIC" disclosure.

  4. If the official advertisement statement "Member FDIC" is in a language other than English, determine whether prior written approval of the translation was obtained from the FDIC. (§328.3(e))
References
FDIC Rules and Regulation Part 328; Advertisement of Membership http://www.fdic.gov/regulations/laws/rules/2000-5200.html
Interagency Statement on Retail Sales of Nondeposit Investment Products http://www.fdic.gov/regulations/laws/rules/5000-4500.html


FDIC Legal Advisory Opinions
Advisory Opinion 89-24: Advertisement of FDIC Insurance by Savings Associations http://www.fdic.gov/regulations/laws/rules/4000-5980.html#400089-24

Advisory Opinion 93-2: Advertisements Soliciting Deposits and Non-Deposit Obligations Should Clearly State Which Investments Are Insured
http://www.fdic.gov/regulations/laws/rules/4000-7910.html#400093-2

Advisory Opinion 00-10: Whether the Rules Regarding the Use of the FDIC Logo Apply to Insured Institution Web Sites
http://www.fdic.gov/regulations/laws/rules/4000-10120.html#400000-10

Advisory Opinion 87-2: Advertising the Solicitation of Deposits
http://www.fdic.gov/regulations/laws/rules/4000-3340.html#400087-2

Advisory Opinion 92-20: Display of Official Deposit Insurance Signs
http://www.fdic.gov/regulations/laws/rules/4000-7110.html#400092-20

Advisory Opinion 95-12: "Federal Deposit Insurance Corporation" Should not be Translated into Non-English Equivalent on Advertising
http://www.fdic.gov/regulations/laws/rules/4000-9420.html#400095-12

Advisory Opinion 91-60: Guidelines for Advertising of Insured Status by Savings Associations
http://www.fdic.gov/regulations/laws/rules/4000-6590.html#400091-60

Advisory Opinion 94-17: Night Depositories and Official Bank Signs
http://www.fdic.gov/regulations/laws/rules/4000-8890.html#400094-17

Advisory Opinion 93-42: Official Bank Sign Need not be Displayed on Night Depositories
http://www.fdic.gov/regulations/laws/rules/4000-8310.html#400093-42

Advisory Opinion 92-15: Official FDIC Sign Need not be Black or Gold, but Text and Symbol
http://www.fdic.gov/regulations/laws/rules/4000-7060.html#400092-15

Advisory Opinion 89-33: Savings Association Display of Official Eagle Logo
http://www.fdic.gov/regulations/laws/rules/4000-4070.html#400089-33

Advisory Opinion 90-77: Savings, Loan and Mortgage Charts Listing Both Insured and Uninsured Institutions Need not Include Official FDIC Advertising Statement
http://www.fdic.gov/regulations/laws/rules/4000-5960.html#400090-77

Advisory Opinion 92-70: Sign Intended as Supplement to Official Savings Association Sign may not be Displayed Because too Similar
http://www.fdic.gov/regulations/laws/rules/4000-7610.html#400092-70

Advisory Opinion 91-29: Size and Design of Official Bank or Savings Association Logo Placed at Teller Windows May not Vary from Requirements of 12 CFR Section 328.1
http://www.fdic.gov/regulations/laws/rules/4000-6280.html#400091-29

Advisory Opinion 96-7: Whether an Insured Depository Institution Can Operate Branch Under a Name that is Different Than That of the Insured Institution
http://www.fdic.gov/regulations/laws/rules/4000-9750.html#400096-7

Advisory Opinion 92-22: Whether FDIC Logo may be Displayed on Lapel Pin Worn by Bank Employees
http://www.fdic.gov/regulations/laws/rules/4000-7130.html#400092-22


Section 42 of the Federal Deposit Insurance (FDI) Act—Branch Closings
Introduction
Section 42 of the Federal Deposit Insurance (FDI) Act (12 USC §1831r) sets forth guidelines for financial institutions to notify the FDIC and its customers regarding proposals to close a branch. Financial institutions are also required to adopt policies for closings of branches, with special content requirements for closing notices relating to branches in low- or moderate-income areas.

Statuatory Overview
For purposes of Section 42, a branch is considered to be a traditional brick-and-mortar branch, or any similar banking facility other than a main office, at which deposits are received or checks paid or money lent. Section 42 does not apply to the following:

  • An ATM, a remote service facility, a loan production office, or a temporary branch;
  • The relocation of a branch or consolidation of one or more branches into another branch, if the relocation or consolidation:

    • - Occurs within the immediate neighborhood; and
    - Does not substantially affect the nature of the business or customers served; or
  • A branch that is closed in connection with an emergency acquisition.
Examination Objectives
The objectives are to determine whether the institution is in compliance with the statutory requirements for branch closings, including those relating to the following:
  • Providing prior notification of any branch closing to its appropriate Federal banking agency and customers of the branch.
  • Establishing internal policies for branch closings.
Examination Procedures
  1. Determine whether the institution has adopted a branch closing policy that ensures compliance with the Interagency Policy Statement Concerning Branch Closing Notices and Policies, regarding branch closing notices and Section 42 of the FDI Act. (Section 42(c))
  2. Determine whether the institution’s procedures for closing a branch have been followed since the latter of December 19, 1991, or the last examination in which compliance was assessed with the Policy Statement concerning branch closing notices and Section 42 of the FDI Act.
  3. Determine whether the institution provided adequate notice of all branch closings to the FDIC at least 90 days prior to the proposed closing of any branch closed on or after December 19, 1991. (Section 42(a))
  4. Determine that the institution provided adequate notice of the proposed closing to its customers at least 90 days prior to the proposed closing of the branch. (Section 42(b))


    5. The institution must:
    • Post a notice in a conspicuous manner on the premises of the proposed branch for a period of not less than 30 days ending on the date proposed for that closing, and
    • Include a notice in:
      - At least one regular account statement mailed to customers of the branch proposed to be closed, or
      - A separate mailing.
    • The notice must include:
      - A detailed statement of the reasons, and
      - Statistical or other information in support of such reasons.
    NOTE: In the case of an interstate bank which proposes to close any branch in a low- or moderate-income area, the notice required shall also contain the mailing address of the FDIC and a statement that comments on the proposed closing may be mailed to the FDIC. (Section 42( c))

  5. Determine if the institution has posted a notice to branch customers in a conspicuous manner on the branch premises at least 30 days prior to the proposed closing of any branch closed on or after December 19, 1991.
References
Section 42 of the FDI Act: Notice of Branch Closure
http://www.fdic.gov/regulations/laws/rules/1000-4400.html#1000sec.42

Interagency Policy Statement Concerning Branch Closing Notices and Policies
http://www.fdic.gov/regulations/laws/rules/5000-3830.html#5000policyso2



The Electronic Signatures in Global and National Commerce Act (E-Sign Act)
Introduction
The Electronic Signatures in Global and National Commerce Act (E-Sign Act)1 , signed into law on June 30, 2000, provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce. The E-Sign Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing, if the consumer has affirmatively consented to such use and has not withdrawn such consent.

Subject to certain exceptions, the substantive provisions of the law were effective on October 1, 2000. Record retention requirements became effective on March 1, 2001. The E-Sign Act grandfathers existing agreements between a consumer and an institution to deliver information electronically. However, agreements made on or after October 1, 2000, are subject to the requirements of the E-Sign Act.

Summary of Major Provisions
Consumer Disclosures
Prior Consent, Notice of Availability of Paper Records
Prior to obtaining their consent, financial institutions must provide the consumer, a clear and conspicuous statement informing the consumer:
  • of any right or option to have the record provided or made available on paper or in a non electronic form, and the right to withdraw consent, including any conditions, consequences, and fees in the event of such withdrawal;
  • whether the consent applies only to the particular transaction that triggered the disclosure or to identified categories of records that may be provided during the course of the parties’ relationship;
  • describing the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and
  • informing the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy.
See Section 101(c)(1)(B).

Hardware and Software Requirements; Notice of Changes
Prior to consenting to the use of an electronic record, a consumer must be provided with a statement of the hardware and software requirements for access to and retention of electronic records. See Section 101(c)(1)(i).

If the consumer consents electronically, or confirms his or her consent electronically, it must be in a manner that reasonably demonstrates the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent. See Section 101(c)(1)(C)(ii).

If a change in the hardware or software requirements need to access or retain electronic records creates a material risk that the consumer will not be able to access or retain subsequent electronic records subject to the consent, a financial institution must:
  • provide the consumer with a statement of (a) the revised hardware and software requirements for access to and retention of electronic records, and (b) the right to withdraw consent without the imposition of any condition, consequence, or fee for such withdrawal; and
  • again comply with the requirements of subparagraph (c) of this section.
See Section 101(c)(1)(D).

Oral communications or a recording of an oral communication shall not qualify as an electronic record. See Section 101(c)(6).

Record Retention
The E-Sign Act requires a financial institution to maintain electronic records accurately reflecting the information contained in applicable contracts, notices or disclosures and that they remain accessible to all persons who are legally entitled to access for the period required by law in a form that is capable of being accurately reproduced for later reference. See Section 101(d).

Agreements reached with consumers prior to October 1, 2000, to deliver information electronically are exempt from the requirements of Section 101(d). However, for any agreements made with new or existing customers on or after October 1, 2000, the requirements of Section 101(c)(1) will supersede all other consumer consent procedures relating to the use of electronic disclosures set forth in other regulations.

Regulatory and Other Actions
The consumer consent provisions in the E-Sign Act became effective October 1, 2000, and did not require implementing regulations. Nonetheless, on March 30, 2001, the Federal Reserve Board (FRB) adopted interim final rules (Interim Final Rules) establishing uniform standards for the electronic delivery of federally mandated disclosures for five consumer protection regulations: Regulation B, Equal Credit Opportunity; Regulation E, Electronic Fund Transfers; Regulation M, Consumer Leasing; Regulation Z, Truth in Lending, and Regulation DD, Truth in Savings.

The Interim Final Rules provided guidance on the timing and delivery of electronic disclosures. Pursuant to the Interim Final Rules, disclosures can be provided by e-mail or can be made available at another location such as the institution’s web site. If a disclosure, such as an account statement or a notice of change of terms, is provide at a web site, an institution must notify the consumer of the disclosure’s availability by e-mail. In addition, the disclosures must remain available on the web site for 90 days.

On August 3, 2001, the FRB lifted the mandatory compliance date of October 1, 2001, and directed institutions to follow their existing procedures2 or, alternatively, to comply with the Interim Final Rules until permanent rules are issued. Once permanent final rules are issued, the Board expects to afford institutions a reasonable period of time to comply with those rules.

Definitions
"Consumer" – The term "consumer" means an individual who obtains, through a transaction, products or services which are used primarily for personal, family, or household purposes, and also means the legal representative of such an individual.

"Electronic" – The term "electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

"Electronic Agent" – The term "electronic agent" means a computer program or an electronic or other automated means used independently to initiate an action to respond to electronic records or performances in whole or in part without review or action by an individual at the time or the action or response.

"Electronic Record" – The term "electronic record" means a contract or other record created, generated, sent, communicated, received, or stored by electronic means.

"Electronic Signature" – The term "electronic signature" means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.

"Federal Regulatory Agency" – The term "Federal regulatory agency" means an agency as that term is defined in section 552(f) of Title 5, United States code.

"Information" – The term "information" means data, text, images, sounds, codes, computer programs, software, databases, or the like.

"Person" – The term "person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, governmental agency, public corporation or any other legal or commercial entity.

"Record" – The term "record" means information, that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

"Requirement" – The term "requirement" includes a prohibition.

"Self-Regulatory Organization" – The term "self-regulatory organization" means an organization or entity that is not a Federal regulatory agency or a State, but that is under the supervision of a Federal regulatory agency and is authorized under Federal law to adopt and administer rules applicable to its members that are enforced by such organization or entity, by a Federal regulatory agency, or by another self-regulatory organization.

"State" – The term "State" includes the District of Columbia and the territories and possessions of the United States.

"Transaction" – the term "transaction" means an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons, including any of the following types of conduct:
  1. the sale, lease, exchange, licensing, or other disposition of (i) personal property, including goods and intangibles, (ii) services, and (iii) any combination thereof; and
  2. the sale, lease, exchange, or other disposition of any interest in real property, or any combination thereof.
Examination Procedures
  1. Determine if and to what extent the financial institution electronically delivers compliance-related notices or disclosures subject to the consumer consent provisions of the Act.
  2. Determine if the financial institution has established procedures to ensure compliance with the provisions of this Act.
  3. Determine that the consumer, prior to consenting, is provided with a clear and conspicuous statement informing the consumer of any right or option to have the record provided or made available on paper or in nonelectronic form, and the right to withdraw the consent, including any conditions, consequences, or fees in the event of such withdrawal. Verify that the statement contains the following:
    1. informs the consumer whether the consent applies only to the particular transaction that triggered the disclosure X. Other – E-Sign Act FDIC Compliance Handbook — June 2006 X-3.3 or to identified categories of records that may be provided during the course of the parties’ relationship;
    2. describes the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and
    3. informs the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy.
  4. Determine that the consumer, prior to consenting, is provided with a statement of the hardware and software requirements for access to and retention of electronic records.
  5. Determine that the consumer provides affirmative consent electronically, or confirms his or her consent electronically, in a manner that reasonably demonstrates the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent.


    6. NOTE: Oral communications shall not qualify as an electronic record.

  6. If a change in the hardware or software requirements needed to access or retain electronic records creates a material risk that the consumer will not be able to access or retain subsequent electronic records subject to the consent, verify that the financial institution provides the consumer with the following:
    1. statement of the revised hardware and software requirements for access to and retention of electronic records;
    2. b. the right to withdraw consent without the imposition of any condition, consequence, or fee for such withdrawal; and
    3. c. the consumer provides a new affirmative consent as previously outlined.
  7. Determine that the financial institution maintains a single "authoritative" copy of any transferable record relating to a loan secured by real property. Such record must be "unique", "identifiable", and "unalterable".
  8. Determine that the financial institution maintains electronic records accurately reflecting the information contained in applicable contracts, notices, or disclosures and that they remain accessible to all persons who are legally entitled to access for the period required by law in a form that is capable of being accurately reproduced for later reference.
References
FIL 79-98: Interagency Guidance on Electronic Financial Services and Consumer Compliance
http://www.fdic.gov/news/news/financial/1998/fil9879.html

Guidance Attachment
http://www.fdic.gov/news/news/financial/1998/fil9879a.pdf

FIL 66-2001: Lifting of Mandatory Compliance Date for Interim Rules Amending Regulations B, E, M, Z, and DD
http://www.fdic.gov/news/news/inactivefinancial/2001/fil0166.html

FIL 40-2001: Interim Final Rules Amending Regulations B, E, M, Z, and DD Regarding Electronic Delivery of Required Disclosures
http://www.fdic.gov/news/news/inactivefinancial/2001/fil0140.html

FIL 72-2000: Notice of Consumer Consent Requirements Applicable to the Electronic Delivery of Consumer Disclosures
http://www.fdic.gov/news/news/financial/2000/fil0072.html

DCA RD Memo 96-044: Electronic Banking Activities
http://fdic01/division/dsc/memos/memos/direct/6480-1.pdf

FIL 14-97: Examination Guidance on the Safety and Soundness Aspects of Electronic Banking Activities,
http://www.fdic.gov/news/news/inactivefinancial/1997/fil9714.html

FIL 70-2001: FDIC Seeks Comment on Study of Banking Regulations Regarding the Online Delivery of Banking Services
http://www.fdic.gov/news/news/financial/2001/fil0170.html

FIL 30-2003: Federal Bank and Credit Union Regulatory Agencies Jointly Issue Guidance on the Risk Associated with Weblinking
http://www.fdic.gov/news/news/financial/2003/fil0330.html

Attachment
http://www.fdic.gov/news/news/financial/2003/fil0330a.html



Prohibition Against Use of Interstate Branches Primarily for Deposit Production3
Introduction
The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation ("the agencies"), jointly issued a final rule, effective October 10, 1997, that adopted uniform regulations4 implementing section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA).

IBBEA allows banks to branch across state lines. Section 109, however, prohibits any bank from establishing or acquiring a branch or branches outside of its home State, pursuant to IBBEA, primarily for the purpose of deposit production. Congress enacted section 109 to ensure that interstate branches would not take deposits from a community without the bank reasonably helping to meet the credit needs of that community.

Subsequently, section 106 of the Gramm-Leach-Bliley Act of 1999 (GLBA) amended section 109 by changing the definition of an "interstate branch" to include any branch of a bank controlled by an out-of State bank holding company. Interagency regulations implementing this amendment became effective October 1, 2002.

The language of section 109 and its legislative history make clear that the agencies are to administer section 109 without imposing additional regulatory burden on banks. Consequently, the agencies’ regulations do not impose additional data reporting requirements nor do they require a bank to produce, or assist in producing, relevant data.

Coverage
Section 109 applies to any bank that has covered interstate branches. Examples of covered interstate branches can be found at the end of the Examination Procedures in this section.

Definitions
"Covered Interstate Branch"
  1. Any branch of a national bank, a State member bank, or a State nonmember bank, and any Federal branch of a foreign bank, or any uninsured or insured branch of a foreign bank licensed by a State, that:
    1. is established or acquired outside the bank’s home State pursuant to the interstatebranching authority granted by IBBEA or by any amendment made by IBBEA to any other provision of law; or
    2. could not have been established or acquired outside of the bank’s home State but for the establishment or acquisition of a branch described in (i) and
  2. any bank or branch of a bank controlled by an out-of-State bank holding company.
"Home State"
  1. For State banks, home State means the State that chartered the bank.
  2. With respect to a national bank, home State means the State in which the main office of the bank is located.
  3. With respect to a bank holding company, home State means the State in which the total deposits of all banking subsidiaries of such company are the largest on the later of:
    1. July 1, 1966; or
    2. the date on which the company becomes a holding company under the Bank Holding Company Act.
  4. With respect to a foreign bank, home State means:
    1. for purposes of determining whether a U.S. branch of a foreign bank is a covered interstate branch, the home State of the foreign bank as determined in accordance with 12 USC 3103(c) and Section 211.22 of the Federal Reserve Board’s Regulations (12 CFR §211.22), Section 28.11(o)) of the OCC’s regulations (12 CFR §28.11(o), and Section 347.202(j) of the FDIC’s regulations (12 CFR §347.202(j)); and
    2. for purposes of determining whether a branch of a U.S. bank controlled by a foreign bank is a covered interstate branch, the State in which the total deposits of all banking subsidiaries of such foreign bank are the largest on the later of:
      1. July 1, 1966; or
      2. (b) the date on which the foreign bank becomes a bank holding company under the Bank Holding Company Act.
"Host State" – means a State in which a covered interstate branch is established or acquired.

"Host State Loan-to-Deposit Ratio" – is the ratio of total loans in the host State to total deposits from the host State for all banks that have that State as their home State.

"Out-of-State Bank Holding Company" – means, with respect to any State, a bank holding company whose home State is another State.

"Statewide Loan-to-Deposit Ratio" – relates to an individual bank and is the ratio of the bank’s loans to its deposits in a particular State where it has one or more covered interstate branches.

The Two Step Test
Beginning no earlier than one year after a covered interstate branch is acquired or established, the agency will determine X. Other – Deposit Production Offices X-4.2 FDIC Compliance Handbook — June 2006 whether a bank is complying with the provisions of section 109. Section 109 provides a two-step test for determining compliance with the prohibition against interstate deposit production offices:

  1. Loan-to-deposit ratio. The first step involves a loan-todeposit (LTD) ratio screen, which is designed to measure the lending and deposit activities of covered interstate branches. The LTD ratio screen compares the bank’s statewide LTD ratio to the host State LTD ratio. If the bank’s statewide LTD ratio is at least one-half of the relevant host State LTD ratio, the bank passes the section 109 evaluation and no further review is required. Host State ratios are prepared, and made public, by the agencies annually. For the most recent ratios, see OCC bulletins, FDIC Financial Institution Letters, or FRB Press Releases.
  2. Credit needs determination. The second step is a credit needs determination that is conducted if a bank fails the LTD ratio screen or if the LTD ratio cannot be calculated due to insufficient data or due to data that are not reasonably available. This step requires the examiner to review the activities of the bank, such as its lending activity and performance under the CRA, in order to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank in the host State. Banks may provide the examiner with any relevant information including loan data, if a credit needs determination is performed.
Although Section 109 specifically requires the examiner to consider a bank’s CRA rating when making a credit needs determination, a bank’s CRA rating should not be the only factor considered. However, since most of the other factors (see procedure for Credit Needs Determination) are taken into account as part of a bank’s performance context under CRA, it is expected that banks with a satisfactory or better CRA rating will receive a favorable credit needs determination. Banks with a less than satisfactory CRA rating may receive an adverse credit needs determination unless mitigated by the other factors enumerated in section 109. To ensure consistency, compliance with Section 109 generally should be reviewed in conjunction with the evaluation of a bank’s CRA performance.

With respect to institutions designated as wholesale or limited purpose banks, a credit needs determination should consider a bank’s performance using the appropriate CRA performance test provided in the CRA regulations. For banks not subject to CRA, including certain special purpose banks and uninsured branches of foreign banks,5 the examiner should use the CRA regulations only as a guideline when making a credit needs determination for such institutions. Section 109 does not obligate the institution to have a record of performance under the CRA nor does it require the institution to pass any CRA performance tests.

Enforcement and Sanctions
Before a bank can be sanctioned under section 109, the appropriate agency is required to demonstrate that the bank failed to comply with the LTD ratio screen and failed to reasonably help meet the credit needs of the communities served by the bank in the host State. Since the bank must fail both the LTD ratio screen and the credit needs determination in order to be in noncompliance with Section 109, the agencies have an obligation to apply the LTD ratio screen before seeking sanctions, regardless of the regulatory burden imposed. Thus, if a bank receives an adverse credit needs determination, the LTD ratio screen must be applied even if the data necessary to calculate the appropriate ratio are not readily available. Consequently, the agencies are required to obtain the necessary data to calculate the bank’s statewide LTD ratio before sanctions are imposed.

If a bank fails both steps of the section 109 evaluation, the statute outlines sanctions that the appropriate agency can impose. The sanctions are:

  1. ordering the closing of the interstate branch in the host State; and
  2. prohibiting the bank from opening a new branch in the host State.
Sanctions, however, may not be warranted if a bank provides reasonable assurances to the satisfaction of the appropriate agency that it has an acceptable plan that will reasonably help to meet the credit needs of the communities served, or to be served. An examiner should consult with the RO before discussing possible sanctions with any bank. Also, before sanctions are imposed, the agencies stated in the preamble to the final 1997 regulation that they intend to consult with State banking authorities.

Examination Objective
To ensure that a bank is not operating a covered interstate branch(es), as defined, primarily for the purpose of deposit production, by determining if the bank meets (i) the loan-to-deposit (LTD) ratio screen, or (ii) the credit needs determination requirements of section 109 of IBBEA.

Examination Procedures
Examples of covered interstate branches can be found at the end of this section.

          Identification of Covered Interstate Branches
  1. Banks controlled by an out-of-State bank holding company.
    • Determine if the bank is controlled by an out-of-State bank holding company by identifying the home State of the bank and the home State of the bank holding company. To determine the home State of a bank, refer to the definition. To determine the home State of a bank holding company, refer to home State data available from your agency and confirm the home State with bank management.
    • If the bank is not controlled by a bank holding company, or the home State of the bank holding company is the same state as the home State of the bank, the bank does not have any covered interstate branches under procedures #1. Go to procedure #2.
    • If the home State of the bank holding company is not the same as the home State of the bank, then the bank meets the definition of a covered interstate branch and is subject to section 109. Go to procedures #2 and #3.
  2. Banks with interstate branches. Determine if the bank has any branches that were established or acquired pursuant to IBBEA in states other than the bank’s home State. If so, the bank has a covered interstate branch. Go to procedure #3. If the bank has no covered interstate branches under procedures #1 and #2, the bank is not subject to section 109 and no further review is necessary.
  3. One-year rule. For the covered interstate branches identified in procedure #1 and/or #2, determine if any have been covered interstate branches for one year or more. Note that, if any of a bank’s covered interstate branches within a particular state have been covered interstate branches for one year or more, then all of the bank’s covered interstate branches within that State are subject to review. If any branch has been a covered interstate branch for one year or more, go to procedure #4. If not, no further review is necessary at this time.


    4. Assessing Compliance with the LTD Ratio Screen
  4. For a covered interstate branch subject to section 109, determine if the bank has sufficient data to calculate a statewide LTD ratio for each respective host State. (The bank is not required to provide this information or assist in providing this information.) For States where the bank has sufficient data, go to procedure #5. For States where the bank does not have sufficient data, go to procedure #6.
  5. For each host State where the bank can provide loan and deposit data, calculate and compare the bank’s statewide LTD ratio to the applicable host State LTD ratio provided by the agencies. If the bank’s statewide LTD ratio equals or exceeds one-half of the relevant host State LTD ratio, the bank passes the LTD ratio screen and the section 109 evaluation in that state and no further review is necessary. If the bank’s statewide LTD ratio is less than one-half of the host State LTD ratio in that state, the bank fails the LTD ratio screen. Go to procedure #6.


    6. Credit Needs Determination
  6. For each host State identified in procedure #4 and/or #5, determine whether the bank is reasonably helping to meet the credit needs of communities served by the bank in the host State. When making this determination, consider the following items:
    • whether the covered interstate branches were formerly part of a failed or failing depository institution;
    • whether the covered interstate branches were acquired under circumstances where there was a low LTD ratio because of the nature of the acquired institution’s business or loan portfolio;
    • whether the covered interstate branches have a higher concentration of commercial or credit card lending, trust services, or other specialized activities, including the extent to which the covered interstate branches accept deposits in the host State;
    • the most recent ratings (overall rating, multistate MSA rating, and State ratings) received by the bank under the Community Reinvestment Act (CRA);
    • economic conditions, including the level of loan demand, within the communities served by the covered interstate branches;
    • the safe and sound operation and condition of the bank; and
    • the CRA regulation, examination procedures, and interpretations of the regulation.
    If the bank passes the credit needs determination test, the bank complies with section 109 and no further review is necessary. If the bank fails the credit needs determination test but a LTD ratio screen has not been conducted, go to procedure #7. If the bank fails the credit needs determination test and has failed the LTD ratio screen, the bank is in noncompliance with section 109. Go to procedure #8.

    Determining Whether Sanctions are Warranted
  7. Calculate the bank’s statewide LTD ratio for each host State in which the bank failed the credit needs determination test. The data used to calculate these ratios may be obtained from any reliable source. The bank may, but is not required to, provide the examiner with additional data at any time during the examination. If the bank’s statewide LTD ratio(s) is equal to or greater than one-half of the host State LTD ratio, the bank complies with section 109 requirements and no further review is necessary. If a bank’s statewide LTD ratio is less than one-half of the respective host State LTD ratio, the bank is in noncompliance with section 109. Go to procedure #8.
  8. Consult the RO to determine whether sanctions are warranted.
Examination Checklist
Identify covered interstate branches subject to Section 109
  Yes No
Evaluation
  1. Does the bank have any covered interstate branches? Determine:


    1. if the bank has established or acquired any branches outside the bank’s home State pursuant to the interstate branching authority granted by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or
    2. whether the bank, including a bank consisting of only a main office, is controlled by an out-of- State bank holding company as defined in section 2(o)(7) of the Bank Holding Company Act of 1956.
    
If the answer to both (a) and (b) is No, no further review is necessary.
  1. Have any covered interstate branches been covered interstate branches for one year or more? If any of a bank’s covered interstate branches within a particular state have been covered interstate branches for one year or more, then all of the bank’s covered interstate branches within that state are subject to review.
    
If the answer is No, no further review is necessary.
Assess Compliance with the Loan-to-Deposit (LTD) Ratio Screen
  1. Does the bank have sufficient data to calculate a statewide LTD ratio(s) in each respective host State for covered interstate branches subject to section 109?
    
For each host State where the answer is No, proceed to #5.
    
  1. For each host State where a covered interstate branch exists, calculate the bank’s statewide LTD ratio. Is the statewide LTD ratio equal to or greater than one-half of the host state LTD ratio?
    
For each host State where the answer is Yes, the bank complies with section 109 and no further review is necessary. For each host State where the answer is No, proceed to #5.
Perform Credit Needs Determination
  1. For each host State identified in #3 or #4, is the bank reasonably helping to meet the credit needs of the communities served by the bank in the host State? When making this determination, consider the following items:
  • Whether the covered interstate branches were formerly part of a failed or failing depository institution;
    
  • Whether the covered interstate branches were acquired under circumstances where there was a low LTD ratio because of the nature of the acquired institution’s business or loan portfolio;
    
  • Whether the covered interstate branches have a higher concentration of commercial or credit card lending, trust services, or other specialized activities, including the extent to which the covered interstate branches accept deposits in the host State;
    
  • The most recent ratings (overall rating, multistate MSA rating, and State ratings) received by the bank under the Community Reinvestment Act (CRA);
    
  • Economic conditions, including the level of loan demand, within the communities served by the covered interstate branches;
    
  • The safe and sound operation and condition of the bank; and
    
  • The CRA regulation, examination procedures, and interpretations of this regulation.
    
If the bank passes the credit needs determination test, the bank complies with section 109 and no further review is necessary. If the bank fails the credit needs determination test but the LTD ratio screen has not yet been conducted, go to #6. If the bank fails the credit needs determination test and has failed the LTD ratio screen, go to #7.

    
Determine if Sanctions are Warranted
  1. Calculate the statewide LTD ratio for each host State where the bank failed the credit needs determination test. Is this ratio equal to or greater than one-half of the host State LTD ratio?
    
If the answer is Yes, the bank complies with section 109 and no further review is necessary. If the answer is No, the bank is in noncompliance with section 109 (go to #7).
    
  1. After consultation with RO, are sanctions warranted?
    




Examples of Covered Interstate Branches

Bank with branches outside of its home State.
Examples of Covered Interstate Branches: Illustration of a bank with branches outside of its home state. Please call the FDIC at 1 (877) 275-3342 for additional information.
Bank A is an interstate bank with branches in PA that were established or acquired under IBBEA. Bank A’s home State is NY and its host State is PA. The PA branches are covered interstate branches subject to the section 109 review. Bank A’s statewide loan-to-deposit (LTD) ratio in PA is compared to the host State LTD ratio for PA.

The section 109 screen is conducted at the same time as a bank’s CRA examination.
Bank, consisting only of a main office, controlled by an out-of-State bank holding company.
Examples of Covered Interstate Branches: Illustration of a bank consisting only of a main office, controlled by an out-of-state bank holding company. Please call the FDIC at 1 (877) 275-3342 for additional information.
Banks B and Bank C are both controlled by a BHC whose home State is NY. Bank B is an intrastate bank and is not subject to the section 109 review.

Bank C’s home State is Connecticut and it is subject to the section 109 review because it is controlled by an out-of-State BHC whose home State is NY. Bank C’s statewide LTD ratio in CT will be compared to the host State LTD ratio for CT.

The section 109 screen is conducted at the same time as a bank’s CRA examination.The section 109 screen is conducted at the same time as a bank’s CRA examination.
Covered interstate branches under a multi-tiered bank holding company structure.
Examples of Covered Interstate Branches: Illustration of covered interstate branches under a multi-tiered bank holding company structure. Please call the FDIC at 1 (877) 275-3342 for additional information.
This example illustrates the requirement to look to the top tier BHC when determining whether to conduct the section 109 review. Banks J, K, L, and M are all controlled by a top-tier BHC whose home State is NY.

Out-of-State BHC: Banks J and M are subject to section 109 reviews because an out-of-State top tier BHC controls both of them. Bank J’s home State is PA; its statewide LTD ratio in PA will be compared to the host State LTD ratio for PA. Bank M’s home tate is CT; its statewide LTD ratio in CT will be compared to the host State LTD ratio for CT.

Out-of-State branches: Bank M’s branches in NY also are subject to the section 109 review because Bank M is an interstate bank. Bank M’s home State is CT; its statewide LTD ratio in NY is compared to the host State LTD ratio for NY. Bank L’s branches in PA also are subject to the section 109 review because Bank L is an interstate bank. Bank L’s home State is NY; its statewide LTD ratio in PA will be compared to the host State LTD ratio for PA.

Not subject to 109 review: Bank K is not subject to review for section 109 compliance because an out-of-State BHC does not control it and it does not have interstate branches.

The section 109 screen is conducted at the same time as a bank’s CRA examination.

References
Regulation - Part 369: Prohibition Against Use of Interstate Branches Primarily for Deposit Production
http://www.fdic.gov/regulations/laws/rules/2000-9100.html


Job Aids
Host State Loan-to-Deposit Ratios
http://www.fdic.gov/news/news/
(Updated annually. Check current year.)

List of Interstate Banks/Branches
http://fdic01/division/dsc/compliance/interstate/index.html
(Updated annually. Check current year.)

List of Banks Controlled by Out-of-State BHCs
http://fdic01/division/dsc/compliance/interstate/index.html
(Updated annually. Check current year.)



Footnotes:

1 Public Law 106-229, June 30, 2000.

2 Existing procedures of the institutions are expected to be compliant with Federal Reserve Regulations E and DD.

3 This section fully incorporates the examination procedures issued under DSC RD Memo 03-006: Interstate Banking Examination Procedures for Section 109 of the Riegle-Neal Interstate Banking and Branching Effiency Act of 1994.

4 See 12 CFR 25, 12 CFR 208, and 12 CFR 369.

5 A special purpose bank that does not perform commercial or retail banking services by granting credit to the public in the ordinary course of business is not evaluated for CRA performance by the agencies. In addition, branches of a foreign bank, unless the branches are insured or resulted from an acquisition as described in the International Banking Act, 12 USC 3101 et seq., are not evaluated for CRA performance by the agencies.

Last Updated 03/15/2007 consumeralerts@fdic.gov

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