Interpretive Rulings

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 7 and 31

[Docket No. 96-03]

RIN 1557-AB38

Interpretive Rulings

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is

revising its interpretive rulings. This final rule is another component

of the OCC's Regulation Review Program to update and streamline OCC

regulations, focus regulations on key safety and soundness concerns and

agency objectives, and eliminate requirements that impose inefficient

and costly regulatory burdens on national banks. The final rule

[[Page 4850]]

clarifies, revises, and reorganizes existing interpretive rulings,

eliminates rulings that are obsolete, adds interpretive rulings to

address new issues, and relocates some interpretive rulings to another

part of title 12.

EFFECTIVE DATE: April 1, 1996.

FOR FURTHER INFORMATION CONTACT: Stuart E. Feldstein, Senior Attorney,

Legislative and Regulatory Activities, (202) 874-5090; Jacqueline

Lussier, Senior Attorney, Legislative and Regulatory Activities, (202)

874-5090; Daniel Cooke, Attorney, Legislative and Regulatory

Activities, (202) 874-5090; or Saumya R. Bhavsar, Attorney, Legislative

and Regulatory Activities, (202) 874-5090. Office of the Comptroller of

Currency, 250 E Street SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

On March 3, 1995, the OCC published a notice of proposed rulemaking

(60 FR 11924, March 3, 1995) (proposal) to revise 12 CFR part 7--the

OCC's interpretive rulings. Part 7 serves as a repository of

interpretive rulings applicable to national banks that generally are

not related to the subject matter contained in other parts of chapter I

of title 12.

The proposal sought to implement the goals of the Regulation Review

Program by updating and streamlining the regulation and eliminating

requirements that imposed inefficient and costly regulatory burdens on

national banks. The proposal also eliminated obsolete rulings, added

interpretive rulings to address new issues, and transferred some

interpretive rulings to 12 CFR part 31.

Comments Received and Changes Made

The final rule implements most of the initiatives contained in the

proposal. However, the OCC has made a number of changes in response to

the comments received and to further reduce unnecessary regulatory

burden.

The OCC received 112 comment letters on the proposal. The vast

majority of these commenters supported the proposed changes to part 7.

The comment letters included 36 from banks and bank holding companies,

24 from trade associations, 19 from governmental representatives, 16

from law firms, eight from private businesses, four from community

groups, three from congressmen, one from an unaffiliated individual,

and one from a clearinghouse.

Commenters strongly favored reducing unnecessary regulatory burden

and updating and clarifying the interpretive rulings. Overall, most

commenters commended the OCC's efforts, and some commenters offered

variations on certain of the proposed changes.

Many commenters recommended changes that focused on specific

sections of the proposal. The OCC carefully considered each of the

comment letters, and the section-by-section discussion later in this

preamble identifies and discusses comments received and changes made to

certain sections of the proposal.

Overview of the Final Rule

The final rule adopts the proposal's structural format and

reorganizes part 7 into four topic areas: Subpart A--Bank Powers,

Subpart B--Corporate Practices, Subpart C--Bank Operations, and Subpart

D--Preemption. Distribution and derivation tables summarizing sections

of former part 7 changed by the final rule are included at the end of

this preamble. The OCC anticipates adding rulings in the future to part

7 or other parts in title 12 as necessary to address changing industry

practices and developing issues.

The OCC received comments on a number of sections for which it did

not propose substantive changes. The OCC has reviewed the comments and

is not making any changes to certain of these sections at this time. A

list of these unchanged sections is included at the end of the section-

by-section summary.

Finally, the final rule removes a number of sections, moves certain

sections to another part of title 12, and retains certain sections

pending the issuance of final rules for 12 CFR parts 1 and 5. A

description of these sections is contained at the end of the preamble.

Section-by-Section Discussion

National Bank Ownership of Property (Section 7.1000)

The proposal simplified and consolidated into a single section,

Sec. 7.1000, several interpretive rulings relating to permissible

ownership of real property by national banks. Proposed Sec. 7.1000: (1)

described real estate that a bank may own pursuant to 12 U.S.C. 29 and

permissible means of holding that real estate; (2) stated that a bank

may own fixed assets; (3) identified certain limitations on investment

in bank premises and on exercising options to purchase bank premises;

(4) stated the circumstances under which a national bank may purchase a

transferred employee's residence; (5) provided that a bank may engage

in lease financing transactions of public facilities; and (6) provided

that a bank may organize a bank premises subsidiary as a corporation, a

partnership, or similar entity.

Most of the comments generally supported the proposal. One

commenter urged the OCC to state in Sec. 7.1000, as it had in the

preamble to the proposal, that a bank may organize a bank premises

subsidiary as a limited liability company. In response to this

suggestion, the final ruling states that the term ``similar entity''

includes limited liability companies.

The OCC also requested comment on whether to expand the proposal

permitting a national bank to own real estate for leasing to

municipalities or other public authorities to include other types of

lease financing transactions. Several commenters urged the OCC to

expand the proposal to permit ownership where the lessee is a non-

public sector entity. The OCC has decided, however, that it will not

address this issue at this time.

The final rule also simplifies and clarifies Sec. 7.1000's

description of the types of real estate that may be held pursuant to

the authority granted by 12 U.S.C. 29 (First). In addition, the final

rule makes a minor organizational change by moving proposed

Sec. 7.1000(c), which describes the permissible means of holding real

estate necessary for the transaction of business, into proposed

Sec. 7.1000(a), which discusses that real estate.

The final rule also eliminates cross references to 12 CFR part 5,

because the approval provisions referenced in the proposal have not yet

been promulgated in part 5. The OCC will reinsert appropriate cross

references when revisions to part 5 are promulgated.

National Bank Acting as Finder (Section 7.1002)

The proposal clarified that a national bank may act as a finder of

certain goods and services in addition to acting as a finder for

insurance. The proposal also stated that acting as a finder does not

include activities that would characterize the bank as a broker under

applicable Federal law. Three commenters recommended that the OCC

remove this limitation.

Two commenters recommending removal of this limitation expressed

concern that the statement is unnecessary and may create some

uncertainty concerning a national bank's legal authority to engage in

brokerage activities. The OCC does not intend for this provision to

limit a national bank's authority to act as a broker where permitted

under applicable Federal law. It merely clarifies that the authority to

act as a

[[Page 4851]]

finder is different from the authority to act as a broker and that a

bank may not rely on the ``finder'' authority to engage in

``brokerage'' activities that are otherwise not authorized by Federal

law. The proposal also stated that, ``Unless otherwise prohibited,'' a

national bank may advertise and accept a fee for acting as a finder.

Two commenters suggested that the OCC delete the phrase ``Unless

otherwise prohibited'' to permit a national bank to act as a finder

without restriction. However, this language recognizes that some

limitations may apply to national bank finders fees. For example, state

laws may prohibit brokers from splitting commissions with nonbrokers.

In addition, the Real Estate Settlement Procedures Act (RESPA) and its

implementing regulations prohibit the acceptance of a fee for a

referral to a settlement service if the referral involves a federally-

related mortgage loan. See 12 U.S.C. 2601 through 2617, and 24 CFR

3500.14(b). Therefore, the final ruling retains this phrase.

One commenter also suggested that the OCC reference RESPA in the

final ruling to ensure that banks do not mistakenly believe that this

ruling preempts RESPA. However, the OCC believes that adding this

reference is unnecessary and, therefore, adopts Sec. 7.1002 as

proposed.

Money Lent at Banking Offices or at Other Than Banking Offices (Section

7.1003); Loans Originating at Other Than Banking Offices (Section

7.1004); Credit Decisions at Other Than Banking Offices (Section

7.1005)

Proposed Secs. 7.1003, 7.1004, and 7.1005 addressed the

circumstances under which the OCC would apply the branching limitations

and procedures set forth in 12 U.S.C. 36 and 12 CFR 5.30 to lending

activities by national banks.

Proposed Sec. 7.1003 incorporated case law relating to where

``money'' is ``lent'' for purposes of branching. Under the proposal,

money is lent where the customer, in person, receives loan funds from

the bank. Thus, if a customer receives funds from a bank employee or at

bank premises, the bank would be subject to branching limitations and

require OCC branch approval. However, if the customer receives funds

from an independent third party, including a messenger service

described in Sec. 7.1012, at a nonbank facility, the bank would not be

subject to branching limitations and would not require OCC branch

approval. Proposed Sec. 7.1003 also would codify OCC interpretations

that branching requirements do not encompass certain accepted industry

practices on loan disbursal such as when an attorney or escrow agent

disburses funds at a real estate closing.

Proposed Sec. 7.1004 retained the language in Sec. 7.7380, a

judicially recognized safe harbor explaining the circumstances under

which national banks may originate loans at nonbranch sites, known as

loan production offices (LPOs), without those sites being considered

branches.

Proposed Sec. 7.1005 incorporated OCC interpretations explaining

that offices at which loan approvals occur are not, solely by virtue of

that activity, considered branches. This interpretation also recognized

that a bank may approve loans originated at an LPO at locations other

than the bank's main office or branches without causing the LPO to be

considered a branch, even though this process does not fit squarely

within the safe harbor set forth in Sec. 7.1004. Of course, this LPO or

loan approval office would constitute a branch if it undertakes to lend

money as defined in Sec. 7.1003 or otherwise is defined as a branch

under the McFadden Act (12 U.S.C. 36(j)) and 12 CFR 5.30.

Fifteen commenters addressed one or more aspects of these rulings.

Most supported the proposals generally or had specific comments seeking

clarification of certain aspects of the proposed language. Several

asked the OCC to state that the Sec. 7.1003 language regarding where a

loan is made pertains only to the lending of money for branching

purposes and does not control where a loan is made for purposes of

applying applicable state laws.

In proposing these rulings, the OCC considered only the language

and history of 12 U.S.C. 36(j) concerning what constitutes a ``branch''

for purposes of the McFadden Act. Thus, for clarification purposes, the

final ruling uses the term ``money lent'' contained in the McFadden Act

instead of the phrase ``loan is made'' and explicitly states that the

definition of ``money lent'' applies only to that term as used in 12

U.S.C. 36(j) and 12 CFR 5.30. The OCC does not intend to apply this

definition to the determination of where a bank is ``located'' for

purposes of applying usury limits set forth in 12 U.S.C. 85 or to

control the applicability of various state laws pertaining to lending.

Several commenters thought that the branching definition set forth

in proposed Sec. 7.1003 was incomplete because it did not take into

account whether the bank had established the lending facility or

whether the public had access to the facility. However, the OCC has

proposed to include a general definition of what constitutes a branch,

including the ``public access'' and ``establishment'' tests, in its

proposed revisions to 12 CFR part 5.1

1 See 59 FR 61034 (proposed November 29, 1994). In this regard,

the OCC also notes that what constitutes ``establishment'' of a

branch would more appropriately be determined pursuant to an

analysis of the McFadden Act, case law, and 12 CFR part 5. Thus, the

OCC has changed references in proposed Sec. 7.1003 to a facility

that is ``owned or rented'' by a bank to a facility that is

``established'' by a bank.

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Several commenters asked the OCC to clarify where money would be

considered to be lent for branching purposes. One commenter expressed

concern that because many loans do not involve in-person disbursement,

a bank could make a loan without branch involvement, thus creating a

``gap'' that causes the test to fail. The OCC recognizes that

technology and market developments may, in many instances, result in a

bank making a loan without branch involvement. This has long been the

case on the deposit side where a customer can make deposits and

withdrawals by mail or through shared ATMs or other electronic means

without branch involvement. As on the deposit side, this ``gap'' does

not cause the test to fail--it just recognizes modern realities that

banks can undertake traditional banking activities in ways that

Congress did not contemplate in the McFadden Act as adopted in 1927. In

the final ruling the OCC specifically includes in Sec. 7.1003(a) the

phrase ``if any'' to indicate that the OCC does not believe that the

making of a loan necessarily causes any particular location to be a

``branch'' within the meaning of 12 U.S.C. 36.

Several commenters also questioned the interplay of Sec. 7.1004

with Secs. 7.1003 and 7.1005. The OCC has retained Sec. 7.1004, former

Sec. 7.7380, because it is a judicially recognized safe harbor

permitting national banks to undertake certain lending related

activities without the constraints of the McFadden Act. The OCC notes,

however, that this is a safe harbor; merely because a lending related

activity falls outside the scope of Sec. 7.1004, as with Sec. 7.1005

regarding the making of credit decisions, does not mean that the OCC

views the bank as violating the McFadden Act.

One commenter also stated that Sec. 7.1003(b) was not broad enough.

The OCC emphasizes that any person or entity qualifying under the

messenger service ruling (Sec. 7.1012), could deliver loan proceeds

without implicating the branching rules and that Sec. 7.1012 is itself

a safe harbor.

[[Page 4852]]

Thus, the OCC has adopted Secs. 7.1003, 7.1004, and 7.1005

substantially as proposed. The final ruling clarifies that the

definition of the phrase ``money lent'' applies solely to that phrase

as used in the McFadden Act and 12 CFR 5.30. In addition, the OCC has

changed the references in the proposal to the ``disbursal of funds by

the bank to a customer'' to the ``receipt of loan proceeds directly

from bank funds.'' This change clarifies that the key portion of a loan

transaction for branching purposes is in-person receipt by the borrower

from the bank or on bank premises of loan proceeds directly from bank

funds--not disbursement by the bank through any mechanism, nor

disbursement of funds that at the time of receipt by the borrower are

not bank funds, nor disbursement of funds that do not at the time of

disbursement constitute loan proceeds. In addition, in the final ruling

the OCC changes references to a ``subsidiary corporation'' to

``operating subsidiary.''

Loan Agreement Providing for a Share in Profits, Income or Earnings or

for Stock Warrants (Section 7.1006)

The proposal did not change this section, which permits a national

bank to take as consideration for a loan a share in the profit, income,

or earnings from a business enterprise of a borrower. One commenter

suggested that the OCC state that a national bank may accept stock

warrants as consideration for a loan.

The OCC has previously approved the acceptance of stock warrants

taken in addition to, or in lieu of, interest on a loan, provided that

a national bank does not exercise the acquired stock warrants. See OCC

Interpretive Letter No. 517 (August 16, 1990), reprinted in [1990-1991

Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,228. The OCC has

incorporated this interpretation into the final ruling.

Postal Service by National Bank (Section 7.1010)

The proposal made no substantive changes to this section. One

commenter noted that, by stating that the services performed by a

postal substation may include meter stamping of letters and packages,

and the sale of related insurance, the ruling could imply that a

national bank may offer only the listed services. The OCC does not

intend for this to be an exclusive list of services and has, by

interpretive letters, found that a national bank may engage in other

activities, including selling stamps, accepting letters and packages

for mailing, and maintaining post office boxes. Because a national bank

operating a postal substation must do so in accordance with the

regulations of the United States Postal Service, the OCC has changed

the ruling to reference those regulations.

National Bank Acting as Payroll Issuer (Section 7.1011)

The proposal made no substantive changes to former Sec. 7.7485,

which recognized that a national bank may disburse to employees of a

bank customer payroll funds deposited with the bank by that customer.

One commenter observed that the proposed ruling could be read narrowly

to bar disbursement of payroll funds if made indirectly to the employee

by crediting the employee's account with a financial institution other

than the disbursing bank. The OCC has recognized that a national bank

may forward funds to other banks in which a customer's employees

maintain accounts. See Letter from F.H. Ellis, Chief National Bank

Examiner (July 19, 1971) (unpublished).2 The OCC has modified the

proposal and former ruling to reflect that precedent and to incorporate

certain technical changes.

2 All unpublished OCC staff interpretive letters are

available (in redacted form) upon request from the Communications

Division, 250 E Street, SW, Washington, DC 20219 (202) 874-4700.

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Debt Cancellation Contracts (Section 7.1013)

The former interpretive ruling permitted national banks to offer

customers debt cancellation contracts (DCCs) that cancel debt upon the

death of the borrower. The proposal added disability and unemployment

as types of DCCs that are expressly permitted by the interpretive

ruling.

The OCC received several comments on this section. The majority of

those commenters supported the proposal. Some urged the OCC to expand

the final ruling to state that national banks may offer additional

types of DCCs that the OCC did not include in the proposal. Some

commenters, however, cautioned that DCCs present certain risks, and,

therefore, did not support expansion of the former interpretive ruling.

The final ruling expands the former ruling to provide that a

national bank may offer DCCs for the death or disability of a borrower.

The OCC recognizes that it also may be appropriate for a national bank

to offer a DCC that is triggered by other events. However, risk

considerations that may be particular to other types of DCCs, or to

specific banks, require the OCC to consider these other types of DCCs

on a case-by-case basis.

In addition, national banks offering DCCs, whether for death or

disability, or for other triggering events, must do so in a safe and

sound manner. If a bank is unable to demonstrate an ability by itself

to estimate and reserve adequately for the risks attendant to DCCs, the

bank may obtain third party coverage or take other measures to cover

the risks presented by the DCC.

Independent Undertakings To Pay Against Documents (Section 7.1016)

The proposal updated former Sec. 7.7016 to reflect modern market

standards and industry usage and replaced the term ``letters of

credit'' with ``independent undertakings.'' The term ``independent

undertakings'' is used by the United Nations Commission on

International Trade Law (UNCITRAL) to cover a broader array of

transactions in this area.

The proposal extended the same safety and soundness principles in

the former ruling to this broader class of independent undertakings.

The proposal explained that non- documentary conditions on the bank's

undertaking are not relevant to the bank's obligation to honor its

commitment. Furthermore, the proposal provided a clearer statement of

regulatory standards directed to the segment of the banking industry

that engages in these activities. The proposal also provided a non-

exclusive list of sample laws and rules of practice under which a

national bank may issue independent undertakings.

The OCC received 13 comments with the majority supporting the

proposal. Several commenters recommended that when referencing

applicable laws or rules of practice, the ruling should use generic

citation references or citations to their most recent versions. The OCC

has updated the non-exclusive list of sample laws and rules of practice

to refer to Revised Article 5 of the Uniform Commercial Code (UCC)

(1995) (current model code) as well as Article 5 of the UCC (1990)

(former model code), and to the 1993 version of the Uniform Customs and

Practice for Documentary Credits (ICC Publication No. 500) (effective

January 1, 1994) instead of the 1983 version. The sample listing is

intended to provide non-exclusive examples of laws or rules of

practice, as the cited examples may not necessarily apply in a

particular case or may be revised in the future, or other applicable

laws or rules of practice subsequently may come into effect. The OCC

has added the phrase ``as any of the foregoing may be amended from time

to tim'' to the end of the non-exclusive listing of sample laws and

rules of

[[Page 4853]]

practice to recognize that they may be revised from time to time.

Four commenters recommended clarifying that ``evergreen'' clauses

are permissible, despite the proposal's requirement in

Sec. 7.1016(b)(1)(iii) that the undertaking be ``limited in duration.''

Long-standing OCC precedent permits national banks to use ``evergreen''

or ``automatic extension'' clauses in their letters of credit provided

that the bank retains the right not to renew the letter of credit.

Therefore, the final ruling adds clarifying language expressly

permitting a national bank to issue an undertaking without an express

expiration date, provided that the bank has the right to cancel the

undertaking upon notice to the parties.

Several commenters objected to the word ``must'' in proposed

Sec. 7.1016(b), as ``must'' seemed to impose mandatory safety and

soundness conditions on the issuance of independent undertakings. The

final ruling changes references in Sec. 7.1016(b) from ``must'' to

``should,'' consistent with former Sec. 7.7016, to provide banks with

added flexibility in structuring and entering into financing

arrangements. Nonetheless, the OCC strongly urges national banks to

evaluate these safety and soundness factors when issuing independent

undertakings.

Some commenters asked whether the proposal's reference to a bank

issuing an undertaking for its own account meant that the OCC permits

national banks to issue two-party letters of credit. As intended in the

proposal, the OCC's position is that a national bank may issue a two-

party letter of credit provided that it is permissible under applicable

law and satisfies the requirements of Sec. 7.1016(b)(2)(iii), regarding

a bank's undertaking for its own account. Since a two-party letter of

credit is issued for the bank's own account, the two-party letter of

credit satisfies the requirements of Sec. 7.1016(b)(1)(iv), regarding a

bank's right of reimbursement.

National Bank as Guarantor or Surety on Indemnity Bond (Section 7.1017)

The proposal removed a well-settled provision stating that foreign

branches may exercise additional powers pursuant to 12 U.S.C. 604a. The

proposal made no other substantive changes.

The proposal generally provided that a national bank may act as

guarantor or surety to indemnify another if the bank has a substantial

interest in the performance of the transaction or a segregated deposit

sufficient in amount to cover the bank's total potential liability. One

commenter suggested that the OCC should expand the ruling to permit a

national bank to guarantee or indemnify a party to a transaction if the

guarantee or indemnification is secured by any of the types of

collateral acceptable under section 23A of the Federal Reserve Act

(FRA) (12 U.S.C. 371c) for a ``covered transaction.''

The OCC finds that the types of collateral listed at section

23A(c)(1) (A) and (B) of the FRA (12 U.S.C. 371c(c)(1) (A) and (B)),

the 100 and 110 percent collateral categories, respectively, are

acceptable for a national bank to use as security without undue risk

when acting as a guarantor or surety to indemnify another. Therefore,

the final ruling permits a national bank to lend its credit, bind

itself as surety to indemnify another, or otherwise become a guarantor

to a transaction if the bank has a security interest in either of these

two categories of collateral.

The 100 percent collateral category includes obligations of the

United States or its agencies, obligations fully guaranteed by the

United States or its agencies as to principal and interest, and notes,

drafts, bills of exchange, and bankers' acceptances that are eligible

for rediscount or purchase by a Federal Reserve Bank. The 110 percent

collateral category includes obligations of a state or political

subdivision of a state.

To ensure that the bank is not exposed to a risk of loss, the bank

must perfect its security interest in the collateral. For example, if

the collateral is a printed security, the bank must have obtained

physical control of the security, and, if the collateral is a book

entry security, the bank must have properly recorded its security

interest.

Because the value of these types of collateral can fluctuate, the

final ruling requires that the collateral have a market value, at the

close of each business day, equal to the bank's total potential

liability if the collateral is composed of obligations of the United

States or its agencies, obligations fully guaranteed by the United

States or its agencies as to principal and interest, or notes, drafts,

bills of exchange, or bankers' acceptances that are eligible for

rediscount or purchase by a Federal Reserve Bank. If the collateral is

composed of obligations of a state or political subdivision of a state,

it must have a market value, at the close of each business day, equal

to 110 percent of the bank's total potential liability.

Furnishing of Products and Services by Electronic Means and Facilities

(Section 7.1019)

The proposal permitted a national bank to use data processing

equipment to perform for itself and others ``all services expressly or

incidentally authorized under the statutes applicable to national

banks.'' The proposal also incorporated the OCC's interpretive position

that a national bank using data processing equipment or technology to

perform authorized services may market and sell ``any legitimate excess

capacity'' in that equipment or technology. See, e.g., OCC Interpretive

Letter No. 677 (June 28, 1995), reprinted in [1994-1995 Transfer

Binder] Fed. Banking L. Rep. (CCH) para. 83,625.

The OCC requested comment on whether the proposed language is

necessary. The OCC also requested comment on whether the OCC should

more specifically describe permissible sales of excess capacity and the

services that a national bank may provide using data processing

equipment or technology.

All 12 of the commenters generally supported the proposal. A

majority of the commenters stated that greater specificity in

describing authorized services would not be useful because more

detailed language would quickly become outdated by the rapid

development of technology. In addition, a majority of the commenters

urged the OCC to adopt a broader standard than the proposal used to

define the scope of permissible sales of data processing equipment and

technology. Three commenters urged the OCC to delete the term

``legitimate'' from the phrase ``legitimate excess capacity.'' One

commenter suggested that the OCC state that a bank may market and sell

any excess capacity in data processing equipment or technology that the

bank acquired or developed for banking purposes based on a good faith

determination of its own current and future needs.

The OCC considered a number of alternatives for changing the

proposal to modernize the treatment of permissible data processing

activities. The OCC recognizes that national banks are engaging, and

will engage, in an increasing range of activities through electronic

means and facilities beyond simply ``data processing.'' For this

reason, the OCC has modified this ruling to refer to activities,

functions, products, and services provided via electronic means and

facilities, rather than ``data processing'' and changes the title of

Sec. 7.1019 from ``Use of data processing equipment and furnishing of

data processing services'' to ``Furnishing of products and services by

electronic means and facilities.''

The OCC also finds the commenter's suggestion of a ``good faith''

standard to be more appropriate than ``legitimate

[[Page 4854]]

excess capacity'' to define the scope of a national bank's permissible

sales of excess electronic capacities. The good faith requirement is an

important safeguard against abusing this authority. Therefore, the OCC

adopts the commenter's suggestion. Moreover, the final ruling, which

expressly states that these sales are appropriate for a bank to

optimize the use of the bank's resources, more closely parallels the

standard the OCC applies when national banks utilize their excess

physical space for non-bank uses. See, e.g., Letter from Peter

Liebesman, Assistant Director, Legal Advisory Services Division (July

24, 1987) (unpublished) and cases cited therein, Wingert v. First Nat'l

Bank of Hagerstown, Md., 175 F. 739 (4th Cir. 1909), aff'd, 223 U.S.

670 (1912); Brown v. Schleier, 118 F. 981 (8th Cir. 1902), aff'd, 194

U.S. 18 (1904).

Purchase of Open Accounts (Section 7.1020)

The proposal contemplated moving former Sec. 7.1105 to 12 CFR part

32. However, the section relates to a national bank's ability to engage

in factoring, and the OCC has concluded that it more appropriately

belongs in part 7. Therefore, the final ruling adopts the language

contained in the former ruling, except for the language that ``accounts

need not in every case represent an evidence of debt.'' This language

is removed because it is well settled under OCC precedents that

factoring is an extension of credit for lending limit purposes.

Corporate Governance Procedures (Section 7.2000)

The proposal provided that a national bank undertaking a corporate

governance procedure must comply with applicable statutes and

regulations, and safe and sound banking practices. The proposal also

established a safe harbor for a national bank that undertakes a

corporate governance procedure, if the bank complied with certain OCC-

designated sections of the Model Business Corporation Act (MBCA), where

the Federal banking statutes and regulations are otherwise silent on

the matter. The OCC invited comment on whether the MBCA is the

appropriate form of guidance to provide national banks with additional

flexibility in structuring their corporate practices or whether the

Delaware General Corporation Law or other sources are preferable.

The OCC received ten comments on the proposal. A number of

commenters recommended that the final ruling permit a national bank to

rely on the corporate governance procedures of the state where the bank

is located or the state where the bank's holding company, if any, is

incorporated. Two commenters recommended expanding the list of

permissible MBCA sections so that a national bank could rely on any

section of the MBCA to the extent it is not inconsistent with Federal

banking statutes or regulations. One commenter suggested permitting the

bank to rely on an opinion of counsel that the procedure is permissible

for a national bank.

Four commenters also discussed Delaware General Corporation Law as

a source of guidance. Two of these commenters stated that Delaware law

would be an acceptable source of guidance. One commenter supported

permitting the use of Delaware law as an alternative to the MBCA. One

commenter opposed the use of Delaware law unless other states' laws are

similarly permitted as a source of guidance for national bank corporate

governance procedures.

After careful consideration of the comments received, the OCC has

adopted a revised two-step approach that provides national banks with

maximum flexibility to structure their corporate governance procedures

while providing shareholders and others with adequate notice as to the

body of corporate standards on which the bank will rely. Under the

final ruling, a corporate governance procedure used by a national bank

must comply with applicable Federal banking statutes and regulations,

and safe and sound banking practices. In addition, to the extent not

inconsistent with those Federal banking statutes and regulations, or

safe and sound banking practices, a national bank may elect to follow

the corporate governance procedures of the state in which the main

office of the bank is located, the state where the bank's holding

company is incorporated, the Delaware General Corporation Law, Del.

Code Ann. tit. 8 (1991, as amended 1994, and as amended thereafter), or

the MBCA (1984, as amended 1994, and as amended thereafter). This

approach provides national banks with a wide range of choices to

structure their corporate governance procedures consistent with the

particular needs of the bank.

The OCC is mindful, however, of providing shareholders and other

interested parties with adequate notice of the bank's corporate

governance procedures. Therefore, the final ruling requires the bank to

designate in its bylaws the body of law that will govern its corporate

procedures. The final ruling also retains a process for a bank to seek

informal staff guidance regarding permissible corporate governance

procedures.

Notice of Shareholders' Meetings (Section 7.2001)

The proposal simplified the language in former Sec. 7.4000 and

clarified that a national bank must mail notice of the time, place, and

purpose of all shareholders' meetings at least ten days before the

proposed meeting.

Two commenters recommended revising this section to permit the sole

shareholder of a national bank to waive notice of the shareholders'

meeting. The OCC agrees that permitting the sole shareholder to waive

shareholder notice will not detrimentally affect bank safety and

soundness and will eliminate unnecessary regulatory burden. Thus, the

final ruling adds a new sentence that the sole shareholder of a

national bank may waive the notice requirements of this section.

Two commenters also recommended modifying this section to state

that shareholders generally may waive their right to written notice of

shareholder meetings. As a general matter, the OCC does not accept

written waivers of the general requirement for notice of regular annual

meetings of national banks or meetings involving certain types of

fundamental corporate changes. The corporate affairs of a bank may not

as closely involve shareholders as directors, and thus regular annual

meetings provide an important forum for expression of shareholder

views. In addition, the absence of notice and full disclosure for

meetings, particularly those involving fundamental corporate changes,

could jeopardize the ability of shareholders to protect their rights.

Another commenter recommended expanding the section to require a

national bank to mail ``or otherwise deliver'' shareholders' notice.

However, requiring a national bank to mail shareholders' notice of all

shareholders' meetings at least ten days prior to the meeting by first

class mail provides the OCC with confirmation of a bank's adherence to

the ``ten day'' shareholder notice requirement. Therefore, the final

ruling does not incorporate the phrase ``otherwise deliver.''

Honorary Directors or Advisory Boards (Section 7.2004)

The proposal permitted a national bank to appoint honorary or

advisory members of the board of directors to act in advisory

capacities without voting power or power of final decision in matters

concerning the bank's business. The proposal made no substantive

changes to this section. One commenter suggested clarifying that one or

more

[[Page 4855]]

separate advisory boards are permitted. The final ruling changes the

title and language of this section to clarify that more than one

advisory board is permissible.

Ownership of Stock Necessary To Qualify as Director (Section 7.2005)

The proposal removed repetitive information requirements relating

to directors' qualifying shares under 12 U.S.C. 72. It also

incorporated OCC precedent to provide that a director's ownership of

preferred stock in a national bank may satisfy statutory requirements.

The proposal also clarified that a director may borrow from the bank or

its affiliates the funds to purchase the required minimum equity

interest.

The OCC received two comment letters on this section. The

commenters each requested the OCC to state that a national bank

director can hold qualifying shares in individual retirement accounts,

retirement plans, 401(k) plans or other similar arrangements.

Twelve U.S.C. 72 requires a national bank director to own the

qualifying shares in ``his or her own right.'' The purpose of the

qualifying shares requirement is to ensure that a director has a

sufficient individual financial interest in the bank to induce him or

her to be vigilant in protecting the bank's interests. Cupo v.

Community National Bank & Trust Co. of New York, 324 F. Supp. 1390,

1393 (E.D.N.Y. 1971). The OCC agrees that various retirement plans and

similar arrangements may provide directors with the requisite financial

interest to satisfy the qualifying shares requirement of 12 U.S.C. 72.

Therefore, the final ruling provides that a director's qualifying

interest also may be held through profit sharing plans, individual

retirement accounts, retirement plans, and similar arrangements,

provided the director retains beneficial ownership and legal control

over the shares. For examples of arrangements the OCC has previously

approved, see Letter from Peter Liebesman, Assistant Director, Legal

Advisory Services Division (July 7, 1981) (unpublished); Letter from

Larry J. Stein, Senior Attorney, Legal Advisory Services Division (May

28, 1986) (unpublished); Letter from Christopher C. Manthey, Senior

Attorney, Legal Advisory Services Division (September 5, 1989)

(unpublished); and Letter from James A. Wright, Attorney, Securities

and Corporate Practices Division (November 6, 1989) (unpublished).

The OCC has also changed the ruling to reflect OCC precedent that

eliminates some of the distinctions between the required amount of

ownership a director must hold in national bank stock as opposed to

holding company stock. See OCC Interpretive Letter No. 503 (April 4,

1989), reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep.

(CCH) para. 83,201. Under the final ruling, a director may hold common

or preferred stock of the bank or a company that controls the bank if

that stock has not less than an aggregate par value of $1,000, an

aggregate shareholders' equity of $1,000, or an aggregate fair market

value of $1,000.

Filling Vacancies and Increasing Board of Directors Other Than by

Shareholder Action (Section 7.2007)

The proposal modified former Sec. 7.4305 to clarify that ``the

majority of shareholders or a majority of directors'' may increase the

number of directors and that this increase is limited to two directors

(when the number of directors is 15 or fewer) or four (when the number

of directors is 16 or more). The proposal also eliminated language that

repeated the statute and clarified the procedures for filling vacancies

on the board of directors.

The OCC received three comments on the proposal. One commenter

noted that the language could be read to preclude shareholders from

increasing the board of directors by more than two (when the number of

directors is 15 or fewer) or four (when the number of directors is 16

or more). This is not the OCC's intent. Nothing in the final ruling is

intended to limit whatever lawful authority shareholders, as distinct

from the directors themselves, may have to increase the board of

directors. Therefore, the final ruling has been changed to focus solely

on increases made by action of the board of directors. Under the final

ruling, if authorized by the bank's articles of association, a majority

of the board of directors may increase the number of the bank's

directors within the limits specified in 12 U.S.C. 71a. When the board

of directors increases the number of directors, that increase is

limited to two when the number of directors last elected by

shareholders was 15 or fewer, and to four when the number of directors

last elected by shareholders was 16 or more.

The final ruling also clarifies that the shareholders, a majority

of the board of directors remaining in office, or, if the directors

remaining in office constitute fewer than a quorum, an affirmative vote

of the directors remaining in office, may fill a vacancy on the board

of directors.

Oath of Directors (Section 7.2008)

The proposal removed the last paragraph of former Sec. 7.4415,

which restated the statute and separated the section into

``administration'' and ``execution'' of the oath. One commenter

recommended clarifying that the oath must be maintained in writing for

a specified period of time. The OCC removed the requirement in the

former ruling that the director subscribe to the oath and immediately

transmit it to the OCC to be filed and preserved for ten years because

that requirement merely restates 12 U.S.C. 73. Therefore, the final

ruling makes no changes and, as in the proposal, removes the last

paragraph of the former ruling.

Directors' Responsibilities (Section 7.2010)

The proposal modified current Sec. 7.4425 to state that while

directors may delegate the day-to-day operations of the bank to

management, the directors maintain responsibility for supervising

management to ensure that the bank is operated in accordance with

policies and procedures established by the board as well as with

applicable law, regulations, and safe and sound banking practices.

Two commenters supported the proposal. Two commenters asserted that

the word ``ensure'' implies that directors are guarantors of the bank's

legal and regulatory compliance. One commenter suggested substituting

the word ``determine'' for ``ensure.'' Another commenter criticized the

proposal as contrary to statutory and case law in stating that the

board may delegate only the bank's day-to-day operations but not the

oversight function and for not stating that directors are entitled to

rely reasonably on management, officers and inside and outside

professionals for nearly all board functions. This commenter

recommended issuing a separate interpretive ruling or Banking Circular

on duties of national bank directors, or removing the ruling from part

7.

The proposal sought to provide directors with a more informed

statement of the OCC's expectations regarding the responsibilities of a

national bank's board of directors. However, the OCC acknowledges the

limitations inherent in crafting a regulation in this complex area that

is not overly detailed yet provides directors with clear and useful

guidance as to their responsibilities. Sources already available, such

as the OCC's Director's Book and the ``Comptroller's Handbook for

National Bank

[[Page 4856]]

Examiners,'' 3 provide an informal and more extensive description

of these responsibilities.

3 These sources are available upon request from the OCC

Communications Division, 250 E Street, SW, Washington, DC 20219

(202) 874-4700.

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Thus, the final ruling has been changed to provide a general

statement that the business and affairs of the bank shall be managed by

or under the direction of the board of directors. However, in order to

notify directors of their basic responsibilities and available sources

of additional guidance, the final ruling also states that a director

should refer to other OCC published guidance for additional information

regarding the OCC's views on the responsibilities of national bank

directors.

Compensation Plans (Section 7.2011)

The proposal combined and condensed current Secs. 7.5000, 7.5010,

and 7.5015, regarding bonus and profit sharing plans, pension plans,

and employee stock option and stock purchase plans, respectively, into

one section on compensation plans.

One commenter suggested that the list of compensation plans should

be illustrative rather than exclusive as there are alternative types of

compensation programs that may be appropriate for national banks but do

not fall within one of these three types. The OCC agrees with the

commenter and clarifies the final ruling to allow national banks

flexibility to adopt compensation plans other than those specified in

this section. The OCC has also changed the ruling to refer to the

compensation provisions contained in 12 CFR part 30, Standards for

Safety and Soundness.

Indemnification of Institution-affiliated Parties (Section 7.2014)

The proposal revised former Sec. 7.5217 to state that a national

bank may indemnify certain individuals and advance legal fees and

expenses, subject to certain limitations. Under the proposal, a

national bank could not, however, indemnify an individual where an

administrative proceeding resulted in a final order that assessed a

civil money penalty or required restitution, or a final removal or

prohibition order under 12 U.S.C. 1818 (e) or (g).

The proposal also imposed certain procedural requirements for

advancing expenses and legal fees in connection with administrative

enforcement actions. Under the proposal, a national bank could advance

expenses and legal fees if the disinterested members of the board of

directors determined, in good faith, that there is a reasonable basis

for the individual to prevail on the merits; that the individual has

the financial capacity to reimburse the bank if he or she did not

prevail; and that the payment of the expenses by the bank is not unsafe

or unsound. The indemnified individual would have been required to

repay advances to the bank, however, if the action or proceeding

resulted in a final order assessing a civil money penalty or requiring

restitution, or a final removal or prohibition order under 12 U.S.C.

1818 (e) or (g). The proposal also required an individual to execute a

formal and binding agreement to reimburse the bank for expenses and

fees in the event he or she did not prevail. The OCC invited comment on

whether these standards were workable or too restrictive, and whether

other standards were more appropriate.

On March 29, 1995, the Federal Deposit Insurance Corporation (FDIC)

issued its second proposal relating to bank indemnification of

institution-affiliated parties. The FDIC proposal would implement the

so-called ``golden parachute'' and indemnification provisions of

section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. 1828(k))

and would apply to all depository institutions, including national

banks. Several commenters responding to the OCC proposal recommended

that the OCC adopt the FDIC proposal in its entirety or specific

provisions of the FDIC proposal that were ``less restrictive'' than the

OCC proposal. These commenters advocated a single indemnification

standard applicable to national banks to avoid conflicting standards.

The OCC agrees that a single set of rules governing permissible

indemnification in connection with administrative proceedings or civil

actions brought by Federal banking agencies should apply to national

banks. One set of rules prevents confusion, reduces compliance and

legal costs, and minimizes unnecessary regulatory burden. Because 12

U.S.C. 1828(k) subjects national banks to the requirements of any FDIC

regulation on indemnification, FDIC standards would supersede less

restrictive separate OCC standards. Therefore, the OCC has changed the

part 7 ruling on indemnification to clarify that a national bank may

make or agree to make indemnification payments to an institution-

affiliated party with respect to an administrative proceeding or civil

action initiated by any Federal banking agency, that are reasonable and

consistent with the requirements of 12 U.S.C. 1828(k) and any

implementing regulations thereunder.

The FDIC proposal does not address indemnification in circumstances

involving an administrative proceeding or civil action not initiated by

a Federal banking agency. The former ruling, Sec. 7.5217, provided

generally that indemnification articles that substantially reflect

general standards of law of the state in which the bank is

headquartered, the law of the state in which the bank's holding company

is incorporated, or the relevant provisions of the MBCA, were presumed

by the OCC to be within the corporate powers of a national bank. The

OCC has changed the proposal to provide further flexibility and to

maintain consistency with the revised corporate governance procedures

in Sec. 7.2000. Under the final ruling, with respect to an

administrative proceeding or civil action not initiated by a Federal

banking agency, a national bank may indemnify an institution-affiliated

party for damages and expenses, including the advancement of expenses

and legal fees, in accordance with the law of the state in which the

main office of the bank is located, the law of the state in which the

bank's holding company is incorporated, or the relevant provisions of

the MBCA or Delaware General Corporate Law. In all cases,

indemnification payments should be consistent with the safety and

soundness of the bank involved. The final ruling also requires the bank

to designate in its bylaws the body of law it has selected to govern

its indemnification procedures. The final ruling no longer requires

banks to include the indemnification provisions in its articles of

association.

Cashier (Section 7.2015)

The proposal changed former Sec. 7.5245 to clarify that the

cashier's duties may be delegated to the president, chief executive

officer, or other officer. One commenter recommended that the OCC

change references to the board of directors to a ``duly designated

officer.'' The OCC agrees with this recommendation and, consistent with

the OCC's continuing effort to reduce unnecessary regulatory burden,

changes the final ruling to permit a duly designated officer to assign

duties previously performed by the bank's cashier.

Facsimile Signatures on Bank Stock Certificates (Section 7.2017)

The proposal revised former Sec. 7.6010 to clarify that facsimile

signatures include electronic means of signature. One commenter

recommended further relief from administrative burden by deleting all

references to ``seals'' and ``corporate seals'' in the corporate

[[Page 4857]]

governance section, including the reference proposed in Sec. 7.2017.

Although the OCC recognizes the need to reduce administrative burden,

12 U.S.C. 52 requires every national bank stock certificate to be

sealed with the seal of the association. Therefore, the OCC adopts this

section as proposed.

Acquisition and Holding of Shares as Treasury Stock (Section 7.2020)

The proposal added a new section to address a national bank's

acquisition and holding of shares as treasury stock. The proposal

explained that pursuant to the authority and procedures of 12 U.S.C.

59, a national bank may acquire its outstanding shares and hold them

for a reasonable period as treasury stock, as long as the acquisition

and retention of the shares is for a legitimate corporate purpose.

Because 12 U.S.C. 59 requires OCC approval and a two-thirds vote of

shareholders for a reduction in capital, there is less risk of improper

use of treasury stock. The OCC notes, however, that it would not be

permissible for a national bank to acquire and hold treasury stock for

speculation or as a means of bypassing some requirement or obligation

under the Federal banking laws. Accordingly, the final ruling adds

language providing that it would not be permissible for a national bank

to acquire or hold treasury stock for speculation.

One commenter expressed concern that the term ``reasonable period''

is too ambiguous. The commenter contended that as long as the bank

complies with 12 U.S.C. 59 regarding the repurchase of outstanding

shares, there is no reason that a national bank may not hold treasury

stock for as long as the bank sees fit. The OCC agrees with the

commenter's suggestion. As long as the acquisition and retention of the

shares fulfills a legitimate corporate need, the bank may continue to

hold the shares. Therefore, the final ruling does not include the term

``reasonable period'' but clarifies that the retention of the shares

must continue, on an ongoing basis, to be for a legitimate corporate

purpose.

Bank Hours and Closings (Section 7.3000)

The proposal revised current Sec. 7.7434 to provide more

comprehensive guidance regarding bank hours and closings. Proposed

Sec. 7.3000(a) maintained the general requirement that a national

bank's board of directors is responsible for establishing a schedule of

business hours independently of other banks.

Proposed Sec. 7.3000(b) informed national banks that the

Comptroller of the Currency (Comptroller), a state or a legally

authorized state official may declare a day to be a legal holiday for

emergency reasons. Proposed Sec. 7.3000(b) also set forth examples to

clarify circumstances under which a national bank may remain closed.

Proposed Sec. 7.3000(c) also provided that a state or a legally

authorized state official may declare a day a legal holiday for

ceremonial reasons, and that a national bank may choose to remain open

or closed on these holidays.

Finally, proposed Sec. 7.3000(d) reminded national banks to look to

applicable law to determine if they may incur liability for closing.

Several commenters requested the OCC to broaden the authority to

close a bank or its branch offices. For example, one commenter

suggested including provisions allowing a bank office to close if a

snow emergency is declared by local authorities. Another commenter

suggested following provisions in New York law that permit bank

officers to independently protect their institutions by closing offices

under certain conditions, provided at least one office remains open.

Twelve U.S.C. 95 clearly authorizes only the Comptroller, a state,

or a state official to designate a day as a legal holiday for emergency

reasons. Nonetheless, the OCC recognizes the practical concerns raised

by the commenters. The ruling attempts to delineate certain emergency

conditions under which the Comptroller will act to authorize the

closing of bank offices. The OCC does not intend for 12 U.S.C. 95 or

the ruling to preclude a bank from asserting defenses, such as

impossibility of performance, if compelled to close due to

circumstances beyond the bank's control.

Sharing Space and Employees (Section 7.3001)

The proposal revised former Sec. 7.7516 to incorporate current OCC

positions on sharing space and employees. Among other things, the

proposal clarified that banks may lease excess space in bank premises

or share space with businesses other than banks and other financial

institutions. The proposal also clarified the OCC's position on a

national bank sharing employees with businesses with which it shares

space. Finally, the proposal summarized the supervisory conditions that

a bank should address in these arrangements, and proposed

Sec. 7.3001(d) identified legal issues a bank should consider when

entering into these arrangements. The proposal requested commenters to

address whether the listed items are appropriate and if the OCC should

identify other considerations in lieu of, or in addition to, those

described in the proposal.

The OCC received 13 comments addressing this section. Several

commenters requested the OCC to clarify whether there are any

limitations on the type of business with which the bank may lease or

share space. The proposal and the final ruling make clear that a bank

may lease excess space in bank premises to one or more businesses.

Similarly, a bank may share space jointly held with one or more other

businesses. Each of these arrangements is subject to supervisory

conditions and legal requirements. However, the ruling does not impose

limitations on the type of activity that the other business engages in

other than that it cannot adversely affect the safety and soundness of

the bank.

One commenter disagreed with the supervisory conditions in proposed

Sec. 7.3001(c) (6) and (7) that require the national bank to ensure

that (1) the activities of the other business do not affect the safety

and soundness of the bank, and (2) the activities of shared employees

are consistent with applicable laws and regulations that pertain to

agents or employees of such other businesses. This commenter asserted

that this would impose inconsistent and duplicative requirements on

brokerage firms and, in the case of the latter requirement, impose new

obligations on national banks to monitor compliance with securities

laws and other regulations by broker-dealers and dual employees of

broker-dealers.

The OCC continues to believe that the importance of maintaining a

safe and sound national bank system requires banks to ensure that the

activities of businesses with which they share premises will not

adversely affect bank safety and soundness. Therefore, the OCC retains

the requirement contained in proposed Sec. 7.3001(c)(6). However, the

OCC did not intend for national banks to monitor compliance on an

ongoing basis with all applicable laws affecting broker-dealers or

other entities with which the bank shares space or employees.

Therefore, the OCC has changed proposed Sec. 7.3001(c)(7) to clarify

that a national bank should take steps to ensure that shared employees,

or the entity for which they perform services, are duly licensed or

meet applicable qualification requirements for the activities in

question.

One commenter sought clarification as to whether these supervisory

conditions are consistent with, or in addition to, the Interagency

Statement on Retail Sales of Nondeposit Investment Products (February

15, 1994)

[[Page 4858]]

(Statement).4 A number of the supervisory conditions incorporate

principal elements of the Statement. However, banks should consult any

applicable component of the Statement as a source of guidance in

structuring these arrangements.

\4\ Available upon request from the OCC Communications Division,

250 E Street, SW, Washington, DC 20219, (202) 874-4700.

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Books and Records of National Banks (Section 7.4000)

The proposal addressed the exclusive examination authority of the

OCC. The ruling clarified that under 12 U.S.C. 484, state authority to

review the books and records of a national bank is limited to those

circumstances in which there is reasonable cause to believe that the

bank has failed to comply with applicable state unclaimed property and

escheat laws. The comments generally supported the proposal, with two

commenters recommending that the OCC clarify the second sentence of

Sec. 7.4000(b) by adding the ``filing of reports with state

regulators'' to the list of prohibited state-imposed requirements. The

OCC has determined that rather than adopting the specific suggested

revision, the OCC will continue to consider this issue on a case-by-

case basis. Therefore, the OCC adopts the final ruling substantially as

proposed with minor revisions to the first sentence of Sec. 7.4000(a).

Charging Interest at Rates Permitted Competing Institutions; Charging

Interest to Corporate Borrowers (Section 7.4001)

Under 12 U.S.C. 85, a national bank may charge interest at the

highest rate allowed to competing lenders by the state where the bank

is located without regard to the location of the borrower. Thus, the

statute permits a national bank to ``export'' to customers in other

states the rate of ``interest'' allowed by the state in which the bank

is located. The proposal defined the term ``interest'' in 12 U.S.C. 85

to reflect current case law. The proposed definition also reflected OCC

interpretive opinions on the types of fees and charges that are

included and not included in the meaning of the term. The proposal

provided non-exclusive lists of specific fees that are ``interest''

(for example, numerical periodic rates, late fees, not sufficient funds

(NSF) fees, overlimit fees, annual fees, cash advance fees, and

membership fees) and that ordinarily are not ``interest'' (for example,

appraisal fees, premiums and commissions on insurance guaranteeing

repayment, finders' fees, fees for document preparation or

notarization, or fees incurred to obtain credit reports).

Whether a particular fee or charge is properly characterized as

``interest'' subject to exportation has been the subject of litigation

in a number of jurisdictions,5 and the OCC received many comments

from parties on both sides of the issue. On one hand, certain consumer

groups and attorneys representing class action suits opposed the

proposal. These groups asserted that the proposed definition is

contrary to the accepted meaning of the term ``interest,'' and is

contrary to consumers' interests. On the other hand, many national

banks supported the proposal because it incorporates clear guidance on

the OCC's position on the issue of what constitutes ``interest'' under

12 U.S.C. 85. The OCC believes that the Federal definition of

``interest'' and the components of interest in the proposal are both

consistent with law and beneficial to national banks and their

customers with respect to interstate lending operations.

\5\ See, e.g., Smiley v. Citibank (South Dakota), N.A., 900 P.2d

690 (Cal. 1995), cert. granted, 64 U.S.L.W. 3500 (U.S. Jan. 19,

1996) (No. 95-860) (holding that the term ``interest'' as used in 12

U.S.C. 85 encompasses late payment fees if such fees are allowed by

a national bank's home state); see also Greenwood Trust Co. v.

Massachusetts, 971 F.2d 818 (1st Cir. 1992), cert. denied, 113 S.

Ct. 974 (1993) (holding that the term ``interest'' as used in

section 521 of the Depository Institutions Deregulation and Monetary

Control Act of 1980 (12 U.S.C. 1831d(a)), a statute modeled on 12

U.S.C. 85, includes late payment fees; in construing the term

``interest'' in 12 U.S.C. 1831d(a), the court concluded that these

parallel sections should be read in pari materia). Contra Sherman v.

Citibank (South Dakota), N.A., No. A-102-94, 1005 WL 710414 (N.J.

Nov. 28, 1995), pet. for cert. filed, 64 U.S.L.W. 3439 (U.S. Dec.

21, 1995) (No. 95-991) (holding that the term ``interest'' as used

in 12 U.S.C. 85 does not include late payment fees).

---------------------------------------------------------------------------

The OCC also received comments from Arkansas trade associations and

the Arkansas congressional delegation expressing concern that the

proposed Federal definition of ``interest'' might be misinterpreted to

require the inclusion of certain charges that are ``interest'' under

the Federal definition, but not so under Arkansas law, when calculating

the maximum effective yield permitted by Arkansas law. The commenters

noted that, if the OCC adopts this interpretation, some loans now

acceptable under Arkansas usury law could be found to be usurious. The

OCC agrees that the language of the proposal is potentially confusing

and might be interpreted mistakenly to affect the definition of

``interest'' in the Arkansas usury law (which, for example, permits

banks to charge late fees, but does not include those fees as

``interest'' in calculating the maximum effective yield).

The definition of interest in Sec. 7.4001 is intended to define

``interest'' for purposes of determining if a particular charge is

subject to 12 U.S.C. 85. Charges that fall within the Federal

definition of ``interest'' are subject to 12 U.S.C. 85 and its ``most

favored lender'' and exportation rules. The fact that a charge is not

labeled ``interest'' under a particular state law does not necessarily

mean that it is impermissible, however.

Section 7.4001(b) clarifies that, under the ruling (and 12 U.S.C.

85), one looks to state law to determine what lending charges are

permitted for the most favored lender, and thus, also for national

banks under 12 U.S.C. 85. However, the Federal definition of

``interest'' generally does not affect state law definitions of

``interest'' or the manner in which state law calculates the amount of

interest being charged. For example, if late fees are not interest

under state law where the national bank is located but state law allows

late fees, then a national bank located in that state may charge late

fees to its intrastate customers. The national bank could also charge

the fees to its interstate customers because the fees are ``interest''

under the Federal definition and an allowable charge under state law

where the national bank is located. However, the late fees would not be

treated as interest for purposes of evaluating compliance with state

usury limitations because state law excludes late fees when calculating

the maximum interest that lending institutions may charge under those

limitations.

The final ruling addresses the concern raised by the Arkansas

commenters regarding the effect of the Federal definition of interest

on state law. The OCC has added to Sec. 7.4001 a new paragraph (c) that

includes a clarifying sentence confirming that the Federal definition

of the term interest does not change a state's definition of interest

(nor how the state definition of interest is used) solely for purposes

of state law. Paragraph (c) of Sec. 7.4001 also provides the example

described in the immediately preceding paragraph of this preamble to

illustrate this concept. The final ruling is substantially identical to

the proposal, with the addition discussed above. In addition, the

reference to ``Morris Plan banks'' that appeared in the last sentence

of proposed Sec. 7.4001(b) has been removed as obsolete. Finally,

paragraph (c), ``Usury,'' in the proposal has been redesignated as

paragraph (d) in the final ruling.

Most courts interpreting 12 U.S.C. 85 have concluded that various

forms of non-percentage-based charges (including such items as late

payment,

[[Page 4859]]

overlimit, and annual fees) for the use of borrowed money fall within

the scope of 12 U.S.C. 85. The final ruling is consistent with OCC

interpretive letters in this area (see, e.g., OCC Interpretive Letter

No. 670 (Feb. 17, 1995), reprinted in [1994-1995 Transfer Binder] Fed.

Banking L. Rep. (CCH) para. 83,618, and the letters cited therein) and

reflects the position the OCC has taken in amicus curiae briefs in

litigation pending in many state and Federal courts (see, e.g., OCC

brief filed in the Supreme Court of Pennsylvania in Bank One, Columbus,

N.A. v. Mazaika, Nos. 1995-31 and 1995-33 (July 17, 1995) (urging

reversal of Mazaika v. Bank One, Columbus, N.A., 653 A.2d 648 (Pa.

Super. Ct. 1994) (en banc), appeal granted, 659 A.2d 557 (Pa. 1995)).

Recently, the California Supreme Court upheld the ability of a

national bank to charge certain fees as a component of ``interest'' and

cited the OCC's recent interpretive opinions, as well as proposed

Sec. 7.4001, as consistent with the court's reasoning. Smiley v.

Citibank (South Dakota), N.A., 900 P.2d 690 (Cal. 1995), cert. granted,

64 U.S.L.W. 3500 (U.S. Jan. 19, 1996) (No. 95-860) (holding that the

term ``interest'' as used in 12 U.S.C. 85 encompasses late payment

fees, if such fees are allowed by a national bank's home state). See

also Copeland v. MBNA America Bank, N.A., 907 P.2d 87 (Colo. 1995) (en

banc), pet. for cert. filed, 64 U.S.L.W. 3469 (U.S. Dec. 28, 1995) (No.

95-1056); Richardson v. Citibank (South Dakota), N.A., No. 94SC670,

1995 Colo. LEXIS 767 (Colo. Dec. 18, 1995) (en banc); Spellman v.

Meridian Bank (Delaware), Nos. 94-3203-3204, 94-3215-3218, 1995 U.S.

App. LEXIS 37149 (3d Cir. Dec. 29, 1995).

However, the Supreme Court of New Jersey also issued a recent

decision concluding that ``interest'' as used in 12 U.S.C. 85 does not

include late payment fees. Sherman v. Citibank (South Dakota), N.A.,

No. A-102-94, 1005 WL 710414 (N.J. Nov. 28, 1995), pet. for cert.

filed, 64 U.S.L.W. 3439 (U.S. Dec. 21, 1995) (No. 95-991). The decision

of the New Jersey Supreme Court in Sherman conflicts with the decisions

of the California Supreme Court in Smiley, the Colorado Supreme Court

in Copeland and Richardson, and the U.S. Court of Appeals for the Third

Circuit in Spellman, and the earlier decision of the First Circuit in

Greenwood Trust. The U.S. Supreme Court recently granted certiorari in

Smiley to resolve the conflict on an expedited basis.

As noted in the proposal, the ruling is not intended to be a

comprehensive treatment of the issue, and other fees or charges may

also be found to be components of interest.

National Bank Charges (Section 7.4002)

The proposal responded to concerns raised by Congress regarding the

scope of Federal preemption reflected in the former version of this

ruling. The conference report to the Riegle-Neal Interstate Banking and

Branching Efficiency Act of 1994, H.R. Conf. Rep. No. 651, 103rd Cong.,

2d Sess. 54 (1994), urged the OCC to review former Sec. 7.8000 to

determine if it should be withdrawn or revised. The conferees expressed

the view that the OCC had applied preemption principles in an overly

broad manner with respect to state laws that prohibit, limit, or

restrict deposit account service charges imposed by a national bank. In

addition, the conference report cited Perdue v. Crocker Nat'l Bank, 702

P.2d 503 (Cal. 1985), cert. dismissed, 475 U.S. 1100 (1986), which held

that Sec. 7.8000 is not a valid finding of Federal preemption, in part,

because Congress had not established a comprehensive Federal statutory

scheme governing the taking of deposits.

The proposal revised the ruling to state that the OCC will consider

on a case-by-case basis whether a national bank may establish a

particular charge or fee that is in conflict with a state law, and

that, in issuing an opinion on whether a particular state law is

preempted, the OCC will employ the preemption principles derived from

the Supremacy Clause of the United States Constitution and judicial

precedent.

The OCC received 26 comments on proposed Sec. 7.4002. Ten

commenters expressed dissatisfaction with the OCC's proposal to

evaluate state laws on a case-by-case basis. Seven of these commenters,

mostly large banks, specifically urged the OCC to either retain

Sec. 7.8000 or otherwise generally preempt state law limitations or

prohibitions on fees and charges. These commenters stated that the

conference report, alone, without clear legislative action, does not

invalidate Sec. 7.8000's general preemption. After careful review of

the comments, the OCC has determined to adopt Sec. 7.4002 substantially

in the form proposed, with certain revisions discussed below.

Ten commenters also expressed concern over the OCC's statement in

the proposal that a national bank may charge customers ``reasonable''

charges and fees on dormant accounts, for credit reports or

investigations (Sec. 7.4002(a)), and for deposit account service

charges and loan-related fees generally (Sec. 7.4002(b)). These

commenters asserted that inclusion of the term ``reasonable'' in

connection with those areas adds uncertainty to their meaning and will

provide a basis for litigation over whether charges and fees are

``unreasonable'' and, therefore, impermissible under Sec. 7.4002.

The OCC notes that previous interpretive rulings on service charges

on dormant accounts and fees for credit reports or investigations

contained a ``reasonable'' standard. Therefore, for those fees and

charges, the final ruling continues this standard. However, the OCC

also recognizes the commenters' concerns. The final ruling clarifies,

in Sec. 7.4002(b), the intent of the proposal that banks have

discretion in setting the amount of charges and fees, and that any

charge or fee is ``reasonably'' established if the bank considered the

factors enumerated in the final ruling.

Some commenters also asserted that, if the references to ``loan-

related fees'' are included in the final ruling, the OCC should clarify

that these fees do not include fees that are components of ``interest''

under Sec. 7.4001. The OCC agrees with this comment. Therefore, the

final ruling omits the phrase ``loan-related fees'' wherever it appears

and instead refers to ``non-interest charges and fees'' and includes

deposit account service charges within non-interest charges and fees.

For additional clarity, the final ruling adds a new paragraph (c),

``Interest,'' that provides that charges and fees that are ``interest''

within the meaning of 12 U.S.C. 85 are governed by Sec. 7.4001 and not

by Sec. 7.4002. Proposed Sec. 7.4002(c) and (d), ``State law'' and

``National bank as fiduciary,'' respectively, have been redesignated as

paragraphs (d) and (e), respectively, in the final ruling.

The OCC also notes that the proposal's listing of the standards for

consideration in setting charges and fees inadvertently omitted the

factor appearing in former Sec. 7.8000(b)(2) on the deterrence of

misuse by customers of banking services. The final ruling incorporates

this factor.

State Licensing of National Banks

The proposal invited public comment on whether the OCC should

propose a specific ruling addressing the applicability of state

licensing requirements to national banks. The proposal did not contain

any specific language for an interpretive ruling but noted in the

preamble the OCC's longstanding position that the authority of a

national bank to exercise powers authorized for national banks under

Federal law cannot be negated by state licensing requirements. The

proposal also restated the principal elements of

[[Page 4860]]

Federal preemption analysis as articulated by the courts.

The OCC received 41 comments addressing this issue. Approximately

half of the commenters opposed issuing a ruling that they assumed would

attempt to preempt state licensing practices. These commenters cited

the OCC's lack of authority to issue a ruling, current litigation and

legislation on this matter, and arguments that states are better placed

to protect consumer interests. Commenters supporting a ruling noted

that it would promote competition by removing disparate treatment of

national banks located in different states. Due to the variety of state

laws that could be implicated and the complexity of the issues

presented, the OCC has decided not to address this area generically at

this time.

Other Sections Adopted in the Final Rule

The proposal contained a number of rulings that were not

substantively changed from the former rule. The OCC received some

comments addressing various aspects of these rulings. The OCC has

reviewed these comments and has decided not to make any changes to most

of these sections.

In addition, there are a number of rulings for which the OCC

proposed changes but did not receive any substantive comments. These

rulings also are adopted in the final rule as proposed or with

nonsubstantive stylistic edits.

The following is a list of these rulings:

Section 7.1001--National bank acting as general insurance agent;

Section 7.1007--Acceptances;

Section 7.1008--Preparing income tax returns for customers or

public;

Section 7.1009--National bank holding collateral stock as

nominee;

Section 7.1012--Messenger service;

Section 7.1014--Sale of money orders at nonbanking outlets;

Section 7.1015--Receipt of stock from a small business

investment company;

Section 7.1018--Automatic payment plan account;

Section 7.2002--Director or attorney as proxy;

Section 7.2003--Annual meeting for election of directors;

Section 7.2006--Cumulative voting in election of directors;

Section 7.2009--Quorum of the board of directors; proxies not

permissible;

Section 7.2012--President as director; chief executive officer;

Section 7.2013--Fidelity bonds covering officers and employees;

Section 7.2016--Restricting transfer of stock and record dates;

Section 7.2018--Lost stock certificates;

Section 7.2019--Loans secured by a bank's own shares;

Section 7.2021--Preemptive rights; and

Section 7.2022--Voting trusts.

Sections Removed From Part 7

The OCC also proposed to remove the following former rulings as

generally unnecessary, outdated or repetitive: Secs. 7.3000, 7.4005,

7.4015, 7.4100, 7.4200, 7.4205, 7.4400, 7.4410, 7.7000, 7.7015, 7.7400,

7.7405, 7.7410, 7.7415, 7.7505, 7.7519, and 7.7590. The OCC received no

comment on these sections, and the final rule removes them. The OCC has

also removed Sec. 7.7355 (regarding debts of affiliates) as it is no

longer necessary.

The following sections are also removed from part 7 or transferred

to 12 CFR part 31 for the reasons stated. This list and the list in the

immediately preceding paragraph do not describe sections that were

incorporated into other sections in part 7.

Section 7.1100--Capital and surplus. This section is no longer

needed.

Section 7.4010--Quorum for shareholders' meeting. This section

merely indicates that the statutes are silent with respect to the

number of shareholders required for a quorum. Therefore, this section

is superseded by the new Sec. 7.2000.

Section 7.5210--Same person holding offices of president and

cashier. There is no legal impediment to one person serving as both

president and cashier. Further, Sec. 7.2015, discusses the assignment

of the cashier's duties and clarifies that the duties of cashier may be

delegated to the president, chief executive officer, or other officer.

Section 7.5220--Contracts of employment. Any employment contract

that is excessive or unreasonable is unsafe and unsound. Therefore, the

current ``reasonable'' standard is necessarily in effect, so it is

unnecessary to reiterate the standard in this interpretive ruling.

Moreover, section 132 of the Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA) (12 U.S.C. 1831p-1), (regarding safety

and soundness standards), and regulations issued by the OCC and other

agencies under section 132 deal with excessive or unreasonable

contracts. See 12 U.S.C. 1831p-1 (c) and (d); 12 CFR part 30.

Section 7.7012--Foreign operations. This section has been removed

and is expected to be incorporated into pending revisions to part 28.

The removal of this section is not intended to imply any change in a

national bank's authority in this area.

Section 7.7115--Insuring lives of bank officers. OCC Banking

Circular 249 covers the relevant issues in more detail and is currently

undergoing review and revision. Therefore, Sec. 7.7115 is removed as

unnecessary.

Sections 7.7360--Loans secured by stock or obligation of an

affiliate, 7.7365--Federal funds transactions between affiliates, and

7.7370--Deposits between affiliated banks. These sections have been

transferred with some stylistic changes to 12 CFR 31.100, 31.101, and

31.102.

Sections 7.7378--Issuance of credit cards, 7.7379--Servicing of

mortgage and other loans as agent. The ability of national banks to

engage in these activities is well established and a specific

interpretive ruling is not needed.

Section 7.7530--Issuance of promissory notes. This section is

removed because it merely restates 12 U.S.C. 24 (Seventh).

Section 7.7540--Reports of condition: Waiver of affiliate reports.

Section 308 of the Riegle Community Development and Regulatory

Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160 (Sept. 23,

1994), eliminated the requirement that national banks and their

affiliates periodically publish the reports of condition in a

newspaper. See 12 U.S.C. 161.

The removal or transfer of these sections does not imply any

alteration of the underlying authority for national bank activity. The

interpretive rulings the OCC proposes to remove or transfer are

grounded in statutory authority that remains unchanged.

Other Sections

Finally, the OCC had proposed to move a number of sections to other

parts of title 12. These sections included Sec. 7.6040--Fractional

shares, 7.7570--Separate investment security limitations, and 7.6120--

Dividends payable in property other than cash. These sections have been

retained, with some minor stylistic changes, pending the issuance of

final rules for 12 CFR parts 1 and 5.

Distribution Table

The distribution table indicates where, if applicable, each section

of the former part 7 will appear in the final part 7 or elsewhere.

------------------------------------------------------------------------

Original provision Revised provision Comment

------------------------------------------------------------------------

Sec. 7.1100....... .................... Removed.

Sec. 7.1105....... Sec. 7.1020........ Modified.

Sec. 7.3000....... Sec. 7.1000........ Unchanged.

Sec. 7.3005....... Sec. 7.1000........ Significant change.

Sec. 7.3010....... Sec. 7.1000........ Significant change.

Sec. 7.3100....... Sec. 7.1000........ Significant change.

Sec. 7.3300....... Sec. 7.1000........ Significant change.

Sec. 7.3500....... Sec. 7.1019........ Significant change.

Sec. 7.4000....... Sec. 7.2001........ Significant change.

[[Page 4861]]

Sec. 7.4005....... .................... Removed.

Sec. 7.4010....... .................... Removed.

Sec. 7.4015....... .................... Removed.

Sec. 7.4020....... Sec. 7.2002........ Modified.

Sec. 7.4100....... .................... Removed.

Sec. 7.4105....... Sec. 7.2003........ Significant change.

Sec. 7.4110....... Sec. 7.2004........ Modified.

Sec. 7.4200....... .................... Removed.

Sec. 7.4205....... .................... Removed.

Sec. 7.4210....... Sec. 7.2005........ Significant change.

Sec. 7.4300....... Sec. 7.2006........ Significant change.

Sec. 7.4305....... Sec. 7.2007........ Significant change.

Sec. 7.4400....... .................... Removed.

Sec. 7.4410....... .................... Removed.

Sec. 7.4415....... Sec. 7.2008........ Modified.

Sec. 7.4420....... Sec. 7.2009........ Unchanged.

Sec. 7.4425....... Sec. 7.2010........ Significant change.

Sec. 7.5000....... Sec. 7.2011........ Significant change.

Sec. 7.5010....... Sec. 7.2011........ Significant change.

Sec. 7.5015....... Sec. 7.2011........ Significant change.

Sec. 7.5200....... Sec. 7.2012........ Modified.

Sec. 7.5210....... .................... Removed.

Sec. 7.5215....... Sec. 7.2013........ Unchanged.

Sec. 7.5217....... Sec. 7.2014........ Significant change.

Sec. 7.5220....... .................... Removed.

Sec. 7.5230....... Sec. 7.1000........ Significant change.

Sec. 7.5245....... Sec. 7.2015........ Significant change.

Sec. 7.6005....... Sec. 7.2016........ Modified.

Sec. 7.6010....... Sec. 7.2017........ Significant change.

Sec. 7.6015....... Sec. 7.2018........ Unchanged.

Sec. 7.6025....... Sec. 7.4000........ Significant change.

Sec. 7.6030....... Sec. 7.2019........ Modified.

Sec. 7.6040....... Sec. 7.2023........ Modified.

Sec. 7.6050....... Sec. 7.2021........ Modified.

Sec. 7.6060....... Sec. 7.2022........ Significant change.

Sec. 7.6120....... Sec. 7.2024........ Modified.

Sec. 7.7000....... .................... Removed.

Sec. 7.7010....... Sec. 7.1017........ Significant change.

Sec. 7.7012....... .................... Removed.

Sec. 7.7015....... .................... Removed.

Sec. 7.7016....... Sec. 7.1016........ Significant change.

Sec. 7.7100....... Sec. 7.1001........ Unchanged.

Sec. 7.7115....... .................... Removed.

Sec. 7.7200....... Sec. 7.1002........ Significant change.

Sec. 7.7310....... Sec. 7.4001........ Significant change.

Sec. 7.7312....... Sec. 7.1006........ Significant change.

Sec. 7.7315....... Sec. 7.4002........ Significant change.

Sec. 7.7355....... .................... Removed.

Sec. 7.7360....... .................... Moved (part 31).

Sec. 7.7365....... .................... Moved (part 31).

Sec. 7.7370....... .................... Moved (part 31).

Sec. 7.7378....... .................... Removed.

Sec. 7.7379....... .................... Removed.

Sec. 7.7380....... Sec. 7.1004........ Unchanged.

Sec. 7.7400....... .................... Removed.

Sec. 7.7405....... .................... Removed.

Sec. 7.7410....... .................... Removed.

Sec. 7.7415....... .................... Removed.

Sec. 7.7420....... Sec. 7.1007........ Unchanged.

Sec. 7.7430....... Sec. 7.1008........ Unchanged.

Sec. 7.7434....... Sec. 7.3000........ Significant change.

Sec. 7.7455....... Sec. 7.1009........ Unchanged.

Sec. 7.7482....... Sec. 7.1010........ Modified.

Sec. 7.7485....... Sec. 7.1011........ Modified.

Sec. 7.7490....... Sec. 7.1012........ Modified.

Sec. 7.7495....... Sec. 7.1013........ Significant change.

Sec. 7.7500....... Sec. 7.1014........ Modified.

Sec. 7.7505....... .................... Removed.

Sec. 7.7515....... Sec. 7.4002........ Significant change.

Sec. 7.7516....... Sec. 7.3001........ Significant change.

Sec. 7.7519....... .................... Removed.

Sec. 7.7530....... .................... Removed.

Sec. 7.7535....... Sec. 7.1015........ Unchanged.

Sec. 7.7540....... .................... Removed.

Sec. 7.7560....... Sec. 7.1018........ Modified.

Sec. 7.7570....... Sec. 7.1021........ Unchanged.

Sec. 7.7590....... .................... Removed.

Sec. 7.8000....... Sec. 7.4002........ Significant change.

------------------------------------------------------------------------

Derivation Table

This derivation table illustrates which former sections of part 7

the final sections are based upon.

------------------------------------------------------------------------

Revised provision Original provision Comment

------------------------------------------------------------------------

Sec. 7.1100........ Removed.

Sec. 7.1000...... Secs. 7.3000, Significant change.

7.3005, 7.3010,

7.3100, 7.3300,

7.5230.

Sec. 7.1001...... Sec. 7.7100........ Unchanged.

Sec. 7.1002...... Sec. 7.7200........ Significant change.

Sec. 7.1003...... .................... Added.

Sec. 7.1004...... Sec. 7.7380........ Unchanged.

Sec. 7.1005...... .................... Added.

Sec. 7.1006...... Sec. 7.7312........ Significant change.

Sec. 7.7405........ Removed.

Sec. 7.7410........ Removed.

Sec. 7.7415........ Removed.

Sec. 7.1007...... Sec. 7.7420........ Unchanged.

Sec. 7.1008...... Sec. 7.7430........ Unchanged.

Sec. 7.1009...... Sec. 7.7455........ Unchanged.

Sec. 7.1010...... Sec. 7.7482........ Modified.

Sec. 7.1011...... Sec. 7.7485........ Modified.

Sec. 7.1012...... Sec. 7.7490........ Modified.

Sec. 7.1013...... Sec. 7.7495........ Significant change.

Sec. 7.1014...... Sec. 7.7500........ Modified.

Sec. 7.7530........ Removed.

Sec. 7.1015...... Sec. 7.7535........ Unchanged.

Sec. 7.1016...... Sec. 7.7016........ Significant change.

Sec. 7.1017...... Sec. 7.7010........ Significant change.

Sec. 7.1018...... Sec. 7.7560........ Unchanged.

Sec. 7.1019...... Sec. 7.3500........ Significant change.

Sec. 7.1020...... Sec. 7.1105........ Modified.

Sec. 7.1021...... Sec. 7.7570........ Unchanged.

Sec. 7.2000...... .................... Added.

Sec. 7.2001...... Sec. 7.4000........ Significant change.

Sec. 7.4005........ Removed.

Sec. 7.4010........ Removed.

Sec. 7.4015........ Removed.

Sec. 7.2002...... Sec. 7.4020........ Modified.

Sec. 7.4100........ Removed.

Sec. 7.2003...... Sec. 7.4105........ Significant change.

Sec. 7.2004...... Sec. 7.4110........ Modified.

Sec. 7.4200........ Removed.

Sec. 7.4205........ Removed.

Sec. 7.2005...... Sec. 7.4210........ Significant change.

Sec. 7.2006...... Sec. 7.4300........ Significant change.

Sec. 7.2007...... Sec. 7.4305........ Significant change.

Sec. 7.4400........ Removed.

Sec. 7.4410........ Removed.

Sec. 7.2008...... Sec. 7.4415........ Modified.

Sec. 7.2009...... Sec. 7.4420........ Unchanged.

Sec. 7.2010...... Sec. 7.4425........ Significant change.

Sec. 7.2011...... Secs. 7.5000, Significant change.

7.5010, 7.5015.

Sec. 7.2012...... Sec. 7.5200........ Modified.

Sec. 7.5210........ Removed.

Sec. 7.2013...... Sec. 7.5215........ Unchanged.

Sec. 7.2014...... Sec. 7.5217........ Significant change.

Sec. 7.5220........ Removed.

Sec. 7.2015...... Sec. 7.5245........ Significant change.

Sec. 7.2016...... Sec. 7.6005........ Modified.

Sec. 7.2017...... Sec. 7.6010........ Significant change.

Sec. 7.2018...... Sec. 7.6015........ Unchanged.

Sec. 7.2019...... Sec. 7.6030........ Modified.

Sec. 7.2020...... .................... Added.

Sec. 7.2021...... Sec. 7.6050........ Modified.

Sec. 7.2022...... Sec. 7.6060........ Significant change.

Sec. 7.2023...... Sec. 7.6040........ Modified.

Sec. 7.2024...... Sec. 7.6120........ Unchanged.

Sec. 7.7000........ Removed.

Sec. 7.7012........ Removed.

Sec. 7.7015........ Removed.

Sec. 7.7115........ Removed.

Sec. 7.7355........ Removed.

Sec. 7.7360........ Moved (part 31).

Sec. 7.7365........ Moved (part 31).

Sec. 7.7370........ Moved (part 31).

Sec. 7.7378........ Removed.

Sec. 7.7379........ Removed.

Sec. 7.7400........ Removed.

Sec. 7.3000...... Sec. 7.7434........ Significant change.

Sec. 7.7505........ Removed.

Sec. 7.3001...... Sec. 7.7516........ Significant change.

Sec. 7.7519........ Removed.

Sec. 7.7540........ Removed.

Sec. 7.7590........ Removed.

Sec. 7.4000...... Sec. 7.6025........ Significant change.

Sec. 7.4001...... Sec. 7.7310........ Significant change.

Sec. 7.4002...... Secs. 7.7315, Significant change.

7.7515, 7.8000.

------------------------------------------------------------------------

Regulatory Flexibility Act

It is hereby certified that this regulation will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required. This

regulation will reduce the regulatory burden on national banks,

regardless of size, by simplifying and clarifying existing regulatory

requirements.

Executive Order 12866

The OCC has determined that the final rule is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4, 109 Stat. 48 (March 22, 1995) (Unfunded Mandates Act), requires

that an agency prepare a budgetary impact statement before promulgating

a rule that includes a Federal mandate that may result in the

expenditure by state, local, and tribal governments, in the aggregate,

or by the private sector, of $100 million or more in any one year. If a

budgetary impact statement is required, section 205 of the Unfunded

Mandates Act also requires an agency to identify and consider a

reasonable number of regulatory alternatives before

[[Page 4862]]

promulgating a rule. Because the OCC has determined that the final rule

will not result in expenditures by state, local, and tribal

governments, or by the private sector, of more than $100 million in any

one year, the OCC has not prepared a budgetary impact statement or

specifically addressed the regulatory alternatives considered.

Nevertheless, as discussed in the preamble, the final rule has the

effect of reducing burden.

Paperwork Reduction Act of 1995

The collection of information requirements contained in this final

rule have received approval from the Office of Management and Budget in

accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3507(d)), under OMB control number (1557-0204). Comments on the

collection of information should be sent to the Office of Management

and Budget, Paperwork Reduction Project 1557-0204, Washington, DC

20503, with copies to the Legislative and Regulatory Activities

Division 1557-0204, Office of the Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219. The OCC will submit the collection

of information requirements contained in this final rule for renewal of

OMB approval following publication of this final rule.

The collection of information requirements in this rule are found

in 12 CFR 7.1000(d)(1), 7.1014, 7.2000(b), 7.2004, and 7.2014(b). The

collections of information are necessary for regulatory and examination

purposes, for national banks to ensure their compliance with Federal

law and regulations, and to evidence bank compliance with various

regulatory requirements. National banks use the information to ensure

their compliance with applicable Federal banking law and regulations.

This information assists bank management in its safe and sound

operation of the bank. The OCC uses the information in the scheduling

and conduct of bank examinations and as an audit tool to verify bank

compliance with law and regulations.

Respondents are not required to respond to the foregoing collection

of information unless it displays a currently valid OMB control number.

The likely respondents are national banks.

Estimated average annual burden hours per recordkeeper: 1.7.

Estimated number of recordkeepers: 2,430.

Estimated total annual recordkeeping burden: 4,156.

Start-up costs to respondents: None.

List of Subjects

12 CFR Part 7

Credit, Insurance, Investments, National banks, Reporting and

recordkeeping requirements, Securities, Surety bonds.

12 CFR Part 31

Credit, National banks, Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons set out in the preamble, chapter I of title 12 of

the Code of Federal Regulations, is amended as follows:

1. Part 7 is revised to read as follows:

PART 7--INTERPRETIVE RULINGS

Subpart A--Bank Powers

Sec.

7.1000 National bank ownership of property.

7.1001 National bank acting as general insurance agent.

7.1002 National bank acting as finder.

7.1003 Money lent at banking offices or at other than banking

offices.

7.1004 Loans originating at other than banking offices.

7.1005 Credit decisions at other than banking offices.

7.1006 Loan agreement providing for a share in profits, income, or

earnings or for stock warrants.

7.1007 Acceptances.

7.1008 Preparing income tax returns for customers or public.

7.1009 National bank holding collateral stock as nominee.

7.1010 Postal service by national bank.

7.1011 National bank acting as payroll issuer.

7.1012 Messenger service.

7.1013 Debt cancellation contracts.

7.1014 Sale of money orders at nonbanking outlets.

7.1015 Receipt of stock from a small business investment company.

7.1016 Independent undertakings to pay against documents.

7.1017 National bank as guarantor or surety on indemnity bond.

7.1018 Automatic payment plan account.

7.1019 Furnishing of products and services by electronic means and

facilities.

7.1020 Purchase of open accounts.

7.1021 Separate investment security limitations.

Subpart B--Corporate Practices

7.2000 Corporate governance procedures.

7.2001 Notice of shareholders' meetings.

7.2002 Director or attorney as proxy.

7.2003 Annual meeting for election of directors.

7.2004 Honorary directors or advisory boards.

7.2005 Ownership of stock necessary to qualify as director.

7.2006 Cumulative voting in election of directors.

7.2007 Filling vacancies and increasing board of directors other

than by shareholder action.

7.2008 Oath of directors.

7.2009 Quorum of the board of directors; proxies not permissible.

7.2010 Directors' responsibilities.

7.2011 Compensation plans.

7.2012 President as director; chief executive officer.

7.2013 Fidelity bonds covering officers and employees.

7.2014 Indemnification of institution-affiliated parties.

7.2015 Cashier.

7.2016 Restricting transfer of stock and record dates.

7.2017 Facsimile signatures on bank stock certificates.

7.2018 Lost stock certificates.

7.2019 Loans secured by a bank's own shares.

7.2020 Acquisition and holding of shares as treasury stock.

7.2021 Preemptive rights.

7.2022 Voting trusts.

7.7023 Fractional shares.

7.2024 Dividends payable in property other than cash.

Subpart C--Bank Operations

7.3000 Bank hours and closings.

7.3001 Sharing space and employees.

Subpart D--Preemption

7.4000 Books and records of national banks.

7.4001 Charging interest at rates permitted competing institutions;

charging interest to corporate borrowers.

7.4002 National bank charges.

Authority: 12 U.S.C. 1 et seq. and 93a.

Subpart A--Bank Powers

Sec. 7.1000 National bank ownership of property.

(a) Investment in real estate necessary for the transaction of

business--(1) General. Under 12 U.S.C. 29(First), a national bank may

invest in real estate that is necessary for the transaction of its

business.

(2) Type of real estate. For purposes of 12 U.S.C. 29(First), this

real estate includes:

(i) Premises that are owned or occupied (or to be occupied, if

under construction) by the bank, its branches, or its consolidated

subsidiaries;

(ii) Real estate acquired and intended, in good faith, for use in

future expansion;

(iii) Parking facilities that are used by customers or employees of

the bank, its branches, and its consolidated subsidiaries;

(iv) Residential property for the use of bank officers or employees

who are:

(A) Located in remote areas where suitable housing at a reasonable

price is not readily available; or

(B) Temporarily assigned to a foreign country, including foreign

nationals

[[Page 4863]]

temporarily assigned to the United States; and

(v) Property for the use of bank officers, employees, or customers,

or for the temporary lodging of such persons in areas where suitable

commercial lodging is not readily available, provided that the purchase

and operation of the property qualifies as a deductible business

expense for Federal tax purposes.

(3) Permissible means of holding. A national bank may acquire and

hold real estate under this paragraph (a) by any reasonable and prudent

means, including ownership in fee, a leasehold estate, or in an

interest in a cooperative. The bank may hold this real estate directly

or through one or more subsidiaries. The bank may organize a bank

premises subsidiary as a corporation, partnership, or similar entity

(e.g., a limited liability company).

(b) Fixed assets. A national bank may own fixed assets necessary

for the transaction of its business, such as fixtures, furniture, and

data processing equipment.

(c) Investment in bank premises--(1) Investment limitation;

approval. 12 U.S.C. 371d governs when OCC approval is required for

national bank investment in bank premises.

(2) Option to purchase. An unexercised option to purchase bank

premises or stock in a corporation holding bank premises is not an

investment in bank premises. A national bank must receive OCC approval

to exercise the option if the price of the option and the bank's other

investments in bank premises exceed the amount of the bank's capital

stock.

(d) Other real property--(1) Lease financing of public facilities.

A national bank may purchase or construct a municipal building, school

building, or other similar public facility and, as holder of legal

title, lease the facility to a municipality or other public authority

having resources sufficient to make all rental payments as they become

due. The lease agreement must provide that the lessee will become the

owner of the building or facility upon the expiration of the lease.

(2) Purchase of employee's residence. To facilitate the efficient

use of bank personnel, a national bank may purchase the residence of an

employee who has been transferred to another area in order to spare the

employee a loss in the prevailing real estate market. The bank must

arrange for early divestment of title to such property.

Sec. 7.1001 National bank acting as general insurance agent.

Pursuant to 12 U.S.C. 92, a national bank may act as an agent for

any fire, life, or other insurance company in any place the population

of which does not exceed 5,000 inhabitants. This provision is

applicable to any office of a national bank when the office is located

in a community having a population of less than 5,000, even though the

principal office of such bank is located in a community whose

population exceeds 5,000.

Sec. 7.1002 National bank acting as finder.

(a) General. A national bank may act as a finder in bringing

together a buyer and seller.

(b) Qualification. Acting as a finder includes, without limitation,

identifying potential parties, making inquiries as to interest,

introducing or arranging meetings of interested parties, and otherwise

bringing parties together for a transaction that the parties themselves

negotiate and consummate. Acting as a finder does not include

activities that would characterize the bank as a broker under

applicable Federal law.

(c) Advertisement and fee. Unless otherwise prohibited, a national

bank may advertise the availability of, and accept a fee for, the

services provided pursuant to this section.

Sec. 7.1003 Money lent at banking offices or at other than banking

offices.

(a) General. For purposes of what constitutes a branch within the

meaning of 12 U.S.C. 36(j) and 12 CFR 5.30, ``money'' is deemed to be

``lent'' only at the place, if any, where the borrower in-person

receives loan proceeds directly from bank funds:

(1) From the lending bank or its operating subsidiary; or

(2) At a facility that is established by the lending bank or its

operating subsidiary.

(b) Receipt of bank funds representing loan proceeds. Loan proceeds

directly from bank funds may be received by a borrower in person at a

place that is not the bank's main office and is not licensed as a

branch without violating 12 U.S.C. 36, 12 U.S.C. 81 and 12 CFR 5.30,

provided that a third party is used to deliver the funds and the place

is not established by the lending bank or its operating subsidiary. A

third party includes a person who satisfies the requirements of

Sec. 7.1012(c)(2), or one who customarily delivers loan proceeds

directly from bank funds under accepted industry practice, such as an

attorney or escrow agent at a real estate closing.

Sec. 7.1004 Loans originating at other than banking offices.

(a) General. A national bank may use the services of, and

compensate persons not employed by, the bank for originating loans.

(b) Approval. An employee or agent of a national bank or of its

operating subsidiary may originate a loan at a site other than the main

office or a branch office of the bank. This action does not violate 12

U.S.C. 36 and 12 U.S.C. 81 if the loan is approved and made at the main

office or a branch office of the bank or at an office of the operating

subsidiary located on the premises of, or contiguous to, the main

office or branch office of the bank.

Sec. 7.1005 Credit decisions at other than banking offices.

A national bank and its operating subsidiary may make a credit

decision regarding a loan application at a site other than the main

office or a branch office of the bank without violating 12 U.S.C. 36

and 12 U.S.C. 81, provided that ``money'' is not deemed to be ``lent'

at those other sites within the meaning of Sec. 7.1003.

Sec. 7.1006 Loan agreement providing for a share in profits, income,

or earnings or for stock warrants.

A national bank may take as consideration for a loan a share in the

profit, income, or earnings from a business enterprise of a borrower. A

national bank also may take as consideration for a loan a stock warrant

issued by a business enterprise of a borrower, provided that the bank

does not exercise the warrant. The share or stock warrant may be taken

in addition to, or in lieu of, interest. The borrower's obligation to

repay principal, however, may not be conditioned upon the value of the

profit, income, or earnings of the business enterprise or upon the

value of the warrant received.

Sec. 7.1007 Acceptances.

A national bank is not limited in the character of acceptances it

may make in financing credit transactions. Bankers' acceptances may be

used for such purpose, since the making of acceptances is an essential

part of banking authorized by 12 U.S.C. 24.

Sec. 7.1008 Preparing income tax returns for customers or public.

A national bank may not serve as an expert tax consultant. However,

a national bank may assist its customers in preparing their tax

returns, either gratuitously or for a reasonable fee.

[[Page 4864]]

Sec. 7.1009 National bank holding collateral stock as nominee.

A national bank that accepts stock as collateral for a loan may

have such stock transferred to the bank's name as nominee.

Sec. 7.1010 Postal service by national bank.

(a) General. A national bank may maintain and operate a postal

substation on banking premises and receive income from it. The services

performed by the substation are those permitted under applicable rules

of the United States Postal Service and may include meter stamping of

letters and packages, and the sale of related insurance. The bank may

advertise, develop, and extend the services of the substation for the

purpose of attracting customers to the bank.

(b) Postal regulations. A national bank operating a postal

substation shall do so in accordance with the rules and regulations of

the United States Postal Service. The national bank shall keep the

books and records of the substation separate from those of other

banking operations. Under 39 U.S.C. 404 and any regulations issued

pursuant thereto, the United States Postal Service may inspect the

books and records of the substation.

Sec. 7.1011 National bank acting as payroll issuer.

A national bank may disburse to an employee of a customer payroll

funds deposited with the bank by that customer. The bank may disburse

those funds by direct payment to the employee, by crediting an account

in the employee's name at the disbursing bank, or by forwarding funds

to another institution in which an employee maintains an account.

Sec. 7.1012 Messenger service.

(a) Definition. For purposes of this section, a ``messenger

service'' means any service, such as a courier service or armored car

service, used by a national bank and its customers to pick up from, and

deliver to, specific customers at locations such as their homes or

offices, items relating to transactions between the bank and those

customers.

(b) Pick-up and delivery of items constituting nonbranching

activities. Pursuant to 12 U.S.C. 24 (Seventh), a national bank may

establish and operate a messenger service, or use, with its customers,

a third party messenger service. The bank may use the messenger service

to transport items relevant to the bank's transactions with its

customers without regard to the branching limitations set forth in 12

U.S.C. 36, provided the service does not engage in branching functions

within the meaning of 12 U.S.C. 36(j). In establishing or using such a

facility, the national bank may establish terms, conditions, and

limitations consistent with this section and appropriate to assure

compliance with safe and sound banking practices.

(c) Pick-up and delivery of items constituting branching functions

by a messenger service established by a third party. (1) Pursuant to 12

U.S.C. 24 (Seventh), a national bank and its customers may use a

messenger service to pick up from, and deliver to, customers items that

relate to branching functions within the meaning of 12 U.S.C. 36(j)

without regard to the branching limitations set forth in 12 U.S.C. 36,

provided the messenger service is established and operated by a third

party. In using such a facility, a national bank may establish terms,

conditions, and limitations, consistent with this section and

appropriate to assure compliance with safe and sound banking practices.

(2) The OCC reviews whether a messenger service is established by a

third party on a case-by-case basis, considering all of the

circumstances. However, a messenger service is clearly established by a

third party if:

(i) A party other than the national bank owns the service and its

facilities (or rents them from a party other than the bank) and employs

the person engaged in the provision of the service; and

(ii) The messenger service:

(A) Makes its services available to the public, including other

depository institutions;

(B) Retains ultimate discretion to determine which customers and

geographical areas it will serve;

(C) Maintains ultimate responsibility for scheduling, movement, and

routing;

(D) Does not operate under the name of the bank, and the bank and

the messenger service do not advertise, or otherwise represent, that

the bank itself is providing the service, although the bank may

advertise that its customers may use one or more third party messenger

services to transact business with the bank;

(E) Assumes responsibility for the items during transit and for

maintaining adequate insurance covering thefts, employee fidelity, and

other in-transit losses; and

(F) Acts as the agent for the customer when the items are in

transit. The bank does not deem items intended for deposit to be

deposited until credited to the customer's account at an established

bank office or other permissible nonbranch facility. The bank deems

items representing withdrawals to be paid when the items are given to

the messenger service.

(3) A national bank may defray all or part of the costs incurred by

a customer in transporting items through a messenger service. Payment

of those costs may only cover expenses associated with each transaction

involving the customer and the messenger service. The national bank may

impose terms, conditions, and limitations that it deems appropriate

with respect to the payment of such costs.

(d) Pickup and delivery of items pertaining to branching activities

where the messenger service is established by the national bank. A

national bank may establish and operate a messenger service to

transport items relevant to the bank's transactions with its customers

if such transactions constitute one or more branching functions within

the meaning of 12 U.S.C. 36(j), provided the bank receives approval to

establish a branch pursuant to 12 CFR 5.30.

Sec. 7.1013 Debt cancellation contracts.

A national bank may enter into a contract to provide for loss

arising from cancellation of an outstanding loan upon the death or

disability of a borrower. The imposition of an additional charge and

the establishment of necessary reserves in order to enable the bank to

enter into such debt cancellation contracts are a lawful exercise of

the powers of a national bank.

Sec. 7.1014 Sale of money orders at nonbanking outlets.

A national bank may designate bonded agents to sell the bank's

money orders at nonbanking outlets. The responsibility of both the bank

and its agent should be defined in a written agreement setting forth

the duties of both parties and providing for remuneration of the agent.

The bank's agents need not report on sales and transmit funds from the

nonbanking outlets more frequently than at the end of the third

business day following receipt of the funds.

Sec. 7.1015 Receipt of stock from a small business investment company.

A national bank may purchase the stock of a small business

investment company (SBIC) (see 15 U.S.C. 682(b)), and may receive the

benefits of such stock ownership (e.g., stock dividends). The receipt

and retention of a dividend by a national bank from an SBIC in the form

of stock of a corporate borrower of the SBIC is not a purchase of stock

within the meaning of 12 U.S.C. 24 (Seventh).

[[Page 4865]]

Sec. 7.1016 Independent undertakings to pay against documents.

(a) General authority. A national bank may issue and commit to

issue letters of credit and other independent undertakings within the

scope of the applicable laws or rules of practice recognized by

law.1 Under such letters of credit and other independent

undertakings, the bank's obligation to honor depends upon the

presentation of specified documents and not upon nondocumentary

conditions or resolution of questions of fact or law at issue between

the account party and the beneficiary. A national bank may also confirm

or otherwise undertake to honor or purchase specified documents upon

their presentation under another person's independent undertaking

within the scope of such laws or rules.

\1\ Samples of such laws or rules of practice include, but are

not limited to: the applicable version of Article 5 of the Uniform

Commercial Code (UCC) (1962, as amended 1990) or revised Article 5

of the UCC (as amended 1995) (available from West Publishing Co., 1/

800/340-9378); the Uniform Customs and Practice for Documentary

Credits (International Chamber of Commerce (ICC) Publication No.

500) (available from ICC Publishing, Inc., 212/206-1150); the United

Nations Commission on International Trade Law (UNCITRAL) Convention

on Independent Guarantees and Standby Letters of Credit (adopted by

UNCITRAL 1995) (available from UNCITRAL, 212/963-5353); and the

Uniform Rules for Bank-to-Bank Reimbursements Under Documentary

Credits (ICC Publication No. 525) (available from ICC Publishing,

Inc., 212/206-1150); as any of the foregoing may be amended from

time to time.

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(b) Safety and soundness considerations--(1) Terms. As a matter of

safe and sound banking practice, banks that issue independent

undertakings should not be exposed to undue risk. At a minimum, banks

should consider the following:

(i) The independent character of the undertaking should be apparent

from its terms (such as terms that subject it to laws or rules

providing for its independent character);

(ii) The undertaking should be limited in amount;

(iii) The undertaking should:

(A) Be limited in duration; or

(B) Permit the bank to terminate the undertaking either on a

periodic basis (consistent with the bank's ability to make any

necessary credit assessments) or at will upon either notice or payment

to the beneficiary; or

(C) Entitle the bank to cash collateral from the account party on

demand (with a right to accelerate the customer's obligations, as

appropriate); and

(iv) The bank either should be fully collateralized or have a post-

honor right of reimbursement from its customer or from another issuer

of an independent undertaking. Alternatively, if the bank's undertaking

is to purchase documents of title, securities, or other valuable

documents, the bank should obtain a first priority right to realize on

the documents if the bank is not otherwise to be reimbursed.

(2) Additional considerations in special circumstances. Certain

undertakings require particular protections against credit,

operational, and market risk:

(i) In the event that the undertaking is to honor by delivery of an

item of value other than money, the bank should ensure that market

fluctuations that affect the value of the item will not cause the bank

to assume undue market risk;

(ii) In the event that an undertaking provides for renewal, the

terms for renewal should be consistent with the bank's ability to make

any necessary credit assessments prior to renewal; and

(iii) In the event that a bank issues an undertaking for its own

account, the underlying transaction for which it is issued must be

within the bank's authority and comply with any safety and soundness

requirements applicable to that transaction.

(3) Operational expertise. The bank should possess operational

expertise that is commensurate with the sophistication of its

independent undertaking activities.

(4) Documentation. The bank must accurately reflect the bank's

undertakings in its records, including any acceptance or deferred

payment or other absolute obligation arising out of its contingent

undertaking.

(c) Coverage. An independent undertaking within the meaning of this

section is not subject to the provisions of Sec. 7.1017.

Sec. 7.1017 National bank as guarantor or surety on indemnity bond.

A national bank may lend its credit, bind itself as a surety to

indemnify another, or otherwise become a guarantor, if:

(a) The bank has a substantial interest in the performance of the

transaction involved (for example, a bank, as fiduciary, has a

sufficient interest in the faithful performance by a cofiduciary of its

duties to act as surety on the bond of such cofiduciary); or

(b) The transaction is for the benefit of a customer and the bank

obtains from the customer a segregated deposit that is sufficient in

amount to cover the bank's total potential liability. A segregated

deposit under this section includes collateral:

(1) In which the bank has perfected its security interest (for

example, if the collateral is a printed security, the bank must have

obtained physical control of the security, and, if the collateral is a

book entry security, the bank must have properly recorded its security

interest); and

(2) That has a market value, at the close of each business day,

equal to the bank's total potential liability and is composed of:

(i) Cash;

(ii) Obligations of the United States or its agencies;

(iii) Obligations fully guaranteed by the United States or its

agencies as to principal and interest; or

(iv) Notes, drafts, or bills of exchange or bankers' acceptances

that are eligible for rediscount or purchase by a Federal Reserve Bank;

or

(3) That has a market value, at the close of each business day,

equal to 110 percent of the bank's total potential liability and is

composed of obligations of a State or political subdivision of a State.

Sec. 7.1018 Automatic payment plan account.

A national bank may, for the benefit and convenience of its savings

depositors, adopt an automatic payment plan under which a savings

account will earn dividends at the current rate paid on regular savings

accounts. The depositor, upon reaching a previously designated age,

receives his or her accumulated savings and earned interest in

installments of equal amounts over a specified period.

Sec. 7.1019 Furnishing of products and services by electronic means

and facilities.

A national bank may perform, provide, or deliver through electronic

means and facilities any activity, function, product, or service that

it is otherwise authorized to perform, provide, or deliver. A national

bank may also, in order to optimize the use of the bank's resources,

market and sell to third parties electronic capacities acquired or

developed by the bank in good faith for banking purposes.

Sec. 7.1020 Purchase of open accounts.

(a) General. The purchase of open accounts is a part of the

business of banking and within the power of a national bank.

(b) Export transactions. A national bank may purchase open accounts

in connection with export transactions; the accounts should be

protected by insurance such as that provided by the Foreign Credit

Insurance Association and the Export-Import Bank.

Sec. 7.1021 Separate investment security limitations.

The 10 percent investment limitation of 12 U.S.C. 24 (Seventh) may

be

[[Page 4866]]

applied separately to each security issue of a single issuer of such

securities, if the proceeds of each issue are to be used to acquire and

lease real estate and related facilities to economically and legally

separate industrial tenants and each issue is payable solely from, and

secured by a first lien on, the revenues to be derived from rentals

paid by such lessee under net noncancellable leases.

Subpart B--Corporate Practices

Sec. 7.2000 Corporate governance procedures.

(a) General. A national bank proposing to engage in a corporate

governance procedure shall comply with applicable Federal banking

statutes and regulations, and safe and sound banking practices.

(b) Other sources of guidance. To the extent not inconsistent with

applicable Federal banking statutes or regulations, or bank safety and

soundness, a national bank may elect to follow the corporate governance

procedures of the law of the state in which the main office of the bank

is located, the law of the state in which the holding company of the

bank is incorporated, the Delaware General Corporation Law, Del. Code

Ann. tit. 8 (1991, as amended 1994, and as amended thereafter), or the

Model Business Corporation Act (1984, as amended 1994, and as amended

thereafter). A national bank shall designate in its bylaws the body of

law selected for its corporate governance procedures.

(c) No-objection procedures. The OCC also considers requests for

its staff's position on the ability of a national bank to engage in a

particular corporate governance procedure in accordance with the no-

objection procedures set forth in Banking Circular 205 or any

subsequently published agency procedures.2 Requests should

demonstrate how the proposed practice is not inconsistent with

applicable Federal statutes or regulations, and is consistent with safe

and sound banking practices.

\2\ Available upon request from the OCC Communications Division,

250 E Street, SW., Washington, DC 20219, (202) 874-4700.

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Sec. 7.2001 Notice of shareholders' meetings.

A national bank must mail shareholders notice of the time, place,

and purpose of all shareholders' meetings at least 10 days prior to the

meeting by first class mail, unless the OCC determines that an

emergency circumstance exists. Where a national bank is a wholly-owned

subsidiary, the sole shareholder is permitted to waive notice of the

shareholder's meeting. The articles of association, bylaws, or law

applicable to a national bank may require a longer period of notice.

Sec. 7.2002 Director or attorney as proxy.

Any person or group of persons, except the bank's officers, clerks,

tellers, or bookkeepers, may be designated to act as proxy. The bank's

directors or attorneys may act as proxy if they are not also employed

as an officer, clerk, teller or bookkeeper of the bank.

Sec. 7.2003 Annual meeting for election of directors.

When the day fixed for the regular annual meeting of the

shareholders falls on a legal holiday in the state in which the bank is

located, the shareholders' meeting shall be held, and the directors

elected, on the next following banking day.

Sec. 7.2004 Honorary directors or advisory boards.

A national bank may appoint honorary or advisory members of a board

of directors to act in advisory capacities without voting power or

power of final decision in matters concerning the business of the bank.

Any listing of honorary or advisory directors must distinguish between

them and the bank's board of directors or indicate their advisory

status.

Sec. 7.2005 Ownership of stock necessary to qualify as director.

(a) General. A national bank director must own a qualifying equity

interest in a national bank or a company that has control of a national

bank. The director must own the qualifying equity interest in his or

her own right and meet a certain minimum threshold ownership.

(b) Qualifying equity interest--(1) Minimum required equity

interest. For purposes of this section, a qualifying equity interest

includes common or preferred stock of the bank or of a company that

controls the bank that has not less than an aggregate par value of

$1,000, an aggregate shareholders' equity of $1,000, or an aggregate

fair market value of $1,000.

(i) The value of the common or preferred stock held by a national

bank director is valued as of the date purchased or the date on which

the individual became a director, whichever value is greater.

(ii) In the case of a company that owns more than one national

bank, a director may use his or her equity interest in the controlling

company to satisfy, in whole or in part, the equity interest

requirement for any or all of the controlled national banks.

(iii) Upon request, the OCC may consider whether other interests in

a company controlling a national bank constitute an interest equivalent

to $1,000 par value of national bank stock.

(2) Joint ownership and tenancy in common. Shares held jointly or

as a tenant in common are qualifying shares held by a director in his

or her own right only to the extent of the aggregate value of the

shares which the director would be entitled to receive on dissolution

of the joint tenancy or tenancy in common.

(3) Shares in a living trust. Shares deposited by a person in a

living trust (inter vivos trust) as to which the person is a trustee

and retains an absolute power of revocation are shares owned by the

person in his or her own right.

(4) Other arrangements. A director may also hold his or her

qualifying interest through profit sharing plans, individual retirement

accounts, retirement plans, and similar arrangements, provided the

director retains beneficial ownership and legal control over the

shares.

(c) Non-qualifying ownership. The following are not shares held by

a director in his or her own right:

(1) Shares pledged by the holder to secure a loan. However, all or

part of the funds used to purchase the required qualifying equity

interest may be borrowed from any party, including the bank or its

affiliates;

(2) Shares purchased subject to an absolute option vested in the

seller to repurchase the shares within a specified period; and

(3) Shares deposited in a voting trust where the depositor

surrenders:

(i) Legal ownership (depositor ceases to be registered owner of the

stock);

(ii) Power to vote the stock or to direct how it shall be voted; or

(iii) Power to transfer legal title to the stock.

Sec. 7.2006 Cumulative voting in election of directors.

When electing directors, a shareholder shall have as many votes as

the number of directors to be elected multiplied by the number of the

shareholder's shares. The shareholder may cast all these votes for one

candidate, or distribute the votes among as many candidates as the

shareholder chooses. If, after the first ballot, subsequent ballots are

necessary to elect directors, a shareholder may not vote shares that he

or she has already fully cumulated and voted in favor of a successful

candidate.

Sec. 7.2007 Filling vacancies and increasing board of directors other

than by shareholder action.

(a) Increasing board of directors. If authorized by the bank's

articles of

[[Page 4867]]

association, between shareholder meetings a majority of the board of

directors may increase the number of the bank's directors within the

limits specified in 12 U.S.C. 71a. The board of directors may increase

the number of directors only by up to two directors, when the number of

directors last elected by shareholders was 15 or fewer, and by up to

four directors, when the number of directors last elected by

shareholders was 16 or more.

(b) Vacancies. If a vacancy occurs on the board of directors,

including a vacancy resulting from an increase in the number of

directors, the vacancy may be filled by the shareholders, a majority of

the board of directors remaining in office, or, if the directors

remaining in office constitute fewer than a quorum, by an affirmative

vote of a majority of all the directors remaining in office.

Sec. 7.2008 Oath of directors.

(a) Administration of the oath. A notary public, including one who

is a director but not an officer of the national bank, may administer

the oath of directors. Any person, other than an officer of the bank,

having an official seal and authorized by the state to administer

oaths, may also administer the oath.

(b) Execution of the oath. Each director attending the organization

meeting shall execute either the joint or individual oath. A director

not attending the organization meeting (the first meeting after the

election of the directors) shall execute the individual oath. A

director shall take another oath upon re-election, notwithstanding

uninterrupted service. Appropriate sample oaths are located in the

``Comptroller's Manual for Corporate Activities.''

Sec. 7.2009 Quorum of the board of directors; proxies not permissible.

A national bank shall provide in its articles of association or

bylaws that for the transaction of business, a quorum of the board of

directors is at least a majority of the entire board then in office. A

national bank director may not vote by proxy.

Sec. 7.2010 Directors' responsibilities.

The business and affairs of the bank shall be managed by or under

the direction of the board of directors. The board of directors should

refer to OCC published guidance for additional information regarding

responsibilities of directors.

Sec. 7.2011 Compensation plans.

Consistent with safe and sound banking practices and the

compensation provisions of 12 CFR part 30, a national bank may adopt

compensation plans, including, among others, the following:

(a) Bonus and profit-sharing plans. A national bank may adopt a

bonus or profit-sharing plan designed to ensure adequate remuneration

of bank officers and employees.

(b) Pension plans. A national bank may provide employee pension

plans and make reasonable contributions to the cost of the pension

plan.

(c) Employee stock option and stock purchase plans. A national bank

may provide employee stock option and stock purchase plans.

Sec. 7.2012 President as director; chief executive officer.

Pursuant to 12 U.S.C. 76, the president of a national bank must be

a member of the board of directors, but a director other than the

president may be elected chairman of the board. A person other than the

president may serve as chief executive officer, and this person is not

required to be a director of the bank.

Sec. 7.2013 Fidelity bonds covering officers and employees.

(a) Adequate coverage. All officers and employees of a national

bank must have adequate fidelity coverage. The failure of directors to

require bonds with adequate sureties and in sufficient amount may make

the directors liable for any losses that the bank sustains because of

the absence of such bonds. Directors should not serve as sureties on

such bonds.

(b) Factors. The board of directors should determine the amount of

such coverage, premised upon a consideration of factors, including:

(1) Internal auditing safeguards employed;

(2) Number of employees;

(3) Amount of deposit liabilities; and

(4) Amount of cash and securities normally held by the bank.

Sec. 7.2014 Indemnification of institution-affiliated parties.

(a) Administrative proceedings or civil actions initiated by

Federal banking agencies. A national bank may only make or agree to

make indemnification payments to an institution-affiliated party with

respect to an administrative proceeding or civil action initiated by

any Federal banking agency, that are reasonable and consistent with the

requirements of 12 U.S.C. 1828(k) and the implementing regulations

thereunder. The term ``institution-affiliated party'' has the same

meaning as set forth at 12 U.S.C. 1813(u).

(b) Administrative proceeding or civil actions not initiated by a

Federal banking agency--(1) General. In cases involving an

administrative proceeding or civil action not initiated by a Federal

banking agency, a national bank may indemnify an institution-affiliated

party for damages and expenses, including the advancement of expenses

and legal fees, in accordance with the law of the state in which the

main office of the bank is located, the law of the state in which the

bank's holding company is incorporated, or the relevant provisions of

the Model Business Corporation Act (1984, as amended 1994, and as

amended thereafter), or Delaware General Corporation Law, Del. Code

Ann. tit. 8 (1991, as amended 1994, and as amended thereafter),

provided such payments are consistent with safe and sound banking

practices. A national bank shall designate in its bylaws the body of

law selected for making indemnification payments under this paragraph.

(2) Insurance premiums. A national bank may provide for the payment

of reasonable premiums for insurance covering the expenses, legal fees,

and liability of institution-affiliated parties to the extent that the

expenses, fees, or liability could be indemnified under paragraph

(b)(1) of this section.

Sec. 7.2015 Cashier.

A national bank's bylaws, board of directors, or a duly designated

officer may assign some or all of the duties previously performed by

the bank's cashier to its president, chief executive officer, or any

other officer.

Sec. 7.2016 Restricting transfer of stock and record dates.

(a) Conditions for stock transfer. Under 12 U.S.C. 52, a national

bank may impose conditions upon the transfer of its stock reasonably

calculated to simplify the work of the bank with respect to stock

transfers, voting at shareholders' meetings, and related matters and to

protect it against fraudulent transfers.

(b) Record dates. A national bank may close its stock records for a

reasonable period to ascertain shareholders for voting purposes. The

board of directors may fix a record date for determining the

shareholders entitled to notice of, and to vote at, any meeting of

shareholders. The record date should be in reasonable proximity to the

date that notice is given to the shareholders of the meeting.

Sec. 7.2017 Facsimile signatures on bank stock certificates.

The president and cashier, or other officers authorized by the

bank's

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bylaws, shall sign each national bank stock certificate. The signatures

may be manual or facsimile, including electronic means of signature.

Each certificate must be sealed with the seal of the association.

Sec. 7.2018 Lost stock certificates.

If a national bank does not provide for replacing lost, stolen, or

destroyed stock certificates in its articles of association or bylaws,

the bank may adopt procedures in accordance with Sec. 7.2000.

Sec. 7.2019 Loans secured by a bank's own shares.

(a) Permitted agreements, relating to bank shares. A national bank

may require a borrower holding shares of the bank to execute

agreements:

(1) Not to pledge, give away, transfer, or otherwise assign such

shares;

(2) To pledge such shares at the request of the bank when necessary

to prevent loss; and

(3) To leave such shares in the bank's custody.

(b) Use of capital notes and debentures. A national bank may not

make loans secured by a pledge of the bank's own capital notes and

debentures. Such notes and debentures must be subordinated to the

claims of depositors and other creditors of the issuing bank, and are,

therefore, capital instruments within the purview of 12 U.S.C. 83.

Sec. 7.2020 Acquisition and holding of shares as treasury stock.

Pursuant to the authority and procedures of 12 U.S.C. 59, a

national bank may acquire its outstanding shares and hold them as

treasury stock, provided that the acquisition and retention of the

shares is, and continues to be, for a legitimate corporate purpose. It

would not be permissible for a national bank to acquire or hold

treasury stock for speculation.

Sec. 7.2021 Preemptive rights.

A national bank in its articles of association must grant or deny

preemptive rights to the bank's shareholders. Any amendment to a

national bank's articles of association which modifies such preemptive

rights must be approved by a vote of the holders of two-thirds of the

bank's outstanding voting shares.

Sec. 7.2022 Voting trusts.

The shareholders of a national bank may establish a voting trust

under the applicable law of a state selected by the participants and

designated in the trust agreement, provided the implementation of the

trust is consistent with safe and sound banking practices.

Sec. 7.2023 Fractional shares.

To avoid complicated recordkeeping in connection with fractional

shares, a national bank issuing additional stock by stock dividend,

upon consolidation or merger, or otherwise, may adopt arrangements such

as the following to preclude the issuance of fractional shares. The

bank may:

(a) Issue scripts or warrants for trading in fractions;

(b) Make reasonable arrangements to provide those to whom

fractional shares would otherwise be issued an opportunity to realize

at a fair price upon the fraction not being issued through its sale, or

the purchase of the additional fraction required for a full share, if

there is an established and active market in the national bank's stock;

(c) Remit the cash equivalent of the fraction not being issued to

those to whom fractional shares would otherwise be issued. The cash

equivalent is based on the market value of the stock, if there is an

established and active market in the national bank's stock. In the

absence of such a market, the cash equivalent is based on a reliable

and disinterested determination as to the fair market value of the

stock if such stock is available; or

(d) Sell full shares representing all the fractions at public

auction, or to the highest bidder after having solicited and received

sealed bids from at least three licensed stock brokers. The national

bank shall distribute the proceeds of the sale pro rata to shareholders

who otherwise would be entitled to the fractional shares.

Sec. 7.2024 Dividends payable in property other than cash.

In addition to cash dividends, directors of a national bank may

declare dividends payable in property, with the approval of the OCC.

Even though the property distributed has been previously charged down

or written off entirely, the dividend is equivalent to a cash dividend

in an amount equal to the actual current value of the property. Before

the dividend is declared, the bank should show the excess of the actual

value over book value on the books of the national bank as a recovery,

and the dividend should then be declared in the amount of the full book

value (equivalent to the actual current value) of the property being

distributed.

Subpart C--Bank Operations

Sec. 7.3000 Bank hours and closings.

(a) Bank hours. A national bank's board of directors should review

its banking hours, and, independently of any other bank, take

appropriate action to establish a schedule of banking hours.

(b) Emergency closings. Pursuant to 12 U.S.C. 95(b)(1), the

Comptroller of the Currency (Comptroller), a state, or a legally

authorized state official may declare a day a legal holiday if

emergency conditions exist. That day is a legal holiday for national

banks or their offices in the affected geographic area (i.e.,

throughout the country, in a state, or in part of a state). Emergency

conditions include natural disasters and civil and municipal

emergencies (e.g., severe flooding, or a power emergency declared by a

local power company or government requesting that businesses in the

affected area close). The Comptroller issues a proclamation authorizing

the emergency closing in accordance with 12 U.S.C. 95 at the time of

the emergency condition, or soon thereafter. When the Comptroller, a

state, or a legally authorized state official declares a day to be a

legal holiday due to emergency conditions, a national bank may choose

to remain open or to close any of its banking offices in the affected

geographic area.

(c) Ceremonial closings. A state or a legally authorized state

official may declare a day a legal holiday for ceremonial reasons. When

a state or a legally authorized state official declares a day to be a

legal holiday for ceremonial reasons, a national bank may choose to

remain open or to close.

(d) Liability. A national bank should assure that all liabilities

or other obligations under the applicable law due to the bank's closing

are satisfied.

Sec. 7.3001 Sharing space and employees.

(a) Sharing space. A national bank may:

(1) Lease excess space on bank premises to one or more other

businesses (including other banks and financial institutions);

(2) Share space jointly held with one or more other businesses; or

(3) Offer its services in space owned or leased to other

businesses.

(b) Sharing employees. When sharing space with other businesses as

described in paragraph (a) of this section, a national bank may

provide, under one or more written agreements among the bank, the other

businesses, and their employees, that:

(1) A bank employee may act as agent for the other business; or

(2) An employee of the other business may act as agent for the

bank.

(c) Supervisory conditions. When a national bank engages in

arrangements of the types listed in paragraphs (a) and (b) of this

section, the bank shall ensure that:

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(1) The other business is conspicuously, accurately, and separately

identified;

(2) Shared employees clearly and fully disclose the nature of their

agency relationship to customers of the bank and of the other

businesses so that customers will know the identity of the bank or

business that is providing the product or service;

(3) The arrangement does not constitute a joint venture or

partnership with the other business under applicable state law;

(4) All aspects of the relationship between the bank and the other

business are conducted at arm's length, unless a special arrangement is

warranted because the other business is a subsidiary of the bank;

(5) Security issues arising from the activities of the other

business on the premises are addressed;

(6) The activities of the other business do not adversely affect

the safety and soundness of the bank;

(7) The shared employees or the entity for which they perform

services are duly licensed or meet qualification requirements of

applicable statutes and regulations pertaining to agents or employees

of such other business; and

(8) The assets and records of the parties are segregated.

(d) Other legal requirements. When entering into arrangements, of

the types described in paragraphs (a) and (b) of this section, and in

conducting operations pursuant to those arrangements the bank must

ensure that each arrangement complies with 12 U.S.C. 29 and 36 and with

any other applicable laws and regulations. If the arrangement involves

an affiliate or a shareholder, director, officer or employee of the

bank:

(1) The bank must ensure compliance with all applicable statutory

and regulatory provisions governing bank transactions with these

persons or entities;

(2) The parties must comply with all applicable fiduciary duties;

and

(3) The parties, if they are in competition with each other, must

consider limitations, if any, imposed by applicable antitrust laws.

Subpart D--Preemption

Sec. 7.4000 Books and records of national banks.

(a) Inspection. Except as otherwise expressly provided by Federal

law, including 12 U.S.C. 62, relating to the right of shareholders,

creditors, and certain tax officials to inspect the list of

shareholders of a bank, only the Comptroller of the Currency or the

Comptroller's authorized representatives are authorized to inspect

books or records of a national bank. Production of records may,

however, be required under normal judicial procedures.

(b) Visitorial powers. Except as otherwise expressly provided by

Federal law, the exercise of visitorial powers over national banks is

vested solely in the OCC, 12 U.S.C. 484. State officials have no

authority to conduct examinations or to inspect or require the

production of books or records of national banks, except for the

limited purpose of ensuring compliance with applicable state unclaimed

property and escheat laws. State authority to review the books and

records of a national bank is limited to those circumstances in which

there is reasonable cause to believe that the bank has failed to comply

with those laws. Federal law provides special procedures for verifying

payroll records for unemployment compensation purposes, 26 U.S.C.

3305(c), for enforcing the Fair Labor Standards Act, 29 U.S.C. 211, and

for ascertaining the correctness of Federal tax returns, 26 U.S.C.

7602.

(c) Report of examination. The report of examination made by an OCC

examiner is designated solely for use in the supervision of the bank.

The bank's copy of the report is the property of the OCC and is loaned

to the bank and any holding company thereof solely for its confidential

use. The bank's directors, in keeping with their responsibilities both

to depositors and to shareholders, should thoroughly review the report.

The report may be made available to other persons only in accordance

with the rules on disclosure in 12 CFR part 4.

Sec. 7.4001 Charging interest at rates permitted competing

institutions; charging interest to corporate borrowers.

(a) Definition. The term ``interest'' as used in 12 U.S.C. 85

includes any payment compensating a creditor or prospective creditor

for an extension of credit, making available of a line of credit, or

any default or breach by a borrower of a condition upon which credit

was extended. It includes, among other things, the following fees

connected with credit extension or availability: numerical periodic

rates, late fees, not sufficient funds (NSF) fees, overlimit fees,

annual fees, cash advance fees, and membership fees. It does not

ordinarily include appraisal fees, premiums and commissions

attributable to insurance guaranteeing repayment of any extension of

credit, finders' fees, fees for document preparation or notarization,

or fees incurred to obtain credit reports.

(b) Authority. A national bank located in a state may charge

interest at the maximum rate permitted to any state-chartered or

licensed lending institution by the law of that state. If state law

permits different interest charges on specified classes of loans, a

national bank making such loans is subject only to the provisions of

state law relating to that class of loans that are material to the

determination of the permitted interest. For example, a national bank

may lawfully charge the highest rate permitted to be charged by a

state-licensed small loan company, without being so licensed, but

subject to state law limitations on the size of loans made by small

loan companies.

(c) Effect on state definitions of interest. The Federal definition

of the term ``interest'' in paragraph (a) of this section does not

change how interest is defined by the individual states (nor how the

state definition of interest is used) solely for purposes of state law.

For example, if late fees are not ``interest'' under state law where a

national bank is located but state law permits its most favored lender

to charge late fees, then a national bank located in that state may

charge late fees to its intrastate customers. The national bank may

also charge late fees to its interstate customers because the fees are

interest under the Federal definition of interest and an allowable

charge under state law where the national bank is located. However, the

late fees would not be treated as interest for purposes of evaluating

compliance with state usury limitations because state law excludes late

fees when calculating the maximum interest that lending institutions

may charge under those limitations.

(d) Usury. A national bank located in a state the law of which

denies the defense of usury to a corporate borrower may charge a

corporate borrower any rate of interest agreed upon by a corporate

borrower.

Sec. 7.4002 National bank charges.

(a) Customer charges and fees. A national bank may charge its

customers non-interest charges and fees, including deposit account

service charges. For example, a national bank may impose deposit

account service charges that its board of directors determines to be

reasonable on dormant accounts. A national bank may also charge a

borrower reasonable fees for credit reports or investigations with

respect to a borrower's credit. All charges and fees should be arrived

at by each bank on a competitive basis and not on the basis of any

agreement, arrangement,

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undertaking, understanding, or discussion with other banks or their

officers.

(b) Considerations. The establishment of non-interest charges and

fees, and the amounts thereof, is a business decision to be made by

each bank, in its discretion, according to sound banking judgment and

safe and sound banking principles. A bank reasonably establishes non-

interest charges and fees if the bank considers the following factors,

among others:

(1) The cost incurred by the bank, plus a profit margin, in

providing the service;

(2) The deterrence of misuse by customers of banking services;

(3) The enhancement of the competitive position of the bank in

accordance with the bank's marketing strategy; and

(4) The maintenance of the safety and soundness of the institution.

(c) Interest. Charges and fees that are ``interest'' within the

meaning of 12 U.S.C. 85 are governed by Sec. 7.4001 and not by this

section.

(d) State law. The OCC evaluates on a case-by-case basis whether a

national bank may establish non-interest charges or fees pursuant to

paragraphs (a) and (b) of this section notwithstanding a contrary state

law that purports to limit or prohibit such charges or fees. In issuing

an opinion on whether such state laws are preempted, the OCC applies

preemption principles derived from the Supremacy Clause of the United

States Constitution and applicable judicial precedent.

(e) National bank as fiduciary. This section does not apply to

charges imposed by a national bank in its capacity as a fiduciary,

which are governed by 12 CFR part 9.

PART 31--EXTENSIONS OF CREDIT TO NATIONAL BANK INSIDERS

2. The authority citation for part 31 is revised to read as

follows:

Authority: 12 U.S.C. 375a(4), 375b(3), 1817(k), and

1972(2)(G)(ii).

3. Part 31 is amended by adding, at the end of the part, the

undesignated center heading ``Interpretations'' and new Secs. 31.100 to

31.102 to read as follows:

Interpretations

Sec. 31.100 Loans secured by stock or obligations of an affiliate.

A bank that makes a loan to an unaffiliated third party may take a

security interest in securities of an affiliate as collateral for the

loan without the loan being deemed a ``covered transaction'' under

section 23A of the Federal Reserve Act (12 U.S.C. 371c) if:

(a) The borrower provides additional collateral that meets or

exceeds the collateral requirements specified in section 23A(c) (12

U.S.C. 371c(c)); and

(b) The loan proceeds are not used to purchase the bank affiliate's

securities that serve as collateral.

Sec. 31.101 Federal funds transactions between affiliates.

The limitations contained in 12 U.S.C. 371c apply to the sale of

Federal funds by a national bank to an affiliate of the bank.

Sec. 31.102 Deposits between affiliated banks.

(a) General rule. The OCC considers a deposit made by a bank in an

affiliated bank to be a loan or extension of credit to the affiliate

under 12 U.S.C. 371c. These deposits must be secured in accordance with

12 U.S.C. 371c(c). However, a national bank may not pledge assets to

secure private deposits unless otherwise permitted by law (see, e.g.,

12 U.S.C. 90 (permitting collateralization of deposits of public

funds); 12 U.S.C. 92a (trust funds); and 25 U.S.C. 156 and 162a (Native

American funds)). Thus, unless one of the exceptions to 12 U.S.C. 371c

noted in paragraph (b) of this section applies or unless another

exception applies that enables a bank to meet the collateral

requirements of 12 U.S.C. 371c(c), a national bank may not:

(1) Make a deposit in an affiliated national bank;

(2) Make a deposit in an affiliated state-chartered bank unless the

affiliated state-chartered bank can legally offer collateral for the

deposit in conformance with applicable state law and 12 U.S.C. 371c; or

(3) Receive deposits from an affiliated bank.

(b) Exceptions. The restrictions of 12 U.S.C. 371c (other than 12

U.S.C. 371c(a)(4), which requires affiliate transactions to be

consistent with safe and sound banking practices) do not apply to

deposits:

(1) Made in the ordinary course of correspondent business; or

(2) Made in an affiliate that qualifies as a ``sister bank'' under

12 U.S.C. 371c(d)(1).

Dated: February 5, 1996.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 96-2903 Filed 2-8-96; 8:45 am]

BILLING CODE 4810-33-P