Regulation H

What Is Regulation H?

Regulation H outlines the requirements that state-chartered banks must adhere to upon becoming members of the Federal Reserve System (FRS). It also lists the procedures for membership and sets certain limits and conditions on some loan types. Regulation H specifies the duties expected of and privileges available to each member bank of the Federal Reserve System.

How Regulation H Works

Part of the regulation stipulates that a bank's capital must be sufficient for the condition of its assets, liabilities, and other corporate responsibilities. The capital required for each member bank is assessed according to the standards of Regulation H. Member banks cannot pay out dividends and other distributions if they do not meet the capital requirements.

Loans and Deposits

Regulation H contains several restrictions on loans and deposits. Part of the assessment process by the Federal Reserve System examines the loan-to-deposit ratio at banks. Interstate branches must not be used primarily for deposit production.

The Federal Reserve also reviews the loan operations of member banks. The Fed checks to see if they are making reasonable efforts to serve the credit needs of the communities in which they operate branches.

Stocks and Other Securities

The regulation also states the rules regarding the securities-related activities of member banks. The Securities Exchange Act of 1934 imposed these requirements on banks acting as transfer agents. Regulation H contains specific provisions regarding dealing in government securities. There are also special reporting requirements when a bank registers its own securities.

Real Estate Lending

Regulation H includes several rules related to real estate lending. Member banks must have written policies for real estate lending that are consistent with sound banking standards. There are also specific rules for extending real estate loans in areas designated as flood hazards by the Federal Emergency Management Agency (FEMA). Member banks may not create, increase, or renew such loans unless the property also has appropriate flood insurance.

Special Considerations: Crime Prevention

Member banks must apply security measures directed against certain crimes as outlined by the Bank Protection Act. Regulation H requires member banks to file reports on suspicious activity. Members must also comply with Bank Secrecy Act (BSA) requirements for recording and reporting foreign transactions.

Regulation H and the CFPB

The Consumer Financial Protection Bureau (CFPB) also has a Regulation H, which is not to be confused with the Fed's Regulation H. This regulation lays out requirements for the licensing of mortgage loan originators, based on the statutory mandates of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the SAFE Act). After the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act transferred rule-making authority for the implementation of the SAFE Act from the Fed to the newly established CFPB, and the Fed repealed its SAFE Act regulations.

Though both of these regulations share the designation "H" and involve banks and lending, they are separate and should not be confused.