WSR 17-19-119
PROPOSED RULES
DEPARTMENT OF
FINANCIAL INSTITUTIONS
[Filed September 20, 2017, 11:58 a.m.]
Original Notice.
Preproposal statement of inquiry was filed as WSR 17-03-115.
Title of Rule and Other Identifying Information: Chapter 208-512 WAC, Banks and trust companies; chapter 208-512A WAC, Limits on loans and extensions of credit. The proposed rules make some technical changes required due to the modernization of the bank and trust statutes by the 2014 legislature in Titles 30A and 30B RCW. The proposal amends chapter 208-512 WAC to also change securities investment standards for state-chartered banks as required under federal law, and amends chapter 208-512A WAC to provide for derivative lending limit rules for federal parity with the Office of Comptroller of the Currency as cited in 12 C.F.R. Parts 32, 159 and 160.
Hearing Location(s): On Tuesday, November 28, 2017, at 10:00 a.m., at the Department of Financial Institutions, 150 Israel Road S.W., Tumwater, WA 98501. Stakeholders will be provided instructions to join the hearing remotely either by phone or by other electronic means.
Date of Intended Adoption: December 1, 2017.
Submit Written Comments to: Ali Higgs, P.O. Box 41200, Olympia, WA 98504-1200, email ali.higgs@dfi.wa.gov, fax 360-704-7028, other banks@dfi.wa.gov, by November 21, 2017.
Assistance for Persons with Disabilities: Contact Angela Nutt, phone 360-902-8704, fax 360-704-6904, TTY 360-664-8126, email angela.nutt@dfi.wa.gov, other banks@dfi.wa.gov, by November 21, 2017.
Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The purpose of this rule making is to be in conformance with federal laws and regulations, as well as make technical changes and repeal outdated and inapplicable sections of WAC pertaining to state-chartered banks and trust companies.
The first proposal amends chapter 208-512 WAC to modernize securities investment standards for state-chartered banks as required under federal law, Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). These changes do not substantively change bank requirements, as banks already comply with federal law.
The second proposal amends chapter 208-512A WAC, specifically the derivative lending limit rules for federal parity with the Office of Comptroller of the Currency, as cited in 12 C.F.R. Parts 32, 159 and 160. A specific option available to national banks will now be available to state-chartered banks with respect to derivative activity.
The third proposal adopts a technical cleanup, modernization, or repeal of certain outdated or inapplicable sections of chapters 208-512 and 208-512A WAC. Specific clean-up efforts include: Changing "Title 30" to "Title 30A"; removing references to trust companies stemming from recodification of the Commercial Bank Act, 2014 c 37 § 1-70 and codifying the Washington Trust Institutions Act, 2014 c 37 § 301-701; moving toward gender neutral language; and repealing outdated WAC 208-512-020, 208-512-030, 208-512-050, 208-512-060, 208-512-120, 208-512-140, 208-512-150, 208-512-160, 208-512-170, 208-512-310, and 208-512-330.
Reasons Supporting Proposal: This is the first part of a multi-phase project to improve WAC pertaining to banks and trust companies to better comply with changes in federal law, clarify existing practices, improve readability by modernizing language, make technical changes to legal citations, as well as repeal outdated sections of WAC. Furthermore, these rules remove references to trust companies, which are no longer in the Commercial Bank Act, Title 30A RCW, and are chartered, regulated, and supervised under the Washington Trust Institutions Act, Title 30B RCW.
Statutory Authority for Adoption: Chapter 208-512 WAC is RCW 43.320.040, 43.320.050, 30A.04.030, 30B.04.020, and Section 939A of the Dodd-Frank Act. Chapter 208-512A WAC is RCW 43.320.040, 43.320.050, 30A.04.030, 30A.04.111, 30A.04.215, 30A.08.140, 30B.04.020, and 32.08.157.
Statute Being Implemented: Commercial Bank Act, 2014 c 37 § 1-70; Washington Trust Institutions Act, 2014 c 37 § 301-701.
Rule is necessary because of a federal law, Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act; 12 C.F.R. Parts 32, 159 and 160.
Name of Proponent: Department of financial institutions, governmental.
Name of Agency Personnel Responsible for Drafting: Ali Higgs, Seattle, Washington, 206-639-6050; Implementation and Enforcement: Roberta Hollinshead, Tumwater, Washington, 360-902-8704.
A school district fiscal impact statement is not required under RCW 28A.305.135.
A cost-benefit analysis is not required under RCW 34.05.328. A cost-benefit analysis is not required because the changes made to WAC are incorporating a federal statute or regulation and/or are providing clarifying language of a rule without changing WAC's effect. A copy of such analysis supporting this conclusion is available upon request.
This rule proposal, or portions of the proposal, is exempt from requirements of the Regulatory Fairness Act because the proposal:
Is exempt under RCW 19.85.061 because this rule making is being adopted solely to conform and/or comply with federal statute or regulations. Citation of the specific federal statute or regulation and description of the consequences to the state if the rule is not adopted: Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, these rules are required under federal law. Not adopting these rules creates uncertainty for state-chartered banks.
12 C.F.R. Parts 32, 159 and 160, these derivative rules are available to national banks, and not adopting this approach may create unfairness between the state and national bank charters.
Is exempt under RCW 19.85.025(3) as the rules are adopting or incorporating by reference without material change federal statutes or regulations, Washington state statutes, rules of other Washington state agencies, shoreline master programs other than those programs governing shorelines of statewide significance, or, as referenced by Washington state law, national consensus codes that generally establish industry standards, if the material adopted or incorporated regulates the same subject matter and conduct as the adopting or incorporating rule; rules only correct typographical errors, make address or name changes, or clarify language of a rule without changing its effect; and rule content is explicitly and specifically dictated by statute.
Explanation of exemptions: Because requested changes are to be in conformity with federal law, or impose no impact or are cost-neutral to small businesses, a small business economic impact statement will not be filed in relation to the rule making for chapters 208-512 and 208-512A WAC. A copy of such analysis supporting this conclusion is available upon request.
September 20, 2017
Roberta Hollinshead, Director
Division of Banks
NEW SECTION
WAC 208-512-010 Definitions.
(1) "Bank" means a commercial bank chartered and regulated under Title 30A RCW, a mutual or stock savings bank chartered and regulated under Title 32 RCW, or a savings association chartered under the provisions of Title 33 RCW.
(2) "Community Reinvestment Act" as defined in this chapter shall be identical to the corresponding definitions set forth in the Community Reinvestment Act of 1977, 12 U.S.C. 2901, et seq. and regulations promulgated under the Federal Reserve Board's Regulation BB, 12 C.F.R. Part 228; provided, these definitions are not inconsistent with the context used, or otherwise defined, in this regulation or in chapter 30A.60 RCW.
(3) "Director" means the director of the division of banks of the department of financial institutions.
(4) "Division" means the division of banks of the department of financial institutions.
(5) "Financial subsidiary," in relation to a bank, has the same meaning that it does in relation to a national bank pursuant to the Gramm-Leach-Bliley Act of 1999, 12 U.S.C. 93a, et seq. and regulations promulgated under the Office of the Comptroller of the Currency, 12 C.F.R., Section 5.39 (d)(6).
(6) "Investment grade" means the issuer of a security has an adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest is expected.
(7) "Investment security" or "investment securities" means a marketable obligation that is investment grade and not predominantly speculative in nature. Such obligations may be represented by an indebtedness of any person, copartnership, association, or corporation; an indebtedness of the government of the United States or any agency thereof; an indebtedness of any state, or political subdivision thereof; or an indebtedness of any publicly owned entity that is an instrumentality of a state or municipal corporation in the form of bonds, notes, and/or debentures.
(8) "Marketable" means that the security:
(a) Is registered under the Securities Act of 1933, 15 U.S.C. 77a et seq.;
(b) Is a municipal revenue bond exempt from registration under the Securities Act of 1933, 15 U.S.C. 77c (a)(2);
(c) Is offered and sold pursuant to Securities and Exchange Commission Rule 144A, 17 C.F.R., Sec. 230.144A, and investment grade; or
(d) Can be sold with reasonable promptness at a price that corresponds reasonably to its fair value.
(9) "Qualifying community investment" means any direct or indirect investment or extension of credit made by a bank in projects or programs designed to develop or redevelop areas in which persons with low-incomes or moderate-incomes reside, designed to meet the credit needs of such low-income or moderate-income areas, or that primarily benefits low-income and moderate-income residents of such areas. 
(a) This term includes, but is not limited to, any of the following investments within the state of Washington:
(i) Investments in governmentally insured, guaranteed, subsidized, or otherwise sponsored programs for housing, small farms, or businesses that address the needs of the low-income and moderate-income areas.
(ii) Investments in residential mortgage loans, home improvement loans, housing rehabilitation loans, and small business or small farm loans originated in low-income and moderate-income areas, or the purchase of such loans originated in low-income and moderate-income areas.
(iii) Investments for the preservation or revitalization of urban or rural communities in low-income and moderate-income areas.
(b) The term does not include personal installment loans, or loans made for the purchase of, or secured by, an automobile.
(10) "Type I security" means:
(a) Obligations of the United States;
(b) Obligations issued, insured, or guaranteed by a department or agency of the United States, including obligations of such departments or agencies representing an interest in a loan or pool of loans;
(c) General obligations of a state or political subdivision including, but not limited to, obligations of a county, city, town, municipal corporation, or any publicly owned entity that is an instrumentality of a state or municipal corporation;
(d) Obligations of any state or political subdivision of a state if a state or political subdivision of a state having general powers of taxation has unconditionally promised to make sufficient funds available for full repayment of the obligation; and
(e) Revenue bonds issued by public improvement agencies.
(11) "Type II security" means:
(a) Obligations issued by any state or political subdivision, or any agency of a state or political subdivision for housing, university or dormitory purposes.
(b) Obligations issued by any state or a political subdivision for the purpose of financing the construction or improvement of facilities at or used by a university or a degree-granting college-level institution, or financing loans for studies at such institutions; and
(c) Obligations which finance the construction or improvement of facilities used by a hospital, provided that the hospital is a department or a division of a university, or otherwise provides a sufficient nexus with university purposes.
(12) "Type III security" means an investment security that does not qualify as a Type I, II, IV, or V security. Examples of Type III securities include corporate bonds and municipal bonds that do not satisfy the definition of a Type I security or a Type II security.
(13) "Type IV security" means:
(a) A small business-related security as defined in section 3 (a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C. 78c (a)(53)(A), that is fully secured by interests in a pool of loans to numerous obligors.
(b) A commercial mortgage-related security that is offered or sold pursuant to Section 4(5) of the Securities Act of 1933, 15 U.S.C. 77d(5), that is investment grade, or a commercial mortgage-related security as described in Section 3 (a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 78c (a)(41), that represents ownership of a promissory note or certificate of interest or participation that is directly secured by a first lien on one or more parcels of real estate upon which one or more commercial structures are located and that is fully secured by interests in a pool of loans to numerous obligors.
(c) A residential mortgage-related security that is offered and sold pursuant to Section 4(5) of the Securities Act of 1933, 15 U.S.C. 77d(5), that is investment grade, or a residential mortgage-related security as described in Section 3 (a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 78c (a)(41) that does not otherwise qualify as a Type I security.
(14) "Type V security" means a security that is:
(a) Investment grade;
(b) Marketable;
(c) Not a Type IV security; and
(d) Fully secured by interests in a pool of loans to numerous obligors and in which a bank could invest directly.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-070 Nonbankable assets.
(1) In determining whether an asset of a bank((, mutual savings bank or trust company)) is bankable, all of the circumstances of the asset shall be weighed((,)) including, but not limited to, the following:
(((1))) (a) Character of the borrower;
(((2))) (b) Capacity of the borrower;
(((3))) (c) Capital of the borrower;
(((4))) (d) Sufficiency of the collateral((, sufficiency of));
(((5))) (e) Economic conditions pertaining to the type of business in which the borrower is engaged; and
(((6))) (f) Conformance to general banking standards as then currently practiced in the banking industry.
(2) If((, in the examination of a bank, mutual savings bank or trust company,)) an examiner ((finds)) determines that an asset ((which in his opinion, after weighing all the circumstances of the asset,)) is nonbankable((, the director may require that such asset be charged off the books of the bank, mutual savings bank or trust company.
Within fifteen days following the next meeting of the board of directors following receipt of written notice from the director to charge off such asset, but in no event more than forty-five days following receipt of such written notice, the bank, mutual savings bank or trust company, shall write the same off as an asset or file)) based on the circumstances weighed in subsection (1)(a) through (f) of this section, the bank must charge-off the asset within thirty days of receipt of the written report of examination, or by the next call report submission date, whichever is longer.
(3) Such charge-off is deemed conclusive, unless it is contested before the expiration of the time period stated in subsection (2) of this section.
(4) A contested charge-off must be in the form of a written statement filed with the director explaining why((, in its opinion,)) the asset should not be ((so treated)) charged off.
(5) After ((considering)) consideration of such written statement and within ((ten)) forty-five days ((after receipt thereof)), the director will notify the bank in writing of his or her decision as to the treatment of the asset. The director's written notification shall be deemed conclusive as to the disposition of the asset.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-080 Purchase or sale of ((United States government)) investment securitiesResale or repurchase agreement.
The purchase or sale of investment securities ((of, or fully guaranteed as to principal and interest by, the United States government and agencies thereof, or a fractional undivided interest therein by a bank,)) under an agreement ((or agreements)) to resell or repurchase the interest transferred, or a portion thereof, at the end of a stated period, ((shall)) does not constitute an obligation subject to the lending ((limit of RCW 30.04.110, an indebtedness or liability of the bank within the meaning of RCW 30.04.150, a borrowing for the purposes of reloaning within the meaning of RCW 30.04.160, nor)) limits under RCW 30A.04.111 and chapter 208-512A WAC and is not considered a pledge or hypothecation of investment securities or assets of the bank to a depositor ((or creditor)) within the meaning of RCW ((30.04.140)) 30A.04.140.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-090 Purchase or sale of ((United States government)) investment securities ((solely for customers' account not within purview of RCW 30.04.200))For customer or institution accounts allowable.
((The provisions of RCW 30.04.200 shall not prohibit banks or the officers or employees thereof in the course of their employment from purchasing and selling securities and stocks without recourse, solely)) Subject to the Federal Reserve Board's Regulation R, 12 C.F.R. Part 218, a bank may purchase and sell investment securities upon the order and for the account of its customers ((of the bank, or from dealing)) and may deal in((,)) the underwriting and purchasing of investment securities for the ((account of the bank obligations of, or obligations guaranteed as to principal and interest by, the United States or agencies thereof or of any state or political subdivision thereof)) bank's investment account subject to WAC 208-512-510 through 208-512-517, inclusive.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-100 Leasing bank premisesLimitations.
(1) A bank ((or trust company)) may lease part of the premises in which it conducts its day-to-day business ((pursuant to RCW 30.04.210)) to persons engaged in nonbanking ((or nontrust)) business activities subject to the following limitations:
(((1))) (a) No director, officer, or employee of such bank ((or trust company)) may have any direct or indirect financial interest ((in)) exceeding ten percent of the lessee's business activities conducted on the premises leased, unless the transaction is made on substantially the same terms as those prevailing at the same time for comparable transactions by the bank with other persons who are not affiliated with the institution, and the transaction has been approved in advance by a majority of the board of the directors of the institution;
(((2))) (b) No bank ((or trust company)) may receive commissions or other revenues from the lessee other than periodic rental payments received under terms that are usual and customary in leasing space used for similar commercial purposes, as determined by the ((supervisor)) director;
(((3))) (c) No lessee may have access to ((security)) secure areas of the ((bank or trust company's)) bank's premises((, nor may)) and a lessee may not conduct business activities on a ((bank or trust company's)) bank's premises other than during regular banking hours;
(((4))) (d) No director, officer, or employee of a bank ((or trust company)) may be employed by, or serve in any fiduciary capacity for, a corporation or other person leasing the premises of such bank ((or trust company)) for such business activities;
(((5))) (e) No bank ((or trust company)) may exercise managerial control over the lessee's business activities or assume, guarantee, or otherwise become obligated for the lessee's debts or legal obligations;
(((6))) (f) No bank ((or trust company)) may advertise a lessee's business activities conducted on such ((bank or trust company's)) bank's premises as a service provided by the bank ((or trust company)), or otherwise represent that the lessee's business activities are not independently owned and operated;
(((7))) (g) No bank ((or trust company)) may use tying arrangements involving the sale of a lessee's goods or services offered on such ((bank or trust company's)) bank's premises or in any other way require purchase of a lessee's goods or services as a condition for granting credit or performing services.
(((8))) (2) For purposes of this section, the term "bank ((or trust company))" means any person or corporation operating under the provisions of Title ((30)) 30A, 32, or 33 RCW directly or indirectly affiliated with the lessor.
AMENDATORY SECTION (Amending WSR 01-06-024, filed 2/27/01, effective 3/30/01)
WAC 208-512-110 Investment securitiesPermissible investments.
((A bank or trust company may purchase or hold obligations of a single obligor which are "investment securities," as defined below, and meet the following guidelines for proper "investment security" management. The term "investment security" shall mean a marketable obligation evidencing indebtedness of any person, copartnership, association, or corporation; of the government of the United States or any agency thereof; of any state, or political subdivision thereof; or of any publicly owned entity that is an instrumentality of a state or municipal corporation in the form of bonds, notes, and/or debentures. They exclude investments which are predominately speculative but shall include:))
(1) Permissible investments include the following investment security types, subject to specific capital limitations:
(a) Type I ((securities)) security, which a bank may deal in, purchase, and sell for its own account without any capital and surplus limitation. ((These securities include:
(a) Obligations of the United States;
(b) Obligations issued, insured, or guaranteed by a department or agency of the United States, including obligations of such departments or agencies representing an interest in a loan or pool of loans;
(c) General obligations of a state or political subdivision including but not limited to obligations of a county, city, town, municipal corporation, or any publicly owned entity that is an instrumentality of a state or municipal corporation;
(d) Obligations of any state or political subdivision of a state if a state or political subdivision of a state having general powers of taxation has unconditionally promised to make sufficient funds available for full repayment of the obligation; and
(e) Revenue bonds issued by public improvement agencies.
(2))) (b) Type II ((securities)) security, which a bank may deal in, purchase and sell for its own account subject to a twenty percent of capital and surplus limitation ((and)), in addition to any limitation set forth in WAC ((50-12-115 (2)(c). These include obligations issued by any state or political subdivision, or any agency of a state or political subdivision for housing, university or dormitory purposes. Such obligations include:
(a) Obligations issued by any state or a political subdivision for the purpose of financing the construction or improvement of facilities at or used by a university or a degree-granting college-level institution, or financing loans for studies at such institutions; and
(b) Obligations which finance the construction or improvement of facilities used by a hospital, provided that the hospital is a department or a division of a university, or otherwise provides a sufficient nexus with university purposes.
(3))) 208-512-115(1).
(c) Type III ((securities)) security which a bank may purchase and sell for its own account with a twenty percent of capital and surplus limitation ((and)), in addition to any limitation set forth in WAC 208-512-115 (((2)(c), but may not deal in. These include investment securities issued by corporations, provided that such securities have received in the most recent edition one of the four highest rating grades by Standard and Poor's, Moodys, or equivalent rating service. Unrated securities must be investment grade and be of equivalent quality to the four highest rating grades and where the investment characteristics are distinctly or predominately not speculative)) (1).
(d) Type IV security, which a bank may purchase and sell for its own account without any capital and surplus limitation.
(e) Type V security, which a bank may purchase and sell for its own account with a twenty-five percent of capital and surplus limitation.
(2) Any investment security held by a bank, regardless of investment security type, must be considered investment grade.
AMENDATORY SECTION (Amending WSR 01-06-024, filed 2/27/01, effective 3/30/01)
WAC 208-512-115 Investment securitiesProper management.
(1) ((A bank may purchase a Type I security for its own account, provided it is permissible under the provisions of Title 30 RCW and this regulation, if through prudent banking judgment it determines there is adequate evidence that the obligor will be able to perform all necessary undertakings in connection with the security, including all debt service requirements.
(2)(a) A bank may purchase a Type II or III security for its own account when through prudent banking judgment (which may be based in part upon estimates which it believes to be reliable), it determines that there is adequate evidence that the obligor will be able to perform all that it undertakes to perform in connection with the security, including all debt service requirements, and that the security is marketable so that it can be sold with relative promptness at a fair market value.
(b) A bank may, subject to the limitations set forth in (c) of this subsection, purchase a security of Type II or III for its own account although its judgment with respect to the obligor's ability to perform is based predominantly upon estimates it believes to be reliable. This subsection permits a bank to exercise a somewhat broader range of judgment with respect to a more restricted portion of its investment portfolio.
(c))) If a bank holds at any time Type II or III securities ((which would not be eligible for purchase pursuant to (a) of this subsection in a total amount in excess of)) that are not considered investment grade and represent an aggregate par value exceeding five percent of the bank's capital and surplus, ((they are to)) the investment securities must be charged down to market value, or a specific reserve ((is to)) must be established within ninety days.
(((3))) (2) Each bank shall maintain in its files credit information adequate to demonstrate that it has exercised prudence in ((making the determinations and)) carrying out the securities-related transactions involving the underwriting, the dealing in, and the purchase and sale of investment securities. This information shall be retained:
(a) When investment securities are purchased for the bank's own portfolio, as long as the investment security remains in the portfolio;
(b) When investment securities are underwritten by the bank, for the maturity or the life of the investment security; and
(c) With regard to dealer activities, for periods set forth in the relevant rules of the municipal securities rule-making board.
(((4))) (3) When a bank purchases an investment security convertible into stock, or with stock purchase warrants attached, entries must be made by the bank at the time of purchase to write down the cost of such investment security to an amount ((which)) that represents the investment value of the investment security ((considered independently)) independent of the conversion feature or attached stock purchase warrants. Purchase of investment securities convertible into stock at the option of the issuer is prohibited.
(((5))) (4) When an investment security is purchased at a price exceeding par or face value, the bank shall:
(a) Charge off the entire premium at the time of purchase; or
(b) Provide for a program to amortize the premium paid or that portion of premium remaining after the write-down subject to subsection (((2))) (1) of this section so that such premium or portion thereof shall be entirely extinguished at or before the maturity of the investment security.
(((6))) (5) Each bank shall take measures to ((insure)) ensure the cumulative investment holdings do not exceed the limitations for a specific investment set forth in Title ((30)) 30A, 32, and 33 RCW, as applicable.
(((7))) (6) The board of directors, a committee thereof, or a duly appointed committee of senior level management shall review at least quarterly the bank's investment portfolio to ((insure)) ensure compliance with the provisions contained in WAC 208-512-110 through ((208-512-116)) 208-512-117, inclusive.
(((8))) (7) The restrictions and limitations set forth in this section do not apply to securities acquired through foreclosure on collateral, or acquired in good faith by way of compromise of a doubtful claim, or to avoid a loss in connection with a debt previously contracted.
AMENDATORY SECTION (Amending WSR 01-06-024, filed 2/27/01, effective 3/30/01)
WAC 208-512-116 Investment securitiesInvestment in investment companies.
A bank ((or trust company)) may invest in shares of an investment company provided that all of the following conditions are met:
(1) The investment company must be registered with Securities and Exchange Commission under the Investment Company Act of 1940 and the Securities Act of 1933 or be a privately offered fund sponsored by an affiliated commercial bank.
(2) The shareholder has a fair and equal proportionate undivided interest in the underlying assets of the investment company calculated pursuant to the Investment Company Act of 1940.
(3) When an investment company's assets consist solely of and are expressly limited to obligations that are eligible for unlimited investment (Type I) as described in WAC 208-512-100, there is no limit on the bank's investment. However, where the investment ((companies)) company's portfolio contains, or is permitted to contain, investment securities subject to the bank's investment or lending limitations, investment by the bank shall be subject to a twenty percent of capital and surplus limitation.
(4) The shareholders are protected against personal liability for acts or obligations of the investment company.
(5) The bank's investment policy, as formally approved by its board of directors, specifically provides for such investments; prior approval of the board of directors is obtained for initial investments in specific investment companies and recorded in the official board minutes; and procedures, standards, and controls for managing such investments are implemented prior to ((acquirement of)) acquiring these investments.
(6) If the investment company makes use of futures, forwards, options, repurchase agreements and securities lending arrangements, their use must be consistent with standards adopted for use of such instruments in the bank's portfolio.
(7) Regulatory reporting of holdings in investment companies is consistent with established standards for (("))marketable ((equity)) investment securities.(("))
AMENDATORY SECTION (Amending WSR 01-06-024, filed 2/27/01, effective 3/30/01)
WAC 208-512-117 Investment((s)) securitiesInvestments in corporations.
Nothing in WAC 208-512-110, 208-512-115, or 208-512-116 shall limit the authority of a bank ((or trust company)) to invest in corporations or entities((,)) pursuant to chapters 32.20 and 33.24 RCW, or with the prior authorization of the director((,)) pursuant to RCW ((30.04.127, (section 1, chapter 498, Laws of 1987))) 30A.04.127.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-130 Community Reinvestment ActPurpose.
((This regulation is)) WAC 208-512-180 and 208-512-190, inclusive, are intended to further refine the requirements under chapter 30A.60 RCW and RCW 30A.04.212 to encourage banks ((chartered under Title 30 RCW)) to help meet the credit needs of their local ((community or)) communities((; to provide guidance to banks as to how the division will assess the records of these banks)) in satisfying their continuing and affirmative obligations to help meet the credit needs of the local communities, including low-income and moderate-income neighborhoods, consistent with safe and sound operation of those banks; and, to provide for ((proper)) further consideration of those records in connection with certain applications.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-180 Community Reinvestment ActLimitation on single investment for commercial banks.
The total investment by a commercial bank in a single parcel of real property, and improvements thereon, shall not exceed twenty-five percent of the aggregate amount of such bank's real estate investments allowed by RCW ((30.04.212)) 30A.04.212.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-190 Community Reinvestment ActInvestment in qualifying community investments for commercial banks.
(1) An amount equal to ten percent of the aggregate amount invested in real estate by a commercial bank pursuant to RCW ((30.04.212)) 30A.04.212 shall be placed in qualifying community investments ((as defined in subsection (3) of this section)).
(2) A qualifying community investment made by an entity that wholly owns a bank, is wholly owned by a bank, or is wholly owned by an entity that wholly owns the bank, shall be deemed to have been made by a bank to satisfy the requirements of subsection (1) of this section.
(((3) The term "qualifying community investment" means any direct or indirect investment or extension of credit made by a bank in projects or programs designed to develop or redevelop areas in which persons with low-incomes or moderate-incomes reside, designed to meet the credit needs of such low-income or moderate-income areas, or that primarily benefits low-income and moderate-income residents of such areas. The term includes, but is not limited to, any of the following investments within the state of Washington:
(a) Investments in governmentally insured, guaranteed, subsidized, or otherwise sponsored programs for housing, small farms, or business that address the needs of the low-income and moderate-income areas.
(b) Investments in residential mortgage loans, home improvement loans, housing rehabilitation loans, and small business or small farm loans originated in low-income and moderate-income areas, or the purchase of such loans originated in low-income and moderate-income areas.
(c) Investments for the preservation or revitalization of urban or rural communities in low-income and moderate-income areas.
The term does not include personal installment loans, or loans made for the purchase of, or secured by, an automobile.))
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-200 Consideration of performance ((record in meeting community credit needs)) in approving and disapproving applications.
Subject to RCW 30A.60.020, the division shall consider, among other factors, the record of performance of the applicant in helping to meet the credit needs of the applicant's entire community, including low-income and moderate-income neighborhoods in determining the approval or disapproval for the following applications:
(1) ((For a)) New branch or satellite facility;
(2) ((For a)) Purchase or sale of assets;
(3) ((For a)) Merger;
(4) ((For an)) Acquisition;
(5) ((For)) Authority to engage in a business activity;
(6) ((For a)) Conversion from a national bank to a state-chartered bank; and
(7) Such other application as the director may consider appropriate.
The performance record need not be considered for subsections (2), (3), and (4) of this section where solvency and safety soundness of the bank is threatened. Assessment of an institution's ((CRA)) Community Reinvestment Act performance may be a basis for denying an application.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-320 Insurance agency activitiesPurpose.
((These rules and regulations are intended to administer and interpret the provisions governing the authority of state-chartered commercial banks and trust companies to act as insurance agents pursuant to the provisions in RCW 30.04.215(1), 30.08.140(10), and 30.08.150(3).)) WAC 208-512-320 through 208-512-370, inclusive, govern the authority of a bank to engage in insurance-related activities.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-340 ((Insurance agency)) Insurance-related activitiesGeneral rule.
Except as provided in these rules, or as otherwise provided by law, a bank may not act as ((insurance agent)) a principal in any insurance-related activity that is not permissible for a national bank, unless consistent with 12 U.S.C. Sec. 1831a.
(1) The Federal Deposit Insurance Corporation has determined that the activity would pose no significant risk to the Deposit Insurance Fund; and
(2) The bank is, and continues to be, in compliance with the capital standards required pursuant to 12 U.S.C. Sec. 1831o and as specified in 12 C.F.R. Part 325, or any applicable successor federal rule; and
(3) If the bank is a federal reserve member bank, any additional requirement or restriction involving insurance-related activities that the Board of Governors of the Federal Reserve system may prescribe.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-350 ((Insurance agency)) Insurance-related activitiesExceptions.
(((1) A bank located in a city of not more than five thousand inhabitants may act as insurance agent from an office in that city. A bank exercising this power may continue to act as insurance agent notwithstanding a change of the population of the city in which it is located.
(2) A trust company may act as an insurance agent pursuant to its powers under RCW 30.08.150(3) "to act as attorney in fact or agent of any corporation, foreign or domestic, for any purpose, statutory or otherwise."
(3) A bank may engage in insurance activities that have been determined by the board of governors of the federal reserve system or by the United States Congress to be closely related to the business of banking, as of June 11, 1986. These activities include, but are not limited to:
(a) General insurance agency activities conducted by a bank with total assets of fifty million dollars or less, provided, however, that such bank may not engage in the sale of life insurance or annuities. For purposes of this exception "total assets" is determined by the latest consolidated report of condition filed with the director of the department of financial institutions. This exception ceases when the value of the assets of the bank exceed fifty million dollars. The insurance agency license must be surrendered and the assets sold or otherwise disposed of within three years unless otherwise extended by the director of the department of financial institutions.
(b) A bank may act as agent for life, disability, and involuntary unemployment insurance if the insurance is limited to assuring the repayment of the outstanding balance due on a specific extension of credit by the bank.
(c) A bank may act as agent for property insurance on loan collateral, provided such insurance is limited to assuring repayment of the outstanding balance of the extension of credit and such extension of credit is not more than ten thousand dollars (twenty-five thousand dollars to finance the purchase of a residential manufactured home and which is secured by such home) increased by the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers published monthly by the Bureau of Labor Statistics for the period beginning on January 1, 1982, and ending on December 31 of the year preceding the year of the extension of credit.
(4) A bank or trust company may engage in any insurance agency activity lawfully engaged in by national banks located in the state of Washington.)) Notwithstanding WAC 208-512-340, a bank may not engage in insurance underwriting except to the extent that activity is permissible for a national bank.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-360 ((Insurance agency)) Insurance-related activitiesSubsidiary.
((A bank or trust company may conduct insurance agency activities that are authorized to be engaged in by the bank or trust company through a subsidiary of the bank or trust company as authorized by RCW 30.04.125(8).)) (1) A bank may conduct insurance-related activities through a subsidiary of the bank as authorized by RCW 30A.04.125(8) subject to subsection 2 of this section.
(2) A subsidiary of a bank may not engage as a principal in any insurance-related activity that is not permissible for a subsidiary of a national bank unless, consistent with 12 U.S.C. Sec. 1831a.
(a) The Federal Deposit Insurance Corporation has determined that the activity would pose no significant risk to the Deposit Insurance Fund; 
(b) The bank is, and continues to be, in compliance with the capital standards required pursuant to 12 U.S.C. Sec. 1831o and as specified in 12 C.F.R. Part 325, or any applicable successor federal rule; and
(c) If the parent bank is a Federal Reserve member bank, any additional requirement or restriction applicable to the subsidiary involving insurance-related activities that the Board of Governors of the Federal Reserve System may prescribe.
AMENDATORY SECTION (Amending WSR 00-17-141, filed 8/22/00, effective 9/22/00)
WAC 208-512-370 Insurance ((agency)) activitiesEnforcement.
It shall be considered an unsafe and unsound practice in conducting the affairs of the bank ((or trust company)) if in the opinion of the director, the ((insurance agency)) insurance-related activities of ((the)) a bank or bank subsidiary are:
(1) A violation of ((any applicable state or federal consumer protection law)) WAC 208-512-340, 208-512-350, or 208-512-360; or
(2) A violation of any ((applicable state or federal statute prohibiting anticompetitive activities)) requirements under Title 48 RCW and the rules of the office of insurance commissioner involving insurance-related activities;
(3) In violation of any applicable state or federal consumer protection law; or
(4) In violation of any applicable state or federal statute prohibiting anti-competitive activities.
AMENDATORY SECTION (Amending WSR 08-22-070, filed 11/4/08, effective 12/5/08)
WAC 208-512-400 Subprime mortgage lendingPurpose of these rules.
These rules are designed to help Washington state-chartered banks (Title 30A RCW), savings banks (Title 32 RCW) and savings associations (Title 33 RCW) establish, reiterate, integrate and maintain their own policies and procedures regarding subprime and nontraditional mortgage lending guidance. These policies and procedures are required by a new state law, chapter 108, Laws of 2008 (chapter 19.144 RCW).
AMENDATORY SECTION (Amending WSR 08-22-070, filed 11/4/08, effective 12/5/08)
WAC 208-512-410 Subprime mortgage lendingWhat is the "guidance"?
Because of concerns about problems with subprime mortgage lending, the federal government issued the Interagency Guidance on Nontraditional Mortgage Product Risks and a Statement on Subprime Mortgage Lending (collectively, "the guidance"). In 2007, the governor convened the Washington state task force for homeowner security. The task force recommended including the federal guidance in state legislation. The 2008 Washington state legislature enacted SHB 2770, requiring the department of financial institutions to apply the two guidance documents to financial institutions in Washington. Starting in 2008, credit unions, banks, savings banks, savings associations, mortgage brokers and other Washington state consumer loan companies (collectively, "financial institutions") must have policies and procedures that use the guidance.
AMENDATORY SECTION (Amending WSR 08-22-070, filed 11/4/08, effective 12/5/08)
WAC 208-512-420 Subprime mortgage lendingWhat does the guidance require of banks, savings banks and savings associations?
The stated intent of the guidance is to help borrowers to better understand adjustable rate mortgage (ARM) risks. The guidance requires financial institutions to have policies and procedures that focus on the various risks of subprime/nontraditional mortgage lending. The guidance requires financial institutions to be aware of portfolio and risk management practices, to use appropriate underwriting standards and to abide by consumer protection principles. Financial institutions also need to maintain strong internal control systems. Many of the recommendations in the guidance are good business practices and may already be followed by financial institutions.
Not all of the elements of the guidance may be applicable to all banks, savings banks and savings associations, or to all other financial institutions. Banks, savings banks and savings associations must determine which elements are relevant to their operations, and incorporate only those subjects into their policies and procedures.
AMENDATORY SECTION (Amending WSR 08-22-070, filed 11/4/08, effective 12/5/08)
WAC 208-512-430 Subprime mortgage lendingIs there a list of subjects that banks, savings banks and savings associations must include in their policies and procedures?
Yes, the guidance requires all financial institutions, including banks, savings banks and savings associations, to focus on the following subjects and apply the relevant ones to their existing policies and procedures:
(()) (1) Help borrowers understand ARM risks, including:
(()) (a) Low initial payment;
(()) (b) High or unlimited reset rate caps;
(()) (c) Low or no documentation loans;
(()) (d) Problems of frequent refinancing;
(()) (e) Risk layering;
(()) (f) Simultaneous second lien loans;
(()) (g) Prepayment penalties;
(()) (h) FDIC or FRB prohibited practices (banks, savings banks and savings associations)((;
– OTS prohibited practices (savings associations))).
(()) (2) Understand portfolio and risk management practices, including:
(()) (a) Relationship between subprime lending and predatory lending;
(()) (b) Risks of loans based on foreclosed or liquidation value;
(()) (c) Problem of loan "flipping";
(()) (d) Fraud detection;
(()) (e) Use of qualifying standards;
(()) (f) Maintenance of appropriate capital levels;
(()) (g) Use of appropriate allowance for loan and lease loss levels;
(()) (h) Risks of stated income loans((;)).
(()) (3) Underwriting standards.
(()) (4) Workout arrangements.
(()) (5) Consumer protection principles, including:
(()) (a) Use of a summary disclosure form;
(()) (b) Avoidance of steering borrowers to inappropriate products;
(()) (c) Explanation of payment shock risk;
(()) (d) Explanation of prepayment penalty;
(()) (e) Explanation of balloon payment;
(()) (f) Explanation of costs of low documentation or stated income loans;
(()) (g) Compliance with the Truth in Lending Act and other federal requirements;
(()) (h) Importance of good consumer communications in promotional materials and product descriptions;
(()) (i) Explanation of borrower responsibility for taxes and insurance.
(()) (6) Development and maintenance of strong internal controls, including:
(()) (a) Management of deals with third-party originators;
(()) (b) Management of secondary market risk;
(()) (c) Effective management information and reporting;
(()) (d) Use of stress testing and performance measures;
(()) (e) Actual practices consistent with policies.
AMENDATORY SECTION (Amending WSR 08-22-070, filed 11/4/08, effective 12/5/08)
WAC 208-512-440 Subprime mortgage lendingWhere can I read the guidance documents?
You can find the two federal guidance documents on the internet: http://www.fdic.gov/news/news/press/2006/pr06086b.pdf; and http://www.fdic.gov/news/news/press/2007/pr07055a.html.
You can also click on the links on the DFI web site at www.dfi.wa.gov.
If you do not have internet access, you may contact the department of financial institutions, division of banks (division of banks) for a copy of the documents.
Read these documents to ensure proper application of the law to your institution and to comply with the required integration of the guidance into your policies and procedures. If your institution needs help incorporating the guidance or reconciling it to your policies and procedures, contact your legal counsel.
AMENDATORY SECTION (Amending WSR 08-22-070, filed 11/4/08, effective 12/5/08)
WAC 208-512-450 Subprime mortgage lendingWhy do I need to read the federal guidance documents?
The federal guidance consists of two lengthy documents that are very detailed. Because they are required by state statutory law, they apply in their entirety. Division of banks cannot merely summarize them or give you a checklist. You must read the documents in order to apply them to your particular institution by means of integrating the guidance into your own policies and procedures.
AMENDATORY SECTION (Amending WSR 08-22-070, filed 11/4/08, effective 12/5/08)
WAC 208-512-460 Subprime mortgage lendingWhat will the division of banks do about compliance with guidance policies and procedures?
Every state-chartered bank, savings banks and savings association is different. There is no "one-size-fits-all" guidance available. Division of banks will not issue model guidance, because the process of self-analysis that your institution needs to do, in order to develop its own guidance policies and procedures, is beneficial. The division of banks does not provide technical legal advice. Also, the guidance is complex and will result in variations in wording or applicability of guidance policies and procedures among institutions, depending upon the size and complexity of a particular institution, the overall characteristics of its mortgage lending market base, and the specific types of mortgage lending it does, if any.
For supervision purposes, the division of banks will:
(1) Verify that an institution has integrated the guidance into its policies and procedures, as part of its risk-focused examination. Division of banks will not mandate the length or exact wording used in the guidance policies and procedures.
(2) Review the guidance policies and procedures with the institution, if a consumer complaint indicates a problem or issue regarding subprime and nontraditional mortgage lending practices.
(3) Verify that an institution is following its policies and procedures.
The division of banks expects prompt compliance by banks, savings banks and savings associations with the requirements of this rule.
The law provides the division of banks with examination, enforcement and investigation authority to take appropriate action against banks, savings banks and savings associations that are in noncompliance with the guidance policies and procedures requirement.
REPEALER
The following sections of the Washington Administrative Code are repealed:
WAC 208-512-020
Characterization of "federal fund transactions."
WAC 208-512-030
Definitions and characterization of time deposits.
WAC 208-512-050
Limiting loans to officers.
WAC 208-512-060
Accounts in excess of one hundred thousand dollars.
WAC 208-512-120
Promulgation.
WAC 208-512-140
Definitions.
WAC 208-512-150
Assessing the record of performance.
WAC 208-512-160
Rating assignment.
WAC 208-512-170
Rating for period January 1, 1986 through December 31, 1986.
WAC 208-512-310
Insurance agency activities—Promulgation.
WAC 208-512-330
Insurance agency activities—Definitions.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-001 Promulgation of rules.
The division of banks of the department of financial institutions (hereinafter, the "division"), after due and proper notice, and pursuant to the provisions of RCW ((30.04.030, 30.04.111, 30.04.215, 30.08.140)) 30A.04.030, 30A.04.111, 30A.04.215, 30A.08.140, 32.08.157, 43.320.040, and 43.320.050, hereby adopts and promulgates this chapter, effective January 21, 2013.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-003 Findings and purpose.
(1) The director of the division (hereinafter, the "director of banks"), by and through the director of bank's delegated authority from the director of the department of financial institutions under RCW 43.320.040 and 43.320.050, finds and determines, that pursuant to RCW ((30.04.030)) 30A.04.030, the division has the broad administrative authority to adopt and promulgate rules and regulations that establish and maintain appropriate standards of safety and soundness with respect to the loans and extensions of credit made by Washington state-chartered banks under Titles 30A and 32 RCW including, without limitation, nonloan investments in derivative and similar transactions.
(2) As of January 21, 2013, the effective date of section 611 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter, "Dodd-Frank Act"), codified as section 18(y) of the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1828(y), a state insured bank may engage in a derivative transaction, as defined in section 5200 (b)(3) of the Revised Statutes of the United States (12 U.S.C. Sec. 84 (b)(3)), only if the law with respect to lending limits of the state in which the state-insured bank is chartered takes into consideration credit exposure to derivative transactions. In addition to making loans, Washington state-chartered banks under Titles 30A and 32 RCW invest in derivative transactions as a regular and often-essential component of their overall investment strategy, including, without limitation, as a tool to manage their liquidity. It is necessary that Washington state law (including statute or regulation, or interpretation of the same by the division), be in compliance with the afore-stated federal statute and preserve the authority of banks under Titles 30A and 32 RCW to continue to engage in derivative transactions on or after January 21, 2013. Therefore, it is prudent and expeditious for the division to assert the full measure of its statutory authority to adopt this chapter so as to clearly set forth the manner in which a bank under Title 30A or 32 RCW may, in addition to its investment in other types of loans and extensions of credit, safely and soundly engage in derivative transactions.
(3) Section 610(a) of the Dodd-Frank Act, amending the National Bank Act, at 12 U.S.C. Sec. 84(b), revises the definition of "loans and extensions of credit" to include credit exposure of a national bank arising from its investment in a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction. The aforementioned section 611 of the Dodd-Frank Act redefines "loans and extensions of credit" to include derivative transactions by, in effect, making derivative transactions applicable to state "lending limits" laws. Section 611 of the Dodd-Frank Act does not specifically address repurchase agreements, reverse repurchase agreements, securities lending transactions, or securities borrowing transactions. However, the director of banks finds and determines that it serves the convenience and advantage of depositors, borrowers, and the general public that Washington state-chartered banks and savings banks be able to continue to prudently invest in repurchase agreements, reverse repurchase agreements, securities lending transactions, and securities borrowing transactions despite any future contingency that may be made applicable to them by federal banking regulations. Therefore, director of banks further finds and determines that the division may, in its safety and soundness standards for state member banks and state insured banks, respectively, apply the same definition of "loans and extensions of credit" as applicable to national banks under section 610 of the Dodd-Frank Act (12 U.S.C. Sec. 84(b)), but only to the extent required by the board of governors of the Federal Reserve System (hereinafter, the "Federal Reserve Board") or the Federal Deposit Insurance Corporation (hereinafter, the "FDIC").
(4) The director of banks finds and determines that, pursuant to RCW ((30.04.111(5) and 30.04.215)) 30A.04.111(5) and 30A.04.215 (3) and (5), it serves the convenience and advantage of depositors, borrowers, and the general public, and further maintains the fairness of competition between state-chartered banks and national banks, that, on or after January 21, 2013, banks under Title 30A RCW be permitted to continue to invest in derivative transactions, repurchase agreements, reverse repurchase agreements, securities lending transactions, and securities borrowing transactions as national banks are generally permitted to under the National Bank Act (12 U.S.C. Sec. 84(b)) and applicable rules of the Office of the Comptroller of the Currency (hereinafter, "OCC"), subject to (a) the restrictions, limitations, and requirements applicable to such powers and authorities of national banks, and (b) the authority of the division to adopt and promulgate rules for banks, which, consistent with Title 30A RCW, vary from the precise powers and authorities of national banks.
(5) The director of banks finds and determines that, pursuant to RCW 32.08.157, a mutual or stock savings bank under Title 32 RCW may be permitted to engage in derivative transactions on or after January 21, 2013, the same as for a bank under Title 30A RCW, provided it subjects itself to all of the restrictions, limitations, and requirements for exercise of any powers and authorities under RCW ((30.04.111)) 30A.04.111 as set forth in this chapter respecting loans and extensions of credit applicable to banks under Title 30A RCW.
(6) There are certain standards of safety and soundness embodied in definitions of terms and other provisions used in RCW ((30.04.111)) 30A.04.111, including, without limitation, the term "capital and surplus," which have heretofore been inconsistent with the standards for computation of lending limits for national banks under the National Bank Act and the OCC rules. Pursuant to RCW ((30.04.215)) 30A.04.215 (3) and (5), the director of banks finds and determines that it both serves the convenience and advantage of depositors, borrowers, and the general public, and further maintains the fairness of competition and parity between Washington state-chartered banks and national banks, if the division adopts, for purposes of RCW ((30.04.111)) 30A.04.111, the same definition of "capital and surplus" as permitted for national banks, while maintaining the higher general lending limit of twenty percent of "capital and surplus" for banks under Title 30A RCW than exists for national banks under the OCC rules. In addition, the director of banks finds and determines that changes in other definitions of terms and technical provisions, as set forth in this chapter, serve the convenience and advantage of depositors, borrowers, and the general public, and further maintain the fairness of competition and parity between Washington state-chartered banks and national banks.
(7) Since RCW ((30.04.111)) 30A.04.111 does not define "loans and extensions of credit" and the words "extensions of credit" are not specified, the director of banks herein exercises the director of bank's broad administrative authority under RCW ((30.04.030)) 30A.04.030 and looks to applicable federal banking law and regulation for clarification of the term "extensions of credit," in keeping with well-settled principles of statutory construction. Accordingly, in promulgating and adopting the definition of "loans and extensions of credit" set forth in this chapter, the director of banks is herein guided by the restrictions on insider lending set forth in Federal Reserve Board Regulation O, at 12 C.F.R. Sec. 215.3, to the extent that (a) "extension of credit" has been therein broadly defined by the Federal Reserve Board to include "an extension of credit in any manner whatsoever" and (b) on account of Regulation O having been adopted by the Federal Reserve Board based on comparable principles of safety and soundness in regard to banks.
(8) The director of banks finds and determines that certain powers and authorities of an out-of-state state-chartered bank with a branch or branches in Washington state, which affect the operations of banking and delivery of financial services in Washington state, and which provide certain exceptions to the general lending limit in emergency circumstances, ought to and will be deemed to be exceptions to the general lending limit under RCW ((30.04.111)) 30A.04.111, subject to the conditions set forth in this chapter.
(9) These rules and regulations are intended to:
(a) Prevent one person, or a relatively small group of persons who directly benefit from each other or who are engaged in a common enterprise, from borrowing or otherwise obtaining an unduly large amount of a bank's funds or other extension of credit;
(b) Safeguard a bank's depositors by establishing and maintaining standards that promote spreading of a bank's loans and extensions of credit among a relatively large number of persons engaged in different lines of business; and
(c) Prescribe standards of safety and soundness with respect to the credit exposure of a bank to its investment in derivative transactions, and to the extent required by the board of governors of the Federal Reserve System and the Federal Deposit Insurance Corporation for state member banks and state insured banks, respectively, to the credit exposure of a bank to its investment in repurchase agreements, reverse repurchase agreements, securities lending transactions, or securities borrowing transactions.
(10) These rules include, without limitation, provisions for:
(a) Defining or further defining or clarifying terms used in RCW ((30.04.111)) 30A.04.111;
(b) Establishing limits or requirements other than those specified in RCW ((30.04.111)) 30A.04.111 for particular classes or categories of loans and extensions of credit;
(c) Determining when a loan or extension of credit putatively made to a person shall, for purposes of this section, be attributed to another person;
(d) Setting standards for computation of time in relation to determining limits on loans and extensions of credit; and
(e) Implementing and incorporating other changes in limits on loans and extensions of credit necessary to conform to federal statute and rule required or otherwise authorized by RCW ((30.04.111)) 30A.04.111.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-005 "Loans and extensions of credit" and "contractual commitment to advance funds"Defined.
(1) "Loan or extension of credit" generally includes:
(a) Any direct or indirect advance of funds to a person made on a basis of any obligation of that person to repay the funds, or repayable from specific property pledged by or on behalf of a person;
(b) Any credit exposure of a bank arising from a derivative transaction or a securities financing transaction, but only to the extent that a securities financing transaction is required, by the Federal Reserve Board or the FDIC, with respect to state member banks and state insured banks, respectively, to be treated as a loan or extension of credit for purposes of RCW ((30.04.111)) 30A.04.111 and this chapter; and
(c) Any contractual commitment to advance funds, and includes a renewal, modification, or extension of the maturity date of a loan or extension of credit.
(2) Notwithstanding any other provision of this section, a "loan or extension of credit" excludes the following:
(a) Special exceptions, conditions and limitations to the general lending limit to the extent set forth in WAC 208-512A-020 through 208-512A-090, inclusive;
(b) A renewal, extension or restructuring of an existing loan, with interest paid current and no further advance of funds, by a bank under the direction and control of a conservator appointed by the director;
(c) A renewal or restructuring of a loan as a new loan or extension of credit, following the exercise by a bank of reasonable efforts, consistent with safe and sound banking practices, to bring the loan into conformance with the lending limit, unless new funds are advanced by the bank to the borrower (except as permitted by WAC 208-512A-015), or a new borrower replaces the original borrower, or unless the division determines that a renewal or restructuring was undertaken as a means to evade the bank's lending limit;
(d) Additional funds advanced for the benefit of a borrower by a bank for payment of taxes, insurance, utilities, security, and maintenance and operating expenses necessary to preserve the value of real property securing the loan, consistent with safe and sound banking practices, but only if the advance is for the protection of the bank's interest in the collateral, and provided that such amounts must be treated as an extension of credit if a new loan or extension of credit is made to the borrower;
(e) Accrued and discounted interest on an existing loan or extension of credit, including interest that has been capitalized from prior notes and interest that has been advanced under terms and conditions of a loan agreement;
(f) Financed sales of a bank's own assets, including other real estate owned, if the financing does not put the bank in a worse position than when the bank held title to the assets;
(g) Amounts paid against uncollected funds in the normal process of collection;
(h) Credit exposures arising from securities financing transactions in which the securities financed are Type I securities, or securities listed in section 5 (c)(1)(C), (D), (E), and (F) of the Home Owners Loan Act and general obligations of a state or subdivision as listed in section 5 (c)(1)(H) of the Home Owners Loan Act, at 12 U.S.C. Sec. 1464 (c)(1)(C), (D), (E), (F), and (H);
(i) Intraday credit exposures arising from a derivative transaction or securities financing transaction; and
(j) That portion of a loan or extension of credit sold as a participation by a bank on a nonrecourse basis, provided that the participation results in a pro rata sharing of credit risk proportionate to the respective interests of the originating and participating lenders. Where a participation agreement provides that repayment must be applied first to the portions sold, a pro rata sharing will be deemed to exist only if the agreement also provides that, in the event of a default or comparable event defined in the agreement, participants must share in all subsequent repayments and collections in proportion to their percentage participation at the time of the occurrence of the event. When an originating bank funds the entire loan, it must receive funding from the participants before the close of business of its next business day. If the participating portions are not received within that period, then the portions funded will be treated as a loan by the originating bank to the borrower. If the portions so attributed to the borrower exceed the originating bank's lending limit, the loan may be treated as nonconforming subject to WAC 208-512A-012, rather than a violation, if:
(i) The originating bank had a valid and unconditional participation agreement with a participant or participants that was sufficient to reduce the loan to within the originating bank's lending limit;
(ii) The participant reconfirmed its participation and the originating bank had no knowledge of any information that would permit the participant to withhold its participation; and
(iii) The participation was to be funded by close of business of the originating bank's next business day.
As used in this chapter and to the extent used in RCW ((30.04.111)) 30A.04.111, the term "loans and extensions of credit," unless otherwise indicated, shall have the meaning set forth in this section. As used in RCW ((30.04.111)) 30A.04.111 and this chapter, the terms "loan," "loans," "extension of credit," "extensions of credit," and "loan or extension of credit" refer, as applicable, to the singular or plural of "loans and extensions of credit."
(3) "Contractual commitment to advance funds" generally means a bank's obligation to advance funds under a legally binding contractual commitment to make a loan or extension of credit.
(a) For purposes of this chapter and calculation of the general lending limit, "contractual commitment to advance funds" includes:
(i) A bank's obligation to make payment (directly or indirectly) to a third person contingent upon default by a customer of the bank in performing an obligation and to make such payment in keeping with the agreed upon terms of the customer's contract with the third person, or to make payments upon some other stated condition;
(ii) A bank's obligation to guarantee or act as surety for the benefit of a person; and
(iii) A bank's obligation to advance funds under a standby letter of credit, a put, or other similar arrangement.
(b) For purposes of this chapter and calculation of the general lending limit, "contractual commitment to advance funds" does not include:
(i) The undisbursed portion of any loan or extension of credit;
(ii) The entire amount of any such commitment that has not yet been drawn upon; and
(iii) Letters of credit and similar instrument:
(A) Which do not guarantee payment;
(B) Which do not provide for payment in the event of a default of a third party; and
(C) In which the issuing bank expects the beneficiary to draw on the issuer.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-007 Other general chapter definitions.
As used in this chapter and to the extent used in RCW ((30.04.111)) 30A.04.111, the following additional terms, unless otherwise indicated, mean:
(1) "ALLL" means a bank's allowance for loan and lease losses.
(2) "Bank" includes a commercial bank chartered and regulated under Title 30A RCW and, to the extent applicable to this chapter pursuant to WAC 208-512A-009, a mutual or stock savings bank chartered and regulated under Title 32 RCW.
(3) "Borrower" means:
(a) A person who is named as a borrower or debtor in a loan or extension of credit;
(b) A person to whom a bank has credit exposure arising from a derivative transaction or a securities financing transaction, entered by the bank; or
(c) Any other person, including a drawer, endorser, or guarantor, who is deemed to be a borrower under the "direct benefit" or the "common enterprise" tests set forth in WAC 208-512A-100.
(4) "Call report" means a bank's Consolidated Report of Condition and Income.
(5) "Capital and surplus" means:
(a) A bank's Tier 1 and Tier 2 capital as reported in a bank's call report; plus
(b) The balance of a bank's ALLL not included in the bank's Tier 2 capital as reported in the bank's call report.
(6) "Close of business" means the time at which a bank closes its accounting records for the business day.
(7) "Control" is presumed to exist when a person directly or indirectly, or acting through or together with one or more persons:
(a) Owns, controls, or has the power to vote twenty-five percent or more of any class of voting securities of another person;
(b) Controls, in any manner, the election of a majority of the directors, trustees, or other persons exercising similar functions of another person; or
(c) Has the power to exercise a controlling influence over the management or policies of another person.
(8) "Credit derivative" has the same meaning as this term has in 12 C.F.R. Part 3, Appendix C, section 2.
(9) "Current market value" means the bid or closing price listed for an item in a regularly published listing or an electronic reporting service.
(10) "Derivative transaction" includes any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
(11) "Director of banks" means the director of the division of banks of the department of financial institutions.
(12) "Division" means the division of banks of the department of financial institutions.
(13) "Effective margining arrangement" means a master legal agreement governing derivative transactions between a bank and a counterparty that requires the counterparty to post, on a daily basis, variation margin to fully collateralize that amount of the bank's net credit exposure to the counterparty created by the derivative transactions covered by the agreement, subject to any monetary threshold requirements as prudently determined by the bank and its counterparty as contained in the master legal agreement.
(14) "Eligible credit derivative" means a single-name credit derivative or a standard, nontranched index credit derivative provided that:
(a) The derivative contract meets the requirements of an eligible guarantee, as defined in 12 C.F.R. Part 3, Appendix C, and has been confirmed by the protection purchaser and the protection provider;
(b) Any assignment of the derivative contract has been confirmed by all relevant parties;
(c) If the credit derivative is a credit default swap, the derivative contract includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
(ii) Bankruptcy, insolvency, or inability of the obligor on the reference exposure to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due and similar events;
(d) The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract;
(e) If the derivative contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss with respect to the derivative reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;
(f) If the derivative contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provides that any required consent to transfer may not be unreasonably withheld; and
(g) If the credit derivative is a credit default swap, the derivative contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event.
(15) "Eligible guarantee" means a guarantee that:
(a) Is written and unconditional;
(b) Covers all or a pro rata portion of all contractual payments of the obligor on the reference exposure;
(c) Gives the beneficiary a direct claim against the protection provider;
(d) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
(e) Is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced;
(f) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligor on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment;
(g) Does not increase the beneficiary's cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure; and
(h) Is not provided by an affiliate of the bank, unless the affiliate is an insured depository institution, bank, securities broker or dealer, or insurance company that:
(i) Does not control the bank; and
(ii) Is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies (as the case may be).
(16) "Eligible protection provider" means:
(a) A sovereign entity (a central government, including the U.S. government, an agency, department, ministry, or central bank);
(b) The Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, or a multilateral development bank;
(c) A federal home loan bank;
(d) The Federal Agricultural Mortgage Corporation;
(e) A depository institution, as defined in section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813(c);
(f) A bank holding company, as defined in section 2 of the Bank Holding Company Act, as amended, 12 U.S.C. 1841;
(g) A savings and loan holding company, as defined in section 10 of the Home Owners' Loan Act, at 12 U.S.C. 1467a;
(h) A securities broker or dealer registered with the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934, 15 U.S.C. 78o et seq.;
(i) An insurance company that is subject to the supervision of the Washington state office of insurance commissioner;
(j) A foreign banking organization;
(k) A non-U.S.-based securities firm or a non-U.S.-based insurance company that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies; and
(l) A qualifying central counterparty.
(17) "FDIC" means the Federal Deposit Insurance Corporation.
(18) "Federal Reserve Board" means the board of governors of the Federal Reserve System.
(19) "Financial instrument" means stocks, notes, bonds, and debentures traded on a national securities exchange, over-the-counter (OTC) margin stocks as defined in Regulation U, 12 C.F.R. Part 221, commercial paper, negotiable certificates of deposit, bankers' acceptances, and shares in money market and mutual funds of the type that issue shares in which banks may perfect a security interest. Financial instruments may be denominated in foreign currencies that are freely convertible to U.S. dollars. The term "financial instrument" does not include mortgages.
(20) "OCC" means the Office of the Comptroller of the Currency.
(21) "Person" means: An individual; sole proprietorship; partnership; joint venture; association; trust; estate; business trust; corporation; limited liability company; limited liability partnership; not-for-profit corporation; sovereign government or agency, instrumentality, or political subdivision thereof; or any similar entity or organization.
(22) "Qualifying central counterparty" has the same meaning as this term has in 12 C.F.R. Part 3, Appendix C, section 2.
(23) "Qualifying master netting agreement" has the same meaning as this term has in 12 C.F.R. Part 3, Appendix C, section 2.
(24) "Readily marketable collateral" means financial instruments and bullion which are saleable under ordinary circumstances with reasonable promptness at a fair market value determined by daily quotations based on actual transactions on an auction or a similarly available daily bid and ask price market.
(25) "Readily marketable staple" means an article of commerce, agriculture, or industry, such as wheat and other grains, cotton, wool, and basic metals such as tin, copper and lead, in the form of standardized interchangeable units, that is easy to sell in a market with sufficiently frequent price quotations. An article comes within this definition if the exact price is easy to determine and the staple itself is easy to sell at any time at a price that would not be considerably less than the amount at which it is valued as collateral. Whether an article qualifies as a readily marketable staple is determined on the basis of the conditions existing at the time the loan or extension of credit that is secured by the staples is made.
(26) "Securities financing transaction" means a repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction.
(27) "State insured bank" denotes a bank, as defined in this chapter, which is an "insured depository institution" as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1813(c)).
(28) "State member bank" denotes a bank, as defined in this chapter, which is a member of a federal reserve bank as authorized under section 9 of the Federal Reserve Act (12 U.S.C. Sec. 321) and, for purposes of this chapter, has the same meaning as that term is defined in section 3(d) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1813(d)).
(29) "Subsidiary" means:
(a) Any company twenty-five percent or more of whose voting shares (excluding shares owned by the United States or by any company wholly owned by the United States) is directly or indirectly owned or controlled by such person, or is held by it with power to vote;
(b) Any company the election of a majority of whose directors is controlled in any manner by such person; or
(c) Any company with respect to the management or policies of which such person has power, directly or indirectly, to exercise a controlling influence, as determined by the division, after notice and opportunity for hearing.
(30) "Type I securities" has the same meaning as set forth in 12 C.F.R. Sec. 1.2(j) and includes:
(a) Obligations of the United States;
(b) Obligations issued, insured, or guaranteed by a department or an agency of the United States government, if the obligation, insurance, or guarantee commits the full faith and credit of the United States for the repayment of the obligation;
(c) Obligations issued by a department or agency of the United States, or an agency or political subdivision of a state of the United States, that represent an interest in a loan or a pool of loans made to third parties, if the full faith and credit of the United States has been validly pledged for the full and timely payment of interest on, and principal of, the loans in the event of nonpayment by the third-party obligor(s);
(d) General obligations of a state of the United States or any political subdivision thereof; and
(e) Municipal bonds if the bank is well capitalized as defined as that term is used in the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1831o (b)(1).
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-009 Applicability of chapter.
This chapter is applicable, notwithstanding any other provision thereof, only to:
(1) A commercial bank under Title 30A RCW;
(2) A mutual or stock savings bank under Title 32 RCW, which, on January 21, 2013, or thereafter, invests in derivative transactions;
(3) A mutual or stock savings bank under Title 32 RCW, which, on January 21, 2013, or thereafter, invests in securities financing transactions, if:
(a) The mutual or stock savings bank is a state member bank and the Federal Reserve Board has determined that loans and extensions of credit apply to securities financing transactions; or
(b) The FDIC has determined that loans and extensions of credit apply to securities financing transactions in relation to state-chartered banks and savings banks; and
(4) A mutual or stock savings bank under Title 32 RCW that has notified the division, as of January 21, 2013, or thereafter, that it has elected to be regulated by and comply with this chapter, even if it does not invest in derivative transactions or securities financing transactions.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-014 Exception to general limitationExtenuating facts and circumstancesStandards for division determination—Director of banks' discretion.
(1) Notwithstanding any provision of this chapter to the contrary, the director of banks, in his or her discretion, may grant an exception to the limit on loans and extensions of credit based on extenuating facts and circumstances.
(2) In deciding whether to grant an exception under this section, the director of banks shall consider:
(a) The proposed transaction for which the exception is sought;
(b) How the requested exception would affect the capital adequacy and safety and soundness of the requesting bank if the exception is not granted or, if the exception is granted, if the proposed borrower should ultimately default;
(c) How the requested exception would affect the loan portfolio diversification of the requesting bank;
(d) The competency of the bank's management to handle the proposed transaction and any resulting safety and soundness issues;
(e) The marketability and value of the proposed collateral (if any); and
(f) The extenuating facts and circumstances that warrant an exception in light of the purpose of the limit on loans and extensions of credit set forth in RCW ((30.04.111)) 30A.04.111 and this chapter.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-080 Special ruleSale of bank's assetsUnpaid portion of purchase price.
The unpaid portion of the purchase price of a sale of a bank's asset or assets, if secured by such asset or assets, shall be excluded from the calculation of the general lending limit set forth in WAC 208-512A-010, subject to the following terms and conditions:
(1) Any sale of a bank's asset or assets, resulting in an unpaid purchase price exceeding the bank's lending limit must be approved in advance of the sale by the board of directors, including the terms of payment of such unpaid purchase price, and if the purchase is by a director, officer or employee of the bank, shall conform to RCW ((30.12.050)) 30A.12.060 and the Federal Reserve Board's Regulation O, at 12 C.F.R. Sec. 215.3.
(2) The bank must ensure that a security interest has been perfected in the collateral, including execution and recording or filing of documents and any other action required by state law.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-200 Computation of timeCalculation date of lending limits.
(1) For purposes of determining compliance with RCW ((30.04.111)) 30A.04.111 and this chapter, a bank shall determine its lending limit as of the most recent of the following dates:
(a) The last day of the preceding calendar quarter; or
(b) The date on which there is a change in the bank's capital category for purposes of the Federal Deposit Insurance Act, at 12 U.S.C. 1831o (b)(1).
(2) A bank's lending limit calculated in accordance with subsection (1)(a) of this section will be effective as of the earlier of the following dates:
(a) The date on which the bank's call report is submitted; or
(b) The date on which the bank's call report is required to be submitted.
(3) A bank's lending limit calculated in accordance with subsection (1)(b) of this section will be effective on the date that the limit is to be calculated.
(4) If the division determines for safety and soundness reasons that a bank should calculate its lending limit more frequently than required by subsection (1) of this section, the division may provide written notice to the bank directing it to calculate its lending limit at a more frequent interval, and the bank shall thereafter calculate its lending limit at that interval until further notice.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-300 Credit exposure arising from derivative transactions.
(1) This section sets forth the rules for calculating the credit exposure arising from a derivative transaction entered into by a bank for purposes of determining the bank's lending limit pursuant to RCW ((30.04.111)) 30A.04.111 and this chapter.
(2) Subject to the direction of the division, a bank shall calculate the credit exposure to a counterparty arising from a derivative transaction by means of:
(a) The internal model method;
(b) The conversion factor matrix method; ((or))
(c) The remaining maturity method; or
(d) The current exposure method.
(3) Except as otherwise required by the division, a bank shall use the same method for calculating counterparty credit exposure arising from all of its derivative transactions.
(4) The division may require a bank to use the internal model method, the conversion factor matrix method, or the remaining maturity method to calculate the credit exposure of derivative transactions if it finds that such method is necessary to promote the safety and soundness of the bank.
(5) The requirements for using the internal model method are as follows:
(a) The credit exposure of a derivative transaction under the internal model method shall equal the sum of the current credit exposure of the derivative transaction and the potential future credit exposure of the derivative transaction.
(b) A bank shall determine its current credit exposure by the mark-to-market value of the derivative contract. If the mark-to-market value is positive, then the current credit exposure equals that mark-to-market value. If the mark-to-market value is zero or negative, than the current credit exposure is zero.
(c) A bank may not use the internal model method in its calculation of potential credit exposure to a derivative transaction unless the bank obtains prior approval of the division or unless it is already using the internal model method, as of January 21, 2013, and the division thereafter determines that the bank's internal model method is safe and sound and that bank's management is competent to administer its derivative investment program using such internal model method.
(d) A bank that calculates its credit exposure by using the internal model method may net credit exposures of derivative transactions arising under the same qualifying master netting agreement.
(6) The credit exposure arising from a derivative transaction under the conversion factor matrix method shall equal and remain fixed at the potential future credit exposure of the derivative transaction as determined at the execution of the transaction by reference to Table 1 below.
Table 1 - Conversion Factor Matrix for Calculating Potential Future Credit Exposure1
Original Maturity2
Interest Rate
Foreign Exchange Rate and Gold
Equity
Other3 (includes commodities and precious metals except gold)
1 year or less
0.015
0.015
0.20
0.06
Over 1 to 3 years
0.030
0.030
0.20
0.18
Over 3 to 5 years
0.060
0.060
0.20
0.30
Over 5 to 10 years
0.120
0.120
0.20
0.60
Over ten years
0.300
0.300
0.20
1.00
1
For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
2
For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
3
Transactions not explicitly covered by any other column in Table 1 are to be treated as "Other."
(7) The credit exposure arising from a derivative transaction under the remaining maturity method shall equal the greater of zero or the sum of the current mark-to-market value of the derivative transaction added to the product of the notional amount of the transaction, the remaining maturity in years of the transaction, and a fixed multiplicative factor determined by reference to Table 2 below.
Table 2 - Remaining Maturity Factor for Calculating Credit Exposure
 
Interest Rate
Foreign Exchange Rate and Gold
Equity
Other1 (includes commodities and precious metals except gold)
Multiplicative Factor
1.5%
1.5%
6%
6%
1
Transactions not explicitly covered by any other column in Table 2 are to be treated as "Other."
(8) The credit exposure arising from a derivative transaction under the current exposure method shall be calculated pursuant to the Office of the Comptroller of the Currency regulations, 12 C.F.R. Part 32, at Sec. 9 (b)(iii).
(9) Notwithstanding any other provision of this section, a bank that uses the conversion factor matrix method or remaining maturity method, or that uses the internal model method without entering an effective margining arrangement, shall calculate the counterparty credit exposure arising from credit derivatives entered by the bank by adding the net notional value of all protection purchased from the counterparty on each reference entity.
(((9))) (10) A bank shall calculate the credit exposure to a reference entity arising from credit derivatives entered by the bank by adding the notional value of all protection sold on the reference entity. However, the bank may reduce its exposure to a reference entity by the amount of any eligible credit derivative purchased on that reference entity from an eligible protection provider.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-320 Policies and procedures related to derivative transactions, etc.
To fulfill the requirements of section 611 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, codified as section 18(y) of the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1828(y), and the requirements (if any) of the FDIC and the Federal Reserve Board in relation to securities financing transactions by state insured banks and state member banks, respectively, the division may publish and implement policies and procedures, consistent with RCW ((30.04.111)) 30A.04.111 and this chapter, related to examination for and supervision and enforcement of WAC 208-512A-300 and 208-512A-310.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-400 Effect of OCC rules, interpretations and opinions as guidance.
Where RCW ((30.04.111)) 30A.04.111 and this chapter do not specifically address certain transactions involving loans and extensions of credit, the division may, as necessary, in its interpretations and supervision and enforcement of banks, be guided by applicable rules, interpretations, and opinions of the Office of the Comptroller of the Currency in the interest of a bank's safety and soundness, but only to the extent that such rules, interpretations, and opinions are compatible with the provisions of RCW ((30.04.111)) 30A.04.111 and this chapter.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-500 Loans and extensions of credit to insiders and their immediate family.
No provision of Titles 30A and 32 RCW, chapter 208-512 WAC, or this chapter, shall limit the duty of a bank or a bank's affiliate, independent of any requirements of this chapter, to also comply with the provisions of Federal Reserve Board Regulation O, 12 C.F.R. Part 215, which relates to loans and extensions of credit to insiders of a bank or bank affiliate and their immediate family.
AMENDATORY SECTION (Amending WSR 13-03-037, filed 1/8/13, effective 2/8/13)
WAC 208-512A-600 Transitional rules.
(1) Loans or extensions of credit that were in violation of RCW ((30.04.111)) 30A.04.111 and the former lending limits rules prior to January 21, 2013, will be considered to remain in violation of law until they are paid in full, regardless of whether the loans or extensions of credit conform to the rules established in this chapter. Renewals or extensions of such loans or extensions of credit will also be considered violations of law.
(2) A bank that has outstanding loans or extensions of credit to a person in violation of RCW ((30.04.111)) 30A.04.111 and the former lending limits rules as of January 21, 2013, may make additional advances to such person after those dates if the additional advances are permitted under this chapter. The additional advances, however, may not be used directly or indirectly to repay any outstanding illegal loans or extensions of credit.
(3) Loans or extensions of credit which were in conformance with RCW ((30.04.111)) 30A.04.111 and the former lending limits rules prior to January 21, 2013, but are not in conformance with this chapter will not be considered to be violations of law during the existing contract terms of such loans or extensions of credit. Renewals or extensions of such loans or extensions of credit which are not in conformance with this chapter may be made on or after January 21, 2013, if the nonconformity is caused by WAC 208-512A-005 (1)(b) and 208-512A-300; however, all loans or extensions of credit made under such renewals or extensions must conform with this chapter no later than June 1, 2013. Loans or extensions of credit which are not in conformance with this chapter for any other reason (i.e., a reduction in the bank's capital) must conform to this section upon renewal or extension.
(4) If a bank, prior to January 21, 2013, entered into a legally binding commitment to advance funds on or after such date, and such commitment was in conformance with RCW ((30.04.111)) 30A.04.111 and the former lending limits rules, advances under such commitment may be made notwithstanding the fact that such advances are not in conformance with this chapter. The bank must, however, demonstrate that the commitment represents a legal obligation to fund, either by a written agreement or through file documentation.
(5) As used in this section, "former lending limits rules" means WAC 208-512-210 through 208-512-300, inclusive.
(6) Notwithstanding any other provision of this chapter, a savings bank under Title 32 RCW will not be considered to be in violation of law during the existing contract terms of any loan or extension of credit, which:
(a) In the case of a savings bank under WAC 208-512A-009 (2) or (3), was made and funded prior to June 1, 2013; or
(b) In the case of a savings bank under WAC 208-512A-009(4) but not subject to WAC 208-512A-009 (2) or (3), was made and funded prior to a date, earlier than June 1, 2013, upon which the savings bank gave notice to the division of its election to conform to the provisions of this chapter pursuant to WAC 208-512A-009(4).
(7) Notwithstanding any other provision of this chapter, a renewal or extension of such a loan or extension of credit by a savings bank under subsection (6)(a) and (b) of this section, which is not in conformance with this chapter, may be made if the nonconformity is caused by WAC 208-512A-005 (1)(b) and 208-512A-300; however, any loan or extension of credit made under such renewals or extensions must conform with this chapter no later than December 31, 2013. However, a loan or extension of credit by such a savings bank which is not in conformance with this chapter for any other reason (i.e., a reduction in the bank's capital) must conform to this section upon renewal or extension.
(8) A bank will not be deemed to be in violation of law, including this chapter, if:
(a) It is engaged in derivative transactions prior to January 21, 2013;
(b) Uses an internal model method in connection with any part of its derivative transaction program;
(c) It is later determined by the division that the bank's specific internal model method is unsafe and unsound or that the bank's management is not competent to administer its derivative transaction program using such specific internal model method; and
(d) The director of banks does not find that the bank has shown a lack of good faith in its use of a specific internal model method.
(9) In the event of a determination pursuant to subsection (8) of this section, the division will treat the bank's derivative transactions program as "nonconforming" rather than a violation of law. In that event, the director of banks may issue a directive to the bank to exercise reasonable efforts to either bring its derivative transactions program into compliance or, if the director of banks so finds in exceptional cases, unwind its derivative transactions program.