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Dreher Tomkies LLP
Attorneys at Law
2750 Huntington Center
41 South High Street
Columbus, Ohio 43215
Telephone: 614-628-8000
Fax: 614-628-1600

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The Federal Reserve Board (“FRB”) adopted a final Regulation W to implement Sections 23A and 23B of the Federal Reserve Act, which restrict the ability of member banks to engage in certain transactions with affiliates. The final rule is similar to the FRB’s proposed rule in a number of respects. For example, the final rule retains proposed rule’s general timing provisions for credit transactions with an affiliate. The timing provisions are used by member banks to calculate the value of covered transactions for purposes of determining compliance with Section 23A’s quantitative restrictions and collateral requirements. The FRB did modify proposed Regulation W in a number of important respects, however, to address concerns of commenters and the FRB. For example, the exemption from Section 23A’s size restrictions and collateral requirements for extensions of credit by a member bank to a nonaffiliate pursuant to a credit card has been revised. The final rule now provides several different methods for a member bank to demonstrate that its credit card meets the 25 percent test to qualify as a “general purpose credit card” subject to the exemption. The final rule also gives member banks that fall out of compliance with the 25 percent test a three‑month grace period to return to compliance before extensions of credit under the card are considered covered transactions. Finally, the final rule gives member banks that are required to validate their ongoing compliance with the 25 percent test a fixed method, time frames and examples of computing compliance. The final rule addresses numerous, but not all, compliance issues regarding Sections 23A and 23B. For example, the final rule does not expressly address whether a bankruptcy‑remote special purpose entity would be deemed an affiliate of a member bank involved in a securitization. The FRB’s explanation of the final rule does provide some guidance on this and other issues, however.

Regulation W incorporates most of the formal and informal interpretations of Sections 23A and 23B issued by the FRB. Accordingly, the FRB rescinded these interpretations. Regulation W will take effect April 1, 2003.

In addition, the FRB is seeking public comment on a proposed rule that would amend an exemption in Regulation W permitting a member bank to exclude the purchase of an extension of credit from an affiliate from the quantitative limits imposed by Section 23A if certain criteria are met. Comments must be received within 30 days of publication of the proposed rule in the Federal Register.

If we can help you comply with the requirements and prohibitions under Regulation W or if you would like a copy of the final or proposed rules, please contact Mike Tomkies at (614) 628‑1603 or [email protected] or Chuck Gall at (614) 628-1605 or [email protected] .