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«REGISTER OF ADMINISTRATIVE LETTERS Issued by Bureau of Financial Institutions Virginia State Corporation Commission FINANCIAL INSTITUTIONS AND ...»

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An Administrative Letter is the method by which the Commissioner of Financial Institutions

formally communicates with entities regulated by the Bureau of Financial Institutions.

Administrative Letters are not regulations or law, but are positions that the Bureau of Financial

Institutions has taken on issues affecting financial institutions. Administrative Letters are often

issued after the Bureau of Financial Institutions identifies or receives a number of questions or concerns about a particular issue, regulation or law. Administrative Letters provide helpful direction, guidance, instructions, interpretations, or general information.


Issued by Bureau of Financial Institutions Virginia State Corporation Commission


Title 6.2 Banks Chapter 8 Letter Number Application for a Branch Office....................................... BFI-AL-0201 §§ 6.2-831 and 6.2-1133 Investment by Banks in Shares of Investment Companies...................................................... BFI-AL-0202 § 6.2-874 Loans Secured by Stock of Financial Institution Holding Companies................................................ BFI-AL-0203 §§ 6.2-874, 6.2-1186, and 6.2-1187 Investment in Community Development Corporations..................... BFI-AL-0204 § 6.2-874 Securities Rating Services........................................... BFI-AL-0205 § 6.2-875 Loans in Violation of Section 6.2-875................................... BFI-AL-0206 § 6.2-875 Obligations Subject to the Limits Specified.............................. BFI-AL-0207 i § 6.2-875 Exceptions to Lending Limits for State-Chartered Banks.......................................................... BFI-AL-0208 § 6.2-875 Right of Offset by Holders of Subordinated Bank Debt...................................................... BFI-AL-0209 §§ 6.2-875 and 6.2-890 Loans Secured by Real Estate............

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Loans Secured by Stock of Financial Institution Holding Companies................................................ BFI-AL-0203 §§ 6.2-874, 6.2-1186, and 6.2-1187

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Investment in Capital Stock of USL Savings Institutions Insurance Group, Ltd...................................... BFI-AL-0301 §§ 6.2-1110 and 6.2-1186 A 22 Investment by Virginia Savings Institutions in Shares of Open-End Management Investment Companies........................... BFI-AL-0303

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Rebate of Unearned Installment Loan Interest by Banks--Rule of 78............................................... BFI-AL-0703 §§ 6.2-401, 6.2-403, 6.2-423, and 6.2-1409

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Compensating, or Offering to Compensate, Unlicensed Mortgage Brokers.........................................BFI-AL-1603 § 6.2-1600 Funds Available to Licensed Mortgage Lenders for Business Operation.............................................. BFI-AL-1604 §§ 6.2-1606 and 6.2-1619

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Minimum Mortgage Lender and Broker Surety Bond....................... BFI-AL§ 6.2-1604 Prepayment Penalties in Alternative Mortgage Transactions.................. BFI-AL§§ 6.2-422 and 6.2-423 <

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1. Any bank or savings institution may apply to the State Corporation Commission for authority to establish a branch office.

2. Authority granted to any bank or savings institution to establish a branch will expire at the end of one year, unless a request for an extension of time is received not less than 45 days nor more than 60 days prior to expiration of the time stated in the certificate of authority to establish the branch. A request for an extension of time must specify the reason(s) for the delay.

3. For good cause, the time within which a branch must be opened for business may be extended for a period not to exceed six months beyond the expiration of the initial one year period authorized for the branch to be opened. Except in unusual circumstances and for good cause shown, a second extension of time will not be granted unless construction of the branch has been started.

4. Where a bank or savings institution has been granted an extension of time for the opening of an approved branch, the State Corporation Commission may elect not to act on an application for an additional branch office until construction of such previously approved branch has been started.

Revised and Reissued July 1, 1999 and June 1, 2011. Original effective date: September 10, 1979.

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Chapter 297 of the 1987 Acts of Assembly amended § 6.1-60.1 (recodified as § 6.2-874) of the Code of Virginia to provide (among other things) that the general prohibition against a bank’s investing in corporate stock shall not prevent any bank “from acquiring, owning and holding, subject to such conditions as the Commissioner may prescribe, shares of investment companies.” This circular prescribes the conditions governing investment in shares of investment companies (or, mutual funds) by state banks.

1. The investment portfolio of the investment company must consist solely and exclusively of instruments and obligations in which the bank could invest directly for its own portfolio.

2. Purchases of such shares are limited to the same extent that direct investment in any particular asset in the investment company’s portfolio would be limited by applicable law or regulation.

3. The bank as shareholder must have legally enforceable, undivided interest in the underlying assets of the investment company, which interest is proportionate to the bank’s ownership in the company.

4. The bank as shareholder must be shielded absolutely from direct or indirect liability for any act or obligation of the investment company.

5. The investment company must be registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and the Securities Act of 1933.

6. Where the investment company engages in such activities as transactions in options, futures, puts or calls, etc., shares purchased by the bank must be treated as if the bank were engaging in such transactions directly and such transactions must be reported and accounted for accordingly.

7. The bank’s board of directors must have established and formally approved an investment policy that specifically provides for investment in investment companies, and that requires specific prior approval by the board of each initial investment in the shares of any company. Thereafter, each additional investment in the shares of that investment company must be reviewed and approved by the board, and such review and approval must be reflected in official board minutes. It is the board’s sole responsibility to determine, with the advice of counsel if necessary, whether the shares of any particular investment company meet all established criteria, legal and otherwise, before authorizing Page 2 of 2

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investment in those shares. The Bureau will not provide a prior determination of the eligibility of the shares of any specific company for investment.

8. Prior to any investment in investment companies, adequately detailed procedures, standards and controls for managing such investments must be established.

9. Not less frequently than quarterly, a detailed review of all holdings of investment companies’ shares must be conducted by the board, and the board must further review the extent to which the board’s policies and procedures are effective.

The board of directors must specifically consider and make adequate provision for the effect of investment in investment companies’ shares upon the bank’s present and future liquidity needs.

The marketability of such shares and their acceptability as security for public deposits and for other purposes requires the full understanding and careful attention of the board. Careful attention to sales fees and accounting for such fees when shares are bought and sold is also necessary.

It is strongly emphasized that the decision to invest in shares of one or more investment companies is the absolute and sole responsibility of each bank’s board of directors.

Considerations of safety and soundness of an institution must not be subordinated to perceived opportunities for income.

Compliance with the foregoing conditions and requirements will be reviewed during examinations.

Issued by the Commissioner of Financial Institutions, August 10, 1987, as Circular 1-87.

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Section 6.2-874 of the Code of Virginia provides, in part, that a bank may not make loans secured by its own stock.

This prohibition does not extend expressly to loans secured by shares of a bank’s holding company. Where no substantial market for a holding company’s stock exists, however, risks similar to those which underlie the statutory prohibition may be involved.

It appears that such instances are less prevalent now than in 1987, when this issue was last addressed.

Accordingly, the Bureau of Financial Institutions deems it an unsafe and unsound practice for a bank that has been in existence for less than five years to make a loan on the security of shares of its own holding company without prior written approval by the Bureau. Otherwise, lending on the security of shares of a bank’s holding company will not be considered an unsound practice.

This ruling does not affect the ability of a bank to take such holding company shares to prevent or reduce loss on a debt previously contracted.

Sections 6.2-1186 and 6.2-1187 of the Code of Virginia do not permit state savings institutions to make loans secured by shares of such institutions or their holding companies. Moreover, no such authority has been granted pursuant to subsection 22 of § 6.2-1186. Therefore, instances of such lending will be cited as violations.

Revised and reissued January 22, 1996 and June 1, 2011.

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Chapter 464 of the 1988 Acts of Assembly amended § 6.1-60.1 (recodified as § 6.2-874) of the Code of Virginia to provide that the general prohibition against investment by a State bank in corporate stock shall not prevent any bank "...from acquiring, owning and holding, subject to such conditions as the Commissioner may prescribe, shares of stock in a community development corporation."

Under that authority, a State bank may invest in a community development corporation (CDC),


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These conditions apply only to investment in the stock (equity) of community development corporations. State banks have authority to donate funds to community organizations (§ 13.1-627 A 13 of the Code of Virginia), or to lend to such organizations subject to the provisions of § 6.2-875 of the Code of Virginia. However, it is noted particularly that, unlike general business corporations in Virginia, State banks are not empowered by law to enter into partnerships, joint ventures, or other associations, regardless of the purpose of such an organization (§ 13.1-627 B of the Code of Virginia).

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Every investment in a CDC by a bank will be reviewed by the Bureau's examiners for asset quality, risk characteristics and adherence to the provisions of § 6.2-874 (15) of the Code of Virginia and this Circular. The management and Board of Directors of the bank are responsible for compliance with applicable laws and regulations.

Issued by the Commissioner of Financial Institutions September 8, 1988 as Circular 1-88.

Revised and reissued August 19, 2015, and April 20, 2016.

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Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act directed the federal banking agencies to remove from their regulations all references to, and requirements to rely on, nationally recognized statistical rating organizations (Moody's, Standard & Poor's, Fitch's, etc.) and to establish appropriate standards for evaluating the creditworthiness of securities and money market instruments.

Accordingly, every bank must, as a matter of prudence and as a basis for investment decisions, have available for analysis sufficient credit information to enable an informed appraisal of any security.

Banks are now required to identify credit risk in investment securities by fully assessing the issuer’s repayment ability. While the process may be more intensive than reliance on external credit ratings, management has several existing tools at its disposal to identify and monitor credit risk. A bank’s existing loan underwriting processes provide a basic starting point for identifying credit risk. As with underwriting credits, the degree of due diligence needed for any specific investment is dependent on the security’s credit quality, the complexity of the structure, and the size of the bank’s investment. So, for example, while a small investment in a straightforward general obligation bond of a local municipality should still receive an appropriate assessment of credit risk, such an investment would likely require less intensive review than a large investment in a corporate bond or a private label mortgage-backed security.1 For additional guidance, banks may refer to the Federal Reserve Board's Supervision and Regulation Letter SR 12-15 (Investing in Securities without Reliance on Nationally Recognized

Statistical Rating Organization Ratings), which is available at the following website:

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