[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR221.115]

[Page 48-49]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 221--CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)--Table of Contents
 
Sec. 221.115  Accepting a purpose statement through the mail without benefit of face-to-face interview.

    (a) The Board has been asked whether the acceptance of a purpose 
statement submitted through the mail by a lender subject to the 
provisions of this part will meet the good faith requirement of 
Sec. 221.3(c). Section 221.3(c) states that in connection with any 
credit secured by collateral which includes any margin stock, a nonbank 
lender must obtain a purpose statement executed by the borrower and 
accepted by the lender in good faith. Such acceptance requires that the 
lender be alert to the circumstances surrounding the credit and if 
further information suggests inquiry, he must investigate and be 
satisfied that the statement is truthful.
    (b) The lender is a subsidiary of a holding company which also has 
another subsidiary which serves as underwriter and investment advisor to 
various mutual funds. The sole business of the lender will be to make 
``non-purpose'' consumer loans to shareholders of the mutual funds, such 
loans to be collateralized by the fund shares. Most mutual funds shares 
are margin stock for purposes of this part. Solicitation and acceptance 
of these consumer

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loans will be done principally through the mail and the lender wishes to 
obtain the required purpose statement by mail rather than by a face-to-
face interview. Personal interviews are not practicable for the lender 
because shareholders of the funds are scattered throughout the country. 
In order to provide the same safeguards inherent in face-to-face 
interviews, the lender has developed certain procedures designed to 
satisfy the good faith acceptance requirement of this part.
    (c) The purpose statement will be supplemented with several 
additional questions relevant to the prospective borrower's investment 
activities such as purchases of any security within the last 6 months, 
dollar amount, and obligations to purchase or pay for previous 
purchases; present plans to purchase securities in the near future, 
participations in securities purchase plans, list of unpaid debts, and 
present income level. Some questions have been modified to facilitate 
understanding but no questions have been deleted. If additional inquiry 
is indicated by the answers on the form, a loan officer of the lender 
will interview the borrower by telephone to make sure the loan is ``non-
purpose''. Whenever the loan exceeds the ``maximum loan value'' of the 
collateral for a regulated loan, a telephone interview will be done as a 
matter of course.
    (d) One of the stated purposes of Regulation X (12 CFR part 224) was 
to prevent the infusion of unregulated credit into the securities 
markets by borrowers falsely certifying the purpose of a loan. The Board 
is of the view that the existence of Regulation X (12 CFR part 224), 
which makes the borrower liable for willful violations of the margin 
regulations, will allow a lender subject to this part to meet the good 
faith acceptance requirement of Sec. 221.3(c) without a face-to-face 
interview if the lender adopts a program, such as the one described in 
paragraph (c) of this section, which requires additional detailed 
information from the borrower and proper procedures are instituted to 
verify the truth of the information received. Lenders intending to 
embark on a similar program should discuss proposed plans with their 
district Federal Reserve Bank. Lenders may have existing or future loans 
with the prospective customers which could complicate the efforts to 
determine the true purpose of the loan.