paving certificate which constitutes a lien on property securing an association loan, if necessary to protect its interest in the property. However, it may not acquire such a certificate as an investment or as to property on which it does not have a mortgage.

[44 FR 39145, July 3, 1979, as amended at 48 FR 23076, May 23, 1983]

8555.4 [Reserved]

§ 555.5 Insurance.

(a) Control over placing of hazard insurance. A Federal association's board of directors has the duty to establish and maintain such requirements over hazard insurance as it considers necessary to protect the association's interest in real estate security for its loans. The requirements may include establishment of fair standards based on such factors as recognized financial ratings of insurers and coverage forms, but such standards may not be based on the insurer's corporate structure. Subject to this limitation, the borrower should have reasonable freedom of choice in placing hazard insurance on the real estate se-curity.

[44 FR 39146, July 3, 1979, as amended at 47 FR 10788, Mar. 12, 1982]

88 555.6-555.7 [Reserved]

§ 555.8 Savings accounts.

(a) Date payments considered received. If a Federal association has fixed a determination date as provided in its charter, it usually must actually receive payments on its savings accounts by that date to consider them received on the first of the month. However, in a month when the determination date falls on a nonbusiness day for the association, it may consider payments received on the next business day after the determination date as received on the first of the month. The association may not, however, represent generally that payments received on a date later than the determination date receive earnings from the first, without stating the month in which that will ocur.

(b) Redemption of savings accounts must not be discriminatory. Section 7 of a Federal mutual association's char

ter does not empower the association to redeem a shareholder's account discriminatorily. Authority to redeem savings accounts "by lot or otherwise" permits redemption only by methods similar to determination by lot, i.e., that are non-discriminatory.

(c) Sale of merchandise in connection with soliciting savings accounts. A Federal association may not, as an incident to powers prescribed in its charter, sell, except in connection with a promotional campaign, merchandise other than coin banks and similar coin-savings devices.

[44 FR 39146, July 3, 1979, as amended at 51 FR 10817, Mar. 31, 1986]

§ 555.9 Effect of loan participation on status of borrowing members.

Solely for the purpose of determining borrower membership in a Federal mutual association under Parts 544 and 563b of this chapter, a person is a borrowing member of the association under its charter only if the association has singly or jointly originated a loan to the person, the loan has not been fully repaid, and the association has not sold its entire ownership interest in the loan to a third party or parties. If the loan is assumed in full, the person assuming the loan becomes a borrowing member of the association in lieu of the original borrower, regardless of whether the original borrower remains obligated on the loan. [44 FR 39146, July 3, 1979]

§ 555.10 Service corporation secured debt limitation.

The unpaid balance of a note executed by a service corporation and secured by a mortgage or similar obligation is debt under § 545.74(c)(3), even if the holder of the note, in the event of default, may proceed only against the security property and has no legal basis for recovery of any deficiency from the service corporation.

[44 FR 39146, July 3, 1979, as amended at 52 FR 7122, Mar. 9, 1987]

§ 555.11 [Reserved]

§ 555.12 Drive-in and pedestrian facilities.

Section 545.93 of the rules and regulations for the Federal Savings and Loan System under certain conditions permits a Federal association, without prior approval of the Board, to establish a single drive-in or pedestrian facility in conjunction with its home office and each branch office. A "pedestrian" facility is a facility at which the person doing business with the association does not enter an office or structure of any kind but remains outside the structure and is serviced by a teller inside a building or structure. Similarly, a person doing business with the association, in the case of a drive-in facility, will remain outside the drive-in facility and may transact business from a vehicle. The building or structure in which a teller is located for such a facility may be the association's home or branch office or a separate structure, but it may not be placed in a store or location of some other business so as to constitute joint occupancy of quarters. There is no objection to a pedestrian facility which faces on an enclosed mall and serves pedestrians who remain in the mall while transacting business with the association. The "ordinary" functions which may be performed at a drive-in or pedestrian facility are limited primarily to acceptance of payments on savings accounts, payment of withdrawals from accounts, acceptance of payments on mortgages or other loans, and opening of savings accounts. Although in the case of a particular association the tellers at its regular offices may give out and receive mortgage loan applications, such function is not an "ordinary" function performed at a teller window but is an extraordinary function, and therefore may not be performed at a drive-in or pedestrian facility.

[40 FR 47103, Oct. 8, 1975, as amended at 52 FR 7122, Mar. 9, 1987]

§ 555.13 First liens on properties sold by the Secretary of HUD.

Under section 5(c) of the Act a Federal association may make mortgage loans insured by the Federal Housing Administration and secured by first

"Owned" and "ownership", in ection with an insurance agency, de, in addition to ownership by a n: (i) Ownership by the person's se, minor child, or other relative ood or marriage having the same e as the person; (ii) ownership ugh a broker or other nominee or t; or (iii) ownership by a company colled by the person. However, the s do not include ownership by one person of less than 10 percent of Insurance agency, or ownership by e than one such person of less - 25 percent of the agency;

- "Profits" means any form of reeration received, or to be received, officers, directors, or controlling ons of the association other than ries, fees, or commissions based n, and reasonably related to, servactually performed respecting an rance agency.

O "Referral" means directing the ness of association members to an iated insurance agency, but does include offering association mem, without specific recommenda-, a list of approved insurance agen. including the affiliated agency, ess the list is designed or given in a aner calculated to cause members elect the affiliated agency over the er listed agencies;

→) General. Subject to exceptions in agraph (c) of this section, as limitby paragraph (d), and § 545.27 of s subchapter, referral of insurance iness of an association's members an insurance agency owned by one more officers or directors of the asHation, or by one or more persons ving the power to direct its managent, constitutes usurpation of the asiation's corporate opportunity to gage in the insurance business.

(c) Exceptions. No corporate opportunity for a Federal association to enter the insurance business is deemed to have existed:

(1) If the referral described in paragraph (b) took place:

(i) While application for permission to engage in the insurance business was on file with the appropriate State agencies and/or the Board;

(ii) Before May 20, 1971; (iii) While a specific State statute or regulation precluded Federal association service corporations (or their wholly-owned subsidiaries) from engaging in the insurance business;

(iv) While State licensing or regulatory authorities whose prior approval is required to engage in the insurance business followed an established and well-known policy of refusing to accept or process applications from Federal association service corporations (or their wholly-owned subsidiaries) for permission to engage in the insurance business (an association need not demonstrate existence of such a policy by instituting legal proceedings to compel approval);

(v) During a reasonable period (not over 18 months) following (A) May 20, 1971 or (B) a change in the State statute or regulation described in paragraph (c)(1)(iii) of this section or policy described in paragraph (c)(1)(iv) of this section for the association to have investigated the feasibility and desirability of acquiring or establishing its own service corporation insurance business and to have prepared and filed applications with respect thereto;

(2) If the association, after filing any necessary application and making a bona fide attempt to obtain any necessary approvals (such attempt need not involve instituting legal proceedings to compel such approvals), was denied permission by the appropriate State licensing or regulatory authorities for its service corporation, or a whollyowned subsidiary thereof, to engage in the insurance business;

(3) If a disinterested and independent majority of the Federal association's board of directors, after receiving a full and fair presentation of the matter, rejected the opportunity to engage in the insurance business

(e) Relief required. (1) Usurpation of corporate opportunity under paragraph (b) of this section entitles the association to the resulting profits of the affiliated insurance agency during the period of usurpation, if such profits are attributable to: (i) Referrals by the association of the association borrowers to the agency during that period and (ii) renewals of such referrals made during such period, unless it can be shown that such renewals were made for a reason other than maintaining the original placement. The association is not entitled to profits for referrals (or renewals thereof) made before the period of usurpation or for referrals (or renewals thereof) made after the corporate opportunity ceased to exist. (2) paragraph (e)(1) of this section, an association whose corporate opportunity was usurped under this section is not entitled to recover insurance agency profits: (i) Which exceed profits actually accruing to the association's officers, directors, or controlling persons (e.g., their pro rata share of the profits based on their partial ownership of the insurance agency) during the period of usurpation; or (ii) from a person who was an officer of the association during the period of unsurpation, if it is clearly shown that the person's receipt of such profits was in lieu of a portion of what otherwise would have been officer's compensation

Notwithstanding

(profits that exceed an amount which could reasonably be regarded to have been in lieu of compensation, based on compensation of persons in comparable positions, are recoverable).

[44 FR 39147, July 3, 1979, as amended at 52 FR 7122, Mar. 9, 1987]

§ 555.18 Deposit assurance of direct deposit of social security payments.

(a) Under the Social Security Administration's "direct deposit program", a social security beneficiary may designate a financial institution, including a Federal association, to receive the beneficiary's benefit payments. Thereafter, benefit payments are made directly to the institution in the form of checks or magnetic tape notices.

R

31

(b) The Board has concluded that giving "deposit assurance" in connection with the program is within a Federal association's implied powers under section 5 of the Act. Deposit assurance consists of the association's undertaking to credit the beneficiary's account with a "deposit" in the amount of the benefit payment on the date it is due to be received, whether or not the association actually receives the check or magnetic tape notice from the Treasury by that date. The Board has concluded, based on the unique nature of the social security direct-deposit program and the improbability of failure to receive payments on time, that the association "constructively" receives payment on that date.

(c) The Board believes, however, that such deposit assurance may in1 volve some risk for Federal associations participating in the program and that they must therefore institute Cadequate safeguards and controls in conjunction therewith.

(d) Electronic fund transfers. Any electronic fund transfer, as that term is defined by section 903 of the Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) and § 205.2 of Regulation E of the Federal Reserve Board (12 CFR 205.2), made under this section, is subject to the provisions of the Electronic Fund Transfer Act and Regulation E.

[44 FR 39148, July 3, 1979, as amended at 45 FR 24447, Apr. 10, 1980]

$555.19 Receipt of interest expressed as a percentage of other income.

(a) With limited exceptions, Federal associations lack the statutory authority to acquire an equity interest either in real estate or in a corporation. Accordingly, associations cannot, as part of a loan transaction, acquire an ownership interest in the security property or in a corporate borrower. The issue has arisen as to whether the receipt of a share of the income generated by the security property or of a corporate borrower, or any similar participation with the borrower in the loan project, necessarily constitutes an unauthorized acquisition of an equity interest.

(b) The Board has determined that the receipt of such income or the right to receive income should not be considered an equity interest if it in substance constitutes no more than a part of the compensation received for the use of the association's funds. Accordingly, if the borrower has an unconditional obligation to repay the loan principal, and if an association receives a substantial payment of interest calculated periodically as a percentage of the outstanding principal loan balance, it may receive additional interest calculated on the basis of the income from or the appreciation of the security property, the income of a corporate borrower, or some other measure of a venture's success. The means by which an association calculates its share of the income is not a material consideration in determining whether the share constitutes equity interest in the property.

an