Regulation G Definition

What Is Regulation G?

Regulation G refers to a rule enforced by the Federal Reserve System that requires banks, their affiliates, and their subsidiaries to publicly disclose written agreements with nongovernmental entities or persons as they pertain to the Community Reinvestment Act. The regulation is officially known as the Disclosure and Reporting of CRA-Related Agreements. Under Regulation G, any agreements of this kind must be submitted to the applicable federal banking agency and followed up on annually.

Understanding Regulation G

The Federal Reserve is the central bank of the United States. One of its main responsibilities is to ensure that the country's financial system is safe, sound, and transparent. As such, it has established a number of regulations by which all member banks must abide. These rules range from the handling of checks and funds transfers to the disclosure of information to the public.

Regulation G governs the disclosure and reporting of agreements related to the federal Community Reinvestment Act. The 1977 law was aimed at reducing discriminatory lending practices that denied loans to prospective homeowners and small business owners in low- and moderate-income neighborhoods. Put simply, it ensures that banks abide by anti-discriminatory lending practices.

The CRA essentially requires banks to make a good-faith effort to extend loans to qualified individuals and business people in low- and moderate-income neighborhoods. Lenders are also mandated to report regularly on those efforts to the appropriate banking agency. The regulations are enforced by the same agencies that approve applications by banks to open new branches or merge with another institution. Their compliance with CRA is a factor to be considered.

The regulation also fulfills some requirements of the Gramm-Leach-Bliley Act. That 1999 law, also known as the Financial Modernization Act, removed barriers to a single company offering banking, investment, and insurance products under one umbrella, and led to the giant financial institutions of the modern era.

Regulation G: What's Covered and Not Covered

Regulation G applies to cash payments, grants, or other considerations that exceed $10,000 per calendar year. This amount does not include loans. However, it does apply to loans that total more than $50,000 per calendar year. In this case, state member banks, bank holding companies, and savings and loan holding companies with deposits must be insured by the Federal Deposit Insurance Company (FDIC).

The rules governing covered agreements do not include individual loans secured by real estate. They also do not cover extensions of credit to the following:

• Individuals
• Businesses
• Farms
• Other entities

Regulation G’s definition of covered agreements does not apply if the funds in question are loaned at rates that are not substantially below market rates. The rule also does not apply if the loan application or documentation does not indicate the borrower intends to use the funds to make a loan or extend credit to any third parties.

How Regulation G Is Applied

Covered agreements that must be reported under Regulation G include any contract, arrangement, or understanding that is made in writing when the parties include one or more insured depository institutions or affiliates of an insured depository institution and one or more nongovernment entity or persons.

Regulation G applies if the agreement is made in connection with the fulfillment of the CRA. This includes agreements made with a nongovernmental entity or person that has issued CRA communications prior to entering into the agreement.

CRA communications are defined as written or oral comments issued to a federal banking agency regarding the sufficiency of a bank’s CRA performance, any affiliated insured depository institutions, or any CRA affiliate.

The Bottom Line

As the country's central bank, the Federal Reserve has several major responsibilities. One of those is to regulate banks and other financial institutions that fall under its purview. Regulation G is a rule established by the Fed. It states that banks must disclose any written agreements or contracts they have with nongovernment entities or persons with respect to the Community Reinvestment Act. The law was enacted to cut down on discriminatory lending, especially for individuals and businesses in low- to moderate-income neighborhoods.