What is Regulation X?

Regulation X is a rule, issued by the Board of Governors of the Federal Reserve System (FRS), which governs credit limits granted to foreign persons or organizations for the purchase of United States Treasury bonds, such as T-links.

The term Regulation X may also refer to a regulation relating to real estate transactions issued by the Consumer Financial Protection Bureau. Borrowers subject to Regulation X may also have to comply with both the Federal Reserve Regulation Trelating to brokers and dealers, and Regulation Ubanks and lenders.

Key points to remember

  • Regulation X is a rule, issued by the Board of Governors of the Federal Reserve System (FRS), that governs the credit limits given to foreign persons or organizations for the purchase of United States Treasury securities, such as treasury bills.
  • Borrowers subject to Regulation X must also prove that the credit they obtain complies with both the Federal Reserve’s Regulation T and Regulation U.
  • Regulation X requires international investors to contribute at least 50% cash for their domestic investments as proof of creditworthiness.
  • Regulation X is also the name of a Consumer Financial Protection Bureau (CFPB) regulation governing real estate transactions.
  • The CFPB recently proposed to amend Regulation X to extend and expand the federal moratorium on foreclosures.

Understanding Regulation X

Regulation X is part of the Securities Exchange Act of 1934. It applies to secured credit both inside and outside the United States. Borrowers under Regulation X must also prove that the credit they obtain complies with both the Federal Reserve Regulation T (concerning brokers and traders) and Regulation U (banks and lenders).

Borrowers who qualify for permanent residency outside the United States and who do not obtain or carry credit over $100,000 outside the United States are exempt from Rule X. Termination credit is any credit for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying the Margin Stock.

The acquisition of US Treasury securities such as bonds by international parties can create complex economic and political interdependence. Countries like China frequently acquire bonds and other US Treasuries. The sale of such bonds allows the federal government to finance budget deficits.

US government debt has been purchased at an appreciable rate since 2008, with international buyers making up a substantial share of this market. The Federal Reserve is also buying some of this debt. As international entities continue to acquire these titles, this gives the federal government greater fiscal flexibility to manage budget variances.

Regulation X is used to enforce policies that prevent foreign individuals and organizations from making domestic investments for which they do not have supporting funds. The rule enforces the guidelines set forth by Regulation T, which prohibits borrowers from using more than 50% financing from brokerage firms when purchasing securities.

When this is enforced through the provisions of Regulation X, it reduces the ability of international buyers to use credit to invest in US securities. Comparable rules under Regulation U also limit the funding available from bank lenders for the purchase of such securities.

The provisions of Regulation X require international investors to contribute at least 50% cash for their domestic investments, regardless of the structure of the remaining credit or financing. This means that international investors must be creditworthy enough to pay at least half the price of their purchases of US Treasuries.

Regulation X in real estate

A completely separate Regulation X has been issued by the Consumer Financial Protection Bureau (CFPB) to effect the Property Settlement Procedures Act 1974. This policy provides protection for consumers who own or apply for federal mortgages. Regulation X, in this context, requires disclosure of the application and servicing of certain secured loans.

In April 2021, the CFPB proposed to amend Regulation X to streamline the process for modifying mortgages for borrowers affected by government restrictions issued during the COVID-19 pandemic and to enforce an emergency review period before foreclosure for mortgages on primary residences to determine if modification or other relief is possible.

Under the new rule, mortgage services would not be allowed to initiate foreclosure proceedings on mortgages for borrowers who have faced financial hardship related to COVID-19. The protections were finalized on June 30, 2021 and became effective on August 31, 2021, but then expired on January 1, 2022.

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