O

Comptroller of the Currency

Administrator of National Banks

Northeastern District

1114 Avenue of the Americas, Suite 3900

New York, New York 10036

June 23, 2004 **CRA Decision #122**

### July 2004

Martha A. Pampel, Esq.

Associate General Counsel

HSBC North America Inc.

2700 Sanders Road

Prospect Heights, Illinois 60070

Re: Applications to merge HSBC Bank & Trust Company (Delaware), National
Association, Wilmington, Delaware, into a newly established interim
national bank with the title, HSBC Bank USA, National Association, New
Castle, Delaware, and the subsequent merger of HSBC Bank USA, Buffalo,
New York, into HSBC Bank USA, National Association, New Castle,
Delaware, under the charter number and title of the latter.

Control Numbers: 2004-NE-02-0020 and 2004-NE-02-0021

Dear Ms. Pampel:

This is to inform you that on June 23, 2004, the Office of the
Comptroller of the Currency ("OCC") conditionally approved HSBC USA,
Inc.'s proposal to merge HSBC Bank & Trust Company (Delaware), National
Association ("HBT"), Wilmington, Delaware, into a newly formed interim
national bank with the title, HSBC Bank USA, National Association, New
Castle, Delaware.

The OCC also conditionally approved, on June 23, 2004, the merger of
HSBC Bank USA ("HSBC"), Buffalo, New York, into HSBC Bank USA, National
Association, ("HUNA" or "Resulting Bank") New Castle, Delaware (the
resulting bank from the merger described above), under the charter and
the title of the latter.[^1] HSBC is currently a New York
state-chartered bank regulated by the Board of Governors of the Federal
Reserve System and the New York State Banking Department.

# Legal Authority

The merger of HBT into the HSBC Bank USA, National Association is
legally authorized under 12 U.S.C. § 215a, and the merger of HSBC into
HUNA is legally authorized as an interstate merger transaction under the
Riegle-Neal Act, 12 U.S.C. §§ 215a-1 and 1831u. The OCC reviewed the
proposed merger under the criteria of the Bank Merger Act (12 U.S.C.
§ 1828(c)), the Community Reinvestment Act (12 U.S.C. §§ 2901
[et]{.underline} [seq]{.underline}.), and applicable OCC regulations,
including 12 C.F.R. § 5.33, and policies. Among other matters, we found
that the proposed transaction would not have any anticompetitive
effects. The OCC considered the financial and managerial resources of
the banks, their future prospects, and the convenience and needs of the
communities to be served. In addition, the Bank Merger Act requires the
OCC to consider, "\... the effectiveness of any insured depository
institution involved in the proposed merger transaction in combating
money laundering activities, including in overseas branches." (12 U.S.C.
§ 1828(c)(11).)[^2] We considered these factors and believe the approval
of this transaction is consistent with the statutory provisions.

# Community Reinvestment Act

With respect to the Community Reinvestment Act ("CRA"), the OCC takes
into account the applicants' record of helping to meet the credit needs
of their entire communities, including low- and moderate-income
neighborhoods, when evaluating certain applications, including
transactions subject to the Bank Merger Act.[^3] Based on HSBC's CRA
record of performance, the OCC found approval to be consistent with the
CRA.

HBT is a national bank whose operations are limited to those of a trust
company and activities related thereto. HBT does not accept deposits,
and it is not an insured bank under the Federal Deposit Insurance Act.
As a result, HBT is not subject to the requirements of the CRA and does
not have a CRA performance rating.

HSBC's two most recent CRA examinations by the New York State Banking
Department and the Federal Reserve Bank of New York ("Reserve Bank")
have resulted in consecutive "Outstanding" ratings. The Reserve Bank's
Performance Evaluation ("PE") dated February 24, 2003, and covering
performance from January 1, 2001, through December 31, 2002, assigned an
overall "Outstanding" rating under the Lending, Investment, and Service
Tests. The Reserve Bank found that the total volume of mortgage and
small business lending showed excellent responsiveness to credit needs
in the bank's assessment areas, the overall distribution of loans to
individuals of different income levels was excellent, community
development lending levels were excellent, and the level of qualified
investments was excellent. Overall, the bank's retail delivery systems
were readily accessible to geographies and individuals of differing
income levels throughout the bank's assessment areas. The Reserve Bank
noted that it did not identify any violations of the substantive
provisions of the anti-discrimination laws and regulations. The OCC does
not expect the merger to have any adverse impact on the CRA efforts or
programs of the Resulting Bank, which will be headquartered in New
Castle, Delaware.

The Resulting Bank's CRA assessment area will be expanded beyond HSBC's
current assessment area to include the northern half of New Castle
County in the State of Delaware.[^4] This area includes the
Wilmington-Newark Metropolitan Statistical Area and consists of 119
census tracts. All low-income census tracts in Delaware are located
within this area.

The applicant has represented that HUNA will launch and promote a CRA
program in Delaware that includes community development loans,
investments and grants. In addition, HUNA will retain a full-time CRA
officer to support its CRA efforts in Delaware and to develop
relationships with community development financial intermediaries and
community development groups, consortia, and intermediaries. During the
first 12 months after consummation, the Resulting Bank, as part of a
Delaware community development program, has committed to provide at
least \$2 million towards community development loans and investments,
and up to \$250,000 for community development grants.

The OCC received comments from one community organization. One concern
raised by the commenter was that HSBC Investments (North America) Inc.
("HSBC Investments"), HSBC's intermediate parent company, will try to
move its subprime operations from Household International, Inc. ("HII"),
to HUNA in order to preempt the application of state consumer protection
laws. [^5] However, the applicant has represented that HII's
branch-based consumer lending business, conducted through Household
Finance Company ("HFC") and Beneficial Corporation ("Beneficial"), will
continue to be operated as a state-regulated business. Moreover, the
applicant has represented that HFC and Beneficial will continue to meet
the commitments of the 2002 multi-state settlement agreement addressing
real estate secured lending practices.[^6]

The commenter also expressed concerns with HSBC's lending record to
minorities and to low- and moderate-income ("LMI") applicants and census
tracts in various New York markets in relation to the lending record of
HFC and Beneficial to those same applicants and census tracts. Using
2002 Home Mortgage Disclosure Act ("HMDA") data, the commenter concluded
that HSBC's prime lending units were lending mostly to whites, while
HII's subprime units were lending mostly to minorities and LMI
applicants.[^7] However, because HSBC Investments did not acquire HII
until March 2003, 2002 HMDA data is not a relevant comparison for the
actions of HSBC Investments. Furthermore, the applicant provided an
analysis of HMDA data indicating that HSBC and its subsidiary, HSBC
Mortgage Corporation, are among the leading mortgage lenders to LMI and
minority applicants in New York.

The applicant also represented that HFC, Beneficial, and HSBC are
cooperating in an effort to make prime and near prime products available
to qualified HFC and Beneficial customers. HFC and Beneficial will
deliver these products to qualifying customers either directly or on
behalf of HSBC. HFC, Beneficial, and HSBC have adopted a common pricing
matrix for these products, and credit underwriting is to be performed
centrally. Testing of the program has already been conducted and
nationwide implementation should be complete by the end of 2004.

Additionally, HSBC has engaged in a variety of efforts to assist
potential homebuyers. For example, the applicant represents that it has
recently launched a special mortgage program in Buffalo, Rochester,
Syracuse, and Albany, in partnership with community groups, to assist
homebuyers with closing costs and to provide home ownership counseling.
The Reserve Bank's 2003 CRA PE recounts HSBC's implementation of
flexible underwriting criteria for New York LMI borrowers for the
purchase or refinancing of properties located in LMI census tracts.

In sum, based on HSBC's CRA record of performance, the OCC found
approval to be consistent with the CRA.

[Request for Hearing]{.underline}

The commenter also requested that the OCC conduct a public hearing.[^8]
After careful consideration, the OCC has determined not to conduct a
hearing on these merger applications. The general standard the OCC
applies to determine whether to hold a public hearing is contained in 12
C.F.R. § 5.11, which provides:

The OCC generally grants a hearing request only if the OCC determines
that written submissions would be insufficient or that a hearing would
otherwise benefit the decision making process. The OCC also may order a
hearing if it concludes that a hearing would be in the public interest.

Since the commenter did not indicate why written submissions would be
insufficient to make an adequate presentation of these and other issues
to the OCC, the OCC determined that the standards for conducting a
hearing were not satisfied.

For the reasons set forth above, the OCC found that the transaction met
the relevant statutory criteria for approval. Inasmuch as the
transaction also raised no supervisory or policy concerns, the
applications are approved.

# Community Development Investments

HUNA will retain previously-made community development investments under
the investment authority of 12 U.S.C. § 24(Eleventh) and 12 C.F.R. Part
24 concerning national bank investments in community and economic
development entities, community development projects, and other public
welfare investments.

First, HUNA will retain the HSBC Community Development Corporation (the
"CDC"). The CDC is a wholly owned subsidiary community development
corporation that has a primary purpose of community development,
specifically to build affordable housing that primarily benefits LMI
individuals or areas. Currently, the CDC holds no assets other than cash
of \$29,000. Second, HUNA will retain equity investments of
\$157,544,358 in limited partnerships and limited liability companies
that finance the development and operation of affordable housing and
qualify for federal low-income housing tax credits, or finance economic
development and are eligible for New Markets Tax Credits. Third, HUNA
will retain investments of \$14,415,610 in community and economic
development entities, community development projects, or other public
welfare investments. Those investments primarily benefit LMI persons,
LMI-income areas, or other areas targeted by a governmental entity for
redevelopment, or the investments would receive consideration as
"qualified investments" under 12 C.F.R. § 25.23 of the CRA. The
aggregate amount of HUNA's community development investments will total
\$171,988,968, which is less than 5 percent of its capital and surplus,
and the investments do not expose HUNA to unlimited liability. The
investments, therefore, are consistent with Section 24 (Eleventh) and
Part 24.

## [Investments in Subsidiaries]{.underline}

Additionally, HUNA will retain as operating subsidiaries a number of
entities that HSBC currently owns. The applicant has represented that
all subsidiaries will be operated in accordance with all applicable OCC
regulations.

HSBC owns noncontrolling interests in two additional entities, Identrus
and The Clearing House Service Company, LLC. HSBC Financial Services
Corp., a wholly owned subsidiary of HSBC, holds a 7.29% ownership
interest in Identrus, a limited liability company that provides digital
certification services to banking institutions. HSBC Clearing Services
(USA) Inc., also a wholly owned subsidiary of HSBC, holds a 7.4%
nonvoting interest in The Clearing House Service Company, LLC
(\"Clearing House").

With regard to both of these holdings, HSBC has certified that the
Resulting Bank: will be well-capitalized and well-managed at the time it
acquires the investments; will have the ability to prevent each
enterprise from engaging in activities that are not permissible for a
national bank or an operating subsidiary because the limited liability
agreements under which each of these entities was formed contains
provisions to ensure that they will engage only in activities that are
permitted for national banks and their operating subsidiaries, and
permits a member to withdraw if the company engages in any impermissible
activity; will account for its investments under the equity or cost
method of accounting; and as a legal and accounting matter, does not
have open-ended liability for Identrus's obligations or for the
obligations of Clearing House or any of its subsidiaries and, thus, its
loss exposure as a result of these investments is limited. The applicant
also has certified that Identrus and Clearing House have agreed to be
subject to OCC supervision and examination, subject to the limitations
and requirements of section 45 of the Federal Deposit Insurance Act (12
U.S.C. § 1831v) and section 115 of the Gramm-Leach-Bliley Act (12 U.S.C.
§ 1820a).

Moreover, the ownership by national banks of a noncontrolling interest
in Identrus meets the remaining standards for the ownership of a
noncontrolling interest in an enterprise. 12 C.F.R. § 5.36(e). The OCC
in published precedent has recognized that national banks may hold a
noncontrolling interest in Identrus. OCC Conditional Approval No. 339
(November 16, 1999); OCC Corporate Decision No. 2002-4 (February 18,
2002); and OCC Conditional Approval No. 301 (January 15, 1999). *See
also* 12 C.F.R. § 5.34(e)(5)(v)(X). Likewise, the ownership by national
banks of a noncontrolling interest in Clearing House meets the remaining
standards for the ownership of a noncontrolling interest in an
enterprise under Section 5.36(e) and the OCC has determined that
national banks may hold a noncontrolling interest in Clearing House.
Interpretive Letter by Julie L. Williams, Chief Counsel (May 16, 1997)
(to be published).

# Residency Waivers

A request for the residency waivers for the Board of Directors of the
interim national bank and citizenship waiver for director Martin J. G.
Glynn is approved. In addition, your request for the residency waivers
for the Board of Directors of the Resulting Bank and citizenship waivers
for directors Martin J. G. Glynn, Stephen K. Green, James H. Cleave,
Douglas J. Flint, and Carole S. Taylor is also approved.

# Consummation Guidance

Please refer to the Business Combination booklet for the required steps
to complete the organization of the interim national bank. The steps to
complete the mergers are also contained in the Business Combination
Booklet.

This approval is granted based on a thorough review of all information
available, including commitments and representations made in the
applications and the merger agreement and those of your representatives.
This includes your representation that HII, an affiliate of HSBC, will
continue to abide by the terms of a December 2002 multi-state settlement
agreement with state attorneys general and regulatory agencies relating
to its non-prime real estate secured lending.

The approval is subject to the following conditions:

1.  After consummation of the merger, HUNA and its
    institution-affiliated parties, as that term is defined at 12 U.S.C.
    § 1813(u), shall continue to comply with each and every term and
    condition contained in the April 30, 2003 Written Agreement entered
    into by and among HSBC, the Federal Reserve Bank of New York (the
    "Reserve Bank"), and the New York State Banking Department
    ("Department"), docket no.: 03-012-WA/RB-SM (the "Agreement"). For
    purposes of clarification, references in the Agreement to 12 C.F.R.
    § 208.62 and/or to 3 N.Y.C.R.R. Part 300 shall hereinafter be deemed
    to be references to 12 C.F.R. § 21.11, and references in the
    Agreement to 12 C.F.R. § 208.63 shall hereinafter be deemed to be
    references to 12 C.F.R. § 21.21. For purposes of further
    clarification, references in the Agreement to obligations of HSBC to
    the Reserve Bank and/or to the Department shall hereinafter be
    deemed to be obligations of HUNA that are owed to the OCC.

2.  HUNA must notify potential affiliated vendors in writing of the
    OCC's examination and regulatory authority under 12 U.S.C. § 481 and
    12 U.S.C. § 1867 (c). All final Service Level Agreements and other
    outsourcing contracts between HUNA and affiliates must stipulate
    that the performance of services provided by the affiliated
    companies to HUNA is subject to the OCC's examination and regulatory
    authority. The provisions of 12 C.F.R. § 9 would be applicable to
    any fiduciary activities contracted out to affiliates.

3.  Within two years of the consummation of the merger between HUNA and
    HSBC, HUNA must divest, conform, or demonstrate to the satisfaction
    of the OCC, the permissibility of the activities and ownership
    interests held by HSBC Asset Management (Americas) Inc. If, within
    this time period, HUNA divests or conforms the activities and
    holdings of this entity, please notify Large Bank Supervision.

These conditions are conditions imposed in writing by the agency in
connection with the granting of any application or other requests within
the meaning of 12 U.S.C. § 1818. As such, the conditions are enforceable
under 12 U.S.C. § 1818.

As a reminder, the district office must be advised in writing 10 days in
advance of the desired effective date for the mergers so that the OCC
may issue the necessary certification.

The OCC will issue a letter certifying consummation of the transactions
when we receive:

1.  Evidence that all required regulatory approvals, waivers, or
    non-objections have been received.

2.  Articles of Association for the Resulting Bank.

If the merger is not consummated within one year from the approval date,
the approval shall automatically terminate, unless the OCC grants an
extension of the time period.

This conditional approval, and the activities and communications by OCC
employees in connection with the filing, do not constitute a contract,
express or implied, or any other obligation binding upon the OCC, the
U.S., any agency or entity of the U.S., or any officer or employee of
the U.S., and do not affect the ability of the OCC to exercise its
supervisory, regulatory and examination authorities under applicable law
and regulations. The foregoing may not be waived or modified by any
employee or agency of the OCC or the U.S.

If you have any questions, please contact me at (212) 790-4055.

Sincerely,

**signed**

Sandya R. Reddy

Acting Licensing Manager

[^1]: HBT and HSBC, are subsidiaries of HSBC USA, Inc., a Maryland
    corporation, which is indirectly owned by HSBC Holdings plc, London,
    England. HUNA will be a direct subsidiary of HSBC USA, Inc.

[^2]: OCC examiners conducted a limited on-site examination of HSBC in
    connection with the applications and determined that the bank is
    taking appropriate measures to strengthen compliance with anti-money
    laundering laws and regulations.

[^3]: *See* 12 U.S.C. § 2903; 12 C.F.R. § 25.29(a). The special
    community reinvestment requirements of the Riegle-Neal Act, 12
    U.S.C. § 1831 (u)(b)(3), are not applicable because HSBC and the
    newly formed interim national bank are affiliated banks. Thus, the
    Resulting Bank will not have a branch or bank affiliate immediately
    following the mergers in any state in which HSBC did not previously
    have a branch or bank affiliate.

[^4]: HSBC's current assessment area includes most of the State of New
    York and small portions of California Florida, Oregon, Pennsylvania,
    and Washington.

[^5]: HII, which was acquired by HSBC Holdings plc, on March 28, 2003,
    is a direct subsidiary of HSBC Investments (North America) Inc.
    (Delaware). The OCC has no regulatory or supervisory authority over
    HII or its subsidiaries, with the exception of Household Bank (SB),
    National Association, a limited purpose credit card bank, which
    received a "Satisfactory" Community Reinvestment Act rating from the
    OCC as of December 16, 2003. HII and its subsidiaries are not
    parties to these applications.

    Many of the concerns raised by the commenter related to HII and its
    non-bank subsidiaries. However, as noted above, the OCC currently
    has no regulatory authority over these entities, nor would the OCC
    have any regulatory authority over those entities as a result of the
    proposed transaction. Accordingly, the OCC was unable to address
    those concerns.

[^6]: The \$484 million settlement agreed to by HII in 2002 will not be
    affected by the current applications pending before the OCC. The
    applicant has represented to the OCC that HII will continue to abide
    by the terms of this agreement.

[^7]: It is important to note that HMDA data alone are not adequate to
    provide a basis for concluding that a bank is engaged in lending
    discrimination or in indicating whether its level of lending is
    sufficient. HMDA data do not take into consideration borrower
    creditworthiness, housing prices, and other factors relevant in each
    of the individual markets, nor do they fully reflect the range of a
    bank's lending activities or efforts.

[^8]: Additionally, the commenter requested that the OCC extend the
    public comment period. The OCC determined not to grant an extension
    of the comment period, because the commenter did not demonstrate
    that additional time was necessary to develop factual information,
    and no extenuating circumstances were present. *See* 12 C.F.R. §
    5.10(b)(2)(ii), (iii). However, the OCC considered all comments
    received after the close of the comment period.