Each depositor insured to at least $250,000 per insured bank



Home > News & Events > Financial Institution Letters




Financial Institution Letters


[Federal Register: October 24, 1997 (Volume 62, Number 206)]
[Rules and Regulations]
[Page 55489-55493]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24oc97-12]

[[Page 55489]]

_______________________________________________________________________

Part III

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Part 3

Federal Deposit Insurance Corporation

12 CFR Part 325

Department of the Treasury

Office of Thrift Supervision

12 CFR Part 567

_______________________________________________________________________

Risk Based Capital Requirements; Transfers of Small Business Loan
Obligations With Recourse; Final Rule

[[Page 55490]]

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 97-17]
RIN 1557-AB14

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AB57

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket No. 97-97]
RIN 1550-AB11


Risk-Based Capital Requirements; Transfers of Small Business Loan
Obligations With Recourse

AGENCIES: Office of the Comptroller of the Currency (OCC), Treasury;
Federal Deposit Insurance Corporation (FDIC); and Office of Thrift
Supervision (OTS), Treasury.

ACTION: Joint final rule.

-----------------------------------------------------------------------

SUMMARY: The OCC, FDIC, and OTS (agencies) are issuing final rules on
the risk-based capital treatment of transfers of small business loans
or leases of personal property with recourse, as required by section
208 of the Riegle Community Development and Regulatory Improvement Act
of 1994. The rules address the risk-based capital treatment of
transfers of small business loans or leases of personal property with
recourse, and, consistent with the statutory purpose, are designed to
facilitate such transfers.

DATES: The final rule is effective January 1, 1998.

FOR FURTHER INFORMATION CONTACT:
    OCC: David Thede, Senior Attorney, Securities and Corporate
Practices Division (202/874-5210); or Tom Rollo, National Bank
Examiner, Office of the Chief National Bank Examiner (202/874-5070),
Office of the Comptroller of the Currency, 250 E Street, SW.,
Washington, DC 20219.
    FDIC: For supervisory issues, Stephen G. Pfeifer, Examination
Specialist, (202/898-8904), Accounting Section, Division of
Supervision; for legal issues, Marc J. Goldstrom, Counsel, (202/898-
8807), Legal Division, Federal Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, D.C. 20429.
    OTS: John F. Connolly, Senior Program Manager for Capital Policy
(202/906-6465), Supervision; or Valerie J. Lithotomos, Counsel, Banking
and Finance (202/906-6439), Regulations and Legislation Division, Chief
Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW.,
Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

    The agencies are issuing final rules on the risk-based capital
treatment of transfers of small business obligations with recourse as
required by section 208 of the Riegle Community Development and
Regulatory Improvement Act of 1994 (CDRI Act), 12 U.S.C. 1835. The
agencies had previously published interim rules implementing section
208 and at that time requested comment on the changes. 60 FR 47455
(OCC); 60 FR 45606 (FDIC); 60 FR 45618 (OTS). The OTS and OCC are now
issuing final rules that are unchanged from their respective interim
rules. The FDIC is issuing a final rule that is substantially the same
as its interim rule.
    Banks and thrifts typically transfer assets with recourse as part
of securitization transactions. Sections 201 through 210 of the CDRI
Act were intended to increase small business access to capital by
removing impediments in existing law to the securitization of small
business loans and leases.
    Under the agencies' current risk-based capital standards, assets
transferred with recourse are included in risk-weighted
assets.1 Section 208 prescribes modified risk-based capital
requirements for transfers of small business loans or leases of
personal property with recourse that are sales under generally accepted
accounting principles (GAAP). This modified risk-based capital
treatment permits a qualified insured depository institution to include
in its risk-weighted assets, for the purposes of applicable capital
standards and other capital measures, only the amount of the retained
recourse multiplied by the appropriate risk-weight percentage. For
example, if an institution sold a $1,000 pool of small business loans
with recourse, but limited its recourse liability to the first $100 of
loss on the pool, section 208 would limit the applicable capital charge
to $8 (8 percent of the $100 of retained recourse).2
---------------------------------------------------------------------------

    \1\ If an institution's maximum contractual liability under a
recourse obligation is less than the capital requirement for the
credit risk exposure on the underlying assets, then, under the low-
level recourse rule, the capital requirement for the recourse
exposure is equal to the institution's maximum contractual
liability.
    \2\ For purposes of determining the amount of risk-weighted
assets for assets transferred with recourse that receive the
preferential capital treatment under section 208, the recourse
liability account established in accordance with GAAP would not be
subtracted from the amount of the recourse obligation.
---------------------------------------------------------------------------

    By contrast, the agencies' risk-based capital regulations generally
require institutions to include in risk-weighted assets the full value
of assets transferred with recourse multiplied by the appropriate risk-
weight percentage. If that rule were applied to the foregoing example,
the institution's capital charge would be 8 percent of the $1,000 pool
of transferred assets resulting in an $80 capital charge, rather than
the $8 capital charge under section 208.3
---------------------------------------------------------------------------

    \3\ Under the low-level recourse rule, if the institution had
limited the recourse obligation to $60 on the loan pool, its capital
charge would be $60.
---------------------------------------------------------------------------

    Section 208 limits the availability of the favorable treatment as
follows:
    (1) To apply section 208 to a transaction, an institution must be a
``qualified insured depository institution'' at the time of the sale
with recourse. A qualified insured depository institution is one that
is either well capitalized or, with the approval of its primary
regulator, adequately capitalized (in either case, without regard to
section 208). If an institution loses its ``qualified'' status,
transactions completed while the institution was qualified will
continue to receive the favorable capital treatment.
    (2) The total outstanding amount of recourse retained by an
institution with respect to transfers of small business loans and
leases of personal property to which section 208 has been applied may
not exceed 15 percent of the total risk-based capital of the
institution, unless the institution's primary federal regulatory
agency, by regulation or order, specifies a greater amount.

Comments

    In response to the interim rule, the agencies received comments
from one bank, three banking trade associations, one accountants'
professional association, and one other trade association. All of the
commenters supported the interim rule.
    Section 208 requires the agencies to use the definition of ``small
business'' established by the Small Business Administration (SBA) in 13
CFR part 121 pursuant to 15 U.S.C. 632 in determining which loans and
leases are eligible for the special capital treatment. Two commenters
observed that this definition is difficult to apply with certainty in
the absence of voluminous

[[Page 55491]]

information gathered from each loan applicant, and that collecting this
information would be prohibitively expensive for the lender and the
loan applicant. The commenters noted that, in extending small business
leases, some institutions use computerized credit scoring that relies
on sales and employment information available from published reports.
This information does not exactly match the criteria in the SBA's
definition. Because the transactions are typically very small, these
commenters stated, the cost of obtaining the additional information
required by the SBA's definition for each lease would effectively
preclude use of section 208 to facilitate securitization of these
leases.
    The agencies have considered these comments and believe that
section 208 and the agencies' regulations permit an institution to
apply the section 208 capital treatment without incurring this
additional cost. If the specific information required by the SBA
definition is not readily available, an institution should use its best
efforts to ensure that, based on other information that is available to
the institution, the borrower would meet the SBA criteria for a small
business. Additionally, an institution should not classify a borrower
as a small business if the institution has access to readily available
information that is not consistent with such a classification. If,
during the course of an examination, it is determined that the
information being used to evaluate whether a borrower is a small
business is being used in a manner that is inconsistent with or that
appears to circumvent the provisions of the actual SBA definition of a
small business, the agencies may require appropriate adjustments to be
made to the institution's regulatory capital calculations for those
periods during which the SBA definition was not consistently applied.
    Another commenter observed that the agencies did not state in the
interim rules that the accounting principles for transfers of small
business loans and leases with recourse in Consolidated Reports of
Condition and Income (Call Reports) and Thrift Financial Reports should
be governed by GAAP. All of the agencies intend to apply GAAP as
required by section 208. No regulatory amendments will be necessary to
implement this change. As of January 1997, all institutions generally
must follow GAAP for financial reporting in their Call Reports and
Thrift Financial Reports, including the reporting of transfers of small
business loans with recourse in accordance with section
208.4
---------------------------------------------------------------------------

    \4\ Because the Call Report instructions have been revised to
conform with GAAP in the reporting treatment of all transfers of
financial assets, including small business loans and leases
transferred with recourse, the FDIC has decided that the interim
rule amendment that added a new paragraph (e) to Sec. 325.3 of the
FDIC's leverage capital rule is now redundant. Therefore, the FDIC's
final rule removes this paragraph.
---------------------------------------------------------------------------

    This commenter also noted that the interim rule requires an
institution to hold capital against the entire face amount of recourse
retained and also to establish a liability reserve for expected future
losses associated with the recourse arrangements. The commenter stated
that this requirement would result in an excessive capital requirement
and that the retained recourse liability should be reduced by the
amount of the reserve before calculating capital requirements.
    The agencies have decided not to change the treatment in the
interim rule. Section 208 specifically requires the treatment described
in the interim rule. Also, as the FRB noted in its final rule
implementing section 208, capital and the GAAP reserve serve different
purposes. The GAAP reserve covers expected losses, while capital is
maintained to absorb unexpected losses. 60 FR 45613 (August 31, 1995).
    Three commenters suggested that the agencies make the risk-based
capital treatment described in section 208 available for all sales of
assets with recourse. One commenter noted that section 208(h) permits
the agencies to adopt an alternative capital treatment that does not
require more aggregate capital and reserves than the treatment
described in section 208. This commenter urged the agencies to use this
discretion to further reduce the capital requirement on transfers of
small business obligations with recourse. The agencies are not
undertaking that change now, but are continuing to review the risk-
based capital requirements applicable to sales of assets with recourse.
The agencies will consider the commenters' suggestions in the context
of that review.
    One commenter asked the agencies to confirm that an institution may
apply the section 208 treatment to small business loans transferred
with recourse after March 22, 1995, the statutory implementation date,
even though the agencies' interim rules were published in August and
September of 1995. Consistent with the guidance previously provided in
the agencies' interim rules, the agencies will not object if an
institution chooses to apply the provisions of the final rule to small
business obligations that were transferred with recourse between March
22, 1995 and the effective date of the final rule, provided the
institution would have been a qualifying institution under the
provisions of the rule at the time of the transfer.
    Under the statute, an adequately capitalized institution will be a
``qualified institution'' eligible to use the capital treatment for
small business loans with the written permission of the responsible
agency. One commenter to the OTS suggested that all adequately
capitalized institutions should be permitted to use the section 208
capital treatment unless the agency determines that an individual
minimum capital requirement or other action is necessary for safety and
soundness purposes. The OTS generally intends to allow institutions to
use the section 208 computational method if OTS determines institutions
will have capital commensurate with their risk exposure.
    One commenter thought that the OCC's treatment of low-level
recourse transactions differed from that of the FDIC and FRB. Although
this issue is not directly related to the final rule implementing
section 208, the OCC wishes to clarify that its treatment of low-level
recourse transactions is consistent with that of the FDIC and FRB. A
low-level recourse transaction is a transaction in which the amount of
retained recourse is less than the effective capital requirement on the
underlying assets. As required by section 350 of the CDRI Act, 12 USC
4808, the OCC, FDIC, and FRB have adopted rules limiting the risk-based
capital requirement for low-level recourse obligations to the bank's
maximum contractual obligation under the recourse provision. (The OTS
already had such a rule in place.5) In addition, the OCC,
FRB, and FDIC, acting under the auspices of the Federal Financial
Institutions Examination Council, have jointly issued Call Report
instructions describing the regulatory reporting treatment applicable
to low-level recourse transactions in the regulatory capital schedule.
(See Call Report Instructions for Schedule RC-R--Regulatory Capital.)
---------------------------------------------------------------------------

    \5\ 12 CFR 567.6(a)(2)(i)(C).
---------------------------------------------------------------------------

    The preamble to the OTS's interim rule on section 208 also
addressed the implementation of section 350 and requested comments on
the proper calculation of the risk-based capital ratio for low-level
recourse exposures. The OTS received one comment on low-level recourse
exposures, which supported the current OTS approach. However, because
this issue was not

[[Page 55492]]

raised in the FDIC and OCC interim rules implementing section 208, the
OTS is not addressing the issue in this joint final rule. The OTS will
consider this comment in reviewing its policy guidance and Thrift
Financial Report instructions.

Prompt Corrective Action

    Section 208(f) states that the capital of an insured depository
institution shall be computed without regard to section 208 in
determining whether the institution is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under section 38 of the Federal Deposit Insurance Act
(12 U.S.C. 1831o). Section 38 addresses prompt corrective action.
    The caption to section 208(f), ``Prompt Corrective Action Not
Affected,'' and the legislative history indicate that section 208 was
not intended to affect the operation of the prompt corrective action
system. See S. Rep. No. 103-169, 103d Cong., 1st Sess. 38, 69 (1994).
However, the statute does not include ``well capitalized'' in the list
of capital categories not affected. The prompt corrective action system
deals primarily with imposing corrective sanctions on institutions that
are less than adequately capitalized. Therefore, allowing an
institution that is adequately capitalized without the section 208
treatment 6 to use section 208 for purposes of determining
whether the institution is well capitalized generally would not affect
the application of the prompt corrective action sanctions to the
institution. Other statutes and regulations treat an institution more
favorably if it is well capitalized as defined under the prompt
corrective action statute, but these provisions are not part of the
prompt corrective action system of sanctions. Permitting an institution
to be treated as well capitalized for purposes of these other
provisions also will not affect the imposition of prompt corrective
action sanctions.
---------------------------------------------------------------------------

    \6\ It is very unlikely but theoretically possible that an
institution that is undercapitalized without section 208 would
become well capitalized if it applied the treatment in section 208.
Because section 208 was not intended to affect prompt corrective
action, and because allowing an undercapitalized institution to
become well capitalized would affect prompt corrective action, the
agencies interpret section 208 not to allow an undercapitalized
institution to use the capital treatment it describes to become well
capitalized for purposes of prompt corrective action.
---------------------------------------------------------------------------

    There is one provision of the prompt corrective action system that
could be affected by treating an institution as well capitalized rather
than adequately capitalized. If an agency determines that an
institution is in an unsafe or unsound condition or is engaging in an
unsafe or unsound practice, section 38(g) (12 U.S.C. 1831o(g))
authorizes the agency (1) to reclassify a well capitalized institution
as adequately capitalized and (2) to require an adequately capitalized
institution (but not a well capitalized institution) to comply with
certain prompt corrective action provisions as if the institution were
undercapitalized. Because the text and legislative history of section
208 indicate that it was not intended to affect prompt corrective
action, the agencies believe that section 208 does not affect the
capital calculation for purposes of section 38(g) regardless of the
institution's capital level.
    Thus, an institution may use the capital treatment described in
section 208 when determining whether it is well capitalized for
purposes of prompt corrective action as well as for other regulations
that reference the well capitalized capital category.7 An
institution may not use the capital treatment described in section 208
when determining whether it is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized for purposes of prompt corrective action or other
regulations that directly or indirectly reference the prompt corrective
action capital categories.8 The agencies will disregard the
capital treatment described in section 208 for purposes of section
38(g).
---------------------------------------------------------------------------

    \7\ An institution that is subject to a written agreement or
capital directive as discussed in the agencies' prompt corrective
action regulations would not be considered well capitalized.
    \8\ Under section 208, the capital calculation used to determine
whether an institution is well capitalized differs from the
calculation used to determine whether an institution is adequately
capitalized. As a result, it is possible that an institution could
be well capitalized using one calculation and adequately capitalized
using the other. In this situation, the institution would be
considered well capitalized.
---------------------------------------------------------------------------

Final Rules

    The OCC is adopting its interim rule without change.
    The OTS is also adopting its interim rule without change.
    The FDIC is adopting its interim rule with one technical, non-
substantive change: section 325.5(e) is being removed as redundant.
Even though paragraph 6 of section II.B. of appendix A to part 325 is
unchanged, it is being republished for the convenience of the reader.

Regulatory Flexibility Act

    Each of the agencies certifies that this final rule will not have a
significant economic impact on a substantial number of small entities.
This rulemaking is required by statute. The final rule authorizes an
alternative method of calculating risk-based capital that permits
institutions to hold less capital for certain recourse obligations. The
final rule will benefit qualified institutions regardless of size. The
final rule will not affect any institution's risk-based capital for
prompt corrective action purposes.

Executive Order 12866

    The OCC and OTS have determined that this final rule is not a
significant regulatory action under Executive Order 12866. Under the
final rule, some institutions' risk-based capital ratios may improve.
This change will not have a material effect on the safety and soundness
of affected institutions and will not affect their measured risk-based
capital for prompt corrective action purposes.

Paperwork Reduction Act

    The Agencies have determined that this final rule will not increase
the regulatory paperwork of banking organizations pursuant to the
provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates
Act) requires that an agency prepare a budgetary impact statement
before promulgating a rule that includes a Federal mandate that may
result in the expenditure by state, local, and tribal governments, in
the aggregate, or by the private sector, of $100 million or more in any
one year. If a budgetary impact statement is required, section 205 of
the Unfunded Mandates Act also requires an agency to identify and
consider a reasonable number of regulatory alternatives before
promulgating a rule. As discussed in the preamble, the final rule
authorizes an alternative method of calculating capital that permits
institutions to elect to hold less capital for certain recourse
obligations. Because the agencies have determined that the final rule
will not result in expenditures by state, local, and tribal
governments, or by the private sector, of more than $100 million in any
one year, the agencies have not prepared a budgetary impact statement
or specifically addressed the regulatory alternatives considered.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital risk, National
banks,

[[Page 55493]]

Reporting and recordkeeping requirements.

12 CFR Part 325

    Bank deposit insurance, Banks, Banking, Capital adequacy, Reporting
and recordkeeping requirements, Savings associations, State nonmember
banks.

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings
associations.

Office of the Comptroller of the Currency

12 CFR Chapter I

Issuance

    For the reasons set out in the preamble, the interim rule amending
12 CFR part 3 which was published at 60 FR 47455 on September 13, 1995,
(as corrected by the document published in the Federal Register at 60
FR 64115 on December 14, 1995) is adopted as a final rule without
change.

Office of The Comptroller of the Currency.

    Dated: September 12, 1997.
Eugene A. Ludwig,
Comptroller of the Currency.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Issuance

    For the reasons set out in the preamble, the Board of Directors of
the Federal Deposit Insurance Corporation adopts as final the interim
rule amending 12 CFR part 325 which was published at 60 FR 45606 on
August 31, 1995, with the following change:

PART 325--CAPITAL MAINTENANCE

    1. The authority citation for Part 325 continues to read as
follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831(o), 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831(n) note); Pub. L. 102-242, 105
Stat. 2236, 2355, 2386 (12 U.S.C. 1828 note).

Sec. 325.3  [Amended]

    2. In Sec. 325.3 paragraph (e) is removed.
    3. In appendix A to part 325, paragraph 6 of section II.B. is
republished to read as follows:

Appendix--A to Part 325--Statement of Policy on Risk-Based Capital

* * * * *
    II. * * *
    B. * * *
    6. Small Business Loans and Leases on Personal Property
Transferred with Recourse--(a) Notwithstanding other provisions of
this appendix A, a qualifying institution that has transferred small
business loans and leases on personal property (small business
obligations) with recourse shall include in risk-weighted assets
only the amount of retained recourse, provided two conditions are
met. First, the transaction must be treated as a sale under
generally accepted accounting principles (GAAP) and, second, the
qualifying institution must establish pursuant to GAAP a non-capital
reserve sufficient to meet the institution's reasonably estimated
liability under the recourse arrangement. Only loans and leases to
businesses that meet the criteria for a small business concern
established by the Small Business Administration under section 3(a)
of the Small Business Act (15 U.S.C. 632(a)) are eligible for this
capital treatment.
    (b) For purposes of this appendix A, a qualifying institution is
a bank that is well capitalized. In addition, by order of the FDIC,
a bank that is adequately capitalized may be deemed a qualifying
institution. In determining whether a bank meets the qualifying
institution criteria, the prompt corrective action well capitalized
and adequately capitalized definitions set forth in Sec. 325.103
shall be used, except that the bank's capital ratios must be
calculated without regard to the preferential capital treatment for
transfers of small business obligations with recourse specified in
section II.B.6.(a) of this appendix A. The total outstanding amount
of recourse retained by a qualifying institution on transfers of
small business obligations receiving the preferential capital
treatment cannot exceed 15 percent of the institution's total risk-
based capital. By order, the FDIC may approve a higher limit.
    (c) If a bank ceases to be a qualifying institution or exceeds
the 15 percent of capital limit under section II.B.6.(b) of this
appendix A, the preferential capital treatment will continue to
apply to any transfers of small business obligations with recourse
that were consummated during the time the bank was a qualifying
institution and did not exceed such limit.
    (d) The risk-based capital ratios of a bank shall be calculated
without regard to the preferential capital treatment for transfers
of small business obligations with recourse specified in paragraph
(a) of this section for purposes of:
    (i) Determining whether a bank is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under the prompt corrective action capital category
definitions specified in Sec. 325.103; and
    (ii) Applying the prompt corrective action reclassification
provisions specified in Sec. 325.103(d), regardless of the bank's
capital level.
* * * * *
Federal Deposit Insurance Corporation.

    By the order of the Board of Directors.

    Dated at Washington, D.C. this 16th day of September 1997.
James D. LaPierre,
Deputy Executive Secretary.

Office of Thrift Supervision

12 CFR Chapter V

Issuance

    Accordingly, the Office of Thrift Supervision hereby adopts as
final the interim rule amending 12 CFR part 567 which was published at
60 FR 45618 on August 31, 1995, without change.

Office of Thrift Supervision.

    By the Office of Thrift Supervision.

    Dated: September 18, 1997.
Nicolas P. Retsinas,
Director.
[FR Doc. 97-27749 Filed 10-23-97; 8:45 am]
BILLING CODE 4810-33-P, 6714-01-P, 6720-01-P
Last Updated 07/17/1999 communications@fdic.gov