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Inactive Financial Institution Letters 


[Federal Register: August 4, 1997 (Volume 62, Number 149)]
[Proposed Rules]
[Page 42005-42016]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04au97-30]



[[Page 42005]]

_______________________________________________________________________

Part III

Department of the Treasury
Office of Comptroller of the Currency

12 CFR Parts 3 and 6

Federal Reserve System

12 CFR Parts 208 and 225

Federal Deposit Insurance Corporation

12 CFR Part 325

Department of the Treasury
Office of Thrift Supervision

12 CFR Parts 565 and 567

_______________________________________________________________________

Capital; Risk-Based Capital Guidelines; Capital Adequacy Guidelines;
Capital Maintenance: Servicing Assets; Proposed Rule

[[Page 42006]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 3 and 6

[Docket No. 97-15]
RIN 1557-AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-0976]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC07

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 565 and 567

[Docket No. 97-67]
RIN 1550-AB11


Capital; Risk-Based Capital Guidelines; Capital Adequacy
Guidelines; Capital Maintenance: Servicing Assets

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Joint notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency, (OCC), the
Board of Governors of the Federal Reserve System (Board), the Federal
Deposit Insurance Corporation (FDIC), and the Office of Thrift
Supervision, (OTS) (collectively, the Agencies) propose to amend their
capital adequacy standards for banks, bank holding companies, and
savings associations (banking organizations) to address the treatment
of servicing assets on both mortgage assets and financial assets other
than mortgages (non-mortgages). This proposed rule was developed in
response to a recent Financial Accounting Standards Board (FASB)
accounting standard that affects servicing assets; that is, Statement
of Financial Accounting Standards No. 125, ``Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities''
(FAS 125), issued in June 1996, which superseded Statement of Financial
Accounting Standards No. 122, ``Accounting for Mortgage Servicing
Rights'' (FAS 122), issued in May 1995. Under this proposed rule,
mortgage servicing assets included in regulatory capital would continue
to be subject to certain prudential limitations. However, the
limitation on the amount of mortgage servicing assets (and purchased
credit card relationships) that can be recognized as a percent of Tier
1 capital would be increased from 50 to 100 percent. Also, all non-
mortgage servicing assets would be fully deducted from Tier 1 capital.
The Agencies are requesting comment on the regulatory capital
limitations that are being proposed for servicing assets and on whether
any interest-only strips receivable should be subject to the same
regulatory capital limitations as servicing assets.

DATES: Comments must be received on or before October 3, 1997.

ADDRESSES: Interested parties are invited to submit written comments to
any or all of the Agencies. All comments will be shared among the
Agencies.
    OCC: Written comments should be submitted to Docket No. 97-15,
Communications Division, Ninth Floor, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219. Comments will be
available for inspection and photocopying at that address. In addition,
comments may be sent by facsimile transmission to FAX number (202) 874-
5274, or by electronic mail to regs.comments@occ.treas.gov.
    Board: Comments should refer to Docket No. R-0976, and may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551. Comments also may be delivered to the Board's
mail room between 8:45 a.m. and 5:15 p.m. weekdays, and to the security
control room at all other times. The mail room and the security control
room are accessible from the courtyard entrance on 20th Street between
Constitution Avenue and C Street, NW. Comments received will be
available for inspection in Room MP-500 of the Martin Building between
9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of
the Board's Rules Regarding Availability of Information.
    FDIC: Written comments shall be addressed to Robert E. Feldman,
Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, NW., Washington, DC 20429. Comments may
be hand delivered to the guard station at the rear of the 17th Street
Building (located on F Street), on business days between 7:00 a.m. and
5:00 p.m. (Fax number: (202) 898-3838; Internet address:
comments@fdic.gov). Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, NW.,
Washington, DC, between 9:00 a.m. and 4:30 p.m. on business days.
    OTS: Send comments to Chief, Dissemination Branch, Records
Management and Information Policy, Office of Thrift Supervision, 1700 G
Street, NW., Washington, D.C. 20552, Attention Docket No. 97-67. These
submissions may be hand-delivered to 1700 G Street, N.W. between 9 a.m.
and 5 p.m. on business days; they may be sent by facsimile transmission
to FAX Number (202) 906-7755; or by e-mail to
public.info@ots.treas.gov. Those commenting by e-mail should include
their name and telephone number. Comments will be available for
inspection at 1700 G Street, N.W., from 9:00 a.m. until 4:00 p.m. on
business days.

FOR FURTHER INFORMATION CONTACT:

    OCC: Gene Green, Deputy Chief Accountant (202/874-5180); Roger
Tufts, Senior Economic Adviser, or Tom Rollo, National Bank Examiner,
Capital Policy Division (202/874-5070); Mitchell Stengel, Senior
Financial Economist, Risk Analysis Division (202/874-5431); Saumya
Bhavsar, Attorney or Ronald Shimabukuro, Senior Attorney (202/874-
5090), Legislative and Regulatory Activities Division, Office of the
Comptroller of the Currency.
    Board: Arleen Lustig, Supervisory Financial Analyst (202/452-2987),
Arthur W. Lindo, Supervisory Financial Analyst, (202/452-2695) or
Thomas R. Boemio, Senior Supervisory Financial Analyst, (202/452-2982),
Division of Banking Supervision and Regulation. For the hearing
impaired only, Telecommunication Device for the Deaf (TDD), Diane
Jenkins (202) 452-3544, Board of Governors of the Federal Reserve
System, 20th and C Streets, NW., Washington, DC 20551.
    FDIC: For supervisory issues, Stephen G. Pfeifer, Examination
Specialist, (202/898-8904), Accounting Section, Division of
Supervision; for legal issues, Marc J. Goldstom, Counsel, (202/898-
8807), Legal Division.
    OTS: John F. Connolly, Senior Program Manager for Capital Policy,
Supervision Policy Division (202/906-6465), Christine Smith, Capital
and Accounting Policy Analyst, (202/906-5740), Timothy J. Stier, Chief
Accountant, (202/906-5699),

[[Page 42007]]

Accounting Policy Division, or Vern McKinley, Attorney, Regulations and
Legislation Division (202/906-6241), Office of Thrift Supervision, 1700
G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

Capital Treatment of Mortgage Servicing Rights Pre-FAS 122

    Prior to the issuance of FAS 122, intangible assets generally were
deducted from capital in determining the amount of Tier 1 capital under
the Agencies' regulatory capital rules. 1 However, limited
amounts of purchased mortgage servicing rights (PMSRs) and purchased
credit card relationships (PCCRs) were allowed in Tier 1 capital.
2 The aggregate amount of PMSRs and PCCRs that could be
recognized for regulatory capital purposes could not exceed 50 percent
of Tier 1 capital, with PCCRs subject to a further sublimit of 25
percent of Tier 1 capital. In addition, PMSRs and PCCRs were each
subject to a 10 percent ``haircut'' that permitted only the lower of
book value or 90 percent of fair market value to be included in Tier 1
capital. This haircut is required for PMSRs under section 475 of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (12
U.S.C. 1828 note) (December 19, 1991)).
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    \1\ For OTS purposes, Tier 1 capital is the same as core
capital.
    \2\ Servicing rights are the contractual obligations undertaken
by an institution to provide servicing for loans owned by others,
typically for a fee. PMSRs are mortgage servicing rights that have
been purchased from other parties. The purchaser is not the
originator of the mortgage. Originated mortgage servicing rights, on
the other hand, generally represent the servicing rights acquired
when an institution originates mortgage loans and subsequently sells
the loans but retains the servicing rights. Under the accounting
standards that were in effect prior to FAS 122, mortgage servicing
rights were characterized as intangible assets.
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    The regulatory capital treatment of servicing rights prior to the
issuance of FAS 122 specified a treatment for PMSRs but not for
originated mortgage servicing rights (OMSRs) or servicing rights on
loans other than mortgages because generally accepted accounting
principles (GAAP), at that time, did not permit institutions to book
OMSRs nor did it generally allow institutions to book servicing rights
on other assets. Furthermore, GAAP based the accounting for servicing
rights on a distinction between normal servicing fees and excess
servicing fees. 3 Although GAAP permitted excess servicing
fees receivable (ESFRs) to be recognized as assets, for regulatory
reporting purposes, banks generally were allowed to book only ESFRs on
first lien, one-to four-family residential mortgages. The Agencies did
not allow banks to book ESFRs on any other loans and, thus, these ESFRs
were also effectively excluded from capital for regulatory reporting
and regulatory capital purposes. 4
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    \3\ A normal servicing fee was defined as a servicing fee that
was representative of servicing fees most commonly used in
comparable servicing agreements covering similar types of loans.
Excess servicing fees arose only when a banking organization sold
loans but retained the servicing and received a servicing fee that
was in excess of a normal servicing fee. Excess servicing fees
receivable were the present value of the excess servicing fees and
were reported on the institution's balance sheet. GAAP continued to
differentiate between normal and excess servicing fees until FAS 125
was implemented in January 1997.
    \4\ Bank holding companies and thrift institutions, however,
were allowed to report ESFRs for regulatory reporting purposes and
recognize all ESFRs in capital in accordance with existing GAAP.
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FAS 122 and the Interim Rule

    In May 1995, FASB issued FAS 122, which eliminated the GAAP
distinction between OMSRs and PMSRs and required that these assets,
together known as mortgage servicing rights (MSRs), be treated as a
single asset for financial statement purposes, regardless of how the
servicing rights were acquired. Under FAS 122, OMSRs and PMSRs are
treated the same for reporting, valuation, and disclosure purposes.
5 The GAAP accounting treatment of ESFRs was not changed by
FAS 122.
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    \5\ Among other things, FAS 122 imposed valuation and impairment
criteria, based on the stratification of MSRs by their predominant
risk characteristics. In addition, FAS 122 eliminated the intangible
asset reference that prior GAAP applied to MSRs and stated that the
characterization of MSRs as either intangible or tangible was
unnecessary because similar characterizations are not applied to
most other assets.
---------------------------------------------------------------------------

    The Agencies adopted the FAS 122 standard for regulatory reporting
purposes and then issued an interim rule on the regulatory capital
treatment of MSRs (60 FR 39226, August 1, 1995), with a request for
public comment. The interim rule, which became effective upon
publication, amended the Agencies' capital adequacy standards to treat
OMSRs in the same manner as PMSRs for regulatory capital purposes.
Under the interim rule, the total of all MSRs (i.e., PMSRs and OMSRs),
when combined with PCCRs, that can be included in regulatory capital
cannot exceed 50 percent of Tier 1 capital. In addition, the interim
rule extended the 10 percent haircut to all MSRs. The interim rule did
not amend any other elements of the Agencies' capital rules.
6
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    \6\ Thus, PCCRs continued to be subject to the 25 percent of
Tier 1 capital sublimit.
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    A majority of the commenters opposed the interim rule's capital
limitations. Several commenters stated that the capital limitations
ignored the increased marketability of MSRs, while others asserted that
FAS 122's valuation and impairment requirements for MSRs were
conservative, thereby providing safeguards against the risks associated
with these assets. They believed that FAS 122's stringent valuation and
impairment standards (lower of cost or market [LOCOM] on a stratum-by-
stratum basis) precluded the need for arbitrary regulatory capital
limits. In addition, while acknowledging that the 10 percent haircut is
required by statute for PMSRs, commenters advocated a legislative
change to eliminate it. If capital limitations on MSRs are retained,
most commenters agreed that disallowed MSRs, i.e., those that exceeded
50 percent of Tier 1 capital, should be deducted from Tier 1 capital on
a basis that is net of any associated deferred tax liability.

FAS 125

    In June 1996, FASB issued FAS 125, which became effective for all
transfers and servicing of financial assets on or after January 1,
1997. FAS 125 requires the recording of servicing on all financial
assets that are serviced for others, including loans other than
mortgages. 7
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    \7\ In a press release issued on December 18, 1996, the Federal
Financial Institutions Examination Council (FFIEC) issued interim
guidance for the regulatory capital treatment of servicing assets
under the Agencies' existing capital standards, which, after the
effective date of FAS 125, will remain in effect until the Agencies
issue a final rule on servicing assets.
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    FAS 125 eliminates the distinction between normal servicing fees
and excess servicing fees and reclassifies these cash flows into two
new types of assets: (a) Servicing assets, which are measured based on
contractually specified servicing fees; and (b) interest-only (I/O)
strips receivable, which reflect rights to future interest income from
the serviced assets in excess of the contractually specified servicing
fees. In addition, FAS 125 requires I/O strips and other financial
assets that can be contractually prepaid or otherwise settled in such a
way that the holder would not recover substantially all of its recorded
investment (including loans, other receivables, and retained interests
in securitizations) to be measured at fair value like debt securities
that are classified as available-for-sale or trading securities under
FASB Statement No. 115, ``Accounting for Certain Investments in Debt
and Equity Securities'' (FAS 115).

[[Page 42008]]

    Under FAS 125, organizations are required to recognize separate
servicing assets (or liabilities) for the contractual obligation to
service financial assets (e.g., mortgage loans, credit card
receivables) that the entity has either sold or securitized with
servicing retained. In addition, servicing assets (or liabilities) that
are purchased (or assumed) as part of a separate transaction must also
be recognized. However, no servicing asset (or liability) need be
recognized when an organization securitizes assets, retains all of the
resulting securities, and classifies the securities as held-to-maturity
in accordance with FAS 115.
    Under FAS 125, the existence of a servicing asset (or liability) is
based on revenues a servicer would receive for performing the
servicing. A servicing asset is recorded for a contract to service
financial assets under which the estimated future revenues from
contractually specified servicing fees, late charges, and other
ancillary revenues (such as ``float'') are expected to more than
adequately compensate the servicer for performing the servicing.
8 However, amounts representing rights to future interest
income from serviced assets in excess of contractually specified
servicing fees are not treated as servicing assets under FAS 125 since
the right to this excess future interest income does not depend on the
servicing work being satisfactorily performed and remaining with the
servicer. Rather, these amounts are treated as financial assets,
effectively, I/O strips receivable.
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    \8\ FAS 125 defines contractually specified servicing fees as
all amounts that, per contract, are due to the servicer in exchange
for servicing a financial asset and would no longer be received by a
servicer if the beneficial owners of the serviced assets or their
trustees or agents were to shift the servicing to another servicer.
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    FAS 125 also adopts the valuation approach established by FAS 122
for determining the impairment of mortgage servicing assets (MSAs) and
extends this approach to all other servicing assets, i.e., servicing
assets on financial assets other than mortgages.

Proposed Amendments to the Capital Adequacy Standards

Overview

    The Agencies are proposing to increase the amount of MSAs that can
be recognized for regulatory capital purposes.9 However,
under this proposal, servicing assets on financial assets other than
mortgages would continue to be deducted from Tier 1 capital. The
Agencies are also seeking comment on whether I/O strips receivable that
are not in the form of a security (whether held by the servicer or
purchased from another organization) should be subject to the capital
limitations imposed on servicing assets.
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    \9\ For regulatory capital purposes, a mortgage servicing asset
is a servicing asset that results from a contract to service
mortgages (as defined in the Reports of Condition and Income for
commercial banks and FDIC-supervised savings banks, Thrift Financial
Report (TFR) for savings associations, and Consolidated Financial
Statements (FR Y-9C) for bank holding companies).
---------------------------------------------------------------------------

    In this proposal, consistent with the interim capital guidance
announced by the FFIEC in its December 1996 press release, the Agencies
have chosen to use FAS 125 terminology when referring to servicing
assets and financial assets in the belief that the adoption of the same
terms for regulatory purposes would reduce the burden of having to
maintain two sets of definitions--one for capital purposes and another
for financial reporting purposes. 10
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    \10\ The Agencies' regulatory reports (Reports of Condition and
Income for commercial banks and FDIC-supervised savings banks,
Thrift Financial Report (TFR) for savings associations, and
Consolidated Financial Statements (FR Y-9C) for bank holding
companies) also reflect FAS 125 definitions for the reporting of
servicing assets beginning with the first quarter of 1997.
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Capital Limitation for Mortgage Servicing Assets

    This proposal would subject all MSAs to a 100 percent of Tier 1
capital limitation and to a 10 percent of fair value
haircut.11 The 10 percent haircut applied to all MSAs
imposes some safeguards on the amount of MSAs that can be included in
Tier 1 capital calculations and, notwithstanding the valuation and
impairment standards in FAS 122 and FAS 125, provides a greater level
of supervisory comfort that addresses concerns about the risks (e.g.,
these assets are potentially volatile due to interest rate and
prepayment risk) involved in holding these assets.12
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    \11\ PCCRs would also continue to be subject to the 10 percent
of fair value haircut.
    \12\ For purposes of determining the amount of servicing assets
on financial assets (mortgage loans and other financial assets) that
would be deducted (or disallowed) under this proposal, organizations
may choose to reduce their otherwise disallowed servicing assets by
the amount of any associated deferred tax liability. Any deferred
tax liability used in this manner would not be available for the
organization to use in determining the amount of net deferred tax
assets that may be included for purposes of Tier 1 capital
calculations.
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    The Agencies propose to retain a capital limitation on MSAs based
on a percentage of Tier 1 capital to minimize banking organizations'
reliance on these MSAs as part of the organizations' regulatory capital
base. Excessive concentrations in these assets could potentially have
an adverse impact on bank capital. The Agencies, however, propose to
increase the capital limitation so that the amount of MSAs, when
combined with PCCRs, that can be included in capital can equal no more
than 100 percent of Tier 1 capital. The Agencies believe that a higher
limit is more reasonable in light of the more specific accounting
guidance in FAS 125 for the valuation and impairment of servicing
assets. Moreover, the Agencies believe that some banking organizations
will exceed the current 50 percent of Tier 1 capital limitation due
only to changes in the accounting for servicing contracts brought about
by FAS 122 and FAS 125.

Capital Treatment of Servicing Assets on Financial Assets Other Than
Mortgages (Non-Mortgage Servicing Assets)

    The Agencies propose to deduct from Tier 1 capital all non-mortgage
servicing assets. 13 Although the Agencies recognize that
the markets for servicing assets for some types of financial assets
other than mortgages are growing, these markets are not as developed as
the mortgage servicing market. Therefore, the Agencies propose to fully
deduct non-mortgage servicing assets from capital because of concerns
that the markets for these assets may not yet be of sufficient depth to
provide liquidity for these assets. In addition, the Agencies are
uncertain whether the fair values of these servicing assets can be
determined with a high degree of reliability and predictability.
Therefore, at this time, the Agencies propose to exclude these assets
from Tier 1 capital. 14
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    \13\ Originated servicing rights on financial assets other than
mortgages were not booked as balance sheet assets under pre-FAS 125
GAAP. However, for regulatory reporting purposes, banks prior to
1997 were permitted to indirectly recognize ESFRs on certain
government-guaranteed small business loans, and thrifts and bank
holding companies booked ESFRs on financial assets other than
mortgages in accordance with GAAP. Under FAS 125, these ESFRs have
been reclassified as either servicing assets or I/O strips
receivable, depending on whether the assets are part of the
``contractually specified servicing fee,'' as that term is defined
in FAS 125.
    \14\ See footnote 12.
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Summary of Proposed Capital Amendment

    The Agencies are proposing two alternatives (alternative A and
alternative B), which are described below, to revise their capital
adequacy standards for servicing assets. These alternatives provide
different treatments of I/O strips receivable. Moreover, the proposed
alternatives do not reflect all deductions (e.g., the disallowed amount
of deferred tax assets and net unrealized losses on available-for-sale
equity

[[Page 42009]]

securities with readily determinable fair values) that are required
when organizations calculate their Tier 1 capital ratios. The
regulatory capital limitations under this proposal can be summarized as
follows:
    (a) Servicing assets and PCCRs that are includable in capital are
each subject to a 90 percent of fair value limitation (also known as a
``10 percent haircut''). 15
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    \15\ If some or all types of non-mortgage servicing assets are
includable in capital in the final rule, they would most likely be
subject to the 90 percent of fair value limitation.
---------------------------------------------------------------------------

    (b) MSAs and PCCRs must be less than or equal to 100% of Tier 1
capital 16
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    \16\ Amounts of MSAs and PCCRs in excess of the amounts
allowable must be deducted from Tier 1 capital.
---------------------------------------------------------------------------

    (c) PCCRs must be less than or equal to 25% of Tier 1 capital.
    (d) Non-mortgage servicing assets and all intangible assets (other
than qualifying PCCRs) must be deducted from Tier 1 capital.
    Under alternative A, I/O strips (whether or not in the form of
securities) would not be subject to any regulatory capital limit. Under
alternative B, I/O strips receivable not in security form (whether held
by the servicer or purchased from another organization) would be
subject to the same capital limitation that is applied to the
corresponding type of servicing assets. That is, if the I/O strips
receivable are related to mortgages, they would be combined with MSAs
and the combined amount would be subject to the 100 percent of Tier 1
capital limitation; if the I/O strips are related to financial assets
other than mortgages, they would be deducted from Tier 1 capital.
17 Furthermore, the I/O strips receivable subject to the
Tier 1 capital limitation would also be subject to the 10 percent
haircut. In all other respects, alternatives A and B are identical. The
proposed rules attached to this document reflect alternative A.
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    \17\ Under either alternative A or B, I/O strips that take the
form of mortgage-backed securities are subject to the provisions of
the Agencies' Supervisory Policy Statement on Securities Activities
(57 FR 4029, February 3, 1992). They are not, however, subject to
any Tier 1 capital limitations. I/O strips receivable that arise in
sales and securitizations of assets, which use this receivable as a
credit enhancement, are considered asset sales with recourse under
the Agencies' risk-based capital standards. Such I/O strips would be
treated like other recourse obligations under the Agencies' capital
rules and would not be subject to the capital limitations for
servicing assets.
---------------------------------------------------------------------------

    The Agencies are requesting public comment on whether to adopt
alternative A or B for regulatory capital purposes. The Agencies also
are seeking comment on whether to extend the capital limitation imposed
on servicing assets (mortgage and non-mortgage) to include certain
other non-security financial instruments, such as loans, other
receivables, or other retained interests in securitizations, that can
be contractually prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment.
    Some reasons in support of amending the capital adequacy standards
to reflect alternative A, which would not subject I/O strips receivable
to a Tier 1 capital limitation, are:
    (1) I/O strips receivable not in security form are similar in
economic substance to I/O strip securities. These I/O strips receivable
should be treated in a manner consistent with the manner in which the
Agencies treat I/O strip securities and not be subject to capital
limitations.18 Moreover, because there is insufficient data
on these new financial assets, the Agencies should not, at this time,
impose capital limits on these new financial assets. Rather, the
Agencies should let the market develop before assessing whether any
regulatory limitations are warranted.
---------------------------------------------------------------------------

    \18\  I/O strips from mortgage-backed securities that are
currently held by banks and thrifts are subject to the ``high-risk
test'' in the Agencies'' Supervisory Policy Statement on Securities
Activities (57 FR 4029, February 3, 1992). That policy statement
has, in the past, limited a depository institution's ability to hold
I/Os because they typically are ``high-risk'' mortgage securities.
---------------------------------------------------------------------------

    (2) Certain I/O strips receivable on credit card receivables would
likely be subject to a risk-based capital charge under the recourse
rules established by the Agencies because these I/O strips receivable,
which generally act as credit enhancements for the credit card asset-
backed securities sold, would function as recourse. Thus, the risk-
based capital rules for ``assets sold with recourse'' would apply to
these I/O strips receivable.
    (3) Under FAS 125, the cash flows underlying the I/O strips
receivable not in security form actually possess characteristics that
are more similar to I/O strip securities than to ESFRs because the
holder of a non-security I/O strip receivable retains the rights to the
I/O strip cash flows even if the underlying servicing (and the related
servicing asset) is shifted away from the servicer (if, for example,
the servicer fails to perform in accordance with the servicing
contract). Thus, I/O strips receivable not in security form should be
treated similarly to I/O strip securities, which are not subject to
regulatory capital limitations.
    (4) The amount of I/O strips receivable recognized by banking
organizations may be limited. For example, the discipline imposed by
the well-developed mortgage markets may minimize the amounts retained
by the servicers above the contractually specified servicing fee
amount.
    Some reasons in support of amending the capital adequacy standards
to reflect alternative B, which limits the amount of I/O strips
receivable not in security form that can be included in Tier 1 capital,
are:
    (1) I/O strips receivable not in security form are not rated and
are not registered. Rather, they are relatively new financial assets,
which are recognized on the balance sheet in response to the recently
issued FAS 125, and for which an active, liquid market does not
currently exist. In contrast, I/O strips receivable that are registered
securities have an identifiable market and are readily salable. Since
the market for these newly-created I/O strips receivable is not
currently well-developed, accurate, dependable information on the fair
value of such assets may not be readily available or may be difficult
to ascertain.
    (2) I/O strips receivable not in security form arising from
servicing activities should receive a no less restrictive capital
treatment than the treatment afforded to the servicing asset itself
because servicing assets and the I/O strips receivable both arise from
the same activity and are subject to similar prepayment risk.
    (3) If I/O strips receivable retained by the servicer are not
subject to the same capital limitation as their related servicing
assets, banking organizations may be inclined to avoid capital
limitations by negotiating contracts that minimize contractually
specified servicing fees, thereby enabling them to classify more of the
cash flows as I/O strips receivable. This would understate the
servicing assets and, thus, minimize the effectiveness of any capital
limitation.
    (4) The economic substance of servicing transactions remains
unchanged. Under FAS 125, the cash flows of these transactions have
simply been reclassified into new assets such as I/O strips receivable.
The risks associated with the servicing assets and the I/O strips
receivable have not changed.

Tangible Equity

    The definition of tangible equity found in each Agency's regulation
for Prompt Corrective Action would be revised to conform to the changes
made in the proposed rule, i.e., the term ``mortgage servicing rights''
would be renamed ``mortgage servicing assets'' to reflect the FAS 125
conceptual changes for measuring servicing. No other

[[Page 42010]]

changes to the definition of tangible equity are proposed at this
time.19
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    \19\ The OTS is proposing to make an additional technical
clarification to its definition of tangible equity in 12 CFR
565.2(f) that would conform the OTS rule to this proposal and
eliminate the double deduction of disallowed mortgage servicing
assets.
---------------------------------------------------------------------------

Request for Public Comment

    The Agencies invite comments on all aspects of these proposed
changes. In particular, the Agencies seek comments from interested
parties on the following:
    1. How readily determinable are fair values of mortgage servicing
assets and non-mortgage servicing assets (e.g., credit card servicing
assets)? Please describe the existing methodologies and market
mechanisms used by your organization for determining fair values for
servicing assets.
    2. Given the supervisory concerns regarding the reliability of the
valuation of servicing assets and the potential volatility in the fair
value of these assets, should limits be retained on the amount of
servicing assets that is recognized for regulatory capital purposes?
    a. What aggregate limit, if any, should apply to the maximum amount
of mortgage servicing assets and PCCRs that may be recognized for
regulatory capital purposes?
    b. To what extent should servicing assets on non-mortgage financial
assets be included in regulatory capital?
    c. Should non-mortgage servicing assets and I/O strips receivable
(if treated similarly to non-mortgage servicing assets) be subject to
the same 25 percent sublimit and haircut as PCCRs?
    3. What types of assets should be subject to regulatory capital
limitations under this rule?
    a. Should I/O strips receivable not in security form be subject to
the same capital limitations as servicing assets?
    b. If alternative B is adopted, should the definition of I/O strips
receivable that are subject to capital limitations be expanded to
include all financial assets not in security form that can be
contractually prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment
as described under FAS 125? These assets would include loans, other
receivables, and other retained interests in securitizations that meet
this condition. Please provide supporting information on the nature of
these non-security financial assets with significant prepayment risk.
    4. For what types of financial assets (other than loans secured by
first liens on 1- to 4-family residential properties) does your
organization currently book servicing assets and/or I/O strips
receivable? How will this change in the future for your organization?
    5. In light of FAS 125 and this proposal, what should be the
capital treatment for amounts previously designated as ESFRs for
financial reporting purposes (if your organization still maintains this
breakdown for income tax or other purposes) held by banking
organizations?
    6. What effect, if any, should efforts to hedge the MSA portfolio
have on the MSA regulatory capital limitations?
    7. Should servicing assets that are disallowed for regulatory
capital purposes be deducted on a basis that is net of any associated
deferred tax liability?

Regulatory Flexibility Act Analysis

OCC Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Comptroller of the Currency certifies that this proposed rule would not
have a significant economic impact on a substantial number of small
entities in accord with the spirit and purposes of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.). Accordingly, a regulatory
flexibility analysis is not required. The adoption of this proposal
would reduce the regulatory burden of small businesses by aligning the
terminology in the capital adequacy standards more closely to newly-
issued generally accepted accounting principles and by relaxing the
capital limitation on mortgage servicing assets. The economic impact of
this proposed rule on banks, regardless of size, is expected to be
minimal.

Board Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Board does not believe that this proposed rule would have a significant
economic impact on a substantial number of small entities in accord
with the spirit and purposes of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.). Accordingly, a regulatory flexibility analysis is
not required. The effect of this proposal would be to reduce the
regulatory burden of banks and bank holding companies by aligning the
terminology in the capital adequacy guidelines more closely to newly-
issued generally accepted accounting principles and by relaxing the
capital limitation on mortgage servicing assets. In addition, because
the risk-based and leverage capital guidelines generally do not apply
to bank holding companies with consolidated assets of less than $150
million, this proposal will not affect such companies.

FDIC Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that this proposed
rule would not have a significant economic impact on a substantial
number of small entities. Accordingly, a regulatory flexibility
analysis is not required. The amendment concerns capital requirements
for servicing assets held by depository institutions of any size. The
effect of the proposal would be to reduce regulatory burden on
depository institutions (including small businesses) by aligning the
terminology used in the capital adequacy guidelines more closely to
newly-issued generally accepted accounting principles and by relaxing
the capital limitation on mortgage servicing assets. The economic
impact of this proposed rule on banks, regardless of size, is expected
to be minimal.

OTS Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OTS certifies that this proposed rule would not have a significant
economic impact on a substantial number of small entities. The
amendment concerns capital requirements for servicing assets which may
be entered into by depository institutions of any size. The effect of
the proposal would be to reduce regulatory burden on depository
institutions by aligning the terminology used in the capital adequacy
standards more closely to newly-issued generally accepted accounting
principles and by relaxing the capital limitation on mortgage servicing
assets.

Paperwork Reduction Act

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

OCC and OTS Executive Order 12866 Statement

    The Comptroller of the Currency and the Director of the OTS have
determined that this proposal is not a significant regulatory action
under Executive Order 12866. Accordingly, a regulatory impact analysis
is not required.

OCC and OTS Unfunded Mandates Act Statement

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act)

[[Page 42011]]

requires that an agency prepare a budgetary impact statement before
promulgating a rule that includes a Federal mandate that may result in
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, this proposed amendment to the
capital adequacy standards would relax the capital limitation on
mortgage servicing assets and PCCRs. Further, the proposed amendment
moves toward greater consistency with FAS 125 in an effort to reduce
the burden of complying with two different standards. Thus, no
additional cost of $100 million or more, to State, local, or tribal
governments or to the private sector will result from this proposed
rule. Accordingly, the OCC and the OTS have not prepared a budgetary
impact statement nor specifically addressed any regulatory
alternatives.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.

12 CFR Part 6

    National banks, Prompt corrective action.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.

12 CFR Part 325

    Administrative practice and procedure, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.

12 CFR Part 565

    Administrative practice and procedure, Capital, Savings
associations.

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings
associations.

Authority and Issuance

Office of the Comptroller of the Currency

12 CFR Chapter I

    For the reasons set forth in the joint preamble, parts 3 and 6 of
chapter I of title 12 of the Code of Federal Regulations are proposed
to be amended as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    1. The authority citation for part 3 continues to read as follows:

    Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.

Sec. 3.3  [Amended]

    2. Section 3.3 is amended by removing the words ``mortgage
servicing rights'' in the first sentence and adding ``mortgage
servicing assets'' in their place.
    3. Section 3.100 is amended by revising paragraph (c)(2) and by
removing the words ``mortgage servicing rights'' in paragraphs (e)(7)
and (g)(2) and adding ``mortgage servicing assets'' in their place, to
read as follows:

Sec. 3.100  Capital and surplus.

* * * * *
    (c) *  *  *
    (2) Mortgage servicing assets;
* * * * *
    4. In appendix A to part 3, paragraph (c)(14) of section 1 is
revised to read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

Section 1. Purpose, Applicability of Guidelines, and Definitions.

* * * * *
    (c) *  *  *
    (14) Intangible assets include mortgage servicing assets, purchased
credit card relationships (servicing rights), goodwill, favorable
leaseholds, and core deposit value.
* * * * *
    5. In appendix A to part 3, in section 2, paragraphs (c)
introductory text, (c)(1), (c)(2), and the heading of paragraph
(c)(3)(i) are revised to read as follows:
* * * * *
    Section 2. Components of Capital.
* * * * *
    (c) Deductions From Capital. The following items are deducted
from the appropriate portion of a national bank's capital base when
calculating its risk-based capital ratio.
    (1) Deductions from Tier 1 capital. The following items are
deducted from Tier 1 capital before the Tier 2 portion of the
calculation is made:
    (i) All goodwill subject to the transition rules contained in
section 4(a)(1)(ii) of this appendix A;
    (ii) Non-mortgage servicing assets;
    (iii) Other intangible assets, except as provided in section
2(c)(2) of this appendix A; and
    (iv) Deferred tax assets, except as provided in section 2(c)(3)
of this appendix A, that are dependent upon future taxable income,
which exceed the lesser of either:
    (A) The amount of deferred tax assets that the bank could
reasonably expect to realize within one year of the quarter-end Call
Report, based on its estimate of future taxable income for that
year; or
    (B) 10% of Tier 1 capital, net of goodwill and all intangible
assets other than mortgage servicing assets and purchased credit
card relationships, and before any disallowed deferred tax assets
are deducted.
    (2) Qualifying intangible assets. Subject to the following
conditions, mortgage servicing assets and purchased credit card
relationships need not be deducted from Tier 1 capital:
    (i) The total of all intangible assets included in Tier 1
capital is limited to 100 percent of Tier 1 capital, of which no
more than 25 percent of Tier 1 capital can consist of purchased
credit card relationships. Calculation of these limitations must be
based on Tier 1 capital net of goodwill and other disallowed
intangible assets.
    (ii) Banks must value each intangible asset included in Tier 1
capital at least quarterly at the lesser of:
    (A) 90 percent of the fair value of each asset, determined in
accordance with paragraph (c)(2)(iii) of this section; or
    (B) 100 percent of the remaining unamortized book value.
    (iii) The quarterly determination of the current fair value of
the intangible asset must include adjustments for any significant
changes in original valuation assumptions, including changes in
prepayment estimates.
    (3) Deferred tax assets--(i) Net unrealized gains and losses on
available-for-sale securities. * * *
* * * * *

PART 6--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 6 continues to read as follows:

    Authority: 12 U.S.C. 93a, 1831o.

    2. Section 6.2(g) is revised to read as follows:

Sec. 6.2  Definitions

* * * * *
    (g) Tangible equity means the amount of Tier 1 capital elements in
the OCC's Risk-Based Capital Guidelines (12 CFR part 3, appendix A)
plus the amount of outstanding cumulative perpetual preferred stock
(including related surplus) minus all intangible assets

[[Page 42012]]

except mortgage servicing assets to the extent permitted in Tier 1
capital under 12 CFR part 3, appendix A, section 2(c)(2).
* * * * *
    Dated: July 17, 1997.
Eugene A. Ludwig,
Comptroller of the Currency.

Federal Reserve System

12 CFR CHAPTER II

    For the reasons set forth in the joint preamble, the Board of
Governors of the Federal Reserve System proposes to amend parts 208 and
225 of chapter II of title 12 of the Code of Federal Regulations as
follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 continues to read as
follows:

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105,
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g),
78l(i), 78o-4(c)(5), 78o-5, 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42
U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

    2. Section 208.41, as proposed to be renumbered from Sec. 208.31
and revised at 62 FR 15291, is further amended by revising paragraph
(f) to read as follows:

Sec. 208.41  Definitions for purposes of this subpart.

* * * * *
    (f) Tangible equity means the amount of core capital elements as
defined in the Board's Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure (Appendix A to this part), plus the amount of
outstanding cumulative perpetual preferred stock (including related
surplus), minus all intangible assets except mortgage servicing assets
to the extent that the Board determines that mortgage servicing assets
may be included in calculating the bank's Tier 1 capital.
* * * * *
    3. In Appendix A to part 208, sections II.B.1.b.i. through
II.B.1.b.v. are revised to read as follows:

Appendix a to Part 208--Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure

* * * * *
    II. ***
    B. ***
    1. Goodwill and other intangible assets ***
    b. Other intangible assets. i. All servicing assets, including
servicing assets on assets other than mortgages (i.e., non-mortgage
servicing assets) are included in this Appendix A as identifiable
intangible assets. The only types of identifiable intangible assets
that may be included in, that is, not deducted from, a bank's
capital are readily marketable mortgage servicing assets and
purchased credit card relationships. The total amount of these
assets included in capital, in the aggregate, can not exceed 100
percent of Tier 1 capital. Purchased credit card relationships are
subject to a separate sublimit of 25 percent of Tier 1 capital.
14
---------------------------------------------------------------------------

    \14\ Amounts of mortgage servicing assets and purchased credit
card relationships in excess of these limitations, as well as
identifiable intangible assets, including core deposit intangibles,
favorable leaseholds and non-mortgage servicing assets, are to be
deducted from a bank's core capital elements in determining Tier 1
capital. However, identifiable intangible assets (other than
mortgage servicing assets and purchased credit card relationships)
acquired on or before February 19, 1992, generally will not be
deducted from capital for supervisory purposes, although they will
continue to be deducted for applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage
servicing assets and purchased credit card relationships, Tier 1
capital is defined as the sum of core capital elements, net of
goodwill, and net of all identifiable intangible assets other than
mortgage servicing assets and purchased credit card relationships,
regardless of the date acquired, but prior to the deduction of
deferred tax assets.
    iii. Banks must review the book value of all intangible assets
at least quarterly and make adjustments to these values as
necessary. The fair value of mortgage servicing assets and purchased
credit card relationships also must be determined at least
quarterly. This determination shall include adjustments for any
significant changes in original valuation assumptions, including
changes in prepayment estimates or account attrition rates.
    iv. Examiners will review both the book value and the fair value
assigned to these assets, together with supporting documentation,
during the examination process. In addition, the Federal Reserve may
require, on a case-by-case basis, an independent valuation of a
bank's intangible assets.
    v. The amount of mortgage servicing assets and purchased credit
card relationships that a bank may include in capital shall be the
lesser of 90 percent of their fair value, as determined in
accordance with this section, or 100 percent of their book value, as
adjusted for capital purposes in accordance with the instructions in
the commercial bank Consolidated Reports of Condition and Income
(Call Reports). If both the application of the limits on mortgage
servicing assets and purchased credit card relationships and the
adjustment of the balance sheet amount for these assets would result
in an amount being deducted from capital, the bank would deduct only
the greater of the two amounts from its core capital elements in
determining Tier 1 capital.
* * * * *
    4. In Appendix A to part 208, section II.B.4. is revised to read as
follows:

* * * * *
    II. * * *
    B. * * *
    4. Deferred tax assets. The amount of deferred tax assets that
is dependent upon future taxable income, net of the valuation
allowance for deferred tax assets, that may be included in, that is,
not deducted from, a bank's capital may not exceed the lesser of (i)
the amount of these deferred tax assets that the bank is expected to
realize within one year of the calendar quarter-end date, based on
its projections of future taxable income for that year,20
or (ii) 10 percent of Tier 1 capital. The reported amount of
deferred tax assets, net of any valuation allowance for deferred tax
assets, in excess of the lesser of these two amounts is to be
deducted from a bank's core capital elements in determining Tier 1
capital. For purposes of calculating the 10 percent limitation, Tier
1 capital is defined as the sum of core capital elements, net of
goodwill, and net of all other identifiable intangible assets other
than mortgage servicing assets and purchased credit card
relationships, before any disallowed deferred tax assets are
deducted. There generally is no limit in Tier 1 capital on the
amount of deferred tax assets that can be realized from taxes paid
in prior carry-back years or from future reversals of existing
taxable temporary differences, but, for banks that have a parent,
this may not exceed the amount the bank could reasonably expect its
parent to refund.
---------------------------------------------------------------------------

    \20\ To determine the amount of expected deferred-tax assets
realizable in the next 12 months, an institution should assume that
all existing temporary differences fully reverse as of the report
date. Projected future taxable income should not include net
operating-loss carry-forwards to be used during that year or the
amount of existing temporary differences a bank expects to reverse
within the year. Such projections should include the estimated
effect of tax-planning strategies that the organization expects to
implement to realize net operating losses or tax-credit carry-
forwards that would otherwise expire during the year. Institutions
do not have to prepare a new 12-month projection each quarter.
Rather, on interim report dates, institutions may use the future-
taxable-income projections for their current fiscal year, adjusted
for any significant changes that have occurred or are expected to
occur.
---------------------------------------------------------------------------

* * * * *
    5. In Appendix B to part 208, section II.b. is revised to read as
follows:

Appendix B to Part 208--Capital Adequacy Guidelines for State
Member Banks: Tier 1 Leverage Measure

* * * * *
    II. * * *
    b. A bank's Tier 1 leverage ratio is calculated by dividing its
Tier 1 capital (the numerator of the ratio) by its average total
consolidated assets (the denominator of the ratio). The ratio will
also be calculated using period-end assets whenever necessary, on a
case-by-case basis. For the purpose of this leverage ratio, the
definition of Tier 1 capital as set forth in the risk-based capital
guidelines contained in Appendix A of this part will be
used.2 As a general matter,

[[Page 42013]]

average total consolidated assets are defined as the quarterly
average total assets (defined net of the allowance for loan and
lease losses) reported on the bank's Reports of Condition and Income
(Call Reports), less goodwill; amounts of mortgage servicing assets
and purchased credit card relationships that, in the aggregate, are
in excess of 100 percent of Tier 1 capital; amounts of purchased
credit card relationships in excess of 25 percent of Tier 1 capital;
all other identifiable intangible assets; any investments in
subsidiaries or associated companies that the Federal Reserve
determines should be deducted from Tier 1 capital; and deferred tax
assets that are dependent upon future taxable income, net of their
valuation allowance, in excess of the limitation set forth in
section II.B.4 of Appendix A of this part.3
---------------------------------------------------------------------------

    \2\ Tier 1 capital for state member banks includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, and qualifying noncumulative perpetual preferred
stock. In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets and purchased credit
card relationships that, in the aggregate, exceed 100 percent of
Tier 1 capital; purchased credit card relationships that exceed 25
percent of Tier 1 capital; other identifiable intangible assets; and
deferred tax assets that are dependent upon future taxable income,
net of their valuation allowance, in excess of certain limitations.
The Federal Reserve may exclude certain investments in subsidiaries
or associated companies as appropriate.
    \3\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. in Appendix A of this part.
---------------------------------------------------------------------------

* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)

    1. The authority citation for part 225 continues to read as
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and
3909.

    2. In Appendix A to part 225, sections II.B.1.b.i. through
II.B.1.b.v. are revised to read as follows:

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure

* * * * *
    II. * * *
    B. * * *
    1. Goodwill and other intangible assets
    b. Other intangible assets. i. All servicing assets, including
servicing assets on assets other than mortgages (i.e., non-mortgage
servicing assets) are included in this Appendix A as identifiable
intangible assets. The only types of identifiable intangible assets
that may be included in, that is, not deducted from, an
organization's capital are readily marketable mortgage servicing
assets and purchased credit card relationships. The total amount of
these assets included in capital, in the aggregate, can not exceed
100 percent of Tier 1 capital. Purchased credit card relationships
are subject to a separate sublimit of 25 percent of Tier 1
capital.15
---------------------------------------------------------------------------

    \15\ Amounts of mortgage servicing assets and purchased credit
card relationships in excess of these limitations, as well as
servicing assets on loans other than mortgages and all other
identifiable intangible assets, including core deposit intangibles
and favorable leaseholds, are to be deducted from an organization's
core capital elements in determining Tier 1 capital. However,
identifiable intangible assets (other than mortgage servicing assets
and purchased credit card relationships) acquired on or before
February 19, 1992, generally will not be deducted from capital for
supervisory purposes, although they will continue to be deducted for
applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage
servicing assets and purchased credit card relationships, Tier 1
capital is defined as the sum of core capital elements, net of
goodwill, and net of all identifiable intangible assets and similar
assets other than mortgage servicing assets and purchased credit
card relationships, regardless of the date acquired, but prior to
the deduction of deferred tax assets.
    iii. Bank holding companies must review the book value of all
intangible assets at least quarterly and make adjustments to these
values as necessary. The fair value of mortgage servicing assets and
purchased credit card relationships also must be determined at least
quarterly. This determination shall include adjustments for any
significant changes in original valuation assumptions, including
changes in prepayment estimates or account attrition rates.
    iv. Examiners will review both the book value and the fair value
assigned to these assets, together with supporting documentation,
during the inspection process. In addition, the Federal Reserve may
require, on a case-by-case basis, an independent valuation of an
organization's intangible assets or similar assets.
    v. The amount of mortgage servicing assets and purchased credit
card relationships that a bank holding company may include in
capital shall be the lesser of 90 percent of their fair value, as
determined in accordance with this section, or 100 percent of their
book value, as adjusted for capital purposes in accordance with the
instructions to the Consolidated Financial Statements for Bank
Holding Companies (FR Y-9C Report). If both the application of the
limits on mortgage servicing assets and purchased credit card
relationships and the adjustment of the balance sheet amount for
these intangibles would result in an amount being deducted from
capital, the bank holding company would deduct only the greater of
the two amounts from its core capital elements in determining Tier 1
capital.
* * * * *
    3. In Appendix A to part 225, section II.B.4. is revised to read as
follows:
* * * * *
    II. * * *
    B. * * *
    4. Deferred tax assets. The amount of deferred tax assets that
is dependent upon future taxable income, net of the valuation
allowance for deferred tax assets, that may be included in, that is,
not deducted from, a banking organization's capital may not exceed
the lesser of (i) the amount of these deferred tax assets that the
banking organization is expected to realize within one year of the
calendar quarter-end date, based on its projections of future
taxable income for that year,23 or (ii) 10 percent of
Tier 1 capital. The reported amount of deferred tax assets, net of
any valuation allowance for deferred tax assets, in excess of the
lesser of these two amounts is to be deducted from a banking
organization's core capital elements in determining Tier 1 capital.
For purposes of calculating the 10 percent limitation, Tier 1
capital is defined as the sum of core capital elements, net of
goodwill, and net of all identifiable intangible assets other than
mortgage servicing assets and purchased credit card relationships,
before any disallowed deferred tax assets are deducted. There
generally is no limit in Tier 1 capital on the amount of deferred
tax assets that can be realized from taxes paid in prior carryback
years or from future reversals of existing taxable temporary
differences.
---------------------------------------------------------------------------

    \23\ To determine the amount of expected deferred tax assets
realizable in the next 12 months, an institution should assume that
all existing temporary differences fully reverse as of the report
date. Projected future taxable income should not include net
operating loss carryforwards to be used during that year or the
amount of existing temporary differences a bank holding company
expects to reverse within the year. Such projections should include
the estimated effect of tax planning strategies that the
organization expects to implement to realize net operating losses or
tax credit carryforwards that would otherwise expire during the
year. Institutions do not have to prepare a new 12 month projection
each quarter. Rather, on interim report dates, institutions may use
the future taxable income projections for their current fiscal year,
adjusted for any significant changes that have occurred or are
expected to occur.
---------------------------------------------------------------------------

* * * * *
    4. In Appendix D to part 225, section II.b. is revised to read as
follows:

Appendix D to Part 225--Capital Adequacy Guidelines for Bank
Holding Companies: Tier 1 Leverage Measure

* * * * *
    II. * * *
    b. A banking organization's Tier 1 leverage ratio is calculated
by dividing its Tier 1 capital (the numerator of the ratio) by its
average total consolidated assets (the denominator of the ratio).
The ratio will also be calculated using period-end assets whenever
necessary, on a case-by-case basis. For the purpose of this leverage
ratio, the definition of Tier 1 capital as set forth in the risk-
based capital guidelines contained in Appendix A of this part will
be used.3 As a general matter, average total consolidated

[[Page 42014]]

assets are defined as the quarterly average total assets (defined net
of the allowance for loan and lease losses) reported on the
organization's Consolidated Financial Statements (FR Y-9C Report), less
goodwill; amounts of mortgage servicing assets and purchased credit
card relationships that, in the aggregate, are in excess of 100 percent
of Tier 1 capital; amounts of purchased credit card relationships in
excess of 25 percent of Tier 1 capital; all other identifiable
intangible assets (including non-mortgage servicing assets); any
investments in subsidiaries or associated companies that the Federal
Reserve determines should be deducted from Tier 1 capital; and deferred
tax assets that are dependent upon future taxable income, net of their
valuation allowance, in excess of the limitation set forth in section
II.B.4 of Appendix A of this part.4
---------------------------------------------------------------------------

    \3\ Tier 1 capital for banking organizations includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, qualifying noncumulative perpetual preferred stock,
and qualifying cumulative perpetual preferred stock. (Cumulative
perpetual preferred stock is limited to 25 percent of Tier 1
capital.) In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets and purchased credit
card relationships that, in the aggregate, exceed 100 percent of
Tier 1 capital; purchased credit card relationships that exceed 25
percent of Tier 1 capital; all other identifiable intangible assets
(including non-mortgage servicing assets); and deferred tax assets
that are dependent upon future taxable income, net of their
valuation allowance, in excess of certain limitations. The Federal
Reserve may exclude certain investments in subsidiaries or
associated companies as appropriate.
    \4\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. in Appendix A of this part.
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* * * * *
    By order of the Board of Governors of the Federal Reserve
System, July 28, 1997.
William W. Wiles,
Secretary of the Board.

Federal Deposit Insurance Corporation 12 CFR Capter III

    For the reasons set forth in the joint preamble, part 325 of
chapter III of title 12 of the Code of Federal Regulations is proposed
to be amended as follows:

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), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, 2386 (12 U.S.C. 1828 note).

    2. In Sec. 325.2, paragraph (n) is revised to read as follows:

Sec. 325.2  Definitions.

* * * * *
    (n) Mortgage servicing assets means those balance sheet assets (net
of any related valuation allowances) that represent the rights to
perform the servicing function for mortgage loans that have been
securitized or are owned by others. Mortgage servicing assets must be
amortized in proportion to, and over the period of, estimated net
servicing income. For purposes of determining regulatory capital under
this part, mortgage servicing assets will be recognized only to the
extent that the rights meet the conditions, limitations, and
restrictions described in Sec. 325.5 (f).
* * * * *

Sec. 325.2  [Amended]

    3. In Sec. 325.2, paragraphs (s), (t), and (v) are amended by
removing the words ``mortgage servicing rights'' and adding in their
place the words ``mortgage servicing assets'' each time they appear.
    4. In Sec. 325.5, paragraph (f) is revised to read as follows:

Sec. 325.5  Miscellaneous.

* * * * *
    (f) Treatment of mortgage servicing assets and credit card
relationships. For purposes of determining Tier 1 capital under this
part, mortgage servicing assets and purchased credit card relationships
will be deducted from assets and from equity capital to the extent that
the mortgage servicing assets and purchased credit card relationships
do not meet the conditions, limitations, and restrictions described in
this section.
    (1) Valuation. The fair value of mortgage servicing assets and
purchased credit card relationships shall be estimated at least
quarterly. The quarterly fair value estimate shall include adjustments
for any significant changes in the original valuation assumptions,
including changes in prepayment estimates or attrition rates. The FDIC
in its discretion may require independent fair value estimates on a
case-by-case basis where it is deemed appropriate for safety and
soundness purposes.
    (2) Fair value limitation. For purposes of calculating Tier 1
capital under this part (but not for financial statement purposes), the
balance sheet assets for mortgage servicing assets and purchased credit
card relationships will each be reduced to an amount equal to the
lesser of:
    (i) 90 percent of the fair value of these assets, determined in
accordance with paragraph (f)(1) of this section; or
    (ii) 100 percent of the remaining unamortized book value of these
assets (net of any related valuation allowances), determined in
accordance with the instructions for the preparation of the
Consolidated Reports of Income and Condition (Call Reports).
    (3) Tier 1 capital limitation. The maximum allowable amount of
mortgage servicing assets and purchased credit card relationships, in
the aggregate, will be limited to the lesser of:
    (i) 100 percent of the amount of Tier 1 capital that exists before
the deduction of any disallowed mortgage servicing assets, any
disallowed purchased credit card relationships, and any disallowed
deferred tax assets; or
    (ii) The amount of mortgage servicing assets and purchased credit
card relationships, determined in accordance with paragraph (f)(2) of
this section.
    (4) Tier 1 capital sublimit. In addition to the aggregate
limitation on mortgage servicing assets and purchased credit card
relationships set forth in paragraph (f)(3) of this section, a sublimit
will apply to purchased credit card relationships. The maximum
allowable amount of purchased credit card relationships, in the
aggregate, will be limited to the lesser of:
    (i) Twenty-five percent of the amount of Tier 1 capital that exists
before the deduction of any disallowed mortgage servicing assets, any
disallowed purchased credit card relationships, and any disallowed
deferred tax assets; or
    (ii) The amount of purchased credit card relationships, determined
in accordance with paragraph (f)(2) of this section.
* * * * *

Sec. 325.5  [Amended]

    5. In Sec. 325.5, paragraphs (g)(2)(i)(B) and (g)(5) are amended by
removing the words ``mortgage servicing rights'' and adding in their
place the words ``mortgage servicing assets'' each time they appear.

Appendix A to Part 325 [Amended]

    6. In appendix A to part 325, the words ``mortgage servicing
rights'' are removed and the words ``mortgage servicing assets'' are
added each time they appear in section I.A.1., section I.B.(1) and
footnote 8 to section I.B.(1), section II.C., and Table I--Definition
of Qualifying Capital and footnote 2 to Table I.

Appendix B to Part 325 [Amended]

    7. In appendix B to part 325, section IV.A. and footnote 1 to
section IV. A. are amended by removing the words ``mortgage servicing
rights'' and adding in their place the words ``mortgage servicing
assets'' each time they appear.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 22nd day of July, 1997.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

Office of Thrift Supervision

12 CFR CHAPTER V

    For the reasons outlined in the joint preamble, the Office of
Thrift Supervision hereby proposes to amend 12 CFR, Chapter V, as set
forth below:

PART 565--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 565 continues to read as
follows:

[[Page 42015]]

    Authority: 12 U.S.C. 1831o.

    2. Section 565.2 is amended by revising paragraph (f) to read as
follows:

Sec. 565.2  Definitions.

* * * * *
    (f) Tangible equity means the amount of a savings association's
core capital as computed in Sec. 567.5(a) of this chapter plus the
amount of its outstanding cumulative perpetual preferred stock
(including related surplus), minus intangible assets as defined in
Sec. 567.1(m) of this chapter that have not been previously deducted in
calculating core capital.
* * * * *

PART 567--CAPITAL

    1. The authority citation for part 567 continues to read as follow:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).

    2. Section 567.1 is amended by revising paragraph (m) to read as
follows:

Sec. 567.1  Definitions

* * * * *
    (m) Intangible assets. The term intangible assets means assets
considered to be intangible assets under generally accepted accounting
principles. These assets include, but are not limited to, goodwill,
favorable leaseholds, core deposit premiums, and purchased credit card
relationships. Servicing assets are not intangible assets under this
definition.
* * * * *
    3. Section 567.5 is amended by revising paragraph (a)(2)(ii) to
read as follows:

Sec. 567.5  Components of capital.

    (a) * * *
    (2) * * *
    (ii) Servicing assets that are not includable in tangible and core
capital pursuant to Sec. 567.12 of this part are deducted from assets
and capital in computing core capital.
* * * * *
    4. Section 567.6 is amended by revising paragraphs (a)(1)(iv)(L)
and (a)(1)(iv)(M) to read as follows:

Sec. 567.6  Risk-based capital credit risk-weight categories.

    (a) * * *
    (1) * * *
    (iv) * * *
    (L) Mortgage servicing assets and intangible assets includable in
core capital pursuant to Sec. 567.12 of this part;
    (M) Interest-only strips receivable;
* * * * *
    5. Section 567.9 is amended by revising paragraph (c)(1) to read as
follows:

Sec. 567.9  Tangible capital requirement.

* * * * *
    (c) * * *
    (1) Intangible assets, as defined in Sec. 567.1(m) of this part,
and servicing assets not includable in core and tangible capital
pursuant to Sec. 567.12 of this part.
* * * * *
    6. Section 567.12 is amended by revising the section heading and
paragraphs (a) through (c), paragraph (d) introductory text, and
paragraphs (e) and (f) to read as follows:

Sec. 567.12  Intangible assets and servicing assets.

    (a) Scope. This section prescribes the maximum amount of intangible
assets and servicing assets that savings associations may include in
calculating tangible and core capital.
    (b) Computation of core and tangible capital. (1) Purchased credit
card relationships may be included (that is, not deducted) in computing
core capital in accordance with the restrictions in this section, but
must be deducted in computing tangible capital.
    (2) Mortgage servicing assets may be included in computing core and
tangible capital, in accordance with the restrictions in this section.
    (3) Non mortgage-related servicing assets are deducted in computing
core and tangible capital.
    (4) Intangible assets, as defined in Sec. 567.1(m) of this part,
other than purchased credit card relationships described in paragraph
(a)(1) of this section and core deposit intangibles described in
paragraph (g)(3) of this section, are deducted in computing tangible
and core capital.
    (c) Market valuations. The OTS reserves the authority to require
any savings association to perform an independent market valuation of
assets subject to this section on a case-by-case basis or through the
issuance of policy guidance. An independent market valuation, if
required, shall be conducted in accordance with any policy guidance
issued by the OTS. A required valuation shall include adjustments for
any significant changes in original valuation assumptions, including
changes in prepayment estimates or attrition rates. The valuation shall
determine the current fair value of assets subject to this section.
This independent market valuation may be conducted by an independent
valuation expert evaluating the reasonableness of the internal
calculations and assumptions used by the association in conducting its
internal analysis. The association shall calculate an estimated fair
value for assets subject to this section at least quarterly regardless
of whether an independent valuation expert is required to perform an
independent market valuation.
    (d) Value limitation. For purposes of calculating core capital
under this part (but not for financial statement purposes), purchased
credit card relationships and mortgage servicing assets must be valued
at the lesser of:
* * * * *
    (e) Core capital limitation--(1) Aggregate limit. The maximum
aggregate amount of mortgage servicing assets and purchased credit card
relationships that may be included in core capital shall be limited to
the lesser of:
    (i) 100 percent of the amount of core capital computed before the
deduction of any disallowed mortgage servicing assets and purchased
credit card relationships; or
    (ii) The amount of mortgage servicing assets and purchased credit
card relationships determined in accordance with paragraph (d) of this
section.
    (2) Reduction by deferred tax liability. Associations may elect to
reduce the amount of their disallowed (i.e., not includable in capital)
mortgage servicing assets exceeding the 100 percent limit by the amount
of any associated deferred tax liability.
    (3) Sublimit for purchased credit card relationships. In addition
to the aggregate limitation in paragraph (e)(1) of this section, a
sublimit shall apply to purchased credit card relationships. The
maximum allowable amount of such assets shall be limited to the lesser
of:
    (i) 25 percent of the amount of core capital computed before the
deduction of any disallowed mortgage servicing assets and purchased
credit card relationships; or

[[Page 42016]]

    (ii) The amount of purchased credit card relationships determined
in accordance with paragraph (d) of this section.
    (f) Tangible capital limitation. The maximum amount of mortgage
servicing assets that may be included in tangible capital shall be the
same amount includable in core capital in accordance with the
limitations set by paragraph (e)(1) of this section.
* * * * *
    Dated: July 7, 1997.

    By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 97-20391 Filed 8-1-97; 8:45 am]
BILLING CODES: 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P
Last Updated 07/17/1999 communications@fdic.gov