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| TO: |
CHIEF EXECUTIVE OFFICER |
| SUBJECT: |
Final Rule on Capital Requirements for Small Business Loans Sold With Recourse
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The FDIC Board of Directors has approved the attached final rule
on the minimum capital levels that FDIC-supervised institutions
must maintain for certain small business loans and leases that are
sold with recourse. The FDIC's final rule is consistent with the
rules adopted by the other federal banking agencies.
The new rule essentially makes permanent an interim interagency
rule in effect since 1995 reducing the minimum capital levels that
institutions must maintain for these transactions. It also
implements Section 208 of the Riegle Community Development and
Regulatory Improvement Act of 1994.
The FDIC's capital standards generally require that banks maintain
risk-based capital against the full amount of assets transferred
with recourse. Under the interim and final rules, if two
conditions are met, qualifying institutions that sell small
business obligations with recourse are required to maintain risk-
based capital only against the amount of recourse retained. The
two conditions are the transaction must be treated as a sale under
generally accepted accounting principles (GAAP), and the
transferring institution must establish a non-capital reserve
sufficient to meet its reasonably estimated liability under the
recourse arrangements.
The final rule states that the amount of recourse retained by a
qualifying institution on transactions receiving this preferential
capital treatment cannot exceed 15 percent of the bank's total
risk-based capital. (A qualifying institution is defined as one
that is well-capitalized or, with the approval of the FDIC,
adequately capitalized, as set forth in the FDIC's prompt
corrective action rules.) Under the final rule, this preferential
capital treatment will not affect the application of prompt
corrective action sanctions.
For further information, please call Stephen G. Pfeifer,
Examination Specialist in the Division of Supervision, at 202-898-
8904.
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Nicholas J. Ketcha Jr. |
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Director |
Attachment: Oct. 24 Federal Register, pp 55490-55493, available on
the FDIC web site: /banknews
Distribution: FDIC-Supervised Banks (Commercial and Savings)
NOTE: Paper copies of FDIC financial institution letters may be
obtained through the FDIC's Public Information Center, 801 17th
Street, N.W., Room 100, Washington, D.C. 20434 (800-276-6003 or
(703) 562-2200). Electronic versions are available on the FDIC web
site: /banknews
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