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FIL-112-97 Attachment

[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