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TO:
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CHIEF EXECUTIVE OFFICER
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SUBJECT:
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Final Rule Revising the Regulatory Capital
Treatment of Servicing Assets
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The FDIC Board of Directors has approved the attached
final rule relaxing the regulatory capital limitations on servicing assets and aligning
the terminology used in the FDIC's capital standards more closely with the terminology
used under generally accepted accounting principles. The rule, which reduces banks'
regulatory burden, is being issued jointly with the rules of the Federal Reserve Board,
the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
The revised rule will take effect on October 1,
1998. However, institutions may choose to apply the revised limits on servicing
assets beginning August 10, 1998, the date of the final rule's publication in
the Federal Register.
Specifically, the final rule increases the amount of mortgage servicing
assets (MSAs) recognized for regulatory capital purposes and, for the
first time, recognizes limited amounts of nonmortgage servicing assets
(NMSAs) in regulatory capital calculations. The rule also retains the
current capital limitations that apply to purchased credit card
relationships.
Servicing assets arise from contracts to service loans or other
financial assets (that have been securitized or are owned by
others) under which the benefits of servicing are expected to
more than adequately compensate the servicer for performing the
servicing. The values assigned to servicing assets are
potentially volatile due to interest rate and prepayment risk.
Because of these risks, excessive concentrations in these assets
could cause a significant adverse impact on bank capital.
MSAs arise from contracts to service loans secured by
real estate that have been securitized or are owned by
others. NMSAs originate from contracts to service
financial assets other than loans secured by real
estate. Purchased credit card relationships (PCCRs)
arise when an institution purchases existing credit card
receivables and also has the right to provide credit
card services to those customers. In general, PCCRs are
the amount paid in excess of the value of the purchased
credit card receivables.
The final rule makes the following revisions to
the FDIC's capital standards:
- 100 Percent Aggregate
Limit. The limitation on
the amount of servicing assets
(when combined with PCCRs) that
can be recognized as a percent
of Tier 1 capital will increase
from 50 percent to 100 percent.
- 25 Percent Sublimit. For
the first time, NMSAs will be
recognized (rather than
deducted) for regulatory capital
purposes, subject to the 25
percent of Tier 1 capital
sublimit that previously applied
only to PCCRs. Thus, NMSAs will
be combined with PCCRs for
purposes of applying this 25
percent sublimit and will also
be combined with MSAs and PCCRs
for purposes of applying the 100
percent aggregate limit.
- 10 Percent Haircut. The
90 percent of fair value limit
(also referred
to as the 10 percent "haircut")
will be retained for
MSAs and PCCRs and extended to
cover NMSAs.
Any balance sheet assets for
MSAs, NMSAs and PCCRs that
exceed the above limitations
will be deducted from assets and
from Tier 1 capital when
calculating a bank's leverage
and risk-based capital ratios.
The final rule will not
impose any regulatory
capital limitation on
interest-only (I/O)
strips receivable. I/O
strips are assets that
represent rights to
receive some or all of
the future interest
income from serviced
assets in excess of the
contractually specified
servicing fees. However,
consistent with current
capital rules, the FDIC
will continue to apply
the risk-based capital
treatment for financial
assets sold with
recourse to those
arrangements where
retained I/O strips are
used as a credit
enhancement to absorb
credit risk on the
underlying assets that
have been sold.
This rule is
generally
consistent with
the proposal
that the four
federal banking
agencies issued
for comment in
August 1997,
with the
exception that
under the
proposal all
NMSAs would have
been deducted
when determining
the amount of
Tier 1 capital.
However, the
final rule will
allow NMSAs to
be recognized in
calculating Tier
1 capital,
subject to the
10 percent
haircut and the
same 25 percent
of capital
sublimit that
previously
applied only to
PCCRs.
For more
information,
please
contact
Stephen
G.
Pfeifer,
Examination
Specialist
in the
FDIC's
Division
of
Supervision,
on
202-898-8904.
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Nicholas
J.
Ketcha
Jr.
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Director
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Attachment
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,
NW,
Room
100,
Washington,
DC
20434
(800-276-6003
or
(703)
562-2200).
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