Interim Rule Lowering Capital
on Small Business Loans Sold With Recourse
The FDIC Board of Directors has approved an
interim rule to reduce the minimum capital levels FDIC-supervised institutions must
maintain for certain small business loans and leases that are sold with recourse. This
action implements Section 208 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (the Riegle Act), and was effective on August 31, 1995. The other
federal banking and thrift regulators are issuing similar rules that will apply to the
institutions they supervise. A copy of the interim rule is attached.
Regulatory reporting instructions for an
FDIC-supervised bank generally require an institution that transfers assets with recourse
to continue to report these assets on its balance sheet when filing its quarterly Reports
of Condition and Income (Call Reports). Thus, these amounts normally are included in the
denominator when calculating the institution's risk-based and leverage capital ratios.
This regulatory reporting and capital treatment differs from how transfers of assets with
recourse are reported under generally accepted accounting principles (GAAP), which permit
many such transactions to be reported as sales, thereby allowing the assets to be removed
from the balance sheet.
In general, hanks currently must maintain
risk-based capital against the full amount of assets transferred with recourse. Under the
FDIC's interim rule, however, qualifying institutions that sell small business obligations
with recourse are required to maintain risk-based capital only against the amount of
recourse retained, if two conditions are met. First, the transaction must be treated as a
sale under GAAP. Second, the transferring institution must establish a non-capital reserve
sufficient to meet its reasonably estimated liability under the recourse arrangements.
A qualifying institution is defined as one that
is well capitalized or, with the approval of the FDIC, adequately capitalized, as these
terms are set forth in the FDIC's prompt corrective action rules. Under the interim rule,
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
For Call Report purposes, transactions completed
on or after August 31, 1995, which meet the above criteria should be reported as sales
under GAAP. Also the Riegle Act directed the federal banking agencies to issue final
regulations implementing Section 208 no later than March 22, 1995. The FDIC, therefore,
will not object if a bank which it supervises and is a qualifying institution under the
interim rule chooses to apply the rule's provisions to small business obligations that
were transferred with recourse between March 22, 1995, and August 31, 1995, effective date
Consistent with Section 208 of the Riegle Act,
the preferential capital treatment set forth in this interim rule will not affect the
application of prompt corrective action sanctions.
Although this rule became effective when it was
published in the Federal Register on August 31, 1995, comments will be accepted for
60 days. The comment period expires on October 30, 1995.
For further information, contact Stephen G.
Pfeifer, an Examination Specialist in the Division of Supervision's Accounting Section