**\[BILLING CODE 4810-33-P\]**

**DEPARTMENT OF THE TREASURY**

**Office of the Comptroller of the Currency**

**12 CFR Part 32**

**\[Docket No. 01-12\]**

**RIN 1557-AB82**

**Community Bank-Focused Regulation Review: Lending Limits Pilot
Program**

**AGENCY:** Office of the Comptroller of the Currency, Treasury

**ACTION:** Final rule.

**SUMMARY:** The Office of the Comptroller of the Currency (OCC) is
publishing a final rule amending part 32, the regulation governing the
percentage of capital and surplus that a national bank may loan to any
one borrower. This final rule establishes a three-year pilot program
that creates new special lending limits for 1-4 family residential real
estate loans and loans to small businesses. Eligible national banks with
main offices located in states that have a lending limit available for
residential real estate, small business or unsecured loans that is
higher than the current Federal limit may apply to take part in the
pilot program. We will review and evaluate national banks experience
with the special limits over the three-year pilot period and determine
at the end of the pilot whether to extend the program and retain, modify
or rescind the exceptions. The final rule also permanently modifies the
lending limit exemption for loans to or guaranteed by obligations of
state and local governments.

**EFFECTIVE DATE:** The final rule is effective on \[INSERT DATE 90 DAYS
AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER.\]

**FOR FURTHER INFORMATION CONTACT:** Deborah Katz, Senior Counsel, or
Stuart Feldstein, Assistant Director, Legislative and Regulatory
Activities Division, (202) 874-5090; Jonathan Fink, Senior Attorney,
Bank Activities and Structure Division (202) 874-5300.

**Background**

On May 12, 1999, the OCC issued an advance notice of proposed rulemaking
(ANPR) inviting comment on possible regulatory changes that could
benefit community banks. 64 FR 25469. The purpose of this community
bank-focused regulation review was to explore ways that our regulations
could be modified, consistent with safety and soundness, to reflect the
fact that community banks operate with more limited resources and often
present different risk profiles than larger institutions. We sought to
identify regulations where it would be appropriate to develop
alternative or differential regulatory approaches that would minimize
burden on community banks and promote community banks competitiveness.

We received thirty-five letters in response to the ANPR commenting on
various aspects of the national bank lending limit. Twelve U.S.C. 84,
the national bank lending limit, governs the percentage of capital and
surplus that a bank may loan to any one borrower. OCC regulations
implementing 84 are set forth at 12 CFR 32. Under 84 and part 32, a
national bank can make unsecured loans of up to 15 percent of its
unimpaired capital and surplus to a single borrower and extend an amount
up to an additional 10 percent of unimpaired capital and surplus to the
same borrower, if the amount of the loan that exceeds the 15 percent
limit is secured by readily marketable collateral. Part 32 refers to
these lending limits as the combined general limit. The statute and
regulation also provide other exceptions to and exemptions from the
combined general limit for various types of loans and extensions of
credit. Finally, the statute authorizes the OCC to establish lending
limits for particular classes or categories of loans that are different
from those expressly provided by the statutes terms. 12 U.S.C. 84(d)(1).

A majority of commenters on the ANPR stated that the national bank
lending limits are especially problematic for community banks because,
according to these commenters, the current lending limits have prevented
many community banks from continuing to lend to creditworthy customers,
and that this has caused a loss in potential income, especially from
valued customers whose credit needs have increased with the growth of
their businesses or increase in local property values. Many commenters
also noted that some states provide higher lending limits than those set
forth in 84 and part 32. These commenters suggested that Federal lending
limits should be the same as those available for state banks so that
national banks can compete on an equal basis with other financial
service providers in the markets they serve.

On September 22, 2000, the OCC issued a notice of proposed rulemaking
(NPRM) soliciting comment on a pilot program to modify certain aspects
of the lending limit to respond to these concerns (65 FR 57292). We
proposed to use the authority afforded by section 84(d)(1) to create new
exceptions or special lending limits for loans secured by 1-4 family
residential real estate and loans to small businesses for banks with
main offices located in states where a lending limit higher than the
current Federal limit applies. To ensure that national banks use this
additional lending authority in a way that is consistent with safe and
sound banking practices, we proposed making the new special limits
available only to eligible banks, subject to an application process. We
also proposed an aggregate limit on the amount a bank could lend under
this new authority. The proposal stated that OCC would review national
banks experience with the new exceptions over the three-year pilot
period and determine whether to retain, modify, or rescind the
exceptions.

The proposed rule also contained a separate amendment to part 32 that
modified the requirements for obtaining a lending limit exemption for
loans to or guaranteed by obligations of state and local governments.

**Overview of Comments Received**

The NPRM was published in the Federal Register on September 22, 2000.
The public comment period closed on November 21, 2000. The OCC received
seventeen comments on the proposal, including comments from one
individual, one savings and loan association, ten banks, one bank
holding company and four bank trade associations.

The majority of the commenters strongly supported the proposal as an
effort to reduce regulatory burden on community banks and to enhance the
ability of community banks to compete in todays banking environment. The
majority of commenters also specifically supported the new special
lending limits. They stated that an increase in the lending limit is
essential to level the playing field for community national banks
operating in states with a higher lending limit. One commenter suggested
that an increase in the lending limits would enhance safety and
soundness because it would minimize loan participations and thus allow a
bank to manage the risk of a credit without outside influences or
outside changes in policy.

One commenter also suggested that the OCC implement the regulation as a
permanent modification to the lending limit, instead of as a pilot
project. This commenter thought that the expense involved in
implementing the pilot program may not be recouped by the marginal
profits made on any loans extended at the higher limits and would
discourage banks from taking advantage of the pilot. The commenter
suggested that, in place of a pilot program, the OCC consider
permanently raising the limit by five percent and then, after three
years, consider an additional five percent increase. Finally, two
commenters thought that the regulatory burden created by the conditions
imposed by the proposal governing a banks ability to take advantage of
the new exceptions would compromise any benefits that might be gained
from the proposal.

We have considered these comments carefully, but have determined not to
modify the proposal in the ways suggested by these commenters. The
Federal lending limit is an important safeguard against undue
concentration of credit risk in the national banking system. Adjustments
to the limit need to be calibrated to enable both the OCC and the banks
affected to gauge the impact of additional flexibility. In our view, the
incremental approach reflected in the proposal best achieves that
objective, as a first step. Accordingly, after consideration of the
comments received, we have adopted a final regulation that is similar to
the proposal, with some modifications and the clarifying changes that
are described below. Because the final rule establishes a pilot program,
however, there will be an opportunity to revisit the constraints imposed
by the proposal at any time, and certainly as the three-year timeframe
of the pilot nears a conclusion.

**Section-by-Section Analysis**

***New Special Limits for 1-4 Family Residential Real Estate and Small
Business Loans***

**1. Categories of loans chosen for special limits**

Proposed 32.3(b)(6) contained new limits for two categories of loans:
those secured by 1-4 family residential real estate and small business
loans. The proposal solicited comment on whether the categories of loans
identified would alleviate the burden and mitigate some of the
competitive disparity for community banks.

Several commenters, including those from trade associations representing
community banks, urged the OCC to revise the proposal to include farm
loans. These commenters urged the OCC to include agricultural loans in
the pilot, so that rural community banks could benefit from the
proposal. The commenters suggested that agricultural loans are no
riskier than small business loans. In addition, some commenters noted
that agricultural community banks have comparable experience and
expertise in making farm loans as they do small business loans. Other
commenters suggested that the OCC create new limits for secured or
unsecured commercial loans.

We have decided not to expand the categories of loans subject to special
limits until we have some experience with the new limits initially
proposed for the pilot. We will continue to analyze the risk
characteristics of agricultural loans of different types (e.g., secured
by farmland or by crops) to determine whether the goals of the pilot
program would be furthered by including some categories of agriculture
loans.[^1]

Accordingly, in beginning this pilot, we have chosen categories \--
residential real estate and small business loans \-- that represent
typical, longstanding business lines for most community banks. In this
way, we hope to obtain information and experience about the effects of
the pilot program modifications to the lending limit on a broad
cross-section of community banks. We expect to use what we learn, not
only as the basis for deciding whether the new special limits should be
continued beyond the 3-year pilot period, but also for considering
whether more categories of loans should be added.

**2. Limit for residential real estate loans**

Under the proposal, the special limit in 32.3(b)(6)(i) applied to
residential real estate loans, defined under 32.2(p) to mean only loans
secured by a perfected first-lien security interest in 1-4 family
residential real estate in an amount that did not exceed 80 percent of
the appraised value of the collateral at the time the loan was made.

The OCC received one comment on this special limit. The commenter
questioned whether an increased lending limit for 1-4 family homes will
have any impact because few community banks make large dollar
residential real estate loans to one borrower. Based upon our experience
with community banks, however, we continue to believe that this special
limit will be helpful to community banks located in areas where the
price of real estate is high. Therefore, 32.7(a)(1) of the final rule
retains a special limit for residential real estate loans.

However, the final rule contains a clarification of the definition of
residential real estate loans. The definition was used to determine
whether a state had a higher lending limit for residential real estate
loans and to restrict the type of real estate loan that a national bank
could make under the authority contained in the pilot program. The final
rule moves the requirements that residential real estate loans be
secured by a perfected first-lien and can not exceed 80 percent of the
appraised value of the collateral at the time the loan was made from the
definition of a residential real estate loan to the description of which
loans qualify for the pilot program contained in 32.7(a)(1). This change
clarifies that a national bank will be required to comply with certain
prudential requirements when making residential real estate loans, but
will not be disqualified from participating in the pilot program because
a states lending limits contain different prudential limits for
residential real estate loans, for example, a lower loan-to-value ratio.

**3. Limit for small business loans**

The proposed special limit in 32.3(b)(6)(ii) for small business loans,
defined in 32.2(r), extended additional lending authority for loans that
could be unsecured, or secured in a manner that is not specified by
regulation. The proposal invited comment on whether the special limit
for small business loans should require specific collateral.

One commenter suggested requiring the borrower to provide real estate
collateral to use the expanded lending authority for small business
loans. Other commenters recommended that collateral not be required. One
reasoned that only well run banks will be able to use this special limit
and they will likely have prudent lending policies that require
collateral as appropriate. The remaining commenters felt that such loans
should be secured by specific collateral only if this requirement is
imposed on state banks.

Small business loans are typically secured by many different types of
collateral. Accordingly, the OCC has concluded that to specify the type
of collateral required would impose undue constraints on the use of this
special limit. Therefore, the rule does not require that the borrower
secure small business loans in order for the loan to qualify under the
pilot program. The type of small business loans eligible for the special
limit is adopted as proposed, in section 32.2(r) of the final rule, with
some adjustment to the definition of small business loan as discussed
below.

Section 32.2(r) of the proposal defined small business loan by
cross-referencing the definition of loans to small businesses from the
instructions for preparation of the Consolidated Reports of Condition
and Income (Call Report). This definition includes loans with original
amounts of \$1 million or less, . . . secured by nonfarm nonresidential
properties, and certain commercial and industrial loans. The NPRM
requested comment on the definition of small business loan.

One commenter thought that the cross-reference to the Call Report was
difficult to find and urged that the regulation include its own
definition of small business loan. Another commenter suggested that the
OCC eliminate the \$1 million cap on small business loans and permit a
bank to loan the lesser of \$10 million or 10 percent of its capital to
any one company.

We continue to believe that a cross-reference to the Call Report is a
readily available and easy-to-use method of defining business loans.
Moreover, banks are familiar with the Call Report definitions which they
regularly use when filing their quarterly Call Reports. However, we
agree that the dollar limitation in the Call Report definition of loans
to small businesses is unnecessary because of the separate percentage
and dollar limits established as part of the special limit for small
business loans. Therefore, the final rule eliminates the \$1 million cap
that was part of the definition of small business loan. However, the
definition continues to identify the small business loans covered by the
pilot program by cross-reference to the definitions of secured by
nonfarm nonresidential properties, and commercial and industrial loans
set forth in the Call Report instructions, Schedule RC-C, Part I (rev.
3-01).

**4. Additional lending authority**

Under 32.3(b)(6) of the proposal, a bank was permitted to extend another
ten percent of its capital and surplus, in addition to the amounts
permissible under the currently applicable lending limits, to a single
borrower for certain real estate and small business loans, respectively,
if a banks main office was located in a state with a higher limit that
applies to these categories of loans.

Commenters on this provision, including those representing community
banks, agreed that ten percent is an appropriate and sufficient amount
to alleviate the current competitive disadvantage faced by community
banks. However, one commenter thought that the limits per borrower
should be the same as state-chartered non-member banks.

A regulation that would provide exact parity between a national and a
state bank located in the same state would be complicated if the goal is
to achieve lending limit parity for all fifty states, but only for two
categories of loans, and no others. We believe that this complexity
would reduce the utility of the new special limits. For this reason, we
originally proposed allowing national banks in the pilot program to
simply extend ten percent of its capital and surplus to a single
borrower for real estate and small business loans, respectively, if a
banks main office is located in a state with a higher limit available
for these categories of loans, without regard to the amount of the state
limit. However, it is not the goal of the pilot program to provide
national banks with a competitive advantage over similarly situated
state banks in states where the applicable limit is lower than the
additional 10 percent we proposed to permit for national banks. Thus, we
have modified the two special limits in 32.7(a)(1) and (2) of the final
rule to permit additional extensions of credit to a single borrower in
the lesser of the following two amounts: (i) 10 percent of its capital
and surplus; or (ii) the percentage of capital and surplus that a state
bank is permitted to lend under a state lending limit that would be
available for residential real estate, small business or unsecured loans
in the state where the main office of the national bank is located and
that exceeds 15 percent \-- the general unsecured limit for national
banks set forth in 12 CFR 32.2(a). Under this approach, for example, in
any state where the state unsecured limit is 20 percent (and the state
has no other, higher, special lending limit available for 1-4 family
residential real estate loans or small business loans), the special
limits available to a national bank under the pilot program would be the
lesser of 5 percent or \$10 million.

Section 32.3(b)(6) of the proposal also provided that to be eligible for
the pilot program a national banks main office had to be located in a
state where the state lending limit that is available for residential
real estate or small business loans is higher than the limit for
national banks. However, state lending limits may involve higher
percentage limits, a different method of calculating the percentage of
bank capital and surplus that can be loaned to a single borrower, or
different rules for combining loans. In order to simplify this process,
the special limits described above now make clear that only situations
where the state has a higher percentage limit that would be available
for residential real estate or small business loans will trigger a
national banks eligibility for the pilot program.

The preamble to the proposed regulations also stated that to demonstrate
its eligibility for the pilot program, a bank could reference a states
specific, general or other limit that applies to 1-4 family residential
real estate or small business loans. Sections 32.7(a)(1) and (2) now
clarify that the applicable limit is the state lending limit for state
banks that is available for residential real estate loans or small
business loans, as defined in the final rule, [or]{.underline} the state
unsecured limit. Thus, for example, where the state unsecured limit is
20 percent and the state also has a 5 percent special lending limit
available for 1-4 family residential real estate loans, the special
limits available to a national bank would be the lesser of 10 percent or
\$10 million for residential real estate loans, and the lesser of 5
percent or \$10 million for small business loans.[^2]

**5. Applicable safeguards**

The proposal incorporated a number of safeguards to ensure that a
national banks use of the additional authority provided by the new
special limits is consistent with safety and soundness. The OCC
solicited comment on each of these safeguards and invited comment on
whether additional safeguards were warranted.

The first proposed safeguard, set forth in proposed 32.3(b)(6)(i) and
(ii), was a dollar cap of \$10 million dollars limiting loans to a
single borrower for real estate and small business loans, respectively,
in addition to the percentage limits described in the preceding section,
for loans made in reliance upon the new special limits.

We received one comment on this dollar cap from a trade association
representing community banks. This commenter stated that the \$10
million cap is adequate for the majority of community national banks. We
believe this limit is appropriate, particularly during the period of the
pilot program. Therefore, this safeguard is adopted as proposed in
32.7(a)(1) and (2) of the final rule.

The second proposed safeguard, found in section 32.3(b)(6)(iii), was an
aggregate lending cap on all loans, to all of a banks borrowers made in
reliance upon the real estate and small business special limits. Under
the proposal, the total amount of these loans, or portions of loans,
together, could not equal more than 100 percent of a banks capital and
surplus.

Some commenters supported an aggregate lending cap. Other commenters
thought that the aggregate cap would create an unnecessary burden and
would make compliance with part 32 more complicated as national banks
will have to keep track of aggregate totals. Some commenters thought
that the proposed aggregate cap was too restrictive and should be
increased to 150 or 200 percent of capital.

We agree that the aggregate cap will require banks to monitor the total
amount of loans extended under this new authority. However, this
additional requirement is consistent with the purpose of the cap.
Throughout, and at the conclusion of the pilot program, we will be in a
position to consider whether the cap is too restrictive and whether it
should be increased. Therefore the aggregate cap is adopted as proposed
in 32.7(a)(4).

The third safeguard made the special limits in 32.3(b)(6)(i) and (ii)
available only to eligible banks, defined in 32.2(i), as a bank that is
well capitalized, as defined in 12 CFR 6.4(b)(1),[^3] and has a rating
of 1 or 2 under the Uniform Financial Institutions Rating System, with
at least a rating of 2 for the management component of this rating
system.

We did not receive any comments on this safeguard, however, upon further
consideration, we have determined that adding the qualification that the
bank must have received a rating of at least 2 for the asset quality
component of its rating to the other qualifications of an eligible bank,
will help to ensure that only those banks that have demonstrated sound
lending practices are eligible to participate in the pilot program.
Accordingly, the final rule includes this qualification standard, in
addition to those proposed.

In addition, 32.3(b)(6)(iv) of the proposed rule required a bank to
apply to its supervisory office and receive approval before using either
of the new special limits. The proposal required an application to
contain the following information to be deemed complete: (1)
certification that the applicant is an eligible bank; (2) citation to
relevant state laws or regulations showing that the banks main office is
located in a state where the state lending limit available for
residential real estate or small business loans or unsecured loans is
higher than the limit for national banks; (3) a written resolution by
the majority of the banks board of directors approving the use of the
new special limits and confirming the terms and conditions for use of
this lending authority; and (4) a description of how the banks board
intends to exercise its continuing responsibility to oversee the use of
this lending authority.

While one commenter supported this application procedure, most
commenters criticized this approach as too complicated and burdensome.
Two commenters suggested that the OCC consider establishing minimum
requirements and a notice procedure, for example, for banks that are 1
or 2 rated and well-capitalized. One of these commenters felt that the
application requirement would create unnecessary paperwork and
discourage banks from making use of this new lending authority.

We believe that an application process will better enable us to monitor
use of the new lending authority and will help to ensure bank safety and
soundness is not compromised under the pilot program. We will revisit
the application requirement after we have had experience with the
benefits, as well as burdens, that arise. Therefore, 32.7(b) of the
final rule adopts the proposed application procedures with the
clarifying changes noted below.

Some commenters specifically objected to the requirement in
32.3(b)(6)(iv)(B) that the application cite to relevant state laws and
regulations showing that the banks main office is located in a state
with higher lending limits available for residential real estate or
small business loans. One commenter suggested that the OCC expand the
lending authority to all banks without regard to where a banks main
office is located. This commenter noted that nothing in 12 U.S.C. 84
requires competitive equality between national and state-chartered
banks. Another commenter thought that the regulation should reference
the location of the origination of the loan, and not the location of the
head office of the bank, since that is the location where a bank will be
competing.

The special limits are designed to afford some degree of competitive
parity between national banks and state chartered lenders. Therefore,
these new limits are available only to banks located in states where
they are operating at an artificial competitive disadvantage as compared
to state banks. The second commenter seems to suggest that the state
lending limit of the location of the borrower should determine whether a
special limit applies. Determining the location of a borrower often may
be complicated. For example, a company may be incorporated in Delaware
and have offices in multiple states. Further, this suggestion would be
inconsistent with the OCCs approach in other areas where the location of
the bank, rather than the borrower, is the operative control. Therefore,
we have not adopted this suggestion.

Finally, because state lending limits vary so greatly among the states,
the scope of a national banks ability to use the pilot program may be
unclear. Where such questions arise, the OCCs Chief Counsel will
determine the extent to which the pilot program is available for
national banks located in a particular state.

**6. New safeguards**

The OCC also has determined that two additional safeguards are necessary
to balance the flexibility afforded to banks through the new special
limits with safety and soundness concerns. The first of these safeguards
addresses a concern that a banks use of the special limits, together
with its combined limit and the other available statutory limits, may
result in an undue concentration of loans to a single borrower. To
address this issue, 32.7(a)(3) of the final rule provides that the total
outstanding amount of a national banks loans and extensions of credit to
one borrower made pursuant to 32.3 (a) and (b),[^4] together with loans
and extensions of credit to the borrower made under the pilot program,
cannot exceed 25 percent of the banks capital and surplus.

As is the case with all the general and specific lending limits, these
new special lending limit thresholds do not insulate loans below the
thresholds from supervisory oversight. Thus, loans within the parameters
of the pilot program are still subject to criticism if they are poorly
underwritten, poorly administered, or if loans made under the program
are part of an excessive concentration by a bank in certain types of
loans.[^5]

Moreover, we also have included in the final rule a procedure to rescind
a banks authority to use the special lending limits in the event that
safety and soundness problems arise. Under 32.7(a)(4)(d) of the final
rule, the OCC reserves the right to rescind a banks authority to use the
special lending limits, based upon concerns about credit quality, undue
concentrations in the banks portfolio of residential or small business
loans, or about a banks overall credit risk management systems and
controls. The bank must cease new extensions of credit in reliance on
the special lending limits after receiving written notice from the OCC
that its authority has been rescinded.

**7. Duration of approval**

The proposed rule was structured as a three-year pilot program. However,
32.3(b)(v) of the proposal stated that OCC approval of a banks authority
to use the special limits would be effective for three years and could
be renewed. Section 32.7(c) of the final rule corrects this provision by
clarifying that a bank that has received OCC approval to participate in
the pilot program may continue to make loans under the special lending
limits only for the duration of the three-year program, provided the
bank remains an eligible bank. Accordingly, a bank that receives OCC
approval to participate in the pilot program one year after the
effective date of this regulation may use the authority granted under
this pilot program for no longer than two more years.

**8. Duration of Program**

As described above, the proposed rule was structured as a three-year
pilot program. The final rule retains the three-year duration that we
proposed. Accordingly, new section 32.7(e) of the final rule contains an
express termination date of **\[INSERT DATE 3 YEARS AFTER DATE OF
PUBLICATION IN THE FEDERAL REGISTER\]**. This section also states that
the OCC also retains the ability to terminate the pilot program prior to
that date. We contemplate that the circumstance where the pilot program
could be terminated early would be where our monitoring of loans made
under the program indicates that overall experience with the program is
raising significant safety and soundness concerns. Prior to the
conclusion of the three-year pilot program the OCC will evaluate the
experience under the program and determine whether, and under what
circumstances, the program should be extended. In its evaluation of the
program and its consideration of conditions under which the program
might be extended, the OCC will consider, among other matters, whether
increases in concentration resulting from any new authority should be
offset by additional portfolio diversification requirements.

**9. Transition issues**

The preamble to the proposal stated that as long as a bank was eligible,
any loan made by the bank during the three year period following
approval would remain legal, even if the bank subsequently became
ineligible.

Two comments raised transition issues. One commenter requested that the
OCC clarify that a national bank that made a loan in compliance with the
pilot program would not be found in violation of part 32 if the bank
subsequently were to become disqualified as an eligible bank during the
three-year period. A second commenter requested that the OCC clarify
that any loans made when a bank was eligible to use the higher limits
will not have to be reduced or called early, if after three years, the
bank becomes ineligible or the program is discontinued.

We agree that various transition issues may arise and should be
addressed in the final rule. Therefore, 32.7(f) of the final rule now
clarifies that loans made by a bank in compliance with the requirements
of the pilot program will not be deemed a lending limit violation and
will not be treated as nonconforming under 32.6 if, for example, the
bank becomes ineligible or the pilot program is discontinued. However,
no additional funds may be advanced to the borrower as long as the
outstanding amount of a national banks loans and extensions of credit to
the borrower exceed the lending limit.

***Exemptions for Loans Secured by State and Local Governments.***

Part 32 provides that a loan or extension of credit made by a national
bank to, or guaranteed by general obligations of a State or political
subdivision is exempt from any lending limit. [See]{.underline} 12 CFR
32.3(c)(5). The term general obligation is defined in 12 CFR part 1. In
addition, to obtain this exemption, this section currently requires the
bank to obtain an opinion of counsel that the loan or extension of
credit or guarantee is a valid and enforceable general obligation of the
State or political subdivision. However, the requirement for an opinion
of counsel is not statutorily required.

The proposed rule revised 32.3(c)(5) to allow a bank to either obtain an
opinion of counsel or rely on the opinion of a State attorney general
(or other State legal official with authority to opine on the obligation
in question) on the validity and enforceability of the obligation,
extension of credit, or guarantee in question. All but one commenter
supported this change. These commenters agreed that obtaining an opinion
of counsel can be expensive and time consuming for community banks,
particularly for those banks that make a substantial number of
agricultural loans under loan guarantee programs. They stated that
allowing community banks to rely upon an opinion of a States attorney
general is a significant improvement.

One commenter thought that it would be more difficult to obtain an
opinion of a states attorney general than an opinion of counsel. The OCC
notes that this provision provides national banks with more and not less
flexibility. It will permit a bank to obtain [either]{.underline} an
opinion of counsel, an opinion of a states attorney general or other
State legal official with authority to opine on the obligation in
question, whichever is easier. Moreover, in some cases, banks may be
able to rely on existing opinions from state officials to satisfy this
requirement. [See, e.g.,]{.underline} OCC Interpretive Letter No. 899
(May 15, 2000), [reprinted in]{.underline} Fed. Banking L. Rep. (CCH)
81-418 (for purposes of qualifying for the exemption in 12 CFR
32.3(c)(5), national banks may rely on an Illinois Attorney General
opinion providing that loans guaranteed by the Illinois Farm Development
Authority are backed by the full faith and credit of the State of
Illinois). Therefore, this provision is adopted as proposed in
32.3(c)(5) of the final rule.

**Regulatory Analysis**

**A. Paperwork Reduction Act**

The OCC may not conduct or sponsor, and an organization is not required
to respond to, an information collection unless it displays a currently
valid Office of Management and Budget (OMB) control number.

OMB has reviewed and approved the collection of information requirements
contained in this rule under control number 1557-0221, in accordance
with the Paperwork Reduction of 1995 (44 U.S.C. 3501 *et seq.*). OMB
clearance will expire on December 31, 2003.

The OCC sought commment on all aspects of the burden estimates for the
information collection contained in the proposed rule. The OCC received
no comments.

The information collection requirements contained in 12 CFR part 32 are
contained in section 32.7(b). Under this section, the final regulation
would require national banks to provide the OCC with certain information
in connection with an application to receive approval from its
supervisory office before using the new special lending limits for 1-4
family residential real estate loans and loans to small businesses for
national banks.

The potential respondents are national banks.

Estimated number of respondents: 2,140

Estimated number of responses: 2,140

Estimated burden hours per response: 26

Estimated total burden: 55,640

The OCC has a continuing interest in the publics opinion regarding
collections of information. Members of the public may submit comments,
at any time, regarding any aspects of these collections of information.
Comments may be sent to Jessie Dunaway, Clearance Officer, Office of the
Comptroller of the Currency, 250 E Street, SW, Mailstop 8-4, Washington,
DC 20219.

**B. Regulatory Flexibility Act Analysis**

Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA), 5
U.S.C. 605(b), the regulatory flexibility analysis otherwise required
under section 603 of the RFA, 5 U.S.C. 603, is not required if the head
of the agency certifies that the rule will not have a significant
economic impact on a substantial number of small entities and the agency
publishes such certification and a statement explaining the factual
basis for such certification in the **Federal Register** along with its
final rule.

On the basis of the information currently available, the OCC is of the
opinion that this final rule will not have a significant impact on a
substantial number of small entities, within the meaning of those terms
as used in the RFA. The final regulation requires national banks that
would like to participate in the pilot program to submit an application
containing certain information and receive approval from its supervisory
office before using the new special limits for 1-4 family residential
real estate loans and loans to small businesses. However, the OCC does
not believe that this application requirement will have a significant
impact on a substantial number of small entities. Accordingly, a
regulatory flexibility analysis not required.

**C. Executive Order 12866 Determination**

The Comptroller of the Currency has determined that this final rule
would not constitute a \"significant regulatory action\" for the
purposes of Executive Order 12866. Under the most conservative cost
scenarios that the OCC can develop on the basis of available
information, the impact of the final rule falls well short of the
thresholds established by the Executive Order.

**D. Unfunded Mandates Reform Act of 1995 Determinations**

Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532
(Unfunded Mandates Act), requires that an agency prepare a budgetary
impact statement before promulgating any rule likely to result in 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 the
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating the rule. However, an agency is not
required to assess the effects of its regulatory actions on the private
sector to the extent that such regulations incorporate requirements
specifically set forth in law. 2 U.S.C. 1531.

The OCC has determined that this final rule will not result in
expenditures by State, local, and tribal governments, in the aggregate,
or by the private sector, of \$100 million or more in any one year.
Accordingly, the OCC has not prepared a budgetary impact statement or
specifically addressed the regulatory alternatives considered.

**List of Subjects in 12 CFR Part 32**

National banks, Reporting and recordkeeping requirements.

**Authority and Issuance**

For the reasons set forth in the preamble, part 32 of chapter I of title
12 of the Code of Federal Regulations is amended as follows:

**PART 32\--LENDING LIMITS**

1\. The authority citation for part 32 continues to read as follows:

**Authority:** 12 U.S.C. 1 [et]{.underline}. [seq]{.underline}., 84, and
93a.

2\. In 32.2:

A. Paragraph (p) is redesignated as paragraph (s);

B. Paragraph (o) is redesignated as paragraph (q);

C. Paragraphs (i) through (n) are redesignated as paragraphs (j) through
(o); and

D. New paragraphs (i), (p), and (r) are added to read as follows:

**32.2 Definitions**

\* \* \* \* \*

\(i\) [Eligible bank]{.underline} means a national bank that:

\(1\) is well capitalized as defined in 12 CFR 6.4(b)(1); and

\(2\) has a composite rating of 1 or 2 under the Uniform Financial
Institutions Rating System in connection with the banks most recent
examination or subsequent review, with at least a rating of 2 for asset
quality and for management.

\* \* \* \* \*

\(p\) [Residential real estate loan]{.underline} means a loan or
extension of credit that is secured by 1-4 family residential real
estate.

\* \* \* \* \*

\(r\) [Small business loan]{.underline} means a loan or extension of
credit secured by nonfarm nonresidential properties or a commercial or
industrial loan as defined in the instructions for preparation of the
Consolidated Report of Condition and Income.

\* \* \* \* \*

3\. In 32.3, paragraph (c)(5) is revised to read as follows:

**32.3 Lending Limits.**

\* \* \* \* \*

\(c\) \* \* \*

\(5\) [Loans to or guaranteed by general obligations of a State or
political subdivision]{.underline}. (i) A loan or extension of credit to
a State or political subdivision that constitutes a general obligation
of the State or political subdivision, as defined in part 1 of this
chapter, and for which the lending bank has an opinion of counsel or the
opinion of that State Attorney General, or other State legal official
with authority to opine on the obligation in question, that the loan or
extension of credit is a valid and enforceable general obligation of the
borrower; and

\(ii\) A loan or extension of credit, including portions thereof, to the
extent guaranteed or secured by a general obligation of a State or
political subdivision and for which the lending bank has an opinion of
counsel or the opinion of that State Attorney General, or other State
legal official with authority to opine on the guarantee or collateral in
question, that the guarantee or collateral is a valid and enforceable
general obligation of that public body.

\* \* \* \* \*

4\. A new 32.7 is added to read as follows:

**32.7 Pilot program for residential real estate and small business
loans.**

\(a\) [Residential real estate and small business loans.]{.underline}
(1) In addition to the amount that a national bank may lend to one
borrower under 32.3, an eligible national bank may make residential real
estate loans or extensions of credit to one borrower in the lesser of
the following two amounts: 10 percent of its capital and surplus; or the
percent of its capital and surplus, in excess of 15 percent, that a
State bank is permitted to lend under the State lending limit that is
available for residential real estate loans or unsecured loans in the
State where the main office of the national bank is located. Any such
loan or extension of credit must be secured by a perfected first-lien
security interest in 1-4 family real estate in an amount that does not
exceed 80 percent of the appraised value of the collateral at the time
the loan or extension of credit is made. In no event may a bank lend
more than \$10 million to one borrower under this authority.

\(2\) In addition to the amount that a national bank may lend to one
borrower under 32.3, an eligible national bank may make small business
loans or extensions of credit to one borrower in the lesser of the
following two amounts: 10 percent of its capital and surplus; or the
percent of its capital and surplus, in excess of 15 percent, that a
State bank is permitted to lend under the State lending limit that is
available for small business loans or unsecured loans in the State where
the main office of the national bank is located. In no event may a bank
lend more than \$10 million to one borrower under this authority.

\(3\) The total outstanding amount of a national banks loans and
extensions of credit to one borrower made under 32.3(a) and (b),
together with loans and extensions of credit to the borrower made
pursuant to paragraphs (a)(1) and (2) of this section, shall not exceed
25 percent of the banks capital and surplus.

\(4\) The total outstanding amount of a national banks loans and
extensions of credit to all of its borrowers made pursuant to the
special lending limits provided in paragraphs (a)(1) and (2) of this
section may not exceed 100 percent of the banks capital and surplus.

\(b\) [Application process.]{.underline} An eligible bank must submit an
application to, and receive approval from, its supervisory office before
using the special lending limits in paragraphs (a)(1) and (2) of this
section. The supervisory office may approve a completed application if
it finds that approval is consistent with safety and soundness. To be
deemed complete, the application must include:

\(1\) certification that the bank is an eligible bank as defined in
32.2(i);

\(2\) citations to relevant State laws or regulations;

\(3\) a copy of a written resolution by a majority of the banks board of
directors approving the use of the limits provided in paragraphs (a)(1)
and (2) of this section, and confirming the terms and conditions for use
of this lending authority; and

\(4\) a description of how the board will exercise its continuing
responsibility to oversee the use of this lending authority.

\(c\) [Duration of approval.]{.underline} Except as provided in 32.7(d),
a bank that has received OCC approval may continue to make loans and
extensions of credit under the special lending limits in paragraphs
(a)(1) and (2) of this section until the date three years after \[INSERT
DATE 90 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER\],
provided the bank remains an eligible bank.

\(d\) [Discretionary termination of authority.]{.underline} The OCC may
rescind a banks authority to use the special lending limits in
paragraphs (a)(1) and (2) of this section based upon concerns about
credit quality, undue concentrations in the banks portfolio of
residential or small business loans, or concerns about the banks overall
credit risk management systems and controls. The bank must cease making
new loans or extensions of credit in reliance on the special limits upon
receipt of written notice from the OCC that its authority has been
rescinded.

\(e\) [Duration of pilot program.]{.underline} The pilot program will
terminate on **\[INSERT DATE 3 YEARS AFTER DATE OF PUBLICATION IN THE
FEDERAL REGISTER\],** unless it is terminated sooner by the OCC.

\(f\) [Existing loans.]{.underline} Any loans or extensions of credit
made by a bank under the special lending limits in paragraphs (a)(1) and
(2) of this section, that were in compliance with this section when
made, will not be deemed a lending limit violation and will not be
treated as nonconforming under 32.6.

Dated: May 31, 2001

**John D. Hawke, Jr.,**

*Comptroller of the Currency*.

[^1]: The lending limit statute and regulations currently contain
    special enhanced limits for certain loans secured by documents
    transferring or securing title to readily marketable staples (35
    percent, in addition to the banks combined general limit), livestock
    and dairy cattle (both 10 percent, in addition to the banks combined
    general limit). [See]{.underline} 12 U.S.C. 84(c)(3), 12 CFR
    32.3(b)(1); 12 U.S.C. 84(c)(9)(A), 12 CFR 32.3(b)(3); 12 U.S.C.
    84(c)(9)(B), 12 CFR 32.3(b)(4).

[^2]: However, as described in section 6, below, the total outstanding
    amount of a national banks loans and extensions of credit to one
    borrower made pursuant to 12 CFR 32.3 (a) and (b), together with
    loans and extensions of credit to the borrower made under the pilot
    program, cannot exceed 25 percent of the banks capital and surplus.

[^3]: Under 12 CFR 6.4(b), well capitalized means that the bank: (1) has
    a total risk-based capital ratio of 10.0 percent or greater; (2) has
    a Tier 1 risk-based capital ratio of 6.0 percent or greater; (3) has
    a leverage ratio of 5.0 percent or greater; and (4) is not subject
    to any written agreement, order or capital directive, or prompt
    corrective action directive issued by the OCC pursuant to section 8
    of the Federal Deposit Insurance Act (FDI Act), the International
    Lending Supervision Act of 1983 or section 38 of the FDI Act, or any
    regulation thereunder, to meet and maintain a specific capital level
    for any capital measure.

[^4]: Section 32.3 is the provision containing the general and existing
    special lending limits and exceptions to the lending limits. This
    section includes a banks combined general limit for unsecured loans
    and loans secured by readily marketable collateral ( 32.3(a)); and
    other special lending limits ( 32.3(b)), such as limits for loans
    secured by documents covering livestock.

[^5]: The documentation exemption described in the Interagency Policy
    Statement on Documentation for Loans to Small- and Medium-sized
    Businesses and Farms contained in Banking Bulletin 93-18, issued by
    the OCC on April 2, 1993, is not available for loans made under the
    Pilot Program.