42006 Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Parts 3 and 6

[Docket No. 97–15]

RIN 1557–AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R–0976]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

RIN 3064–AC07

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 565 and 567

[Docket No. 97–67]

RIN 1550–AB11

Capital; Risk-Based Capital

Guidelines; Capital Adequacy

Guidelines; Capital Maintenance:

Servicing Assets

AGENCIES: Office of the Comptroller of

the Currency, Treasury; Board of

Governors of the Federal Reserve

System; Federal Deposit Insurance

Corporation; and Office of Thrift

Supervision, Treasury.

ACTION: Joint notice of proposed

rulemaking.

SUMMARY: The Office of the Comptroller

of the Currency, (OCC), the Board of

Governors of the Federal Reserve

System (Board), the Federal Deposit

Insurance Corporation (FDIC), and the

Office of Thrift Supervision, (OTS)

(collectively, the Agencies) propose to

amend their capital adequacy standards

for banks, bank holding companies, and

savings associations (banking

organizations) to address the treatment

of servicing assets on both mortgage

assets and financial assets other than

mortgages (non-mortgages). This

proposed rule was developed in

response to a recent Financial

Accounting Standards Board (FASB)

accounting standard that affects

servicing assets; that is, Statement of

Financial Accounting Standards No.

125, ‘‘Accounting for Transfers and

Servicing of Financial Assets and

Extinguishments of Liabilities’’ (FAS

125), issued in June 1996, which

superseded Statement of Financial

Accounting Standards No. 122,

‘‘Accounting for Mortgage Servicing

Rights’’ (FAS 122), issued in May 1995.

Under this proposed rule, mortgage

servicing assets included in regulatory

capital would continue to be subject to

certain prudential limitations. However,

the limitation on the amount of

mortgage servicing assets (and

purchased credit card relationships) that

can be recognized as a percent of Tier

1 capital would be increased from 50 to

100 percent. Also, all non-mortgage

servicing assets would be fully deducted

from Tier 1 capital. The Agencies are

requesting comment on the regulatory

capital limitations that are being

proposed for servicing assets and on

whether any interest-only strips

receivable should be subject to the same

regulatory capital limitations as

servicing assets.

DATES: Comments must be received on

or before October 3, 1997.

ADDRESSES: Interested parties are

invited to submit written comments to

any or all of the Agencies. All comments

will be shared among the Agencies.

OCC: Written comments should be

submitted to Docket No. 97–15,

Communications Division, Ninth Floor,

Office of the Comptroller of the

Currency, 250 E Street, SW.,

Washington, DC 20219. Comments will

be available for inspection and

photocopying at that address. In

addition, comments may be sent by

facsimile transmission to FAX number

(202) 874–5274, or by electronic mail to

regs.comments@occ.treas.gov.

Board: Comments should refer to

Docket No. R–0976, and may be mailed

to William W. Wiles, Secretary, Board of

Governors of the Federal Reserve

System, 20th Street and Constitution

Avenue, NW., Washington, DC 20551.

Comments also may be delivered to the

Board’s mail room between 8:45 a.m.

and 5:15 p.m. weekdays, and to the

security control room at all other times.

The mail room and the security control

room are accessible from the courtyard

entrance on 20th Street between

Constitution Avenue and C Street, NW.

Comments received will be available for

inspection in Room MP–500 of the

Martin Building between 9:00 a.m. and

5:00 p.m. weekdays, except as provided

in 12 CFR 261.8 of the Board’s Rules

Regarding Availability of Information.

FDIC: Written comments shall be

addressed to Robert E. Feldman,

Executive Secretary, Attention:

Comments/OES, Federal Deposit

Insurance Corporation, 550 17th Street,

NW., Washington, DC 20429. Comments

may be hand delivered to the guard

station at the rear of the 17th Street

Building (located on F Street), on

business days between 7:00 a.m. and

5:00 p.m. (Fax number: (202) 898–3838;

Internet address: comments@fdic.gov).

Comments may be inspected and

photocopied in the FDIC Public

Information Center, Room 100, 801 17th

Street, NW., Washington, DC, between

9:00 a.m. and 4:30 p.m. on business

days.

OTS: Send comments to Chief,

Dissemination Branch, Records

Management and Information Policy,

Office of Thrift Supervision, 1700 G

Street, NW., Washington, D.C. 20552,

Attention Docket No. 97–67. These

submissions may be hand-delivered to

1700 G Street, N.W. between 9 a.m. and

5 p.m. on business days; they may be

sent by facsimile transmission to FAX

Number (202) 906–7755; or by e-mail to

public.info@ots.treas.gov. Those

commenting by e-mail should include

their name and telephone number.

Comments will be available for

inspection at 1700 G Street, N.W., from

9:00 a.m. until 4:00 p.m. on business

days.

FOR FURTHER INFORMATION CONTACT:

OCC: Gene Green, Deputy Chief

Accountant (202/874–5180); Roger

Tufts, Senior Economic Adviser, or Tom

Rollo, National Bank Examiner, Capital

Policy Division (202/874–5070);

Mitchell Stengel, Senior Financial

Economist, Risk Analysis Division (202/

874–5431); Saumya Bhavsar, Attorney

or Ronald Shimabukuro, Senior

Attorney (202/874–5090), Legislative

and Regulatory Activities Division,

Office of the Comptroller of the

Currency.

Board: Arleen Lustig, Supervisory

Financial Analyst (202/452–2987),

Arthur W. Lindo, Supervisory Financial

Analyst, (202/452–2695) or Thomas R.

Boemio, Senior Supervisory Financial

Analyst, (202/452–2982), Division of

Banking Supervision and Regulation.

For the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), Diane Jenkins (202) 452–3544,

Board of Governors of the Federal

Reserve System, 20th and C Streets,

NW., Washington, DC 20551.

FDIC: For supervisory issues, Stephen

G. Pfeifer, Examination Specialist, (202/

898–8904), Accounting Section,

Division of Supervision; for legal issues,

Marc J. Goldstom, Counsel, (202/898–

8807), Legal Division.

OTS: John F. Connolly, Senior

Program Manager for Capital Policy,

Supervision Policy Division (202/906–

6465), Christine Smith, Capital and

Accounting Policy Analyst, (202/906–

5740), Timothy J. Stier, Chief

Accountant, (202/906–5699),
Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules 42007

1For OTS purposes, Tier 1 capital is the same as

core capital.

2Servicing rights are the contractual obligations

undertaken by an institution to provide servicing

for loans owned by others, typically for a fee.

PMSRs are mortgage servicing rights that have been

purchased from other parties. The purchaser is not

the originator of the mortgage. Originated mortgage

servicing rights, on the other hand, generally

represent the servicing rights acquired when an

institution originates mortgage loans and

subsequently sells the loans but retains the

servicing rights. Under the accounting standards

that were in effect prior to FAS 122, mortgage

servicing rights were characterized as intangible

assets.

3A normal servicing fee was defined as a

servicing fee that was representative of servicing

fees most commonly used in comparable servicing

agreements covering similar types of loans. Excess

servicing fees arose only when a banking

organization sold loans but retained the servicing

and received a servicing fee that was in excess of

a normal servicing fee. Excess servicing fees

receivable were the present value of the excess

servicing fees and were reported on the institution’s

balance sheet. GAAP continued to differentiate

between normal and excess servicing fees until FAS

125 was implemented in January 1997.

4Bank holding companies and thrift institutions,

however, were allowed to report ESFRs for

regulatory reporting purposes and recognize all

ESFRs in capital in accordance with existing GAAP.

5Among other things, FAS 122 imposed valuation

and impairment criteria, based on the stratification

of MSRs by their predominant risk characteristics.

In addition, FAS 122 eliminated the intangible asset

reference that prior GAAP applied to MSRs and

stated that the characterization of MSRs as either

intangible or tangible was unnecessary because

similar characterizations are not applied to most

other assets.

6Thus, PCCRs continued to be subject to the 25

percent of Tier 1 capital sublimit.

7 In a press release issued on December 18, 1996,

the Federal Financial Institutions Examination

Council (FFIEC) issued interim guidance for the

regulatory capital treatment of servicing assets

under the Agencies’ existing capital standards,

which, after the effective date of FAS 125, will

remain in effect until the Agencies issue a final rule

on servicing assets.

Accounting Policy Division, or Vern

McKinley, Attorney, Regulations and

Legislation Division (202/906–6241),

Office of Thrift Supervision, 1700 G

Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

Capital Treatment of Mortgage Servicing

Rights Pre-FAS 122

Prior to the issuance of FAS 122,

intangible assets generally were

deducted from capital in determining

the amount of Tier 1 capital under the

Agencies’ regulatory capital rules. 1

However, limited amounts of purchased

mortgage servicing rights (PMSRs) and

purchased credit card relationships

(PCCRs) were allowed in Tier 1 capital. 2

The aggregate amount of PMSRs and

PCCRs that could be recognized for

regulatory capital purposes could not

exceed 50 percent of Tier 1 capital, with

PCCRs subject to a further sublimit of 25

percent of Tier 1 capital. In addition,

PMSRs and PCCRs were each subject to

a 10 percent ‘‘haircut’’ that permitted

only the lower of book value or 90

percent of fair market value to be

included in Tier 1 capital. This haircut

is required for PMSRs under section 475

of the Federal Deposit Insurance

Corporation Improvement Act of 1991

(12 U.S.C. 1828 note) (December 19,

1991)).

The regulatory capital treatment of

servicing rights prior to the issuance of

FAS 122 specified a treatment for

PMSRs but not for originated mortgage

servicing rights (OMSRs) or servicing

rights on loans other than mortgages

because generally accepted accounting

principles (GAAP), at that time, did not

permit institutions to book OMSRs nor

did it generally allow institutions to

book servicing rights on other assets.

Furthermore, GAAP based the

accounting for servicing rights on a

distinction between normal servicing

fees and excess servicing fees. 3

Although GAAP permitted excess

servicing fees receivable (ESFRs) to be

recognized as assets, for regulatory

reporting purposes, banks generally

were allowed to book only ESFRs on

first lien, one-to four-family residential

mortgages. The Agencies did not allow

banks to book ESFRs on any other loans

and, thus, these ESFRs were also

effectively excluded from capital for

regulatory reporting and regulatory

capital purposes. 4

FAS 122 and the Interim Rule

In May 1995, FASB issued FAS 122,

which eliminated the GAAP distinction

between OMSRs and PMSRs and

required that these assets, together

known as mortgage servicing rights

(MSRs), be treated as a single asset for

financial statement purposes, regardless

of how the servicing rights were

acquired. Under FAS 122, OMSRs and

PMSRs are treated the same for

reporting, valuation, and disclosure

purposes. 5 The GAAP accounting

treatment of ESFRs was not changed by

FAS 122.

The Agencies adopted the FAS 122

standard for regulatory reporting

purposes and then issued an interim

rule on the regulatory capital treatment

of MSRs (60 FR 39226, August 1, 1995),

with a request for public comment. The

interim rule, which became effective

upon publication, amended the

Agencies’ capital adequacy standards to

treat OMSRs in the same manner as

PMSRs for regulatory capital purposes.

Under the interim rule, the total of all

MSRs (i.e., PMSRs and OMSRs), when

combined with PCCRs, that can be

included in regulatory capital cannot

exceed 50 percent of Tier 1 capital. In

addition, the interim rule extended the

10 percent haircut to all MSRs. The

interim rule did not amend any other

elements of the Agencies’ capital rules. 6

A majority of the commenters

opposed the interim rule’s capital

limitations. Several commenters stated

that the capital limitations ignored the

increased marketability of MSRs, while

others asserted that FAS 122’s valuation

and impairment requirements for MSRs

were conservative, thereby providing

safeguards against the risks associated

with these assets. They believed that

FAS 122’s stringent valuation and

impairment standards (lower of cost or

market [LOCOM] on a stratum-bystratum basis) precluded the need for

arbitrary regulatory capital limits. In

addition, while acknowledging that the

10 percent haircut is required by statute

for PMSRs, commenters advocated a

legislative change to eliminate it. If

capital limitations on MSRs are

retained, most commenters agreed that

disallowed MSRs, i.e., those that

exceeded 50 percent of Tier 1 capital,

should be deducted from Tier 1 capital

on a basis that is net of any associated

deferred tax liability.

FAS 125

In June 1996, FASB issued FAS 125,

which became effective for all transfers

and servicing of financial assets on or

after January 1, 1997. FAS 125 requires

the recording of servicing on all

financial assets that are serviced for

others, including loans other than

mortgages. 7

FAS 125 eliminates the distinction

between normal servicing fees and

excess servicing fees and reclassifies

these cash flows into two new types of

assets: (a) Servicing assets, which are

measured based on contractually

specified servicing fees; and (b) interestonly (I/O) strips receivable, which

reflect rights to future interest income

from the serviced assets in excess of the

contractually specified servicing fees. In

addition, FAS 125 requires I/O strips

and other financial assets that can be

contractually prepaid or otherwise

settled in such a way that the holder

would not recover substantially all of its

recorded investment (including loans,

other receivables, and retained interests

in securitizations) to be measured at fair

value like debt securities that are

classified as available-for-sale or trading

securities under FASB Statement No.

115, ‘‘Accounting for Certain

Investments in Debt and Equity

Securities’’ (FAS 115).
42008 Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

8FAS 125 defines contractually specified

servicing fees as all amounts that, per contract, are

due to the servicer in exchange for servicing a

financial asset and would no longer be received by

a servicer if the beneficial owners of the serviced

assets or their trustees or agents were to shift the

servicing to another servicer.

9For regulatory capital purposes, a mortgage

servicing asset is a servicing asset that results from

a contract to service mortgages (as defined in the

Reports of Condition and Income for commercial

banks and FDIC-supervised savings banks, Thrift

Financial Report (TFR) for savings associations, and

Consolidated Financial Statements (FR Y–9C) for

bank holding companies).

10The Agencies’ regulatory reports (Reports of

Condition and Income for commercial banks and

FDIC-supervised savings banks, Thrift Financial

Report (TFR) for savings associations, and

Consolidated Financial Statements (FR Y–9C) for

bank holding companies) also reflect FAS 125

definitions for the reporting of servicing assets

beginning with the first quarter of 1997.

11PCCRs would also continue to be subject to the

10 percent of fair value haircut.

12For purposes of determining the amount of

servicing assets on financial assets (mortgage loans

and other financial assets) that would be deducted

(or disallowed) under this proposal, organizations

may choose to reduce their otherwise disallowed

servicing assets by the amount of any associated

deferred tax liability. Any deferred tax liability used

in this manner would not be available for the

organization to use in determining the amount of

net deferred tax assets that may be included for

purposes of Tier 1 capital calculations.

13Originated servicing rights on financial assets

other than mortgages were not booked as balance

sheet assets under pre-FAS 125 GAAP. However,

for regulatory reporting purposes, banks prior to

1997 were permitted to indirectly recognize ESFRs

on certain government-guaranteed small business

loans, and thrifts and bank holding companies

booked ESFRs on financial assets other than

mortgages in accordance with GAAP. Under FAS

125, these ESFRs have been reclassified as either

servicing assets or I/O strips receivable, depending

on whether the assets are part of the ‘‘contractually

specified servicing fee,’’ as that term is defined in

FAS 125.

14See footnote 12.

Under FAS 125, organizations are

required to recognize separate servicing

assets (or liabilities) for the contractual

obligation to service financial assets

(e.g., mortgage loans, credit card

receivables) that the entity has either

sold or securitized with servicing

retained. In addition, servicing assets (or

liabilities) that are purchased (or

assumed) as part of a separate

transaction must also be recognized.

However, no servicing asset (or liability)

need be recognized when an

organization securitizes assets, retains

all of the resulting securities, and

classifies the securities as held-tomaturity in accordance with FAS 115.

Under FAS 125, the existence of a

servicing asset (or liability) is based on

revenues a servicer would receive for

performing the servicing. A servicing

asset is recorded for a contract to service

financial assets under which the

estimated future revenues from

contractually specified servicing fees,

late charges, and other ancillary

revenues (such as ‘‘float’’) are expected

to more than adequately compensate the

servicer for performing the servicing. 8

However, amounts representing rights to

future interest income from serviced

assets in excess of contractually

specified servicing fees are not treated

as servicing assets under FAS 125 since

the right to this excess future interest

income does not depend on the

servicing work being satisfactorily

performed and remaining with the

servicer. Rather, these amounts are

treated as financial assets, effectively, I/

O strips receivable.

FAS 125 also adopts the valuation

approach established by FAS 122 for

determining the impairment of mortgage

servicing assets (MSAs) and extends this

approach to all other servicing assets,

i.e., servicing assets on financial assets

other than mortgages.

Proposed Amendments to the Capital

Adequacy Standards

Overview

The Agencies are proposing to

increase the amount of MSAs that can

be recognized for regulatory capital

purposes.9 However, under this

proposal, servicing assets on financial

assets other than mortgages would

continue to be deducted from Tier 1

capital. The Agencies are also seeking

comment on whether I/O strips

receivable that are not in the form of a

security (whether held by the servicer or

purchased from another organization)

should be subject to the capital

limitations imposed on servicing assets.

In this proposal, consistent with the

interim capital guidance announced by

the FFIEC in its December 1996 press

release, the Agencies have chosen to use

FAS 125 terminology when referring to

servicing assets and financial assets in

the belief that the adoption of the same

terms for regulatory purposes would

reduce the burden of having to maintain

two sets of definitions—one for capital

purposes and another for financial

reporting purposes. 10

Capital Limitation for Mortgage

Servicing Assets

This proposal would subject all MSAs

to a 100 percent of Tier 1 capital

limitation and to a 10 percent of fair

value haircut.11 The 10 percent haircut

applied to all MSAs imposes some

safeguards on the amount of MSAs that

can be included in Tier 1 capital

calculations and, notwithstanding the

valuation and impairment standards in

FAS 122 and FAS 125, provides a

greater level of supervisory comfort that

addresses concerns about the risks (e.g.,

these assets are potentially volatile due

to interest rate and prepayment risk)

involved in holding these assets.12

The Agencies propose to retain a

capital limitation on MSAs based on a

percentage of Tier 1 capital to minimize

banking organizations’ reliance on these

MSAs as part of the organizations’

regulatory capital base. Excessive

concentrations in these assets could

potentially have an adverse impact on

bank capital. The Agencies, however,

propose to increase the capital

limitation so that the amount of MSAs,

when combined with PCCRs, that can be

included in capital can equal no more

than 100 percent of Tier 1 capital. The

Agencies believe that a higher limit is

more reasonable in light of the more

specific accounting guidance in FAS

125 for the valuation and impairment of

servicing assets. Moreover, the Agencies

believe that some banking organizations

will exceed the current 50 percent of

Tier 1 capital limitation due only to

changes in the accounting for servicing

contracts brought about by FAS 122 and

FAS 125.

Capital Treatment of Servicing Assets

on Financial Assets Other Than

Mortgages (Non-Mortgage Servicing

Assets)

The Agencies propose to deduct from

Tier 1 capital all non-mortgage servicing

assets. 13 Although the Agencies

recognize that the markets for servicing

assets for some types of financial assets

other than mortgages are growing, these

markets are not as developed as the

mortgage servicing market. Therefore,

the Agencies propose to fully deduct

non-mortgage servicing assets from

capital because of concerns that the

markets for these assets may not yet be

of sufficient depth to provide liquidity

for these assets. In addition, the

Agencies are uncertain whether the fair

values of these servicing assets can be

determined with a high degree of

reliability and predictability. Therefore,

at this time, the Agencies propose to

exclude these assets from Tier 1

capital. 14

Summary of Proposed Capital

Amendment

The Agencies are proposing two

alternatives (alternative A and

alternative B), which are described

below, to revise their capital adequacy

standards for servicing assets. These

alternatives provide different treatments

of I/O strips receivable. Moreover, the

proposed alternatives do not reflect all

deductions (e.g., the disallowed amount

of deferred tax assets and net unrealized

losses on available-for-sale equity
Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules 42009

15 If some or all types of non-mortgage servicing

assets are includable in capital in the final rule,

they would most likely be subject to the 90 percent

of fair value limitation.

16Amounts of MSAs and PCCRs in excess of the

amounts allowable must be deducted from Tier 1

capital.

17Under either alternative A or B, I/O strips that

take the form of mortgage-backed securities are

subject to the provisions of the Agencies’

Supervisory Policy Statement on Securities

Activities (57 FR 4029, February 3, 1992). They are

not, however, subject to any Tier 1 capital

limitations. I/O strips receivable that arise in sales

and securitizations of assets, which use this

receivable as a credit enhancement, are considered

asset sales with recourse under the Agencies’ riskbased capital standards. Such I/O strips would be

treated like other recourse obligations under the

Agencies’ capital rules and would not be subject to

the capital limitations for servicing assets.

18 I/O strips from mortgage-backed securities that

are currently held by banks and thrifts are subject

to the ‘‘high-risk test’’ in the Agencies’’ Supervisory

Policy Statement on Securities Activities (57 FR

4029, February 3, 1992). That policy statement has,

in the past, limited a depository institution’s ability

to hold I/Os because they typically are ‘‘high-risk’’

mortgage securities.

securities with readily determinable fair

values) that are required when

organizations calculate their Tier 1

capital ratios. The regulatory capital

limitations under this proposal can be

summarized as follows:

(a) Servicing assets and PCCRs that

are includable in capital are each

subject to a 90 percent of fair value

limitation (also known as a ‘‘10 percent

haircut’’). 15

(b) MSAs and PCCRs must be less

than or equal to 100% of Tier 1 capital 16

(c) PCCRs must be less than or equal

to 25% of Tier 1 capital.

(d) Non-mortgage servicing assets and

all intangible assets (other than

qualifying PCCRs) must be deducted

from Tier 1 capital.

Under alternative A, I/O strips

(whether or not in the form of securities)

would not be subject to any regulatory

capital limit. Under alternative B, I/O

strips receivable not in security form

(whether held by the servicer or

purchased from another organization)

would be subject to the same capital

limitation that is applied to the

corresponding type of servicing assets.

That is, if the I/O strips receivable are

related to mortgages, they would be

combined with MSAs and the combined

amount would be subject to the 100

percent of Tier 1 capital limitation; if

the I/O strips are related to financial

assets other than mortgages, they would

be deducted from Tier 1 capital. 17

Furthermore, the I/O strips receivable

subject to the Tier 1 capital limitation

would also be subject to the 10 percent

haircut. In all other respects,

alternatives A and B are identical. The

proposed rules attached to this

document reflect alternative A.

The Agencies are requesting public

comment on whether to adopt

alternative A or B for regulatory capital

purposes. The Agencies also are seeking

comment on whether to extend the

capital limitation imposed on servicing

assets (mortgage and non-mortgage) to

include certain other non-security

financial instruments, such as loans,

other receivables, or other retained

interests in securitizations, that can be

contractually prepaid or otherwise

settled in such a way that the holder

would not recover substantially all of its

recorded investment.

Some reasons in support of amending

the capital adequacy standards to reflect

alternative A, which would not subject

I/O strips receivable to a Tier 1 capital

limitation, are:

(1) I/O strips receivable not in

security form are similar in economic

substance to I/O strip securities. These

I/O strips receivable should be treated

in a manner consistent with the manner

in which the Agencies treat I/O strip

securities and not be subject to capital

limitations.18 Moreover, because there is

insufficient data on these new financial

assets, the Agencies should not, at this

time, impose capital limits on these new

financial assets. Rather, the Agencies

should let the market develop before

assessing whether any regulatory

limitations are warranted.

(2) Certain I/O strips receivable on

credit card receivables would likely be

subject to a risk-based capital charge

under the recourse rules established by

the Agencies because these I/O strips

receivable, which generally act as credit

enhancements for the credit card assetbacked securities sold, would function

as recourse. Thus, the risk-based capital

rules for ‘‘assets sold with recourse’’

would apply to these I/O strips

receivable.

(3) Under FAS 125, the cash flows

underlying the I/O strips receivable not

in security form actually possess

characteristics that are more similar to

I/O strip securities than to ESFRs

because the holder of a non-security I/

O strip receivable retains the rights to

the I/O strip cash flows even if the

underlying servicing (and the related

servicing asset) is shifted away from the

servicer (if, for example, the servicer

fails to perform in accordance with the

servicing contract). Thus, I/O strips

receivable not in security form should

be treated similarly to I/O strip

securities, which are not subject to

regulatory capital limitations.

(4) The amount of I/O strips

receivable recognized by banking

organizations may be limited. For

example, the discipline imposed by the

well-developed mortgage markets may

minimize the amounts retained by the

servicers above the contractually

specified servicing fee amount.

Some reasons in support of amending

the capital adequacy standards to reflect

alternative B, which limits the amount

of I/O strips receivable not in security

form that can be included in Tier 1

capital, are:

(1) I/O strips receivable not in

security form are not rated and are not

registered. Rather, they are relatively

new financial assets, which are

recognized on the balance sheet in

response to the recently issued FAS 125,

and for which an active, liquid market

does not currently exist. In contrast, I/

O strips receivable that are registered

securities have an identifiable market

and are readily salable. Since the market

for these newly-created I/O strips

receivable is not currently welldeveloped, accurate, dependable

information on the fair value of such

assets may not be readily available or

may be difficult to ascertain.

(2) I/O strips receivable not in

security form arising from servicing

activities should receive a no less

restrictive capital treatment than the

treatment afforded to the servicing asset

itself because servicing assets and the I/

O strips receivable both arise from the

same activity and are subject to similar

prepayment risk.

(3) If I/O strips receivable retained by

the servicer are not subject to the same

capital limitation as their related

servicing assets, banking organizations

may be inclined to avoid capital

limitations by negotiating contracts that

minimize contractually specified

servicing fees, thereby enabling them to

classify more of the cash flows as I/O

strips receivable. This would understate

the servicing assets and, thus, minimize

the effectiveness of any capital

limitation.

(4) The economic substance of

servicing transactions remains

unchanged. Under FAS 125, the cash

flows of these transactions have simply

been reclassified into new assets such as

I/O strips receivable. The risks

associated with the servicing assets and

the I/O strips receivable have not

changed.

Tangible Equity

The definition of tangible equity

found in each Agency’s regulation for

Prompt Corrective Action would be

revised to conform to the changes made

in the proposed rule, i.e., the term

‘‘mortgage servicing rights’’ would be

renamed ‘‘mortgage servicing assets’’ to

reflect the FAS 125 conceptual changes

for measuring servicing. No other
42010 Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

19The OTS is proposing to make an additional

technical clarification to its definition of tangible

equity in 12 CFR 565.2(f) that would conform the

OTS rule to this proposal and eliminate the double

deduction of disallowed mortgage servicing assets.

changes to the definition of tangible

equity are proposed at this time.19

Request for Public Comment

The Agencies invite comments on all

aspects of these proposed changes. In

particular, the Agencies seek comments

from interested parties on the following:

1. How readily determinable are fair

values of mortgage servicing assets and

non-mortgage servicing assets (e.g.,

credit card servicing assets)? Please

describe the existing methodologies and

market mechanisms used by your

organization for determining fair values

for servicing assets.

2. Given the supervisory concerns

regarding the reliability of the valuation

of servicing assets and the potential

volatility in the fair value of these

assets, should limits be retained on the

amount of servicing assets that is

recognized for regulatory capital

purposes?

a. What aggregate limit, if any, should

apply to the maximum amount of

mortgage servicing assets and PCCRs

that may be recognized for regulatory

capital purposes?

b. To what extent should servicing

assets on non-mortgage financial assets

be included in regulatory capital?

c. Should non-mortgage servicing

assets and I/O strips receivable (if

treated similarly to non-mortgage

servicing assets) be subject to the same

25 percent sublimit and haircut as

PCCRs?

3. What types of assets should be

subject to regulatory capital limitations

under this rule?

a. Should I/O strips receivable not in

security form be subject to the same

capital limitations as servicing assets?

b. If alternative B is adopted, should

the definition of I/O strips receivable

that are subject to capital limitations be

expanded to include all financial assets

not in security form that can be

contractually prepaid or otherwise

settled in such a way that the holder

would not recover substantially all of its

recorded investment as described under

FAS 125? These assets would include

loans, other receivables, and other

retained interests in securitizations that

meet this condition. Please provide

supporting information on the nature of

these non-security financial assets with

significant prepayment risk.

4. For what types of financial assets

(other than loans secured by first liens

on 1- to 4-family residential properties)

does your organization currently book

servicing assets and/or I/O strips

receivable? How will this change in the

future for your organization?

5. In light of FAS 125 and this

proposal, what should be the capital

treatment for amounts previously

designated as ESFRs for financial

reporting purposes (if your organization

still maintains this breakdown for

income tax or other purposes) held by

banking organizations?

6. What effect, if any, should efforts

to hedge the MSA portfolio have on the

MSA regulatory capital limitations?

7. Should servicing assets that are

disallowed for regulatory capital

purposes be deducted on a basis that is

net of any associated deferred tax

liability?

Regulatory Flexibility Act Analysis

OCC Regulatory Flexibility Act

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the

Comptroller of the Currency certifies

that this proposed rule would not have

a significant economic impact on a

substantial number of small entities in

accord with the spirit and purposes of

the Regulatory Flexibility Act (5 U.S.C.

601 et seq.). Accordingly, a regulatory

flexibility analysis is not required. The

adoption of this proposal would reduce

the regulatory burden of small

businesses by aligning the terminology

in the capital adequacy standards more

closely to newly-issued generally

accepted accounting principles and by

relaxing the capital limitation on

mortgage servicing assets. The economic

impact of this proposed rule on banks,

regardless of size, is expected to be

minimal.

Board Regulatory Flexibility Act

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the Board

does not believe that this proposed rule

would have a significant economic

impact on a substantial number of small

entities in accord with the spirit and

purposes of the Regulatory Flexibility

Act (5 U.S.C. 601 et seq.). Accordingly,

a regulatory flexibility analysis is not

required. The effect of this proposal

would be to reduce the regulatory

burden of banks and bank holding

companies by aligning the terminology

in the capital adequacy guidelines more

closely to newly-issued generally

accepted accounting principles and by

relaxing the capital limitation on

mortgage servicing assets. In addition,

because the risk-based and leverage

capital guidelines generally do not

apply to bank holding companies with

consolidated assets of less than $150

million, this proposal will not affect

such companies.

FDIC Regulatory Flexibility Act

Pursuant to section 605(b) of the

Regulatory Flexibility Act (Pub. L. 96–

354, 5 U.S.C. 601 et seq.), it is certified

that this proposed rule would not have

a significant economic impact on a

substantial number of small entities.

Accordingly, a regulatory flexibility

analysis is not required. The

amendment concerns capital

requirements for servicing assets held

by depository institutions of any size.

The effect of the proposal would be to

reduce regulatory burden on depository

institutions (including small businesses)

by aligning the terminology used in the

capital adequacy guidelines more

closely to newly-issued generally

accepted accounting principles and by

relaxing the capital limitation on

mortgage servicing assets. The economic

impact of this proposed rule on banks,

regardless of size, is expected to be

minimal.

OTS Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the OTS

certifies that this proposed rule would

not have a significant economic impact

on a substantial number of small

entities. The amendment concerns

capital requirements for servicing assets

which may be entered into by

depository institutions of any size. The

effect of the proposal would be to

reduce regulatory burden on depository

institutions by aligning the terminology

used in the capital adequacy standards

more closely to newly-issued generally

accepted accounting principles and by

relaxing the capital limitation on

mortgage servicing assets.

Paperwork Reduction Act

The Agencies have determined that

this proposal would not increase the

regulatory paperwork of banking

organizations pursuant to the provisions

of the Paperwork Reduction Act (44

U.S.C. 3501 et seq.).

OCC and OTS Executive Order 12866

Statement

The Comptroller of the Currency and

the Director of the OTS have determined

that this proposal is not a significant

regulatory action under Executive Order

12866. Accordingly, a regulatory impact

analysis is not required.

OCC and OTS Unfunded Mandates Act

Statement

Section 202 of the Unfunded

Mandates Reform Act of 1995, Pub. L.

104–4 (Unfunded Mandates Act)
Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules 42011

requires that an agency prepare a

budgetary impact statement before

promulgating a rule that includes a

Federal mandate that may result in

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, this

proposed amendment to the capital

adequacy standards would relax the

capital limitation on mortgage servicing

assets and PCCRs. Further, the proposed

amendment moves toward greater

consistency with FAS 125 in an effort to

reduce the burden of complying with

two different standards. Thus, no

additional cost of $100 million or more,

to State, local, or tribal governments or

to the private sector will result from this

proposed rule. Accordingly, the OCC

and the OTS have not prepared a

budgetary impact statement nor

specifically addressed any regulatory

alternatives.

List of Subjects

12 CFR Part 3

Administrative practice and

procedure, Capital, National banks,

Reporting and recordkeeping

requirements, Risk.

12 CFR Part 6

National banks, Prompt corrective

action.

12 CFR Part 208

Accounting, Agriculture, Banks,

banking, Confidential business

information, Crime, Currency, Federal

Reserve System, Mortgages, Reporting

and recordkeeping requirements,

Securities.

12 CFR Part 225

Administrative practice and

procedure, Banks, banking, Federal

Reserve System, Holding companies,

Reporting and recordkeeping

requirements, Securities.

12 CFR Part 325

Administrative practice and

procedure, Banks, banking, Capital

adequacy, Reporting and recordkeeping

requirements, Savings associations,

State non-member banks.

12 CFR Part 565

Administrative practice and

procedure, Capital, Savings

associations.

12 CFR Part 567

Capital, Reporting and recordkeeping

requirements, Savings associations.

Authority and Issuance

Office of the Comptroller of the

Currency

12 CFR Chapter I

For the reasons set forth in the joint

preamble, parts 3 and 6 of chapter I of

title 12 of the Code of Federal

Regulations are proposed to be amended

as follows:

PART 3—MINIMUM CAPITAL RATIOS;

ISSUANCE OF DIRECTIVES

1. The authority citation for part 3

continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818,

1828(n), 1828 note, 1831n note, 1835, 3907,

and 3909.

§ 3.3 [Amended]

2. Section 3.3 is amended by

removing the words ‘‘mortgage servicing

rights’’ in the first sentence and adding

‘‘mortgage servicing assets’’ in their

place.

3. Section 3.100 is amended by

revising paragraph (c)(2) and by

removing the words ‘‘mortgage servicing

rights’’ in paragraphs (e)(7) and (g)(2)

and adding ‘‘mortgage servicing assets’’

in their place, to read as follows:

§ 3.100 Capital and surplus.

* * * * *

(c) * * *

(2) Mortgage servicing assets;

* * * * *

4. In appendix A to part 3, paragraph

(c)(14) of section 1 is revised to read as

follows:

Appendix A to Part 3—Risk-Based

Capital Guidelines

Section 1. Purpose, Applicability of

Guidelines, and Definitions.

* * * * *

(c) * * *

(14) Intangible assets include

mortgage servicing assets, purchased

credit card relationships (servicing

rights), goodwill, favorable leaseholds,

and core deposit value.

* * * * *

5. In appendix A to part 3, in section

2, paragraphs (c) introductory text,

(c)(1), (c)(2), and the heading of

paragraph (c)(3)(i) are revised to read as

follows:

* * * * *

Section 2. Components of Capital.

* * * * *

(c) Deductions From Capital. The following

items are deducted from the appropriate

portion of a national bank’s capital base

when calculating its risk-based capital ratio.

(1) Deductions from Tier 1 capital. The

following items are deducted from Tier 1

capital before the Tier 2 portion of the

calculation is made:

(i) All goodwill subject to the transition

rules contained in section 4(a)(1)(ii) of this

appendix A;

(ii) Non-mortgage servicing assets;

(iii) Other intangible assets, except as

provided in section 2(c)(2) of this appendix

A; and

(iv) Deferred tax assets, except as provided

in section 2(c)(3) of this appendix A, that are

dependent upon future taxable income,

which exceed the lesser of either:

(A) The amount of deferred tax assets that

the bank could reasonably expect to realize

within one year of the quarter-end Call

Report, based on its estimate of future taxable

income for that year; or

(B) 10% of Tier 1 capital, net of goodwill

and all intangible assets other than mortgage

servicing assets and purchased credit card

relationships, and before any disallowed

deferred tax assets are deducted.

(2) Qualifying intangible assets. Subject to

the following conditions, mortgage servicing

assets and purchased credit card

relationships need not be deducted from Tier

1 capital:

(i) The total of all intangible assets

included in Tier 1 capital is limited to 100

percent of Tier 1 capital, of which no more

than 25 percent of Tier 1 capital can consist

of purchased credit card relationships.

Calculation of these limitations must be

based on Tier 1 capital net of goodwill and

other disallowed intangible assets.

(ii) Banks must value each intangible asset

included in Tier 1 capital at least quarterly

at the lesser of:

(A) 90 percent of the fair value of each

asset, determined in accordance with

paragraph (c)(2)(iii) of this section; or

(B) 100 percent of the remaining

unamortized book value.

(iii) The quarterly determination of the

current fair value of the intangible asset must

include adjustments for any significant

changes in original valuation assumptions,

including changes in prepayment estimates.

(3) Deferred tax assets—(i) Net unrealized

gains and losses on available-for-sale

securities. * * *

* * * * *

PART 6—PROMPT CORRECTIVE

ACTION

1. The authority citation for part 6

continues to read as follows:

Authority: 12 U.S.C. 93a, 1831o.

2. Section 6.2(g) is revised to read as

follows:

§ 6.2 Definitions

* * * * *

(g) Tangible equity means the amount

of Tier 1 capital elements in the OCC’s

Risk-Based Capital Guidelines (12 CFR

part 3, appendix A) plus the amount of

outstanding cumulative perpetual

preferred stock (including related

surplus) minus all intangible assets
42012 Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

14Amounts of mortgage servicing assets and

purchased credit card relationships in excess of

these limitations, as well as identifiable intangible

assets, including core deposit intangibles, favorable

leaseholds and non-mortgage servicing assets, are to

be deducted from a bank’s core capital elements in

determining Tier 1 capital. However, identifiable

intangible assets (other than mortgage servicing

assets and purchased credit card relationships)

acquired on or before February 19, 1992, generally

will not be deducted from capital for supervisory

purposes, although they will continue to be

deducted for applications purposes.

20To determine the amount of expected deferredtax assets realizable in the next 12 months, an

institution should assume that all existing

temporary differences fully reverse as of the report

date. Projected future taxable income should not

include net operating-loss carry-forwards to be used

during that year or the amount of existing

temporary differences a bank expects to reverse

within the year. Such projections should include

the estimated effect of tax-planning strategies that

the organization expects to implement to realize net

operating losses or tax-credit carry-forwards that

would otherwise expire during the year. Institutions

do not have to prepare a new 12-month projection

each quarter. Rather, on interim report dates,

institutions may use the future-taxable-income

projections for their current fiscal year, adjusted for

any significant changes that have occurred or are

expected to occur.

2Tier 1 capital for state member banks includes

common equity, minority interest in the equity

accounts of consolidated subsidiaries, and

qualifying noncumulative perpetual preferred stock.

In addition, as a general matter, Tier 1 capital

except mortgage servicing assets to the

extent permitted in Tier 1 capital under

12 CFR part 3, appendix A, section

2(c)(2).

* * * * *

Dated: July 17, 1997.

Eugene A. Ludwig,

Comptroller of the Currency.

Federal Reserve System

12 CFR CHAPTER II

For the reasons set forth in the joint

preamble, the Board of Governors of the

Federal Reserve System proposes to

amend parts 208 and 225 of chapter II

of title 12 of the Code of Federal

Regulations as follows:

PART 208—MEMBERSHIP OF STATE

BANKING INSTITUTIONS IN THE

FEDERAL RESERVE SYSTEM

(REGULATION H)

1. The authority citation for part 208

continues to read as follows:

Authority: 12 U.S.C. 36, 248(a), 248(c),

321–338a, 371d, 461, 481–486, 601, 611,

1814, 1823(j), 1828(o), 1831o, 1831p–1, 3105,

3310, 3331–3351, and 3906–3909; 15 U.S.C.

78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78o–5,

78q, 78q–1, and 78w; 31 U.S.C. 5318; 42

U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

2. Section 208.41, as proposed to be

renumbered from § 208.31 and revised

at 62 FR 15291, is further amended by

revising paragraph (f) to read as follows:

§ 208.41 Definitions for purposes of this

subpart.

* * * * *

(f) Tangible equity means the amount

of core capital elements as defined in

the Board’s Capital Adequacy

Guidelines for State Member Banks:

Risk-Based Measure (Appendix A to this

part), plus the amount of outstanding

cumulative perpetual preferred stock

(including related surplus), minus all

intangible assets except mortgage

servicing assets to the extent that the

Board determines that mortgage

servicing assets may be included in

calculating the bank’s Tier 1 capital.

* * * * *

3. In Appendix A to part 208, sections

II.B.1.b.i. through II.B.1.b.v. are revised

to read as follows:

Appendix a to Part 208—Capital

Adequacy Guidelines for State Member

Banks: Risk-Based Measure

* * * * *

II. ***

B. ***

1. Goodwill and other intangible assets ***

b. Other intangible assets. i. All servicing

assets, including servicing assets on assets

other than mortgages (i.e., non-mortgage

servicing assets) are included in this

Appendix A as identifiable intangible assets.

The only types of identifiable intangible

assets that may be included in, that is, not

deducted from, a bank’s capital are readily

marketable mortgage servicing assets and

purchased credit card relationships. The total

amount of these assets included in capital, in

the aggregate, can not exceed 100 percent of

Tier 1 capital. Purchased credit card

relationships are subject to a separate

sublimit of 25 percent of Tier 1 capital. 14

ii. For purposes of calculating these

limitations on mortgage servicing assets and

purchased credit card relationships, Tier 1

capital is defined as the sum of core capital

elements, net of goodwill, and net of all

identifiable intangible assets other than

mortgage servicing assets and purchased

credit card relationships, regardless of the

date acquired, but prior to the deduction of

deferred tax assets.

iii. Banks must review the book value of all

intangible assets at least quarterly and make

adjustments to these values as necessary. The

fair value of mortgage servicing assets and

purchased credit card relationships also must

be determined at least quarterly. This

determination shall include adjustments for

any significant changes in original valuation

assumptions, including changes in

prepayment estimates or account attrition

rates.

iv. Examiners will review both the book

value and the fair value assigned to these

assets, together with supporting

documentation, during the examination

process. In addition, the Federal Reserve may

require, on a case-by-case basis, an

independent valuation of a bank’s intangible

assets.

v. The amount of mortgage servicing assets

and purchased credit card relationships that

a bank may include in capital shall be the

lesser of 90 percent of their fair value, as

determined in accordance with this section,

or 100 percent of their book value, as

adjusted for capital purposes in accordance

with the instructions in the commercial bank

Consolidated Reports of Condition and

Income (Call Reports). If both the application

of the limits on mortgage servicing assets and

purchased credit card relationships and the

adjustment of the balance sheet amount for

these assets would result in an amount being

deducted from capital, the bank would

deduct only the greater of the two amounts

from its core capital elements in determining

Tier 1 capital.

* * * * *

4. In Appendix A to part 208, section

II.B.4. is revised to read as follows:

* * * * *

II. * * *

B. * * *

4. Deferred tax assets. The amount of

deferred tax assets that is dependent upon

future taxable income, net of the valuation

allowance for deferred tax assets, that may be

included in, that is, not deducted from, a

bank’s capital may not exceed the lesser of

(i) the amount of these deferred tax assets

that the bank is expected to realize within

one year of the calendar quarter-end date,

based on its projections of future taxable

income for that year,20 or (ii) 10 percent of

Tier 1 capital. The reported amount of

deferred tax assets, net of any valuation

allowance for deferred tax assets, in excess of

the lesser of these two amounts is to be

deducted from a bank’s core capital elements

in determining Tier 1 capital. For purposes

of calculating the 10 percent limitation, Tier

1 capital is defined as the sum of core capital

elements, net of goodwill, and net of all other

identifiable intangible assets other than

mortgage servicing assets and purchased

credit card relationships, before any

disallowed deferred tax assets are deducted.

There generally is no limit in Tier 1 capital

on the amount of deferred tax assets that can

be realized from taxes paid in prior carryback years or from future reversals of existing

taxable temporary differences, but, for banks

that have a parent, this may not exceed the

amount the bank could reasonably expect its

parent to refund.

* * * * *

5. In Appendix B to part 208, section

II.b. is revised to read as follows:

Appendix B to Part 208—Capital

Adequacy Guidelines for State Member

Banks: Tier 1 Leverage Measure

* * * * *

II. * * *

b. A bank’s Tier 1 leverage ratio is

calculated by dividing its Tier 1 capital (the

numerator of the ratio) by its average total

consolidated assets (the denominator of the

ratio). The ratio will also be calculated using

period-end assets whenever necessary, on a

case-by-case basis. For the purpose of this

leverage ratio, the definition of Tier 1 capital

as set forth in the risk-based capital

guidelines contained in Appendix A of this

part will be used.2 As a general matter,
Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules 42013

excludes goodwill; amounts of mortgage servicing

assets and purchased credit card relationships that,

in the aggregate, exceed 100 percent of Tier 1

capital; purchased credit card relationships that

exceed 25 percent of Tier 1 capital; other

identifiable intangible assets; and deferred tax

assets that are dependent upon future taxable

income, net of their valuation allowance, in excess

of certain limitations. The Federal Reserve may

exclude certain investments in subsidiaries or

associated companies as appropriate.

3 Deductions from Tier 1 capital and other

adjustments are discussed more fully in section II.B.

in Appendix A of this part.

15Amounts of mortgage servicing assets and

purchased credit card relationships in excess of

these limitations, as well as servicing assets on

loans other than mortgages and all other identifiable

intangible assets, including core deposit intangibles

and favorable leaseholds, are to be deducted from

an organization’s core capital elements in

determining Tier 1 capital. However, identifiable

intangible assets (other than mortgage servicing

assets and purchased credit card relationships)

acquired on or before February 19, 1992, generally

will not be deducted from capital for supervisory

purposes, although they will continue to be

deducted for applications purposes.

23To determine the amount of expected deferred

tax assets realizable in the next 12 months, an

institution should assume that all existing

temporary differences fully reverse as of the report

date. Projected future taxable income should not

include net operating loss carryforwards to be used

during that year or the amount of existing

temporary differences a bank holding company

expects to reverse within the year. Such projections

should include the estimated effect of tax planning

strategies that the organization expects to

implement to realize net operating losses or tax

credit carryforwards that would otherwise expire

during the year. Institutions do not have to prepare

a new 12 month projection each quarter. Rather, on

interim report dates, institutions may use the future

taxable income projections for their current fiscal

year, adjusted for any significant changes that have

occurred or are expected to occur.

3Tier 1 capital for banking organizations includes

common equity, minority interest in the equity

accounts of consolidated subsidiaries, qualifying

noncumulative perpetual preferred stock, and

qualifying cumulative perpetual preferred stock.

(Cumulative perpetual preferred stock is limited to

25 percent of Tier 1 capital.) In addition, as a

general matter, Tier 1 capital excludes goodwill;

amounts of mortgage servicing assets and purchased

credit card relationships that, in the aggregate,

exceed 100 percent of Tier 1 capital; purchased

credit card relationships that exceed 25 percent of

Tier 1 capital; all other identifiable intangible assets

(including non-mortgage servicing assets); and

deferred tax assets that are dependent upon future

taxable income, net of their valuation allowance, in

excess of certain limitations. The Federal Reserve

may exclude certain investments in subsidiaries or

associated companies as appropriate.

average total consolidated assets are defined

as the quarterly average total assets (defined

net of the allowance for loan and lease losses)

reported on the bank’s Reports of Condition

and Income (Call Reports), less goodwill;

amounts of mortgage servicing assets and

purchased credit card relationships that, in

the aggregate, are in excess of 100 percent of

Tier 1 capital; amounts of purchased credit

card relationships in excess of 25 percent of

Tier 1 capital; all other identifiable intangible

assets; any investments in subsidiaries or

associated companies that the Federal

Reserve determines should be deducted from

Tier 1 capital; and deferred tax assets that are

dependent upon future taxable income, net of

their valuation allowance, in excess of the

limitation set forth in section II.B.4 of

Appendix A of this part.3

* * * * *

PART 225—BANK HOLDING

COMPANIES AND CHANGE IN BANK

CONTROL (REGULATION Y)

1. The authority citation for part 225

continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818,

1831i, 1831p–1, 1843(c)(8), 1844(b), 1972(l),

3106, 3108, 3310, 3331–3351, 3907, and

3909.

2. In Appendix A to part 225, sections

II.B.1.b.i. through II.B.1.b.v. are revised

to read as follows:

Appendix A to Part 225—Capital Adequacy

Guidelines for Bank Holding Companies:

Risk-Based Measure

* * * * *

II. * * *

B. * * *

1. Goodwill and other intangible assets

b. Other intangible assets. i. All servicing

assets, including servicing assets on assets

other than mortgages (i.e., non-mortgage

servicing assets) are included in this

Appendix A as identifiable intangible assets.

The only types of identifiable intangible

assets that may be included in, that is, not

deducted from, an organization’s capital are

readily marketable mortgage servicing assets

and purchased credit card relationships. The

total amount of these assets included in

capital, in the aggregate, can not exceed 100

percent of Tier 1 capital. Purchased credit

card relationships are subject to a separate

sublimit of 25 percent of Tier 1 capital.15

ii. For purposes of calculating these

limitations on mortgage servicing assets and

purchased credit card relationships, Tier 1

capital is defined as the sum of core capital

elements, net of goodwill, and net of all

identifiable intangible assets and similar

assets other than mortgage servicing assets

and purchased credit card relationships,

regardless of the date acquired, but prior to

the deduction of deferred tax assets.

iii. Bank holding companies must review

the book value of all intangible assets at least

quarterly and make adjustments to these

values as necessary. The fair value of

mortgage servicing assets and purchased

credit card relationships also must be

determined at least quarterly. This

determination shall include adjustments for

any significant changes in original valuation

assumptions, including changes in

prepayment estimates or account attrition

rates.

iv. Examiners will review both the book

value and the fair value assigned to these

assets, together with supporting

documentation, during the inspection

process. In addition, the Federal Reserve may

require, on a case-by-case basis, an

independent valuation of an organization’s

intangible assets or similar assets.

v. The amount of mortgage servicing assets

and purchased credit card relationships that

a bank holding company may include in

capital shall be the lesser of 90 percent of

their fair value, as determined in accordance

with this section, or 100 percent of their book

value, as adjusted for capital purposes in

accordance with the instructions to the

Consolidated Financial Statements for Bank

Holding Companies (FR Y–9C Report). If both

the application of the limits on mortgage

servicing assets and purchased credit card

relationships and the adjustment of the

balance sheet amount for these intangibles

would result in an amount being deducted

from capital, the bank holding company

would deduct only the greater of the two

amounts from its core capital elements in

determining Tier 1 capital.

* * * * *

3. In Appendix A to part 225, section

II.B.4. is revised to read as follows:

* * * * *

II. * * *

B. * * *

4. Deferred tax assets. The amount of

deferred tax assets that is dependent upon

future taxable income, net of the valuation

allowance for deferred tax assets, that may be

included in, that is, not deducted from, a

banking organization’s capital may not

exceed the lesser of (i) the amount of these

deferred tax assets that the banking

organization is expected to realize within one

year of the calendar quarter-end date, based

on its projections of future taxable income for

that year,23 or (ii) 10 percent of Tier 1 capital.

The reported amount of deferred tax assets,

net of any valuation allowance for deferred

tax assets, in excess of the lesser of these two

amounts is to be deducted from a banking

organization’s core capital elements in

determining Tier 1 capital. For purposes of

calculating the 10 percent limitation, Tier 1

capital is defined as the sum of core capital

elements, net of goodwill, and net of all

identifiable intangible assets other than

mortgage servicing assets and purchased

credit card relationships, before any

disallowed deferred tax assets are deducted.

There generally is no limit in Tier 1 capital

on the amount of deferred tax assets that can

be realized from taxes paid in prior carryback

years or from future reversals of existing

taxable temporary differences.

* * * * *

4. In Appendix D to part 225, section

II.b. is revised to read as follows:

Appendix D to Part 225—Capital

Adequacy Guidelines for Bank Holding

Companies: Tier 1 Leverage Measure

* * * * *

II. * * *

b. A banking organization’s Tier 1 leverage

ratio is calculated by dividing its Tier 1

capital (the numerator of the ratio) by its

average total consolidated assets (the

denominator of the ratio). The ratio will also

be calculated using period-end assets

whenever necessary, on a case-by-case basis.

For the purpose of this leverage ratio, the

definition of Tier 1 capital as set forth in the

risk-based capital guidelines contained in

Appendix A of this part will be used.3 As a

general matter, average total consolidated
42014 Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

4 Deductions from Tier 1 capital and other

adjustments are discussed more fully in section II.B.

in Appendix A of this part.

assets are defined as the quarterly

average total assets (defined net of the

allowance for loan and lease losses)

reported on the organization’s

Consolidated Financial Statements (FR

Y–9C Report), less goodwill; amounts of

mortgage servicing assets and purchased

credit card relationships that, in the

aggregate, are in excess of 100 percent

of Tier 1 capital; amounts of purchased

credit card relationships in excess of 25

percent of Tier 1 capital; all other

identifiable intangible assets (including

non-mortgage servicing assets); any

investments in subsidiaries or

associated companies that the Federal

Reserve determines should be deducted

from Tier 1 capital; and deferred tax

assets that are dependent upon future

taxable income, net of their valuation

allowance, in excess of the limitation set

forth in section II.B.4 of Appendix A of

this part.4

* * * * *

By order of the Board of Governors of the

Federal Reserve System, July 28, 1997.

William W. Wiles,

Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR Capter III

For the reasons set forth in the joint

preamble, part 325 of chapter III of title

12 of the Code of Federal Regulations is

proposed to be amended as follows:

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), 1831o, 1835, 3907, 3909,

4808; Pub. L. 102–233, 105 Stat. 1761, 1789,

1790 (12 U.S.C. 1831n note); Pub. L. 102–

242, 105 Stat. 2236, 2355, 2386 (12 U.S.C.

1828 note).

2. In § 325.2, paragraph (n) is revised

to read as follows:

§ 325.2 Definitions.

* * * * *

(n) Mortgage servicing assets means

those balance sheet assets (net of any

related valuation allowances) that

represent the rights to perform the

servicing function for mortgage loans

that have been securitized or are owned

by others. Mortgage servicing assets

must be amortized in proportion to, and

over the period of, estimated net

servicing income. For purposes of

determining regulatory capital under

this part, mortgage servicing assets will

be recognized only to the extent that the

rights meet the conditions, limitations,

and restrictions described in § 325.5 (f).

* * * * *

§ 325.2 [Amended]

3. In § 325.2, paragraphs (s), (t), and

(v) are amended by removing the words

‘‘mortgage servicing rights’’ and adding

in their place the words ‘‘mortgage

servicing assets’’ each time they appear. 4. In § 325.5, paragraph (f) is revised

to read as follows:

§ 325.5 Miscellaneous.

* * * * *

(f) Treatment of mortgage servicing

assets and credit card relationships. For

purposes of determining Tier 1 capital

under this part, mortgage servicing

assets and purchased credit card

relationships will be deducted from

assets and from equity capital to the

extent that the mortgage servicing assets

and purchased credit card relationships

do not meet the conditions, limitations,

and restrictions described in this

section.

(1) Valuation. The fair value of

mortgage servicing assets and purchased

credit card relationships shall be

estimated at least quarterly. The

quarterly fair value estimate shall

include adjustments for any significant

changes in the original valuation

assumptions, including changes in

prepayment estimates or attrition rates.

The FDIC in its discretion may require

independent fair value estimates on a

case-by-case basis where it is deemed

appropriate for safety and soundness

purposes. (2) Fair value limitation. For purposes

of calculating Tier 1 capital under this

part (but not for financial statement

purposes), the balance sheet assets for

mortgage servicing assets and purchased

credit card relationships will each be

reduced to an amount equal to the lesser

of:

(i) 90 percent of the fair value of these

assets, determined in accordance with

paragraph (f)(1) of this section; or (ii) 100 percent of the remaining

unamortized book value of these assets

(net of any related valuation

allowances), determined in accordance

with the instructions for the preparation

of the Consolidated Reports of Income

and Condition (Call Reports). (3) Tier 1 capital limitation. The

maximum allowable amount of

mortgage servicing assets and purchased

credit card relationships, in the

aggregate, will be limited to the lesser

of:

(i) 100 percent of the amount of Tier

1 capital that exists before the deduction

of any disallowed mortgage servicing

assets, any disallowed purchased credit

card relationships, and any disallowed

deferred tax assets; or

(ii) The amount of mortgage servicing

assets and purchased credit card

relationships, determined in accordance

with paragraph (f)(2) of this section. (4) Tier 1 capital sublimit. In addition

to the aggregate limitation on mortgage

servicing assets and purchased credit

card relationships set forth in paragraph

(f)(3) of this section, a sublimit will

apply to purchased credit card

relationships. The maximum allowable

amount of purchased credit card

relationships, in the aggregate, will be

limited to the lesser of:

(i) Twenty-five percent of the amount

of Tier 1 capital that exists before the

deduction of any disallowed mortgage

servicing assets, any disallowed

purchased credit card relationships, and

any disallowed deferred tax assets; or (ii) The amount of purchased credit

card relationships, determined in

accordance with paragraph (f)(2) of this

section.

* * * * *

§ 325.5 [Amended]

5. In § 325.5, paragraphs (g)(2)(i)(B)

and (g)(5) are amended by removing the

words ‘‘mortgage servicing rights’’ and

adding in their place the words

‘‘mortgage servicing assets’’ each time

they appear.

Appendix A to Part 325 [Amended]

6. In appendix A to part 325, the

words ‘‘mortgage servicing rights’’ are

removed and the words ‘‘mortgage

servicing assets’’ are added each time

they appear in section I.A.1., section

I.B.(1) and footnote 8 to section I.B.(1),

section II.C., and Table I—Definition of

Qualifying Capital and footnote 2 to

Table I.

Appendix B to Part 325 [Amended]

7. In appendix B to part 325, section

IV.A. and footnote 1 to section IV. A. are

amended by removing the words

‘‘mortgage servicing rights’’ and adding

in their place the words ‘‘mortgage

servicing assets’’ each time they appear.

By order of the Board of Directors.

Dated at Washington, D.C., this 22nd day

of July, 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Office of Thrift Supervision

12 CFR CHAPTER V

For the reasons outlined in the joint

preamble, the Office of Thrift

Supervision hereby proposes to amend

12 CFR, Chapter V, as set forth below:

PART 565—PROMPT CORRECTIVE

ACTION

1. The authority citation for part 565

continues to read as follows:
Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules 42015

Authority: 12 U.S.C. 1831o.

2. Section 565.2 is amended by

revising paragraph (f) to read as follows:

§ 565.2 Definitions.

* * * * *

(f) Tangible equity means the amount

of a savings association’s core capital as

computed in § 567.5(a) of this chapter

plus the amount of its outstanding

cumulative perpetual preferred stock

(including related surplus), minus

intangible assets as defined in

§ 567.1(m) of this chapter that have not

been previously deducted in calculating

core capital.

* * * * *

PART 567—CAPITAL

1. The authority citation for part 567

continues to read as follow:

Authority: 12 U.S.C. 1462, 1462a, 1463,

1464, 1467a, 1828 (note).

2. Section 567.1 is amended by

revising paragraph (m) to read as

follows:

§ 567.1 Definitions

* * * * *

(m) Intangible assets. The term

intangible assets means assets

considered to be intangible assets under

generally accepted accounting

principles. These assets include, but are

not limited to, goodwill, favorable

leaseholds, core deposit premiums, and

purchased credit card relationships.

Servicing assets are not intangible assets

under this definition.

* * * * *

3. Section 567.5 is amended by

revising paragraph (a)(2)(ii) to read as

follows:

§ 567.5 Components of capital.

(a) * * *

(2) * * *

(ii) Servicing assets that are not

includable in tangible and core capital

pursuant to § 567.12 of this part are

deducted from assets and capital in

computing core capital.

* * * * *

4. Section 567.6 is amended by

revising paragraphs (a)(1)(iv)(L) and

(a)(1)(iv)(M) to read as follows:

§ 567.6 Risk-based capital credit riskweight categories.

(a) * * *

(1) * * *

(iv) * * *

(L) Mortgage servicing assets and

intangible assets includable in core

capital pursuant to § 567.12 of this part;

(M) Interest-only strips receivable;

* * * * *

5. Section 567.9 is amended by

revising paragraph (c)(1) to read as

follows:

§ 567.9 Tangible capital requirement.

* * * * *

(c) * * *

(1) Intangible assets, as defined in

§ 567.1(m) of this part, and servicing

assets not includable in core and

tangible capital pursuant to § 567.12 of

this part.

* * * * *

6. Section 567.12 is amended by

revising the section heading and

paragraphs (a) through (c), paragraph (d)

introductory text, and paragraphs (e)

and (f) to read as follows:

§ 567.12 Intangible assets and servicing

assets.

(a) Scope. This section prescribes the

maximum amount of intangible assets

and servicing assets that savings

associations may include in calculating

tangible and core capital.

(b) Computation of core and tangible

capital. (1) Purchased credit card

relationships may be included (that is,

not deducted) in computing core capital

in accordance with the restrictions in

this section, but must be deducted in

computing tangible capital.

(2) Mortgage servicing assets may be

included in computing core and

tangible capital, in accordance with the

restrictions in this section.

(3) Non mortgage-related servicing

assets are deducted in computing core

and tangible capital.

(4) Intangible assets, as defined in

§ 567.1(m) of this part, other than

purchased credit card relationships

described in paragraph (a)(1) of this

section and core deposit intangibles

described in paragraph (g)(3) of this

section, are deducted in computing

tangible and core capital.

(c) Market valuations. The OTS

reserves the authority to require any

savings association to perform an

independent market valuation of assets

subject to this section on a case-by-case

basis or through the issuance of policy

guidance. An independent market

valuation, if required, shall be

conducted in accordance with any

policy guidance issued by the OTS. A

required valuation shall include

adjustments for any significant changes

in original valuation assumptions,

including changes in prepayment

estimates or attrition rates. The

valuation shall determine the current

fair value of assets subject to this

section. This independent market

valuation may be conducted by an

independent valuation expert evaluating

the reasonableness of the internal

calculations and assumptions used by

the association in conducting its

internal analysis. The association shall

calculate an estimated fair value for

assets subject to this section at least

quarterly regardless of whether an

independent valuation expert is

required to perform an independent

market valuation.

(d) Value limitation. For purposes of

calculating core capital under this part

(but not for financial statement

purposes), purchased credit card

relationships and mortgage servicing

assets must be valued at the lesser of:

* * * * *

(e) Core capital limitation—(1)

Aggregate limit. The maximum

aggregate amount of mortgage servicing

assets and purchased credit card

relationships that may be included in

core capital shall be limited to the lesser

of:

(i) 100 percent of the amount of core

capital computed before the deduction

of any disallowed mortgage servicing

assets and purchased credit card

relationships; or

(ii) The amount of mortgage servicing

assets and purchased credit card

relationships determined in accordance

with paragraph (d) of this section.

(2) Reduction by deferred tax liability.

Associations may elect to reduce the

amount of their disallowed (i.e., not

includable in capital) mortgage

servicing assets exceeding the 100

percent limit by the amount of any

associated deferred tax liability.

(3) Sublimit for purchased credit card

relationships. In addition to the

aggregate limitation in paragraph (e)(1)

of this section, a sublimit shall apply to

purchased credit card relationships. The

maximum allowable amount of such

assets shall be limited to the lesser of:

(i) 25 percent of the amount of core

capital computed before the deduction

of any disallowed mortgage servicing

assets and purchased credit card

relationships; or
42016 Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

(ii) The amount of purchased credit

card relationships determined in

accordance with paragraph (d) of this

section.

(f) Tangible capital limitation. The

maximum amount of mortgage servicing

assets that may be included in tangible

capital shall be the same amount

includable in core capital in accordance

with the limitations set by paragraph

(e)(1) of this section.

* * * * *

Dated: July 7, 1997.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 97–20391 Filed 8–1–97; 8:45 am]

BILLING CODES: 4810–33–P, 6210–01–P, 6714–01–P,

6720–01–P