[Federal Register Volume 62, Number 149 (Monday, August 4, 1997)]
[Proposed Rules]
[Pages 42006-42016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20391]


      

[[Page 42005]]

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Part III

Department of the Treasury
Office of Comptroller of the Currency



12 CFR Parts 3 and 6

Federal Reserve System



12 CFR Parts 208 and 225

Federal Deposit Insurance Corporation



12 CFR Part 325

Department of the Treasury
Office of Thrift Supervision



12 CFR Parts 565 and 567



_______________________________________________________________________



Capital; Risk-Based Capital Guidelines; Capital Adequacy Guidelines; 
Capital Maintenance: Servicing Assets; Proposed Rule

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

[[Page 42006]]


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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.

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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 <a href="/cdn-cgi/l/email-protection#b6c4d3d1c598d5d9dbdbd3d8c2c5f6d9d5d598c2c4d3d7c598d1d9c0"><span class="__cf_email__" data-cfemail="73011614005d101c1e1e161d0700331c10105d07011612005d141c05">[email protected]</span></a>.
    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: 
<a href="/cdn-cgi/l/email-protection#10737f7d7d757e646350767479733e777f66"><span class="__cf_email__" data-cfemail="e4878b8989818a9097a482808d87ca838b92">[email protected]</span></a>). 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 
<a href="/cdn-cgi/l/email-protection#89f9fcebe5e0eaa7e0e7efe6c9e6fdfaa7fdfbece8faa7eee6ff"><span class="__cf_email__" data-cfemail="b0c0c5d2dcd9d39ed9ded6dff0dfc4c39ec4c2d5d1c39ed7dfc6">[email protected]</span></a>. 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),

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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. <SUP>1</SUP> However, limited 
amounts of purchased mortgage servicing rights (PMSRs) and purchased 
credit card relationships (PCCRs) were allowed in Tier 1 capital. 
<SUP>2</SUP> 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)).
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    \1\ For OTS purposes, Tier 1 capital is the same as core 
capital.
    \2\ Servicing 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.
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    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. <SUP>3</SUP> 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. <SUP>4</SUP>
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    \3\ A 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.
    \4\ Bank 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.
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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. 
<SUP>5</SUP> The GAAP accounting treatment of ESFRs was not changed by 
FAS 122.
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    \5\ Among 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.
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    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. 
<SUP>6</SUP>
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    \6\ Thus, PCCRs continued to be subject to the 25 percent of 
Tier 1 capital sublimit.
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    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-by-
stratum 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. <SUP>7</SUP>
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    \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.
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    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) interest-only (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).

[[Page 42008]]

    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-to-maturity 
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. 
<SUP>8</SUP> 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.
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    \8\ FAS 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.
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    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.<SUP>9</SUP> 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.
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    \9\ For 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).
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    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. <SUP>10</SUP>
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    \10\ The 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.
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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.<SUP>11</SUP> 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.<SUP>12</SUP>
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    \11\ PCCRs would also continue to be subject to the 10 percent 
of fair value haircut.
    \12\ For 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.
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    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. <SUP>13</SUP> 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. <SUP>14</SUP>
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    \13\ Originated 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.
    \14\ See footnote 12.
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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

[[Page 42009]]

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''). <SUP>15</SUP>
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    \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.
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    (b) MSAs and PCCRs must be less than or equal to 100% of Tier 1 
capital <SUP>16</SUP>
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    \16\ Amounts of MSAs and PCCRs in excess of the amounts 
allowable must be deducted from Tier 1 capital.
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    (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. 
<SUP>17</SUP> 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.
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    \17\ Under 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' risk-based 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.
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    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.<SUP>18</SUP> 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.
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    \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.
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    (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 asset-
backed 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 well-developed, 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

[[Page 42010]]

changes to the definition of tangible equity are proposed at this 
time.<SUP>19</SUP>
---------------------------------------------------------------------------

    \19\ The 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.
---------------------------------------------------------------------------

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)

[[Page 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.


Sec. 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:


Sec. 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:


Sec. 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

[[Page 42012]]

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 Sec. 208.31 
and revised at 62 FR 15291, is further amended by revising paragraph 
(f) to read as follows:


Sec. 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. 
<SUP>14</SUP>
---------------------------------------------------------------------------

    \14\ Amounts 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.
---------------------------------------------------------------------------

    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,<SUP>20</SUP> 
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 carry-back 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.
---------------------------------------------------------------------------

    \20\ To 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 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.
---------------------------------------------------------------------------

* * * * *
    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.<SUP>2</SUP> As a general matter,

[[Page 42013]]

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.<SUP>3</SUP>
---------------------------------------------------------------------------

    \2\ Tier 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 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.
---------------------------------------------------------------------------

* * * * *

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.<SUP>15</SUP>
---------------------------------------------------------------------------

    \15\ Amounts 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.
---------------------------------------------------------------------------

    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,<SUP>23</SUP> 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.
---------------------------------------------------------------------------

    \23\ To 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.
---------------------------------------------------------------------------

* * * * *
    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.<SUP>3</SUP> As a general matter, average total consolidated

[[Page 42014]]

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.<SUP>4</SUP>
---------------------------------------------------------------------------

    \3\ Tier 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.
    \4\ Deductions from Tier 1 capital and other adjustments are 
discussed more fully in section II.B. in Appendix A of this part.
---------------------------------------------------------------------------

* * * * *
    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 Sec. 325.2, paragraph (n) is revised to read as follows:


Sec. 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 Sec. 325.5 (f).
* * * * *


Sec. 325.2  [Amended]

    3. In Sec. 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 Sec. 325.5, paragraph (f) is revised to read as follows:


Sec. 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.
* * * * *


Sec. 325.5  [Amended]

    5. In Sec. 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:


[[Page 42015]]


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

    2. Section 565.2 is amended by revising paragraph (f) to read as 
follows:


Sec. 565.2  Definitions.

* * * * *
    (f) Tangible equity means the amount of a savings association's 
core capital as computed in Sec. 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 
Sec. 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:


Sec. 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:


Sec. 567.5  Components of capital.

    (a) * * *
    (2) * * *
    (ii) Servicing assets that are not includable in tangible and core 
capital pursuant to Sec. 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:


Sec. 567.6  Risk-based capital credit risk-weight categories.

    (a) * * *
    (1) * * *
    (iv) * * *
    (L) Mortgage servicing assets and intangible assets includable in 
core capital pursuant to Sec. 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:


Sec. 567.9  Tangible capital requirement.

* * * * *
    (c) * * *
    (1) Intangible assets, as defined in Sec. 567.1(m) of this part, 
and servicing assets not includable in core and tangible capital 
pursuant to Sec. 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:


Sec. 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 Sec. 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

[[Page 42016]]

    (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


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