55490 Federal Register / Vol. 62, No. 206 / Friday, October 24, 1997 / Rules and Regulations

1 If an institution’s maximum contractual liability

under a recourse obligation is less than the capital

requirement for the credit risk exposure on the

underlying assets, then, under the low-level

recourse rule, the capital requirement for the

recourse exposure is equal to the institution’s

maximum contractual liability.

2For purposes of determining the amount of riskweighted assets for assets transferred with recourse

that receive the preferential capital treatment under

section 208, the recourse liability account

established in accordance with GAAP would not be

subtracted from the amount of the recourse

obligation.

3Under the low-level recourse rule, if the

institution had limited the recourse obligation to

$60 on the loan pool, its capital charge would be

$60.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket No. 97–17]

RIN 1557–AB14

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

RIN 3064–AB57

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket No. 97–97]

RIN 1550–AB11

Risk-Based Capital Requirements;

Transfers of Small Business Loan

Obligations With Recourse

AGENCIES: Office of the Comptroller of

the Currency (OCC), Treasury; Federal

Deposit Insurance Corporation (FDIC);

and Office of Thrift Supervision (OTS),

Treasury.

ACTION: Joint final rule.

SUMMARY: The OCC, FDIC, and OTS

(agencies) are issuing final rules on the

risk-based capital treatment of transfers

of small business loans or leases of

personal property with recourse, as

required by section 208 of the Riegle

Community Development and

Regulatory Improvement Act of 1994.

The rules address the risk-based capital

treatment of transfers of small business

loans or leases of personal property with

recourse, and, consistent with the

statutory purpose, are designed to

facilitate such transfers.

DATES: The final rule is effective January

1, 1998.

FOR FURTHER INFORMATION CONTACT:

OCC: David Thede, Senior Attorney,

Securities and Corporate Practices

Division (202/874-5210); or Tom Rollo,

National Bank Examiner, Office of the

Chief National Bank Examiner (202/

874–5070), Office of the Comptroller of

the Currency, 250 E Street, SW.,

Washington, DC 20219.

FDIC: For supervisory issues, Stephen

G. Pfeifer, Examination Specialist, (202/

898–8904), Accounting Section,

Division of Supervision; for legal issues,

Marc J. Goldstrom, Counsel, (202/898–

8807), Legal Division, Federal Deposit

Insurance Corporation, 550 17th Street,

N.W., Washington, D.C. 20429.

OTS: John F. Connolly, Senior

Program Manager for Capital Policy

(202/906–6465), Supervision; or Valerie

J. Lithotomos, Counsel, Banking and

Finance (202/906–6439), Regulations

and Legislation Division, Chief

Counsel’s Office, Office of Thrift

Supervision, 1700 G Street, NW.,

Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

The agencies are issuing final rules on

the risk-based capital treatment of

transfers of small business obligations

with recourse as required by section 208

of the Riegle Community Development

and Regulatory Improvement Act of

1994 (CDRI Act), 12 U.S.C. 1835. The

agencies had previously published

interim rules implementing section 208

and at that time requested comment on

the changes. 60 FR 47455 (OCC); 60 FR

45606 (FDIC); 60 FR 45618 (OTS). The

OTS and OCC are now issuing final

rules that are unchanged from their

respective interim rules. The FDIC is

issuing a final rule that is substantially

the same as its interim rule.

Banks and thrifts typically transfer

assets with recourse as part of

securitization transactions. Sections 201

through 210 of the CDRI Act were

intended to increase small business

access to capital by removing

impediments in existing law to the

securitization of small business loans

and leases.

Under the agencies’ current risk-based

capital standards, assets transferred

with recourse are included in riskweighted assets.1 Section 208 prescribes

modified risk-based capital

requirements for transfers of small

business loans or leases of personal

property with recourse that are sales

under generally accepted accounting

principles (GAAP). This modified riskbased capital treatment permits a

qualified insured depository institution

to include in its risk-weighted assets, for

the purposes of applicable capital

standards and other capital measures,

only the amount of the retained recourse

multiplied by the appropriate riskweight percentage. For example, if an

institution sold a $1,000 pool of small

business loans with recourse, but

limited its recourse liability to the first

$100 of loss on the pool, section 208

would limit the applicable capital

charge to $8 (8 percent of the $100 of

retained recourse).2

By contrast, the agencies’ risk-based

capital regulations generally require

institutions to include in risk-weighted

assets the full value of assets transferred

with recourse multiplied by the

appropriate risk-weight percentage. If

that rule were applied to the foregoing

example, the institution’s capital charge

would be 8 percent of the $1,000 pool

of transferred assets resulting in an $80

capital charge, rather than the $8 capital

charge under section 208.3

Section 208 limits the availability of

the favorable treatment as follows:

(1) To apply section 208 to a

transaction, an institution must be a

‘‘qualified insured depository

institution’’ at the time of the sale with

recourse. A qualified insured depository

institution is one that is either well

capitalized or, with the approval of its

primary regulator, adequately

capitalized (in either case, without

regard to section 208). If an institution

loses its ‘‘qualified’’ status, transactions

completed while the institution was

qualified will continue to receive the

favorable capital treatment.

(2) The total outstanding amount of

recourse retained by an institution with

respect to transfers of small business

loans and leases of personal property to

which section 208 has been applied may

not exceed 15 percent of the total riskbased capital of the institution, unless

the institution’s primary federal

regulatory agency, by regulation or

order, specifies a greater amount.

Comments

In response to the interim rule, the

agencies received comments from one

bank, three banking trade associations,

one accountants’ professional

association, and one other trade

association. All of the commenters

supported the interim rule.

Section 208 requires the agencies to

use the definition of ‘‘small business’’

established by the Small Business

Administration (SBA) in 13 CFR part

121 pursuant to 15 U.S.C. 632 in

determining which loans and leases are

eligible for the special capital treatment.

Two commenters observed that this

definition is difficult to apply with

certainty in the absence of voluminous
Federal Register / Vol. 62, No. 206 / Friday, October 24, 1997 / Rules and Regulations 55491

4Because the Call Report instructions have been

revised to conform with GAAP in the reporting

treatment of all transfers of financial assets,

including small business loans and leases

transferred with recourse, the FDIC has decided that

the interim rule amendment that added a new

paragraph (e) to § 325.3 of the FDIC’s leverage

capital rule is now redundant. Therefore, the FDIC’s

final rule removes this paragraph. 5 12 CFR 567.6(a)(2)(i)(C).

information gathered from each loan

applicant, and that collecting this

information would be prohibitively

expensive for the lender and the loan

applicant. The commenters noted that,

in extending small business leases,

some institutions use computerized

credit scoring that relies on sales and

employment information available from

published reports. This information

does not exactly match the criteria in

the SBA’s definition. Because the

transactions are typically very small,

these commenters stated, the cost of

obtaining the additional information

required by the SBA’s definition for

each lease would effectively preclude

use of section 208 to facilitate

securitization of these leases.

The agencies have considered these

comments and believe that section 208

and the agencies’ regulations permit an

institution to apply the section 208

capital treatment without incurring this

additional cost. If the specific

information required by the SBA

definition is not readily available, an

institution should use its best efforts to

ensure that, based on other information

that is available to the institution, the

borrower would meet the SBA criteria

for a small business. Additionally, an

institution should not classify a

borrower as a small business if the

institution has access to readily

available information that is not

consistent with such a classification. If,

during the course of an examination, it

is determined that the information being

used to evaluate whether a borrower is

a small business is being used in a

manner that is inconsistent with or that

appears to circumvent the provisions of

the actual SBA definition of a small

business, the agencies may require

appropriate adjustments to be made to

the institution’s regulatory capital

calculations for those periods during

which the SBA definition was not

consistently applied.

Another commenter observed that the

agencies did not state in the interim

rules that the accounting principles for

transfers of small business loans and

leases with recourse in Consolidated

Reports of Condition and Income (Call

Reports) and Thrift Financial Reports

should be governed by GAAP. All of the

agencies intend to apply GAAP as

required by section 208. No regulatory

amendments will be necessary to

implement this change. As of January

1997, all institutions generally must

follow GAAP for financial reporting in

their Call Reports and Thrift Financial

Reports, including the reporting of

transfers of small business loans with

recourse in accordance with section

208.4

This commenter also noted that the

interim rule requires an institution to

hold capital against the entire face

amount of recourse retained and also to

establish a liability reserve for expected

future losses associated with the

recourse arrangements. The commenter

stated that this requirement would

result in an excessive capital

requirement and that the retained

recourse liability should be reduced by

the amount of the reserve before

calculating capital requirements.

The agencies have decided not to

change the treatment in the interim rule.

Section 208 specifically requires the

treatment described in the interim rule.

Also, as the FRB noted in its final rule

implementing section 208, capital and

the GAAP reserve serve different

purposes. The GAAP reserve covers

expected losses, while capital is

maintained to absorb unexpected losses.

60 FR 45613 (August 31, 1995).

Three commenters suggested that the

agencies make the risk-based capital

treatment described in section 208

available for all sales of assets with

recourse. One commenter noted that

section 208(h) permits the agencies to

adopt an alternative capital treatment

that does not require more aggregate

capital and reserves than the treatment

described in section 208. This

commenter urged the agencies to use

this discretion to further reduce the

capital requirement on transfers of small

business obligations with recourse. The

agencies are not undertaking that

change now, but are continuing to

review the risk-based capital

requirements applicable to sales of

assets with recourse. The agencies will

consider the commenters’ suggestions in

the context of that review.

One commenter asked the agencies to

confirm that an institution may apply

the section 208 treatment to small

business loans transferred with recourse

after March 22, 1995, the statutory

implementation date, even though the

agencies’ interim rules were published

in August and September of 1995.

Consistent with the guidance previously

provided in the agencies’ interim rules,

the agencies will not object if an

institution chooses to apply the

provisions of the final rule to small

business obligations that were

transferred with recourse between

March 22, 1995 and the effective date of

the final rule, provided the institution

would have been a qualifying institution

under the provisions of the rule at the

time of the transfer.

Under the statute, an adequately

capitalized institution will be a

‘‘qualified institution’’ eligible to use

the capital treatment for small business

loans with the written permission of the

responsible agency. One commenter to

the OTS suggested that all adequately

capitalized institutions should be

permitted to use the section 208 capital

treatment unless the agency determines

that an individual minimum capital

requirement or other action is necessary

for safety and soundness purposes. The

OTS generally intends to allow

institutions to use the section 208

computational method if OTS

determines institutions will have capital

commensurate with their risk exposure.

One commenter thought that the

OCC’s treatment of low-level recourse

transactions differed from that of the

FDIC and FRB. Although this issue is

not directly related to the final rule

implementing section 208, the OCC

wishes to clarify that its treatment of

low-level recourse transactions is

consistent with that of the FDIC and

FRB. A low-level recourse transaction is

a transaction in which the amount of

retained recourse is less than the

effective capital requirement on the

underlying assets. As required by

section 350 of the CDRI Act, 12 USC

4808, the OCC, FDIC, and FRB have

adopted rules limiting the risk-based

capital requirement for low-level

recourse obligations to the bank’s

maximum contractual obligation under

the recourse provision. (The OTS

already had such a rule in place.5) In

addition, the OCC, FRB, and FDIC,

acting under the auspices of the Federal

Financial Institutions Examination

Council, have jointly issued Call Report

instructions describing the regulatory

reporting treatment applicable to lowlevel recourse transactions in the

regulatory capital schedule. (See Call

Report Instructions for Schedule RC–

R—Regulatory Capital.)

The preamble to the OTS’s interim

rule on section 208 also addressed the

implementation of section 350 and

requested comments on the proper

calculation of the risk-based capital

ratio for low-level recourse exposures.

The OTS received one comment on lowlevel recourse exposures, which

supported the current OTS approach.

However, because this issue was not
55492 Federal Register / Vol. 62, No. 206 / Friday, October 24, 1997 / Rules and Regulations

6 It is very unlikely but theoretically possible that

an institution that is undercapitalized without

section 208 would become well capitalized if it

applied the treatment in section 208. Because

section 208 was not intended to affect prompt

corrective action, and because allowing an

undercapitalized institution to become well

capitalized would affect prompt corrective action,

the agencies interpret section 208 not to allow an

undercapitalized institution to use the capital

treatment it describes to become well capitalized for

purposes of prompt corrective action.

7An institution that is subject to a written

agreement or capital directive as discussed in the

agencies’ prompt corrective action regulations

would not be considered well capitalized.

8Under section 208, the capital calculation used

to determine whether an institution is well

capitalized differs from the calculation used to

determine whether an institution is adequately

capitalized. As a result, it is possible that an

institution could be well capitalized using one

calculation and adequately capitalized using the

other. In this situation, the institution would be

considered well capitalized.

raised in the FDIC and OCC interim

rules implementing section 208, the

OTS is not addressing the issue in this

joint final rule. The OTS will consider

this comment in reviewing its policy

guidance and Thrift Financial Report

instructions.

Prompt Corrective Action

Section 208(f) states that the capital of

an insured depository institution shall

be computed without regard to section

208 in determining whether the

institution is adequately capitalized,

undercapitalized, significantly

undercapitalized, or critically

undercapitalized under section 38 of the

Federal Deposit Insurance Act (12

U.S.C. 1831o). Section 38 addresses

prompt corrective action.

The caption to section 208(f), ‘‘Prompt

Corrective Action Not Affected,’’ and

the legislative history indicate that

section 208 was not intended to affect

the operation of the prompt corrective

action system. See S. Rep. No. 103–169,

103d Cong., 1st Sess. 38, 69 (1994).

However, the statute does not include

‘‘well capitalized’’ in the list of capital

categories not affected. The prompt

corrective action system deals primarily

with imposing corrective sanctions on

institutions that are less than adequately

capitalized. Therefore, allowing an

institution that is adequately capitalized

without the section 208 treatment 6 to

use section 208 for purposes of

determining whether the institution is

well capitalized generally would not

affect the application of the prompt

corrective action sanctions to the

institution. Other statutes and

regulations treat an institution more

favorably if it is well capitalized as

defined under the prompt corrective

action statute, but these provisions are

not part of the prompt corrective action

system of sanctions. Permitting an

institution to be treated as well

capitalized for purposes of these other

provisions also will not affect the

imposition of prompt corrective action

sanctions.

There is one provision of the prompt

corrective action system that could be

affected by treating an institution as

well capitalized rather than adequately

capitalized. If an agency determines that

an institution is in an unsafe or

unsound condition or is engaging in an

unsafe or unsound practice, section

38(g) (12 U.S.C. 1831o(g)) authorizes the

agency (1) to reclassify a well

capitalized institution as adequately

capitalized and (2) to require an

adequately capitalized institution (but

not a well capitalized institution) to

comply with certain prompt corrective

action provisions as if the institution

were undercapitalized. Because the text

and legislative history of section 208

indicate that it was not intended to

affect prompt corrective action, the

agencies believe that section 208 does

not affect the capital calculation for

purposes of section 38(g) regardless of

the institution’s capital level.

Thus, an institution may use the

capital treatment described in section

208 when determining whether it is

well capitalized for purposes of prompt

corrective action as well as for other

regulations that reference the well

capitalized capital category.7 An

institution may not use the capital

treatment described in section 208 when

determining whether it is adequately

capitalized, undercapitalized,

significantly undercapitalized, or

critically undercapitalized for purposes

of prompt corrective action or other

regulations that directly or indirectly

reference the prompt corrective action

capital categories.8 The agencies will

disregard the capital treatment

described in section 208 for purposes of

section 38(g).

Final Rules

The OCC is adopting its interim rule

without change.

The OTS is also adopting its interim

rule without change.

The FDIC is adopting its interim rule

with one technical, non-substantive

change: section 325.5(e) is being

removed as redundant. Even though

paragraph 6 of section II.B. of appendix

A to part 325 is unchanged, it is being

republished for the convenience of the

reader.

Regulatory Flexibility Act

Each of the agencies certifies that this

final rule will not have a significant

economic impact on a substantial

number of small entities. This

rulemaking is required by statute. The

final rule authorizes an alternative

method of calculating risk-based capital

that permits institutions to hold less

capital for certain recourse obligations.

The final rule will benefit qualified

institutions regardless of size. The final

rule will not affect any institution’s riskbased capital for prompt corrective

action purposes.

Executive Order 12866

The OCC and OTS have determined

that this final rule is not a significant

regulatory action under Executive Order

12866. Under the final rule, some

institutions’ risk-based capital ratios

may improve. This change will not have

a material effect on the safety and

soundness of affected institutions and

will not affect their measured risk-based

capital for prompt corrective action

purposes.

Paperwork Reduction Act

The Agencies have determined that

this final rule will not increase the

regulatory paperwork of banking

organizations pursuant to the provisions

of the Paperwork Reduction Act (44

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

Unfunded Mandates Act of 1995

Section 202 of the Unfunded

Mandates Act of 1995 (Unfunded

Mandates Act) requires that an agency

prepare a budgetary impact statement

before promulgating a rule that includes

a Federal mandate that may result in the

expenditure by state, local, and tribal

governments, in the aggregate, or by the

private sector, of $100 million or more

in any one year. If a budgetary impact

statement is required, section 205 of the

Unfunded Mandates Act also requires

an agency to identify and consider a

reasonable number of regulatory

alternatives before promulgating a rule.

As discussed in the preamble, the final

rule authorizes an alternative method of

calculating capital that permits

institutions to elect to hold less capital

for certain recourse obligations. Because

the agencies have determined that the

final rule will not result in expenditures

by state, local, and tribal governments,

or by the private sector, of more than

$100 million in any one year, the

agencies have not prepared a budgetary

impact statement or specifically

addressed the regulatory alternatives

considered.

List of Subjects

12 CFR Part 3

Administrative practice and

procedure, Capital risk, National banks,
Federal Register / Vol. 62, No. 206 / Friday, October 24, 1997 / Rules and Regulations 55493

Reporting and recordkeeping

requirements.

12 CFR Part 325

Bank deposit insurance, Banks,

Banking, Capital adequacy, Reporting

and recordkeeping requirements,

Savings associations, State nonmember

banks.

12 CFR Part 567

Capital, Reporting and recordkeeping

requirements, Savings associations.

Office of the Comptroller of the

Currency

12 CFR Chapter I

Issuance

For the reasons set out in the

preamble, the interim rule amending 12

CFR part 3 which was published at 60

FR 47455 on September 13, 1995, (as

corrected by the document published in

the Federal Register at 60 FR 64115 on

December 14, 1995) is adopted as a final

rule without change.

Office of The Comptroller of the Currency.

Dated: September 12, 1997.

Eugene A. Ludwig,

Comptroller of the Currency.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Issuance

For the reasons set out in the

preamble, the Board of Directors of the

Federal Deposit Insurance Corporation

adopts as final the interim rule

amending 12 CFR part 325 which was

published at 60 FR 45606 on August 31,

1995, with the following change:

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), 1831(o), 1835, 3907, 3909,

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

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

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

1828 note).

§ 325.3 [Amended]

2. In § 325.3 paragraph (e) is removed.

3. In appendix A to part 325,

paragraph 6 of section II.B. is

republished to read as follows:

Appendix—A to Part 325—Statement of

Policy on Risk-Based Capital

* * * * *

II. * * *

B. * * *

6. Small Business Loans and Leases on

Personal Property Transferred with

Recourse—(a) Notwithstanding other

provisions of this appendix A, a qualifying

institution that has transferred small business

loans and leases on personal property (small

business obligations) with recourse shall

include in risk-weighted assets only the

amount of retained recourse, provided two

conditions are met. First, the transaction

must be treated as a sale under generally

accepted accounting principles (GAAP) and,

second, the qualifying institution must

establish pursuant to GAAP a non-capital

reserve sufficient to meet the institution’s

reasonably estimated liability under the

recourse arrangement. Only loans and leases

to businesses that meet the criteria for a small

business concern established by the Small

Business Administration under section 3(a)

of the Small Business Act (15 U.S.C. 632(a))

are eligible for this capital treatment.

(b) For purposes of this appendix A, a

qualifying institution is a bank that is well

capitalized. In addition, by order of the FDIC,

a bank that is adequately capitalized may be

deemed a qualifying institution. In

determining whether a bank meets the

qualifying institution criteria, the prompt

corrective action well capitalized and

adequately capitalized definitions set forth in

§ 325.103 shall be used, except that the

bank’s capital ratios must be calculated

without regard to the preferential capital

treatment for transfers of small business

obligations with recourse specified in section

II.B.6.(a) of this appendix A. The total

outstanding amount of recourse retained by

a qualifying institution on transfers of small

business obligations receiving the

preferential capital treatment cannot exceed

15 percent of the institution’s total risk-based

capital. By order, the FDIC may approve a

higher limit.

(c) If a bank ceases to be a qualifying

institution or exceeds the 15 percent of

capital limit under section II.B.6.(b) of this

appendix A, the preferential capital

treatment will continue to apply to any

transfers of small business obligations with

recourse that were consummated during the

time the bank was a qualifying institution

and did not exceed such limit.

(d) The risk-based capital ratios of a bank

shall be calculated without regard to the

preferential capital treatment for transfers of

small business obligations with recourse

specified in paragraph (a) of this section for

purposes of:

(i) Determining whether a bank is

adequately capitalized, undercapitalized,

significantly undercapitalized, or critically

undercapitalized under the prompt corrective

action capital category definitions specified

in § 325.103; and

(ii) Applying the prompt corrective action

reclassification provisions specified in

§ 325.103(d), regardless of the bank’s capital

level.

* * * * *

Federal Deposit Insurance Corporation.

By the order of the Board of Directors.

Dated at Washington, D.C. this 16th day of

September 1997.

James D. LaPierre,

Deputy Executive Secretary.

Office of Thrift Supervision

12 CFR Chapter V

Issuance

Accordingly, the Office of Thrift

Supervision hereby adopts as final the

interim rule amending 12 CFR part 567

which was published at 60 FR 45618 on

August 31, 1995, without change.

Office of Thrift Supervision.

By the Office of Thrift Supervision.

Dated: September 18, 1997.

Nicolas P. Retsinas,

Director.

[FR Doc. 97–27749 Filed 10–23–97; 8:45 am]

BILLING CODE 4810–33–P, 6714–01–P, 6720–01–P