15858 Federal Register / Vol. 60, No. 59 / Tuesday, March 28, 1995 / Rules and Regulations

1The GAAP treatment focuses on the transfer of

benefits rather than the retention of risk and, thus,

stating that the milk was produced and

processed in a country declared free of

rinderpest and FMD, or that the milk

product was processed in a country

declared free of rinderpest and FMD

from milk produced in a country

declared free of rinderpest and FMD.

The certificate will have to name the

country in which the milk was

produced and the country in which the

milk or milk product was processed.

The certificate will also have to state

that the milk or milk product has never

been in any country in which rinderpest

or FMD exists.

We do not expect that requiring a

certificate will have any significant

economic impact for U.S. importers of

milk or milk products. The exporter of

the milk or milk products will have to

obtain the required certification through

the national government of the country

of export prior to shipping the milk or

milk products to the United States. We

do not know how many of those

governments will charge a fee for

providing the certificate, but it is

unlikely that any fee will be high

enough to significantly raise the cost of

the milk or milk product should the

exporter choose to pass the cost of the

certificate on to the importer in the

United States.

Under these circumstances, the

Administrator of the Animal and Plant

Health Inspection Service has

determined that this action will not

have a significant economic impact on

a substantial number of small entities.

Executive Order 12778

This rule has been reviewed under

Executive Order 12778, Civil Justice

Reform. This rule: (1) Preempts all State

and local laws and regulations that are

inconsistent with this rule; (2) has no

retroactive effect; and (3) does not

require administrative proceedings

before parties may file suit in court

challenging this rule.

Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1980 (44 U.S.C. 3501

et seq.), the information collection or

recordkeeping requirements included in

this rule have been submitted for

approval to the Office of Management

and Budget.

List of Subjects in 9 CFR Part 94

Animal diseases, Imports, Livestock,

Meat and meat products, Milk, Poultry

and poultry products, Reporting and

recordkeeping requirements.

Accordingly, 9 CFR part 94 is

amended as follows:

PART 94—RINDERPEST, FOOT-ANDMOUTH DISEASE, FOWL PEST (FOWL

PLAGUE), VELOGENIC

VISCEROTROPIC NEWCASTLE

DISEASE, AFRICAN SWINE FEVER,

HOG CHOLERA, AND BOVINE

SPONGIFORM ENCEPHALOPATHY:

PROHIBITED AND RESTRICTED

IMPORTATIONS

1. The authority citation for part 94

continues to read as follows:

Authority: 7 U.S.C. 147a, 150ee, 161, 162,

and 450; 19 U.S.C. 1306; 21 U.S.C. 111, 114a,

134a, 134b, 134c, 134f, 136, and 136a; 31

U.S.C. 9701; 42 U.S.C. 4331, and 4332; 7 CFR

2.17, 2.51, and 371.2(d).

2. In § 94.16, a new paragraph (d) is

added to read as follows:

§ 94.16 Milk and milk products.

* * * * *

(d) Except for milk and milk products

imported from Canada, and except as

provided in this paragraph, milk or milk

products imported from a country listed

in § 94.1(a)(2) as free of rinderpest and

foot-and-mouth disease must be

accompanied by a certificate endorsed

by a full-time, salaried veterinarian

employed by the country of export. The

certificate must state that the milk was

produced and processed in a country

listed in § 94.1(a)(2), or that the milk

product was processed in a country

listed in § 94.1(a)(2) from milk produced

in a country listed in § 94.1(a)(2). The

certificate must name the country in

which the milk was produced and the

country in which the milk or milk

product was processed. Further, the

certificate must state that, except for

movement under seal as described in

§ 94.16(c), the milk or milk product has

never been in any country in which

rinderpest or foot-and-mouth disease

exists. Milk or milk products from a

country listed in § 94.1(a)(2) that were

processed in whole or in part from milk

or milk products from a country not

listed in § 94.1(a)(2) may be imported

into the United States in accordance

with § 94.16(b)(3).

Done in Washington, DC, this 22nd day of

March 1995.

Terry L. Medley,

Acting Administrator, Animal and Plant

Health Inspection Service.

[FR Doc. 95–7599 Filed 3–27–95; 8:45 am]

BILLING CODE 3410–34–P

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

RIN 3064–AB60

Capital Maintenance

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Final rule.

SUMMARY: The FDIC is amending its

risk-based capital standards for insured

state nonmember banks to implement

section 350 of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (Riegle Act).

Section 350 states that the amount of

risk-based capital required to be

maintained by any insured depository

institution, with respect to assets

transferred with recourse, may not

exceed the maximum amount of

recourse for which the institution is

contractually liable under the recourse

agreement. This rule will have the effect

of correcting the anomaly that currently

exists in the risk-based capital treatment

of recourse transactions under which an

institution could be required to hold

capital in excess of the maximum

amount of loss possible under the

contractual terms of the recourse

obligation.

EFFECTIVE DATE: April 27, 1995.

FOR FURTHER INFORMATION CONTACT:

Robert F. Storch, Chief, Accounting

Section, Division of Supervision, (202)

898–8906, or Cristeena G. Naser,

Attorney, Legal Division, (202) 898–

3587, Federal Deposit Insurance

Corporation, 550 17th Street, NW.,

Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Background

The FDIC’s current regulatory capital

standards are intended to ensure that

FDIC-supervised banks that transfer

assets and retain the credit risk inherent

in the assets maintain adequate capital

to support that risk. This is generally

accomplished by requiring that bank

assets transferred with recourse

continue to be reported on the balance

sheet in the Reports of Condition and

Income (Call Reports). These amounts

are thus included in the calculation of

banks’ risk-based and leverage capital

ratios. The regulatory reporting

treatment for most asset transfers with

recourse differs from the treatment of

such transactions under generally

accepted accounting principles

(GAAP).1
Federal Register / Vol. 60, No. 59 / Tuesday, March 28, 1995 / Rules and Regulations 15859

allows a transfer of receivables with recourse to be

accounted for as a sale if the transferor: (1)

Surrenders control of the future economic benefits

of the assets; (2) is able to reasonably estimate its

obligations under the recourse provision; and (3) is

not obligated to repurchase the assets except

pursuant to the recourse provision. In addition, the

transferor must establish a separate liability account

equal to the estimated probable losses under the

recourse provision (GAAP recourse liability

account).

In cases where an institution retains

a low level of recourse, the amount of

capital required under the FDIC’s riskbased capital standards could exceed

the institution’s maximum contractual

liability under the recourse agreement.

This can occur in transactions in which

a bank contractually limits its recourse

exposure to less than the full effective

risk-based capital requirement for the

assets transferred—generally, four

percent for residential mortgage loans

and eight percent for most other assets.

The FDIC and the other federal

banking agencies have long recognized

this anomaly in the risk-based capital

standards. On May 25, 1994, the

banking agencies, acting upon a

recommendation by the Federal

Financial Institutions Examination

Council, issued a Notice of Proposed

Rulemaking (NPR) (59 FR 27116)

addressing the risk-based capital

treatment of recourse and direct credit

substitutes. One of the principal features

of the NPR was a proposal to amend the

banking agencies’ risk-based capital

standards to limit the capital charge in

low level recourse transactions to an

institution’s maximum contractual

recourse liability. The proposal for these

types of transactions would effectively

result in a one dollar capital charge for

each dollar of low level recourse

exposure, up to the full effective riskbased capital requirement on the

underlying assets.

The proposal requested specific

comment on whether an institution

should be able to use the balance of the

GAAP recourse liability account to

reduce the dollar-for-dollar capital

charge for the recourse exposure on

assets transferred with low level

recourse in a transaction reported as a

sale for Call Report purposes. In

addition, the proposal indicated that the

capital requirement for an exposure to

low level recourse retained in a

transaction associated with a swap of

mortgage loans for mortgage-related

securities would be the lower of the

capital charge for the swapped

mortgages or the combined capital

charge for the low level recourse

exposure and the mortgage-related

securities, adjusted for any double

counting.

The NPR also addressed other issues

related to recourse transactions,

including equivalent capital treatment

of recourse arrangements and direct

credit substitutes that provide first

dollar loss protection and definitions for

‘‘recourse’’ and associated terms such as

‘‘standard representations and

warranties.’’ The NPR was issued in

conjunction with an Advance Notice of

Proposed Rulemaking (ANPR) that

outlined a possible alternative approach

to deal comprehensively with the riskbased capital treatment of asset

securitizations and any associated

recourse arrangements and direct credit

substitutes. The comment period for the

NPR and ANPR ended on July 25, 1994.

During the agencies’ review of the

comments received, the Riegle Act was

signed into law on September 23, 1994.

Section 350 of the Act requires the

federal banking agencies to issue

regulations not later than March 22,

1995, limiting the amount of risk-based

capital an insured depository institution

is required to hold for assets transferred

with recourse to the maximum amount

of recourse for which the institution is

contractually liable. In order to meet the

statutory requirements of section 350,

the FDIC is now issuing a rule that puts

into final form only those portions of

the NPR dealing with low level recourse

transactions.

II. Comments Received

In response to the NPR and ANPR, the

FDIC received comment letters from 37

entities. Of these respondents, 25

addressed issues related to the NPR’s

proposed low level recourse capital

treatment. These commenters included

12 banking organizations, nine trade

associations, one government-sponsored

agency, and three other commenters. Of

these 25 respondents, 22 provided a

favorable overall assessment of the low

level recourse proposal. In general,

these respondents viewed the low level

proposal as a way of correcting an

anomaly in the existing risk-based

capital standards so that institutions

would not be required to hold capital in

excess of their contractual liability.

Nevertheless, seven of the

commenters further indicated that,

while the proposed low level recourse

capital treatment was a positive step, it

still would result in too high of a capital

requirement for assets sold with limited

recourse. These respondents, which

included five of the 12 banking

organizations and two of the nine trade

associations, expressed the view that the

banking agencies should adopt the

GAAP treatment of assets sold with

recourse for purposes of calculating the

regulatory capital ratios. These

commenters maintained that the GAAP

recourse liability account provides

adequate protection against the risk of

loss on assets sold with recourse,

obviating the need for additional

capital.

The NPR specifically sought comment

on five issues related to the proposed

capital treatment of low level recourse

transactions. Twelve of the 25

respondents commented on the first

issue, which concerned the treatment of

the GAAP recourse liability account

established for assets sold with recourse

reported as sales in the Call Report.

These 12 commenters favored reducing

the capital requirement for low level

recourse transactions by the balance of

the related GAAP recourse liability

account, which would continue to be

excluded from an institution’s

regulatory capital. In their view, not

taking the GAAP recourse liability

account into consideration would result

in double coverage of the portion of the

risk provided for in that account.

Twelve commenters, including five

banking organizations and five trade

associations, responded to the second

issue, which sought comment on

whether a dollar-for-dollar capital

requirement would be too high for low

level recourse transactions. Ten

commenters indicated that such a

capital charge would be too high since

it was unlikely that an institution would

incur losses up to its maximum

contractual liability. Two others

responded that whether the capital

treatment was too high depended upon

the credit quality of the underlying asset

pool and the structure of the

securitization.

The third issue dealt with ways of

demonstrating that the dollar-for-dollar

capital requirement might be too high

and possible methods for reducing this

requirement without jeopardizing safety

and soundness. The nine commenters

on this issue indicated that historical

analysis, examiner review, and

‘‘depression scenario’’ stress testing

would show whether the capital

requirement would be too high relative

to historical losses.

The fourth issue concerned ways the

banking agencies could handle the

increased probability of loss to the

insurance funds administered by the

FDIC if less than dollar-for-dollar capital

is maintained against low level recourse

transactions. The eight commenters on

this issue stated that as long as the

amount of required capital held against

the low level recourse transactions was

prudently assessed based upon expected

losses, actual losses would seldom, if

ever, exceed the capital requirement.
15860 Federal Register / Vol. 60, No. 59 / Tuesday, March 28, 1995 / Rules and Regulations

2Under this treatment, a pool of residential

mortgages that had been transferred with recourse

was excluded from risk-weighted assets if the

transferring institution did not retain significant

risk of loss, i.e., the institution’s maximum

contractual recourse exposure did not exceed its

reasonably estimated probable losses on the

transferred mortgages, and the institution

established and maintained a recourse liability

account equal to the maximum amount of its

recourse obligation. Under the low level recourse

rule, this type of sale transaction would effectively

continue to be excluded from risk-weighted assets

because of the size of the recourse liability account

that must be maintained.

Thus, the insurance funds would not

likely experience losses.

The fifth issue sought comment on

whether the proposed low level

recourse capital treatment would reduce

transaction costs or otherwise help to

facilitate the sale or securitization of

banks’ assets. The eight commenters

that responded to this issue were all of

the opinion that the low level capital

treatment generally would help lower

transaction costs and help facilitate

securitization.

III. Final Rule

After considering the comments

received, further deliberating on the

issues involved, particularly the

requirements of section 350 of the

Riegle Act, and consulting with the

other banking agencies, the FDIC is

adopting a final rule amending its riskbased capital standards with respect to

the treatment of low level recourse

transactions. Specifically, the final

amendment implements section 350 by

reducing the risk-based capital

requirements for all recourse

transactions in which an FDICsupervised bank contractually limits its

recourse exposure to less than the full,

effective risk-based capital requirement

for the assets transferred.

This rule applies to low level recourse

transactions involving all types of

assets, including small business loans,

commercial loans, multifamily housing

loans, and residential mortgages. In this

regard, the FDIC notes that previously

under the risk-based capital standards

certain residential mortgage loans

transferred with recourse were excluded

from risk-weighted assets if the

institution did not retain significant risk

of loss.2 As proposed, this treatment

would be superseded by the broader low

level recourse rule that the FDIC is

adopting.

Under the final low level recourse

rule, an FDIC-supervised bank that

contractually limits its maximum

recourse obligation to less than the full

effective risk-based capital requirement

for the transferred assets would be

required to hold risk-based capital equal

to the contractual maximum amount of

its recourse obligation. This requirement

limits to one dollar the capital charge

for each dollar of low-level recourse

exposure. Under this dollar-for-dollar

capital requirement, the capital charge

for a 100 percent risk-weighted asset

transferred with three percent recourse

would be three percent of the amount of

the transferred assets, rather than the

eight percent previously required. Thus,

a bank’s risk-based capital requirement

on a low level recourse transaction

would not exceed the contractual

maximum amount it could lose under

the recourse obligation.

Under the final rule, an institution

may reduce the dollar-for-dollar capital

charge held against the recourse

exposure on assets transferred with low

level recourse for a transaction reported

as a sale for Call Report purposes by the

balance of any associated noncapital

GAAP recourse liability account. In

adopting this aspect of the final rule, the

FDIC concurs with commenters that

indicated that nonrecognition of the

liability account would result in double

coverage of the portion of the credit risk

provided for in that account.

In applying the final rule, the FDIC

will, as proposed, limit the risk-based

capital requirement for an exposure to

low level recourse retained in a

transaction associated with a swap of

mortgage loans for mortgage-related

securities to the lower of the capital

charge for the swapped mortgages or the

combined capital charge for the low

level recourse exposure and the

mortgage-related securities, adjusted for

any double counting.

In setting forth this final rule, the

FDIC has considered the arguments that

several commenters made for adopting

for regulatory capital purposes the

GAAP treatment for all assets sold with

recourse, including those sold with low

levels of recourse. Under such a

treatment, assets sold with recourse in

accordance with GAAP would have no

capital requirement, but the GAAP

recourse liability account would

provide some level of protection against

losses. Nevertheless, the FDIC continues

to believe it would not be appropriate to

adopt for regulatory capital purposes the

GAAP treatment of recourse

transactions, even if the transferring

bank retains only a low level of

recourse.

In the FDIC’s view, the GAAP

recourse liability account would be an

inadequate substitute for maintaining

capital at a level commensurate with the

risks. One of the principal purposes of

regulatory capital is to provide a

cushion against unexpected losses. In

contrast, the GAAP recourse liability

account is, in effect, a specific reserve

that is intended to cover only an

institution’s probable expected losses

under the recourse provision. In this

regard, the FDIC notes that the riskbased capital standards explicitly state

that specific reserves created against

identified losses may not be included in

regulatory capital.

In addition, the amount of credit risk

that is typically retained in a recourse

transaction greatly exceeds the normal

expected losses associated with the

transferred assets. Thus, even though a

transferring institution may reduce its

exposure to potential catastrophic losses

by limiting the amount of recourse it

provides, it may still retain, in many

cases, the bulk of the risk inherent in

the assets. For example, an institution

transferring high quality assets with a

reasonably estimated expected loss rate

of one percent that retains ten percent

recourse in the normal course of

business will sustain the same amount

of losses it would have had the assets

not been transferred. This occurs

because the amount of exposure under

the recourse provision is very high

relative to the amount of expected

losses. The FDIC believes that in such

transactions the transferor has not

significantly reduced its risk for

purposes of assessing regulatory capital

and should continue to be assessed

regulatory capital as though the assets

had not been transferred.

The FDIC is issuing this final rule

now in order to implement section 350

of the Riegle Act in accordance with the

statutory deadline. Consequently, the

rule deals with only those portions of

the NPR concerned with low level

recourse transactions. The FDIC will

continue to consider, on an interagency

basis, other aspects of the NPR, as well

as all aspects of the ANPR that was

issued in conjunction with the NPR.

This final rule is effective April 27,

1995. However, FDIC-supervised banks

may choose to apply the low level

recourse rule when completing the riskbased capital schedule (Schedule RC–R)

in their Reports of Condition and

Income (Call Reports) for March 31,

1995.

IV. Regulatory Flexibility Act Analysis

The purpose of this final rule is to

reduce the risk-based capital

requirement on transfers of assets with

low levels of recourse. Therefore,

pursuant to section 605(b) of the

Regulatory Flexibility Act, the FDIC

hereby certifies that this rule will have

a beneficial economic impact on small

business entities (in this case, small

banks) that sell assets with low levels of

recourse.
Federal Register / Vol. 60, No. 59 / Tuesday, March 28, 1995 / Rules and Regulations 15861

V. Paperwork Reduction Act

The FDIC has determined that, in

comparison to the existing risk-based

capital treatment of low level recourse

transactions, this final rule will not

increase the regulatory paperwork

burden of FDIC-supervised banks

pursuant to the provisions of the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.).

List of Subjects in 12 CFR Part 325

Bank deposit insurance, Banks,

banking, Capital adequacy, Reporting

and recordkeeping requirements,

Savings associations, State nonmember

banks.

For the reasons set forth in the

preamble, the Board of Directors of the

Federal Deposit Insurance Corporation

hereby amends part 325 of title 12 of the

Code of Federal Regulations as follows:

PART 325—CAPITAL MAINTENANCE

1. The authority citation for Part 325

is revised 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, 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. Section II.D.1. of appendix A to

part 325 is amended by removing the

sixth paragraph and adding in its place

two new paragraphs to read as follows:

Appendix A to Part 325—Statement of

Policy on Risk-Based Capital

* * * * *

II. * * *

D. * * *

1. * * *

Sale and repurchase agreements and

asset sales with recourse, if not already

included on the balance sheet, are also

converted at 100 percent. For risk-based

capital purposes, the definition of sales

of assets with recourse, including the

sale of one-to-four family residential

mortgages, is consistent with the

definition contained in the instructions

for the preparation of the Consolidated

Reports of Condition and Income.

Accordingly, except as noted below, the

entire amount of any assets transferred

with recourse that are not already

included on the balance sheet,

including pools of one-to-four family

residential mortgages, is to be converted

at 100 percent and assigned to the risk

weight category appropriate to the

obligor or, if relevant, the guarantor or

the nature of the collateral. The terms of

a transfer of assets with recourse may

contractually limit the amount of the

bank’s liability to an amount less than

the effective risk-based capital

requirement for the assets being

transferred with recourse. If such a

transaction (including one that, in

accordance with the instructions for the

preparation of the Consolidated Reports

of Condition and Income, is reported as

a financing, i.e., the assets are not

removed from the balance sheet) meets

the criteria for sale treatment under

generally accepted accounting

principles, the amount of total capital

required is equal to the maximum

amount of loss possible under the

recourse provision. If the transaction is

also treated as a sale in accordance with

the instructions for the preparation of

the Consolidated Reports of Condition

and Income, then the required amount

of capital may be reduced by the

balance of any associated noncapital

liability account established pursuant to

generally accepted accounting

principles to cover estimated probable

losses under the recourse provision. Socalled ‘‘loan strips’’ (that is, short-term

advances sold under long-term

commitments without direct recourse)

are defined in the instructions for the

preparation of the Consolidated Reports

of Condition and Income and for riskbased capital purposes as assets sold

with recourse.

In addition, a 100 percent conversion

factor applies to forward agreements.

Forward agreements are legally binding

contractual obligations to purchase

assets with drawdown which is certain

at a specified future date. These

obligations include forward purchases,

forward deposits placed, and partly paid

shares and securities, but do not include

forward foreign exchange rate contracts

or commitments to make residential

mortgage loans.

* * * * *

By order of the Board of Directors.

Dated at Washington, D.C., this 21st day of

March, 1995.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95–7535 Filed 3–27–95; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 95–55]

RIN 1550–AA78

Loans to one Borrower

AGENCY: Office of Thrift Supervision,

Treasury.

ACTION: Interim final rule with request

for comments.

SUMMARY: The Office of Thrift

Supervision (OTS) is amending its

lending limits regulation, also known as

the loans to one borrower (LTOB) rule,

to reflect recent changes to the Office of

the Comptroller of the Currency’s

(OCC’s) lending limits regulation.

Section 5(u) of the Home Owners’ Loan

Act requires that savings association

lending limits parallel those applicable

to national banks. This interim final rule

amends OTS’s LTOB regulation so that

thrifts, like national banks, will use

regulatory capital as the starting point

for determining ‘‘unimpaired capital

and unimpaired surplus’’ for LTOB

purposes, removing the need for a

separate calculation. It also removes

other outdated or redundant provisions.

DATES: The interim final rule is effective

March 28, 1995. Written comments on

this interim final rule must be received

on or before April 27, 1995.

ADDRESSES: Send comments to Director,

Information Services Division, Office of

Thrift Supervision, 1700 G Street, NW.,

Washington, D.C. 20552, Attention

Docket No. 95–55. These submissions

may be hand-delivered to 1700 G Street,

NW., from 9 a.m. to 5 p.m. on business

days; they may be sent by facsimile

transmission to FAX Number (202) 906–

7755. Comments will be available for

inspection at 1700 G Street, NW., from

1 p.m. until 4 p.m. on business days.

Visitors will be escorted to and from the

Public Reading Room at established

intervals.

FOR FURTHER INFORMATION CONTACT:

William J. Magrini, Project Manager,

Policy, (202) 906–5744; Valerie J.

Lithotomos, Counsel (Banking and

Finance), (202) 906–6439; Deborah

Dakin, Assistant Chief Counsel, (202)

906–6445, Regulations and Legislation

Division, Chief Counsel’s Office, Office

of Thrift Supervision, 1700 G Street,

NW., Washington DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory and Regulatory Ties

Between OCC and OTS Lending Limits

Both savings associations and

national banks have statutory limits

placed on the amount an institution can

lend to one borrower. Since 1989,

Section 5(u) of the Home Owners’ Loan

Act (HOLA) has provided that ‘‘Section

5200 of the Revised Statutes applies to

savings associations in the same manner

and to the same extent as it applies to