19688 Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Proposed Rules

[FR Doc. 95–9764 Filed 4–19–95; 8:45 am]

BILLING CODE 7590–01–C
Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Proposed Rules 19689

1The lending limit also includes any higher

amounts that are permitted by the exceptions

included in 12 U.S.C. 84. Where state law

establishes a lower lending limit for a state member

bank, that lower lending limit is the lending limit

for the state member bank.

FEDERAL RESERVE SYSTEM

12 CFR Part 215

[Regulation O; Docket No. R–0875]

Loans to Executive Officers, Directors,

and Principal Shareholders of Member

Banks; Loans to Holding Companies

and Affiliates

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Proposed rule.

SUMMARY: The Board is proposing an

amendment to Regulation O to conform

the definition of unimpaired capital and

unimpaired surplus in the regulation’s

definition of lending limit to the

definition of capital and surplus

recently adopted by the Office of the

Comptroller of the Currency in

calculating the limit on loans by a

national bank to a single borrower. The

proposed rule would reduce the

recordkeeping burden for member banks

monitoring lending to their insiders and

their related interests.

DATES: Comments should be submitted

on or before May 22, 1995.

ADDRESSES: Comments should refer to

Docket No. R–0875, 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

Room B–2222 of the Eccles Building

between 8:45 a.m. and 5:15 p.m.

weekdays, or to the guard station in the

Eccles Building courtyard on 20th Street

NW. (between Constitution Avenue and

C Street) at any time. Comments may be

inspected in Room MP–500 of the

Martin Building between 9 a.m. and 5

p.m. weekdays, except as provided in 12

CFR 261.8 of the Board’s rules regarding

availability of information.

FOR FURTHER INFORMATION CONTACT:

Gregory Baer, Managing Senior Counsel

(202/452–3236), or Gordon Miller,

Attorney (202/452–2534), Legal

Division; or William G. Spaniel,

Assistant to the Director (202/452–

3469), Division of Banking Supervision

and Regulation, Board of Governors of

the Federal Reserve System. For the

hearing impaired only,

Telecommunications Device for the Deaf

(TDD), Dorothea Thompson (202/452–

3544).

SUPPLEMENTARY INFORMATION:

Background

The Board’s Regulation O (12 CFR

Part 215) implements the insider

lending prohibitions of section 22(h) of

the Federal Reserve Act. Section 215.2(i)

of the regulation (12 CFR 215.2(i))

defines the limit for loans to any insider

of a member bank and insider of the

bank’s affiliates as an amount equal to

the limit on loans to a single borrower

established by the National Bank Act

(12 U.S.C. 84). That amount is 15

percent of the bank’s unimpaired capital

and unimpaired surplus for loans that

are not fully secured, and an additional

10 percent of the bank’s unimpaired

capital and unimpaired surplus for

loans that are fully secured by certain

readily marketable collateral.1

Although Regulation O adopts the

percentage limits used in the National

Bank Act, Regulation O provides its

own definition of what constitutes

unimpaired capital and unimpaired

surplus. Unimpaired capital and

unimpaired surplus are equal to the sum

of (i) ‘‘total equity capital’’ as reported

on the bank’s most recent consolidated

report of condition, (ii) any

subordinated notes and debentures that

comply with requirements of the bank’s

primary regulator for inclusion in the

bank’s capital structure and are reported

on the bank’s most recent consolidated

report of condition, and (iii) any

valuation reserves created by charges to

the bank’s income and reported on the

bank’s most recent consolidated report

of condition. 12 CFR 215.2(i).

The Office of the Comptroller of the

Currency (OCC) has recently revised its

regulatory definition of unimpaired

capital and unimpaired surplus for

purposes of implementing the single

borrower limit of the National Bank Act.

See 59 FR 8533, February 15, 1995.

Under that revised definition, a national

bank’s ‘‘capital and surplus’’ are equal

to Tier 1 and Tier 2 capital included in

the calculation of the bank’s risk-based

capital together with the amount of the

bank’s allowance for loan and lease

losses not included in this calculation.

12 CFR 32.2(b).

The Board is proposing to amend

Regulation O to conform its definition of

unimpaired capital and unimpaired

surplus to the OCC’s revised definition

of capital and surplus. In substantially

all cases, the Board believes that

calculating the insider lending limits of

Regulation O using the revised

definition would not significantly

increase or decrease a bank’s insider

lending limit. The elimination of the

separate definition of unimpaired

capital and unimpaired surplus in

Regulation O therefore is expected to

create minimal disruption in lending by

member banks to their insiders and to

insiders of their affiliates, while

eliminating duplication in the

calculation of lending limits for national

banks and for state member banks with

state lending limits identical to national

bank lending limits.

Initial Regulatory Flexibility Analysis

The Regulatory Flexibility Act (5

U.S.C. 601 et seq.) requires an agency to

publish an initial regulatory flexibility

analysis with any notice of proposed

rulemaking. Two of the requirements of

an initial regulatory flexibility analysis

(5 U.S.C. 603(b))—a description of the

reasons why the action by the agency is

being considered and a statement of the

objectives of, and legal basis for, the

proposed rule—are contained in the

supplementary information above.

Another requirement for the initial

regulatory flexibility analysis is a

description of, and where feasible, an

estimate of the number of small entities

to which the proposed rule will apply.

The proposed rule would apply to all

member banks, regardless of size. The

Board has determined that its proposed

rule would impose no additional

reporting or recordkeeping

requirements, and that there are no

relevant federal rules that duplicate,

overlap, or conflict with the proposed

rule. In addition, the proposed rule is

not expected to have a negative

economic impact on small institutions.

Instead, the proposed rule is expected to

relieve the regulatory burden on a large

majority of member banks.

Paperwork Reduction Act

In accordance with section 3507 of

the Paperwork Reduction Act of 1980

(44 U.S.C. 3507; 5 CFR 1320.13), the

Board will review its proposed

amendment to Regulation O under

authority delegated to the Board by the

Office of Management and Budget after

considering comments received during

the public comment period.

List of Subjects in 12 CFR Part 215

Credit, Federal Reserve System,

Penalties, Reporting and recordkeeping

requirements.

For the reasons set forth in the

preamble, the Board proposes to amend

12 CFR part 215 as set forth below:

PART 215—LOANS TO EXECUTIVE

OFFICERS, DIRECTORS, AND

PRINCIPAL SHAREHOLDERS OF

MEMBER BANKS (REGULATION O)

1. The authority citation for part 215

continues to read as follows:
19690 Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Proposed Rules

Authority: 12 U.S.C. 248(i), 375a(10), 375b

(9) and (10), 1817(k)(3) and 1972(2)(G)(ii);

Pub. L. 102–242, 105 Stat. 2236.

2. Section 215.2 is amended as

follows:

a. The last sentence of paragraph (i)

introductory text is revised;

b. Paragraphs (i)(1) and (i)(2) are

revised; and

c. Paragraph (i)(3) is removed.

The revisions read as follows:

§ 215.2 Definitions.

* * * * *

(i) * * * A member bank’s

unimpaired capital and unimpaired

surplus equals:

(1) A bank’s Tier 1 and Tier 2 capital

included in the bank’s risk-based capital

under the capital guidelines of the

appropriate Federal banking agency,

based on the bank’s most recent

consolidated report of condition filed

under 12 U.S.C. 1817(a)(3); and

(2) The balance of a bank’s allowance

for loan and lease losses not included in

the bank’s Tier 2 capital for purposes of

the calculation of risk-based capital by

the appropriate Federal banking agency,

based on the bank’s most recent

consolidated report of condition filed

under 12 U.S.C. 1817(a)(3).

* * * * *

By order of the Board of Governors of the

Federal Reserve System, April 14, 1995.

William W. Wiles,

Secretary of the Board.

[FR Doc. 95–9737 Filed 4–19–95; 8:45 am]

BILLING CODE 6210–01–P

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 701

Organization and Operations of

Federal Credit Unions

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Proposed rule.

SUMMARY: National Credit Union

Administration (NCUA) Rules and

Regulations prohibit officials and

certain employees of federally insured

credit unions from receiving either

incentive pay or outside compensation

for certain activities related to credit

union lending. The regulations are

ambiguous in places and have proved

difficult to interpret. Further, the

regulations may be too restrictive in

some instances and too broad in others.

The NCUA Board is proposing to amend

the regulations to make them clearer, to

authorize lending-related compensation

in certain situations where it is

currently prohibited, and to prohibit it

in other situations. If amended as

proposed, it should be easier for credit

unions to determine when incentives

may be paid and easier for officials and

employees to determine whether they

may accept compensation for outside

activities.

DATES: Comments must be postmarked

or posted on NCUA’s electronic bulletin

board by June 19, 1995.

ADDRESSES: Mail comments to Becky

Baker, Secretary of the Board, National

Credit Union Administration, 1775

Duke Street, Alexandria, VA 22314–

3428. Send comments to Ms. Baker via

the bulletin board by dialing 703–518–

6480.

FOR FURTHER INFORMATION CONTACT: Lisa

Henderson, Staff Attorney, (703) 518–

6561, at the above address.

SUPPLEMENTARY INFORMATION:

Background

Section 701.21(c)(8) of the NCUA

Rules and Regulations, 12 CFR

701.21(c)(8), prohibits federal credit

unions from making a loan if, either

directly or indirectly, any commission,

fee, or other compensation is to be

received by the credit union’s directors,

committee members, senior

management employees, loan officers,

or any immediate family members of

such individuals, in connection with

underwriting, insuring, servicing, or

collecting the loan. However, noncommission salary may be paid to

employees. As a condition of federal

insurance pursuant to Section 741.3(a)

of the Regulations, 12 CFR 741.3(a), the

prohibition applies to federally insured

state-chartered credit unions. The

purpose of Section 701.21(c)(8) is to

ensure that an individual who is in a

position of authority in a credit union

does not put self-interest ahead of the

credit union’s interest in making good

loans and providing good service to its

members. The provision prohibits

compensation from third parties and

from the credit union itself, in the form

of commissions, incentive pay, or

bonuses.

Under the current regulation, a ‘‘loan

officer’’ is an individual who has the

authority to approve a loan. A loan

officer may or may not be involved in

taking and processing loan applications.

‘‘Underwriting the loan’’ means

approving or disapproving it. Thus, an

individual who has any part in

approving a loan is prohibited for

receiving incentive pay in connection

with that loan. An individual who is

involved in processing a loan, but who

has no role in its approval or

disapproval, may receive incentive pay

in connection with the loan.

The prohibition against making a loan

if a commission or fee is to be received

by a loan officer in connection with

insuring the loan means, for example,

that the individual who has the

authority to approve a loan may not

receive an incentive for selling credit

life or disability insurance on it.

Noting that credit union management

had become increasingly interested in

implementing lending-related incentive

pay programs, the NCUA Board, on

March 9, 1994, issued a Request for

Comment on whether § 701.21(c)(8)

should be amended to permit loan

officers and/or senior management to

receive incentive pay for underwriting

and insuring loans, 59 FR 11937 (March

15, 1994). A total of 252 comments was

received, 177 of which expressed

support for allowing incentive pay for

loan officers. Most of the latter

suggested that incentive pay be

permitted only with controls in place.

A number of commenters described

the success their credit unions had had

with incentive programs involving

employees other than loan officers; they

argued that even greater benefits would

accrue from paying incentives to loan

officers. Most of these programs seem to

have been implemented in the past few

years, however, and some of the

information submitted to the Board

raises questions about whether they will

be successful in the long run.

For example, information submitted

by one commenter cites research which

has shown that incentive programs can

fail in the long term because employees

become preoccupied with meeting goals

and fail to carry out their normal

routines. When management sets a

specific goal, and offers a reward for

meeting it, work or problems that do not

relate to that goal are ignored.

Cooperative spirit between people often

diminishes because each has different

goals and becomes wrapped up in his or

her own work. Incentive pay can

actually work to undermine an

employee’s internal motivation to

perform well, as employees end up

working for the incentive rather than the

satisfaction of the work itself.

Employees can also be demoralized by

the underlying assumption that they are

not working hard and need incentives to

perform.

One credit union commenter learned

about the risks of incentive programs

the hard way. He reported that his credit

union’s incentive program for loan

officers was unsuccessful for the

following reasons: (1) Despite controls

being in place, some loan officers

exceed their authority in approving