[Federal Register Volume 59, Number 22 (Wednesday, February 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2297]
[[Page Unknown]]
[Federal Register: February 2, 1994]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. 93-145]
RIN 1550-AA49
Regulatory Capital: Intangible Assets
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of Thrift Supervision (OTS) is amending its risk-
based capital treatment of intangible assets held by savings
associations. These amendments implement section 475 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which
requires the OTS and each of the other federal banking regulators to
determine the amount of purchased mortgage servicing rights (PMSRs)
that insured depository institutions may include in capital. Section
475 also requires PMSRs to be included in capital at 90 percent of
market value, calculated at least quarterly. This rule defines
``qualifying intangible assets'' as PMSRs and purchased credit card
relationships (PCCRs). Such assets may be included in the aggregate in
core capital calculations up to 50 percent of core capital, provided
that PCCRs may not exceed a sublimit of 25 percent of core capital.
Savings associations may include the same dollar amount of PMSRs in
tangible capital that they include in core capital. These assets must
be valued at the lower of 90 percent of fair market value (in
accordance with section 475 of FDICIA) or 100 percent of remaining
unamortized book value computed in accordance with instructions to the
Thrift Financial Report. PMSRs and PCCRs in excess of applicable
limits, as well as core deposit intangibles (CDIs) and other types of
nonqualifying intangibles, must be deducted from both assets and
capital in calculating core and tangible capital.
EFFECTIVE DATE: March 4, 1994.
FOR FURTHER INFORMATION CONTACT: John F. Connolly, Program Manager,
Capital Policy, (202) 906-6465, Supervision Policy; Evelyne Bonhomme,
Counsel (Banking and Finance), (202) 906-7052, 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 and Description of Proposal
In April 1992, the OTS proposed to amend its capital treatment of
intangible assets. 57 FR 12761 (April 13, 1992). The public comment
period closed on May 13, 1992. The proposal was based on a tentative
agreement on the treatment of intangible assets reached by the OTS, the
Board of Governors of the Federal Reserve System (FRB), the Office of
the Comptroller of the Currency (OCC), and the Federal Deposit
Insurance Corporation (FDIC) (collectively with the OTS referred to as
the ``federal banking agencies'' or ``agencies'').
Previously, all of the agencies allowed PMSRs to count towards core
(Tier 1) capital calculations, with qualitative and quantitative limits
that varied among the agencies. Each agency had determined that PMSRs
generally met criteria comparable to those set forth in section
567.5(a)(2)(ii) of the OTS capital regulation, which provides that: (1)
The intangible asset must be able to be separated and sold apart from
the savings association or from the bulk of the association's assets;
(2) the market value of the intangible asset must be established on an
annual basis through an identifiable stream of cash flows, and there
must be a high degree of certainty that the asset will hold this market
value notwithstanding the future prospects of the savings association;
and (3) the savings association must demonstrate and document that a
market exists that will provide liquidity for the intangible asset.
The agencies differed on the extent to which other intangibles met
this three-part test and treated such assets differently in calculating
capital. The OTS policy, which is being modified with the adoption of
this rule, was that other identifiable intangible assets, specifically
CDIs, could satisfy the three-part test. The OTS did not require the
deduction of such other qualifying intangible assets from capital, but
limited them to 25 percent of core capital.
All the agencies limited the amount of qualifying intangibles that
institutions could include in capital.1 The FDIC and the OTS also
imposed certain PMSR valuation requirements and reduced the amount of
PMSRs reported on the balance sheet to the lesser of: (1) 90 percent of
fair market value; (2) 90 percent of original purchase price; or (3)
100 percent of remaining unamortized book value.
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\1\Before the enactment of section 475 of FDICIA, savings
associations' PMSR holdings were subject to quantitative limits set
by the FDIC, as well as by the qualitative standards of the FDIC and
OCC. Under the FDIC's PMSR rule, thrifts could include PMSRs up to
50 percent of core capital and 100 percent of tangible capital.
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The OTS proposed the following treatment for identifiable
intangible assets for purposes of the tangible, core, and risk-based
capital requirements:
1. PMSRs and PCCRs would be considered qualifying intangible
assets.2 As such, they would not be deducted from capital provided
that, in the aggregate, they did not exceed 50 percent of core capital
and provided that PCCRs did not exceed a sublimit of 25 percent of core
capital. Excess PMSRs and PCCRs would be deducted in determining core
capital.
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\2\In accordance with FIRREA and its statutorily specified
transition, savings associations are permitted to count qualifying
supervisory goodwill in core capital. The continued inclusion in
core capital of remaining qualifying supervisory goodwill is
unaffected by this rulemaking or the standards for PMSRs and PCCRs.
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To illustrate, assume that a savings association has total core
capital of $1,000,000. The association also has qualifying PCCRs of
$300,000 and qualifying PMSRs of $200,000. For capital computation
purposes, the association could include $250,000 of its PCCRs (25
percent of $1,000,000) and all $200,000 of its PMSRs because the total
of PMSRs and allowable PCCRs does not exceed 50 percent of core
capital.
2. Savings associations could include the same amount of PMSRs in
tangible capital that they include in core capital. Amounts excluded
from core capital must also be excluded from tangible capital.
3. PCCRs would be includable only in core capital, not tangible
capital.
4. The limits on PMSRs and PCCRs would be based on a percentage of
core capital before excess holdings of these assets are deducted, but
after nonqualifying identifiable intangible assets (i.e.,
nongrandfathered CDIs) are deducted.3
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\3\Remaining qualifying supervisory goodwill, grandfathered
CDIs, and grandfathered PMSRs are not deducted in calculating this
amount.
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5. Savings associations would be required to determine the fair
market value and to review the book value of their PMSRs and PCCRs at
least quarterly. Such assets could not be carried at a book value that
exceeds the discounted value of their future net income.
6. For purposes of calculating regulatory capital, the amount of
PMSRs and PCCRs reported as balance sheet assets would be reduced to
the lesser of 90 percent of their fair market value, 90 percent of
their original purchase price, or 100 percent of their remaining
unamortized book value.
7. Nongrandfathered CDIs and all identifiable intangible assets
other than qualifying intangible assets would be deducted from capital
in calculating core capital.
II. Summary of Comments and OTS Response
The OTS received twenty-seven comment letters on the proposed rule.
Commenters included eighteen savings associations, six trade
associations, a group of fifteen mortgage servicers, one commercial
bank, and one law firm. No comments addressed PCCRs. Comments focused
primarily on two areas: the treatment of PMSRs and the treatment of
CDIs. Issues raised by commenters are addressed below.
A. PMSR Treatment and Valuation
No commenters objected to the inclusion of PMSRs as qualifying
intangible assets.
1. Fifty Percent Capital Limitation
Some commenters objected to limiting qualifying intangibles to 50
percent of core capital. One suggested that less disruptive ways to
achieve the same goals exist such as substituting a case-by-case
supervisory approach to determine capital adequacy of depository
institutions holding PMSRs.
The OTS is adopting a 50 percent of core capital limit on PMSRs to
be consistent with the rules issued by the other federal banking
agencies.4 OTS capital rules are in the main patterned after those
of the other banking agencies, especially the OCC. The statute, as well
as sensible practice, dictates uniformity to the greatest extent
feasible.
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\4\See 58 FR 7973 (Feb. 11, 1993) (FRB); 58 FR 16481 (Mar. 29,
1993) (OCC); and 58 FR 6363 (Jan. 28, 1993) (FDIC).
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2. Annual Independent Market Valuation of PMSRs
Many commenters objected to an annual independent valuation of
PMSRs as excessively costly and unnecessarily burdensome when combined
with other limitations in the proposal, and suggested that the
requirement be eliminated. Many commenters noted that banks regulated
by the OCC and the FRB are not subject to this requirement. Some
commenters recommended establishing a minimum threshold below which OTS
would not require independent annual valuation of PMSRs. Other
commenters suggested that an independent valuation be required only
where an institution cannot produce a satisfactory internal valuation.
In response to these comments, the OTS is modifying Sec. 567.12(d)
to remove the independent valuation requirement. The OTS, however, will
reserve the right to require certain savings associations to obtain
independent valuations, either on a case-by-case basis or according to
general guidance issued in conjunction with the adoption of this rule.
3. PMSR Valuation Basis
Some commenters proposed that an association should be permitted to
calculate the discounted book value of qualifying intangibles on an
aggregate basis for the institution's total purchased servicing
portfolio rather than on a pool-by-pool basis. The OTS and the other
agencies will permit an institution to use either method. The
accounting practices otherwise required by this rule protect adequately
against potential abusive practices.
4. Discounting Approach
Some commenters stated that limiting PMSRs and PCCRs to 90 percent
of fair market value was arbitrary and that no other assets are subject
to such treatment. Two commenters argued that a constant discount rate
should be applied to book value, but not market value. One commenter
suggested using a case-by-case approach based on criteria such as
efficiency, effectiveness, and profitability.
Section 475 of FDICIA requires PMSRs included in capital to be
valued at no more than 90 percent of fair market value computed at
least quarterly. The agencies have chosen to apply the same limit to
PCCRs for consistency. The OTS and the other agencies never intended to
require institutions to use a constant discount rate in computing
market value. This rule, however, retains the proposed rule's
requirement that savings associations use a discounting approach in
calculating book value because the OTS believes that the nondiscounted
approach can result in inflated carrying values. The OTS has issued a
Thrift Bulletin regarding the valuation of PMSRs.5
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\5\See OTS Thrift Bulletin 60, June 23, 1993.
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5. Discount Rate
Some commenters believed that the proposed requirement to limit the
discount rate used in the quarterly PMSR valuation to a rate that is no
less than the discount rate used at the original acquisition of the
assets contradicts the concept of determining current market value. The
limitation on discount rate would only be used in calculating book
value. The agencies believe that requiring a discounting approach that
uses the discount rate embedded in the yield estimate at original
purchase is appropriate in calculating book value because it will deter
any overvaluation of the book value of PMSRs and is consistent with
historical cost accounting.
This final rule is consistent with the final rules of the other
agencies. These rules retain the requirement to use a discounting
approach but transfer the specific guidance on the applicable discount
rate and other valuation guidance to their Consolidated Reports of
Condition and Income (Call Reports).
The Thrift Financial Report will require PMSRs and PCCRs to be
carried at a book value that does not exceed the discounted amount of
estimated future net cash flows. Management of an association must
review the carrying value at least quarterly, adequately document this
review, and adjust the book value as necessary. If unanticipated
prepayments, defaults, account attrition, or other events reduce the
amount of expected future net cash flows, a write down of the book
value of the PMSRs or PCCRs must be made to the extent that the
discounted amount of future net cash flows is less than the assets'
carrying amounts. The discount rate used for this book value
calculation may not be less than the original discount rate inherent in
the intangible asset at the time of its acquisition based upon the
estimated net cash flows and the price paid at the time of purchase.
6. Valuation Limitation of 90 Percent of Original Cost
Some commenters recommended that the agencies drop the proposed
requirement that qualifying intangibles be carried at no more than 90
percent of their original purchase price. They argued that this
limitation provides no additional protection to the insurance fund from
economic risk and unfairly penalizes institutions with recently
acquired PMSRs or PCCRs. The agencies agree and believe that the other
valuation limitations should ensure that qualifying intangibles are
conservatively valued for capital purposes. Accordingly, the 90 percent
of original cost limitation has been removed.
7. OTS Transition Provision for PMSRs
The proposed transition provision would permit grandfathered PMSRs
that ``run-off'' to be replaced without loss of grandfathered status if
certain criteria are satisfied. Many commenters agreed with the
proposed transition provisions for PMSRs. Several commenters
recommended that the grandfathering provisions become effective as of
January 28, 1991 (the effective date of the FDIC's PMSR rule, 12 CFR
325.5) rather than February 9, 1990 (the date of publication of the
FDIC PMSR proposal for that rule) or on the effective date of this
regulation. One commenter suggested that the OTS consider allowing
large servicers to replace PMSR run-offs to minimize economic loss to
institutions from depletion of assets.
The final rule retains the February 9, 1990, grandfathering date.
This grandfathering date was used in the FDIC's PMSR rule, which was
applicable to both savings associations and state nonmember banks until
the enactment of section 475 in FDICIA. The OTS believes that no
distinction between large and small servicers is warranted. The OTS
has, however, retained the discretion to extend, on a case-by-case
basis, grandfathered treatment to all or some of an association's newly
acquired PMSRs if purchased to replace grandfathered PMSRs that have
prepaid or otherwise run off. This approach is designed to mitigate
harm to associations from precipitous drops in the level of their PMSR
portfolios. Because mortgage servicing is a business that has
relatively high fixed costs, its profitability is highly sensitive to
achieving and maintaining a certain volume of servicing. This
transition treatment will only be available if the OTS determines that:
(1) The association is phasing down PMSRs as a percentage of capital at
an acceptable rate, and (2) such treatment would be consistent with the
association's safe and sound operation.
B. CDI Treatment and Grandfathering
The OTS has previously allowed certain CDIs to be included in
assets and capital provided that they are conservatively valued and
meet the three-part test articulated in section 567.5(a)(2)(ii). The
OTS is concerned that excluding all CDIs from capital might impose an
artificial regulatory barrier to sound mergers and acquisitions. The
proposed uniform interagency proposal specifically excluded CDIs from
qualifying intangible assets.
Eleven commenters objected to the proposed treatment of CDIs and
argued that CDIs should be treated as qualifying intangible assets. One
commenter urged the OTS to apply the three-part test to CDIs, with
periodic reviews of CDIs and continuous evaluations of CDI
amortization. Another commenter proposed that the set of qualifying
intangibles be expanded to include CDIs, and that CDIs and PCCRs be
subjected to the sublimit of 25 percent of core capital, and that CDIs
should only be deducted from capital for undercapitalized institutions.
One commenter questioned the inclusion of the three-part test in the
regulation if PMSRs and PCCRs are the only acceptable qualifying
intangibles. Another commenter recommended that CDIs existing at the
time the proposal is finalized be grandfathered as a component of core
capital.
To minimize confusion, all the banking agencies agreed to delete
the three-part test from their capital regulations and guidelines.
Although the three criteria are no longer part of the agencies'
regulations and guidelines, they may be used in the future to determine
whether other intangibles should be added to the definition of
qualifying intangible assets.
In the interest of interagency uniformity, the OTS is changing its
current policy on CDIs and will henceforth no longer treat CDIs as
qualifying intangibles. The OTS is also rescinding Thrift Bulletin No.
38-1 regarding CDIs.
The OTS, however, will grandfather CDIs that result from prior
transactions or that will arise from transactions that are under firm
contract as of the effective date of this rule. Nongrandfathered CDIs
shall be deducted from assets and capital in computing core capital. No
CDIs or PCCRs are included in tangible capital.
Some commenters suggested that CDIs should not be subject to the
requirements for annual and quarterly market valuations, quarterly
determinations of book value, and value limitations set forth in 12 CFR
567.12(d), (e), and (f), respectively. They also said that these assets
should be recorded in accordance with GAAP. In response to those
comments, the OTS is modifying its treatment of grandfathered CDIs to
require associations to apply GAAP. The OTS, however, will require
associations to use credible and supportable assumptions in applying
GAAP to CDIs not deducted from assets and capital. Valuing CDIs depends
upon assumptions regarding interest rates for alternative funding,
costs other than interest associated with the core deposit base, the
decay rate for an acquired customer base, and a discount rate. The
amortization rate should be adjusted each year for changes in
experienced and expected decay in the acquired customer base.
Typically, the decay rate in the customer base is greater in the early
years. The OTS may restrict an association's inclusion of grandfathered
CDIs in capital if the OTS determines that the association is not using
prudent valuation assumptions.
III. Description of Final Rule
The final rule makes some significant changes from the proposal,
but follows the same general framework set forth in the proposal and
the previous FDIC rule. PMSRs and PCCRs will be considered qualifying
intangible assets and included in the aggregate in core capital up to
50 percent of core capital, provided that PCCRs may not exceed 25
percent of core capital. Associations may include the same amount of
PMSRs in tangible capital that they include in core capital. The
valuation requirements of this rule apply to PMSRs and PCCRs to be
included in assets and not deducted from capital.
The major differences between the final rule and the proposal,
then, are: (1) The deletion from section 567.5(a)(2)(ii) of the three
criteria used to determine whether an intangible asset qualifies for
inclusion in core capital; (2) the reservation by the OTS of the
authority to require an independent market valuation of PMSRs and PCCRs
on a case-by-case basis or by the issuance of separate policy guidance;
(3) the transfer of the requirements imposed in conducting the book
value test from this rule to the Thrift Financial Report; and (4) the
elimination of the 90 percent of original cost limitation for purposes
of calculating capital.
IV. Regulatory Flexibility Act
Pursuant to the requirements of the Regulatory Flexibility Act, 5
U.S.C. 605(b), it is hereby certified that this rule will not have a
significant or disproportionate economic impact on a substantial number
of small savings associations. Furthermore, this rule will not impose
any new recordkeeping or other requirements on any associations. It
generally will retain the current treatment of thrifts' PMSRs and will
allow PCCRs to be counted in thrifts' core capital. Accordingly, a
Regulatory Flexibility Act analysis is not required.
V. Executive Order 12866
The Director of the OTS has determined that this rule is not a
``significant regulatory action'' for purposes of Executive Order
12866.
List of Subjects in 12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Savings
associations.
Accordingly, the Office of Thrift Supervision amends part 567,
subchapter D, title 12 of the Code of Federal Regulations as follows:
SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS
PART 567--CAPITAL
1. The authority citation for part 567 is revised to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
2. Section 567.5 is amended by revising paragraphs (a)(2)(i) and
(a)(2)(ii), and by removing and reserving paragraph (a)(2)(iii) to read
as follows:
Sec. 567.5 Components of capital.
(a) * * *
(2) Deductions from core capital: (i) Intangible assets are
deducted from assets for purposes of determining core capital except as
provided in paragraph (a)(2)(ii) of this section and Sec. 567.12 of
this part.
(ii) Paragraph (a)(2)(i) of this section does not apply to
qualifying supervisory goodwill held by an eligible savings association
(as defined in Sec. 567.1(h) of this part) to the extent permitted by
this paragraph. The amount of qualifying supervisory goodwill may not
exceed the applicable percentage of adjusted total assets as calculated
for the tangible capital requirement set forth in the following table:
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Percent
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Jan. 1, 1993--Dec. 31, 1993................................... 0.750
Jan. 1, 1994--Dec. 31, 1994................................... 0.375
Thereafter.................................................... 0
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(iii) [Reserved]
* * * * *
3. Section 567.6 is amended by revising paragraph (a)(1)(iv)(L) to
read as follows:
Sec. 567.6 Risk-based capital credit risk weight categories.
(a) * * *
(1) * * *
(iv) * * *
(L) Any intangible assets not deducted from capital pursuant to
Sec. 567.5(a)(2) of this part;
* * * * *
4. Section 567.9 is amended by revising paragraph (c)(1) to read as
follows:
Sec. 567.9 Tangible capital requirement.
* * * * *
(c) * * *
(1) Any intangible assets, except certain purchased mortgage
servicing rights as provided in Sec. 567.12 of this part.
* * * * *
5. A new Sec. 567.12 is added to read as follows:
Sec. 567.12 Qualifying intangible assets.
(a) Scope. This section prescribes the maximum amount of qualifying
intangible assets that savings associations may include in calculating
tangible and core capital.
(b) Definition. Qualifying intangible assets means purchased
mortgage servicing rights and purchased credit card relationships.
Purchased mortgage servicing rights may be included in (that is, not
deducted from) tangible and core capital calculations and purchased
credit card relationships may be included in core capital calculations.
These assets may be included in capital only to the extent they meet
the limitations and restrictions set forth in this section. Other
identifiable intangible assets, including core deposit intangibles not
grandfathered pursuant to paragraph (g)(3) of this section, must be
deducted from assets and capital, except as provided by
Sec. 567.5(a)(2)(ii) of this part.
(c) Market valuations. The OTS reserves the authority to require
any savings association to perform an independent market valuation of
qualifying intangible assets 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 market value of the qualifying intangibles
by applying an appropriate market discount rate to the net cash flows
expected to be generated from the intangibles. 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 market
value for the qualifying intangibles 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), each
qualifying intangible asset must be valued at the lesser of:
(1) 90 percent of the fair market value of the intangible assets
determined in accordance with paragraph (c) of this section; or
(2) 100 percent of the remaining unamortized book value of the
intangible assets determined in accordance with the instructions in the
Thrift Financial Report.
(e) Core capital limitation--(1) Aggregate limit. The maximum
aggregate amount of qualifying intangible assets that may be included
in core capital shall be limited to the lesser of:
(i) 50 percent of the amount of core capital computed before the
deduction of any disallowed qualifying intangible assets; or
(ii) The amount of qualifying intangible assets determined in
accordance with paragraph (d) of this section.
(2) Sublimit for purchased credit card relationships. In addition
to the aggregate limitation on qualifying intangible assets set forth
in paragraph (e)(1) of this section, a sublimit shall apply to
purchased credit card relationships. The maximum allowable amount of
purchased credit card relationships shall be limited to the lesser of:
(i) 25 percent of the amount of core capital, as computed before
the deduction of any disallowed qualifying intangible assets; or
(ii) The amount of qualifying intangible assets determined in
accordance with paragraph (d) of this section.
(f) Tangible capital limitation. The maximum amount of purchased
mortgage servicing rights 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.
(g) Grandfathering. (1) Notwithstanding the core capital and
tangible capital limitations set forth in paragraphs (e) and (f) of
this section, any otherwise disallowed purchased mortgage servicing
rights that were acquired on or before February 9, 1990, and any
otherwise disallowed purchased mortgage servicing rights for which a
contract to purchase the servicing rights had been executed on or
before February 9, 1990, may be grandfathered and recognized for
regulatory capital purposes under this part to the extent permitted by
the OTS. Grandfathered purchased mortgage servicing rights must be
treated in accordance with generally accepted accounting principles and
the requirements of paragraphs (c) and (d) of this section.
Grandfathered purchased mortgage servicing rights will count toward the
core capital and tangible capital limitations described in paragraphs
(e) and (f) of this section.
(2) (i) On a case-by-case basis, the OTS may extend grandfathered
treatment prospectively to all or part of the purchased mortgage
servicing rights acquired by an association to replace its
grandfathered purchased mortgage servicing rights if OTS determines
that:
(A) The association is reducing, at an acceptable rate, its level
of purchased mortgage servicing rights to the levels permitted by this
section; and
(B) The granting of such grandfathered treatment is consistent with
the safe and sound operation of the association.
(ii) The OTS may terminate or limit such grandfathered treatment at
any time if it determines that either of the conditions in paragraph
(g)(2)(i) of this section is not being satisfied.
(3) Core deposit intangibles resulting from transactions
consummated or under firm contract on the effective date of this rule
may be grandfathered and recognized for capital purposes under this
part, to the extent permitted by OTS, provided that such core deposit
intangibles are valued in accordance with generally accepted accounting
principles, supported by credible assumptions, and have their
amortization adjusted at least annually to reflect decay rates (past
and projected) in the acquired customer base.
(h) Exemption for certain subsidiaries.--(1) Exemption standard. An
association holding purchased mortgage servicing rights in separately
capitalized, nonincludable subsidiaries may submit an application for
approval by the OTS for an exemption from the deductions and
limitations set forth in this section. The deductions and limitations
will apply to such purchased mortgage servicing rights, however, if the
OTS determines that:
(i) The thrift and subsidiary are not conducting activities on an
arm's length basis; or
(ii) The exemption is not consistent with the association's safe
and sound operation.
(2) Applicable requirements. If the OTS determines to grant or to
permit the continuation of an exemption under paragraph (h)(1) of this
section, the association receiving the exemption must ensure the
following:
(i) The association's investments in, and extensions of credit to,
the subsidiary are deducted from capital when calculating capital under
this part;
(ii) Extensions of credit and other transactions with the
subsidiary are conducted in compliance with the rules for covered
transactions with affiliates set forth in sections 23A and 23B of the
Federal Reserve Act, as applied to thrifts; and
(iii) Any contracts entered into by the subsidiary include a
written disclosure indicating that the subsidiary is not a bank or
savings association; the subsidiary is an organization separate and
apart from any bank or savings association; and the obligations of the
subsidiary are not backed or guaranteed by any bank or savings
association and are not insured by the FDIC.
Dated: August 2, 1993.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-2297 Filed 2-1-94; 8:45 am]
BILLING CODE 6720-01-P