[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:

------------------------------------------------------------------------
                                                                 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