[Federal Register Volume 60, Number 147 (Tuesday, August 1, 1995)]
[Rules and Regulations]
[Pages 39226-39233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18772]




[[Page 39225]]

_______________________________________________________________________

Part IV

Department of the Treasury
Office of the Comptroller of the Currency

Federal Reserve System

Federal Deposit Insurance Corporation

Department of the Treasury
Office of Thrift Supervision
_______________________________________________________________________



12 CFR Part 3, et al.



Capital; Risk-Based Capital Guidelines; Capital Adequacy Guidelines; 
Capital Maintenance; Final Rule

  Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules 
and Regulations   

[[Page 39226]]


DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 3 and 6

[Docket No. 95-18]
RIN 1557-AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Docket No. R-0887]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AB61

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 565 and 567

[Docket No. 95-140]
RIN 1550-AA84


Capital; Risk-Based Capital Guidelines; Capital Adequacy 
Guidelines; Capital Maintenance

AGENCIES: Office of the Comptroller of the Currency (OCC), Department 
of the Treasury; Board of Governors of the Federal Reserve System 
(FRB); Federal Deposit Insurance Corporation (FDIC); Office of Thrift 
Supervision (OTS), Department of the Treasury.

ACTION: Joint interim rule with request for comments.

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SUMMARY: The OCC, FRB, FDIC, and OTS (the Agencies) are amending their 
capital adequacy standards for banks, bank holding companies, and 
savings associations (banking organizations) to treat originated 
mortgage servicing rights (OMSRs) the same as purchased mortgage 
servicing rights (PMSRs) for regulatory capital purposes. The interim 
capital rule was developed in response to the Financial Accounting 
Standards Board's issuance of Statement No. 122, ``Accounting for 
Mortgage Servicing Rights,'' which eliminates the accounting 
distinction between OMSRs and PMSRs by requiring OMSRs to be 
capitalized as balance sheet assets, a treatment previously required 
only for PMSRs. Under the interim rule, both OMSRs and PMSRs are 
``included in'' (i.e., not deducted from) regulatory capital when 
determining Tier 1 (core) capital for purposes of the Agencies' risk-
based and leverage capital standards, and when calculating tangible 
equity for purposes of prompt corrective action, subject to the 
regulatory capital limitations that previously applied only to PMSRs. 
Thus, the effect of the interim rule is to permit OMSRs in regulatory 
capital, subject to certain limitations.

DATES: The interim rule is effective August 1, 1995. Comments must be 
received by October 2, 1995.

ADDRESSES: Commenters should respond to their primary federal 
regulator. All comments will be shared among all of the Agencies.
    OCC: Written comments should be submitted to Docket No. 95-18, 
Communications Division, Ninth Floor, Office of the Comptroller of the 
Currency, 250 E Street SW., Washington, DC 20219, Attention: Karen 
Carter. Comments will be available for inspection and photocopying at 
that address.
    FRB: Comments should refer to Docket No. R-0887, 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 received will 
be available for inspection in Room MP-500 of the Martin Building 
between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR 
261.8 of the Board's rules regarding availability of information.
    FDIC: Written comments shall be addressed to Office of the 
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429. Comments may be hand delivered to 
Room F-402, 1776 F Street NW., Washington, DC 20429, on business days 
between 8:30 a.m. and 5:00 p.m. (Fax number: (202) 898-3838; Internet 
address: [email protected]) Comments will be available for inspection 
at the FDIC's Reading Room, Room 7118, 550 17th Street NW., Washington, 
DC, between 9:00 a.m. and 4:30 p.m. on business days.
    OTS: Send comments to Chief, Dissemination Branch, Records 
Management and Information Policy, Office of Thrift Supervision, 1700 G 
Street, N.W., Washington, D.C. 20552, Attention Docket No. 95-140. 
These submissions may be hand-delivered to 1700 G Street, N.W. between 
9 a.m. and 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, N.W., from 1:00 p.m. until 4:00 p.m. 
on business days.

FOR FURTHER INFORMATION CONTACT: OCC: Christine A. Smith, Esq., 
Professional Accounting Fellow, (202/874-5180), Roger Tufts, Senior 
Economic Advisor, (202/874-5070), Office of the Chief National Bank 
Examiner; Mitchell Stengel, Financial Economist, (202/874-5431), Risk 
Analysis Division; Ronald Shimabukuro, Senior Attorney, or P. Moni 
SenGupta, Attorney, (202/874-5090), Legislative and Regulatory 
Activities Division, Washington, D.C. 20219.
    FRB: Arthur W. Lindo, Supervisory Financial Analyst, (202/452-2695) 
or Thomas R. Boemio, Supervisory Financial Analyst, (202/452-2982), 
Division of Banking Supervision and Regulation. For the hearing 
impaired only, Telecommunication Device for the Deaf (TDD), Dorothea 
Thompson (202) 452-3544, Board of Governors of the Federal Reserve 
System, 20th and C Streets, N.W., Washington, D.C. 20551.
    FDIC: For supervisory issues, Stephen G. Pfeifer, Examination 
Specialist, (202/898-8904), Accounting Section, Division of 
Supervision; for legal issues, Jules E. Bernard, Counsel, (202/898-
3731), Legal Division.
    OTS: John F. Connolly, Senior Program Manager for Capital Policy, 
(202/906-6465), or Timothy J. Stier, Assistant Chief Accountant, (202/
906-5699), Supervision; Deborah Dakin, Assistant Chief Counsel, (202/
906-6445), Regulations and Legislation Division, Office of the Chief 
Counsel, Office of Thrift Supervision, 1700 G Street, N.W., Washington, 
D.C. 20552.

SUPPLEMENTARY INFORMATION:

Background

     Mortgage servicing rights are the contractual obligations 
undertaken by an institution to provide servicing for mortgage loans 
owned by others, typically for a fee. Originated mortgage servicing 
rights (OMSRs) generally represent the servicing rights acquired when 
an institution originates mortgage loans and subsequently sells the 
loans but retains the servicing rights. Purchased mortgage servicing 
rights (PMSRs) are mortgage servicing rights that have been purchased 
from other parties.
    In May 1995, the Financial Accounting Standards Board (FASB) issued 
Statement of Financial Accounting Standards No. 122 (FAS 122), 
``Accounting for Mortgage Servicing Rights.'' FAS 122 eliminates the 
accounting distinction between 

[[Page 39227]]
OMSRs and PMSRs and the need for companies engaged in mortgage banking 
to sell OMSRs in order to realize their value for financial statement 
purposes. FAS 122 specifies that capitalized mortgage servicing rights 
are to be treated as a single type of asset, regardless of how these 
rights were acquired. As a result, upon an institution's adoption of 
FAS 122, both OMSRs and PMSRs must be capitalized as balance sheet 
assets, a treatment previously permitted only for PMSRs. Both types of 
mortgage servicing rights may be reported in the same balance sheet 
asset category. Thus, on a prospective basis, under generally accepted 
accounting principles (GAAP), there generally will no longer be any 
significant accounting distinction between OMSRs and PMSRs for 
reporting, valuation, or disclosure purposes.
    Prior to the issuance of FAS 122, GAAP referred to PMSRs as 
intangible assets. FAS 122 eliminates the reference to PMSRs as 
intangible assets but does not characterize mortgage servicing rights 
as either intangible or tangible assets. FAS 122 indicates that no 
characterization of mortgage servicing rights as either intangible or 
tangible assets is necessary because similar characterizations are not 
made for most other assets. However, FAS 122 also indicates that the 
elimination of the intangible asset reference does not imply that 
mortgage servicing rights are tangible assets.
    FAS 122 requires that mortgage servicing rights be considered 
impaired whenever their fair value is less than their amortized cost. A 
valuation allowance is required for the amount of any impairment, which 
must be measured by stratifying mortgage servicing rights based on one 
or more of the predominant risk characteristics of the underlying 
loans. These characteristics may include loan type, size, note rate, 
date of origination, term and geographic location.
     FAS 122 is effective for financial statements prepared in 
accordance with GAAP for fiscal years beginning after December 15, 
1995, although FASB encourages earlier application. On June 21, 1995, 
the Federal Financial Institutions Examination Council (FFIEC) 
announced that banks must adopt FAS 122 for purposes of the Reports of 
Condition and Income (Call Report) as of the same effective date and 
with earlier application permitted to the extent allowable in this 
accounting standard. The OTS requires savings associations to follow 
GAAP for regulatory reporting and, thus, FAS 122's effective date 
provisions are also applicable for Thrift Financial Report 
purposes.1

    \1\Commercial banks are required to file quarterly Consolidated 
Reports of Condition and Income (Call Reports) and should report 
OMSRs and PMSRs in Schedule RC-M (Memoranda), item 6.a., ``Mortgage 
servicing rights'' and in Schedule RC (Balance Sheet), item 10, 
``Intangible assets.'' Bank holding companies with total 
consolidated assets of $150 million or more file quarterly 
Consolidated Financial Statements for Bank Holding Companies (FR Y-
9C reports) with the Federal Reserve, and should report OMSRs and 
PMSRs in Schedule HC--Consolidated Balance Sheet, item 10.a., 
``Mortgage servicing rights.'' Savings Associations are required to 
file quarterly Thrift Financial Reports and should report 
capitalized OMSRs and PMSRs on Thrift Financial Report Schedule SC, 
line 640, which is currently labeled ``purchased loan servicing 
rights.''
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Interim Amendments to the Capital Adequacy Guidelines

    Banking organizations adopting FAS 122 early could reflect OMSRs on 
their regulatory reports as soon as June 30, 1995.2 In view of 
this implementation schedule, the Agencies are now adopting an interim 
rule that is effective immediately in order to give banking 
organizations that adopt FAS 122 early direction on the regulatory 
capital treatment of OMSRs.

    \2\Banking organizations that do not adopt FAS 122 early may not 
capitalize OMSRs in 1995 and would not reflect the asset on their 
regulatory reports. In the interim, such institutions should 
continue to report PMSRs in accordance with the existing Call Report 
and Thrift Financial Report instructions until they adopt FAS 122 in 
1996.
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    Under the interim rule, for risk-based and leverage capital 
purposes, mortgage servicing rights, including both PMSRs and 
OMSRs3, and purchased credit card relationships (PCCRs) may be 
included in capital only to the extent that, in the aggregate, they do 
not exceed 50 percent of Tier 1 (core) capital.4 For purposes of 
calculating Tier 1 (core) capital, all mortgage servicing rights are 
valued--as PMSRs previously were--at the lesser of 90 percent of fair 
market value or 100 percent of their book value (net of any valuation 
allowance). In addition, under the interim rule, the amount of mortgage 
servicing rights that may be included in tangible equity for purposes 
of prompt corrective action is the same as that permitted in Tier 1 
(core) capital.

    \3\Due to the 50 percent of Tier 1 (core) capital limitation, it 
is possible that at least some of the OMSRs an institution reports 
as balance sheet assets for Call Report and Thrift Financial Report 
purposes may be required to be deducted in computing regulatory 
capital under this interim rule. For purposes of determining the 
amount of any OMSRs that would be deducted (or disallowed) under 
this 50 percent of Tier 1 (core) capital limitation, institutions 
may choose to reduce their otherwise disallowed OMSRs by the amount 
of any associated deferred tax liability. Any such deferred tax 
liability used in this manner would not be available for the 
institution to use in determining the amount of any net deferred tax 
assets that may be included in Tier 1 (core) capital for risk-based 
and leverage capital purposes.
    \4\The 25 percent of Tier 1 (core) capital sublimit on PCCRs is 
not affected by this rulemaking. In addition, all other intangible 
assets continue to be fully deducted from capital.
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    The Agencies are adopting this interim rule because they believe 
that the risk characteristics of OMSRs are similar to those of PMSRs. 
In view of the subjectivity and uncertainty surrounding the valuation 
of PMSRs and the consequent risks resulting from a high concentration 
of these assets, the Agencies previously decided to limit the amount of 
PMSRs that an institution could include in regulatory capital. 
Therefore, the Agencies believe that it is consistent to limit OMSRs in 
the same manner as PMSRs, pending a review of the comments received on 
this interim rule and the Agencies' resulting determination of the 
appropriate capital treatment of mortgage servicing rights. This 
interim capital rule is consistent with the recommendations provided on 
June 21, 1995, to the Agencies by the FFIEC's Task Force on 
Supervision.
    The Agencies are seeking comment on all aspects of this interim 
rule. The Agencies also request specific comment on the following:
    (1) For regulatory capital purposes, the Agencies have considered 
PMSRs as intangible assets. This determination was based, in part, on 
the prior GAAP characterization of this asset. FAS 122 indicates 
indifference toward any characterization of mortgage servicing rights 
(both PMSRs and OMSRs) as intangible or tangible assets.
    (a) Should mortgage servicing rights be viewed as intangible assets 
for regulatory capital purposes?
    (b) If mortgage servicing rights are considered to be intangible 
assets for regulatory capital purposes, should they continue to be 
subject to the regulatory capital limitations previously applied only 
to PMSRs?
    (c) If mortgage servicing rights are considered to be tangible 
assets for regulatory capital purposes, what regulatory capital 
limitations, if any, should apply?
    (2) How should any deferred tax liability associated with PMSRs and 
OMSRs be treated when calculating a regulatory capital limit?
    (3) When an institution originates mortgage loans and swaps them 
for mortgage-backed securities, including agency guaranteed mortgage-
backed securities, FAS 122 requires the institution to attribute a 
separate cost basis to the loan and servicing right components of such 
mortgage-backed securities. What is the appropriate regulatory capital 
treatment of mortgage servicing rights that are associated with 
mortgage-backed securities that are 

[[Page 39228]]
acquired in swap transactions and included in an institution's assets?

Regulatory Flexibility Act Analysis

     The Agencies do not believe that the adoption of their interim 
rule will have a significant economic impact on a substantial number of 
small business entities (in this case, small banking organizations), in 
accordance with the spirit and purposes of the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.). Because of the pre-FAS 122 accounting 
treatment of OMSRs, no banking organizations--large or small--currently 
carry any OMSRs, which are the subject of the interim rule, as assets 
on their balance sheets or include them in capital. The Agencies' 
interim rule, in combination with the requirement that institutions 
adopt FAS 122 for regulatory reporting purposes, allows banking 
organizations to increase their regulatory capital by including OMSRs 
in assets and Tier 1 (core) capital. This interim rule would only 
affect those banking organizations that originate and subsequently sell 
or securitize mortgage loans but retain the servicing rights. In 
addition, FAS 122 is to be applied prospectively. As a result, OMSRs 
will only need to be capitalized for those transactions that occur 
after the date as of which an institution adopts FAS 122. Moreover, 
because the risk-based and leverage capital guidelines generally do not 
apply to bank holding companies with consolidated assets of less than 
$150 million, this proposal will not affect such companies.

OCC and OTS Executive Order 12866 Statement

     The Comptroller of the Currency and the Director of the OTS have 
determined that the interim rule described in this notice is not a 
significant regulatory action under Executive Order 12866. Accordingly, 
a regulatory impact analysis is not required.

Paperwork Reduction Act and Regulatory Burden

     The Agencies have determined that this interim rule will not 
increase the regulatory paperwork burden of banking organizations 
pursuant to the provisions of the Paperwork Reduction Act (44 U.S.C. 
3501 et seq.).
     Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) provides that 
the federal banking agencies must consider the administrative burdens 
and benefits of any new regulation that imposes additional requirements 
on insured depository institutions. The Agencies have found that their 
interim rule does not impose any additional reporting or recordkeeping 
burdens. Section 302 also requires such a rule to take effect on the 
first day of the calendar quarter following final publication of the 
rule, unless the agency, for good cause, determines an earlier 
effective date is appropriate. The Agencies have decided that their 
interim rule should be effective immediately because it provides 
institutions with information on the regulatory capital treatment for 
OMSRs that may begin to be reported on the June 30, 1995 Call Report 
and Thrift Financial Report.

Administrative Procedure Act

     Pursuant to section 553 of the Administrative Procedure Act, 5 
U.S.C. 553, the Agencies find good cause for issuing this interim rule 
in advance of the receipt of comments from interested parties and for 
waiving the 30-day delay of effectiveness provisions of the 
Administrative Procedures Act. This ``good cause'' determination is 
based upon institutions' immediate need to know how to treat OMSRs in 
computing regulatory capital. This guidance is necessary because the 
Financial Accounting Standards Board, on May 12, 1995, revised the 
treatment of OMSRs under generally accepted accounting principles by 
adopting Statement of Financial Accounting Standard No. 122 (FAS 122), 
``Accounting for Mortgage Servicing Rights,'' which institutions may 
adopt beginning in reports prepared as of June 30, 1995. Under FAS 122, 
OMSRs will be capitalized and included in assets with corresponding 
increases to an institution's capital base. Prior to the issuance of 
FAS 122, OMSRs were not capitalized and not recorded on the balance 
sheet. This interim rule allows institutions that early adopt FAS 122 
in their June 30, 1995, regulatory reports to include OMSRs in assets 
and regulatory capital, subject to certain limitations.

OCC and OTS Unfunded Mandates Act Statement

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act) (signed into law on March 22, 1995) 
requires that an agency prepare a budgetary impact statement before 
promulgating a rule that includes a Federal mandate that may result in 
expenditure by State, local and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more in any one year. If a 
budgetary impact statement is required, section 205 of the Unfunded 
Mandates Act also requires an agency to identify and consider a 
reasonable number of regulatory alternatives before promulgating a 
rule. As discussed in the preamble, this interim rule, in conjunction 
with FAS 122, permits OMSRs to be capitalized as balance sheet items, a 
treatment that was previously only permitted for PMSRs. Under the 
interim rule, OMSRs will be included in calculating Tier 1 (core) 
capital for risk-based capital and leverage capital standards subject 
to the same constraints that are imposed on PMSRs. Thus, no additional 
cost of $100 million or more, to State, local, or tribal governments or 
to the private sector will result from this rule. Accordingly, the OCC 
and the OTS have not prepared a budgetary impact statement nor 
specifically addressed any regulatory alternatives.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital, National banks, 
Reporting and recordkeeping requirements, Risk.

12 CFR Part 6

    Capital, National banks.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Flood insurance, 
Mortgages, Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.
12 CFR Part 325

    Bank deposit insurance, Banks, banking, Capital adequacy, Reporting 
and recordkeeping requirements, Savings associations, State nonmember 
banks.

12 CFR Part 565

    Administrative practice and procedure, Capital, Savings 
associations.

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings 
associations.

Authority and Issuance

Office of the Comptroller of the Currency

12 CFR Chapter I

    For the reasons set out in the joint preamble, the Office of the 
Comptroller 

[[Page 39229]]
of the Currency amends 12 CFR chapter I as set forth below.

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    1. The authority citation for part 3 continues to read as follows:

    Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n 
note, 1835, 3907, and 3909.

    2. In part 3, paragraph (c)(2) of Sec. 3.100 is revised to read as 
follows:


Sec. 3.100  Capital and surplus.

* * * * *
    (c) * * *
    (2) Mortgage servicing rights;
* * * * *
    3. In appendix A to part 3, paragraph (c)(13) of section 1 is 
revised to read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

Section 1. Purpose, Applicability of Guidelines, and Definitions

* * * * *
    (c) * * *
    (13) Intangible assets include mortgage servicing rights, 
purchased credit card relationships (servicing rights), goodwill, 
favorable leaseholds, and core deposit value.
* * * * *
    4. In appendix A to part 3, paragraphs (c) introductory text, 
(c)(1), and (c)(3) of section 2 are revised to read as follows:
* * * * *

Section 2. Components of Capital

* * * * *
    (c) Deductions From Capital. The following items are deducted 
from the appropriate portion of a national bank's capital base when 
calculating its risk-based capital ratio:

    \6\[Reserved].
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    (1) Deductions from Tier 1 capital. The following items are 
deducted from Tier 1 capital before the Tier 2 portion of the 
calculation is made:
    (i) All goodwill subject to the transition rules contained in 
section 4(a)(1)(ii) of this appendix A;
    (ii) Other intangible assets, except as provided in section 
2(c)(2) of this appendix A; and
    (iii) Deferred tax assets, except as provided in section 2(c)(3) 
of this appendix A, that are dependent upon future taxable income, 
which exceed the lesser of either:
    (A) The amount of deferred tax assets that the bank could 
reasonably expect to realize within one year of the quarter-end Call 
Report, based on its estimate of future taxable income for that 
year; or
    (B) 10% of Tier 1 capital, net of goodwill and all intangible 
assets other than mortgage servicing rights and purchased credit 
card relationships, and before any disallowed deferred tax assets 
are deducted.
    (2) Qualifying intangible assets. Subject to the following 
conditions, mortgage servicing rights (originated and purchased) and 
purchased credit card relationships need not be deducted from Tier 1 
capital:
    (i) The total of all intangible assets which are included in 
Tier 1 capital is limited to 50 percent of Tier 1 capital, of which 
no more than 25 percent of Tier 1 capital can consist of purchased 
credit card relationships. Calculation of these limitations must be 
based on Tier 1 capital net of goodwill and other disallowed 
intangible assets.
    (ii) Each intangible asset which is included in Tier 1 capital 
must be valued at the lesser of:
    (A) 90 percent of the fair market value of the intangible asset, 
determined in accordance with section 2(c)(2)(iii) of this appendix 
A; or
    (B) 100 percent of the remaining unamortized book value of the 
intangible asset, determined at least quarterly in accordance with 
the instructions of the Call Report.
    (iii) Banks shall determine the current fair market value of 
each intangible asset included in Tier 1 capital at least quarterly. 
The quarterly determination of the current fair market value of the 
intangible asset must include adjustments for any significant 
changes in original valuation assumptions, including changes in 
prepayment estimates. In determining the current fair market value 
of the intangible asset, the bank shall apply an appropriate market 
discount rate to the expected net cash flows of the intangible 
asset.
* * * * *

PART 6--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 6 continues to read as follows:

    Authority: 12 U.S.C. 93a, 1831o.

    2. In subpart A to part 6, paragraph (g) of Sec. 6.2 is revised to 
read as follows:


Sec. 6.2  Definitions.

* * * * *
    (g) Tangible equity means the amount of Tier 1 capital elements in 
the OCC's Risk-Based Capital Guidelines (appendix A to part 3 of this 
chapter) plus the amount of outstanding cumulative perpetual preferred 
stock (including related surplus) minus all intangible assets except 
mortgage servicing rights to the extent permitted in Tier 1 capital 
under section 2(c) in appendix A to part 3 of this chapter.
* * * * *
    Dated: July 21, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
Federal Reserve System

12 CFR Chapter II

    For the reasons outlined in the joint preamble, the Board of 
Governors of the Federal Reserve System amends 12 CFR Chapter II as set 
forth below.

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351 and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c) (5), 78q, 78q-l, and 78w; 31 U.S.C. 5318; 42 U.S.C. 
4012a, 4104a, 4104b, 4106, and 4128.

    2. In Sec. 208.31, paragraph (f) is revised to read as follows:


Sec. 208.31  Definitions.

* * * * *
    (f) Tangible equity means the amount of core capital elements in 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part), plus the amount of outstanding 
cumulative perpetual preferred stock (including related surplus), minus 
all intangible assets except mortgage servicing rights to the extent 
that the Board determines that mortgage servicing rights may be 
included in calculating the bank's tier 1 capital.
* * * * *
    3. Appendix A to part 208 is amended by revising section II.B.1.b. 
to read as follows:

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure

* * * * *
    II. * * *
    B. * * *
    1. * * *
    b. Other intangible assets. i. The only types of identifiable 
intangible assets that may be included in, that is, not deducted 
from, a bank's capital are readily marketable mortgage servicing 
rights and purchased credit card relationships, provided that, in 
the aggregate, the total amount of these assets included in capital 
does not exceed 50 percent of tier 1 capital. Purchased credit card 
relationships are subject to a separate sublimit of 25 percent of 
tier 1 capital.14

    \14\Amounts of mortgage servicing rights and purchased credit 
card relationships in excess of these limitations, as well as all 
other identifiable intangible assets, including core deposit 
intangibles and favorable leaseholds, are to be deducted from a 
bank's core capital elements in determining tier 1 capital. However, 
identifiable intangible assets (other than mortgage servicing rights 
and purchased credit card relationships) acquired on or before 
February 19, 1992, generally will not be deducted from capital for 
supervisory purposes, although they will continue to be deducted for 
applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage 
servicing rights and purchased credit card relationships, tier 1 
capital is defined as the sum of core capital 

[[Page 39230]]
elements, net of goodwill and all identifiable intangible assets other 
than mortgage servicing rights and purchased credit card 
relationships, regardless of the date acquired. This method of 
calculation could result in mortgage servicing rights and purchased 
credit card relationships being included in capital in an amount 
greater than 50 percent--or in purchased credit card relationships 
being included in an amount greater than 25 percent--of the amount 
of tier 1 capital used to calculate an institution's capital ratios. 
In such instances, the Federal Reserve may determine that a bank is 
operating in an unsafe and unsound manner because of over-reliance 
on intangible assets in tier 1 capital.
    iii. Banks must review the book value of all intangible assets 
at least quarterly and make adjustments to these values as 
necessary. The fair market value of mortgage servicing rights and 
purchased credit card relationships also must be determined at least 
quarterly. The fair market value generally shall be determined by 
applying an appropriate market discount rate to the expected future 
net cash flows. This determination shall include adjustments for any 
significant changes in original valuation assumptions, including 
changes in prepayment estimates or account attrition rates.
    iv. Examiners will review both the book value and the fair 
market value assigned to these assets, together with supporting 
documentation, during the examination process. In addition, the 
Federal Reserve may require, on a case-by-case basis, an independent 
valuation of a bank's intangible assets.
    v. The amount of mortgage servicing rights and purchased credit 
card relationships that a bank may include in capital shall be the 
lesser of 90 percent of their fair market value, as determined in 
accordance with this section, or 100 percent of their book value, as 
adjusted for capital purposes in accordance with the instructions in 
the commercial bank Consolidated Reports of Condition and Income 
(Call Reports). If both the application of the limits on mortgage 
servicing rights and purchased credit card relationships and the 
adjustment of the balance sheet amount for these intangibles would 
result in an amount being deducted from capital, the bank would 
deduct only the greater of the two amounts from its core capital 
elements in determining tier 1 capital.
    vi. The treatment of identifiable intangible assets set forth in 
this section generally will be used in the calculation of a bank's 
capital ratios for supervisory and applications purposes. However, 
in making an overall assessment of a bank's capital adequacy for 
applications purposes, the Board may, if it deems appropriate, take 
into account the quality and composition of a bank's capital, 
together with the quality and value of its tangible and intangible 
assets.
    vii. Consistent with long-standing Board policy, banks 
experiencing substantial growth, whether internally or by 
acquisition, are expected to maintain strong capital positions 
substantially above minimum supervisory levels, without significant 
reliance on intangible assets.
    2. * * *
* * * * *
    4. Appendix A to part 208 is amended by revising section II.B.4. to 
read as follows:
* * * * *
    II. * * *
    B. * *  *
    4. Deferred tax assets. The amount of deferred tax assets that 
are dependent upon future taxable income, net of the valuation 
allowance for deferred tax assets, that may be included in, that is, 
not deducted from, a bank's capital may not exceed the lesser of: 
(i) the amount of these deferred tax assets that the bank is 
expected to realize within one year of the calendar quarter-end 
date, based on its projections of future taxable income for that 
year,20 or (ii) 10 percent of tier 1 capital. The reported 
amount of deferred tax assets, net of any valuation allowance for 
deferred tax assets, in excess of the lesser of these two amounts is 
to be deducted from a bank's core capital elements in determining 
tier 1 capital. For purposes of calculating the 10 percent 
limitation, tier 1 capital is defined as the sum of core capital 
elements, net of goodwill and all identifiable intangible assets 
other than mortgage servicing rights and purchased credit card 
relationships, before any disallowed deferred tax assets are 
deducted. There generally is no limit in tier 1 capital on the 
amount of deferred tax assets that can be realized from taxes paid 
in prior carryback years or from future reversals of existing 
taxable temporary differences, but, for banks that have a parent, 
this may not exceed the amount the bank could reasonably expect its 
parent to refund.

    \20\To determine the amount of expected deferred tax assets 
realizable in the next 12 months, an institution should assume that 
all existing temporary differences fully reverse as of the report 
date. Projected future taxable income should not include net 
operating loss carryforwards to be used during that year or the 
amount of existing temporary differences a bank expects to reverse 
within the year. Such projections should include the estimated 
effect of tax planning strategies that the organization expects to 
implement to realize net operating losses or tax credit 
carryforwards that would otherwise expire during the year. 
Institutions do not have to prepare a new 12 month projection each 
quarter. Rather, on interim report dates, institutions may use the 
future taxable income projections for their current fiscal year, 
adjusted for any significant changes that have occurred or are 
expected to occur.
---------------------------------------------------------------------------

* * * * *
    5. Appendix B to part 208 is amended by revising section II.b. to 
read as follows:

Appendix B to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Tier 1 Leverage Measure

* * * * *
    II. * * *
    b. A bank's tier 1 leverage ratio is calculated by dividing its 
tier 1 capital (the numerator of the ratio) by its average total 
consolidated assets (the denominator of the ratio). The ratio will 
also be calculated using period-end assets whenever necessary, on a 
case-by-case basis. For the purpose of this leverage ratio, the 
definition of tier 1 capital for year-end 1992 as set forth in the 
risk-based capital guidelines contained in Appendix A of this part 
will be used.2 As a general matter, average total consolidated 
assets are defined as the quarterly average total assets (defined 
net of the allowance for loan and lease losses) reported on the 
bank's Reports of Condition and Income (Call Reports), less 
goodwill; amounts of mortgage servicing rights and purchased credit 
card relationships that, in the aggregate, are in excess of 50 
percent of tier 1 capital; amounts of purchased credit card 
relationships in excess of 25 percent of tier 1 capital; all other 
intangible assets; any investments in subsidiaries or associated 
companies that the Federal Reserve determines should be deducted 
from tier 1 capital; and deferred tax assets that are dependent upon 
future taxable income, net of their valuation allowance, in excess 
of the limitation set forth in section II.B.4 of this Appendix 
A.3

    \2\At the end of 1992, tier 1 capital for state member banks 
includes common equity, minority interest in the equity accounts of 
consolidated subsidiaries, and qualifying noncumulative perpetual 
preferred stock. In addition, as a general matter, tier 1 capital 
excludes goodwill; amounts of mortgage servicing rights and 
purchased credit card relationships that, in the aggregate, exceed 
50 percent of tier 1 capital; amounts of purchased credit card 
relationships that exceed 25 percent of tier 1 capital; all other 
intangible assets; and deferred tax assets that are dependent upon 
future taxable income, net of their valuation allowance, in excess 
of certain limitations. The Federal Reserve may exclude certain 
investments in subsidiaries or associated companies as appropriate.
    \3\Deductions from tier 1 capital and other adjustments are 
discussed more fully in section II.B. in Appendix A of this part.
---------------------------------------------------------------------------

* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 continues to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 
3909.

    2. Appendix A to part 225 is amended by revising section II.B.1.b. 
to read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure

* * * * *
    II. * * *
    B. * * *
    1.* * *
    b. Other intangible assets. i. The only types of identifiable 
intangible assets that may be included in, that is, not deducted 
from, a organization's capital are readily marketable mortgage 
servicing rights and purchased credit card relationships, provided 
that, in the aggregate, the total amount of these assets included in 
capital does not exceed 50 percent of tier 1 capital. Purchased 
credit card relationships are subject to a separate sublimit of 25 
percent of tier 1 capital.\15\

    \15\Amounts of mortgage servicing rights and purchased credit 
card relationships in excess of these limitations, as well as all 
other identifiable intangible assets, including core deposit 
intangibles and favorable leaseholds, are to be deducted from an 
organization's core capital elements in determining tier 1 capital. 
However, identifiable intangible assets (other than mortgage 
servicing rights and purchased credit card relationships) acquired 
on or before February 19, 1992, generally will not be deducted from 
capital for supervisory purposes, although they will continue to be 
deducted for applications purposes. 

[[Page 39231]]

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

    ii. For purposes of calculating these limitations on mortgage 
servicing rights and purchased credit card relationships, tier 1 
capital is defined as the sum of core capital elements, net of 
goodwill and all identifiable intangible assets other than mortgage 
servicing rights and purchased credit card relationships, regardless 
of the date acquired. This method of calculation could result in 
mortgage servicing rights and purchased credit card relationships 
being included in capital in an amount greater than 50 percent--or 
in purchased credit card relationships being included in an amount 
greater than 25 percent--of the amount of tier 1 capital used to 
calculate an institution's capital ratios. In such instances, the 
Federal Reserve may determine that an organization is operating in 
an unsafe and unsound manner because of overreliance on intangible 
assets in tier 1 capital.
    iii. Bank holding companies must review the book value of all 
intangible assets at least quarterly and make adjustments to these 
values as necessary. The fair market value of mortgage servicing 
rights and purchased credit card relationships also must be 
determined at least quarterly. The fair market value generally shall 
be determined by applying an appropriate market discount rate to the 
expected future net cash flows. This determination shall include 
adjustments for any significant changes in original valuation 
assumptions, including changes in prepayment estimates or account 
attrition rates.
    iv. Examiners will review both the book value and the fair 
market value assigned to these assets, together with supporting 
documentation, during the inspection process. In addition, the 
Federal Reserve may require, on a case-by-case basis, an independent 
valuation of an organization's intangible assets.
    v. The amount of mortgage servicing rights and purchased credit 
card relationships that a bank holding company may include in 
capital shall be the lesser of 90 percent of their fair market 
value, as determined in accordance with this section, or 100 percent 
of their book value, as adjusted for capital purposes in accordance 
with the instructions to the Consolidated Financial Statements for 
Bank Holding Companies (FR Y-9C Report). If both the application of 
the limits on mortgage servicing rights and purchased credit card 
relationships and the adjustment of the balance sheet amount for 
these intangibles would result in an amount being deducted from 
capital, the bank holding company would deduct only the greater of 
the two amounts from its core capital elements in determining tier 1 
capital.
    vi. The treatment of identifiable intangible assets set forth in 
this section generally will be used in the calculation of a bank 
holding company's capital ratios for supervisory and applications 
purposes. However, in making an overall assessment of an 
organization's capital adequacy for applications purposes, the Board 
may, if it deems appropriate, take into account the quality and 
composition of an organization's capital, together with the quality 
and value of its tangible and intangible assets.
    vii. Consistent with long-standing Board policy, banking 
organizations experiencing substantial growth, whether internally or 
by acquisition, are expected to maintain strong capital positions 
substantially above minimum supervisory levels, without significant 
reliance on intangible assets.
    2.* * *
* * * * *
    3. Appendix A to Part 225 is amended by revising section II.B.4. to 
read as follows:
* * * * *
    II. * * *
    B. * * *
     4. Deferred tax assets. The amount of deferred tax assets that 
are dependent upon future taxable income, net of the valuation 
allowance for deferred tax assets, that may be included in, that is, 
not deducted from, a banking organization's capital may not exceed 
the lesser of: (i) the amount of these deferred tax assets that the 
banking organization is expected to realize within one year of the 
calendar quarter-end date, based on its projections of future 
taxable income for that year,\23\ or (ii) 10 percent of tier 1 
capital. The reported amount of deferred tax assets, net of any 
valuation allowance for deferred tax assets, in excess of the lesser 
of these two amounts is to be deducted from a banking organization's 
core capital elements in determining tier 1 capital. For purposes of 
calculating the 10 percent limitation, tier 1 capital is defined as 
the sum of core capital elements, net of goodwill and all 
identifiable intangible assets other than mortgage servicing rights 
and purchased credit card relationships, before any disallowed 
deferred tax assets are deducted. There generally is no limit in 
tier 1 capital on the amount of deferred tax assets that can be 
realized from taxes paid in prior carryback years or from future 
reversals of existing taxable temporary differences.

    \23\To determine the amount of expected deferred tax assets 
realizable in the next 12 months, an institution should assume that 
all existing temporary differences fully reverse as of the report 
date. Projected future taxable income should not include net 
operating loss carryforwards to be used during that year or the 
amount of existing temporary differences a bank holding company 
expects to reverse within the year. Such projections should include 
the estimated effect of tax planning strategies that the 
organization expects to implement to realize net operating losses or 
tax credit carryforwards that would otherwise expire during the 
year. Institutions do not have to prepare a new 12 month projection 
each quarter. Rather, on interim report dates, institutions may use 
the future taxable income projections for their current fiscal year, 
adjusted for any significant changes that have occurred or are 
expected to occur.
---------------------------------------------------------------------------

* * * * *
    4. Appendix D to part 225 is amended by revising section II.b. to 
read as follows:

Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Tier 1 Leverage Measure

* * * * *
    II. * * *
    b. A banking organization's tier 1 leverage ratio is calculated 
by dividing its tier 1 capital (the numerator of the ratio) by its 
average total consolidated assets (the denominator of the ratio). 
The ratio will also be calculated using period-end assets whenever 
necessary, on a case-by-case basis. For the purpose of this leverage 
ratio, the definition of tier 1 capital for year-end 1992 as set 
forth in the risk-based capital guidelines contained in Appendix A 
of this part will be used.\3\ As a general matter, average total 
consolidated assets are defined as the quarterly average total 
assets (defined net of the allowance for loan and lease losses) 
reported on the organization's Consolidated Financial Statements (FR 
Y-9C Report), less goodwill; amounts of mortgage servicing rights 
and purchased credit card relationships that, in the aggregate, are 
in excess of 50 percent of tier 1 capital; amounts of purchased 
credit card relationships in excess of 25 percent of tier 1 capital; 
all other intangible assets; any investments in subsidiaries or 
associated companies that the Federal Reserve determines should be 
deducted from tier 1 capital; and deferred tax assets that are 
dependent upon future taxable income, net of their valuation 
allowance, in excess of the limitation set forth in section II.B.4 
of this Appendix A.\4\

    \3\At the end of 1992, tier 1 capital for banking organizations 
includes common equity, minority interest in the equity accounts of 
consolidated subsidiaries, qualifying noncumulative perpetual 
preferred stock, and qualifying cumulative perpetual preferred 
stock. (Cumulative perpetual preferred stock is limited to 25 
percent of tier 1 capital.) In addition, as a general matter, tier 1 
capital excludes goodwill; amounts of mortgage servicing rights and 
purchased credit card relationships that, in the aggregate, exceed 
50 percent of tier 1 capital; amounts of purchased credit card 
relationships that exceed 25 percent of tier 1 capital; all other 
intangible assets; and deferred tax assets that are dependent upon 
future taxable income, net of their valuation allowance, in excess 
of certain limitations. The Federal Reserve may exclude certain 
investments in subsidiaries or associated companies as appropriate.
    \4\Deductions from tier 1 capital and other adjustments are 
discussed more fully in section II.B. in Appendix A of this part.
---------------------------------------------------------------------------

* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, July 26, 1995
William W. Wiles,
Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR Chapter III

    For the reasons outlined in the joint preamble, the Board of 
Directors of the Federal Deposit Insurance Corporation amends 12 CFR 
chapter III as set forth below. 

[[Page 39232]]


PART 325--CAPITAL MAINTENANCE

    1. The authority citation for part 325 continues to read as 
follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 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. In Sec. 325.2, paragraph (n) is amended by removing the word 
``purchased'' each place it appears and paragraph (s) is revised to 
read as follows:


Sec. 325.2  Definitions.

* * * * *
    (s) Tangible equity means the amount of core capital elements as 
defined in Section I.A.1. of the FDIC's Statement of Policy on Risk-
Based Capital (appendix A to this Part 325), plus the amount of 
outstanding cumulative perpetual preferred stock (including related 
surplus), minus all intangible assets except mortgage servicing rights 
to the extent that the FDIC determines pursuant to Sec. 325.5(f) of 
this part that mortgage servicing rights may be included in calculating 
the bank's Tier 1 capital.
* * * * *


Sec. 325.5  [Amended]

    3. Section 325.5 is amended by removing the words ``purchased 
mortgage servicing rights'' and adding, in their place, the words 
``mortgage servicing rights'' in paragraphs (f), (g)(2)(i)(B), and 
(g)(5).

Appendix A to Part 325 [Amended]

    4. In Appendix A to part 325, remove the words ``purchased mortgage 
servicing rights'' in footnote 2 to ``Table I--Definition of Qualifying 
Capital'' and add, in their place, the words ``mortgage servicing 
rights''.

Appendix B to Part 325 [Amended]
    5. In Appendix B to part 325, section IV.A.:
    a. Remove the words ``purchased mortgage servicing rights'' and 
add, in their place, the words ``mortgage servicing rights'' each place 
they appear in footnote 1 and in the last sentence of the last 
paragraph; and
    b. Remove the words ``purchased servicing intangibles'' and add, in 
their place, the words ``servicing intangibles'' in the last sentence 
of the last paragraph.

    By order of the Board of Directors.

    Dated at Washington, DC, this 21st day of July, 1995.

Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.

Office of Thrift Supervision

12 CFR Chapter V

    For the reasons outlined in the joint preamble, the Office of 
Thrift Supervision hereby amends 12 CFR chapter V as set forth below.
SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS

PART 565--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 565 continues to read as 
follows:

    Authority: 12 U.S.C. 1831o.

    2. Section 565.2 is amended by revising paragraph (f) to read as 
follows:


Sec. 565.2  Definitions

* * * * *
    (f) Tangible equity means the amount of a savings association's 
core capital as defined in part 567 of this subchapter plus the amount 
of its outstanding cumulative perpetual preferred stock (including 
related surplus), minus intangible assets as defined in Sec. 567.1(m) 
of this subchapter and mortgage servicing rights not includable in core 
capital pursuant to Sec. 567.12 of this subchapter.
* * * * *

PART 567--CAPITAL

    1. The authority citation for part 567 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 
(note).

    2. Section 567.1 is amended by revising paragraph (m) to read as 
follows:


Sec. 567.1  Definitions.

* * * * *
    (m) Intangible assets. The term intangible assets means assets 
referred to as intangible assets in authoritative literature on 
generally accepted accounting principles. These intangible assets 
include, but are not limited to, goodwill, favorable leaseholds, core 
deposit premiums and purchased credit card relationships. Mortgage 
servicing rights (either originated or purchased) are not intangible 
assets under this definition.
* * * * *
    3. Section 567.5 is amended by revising paragraphs (a)(2) heading, 
(a)(2)(i) and (a)(2)(ii) to read as follows:


Sec. 567.5  Components of capital.

    (a) * * *
    (2) Deductions from core capital. (i) Intangible assets, as defined 
in Sec. 567.1(m) of this part, are deducted from assets and capital in 
computing core capital, except as otherwise provided by Sec. 567.12 of 
this part.
    (ii) Mortgage servicing rights (both originated and purchased) that 
are not includable in tangible and core capital pursuant to Sec. 567.12 
of this part are deducted from assets and capital in computing core 
capital.
* * * * *
    4. Section 567.6 is amended by revising paragraphs (a)(1)(iv)(L) 
and (a)(1)(iv)(M) to read as follows:


Sec. 567.6  Risk-based capital credit risk-weight categories.

    (a) * * *
    (1) * * *
    (iv) * * *
    (L) Mortgage servicing rights and intangible assets includable in 
core capital pursuant to Sec. 567.12 of this part;
    (M) Excess servicing receivables;
* * * * *
    5. Section 567.9 is amended by revising paragraph (c)(1) to read as 
follows:


Sec. 567.9  Tangible capital requirement.

* * * * *
    (c) * * *
    (1) Intangible assets, as defined in Sec. 567.1(m) of this part, 
and mortgage servicing rights (purchased or originated) not includable 
in core and tangible capital pursuant to Sec. 567.12 of this part.
* * * * *
    6. Section 567.12 is amended by revising the section heading and 
paragraphs (a) through (f) to read as follows:


Sec. 567.12  Qualifying intangible assets and mortgage servicing 
rights.

    (a) Scope. This section prescribes the maximum amount of qualifying 
intangible assets, as defined in Sec. 567.1(m) of this part, and 
mortgage servicing rights that savings associations may include in 
calculating tangible and core capital.
    (b) Definition. Qualifying intangible assets and mortgage servicing 
rights means purchased credit card relationships and mortgage servicing 
rights (both originated and purchased). Mortgage servicing rights (both 
originated and purchased) may be included (that is, not deducted) in 
computing core and tangible capital. Purchased credit card 
relationships may be included in computing core capital, but must be 
deducted in computing tangible capital. These qualifying intangible 
assets and mortgage servicing 

[[Page 39233]]
rights may be included in capital only in accordance with the 
limitations and restrictions set forth in this section. Intangible 
assets, as defined in Sec. 567.1(m) of this part, other than purchased 
credit card relationships and core deposit intangibles grandfathered by 
paragraph (g)(3) of this section, must be deducted in computing 
tangible and core capital.
    (c) Market valuations. The OTS reserves the authority to require 
any savings association to perform an independent market valuation of 
qualifying intangible assets and mortgage servicing rights 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 intangible assets and mortgage 
servicing rights by applying an appropriate market discount rate to the 
net cash flows expected to be generated from the qualifying intangible 
assets and mortgage servicing rights. 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 intangible 
assets and mortgage servicing rights 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), qualifying 
intangible assets and mortgage servicing rights must be valued at the 
lesser of:
    (1) 90 percent of their fair market value determined in accordance 
with paragraph (c) of this section; or
    (2) 100 percent of their remaining unamortized book value 
determined in accordance with the instructions for the Thrift Financial 
Report.
    (e) Core capital limitation.--(1) Aggregate limit. The maximum 
aggregate amount of qualifying intangible assets and mortgage servicing 
rights 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 mortgage 
servicing rights; or
    (ii) The amount of qualifying intangible assets and mortgage 
servicing rights determined in accordance with paragraph (d) of this 
section.
    (2) Reduction by deferred tax liability. Associations may elect to 
reduce the amount of their disallowed (i.e., not includable in capital) 
originated mortgage servicing rights exceeding the 50 percent aggregate 
limit by the amount of any associated deferred tax liability.
    (3) Sublimit for purchased credit card relationships. In addition 
to the aggregate limitation on qualifying intangible assets and 
mortgage servicing rights 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 computed before the 
deduction of any disallowed qualifying intangible assets or mortgage 
servicing rights; or
    (ii) the amount of purchased credit card relationships determined 
in accordance with paragraph (d) of this section.
    (f) Tangible capital limitation. The maximum amount of 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.
* * * * *
    Dated: July 25, 1995.

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 95-18772 Filed 7-31-95; 8:45 am]
BILLING CODES 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P