[Federal Register Volume 60, Number 169 (Thursday, August 31, 1995)]
[Rules and Regulations]
[Pages 45618-45622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21564]
[[Page 45617]]
_______________________________________________________________________
Part VII
Department of the Treasury
_______________________________________________________________________
Office of Thrift Supervision
_______________________________________________________________________
12 CFR 567
Risk-Based Capital Requirements Transfer of Assets With Recourse; Final
Rule
Federal Register / Vol. 60, No. 169 / Thursday, August 31, 1995 /
Rules and Regulations
[[Page 45618]]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. 95-159]
RIN 1550-AA81
Risk-Based Capital Requirements Transfer of Assets With Recourse
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Interim rule with request for comment.
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SUMMARY: The Office of Thrift Supervision (OTS) is amending its risk-
based capital standards as required by sections 208 and 350 of the
Riegle Community Development and Regulatory Improvement Act of 1994
(the Riegle Act).
Section 208 of the Riegle Act is intended to facilitate the
origination and sale of small business loans and leases of personal
property by providing a more favorable risk-based capital treatment for
transfers of such loans and leases with recourse. The OTS is amending
12 CFR Part 567 to permit qualifying institutions to elect to use this
more favorable capital treatment.
Because the OTS capital rules already incorporate the requirements
of section 350 of the Riegle Act, the agency does not propose
regulatory revisions implementing this provision.
DATES: The interim rule is effective August 31, 1995. Comments on this
interim rule must be received by October 30, 1995.
ADDRESSES: Written comments should be submitted to Chief, Dissemination
Branch, Office of Thrift Supervision, 1700 G Street NW., Washington, DC
20552, Attention: Docket No. 95-159. These submissions may be hand
delivered to 1700 G Street NW., from 9:00 a.m. to 5:00 p.m. on business
days; they may be sent by facsimile transmission to FAX number (202)
906-7755. Comments will be available for inspection at 1700 G Street
NW., from 1:00 p.m. until 4:00 p.m., on business days.
FOR FURTHER INFORMATION CONTACT: John F. Connolly, Senior Program
Manager for Capital Policy (202/906-6465), Supervision; or Karen
Osterloh, Counsel, Banking and Finance (202/906-6639), Regulations and
Legislation Division, Chief Counsel's Office, Office of Thrift
Supervision, 1700 G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
The OTS is amending its risk-based capital requirements, as
necessary, to implement sections 208 and 350 of the Riegle Community
Development and Regulatory Improvement Act of 1994, Pub. L. 103-325,
108 Stat 2160 (Riegle Act). These sections address the treatment of
recourse obligations under the risk-based capital rules. A recourse
obligation arises, for example, when a savings association transfers a
loan or mortgage-related security subject to an agreement to repurchase
or replace the loan or security if the underlying borrower defaults.
The Office of the Comptroller of the Currency, the Federal Reserve
Board and the Federal Deposit Insurance Corporation 1 are also in
the process of developing and issuing rules implementing sections 208
and 350 of the Riegle Act.
\1\ These agencies with the OTS are collectively referred to as
``the Banking Agencies.''
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II. Current Treatment of Recourse Obligations Under OTS Risk-Based
Capital Regulations
Under current OTS risk-based capital regulations, the full value of
assets sold with recourse must be included in total assets and
multiplied by the appropriate risk-weight percentage. Savings
associations are required to hold capital equal to 8 percent of the
risk-weighted value of the assets sold.2
\2\ 12 CFR 567.6(a)(2)(i)(C).
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However, an alternative rule (commonly called the ``low-level
recourse rule'') applies whenever the foregoing requirements would
result in a capital charge greater than the savings association's
maximum recourse liability on the assets sold. Under these
circumstances, instead of including the assets sold in an association's
risk-weighted assets, the savings association's risk-based capital
requirement is simply increased by an amount equal to the association's
maximum recourse liability.3
\3\ 12 CFR 567.6(a)(2)(i)(C).
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Additionally, if the association is required under generally
accepted accounting principles (GAAP) to establish a recourse liability
account to absorb estimated probable losses from the recourse
obligation, the amount of capital required is reduced.4 When the
low-level recourse rule applies, the amount of the recourse obligation
would be deducted from the maximum contractual obligation. When the
low-level recourse rule does not apply, the amount of the recourse
liability account would be deducted from the amount of the transferred
assets.
\4\ 59 FR 27116, 27122, n.17 (May 25, 1994).
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The following example illustrates how the foregoing rules work. If
an association transfers a $1,000 pool of small business loans with
unlimited recourse, it would be required to hold capital equal to 8
percent of $1,000 (an $80 capital charge). However, if the association
limits its maximum contractual recourse obligation to $30, the capital
requirement would be limited to $30 under the low-level recourse rule.
Moreover, if the association is required to establish a recourse
liability account of $10 under GAAP, the capital charge would be
reduced to $20.
III. Section 350 of the Riegle Act
Section 350(b)(1) of the Riegle Act provides that ``[t]he amount of
risk-based capital required to be maintained, under regulations
prescribed by the appropriate Federal banking agency, by any insured
depository institution with respect to assets transferred with recourse
by such institution may not exceed the maximum amount of recourse for
which such institution is contractually liable under the recourse
agreement.'' The OTS capital rule, described above, already
incorporates this ``low-level recourse'' approach at 12 CFR
567.6(a)(2)(i)(C).
Section 350(b)(2) permits the OTS to impose a higher capital charge
if it determines that a higher capital requirement is necessary for the
savings association's safety and soundness. Consistent with this
section, the OTS has retained the authority to increase this capital
charge under appropriate circumstances.5
\5\ 12 CFR 567.3.
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Accordingly, the OTS has determined that it does not need to take
further action to implement section 350 of the Riegle Act.
The OTS, however, solicits comment on its current approach for
factoring associations' capital requirements under the low-level
recourse approach into their total risk-based capital ratio and Tier 1
(core) risk-based capital ratio. The numerator in these ratios is the
actual amount of risk-based or core capital, respectively, held by an
association. The denominator is the total risk-weighted assets held by
an association. These ratios are used to assess associations' capital
positions and to determine capital categories for purposes of the
prompt corrective action (PCA) provisions of section 38(b) of the
Federal Deposit Insurance Act. 12 U.S.C. 1831o.6 As OTS
regulations are
[[Page 45619]]
currently worded, an association that utilizes the low-level recourse
rule merely adds the amount of its maximum contractual recourse
obligation to its capital requirement. Furthermore, the amount of
assets sold subject to the low-level recourse is not included in the
association's total risk-weighted assets. Thus, when the aforementioned
capital ratios under the PCA provisions are computed, adjustments must
be made to ensure that the ratios take into account a savings
association's low-level recourse exposure.
\6\ See 12 CFR Part 565.
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The OTS currently permits associations to use the more favorable of
two adjustment computations. A savings association may either: (1)
Deduct its aggregate low-level recourse capital requirement from the
capital amount (i.e., the numerator) in calculating these ratios; or
(2) add its low-level recourse capital requirement multiplied by 12.5
(i.e., the reciprocal of the 8 percent capital requirement) to its
risk-weighted assets (i.e., the denominator) in calculating the ratios.
These alternative methods for calculating an association's Tier 1 risk-
based capital ratio and total risk-based capital ratio are set forth in
Appendix B to section 120, ``Capital Adequacy,'' of the OTS Regulatory
Handbook: Thrift Activities (January, 1994). The Banking Agencies are
considering other alternatives including requiring all institutions to
follow option (2) described above. The OTS specifically requests
comment on this approach.
IV. Section 208 of the Riegle Act
Section 208 of the Riegle Act prescribes accounting principles and
establishes modified capital rules for transfers of small business
loans and leases of personal property with recourse (small business
obligations) by qualified insured depository institutions. The term
``small business'' means a business that meets the criteria for a small
business concern established by the Small Business Administration under
section 3(a) of the Small Business Act.7 Under section 208(c), an
insured depository institution is a qualified institution, if it: (1)
Is well capitalized for PCA purposes, or (2) is adequately capitalized
for PCA purposes and has obtained approval to apply the modified
capital rules from the appropriate Federal banking agency.8 The
OTS solicits comments on how it should determine whether an adequately
capitalized association should be permitted to use the modified capital
rule under section 208.
\7\ See 15 U.S.C. 632(a) and 13 CFR Part 121 (1995).
\8\ See Section 208(i)(1) and (7). Determinations as to whether
a savings association is a qualified institution are made without
regard to the accounting principles or capital requirements set
forth in section 208(a) and (b). See Section 208(c).
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Under section 208(a), accounting principles applicable to the
transfer of a small business loan or lease of personal property with
recourse and contained in reports or statements required to be filed
with the appropriate Federal banking agency by a qualified insured
depository institution, must be consistent with GAAP. The OTS currently
requires savings associations to comply with GAAP in their financial
reports and statements, including the reporting of transfers of assets
with recourse.9 Accordingly, no regulatory amendments are required
to implement section 208(a).
\9\ 12 CFR 562.2(b)(1995).
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Section 208(b) prescribes modified risk-based capital requirements
for transfers of small business loans or leases of personal property
with recourse that are sales under GAAP. This modified risk-based
capital treatment permits a qualified insured depository institution to
include in its risk-weighted assets, for the purposes of applicable
capital standards and other capital measures, only the amount of the
retained recourse multiplied by the appropriate risk-weight percentage.
For example, if an association sold a $1,000 pool of small business
loans with recourse, but limited its recourse liability to the first
$100 dollars of loss on the pool, section 208(b) would limit the
applicable capital charge to $8.00 (8 percent of the $100 of retained
recourse).
By contrast, current OTS risk-based capital regulations require
savings associations to include in risk-weighted assets the full value
of assets transferred with recourse multiplied by the appropriate risk-
weight percentage. If the current rule were applied to the foregoing
example, the association's capital charge would be 8 percent of the
$1,000 pool of transferred assets resulting in an $80 capital charge,
rather than the $8.00 capital charge under section 208(b).
To be eligible for the preferential capital treatment under section
208(b), a qualified institution must ``establish and maintain a reserve
equal to an amount sufficient to meet the reasonable estimated
liability of the institution under the recourse arrangement.'' The OTS
capital rule follows GAAP in determining when to treat transfers with
recourse as sales and how those sales must be accounted for.
Accordingly, the OTS already requires transferors of assets with
recourse to accrue, as a separate liability, an amount sufficient to
absorb their estimated probable losses under the recourse provision for
the life of the assets transferred.
Section 208(d) limits the aggregate amount of recourse that may be
retained by a qualified insured depository institution with respect to
transactions that are accorded the modified capital treatment. Under
this provision, the total outstanding amount of recourse retained by
the institution and accorded the modified capital treatment may not
exceed 15 percent of the association's risk-based capital or such
greater amount as may be established by the appropriate Federal banking
agency by regulation or order. The rule sets the limit under section
208(d) at 15 percent of the association's total capital under 12 CFR
567.5(c)(4).
Furthermore, section 208(e) provides that if an institution exceeds
the aggregate limit or if it loses its qualified status, transactions
completed while the institution was qualified continue to receive the
favorable capital treatment. This provision is incorporated in the rule
at 12 CFR 567.6(a)(3)(iv).
Section 208 contains two provisions that permit the agency, by
regulation, to modify the requirements specified in the statute. As
noted above, section 208(d)(2) permits the agency to increase the 15
percent aggregate limit. In addition, section 208(h) authorizes the OTS
to establish an alternative system governing the amount of capital and
reserves for small business obligations. The OTS has elected not to
implement these discretionary alternative provisions at this time.
Section 208(f) states, ``The capital of an insured depository
institution shall be computed without regard [to section 208] in
determining whether the institution is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under section 38 of the Federal Deposit Insurance Act
(12 U.S.C. 1831o).'' Section 1831o addresses prompt corrective action.
The caption to section 208(f), ``Prompt Corrective Action Not
Affected,'' and the legislative history indicate that section 208 was
not intended to affect the prompt corrective action system.10
However, the statute does not include ``well capitalized'' in the list
of capital categories not affected.
\10\ See S. Rep. No. 103-169, 103d Cong., 1st Sess. 38, 69
(1993).
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The prompt corrective action system deals primarily with imposing
corrective sanctions on associations that are less than adequately
capitalized. Therefore, allowing an association that
[[Page 45620]]
is adequately capitalized without section 208 11 to use the
modified capital treatment under section 208 for purposes of
determining whether it is well capitalized generally would not affect
the application of the prompt corrective action sanctions to the
association. Other statutes and regulations treat an association more
favorably if it is well capitalized (as defined under the prompt
corrective action statute), but these provisions are not part of the
prompt corrective action system of sanctions. Permitting an association
be treated as well capitalized for purposes of these other provisions
also will not affect the imposition of prompt corrective action
sanctions.
\11\ It is very unlikely, but theoretically possible that an
association that is undercapitalized without section 208 would
become well capitalized if it applied the modified capital treatment
under section 208. Because section 208 was not intended to affect
prompt corrective action and because allowing an undercapitalized
association to become well capitalized would affect prompt
corrective action, the OTS believes that section 208 does not allow
an undercapitalized association to use the modified capital
treatment to become well capitalized for the purposes of prompt
corrective action.
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There is one provision of the prompt corrective action system that
could be affected by treating an association as well capitalized,
rather than adequately capitalized. If the OTS determines that an
association is in an unsafe or unsound condition or is engaging in an
unsafe or unsound practice, section 1831o(g) authorizes the OTS--(1) to
reclassify a well capitalized association as adequately capitalized,
and (2) to require an adequately capitalized association to comply with
certain prompt corrective action provisions as if the association were
undercapitalized. Because the text and legislative history of section
208 clearly indicate that Congress did not intend to affect prompt
corrective action, the OTS believes that section 208 does not affect
the capital calculation for purposes of section 1831o(g), regardless of
the association's capital level.
Thus, an association may use the capital treatment described in
section 208 when determining whether it is well capitalized for
purposes of prompt corrective action (except 12 U.S.C. 1831o(g)), as
well as for other regulations that reference the well capitalized
capital category.12 An association may not use the capital
treatment described in section 208 when determining whether it is
adequately capitalized, undercapitalized, significantly
undercapitalized, or critically undercapitalized for purposes of prompt
corrective action or other regulations that directly or indirectly
reference the prompt corrective action capital categories.13 No
association may use the capital treatment under section 208 for
purposes of 12 U.S.C. 1831o(g). The following is a summary of the
applicable rules:
\12\ An association that is subject to a written agreement or
capital directive as discussed in the OTS's prompt corrective action
regulation would not be considered to be well capitalized.
\13\ Under section 208, the capital calculation used to
determine whether an association is well capitalized differs from
the calculation used to determine whether an association is
adequately capitalized. As a result, it is possible that an
institution could be well capitalized using one calculation and
adequately capitalized using the other. In this situation, the
institution would be considered well capitalized.
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(1) Associations that are well capitalized without using section
208. These associations are ``qualifying'' and may apply section 208 to
any transfers of small business obligations with recourse (up to the
15% of capital limit), for all purposes except 12 U.S.C. 1830o(g).
(2) Associations that are adequately capitalized without using
section 208, but have written permission from the OTS to use section
208. These associations are also ``qualifying'' and may apply section
208 to any transfers of small business obligations with recourse (up to
the 15% of capital limit), for all purposes except 12 U.S.C. 1830o(g).
(3) All other associations. Other types of associations are not
``qualifying'' and cannot apply section 208 to new obligations.
However, if the association qualified in the past, it may continue to
apply section 208 to obligations arising out of transfers that occurred
while the association was qualified, for purposes of determining
capital under Part 567.14 However, section 208 may not be used by
these associations for purposes of prompt corrective action or other
regulations that directly or indirectly reference prompt corrective
action capital categories.
\14\ E.g., 12 CFR 567.2 (minimum capital requirements) and other
regulations keyed to the OTS minimum capital requirements rather
than the prompt corrective action categories.
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The OTS will not object if an association decides to apply the
capital treatment described in this rule as of March 22, 1995, because
this is the date by which the regulatory changes prescribed by the
Riegle Act were to have become effective.
The OTS solicits comment on all aspects of this rule and any other
issues related to its implementation of sections 208 and 350.
The Banking Agencies are in the process of reviewing other
regulations and written policies relating to transfers of assets with
recourse. They intend to make comprehensive revisions of their
regulations and written policies addressing the exposure of insured
depository institutions to credit risk from transfers of assets with
recourse. A notice of proposed rulemaking and advance notice of
proposed rulemaking were published in the Federal Register on May 25,
1994.15 The Banking Agencies are working together on this
rulemaking and intend to take further action as quickly as feasible.
\15\ See 59 FR 27116 (May 25, 1994).
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OTS hereby certifies that this interim rule will not have a significant
economic impact on a substantial number of small entities. The changes
are required by statute and will not affect savings associations' risk-
based capital for prompt corrective actions purposes. Accordingly, a
regulatory flexibility analysis is not required.
VI. Executive Order 12866
The OTS has determined that this interim rule is not a significant
regulatory action as defined in Executive Order 12866. Under the
interim rule, some associations' measured risk-based capital ratios may
improve. This change, however, should have no material effect on the
safety and soundness of affected associations and will not affect their
measured risk-based capital for prompt corrective action purposes.
VII. Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, 104 Pub.
L. 104-4 (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 one year. If the budgetary impact
statement is required, section 205 of the Act also requires an agency
to identify and consider a reasonable number of regulatory alternatives
before promulgating a rule. As discussed in the preamble, the interim
rule authorizes an alternative method of calculating capital that
permits savings associations to elect to hold less capital for certain
recourse obligations. The OTS has therefore determined that the interim
rule will not result in expenditure by State, local, or tribal
governments or by the private
[[Page 45621]]
sector of more than $100 million. Accordingly, sections 202 and 205 do
not apply.
VIII. Paperwork Reduction Act and Regulatory Burden
The OTS has determined that this interim rule will not increase the
regulatory paperwork burden on savings associations under the Paperwork
Reduction Act of 1980 (44 U.S.C. 3501 et seq.). Consequently, no
information has been submitted to the Office of Management and Budget
for review.
Section 302 of the Riegle Act requires that new regulations and
amendments to regulations that impose additional reporting,
disclosures, or other new requirements take effect on the first date of
the calendar quarter following publication of the rule unless, among
other things, the agency determines, for good cause, that the
regulations should become effective on a day other than the first day
of the next quarter. The OTS believes that an immediate effective date
is appropriate since the interim rule relieves a regulatory burden on
qualifying savings associations that transfer small business
obligations with recourse by significantly reducing the capital
requirements on such obligations. This immediate effective date will
permit qualifying institutions to reduce the amount of capital they
must maintain to support the risk retained in these transfers.
Moreover, the OTS does not anticipate that the immediate application of
the rules will present a hardship to institutions in terms of
compliance. Also, there is a statutory requirement for the OTS to
promulgate final regulations implementing the provisions of section 208
by March 22, 1995. For these reasons, the OTS has determined that this
effective date is appropriate.
IX. Administrative Procedure Act
Section 208(g) of the Riegle Act requires that the OTS promulgate
final rules implementing section 208 no later than March 22, 1995. The
OTS has determined that the notice and public participation that are
ordinarily required by the Administrative Procedure Act (5 U.S.C. 553)
(the APA) before a regulation may take effect would, in this case, be
impracticable due to the time constraints imposed by section 208(g). In
addition, advance public notice and comment is unnecessary because the
interim rule substantially restates the provisions of the statute.
Further, the interim rule would permit qualifying institutions to
reduce their capital levels, thereby providing these institutions with
greater lending flexibility. Consequently, the added delay that would
result from seeking advance notice and public participation could
potentially adversely impact credit availability.
Section 553(d) of the APA permits the waiver of the 30-day delayed
effective date requirement for good cause, or where a rule relieves a
restriction. The OTS believes that the limitations of time and the
potential loss of benefit to affected parties during the pendency of
this rulemaking constitutes good cause to waive the 30-day delayed
effective date requirement. The OTS further believes that the 30-day
effective date may be waived because the rule relieves a restriction.
Accordingly, the interim rule will be immediately effective upon
publication in the Federal Register. Nevertheless, the OTS seeks the
benefit of public comment before adopting a final rule on this subject.
Accordingly, the OTS invites interested persons to submit comments
during the 60-day comment period. The OTS will revise the interim rule
as appropriate based on these comments.
List of Subjects in 12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Savings
associations.
For the reasons set forth in the preamble, the Office of Thrift
Supervision hereby amends Part 567, chapter V, title 12, Code of
Federal Regulation as set forth below:
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, 1835, 1848
(note), 4808.
2. Section 567.6(a) is revised by adding a fourth and fifth
sentence between the phrase `` `recourse servicing'.'' and the
parenthetical in (a)(2)(i)(C), and by adding a new paragraph (a)(3) to
read as follows:
Sec. 567.6 Risk-based capital credit risk-weight categories.
(a) * * *
(2) * * *
(i) * * *
(C) * * * This category also includes transfers of small business
loans or leases of personal property with recourse. Such transfers,
however, may be subject to the alternative capital computation set
forth in paragraph (a)(3) of this section. * * *
* * * * *
(3) Alternative capital computation for small business
obligations-- (i) Definitions. For the purposes of this paragraph
(a)(3):
(A) Qualified savings association means a savings association that:
(1) Is well capitalized as defined in 12 CFR 565.4 without applying
the capital treatment described in paragraph (a)(3)(ii) of this
section; or
(2) Is adequately capitalized as defined in 12 CFR 565.4 without
applying the capital treatment described in paragraph (a)(3)(ii) of
this section and has received written permission from the OTS to apply
that capital calculation.
(B) Small business means a business that meets the criteria for a
small business concern established by the Small Business Administration
in 12 CFR 121 pursuant to 15 U.S.C. 632.
(ii) Capital requirement. With respect to a transfer of a small
business loan or lease of personal property with recourse that is a
sale under generally accepted accounting principles, a qualified
savings association may elect to include only the amount of its
retained recourse in its risk-weighted assets for the purposes of
paragraph (a)(2)(i)(C) of this section. To qualify for this election,
the savings association must establish and maintain a reserve under
generally accepted accounting principles sufficient to meet the
reasonable estimated liability of the savings association under the
recourse arrangement.
(iii) Aggregate amount of recourse. The total outstanding amount of
recourse retained by a qualified savings association with respect to
transfers of small business loans and leases of personal property and
included in the risk-weighted assets of the savings association as
described in paragraph (a)(3)(ii) of this section, may not exceed 15
percent of the association's total capital computed under
Sec. 567.5(c)(4).
(iv) Savings association that ceases to be a qualified savings
association or that exceeds aggregate limits. If a savings association
ceases to be a qualified savings association or exceeds the aggregate
limit described in paragraph (a)(3)(iii) of this section, the savings
association may continue to apply the capital treatment described in
paragraph (a)(3)(ii) of this section to transfers of small business
loans and leases of personal property that occurred when the
association was a qualified savings association and did not exceed the
limit.
(v) Prompt corrective action not affected. (A) A savings
association shall compute its capital without regard to this paragraph
(a)(3) of this section for purposes of prompt corrective action (12
U.S.C. 1831o), unless the savings association is adequately or well
capitalized without applying the capital
[[Page 45622]]
treatment described in this paragraph (a)(3) and would be well
capitalized after applying that capital treatment.
(B) A savings association shall compute its capital without regard
to this paragraph (a)(3) for the purposes of applying 12 U.S.C.
1831o(g), regardless of the association's capital level.
* * * * *
Dated: August 21, 1995.
By the Office of Thrift Supervision.
John F. Downey,
Director, Supervision.
[FR Doc. 95-21564 Filed 8-30-95; 8:45 am]
BILLING CODE 6720-01-P