[Federal Register Volume 60, Number 172 (Wednesday, September 6, 1995)]
[Proposed Rules]
[Pages 46246-46251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21983]



      
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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 60, No. 172 / Wednesday, September 6, 1995 / 
Proposed Rules  


[[Page 46246]]


DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 23

[95-21]
RIN 1557-AB45


Leasing

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing to revise its regulation governing the personal property 
lease financing transactions of national banks. This proposal is 
another component of the OCC's Regulation Review Program to update and 
streamline OCC regulations and to reduce unnecessary regulatory costs 
and other burdens. The proposal revises the regulation to improve its 
clarity. In addition, the OCC has identified several areas where 
substantive changes may be appropriate based upon comments received in 
this rulemaking.

DATES: Comments must be received by November 6, 1995.

ADDRESSES: Comments should be directed to: Communications Division, 250 
E Street, SW., Washington, DC 20219, Attention: Docket No. 95-21. 
Comments will be available for public inspection and photocopying at 
the same location.

FOR FURTHER INFORMATION CONTACT: Morris Morgan, Credit and Management 
Policy, Chief National Bank Examiner's Office 202/874-5170; Jacqueline 
Lussier, Senior Attorney, Legislative and Regulatory Activities 202/
874-5090, Aline J. Henderson, Senior Attorney, Bank Activities and 
Structure, Chief Counsel's Office 202/874-5300.

SUPPLEMENTARY INFORMATION:

Introduction

    The OCC is proposing to revise 12 CFR part 23, which governs 
personal property lease financing transactions by national banks. This 
proposal is another component of the OCC's Regulation Review Program. 
The principal goal of the Program is to review all of the OCC's rules 
with a view toward eliminating provisions that do not contribute 
significantly to maintaining the safety and soundness of national banks 
or to accomplishing the OCC's other statutory responsibilities. Another 
important goal is to clarify regulations so that they more effectively 
convey the standards the OCC seeks to apply.
    The OCC first adopted part 23 in mid-1991.1 The OCC's 
experience to date suggests that a complete, substantive rewrite of the 
regulation is not warranted at this time, but that revisions to improve 
its clarity would be useful. Accordingly, the proposal revises the 
regulation by shortening and streamlining its text; reorganizing many 
of its provisions and adding paragraph headings; and conforming its 
style to that of the OCC's other rules. In addition, the OCC has 
identified several areas, described in the Discussion section below, 
where substantive changes may be appropriate based upon the comments 
received in response to this proposal.

    \1\  56 FR 28314 (June 20, 1991). The final regulation replaced 
the OCC's interpretive ruling on lease financing transactions, which 
had been codified at 12 CFR 7.3400. Much of the substance of this 
interpretive ruling was retained, however, in the portions of part 
23 that apply to Section 24(Seventh) Leases.
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Background

    National banks may engage in leasing activities pursuant to two 
independent sources of authority. First, under 12 U.S.C. 24(Seventh), 
national banks may engage in personal property lease financing 
transactions (Section 24(Seventh) Leases) when the lease is the 
functional equivalent of a loan.2 The OCC has interpreted the 
functional equivalency standard to mean that Section 24(Seventh) Leases 
must be ``net, full-payout leases.'' Under the current regulation, the 
net lease requirement means that the lessor national bank may not 
provide certain enumerated services such as repairs, maintenance, or 
insurance in connection with the leased property. The full-payout 
requirement means that the bank must expect to recover the full 
acquisition and financing costs of the leasing transaction from sources 
that include the estimated, unguaranteed residual value of the leased 
property, but that the bank may rely on estimated residual value only 
to a limited extent. There is no aggregate limit on a national bank's 
investment in Section 24(Seventh) Leases.

    \2\ See M & M Leasing Corp. v. Seattle First National Bank, 563 
F.2d 1377 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978) 
(upholding national banks' authority under 12 U.S.C. 24(Seventh) to 
engage in personal property lease financing transactions if the 
lease is the functional equivalent of a loan).
    In 1987, Congress gave national banks a second, explicit source of 
authority to engage in the personal property lease financing. The 
Competitive Equality Banking Act (CEBA) 3 amended 12 U.S.C. 24 by 
adding a new paragraph Tenth, which allows national banks to invest in 
tangible personal property, including vehicles, manufactured homes, 
machinery, equipment, and furniture, for lease financing transactions 
on a net lease basis. Investment in personal property to be leased 
under the authority of 12 U.S.C. 24(Tenth) (CEBA Leases) may not exceed 
10 percent of a national bank's assets. Although a national bank must 
expect to recover its full acquisition and financing costs in a CEBA 
leasing transaction from the same sources as the regulation specifies 
for a Section 24(Seventh) leasing transaction, CEBA Leases are not 
subject to a maximum estimated residual value limit.

    \3\ Pub. L. 100-86, Sec. 108, 101 Stat. 552, 579 (August 10, 
1987). See also S. Rep. No. 100-19, 100th Cong., 1st Sess. 43 (1987) 
(CEBA expanded national banks' leasing authority in order to enable 
them to respond to customer demand for a broader range of lease 
financing transactions and to compete with thrift and other nonbank 
lessors).
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    Both Section 24(Seventh) Leases and CEBA Leases are governed by 
standards set forth in part 23. The current version of part 23 contains 
three subparts: subpart A applies to all lease financing transactions; 
subpart B contains additional requirements applicable only to CEBA 
Leases; and subpart C contains additional requirements applicable only 
to Section 24(Seventh) Leases. The proposal retains the three-subpart 
structure, but revises and reorganizes the rule's provisions to enhance 
clarity. A derivation table showing these changes appears at the 
conclusion of this preamble.
    The Discussion portion of the preamble contains a section-by-
section description of the proposed revisions.

[[Page 46247]]


Discussion

Subpart A--General Provisions

Authority, Purpose, and Scope (Proposed Sec. 23.1)
    Current Section 23.1(a) sets out the authority of national banks to 
engage in personal property lease financing transactions. The proposal 
does not change the authority provision, but it adds subsections 
describing the purpose of part 23 and the scope of its respective 
subparts. Current 23.1(b), which authorizes a national bank to recover 
its acquisition and financing costs from rentals, tax benefits, and the 
residual value of the leased property, is relocated to proposed 
Sec. 23.3.
Definitions (Proposed Sec. 23.2)
    The current regulation does not contain a definitions section. 
Proposed Sec. 23.2 defines several terms, including ``CEBA Lease,'' 
``conforming lease,'' ``off-lease property,'' and ``Section 24(Seventh) 
Lease'' for the purpose of making the operative provisions of the 
regulation shorter and easier to read.
    Current Sec. 23.2 contains both a definition of the term ``net 
lease'' and operative provisions, including the so-called ``distress 
clauses,'' which allow a national bank to take reasonable action to 
protect its interest in leased property, and a provision that allows a 
national bank to arrange for a third party to provide operational 
services that the bank is precluded from providing under a net lease. 
The definition of ``net lease'' is retained in proposed Sec. 23.2(d) 
without substantive change; the operative provisions are moved to 
proposed Sec. 23.4.
    Proposed Sec. 23.2(c) contains a definition of the term ``full-
payout lease.'' The term is defined as a lease financing transaction in 
which the unguaranteed portion of the estimated residual value of the 
leased property \4\ on which a bank relies for recovery of its 
acquisition and financing costs is no greater than 25 percent of the 
cost of the leased property to the lessor. This estimated residual 
value limit is the same as the limit that currently appears at 
Sec. 23.11(a) of the current regulation. Other, operative provisions of 
the current regulation that pertain to residual value are retained in 
subpart C of part 23, as described below.

    \4\ The ``estimated residual value'' is the estimated market 
value of leased property at the end of the lease term; the 
``unguaranteed portion'' of the estimated residual value is the 
estimated residual value at the end of the lease term less any 
portion of the estimated residual value guaranteed by the lessee, 
the manufacturer, or a third party. See 12 CFR 23.1(b), 23.11.
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    The purpose of a residual value limit is to ensure that a lessor 
bank relies primarily on the creditworthiness of the lessee to recover 
its entire investment in the leased property. When the OCC adopted the 
current residual value limit in 1979, it selected 25 percent as the 
level that best protected national banks from the increased risk that 
results from excessive reliance on residual value. That amount was 
based in part on the OCC's experience at that time in examining and 
supervising banks engaged in Section 24(Seventh) lease financing 
activities. See 44 FR 22388, 22390 (April 13, 1979) (adoption of 
interpretive rule establishing estimated residual value limit of 25 
percent).\5\

    \5\ In 1979, the regulations promulgated by the Board of 
Governors of the Federal Reserve System (FRB) that authorized a bank 
holding company or its subsidiary to engage in lease financing 
activities limited the reliance placed on residual value to a 
maximum of 20 percent of the cost of the property. In 1992, the FRB 
decided to conform its residual value provisions to the OCC's limit 
for Section 24(Seventh) Leases. The FRB based its decision, in part, 
on the fact that the OCC had not identified any significant 
increased risk from permitting reliance on the slightly higher level 
of 25 percent. See 57 FR 20958, 20959-60 (May 18, 1992) (final 
regulation; discussion of bases for FRB action). The FRB's 
regulation appears at 12 CFR 225.25(b)(8).
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    Since then, national banks have been given authority to enter into 
CEBA Leases, which are not subject to a maximum residual value limit 
(but are restricted in aggregate amount to 10 percent of a national 
bank's total consolidated assets). National banks do not appear to be 
engaged in CEBA leasing to the full extent of their statutory 
authority, and liberalization of the residual value limit for Section 
24(Seventh) Leases may therefore be unnecessary.
    The OCC is interested in commenters' views on this question, and 
specifically invites comment on whether the residual value limit for 
Section 24(Seventh) Leases should be modified. In addressing this 
question, commenters may wish to discuss the effect of Financial 
Accounting Standards Board Statement of Financial Accounting Standard 
13, ``Accounting for Leases,'' which, as a practical matter, may affect 
the extent to which a national bank relies on residual value. 
Commenters who support a more flexible limit on residual value for 
Section 24(Seventh) Leases are asked to identify any increased risk 
that may accompany a new limit and to discuss how the OCC should 
address that risk.
Recovery of Investment (Proposed Sec. 23.3)
    Proposed Sec. 23.3 is the same as current Sec. 23.1(b), which 
requires that a national bank entering into a lease financing 
transaction must reasonably expect to recover its full investment in 
the leased property as well as its estimated financing costs over the 
life of the lease from three sources: rentals, estimated tax benefits, 
and the estimated residual value of the leased property.
    As its placement in subpart A of part 23 indicates, the recovery of 
investment provision applies both to CEBA Leases and to Section 
24(Seventh) Leases. The maximum estimated residual value requirement 
that appears in the definition of the term ``full-payout lease,'' 
however, applies only to Section 24(Seventh) Leases. Neither the 
current regulation nor the proposal limits the extent to which a 
national bank may rely on residual value to recover its acquisition and 
financing costs in a CEBA Lease transaction.
Net Lease Requirement (Proposed Sec. 23.4)
    A new paragraph (a) is added to proposed Sec. 23.4. This paragraph 
contains an explicit statement of the requirement that national banks 
may engage in a lease financing transaction, and in activities 
incidental to the transaction, only if the lease is a net lease. The 
current rule does not contain a plain statement of this basic 
requirement. The statement is added for purposes of clarity and 
completeness; it is not intended to change the requirement.
    The incidental activities clause in proposed Sec. 23.4(a) reflects 
the OCC's long-standing interpretations authorizing national banks to 
engage in activities incidental to leasing. As the placement of the 
incidental activities reference within subpart A of part 23 indicates, 
the OCC takes the position that a national bank may engage in 
incidental activities with respect both to Section 24(Seventh) Leases 
and CEBA Leases.
    The activities incidental to leasing that the OCC has authorized to 
date for national banks acting as lessors include: \6\ providing 
management, 

[[Page 46248]]
marketing, and administrative services through an operating subsidiary; 
offering credit life insurance to lessees; and acquiring rights under 
maintenance contracts associated with purchased leases.\7\ The OCC does 
not propose to include a list of permissible activities incidental to 
leasing in part 23. Commenters are, however, invited to address the 
desirability of retaining this case-by-case approach and to discuss 
incidental activities that may be appropriate for OCC consideration. In 
particular, the OCC is seeking comment on whether it should, on a case-
by-case basis, permit national banks to lease real estate when the real 
estate lease is incidental to a personal property lease financing 
transaction. This issue may arise, for example, when a bank wishes to 
lease personalty, such as machinery, that is affixed to the land on 
which it sits.

    \6\ The OCC has also authorized national banks to engage in 
incidental activities with respect to lease financing transactions 
to which the bank is not a party. These activities include acting as 
finder or performing similar functions as agent or broker. See 12 
CFR 7.7200. They also include providing lease consulting services 
such as financial advice; providing management, brokerage, and 
finder services; and performing lease servicing for third parties. 
See, e.g., OCC Interpretive Letter No. 567 (Oct. 29, 1991) reprinted 
in [1991-92 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 
83,337; Letter from Wallace S. Nathan (Oct. 28, 1985) (unpublished); 
Letter from Peter Liebesman (June 15, 1981) (unpublished).
    Copies of unpublished letters are available in the OCC's public 
comment file for this rulemaking.
    \7\ See Letter from H. Joe Selby, Nov. 24, 1976 (unpublished) 
(management, marketing, and administrative services through an 
operating subsidiary); Letter from Peter Liebesman, Jan. 14, 1985 
(unpublished) (credit life insurance); Letter from J.T. Watson, May 
14, 1975 (unpublished) (rights under maintenance contracts 
associated with purchased leases).
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    The substance of proposed Sec. 23.4(b) is the same as that of 
current Sec. 23.2(b), (c), and (d), but the text has been revised so 
that it is shorter and simpler. For example, the provisions specifying 
the conditions under which a national bank may take appropriate action 
to protect its interests have been amended so that they no longer 
require that a change in condition be ``unexpected'' or that a bank's 
increased exposure to risk be ``significant.'' As is the case in 
current Sec. 23.2, proposed Sec. 23.4(b) provides that the actions a 
national bank may take to salvage or protect its investment under the 
distress clauses include the actions described in the definition of net 
lease at Sec. 23.2(d).
Investment in Personal Property (Proposed Sec. 23.5)
    Current Sec. 23.3, which governs the acquisition of property to be 
leased, the disposition of the property at the conclusion of the lease 
term or upon the lessee's default, and the use of short-term leases, 
has been moved to proposed Sec. 23.5 with certain clarifying changes. 
For example, the text of the provision covering bridge or interim 
leases has been rewritten to state more clearly the current rule that a 
bank's use of a bridge or interim lease pending the long-term 
disposition of off-lease property does not extend the off-lease holding 
period. Property is ``off-lease'' at the expiration of the lease term 
or upon the lessee's default on the lease agreement prior to 
expiration.
    Current Sec. 23.3(b) requires that a national bank dispose of or 
re-lease off-lease property as soon as practicable, but not later than 
two years from the date the lease expires. Proposed Sec. 23.5(b) is 
substantively the same but contains new language to clarify that the 
two-year holding period runs either from the date the lease expires or 
from the date of the lessee's default, depending on the reason that the 
national bank takes possession or control of the leased property.
    Both Section 24(Seventh) Leases and CEBA Leases are subject to this 
holding period limitation for off-lease assets. Property that the bank 
retains in anticipation of re-leasing must be revalued when it comes 
off-lease at the lower of current fair market value or book value. Upon 
the expiration of the two-year period, national banks are required to 
write-off any remaining book value for off-lease assets.
    The OCC has considered whether it should extend the holding period 
for off-lease property. For example, a longer holding period may be 
appropriate where markets for particular types of property become 
depressed, and the two-year period might be insufficient to allow 
national banks to proceed with the orderly liquidation or re-lease of 
the property. The OCC, however, lacks empirical data on the experiences 
national banks have had in attempting to liquidate or re-lease specific 
kinds of off-lease property within the current holding period and, 
accordingly, is not now proposing any change.
    The OCC would consider modifying the holding period in the final 
revisions of part 23 if commenters present persuasive reasons, 
supported by empirical evidence, for doing so. Accordingly, the OCC 
requests comment on the following issues: (1) Should the holding period 
for off-lease assets be extended and, if so, should it be extended for 
all categories of assets or only for particular categories? (2) If the 
holding period were extended, what is a reasonable additional time 
period, in general or for particular categories of assets? (3) What 
evidence supports extension of the holding period? (4) If the holding 
period were extended, how should the OCC ensure that banks do not use 
the longer period to retain property for essentially speculative 
purposes? The OCC invites specific comment on the experiences of 
national banks in attempting to liquidate or re-lease specific kinds of 
off-lease personal property that are relevant to the issue of extending 
the holding period requirement.
Requirement for Separate Records (Proposed Sec. 23.6)
    Proposed Sec. 23.6 retains the requirement in current Sec. 23.4 
that national banks maintain separate records for CEBA Leases and 
Section 24(Seventh) Leases. Minor revisions have been made to shorten 
and clarify the text.
Applicability of Consumer Laws (Current Sec. 23.6; Removed in Proposal)
    Current Sec. 23.6 states that nothing in part 23 shall be construed 
to be in conflict with the duties, liabilities and standards imposed by 
the Consumer Leasing Act of 1976, 12 U.S.C. 1667 et seq. (CLA). The OCC 
is proposing to remove this section because other consumer protection 
laws and regulations may also apply to personal property lease 
financing, making the cross-reference potentially misleading. Of 
course, this change does not affect the applicability of the CLA or any 
other consumer credit laws to national banks' lease financing 
activities, and national banks must know and comply with the full range 
of requirements that govern these activities.
Application of Lending Limits; Restrictions on Transactions With 
Affiliates (Proposed Sec. 23.7)
    The proposal continues to subject lease financing transactions to 
lending limits and transactions with affiliates restrictions, but 
clarifies that the transactions with affiliates restrictions apply only 
if the lessee is an affiliate of the lessor bank. The proposal also 
retains the reservation of the OCC's authority to impose other limits 
or restrictions. These provisions currently appear at Sec. 23.5; they 
are relocated in the proposal to Sec. 23.7.

Subpart B--CEBA Leases

Provisions Applicable to CEBA Leases (Proposed Secs. 23.8, 23.9, and 
23.10)
    Proposed Secs. 23.8, 23.9, and 23.10 contain the requirements 
applicable to CEBA Leases, including a statement of the general rule 
authorizing investment in CEBA Leases, the limits placed on banks' 
exercise of their CEBA leasing authority, and a transition rule for 
CEBA Leases entered into after CEBA's enactment but before the 
effective date of the OCC's final implementing rule. The substance of 
these provisions is the same as that of current Secs. 23.7. 23.8, and 
23.9. Minor changes have been made to shorten and clarify the text. 

[[Page 46249]]


Subpart C--Section 24(Seventh) Leases

General Rule (Proposed Sec. 23.11)
    Current Sec. 23.10 states the general rule authorizing national 
banks to engage in lease financing pursuant to 12 U.S.C 24(Seventh). 
The substance of proposed Sec. 23.11 is the same as this current rule. 
The reference to incidental activities in the current rule has been 
deleted as redundant, however, given the treatment of incidental 
activities in proposed Sec. 23.4. Other, minor revisions have been made 
to shorten and clarify the text.
Estimated Residual Value (Proposed Sec. 23.12)
    Current Sec. 23.11 prescribes not only the residual value limit 
that applies to Section 24(Seventh) Leases but also certain other 
provisions that apply to a bank's reliance on or estimate of residual 
value. First, the amount of any estimated residual value guaranteed by 
a manufacturer, the lessee, or a third party that is not an affiliate 
of the bank may exceed 25 percent of the original cost of the property 
if the bank has determined that the guarantor has the resources to meet 
the guarantee and the bank can document its determination. Second, the 
estimated residual value amounts must be reasonable given the type of 
property leased and the relevant circumstances, so that realization of 
the lessor bank's full investment and the cost of financing the 
property primarily depends on the creditworthiness of the lessee and 
any guarantor of the residual value, and not on the residual market 
value of the leased item. Finally, when a bank leases personal property 
to a government entity, its estimates of residual value may be based on 
future transactions that it reasonably anticipates will occur.
    The estimated residual value limit has been incorporated into a 
definition of the term ``full-payout lease'' that appears in proposed 
Sec. 23.2. The other provisions remain substantively unchanged but have 
been moved to proposed Sec. 23.12 with minor revisions to shorten and 
clarify the text.
Transition Rule (Proposed Sec. 23.13)
    Current Sec. 23.12 provides that leases executed before June 12, 
1979,\8\ are not subject to part 23 and prescribes rules for renewing 
those leases. Proposed Sec. 23.13 retains these provisions with minor 
revisions to shorten and clarify the text.

    \8\ June 12, 1979, was the effective date of the OCC's final 
rule amending 12 CFR 7.3400 to reflect the Ninth Circuit's decision 
in the M&M Leasing case.
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    The OCC welcomes comments on any aspect of the proposed regulation, 
particularly on those issues specifically noted in this preamble.

                            Derivation Table                            
     [This table directs readers to the provision(s) of the current     
     regulation, if any, upon which the proposed revision is based.]    
------------------------------------------------------------------------
                                               Original                 
             Revised provision                provision       Comments  
------------------------------------------------------------------------
Sec.  23.1................................  Sec.  23.1(a)  Modified.    
Sec.  23.2(a), (b), (c)...................  .............  Added.       
Sec.  23.2(d).............................  Sec.  23.2(a)  Modified.    
Sec.  23.3................................  Sec.  23.1(b)  Modified.    
Sec.  23.4(a).............................  .............  Added.       
Sec.  23.4(b).............................  Sec.  23.2     Modified.    
                                             (b), (c),                  
                                             (d).                       
Sec.  23.5................................  Sec.  23.3...  Modified.    
Sec.  23.6................................  Sec.  23.4...  Modified.    
Sec.  23.7................................  Sec.  23.5...  Modified.    
                                            Sec.  23.6...  Removed.     
Sec.  23.8................................  Sec.  23.7...  Modified.    
Sec.  23.9................................  Sec.  23.8...  Modified.    
Sec.  23.10...............................  Sec.  23.9...  Modified.    
Sec.  23.11...............................  Sec.  23.10..  Modified.    
Sec.  23.12...............................  Sec.  23.11..  Modified.    
Sec.  23.13...............................  Sec.  23.12..  Modified.    
------------------------------------------------------------------------

Regulatory Flexibility Act

    It is hereby certified that this proposal, if adopted as a final 
rule, will not have a significant economic impact on a substantial 
number of small entities. Accordingly, a regulatory flexibility 
analysis is not required. This proposal, if adopted as a final rule, 
will reduce the regulatory burden on national banks, regardless of 
size, by simplifying and clarifying existing regulatory requirements.

Executive Order 12866

    The OCC has determined that this proposal is not a significant 
regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

    The OCC has determined that the requirements of this proposal will 
not result in expenditures by State, local, and tribal governments, or 
by the private sector, of more than $100 million in any one year. 
Accordingly, a budgetary impact statement is not required under section 
202 of the Unfunded Mandates Reform Act of 1995.

List of Subjects in 12 CFR Part 23

    National banks, Banking, Leasing, Lease financing transactions.

Authority and Issuance

    For the reasons set out in the preamble, part 23 of title 12, 
chapter I, of the Code of Federal Regulations is proposed to be amended 
as set forth below:
    1. Part 23 is revised to read as follows:

PART 23--LEASING

Subpart A--General Provisions

Sec.
23.1  Authority, purpose, and scope.
23.2  Definitions.
23.3  Recovery of investment.
23.4  Net lease requirement.
23.5  Investment in personal property.
23.6  Requirement for separate records.
23.7  Application of lending limits; restrictions on transactions 
with affiliates.

Subpart B--CEBA Leases

23.8  General rule.
23.9  Lease term.
23.10  Transition rule.

Subpart C--Section 24(Seventh) Leases

23.11  General rule.
23.12  Estimated residual value.
23.13  Transition rule.

    Authority: 12 U.S.C. 1; 12 U.S.C. 24(Seventh) and 24(Tenth); 12 
U.S.C. 93a.

Subpart A--General Provisions


Sec. 23.1  Authority, purpose, and scope.

    (a) Authority. A national bank may engage in personal property 
lease financing transactions pursuant to 12 U.S.C. 24(Seventh) and 12 
U.S.C. 24(Tenth).
    (b) Purpose. The purpose of this part is to set forth standards for 
personal property lease financing transactions authorized for national 
banks.
    (c) Scope. A national bank that enters into a lease under the 
authority of 12 U.S.C. 24(Seventh) must comply with subparts A and C of 
this part. A national bank that enters into a lease under the authority 
of 12 U.S.C. 24(Tenth) must comply with subparts A and B of this part.


Sec. 23.2  Definitions.

    (a) CEBA Lease means a personal property lease entered into under 
the authority of 12 U.S.C. 24(Tenth).
    (b) Conforming lease means:
    (1) A CEBA Lease that conforms with the requirements of subparts A 
and B of this part; or
    (2) A Section 24(Seventh) Lease that conforms with the requirements 
of subparts A and C of this part.
    (c) Full-payout lease means a lease financing transaction in which 
any unguaranteed portion of the estimated residual value relied upon by 
the bank to yield the return of its full investment in the leased 
property, plus the estimated cost of financing the property over the 
term of the lease, does not exceed 25 percent of the original cost of 
the property to the lessor. 

[[Page 46250]]

    (d) Net lease means a lease under which the bank will not, directly 
or indirectly, provide or be obligated to provide for:
    (1) Servicing, repair, or maintenance of the leased property during 
the lease term;
    (2) Purchasing parts and accessories for the leased property; 
however, improvements and additions to the leased property may be 
leased to the lessee upon the lessee's request in accordance with any 
applicable requirements for maximum estimated residual value;
    (3) Loan of replacement or substitute property while the leased 
property is being serviced;
    (4) Purchasing insurance for the lessee, except where the lessee 
has failed in its contractual obligation to purchase or maintain the 
required insurance; or
    (5) Renewal of any license or registration for the property unless 
renewal by the bank is necessary to protect its interest as owner or 
financier of the property.
    (e) Off-lease property means personal property that reverts to a 
national bank's possession or control upon the expiration of a lease or 
upon the default of the lessee.
    (f) Section 24(Seventh) Lease means a personal property lease 
entered into under the authority of 12 U.S.C. 24(Seventh).


Sec. 23.3  Recovery of investment.

    A national bank that enters into a lease financing transaction must 
reasonably expect to realize the return of its full investment in the 
leased property, plus the estimated cost of financing the property over 
the term of the lease, from:
    (1) Rentals;
    (2) Estimated tax benefits; and
    (3) The estimated residual value of the property at the expiration 
of the term of the lease.


Sec. 23.4  Net lease requirement.

    (a) General rule.  A national bank may engage in a lease financing 
transaction and activities incidental to the transaction only if the 
lease qualifies as a net lease.
    (b) Exceptions--(1) Change in conditions. If, in good faith, a 
national bank believes that there has been a change in conditions that 
threatens its financial position by increasing its exposure to loss, 
then the bank may:
    (i) As the owner and lessor under a net lease, take reasonable and 
appropriate action (including the actions specified in Sec. 23.2(d)) to 
salvage or protect the value of the property or its interests arising 
under the lease;
    (ii) As the assignee of a lessor's interest in a lease, become the 
owner and lessor of the leased property pursuant to its contractual 
rights, or take any reasonable and appropriate action (including the 
actions specified in Sec. 23.2(d)) to salvage or protect the value of 
the property or its interests arising under the lease.
    (2) Provisions to protect the bank's interests. A national bank may 
include any provisions in a lease, or make any additional agreements, 
to protect its financial position or investment in the event of a 
change in conditions that would increase its exposure to loss.
    (3) Arranging for services by a third party. A national bank may 
arrange for any of the services enumerated in Sec. 23.2(d) to be 
provided to a lessee by a third party at the expense of the lessee.


Sec. 23.5  Investment in personal property.

    (a) Requirement for written agreement. A national bank may acquire 
specific personal property to be leased only after the bank has entered 
into either:
    (1) A legally binding written agreement that indemnifies the bank 
against loss in connection with its acquisition of the property; or
    (2) A legally binding written commitment to enter into a conforming 
lease.
    (b) Two-year holding period. At the expiration of the lease 
(including any renewals or extensions with the same lessee), or in the 
event of a default on a lease agreement prior to the expiration of the 
lease term, a national bank shall either liquidate the property or re-
lease it under a conforming lease as soon as practicable. In any event, 
liquidation or re-lease shall occur not later than two years from the 
date of the expiration of the lease or the date of the lessee's 
default. Property that the bank retains in anticipation of re-leasing 
must be revalued at the lower of current fair market value or book 
value before the bank enters into any subsequent lease.
    (c) Bridge or interim leases. During the two-year holding period 
allowed by paragraph (b) of this section, a bank may enter into a 
short-term bridge or interim lease pending the sale of off-lease 
property or the re-lease of the property under a long-term conforming 
lease. A short-term bridge or interim lease must be a net lease, but it 
need not comply with any other requirement of subpart B or C of this 
part.


Sec. 23.6  Requirement for separate records.

    If a national bank enters into both CEBA Leases and Section 
24(Seventh) Leases, the bank's records must distinguish the CEBA Leases 
from the Section 24(Seventh) Leases.


Sec. 23.7  Application of lending limits; restrictions on transactions 
with affiliates.

    A national bank's lease financing transactions are subject to the 
lending limits prescribed by 12 U.S.C. 84 or, if the lessee is an 
affiliate of the bank (as defined by 12 U.S.C. 371c), to the 
restrictions on transactions with affiliates prescribed by 12 U.S.C. 
371c and 371c-1. The OCC may also determine that other limits or 
restrictions apply.

Subpart B--CEBA Leases


Sec. 23.8  General rule.

    Pursuant to 12 U.S.C. 24(Tenth), a national bank may invest in 
tangible personal property, including, without limitation, vehicles, 
manufactured homes, machinery, equipment, or furniture for lease 
financing transactions, or may become the owner and lessor of tangible 
personal property by purchasing the property from another lessor in 
connection with the bank's purchase of the related lease, provided 
that: the lease is a conforming lease; and the aggregate book value of 
all tangible personal property held for lease under the authority of 12 
U.S.C. 24(Tenth) does not exceed 10 percent of the bank's consolidated 
assets.


Sec. 23.9  Lease term.

    (a) Initial term. A CEBA Lease must have an initial term of not 
less than 90 days.
    (b) Exception. The 90-day term requirement prescribed by paragraph 
(a) of this section does not apply to the acquisition of property 
subject to an existing lease with a remaining maturity of less than 90 
days, provided that, at its inception the lease was a conforming lease.


Sec. 23.10  Transition rule.

    (a) General rule. CEBA Leases entered into prior to July 22, 1991, 
may continue to be administered in accordance with the lease financing 
terms agreed to by the bank/lessor and the lessee. For purposes of 
applying the lending limits and the restrictions on transactions with 
affiliates described in Sec. 23.7, however, a bank that enters into a 
new extension of credit to a customer, including a lease, shall include 
all outstanding leases regardless of the date on which they were made.
    (b) Renewal of non-conforming leases. A national bank may renew a 
CEBA Lease that was entered into prior to July 22, 1991, and that is 
not a conforming lease only if the following conditions are satisfied: 

[[Page 46251]]

    (1) The bank entered into the CEBA Lease in good faith;
    (2) The expiring lease contains a binding agreement requiring that 
the bank renew the lease at the lessee's option, and the bank cannot 
reasonably avoid its commitment to do so; and
    (3) The bank determines in good faith and demonstrates by 
appropriate documentation that renewal of the lease is necessary to 
avoid financial loss and to recover its investment in and its cost of 
financing the property.

Subpart C--Section 24(Seventh) Leases


Sec. 23.11  General rule.

    Pursuant to 12 U.S.C. 24(Seventh), a national bank may become the 
legal or beneficial owner and lessor of, or otherwise acquire, personal 
property; or may become the owner and lessor of personal property by 
purchasing the property from another lessor in connection with the 
bank's purchase of the related lease, provided that: the lease is a 
net, full-payout lease representing a noncancelable obligation of the 
lessee (notwithstanding the possible early termination of that lease); 
and the lease is a conforming lease.
Sec. 23.12  Estimated residual value.

    (a) Recovery of investment and costs. A national bank's estimates 
of the residual value of the property and the portion of the estimated 
residual value that the bank relies upon to satisfy the requirements of 
a full-payout lease, as defined in Sec. 23.2(c), must be reasonable in 
light of the nature of the leased property and all circumstances 
relevant to the transaction. The bank's realization of its full 
investment in the leased property, plus the estimated cost of financing 
the property over the term of the lease, must depend primarily on the 
creditworthiness of the lessee and any guarantor of the residual value, 
and not on the residual value of the leased item.
    (b) Estimated residual value subject to guarantee. The amount of 
any estimated residual value guaranteed by the manufacturer, the 
lessee, or a third party may exceed 25 percent of the original cost of 
the property if the bank determines and demonstrates by appropriate 
documentation that the guarantor has the resources to meet the 
guarantee and the guarantor is not an affiliate of the bank, as defined 
by 12 U.S.C. 371c.
    (c) Leases to government entities. Calculations of estimated 
residual value on leases of personal property to Federal, State, or 
local government entities may be based on future transactions or 
renewals that the bank reasonably anticipates will occur.


Sec. 23.13  Transition rule.

    (a) Exclusion. Subpart A and this subpart shall not apply to any 
Sec. 24(Seventh) Leases executed prior to June 12, 1979. For purposes 
of applying the lending limits and the restrictions on transactions 
with affiliates described in Sec. 23.7, however, a bank that enters 
into a new extension of credit to a customer, including a lease shall 
include all outstanding leases regardless of the date on which they 
were made.
    (b) Renewal of non-conforming leases. A national bank may renew a 
Section 24(Seventh) Lease that was entered into prior to June 12, 1979, 
and that is not a conforming lease only if the following conditions are 
satisfied:
    (1) The bank entered into the Section 24(Seventh) Lease in good 
faith;
    (2) The expiring lease contains a binding agreement requiring that 
the bank renew the lease at the lessee's option, and the bank cannot 
reasonably avoid its commitment to do so; and
    (3) The bank determines in good faith and demonstrates by 
appropriate documentation that renewal of the lease is necessary to 
avoid financial loss and to recover its investment in and its cost of 
financing the property.

    Dated: August 14, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-21983 Filed 9-5-95; 8:45 am]
BILLING CODE 4810-33-P