[Federal Register Volume 60, Number 177 (Wednesday, September 13, 1995)]
[Rules and Regulations]
[Pages 47455-47458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22666]



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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 95-22]
RIN 1557-AB14


Risk-Based Capital Requirements--Small Business Loan Obligations

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

ACTION: Interim rule with request for comments.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
amending its risk-based capital standards as required by section 208 of 
the Riegle Community Development and Regulatory Improvement Act of 
1994. The changes will modify the risk-based capital treatment of 
transfers of small business loans or leases of personal property with 
recourse, and are intended to facilitate such transfers.


[[Page 47456]]

DATES: The interim rule is effective September 13, 1995. Comments must 
be received on or before November 13, 1995.
ADDRESSES: Written comments should be submitted to Docket No. 95-22. 
Communications Division, Third Floor, Office of the Comptroller of the 
Currency, 250 E Street, SW., Washington, DC 20219, Fax (202) 874-5274. 
Comments will be available for inspection and photocopying at that 
address.

FOR FURTHER INFORMATION CONTACT: David Thede, Senior Attorney, 
Securities and Corporate Practices Division (202/874-5210); Stephen 
Jackson, National Bank Examiner, (202) 874-5070, Office of the 
Comptroller of the Currency.

SUPPLEMENTARY INFORMATION: The OCC is amending its risk-based capital 
standards for transfers of small business obligations with recourse as 
required by section 208 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (the Riegle Act), 12 U.S.C. 1835. 
Banks typically transfer assets with recourse as part of securitization 
transactions. Sections 201-210 of the Riegle Act were intended to 
increase small business access to capital by removing impediments in 
existing law to the securitization of small business loans and leases.
    Under the OCC's current risk-based capital standards, assets 
transferred with recourse are reported on the balance sheet in 
regulatory reports. These amounts are thus included in the calculation 
of banks' risk-based capital and leverage capital ratios.
    Section 208 requires the OCC, the Office of Thrift Supervision, the 
Federal Deposit Insurance Corporation, and the Federal Reserve Board 
(the Federal banking agencies) to change this capital treatment for 
transfers of small business loans and leases with recourse. Under 
section 208, a bank may hold capital only against the face amount of a 
recourse obligation (rather than the amount of the asset transferred 
with recourse) if the bank establishes a reserve equal to the bank's 
reasonable estimated liability under the recourse obligation.1 
Section 208 limits the availability of this treatment as follows:

    \1\ For purposes of determining a bank's capital ratio, the 
reserve would not be subtracted from the amount of the recourse 
obligation.
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    (1) To apply section 208 to a transaction, a bank must be a 
``qualified insured depository institution'' at the time of the sale 
with recourse. A qualified insured depository institution must be 
either well capitalized or, with the approval of the OCC, adequately 
capitalized (in either case, without regard to section 208). If an 
institution loses its ``qualified'' status, transactions completed 
while the institution was qualified will continue to receive the 
favorable capital treatment.
    (2) The total outstanding amount of recourse retained by a bank 
with respect to transfers of small business loans and leases of 
personal property and included in the risk-weighted assets of the bank 
as described in section 208 may not exceed 15 percent of the risk-based 
capital of the bank, unless the OCC, by regulation or order, specifies 
a greater amount.

Prompt Corrective Action

    Section 208(f) states that 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 operation of the prompt corrective action 
system. See S. Rep. No. 103-169, 103d Cong., 1st Sess. 38, 69 (1993). 
However, the statute does not include ``well capitalized'' in the list 
of capital categories not affected. The prompt corrective action system 
deals primarily with imposing corrective sanctions on banks that are 
less than adequately capitalized. Therefore, allowing a bank that is 
adequately capitalized without the section 208 treatment 2 to use 
section 208 for purposes of determining whether the bank is well 
capitalized generally would not affect the application of the prompt 
corrective action sanctions to the bank. Other statutes and regulations 
treat a bank 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 a bank 
to be treated as well capitalized for purposes of these other 
provisions also will not affect the imposition of prompt corrective 
action sanctions.

    \2\ It is very unlikely but theoretically possible that a bank 
that is undercapitalized without section 208 would become well 
capitalized if it applied the treatment in section 208. Because 
section 208 was not intended to affect prompt corrective action, and 
because allowing an undercapitalized bank to become well capitalized 
would affect prompt corrective action, the OCC interprets section 
208 not to allow an undercapitalized bank to use the capital 
treatment it describes to become well capitalized for 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 a bank as well capitalized rather than 
adequately capitalized. If the OCC determines that a bank is in an 
unsafe or unsound condition or is engaging in an unsafe or unsound 
practice, 12 U.S.C. 1831o(g) authorizes the OCC to require an 
adequately capitalized bank (but not a well capitalized bank) to comply 
with certain prompt corrective action provisions as if the bank were 
undercapitalized. Because the text and legislative history of section 
208 indicate that it was not intended to affect prompt corrective 
action, the OCC believes that section 208 does not affect the capital 
calculation for purposes of 12 U.S.C. 1831o(g), regardless of the 
bank's capital level. (The OCC requests comment on this conclusion and 
also asks that commenters discuss the legal justification for any 
alternative interpretation that they suggest.)
    Thus, a bank may use the capital treatment described in section 208 
when determining whether it is well capitalized for purposes of prompt 
corrective action as well as for other regulations that reference the 
well capitalized capital category.3 A bank 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.4 The 
banking agencies will disregard the capital treatment described in 
section 208 for purposes of 12 U.S.C. 1831o(g).

    \3\ An institution that is subject to a written agreement or 
capital directive as discussed in the OCC's prompt corrective action 
regulation would not be considered well capitalized.
    \4\ Under section 208, the capital calculation used to determine 
whether an institution is well capitalized differs from the 
calculation used to determine whether an institution 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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    The OCC requests comments on all aspects of this interim rule.

Summary Outline

    (1) Which small business obligations can an institution apply 
section 208 to? The answer depends on the capital level of the bank 
without considering section 208. 

[[Page 47457]]

    (a) Bank is well capitalized without using section 208: bank is 
``qualifying'' and can apply section 208 to any transfer of small 
business obligations with recourse, up to the 15% of capital limit.
    (b) Bank is adequately capitalized without using section 208 and 
has permission from its regulator: bank is ``qualifying'' and can apply 
section 208 to any transfer of small business obligations with 
recourse, up to the 15% of capital limit.
    (c) Other banks: bank is not ``qualifying'' and so cannot apply 
section 208 to new obligations. However, if the bank was qualifying in 
the past, it can continue to apply section 208 to obligations arising 
out of transfers that occurred during the time that the bank was 
qualified.
    (2) If a bank has assets that it can apply section 208 to, for what 
purposes can the bank use the section 208 treatment? Again, the answer 
depends on the capital level of the bank without considering section 
208.

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                                                                         Other laws and        Other laws and   
      Capital level       PCA, except 1831o(g)        1831o(g)          regulations that     regulations that do
                                                                          reference PCA       not reference PCA 
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Well capitalized without  Yes.................  N/A 2...............  Yes.................  Yes.                
 using 208 1.                                                                                                   
Well capitalized using    Yes.................  No..................  Yes.................  Yes.                
 208 and adequately                                                                                             
 capitalized without                                                                                            
 using 208.                                                                                                     
Other banks.............  No..................  No..................  No..................  Yes.                
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1 Most banks currently fall into this category and so would be able to use section 208 for all capital          
  calculations.                                                                                                 
2 If a bank is well-capitalized without using section 208, application of section 208 will not affect the status
  of the bank under 12 U.S.C. 1831o(g).                                                                         

Regulatory Flexibility Act

    It is hereby certified that this interim rule will not have a 
significant economic impact on a substantial number of small entities. 
This rulemaking is required by statute and will not affect a bank's 
risk-based capital for Prompt Corrective Action purposes, regardless of 
bank size.

Administrative Procedure Act

    Section 208(g) requires that the Federal banking agencies 
promulgate rules implementing section 208 no later than March 22, 1995. 
The OCC has determined that the notice and public participation that 
are ordinarily required by the Administrative Procedure Act (5 U.S.C. 
553) before a regulation may take effect would, in this case, be 
impracticable due to the time constraints imposed by section 208(g). In 
addition, in the OCC's view, advanced public notice and comment is 
unnecessary as the interim rule merely restates 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 providing advance notice and public participation could adversely 
affect credit availability.
    The interim rule is immediately effective upon publication in the 
Federal Register. This action is being taken pursuant to 5 U.S.C. 
553(d) of the Administrative Procedure Act which permits the waiver of 
the 30-day delayed effective date requirement for good cause or where a 
rule relieves a restriction. The OCC views the limitations of time and 
the potential loss of benefit to affected parties during the pendency 
of this rulemaking as good cause to waive the 30-day delayed effective 
date. In addition, as the interim rule relieves a restriction, the 30-
day delayed effective date may be waived. Nevertheless, the OCC desires 
to have the benefit of public comment before adoption of a final rule. 
Accordingly, the OCC invites interested persons to submit comments 
during a 60-day comment period. In adopting a final rule, the OCC will 
revise the interim rule as may be appropriate based on the comments 
received.

Executive Order 12866

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

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates 
Act) requires that an agency prepare a budgetary impact statement 
before promulgating a rule that includes a Federal mandate that may 
result in the 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, the interim rule 
authorizes an alternative method of calculating capital that permits 
banks to elect to hold less capital for certain recourse obligations. 
Because the OCC has determined that the interim rule 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, the OCC has not 
prepared a budgetary impact statement or specifically addressed the 
regulatory alternatives considered.

Paperwork Reduction Act (44 U.S.C. 3501 et seq.) and Regulatory Burden

    The OCC has determined that this interim rule will not increase the 
regulatory paperwork burden of national banks.
    Section 302 of the Riegle Act requires that new regulations and 
amendments to regulations that impose additional reporting, disclosure, 
or other new requirements take effect on the first day of the calendar 
quarter following publication of the rule unless, among other things, 
the agency determines, for good cause, that the regulation should 
become effective on a day other than the first day of the next quarter. 
The OCC believes that an immediate effective date is appropriate since 
the interim rule relieves a regulatory burden on qualifying banks 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 
sales. Moreover, the OCC does not anticipate that immediate application 
of the rule will present a hardship to qualifying institutions in terms 
of compliance. Also, there is a statutory requirement for the banking 
agencies to promulgate final regulations implementing the provisions of 
section 208 by March 22, 1995. For these reasons, the OCC has 
determined that there is sufficient good cause to provide for an 
immediate effective date. 

[[Page 47458]]


List of Subjects in 12 CFR Part 3

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

Authority and Issuance

    For the reasons set out in the preamble, appendix A to part 3 of 
chapter I of title 12 of the Code of Federal Regulations is amended as 
follows:

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 appendix A to part 3, section 3 is amended by adding a new 
paragraph (c) to read as follows:

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

* * * * *

Section 3. Risk Categories/Weights for On-Balance Assets and Off-
Balance Sheet Items.

* * * * *
    (c) Alternative Capital Calculation for Small Business 
Obligations. (1) Definitions. For purposes of this section 3(c):
    (i) Qualified bank means a bank that:
    (A) Is well capitalized as defined in 12 CFR 6.4 without 
applying the capital treatment described in this section 3(c), or
    (B) Is adequately capitalized as defined in 12 CFR 6.4 without 
applying the capital treatment described in this section 3(c) and 
has received written permission from the appropriate district office 
of the OCC to apply the capital treatment described in this section 
3(c).
    (ii) Recourse has the meaning given to such term under generally 
accepted accounting principles.
    (iii) Small business means a business that meets the criteria 
for a small business concern established by the Small Business 
Administration in 13 CFR part 121 pursuant to 15 U.S.C. 632.
    (2) Capital and reserve requirements. With respect to a transfer 
of a small business loan or a lease of personal property with 
recourse that is a sale under generally accepted accounting 
principles, a qualified bank may elect to apply the following 
treatment:
    (i) The bank establishes and maintains a non-capital reserve 
under generally accepted accounting principles sufficient to meet 
the reasonable estimated liability of the bank under the recourse 
arrangement;
    (ii) For purposes of calculating the bank's risk-based capital 
ratio, the bank includes only the amount of its retained recourse in 
its risk-weighted assets; and
    (iii) For purposes of calculating the bank's tier 1 leverage 
ratio, the bank excludes from its average total consolidated assets 
the outstanding principal amount of the small business loans and 
leases transferred with recourse.
    (3) Limit on aggregate amount of recourse. The total outstanding 
amount of recourse retained by a qualified bank with respect to 
transfers of small business loans and leases of personal property 
and included in the risk-weighted assets of the bank as described in 
section 3(c)(2) of this appendix A may not exceed 15 percent of the 
bank's total capital after adjustments and deductions, unless the 
OCC specifies a greater amount by order.
    (4) Bank that ceases to be qualified or that exceeds aggregate 
limit. If a bank ceases to be a qualified bank or exceeds the 
aggregate limit in section 3(c)(3) of this appendix A, the bank may 
continue to apply the capital treatment described in section 3(c)(2) 
of this appendix A to transfers of small business loans and leases 
of personal property that occurred when the bank was qualified and 
did not exceed the limit.
    (5) Prompt Corrective Action not affected. (i) A bank shall 
compute its capital without regard to this section 3(c) for purposes 
of prompt corrective action (12 U.S.C. 1831o and 12 CFR part 6) 
unless the bank is an adequately or well capitalized bank (without 
applying the capital treatment described in this section 3(c)) and, 
after applying the capital treatment described in this section 3(c), 
the bank would be well capitalized.
    (ii) A bank shall compute its capital without regard to this 
section 3(c) for purposes of 12 U.S.C. 1831o(g) regardless of the 
bank's capital level.
* * * * *
    Dated: August 28, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-22666 Filed 9-12-95; 8:45 am]
BILLING CODE 4810-33-P