[Federal Register Volume 61, Number 138 (Wednesday, July 17, 1996)]
[Proposed Rules]
[Pages 37227-37229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18021]
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Proposed Rules
Federal Register
________________________________________________________________________
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. 61, No. 138 / Wednesday, July 17, 1996 /
Proposed Rules
[[Page 37227]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 32
[Docket No. 96-14]
RIN 1557-AB55
Lending Limits
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 revisions to its lending limits regulation in order to
provide additional flexibility for a national bank to preserve personal
property securing a loan, consistent with safe and sound banking
practices. The proposal also makes several technical changes designed
to clarify certain provisions in the current rule.
DATES: Comments must be received by September 16, 1996.
ADDRESSES: Comments should be directed to Office of the Comptroller of
the Currency, Communications Division, 250 E Street, SW., Washington,
DC 20219, Attention: Docket No. 96-14. Comments will be available for
public inspection and photocopying at the same location. In addition,
comments may be sent by facsimile transmission to FAX number (202) 874-
5274 or by internet mail to [email protected].
FOR FURTHER INFORMATION CONTACT: William C. Kerr, National Bank
Examiner, or Frank R. Carbone, National Bank Examiner, Credit and
Management Policy, (202) 874-5170; Laura Goldman, Attorney, or Aline J.
Henderson, Senior Attorney, Bank Activities and Structure Division,
(202) 874-5300; or Mark J. Tenhundfeld, Senior Attorney, Legislative
and Regulatory Activities Division, (202) 874-5090.
SUPPLEMENTARY INFORMATION:
Background
In 1995, as part of its Regulation Review Program (Program), the
OCC comprehensively revised its lending limits regulation. See 60 FR
8537 (February 15, 1995). These amendments to part 32 changed, among
other things, the definition of ``loans and extensions of credit'' to
exempt under certain circumstances additional funds advanced for the
payment of maintenance and operating expenses necessary to preserve the
value of real property securing a loan. See 12 CFR 32.2(j)(2)(i). Also,
the amendments changed the definition of ``capital and surplus'' to
allow a national bank, in most instances, to calculate its lending
limit based on information contained in the bank's most recent
quarterly Consolidated Report of Condition and Income (Call Report).
See id. Sec. 32.4.
As is explained in greater detail in the discussion that follows,
these changes prompted requests for the OCC: (a) to extend the
exemption for funds advanced to preserve and maintain collateral to
loans secured by personal property as well as to loans secured by real
property; and (b) to clarify the date on which a national bank must
recalculate its capital and surplus. This proposal addresses both
issues, and makes several technical changes designed to improve part 32
without changing its substance. Moreover, the proposal reflects the
OCC's continuing commitment to assess the effectiveness of the rules it
has revised under the Program and to make further changes where
necessary to improve a regulation.
The OCC invites comments of a general nature on all aspects of the
proposal in addition to comments on specific issues identified in the
text that follows.
The Proposal
Definition of ``Loans and Extensions of Credit'' (Sec. 32.2(j))
Current Sec. 32.2(j)(2)(i) states that additional funds advanced
for the benefit of a borrower by a bank for payment of maintenance and
operating expenses necessary to preserve the value of real property
securing a loan are not ``loans or extensions of credit'' for purposes
of 12 U.S.C. 84 and part 32 under certain circumstances. This exemption
for funds advanced to protect collateral does not address advances for
the purpose of protecting personal property collateral.
The proposal amends the current exemption by treating an advance to
protect personal property collateral the same as an advance to protect
real property collateral. The reasoning underlying both types of
advances is identical, namely, to protect the position of the lending
bank by preserving collateral prior to foreclosure in order to avoid
greater expenses later. For example, advancing funds for the purpose of
preserving the condition of equipment or getting perishable crops to
market may protect the bank's condition more effectively than waiting
until after foreclosure to take the steps necessary to protect the
bank's interest.
Under the proposal, an advance to protect personal property
collateral is subject to the same safeguards that currently apply to an
advance to protect real property. Thus, the advance must be for
maintenance and operating expenses only to the extent necessary to
preserve the collateral, and must be consistent with safe and sound
banking practices. These advances are permitted only for the purpose of
protecting a bank's interest in the collateral. Moreover, a bank must
treat any amount so advanced as an extension of credit if the bank
makes a new loan to the borrower.
In proposing this expansion of the exemption, the OCC expects that
a bank will reasonably anticipate a borrower's need to fund various
expenses in determining the appropriate size of the loan that the bank
will make. Moreover, the OCC intends for the exemption not to create
incentives for borrowers to divert or reclassify spending in order to
qualify larger portions of their credit needs for the exemption. A bank
that wishes to advance funds pursuant to the proposed exemption should
be able to document what collateral is being protected, how the
additional advance will preserve the collateral, why the amount of the
advance is the necessary amount, the basis for the bank's belief that
the additional advance is likely to be repaid, and how the bank's
position would be protected by preserving the collateral as compared to
attempting a sale of the property.
The proposal also clarifies that the exemption, whether it applies
to
[[Page 37228]]
advances to protect real or personal property, is to protect and
maintain identified collateral for a particular loan. The exemption is
not intended to allow a bank to speculate on the value of collateral by
advancing additional funds in the hope that increasing collateral
values will enable the borrower to repay all funds advanced. Nor is the
exemption intended to permit a bank to continue funding the operations
of a borrower until the borrower's business fortunes improve. To
further clarify the scope of the exemption with respect to advances to
protect either real or personal property collateral, and to emphasize
that the exception is not available for speculative purposes, the
proposal deletes the words ``value of'' used in conjunction with the
reference to the relevant real or personal property.
The OCC requests comment on whether the restrictions it proposes to
place on the advance of funds pursuant to the expanded exemption are
workable and adequate to insure safety and soundness. Commenters are
invited to suggest additional or alternative conditions.
Calculation of Lending Limits (Sec. 32.4)
Current Sec. 32.4(a) requires a bank to calculate its lending limit
as of the later of the date when the bank's Call Report ``is required
to be filed'' or when the bank's capital category changes for purposes
of the prompt corrective action provisions of 12 U.S.C. 1831o and 12
CFR part 6. Pursuant to current Sec. 32.4(b), the OCC may require a
national bank to calculate its lending limit more frequently if the OCC
determines that the bank should do so for safety and soundness reasons.
Because the General Instructions to the Call Report refer to two
separate ``filing'' dates, questions have arisen under the current rule
concerning the date on which a recalculated lending limit is to become
effective. The first potential filing date identified in the General
Instructions, termed the ``report date,'' is defined as the last
calendar day of each calendar quarter. The second potential filing
date, termed the ``submission date,'' is the date by which the
appropriate Federal banking agency must receive the Call Report. For
most banks, the submission date is 30 days after the report date. Thus,
the reference in the current rule to the date when the Call Report ``is
required to be filed'' could produce some confusion as to when a
recalculated limit becomes effective, depending on which ``filing''
date is used.
The proposal resolves this ambiguity by distinguishing the
``calculation date'' of a lending limit from its ``effective date.''
Assuming that a national bank's capital category has not changed, the
bank is to calculate its lending limit using numbers reported in the
bank's most recent Call Report, and, therefore, base its lending limit
on the bank's capital and surplus as of the end of the most recent
calendar quarter (the calculation date). However, this new limit will
not be effective until the earlier of the date on which the bank
submits its Call Report or is required to submit the Call Report (the
effective date). The proposal amends Sec. 32.4(a)(1), redesignates
current Sec. 32.4(b) as Sec. 32.4(c), and adds a new Sec. 32.4(b) that
sets forth the effective date for using the updated numbers to
accomplish this result.
If a bank's capital category for prompt corrective action purposes
changes, then the bank must determine its lending limit as of the date
on which the capital category changes. The new limit in this instance
will be effective on the date that the limit is to be recalculated. The
OCC also will continue its practice of permitting a recalculation of
lending limits at a point during a quarter when there is a material
change in a bank's capital arising from corporate activities such as a
merger or stock issuance.
Technical Amendments (Secs. 32.2(b) and 32.3(c))
The proposal makes several clarifying technical amendments to part
32. None of these amendments affects the substance of the current rule.
The technical amendments are summarized below.
Current Sec. 32.2(b) states that capital and surplus includes,
among other things, a bank's Tier 1 and Tier 2 capital ``included in
the bank's risk-based capital under'' the OCC's minimum capital ratios
as set forth in Appendix A to 12 CFR Part 3. The proposal clarifies
this definition by changing that language to refer to a bank's Tier 1
and Tier 2 capital ``calculated under the OCC's risk-based capital
standards set out in Appendix A to part 3 of this chapter as reported
in the bank's Consolidated Report of Condition and Income as filed
under 12 U.S.C. 161.''
Current Sec. 32.3(c)(4)(ii) exempts a loan from the lending limits
to the extent that the loan is secured by an unconditional takeout
commitment or guarantee of a Federal agency. In explaining when a
commitment or guarantee is unconditional, Sec. 32.3(c)(4)(ii)(B) notes
that protection against loss is not materially diminished or impaired
by a procedural requirement, such as ``an agreement to take over only
in the event of default * * *.'' The proposal clarifies that the phrase
``an agreement to take over'' means an agreement to pay on an
obligation.
Finally, current Sec. 32.3(c)(6)(ii)(B) states that a bank must
establish procedures to revalue foreign currency deposits to ensure
that the loan or extension of credit remains fully secured at all
times. The proposal clarifies that the revaluation must be periodic.
The OCC invites comments on these proposed technical amendments and
suggestions for other technical changes that would clarify or improve
the rule.
Regulatory Flexibility Act
It is hereby certified that this proposal will not have a
significant economic impact on a substantial number of small entities.
As is explained in greater detail in the preamble to this proposal, the
only substantive change that is proposed would enhance a national
bank's ability to protect its interest in real property that serves as
collateral for a loan already made by the bank. By relaxing a
restriction that currently impedes this ability, the proposal will
reduce the regulatory burden on national banks, regardless of size.
Accordingly, a regulatory flexibility analysis is not required.
Executive Order 12866
The OCC has determined that this proposal 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 notice of proposed rulemaking (NPRM) likely to
result in a rule that includes a Federal mandate that may result in the
annual expenditure of $100 million or more in any one year by State,
local, and tribal governments, in the aggregate, or by the private
sector. If a budgetary impact statement is required, section 205 of the
Unfunded Mandates Act requires an agency to identify and consider a
reasonable number of alternatives before promulgating an NPRM. The OCC
has determined that the 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, the OCC has not
prepared a budgetary impact statement or specifically addressed the
regulatory alternatives considered. As discussed in the preamble, the
proposal would clarify certain provisions of the current rule and
provide additional flexibility to a
[[Page 37229]]
national bank to extend credit for the purpose of protecting personal
property that secures a loan from the bank.
List of Subjects in 12 CFR Part 32
National banks, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set out in the preamble, part 32 of chapter I of
title 12 of the Code of Federal Regulations is proposed to be amended
as set forth below:
PART 32--LENDING LIMITS
1. The authority citation for part 32 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 84, and 93a.
2. In Sec. 32.2, paragraphs (b) and (j)(2)(i) are revised to read
as follows:
Sec. 32.2 Definitions.
* * * * *
(b) Capital and surplus means--
(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's
risk-based capital standards set out in Appendix A to part 3 of this
chapter as reported in the bank's Consolidated Report of Condition and
Income as filed under 12 U.S.C. 161; plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital under Appendix A to part 3 of this chapter, as
reported in the bank's Consolidated Report of Condition and Income as
filed under 12 U.S.C. 161.
* * * * *
(j) * * *
(2) * * *
(i) Additional funds advanced for the benefit of a borrower by a
bank for payment of taxes, insurance, utilities, security, and
maintenance and operating expenses to the extent necessary to preserve
real or personal property securing the loan, consistent with safe and
sound banking practices, but only if the advance is for the protection
of the bank's interest in the collateral, and provided that such
amounts must be treated as an extension of credit if a new loan or
extension of credit is made to the borrower;
* * * * *
Sec. 32.3 [Amended]
3. Paragraph (c)(4)(ii)(B) of Sec. 32.3 is amended in the last
sentence by removing the term ``take over'' and adding in lieu thereof
``pay on the obligation''.
4. Paragraph (c)(6)(ii)(B) of Sec. 32.3 is amended by adding the
word ``periodically'' before the word ``revalue''.
5. Section 32.4 is revised to read as follows:
Sec. 32.4 Calculation of lending limits.
(a) Calculation date. For purposes of determining compliance with
12 U.S.C. 84 and this part, a bank shall determine its lending limit as
of the most recent of the following dates--
(1) The last day of the preceding calendar quarter; or
(2) The date on which there is a change in the bank's capital
category for purposes of 12 U.S.C. 1831o and Sec. 6.3 of this chapter.
(b) Effective date. (1) A bank's lending limit calculated in
accordance with paragraph (a)(1) of this section will be effective as
of the earlier of the following dates--
(i) The date on which the bank's Consolidated Report of Condition
and Income (Call Report) is submitted; or
(ii) The date on which the bank's Call Report is required to be
submitted.
(2) A bank's lending limit calculated in accordance with paragraph
(a)(2) of this section will be effective on the date that the limit is
to be calculated.
(c) More frequent calculations. If the OCC determines for safety
and soundness reasons that a bank should calculate its lending limit
more frequently than required by paragraph (a) of this section, the OCC
may provide written notice to the bank directing the bank to calculate
its lending limit at a more frequent interval, and the bank shall
thereafter calculate its lending limit at that interval until further
notice.
Dated: June 24, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-18021 Filed 7-16-96; 8:45 am]
BILLING CODE 4810-33-P