[Federal Register Volume 61, Number 244 (Wednesday, December 18, 1996)]
[Rules and Regulations]
[Pages 66554-66561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31967]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 23
[Docket No. 96-28]
RIN 1557-AB45
Leasing
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
revising its rules governing the personal property lease financing
transactions of national banks. This final rule, which is another
component of the OCC's Regulation Review Program, updates and
streamlines the rules. The final rule is substantively similar to the
OCC's proposal but incorporates modifications reflecting suggestions
made by commenters and further clarifies and simplifies the rule.
EFFECTIVE DATE: January 17, 1997.
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, Office of the
Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Introduction
The OCC is revising 12 CFR part 23, which governs personal property
lease financing transactions by national banks. This final rule 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 or revising 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 to more effectively convey the
standards the OCC seeks to apply.
As the OCC indicated in its notice of proposed rulemaking
(proposal), the agency's experience suggests that, while a wholesale
substantive rewrite of part 23 is not warranted,1 changes to
improve clarity and to provide some additional flexibility would be
appropriate. See 60 FR 46246 (Sept. 6, 1995). Accordingly, the proposal
shortened and streamlined part 23; reorganized many of its provisions;
added paragraph headings; and conformed its style to that of the OCC's
other rules. In addition, the OCC identified and specifically requested
comment on several areas where substantive changes to the regulation
might be appropriate, depending on the responses received.
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1 The OCC first adopted part 23 in mid-1991. 56 FR 28314
(June 20, 1991). Part 23 replaced an earlier OCC interpretive ruling
on lease financing transactions, which had been codified at 12 CFR
7.3400.
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The OCC received 11 comments in response to the proposal, which the
OCC has carefully considered in preparing this final rule. The
commenters included national banks, a national bank subsidiary, and
trade associations representing both banks and leasing companies. The
commenters generally supported the proposal, and a few suggested
further modifications or improvements. The final rule incorporates
suggestions made by some of the commenters, and the OCC has made
additional changes to clarify and simplify the regulatory text. The
final rule also makes other minor technical changes.
The Discussion portion of this preamble contains a section-by-
section description of the final rule and the significant changes from
the proposed version. A derivation table showing modifications from the
former part 23 appears at the conclusion of this preamble.
Background
National banks may engage in leasing activities pursuant to two
independent sources of authority. First, under 12 U.S.C. 24 (Seventh),
a national bank may acquire tangible and intangible personal property
for the purpose of, or in connection with leasing that property when
the lease is the functional equivalent of a loan (Section 24 (Seventh)
Leases).2 The OCC has interpreted the functional equivalency
requirement to mean that a Section 24 (Seventh) Lease must be a
``net,'' ``full-payout'' lease and any unguaranteed portion of the
estimated residual value of the leased property must not exceed 25% of
the original cost of the property. The ``net'' lease requirement means
that the lessor national bank may not be obligated to provide specified
services such as repairs or maintenance, or purchase insurance on the
lessee's behalf in connection with the leased property. The ``full-
payout'' requirement means that the bank must expect to recover the
full costs of acquiring the property to be leased and financing the
leasing transaction from sources that include rentals, estimated tax
benefits, and the estimated residual value of the property at the end
of the lease. For a Section 24(Seventh) Lease, however, the bank may
rely on the unguaranteed portion of the estimated residual value of the
leased property only to a limited extent--not more than 25% of the
original cost of the property. There is no percentage-of-assets limit
on a national bank's investment in Section 24 (Seventh) Leases.
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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) (M&M Leasing).
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In 1987, Congress gave national banks a second, explicit source of
authority to engage in personal property lease financing. The
Competitive Equality Banking Act (CEBA) 3 amended 12 U.S.C. 24 by
adding paragraph Tenth, which allows a national bank to invest in
tangible personal property, including vehicles, manufactured homes,
machinery, equipment, and furniture, for lease financing transactions
(CEBA Leases). Investment in personal property to be leased under the
authority of 12 U.S.C. 24(Tenth) may not exceed 10 percent of a
national bank's assets. A CEBA Lease also must be a ``net'' lease and a
``full-payout'' lease, but is not subject to a maximum estimated
residual value limit. Both Section 24(Seventh) Leases and CEBA Leases
are governed by standards set forth in part 23.
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\3\ Pub. L. 100-86, sec. 108, 101 Stat. 552, 579 (Aug. 10,
1987). See also S. Rep. No. 19, 100th Cong., 1st Sess. 43 (1987)
(explanation of purpose of CEBA's expansion of national banks'
leasing authority).
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Discussion
Subpart A--General Provisions
Authority, Purpose, and Scope (Sec. 23.1)
The proposal retained the authority provision of the former
regulation but added paragraphs describing the purpose of part 23 and
the scope of its respective subparts. The final rule retains the
structure described in the scope section of the part 23 proposal.
[[Page 66555]]
Subpart A contains definitions and standards applicable to both Section
24 (Seventh) Leases and CEBA Leases. Subpart B contains standards
unique to CEBA Leases, and subpart C contains standards unique to
Section 24 (Seventh) Leases. The scope section of the final rule also
is revised to state that part 23 applies to the acquisition of personal
property by a national bank for the purpose of, or in connection with,
the leasing of that property.
Definitions (Sec. 23.2)
The proposal added to part 23 a new section defining significant
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. These terms
are adopted substantially as proposed. The OCC has shortened the
definition of the term net lease by removing the explicit
acknowledgment that a national bank may lease improvements and
additions to the leased property to the lessee in accordance with any
applicable residual value requirements. The OCC believes that this
portion of the text was unnecessary because the activity it describes
is not otherwise prohibited by the regulation. Thus, the removal of
this language does not substantively alter a national bank's ability to
lease improvements and additions to its lessees.
As is explained in this discussion under ``Investment in personal
property,'' the final rule permits a national bank to acquire property
for leasing purposes even if the bank has not entered into a conforming
lease, a commitment to enter into a conforming lease, or an
indemnification agreement. For prudential reasons, however, this
authority is subject to an aggregate limit based on the bank's capital
and surplus. Accordingly, the OCC has added to the final rule a
definition of the term capital and surplus that is consistent with the
way this term is defined in other OCC regulations, such as 12 CFR part
32, which governs national banks' lending limits.
The OCC has also added to this section a revised definition of the
term affiliate that cross-references the definition of that term at
Sec. 23.6. The definition had appeared in Sec. 23.7 of the proposal.
The OCC proposed to define a full-payout lease as 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. The OCC asked
commenters to address whether the 25 percent limit contained in this
definition should be increased or modified. As discussed in the
proposal, the OCC had selected the 25 percent limit in 1979 based in
part on its experience at that time in examining and supervising banks
engaged in Section 24(Seventh) lease financing activities.4
Congress subsequently gave national banks authority to enter into CEBA
Leases, which are not subject to a maximum residual value limit (though
the aggregate cost of the personal property acquired for the purpose of
CEBA Lease transactions is restricted in aggregate amount to 10 percent
of a national bank's total consolidated assets). The proposal noted,
however, that national banks did not appear to be engaged in CEBA
leasing to the full extent of their statutory authority and it asked
whether, under these circumstances, a change in the residual value
limit for Section 24(Seventh) Leases was appropriate. Commenters
supporting a more flexible limit were asked to identify any increased
risk that would accompany a new limit and to discuss how the OCC should
address that risk.
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4 See 44 FR 22388, 22390 (April 13, 1979) (adoption of
interpretive rule establishing estimated residual value limit of 25
percent for leases that serve as the functional equivalent of
loans).
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Five commenters addressed this issue. The majority favored no
modification to the limit, pointing out that whenever it is appropriate
to exceed the 25 percent limit, banks may use their CEBA leasing
authority instead. Based on the comments and the OCC's more recent
experience with national banks' lease financing activities, the OCC has
concluded that the 25 percent residual value limit for Section
24(Seventh) Leases does not inhibit national banks from competing
effectively with other providers of lease financing. The final rule
retains the 25 percent residual value requirement for Section
24(Seventh) Leases,5 but the requirement is relocated to subpart
C, which applies only to Section 24(Seventh) Leases.
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5 The 25 percent limit is the same as the limit that the
Federal Reserve Board (FRB) currently applies to full-payout
personal property leasing by bank holding companies (BHCs) and their
subsidiaries under Regulation Y (addressing the permissible non-
banking activities of BHCs). See 12 CFR 225.25(b)(5). The FRB,
however, has recently proposed revisions to Regulation Y that could
result in changes to its personal property leasing standards. See 61
FR 47242, 47251-52, 47273-74 (Sept. 6, 1996).
The Office of Thrift Supervision has recently increased its
analogous residual value limit from 20 percent to 25 percent. See 61
FR 50951, 50960 (Sept. 30, 1996).
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The OCC has concluded that combining the cost recovery requirement
with the residual value limit, which was the approach taken in the
proposed version of part 23, is confusing because it obscures the fact
that a bank must receive its acquisition and financing costs in order
for any lease, including a CEBA Lease, to be economically viable. The
OCC believes that part 23 will be easier to read and to use if the
requirement for cost recovery is separately stated in the subpart
applicable to both Section 24(Seventh) Leases and CEBA Leases, and the
percentage limit on residual value continues to appear in the subpart
addressing Section 24(Seventh) Leases, which are the only leases
subject to that limit. Accordingly, the OCC has revised the proposed
definition of the term full-payout lease. The final rule defines that
term to specify the sources on which a national bank may rely to
recover both its investment in the leased property and the estimated
cost of financing the property over the lease term. The 25 percent
residual value limit applicable to Section 24(Seventh) Leases is
relocated to Sec. 23.21 of the final rule.
Lease Requirements (Sec. 23.3)
The former rule and proposed Sec. 23.3 both required 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. The cost recovery
requirement applies both to CEBA Leases and to Section 24(Seventh)
Leases. As described in the preceding section, the final rule defines
the term full-payout lease to specify these three sources of cost
recovery. Thus, Sec. 23.3(a) of the final rule simply states the
requirement that all of a national bank's leases must be full-payout
leases. These changes in the final rule--the revised definition of
full-payout lease, the relocation of the 25 percent residual value
limit to subpart C, and the statement of the full-payout requirement in
Sec. 23.3(a)--do not change the substantive effect of the revisions as
proposed.
The proposal also added to the regulation a new paragraph
containing an explicit statement of the requirement that a national
bank may engage in a lease financing transaction, and in activities
incidental to the transaction, provided the lease is a net lease. The
incidental activities clause in proposed
[[Page 66556]]
Sec. 23.4(a) reflected the OCC's long-standing interpretations
authorizing national banks to engage in activities incidental to
leasing. The proposal also confirmed the OCC's position that there is
no safety or soundness reason for treating activities incidental to
leasing differently depending on the underlying source of statutory
authority for the leasing transaction, and that a national bank may
therefore engage in approved incidental activities with respect both to
Section 24(Seventh) Leases and CEBA Leases. Since both the ``full-
payout'' requirement and the ``net'' lease requirement apply to Section
24(Seventh) Leases and CEBA Leases, Sec. 23.3(a) of the final rule
contains the general requirement that a national bank may acquire
personal property for the purpose of, or in connection with leasing
that property, provided the lease qualifies as a full-payout lease and
a net lease. Section 23.3(a) also provides that national banks may
engage in activities that are incidental to permissible personal
property acquisition and leasing transactions.
In the proposal, the OCC did not include a list of permissible
activities incidental to leasing, but it invited commenters to address
the desirability of retaining a case-by-case approach to determining
permissible incidental activities. Six commenters responded to this
request. All but one commenter urged that the OCC retain the case-by-
case approach because any ``laundry list'' appearing in the regulation
would become out of date quickly. The OCC agrees with the commenters
that a list would soon become obsolete and will therefore retain the
case-by-case approach.
The OCC also requested comment on whether it should, on a case-by-
case basis, permit national banks to acquire and lease real estate when
the real estate acquisition and lease is incidental to a personal
property lease financing transaction. The incidental leasing of real
estate could occur, for example, in a so-called ``facility'' leasing
transaction, which one commentator has described as follows:
[A] facility is a ``stand-alone'' complex that functions either
as a separate operating unit or as a discrete component of an
integrated operating system. A facility has at least four basic
components: An interest in the real property site upon which the
rest of the facility is situated; improvements to the site, usually
including a structure of some sort; equipment or other tangible
personal property, usually the asset actually being financed in the
transaction; and intangible property such as contracts, licenses, or
other ancillary rights and benefits that are necessary or desirable
for the operation or support of the other components of the
facility. A facility is practicably immovable as an entirety.\6\
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\6\ Anthony D. Schlesinger, Special Concerns in Facility
Leveraged Lease Transactions, 1 Equipment Leasing--Leveraged Leasing
987, 987 (B. Fritch, A. Reisman & I. Shrank eds. 1988) (Practicing
Law Institute Publication No. A3-1406).
The six commenters who addressed this issue urged that the OCC
permit real estate leasing if it is incidental to the lease financing
of personal property. The commenters asserted that, in a competitive
leasing environment, national banks and national bank-owned leasing
companies suffer a competitive disadvantage with respect to certain
types of transactions--particularly facility lease financing
arrangements--if they are prohibited from acquiring and leasing real
estate in all circumstances.
The commenters also thought that acquiring and leasing real estate
as a component of a personal property lease financing transaction would
better protect the bank's collateral interest in the leased property
and therefore enhance the safety and soundness of the transaction. For
example, they said, improvements to fuel storage facilities,
manufacturing facilities or other installed equipment have a greater
collateral value ``in place, in use'' than they would have if they were
removed and re-sold in the event of default. Thus, if a lessee defaults
under a personal property lease of this type, a lessor bank having the
right to foreclose on and sell or re-lease the personal property in
place on the site or in the building is in a better financial position
than a bank that must remove the equipment and dispose of it
separately.
The OCC agrees that under some circumstances real estate leasing
may be an incidental component of a personal property leasing
transaction. Therefore, consistent with its decision to retain a case-
by-case approach to activities incidental to leasing generally, the OCC
will determine the permissibility of personal property lease financing
transactions that have a real estate leasing component based upon the
facts of a given lease financing transaction (or multiple lease
financing transactions, if they present essentially similar facts).
This will enable the OCC to review any safety or soundness or other
supervisory concerns that particular transactions may present.
The OCC notes that the activities incidental to leasing that it has
authorized to date for national banks acting as lessors include
providing management, marketing, and administrative services and
offering credit life insurance to lessees.\7\ 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 providing lease consulting services
such as financial advice; providing management, brokerage, and finder
services; and performing lease servicing for third parties.\8\
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\7\ See, e.g., Letter from H. Joe Selby, First Deputy
Comptroller for Operations, Nov. 24, 1976 (unpublished); Letter from
Peter Liebesman, Assistant Director, Legal Advisory Services
Division, Jan. 14, 1985 (unpublished). Copies of unpublished OCC
staff interpretive letters are available (in redacted form) upon
request from the Communications Division, 250 E Street, SW.,
Washington, DC 20219 (202) 874-4700.
\8\ See, e.g., 12 CFR 7.1002; OCC Interpretive Ltr. No. 567
(Oct. 29, 1991) reprinted in [1991-92 Transfer Binder] Fed. Banking
L. Rep. (CCH) para.83,337; Letter from Wallace S. Nathan, District
Counsel, Oct. 28, 1985 (unpublished); Letter from Peter Liebesman,
Assistant Director, Legal Advisory Services Division, June 15, 1981
(unpublished). See also OCC Interpretive Ltr. No. 741 (Aug. 19,
1996) reprinted in [Current Binder] Fed. Banking L. Rep. (CCH)
para.81-105. Copies of the unpublished letters are available from
the Communications Division, see note 7 above.
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Finally, Sec. 23.3(b) includes provisions (proposed as
Sec. 23.4(b)) specifying the conditions under which a national bank may
take appropriate action to protect its interests and the distress
clause permitting a national bank to take certain actions to salvage or
protect its investment. Section 23.3(b) of the final rule has been
shortened and slightly revised, but these changes do not change the
substantive effect of the provision.
Investment in Personal Property (Sec. 23.4)
Like the former rule, proposed Sec. 23.5(a) specifically authorized
a national bank to acquire personal property to be leased after the
bank had entered into either a legally binding agreement indemnifying
the bank against loss in connection with the acquisition or a legally
binding commitment to enter into a conforming lease. The purpose of
this provision was to prevent the speculative acquisition of personal
property. The OCC believes, however, that measures other than flatly
prohibiting a national bank from acquiring property before the leasing
arrangements are essentially completed will provide adequate safeguards
against speculation. Accordingly, Sec. 23.4(b) of the final rule
authorizes a national bank to acquire property to be leased in the
absence of a commitment to enter into a conforming lease, or an
indemnification agreement, if the bank satisfies certain conditions
demonstrating that the acquisition of property is not speculative.
These
[[Page 66557]]
conditions require that: (1) The acquisition of the property either be
consistent with the leasing business then conducted by the bank or with
a business plan for the expansion of the bank's existing leasing
business or for entry into the leasing business; and (2) the bank's
aggregate investment in property under this provision not exceed 15
percent of the bank's capital and surplus.
The 15 percent limit applies to all property acquired under
Sec. 23.4(b) of the final rule, whether the lease will be entered into
pursuant to 12 U.S.C. 24(Seventh) or 24(Tenth). However, property
acquired under this provision does not count toward the 10 percent
volume limitation on CEBA Leases until the bank enters into a
conforming lease, a legally binding commitment to lease, or an
indemnification agreement pursuant to Sec. 23.10 of the final rule.
The OCC has also added to Sec. 23.4(a) of the final rule an
explicit statement that a national bank may acquire property after
entering into a conforming lease, as well as after entering into a
lease commitment or an indemnification agreement. The OCC has
incorporated this change, which was requested by a commenter, to
clarify the flexibility available under the regulation.
The former rule required 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. 23.2(e) defined
off-lease property as property that reverts to a bank's possession or
control upon the expiration of a lease or upon the default of the
lessee. Proposed Sec. 23.5(b) was substantively the same as the former
rule, but it specifically provided that the two-year holding period
runs either from the date the lease expires (including any renewals or
extensions with the same lessee) or the date of the lessee's default.
Both Section 24(Seventh) Leases and CEBA Leases are subject to this
holding period limitation.
Extension of off-lease holding period. The preamble to the proposal
indicated that the OCC was considering whether to extend the holding
period for off-lease property but lacked data on the experiences
national banks have had in attempting to liquidate or re-lease specific
kinds of off-lease property within the two-year holding period. The
proposal did not change the holding period but requested comment on
four issues:
(1) Should the holding period 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 would be 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 proposal also invited banks to provide specific comment on
their experiences in attempting to sell or re-lease specific kinds of
off-lease personal property with respect to the issue of extending the
holding period.
Seven commenters responded. One commenter thought that in most
cases the two-year holding period is appropriate. The others offered
various suggestions for liberalizing the regulation, including:
Extending the holding period for specific assets--such as airplanes,
rail cars, vessels, oil rigs, machine tools, manufacturing equipment--
characterized as ``historically cyclic''; extending the holding period
generally but with conditions, such as requiring banks to make diligent
sales efforts or obtain annual appraisals of the off-lease assets;
substituting the holding period regulations applicable to other real
estate owned property (OREO) for the existing provision; 9 or
simply extending the holding period in cases of market distress.
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\9\ 12 U.S.C. 29 requires a national bank to dispose of OREO
within five years from the date of acquisition and authorizes the
OCC, under certain circumstances, to grant a bank an additional five
years in which to dispose of the property.
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In light of the discussion provided by the commenters on this
point, the OCC concludes that it is appropriate to provide for a longer
holding period for off-lease property. Section 23.4(c) of the final
rule adopts a five-year holding period generally and provides for the
holding period to be extended for up to an additional five years if the
bank provides a clearly convincing demonstration as to why any
additional holding period is necessary. The initial five-year rule is
consistent with the time prescribed for the disposition of OREO, but
the OCC expects that a bank will usually be able to dispose of off-
lease personal property more quickly than real estate. Accordingly, the
OCC will require a ``clearly convincing'' demonstration of necessity in
order to justify any extension of the holding period for off-lease
property beyond five years.
Section 23.4(c) of the final rule retains the requirement that off-
lease property be valued at the lower of fair market or book value. The
OCC notes that, consistent with generally accepted accounting
principles, this valuation should occur promptly after the property
comes off-lease.
Commencement of off-lease holding period. As indicated earlier in
this discussion, the holding period for off-lease property commences on
either the date of expiration of the lease or the date of the lessee's
default, depending on the reason that the national bank takes
possession or control of the leased property. This language conveys
that the holding period begins when the bank is in a position to
dispose of or re-lease the property, that is, when it takes possession
or control.
Five commenters, however, asked for further clarification on when
the holding period commences in the event the lessee defaults before
the expiration of the term of the lease. Some commenters pointed out
that while the preamble to the proposal and the proposed definition of
off-lease property refer to a national bank's taking possession or
control of the leased property, the proposed regulatory text itself did
not contain the ``possession or control'' language. Moreover, as the
commenters pointed out, actual possession or control of an asset alone
may not allow the bank to dispose of it or re-lease it. In foreclosure
or bankruptcy situations, the bank may need to obtain a court order
establishing its legal right to do so.
The OCC agrees with the commenters that the provision requires
clarification and adjustment to cover situations such as bankruptcy or
foreclosure. Section 23.4(c) of the final rule therefore provides that
the OCC will measure the five-year period beginning on the date that
the national bank obtains the legal right to possession or control of
the asset. This date could be the date that the lease expires or the
date that the lessee defaults if, for example, the national bank has a
clear contractual right to repossess the property at that time and the
lessee does not physically impede it from doing so. Where the bank must
establish its legal right to the property, however, the five-year
period will begin when the bank has completed that step. The OCC notes
that this treatment is consistent with the way it administers the
holding period for OREO.10
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\10\ See 12 CFR 34.82 (b) and (c) (five-year holding period for
OREO does not begin until after ownership of property is transferred
to the bank; in foreclosure situations in states with statutory
rights of redemption, holding period does not begin until statutory
redemption period has expired).
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[[Page 66558]]
Section 23.4(d) of the final rule reflects minor technical changes
from the proposal to conform with the revised off-lease holding period
provision in Sec. 23.4(c).
Requirement for Separate Records (Sec. 23.5)
Proposed Sec. 23.6 retained the requirement in the former rule that
national banks maintain separate records for CEBA Leases and Section
24(Seventh) Leases. The OCC received no comments on this provision and
adopts it as proposed, except to renumber it as Sec. 23.5.
Application of Lending Limits; Restrictions on Transactions With
Affiliates (Sec. 23.6)
Like the former rule, proposed Sec. 23.7 subjected lease financing
transactions to lending limits and transactions-with-affiliates
restrictions. The proposal, however, clarified that the transactions-
with-affiliates restrictions apply only if the lessee is an affiliate
of the lessor bank. In any other case, lending limits restrictions
apply. The proposal also retained the reservation of the OCC's
authority to impose other limits or restrictions.
One commenter requested that the OCC state specifically that
nonrecourse debt is excluded from the value of the leased property in
computing the appropriate lending limit position. This commenter noted
that although the regulatory text did not address the point, the
preamble to the former rule specifically addressed the issue.11
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\11\ See 56 FR 28314, 28316 (June 20, 1991) (preamble to part 23
final rule).
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This issue typically arises in leveraged lease transactions, that
is, transactions in which a national bank borrows from a third-party
creditor a portion of the funds necessary to purchase the property to
be leased. In these cases, the third-party creditor's loan to the bank
is often on a nonrecourse basis, so that the creditor looks only to the
lease payments and its security interest in the leased property as the
source of repayment for its loan to the bank and does not rely on the
general credit of the bank. In this type of transaction, the bank's
exposure to loss in the event of the lessee's default is mitigated to
the extent that the bank has used outside funding to finance the
transaction. For this reason, the OCC permits a national bank to use
the recorded investment in a lease net of any nonrecourse debt the bank
has incurred to finance the acquisition of the asset to be leased, for
the purpose of measuring whether the bank's leases comport with the
appropriate lending limits. This treatment is also consistent with
generally accepted accounting principles.
The commenter is therefore correct about the treatment of
nonrecourse debt. The final rule states that for the purpose of
measuring compliance with the lending limits, a national bank records
the investment in a lease net of any nonrecourse debt the bank has
incurred to finance the acquisition of the leased asset. The OCC has
revised Sec. 23.7 to this effect, and renumbered it as Sec. 23.6 in the
final rule.
Applicability of Consumer Leasing Act (Removed)
The former rule stated that nothing in part 23 could 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 proposed to remove this provision because other consumer protection
laws and regulations may also apply to personal property lease
financing activities, making the cross-reference potentially misleading
and confusing. The OCC received no comments on this portion of the
proposal and Sec. 23.6 of the former rule is removed. This change does
not affect the applicability of the CLA or any other consumer credit
laws to national banks' lease financing activities, however. National
banks still must know and comply with the full range of requirements
that govern these activities.
Subpart B--CEBA Leases
Provisions Applicable to CEBA Leases (Secs. 23.10, 23.11, and 23.12)
Proposed Secs. 23.8, 23.9, and 23.10 contained the requirements
applicable to CEBA Leases, including a statement of the general rule
authorizing investment in personal property in connection with CEBA
Leases, the limits placed on a national bank's exercise of its 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 in 1991. The substance of these provisions as
proposed was the same as the former rule.
The OCC received one comment on these provisions. The commenter who
asked that the rule specifically address the exclusion of nonrecourse
debt in connection with the computation of lending limits for leases
also asked that nonrecourse debt be specifically excluded in measuring
compliance with the 10 percent of assets limitation applicable to CEBA
Leases. The OCC has permitted this treatment since it promulgated part
23 in 1991. Section 23.10 of the final rule states this position.
This commenter also asked whether the OCC intended any meaningful
distinction between ``tangible personal property'' as used in proposed
Sec. 23.8 and ``personal property'' as used in proposed Sec. 23.11. The
reference to ``tangible personal property'' in proposed Sec. 23.8
derives from the statutory language authorizing CEBA Leases. Section
24(Tenth) requires that CEBA Leases must be leases for tangible
personal property. A national bank wishing to acquire and lease
intangible personal property, such as patents, copyrights or other
forms of intellectual property, must rely on its authority under
section 24(Seventh). For these reasons, the final rule continues to use
the phrase ``tangible personal property'' with respect to CEBA Leases.
With respect to Section 24(Seventh) Leases, the final rule refers to
tangible or intangible personal property. The OCC received no comments
on proposed Secs. 23.9 and 23.10, and adopts them as proposed, except
to renumber them as Secs. 23.11 and 23.12.
Subpart C--Section 24(Seventh) Leases
General rule (Sec. 23.20)
Proposed Sec. 23.11 stated the general rule authorizing national
banks to engage in lease financing pursuant to 12 U.S.C 24(Seventh).
The OCC received no comments on this section, other than the request
for clarification, noted in this discussion under ``Provisions
applicable to CEBA Leases,'' with respect to the use of two different
terms in proposed Secs. 23.8 and 23.11. The OCC adopts this section
with minor changes from the proposal, except that it removes as
redundant the requirements in proposed Sec. 23.11 that the lease must
be a full-payout and net lease, and renumbered the section as
Sec. 23.20.
Estimated Residual Value (Sec. 23.21)
Proposed Sec. 23.12 contained provisions that apply to a national
bank's reliance on or estimate of residual value in Section 24(Seventh)
leasing transactions. These provisions were substantively the same as
the requirements of the former rule, including: (1) A provision that
the amount of any estimated residual value guaranteed by a
manufacturer, the lessee, or other third party that is not an affiliate
of the bank may exceed 25 percent of the original cost of the property
if the bank determines that the guarantor has the resources to meet the
[[Page 66559]]
guarantee and can document its determination; (2) a requirement that
the estimated residual value amounts be reasonable given the type of
property leased and other 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; and (3) a provision that, 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 OCC received no comments on this section. The OCC made the
following revisions in the final rule: Renumbered it as Sec. 23.21,
moved the 25% residual value limit that had appeared in proposed
Sec. 23.2(c) to this section for the reason discussed in this preamble
under ``Definitions,'' and removed the last sentence of proposed
Sec. 23.12(a), which stated that the bank must depend primarily on the
creditworthiness of the lessee (and any guarantor) and not on the
residual value of the leased property. The OCC removed this sentence
because it is redundant in light of the relocation of the 25 percent
limit which appears in the final version of this section. The
restrictions on Section 24(Seventh) leasing in subparts A and C are
designed to ensure that the bank depends primarily on the credit of the
lessee, and not on the residual value of the leased property at the end
of the lease term.
Transition Rule (Sec. 23.22)
The former rule and proposed Sec. 23.13 provide that leases
executed before June 12, 1979, which 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, are not subject to part 23, and
prescribe rules for renewing those leases. The OCC received no comments
on this section and it remains unchanged, except for renumbering it as
Sec. 23.22.
Derivation Table
[This table directs readers to the provision(s) of the former
regulation, if any, upon which the final rule is based.]
------------------------------------------------------------------------
Revised provision Original provision Comments
------------------------------------------------------------------------
Sec. 23.1...................... Sec. 23.1(a)....... Modified.
Sec. 23.2(a), (b), (c), (d), .................... Added.
(g), (h).
Sec. 23.2(e)................... Sec. 23.1(b)....... Modified.
Sec. 23.2(f)................... Sec. 23.2(a)....... Modified.
Sec. 23.3(a)................... .................... Added.
Sec. 23.3(b)................... Sec. 23.2(b), (c), Modified.
(d).
Sec. 23.4(a)................... Sec. 23.3(a)....... Modified.
Sec. 23.4(b)................... .................... Added.
Sec. 23.4(c)................... Sec. 23.3(b)....... Modified.
Sec. 23.4(d)................... Sec. 23.3(c)....... Modified.
Sec. 23.5...................... Sec. 23.4.......... Modified.
Sec. 23.6...................... Sec. 23.5.......... Modified.
Sec. 23.6.......... Removed.
Sec. 23.10..................... Sec. 23.7.......... Modified.
Sec. 23.11..................... Sec. 23.8.......... Modified.
Sec. 23.12..................... Sec. 23.9.......... Modified.
Sec. 23.20..................... Sec. 23.10......... Modified.
Sec. 23.21..................... Sec. 23.11......... Modified.
Sec. 23.22..................... Sec. 23.12......... Modified.
------------------------------------------------------------------------
Regulatory Flexibility Act
It is hereby certified that this 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
final rule will reduce the regulatory burden on national banks,
regardless of size, by simplifying and clarifying existing regulatory
requirements.
Paperwork Reduction Act of 1995
The OCC invites comments on:
(1) Whether the collections of information contained in this notice
of final rule are necessary for the proper performance of OCC
functions, including whether the information has practical utility;
(2) The accuracy of the estimate of the burden of the information
collections;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(4) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
Respondents/recordkeepers are not required to respond to the
foregoing collections of information unless this displays a currently
valid OMB control number.
The collections of information contained in this final rule have
been approved by the Office of Management and Budget (OMB) through June
30, 1997, in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), under OMB Control No. 1557-0206. Comments on the
collections of information should be sent to the Office of Management
and Budget, Paperwork Reduction Project (1557-0206), Washington, DC
20503, with a copy to the Legislative and Regulatory Activities
Division, Office of the Comptroller of the Currency, 250 E Street, SW.,
Washington, DC 20219. The OCC will submit the collections of
information contained in this final rule for renewal of OMB approval
following publication of this final rule.
The collections of information in this final rule are found in 12
CFR 23.4(c) and 23.5. These collections of information are necessary in
order for a national bank to submit a request to the OCC for permission
to extend the holding period of off-lease property, to maintain records
according to generally accepted accounting principles and Federal law,
and to ensure bank safety and soundness. The likely respondents/
recordkeepers are national banks.
Estimated average annual burden hours per respondent/recordkeeper:
2.8.
Estimated number of respondents and/or recordkeepers: 660.
Estimated total annual reporting and recordkeeping burden: 1,820.
Start-up costs to respondents: None.
Executive Order 12866
OMB has concurred with the OCC's determination that this final rule
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 final rule
will not result in expenditures by State, local, and tribal
governments, or by the private sector, of $100 million or more in any
one year. Accordingly, a budgetary impact statement is not required
under section 202 of the Unfunded Mandates Reform Act of 1995. As
discussed in the preamble, this final rule has the effect of reducing
burden and increasing the efficiency of lease financing transactions
undertaken by national banks.
List of Subjects in 12 CFR Part 23
Banks, banking, Lease financing transactions, Leasing, National
banks, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set out in the preamble, part 23 of chapter I of
title 12 of the Code of Federal Regulations is revised to read as
follows:
[[Page 66560]]
PART 23--LEASING
Subpart A--General Provisions
Sec.
23.1 Authority, purpose, and scope.
23.2 Definitions.
23.3 Lease requirements.
23.4 Investment in personal property.
23.5 Requirement for separate records.
23.6 Application of lending limits; restrictions on transactions
with affiliates.
Subpart B--CEBA Leases
23.10 General rule.
23.11 Lease term.
23.12 Transition rule.
Subpart C--Section 24(Seventh) Leases
23.20 General rule.
23.21 Estimated residual value.
23.22 Transition rule.
Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 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) or 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. This part applies to the acquisition of personal
property by a national bank for the purpose of, or in connection with,
the leasing of that property.
Sec. 23.2 Definitions.
(a) Affiliate means an affiliate as described in Sec. 23.6.
(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 forth in appendix A to 12 CFR part 3
as reported in the bank's Consolidated Report of Condition and Income
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 described in paragraph (b)(1) of this section, as
reported in the bank's Consolidated Report of Condition and Income
filed under 12 U.S.C. 161.
(c) CEBA Lease means a personal property lease authorized under 12
U.S.C. 24(Tenth).
(d) 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.
(e) Full-payout lease means a lease in which the national bank
reasonably expects 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 lease term.
(f) Net lease means a lease under which the national 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) Parts or accessories for the leased property;
(3) Loan of replacement or substitute property while the leased
property is being serviced;
(4) Payment of insurance for the lessee, except where the lessee
has failed in its contractual obligation to purchase or maintain
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.
(g) Off-lease property means property that reverts to a national
bank's possession or control upon the expiration of a lease or upon the
default of the lessee.
(h) Section 24(Seventh) Lease means a personal property lease
authorized under 12 U.S.C. 24(Seventh).
Sec. 23.3 Lease requirements.
(a) General requirements. A national bank may acquire personal
property for the purpose of, or in connection with leasing that
property, and may engage in activities incidental thereto, if the lease
qualifies as a full-payout lease and a net lease.
(b) Exceptions--(1) Change in condition. If, in good faith, a
national bank believes that there has been a change in condition that
threatens its financial position by increasing its exposure to loss,
then the bank may:
(i) Take reasonable and appropriate action, including the actions
specified in Sec. 23.2(f), to salvage or protect the value of the
leased property or its interests arising under the lease; and
(ii) Acquire or perfect title to the leased property pursuant to
any existing rights.
(2) Provisions to protect the bank's interests. A national bank may
include any provision in a lease, or make any additional agreement, 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 a third party to provide any of the services enumerated in
Sec. 23.2(f) to the lessee at the expense of the lessee.
Sec. 23.4 Investment in personal property.
(a) General rule. A national bank may acquire specific property to
be leased only after the bank has entered into:
(1) A conforming lease;
(2) A legally binding written agreement that indemnifies the bank
against loss in connection with its acquisition of the property; or
(3) A legally binding written commitment to enter into a conforming
lease.
(b) Exception. A national bank may acquire property to be leased
without complying with the requirements of paragraph (a) of this
section, if:
(1) The acquisition of the property is consistent with the leasing
business then conducted by the bank or is consistent with a business
plan for expansion of the bank's existing leasing business or for entry
into the leasing business; and
(2) The bank's aggregate investment in property held pursuant to
this paragraph (b) does not exceed 15 percent of the bank's capital and
surplus.
(c) 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 off-lease property or re-
lease it under a conforming lease as soon as practicable. Liquidation
or re-lease must occur not later than five years from the date that the
bank acquires the legal right to possession or control of the property,
except the OCC may extend the period for up to an additional five
years, if the bank provides a clearly convincing demonstration why any
additional holding period is necessary. The bank must value off-lease
property at the lower of current fair market value or book value
promptly after the property becomes off-lease property.
(d) Bridge or interim leases. During the holding period allowed by
paragraph (c) of this section, a national bank may enter into a short-
term bridge or interim lease pending the liquidation of off-lease
property or the re-lease of the property under a conforming lease. A
short-term bridge or interim lease must be a net lease, but need not
[[Page 66561]]
comply with any requirement of subpart B or C of this part.
Sec. 23.5 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. 23.6 Application of lending limits; restrictions on transactions
with affiliates.
A lease entered into pursuant to this part is subject to the
lending limits prescribed by 12 U.S.C. 84 or, if the lessee is an
affiliate of the bank, 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. The term affiliate
means an affiliate as defined in 12 U.S.C. 371c or 371c-1, as
applicable. For the purpose of measuring compliance with the lending
limits prescribed by 12 U.S.C. 84, a national bank records the
investment in a lease net of any nonrecourse debt the bank has incurred
to finance the acquisition of the leased asset.
Subpart B--CEBA Leases
Sec. 23.10 General rule.
Pursuant to 12 U.S.C. 24(Tenth) a national bank may invest in
tangible personal property, including vehicles, manufactured homes,
machinery, equipment, or furniture, for the purpose of, or in
connection with leasing that property, if the aggregate book value of
the property does not exceed 10 percent of the bank's consolidated
assets and the related lease is a conforming lease. For the purpose of
measuring compliance with the 10 percent limit prescribed by this
section, a national bank records the investment in a lease entered into
pursuant to this subpart net of any nonrecourse debt the bank has
incurred to finance the acquisition of the leased asset.
Sec. 23.11 Lease term.
A CEBA Lease must have an initial term of not less than 90 days. A
national bank may acquire property subject to an existing lease with a
remaining maturity of less than 90 days if, at its inception, the lease
was a conforming lease.
Sec. 23.12 Transition rule.
(a) General rule. A CEBA Lease entered into prior to July 22, 1991,
may continue to be administered in accordance with the lease terms in
effect as of that date. For purposes of applying the lending limits and
the restrictions on transactions with affiliates described in
Sec. 23.6, however, a national bank that enters into a new extension of
credit to a customer, including a lease, on or after July 22, 1991,
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:
(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 leased property.
Subpart C--Section 24(Seventh) Leases
Sec. 23.20 General rule.
Pursuant to 12 U.S.C. 24(Seventh) a national bank may invest in
tangible or intangible personal property, including vehicles,
manufactured homes, machinery, equipment, furniture, patents,
copyrights, and other intellectual property, for the purpose of, or in
connection with leasing that property, if the related lease is a
conforming lease representing a noncancelable obligation of the lessee
(notwithstanding the possible early termination of that lease).
Sec. 23.21 Estimated residual value.
(a) Recovery of investment and costs. A national bank's estimate of
the residual value of the property that the bank relies upon to satisfy
the requirements of a full-payout lease, for purposes of this subpart:
(1) Must be reasonable in light of the nature of the leased
property and all circumstances relevant to the transaction; and
(2) Any unguaranteed amount must not exceed 25 percent of the
original cost of the property to the bank.
(b) Estimated residual value subject to guarantee. The amount of
any estimated residual value guaranteed by the manufacturer, the
lessee, or other 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.
(c) Leases to government entities. A bank's calculations of
estimated residual value in connection with leases of personal property
to Federal, State, or local governmental entities may be based on
future transactions or renewals that the bank reasonably anticipates
will occur.
Sec. 23.22 Transition rule.
(a) Exclusion. A Section 24(Seventh) Lease entered into prior to
June 12, 1979, may continue to be administered in accordance with the
lease terms in effect as of that date. For purposes of applying the
lending limits and the restrictions on transactions with affiliates
described in Sec. 23.6, however, a national bank that enters into a new
extension of credit to a customer, including a lease, on or after June
12, 1979, 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 leased property.
Dated: December 10, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-31967 Filed 12-17-96; 8:45 am]
BILLING CODE 4810-33-P