[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]


=======================================================================
-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

     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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

     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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

     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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

     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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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).

---------------------------------------------------------------------------

[[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
---------------------------------------------------------------------------

    \11\ See 56 FR 28314, 28316 (June 20, 1991) (preamble to part 23 
final rule).
---------------------------------------------------------------------------

    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