[Federal Register Volume 63, Number 62 (Wednesday, April 1, 1998)]
[Rules and Regulations]
[Pages 15744-15746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8558]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket No. 98-04]
RIN 1557-AB55


Lending Limits

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 lending limits regulation by making several technical 
changes designed to clarify certain provisions in the current rule.

EFFECTIVE DATE: May 1, 1998.

FOR FURTHER INFORMATION CONTACT: William C. Kerr, Special Assistant, 
Special Supervision, (202) 874-5170; Saumya R. Bhavsar, Attorney, 
Legislative and Regulatory Activities, (202) 874-5090; or Aline J. 
Henderson, Senior Attorney, or Laura Goldman, Attorney, Bank Activities 
and Structure, (202) 874-5300. Office of the Comptroller of Currency, 
250 E Street, SW, Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

    The OCC comprehensively revised its regulations in 12 CFR part 32 
in 1995 (60 FR 8526 (February 15, 1995)), as part of its Regulation 
Review Program (Program) to update and streamline the regulation and 
eliminate requirements that imposed inefficient and costly regulatory 
burdens on national banks. These amendments to part 32 included 
changing the definition of ``loans and extensions of credit'' to 
exempt, under certain circumstances, additional funds advanced for the 
payment of maintenance and operating expenses necessary to preserve the 
value of real property securing a loan. See 12 CFR 32.2(j)(2)(i). In 
addition, the amendments changed the definition of ``capital and 
surplus'' to allow a national bank, in most instances, to calculate its 
lending limit based on information contained in the bank's most recent 
quarterly Consolidated Report of Condition and Income (Call Report). 
See id. Sec. 32.4.
    Some of the part 32 changes prompted requests for: (a) further 
clarification and extension of the exemption for funds advanced to 
preserve and maintain collateral to loans secured by personal property 
as well as loans secured by real property; and (b) clarification of the 
date on which a national bank must recalculate its capital and surplus. 
In response to these requests, the OCC published a notice of proposed 
rulemaking (proposal) on July 17, 1996 (61 FR 37227), to address these 
issues. The proposal also made several technical changes designed to 
improve part 32 without changing its substance. The proposal reflected 
the OCC's continuing commitment to assess the effectiveness of the 
rules it has revised under the Program and to make further changes 
where necessary to improve a regulation.

Comments Received and Changes Made

    The OCC received 11 comments on the proposal, six of which came 
from banks and bank holding companies and five from trade associations. 
Most commenters supported the OCC adding increased flexibility and 
clarity to the lending limits regulation. Commenters generally 
commended the OCC's efforts, while some commenters offered alternatives 
to certain of the proposed changes.
    Upon further review, the OCC has decided not to adopt the 
proposal's exemption from the lending limit for additional funds 
advanced to preserve and maintain collateral to loans secured by 
personal property. However, the OCC has adopted the proposal's other 
changes.

Discussion

Exemption for Funds Advanced to Protect Personal Property Collateral 
(Sec. 32.2(j))

    Under Sec. 32.2(j)(2)(i), additional funds advanced for the benefit 
of a borrower by a bank for the payment of certain expenses necessary 
to preserve the value of real property are not considered to be a 
``loan or extension of credit'' for purposes of 12 U.S.C. 84 and part 
32 under certain circumstances. The OCC proposed amending 
Sec. 32.2(j)(2)(i) to include advances to protect personal property 
collateral and to treat any additional advance to protect collateral--
whether personal property or real property--the same.
    Commenters supported this proposed amendment. Upon further review, 
however, the OCC has determined that it would be inappropriate to adopt 
the change to Sec. 32.2(j)(2)(i) at this time. As a result of its 
continued monitoring of credit quality standards, the OCC is concerned 
that credit standards have been relaxed since the proposed rule was 
published. Accordingly, the OCC has decided it would not be appropriate 
at this time to modify this prudential

[[Page 15745]]

safeguard that limits the amount a bank may lend to any one borrower.
    The OCC is retaining the existing exemption for advances made to 
protect real property collateral. Certain factors supporting the 
exemption for real property collateral do not necessarily apply to 
personal property. For instance, in the case of real estate, 
foreclosure is a time-consuming process in many states, often making it 
necessary for a borrower to undertake repairs and incur other expenses 
to maintain the value of the collateral while the foreclosure action 
proceeds. Thus, the final rule leaves unchanged the existing rule 
governing additional funds advanced to protect collateral.

Calculation of Lending Limits (Sec. 32.4)

    Former Sec. 32.4(a) required a bank to calculate its lending limit 
as of the later of the date when the bank's Call Report ``is required 
to be filed'' or when the bank's capital category changes for purposes 
of the prompt corrective action provisions of 12 U.S.C. 1831o and 12 
CFR part 6 (unless the OCC requires a national bank to calculate its 
lending limit more frequently for safety and soundness reasons).
    Because the General Instructions to the Call Report refer to two 
separate ``filing'' dates, questions arose under the former rule 
concerning the date on which a recalculated lending limit is to become 
effective. The first potential filing date identified in the General 
Instructions, termed the ``report date,'' is defined as the last 
calendar day of each calendar quarter. The second potential filing 
date, termed the ``submission date,'' is the date by which the 
appropriate Federal banking agency must receive the Call Report. For 
most banks, the maximum submission date is 30 days after the report 
date. Thus, the reference in the former rule to the date when the Call 
Report ``is required to be filed'' could produce some confusion as to 
when a recalculated limit becomes effective, depending on which 
``filing'' date is used.
    Proposed Sec. 32.4 resolved this ambiguity by distinguishing the 
``calculation date'' of a lending limit from its ``effective date.'' 
Assuming that a national bank's capital category has not changed, the 
bank is to calculate its lending limit using numbers reported in the 
bank's most recent Call Report, and, therefore, base its lending limit 
on the bank's capital and surplus as of the end of the most recent 
calendar quarter (the calculation date). However, this new limit will 
not be effective until the earlier of the date on which the bank 
submits its Call Report or the date by which the bank is required to 
submit the Call Report (the effective date). The proposal amended 
Sec. 32.4(a)(1), redesignated current Sec. 32.4(b) as Sec. 32.4(c), and 
added a new Sec. 32.4(b) that set forth the effective date for using 
the updated numbers to accomplish this result.
    Under the proposal, if a bank's capital category for prompt 
corrective action purposes changes, then the bank must determine its 
lending limit as of the date on which the capital category changes. The 
new limit in this instance will be effective on the date that the limit 
is to be recalculated. The proposal also stated that the OCC also would 
continue its practice of permitting a recalculation of lending limits 
at a point during a quarter when there is a material change in a bank's 
capital arising from corporate activities such as a merger or stock 
issuance.
    The OCC received seven comments on the proposal. Five commenters 
agreed with the clarification of the ``calculation date'' versus 
``effective date,'' noting that the change removes ambiguity as to when 
a national bank's recalculated lending limit becomes effective.
    Two commenters disagreed with the proposal. One commenter opposed 
the proposal because, in this commenter's views, the proposal would 
further delay implementation of a new lending limit by 25 days. The OCC 
notes that the proposed change would simply clarify what is the 
industry practice under the current rule, and would not create any 
additional delay in the implementation of an effective date. Under both 
the former rule and this final rule, a bank is to calculate its lending 
limit based on the capital in the bank as of the last day of a calendar 
quarter. However, it will not be able to calculate this new lending 
limit until it gathers most of the information it will need to prepare 
and file its Call Report.
    Another commenter opposed the date of submission of a bank's Call 
Report as the effective date because the commenter thought that the 
flexibility to submit Call Reports on any day of the month up to the 
mandatory submission date would allow for inconsistent effective dates. 
The commenter recommended that the date should be either the date the 
Call Report is required to be submitted or as per letter of instruction 
from the OCC.
    While it is true that the effective date for new lending limits 
will be determined in most cases by when a bank submits its Call 
Report, the OCC believes that the benefits of clarifying when a new 
lending limit is effective outweigh the minimal risk that a bank will 
make an unsafe loan in anticipation of a lower lending limit. Any loan 
that becomes nonconforming because of a drop in the bank's lending 
limit is subject to the provisions of Sec. 32.6, which require a bank 
to use reasonable efforts to bring the loan into conformity with the 
lending limit unless to do so would be inconsistent with safe and sound 
banking practices. Moreover, the clarification regarding the effective 
date of a new lending limit will not affect the amount of the limit, 
because lending limits are to be calculated by using data from the last 
day of a calendar quarter. The OCC believes that the final rule is 
sufficiently flexible to accommodate the commenter's concern while also 
removing any ambiguity that may have existed concerning the difference 
between the calculation date of a new lending limit and its effective 
date.

Technical Amendments (Secs. 32.2(b) and 32.3(c))

    The proposal made several clarifying technical amendments to part 
32. These amendments do not affect the substance of the current rule. 
The technical amendments are summarized below.
    Former Sec. 32.2(b) stated that capital and surplus includes, among 
other things, a bank's Tier 1 and Tier 2 capital ``included in the 
bank's risk-based capital under the OCC's Minimum Capital Ratios in 
Appendix A of part 3 of this chapter.'' The proposal clarified this 
definition by changing that language to refer to a bank's Tier 1 and 
Tier 2 capital ``calculated under the OCC's risk-based capital 
standards set forth in Appendix A to 12 CFR part 3 as reported in the 
bank's Consolidated Report of Condition and Income as filed under 12 
U.S.C. 161.''
    Former Sec. 32.3(c)(4)(ii) exempted a loan from the lending limits 
to the extent that the loan is secured by an unconditional takeout 
commitment or guarantee of a Federal agency. In explaining when a 
commitment or guarantee is unconditional, former Sec. 32.3(c)(4)(ii)(B) 
noted that protection against loss is not materially diminished or 
impaired by a procedural requirement, such as ``an agreement to take 
over only in the event of default . . .'' The proposal clarified that 
the phrase ``an agreement to take over'' means an agreement to pay on 
an obligation.
    Finally, former Sec. 32.3(c)(6)(ii)(B) stated that a bank must 
establish procedures to revalue foreign currency deposits to ensure 
that the loan or extension of credit remains fully secured at all 
times. The proposal clarified that the revaluation must be periodic.
    The OCC requested comment on the proposed technical changes and

[[Page 15746]]

suggestions for other technical changes that would clarify or improve 
the rule. Three commenters addressed the technical amendments, and all 
three supported the changes. One commenter specifically supported the 
clarification that Tier 1 and Tier 2 capital is to be calculated under 
the OCC's risk-based capital standards and as reported in the Call 
Report. In light of the comments received and the OCC's further 
deliberations, the final rule adopts the technical changes as proposed.

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. 
As is explained in greater detail in the preamble to this final rule, 
the final rule makes only stylistic changes designed to clarify various 
sections of part 32. The rule imposes no new burden of any sort on 
national banks. Accordingly, a regulatory flexibility analysis is not 
required.

Executive Order 12866

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

Unfunded Mandates Act of 1995

    The OCC has determined that this final rule will not result in 
expenditures by State, local, and tribal governments, or by the private 
sector, of more than $100 million in any one year. Accordingly, the OCC 
has not prepared a budgetary impact statement or specifically addressed 
in this final rule the regulatory alternatives considered, as would 
otherwise be required by the Unfunded Mandates Act of 1995. As 
discussed in the preamble, this final rule only clarifies certain 
provisions of the former rule.

List of Subjects in 12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set out in the preamble, part 32 of chapter I of 
title 12 of the Code of Federal Regulations, is amended as follows:

PART 32--LENDING LIMITS

    1. The authority citation for part 32 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 84, and 93a.


Sec. 32.2  [Amended]

    2. In Sec. 32.2, paragraph (b) is revised to read as follows:


Sec. 32.2  Definitions.

* * * * *
    (b) Capital and surplus means--
    (1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's 
risk-based capital standards set 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 Call Report filed under 12 U.S.C. 161.
* * * * *


Sec. 32.3  [Amended]

    3. In Sec. 32.3, paragraph (c)(4)(ii)(B) is amended by removing the 
term ``take over'' from the second sentence and adding in lieu thereof 
the term ``pay on the obligation'', and paragraph (c)(6)(ii)(B) is 
amended by adding the word ``periodically'' before the word 
``revalue''.
    4. Section 32.4 is revised to read as follows:


Sec. 32.4  Calculation of lending limits.

    (a) Calculation date. For purposes of determining compliance with 
12 U.S.C. 84 and this part, a bank shall determine its lending limit as 
of the most recent of the following dates:
    (1) The last day of the preceding calendar quarter; or
    (2) The date on which there is a change in the bank's capital 
category for purposes of 12 U.S.C. 1831o and 12 CFR 6.3.
    (b) Effective date. (1) A bank's lending limit calculated in 
accordance with paragraph (a)(1) of this section will be effective as 
of the earlier of the following dates:
    (i) The date on which the bank's Call Report is submitted; or
    (ii) The date on which the bank's Call Report is required to be 
submitted.
    (2) A bank's lending limit calculated in accordance with paragraph 
(a)(2) of this section will be effective on the date that the limit is 
to be calculated.
    (c) More frequent calculations. If the OCC determines for safety 
and soundness reasons that a bank should calculate its lending limit 
more frequently than required by paragraph (a) of this section, the OCC 
may provide written notice to the bank directing the bank to calculate 
its lending limit at a more frequent interval, and the bank shall 
thereafter calculate its lending limit at that interval until further 
notice.

    Dated: March 20, 1998.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 98-8558 Filed 3-31-98; 8:45 am]
BILLING CODE 4810-33-P