[Federal Register Volume 63, Number 153 (Monday, August 10, 1998)]
[Rules and Regulations]
[Pages 42668-42679]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21141]



[[Page 42667]]

  
  
  
  
  
  
  
  
  
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Part II

Department of the Treasury
Office of the Comptroller of the Currency



12 CFR Parts 3 and 6

Federal Reserve System



12 CFR Parts 208 and 225

Federal Deposit Insurance Corporation



12 CFR Part 325

Department of the Treasury
Office of Thrift Supervision



12 CFR Parts 565 and 567



_______________________________________________________________________



Risk-Based Capital Guidelines; Capital Adequacy Guidelines, and Capital 
Maintenance: Servicing Assets; Final Rule

  Federal Register / Vol. 63, No. 153 / Monday, August 10, 1998 / Rules 
and Regulations  

[[Page 42668]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 3 and 6

[Docket No. 98-10]
RIN 1557-AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-0976]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC07

DEPARTMENT OF THE TREASURY

Office Of Thrift Supervision

12 CFR Parts 565 and 567

[Docket No. 98-68]
RIN 1550-AB11


Capital; Risk-Based Capital Guidelines; Capital Adequacy 
Guidelines; Capital Maintenance: Servicing Assets

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC); the Board 
of Governors of the Federal Reserve System (Board); the Federal Deposit 
Insurance Corporation (FDIC); and the Office of Thrift Supervision 
(OTS) (collectively, the Agencies) are amending their capital adequacy 
standards for banks, bank holding companies, and savings associations 
(collectively, institutions or banking organizations) to address the 
regulatory capital treatment of servicing assets on both mortgage 
assets and financial assets other than mortgages (nonmortgages). This 
rule increases the maximum amount of servicing assets (when combined 
with purchased credit card relationships (PCCRs)) that are includable 
in regulatory capital from 50 percent to 100 percent of Tier 1 capital. 
Servicing assets include the aggregate amount of mortgage servicing 
assets (MSAs) and nonmortgage servicing assets (NMSAs). It also applies 
a further sublimit of 25 percent of Tier 1 capital to the aggregate 
amount of NMSAs and PCCRs. The rule also subjects the valuation of 
MSAs, NMSAs, and PCCRs to a 10 percent discount. The final rule also 
modifies certain terms used in the Agencies' capital rules to be more 
consistent with the terminology found in accounting standards recently 
prescribed by the Financial Accounting Standards Board (FASB) for the 
reporting of these assets.

DATES: This final rule is effective October 1, 1998. The Agencies will 
not object if an institution wishes to apply the provisions of this 
final rule beginning on August 10, 1998.

FOR FURTHER INFORMATION CONTACT:
    OCC: Gene Green, Deputy Chief Accountant (202/874-5180); Roger 
Tufts, Senior Economic Adviser, or Tom Rollo, National Bank Examiner, 
Capital Policy Division (202/874-5070); Mitchell Stengel, Senior 
Financial Economist, Risk Analysis Division (202/874-5431); Saumya 
Bhavsar, Attorney or Ronald Shimabukuro, Senior Attorney (202/874-
5090), Legislative and Regulatory Activities Division, Office of the 
Comptroller of the Currency, 250 E Street, S.W., Washington, D.C. 
20219.
    Board: Arleen Lustig, Supervisory Financial Analyst (202/452-2987), 
Arthur W. Lindo, Supervisory Financial Analyst, (202/452-2695) or 
Thomas R. Boemio, Senior Supervisory Financial Analyst, (202/452-2982), 
Division of Banking Supervision and Regulation. For the hearing 
impaired only, Telecommunication Device for the Deaf (TDD), Diane 
Jenkins (202) 452-3544, Board of Governors of the Federal Reserve 
System, 20th and C Streets, N.W., Washington, D.C. 20551.
    FDIC: For supervisory issues, Stephen G. Pfeifer, Examination 
Specialist, (202/898-8904), Accounting Section, Division of 
Supervision; for legal issues, Marc J. Goldstom, Counsel, (202/898-
8807), Legal Division.
    OTS: Michael D. Solomon, Senior Program Manager for Capital Policy, 
(202/906-5654), Christine Smith, Capital and Accounting Policy Analyst, 
(202/906-5740), or Timothy J. Stier, Chief Accountant, (202/906-5699), 
Vern McKinley, Senior Attorney, Regulations and Legislation Division 
(202/906-6241), Office of Thrift Supervision, 1700 G Street, N.W., 
Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    This section describes the changes in accounting guidance that have 
prompted the Agencies to amend their risk-based and leverage capital 
rules with respect to servicing assets.

FAS 122

    In May 1995, FASB issued Statement of Financial Accounting 
Standards No. 122, ``Accounting for Mortgage Servicing Rights'' (FAS 
122), which eliminated the distinction in generally accepted accounting 
principles (GAAP) between originated mortgage servicing rights (OMSRs) 
and purchased mortgage servicing rights (PMSRs). FAS 122 required that 
these assets, together known as mortgage servicing rights (MSRs), be 
treated as a single class of assets for financial statement purposes, 
regardless of how the servicing rights were acquired.1 This 
change allowed OMSRs to be reported as balance sheet assets for the 
first time. Under FAS 122, OMSRs and PMSRs were treated the same for 
reporting, valuation, and disclosure purposes. Among other things, FAS 
122 imposed valuation and impairment criteria based on the 
stratification of MSRs by their predominant risk characteristics. In 
addition, prior to FAS 122, GAAP treated MSRs as intangible assets. FAS 
122 eliminated this characterization as unnecessary because similar 
characterizations as tangible or intangible are not applied to most 
other assets.
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    \1\ Mortgage servicing rights represent the contractual 
obligations undertaken by an institution to provide the servicing 
for mortgage loans owned by others, typically for a fee. Mortgage 
servicing rights generally have value to the servicing institution 
due to the present value of the expected net future cash flows for 
servicing mortgage assets. PMSRs are mortgage servicing rights that 
are purchased from other parties. The purchaser is not the 
originator of the mortgages. OMSRs, on the other hand, generally 
represent the servicing rights created when an institution 
originates mortgage loans and subsequently sells the loans but 
retains the servicing rights.
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    The Agencies adopted FAS 122 for regulatory reporting purposes and 
then issued a joint interim rule on the regulatory capital treatment of 
MSRs with a request for public comment on August 1, 1995 (60 FR 39226). 
The interim rule, which became effective upon publication, amended the 
Agencies' capital adequacy standards for mortgage servicing rights and 
intangible assets. It treated OMSRs in the same manner as PMSRs for 
regulatory capital purposes. The interim rule permitted banking 
organizations to include MSRs plus PCCRs in regulatory capital up to a 
limit of 50 percent of Tier 1 capital.2 In addition, the 
interim rule applied a 10 percent valuation discount (or ``haircut'') 
to all MSRs and PCCRs. This haircut is statutorily required for 
PMSRs.3 The interim rule did not

[[Page 42669]]

amend any other elements of the Agencies' capital rules.
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    \2\ For OTS purposes, Tier 1 capital is the same as core 
capital.
    \3\ This 10 percent haircut is required by section 475 of the 
Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA) (12 U.S.C. 1828 note). Also see the Financial Institutions 
Recovery, Reform, and Enforcement Act (FIRREA) (12 U.S.C. 1464(t)) 
for the statute applicable to thrifts. It applies to the fair value 
of the MSRs so that the amount of MSRs recognized for regulatory 
capital purposes does not exceed 90 percent of the fair value.
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FAS 125

    In June 1996, FASB issued Statement of Financial Accounting 
Standards No. 125, ``Accounting for Transfers and Servicing of 
Financial Assets and Extinguishments of Liabilities' (FAS 125), the 
servicing related provisions of which became effective on January 1, 
1997. FAS 125, which superseded FAS 122, requires organizations to 
recognize separate servicing assets (or liabilities) for the 
contractual obligation to service financial assets (e.g., mortgage 
loans, credit card receivables) that the entities have either sold or 
securitized with servicing retained. Furthermore, servicing assets (or 
liabilities) that are purchased (or assumed) as part of a separate 
transaction must also be recognized under FAS 125.
    FAS 125 also eliminates the previous distinction in GAAP between 
normal servicing fees and excess servicing fees.4 FAS 125 
reclassifies these cash flows into two assets: (a) servicing assets, 
which are measured based on contractually specified servicing fees; and 
(b) interest-only (I/O) strips receivable, which reflect rights to 
future interest income from the serviced assets in excess of the 
contractually specified servicing fees. In addition, FAS 125 generally 
requires I/O strips and other financial assets (including loans, other 
receivables, and retained interests in securitizations) to be measured 
at fair value if they can be contractually prepaid or otherwise settled 
in such a way that the holder would not recover substantially all of 
its recorded investment.5 However, under FAS 125, no 
servicing asset (or liability) need be recognized when a banking 
organization securitizes assets, retains all of the resulting 
securities, and classifies the securities as held-to-maturity in 
accordance with FAS 115.
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    \4\ Prior to FAS 125, excess servicing fees arose only when an 
organization sold loans but retained the servicing and received a 
servicing fee that was in excess of a normal servicing fee. Excess 
servicing fees receivable (ESFRs) represented the present value of 
the excess servicing fees and were reported as a separate asset on 
an institution's balance sheet.
    \5\ These assets are to be measured at fair value like debt 
securities that are classified as available-for-sale or trading 
securities under FASB Statement No. 115, ``Accounting for Certain 
Investments in Debt and Equity Securities'' (FAS 115).
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    FAS 125 also adopts the valuation approach established in FAS 122 
for determining the impairment of mortgage servicing assets (MSAs) and 
extends this approach to all other servicing assets (i.e., servicing 
assets on financial assets other than mortgages). Thus, impairment 
should be assessed based on the stratification of servicing assets by 
their predominant risk characteristics.
    The Agencies issued interim guidance to banking organizations on 
December 18, 1996, to ensure banking organizations' compliance with FAS 
125 for reporting purposes when the servicing-related provisions became 
effective on January 1, 1997. Under the interim guidance, the Agencies 
also clarified that their existing rules on mortgage servicing applied 
to all MSAs. Furthermore, consistent with their existing rules, the 
OCC, FDIC, and the Board did not allow the inclusion of NMSAs for 
regulatory capital purposes. The OTS included NMSAs in regulatory 
capital, subject to the same 50 percent of Tier 1 capital aggregate 
limit, 25 percent sublimit, and 10 percent haircut applicable to PCCRs.

II. Description of the Proposal

    The Agencies issued a joint proposed rule on August 4, 1997 (62 FR 
42006). The proposal raised three main questions: (1) Should the 
Agencies continue to retain a limitation on the amount of mortgage 
servicing assets that may be included in regulatory capital; (2) should 
the Agencies continue to deduct NMSAs for regulatory capital purposes; 
and, (3) should the Agencies impose regulatory capital limits on I/O 
strips receivable not in the form of a security or on certain other 
nonsecurity financial instruments subject to prepayment risk 
(collectively, I/O strips receivable)?
    Specifically, with respect to the first issue, the Agencies 
proposed to increase the aggregate amount of MSAs and PCCRs that 
banking organizations could include in regulatory capital from 50 to 
100 percent of Tier 1 capital. In addition, they proposed to apply the 
10 percent haircut to all MSAs. The proposal also continued to subject 
PCCRs to a 10 percent haircut and a 25 percent of Tier 1 capital 
sublimit.
    With respect to the second issue, the Agencies proposed to exclude 
from regulatory capital the amount of banking organizations' NMSAs. 
Prior to the adoption of FAS 125, NMSAs generally were not recognized 
as balance sheet assets for GAAP or regulatory reporting purposes.
    With respect to the third issue, the Agencies requested comment on 
two options for the capital treatment of I/O strips receivable. Under 
Alternative A, I/O strips receivable, whether or not in the form of a 
security, would be included in Tier 1 capital on an unlimited basis; 
that is, they would not be subject to any Tier 1 capital deduction. 
Under Alternative B, I/O strips receivable not in the form of a 
security would be combined with the corresponding type of servicing 
assets and subject to the same capital limitation and 10 percent 
haircut (or capital deduction) that are applied to the related 
servicing assets.
    In addition, the Agencies specifically requested public comment on 
a number of topics related to the proposal. The topics included the 
reliability of the fair values of servicing assets, the appropriate 
Tier 1 capital limitation for mortgage and NMSAs, and whether servicing 
assets that are disallowed for regulatory capital purposes should be 
deducted on a basis that is net of any associated deferred tax 
liability.

III. Summary of Comments and Description of the Final Rule

Final Rule

    After considering the public comments received and discussed below, 
the Agencies have decided to amend their respective risk-based and 
leverage capital rules as follows:
    (a) All servicing assets and PCCRs that are includable in capital 
are each subject to a 90 percent of fair value limitation (also known 
as a ``10 percent haircut'').6
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    \6\ The Agencies have chosen to use FAS 125 terminology when 
referring to servicing assets and financial assets. The Agencies' 
regulatory reports (Reports of Condition and Income for commercial 
banks and FDIC-supervised savings banks, Thrift Financial Report 
(TFR) for savings associations, and Consolidated Financial 
Statements (FR Y-9C) for bank holding companies) also reflect FAS 
125 definitions for the reporting of servicing assets. Consistent 
with the foregoing, the FDIC has made an additional technical 
clarification to its definition of ``mortgage servicing assets'' in 
12 CFR 325.2(n) that conforms this definition more closely to the 
definitions used in the Agencies' regulatory reports.
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    (b) The aggregate amount of all servicing assets and PCCRs included 
in capital cannot exceed 100% of Tier 1 capital.
    (c) The aggregate amount of NMSAs and PCCRs included in capital 
cannot exceed 25% of Tier 1 capital.
    (d) All other intangible assets (other than qualifying PCCRs) must 
be deducted from Tier 1 capital.
    Amounts of servicing assets and PCCRs in excess of the amounts 
allowable must be deducted in determining Tier 1 capital. Furthermore, 
I/O strips receivable, whether or not in security form, are not subject 
to any regulatory capital limitations under this rule.

[[Page 42670]]

Summary of Comments

    The Agencies collectively received 35 comment letters on the 
proposal during the comment period, which ended on October 3, 1997. The 
commenters represented a diverse group of organizations that included: 
Six banks, seven bank holding companies, seven Federal Reserve Banks, 
seven thrifts, seven trade associations, and one government sponsored 
enterprise. This final rule is similar in most respects to the 
Agencies' proposal, but incorporates several changes in response to 
comments received. The following analysis identifies and discusses the 
major issues raised in the comments and the Agencies' responses to 
these issues.

Capital Limitation for Mortgage Servicing Assets

    The Agencies solicited comment on a proposal to increase the 50 
percent of Tier 1 capital limit for MSAs and PCCRs to 100 percent of 
Tier 1 capital and to retain a 25 percent sublimit for PCCRs. The 
Agencies also requested comment on what the aggregate limit, if any, 
should be for the inclusion of MSAs and PCCRs in regulatory capital. 
The Agencies received 29 comments on this issue. Twenty-five of the 29 
commenters supported increasing the 50 percent limit. Some of these 
commenters supported the proposal's increase to 100 percent of Tier 1 
capital. Others recommended a higher Tier 1 capital limitation (e.g., 
200 percent of capital), while still others recommended the complete 
elimination of any limitation on the amount of MSAs included in Tier 1 
capital.
    Those commenters supporting an increase in, or elimination of, the 
Tier 1 capital limit argued that the GAAP valuation and impairment 
requirements for MSAs under FAS 125, which are based on the lower of 
cost or market (LOCOM), are conservative. Therefore, they argued that 
these standards provide safeguards against the risks associated with 
these assets and preclude the need for regulatory capital limitations. 
They further reasoned that the fair value of MSAs is readily available 
in the active, mature market for MSAs. This information, in turn, 
allows market participants to use market-based data on prepayment 
speeds and discount rates to model the present values of MSAs using 
discounted cash flow valuation techniques. Furthermore, they argued 
that the use of the market-based data on prepayments, loan balances, 
delinquencies, and servicing costs helps reduce the volatility of 
reported values of servicing assets. Some of these commenters also 
noted that software packages used to determine fair values of MSAs 
enable servicers to more accurately value MSAs.
    Several commenters who were in favor of eliminating the regulatory 
capital limit on MSAs believed that the Agencies' capital guidelines 
should focus on institutions' overall risk profiles rather than on 
limitations for specific types of assets, such as MSAs which are often 
hedged.
    Furthermore, most commenters believed that the requirement to 
deduct from Tier 1 capital all amounts of MSAs exceeding the percent of 
Tier 1 capital limitation would continue to put insured institutions at 
a competitive disadvantage vis-a-vis non-regulated/nonbank entities. 
Such uninsured entities are not subject to the cost of this capital 
limitation, which increases insured institutions' costs for performing 
servicing and, in turn, limits the growth of their portion of the 
servicing and securitization markets.
    Other commenters noted that the Tier 1 capital limit should be 
increased because the limit is considerably more constraining now than 
it was prior to the issuance of FAS 122 and FAS 125 because FAS 122 
required the capitalization of OMSRs and FAS 125 redefined MSAs to 
include the bulk of ESFRs. The 50 percent limit was originally intended 
only for PMSRs, but is now applied to OMSRs and the large majority of 
what were formerly classified as ESFRs.
    Four commenters opposed the increase of MSAs to 100 percent of Tier 
1 capital noting problems in estimating their value, including 
difficulty in making assumptions regarding future loan repayments, 
credit quality, and interest rates. In addition, these commenters 
pointed out that a weak economy or significant changes in interest 
rates could exacerbate problems of uncertainty in valuing MSAs, due, in 
part, to changes in mortgage prepayment rates. One commenter noted that 
despite continued growth in the market, it is concerned that community 
banks holding relatively small amounts of these assets still face 
significant difficulties in obtaining accurate valuations. These 
commenters do not believe that, for their banking organizations, 
adequate information is available overall to make appropriate 
assumptions in calculating valuations and impairment.
    The Agencies believe that increasing the limit of MSAs allowable in 
Tier 1 capital from 50 to 100 percent is appropriate and that the 
application of more rigorous valuation and impairment standards for 
servicing assets pursuant to FAS 125 has improved the valuation of 
these assets.7 FAS 125 has significantly changed the 
treatment of mortgage servicing from when Congress through FIRREA 
imposed PMSR limits on thrifts in 1989 and FDICIA imposed valuation 
criteria on all banks' and thrifts' PMSRs in 1991.8 
Furthermore, the volume of servicing assets that is traded regularly in 
the market has greatly increased, making market-based data more readily 
available and information on prepayment rates, delinquency rates, and 
other servicing costs more accessible. However, the Agencies also 
believe that more experience with institutions' application of the 
valuation standard under FAS 125, as well as with the volatility of 
these assets, is needed before considering the removal, or further 
easing, of the Tier 1 capital limits. Therefore, as a result of 
development of the mortgage servicing markets and the improved 
valuation and impairment standards under FAS 122 and 125, the Agencies 
are increasing the Tier 1 capital limit for MSAs from 50 to 100 percent 
of Tier 1 capital.
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    \7\ Among other things, FAS 125 requires banking organizations 
to stratify their servicing assets based on one or more of their 
predominant risk characteristics. Thus, declines in fair market 
value of a particular stratum of servicing assets below cost must be 
recognized under GAAP, while gains in the value of another stratum 
of servicing assets may not offset losses experienced in other 
strata. This methodology discourages banking organizations from 
overvaluing their servicing portfolios because they will be required 
to recognize larger declines if prepayments occur.
    \8\ The current 50 percent of Tier 1 capital limit applies to 
the aggregate amount of MSAs and PCCRs only. The final rule will 
apply the 100 percent of Tier 1 capital limit to the aggregate 
amount of MSAs, NMSAs, and PCCRs.
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Purchased Credit Card Relationships

    The Agencies proposed no changes to the current regulatory capital 
treatment of PCCRs, which are subject to the 100 percent of Tier 1 
limit, to a 25 percent of Tier 1 capital sublimit, and to a 10 percent 
haircut. Although the Agencies did not specifically request comment on 
the capital treatment of PCCRs, except in the context of an aggregate 
limit when combined with servicing assets, the Agencies received six 
comments on the regulatory capital limitation of PCCRs. Generally, 
these commenters supported removing all regulatory capital limits on 
PCCRs, although a few supported some type of limitation. Since the 
Agencies did not solicit comments, they are not taking any action at 
this time.9
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    \9\ Under the existing rules, only PCCRs are subject to the 
sublimit of 25 percent of Tier 1 capital. Under the final rule, the 
sublimit will apply to the aggregate amount of PCCRs and NMSAs.

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[[Page 42671]]

Nonmortgage Servicing Assets

    The Agencies requested comment on whether servicing assets on 
nonmortgage financial assets should be recognized in Tier 1 capital. 
The Agencies received 18 comments addressing this issue. Five 
commenters supported the proposal's full deduction of NMSAs from 
regulatory capital because of valuation and market liquidity concerns. 
The other commenters recommended that the Agencies place either no 
limit on NMSAs or apply the proposed treatment for MSAs (i.e., 100 
percent of Tier 1 capital).
    The commenters opposing the proposal acknowledged that the market 
for NMSAs is less developed than for MSAs, but believed that the 
Agencies should not prevent the development of markets for NMSAs by 
excluding these assets from regulatory capital. These commenters argued 
that: (1) The rigorous valuation and impairment criteria of FAS 125 are 
conservative and provide sufficient protection against overvaluation of 
NMSAs; (2) NMSAs have less potential for volatility than MSAs because 
they typically have shorter lives than MSAs and are not as sensitive to 
changes in market interest rates; (3) fair values are obtainable for 
NMSAs using discounted cash flow models or market surveys of similar 
pricing arrangements; (4) excluding NMSAs from regulatory capital would 
put financial institutions at a serious competitive disadvantage with 
non-regulated entities; and (5) there is sufficient experience with 
contractual servicing fees related to securitizations to enable 
examiners to evaluate the appropriateness of such fees. Finally, these 
commenters argued that, under FAS 125, the majority of banks with 
substantial amounts of servicing assets and other nonsecurity financial 
instruments related to securitizations generally have sophisticated 
cost accounting systems and can clearly track their cost associated 
with servicing the securitized receivables. Therefore, these commenters 
contended that a fully developed public market in trading these 
servicing portfolios is not necessary in determining their fair 
value.10
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    \10\ One commenter noted that OTS-regulated institutions are 
currently allowed to include NMSAs in Tier 1 capital, subject to the 
same haircut and 25 percent sublimit as PCCRs. Therefore, they 
recommended a grandfathering provision for transactions that 
occurred prior to any change in the regulatory capital treatment of 
NMSAs. Under today's final rule, these grandfathering provisions are 
unnecessary.
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    The proposal also requested comment on what types of nonmortgage 
financial assets (other than loans secured by first liens on 1- to 4-
family residential properties) banking organizations currently book as 
servicing assets or I/O strips receivable. Seven commenters responded 
to this question. These commenters noted the following types of 
servicing assets: Commercial loans, automobile loans, credit card 
receivables, unsecured installment loans, student loans, Small Business 
Administration loans, home equity loans, commercial mortgages, 
recreational vehicle loans, and marine loans.
    After careful consideration of these comments, the Agencies have 
decided to allow banking organizations to include NMSAs in Tier 1 
capital, but subject the aggregate of NMSAs and PCCRs to the 25 percent 
of Tier 1 sublimit and to the 10 percent haircut. The Agencies believe 
that a conservative regulatory capital limit is appropriate until the 
depth and maturity of this market develops further. This approach 
allows banking organizations to include some prudently valued NMSAs in 
Tier 1 capital calculations, while retaining the supervisory safeguards 
that the Agencies believe are warranted in light of their concerns 
about the potential valuation, liquidity, and volatility of these 
assets.11
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    \11\  While savings associations may include NMSAs in core (Tier 
1) capital, they may not include such assets in tangible capital 
under 12 U.S.C. 1464(t)(9)(C). See OTS final rule at 12 CFR 
567.12(b)(2). In addition, OTS has revised its definition of 
tangible equity under the prompt corrective action rule at 12 CFR 
565.2(f). The revised rule reflects the fact that NMSAs are deducted 
from tangible equity and other minor technical changes.
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Discounted Valuation (``Haircut'')

    The final rule retains the interim rule's application of the 
required 10 percent discount in valuing MSAs and PCCRs. Although the 
Agencies did not specifically request comment on this issue, nine 
commenters recommended elimination of the haircut. These commenters 
acknowledged that the valuation discount is required by statute for 
PMSRs, but advocated its elimination by legislative 
change.12 At a minimum, some commenters recommended that the 
haircut apply only to PMSRs, even though the application of the haircut 
to PMSRs could be difficult because PMSRs are not reported as separate 
assets under GAAP. These commenters argued that the haircut is an 
arbitrary and ineffective way to protect against prepayment and other 
risks. Instead, they believed that it is preferable to measure risks 
associated with MSAs and PCCRs as part of banking organizations' 
overall interest rate risk analyses. One commenter, however, supported 
retaining the ten percent haircut because it injects an element of 
conservatism into the regulatory capital measure. The final rule 
retains the 10 percent haircut for MSAs and PCCRs and extends it to 
NMSAs. The Agencies, however, may revisit this issue if Congress 
revises the current statutory requirement.
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    \12\ Section 115 of S. 1405, the Financial Regulatory Relief and 
Economic Efficiency Act, currently pending, could, among other 
things, provide discretion for the Agencies to reduce or eliminate 
the ten percent haircut for PMSRs.
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Interest-Only Strips Receivable

    The Agencies proposed, and requested public comment on, two options 
for the capital treatment of I/O strips receivable. Under Alternative 
A, I/O strips receivable, whether or not in the form of a security, 
would be included in Tier 1 capital on an unlimited basis, that is, 
they would not be deducted from Tier 1 capital regardless of the amount 
of such holdings. Under Alternative B, I/O strips receivable not in the 
form of a security would be subject to the same capital limitations and 
10 percent haircut that are applied to the related type of servicing 
assets. The Agencies also asked for comment on whether the definition 
of I/O strips receivable that could be subject to such capital 
limitations under Alternative B should be expanded to include certain 
other financial assets not in security form that have substantial 
prepayment risks (as defined in FAS 125).
    The Agencies received 19 comments on the treatment of I/O strips 
receivable. Fourteen commenters supported Alternative A, contending 
that I/O strips receivable should not be subject to a Tier 1 capital 
limit. They asserted that I/O strips receivable associated with 
servicing assets are indistinguishable from I/O strip securities and 
should be treated consistently with other I/O strip securities, which 
are not subject to Tier 1 capital limitations. In addition, these 
commenters believed that, because the income stream of I/O strips 
receivable is not dependent on a banking organization servicing the 
underlying loans, I/O strips receivable should not necessarily be 
subject to the same capital requirement applied to the servicing assets 
on the same type of loans. Some commenters noted that banking 
organizations' interest rate risk models currently measure and assess 
the risk of I/O strips, which provide a better analytical foundation 
for establishing capital requirements than imposing rigid percentage-
of-capital limitations. Other commenters stated

[[Page 42672]]

that I/O strips receivable often serve as a credit enhancement to 
securities holders and therefore already are subject to the capital 
treatment for recourse obligations and direct credit substitutes.
    Five commenters supported Alternative B. The reasons cited by these 
commenters included the difficulty of valuing I/O strips receivable 
because they are not securities, not rated, and not registered. These 
commenters also cited the lack of an active, liquid market because 
these assets are relatively new financial assets. One commenter argued 
that if I/O strips receivable are not subject to the same capital 
limitation as their related servicing assets, banking organizations may 
be inclined to avoid capital limitations by negotiating contracts that 
classify more of the cash flows as I/O strips receivable instead of 
servicing assets.
    Based on the comments received and a further analysis of the 
issues, the Agencies have decided to adopt Alternative A. The Agencies 
agree that I/O strips receivable associated with servicing assets are 
sufficiently similar to I/O strip securities, which are not subject to 
a capital deduction requirement under current rules, to warrant 
consistent treatment. Furthermore, the agencies also recognize the 
prudential effects of banking organizations' relying on their own risk 
assessment and valuation tools, particularly their interest-rate risk, 
market risk, and other analytical models. Accordingly, the Agencies 
will not apply a regulatory capital limitation to I/O strips receivable 
or non-security financial instruments under the final rule. 
Nevertheless, the Agencies will continue to review banking 
organizations' valuation of I/O strips receivable, evaluate 
concentrations of these assets relative to the organizations' 
regulatory capital levels, and determine whether cash flows are being 
correctly classified as either I/O strips receivable or servicing 
assets. As with other assets, the Agencies may, on a case-by-case 
basis, require banking organizations that the Agencies determine have 
high concentrations of these assets relative to their capital, or are 
otherwise at risk from these assets, to hold additional capital 
commensurate with their risk exposure.
    In addition, the Agencies will continue to apply the capital 
treatment for assets sold with recourse to those arrangements where I/O 
strips receivable are used as a credit enhancement to absorb credit 
risk on the underlying loans that have been sold.

Other Issues

Excess Servicing Fees Receivables
    The proposal requested comment on the appropriate capital treatment 
for amounts previously designated as ESFRs if a banking organization 
still maintains this breakdown for income tax or other purposes. The 
Agencies requested comment on ESFRs because, for tax purposes, banking 
organizations may continue to report ESFRs separately from servicing 
assets. The agencies were exploring whether any banking organizations 
that report ESFRs for tax purposes would similarly want to report ESFRs 
separately for regulatory capital purposes.
    The Agencies received nine comments on this question. The 
commenters generally supported according ESFRs the same capital 
treatment as I/O strips receivable, because both ESFRs and I/O strips 
receivable can be sold separately from the servicing asset, or treating 
ESFRs like other servicing assets. If ESFRs are treated like I/O strips 
receivable, the commenters thought that they should not be subject to 
any regulatory capital limitations or valuation discounts. Other 
commenters noted that the Agencies' proposed increase of servicing 
assets to 100 percent is a meaningful liberalization because more 
assets, including many ESFRs, may fall within the scope of the limit. 
One commenter, however, recommended a 200 percent capital limit.
    Under this final capital rule, banking organizations should follow 
FAS 125 in reporting cash flows as either servicing assets or I/O 
strips receivable. Some cash flows that were previously categorized as 
ESFRs, particularly ESFRs not related to residential mortgage loans, 
will be classified as I/O strips receivable. On the other hand, some 
excess servicing fees may become part of the contractually specified 
servicing fees under FAS 125. The Agencies' decision to increase the 
Tier 1 capital limitation from 50 to 100 percent should mitigate the 
capital effects of including such ESFRs in servicing assets.
Hedging the Servicing Assets Portfolio
    The proposal requested comment on what effect efforts to hedge the 
MSA portfolio should have on the application of capital limitations to 
various types of servicing assets. Thirteen commenters addressed this 
question. Two commenters believed that efforts to hedge the mortgage 
servicing asset portfolio should not impact the capital limitations for 
these assets. Alternatively, six commenters supported the incorporation 
of hedging into banking organizations' capital computations. Two of 
these commenters recommended a method of incorporating hedging into the 
capital calculation by allowing institutions to include directly hedged 
servicing assets in Tier 1 capital without any regulatory capital 
limitation. One commenter noted that the Agencies should defer a 
decision on this issue until FASB completes its guidance on hedging.
    The Agencies recognize the important function of hedging servicing 
assets due to the inherent volatility of these assets. Banking 
organizations with substantial portfolios of servicing assets generally 
should hedge these portfolios. However, because the Agencies have not 
had sufficient experience with institutions' hedging of servicing and 
other assets covered by FAS 125, the Agencies are not adjusting the 
capital limitations in this final rule to adjust for hedging. The 
Agencies may revisit this issue when they evaluate any changes that 
FASB may make to hedge accounting under GAAP.
Net of Tax
    The proposal asked for comment on whether servicing assets that are 
disallowed for regulatory capital purposes should be deducted on a 
basis that is net of any associated deferred tax liability. Several 
commenters addressed this issue. Those commenters unanimously agreed 
that servicing assets and PCCRs deducted from Tier 1 capital under this 
rule should be deducted on a basis that is net of any associated 
deferred tax liability. Thus, this final rule gives banking 
organizations the option to deduct otherwise disallowed servicing 
assets on a basis that is net of any associated deferred tax 
liability.13 Any deferred tax liability used in this manner 
would not be available for the organization to use in determining the 
amount of net deferred tax assets that may be included for the purposes 
of Tier 1 capital calculations.
---------------------------------------------------------------------------

    \13\ The OTS' current rule addresses the net of tax issue and 
the OTS has made minor technical changes to its final rule text. The 
OTS is also reviewing its TFR instructions implementing this 
provision to better accord with this rulemaking.
---------------------------------------------------------------------------

Tangible Equity
    No comments were received on conforming the terminology in the 
definition of tangible equity found in each Agency's regulation for 
Prompt Corrective Action to reflect the FAS 125 conceptual changes for 
measuring servicing assets. Therefore, the term ``mortgage servicing 
assets'' will replace ``mortgage servicing rights'' in the

[[Page 42673]]

definition of tangible equity in each Agency's Prompt Corrective Action 
regulation.14
---------------------------------------------------------------------------

    \14\ See OTS changes to tangible equity at footnote number 11.
---------------------------------------------------------------------------

III. Regulatory Flexibility Act Analysis

OCC Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Comptroller of the Currency certifies that this final rule would not 
have a significant economic impact on a substantial number of small 
entities in accord with the spirit and purposes of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.). Accordingly, a regulatory 
flexibility analysis is not required. The adoption of this final rule 
would reduce the regulatory burden of small businesses by aligning the 
terminology in the capital adequacy standards more closely to newly-
issued generally accepted accounting principles and by relaxing the 
capital limitation on servicing assets. The economic impact of this 
final rule on banks, regardless of size, is expected to be minimal.

Board Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Board certifies that this final rule would not have a significant 
economic impact on a substantial number of small entities in accord 
with the spirit and purposes of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.). Accordingly, a regulatory flexibility analysis is 
not required. The effect of this final rule would be to reduce the 
regulatory burden of banks and bank holding companies by aligning the 
terminology in the capital adequacy guidelines more closely to newly-
issued generally accepted accounting principles and by relaxing the 
capital limitation on servicing assets. In addition, because the risk-
based and leverage capital guidelines generally do not apply to bank 
holding companies with consolidated assets of less than $150 million, 
this final rule will not affect such companies.

FDIC Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. 
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that this final rule 
would not have a significant economic impact on a substantial number of 
small entities. Accordingly, a regulatory flexibility analysis is not 
required. The amendment concerns capital requirements for servicing 
assets held by depository institutions of any size. More specifically, 
it changes the current capital treatment of servicing assets by 
allowing depository institutions to include more of their servicing 
assets in Tier 1 capital. It would also reduce regulatory burden on the 
depository institutions (including small businesses) by aligning the 
terminology used in the capital adequacy guidelines more closely to 
newly-issued generally accepted accounting principles. The economic 
impact of this final rule on banks, regardless of size, is expected to 
be minimal.

OTS Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
OTS certifies that this final rule would not have a significant 
economic impact on a substantial number of small entities. The 
amendment concerns capital requirements for servicing assets which may 
be entered into by depository institutions of any size. The effect of 
the final rule would be to reduce regulatory burden on depository 
institutions by aligning the terminology used in the capital adequacy 
standards more closely to newly-issued generally accepted accounting 
principles and by relaxing the capital limitation on servicing assets. 
The economic impact of this final rule on savings associations, 
regardless of size, is expected to be minimal.

IV. Early Compliance

    Subject to certain exceptions, 12 U.S.C. 4802(b) provides that new 
regulations and amendments to regulations prescribed by a Federal 
banking agency which impose additional reporting, disclosures, or other 
new requirements on an insured depository institution shall take effect 
on the first day of a calendar quarter which begins on or after the 
date on which the regulations are published in final form. However, 
section 4802(b) also permits persons who are subject to such 
regulations to comply with the regulation before its effective date. 
Accordingly, the Agencies will not object if an institution wishes to 
apply the provisions of this final rule beginning with the date it is 
published in the Federal Register.

V. Paperwork Reduction Act

    The Agencies have determined that this final rule would not create 
or change any collection of information pursuant to the provisions of 
the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

VI. OCC and OTS Executive Order 12866 Statement

    The Comptroller of the Currency and the Director of the OTS have 
determined that this final rule is not a significant regulatory action 
under Executive Order 12866. Accordingly, a regulatory impact analysis 
is not required.

VII. OCC and OTS Unfunded Mandates Act Statement

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by State, local and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. As discussed in the preamble, 
this amendment to the capital adequacy standards would relax the 
capital limitation on servicing assets and PCCRs. Further, the 
amendment moves toward greater consistency with FAS 125 in an effort to 
reduce the burden of complying with two different standards. Thus, no 
additional cost of $100 million or more, to State, local, or tribal 
governments or to the private sector will result from this final rule. 
Accordingly, the OCC and the OTS have not prepared a budgetary impact 
statement nor specifically addressed any regulatory alternatives.

List of Subjects

12 CFR Part 3

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

12 CFR Part 6

    National banks, Prompt corrective action.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 325

    Administrative practice and procedure, Banks, banking, Capital

[[Page 42674]]

adequacy, Reporting and recordkeeping requirements, Savings 
associations, State non-member banks.

12 CFR Part 565

    Administrative practice and procedure, Capital, Savings 
associations.

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings 
associations.

Authority and Issuance

Office of the Comptroller of the Currency

12 CFR Chapter I

    For the reasons set out in the joint preamble, parts 3 and 6 of 
chapter I of title 12 of the Code of Federal Regulations are amended as 
set forth below:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    1. The authority citation for part 3 continues to read as follows:

    Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n 
note, 1835, 3907, and 3909.

    2. Section 3.100 is amended by revising paragraph (c)(2) and by 
removing the words ``mortgage servicing rights'' in paragraphs (e)(7) 
and (g)(2) and adding ``mortgage servicing assets'' in their place to 
read as follows:


Sec. 3.100  Capital and surplus.

* * * * *
    (c) * * *
    (2) Mortgage servicing assets;
* * * * *
    3. In appendix A to part 3, paragraph (c)(14) of section 1. is 
revised to read as follows:

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

Section 1. Purpose, Applicability of Guidelines, and Definitions

* * * * *
    (c) * * *
    (14) Intangible assets include mortgage and non-mortgage 
servicing assets (but exclude any interest only (IO) strips 
receivable related to these mortgage and nonmortgage servicing 
assets), purchased credit card relationships, goodwill, favorable 
leaseholds, and core deposit value.
* * * * *
    4. In appendix A to part 3, paragraphs (c) introductory text, 
(c)(1), and (c)(2) of section 2 are revised to read as follows:
* * * * *

Section 2. Components of Capital.

* * * * *
    (c) Deductions from Capital. The following items are deducted 
from the appropriate portion of a national bank's capital base when 
calculating its risk-based capital ratio:
    (1) Deductions from Tier 1 Capital. The following items are 
deducted from Tier 1 capital before the Tier 2 portion of the 
calculation is made:
    (i) Goodwill;
    (ii) Other intangible assets, except as provided in section 
2(c)(2) of this appendix A; and
    (iii) Deferred tax assets, except as provided in section 2(c)(3) 
of this appendix A, that are dependent upon future taxable income, 
which exceed the lesser of either:
    (A) The amount of deferred tax assets that the bank could 
reasonably expect to realize within one year of the quarter-end Call 
Report, based on its estimate of future taxable income for that 
year; or
    (B) 10% of Tier 1 capital, net of goodwill and all intangible 
assets other than mortgage servicing assets, non-mortgage servicing 
assets, and purchased credit card relationships, and before any 
disallowed deferred tax assets are deducted.
    (2) Qualifying intangible assets. Subject to the following 
conditions, mortgage servicing assets, nonmortgage servicing assets 
6 and purchased credit card relationships need not be 
deducted from Tier 1 capital:
---------------------------------------------------------------------------

    \6\ Intangible assets are defined to exclude any IO strips 
receivable related to these mortgage and non-mortgage servicing 
assets. See section 1(c)(14) of this appendix A. Consequently, IO 
strips receivable related to mortgage and non-mortgage servicing 
assets are not required to be deducted under section 2(c)(2) of this 
appendix A. However, these IO strips receivable are subject to a 100 
percent risk weight under section 3(a)(4) of this appendix A.
---------------------------------------------------------------------------

    (i) The total of all intangible assets that are included in Tier 
1 capital is limited to 100 percent of Tier 1 capital, of which no 
more than 25 percent of Tier 1 capital can consist of purchased 
credit card relationships and non-mortgage servicing assets in the 
aggregate. Calculation of these limitations must be based on Tier 1 
capital net of goodwill and all identifiable intangible assets, 
other than mortgage servicing assets, nonmortgage servicing assets 
and purchased credit card relationships.
    (ii) Banks must value each intangible asset included in Tier 1 
capital at least quarterly at the lesser of:
    (A) 90 percent of the fair value of each intangible asset, 
determined in accordance with section 2(c)(2)(iii) of this appendix 
A; or
    (B) 100 percent of the remaining unamortized book value.
    (iii) The quarterly determination of the current fair value of 
the intangible asset must include adjustments for any significant 
changes in original valuation assumptions, including changes in 
prepayment estimates.
    (iv) Banks may elect to deduct disallowed servicing assets on a 
basis that is net of any associated deferred tax liability. Deferred 
tax liabilities netted in this manner cannot also be netted against 
deferred tax assets when determining the amount of deferred tax 
assets that are dependent upon future taxable income.
* * * * *

PART 6--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 6 continues to read as follows:

    Authority: 12 U.S.C. 93a, 1831o.

    2. Section 6.2 is amended by revising paragraph (g) to read as 
follows:


Sec. 6.2  Definitions.

* * * * *
    (g) Tangible equity means the amount of Tier 1 capital elements in 
the OCC's Risk-Based Capital Guidelines (appendix A to part 3 of this 
chapter) plus the amount of outstanding cumulative perpetual preferred 
stock (including related surplus) minus all intangible assets except 
mortgage servicing assets to the extent permitted in Tier 1 capital 
under section 2(c)(2) in appendix A to part 3 of this chapter.
* * * * *
    Dated: July 17, 1998.
Julie L. Williams,
Acting Comptroller of the Currency.

Federal Reserve System

12 CFR Chapter II

    For the reasons set forth in the joint preamble, the Board of 
Governors of the Federal Reserve System amends parts 208 and 225 of 
chapter II of title 12 of the Code of Federal Regulations as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 continues to read as 
follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1823(j), 1828(o), 
1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 3310, 3331-
3351 and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-
4(c)(5), 78q, 78q-l, and 78w; 31 U.S.C. 5318; 42 U.S.C. 4012a, 
4104a, 4104b, 4106, and 4128.

    2. Section 208.41, as revised at 63 FR 37652 effective October 1, 
1998, is amended by revising paragraph (f) to read as follows:


Sec. 208.41  Definitions for purposes of this subpart.

* * * * *
    (f) Tangible equity means the amount of core capital elements as 
defined in the Board's Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure (Appendix A to this part), plus the amount of 
outstanding cumulative perpetual preferred stock (including related 
surplus), minus all intangible assets except mortgage

[[Page 42675]]

servicing assets to the extent that the Board determines that mortgage 
servicing assets may be included in calculating the bank's Tier 1 
capital.
* * * * *
    3. In Appendix A to part 208, sections II.B.1.b.i. through 
II.B.1.b.v. are revised to read as follows:

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure

* * * * *
    II. * * *
    B. * * *
    1. Goodwill and other intangible assets * * *
    b. Other intangible assets. i. All servicing assets, including 
servicing assets on assets other than mortgages (i.e., nonmortgage 
servicing assets) are included in this Appendix A as identifiable 
intangible assets. The only types of identifiable intangible assets 
that may be included in, that is, not deducted from, a bank's 
capital are readily marketable mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card 
relationships. The total amount of these assets included in capital, 
in the aggregate, can not exceed 100 percent of Tier 1 capital. 
Nonmortgage servicing assets and purchased credit card relationships 
are subject to a separate sublimit of 25 percent of Tier 1 
capital.14
---------------------------------------------------------------------------

    \14\ Amounts of servicing assets and purchased credit card 
relationships in excess of these limitations, as well as 
identifiable intangible assets, including core deposit intangibles, 
including favorable leaseholds, are to be deducted from a bank's 
core capital elements in determining Tier 1 capital. However, 
identifiable intangible assets (other than mortgage servicing assets 
and purchased credit card relationships) acquired on or before 
February 19, 1992, generally will not be deducted from capital for 
supervisory purposes, although they will continue to be deducted for 
applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships, Tier 1 capital is defined as the sum of core 
capital elements, net of goodwill, and net of all identifiable 
intangible assets other than mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships, 
regardless of the date acquired, but prior to the deduction of 
deferred tax assets.
    iii. The amount of mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships that a 
bank may include in capital shall be the lesser of 90 percent of 
their fair value, as determined in accordance with this section, or 
100 percent of their book value, as adjusted for capital purposes in 
accordance with the instructions in the commercial bank Consolidated 
Reports of Condition and Income (Call Reports). If both the 
application of the limits on mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships and the 
adjustment of the balance sheet amount for these assets would result 
in an amount being deducted from capital, the bank would deduct only 
the greater of the two amounts from its core capital elements in 
determining Tier 1 capital.
    iv. Banks may elect to deduct disallowed servicing assets on a 
basis that is net of any associated deferred tax liability. Deferred 
tax liabilities netted in this manner cannot also be netted against 
deferred tax assets when determining the amount of deferred tax 
assets that are dependent upon future taxable income.
    v. Banks must review the book value of all intangible assets at 
least quarterly and make adjustments to these values as necessary. 
The fair value of mortgage servicing assets, nonmortgage servicing 
assets, and purchased credit card relationships also must be 
determined at least quarterly. This determination shall include 
adjustments for any significant changes in original valuation 
assumptions, including changes in prepayment estimates or account 
attrition rates. Examiners will review both the book value and the 
fair value assigned to these assets, together with supporting 
documentation, during the examination process. In addition, the 
Federal Reserve may require, on a case-by-case basis, an independent 
valuation of a bank's intangible assets.
* * * * *
    4. In Appendix A to part 208, section II.B.4. is revised to read as 
follows:
* * * * *
    II. * * *
    B. * * *
    4. Deferred tax assets. The amount of deferred tax assets that 
is dependent upon future taxable income, net of the valuation 
allowance for deferred tax assets, that may be included in, that is, 
not deducted from, a bank's capital may not exceed the lesser of (i) 
the amount of these deferred tax assets that the bank is expected to 
realize within one year of the calendar quarter-end date, based on 
its projections of future taxable income for that year,20 
or (ii) 10 percent of Tier 1 capital. The reported amount of 
deferred tax assets, net of any valuation allowance for deferred tax 
assets, in excess of the lesser of these two amounts is to be 
deducted from a bank's core capital elements in determining Tier 1 
capital. For purposes of calculating the 10 percent limitation, Tier 
1 capital is defined as the sum of core capital elements, net of 
goodwill, and net of all other identifiable intangible assets other 
than mortgage and nonmortgage servicing assets and purchased credit 
card relationships, before any disallowed deferred tax assets are 
deducted. There generally is no limit in Tier 1 capital on the 
amount of deferred tax assets that can be realized from taxes paid 
in prior carry-back years or from future reversals of existing 
taxable temporary differences, but, for banks that have a parent, 
this may not exceed the amount the bank could reasonably expect its 
parent to refund.
---------------------------------------------------------------------------

    \ 20\ To determine the amount of expected deferred-tax assets 
realizable in the next 12 months, an institution should assume that 
all existing temporary differences fully reverse as of the report 
date. Projected future taxable income should not include net 
operating-loss carry-forwards to be used during that year or the 
amount of existing temporary differences a bank expects to reverse 
within the year. Such projections should include the estimated 
effect of tax-planning strategies that the organization expects to 
implement to realize net operating losses or tax-credit carry-
forwards that would otherwise expire during the year. Institutions 
do not have to prepare a new 12-month projection each quarter. 
Rather, on interim report dates, institutions may use the future-
taxable-income projections for their current fiscal year, adjusted 
for any significant changes that have occurred or are expected to 
occur.
---------------------------------------------------------------------------

* * * * *
    5. In Appendix B to part 208, section II.b. is revised to read as 
follows:

Appendix B to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Tier 1 Leverage Measure

* * * * *
    II. * * *
    b. A bank's Tier 1 leverage ratio is calculated by dividing its 
Tier 1 capital (the numerator of the ratio) by its average total 
consolidated assets (the denominator of the ratio). The ratio will 
also be calculated using period-end assets whenever necessary, on a 
case-by-case basis. For the purpose of this leverage ratio, the 
definition of Tier 1 capital as set forth in the risk-based capital 
guidelines contained in Appendix A of this part will be 
used.2 As a general matter, average total consolidated 
assets are defined as the quarterly average total assets (defined 
net of the allowance for loan and lease losses) reported on the 
bank's Reports of Condition and Income (Call Reports), less 
goodwill; amounts of mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships that, in 
the aggregate, are in excess of 100 percent of Tier 1 capital; 
amounts of nonmortgage servicing assets and purchased credit card 
relationships that, in the aggregate, are in excess of 25 percent of 
Tier 1 capital; all other identifiable intangible assets; any 
investments in subsidiaries or associated companies that the Federal 
Reserve determines should be deducted from Tier 1 capital; and 
deferred tax assets that are dependent upon future taxable income, 
net of their valuation allowance, in excess of the limitation set 
forth in section II.B.4 of Appendix A of this part.3
---------------------------------------------------------------------------

    \2\ Tier 1 capital for state member banks includes common 
equity, minority interest in the equity accounts of consolidated 
subsidiaries, and qualifying noncumulative perpetual preferred 
stock. In addition, as a general matter, Tier 1 capital excludes 
goodwill; amounts of mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships that, in 
the aggregate, exceed 100 percent of Tier 1 capital; nonmortgage 
servicing assets and purchased credit card relationships that, in 
the aggregate, exceed 25 percent of Tier 1 capital; other 
identifiable intangible assets; and deferred tax assets that are 
dependent upon future taxable income, net of their valuation 
allowance, in excess of certain limitations. The Federal Reserve may 
exclude certain investments in subsidiaries or associated companies 
as appropriate.
    \3\ Deductions from Tier 1 capital and other adjustments are 
discussed more fully in section II.B. in Appendix A of this part.
---------------------------------------------------------------------------

* * * * *

[[Page 42676]]

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 continues to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 
3909.

    2. In Appendix A to part 225, sections II.B.1.b.i. through 
II.B.1.B.v. are revised to read as follows:

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure

* * * * *
    II. * * *
    B. * * *
    1. Goodwill and other intangible assets * * *
    b. Other intangible assets. i. All servicing assets, including 
servicing assets on assets other than mortgages (i.e., nonmortgage 
servicing assets) are included in this Appendix A as identifiable 
intangible assets. The only types of identifiable intangible assets 
that may be included in, that is, not deducted from, an 
organization's capital are readily marketable mortgage servicing 
assets, nonmortgage servicing assets, and purchased credit card 
relationships. The total amount of these assets included in capital, 
in the aggregate, cannot exceed 100 percent of Tier 1 capital. 
Nonmortgage servicing assets and purchased credit card relationships 
are subject, in the aggregate, to a sublimit of 25 percent of Tier 1 
capital.15
---------------------------------------------------------------------------

    \15\ Amounts of mortgage servicing assets, nonmortgage servicing 
assets, and purchased credit card relationships in excess of these 
limitations, as well as all other identifiable intangible assets, 
including core deposit intangibles and favorable leaseholds, are to 
be deducted from an organization's core capital elements in 
determining Tier 1 capital. However, identifiable intangible assets 
(other than mortgage servicing assets, and purchased credit card 
relationships) acquired on or before February 19, 1992, generally 
will not be deducted from capital for supervisory purposes, although 
they will continue to be deducted for applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships, Tier 1 capital is defined as the sum of core 
capital elements, net of goodwill, and net of all identifiable 
intangible assets and similar assets other than mortgage servicing 
assets, nonmortgage servicing assets, and purchased credit card 
relationships, regardless of the date acquired, but prior to the 
deduction of deferred tax assets.
    iii. The amount of mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships that a 
bank holding company may include in capital shall be the lesser of 
90 percent of their fair value, as determined in accordance with 
this section, or 100 percent of their book value, as adjusted for 
capital purposes in accordance with the instructions to the 
Consolidated Financial Statements for Bank Holding Companies (FR Y-
9C Report). If both the application of the limits on mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships and the adjustment of the balance sheet amount 
for these intangibles would result in an amount being deducted from 
capital, the bank holding company would deduct only the greater of 
the two amounts from its core capital elements in determining Tier 1 
capital.
    iv. Bank holding companies may elect to deduct disallowed 
servicing assets on a basis that is net of any associated deferred 
tax liability. Deferred tax liabilities netted in this manner cannot 
also be netted against deferred tax assets when determining the 
amount of deferred tax assets that are dependent upon future taxable 
income.
    v. Bank holding companies must review the book value of all 
intangible assets at least quarterly and make adjustments to these 
values as necessary. The fair value of mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card 
relationships also must be determined at least quarterly. This 
determination shall include adjustments for any significant changes 
in original valuation assumptions, including changes in prepayment 
estimates or account attrition rates. Examiners will review both the 
book value and the fair value assigned to these assets, together 
with supporting documentation, during the inspection process. In 
addition, the Federal Reserve may require, on a case-by-case basis, 
an independent valuation of an organization's intangible assets or 
similar assets.
* * * * *
    3. In Appendix A to part 225, section II.B.4. is revised to read as 
follows:
* * * * *
    II. * * *
    B. * * *
    4. Deferred tax assets. The amount of deferred tax assets that 
is dependent upon future taxable income, net of the valuation 
allowance for deferred tax assets, that may be included in, that is, 
not deducted from, a banking organization's capital may not exceed 
the lesser of (i) the amount of these deferred tax assets that the 
banking organization is expected to realize within one year of the 
calendar quarter-end date, based on its projections of future 
taxable income for that year,23 or (ii) 10 percent of 
Tier 1 capital. The reported amount of deferred tax assets, net of 
any valuation allowance for deferred tax assets, in excess of the 
lesser of these two amounts is to be deducted from a banking 
organization's core capital elements in determining Tier 1 capital. 
For purposes of calculating the 10 percent limitation, Tier 1 
capital is defined as the sum of core capital elements, net of 
goodwill, and net of all identifiable intangible assets other than 
mortgage servicing assets, nonmortgage servicing assets, and 
purchased credit card relationships, before any disallowed deferred 
tax assets are deducted. There generally is no limit in Tier 1 
capital on the amount of deferred tax assets that can be realized 
from taxes paid in prior carryback years or from future reversals of 
existing taxable temporary differences.
---------------------------------------------------------------------------

    \23\ To determine the amount of expected deferred tax assets 
realizable in the next 12 months, an institution should assume that 
all existing temporary differences fully reverse as of the report 
date. Projected future taxable income should not include net 
operating loss carryforwards to be used during that year or the 
amount of existing temporary differences a bank holding company 
expects to reverse within the year. Such projections should include 
the estimated effect of tax planning strategies that the 
organization expects to implement to realize net operating losses or 
tax credit carryforwards that would otherwise expire during the 
year. Institutions do not have to prepare a new 12 month projection 
each quarter. Rather, on interim report dates, institutions may use 
the future taxable income projections for their current fiscal year, 
adjusted for any significant changes that have occurred or are 
expected to occur.
---------------------------------------------------------------------------

* * * * *
    4. In Appendix D to part 225, section II.b. is revised to read as 
follows:

Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Tier 1 Leverage Measure

* * * * *
    II. * * *
    b. A banking organization's Tier 1 leverage ratio is calculated 
by dividing its Tier 1 capital (the numerator of the ratio) by its 
average total consolidated assets (the denominator of the ratio). 
The ratio will also be calculated using period-end assets whenever 
necessary, on a case-by-case basis. For the purpose of this leverage 
ratio, the definition of Tier 1 capital as set forth in the risk-
based capital guidelines contained in Appendix A of this part will 
be used.3 As a general matter, average total consolidated 
assets are defined as the quarterly average total assets (defined 
net of the allowance for loan and lease losses) reported on the 
organization's Consolidated Financial Statements (FR Y-9C Report), 
less goodwill; amounts of mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships that, in 
the aggregate, are in excess of 100 percent of Tier 1 capital; 
amounts of nonmortgage servicing assets and purchased credit card 
relationships that, in the aggregate, are in excess of 25 percent of 
Tier 1 capital; all other identifiable intangible assets; any 
investments in subsidiaries or associated companies that the Federal 
Reserve determines should be deducted from Tier 1

[[Page 42677]]

capital; and deferred tax assets that are dependent upon future 
taxable income, net of their valuation allowance, in excess of the 
limitation set forth in section II.B.4 of Appendix A of this 
part.4
---------------------------------------------------------------------------

    \3\ Tier 1 capital for banking organizations includes common 
equity, minority interest in the equity accounts of consolidated 
subsidiaries, qualifying noncumulative perpetual preferred stock, 
and qualifying cumulative perpetual preferred stock. (Cumulative 
perpetual preferred stock is limited to 25 percent of Tier 1 
capital.) In addition, as a general matter, Tier 1 capital excludes 
goodwill; amounts of mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships that, in 
the aggregate, exceed 100 percent of Tier 1 capital; nonmortgage 
servicing assets and purchased credit card relationships that, in 
the aggregate, exceed 25 percent of Tier 1 capital; all other 
identifiable intangible assets; and deferred tax assets that are 
dependent upon future taxable income, net of their valuation 
allowance, in excess of certain limitations. The Federal Reserve may 
exclude certain investments in subsidiaries or associated companies 
as appropriate.
    \4\ Deductions from Tier 1 capital and other adjustments are 
discussed more fully in section II.B. in Appendix A of this part.
---------------------------------------------------------------------------

* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, August 3, 1998.
Jennifer J. Johnson,
Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR Chapter III

    For the reasons set forth in the joint preamble, part 325 of 
Chapter III of Title 12 of the Code of Federal Regulations is amended 
as follows:

PART 325--CAPITAL MAINTENANCE

    1. The authority citation for part 325 is revised to read as 
follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat. 
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 
2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended 
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).

    2. In Sec. 325.2, paragraph (n) is revised to read as follows:


Sec. 325.2  Definitions.

* * * * *
    (n) Mortgage servicing assets means those assets (net of any 
related valuation allowances) that result from contracts to service 
loans secured by real estate (that have been securitized or are owned 
by others) for which the benefits of servicing are expected to more 
than adequately compensate the servicer for performing the servicing. 
For purposes of determining regulatory capital under this part, 
mortgage servicing assets will be recognized only to the extent that 
the assets meet the conditions, limitations, and restrictions described 
in Sec. 325.5 (f).
* * * * *


Sec. 325.2  [Amended]

    3. In Sec. 325.2, paragraph (s) is amended by removing the words 
``mortgage servicing rights'' and adding in their place the words 
``mortgage servicing assets'' each time they appear.
    4. In Sec. 325.2, paragraphs (t) and (v) are amended by removing 
the words ``mortgage servicing rights'' and adding in their place the 
words ``mortgage servicing assets, nonmortgage servicing assets,'' each 
time they appear.
    5. In Sec. 325.5, paragraph (f) is revised to read as follows:


Sec. 325.5  Miscellaneous.

* * * * *
    (f) Treatment of mortgage servicing assets, purchased credit card 
relationships, and nonmortgage servicing assets. For purposes of 
determining Tier 1 capital under this part, mortgage servicing assets, 
purchased credit card relationships, and nonmortgage servicing assets 
will be deducted from assets and from common stockholders' equity to 
the extent that these items do not meet the conditions, limitations, 
and restrictions described in this section. Banks may elect to deduct 
disallowed servicing assets on a basis that is net of any associated 
deferred tax liability. Any deferred tax liability netted in this 
manner cannot also be netted against deferred tax assets when 
determining the amount of deferred tax assets that are dependent upon 
future taxable income and calculating the maximum allowable amount of 
these assets under paragraph (g) of this section.
    (1) Valuation. The fair value of mortgage servicing assets, 
purchased credit card relationships, and nonmortgage servicing assets 
shall be estimated at least quarterly. The quarterly fair value 
estimate shall include adjustments for any significant changes in the 
original valuation assumptions, including changes in prepayment 
estimates or attrition rates. The FDIC in its discretion may require 
independent fair value estimates on a case-by-case basis where it is 
deemed appropriate for safety and soundness purposes.
    (2) Fair value limitation. For purposes of calculating Tier 1 
capital under this part (but not for financial statement purposes), the 
balance sheet assets for mortgage servicing assets, purchased credit 
card relationships, and nonmortgage servicing assets will each be 
reduced to an amount equal to the lesser of:
    (i) 90 percent of the fair value of these assets, determined in 
accordance with paragraph (f)(1) of this section; or
    (ii) 100 percent of the remaining unamortized book value of these 
assets (net of any related valuation allowances), determined in 
accordance with the instructions for the preparation of the 
Consolidated Reports of Income and Condition (Call Reports).
    (3) Tier 1 capital limitation. The maximum allowable amount of 
mortgage servicing assets, purchased credit card relationships, and 
nonmortgage servicing assets, in the aggregate, will be limited to the 
lesser of:
    (i) 100 percent of the amount of Tier 1 capital that exists before 
the deduction of any disallowed mortgage servicing assets, any 
disallowed purchased credit card relationships, any disallowed 
nonmortgage servicing assets, and any disallowed deferred tax assets; 
or
    (ii) The sum of the amounts of mortgage servicing assets, purchased 
credit card relationships, and nonmortgage servicing assets determined 
in accordance with paragraph (f)(2) of this section.
    (4) Tier 1 capital sublimit. In addition to the aggregate 
limitation on mortgage servicing assets, purchased credit card 
relationships, and nonmortgage servicing assets set forth in paragraph 
(f)(3) of this section, a sublimit will apply to purchased credit card 
relationships and nonmortgage servicing assets. The maximum allowable 
amount of purchased credit card relationships and nonmortgage servicing 
assets, in the aggregate, will be limited to the lesser of:
    (i) Twenty-five percent of the amount of Tier 1 capital that exists 
before the deduction of any disallowed mortgage servicing assets, any 
disallowed purchased credit card relationships, any disallowed 
nonmortgage servicing assets, and any disallowed deferred tax assets; 
or
    (ii) The sum of the amounts of purchased credit card relationships 
and nonmortgage servicing assets, determined in accordance with 
paragraph (f)(2) of this section.
* * * * *


Sec. 325.5  [Amended]

    6. In Sec. 325.5, paragraph (g)(2)(i)(B) is amended by removing the 
words ``any disallowed mortgage servicing rights'' and adding in their 
place the words ``any disallowed mortgage servicing assets, any 
disallowed nonmortgage servicing assets''.
    7. In Sec. 325.5, paragraph (g)(5) is amended by removing the words 
``mortgage servicing rights'' and adding in their place the words 
``mortgage servicing assets, nonmortgage servicing assets''.

Appendix A to Part 325--[Amended]

    8. In appendix A to part 325, the words ``mortgage servicing 
rights'' are removed and the words ``mortgage servicing assets, 
nonmortgage servicing assets'' are added each time they appear in 
section I.A.1., section I.B.(1) and footnote 8 to section I.B.(1), 
section II.C., and Table I--Definition of Qualifying Capital and 
footnote 2 to Table I.

[[Page 42678]]

Appendix B to Part 325--[Amended]

    9. In appendix B to part 325, section IV.A. and footnote 1 to 
section IV.A. are amended by removing the words ``mortgage servicing 
rights'' and adding in their place the word ``mortgage servicing 
assets, nonmortgage servicing assets'' each time they appear.

    Dated at Washington, D.C., this 7th day of July, 1998.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

Office of Thrift Supervision

12 CFR Chapter V

    For the reasons set forth in the joint preamble, the Office of 
Thrift Supervision amends parts 565 and 567 of chapter V of title 12 of 
the Code of Federal Regulations as follows:

PART 565--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 565 continues to read as 
follows:

    Authority: 12 U.S.C. 1831o.

    2. Section 565.2 is amended by revising paragraph (f) to read as 
follows:


Sec. 565.2  Definitions.

* * * * *
    (f) Tangible equity means the amount of a savings association's 
core capital as computed in part 567 of this chapter plus the amount of 
its outstanding cumulative perpetual preferred stock (including related 
surplus), minus intangible assets as defined in Sec. 567.1 of this 
chapter and nonmortgage servicing assets that have not been previously 
deducted in calculating core capital.
* * * * *

PART 567--CAPITAL

    3. The authority citation for part 567 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 
(note).

    4. Section 567.1 is amended by revising the definition for 
Intangible assets to read as follows:


Sec. 567.1  Definitions.

* * * * *
    Intangible assets. The term intangible assets means assets 
considered to be intangible assets under generally accepted accounting 
principles. These assets include, but are not limited to, goodwill, 
core deposit premiums, purchased credit card relationships, and 
favorable leaseholds. Servicing assets are not intangible assets, and 
interest-only strips receivable and other nonsecurity financial 
instruments are not intangible assets under this definition.
* * * * *
    5. Section 567.5 is amended by revising paragraph (a)(2)(ii) to 
read as follows:


Sec. 567.5  Components of capital.

    (a) * * *
    (2) * * *
    (ii) Servicing assets that are not includable in core capital 
pursuant to Sec. 567.12 of this part are deducted from assets and 
capital in computing core capital.
* * * * *
    6. Section 567.6 is amended by revising paragraphs (a)(1)(iv)(L) 
and (a)(1)(iv)(M) to read as follows:


Sec. 567.6  Risk-based capital credit risk-weight categories.

    (a) * * *
    (1) * * *
    (iv) * * *
    (L) Certain nonsecurity financial instruments including servicing 
assets and intangible assets includable in core capital under 
Sec. 567.12 of this part;
    (M) Interest-only strips receivable;
* * * * *
    7. Section 567.9 is amended by revising paragraph (c)(1) to read as 
follows:


Sec. 567.9  Tangible capital requirement.

* * * * *
    (c) * * *
    (1) Intangible assets, as defined in Sec. 567.1 of this part, and 
servicing assets not includable in tangible capital pursuant to 
Sec. 567.12 of this part.
* * * * *
    6. Section 567.12 is amended by revising the section heading and 
paragraphs (a) through (f) to read as follows:


Sec. 567.12  Intangible assets and servicing assets.

    (a) Scope. This section prescribes the maximum amount of intangible 
assets and servicing assets that savings associations may include in 
calculating tangible and core capital.
    (b) Computation of core and tangible capital. (1) Purchased credit 
card relationships may be included (that is, not deducted) in computing 
core capital in accordance with the restrictions in this section, but 
must be deducted in computing tangible capital.
    (2) In accordance with the restrictions in this section, mortgage 
servicing assets may be included in computing core and tangible capital 
and nonmortgage servicing assets may be included in core capital.
    (3) Intangible assets, as defined in Sec. 567.1 of this part, other 
than purchased credit card relationships described in paragraph (b)(1) 
of this section and core deposit intangibles described in paragraph 
(g)(3) of this section, are deducted in computing tangible and core 
capital.
    (c) Market valuations. The OTS reserves the authority to require 
any savings association to perform an independent market valuation of 
assets subject to this section on a case-by-case basis or through the 
issuance of policy guidance. An independent market valuation, if 
required, shall be conducted in accordance with any policy guidance 
issued by the OTS. A required valuation shall include adjustments for 
any significant changes in original valuation assumptions, including 
changes in prepayment estimates or attrition rates. The valuation shall 
determine the current fair value of assets subject to this section. 
This independent market valuation may be conducted by an independent 
valuation expert evaluating the reasonableness of the internal 
calculations and assumptions used by the association in conducting its 
internal analysis. The association shall calculate an estimated fair 
value for assets subject to this section at least quarterly regardless 
of whether an independent valuation expert is required to perform an 
independent market valuation
    (d) Value limitation. For purposes of calculating core capital 
under this part (but not for financial statement purposes), purchased 
credit card relationships and servicing assets must be valued at the 
lesser of:
    (1) 90 percent of their fair value determined in accordance with 
paragraph (c) of this section; or
    (2) 100 percent of their remaining unamortized book value 
determined in accordance with the instructions for the Thrift Financial 
Report.
    (e) Core capital limitation--(1) Aggregate limit. The maximum 
aggregate amount of servicing assets and purchased credit card 
relationships that may be included in core capital shall be limited to 
the lesser of:
    (i) 100 percent of the amount of core capital computed before the 
deduction of any disallowed servicing assets and disallowed purchased 
credit card relationships; or
    (ii) The amount of servicing assets and purchased credit card 
relationships determined in accordance with paragraph (d) of this 
section.
    (2) Reduction by deferred tax liability. Associations may elect to 
deduct disallowed servicing assets on a basis

[[Page 42679]]

that is net of any associated deferred tax liability.
    (3) Sublimit for purchased credit card relationships and non 
mortgage-related servicing assets. In addition to the aggregate 
limitation in paragraph (e)(1) of this section, a sublimit shall apply 
to purchased credit card relationships and non mortgage-related 
servicing assets. The maximum allowable amount of these two types of 
assets combined shall be limited to the lesser of:
    (i) 25 percent of the amount of core capital computed before the 
deduction of any disallowed servicing assets and purchased credit card 
relationships; or
    (ii) The amount of purchased credit card relationships and non 
mortgage-related servicing assets determined in accordance with 
paragraph (d) of this section.
    (f) Tangible capital limitation. The maximum amount of mortgage 
servicing assets that may be included in tangible capital shall be the 
same amount includable in core capital in accordance with the 
limitations set by paragraph (e) of this section. All nonmortgage 
servicing assets are deducted in computing tangible capital.
* * * * *
    Dated: July 6, 1998.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-21141 Filed 8-7-98; 8:45 am]
BILLING CODE 4810-33-P (25%); 6210-01-P (25%); 6714-01-P (25%); 6720-
01-P (25%).