[Federal Register Volume 65, Number 185 (Friday, September 22, 2000)]
[Proposed Rules]
[Pages 57292-57296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24280]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 65, No. 185 / Friday, September 22, 2000 / 
Proposed Rules  

[[Page 57292]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket No. 00-19]
RIN 1557-AB82


Community Bank-Focused Regulation Review: Lending Limits Pilot 
Program

AGENCY: Office of the Comptroller of the Currency, Treasury

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing to amend part 32, its regulation governing the percentage of 
capital and surplus that a national bank may loan to any one borrower. 
This proposal would implement a pilot program that would create new 
exceptions to the lending limit for 1-4 family residential real estate 
loans and loans to small businesses. The proposal also would modify the 
lending limit exemption for loans to or guaranteed by obligations of 
state and local governments. Only eligible banks will be permitted to 
make use of the new exceptions and use of the exceptions also will be 
subject to an application process. The proposal is being issued in 
response to the advance notice of proposed rulemaking that the OCC 
published to initiate its community bank-focused regulation review. The 
proposal is intended to remove unnecessary regulatory burden on 
community banks without impairing their safety and soundness. If the 
proposed pilot program is adopted as a final rule, the OCC will review 
national banks' experience with the new exceptions over the three year 
pilot period and determine whether to retain, modify or rescind the 
exceptions.

DATES: Comments must be received on or before November 21, 2000.

ADDRESSES: Please direct your comments to: Communications Division, 
Office of the Comptroller of the Currency, 250 E Street, SW., Third 
Floor, Washington, DC 20219, Attention: Docket No. 00-19; Fax number 
(202) 874-5274 or Internet address: [email protected]. 
Comments may be inspected and photocopied at the OCC's Public Reference 
Room, 250 E Street, SW., Washington, DC, between 9 a.m. and 5 p.m. on 
business days. You can make an appointment to inspect the comments by 
calling (202) 874-5043.

FOR FURTHER INFORMATION CONTACT: Stuart Feldstein, Assistant Director, 
Legislative and Regulatory Activities Division, (202) 874-5090; Deborah 
Katz, Senior Attorney, Legislative and Regulatory Activities Division, 
(202) 874-5090; or Heidi Thomas, Senior Attorney, Legislative and 
Regulatory Activities Division, (202) 874-5090.

SUPPLEMENTARY INFORMATION:

Background

    On May 12, 1999, the OCC issued an advance notice of proposed 
rulemaking (ANPR) inviting comment on possible regulatory changes 
relating to lending limits, corporate activities and transactions, 
corporate governance, and capital requirements that could benefit 
community banks. 64 FR 25469. In issuing the ANPR, we recognized that 
community banks operate with more limited resources than larger 
institutions and may present a different risk profile. For example, 
many community banks have more direct ``hands-on'' oversight by senior 
management and a smaller range of operations such that less complex 
risk-management or compliance systems may be appropriate. In addition, 
differences between community banks and larger banks in operational 
structure and focus may have resulted in inefficient or uneven 
application of regulatory requirements. The purpose of our community 
bank-focused regulation review was to eliminate or modify regulatory 
requirements that impose unnecessary burden. In addition, we sought to 
identify regulations for which it may be appropriate to develop 
alternative, differential regulatory approaches that will minimize 
burden on community banks without jeopardizing their safety and 
soundness.
    We received forty-one comment letters in response to the ANPR. 
Thirty-five of these letters commented on various aspects of the 
national bank lending limit. Twelve U.S.C. 84, the national bank 
lending limit, governs the percentage of capital and surplus that a 
bank may loan to any one borrower. OCC regulations implementing section 
84 are set forth at 12 CFR part 32. Under section 84 and part 32, a 
national bank can make unsecured loans of up to 15 percent of its 
unimpaired capital and surplus to a single borrower, and extend an 
additional 10 percent of unimpaired capital and surplus to the same 
borrower, if the loan is secured by ``readily marketable collateral.'' 
Part 32 refers to these lending limits as ``the combined general 
limit.'' The statute and regulation also expressly provide other 
exceptions to and exemptions from the combined general limit for 
various types of loans and extensions of credit. Finally, the statute 
authorizes the OCC to establish lending limits ``for particular classes 
or categories of loans'' that are different from those expressly 
provided by its terms.'' 12 U.S.C. 84(d)(1).
    A majority of commenters stated that the lending limits in section 
84, as interpreted in part 32, are especially problematic for community 
banks because they do not provide enough flexibility for them to 
adequately serve their customers. Because of their small size, 
community banks can quickly reach their lending limits. Many commenters 
noted that the current lending limits have prevented them from 
continuing to lend to creditworthy customers, and that this has caused 
a loss in potential income, especially from valued customers whose 
credit needs have increased with the growth of their businesses. These 
commenters indicated that, as a result of the lending limits, they 
often must participate out larger loans to other banks, which can be 
very burdensome and time consuming for both the bank and the borrower. 
In addition, the commenters noted that when a community bank 
participates its loans, the bank risks losing its customer to the 
participant.
    Many commenters also noted that States provide higher lending 
limits than those set forth in section 84 and part 32. Many of these 
commenters suggested that Federal lending limits be the same as those 
available for State banks so that national banks can compete on equal 
footing with other financial service providers in the markets where 
they compete.

[[Page 57293]]

    A minority of commenters found the current lending limits 
appropriate and opposed any lending limit increase. Some of these 
commenters advocated the use of loan participations to support 
spreading risk.

Description of the Proposal

    This notice of proposed rulemaking (NPRM) addresses suggestions by 
the commenters. Specifically, we are proposing to amend 12 CFR part 32 
to create new lending limit exceptions for real estate and small 
business loans for national banks with main offices located in States 
where a limit higher than the current Federal limit applies, and to 
modify the lending limit exemption in Sec. 32.3(c) for loans to or 
guaranteed by general obligations of State and local governments. To 
ensure that national banks use this additional lending authority in a 
way that is consistent with safe and sound banking practices, the new 
exceptions will be available only to ``eligible banks,'' and will be 
subject to an application process. Furthermore, an aggregate limit will 
restrict a bank's ability to make use of this new lending authority.

New Exceptions for 1-4 Family Residential Real Estate and Small 
Business Loans

1. Categories of Loans Subject to Exceptions
    In reviewing part 32, we considered a number of different 
categories of loans for which alternative lending limits may be 
appropriate. One-to-four family residential real estate and small 
business lending are lines of business common for community banks. 
Thus, providing additional lending authority in these areas is likely 
to be responsive to the concerns described by the majority of 
commenters who responded to the ANPR. Moreover, national banks have 
substantial and longstanding experience with lending in these areas. 
The safety and soundness issues presented by these types of loans are 
already issues that banks routinely address, so that banks can rely on 
their existing expertise to use this additional lending authority.
    The exception for real estate applies only when a loan is secured 
by a perfected first-lien security interest in 1-4 family residential 
real estate in an amount that may not exceed 80 percent of the 
appraised value of the collateral at the time the loan is made. The 
exception for small business loans, as proposed, extends additional 
lending authority for loans that could be unsecured, or secured in a 
manner that is not specified by regulation. As all of the other lending 
limit exceptions apply to secured loans only, either when there is 
specific collateral pledged or a guarantee offered, we invite comment 
on whether the exception for small business loans should require 
specific collateral.
    The NPRM also requests comment on whether the definition of ``small 
business loan'' in the proposed regulation is appropriate. This 
definition is identical to that found in our CRA regulation, 12 CFR 
25.12(u), which incorporates the definition of ``loans to small 
businesses'' from the instructions for preparation of the Consolidated 
Reports of Condition and Income. These include loans with original 
amounts of $1 million or less, secured by nonfarm nonresidential 
properties, and certain commercial and industrial loans.
2. Additional Lending Authority
    Under this proposal, a bank may extend another ten percent of its 
capital and surplus, in addition to the amounts permissible under the 
currently applicable lending limits, to a single borrower for certain 
real estate and small business loans, respectively, if a bank's main 
office is located in a State with a higher limit that applies to these 
categories of loans. The commenters strongly urged the OCC to provide 
lending limit parity between a national bank and a State bank in the 
State where the national bank is located. Some commenters specifically 
advocated that the OCC adopt the lending limit of their State.
    A regulation that would provide exact parity between national banks 
and banks located in all fifty States would be very complicated, 
however, because State lending limits may involve higher general 
limits, a different method of calculating the percentage of bank 
capital and surplus that can be loaned to a single borrower, or 
different rules for combining loans to separate borrowers. We believe 
that providing exceptions in the two categories described to national 
banks with main offices located in States that apply a higher limit to 
these categories of loans addresses the parity concern without 
requiring an unduly complex calculation.
    Moreover, in addition to the percentage limit, each of the 
exceptions contains a $10 million dollar cap. The dollar cap will 
ensure that banks over $1 billion receive no greater benefit, and 
cannot make larger loans in reliance upon these exceptions, than banks 
that are smaller in size.
3. Applicable Safeguards
    The proposal incorporates a number of safeguards designed to ensure 
that a national bank's use of the additional authority provided by the 
new exceptions is consistent with safety and soundness. The first is 
the per borrower dollar limitation described in the preceding 
paragraph. The second is an aggregate lending cap on any loans, or 
portions thereof, to all of a bank's borrowers made in reliance upon 
the real estate and small business exceptions. The total amount of 
these loans, or portions of loans, together, cannot equal more than 100 
percent of a bank's capital and surplus. This cap is similar to the 
statutory aggregate limit on loans to all bank insiders. See 12 U.S.C. 
375b(5).
    Third, only ``eligible banks'' can make use of these exceptions. To 
be an ``eligible bank'' for purposes of this part, the bank must be 
well capitalized, as defined in 12 CFR 6.4(b)(1),\1\ and must have a 
rating of 1 or 2 under the Uniform Financial Institutions Rating 
System, with at least a rating of 2 for the management component of 
this rating system. These criteria will ensure that only banks with 
sufficient capital and good managerial oversight will be permitted to 
use the increased limits.
---------------------------------------------------------------------------

    \1\ Under 12 CFR 6.4(b), ``well capitalized'' means that the 
bank: (1) has a total risk-based capital ratio of 10.0 percent or 
greater; (2) has a Tier 1 risk-based capital ration of 6.0 percent 
or greater; (3) has a leverage ratio of 5.0 percent or greater; and 
(4) is not subject to any written agreement, order or capital 
directive, or prompt corrective action directive issued by the OCC 
pursuant to section 8 of the Federal Deposit Insurance Act (FDI 
Act), the International Lending Supervision Act of 1983 or section 
38 of the FDI Act, or any regulation thereunder, to meet and 
maintain a specific capital level of any capital measure.
---------------------------------------------------------------------------

    In addition, the proposed rule requires a bank to apply to its 
supervisory office and receive approval before using either of the new 
exceptions. To be deemed complete, the application must contain the 
following information. First, the bank must certify that it is an 
``eligible bank.'' Second, the bank must cite to relevant State laws or 
regulations showing that its main office is located in a State where 
the State bank lending limit that applies to 1-4 family residential 
real estate or small business loans is higher than the limit for 
national banks. The citation may reference a higher general, specific 
or other limit that applies to 1-4 family residential real estate or 
small business loans. This requirement will limit use of the exceptions 
to national banks with main offices located in States where they are 
operating at a competitive disadvantage as compared to State banks. 
Third, the bank must provide the

[[Page 57294]]

OCC with a written resolution by the majority of its board of directors 
approving the use of these exceptions and confirming the terms and 
conditions for use of this lending authority. In this way, the board 
will be required to identify the policies and procedures that will 
govern the use of the exceptions. Last, the bank will have to provide a 
description of how the board intends to exercise its continuing 
responsibility to oversee the use of this lending authority, for 
example, requiring quarterly reports of all loans made under these 
exceptions. This provision emphasizes the continuing responsibility of 
the board to monitor use of the exceptions if the bank's application is 
granted. Finally, the supervisory office will still have the discretion 
to deny the bank's application based upon safety and soundness 
considerations.
    OCC approval is effective for three years and may be renewed. 
Provided the bank remains eligible during the three year period, any 
loan made during the three year period will remain legal, even if the 
bank thereafter becomes ineligible.
    If this proposal is adopted as a final rule, the OCC will evaluate 
national banks' experience with these new exceptions over the three 
year pilot period following the effective date of the rule and 
determine at that time whether to retain, modify or rescind the 
exceptions.
4. Comments
    In addition to requesting comments generally on all aspects of this 
proposal, we ask for comments on whether:
     The categories of loans identified will alleviate the 
burden and mitigate some of the competitive disparity for community 
banks;
     Loans to small business should be secured by specific 
collateral in order to qualify for the exception;
     The per borrower percentage limit and dollar caps for the 
exceptions are appropriate;
     The aggregate limit is appropriate; and
     Additional safeguards are warranted.

Exemptions for Loans Secured by State and Local Governments.

    Part 32 provides that a loan or extension of credit made by a 
national bank to, or guaranteed by general obligations of a State or 
political subdivision is exempt from any lending limit. See 12 CFR part 
32.3(c)(5). The phrase ``general obligation,'' is defined in 12 CFR 
part 1. In addition, to obtain this exemption, this section currently 
requires the bank to obtain an opinion of counsel that the loan or 
extension of credit or guarantee is a valid and enforceable general 
obligation of the State or political subdivision.
    However, the requirement for an opinion of counsel is not 
statutorily required. The OCC understands that requiring an opinion of 
counsel can be expensive and time consuming for community banks, 
particularly for those banks that make a substantial number of 
agricultural loans under the loan guarantee programs. Therefore, the 
proposed rule revises Sec. 32.3(c)(5) to allow a bank to either obtain 
an opinion of counsel or rely on the opinion of a State attorney 
general (or other State legal official with authority to opine on the 
obligation in question) on the validity and enforceability of the 
obligation, extension of credit, or guarantee in question.
    Comment is invited on this modification as well as all aspects of 
this NPRM.

Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, sec. 
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. We invite your comments on how to make 
this proposal easier to understand. For example:
     Have we organized the material to suit your needs? If not, 
how could this material be better organized?
     Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be more clearly stated?
     Does the proposed regulation contain language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes to the format would make the regulation 
easier to understand?
     What else could we do to make the regulation easier to 
understand?

Solicitation of Comments on Impact on Community Banks

    The OCC also seeks comments on the impact of this proposal on 
community banks. The OCC recognizes that community banks may present a 
different risk profile than larger banks, and we intend this proposal 
to address that difference in risk. We invite comment specifically on 
whether the proposal achieves that objective.

Regulatory Analysis

A. Paperwork Reduction Act

    For purposes of compliance with the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501 et seq., the OCC invites comment on:
    (1) Whether the proposed collection of information contained in 
this notice of proposed rulemaking is necessary for the proper 
performance of the OCC's functions, including whether the information 
has practical utility;
    (2) The accuracy of the OCC's estimate of the burden of the 
proposed information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (4) Ways to minimize the burden of the information collection on 
the respondents, including the use of automated collection techniques 
or other forms of information technology; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Respondents are not required to respond to this collection of 
information unless the final regulation displays a currently valid 
Office of Management and Budget (OMB) control number.
    The collection of information requirements contained in this notice 
of proposed rulemaking have been submitted to the OMB for review in 
accordance with the Paperwork Reduction of 1995 (44 U.S.C. 3507(d)). 
Comments on the collection of information should be sent to the Office 
of Management and Budget, Paperwork Reduction Project Number 1557-to be 
assigned, Washington, DC 20503, with a copy to Jessie Dunaway, 
Legislative and Regulatory Activities Division, Office of the 
Comptroller of the Currency, 250 E Street, SW, Mailstop 8-4, 
Washington, DC 20219.
    The information collection requirements contained in 12 CFR part 32 
are contained in section 32.3(b)(6)(iv). Under this section, the 
proposed regulation would require national banks to provide the OCC 
with certain information in connection with an application to receive 
approval from its supervisory office before using the exceptions to the 
lending limit for 1-4 family residential real estate loans and loans to 
small businesses for national banks. The likely respondents are 
national banks.
    Estimated number of respondents: 2,140.
    Estimated number of responses: 2,140.

[[Page 57295]]

    Estimated burden hours per response: 26.
    Estimated total burden: 55,640.

B. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) requires federal agencies 
either to certify that a proposed rule would not, if adopted in final 
form, have a significant impact on a substantial number of small 
entities or to prepare an initial regulatory flexibility analysis 
(IRFA) of the proposal and publish the analysis for comment. See 5 
U.S.C. 603, 605. On the basis of the information currently available, 
the OCC is of the opinion that this proposal, if it is adopted in final 
form, is unlikely to have a significant impact on a substantial number 
of small entities, within the meaning of those terms as used in the 
RFA. Commenters are invited to provide the OCC with any information 
they may have about the likely quantitative effects of the proposal.

C. Executive Order 12866 Determination

    The Comptroller of the Currency has determined that this proposed 
rule, if adopted as a final rule, would not constitute a ``significant 
regulatory action'' for the purposes of Executive Order 12866. Under 
the most conservative cost scenarios that the OCC can develop on the 
basis of available information, the impact of the proposal falls well 
short of the thresholds established by the Executive Order.

D. Unfunded Mandates Reform Act of 1995 Determinations

    Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 
1532 (Unfunded Mandates Act), requires that an agency prepare a 
budgetary impact statement before promulgating any rule likely to 
result in a Federal mandate that may result in the 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 the agency to identify and consider a reasonable number 
of regulatory alternatives before promulgating the rule. However, an 
agency is not required to assess the effects of its regulatory actions 
on the private sector to the extent that such regulations incorporate 
requirements specifically set forth in law. 2 U.S.C. 1531.
    The OCC has determined that this proposed regulation will not 
result in expenditures by State, local, and tribal governments, in the 
aggregate, or by the private sector, of $100 million or more in any one 
year. Accordingly, the OCC has not prepared a budgetary impact 
statement or specifically addressed the regulatory alternatives 
considered.

List of Subjects in 12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the preamble, part 32 of chapter I of 
title 12 of the Code of Federal Regulations is proposed to be 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.

    2. In Sec. 32.2:
    A. Paragraph (p) is redesignated as paragraph (s);
    B. Paragraph (o) is redesignated as paragraph (q);
    C. Paragraphs (i) through (n) are redesignated as paragraphs (j) 
through (o); and
    D. New paragraphs (i), (p) and (r) are added to read as follows:


Sec. 32.2  Definitions.

* * * * *
    (i) Eligible bank means a national bank that:
    (1) Is well capitalized as defined in 12 CFR 6.4(b)(1); and
    (2) Has a composite rating of 1 or 2 under the Uniform Financial 
Institutions Rating System in connection with the bank's most recent 
examination or subsequent review, with at least a rating of 2 for 
management, if that rating is given.
* * * * *
    (p) Residential real estate loan means any loan or extension of 
credit that is secured by a perfected first-lien security interest in 
1-4 family residential real estate in an amount that does not exceed 80 
percent of the appraised value of the collateral at the time the loan 
or extension of credit is made.
* * * * *
    (r) Small business loan means any loan or extension of credit 
included in ``loans to small businesses'' as defined in the 
instructions for preparation of the Consolidated Report of Condition 
and Income.
* * * * *
    3. In Sec. 32.3, a new paragraph (b)(6) is added and paragraph 
(c)(5) is revised to read as follows:


Sec. 32.3  Lending limits.

* * * * *
    (b) * * *
    (6) Loans for residential real estate and small businesses. (i) An 
eligible national bank may extend residential real estate loans to a 
borrower in an amount that does not exceed 10 percent of its capital 
and surplus or $ 10 million, whichever is less, in addition to the 
amount allowed under the bank's combined general limit, if the main 
office of the bank is located in a state where the state bank lending 
limit that applies to residential real estate loans is higher than the 
limit for national banks.
    (ii) An eligible national bank may extend small business loans to a 
borrower in an amount that does not exceed 10 percent of its capital 
and surplus or $10 million, whichever is less, in addition to the 
amount allowed under the bank's combined general limit, if the main 
office of the bank is located in a state where the state bank lending 
limit that applies to small business loans is higher than the limit for 
national banks.
    (iii) The total of all portions of a national bank's loans and 
extensions of credit made pursuant to the exceptions provided in 
paragraphs (b)(6)(i) and (ii) of this section may not exceed 100 
percent of the bank's capital and surplus.
    (iv) A national bank must submit an application to, and receive 
approval from its supervisory office before using the exceptions in 
paragraphs (b)(6)(i) and (ii) of this section. The supervisory office 
may approve a completed application if it finds that approval is 
consistent with safety and soundness. To be deemed complete, the 
application must include:
    (A) Certification that the bank is an ``eligible bank'' as defined 
in Sec. 32.2(i);
    (B) Citations to relevant state laws or regulations;
    (C) A copy of a written resolution by a majority of the bank's 
board of directors approving the use of the limits provided in 
paragraphs (b)(6)(i) and (ii) of this section, and confirming the terms 
and conditions for use of this lending authority; and
    (D) A description of how the board intends to exercise its 
continuing responsibility to oversee the use of this lending authority.
    (v) Provided that a bank remains an ``eligible bank,'' OCC approval 
of the bank's authority to use the exceptions in paragraphs (b)(6)(i) 
and (ii) of this section is effective for three years and may be 
renewed.
* * * * *
    (c) * * *
    (5) Loans to or guaranteed by general obligations of a State or 
political subdivision. (i) A loan or extension of credit to a State or 
political subdivision that constitutes a general obligation of

[[Page 57296]]

the State or political subdivision, as defined in part 1 of this 
chapter, and for which the lending bank has an opinion of counsel or 
the opinion of that State Attorney General, or other State legal 
official with authority to opine on the obligation in question, that 
the loan or extension of credit is a valid and enforceable general 
obligation of the borrower; and
    (ii) A loan or extension of credit, including portions thereof, to 
the extent guaranteed or secured by a general obligation of a State or 
political subdivision and for which the lending bank has an opinion of 
counsel or the opinion of that State Attorney General, or other State 
legal official with authority to opine on the guarantee or collateral 
in question, that the guarantee or collateral is a valid and 
enforceable general obligation of that public body.
* * * * *

    Dated: September 15, 2000.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 00-24280 Filed 9-21-00; 8:45 am]
BILLING CODE 4810-33-P