[Federal Register Volume 66, Number 112 (Monday, June 11, 2001)]
[Rules and Regulations]
[Pages 31114-31121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14529]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket No. 01-12]
RIN 1557-AB82


Community Bank-Focused Regulation Review: Lending Limits Pilot 
Program

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
publishing a final rule amending part 32, the regulation governing the 
percentage of capital and surplus that a national bank may loan to any 
one borrower. This final rule establishes a three-year pilot program 
that creates new special lending limits for 1-4 family residential real 
estate loans and loans to small businesses. Eligible national banks 
with main offices located in states that have a lending limit available 
for residential real estate, small business or unsecured loans that is 
higher than the current Federal limit may apply to take part in the 
pilot program. We will review and evaluate national banks' experience 
with the special limits over the three-year pilot period and determine 
at the end of the pilot whether to extend the program and retain, 
modify or rescind the exceptions. The final rule also permanently 
modifies the lending limit exemption for loans to or guaranteed by 
obligations of state and local governments.

EFFECTIVE DATE: The final rule is effective on September 10, 2001.

FOR FURTHER INFORMATION CONTACT: Deborah Katz, Senior Counsel, or 
Stuart Feldstein, Assistant Director, Legislative and Regulatory 
Activities Division, (202) 874-5090; Jonathan Fink, Senior Attorney, 
Bank Activities and Structure Division (202) 874-5300.

Background

    On May 12, 1999, the OCC issued an advance notice of proposed 
rulemaking (ANPR) inviting comment on possible regulatory changes that 
could benefit community banks. 64 FR 25469. The purpose of this 
community bank-focused regulation review was to explore ways that our 
regulations could be modified, consistent with safety and soundness, to 
reflect the fact that community banks operate with more limited 
resources and often present different risk profiles than larger 
institutions. We sought to identify

[[Page 31115]]

regulations where it would be appropriate to develop alternative or 
differential regulatory approaches that would minimize burden on 
community banks and promote community banks' competitiveness.
    We received thirty-five letters in response to the ANPR commenting 
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 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 amount up to an additional 10 percent of unimpaired capital 
and surplus to the same borrower, if the amount of the loan that 
exceeds the 15 percent limit is secured by ``readily marketable 
collateral.'' Part 32 refers to these lending limits as ``the combined 
general limit.'' The statute and regulation also 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 the statute's terms. 12 U.S.C. 84(d)(1).
    A majority of commenters on the ANPR stated that the national bank 
lending limits are especially problematic for community banks because, 
according to these commenters, the current lending limits have 
prevented many community banks 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 or increase in local property values. 
Many commenters also noted that some states provide higher lending 
limits than those set forth in section 84 and part 32. These commenters 
suggested that Federal lending limits should be the same as those 
available for state banks so that national banks can compete on an 
equal basis with other financial service providers in the markets they 
serve.
    On September 22, 2000, the OCC issued a notice of proposed 
rulemaking (NPRM) soliciting comment on a pilot program to modify 
certain aspects of the lending limit to respond to these concerns (65 
FR 57292). We proposed to use the authority afforded by section 
84(d)(1) to create new exceptions or special lending limits for loans 
secured by 1-4 family residential real estate and loans to small 
businesses for banks with main offices located in states where a 
lending limit higher than the current Federal limit applies. To ensure 
that national banks use this additional lending authority in a way that 
is consistent with safe and sound banking practices, we proposed making 
the new special limits available only to ``eligible banks,'' subject to 
an application process. We also proposed an aggregate limit on the 
amount a bank could lend under this new authority. The proposal stated 
that OCC would review national banks' experience with the new 
exceptions over the three-year pilot period and determine whether to 
retain, modify, or rescind the exceptions.
    The proposed rule also contained a separate amendment to part 32 
that modified the requirements for obtaining a lending limit exemption 
for loans to or guaranteed by obligations of state and local 
governments.

Overview of Comments Received

    The NPRM was published in the Federal Register on September 22, 
2000. The public comment period closed on November 21, 2000. The OCC 
received seventeen comments on the proposal, including comments from 
one individual, one savings and loan association, ten banks, one bank 
holding company and four bank trade associations.
    The majority of the commenters strongly supported the proposal as 
an effort to reduce regulatory burden on community banks and to enhance 
the ability of community banks to compete in today's banking 
environment. The majority of commenters also specifically supported the 
new special lending limits. They stated that an increase in the lending 
limit is essential to level the playing field for community national 
banks operating in states with a higher lending limit. One commenter 
suggested that an increase in the lending limits would enhance safety 
and soundness because it would minimize loan participations and thus 
allow a bank to manage the risk of a credit ``without outside 
influences or outside changes in policy.''
    One commenter also suggested that the OCC implement the regulation 
as a permanent modification to the lending limit, instead of as a pilot 
project. This commenter thought that the expense involved in 
implementing the pilot program may not be recouped by the marginal 
profits made on any loans extended at the higher limits and would 
discourage banks from taking advantage of the pilot. The commenter 
suggested that, in place of a pilot program, the OCC consider 
permanently raising the limit by five percent and then, after three 
years, consider an additional five percent increase. Finally, two 
commenters thought that the regulatory burden created by the conditions 
imposed by the proposal governing a bank's ability to take advantage of 
the new exceptions would compromise any benefits that might be gained 
from the proposal.
    We have considered these comments carefully, but have determined 
not to modify the proposal in the ways suggested by these commenters. 
The Federal lending limit is an important safeguard against undue 
concentration of credit risk in the national banking system. 
Adjustments to the limit need to be calibrated to enable both the OCC 
and the banks affected to gauge the impact of additional flexibility. 
In our view, the incremental approach reflected in the proposal best 
achieves that objective, as a first step. Accordingly, after 
consideration of the comments received, we have adopted a final 
regulation that is similar to the proposal, with some modifications and 
the clarifying changes that are described below. Because the final rule 
establishes a pilot program, however, there will be an opportunity to 
revisit the constraints imposed by the proposal at any time, and 
certainly as the three-year timeframe of the pilot nears a conclusion.

Section-by-Section Analysis

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

1. Categories of Loans Chosen for Special Limits
    Proposed Sec. 32.3(b)(6) contained new limits for two categories of 
loans: Those secured by 1-4 family residential real estate and small 
business loans. The proposal solicited comment on whether the 
categories of loans identified would alleviate the burden and mitigate 
some of the competitive disparity for community banks.
    Several commenters, including those from trade associations 
representing community banks, urged the OCC to revise the proposal to 
include farm loans. These commenters urged the OCC to include 
agricultural loans in the pilot, so that rural community banks could 
benefit from the proposal. The commenters suggested that agricultural 
loans are no riskier than small business loans. In addition, some 
commenters noted that agricultural community banks have comparable 
experience and expertise in making farm loans as they do small business 
loans. Other commenters suggested that the OCC

[[Page 31116]]

create new limits for secured or unsecured commercial loans.
    We have decided not to expand the categories of loans subject to 
special limits until we have some experience with the new limits 
initially proposed for the pilot. We will continue to analyze the risk 
characteristics of agricultural loans of different types (e.g., secured 
by farmland or by crops) to determine whether the goals of the pilot 
program would be furthered by including some categories of agriculture 
loans.\1\
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    \1\ The lending limit statute and regulations currently contain 
special enhanced limits for certain loans secured by documents 
transferring or securing title to readily marketable staples (35 
percent, in addition to the bank's combined general limit), 
livestock and dairy cattle (both 10 percent, in addition to the 
bank's combined general limit). See 12 U.S.C. 84(c)(3), 12 CFR 
32.3(b)(1); 12 U.S.C. 84(c)(9)(A), 12 CFR 32.3(b)(3); 12 U.S.C. 
84(c)(9)(B), 12 CFR 32.3(b)(4).
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    Accordingly, in beginning this pilot, we have chosen categories--
residential real estate and small business loans--that represent 
typical, longstanding business lines for most community banks. In this 
way, we hope to obtain information and experience about the effects of 
the pilot program modifications to the lending limit on a broad cross-
section of community banks. We expect to use what we learn, not only as 
the basis for deciding whether the new special limits should be 
continued beyond the 3-year pilot period, but also for considering 
whether more categories of loans should be added.
2. Limit for Residential Real Estate Loans
    Under the proposal, the special limit in Sec. 32.3(b)(6)(i) applied 
to ``residential real estate loans,'' defined under Sec. 32.2(p) to 
mean only loans secured by a perfected first-lien security interest in 
1-4 family residential real estate in an amount that did not exceed 80 
percent of the appraised value of the collateral at the time the loan 
was made.
    The OCC received one comment on this special limit. The commenter 
questioned whether an increased lending limit for 1-4 family homes will 
have any impact because few community banks make large dollar 
residential real estate loans to one borrower. Based upon our 
experience with community banks, however, we continue to believe that 
this special limit will be helpful to community banks located in areas 
where the price of real estate is high. Therefore, Sec. 32.7(a)(1) of 
the final rule retains a special limit for residential real estate 
loans.
    However, the final rule contains a clarification of the definition 
of ``residential real estate loans.'' The definition was used to 
determine whether a state had a higher lending limit for residential 
real estate loans and to restrict the type of real estate loan that a 
national bank could make under the authority contained in the pilot 
program. The final rule moves the requirements that residential real 
estate loans be secured by a ``perfected first-lien'' and can ``not 
exceed 80 percent of the appraised value of the collateral at the time 
the loan was made'' from the definition of a residential real estate 
loan to the description of which loans qualify for the pilot program 
contained in Sec. 32.7(a)(1). This change clarifies that a national 
bank will be required to comply with certain prudential requirements 
when making residential real estate loans, but will not be disqualified 
from participating in the pilot program because a state's lending 
limits contain different prudential limits for residential real estate 
loans, for example, a lower loan-to-value ratio.
3. Limit for Small Business Loans
    The proposed special limit in Sec. 32.3(b)(6)(ii) for ``small 
business loans,'' defined in Sec. 32.2(r), extended additional lending 
authority for loans that could be unsecured, or secured in a manner 
that is not specified by regulation. The proposal invited comment on 
whether the special limit for small business loans should require 
specific collateral.
    One commenter suggested requiring the borrower to provide real 
estate collateral to use the expanded lending authority for small 
business loans. Other commenters recommended that collateral not be 
required. One reasoned that only well run banks will be able to use 
this special limit and they will likely have prudent lending policies 
that require collateral as appropriate. The remaining commenters felt 
that such loans should be secured by specific collateral only if this 
requirement is imposed on state banks.
    Small business loans are typically secured by many different types 
of collateral. Accordingly, the OCC has concluded that to specify the 
type of collateral required would impose undue constraints on the use 
of this special limit. Therefore, the rule does not require that the 
borrower secure small business loans in order for the loan to qualify 
under the pilot program. The type of small business loans eligible for 
the special limit is adopted as proposed, in section Sec. 32.2(r) of 
the final rule, with some adjustment to the definition of ``small 
business loan'' as discussed below.
    Section 32.2(r) of the proposal defined ``small business loan'' by 
cross-referencing the definition of ``loans to small businesses'' from 
the instructions for preparation of the Consolidated Reports of 
Condition and Income (Call Report). This definition includes ``loans 
with original amounts of $1 million or less,'' * * * ``secured by 
nonfarm nonresidential properties,'' and certain ``commercial and 
industrial loans.'' The NPRM requested comment on the definition of 
``small business loan.''
    One commenter thought that the cross-reference to the Call Report 
was difficult to find and urged that the regulation include its own 
definition of small business loan. Another commenter suggested that the 
OCC eliminate the $1 million cap on small business loans and permit a 
bank to loan the lesser of $10 million or 10 percent of its capital to 
any one company.
    We continue to believe that a cross-reference to the Call Report is 
a readily available and easy-to-use method of defining business loans. 
Moreover, banks are familiar with the Call Report definitions which 
they regularly use when filing their quarterly Call Reports. However, 
we agree that the dollar limitation in the Call Report definition of 
``loans to small businesses'' is unnecessary because of the separate 
percentage and dollar limits established as part of the special limit 
for small business loans. Therefore, the final rule eliminates the $1 
million cap that was part of the definition of small business loan. 
However, the definition continues to identify the small business loans 
covered by the pilot program by cross-reference to the definitions of 
``secured by nonfarm nonresidential properties,'' and ``commercial and 
industrial loans'' set forth in the Call Report instructions, Schedule 
RC-C, Part I (rev. 3-01).
4. Additional Lending Authority
    Under Sec. 32.3(b)(6) of the proposal, a bank was permitted to 
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 was located in a state with a 
higher limit that applies to these categories of loans.
    Commenters on this provision, including those representing 
community banks, agreed that ten percent is an appropriate and 
sufficient amount to alleviate the current competitive disadvantage 
faced by community banks. However, one

[[Page 31117]]

commenter thought that the limits per borrower should be the same as 
state-chartered non-member banks.
    A regulation that would provide exact parity between a national and 
a state bank located in the same state would be complicated if the goal 
is to achieve lending limit parity for all fifty states, but only for 
two categories of loans, and no others. We believe that this complexity 
would reduce the utility of the new special limits. For this reason, we 
originally proposed allowing national banks in the pilot program to 
simply extend ten percent of its capital and surplus to a single 
borrower for real estate and small business loans, respectively, if a 
bank's main office is located in a state with a higher limit available 
for these categories of loans, without regard to the amount of the 
state limit. However, it is not the goal of the pilot program to 
provide national banks with a competitive advantage over similarly 
situated state banks in states where the applicable limit is lower than 
the additional 10 percent we proposed to permit for national banks. 
Thus, we have modified the two special limits in Sec. 32.7(a)(1) and 
(2) of the final rule to permit additional extensions of credit to a 
single borrower in the lesser of the following two amounts: (i) 10 
percent of its capital and surplus; or (ii) the percentage of capital 
and surplus that a state bank is permitted to lend under a state 
lending limit that would be available for residential real estate, 
small business or unsecured loans in the state where the main office of 
the national bank is located and that exceeds 15 percent--the general 
unsecured limit for national banks set forth in 12 CFR 32.2(a). Under 
this approach, for example, in any state where the state unsecured 
limit is 20 percent (and the state has no other, higher, special 
lending limit available for 1-4 family residential real estate loans or 
small business loans), the special limits available to a national bank 
under the pilot program would be the lesser of 5 percent or $10 
million.
    Section 32.3(b)(6) of the proposal also provided that to be 
eligible for the pilot program a national bank's main office had to be 
located in a state where the ``state lending limit'' that is available 
for residential real estate or small business loans is higher than the 
limit for national banks. However, state lending limits may involve 
higher percentage 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. In order to simplify 
this process, the special limits described above now make clear that 
only situations where the state has a higher percentage limit that 
would be available for residential real estate or small business loans 
will trigger a national bank's eligibility for the pilot program.
    The preamble to the proposed regulations also stated that to 
demonstrate its eligibility for the pilot program, a bank could 
reference a state's ``specific, general or other limit that applies to 
1-4 family residential real estate or small business loans.'' Sections 
32.7(a)(1) and (2) now clarify that the applicable limit is the state 
lending limit for state banks that is available for residential real 
estate loans or small business loans, as defined in the final rule, or 
the state unsecured limit. Thus, for example, where the state unsecured 
limit is 20 percent and the state also has a 5 percent special lending 
limit available for 1-4 family residential real estate loans, the 
special limits available to a national bank would be the lesser of 10 
percent or $10 million for residential real estate loans, and the 
lesser of 5 percent or $10 million for small business loans.\2\
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    \2\ However, as described in section 6, below, the total 
outstanding amount of a national bank's loans and extensions of 
credit to one borrower made pursuant to 12 CFR 32.3(a) and (b), 
together with loans and extensions of credit to the borrower made 
under the pilot program, cannot exceed 25 percent of the bank's 
capital and surplus.
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5. Applicable Safeguards
    The proposal incorporated a number of safeguards to ensure that a 
national bank's use of the additional authority provided by the new 
special limits is consistent with safety and soundness. The OCC 
solicited comment on each of these safeguards and invited comment on 
whether additional safeguards were warranted.
    The first proposed safeguard, set forth in proposed 
Sec. 32.3(b)(6)(i) and (ii), was a dollar cap of $10 million dollars 
limiting loans to a single borrower for real estate and small business 
loans, respectively, in addition to the percentage limits described in 
the preceding section, for loans made in reliance upon the new special 
limits.
    We received one comment on this dollar cap from a trade association 
representing community banks. This commenter stated that the $10 
million cap is adequate for the majority of community national banks. 
We believe this limit is appropriate, particularly during the period of 
the pilot program. Therefore, this safeguard is adopted as proposed in 
Sec. 32.7(a)(1) and (2) of the final rule.
    The second proposed safeguard, found in Sec. 32.3(b)(6)(iii), was 
an aggregate lending cap on all loans, to all of a bank's borrowers 
made in reliance upon the real estate and small business special 
limits. Under the proposal, the total amount of these loans, or 
portions of loans, together, could not equal more than 100 percent of a 
bank's capital and surplus.
    Some commenters supported an aggregate lending cap. Other 
commenters thought that the aggregate cap would create an unnecessary 
burden and would make compliance with part 32 more complicated as 
national banks will have to keep track of aggregate totals. Some 
commenters thought that the proposed aggregate cap was too restrictive 
and should be increased to 150 or 200 percent of capital.
    We agree that the aggregate cap will require banks to monitor the 
total amount of loans extended under this new authority. However, this 
additional requirement is consistent with the purpose of the cap. 
Throughout, and at the conclusion of the pilot program, we will be in a 
position to consider whether the cap is too restrictive and whether it 
should be increased. Therefore the aggregate cap is adopted as proposed 
in Sec. 32.7(a)(4).
    The third safeguard made the special limits in Sec. 32.3(b)(6)(i) 
and (ii) available only to ``eligible banks,'' defined in Sec. 32.2(i), 
as a bank that is well capitalized, as defined in 12 CFR 6.4(b)(1),\3\ 
and has 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.
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    \3\ 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 ratio 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 for any capital measure.
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    We did not receive any comments on this safeguard, however, upon 
further consideration, we have determined that adding the qualification 
that the bank must have received a rating of at least 2 for the asset 
quality component of its rating to the other qualifications of an 
``eligible bank,'' will help to ensure that only those banks that have 
demonstrated sound lending practices are eligible to participate in the 
pilot program. Accordingly, the final rule includes this qualification 
standard, in addition to those proposed.
    In addition, Sec. 32.3(b)(6)(iv) of the proposed rule required a 
bank to apply

[[Page 31118]]

to its supervisory office and receive approval before using either of 
the new special limits. The proposal required an application to contain 
the following information to be deemed complete: (1) Certification that 
the applicant is an eligible bank; (2) citation to relevant state laws 
or regulations showing that the bank's main office is located in a 
state where the state lending limit available for residential real 
estate or small business loans or unsecured loans is higher than the 
limit for national banks; (3) a written resolution by the majority of 
the bank's board of directors approving the use of the new special 
limits and confirming the terms and conditions for use of this lending 
authority; and (4) a description of how the bank's board intends to 
exercise its continuing responsibility to oversee the use of this 
lending authority.
    While one commenter supported this application procedure, most 
commenters criticized this approach as too complicated and burdensome. 
Two commenters suggested that the OCC consider establishing minimum 
requirements and a notice procedure, for example, for banks that are 1 
or 2 rated and ``well-capitalized.'' One of these commenters felt that 
the application requirement would create unnecessary paperwork and 
discourage banks from making use of this new lending authority.
    We believe that an application process will better enable us to 
monitor use of the new lending authority and will help to ensure bank 
safety and soundness is not compromised under the pilot program. We 
will revisit the application requirement after we have had experience 
with the benefits, as well as burdens, that arise. Therefore, 
Sec. 32.7(b) of the final rule adopts the proposed application 
procedures with the clarifying changes noted below.
    Some commenters specifically objected to the requirement in 
Sec. 32.3(b)(6)(iv)(B) that the application cite to relevant state laws 
and regulations showing that the bank's main office is located in a 
state with higher lending limits available for residential real estate 
or small business loans. One commenter suggested that the OCC expand 
the lending authority to all banks without regard to where a bank's 
main office is located. This commenter noted that nothing in 12 U.S.C. 
84 requires competitive equality between national and state-chartered 
banks. Another commenter thought that the regulation should reference 
the location of the origination of the loan, and not the location of 
the head office of the bank, since that is the location where a bank 
will be competing.
    The special limits are designed to afford some degree of 
competitive parity between national banks and state chartered lenders. 
Therefore, these new limits are available only to banks located in 
states where they are operating at an artificial competitive 
disadvantage as compared to state banks. The second commenter seems to 
suggest that the state lending limit of the location of the borrower 
should determine whether a special limit applies. Determining the 
location of a borrower often may be complicated. For example, a company 
may be incorporated in Delaware and have offices in multiple states. 
Further, this suggestion would be inconsistent with the OCC's approach 
in other areas where the location of the bank, rather than the 
borrower, is the operative control. Therefore, we have not adopted this 
suggestion.
    Finally, because state lending limits vary so greatly among the 
states, the scope of a national bank's ability to use the pilot program 
may be unclear. Where such questions arise, the OCC's Chief Counsel 
will determine the extent to which the pilot program is available for 
national banks located in a particular state.
6. New Safeguards
    The OCC also has determined that two additional safeguards are 
necessary to balance the flexibility afforded to banks through the new 
special limits with safety and soundness concerns. The first of these 
safeguards addresses a concern that a bank's use of the special limits, 
together with its combined limit and the other available statutory 
limits, may result in an undue concentration of loans to a single 
borrower. To address this issue, Sec. 32.7(a)(3) of the final rule 
provides that the total outstanding amount of a national bank's loans 
and extensions of credit to one borrower made pursuant to Sec. 32.3 (a) 
and (b),\4\ together with loans and extensions of credit to the 
borrower made under the pilot program, cannot exceed 25 percent of the 
bank's capital and surplus.
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    \4\ Section 32.3 is the provision containing the general and 
existing special lending limits and exceptions to the lending 
limits. This section includes a bank's combined general limit for 
unsecured loans and loans secured by readily marketable collateral 
(Sec. 32.3(a)); and other special lending limits (Sec. 32.3(b)), 
such as limits for loans secured by documents covering livestock.
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    As is the case with all the general and specific lending limits, 
these new special lending limit thresholds do not insulate loans below 
the thresholds from supervisory oversight. Thus, loans within the 
parameters of the pilot program are still subject to criticism if they 
are poorly underwritten, poorly administered, or if loans made under 
the program are part of an excessive concentration by a bank in certain 
types of loans.\5\
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    \5\ The documentation exemption described in the ``Interagency 
Policy Statement on Documentation for Loans to Small- and Medium-
sized Businesses and Farms'' contained in Banking Bulletin 93-18, 
issued by the OCC on April 2, 1993, is not available for loans made 
under the Pilot Program.
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    Moreover, we also have included in the final rule a procedure to 
rescind a bank's authority to use the special lending limits in the 
event that safety and soundness problems arise. Under 
Sec. 32.7(a)(4)(d) of the final rule, the OCC reserves the right to 
rescind a bank's authority to use the special lending limits, based 
upon concerns about credit quality, undue concentrations in the bank's 
portfolio of residential or small business loans, or about a bank's 
overall credit risk management systems and controls. The bank must 
cease new extensions of credit in reliance on the special lending 
limits after receiving written notice from the OCC that its authority 
has been rescinded.
7. Duration of Approval
    The proposed rule was structured as a three-year pilot program. 
However, Sec. 32.3(b)(v) of the proposal stated that OCC approval of a 
bank's authority to use the special limits would be effective for three 
years and could be renewed. Section 32.7(c) of the final rule corrects 
this provision by clarifying that a bank that has received OCC approval 
to participate in the pilot program may continue to make loans under 
the special lending limits only for the duration of the three-year 
program, provided the bank remains an eligible bank. Accordingly, a 
bank that receives OCC approval to participate in the pilot program one 
year after the effective date of this regulation may use the authority 
granted under this pilot program for no longer than two more years.
8. Duration of Program
    As described above, the proposed rule was structured as a three-
year pilot program. The final rule retains the three-year duration that 
we proposed. Accordingly, new section Sec. 32.7(e) of the final rule 
contains an express termination date of June 11, 2004. This section 
also states that the OCC also retains the ability to terminate the 
pilot program prior to that date. We contemplate that the circumstance 
where the pilot program could be terminated early would be where our 
monitoring of loans made under the program indicates that overall 
experience with the program is raising

[[Page 31119]]

significant safety and soundness concerns. Prior to the conclusion of 
the three-year pilot program the OCC will evaluate the experience under 
the program and determine whether, and under what circumstances, the 
program should be extended. In its evaluation of the program and its 
consideration of conditions under which the program might be extended, 
the OCC will consider, among other matters, whether increases in 
concentration resulting from any new authority should be offset by 
additional portfolio diversification requirements.
9. Transition Issues
    The preamble to the proposal stated that as long as a bank was 
``eligible,'' any loan made by the bank during the three year period 
following approval would remain legal, even if the bank subsequently 
became ineligible.
    Two comments raised transition issues. One commenter requested that 
the OCC clarify that a national bank that made a loan in compliance 
with the pilot program would not be found in violation of part 32 if 
the bank subsequently were to become disqualified as an eligible bank 
during the three-year period. A second commenter requested that the OCC 
clarify that any loans made when a bank was eligible to use the higher 
limits will not have to be reduced or called early, if after three 
years, the bank becomes ineligible or the program is discontinued.
    We agree that various transition issues may arise and should be 
addressed in the final rule. Therefore, Sec. 32.7(f) of the final rule 
now clarifies that loans made by a bank in compliance with the 
requirements of the pilot program will not be deemed a lending limit 
violation and will not be treated as nonconforming under Sec. 32.6 if, 
for example, the bank becomes ineligible or the pilot program is 
discontinued. However, no additional funds may be advanced to the 
borrower as long as the outstanding amount of a national bank's loans 
and extensions of credit to the borrower exceed the lending limit.

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 
32.3(c)(5). The term ``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 proposed rule revised 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. All but one 
commenter supported this change. These commenters agreed that obtaining 
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 loan guarantee programs. They stated that 
allowing community banks to rely upon an opinion of a State's attorney 
general is a significant improvement.
    One commenter thought that it would be more difficult to obtain an 
opinion of a state's attorney general than an opinion of counsel. The 
OCC notes that this provision provides national banks with more and not 
less flexibility. It will permit a bank to obtain either an opinion of 
counsel, an opinion of a state's attorney general or other State legal 
official with authority to opine on the obligation in question, 
whichever is easier. Moreover, in some cases, banks may be able to rely 
on existing opinions from state officials to satisfy this requirement. 
See, e.g., OCC Interpretive Letter No. 899 (May 15, 2000), reprinted in 
Fed. Banking L. Rep. (CCH) para.81-418 (for purposes of qualifying for 
the exemption in 12 CFR 32.3(c)(5), national banks may rely on an 
Illinois Attorney General opinion providing that loans guaranteed by 
the Illinois Farm Development Authority are backed by the full faith 
and credit of the State of Illinois). Therefore, this provision is 
adopted as proposed in Sec. 32.3(c)(5) of the final rule.

Regulatory Analysis

A. Paperwork Reduction Act

    The OCC may not conduct or sponsor, and an organization is not 
required to respond to, an information collection unless it displays a 
currently valid Office of Management and Budget (OMB) control number.
    OMB has reviewed and approved the collection of information 
requirements contained in this rule under control number 1557-0221, in 
accordance with the Paperwork Reduction of 1995 (44 U.S.C. 3501 et 
seq.). OMB clearance will expire on December 31, 2003.
    The OCC sought commment on all aspects of the burden estimates for 
the information collection contained in the proposed rule. The OCC 
received no comments.
    The information collection requirements contained in 12 CFR part 32 
are contained in section 32.7(b). Under this section, the final 
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 new special lending limits for 
1-4 family residential real estate loans and loans to small businesses 
for national banks.

The potential respondents are national banks.
Estimated number of respondents: 2,140
Estimated number of responses: 2,140
Estimated burden hours per response: 26
Estimated total burden: 55,640

    The OCC has a continuing interest in the public's opinion regarding 
collections of information. Members of the public may submit comments, 
at any time, regarding any aspects of these collections of information. 
Comments may be sent to Jessie Dunaway, Clearance Officer, Office of 
the Comptroller of the Currency, 250 E Street, SW, Mailstop 8-4, 
Washington, DC 20219.

B. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA), 
5 U.S.C. 605(b), the regulatory flexibility analysis otherwise required 
under section 603 of the RFA, 5 U.S.C. 603, is not required if the head 
of the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities and the 
agency publishes such certification and a statement explaining the 
factual basis for such certification in the Federal Register along with 
its final rule.
    On the basis of the information currently available, the OCC is of 
the opinion that this final rule will not have a significant impact on 
a substantial number of small entities, within the meaning of those 
terms as used in the RFA. The final regulation requires national banks 
that would like to participate in the pilot program to submit an 
application containing certain information and receive approval from 
its supervisory office before using the new special limits for 1-4 
family residential real estate loans and loans to small businesses. 
However, the OCC does not believe that this application requirement 
will have a significant

[[Page 31120]]

impact on a substantial number of small entities. Accordingly, a 
regulatory flexibility analysis not required.

C. Executive Order 12866 Determination

    The Comptroller of the Currency has determined that this 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 final rule 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 final rule 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 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 asset 
quality and for management.
* * * * *
    (p) Residential real estate loan means a loan or extension of 
credit that is secured by 1-4 family residential real estate.
* * * * *
    (r) Small business loan means a loan or extension of credit 
``secured by nonfarm nonresidential properties'' or ``a commercial or 
industrial loan'' as defined in the instructions for preparation of the 
Consolidated Report of Condition and Income.
* * * * *

    3. In Sec. 32.3, paragraph (c)(5) is revised to read as follows:


Sec. 32.3  Lending limits.

* * * * *
    (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 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.
* * * * *

    4. A new Sec. 32.7 is added to read as follows:


Sec. 32.7  Pilot program for residential real estate and small business 
loans.

    (a) Residential real estate and small business loans. (1) In 
addition to the amount that a national bank may lend to one borrower 
under Sec. 32.3, an eligible national bank may make residential real 
estate loans or extensions of credit to one borrower in the lesser of 
the following two amounts: 10 percent of its capital and surplus; or 
the percent of its capital and surplus, in excess of 15 percent, that a 
State bank is permitted to lend under the State lending limit that is 
available for residential real estate loans or unsecured loans in the 
State where the main office of the national bank is located. Any such 
loan or extension of credit must be secured by a perfected first-lien 
security interest in 1-4 family 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. In no event may a bank lend 
more than $10 million to one borrower under this authority.
    (2) In addition to the amount that a national bank may lend to one 
borrower under Sec. 32.3, an eligible national bank may make small 
business loans or extensions of credit to one borrower in the lesser of 
the following two amounts: 10 percent of its capital and surplus; or 
the percent of its capital and surplus, in excess of 15 percent, that a 
State bank is permitted to lend under the State lending limit that is 
available for small business loans or unsecured loans in the State 
where the main office of the national bank is located. In no event may 
a bank lend more than $10 million to one borrower under this authority.
    (3) The total outstanding amount of a national bank's loans and 
extensions of credit to one borrower made under Secs. 32.3(a) and (b), 
together with loans and extensions of credit to the borrower made 
pursuant to paragraphs (a)(1) and (2) of this section, shall not exceed 
25 percent of the bank's capital and surplus.
    (4) The total outstanding amount of a national bank's loans and 
extensions of credit to all of its borrowers made pursuant to the 
special lending limits provided in paragraphs (a)(1) and (2) of this 
section may not exceed 100 percent of the bank's capital and surplus.
    (b) Application process. An eligible bank must submit an 
application to, and receive approval from, its supervisory office 
before using the special lending limits in paragraphs (a)(1) and (2) of 
this section. The supervisory office may approve a completed 
application if it

[[Page 31121]]

finds that approval is consistent with safety and soundness. To be 
deemed complete, the application must include:
    (1) Certification that the bank is an ``eligible bank'' as defined 
in Sec. 32.2(i);
    (2) Citations to relevant State laws or regulations;
    (3) 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 (a)(1) and (2) of this section, and confirming the terms and 
conditions for use of this lending authority; and
    (4) A description of how the board will exercise its continuing 
responsibility to oversee the use of this lending authority.
    (c) Duration of approval. Except as provided in Sec. 32.7(d), a 
bank that has received OCC approval may continue to make loans and 
extensions of credit under the special lending limits in paragraphs 
(a)(1) and (2) of this section until the date three years after 
September 10, 2001, provided the bank remains an ``eligible bank.''
    (d) Discretionary termination of authority. The OCC may rescind a 
bank's authority to use the special lending limits in paragraphs (a)(1) 
and (2) of this section based upon concerns about credit quality, undue 
concentrations in the bank's portfolio of residential or small business 
loans, or concerns about the bank's overall credit risk management 
systems and controls. The bank must cease making new loans or 
extensions of credit in reliance on the special limits upon receipt of 
written notice from the OCC that its authority has been rescinded.
    (e) Duration of pilot program. The pilot program will terminate on 
June 11, 2004, unless it is terminated sooner by the OCC.
    (f) Existing loans. Any loans or extensions of credit made by a 
bank under the special lending limits in paragraphs (a)(1) and (2) of 
this section, that were in compliance with this section when made, will 
not be deemed a lending limit violation and will not be treated as 
nonconforming under Sec. 32.6.

    Dated: May 31, 2001.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 01-14529 Filed 6-8-01; 8:45 am]
BILLING CODE 4810-33-P