[Federal Register Volume 67, Number 239 (Thursday, December 12, 2002)]
[Proposed Rules]
[Pages 76618-76619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30635]



  Federal Register / Vol. 67, No. 239 / Thursday, December 12, 2002 / 
Proposed Rules  

[[Page 76618]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 223

[Regulation W; Docket No. R-1135]


Transactions Between Member Banks and Their Affiliates

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board of Governors of the Federal Reserve System proposes 
to amend an exemption in Regulation W that permits a member bank to 
exclude the purchase of an extension of credit from an affiliate from 
the quantitative limits imposed by section 23A of the Federal Reserve 
Act if certain criteria are met. The proposed amendment would limit a 
member bank's ability to buy an extension of credit from an affiliate 
under the exemption to 100 percent of the capital stock and surplus of 
the member bank.

DATES: Submit comments on or before January 13, 2003.

ADDRESSES: Comments should refer to docket number R-1135 and should be 
sent to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551 or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson 
also may be delivered between 8:45 a.m. and 5:15 p.m. to the Board's 
mail facility in the west courtyard of the Eccles Building, located on 
21st Street between Constitution Avenue and C Street, NW. Members of 
the public may inspect comments in accordance with the Board's Rules 
Regarding the Availability of Information (12 CFR part 261) in Room MP-
500 of the Martin Building on weekdays between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Pamela G. Nardolilli, Senior Counsel 
(202/452-3289), or Mark E. Van Der Weide, Counsel (202/452-2263), Legal 
Division; for users of Telecommunications Device for the Deaf (TDD) 
only, contact 202/263-4869.

SUPPLEMENTARY INFORMATION: 

Background

    Section 23A is designed to protect banks from misuse in financial 
transactions with their affiliates. Section 23A attempts to accomplish 
this goal by imposing safeguards on all ``covered transactions'' 
between a bank and its affiliates; this includes limiting all covered 
transactions by a bank with any single affiliate to no more than 10 
percent of the bank's capital stock and surplus, and limiting a bank's 
covered transactions with all affiliates to 20 percent of the bank's 
capital stock and surplus.
    In 1974, the Board issued a formal interpretation that exempted 
from section 23A a bank's purchase, on a nonrecourse basis, of a 
mortgage note or participation therein from a mortgage banking 
affiliate, provided that the bank's commitment to purchase was (i) 
obtained by the affiliate within the context of each proposed loan, 
(ii) obtained prior to the affiliate's commitment to make each loan, 
and (iii) based upon the bank's independent evaluation of the 
creditworthiness of each mortgagor (the ``Purchase Exemption'').\1\ 
Although this interpretation did not impose a strict dollar limit on 
the amount of an affiliate's mortgage loans that a bank could purchase 
under the exemption, the interpretation cautioned that the purpose of 
the exemption was to allow a bank to take advantage of an investment 
opportunity and not to provide all the working capital needed by an 
affiliate.
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    \1\ This exemption was codified at 12 CFR 250.250 (2002).
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    By 1995, some bank holding companies were using the Purchase 
Exemption extensively to fund their nonbank lending affiliates. In 
those cases, banks were providing all or nearly all of such affiliates' 
funding. In response, staff indicated in an interpretive letter that 
the Purchase Exemption was not available if the dollar amount of the 
bank's loan purchases from the affiliate represented more than 50 
percent of the total dollar amount of loans originated by the 
affiliate. Staff reasoned that, in these circumstances, the asset 
purchases look less like the bank taking advantage of an investment 
opportunity brought to it by the affiliate and more like the bank 
providing an ongoing funding mechanism for the affiliate. Staff 
intended that this restriction would require the affiliate to have 
alternative funding sources and would reduce the pressure on the bank 
to purchase the affiliate's extensions of credit.
    In 2001, the Board reviewed a proposal where a leasing company 
proposed to charter a bank for the primary purpose of purchasing loans 
or leases from the leasing company.\2\ The Board was concerned that, 
under the proposal, the new bank's credit underwriting process could be 
compromised as result of the complete dependence of the bank on the 
affiliate for asset growth. The Board conditioned its approval of the 
proposal on the bank limiting its purchases of leases or loans from an 
affiliate to no more than 50 percent of the bank's credit portfolio.
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    \2\ Amplicon Inc., 87 Federal Reserve Bulletin 421 (2001).
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    Concurrently with the issuance of this proposed rule, the Board is 
adopting final Regulation W, which incorporates the Purchase Exemption 
at 12 CFR 223.42(k) and formally expands the exemption to cover the 
purchase of any of type of extension of credit from an affiliate.
    The Purchase Exemption in Regulation W also retains the limitation 
previously imposed by staff that prevents a bank from using the 
Purchase Exemption to purchase more than 50 percent of the loans 
originated by any affiliate. When the Board proposed Regulation W, the 
preamble of the regulation asked for comment on whether the rule should 
include a quantitative condition to the Purchase Exemption based on the 
size of the purchasing bank.\3\ The Board, however, did not propose a 
specific bank-based limit at that time. Eleven commenters objected to 
such a condition and argued that case-by-case review is a better 
approach to handling situations where loans purchased from an affiliate 
represent a large portion of a bank's assets. These commenters believed 
that the remaining conditions of the Purchase Exemption should suffice 
to prevent abuse of the bank. One commenter, on the other hand, 
recommended that the rule include a 50 percent limit based on the 
assets of the bank.
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    \3\ 66 FR 24186, 24199-00, May 11, 2001.
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    In light of the comments and the fact that the Board did not set 
forth a specific limit based on the bank's size in proposed Regulation 
W, the Board now proposes to amend Regulation W to impose a limitation 
on the Purchase Exemption based on the capital stock and surplus of the 
bank. Specifically, the Board is requesting comment on a condition that 
would limit the amount of extensions of credit that a bank could 
purchase from an affiliate under the Purchase Exemption to 100 percent 
of the bank's capital stock and surplus. All other restrictions imposed 
by the Purchase Exemption would still apply. Although those 
restrictions include a requirement that the bank conduct an independent 
credit review prior to purchasing assets under the Purchase Exemption, 
sections 23A and 23B were enacted in recognition that the bank might 
relax its independent judgment when making credit decisions involving 
an affiliate. The Board believes that the

[[Page 76619]]

100 percent limit will guard against a bank acquiring an excessive 
concentration of assets under the Purchase Exemption, but still will 
provide the bank with the flexibility to purchase assets from an 
affiliate, within prudential limitations, in an amount well in excess 
of the statute's 10 and 20 percent quantitative limits.

Regulatory Flexibility Act

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 603(a)) the Board must publish an initial regulatory 
flexibility analysis with this proposed regulation. As discussed above, 
the purpose of the rule is to limit the concentration of assets held by 
a bank that are originated by an affiliate and to reduce pressure on 
the bank to make inappropriate credit decisions. The Board does not 
collect data on the number of institutions that take advantage of the 
current exemption. There are approximately 3,300 banks below $100 
million in assets, but the Board does not believe that a significant 
number of these institutions engage in Purchase Exemption transactions 
because most banks of that size do not have affiliates engaged in 
credit-extending activities. The requirements of the proposed rule 
would be the same for all depository institutions regardless of their 
size. The Board knows of no other regulations that overlap, conflict 
with, or duplicate the proposed rule. The Board solicits comment on the 
likely impact the proposed rule would have on depository institutions, 
including small depository institutions. The proposed rule contains no 
reporting requirement.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 appendix A.1), the Board has reviewed the proposed 
rule under the authority delegated to the Board by the Office of 
Management and Budget. The proposed rule contains no new collections of 
information and proposes no substantive changes to existing collections 
of information pursuant to the Paperwork Reduction Act.

List of Subjects in 12 CFR Part 223

    Banks, Banking, Affiliates, Federal Reserve System.

    For the reasons stated in the preamble, the Board proposes to amend 
12 CFR part 223 as set forth below:

PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES 
(REGULATION W)

    1. The authority citation for part 223 continues to read as 
follows:

    Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-
1(e), 1828(j), and 1468(a).

    2. Section 223.42 would be amended by adding a new paragraph (k)(6) 
to read as follows:


Sec.  223.42  What covered transactions are exempt from the 
quantitative limits, collateral requirements, and low-quality asset 
prohibition?

* * * * *
    (k) Purchasing an extension of credit from an affiliate. * * *
    (6) The dollar amount of the extension of credit, when aggregated 
with the dollar amount of all other extensions of credit purchased by 
the member bank from affiliates under this exemption and currently 
owned by the member bank, does not represent more than 100 percent (or 
such lower percent as is imposed by the member bank's appropriate 
Federal banking agency) of the capital stock and surplus of the member 
bank.

    By order of the Board of Governors of the Federal Reserve 
System, November 27, 2002.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-30635 Filed 12-11-02; 8:45 am]
BILLING CODE 6210-01-P