[Federal Register Volume 67, Number 245 (Friday, December 20, 2002)]
[Rules and Regulations]
[Pages 77909-77918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31782]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 506, 559, 562, and 563

[No. 2002-64]
RIN 1550-AB55


Savings Associations--Transactions with Affiliates

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Interim final rule with request for comment.

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SUMMARY: The Office of Thrift Supervision (OTS) is revising its 
regulations on transactions with affiliates. This interim final rule 
conforms OTS regulations to the Board of Governors of the Federal 
Reserve System (FRB) final rule implementing sections 23A and 23B of 
the Federal Reserve Act (FRA). The FRB rule (Regulation W) combines 
statutory restrictions on transactions with affiliates with new and 
existing interpretations and exemptions.

DATES: This interim final rule is effective April 1, 2003. Comments 
must be received on or before February 18, 2003.

ADDRESSES: Mail: Send comments to Regulation Comments, Chief Counsel's 
Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, 
DC 20552, Attention: No. 2002-64. Commenters should be aware that there 
have been unpredictable and lengthy delays in postal deliveries to the 
Washington, DC area in recent weeks and may prefer to make their 
comments via facsimile, e-mail, or hand delivery.
    Delivery: Hand deliver comments to the Guard's Desk, East Lobby 
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, 
Attention: Regulation Comments, Chief Counsel's Office, No. 2002-64.
    Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
6518, Attention: No. 2002-64.
    E-Mail: Send e-mails to [email protected], Attention: No. 
2002-64, and include your name and telephone number.
    Availability of comments: OTS will post comments and the related 
index on the OTS Internet Site at www.ots.treas.gov. In addition, you 
may inspect comments at the Public Reading Room, 1700 G Street, NW., by 
appointment. To make an appointment for access, call (202) 906-5922, 
send an e-mail to public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile 
transmission to (202) 906-7755. (Please identify the materials you 
would like to inspect to assist us in serving you.) We schedule 
appointments on business days between 10 a.m. and 4 p.m. In most cases, 
appointments will be available the business day after the date we 
receive a request.

FOR FURTHER INFORMATION CONTACT: Karen A. Osterloh, Special Counsel, 
(202) 906-6639, Regulations and Legislation Division, Chief Counsel's 
Office, or Donna Deale, Manager, (202) 906-7488, Supervision Policy, 
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 11(a)(1) of the Home Owners' Loan Act (HOLA) (12 U.S.C. 
1468(a)(1)) applies sections 23A and 23B of the FRA (12 U.S.C. 371c and 
371c-1) to every savings association ``in the same manner and to the 
same extent'' as if the savings association were a member bank of the 
Federal Reserve System.
    Section 23A of the FRA imposes three major limitations on a member 
bank's (and its subsidiaries') transactions with affiliates. First, 
section 23A limits the amount of ``covered transactions'' with any 
single affiliate to no more than 10 percent of the member bank's 
capital stock and surplus. Covered transactions with all affiliates are 
limited to no more than 20 percent of the member bank's capital stock 
and surplus. A covered transaction includes a loan or extension of 
credit to an affiliate, a purchase of or investment in securities 
issued by an affiliate, a purchase of assets from an affiliate, the 
acceptance of securities issued by an affiliate as collateral security 
for a loan or extension of credit to any person or company, and the 
issuance of a guarantee, acceptance, or letter of credit on behalf of 
an affiliate.
    Second, section 23A requires that all covered transactions between 
a member bank and its affiliates be on terms and conditions that are 
consistent with safe and sound banking practices and prohibits a member 
bank from purchasing low-quality assets from an affiliate. Finally, 
section 23A requires that a member bank's extensions of credit to 
affiliates and guarantees on behalf of affiliates be appropriately 
secured by a statutorily defined amount of collateral.
    Section 23B of the FRA protects member banks by requiring that 
transactions between the bank and its affiliates occur on market 
terms--on terms and under circumstances that are substantially the 
same, or at least as favorable to the bank, as those prevailing at the 
time for comparable transactions with unaffiliated companies. Section 
23B applies to covered transactions under section 23A, as well as other 
transactions, such as the sale of securities or other assets to an 
affiliate and the payment of money or the furnishing of services to an 
affiliate. Section 23B also prohibits certain purchases and 
acquisitions of securities by a member bank or its subsidiary subject 
to certain conditions, and prohibits certain advertisements or 
agreements that state or suggest that the member bank is responsible 
for the obligations of its affiliates.
    In addition to the section 23A and 23B restrictions, section 
11(a)(1) of the HOLA imposes two prohibitions on savings associations. 
First, a savings association may not make a loan or other extension of 
credit to any affiliate unless that affiliate is engaged only in 
activities that a bank holding company may conduct. In addition, no 
savings association may purchase or invest in securities issued by an 
affiliate, other than with respect to shares of a subsidiary. Section 
11(a)(4) of the HOLA authorizes OTS to impose such additional 
restrictions on any transaction between a savings association and any 
affiliate as it

[[Page 77910]]

determines to be necessary to protect the safety and soundness of the 
association.
    In 1991, OTS issued comprehensive rules implementing section 11(a) 
of the HOLA.\1\ These rules, which are currently codified at 12 CFR 
563.41 and 563.42 (2002), define and clarify the application of 
sections 23A and 23B to savings associations and their subsidiaries, 
implement the two prohibitions imposed under section 11(a) of the HOLA, 
and impose additional restrictions and safeguards, as authorized by 
section 11(a)(4) of the HOLA. OTS has made only minor amendments to 
these rules since 1991.
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    \1\ 56 FR 34005 (July 25, 1991).
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    The FRB has statutory authority to issue regulations to administer 
and carry out the purposes of sections 23A and 23B of the FRA.\2\ Until 
recently, the FRB had promulgated no comprehensive regulations on this 
subject. Instead, the FRB relied on a series of regulatory 
interpretations and informal staff guidance.\3\ The FRB recently issued 
Regulation W, a comprehensive final rule implementing sections 23A and 
23B of the FRA.\4\ Regulation W incorporates many existing FRB 
interpretations, supersedes certain outdated interpretations, exempts 
specific types of transactions, and implements revisions to sections 
23A and 23B contained in the Gramm-Leach-Bliley Act (GLBA).\5\
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    \2\ 12 U.S.C. 371c(f), 371c-1(e).
    \3\ The FRB codified some of these interpretations at 12 CFR 
250.240 through 250.250 (2002).
    \4\ 67 FR 76560 (Dec. 12, 2002), to be codified as 12 CFR part 
223. In this rule, OTS cites to 12 CFR part 223 as it will be 
codified in the 2003 Code of Federal Regulations, rather than by 
citation to publication of the final rule in the Federal Register
    \5\ Pub. L. No. 106-102, 113 Stat. 1338 (1999).
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    The FRB's final rule does not by its terms apply to savings 
associations. However, because sections 23A and 23B apply to every 
savings association in the same manner and to the same extent as if the 
savings association were a member bank, OTS is revising its regulations 
on transactions with affiliates to reflect Regulation W. Today's 
interim final rule has three goals:
    [sbull] To incorporate all applicable provisions and exceptions 
prescribed by the FRB in Regulation W;
    [sbull] To provide guidance concerning the relationship between the 
additional prohibitions under section 11(a)(1) of the HOLA and 
Regulation W; and
    [sbull] To set out the additional restrictions OTS imposes under 
section 11(a)(4) of the HOLA.

II. General Approach

    OTS is replacing its existing rules on transactions with affiliates 
at 12 CFR 563.41 and 563.42 (2002) with a new interim final rule, which 
will be codified at 12 CFR 563.41. The interim final rule cross 
references the substantive provisions contained in Regulation W; 
interprets Regulation W to the extent necessary to apply these 
restrictions to savings associations; incorporates the prohibitions in 
section 11(a)(1) of the HOLA; and imposes various additional 
restrictions on savings associations under section 11(a)(4) of the 
HOLA.
    OTS considered, but is not adopting, an alternative presentation. 
Specifically, OTS reviewed whether its rule should restate, with 
appropriate revisions, all of Regulation W. While this alternative 
presentation would consolidate in one place all regulations under 
section 11(a) of the HOLA, OTS believes that this approach would be 
duplicative. Moreover, this approach would require OTS to revise its 
regulations every time that the FRB amends Regulation W. The approach 
in this interim final rule, on the other hand, will ensure that most 
amendments to Regulation W are automatically incorporated in OTS rules 
without further notice and comment rulemaking. OTS specifically seeks 
public comment on which approach is more suitable.

III. Interim Final Rule--12 CFR 563.41

A. Scope

    The interim final rule at Sec.  563.41(a) sets out the scope of the 
new rule. Specifically, it states that Sec.  563.41 implements section 
11(a) of the HOLA, which applies sections 23A and 23B of the FRA to 
every savings association in the same manner and to the same extent as 
if the association were a member bank; prohibits certain types of 
transactions with affiliates; and authorizes OTS to impose additional 
restrictions on savings association transactions with affiliates.
    The interim final rule implements only section 11(a) of the HOLA. 
It does not contain every statutory or regulatory restriction on 
transactions between savings associations and their affiliates. For 
example, the rule does not address additional restrictions on 
transactions with affiliates that OTS may require as prompt corrective 
action under section 38(f)(2)(B) of the Federal Deposit Insurance Act 
(FDIA). 12 U.S.C. 1831o(f)(2)(B).

B. Sections 23A and 23B of the FRA/Regulation W

    The interim final rule at Sec.  563.41(b) states that a savings 
association must comply with sections 23A and 23B of the FRA and 
Regulation W. To clarify Regulation W for savings associations, OTS has 
prepared a chart briefly explaining how specific sections of Regulation 
W apply and explaining why other sections do not apply to savings 
associations. These provisions are described below.
1. Applying Regulation W to Savings Associations
    Regulation W by its terms applies only to member banks and defines 
this term as ``any national bank, State bank, banking association, or 
trust company that is a member of the Federal Reserve System. For 
purposes of this definition, an operating subsidiary of a member bank 
is treated as part of the member bank.'' 12 CFR 223.3(w). To ensure 
that Regulation W applies to savings associations and their 
subsidiaries in the same manner and to the same extent as member banks, 
the interim final rule at Sec.  563.41(b)(11) states that the term 
``member bank'' as used in Regulation W includes a savings association.
    Like the existing rule, the interim final rule defines ``savings 
association'' to include federal and state-chartered savings 
associations and most thrift subsidiaries.\6\ Savings association also 
includes any savings bank or cooperative bank that is a savings 
association under section 10(l) of the HOLA.\7\ This provision reflects 
the agency's long-standing interpretation that a savings bank or 
cooperative bank that elects to be treated as a savings association for 
the purposes of section 10(l) of the HOLA has also made an election to 
be treated as a savings association for the purposes of section 11 of 
the HOLA.\8\ Accordingly, the interim final rule continues to include 
within the definition of savings association those state banks and 
cooperative banks that are subsidiaries of section 10(l) holding 
companies.
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    \6\ See 12 CFR 563,41(b)(5)(2002), which incorporates the 
definition of savings association at 12 CFR 583.21(2002). Thrift 
subsidiaries are discussed below.
    \7\ Section 10(l) of the HOLA states: ``Notwithstanding any 
other provision of law, a savings bank (as defined in [12 U.S.C. 
1813(g)]) and a cooperative bank that is an insured bank (as defined 
in [12 U.S.C. 1813(H)]) upon application shall be deemed to be a 
savings association for the purposes of [section 10 of the HOLA], if 
the Director [of OTS] determines that such bank is a qualified 
thrift lender * * *.'' 12 U.S.C. 1467A(l).
    \8\ See section 10(d) of the HOLA. 12 U.S.C. 1467a(d).

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[[Page 77911]]

    OTS has also revised the reference to ``operating subsidiaries.'' 
Under Regulation W, the definition of affiliate generally excludes any 
company that is a subsidiary of the member bank unless the subsidiary 
is: (1) A depository institution; (2) a financial subsidiary;\9\ (3) a 
company that is directly controlled by one or more affiliates (other 
than depository institution affiliates) or by a shareholder that 
controls the member bank or a group of shareholders that together 
control the member bank; (4) an employee stock option plan, trust, or 
other similar organization that exists for the benefit of the 
shareholders, partners, members, or employees of the member bank; or 
(5) any other company that the FRB or appropriate banking agency 
determines to be an affiliate. 12 CFR 223.2(b)(1)(i)-(v). The FRB 
refers to all non-affiliate subsidiaries as ``operating subsidiaries.'' 
12 CFR 223.3(aa). OTS believes that this term is unnecessary and 
confusing given the use of the term ``operating subsidiary'' in other 
OTS regulations. See 12 CFR part 559. Accordingly, the chart at Sec.  
563.41(b) of the interim final rule does not use the term ``operating 
subsidiary.'' Instead, where it is appropriate to refer to a subsidiary 
that is not an affiliate, the chart uses the phrase ``non-affiliate 
subsidiary.''
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    \9\ Financial subsidiaries are discussed in this preamble at 
section III.B.2.b.
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2. Affiliates
    Under Regulation W, the term ``affiliate'' is defined to include 
parent companies (any company that controls the member bank); companies 
under common control with the member bank; companies under other types 
of common control; companies with interlocking directors or trustees; 
companies that are sponsored and advised on a contractual basis by the 
member bank, its subsidiary, or an affiliate; investment companies for 
which a member bank or any affiliate is an investment advisor; 
depository institution subsidiaries of a member bank; financial 
subsidiaries; companies held under merchant banking or insurance 
company investment authority; partnerships for which the member bank or 
an affiliate serves as general partner; subsidiaries of affiliates; and 
other companies that the FRB deems to be an affiliate of the member 
bank. 12 CFR 223.2(a). This definition specifically excludes certain 
companies, including most subsidiaries of member banks. 12 CFR 
223.2(b). The interim final rule adopts the FRB definition of affiliate 
except as described below.
a. Control
    One of the fundamental concepts underlying the definition of 
affiliate is the concept of control. Regulation W states that control 
by a company or shareholder over another company means that:
    [sbull] The company or shareholder, directly or indirectly, or 
acting through one or more other persons, owns, controls, or has the 
power to vote 25 percent or more of any class of voting securities or 
other similar voting interest of the other company.
    [sbull] The company or shareholder controls in any manner the 
election of a majority of the directors, trustees, or general partners 
(or individuals exercising similar functions) of the other company.
    [sbull] The Board determines, after notice and opportunity for 
hearing, that the company or shareholder, directly or indirectly, 
exercises a controlling influence over the management or policies of 
the other company. 12 CFR 223.3(g)(1).
    Regulation W also includes specific provisions addressing ownership 
or control of shares as a fiduciary, shares by a subsidiary, 
convertible securities, and nonvoting equity securities. See 12 CFR 
223.3(g)(2)-(5).
    When OTS promulgated its transactions with affiliates regulation in 
1991, it exercised its authority under section 11(a)(4) of the HOLA to 
expand the definition of control. Specifically, existing Sec.  
563.41(b)(3) states that a company or shareholder has control over 
another company if the company or shareholder, directly or indirectly, 
or acting through one or more other persons owns, controls, or has the 
power to vote 25 percent or more of any class of voting securities of 
the other company or if the company or shareholder would be deemed to 
control another company under 12 CFR 574.4(a) or presumed to control 
the company under 12 CFR 574.4(b). As a related matter, OTS also 
applied its own concept of control to define a subsidiary of a savings 
association. Specifically, existing Sec.  563.41(b)(4) defines 
subsidiary of a savings association as a company that is controlled by 
a savings association within the meaning of part 574.
    This interim final rule at Sec.  563.41(b)(6) continues to use the 
existing OTS definition of control.\10\ OTS-regulated savings 
associations are accustomed to applying part 574 control concepts to 
transactions with affiliates and in numerous other contexts. See 
definitions of control used in 12 CFR part 559 (subordinate 
organizations) and 12 CFR part 563b (the mutual-to-stock conversions 
rule). While this definition is more expansive than the FRB's 
definition of control, its use is consistent with section 11(a)(4) of 
the HOLA, which permits OTS to impose additional restrictions on 
savings associations' transactions with affiliates. OTS specifically 
requests comment on whether these control rules continue to be 
appropriate or whether it should conform these rules more closely to 
Regulation W.
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    \10\ OTS made one minor revision to its existing definition of 
control. Under OTS's current transactions with affiliates rules, no 
company is deemed to own or control a company by virtue of its 
ownership or control of shares in a fiduciary capacity, except under 
certain circumstances. OTS has updated this provision to more 
closely reflect the related FRB provision at 12 CFR 223.3(g)(2).
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b. Financial Subsidiaries
    Regulation W defines affiliate to include a financial subsidiary of 
a member bank. 12 CFR 223.2(a)(8). A financial subsidiary is defined as 
any subsidiary of a member bank that ``engages, directly or indirectly, 
in any activity that national banks are not permitted to engage in 
directly or that is conducted on terms and conditions that differ from 
those that govern the conduct of such activity by national banks.'' The 
definition excludes a subsidiary that ``a national bank is specifically 
authorized to own or control by the express terms of a Federal statute 
* * *.'' \11\
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    \11\ 12 CFR 223.3(p).
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    Approximately 100 thrifts have investments in subsidiaries called 
service corporations that engage in activities in which a national bank 
may not engage directly. Regulation W did not address whether these 
thrift subsidiaries would be considered to be financial subsidiaries. 
For the reasons stated below, OTS concludes that savings association 
subsidiaries are not financial subsidiaries under the definition in 
Regulation W.
    OTS believes that service corporations would fall within the 
exception to the definition of financial subsidiary. As noted above, 
Regulation W states that a financial subsidiary does not include a 
subsidiary that a national bank is specifically authorized by the 
express terms of a Federal statute to own or control. This exception is 
based on the definition of a financial subsidiary of a national bank at 
12 U.S.C. 24a, which also expressly provides that bank service 
companies are not financial

[[Page 77912]]

subsidiaries under the exception.\12\ To apply this exception to 
savings associations ``in the same manner and to the same extent'' as 
member banks, OTS believes that it is appropriate to exclude any 
subsidiary that a savings association is specifically authorized by 
Federal statute to own or control. Since federal savings associations 
are specifically authorized to invest in and control service 
corporations under section 5(c)(4)(B) of the HOLA, service corporations 
would be excluded.
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    \12\ U.S.C. 24a(g)(3)(B) states that subsidiaries that a 
national bank may control under the Bank Service Company Act are 
excluded as finance subsidiaries.
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    OTS also believes that the statutory scheme underlying GLBA 
strongly indicates that Congress did not contemplate that a savings 
association would own or control a financial subsidiary as that term is 
defined in section 23A of the FRA. Section 121 of GLBA added the new 
provisions addressing financial subsidiaries. In addition to the 
changes to section 23A(e) of the FRA, section 121 added extensive 
provisions governing financial subsidiaries of national banks \13\ and 
parallel provisions addressing financial subsidiaries of insured state 
banks.\14\ However, no GLBA provision explicitly referred to a 
financial subsidiary of a savings association and no legislative 
history hinted that the GLBA's new financial subsidiary provisions 
would have any impact on thrift subsidiaries. Moreover, while section 
121 included numerous statutory revisions reconciling the new financial 
subsidiary provisions with existing sections of the FDIA, the FRA, the 
Bank Holding Company Act, and the Revised Statutes, GLBA included no 
similar conforming revisions to the HOLA or the Savings and Loan 
Holding Company Act. GLBA's failure to reconcile conflicting provisions 
in these two acts strongly suggests that Congress did not intend to 
include thrift subsidiaries as financial subsidiaries.\15\
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    \13\ Section 121(a) of GLBA added 12 U.S.C. 24a, which 
specifically authorizes national banks to conduct activities through 
financial subsidiaries; regulates the activities that may be 
conducted by those financial subsidiaries; and imposes various 
restrictions on national banks that control financial subsidiaries.
    \14\ Section 121(d) of GLBA added section 46 to the FDIA to 
permit an insured state bank to control an interest in a subsidiary 
that engages in activities that would be permissible for a national 
bank to conduct through a financial subsidiary. Section 46 includes 
safety and soundness firewalls that generally require insured state 
banks to comply with the same conditions and restrictions that apply 
to a national bank under 12 U.S.C. 24a, including restrictions on 
transactions with financial subsidiaries.
    \15\ For example, GLBA made no conforming revisions to section 
11 (a)(l)(B) of the HOLA, which prohibits thrifts from purchasing or 
investing in securities issued by an affiliate, other than with 
respect to shares of a subsidiary. Section 23A(e)(2) of the FRA 
specifically states that a financial subsidiary ``shall be deemed to 
be an affiliate of the bank'' and ``shall not be deemed to be a 
subsidiary of the bank.'' If a service corporation were a financial 
subsidiary and, thus, an affiliate and not a subsidiary, section 11 
and section 23A(e)(2)--when read together--would prohibit a savings 
association from investing in the service corporation's securities. 
This would nullify a federal savings association's express authority 
to invest in service corporations under section 5(c)(4)(B) of the 
HOLA. Similar issues could be raised regarding section 11(a)(1)(A) 
of the HOLA, which prohibits thrifts from making any loan or 
extension of credit to an affiliate engaged in activities that are 
not permitted to bank holding companies.
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    The text of section 23A(e) of FRA provides further evidence that 
Congress did not intend to include thrift subsidiaries as financial 
subsidiaries. Section 23A(e)(1) defined financial subsidiary as any 
company that is ``a subsidiary of a bank that would be a financial 
subsidiary of a national bank under [12 U.S.C. 24a].'' Congress could 
have used the phrase ``a subsidiary of an insured depository 
institution that would be a financial subsidiary of a national 
bank.''\16\ The use of the phrase ``subsidiary of a bank that would be 
a financial subsidiary of a national bank,'' however, suggests that 
Congress intended a limited application of this definition only to 
subsidiaries of national and state banks.
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    \16\ Compare 12 U.S.C. 24a(g)93) (the term ``financial 
subsidiary means any company that is controlled by one or more 
insured depository institutions * * *'').
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    OTS notes that a contrary interpretation would also fail to 
recognize that Congress specifically and comprehensively addressed the 
regulation of savings associations and their subsidiaries in the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA).\17\ In FIRREA, Congress was aware that certain subsidiaries 
could engage in activities that were impermissible for a parent savings 
association under section 5(c)(4)(B) of HOLA, and that these activities 
were broader than the activities allowed for national banks and their 
subsidiaries. As a part of that legislation, Congress enacted various 
provisions specifically designed to address transactions by savings 
associations with their subsidiaries. Many of these restrictions serve 
similar purposes as the restrictions on transactions with financial 
subsidiaries addressed by section 23A(e) of the FRA.\18\
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    \17\ Pub. L. No. 101-73, 103 Stat. 183 (1989).
    \18\ For example, section 23A of the FRA restricts covered 
transactions with financial subsidiaries, including limits on loans, 
extensions of credit, and purchases of, or investments in, 
securities issued by affiliates. See 12 U.S.C. 371c(b)(7)(A) and 
(B), FIRREA also established prudential limits on these 
transactions. Section 5(t)(5) of the HOLA requires Federal and state 
chartered savings associations to deduct from capital all 
investments and extensions of credit to any subsidiary engaged in 
activities taht are not permissible for national banks. Other 
depository institutions are not subject to as extensive restrictions 
on their investments in subsidiaries that engage in activities that 
re impermissible to a national bank. By contrast, national banks 
must deduct equity and retained earnings in financial subsidiaries, 
but not debt investments. 12 U.S.C. 24a(c).
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    Finally, OTS believes that its interpretation is consistent with 
the purposes of sections 23A and 23B of the FRA. These two provisions 
were designed to limit the risks to an institution (and the Federal 
deposit insurance funds) from transactions between the institution and 
its affiliates, and to limit the ability of an institution to transfer 
to its affiliates the subsidy arising from the institution's access to 
the Federal safety net.\19\ OTS has addressed these risks through its 
comprehensive regulation of the relationship between savings 
associations and their subsidiaries. Under this regulatory scheme, OTS 
has not experienced significant problems that would warrant the 
application of sections 23A and 23B to these subordinate organizations. 
In light of this successful record, there is no demonstrable need to 
apply affiliate restrictions to thrift subsidiaries by classifying them 
as financial subsidiaries.
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    \19\ 66 FR 24186 (May 11, 2000).
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    Accordingly, the interim final rule at Sec.  563.41(b) states that 
the Regulation W references to financial subsidiaries do not apply to 
savings associations and their subsidiaries. These references include 
12 CFR 223.2(a)(8) and (b)(1)(ii) (affiliate includes a financial 
subsidiary); 12 CFR 223.3(p) (definition of financial subsidiary); and 
12 CFR 223.32 (rules that apply to a financial subsidiary of a member 
bank).
c. Companies That Are Both Subsidiaries and Affiliates
    Under Regulation W, subsidiaries of a member bank are generally not 
affiliates unless the subsidiary is: (1) A depository institution; (2) 
a financial subsidiary; (3) directly controlled by one or more 
affiliates (other than depository institution affiliates) of the member 
bank, by a shareholder that controls the member bank, or by a group of 
shareholders that together control the member bank; (4) an employee 
stock option plan (ESOP), trust, or similar organization that exists 
for the benefit of shareholders, partners, members, or employees of the 
member bank or its affiliates, or (5) determined by the FRB

[[Page 77913]]

or appropriate federal banking agency to be an affiliate.\20\
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    \20\ 12 CFR 223.2(b)(1)-(v).
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    Except for references to financial subsidiaries, the OTS interim 
final rule follows Regulation W. This will modify OTS's current 
treatment of thrift subsidiaries. In one respect, the interim final 
rule will add to the definition of affiliate a subsidiary that is an 
ESOP, trust, or similar organization that exists for the benefit of 
shareholders, partners, members, or employees of the member bank or its 
affiliates.
    In another respect, the interim rule will delete from the OTS 
definition of affiliate ``any company that would be an affiliate under 
[12 CFR 563.41(b)(1) (2002)] but for the fact that it is a subsidiary 
of a savings association.''\21\ By contrast, the corollary provision of 
Regulation W only includes as affiliates those companies that are 
directly controlled by one or more affiliates or by shareholders that 
control the institutions. The application of these two provisions leads 
to slightly different results. For example, a subsidiary that is 
sponsored and advised on a contractual basis by an affiliate of the 
savings association is both a subsidiary and an affiliate. Under the 
current OTS rule, the entity would appear to be an affiliate. Under 
Regulation W, the entity would be a subsidiary, but not an affiliate. 
While OTS may impose greater restrictions on transactions by savings 
associations, OTS believes that its current rule is overly broad, 
particularly in light of the authority discussed below which permits 
OTS (or the FRB) to deem any company (including a subsidiary) to be an 
affiliate on a case-by-case basis.
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    \21\ See 12 CFR 563.41(b)(2)(i)(2002).
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d. Companies Deemed To Be Affiliates
    Section 223.2(a)(12) states that ``affiliate'' includes any company 
that the FRB or the appropriate federal banking agency determines by 
regulation or order to have a relationship with the member bank or any 
subsidiary or affiliate of the bank such that covered transactions by 
the bank with that company may be affected by the relationship to the 
detriment of the bank or its subsidiary.\22\ OTS's existing rule at 
Sec.  563.41(b)(1)(v)(A) is nearly identical to Regulation W. However, 
existing Sec.  563.41(b)(1)(v)(B) adds that OTS may also deem a company 
to be an affiliate if it determines that the company presents a risk to 
the safety or soundness of the savings association. The OTS rule lists 
a number of factors for OTS consideration including the nature of the 
activities conducted by the company, the amount of transactions with 
the savings association or its subsidiaries, the financial condition of 
the company or its parent savings association, and other supervisory 
factors.
---------------------------------------------------------------------------

    \22\ The FRB may make other determinations under Regulation W 
that may affect institutions regulated by OTS. For example, a 
savings association may request the FRB to grant an exemption from 
the requirements of section 23A or 23B of the FRA (12 CFR 223.43 and 
223.55). The FRB generally seeks OTS concurrence before it takes an 
action that impacts an OTS-regulated institution. Thus, the interim 
final rule does not require an institution to notify OTS before it 
makes a request for exemption. To expedite these requests, however, 
OTS-regulated institutions should contact OTS when they file an 
exemption request.
---------------------------------------------------------------------------

    The interim final rule addresses OTS authority to make case-by-case 
determinations at Sec.  563.41(b)(3). OTS has reworded the safety and 
soundness standard to more accurately reflect section 11(a)(4) of the 
HOLA and has deleted the list of supervisory factors as unnecessary. 
OTS, however, will continue to consider these and other factors when it 
makes its determination under the safety and soundness standard.\23\
---------------------------------------------------------------------------

    \23\ Currently, OTS may also, on a case-by-case basis, elect to 
treat a company that is both an affiliate and a subsidiary as a 
subsidiary. See 12 CFR 563.41(b)(2)(ii)(2002) (last phrase). OTS has 
never exercised this authority and not included this provision in 
the interim final rule.
---------------------------------------------------------------------------

3. Other Provisions of Regulation W
a. Capital Stock and Surplus
    Regulation W's definition of the phrase ``capital stock and 
surplus'' uses capital terms such as Tier 1 and Tier 2 capital. By 
contrast, the existing OTS definition of the phrase ``capital stock and 
surplus'' cross-references the definition of unimpaired capital and 
unimpaired surplus under OTS's loans-to-one-borrower rule, which uses 
thrift-specific capital terms such as core and supplementary capital. 
To ensure that thrifts will be able to apply this definition, the 
interim rule continues to use the current OTS definition. For similar 
reasons, all citations to the Call Report will refer to the Thrift 
Financial Report.
b. U.S. Branches or Agencies of Foreign Banks
    OTS does not regulate U.S. branches or agencies of foreign banks. 
Accordingly, Sec.  563.41(b) of the interim final rule states that 12 
CFR 223.61, which addresses these entities, does not apply.\24\
---------------------------------------------------------------------------

    \24\ OTS has made one additional revision that affects the 
application of its current rule. Under section23A(c) of the FRA, 
each loan, extension of credit to, or guarantee, acceptance, or 
letter of credit issued on behalf of, an affiliate must be secured 
by collateral having a market value equal to a set percentage of the 
transaction. A transaction that is secured by notes, drafts, bills 
of exchange, or bankers' acceptances that are eligible for 
rediscount or purchase by a Federal Reserve Bank must be 
collateralized at 100 percent. 12 U.S.C. 371c(c)(10)(A)(iii). This 
provision requires only that the cited instruments must be eligible 
for purchase or reinvestment and imposes no requirement that the 
institution must be a member bank. The current OTS rule adds to the 
statutory provision by stating that collateral that is eligible for 
rediscount or purchase by a Federal Home Loan Bank may also be 
collateralized at 100 percent. 12 CFR 563.41(c)(1)(i)(C). The 
additional language in the current OTS rule is not necessary to 
ensure that savings associations have parity with member banks. 
Accordingly, the interim rule does not include this current language 
provisions.
---------------------------------------------------------------------------

C. Additional Prohibitions and Restrictions under Section 11 of the 
HOLA

    Section 11(a) of the HOLA imposes two prohibitions on savings 
associations in addition to those found in sections 23A and 23B of the 
FRA, and authorizes OTS to impose additional restrictions on a savings 
association's transactions with affiliates. Paragraph (c) of the 
interim final rule addresses these additional provisions.
1. Regulation W Definitions
    The interim final rule applies Regulation W definitions to the 
additional section 11 prohibitions and restrictions, except as 
described in the chart at Sec.  563.41(b) of the interim rule.
2. Loans and Extensions of Credit
    Section 11(a)(1)(A) of the HOLA states that ``no loan or other 
extension of credit may be made to any affiliate unless that affiliate 
is engaged only in activities described at section 10(c)(2)(F)(i) of 
[the HOLA].'' Section 10(c)(2)(F)(i) of the HOLA refers to activities 
``which the [FRB], by regulation, has determined to be permissible for 
bank holding companies under [12 U.S.C. 1843(c)], unless the Director, 
by regulation, prohibits or limits any such activities for savings and 
loan holding companies.''\25\ Thus, under section 11(a)(1)(A), a 
savings association may not make a loan or other extension of credit to 
an affiliate engaged in non-bank holding company activities. OTS 
restates this restriction at Sec.  563.41(c)(1) of the interim final 
rule.\26\
---------------------------------------------------------------------------

    \25\ These activities include activities approved for bank 
holding companies by regulation at 12 CFR 225.28, or by case-by-case 
order of the FRB in accordance with 12 CFR 225.23 and 225.24.
    \26\ The chart in the interim rule at Sec.  563.41(b)(7) also 
refers to this prohibition.
---------------------------------------------------------------------------

    For the purposes of this prohibition, the current rule states that 
a loan or other extension of credit includes a purchase of assets from 
an affiliate that is subject to the affiliate's agreement to 
repurchase. As a result, the existing rule

[[Page 77914]]

generally prohibits these agreements with affiliates that are engaged 
in non-bank holding company activities. The current rule, however, 
exempts certain agreements that involve United States Treasury 
securities and that meet specified requirements.
    Section 11 of the HOLA does not define ``loan or other extension of 
credit,'' and does not compel a legal conclusion that purchases of 
assets that are subject to an affiliate's agreement to repurchase are, 
or are not, prohibited by statute. When it originally promulgated this 
provision, OTS noted that section 11(a)(1)(A) focused on prohibiting 
transactions with non-banking affiliates that transfer credit and other 
risks to the savings association. Because a purchase of assets that is 
subject to an agreement to repurchase generally bears many of the 
economic characteristics of a loan or extension of credit to such an 
affiliate,\27\ OTS concluded that it was appropriate to treat most of 
these transactions as loans or extensions of credit under section 
11(a)(1)(A). OTS requests comment on whether it should retain these 
provisions on purchases of assets that are subject to agreements to 
repurchase.
---------------------------------------------------------------------------

    \27\ The savings association transfers funds to the affiliate, 
expecting to be repaid when the company repurchases the assets. The 
purchased assets essentially amount to collateral, since the savings 
association is required to return the assets at the time of 
repurchase. The principal risk to the savings association, its 
depositors and the depot insurance fund is credit risk--the 
possibility that the affiliate will default on its obligation to 
make the repurchase. These types of agreements are generally 
considered the functional equivalent of a loan or extension of 
credit. See amendments to Federal Financial Institutions Examination 
Council Policy Statement on Repurchase Agreements of Depository 
Institutions with Securities Dealers and Others, 63 FR 6935 
(February 11, 1998).
---------------------------------------------------------------------------

    In addition to the rules on purchases of assets that are subject to 
an agreement to repurchase, OTS has issued a number of interpretations 
regarding the loan prohibition. These interpretations are contained in 
various documents including preambles to proposed and final rules, 
opinion letters, and other guidance. For example, OTS has considered 
whether a savings association is barred from extending credit to an 
affiliate that directly engages only in activities permissible for a 
bank holding company, but owns subsidiaries engaged in activities not 
permissible for bank holding companies, such as real estate 
development. OTS determined that, in the case of affiliates that are 
not savings associations, such activities are imputed to each parent 
affiliate in a vertical ownership chain up to, but not including, a 
controlling holding company in the corporate structure. Activities are 
not, however, attributed downward to subsidiaries of an affiliate.\28\ 
Where non-bank holding company activities are attributed to an 
affiliate from its subsidiary, a savings association is barred from 
extending credit to that affiliate. While this guidance reflects OTS's 
existing position, OTS has not incorporated its interpretations on the 
attribution of activities in the interim final rule. OTS specifically 
requests comment on whether it should include this guidance in the 
final rule.
---------------------------------------------------------------------------

    \28\ 56 FR 34405, at 34009.
---------------------------------------------------------------------------

    OTS has also considered whether a third party attribution rule 
applies to the loan prohibition. Sections 23A(a)(2) and 23B(a)(3) of 
the FRA require a member bank (and thus savings associations) to treat 
any transaction with any person as a transaction with an affiliate to 
the extent that the proceeds are used for the benefit of, or 
transferred to, an affiliate. Regulation W includes this third party 
attribution rule at 12 CFR 223.16 and 223.52(b). By contrast, section 
11(a)(1)(A) of the HOLA does not include a third party attribution 
rule, and OTS has declined to infer such a rule for the purposes of 
section 11. As a result, OTS's existing rules implementing section 
11(a)(1)(A) do not prohibit a loan or extension of credit to a non-
affiliate where the proceeds are used for the benefit of, or 
transferred to, an affiliate that engages in non-bank holding company 
activities.\29\ The interim final rule includes a similar provision. 
Several OTS legal opinions, however, indicate that the agency may, 
nonetheless, attribute such a loan to an affiliate if the loan is not 
bona fide or is not of independent substance, or there is evidence that 
the loan was a prearranged step in a series of transactions designed to 
channel funds to an affiliate to which the institution could not lend 
directly.\30\ OTS requests comment on whether it should include this 
additional guidance in the final rule.
---------------------------------------------------------------------------

    \29\ See 12 CFR 563.41(a)(2)(2002).
    \30\ Op. OTS Chief Counsel (Dec. 22, 1991) and Op. OTS Chief 
Counsel (March 13, 1992).
---------------------------------------------------------------------------

3. Purchases or Investments in Securities Issued by an Affiliate
    Section 11(a)(1)(B) provides that ``no savings association may 
enter into any transaction described in section 23A(b)(7)(B) of [the 
FRA] with any affiliate other than with respect to shares of a 
subsidiary.'' Section 23A(b)(7)(B) of the FRA describes ``a purchase of 
or investment in securities issued by [an] affiliate.''
    Section 563.41(c)(2) of the interim final rule restates this 
restriction.\31\ To ensure that a savings association may make 
investments in a bank or savings association that is a subordinate 
organization, the interim final rule also continues to state that the 
term subsidiary includes a bank and a savings association for the 
purposes of this provision. OTS has issued a number of legal opinions 
interpreting this prohibition and is considering including these 
interpretations in the rule. OTS specifically requests comment on 
whether it should include these or other interpretations of section 
11(a)(1)(B) of the HOLA in the final rule.\32\
---------------------------------------------------------------------------

    \31\ The chart in the interim rule at Sec.  563.41(b)(8) also 
refers to this prohibition.
    \32\ See Op. Acting Chief Counsel (Sept. 9, 1993) (Purchases of 
mortgage-backed securities that are guaranteed by Fannie Mae, 
Freddie Mac, or Ginnie Mae from an affiliate are not subject to the 
section 11(a)(1)(B) prohibition) and Op. Acting Chief Counsel (June 
30, 1993) (Purchases of securities, including mutual funds, issued 
by an affiliate, are not prohibited if the purchase is made on a 
riskless principal or agency basis).
---------------------------------------------------------------------------

4. Recordkeeping
    Currently Sec. Sec.  563.41(e) and 563.42(e) require a savings 
association to make and retain records that reflect in reasonable 
detail all transactions between a savings association (and its 
subsidiaries) and affiliates, and transactions with an unaffiliated 
party that are attributed to an affiliate under the third party 
attribution rule. The current rule also includes minimum recordkeeping 
requirements at Sec.  563.41(e)(1)(i) through (vii). OTS imposed these 
recordkeeping requirements under its authority at section 11(a)(4) of 
the HOLA, which permits OTS to impose additional restrictions to 
protect the safety and soundness of savings associations. The interim 
final rule retains these requirements at Sec.  563.41(c)(3).
5. Notice
    Under the existing rules, OTS may require certain savings 
associations to notify it at least 30 days before the savings 
association or its subsidiary conducts a transaction with an affiliate. 
These associations include a savings association that commenced de novo 
operations within the past two years, an association that was the 
subject (or whose holding company was the subject) of an approved 
application or notice under the control regulations at 12 CFR part 574 
within the past two years, an association with a composite CAMELS 
rating of ``4'' or ``5,'' an association that does not meet all 
regulatory capital requirements, an association that has entered into a

[[Page 77915]]

consent to merge or a supervisory agreement or has been the subject of 
a cease and desist order within the past two years, an association that 
is the subject of a formal enforcement proceeding, a problem 
association, and an association that is in a troubled condition.
    OTS restates these requirements with minor revisions at paragraph 
(c)(4) of the interim final rule. OTS has clarified that ``troubled 
condition'' is defined at 12 CFR 563.555. OTS has also deleted specific 
references to problem institutions, institutions that have a composite 
rating of 4 or 5 under CAMELS, and institutions that are subject to a 
cease and desist order. These institutions will either fall within the 
definition of troubled condition, or one of the other listed 
categories.

IV. Solicitation of Comments Regarding the Use of Plain Language

    Section 722 of the GLBA \33\ requires federal banking agencies to 
use ``plain language'' in all proposed and final rules published after 
January 1, 2000. OTS invites comments on how to make this rule easier 
to understand. For example:
---------------------------------------------------------------------------

    \33\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

    (1) Have we organized the material to suit your needs? If not, how 
could the material be better organized?
    (2) Do we clearly state the requirements in the rule? If not, how 
could the rule be more clearly stated?
    (3) Does the rule contain technical language or jargon that is not 
clear? If so, what language requires clarification?
    (4) Would a different format (grouping and order of sections, use 
of headings, paragraphing) make the rule easier to understand? If so, 
what changes to the format would make the rule easier to understand?

V. Issuance of an Interim final rule

    Section 553 of the Administrative Procedure Act (APA) permits an 
agency to issue a rule without prior notice and public comment if the 
agency, for good cause, finds that notice and comment is impractical, 
unnecessary, or contrary to the public interest, and explains its 
finding when it publishes the final rule. 5 U.S.C. 553(b)(B).
    Among the purposes of this interim final rule are updating existing 
OTS rules to reflect FRB's newly issued Regulation W, interpreting 
Regulation W to the extent necessary to apply it to savings 
associations, providing guidance concerning the relationship between 
the prohibitions imposed by section 11(a)(1) of the HOLA and Regulation 
W, and clearly setting out additional restrictions imposed by OTS under 
section 11(a)(4) of the HOLA. OTS's existing regulations at 12 CFR 
563.41 and 563.42 contain provisions that conflict with final 
Regulation W and do not reflect updated interpretations contained in 
Regulation W. As a result, the continued retention of these rules 
following the effective date of Regulation W is likely to cause undue 
confusion concerning applicable restrictions on transactions with 
affiliates. OTS has already received numerous inquiries on these 
matters. Having an interim final rule in place will help to minimize 
this confusion and ensure a smoother transition for savings 
associations as OTS implements Regulation W. OTS therefore believes 
that prior notice and public comment on this interim final rule is 
impractical, unnecessary, and contrary to the public interest.

VI. Effective Date and Transition Rule

    The FRB made Regulation W effective April 1, 2003. Accordingly, 
transactions entered into on or after April 1, 2003, will be 
immediately subject to Regulation W. Transactions entered into after 
the date of publication of Regulation W in the Federal Register, but 
before April 1, 2003, will become subject to Regulation W on April 1, 
2003.
    The FRB included a limited transition rule for transactions 
consummated on or before the publication date of Regulation W. Under 
this transition rule, if such a transaction would become subject to 
section 23A or 23B (or the treatment of the transaction would change) 
solely as a result of Regulation W, the transaction will not become 
subject to Regulation W until July 1, 2003. A transaction is subject to 
section 23A or 23B solely as a result of Regulation W, if the 
transaction is subject to section 23A or 23B under Regulation W, but 
was not subject to section 23A or 23B under the terms of the statute or 
any written interpretation of the statute by the FRB or its staff dated 
before publication of Regulation W. Similarly, a transaction's 
treatment under section 23A or section 23B changes solely as a result 
of Regulation W if the treatment of the transaction under Regulation W 
differs from the treatment of the transaction under the terms of 
sections 23A and 23B or any written interpretation of the statute by 
the FRB or its staff dated before publication of Regulation W.
    There are two exceptions to the FRB transition rule. First, a 
transaction that otherwise qualifies for the transition period will 
immediately become subject to Regulation W if it is renewed, extended, 
or materially altered on or after April 1, 2003. Second, a purchase of 
assets that was consummated on or before the publication of Regulation 
W and that qualifies for the transaction rule, is not subject to the 
new requirements in Regulation W.
    To relieve regulatory burden, the FRB also permits member banks to 
apply specified provisions before Regulation W's effective date. Member 
banks may apply the following rules beginning on the date of 
publication of Regulation W: (1) Section 223.16(c)(4) (general purpose 
credit card exemption); (2) Sec.  223.24(a), (b), and (c) (valuation 
principles applicable to extensions of credit secured by affiliate 
securities); (3) Sec.  223.31(d) (exemption for step transactions 
involving the acquisition of an affiliate that becomes a non-affiliate 
subsidiary after the acquisition); (4) Sec.  223.41(d) (exemption for 
internal corporate reorganization transactions); and (5) Sec.  
223.42(c), (f), (g), (i), (j), and (k) (exemptions for transactions 
secured by cash or U.S. government securities, purchases of certain 
marketable securities, purchases of municipal securities, asset 
purchases by a newly formed institution, transactions approved under 
the Bank Merger Act, and purchases of extensions of credit from an 
affiliate).
    In today's interim final rule, OTS has established the same 
effective date, will apply identical transition rules, and will permit 
savings associations to apply the specified sections of Regulation W 
before the effective date of the rule. OTS, however, requests comment 
on whether the appropriate dates for these periods should be based on 
the date of publication of this interim rule, rather than the date of 
publication of Regulation W.

VII. Executive Order 12866

    The Director of OTS has determined that this rule does not 
constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

VIII. Regulatory Flexibility Act Analysis

    An initial regulatory flexibility analysis under the Regulatory
    Flexibility Act (RFA) is required when an agency must publish a 
general notice of proposed rulemaking. 5 U.S.C. 603. As noted above, 
OTS has determined that it is not necessary to publish a notice of 
proposed rulemaking for this interim final rule. Accordingly, the RFA 
does not require an initial regulatory flexibility analysis.
    Nonetheless, OTS has considered the likely impacts of this rule on 
small businesses and believes that the rule

[[Page 77916]]

will not have a significant impact on a substantial number of small 
entities. OTS has had comprehensive regulations implementing section 11 
of the HOLA since 1991. Today's interim final rule updates these 
provisions to incorporate Regulation W, interprets Regulation W to the 
extent necessary to apply the FRB rule to savings associations, 
clarifies the relationship between section 11(a)(1) of the HOLA and 
Regulation W, and sets out the additional restrictions imposed under 
section 11(a)(4) of the HOLA. In light of existing Sec.  563.41, OTS 
does not believe that the interim final rule will significantly 
increase the applicable burdens for small or large savings 
associations. Accordingly, a regulatory flexibility analysis is not 
required.

IX. Unfunded Mandates Act of 1995

    The Unfunded Mandates Reform Act of 1995, Public Law 104-4 
(Unfunded Mandates Act) applies only when an agency is required to 
issue a general notice of proposed rulemaking or a final rule for which 
a general notice of proposed rulemaking was published. 2 U.S.C. 1532. 
As noted above, OTS has determined that a notice of proposed rulemaking 
is not required. Accordingly, OTS has concluded that the Unfunded 
Mandates Act does not require an analysis of this interim final rule.
    Moreover, OTS has determined that the interim final rule will not 
result in expenditures by state, local, or tribal governments or by the 
private sector of $100 million or more. OTS has had comprehensive 
regulations implementing section 11 of the HOLA since 1991. Today's 
interim final rule merely updates these provisions to incorporate 
Regulation W, interprets Regulation W to the extent necessary to apply 
the FRB rule to savings associations, interprets Regulation W to the 
extent necessary to apply the FRB rule to savings associations, 
clarifies the relationship between section 11(a)(1) of the HOLA and 
Regulation W, and sets out the additional restrictions imposed under 
section 11(a)(4) of the HOLA. In light of existing Sec.  Sec.  563.41, 
OTS does not believe that the interim final rule will significantly 
increase the applicable burdens for savings associations and will not 
result in increased expenditures by these institutions. Accordingly, 
OTS has not prepared a budgetary impact statement or specifically 
addressed the regulatory alternatives considered.

X. Paperwork Reduction Act of 1995

    The information collection requirements in the existing OTS rules 
at 12 CFR 563.41(e) and 563.42(e) were previously approved under OMB 
control number 1550-0078. The interim final rule incorporates these 
requirements at Sec.  563.41(c)(3) and (4), and does not make any 
substantive changes that affect the overall burden of compliance.

List of Subjects

12 CFR Part 506

    Reporting and recordkeeping requirements.

12 CFR Part 559

    Reporting and recordkeeping requirements, Savings associations, 
Subsidiaries.

12 CFR Part 562

    Accounting, Reporting and recordkeeping requirements, Savings 
associations.

12 CFR Part 563

    Accounting, Advertising, Crime, Currency, Investments, Reporting 
and recordkeeping requirements, Savings associations, Securities, 
Surety bonds.

    Accordingly, the Office of Thrift Supervision amends chapter V, 
title 12, Code of Federal Regulations to read as follows:

PART 506--INFORMATION COLLECTION REQUIREMENTS UNDER THE PAPERWORK 
REDUCTION ACT

    1. The authority citation for part 506 continues to read as 
follows:

    Authority: 44 U.S.C. 3501 et seq.

    2. Amend Sec.  506.1(b) by adding an entry for Sec.  563.41(c)(3) 
and(4), and by removing the entries for Sec.  563.41(e) and Sec.  
563.42(e) to read as follows:


Sec.  506.1  OMB control numbers assigned pursuant to the Paperwork 
Reduction Act.

* * * * *
    (b) Display.

------------------------------------------------------------------------
                                                           Current OMB
12 CFR part or section where identified and described.     control No.
------------------------------------------------------------------------
 
                                * * * * *
563.41(c)(3) and (4)..................................         1550-0078
 
                                * * * * *
------------------------------------------------------------------------

PART 559--SUBORDINATE ORGANIZATIONS

    3. The authority citation for part 559 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828.

    4. Amend Sec.  559.3 by revising paragraph (l) to read as follows:


Sec.  559.3  What are the characteristics of, and what requirements 
apply to, subordinate organizations of Federal savings associations?

* * * * *

----------------------------------------------------------------------------------------------------------------
                                                 Operating subsidiary                 Service corporation
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
(l) How do the transactions with         (1) Section (2) Section 563.41 of    (2) Section (2) Section 563.41 of
 affiliates (TWA) regulations (Sec.       this chapter explains how TWA        this chapter explains how TWA
 563.41 of this chapter apply?            applies. Generally, an operating     applies. Generally, a service
                                          subsidiary is not an affiliate,      corporation is not an affiliate,
                                          unless it is a depository            unless it is a depository
                                          institution; is directly             institution; is directly
                                          controlled by another affiliate of   controlled by another affiliate
                                          the savings association or by        of the savings association or by
                                          shareholders that control the        shareholders that control the
                                          savings association; or is an        savings association; or is an
                                          employee stock option plan, trust,   employee stock option plan,
                                          or similar organization that         trust, or similar organziaiton
                                          exists for the benefit of            that exists for the benefit of
                                          shareholders, partners, members,     shareholders, partners, members,
                                          or employees of the savings          or employees of the savings
                                          association or an affiliate. An      association or an affiliate. If a
                                          operating subsidiary's               savings association directly or
                                          transactions with affiliates are     indirectly controls a service
                                          aggregated with those of the         corporation, the service
                                          thrift                               corporation's transactions with
                                                                               affiliates are aggregated with
                                                                               those of the thrift.
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------


[[Page 77917]]

PART 562--REGULATORY REPORTING STANDARDS

    5. The authority citation for part 562 continues to read as 
follows:

    Authority: 12 U.S.C. 1463.


Sec.  562.4  [Amended]

    6. Amend Sec.  562.4(a) and (e) by removing ``12 CFR 563.41(b)(1)'' 
and adding in lieu thereof ``12 CFR 563.41.''

PART 563--SAVINGS ASSOCIATIONS--OPERATIONS

    7. The authority citation for part 563 continues to read as 
follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1820, 1828, 1831o, 3806; 42 U.S.C. 4106.

    8. Revise Sec.  563.41 to read as follows:


Sec.  563.41  Transactions with affiliates.

    (a) Scope. (1) This section implements section 11(a) of the Home 
Owners' Loan Act (12 U.S.C. 1468(a)). Section 11(a) applies sections 
23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) to 
every savings association in the same manner and to the same extent as 
if the association were a member bank; prohibits certain types of 
transactions with affiliates; and authorizes OTS to impose additional 
restrictions on a savings association's transactions with affiliates.
    (2) For the purposes of this section, ``savings association'' 
defined at section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813), and also includes any savings bank or any cooperative bank that 
is a savings association under 12 U.S.C. 1467a(l). A non-affiliate 
subsidiary of a savings association as described in paragraph (b)(12) 
of this section is treated as part of the savings association.
    (b) Sections 23A and 23B of the FRA/Regulation W. A savings 
association must comply with sections 23A and 23B of the Federal 
Reserve Act and the Federal Reserve Board (FRB) implementing regulation 
at 12 CFR part 223 (Regulation W), except as described in the following 
chart:

----------------------------------------------------------------------------------------------------------------
               Provision of Regulation W                                       Application
----------------------------------------------------------------------------------------------------------------
(1) 12 CFR 223.1--Authority, purpose, and scope........  Does not apply. Section 563.41(a) addresses these
                                                          matters.
(2) 12 CFR 223.2(a)(8)--``Affiliate'' includes a         Does not apply. Savings association subsidiaries do not
 financial subsidiary.                                    meet the statutory definition of financial subsidiary.
(3) 12 CFR 223.2(a)(12)--Board or appropriate Federal    Shall be read to include the following statement:
 banking agency determination that ``affiliate''          ``Affiliate also includes any company that OTS
 includes other types of companies.                       determines, by order or regulation, to present a risk
                                                          to the safety and soundness of the savings
                                                          association.''
(4) 12 CFR 223.2(b)(1)(ii)--``Affiliate'' includes a     Does not apply. Savings association subsidiaries do not
 subsidiary that is a financial subsidiary.               meet the statutory definition of financial subsidiary.
(5) 12 CFR 223.3(d)--Definition of ``capital stock and   Does not apply. Capital stock and surplus means
 surplus''.                                               ``unimpaired capital and unimpaired surplus,'' as
                                                          defined in 12 CFR 560.93(b)(11).
(6) 12 CFR 223.3(g)--Definition of ``control''.........  Does not apply. (i) ``Control'' by a company or
                                                          shareholder over another company means that the
                                                          company or shareholder:
                                                         (A) Directly or indirectly, or acting through one or
                                                          more other persons owns, controls or has the power to
                                                          vote 25 percent or more of any class of voting
                                                          securities of the other company;
                                                         (B) Is deemed to control the company under 12 CFR
                                                          574.4(a); or
                                                         (C) Is presumed to control the company under 12 CFR
                                                          574.4(b) and control has not been rebutted.
                                                         (ii) Notwithstanding any other provision of this rule,
                                                          no company owns or controls another company by virtue
                                                          of its ownership or control of shares in a fiduciary
                                                          capacity, except as provided in 12 CFR 223.2(a)(3) or
                                                          if the company owning or controlling the shares is a
                                                          business trust.
(7) 12 CFR 223.3(h)(1)--Section 23A covered              Shall be read to incorporate Sec.   563.41(c)(1), which
 transactions include an extension of credit to the       prohibits loans extensions of credit to an affiliate,
 affiliate.                                               unless the affiliate, is engaged in the activities
                                                          described at 12 U.S.C. 1467a(c)(2)(F)(i), as defined
                                                          in Sec.   584.2-2 of this chapter.
(8) 12 CFR 223.3(h)(2)--Section 23A covered              Shall be read to incorporate Sec.   563.41(c)(2), which
 transactions include a purchase of or investment in      prohibits purchases and investments in securities
 securities issued by an affiliate.                       issued by an affiliate, other than with respect to
                                                          shares of a subsidiary.
(9) 12 CFR 223.3(k)--Definition of ``depository          Shall be read to include the following statement: ``For
 institution''.                                           the purposes of this definition, a non-affiliate
                                                          subsidiary of a savings association is treated as part
                                                          of the depository institution.''
(10) 12 CFR 223.3(p)--Definition of ``financial          Does not apply. Savings association subsidiaries do not
 subsidiary''.                                            meet the statutory definition of financial subsidiary.
(11) 12 CFR 223.3(w)--Definition of ``member bank''....  Shall be read to include the following statement:
                                                          ``Member bank also includes a savings association. For
                                                          purposes of this definition, a non-affiliate
                                                          subsidiary of a savings association is treated as part
                                                          of the savings association.''
(12) 12 CFR 223.3(aa)--Definition of ``operating         Does not apply. Other OTS regulations include a
 subsidiary''.                                            conflicting definition of this same term. Instead, OTS
                                                          uses the phrase ``non-affiliate subsidiary.'' A non-
                                                          affiliate subsidiary is a subsidiary of a savings
                                                          association other than a subsidiary described at 12
                                                          CFR 223.2(b)(1) (i), (iii) through (v).
(13) 12 CFR 223.3(ii)--Definition of ``subsidiary''....  Shall be read to include the following statement:
                                                          ``However, a subsidiary of a savings association means
                                                          a company that is controlled by the savings
                                                          association within the meaning of part 574 of this
                                                          chapter.''
(14) 12 CFR 223.31--Application of section 23A to an     Shall be read to refer to ``operating subsidiary''
 acquisition of an affiliate that becomes an operating    instead of ``a non-affiliate subsidiary.''
 subsidiary.
(15) 12 CFR 223.32--Rules that apply to financial        Does not apply. Savings association subsidiaries do not
 subsidiaries of a bank.                                  meet the statutory definition of financial subsidiary.

[[Page 77918]]

 
(16) 12 CFR 223.42(f)(2)--Exemption for purchasing       Shall be read to refer to ``Thrift Financial Report''
 certain marketable securities.                           instead of ``Call Report.''
(17) 12 CFR 223.42(g)(2)--Exemption for purchasing       Shall be read to refer to ``Thrift Financial Report''
 municipal securities.                                    instead of ``Call Report.''
(18) 12 CFR 223.61--Application of sections 23A and 23B  Does not apply. OTS does not regulate U.S. branches and
 to U.S. branches and agencies of foreign banks.          agencies of foreign banks.
----------------------------------------------------------------------------------------------------------------

    (c) Additional prohibitions and restrictions. A savings association 
must comply with the additional prohibitions and restrictions in this 
paragraph. Except as described in paragraph (b) of this section, the 
definitions in 12 CFR part 223 apply to these additional prohibitions 
and restrictions.
    (1) Loans and extensions of credit. (i) A savings association may 
not make a loan or other extension of credit to an affiliate, unless 
the affiliate is solely engaged in the activities described at 12 
U.S.C. 1467a(c)(2)(F)(i), as defined in Sec.  584.2-2 of this chapter. 
This paragraph (c)(1) does not prohibit a loan or extension of credit 
to a non-affiliate, merely because proceeds of the transaction are used 
for the benefit of, or transferred to, an affiliate.
    (ii) For the purposes of this paragraph (c)(1), a loan or other 
extension of credit includes a purchase of assets from an affiliate 
that is subject to the affiliate's agreement to repurchase the assets. 
Such a purchase is not a loan or extension of credit, however, if the 
purchase is a transaction or series of transactions meeting all of the 
following requirements:
    (A) The savings association purchases United States Treasury 
securities from the affiliate, the affiliate agrees to repurchase the 
securities at the end of a stated term, the remaining term of the 
securities purchased by the savings association exceeds the term of the 
affiliate's repurchase agreement, and the savings association has 
possession or control of the securities and the right to dispose of the 
securities at any time during the term of the agreement and upon 
default.
    (B) The affiliate purchases United States Treasury securities from 
the savings association and the savings association agrees to 
repurchase the securities at the end of a stated term.
    (C) The aggregate amount of the affiliate's outstanding obligations 
to repurchase securities from the savings association under the 
repurchase obligation described at paragraph (c)(1)(ii)(A) of this 
section, at all times, is less than the aggregate amount of the savings 
association's outstanding obligations to repurchase securities from the 
affiliate under paragraph (c)(1)(ii)(B) of this section.
    (2) Purchases or investments in securities. A savings association 
may not purchase or invest in securities issued by any affiliate other 
than with respect to shares of a subsidiary. For the purposes of this 
paragraph (c)(2), subsidiary includes a bank and a savings association.
    (3) Recordkeeping. A savings association must make and retain 
records that reflect, in reasonable detail, all transactions between 
the savings association and its affiliates and any other person to the 
extent that the proceeds of a transaction are used for the benefit of, 
or transferred to, an affiliate. At a minimum, these records must:
    (i) Identify the affiliate;
    (ii) Specify the dollar amount of the transaction and demonstrate 
that this amount is within the quantitative limits in 12 CFR 223.11 and 
223.12, or that the transaction is not subject to those limits;
    (iii) Indicate whether the transaction involves a low-quality 
asset;
    (iv) Identify the type and amount of any collateral involved in the 
transaction and demonstrate that this collateral meets the requirements 
in 12 CFR 223.14 or that the transaction is not subject to those 
requirements;
    (v) Demonstrate that the transaction complies with 12 CFR part 223, 
subpart F or that the transaction is not subject to those requirements;
    (vi) Demonstrate that all loans and extensions of credit to 
affiliates comply with paragraph (c)(1) of this section; and
    (vii) Be readily accessible for examination and supervisory 
purposes.
    (4) Notice requirement. (i) OTS may require a savings association 
to notify the agency before the savings association may engage in a 
transaction with an affiliate or a subsidiary (other than exempt 
transactions under 12 CFR part 223). OTS may impose this requirement 
if:
    (A) The savings association is in troubled condition as defined at 
Sec.  563.555 of this part;
    (B) The savings association does not meet its regulatory capital 
requirements;
    (C) The savings association commenced de novo operations within the 
past two years;
    (D) OTS approved an application or notice under 12 CFR part 574 
involving the savings association or its holding company within the 
past two years;
    (E) The savings association entered into a consent to merge or a 
supervisory agreement within the past two years; or
    (F) OTS or another banking agency initiated a formal enforcement 
proceeding against the savings association and the proceeding is 
pending.
    (ii) OTS must notify the savings association in writing that it has 
imposed the notice requirement and must identify the circumstance 
listed in paragraph (c)(4)(i) of this section that supports the 
imposition of the notice requirement.
    (iii) If OTS has imposed the notice requirement under this 
paragraph, a savings association must provide a written notice to OTS 
at least 30 days before the savings association may enter into a 
transaction with an affiliate or a subsidiary. The written notice must 
include a full description of the transaction. If OTS does not object 
during the 30-day period, the savings association may proceed with the 
proposed transaction.


Sec.  563.42  [Removed]

    9. Remove Sec.  563.42.

    10. Amend Sec.  563.43 by revising paragraph (d) to read as 
follows:


Sec.  563.43  Loans by savings associations to their executive 
officers, directors, and principal shareholders.

* * * * *
    (d) The term subsidiary includes a savings association that is 
controlled within the meaning of Sec.  563.41(b)(6) of this part by a 
company (including for this purpose an insured depository institution) 
that is a savings and loan holding company. When used to refer to a 
subsidiary of a savings association, the term subsidiary means a 
``subsidiary'' as that term is defined at Sec.  563.41(b)(13) of this 
part.
* * * * *

    Dated: December 12, 2002.

    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 02-31782 Filed 12-19-02; 8:45 am]
BILLING CODE 6720-01-P