[Federal Register Volume 69, Number 160 (Thursday, August 19, 2004)]
[Rules and Regulations]
[Pages 51355-51358]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18888]



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  Federal Register / Vol. 69, No. 160 / Thursday, August 19, 2004 / 
Rules and Regulations  

[[Page 51355]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket No. 04-21]
RIN 1557-AC83


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 
extending for three years the lending limits pilot program (pilot 
program or program) that currently authorizes special lending limits 
for 1-4 family residential real estate loans and small business loans. 
Under the pilot program, which originated in 2001, eligible national 
banks with main offices located in states that prescribe a lending 
limit for residential real estate loans or small business loans that is 
higher than the current Federal limit may apply to take part in the 
program and use the higher limits. While the program has operated in a 
safe and sound manner thus far, we believe that additional experience 
with the program is needed before we can make a long-term determination 
whether to retain, modify, or rescind these special lending limits. 
Accordingly, the final rule extends the pilot program, as revised by 
this rule, for an additional three years, until June 11, 2007. The 
final rule also expands the program to include certain agricultural 
loans.

DATES: Effective Date: August 19, 2004.

FOR FURTHER INFORMATION CONTACT: Stuart Feldstein, Assistant Director, 
Legislative and Regulatory Activities Division, (202) 874-5090; 
Mitchell Plave, Counsel, Legislative and Regulatory Activities 
Division, (202) 874-5090; Jonathan Fink, Senior Attorney, Bank 
Activities and Structure, (202) 874-5300; or Thomas O'Dea, National 
Bank Examiner, Credit Risk, (202) 874-5170. Mailing address: Office of 
the Comptroller of the Currency, 250 E Street, SW., Washington, DC 
20219.

SUPPLEMENTARY INFORMATION:

I. Background

    Federal statutes and regulations provide that a national bank may 
make loans to a single borrower in an amount up to 15 percent of its 
unimpaired capital and surplus.\1\ A national bank also may extend 
credit 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.'' Twelve 
CFR part 32 refers to these lending limits as the ``combined general 
limit.'' The statute and regulation also provide exceptions to the 
combined general limit for various types of loans and extensions of 
credit.
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    \1\ 12 U.S.C. 84; 12 CFR part 32 (implementing section 84).
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    Twelve U.S.C. 84 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. In 2001, relying 
on this authority, the OCC published a final rule establishing a pilot 
program with special lending limits for residential real estate loans 
and small business loans. 66 FR 31114 (June 11, 2001) (2001 Final 
Rule). The purpose of the program is to enable community banks to 
remain competitive in states that provide their state-chartered 
institutions with a higher lending limit for these types of loans, 
while continuing to ensure that banks conduct their lending operations 
in a safe and sound manner. As of the end of June 2004, 178 national 
banks headquartered in 23 states had received approval to participate 
in the program.
    On April 24, 2004, the OCC proposed to extend the pilot program for 
three years beyond its current expiration date of June 11, 2004. 69 FR 
21978 (April 23, 2004). We proposed this extension to gain additional 
information and experience about the program and to reach a 
determination of whether, and under what circumstances, to terminate, 
modify, or extend the program. On June 10, 2004, the OCC issued an 
interim rule extending the pilot program through September 11, 2004.\2\ 
69 FR 32435 (June 10, 2004). We issued the interim rule to allow the 
pilot program to continue, uninterrupted, while we reviewed public 
comments on the proposed rule.
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    \2\ Under the 2001 Final Rule, national banks with approval to 
participate in the pilot program could make loans under the program 
until September 11, 2004.
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II. Overview of Comments Received

    The OCC received 13 comments on the proposed rule. Eight comments 
were from national banks, most operating in small communities. Two 
comments were submitted by national-level bank trade associations; one 
comment was submitted by a state banking trade association. One comment 
was from a major trade association for homebuilders; and one comment 
was submitted by a Federal thrift.
    All of the commenters supported the pilot program and favored 
extending it for three years, although many would prefer that the OCC 
make it permanent. One commenter, a national bank, stated that the 
lending program helped the bank retain customers who want one 
institution to provide all of their financing. A second commenter, also 
a national bank, stated that the pilot program has enabled the bank to 
remain competitive with state-chartered institutions with higher 
lending limits. A third commenter, a trade association for banks, 
endorsed the pilot program, noting that the higher lending limits have 
allowed community banks to retain customers they may have otherwise 
lost to other institutions.\3\
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    \3\ In the proposed rule, we solicited comment on whether to 
expand part 32 beyond its current scope (loans made by banks and 
their domestic operating subsidiaries) to statutory subsidiaries 
(e.g., agricultural credit corporations). We received no comment on 
this question. Nor do we have any indication that this change is 
required by safety and soundness concerns. Therefore, the final rule 
does not change the scope of 12 CFR part 32.
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III. Description of the Final Rule

1. Continuation of the Pilot Program

    The preamble to the 2001 Final Rule stated that, prior to 
conclusion of the pilot program, we would evaluate our experiences 
under the program and determine whether, and under what circumstances, 
to extend its duration. The proposal to this final rule noted that 
banks in the program have not had the additional lending authority for 
a sufficient period of time to allow the

[[Page 51356]]

OCC to assess fully the effects of the program. We also observed that 
the limited number of banks in the pilot program, and the relatively 
small number of quarters of data available for review, made reaching a 
final conclusion about the program premature. For these reasons, we 
proposed extending the pilot program for an additional three years.
    As described earlier, all of the commenters supported extending the 
program. Several commenters also indicated that the pilot program has 
allowed them to remain competitive or retain customers. We continue to 
believe, however, that more data are needed before we can adequately 
evaluate whether to make the program permanent. Therefore, the final 
rule extends the program for an additional three years until June 11, 
2007, with one substantive change to include an additional special 
lending limit for farm lending. Banks already approved under the pilot 
program need not reapply to continue lending under the program.

2. Scope of the Pilot Program

    The pilot program authorizes an eligible national bank to apply for 
approval to make residential real estate loans and small business loans 
to a single borrower in addition to amounts that they may already lend 
to a single borrower under the existing combined general limit and 
special limits in 12 CFR 32.3(a) and (b). Under the pilot program, an 
eligible national bank may make residential loans in an additional 
amount up to the lesser of 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. Similarly, 
an eligible national bank may make small business loans in an 
additional amount up to the lesser of 10 percent of 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 
each case, the bank may lend no more than $10 million to a single 
borrower under the special authority. The 2001 Final Rule provides 
specific definitions for residential real estate loans and small 
business loans. 66 FR 31120 (June 11, 2001); see also 12 CFR 32.2(p) 
and (r).
    Several commenters requested that the OCC add agricultural loans as 
another category of loans eligible for the special lending limits. One 
commenter observed that consolidation has resulted in fewer, but 
larger, farms with expanded credit needs. This situation makes the 
higher lending limit more important and useful to serving the bank's 
customers. Another commenter stated that rural banks have significant 
expertise in agricultural lending, thereby reducing the risk of loss of 
the agricultural loans they make. Another commenter stated that loans 
to small farms present no more risk, and perhaps less risk, than small 
business loans.
    We agree with the commenters that the addition of agricultural 
loans to the pilot program likely will help both the community national 
banks that serve rural agricultural communities in those states with 
higher lending limits and their customers. Moreover, the incremental 
risk posed by the expansion of the pilot program to include 
agricultural loans does not raise significant safety and soundness 
concerns. It is our supervisory observation that agricultural loans 
have rates of loss that are similar to, and sometimes lower than, other 
types of loans. Therefore, the final rule provides that, in addition to 
the amount that a bank may lend to one borrower under Sec. Sec.  32.3 
(a) and (b), an eligible national bank may make small farm loans 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 farm 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. The OCC will use the data we accumulate 
over the three-year extension of the program to evaluate the effects of 
this additional authority on participating banks.
    This final rule defines the term ``small farm loans'' by referring 
to the instructions for preparation of the Consolidated Report of 
Condition and Income (Call Report Instructions).\4\ The Call Report 
Instructions include loans or extensions of credit ``secured by 
farmland (including farm residential and other improvements)'' or loans 
or extensions of credit ``to finance agricultural production and other 
loans to farmers.'' We adopted this definition because banks are 
familiar with the Call Report Instructions.
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    \4\ The Call Report Instructions are available at http://www.ffiec.gov. The addition of agricultural loans to the pilot 
program is not intended to expand the program to loans for farm 
property construction and land development. Such loans are currently 
excluded from the definition of ``loans to small farms.'' See Call 
Report Instructions, item 1.b, at RC-C-4.
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    One commenter, a major trade association for homebuilders, 
suggested that we add loans for property construction and land 
development (construction and development) purposes to the program. The 
commenter asserted that lending limits are problematic for community 
banks. We did not receive comment from any banks suggesting that banks 
have been disadvantaged due to higher state lending limits for 
construction and development lending. Nor did the homebuilders 
association provide such evidence. Moreover, it is our supervisory 
experience that construction and development loans present more 
significant risks than do loans currently in the pilot program. 
Therefore, we decline to extend the program to construction and 
development loans.

3. Safeguards

    At the outset of the pilot program, in 2001, we adopted a number of 
safeguards that apply to banks using the authority under the pilot 
program. For example, the amount that a bank may lend under the pilot 
program's special limits is subject to an individual borrower cap and 
an aggregate borrower cap. Under the individual borrower cap, the total 
outstanding amount of a bank's loans to one borrower under 12 CFR 
32.3(a) and (b), together with loans made under the program, may not 
exceed 25 percent of the bank's capital and surplus. The aggregate cap 
provides that the total outstanding amount of any loan or parts of 
loans made by a bank to all of its borrowers under the special limits 
of the pilot program may not exceed 100 percent of the bank's capital 
and surplus. And, as noted earlier, the amount a bank may lend to one 
borrower under the special lending limit may not exceed $10 million. 
These caps, which apply to residential real estate loans and small 
business loans banks, will now include small farm loans made by a bank 
under the expanded pilot program.
    One commenter suggested that the OCC increase the $10 million 
individual cap to $20 million to broaden the appeal of the program and 
further level the playing field between state and national banks. The 
same commenter also recommended expanding the program's aggregate 
lending cap on all small business and real estate loans from 100 
percent to 200 percent of a bank's capital and surplus.
    We believe that the 100 percent aggregate lending cap provides

[[Page 51357]]

significant opportunity for lending under the pilot program and is a 
provision that comports with safety and soundness. As we stated in the 
proposed rule, while the pilot program has operated in a safe and sound 
manner, the data available to the OCC is not of sufficient volume or 
maturity to make a long-term decision about whether to modify these 
safeguards. Therefore, at this time we decline to increase the amounts 
that banks may lend under the pilot program. During the course of the 
next few years, we will consider the effect of the cap on lending under 
the revised pilot program, e.g., whether agricultural lenders typically 
make loans under other parts of the pilot program and, if so, whether 
the caps have resulted in a competitive disadvantage for participating 
banks.

4. Application Process

    A bank is eligible for the pilot program only if it is well 
capitalized, as defined in 12 CFR 6.4(b)(1), and has a rating of 1 or 2 
under the Uniform Financial Institutions Rating System (UFIRS), with at 
least a rating of 2 for asset quality and for management. These 
criteria ensure that only banks with sufficient capital and good 
managerial oversight are permitted to use the increased limits.
    A bank also must apply and obtain the OCC's approval before it may 
use the special lending limits. The application includes a 
certification that the bank is well capitalized and has the requisite 
ratings, citation to state law on lending limits, a copy of a written 
resolution by a majority of the bank's board of directors approving the 
use of the new lending authority, and a description of how the board 
will exercise its continuing responsibility to oversee the use of this 
lending authority.
    One commenter suggested that the OCC allow a national bank to self-
certify that it is an eligible bank rather than go through an 
application process. We believe that the application process is an 
important tool that allows the OCC to monitor carefully the banks that 
wish to participate in the program. Therefore, we are maintaining the 
application requirement.

IV. Regulatory Analysis

1. Regulatory Flexibility Act

    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 604 of the RFA is not required if the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities and publishes its certification 
and a short, explanatory statement in the Federal Register along with 
its rule.
    Pursuant to section 605(b) of the RFA, the OCC hereby certifies 
that this final rule will not have a significant economic impact on a 
substantial number of small entities for the following reasons. 
Participation in the pilot program is voluntary; the program does not 
impose new requirements on banks; the program confers a benefit; and 
banks that participate in the program will not experience a significant 
economic impact, regardless of size. Also, to date, only a small 
fraction of national banks have taken part in the program.

2. Administrative Procedure Act

    Under section 553(d) of the Administrative Procedure Act (APA), 5 
U.S.C 553(d), the OCC must generally provide a 30-day delayed effective 
date for final rules. The OCC may dispense with the 30-day delayed 
effective date requirement ``for good cause found and published with 
the rule.'' Similarly, section 302 of the Riegle Community Development 
and Regulatory Improvement Act of 1994 (CDRI), requires a banking 
agency to make a rule effective on the first day of the calendar 
quarter that begins on or after the date on which the regulations are 
published in final form, unless the agency finds good cause for an 
earlier effective date. 12 U.S.C. 4802(b)(1).
    The OCC finds that there is good cause to dispense with the two 
effective date requirements because a failure to extend the September 
11, 2004, sunset date would cause unnecessary disruption in the 
operation of the pilot program. In addition, the purpose of the APA and 
CDRI delayed effective date provisions is to afford affected persons a 
reasonable time to comply with rule changes. While the final rule 
expands the scope of loans a bank may make under the program, the rule 
makes no substantive changes to the existing lending limits pilot 
program. Therefore, there is no additional regulatory or compliance 
burden associated with the final rule for banks that apply to enter the 
program or banks already in the pilot program.

3. Executive Order 12866

    The OCC has determined that this final rule is not a significant 
regulatory action under Executive Order 12866.

4. 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. 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.

5. Paperwork Reduction Act

    The Office of Management and Budget (OMB) has reviewed and approved 
the collection of information requirements contained in the pilot 
program under control number 1557-0221, in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

List of Subjects in 12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

Authority and Issuance

0
For the reasons set forth in the preamble, part 32 of chapter I of 
title 12 of the Code of Federal Regulations is amended to read as 
follows:

PART 32--LENDING LIMITS

0
1. The authority citation for part 32 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, and 12 U.S.C. 93a.

0
2. In Sec.  32.2, paragraph (s) is redesignated as paragraph (t), and a 
new paragraph (s) is added to read as follows:


Sec.  32.2  Definitions.

* * * * *
    (s) Small farm loans or extensions of credit means ``loans to small 
farms,'' as defined in the instructions for preparation of the 
Consolidated Report of Condition and Income.
* * * * *

0
3. Section 32.7 is amended by removing the phrase ``(a)(1) and (2)'' 
each place it appears and adding the phrase ``(a)(1), (2), and (3)'' in 
its place; revising the heading of paragraph (a); redesignating 
paragraphs (a)(3) and (4) as paragraphs (a)(4) and (5); adding a new

[[Page 51358]]

paragraph (a)(3); in paragraph (c), removing the phrase ``the date 
three years after September 10, 2001,'' and adding in its place 
``September 10, 2007,''; in the first sentence of paragraph (d), 
removing the phrase ``residential or small business'' and adding in its 
place ``residential real estate, small business, or small farm''; and 
in paragraph (e), removing the phrase ``2004'' and adding in its place 
the phrase ``2007'' to read as follows:


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

    (a) Residential real estate, small business, and small farm loans.
* * * * *
    (3) 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 
farm 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 farm 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.
* * * * *

    Dated: August 6, 2004.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 04-18888 Filed 8-18-04; 8:45 am]
BILLING CODE 4810-33-P